journal single colour - caa-ahm.orgcaa-ahm.org/Pdf/Journal/Journal-42.pdf · every individual is...

Ahmedabad Chartered Accountants Journal August, 2014 259

Volume : 38 Part : 05 August, 2014

Ahmedabad Chartered Accountants JournalE-mail : [email protected] Website : www.caa-ahm.org

C O N T E N T S To Begin with

MananamCharity.... begins at home..................................................................... CA. Samir D. Shah.................. 261

EditorialThe Ungraceful Audit......................................................................... CA. Ashok Kataria .................... 262

From the President............................................................................CA. Shailesh C. Shah................. 263

Articles

The Right to Information Act, 2005 - Filing of Appeal.........................CA. S. K. Sadhwani....................264

Direct Taxes

Glimpses of Supreme Court Rulings................................................... Adv. Samir N. Divatia................270

From the Courts.................................................................................. CA. C.R. Sharedalal &CA. Jayesh Sharedalal............... 272

Tribunal News.....................................................................................CA. Yogesh G. Shah &CA. Aparna Parelkar.................. 274

Unreported Judgements......................................................................CA. Sanjay R. Shah.................... 279Controversies......................................................................................CA. Kaushik D. Shah................. 281Judicial Analysis..................................................................................Adv. Tushar P. Hemani................285

FEMA & International Taxation

FEMA Updates................................................................................... CA. Savan A. Godiawala............289

Indirect Taxes

Service Tax

Service Tax Decoded.......................................................................... CA. Punit R. Prajapati................291Recent Judgements............................................................................. CA. Ashwin H. Shah...................299

Value Added Tax

VAT Demystified.................................................................................. CA. Priyam R. Shah................... 301Recent Judgements and Updates........................................................ CA. Bihari B. Shah.....................305

Corporate Law & Others

Business Valuation.............................................................................. CA. Hozefa Natawala.................309Corporate Law Update....................................................................... CA. Naveen Mandovara............. 312

From Published Accounts ................................................................ CA. Pamil H. Shah..................... 315

From the Government ......................................................................CA. Kunal A. Shah..................... 317

Association News.............................................................................. CA. Abhishek J. Jain &CA. Nirav R. Choksi................... 319

ACAJ Crossword Contest....................................................................................................................322

Ahmedabad Chartered Accountants Journal August, 2014260

AttentionMembers / Subscribers / Authors / Contributors1. Journals are carefully posted. If not received, you are requested to write to the Association's

Office within one month. A copy of the Journal would be sent, if extra copies are available.2. You are requested to intimate change of address to the Association's Office.3. Subscription for the Financial Year 2014-15 is ` 400/-. Single Copy (if available) ` 40/-.4. Please mention your membership number/journal subscription number in all your correspondence.5. While sending Articles for this Journal, please confirm that the same are not published / not

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

6. 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 with the authors / contributors.

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

Published ByCA. Ashok Kataria,on behalf of Chartered Accountants Association, Ahmedabad, 1st Floor, C. U. Shah Chambers, NearGujarat Vidhyapith, Ashram Road, Ahmedabad - 380 014.Phone : 91 79 27544232Fax : 91 79 27545442No part of this Publication shall be reproduced or transmitted in any form or by any meanswithout the permission in writing from the Chartered Accountants Association, Ahmedabad.While every effort has been made to ensure accuracy of information contained in this Journal,

Professional AwardsThe best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law and

the Publisher is not responsible for any error that may have arisen.

Auditing' and 'Allied Laws and Others' will be awarded the Trophies/ Certificates of Appreciationafter being vetted by experts in the profession.

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

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

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

Journal CommitteeCA. Ashok Kataria CA. Pitamber Jagyasi

Chairman ConvenorMembers

CA. Gaurang Choksi CA. Jayesh Sharedalal CA. Mukesh KhandwalaCA. Naveen Mandovara CA. Rajni Shah CA. T. J. Advani

Ex-officioCA. Shailesh Shah CA. Abhishek Jain


For most of us the word charity means donatingmoney for a good cause. In our busy schedule, wecontribute a small portion of our earnings here andthere and feel a sense of contentment of havingdone some good for the Society. But this is not all.Even donating money requires a lot of research andplanning. Each and every charitable institution hasits own set of purpose and norms of functioning.Firstly, one needs to identify the purpose for whichhe wants to donate. Secondly, one needs to findout an appropriate organization functioning for theidentical cause and purpose. And lastly, one needsto identify as to how he would like to contribute.Mind you, donating money in itself is not the solepurpose of charity. One may contribute by way oftime and energy as well. One may even contributein kind.

According to Vedic scriptures, service to the Societyis part of ‘dharma’ of one’s being. From timesimmemorial, the well placed Individuals have beencontributing their might for the well being of thepoor and downtrodden. In today’s context, charityhas assumed new-found importance as each andevery individual is running short of time in his dayto day life. It has become very difficult to sparetime to look after the well being of one’s familymembers, forget outsiders. We need to spare timeout of our busy schedule and allocate resources forthe betterment of the Society at large.

For any civilization to prosper, a fair and equitableallocation of resources amongst its citizens isnecessary. Despite efforts from the authorities(Government), disparities in such allocation arebound to remain. Charity from well placedindividuals and organizations tries to bridge this gap,to an extent. In more developed countries, theprivate sector plays a role parallel to theadministration towards this end. There areexamples of billionaires like Bill Gates and Warren

CA. Samir D. [email protected]

rdBuffet contributing almost 2/3 of their wealth toCharity ..... begins at home .....charity. This is done in a most systematic andorganized manner and the resources are allocatedglobally for various causes like elimination ofpoverty and hunger, spread of quality education,providing fresh drinking water, elimination ofdreaded diseases like Aids, so on and so forth. Asfar as India is concerned, exemplary work is beingdone by the Tata Group and individuals like Messrs.N. R. Narayanmurthy, Nandan Nilenkani, AzimPremji, et al.

In the recent past, private sector participation incharity has been corporatized by the newly enactedCompany Law. Under the new Companies Act,2013 a whole set of rules have been framed under“Corporate Social Responsibility” wherebycorporates are duti-bound to spend a part of theirearnings for social causes. It’s a welcome movewhich shall bring about all round development ofthe Society and provide equal opportunities to thepoor and needy. Most of the resources availableshall hopefully be allocated to tackle issues thathaunt Indian Society i.e. population control,elimination of poverty, availability of basiceducation to one and all, provision of fresh drinkingwater, providing vocational training, establishingand running sophisticated medical facilities,establishing and running basic civil amenities likedrainage and sewerage systems, drinking waterpipelines, etc.

As the title suggests, charity begins at home. Letus all take a vow to contribute our might in termsof money and time, for the betterment of the Societyat large.

M MananaM Manana


Section 44AB in the Income Tax Act has beenaround since about last 30 years stipulating auditof assessees whose turnover or gross receiptsexceed the prescribed limits. Over the period of threedecades various issues have emerged in the process,many of which are settled, and many are still beingevolved and debated with the ever changing lawand the changing business environment. Despite thelaw being there since such a long time and alsovarious guidance notes published by the Instituteof Chartered Accountants of India, the basicquestions like whether a particular item forms partof the turnover or not is still a matter of discussion.Without doubt, the provisions of section 44AB arein the interest of the profession providing ampleprofessional opportunity to chartered accountants,the idea behind bringing in such a provision of amore relevance.

The tax audit is to facilitate the Income TaxDepartment with the information of large assesseeswhich would be helpful while framing theirassessments. To put it simply, it is the requirementof the department to extract information of suchassessees but as it lacks with the infrastructure andthe machinery to meet such requirement, theresponsibility is cast upon the profession ofchartered accountancy. It is the charteredaccountants that are trusted by the Government andallowed to undertake tax audits which otherwisecould be done by the department itself.

The important point to be considered is that the auditis done on behalf of the government, of a client, togather information for which the professional feeis borne by the client. In a given scenario, eventhough the audit is carried out diligently, theemotions go with the client as he is the one whopays for the job. Is it possible to maintain integrityand independence while conducting the audit whereon one hand the department wants us to providethe information and clients have their ownexpectations against the professional fees paid?

EditorialThe Ungraceful Audit

The reporting formats of tax audits have undergonea change w.e.f. 25-7-2014 and the new forms havebeen made effective with immediate effect withoutany prior intimation to chartered accountants or theassessees. The sudden change has caused a greathardship to all practicing chartered accountants. Thereare instances where audits have already beencompleted before 25-7-2014 but the reports are notuploaded on the website of the department. After 25-7-2014, the utility to upload the tax audit reports inold format has been withdrawn by the department.As of today there is no clear and easy solution as tohow to upload these completed reports despite thedepartment’s clarification asking for all reports after25-7-2014 to be furnished in the revised format.Whether an auditor can revise the reports once issuedand more so when these reports have already beensubmitted to various stake holders including banks.

At this juncture, the entire process of tax audits hascome to a standstill as the department has not beenable to provide the new utility to upload the taxaudit reports. The experience from the departmentas far as providing the platform to file income taxreturns after the end of the financial year is not verygood and if the department continues to function inthe manner it has been over the last few years, it isgoing to be a tough task ahead for all charteredaccountants to complete their tax audit assignmentsbefore the due date.

The better option would have been that the CBDTwould have come with draft forms and waited forthe suggestions from the professional bodiesincluding the Institute of Chartered Accountants ofIndia and only after addressing the concerns ofprofessional bodies and assessees, the departmentshould have made the new forms mandatory. It isnot yet too late to make new forms optional for thecurrent assessment year and bring it from the nextyear which would bring some grace to the auditwhich otherwise has proved to be so ungracefulover these years.

Namaste,CA. Ashok Kataria

[email protected]


Dear Esteemed Reader,

A spectacular election campaign, the promise ofdramatic change-growth-reform, a thumpingvictory with the biggest mandate for a singlepolitical party in three decades and then thediplomatic coup of his swearing in ceremony—allthese had combined to raise expectations from thenew government. We could even say that peoplehad begun to expect that Narendra Modi as primeminister (PM) would be nothing short of AmitabhBachhan or Rajnikant on screen!

The Finance Minister presented his maiden budgetin the parliament on 10-07-2014. With his openingwords, ‘people of India have decisively voted for achange and that the poll verdict was a sign of theirexasperation with the status quo’, the FinanceMinister has tried to touch upon each and everysegment so as to ensure that no one remainsunpleased.

A number of reforms have been proposed includingliberalization of foreign direct investment in defenseand insurance upto 49%, a pass-through regime forreal estate and infrastructure investment trusts, somecertainty for foreign institutional investors (FIIs) andforeign portfolio investors (FPIs), boost to debtmarkets, and a clear commitment towards a stableand predictable tax system. However clarificationon some of the items like general anti-avoidancerules (GAAR) has not been made. Hopefully thesewill be addressed in Budget 2015.

After looking to the budget it seems that the “bitterpill” referred to by Prime Minister in his earlierspeech didn’t mean higher taxes. But it means thatpeople would be asked to pay more for utilities.Unless users pay, utilities can’t survive.

It is argued that it is copy and paste of the interimbudget. However, it is unfair to judge a Budget thathad to be prepared in 45 days, especially when therewere burning issues of poor monsoon and increase

From the President

in crude oil prices.

CA. Shailesh C. [email protected]

We can say that it was a ‘thanksgiving’ Budget forvoters who gave the BJP a clear majority in theLoksabha election.

The biggest threat to this year’s monsoon seems tohave moved away, as most of the parts of Indiahave received good amount of rainfall. This couldbe the reason for cheer in India as India’s economyheavily depends on monsoon.

At the Association, the program on TechnicalAspects of the Finance Bill – 2014 by Shri SaurabhSoparkar was held jointly with Ahmedabad Branchof WIRC of ICAI which was very well receivedby all the members. Like every year, budget bookletcovering important amendments relating to Incometax and Service tax was also released. I am pleasedto inform you that around 12000 copies of thebooklet in Gujarati and English were sold. Whenthis issue will reach you we all will be busy infinalizing the tax audit work. Friends, new tax auditreport notified by the Department has createdhardship for the chartered Accountants. Manymembers have already prepared the tax audit reportpending uploading on the website of theDepartment. We at the Association have made astrong representation to postpone the applicabilityof the new tax audit report for one year.Alternatively, we have also suggested thatadditional time of at least one month be granted foruploading the tax audit report in the old format incases where audits are completed and report issuedprior to 25-7-2014.

Before I conclude I wish all of you happy festiveseason and happy audit season.

With regards,CA. Shailesh C. ShahPresident


Please refer to my article published in AhmedabadChartered Accountants Journal (July, 2013)dealing with the citizens’ right to access theinformation held by the public authority andprocedure to file RTI application for seeking theinformation from Public Authority. In this article,attempt has been made to deal with the situationswhen citizen has been denied the access toinformation, he may file Appeal/Complaint beforethe Central Information Commission (CIC).

First Appeal

If a citizen does not receive the information withinthe period of 30 days of filing of RTI application oris aggrieved by the decision of the PIO, he canprefer an appeal. [S. 19(1)]

In any appeal proceedings, the onus to prove that adenial of a request was justified shall be on the PIOwho denied the request. [S. 19(5)]

Appeal should be filed within a period of 30 daysfrom the date on which the limit of 30 days of supplyof information is expired or from the date on whichthe information or decision of the PIO is received.

The belated appeal can be admitted if the appellateauthority is satisfied that appellant was preventedby sufficient cause from filing the appeal in time.

Fees Payable

No fees is payable for the filing of appeal under theRTI Act.

How to locate the name and address of the firstappellate authority

Generally, Officer who is senior in rank to the PIOis the First Appellate Authority (FAA), in eachPublic Authority. However, it is the duty of the PIOto mention the particulars such as name, designationand address of the FAA in the order passed by him

Format of First Appeal

No standard form of first appeal is mandated in

while disposing of the request for information.

Central RTI Rules. However, the appeal shouldcontain following basic particulars:

· Name and address of the appellant;

· Name and address of the Public InformationOfficer against the decision of whom the appealis preferred;

· Particulars of the order including number if any,against which the appeal is preferred;

· Brief facts leading to the appeal;

· If the appeal is preferred against deemed refusal,particulars of the application, including numberand date and name and address of the CentralPublic Information Officer to whom theapplication is made;

· Prayer or relief sought;

· Grounds for prayer or relief;

· Verification and Sign of appeal by citizenhimself.

The appeal shall be accompanied by the followingdocuments, self attested by the appellant himself:

· Copy of request seeking the information;

· Copy of order passed by the CPIO against whichthe appeal is preferred;

· Copy of communication or application orrelevant document based on which appellantseeks the information.

Suggested format of first appeal is appended hereto.[See Exhibit-I]

Authorized Representative

Appellant may be present in person or through hisduly authorized representative. Appellant canauthorize a CA or an Advocate or any other personto represent him in the course of hearing before the

CA. S. K. [email protected]

The Right to Information Act, 2005- Filing of Appeal


The Right to Information Act, 2005 - Filing of Appeal

appellate authority by way of power of attorneythat specifically provides for delegation of powerwith respect to RTI matters.

Online Filing of First Appeal

First appeal can also be filed on RTI online portali.e. www.rtionline.gov.in by selecting the option“submit first appeal”. Nodal officer will transmitthe first appeal to the concerned appellate authorityeither electronically or physically. However, thisonline facility is available only in respect of someof the Ministries and Central GovernmentDepartments. Supporting documents to be uploadedwith the online RTI appeal should be in the PDFformat up to 1MB size.

Time Limit for Disposal of First Appeal

The FAA shall dispose of the appeal within a periodof 30 days of receipt of the appeal or within suchextended period not exceeding a total of 45 daysfrom the date of filing thereof. [S. 19(6)]

Decision on First Appeal

The FAA is conducting quasi judicial proceedingsand required to record reasons in writing for arrivingat the decision. The FAA may order directing thePIO to provide the information or reject the appealand refuse to give the information.

