ahemdabad ca society journal

Ahmedabad Chartered Accountants Journal September, 2015 337

Volume : 39 Par t : 06 September, 2015

E-mail : [email protected] Website : www.caa-ahm.org

Ahmedabad Chartered Accountants Journal

C O N T E N T S To Begin with

MananamLive Life acebook Style.....................................................................CA. Ashok Kataria......................339

Editor ialTax Audits - Stress Embedded.............................................................CA. Ashok Kataria .................... 340

From the President............................................................................CA. Yamal A. Vyas.........................341

Ar ticles

Deduction of Bad Debts-Law is now settled........................................ CA. Kaushik D. Shah.....................342National IPR Policy of India................................................................Adv. Nakul Sharedalal................346

Direct Taxes

Glimpses of Supreme Court Rulings................................................... Adv. Samir N. Divatia................348

From the Courts..................................................................................CA. C.R. Sharedalal &CA. Jayesh Sharedalal............... 349

Tribunal News.....................................................................................CA. Yogesh G. Shah &CA. Aparna Parelkar.................. 352

Unreported Judgements......................................................................CA. Sanjay R. Shah....................357

Controversies...................................................................................... CA. Kaushik D. Shah..................361

Judicial Analysis..................................................................................Adv. Tushar P. Hemani................366

FEMA & International Taxation

FEMA Updates................................................................................... CA. Savan Godiawala................369

Indirect Taxes

Service Tax

Service Tax Decoded..........................................................................CA. Punit R. Prajapati................372Recent Judgements............................................................................. CA. Ashwin H. Shah...................375

Value Added TaxJudgements and Updates ...................................................................CA. Bihari B. Shah.....................377

Corporate Law & Others

Business Valuation..............................................................................CA. Hozefa Natalwala.................379

Corporate Law Update.......................................................................CA. Naveen Mandovara..............381

All ied Laws Corner..............................................................................Adv. Ankit Talsania.......................387

From Published Accounts ................................................................ CA. Pamil H. Shah..................... 389

From the Government ......................................................................CA. Kunal A. Shah..................... 391

ACAJ Crossword Contest....................................................................................................................392

- caaahmedabad

Ahmedabad Chartered Accountants Journal September, 2015338

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. Please mention your membership number in all your correspondence.4. While sending Articles for this Journal, please confirm that the same are not published / not

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

5. The opinions, views, statements, results published 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.

6. Membership Fees :Amount in `

Basic S-Tax TotalLife Membership 7500/- 1050/- 8550/-Entrance Fees 500/- 70/- 570/-Ordinary Membership Fees for the year 2015-16In case of Membership (of ICAI) for a period of less than 600/- 84/- 684/-or equal to five years,In case of Membership of (ICAI) for a period of more than five years, 750/- 105/- 855/-Financial Year : April to March

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

Professional AwardsThe best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law andAuditing' and 'Allied Laws and Others' will be awarded the Trophies/ Certi ficates of Appreciationafter being vetted by experts in the profession.Articles and reading literatures are invited from members as well as from other professional colleagues.

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

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

Journal CommitteeCA. Ashok Kataria CA. Pitamber Jagyasi

Chairman ConvenorMembers

CA. Gaurang Choksi CA. Jayesh SharedalalCA. Rajni Shah CA. Shailesh Shah

Ex-officioCA. Yamal Vyas CA. Nirav Choksi


Thirty years back, there was on an average onetelevision set amongst a group of about fiftyfamilies, with just one channel and that too withrestricted timings of telecast. A twice a week moviesongs program, Chitrahar, and a Sunday moviewere the entertainment bonanzas for the televisionviewers. The time when all were not fortunateenough to have the comfort of possessing atelevision, somehow everyone enjoyed the Sundaymovie. This was possible because the owner of that‘priceless belonging’ invited all and shared the joywith everyone in the locality. The person whoallowed others to enjoy his possession enjoyed themost by bringing smiles in the lives of so manypeople. The beneficiaries on the other hand wereever proud as one of their neighbours owned atelevision, unlike today, when we have a sense ofdiscomfort and dejection if a neighbour possessessomething bigger or better than us. Suchresentfulness is not just restricted to neighbours butunfortunately, today the intolerance has crept inamongst the family members as well. The exampleof television is one out of many and of the timewhen people lived in harmony irrespective of theirpossessions. Similarly, then, a rare house in manyhad the privilege of a landline telephone connectionbut the communication at that time reigned supremeamongst all.

As we introspect into our living today, almosteveryone in the family wishes to have his personaltelevision and also a cell phone. Many are fortunateto get their wish fulfilled. The question arises arewe able to enjoy our life to the extent we used to inearlier years. Our possessions have increased butsomehow the level of enjoyment and satisfactionhas gone down. Why is it so that in earlier timeswe enjoyed far more despite not owning manythings? Where are we going wrong and what needsto be changed?

The answer to this is simple and twofold. Firstly,we have forgotten to appreciate and l ike whatothers have and secondly, with possessions has

MananaM

Live Life acebook Style

CA. Ashok Katar [email protected]

come the possessiveness. We have stopped sharingand have become self-centric. It is me and mineonly. The problems have increased and the level ofhappiness has gone down because importance isgiven to material possessions. In other wordsvaluables have taken precedence over values.One may argue how can our happiness increase bysharing what we have and by appreciating whatothers have? The television and telephone of yesteryears are the testimony of the rule when we sharedthese medium of communication of others. Thisissue is: how can this be achieved in the presentdigital age.

The answer is ‘Facebook’. ‘Facebook’ today iscommon and almost every one of us uses it to shareinformation. It is a tool of social networking and apopular way to communicate with friends andrelatives. The platform of ‘facebook’ allows us to‘like’ what our friends post and encourages us toshare what we have. We enjoy and cherish whenwe like something good being shared with ourfriends? Whenever we l ike something on the‘facebook’ there is a sense of appreciation towardsothers and whenever we share, there is enormouspleasure as our friends acknowledge our posts.‘Facebook’ proves that to add to your joy you needto ‘share’. We experience this joy in the digitalworld but sadly ignore the rule when it comes topossessions.

It is only when we start appreciating others; thesense of separateness fades, and feeling of onenessprevails. Similarly, when we start sharing thebenefits of what is available to us, our happinesswill increase manifold. Sharing is the key for a happyliving, aptly demonstrated by ‘facebook’.

I would conclude by quoting Dada Vaswani:‘Nothing belongs to us’.

If this be the case, let us share our possessions toexperience and live in happiness.

Let us never forget that ‘facebook’ teaches us toexperience sharing.


September is the month when almost al lprofessional brethrens get completely engaged inthe tax audit assignments. Over the years tax-auditshave been one of the major and important sourceof earnings for practising chartered accountants.Any area of work that creates a professionalopportunity is good as far as the profession isconcerned but somehow it seems that we have beenstuck and got so attached with these assignmentsthat we do not even dare to think of losing even asingle client despite the pressure under which thistask is being accomplished.

Time is a crucial factor as far as tax-auditassignments are concerned. Generally, thoseprofessionals who undertake these assignmentshave income tax as their practise domain. For allpractical purposes such a chartered accountant, afterthe every year end, files TDS returns upto the monthof May, then non audited returns upto July and hastwo months to carry out and finish tax audits andreturns. In these two months, viz. August andSeptember a chartered accountant forgets everyother thing except making the tax audits and returnsas the only priority with full onus on himselfirrespective of the lethargy of clients. In the processhe even sacrifices his personal and social life toensure that all his assignments get completed in timeand none of his clients is subjected to penalty ofnon-compliance.

The legislature in its wisdom has granted twomonths where this kind of work is to be done andcould be regarded as the minimum time required tocomplete it. This year, however, it was verydifferent. The inefficiency and incapability of theCentral Board of Direct Taxes became public withtheir insensitive behaviour. It has been about threeto four years that CBDT is unable to release income

Editor ialTax Audits - Stress Embedded

[email protected]

tax return forms in time. This time it took them almost4 months to release the forms which had minorchanges compared to last year, admitted by theCBDT itself. After the failure to release the formsand online utility, CBDT suo moto extended thedate of filing of non-audited returns from 31st Julyto 7th of September. This was a generous moveand similar step was expected for audit cases byalmost every chartered accountant in the country.On the contrary the CBDT turned numb and cameout with a press release that it will not extend thedue date for the assessees subject to tax audit .

The press release gave a feel of monarchy in thecountry where CBDT became the king issuingorders to be followed by the subjects. Hats off toall the professionals who decided to fight and tookthe matter to various High Courts of the countryand expose the autocratic behaviour of CBDT. InGujarat it was All Gujarat of Federation of TaxConsultants, compliments to all the office bearersfor rising to the occasion and standing for the causeof professional brothers.

In the entire process the role of ICAI became amockery before the members as the only visiblemeasure was a representation before the Ministryof Finance for the extension of the due date. Theirony was the e-mails from some of the prospectivecandidates od regional and central council electionsself-proclaiming the credit for extension that cameon 1st of October, after the due date. How many onearth would have waited upto 30th September toget the extension. It’s important that we re-organiseourselves, carry out our work meticulously withinthe time available with proper planning andexecution and stand together to fight the system ifneed arises.

Namaste,CA. Ashok Kataria


From the PresidentCA. Yamal A. Vyas

[email protected]

All’s well that ends well. I was reminded of thisold saying at the end of September when the lastdate for filing of Tax Audit Reports and the relatedIT Returns was extended by one month.There wasfrenetic activity prior to that announcement, a fewcourt cases, long trails of messages on Social mediaand a lot of anxiety.

In my humble view, the problem this time wasgenuine, and the manner in which the issue wasdiscussed across the country on various fora goesto prove that the social media has become verypotent.

In fact this month I am going to discuss only that.For the candidates to the forthcoming ICAIelections, this may be a double edged sword. Toomuch of a presence on the social media puts peopleoff and not being on the social media on an activebasis is also not welcomed by the voters.

The elections these days-whether for stateassemblies or ICAI - are fought on various turfs.First it used to be the ground only. In larger electionsthe candidates held public meetings and ICAIcandidates went around the offices of memberssoliciting votes.

So long as the Regions had limited number ofmembers, this was a good way of campaigning.But, now that the number of voters is increasingexponentially -I believe there are more than 70,000voters in WIRC- in my view this strategy of goingfrom office to office will not be practical.

Enter social media. This is one area where the reachis instant, inexpensive and i t el iminates thelocational disadvantage, if any. A candidate fromGodhra can reach a voter in Goa as easily as a Goancandidate. Because it is inexpensive and easy, thismode is also prone to misuse by the enthusiasts.

ICAI has done well to ask the members well inadvance whether they would like to receive emailsf rom candidates and only those who haveresponded positively will get email communication

from the candidates. I am also told that canvassingon social media is prohibited. With due respect, Ithink such a prohibition is unwarranted.

After all, every social medium -be it Facebook,Whatsapp, Twitter, gives the receiver a facility toblock unwarranted messages. ICAI should allowthe candidates to canvass on social media and showthe voters their good points, their agenda and thework done by them in the past. If the voter wants,he can block a particular candidate, but everycandidate should be given an equal opportunity toreach out to his constituents.

Misuse of any medium is not good and should beclamped down, but on the other hand puttingrestrictions which even Election Commission ofIndia also does not put in General Elections is alsonot fair in my personal view. A level playing fieldis required in ICAI and such freedom will do exactlythat.

In WIRC, more than 60 per cent of the voters arebased in Mumbai so any candidate from outsidethat city will have very little chance of reaching outto such a large number of voters unless he isallowed the facility of using social media.

Moreover , voting in our elections is usually verylow for an Institute in which all members are amongthe most aware citizens of the country. If the use ofsocial media is allowed in the campaigning, thebarrage of messages may probably lead to a higherpercentage of voting in the coming election.

In the past two elections at least, the youngermembers -especially those in industry- vote in verysmall numbers. This has to change. I suggest someinnovative measure like 10 unstructured CPE hoursor 5 structured CPE hours can be awarded to eachvoter to the elections. This might work as a smallincentive for those members who value the CPEhours. Over to you, ICAI.

CA. Yamal VyasPresident


Section 36(1)(vii) read with section 37(1) of theIncome Tax Act, 1961 empowers an assessee toclaim deduction of any bad debt or part thereofwhich is written off as irrecoverable.

Thus the Act provides for deduction of debt whichis bad and written off as irrecoverable i.e. twinconditions of the debt being bad and write off asirrecoverable is required to be established.

However, earlier law was not clear and the courtstook a narrow view regarding deduction of bad debts.

The Madras High Cour t in the case of SouthIndia Surgical Co. L td. v/s. Asstt. CIT (Mad)repor ted in 287 ITR 62 has observed as under :“It is not sufficient for the assessee to say that hebecame pessimistic about the prospect of recoveryof the debt in question. He must feel honestlyconvinced that the financial position of the debtorwas so precarious and shaky and that it would beimpossible to collect any money from him. Thequestion is really one of fact depending upon thevarious facts and diverse circumstances bearing onthe debtor’s pecuniary position, his commitmentsand obligations. The judgment of the assesseeregarding the debt as bad debt must be an honestjudgment and not a convenient judgment. Thejudgment of the assessee must be established tohave been taken on relevant facts andcircumstances, which should show that the debt isnot realisable for some fault on the part of the debtoror some supervening impossibility on the part ofthe debtor to pay, but not possible difficulties orhurdles the assessee may have to incur to compelthe recalcitrant debtor to pay. The assessee for hisconvenience may decide that the debt is too smalland it is not worthwhile to pursue the debtor butthat judgment would not be a honest judgment,which would establish that the debt has become abad debt. A time-barred debt can be assumed to bebad, but is not necessarily bad because of expiry oflimitation for recovery of the same.”

With the above observations the Madras High Courthas held as under:

“Except the unilateral act of the assessee to writeoff the debts as bad debts in the books of accountfor the previous year relevant to the assessment yearin question, the assessee has not made out any caseregarding the debts as irrecoverable. The judgmentof the assessee in regarding the debts as bad debtswas not an honest judgment having regard to thefinancial position of the hospitals. The Tribunal wasright in law in holding that the debt claimed by theappellant as bad had not become bad and thus notallowable as deduction under Section 36(1)(vii).”

Under the scheme as provided for under theIncome-tax Act, the entries which were made, asto whether the same were genuine entry and notimaginary and fanciful entry, qua the same theAssessing Officer was fully empowered to makeinquiry. However, wisdom of the assessee couldnot be in such manner questioned and nodemonstrative or infallible proof of bad debt havingbecome bad was required, and commercialexpediency was to be seen from the point of viewof the assessee, depending on the nature of thetransactions, capacity of debtor, etc., but qua entry,semblance of genuineness was there and the sameshould not be mere paper work. The High Courtwas of the view that under section 143(2) of theI.T. Act, the Assessing Officer was empowered torequire the assessee to produce the evidence insupport of the return, as such where the assesseehad claimed as bad debt or part thereof, written offas irrecoverable in the accounts of the assesseeunder the provisions of sec. 36(1)(vii) of the I.T.Act, 1961, then on the strength of the amendmentmade on 1.4.1989, it could not be said that aninquiry was not permissible under the provisionsof the Income-tax Act to see and satisfy that therewas some semblance of the genuineness in the entry,which had been made, the same was not at all totally

Deduction of Bad Debts -Law is now settled

CA. Kaushik D. [email protected].


Deduction of Bad Debts - Law is now settled

fake entry as the assessee would be entitled fordeduction only if it was bad debt, or part thereof.

Now let me refer to the judgement of the SupremeCourt in the case of Travancore Tea Estates Co. Ltd.v. CIT (1998) 233 ITR 203 (SC). In this case theSupreme Court had taken the view, that as to whethera debt had become bad or at what point of time itbecame bad, were all questions of fact. Thoughstandard of proof of proving the same as bad debt, isnot r·equired to be adopted and is to be decided onthe wisdom of the assessee and not on the wisdomof the Assessing Officer, but to show that entry whichhad been made as bad debt there was some materialin support of the same,. Giving some semblance ofgenuineness and truthfulness to the same in thedirection of forming opinion, that said debt wasarising out of trading activity, there was relationshipof debtor or creditor, the same was irrecoverable.Thus, it was held that in this case on the substantialquestion of law posed, the provision of section 143(2)of the I.T. Act vis-a-vis section 36(1)((vii) of the I.T.Act, read with section 36(1) of the I.T. Act bothwould be harmonized to give purposeful meaningto both the statutory provisions, as one extendsbenefits to the assessee of deduction for their debt orpart thereof becoming bad and to other authorizesthe Assessing Officer to see that the provision of theIncome -Tax Act are not flouted by any means.

In the case of DCIT v/s. Oman International Bank,the Allahabad High Court held that the order passedin the case of Oman International Bank dated 4.08.06is quashed and set aside with an observation that u/s. 143(2) of the Income Tax Act 1961, the AO isempowered to require the assessee to produce theevidence in support of the claim of a bad debt.

We should also not loose sight of on the decisionof Dhal Enterprise and Engineers Pvt. Ltd. v/s. CIT295 ITR 481 where their Lordships of GujMat HighCourt has held that the assessee has to prove thatdebt as a bad debt ir1 view of the language of lawused in section 3G(1)(vii) of the Income Tax Act,1961.

However let me now focus on recent Judicialdevelopments regarding claim of deduction of baddebts.

The Ahmedabad Bench of the IT AT in the caseof Asstt. CIT Baroda v/s. M/s. TDW.India L td.has held as under:

“I have considered the submissions of the ld. A.R.and the facts of the case. The rule of evidenceregarding the writing off of bad debts u/s 36(1)(vii)has undergone change with the amendment of thesection with effect from 1-4-1989. In the pre-amended section, the expression used was “anydebt or part thereof, which is established to havebecome a bad debt in the previous year.” This hasbeen omitted by the amendment and substituted bythe expression “written off as irrecoverable”. Thus,the intention of the Legislature appears to be that,whereas earlier it was incumbent upon the assesseeto establish that the debt had become bad duringthe previous year, after the said amendment, it wassufficient that the assessee had merely written offthe debt as irrecoverable however, there continuedto prevail an opinion that since the word “debt”was preceded by the word “bad”, not every debtwritten off was allowable but only a debt whichwas “bad” was allowed to be written off. In thisview, there still remained a duty cast upon theassessee to establish that the debt had become badduring the previous year.

In order to resolve the divergent judicial opinion the,Special bench of the IT AT was constituted to lookinto the issue. The Special Bench has held in thecase of DCIT vs. Oman International Bank, 100 ITO285 (Mum.SB) that prior to the amendment, assesseehad to establish that the debt had become bad duringthe previous year and the AO could allow or disallowthe claim on the basis whether the debt had becomebad during the said previous year or not. In otherwords, irrespective of the write-off claimed by theassessee, the deduction was still dependent on thefinding of the A.O. regarding the previous year inwhich the debt has become bad, based on which,the A.O. would allow the deduction either in an earlierassessment year or in a later assessment year, whichwas different from the assessment year in which theassessee had written off the debt as bad. Referringto the CBDT Circular No, 551 dated 23.1.1990, theSpecial Bench observed that the amendment wasbrought to do away with all the complicationsinvolved in determining the issue of deductibility of


bad debts as well as the year in which the deductionwas to be allowed. The dispute regarding the year inwhich the debt has to be allowed as deduction washeld to be resolved by the clear statement of theamended law that the deduction was allowable inthe year in which the debt has been written off asirrecoverable. Thus, the wording of the law and thelegislative intent were clear in as much as the earlierrule of establishing that the debt had become badwas omitted from the provisions of law. It was furtherheld that “the act of writing off a debt as irrecoverablein the accounts of the assessee, is deemed to bedischarging the onus of the assessee in holding a debtas bad. When the statute has provided the mode ofdischarging the onus of proof by writing off the debtas bad, it is not incumbent on the revenue to call forfurther evidence. The rule regarding the deductibilityof bad debt provided in section 36(1)(vii) after theamendment is a statutory rule by itself and, there isno need of insisting on any other proof. The statutoryrule itself declares the rule of deduction of bad debt.If it is again necessary to prove by demonstrativeproof that the debt has become bad, then there wasno necessity to insert a statutory rule. The onus ofproving the debt as bad debt has been prescribed bythe statutory rule. Once that statutory rule is satisfiedby following the prescribed method, no furtherobligations remain on the assessee to be discharged.”

In view of the decision of the Special Bench, whichis squarely applicable on the facts of the presentcase, I am of the opinion that the AO was notjustified in asking for demonstrative proof regardingthe irrecoverability of the debts. The above view isreinforced by the decision of the Gujarat High Courtin CIT vs. Girish Bhagwat Prasad 256 ITR 772.Fol lowing the above ci ted decisions, thedisal lowance of bad debts amounting toRs.10,11,966/- is directed to be deleted.”

