volume : 40 | part 12 | march, 2017 · ahmedabad chartered accountants journal march, 2017 749...

Volume : 40 | Part 12 | March, 2017

Ahmedabad Chartered Accountants Journal March, 2017 749

Volume : 40 Part : 12 M ar ch, 2017

E-mai l Website : caaahmedabad@gmail .com : www.caa-ahm.org

Ahmedabad Chartered Accountants Journal

C O N T E N T S To Begin with

Editor ial

Fr om the Pr esident

Art icles

751

- 752

753

- Facebook - Social Networking or Social Compulsion........CA. Ni rav Choksi.......................

GST Cal ling - Business & Profession................................ CA. Ashok Katar ia ....................

.............................................................................CA. Raju Shah..............................

Need for speaking orders by Judicial Authorities................................CA. Kaushik D. Shah..................754

Foreign Tax Credi t - FTC.....................................................................CA. Lali t Patel.............................758

Gl impses of Supreme Court Rul ings....................................................Adv. Samir N. Divatia...................766

Di rect Taxes

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

Tr ibunal News.....................................................................................CA. Yogesh G. Shah &

767

CA. Aparna Parelkar..................

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

Controversies.......................................................................................CA. Kaushik D. Shah....................781

770

775

Judicial Analysis..................................................................................Adv. Tushar P. Hemani ................785

FEMA & Internat ional Taxat ion

...............................CA. Dhinal A. Shah &CA. Sagar Shah.............................

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

791

793

Indirect Taxes

Service Tax

Value Added Tax

Cor por ate Law & Other s

Fr om the Gover nment

Associat ion News

Recent Judgements..............................................................................CA. Ashwin H. Shah.....................

Judgements and Updates ...................................................................CA. Bihar i B. Shah.....................798

Mergers and Acquisi tion Corner..........................................................CA. Kush Desai.............................

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

Al lied Laws Corner..............................................................................Adv. Anki t Talsania.......................

......................................................................CA. Kunal A. Shah.......................

.................................................................................CA. Di lip U. Jodhani &

796

800

801

808

813

CA. Riken J Patel..............................................................................................................................................

815816ACA J Cr osswor d Contest

- caaahmedabad

The evolution of Permanent Establishment concept

mailto:[email protected]

http://www.caa-ahm.org

Ahmedabad Chartered Accountants Journal March, 2017750

AttentionMember s / Subscr iber s / Author s / Contr ibutor s1. Journals are carefully posted. If not received, you are requested to write to the Association's

Office within one month. A copy of the Journal would be sent, if extra copies are available.2. You are requested to intimate change of address to the Association's Office.3. Please mention your membership number in al l your correspondence.4. While sending Articles for this Journal, please confirm that the same are not publ ished / not

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

5. The opinions, views, statements, results published in this Journal are of the respective authors/ contributors and Chartered Accountants Association, Ahmedabad is neither responsible for thesame nor does it necessarily concur wi th the authors / contr ibutors.

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

The best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law andProfessional Awar ds

Auditing' and 'Al lied Laws and Others' will be awarded the Trophies/ Certificates of Appreciationaf ter being vetted by experts in the profession.Articles and reading literatures are invited from members as well as from other professional colleagues.

Pr inted : Pratiksha Pr interM-2 Hasubhai Chambers, Near Town Hal l, Ellisbridge, Ahmedabad - 380 006.

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

Journal CommitteeCA. Ashok Kataria CA. Pitamber Jagyasi

Chairman ConvenorMembers

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

Executive CommitteeCA. Raju Shah CA. Dil ip Jodhani

President Hon. SecretaryCA. Kunal A. Shah CA. Riken J. Patel

Vice - President Hon. SecretaryMembers

CA. Jayesh M.Shah CA. Jignesh J. Shah CA. Malav K. MehtaCA. Mihir H. Pujara CA. Nalin K. Thakkar CA. Naveen R. MandovaraCA. Pradeep G. Tulsian CA. Rakesh B. Lahoti CA. Umang B. Saraf

- CA. Yamal A. VyasImm. Past President



Facebook - Social Networking or Social Compulsion

Facebook is well defined as a popular freesocial networking websi te that al lowsregistered users to create profi les, uploadphotos and video, send messages and KEEPIN TOUCH. Mostly such social networkingtools like Orkut, Facebook, etc. were createdto contact your old acquaintances staying atdistant places and try to build on the relations.The intention was beautiful but ARE WEMAKING THE CORRECT USE OF SUCHTOOLS. Aren’t we replacing the word SocialNetworking with Social Compulsion. Myneighbor, I don’t care to meet or greet himre , gularly but if he posts something then I haveto be the first one to like share or comment onthe post. My friend who stays far off from me,I don’t call or meet him when I am in his city,but I have to like each and every of his silliestposts. Is it that the new age mantra to maintaina relation is a LIKE SHARE OR COMMENTonly? Are we inspiring our next generations(onl ine generation) to social ize using suchtools rather than to have a real meaningfulfriend list which would be always by his sidefor life? Can a Big Birthday Cake Photo postedonline with a long Birthday message replacea simple phone cal l saying HAPPYBIRTHDAY? We are not ready to bend toreconcile with our relatives but at the sametime we very comfortable to share an oldphoto and write an emotional message so thatthe entire world perceives we have the bestof the relations with our family members.

I t does not end here though, the personposting something, expects that he gets themaximum LIKE SHARE OR COMMENT. Incase you don’t get the desired Likes, does thatundervalue or demean your achievement? Didyou work hard or did something in personalor professional life so that at the end of theday you get 500 Likes / 100 comments / 50Shares on FB?

Perhaps in our quest to be technological lyupdated, we have somewhere forgotten ourfundamentals to maintai n a long termrelationship. It is the personal touch which isthe base of any relationship, isn’t that missingin this online world. And who is to be blamedover here, the technology or the human being?I think it is neither of two; it is actually themindset of the enti re Society which hasaccepted to a larger extent that traditionalmethods are outdated and in this everychanging fast world, online is the solution toeverything. Perhaps all will not agree with thisnew trend. Perhaps somewhere we still valuethat smile, hug, greet or touch which we havewhen we meet in person. Perhaps a blessingtaken by touching feet in person has morepower than tons and tons of Al l the Bestmessages recei ved onl ine. Perhaps nomessage can impart the same intensity whicha tear of joy can give to happy news. Perhapsno condolence message can replace ashoulder to cry upon. Perhaps all is not lost.Let’s Keep in Touch Online but not maintainour relations in Online Mode.

CA. Nir av [email protected]



The central laws related to GST, the Central Goods

and Service Tax Act - 2017 and the Integrated

Goods and Service Tax Act - 2017 have got the

nod from the Parliament and the President. It is now

the states that have to enact the State Goods and

Service Tax Act. Telangana is the first state to pass

the State Goods and Services Tax (SGST) Bills.

Rajasthan and Bihar have called special sessions

of their respective Assemblies to pass the SGST

Bill on April 24. It is expected that most of the states

are l ikely to pass by the end of May-2017.

The new taxation regime of One Nation One Tax

theory is going to throw many challenges but on

the other end i t wil l al so bring enormous

professional opportuni ties for all chartered

accountants. It will provide a common platform as

far as understanding the law is concerned. Being a

new enactment, every practi sing chartered

accountant will be at par and those who will be

sincere and serious enough to learn the new law

will have the advantage.

The basic exemption under the GST is turnover of

Rs. 20 lacs and the turnover upto Rs. 50 lacs allows

small and medium enterprises compliances with

lowered rates of taxes without any credits. Initial ly

we might see the firms understating their turnover

to remain outside the purview or to avail the

lowered rate of composite tax. However, increased

compliance under GST will benefit firms in the long

run by providing them access to cheaper capital and

lower input costs, in the short term, the switch from

Editor ial [email protected]

GST Calling - Business & Profession

the unorganised to organised sector may make them

less competitive. Businesses making a switch to the

organised sector would, in the short run, become

less competitive with the rise in compliance costs.

However, changing and coming in the mainstream

should eventually be beneficial.

The advantage under the GST would be most of

the registered entities would prefer to do business

with other registered entities only. It will allow them

to avail input tax credit and will also help when the

charge is on the reverse mechanism. The objective

of the reverse charge is to increase tax compliance

and revenues. The concept is already present in

service tax. In theGST regime, reverse charge may

be applicable for both services as well as goods. It

wil l have to be paid by the receiver of goods or

services. In case an unregistered dealer sells or

supplies to a registered dealer the registered dealer

has to pay theGST on the supplied good or service.

Hence, registered businesses will not want to deal

with those entities in the unorganised sector. Non-

compliance by small businesses, or any efforts to

stay out of the organised sector, will only hurt their

business over a period of time.

It is high time that be it business houses and

practising professionals providing services to these

businesses need to gear up. Times are changing,

the day is not far. Let’s get ready for it.

CA. Ashok Kataria



From the PresidentCA. Raju Shah

[email protected]

Respected seniors and dear professional colleagues,

I t is very wel l said that “To perform you needpractice, to practice you need passion”, and “Lifeis ful l of challenges, seen and unseen, so to lookand feel great, you must hold your head up eachday and project your inner confidence.” With thisin mind we could achieve our goals set for the year2016-17.

A joint semi nar wi th Servi ce tax Division-1Ahmedabad was arranged on 20 March, 2017 atth

Association’s office on GST to understand “Goods& Service Tax i n I ndi a- Impl ementati on &Transi tion.

A s part of sports act ivi ty we have pl ayed aCRI CKET match on 18/02/2017 wi th BarodaBranch of WIRC of ICAI at Sabarmati Rai lwayGround, Ahmedabad. I t was a very goodsportsmanship match and happy to inform you thatCA Association has won the match. 3 T-10 Tennisrd

Ball Cricket Tournament played on 18/03/2017 atAdani Shantigram Cricket Ground, Ahmedabad.Thanks to team sponsors Talati & Talati, Manubhai& Shah and R.S.Patel & Co. for their continued thesupport to the tournament.

A one-day picnic for members and their family wasarranged at “Suryam Repose” on Sunday, 19 March,th

2017. The program was organised after a gap of manyyears and it was a fun filled program with enjoyablerecreational and gaming activities. The Associationalso jointly organized with Zebpay a programme on“T he Bitcoin” at YMCA Banquets Green.

As this is my last communication as President ofthis presti gious Associ at ion, I look back andrecollect the events of 2016-17. Our this year slogan

coul d be very wel l“A Passi on to Per f or m”executed because of enthusiastic ef forts of all theyoung and experienced Execut ive CommitteeMembers, Chai rmen and conveners of al l subcommittees, coordinator, speakers. The Associationprovided wide range of programmes to its membersthroughout the year wi th a fine blend and balanceof knowledge and entertainment. ResidentialRefresher Courses at Jodhpur, M umbai and

I nternat ional RRC at Thai land, Brain Trustmeetings, Study Circle Meetings on varied topicsand intensive study courses were the highl ightsduri ng the year. A part f rom the educat ionalprogrammes, the A ssoci ation also arrangedrecreati onal programmes l i ke i ts popularprogramme “Tal ent Evening” performed byMembers and their fami ly members and a GujaratiDrama a f un-f i l led“Dost Hu Gujar at Chu”Entertainment Evening, one day Picnic at SuryamRepose, Special Event Committee has arranged aprogrammed l i ke “5 Pi l lars of Happi ness”,Celebration of CA Association foundation day inunique fashion with talk on Wel lness and Heal thcheck up for members and Cricket Matches playedwith other organizations and between the membersduring the year. All sub committees have put in theirpersistent hard work in organizing these activities.

Before I conclude, I would like to place on recordmy deepest appreciation of the tireless effort of allEC members, crowns of Past presidents, Chairman-convenor and members of all committees, speakersof all the seminars and study circle meetings, paperwri ters and column wri ters of journals for thei runt i ring support in working of the associationactivities. I draw solace that with such a wonderfulteam I have at the office bearer our shared aspirationis surely within reach. A finally, a special word ofthank to all of you, our valued members, for theirunstinted support and encouragement.

Be inf ormed that the Annual General Meeting ofthe Association would be held on 6 May, 2017 atth

5.30 pm at Shanti nath Hal l , “I CAI Bhavan”Ahmedabad Branch of WIRC of ICA I. I wouldrequest al l members to attend.

“You win, not by defeat ing others, but byperforming better than before.”

I bel ieve that a successful exi t than a favorableentrance is better. Because, what matters is not beingclapped when we arrive but being rememberedwhen we leave.

With regards,

PresidentCA. Raju C. Shah



Need for speaking orders byJudicial Author ities

Introduction:Whether the Quasi-Judicial bodies are required torecord reasons in support of their decisions. Thejudicial authorities including Quasi -judicialauthorities must pass speaking orders otherwise theorders passed by them is not valid and legal. Thenecessity for quasi-judicial Tribunals to give reasonsfor thei r decision came up in several cases.Recording reasons in support of the conclusionsreached by judicial authorities is a requirement forboth judicial accountability and transparency. Sincethe requirement to record reasons emanates fromthe broad doctrine of fairness in decision making,the said requirement is now virtually a componentof human rights.

The ongoing judicial trend in all countries committedto rule of law and constitutional governance is infavour of reasoned decisions based on relevant facts.Th rtis is vi ually the l ife blood of judicial decisionmaking justifying the principle that reason is the soulof sti ju ce. Judicial or even quasi-judicial opinionsthese days can be different as the judges andauthorities who deliver them. All these decisions serveon mm wh e e co on purpose ich is to demonstrat byreason that the relevant factors have been objectivelyconsidered. This is important for sustaining thelitigant’s faith in the justice delivery system.

Insistence on reason is a requirement for bothjudicial accountabili ty and transparency. If a judgeor a quasi-judicial authority is not candid enoughabout his/her decision making process then it isimpossible to know whether the person deciding isfaithful to the doctrine of precedent or to principlesof incrementalism. Reasons in support of decisionsmust be cogent, clear and succinct. A pretence ofreasons or ‘rubber-stamp reasons’ is not to beequated with a valid decision making process.

Ground realities:

It is seen that in number of cases A.O. and CIT(A )does not pass speaking orders. They following

examples are indicative of the fact that the speakingorders are not being passed by judicial authoritiesincluding quasi-judicial authorities.

1. The appeal orders simply reproduce theconclusions/ observations of the A.O from theassessment order and thereaf ter wri ttensubmissions of the counsel are reproduced andthereafter without recording reasons or dealingwith the arguments the appeal is being dismissedby stating that the arguments are not acceptable.

2. Though the jurisdictional High court has givendecision in favour of the assessee, the A.O prefersnot to follow the decision on the ground that thedepartment has not accepted the decision.

3. In respect of additi on u/s 14A though theassessee relies on the decision of Gujarat highcourt in CIT vs. Gujarat state fertil izers andchemical ltd. 358 ITR 323. Wherein it is heldthat where assessee’s interest free funds farexceed vestmens in t made for earning exemptdividend income than no disallowance can bemade u/s 14A of the I.T. Act 1961. The A.O aswell as CITA do not discuss the judgmentreferred to at the time of proceedings. They donot give any reasons also for not following thejurisdictional high court decision.

4. It is further submitted that jurisdictional HighCourt in CIT vs. Raghuveer Synthetics Ltd. 354ITR 222 has held that when interest free fundsavailable with the assessee were far greater thanlo adan vance to sister concerns and borrowedmoney was not uti l ized for the purpose ofadvance to the sister concern then interest is notto be disallowed merely on account of utilizationof funds for non- business purposes and whenno re th evidence is brought on cord by e dept.that borrowed money was utilized for the purposeof advance to sister concerns.

5. In respect of disallowance of interest expenditureon loan taken for acquiring controlling interest

CA. Kaushik D. [email protected].

mailto:[email protected].


though it is pointed out that the decision ofBombay High Court in Amrita R. Shah was notfo llowed by their Lordships of Bombay highcourt in CIT vs. shrishti securities 321 ITR 498the Learned CIT(A) makes note of the laterdecision but does not follow nor differentiatesan cursorily dismisses the argument

6. In yet another case the learned CIT(A) refusesto deal wi th the argument of A .R thathousehold expenses of Rs. 20,000 i sreasonable. He takes into account householdexpenses of Rs. 5000 per month and differencesadded to total income.

7. It was claimed before CIT(A) as under “Under[point no 3(a) of circular no 2/2016 dated 29February 2016 issued by CBDT], it has been

th

clari f i ed that where the assessee i tsel firrespective of the period of holding the l istedshared and securities opts to treat them as stockin trade the income arising from the transfer ofsuch shared/securities would be treated as itsbusiness income.”

“In my Financials, I have clearly shown the sharesunder Balance sheet as investment under currentassets and not under Trading/Profi t and Lossaccount as stock in trade. This again substantiatesmy intention to hold it as investment and not astrading item and which can only be treated as shortterm capi tal Gain and not business income asdecided by learned AO.”

The assessee relied on the judgement of Hon. ITATin the case of Mr. Manish Ajmera ITA No. 5700/Mum/2013 decided on 26.08.2016. However,dismissing the appeal the learned CIT(A) relied onCBDT circular No. 4 of 2007 Dated 15.06.2007and surpri singly the latest ci rcular of 29February,2016 as well as the decision in the case

th

of Manish Ajmera was not referred to at all.

The above referred examples are only i llustrativeexamples, there are number of other examples alsoand if details are reproduced here, this article wil lbe too lengthy.

It is seen that when such examples are noticed andthe assessee fi les misc. petition, they are notdisposed off.

Exceptions:

It is important to note that every judicial order maynot be supported by recording reasons. In court-martial cases, the Supreme Court in S.N. Mukherjeev Union of India, AIR 1990 held:

i. They do not belong to the judicial branch ofthe government.

ii. Court-martial are sui generis in nature and aredealt with differently by the constitution itself.

Thus, it is not necessary in such cases to recordreasons by the authorities.

Speaking or ders- Judicial Author ities

It is submitted that there are number of decisionswhich lay down that all the issues as per the assesseemust be dealt with by judicial authorities. Let merefer to the decision of M/s calATM Forgings, FoPoint, Jalandhar… … Appel lant versus TheCommissioner of Income Tax II, Jalandhar. ITAno. 598 of 2008 (O& M) Date of decision :26.08.2013. the operative part of the decision oftheir lordships of Punjab and Haryana High courtreads as under

“it would be apposite to refer to the order of thetribunal dated 27.02.2008 which would show thatthe Tribunal has in para 11 thereof noticed thecontentions of the parties and accepted the appealof the revenue without giving any cogent andconvincing reasons. Therefore, the order dated27.02.2008 does not satisfy the requirements asenunciated by the Court noticed herein above. Thus,the substantial question of law is answered in favourof the appellant-assessee and against the revenue.Accordingly, after setting aside the order of thetribunal dated 27.02.2008 which is passed inviolation of the principles of natural justice as perthe law laid down by the Court as mentioned above,the matter is remanded to the Tribunal to decideafresh after affording an opportunity of hearing tothe parties in accordance with law. As a result, boththe appeals are allowed.”

Let me now refer to another important decision ofMadras High Court which has also confirmed thatJudicial Authorities must pass speaking orders. Thecitation of the decision is as under:

Need for speaking or der s by Judicial Author ities


Tax case (Appeal) Nos. 202 and 203 of 2012 &M.P. Nos.1 and 1 of 2013

M/s. A lti us securi ties Trading (P) L td.,… … .Appellant in T.C. (A) No. 202 of 2012

Shri C. Srikanth , … … Appellant in T.C. (A)No.203 of 2012

Vs.The Deputy Commissioner of Income Tax,Company Circle I(1)

In this case, it was held as under:

“As far as the present case is concerned, theTribunal has not adjudicated on the issue in the lightof the materials projected by the assessee in supportof his case.

In similar situation, in the decision reported in(1967) 66 ITR 462 (UdhavdasKewal ram V.Commissioner of Income-tax), the Apex courtpointed out “the Tribunal was undoubtedlycompetent to disagree wi th the view of theAppel late Assistant Commissioner. But inproceeding to do so, the Tribunal has to actjudicially, i-e, to consider all the evidence in favourof and against the assessee. An order recorded on areview of only a part of the evidence and ignoringthe remaining evidence could not be regarded asconclusively determining the questions of fact raisedbefore the Tribunal.”

In the unreported decision of this Court dated13.2.2012 in T.C.(A)No.791 of 2004 (CIT V. GECAlsthom India Ltd.), this Court referred to thedecision of the Apex Court reported in 2010 (9) Scale199 (M/s. Kranti Associates Pvt. Ltd and another V.Sh . Masood Ahmed Khan and others) and to theobservation in paragraph 51. We need not reproducethe same, except to point out that recording of reasonsis meant to serve wider principles of justice and thequasi-judicial authori ty must record reasons insupport of his conclusions and insistence on reasonis a requirement for both judicial accountabil ity andtransparency, it goes without saying that the orderpassed by the Tribunal on the mistaken impressionthat the assessee had not raised any dispute on thefacts found by the Assessing Officer, calls forinterference by this Court.

Thus, wi thout going into the meri ts of thecontentions made by the assessee, this Court hasno hesitation to set aside the order of the Tribunal,thereby direct the Tribunal to hear the appeal denovo and pass orders in accordance with law.”

On the issue of need for passing speaking ordersby Judicial Authorities, we have landmark decisionin the case of M/s. Kranti Associates Pvt. Ltd.&Anr. V/s Sh. Masood Ahmed Khan & OthersWITH CIVIL APPEAL NO. _____ of 2010. Theimportant principles laid down by their lordshipsof Supreme Court are as under:

“The Supreme Court in Kranti Associates PrivateLtd. Case, summarized and laid down the followingprinciples relating to ‘speaking order’.

(i) Recording of reasons in support of a decisionensures that the decision is not a result ofCaprice, whim or fancy but a decision arrivedat is just and based on consideration of therelevant law;

(i i) When the order passed is subject to appeal, thenthe necessity to record reasons is even greater;

(iii) Mere giving an opportunity of hearing is notenough;

(iv) Reasons for decision being given is requiredfor two grounds:

(a) That the aggrieved person gets theopportunity to demonstrate that the reasonsare erroneous; and

(b) Obligation to record reasons operates asan ef fective deterrent against possiblearbitrary action. The requi rement ofreasons i s to prevent unf ai rness orarbitrariness in reaching s andconclusionreasoned and just conclusions wil l alsohave the appearance of justi ce. In theabsence of reasons, it would be difficult toknow whether the decision is right orwrong.

(v) Reasons should not be a mere ‘rubber stampreasons’ and they must disclose:

(a) How the mind was applied to the subject-matterfor a decision (irrespective of the fact that it ispurely administrative or quasi-judicial);



(b) The l ink between the materials which areconsidered and the conclusions which arereached and it should provide a national nexusbetween the two;

(vi) Requirement of ‘reasons’ in support of the orderis as basic as the adherence to the principles ofnatural justice,

Principles of natural justice provides that it mustbe observed in proper spirit and a mere pretenceof compl iance would not sati sfy therequirements of law.

