november, 2012 - chartered accountants association...

November, 2012

369AHMEDABAD CHARTERED ACCOUNTANTS JOURNAL

EDITORIAL

PRESIDENT'S MESSAGE

ARTICLE:FORMATION AND TAXATION OF CHARITABLE& RELIGIOUS TRUSTSCA. Ajit C. Shah

ARTICLE:APPLICABILITY OF SECTION 50C TO SALE OFIMMOVABLE PROPERTY WHICH IS STOCK-IN-TRADE OR WHICH FORMS PART OF BLOCKOF ASSETSCA. Chandrakant K. Thakkar

GLIMPSES OF SUPREME COURT RULINGSAdvocate Samir N. Divatia

FROM THE COURTSCA. C. R. Sharedalal &CA. J. C. Sharedalal

TRIBUNAL NEWSCA. Yogesh G. Shah &CA. Aparna Parelkar

UNREPORTED JUDGMENTSCA. Sanjay R. Shah

CONTROVERSIESCA. Kaushik D. Shah

JUDICIAL ANALYSISAdvocate Tushar P. Hemani

FEMA UPDATECA. Savan A. Godiawala

SERVICE TAX REVIEWCA. Ashwin H. Shah

FROM PUBLISHED ACCOUNTSCA. Pamil H. Shah

INDIRECT TAXES CORNERCA. Bihari B. Shah

CORPORATE LAWS UPDATECA. Chirag M. Shah

FROM THE GOVERNMENTCA. Chandrakant H. Pamnani &CA. Kunal A. Shah

ASSOCIATION NEWSCA. Ashok C. Kataria &CA. Chintan M. Doshi

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JOURNAL COMMITTEE

CA. Shailesh C. ShahChairman (Editor)

CA. Umesh S. ShahConvener

CA. Gaurang M. ChoksiPresident (Ex-Officio)

CA. Ashok C. KatariaHon. Secretary (Ex-Officio)

CA. Jayesh C. SharedalalPast President - Representative

CA. Rajni M. ShahExe. Committee Member

MEMBERS

CA. Ajit C. Shah

CA. Darshan A. Shah

CA. Mukesh M. Khandwala

CA. T. J. Advani

AHMEDABADCHARTEREDACCOUNTANTSJOURNAL

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

Volume : 36Part : 08Months : November, 2012

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

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

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

ATTENTION

Members / Subscribers / Authors / Contributors

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

You are requested to intimate change ofaddress to the Association's Office.

Subscription for the Financial Year 2012-13 is` 400/-. Single Copy (if available) ` 40/-.

Please mention your Membership number /journal subscription number in all yourcorrespondence.

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

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

Membership Fees (For ICAI Members)

Life Membership ` 7500/-

Entrance Fees ` 500/-

Ordinary Membership Feesfor the year 2012-13 ` 600/-/` 750/-

Financial Year : April to March

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PROFESSIONAL AWARDS

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

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

QUOTES FOR THE MONTH

Take up one idea. Make that one idea yourlife - think of it, dream of it, live on thatidea. Let the brain, muscles, nerves, everypart of your body, be full of that idea, andjust leave every other idea alone. This isthe way to success.

Swami Vivekananda

The more we come out and do good toothers, the more our hearts will be purified,and God will be in them.

Swami Vivekananda

November, 2012


EDITORIAL

VOTE YOU MUSTFirstly I wish all of you a happy and a prosperous VikarmSamvant Year 2069.

It is indeed the election season for Gujarat based CharteredAccountants.

On one hand, ICAI elections for Central and RegionalCouncils are scheduled on 7th and 8th December 2012. Theduty is once again cast upon us as the members of theInstitute to ensure that the right candidates are chosen whorepresent us and the profession as a whole at the councils.The leaders at the councils are those who are entrustedupon to carry forward the profession to scale new heightswith right vision. The vision and the action exhibited by theleadership at the Institute indicate the direction in which theprofession head towards. We thus, are having a largerresponsibility to elect the proper candidates both, at theregional and central council who can “Bring in the Difference”we all are looking for in the profession.

Thereupon, soon after the ICAI elections, Gujarat AssemblyElections are scheduled for 13th and 17th December 2012.The political temperature of Gujarat is on rise. The entireIndian media is eyeing on Gujarat to check whether theGujarat CM Narendra Modi is able to make it to GujaratAssembly for third consecutive time or not. Gujarat is beinggoverned by the BJP led government since last 15 yearswith three consecutive wins. Narendra Modi has been thefront runner as the leader in two of the three elections as themaster campaigner. Under his leadership, BJP has wonalmost two third majority in assembly elections which showsgreat hold of Shri Narendra Modi on Gujarat voters.

It seems that words are not transforming into action for bigIndian cities when it comes to participating in large numbersto vote their favourite candidates in polls. Despite a highurban base with more discerning and affluent electorate,witnessing a low turnout in elections, local or general, isadage for these cities.

Voting in ICAI election is not an exception. Notwithstandingthe hue and cry made through promotional activities andadvertisements, cities like Mumbai, Delhi, Bangalore,Hyderabad, Chennai and Ahmedabad hardly believe inexercising their franchise to elect ‘right’ candidates in polls,as shown by the low voting percentage each time. Not votingmeans handing power to those, irrespective of the politicalparty, who make us feel so uncomfortable about voting. Ona deeper and more desperate level, we must vote for thesake of democracy. Those who are so successfully draggingus towards extreme democracy, where liberty is license,and where there’s no distinction between good and evil, willdestroy democracy itself.

CA. Shailesh C. ShahPractising since 1986. He can be reached [email protected]

When it comes to voting, it is the duty of every Indian tovote in an election. Unbelievable though, it is the illiteratesection who will turn up to vote in large and the knowlegableand the educated would prefer to seek comfort at homes,watch any sports or have an extended weekend given thatthe election day is a public holiday. It will be these cynicalminds who will then be complaining about black money, badroads, poor airports, etc.

The attitude of most of the people (specially “Educated andSophisticated” people) towards voting is:1. I don’t care who gets elected, I got my job, I am getting

my salary why should I bother, let any Tom, Dick orHarry become the leader, I don’t care.

2. Many people believe that their one vote cannot make anydifference. The last assembly elections in Rajasthan wouldbest describe it where the chief ministerial candidate lostby one vote in the constituency of Nathdwara and ultimatelycould not become the chief minister.

The same attitude is passing from one generation to another.At this point “Compulsory voting” comes into thepicture. Compulsory voting has pros and with some consas well. Compulsory voting will encourage participation ofall people. Compulsory voting will not change anything todayitself. It’s a long process. I am reminded that in 2009 Obamagot elected as first American black president. It did nothappen overnight, but it took 150 years for such a changeto actually happen. It is someone who started the process150 years back and fruits are enjoyed by today’s generation.Let’s sow the seeds of reforms to enable the generationsahead to reap the fruits.

The mantra would be, “Cheer up and vote.” Politics is alwaysa sad compromise. If you’re waiting for the perfect politicalregime and the perfect political candidate before you vote,you’re expecting divine things from the merely human. Thisis a fallen world. There never has been a perfect politicalregime; there never will be. India or ICAI are no exception.But since no one is ever born into a perfect regime, then weshall be judged only by how well we acted amid whateverimperfections fall to our historical lot. We shall therefore bejudged, in part, on our voting record. So friends, lets’ allcome along, let us reason together and see things from properperspective and as Gandhiji said “Be the change you wishto see in this world”.

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Dear Professional Friends,

“DIWALI GREETINGS AND WISH YOU A VERY HAPPYNEW YEAR”

Tribute

SHRI BAL KESHAV THAKERAY, a cartoonist , founder ofShiv Shena a strong political party in Maharashtra, popularlyknown as The Tiger, great admirer of Hitler for his some ofthe methods on governance & politics, who admired IndiraGandhi’s attack on Pakistan and backed her Emergency incountry, a great orator and one of Maharashtra’s most iconicand divisive figures died on Saturday, 17th November, 2012.He will always be remember by Maharashtra politicians andremain in the hearts of people of Maharashtra and the entirenation.

At last Justice served to Mumbai Terrorist Attack

The sole surviving gunman of the Mumbai terror attack, LeTTerrorist Ajmal Amir Kasab was hanged in a Pune’sYerawada Central Jail at 7.30 am on 21st November, 2012.His execution was carried out in a complete secret operation.His end came five days before the fourth anniversary of thebrutal terror attacks on 26 November, 2008 that claimed166 lives and injured 300 people. Kasab was sentenced todeath on four counts and to life sentence on five counts oncharges including murder, waging war on India andpossessing weapons. The story behind his heinous act ofterror is that on Eid he demanded New cloths from his fatherand due to poverty his father, who was a food vendor refusedto buy him new clothes that forced a miffed Kasab to quithome, take to crime and then embrace jihad.

The top secret “Operation X” for execution was kept secretand neither the Prime Minister nor any of the Ministers weretold about it. On 5th November, President rejected Kasab’spetition for clemency and conveyed to home ministry. I greetthe President and Home Minister for their quick action andthe bold step to clear the Kasab’s file. At last the justicehas prevailed!

Rarest of rare Exhibition :

Many including myself would not know who is ANASUYASARABHAI ? In the second week of November’12 anexhibition of rare picture of Anasuya Sarabhai was held atShantisadan, Mirzapur, Ahmedabad on her 127 birthday(1885 – 1972), which was rarest of rare. She was the firstwoman to lay the foundation of the trade union movement inthe country. She was the founder of Country’s first TextileLabour Association (TLA) in 1920. She is respected by lakhsof textile workers and the poor. She is known as MOTABENand she was the only woman to whom Gandhiji called and

PRESIDENT'S MESSAGE

CA. Gaurang M. ChoksiPractising since 1986. He can be reached [email protected]

addressed her as “ Poojya.” In 1914, when she first visitedplight of workers in Amrapura Chawl, outside Delhi Gate,Ahmedabad, she found that there was no provision forChildren’s education, the women lived in unhygienicconditions, children worked for more than 12 hours and menworked continuously 36 to 48 hours in mills. She then starteda small school for children and literacy classes for adult.On 4th December, 1917 she organized the first worker strikeagainst her brother Ambalal Sarabhai who was the owner ofCalico Mills and other mill owners demanding a 50% hike inplague bonus for local textile workers. Under her leadershipThe Ahmedabad Textile Labour Association was establishedin 1920. It had 64 trade union affiliated with a totalmembership of more than 1.40 lacs. She remained thepresident until her death.

India’s Economic

In this festive season Government has taken a positivesteps by put aside the policy paralysis tag and passed longpending financial sector reforms- hiked the limit of foreignequity investment in Insurance Companies to 49% from 26%and proceeded with the long amendments to the largest singlepiece of legislation in the world, The Companies Act, 1956.It now appears that the government is trying to get on tractwith various action plans in hand.

At the Association

At Association, on Friday, 23rd November Diwali get togetherwas organized for members at Aangan Party Plot, Satelite,Ahmedabad. Total 550 persons were present and enjoyedthe get together with delicious Gujarati food with fine music.A joint programme was organised on 26th November, 2012with Ahmedabad Branch of WIRC of ICAI on the topic of “Awareness of Voters, Gujarat Assembly Election 2012.” ShriVijay Nehra, District Collector, Ahmedabad and Shri A. J.Shah, Nodal Electoral Officer addressed on the subject.On 4th December, 7th Study Circle meeting will be held, ledby CA. Chandravadan A. Shah, Ahmedabad on the topic“Issues under Foreign Contribution Regulation Act, 2010.” Ithank members for their support by way of participation inall the programs of the Association.

With regards,5 5 5

November, 2012


In every society and in every country there are peoplewho wish to do something monetarily for the poor andneedy in various ways. For this purpose, instead ofdonating the amounts to the government or semi-Government organizations, they prefer to formcharitable trusts or organizations and do the charitythrough such trusts.

When any body wishes to form a charitable trust, it isnecessary to know the meaning of charitable purpose.Charitable purpose has been defined U/s 2(15) of theIncome Tax Act 1961 as well as under section 9 ofBombay Public Trust Act 1950. Unlike the word‘charitable purpose’, the word ‘religious purpose’ hasnot been defined in any of the Acts. It would includethe advancement, support or propagation of a religionof idols and performance of religious and its tenets.Thus trusts established for the worship of idols andperformance of religious festivals would be exempt U/s 11 of the I. T. Act 1961, though they may be for thebenefit of a particular religious community or caste. Itincludes relief of poor, education, medical relief andthe advancement of any other object of general publicutility. Promotion of sports and games is considered tobe a charitable purpose vide circular no 395 dated 24-9-1984. The words “Not involving the carrying on ofany activity for profit” have been omitted form the saiddefinition of charitable purpose with effect form 1st April1984. The definition is an inclusive one and not anexclusive.

Therefore it is advisable not to form charitable trust forcarrying on of any activity for profit. If it is formedaccordingly, it will be liable to tax at maximum marginalrate.

1. PURPOSE BEHIND FORMATION OF TRUST

Charitable and Religious institutions and trusts areformed to create and maintain the followingestablishments in public interest.

RELIEF OF THE POOR: It is not necessary thatthe relief of the poor means providing somethingwithout recovering any cost or for less than its cost.The relief may be given to the poor generally or toan identifiable section or poor public.

In the context of certain trust deeds, charity maymean only relief of poor. It is not necessary thatthe benefit be confined to poor only.

CA. Ajit C. ShahThe author is practising CharteredAccountants since 1979. He can be reached [email protected]

However, relief to a group of private individualslike relatives or employees of the donor would notamount to a charitable purpose.

EDUCATION: Education includes activity to open,establish, maintain, acquire, support, aid or grantmonetary assistance to any schools, colleges,industrial homes, polytechnic institution,commercial colleges, research laboratories orother vidhyapith or institutions imparting educationand training to students in these lines and courses.It also includes activity to establish and support,professorship, fellowship, lectureship and prizesin the name of the trust at any schools, collegesor other educational institutions.

MEDICAL RELIEF: On the same lines as ‘relief ofthe poor’, medical relief also does not necessarilymean only the provision of free treatment ortreatment on a concessional basis. Hospital orother medical institutions may be considered asestablished for charitable purpose if in order toprovide itself with revenue for its maintenance, itruns special wards for the patients who pay thefull price, over and above the voluntary donation.

Hospital would not lose its charitable character ifcertain fees are charged to affording persons whochoose to take the benefit of the hospital.

Thus, it is not necessary that benefit of trust isavailable to poor only. There may be general ward,semi special ward, special ward or A.C. room forpatients who pays the charges accordingly.

GENERAL PUBLIC UTILITY:

The Supreme Court in Ahmedabad Rana CasteAssociation Vs. CIT (1971) 82 ITR 704, has furtherenunciated the well settled principle that an objectof general public util ity includes an objectbeneficial to a section of the public and it is notnecessary that the object should be for the benefitof the whole of mankind or all persons of thatcountry or state. It would be sufficient if the

FORMATION AND TAXATION OF CHARITABLE &RELIGIOUS TRUSTS

November, 2012


intention is to benefit a definite and identifiablesection of the public having a common quality asdistinguished from a specified individual.

On the basis of this judgment, many High Courtshave delivered similar judgments in favour of thetrust.

2. FORMS OF CHARITABLE AND RELIGIOUSINSTITUTIONS

Main forms of charitable and religious institutionsare constituted in any one of the following forms:

a) Companies:

An association may be registered underSection 25 of the Companies Act, 1956 if it isabout to be formed as a limited company forpromoting charity or any other useful objectand if it intends to apply its profit or otherincome in promoting its objects and to prohibitthe payment of any dividend to its members.In such cases The Central Government mayby license register such association as acompany with limited liability without the word“Limited” or “Private Limited”.

b) Societies:

A society registered under the SocietiesRegistration Act, 1860 u/s 20 is a legal entityapart from its members of the governingbody, secretary or trustees.

c) Public Charitable Trusts:

Public Trust is a trust for public religious orcharitable purposes and includes a temple,mosque, church and a society for a religiousor charitable purpose. Society may havereligious and charitable object but if it is not atrust then it will not be ‘Public Trust’.

d) Muslim Wakf:

Trust under the Mohammedan Law is calledWakf. Section 2 of the Musalman WakfValidation Act defines Wakf as dedication byperson professing Islam or the Musalmanfaith, or any purpose recognized by TheMusalman Law as religious, pious orcharitable.

3. WHAT IS ‘CHARITABLE PURPOSE’ UNDERINCOME TAX ACT?

Section 2(15) of The Income Tax Act definescharitable purpose for the Act and they areclassified under four heads:

a) Relief to poor

b) Education

Article : Formation and Taxation of Charitable & Religious Trusts

c) Medical relief

d) Any other object of general public utility

A purpose in order to be charitable, must be directto the benefit of the community or a section of thecommunity, as distinguished from an individual ora group of individuals.

4. APPLICABILITY OF BOTH CENTRAL & STATELAWS

Registration of charitable trust under a particularAct, Central or State does not necessarily makethe organization escape from other enactments.It must be noted that in states like Maharashtraand Gujarat, even if an organization is registeredunder any enactments, the Bombay Public TrustAct, 1950 are attracted if an organisation carrieson public charitable or religious activities. It istherefore, mandatory for such organizations to getthemselves registered under Bombay Public TrustAct, 1950.

5. AMENDMENTS BY THE FINANCE ACT, 2006

A section 115BBC has been inserted in the IncomeTax Act, 1961 which defines ‘Anonymous Donation’and as per the same, any voluntary contributionreferred to in Section 2(24)(iia) of the Act is an‘Anonymous Donation’ where a person receivingsuch contribution does not maintain a record ofthe identity including the name and address of theperson making such contribution and the sameshall be included in the total income of theassessee, being the person in receipt of suchincome on behalf of the trust and shall bechargeable to tax at maximum marginal rate.

6. AMENDMENTS BY THE TAXATION LAWS ACT,2006

The Taxation Laws Amendment Act, 2006 hasmodified conditions as to registration of trust byamending section 12A of the Act which providesthat the accounts of the trust for that year shouldbe audited by a chartered accountant where thetotal income of the trust as computed under thisAct without giving effect to the provision of section11 and 12 exceeds the maximum amount whichis not chargeable to the Income tax in any previousyear and such audit report is furnished along withthe return of income for the relevant assessmentyear. (with effect from 1st April, 2006)

7. FORMATION OF THE TRUST

a) What is a Trust?

A trust is created in a convenient formwhereby a limited number of persons may

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hold property on behalf of other persons, whomay be a large or fluctuating body or whomay include a person not yet born.

Once the property has been vested with thetrust, the trustees own the property, but theyare compelled by law to exercise theirownership for the benefit of the beneficiariesand for them only.

b) Types of Trusts

1. Charitable or Public Trust

2. Private Trusts

A public or charitable trust is one whichbenefits the public at large, or someconsiderable portion if it. But in the case ofprivate trusts, the beneficiaries areascertained individuals or families.

c) Requisites for creation of a Trust

1. There is a founder/ settler/ author of trust;

2. There should be person/ persons calledtrustee/ trustees;

3. There is a property of the trust which thesettler gives;

4. There is a person capable to enforce thatobligation.

5. There are beneficiaries who will enjoybenefits out of that property;

6. An intention of the author or founder tocreate a trust;

7. The purpose i.e. objects of the trust;

8. Transfer the property to the trustees.

d) Conditions for creation of Trust

1. The Settler has to give up ownership andall beneficial interest in the property,

2. The property should be clearly described,

3. The objects for creation of trust shouldbe clearly indicated,

4. Formal deed or any other writing is notrequired and an intention to create a trustmay be shown through oral words.However it is advisable to have a writtentrust deed for all practical purposes.

5. The settler must be a person competentto contract,

6. The trust property must be properlytransferable to the beneficiary.

e) Who may Create Trust?

Any person, who has power of ‘Disposition ofa Property’ means a person who is competentto contract and entitled to transferableproperty or authorized to dispose oftransferable property not his own, iscompetent to transfer such property, eitherwholly or in part, either absolutely orconditionally, has capacity to create a trustover such property.

Any Hindu under the Hindu Law can create aHindu endowment and under the Muslim Law,any Muslim can create a public Wakf.

In addition a body of individuals, an institution,a limited company, a Hindu Undivided Familythrough its karta can also create a trust. Akarta of joint Hindu Family in relation to thefamily property, for the benefit of the familyor if it is necessary to fulfill the religious orcharitable responsibility of the family.

f) Who may be trustee?

A Government, a corporation or a limitedcompany, an individual can be a trustee. Evena minor can be appointed as a trustee if he isto be only inactive trustee. Beneficiary mayalso be a trustee and the author or settler ofa trust may appoint him self as the sole trusteeor as one of the several trustees.

Any number of persons may be appointed astrustees. If there is no existence of trusteethen an official trustee may be appointed bythe court and the trust can be administrated.

8. TRUST DEED

The instrument by which the trust is declared iscalled as the ‘Trust deed’. With effect from 1st April,1973, for claiming exemption u/s 11 the conditionis that there should be an instrument or writtendocument for creating or establishing a trust.Though a trust may be created orally in certaincases a written trust deed is always desirable.

a) Advantages of a Trust Deed

The main advantages of trust deed areclassified as under:

1. A written trust deed is a prima facieevidence to existence of trust;

2. It facilitates transfer of the trust propertyto the trust;

3. A written trust deed is important forregistration of transfer of immovableproperty in the name of trust;

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4. A written trust deed is also very importantfor obtaining registration and claimingexemption under the Income Tax Act;

5. To direct, control and for the managementof the working and operations a writtentrust deed is essential;

6. Powers, rights, duties of the trustees andalso appointment and removal is indicatedin the trust deed.

b) Contents of a Trust Deed

A trust may be created in any language,enough to show the intention and no technicalwords are necessary. A written trust deedincludes the name of settler, trustees andname of beneficiaries, the name by which thetrust shall be identified, address of the placewhere its principal office shall be situated, alsoan intention to divest the trust property uponthe trustee, most importantly, the object ofthe trust, rights, duties, appointment, removalof the trustees and mode & method ofdetermination of the trust.