Also in the case of T.R.F. Ltd. v/s. CIT reported in230 CTR 14(SC) has held as under:

“This position in law is well-settled, after l’t April,1989, it is not necessary for the assessee to establishthat the debt, in fact, has become irrecoverable. Itis enough i f the bad debt is wri tten off asirrecoverable in the accounts of the assessee.”

Finally:It is submitted that once a debt is written off as abad debt, the same has to be allowed as deductionu/s. 36(1)(vii) of the Income Tax Act, 1961, unlessthe write off is not genuine and is proved by theAO that the same is not genuine.The Central Board of Direct Taxes, in its CircularNo. 551 dated 23-1-1990 [183 ITR St.) 37)] , hasexplained the object and the ambit of the amendmentin the following manner:

Amendments to section 36(1)(vi i) and 36(2) torationalize provisions regarding allowabil ity ofbad debts

The old provisions of clause (vii) of sub-section(1} read with sub-section (2} of the section laiddown conditions necessary for allowability of baddebt. I t was provided that the debt must beestablished to have become bad in the previous year.This lead to enormous litigation on the question ofallowability of bad debt in a particular year in whichthe same had been written off on the ground thatthe debt was not established to have become bad inthat year. In order to eliminate the disputes in thematter of determining the year in which a bad debtcan be allowed and also to rationalize the provisions,the Amending Act, 1987 has amended clause (vii)of sub-section (1) and clause (i) of sub-section (2)of the section to provide that the claim for the debtwill be allowed in the year in which such a baddebt has been written off as irrecoverable in theaccounts of the assessee.”

Prior to the amendment explained above, anassessee had to establish that the debt has becomebad during the previous year and the AssessingOfficer may allow or disallow the claim in terms ofsection 36(2) on the basis of his observationwhether· the debt has become bad during the. saidprevious year or not. In other· words, irrespectiveof the write off claimed by the assessee, thededuction was still dependent on the finding of theAssessing officer· that in which previous year thedebt has become bad and based on which theAssessing Officer could allow the deduction eitherin an earlier assessment year or in a later assessmentyear which is different from the assessment year inwhich the assessee has written off the debt as baddebt. As explained by the above circular, the



amendment has been brought to do away with allthe complications involved in determining the issueof deductibility of bad debts under section 36(1)(vii).The amendment decided the year in which thededuction has to be allowed; as the year in whichthe assessee has written off the debt as bad debt inthe books of account. The amendment has also doneaway with the requirement of establishing that thedebt has become bad.

This is clear from the circular of the Board where itis stated that the amendment has been brought toeliminate the disputes in the matter of determiningthe year in which a bad debt can be allowed andalso to rationalize the provisions. Even after theamendment, if the assessee is again called upon toestablish that the debt has become bad, the true spiritof the amendment will not be fulfilled. The intentand purpose of the amendment is to avoid litigationsand do away with all sorts of disputes regardingthe allowability of bad debts as a deduction incomputing the income of an assessee.

The dispute regarding the year in which the debthas to be allowed as a deduction has been resolvedby the clear statement of the amended law that thededuction shall be allowed in the year in which thedebt has been written off as irrecoverable. It is veryimportant to note that the earlier expression” anydebt, or part thereof, which is established to havebecome a bad debt in the previous year "has beenconspicuously omitted by the amendment andsubstituted by the expression" written off asirrecoverable”.The words of the law are clear and the intent andpurpose of the amendment are manifest. The earlierrule of establishing that the debt has become bad isomitted from the provisions of law. Therefore, thereis no occasion or provocation to consider whetherthe assessee has again to establish that the debt hasbecome bad. In fact, there is no provocation at allto go to that extent of discussion because theamendment has omitted the expression “debt whichis established to have become a bad debt.”

I am of the view that when the amendment has beenbrought to cure a defect and the amendment hasomitted the expression which has made way forsuch defect there is no reason to ponder over thepast and to decide the matter still under the law as it

stood prior to the amendment.CBDT Circular No. 551, dated 23rd January, 1990inter alia clarifies the rationale for amending section36(1)(vii) by stating that the section was beingamended, so that the claim for Bad Debts wouldbe allowed in the year in which such a bad debt iswritten off as irrecoverable in the accounts of theassessee. The Hon’ble Gujarat High Court has inthe case of CIT V/s Girish Bhagwatprasad (256ITR 772) observed that with effect from 1st April,1989 all that the assessee had to show was that thebad debt was written off as irrecoverable and theveracity of the doubtful debts cannot be gone intoby the Department. An assessee would be the bestjudge from the commercial perspective as towhether the debt has become bad and theDepartment could not go behind it. The relianceon the judgment of the Hon’ble Gujarat High Courtin the case of Dhall Enterprises (295 ITR 481) ismisconceived since the said judgment pertains tothe assessment year prior to the amendment dated1.4.1989. Thus, the said judgment is not applicablein view of the amended provisions and the settledlegal position with regard to the effect of theamendment to the section w.e.f. 1.4.1989.The Delhi High Court also extensively relied onthis circular in the case of CIT v. Morgan Securitiesand Credit Pvt. ltd. and held that this circularclearly left no scope for debate and that a bad debtwas allowable in the year as write-off in theaccounts. The said view is also supported by thedecision in the case of Dy. CIT v/s Patidar Ginningand Pressing Co. (157 CTR 177) where the issuebefore the Hon’ble Gujarat High Court was whetherit was sufficient for the assessee to write off as baddebts and he need not establish that the same hadbecome bad. The High Court affirmed the view ofthe Tribunal relying upon the amendment to thesection w.e.f. 1.4.1989.

It is respectfully submitted that after the amendmentto section 36(1)(vii) of the Act with effect from01.04.89 and in view of the decision of the SupremeCourt in this case of TRF Ltd. once the debt iswritten off as bad debt, the same has to be allowedas deduction u/s. 36(1)(vii) of the Income Tax Act1961 unless this write off is not genuine.

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The last decade has observed some very significantchanges within the Indian IP infrastructure. In theyear 2005 the Indian government in compliance withthe TRIPs agreement made changes to its PatentLaws to ensure they were compatible wi thinternational standards. This also included theexceptions that the Doha Declaration on the TRIPsAgreement, such as compulsory licensing, if the sameis necessary to attain the objective of securing publichealth. India is also considered as home to genericsi.e. generic industry are prevalent in India due to theircheaper manufacturing of drugs which is moreaffordable for the masses in India. It is also importantto keep in mind that prior to 2005 India granted onlyprocess patent, product patent was identified post2005 due to the amendments made in the existingPatent Act. Trouble started brewing when the Indiancourts in the decision of Natco v. Bayer Corp. Ltdallowed compulsory licensing for the first time onthe grounds that the foreign patent holder was notmanufacturing enough drugs to satisfy the demandsof the masses and the price was way too high for anaverage man to purchase, the said drug was intendedfor treatment of kidney and liver cancer and at theexisting price was accessible only to 2% of thepatients in India. The Indian courts gave priority topublic interest rather than the Corporate commercialinterests. The public interest policy was also visiblein the historic Novartis decision wherein the IndianCourts rejected Novartis’ patent over the drug Glivecon the premise that there was enhanced efficacy intheir patent -it is an essential requirement within (thenow famous) Section 3(d) of the Patent Act, 1970.In the absence of substantial evidence to proveenhanced efficacy the patent was rejected thisdecision was seen as a threat to pharmaceuticalcompanies across the world. Novartis’s practice wastermed as ‘ever greening’ i.e. making minor changesin the original patent for the sake of extending thelifetime of the patent, this decision received flak fromWestern countries like the U.S. that strongly support

Corporate interests. However, the same did not deterthe Indian Supreme Court from upholding the HighCourt’s decision on the matter. In addition to theprotectionist patent regime, India has often beenaccused of weak implementation of IP laws as a resultIndia has been constantly listed in the Priority WatchList of the U.S.T.R. 2014, saw a major politicalchange with a new political party at the centre. Thenew ruling party has also shown interest in increasingforeign investment within the country and to ensurethe same the current government has taken a step inthe right direction by drafting a new IPR Policy.

The National IPR Policy of India is based on sevenobjectives which can be called seven pillars ofIntellectual Property Rights that are going to decidethe future of IP in India for the coming five decades.The IPR Policy is based on the theme of “InnovativeIndia, Creative India”. The Government of India isat present making hard efforts to make India abusiness friendly as well investment friendly country.To achieve the same objective, the government istaking several steps to rejuvenate and reinvent variousframeworks and one such step is to re-establish theIntellectual Property scenario of India in a mannerwhich encourages business and infuses confidencein the companies to make investments in the countrywhile feeling secured about their Intel lectualProperties. The seven objectives of the policy havebeen designed in a manner to address the immediateand long term needs that have arisen and should arisein the time to come. The draft IP Policy speaks onawareness, creation, existing framework and plansfor review, managing the Intellectual Property Officesacross the country, IP generation, enforcement ofIPR, commercial ization and human capi taldevelopment. The star of the IP Policy is the last andfinal objective which is the human capi taldevelopment as it speaks about a lot more IPeducation in the country across all the sectors of thesociety.

National IPRPolicy of India

Adv. Nakul [email protected]


At this juncture, I would like to add that, India hasno obligation to have a National IPR Policy and itscurrent laws are consistent enough to guide theprotection of Intellectual Properties in the country,but I am also of the view that the National IPR Policywould bring about a positive change in the existingIP situation of India which shall be good for thenation.

The Intellectual Property Policy begins by layingvarious awareness objectives like train shows androad shows which circulate the basics of IntellectualProperty Rights in the country. It also talks aboutbrochures spreading IP Awareness being publishedin multiple languages which would incorporatevarious salient IP rulings that India has had in thepast decade. It then talks about the creation ofIntellectual Property Right through bringing in thesocial , cul tural and economical benefi ts ofIntellectual Property. The main focus in creation ison the newly defined IP generation of the countrywhich belongs to various sectors of innovation,research, creation and invention. The main focuswould be assist the said generation through humancapital development and provide deep knowledgeof IP and there by assist them in teaching, training,nurturing and skill developing their IPR. The legalIP framework of the country has been given asmuch importance and has been laid down as thethird objective in the Intellectual Property Policy.The policy has discussed revising the existing rulesand guidelines of court to process the IP cases aswell as handling them and it has also discussedvarious avenues of the IP statutes and reviewingthem to meet the IP needs of the country.

One of the most outstanding objective of this policywhich I absolutely look up to is the management ofthe Intellectual Property Offices across the country.There have been many vastly discussed provisionsin the National IPR Policy which make this policyworthy to be credited as farsighted enough to havefruitful effects for time to come. Like the provisionswhich talk about financial autonomy to the IPOs andthe harmonization of the IPOs are pin pointed at thedevelopment. Further, the provisions which speakabout digitalization of all the IPOs and availabilityof the documents online and offline is a huge boon

for the applicants as well as registered owners. Iwould also like to add that, small but significantprovisions like public relations officer (4.10.3) andhelp desk at each IPO (4.10.13) will prove to be of alot of help and support to the proposed and currentapplicants, registered IP owners as well as curiousfence benchers are concerned. The objective ofcommercialization has also been proposed withprovisions which are much global in sense, whetherit be the provision of IP exchange program whichbrings, innovators and actual buyers under one roofor be it the provisions which talk about guidelinesbeing rolled out for technology transfer/licenseagreements as well as for valuation of IP.

Again, the enforcement of IP has been veryminutely planted in the policy and has someremarkable provisions like special IP courts forselected districts (6.3.1), expert patent judicialbenches in the high court of metro cities (6.3.2) andregionalizing of the IPAB where the IPOs are based(6.3.5). I must add here that, these provisions willhelp in speedy disposal of the cases and will alsoencourage result based filing of IP cases at rurallevel as well. This is something which has beenproposed in the provisions of the policy which isthe need of the hour as far as enforcing the IP rightin the litigation is concerned. Like I have said earlierin my work here, that, the objective of humancapital development is an out of the box featurewhich shall immensely help and support to all thesix objectives of the National IPR Policy becausethe objective is filled with provisions of providingbasic and case based knowledge to enforcementofficials, government officials, common person,researchers, scientists, innovators, creators andstudents. The policy also has proposed provisionsin this objective which aim to establish educationalinstitutions of Intellectual Property for variousindividuals discussed here in above.

I think that with this IPR Policy there is a lot instored for other nations but the immediate andassured resul ts that other nations makingapplications in India would feel in the form of anexpedited registration process and very effective,strong and smooth enforceable IP process in the

National IPR Policy of India

contd. on page no. 365


Advocates – client-lawyer relationship:

Lawyers are perceived to be their client’s agents.The law of agency may not strictly apply to theclient- lawyer’s relationship as lawyers have certainauthority and certain duties. Because lawyers arealso fiduciaries, their duties will sometimes be moredemanding than those imposed on their agents. Theauthority-agency status affords the lawyers to actfor the client on the subject matter of the retainer.One of the most basic principles of the lawyer clientrelationship is that lawyers owe fiduciary duties totheir clients. As part of those duties, lawyers assumeall the traditional duties that agents owe to theirprinciples and, thus, have to respect the clients’autonomy to make decisions at a minimum, as tothe objectives of the representation. Thus, accordingto generally accepted notions of professionalresponsibility, lawyers should follow the client’sinstructions rather than substitute their judgment forthat of the client. The law is now well settled that alawyer must be specifically authorized to settle andcompromise a claim, that merely on the basis of hisemployment he has no implied or ostensibleauthority to bind his client to a compromise/settlement. A lawyer generally has no implied orapparent authority to make an admission orstatement which would be directly surrender orconclude the substantial legal rights of the clientunless such an admission or statement is clearly aproper step in accomplishing the purpose for whichthe lawyer was employed.

To put it alternatively that a lawyer by virtue ofretention, has the authority to choose the means forachieving the client’s legal goal, while the clienthas he right to decide on what the goal will be. Insome cases, the decision is reserved for the client.It is often said that the lawyer can make decisionsas to tactics without consulting the client, while theclient has a right to make decisions that can affect

Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

17 his rights. If the decision in question falls withinthose that clearly belong to the client, the lawyer’sconduct in failing to consult the client or in makingthe decision for the client, is more likely to constituteineffective assistance of counsel.

An advocate has to conduct himself and his dutiesin an extremely responsible manner. They must bearin mind that what may be appropriate and lawfulfor a person who is not a member of the Bar, or fora member of the Bar in his non-professionalcapacity, may be improper for an advocate in hisprofessional capacity.

[Himalayan Co-op. Group Housing society vs.Balwan singh (7 SCC 373)]

Principle of Interpretation:

It is trite as well that in a case of reasonable doubt,the construction most beneficial to the subject is tobe adopted. The underlying principle is that themeaning and the intention of a statute must becol lected from the plain and unambiguousexpressions used therein rather than from any notionthat may be entertained by a court which may appearto it to be just and expedient. Equally, fundamentalis the principle of statutory interpretation that noconstruction to legislation ought to be provided soas to render a part of it otiose or redundant as heldinter alia by this Court in Maharashtra Universityof health sciences vs. Satchikitsa Prasarak Mandal[ (2010) 3 SCC 786]

That it is the cardinal principle of interpretation notto brush aside a word used in a statute or in anotification issued under a statute and full effectmust be given to every word of an instrument hadbeen underscored by this Court in South CentralRai lway Employees Cooop Credi t SocietyEmployee’s union Vs. Registrar of Coop Societies[ (1998) 2 SCC 580] . [Voltas Limited vs. State of Gujarat (7 SCC 527)]

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Tax Recovery from Directors : Sec. 179:Conditions : Ram Prakash SingheshwarRungta v/s. ITO (2015) 370 ITR 641(Guj)

Issue :

What are the conditions to be fulfi lled beforeinvoking provisions of Sec. 179 of the I.T. Act,1961?

Held :

Sub – Section (1) of section 179 of the Income TaxAct, 1961, provides for joint and several liabilityof the directors of a private company wherein thetax due from such company in respect of anyincome of any previous year cannot be recovered.The first requirement to attract such liability of thedirector of a private limited company is that the taxcannot be recovered from the company itself. Suchrequirement is a pre-requisite and necessarycondition to be ful-filled before action under section179 can be taken. Once it is shown that there is aprivate company whose tax dues have remainedoutstanding and cannot be recovered, any personwho was a director of such a company at the relevanttime would be liable to pay such dues. However,such liability can be avoided if it is proved that thenon-recovery cannot be attributed to the threefactors of gross negligence, misfeasance or breachof duty on the part of the directors. The lack ofgross negligence, misfeasance or breach of duty onthe part of the directors is to be viewed in the contextof non recovery of the tax dues of the company. Inother words, as long as the director establishes thatthe non recovery of tax cannot be attributed to hisgross neglect, etc. his liability under section 179(1)of the Act would not arise. Here again theLegislature advisedly used the word “gross” neglectand not a mere neglect on his part.

CA. C. R. [email protected]

Firm transformed into Pr ivate L td Co.Sec. 45 does not apply : CIT v/s. UnitedFish Nets (2015) 228 Taxman 302 (A.P)

Issue :

When the firm was transformed into a Private Ltd.Co. and partners were issued only shares, whetherprovisions of Sec. 45 would be applicable?

Held :

It becomes clear that two aspects become importantviz. the dissolution of the firm and distribution ofassets as a consequence thereof. Assuming that onit being transformed into a private limited company,the assessee ceased to exist and thereby, it stooddissolved, the liability to pay tax would arise, if onlythere is distribution of assets, as a result of suchdissolution. Even according to the Department, theerstwhile partners of the firm did not receive theassets corresponding to their shares. What all hadtaken place is that they had been allotted shares inthe company corresponding to their shares of assetsin the firm.

The distribution must result is some tangible act ofthe physical transfer of properties or the intangibleact of conferring exclusive right vis-à-vis an itemof property on the erstwhile shareholder. Unlessthese or other legal correlatives take place, it cannotbe inferred that there was any distribution of assets.In the instant case, the shares of the respectiveshareholders in the company were defined underthe partnership deed. The only change that hastaken place on the firm being transformed into acompany was that the shares of the partners werereflected in the form of share certificates. Beyondthat, there was no physical distribution of assets inthe form of dividing them into parts, or allocationof the same.

From the Courts

CA. Jayesh C. [email protected]

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Precedent: Judicial Discipline: Tr ibunal:C.I .T. v/s. Janapr i ya Engineer ingSyndicate (2015) 274 CTR 71 (AP)

Issue :How the Tribunal has to follow precedent? Whatis the judicial principle?

Held:When the appeal was pending before High Courtagainst the decision of ITAT’s Special Benchdecision, until and unless the decision of SpecialBench is upset by High Court, it binds smallerbench and Coordinate Bench of the Tribunal. Underthe circumstances, it is not open to the Tribunal toremand the matter on the ground of pendency ofthe same issue before High Court, overlooking andoverruling, by necessary implication, the decisionof the Special Bench. It is not permissible underquasi judicial discipline. Under the circumstances,the impugned order is set aside and the matter isrestored to the Tribunal to decide the issue inaccordance with law and it would be open to theTribunal either to follow the Special Bench decisionor not to follow.

Reopening: M eaning of “Reason ToBelieve” : Techman Buildwell P. L td. v/s. Asst. C.I.T. (2015) 370 ITR 771 (Delhi).

Issue:What is the meaning of “Reason To Believe” inreopening of assessment and how the AOs shouldact?Held :Even though the statute is apparently wider, thecontrolling expression in Sec. 147 of the I.T.Act.1961, i.e. “reason to believe” necessarily refers tosome objective, set of circumstances. In other words,the material or objective facts should pertain tosomething discovered by or made known to the A.O.subsequent to the original assessment made. Toaccept the revenue’s contention based upon a purelytextual interpretation of the provision would in factresult in a disguised review of the power which isclearly beyond the intent of Parliament. In fact suchexercise of power amounts to abuse of power.

The assessee is required to fairly disclose what isexpedient of him, “the primary facts”, whilesubmitting the return. It is up to the A.O. to drawthe necessary inferences.

From the Cour ts

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In the instant case it is held that:The “reasons to believe” nowhere highlighted what,if at all, was the material, which the A.O. came uponor became aware of subsequent to the originalassessment. In other words, what triggered the AO’scuriosity to imped him to reexamine the files anddocuments pertaining to a completed assessmentwas unknown. Nor did the materials placed in theassessment show that the assessee had unjustifiablysuppressed valid or relevant information which wasotherwise avai lable. The advertence to thedisallowance of a provision for an ascertainedl iabi l i ty points to the A.O. impugning whatamounted to nothing but a masked review. Whatappears to have exerted the A.O.’s mind was thatthe original order was not framed properly as itoverlooked certain materials which led to loss ofrevenue. The A.O. in the first instance did notperform his job properly for which the assesseecould not be faulted. The A.O.’s omission was thesole basis for issuing the reasseement notice and,consequently, proceeding to make the demand.Therefore, the notice and the demands arisingconsequent to the notice were quashed.