(vii)When an action taken deprives or restrictsfundamental right, the authorities must see thatjustice is not only done but manifestly appearsto be done as well as this mandates thedisclosure of reasons for the decision

(viii) Refusal to give reasons is an exercise of anexceptional nature and to be done sparingly andit should be fully justified by the exigencies ofan uncommon situation. It should not be a meremotive to keep the reason away from judicialscrutiny

(ix) As observed by Justice ’naturalKrishna Iyer, justice requires reasons to be written for theconclusions reached’

(x) Reasons being given for the pr incipleenunciated in Ces-santa Ratione Legiscessatipsm Lex (Reason for any particular lawceases, so does the law itself) and reason isconsidered as the soul of the law

(xi) Faith of the people in administrative Tribunalscan be sustained only, if the Tribunal acts fairlyand dispose of the matter before them by well-considered orders

(xii)The expression ‘consider’ means not to actmechanically but duly apply its mind and givereasons for the decision

(xi i i ) Disclosure of reasons provide for anopportunity for an objective review both bysuperior administrative heads and for judicialprocess

(xiv) Distinction has to be made between factswhich are not in dispute and disputed facts. Inthe former case, non-recording of reasons may

not violate the principles of natural justice butin the latter case, it would be a violation ofnatural justice

(xv)Mandatory for reasons to be given in the awardaffecting public interest as it would facil itatethe High Courts to review the validity of theaward

(xvi) Statutes l ike the Consumer Protection Actwhich is a benevolent piece of legislationintended to protect large body of consumersfrom exploitation and for consumer justice bysummary trials must give conclusions based onreasons

(xvii) Even in cases where the Courts act in theirdiscretion, there is a very strong reason infavour of disclosing of reasons. There is nowincreasing recognition towards the duty of theCourt to give reasons in U.K.

(xviii) Unless the parties become aware of thereasons as to why one has won and the othershas lost, justice wil l not be done

(xix) Decisions being supported by reasons imposesdiscipline contributin to the g decisions beingconsidered with care, the decisions renderedencourages transparency, and helps the Courtsin performing their supervisory function andjudicial review proceedings and

(xx)Considerations underlying the actions underreview need a thorough scrutiny of the recordedreasons and also set up precedents for futureadjudications.

The ratio in , case andKranti Associates Pr ivate Ltdthe guidel ines serve as a reference for al ladministrative and judicial (including quasi-judicialauthorities) to exercise their powers of decision-making judiciously- judicial application of mind andthe decisions rendered may receive publi cappreciation.

It is suggested that the copy of the judgment may becirculated to all decision-making authorities whichmay ultimately contribute to transparency in allspheres of administration. It is further suggested thatCBDT should come out with circular directing AOand CIT(A) to pass speaking orders with reasons.

❉ ❉ ❉



Foreign Tax Credit-FTC

Preamble:

The world economies have moved forward andhave come closer to each other making the borderinvisible across the globe for economic purposes inthe recent past. Due to increasing liberalization andglobalization there are many cross border economictransactions which are carried out in India. In sucha scenario earnings of a person is not restricted tonational boundaries and there are opportunities toearn money internationally and which may createcontroversy in the area of taxation. Most of thecountries are now following a combination ofsource and residence based concept of taxation i.e.a country seeks to tax the worldwide income of aperson who is a resident in that country as well astax all the income which arises to a person (whetherresident or non-resident) in its territory which resultsin double taxation of the income, firstly in thecountry of source of income and secondly in thecountry of residence of the person earning incomewhich ultimately results into reduced effectiveincome in hands of the assessee.

When the same income is taxed more than once, it

Double Taxation:

suffers double taxation

1. Jur isdictional Double Taxation:

.

This i s general l y addressed by DoubleTaxation Avoidance Agreement - DTAA. If aperson is bound to pay tax on the same incomewhich he had earned in mor e than onejur isdiction then it leads to double taxation. Itmay take place due to following circumstances:

In this concept, a resident country levies

A. Residence & Source Based:

tax on the global income of its residentsirrespective of its occurrence. Further, asource country also levies tax on suchincome which has arisen or accrued in itirrespective of the fact that the person is aresident of other country.

E.g.: Permanent Establishment – PE taxed

B. Tr iangular Taxation:

in one state which receives income fromvarious other states and it is consolidatedat company source confl ict with anotherState. For example, assume that CompanyA is a corporation resident in State A. Ithas an office in State level in a state. Insome cases, a State may have a source-residence confl ict with one State and asource- B and makes sales from that officeinto State C. Under their domestic laws,State A taxes income from those salesunder the residence principle and State Band State C both tax that income under thesource principle. A bilateral tax treatybetween State A and State B is likely tosolve the residence-source confl ict butprobably would not solve the source-sourceconfl ict. If State B and State C also have abilateral tax treaty, however, the source-source conflict may also be solved.

CA. Lalit Patellal [email protected]

Double Taxation

Jurisdictional Double Taxation

Same income of the same person istaxed in more than one jurisdictions.

E.g. Simultaneous implication ofthe concepts of Residence andConcept of Source.

Economic Double Taxation

Same income is taxed in the handsof more than one person.

E.g. Payment of dividend istaxed in the handes of thedistributor as well as in thehandes of shareholder.



2. Economic Double Taxation:

taxation of two different taxpayer s with respect to the sameEconomic double taxation refers to the income (or capital). E.g. Payment of dividend is taxed in the hands of the distributor as well as in thehands of shareholder.

This double taxation restrains the economic activity of the entrepreneur, it influences the growth of prices or

Methods of Eliminating Double Tax:

goods and services, it increases tax burden on juridical and physical subjects, and also it violates the principalof tax fairness.

Foregin Tax Credit – FTC:

To eliminate this double taxation, countries enter into bilateral treaties with each other to allocate thetaxing rights of each other over the income earned by resident of one country in the other country’s territory.Under this arrangement, the countries either exempt a particular income from tax in one country or stipulatea maximum rate of tax for a particular source of income (for e.g. most of the DTAA provide for a gross taxrate of 10% - 15 % for income in the nature of royalty or fees for technical services). Further, the tax whichis paid in the source country by the person receiving income is allowed as a credit by the country of residencewhile computing the tax payable in the country of residence. Additionally, most countries also provide forunilateral relief under its domestic law, which would aid in eliminating tax cascading where no DTAAexists.

Foreign Tax Credit - FTC

Methods forElimination of

Double Taxation

Allocation of

right to tax

Foreign tax

credit (FTC)

Renunciation of

right to tax byone state

Unilateral tax relief Bilateral tax relief

Sharing of profit

between twostates

Section 91 of

Income TaxAct, 1961

Section 90 of

Income TaxAct, 1961

Applicable where

DTAA does not exist

Applicable where

DTAA exist



Methods of ax Credit:Recognising Foreign T

1. Exemption Method:

This method involves providing exemption to the foreign income of the resident of country either whollyor partial ly.

a. Full Exemption Method:

· This is a method which completely ignores the income which has already been taxed in thesource country at the time of computing tax payable in the resident country.

b. Progressive Exemption Method:

· Income which has already been taxed in the source county shall be considered for determinationof tax rate at which the domestic income is going to be taxed.

In case, the if an assessee is a resident of a country which follows progressive tax slab rate·system then as per this method the assessee may end up paying higher tax on its domesticincome but not to pay again tax in domestic country on the foreign income.

X Ltd., resident of a state F, has earned total income of Rs. 2,00,000/-. Out of which Rs.

Case Study:

150,000/- has been earned from state G. State F is taxing the income of its resident at 5% ofincome upto Rs. 50,000/- and at flat 10% tax on the entire income in case of income above Rs.50,000/-. State G is levying tax at 7.5% on the income accrued and arisen in India.

Full Exemptin MethodIncome taxed in the source country is

not at all considered for the tax calculation

Exemption Method

Progressive Exemption

Method

Income taxed in the source country isconsidered only for arriving the tax rates

for the tax calculation

Full Credit MethodResident country grants credits

without any restrictions or limits

Credit Method

Underlying Credit

Method

Tax Sparing

Credit Method

Ordinary Credit

Method

Here, tax credit isresctricted to lower of the

taxes to be paid in the Resident state;or the actual taxes discharged in

the Source state

It attempts to miligate the economic double taxation E.G. : Credit is granted

by resident country for the taxes with held on dividends & also tothe company paying the dividend

This is arrived by way of granting a tax credit in the resident for the

amount of tax that would have been payable in the overseas jurisdiction


Payment of tax to different countries:

(Amount in Rs.)

Particulars Full PartialExemption exemption

Method MethodIncome in resident country for Tax purposeResident country income 50,000 50,000Source country income 1,50,000Net Income considered for tax rate purpose 50,000 2,00,000Total Tax calculated 5% 10%Tax in resident country 2,500 5,000Tax in Source country 11,250 11,250T wotal Tax outflo 13,750 16,250Relief in Resident countryTotal Income of X Ltd. 2,00,000 2,00,000Tax at 10% on total income 20,000 20,000Net Relief gained in resident country 6,250 3,750

2. Under lying Credit Method

A method employed by a home country to provide fiscal incentives for outbound investments by home-based multi-national companies in which the total tax cost on foreign dividends is capped at the level ofthe home country’s corporate tax rate. It focuses on mitigating economic double taxation.

Generally, this concept is implemented only in case of Dividend.

Example,

(Amount in Rs.)

Particulars Under lying Under lyingtax credit tax credit

not available availableTotal income earned by X Inc. 1,00,000 1,00,000Cor porate Tax payable on income (1,00,000 x 20%) 20,000 20,000Amount distr ibuted as dividend 80,000 80,000Withholding tax on dividend @ 10% 8,000 8,000Income for the parent company * 80,000 1,00,000Tax on the same @ 34% 27,200 34,000Under lying tax credit (A) - 20,000Credit for withholding tax on dividend (B) 8,000 8,000Total credit available 8,000 28,000Balance Tax payable in India 21,200 6,000

* In order to give a credit on a comparable basis, parent company A Ltd. will gross up the income toinclude the foreign tax paid, and will start the calculation from the same income as that earned by thesubsidiary company, X Inc. While the above il lustration is just an example of method of computingunderlying tax credit, different countries may actually have a separate method of computing the underlyingtax credit.



Further, as the India-US DTAA has provisions for underlying tax credit, it may be possible for an USinvestor in India to claim credit for the Dividend Distribution Tax suffered under Section 115O of theAct, on the dividends received from its Indian investments. However, in case of DTAAs where there isno underlying tax credit available, the issue on whether ordinary foreign tax credit would be availablefor Dividend Distribution Tax or not is not free from doubt. India, however, does not have a tax systemwhich allows credit of the underlying taxes paid by the overseas subsidiaries of Indian corporations.India generally taxes dividend without giving credit for any underlying taxes. However, there are certainexceptions such as the treaties signed with

Mauritius and Singapore, where credit is provided for the underlying taxes paid.

3. Credit Method

a. Full Credit Method:

Resident country grants straight away full credit of tax paid in foreign country without any limits orrestriction.

This is a method which is generally adopted in DTAA. In this method, availment of credit of

b. Ordinar y Credit Method:

foreign tax paid is restricted to taxes paid in the overseas jurisdiction against each head of income aswell. If the tax paid in overseas jurisdiction is in excess to the tax chargeable in resident country, itis ignored and no credit is given for the excess tax paid.

Here the exemption method has been i llustrated under different two assumptions on the basis of

Case study:

two different tax rates prevail ing in the resident country:(Amount in Rs.)

Particulars Tax @ 30 % in Tax @ 10 % in source Countr y source Country

Full Ordinary Full OrdinaryCredit Credit Credit Credit

Income in resident country for Tax purposeResident country income 1,00,000 1,00,000 1,00,000 1,00,000Source country income 25,000 25,000 25,000 25,000Net Income considered for tax rate purpose 1,25,000 1,25,000 1,25,000 1,25,000Total Tax calculatedTax rate in resident Country (b) 20% 20% 20% 20%Tax in resident country 25,000 25,000 25,000 25,000Tax in Source country 7,500 7,500 2,500 2,500Tax Credit Available 7,500 5,000 2,500 2,500Tax payable in country R after relief/tax credit 17,500 20,000 22,500 22,500

4. Tax Spar ing Credit Method

This is the only method which grants a tax credit in the resident country for the amount of tax that wouldhave been payable into the overseas jurisdiction. This method comes into play when the tax incentivesoffered by a particular overseas jurisdiction are deemed to have been paid as a foreign tax for thepurpose of computing and granting foreign tax credit in the resident country.



Many Indian tax treaties contain tax sparing clauses which are now being renegotiated to eliminatetreaty abuse by structuring transactions.

(Amount in Rs.)Case study:

Particulars Abbrevi- Tax Taxations sparing – sparing –

Absent PresentAssumptions Amount Amount

in Rs. in Rs.

Income in State R (Residence Country) 80,000 80,000Income in State S (Source Country) 20,000 20,000Aggregate taxable income in State R 1,00,000 1,00,000Tax rate in State R 35% 35%Tax rate in State S (exempted 30%) - normal rate - special rate 30%0% 30%0%WorkingsTax payable in State R (A) 35,000 35,000Tax payable in State S (B) - -Tax credit (tax charged in State S) (C) - -Tax credit (tax exempted in State S) (20,000 * 30%) (D) - 6,000Total tax credit (C) + (D) (E) - 6,000Total tax after relief – (A) – (E) (F) 35,000 29,000

FTC – Indian Per spective:

Computation of FTC with respect to doubly taxed income is always a contentious issue. In absence of well-defined rules with respect to framework/manner for granting FTC in India it has resulted into diversifiedpractices and major controversial issues, some of them have been depicted here as below:

1. If the company in India is enjoying exemption under section 10 and earning foreign income, whethersuch company can claim foreign tax credit in India was a controversy.

2. When the company is claiming complete deduction from the total income as per income tax law, thenwhether such company can claim foreign tax credit in India was a controversy.

3. If the tax has not been paid in the foreign country, then whether credit can be claimed of such payableforeign tax in India.

4. There may be a foreign income which may not be considered as an income as per domestic tax laws,then in such case whether such assessee can claim credit of such tax paid in foreign on such foreignincome.

5. It may be possible that in foreign the assessee is l iable to pay tax on the foreign income to both thecentral as well as state government. Here the question arises that whether such assessee is eligible toclaim credit of the tax paid both to the central government as well as state government.

There are couple of judicial precedent which has attempted to clarify the issue of FTC in India. To provide

I ntroduction to FTC Rules:

respite from this, the Finance Act 2015, vide amendment to section 295 of the Act, empowered CentralBoard of Direct Taxes(‘CBDT’)to frame rules regarding ‘procedure for granting relief or deduction of anyforeign tax paid against the Indian tax payable.’ Accordingly, the CBDT has notified on June 27, 2016 theForeign Tax Credit Rules, 2016(‘Rules’) which provide clarity on the mechanism of obtaining foreign taxcredit in India, of foreign taxes paid.



Applicabil ity of the Rules:

· The rules shall come into force .from 1 April 2017st

· Available only resident for the amount of .foreign taxes paid by him in a foreign country

· Credit is available only if or assessed to tax inincome cor responding to the taxes is offered for taxesIndia dur ing the year in which the credit is claimed.

· In the cases where the income for which the foreign taxes paid or deducted is offered to taxes for morethan one year, the credit will be given across the years in the same propor tion to which the income isoffered to tax in India.

Detailed Interpretation of the Notified Rules:

Rule No. Particulars Notified Rules(I nterpretation)

128 (1) Allowance of FTC An assessee can claim foreign tax credit in a year in which hehas offered his foreign income in India.

In case, the assessee doesn’t offer his foreign income inane strokebut offers partially in more than one year than FTC is to be claimedin the proportion of the income offered in the respective year.

128 (2) Meaning of‘Foreign Tax’

The foreign tax is defined to mean:a) Where any agreement for avoidance of double taxation

avoidance agreement (‘DTAA’) in terms of Section 90 or 90Aof the Income-tax Act, 1961 (‘the Act’) :-Tax as covered underthe respective DTAA.

b) In respect of any other country/ specified territory outside India:-The tax payable under the law in force in that country orspecified ter r itor y in the nature of Income-tax referred to inclause (iv) of the Explanation to Section 91 of the Act.

128 (3) Eligibili ty for The FTC can be claimed claiming FTC but

against the amount of income tax,surcharge and cess not in respect of any sum payable byway of interest, fee or penalty

128 (4) Credit in respect of The Notified Rules now disputed foreign tax for the year in which the income is offered

enable taxpayer s to claim credit ofdisputed foreign taxto tax or assessed to tax, within six months from the end of themonth in which the dispute is finally settled, provided followingdocuments are furnished:· Evidence of settlement of dispute (e.g. tax orders etc.);· Evidence to the effect that the l iabili ty for payment of disputed

FTC has been discharged and· Undertaking that no refund in respect of such amount has directly

or indirectly been claimed and shall be claimed.

128 (5) Computation of FTC The computation of FTC shall be done separately for each sourceof income and given effect to in the following manner:

i. The credit shall be the lower of the tax payable under theAct and the foreign tax paidon such income on such income;



ii. The credit shall be determined by conversion of the cur rencyof payment of foreign tax at the telegraphic tr ansfer buyingrate on the date on which such tax has been paid ordeducted· In case foreign tax paid exceeds the amount of tax payable

in accordance with the provisions of DTAA, then, such while computing FTC.excess shall be ignored

128 (6) Allowance of FTC FTC shall also be minimum alternate tax ( ) available against ‘MAT’against MAT/ AMT / Alternate minimum Tax ( ) provisions applicable to‘AMT’liabili ty companies and other entities under the Act.

128 (7) Computation of FTC, Any over FTCexcess of FTC eligible against MAT/ AMTin case tax is paid available under the normal tax provisions, will under MAT / AMTprovisions

not be entitled forcar ry for ward

128 (8) Documentation for No FTC shall be allowed unless the following documents areclaiming credit of furnished by the taxpayer:foreign taxes (i) a statement of income and amount of foreign tax deducted or

paid on such income in prescribed form i.e.(notified);

Form no 67

(i i) Certificate or statement specifying the nature of income andthe amount of tax deducted ther ef rom or paid by thetaxpayer:a) From foreign tax authorities, orb)From the person, responsible for deduction of such tax; orc) Self-attested by the taxpayer. If the certificate / statement is

self-attested, then, it shall be accompanied by· An acknowledgement of online payment or a bank counter

foil or challan for payment of tax; or· Proof of deduction where the tax has been deducted.

128 (9) Due date for To be furnished submitting the of the

on or before the due date specified forfurnishing the return of income under Section 139(1)

prescribed form Act, in the manner specified for furnishing such return of income(i.e. Form no 67)

128 (10) Carry backward of loss in a case where the carryForm no 67 shall also be furnishedresulting in refund of backward of loss of the current year results in refund of foreignforeign tax in home tax for which credit has been claimed in any earlier previous yearcountry or years.

FTC in India context is becoming more critical and important determinant factor to arrive group tax rate inConclusion

cross border business horizons. Especially with Indian corporate going global by expanding its businesspresence across border, the rules notified are a positive step and gives certain clarity on the foreign tax crediteligibility estimate its . While it is a l ight of hope to the corporate to family global tax l iabili ty with somecertainty, let’s hope that issues untouched and those crop up out of the new rules wil l be addressed in the duecourse by necessary amendments to ensure a batter visibil ity of tax l iabili ty on global operation.

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Power to Remand Case:

In absence of any pleadings for remand before HighCourt or first appellate court, matter cannot bedemanded to lower court. Where the parties toappeal never complained at any stage ofproceedings that trial of suit was unsatisfactoryresulting in prejudice, under such circumstancesremand cannot be made. If High Court did not framesubstantial question of law as to remanding matterwhile admitting second appeal , then it cannotexercise power to remand the matter. Party seekingthe remand must make out case under R.23 orR.23A o R.25 of Or. 41 CPC. While remandingthe matter, appellate court needs to assign its reasonfor such remand. In absence of any pleadingsregarding remand or where party fails to state as towhy remand is justified under R.23 or R.23A oR.25 of Or. 41 CPC.

[Syeda Rahimunnisa Vs. Malan Bi (Dead) by LegalRepresentatives and another (2016) (10 SCC 315)]

‘Quest ion of l aw’ and ‘Substant ialquestion of law’ :

To consti tute question of law, there must bepleadings regarding question of law involved inmatter. Such legal question should emerge fromsubstantial findings of fact recorded by courts offact. It must be necessary to decide that question oflaw for just and proper decision of the case.Substantial question of law means question of lawhaving substance, essential, real, of sound worth,important or considerable. Fairly arguable questionof law, where there is room for difference ofopinion on it or where court thought it necessary todeal with that question at some length and discussalternative views, then such question would besubstantial question of law. Question of law mustbe debatable and not sly previou settled by law ofland or a binding precedent and it must havematerial bearing on decision of case, if answeredeither way in so far as rights of parties concerned.

Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

20 It however does not mean application of settledlegal principles. Substantial question of law onwhich second appeal shall be heard need notnecessarily be substantial question of law of generalimportance.Tests for determination whether a question of lawis substantial or not is(i) whether it is of general importance(ii) whether it is directly and substantially affects

rights of parties and if so, whether it is eitheran open question not being finally settled byhighest court or is not free from difficulty orcal l s for al ternati ve views. However,application of principles settled by highest courtor the general principles would not amount tosubstantial question of law.

Whether question of law is substantial or notdepends upon the facts and circumstances of eachcase. Need for striking judicious balance betweenindispensable obligation to do justice at all stagesand impelling necessity to avoid prolongation ofli tigation should be of paramount consideration.[Syeda RahimunnisaVs. Malan Bi (Dead) by LegalRepresentatives and another (2016) (10 SCC 315)]

Section 138-Negotiable Instruments Act,1881-dishonor of post-dated cheque:

The crucial question to determine applicabil ity ofsection 138 of the Act is whether the chequerepresents discharge of existing and enforceable debtor l iability or whether it represents advance paymentwithout there being subsisting debt or l iabili ty. Weare of the view that the question whether a postdatedcheque is for ‘discharge of debt or liability’ dependson the nature of the transaction. If on the date of thech lia oreque, bili ty debt exists or the amount hasbecome legally recoverable, the section is attractedand not otherwise.

[Sampelly Satyanarayana Rao Vs. IndianRenewable Energy Development Agency Ltd.

(2016) (10 SCC 458)]

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2122



Payment of Bonus : Sec. 36(1)(i i), Sec.43B(b) and Sec. 40A(9)Shasun Chemicals And Dr ugs L td. v/s.CIT ) (2016 388 ITR 1 (SC)

Payment of Bonus and Sec. 36(1)(i i), Sec. 43B(6)and Sec. 40A(9). How to be interpreted?

Under section 36(1)(ii) of the Income Tax Act, 1961Held:

expenditure incurred on account of payment ofbonus to employees i s allowable as businessexpenditure. Section 43B, however, mandates thatcertain deductions would be allowed only on actualpayment. Section 40A(9) deals with deductions inrespect of the amount paid by the assessee as anemployer towards the setting up or formation of oras contribution to, any fund, trust, company. etc.The condition is that such sum has to be paid forthe purpose and to the extent provided by or underclause (i i) or clause (iva) or (v) of sub-section (1)of section 36. However, the payment of bonus isnot covered by any of the clauses of sub-section(1) of section 36 but is allowable as deduction underclause (ii) of sub section (1) of section 36. Therefore,section 40A (9) has no application. The provisionsof section 43B are also not applicable in as muchas clause (b) of section 43B refers to sums payableby way of contribution to any provident fund orsuperannuation fund or gratuity fund or any otherfund for the welfare of the employees. Thus, thisprovision also does not mention bonus. Section 36enumerates various kinds of expenses which areallowable as deduction whi le computing thebusiness income under section 28 of the Act. Theamount paid by way of bonus i s one suchexpenditure which is allowable under clause (ii) ofsub section (1) of section 36.