9. REGISTRATION OF TRUSTRegistration of trust is mainly required from twoangles:

a. registration under State Act

b. registration under Income Tax Act

Other types of registration associated with a trust,required in certain situations, may be briefly statedas under:

a. Registration under the Indian RegistrationAct;

b. Registration under Public Trust Act;

c. Registration under the Foreign Contribution(Regulation) Act.

F REGISTRATION UNDER INCOME-TAX ACT

Charitable or religious trusts and societies, claimingexemption under Sections 11 and 12 of theIncome-Tax Act are required to obtain registrationunder the Act. Private/family trusts are neitherallowed such exemption nor, thus, required to seekregistration under the Income-tax Act. However,private trusts partly for charitable or Religiouspurposes, are eligible and should, thus, obtainRegistration.

POINTS TO BE KEPT IN MIND FOR REGISTRATIONOF TRUST U/S 11 AND 12 OF THE INCOME TAXACT, 1961.

1. Provision of section 12AA of the Act provides forthe procedure to be followed for grant ofregistration to a trust or institution.

2. According to which, the person in receipt of theincome should make an application in Form No.10A for registration of the trust or Institution to theCommissioner before the expiry of a period of oneyear from the date of the creation of the trust orthe date of establishment of Institution, whicheveris earlier.

3. However, where an application for registration ismade after the expiry of the aforesaid period, theprovisions of sections 11 and 12 will apply fromthe date of the creation of the trust or theestablishment of the institution if theCommissioner, for reasons to be recorded inwriting, is satisfied that the person in receipt ofthe income was prevented from making theapplication within the aforesaid period for sufficientreasons.

If the commissioner is not so satisfied, theprovisions of sections 11 & 12 will apply from 1st

day of the financial year in which the application ismade.

4. Along with Form No. 10A (in duplicate), file theoriginal (or certified copy of) trust deed, togetherwith two copies of accounts (i.e. balance sheet,income expenditure account, & receipts andpayment account) for the last three years, prior tothe financial year which application is made, arealso to be filed along with the application(ifapplicable). It should be noted here that only thecopies of accounts of the trust since its inceptionor during the last three years, which everapplicable, are required to be filed.

5. The commissioner shall call for documents andinformation and hold enquires regarding thegenuineness of the trust or institution.

After he is satisfied about the charitable or religiousnature of the objects and genuineness of theactivities of the trust or institution, he will pass anorder granting registration and if he is not satisfied,he will pass an order refusing registration, subjectto the condition that an opportunity of being heardshall be provided to the applicant before an orderof refusal to grant registration is passed by theChief Commissioner or Commissioner and thereasons for refusal of registration shall be mentionin such order.

6. W.e.f. June 01, 1999, an application for registrationof a trust or institution is to be made to theCommissioner only and not to the ChiefCommissioner. However, in case the trust fallsunder the jurisdiction of an income tax authorityhaving its head quarters at Mumbai, Chennai,


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Kolkata or Delhi, the application is to be made tothe Director of the Income Tax (Exemptions).

7. The order granting or refusing registration has tobe passed within Six months from the end of themonth in which the application for registration isreceived by the commissioner and a copy of suchorder shall be sent to all the applicants. The orderis effective until it is withdrawn. It is also providedthat the grant of registration shall be one of theconditions for grant of income tax exemption u/s11 & 12 of the income tax act 1961.

8. The finance (No. 2) Act, 2004, has amendedsection 12AA of the Act empowering thecommissioner to cancel registration at any time ifhe is satisfied that the activities of the trust are notgenuine or not according to the objects of the trust,after giving a reasonable opportunity for beingheard.

9. The Taxation Laws (amendment) Act, 2006 hasmodified conditions as to registration of trusts byamending section 12A of the Act providing thatthe accounts of the trust or institution for that yearshould be audited by a C.A where the total incomeof the trust or institution as computed under theIncome Tax Act without giving effect to theprovisions of sections 11 & 12 exceeds themaximum amount which is not chargeable toincome tax in any previous year and such auditreport is furnished along with the return of incomefor the relevant assessment year. (w.e.f. 1st day ofApril, 2006)

10. INCOME TAX PROVISIONS & EXEMPTIONS

A. INCOME TAX PROVISIONS

1. Maintenance of books of accounts

Though there is no provisions u/s 44AArequiring a charitable trust for maintenanceof accounts, however, section 80G(5)(iv)requires maintenance of regular accounts ofreceipts and expenditures only.

2. Application for PAN

The Income Tax Act specifically lays down amandatory provision for a trust to make anapplication for allotment of PAN to theassessing officer in form no 49A of IncomeTax Rules.

Failure to make an application for PAN makesthe trust or institution liable for beingpenalized up to Rs. 10000 for the default.Therefore, the trust should make an

application immediately on registration of trustor institution.

3. Application for TAN

The trust or institution should make anapplication for allotment of TAN, if applicable,to the assessing office or the prescribedauthority, in form no 49B of income tax rulesimmediately on registration of the trust orinstitution and quote the same on all thechallans for payment of sums u/s 200, on allthe TDS certificates and all the returnsdelivered u/s 206, 206A and 206B. A penaltyof Rs. 10000 has been prescribed by section272BB in case of failure to do so.

4. Audit when necessary?

The accounts of the trust should be auditedfor such accounting year in which its incomewithout giving effect to the provisions ofsection 11 and 12 exceeds the maximumamt. which is not chargeable to income tax.The audit report has to be in form No.10B.

B. EXEMPTION PROVISIONS

1. Conditions for availing exemption

Requirements/conditions for availingexemption under the Income-Tax Act are asunder:

a. Exemption under section 11(1)(a) isavailable only to trust/institution whichholds the property (from which income isderived) in trust wholly for charitable orreligious purposes. It means that allobjects of the trust should be forcharitable or religious purposes.

b. It is necessary that the property settledupon trust is held in trust. It would not besufficient that the income is held in trust.

c. The creation of trust must be wholly forcharitable purposes or wholly for religiouspurposes. It should not be created for thebenefit of any particular religiouscommunity or caste.

d. The creation of the trust should not be forcarrying on business for profit. The objectsof the trust should be such as those whichare charitable within the meaning ofsection 2(15) of the Income-Tax Act (i.e.,relief of the poor, education, medical reliefand the advancement of any other objectof general public utility).


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e. The exemption is not available to the entireincome from the property held in trust. Itis available only to that part of the incomewhich is applied to charitable and religiouspurposes in India.

f. It is necessary to ensure through the trustdeed that the income of the trust and ofthe property is utilized for charitablepurposes in India.

g. It is further necessary to ensure that theincome or the property of the trust doesnot ensure for the benefit of thesettler(author) of the trust or his relativesas specified in the Explanation to section13.

h. All public trusts are required to beregistered with the Commissioner bymaking an application in Form No. 10Awithin one year from date of creation ofthe trust.

i. If it is not possible to apply the whole ofthe income earned form the property heldin trust to desired objects in the very yearin which the income is earned, then suchincome should be accumulated or setapart for application to charitable orreligious purposes in India in future years.However, such accumulation is permittedonly up to 15% of the income earned inthe relevant accounting period.

j. Income in the form of voluntarycontributions made with a specific directionthat they shall form part of the corpus ofthe trust are exempt form tax.

2. Provisions regarding application &accumulation of Income

a) Application of Income

In order to avail exemption, the incomeof a wholly charitable or religious trustshould be applied for charitable orreligious purposes in India and theexemption is available to the extent ofsuch application.

Is it necessary that the entire incomeshould be so applied?

The Act gives a concession here. It ispossible to claim the exemption even ifthe trust or institution applies only 85% ofthe income derived from the trust propertyfor the purpose of the trust during therelevant previous year.

An accumulation not exceeding 15% ofthe income from such property ispermissible. For computing this 15%,voluntary contribution referred to inSection 12 shall be deemed to be part ofthe income. It must be clearly noted thataccumulation must be with the object ofapplication of the accumulated amount forcharitable or religious purpose in India ata later date. Such a facility foraccumulation is not available for thosetrusts whose income is to be appliedoutside India.

b) Accumulation of Income

The word ‘accumulated’ means that theincome is set apart during the year forfuture spending on the specified purpose.According to section 11(1)(a), in additionto the income spent on charitable orreligious purposes during the relevantaccounting period, income accumulatedor set apart for application to suchpurposes upto 15% of the income fromproperty held for charitable or religiouspurposes is also exempt.

Where, the accumulation is in excess of15% of the income from property then thesurplus in excess of 15% will be liable totax. However, one can obtain exemptionunder section 11(2) by setting apart theincome subject to the conditionsprescribed there under.

(i) setting apart of income -

Under clauses (a) or (b) of section11(1), 85% of income has to beapplied for charitable or religiouspurposes and only 15% can beaccumulated for such purpose.However, even this 85% of suchincome may be accumulated or setapart and it will earn full exemption,subject to the fulfillment of certainconditions. Thus the total 100% ofincome may even be accumulated andit will qualify for exemption 15% undersection 11(1)(a) and 85% undersection 11(2) which is a specificprovision for setting apart of income.The conditions precedent foraccumulation of the balance 85% ofincome are as under:


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(a) the trustees should specify, bynotice in writing to the assessingofficer in Form No. 10, the purposefor which the income is beingaccumulated or set apart and theperiod for which the income is tobe accumulated or set apart,which shall in no case exceed 5years. The notice once given neednot be given every year during theperiod of accumulation. A separatenotice may also be given for thesurplus of each year, though theobject may be the same.

(b) The money so accumulated or setapart should, vide section 11(2)(b),be invested or deposited in theforms or modes specified insection 11(5).

(ii) Consequences of failure

Where the income which isaccumulated for the specified purposeor purposes of the trust, is applied topurposes other than charitable orreligious purposes or ceases to beaccumulated or set apart forapplication to such purposes, it will bechargeable to tax as the income of thatyear.

If in any year, the accumulation doesnot remain in securities specified insection 11(5) then the income soaccumulated will be chargeable to taxas the income of that year.

If the accumulation is not utilized forthe specified purposes during theperiod of accumulation or in the yearimmediately following the expiry of thatperiod, then the accumulations, to theextent they are not so utilized, will bechargeable to tax as income of theprevious year immediately followingthe expiry of that period. Whereaccumulated income cannot beapplied in specified manner due tocircumstances beyond the control oftrustees, the Assessing Officer mayallow such income to be applied forsuch other charitable purposes in Indiaas are in conformity with the objectsof the trust.

DENIAL OR WITHDRAWAL OF EXEMPTION[SECTION 13]In following cases the income of charitable trusts donot qualify for exemption under section 11 of the Act.(1) The income of a private religious trust, which does

not enure for the benefit of the public. [sec.13(1)(a)]

(2) In case of a charitable trust or institution createdor established after 1-4-1962 for the benefit of anyparticular religious community or caste, its incomewould not be exempt. Conversely where such trustor institution had been created or establishedbefore 1-4-1962 exemption of its income from taxcannot be denied.

(3) Section 13(1)(c) provides that a charitable orreligious trust or institution created or establishedon or after 1-4-1962, shall lose the exemptionunder section 11 if any part of this income enure(under the terms of the trust, etc.) to the benefit ofany of the interested persons, or any part of itsincome or property is, irrespective of the date ofits creation or establishment, used or applied byor for the benefit of any such interested personduring any part of the previous year, whetherdirectly or indirectly.

Exceptionsa. There is an exception to the above general rule.

If, however, such trust or institution was createdor established before 1-4-1962, then any use orapplication, whether directly or indirectly, of anypart of its income or property, if such use orapplication is by way of compliance with amandatory terms of the trust or a mandatory rulegoverning the institution, the same shall not actas a bar to the exemption under section 11.

b. Charitable trusts not to lose exemption evenif educational or medical facilities provided tospecified persons.-Section 13(6) provides that a charitable or religioustrust running an educational institution or medicalinstitution or a hospital shall not be denied thebenefit of exemption under section 11 or 12, inrelation to any income other than income referredto in section 12(2) merely because the trust hasprovided medical or educational facilities to the“specified persons”.

c. Exemption cannot be denied where there isno available surplus -It was held in CIT v Apostolos Raptakos Trust thatexemption under section 11 could not be deniedon the ground that trust had no available surplusincome at all which could be applied to charitableor religious purpose.

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1. INTRODUCTION:

The generation of black money is major problemin India. Various committees were formed andnumber of suggestions were given by suchcommittees to finance ministry and based on saidrecommendations number of measures have beentaken to curb generation of black money. Evenschemes like VDIS and other options likeinvestment in bonds etc were also taken but thesuccess ratio of such measures is not uptoexpectation. A parallel economy of black moneyis in operation. Out of the reports of variouscommittees, the finance ministry came to knowthat real estate transactions are major generatorsof black money. After terrorist attacks, thegovernment tried to know the source of funding toterrorists and it was observed that hawalatransactions, black money of real estate and sharemarket transactions were the source of funding toterrorist. Money Laundering Act was introducedto curb such transactions but it has not given theresults as expected. One of the measuresintroduced by the Finance minister wasintroduction of section 50C in Income tax Act videFinance Act, 2002, w.e.f 01-04-2003. Theprovisions of said section and its applicability arediscussed in detail herein below.

2(A). APPLICABILITY OF SECTION 50C TOSALE OF LAND, BUILDING OR BOTH FORMINGPART OF STOCK-IN-TRADE.

SECTION 50C:

The provisions of section 50C are reproducedherein below for ready reference.

SPECIAL PROVISION FOR FULL VALUE OFCONSIDERATION IN SPECIAL CASES:

50C.(1) Where the consideration received oraccruing as a result of the transfer by an assesseeof a capital asset, being land or building or both,is less than the value adopted or assessed (orassessable) by any authority of a StateGovernment (hereafter in this Section referred toas the “stamp valuation authority”) for the purposeof payment of stamp duty in respect of suchtransfer, the value so adopted or assessed (orassessable) shall, for the purpose of section 48,be deemed to be the full value of the considerationreceived or accruing as a result of such transfer.

The provision can be correctly interpreted onlywhen its major words are taken into considerationswhich are as under.

- Consideration

- Capital asset

- Transfer

- Section 48

- Deemed to be full value of consideration.

- Now let us take each point enumerated hereinabove and deliberate so as to reach to correctinterpretation of section 50C(1).

- CONSIDERATION:

There has to be consideration and if considerationis not there, provisions of section 50C are notapplicable. Hence, the transfer of land, buildingor both by gift deed will not be governed by section50C. Incase of gift, taxability would be as perprovisions of section 56. If gift is made to a relativewithin the definition of relative as per section 56(vii),sub clause (e) to Explanation to second proviso isto be referred. If it is transferred by means otherthan gift, reference is invited to second proviso tosection 56(vii) and relevant clauses are (b), (c),(d), (e), (f) for taxability or non taxability is to bereferred. How it will be taxed if it is taxable is definedin section 56(vii)(b) read with sub clause (a) toExplanation to second proviso to section 56 (vii).

- CAPITAL ASSET:

The capital asset has been defined vide section2(14) which reads as under.

Section 2(14): Capital asset means property of anykind held by an assessee, whether or notconnected with his business or profession, butdoes not include-

· Any stock-in-trade, consumable stores or rawmaterials held for the purpose of his businessor profession;

· Agricultural land in India, not being landsituated

APPLICABILITY OF SECTION 50C TO SALE OFIMMOVABLE PROPERTY WHICH IS STOCK-IN-TRADE OR

WHICH FORMS PART OF BLOCK OF ASSETS.

CA. Chandrakant K. ThakkarThe author is practising since 1983. He can bereached at [email protected]

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(a) In any area which is comprised within thejurisdiction of a municipality (whetherknown as a municipality, municipalcorporation, notified area committee, townarea committee, town committee, or by anyother name) or a cantonment board andwhich has a population of not less than tenthousand according to the last precedingcensus of which the relevant figures havebeen published before the first day of theprevious year; or

(b) In any area within such distance, not beingmore than eight kilometers, from the locallimits of any municipality or cantonmentboard referred to in item (a) as the CentralGovernment may, having regard to theextent of, and scope for, urbanization ofthat area and other relevant considerations,specify in this behalf by notification in theofficial Gazette.

In the definition portion of capital asset onlyrelevant sub clauses which are connected withsection 50C are reproduced as other subclauses are not relevant. In view of above itcan be concluded that for builders land andbuilding meant for sale are stock-in- trade andhence, it will be out of purview of section 50C.Secondly section 50C is for computation ofcapital gain whereas land and building sold bybuilder which is his stock in trade is businessincome and hence, 50C would not beapplicable to sale of land building or both whichare in the form of stock in trade. Even to anagricultural land situated in specified areawhich does not form part of the definition ofcapital asset, the provisions of section 50C arenot applicable as it is not capital asset at alland hence, question of computation of capitalgain does not arise on such agricultural land.

· TRANSFER :

The word transfer has been defined in section2(47) which reads as under.

Transfer in relation to a capital asset, includes,-

(i) The sale, exchange or relinquishment of theasset; or

Above definition also states that transfer shouldbe in relation to capital asset and as stock- in– trade is not capital asset as per definition ofcapital asset prescribed in section 2(14) ofIncome tax Act, 1961 the sale of land, buildingor both which forms part of stock in trade wouldnot be covered in the scope of section 50C ofIncome tax Act, 1961.

Article : Applicability of Section 50C to Sale of Immovable Property which is.....

· SECTION 48:

MODE OF COMPUTATION:

S.48. The income chargeable under the headcapital gains shall be computed, by deducting fromthe full value of the consideration received oraccruing as a result of the transfer of capital assetthe following amounts, namely:-(i) expenditure incurred wholly and exclusively in

connection with such transfer;(ii) the cost of acquisition of the asset and the cost

of any improvement thereto:

Only relevant portion of section 48 is reproducedherein above. Here also it is to be noted that thesection is for income chargeable under the headcapital gain and it should be for transfer of capitalasset but the income of builders who shows theland, building or both as stock-in –trade aresupposed to offer their income under headbusiness and profession and not under capitalgain. The transaction of sale of land, building orboth shown as stock-in-trade will not be withinscope and ambit of section 50C. It is also to benoted that as discussed earlier, income arising onaccount of sale of land, building or both does notaccrue due to transfer of capital asset asprescribed in section 48 r.w.s. 2(14) of Incometax Act, 1961, the question of applicability of section50C to sale of land, building or both forming partof stock-in-trade does not arise.

· DEEMED TO BE FULL VALUE OFCONSIDERATION:While computing income under head Capital gainis concerned, the procedure for computation ofcapital gain is prescribed in Section 48. Section48 says that from full value of consideration, thecost of acquisition and expenditure incurred whollyand exclusively in connection with transfer of capitalasset is to be deducted. For calculation of capitalgain only deeming provision section 50C isintroduced and the full value of consideration assaid in section 48 will be deemed to be value asprescribed by stamp valuation authority if full valueof consideration is less than valuation assessedor assessable by stamp valuation authority. Asprovisions of section 48 are not applicable ontransfer of land, building or both as per pararelating to section 48 discussed herein above, thequestion of applicability of section 50C to sale ofland, building or both forming part of stock-in-tradedoes not arise.

From above discussion, it can be concluded thatfor transfer of land, building or both which formspart of stock-in-trade provisions of section 50C arenot applicable.

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2(B). APPLICABILITY OF SECTION 50C TOBUILDING FORMING PART OF BLOCK OFASSETS.

Now let us discuss the asset in the form of buildingwhich forms part of block of asset on whichdepreciation is claimed and said asset is sold,whether provisions of section 50C are applicableor not. Before we discuss the same it is necessaryto know how computation is to be made for gainon sale of such asset. As such if there is gain onaccount of sale of asset like office building, factorybuilding, godown etc. the income should betaxable as long term capital gain or short termcapital gain based on its period of holding but onaccount of deeming provision under section 50 itis treated as short term capital gain. Hence, it isnecessary to know the provisions of section 50which are reproduced herein below.

Section 50: Special provision for computation ofcapital gains in case of depreciable assets.

50. Notwithstanding anything contained in clause(42A) of Section 2, where the capital asset is anasset forming part of block of assets in respect ofwhich depreciation has been allowed under thisAct or under the Indian Income tax Act,1922 (11of 1922), the provisions of section 48 and 49 shallbe subject to the following modifications:-

(1) Where the full value of the considerationreceived or accruing as a result of the transferof the asset together with the full value of suchconsideration received or accruing as a resultof the transfer of any other capital asset fallingwithin the block of the assets during theprevious year, exceeds the aggregate of thefollowing amounts namely:-

(i) expenditure incurred wholly and exclusivelyin connection with such transfer ortransfers;

(ii) the written down value of the block of assetsat the beginning of the previous year; and

(iii) the actual cost of any asset falling withinthe block of assets acquired during theprevious year,

Such excess shall be deemed to be thecapital gains arising from the transfer ofshort term capital assets;

Now we have to see important words anddefinitions which are required to be referredfor interpretation of section 50 of Incometax Act, 1961. They are as under.

· Section 2(42A) defines short term capitalasset.