Second Appeal to Commission

Any person aggrieved by the order passed by theFAA or by non disposal of his appeal by the FAAwithin the prescribed time of 90 days from the dateon which the decision was given or the time limitprescribed for disposal of first appeal has expired,may prefer a second appeal before the CentralInformation Commission. [S. 19(3)]

However, Information Commission may condonethe delay if it is satisfied that appellant was preventedby sufficient cause from filing the appeal in time.

Format and Documents to be annexed

Format of second appeal is given in appendix to theRight to Information Rules, 2012. [See Exhibit-II]

The appeal shall be accompanied by the followingdocuments duly authenticated and verified by theappellant: [Rule 8 & 10]

· Copy of the application submitted to the CPIO;

· Copy of the reply received, if any, from theCPIO;

· Copy the appeal made to the FAA;

· Copy the order received if any, from the FAA;

· Copies of other documents relied upon by theappellant and referred to in his appeal ; and

· Index of the documents referred to in the appeal.

· Proof of identity of appellant as per order dated02.11.12 of the Punjab & Haryana High Courtin CWP No. 4787/2011 – Fruit MerchantUnion v/s. CIC

Check list for filing second appeal is also availableon the home page of website of Central InformationCommission i.e. www.cic.gov.in Address of CICfor submission of Second Appeal: August KrantiBhavan, Bhikaji Cama Place, New Delhi - 110066 & Old JNU Campus, New Delhi - 110 067.Phone: 26161137 Fax: 26186536

If the appeal is not accompanied by the documentsas specified above, it may be returned to theappellant for removing the deficiencies. No appealshall be dismissed on the ground that it has not beenmade in the prescribed format if it is accompaniedby the aforesaid documents.

Process of Appeal

If the commission is satisfied that it is a fit case toproceed with, it may consider the appeal if it satisfiedthat appellant has availed of all the remedies availableto him under the Act. Otherwise, it may, after givingan opportunity of being heard to the appellant andafter recording reasons, dismiss the appeal. Appellantshall be deemed to have availed of all the remediesavailable to him under the Act if:

· he had filed an appeal before the FAA and ithad made a final order on the appeal; or

· no final order has been made by the FAA withregard to the appeal preferred and a period of 45days from the date of filing of appeal has elapsed.

Fees Payable

No fees is payable for filing of appeal beforeCentral information Commission.


Hearing of Appeal

The appellant shall be informed of the date of thehearing at least 7 clear days before the date ofhearing. The Commission has resolved that if theappeal/complaint is received from senior citizen ordifferently abled person or which involves largerpublic interest, will be accorded priority in hearing.

Authorised Representative

The appellant may be present in person or throughhis duly authorized representative or through videoconferencing, if the facility of video conferencingis available, at the time hearing of the appeal by theCommission. The Public Authority may authorizeany representative or any of the officers of publicauthority to present its case.

Time Limit for disposal of Second Appeal

The time limit for deciding first appeal is prescribed30 days. But no such time limit is set for secondappeal before Central Information Commission.

RTI activists have demanded that the Commissionmay be directed to provide decisions in respect ofappeals or complaints duly registered, within 3months from the date of filing or any other timeframethe authorities deem fit, to avoid the adoption ofarbitrary practice in listing and processing ofappeals.

Decision on Appeal

The Commission, while deciding an appeal, may -

· receive oral or written evidence on oath or anaffidavit from the concerned person;

· peruse or inspect the public documents/records;

· inquiry further details/facts through authorizedofficer;

· hear the CPIO or FAA or third party or suchother person against whom appeal lies.

Order of Commission

The order of the Commission shall be in writingand issued under the seal of the commission dulyauthenticated by the Registrar or any other officer

Overriding effect of RTI

The provisions of RTI Act shall have the effect

authorized by the Commission for this purpose.

notwithstanding anything inconsistent therewithcontained in the Official Secrets Act, 1923 and anyother law for the time being in force or in anyinstrument having effect by virtue of any law otherthan this Act. [S. 22]

Bar on Jurisdiction of Court

No court shall entertain any suit, application or otherproceeding in respect of any order made under thisAct and no such order shall be called in questionotherwise than by way of an appeal under his Act.[S. 23]

Writ Petition before Hon. Courts

In following situations, writ petitions may lie beforeHon. High Court or Supreme Court:

· If the order of commission is found to be perversei.e. unreasonable, unacceptable or contrary to thelaw; or

· When all the efforts of the citizen fail and he/sheis unable to get the desired information.

Online Filing of Second Appeal

· Second appeal can also be filed online on thewebsite of CIC i.e. www.cic.gov.in by selectingthe link “CIC online - Submit Second Appeal”.

· The supporting document file type allowed forupload need to be in PDF, JPG or GIF format.

· Maximum file size allowed for upload is 2MB.

· Once the form is saved as draft a unique appealid is provided which can be used in the futurefor editing the form before final submission.

· Details of second appeal shall not be taken upfor hearing; if copy of the RTI request and firstappeal is not submitted along with the secondappeal

· Information Commission has also launchedhelpline number- (011) 61117666. By diallingthis number, appellant can get the status of thereceipt by name, by diary number or by diaryyear and complaint or appeal file number etc.



Appeal before State Information Commission

The State Governments are empowered to makethe rules regarding cost, fee payable, procedure tobe adopted by the State Information Commissionin deciding the appeals. [S. 27]

Gujarat Government has made the separate rulesi.e. Gujarat Right to Information Rules, 2005.Accordingly, First appeal is to be filed in Form-G.[See Exhibit - III]

No format of second appeal to State informationCommission has been prescribed.

E-appeal can be filed on the website of Gujarat StateInformation Commission i.e. gic.gujarat.gov.in

Filing of complaint before informationcommission

It is duty of Central Information Commission (CIC)or State Information Commission (SIC) to receiveand inquire into the complaint received from anyperson on following grounds: [S. 18]

· If an applicant is unable to submit request to PIOby the reason that no such officer has beenappointed by authority.

· If PIO refuses to accept his/her application.

· If he has been refused to access any informationunder this Act.

· If his RTI application for information notresponded or he has been denied to access theinformation within the time limit specified.

· If he has been required to pay fees which isconsidered unreasonable.

· If he has been given incomplete, misleading orfalse information.

· Non compliance of any order or directions ofthe Commission

The CIC and SIC are vested with the powers ofCivil Court while inquiring into the matter underthis section.

Complaint can also be filed online on the websiteof CIC i.e. www.cic.gov.in by selecting the link“CIC online - Submit Complaint”. Check list forfiling complaint is available on the home page ofwebsite of Central Information Commission.

❉ ❉ ❉

Exhibit - ISuggested Format of First Appeal

Appeal under Right to Information Act, 2005

Appeal to the ______________(Designation of the Appellate Authority)

1. Name and address of the appellant2. Name and address of CPIO passing order appealed against3. Details of information sought for4. Period to which information relates5. No. and date of service of order6. Section under which CPIO passed the order7. Statement of facts8. Grounds of Appeal

——————————— Signature (appellant) Tel. No………………

Form of VerificationI, _________________________________, the appellant, do hereby declare that what is stated above istrue to the best of my information and belief.Place: ———————————Date: Signature (appellant)



Exhibit - II

Format of Appeal to Commission

Appeal to Hon. Central Information Commission, New Delhi

(See Rule 8)

1. Name and address of the appellant

2. Name and address of CPIO to whom the application was addressed

3. Name and address of CPIO who gave reply to the application

4. Name and address of the First Appellate Authority who decided the First Appeal

5. Particulars of the Application

6. Particulars of the order(s) including, if any, against which the appeal is preferred

7. Brief facts leading to the appeal

8. Prayer or relief sought

9. Grounds for the prayer or relief

10. Any other information relevant to the appeal

——————————————

Signature (appellant)

Verification by Appellant

I, __________________________, the appellant, do hereby declare that what is stated above is true to thebest of my information and belief.

——————————————

Signature (appellant)

Place : Tel. No………………

Date:



Exhibit - III

GUJARAT RIGHT TO INFORMATION RULES, 2005FORM G

FORM OF FIRST APPEAL[See Rule 6(1)]

I.D. No…………………Date :…………………..(For office use)

To The Appellate Authority (Department/office)………..

Sir, As I have not received any decision/As I am aggrieved by the decision of the public InformationOfficer ………………I, hereby file this appeal.The particulars of my application are under:-

1. Name of the Appellant :2. Address of Appellant :3. (A) Name of the Public Information Officer :

Address of Public Information Officer:(B) Department/Office and address:(C) Particulars of the decision against which the appeal is preferred including the No. & Date

of such decision.4. Date of application submitted in the Form A :5. Details of Information:

(1) Information asked for(2) Period for which information is sought

6. Date as on completion of 30 days after submitting application in Form A.7. Reasons for Appeal –

(A) No decision is received within 30 days of submission of application in Form A(B) Aggrieved by the decision of Public Information officer Dated :

8. Ground for appeal. Brief facts of the case.9. Last date for filing the appeal :10. Prayer/reliefs sought for :

I hereby state that the information and particulars given above are true to the best of myknowledge and belief.

Name of appellant

Date : Signature of appellantPlace : Telephone No. : (Office):________________________

(Resi.):________________________ (Mob.):________________________

❉ ❉ ❉



Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

Reputation, Right to:

Reputation is fundamentally a glorious amalgamand unification of virtues which makes a man feelproud of his ancestry and satisfies him to bequeathit as a part of inheritance on posterity. It is a nobilityin itself for which a conscientious man would neverbarter it with all the tea of China or for that matterall the pearls of the sea. The said virtue has bothhorizontal and vertical qualities. When reputationis hurt, a man is half-dead. It is an honour whichdeserves to be equally preserved by thedowntrodden and the privileged. The aroma ofreputation is an excellence which cannot be allowedto be sullied with the passage of time. The memoryof nobility no one would like to lose; none wouldconceive of it being atrophied. It is dear to life andon some occasion it is dearer than life. And that iswhy it has become an inseparable facet of Article21 of the Constitution. No one would like to havehis reputation dented. One would like to perceiveit as an honour rather than popularity.

[Om prakash Chautala vs. Kanwar Bhan andothers (2014) 5 SCC 417]

Judicial Process:

Held, decision-making process expects Judge toapply restraint, ostracise perceptual subjectivity,make one’s emotions subservient to one’s reasoningand think dispassionately – He is expected to beguided by established norms of judicial process anddecorum – A judgment may have rhetorics but saidrhetoric has to be dressed with reason and must bein accord with legal principles, or else mere rhetoricin judgment may cause prejudice to person andcourts must refrain from making any kind ofprejudicial remarks against a person, especiallywhen he is not party before it – Judge should

remember that humility and respect temperance andchastity of thought are at bedrock of appositeexpression – Judge should abandon his passion andconstantly remind himself that he has singularmaster ‘duty to truth’ and such truth should bearrived at within legal parameters.

[Om prakash Chautala vs. Kanwar Bhan andothers (2014) 5 SCC 417]

Retracted confession under section 15,TATA:

Retraction does not always dilute or reduce or wipeout the evidentiary value of a confessional statement.Quite often retraction is an afterthought. It couldbe the result of legal advice or pressure exerted bythose whose involvement may be likely to bedisclosed or confirmed by the confessionalstatement of the accused. Therefore, in each case,the court will have to examine whether theconfession was voluntary and true and whether theretraction was an afterthought. In Kalawati vs. Stateof H.P. (AIR 1953 SC 131), this court stated thatthe amount of credibility to be attached to a retractedconfession would depend upon the facts andcircumstances of each case. Again in State of T.N.vs Kutty, this Court stated that a retracted confessionmay form legal basis for conviction if the court issatisfied that the confession was true and wasvoluntary made. Following these judgment in YakubAbdul Razak Memon, this Court held that wherethe original confession was truthful and voluntary,the Court can rely upon such confession to convictthe accused in spite of a subsequent retraction andits denial in statement u/s 313 CrPC. The law isthus crystallized. A retracted confessional statementis therefore not always worthless.

[Periyasami, s/o Duraisami Novanagar vs. Staterepresented through the inspector or police, ‘Q’

branch CID, Tiruchirappalli, Tamil Nadu(2014) 6 SCC 59]

16

18

17


Doctrine of res judicata:

A decision rendered by a competent Court cannotbe challenged in collateral proceedings for thereason that if it is permitted to do so there would beconfusion and chaos and the finality of proceedingswould cease to have any meaning. Thus, theprinciple of finality of litigation is based on a soundfirm principle of public policy. In the absence ofsuch a principle great oppression might result underthe colour and pretence of law inasmuch as therewill be no end to litigation. The doctrine of resjudicata has been evolved to prevent such ananarchy. In a country governed by the rule of law,finality of judgment is absolutely imperative andgreat sanctity is attached to the finality of thejudgment and it is not permissible for the parties toreopen the concluded judgments of the court as itwould not only tantamount to merely an abuse ofthe process of the court but would have far-reachingadverse effect on the administration of justice. Itwould also nullify the doctrine of stare decisis, awell-established valuable principle of precedentwhich cannot be departed from unless there arecompelling circumstances to do so. The judgmentsof the court and particularly the Apex Court of acountry cannot and should not be unsettled lightly.

Precedent keeps the law predictable and the lawdeclared by the Supreme Court, being the law ofthe land, is binding on all courts/tribunals andauthorities in India in view of Article 141 of theConstitution. The judicial system ‘only works if

someone is allowed to have the last word’ and thelast word so spoken is accepted and religiouslyfollowed. The doctrine of stare decisis promotes acertainty and consistency in judicial decisions andthis helps in the development of the law. Besidesproviding guidelines for individuals as to whatwould be the consequences if they choose a legalaction, the doctrine promotes confidence of thepeople in the system of the judicial administration.Even otherwise it is an imperative necessity to avoiduncertainty, confusion. Judicial propriety anddecorum demand that the law laid down by thehighest court of the land must be given effect to.

[Union of India and others vs. Major S. P.Sharma and others (2014) 6 SCC 351]

Doctrine of stare decisis:

Finality of judgments – Role of – Sanctity attachedto finality of judgments of Supreme Court –Certainty in law – Cardinal importance of –Reopening concluded judgments of the courttantamount not merely to an abuse of the processof the court but would have far-reaching adverseeffect on the administration of justice – It alsonullifies doctrine of stare decisis, a well-establishedvaluable principle of precedent which cannot bedeparted from unless there are compellingcircumstances to do so.

[Union of India and others vs. Major S. P.Sharma and others (2014) 6 SCC 351]

❉ ❉ ❉

19

20

Glimpses of Supreme Court Rulings


Appeal Filed before wrong officer -Procedure to be followed :

Radha Vinyl P. Ltd. v/s. CIT (2014) 364ITR 199 (AP)

Issue

What is the procedure to be followed by theDepartment on filing of appeal before a wrongofficer?

Held

It could not be said that there was no appeal pendingbefore the Department in as much as there was nocategorical denial of the fact that the assessee filedthe appeal before the Department though the appealhad been addressed to the Deputy Commissioner(Appeals). There was no dispute that the appealwas filed as far back as on July, 14, 1993, and forone reason or the other the appeal was not disposedoff. Even if it was assumed that the appeal filed bythe assessee was addressed to a wrong officernothing prevented the Department from intimatinghim to return the papers to enable the assessee tofile the appeal before the appropriate authority orin the alternative making over the appeal papers tothe competent authority in the hierarchy. Theexercise having not been done by the Departmentand the assessee having never been informed of itsappeal not being accepted on the technical groundthat the appeal was addressed to the DeputyCommissioner (Appeals), it was not open for theDepartment to turn round and say that the appealwas not filed before the Competent Authority.Therefore, there was no lapse on the part of theassessee in filing the declaration and the authoritiesought to have considered the declaration by theassessee under the Kar Vivad Sanadhan Scheme,1998, introduced by the Finance (No. 2) Act, 1998

CA. C. R. [email protected]

on merits.

Reference to DVO without rejection ofbooks invalid :

CIT v/s. Chohan Resorts(2013) 359 ITR 394 (P & H)

Issue

When assessee maintains books of account ofconstruction, whether reference to DVO is validwithout rejection of books ?