Reopening : Four Years or Six YearsDonaldson India Filters System (P) L td.v/s. Dy. C.I .T. (2015) 274 CTR 73 (Del)

Issue :

How the action of A.O. and provision of law is tobe considered for limits of 4 years/ 6 years in thematter of reopening of assessment?

Held :

The first proviso to s. 147 makes it abundantly clearthat no action there under is ordinarily permissiblein cases where assessment for the relevant assessmentyear has already been made under s. 143(3), afterexpiry of four years from the end of the relevantassessment year. But, it is clear that this limitationwould apply only if there has been a scrutinyassessment and not otherwise. There is, however,an exception available even to the four year rulewherein such reopening of the assessmentproceedings is permitted if any income chargeableto tax has escaped assessment on account of failureon the part of the assessee ‘to disclose fully and trulyall material facts necessary’ for assessment for theassessment year in question. Noticeably, the

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From the Cour ts

reopening of the assessment after expiry of four yearsis permitted only if there has been a default on thepart of the assessee to disclose. To put it conversely,the law does not provide for reopening of theassessment, through the route of s. 147, if any incomehas escaped assessment on account of failure on thepart of the assessing authority to gather necessaryinformation within the prescribed period or to makeproper inquiry or subject the available material toproper scrutiny. Thus, it emerges that generally theassessing authority is vested by the amended law ins. 147 to reassess (recompute etc.) if he has reasonsto believe that income has escaped assessment butthis he can do only within four year period. On elapseof such period, the matter must attain finality. Yet, ifthe AO also finds material giving rise to reasons tobelieve that the escapement was due to default ofassessee to truly disclose, the bar of limitation wouldget lifted. Undoubtedly, Expln. 1 to s. 147 indicatesthat mere production of account books or otherevidence before the AO would not necessari lyamount to disclosure of the material information bythe assessee. But then, the Explanation clarifies thesaid general refrain by the words “not necessarily”.Therefore, the burden is equally placed on the AOto exercise due diligence in examining the record(account books or evidence) produced before himin the light of declarations made in the return orresponses (to the notices, questionnaire etc). The sinequo non for action under s. 147 (to deal withescapement of income) is gathering or availabilityof some “tangible material” requiring the matter tobe reopened.

Section 68 and Peak Theory: C.I .T. v/s.Manoj Indravadan Chokshi (2015) 229Taxman 56 (Guj .)

Issue:How the benefit of Peak Theory in cash deposits isto be given to the assessee?Held:The A.O. found that the assesses had withdrawnlarge sum of Rs.39.70 lakhs from his bank accountand again deposited the same in his bank account.Observing that the assessee withdraw the cashinstead of sufficient cash balance available withhim, the A.O. added the said amounts as unexplainedcash deposits.

When the matter was carried to High Court it isheld as under.

As such the assessee did explain his deposits of theaforesaid amount in his Bank account. Thereafteri t was immaterial whether the assessee hadwithdrew the said amount and applied subsequentlyfor his own use by redepositing the same in his Bankaccount. As rightly observed by the CIT(Appeals),once the source of cash deposit in Bank account isexplained, subsequent withdrawal is not requiredto be explained. The A.O. had not brought on recordany evidence which proves that cash withdrawalhad been invested somewhere else and cash balancein the cash book is artificial.

Audi t obj ect ion and r eopening:Rajratna Metal Industr ies Ltd. v/s. Asst.C.I .T. (2015) 371 ITR 222 (Guj .)

Issue:

Reopening of assessment on the objection of auditparty is valid?

Held:

“To satisfy ourselves, whether the reassessmentproceedings have been initiated at the instance ofthe audit party and solely on the ground of auditobjections, we cal led upon learned advocateappearing on behalf of the revenue to provide theoriginal files from the Assessing Officer, and learnedadvocate has produced the relevant files from theoffice of the Assessing Officer. On a perusal of thefi les the noting made therein and the relevantdocuments, it appears that the assessment is soughtto be reopened at the instance of the audit party, solelyon the ground of audit objections. It is also foundthat, as such, the Assessing Officer tried to sustainhis original assessment order and submitted to theaudit party to drop the audit objection. Such beingthe position, the matter requires to be considered.

The present petition succeeds on the aforesaid groundalone, i.e. the assessment was reopened solely onthe ground of audit objections raised by the auditparty. Consequently, the impugned reassessmentproceedings are hereby quashed and set aside”.

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John Energy L td. v. DCIT 154 ITD 451(Ahd)Assessment Year : 2002-03 to 2009-10Order dated: 10th Apr il, 2015

Basic Facts

The assessee was engaged in business of oil andgas exploration like drilling of wells, conductingof seismic survey of any oil fields including theactivities like hiring of equipments and tools inproject on turnkey basis.The assessee entered intoan agreement with ONGC. It had given mobilecrane to ONGC, on hire. The vehicle was used forrectifying the defect in different wells and wasmoving from one well to other well. The assesseeraised bill in respect of moving charges betweenlocations including rig down and rig up.Theassessee claimed higher rate of depreciation at therate of 40 per cent on ‘work-over rigs’ treating it as‘heavy motor vehicle’ considering the features,functions and nature of work over rigs.The AO heldthat merely because a particular rig was mountedon motor vehicle or motor lorry does not make thewhole rig as a motor lorry or motor vehicle. Hetherefore allowed depreciation at lower of 25% andmade addition. It was observed by the AO that thelorry and rig mounted on it are two different andseparable unit. The cost of rig is higher than thecost of lorry, therefore, the assessee is not entitledfor higher depreciation. The assessee, beingaggrieved by the assessment order, preferred anappeal before the ld. CIT(A), who, after consideringthe submissions, dismissed the appeal of theassessee.

Issue

Whether where r ig was inseparable/ integralpar t of motor lor r y which was used forr ecti fying, defect, etc. in di f fer ent wel l s,assessee’s claim of higher depreciation was tobe allowed on motor lor ry under section 32?

Held

As per explanation (b) to Section 32, the expression“heavy goods vehicle”, “heavy passenger motorvehicle”, “light motor vehicle”, “medium goodsvehicle”, “medium passenger motor vehicle”,“maxi-cab”, “motor- cab”, “tractor” and “road-roller” shall have the meanings respectively asassigned to them in Section 2 of the Motor VehiclesAct, 1988. Rig falls under the category of HeavyGoods Vehicle as per Motor Vehicle Act and hasbeen so registered by the State Transport Authorityin the registration certificate. From the photographgiven by the assessee, it is observed that theworkover/ servicing mobile rigs are specificallydesigned for such purpose. Moreover, as per theproforma invoices submitted by the assessee, it isevident that it pertains to 100 ton work-over/servicing mobile rig. Therefore, the contention thatthe work over rig remains static is not correct. It isalso noteworthy that the assessee-company hasraised invoices per kilometer in respect of themovement of the rig from one place to another. It isnot the case that where the bill has been raised solelyon the basis of static operations. As per Ld. CIT(A),the depreciation at higher rate would be availableonly if crane is given on hire in view of the judgmentof Gujarat High Court in Gujco Carriers v. CIT[2002] 256 ITR 50/122 Taxman 206 but it wouldnot be available to workover mobile rig. Thereasoning of ld. CIT(A) is not acceptable, as in boththe cases there is mobility from place to anotherand both are designed for rendering specificservices. The fact that State transport authority hasregistered the workover/servicing mobile rig underthe category heavy goods vehicle drilling rig.Thus,the Hon’ble ITAT held that the ratio laid down bythe Gujarat High Court in case of Gujco Carriers(supra) is squarely applicable in the facts of thepresent case. Therefore, respectfully following thesame the AO was di rected to al low higher

CA. Yogesh G. [email protected]

Tribunal News

CA. Aparna [email protected]

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depreciation at the rate of 40 per cent on rigs asclaimed by the assessee. Thus, the appeal of theassessee was allowed.

DCIT v. Subramanya Constructions &Development Co L td 154 I TD 303(Bang)Assessment Year : 2009-10Order dated: 20th February, 2015

Basic Facts

The assessee-company was a builder, i t madeinvestments in equity shares and earned dividendincome from it. A major portion of the investmentsunder question was made in the Financial Year2005-06. The incremental investment was anegligible amount. The income earned, being innature of dividend was exempt from tax. The AOwas of the opinion that assessee had not adducedanything to show that the investment was made fromnon-interest bearing funds. Therefore, he appliedRule 8D(2)(i i ) and Rule 8D(2)(i i i ) to makedisallowance in respect of interest. The CIT(A) heldthat the disallowance made under Rule 8D (2)(ii)was uncalled for, but the disallowance under Rule8D(2)(iii) was held valid as he opined that noinvestment could be maintained for such a longperiod without any expenditure made. Therefore,he deleted the disallowance made under Rule 8D(ii)while confirming the disallowance made under Rule8D(2)(iii).

Issue

Whether where, once, assessee raised a plea thatit had incur red no expense covered by section14A for i ts investment por tfol io, AssessingOfficer had to make a ver ification especiallywhen incremental investments was negligibleand whether, in absence of any such satisfactionrecor ded by author it ies below, impugneddisallowance was liable to be deleted?

Held

The Tribunal found from records that interest freefunds were available with assessee which wassubstantially higher than the investments made byappellant. The Tribunal held that i t was notnecessary to draw a one to one nexus between

investments and interest free funds. When the fundshad gone out of a common pool and the assesseehad interest free funds in excess of investments, itcould take a valid pleas that such investments weremade out of interest free funds. This being the caseunder consideration, the disallowance of interest u/s 14A was deleted.

The Hon’ble ITAT vis-à-vis the disallowance madeunder Rule 8D(2)(iii) found that though the assesseedid not take specific plea it had stated there wasnothing which called for a disallowance undersection 14A investment portfolio. Under section14A, once assessee has taken a stand that it had notincurred any expenditure u/s 14A, in the opinionof Tribunal the AO is not justified in invoking Rule8D(2)(iii) for disallowance of indirect expenditureunless he recorded dis-satisfaction of claim. It isessential such non-satisfication has to be given withcogent reasons before invoking section 14A.Doctrine of satisfaction no doubt, does not meanthat an AO should presume what was in the mindof the assessee and express his approval ordisapproval thereon. However once assessee saythat it had incurred no expenses covered by section14A for its investment portfolio, AO had to make averification, especially when incremental investmentwas negligible. Therefore, order of the CIT(A)wasset aside. Disallowance made under rule 8D(iii) wasalso deleted in favour of the assessee.

DCIT Vs. Mur lidhar Gattani 154 ITD408 (Guwahati)Assessment Year : 2008-09 Order dated:27th January, 2015

Basic Facts

During the year under consideration, the assesseeclaimed deduction u/s 80-IC. The Assessing Officerdisallowed the assessee’sclaim of deduction u/s 80-IC on profits derived from the business conductedby the assessee on the grounds that ‘milk’ and ‘milk’based products are not articles covered in theFourteenth Schedule of the Act. On appeal, CIT(A)allowed the claim of the assessee.

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Issue

Whether since milk is an ar ticle mentioned inthe Four teenth Schedule of the Act, profitder ived from production of milk is eligible fordeduction under section 80-IC?

Held

The Hon’ble ITAT referred the decision of Hon’bleSupreme court in case of CIT v. Tara Agencies,wherein the apex court while explaining themeaning of the word production held that theexpression “produced” was given a wider meaningthan the word “manufacture” pointing out that theword “produced” wil l include an activity ofmanufacturing the materials by applying humanendeavor on some existing raw material, but theword ‘produce’ may include securing certainproduce from natural elements, for example, bymulching the cow the milkman, produce milkthough he has not applied any process on any rawmaterial for the purpose of bringing into existencethe thing known as milk .The word ‘Production’ or‘Produce’ used in juxtaposi tion to the word‘Manufacture’ takes in bringing into existence newgoods by a process which may or may not amountto manufacture. It also takes in all the by-products,intermediate products and residual products whichemerge in the course of manufacture of goods. Thus,in view of the decision of Hon’ble Supreme Courtin case of Tara Agencies (supra), it was held that“Milk” is an article or thing which can be producedby the assessee and, therefore, the views taken bythe CIT(A) in holding that “Milk” is an article orthing mentioned in Part-A of Fourteenth Scheduleof the Act, and that the profit derived fromproduction of milk is eligible for deduction u/s 80-IC of the Act is upheld.

ITO Vs. Earnest Towers (P) L td. 171TTJ 319 (Kol)Assessment Year : 2008-09 Order dated:13th May, 2015

Basic Facts

M/s MMRDA Ltd. allotted a plot of land to theassessee under a lease agreement for a period of 80years. Terms of the lease deed make it abundantly

clear that the huge lease premium paid by theassessee was for the acquisition of rights over theproperty rather than the ‘use’ of land as specified insection 194I of the Act.Therefore, the assessee didnot deduct TDS u/s 194I of The Act. However, theAO contended that TDS must be deducted underthe provisions of section 194I of the Act as thetransaction is in the nature of ‘advance rent’ for theuse of ‘land’ and ‘building’ appurtenant on the land.An appeal was preferred to CIT(A) by the assesseewho allowed the assessee’s appeal. While doing sothe CIT(A) emphasized on the expression “for theuse of land” appearing in s. 194-I of the Act andheld that the payment of premium by the assesseeis not for “use” of property itself rather it is for therights for the exploitation of the property byconstructing commercial apartments. Furthermore,the CIT(A) referred to the distinction between thelease premium and the rent and came to theconclusion that premium is not paid under lease butis paid as a price for obtaining lease.

Issue

Whether the assessee is required to deduct TDSu/s 194I of the Act on the lease premium paid?

Held

In the instant case, the assessee had entered intothe agreement for the acquisition of rights in theleasehold property rather than ‘use’ of the landaccording to the definition of ‘use’ implied in theAct. The terms of the lease deed leave no mannerof doubt that the lease premium was for acquisitionof rights in the leasehold property rather than useof land. The implication of s. 194I is not to bring inits purview payments of any or every kind. Onlythose payments which are in the nature of “use” ofland come within the ambit of s. 194I. The word“use” is therefore, of prime importance fortransactions where the consideration paid for theproperty would be termed as “rent”. The term “use”has to be interpreted keeping in mind therelationship between the landlord and the tenant.The same cannot be extended to bring within itspurview exploitation of any kind with reference tothe property by changing its identity for its ownbenefit and thereafter selling it for profit. If that be

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so and the word ‘use’ is given an extended meaning,there would be no difference between a saletransaction and a transaction between the landlordand the tenant. This would render the intention ofthe legislature in importing the word ‘use’ in s. 194-I otiose. Further the Hon’ble ITAT, purported thatthe lease term (of 80 years) supports the fact thatthe lease was entered for reasons other than the ‘use’of asset; some of the purposes being, the rights tomodi fy, the rights of exploi tation long-termenjoyment, right to mortgage and sell. These rightsdo not constitute ‘use’ as defined in the Act.Keeping these facts in mind the amount paid forthe lease cannot be classified as ‘advance rent’. TheHon’ble ITAT also found it relevant to pronouncethat the premium was not in the nature of rent asthe amount does not align with the market rentalvalue of the property. The price paid to part withthe property is premium or salami and hence not inthe nature of rent for the ‘use’ of the asset. Therefore,the provisions of s. 194I were not applicable to thelease premium paid by the assessee.

Aspect Sof twar I NC. Vs. ADI T(International Taxation) 172 TTJ 1 (Del)Assessment Year : 2003-04, 2004-05,2007-08 to 2010-11Order dated: 13th May, 2015

Basic Facts

The appellant is a corporationincorporated inDelaware State, USA. The appellant is engaged inthe businessof provision of hardware, software andrendering of support services thatenable call centrecompanies, to better manage customer interactionsvia voice,email, web and fax. The assessee derivesits revenue primari ly from supply of”contactsolutions”, software l icense and provision ofservices including,installation, maintenance andprofessional services.The assessee sel l scontactsolutions to the customers in India which iscombination of software andcompatible hardwarethat enables the customer of Aspect US toanswercustomer request, log in complaints androute communications. The softwareand hardwareboth are integral parts of the solutions which theassessee sellsto the customers and channel partnersin India. While the hardware is sold,the software is

licensed. With respect to software, the customer isgrantedpartial rights permitting the use of softwarefor internal use. The AO considering the definitionof ‘royalty’ under section 9(1)(vi) of the Act, aswell as Article 12(3) of the Tax Treaty came to theconclusion that the amount received by the assesseefrom licensing of software qualified to be royalty.The DRP confirmed the action of the AO and heldthat the customer isgetting a right to use thesoftware, which can be used for internal operationsinbusiness of the customer. The nature of softwarewas far from being ‘shrinkwrapped software’.

Issue

Whether consideration received by the assesseefor the supply of the said product i.e. “contactsolutions” along with licence of software doesnot constitute to royalty under ar t. 12 of theIndo-US DTAA?

Held

All the contact solutions are manufactured outsideIndia in USAand the supplies are made from outsideIndia to various customers on Exwork/ FOB basis.The title and risk is passed outside India on shipment.The assessee has contracts with 63 customersinIndia for supply of contact solutions and licensingof embedded software.Further, 8 out of 63customershave been sold software exclusively, implying amajority ofcustomers having purchased bothhardware and software.. Considering the businessmodel of the assessee with respect to supply/licensing of software, the agreement withend usercustomer and Channel Partnerwere examined.From the clauses of the agreements, it was evidentthat what is sold to the endcustomer is a productcomprising of both hardware and software. Thesoftwareis not separately licensed. Further, theappellant retains all the intellectualproperty rightsin the software and the end user is merely providedwith limitedright to use the licensed product solelyfor internal use. The issue relating to supply of“contact solutions” which comprises saleofhardware and license of embedded software toend customers is squarelycovered in the favour ofthe assessee by the decision of the Hon’ble DelhiHighCourt in the case of DIT v. Ericsson A.B. It

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was accordingly held that the consideration receivedby the assessee for supply ofproduct along withlicense of software to end user is not royalty underArticle12 of the Tax Treaty. Even where thesoftware is separately licensed withoutsupply ofhardware to the end users (i.e. eight out of 63customers), it is not considered as royalty as heldin the case of Infrasoft Ltd. by Delhi HighCourt.Accordingly, it was held that there was notransfer of any right inrespect of copyright by theassessee and it was a case of mere transfer ofacopyrighted article. The payment is for acopyrighted article and represents thepurchase priceof an article. Hence, the payment for the same isnot in thenature of royalty under Article 12 of theTax Treaty.

Aithent Technologies (P) L td. Vs. DCIT171 TTJ 768 (Del)Assessment Year : 2007-08Order dated: 12th June, 2015

Basic Facts

The assessee, an Indian company, was engaged indevelopment of software.The assessee has a branchoffice in Canada. The assessee and its branch officealso rendered certain services to its AE at US.Theassessee inadvertently considered a transactionentered into with the branch from his office in Indiaas an international transaction. The TPO treated itas such and computed the Arm’s length Price byapplying the average operating profit margin of thecomparables to the cost base of transactions withthe AE, which also included the transaction withthe branch office. The DRP upheld AO’s order onthis issue.

Issue

Whether the transaction between head office inIndia and branch office in Canada could beconsidered as international transaction?

Held

As per Tribunal the answer to the above issue wasin negative because section 92B(1)categoricallyprovides that ‘For the purposes of this section andss. 92, 92C, 92D and 92E, an “international

transaction” means a transaction between two ormore AEs… … … … ”. From the definition of‘international transaction’ given in section 92Balongwith the meaning of the AE given in s.92A, itis clear that that in order to describe a transaction asan ‘international transaction’ there must be two ormore separate entities. The tribunal based on judicialprecedent held that there cannot be valid transactionof sale between branch office and head office. Itfurther held that the assesee is only one entity, thensuch inter se dealing between the head office andthe branch office cease to be commercial transactionin the primary sense and hence it cannot beconsidered as international transaction whoseprerequisite is a transaction between two or moreAEs. Accordingly it was held that since the officein Canada is only a branch office and not a separateentity distinct from the assessee, the transactionbetween head office in India and branch office inCanada cannot be considered as internationaltransaction.

The tribunal also held that there is hardly any needto accentuate that there can be no estoppel againstlaw. Merely because the assessee took aninadvertent appreciation of the transactions with selfas international that cannot prevent it from claimingbefore the authorities that the correct legal positionshould prevail.

It was accordingly held that , the TPO was notjustified in determining the ALP of the internationaltransaction of ‘Software Product Development/Software Consultancy Services’ by applying theaverage operating profit margin of the comparablesto the cost base of transactions with its AE, whichalso included the transactions with the branch officein Canada. Such cost base was directed to beconsidered as exclusive of transactions with theCanada branch. Therefore, the impugned order wasset aside to that extent.