· Block of assets as per section 2(11)

· Short term capital gain as per section2(42B)

· Written down value as defined in section43(6)(c)

(i) SHORT TERM CAPITAL ASSET AS PERSECTION 2(42A)

“Short term capital asset” means a capital assetheld by an assessee for not more than thirty sixmonths immediately preceding the date of itstransfer:

Provided that in the case of a share held in acompany (or any other security listed in arecognized stock exchange in India or a unit ofthe Unit Trust of India established under the UnitTrust of India Act, 1963 (52 of 1963) or a unit ofMutual Fund specified under clause (23D) ofsection 10 or a zero coupon bond, the provisionsof this clause shall have effect as if the words thirtysix months, the words twelve months have beensubstituted.

On analysis of the above provision any other assetother than asset stated in proviso shall be treatedas short term capital asset if it is not hold for morethan thirty six months and for assets like sharesof a company or security listed on recognizedstock exchange or unit of UTI or unit of Mutualfund or a zero coupon bond they shall be treatedas short term capital asset if they are hold not morethan twelve months. In section 50 it is providedthat even if asset which forms part of block of asseton which depreciation has been allowed shall betreated as short term capital asset even if theyare hold for more than 36 months and gain onsale shall be treated as short term capital gain bydeeming provision.

(ii) BLOCK OF ASSETS AS PER SECTION 2(11).

“Block of assets” means a group of assets fallingwithin a class of assets comprising-

(a) Tangible assets, being buildings, machinery,plant or furniture;

(b) Intangible assets being know how, patents,copyrights, trade- marks, licences, franchiseesor any other business or commercial rights ofsimilar nature, in respect of which the samepercentage of depreciation is prescribed.

As buildings of different nature on whichdepreciation is allowable shall form part ofblock of asset as per percentage ofdepreciation prescribed under Income TaxRules, 1962.

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(iii) SHORT TERM CAPITAL GAIN AS PER SECTION2(42B).

“Short term capital gain” means capital gain arisingfrom the transfer of a short term capital asset.”

On analysis of above definition short term capitalgain arises when short term capital asset is sold.Short term capital asset is defined in section 2(42A)as per discussion given herein above. However,section 50 says that even if assets are not shortterm capital assets i. e they are long term capitalasset but if they are part of block of asset on whichdepreciation has been allowed, the gain shall beshort term capital gain by deeming provision andnot long term capital gain as per normal provision.

(iv) WRITTEN DOWN VALUE AS PER SECTION43(6)(c) .The definition of written down value in the case ofblock of assets is summarized as under.

Opening WDV + (plus) acquisition of asset duringthe year – (less) sales consideration of asset sold.It is treated as block till it does not become zero.When it results into negative, it is treated as shortterm capital gain irrespective of holding period ofasset under deeming provision of section 50.

Now from analysis of above provisions , it can beconcluded that building which forms part of theblock of assets even if held for more than 36months and gain arises on sale of said block (whenblock becomes negative on deduction of saleconsideration), the gain will be short term and notlong term. Such gain is considered as Short termgain by deeming provision under section 50 ofIncome tax Act, 1961. Then question arises whydeeming provisions of section 50C are notapplicable to asset like building which forms partof block of asset. The reasons are as under.

· For arriving the short term capital gain u/s 50specific formula as given by me in clause (iv)for Written down Value as per section 43(6)(c)is to be referred and in said section it isspecifically said that consideration received orreceivable is to be deducted which is not asper section 48 and hence, deeming provisionsof section 50C are not applicable.

· Both section 50 and section 50C are deemingprovision for different purposes. Section 50 isfor treating gain on sale of asset sold in blockof asset as short term capital gain irrespectiveof its period of holding. When it will beconsidered as capital gain is also prescribedby specific method or formula and in saidmethod value of consideration is to bededucted and it is not to be replaced by value

as per stamp valuation authority. Whereas incase of asset like land, building or both whensold and on which computation of capital gainis to be made the sale consideration is to bereplaced by valuation made by Stamp valuationauthority if sales consideration is less thanvaluation made by stamp valuation authority.Hence, it can be concluded that purpose ofdeeming provisions u/s 50 and u/s 50C aredifferent and methods are specifically providedin relevant sections to arrive at capital gain.

· It has been held by various courts and tribunalsthat deeming provisions are to be interpretedfor the specific purpose for which deeming isprovided in concerned section and it cannotbe extended to other provisions for which it isnot intended by legislature.

3. DECISIONS RELIED UPON:

(a) Subash Chand v. Asstt. CIT [2012] 49 SOT732 / 18 taxmann.com 149 (Chd.)

The Chandigarh Bench of the AppellateTribunal in this case has held that the legalfiction created by section 50C is intended onlyto compute capital gains arising from transferof land or building or both and will not apply toany of the legal fictions created by sections 69,69A and 69B of the Act.

The Tribunal held that section 50C was enactedfor the limited purpose of section 48 to facilitatecomputation of capital gains. It held that thedeeming provisions in the statute are legal fictionsto facilitate achievement of certain desired results,though in reality these may be untrue.

The fiction created by section 50C is only totax a transaction where the apparent saleconsideration is less than the value adoptedfor registration purposes by the StampValuation Authority. When the recital in theconveyance deed states a specific sum as theconsideration and merely because theAssessing Officer had adopted the value fixedby the Stamp Valuation Authority as deemedsale consideration for computing capital gains,the assessee cannot take advantage of suchdeemed sale consideration to explain thesource for subsequent investments.

The Tribunal explained the rules that are tobe applied for interpreting a provision creatinga legal fiction, viz., (i) the purpose of insertion;(ii) it should not be interpreted beyond thepurpose or language of the section by which itis created; and (iii) outside the bounds of legalfiction, the difference between reality and fiction


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may subsist and such difference could beascertained by making reference to the subjectand context of those provisions.

(b) CIT v. Thiruvengadam Investments (P.)Ltd. [2010] 320 ITR 345 (Mad.).

It was held by Honorable Madras High courtthat Section 50C will apply only when thetransferred immovable property is liable to taxunder the head capital gains. Where theimmovable property is stock-in-trade of thetransferor, the provisions of section 50C willnot apply.

(c) CIT v. Amarchand N. Shroff [1963] 48 ITR 59(SC)

The issue before the Supreme Court in abovereferred case was whether the amountsreceived by the legal representatives of A couldbe taxed in their hands the Supreme Courtfollowing its earlier decision in Bengal ImmunityCo. Ltd. v. State of Bihar AIR 1955 SC 661 andafter observing that “legal fictions are only fora definite purpose and they are limited to thepurpose for which they are created and shouldnot be extended beyond that legitimate field”held that they (the receipts) could not be saidto be income which might be deemed by fictionto have been received by the deceased A.

Following the same decision in BengalImmunity Co. Ltd. (supra) the Supreme Courtin this case made a similar observation as wasdone in Amarchand N. Shroff (supra) and thatobservation was to the following effect-

“It is well-settled that legal fictions are createdonly for some definite purpose and these mustbe limited to that purpose and should not beextended beyond that legitimate field.”

In Mother India Refrigeration Industries (P.)Ltd. (supra) the same view was reiterated byholding that the “Legal fictions are created onlyfor some definite purpose and these must belimited to that purpose and should not beextended beyond their legitimate field”.

(d) CIT v. ACE Builders (P.) Ltd.[2006] 281 ITR210 /[2005] 144-Taxman 855 (Bom.)

The Hon’ble Bombay High Court in abovereferred case considered the facts in which theassessee was a partner in a firm which wasdissolved in the year 1984 and the assesseewas allotted a flat towards its credit in the capitalaccount with the firm. The assessee showedthe flat as capital asset in its books of account

and depreciation was claimed and allowed fromyear to year. In the previous year relevant tothe assessment year 1992-93 the assesseesold the flat and invested the net sale proceedsin a scheme eligible under section 54E of theAct and, accordingly, declared Nil incomeunder the head ‘Capital gains’. The AssessingOfficer opined that since the block of buildingceased to exist on account of sale of flat duringthe year, the written down value of the flat wasliable to be taken as cost of acquisition undersection 54E of the Act. He further held thatsince the assessee had availed depreciationon such asset which was otherwise long-termcapital asset, the deeming provision undersection 50 would apply and it would be treatedas capital gain on the sale of short-term capitalasset and resultantly no benefit under section54E could be allowed. When the matter cameup before the Hon’ble Bombay High Court, itnoted that sub-sections (1) and (2) of section50 contained a deeming provision and suchfiction was restricted only to the mode ofcomputation of capital gain contained insections 48 and 49 and, hence, it did not applyto other provisions. Consequently, theassessee was held to be eligible for exemptionunder section 54E in respect of capital gainarising out of the capital asset on whichdepreciation was allowed. On the appraisal ofabove judgments, the legal position which turnsout is that whenever a legal fiction is createdby way of a deeming provision, it is ofparamount importance to go strictly by theprescription of such provision. Such deemingprovision cannot be extended beyond thepurpose for which it is intended.”

4. CONCLUSION :

From the analysis of provisions of section 50C andsection 50, it can be concluded that deeming valueof consideration as per stamp valuation authorityas provided in section 50C is for computation ofcapital gain on sale of capital asset and it cannotbe applied to land, building, or both forming part ofstock-in-trade. Similarly, deeming value ofconsideration as provided in section 50C cannotbe applied to building sold which forms part of theblock of assets and income on sale of said buildingis short term capital gain as per section 50 of Incometax Act, 1961. The above analysis made by me isendorsed by various courts and tribunals for whichI have enumerated some of the decisions.

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ALTERNATIVE REMEDY – ARTICLE 226 AND136 :

Writ petition filed without taking recourse to alternativeremedy under statute. But no objection raised in writproceedings before High Court. Writ petition allowedby High Court on basis of factual details by going intomerits of the case. Held, Supreme Court in appeal wouldnot entertain such objection for the first time.

[State of Uttar Pradesh & Others vs. AmbrishTandon & others (2012) 5 SCC 566]

RECALL - WRIT – ARTICLES 226 AND 136 :

When warranted – Dismissal of writ petition by HighCourt for non-prosecution – Recall application alsodismissed – Approach – Held, explanation offered forrecall was satisfactory – such applications ought to beconsidered sympathetically instead of adopting hypertechnical approach – Recall application allowed andwrit petition restored to file – practice and procedure –Recall.

[S. M. I. Kazim Vs. New India Assurance CompanyLtd. and Others (2012) 5 SCC 621]

METHOD OF ACCOUNTING – VALUATIONOF STOCK:

Valuation of Stock – Excise duty – Where assessee isfollowing net method of valuation of closing stock,whether excise duty is to be excluded from value ofclosing stock of finished goods at end of accountingperiod - Held Yes (Prior to A.Y. 1999-2000).

[CIT, New Delhi vs. Shri Ram Honda PowerEquipment Ltd. (210 Taxman 577 (SC)]

Advocate Samir N. DivatiaThe author is practising advocate since 1974.He can be reached at [email protected].

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SECTION 234B AND SECTION 115JA :

Whether interest can be charged under Section 234Bon brought forward tax credit balance – Held No.

[CIT, New Delhi vs. Sage Metals Ltd. (2012) 210Taxman 582 (SC)]

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PERVERSE FINDING OF FACT BY TRIBUNALNOT BINDING TO HIGH COURT :-

C.I.T. V/S NOVA PROMOTERS AND FINLEASE (P)LTD.

(2012) 342 ITR 169 (DELHI)

Issue:-

Whether findings of fact are binding on High Court?

Held:-

On the above question Delhi High Court has held asunder:-

Even where a reference of a question of law is made tothe High Court in its advisory jurisdiction, and not theappellate jurisdiction where normally the findings of factrecorded by the Tribunal are binding on the High Court,the findings are not binding on the High Court if theyare perverse or if the findings are such that no personacting judicially and properly instructed as to therelevant law could have come to the determination underappeal. The position in an appeal u/s 260A of theIncome Tax Act, 1961 is “a fortiori”.

ITR –V TO BANGALORE BY ORDINARY POSTAND DIFFICULTY FACED

CRAWFORD BALY & CO. V/S. UNION OF INDIA &URS.

(2012) 246 CTR (BOM) 459

Issue:-

Submission of ITR-V repeatedly to Bangalore and nonreceipt thereof. Difficulty faced by assessee a SolicitorsFirm.

Held:-

This is an interesting case of solicitors who haduploaded Return of Income Electronically and forwardedITR-V by ordinary post thrice to Bangalore. Evenassessee’s representative was personally deputed toBangalore to see Asst. CIT, Processing Centre, but shewas not allowed to meet him.

Consequently Dept issued notice of non receipt of ITR-V, and stated that the Return Electronically filed isinvalid.

50

CA. Jayesh C. SharedalalThe author is practising since 1981. He canbe reached at [email protected].

CA. C. R. SharedalalThe author is practising since 1953. He canbe reached at [email protected].

On the above facts, the Assessee, a firm of Solicitorshad to approach High Court for relief.

High Court in the order permitted to file the Return tothe ITO as per provisions of Sec. 139(9).

Above case is digested to appreciate the procedure ofsubmitting ITR-V by ordinary post and the difficulty facedby the assessee.

In this case assessee was a firm of Solicitors. Whatwould be the position of an assessee who is a smalltrader?

KEYMAN INSURANCE PREMIUMALLOWABLE :-

C.I.T. V/S RAJAN NANDA

(2012) 249 CTR 141 (DEL)

Issue:-

Whether amount paid towards Keyman InsurancePremium is allowable?

Held:-

The Tribunal has rightly referred to and relied uponthe CBDT circular no. 762. Dt. 18th Feb. 1998. Thecircular is binding on the I. T. Department, whichcategorically stipulates that premium on Keyman Policyshould be allowed as business expenses. The assesseewould naturally, take into consideration such clarificationissued by the CBDT and would act on the basis thereof.

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From the Courts

When the assessee was given the impression, bymeans of circular, that if expenditure is incurred on theKeyman policy, it would be treated as businessexpenditure, there is no reason for the department todeviate there from when it comes to the assessment.The argument of Revenue that taking such KeymanInsurance policy every year and thereafter assigningthe same to the beneficiaries may be treated ascolorable device, may not be correct. Though theargument appears to be attractive looking to the factthat the assessee had been taking the policies andthereafter assigning the same year after year in favourof the beneficiaries, what cannot by ignored is that thecourse of action is permitted by the Department itselfas stated in CBDT Circular dated 18/02/1998. Theexpenditure incurred has to be tested on the touchstoneof Sec. 37 and to see as to whether such expenditureis permissible or not. No doubt, the object of keymaninsurance policy is to enable business organisations toinsure the life of a keyman in order to protect thebusiness against financial loss which may occur in thelikely eventuality of premature death. Such anexpenditure is treated as business expenditure by theDepartment itself and recognized as such in circular or18/02/1998. The expenditure is to be seen at the timeit is incurred. Merely because the policy was assignedafter sometime would not mean that the expenditureincurred in the first instance would lose the flavour ofbeing business expenditure. Once the legal provisionsand the outlook of Department itself based on suchlegal provisions permit the assessee to have the taxplanning of this nature, and the course of action takenby the assessee is permissible under law. The argumentof colorable device cannot be advanced by theRevenue. When the expenditure of this nature is treated“business expenditure” per se by the Department itself,there cannot be any question of raising the issue ofwant of business expediency. The counsel for theassessee is right in his submission that the Departmentwould not sit on the armchair of the assessee anddecide as to whether it was appropriate on businessexpediency for the assessee to incur such anexpenditure or not. If the transaction is otherwise validin law and is a part of tax planning, merely because ithas resulted in reduction of tax, such an expediencycannot be ignored raising the issue of underlying motiveof entering into such type of transaction.

APPLICABILITY OF SEC. 41(1)

C.I.T. V/S. COMPAQ ELECTRIC LTD.

(2012) 249 CTR 214 (KAR)

Issue:-

When can provisions of Sec. 41(1) can be applied?

Held:-

For the application of Sec. 41(1), the conditionprecedent is that there should be an allowance ordeduction in assessment for any year in respect of loss,expenditure or trading liability incurred by the assessee.Then, subsequently, during any previous year, if thecreditor remits or waived any such liability, then theassessee is liable to pay tax under Sec. 41. The wholeobject is to avoid double benefit to the assessee. In theinstant case, the amount claimed as capital receipt isin respect to which there was no allowance or deductionclaimed by the assessee for the previous year.Therefore, when his creditor has waived the repaymentof the said amount, it amounts to a capital receipt andnot a revenue receipt. As the assessee did not havethe benefit of any allowance or deduction in respect ofthe said amount, Sec. 41 is not attracted. In that viewof the matter no merit is seen in this appeal.

WEALTH TAX ACT: INTEREST ON SELFASSESSMENT TAX PAID :-

NASSER ZACKERIA & ORS. V/S. C.W.T.

(2012) 249 CTR 303 (KER)

Issue:-

Is assessee entitled to interest on refund of selfassessment tax paid under Wealth Tax Act?

Held:-

Self assessment tax is very much a mode ofassessment. Sub-Sec(2) of Sec.15B makes it crystalclear that once a regular assessment is made u/s 16,any amount paid under sub-section (1) of sec. 15B shallbe deemed to be paid towards such regularassessment. It would be necessary to issue a demandnotice u/s 30 only if any residual liability remains to besatisfied towards the balance amount of tax, interest,penalty or fine, as the case may be, absence ofissuance of any notice u/s 30 is inconsequential as thebasis of the liability to pay the amount is the assessmentand not the demand notice, issuance of notice u/s 30is only a consequential step to realize the due amount.A law abiding citizen who discharges his liabilityvoluntarily to satisfy the same pursuant to assessment(whether it be self assessment or otherwise) withoutwaiting for issuance of notice of demand cannot be putin more disadvantageous position than a person whosatisfies the due amount with interest or otherwise after

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issuance of a notice of demand. There is absolutely nomerit or rationale on the part of the respondent in takinga contrary stand on this score more so when theassessment is completed and tax has been adjusted.Protracted litigation became inevitable only becauseof the wrong course pursued by the respondents beforethe version of the asessee came to be accepted whichhas become final. Thus, the said excess amount wasbeing wrongfully retained by the revenue, virtuallypreventing the assessee from obtaining refund atproper time. Hence, the impugned orders are set asideand the assessee is entitled to interest on refund asprovided u/s 34A(4B)(a).

GUIDELINE FOR TAX RECOVERY ANDTREATMENT TO STAY PETITIONS:-

UTI MUTUAL FUND V/S I.T.O.

(2012) 206 TAXMAN 341 (BOM)

Issue:-

What is the guideline laid down by Bombay High Courtfor recovery of tax and treatment to stay petition?

Held:-

Consistent with the parameters which were laid downby the division bench in KEC International Ltd. 251 ITR520 (Bom) and the observations in the judgment in CocaCola India (P) Ltd. 285 ITR 419 (Bom) it is directed thatthe following guidelines should borne in mind foreffecting recovery:-

1. No recovery of tax should be made pending,

(a) Expiry of the time for filing an appeal; and

(b) Disposal of a stay application, if any, movedby the assessee and for a reasonable periodthereafter to enable the assessee to move ahigher forum, if so advised. Coercive stepsmay, however, be adopted when the authorityhas reason to believe that the assessee maydefeat the demand, in which case brief reasonsmay be indicated.

2. The stay application, if any, moved by the assesseeshould be disposed off after hearing the assesseeand bearing in mind the guideline in KECInternational Ltd.

3. If the A.O. has taken a view contrary to what hasbeen held in the preceding previous years withoutthere being a material change in facts or law, thatis relevant consideration in deciding the applicationfor stay.

4. When a bank account has been attached, beforewithdrawing the amount reasonable prior noticeshould be furnished to the assessee to enable theassessee to make a representation or seekrecourse to a remedy in law.

5. In exercising the powers of stay the ITO shouldnot act as a mere tax gatherer but as a Quasi-Judicial authority vested with the public duty ofprotecting the interest of the revenue while at thesame time balancing the need to mitigate hardshipto the assessee. Though the A.O. has made anassessment, he must objectively decide theapplication for stay considering that an appeal liesagainst his order; the matter must be consideredfrom all its facts believing the interest of theassessee with the protection of the revenue.

IGNORANCE OF ASSESSEE: DUTY OF A.O.:-

SMT. RAJ RANI GULATI V/S C.I.T.

(2012) 249 CTR 51 (ALL)

Issue:-

In the case of ignorance of the assessee of the correctlegal provisions, what is the duty of the A.O.?

Held:-

Needless to mention that proviso of Sec. 112(1) wasintroduced w.e.f. 1st April 2000 by the Finance Act, 1999.In other words, it was introduced during the assessmentunder consideration and assessee was not aware aboutlatest amendment by the Finance Act, 1999 w.e.f. 1st

April 2000, though ignorance of law has no excuse,but it can be excused in tax matter. It is not expectedthat the department shall take the advantage ofassessee’s ignorance as per CBDT circular No. 14 (XL– 35) 1955 dt. 11th April 1955. Even under the bonafidebelief, the assessee has shown the long term capitalgain @ 20 percent but it was expected from the A.O. toknow the latest amendment. The mistake might havebeen corrected by passing on order u/s 154. Thequestion of law that arose from the fact as found by theI.T. authority and legal issue can be raised at any stage.The assessee is entitled to raise the legal issue beforethe first appellate authority, which possessed co-terminus powers similar to the A.O. Hence, C.I.T. (A)has rightly adjudicated the statutory right of theassessee and directed to allow the long term capitalgain @ 10 percent.

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BANGALORE ELECTRICITY SUPPLY CO.LTD. V. ITO 149 TTJ 102 (BANG.)