That there was no dispute that the amountrepresenting bonus was paid by the assessee to itsemployees within the stipulated time. The embargospecified under section 43B or section 40A(9) ofthe Act would not come in the way of the assessee.

[email protected]. C. R. Sharedalal

Therefore, the High Court was wrong indisallowing this expenditure as deduction whilecomputing the business income of the assessee andthe decision of the Tribunal was correct.

Duty to pass a reasoned orderCIT v/s. Banarasi Sweets P. Ltd.(2016) 387 ITR 172 (P & H)

Issue :

Held :

Why it is necessary to pass a reasoned order?

There is a need for passing a well reasoned orderafter examining the entire evidence as is expected ofa administrative , Quasi –Judicial or judicial decision.Hon. High Court has l isted out the duties of a Tribunalgiving 15 points for guidance and reasons why anor der should be reasoned order. Hon. High Courthas listed fifteen points enumerating the requirementto pass a reasoned order.

Note: Hon High Court has listed fifteen points (a)to (o) in the decision, giving the guidance.

Sec. 263 Erroneous and prejudicial tothe interests of the Revenue.CIT & Anr. v/s. Saravana Developers(2016) 289 CTR 550 (Kar)

Issue :For the purpose of Sec. 263, how the words“erroneous and prejudicial to the interests of therevenue” are to be interpreted?

The CIT proceeded to initiate proceedings underHeld :

S. 263 only on the ground that the AO has notassigned any reasons for accepting the valuationof the work in progress declared by the assessee.As per the materials placed before the Tribunal inthe records pertaining to the assessment year inquestion, a detailed examination is made by theTribunal. Tribunal is of the view that the AO hasappl ied his mind before accepting the figuredeclared by the assessee in the work in progressreport. Such an order cannot be held to be erroneous

[email protected]

From the Courts

CA. Jayesh C. Sharedalal

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and prejudicial to the interests of the Revenue. It isnot a case of ‘lack of inquiry’. Further inquiryordered by the CIT would amount to fishing/rowinginquiry in the matter already concluded.

Notice u/s 158 BC in search case whenno incr iminating mater ial found :Dr. Gautam Sen v/s. Chief CIT and Ors.(2016 289 CTR ) 478 (Bom)

Issue:Can assessment proceedings be taken when noincriminating material is found during searchproceedings?

From the appraisal report also, it is clear as day lightHeld :

that no incriminating documents were found duringthe course of search nor was it found that the assesseewas in any manner involved in the bank account withhis name in the bank. Thus, it appears that theRevenue took search and seizure proceeding inrespect of the assessee on account of mistakenidentity. In any case the appraisal report wouldin t dicate tha no notice under S. 158BC could beissued to the assessee as the condition precedent issuenot ice under S. 158BC. Viz. undisclosed incomefound during the search proceedings, is not satisfied.

Action on the part of the Revenue to issue theimpugned notice ignoring the appraisal report ishighly deplorable. We live in a county governedby laws. The officers of the I.T. Department areobliged to proceed in accordance with the statutoryprovisions and not on their whim and fancy. Theofficers hold power in trust and must ensure thatno citizen is harassed by sending him notices, whenon the basis on its own record, such notices are notsustainable. The IT Department would adopt astandard operating procedure which would providefor appropriate safeguards before issuing noticesunder Chapter XIV-B. This alone would ensure thatofficers of the Revenue act in terms of the mandateprovided in the Act.

Counsel for the Revenue informed that the Revenueseeks to press the impugned notice and seekdismissal of the present petition. In the above view,this is the fit case where costs should be awardedto the assessee. The Revenue i.e. the jurisdictionalChief CIT is directed to pay the costs of Rs. 20,000/- to the assessee within four weeks.

From the Cour ts

Interpretation of StatuesIVRCL-JL (JV) v/s. Asstt. CIT(2016) 386 ITR 564 (T & AP)

Issue :

Held :

How the Rules and Provisos are to be interpreted?

It is settled law that Rules made under the Act shouldbe interpreted in conformity with the provisions ofthe Act.

It is a fundamental rule of construction that a‘Proviso’ must be considered in relation to theprincipal matter to which it stands as a proviso. Itis to be construed harmoniously with the mainenactment.

Validity of Notice u/s 271(1)(c)CTR v/s. SSA’s Emerald MeadowsSLP (C) No. 23272 of 2016386 ITR Supreme Court Reporter @P13

Issue :

When notice is not specific, whether the same isvalid?

Hon. Supreme Court in the above case hasHeld :

dismissed the special leave petition against thejudgmen of t Karnataka High Court , holding thatthe notice issued by Assessing Officer u/s 274 readwith section 271(1)(c) of the I.T. Act, 1961 wasbad in law as it did not specify under which l imb ofsection 271(1)(c) the penalty proceedings had beeninitiated i.e. whether for concealment of income orfor furnishing inaccurate particular of income.

Re-opening : Reasons to be recordedand reference to the mater ials that formbasis of reasons.Agya Ram v/s. CIT (2016) 386 ITR 545(Delhi)

IssueNecessity of recording reasons and reference to thematerials that form the basis of reasons.

Although the Assessing Officer may not have freshHeld :

tangible material to form reasons to believe thatincome has escaped assessment, he should have, after

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107


examining the returns and the documentsaccompanying the returns, set out at least, the primafa lievecie, reasons for arriving at the reason to bethat income has escaped assessment for theassessment year in question. The requirement of thelaw is that reasons, even prima facie, and notconclusions, needed to be recorded by the AssessingOfficer for reopening the assessments. Reference hasto be made to the materials that form the basis ofsuch reasons even if such materials are not fresh onesbut already form part of the record. The reasonsrecorded by the Assessing Officer to believe thatincome had escaped assessment should have a linkwith an objective fact in the form of information ormaterials on record to reopen an assessment.

Jur isprudence : Binding nature of HighCour t and Supreme Cour t decisions :K air a Dist. Co.Op. M il k Producer sUnion v/s. Dy. CIT(2016) 386 ITR 633 (Guj )

Issue :

What is the effect of High Court and Supreme Courtdecisions on the lower authorities?

The law laid down by the High Court must beHeld :

followed by all authorities and subordinate Tribunaland they cannot ignore it either in ini tiatingproceedings or deciding the rights involved in sucha proceeding. If in spite of the earlier exposition oflaw by the High Court having been pointed outand attention being pointedly drawn to that legalposition, proceedings are initiated, it must be heldto be a wil lful disregard of the law laid down bythe High Court and would amount to civil contemptas defined in section 2(b) of the Contempt of CourtsAct, 1971.

Power s of Commissioner of Income Taxu/s 264 and Benefit to assessee.Vijay Gupta v/s. CIT (2016) 386 ITR643 (Delhi)

Issue :Whether powers u/s 264 given to the CIT can beused for the benefit of the assessee?

The powers conferred under section 264 of theHeld :

Income tax Act, 1961 are very wide. The

Commissioner is bound to apply his mind to thequestion whether the assessee was taxable on thatincome. Since section 264 uses the expression “anyother”, it would imply that the section does not limitthe power to correct errors committed by thesubordinate authorities but could even be exercisedwhere errors are committed by the assessee. Thereis nothing in section 264 which places anyrestriction on the Commissioner’s revisional powerto give relief to the assessee in a case where theassessee detects mistakes because of which he isover assessed after the assessment was completed.When the substantive law confers a benefit on theassessee under a statue, it cannot be taken away bythe adjudicatory authority on mere technicalities.

Sear ch and effect on thi rd per son :Pr incipal CI T v/s. Nikk i Dr ugs andChemicals P. L td.(2016) 386 ITR 680 (Delhi)

Issue :How and to what extent the search on assessee,has effect on the third person and what is the dutyof the Search ITO?

It was necessary for the Assessing Officer of theHeld :

person in respect of whom search was conductedto record his satisfaction that the specified seizeddocuments belonged to the assessee to initiateproceedings under section 153C of the Act. TheDepartment failed to confirm whether such note wasprepared initiation of the proceeding prior to the sunder section 153C of the Act and also failed tocontrovert the contention of the assessee that suchnote was not disclosed despite its request. Moreover,the documents seized could not be considered tobe belonging to the assessee.

Since the Assessing Officer of the person in respectof whom search was conducted did not record hissatisfaction that the specified seized documentsbelonged to the assessee, the ini ti ation ofproceedings under section 153C of the Act, inrespect of the assessee was without jurisdiction andhence the proceedings were not valid.

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From the Cour ts

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Uniphos Environtrocnic Pvt. L td. Vs.DCI T CPC- TDS [2017] 79taxmann.com 75 (Ahmedabad)Assessment Year : 2013-14 Or der Dated:6 Feb, th 2017

Basic FactsThe assessee has received legal services from a lawfirm havingprincipal place of business at Germany.The assessee had in accordance with article 12 -Fee for technical services of DTAA between Indiaand Germanythe assessee had deducted TDS @10%. The AO held that the assessee had deductedTDS at lower rate of 10% instead of 20.6%. Onappeal, the Ld. CIT(A) has rejected the appeal ofthe assessee. The assessee preferred an appealbefore the IT T.A

IssueWhether provisions of section 206AA could beinvoked when tax had been deducted on fee forlegal services to a German company on strengthof beneficial pro AA?visions of DT

HeldThe Hon’ble ITAT held that it is only elementarythat, under the scheme of the Income Tax Act 1961-as set out under section 90(2) of the Act, theprovisions of the applicable tax treaties override theprovisions of the Income Tax Act 1961- exceptwhen the provisions of the Act are more beneficialto the assessee. The provisions of the applicabletax treaty, in the present case, prescribe the tax rate@ 10%. This rate of 10% is applicable on the relatedincome whether or not the assessee has obtainedthe permanent account number. In effect, therefore,even when a foreign entity does not obtain PAN inIndia, the applicable tax rate is 10% in this case.Section 206AA, which provides a higher taxburden- i.e. taxabili ty @ 20% in the event of foreignentity not obtaining the permanent account numberin India, therefore, cannot be pressed into service,

as has been done in the course of processing ofreturn under section 200A. To that extent, shortdeduction of tax at source demand, raised in thecourse of processing of TDS return under section200A, is unsustainable in law. Accordingly theyquashed short deduction of tax at source demand.And since the grievance of the assessee was justified,it was accepted.

Sun Pharmaceuticals Industr ies Ltd. Vs.DCI T [2017] I TA No. 360/Ahd/2017(Ahmedabad)Assessment Year : 2012-13 Or der Dated:14th March, 2017

Basic FactsThe assessee sought for a stay on collection/recoveryof disputed tax and income tax demands in thematter of assessment under section 143(3) r.w.s.144C of the Income Tax Act, 1961. The AOrejected the stay petition of the assessee and askedto pay the demand in instalments. The assessee,without avail ing the opportunities available to it byway of appeal to the higher authorities, i.e. Add.CIT and Jurisdictional Pr.CIT, fi led the stay petitionbefore the Hon’ble ITAT. The assessee submittedthat since it was fag end of the financial year, therewas considerable pressure on the Revenue toachieve their annual revenue collection targets andthus approaching all the administrative authoritieswas not practical.

IssueWhether assessee was cor r ect i n dir ectl yapproaching the ITAT without exhaustingalternative remedies available to him?

HeldThe Tribunal found merits in the objection raisedby Department, as also in the apprehensions raisedby the assessee. According to the Tribunal on aprocedural note, the assessee should indeed haveexhausted all the alternate remedies available to

[email protected] [email protected]. Yogesh G. Shah CA. Aparna Parelkar

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them. But they also observed that it was harshreality that sometime, particularly in end of the year,the income tax authorities behave in such a highhanded manner so as to, in effect, render the rightto seek remedies against recovery of such demandsnugatory and infructuous. If no time, or very li ttletime, is allowed to the assessee to seek remediesagainst any coercive action to recover the disputeddemands, the assessee’s right to approach thetribunal wil l indeed become meaningless. Theapprehensions raised by the assessee are also quitein tune with the ground realities.

In this background the Hon’ble ITAT held that abalance indeed needs to be struck betweenprocedural requirements to be followed by theassessee and substantive legal rights of the assessee.The Hon’ble ITAT directed the assessee to approachthe Pr. CIT within three working days of this orderbeing pronounced in the open court, and direct thePr. CIT to consider the request of the assessee in ajudicious manner as early as possible, after givingthe assessee a fair opportunity of hearing and byway of a speaking order. The ITAT also directedthe AO to not take any coercive action for collectionor recovery of the demandstil l one week from thedate on which the order on such a stay petitioniffi led, is communicated to the assessee. The ITATrestored the matter to the file of Pr. CIT.

ITO (Intl. Taxation) Vs. Cadila HealthCare Ltd. [2017] 78 taxmann.com 330(Ahmedabad)Assessment Year : 2008-09 Or der Dated:6 Feb, th 2017

Basic FactsThe assessee had made remittance for technicalconsultancy and professional services withoutwithholdin ection 195 of theact.g tax in terms of sThe AO passed order holding that payments madeby the assessee were in the nature of fees fortechnical services within the meaning of section 9(1)(vii) the of Act. The AO held that the paymentmade to the foreign parties were taxable in Indiawithin the language of the DTAA with USAandCanada as the services were made available inthe form of report onanalytical study as per theagreements and the services provided by the

Belgium parties were fees for technicalservices asper article 12(3)(b) of the Belgium DTAA.Therefore, the AO concluded that assessee wasliable to pay tax on the entire amount remitted. Onappeal, the CIT(A) held in favour of the assesseethat the payments did not fall within the purviewof included services as per India – US & IndiaCanada treaty and hencethere was no liabil ity onthe assessee to deduct TDS u/s. 195. In respect ofthe Belgium Treaty the CIT(A) upheld theassessee’s contention that in view of “MostFavoured Nation” (MFN) clause the restrictedmeaning for included services as per India USAand India Canada Treaty needs to be applied to theIndia Belgium treaty and according to which sinceno technical knowledge is made available by theBelgium firms the payment to them cannot beconsidered as fees for technical services. Aggrievedby the order of CIT(A), revenue is in appeal.

IssueWhether MFN clause in DTAA between Indiaand Belgium, language of ar ticle 12 of DTAAbetween I ndia and USA would apply tor emit tances made by assessee to Belgiancompany?

HeldThe Hon’ble ITAT held that the servicesprovidedby non-resident did not involve any transfer oftechnology. The ITAT held that non-resident partieshave no PE in India and since the non-residentparties did not ‘make available’ any technicalknowledge, Article 12(4)(b) of the DTAAs withUSA and Canada is not applicable. Further, theITAT held that the AO failed to prove that theBelgiumnon-resident parties have made availableany technical knowledge orknow-how to theassessee. Also, the ITAT considered the findingsof the CIT(A) and held that because of the MostFavoured Nation clause,the scope of fees fortechnical services under the India- Canada DTAAand the India-USA DTAA was more restrictedthanthat under India-Belgium DTAA, therefore, thelanguage of article 12of the aforesaid two treatiesshal l apply to the DTAA between IndiaandBelgium. In view of the above, the ITAT upheldthe findings of the CIT(A).

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Shapoor j i Pallonj i & Co. L td. Vs. DCIT79 Taxmann.com 39(Mumbai)Assessment Year : 2011-12 Or der Dated:3rd March 2017

Basic FactsThe assessee during the concerned year hascomputed the disallowance u/s 14A r.w.r. 8D(2)(ii)and 14 r.w.r. 8D(2)(i i i) and made a suo-motodisallowance of Rs. 1.10 crores and Rs. 1 lakhsrespectively. The AO vide his assessment orderdisallowed Rs. 60 crores u/s 14A r.w.r. 8D(2)(ii)and a consequent disallowance of Rs. 4.6 lakhs u/s 14A r.w.r. 8D(2)(i ii). The assessee contended thatthe own funds substantially covers the investmentmade by the assessee as per the position settled inlaw. Further, the method of calculation followedby the assessee has to be accepted for makingdisallowance u/s 14A of the Act as has beenaccepted by the Revenue in the past several years,thus, rule of consistency requires that similar viewshould be taken in the present year also.

However, i nstead of fol l owing the rule ofconsistency, the Ld. Commissioner of Income Tax(Appeal) enhanced the disallowance under Rule-8D(2)(ii) for an amount of Rs.60,04,84,033/-, whichis under challenge.

IssueWhether Rule 8D of 1962 Rules is not attractedautomatically to an assessee who earns exemptincome, r ather, in a case, where AssessingOfficer after examination of books of accountunder section 14A(2), records his satisfactionthat disallowance or ‘nil’ disallowance made byassessee is found to be unsati sfactor y, he isauthor ized to compute amount to be disallowedunder r ule 8D of 1962 Rules?

Held

Under sub-section (2) of Section 14A of the Act, theAO is required to examine the accounts of theassessee and only when he is not satisfied with thecorrectness of the claim of the assessee in respect ofexpenditure in relation to exempt income, the AOcan determine the amount of expenditure, whichshould be disallowed in accordance with suchmethod as prescribed i.e. Rule-8D of the Rules,

therefore, the AO at the first instance must examinethe disallowance made by the assessee or the claimof the assessee that no expenditure was incurred toearn the exempt income. If and only if the AO is notsatisfied on the count after making reference to theaccounts only then he is entitled to adopt the methodas prescribed under Rule-8D of the Rules, thus, Rule-8D is not attracted and applicable in a situation,wh edere, the assessee has voluntari ly comput thedisallowance as per Rule-8D of the Rules.

The Tribunal upheld the assessee’s contention thatsince the appellant’s claim was accepted in theearlier years, the same should be accepted in theyear under consideration also since the departmenthas not brought on record any new facts, the tribunaldirected the AO to follow the decisions of earl ieryears. As far as disallowanceas per Rule 8D(iii) wasconcerned the tribunal found that as against assesseedisallowance of Rs.1 lakh, the tribunal had upheldthe disallowance of Rs.10 lacs. The Tribunalfollo AOwing the rule of consistency directed the to consider disallowance as pre Rule 8D(ii i) atRs.10 lakhs.

Cairn UK Holdings L imited vs. DCIT79 taxmann.com 128Assessment year 2007-08

Basic Facts:

Cai rn Energy Plc (‘CPLC’) i s a companyincorporated outside India and has 9 wholly-ownedsubsidiaries, which have oil and gas assets locatedin India. Assessee was incorporated in UK.Thereaf ter, i t entered into a share exchangeagreement with CPLC, wherein the entire issuedshare capital of the 9 subsidiaries of CPLC weretransferred to the Assessee in exchange for issuanceof the share capital of the Assessee. Thereafter,Cairn India Holdings Limi ted (‘CIHL’) wasincorporated in Jersey and post incorporation, itentered into a share exchange agreement with theAssessee. As per the said agreement, the Assesseetransferred all the shares of the 9 subsidiaries toCIHL in exchange for the issuance of shares ofCIHL. The said agreement was entered into infinancial year 2006-07.Further, vide a DebtConversion Agreement, the debt owed by Cairn

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Energy Hydrocarbons Limi ted to CPLC, wasassigned to the Assessee for a consideration in theform of shares of the Assessee. The said debt wasfurther assigned by the Assessee to CIHL for aconsideration in the form of shares of CIHL. Finally,Cairn India Limited (‘CIL’) was incorporated inIndia as a wholly-owned subsidiary of the Assessee.Vide a subscription and share purchase agreementand a share purchase deed, the entire share capitalof CIHL was transferred by the Assessee to CILduring the financial year 2006-07 for a considerationwhich was partly paid in cash and partly as sharesof CIL. Subsequently, CIL floated an initial publicoffer (‘IPO’) in the Indian capital market and theshares of CIL were l isted on various stockexchanges in India.The AO al leged that theimpugned transaction entered into by the Assesseeis governed by the provisions of section 9(1)(i) readwith explanation 5 of the Act as there is a transferof share or interest in a company which derives itsvalue substantially from assets located in India. TheAO therefore held that the gains from the sale ofshares of CIHL by the Assessee to CIL are shortterm capital gains chargeable to tax in India.

Issue:

Is the assessee liable to pay capital gain tax onshares in India?

Held:

The first contention taken by the Assessee was thatthe retrospective amendment to section 9(1)(i) ofthe Act by the Finance Act, 2012, is bad in law andultra vires. The Tribunal held that it is not the rightforum to challenge the validity of the provisions ofthe Act and thus rejected the contention of theAssessee.

On the argument of the Assessee that the transactionof transfer of shares by the Assessee to CIL is aninternal reorganization of the group and there is nochange in the controlling interest, the Tribunal heldthat part of the purchase price was paid by CILf rom the proceeds of IPO and the balanceconsideration was paid through issue of shares ofCIL to the Assessee. Therefore, the said transactionis not merely a business reorganization process.Further, the Tribunal was not convinced with the

argument of the Assessee that there is no increasein the wealth of the Assessee. The Tribunal heldthat the value of the holdings of the Assessee inCIL has been unlocked due to the IPO and value isderi ved by the book building process. On theargument that no real income accrued to theAssessee, the Tribunal looked into the financialstatements of the Assessee and held that theAssessee has earned substantial gain on sale ofshares and has also gained on account of taxes asthe said gains were not chargeable to tax in UKand thereby, the Assessee earned real income onaccount of sale of shares of CIHL to CIL.

On the additional ground raised by the Assesseethat for the purpose of taxabili ty of capital gains,the domestic law should be seen as it was inexistence on the date on which the India-UK taxtreaty was notified, the Tribunal held that provisionsof the tax treaty cannot make the domestic law staticwith respect to taxabili ty of a particular incomewhen unequivocally, both states have left it to thedomestic laws of the countries.

The Tribunal observed that since both the Assesseeand the AO had determined same amount of saleconsideration, it did not get into the controversy ofwhether the transaction is of exchange or sale. Thetax payer argued that the cost of acquisition shouldbe stepped up to the fair value of the shares of CIHLon the date of acquisition. Further, when any assetis transferred in lieu of another asset and no specificamount for consideration is agreed between theparties, in such cases while computing capital gainsfai r market value of the asset received inconsideration for the assets transferred, should beconsidered as full value of consideration. TheTribunal held that merely because the considerationis not stated in monetary terms in the agreement, itcannot be said that sale consideration and costcannot be determined. In this case, the price ofshares in each agreement was identified and theamount of acquisition recorded in the books ofaccount, also proves the amount paid for theacquisition of the shares. The Assessee furtherargued that as per the AO’s stand even the earl iertransfers were taxable and the cost of acquisitionfor the transfer of shares by the Assessee, will be

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the sale consideration determined in earl ier transfers.Since there is no difference of time between thetransfers, the cost of acquisition will be same as thesale consideration in the hands of the Assessee andthere wil l not be any capital gains. The Tribunaldid not agree with the contention of the Assessee.The Tribunal held that the provision of section 48,49 and 55(2) of the Act does not allow suchtreatment as it does not fall under any of the clauseswhich provide for considering cost to previousowner as cost to the Assessee.

Veer Gems Vs. ACIT 77 Taxmann.com127(Ahmedabad)Assessment Year : 2008-09 Or der Dated:3 January 2017

Basic FactsThe A ssessee was engaged in business ofmanufacture and saleof the polished diamonds.Itsold the diamonds both in domestic as well asexports. During AY 2008-09, the Assessee hadentered into certain international transactions withan entity named Blue Gems BVBA, Belgium. TheAssessee’s contention was that the said entity wasnot an associated enterprise of the Assessee as persection 92A, as the conditions specified in the saidsection were not satisfied. The AO however,contended that the said entity was an associatedenterprises, for the purposes of section 92A(2)(j)and made an adjustment of

INR 5.22 crores. On appeal, the CIT(A) even beforedeciding whether the assessee and Blue GemsBVBA could indeed be held to be ‘associatedenterprises’, proceeded to examine correctness ofthe ALP adjustment impugned in appeal before himon merits and held it to be unsustainable on the factsof the case.