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In this issue we are giving gist of an importantdecision rendered on 31/8/2015 by the Hon’bleIncome Tax appellate Tribunal (ITAT), ‘D’-Bench,Ahmedabad in the case Biotech Ophthalmic Pvt.Ltd. (Appeal No. 443/Ahd/2011 and C.O. No. 71/Ahd/2011) which throws light on the provisions ofsection 153 (3), 151(1) as regards what is themeaning of “finding” and “direction”.

The brief facts which led to this appeal was theissue regarding taxability of the loan availed fromone of the associate companies by the assessee forwhich the Assessing Officer invoked provisions ofsection 2 (22) (e) of the Act and wanted to tax thesame as deemed dividend on the ground that oneof the common shareholders in both the companiesis having substantial shareholding in both thecompanies.

The main issue about the taxability of dividend u/s2 (22)(e) of the Act was decided by the CIT(A) infavour of the assessee following the decisions ofHon’ble Special Bench of Tribunal in the case ofACIT v/s Bhaumik Colours Pvt. Ltd. 118 ITD 1and also following the decisions of other HighCourts. However, while disposing off this appealof the assessee, the CIT(A) gave direction to theA.O. to tax the same amount of deemed dividendin the hands of shareholder, i .e. the commonshareholder in both the lender and the borrowingcompany.

In the appeal before Hon’ble Tribunal , thedepartment filed appeal against the deletion ofdividend u/s 2 (22)(e) whereas assessee filed CrossObjection objecting to the observations of thelearned CIT(A) to tax it in the hands of Director ofthe Company. The assessee challenged this findingin C.O. and requested the Tribunal to expunge samefrom the order of CIT(A).

CA. Sanjay R. [email protected]

Unreported Judgements

The Hon’ble Tribunal on merits of the case abouttaxability of dividend u/s 2 (22) (e) following theSpecial Bench decision in the case of BhaumikColours Pvt. Ltd. (supra) and also Gujarat HighCourt decision in the case of CIT v/s Daisy PackersPvt. Ltd. in Tax Appeal No.212 of 2010 held thatsuch dividend can only be taxed in the hands ofshareholder and since the borrowing company isnot the shareholder, in the lending company suchdeemed dividend cannot be taxed in the hands ofthe borrowing company.

As regards the Cross Objection of the assessee forexpunging the directions of the CIT(A), the Tribunalmade a very detailed analysis of provisions ofsection 153 (3) (ii), 151 (1) and also the relevantdecisions of higher Courts in this regard. Since theanalysis makes an interesting reading, the same isproduced verbatim from Para-9 onwards of the saiddecision, which are reproduced as under:

Extracts from Decision of Tribunal

…………………………………………………………………………………………………………………………………………

“9. The assessee has also moved a cross objectionwhich seeks to expunge CIT(A)’s directionsto bring this deemed dividend to tax in thehands of Shri Mehul P Asnani, director inassessee’s company.

10. Learned counsel submits that while decidingappeal of the assessee before him, it was notopen to the CIT(A) to give adjudication ontaxability of this income in the hands of aperson other than this assessee. He hasclearly exceeded his jurisdiction in holdingthat the amount in question is taxable in thehands of Shri Mehul P Asnani. He urges usto expunge these observations. In support ofhis prayer, learned counsel for the assesseeinvites our attention to a decision of thecoordinate bench in the case of Jagat MineralsPvt Ltd Vs DCIT and vice versa (ITA Nos


2110, 2403 and 2750/Ahd/11; dated22.4.2015) whereby similar remarks made bythe CIT(A) have been modified.

11. Learned Departmental Representative, on theother hand, relies upon the stand taken by theCIT(A). He submits that when the impugnedaddition was deleted solely on the ground thatit was required to be taxed in the hands of thedirector concerned, the CIT(A) was quite justified in directing the Assessing Officer tobring it to tax in the hands of that director.

12. We have heard the rival contentions, perusedthe material on record and duly consideredfacts of the case in the light of the applicablelegal position.

13. In our considered view, it is important to firstunderstand the role played by the findings ordirections of this nature. We are dealing withthe assessment year 2006-07 and the orderof the CIT(A) was served on the AssessingOfficer on 5th January 2011. Obviously, theassessment must have attained finality, by thetime the Assessing Officer came to know ofthese directions, since in terms of Section153(1) “no order of assessment shall bemade under section 143 or section 144 atany time after the expiry of—(a) two yearsfrom the end of the assessment year in whichthe income was first assessable; or (b) oneyear from the end of the financial year inwhich a return or a revised return relatingto the assessment year commencing on the1st day of April, 1988, or any earlierassessment year, is filed under sub-section(4) or subsection (5) of section 139,whichever is later”. No doubt, under section153 (2A), when an assessment is set aside orcancelled under section 250, 254,263 or 264a fresh assessment, as a result of such acancellation, can be framed within one yearfrom the end of the financial year in whichthe order under section 250 or section 254 isreceived by the Commissioner or the orderunder section 263 or section 264 is passed bythe Commissioner. However, this provision

comes into play only when the order passedunder section 250, 254, 263 or 264 in the caseof the assessee himself. That is not thesituation that we are dealing with at present.

14. Section 153 (3), dealing with the impact ofthe findings or di rection given by the revisionary, appellate or judicial authorities, prescribes that “the provisions of” inter aliasection 151(1) “shall not apply to the …..assessments, reassessments andrecomputations which may, subject to theprovisions of sub-section (2A) be completedat any time where the assessment,reassessment or recomputation is made onthe assessee or any person in consequenceof or to give effect to any finding or directioncontained in an order, under sections 250,254, 260, 262, 263 or 264 1535 or in an orderof any court in a proceeding otherwise thanby way of appeal or reference under thisAct”. In other words, when effect of a findingor direction of an revisionary, appellate orjudicial authority is to be given, that exercisecan be carried out any point of time de horsthe time limits specified in section 153(1).However, even this relaxation of time limits issubject to certain riders, including ridercontained in Explanation 3 to Section 153(3)which provides that, where by a revisionary,appellate or judicial order of the above nature,an income is excluded from the income of oneassessee and held to be income of the otherassessee, the assessment of such an incomein the hands of another assessee “be deemedto be one made in consequence of or to giveeffect to any finding or direction containedin the said order, provided such other personwas given an opportunity of being heardbefore the said order was passed (Emphasisby underl ing supplied by us).” Clearly,therefore, unless the person in whose handincome is directed to be added has been heardbefore such di rections are i ssued, thedirections issued by the revisionary, appellateor judicial authority are an exercise in futility.This rider is equally relevant in respect of

Unrepor ted Judgements


reopening of an assessment under section154, as a result of the findings or directions ofthe revisionary, appel late or judicialauthorities.

15. It is an undisputed position, on the facts ofthis case, that Shri Mehul P Asnani, in whosehands CIT(A) has directed this income to beadded, has not been granted an opportunityof hear ing by the CIT(A) before thesedirections were issued. Such being theadmitted facts, i ts beyond doubt that acompleted assessment cannot be disturbedor reopened to give effect to such findings ordirections.

16. There is, however, an even more fundamentalissue, and that issue is whether the directionthat the deemed dividend income beingbrought to tax in the hands of Shri Asnani is adirection necessary for the disposal of case.This issue assumes significance in view of thelegal position that, as held by Hon’bleSupreme Court in the case of CIT vs RajinderNath [(1979) 120 ITR 14 (SC)], “As regardsthe expression “direction” in s. 153(3)(ii) ofthe Act, it is now well settled that it must bean express direction necessary for thedisposal of the case before the authority orCourt. It must also be a direction which theauthority or Court is empowered to givewhile deciding the case before it.” TheirLordships then added that “The expressions“finding” and “direction” in s. 153(3)(ii) ofthe Act must be accordingly confined” andthat “ Sec. 153(3)(ii) is not a provisionenlarging the jurisdiction of the authority orCourt.”

17. As to what constitutes “an express directionnecessary for disposal of a case”, we find thefollowing guidance from Their Lordships:

To be a necessary finding, it must be directlyinvolved in the disposal of the case. It ispossible in certain cases that in order torender a finding in respect of A, a finding inrespect of B may be called for. For instance,where the facts show that the income can

belong either to A or B and no one else, afinding that it belongs to B or does not belongto B would be determinative of the issuewhether it can be taxed as A’s income. Afinding respecting B is intimately involvedas a step in the process of reaching theultimate finding respecting A. If, however,the finding as to A’s liability can be directlyarrived at without necessitating a finding inrespect of B. then a finding made in respectof B is an incidental finding only. It is not afinding necessary

for the disposal of the case pertaining to A.The same principles seem to apply when thequestion is whether the income underenquiry is taxable in the assessment yearunder consideration or any other assessmentyear. As regards the expression “direction”in s. 153(3)(ii) of the Act, it is now well settledthat it must be an express direction necessaryfor the disposal of the case before theauthority or Court. It must also be adirection which the authority or Court isempowered to give while deciding the casebefore it.

18. Let us now, in the above light, revert to thefacts of the case before us. The authoritiesbelow were dealing with a deeming fiction,i.e. deemed dividend, about an income. Thecase of the assessee was that this deemingfiction of deemed dividend could not beinvoked in the present case because theassessee did not hold the shareholdings in thecompany which had extended loan to theassessee. This plea has been accepted by theCIT(A), but, for accepting such a plea, it isnot a condition precedent that this deemingfiction must come into play in the hands ofsome other assessee other than this assessee.Whether the loan received by the assessee isheld to be deemed dividend in the case of someother person or not is wholly irrelevant fordeciding whether or not this is deemeddividend in the hands of this assessee or not.Learned CIT(A) holds that since Mehul PAsanai is a shareholder in the said company,



the receipt can be added as deemed dividendin the hands of Mehul P Asnani, but then whathe overlooks is that al l the condi tionsprecedent for taxing a receipt as deemeddividend are to be satisfied qua the assesseein whose income is to be taxed, and being ashareholder is only one such precondition.Learned CIT(A) has, as noted earlier in thisorder, observed that “If the recipient of loanis not a shareholder and the transaction iscovered by this provision, the addition is tobe made in the hands of the shareholder”,but then it is difficult to comprehend as to howone can come to a conclusion that atransaction is covered by this provision, i.e.deeming fiction of the deemed dividend,without examining the transaction betweenthe shareholder of the company and thecompany in which such shares are held.Wi thout even giving a fi nding aboutsatisfaction of all these conditions, learnedCIT(A) proceeds to hold that it is an incometo be taxed in the hands of the shareholderi.e. Mehul P Asnani. It is a classic case ofputting cart before the horse and is whollybased on fallacious logic. The direction is thusnot only unnecessary but patently incorrect.Viewed thus, the direction given by theCIT(A), for taxability of this deemed dividendin the hands of Shri Asnani, does not constitute“an express direction necessary for disposalof a case”. Nothing really turns on hisdirection, as such. Even if this direction wascorrect, learned CIT(A) had no business togive such a direction without affording anopportunity of hearing to the affected partyand that too when it was absolutely necessaryto decide the issue in appeal before him. Thereis a certain degree of restraint that is expectedof the appellate authorities in discharge oftheir judicial functioning.

19. As we part with our adjudication on this issue,we may also take note of l earnedDepartmental Representative’s contentionthat the assessee has no locus standi to raiseany grievance against these directions as he

is not the aggrieved party vis-à-vis thesedirections. We are unable to see any merits inthis plea either. The manner in which theappeal has been decided by the CIT(A) givesan impression, which i s a whol l yinappropriate impression and which has alsobeen reiterated before us by the learnedDepartmental Representative, that theimpugned additions have been deleted in thehands of the assessee as these additions arerequired to be made in the hands of someoneelse. The deletion of the impugned additionin the hands of the assessee company has beenthus projected to be, though perhaps at asomewhat subliminal level, dependent of theaddition being confirmed in the hands of thedirector. The directions given by the CIT(A)do prejudice interests of the assesseeinasmuch as these di rections not beingimplemented may be viewed as detrimentalto the interests of the assessee but then thedirections suffer from legal infirmities, fromglaring procedural flaws, and are incapableof being implemented anyway. In any case,since these directions are given in the case ofthis assessee and the appellate order by theCIT(A) in the case of this assessee cannot bechallenged, in appeal before us, by a thirdparty, the only way to prevent these directionsreaching the finality is a challenge by thisassessee himself, particularly because, as isthe settled legal posi tion, the statutoryprovisions are to be construed ut res magisvaleat quam pereat i.e., in such a manner asto make it workable rather than redundant.The assessee before us, therefore, has, in ourconsidered view, locus standi to challengelegality of these directions.

20. In view of the above discussions, and bearingin mind entirety of the case, we vacate thedirections in questions. The cross objection isthus allowed.”

We hope readers would find the above very useful.

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It is proposed that when mere additions are madeto the total income in respect of repairs expenditureof Rs 100000 treating the same as capi talexpenditure and when the club membership feesof Rs 500000 are disallowed then the view of theAssessing Officer to levy concealment penalty isinappropriate. Such disallowance of expenditureduring assessment cannot be considered as areasonable and justified ground for imposition ofpenalty provisions u/s 271(1)(c).

View Against the Proposition:Explanation 1 to Sec 271(1)(c) provides that anyaddition or disallowance is deemed to representconcealed income once the conditions under theExplanation are fulfilled and will attract the penaltyfor concealment of income. Hence, the explanationto the said section provides a deeming fiction thatany addition or disallowance made to the Totalincome is regarded as concealed income andleviable for concealment penal ty i f thecircumstances under the Explanation are matchedwith. Hence, the burden of proof (onus of proof)shifts from the department to the assessee as regardsthe concealed income.

It is submitted that the decision of the Apex Courtin the case of Dharmendra Textile Processors (306ITR 277) is very clear and now it is not necessaryfor the Assessing Officer to prove the deliberateact on the part of the assessee for concealment andhence, once the addition is confirmed the penaltyproceedings can be initiated against the assessee.

Earlier the Apex Court in the case of Dilip N. Shroff(291 ITR 519) held that the order to impose suchpenalty is quasi criminal in nature and concealmentof income as well as furnishing of inaccurateparticulars of income both refers to the deliberateact on the part of the assessee. The Supreme Courtwas of the view that mens rea (guilty state ofmind) is an essential ingredient for leviability ofconcealment penalty.

CA. Kaushik D. [email protected].

Controversies

Whether Disallowed claim for expenditureamounts to Fur nishing I naccur atePar ticular s and Concealment penalty u/s271(1)(c) is leviable?

Issue:

When additions are made to the total income inrespect of repairs expenditure of Rs 100000 treatedas capital expenditure and in respect of payment ofclub membership fees of Rs 500000, the AssessingOfficer is of the view that concealment penalty ischargeable for concealment of particulars of incomeand/or filing of inaccurate particulars of income.

Proposition:

In the context of imposing concealment penaltyvarious issues are under debate and one such issueis whether disallowance of claim of expendituretreating the same as incorrect amounts to furnishinginaccurate particulars of income attracting theprovisions of concealment penalty.

A penalty u/s 271(1)(c) of the Income Tax Act canbe levied in case the assessee has concealed theparticulars of his income or he has furnishedinaccurate particulars of income. The action ofimposition of penalty should clearly bring outwhether it is imposed on account of concealedincome or furnishing inaccurate particulars ofincome. Such penalty shall be leviable by theAssessing Officer, CIT(A) or CIT during any ofthe proceedings under the Income Tax Act.

By and large, in practice, once any claim ofexpenditure as shown in the return of income ofassessee is disallowed, the Assessing Officerinitiates the penalty proceedings and once suchdisallowance is confirmed by the First AppellateAuthority, the Assessing Officer imposes theconcealment penalty although it is a settled provisionthat a mere disallowance or an addition to incomedoes not give rise to concealed income.


However, the decision in the case of Dilip N Shroffstands overruled by the subsequent decision in thecase of Dharmendra Textile Processors and hencefor levying concealment penalty criminal intentionsare not required to be proved. Once the case iscovered by legal fiction as per Explanation 1 to Sec271(1) any addition or disallowance is deemed torepresent the concealed income for the purpose oflevy of concealment penalty.

In the case of Bhaskar Bhattacharya J., theassessee failed to disclose the salary income for aperiod of 8 months received from the previousemployer. The Department contended that such Actof the assessee for failure to disclose such incomeearned by him could not be considered as oversightor an inadvertent mistake on his part and hencelevied penalty for concealment of income u/s271(1)(c). The assessee argued that full amount oftax payable by him from salary concealed wasdeducted by earlier employer and thus assessee hadno intention to deceive. However, the Kolkata ITATconsidered the same as concealment of incomenotwithstanding the fact that such concealment wasan inadvertent mistake on the part of the assesseeand thus levied penalty u/s 271(1)(c).

It is submitted that when the claim for expenditure istotally without any legal basis and is made withmalafide intentions to reduce the income it willamount to filing of inaccurate particulars of income.When capital expenditure is treated as revenue andclub membership fees which is always for a largerperiod is claimed in one year then obviously theassessee has malafide intention of claiming theexpenditure which is not claimable. In short, whenthe assessee makes the claim which is totallyunacceptable in law then it invites concealmentpenalty for filing of inaccurate particulars of income.

In the case of MAK Data Pvt Ltd, the real test wasabout whether the surrender was voluntary ? Merelybecause the assessee claims the admission to bevoluntary by using such phrases like “Buying Piece”,“Avoid Litigation”, or “Amicable Settlement”, theassessee’s conduct in not offering the income in thereturn ,cannot be explained away, was the point ofview of the Apex Court. The facts of the case wereblank transfer deeds for shares were found at

assessee’s premises. Details regarding the same werenot given while filing the return and the facts werenot recorded in the books. On inquiry regarding thesame by the Assessing Officer, an amount of Rs.40.47lakhs was admitted as undisclosed income. Onthe facts it was borne out that, the nature of thetransaction as evident from blank transfer deedsindicate the intent to suppress the source of suchshares covered by the blank documents. TheSupreme Court presented the view that thecircumstances of the case clearly indicated that thesurrender was hardly voluntary. Further it indicatedthat “the law does not provide that when the assesseemakes a voluntary disclosure of his concealedincome he is to be absolved from penalty”. At thesame time, Supreme Court did not rule out voluntaryadmissions prior to detection by the assessing officer.Hence, penalty u/s 271(1)(c) for concealment ofincome was confirmed by the Supreme Court.

In our case as stated above as the repairsexpenditure are capital in nature and the clubmembership fees is in the nature of expenditure ,the benefit of which is available for a longer periodof time and hence the same have been disallowed ,the Department taking the base of judgement ofDharmendra Textile Processors would levy penaltyfor concealment once these additions are confirmedby Appellate Authorities.

The department subsequent to the judgement ofDharmendra Textiles has taken a view that whenthe disallowance is confirmed at the Appellate leveland the Assessed income is higher than the Returnincome, provisions relating to concealment penaltygets attracted.

View in favour of the proposition:I t is submitted that i t i s very obvious thatconcealment penalty would be levied once theconditions specified u/s 271(1)(c) is fulfilled. Therecan be no dispute that everything would bedependant upon the return of income filed becauseit is the only document where assessee can furnishparticulars of his income. When such particularsare found to be incorrect, penalty shall be levied.However there are a series of decisive judgementsavailable which concludes that mere disallowanceof expenditure as furnished in the return of income

Controversies


would not lead to a conclusion that assessee hasconcealed his income or filed inaccurate particularsleading to penalty u/s 271(1)(c).

CIT v/s Reliance Petroproducts Pvt ltd:The assessee in the above case had furnished thereturn of income showing a loss of Rs 26,54,554.The assessee had claimed deduction of expenditureby way of interest of Rs 2877242 on borrowingsfor the purchase of shares of IPL. As no income onsuch shares was earned by the assessee during theyear, the Assessing Officer disallowed the claim ofthe said interest. The Assessing Officer issued ashow cause notice for levy of penalty u/s 271(1)(c). The assessee was of the opinion that suchdisal lowance was merely on the grounds ofdifference of opinion and cannot be considered asa case of concealment of income.

The First Appellate Authority deleted such penaltyimposed by the Assessing Officer and when theDepartment took the matter up to the Tribunal, it alsoconfirmed the view of the First Appellate Authority.The honourable High Court also gave the same view.However, the department was of the view that suchdeduction of interest expenditure by the assessee waspurely without any legal basis and confirmed themalafide intentions on the part of the assessee.Thedepartment also contended that u/s 36(1)(ii) of theIncome tax act only that amount of interest is allowedwhich pertains to the borrowings for the purpose ofbusiness/ profession. Hence the contentions ofassessee to claim the expenditure as allowable waspurely unacceptable in law and hence invoking theprovisions of penalty u/s 271(1)(c)

The Honourable Apex Court has held that whenthe interest on borrowings to purchase the sharesof IPL was disallowed by the Assessing Officerclaiming that no taxable income was earned by theassessee on such shares and hence invoking theprovisions of sec 14A such expenditure would notbe allowed, such allowabil i ty claimed by theassessee in the return furnished cannot lead to aconclusion that there is concealment or filing ofinaccurate particulars on the part of the assessee.The Supreme Court also contended that noinformation furnished in the return of income werefound to be factually incorrect or inaccurate.