Held

Wherever the books of account are maintained withrespect to the construction, the matter can be referredto District Valuation Officer after the books ofaccount are rejected by the Revenue on some legalor justified basis. In the absence of the rejection ofbooks of account, the reference to the DistrictValuation Officer cannot be upheld.

High Court took support of Supreme Court decisionin the case viz. Surgam Cinema v/s. CIT (2010)328 ITR 513 (SC) and held that :

“Respectfully following the judgment of the Hon.Supreme Court we hold that no addition can bemade on the basis of the report of the DVO withoutthe books of account being rejected wherein everyexpenditure relating to the construction is recordedand those books of account have not been rejectedby the A.O. u/s 145 of the Act, consequently, wedelete the impugned addition and direct the A.O.to accept the returned income”.

Also See :

Nirpal Singh v/s. CIT

(2013) 359 ITR 398 ( P & H)

Note :

The law is proposed to be amended by TheFinance (No.2) Bill, 2014, to provide that referenceto DVO can be made without rejection of books of

From the Courts

CA. Jayesh C. [email protected]

account.

29 30


Mention by Advocate : Dismissal ofAppeal :

Bharat Petroleum Corporation Ltd.v/s. I.T.A.T. (2013) 359 ITR 371 (Bom)

Issue

What are the duties of ITAT in the case of mentionbeing made by an Advocate and when the assessee/advocate of assessee is not present on the date ofhearing?

Held

The ultimate object of the Tribunal is to decide adispute between the Revenue and the assessee inaccordance with law to ensure that justice is done.In the course of ensuring that justice is done, theTribunal cannot as a matter of practice bar anyadvocates or representatives from mentioning thematters before the Tribunal. The mentions of mattersshould be allowed by the Tribunal. It is of coursein the Tribunal’s discretion to allow the requestmade by the parties while mentioning butprohibiting mentioning of matters before theTribunal is a likely recipe for injustice.

When the assessee is not present before the Tribunalwhen the appeal is called out for hearing, theTribunal could either adjourn the hearing of theappeal in its inherent jurisdiction or in terms of rule24 of the Income Tax (Appellate Tribunal) Rules,1963, dispose of the appeal on its merits afterhearing the respondent. In terms of Rule 24 of the1963 Rules, the option of dismissing an appeal fordefault is not available to the Tribunal. Thus, it isnot open to the Tribunal to exercise its inherentpowers to dismiss the appeal for default as themandate of section 254(1) of the Act is to disposeof the appeal on its merits even in the absence ofthe assessee.

Dismissal of an appeal for non prosecution in theface of Rule 24 of the 1963 Rules is an errorapparent on the face of the record leading to an

Applicability of provisions of Sec. 40A(2)

irregular order which can be rectified u/s 254 (2).

CIT v/s. Rajnish Ahuja(2017) 219 Taxman 85 (P & H) (Mag)

Issue

Whether provisions of Section 40(A)(2) can beapplied when there is no expense claimed?

Held

When assessee had charged less sale price to sisterconcerns, provisions of Sec. 40A could not beinvoked as no payment had been made to sisterconcern for any item of expenditure which assesseemight have claimed as revenue expenditure.

Requirement for Registration of Trustu/s 12AA :CIT v/s. Jankiji Education Society(2013) 219 Taxman 69 (P & H) (Mag)

Issue

What is the requirement for Registration u/s 12AAof I.T. Act ?

Held

Assessee was declined registration u/s 12AA onground that funds were surplus and were notutilized for charitable purpose. Tribunal reversedorder relying upon an earlier decision where in itwas held that object of Section 12AA is to examinegenuineness of objects of trust, but not applicationof income of trust for charitable or religiouspurposes. High Court held that assessee was rightlyallowed registration under Sec. 12AA.

Interpretation Principles : ReasonableConstruction :CIT v/s. Textool Co. Ltd.(2013) 263 CTR 257 (SC)

IssueFiscal Statute is to be construed strictly. Stillapplication of reasonable construction is applicable?

HeldAssesee company had to make contribution toapproved gratuity fund. Company made directpayment to LIC which was disallowed by AO. Onappeal it is held that :-

32

From the Courts

33

31

34

contd. on page no. 280


OIP Sensor System India Liasion Officevs. ADIT 148 ITD 324 (Del.)Assessment year: 2007-08 Order Dated:

th20 December, 2013

Basic FactsThe assessee, liaison office of a foreign company,filed its return on 18-10-2007. The notice undersection 143(2) had been served upon the assesseeon 1-10-2008, which was beyond the prescribedtime limit. The assessee claimed that said notice wasinvalid and void. The Assessing Officer, however,rejected this objection on ground that ‘service ofnotice by post’ had nowhere been defined in theAct, and as such, according to section 27 of theGeneral Clauses Act, 1897 notice was properlyaddressed and sent by speed post. He completedassessment accordingly. On appeal, the assesseesubmitted that assessment was barred by limitation.

IssueWhether date. of service of notice is date of itsactual receipt by assessee?

HeldThe proviso to section 143(2)(ii) was amended bythe Finance Act, 2008, w.e.f. 1-4-2008, to providethat notice under section 143(3) needs to be issuedwithin six months from the end of the FinancialYear in which the return is filed. This governingprovisions regarding the limitation are proceduralprovisions and, hence, retrospective in nature, aposition also recognized by the CBDT while issuingCircular No. 1 of 2009, dated 27-3-2009, which isbinding on the taxing authorities. In view of this,ITAT held that since the return in this case was filedon 18-10-2007, the limitation for service of noticeunder section 143(2), in accordance with theapplicable proviso to section 143(2)(ii), would besix months from the end of the financial year inwhich the return is furnished. The notice undersection 143(2) having been issued on 30-9-2008,is, clearly, beyond the limitation prescribed.

The authorities below have taken the date ofissuance of notice, i.e., 30-9-2008 as the deemeddate of service, seeking to invoke the provisions ofsection 27 of the General Clauses Act. The assessee,on the other hand, maintains that since the noticewas served on 1-10-2008 it is this date which is thedate of service of notice. The contention of theassessee was accepted by the Tribunal and it heldthat the authorities below have erred in taking thedate of issuance of the notice under section 143(2),i.e., 30-9-2008 as the deemed date of the service ofsuch notice on the assessee. The date of service ofnotice is the date of its actual receipt by the assessee,i.e., 1-10-2008 Accordingly, all proceedingspursuant to such notice are held to be illegal.

Sudhir Menon HUF v. ACIT 148 ITD260 (Mum)Assessment Year:2010-11 Order dated:

th12 March, 2014

Basic FactsThe assessee was holding 4.98 per cent share capitalof company ‘D’. The assessee was offeredadditional shares at the face value of Rs. 100 each,on a proportionate basis along with othershareholders. The assessee subscribed to and wasaccordingly allotted on the same terms, not onlythe shares similarly offered to them but also thatnot subscribed to by the other shareholders. As thebook value of the shares of company ‘D’ as on 31-3-2009 was Rs. 1,538 per share, which was to beadopted as a measure of their fair market value(FMV) under the applicable rules (Rule 11U andrule 11UA), the Assessing Officer (A.O.), treatingthe difference of Rs. 1,438 per share as the extentof the inadequate consideration, i.e., in terms ofsection 56(2)(vii)(c) towards the acquisition ofadditional shares, brought the same to tax. The

Tribunal News

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

Commissioner (Appeals) confirmed said addition.

25

26


Issue

Whether right issue of shares to shareholders ofa company at a price lesser than FMV can beconsidered as income chargeable to tax in handsof shareholders under section 56(2)(vii) of the Act.

Held

Applicability of Section 56(2)(vii) of the Act tofresh issue of shares by way of right or bonusThe shareholders get the right to acquire theadditional shares on the passing of the boardresolution, but the receipt of the property is only ontheir allotment, on which date the shares, a specifiedproperty, is in existence.

That allotment is generally neither more nor lessthan the acceptance by the company of the offer totake shares. All it means is appropriation out of thepreviously un-appropriated capital of a companyof a certain number of shares to a particular person.Till such allotment the shares do not exist as such,and in a sense come into existence on their allotment

Thus the right to subscribe to shares is a propertyspecified under Section 56(2)(vii) of the Act andthere is no basis to state that on the date of receiptof the right to subscribe to shares, specified propertyi.e. shares were non-existent.

Though the shareholders get the right to acquire freshshares on passing of board resolution, the receipt ofproperty is only on their allotment on which date aspecified property (i.e. shares) come into existence.

Section 56(2)(vii) of the Act seeks to substitute FMVas the normative basis for transactions involvingreceipt of property, the inadequacy of considerationas compared to FMV being chargeable as incomein hands of the recipient of property.

In case of issue of fresh shares, such situation wouldarise where controlling interest in a company isincreased at consideration far below the FMV ofthe shares or underlying assets. Only a pro-rataallotment or adequately priced issue wouldeffectively ensure an exchange of interest or assetsat their par values.

In case of issue of bonus shares, since receipt ofbonus shares would be merely a split of the existingshares and there would not be an enhancement inthe wealth or property or shareholding of the

shareholder over and above its existing holding, theprovisions of Section 56(2)(vii) of the Act shouldnot be applicable.

The treatment in case of bonus shares should equallyapply to a right issue as far as no disproportionateallotment is made by the company. In absence ofhis interest getting enhanced in the company/underlying assets, there would be no question ofany property being received by the shareholder onthe said allotment.

In such scenario, there will be merely anapportionment of the value of their existing holdingover a large number of shares as in case of bonusshares. However where disproportionate allotmentis done resulting an increase in the interest of ashareholder in the company / underlying assets, thesame would be covered within the provisions ofSection 56(2)(vii) of the Act.

Issue of fresh shares at a price lower than FMVwould give rise to income in the hands of theshareholder to the extent shares are allotted to sucha shareholder in excess of his existing shareholdingand thus its receipt cannot be said to be in lieu of oras recompense of his existing property.

Whether ‘transfer’ is sine qua non for applyingprovisions of Section 56(2)(vii) of the Act‘Transfer’ is not the mode of acquisition to whichSection 56(2)(vii) of the Act applies even though itmay be a relevant consideration for income in natureof capital gains under Section 45 of the Act.Accordingly, the arguments of the taxpayer that thesaid provision is not applicable in absence of a‘transfer’ and the issuer company not being theowner of the shares is not tenable. The argumentof ‘receipt’ being a synonym for ‘transfer’ isinconsistent both in context of the intent of theprovision as well as its clear language. ‘Receipt’ isa wide term and would include acquisition bymodes other than by way of transfer also.

In the given facts, since there was a reduction inthe shareholder’s interest in the company postsubscription of fresh shares at a price lower thanFMV, the difference between the FMV and the issueprice could not be assessed as income in the handsof the taxpayer.

Tribunal News


POSCO Engineering and ConstructionCo. Ltd. vs. ADIT InternationalTaxation 148 ITD 527Assessment Year: 2008-09 Order Dated:

th26 February, 2014Basic FactsThe assessee was a non-resident companyincorporated in and also Tax resident of Korea. Itwas mainly engaged in Engineering and constructionfor Iron, energy and public works etc. It entered intoan agreement as a consortium consisting of theassessee (as its leader) and another partner, NCC onone hand and SAIL on the other, for setting up ablast Furnace Complex. The assessee did not offerto tax advance received from SAIL for offshoresupply of equipment’s, fee for technical services,design and engineering, foreign supervision charges(onshore services) and onshore supply ofequipment’s for which activities were completedoutside India without any involvement of Indianoffice. Further the advance was remitted outside Indiaand title in goods was transferred at High Sea. TheAO held that the assessee had a fixed place PE/Supervisory PE/Services PE in terms of article 5 ofthe DTAA and was also having business connectionin India in terms of section 9(1)(i). The accordinglybrought to tax the 5 per cent of mobilization chargesreceived in respect of offshore supply of equipmentas business income as per article 7 of the DTAA andalso section 9(1)(i). The 5 per cent of mobilizationcharges received in respect of design andengineering, the AO initially held it to be royalty asper section 9(1)(vi) and then also as ‘Fees forTechnical Services’ as per section 9(1)(vii). However,while computing the total income, he included 90percent of this amount as attributable to the PE byapplying profit margin of 30.65 percent. The DRPset aside the objections raised by assessee.

IssueWhether in case of a composite income, whichis partly relatable to operations, carried out inIndia and partly to outside India, aproportionate part of income which is sorelatable to operations carried out in India asper section 9(1), has to be charged to tax in termsof article 7 of India-Korea DTAA?

HeldIt can be seen that the position under the DTAA isalmost analogous to the position as stipulated byExplanation (1)(a) to section 9(1)(i). Crux of both

the provisions is that only that part of the businessincome of the non-resident can be charged to tax inIndia, which is attributable to operations carried outin India due to business operations as per section9(1) or is attributable to the PE as per Article 7 of theDTAA. Thus, it is vivid that the principle ofapportionment of income with reference to theterritorial nexus is not only explicit but also forms anintegral part of both section 9(1) read withExplanation (1)(a) as well as Article 7 of the DTAA.If a particular income is not attributable to theoperations carried out in India and thus has noterritorial nexus with India, then a non-residentcannot be charged to tax for that income. Per contra,if a particular income is attributable to the operationscarried out in India and thus has territorial nexus withIndia, then there can be no escape from charge ofsuch income to tax. In case of a composite income,which is partly relatable to the operations carried outin India and partly to outside India, a proportionatepart of income which is so relatable to the operationscarried out in India, has to be charged to tax.Therefore, it can be concluded that, the income forwhich everything is done in India is fully taxablebut the principle of apportionment applies to tax thatpart of the composite income which is relatable tooperations carried out in India, leaving aside that partof income which is not so. Applying the aboveprinciple, it is palpable that that the second componentof the sale in India, is chargeable to tax in India.

The Tribunal held that the amount received forDesign & Drawings would be taxable in India sinceit is not part of the equipment’s supplied outsideIndia, it deals with every aspect of the erection andcommissioning of the plant right from foundationof buildings and roads till the completion of theentire project. All such drawings are customized.The tribunal held that payment could not be termedas royalty since the drawings and designs werecustomized for a particular project which are notcapable of use for any other purpose. The amountwere held to be fees for technical services since thedrawings & Designs customized to the assessee’srequirements are result of the rendering of technicalservices. On the basis of the new explanation belowsection 9(2) inserted by Finance Act 2010 withretrospective effect from 1/6/1976, it was held thatthe fees for Design & Drawings would be taxablein India even though nonresident has not renderedservices in India and since the drawings& designswere to be used for business carried out in India.

Tribunal News

27


Nanubhai D. Desai vs. ACIT 162 TTJ673 (Ahd)(SB)

rdOrder Dated: 23 May, 2014

Basic FactsThe Special Bench had been reconstituted as perthe directions of Hon’ble Gujarat High Court inappeal titled as Deepak R Shah V ITAT since theSpecial Bench constituted earlier had notpronounced any order. The question referred to theSpecial Bench was “whether Shri Deepak R. Shah,advocate and Ex-AM of the Tribunal is debarredfrom practicing before the Tribunal in view of theinsertion of r.13E in the ITAT Members(Recruitment and Conditions of Services) Rule,1963?. In the beginning of the hearing itself theBench has placed following question.

IssueWhether Tribunal has the inherent jurisdictionto decide question as to whether an Ex-memberof Tribunal can appear and practice beforeIncome Tax Tribunal Benches?