Both the Assessee and Revenue have preferredappeal.

IssueWhether as long as provisions of one of clausesin section 92A(2) are not satisfied, even if anenterpr ise has a de facto participation in capital,management or control of other enterpr ise, twoenter pr ises cannot be said to be associatedenterpr ises?

Whether clause (j) of section 92A(2) requiresthat to be associated enterpr ise, both enterpr isesshould be controlled by an ‘individual’ or hisrelative?

Whether wher e assessee was a par tner shipconcern, it could not be said to be controlled byan ‘individual’ and thus, aforesaid clause (j )could not be invoked to hold assessee firm andBelgium enterpr ise run by relatives of par tnersassociated enterpr ise?

Held

The Hon’ble ITAT held that in order to invoke thetransfer pri cing provisions and deal with thedetermination of arm’s length price, it is absolutelyessential that the international transaction inquestion must be between the associated enterprises.

The Hon’ble ITAT specifically mentioned that thereis no merit in the approach adopted by theCommissioner (Appeals). The first thing that needsto be adjudicated upon is whether or not the assesseeand Blue Gems BVBA are associated enterprises.

Further, the Hon’ble ITAT held that the basic rulefor treating the enterprises as associated enterprisesis set out in section 92A(1). The il lustrations inwhich basic rule finds application are set out insection 92A(2). Section 92A(1) lays down the basicrule that in order to be treated as associatedenterprise one enterprise, in relation to anotherenterprise, participate, directly or indirectly, orthrough one or more intermediaries, ‘in themanagement or control or capital of the otherenterprise’ or when ‘one or more persons whoparticipate, directly or indirectly, or through one ormore intermediaries, in its management or controlor capital, are the same persons who participate,directly or indirectly, or through one or moreintermediaries, in the management or control orcapital of the other enterprise’. Section 92(A)(2)only provides illustrations of the cases in which suchan enterprise participates in management, capitalor control of another enterprise.

Section 92A(2) governs the operation of section92A(1) by controlling the definition of participation

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contd. to page 797


CA. Sanjay R. [email protected]

Unreported Judgements

In this issue we are giving full text of a decision byITAT, Ahmedabad Bench on the i ssue ofallowabili ty of Foreign Tax Credit in respect ofdividend and interest income earned outside Indiaand brought to tax in India. Also the Hon’bleTribunal discussed about the allowabili ty of portfoliohandling expenses for the portfolio managed by theoverseas mutual funds while calculating income ofthe assessee in India from such interest and dividendearned overseas. Observations of Hon’ble Tribunalin para 8 & 18 are worth noting.

We hope the readers would find the same useful.

In the Income Tax Appellate Tr ibunalAhmedabad “I” BENCH, Ahmedabad

[Cor am: Pr amod K AM and Rajpalumar Yadav JM]

ITA No.933/Ahd/2013Assessment year: 2009-10

22, Amar kadamb SocietyBhavin A Shah.........................… ......Appellant

Ramdev Nagar Road, Satelli teAhmedabad 380 015 [PAN: AYIPSS5534P]

Vs.

Assistant Commissioner of Income TaxCircle 14, Ahmedabad....................Respondent

Date of concluding the hearing : January 18 2017Date of pronouncing the order : March 29, 2017

O r d e r

Per Pr amod Kumar AM:

1. By way of this appeal, the assessee appellanthas challenged correctness of order dated 1stJanuary 2013 passed by the learned CIT(A),in the matter of assessment under section 143(3)of the Income Tax Act, 1961, for theassessment year 2009-10.

2. Ground no. 1 is general and it does not call forany specific adjudication. It is dismissed as such.

3. In ground no. 2, the appellant has raised thefollowing grievances:

2. The learned Commissioner of Income Tax(Appeals) erred in law andon facts inconfirming the disallowance of portfoliomanagementexpenses and interest charges(cal led as safeguarding charges)amounting to Rs.1,79,506 claimeddeductible under section 57 of the Act.

2.1 The learned Commissioner of Income Tax(Appeals) erred in law and on facts byholding that the portfolio managementexpenses and interest charges incurredhave no nexus with the overseas dividendand interest income.

Al ternatively and without prejudice toground number 2 and 2.1, the portfoliomanagement expenses and the interestcharges amounting to Rs.1,79,506 shouldhave been allowed as deductible expensesfrom the overseas capital gains incomeoffered to tax under the head”CapitalGains” by the learned CIT(A). The learnedCIT(A) failed toconsider this alternativeground taken before him.

4. The appellant is an individual, resident in India,and is in employment of JP Morgan India PvtLtd as Managing Director and Global head oftechnology research of the company. He hadentered into transactions for sale and purchaseof variousforeign securities and the incomearising from such transactions was offered totax as capital gains. These transactions are saidto have taken place through non discretionarytrading accounts maintained in this regard withthe portfolio managers i.e. Credit Suisse (Zurichand Singapore branch) and UBS (Singaporebranch). The assessee had also offered to taxincome from interest and dividend on the



sesecurities. During the relevant previous year,the assessee had incurred total managementexpenses of Rs 6,37,828 and he claimed adeduction, of 25% ofexpenses so incurred i.e.Rs 1,59,459, on account of , as portfol iomanagers termedit, ‘safeguarding expenses’and of Rs 20,046 on account of interest paid tothe port folio managers. It was also explainedthat since income from dividends and interestarising from these securities is duly offered totax, these expenses are admissible asdeductions. The Assessing Officer declined theclaim, and, while doing so, observed as follows:

“4. In the return of income the assessees hasclaimed expenses under section57 of theIT. Act amounting to Rs.1,79,506/-. Theassessee was asked to submit details andevidence of expenses claimed along withjustification forclaim. The assessee videsubmission dt. 20.12.2011 submi ttedcopy of advices issued by ‘Credit Suisse’towards safe custody charges forsecur i ti es.The expenses u/s.57 areallowable only if i t is laid out or expendedwholly and exclusively for the purposeof making or earning such income. Inthe assessee’s case the expenses claimedhas no connection/nexus with the incomeearned. The assessee has also notsubmitted any justification for thesame.In view of the same, expenses claimed u/s.57 amounting to Rs.1,79,506/- aredisal lowed and added to the totalincome.”

5. Aggrieved, assessee carried the matter in appealbefore the CIT(A). It was submitted by theassessee that entire expenses, on account of feespaid to portfolio managers, was deductible, asa measure of abundant caution, the assesseehas claimed only 25% of these expenses. Theassessee also furnished evidences of fees paidto the portfolio managers. However, when aremand report was called from the AssessingOfficer in respect of these submissions, theAssessing Officer is said tohave stated that“expenses were incurred for earning of income

but 25% of total expenses is hypothetical andon the higher side considering the nature oftransactions”. It was in this backdrop that theCIT(A) also rejected the claim of the assessee.His l ine of reasoning, for doing so, was asfollows:

‘6.3I have carefully perused the assessmentorder, the remand commentsand also thecounter comments offered by the appellant.The AO in theassessment order has pointedout that the expenses claimed must haveconnection or nexus with the income earned.Subsequently, in the remand proceedings,the AO, on the basis of letter filed from CreditSuisse, hasagreed that such expenses mighthave been incurred by the assessee.However, the basis of claim made by theassessee @ 25% of the total expenditure isnot explained. The assessee himself hasad mitted that he has claimed 25% of thetotal expenses being the expenses in relationto theincome earned by him. In this context,the narration of expenses by the CreditSuisse is notice worthy. The Credit Suissehas termed these expenses as’safeguardingexpenses’. The nexus or connection with theincome as pointedout by the AO remainedunanswered, even at the appellate stage. Iam of theview that mere certificate fromCredit Suisse will not entitle the appellanttomake a arbitrary claim of expenses @25% of the total amount paid.Accordingly,the action of the AO in making an additionof Rs.1,79,506/- isconfirmed.”

6. The assessee is aggrieved and is in furtherappeal before us.

7. We have heard the rival contentions, perusedthe material on record and duly considered factsof the case in the light of applicable legal position.

8. We find that there is no dispute, as evident fromthe stand taken by the Assessing Officer inremand report and as recorded by the CIT(A) inparagraph 6.2of his order, that “expenses wereincurred for earning of income but”, the objectionofthe Assessing Officer was that “25% of total

Unrepor ted Judgements


expenses is hypothetical and on thehigher sideconsidering the nature of transactions”. Once itis an undisputed positionthat the expenses werein recurred for earning of income, the me factth ghat theexpenses are hi or that the expensesare claimed only in part cannot be reasonenoughto ma ke the disallowance. We have noted thatthe related securities wereheld by Credit Suissean d ve ard UBS an that these entities ha ch gedthe assessee for “safekeeping ofsecurities… … and their administration”. Thecopies of invoices, asalso letter confirming thecharges, are filed before us, and we find noinfirmities inthese documents. The expenses soincurred by the assessee are in the nature ofexpenses incurred on portfolio manager. As theexpenses so incurred by theassessee admittedlyrelated to the safekeeping and administration ofsecurities inquestion, income from which hasbeen offered to tax by the assessee, we do notfi ndany reason todisallow the partial claim ofthe assessee to the extent of 25%, asclaimed, ofth exe penses so incurred by the assessee. TheAssessing Officer hasnot brought on record anymaterial to establish, or even indicate, that theclaim of 25%, or for that purpose even any partof these expenses, is inadmissible. If theexpensesare on the higher side, that does not imply theexpenses are fictitious or inadmissible. There isreasonable evidence of the expenses havingbeen incurred as copies of related bankdo on rdcumentation is placed reco before us.When the assessee is earning income fromforeign securities held by its portfolio managersab as road, and duly offering it to tax ‘incomefrom other sources’, the safekeeping andadministration fee, paid in respect of suchsecurities to its portfolio managers, cannot bede declined duction under section 57(iii). Thenexus between earning of dividend and interestincome and incurring of these expenses is clear,and since, inour opinion, these expenses areincurred for the purposes of earning incometaxable as ‘income from other sources’, thededuction for expenses is duly admissibleundersection 57(iii) of the Act. We, therefore,uphold the plea of the assessee. TheAssessing

Officer is, accordingly, directed to grantdeduction of Rs 1,79,506.

9. Ground no. 2 is thus allowed.

10. In ground no. 3, the assessee has raised thefollowing grievances:

3. The learned Commissioner of Income Tax(Appeals) erred in law andon facts indisallowing relief by way of tax credi tamounting toRs.3,72,698 claimeddeductible u/s 90 of the Act in respect ofthe dividend income earned outside India.

3.1. learn The ed Commissioner of Income Tax(Appea as on factsls) erred in law aswell in disallowing the relief by way of tax creditclaimedunder section 90 in accordancewith the DTAA between India and USA inrespect of the foreign taxes withheld fromthe overseas dividend income solely on theground that the evidences do not bear thename of the appellant and are not signedby appropriate person from Credit Suisse/issuing authority defying the evidentiaryvalue of the same. It is submitted that it beso held now and credit for Rs 3,72,698 asclaimed by the appellant be granted to him.

3.2. The learned Commissioner of Income Tax(Appeals) erred in law as well as on factsby accepting the overseas dividend incomefrom the evidences furnished by theappellant but not the figures of the foreigntaxes withheld from the same thereby onlypartly accepting the evidentiary value ofthe furnished statements.

3.3. Wi thout prejudice to the above, theappel lant contends that in case theevidences submitted are not perceived tobe authentic, the overseas dividend incomeshall also be reduced from the taxableincome of the appellant.

11. During the course of scrutiny assessmentproceedings, the Assessing Officer declined thetax credit claim of the assessee, in respect of taxof Rs 3,72,698 deducted from its dividendearnings in the United States, on the ground that



“relief will be available on actual payment madein the return of income filed in USA and taxpaidthereon” and that “tax credit cannot be given onsimply TDS deducted fromforeign dividendincome”. Aggrieved, assessee carried the matterin appeal before the CIT(A) but without anysuccess. It was explained by the assessee that heis‘resident’ in India for this assessment year, andthat even his income earned in USA is subjectto tax in his hands. There is thus double taxationof the US dividend income- in US as also inIndia, and the assessee is, therefore, entitled torelief from double taxation under article 25 ofIndia United States Double Taxation AvoidanceAgreement [(1991) 187 ITR (St) 102; Indo UStax treaty, in short]. None of thesesubmissions,however, impressed the learned CIT(A). Heconfirmed the action of the Assessing Officerand declined to interfere in the matter. He alsonoted that some of the evidences donot bear thename of the appellant, are not signed byresponsible persons from Credit Suisse or theauthority issuing these evidences. It was alsonoted that the taxes withheld in US work out toalmost 30% of the grossreceipts. The assesseeis not satisfied by the stand so taken by theCIT(A) as well, and is in further appeal beforeus.

12. We have heard the rival contentions, perusedthe material on record and duly considered factsof the case in the light of applicable legal position.

13. We find that, at page 59A of the paper-book,the assessee has given details of the dividendearnings from its foreign securities and the taxeswithheld from these earnings. As long as theassessee has shown all these incomes in hisincome offered to tax, the tax credits are alsobe granted in respect of the taxes with held inthe United States. As to the manner in whichtax credits are to be computed, we find guidancefrom the text of art. 25(2)(a) of the Indo-USDTAA which is as follows :

“Where a resident of India derives incomewhich, in accordance with theprovisionsof this Convention, may be taxed in theUni ted States, India shal l al l ow a

deduction from the income of that residentan amount equal to income-tax paid in theUnited States, whether directly or by wayof deduction. Such deduction shall howevernot exceed that part of income-tax (ascomputed before the deduction is given)which is attributable to the income whichis taxed in the United States”

14. So far as the rates at which dividend income ofresident of India can be brought to tax, inaccordance with Indo US tax treaty, we findguidan of the said ce from article10 tax treatywhich is as follows:

Ar ticle 10- Dividends

1. Dividends paid by a company which isa resident of a Contr acting State to aresident of the other Contracting Statemay be taxed in that other State.

2. However, such dividends may also betaxed in the Contr acting State of whichthe company paying the dividends is aresident, and accor ding to the laws ofthat State, but if the beneficial owner ofthe dividends is a resident of the otherContracting State, the tax so chargedshall not exceed :

(a) 15 per cent of the gross amount ofthe dividends if the beneficial owneris a company which owns at least10 per cent ofthe voting stock of thecompany paying the dividends;

(b) 25 per cent of the gross amount ofthe dividends in all other cases.

Sub-par agr aph (b) and not sub-paragr aph (a) shall apply in the casedividends paid by a Uni ted Statesperson which is a Regulated InvestmentCompany. Sub-par agraph (a) shall notapply to dividends paid by a UnitedStates per son which is a Real EstateInvestment Trust, and sub-paragr aph(b) shall only apply if the dividend isbenef iciall y owned by an individualholding a less than 10 per cent interest



in the Real Estate Investment Trust.This par agraph shall not affect thetaxation of the company in respect ofthe profits out of which the dividendsare paid.

3. The ter m “dividends” as used in thisArticle means income from shares orother r ights, not being debt -claims,participating in profits, income fromother cor por ate r ights which ar esubj ected t o the same taxat iontreatment as income from shares by thetaxation laws of the State of which thecompany making the distr ibution is ar esident ; and income f r omar r angements, i ncluding debtobl igat ions, car r ying the r ight toparticipate in profits, to the extent socharacter ized under the laws of theContracting which the income State in arises.

4. The provisions of paragraphs 1 and 2shall not apply if the beneficial ownerof the dividends, being a resident of aContracting State, car r ies on businessin the other Contracting State, of whichthe company paying the dividends is ar esident , t hr ough a per manentestabli shment si tuated ther ein, orper for ms in that other St ateindependent personal services from afixed base si tuated therein, and thedividends ar e att r ibutable to suchper manent establishment or fixed base.In such isions of case the prov Ar ticle 7(Business pr of it s) or Ar t i cle 15(Independent personal services), as thecase may be, shall apply.

5. Where a company which is a resident ofContr acting State der ives profits orincome from the other Contracting State,that other State may not impose any taxon the dividends paid by the companyexcept insofar as such dividends are paidto a resident of that other State or insofar

asthe holding in respect of which thedividends are paid is effectivelyconnectedwith a permanent establishment or afixed base situated in that other State,nor subject the company’s undistr ibutedpr ofi ts to a taxon the company’sundist r ibuted pr of its, even if thedividends paid or the undistr ibutedprofits consist wholly or par tly of profitsor income ar isingin such other State.

15. What fol lows from an analysis of theseprovisions of the Indo US tax treaty is this. Aslong as a person, resident in India in terms ofthe treaty provisions, has been taxed in respectof his dividend earning United States,s in the whether directly or by way of tax withholdings,in accordance with the provisions of article 10,the tax credit will be available to him, againsthis tax liabil i ty in India in respect of suchdividend income, subject to the condition thatsuch tax credit wil l not exceed the Indianincome tax liabil ity in respect of the income inquestion. As we deal with this aspect of thematter, it is also essential to bear in mind thefact that in order to avail the treaty benefits, i tis not sufficient that the assessee is a ‘resident’of India under the Income Tax Act. The assesseeis also required to satisfy the requirements ofArticle 4 for being termed as ‘resident of acontracting ate’, i.e. st India. In order to grantthe tax credit, therefore, the Assessing Officerhas to first examine whether a the assessee is resident of India under article 4 of the Indo UStax treaty, that amounts shown as dividends areactually in the nature of dividends, that US taxwi th holding i s in accordance with theprovisions of article 10, and, if that be so, granta foreign taxcredit for the amount of such taxwith or holding Indian tax l iabili ty in respectof the related income- whichever is less. In casethe US tax actually levied is in excess of therate specif ied under article 10, the amounteligible for tax credit will remain confined tothe amount computed on the basis of the rateprescribed under the IndoUS tax treaty.



17. The assessee has filed detailed paper-bookbefore us which has supporting evidences fortax with holding and the bank advices. Thesedetails were also fi led before the CIT(A), theCIT(A) called for a remand report on the samebut did not deal with the specifics of the matterbeyond making generalized observations to theeffect that “some” of these tax with holdingcertificates did not mention the name of theassessee or were not signed by responsiblepersons. These objections are too vague andtoo generalized. In any case, one of thingsnoticed during the hearing was that though theassessee has filed these details, there are someapparent in consistencies. We find, for example,that clearl y the aggregate of these taxwithholdings is much more than 25% of USdividend income, which, according to theprovisions of Indo US tax treaty, i s themaximum permissible tax withholding underarticle 10. When we pointed out the aboveinconsistency to the learned counsel for theassessee, learned counsel for the assessee didaccept that the tax credit claim is almost 30%of the amount of related dividend earnings, butsubmitted that the tax credit may be restrictedto 25% only.

18. The course of action suggested by the learnedcounsel does seem an easy option but it will notbe a judicially correct option. There is no scopeof sweeping generalizations while computingtax credit. The tax credit computation is to bedone on a case to case basis, dealing with thetax levied in the other contracting state (i.e.US)and the income in respect of which such tax islevied. As for 25% tax withholding from USdividend income, it is not the appl icablewi thholding rate but the maximum taxwithholding rate. It is, therefore, not essentialthat the entire US taxlevy in respect of dividendincome is @ 25% only. As a corollary to the thisposition, the actual admissible withholding underarticle 10 is bound to be an amount lower than25% because in some of the cases, the applicableUS tax rate could even be15%. These factorsapart, in the case before is, there are some tax

deductions atrates other than 15% and 25%. Forexample, in the case of Vanuguard, at page59Aof the paper-book filed before us, the taxwithholdings are @ 20%. The tax credit inrespect of this tax withholding- as also othersimilarly placed securities, therefore, cannot bemore than 20% of dividend income in any event,ev hoen though the basis of 20% tax with ldingis not at all clear. It is also not clear which are thecases inwhich tax withholding rate is 10% andin which cases the tax withholding rate is 25%.While computing the admissible tax credits, allthese aspects need to be examined includingwhether the characterization of income asdivi t taxdend is correct, so as to ensure correccredit computation. We are, therefore, notincl ined to accept the learned counsel’ssuggestion for restricting the tax credit to 25%of the dividend income, nor do we think that itis proper to examine all these evidences, in detail,for the first time at the stage of proceedingsbefore this Tribunal. In our considered view, allthese issues and evidences should be examinedproperly at the stage of theAssessing Officer inac e Actcordance with the scheme of th as setout above. In our considered view, the rightcourse of action wil l be to remit the matter to thefi le of theAssessing Officer with the directionsto compute the admissible tax credi t i nac obscordance with our ervations above. Theassessee is directed to furnish all the requisiteevidence before the Assessing Officer, and willalso be at l iberty to raisesuch legal and factualissues as he may be advised to. The AssessingOff icer wil l decide the matter a fresh inaccordance with the law, in the l ight of ourobservationsabove, by way of a speaking orderand after giving yet another opportunity ofhearing to the assessee.

19. Ground no. 3 is thus allowed for statisticalpurposes.

20. Ground no. 4 does not require any specificadjudication and is dismissed assuch.

21. In the result, the appeal is partly allowed in theterms indicated above.

❉ ❉ ❉



CA. Kaushik D. [email protected].

Controversies

Whether Interest paid on borrowed funds foracquir ing a Controlling Interest in a company

be allowed as deduction?

The allowance of deduction u/s 57(ii i) for interestpaid on loan availed for acquiring the controll inginterest by purchasing shares of the company ismatter under debate.

When loan is taken for making investment in shares

Issue:

of the company which results into acquiring of thecontroll ing interest of that company, whetherdeduction of interest paid on such loan would beallowed as per sec 57(i ii) of the Act?

It is submitted that the interest expenditure incurred

Proposition:

on loan taken for acquiring the shares to be allowedas deduction under sec 57(ii i) as the interest anddividend income earned against such expenditurewas chargeable to the tax. As per sec 57 of the Act,the income chargeable under the head ‘Income fromother Sources’ shall be computed after makingfollowing deductions; wherein sub-section (i i i)states that any other expenditure (not being anexpenditure of capital nature) laid out or expendedwholly and exclusively for the purpose of makingor earning such income would be al lowed asdeduction.

1. When the primary intention of acquiring the

View against the Proposition:

shares was having a control over the othercompany and not earning interest or dividendincome, the expenditure incurred for acquiringthe control would constitute to be of capitalnature and accordingly to be disallowed u/s57(ii i).

2. It is provided in sec 57(ii i) that ‘expenditurelaid out or expended wholly and exclusivelyfor the purpose of making or earning such

income’ would be allowed as deduction.However. in present case, the investment inshares was made to acquire the control alongwith earning interest income and thus theinvestment was not fully and exclusively forearning interest and dividend income.

Let me now refer to the decision of CIT Vs.Amrita R. Shah 238 [ITR] 777 (Bom). Theirlordship of Bombay high court decided that theinterest paid by the assesse in this case doesnot fall within the purview of Section 57(i ii) ofthe Act and hence, the same is not an allowablededuction in computation of the income of theassesse. Deduction under Section 57(i ii) isallowable only if an expenditure laid out orexpended wholly or exclusively for the purposeof making or earning the income referred to inthat section, i.e., “Income from Other Sources”.The object of the acquisition of shares beingacquisition of controll ing interest i n thecompany, the expenditure incurred on the loanobtained for that purpose could not be regardedas expenditure incurred wholly and exclusivelyfor the purpose of making or earning incomefrom other sources.