Honourable Pune tribunal in the case of KanbaySoftwar e India Pvt L td. has discussed theapplicability of Sec 271(1)(c) in a situation wherea claim of deduction was disallowed duringassessment. The Pune tribunal has held that whenan expenditure is accepted or rejected it has nothingto do with filing of inaccurate particulars of income.When the assessee has raised a legal claim whichwas ultimately found to be unacceptable does nottantamount to filing of inaccurate particulars by theassessee. It was further held that concealment ofincome means that the assessee has made all theconcise efforts to hide or cover up the income earnedby him. But when the assessee has clearly disclosedsuch particulars in the return of income, it can beconcluded that the assessee has acted in atransparent manner.

In the case of T. Ashok Pai , the Supreme Courthas held that mere omission or negligence doesnotconstitute a deliberate act on the part of theassessee.Hence, when the assessee makes bonafidemistake it doesnot form a valid ground for levy ofpenalty for concealment of income.

The Mumbai ITAT in the case of VIP IndustryL td has held that when the assessee has genuinelyclaimed an expenditure as a deduction afterdisclosure of necessary facts it does not concludeto concealment of income.The Honourable Punjaband Haryana High Court in the case of SSP Ltdhas held that an erroneous claim made by theassessee in the absence of concealment or filing ofinaccurate particulars cannot be a ground for levyof penalty. In the case of CIT v/s Deeksha Holidaysit is clearly held that any deduction of expenditureclaimed by the assessee if not found to be bogus oringenuine and the assessee has disclosed all the factsrelating to such expendi ture , then a meredisallowance of such expenditure would not be aconclusive ground for levy of penalty.

The Madras High Court in the case of CIT v/sJayaraj Talkies has held that a mere addition ofincome or surrender of income did not implyconcealment of income where the assesseesurrendered certain amount to assessment becauseit was unable to substantiate its claims with thenecessary vouchers.

Controversies


The decision of the Apex Court in the case of ShreeKr ishna Electr icals which stated that when theitems which were not included in the Turnover ofthe assessee for the purpose of computation of taxwere disclosed in the appellant’s books of accounts, the Assessing Officer can include such items inthe turnover of the assessee disallowing theexemption claimed but penalty cannot be imposedon the assessee.It is submitted that it is a settled law that the assessmentproceedings and the penalty proceedings are separateand independent of each other. Therefore, everydisallowance cannot be a subject matter of penaltyeven if such disallowance is confirmed by the higherauthorities. In all of the above cases and in manymore cases though the additions have been confirmedby the higher authorities but penalties levied by theAssessing Officer do not find favour of the AppellateAuthorities.Summation:The decision in case of Reliance Petroproducts PvtLtd by the Apex Court can be taken as a base toconclude that a mere disallowance would not beconsidered as a malafide or deliberate act on thepart of the assessee nor does i t amount toconcealment of income and hence the view of theAssessing Officers to levy penalty u/s 271(1)(c) isnot justified. The same view was reiterated by theSupreme Court in the case of Shree KrishnaElectri cals and accordingly in such casesconcealment penalty cannot be levied.By the judgement of Reliance Petroproducts PvtLtd, there are four major principles which theSupreme Court has analysed for the levy of penalty:1. Penalty u/s 271(1)(c) cannot be imposed

merely because there are additions to the totalincome of the assessee.

2. Assessing Officer needs to prove that:(i) There was concealment of income or(ii) The return of income furnished by the

assessee is on the basis of incorrect facts,falsity and untruth

3. For imposing penalty AO need not prove themental status of the assessee i.e AssessingOff icer need not prove that whether theassessee has fi led such incorrect detai lsintentionally or not.

4. Notwithstanding the fact that the return pertainsto income or loss , penalty u/s 271(1)(c)

It is now clear that the judgement of Apex Court inthe case of Dilip N Shroff stands overruled by the

judgement in the case of Dharmendra TextileProcessors only to the extent it holds that the elementof mens rea is essential for levy of concealmentpenalty and the other observations in case of DilipN Shroff holds good except perhaps the observationswith regard to nature of concealment penalty.In the case of Price Waterhouse Coopers v/s CIT,the assessee had furnished its tax audit reportprepared by another Chartered Accountant clearlymentioning that a claim of Rs 40 lakhs debited toP/L is not allowed u/s 40(A)(7) . However, whilefiling the return of income the assessee claimed suchexpenditure as deductible. The assessment wasmade ignoring the above facts and later on a noticeu/s 148 was issued to the assessee to have a detailedlook at the return but the assessee filed the samereturn in response to such notice as the originalreturn. The Assessing Officer levied penalty u/s271(1)(c) . The Supreme Court has held that theassessee could make a silly mistake and that thecallibre or the professional expertise of the assesseehas little or nothing to do with the inadvertent error.Therefore, the penalty u/s 271(1)(c) could not belevied in such cases.In the case of Guj ar at Nar mada Val leyFer tilizers Co L td. , proceedings were initiatedfor certain taxable allowances paid to the employeeson which tax was not deducted by the assessee.The employer bonafide bel ieved that suchexpendi ture were not taxable and hence nodeduction of tax was made at source. The assesseealso further contended that the proceedings forinterest on such non deduction had been initiatedin the earlier years but later on had been droppedby the department. Hence, assessee was justifiedof his bonafide intentions. Hence, a bonafide beliefthat the amount is not taxable, although it is taxablewill not qualify for penalty u/s 271(1)(c).Alongwith this it is also hereby submitted that evenif the assessee has not challenged the order ofassessment levying tax and interest and has paid suchinterest and tax that by itself would not be consideredas a sufficient evidence for the authorities either toinitiate penalty proceedings or to impose penalty.Only when no explanation is given by the assesseeor when the explanation provided by the assesseeis found to be false or where the assessee fails topresent that hi s explanation i s bonaf ide,concealment penalty can be levied. It is furtherclarified that when the explanation offered by theassessee , even though not substantiated are found

Controversies


to be bonafide and all such facts are disclosed Inthe return of income and computation thereof , nopenalty can be imposed.Thus, it is a settled law that when the claims aremade by the assessee in the return of income on thebasis of bonafide intentions and doesnot amount toa deliberate act on the part of the assessee it cannotbe leviable for penalty u/s 271(1)(c).All theunderstatement in the return of income will notwarrant for penalty. Therefore when the repairexpenditure amounting to Rs 100000 is disallowedconsidering the same as capital expenditure andwhen the club membership fees of Rs 600000 aredisallowed then the same doesnot tantamount toconcealment of income or fi ling of inaccurateparticulars of income. Inadvertent mistakes whichare readily admissible during the hearing should notmerit penalty. When the assessee discloses all thefacts , but draws an inference which is not

acceptable by the Assessing Officer , it doesnotmean that the assessee is liable for penalty.Hence from al l the past cases and logicalinterpretation of the Law, I would like to sum upthe controversy in favour of the assessee. Since,there are ample evidences to prove that the claimfor repair expenditure and the club membership feesamounted to a bonafide belief on the part of theassessee, the levy of penalty is not valid in law.Therefore, notwithstanding the view given in the caseof Dharmendra Textile Processors it is hoped thatDepartment follows the view of the Apex Court inthe case of Reliance Petroproducts Pvt Ltd in fullspirit. We also hope that the Department would notinitiate proceedings for levy of concealment penaltyor filing of inaccurate particulars in such cases.

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litigation sector. Back in India, the pharmaceuticaland technology industry are top applicants as far asthe Intellectual Property sector is concerned andthey may expect the same concrete results whichwould be evident soon enough in the IP registrationand litigation sector. Apart from that, the objectiveslike commercialization of Intellectual Propertywould help these industries a lot by tapping the poolof inventions through the IP exchange program andthereby increasing the bank of their IntellectualProperties. Also, the provisions of tax incentives,to the companies with R & D facilities in India andvarious sops for SMEs & MSMEs is aimed atencouraging start ups and giving a boost toinnovation in the country.

Moreover, the policy has also reached far out to theless fortunate and has included provisions in thedraft to encourage Intellectual Property applicationsby not only awareness programs and human capitaldevelopment, but by also arranging financial loansfrom rural and co-operative banks to facilitate thedevelopment of IP at the lower level of the societywhere talent is lost because of eclipse of funds. Also,one must not forget to give due credit to the thinktank behind this policy who has managed to sneakin provisions for implementation of Intellectual

contd. from page 347 Ar ticle : National IPR Policy of I ndia

Property facilitation centers with Advisory councilswho would help and support not only the SMEs &MSMEs but also the researchers, innovators andscientists in building their Intellectual Propertystrategically on their way to its application with theIPOs and beyond, if need be in its enforcement andcommercialization.

Lastly, I would want to applaud the think tank forcreating such a balanced IPR policy which reachesout to all the sectors that needed to be addressed.However, I also feel that if a provision of a NationalIPR budget would have been proposed as aprovision to this draft than it would have beensupportive of all the ambitious objectives of theNational IPR Policy. The Intellectual Property inIndia is a part of Ministry of Commerce & Industry,Ministry of Human Resource Development,Ministry of Information & Technology, Ministry ofAgriculture and Ministry of Environment & Forests.Therefore, it would have less difficult to propose anationwide IPR budget but at the same time I feelthat think tank being the expert pool of individualsthat it is, must have thought or proposed a wayaround for it too.

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Controversies


No penalty can be levied u/s 271(1)(c) onceincome returned u/s 153A is accepted byAssessing Officer

Kir it Dahyabhai Patel vs. ACIT (Tax AppealNo. 1181 to 1185 of 2010) (Gujarat High Cour t)

xxx…

We have heard learned advocates for the partiesand perused the material on record. Before dealingwith the contentions, i t would be relevant toreproduce Explanation 5 to Section 271 (1) (c) ofthe Income Tax Act, which reads as under:”

Explanation 5. Wherein in the course of a [searchinitiated under section 132 before the 1st day ofJune, 2007] , the assessee is found to be the ownerof any money bullion, jewellery or other valuablearticle or thing (hereafter in this Explanationreferred to as assets) and the assessee claims thatsuch assets have been acquired by him by utilising(wholly or in part) his income

xxx…

9. The High Court of Madras in the case ofS.D.V.Chandru (supra) held that in a casewhere the assessee had not disclosed hisincome in the returns filed for the previous yearwhich have ended prior to the date of thesearch and, in the statement given underSection 132(4) the assessee admitted thereceipt of undisclosed income for those yearsand also specified the manner in which suchincome had been derived and thereafter paysthe tax on that undisclosed income withinterest, then such undisclosed income wouldget immunised from the levy of penalty.

10. Looking to the facts and circumstances of thecase, it would be relevant to refer the decisionrelied upon by learned senior advocate for theappellant in the case of GebilalKanbhaialal(HUF) (supra), wherein the Apex Court inparagraph No.6 has observed as under:”

Advocate Tushar [email protected]

Judicial Analysis

6. Explanation 5 is a deeming provision. Itprovides that where, in the course of searchunder Section 132, the assessee is found tobe the owner of unaccounted assets andthe assessee claims that such assets havebeen acquired by him by utilizing, whollyor partly, his income for any previous Yearwhich has ended before the date of searchor which is to end on or after the date ofsearch, then, in such a si tuation,notwi thstanding that such income isdeclared by him in any return of incomefurnished on or after the date of search, heshall be deemed to have concealed theparticulars of his income for the purposeof imposition of penalty under Section271(1)(C). The only exceptions to such adeeming provision or to such apresumption of concealment are given insub clauses (1) and (2) of Explanation 5.In this case, we are concerned wi thinterpretation of clause (2) of Explanation5, which has quoted above. Threeconditions have got to be satisfied by theassessee for claiming immuni ty frompayment of penalty under clause (2) ofExplanation 5 to Section 271(1(C). The firstcondition was that the assessee must makea statement under Section 132(4) in thecourse of search stating that theunaccounted assets and incriminatingdocuments found from his possessionduring the search have been acquired outof his income, which has not been disclosedin the return of income to be furnishedbefore expiry of time specified in Section139(1). Such statement was made by theKarta during the search which concludedon August 1, 1987. It is not in dispute thatcondition No.1 was fulfilled. The secondcondition for availing of the immunity from


penalty under Section 271(1)(C) was thatthe assessee should specify, in his statementunder Section 132(4), the manner in whichincome stood derived. Admittedly, thesecond condition, in the present case alsostood sati sfied. According to thedepartment, the assessee was not entitledto immunity under Clause (2) as he didnot satisfy the the condition for availingthe benefit of waiver of penalty underSection 271(1)(c) as the assessee failed tofile his return of income on 31st July, 1987and pay tax thereon particularly when theassessee concealed on August 1, 1987 thatthere was concealment of income. Thethird condition under clause (2) was thatthe assessee had to pay the tax togetherwith interest, i f any, in respect of suchundisclosed income. However, no timel imi t for payment of such tax stoodprescribed under clause(2). The onlyrequirement stipulated in the thi rdcondition was for the assessee to “pay taxtogether with interest”. In the present case,the third condition also stood fulfilled. Theassessee has paid tax with interest up tothe date of payment. The only conditionwhich was required to be fulfilled for gettingthe immunity, after the search proceedingsgot over, was that the assessee had to paythe tax together with interest in respect ofsuch undisclosed income upto the date ofpayment. Clause(2) did not prescribe thetime limit within which the assessee shouldpay tax on income disclosed in thestatement under Section 132(4).”

11. Even, the High Court of Chattisgarh in the caseof Abdul Rashid(supra) has held that in orderto get the benefit of immunity under clause(2)of explanation 5 to Section 271(1)(c) of theIncome Tax Act, it is not necessary to file thereturn before the due date provided that theassessee had made a statement, during thesearch and explained the manner in which thesurrendered amount was derived, and paid taxas well as interest on the surrendered amount.

12. At this stage, it is required to be noted that theApex Court in the case of Commissioner ofIncome Tax, West BanagalI Vs. VegetableProducts Ltd. (supra), has held that if the Courtfinds that the language of a taxing provision isambiguous or capable of more meaning thanone, then the Court has to adopt theinterpretation which favours the assessee, moreparticularly so where the provision relates tothe imposition of a penalty.

13. Considering the facts and circumstances of thecase and also considering the decisions reliedupon by learned senior advocate for theappellant, we are of the considered opinion thatthe view taken by the Tribunal is erroneous.The CIT(A) rightly held that it is not relevantwhether any return of income was filed by theassessee prior to the date of search and whetherany income was undisclosed in that return ofincome. In view of specific provision ofSection 153A of the I.T. Act, the return ofincome fi led in response to notice underSection 153(a) of the I.T. Act i s to beconsidered as return filed under Section 139of the Act, as the Assessing Officer has madeassessment on the said return and therefore,the return is to be considered for the purposeof penalty under Section 271(1)(c ) of the I.T.Act and the penalty is to be levied on theincome assessed over and above the incomereturned under Section 153A, if any.

14. Further, in the present case, it appears fromthe record that the assessees had satisfied allthe conditions which are required for claimingimmunity from payment of penalty underSection 271(1) of the Act. The provision doesnot specify any time limit during which theaforesaid amount i.e. the amount of penaltywith interest has to be paid. Admittedly whenthe assessees herein have paid the entire amountwith interest, the Assessing Officer ought tohave granted them immunity available underSection 271(1)(C ) of the Income Tax Act.

15. The decision relied upon by learned advocatefor the respondent will not apply to the factsof the present case.

Judicial Analysis


16. In view of the aforesaid facts of the case andalso the principle laid down in the decisionsrelied upon by the learned senior counsel forthe appellant more particularly the principle laiddown in the case of Assistant Commissionerof Income Tax Vs. GebilalKanhailal (supra)and Commissioner of Income Tax Vs. AbdulRashid (supra), we are of the consideredopinion that the penal ty under Section271(1)(C) of the Income Tax Act cannot belevied on the income shown in the return filedunder Section 153 of the I.T. Act.

17. Considering the facts and circumstances of thecase and also considering the decision of theMadras High Court in the case of S.D.V.Chandu (supra), we are of the opinion that theappellant is entitled to the benefit of theprovisions of Explanation 5(2) to Section271(1)(c) of the Income Tax Act.

18. For the foregoing reasons, the present appealsstand allowed. The order of the Tribunal isquashed and set aside. Consequently, the orderof the CIT(A) is restored. The question of lawinvolved in this appeals is answered in favourof the assessee and against the revenue.

CI T vs. Br i j endr a Gupta [2015] 61taxmann.com 180 (Calcutta)xxx…

4. Mr. Sinha, learned advocate appearing for therevenue did not dispute the fact that theassessee duly satisf ied the condi ti ons.However, for the sake of clarity, some cloudis required to be dispersed. Explanation-5 toSection 271(1) of the Income Tax Act readsas follows:

“Explanation 5.- Where in the course of a[search initiated under section 132 before the1st day of June, 2007], the assessee is foundto be the owner of any money, bul l ion,jewellery or other valuable article or thing(hereafter in this Explanation referred to asassets) and the assessee claims that such assetshave been acquired by him by utilising (whollyor in part) his income,—

xxx…

Clause (a) contemplates income for any previousyear for which returns has been furnished butthe income since disclosed had not been shown.It is axiomatic that if such income had beendisclosed in the returns filed under Section 139,the question of undisclosed income would nothave arisen. When the return had been filed butthe income since discovered was not disclosed,the question of concealment naturally arises.The legislature, however, made a consciousdeparture by carving out an exception providedthe conditions laid down in Clause (i) or Clause(ii) thereof have been complied with.

5. We are, in this case, concerned with Clause (ii).One of the conditions is that the assessee makesa statement under sub-Section (4) of Section 132that the assets unearthed have been acquired outof his income which has not been disclosed sofar in his returns of income already filed. Thedifficulty arises by the use of the expression “tobe furnished before the expiry of time specifiedin sub-Section (1) of Section 139”. A confusionis likely to arise as to whether the departure hasbeen sought to be made by the legislature onlyfor those cases where the statement as regardsundisclosed income was made pertaining to aprevious year for which time to file return underSection 139 had not expired. But that was notthe intention because the expression “unless”appears after Clauses (a) and (b) of Explanationwhich provides for imposition of penalty.Therefore, ‘unless’ has to apply to the provisionfor imposition of penalty. Therefore, theaforesaid expression “to be furnished” has tobe interpreted as ‘’required to be furnished”.Only in that case the Section will make ameaning otherwise the Section does not makeany meaning.

6. We are supported in our view by the judgmentof the Madras High Court in the case of CITv. S.D.V. Chandru[2004] 266 ITR 175/136Taxman 537 wherein a Division Bench opinedthat “ The additional words which refer to thetime specified in section 139(1) are only areiteration of the legal requirement regardingthe time within which returns should normallybe filed.”

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Judicial Analysis


CA. Savan [email protected]

Foreign Direct Investment – Repor tingunder FDI Scheme on the e-Biz platform

1. Attention of Authorised Dealers Category-I(AD Category - I) banks is invited to theprovisions of the Foreign ExchangeManagement (Transfer or Issue of Security bya Person Resident outside India) Regulations2000, notified by the Reserve Bank videNotification No. FEMA 20/2000-RB, dated3rd May 2000, as amended from time to time.Attention of AD Category – I banks is alsoinvited to A.P. (DIR Series) Circular No.6 datedJuly 18, 2014.

2. With a view to promoting the ease of reportingof transactions under foreign direct investment,the Reserve Bank of India (RBI), under theaegis of the e-Biz project of the Governmentof India has enabled online filing of the ForeignCurrency Transfer of Shares (FCTRS) returnsfor reporting transfer of shares, convertibledebentures, partly paid shares and warrants froma person resident in India to a person residentoutside India or vice versa.

3. The design of the reporting platform enablesthe customer to login into the eBiz portal,download the reporting form (FCTRS),complete and then upload the same onto theportal using their digitally signed certificates.The Authorised Dealer Banks (ADs) will berequired to download the completed forms,verify the contents from the available documentsand if necessary, call for additional informationfrom the customer and then upload the samefor RBI to process and al lot the UniqueIdentification Number (UIN). The FCTRSservices of RBI will be made operational onthe e-Biz platform from August 24, 2015. The

user manual for this service is Annexed to thisCircular.

4. It may be noted that for the present, the onlinereporting on the e-Biz platform is an additionalfacility to the Indian residents to undertake theirFCTRS reporting and the manual system ofreporting as prescribed in terms of A.P. (DIRSeries) Circular No.6 dated July 18, 2014would continue till further notice.