A.Y. 2005-06 to 2008-09, Order Dated: 16th March,2012

BASIC FACTS

Assessee Company is engaged in the distribution ofelectricity to the local areas assigned to it. It waspurchasing electricity from the power generationcompany and distributing the same by using thetransmission network of the transmission company.TheIT Department carried out a survey u/s 133A of the Actat the business premises of the assessee. It was seenthat the assessee had made payments of transmissioncharges on which no TDS was made. The CIT(A) heldthat payments of transmission charges cannot comeunder the purview of sec 194J and no tax was to bededucted. Hence the revenue went for an appeal beforethe Tribunal.

ISSUE

Whether transmission charges paid by theassessee, an Electricity Distribution Company, toTransmission Company were in the nature of feesfor technical services u/s 194J or rent u/s 194I andtherefore liable to deduct TDS from transmissioncharges?

HELD

The Tribunal relying on the decision of the Jaipur Benchin case of Jaipur Vitran Nigam Ltd. held the applicabilityof section 194J would come into effect only when bymaking payment of fee for technical services, assesseacquired certain skill/knowledge/intellect which can befurther used by him for its own purpose/research.Where facility is provided by use of machine/robot orwhere sophisticated equipments are installed andoperated with a view to earn income by allowing thecustomers to avail of the benefit by use of suchequipment, the same does not result in the provisionof technical services to the customer for fee. It wasthus held that use of transmission lines does not resultin any technical services rendered to the assesse andaccordingly provisions of section 194J would not beapplicable.

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In respect of applicability of provisions of section 194Ithe tribunal relied on the decision of the Mumbai Benchin case of Chattisgarh State Electricity Board to holdthat the assesse has no control over the operations ofthe transmission lines and all that it gets from thearrangement is that it can draw electrical power fromtransmission lines in agreed manner. In a situation inwhich the payment is made only for the purpose of aspecific act, it cannot be said to be for the use of anasset even if an asset is used in the process. Thereforesection 194I has no application to the impugnedpayments for transmission of electricity.

MUMBAI CRICKET ASSOCIATION V.DIT(EXEMPTION) 138 ITD 338 (MUM.)

Order dated: 8th August, 2012

BASIC FACTS

The assessee-association was a public charitable trustengaged in the activity of promoting and regulating thegame of cricket in Mumbai. It was registered undersection 12A. The association entered into an agreementdated 12-12-2005 with ‘SI’ for development of worldclass indoor cricket academy. As per the concessionagreement, the concessionaire was to construct theindoor cricket academy (ICA) and facilities therein atits own cost. ICA was to be handed over immediatelyupon completion of its construction for exclusive use,administration and maintenance by the association. Inorder to enable the concessionaire to recoup its costthe association granted him a ‘concession’ to operate/run certain facilities (known as ICA facilities) in theconstructed premises by admitting 7000 associates tothe facility who would be permitted to make use of such

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

CA. Aparna ParelkarThe author is practising since 1991. She canbe reached at [email protected]

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facilities on payment of charges to the concessionaire.The Director (Exemption) found that in terms ofconcession agreement, apart from cricket academyvarious other activities such as restaurants with bar,banquet halls, card rooms etc., were started. He wasof the view that said activity of the assessee wasbusiness activity and could not be in any way be saidto be incidental to the objects being pursued by theassessee. Thus, the activities were against the objectsof the trust. He further observed that the land wasallotted by MMRDA to assessee strictly for non-commercial activity. It was mainly allotted for the activityof cricket. However, by planning, executing the activityof recreation centre, the assessee had violated theterms of the agreement vide which MMRDA had allottedthe land. Accordingly, the Director (Exemption) passedan order under section 12AA (3) cancelling theregistration of assessee-association.

ISSUE

Whether where assessee cricket associationentered into an agreement with another party forrunning activities such as restaurants, bar, banquethalls, etc. apart from cricket academy, it beingactivities of commercial nature, registration wascorrectly cancelled by invoking provisions ofsection 12AA(3)?

HELD

From the reading of the Agreement between MCA &SI, it was clear that the reigns of the ManagingCommittee of ICA Facilities shall always remain withMCA.MCA entered into an agreement with SI to developtwo premises, i.e. ICA and ICA Facilities, which wereentirely different in their own functioning. The facilities,as developed cannot, but be called as commercial andprofit sharing venture undertaken, primarily by SI, butwith the assessee to stand on. What ultimately cameup was totally against the terms and conditions onwhich the allotment of land was taken on.

From the facts as seen, there has been a completeviolation of basic condition for allotment of land and itsutilization by assesse and so far as its conduct isconsidered, assesse has entered into commercial andprofit motive for a longer duration, covering at least 17years and by which assesse as an association crossedits line and entered into the territory of profit motiveand not pursuing only charitable and welfare activities.

The contentions of the AR that once registration isgranted, it cannot be reviewed, cannot be accepted.

There is no bar in the review of functions of anAssociation, which the department can do at any time,In fact, the CIT can review the grant of registration atany time because the words used in the provision are,“and subsequently the Commissioner is satisfied”,which means that registration can be reviewed at anygiven point of time. However, registration cannot becancelled retrospectively.In the result, cancellation ofregistration shall not be retrospective i.e. from date ofsigning of concessionaire agreement but prospectivei.e. from 1-6-2010 i.e. date of amendment of section12AA(3).

GAP INTERNATIONAL SOURCING (INDIA) (P)LTD. Vs. AC IT 149TTJ 437 (DEL),

A. Y. 2006-07 & 2007-08, Order Dated: September18, 2012

BASIC FACTS

GAP International Sourcing (India) Pvt. Ltd. (theassessee) is a wholly owned subsidiary of GAPInternational Sourcing Inc., USA (AE). The assesseefacilitates sourcing of apparel merchandise from Indiafor the GAP Group. The assessee claimed that theTransactional Net Margin Method (TNMM) with costplus 15 percent remuneration to be most appropriatemethod for determination of Arm’s Length Price (ALP).For benchmarking the international transactions, theassessee selected full-f ledged distributors ascomparable companies by making suitable workingcapital adjustments so as to remove the effect ofinventory holding, debtors, creditors etc. which areinherent in the case of full-fledged distributors. Prior tothe years under consideration, similar services wererendered by the liaison office to the GAP Group, withthe latter being remunerated at a cost plus 15 percentand the same was accepted during the course oftransfer pricing audits. The Transfer Pricing Officer(TPO) however rejected this arrangement of cost plus15 percent and held that commission of 5 percent onthe (FOB) value of goods sourced by the foreignenterprise through Indian Vendors was the ALP of theremuneration receivable by the assessee. Inter-alia,the TPO re-characterized the assessee as a risk-bearing agent as opposed to limited-risk sourcingsupport provider purported by the assessee. Thisresulted in the cost plus mark-up of 830 percent and660 percent for AY 2006-07 and AY 2007-08respectively. The TPO also relied upon the Tribunalruling of Li & Fung to hold that the taxpayer had createdsignificant human capital and supply chain intangible

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while performing its functions on account of which alsothe remuneration should be based on value of goodssourced rather than on a cost plus basis.

ISSUE

Whether the taxpayer was a risk bearing agent or alimited risk sourcing support provider?

Whether PLI based on cost plus mark-up or 5percent of commission on FOB value of goodsfacilitated by the taxpayer for outsourcing was themost appropriate?

Whether the taxpayer’s case is covered by thejudgment given by the Delhi Tribunal in case of Li& Fung India (P) Ltd,?

HELD

No adverse facts or material were brought on recordby the TPO which supported the view that the assesseeis a risk bearing agent and has developed significantsupply chain and human resource intangibles. With nodecision making or entrepreneurial role embedded intheir work profiles, it is not clear how TPO can arrive ata conclusion that these routine activities led to creation/ development of any valuable supply chain or humanasset.

Further, with regard to the development of supply chainissue, the assessee’s role, activities and suppliers arealready identified and merely following the guidinginstructions cannot be assumed to create a supplychain. Supply chain of garment manufacturers in Indiawas provided by the AE and not the taxpayer. The intentof sourcing from low cost countries for a manufacturer/ retailer is to survive in stiff competition by providing alower cost to its end-customers and the same wouldnot lead to any locational savings. Generally, theadvantage of location savings is passed on to the end-customer via a competitive sales strategy. Theassessee is a low risk procurement service provider.The application of Profit level indicator (PLI) determinedon the basis of commission on FOB value would giveabsurd results and hence the same cannot be used.The PLI used should be in consonance to the functions,assets and risks of the taxpayer. Accordingly theapplication of cost plus mark-up was the mostappropriate PLI.

There seems to no similarity with the case of Li & FungIndia (P) Ltd. as the assesse in that case was not ableto establish that it was a low risk procurement serviceprovider since it was providing sourcing services to itsAE, who itself was engaged in providing sourcing

services to third parties, for which, the it wasremunerated on a commission of 5 percent on the valueof goods sourced from India. Further, the Hong Kongbased AE lacked substance and all the significant valueadded activities relating to sourcing was carried out bythe Indian entity. Thus the principles laid down in Li &Fung were based on the specific facts of the case,especially those relating to those of the AE.

The asessee’s counsel in the proceedings before theTribunal had pleaded that in extreme scenario also,the cost plus mark up in assessee’s case cannot bestretched beyond 32% looking from Li Fung case orany other angle. The plea of the assessee was beingaccepted that even based on the principle laid down inLi & Fung India (P) Ltd., if an ALP of 5 percentcommission based on FOB value of goods sourcedwould result in an arm’s length cost plus mark-up of 32percent and the same should be applied even thoughit was higher than the mark-up earned by all thecomparable sets placed on record

KOTAK MAHINDRA CAPITAL CO. LTD. VS.ACIT 148 TTJ 393 (MUM),

A. Y. 2003-04, Order Dated: August 10, 2012

BASIC FACTS

In the year under consideration, the assessee declaredthe short-term capital gain and the brought forwardlong-term capital loss relating to assessment year2001-02 to the extent was set off by it against the saidshort-term capital gain. The claim of the assessee forsuch set off was disallowed by the Assessing Officeras well as by the Commissioner (Appeals) relying onthe provisions of section 74(1) as amended by theFinance Act, 2002 with effect from 1-4-2003 on theground that by virtue of the said amended provisions,the assessee was entitled to set off the brought forwardlong-term capital loss relating to assessment year2001-02 only against long term capital gain and notagainst short-term capital gain.

ISSUE

Whether the contention of the departmentalrepresentative that the pre amended provisions ofsec. 74(1) provide only for carry forward and notfor set off in the year following the succeeding yearwas correct?

HELD

In the present case, the provisions of section 74(1) asamended with effect from 1-4-2003 have been reliedupon by the revenue authorities to disallow the

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assessee’s claim for set off of long-term capital lossrelating to assessment year 2001-02 against short-termcapital gain of the year under consideration. However,the plain grammatical construction of the language ofsection 74(1) as amended with effect from 1-4-2003makes it clear that the same are applicable and dealwith carry forward and set off of loss under the head‘capital gain’ incurred in assessment year 2003-04 andsubsequent years. The right accrued to the assesseeby virtue of section 74(1) as it stood prior to theamendment made with effect from 1-4-2003 thus hasnot been taken away either expressly by the provisionsof section 74(1) as amended with effect from 1-4-2003or even by implication.

Therefore, it is held that the provisions of section 74which deal with carry forward and set off of losses underthe head ‘capital gains’ as amended by Finance Act,2002, will apply only to the unabsorbed capital loss forthe assessment year 2003-04 and onwards and willnot apply to the unabsorbed capital losses relating tothe assessment years prior to the assessment year2003-04. Accordingly, assessee was entitled to set offlong-term capital loss incurred in assessment year2001-02 against short-term capital gain made by it inassessment year 2003-04.

ABU DHABI COMMERCIAL BANK LTD. VS.ADIT (INTERNATIONAL TAXATION) 138 TTD

83 (MUM),A. Y. 1995-96 to 2000-01, Order Dated: July 20, 2012BASIC FACTS

The assessee was a banking company incorporated inUAE. It had two branches in India. The income frombanking operations in India was offered for tax in India.Assessee claimed ‘head office’ expenses of Rs. 40.04lakh, which were incurred and were attributable to theIndian operations. The assessee computed the totalincome of its PE as per the provisions of article 7(3) ofthe Indo-UAE DTAA and ignored the provisions ofsection 44C of the Income-tax Act. The AO, however,was of the opinion that ‘head office’ expenses was tobe allowed to the PE within the limits prescribed undersection 44C. In appeal before the CIT (A), the assesseepleaded that the total income of the PE should becomputed as per provisions of article 7(3), where therewas no restriction clause for applying the tax laws ofthe contracting state. Assessee further pleaded thatsuch a restriction in article 7(3) had come by way of anamendment brought through protocol dated 3-10-2007,with effect from 1-4-2008; and prior to the amendmentsuch a restriction clause could not be read into.

The CIT (A) in its order, though had accepted that article7(3) did not contain any such restriction clause, butheld that provisions of article 25(1) would prevail in sucha situation; in view whereof, laws in force in India wouldcontinue to govern the taxation of income of PE situatedin India. As per the CIT (A), the fact of amendment ofarticle 7(3) further strengthened the revenue’s case,as it had clarified the matter that expenses pertainingto executive and administrative items were to beallowed in accordance with the provisions of domesticlaw only; and through such an amendment provisionsof article 25(1) had been satisfied.

ISSUE

Whether in determining the profits of PE in India,the expenses incurred for the purpose of PE is tobe computed by applying the provisions of section44C on an interpretation of Article 7(3) read withArticle 25(1) of the India-UAE DTAA as wasprevalent in the relevant assessment year?

HELD

As per the relevant provision contained in Article 7(3)of Indo-UAE DTAA prior to 1-4-2008 which was basedon OECD it is apparent, that in determining the profitsof PE,

(i) all expenses incurred for the purposes of thebusiness of the PE shall be allowed as a deductionin determining profits of PE;

(ii) such expenses include executive and generaladministrative expenses; and

(iii) such expenses could be incurred within or outsidethe state in which the PE is situated.

Thus, there is no restriction on allowing of head officeexpenses and other expenses attributable to PE. Thesaid article has now been amended by the Protocolentered into by the India-UAE on 3-10-2007 which hasbeen notified on 28-11-2007, effective from 1-4-2008.

Therefore, it is held that, firstly, in the assessment yearinvolved, limitation clause of applicability of Income-taxAct will not apply in Article 7(3) and, consequently,provisions of section 44C will not be applicable;secondly, the amendment brought by way of Protocolby which article 7(3) has been amended and limitationclause has been brought in, will apply from 1-4-2008and will not have any retrospective effect; and Lastly,from the above conclusions, it is held that computationof income and disallowance of expenses relating tohead office cannot be made by invoking the provisionsof section 44C of IT Act. Thus, in view of the above

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conclusions, it was held that income of the PE of theassessee should be computed as business income afterallowing all the expenses attributable to its business inIndia including the head office expenses.

TAURUS MERCHANDISING (P.) LTD. VS. ITO,138 ITD 204 (DELHI),

Asst. Year 2002-03 & 2003-04, Order dated:November 30th, 2011

BASIC FACTS

The assessee was engaged in production of quilts, bedsheets, bed spreads etc. in its EOU. It claimed exemptionunder section 10B. The Assessing Officer disallowed theexemption claimed, observing, inter alia, that theassessee had restarted its old business activity of exportof the same items; that the assessee had merelyreconstructed the existing business to avail of deductionunder section 10B; that the business was carried on byusing old infrastructure without addition of any new plantand machinery; that the assessee had utilized theinfrastructure of its sister concern; and that the old stockhad been carried forward as opening stock.The CIT(A)upheld the aforesaid findings of the AO. It was furtherheld that the assessee had violated the criteria laid downunder section 10A(2) as mentioned by the AssessingOfficer; that the assessee had not purchased anymachinery, required for manufacture of the items, afterthe establishment of the new EOU, that the contentionthat no new machinery was required, was not correct;that the assessee had got most of the work done fromoutsiders as job work; that there was no value additionby the assessee company; that the assessee had usedthe premises taken on lease/rent, as a mere godown,rather than as a facility for manufacture/processing; thatthe assessee had also not fulfilled the conditions laiddown by the Development Commissioner in his approvalletter and that the assessee had not provedmanufacturing or processing of articles/things. Hencethe assessee went into an appeal before the ITAT.

ISSUE

Whether in order to claim exemption under section10B, there is any legal bar against outsourcing ofactivities involved in manufacture or processingof goods?

HELD

The ITAT held that the issue of splitting up orreconstruction was not applicable in assessee’s case,as there was no business in old unit for over five years,prior to start of production by new EOU.The ITAT held

that the provisions of Sec 10B did not place any bar onhaving a separate new undertaking for manufacture andproduction of the same or similar goods, as done by theold units. What was important was that ‘new undertaking’was formed to be eligible for deduction u/s 10B. TheITAT observed that to claim deduction u/s 10B, it wasnot necessary that plant and machinery must be usedfor manufacturing activity. The business of the assesseewas to manufacture hand-made quilts and bed spreads.Accordingly, the assessee did not require any plant andmachinery for its manufacturing activity. ITAT noted thatonly tools required for business were needles andscissors, which were accounted as consumable stores.The ITAT thus held that deduction u/s 10B cannot bedenied on the ground that no new plant and machinerywas purchased by the new unit.The assessee claimedthat the old machinery reported in books was officemachinery and it was not machinery which could be usedin manufacturing activity. The books of accounts of theassessee showed that old stock was continued to becarried forward from year to year, as head officeassets.Further, ITAT observed that requirement of Sec.10B was that the new undertaking should not be formedby transfer of old machinery. Mere transfer of machineryto new undertaking was not sufficient to deny deduction.ITAT concluded that it was not shown by lower authoritiesthat the new unit would not have come into existence,without transfer of machinery from old unit. ITATobserved that the assessee had its own resources,expenses and customers different from Taurus Exports.ITAT held that deduction u/s 10B not to be denied onthe ground that the assessee was outsourcing itsactivities. ITAT also observed that since AO himself hadallowed the deduction u/s 80HHC as a manufacturer, itindicated that the AO had accepted that the assesseewas a manufacturer.Further based on facts and accountsof the assessee, ITAT concluded that leased premiseswas not used merely as godown, but was also used forfinishing and packing of goods. The finishing and packingactivity was carried out under the supervision of theassessee’s employees and contract labour. Hence, ITATalso rejected the contention that there was no valueaddition by the assessee.Accordingly, ITAT concludedthat the new 100% EOU was not formed by splitting upor reconstruction of existing business or by transfer ofold plant and machinery. ITAT held that the assesseewas entitled to tax holiday benefit u/s 10B, as it dulycomplied with all the conditions provided u/s 10B.

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In this issue we are providing gist of a very importantdecision of Hon’ble Gujarat High Court in the case ofMaganbhai Hansrajbhai Patel dealing with the issuerelating to recovery of arrears of tax due from a PrivateCompany from its Director u/s 179 of the Act. Thedecision deals with several important issues to be keptin mind while invoking section 179 by the Departmentand the defence available to the Directors in suchcases. We hope the readers would find the same useful.

IN THE HIGH COURT OF GUJARAT ATAHMEDABAD

SPECIAL CIVIL APPLICATION NO. 3910 of 2012With

SPECIAL CIVIL APPLICATION NO. 4227 OF 2012MAGANBHAI HANSRAJBHAI PATEL-Petitioner (s)

VersusASST. COMMISSIONER OF INCOME TAX &1 -

Respondent(s)

Appearance :

MR. J.P. SHAH WITH MR. MANISH J. SHAH forPetitioner (s) : 1,

MR. K.M. PARIKH for Respondent (s) : 1, 2

CORAM :HONOURABLE MR. JUSTICE AKILKURESHI

andHONOURABLE MS. JUSTICE HARSHA DEVANI

Date :25,26/09/2012

Gist of Judgment

(1) Facts :

i) The issue before the Hon’ble High Court in thiscase was regarding interpretation of Section179 of I.T. Act.

ii) The petitioner was one of the two Directors ofAgni Briquette Pvt. Ltd. For the AssessmentYear 1997-98, the company had filed its returndeclaring nil income, but it was assessed at apositive income raising a tax demand ofRs.26.55 lakhs and penalty of Rs.11.41 lakhs.After several proceedings an amount ofRs.20.78 lakhs towards income tax andRs.11.41 lakhs towards penalty remainedunpaid for which the order was passed on 27/2/2012 u/s 179 of IT Act against the petitionercalling upon him to pay all these amounts as

CA. Sanjay R. ShahThe author is practising since 1981. He canbe reached at [email protected]

the department could not recover the amountfrom the company.

iii) Before passing of such order against the noticefor invoking section 179, the petitioner hadcontended before the department that he hadtaken all possible steps to enable departmentto recover their dues from the company andtherefore the dues of the company which couldnot be recovered cannot be recovered fromhim in his capacity as a Director as he was notnegligent or there was no breach of duty onhis part.

(2) Questions before Hon’ble Court

Following questions were framed by the Hon’bleHigh Court to dispose off the Writ Petition:

i) Whether before seeking recovery of thearrears from the petitioner, the pre-requirement of the department not being ableto recover the tax from the company wassatisfied?

ii) Whether under section 179 of the Act, it is onlythe principal dues of tax which can be recoveredor the interest thereon and penalties also canbe the subject matter of recovery?

iii) In facts of the case, whether the AssistantCommissioner was justified in ordering suchrecovery against the petitioner?

(3) Contentions by the Petitioner:

The petitioner raised the following points to supporthis Writ Petition :

i) In order to invoke provisions of section 179against a Director of Private Company, thedepartment must first establish that tax duesfrom the company cannot be recovered.

UNREPORTEDJUDGMENTS

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ii) U/s 179 only tax amount could be recoveredfrom the Director but not interest or penalty.

iii) There was no negligence, much less, grossnegligence on the part of petitioner to whichnon-recovery can be attributed. The petitionerhad taken various steps to see that departmentrecovers the tax from the company.