It is submitted that as the income arising is taxable

View in Favour of Proposition:

under the Act, the expenditure related to suchincome should be allowed as deduction.

The Supreme Court in the case of VodafoneInternational Holdings B.V. Vs. UOI, held that ifthe dividend income is taxable during the yearunder consideration, the interest is allowable asdeduction under section 57(ii i).

It was observed by the Hon’ble Supreme Court that:· Controlling interest forms an inalienable part of

the share itself and cannot be traded separatelyunless otherwise provided by the statue.



Contr over sies

· The argument that controll ing interest is anidentifiable or distinct capital asset independentof holding of shares, cannot be accepted

· It was inherently a contractual right and not aproperty right and cannot be considered as acapi tal asset unless the statue stipulatesotherwise.

· Acquisition of shares may carry the acquisitionof controll ing interest, which is purely acommercial concept and tax is levied on thetransaction, not its effect.

Further, the Bombay High Court in case of CITVs. Srishti Securities Pvt. Ltd. did not agree withtheir previous decision and held that the object ofthe loan was irrelevant and the interest on investmentwould be allowed as deduction.

Let me now refer to the decision of CIT Vs. SrishtiSecurities Pvt. Ltd. (2010) 321 ITR 498 (Bom).Their lordships of Bombay High Court held asunder:

“The learned tribunal addressed itsel f to thequestion, as to whether the assesse is entitled todeduction in respect of interest liabili ty either underSection 36(1)(i ii) or under Section 57(i ii) of theIncome Tax Act. Reliance was placed on thejudgment of this court in the case of Commissionerof Income Tax Vs. Lokhandwala ConstructionIndustries Ltd.

260 ITR 579 (Bom) for the proposition that whenthe assessee claims deduction of interest paid oncapital borrowed, all that the assesse has to show isthat the capital which was borrowed was used forthe business purpose in the relevant year of accountand it does not matter whether the capital wasborrowed or not to acquire revenue asset or capitalasset. The learned tribunal also relied on thejudgment of the Calcutta High Court in the case ofCIT Vs. Rajeeva Lochan Kanoria 208 ITR 616(Cal) where the Calcutta High Court took a viewthat under the provisions of Section 36(1)(iii) ofthe Income Tax Act, the only enquiry to be made iswhether the paym in respect ofent of interest was capital borrowed for the purpose of assessee’sbusiness or profession. Such amount borrowed, iffor the purpose of business of profession may be

uti lized for the purpose of acquisition of stock intrade or for the purpose of acquisition of capitalasset.

The learned court took a view that under Section36(1) is (ii i) there no bar for allowance of interestpaid in respect of capital borrowed which has beenuti lized for the purpose of acquisition of capitalassets. Considering this the learned I.T.A.T. heldthat if the funds are borrowed by an investmentcompany for making investment in shares whichmay be held as investment or as stock in trade orfor the purpose of controll ing interest in othercompanies, interest paid on such borrowed fundswil l be deductible u/s 36(1)(ii i) of the Income TaxAct.”

After recording this finding, it held that the interestexpenditure is allowable under Section 36(1)(ii i)and therefore, disallowance to the extent sustainedby the C.I.T.(A) was directed to be deleted.”

Following authorities have also taken the sameview:a) CIT Vs. Lokhandwala Construction inds Ltd

[2003] 260 ITR 579 (Bombay)b) India Cements Ltd. Vs. CIT [1996] 60 ITR 52

(SC)

Summation:

At the outset, it is submitted that the interestexpenditure is to be allowed as deduction and thereis no question of treating the same as capitalexpenditure.

In the case of Srishti Securities Pvt Ltd, the BombayHigh Court, rel ying on the decision ofLokhandwala Construction Inds Ltd Vs. CIT[2003] 260 ITR 579 (Bom) and the decision of IndiaCements Ltd Vs. CIT [ 1966] 60 ITR 52 (SC) heldthat the object of the Loan was irrelevant and theinterest which was disallowed to the extent ofinvestment would have to be allowed.

The decisions relied in the case of Srishti SecuritiesPvt Ltd were applicable to the facts of the presentcase since in those cases also the loan was takenfor acquiring the controlling interest in the company.In the present case also, the loan was taken foracquiring shares of the company and after acquiring


shares of the company, the taxpayer had gotcontrolling interest of the company.

In the decision of the Amitaben R. Shah theBombay High Court held that interest was notal lowable if the loan was taken for acquiringcontroll ing interest. However, when two viewswere possible then the view beneficial to thetaxpayer had to be considered as held by theSupreme Court in the case of Vegetable ProductsLtd [1973] 88 ITR 192 (SC)

In the case of Vodafone International Holdings B.V.the Supreme Court has observed that- Controll ing interest forms an inalienable part

of the share itsel f and cannot be tradedseparately unless otherwise provided by statue.

- Control is an interest arising from holding aparticular number of shares and cannot beseparately acquired or transferred.

- Controll ing interest was not an identifiable ordistinct capital asset independent of holding ofshares.

- It was inherently a contractual right and not aproperty right and cannot be considered a capitalasset unless statute stipulates otherwise.

- Acquisition of shares may carry the acquisitionof controll ing interest, which is purely acommercial concept and tax is levied on thetransaction, not on its effect.

- Controll ing interest which stood transferred toVodafone from HTI (BVI) Holdings Ltd.accompanied the CGP (Cayman Islandscompany) share and cannot be dissected so asto be treated as transfer of controlling interestof Mauritian entities and then that of Indianentities and ultimately that of Hutchison EssarLtd (The Indian Telecom Company).

- Thereafter, the Supreme Court held that capitalgain chargeable under section 45 and theircomputation is to be in accordance with theprovision hat follow section 45 s t and there isno notion of indirect transfer in section 45.

The ratio in case of Vodafone International HoldingsB.V. was applicable to facts of the present case sinceacquiring of controlling interest in the company doesnot bear any income or expenditure, to be assessedor not to be allowed

Since the interest was paid on borrowed funds foracquiring the shares of a company and the dividendincome was taxable during the last year underconsideration, the interest was allowable asdeduction under section 57(i ii) or under section36(1)(ii i) of the Act.

In present case the Tribunal relied on the decision

Our Comment:

of the Supreme Court in the case of Vodafone whereit was held that the controll ing interest forms aninalienable part of the share itself and it cannot betraded separately unless otherwise provided by thestatue. Accordingly, the Tribunal did not accept thecontention of the tax department that the mainpurpose for making investment was to acquirecontrolling interest in the company and not to earndividend. Consequently, the Tribunal held that theinterest, of a company is allowable as deductionunder section 57(ii i) or under section 36(1)(i ii) ofthe Act.

In the case of Off Shore India Ltd. Vs. DCIT [1996]59 ITD 652 (Cal), the Calcutta Tribunal held thatthe motive to acquire the controll ing interest of acompany by acquiring shares of such company bythe taxpayer was a wholly irrelevant considerationfor judging allowabil i ty of interest payment onborrowings under section 57(i i i ) of the Act.Accordingly, the interest paid by the taxpayer onborrowings for purchasing shares was allowableas deduction even though no dividend was receivedon those shares during the year under consideration.

In the case of Model Manufacturing Co. (P) LtdVs. CIT[1980] 122 ITR 767 (Cal), the CalcuttaHigh Court held that though ultimate motive of thetaxpayer might have been to acquire controll inginterest, yet immediate purpose for acquisition ofshares was to earn income from dividends thereofand therefore, the taxpayer was entitled to deductionunder section 57 of the Act. Further, the MumbaiTribunal in the case of Ultimate & Pigments LtdVs. ACIT (ITA no. 2775/Mum/2005) held thatinterest on borrowings made for acquiring sharesin Malaysian company along wi th controlli nginterest is allowable under section 57(iii) of the Act.

❉ ❉ ❉

Contr over sies


Can Corpor ate Veil be l ifted while applying theprovisions of S. 179 of the Act? – Part I I

Dhaval N. Patel v. CIT [2014] 44 taxmann.com211 (Gujarat)

7.

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As could be noti ced from the materials onrecord, the petitioner herein was the director ofthe company which was originally incorporatedas Ravi tVinimay with the Registrar ofCompanies, Gujarat on 19.8.1992. It obtainedcertificate of commencement of business on17.9.1992. The company changed its namefrom Ravi tVinimay to Lanzorate Finance(India) L imited and was registered wi thRegistrar of Companies vide certificate dated14.12.1995. The petitioner also brought onrecord a certificate issued by the ROC, beingthe certif icate of incorporation as also thecertificate of commencement of business andfurther changed the name to Lanzorate Finance(India) Limited. It appears that the companythus from the very incorporation was a publiclimited company and its public issue also wereout on 18.6.1996. The peti tioner was thepromoter/director and continued to be with thecompany ti l l he resigned from the post on31.5.2000.

8. The arrears of tax demand raised on thepetitioner in his capacity of Director by issuanceof the impugned notice under section 179 isfor the assessment year 1996-1997. Theprovision of section 179 permits recovery ofsuch tax arrears of a company from the directorof the company which is a private company ora private l imited company. The provisionmakes it amply clear that when the company isa public company or a public l imited company,such provision would not be applicable.Relevant here would be to refer to the provisionsof law and some of the well pronouncedjudgments on the subject.

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10. As contained in the said provision, where anytax is due from a private company in respect of

Advocate Tushar [email protected]

Judicial Analysis

any income from the said company or any othercompany in respect of any income of thecompany of the previous year during whichyear such company was a private company, ifthe Revenue is not in a position to recover, everyperson who was a director of the privatecompan y, during such relevant previous yearwould be jointly and severally l iable for thepayment of such tax, unless he proves that non-recovery could not be attributed to any grossneglect, misfeasance or breach of duty on hispart in relation to the affairs of the company.Sub-section (2) of section 179 of the Act alsoprovides the situation that where the privatecompany converted into public company andthe tax in respect of private company could notbe recovered, nothing contained in sub-section(1) would be applicable to any person who wasa director of such private company in relationto any tax due in respect of any income of suchprivate company assessable for any assessmentyear commencing before the 1st day of April,1962.

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12. In wake of such legal position, the only factualcontention that requires to be dealt with is thereference of code no. 13 in the return of incomefiled by the company as it is the code applicableto a domestic company which is a company inwhich the public is substantially not interested.This solitary circumstance can never be theground for the Revenue to not recognise othersubstantive and cogent evidences which are farmore pronounced and for which no disputeshave been raised at any stage. Mere mentioningof the code as contended by the Revenue couldbe hardly a ground to allow it to pursue thenotice impugned. It is also necessary to note atthis stage that the earl ier petition preferredbefore this Court was not entertained on theground that necessary documents for the Courtto arrive at a decision, whether the companywas a public limited company or not, wereabsent. That ipso facto itself cannot be theground for the concerned authority not toexamine the subject matter on merits in the



revision petition. Therefore, both, the orderunder section 179 and the consequential orderunder section 264 in the revision application,in light of the above discussion, must fail.

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PadmashiDevj iVi t hlaniv. CI T [2014] 44taxmann.com 231 (Gujarat)

9. Whether discarding the concept of private andpubli c l imited company contained in theCompanies Act, 1956 recovery under section179 (1) can be made from the director of apublic company is a question we need notanswer in this petition. This is so because evenassuming for a moment that it was so, theRevenue had to lay a foundation of facts tocome to the conclusion, as canvassed beforeus by the counsel that despite its lag of a publicl imited company, for the purpose of theCompanies Act, in reality the said companywas a closely held company with all i tscharacters of a private l imited company. Evenfor l ifting of the corporate veil as within thenarrow confines permi tted in the case ofPravinbhai M. Kheni (supra), the foundationalfacts must be found in the notice givingsufficient opportunity to the assessee to dealwith the allegations and present his ownmaterial to convince the Assessing Officer tohold otherwise.

In the present case, the show cause notice is10.bereft of any such details. It merely calls uponthe petitioner to show cause why tax recovery,which could not be made from the companybe not made from him under Section 179 (1)of the Act. We would therefore hold that evenotherwise, in absence of any previous materialindicating that the show cause notice and anybipartite hearing on such issues by the IncomeTax Officer, such question need not be goneinto. Even from the order under section 179,we do not find that the Assessing Officer hadbased his case of li fting the corporate veil, aswas referred to by thi s Court in case ofPravinbhai M. Kheni (supra) in which, we hadobserved as under :—

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11. In the result, subject to above observations, writpetitions are allowed. Impugned orders underSection 179 of the Income-tax Act, 1961 andthe further revision orders are quashed. Rulemade absolute.

Gaur av V. Shah v. ACI T [2014] 44taxmann.com 65 (Gujarat)

6. Upon thus hearing both the sides and onconsidering the material on record, the questionthat needs to be addressed to is as to whetherthe Di rectors of the company mainlyincorporated in the year 1994 are l iable forpayment of tax dues from the company for theassessment year 1996 - 1997 in accordancewith the provisions of Section 179 of theIncome Tax Act (the ‘Act’ hereinafter). At theoutset the provisions of Section 179 of the Actrequires reproduction, which reads as under :

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7. Sub-section (1) and Sub-Section (2), when readtogether, Sub-Section (1) brings wi thin itssweep Directors of the private company andSub-Section (2) confers power on the Revenueto recover tax arrears from the Directors ofprivate company.

Thus, Section 179 of the Act applies to a case8.of private company. In the event of any tax duefrom a private company in respect of the incomeof any previous year or of other company inrespect of any previous year during which suchcompany was a private company, all thosepersons who were the Director of the companyat the relevant point of time, are responsiblefor payment of such arrears of the tax unlessthe person concerned proves that the non-recovery cannot be attributed to any grossnegligence, misfeasance or breach of duty inhis part in relation to the affairs of the company.

Sub-section (2) of Section 179 of the Act makes9.it amply clear that where a private companyconverts into public company and the taxassessed of any previous year or during whichsuch company was a private company, cannotbe recovered, the provisions of sub-section (1)of Section 179 of the Act would not apply to aperson, who was a Director of such companyin relation to such arrears of the tax before the1st day of April, 1962.

We notice that the petitioner herein, while10.replying to the show cause noti ce dated18.09.2003 under Section 179 of the Act hadcontended of her being a salaried employee,so also of her not having any role vis-a-visfi nancial transactions in the af fai rs of thecompany. However, at the time when theRevision Appli cation was preferred by the

Judicial Analysis


petitioner, after impugned order under Section179 of the Act was passed, a contention wasraised of the provision of Section 179 of theAct not being applicable in the instant case forM/s Asian Finstock Limited not being a privatecompany, but, a public l imited company from05.12.1994 undisputedly, this company hasbecome a public l imited company from Dec.1994.

10.1 We notice that learned counsel for the Revenuehad raised the contention that such company isclosely held company where the public is notsubstantial interested. However, the revenueneither in show cause notice under Section 179of the Act nor in the order passed under suchprovisions has laid any factual foundationthereby disputing the status of such companyof that a public limited company. In absence ofany such foundational facts and in wake of clearand eloquent evidences reflecting the status ofcompany as that of a public l imited company,the contention of the petitioner, though raisedin the revision application, shall need to beregarded that in a case of Director of a publiclimited company, the provisions of Section 179cannot be made appl icable. Such being afactual matrix in the instant case, we upholdthe version of the petitioner that the issuanceof show cause notice and the consequentlyproceedings under Section 179 in case and allthe petitions must surely fail.

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Pr avinbhai M . K heniv. ACI T [2012] 28taxmann.com 111 (Gujarat)

10.

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It is not in dispute that despite such efforts norecovery could be made. I t can thus bestraightway seen that despite several attemptsmade by the respondents, no recovery couldbe made from the company. Counsel for thepetitioner therefore, would be wholly incorrectin suggesting that revenue did not establish thattax could not be recovered from the company.

With respect to the finding that such recovery11.cannot be attributed to any gross negligence,misfeasance or breach of duty on part of thepetitioner also we are afraid such a contentioncannot be accepted. This is so because in ourview such condition i s expressed in thenegative terms namely, that unless the Directorproves that non recovery cannot be attributedto any of the above-noted causes. In other

words, once it is established that tax dues couldnot be recovered from the company and that acertain person was a director of the said privatecompany at the relevant time, his joint andseveral liabili ty would arise. It would be uptohim then to establish that such liabili ty shouldnot arise since the non recovery cannot beattributed to any gross neglect, misfeasance orbreach of duty on his part in relation to affairsof the company. In the present case, thepetitioner never putforth any such defence, didnot urge any grounds or bring any materialbefore the respondents to contend that his caseshould fal l within exclusion clause of sub-section(1) of section 179. The contention thatonus was on the Revenue to establish that suchnon recovery was attr ibutable to grossnegligence, misfeasance or breach of duty onhis part, is not borne out from the plain languageused in sub-section(1) of section 179 of the Act.In a recent decision dated 25,26/09/2012passed in Special Civil Application No.3910/2012 and al l i ed matters in case ofMaganbhaiHansrajbhai Patel v. Asstt. CIT[2012] 211 Taxmann 386/26 taxmann.com 226(Guj.) Division Bench of thi s Court hadobserved as under :

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12. This brings us to the central and most hotlycontested issue of piercing corporate veil. Thefact that the company is a public company isnot in dispute. The Revenue authorities whileapplying principle of l ifting corporate veil haveprincipally pressed in service the followingfactors which emerge from the impugned orderof the Assistant Commissioner dated15.4.2002. Such factors are :

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13. Question is if these facts are established shouldthe corporate veil be l ifted?

The principle of lifting or piercing the corporate14.veil is neither new nor unknown. It is however,not possible of any precise def ini tion orapplication in a straitjacket formula. We maynotice some of the authorities dealing with sucha concept.

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15. From the above judicial pronouncements, it canbe seen that concept of l ifting or piercing thecorporate veil as some times referred to ascracking the corporate shell, is applied by

Judicial Analysis


Courts sparingly and cautiously. It is however,recognised that boundaries of such principlehave not yet been defined and areas where suchprinciple may have to be applied may expand.Principally, the concept of corporate bodybeing an independent entity enjoying existenceindependent of its directors, is a well knownprinciple. Its assets are distinct and separate anddistinct from those of its members. Its creditorscannot obtain satisfaction from the assets of itsmembers. However, with ever developingworld and expanding economic complexities,the Courts have refused to limit the scope andparameters or areas where corporate veil mayhave to be li fted.

Howsoever cautiously, the concept of piercing16.of corporate veil is applied by the Courts invarious situations. Two situations where suchprinciple is consistently applied are, one wherethe statute itself so permits or provides for andsecond where due to glaring facts establishedon record it is found that a complex web hasbeen created only with a view to defraud therevenue interest of the State. If it is found thatincorporation of an entity is only to create asmoke screen to defraud the revenue and shieldthe individuals who behind the corporate veilare the real operators of the company andbeneficiaries of the fraud, the Courts have nothesitated in ignoring the corporate status andstriking at the real beneficiaries of such complexdesign.

Section 179 of the Act itself is a statutory17.creation of piercing of corporate veil. Ordinari ly,directors of a company even that of a privatecompany would not be answerable for the taxdues of the company. Under sub-section(1) ofsection 179 of the Act, however, subject tosatisfaction of certain conditions, the directorscan be held jointly and severally l iable to paythe dues of the company.

In the present case, however, the Revenue18.desired to apply the principle of li fting thecorporate veil in case of a public company andseeking to resort to provisions contained insection 179 of the Act. In our view if the factorsnoted by the Assistant Commissioner are dulyestablished, there is no reason why such doubleapplication of li fting the corporate veil onestatutorily provided and other due to emergentneed of the situation, cannot be applied. Asnoted above, the factors recounted by theAssistant Commissioner in the impugned order

are glaring. The company had defaulted in taxfor more than Rs.155 crores. Same wasunearthed during search operations carried outby the R . The attachment ofevenue Authoritythe assets of the company could lead to recoveryof not more than Rs. 5 crores from such hugeoutstanding dues. The company was formedfor taking over business of the partnership. Themembers of the partnership firm and otherfamily members of the same family became thedirectors of the company. Shares of thecompany were held by them and not by anymembers of the public. The directors hadamassed huge wealth in the form of immovableproperty. The Assistant Commissionertherefore, was of the opinion that the companywas only a conduit for creation of unaccountedmoney and appropriating in directors.

If these facts are duly established, we have no19.hesitation in holding that principle of l ifting thecorporate veil should be applied. By applicationof section 179 of the Act, the recovery of thetax dues of the company can be sought fromthe directors.

With respect to the finding of the Assistant20.Commissioner however, we have tworeservations. Firstly, it is nowhere pointed outfrom where or on basis of which material suchfindings have been arrived at. There are somefar reaching observations and conclusionswhich would require thorough investigationand support from materials on record. Forexample, the Assistant Commissioner hasrecorded that the directors of the company haveamassed substantial wealth in the form ofimmovable property. Full detail s of suchproperties, when they were acquired andwhether there was any known source out ofwhich the same were acquired is not known.This and many other observations of theAssistant Commissioner require further scrutinyand investigation.

Second dispute that we have with the Assistant21.Commissioner’s order is that same suffers fromgross violation of principles of natural justice.In his notice under section 179(1) of the Act,he only put the petitioner to notice that heproposed to hold him liable for recovery of thetax dues of the company. He neither mentionednor disclosed any tentative reasons why he mayalso invoke the principle of l ifting of corporateveil. When the petitioner replied to such a showcause notice and contended that the company

Judicial Analysis


being a public company, section 179 of the Actwould not apply, the Assistant Commissionerwhile passing his final order, rejected such acontention by making detailed observations onthe grounds on which principle of li fting thecorporate veil should be applied.

To our mind entire procedure was defective.22.Large number of observations have been madeby the Assistant Commissioner in the said orderwithout ever putting the petitioner to alert thatbecause of certain prima facie materials at hiscommand, he proposed to hold that the situationwas such where the principle of l i fting ofcorporate veil should be applied. It is true thatafter the Assistant Commissioner passed thesaid order on 15.4.2002, the petitioner made adetailed representation to the AssistantCommissioner raising several contentions whysuch principle could not be invoked. To ourmind this would not cure the defect committedby the Assistant Commissioner. Firstly, theconcept of post decisional hearing is not alwaysaccepted by the Courts and found to be ratherunsatisfactory manner in which requirement ofnatural justice can be stated to have beenful f i l l ed. Secondly, even the A ssistantCommissioner did not take into account suchobjections after passing his order and suchobjections thus remained pending. Thepetitioner did file revision against the order ofthe A ssi stant Commissioner and theCommissioner did examine his objections,however, there was no opportunity whatsoeverto the petitioner to demonstrate before theauthorities that the factors which have weighedwith the Assistant Commissioner to invoke theprinciples of l ifting the corporate veil do notarise at all. Thirdly, in the matter of this naturewhere due to its extreme complexity of thetransactions and law required to be applied, itwould be highly unsatisfactory manner ofeliciting the response from a citizen and dealingwith the same. In the context of conflictingtheories of requirement of hearing before takingadverse decision and for not insisting on suchrequirement rigidly when no prejudice i scaused by non hearing, the Apex Court in caseof Canara bank v. Debasis Das AIR 2003 SC2041, referred to Lord Ackner who had statedthat “‘useless formality theory’ is a dangerousone and, however inconvenient, natural justicemust be followed” because, “convenience andjustice are often not on speaking terms”.