5. The ADs will be required to access the e-Bizportal [which is hosted on the NationalInformatics Centre (NIC) servers] using aVirtual Private Network (VPN) Accountobtained from NIC. ADs may refer to A.P. (DIRSeries) Circular No.95 dated April 17, 2015for financial aspects of obtaining/using the VPNaccounts.

6. AD Category-I banks may bring the contentsof this circular to the notice of their customers /constituents concerned. They are advised toextend due cooperation/assistance to theirconstituents for uploading the abovementionedforms on the e-Biz platform.

7. The directions contained in this circular havebeen issued under sections 10(4) and 11(1) ofthe Foreign Exchange Management Act(FEMA), 1999 (42 of 1999) and are withoutprejudice to permissions / approvals, if any,required under any other law.

For Full Text refer to A.P. (DIR Series) CircularNo. 9 dated 21 August 2015

h t t p s : / / w w w . r b i . o r g . i n / sc r i p t s /BS_CircularIndexDisplay.aspx?Id=9993

FEMA Updates

32


Statistics on share of top investing countr ies in India in terms in FDI equity flows for financial years2013-14 and 2014-15

Amount Rupees in crores (US$ in million)

Amount Rupees Country 2013-14 2014-15 Cumulative %age toin crores (April – (April ‘14- Inflows total Inflows(US$ in million) March) March, (April ’00 - (in terms ofRanks 2015) March ‘15) US $)

1. MAURITIUS 29,360 55,172 425,657 35 %

(4,859) (9,030) (87,555)

2. SINGAPORE 35,625 41,350 167,157 13 %

(5,985) (6,742) (32,188)

3. U.K. 20,426 8,769 109,654 9 %

(3,215) (1,447) (22,210)

4. JAPAN 10,550 12,752 93,396 7 %

(1,718) (2,084) (18,352)

5. NETHERLANDS 13,920 20,960 77,258 6 %

(2,270) (3,436) (14,671)

6. U.S.A. 4,807 11,150 66,880 6 %

(806) (1,824) (13,751)

7. CYPRUS 3,401 3,634 39,363 3 %

(557) (598) (8,044)

8. GERMANY 6,093 6,904 38,509 3 %

(1,038) (1,125) (7,644)

9 FRANCE 1,842 3,881 22,588 2 %

(305) (635) (4,513)

10. UAE 1,562 2,251 15,120 1 %

(255) (367) (3,045)

Total FDI Inflows from all countr ies* 147,518 189,107 1,233,538 -

(24,299) (30,931) (248,633)

* Includes inflows under NRI Schemes of RBI.

FEMA Updates


Statistics on sectors attracting highest FDI equity inflows in India for financial years 2013-14 and2014-15

Amount Rupees in crores (US$ in million)

Amount in Rs. Sector 2013-14 2014-15 Cumulative % age tocrores (April – (April ‘14- Inflows total Inflows(US$ in million) March) March, (April ’00 - (in terms ofRanks 2015) March ‘15) US $)

1. SERVICES SECTOR 13,294 19,963 205,532 17 %* * (2,225) (3,253) (42,713)

2. CONSTRUCTION 7,508 4,582 113,140 10 %DEVELOPMENT: (1,226) (758) (24,064)TOWNSHIPS,HOUSING,BUILT-UPINFRASTRUCTURE

3. TELECOMMUNICATIONS 7,987 17,372 84,092 7 %(radio paging, cellular mobile, (1,307) (2,895) (17,058)basic telephone services)

4. COMPUTER SOFTWARE 6,896 13,564 73,235 6 %& HARDWARE (1,126) (2,200) (15,017)

5. DRUGS & 7,191 9,211 65,282 5 %PHARMACEUTICALS (1,279) (1,523) (13,121)

6. AUTOMOBILE INDUSTRY 9,027 15,794 63,991 5 %(1,517) (2,570) (12,383)

7. CHEMICALS (OTHER 4,738 4,077 49,310 4 %THAN FERTILIZERS) (878) (669) (10,337)

8. POWER 6,519 3,985 46,640 4 %(1,066) (657) (9,557)

9. METALLURGICAL 3,436 2,897 41,147 3 %INDUSTRIES (568) (472) (8,547)

10 TRADING 8,191 16,962 43,799 3 %(1,343) (2,761) (8,060)

For Full data refer to

http://dipp.nic.in/English/Publications/FDI_Statistics/2015/india_FDI_March2015.pdf

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FEMA Updates


CA. Punit R. [email protected]

Service Tax Decoded

Point of Taxation in Construction Industry

1. Point of taxation means the point in time whena service shall be deemed to have beenprovided. In simple terms, point of taxation,is the time, when liability to pay service taxarise and has to be discharged accordingly.In this regards, Point of Taxation Rules, 2011has been notified and point of taxation is tobe determined accordingly. Generally, servicetax is to be discharged on raising of invoiceor receipt of money, whichever is earlier. It isworth noting that under Rule 4A of theService Tax Rules, 1994, issue of invoice iscompulsory. Under the said rule, invoice is tobe issued within 30 days from the date ofcompletion of the service. Thus, it is importantto determine that at what time provision ofservice gets completed.

2. Provision of many services, like constructionservices, takes longer time which may run inyears and service provider can’t wait for thecompletion of entire construction project forissuance of invoice or payment of service.Similarly, Government also can’t wait forsuch longer period for collection of servicetax. Such services are considered to be a“Continuous Supply of Service”.

3. Continuous Supply of Service is defined inRule 2(c) of the Point of Taxation Rules, 2011as any service which is provided, or agreedto be provided continuously or on recurrentbasis, under a contract, for a period exceedingthree months with the obligation for paymentperiodically or from time to time.

4. Further, in terms of first Proviso to Rule 3 ofthe Point of Taxation Rules, 2011, in case ofcontinuous supply of service where theprovision of the whole or part of the serviceis determined periodically on the completion

of an event in terms of a contract, whichrequires the receiver of service to make anypayment to service provider, the date ofcompletion of each such event as specified inthe contract shall be deemed to be the date ofcompletion of provision of service.

5. In other words, construction services aregenerally continuous for the period exceedingthree months and hence it is to be treated as“Continuous Supply of Service” for point oftaxation and service tax is to be dischargedaccordingly. If contract provides that oncompletion of any event service receiver isrequired to make payment to service provider,completion of such event will be consideredas completion of service and invoice isrequired to be issued within 30 days of suchevent an service is to be paid accordingly.

6. For example, a builder has accepted abooking of a unit from the buyer with thecondition that buyer will be required to pay20% on booking, 25% on completion of 1st

Floor, 25% on completion of 2nd Floor, andbalance 30% when builder handover the unitto buyer. In such a case service tax on 20%of amount is required to be paid on bookingamount, on 25% of the amount on completionof 1st Floor, on 25% of the amount oncompletion of the second floor and on 30%of the amount when bui lder handoverpossession. Service tax is required to bedischarged as stated above whether or notbuyer has actually paid the amount as agreedor not.

7. For example, on 1-4-2015, for unit in abuilding, an agreement was entered with abuyer and entire amount was agreed to bereceived in three equal quarterly instalments.However, buyers have not adhered to


Service Tax Decoded

payment schedule and last two instalments areyet not received till 30-9-2015. As per theagreed terms, due date of instalment is theevent, which requires buyers to makepayment. As this event, i .e. instalmentbecomes due, is completed, service tax isrequired to be paid even if buyer has not paidhis instalment in time.

8. Provision of construction service takes longertime and in many cases, it may run in years.It is quite possible that between starting andcompletion of service, rate of service tax hasgot changed. In such chase, Rule 4 of thePoint of Taxation Rules, 2011 comes intopicture and liability of service tax is to bedetermined accordingly. To determine the

applicable rate of tax as provided under Rule4, following three events are important.1. Provision of service i.e. completion of

service2. Issuance of Invoice3. Receipt of Payment

If any two events, out of three are occurredbefore change in rate, old rate will apply andif any two events out of three are occurredafter change in rate, new rate wi l l beapplicable.

9. This can be further understood throughfollowing example. W.e.f. 01-06-2015, rateof service tax is increased from 12% to 14%.Applicable rate will be as follows as stated inthe table.

Sr. Date of Completion Date of Issuance Date of Receipt Applicable Rate(Like Instalment Due) of Invoice of Payment

1 30/04/2015 15/05/2015 01/06/2015 12%

2 31/05/2015 01/06/2015 10/06/2015 14%

3 31/05/2015 01/06/2015 15/05/2015 12%

4 31/12/2015 31/05/2015 31/05/2015 12%

5 15/06/2015 31/05/2015 05/06/2015 14%

6 01/06/2015 05/06/2015 30/05/2015 14%

In the forth case, it is important to note the evenif services are getting completed long after theactual issuance of invoice and date on whichpayment is received, it is still chargeable at oldrate of 12% only. Thus, actual provision of theservice may not be relevant if invoice is issuedand payment is received.

In the fifth case, new rate of 14% will beapplicable even if invoice was issued at 12%.Thus, merely issuance of invoice will notresult in freezing of quantum of liability atcurrent rate.

10. In the case of contractors, in terms of thecontracts, builders are generally liable to payto contractor on monthly basis. Contractorsare required to raise the invoices on monthlybasis and pay service tax accordinglyirrespective of the fact that whether buildershave paid for their bill or not.

11. Whether service recipient is liable to pay tothe service provider during the continuity ofthe contract is to be determined as agreed inthe contract. If contract is silent on such event,which requires service recipient to make anypayment to service providers, service tax isto be paid only if amount is paid or invoice isissued.

12. Many times buyers pay their instalments inadvance for any reason, for example to savecapital gain. Even in case of continues supplyof service, it is worth noting that if advance ispaid by the service recipient, service tax is tobe paid on receipt of such advanceirrespective of the fact that in terms of thecontract, service recipient was not requiredto pay such advance.

13. In construction industry, it is not easy todetermine the time when services gets


completed. Even after completion of physicalconstruction activities, numbers of otherprocedures are to be fol lowed l i kemeasurement and quality approval etc. Suchprocess takes considerable time and servicerecipient does not finalize invoice amount orpay consideration to service provider. Here,question arises is whether invoice is requiredto be issued by service provider immediatelyon completion of physical activity or aftercompletion of all such activities which enablesservice provider to claim his money. The issueis clarified by the department through theirCircular No. 144/13/2011-ST, Dated18-07-2011. It has been clarified that completion ofservice would include not only the physicalpart of the providing the service but also thecompletion of all other auxiliary activities thatenable the service provider to be in a positionto issue the invoice. Such auxiliary activitiescould include activities like measurement,quality testing etc. which may be essential pre-requisites for identification of completion ofservice. It is further, stated that the test for thedetermination whether a service has beencompleted would be the completion of all therelated activities that place the service providerin a situation to be able to issue an invoice.

14. In terms of the Rule 4A of the Service TaxRules, 1994 invoice is required to be issuedwithin 30 days from the completion of theservice. In continues supply of service like inconstruction service, part of the service isdeemed to be completed when any event,which entitle service provider to receive hispayment, is completed. Invoice for suchpartially completed service is also required tobe issued within 30 days from the date of suchevent. Builders and Developers are also notexceptions to it and are required to issueinvoices to the buyers of the construction unit.

15. In many cases, builders do not enter into anyformal agreement with buyers and terms ofpayments are not clear. In absence of suchcontract, it is difficult to arrive at periodicalevents on which service tax should be paidand service tax should be paid as and whenpayment is received from buyers.

16. Many times, a buyer has to obtain a loan topurchase a property and bank requiresAgreement to Sale (i.e. Banakhat) so that itcan disburse the loan periodically as stated inthe Agreement to Sale. In this agreement,buyers and bui lders agree at periodicalinstalments and instalments become due asstated in the said agreement. Thus, in suchcases, event, which enables builder to receivethe payment is completed and service tax isrequired to be paid on event when suchinstalment becomes due and irrespective ofthe fact that whether buyer has paid suchinstalment in time or not.

17. It is also worth noting that in terms of Section2(ba) of the Point of Taxation Rules, 2011,“change in effective rate of tax” shall includea change in the portion of value on which taxis payable in terms of a notification. It meansthat even if there is change in portion of valuelike change in abatement percentage, it willalso be considered as change in effective rateand Rule 4 of the Point of Taxation Rules,2011 wi l l apply to such changes also.Similarly, under Service Tax (DeterminationValue) Rules, 2006, some speci f i edpercentage of value is provided for certainservices like Works Contract. Change inpercentage of such value is also “change ineffective rate of tax” and hence provision ofRule 4 of the Point of Taxation Rules, 2011will also be applicable to such change.

For example, abatement in the case ofcommercial construction was reduced from75% to 70% w.e.f. 01-03-2013. Such changewill also subject to Rule 4 and rate of tax is tobe determined accordingly. Further, w.e.f. 01-10-2014, Rule 2A of the Service Tax(Determination of Value) Rules, 2006 wasamended and percentage of taxable value forservice tax for works contracts for completionand finishing services such as glazing,plastering, floor and wall tiling etc. wereincreased from 60% to 70%. Such change isalso subject to Rule 4 of the Point of TaxationRules, 2011.

❉ ❉ ❉

Service Tax Decoded


CA. Ashwin H. [email protected]

Shr i Chaturshr ingi Seva Samittee vs.Commissioner of Central Excise, PuneI I I , CESTAT Mumbai (2015) 39 STR169 (Tr i-Mum)

Facts:-Demand of service tax was confirmed againstassessee on ground that they provided service ofmandap keeper. Assessee submitted that their activitydo not fall under scope of mandap keeper serviceand hence the demand was not sustainable.

Held:-It was held that demands were confirmed undermandap keeper service. As per provisions of ss 65(67)and 65(105) of the Finance Act, mandap keepermeans person who allowed temporary occupationof mandap for consideration for organizing anyofficial, social or business function. In this regard,appellants were Charitable Trusts registered underthe Income-tax Act and engaged in the activity ofmanaging the affairs of a temple. During Navratridays, the devotees came to the temple and some stallswere let out to different persons for the business ofselling toys, garlands, flowers, food etc. in the openplace adjoining to the temple. The appellants evenproduced copy of tenders under which the stalls wereallotted to different persons. That appellant contentedthat this activity does not fall under the scope ofmandap keeper service. Merit was found insubmission of assessee’s that they were not coveredunder scope of mandap keeper service. Impugnedorders accordingly set aside and assessee’s appealwas allowed.

Commissioner of Central Excise vs.Customs, Excise and Service Tax and M/s.Capital Color Lab High Court of Madras(2015) 22 CCHST 0569 (Chen HC )

Facts:-Adjudicating Authority confirmed demand againstassessee in respect of providing photography

Service Tax -Recent Judgements

service on the ground that there was short paymentof service tax with intention to evade payment ofservice tax..Adjudicating Authority also imposedequal penalty u/ss 76 and 78 of the Act. Tribunalset aside review order passed by Commissioner.

Held:-It was held that Commissioner should not imposehigher penal l iabil ity. It was further held thatmonetary limits were fixed in this regard and onlyif monetary limit exceeded Rs.2 Lakhs, appealcould be filed. Since monetary limit, even as perorder of Adjudicating Authority was well withinlimit of Rs.2 Lakhs, appeal filed by Departmentwas not maintainable and thus revenue’s appealdismissed accordingly.

Commissioner of Centr al Excise,Nagpur vs. M/s. Prakash R. JaiswalCESTAT Mumbai (2015) 22 CCHST0580 ( Mum-Tr ib )

Facts:-Issue involved in this case was regarding servicetax liability on activities of assessee in marketingand distribution of recharge vouchers of BSNL andimposition of penalties thereby. First appellateauthority held that service tax liability does not arisein respect of recharge vouchers. First appellateauthority accordingly reduced penalty imposed byadjudicating authority on assessee and also set asidedemand made against the assessee.

Held:-It was held that invocation of extended periodsought to be incorrect as issue was being agitatedbefore judicial forum. Show-cause notice whichinvoked extended period for demand of service taxfrom assessee needed to be set aside. In respect ofdemand within period of limitation from date ofissuance of show-cause notice, it was held thatassessee was liable to pay service tax liability alongwith interest. As regards penalty imposed, assesseecould have entertained bonafide belief on service

28

29

30


tax liability on recharge coupons as there were manyconflicting decisions by Tribunal. Hence view couldbe taken that assessee need not be visited bypenalties. As regards service tax liability on paddymilling charges, assessee could have entertainedbonafide belief that paddy milling charges on agroproduct which had been undertaken by Assesseemight not be covered under tax net. As regardsservice tax liabili ty on goods transport duringrelevant period, issue was being agitated beforevarious authorities. Hence assessee made out casewith justifiable reason that penalties need not beimposed on them. Accordingly, by invokingprovisions of s 80 of the Finance Act, 1994, penaltiesimposed by adjudicating authority under varioussections were set aside.In short where justifiable reasons were given byassessee for not imposing penalty on them, samewere justified to be set aside by invoking provisionsof s 80 of the Finance Act, 1994.

M /s. Pushpanj al i Tr avels vs.Commissioner of CE & Customs,Nagpur CESTAT Mumbai (2015) 22CCHST 0583 (Mum-Tr ib)

Facts:- Issue involved in this case was regardingservice tax liability for services rendered by assesseeunder category of Rent-a-Cab service during period2003-04 to 2006-07. Adjudicating Authori tyimposed penalties on assessee and same was upheldby first appellate authority.Held:- It was held that issue with regard to servicesrendered by assessee in providing cabs to variousauthorities would fall under category of Rent-a-Cabservice or not was agitated before various forumsduring material period in this appeal. Since issuewas not decided, assessee could have entertainedbonafide belief as to that they were not required todischarge any service tax liability. Thus this was afit case for invoking provisions of s 80 of theFinance Act, 1994 and penalty imposed on assesseewas set aside.

❉ ❉ ❉

31

contd. from page 348 Glimpses of Supreme Cour t Rulings

Expression ‘Rent’:

From the reading of 194-I, it becomes clear thatTDS is to be made on the ‘rent’. The expression‘rent’ is given much wider meaning under thisprovision than what is normally know in commonparlance. In the first instance, it means any paymentwhich is made under any lease, sub-lease or tenancy.Once the payment is made under lease, sub-leaseor tenancy, the nomenclature which is given isinconsequential. Such payment under lease, sub-lease and /or tenancy would be treated as ‘rent’. Inthe second place, such a payment made even underany other ‘agreement or arrangement for the use ofany land or any building ‘would also be treated as‘rent’. Whether or not such building is owned bythe payee is not relevant. The expression ‘anypayment’, by whatever name called and ‘any otheragreement or arrangement’ have the widest import.Likewise, payment made for the ‘use of any landor any building’ widens the scope of the proviso.In the present case, airlines are allowed to land andtake-off their aircrafts at IGIA for which landingfees is charged. Likewise, they are allowed to parktheir aircrafts at IGIA for which parking fees ischarged. It is done under an agreement and/orarrangement with AAI. These services includeproviding of air traffic services, ground safetyservices, aeronautical communication facilities,

installation and maintenance of navigational aidsand meteorological services at the airport. Theservices which are required to be provided by theseauthorities, like AAI, are aimed at passengers’safety as well as on safe landing and parking of theaircrafts. Therefore, it is not mere ‘use of the land’.On the contrary, it is the facilities, that are to becompulsorily offered by the AAI in tune with therequirements of the protocol, which is the primaryfocus. The AAI is providing all these facilities forlanding and take-off of an aircraft and in this wholeprocess, ‘use of the land’ pales into insignificance.What is important is that the charges payable arefor providing of these facilities. In fact, the chargeswhich are taken from the air-crafts for landing andeven for parking of the aircrafts are not dependentupon the use of the land. On the contrary, theprotocol prescribes a detailed methodology of fixingthese charges. Thus, when the airlines pay for thesecharges, treating such charges as charges for ‘useof land’ would be adopting a totally naïve andsimplistic approach which is far away from thereality. When matter is looked into from this angle,keeping in view the full and larger picture in mind,it becomes very clear that the charges are not foruse of land per se and, therefore, it cannot be treatedas ‘rent’ within the meaning of Sec.194-I.

[Japan Airlines Co. Ltd. Vs. CIT (123 DTR 103)]❉ ❉ ❉

19

Service Tax - Recent Judgements


CA. Bihar i B. [email protected].

Statute Updates Value Added Tax (VAT)

[I] Important Judgment:

[1] I n case of Del ta Rubber and PlasticsProducts (Gujarat High Cour t)

Issue:Whether Tax Credit can be disallowed in casewhere Registration No. of the sel ler iscancelled ab-initio?