(4) Contentions by the Department:

i) The department had issued order u/s 179 afterthey exhausted the remedy against thecompany for the recovery of the dues and aftergiving sufficient opportunity to the petitionerwherein aspects of the petitioner’s negligencewere recorded.

ii) U/s 179, not only the tax, but also penalty andinterest could be recovered following decisionof Hon’ble Bombay High Court in Union of Indiav/s ManikDattatreyaLotlikar 172 ITR 1 andHon’ble Kerala High Court in Alex Cherianv.sCIT 320 ITR 49.

(5) Held by the Hon’ble High Court :

i) Section 179 (1) provides for joint and severalliabilities of the Directors of the PrivateCompanies where tax due from such companyin respect of any income of any previous yearif cannot be recovered, the same can berecovered from the Directors. In the instantcase it is noticed that department had takenstrenuous steps to recover dues from thecompany and only thereafter the notices forrecovery as well as summons were issued tothe Directors for the recovery and thereforethese requirements of section 179(1) of the Acthave been fulfilled.

ii) However, as far as the tax due to be recoveredfrom the Directors are concerned, followingJudgment of Hon’ble Supreme Court in caseof Harshad Mehta v/s Custodian 231 ITR871,the Hon’ble High Court held that u/s 179only tax due can be recovered from the Directorand not the penalty as well as interest due fromthe company. The Hon’ble Court alsodistinguished the decisions referred to by theCounsel for the department in this regard.

iii) As regards the third and most importantquestion as to whether in the facts of the casethe amount due from the company can berecovered from the Director, the Hon’ble HighCourt observed as under :

“21. To our mind, the authority completelyfailed to appreciate in proper perspective

Unreported Judgments

the requirement of section 179(1) of the Act.We may recall that said provision providesfor a vicarious liability of the director of apublic company for payment of tax dueswhich cannot be recovered from thecompany. However, such liability could beavoided if the director proves that the nonrecovery cannot be attributed to any grossnegligence, misfeasance or breach of dutyon his part in relation to the affairs of thecompany. It is, of course, true that theresponsibility of establishing such facts iscast upon the director. Therefore, once itis shown that there is a private companywhose tax dues have remained outstandingand same cannot be recovered, any personwho was a director of such a company atthe relevant time would be liable to paysuch dues. However, such liability can beavoided if he proves that the non recoverycannot be attributed to the three factorsmentioned above. Thus the responsibilityto establish such facts are on the director.However, once the director places beforethe authority his reasons why it should beheld that non recovery cannot be attributedto any of the three factors, the authoritywould have to examine such grounds andcome to a conclusion in this respect.Significantly, the question of lack of grossnegligence, misfeasance or breach of dutyon part of the director is to be viewed inthe context of non recovery of the tax duesof the company. In other words, as long asthe director establishes that the nonrecovery of the tax cannot be attributed tohis gross neglect, etc., his liability undersection 179(1) of the Act would not arise.Here again the legislature advisedly usedthe word gross neglect and not a mereneglect on his part. The entire focus anddiscussion of the Assistant Commissionerin the impugned order is with respect tothe petitioner’s neglect in functioning ofthe company when the company wasfunctional. Nothing came to be stated byhim regarding the gross negligence on partof the petitioner due to which the tax duesfrom the company could not be recovered.In absence of any such consideration, theAssistant Commissioner could not haveordered recovery of dues of the companyfrom the director. We would clarify that inthe present case the petitioner had putforth

Contd. on page no. 398

November, 2012


IS SECTION 41(1) APPLICABLE ONLY TO TRADINGLIABILITY OR IS IT APPLICABLE TO OTHERLIABILITIES ALSO? (AN UPDATE)

Issue:

XYZ Ltd. received loan of Rs. 1 Cr. from an associateconcern M/s XY, a partnership firm it purchased plant& machinery out of such loan. Subsequently on accountof bad financial condition XYZ Ltd. requested M/s XYto waive the loan payable to them. Looking to the badfinancial condition, M/s XY agreed to such waiver andM/s XYZ Ltd. credited such loan waiver to its capitalreserve. AO is of the view that the waiver of loan istaxable U/s 41(1) of the Income Tax Act, 1961.He wasalso of the view that since the loan was taken for plant& machinery , the cost of plant & machinery is requiredto be reduced.

Proposition:

When a loan is waived it is not covered by section 41(1)of the Income Tax Act, 1961 as it is only applicable totrading liability.

View against the proposition:

Section 41(1) expressly provides that where anallowance is granted in any year in respect of any loss,expenditure or trading liability and subsequently duringany previous year the assessee receives, whether incash or in any other manner whatsoever, any amountin respect of such loss or expenditure, or the assesseeis benefited by the remission or cessation of the tradingliability, the amount received or the amount of theliability which is extinguished is chargeable as businessprofits of that previous year.

The two important requisites for invoking this sectionare-

1) The assessee must have incurred a trading liabilitywith respect to which he should have obtained adeduction or allowance in his assessment in apreceding year.

2) Subsequently, there should be a remission orcessation of that liability, resulting into some benefitto the assessee.

CA. Kaushik D. ShahThe author is practising since 1976. He can bereached at [email protected].

A waiver of loan by the lender results into a benefit forthe borrower. The only question to be answered iswhether this benefit has arisen from the business orprofession.

The Supreme Court of India in Sahnay and Press WorksLtd. v/s CIT 228 ITR 253 laid down the principle that ifpayments in the nature of subsidy from public are madeto the assessee to assist in carrying on his trade orbusiness, they are trade receipts and accordinglychargeable to tax. It observed that if the purpose is tohelp the assessee to set up its business or complete aproject the monies must be treated as having beenreceived for capital purposes. However, if the moneyis given to the assessee for assisting him in carryingon the business operation, it is a trade receipt.

Thus, if a benefit has been received for carrying on thebusiness operation, it would constitute a trade receipt.If the holding company has granted loan to thesubsidiary company for carrying on its business andlater on waived such loan, it would result into a benefiton revenue account and can be treated as an incomefor the year in which it has been waived.

I would also like to refer the decision of Solid ContainersLimited v/s DCIT (Bombay) 308 ITR 421.

In the said case, their lordships of Bombay High Courtrelying on the decision of the Apex court in T VSundaram Iyenger and Sons ltd. 222 ITR 344 observedthat if an amount is received in course of tradingtransaction, even though it is not taxable in the year ofreceipt as being of revenue character, the amountchanges its character when the amount becomes theassessee’s own money because of limitation or by anyother statutory or contractual right. When such a thinghappens, common sense demands that the amountshould be treated as income of the assessee.

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Controversies

It further pointed out that if money was received by theassessee in the course of carrying on his businessalthough it is treated as deposit and is of a capital natureat the time it is received; by effluxion of time moneyhas become the assessee’s own money. Thus, theamount in question is taxable u/s 41(1) or under section28(iv) since it would amount to benefit or perquisitearising out of carrying on business.

In our case also, loan was received for purchase offixed asset in the course of carrying on of businessand hence, waiver of such loan is liable to be taxedeither u/s 41(1) or section 28(iv).

View in favour of proposition:

Section 41(1) is applicable when trading liability isremitted or benefit is obtained, it is not applicable toany other types of liability. For example, if A purchasesstock in trade on credit, it is a trading liability and waiverwill attract section 41(1).However, if assessee borrowsmoney, it is not a trading liability and the waiver of suchliability cannot attract provision of section 41(1).It is veryclear that section 41(1) cannot be invoked if a loanliability Is waived. Reliance can be placed on thedecision of CIT v/s PhoolChand Jiwan Ram (1961). 131ITR 37 (Delhi).

I would like to now refer to the decision in the case ofChetan Chemicals Pvt. Ltd. 267 ITR 770 (Guj.)wherein it was held that except for the interest, theprinciple amount remitted by the creditors is not taxableeither u/s 28(iv) or u/s 41(1). Similar decision isdelivered in the case of CIT v/s Toosha InternationalLtd. (2009) 176 taxmann 187 (Delhi) and in the case ofMahindra & Mahindra Ltd. v/s CIT (2003) 261 ITR501(Bombay)

Summation:

Section 41(1) is applicable if the following conditionsare satisfied.

1) In any of the earlier years a deduction was allowedto the taxpayer in respect of loss, expenditure(revenue or capital expenditure) or trading liabilityincurred by the assessee.

2) During the current previous year, the taxpayer –

a) Has obtained a refund of such trading liability( it may be in cash or in any other manner) ; or

b) Has obtained some benefit in respect of suchtrading liability by way of remission orcessation thereof (“Remission or cessation” forthis purpose includes unilateral act of the

assessee by way of writing off of such liabilityin the books of account).

Let me now refer to the latest decision of BombayHigh Court in the case of CIT v/s M/s Xylon HoldingsPvt. Ltd. dated 30th September, 2012.

Their lordships of Bombay High Court held asunder:

“We have considered the submission. The issuearising in this case stand covered by the decisionof this court in the matter of Mahindra & Mahindra(supra).The decision of this court in the matter ofSolid Containers (supra) is on completely differentfacts and inapplicable to this case. In the matter ofSolid Containers (supra) the assessee there in hadtaken the loan for business purpose. In view of theconsent terms arrived at the amount of loan takenwas waived by the lender. The case of theassessee therein was that the loan was a capitalreceipt and has not been claimed as deductionfrom the taxable income in the earlier years andwould not come within the purview of section 41(1)of the Act. However, this court by placing relianceupon the decision of the Apex court in the matterof CIT v/s Sundaram Iyenger and Sons Ltd.222ITR 344 held that the loan was received by theassessee for carrying on its business and therefore,not a loan taken for the purchase of capital asset.Consequently, the decision of this court in thematter of Mahindra & Mahindra Ltd.(supra) wasdistinguished as in the said case the loan was takenfor the purchase of capital assets and not fortrading activities as in the case of Solid ContainersLtd.(supra). In view of the above, the decision ofthis court in the matter of Solid ContainersLtd.(supra) will have no application to the facts ofthe present case and the matters stand coveredby the decision of this court in the matter ofMahindra & Mahindra Ltd.(supra). The alternativesubmission that the amount of loan written offwould be taxable u/s 28(iv) of the Act also cameup for consideration before this court in the matterof Mahindra & Mahindra Ltd.(supra) and it was heldthere in that section 28(iv) of the Act would applyonly when a benefit or perquisite is received in kindand has no application where benefit is receivedin cash or money.”

It is further submitted that for invoking section 41(1),revenue has to prove that the deduction wasallowed in the earlier years and the assessee hasobtained some benefit in respect of trading liability.

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In case of Steel & General Mills Ltd. V/s CIT (1974)96 ITR 438 (Delhi), CIT V/s Nathubhai Desabhai(1981) 130 ITR 238 it was held that revenue hasto prove that deduction was granted in earlier yearsto invoke sec 41(1) of the IT Act, 1961.

Let me now refer to the decision of Bombay Highcourt In the case of Solid Containers Ltd. Citedsupra. In the said case, there was a waiver of loantaken for trading activity and assessee creditedsuch waiver to P&L a/c but claimed such waiver tobe as Capital Receipt. In this circumstance, it washeld that credit balance written back was incomeof the assessee since it arises on account ofbusiness activity of the assessee.

The next issue to be considered is whether waiverof loan taken for the purpose of acquiring capitalasset is required to be reduced from the cost ofPlant & Machinery. In respect of computation ofactual cost when loan is taken to acquire fixed assetand subsequently the loan is waived, the actualcost has to be reduced.

When asset is acquired by taking loan, subsequentwaiver of loan cannot disturb actual cost of theasset.CIT v/s TISCO 231 ITR 285 (SC).

However, Allahabad high court in Ravi leather 240ITR 702, decided that subsequent waiver of loan

Controversies

may reduce the actual cost of the asset if loan isgiven as a grant for acquiring Plant and Machinery.Recently, Delhi High Court also held that when loanis received from Government for acquisition ofasset than if such loan is subsequently waived, theactual cost of asset has to be reduced. (SteelAuthority of India Ltd. vs.CIT 348 ITR 150).

However, in the case of CIT v/s. Cochin Co. Pvt.Ltd. 184 ITR 231, their Lordships of Kerala HighCourt held that as per sec.43(1) of the I.T. Act,1961, if the cost of the Assets is met directly orindirectly, at the time of purchase of machinery thenonly the actual cost of the Assets is required to bereduced. However, if at the time of purchase ofmachinery no person meets the costs of the Assetseither Directly or indirectly and later on in futurewhen the lender writs off the debt than the actualcost of the assets cannot be reduced.

From the above decisions one can come to thebroad conclusion that if the loan is not repaid it willnot reduce actual cost but if the loan is receivedfor the purpose of acquiring the assets and isspecifically waived then it may reduce the actualcost.

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Contd. from page no. 395 Unreported Judgments

a strong representation to the proposal ofrecovery of tax from him under section 179of the Act. In such representation, he haddetailed the steps taken by him and thecircumstances due to which non recoveryof tax cannot be attributed to his grossneglect. It was this representation and thefactors which the petitioner had putforthbefore the Assistant Commissioner whichhad to be taken into account before theorder could be passed. It is not even thecase of the department that the petitionerpaid the dues of other creditors of thecompany in preference to the tax dues ofthe department. It is not the case of thedepartment that the petitioner negligentlyfrittered away the assets of the companydue to which the dues of the departmentcould not be recovered. To suggest thatthe petitioner did not oppose the GSFC’sauction sale is begging the question.GSFC had sold the property after severalattempts through auction. It is not the caseof the department that proper price was notfetched”.

“22. Additionally, we also notice that theAssistant Commissioner has referred toseveral factors, dates and events which,according to him, established grossnegligence on part of the petitioner withouteven putting the petitioner to notice aboutsuch factors and events. Therefore, quiteapart from our conclusion that theAssistant Commissioner did not recordthat the petitioner failed to prove that nonrecovery of tax from the company could notbe attributed to his gross neglect,misfeasance or breach of duty, suchfindings were also based on materials reliedupon by the Assistant Commissionerwithout notice to the petitioner. This is onlyan additional ground on which we areinclined to quash the order.”

In the result, the Writ Petition of the Petitioner wasallowed by quashing order u/s 179 passed by thedepartment dated 27/2/2012.

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November, 2012


SOME RECENT UNREPORTED DECISIONS OFGUJARAT HIGH COURT

· Only “Profit element” embedded in grossreceipts added as “Undisclosed income”should be charged to tax if the same are inrespect of business transactions:

AO made addition of the gross receipts as“Undisclosed Income”. The Hon’ble ITAT held thatonly “Profit element” embedded in such grossreceipts should be charged to tax since the saidreceipts were in respect of business transactions.Hon’ble High Court dismissed the tax appealpreferred by the Revenue since it didn’t give riseto any substantial question of law.

[JINENDRA S. JAIN (TAX APPEAL No.2280 of2009, Judgment dated 17/07/12) &PANNACORPORATION (TAX APPEAL No.323 with 325of 2000, Judgment dated 16/06/12)]

· S. 194C is not applicable in the first year ofoperation. Consequently, notice issued u/s 148to disallow expenditure for non-compliance ofS. 194C is liable to be quashed:

A notice u/s 148 was issued within a period of fouryears from the end of relevant Asst. Year so as todisallow an amount of Rs.3,07,59,872/- in respectof labour charges on the pretext that the assesseefailed to deduct tax at source u/s 194C at the timeof making the said payment. Asst. was framedearlier u/s 143(3) without making disallowance inrespect of the same. According to Proviso toSection 194C(2), an individual or HUF is supposedto deduct tax at source only if its total sales, grossreceipts or turnover from its business or professionexceeds monetary limits specified under clauses(a) or (b) of Section 44AB during the financial yearimmediately preceding the financial year in whichsuch sum is credited or paid. This being the firstyear of operation, the said condition is not fulfilledand hence the assessee is not supposed to deducttax u/s 194C. Hence, AO’s reason to believe thatincome chargeable to tax in case of assessee hasescaped assessment is without foundation and

lacks validity. Accordingly, the impugned noticeissued u/s 148 is quashed.

[HARSHADBHAI NARANBHAI BAGADIA (SCA12243 of 2009, Judgment dated 16/07/2012)]

· Refund claim of an assessee must be examinedin light of circular in force as of the date ofapplication for such refund:

Petitioner moved an application for refund arisingto it which was appropriate in light of the CBDTcircular prevalent at that point of time. Since, theDepartment did not respond to the said applicationfor a considerable time, another letter remindingabout the same was addressed to AO. During thependency of such application, CBDT came out withanother circular superseding the earlier circular andaccording to provisions of the said circular,Petitioner was ineligible for the said refund and theDepartment denied the said refund on the strengthof such subsequent circular. It was held that theDepartment cannot process application of anassessee after an indefinite period of time and applya rule that may have changed in the meantime byvirtue of change in circular. Hence, the refund claimof the Petitioner must be examined in light of thecircular in force as of the date of application.

[MARDIA CHEMICALS LTD. (SCA 4141 of 2001,Judgment dated 23/07/12) &FAG BEARINGS INDIALTD. (SCA 11132 of 2002, judgment dated 23/07/12)]

· Income from salary which has been subjectedto TDS can’t be categorized as undisclosedincome:

Income from Salary which has been subjected todeduction of tax at source cannot be categorizedas “Undisclosed Income” as defined u/s 158B(b).Such an income cannot be taxed as income during

Advocate Tushar HemaniThe author is practising advocate. He can bereached at [email protected]

November, 2012


the block period by virtue of computation provisionsof section 158BB in Search cases.

[HARISHKUMAR J. GUPTA (TAX APPEAL No.63of 2000, Judgment dated 16/07/12)]

· No penalty can be levied in respect of additionmade on account of adoption of differentmethods of valuation by assessee andDepartment:

No penalty can be levied u/s 18(1)(c) on additionmade in respect of difference in valuation ofproperties on account of adoption of differentmethods of valuation by assessee and Department.Further, in case the Penalty Order does not clearlyspell out as to whether the penalty is levied forconcealment of wealth or for furnishing inaccurateparticulars of wealth, penalty cannot be levied.

[RAMANBHAI B. PATEL HUF (TAX APPEAL No.145with 147 of 2000, Judgment dated 24/07/12)]

· Purchase of electric meters from RSEB andleasing back the same to RSEB is genuinetransaction and depreciation can be claimedon such electric meters:

The assessee bought electric meters fromRajasthan State Electricity board (RSEB) andleased them back to RSEB on hire purchase basis.The Department didn’t allow assessee’s claim ofdepreciation on the said electric meters as it wasof the view that the said transaction was a shamtransaction in light of the ratio laid down inMcDowell’s case (154 ITR 148). It was held by theHon’ble High Court that the said transaction was agenuine transaction and the assessee was eligiblefor depreciation on the said electric meters.

[PARAMOUNT POLLUTION CONTROL LTD. (TAXAPPEAL No.166 of 2000, Judgment dated 17/07/12)]

· Provisions of S. 35AB are not applicable toRevenue expenditure:

Provisions of Section 35AB dealing with expenditureon know-how shall be applicable only if any suchexpenditure incurred is Capital in nature. TheRevenue expenditure on know-how would becontinued to be governed by the provisions ofS.37(1) of the Act. Provisions of S. 35AB won’t applyto Revenue expenditure even if the same is inrespect of know-how.

[SAYAJI INDUSTRIES LTD. (TAX APPEAL No.326of 2000, Judgment dated 03/07/12)]

· No addition u/s 68 can be made in respect ofsale proceeds already offered as income:

Once the sale proceeds have been offered asincome by the assessee and the same has beenaccepted by AO, no addition in respect of the samecan be justified u/s 68 or else, it shall tantamountto double taxation of the same income.

[VISHAL EXPORTS OVERSEAS LTD. (TAXAPPEAL No.2471 with 2473, 2475 & 2476 of 2009,Judgment dated 03/07/12)]

· No interest can be levied u/s 234A if entireamount of tax has been paid on or before duedate of filing return of income even if return isfiled after due date:

If entire amount of tax on taxable income has beenpaid on or before due date of filing return of income,then even if return of income is filed after due dateof filing return of income, no interest can be leviedu/s 234A. If tax on total income has been paid inpart on or before due date of filing return of income,then interest u/s 234A can be levied only ondifferential amount of tax (i.e. on total tax less taxalready paid before on or before due date) andnot on the entire amount of tax or else, it shallrender the provisions of Section 234A penal innature which the statute does not provide for.

[BHARATBHAI B. SHAH (SCA 9820 of 2002,Judgment dated 18/06/12)]

· In case where ITAT remands a matter to the fileof AO, if AO doesn’t pass Asst. Order withinone year from the end of financial year in whichsuch order is received by CCIT or CIT, suchasst. proceedings become time barred:

Whenever Hon’ble ITAT remands a matter to thefile of AO with certain specific directions, AO mustpass an Asst. Order within a period of two yearsfrom the end of financial year (“One Year” insteadof “two years” w.e.f. 01/06/2001) in which suchorder passed by Hon’ble ITAT is received by theChief Commissioner or Commissioner asprescribed u/s 153(2A) of the Act. If AO doesn’tpass an Asst. Order within the prescribed time limit,such proceedings become time-barred and theassessment placed before AO by Hon’ble ITAT’sorder must be treated as having abated. Any excesstax paid by the assessee under original assessment

Judicial Analysis

November, 2012


framed by the AO must be refunded withconsequential effect.