As held by series of decisions including in caseof Canara bank (supra), in a case where breachof natural justice is noticed, the proceedingscannot be terminated for all times to come, butwould have to be revived from the stage wherethe defect is noticed.

Our conclusions therefore, are as follows :23.

(1) The respondent authorities did establishthat it was not possible to recover the taxdues from the company.

(2) The peti ti oner nei ther pleaded norsucceeded in establishing that such nonrecovery was not attributable to any grossneglect, misfeasance or f ai l ure indischarging duty on his part in connectionwith the affairs of the company.

(3) Being a publ ic company, ordinari l y,provisions of section 179(1) of the Actcannot be applied. However, if the factorsnoted by the Assistant Commissioner in hisimpugned order dated 15.4.2002 andhighlighted by us in this judgment are dulyestablished, it would certainly be a fit casewhere invocation of principle of l ifting ofcorporate veil would be justified.

(4) We however, hold that the AssistantCommissioner proceeded to record suchf indings wi thout giving suf f i cientopportunity of hearing to the petitioner andwithout disclosing the necessary materialsfor coming to such a conclusion.

(5) The impugned orders dated 15.4.2002 andrevisional order dated 9.4.2003 arequashed.

(6) The proceedings are however, placed backbefore the Assistant Commissioner forproceeding further in accordance with lawafter giving a noti ce to the petitionerindicating his tentative grounds why hedesires to invoke the concept of l ifting ofcorporate veil, giving sufficient opportunityto the petiti oner to meet wi th suchallegations. After giving opportunity ofhearing to the petitioner and following theprinciples of natural justice it would beopen for the Assistant Commissioner topass fresh orders in accordance with lawas may be found appropriate on the basisof material on record.

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Judicial Analysis


A. Background

Formulating anti-BEPS (Base Erosion andProfit Shif ting) measures for cases wherecompanies were deemed to not have aPermanent Establ i shment (PE) despitesubstantial business activity, was a key priorityfor the Organization for Economic Cooperationand Development (OECD) in its BEPS project.

B. Recommendation of Action Plan 7

Action Plan 7 of the BEPS project, ti tled“Preventing the Arti fi cial Avoidance ofPermanent Establishment Status”, involvedsignifi cant work by OECD and associatedcountries to arrive at suitable recommendations.Action Plan 7 has proposed to revise the PEstandard predominantly to prevent the misuseof the following arrangements:

· Commissionai re and other si mi lararrangements

Amendments have been proposed in amanner that widen the scope of whatwould be considered dependent agentactivities, while also narrowing down theindependent agent exception, such thatagents who play a key role in theconclusion of contracts, or i n theconclusion of contracts without materialmodification by the enterprise, or thosewho provide services to multiple relatedparties may now result in the formation ofPE for the foreign enterprise.

· Use of preparatory or auxil iary activityexemptions

As per the current practice and languageof the treaties, certain acti vities areobjectively exempted from creating a PEon the assumption that such activities arepreparatory and auxil iary by their verydefinition.

CA. Dhinal A. [email protected]

The evolution ofPermanentEstablishmentconcept CA. Sagar Shah

[email protected]

It is proposed to narrow these exemptionsfor fixed place of business PE by requiringactivities to subjectively pass the test ofactually being preparatory or auxiliary incharacter. For instance, storing anddelivering goods to fulfi l online sales maynot be considered as preparatory orauxiliary activities for the business.

· Artificial fragmentation of activities

It has been proposed to incorporate a newanti-fragmentation rule to prevent misuseof specific activity exemptions. Under thenew rule, it is proposed that a PE may existif the enterprise or a closely relatedenterprise carries on business activities atthe same location, or different locations inthe same country and such activitiesconstitute complementary functions that arepart of a cohesive business operation, andsuch activities, when combined, exceedwhat may be considered preparatory orauxiliary.

· Splitting up of contracts between closelyrelated parties:

An automatic rule requiring aggregation ofthe time spent by closely related enterprisesat the same site or project to calculate thethreshold, or Principal Purpose Test (PPT)would apply to long-duration construction/installation contracts to avoid artificialavoidance of PE by spl i tti ng up ofcontracts.

C. Current importance

Besides the criticality of the PE status of foreigncorporations for Governments and taxauthorities for calculation of tax on businessprofits, the heightened importance of theconsequences of this Action Plan at this pointis also attributable to the following:




The evolution of Permanent Establishment concept

· Pace of growth of the digital economy,which exacerbates the possibi l i ty ofenterprises not having physical presencein another country

· First signing of the Multilateral Instrumentby a group of countries in June 2017,which would commence the process ofbilateral tax treaty amendments, includingPE-related changes.

D. I ndia’s response

· India has a varied tax treaty policy, andmany of its treaties already contain a wideragency PE rule. Essentially, this means thatsome OECD proposals echo the approachcurrently followed by the Indian taxauthoriti es and might also result in apositive revenue impact.

· However, how India chooses to implementchanges in relation to the preparatory/auxil iary test and contract split or appliesthe anti-fragmentation rules remains to beseen. This is the area l ikely to affectEngineering, Procurement andConstruction (EPC) projects andarrangements, which include activities suchas storage, distribution and delivery, themost. Accordingly, it may be relevant forcompanies to review thei r operatingstructures in India to assess the changes thatmay arise once the recommendations areimplemented in tax treaties.

· India’s OECD patterned treaties, such asthose with Brazil, China and Japan, maystand to be most impacted by the ActionPlan 7 recommendations.

E. Treaty amendments and the Multilater alInstrument

· Action Plan 7 recommendations are not aminimum standard that must be adheredto by countries. Accordingly, both thechoice and the mode of implementationhave been left as an option, and a countrythat chooses to do so may undertake eitherof the bilateral or multilateral routes.

· The text of the Multi lateral Instrument,released in er 2016, contains theNovembPE-related articles in pursuance of ActionPlan 7 that may be incorporated into taxtreaties. However, it is also possible forartificial splitting of contracts to also becovered by the PPT clause of a treaty,which is likely to be adopted by India andmost countries in terms of their obligationsto implement measures of Action Plan 6dealing with treaty abuse.

· PE taxation is an area that may witnessaction and developments in the near termon account of the Multilateral Instrument,growth of the digital economy and the paceat which BEPS-related changes are beingenacted across jurisdiction.

F. Concluding remarks

· The Action 7 Report sets forth specificamendments modifying paragraphs 4, 5and 6 of Article 5 of the OECD Model,together with proposed Commentary toprovide guidance on the new rules.

· Once implemented, the Action 7 Reportamendments wil l have implications forhow companies operate global businessesgoing forward as current operating modelscould create new PEs in other countriesfor these companies. New PEs would meanaddi tional tax f i l ing obligations andincreased potential for controversy.Moreover, the issue of profit attribution tothese new PEs is an important matter forbusinesses, and the work on that issue hasnot yet been done.

· Companies should evaluate how theproposals may af fect their globalbusinesses. Companies also should stayinformed about PE developments in thecountries where they operate or invest, aswell as developments in the OECD relatedto the ongoing work on profit attributionto PEs.

❉ ❉ ❉


CA. Savan Godiawala

Issuance of Rupee denominated bonds overseas

[email protected]

– Multilater al and Regional

Financial Institutions as Investors

In order to provide more choices of investors toIndian entities issuing Rupee denominated bondsabroad, it has been decided to also permi tMulti lateral and Regional Financial Institutionswhere India is a member country, to invest in theseRupee denominated bonds.

A. P. (DI R Ser ies) Circular No. 31, datedFebruary 16, 2017

For Full Text refer to https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10865

Master Direction – Money Transfer ServiceScheme (MTSS)

Money Transfer Service Scheme (MTSS) is a quickand easy way of transferring personal remittancesfrom abroad to beneficiaries in India.

The directions relating to Money Transfer ServiceScheme are being issued in a consolidated formthrough the Master Direction enclosed to the masterdirection. Reporting instructions can be found inthe Master Direction on Reporting.

FED Master Direction No.1/2016-17 datedFebruary 2017 22,

For full text refer to https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10868

Foreign Exchange Management (Transfer orIssue of Secur ity by a Per son Resident outsideIndia) (Second Amendment) Regulations, 2017

A. In the Foreign Exchange Management(Transfer or Issue of Securi ty by a PersonResident outside India) Regulations, 2000,(Notification No. FEMA 20/2000-RB dated3rd May 2000), in Regulation 5, for the existing

sub-regulation (9), the fol lowing shall besubstituted, namely:

“5 (9) A person resident outside India (otherthan a citizen of Pakistan or Bangladesh) or anentity incorporated outside India (other than anentity in Pakistan or Bangladesh), not being aForeign Portfol i o Investor or ForeignInstitutional Investor or Foreign Venture CapitalInvestor registered in accordance with SEBIguidelines, may contribute foreign capital eitherby way of capital contribution or by way ofacquisition / transfer of profit shares in thecapital structure of an LLP under ForeignDirect Investment, subject to the terms andconditions as specified in Schedule 9”

B. Schedule 9 shall be substi tuted (excerptsbelow):

The Scheme shal l be called Foreign DirectInvestment (FDI-LLP) in Limited Liabil ityPartnerships (LLP) formed and registered underthe Limited Liabili ty Partnership Act, 2008.

1. Eligible Investors:

A person resident outside India (other thana citizen of Pakistan or Bangladesh) or anenti ty incorporated outside India (otherthan an entity in Pakistan or Bangladesh),not being a Foreign Portfolio Investor orForeign Institutional Investor or ForeignVenture Capital Investor registered inaccordance with SEBI guidelines, maycontribute foreign capital either by way ofcapital contribution or by way ofacquisition / transfer of profit shares in thecapital structure of an LLP.

2. Eligible investment

Contribution to the capital of an LLPwould be an eligible investment under thescheme.

FEMA Updates


https://www.rbi.org.in/Scripts/



Note: Investment by way of ‘profit share’will fall under the category of reinvestmentof earnings

3. Eligibili ty of a LLP

FDI in LLPs is permitted, subject to thefollowing conditions:

i. FDI is permitted under the automaticroute in LLPs operating in sectors /activities where 100% FDI is allowedthrough the automatic route and thereare no FDI l i nked performanceconditions. For ascertaining suchsectors, reference shall be made toAnnex B to Schedule 1 of theseRegulations.

ii. An Indian company or an LLP, havingforeign investment, will be permittedto make downstream investment inanother company or LLP engaged insectors in which 100% FDI is allowedunder the automatic route and there areno FDI linked performance conditions.Onus shall be on the Indian company/ LLP accepting downstreaminvestment to ensure compliance withthe above conditions.

iii. FDI in LLP is subject to the complianceof the conditions of Limited Liabil ityPartnership Act, 2008.

iv. A company having foreign investmentcan be converted into an LLP underthe automatic route only if it is engagedin a sector where foreign investmentup to 100 percent is permitted underautomatic route and there are no FDIlinked performance conditions.

4. Pricing

FDI in a LLP either by way of capitalcontribution or by way of acquisition /transfer of profit shares, would have to bemore than or equal to the fair price asworked out with any valuation norm whichis internationally accepted / adopted as per

FEM A Updates

market practice (hereinafter referred to as“fair price of capital contribution / profitshare of an LLP”) and a valuationcertificate to that effect shall be issued bythe Chartered Accountant or by a practicingCost Accountant or by an approved valuerfrom the panel maintained by the CentralGovernment.

In case of transfer of capital contribution /prof it share from a resident to a non-resident, the transfer shal l be for aconsideration equal to or more than the fairprice of capital contribution / profit shareof an LLP. Further, in case of transfer ofcapital contribution / profit share from anon-resident to resident, the transfer shallbe for a consideration which is less than orequal to the fair price of the capi talcontribution / profit share of an LLP.

5. Mode of payment

Payment by an investor towards capitalcontribution in LLPs shall be made:

(i) by way of inward remittance throughbanking channels; or

(i i) by debit to NRE / FCNR(B) accountof the person concerned, maintainedwith an AD Category - I bank inaccordance with Foreign ExchangeManagement (Deposit) Regulations,2016, as amended from time to time.

6. Reporting

(i) Reporting of foreign investment inLLPs and disinvestment/transfer ofcapital contribution or profit sharesbetween a resident and a non-residentmay be made in a manner as prescribedby Reserve Bank of India from timeto time.

(i i) All LLPs which have received ForeignDirect Investment in the previousyear(s) including the current year shallsubmit to the Reserve Bank of India,on or before the 15th day of July of


each year, a report ti tled ‘AnnualReturn on Foreign Liabil i ti es andAssets’ as specified by the ReserveBank from time to time.”

Notification No. FEMA.385/2017-RB dated March03, 2017

For full text refer to https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10876&Mode=0

Foreign Exchange Management (Transfer orIssue of Secur ity by a Per son Resident outsideIndia) (Fourth Amendment) Regulations, 2017

In the Foreign Exchange Management (Transfer orIssue of Security by a Person Resident outside India)Regulations, 2000, (Notification No. FEMA 20/2000-RB dated 3rd May 2000), in Regulations 2,

i. after the sub-regulation (ii dd) and before theexisting sub-regulation (ii e), the following sub-regulations shall be inserted:

“(i i E) E-commerce:

a. ‘E-commerce’ means buying and sell ing ofgoods and services including digital productsover digital & electronic network.

b. ‘E-commerce enti ty’ means a companyincorpo the rated under Companies Act, 1956or the Companies Act, 2013 or a foreigncompany covered under section 2 (42) of theCompanies Act, 2013 or an office, branch oragency in India as provided in Section 2 (v)(ii i) of FEMA 1999, owned or controlled by aperson resident outside India and conductingthe e-commerce business.

c. ‘Inventory based model of e-commerce’ meansan e-commerce activity where inventory ofgoods and services is owned by e-commerceentity and is sold to the consumers directly.

d. ‘Market place model of e-commerce’ meansproviding of an information technologyplatform by an e-commerce entity on a digital& electronic network to act as a facili tatorbetween buyer and seller.”

3. Amendment of Schedule 1

In the Foreign Exchange Management(Transfer or Issue of Securi ty by a PersonResident outside India) Regulations, 2000,(Notification No. FEMA 20/2000-RB dated3rd May 2000), in Schedule 1, in the existingAnnex B, the existing entry 16.2 shall besubstituted by the following:

16.2 E-Commerce % of equity/ EntryFDI Cap route

16.2.1 B2B E-commerce 100 % Automaticactivities

Such compani es woul d engage only i nBusiness to Business (B2B) e-commerce andnot in retail trading, inter alia implying thatexi sti ng restri cti ons on FDI in domesti ctrading would be applicable to e-commerceas well.

16.2.2 Market place model 100 % Automaticof e-commerce

Other conditions are stipulated in para 16.2.3. FDIis not permitted in inventory based model of e-commerce. Sale of services through e-commerceshall be under automatic route subject to the sectorspecific conditions, applicable laws/regulations,security and other conditionalities.

Notification No. FEMA.387/2017-RB dated March09, 2017

For full text refer to https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10884&Mode=0

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CONGRATULATI ONS!!!

CA. Anjal i Choksi , member of ourAssociati on has completed herPHD on " Der ivat ive Tr adingStrategies in Indian Stock Market" .

FEM A Updates




CA. Ashwin H. Shah

Safety Retreading Company Pvt. L td vs.

[email protected]

Commissioner of Central Excise [2017],

Facts:-The issue involved in the present appeal is whether ina contract for retreading of tyres, service tax is leviableon the total amount including the value of the materialused and sold in the execution of the contract. Thesaid matter before the Tribunal was referred to a thirdMember wherein it was held that there is no evidenceof sale of materials in rendering the service of“Maintenance and Repairs” and the conditions ofNotification 12/2003-ST are not proved to be satisfied.Further, it was held that maintenance and repair servicebeing a specific service cannot be treated as a workscontract and the concept of deemed sale is applicableonly under works contract services. Aggrieved by thesaid order the present appeal is fi led.

-Held:The Court noted that the provisions of section 67 ofthe Finance Act, 1994 [as it read prior to 2006]specifically excludes the cost of parts or other materialif any sold while providing maintenance and repairservice and Notification 12/2003-ST also providesfor such exclusion. The invoices issued clearlyprovide that service tax is discharged on the labourcomponent after deducting 70% towards materialcost under the State Act. No dispute is raised withregard to assessment under the State Act where VATis discharged on 70% of the total value. The Courtobserved that the contention of the respondent thatthere was no proof of incurring of expenses on goodsappears to be an afterthought and on merits is whollyunsustainable. Accordingly, It was held that servicetax is payable only on the service component whichunder the State Act is quantified at 30% and themajority order of the Tribunal is incorrect in law.

Shr ee Pandur ang SSK L td vs.Commissioner of Central Excise, Pune-I I I [2017]

Service Tax -Recent Judgements

Facts:-Appellants availed CENVAT credi t on inputservices related to erection, installation of capitalgoods. The same was capitalised and depreciationwas claimed. The department contended that thiswas a case of double benefit of CENVAT creditand depreciation and therefore CENVAT creditshould not be allowed in terms of Rule 4(4) of theCENVAT Credit Rules, 2004.

:-HeldThe Tribunal noted that restriction in availing creditif depreciation is claimed is only in respect of capitalgoods under Rule 4(4). There is no explicitprovision in the said rules to restrict credit on inputservices, if depreciation is claimed. Therefore,CENVAT credit cannot be denied and the appealis allowed.

Infosys Technologies L td. vs. Comm. OfC. Ex., Pune-I [2017].

Facts:-The appel lant is engaged in providing servicesdomestically as well as export of services. A refundclaim was filed for refund of accumulated unutilisedCENVAT credit. First Appellate and lower authoritiesdenied the refund claim on the ground that servicewhich was exported was not taxable but was exemptservice and since refund of CENVAT credit pertainingto such exempt service is claimed, refund claim underCENVAT Credit Rules 2004 was rejected.

The Tribunal observed that the refund mechanism

Held:-

was provided in the law so that taxes would notget exported. In the instant case, the appellant hadobtained registration under applicable categories ofservices and had been depositing service tax andfi li ng service tax returns showing services as‘taxable’. The Tribunal observed that the CENVATCredi t Rules are not the mechanism forimplementing duty exemption but a manner for

58

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meeting tax obligations. The appel lant wasdischarging tax and hence CENVAT credit cannotbe denied. It was further held that nowhere achallenge was made for ‘allowabil ity’ or otherwiseof “input service” at the first place and hence taxpaid on input services being eligible credit, i t washeld that the credit rejection is not valid.

Khanna Plymers Vs. Comm. Of CentralExcise Noida [2017].

Facts:-The appellant a selling agent represented suppliersand sold goods on their behalf and collectedpayment from respective purchasers. Commissionwas received against sale of goods on which theappellant has discharged service tax. In certaincases, the appellant from his own account madepayment to his principals before due dates and forwhich principals gave early payment incentives tothe appellant. Department confirmed service taxdemand on such incentives received.

It was held that incentive received was in nature ofHeld:-

cash discounts and had no relation with theconsideration for the service rendered by theappellant.

Service Tax - Recent Judgements

Comm. of C.Ex.Delhi-I I I VS. SuzukiMotorcycle I ndia Pvt. L td., Bombay[2017].

Facts:-The appellant availed insurance service for itsemployees and garden maintenance service at itsfactory. Demand was confirmed on the ground thatpost 2011, such acti vities were not “INPUTSERVICES” for the purpose of CENVAT CreditRules, 2004.

Held:-It was held that appellant was entitled to availCENVAT credit of insurance service in respect ofmedical insurance of its employees which wasstatutorily required under ESIC Act and thereforeinsurance service was held to be integrall yconnected to the manufacturing activity.

For garden maintenance service availed, it was heldthat since Appellant was compulsorily required tomaintain garden in its factory to fulfil l pollutioncontrol norms and without it, factory cannot runand hence such service being directly related tomanufacturing activity, was eligible for CENVAT.

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in management or capital or control by one of theenterprise in the other enterprise. If a form ofparticipation in management, capital or control isnot recognized by section 92A(2), even if it endsup in de facto or even de jure participation inmanagement, capi tal or control by one of theenterprise in the other enterprise, it does not resultin the related enterprises being treated as ‘associatedenterprises’.

Sections 92A(1) and (2), in that sense, are requiredto be read together, even though section 92A(2)does provide several deeming fictions which primafacie stretch the basic rule in section 92A(1) quiteconsiderably on the basis of, what appears to be,manner of participation in ‘control’ of the otherenterprise. It is thus clear that as long as theprovisions of one of the clauses in section 92A(2)are not satisfied, even if an enterprise has a de factoparticipation capital, management or control overthe other enterprises, the two enterprises cannot besaid to be associated enterprises.

contd. fr om page 774 Tr ibunal News

Further, the Hon’ble ITAT held that the case of therevenue hinges on appl ication of clause (j ) ofsection 92A(2).That is the only clause invoked bythe Assessing Officer, and if this clause does notapply to the facts of this case, that is end of thematter. This clause provides that ‘where oneenterprise is controlled by an individual, the otherenterprise is also controlled by such individual orhis relative or jointly by such individual and relativeof such individual’. In the present case, the assesseeis a partnership concern and the assessee firm,therefore, cannot be said to be controlled by ‘anindividual’ which is starting point for section92A(2)(j) being invoked.

Therefore, the assessee and Blue Gems BVBAcannot be said to be associated enterprises. As theseenterprises are not associated enterprises, the ALPadjustments in respect of the transactions betweenthese enterprises were wholly unwarranted.

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CA. Bihar i B. [email protected].

Important Judgments:

[1] In case of Prabhat Body Builders v/s Stateof Gujar at: (GVAT Tr ibunal)

Issue:

[i] Deduction under Rule 42 for URDassessments;

[i i] Enhancement of Turnover in case ofdetermined from the sales bills;

[iii] Penalty u/s.34(7) and 29(5) in case ofURD.

The facts of the case as stated by the appellant

Facts:

is that the appel lant was engaged in thebusiness of building, fabricating, assemblingbodies on the motor chassis by way of workscontract. The business premises of the appellantwas surprisingly searched by the officials ofthe Commercial Tax Department on21.09.2000. On that day he was not registereddealer under the Act. It is stated that he hadcommenced procedure to obtain registration,and the time l imit within which a dealer has toapply for registration was also when he becameliable to tax was also available to him. It isfurther stated that the visiting authority hadissued a Notice in Form No. 302 and FormNo. 309 to frame assessment. It is further statedthat the visiting authority had seized sales billbook and had recorded statement of theappellant. Thereafter, in pursuance to searchand noti ces, the assessment for the un-registered period was conducted. TheAssessing Authority had raised the demand ofRs. 3,85,200/- which inter-alia includes amountof tax of Rs. 1,54,080/- and penalty undersection 34(7) of Rs. 2,31,120/-. It is furtherstated that the assessment was framed byaccepting sales figure from the said sales bills,

however, the Authority had further added 100%of the amount total sales as per sales bills anddetermined the total turnover of sales. Theappellant being aggrieved by the order ofassessment had filed First Appeal before theLd. First Appellate Authority and raised groundthat the Authority had erred in deciding the totalturnover of sales by adding said 100% amount.He had also disputed that the authority has notgranted deduction of Rs. 5,00,000/- thresholdlimit available to him. He had also disputed thelevy of penalty under section 34(7) and total toat 150%.