Facts:The respondent – assessee had purchasedcertain goods from different sellers who areregistered under the provisions of Vat Act ondifferent dates. As far as one Vikas Enterpriseis concerned, from whom the assessee hadpurchased the goods to the tune of Rs.7,79,387/-, the registration was ab initio cancelled, theauthori ty passed assessment order on27.10.2010 and imposed the tax to the tune ofRs. 73,797/- + Interest and Penalty. The saiddecision was challenged by the assessee by wayof f i l i ng appeal before the DeputyCommissioner of Commercial Tax, Appeal –2, Ahmedabad. The appeal was partly allowedand the penalty was reduced from Rs. 2,21,392/- to Rs. 1,84,493/- by the order dated21.12.2011. The assessee challenged the saiddecision before the Tribunal by way of preferringSecond Appeal No. 22 of 2012. The appeal waspartly allowed, hence the appeal.

The learned Assistant Government Pleaderappearing for the appellant would submit thatthe Tribunal had erred in holding that the inputtax credit which was excess amount lying withcommercial department should have beencarried further for the next year and theauthority ought not to have imposed interestor penalty and the same is illegal since theregistration of the seller was cancelled ab-

initio. However, the Ld. AGP has fairlysubmitted that the decision relied upon by theTribunal in the case of Cosmos InternationalLimited passed by the Tribunal was challengedbefore this Court in Tax Appeal No. 857 of2013 and allied matters which have beendismissed by the Division Bench of this Courtby common oral judgment dated 20.3.2015.She, therefore, would submit that appropriateorder may be passed.

The learned Advocate appearing for theassessee has placed on record copy of decisiondated 20.3.2015 passed by the Division Benchof this Court in Tax Appeal No. 857 of 2013and allied matters.

The Hon’ble High Court has gone the saidjudgment and of the opinion that the Tribunalhas committed no error in removing the interestas well as penalty upon the assessee. Hence theappeal preferred by the State of Gujarat is herebydismissed. In view of dismissal of main appeal,Civil Application also stands dismissed.

As far as the cross objections filed by theassessee is concerned, the learned advocate ofthe appellant would submit that the assessee haspurchased the goods from a dealer who was aregistered dealer and, therefore, subsequentevents with regard to cancellation of registrationof the said seller would not disentitle the assesseefor claiming the benefit. In support of thesubmissions, he relied upon the decision of theHon’ble Supreme Court in the case of State ofMaharashtra v. Suresh Trading Company, 109STC 439 and submitted that the cross objectionsmay be allowed.

On the other hand, the learned Asst.Government Pleader has opposed the crossobjections and submitted that since theregistration of the seller is concerned, he wouldnot be entitled for any benefit.

Judgements and Updates


The Hon’ble High Court has heard learnedAdvocates for the respective parties.

It is an undisputed fact that when the assesseehas purchased the goods from the dealer/seller,he was registered under the provisions of theVat Act. It is also an admitted position thatsubsequently, his registration has beencancelled. Therefore, in our opinion, theassessee cannot be deprived of his right ofgetting credit of input tax available under theprovisions of Vat Act. The Hon’ble SupremeCourt in case of State of Maharashtra v. SureshTrading Company (Supra) has observed inparagraph 5 as under.

“… A purchasing dealer is entitled by law torely upon the certificate of registration of theselling dealer and to act upon it. Whatever maybe the effect of a retrospective cancellation uponthe selling dealer, it can have no effect uponany reason who has acted upon the strength ofa registration certificate when the registrationwas current. The argument on behalf of thedepartment that it was the duty of personsdealing with registered dealers to find outwhether a state of facts exists which wouldjustify the cancellation of registration must berejected. To accept it would be to nullify theprovisions of the statute which entitle personsdealing with registered dealers to act upon thestrength of registration certificates.”

Considering the above aspects, in our opinion,the case of the present assessee is covered underthe above referred decision of the Hon’bleSupreme Court. Hence the cross objection isallowed.

[2] Har iom Paper Mills vs. Dy. Commissionerof Commercial Tax:

Issue:The Tax Credi t was disal lowed on thepurchase of machinery.

Facts:Tax Credit was disallowed on purchase ofmachinery while passing assessment order forthe period 2006-07. The first appeal was partlyallowed. The appellant contended before the

VAT - Updates and Tr ibunal Judgements

Hon’ble Tribunal that the Ld. AppellateAuthority was not justified in not allowing taxcredit in respect of purchases of vertical firedrive panel and boiler. The Hon’ble Tribunalreferred appeal order and perused the recordand held that the appellant was entitled to claimtax credit in respect to the purchase of verticalfire drive panel and boiler.

[3] Keshav Till Factory vs. Dy. Commissionerof Commercial Tax

Issue:Whether the Tax Credi t i n case ofmanufacturing of 'Natural Till' into 'Dried Till'wi th the material used of caustic soda,machinery part, packing materials is allowableor not?

Facts:The activity of processing of natural till to driedtill and natural sesame seed in to hull sesameseed is held manufacture as provided in section2(14) of the Act and hence the tax credit isalso held admissible in respect of purchase ofcaustic soda, machinery parts, packing materialand other consumable stores.

As regard the second appeal filed by M/s.Keshav Till Factory, the reassessment order waspassed and the tax credit in respect of thepurchase of caustic soda, machinery parts,packing material was disallowed on the groundthat the activity of processing natural till intoDried Till does not amount to manufacture. Theaudit assessment order was passed in case ofM/s. Shyam Industries in which it was held thatthe activity of processing of NSS to HulledSesame Seed does not amount to manufactureand hence the tax credit was denied in respectof the purchases of fuel, machinery parts,packing materials and other consumable stores.The appellant contended before the Hon’bleTribunal that activity of processing natural Tillinto Dried Till and processing of NSS to hulledsesame seed is manufacturing activity as coveredu/s. 2(14) of the Vat Act and hence the tax creditin respect of the purchases of caustic soda,



CA. Hozefa [email protected]

results is dependent on actions, plans, andassumptions of management.

5. The conclusion of value arrived at herein isbased on the assumption that the current levelof management expertise and effectivenesswould continue to be maintained, and that thecharacter and integrity of the enterprise throughany sale, reorganization, exchange, ordiminution of the owners’ participation wouldnot be materially or significantly changed.

6. This report and the conclusion of value arrivedat herein are for the sole and specific purposesas noted herein. It may not be used for anyother purpose or by any other party for anypurpose. Furthermore the report and conclusionof value are not intended by the author andshould not be construed by the reader to beinvestment advice in any manner whatsoever.The conclusion of value represents our opinionbased on the information furnished by [ABCCompany] and other sources.

7. Neither all nor any part of the contents of thisreport (especially the conclusion of value,should be disseminated to the public throughany means of communication without our priorwritten consent and approval.

8. No change of any item in this appraisal reportshall be made by anyone other than us and weshall have no responsibili ty for any suchunauthorized change.

9. Unless otherwise stated, no effort has beenmade to determine the possible effect, if any,on the subject business due to future change instate, or local legislation.

10. If prospective financial information approvedby management has been used in our work,we have not examined or compi led theprospective financial information and therefore,do not express an audit opinion or any other

Business Valuation

I l lustr ative l ist of Assumptions, L imitingConditions and Disclaimers for a BusinessValuation

The valuation report should include a l ist ofassumptions and limiting conditions under whichthe valuation task is performed. This appendixincludes an illustrative list of assumptions andlimiting conditions that may apply to a businessvaluation.

I llustrative L ist of Assumptions and L imitingConditions1. The conclusion of value as reported herein this

report is valid only for the stated purpose as ofthe date of the valuation.

2. We have relied on the financial statements andother related information provided by [ABCCompany] or its representatives, in the courseof our valuation process, as fully and correctlyreflecting the enterprise’s business conditionsand operating results for the respective periods,except as specifically noted herein. We havenot audi ted, reviewed, or veri f i ed thecorrectness of the f inancial informationprovided to us and, accordingly, we expressno opinion or any other form of assurance onthis information.

3. Public information and industry and statisticalinformation have been obtained from sourceswe believe to be reliable. However, we makeno representation as to the accuracy orcompleteness of such information and haveperformed no procedures to corroborate theinformation.

4. We do not provide assurance on theachievability of the results forecasted by [ABCCompany] because events and circumstancesfrequently do not occur as expected; differencesbetween actual and expected results may bematerial; and achievement of the forecasted

Academic Refresher


form of assurance on the prospective financialinformation or the related assumptions. Eventsand circumstances frequently do not occur asexpected and there will usually be differencesbetween prospective financial information andactual results, and those differences may bematerial.

11. We have conducted interviews with the currentmanagement of [ABC Company] concerningthe past, present, and prospective operatingresults of the company.

12. Except as noted, we have rel ied on therepresentations of the owners, management,and other third parties concerning the value anduseful condition of all equipment, properties,investments used in the business, and any otherassets or liabilities, except as specifically statedto the contrary in this report. The assets andinvestments are physically verified by us to the

extent available and for others we have reliedon the certi f i cation provided by themanagement and experts. We have notattempted to confirm whether or not all assetsof the business are free and clear of liens andencumbrances or that the entity has good titleto all assets.

13. The valuation contemplates facts andconditions existing as of the valuation date.Events and conditions occurring after that datehave not been considered, and we have noobligation to update our report or calculationof value for such events, happenings andconditions. Also, we have no obligation toupdate the report or the calculation of valuefor information that comes to our attention afterthe date of the valuation report.

❉ ❉ ❉

contd. from page 378 VAT - Updates and Tr ibunal Judgements

machinery parts, packing materials andconsumable stores was admissible to theappellant. The appellant relied on definition ofmanufacture as provided in section 2(14) andthe definition of raw material as provided insection 2(19) and also relied on judgments incase of M/s. Pio Food Packers 46 STC 63 (SC),M/s. Kumar Motors 5 VST 646 (SC), M/s.Sonebhadra Fuels 147 STC 594 (SC), M/s.Coco Fiber 80 STC 249 (SC), M/s. ArihantTiles and Marbles Pvt. Ltd. 2010 (249) ELT161, M/s. Air Liquid North India Pvt. Ltd., M/s. Ganesh Trading Co. 32 STC 623 (SC), M/s.Bell Mark Tobacco Co. 19 STC 129 (SC) andin the case of M/s. ONGC 49 STC 310 (GUJ).The Hon’ble Tribunal referred relevantprovisions of the Act as well as the judgmentsrelied on by the appellant and held that theactivity of processing Natural Till into Dried Tilland processing of NSS to hulled sesame seedis manufacturing activity as covered u/s. 2(14)of the Vat Act and hence the tax credit in respectof the purchases of caustic soda, machineryparts, packing materials and consumable storesis admissible to the appellant.

[4] M ech Tech I ncor por at ion vs. Dy.Commissioner of Commercial TaxIssue:Whether the Tax Credit in respect of purchasesof beam, M.S. Steel & H.R. Plate are admissibleor not as they were used as capital goods?

Facts:While passing assessment order for the year2008-09, the tax credit was disallowed inrespect of the purchases of beam, M.S. Steeland H.R. Plate. The item beam was used asrail to run hoist and M.S. Steel and H.R. Plateswere used for installing the dryer and girder.The first appeal was rejected on the groundthat the appellant was not able to differentiatethe use of goods in the manufacturing ofmachinery. The Hon’ble Tribunal held that thebeams are to be fastened in the walls and hencethe said beams utilized as rail to run the hoist.The item M.S. Steel was used for installingthe dryer and girder. Accordingly, the itemsbeam, M.S. Steel and H.R. Plate were used ascapital goods and hence the tax credit was heldadmissible to the appellant.

❉ ❉ ❉

Business Valuation


CA. Naveen [email protected]

Corporate Law Update

MCA Updates:

1. Modification in var ious e-forms by theMCA:

The MCA has modified the version of e-forms20B, Form 23AC, Form 21A, Form 23ACA,Form 66, Form 23ACA (XBRL), Form 4 LLP,Form FC-4, Form 23B, Form FC-1, w. e. f.01st August, 2015.

2. Modification in e-form MR-2 by the MCA:

The MCA has modified the version of e-formMR-2 i.e. Form of application to the CentralGovernment for approval of appointment orreappointment and remuneration or increase inremuneration or waiver for excess or overpayment to managing director or whole timedirector or manager and commission orremuneration to directors w. e. f. 14th August,2015.

3. Companies (M anagement andAdministration) Amendment Rules, 2015.

In the Companies (Management andAdministration) Rules, 2014,-

(i) in rule 23, in sub-rule (1) for the words“not more than five lakh rupees”, thewords “not less than five lakh rupees” shallbe substituted.

(ii) Form MGT-7, i.e. Form for filing AnnualReturn has been replaced wi th newversion of MGT-7.

[F. No. 01/34/2013 CL-V- Par t-I , DatedAugust 28th, 2015]

4. Extension of time for filing of cost auditrepor t to the Central Government for theFinancial Year 2014-2015 in form CRA-4.

In continuation to General Circular No.08/2015 dated 12.06.2015, the last date of filing

of Form CRA-4 without any penalty/late feehas been extended up to 30th September,2015.

SEBI Updates:

1. I ssue of Capi tal and Disclosur eRequi r ements (Four th Amendment)Regulations, 2015:

Following amendments have been made in theSecurities and Exchange Board of India (Issueof Capital and Disclosure Requirements)Regulations, 2009

(i) In regulation 60, after sub-regulation (3)and before sub-regulation (4), thefol lowing proviso shal l be inserted,namely:-

“Provided that requirements of this sub-regulation shall not be applicable in caseof product advertisements of the issuer.”

(ii) Chapter XC i.e. Listing on InstitutionalTrading Platform, has been substituted.Major changes are summarized as under:-

Applicability:

The provisions of this chapter shall apply toentities which seek listing of their specifiedsecurities exclusively on the institutionaltrading platform either pursuant to a publicissue or otherwise.

Definitions:

Definitions of institutional trading platform,institutional investor and institutional investorhave been defined / prescribed.

Trading Lot:

The minimum trading lot shall be ten lakhrupees.

Eligibility:



a. an entity which is intensive in the use oftechnology, information technology,intellectual property, data analytics, bio-technology or nano-technology to provideproducts, services or business platformswith substantial value addition and at leasttwenty five per cent of its pre-issue capitalis held by qualified institutional buyer(s)as on the date of filing of draft informationdocument or draft offer document with theBoard, as the case may be; or

b. any other entity in which at least fifty percent of the pre-issue capital is held byqualified institutional buyers as on the dateof filing of draft information document ordraft offer document with the Board, asthe case may be.

No person, individually or collectively withpersons acting in concert, shall hold twenty

five per cent or more of the post-issue sharecapital in an entity specified herein above.

Following other points also have been dealtwith:

· Listing without public issue

· Listing pursuant to public issue

· Lock In

· Exit of entities listed without making apublic issue

· Migration to main board

· Repeal and saving etc.

(iii) in Schedule IV,-

(a) in reference title, the word, number andsymbol “ and 91E(3)”, shall be substitutedwith the word, numbers and symbols“,91E(3), 106Z(1) and 106ZA(1)”;

(b) in Part A, in para (1), after sub-para (b),the following shall be inserted, namely:-

(c) In case of listing without public issue:

Paid up capital of the entity Amount / Rate of fees

Less than or equal to ten crore rupees. A flat charge of one lakh rupees(1,00,000/-).

More than ten crore rupees, but less than 0.1 per cent of the paid up capitalor equal to five thousand crore rupees.

More than five thousand crore rupees. Five crore rupees (5,00,00,000/-) plus 0.025percent of the portion of the paid up capital in excessof five thousand crore rupees (5000,00,00,000/-).

(iv) in Schedule VI, in Form A, after clause17, the fol lowing shal l be inserted,namely:-

“(18) We certify that the entity is eligibleunder 106Y (1) (a) or (b) (as the case maybe) to l ist on the institutional tradingplatform, under Chapter XC of theseregulations. (if applicable)”

(v) in Schedule VIII, -

(a) the recital before Part A, shall besubsti tuted wi th the fol lowing,namely:-

“(i) The words “group companies”,wherever they occur, shall include

such companies as coveredunder the applicable accountingstandards and also othercompanies as considered materialby the board of the issuer.

(ii) The policy on materiality shall bedisclosed in the offer document.”

(b) in Part A , in para (2), in sub-para(X), in clause (A), -

(I) sub-clauses (1) and (2) shal l besubstituted with the following, namely:

“(1) Litigations involving the issuer/ itsdi r ect or s/ promot ers/ gr oupcompanies/ subsidiaries:



(i) All criminal proceedings;

(ii) All actions by statutory / regulatoryauthorities;

(iii) Taxation - Separate disclosuresregarding claims related to direct andindirect taxes, in a consolidatedmanner giving details of number ofcases and total amount;

(iv) Other pending litigations - As perpolicy of materiality defined by theboard of the issuer and disclosed inthe offer document.

(2) Outstanding dues to creditors:

(i) Based on the policy on materiality ofthe board of the i ssuer and asdisclosed in the offer document,disclosure for such creditors;

(ii) Consol idated information onoutstanding dues to small scaleundertakings and other creditors,separately giving details of numberof cases and amount involved;

(iii) Complete details about outstandingdues to creditors as per (i) and (ii)above shall be disclosed on thewebpage of the company with a weblink thereto in the offer document.”

(II) Sub-clause (3) shall be omitted.

(vi) Schedule XIX A shall be omitted.

For details please refer the Circular No.SEBI/LAD-NRO/GN/2015-16/008,dated August 14, 2015.

2. I ssue of Capi tal and Disclosur eRequi r ements (Fi f th Amendment)Regulations, 2015

Effective Date: 01st January, 2016:

Following amendments have been made in theSecurities and Exchange Board of India (Issueof Capital and Disclosure Requirements)Regulations, 2009:

i. In regulation 12, after the words andsymbol “syndicate members,” and before

the word “underwriters”, the words andsymbols “registrar to issue and sharetransfer agents, depository participants,stock brokers,” shall be inserted.

ii. In regulation 58, sub-regulation (5) shallbe substituted with the following, namely

“(5) In all, -

(i) Public issues, the issuer shall acceptbids using only ASBA facility in themanner specified by the Board;

(ii) Rights issues, where not more thanone payment option is given, theissuer shall provide the facility ofASBA in accordance wi th theprocedure and eligibi l i ty criteriaspecified by the Board:

Provided that in case of qual i f i edinstitutional buyers and non institutionalinvestors the issuer shall accept bids usingASBA facility only.”

iii. In regulation 65, sub-regulation (1)and (2) shall be substituted with thefollowing, namely:-

(i) In public issue, the lead merchantbanker shall submit final post-issue report as specified in PartC of Schedule XVI, within sevendays of the date of finalization ofbasis of allotment or within sevendays of refund of money in caseof failure of issue.

(ii) In rights issue, the lead merchantbanker shall submit post-issuereports as follows:-

a) Ini ti al post i ssue report asspecified in Part B of ScheduleXVI, within three days of closureof the issue;

b) Final post issue report as specified inPart D of Schedule XVI, withinfifteen days of the date of finalizationof basis of allotment or within fifteen


days of refund of money in case offailure of issue. “

iv. In Schedule VIII, in Part A, in Para (2), -

(i) In sub-para (VI), in clause (B), insub-clause (6), after the words andsymbol “Self-Certified SyndicateBanks,” and before the word “etc.”,the words and symbols “registrar toissue and share transfer agents,depository participants,” shall beinserted;

(ii) In sub-para (XII), in clause (B), insub-clause (3), item (f), sub-item (ii),after the word “SCSBs” and beforethe word “and”, the words andsymbols “/ RTAs / DPs / stockbrokers” shall be inserted.

v. In Schedule VIII, in Part D, in para (II),after clause (F), following new clauseshall be inserted, namely:-

“(FA) Details regarding website address(es)/link(s) from which the investor canobtain list of registrar to issue and sharetransfer agents, depository participants andstock brokers.”

vi. In Schedule XI, in Part A, -

(i) In item 6,-

a) in the proviso to sub-item (a), afterthe words and symbols “Sel f -Certified Syndicate Banks,” andbefore the words “shall also”, thewords and symbols “Registrar toIssue and Share Transfer Agents,Deposi tory Parti cipants, Stockbrokers” shall be inserted;

b) sub-item (b) shall be substituted withthe following namely

“(b) The stock brokers, Self CertifiedSyndicate Bank, Registrar to Issueand Share Transfer Agents andDepository Participants acceptingapplications and application moniesshall be deemed as ‘bidding/collectioncentres’.”

c) in sub-item (c), for the words andsymbols “book runners/syndicatemembers/stock brokers/Self CertifiedSyndicate Banks a”, the words“SEBI registered intermediaries”shall be substituted;

(ii) In item 12,-

a) in sub-item (d), for the words andsymbols “on-l ine system or SelfCertif ied Syndicate Banks”, thewords “on-line system, Self CertifiedSyndicate Banks, Registrar to Issueand Share Transfer Agents orDepository Participants,” shall besubstituted;

b) in sub-item (e), after the words “Self-Certified Syndicate Bank” and beforethe words “shall accept”, the wordsand symbols “, Registrar to Issue andShare Transfer Agents or DepositoryParticipants” shall be inserted;

c) in sub-i tem (i ), for the words“finalization of allotment”, the words“closure of the i ssue” shal l besubstituted.

vii. In Schedule XIII, -

(i) in Part A, under the items of theheading “AVAILABIL ITY OFAPPLICATION FORMS”, after thewords “Self Certi fied SyndicateBanks” and before the words andsymbols “(as the case may be)”, thewords and symbols “,Registrar toIssue and Share Transfer Agents,Depository Participants” shall beinserted;

(ii) in Part B, under the items of theheading “AVAILABIL ITY OFAPPLICATION FORMS”, after thewords “Self Certi fied SyndicateBanks” and before the words andsymbols “(as the case may be)”, thewords and symbols “, Stock Brokers,



Registrar to Issue and Share TransferAgents, Depository Participants”shall be inserted;

(iii) in Part C, under the items of theheading “AVAILABIL ITY OFAPPLICATION FORMS”, after thewords “Self Certi fied SyndicateBanks” and before the words andsymbols “(as the case may be)”, thewords and symbols “, Stock Brokers,Registrar to Issue and Share TransferAgents, Depository Participants”shall be inserted;

viii. In Schedule XVI, -

(i) Part A shall be omitted;

(ii) In Part C,-

a) in reference title, the number andsymbol “65(2)(b)” shal l besubstituted with the number andsymbol “65(1)”.

b) item No. I (5) shall be omitted.