[INSTRUMENTS AND CONTROL COMPANY(SCA 10330 of 2003, Judgment dated 18/06/12)]

· Circular passed by CBDT as per S. 119 beyondits authority is not considered to be effective:

As per the provisions of Section 194A(3)(v), a co-operative society is not supposed to comply withthe requirements of TDS as prescribed u/s 194Aat the time of paying interest to its members or toany other co-operative society. The said sectionmakes no distinction between different classes ofmembers. However, CBDT issued a Circular dated11/09/02 making certain distinction betweendifferent classes of members and narrowed downthe scope of members in respect of whom the saidexemption was available. On challenging the saidvalidity of the said circular, the Hon’ble High Courtheld that CBDT has crossed its authority under thegarb of Section 119 of the Act and hence, the saidcircular is not effective.

[GUJARAT URBAN CO-OPERATIVE BANKFEDERATION (SCA 11209 of 2002 with 1465 of2003, Judgment dated 12/06/12)]

· Once the assets are put to use in earlier yearsand form part of block of assets, depreciationcan be claimed on the same in subsequentyears even if all the items in block are not usedsimultaneously.

Once the assets have been put to use in earlieryears, such assets form part of block of assets anddepreciation thereon has been allowed in the past,then depreciation on the said assets can’t berestricted or disallowed in subsequent years on thepretext that only a portion thereof has been put touse. Items falling within the block of assets cannotbe segregated for the purpose of granting orrestricting depreciation. Once the assets are usedfor business, it is not necessary that all the itemsfalling within the concerned block have to besimultaneously used for being entitled todepreciation.

[S.K.PATEL FAMILY TRUST (TAX APPEAL No.84of 2000, Judgment dated 19/06/12)]

· No interest u/s 234B can be levied unless AOgives specific direction in the Asst. Order:

No interest can be levied through a notice ofdemand unless there is any specific direction givingreference to the section charging interest in theAssessment Order.

[S.K.PATEL FAMILY TRUST (TAX APPEAL No.84of 2000, Judgment dated 19/06/12)]

· Process of converting semi-finished bags intolaminated HDPE bags amounts to manufactureand hence, deduction can be availed u/s 80IA:

The process of converting “Semi finished bags” into“Laminated HDPE bags” amounts to “Manufacture”since both the products are entirely distinct, havedifferent identity, have different utilities and bothfetch different prices in the market. The assessee’sunit, being engaged in an activity of manufacture,falls within the ambit of “Industrial Undertaking” asdefined u/s 80IA(12)(b) and is therefore eligible fordeduction u/s 80IA of the Act.

[JHAVERI COATERS (P.) LTD. (TAX APPEALNo.96 of 2000, Judgment dated 19/06/12) &JHAVERI COATERS (P.) LTD. (TAX APPEALNo.98 of 2000, Judgment dated 19/06/12)]

· If an assessee-company cannot allot sharesimmediately in favor of State Governmentagainst investment made by it in assessee-company, then Interest earned on depositsmade out of such funds shall belong to theState Govt. and shall not be taxed in the handsof assessee.

The assessee company received certain fundsfrom Govt. of Gujarat as contribution towards itequity share capital. Till the time the assesseecompany allotted shares to Govt. of Gujarat, thesaid funds were parked in short term deposits witha schedule bank on which it earned certain interest.The assessee company and Govt. of Gujarat hadentered into an arrangement according to whichthe said interest should belong to and be receivedon behalf of Govt. of Gujarat. It was held by theHon’ble High Court that during the pendency ofallotment of shares, the funds received towardsequity share capital were held by the assesseecompany in trust for and on behalf of Govt. ofGujarat and hence, any interest accrued byinvestment of such funds must belong to the Govt.of Gujarat and till it remained in the hands of theassessee company, it must be treated to have beenheld in trust.

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November, 2012


[GUJARAT POWER CORPORATION LTD. (TAXAPPEAL No.99 of 2000, Judgment dated 26/06/12)]

· Reconstitution of Partnership Firm doesn’tamount to deemed gift:

Reconstitution of a Partnership Firm at the time ofadmission of a new partner resulting into reductionof share in profits of erstwhile partners doesn’tamount to deemed gift and shall not give rise tolevy of gift tax.

[RATILAL P. PATEL (TAX APPEAL No.394 with 395of 2000, Judgment dated 16/06/12) & URMILABENA. PATEL (TAX APPEAL No.346 of 2002, Judgmentdated 16/16/12)]

· If liability to pay Excise duty is not incurred,excise duty is not to be included in closingstock:

Under the scheme of excise duty, an assesseeincurs liability to pay excise duty only upon boththe events taking place, namely manufacture ofexcisable goods and removal of excisable goods.Accordingly, if such a liability in not incurred, exciseduty is not to be included in the valuation of closingstock.

[BELL GRANITO CERAMICA LTD. (TAX APPEALNo.436 with 437 of 2011, judgment dated 13/06/12)]

· Commercial Properties were not considered asassets in terms of S. 2(ea)(i) of The Wealth-taxAct, 1957 prior to 01/04/97 and hence, suchproperties can’t be assessed under the saidAct:

Property given on rent, being a productive asset,bears the character of a “Commercial Property”.Commercial properties were not included in thedefinition of asset as prescribed u/s 2(ea)(i) of TheWealth-tax Act, 1957 as it stood prior to 01/04/1997.Since the year under consideration was Asst. Year1996-97, it was held by the Hon’ble High Court thatthe said property cannot be assessed under TheWealth-tax Act, 1957.

[DR. NARAYAN T. BADDI (TAX APPEAL No.540of 2006, Judgment dated 16/06/12)]

· A transaction in respect of transfer of sharespledged with a bank to a group company canbe regarded as “Transfer” for income-taxpurposes so far as requirements of S. 2(47) arecomplied with:

A transaction in respect of sale of shares pledgedwith a bank to a group company cannot be said tobe a colorable device merely on the grounds thatsuch a transaction resulted into loss to the assesseeand that the requirements of Section 108 of TheCompanies Act, 1956 regarding registration oftransfer of shares have not been complied with sincethe shares were in possession of a bank owing towhich such shares could not have been said to betransferred. So far as the requirements of Section2(47) of the Income-tax Act, 1961 are complied with,the transaction is to be regarded as “Transfer” forthe income-tax purposes. There is no restriction thatsuch a transaction cannot be effected with a groupcompany. Also, it is not open for the revenue to doubtthe loss suffered by the assessee unless it doubtsthe sale prices of the shares.

[BIRAJ INVESTMENT PVT. LTD. (TAX APPEALNo.260 of 2000, Judgment dated 07/08/12)]

· Once Department accepts the tax paid underreturns of income filed by an assessee withoutever questioning that such returns were filedbefore a wrong officer, it cannot later contendthat such officer had no jurisdiction to acceptthe same:

Assessee had filed its returns of income before hisnormal Assessing Officer which were accepted bysuch officer u/s 143(1) whereas he was actuallysupposed to file the same before the specialAssessing officer designated as such consequentto search action at the assessee’s premises in thepast. Hence, the assessment was sought to be re-opened on the sole ground that assessee had filedreturns of income with other wards with mala fideintentions. It was held by the Hon’ble High Courtthat the assessee had discharged his liabilities byfiling returns of income and the same beingaccepted vide intimation u/s 143(1). Since theDepartment has accepted the tax paid under suchreturns without ever questioning filing of suchreturns before a wrong officer, it cannot now beallowed to contend that such returns were filedbefore wrong officers who had no jurisdiction toaccept the same. Since the sole ground for suchre-opening of the assessment was not sustainable,notices u/s 148 were quashed.

[BIPINKUMAR P KHANDHERIA (SCA 6557 TO6560 of 2001, Judgment dated 13/08/12)]

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Judicial Analysis

November, 2012


Foreign investment in NBFC Sector – Amendmentto the Foreign Direct Investment (FDI) Scheme

Ref.: A. P. (DIR Series) Circular No. 41 dated October10, 2012

Attention is invited to Schedule 1 to Foreign ExchangeManagement (Transfer or Issue of Security by a PersonResident outside India) Regulations, 2000 notified bythe Reserve Bank vide Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time,read with Sr.No.24.2 of Annex B to A.P. (DIR Series)Circular No. 137 dated June 28, 2012 pertaining tosector specific conditions for FDI in NBFCs .

CA. Savan GodiawalaThe author is practising since 1992. He canbe reached at [email protected]

2. It has now been decided in consultation with theGovernment to amend certain conditions in theaforesaid circular. The amended conditions aregiven as under:

c.f. A.P.(DIR Series) Circular No. Earlier Condition Revised condition137 dated June 28, 2012

Sr.No.24.2 (1) (iv) 10. 100% foreign owned NBFCs NBFCs (i) having foreign investmentwith a minimum capitalisation of more than 75% and up to 100%, andUS$ 50 million can set up step (ii) with a minimum capitalisation ofdown subsidiaries for specific US$ 50 million, can set up step downNBFC activities, without any subsidiaries for specific NBFCrestriction on the number of activities, without any restriction on theoperating subsidiaries and without number of operating subsidiaries andbringing in additional capital. The without bringing in additional capital.minimum capitalization condition The minimum capitalization conditionas mandated by para 3.10.4.1, as mandated by para 3.10.4.1 of DIPPtherefore, shall not apply to Circular 1of 2012 dated April 10, 2012downstream subsidiaries. on Consolidated FDI Policy, therefore,

shall not apply to downstreamsubsidiaries.

3. All other conditions contained in Sr. No. 24.2 in theA.P. (DIR Series) Circular No. 137 dated June 28,2012 shall remain unchanged.

4. A copy of Press Note No.9 (2012 Series) datedOctober 3, 2012 issued in this regard byDepartment of Industrial Policy and Promotion(DIPP), Ministry of Commerce and Industry,Government of India is enclosed.

5. Necessary amendments to Foreign ExchangeManagement (Transfer or Issue of Security by aPerson Resident outside India) Regulations, 2000(Notification No. FEMA 20/2000-RB dated May 3,2000) are being notified separately.

Foreign Exchange Management (Deposit)Regulations, 2000 – Loans to Non Residents / thirdparties against security of Non Resident (External)Rupee Accounts [NR (E) RA] / Foreign CurrencyNon Resident (Bank) Accounts [FCNR (B)] Deposits


Attention is invited to Para 6 of Schedule 1 and Para 9of Schedule 2 to Foreign Exchange Management(Deposit) Regulations, 2000 notified vide NotificationNo.FEMA 5/2000-RB dated May 3, 2000, as amendedfrom time to time regarding loans against security offunds held in deposit accounts. Further, attention of

November, 2012


the banks is also invited to A. P. (DIR Series) CircularNo.66 dated April 28, 2009 in terms of which it wasdecided to enhance the then existing cap of Rs.20 lakhto Rs.100 lakh on loans against security of funds heldin NR(E)RA and FCNR(B) deposits either to thedepositors or third parties.

2. The Committee to review the facilities for individualsunder FEMA, 1999 (Chairperson: Smt. K. J. Udeshi)has recommended that the banks may sanctionRupee loans in India or foreign currency loans

outside India to either the account holder or a thirdparty to the extent of the balance in the NRE/FCNR(B) account subject to margin requirements. Theexisting position in this regard has been reviewedand it has been decided, in exercise of powersunder paragraph 6(d) of Schedule-1 read with para9(1) of Schedule-2 of the Foreign ExchangeManagement (Deposit) Regulations, 2000, that thebanks may now grant loans against NR(E)RA andFCNR(B) deposits either to the depositors or thethird parties as under:-

FEMA Update

Existing provision Proposed provision

Rupee loans* in India Rs. 100 lakhs ceiling applicable Rupee loans to be allowed to depositorLoans against NRE/FCNR(B) / third party without any ceiling subjectFixed Deposits to usual margin requirements**

Foreign Currency loan* in India/ outside India

Loans against NRE/FCNR(B) Rs. 100 lakhs ceiling applicable Foreign Currency loans to be allowedFixed Deposits to depositor/third party without any

ceiling subject to usual marginrequirements **

* The term ‘loan’ shall include all types of fund based/non-fund based facilities.

** In case of FCNR deposits, the margin requirement shall be notionally calculated on the rupee equivalent ofthe deposits in accordance with para 9(2) of Schedule-2 of Foreign Exchange Management (Deposit)Regulations, 2000.

Further, the facility of premature withdrawal of NRE/FCNR deposits shall not be available where loansagainst such deposits are to be availed of. Thisrequirement may specifically be brought to thenotice of the deposit holder at the time of sanctionof the loan. The existing loans which are not inconformity with the above instructions shall continuefor their existing term and shall not be rolled over/renewed. Other conditions as regards grant of loanagainst NRE/FCNR deposits shall remainunchanged.

3. The above instructions shall come into force withimmediate effect. The banks may bring contentsof this circular to the notice of their constituentsand customers concerned.

Facilities for Persons Resident outside India – FIIs


Attention is invited to the Foreign ExchangeManagement (Foreign Exchange Derivative Contracts)Regulations, 2000 dated May 3, 2000 [Notification No.FEMA/25/RB-2000] and A.P. (DIR Series) CircularNo.32 dated December 28, 2010, as amended fromtime to time.

2. As per the extant guidelines, only designatedbranches of AD Category I banks maintainingaccounts of FIIs are allowed to act as marketmakers to FIIs for hedging their currency risk onthe market value of entire investment in equity and/or debt in India as on a particular date.

3. It has now been decided to allow FIIs to approachany AD Category I bank for hedging their currencyrisk on the market value of entire investment inequity and/or debt in India as on a particular datesubject to the following conditions:

i. The eligibility for cover may be determined onthe basis of a valuation certificate provided by

November, 2012


the designated AD category bank along with adeclaration by the FII to the effect that its globaloutstanding hedges plus the derivativescontracts cancelled across all AD categorybanks is within the market value of itsinvestments.

ii. The FII should also provide a quarterlydeclaration to the custodian bank that the totalamount of derivatives contract booked acrossAD Category banks are within the market valueof its investments.

iii. The hedges taken with AD banks other thandesignated AD banks, have to be settledthrough the Special Non-Resident Rupee A/cmaintained with the designated bank throughRTGS/NEFT.

Supply of Goods and Services by Special EconomicZones (SEZs) to Units in Domestic Tariff Areas(DTAs) against payment in foreign exchange


Attention is invited to A.P. (Dir Series) Circular No.105dated June 16, 2003, in terms of which units in theDomestic Tariff Areas (DTAs) have been permitted topurchase foreign exchange from ADs for makingpayment towards goods supplied to them by units inthe Special Economic Zones (SEZs).

2. The matter has since been reviewed in consultationwith the Ministry of Commerce and Industry,Government of India and it has been decided toallow ADs to sell foreign exchange to a unit in theDTA for making payment in foreign exchange to aunit in the SEZ for the services rendered by it (i.e.a unit in SEZ) to a DTA unit. It may, however, beensured that there is an enabling provision ofsupplying these goods/services by the SEZ unit tothe DTA unit and for payment in foreign exchangefor such goods/ services to the SEZ unit, in theLetter of Approval (LoA) issued to the SEZ unit bythe Development Commissioner(DC) of the SEZ.

Export of Goods and Services – Simplification andRevision of Softex Procedure


Attention is invited to Regulation 6 of the NotificationNo. FEMA 23/2000-RB dated May 3, 2000 viz. ForeignExchange Management (Export of Goods and Services)Regulations, 2000, as amended by the NotificationNo.FEMA.36/2001-RB dated February 27, 2001, interms of which designated officials of the Ministry ofInformation Technology, Government of India at theSoftware Technology Parks of India (STPIs) or at FreeTrade Zones (FTZs) or Export Processing Zones(EPZs) or Special Economic Zones (SEZs), had beenauthorized to certify exports declared through SOFTEXForms.

2. Considering the spurt in the volume of softwareexports from India in recent times, the complexityof work contracts involved, the voluminous natureof contract agreements and the duration involvedin execution of each contract as well as the time-consuming process involved in the certification ofSOFTEX forms, simplified and revised Softexprocedure was introduced vide A.P. (DIR Series)Circular No.80 dated February 15, 2012. Initiallythe revised procedure was applicable in STPI atBangalore, Hyderabad, Chennai, Pune andMumbai with effect from April 01, 2012.

3. Since the revised procedure is running successfullyat the 5 designated centres, it has been decidedto implement the revised procedure in all the STPIsin India with immediate effect.

4. As per the revised procedure, a software exporter,whose annual turnover is at least Rs.1000 croreor who files at least 600 SOFTEX forms annuallyon all India basis, will be eligible to submit astatement in excel format as detailed in our A.P.(DIR Series) Circular No.80 dated February 15,2012.

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FEMA Update

November, 2012


CA. Ashwin H. ShahThe author is practising since 1975. He canbe reached at [email protected]

In this issue, judgements on Renting of ImmovableProperty are reported for the benefit of Members.

1) In a situation where all assessee co-owners rentout property separately to a person, Whether rentreceived by each co-owner is to be consideredseparately for threshold exemption of Rs 10 lacs ?

[2012] 26 taxmann.com 339 (Ahd. -CESTAT)CESTAT, AHMEDABAD BENCH Smt.K.D Chaudhary v. Commissioner of Service tax,Ahmedabad*

Facts:-

Assessees, being co-owners of a building rented aproperty. Tenant was paying rent through differentcheques separately to all such co-owners.Receiptsof every co-owner were less than Rs. 10 lakhs.Assessees claimed small service provider exemptionunder Notification No. 6/2005-ST .

Held:-

A property may be co-owned by more than oneperson, in which case, each such person has theright to rent or not-rent his portion.

In case such a co-owned property is rented, eachperson is entitled to receive rent in his own rightand if such rent is up to Rs. 10 lakhs, then, the sameis eligible for small service provider’s exemption.

After considering the submissions made by bothsides, it was held that benefit of SSI exemptionNotification No.6/2005-ST dated 01.3.2005 asamended vide Notification No.8/2008-ST dated01.3.2008, grants the benefit of exemption ofservice tax per year, provided that the assesseehas not crossed the threshold limit of rupees tenlakhs in the preceding financial year. On perusalof the said notification, we find that the saidnotification talks about the aggregate value of thetaxable services rendered, should be consideredfor the purpose of exemption and in this case ifindividually all the appellants be considered asprovider of such service, their aggregate valuedoes not exceed the threshold limit. Prima-facie,we find that the appellants have made out a casefor waiver of pre-deposit of amounts involved.Accordingly, the applications for waiver of pre-deposit of amounts are allowed and recoveries

thereof stayed till disposal of appeals. ( In favourof assessee)

Similar judgement in case of Dinesh K. Patwav.Commissioner of Service Tax* [2012]25taxmann.com 515 (Ahd. - CESTAT) CESTAT,AHMEDABAD BENCH

2) Whether renting of building used for hotel isexcluded from renting of immovable property ?

[2012] 24 taxmann.com 295 (New Delhi -CESTAT) CESTAT, NEW DELHI BENCH JaiMahal Hotels (P.) Ltd. V .Commissioner ofCentral Excise

Facts:-

Assessee rented its building for running of hotel.Department demanded service tax thereon.Assessee agrued that in view of clause (d) ofExplanation 1 to Section 65(105)(zzzz), renting ofbuilding used for hotel is excluded from renting ofimmovable property .

Held:-

The prayer is to dispense with the condition of pre-deposit of Service Tax of Rs. 6,62,885/- confirmedagainst the applicant on the ground of providing‘renting of immovable property services’. The saidservices stand provided to Indian Hotel CompanyLtd. who are running hotel on the said property.As per the appellant, renting of immovable propertydoes not include renting of building used for hotelin terms of sub clause (d) of the definition ascontained in Section 65(1)(105)(zzzz).

An identical issue was considered by the Tribunalin the case of Paradise Mehak Properties (P.) Ltd.v. CCE, [Stay Oral Order No. ST/S/446/2012 - Cus.dated 13-4-2012], wherein by taking into accountthe above exclusion clause, unconditional stay wasgranted. By following the stay order, we allow thestay petition in the present case also. Stay petitionis allowed in the above terms. (In favour of assessee)

5 5 5

November, 2012


CA. Pamil H. ShahThe author is practising since 1995. He can bereached at [email protected]

AS-16 Borrowing Costs

GMR INFRASTRUCTURE LIMITED ANNUAL REPORT2011-12

Notes to Financial Statements for the year endedMarch 31, 2012

2.1 Summary of significant accounting policies

h. Borrowing costs

Borrowing costs include interest, amortization ofancillary costs incurred in connection with thearrangement of borrowings and exchangedifferences arising from foreign currencyborrowings to the extent they are regarded as anadjustment to the interest cost.

Borrowing costs directly attributable to theacquisition, construction or production of an assetthat necessarily takes a substantial period of timeto get ready for its intended use or sale arecapitalized as part of the cost of the respectiveasset. All other borrowing costs are expensed inthe period they occur.

FIEM INDUSTRIES LIMITED ANNUAL REPORT 2011-12

Notes on Financial Statements for the year endedMarch 31, 2012

1. Significant Accounting Policies Followed byThe Company

O. Borrowing Cost

Borrowing costs include interest; amortization ofancillary costs incurred and exchange differencesarising from foreign currency borrowings to theextent they are regarded as an adjustment to theinterest cost. Borrowing costs in connection withthe borrowing of funds to the extent not directlyrelated to the acquisition of qualifying assets arecharged to the Statement of Profit and Loss.Borrowing costs, allocated to and utilized forqualifying assets, pertaining to the period fromcommencement of activities relating to construction/ development of the qualifying asset upto the date

of capitalization of such asset is added to the costof the assets. Capitalization of borrowing costs issuspended and charged to the Statement of Profitand Loss during extended periods when activedevelopment activity on the qualifying assets isinterrupted.