HeldThe legal position is that the High Court of judicatureat Allahabad, Lucknow Bench, in the case of DineshChandra Agarwal V Union of India( Service Bench

thNo.62 of 2012) vide an order dt. 19 January 2012has held that the judgment rendered in the case ofConcept Creations V Add. CIT (2009) 125TTJ(DEL)(SB) 433 was beyond its pale of taxappeals as contained in the IT Act vide Ss.253 and254 thereof. Hence the view taken by the SpecialBench in the Concept Creations about thecompetence of the Tribunal Benches to hear servicerelated issues, including Special Bench, now stoodreversed. Moreover as on date, there is no otherdecision of any other High Court. The TribunalBench as also the Special Bench are subordinate tothe High Courts. In the hierarchical judicial systeman accepted rule to follow a precedent is that, “thebetter wisdom of the Court below has to yield tohigher wisdom of the Court above. Once an authorityhigher than the Tribunal has expressed an opinionon some issue, then the Tribunal is no longer at libertyto rely upon its earlier decision, may be a decision ofthe Special Bench”. This is a settled rule hence evena non-jurisdictional High Court order do not alterthe position and therefore to be followed, if notdissented. Hence, the Tribunal being a subordinate

Court, is expected to follow in letter and spirit anorder of the Hon’ble High Court, unless and untileither reversed by the Hon’ble Apex Court or by anorder of the Jurisdictional High Court taking acontradictory view. Hence, the decision of the SpecialBench pronounced in the case of Concept Creationsis no more a good law on this issue being reversedby the Hon’ble Allahabad High Court. So the presentlegal position is that the Tribunal has no inherentjurisdiction to decide the question as to whether anEx-Member of the Tribunal can appear and practicebefore the Income Tax Tribunal Benches.

Note: The Account member (minority view) hasexpressed dissenting view holding that since theSpecial Bench was reconstituted by the President

thas per directions of jurisdictional High Court dt.11Feb 2014 which has been passed after interim order

thdt.19 Jan 2012 of the Allahabad High Court thespecial bench of the tribunal is duty bound to decidethe referred question as no material was broughton record that the aforesaid direction of theJurisdictional High Court was varied subsequentlyby the Gujarat High Court or the Supreme Court.

Panasonic Industrial Asia Pte Ltd.. vs.DDIT 162 TTJ 475(Del)Assessment Year: 2009-10 Order dated:

st31 January, 2014

Basic FactsThe assessee was a company incorporated inSingapore and was operating in India through abranch office. During the relevant assessment yearthe assessee entered into international transactionsrelating to provision of support services andreimbursement of expenses. In the course of transferpricing proceedings, the assessee submitted a list ofcomparable including one ICC agencies.Subsequently, the assessee sought exclusion of ICCagencies from list of comparable contending that dueto State Policy adopted by the State Government,said comparable managed to earn super normalprofits during relevant period. The TPO as well asthe DRP refused to accept the assessee’s plea.

Issue

Whether can a assessee be barred frompleading for exclusion of a comparable even ifthe said entity was included in the comparablesby the assessee itself.

28

Tribunal News

29


HeldThe assessee has pleaded that the operation of thepolicy of the State of Gujarat in the immediatelypreceding assessment year which had focused onlarge scale distribution of sewing machines materiallyaffected the profits of the very same comparable andthese conditions operated in the year underconsideration also. The position that the comparableICC agencies is a functional comparable wasproposed by the assessee during the proceedingsbefore the TPO which it now seeks to exclude onthe ground that the said comparable, thoughfunctionally similar, has in the year underconsideration shown extraordinary profits due to theimpact of the Government policy. The Hon’ble ITATheld that in the afore-mentioned facts, it is opinedthat the data available in the public domain leadingto the conclusion that ICC Agencies was operatingin unique circumstances during the period underconsideration prima facie requires to be consideredand verified and cannot be out rightly rejected takinga specious plea that the comparable was proposedby the assessee itself. The assessee cannot be barredfrom pleading for the exclusion of a comparablewhen it pleads the existence of extraordinarycircumstances. The existence of such a fact wouldmake a specific period creating extraordinarycircumstances in the case of a functional comparablean incomparable. The argument that since it wasproposed by the assessee as such should not beexcluded solely on this ground has no merit. To holdso would be not in compatibility with the scheme asthe very purpose of having Appellate Forums wouldbe defeated if it is held that once a functionalcomparable is offered by a party where on facts itcould not have been a comparable then for all timesto come the said party de horse the material on recordwould be barred from pleading for its exclusion.Accordingly the issue was restored back to the TPOwith directions to consider the arguments forexcluding the said comparable after allowing theassessee to lay evidence in support of its claim.

Jhonson & Jhonson Ltd. V ACIT 148ITD 129 (Mum).Assessment Year 2002-03; Order dated

th28 August 2013.

Basic FactsThe assessee had entered into internationaltransactions with its AE. It had paid royalty for theuse of brands and trademarks as per the terms of thebrand usage agreement and also paid royalty for thetechnical/marketing knowhow provided to theassessee as per the terms of the Knowhow agreemententered into between assessee & AE. The asseseeadopted the Transactional Net Margin Method(TNMM) for determining the arm’s length price ofits international transactions. The TPO observed thatassessee was not getting any fresh technology per sefrom AE and restricted the technical knowhowroyalty to 1% on manufactured goods and furtherdisallowed (a) tax paid by assessee on payment ofbrand name royalty (b) royalty on sale of tradedfinished goods and (c) corresponding tax and researchand development cess. On appeal CIT(A) confirmedthe disallowance of tax paid by assesse on paymentof brand name royalty whereas deleted the otherdisallowance made by the TPO.

IssueWhether payments of royalty made to AE asper agreement approved by RBI were allowableexpenditure.

HeldThe application made by the assessee to RBI forbrand usage agreement specifically mentioned thatthe royalty to be remitted is net of taxes. Furtherthe approval was received from the RBI to remitthe royalty on brand usage by the assessee net oftaxes. Considering the brand usage agreement vis–a vis the approval granted by RBI, it can be safelyinferred that the taxes were liability of the assesseeunder the agreement. The agreement betweenassessee and AE for payment of royalty has to beconsidered in the light of the approval of the RBI.There is no substance in the findings of the TPOthat there is no need for paying royalty for technical/marketing knowhow. There is also no force in thefindings of the TPO that this royalty is deemed tobe included in the brand royalty. In view of thefindings that the royalty payment has been approvedby RBI, the tribunal allowed tax and research anddevelopment cess & Technical know-how royalty.

❉ ❉ ❉

30

Tribunal News


Whether an assessee can get refund of the TDSmade from the income earned by him even whenthe same is not deposited by the deductor is an issuewhich we come across many a times in our routinepractice. Recently, Hon’ble Gujarat High Court inthe case of Sumit Devendra Rajani decided this issuein favour of the assessee, the gist of which is givenin this issue. We hope readers would find it useful.

In the High Court of Gujarat at Ahmedabad

Special Civil Application No. 2349 of 2014

Sumit Devendra Rajani…… Petitioner(s)Versus

Asstt. Commissioner of Income Tax – OSD -…… Respondent(s)

Appearance:Mr. Ketan H. Shah, Advocate for thePetitioner(s) No.1Mrs. Mauna M. Bhatt, Advocate for theRespondent(s) No.1

Coram : Honourable Mr. Justice M.R. Shahand

Honourable Mr. Justice K.J. Thaker

Date : 23/06/2014

CAV Judgment

(Per : Honourable Mr. Justice M.R. Shah)

Gist onlyFacts :

The petitioner being an individual and assessed totax filed his return of income for A.Y. 2010-11showing a total income of Rs.29,54,982/- andclaimed the credit of TDS of Rs.5,86,606/-. Thepetitioner individual was in receipt of this amountfrom his employer M/s Amar Remedies Limitedfrom whom he was receiving both salary as well asconsultation fees for which necessary TDS wasmade and relevant Form No. 16 &16A asapplicable were issued. In the Form No. 26AS

Unreported Judgements

CA. Sanjay R. [email protected]

downloaded from the departmental site only partialcredit was appearing in favour of the petitionerthough in the two TDS certificates of Form No.16 & 16A issued by M/s Amar Remedies Limited,the entire amount of TDS was shown to be havebeen paid to Government.

The department, since it did not find full credit inForm No. 26AS, did not give credit to the petitionerfor full amount and raised demand u/s 221(1) ofthe Act, which was challenged by the petitioner byway of Writ Petition in the Gujarat High Court.

Contentions of petitioner before Gujarat HighCourt:

i) The impugned demand / recovery notice withoutgiving any credit of TDS, which is shown to havebeen made by the deductor is illegal and arbitrary.

ii) M/s Amar Remedies Limited has shown TDSof Rs.5,86,606/- in Form No. 16 & 16A to thepayee and hence to that extent payee has receivedless amount.

iii)As per the provisions of Section 205 of the Acteven in a case where deductor may not havedeposited the amount of TDS, where tax isdeductible under Chapter-XVII, assessee shallnot be called upon to pay the tax himself to theextent to which TDS is made from the income.In such case, the department is required torecover amount from the deductor and no suchrecovery can be made from the assessee.

iv)The petitioner also relied on following decisions:

a) Gauhati High Court in the case of ACIT v/sOm PrakasGattani - 242 ITR 638

b) Bombay High Court in the case ofYashpalSahni v/s ACIT - 293 ITR 539

c) Director of Income Tax (InternationalTaxation) v/s NGC Network Asia Lic - 313ITR 187 (Bom)


d) Anusuya Alva v/s DCIT - 278 ITR 206(Karnataka)

e) CIT v/s Ranoli Investment P. Ltd. – 235ITR 433 (Guj.)

Decision of the Hon’ble High Court

After considering the contentions of both the parties,the Hon’ble High Court following the decisions ofGauhati High Court in the case of OmPrakasGattaniand Bombay High Court in the caseof YashpalSahni referred earlier agreed with theviews of both the High Courts and held as under :

“We are in complete agreement with the view takenbythe Bombay High Court and Gauhati HighCourt. Applying the aforesaid two decisions of theBombay High Court as well as Gauhati HighCourt, the facts of the case on hand and evenconsidering Section 205 of the Act action of therespondent in not giving the credit of the taxdeducted at source for which Form No. 16A havebeen produced by the assessee – deductee andconsequently impugned demand notice issuedunder Section 221(1) of the Act cannot be sustained.

Concerned respondent therefore, is required to bedirected to give credit of tax deducted at source tothe assessee – deductee of the amount for whichFrom No. 16A have been produced.

In view of the above and for the reasons statedpetition succeeds. It is held that the petitioner-assessee– deductee is entitled to credit of the tax deducted atsource with respect to amount of TDS for whichForm No. 16A issued by the employer – deductor –M/s Amar Remedies Limited has been produced andconsequently department is directed to give credit oftax deducted at source to the petitioner – assessee –deductee to the extent Form No. 16A issued by thedeductor have been issued. Consequently, theimpugned demand notice dated 6/1/2012 (AnnexureD) is quashed and set aside. However, it is clarifiedand observed that if the department is of the opiniondeductor has not deposited the said amount of taxdeducted at source, it will always open for thedepartment to recover the same from the deductor.Rule is made absolutely to the aforesaid extent. Inthe facts and circumstances of the case, there shallbe no order as to costs.”

❉ ❉ ❉

Unreported Judgements

contd. from page 273 From the Courts

35

Real intention behind the provision of Sec. 36(1)(v)is that the employer should not have any controlover the funds of the irrevocable trust createdexclusively for the benefit of the employees. In theinstant case, it is evident from the findings recordedby the CIT(A) and affirmed by the Tribunal thatthe assessee had absolutely no control over the fundcreated by the LIC for the benefit of the employeesof the assessee and further all the contributionsmade by the assessee in the said fund ultimatelycome back to the fund, approved by the CIT, Thusthe conditions stipulated in Sec. 36(1)(v) weresatisfied and therefore, payment made by theassessee company directly to LIC towards groupgratuity fund is deductible u/s 36(1)(v).

Though a fiscal statute is to be constructed strictly,and nothing should be added or subtracted to thelanguage employed in the section, a strictconstruction of a provision does not rule out the

application of the principles of reasonableconstruction to give effect to the purpose andintention of any particular provision of the Act.

Income u/s 115JB : No Penalty u/s271(1)(c) : CIT v/s. Aleo Manali Hydro

(2013) 219 Taxman 90 (All) (Mag)

IssueWhen income is assessed under MAT provisionu/s 115JB, whether provision of Section 271(1)(c)would be applicable ?

HeldWhere deemed income assessed u/s 115JB becomesbasis of assessment as it was higher than incomedetermined under normal provisions and thus,concealment would have no role to play and itwould be totally irrelevant. Concealment did notlead to tax evasion at all for imposing penalty.

❉ ❉ ❉


Whether prosecution u/s 276B of the IncomeTax Act, 1961 can be initiated if the TDS is paidlate?

Issue:

XYZ Ltd. is a sick company incurring losses sincelast five years. However, in spite of adverse financialconditions the company paid all the tax deductedat source, but same was paid late. The CIT (TDS)has initiated provisions of Section 276B, of theIncome Tax Act, 1961 for prosecution.

Proposition:

It is worthwhile examining the wording of relevantprovisions closely. The text is as follows:

276B- Failure to pay tax to the credit of CentralGovernment under chapter XIID or XVIIB.

“If a person fails to pay to the credit of the CentralGovernment,

• the Tax deducted at source by him as requiredby or under provisions of Chapter XVIIB or

• the tax payable by him , as required by him orunder,

• Sub Section(2) of Section 115-O; or

• the second proviso to Section 194B,

he shall be punishable with rigorous imprisonmentfor a term which shall not be less than 3 months butwhich may extend to 7 years and with fine.”

It is proposed that provision of Section 276B of theIncome Tax Act 1961, can be initiated when theamount of the tax deducted at source has been paid,though it is paid late.

View Against Proposition:

Firstly, the very heading suggest that there shouldbe a failure to pay the tax. Secondly the placementof clause (a) in the section, makes it clear that itpertains to the tax deducted as per the provisions of

chapter XVIIB and not payment as per provisionof chapter XVIIB. Thus, failure to pay is ondifferent footing. Put differently, payment need notbe within the time specified in that chapter.

In short, the section contemplates total failure andnot mere delay. As against this, even if the tax isalready paid with interest, the notices forprosecution are being issued. The notices alsomention the fact of prior payment. This, then, isclearly against the wording and spirit of theprovision.

It is necessary to compare the text of section 276Bwith provisions of section 40(a)(ia).S ection40(a)(ia) contemplates a time limit for the paymentof tax as well ; and not merely the deduction as perChapter XVII B. For mere delay, there are alreadyadequate provisions viz. section 40(a)(ia)disallowance; 201(1A)- interest, 271C and 221 –penalty. Thus, section 276B clearly applies to totalfailure and not a mere delay.

In case of BEE GEE MOTORS ANDTRACTORS AND ANOTHER vs. INCOMETAX OFFICER Punjab and Haryana Highcourt reported 218 ITR 155 “held that thecomplaint was that the petitioners did not deductthe income tax at source for the years 1982-83 &1983-84, thus, making themselves liable forpunishment under section 276B of the Act.However, the petitioners later did deduct therequired tax on February 20, 1985 and depositedthe same on the same date. By the time tax wasdeducted and deposited, no prosecution had beenlaunched. Since an insignificant amount of Rs. 9428in one case and an even lesser amount in anothercase was involved and the prosecution waslaunched after a number of years after the defaultwas committed or the tax was deposited and thematter was pending since 1993, the complaint

ControversiesCA. Kaushik D. Shah

[email protected].

deserved to be quashed.”


View in favour of the proposition:

The provision of the chapter XVIIB cast duties onassessee to deduct tax at source on various paymentsmade to the deductee. Thus, the deductor is an agentof the government to collect tax. The tax socollected, has to be deposited or paid to the creditof the Central Government and any failure in thepayment of tax in time will attract all theconsequences of payment of interest and penaltyand even prosecution.

The High Court of Bombay , Nagpur Bench in thecase of ITO V/S Sultan Enterprises reported in 127Taxman 514 was held as under :

“The facts of the case are not much in dispute. Theoffence in question relates to non deposit of taxdeducted at source amount within the prescribedtime and therefore action was taken against themand dues were recovered by imposing penalty andinterest. This also amounts to offence punishableprovided under sections 276B and 278B.Thelearned CJM erred in applying the principle ofdouble jeopardy as provided under section 300 ofthe code of criminal procedures for the simple reasonthat the recovery of the amount due and payableby respondent firm to the Income Tax Departmenthas nothing to do with criminal prosecution becauseit is a distinct provision inviting penal action for thedefault committed by the firm. They are liable bothfor the recovery of the amount with interest andpenalty so also for prosecution for havingcommitted offence punishable under section 276Bof the Act for their failure to pay the amount withinthe prescribed period and as the respondent firm isa partnership concern all the partners of the firm ascontemplated under section 278B would be liableto be prosecuted.”