The Ld. First Appellate Authority alloweddeduction of Rs. 5,00,000/- from the totalturnover. He has also allowed 20% deductionby way of labour charges and reduced the rateof penalty to 50%. In all the Ld. AppellateAuthority reduced the l iabili ty of the appellantto the tune of Rs. 94,896/-.

The Ld. Government Representative appearingfor the respondent on the other hand, has reliedon the order passed by the Ld. First AppellateAuthority. He has further submitted that theappel lant would not have applied forregistration and would have evaded tax if theAuthority had not visited the premises of theappellant. Therefore, according to him, thepresent case is the case of tax evasion andenhancement in turnover, is just and proper. Hefurther submitted that the Ld. Visiting Authorityhas observed that the appellant has notmaintained regular books of accounts, thereforein the absence of books of account, theauthority had reasons to make enhancement.He further submitted that the demand was paidwill ingly by the appellant, without any dispute,and therefore, it is not now open for theappellant to challenge the l iabili ty. So far asthe issue relating to deduction under section

VAT - Judgementsand Updates



VAT - Judgements and Updates

42 is concerned, he submitted that the Rule isapplicable only in case of registered dealer. Theappellant being unregistered dealer at the timeof sale, he had no right to collect tax on suchsales, therefore, submission of the appellant thatthe sales were inclusive of tax, is not at allacceptable.

The Hon. Tribunal considered the ri valsubmissions and the facts of the case and hasalso gone through the orders passed by theAuthorities below and the documents producedbefore this Tribunal. It appears from theassessment order that the Authority hasdetermined the turnover on the basis of salesbil ls seized from the premises of the appellant.However, at the time of search the statement ofthe appellant was recorded and as per the saidstatement, the Bank statement was submittedto the Authority. In absence of books ofaccount, the authority had relied on saiddocuments and determined the total turnoverof sales. However, the learned assessingauthority has not doubted any of the documentsand has also not mentioned any reason to makeaddi tion in said turnover. Therefore, theAuthority has no reason to enhance furtherturnover. However, the Assessing Authorityhas enhanced the turnover. In view of the Hon/Tribunal, such enhancement in turnover wasnot proper; hence the Hon. Tribunal removesthe enhancement.

This second appeal is partly allowed. The

Held:

enhancement in turnover, as mentioned in bodyof the judgment is removed. The penalty leviedby the Ld. Assessing Authority and partlyconfirmed by the Ld. First Appellate Authorityis entirely removed. The appellant beingunregistered dealer not entitled to claimdeduction of tax element from the turnoverunder Rule 42. The Assessing Authority isdirected to pass consequential order and grantrefund to the appellant.

[2] Case of Ashima L td.

Issue:

Tax Credit in respect to by-products cottonwaste and cot t on yar n waste i s heldadmissible u/s. 11 of the Vat Act:

Held:

The appel lant engaged in the business ofmanufacturing of cotton fabrics and denimfabrics purchased cotton and cotton yarn onpayment of tax. The cotton fabrics and denimfabrics were exempted from tax. However theby-products cotton waste and cotton yarn wastewere liable to tax under the Vat Act. The claimof tax credit of the appellant in respect to taxablesale of by-products was rejected while passingassessment order for the period 2009-10 to2010-11. The appellant contended that thewaste generated during the manufacturingprocess is altogether a new marketable productbecause there is a commercial market of suchcotton waste and cotton yarn waste. Theappellant referred section 11(3)(a) of the VatAct. The Hon’ble Tr ibunal referred thejudgment of Hon’ble Gujarat High Court inthe case of M/s. Jayant Organic Ltd. and heldthat the appellant is entitled to claim tax crediton the purchase of cotton and cotton yarn inproportion to the taxable sale of cotton wasteand cotton yarn waste.

[3] Case of Pr abhat Industr ies

Issue:

The interest u/s. 54(1)(aa) of the GST Act isheld admissible on the amount of refundar ise in deciding of the appeal.

Held:

The refund of Rs. 3,358/- and Rs. 1,65,652/-was held admissible under the GST Act andunder the CST Act respectively in deciding ofthe appeal. The request of the appellant ofgranting interest on refund was not considered.The appellant contended before the Hon’bleTribunal that in view of the judgment in case

contd. to page 814


CA. Kush [email protected]

Mergers andAcquisition Corner

1. Air tel acquires Tikona’s 4G business for Rs.1,600 crore1

The ongoing consolidation in the telecom spacehas forced Tikona Digital Networks to sell its4G spectrum to A i r tel seven years af teracqui ring it. Though both companies declinedto share the f i nanci al detai l s, investmentbanking sources pegged the deal at around Rs.1,600 crore. Tikona, a company control led byformer Reliance Communications CEO PrakashBajpai, had acquired the spectrum in 2010 forRs. 1,058 crore. However, the company couldnot utili se the spectrum all these years due tolack of funding. The deal , which is expectedto be compl eted in 60 days, incl udes 350telecom towers owned by Tikona. Bharti Airtelwill also assume Tikona’s debt of about Rs. 450-500 crore, said sources close to thedevelopment. For Tikona, the deal will allow itto be debt free and focus on its existing businessof providi ng broadband services usi ngunl icensed spectrum. Bajpai had tried to usethe 4G spectrum to expand the business butcould not raise funds. The deal wi th A irtel ,therefore, provides the company a good exit.“Now, 4G is the mainstay in the market. Thespectrum we had acquired was very valuable,but it took sometime for the industry andtechnology to mature and devices to becomeavailable. Obviously the spectrum can generatea lot of value now,” Bajpai told BusinessLine.

For Airtel, the deal means more 4G spectrumMore 4G airwaves

to take on Reliance Jio. Tikona holds 20 MHzof spectrum in the 2300 MHz band in theGujarat, Uttar Pradesh (East), Uttar Pradesh(West), Rajasthan and Himachal Pradeshcircles.After the deal, Airtel will hold 30 MHzin the 2300 MHz band in 13 circles. This is thefourth major acquisition by Airtel in the lastyear. The telecom industry is consolidating from10-12 operators to 4-5 players.“After the Vodafone-Idea deal, this is anotherstep towards consolidation in the Indian telecomsector. Future expansion and growth wi l ldepend on the quantum of spectrum held andthe qual i ty of services of f ered. Such

acquisitions help operators address theseissues,” said ejpal, Principal ResearchRishi TAnalyst at Gartner.

2. Oncology chain HCG to buy major ity stakein Kenyan firm2

Bangalore-based Healthcare Global EnterprisesLt had (HCG) s agreed to purchase a majoritystake in a cancer-care centre in Kenya in its firstov ac a erseas quisition.HCG will buy 93.66%stake in Nairobi based Cancer Care Kenya Ltdfor 93.15 mill ion Kenyan shi ll ings (about$905,000) in cash, the Indian company said ina stock-exchange filing. HCG will acquire thestake through step-down subsidiary HealthCareGlobal (Kenya) Pvt Ltd.HCG added that it hasalso signed a pact with Nairobi-based MP ShahHo Can yaspital and cer Care Ken ’s promotersto ib subscr e to shares of the target company.After this pact is concluded, HCG will have a77.5% stake in Cancer Care Kenya while MPShah Hospital wi l l have 10%. The targetcompany’s promoters will have the remaining12.5% stake.”We expect to bridge the demand-supply gap existing in the cancer care space inKenya, where patients have to travel out of thecountry for avail ing cancer care services due toinadequate treatment facil ities in Kenya,” HCGsaid.The transaction is subject to approval fromthe Competition Authority of Kenya and is l ikelyto be completed by the end of June, the companysaid. This is the first major takeover deal by HCGin more than three years. In 2013, HCG hadacquired a 50% stake in Bengaluru-based fertili tycare provider Bangalore Assisted ConceptionCentre Pvt Ltd.HCG is backed by PremjiInvest,the investment arm of Wipro Ltd chairman AzimPremji, and World Bank arm InternationalFinance Corporation. Earli er this month,PremjiInvest sold a 2.54% stake in the company.

1. http://www.thehi ndubusinessl ine.com/i nf o-tech/airtel-acquires-ti konas-4g-business-for-1600-crore/article9598163.ece

2. http://www.vccircle.com/news/banking/2017/02/15/cabi net-cl ears-state-bank-india-s-merger-f i ve-subsidiarieshttps://www.vcci rcl e.com/oncol ogy-chain-hcg-to-buy-majori ty-stake-in-kenyan-firm/

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http://www.thehindubusinessline.com/info-tech/

http://www.vccircle.com/news/banking/2017/02/15/

https://www.vccircle.com/oncology-


CA. Naveen [email protected]

Corporate Law Update

MCA Updates:

1. Companies (Transfer of Pending Proceedings) Amendment Rules, 2017.

Rule/Effect of the amendment rules, 2017 is as under:

Provisions under the Provisions under the Companies Effect of theClause Companies (Transfer of (Transfer of Pending Proceedings) amendment

Pending Proceedings) Amendment Rules, 2017Rules, 2016

Proviso to Provided that the petitioner Provided that the petitioner shall The words “sixtysub-rule shall submit all information, submit all information, other than days” have been(1) of Rule 5 other than information information forming part of the substituted by the

forming part of the records records transferred in accordance words “sixtransferred in accordance with Rule 7, required for admission months”.with Rule 7, required for of the petition under sections 7, 8 oradmission of the petition 9 of the Code, as the case may be,under sections 7, 8 or 9 of the including details of the proposedCode, as the case may be, insolvency professional to theincluding details of the Tribunal within six months fromproposed insolvency date of this notification, fail ingprofessional to the Tribunal which the petition shall abate.within sixty days from dateof this notification, failingwhich the petition shall abate.

[F. No. 1/5/2016- CL -V dated 28 Febr uar y, 2017]th

2. Investor Education and Protection Fund Author ity (Accounting, Audit, Transfer and Refund)Amendment Rules, 2017:

The following amendments have been made:

Rule/ Provisions under the Provisions under the Investor Effect of theClause Investor Education and Education and Protection Fund amendment

Protection Fund Author ity Author ity (Accounting, Audit,(Accounting, Audit, Transfer and Refund)Transfer and Refund) Amendment Rules, 2017Rules, 2016

SubstitutedSub-rule (d), “Company” means company “Company” means a companyin sub-rule as defined in sub-section (20) defined in sub-section (20) of(1), in of section 2 of the Act and section 2 of the Act and includesRule 2 includes ‘corresponding new ‘corresponding new bank’ as

bank’ as defined in sub- defined in sub-section (d) of sectionsection (d) of section 2 of the 2 of the Banking Companies



Cor por ate Law Update

Banking Companies (Acquisition and Transfer of(Acquisition and Transfer of Undertakings) Act,1970 (5 of 1970)Undertakings) Act, 1970 (5 and clause (b) of section 2 of theof 1970) and clause (b) of Banking Companies (Acquisitionsection 2 of the Banking and Transfer of Undertakings) Act,Companies (Acquisition and 1980 (40 of 1980) and ‘subsidiaryTransfer of Undertakings) bank’ as defined in clause (k) ofAct, 1980 (40 of 1980). section 2 of State Bank of India

(Subsidiary Bank) Act, 1959(38 of 1959);

Sub-rule “Corporate action” means any(da), in sub-

— Insertedaction taken by the company

rule (1), in relating to transfer of shares and allRule 2 the benefits accruing on such shares

namely, bonus shares, split,consolidation, fraction shares etc.,except right issue to the Authority

Rule 3(2)(g) All amounts payable as All amounts payable as mentionedmentioned in sub-section (3) in sub-section (3) of section 10B of

Substituted

of section 10B of the the Banking CompaniesBanking Companies (Acquisition and Transfer of(Acquisition and Transfer Undertakings) Act, 1970, sectionof Undertakings) Act, 1970 10B of Banking Companiesand section 10B of Banking (Acquisition and Transfer ofCompanies (Acquisition and Undertakings) Act, 1980 & sectionTransfer of Undertakings) 40A of the State Bank of IndiaAct, 1980; and (Subsidiary Bank) Act, 1959;and

Rule 6 Manner of transfer of shares Please refer the notification for theunder sub-section (6) of

Substitutedfull text.

section 124 to the Fund

Rule 7 Refund to claimants from Please refer the notification for theFund

Substitutedfull text.

Few amendments have been brought about in Form IEPF-3, IEPF-5 and IEPF-6 also.

[F. No. 5/23/2016- IEPF dated 28 Febr uar y, 2017]th

3. COMPANIES (INDIAN ACCOUNTING STANDARDS) (AMENDMENTS) RULES, 2017.

The following amendments have been made in the principal rules, in the “Annexure”, under the heading“B. Indian Accounting Standards (Ind AS) 102, :Share-based payment

Paragr aph Provisions under the Companies (Indian Accounting Effect of theStandards)(Amendment) Rules, 2017 amendment

Paragraph A grant of equity instruments might be conditional upon satisfying19

Substitutedspecified vesting conditions. For example, a grant of shares or share optionsto an employee is typically conditional on the employee remaining in the


entity’s employment for a specified period of time. There might beperformance conditions that must be satisfied, such as the entity achievinga specified growth in profit or a specified increase in the entity’s shareprice. Vesting conditions, other than market conditions, shall not be takeninto account when estimating the fair value of the shares or share optionsat the measurement date, Instead, vesting conditions, other than marketconditions, shall be taken into account by adjusting the number of equityinstruments i ncluded in the measurement of the transaction amount sothat, ultimately, the amount recognised for goods or services received asconsideration for the equity instruments granted shall be-based on thenumber of equity instruments that eventually vest. Hence, on a cumulativebasis, no amount is recognised for goods or services received if the equityinstruments granted do not vest because of failure to satisfy a vestingcondition, other than a market condition, for example, the counterpartyfails to complete a specified service period, or a performance condition isnot satisfied, subject to the requirements of paragraph 21.

Paragraph For cash-settled share-based payment transactions, the entity shall30

Substitutedmeasure the goods or services acquired and the l iabil ity incurred at the fairvalue of the liabil ity, subject to the requirements of paragraphs 31-33D.Unti l the liabil ity is settled, the entity shall remeasure the fair value of theliabil ity at the end of each reporting period and at the date of settlement,with any changes in fair value recognised in profit or loss for the period

Paragraph For example, an entity might grant share appreciation rights to employees31

Substitutedas part of their remuneration package, whereby the employees will becomeentitled to a future cash payment (rather than an equity instrument), basedon the increase in the entity’s share price from a specified level over aspecified period of time. Alternatively, an entity might grant to itsemployees a right to receive a future cash payment by granting to them aright to shares (including shares to be issued upon the exercise of shareoptions) that are redeemable, either mandatori ly (for example, uponcessation of employment) or at the employee’s option. These arrangementsare examples of cash-settled share-based payment transactions. Shareappreciation rights are used to i llustrate some of the requirements inparagraphs 32-33D; however, the requirements in those paragraphs applyto all cash-settled share-based payment transactions.

Paragraph The liabil ity shall be measured, initially and at the end of each reporting33

Substitutedperiod until settled, at the fair value of the share appreciation rights, byapplying an option pricing model, taking into account the terms andconditions on which the share appreciation rights were granted, and theextent to which the employees have rendered service to date subject tothe requirements of paragraphs 33A-33D. An entity might modify theterms and conditions on which a cash-settled share-based payment isgranted. Guidance for a modification of a share-based payment transactionthat changes its classification from cash-settled to equity-settled is givenin paragraphs B44A-B44C in Appendix B



Paragraph A cash-settled share-based payment transaction might be conditional upon33A

Insertedsatisfying specified vesting conditions. There might be performanceconditions that must be satisfied, such as the entity achieving a specifiedgrowth in profit or a specified increase in the entity’s share price. Vestingconditions, other than market conditions, shall not be taken into accountwhen estimating the fair value of the cash-settled share-based payment atthe measurement date. Instead, vesting conditions, other than marketconditions, shall be taken into account by adjusting the number of awardsincluded in the measurement of the l iabili ty arising from the transaction.

Paragraph To apply the requirements in paragraph 33A, the entity shall recognise33B

Insertedan amount for the goods or services received during the vesting period.That amount shall be based on the best available estimate of the numberof awards that are expected to vest. The entity shall revise that estimate, ifnecessary, if subsequent information indicates that the number of awardsthat are expected to vest differs from previous estimates. On the vestingdate, the entity shall revise the estimate to equal the number of awardsthat ultimately vested.

Paragraph Market conditions, such as a target share price upon which vesting (or33C

Insertedexercisabil ity) is conditioned, as well as non-vesting conditions, shall betaken into account when estimating the fair value of the cash settled share-based payment granted and when remeasuring the fair value at the end ofeach reporting period and at the date of settlement.

Paragraph As a result of applying paragraphs 30-33C, the cumulative amount33D

Insertedultimately recognised for goods or services received as consideration forthe cash-settled share-based payment is equal to the cash that is paid.

Paragraph Tax laws or regulations may oblige an entity to withhold an amount for33E

Insertedan employee’s tax obligation associated with a share-based payment andtransfer that amount, normall y in cash, to the tax authority on theemployee’s behalf. To fulfil this obligation, the terms of the share-basedpayment arrangement may permit or require the entity to withhold thenumber of equity instruments equal to the monetary value of theemployee’s tax obligation from the total number of equity instrumentsthat otherwise would have been issued to the employee upon exercise (orvesting) of the share-based payment (i.e. the share-based paymentarrangement has a ‘net settlement feature’).

Paragraph As an exception to the requirements in paragraph 34, the transaction33F

Inserteddescribed in paragraph 33E shall be classified in its entirety as an equity-settled share-based payment transaction if it would have been so classifiedin the absence of the net settlement feature.

Paragraph The entity applies paragraph 29 of this Standard to account for the33G

Insertedwithholding of shares to fund the payment to the tax authority in respectof the employee’s tax obligation associated with the share-based payment.Therefore, the payment made shall be accounted for as a deduction from



equity for the shares withheld, except to the extent that the paymentexceeds the fair value at the net settlement date of the equity instrumentswithheld.

Paragraph The exception in paragraph 33F does not apply to33H

Inserted(a) a share-based payment arrangement with a net settlement feature for

which there is no obligation on the entity under tax laws or regulationsto withhold an amount for an employee’s tax obligation associatedwith that share-based payment; or

(b) any equity instruments that the entity withholds in excess of theemployee’s tax obligation associated with the share-based payment(i.e. the entity withheld an amount of shares that exceeds the monetaryvalue of the employee’s tax obligation). Such excess shares withheldshall be accounted for as a cash-settled share-based payment whenthis amount is paid in cash (or other assets) to the employee.”

Paragraph If the information required to be disclosed by this Standard does not satisfy52

Substitutedthe principles in paragraphs 44, 46 and 50, the entity shall disclose suchadditional information as is necessary to satisfy them. For example, if anentity has classified any share-based payment transactions as equity-settledin accordance with paragraph 33F, the entity shall disclose an estimate ofthe amount that it expects to transfer to the tax authority to settle theemployee’s tax obligation when it is necessary to inform users about thefuture cash flow ef fects associated wi th the share-based paymentarrangement.

Paragraph [Refer Appendix 1]53-59, 59A

“Transitional provisions” Inserted

and 59B

Paragraph [Refer Appendix 1]60-63C

“Effective date” Inserted

63D Amendments to Classification and Measurement of Share-based PaymentTransactions under Ind AS 102 amended paragraphs 19, 30-31, 33 and

Inserted

52 and added paragraphs 33A-33H, 59A-59B, 63D and B44A-B44Cand their related headings. An entity shall apply those amendments forannual periods beginning on or after 1 April, 2017

Paragraph “Accounting for a modification of a share-based payment transaction thatB44A, B

Insertedchanges its classification from cash-settled to equity-settled”

and C inAppendix B

Paragraph 5 Paragraphs 53-59 and 60-63C in IFRS 2 have not been included in Indin

InsertedAS 102 as these paragraphs relate to Transitional Provisions and

Appendix 1 Effective date, respectively. However, in order to maintain consistencywith paragraph numbers of IFRS 2, the paragraph numbers are retainedin Ind AS 102.



The following amendments have been made in the principal rules, in the “Annexure”, under the heading“B. Indian Accounting Standards (Ind AS) 7, “Statement of Cash Flows”:

Paragraph An entity44A

“Changes in liabili ties ar ising from financing activities” Insertedshall provide disclosures that enable users of financial statements toevaluate changes in liabili ties arising from financing activities, includingboth changes arising from cash flows and non-cash changes.

Paragraph To the extent necessary to satisfy the requirement in paragraph 44A, an44B

Insertedentity shall disclose the following changes in liabili ties arising fromfinancing activities:

(a) changes from financing cash flows;

(b) changes arising from obtaining or losing control of subsidiaries orother businesses;

(c) the effect of changes in foreign exchange rates;

(d) changes in fair values; and

(e) other changes.

Paragraph Liabil ities arising from financing activities are l iabili ties for which cash44C

Insertedflows were, or future cash flows wil l be, classified in the statement ofcash flows as cash flows from financing activities. In addi tion, thedisclosure requirement in paragraph 44A also applies to changes infinancial assets (for example, assets that hedge l iabilities arising fromfinancing activities) if cash flows from those financial assets were, orfuture cash flows will be, included in cash flows from financing activities.

Paragraph One way to fulfil the disclosure requirement in paragraph 44A is by44D

Insertedproviding a reconciliation between the opening and closing balances inthe balance sheet for liabil ities arising from financing activities, includingthe changes identified in paragraph 44B. Where an entity discloses sucha reconcil iation, it shall provide sufficient information to enable users ofthe financial statements to l ink items included in the reconciliation to thebalance sheet and the statement of cash flows.

Paragraph If an entity provides the disclosure required by paragraph 44A in44E

Insertedcombination with disclosures of changes in other assets and l iabili ties, itshall disclose the changes in l iabil ities arising from financing activitiesseparately from changes in those other assets and liabil ities.

Paragraph [Refer Appendix 1]“Effective date”53-59

Paragraph Paragraphs 44A-44E have been added. When the entity first applies these60

Insertedamendments, it is not required to provide comparative information forpreceding periods. An entity shall apply those amendments for annualperiods beginning on or after 1 April, 2017.

Paragraph Paragraphs 53-59 in IAS 7 have not been included in Ind AS 7 as these6 in

Insertedparagraphs relate to Effective date. However, in order to maintain



Appendix 1 consistency with paragraph numbers of IAS 7, the paragraph numbersare retained in Ind AS 7

[F. No. 01/01/2009-CL -V (Par t VI ) dated 17 March 2017]th

4. Companies to Disclose details of Specified Bank Notes in Balance Sheet and Audit Report:

1. In Schedule III, in Division I, in Part I under the heading “General instructions for preparation ofBalance Sheet” in paragraph 6, after clause ‘W’, the following clause shall be inserted namely:-

“X. Every company shall disclose the details of Specified Bank Notes (SBN) held and transactedduring the period from 8th November, 2016 to 30th December, 2016 as provided in the Tablebelow:-

SBNs Other Totaldenomination

notes

Closing cash in hand as on 08.11.2016

(+) Permitted receipts

(-) Permitted payments

(-) Amount deposited in Banks


:Explanation

For the purposes of this clause, the term ‘Specified Bank Notes’ shall have the same meaningprovided in the notification of the Government of India, in the Ministry of Finance, Department ofEconomic Affairs number S.O. 3407(E), dated the 8th November, 2016.”.