VASCON ENGINEERS LIMITED ANNUAL REPORT2011-12

Notes to the Financial Statements for the yearended March 31, 2012

2. Significant accounting policies

2.10 Borrowing Cost

Interest and other costs in connection with theborrowing of the funds to the extent related/attributed to the acquisition/construction ofqualifying assets, if any, are capitalized up to thedate when such assets are ready for sale or itsintended use and other borrowing costs arecharged to the Statement of Profit & Loss.Advances/deposits given to the vendors under thecontractual arrangement for acquisition/construction of qualifying assets are considered ascost for the purpose of capitalization of borrowingcost. During the period of suspension of work onproject, the capitalization of borrowing cost is alsosuspended.

CMC LIMITED ANNUAL REPORT 2011-12

Notes forming part of the financial statements


O. Borrowing Cost

Borrowing costs include interest, amortization ofancillary costs incurred and exchange differences

November, 2012


From Published Accounts

arising from foreign currency borrowings to theextent they are regarded as an adjustment to theinterest cost. Costs in connection with the borrowingof funds to the extent not directly related to theacquisition of qualifying assets are charged to theStatement of profit and loss over the tenure of theloan. Borrowing costs, allocated to and utilized forqualifying assets, pertaining to the period fromcommencement of activities relating to construction/ development of the qualifying asset upto the dateof capitalization of such asset is added to the costof the assets. Capitalization of borrowing costs issuspended and charged to the Statement of profitand loss during extended periods when activedevelopment activity on the qualifying assets isinterrupted.

DLF LIMITED ANNUAL REPORT 2011-12

Notes to the Standalone Financial Statements


j. Borrowing Costs

Borrowing costs that are attributable to theacquisition and/or construction of qualifying assetsare capitalized as part of the cost of such assets,in accordance with notified Accounting Standard16 “Borrowing Costs”. A qualifying asset is one thatnecessarily takes substantial period of time to getready for its intended use. Capitalization ofborrowing costs is suspended in the period duringwhich the active development is delayed due to,other than temporary interruption. All otherborrowing costs are charged to the statement ofprofit and loss as incurred.

A2Z MAINTANANCE & ENGINEERING SERVICESLIMITED ANNUAL REPORT 2011-12

Notes forming part of the financial statements

Note 2 Statement of significant accountingpolicies

g) Borrowing Costs

Borrowing costs directly attributable to theacquisition, construction or production of aqualifying asset that necessarily takes substantialperiod of time to get ready for its intended use orsale are capitalized as part of the cost of therespective qualifying asset. Borrowing costs consistof interest and other ancillary costs that an entity

incurs in connection with the borrowing of funds.Ancillary costs related to borrowings are amortizedover the tenure of loan. All other borrowing costsare expensed in the year they occur.

H. P. COTTON TEXTILE MILLS LIMITED ANNUALREPORT 2011-12


Note 1 Significant accounting policies

9. Borrowing Costs

Borrowing costs are charged to Profit & LossAccount except borrowing costs directly attributableto the acquisition of fixed assets which arecapitalized upto the date of fixed assets is put tocommercial use.

ONMOBILE GLOBAL LIMITED ANNUAL REPORT2011-12



k. Borrowing Cost

Borrowing costs incurred for the acquisition ofqualifying assets are recognized as part of cost ofsuch assets when it is possible that they will resultin future economic benefits to the company whileother borrowing costs are expensed.

GAIL (INDIA) LIMITED ANNUAL REPORT 2011-12

Notes to the Financial Statements for the yearended March 31, 2012

1. Summary of significant accounting policies

1.14 Borrowing Cost

Borrowing cost of the funds specifically borrowedfor the purpose of obtaining qualifying assets andeligible for capitalization along with the cost of theassets, is capitalized up to the date when the assetis ready for use after netting off any income earnedon temporary investment of such funds.

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November, 2012


CA. Bihari B. ShahThe author is practising since 1970. He canbe reached at [email protected].

[I] IMPORTANT CIRCULARS / NOTIFICATIONS:

[A] Vide Notification No. GHN-21 dated 17.9.2012the Govt. of Gujarat has amended theNotification No. 35 of 2006 dated 31.05.2006and by this Notification the sale of RailwayCoaches, Railway Engines, Wagons and partthereof, the rate of Vat will be 1 Paise in a rupeeand regulations and conditions applies.Similarly in question of sale of Metro RailCoaches and part thereof when sold by anyMetro Rail Company the tax would be 2 Paisein a rupee. These rates will be applicable upto the sale of 31st March 2014 for Metro Railcoaches.

[B] Vide Notification No. 23 dated 3.10.2012 theGujarat Government has made an amendmentto the old Notification No. 35 of 2006 dated31.3.2006 and by which the sale of stainlesssteel flats, stainless steel sheets, their pattaand patti the rate would be applicable Ps. 1 ina rupee.

[C] Vide Notification No. 24 dated 3.10.2012 theGujarat Government has changed the rate ofstainless steel utensils. The rate would be 0%and for stainless steel circles the rate wouldbe 1% if the sales is made in the course ofInter - state Trade or Commerce.

[d] Vide Notification No. 25 dated 3.10.2012 theGovt. of Gujarat has considered to remit thewhole of the tax payable u/s. 3 of the EntryTax on the entry of yarn brought by thespecified dealer subject to certain conditions.The specified dealers are a dealer havingmanufacturing unit in Umargaon Taluka andengaged for the job work of weaving ofspecified fabrics from yarns who has beengranted a certificate of entitlements by theCommissioner. The expression ‘specifiedfabrics’ means suiting, shirting fabrics, finishing

fabrics and towel – napkin fabrics. For thatcertain forms are prescribed in the notification.

[II] IMPORTANT DETERMINATIONS:

[A] Aluminium Panel Sheet, AluminiumComposite Panel and Plastic LaminatedSheet are covered by sub item 172 of thelist published for the purpose of IndustrialInput as covered by Entry 42(A) of ScheduleII of the Vat Act.

It was held in the determination order passedu/s. 80 that item Aluminium Pabel Sheet,Aluminium Composite Panel and PlasticLimited Sheet are not Plastic Laminated Sheet.They are Aluminium Laminated Sheet. Thereis no specific entry for the disputed products.They are held as covered by residuary entry87 of Schedule II of the Vat Act. Appellantcontended before Hon. Tribunal that theseproducts are Plastic Laminated items andhence they are covered under sub item No.172 of the list of Industrial Inputs published forthe purpose of entry 42 (A) of Schedule II ofthe Vat Act. Hon. Tribunal examined disputedproduct in presence of the Ld. GovernmentAgent and also referred sub item No. 172 oflist of Industrial Input and held that the disputeditems are combination of thin plastic plate orplastic sheet as well as thin aluminium sheet /plate and hence they are covered by entry 172of list of Industrial Inputs.

November, 2012


Hon. Tribunal held that the products in disputesare covered by entry 42 (A) of Schedule II readwith item No.172 of the list of Industrial Inputs.

M/s. Umiya Flexifoam Pvt. Ltd. Appeal No.11 of 2007 decided on 17.08.2009. Reportedat 2011 GSTB Part I Page 317.

[B] Unicool Natural Water Cooling System is asolar energy equipment covered by Entry82A of Schedule I of the GST Act.

The Determining Authority held that the itemUnicool Natural Water Cooling System isrenewable energy device and not Solar EnergyEquipment and hence it is covered by residuaryentry 195 of Schedule II of the GST Act.Appellant contended before Hon. Tribunal thatthe product is not required to be kept undersun light. The Cooling System of the productstill functions under the shadow of a tree orbuildings. Appellant also relied on thedetermination order passed u/s. 62 in thematter of M/s. Nature Products in which theidentical product was held as covered underentry 82A of Schedule I of the GST Act.

Hon. Tribunal held that the determination orderpassed in the case of M/s. Nature Productsclearly supports the case of the appellant.

The Determination Order in the case of M/s.Nature Product is not challenged by thedepartment. The approach of the determiningauthority is not in accordance to law. Hon.Tribunal following earlier determining orderpassed in the case of M/s. Natural Productsheld that the disputed item ‘Unicool NaturalWater Cooling System’ is solar energyequipment as covered by entry 82A ofSchedule I of the GST Act.

M/s. Rachana Industries Appeal No. 17 of2009 decided on 17.08.2009. Reported at2011 GSTB Part II Page 336.

[III] IMPORTANT JUDGMENTS:

The judgments quoted herein under for the specificissues of appeal dismissed or not admitted on theground of deposit or pre-deposit of amount as

these are the burning issues of to-day. I have citedtwo important judgments.

[A] In case of Mahavir Impex, the AppellateAuthority has dismissed the appeal u/s. 73(4)on the ground that the appellant has notdeposited the sales tax. In this appeal, the Hon.Tribunal has discussed the rule of naturaljustice in detail and therefore the gist of thediscussion in the order is reproducedhereunder.

Thus great prejudice has caused to theappellant in this behalf. It is the case of theappellant that in this case, principle of naturaljustice are violated. In this case, notice is notproperly served to the appellant i.e. the learnedAssessing Authority passed an assessmentorder prior to the date of hearing that to withouthearing the appellant. Thus, order is void abinitio and liable to be quashed and set aside.He has relied upon the judgment of the Tribunalin the case of M/s. Dhrave Distributors beingSA No. 594 of 2011 decided on 19.07.2011,wherein this Tribunal has considered principleof natural justice and in similar circumstancesthe Tribunal has set aside the order.

It is well settled position of law that the conceptof natural justice has following particularly (i)audi alteram partem i.e. a person affected bya decision has a right to be heard, and (ii)Nemo judex in re sua i.e. the authority decidingthe matter should be free from bias.

The audi alteram partem rule that no one shouldbe condemned unheard. It is the first principleof civilized jurisprudence that a person againstwhom any action is sought to be taken, orwhose right or interest is being affected, shouldbe given a reasonable opportunity to defendhimself. Hearing means a ‘fair hearing’. Thusinvolves many components.

Thus order is passed in breach of principle ofnatural justice because order has been passedwithout hearing of the appellant. In our view,the sales tax officer has passed an order i.e. adecision which contravenes the rules of natural

Indirect Taxes Corner

November, 2012


justice is a nullity and person affected is entitledto have such decision set aside.

As per the Rules of Natural Justice isconcerned, this Tribunal is considered theseRules of Hon. Justice particularly in the caseof S. A. No. 139 of 2010 M/s. Sai Trading Co.decided on 6.10.2010 by (Coram: Mr. JusticeK. M. Mehata (Retd), President and Shri M. T.Unadkat, Member in the said matterparticularly from para 37 onward on page 17till para 46.5. The Tribunal has considered thevarious judgments of the Hon, Gujarat HighCourt in connection with Rule of Natural Justiceof various authority has also been consideredup to 51.1. Those principles the Tribunalrespectfully fall in this case.

The Tribunal also relied upon the Book of Lawof Writs by Hon. & Respected Shri Justice C.K. Thakker ‘Sixth Edition’ particularly onchapter of Natural Justice there the learnedjudge has also considered the various aspectsof natural justice where, on Page No. 271 it isstated as under.

‘The Traditional English Law recognizes twoprinciples of natural justice.

[i] Nemo debet esse judex in propriacause.No man shall be a judge in his owncause, or a man cannot act as judge andat the same time a party or suitor, or thedeciding authority must be impartial andwithout bias, and

[ii] Audit alteram partem, hear the other side,or both the sides must be heard, or noman should be condemned unheard, orthat there must be fairness on the part ofthe deciding authority’.

The learned author has also explained theRecent Trend as under.

‘Recent Trend, however, shows that the testof ‘prejudice’ is applied. And even in thosecases, where procedural requirements havenot been complied with, ipso facto the actionhas not been declared unlawful, unless it is

shown that non-observance has prejudiciallyaffected the applicant.’

In this case, even there is breach of principleof fair hearing also.

In view of the same, the Tribunal is settingaside the order dated 05.01.2011 passed bythe Ld. Asst. Commercial Tax Commissioneras well as order dated 31.03.2011 passed bythe appellate authority in this behalf. We directthe learned assessing officer will give sufficientnotice to the appellant and give an opportunityof being heard to the appellant and appellantwill also produce necessary evidence insupport of the same. The learned assessingofficer will also duly apply his mind and willconsider evidence on record. The learnedassessing authority will pass short but speakingorder in this behalf.

[B] In case of Adani Enterprises the appellant hasfiled the appeal before the Joint Commissionerand the same is dismissed on the ground thatthe appellant has not paid 20% of tax as a pre-deposit amount of sales tax.

Appellate authority insisted payment @ 20%of tax – appeal before Tribunal – Consideredrelevant facts on each point – claim of Form H– Rule 12(10) and Sec. 5(3) & 5(4) ofdiscussed – Decision of Lucky Enterprise dated17.12.2000 and Section 50(1) of Custom Act1962 discussed – Section 5(3) of CST Act &decision of Azad Builders 2010 )9) SCC 524also discussed – Decision of Haridas MuljiThakkar 84 STC 317 followed with variousdecisions cited in para 87.4 – directed to payRs. 50/- lacs for admission of appeal and willbe disposed off by Appellate Authority.

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Indirect Taxes Corner

November, 2012


A. CIRCULARS:

(1) Filing of Balance Sheet and profit and LossAccount by companies in Non - XBRL for theaccounting year commencing on or after 1-4-2011 (General Circular No. 38/2012 [F.No.17/160/2012-CL-V], dated 23-11-2012)

In continuation of General Circular No. 30/2012,dated 28-9-2012 on the subject cited above, I amdirected to say that Due date of filing of e-forms23AC (Non-XBRL) and 23ACA (Non-XBRL) as pernew schedule VI (applicable for the accounting yearcommencing on or after 1-4-2011) has beenextended upto 24-11-2012 for Companies holdingAGM or whose due date for holding AGM is on orafter 21-9-2012.

Such companies can now file these e-Formswithout any additional fees upto 24-11-2012 or duedate of filing, whichever is later.

This has been issued with the approval of thecompetent authority.

(2) Examination of Balance Sheets by RoCs-General Circular No. 37/2012, dated 6-11-2012

It is considered expedient to issue the followingcircular for general information.

2. Every company registered under the provisionsof the Companies Act, 1956 is required to fileits balance sheet annually with the office of theRegistrar of Companies within whosejurisdiction the registered office of thecompany is located. Presently, there are morethan 8 lakh companies registered with variousoffices of the RoCs located all over the country.Balance sheets of all the companies who carryout the filing are available for public inspectionon the portal of this Ministry (http://www.mca.gov.in). The underlying idea behindthe filing of balance sheets and otherdocuments which require similar filings is topublicly disclose information which reflectsvarious aspects of the working of a companyso that the company’s public accountability ismaintained. It is neither intended nor feasiblefor the Registrars to scrutinize or verify the

CA. Chirag M. ShahThe author is practising since 1991. He canbe reached at [email protected]

contents of filing except on a random basis.Companies and its Directors and officials areliable to be penalized for any incorrect, falseor misleading information that such filingdisclose. In the following cases, however, theRegistrars routinely scrutinize balance sheets:

(i) of companies against whom there arecomplaints;

(ii) of companies which have raised moneyfrom the public through public issue ofshares/debentures etc.;

(iii) in cases where the auditors have qualifiedtheir reports.

(iv) Default in payment of matured depositsand debentures.

(v) References received from other regulatoryauthorities pointing out violations/irregularities calling for action under theCompanies Act, 1956.

3. After the scrutiny suitable steps are initiatedwherever necessary to obtain explanation andclarification and to institute inspections,investigations and prosecutions whereverwarranted.

(3) Appointment of Cost Auditor by Companies -General Circular No. 36/2012, dated 6-11-2012

In continuation of the General Circular No. 15/2011dated 11th April 2011, Ministry hereby makes thefollowing changes:

(a) The company shall, within thirty days from thedate of approval by MCA of the applicationmade to the Central Government in theprescribed Form 23C seeking its prior approvalfor the appointment of cost auditor, issueformal letter of appointment to the cost auditor,as approved by the Board.

November, 2012


(b) The cost auditor shall, within thirty days of thedate of formal letter of appointment issued bythe company, inform the Central Governmentin the prescribed form 23D, alongwith a copyof such appointment.

(c) In case of change of cost auditor caused bythe death of existing cost auditor, companiesare allowed to file fresh e-form 23C, withoutany additional fee, within 90 days of the dateof death. The additional fee payable as per theCompanies (Fees on Applications) Rules, 1999[as amended] shall become applicable afterexpiry of the said 90 days. Accordingly, e-forms23C and 23D are being modified to capturesuch details.

(d) In case of change of cost auditor for reasonsother than death of the existing cost auditor,companies are required to file fresh e-form 23Cwith applicable fee & additional fee, clearlyspecifying the reasons of change. In case ofchange due to resignation of the existing costauditor, e-form 23C should be accompaniedby the resignation letter of the existing costauditor. In case of change due to themanagement policy of periodical rotation, thenattach a copy of the Board approved rotationalpolicy with the e-form 23C. In any other case,the change should be duly justified andsupported with the relevant documents.

(e) In order to ensure compliance of section 224(1-B) of the Companies Act 1956, requiredchanges are being made in the MCA21 systemto restrict the number of cost audit approvalsto the limits specified in section 224(1-B)through a counter on the membership numberof the sole proprietor or partner of the firm. Itwill be further ensured that in case of a soleproprietor, he has completed the audit andsubmitted the cost audit report. In case of apartnership firm, the partner so appointed orany other partner of the same firm is allowedto complete the audit & submit cost audit reportsubject to his total numbers not exceeding thelimit specified in section 224(1-B).

2. MCA is regularly receiving requests from thecompanies and cost auditors for makingcorrections in the e-forms 23C & 23D in respectof minor typographical errors or other mistakessuch as incorrect financial year, incorrect nameof the cost auditor or the cost audit firm,

incorrect PAN number, incorrect scope of audit,etc. In MCA21 system, no changes arepermitted in the approved e-forms. Therefore,all companies and cost auditors are herebyinformed to carefully verify all particulars beforeuploading e-forms 23C or 23D on the MCA21portal. In any rare case, if still any error/mistakeis observed, it should be brought to the noticeof MCA well before its approval enabling it toreturn the said e-form for re-submission aftermaking the required corrections. Else, thecompanies and cost auditors shall be requiredto file fresh e-forms 23C & 23D containingcorrect particulars, alongwith the applicable feeand additional fee.

3. If a company or the cost auditor contravenesany provisions of this circular, the companyand every officer thereof who is found to be indefault, and the cost auditor in case he is indefault, shall be punishable as per applicableprovisions of the Companies Act, 1956.

4. The modifications contained in this circular shallbe effective from the financial year commencingon or after the 1st day of January, 2013.

5. The Institute is requested to bring this to thegeneral information of all Members in practice,and of the corporate sector.

(4) Default by the Cost Auditors in filing Form 23Dagainst the corresponding Form 23C

GENERAL CIRCULAR NO. 35/2012 [F. NO. 52/5/CAB-2011], DATED 5-11-2012

Ministry of Corporate Affairs vide General CircularNo. 15/2011, dated April 11, 2011 had prescribeda revised procedure to be followed for appointmentof cost auditors. As per the revised procedure,each company is required to e-file its applicationwith the Central Government in the prescribedForm 23C within ninety days from the date ofcommencement of each financial year, which shallbe approved by MCA within 30 days.

2. Upon approval by MCA, the company isrequired to issue formal letter of appointmentto the cost auditor, who shall, within 30 daysof receipt of such letter of appointment, informthe Central Government in the prescribed Form23D alongwith a copy of such appointment.

3. It is, however, observed that since April 1,2011, though all the appointment applications

Corporate Laws Update

November, 2012


made by the companies concerned in Form23C have already been approved by the MCA,a large number of cost auditors have defaultedin filing the required Form 23D within thestipulated time. In many cases, the defaultperiod is even more than a year. This has beenviewed very seriously by the Ministry.

4. Keeping in view the initial operation of therevised procedure, all the defaulting costauditors are requested to file their requiredForm 23D that have already become due tilldate, by December 16, 2012 positively. In caseof any further default, names of such defaultingmembers shall be sent to the Institute onDecember 17, 2012 intimating the Institute toinitiate Disciplinary Proceedings against themunder the relevant provisions of Cost andWorks Accountants Act, 1959.

5. In cases where the company concerned, afterapproval of Form 23C, has failed to issue theformal letter of appointment to the cost auditor,they shall do so within 15 days of the issue ofthis Circular enabling the cost auditor to fileForm 23D within the extended time indicatedabove. In case of non-compliance, thecompany and every officer thereof who isfound to be in default shall be punishable asper provisions of the Companies Act, 1956.

6. The Institute is requested to circulate this forthe information of all concerned.

B. PRESS RELEASE –

COST ACCOUNTANTS IN FULL-TIMEEMPLOYMENT CAN SIGN SPECIFIEDCOMPLIANCE REPORTS RELATING TO COSTRECORDS , DATED 3-11-2012

The Central Government vide the followingnotifications, has allowed cost accountants in fulltime employment, in addition to certification bymembers in full-time practice, to certify theCompliance Report to be filed with the CentralGovernment in compliance with the following rules,namely:-

(a) The Companies (Cost Accounting Records)Rules, 2011 notified vide GSR 429(E), datedthe 3rd June, 2011;

(b) The Companies (Cost Audit Report) Rules,2011 notified vide GSR 430(E), dated the 3rdJune, 2011;

(c) The Cost Accounting Records(Telecommunication Industry) Rules, 2011notified vide GSR 869(E), dated the 7thDecember, 2011;

(d) The Cost Accounting Records (PetroleumIndustry) Rules, 2011 notified vide GSR870(E), dated the 7th December, 2011;

(e) The Cost Accounting Records (ElectricityIndustry) Rules, 2011 notified vide GSR871(E), dated the 7th December, 2011;

(f) The Cost Accounting Records (Sugar Industry)Rules, 2011 notified vide GSR 872(E), datedthe 7th December, 2011;

(g) The Cost Accounting Records (FertilizerIndustry) Rules, 2011 notified vide GSR873(E), dated the 7th December, 2011;

(h) The Cost Accounting Records (PharmaceuticalIndustry) Rules, 2011 notified vide GSR874(E), dated the 7th December, 2011.