The Central Board of Direct Taxes (CBDT) hasrecently modified the guidelines for initiation ofprosecution under section 276B of the Income TaxAct, 1961 (“Act”). The press release dated August6, 2013 has clarified that any delay in remittance ofTax Deducted at Source (“TDS”), would be liablefor prosecution regardless of the period of delay.

Under Section 276B of the Act, any tax deductorcould be prosecuted for delay or default inremittance of TDS and be sentenced with rigorousimprisonment up to a period of 7 years. Prior tothis press release, the Revenue Authorities (“RA”)were adhering to an internal guideline of initiatingprosecution proceedings where the delay was morethan 12 months. In other words, a tolerance periodof 12 months of delay for initiation of prosecutionwas followed.

To curb the practice of tax deductors deliberatelydeducting the remittance of TDS and deploying thefunds for business, the CBDT has withdrawn thetolerance period, which was only an internalguideline, not prescribed in law. With this changein policy, the RA could initiate prosecutionproceedings even for a day’s delay in remittance oftaxes. It has also been clarified that tax deductorswould have the option of applying for compoundingof such offences before the Jurisdictional ChiefCommissioner and the offence would becompounded in suitable cases.

Summation:

It is pertinent to note that CBDT had issuedinstruction number 1335 of CBDT dated 28-5-1980to the effect that prosecution should not normallybe proposed when the amount involved are notsubstantial and the amount in default has also beendeposited to the credit of the government.

It is necessary to compare the text of section 276Bwith provisions of section 40(a)(ia). Section40(a)(ia) contemplates a time limit for the paymentof tax as well; not merely the deduction as perChapter XVIIB. For merely delay, there are alreadyadequate provisions viz. Section 40(a)(ia)disallowance; 201(1A)-interest, 271C and 221-penalty. Thus, section 276B clearly applies to totalfailure and not a mere delay.

The Provisions of Section 278AA lays down thatno person shall be punishable for any failure referredto in section 276B if he proves that there wasreasonable cause for such failure.

Controversies


It is essentially a question of fact to be decided ineach case on consideration of material placed beforethe concerned authority. However the burden ofproof that there was a reasonable cause for defaultis on assessee.

In SEQUOIA CONSTRUCTION CO. LTD. &ORS. Vs. P.P. SURI, INCOME TAX OFFICERreported in(1985) 47 CTR(DEL) 277: (1986) 158ITR 496 (DEL) : (1985) 21 TAXMAN 13 therewas delay in deposit of TDS. In view of reasonablecause shown by assessee, penalty proceedings cameto be dropped by both appellate authorities. In thisrespect the court held that “Dropping of penaltyproceedings must weigh with trial Court whilejudging the reasonable cause prevailing withassessee. Milder proof of reasonable cause must betaken to have been established. Continuance ofprosecution proceedings would be a sheer exercisein futility and harassment of assessee – Prosecutionwas quashed”.

In UNION OF INDIA vs PYARELALTARACHAND & ANR. (2003) 180 CTR (MP)551 : (2003) 264 ITR 525 (MP) : (2004) 135TAXMAN 97 the Hon High Court declined tointerfere in the judgment where trial court acquittedthe assessee because it was not proved that theassessee has deliberately or intentionally committedthe default.

Prosecution cannot be initiated against the company.It has to be initiated in the name of Director orPrincipal Officer responsible for TDS compliances.For initiating prosecution proceedings against thedirector of the company, the assessing officer hasto give notice u/s 2(35) expressing his intention totreat such directors of a company as “principalofficers”. However, it would be sufficientcompliance if in the show cause notice issued tothe company it is mentioned that the directors areto be considered as principal officers of thecompany.

In absence of both, permission is not granted toappeal against the judgment passed by Addl. ChiefMetropolitan Magistrate whereby respondent

director of the company has been acquitted of theoffence under s. 276B. (COMMISSIONER OFINCOME TAX vs. DELHI IRON WORKS (P)LTD. & ORS(2011) 331 ITR 5 (DEL) : (2010)195 TAXMAN 372 (DEL).

The Supreme Court in Madhumilan SyntexLimited vs Union of India (2007) 290 ITR 199(SC) (2007) 160 Taxman 71 (SC) held that adelayed payment of tax deducted at sourceconstitutes offence u/s 276B. In that case, theassessee had deposited the TDS amount late. Theassessee had contended that since it has paid theamount, though late, it has not committed anydefault and hence no offence can be registeredagainst it. The Supreme Court dismissed thiscontention and observed that – “ The contention ofthe appellant that though tax deducted at source hasbeen deposited late but since TDS has already beendeposited to the account of the CentralGovernment, there was no default and noprosecution can be ordered, could not be accepted.Once a statute requires to pay tax and stipulatesperiod within which such payment is to be made,the payment must be made within that period. Ifthe payment is not made within that period, there isdefault and appropriate action can be taken underthe Act. Interpretation canvassed by the appellantwould make the provision relating to prosecutionnugatory.”

Keeping in mind the stringent provisions of law,first thing which is required is its strict compliance.Assessee is required to pay interest and penalty forvarious defaults. There is an urgent need for clearcut guidelines about the amount of tax default andperiod of default which may attract prosecution.This will not only save time of the assessee and thedepartment but will also save assessee from undueharassment.

❉ ❉ ❉

Controversies


add


In case of violation of S.11(5) of the Income TaxAct, only income from such investments losesexemption u/s 11 and not the whole income.

CIT v. Fr. Mullers Charitable Institutions [2014]44 taxmann.com 275 (Kar)xxx…

11. With regard to second and third substantialquestions of law are concerned, reading ofSection 13(1)(d) of the Act makes it clear thatit is only the income from such investment ordeposit which has been made in violation ofSection 11(5) of the Act that is liable to be taxedand that violation under Section 13(1)(d) doesnot tantamount to denial of exemption underSection 11 on the total income of the assessee.An identical question came before the BombayHigh Court in the case reported in ShethMafatlal Gagalbhai Foundation Trust (supra).The question before the Bombay High Courtis “Whether violation of Section 11(5) r/wSection 13(1)(d) by the assessee-Trust attractsmaximum marginal rate of tax on the entireincome of the Trust? The Bombay High Courtheld that in case of contravention of Section13(1)(d), maximum marginal rate of tax underSection 164(2), proviso is applicable only tothat part of income of the Trust which hasforfeited exemption and not the entire income.Relevant paragraph reads as under:

“Sec. 164(2) refers to the relevant income whichis derived from property held under trust whollyfor charitable or religious purposes. If suchincome consists of severable portions, exemptas well as taxable, the portion which is exemptis to be left out and the portion which is notexempt is charged to tax as if it is the income ofan AOP. Therefore, a proviso was inserted bythe Finance Act, 1984 w.e.f 1st April 1985, underwhich in cases where the whole or any part ofthe relevant income is not exempt under s. 11 or

Advocate Tushar [email protected]

Judicial Analysis

s.12 because of the contravention of s.13(1)(d),the tax shall be charged on such income or partthereof, as the case may be, at the maximummarginal rate. In other words, only the non-exempt income portion would fall in the net oftax as if it was the income of an AOP. The phrase‘relevant income or part of the relevant income’in the proviso is required to be read incontradistinction to the phrase ‘whole income’under s. 161(1A). This is only by way ofcomparison. Under s. 161(1A), which beginswith a non obstante clause, it is provided thatwhere any income in respect of which a personis liable as a representative assessee consists ofprofits of business, the tax shall be charged onthe whole of the income in respect of which suchperson is so liable at the maximum marginal rate.Therefore, reading the above two phrases showsthat the legislature has clearly indicated its mindin the proviso to s. 164(2) when it categoricallyrefers to forfeiture of exemption for breach ofs.13(1)(d), resulting in levy of maximummarginal rate of tax only to that part of the incomewhich has for forfeited exemption. It does notrefer to the entire income being subjected tomaximum, marginal rate of tax. Thisinterpretation is also supported by CircularNo.387, dt. 6th July, 1984. Vide the saidCircular, it has ‘ been laid down in para 28.6that where a trust contravenes s.13(1)(d), themaximum marginal rate of Income-tax will applyonly to that part of the income which hasforfeited exemption wider the said provision andnot to the entire income. There is a vitaldifference between eligibility for exemption andwithdrawal of exemption/forfeiture of exemptionfor contravention of the provisions of law. Thesetwo concepts are different. They have differentconsequences. In the circumstances, there is meritin the contention of the assessee that in thepresent case the maximum marginal rate of tax


will apply only to the divided income fromshares held in contravention of s.13(1)(a) andnot to the entire income. Therefore, income otherthan dividend income shall be taxed at normalrate of taxation under the Act.”

A similar view has been taken by the DelhiHigh Court in a judgment reported in AgrimCharan Foundation (Supra).

Reading of the proviso to Section 142 is veryclear that the legislature has clearly contemplatedthat in a case, where the whole or part of therelevant income is not exempted under Section11 by virtue of violation of Section 13(1)(d) ofthe Act, tax shall be levied on the relevant incomeor a part of the relevant income at the maximummarginal rate. The said analogy is applicable tothe facts of the present case.

12. We are in respectful agreement with the viewsexpressed by the Bombay High Court as wellas Delhi High Court for violating Section 11(5)of the Act and the entire income of therespondent-Trust cannot be assessed for the tax.

xxx…

Director of Income-tax (Exemption) v. ShethMafatlal Gagalbhai Foundation Trust [2001]249 ITR 533 (BOM.)Kapadia, J. - The short question of law which arisesfor determination in the above group of appeals isas follows :

“Whether violation of section 11(5) read withsection 13(1)(d ) by the assessee-trust attractsmaximum marginal rate of tax on the entire incomeof the trust ?”

In these appeals, we are essentially concerned withdeciding the scope of section 164(2) read with itsproviso as also the effect of contravention of section11(5) and section 13(1)(d)( iii) of the Income-taxAct, 1961 (‘the Act’).

Facts

2. The assessee-trust came into existence after 1-6-1973. The assessee-trust was a holder ofequity shares of Mafatlal Industries during theassessment year 1994-95. They were the holdersof the shares even after 31-3-1993. In this groupof appeals, we are only concerned with the effect

of the violation of section 13(1)(d). There is nodispute about the contravention. The assessee,during the relevant assessment year, receiveddividend income from Mafatlal Industries of Rs.15,103. The assessee also received interestincome of Rs. 2,095. These facts are taken fromIncome-tax Appeal No. 267 of 2000. The factsare common to all other appeals. Hence, by thisjudgment, the above group of appeals aredisposed of as the facts are common in all theabove matters. The point of law is also common.According to the Assessing Officer, on accountof violation of section 11(5), the department tookthe stand that the assessee forfeited its exemptionunder section 11 in respect of its entire income,viz., dividend income plus interest income,whereas, according to the assessee, they wereentitled to claim exemption and they wereentitled to continuance of exemption in respectof interest income though they had forfeited theirright to claim exemption vis-a-vis the dividendincome as the assessees continued to hold theshares of non-Government company even after31-3-1993. Being aggrieved, the assessee carriedthe matter in appeal to the Commissioner whichcame to the conclusion that the assessee was notentitled to the benefit of exemption under section11 in respect of the entire income. Beingaggrieved, the assessee carried the matter inappeal to the Tribunal. The Tribunal came to theconclusion that in view of section 164(1), theincome receivable by the trust was the relevantincome and that a portion of such relevantincome only would suffer tax because of theviolation of the condition of investmentprescribed by section 11(5). The Tribunal foundthat non-fulfilment of such condition cannotdeprive the trust of the exemption of its otherincome which has been granted to it in the earlieryears. Hence, the Tribunal allowed the appeal.It directed that only dividend income in thepresent case should be taxed at maximummarginal rate and the income, other than thedividend income, viz., interest income be taxedat normal rate of taxation as applicable underthe law.

Judicial Analysis


Arguments3. Mr. Desai, the learned senior counsel appearing

on behalf of the department, contended thatsection 11(5) provides for various forms andmodes of investing or depositing the money bythe trust. He contended that violation of section11(5) results in forfeiture of exemption given tothe trust. He contended that under section 11(2)of the Act, it is provided that where 70 per centof the income referred to in clause (a) or clause(b) of section 11(1) is not attracted to charitableor religious purposes in India during the previousyear, but is accumulated or set apart either inwhole or in part for application to such purposes,then such income so accumulated or set apartshall not be included in the total income of theprevious year provided certain conditions aresatisfied. He contended that violation of section11(5) results in consequences which arespecifically mentioned in section 164(2) which,inter alia, lays down that in the case of relevantincome derived from property held under trust,tax shall be charged on so much of the relevantincome as is not exempt under section 11 as ifthe relevant income, not so exempt, was theincome of an AOP. In other words, he contendedthat in view of section 164(2), forfeiture ofexemption for breach of section 11(5) wouldresult in imposition of tax at maximum marginalrate as if the assessee was an AOP. He contendedthat by a deeming fiction the Legislature hasprovided for an assessee-trust to be assessed asan AOP consequent upon its violation of section11(5). He, accordingly, contended that the entireincome of the trust was liable to be charged totax under maximum marginal rate and on thebasis of such income accruing to an AOP.

4. On the other hand, Mr.Andhyarujina, the learnedcounsel appearing on behalf of the trust,contended that the requirement of investment inspecified securities under section 11(5) resultsin an income to the trust which is receivable bythe trustees and it is called as relevant incomeunder section 164(1). He contended that a portionof such relevant income, in the present case,would suffer tax because the condition ofinvestment, as prescribed under section 11(5),had not been fulfilled, but non-fulfilment of suchcondition cannot deprive the trust of theexemption of its other income which had been

granted in the earlier years. He contended thatin this connection the proviso to section 164(2)is very important. He contended that under thesaid proviso, the Legislature has clearlycontemplated that in a case where the whole orpart of the relevant income is not exempt undersection 11 by virtue of violation of section13(1)(d), tax shall be charged on the relevantincome or a part of the relevant income at themaximum marginal rate. In this connection, herelied upon the Circular issued by the Boardbearing No. 387, dated 6-7-1984 whichsupports his above contention.Findings

5. For the purposes of this appeal, it would berelevant to quote section 164(2) read with itsproviso :“164(2) In the case of relevant income whichis derived from property held under trust whollyfor charitable or religious purposes, or whichis of the nature referred to in sub-clause (iia) ofclause (24) of section 2, or which is of thenature referred to in sub-section (4A) of section11, tax shall be charged on so much of therelevant income as is not exempt under section11 or section 12, as if the relevant income notso exempt were the income of an associationof persons :Provided that in a case where the whole or anypart of the relevant income is not exempt undersection 11 or section 12 by virtue of theprovisions contained in clause (c) or clause (d)of sub-section (1) of section 13, tax shall becharged on the relevant income or part ofrelevant income at the maximum marginal rate.”