[SEBI /LAD-NRO/GN/2015-16/012, datedAugust 14, 2015]

3. Secur ities and Exchange Board of India(Substantial Acquisit ion of Shares andTakeover s) (Thi r d Amendment)Regulations, 2015:

In the Securities and Exchange Board of India(Substantial Acquisi tion of Shares andTakeovers) Regulations, 2011, in regulation 1,in sub-regulation (3), the proviso shall besubstituted by the following, namely:-

“Provided that these regulations shall not applyto direct and indirect acquisition of shares orvoting rights in, or control over a company listedwi thout making a publ i c issue, on theinstitutional trading platform of a recognisedstock exchange.”


4. Secur ities and Exchange Board of India(Del ist ing of Equi ty Shar es) (SecondAmendment) Regulations, 2015:

In the Securities and Exchange Board of India(Delisting of Equity Shares) Regulations, 2009,in regulation 3, in sub-regulation (1), theproviso shall be substituted with the followingnamely:-

“Provided that these regulations shall not applyto securities listed without making a publicissue, on the institutional trading platform of arecognised stock exchange.”


5. Secur ities and Exchange Board of India(Al ter nat i ve I nvestment Funds)(Amendment) Regulations, 2015:

In the Securities and Exchange Board of India(Alternative Investment Funds) Regulations,2012, in regulation 15, in sub-regulation (1),after clause (g), the following shall be inserted,namely:-

“(h) Investment by Category I and Category IIAlternative Investment Funds in the shares ofentities listed on institutional trading platformafter the commencement of Securities andExchange Board of India (Issue of Capital andDisclosure Requi rements) (FourthAmendment) Regulations, 2015 shall bedeemed to be investment in ‘unlisted securities’for the purpose of these regulations.”


Case Laws:

1. Rose Valley Real Estates and ConstructionL imited and Others vs. SEBI: (Appeal No.233 of 2014 decided on 26/08/2015 by theSAT)

Facts of the Case:

Rose Valley Real Estates and ConstructionLimited and Others had admitted before theTribunal that they are ready and willing tocomply with the order of ‘SEBI’ dated June18, 2014, by selling the properties and assetsbelonging to the Appellants and its directors.



Accepting the said statement, this Tribunaldisposed of the appeal by di recting theAppellants and its directors to sell the propertiesbelonging to them under the supervision ofSEBI within six months so that the saleproceeds received there-under are distributedto the investors from whom the monies havebeen collected by the Appellants.

The appellants stated in the Misc. Applicationthat pursuant to order passed by the CalcuttaHigh Court on April 21, 2015 the propertiesbelonging to the Appellants are being soldunder the supervision of a Commi tteeconstituted by the Calcutta High Court andsince the Committee would take some time tosell the properties / assets belonging to theAppellants, they sought the extension of timeto comply with the order passed by thisTribunal on December 15, 2014.

They further submitted before the CalcuttaHigh Court that an independent person shouldbe appointed who, under the supervision of theCourt (Calcutta High Court) could sell theproperties belonging to the Appellants andmake disbursement of funds to the investors.

It was observed that, the Appellants hadcollected huge amounts from the investorsunder the Collective Investment Scheme (CIS)in violation of CIS Regulations framed bySEBI. Under the SEBI Act, SEBI i sempowered to regulate the CIS andaccordingly SEBI had passed appropriate orderagainst the Appellants. When the order of SEBIwas accepted by the Appellants and thisTribunal had directed that the propertiesbelonging to the Appellants be sold under thesupervision of SEBI, Appellants are notjustified in obtaining an order from the CalcuttaHigh Court behind the back of SEBI. Counselfor the Appellants state that in July 2105.

Conclusion:

In any event, as on date, jurisdiction of SEBIto supervise sale of properties belonging to theAppellants as ordered by this Tribunal standsdivested pursuant to the order passed by the

Calcutta High Court. Since Calcutta HighCourt is seized of the matter relating to sale ofthe properties belonging to the Appellantsquestion of our granting extension of time tothe Appellants to sell their property does notari se. Accordingly, the M iscel laneousAppl ication fi led by the Appel lants wasrejected.

2. Citrus Check Inns L imited and others vs.SEBI : (Appeal No. 336 of 2015 decided on06/08/2015 by the SAT)

Facts of the Case:

Appellants were aggrieved by the ex-parte adinterim order passed by the Whole TimeMember (WTM) of Securities and ExchangeBoard of India (SEBI) on June 3, 2015. Bythe said order appellants and its other directorsare, inter alia, restrained from collecting anyfresh money from its members under theexisting schemes and are further directed notto launch any new schemes or plans.

Grievance of the appellants was that the aboveex parte ad interim order passed withouthearing the appellants in spite of furnishing therequisi te information is causing seriousprejudice to the appellants and to its 4.5 lakh(approx.) members. It was contended that thebusiness carried on by the appellants does notfal l wi thin the category of Col lecti veInvestment Scheme (CIS) defined underSection 11AA of SEBI Act, 1992 and theprima facie view of SEBI i s whol l yunsustainable in view of various decisions ofthis Tribunal. Counsel for SEBI disputes theabove contentions.

Before these appeals could be taken up forhearing, the WTM of SEBI had offered to hearthe appellants on August 10, 2015. In this viewof the matter, without going into the merits ofthe case we direct the appellants to file theirreply, if any, on or before August 10, 2015 andthe WTM of SEBI is directed to hear theappellants on or before August 13, 2015 and




Adv. Ankit [email protected]

Allied Laws Corner

3. Time – frame for deliver ing ArbitrationAward:

Insertion of a new provision that the ArbitralTribunal shall make its award within a periodof 12 months. Parties may extend such periodup to six months. Thereafter, it can only beextended by the Court, on sufficient cause. TheCourt while extending the period may alsoorder reduction of fees of arbitrator(s) notexceeding five percent for each month of delay,if the court finds that the proceedings have beendelayed for reasons attributable to the arbitraltribunal. If the award is made within a periodof six months, arbitrator may get additional feesif the parties may agree.

4. Fast Track:

It is proposed to insert a provision for fast trackprocedure for conducting arbitration. Parties tothe dispute may agree that their dispute beresolved through fast track procedure. Awardin such cases shall be given in six monthsperiod.

5. New Section 31A:

One of the main complaints against arbitrationin India, especially ad hoc arbitration, is thehigh costs associated with the same – includingthe arbitrary, unilateral and disproportionatefixation of fees by several arbitrators. The LawCommission is of the opinion that if arbitrationis really to become a cost effective solution fordispute resolution in the domestic context, thereshould be some mechanism to rationalize thefee structure for arbitrations. It is proposed toinsert a new Section 31A for providingcomprehensive provisions for costs regime. Itis applicable both to arbitrators as well as relatedlitigation in Court. It will avoid frivolous andmeritless litigation/arbitration.

Amendments to the Ar bi t r at ion andConciliation Bill, 2015

The Law Commission of India’s Report No.246recommended several path-breaking amendmentsto the Arbitration & Conciliation Act in order tomake it more effective and with an aim to expeditethe arbitral process. The Union Cabinet chaired bythe Prime Minister, Shri Narendra Modi, has givenits approval on 28th August, 2015 for amendmentsto the Arbitration and Conciliation Bill, 2015 takinginto consideration the Law Commission’srecommendations, and suggestions received fromstake holders. The Government of India has decidedto amend the Arbitration and Conciliation Act, 1996by introducing the Arbitration and Conciliation(Amendment) Bill, 2015 in the Parliament.

The silent amendments in the Bill, 2015 approvedby the Cabinet are as under:

1. Inser tion of new sub-section in S.11:

A new sub-section in Section 11 to be addedto the effect that an application for appointmentof an Arbitrator shall be disposed of by theHigh Court or Supreme Court as expeditiouslyas possible and an endeavour should be madeto dispose of the matter within 60 days.

2. Amendment in S.12 – Disclosure by theArbitrator:

In order to ensure neutrality of arbitrators, it isproposed to amend Section 12 to the effect thatwhen a person is approached in connectionwith possible appointment of arbitrator, he shalldisclose in writing about existence of anyrelationship or interest of any kind, which islikely to give rise to justifiable doubts. Further,if a person is having specified relationship, heshal l be ineligible to be appointed as anarbitrator.


In order to provide a workable solution to thisproblem, the Law Commission hasrecommended a model schedule of fees andhas empowered the High Court to frameappropriate rules for fixation of fees forarbitrators and for which purpose it may takethe said model schedule of fees into account.The model schedule of fees are based on thefee schedule set by the Delhi High CourtInternational Arbitration Centre, which are over

5 years old, and which have been suitablyrevised. The schedule of fees would requireregular updating and must be reviewed every3-4 years to ensure that they continue to stayrealistic. The Law Commission has expresslyrestricted its recommendations in the contextof purely domestic, ad hoc, arbitrations.

The Model Fees recommended by the LawCommission in its report at the Sixth Scheduleis as under:

All ied Laws Corner

Sum in Dispute (Rs.) Model Fees (Indicative)

Upto Rs. 5,00,000/- Rs. 45,000/-

Above Rs. 5,00,000/- and upto Rs. 45,000/- + 3.5% of the claim amount over andRs. 20,00,000/- above Rs. 5,00,000/-

Above Rs. 20,00,000/- and upto Rs. 97,500/- + 3% of the claim amount over andRs. 1,00,00,000/- above Rs. 20,00,000/-

Above Rs. 1,00,00,000/- and upto Rs. 3,37,500/- + 1% of the claim amount over andRs. 10,00,00,000/- above Rs. 1,00,00,000/-

Above Rs. 10,00,00,000/- and upto Rs. 12,37,500/- + 0.75% of the claim amount overRs. 20,00,00,000/- and above Rs. 1,00,00,000/-

Above Rs. 20,00,00,000/- Rs. 19,87,500/- + 0. 5% of the claim amount overand above Rs. 20,00,00,000/- with a ceiling ofRs. 30,00,000/-

In the event, the arbitrator to be appointed is aSole Arbitrator; he shall be entitled to anadditional amount of 25% on the fee payableas per the table set out above.

6. Amendment to S.34 – Setting Aside ofDomestic Arbitration Award :

It is proposed to amend Section 34 relating togrounds for challenge of an arbitral award, torestrict the term ‘Public Policy of India” (as aground for chal lenging the award) byexplaining that only where making of awardwas induced or affected by fraud or corruption,or it is in contravention with the fundamentalpolicy of Indian Law or is in conflict with themost basic notions of morality or justice, the

award shall be treated as against the PublicPolicy of India.

7. Amendment to S.36 – No Automatic Stay ofExecution of Award:

It is proposed to amend provisions of S.36 ofthe Act to the effect that mere filing of anapplication for challenging the award wouldnot automatically stay execution of the award.Award can only be stayed where the Courtpassed any specific order on an application filedby the party.

❉ ❉ ❉


CA. Pamil H. [email protected]

From Published Accounts

Current Investments are carried at lower of cost andquoted/fair value, computed category-wise. NonCurrent investments are stated at cost. Provision fordiminution in the value of Non Current investmentsis made only if such a decl ine is other thantemporary.

Hove Services Limited

Investments are classified into long term and currentinvestments. Long- term investments are carried atcost and provision is made to recognize any declinein the value other than temporary in the value ofsuch investment. Current Investments are carried atthe lower of the cost or fair value/ market valueand provision is made to recognize any decline inthe carrying value of the investment. Investment inproperty is recognized at cost less amortization.

Tr iveni Turbine Limited

Investments, that are readily realizable and Intendedto be held for not more than one year from the dateon which such investments are made, are classifiedas current investments. All other investments areclassi fied as long term investments. CurrentInvestments are carried at lower of cost and fairvalue determined on an individual investment basis.Long term investments are carried at cost. However,provision for diminution is made to recognise adecline, other than temporary, in the value of longterm investments, such reduction being determinedand made for each investment individually.

VRL Logistics L imited

Investments are classified into current investmentsand non-current investments. Current investments,i.e. investment that are readily realizable andintended to be held for not more than a year arevalued at lower of cost and net realizable value.Any reduction in the carrying amount or any reversalof such reductions are charged or credited to theStatement of Profit and Loss.

AS –13 Accounting for Investments

Notes Forming Parts of the Financial Statementsfor the Year Ended 31st March, 2015

KPR Mill L imited –

Long-term investments (excluding investmentproperties) are carried at cost less provision fordiminution other than temporary in the value of suchinvestment. Current investments are stated at lowerof cost and fair value. Cost of Investment Includeacquisition charges such as brokerage, fees andduties.

Investment properties are carried individually at costless accumulated depreciation and impairment, ifany. Investment properties are Capitalized anddepreciated (where applicable) in accordance withthe policy stated for Fixed Assets.

Chemfab Alkalis Limited

Investments that are readily realizable and areintended to be held for not more than one year fromthe date, on which such investments are made, areclassi fi ed as current investments. A l l otherinvestments are classified as long-term investments.Current investments are stated at lower of cost orfair market value. Long term investments are statedat cost of acquisition. Provision for diminution ismade when such diminution is considered other thantemporary in nature. Valuation is determined on thebasis of each category of investments.

Indian Oil Corporation Limited

7.1 long term investments are valued at cost andprovision for diminution in value, thereof ismade, wherever such diminution is other thantemporary.

7.2 Current investments are valued at lower of costor fair market value.

Reliance Industr ies L imited


Non-current investments are stated at cost. Provisionfor diminution in the value of These Investment ismade only if such decline is other than temporary,in the opinion of the Management.

Hindustan Media Ventures L imited

Investments, which are readily realizable and intendto be held for not more than one year from the dateon which such investments are made, are classifiedas current investments. All other investments areclassified as long-term investments.

On initial recognition, all investments are measuredat cost. The cost comprise purchase price anddirectly attributable acquisition charges such asbrokerage, fees and duties. If an investment isacquired, or partly acquired, by the issues of sharesor other securities, the acquisition cost is the fairvalue of the securities issued. If an investment is

From Published Accounts

contd. from page 386 Corporate Law Update

thereafter pass appropriate order thereon andcommunicate the same to the appellants on orbefore August 24, 2015.

Conclusion:It was made clear that if the WTM of SEBIfails to hear the appellants on or before August13, 2015 and fails to pass and communicatethe final order on or before August 24, 2015,the ex parte ad interim order dated June 3, 2015shall forthwith come to an end. Accordingly,the Appeals were disposed of.

3. M/s. Ideal Hotels & Industr ies L td. vs.SEBI : (Appeal No. 164 of 2015 decided on04/08/2015 by the SAT)

Facts of the Case:

The appellant had preferred the appeal againstthe impugned order dated October 29, 2014passed by the learned Adjudicating Officerunder Section 15C of the SEBI Act, 1992,seeking to impose a monetary penalty of Rs.1,20,000/- for violating SEBI’s circular datedJune 3, 2011 read with Circular dated August13, 2012, for not redressing the investors’complaints as prescribed by SEBI throughvarious circulars issued from time to time.

acquired in exchange of another asset, the acquiredis determined by reference to the fair value of theasset given up or by reference to the fair value ofthe investment acquired, whichever is more clearlyevident.

Current investments are carried in the financialstatements at lower of cost and fair value determinedon an individual investment basis. Long-terminvestments are carried at cost. However, provisionfor diminution in value is made to recognize adecline other than temporary in the value of theinvestments.

On disposal of an investment, the differencebetween its carrying amount and net disposalproceeds is charged or credited to the Statement ofprofit and Loss.

❉ ❉ ❉

The appellant had violated the said circularsas it failed to obtain SCORES authenticationand also did not resolve the pending investors’grievances as per the mandate of law. Thisallegation and consequent finding of the learnedAdjudicating Officer has not been refuted bythe appellant. Therefore, the appellant cannotchallenge the imposition of penalty of Rs.1,20,000/- as against the maximum penalty ofRs. 1 crore prescribed by Section 15C of theSEBI Act, 1992 only on the ground ofproportionality.

Conclusion:

In the facts and circumstances of the presentcase, the appeal was, therefore, liable to bedismissed. In fact, it is one of the importantduties cast upon the SEBI to see that there isspeedy redressal of grievances of investors andthe appellant has admittedly failed to uploadand do the needful as regards the redressal ofcomplaints of various investors in time.

❉ ❉ ❉


CA. Kunal A. [email protected]

From the Government

Income Tax

1) Extension of due date for filing tax auditrepor t and return of income

CBDT vide order dated 01/10/2015 herebyextends the due date of filing the returns ofincome and audit report u/s 44AB from 30th

September,2015 to 31st October,2015.

2) Notification regarding amendment in rule29C - (Declaration by person claiming receiptof certain incomes without deduction of tax)

CBDT hereby makes following amendmentin rule 29C and also substitutes form 15G and15H:-

- The declaration in form 15G/H may befurnished ei ther in paper form orelectronically;

- The deductor will not deduct tax and willallot Unique Identification Number (UIN)to all self-declarations in accordance withlaid down procedures to be speci f iedseparately.

- The particulars of self-declarations will haveto be furnished by the deductor along withUIN in the quarterly TDS statements.

- The deductor will however be required toretain form 15G and 15H for seven years.(ie.The income tax authority may before the endof seven years require the deductor to furnishor make available the declaration for thepurpose of verification or any proceedingsunder the act.

(For full text refer notification no. 76 , dated29th September,2015)

3) Not i f i cat ion r egar ding r egist r at ionpr ocedur e of a pr escr ibed f inancialinstitution.

CBDT hereby prescribes the procedure forregistration and submission of report as perclause (k) of sub-sec 1 of sec 285BA of theIncome Tax Act.

Note:- sub clause (k) – a prescribed reportingfinancial insti tution ; section 285BA –Obligation to furnish statement of financialtransaction or reportable account.

(For full text refer Notification no. 4/2015,dated 04/09/2015)

4) Circular r egarding clar ifications on taxcompliance for undisclosed foreign incomeand assets

The Black Money (Undisclosed ForeignIncome and Assets) and Imposition of Tax Act,2015 has introduced a tax compliance provisionunder chapter VI of the Act. Earlier clarificationregarding 32 queries have been issued by theboard vide circular no. 13 dated 6/7/2015 andfurther more clarifications have been issuedvide this circular.

(For full text refer circular no. 15/2015, dated03/09/2015)

❉ ❉ ❉


Across1. Incineration charges for usage of storage tank

is liable to service tax under the category of______ & ___________ Services.

2. Service tax is a levy on the ___________ valueand not on its market value or cost or any othervalue.

3. Everything is prewritten but with ______ it canbe rewritten.

Down4. An element of _________ is a must in the

concept of borrowing.5. U/s 195, the primary condition for liability to

deduct tax at source is that the sum payable tothe non resident should be chargeable to tax in_____ in the hands of such non resident.

6. A transaction in which a contract for purchaseor sale is periodically or ultimately settledotherwise than by the actual delivery is a_________ transaction.

ACAJ Crossword Contest # 17

Notes:

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

2. Two lucky winners on the basis of a draw willbe 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 # 16 - SolutionAcross1. Private Company 2. Tribunal3. Depreciation

Down4. Ignorance 5. EVC6. Devigarh

❉ ❉ ❉

Winners of ACAJ Crossword Contest # 16

1. CA. Keyur Shah

2. CA. Chintan Patel

4. Members may submit thei r reply ei therphysically at the office of the Association orby email at [email protected] on orbefore 21/10/2015.

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

ahemdabad ca society journal

Economy & Finance