The Compliance Report would be required to befiled in XBRL mode and the member in employmentwould be required to affix his digital signature tothe e-Form for filing of the report.

It may be noted that the status of the member wouldbe checked by the MCA at the time of filing againstthe database of the Institute.

In case of members in full-time employment whowould be certifying the Compliance Report of thecompany where they are employed, their attentionis drawn to the above requirement and herebyadvised to provide the Institute with full particularsof their employment, designation, employer’s namewith address and membership status for updatingin the database of the Institute. In case there ismismatch of the member’s status of employmentas recorded in the database of the Institute, thevalidation of the Compliance Report may fail whilebeing uploaded to the MCA Website.

The details are to be sent by signed hard copy tothe Membership Department of the Institute of CostAccountants of India, 12, Sudder Street, Kolkata -700 016. Scanned copy of the same may also besent by e-mail to: [email protected].

All members in employment are hereby requestedto send their employment details to the Institutepositively by November 30, 2012.

C. CASE LAWS:

1. A creditor, if could prove a just claim beforeCompany Judge, would make his winding uppetition maintainable


November, 2012


Vikash Metal And Power Ltd. V. CorporationBank - High Court Of Calcutta [2012] 27taxmann.com 145 (Calcutta)OCTOBER 16, 2012

Section 433 of the Companies Act, 1956 - Windingup - Circumstances in which a company may bewound up - Whether a creditor, if could prove ajust claim before Company Judge, would make hiswinding up petition maintainable –

Held, yes –

Whether if a creditor makes a claim and informscompany that he would apply for winding up in casesuch demand is not made, company would havetwo options, either to secure/compound or defendsuch action by disputing claim bona fide and oncecompany is successful on either score, winding uppetition would automatically fail - Held, yes -Whether where company did not dispute claim ofcreditor-bank, winding up petition against companywas to be admitted - Held, yes

Facts

• By virtue of a financial arrangement, theappellant-companies being constituent of therespondent bank used to enjoy credit facilitiesagainst the cheques being deposited in thebank without waiting for their clearance.

• As per the arrangement the moment chequeswere deposited, bank would be allowing themto enjoy the amount covered by the chequesand would credit the account by adjustmentas soon as the bank would realize the amountfrom the drawee.

• According to the agreement, in case ofdishonour of any cheque, the amount wouldbe deposited by the constituent immediatelyon the next day.

• The appellant-companies deposited severalcheques but all the cheques weredishonoured.

• By the time the cheques were placed and gotdishonoured, the constituent availed theamount covered by the said cheques.

• The bank issued a demand notice undersection 434 upon the companies followed bywinding up proceeding that were admitted bythe Single Judge.

HELD

Maintainability of winding up petition by acreditor

• A creditor can maintain a winding up petition ifhe complies with the provisions of sections 433,434 and 439. In the instant case, therespondent-bank was admittedly a creditor ofthe company. The company did not disputesuch relationship. The company did not disputereceipt of the notice, hence, the winding uppetition was maintainable.

• The appellant cannot be agreed with in sayingthat, bank as a creditor was not entitled tomaintain a winding up petition in view ofSARFAESI Act and the Debt Recovery Actcoming into force. Moreover, from the facts itcannot be held that the bank was a securedcreditor. In any event, a secured creditor canalso apply for winding up.

• The appellant’s second contention is also notmaintainable when it says, winding up petitionwas not maintainable in view of otherproceedings being had. The proceeding undersection 138 of the Negotiable Instrument Actis a quasi-criminal action that a drawee of acheque is entitled to initiate against the drawerthat would have penal consequence. Thewinding up proceeding is not for recovery ofdebt. A creditor, if could prove a just claimbefore the Company Judge, would make hiswinding up petition maintainable. His status asa just creditor was relevant to maintain awinding up proceeding. It would have nofurther consequence as the winding up Courtcould not be used as a process of debtcollection.

• If a creditor makes a claim and informs thecompany that he would apply for winding up incase such demand is not made, the companywould have two options, either to secure orcompound or defend such action by disputingthe claim bona fide and once the company issuccessful on either score, the winding uppetition would automatically fail. Otherwise, theCourt would proceed to winding up thecorporate entity and in such case there wouldbe no occasion for the petitioner to realize hisdebt. He would at best be ranked as a creditorand would have to wait for his turn to have hisdividend in case declared by the OfficialLiquidator after disposal of the assets of thecompany in liquidation under sections 529,529A and 530. [Para 14]


November, 2012


Admission of liability by company

• If one gives a close look to section 434, acreditor having a claim more than a minimumamount prescribed therein would be entitledto maintain his opinion. The test is whether thecompany would be able to resist the same bydisputing the claim bona fide. [Para 16]

• It was found that umpteen number of letters werewritten by the company admitting their liability,that would foreclose the scope of the companyto dispute the claim. The company from time totime suggested repayment proposals. Thecorrespondence predominantly suggests, theclaim was never disputed. [Para 17]

Conclusion

• The company did not have any defence to thejust claim of the respondent-bank. [Para 18]

• Even if the provisions of Debt Recovery Act orSARFAESI Act would empower the bank torecover their dues through special modeprescribed therein that would not operate as abar to apply for winding up. The provisions ofsection 37 of the SARFAESI Act would make itclear. [Para 20]

• There is no scope of interference. The appeal,thus, fail and is to be dismissed. [Paras 21 and22]

2. In a scheme of merger of a wholly ownedtransferor subsidiary company with its holdingcompany, holding transferee company is notrequired to initiate separate proceedings undersections 391 to 394

Reliance Jamnagar Infrastructure Ltd., In reHighCourt Of Gujarat[2012] 27 taxmann.com 228(Gujarat)OCTOBER 8, 2012

Section 391, read with section 394, of theCompanies Act, 1956 - Compromise andarrangement - Whether where scheme ofamalgamation provides for transfer of all assetsand liabilities of subsidiary transferor company toholding transferee company, and such transferdoes not affect rights of its members or creditorsand does not involve reorganization of share capitalof transferee company, no separate application bytransferee company, under section 391 or section394, would be necessary - Held, yes - WhetherHigh Court considering application/petition bytransferor company can observe that transferee

company is not required to file a separateapplication/petition for obtaining sanction to schemeof amalgamation - Held, yes

3. It cannot be said that all debts due to securedcreditors will rank paripassu with workmen’sdues and have to be paid along with workmen’sdues in priority to all other debts of company-in-liquidation

JitendraNath Singh v. Official Liquidator -SUPREME COURT OF INDIA[2012] 27taxmann.com 24 (SC)SEPTEMBER 21, 2012

Section 529, read with section 529A, of theCompanies Act, 1956 and sections 45 and 47of Provincial Insolvency Act, 1920 - Windingup - Application of insolvency rules - Whetherit cannot be said that all debts due to securedcreditors will rank paripassu with workmen’sdues and have to be paid along with workmen’sdues in priority to all other debts of company -Held, yes - Whether Only where securedcreditor opts to realize security and is unableto realize a portion of his dues because ofparipassu charge created in favour ofworkmen, he has paripassu charge and onlysuch debts due to secured creditor which rankparipassu with dues of workmen have to bepaid in priority over all other debts of company- Held, yes

Issue Involved

• Whether all debts due to secured creditors willrank paripassu with the workmen’s dues andhave to be paid along with the workmen’s duesin priority to all other debts of the company?

HELD (As per majority view)

Respective rights of secured and unsecuredcreditors with respect to the assets of theinsolvent company being wound up will be thesame as in the Insolvency Act

• A plain reading of clause (c) of sub-section (1)of section 529 makes it clear that in the windingup of an insolvent company, the same rulesshall prevail and be observed with regard tothe respective rights of secured and unsecuredcreditors as are in force for the time beingunder the law of insolvency with respect to theestates of persons adjudged insolvent. Thiswould mean that the respective rights ofsecured and unsecured creditors of an


November, 2012


insolvent company, which is being wound up,will be the same as the respective rights ofsecured and unsecured creditors with respectto the estates of persons adjudged insolventas are in force under the law of insolvency. Inthe State of Jharkhand, the ProvincialInsolvency Act, 1920 is in force and,accordingly, the respective rights of securedand unsecured creditors with respect to theassets of the insolvent company being woundup will be the same as in the Insolvency Act.

• It will be clear from the definition of ‘creditor’ insection 2(1)(a) of the Insolvency Act that it isan inclusive and not an exhaustive definition,whereas it will be clear from the definition of‘secured creditor’ in section 2(1)(e ) of theInsolvency Act that it is an exhaustive definitionand that a secured creditor means a personholding a mortgage, charge or lien on theproperty of the debtor or any part thereof as asecurity for a debt due to him from the debtor.The result is that the expression ‘securedcreditor’ in section 529(1)(c) would mean aperson who holds a mortgage, charge or lienon the property of the company or any partthereof as a security for a debt due to him fromthe company. Where, therefore, a creditor,such as the bank or the financial institution ininstant case, does not hold a mortgage, chargeor lien on the property of the company or anypart thereof as a security for a debt due to itfrom the company, it is not a secured creditorfor the purposes of section 529 and 529A.[Para 5]

Secured creditor has only a right over theparticular property offered to him assecurity

Conclusions

• The conclusions on interpretation of theprovisions of sections 529 and 529A, therefore,are:

(i) a secured creditor has only a charge overa particular property or asset of thecompany. The secured creditor has theoption to either realize his security orrelinquish his security. If the securedcreditor relinquishes his security, like anyother unsecured creditor, he is entitled toprove the debt due to him and receive

dividends out of the assets of the companyin the winding up proceedings. If thesecured creditor opts to realize his security,he is entitled to realize his security in aproceeding other than the winding upproceeding but has to pay to the liquidatorthe costs of preservation of the security tillhe realizes the security.

(ii) over the security of every secured creditor,a statutory charge has been created in thefirst limb of the proviso to clause (c) of sub-section (1) of section 529 in favour of theworkmen in respect of their dues from thecompany and this charge is paripassu withthat of the secured creditor and is to theextent of the workmen’s portion in relationto the security of any secured creditor ofthe company as stated in clause (c) of sub-section (3) of section 529.

(iii) where a secured creditor opts to realize thesecurity then so much of the debt due tosuch secured creditor as could not berealized by him by virtue of the statutorycharge created in favour of the workmenshall to the extent indicated in clause (c) ofthe proviso to sub-section (1) of section 529rank paripassu with the workmen’s duesfor the purposes of section 529A.

(iv) the workmen’s dues and where the securedcreditor opts to realize his security, the debtto the secured creditor to the extent it ranksparipassu with the workmen’s dues underclause (c) of the proviso to sub-section (1)of section 529 shall be paid in priority overall other dues of the company. [Para 12]

DISSENTING VIEW AS PER SWATANTER KUMAR J.

Dues of the workmen may be made to rankparipassu with those of the secured creditors

• By way of the Companies (Amendment) Act, 1985,section 529A, as well as the proviso to section529(1) were inserted with effect from 24-5-1985.The purpose of these provisions appears to be thatthe dues of the workmen may be made to rankparipassu with those of the secured creditors andeven above the dues of the Government, in theevent of winding up of the company. The legislativeintent appears to be that the dues of the securedcreditors and workmen should be paid in preferenceto others, however, would remain paripassu to


November, 2012


each other. It was not the intention of the framersof law to take away or deprive a secured creditorof its dues or charge of the workmen, unless, itwas specifically given up by the secured creditor.[Para 9]

• The opening language of section 529 contemplatesthat in winding up of an insolvent company, theRules prevalent under the law of insolvency shallbe applicable. Thus, the Provincial Insolvency Act,1920, to the extent permissible, would be applicablein regard to the winding up of a company. [Para10]

• Section 47 of the Insolvency Act gives differentoptions that are available and can be exercised bya secured creditor. It, however, has to be kept inmind that in terms of section 529 the rules ofinsolvency shall prevail and be observed but onlywith regard to debts provable, the valuation ofannuities and future and contingent liabilities andthe respective rights of secured and unsecuredcreditors. Where a secured creditor realizes hissecurity, he may prove the balance due to him afterdeducting the net amount realized; or where asecured creditor relinquishes his security for thegeneral benefit of the creditors, he may prove forwhole of his debt. Still, where a secured creditordoes not exercise either of these options, he isentitled to have his debt entered in the scheduleand would be entitled to receive the dividend interms of section 47(3). [Para 11]

Conclusions

• From the above discussion on law and thejudgments of the Supreme Court, the followingprinciples can be safely deduced:

1. The rules of insolvency or the provisions of theProvincial Insolvency Act, 1920 would apply inthe winding up of an insolvent company underthe provisions of section 529 but it has a limitedapplication as per terms of clauses (a) to (c )of section 529(1).

2. The provisions of the Insolvency Act and evensection 529 cannot control the scope andapplication of section 529A.

3. Merely submitting of an affidavit or demand bythe secured creditor in response to the noticeissued by the official liquidator inviting claimswould not tantamount to effective participationin the winding up proceedings.

4. Mere institution of a petition by a securedcreditor before a Court or forum of competentjurisdiction per se will not lead to an inferencethat the secured creditor has stood outside thewinding up proceedings unless it takes someeffective steps to pursue those proceedingsand realizes its security de hors the specificprocedure under the Act.

5. The proviso to section 529(1) has twoprescribed contents which have to be satisfiedcumulatively. The expression ‘and’ appearingtherein will have to be read as ‘conjunctive’ andnot ‘disjunctive’.

The contents are, firstly, that the provisioncreates a legal fiction of paripassu charge infavour of the workmen on the security of asecured creditor and, secondly, that thesecured creditor should realize its security incontradistinction to relinquishment of hissecurity for recovery of its dues in accordancewith law.

6. Relinquishment has to be a conscious act onthe part of the secured creditor and is incapableof being construed by implication.

7. The secured creditor and dues of the workmenin the proportion calculated in terms of section529A are liable to be paid in preference to allother dues but are paripassu inter se. [Para 31]

4. Where there was no outlay of funds nor interestof creditors was affected, reduction of capitalof company was to be sanctioned

Radhe Developers (India) Ltd. In re -HIGHCOURT OF GUJARAT-[2012] 26 taxmann.com194 (Guj.)SEPTEMBER 12, 2012

Section 100, read with section 101, of theCompanies Act, 1956 - Share capital -Reduction of - Whether where petitioner-company had followed required procedure ascontemplated under sections 100 and 101 forproposed reduction of capital and there wasno outlay of funds, interest of creditors wasnot adversely affected and, therefore,proposed reduction of capital was to besanctioned - Held, yes

(Source: www.taxmann.com)

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November, 2012


(A) INCOME TAX

1) Introduction of Equity Savings Scheme u/s80CCG

In pursuance of sub-section (1) of section 80CCGof the Income-tax Act, 1961 (43 of 1961), theCentral Government has introduced the RajivGandhi Equity Savings Scheme, 2012. It has comeinto force on the date of its publication in the OfficialGazette. This Scheme shall apply for claimingdeduction in the computation of total income of theassessment year relevant to a previous year onaccount of investment in eligible securities undersub-section (1) of section 80CCG of the Income-tax Act, 1961.

(For full Text refer Notification 51, dated23/11/2012)

(B) SERVICE TAX

1) Restoration of service specific accountingcodes for payment of service tax :-

After the “ All Taxable Services “ commonaccounting code under the Negative List basedcomprehensive approach, once again the servicespecific old accounting codes have beenrestored. Accordingly a list of 120 descriptions ofservices for the purpose of registration andaccounting codes corresponding to eachdescription of service for payment of tax is providedin the annexure to this Circular. To view theannexure refer circular no-165, dated20/11/2012.

A specific sub-head has been created for paymentof “penalty” under various descriptions of services.Henceforth, the sub-head “other receipts” is meantonly for payment of interest payable on delayedpayment of service tax. Accounting Codes underthe sub-head “deduct refunds” is not to be usedby the taxpayers, as it is meant for use by the fieldformations while allowing refund of tax.

Further the Registrations obtained under thepositive list approach continue to be valid. Newtaxpayers can obtain registrations by selecting therelevant description/s from among the list of 120

CA. Chandrakant H. PamnaniThe author is practising since 1987. He canbe reached at [email protected]

CA. Kunal A. ShahThe author is practising since 2006. He canbe reached at [email protected]

descriptions of services given in the Annexure.Where registrations have been obtained under thedescription ‘All Taxable Services’, the taxpayershould file amendment application online in ACESand opt for relevant description/s from the list of120 descriptions of services given in the Annexure.If any applications for amendment of ST-1 arepending with field formations, seeking thedescription ‘all taxable services’, such amendmentmay not be necessary and the officers in the fieldformations may provide necessary guidance to thetaxpayers in this regard. Directorate General ofSystems will be making necessary arrangementsfor display of the list of 120 descriptions of servicesand their corresponding Accounting Codes in FormST-1 and Form ST-2 as may be necessary.

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CONGRATULATION

CA. Rohit K. Choksi, Member of our Associationhas been appointed as Member of the RegionalDirect Taxes Advisory Committee of Income TaxDepartment, Ahmedabad.

November, 2012


FORTHCOMING PROGRAMMES:

Date/Day Time Programmes Speaker Venue

04-12-2012 05:30 pm 7th Study Circle Meeting on CA. Chandravadan A. Shah H. K. Hall,Tuesday "Highlights & Issues under Opp. Handloom House,

Foreign Contribution Regulation Act, 2010 Ashram Road,Ahmedabad

22-12-2012 08:30 am President XI - Sardar Patel Stadium,Saturday vs Nr. Stadium Circle,

Secretary XI P.O. Navjivan,Ahmedabad

06-01-2013 08:30 Cricket Match CA Association - H.L.CommerceSunday am vs College,

I.T.Bar Association Ahmedabad

03-02-2013 08:30 am Chartered Accountants Association - Sardar Patel Stadium,Sunday vs Nr. Stadium Circle,

Baroda Branch of WIRC of ICAI P.O. Navjivan,Ahmedabad

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CA. Ashok C. KatariaHon. Secretary

CA. Chintan M. DoshiHon. Secretary

Formation of Picnic Sub-Committee

At the 4th Executive Committee Meeting of Association for the year 2012-13, held on 23-11-2012 atAangan Party Plot, Satellite, Ahmedabad, sub committee, viz. Picnic Committee was formed withCA. Abhishek J. Jain as the Chairman. The other members of the committee are as under:

Picnic Committee

Chairman - CA. Abhishek J. Jain

Convenor - CA. Monish S. Shah

Members - CA. Ajit C. ShahCA. Chandrakant H. PamnaniCA. Chintan M. DoshiCA. Jayesh C. Sharedalal

Glimpses of Events Gone By

Study Circle Meeting on Issues under Income Tax.

The fifth study circle meeting for the year 2012-13 was held on Monday, 15th October, 2012 on the topic of “Issuesunder Income Tax”. The study circle meeting was led by CA. Rutvij P. Shah. Various practical case studies werediscussed at the meeting with active participation of more than 55 members. Past President CA. K.P.Shah was thechairman of the meeting.

(L to R – CA. Ashok Kataria, CA. Umang Saraf,CA. Prakash Sheth, CA. Gaurang Choksi,

CA. Rutvij Shah, CA. Kirit Shah and CA. Jatin Shah)

Study Circle Meeting on Registration and Taxability of Charitable Trusts

The sixth study circle meeting for the year was held on Friday, 26th October 2012 on the topic of Registration andTaxability of Charitable Trusts. The speakers for the program were CA. P.G.Hemani from Bhavnagar and CA. AjitC. Shah, Past President of the Association. CA. P.G.Hemani explained various provisions relating to registration ofcharitable trusts and other compliances with the Charity Commissioner. The income tax aspect of the trusts wasdealt with by CA. Ajit C. Shah. The program was attended by more than 50 members. CA. Anil N. Shah, pastpresident, was the chairman of the meeting.

(L to R – CA. Ashok Kataria, Hon. Secretary, CA. P.G.Hemani, Faculty, CA. Gaurang Choksi, President,CA. Anil N. Shah, Chairman, CA. Ajit C. Shah, Faculty, CA. Jitesh Shah, Convener)

Diwali Get Togther

The Diwali Get Together of the Association was held on Friday, 23rd November 2012 at Aangan Party Plot, JodhpurGam, Satellite, Ahmedabad, to exchange greetings amongst the members and their family members. The programwas attended by more than 550 persons including family members of the members of the Association.

Study Circle Meeting

On 13-10-2012, 4th study circle meeting was held on the topic of “Overview of Accounting Standards”. The speaker for theprogram was CA. D.S.Rawat, renowned author of various books on Accounting Standards. The learned speaker shared hisviews on AS-7, AS-9 and AS-11 along with implications arising on implementation of IFRS. The program was well received bythe members.

(L to R – CA. C.H.Pamnani, CA. Chintan M. Doshi, CA. Ashok Kataria, CA. Gaurang M. Choksi,CA. D.S.Rawat, CA. C.F.Patel and CA. C.A.Shah)

(Officer Bearers welcoming the members atDiwali Get Together)

(Members at Diwali Get Together)

november, 2012 - chartered accountants association...

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