6. Section 164 does not create a charge on theincome of a discretionary trust. The word‘charge’ in section 164 means ‘levy’. Section164(2) refers to the relevant income which isderived from property held under trust whollyfor charitable or religious purposes. If suchincome consists of severable portions, exemptas well as taxable, the portion which is exemptis to be left out and the portion which is notexempt is charged to tax as if it is the income ofan AOP. Therefore, a proviso was inserted bythe Finance Act, 1984 with effect from 1-4-1985under which in cases where the whole or anypart of the relevant income is not exempt under

Judicial Analysis


section 11 or section 12 because of thecontravention of section 13(1)(d), the tax shallbe charged on such income or part thereof, asthe case may be, at the maximum marginal rate.In other words, only the non-exempt incomeportion would fall in the net of tax as if it wasthe income of an AOP. Section 11(5) lays downvarious modes or forms in which a trust isrequired to deploy its funds. Section 13(1) laysdown cases in which section 11 shall not apply.Under section 13(1)(d)( iii), it has been laid downthat any share in a company, not being aGovernment company, held by the trust after 30-11-1983 shall result in forfeiture of exemption.By virtue of the proviso (iia) it has been laiddown that any asset which does not form part ofpermissible investment under section 11(5) shallbe disposed of within one year from the end ofthe previous year in which such asset is acquiredor by 31-3-1993, whichever is later. In thepresent case, the assessee was required todispose of the shares under the said proviso by31-3-1993 [See the judgment of this Court in ITAppeal No. 81 of 1999 dated 14-9-2000]. Theshares have not been disposed of even duringthe assessment year in question. Now, undersection 164(2), it is, inter alia, laid down that inthe case of relevant income which is derived fromproperty held under trust for charitable purposes,which is of the nature referred to in section11(4A), tax shall be charged on so much of therelevant income as is not exempt under section11. Section 164(2) was reintroduced by theDirect Tax Laws (Amendment) Act, 1989 witheffect from 1-4-1989. Earlier it was omitted bythe Direct Tax Laws (Amendment) Act, 1987.However, the Legislature inserted a proviso bythe Finance Act, 1984 with effect from 1-4-1985.By the said proviso, it is, inter alia, laid downthat where whole or part of the relevant incomeis not exempt by virtue of section 13(1)(d), taxshall be charged on the relevant income or partof the relevant income at the maximum marginalrate. The phrase ‘relevant income or part of therelevant income’ is required to be read incontradistinction to the phrase ‘whole income’under section 161(1A). This is only by way ofcomparison. Under section 161(1A), whichbegins with a non obstante clause, it is providedthat where any income in respect of which a

person is liable as a representative assesseeconsists of profits of business, the tax shall becharged on the whole of the income in respectof which such person is so liable at the maximummarginal rate. Therefore, reading the above twophrases shows that the Legislature has clearlyindicated its mind in the proviso to section 164(2)when it categorically refers to forfeiture ofexemption for breach of section 13(1)(d),resulting in levy of maximum marginal rate oftax only to that part of the income which hasforfeited exemption. It does not refer to the entireincome being subjected to maximum marginalrate of tax. This interpretation of ours is alsosupported by Circular No. 387, dated 6-7-1984.Vide the said Circular, it has been laid down inPara 28.6 that where a trust contravenes section13(1)(d), the maximum marginal rate of income-tax will apply only to that part of the incomewhich has forfeited exemption under the saidprovision and not to the entire income. We mayalso add that in law there is a vital differencebetween eligibility for exemption and withdrawalof exemption/forfeiture of exemption forcontravention of the provisions of law. Thesetwo concepts are different. They have differentconsequences. It is interesting to note thatalthough the Legislature withdrew section 164(2)by the Direct Tax Laws (Amendment) Act, 1987which provision was reintroduced by the DirectTax Laws (Amendment) Act 1989, theLegislature did not touch the proviso to section164(2) which has been on the statute book rightfrom 1-4-1985. The said proviso was insertedby the Finance Act, 1984. The provisospecifically refers to violation of section 13(1)(d)and its consequences. In the circumstances, wefind merit in the contention of the assessee thatin the present case the maximum marginal rateof tax will apply only to the dividend incomefrom shares in Mafatlal Industries Ltd. and notto the entire income. Therefore, income otherthan dividend income shall be taxed at normalrate of taxation under the Act.

7. Accordingly, the above question is answeredin the negative, i.e., in favour of the assesseeand against the department. Question No. 1 isanswered in our judgment in IT Appeal No.81 of 1999.

❉ ❉ ❉

Judicial Analysis


CA. Savan A. [email protected]

Guidelines relating to participation ofForeign Portfolio Investors (FPIs) in theExchange Traded Currency Derivatives(ETCD) market

It has now been decided to allow foreign portfolioinvestors (FPIs) eligible to invest in securities as laiddown in Schedules 2, 5, 7 and 8 of the ForeignExchange Management (Transfer or Issue ofSecurity by a person resident outside India)Regulations, 2000 (FEMA 20/2000-RB dated May3, 2000 (GSR 406 (E) dated May 3, 2000)) asamended from time to time to enter into currencyfutures or exchange traded currency optionscontracts subject to the terms and conditions.

For Full Text refer to A.P. (DIR Series) CircularNo. 148 - http://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=8952

Remittances to non-residents –Deduction of Tax at Source

The Central Board of Direct Taxes (CBDT) hasrevised the existing instructions to be followed whileallowing remittances to the non-residents, witheffect from October 1, 2013. It has issued IncomeTax (14th Amendment) Rules, 2013 videNotification No. S.O 2659(E) dated September 2,2013 on furnishing of information under Section195(6) of the Income Tax Act, 1961 and prescribedthe rules and forms to this effect.

Reserve Bank of India has reviewed the policyrelating to issue of instructions under ForeignExchange Management Act, 1999 (FEMA),clarifying tax issues. It has now been decided thatReserve Bank of India will not issue anyinstructions under the FEMA, in this regard.

For full text refer to: A.P. (DIR Series) Circular No.151 - http://www.rbi.org.in/scripts/BS_Circular

Financial Commitment (FC) by Indian

Index Display.aspx?Id=8971

Party under Overseas Direct

Investments (ODI) – Restoration of Limit

It has been decided to restore the limit of OverseasDirect Investments (ODI)/ Financial Commitment(FC) to be undertaken by an Indian Party under theautomatic route to the limit prevailing, as per theextant FEMA provisions, prior to August 14, 2013.It has, however, been decided that any financialcommitment exceeding USD 1 (one) billion (or itsequivalent) in a financial year would require priorapproval of the Reserve Bank even when the totalFC of the Indian Party is within the eligible limitunder the automatic route.

For full text refer to: A.P. (DIR Series) Circular No.1- http://www.rbi.org.in/scripts/BS_Circular IndexDisplay.aspx?Id=9088

Import of Rough, Cut and PolishedDiamonds

It is permitted to approve Suppliers’ and Buyers’Credit (Trade Credit), including the usance periodof Letters of Credit for import of Rough, Cut andPolished Diamonds for a period not exceeding 90days from the date of shipment.

Taking into account the representations receivedfrom the diamond importers and the GJEPC, it hasbeen decided, in consultation with the Governmentof India, that the Clean Credit i.e. credit given by aforeign supplier to its Indian customer/ buyer,without any Letter of Credit (Suppliers’ Credit) /Letter of Undertaking (Buyers’ Credit) / FixedDeposits from any Indian financial institution forimport of Rough, Cut and Polished Diamonds, maybe permitted for a period not exceeding 180 daysfrom the date of shipment.

For full text refer to: A.P. (DIR Series) Circular No.2 - http://www.rbi.org.in/scripts/BS_Circular IndexDisplay.aspx?Id=9090

FEMA Updates

21 23

22 24


Issue of Partly Paid Shares andWarrants by Indian Company toForeign Investors

A review of the policy as regards to partly paidshares and warrants has been undertaken and it hasbeen decided as under apart from other conditionsmentioned in the circular:

(i) Eligible instruments and investors

Partly paid equity shares and warrants issuedas per applicable law, shall be eligibleinstruments for the purpose of FDI and FPI byFIIs/RFPIs subject to compliance with FDI andFPI schemes.

(ii) Pricing and receipt of balance consideration

(a) Partly paid equity shares: Pricing of partlypaid equity shares shall be determinedupfront and 25% of the total considerationamount shall also be received upfront; andbalance within 12 months. The time periodfor receipt of balance consideration within12 months can be extended in certain cases.

(b) Warrants: The pricing of the warrants andprice/ conversion formula shall bedetermined upfront and 25% of theconsideration amount shall also be receivedupfront and the balance within 18 months.The price at the time of conversion shouldnot in any case be lower than the fair valueworked out, at the time of issuance of suchwarrants, in accordance with the extantFEMA Regulations and pricing guidelinesstipulated by RBI from time to time.

(iii) Reporting

(a) Partly paid equity shares: The reporting ofreceipt of foreign inward remittancetowards each upfront /call payment for FDItransaction shall be made in AdvanceReporting Form along with supportingdocuments. The reporting of issue ortransfer of partly paid shares shall be madein form FC-GPR and form FC-TRSrespectively, to the extent the equity sharesare called up.

(b) Warrants: The identity of non-residentinvestor shall be disclosed for the purposeof compliance with KYC norms at the timeof issuance of warrants.

The reporting of receipt of foreign inwardremittance towards each upfront /call paymentfor FDI transaction shall be made in AdvanceReporting form along with supportingdocuments. The reporting of issue or transferof warrants in form FC-GPR and form FC-TRS respectively, under the head ‘others’.

(iv) Compliance

The onus of compliance of all the conditionsunder FEMA as regards entry route, sectoralcaps and all other conditions under FDIguidelines shall be on the Investee company incase of issue of partly paid shares /warrants aswell as upon resident transferor or transfereein accordance with extant guidelines in case oftransfer of partly-paid shares/warrants. The onusof compliance with individual limit below 10%of the total paid-up equity capital shall be oneach FII/RFPI.

For full text refer to: A.P. (DIR Series) CircularNo. 3 - http://www.rbi.org.in/scripts/BS_Circular Index Display.aspx?Id=9095

Foreign Direct Investment (FDI) in India- Issue/Transfer of Shares or ConvertibleDebentures

Optionality clauses have been allowed in equityshares and compulsorily and mandatorilyconvertible preference shares/debentures to beissued to a person resident outside India under theForeign Direct Investment (FDI) scheme subject toconditions mentioned therein.

The extant pricing guidelines in respect of transfer/issue of shares and for exit from investment in equityshares with or without optionality clauses of listed/unlisted Indian companies have since been reviewedso as to provide greater freedom and flexibility tothe parties concerned under the FDI framework asunder:

25

FEMA Updates

26

contd. on page no. 316


CA. Punit R. [email protected]

d. Deduction of 3% in interest rate as providedin the proviso to Section 75 is still availablewhere value of taxable services provided,in the preceding financial year is notexceeding Rs. 60 Lakhs.

e. This amendment (“Bure Din”) will comein to force (“Aayenge”) from 01-10-2014.Even, service tax outstanding on that day,for the period one year will be subject tointerest @ 30% p.a. from 1-10-2014 for thedelay beyond one year.

f. These rates of interest will affect the assesseewho will chose to fight the demand.Generally, at present, show cause noticesare being issued for the period coveringperiod of last five years. Once the notice isissued, it takes around one year to two yearsfor adjudication. Thereafter, further oneyear to one and half year is required forappeal before the Commissioner (Appeals).And, at present, at the Central Excise andService Tax Appellate Tribunal (CESTAT)it may take 2-3 years for final order. Evenif we don’t consider the time required inHigh Courts and Supreme Courts, ifappellant lose the case at the CESTAT,appellants may be end up paying interest@ 30% p.a. for 5-7 years which willdefinitely be more than the service taxliability itself. Now, where questions ofinterpretation are involved, a taxpayer eitherhas to pay full service tax as pre-deposit orhe will be exposed to risk of payment ofhigh interest @ 30% p.a. at end of thelitigation. It is exorbitant rate of interestwhich is nothing but deprive of right to havejustice. Now, even if you survive penaltiesdue to involvement of question ofinterpretation or unintentional non-payments, you still have to pay penalty in

Service Tax Decoded

Budget SimplifiedFor the year 2014-15, budgeted revenue fromservice tax is Rs. 2,15,973/- Crores which showsgrowth of Rs. 51,046/- Crores compared to revisedbudget revenue of Rs. 1,64,927/- Crores for theyear 2013-14. It is worth noting that year 2013-14was the first full year of Negative List Regime. Thusthere is huge growth of 30.95% is expected fromthe service tax. This is the highest growth rate inany tax revenue for this budget. This year, it is thefirst time when tax revenue from service tax hasovertaken the revenue from Customs or the revenuefrom Excise Duty. It is for sure that withdrawal offew exemptions and keeping the same tax rate arenot going to fetch additional Rs. 51 thousand cores.Thus, we need to go through the proposals of theFinance (No.2) Bill, 2014 and related notificationscarefully. Major changes are discussed in this article.

1. One of the most discussed and far reachingchange is increase in the rate of interest fordelayed payment of service tax. Rate of interestis increased upto 30% per annum. Rate ofinterest is linked to the period of delay. Interest@ 18% p.a. is to be paid for delay upto theperiod of six months, interest @ 24% p.a. ispayable for the period beyond six month andupto the delay of one year. Interest @ 30% p.a.is required to be paid for the period beyondone year.

a. I am not aware about any tax law whereinterest is payable at rate as high as 30%p.a. So as far as the rate of interest isconcerned, now service tax law may beregarded as a worst tax law.

b. This provision will result in highcompliance through timely payment ofservice tax. Now, no one can afford to payinterest @ 30% p.a.

c. High rate of interest say @24%/30% isnothing but a penalty named as interest.


form of interest as cost to choose to havefight with the department.

2. Another important change is in the field oflitigation. At present, against the demandconfirmed through Order-in-Original, assesseecan prefer appeal before the Commissioner(Appeals) or the CESTAT as the case may be.The appellate authority may waive therequirement of pre-deposit in the cases wherethe appellant has prima facie strong case andpre-deposit may cause undue hardship to theappellant. Section 35F of the Central ExciseAct, 1944, which is also made applicable tothe service tax is being substituted. w.e.f. thedate of enactment of the Finance Act, 2014, itwill be compulsory for appellant to pre-deposit10% of the duty demanded and penalty if orderis passed by the Commissioner (Appeals) andappeal is to be filed before the CESTAT. If thefirst appeal is before Commissioner (Appeals)or before CESTAT, such amount of pre-depositwould be 7.5%.

a. This amendment has got both positive andnegative responses from the society.Although most of the people are not havingpositive response for such amendment, Ifeel that this proposal is not worth throwingaway. However, certain relaxations areneeded to be given in genuine cases forexamples; cases where dispute in the matteris already covered by the decision of theHigh Courts or the Supreme Courts infavour of the assessee; cases where demandis periodical demand and earlier demandhas not survived in litigation etc.

b. More than 80% of the demands, confirmedin the orders don’t survive at the CESTAT.It shows that majority of the demands beingconfirmed by the learned officers arefrivolous. It means that this majority of theappellants who are victim of such attitudeof the department will also have to suffer apain of paying pre-deposit of 7.5%/10% asthe case may be.

c. Today around half of the time of theCESTAT is being spent on the hearing stay

applications. If the requirement of the pre-deposit is dealt with in the law, this essentialtime may be utilized in delivering the finaljudgments on the appeals. This amendmentis going to get that essential time savedparticularly when number of pending casesat CESTAT has crossed one lakh.

d. One doubt being raised is that when 7.5%of duty demanded (and penalty if any) ispaid as pre-deposit for appeal before theCommissioner (Appeal), whether assesseeneeds to deposit additional 10% or is itsuffice if rest of 2.5% is paid for appealbefore the CESTAT. Reading of theprovisions of Section 35F of the CentralExcise Act, 1944 reveals that it will besuffice if additional 2.5% of the dutydemanded (and penalty if any) is paid aspre-deposit at this stage. Some clarificationfrom the Central Board of Excise andCustom (CBEC) is badly needed.

e. One more doubt is being raised. Pre-depositof 7.5%/10% is made mandatory with aview to unlock the crores of rupees ofrevenue locked in the litigation and speedup the delivery of judgment in litigation.One doubt is that even after payment of pre-deposit of 7.5%, is appellant required to filea stay application for recovery of the restof the demand or not? One school ofthought is that once the order is passed,unless stayed or set a side by the higherauthority, it is final and recovery of thedemand may be initiated and hence to stayoperations of such order, application for stayis still required. However, if it is thesituation, entire purpose for amendment ofmandatory pre-deposit would be defeated.Clarification from the CBEC may throwsome light on the situation.

f. Section 35 reads that 7.5%/10% of “dutydemanded or penalty imposed or both” isto be paid as pre-deposit. Another doubtbeing raised is that as the “or” is used, is itproper that if only 7.5%/10% of dutydemanded or penalty imposed is paid. In

Service Tax Decoded


my opinion, the provision may be read asfollows. If only duty is demanded,percentage of duty demanded is to be paid,if only penalty is demanded, percentage ofpenalty is to be paid and if both aredemanded percentage of both is requiredto be paid.

g. As provided in the first proviso to the Section35F of Central Excise Act, 1944, amountrequired to be deposited shall not exceed Rs.10 crores. This cap is also too high and goingto help only high profile assesses.

h. Provisions of the Section 35F will come intoforce from the date of commencement ofthe Finance (No.2) Act, 2014. Secondproviso to the said section clarifies that theprovisions of new section 35F will not beapplicable to the appeals and stayapplication pending on the date ofcommencement of the Finance (No.2) Act,2014. It means that payment of mandatorypre-deposit will be required for any appealfiled on or after the date on which theFinance (No.2) Bill, 2014 receives assentof the President.

i. In terms of old provisions of Section 35F“duty demanded” would include interestalso. However, in terms of explanation toproposed Section 35 “duty demanded”don’t include the interest and hence, pre-deposit of 7.5%/10% of the interest amountis not required.

j. Pre-deposit will be mandatory as it isembedded in the provision of the CentralExcise Act, 1944. The CESTAT, being acreature of the provisions of the Customs Act,1962 (made applicable to Central Excise Act,1944 and Finance Act, 1994), can’t gobeyond the provisions of the Central ExciseAct, 1944 or the Finance Act, 1994.Meaning thereby, the CESTAT can’t waivethe pre-deposit by the appellant which ismade mandatory through the provisions ofthe Central Excise Act, 1994. However, High

Courts may waive off the requirement of thepre deposit in interest of justice.