2. In Schedule III, in Division II, in Part I under the heading “General instructions for preparation ofBalance Sheet” in paragraph 6, after clause ‘J’, the following clause shall be inserted namely:-

“K. Every company shall disclose the details of Specified Bank Notes (SBN) held and transactedduring the period 08/11/2016 to 30/12/2016 as provided in the Table below:-

SBNs Other Totaldenomination

notesClosing cash in hand as on 08.11.2016

(+) Permitted receipts

(-) Permitted payments

(-) Amount deposited in Banks


:Explanation

For the purposes of this clause, the term ‘Specified Bank Notes’ shall have the same meaningprovided in the notification of the Government of India, in the Ministry of Finance, Department ofEconomic Affairs number S.O. 3407(E), dated the 8th November, 2016.”.

[F. No. 17/62/2015-CL -V (Vol.I ) dated 30 March, 2017]th

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Adv. Ankit [email protected]

Allied Laws Corner

(P) Ltd., M/s. A.B.Metal Industries (P)Ltd., M/s. SAMD Cast (P) Ltd., M/s.Pratikar Finlease Pvt. Ltd., M/s. SubodhGupta & Associates, M/s. UtkarshInternational and M/s. Formex Forms (P)Ltd.

2. The Disciplinary Committee issued noticeto the respondent to appear before theCommittee. The record of the DisciplinaryCommittee would show that from August25, 2004 the respondent, on one pretext orthe other, took adjournments andsuccessfully managed to drag on theproceedin til l gs July 29, 2006. On a datewhich is not emerging from the record theCommittee heard the complainant and therespondent and submitted a report onOctober 03, 2006 holding the respondentguilty of professional misconduct withinthe meaning of Clause 11 of the FirstSchedule to the Chartered AccountantsAct, 1949 and with respect to the chargeof other misconduct observed that the sameshall be decided after the outcome of theverdict by the CBI Court. The reason beingthat investigation qua the fraud committedby the Branch Manager was investigatedby CBI and a charge sheet was filed in theCourt of Competent Jurisdiction in whichamongst others, the respondent was namedas an accused.

3. The report of the Disciplinary Committeewas considered by the Council whichreferred the matter to the DisciplinaryCommittee for further inquiry and to submita complete report.

B. Findings of the Disciplinary Committee asnoted in their Report :

A practicing Chartered Accountant but activelycarrying on business through Companies, Trustsand Fir ms found to be guilty of professionalmisconduct and his name is removed fr omRegist r ar of M ember s of the I nst itute ofChar tered Accountants of India for a per iod oftwo year s.

Recently, the Delhi High Court in the case ofCouncil of Institute of Chartered Accountantsof I ndia vs. Subodh Gupta 79 reported in taxmann.com 9 held that since being a charteredaccountant, he was actively carrying on businessthrough companies, trusts and firms, respondent andaccordingly was guilty of professional misconductand his name was to be removed from Register ofMembers of the Institute of Chartered Accountantsfor a period of two years.

1. A complaint was received from the Punjab

A. Facts of the case :

National Bank alleging that the respondent: a practicing Chartered Accountant, hadincorporated three companies and a trust,wi th he being the f ounder di rector/president and had opened accounts in thename of the companies and the trust withthe complainant’s branch at Agra. Thethree companies incorporated were : M/s.Seeroo Foods Pvt. L td., M/s. G.K.Consultant Ltd. and M/s. Jagrook BuildersPvt. Ltd. The trust set up was M/s. NirogiCharitable and Medical Research Trust. Itwas further alleged that in connivance withthe Branch Manager, funds were divertedto companies and f irms in which therespondent was associated directly as adirector or as a partner. The said entitieswere : M/s. Radha Raman Plastic ConcernLtd., M/s. Himalayan Production & Estate



1. The Committee noted that the respondentwas signing the Balance Sheet of variouscompanies i.e. M/s. G.K. Consul tantsLimi ted, M/s. Seeroo Foods Pri vateLimi ted, M/s. Radha Raman Plasti cConcern Ltd. etc. in the capacity of as aDirector of the said Companies. Further, itis an admitted fact that the respondent wasalso operating the bank account of theCompanies.

2. The Committee noted that and it is anadmitted fact that the respondent wasDirector in several companies i.e. M/s.Seeroo Foods (p) Ltd., M/s. Ni rogiCharitable & Medical Research Ltd., M/s.G.K. Consultant Ltd. etc. However, therespondent have taken permission from theInsti tute to be a Di rector only in oneCompany i.e. M/s. G.K. Consultant Ltd.

3. The respondent submi tted that he washonorary Director in all the Companies andfor that no specific permission was requiredfrom the Institute. But the Committee isnot convinced with the contention of ther espondent as the r espondent wasactively involved in the day to dayoperation of the Companies as he wasinvolved in signing the balance Sheetsof the var ious Companies in thecapacity of a Director, operating theBank account9s) signing the L oanappl icat ion/documents etc. TheComplainant has submitted the copies ofresolution of the Companies, authorizingthe respondent to operate the Bankaccounts, Copies of the Memorandum &Arti cle of Associati on of variousCompanies in which the respondent wasshown as a promoter of the Companies.Further, the respondent was act ivelyinvolved in the Company’s activitiesrelating to bank’s transaction and hesigned the documents for over dr aftfacil ity as well.

Al lied Laws Cor ner

4. In view of the above, it is evident thatthe respondent was involved in day today activities of var ious Companiesnamely, M/s. Seeroo Foods (P) Ltd., M/s.Nirogi Charitable & Medical ResearchTrust, M/s. G.K. Consul tant Ltd., M/s.Jagrook Builders (P) Ltd., M/s. RadhaRaman Plasti c Concern L td., M/s.Himalayan Production & Estate (P) Ltd.,M/s. A.B. Metal Industries (P) Ltd., M/s.SAMD Cast (P) Ltd., M/s. Prati karFinlease Pvt. Ltd., M/s. Subodh Gupta &Associates, M/s. Utkarsh International andM/s. Formex Forms (P) Ltd. withoutobtaining the prior permission of theInstitute.

5. Thus, in view of above the Committeeholds the r espondent guil ty ofprofessional misconduct fall ing with themeaning of Clause (11) of Par 1 of Fir stSchedule to the Char tered AccountantsAct, 1949.

6. The Committee noted that the secondchar ges i s that t he r espondent i sconnivance wi th the then Br anchManager had defr auded the Bank. I t isan admitted fact that the Bank has beencheated by the Companies in which theRespondent was the Director and thebranch manager was actively involvedin the said fraud. The Committee notedthat the bank has been defrauded to thetune of Rs. 3.50 crores and for the samethe Bank has filed recovery suit. The saidsuit has been withdrawn as the Bank hasentered into a compromise with theCompanies. The Committee noted that theBranch Manager had allowed the cleanoverdraft to the Companies superseding hisstatutory powers.

7. The Committee noted that the criminal suitis still pending in the Court and the chargeshave not been framed despite the fact that



more than 9 years have elapsed. TheCommittee noted that the Respondent’scontention was that he was given cleanoverdraft based on the creditworthiness ofthe Companies and he has not furnishedany wrong document.

8. The Commi ttee observed that thecontention raised by the Respondent is notat all tenable as the charge sheet whichhas been fi led by the CBI wherein theRespondent is one of the accused alongwith other s, namely, Deepak KumarNayyar, Manager, Punjab National Bank,(under suspension). It has been pointed outin the charge-sheet that Nirogi Charitable& Medical Research Trust was neitheravailing any credit facil ity/loan nor therewas any OD account in the name of thesaid Society in the Punjab National Bank,Kamla Nagar Branch, Agra. Further, i t wasmentioned that Mr. Deepak Kumar Nayyar,Manager, Punjab National Bank hadabused his position as Branch Manager byconspiring with the respondent to causewrongful loss to the Bank and wrongfulgain to themselves by fraudulent meansand in furtherance of the said conspiracy,the said Branch Manager debited a sum ofRs. 85,12,750/- to a non-existence ODaccount of the Society on 27th April, 1998and got issued 11 demand drafts for a totalsum of Rs. 85 lacs drawn on CDPC, NewDelhi favouring various beneficiaries ofDelhi on the basis of draft application formssubmitted by the respondent.

9. The Committee also observed that it wasalleged in the charge-sheet that M/s.Seeroo Foods Pvt. Ltd. represented by therespond as ent its Director was having anAnupam Fixed Deposit Account No. 489and corresponding OD account which wasoperated by the respondent himself. On16th December, 1997 while the AnupamAccount was showing a credit balance of

Rs. 2,25,98,910/-, Mr. Nayyar fraudulentmade an excess credit of Rs. 7,11,715/- asinterest on 19.9.97. The said Managerfurther two fake credits for Rs. 5,24,96,50/- on 13.11.97 and Rs. 80,50,000/- on18.11.97 showing the same as being theamounts against FDR No. 589/97 andFDR No. 603/97 respectively. It wasfurther alleged that all the aforesaid threeentries were made by Mr. D.K. Nayyar inconnivance with the Respondent withoutreceipt of funds from or on behalf of M/s.Seeroo Foods Pvt. Ltd. and the amountwas withdrawn from Anupam OD A/c. No.49 on the various dates by the respondent.

10. On perusal of the aforestated charge-sheet and the involvement of therespondent in the enti re mat ter, theCommittee felt that the respondent’scontention that he was not at all involvedin this entire episode is not acceptable.The Committee further noted that therespondent at each stage was aware of thefact as to how the amounts were creditedto the Society’s account and only at hisinstance 11 demand drafts were issued tovarious benef i ciaries for which therespondent himself had submitted the draftapplications.

11. Though the Committee noted that theComplainant has not submitted any specificdocument before the Committee yet theCommittee on perusal of the charge-sheetalong with the various correspondencewhich has been exchanged by therespondent with the Bank is of the viewthat the respondent was dealing with thebank on day to day basis and he was wellaware about the security available to theBank and despite knowing that he enjoyedthe clean overdraft facility in contraventionof the Rules of the Bank. I t is apparentthat the Respondent was in connivancewith the then Br anch M anager and


enjoyed the clean over dr aft facil i tywithout any secur i ty. Therefore, theCommit tee is of the view that theRespondent i s gui l ty of ‘OtherMisconduct’ under Section 22 read withSect ion 21 of the Char ter edAccountants Act, 1949

C. Findings of the Delhi H igh Cour t on

.

reference made by the Council of ICAI :

1. There is evidence on record that therespondent was operating the bankaccounts of the three companies. There isevidence on record that the respondent wassigning the balance sheet of variouscompanies in the capacity as a director andwas also operating the bank accounts andsigning various applications submitted tothe bank. Memorandum and arti cle ofassociations of various companies show therespondent to be the promoter of thecompanies. There is also evidence that therespondent had signed as the introducerwhen accounts of other companies wereopened and significantly the address ofthese other companies was the same fromwhere the respondent carried on hisprofession as a Chartered Accountant. Weshall be noting, in some detail, one suchact of the respondent which is indicativeof what he was indulging in.

2. Relevant would it be to highlight thatpertaining to the indictment of havingcommitted other misconduct, there isevidence that the applications to issueeleven demand drafts were submitted bythe respondent. The trust was not enjoyingany credit or loan or an overdraft facili ty.There being no money in the account. Themanager debited a sum of Rs. 85,12,750/-in the account treating the same as havingan overdraft facil ity. Eleven demand draftswere issued favouring various facili ties.


3. There is evidence that M/s. Seeroo FoodsPvt. Ltd. of which the respondent wasacting as a director had an Anupam FixedDeposi t Account No. 489 in whichaccount, on December 16, 1997 there wasa credi t balance of Rs. 2,25,98,910/-.Excess credit of interest in sum of Rs.7,11,715/- was made in the account onSeptember 19, 1997. Two other credits insum of Rs. 52,49,650/- and Rs. 80,50,000/- were made against two fixed depositreceipts. The money was withdrawn fromthe Anupam Accounts on various dateswithout actual receipt of funds.

4. It is thus not a case where the respondenthas established his involvement with thecompanies in an honorary capacity.

5. The second contention urged by learnedcounsel for the respondent was that trialbefore the CBI Court is not get over.Nothing turns on that because the chargein the criminal proceedings is one ofconspi racy and cheating. I nstantproceedings relate to the charge of ther espondent being a Char ter edAccountant and wi thout per missionf r om the I nst i tute of Char ter edAccountant act ing as a dir ector invar ious companies. No doubt theprofessional misconduct encompassesthe acts of cheating, but that was thesubject matter of a separate indictmentagainst which the appeal fi led by ther espondent in t hi s Cour t waswithdrawn.

6. To bring home one il lustrative point as tohow the respondent was involved,overlooking the names of the persons whowere responsible, for the reason this wouldrelate to the charge of conspiracy, evidenceshows that on advise f rom ForeignExchange Office of PNB, two FDRs underFCNR Account No. 12 were issued in sum



of Rs. 99,62,526/- and Rs. 47,34,921/- inthe name of Tajinder Singh Sahni and Mrs.Jasbeer Kaur Sahni. Two parallel sets ofFDRs in same amount were also issued butpertaining to FCNR Account No. 11. Themodus operandi was to tag the name ofMrs. Jasbeer Kaur Sahni , wi fe ofSurinderpal Singh and that of Taj inderSingh Sahni . The actual benefi ciariesought to have been Tajinder Singh andJasbeer Kaur. A document was thenintroduced in the record, allegedly pointingout aforesaid anomaly and the result wasfi ve FDRs being issued in the correctnames. The two sets of FDRs in the jointname of Tajinder Singh and Jasbeer Kaur,which were required to be cancelledoutright, were not cancel led. Who didwhat would not be relevant for thepurposes of the present proceedings, butrelevant would be the fact that thissiphoned-off funds was used for making11 demand dr afts, 9 out of which in sumof Rs. 81 lacs were deposited in CurrentAccount No. 130 maintained by I ndianOverseas Bank, Preet Vihar in the nameof M/s. S.A. Casting Industr ies Pvt. L td.The respondent was the person whointroduced the account holder. Theaddress of M/s. S.A. Casting Industr iesPvt. L td. is the same as that of M/s.Seeroo Foods Pvt. Ltd., which accountwith I ndian Over seas Bank, beingCurrent Account No. 117, was oper atedby the respondent. Aforesaid showsrespondent acti vely par ticipat ing inbusinesses, which as a pr act i cingChar tered Accountant the respondentcould not indulged in.

7. The third submission advanced by learnedcounsel for the respondent was predicatedon a decision dated August 16, 2016deli vered by a Division Bench of thisCourt in Chat. A. Ref. No. 4/2012 Council

of Institute of Chartered Accountants ofIndia v. Gurvinder Singh [2016] 72taxmann.com 197/242 Taxman 36 inwhich the view taken was that a CharteredAccountant would not be amenable to anydisciplinary proceedings while acting as anindividual and dealing with a complainantin a commercial matter. : A CharteredAccountant enters into an agreement to selland receives an earnest money which heclaims to have forfeited alleging default bythe buyer. The buyer takes the stand thatthe Chartered Accountant never intendedto sell the property and thus has cheatedthe buyer. This dispute cannot form thesubject matter of a discipl inaryproceedings because the CharteredAccountant is not acting as a CharteredAccountant. He is acting as the owner ofthe property.

8. In the instant case the admitted positionis that the respondent is registered withthe Council to practice as a Char teredAccountant. He cannot be a director ofa company without the permission ofthe Counci l. The appel lant i s thepromoter of var ious companies of whichhe is a director as per the evidence onrecor d. Being a Char tered Accountantthe respondent cannot actively car ry onbusiness through companies, trusts andf i r ms. Ther e i s evidence t hat therespondent is doing so

9. Af f i r ming the ver dict of guil t and

.

keeping in view the gr avi ty of themisconduct we answer the reference byimposing the penalty of r emoval ofrespondent’s name from the Register ofMembers of the Institute of CharteredAccountants for a per iod of two year s.

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CA. Kunal A. [email protected]

From the Government

Income Tax

1) Pr ess Release r elat ing to mandator yQuoting of Aadhaar For PAN Applications& Fil ing Return of Income

Section 139AA of the Income-tax Act, 1961as introduced by the Finance Act, 2017 providesfor mandatory quoting of Aadhaar / EnrolmentID of Aadhaar application form, for fi ling ofreturn of income and for making an applicationfor allotment of Permanent Account Numberwith effect from 1st July, 2017.

It is clarified that such mandatory quoting ofAadhaar or Enrolment ID shall apply only to aperson who i s eligible to obtain Aadhaarnumber. As per the Aadhaar Act, 2016, only aresident individual is entitled to obtain Aadhaar.Accordingly, the requirement to quote Aadhaaras per section 139AA of the Income-tax Actshall not apply to an individual who is not aresident as per the Aadhaar Act, 2016

(Press Release dated 5 April,2017)th

2) Notification regar ding amendment in sec269ST

The Central Government hereby notifies thatthe provision of section 269ST shall not applyto receipt by any person from an entity referredto in sub-clause (b) of clause (i) of the provisoto section 269ST. The notification shall bedeemed to have come into force with effectfrom 1st day of April, 2017.

(Notification no.28, dated 5 April, 2017)th

3) Press Release regar ding New Income TaxReturn Forms for AY 2017-18

The Central Board of Direct Taxes has notifiedIncome-tax Return Forms (ITR Forms) for theAssessment Year 2017-18.

One of the major reforms made in the notifiedITR Forms is the designing of a one pagesimplified ITR Form-1(Sahaj). This ITR Form-1(Sahaj) can be filed by an individual havingincome upto Rs.50 lakh and who is receivingincome from salary one house property / otherincome (interest etc.) . Various parts of ITRForm-1 (Sahaj ) viz. parts relating to taxcomputation and deductions have beenrationalised and simplified for easy compliance.

The number of ITR Forms have been reducedfrom the existing nine to seven forms. Theexisting ITR Forms ITR-2, ITR-2A and ITR-3 have been rationalized and a single ITR-2has been notified in place of these three forms.Consequently, ITR-4 and ITR-4S (Sugam) havebeen renumbered as ITR-3 and ITR-4 (Sugam)respectively.

Whereas there is no change in the manner offi ling of ITR Forms as compared to last year.A l l these ITR Forms are to be f i ledelectronically.

The following persons have an option to filereturn in paper form where the return of incomeis furnished in form ITR 1 (Sahaj) or ITR 4(Sugam):-

(i) an individual of the age of 80 years or moreat any time during the previous year; or

(i i) an individual or HUF whose income doesnot exceed five lakh rupees and who hasnot claimed any refund in the return ofincome.

The notified ITR Forms are available on thedepartment’s of fi cial websi tewww.incometaxindia.gov.in

(Press Release dated 31 , March,2017)st


http://www.incometaxindia.gov.in


Fr om the Government

4) Clar ification on Income Computation andDisclosure Standards (ICDS) notified undersection 145(2) of the Income – tax Act, 1961.

Central Government vide notification no. 87dated 29 September, 2016 notifies the incometh

computation and disclosure standards to befollowed by al l assessees (other than anindividual or a Hindu undivided family who isnot required to get his accounts of the previousyear audited in accordance with the provisionsof section 44AB of the said Act) following themercanti le system of accounting, for thepurposes of computation of income chargeable

contd. fr om page 799 VAT - Judgements and Updates

to income-tax under the head “Profits and gainsof business or profession” or “Income fromother sources”.

The CBDT hereby i ssues clari f i cationsregarding the provisions of ICDS by way ofF Qs A and accordingly vide notification no. 87,dated 29 September,2016, the centralth

government notified amended ICDS w.e.f. AY2017-18.

( Full text refer circular no. 10/2017 , dated23rd March,2017)

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of M/sd. Saurashtra Cement Ltd. S.A. No. 603of 2007 decided on 01.08.2014, the appellantwas entitled to get interest on the amount ofrefund. It was further submitted that the issueof granting of interest on the amount of refundarise in deciding of the appeal is decided bythe Hon’ble Gujarat High Court in the case ofM/s. Doshi Printing Press. The Hon’bleTribunal referred section 54(1)(aa) and alsoreferred judgm by the appellantents relied on and held that the appellant is entitled to getinterest on the amount of refund.

[4] Tr ansasia Bio M edical L td. v/s. DeputyCommercial Tax Officer : (M adr as HighCour t)

Issue:

Late submission of ‘C’ Forms are to beaccepted consider ing the provisions of Rule12 of the CST Rules, 1956.

Facts:

The assessee is engaged in business of medicalequipments and registered dealer under thelocal Act as well as the CST Act. The assesseesold goods in the course of inter-state trade andcommerce as well as transferred goods to thebranches outside the State. The assessee filedi ts returns accordingly and claimed thetransactions accordingly. However, the assesseecould not fi le the declaration forms C & F within

the time. The assessing authority issued a noticefor reversal of exemption claim in absence ofstatutory forms. The assessee requested for timefor fi ling the declaration forms and thereafter,fi led such forms also. The assessing authorityaccepted Forms ‘C’ but rejected Form ’F’.Being aggrieved, the assessee filed present writpetition before the Madras High Court.

The Madras High Court held that on account

Held:

of the fact that the Rule itself encapsulates theprinciple that if, declarations are filed, theyshould be accepted unless the request made isdelayed beyond reasonable time and withoutsuff icient cause. Acceptance of genuinedeclarations should be the norm and not anexception, so that, the dealers are not put tounnecessary trouble and deprived of thei rlegitimate benefits. As a matter of fact, theAssessing Officer, should concentrate more onwhether or not, the declarations fi led areoriginal and genuine, rather than, adopt apedantic approach, vis-à-vis, the time frame,within which, declarations are to be filed. Suchan approach will stem the flow of cases to thisCourt. The impugned assessment order and thenotices for each of the assessment years cameto be set aside and the writ petition fi led by theassessee came to be allowed accordingly.

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Association News

CA. Dil ip U. JodhaniHon. Secretary

CA. Riken J. PatelHon. Secretary

Glimpses of the Past Events

Joint Programme with Service Tax Department

T10 Cricket Tournament

Talk on Bitcoin


Across1. Notice issued u/s 148 without _________ of

mind or proper satisfaction of escapement ofincome is not valid.

2. agThe _______ Property Bill 2016 guards ainstthe claims of succession or transfer of theproperties left by people who migrated toPakistan and China after wars.

3. To claim additional depreciation, the assets needto be acquired and _______ as per the wordingsof section 32(i)(i ia).

4. _______ is l ike oxygen passing through aDown

venti lator giving enormous strength to survive.5. In case of R.B. Jessaram Fatehchand, it was

held that if records of addresses are not kept inrespect of _________, then books of accountcannot be rejected on this account.

6. In the case of Zydus Infrastructure Pvt. Ltd., itwas held that expenditure incurred on softwareli cense valid for l ong term is eligible at________ percent of depreciation.

1. The Crossword puzzle is based on previous

ACAJ Crossword Contest # 35

Notes:

issue of ACA Journal.

2. Two lucky winners on the basis of a draw wil lbe awarded prizes.

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

4. Members may submi t thei r reply ei therphysically at the office of the Association orby email at [email protected] on orbefore 30/04/2017.

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

ACAJ Crossword Contest # 34- Solution

Across1. Hyatt Regency2. Ketto 3. Refund

4. StatuteDown

5. Gratitude6. Notional

1.

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Winners of ACAJ Crosswor d Contest # 34

CA. Arvind Gaudana

2. CA. Priyank Dave

4

1 5

2

6

3


volume : 40 | part 12 | march, 2017 · ahmedabad chartered accountants journal march, 2017 749...

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