3. Another important change is in the CENVATCredit Rules, 2004. At present there is no timelimit for taking CENVAT Credit and the samemay be taken even after 3-4 years as held bythe various courts and tribunals. However, nowRule 4(1) and Rule 4(7) of the CENVAT CreditRules, 2004 are being amended to provide thatCENVAT Credit is to be taken within sixmonths from the date of issue of invoice or otherdocuments as specified in the Rule 9(1) of thesaid rules.

a. This amendment is a very harsh. It takesaway legitimate right of the serviceproviders. Now, it will not be possible totake CENVAT credit if such a credit ismissed due to oversight and came to theknowledge after six months.

b. This limitation is apply only to the “input”and “input services” and not to the “capitalgoods” and hence CENVAT credit for“capital goods” as defined in the rules maybe taken even after the period of six months.

c. CENVAT credit for the service tax paid underreverse charge mechanism may be takenbased on the challan through which serviceprovider has paid the service tax. It is alsoan eligible document under Rule 9(1) fortaking CENVAT Credit. Hence, CENVATcredit for service tax paid under full reversecharge mechanism may be taken within sixmonths from the date of such challan.

d. This amendment is coming into force fromst1 September, 2014. Hence, the assessee

may find out the CENVAT credit missedstand take the same on or before 31 August,

2014 even if invoices are issued or challansare paid prior the six months, subject to otherconditions.

e. It is worth noting that the restriction isimposed on taking of the CENVAT credit.Once, the CENVAT credit is taken withinthe time limit, there is no time limit forutilization of the said credit.

Service Tax Decoded


f. CENVAT credit may be taken immediatelyon receipt of invoice. But if payment toservice provider/manufacturer is not madewithin the period of three months from thedate of payment, assessee is required to payamount equivalent to the CENVAT crediton such invoice and on payment to serviceprovider/manufacture, assessee becomesentitled to take that CENVAT credit back[New third proviso to Rule 4(7)]. However,such a entitlement is subject to otherprovisions of the CENVAT Credit Rules,2004 and as per this new provisions,CENVAT credit may not be available ifpayment to service provider/manufacturerhas been delayed for six months or above.

g. Most of the time demand of service tax isbeing confirmed after six months. Or evenassessee may come to know only after sixmonths that service tax is payable on certainservices. In such a case generally, CENVATcredit is being allowed on input and inputservices which are used by the serviceprovider for providing that services and onlynet service tax payable may be demanded.However, now, by the time the demands getconfirmed, assessee’s right to claim creditmay have been gone and department maydispute the eligibility of the CENVAT anddemand the full service tax liability withoutallowing the CENVAT credit for inputservices/inputs used for such services.

4. Under Entry No. 9 of the mega exemptionNotification No. 25/2012-ST, service providedto an educational institution by way of rentingof immovable property was exempt from thetax. This entry is amended to withdraw thisexemption and now schools and colleges willhave to pay service tax to service providers inaddition to rent for premise. Further, blanketexemption was provided to services providedto an educational institution for the serviceswhich an educational institute carry outthemselves but may obtain as outsourced fromother person. Scope of this exemption is nowrestricted to transportation, catering, security,

housekeeping and admission & examinationrelated services. Even after 67 years of theindependence, the Government is failed inproviding education to all the citizens. In sucha situation it is not at all a welcome change.w.e.f. 11-7-2014, “Bure Din Aa Gaye”.

5. In the case of Goods Transportation Agency(GTA) Services, abatement of 75% is availableif CENVAT credit for inputs, input services andcapital goods in not taken. In the case of GTA,generally, service recipient is liable to payservice tax and it is difficult for him to provethat service provider has not taken theCENVAT Credit and for that service recipientwas required to obtain certificate from each andevery GTA service provider to that effect. Thisis an age old issue which was settled earlierthrough inserting suitable provision inprevailing abatement notification but the sameprovision was missing in the new abatementNotification No. 26/2012-ST came intoexistence with Negative List Regime. Due tothis, that old age issue of obtaining certificatesfrom GTA was reemerged. Now, it is settledonce again and obtaining certificate from GTAis not required (w.e.f.11-7-2014).

6. At present, transportation of passengers by acontract carriage, whether airconditioned or not,is exempt under Entry No. 23 (b) of the megaexemption Notification No. 25/2012-ST. Now,exemption for airconditioned contract carriagehas been withdrawn w.e.f. 11-07-2014.Definition of the Contract Carriage is borrowedfrom the Motor Vehicle Act, 1988. In terms ofSection 2(7) of the said Act, a contract carriageis a motor vehicle which carries a passenger orpassengers for hire or reward and is engagedunder a contract, whether expressed or implied,for the use of such vehicle as a whole for thecarriage of passengers mentioned therein andentered into by a person which a holder of apermit in relation to such vehicle or any personauthorized by him in this behalf on a fixed oran agreed rate of sum on a time basis, whetheror not with reference to any route or distance;or from one point to another, and in either case,

Service Tax Decoded


without stopping to pick up or set downpassengers not included in the contractanywhere during the journey, and includes amaxicab and a motor cab. In simple words,private air conditioned buses will have to payservice tax w.e.f. 11-7-2014.

7. Loading, unloading, packing, storage,warehousing and transportation (except by air)of cotton (ginned or bailed) is made exemptw.e.f. 11-7-2014.

8. Selling of space or time slots for advertisements(other than advertisements broadcast by radioor television) is a service in the Negative Listin terms of Section 65D(g). This entry is beingamended w.e.f. date to be notified afterenactment of the Finance (No.2) Act, 2014.This exclusion is being restricted to selling ofspace for advertisement in print media and allother selling of space and time slots will betaxable. Following points should be noted inthis regards.

a. Under Entry No. 55 of the LIST II- STATELIST of the Constitution of India, taxes onadvertisements other than advertisementspublished in the newspapers andadvertisement broadcast by radio ortelevision is subject matter of the State andhence Central Government is notempowered to tax thereon. In the year2001, Hon’ble Madras High Court hasupheld the constitutional validity of servicetax on services provided by advertisingagency in relation to advertisement in thecase of Advertising Club V. CBEC [2006(2) STR 457 (Mad.)]. However, now theentry is differently worded and it seems thatit steps into the exclusive power of the Stateand hence constitutional validity of thisproposed entry may be challenged in theHigh Court.

b. Selling of space for advertisement in printmedia is still not subject to service tax. Printmedia is defined to be books and newspapers as defined in the Press andRegistration of Books Act, 1867.

- In terms of the Section 1(1) of the saidAct, book includes every volume, part ordivision of a volume, and pamphlet, inany language, and every sheet of music,map chart or plan separately printed.

- In terms of the Section 1(1) of the sameAct, newspaper means any printedperiodical work containing public newsor comments on public news.

c. Definition of “book” as given in the abovestated Act is an inclusive definition. We needto refer to meaning of the books in generalparlance and law settled under the said act.

thBlack’s Law Dictionary (4 Edition)defines the books as an assembly orconcourse of ideas expressed in words. Itis also defined as a literary compositionwhich is printed; a printed compositionbound in a volume. Whether any materialis book or not will be question of facts andarea is prone to litigation.

d. In terms of the proposed Section 65B(39a)of the Finance Act, 1994, BusinessDirectories, Yellow Pages and TradeCatalogues which are primarily meant forcommercial purpose is not to be consideredas print media and hence selling of spacefor advertisement in such BusinessDirectories, Yellow Pages and TradeCatalogues will be made taxable.

e. Examples for coverage for new levy asgiven in D.O.F No. 334/15/2014-TRUdated 10-7-2014 are advertisements oninternet websites, out-of-home media, onfilm screen in theatres, bill boards,conveyances, buildings, cell phones,Automated Teller Machines, tickets,commercial publications, aerial advertising,etc.

9. Service of transportation of passengers byRadio Taxis is service in the Negative List interms of Section 65D(o). This exclusion isbeing removed w.e.f. the date to be notifiedafter enactment of the Finance (No.2) Act,

Service Tax Decoded


2014 and service of transportation of passengersby Radio Taxies would be taxable.

a. In terms of Paragraph 2(za) of theNotification No. 25/2012-ST as amendedby Notification No. 6/2014-ST, “radio taxi”means a taxi including a radio cab, bywhatever name called, which is in two-wayradio communication with a central controloffice and is enabled for tracking usingGlobal Positioning System (GPS) orGeneral Packet Radio Service (GPRS).

b. Abatement of 60% will be provided to suchservices.

10. Scope of Reverse Charge Mechanism (RCM)has been expanded or amended as follows.

a. Banking company, financial institution andnon-banking financial companies are madeliable to pay service tax on services receivedfrom a recovery agent. 100% of the tax isto be discharged by the service recipients.(w.e.f. 11-7-2014)

b. Similarly, service provided by the directorof a body corporate, even if it is not a“company” is brought under the ReverseCharge Mechanism. For examples, Co-operative Banks are having directors butthey may be registered under Multi-StateCo-operative Societies Act, 2002 or otherActs and not as a “Company”. Now, reverescharge is also made applicable to such cases.100% of the tax is to be discharged by theservice recipients. (w.e.f. 11-7-2014)

c. In the case of renting of motor vehicledesigned to carry passengers, if services arecovered under RCM and if value is notabated (i.e. CENVAT credit is taken), 40%of the tax liability is to be discharged bythe service recipient and 60% by the serviceprovider. Now, w.e.f. 1-10-2014, servicerecipient will have to pay 50% and serviceprovider will have to pay 50% of the totaltax payable.

11. At present, payment of service tax shall bemade electronically through internet bankingif total service tax paid is Rs. 1 Lakh or more

(including utilization of CENVAT Credit) inthe preceding financial year. W.e.f. 1-10-2014,every assessee is bound to pay service taxelectronically through internet banking.

a. Method for making payment is procedurallaw and law as stands on the date ofcompliance will be applicable. Payment ofservice tax for the month of September,2014 is required to be discharged on or

thbefore 6 October, 2014 and hence will berequired to be made electronically only.

b. This amendment will affect small taxpayers, particularly who are liable to payservice tax under reverse chargemechanism only.

c. It is worth noting that if the payment is notmade electronically, penalty of Rs. 10,000/- may be imposed under section 77(1)(d)of the Finance Act, 1994.

d. Jurisdictional Assistant Commissioner/Deputy Commissioner may for reasons tobe recorded in writing, allow assessee todeposit the service tax by any mode otherthan internet banking.

12. At present in the case of renting of a motorvehicle abatement of 60% in the value is notavailable if CENVAT credit is taken. In the caseof Motor Cabs, where sub-contracting isinvolved, it is not possible for the sub-contractors/main contractor to take CENVATcredit and pass on the same if they want to takeabatement. This issue is now addressed afterlong representations since introduction ofNegative List in the year 2012.

a. This amendment will come into force onlyon 1-10-2014 and not before that.

b. CENVAT credit of Inputs and Capitalgoods is still not available.

c. Input services of renting of motor cab willbe allowed as follows. If person fromwhom service is received is paying servicetax on 40% of the value, full CENVATcredit will be allowed. If person from whomservice is received is paying service tax on

Service Tax Decoded


full value, CENVAT credit upto 40% willbe allowed.

d. Input services other than renting of motorcab will still not be allowed.

13. W.e.f. 1-10-2014 Rule 2A of the Service Tax(Determination of Value) Rules, 2006 is beingamended and in the case of works contractsfor maintenance or repair or completion andfinishing services such as glazing or plasteringor floor and wall tiling or installation ofelectrical fittings of immovable property, 70%of value of such works contract will be subjectto service tax instead of 60% at present.

14. In terms of Rule 7 of the Point of Taxation Rules,2011, point of taxation in the case of ReverseCharge Mechanism (RCM) is the date on whichpayment is made to the service provider. In termsof present first proviso to Rule 7 of the Point ofTaxation Rules, 2011, if the payment is not madeto the service provider within period of sixmonths from the date of invoice, point of taxationpre-ponds to date of invoice and liability isrequired to be discharged along with interest oncompletion of six months. Now, w.e.f. 1-10-2014, the said proviso is being substituted toeffect that if payment is not made within threemonths from the date of invoice, point of taxationshall be the date immediately following the saidperiod of three months.

a. It means that now:

- first, limit of six month is reduced to threemounts; and

- secondly, point of taxation will not pre-pond to date of invoice and hence undueinterest liability will not be there.

b. Further, transitional provision is made toeffect that for invoices issued before 1-10-2014, if the payment is made within sixmonths from the date of invoice, that datewill be the point of taxation otherwise, pointof taxation will pre-pond to invoice date.

15. Place of provision for intermediary services isthe location of the service provider [Rule 9(c))of the Place of Provision of Services Rules,2012]. If the intermediary is located in taxable

territory, service tax is to be levied and if theintermediary is located in non-taxable territory,service tax is not applicable. At presentintermediary means a broker, agent or any otherperson who arranges or facilitates a provisionof service and broker, agents etc. dealing ingoods are not intermediary and place ofprovision in their services is generally beingdetermined based on the location of the servicerecipient and not based on the location of theservice provided. Now, w.e.f 1-10-2014,commission agents, brokers etc. dealing ingoods will be considered as “intermediary” andhence place of provision will be determinedbased on their location.

a. For example, suppose an importer of goodshas paid commission to a commission agentlocated in a non-taxable territory then atpresent their place of provision is place ofprovision of service recipient, i.e. importer,i.e. in the taxable territory and service taxis to be paid by the service recipient underreverse charge mechanism. However, w.e.f.1-10-2014, place of provision will belocation of service provider, i.e. in non-taxable territory and hence service tax willnot be applicable thereon.

b. Same way, commission agents located intaxable territory and receiving commissionfrom the foreign suppliers/buyer inconvertible foreign exchange will have topay service tax as the place of the provisionof services will be in taxable territory.

c. Thus, situation may totally be reversed oncethis amendment will come into effect. Anyperson paying or receiving commission forgoods in cross border transactions is requiredto revisit their taxation for service tax.

16. Facility for advance ruling is now madeavailable to the private limited companies w.e.f.11-7-2014. Now, a private limited company canalso seek for an advance ruling for thedetermination of a question of law or factregarding the liability to pay service tax in

Service Tax Decoded


relation to a service proposed to be providedby the private limited company.

17. In terms of present explanation to Section 67Aof the Finance Act, 1994, rate of exchange israte of exchange referred to in the Explanationto Section 14 of the Customs Act, 1962. Thus,to make payment under Reverse ChargeMechanism, one need to refer to the ratesnotified under the Customs Act, 1962 which isbeing changed frequently and hence hard tobe followed by the tax payer.

a. It is proposed that particular rules underservice tax law itself will be prescribed fordetermination of rate of exchange anddependency on the Customs Act, 1962 willnot be there.

b. This amendment will come into force fromthe date to be notified by the CentralGovernment and till date no rules isprescribed for this.

18. Up to 10-7-2014, CENVAT credit of servicetax paid under reverse charge mechanism isavailable only if payment of the service is paidto service provider and service tax is also paidby the service recipient. Payment to serviceprovider for value of service was really unduerequirement.

a. W.e.f. 11-7-2014, CENVAT credit forservice tax paid under full reverse chargewill be available irrespective of the fact thatpayment for service to service provider hasbeen made or not.

b. However, for the services covered underpartial reverse charge, this requirement isstill to be complied with.

19. Once the Show Cause Notice is issued, thereis no time limit for the determination of servicetax due at present and Adjudication Officersgenerally takes one year to two year toadjudicate the Show Cause Notices generally.Now, sub section (4B) is being inserted inSection 73 (w.e.f. the date of enactment of theFinance (No. 2) Act, 2014) and it is beingprovided that the Central Excise Officer shall

determine the amount of service tax due withinsix months from the date of notice.

a. This time limit is not made a compulsionbut has to be followed where it is possibleto do so. So the God knows how mucheffective this provision will be.

b. This limit will be of one year when extendedperiod of limitation is invoked under theproviso to Section 73(1) or the proviso toSection 73(4A). Department hardly issuesShow Cause Notice without invokingextended period of limitation i.e. withoutcharge of fraud, collusion etc. and hencefor most of the notices this limit will of oneyear only.

20. At present search and seizer may be authorizedby the Joint Commissioner. Now, it is proposedto give such a power to Joint Commissioner/Additional Commissioner or any other officeras notified by the CBEC. W.e.f. date ofenactment of the Finance (No.2) Act, 2014,CBEC will be empowered to notify even aSuperintendent who can authorize a search orseizure.

21. Section 87 is proposed to be amended to effectthat service tax due from the predecessor ofthe business at time of transfer of business maybe recovered from the goods in the custody orpossession of the successor of the business.

a. This amendment will come into force fromdate of enactment of the Finance (No.2)Act, 2014.

b. Only “goods” are covered under thisamendment and the immovable propertyobtained by successor of the business is notsubject to be recovered under this provision.

Now, assessee is required to pay interest upto 30%p.a.; required to pre-deposit of 7.5%/10% even ingenuine cases and frivolous demands; hisCENVAT credit will be lapsed if not taken withinsix months or payment to service provider is notmade within six months. So, all what we can do isjust have a hope that “Acche Din Aayenge”.

❉ ❉ ❉

Service Tax Decoded


CA. Ashwin H. [email protected]

[ 2014 ] 41 taxmann.com 347(Ahmedabad - CESTAT) CESTAT,AHMEDABAD BENCH GhardaChemicals Ltd. v. Commissioner ofCentral Excise & Service Tax, Surat

Transfer of invention, design, idea, process, patentand other technical know-how in terms of sale andpurchase agreement as a going concern is not liableto service tax under Scientific or TechnicalConsultancy Services or Intellectual PropertyServices

a) Facts

Assessee transferred entire property viz.invention, design, idea, process, patent and othertechnical know-how in terms of sale andpurchase agreement as a going concern.Department sought levy of service tax thereonunder scientific or technical consultancy services.

Held

It is clear from definition of 'scientific ortechnical consultancy services' that there shouldbe an advice given by person or an institutionto another person. In this case, it had not beenbrought out by the Revenue as to what advicehas been given by seller to buyer. Hence, primafacie, no service tax was leviable under thisservice and demand was stayed accordingly.

b) Facts

Assessee transferred entire property viz.invention, design, idea, process, patent and othertechnical know-how in terms of sale andpurchase agreement as a going concern.Department sought levy of service tax thereonunder Intellectual Property Services.

Held

Intellectual property service is treated to havebeen rendered only if there is a temporarytransfer of some intellectual property or

Service Tax -Recent Judgements

17permitting its use. In this case, there was notemporary transfer of intellectual property.Hence, prima facie, no service tax was leviableunder this service and demand was stayedaccordingly.

[2014] 41 taxmann.com 376(Ahmedabad - CESTAT) CESTAT,AHMEDABAD BENCH State ChargeGog Port of Magdalla v .Commissionerof Central Excise & Service Tax, Surat

Intellectual property rights are rights available withindividual/ person; therefore, 'Waterfront royaltycharges' recovered by State Government for usageof Waterfront under its sovereign rights cannot becharged to service under Intellectual PropertyServices.

Facts

Assessee, State Government had collectedWaterfront Royalty charges, which were chargedby Government of Gujarat from Fort users/privateparties for use of such Waterfront. Departmentsought levy of service tax on such charges underIntellectual Property Services. Assessee argued that:(a) same was a sovereign right of Government,which could not be taxed and (b) even otherwise,though charges were termed as Waterfront Royalty,amount thereof was based upon tonnage of cargohandled at a particular Port, which by any stretchof imagination, could not be covered underdefinition of Intellectual Property Rights.

HeldDefinition of Intellectual Property Rights is aboutright available within individual or person. Chargescollected by assessee-Government for usage ofWaterfront as Waterfront Royalty Charges cannot,prima facie, be covered under definition ofIntellectual Property Rights. Hence, requirement ofpre-deposit was waived.

18


[ 2014 ] 41 taxmann.com 371 (Bangalore- CESTAT) CESTAT, BANGALOREBENCH Alchemist HR Services (P.) Ltd.v .Commissioner of Customs & CentralExcise, Hyderabad

To attract service tax under 'Manpower Recruitmentor Supply Agency', services should be rendered toa client; since students cannot be treated as clientsto whom services of recruitment and supply arebeing rendered, no service tax can be charged onconsideration received from them for ensuringemployment.FactsAssessee was engaged in : (a) enrolling studentswho have completed courses conducted by Instituteof Chartered Financial Analysts of India (ICFAI)and its affiliates and (b) after course was completed,students were assured of employment with variouscompanies/firms with a specified minimumremuneration. Towards this service, assessee wascollecting fee of Rs. 3300 from each student inadvance. Department sought levy of service tax onsuch amounts under 'Manpower RecruitmentServices'.HeldTo attract Service Tax under category of 'ManpowerRecruitment or Supply Agency', services should berendered to a client. Prima facie, students cannotbe treated as clients to whom services of recruitmentand supply are being rendered. Hence, requirementof pre-deposit was waived in entirety.

[ 2014 ] 43 taxmann.com 172 (Mumbai -CESTAT) CESTAT, MUMBAIBENCH Hiranandani Constructions(P.) Ltd. v. Commissioner of CentralExcise, Thane

Where assessee-builder was collecting taxes/charges payable under Maharashtra Ownership ofFlats (Regulation) Act, 1963 on actual basis fromflat owners, said activity did not, prima facie,amount to Management, Maintenance or RepairServices.FactsAssessee-builder, being promoter/executor, wasliable to discharge, on behalf of flat owners,payments towards municipal local taxes, propertytax, water charges, electric charges, revenue

assessment or interest or any mandatory chargesunder of Maharashtra Ownership of Flats(Regulation) Act, 1963. Assessee was collectingdevelopment and maintenance fees from flat buyersprior to handing over of possession and wasreturning balance amount left after debiting saidexpenses. Department argued that said activity ofassessee amounted to Management, maintenanceand repair services. Assessee argued that aforesaidactivity did not amount to service and clarified thatin respect of various services such as cleaningservices, lift maintenance etc., individual serviceproviders had discharged Service Tax.HeldIn view of Section 5 of Maharashtra Ownership ofFlats (Regulation) Act, 1963, assessee's activity didnot, prima facie, amount to taxable service. Hence,pre-deposit was waived in full .

[2014 ] 44 taxmann.com 474 (Allahabad)HIGH COURT OF ALLAHABADIndian Coffee Workers Co-operativeSociety Ltd. v. Commissioner of CentralExcise & Service Tax, Allahabad.

An assessee engaged in running and maintenanceof canteen or guest houses or engaged in cateringat premises belonging to clients, is an outdoorcaterer and liable to service taxFactsAn assessee engaged in running and maintenanceof canteen or guest houses or engaged in cateringat premises belonging to clients, is an outdoorcaterer. Such assessee is liable to service tax onvalue of services provided by it irrespective of factthat food supplied by assessee is not consumed byclient but its employees, workers and guests.HeldIt was held that assessee paying VAT on sale ofgoods on supply of food and beverages to thosewho consume them at canteen, would not excludeliability of assessee for payment of service tax inrespect of a taxable service provided by assesseeas an outdoor caterer. It was further held that therewere contrary views which had held the field, acase for imposition of penalty was not made out.The essential ingredients of Section 78 were notfulfilled and hence the penalty would, consequently,have to stand deleted.

❉ ❉ ❉

19

20

21

Service Tax - Recent Judgements


CA. Priyam R. [email protected]

Sale Price under Gujarat VAT

1. IntroductionIn my last article, I have discussed the conceptof deemed sale under works contracts,particularly in the case of constructioncontracts, In this Article, I have discusseddefinition of sale price under GVAT Act, withreference to Central Sales Tax Act and alsodiscussed some of the important decisions forbetter understanding.

2. Definitions

2.1 Section 2(23) of Gujarat VAT Act, defines'Sale'. The next question which comes toour mind is on which value, tax is requiredto be charged and paid.

2.2 Section 2(24) of Gujarat VAT Act, defineswhat is sale price, which reads as under:

“sale price” means the amount of valuableconsideration paid or payable to a dealeror received or receivable by a dealer forany sale of goods made including theamount of duties levied or leviable underthe Central Excise Tariff Act, 1985 or theCustoms Act, 1962 and any sum chargedfor anything done by the dealer inrespect of the goods at the time of orbefore delivery thereof and includes,-

(a) in relation to –

(i) the transfer, otherwise than inpursuance of a contract, ofproperty in any goods,

(ii) the transfer of the right to use anygoods for any purpose, whether ornot for a specified period,

(iii)the supply of goods by anyunincorporated association orbody of person to a member

(iv)the supply by way of or as part of

thereof,

any service or in any other mannerwhatsoever, of goods, being foodor any other article for humanconsumption or any drink(whether or not intoxicating),

the amount of cash, deferred paymentor other valuable consideration paid orpayable thereof;

(b) in relation to the transfer of propertyin goods (whether as goods or in someother form) involved in the executionof a works contract, such amount asis arrived at by deducting from theamount of valuable consideration paidor payable to a person for theexecution of such works contract, theamount representing labourcharges for such execution;

(c) in relation to the delivery of goods onhire purchase or any system ofpayment by installments, the amountof valuable consideration payable to aperson for such delivery;

Following points emerges from abovedefinition:

This is an inclusive definition

Valuable consideration paid orpayable is chargable to tax,

Including the amount of dutieslevied or leviable under Centralexcise or Customes Act,

Including any sum charged foranything done by the dealer inrespect of the goods at the timeof or before delivery,

VAT Demystified

Ø

Ø

Ø

Ø


Includes the amount of cash,deferred payment or other valuableconsideration paid or payable inrelation to :

- Works Contacts,

- transfer of the right to use anygoods,

- supply of goods by anyunincorporated association or bodyof person to a member thereof,

- sale of eatables by hotelsrestaurants etc.,

but excluding, the amountrepresenting labour charges insuch execution;

2.3 Sec 2(h) of CST Act defines, sale price as under:

“sale price” means the amount payable to adealer as consideration for the sale of any goods,less any sum allowed as cash discountaccording to the practice normally prevailingin the trade, but inclusive of any sum chargedfor anything done by the dealer in respect ofthe goods at the time of or before the deliverythereof other than the cost of freight ordelivery or the cost of installation in caseswhere such cost is separately charged:

[Provided that in the case of a transfer ofproperty in goods (whether as goods or in someother form) involved in the execution of aworks contract, the sale price of such goodsshall be determined in the prescribed mannerby making such deduction from the totalconsideration for the works contract as may beprescribed and such price shall be deemed tobe the sale price for the purpose of this clause;]

3. Now question arises :

3.1. Whether discount from sale price is allowedas deduction or not:

There can be two types of situation:

a) Where discount is shown in bill and

b) Where discount is not shown in bill , butgiven at later date by way of credit note.

i) In the first case, where discount isshown in the bill and VAT is collectedon after discount price, we have directdecision of advance rulling authorityu/s 80 of Gujart VAT Law in the caseof “AnyBody” order dtd: 20-11-2012,wherein Hon’ble Joint Commissioner(legal) has accepted the argument ofdealer and held that as per definitionof sale price u/s 2(24), “dealer is liableto pay tax on amount of valuableconsideration paid or payable to adealer or received or recivable by adealer for any sale of goods”

It means discount is allowed asdeduction and VAT is payable on theamount after deducting discount.

ii) In second case, where discount is notshown in bill, but given at later dateby way of credit note, we havedecision of Hon’ble Supreme court inthe case of IFB Industries Ltd. v/s Stateof Kerala reported in 49 VST 1 (SC)

In this case, discount was given tocustomer through credit notes issuedsubsequent to sale and the sale wasdisallowed, which was confirmed byHon’ble Kerala High Court and inappeal before Hon’ble Supreme Court,S.C. while intrepreting Rule 9(a) hasheld that “The assessing authorityshall not reject the appellants’ claimfor exemption of the amounts of tradediscount solely on the ground that thediscount amounts were not shown inthe sale invoices.”

Following the above judgement ofHon’ble Supreme Court, MadhyaPradesh High Court in the case of BPLLtd. v/s Assistant Commissioner,Commercial Tax, Bhopal Division-1,Bhopal (MP) and others 69VST149(MP) held that :

“The assessees are entitled todeduction under the Madhya Pradesh

VAT Demystified

Ø


Commercial Tax Act, 1994, ofdiscounts allowed by them to retailersbased on ordinary trade practice byway of issuing credit note even withoutshowing them in the sale invoice or thebill. “

If we refer to Sec 8(1)(b) Gujart VATLaw read with Rule 43, there is nomandatory requiremet to showdiscount in the invoice itself.

3.2. Under which circumstances transportationcharges and fright is allowed as deduction?

Again there can be two types of situations:

a) Sale complete at the place of seller and

b) Sale complete at the place of buyer

In the first case, it was held in the case ofPrakash Retail P Ltd. V.s DeputyCommissioner of Commercial Tax (Audit-14), Dvo-1, Bangalore and others 68 VST392 (Kar) that-

If the transfer of title of goods is to be at theplace of seller then the subsequent charges fortransporting goods, installation and otherexpenditure do not form part of amount forwhich the goods are sold. If the sale agreementspecifies an obligation on the part of the sellerto transport the goods as incidental to the salethen the same becomes part of the amount forwhich the goods are sold.

It was held that, a perusal of the price listsissued by manufacturer showed that the priceswere exclusive of installation charges. Furtherthe invoices raised by the petitioners specifiedthat the prices of goods were ex-showroomprice. It further specified that transfer of title ingoods took place at the place of seller.Therefore, the sale price of the goods at theex-showroom price attracted tax. Subsequentto transfer of title in the goods at the place ofseller they acted as agents of customers fortransportation of goods and for installationpurpose. The invoices produced by thepetitioner specified under different heads, the

sale price of the goods, the transportationcharges and the installation charges .

Therefore the transportation charges and theinstallation charges did not become the part ofsale price of the goods.

In the second case, it was held in the case ofIndia Meters Ltd. v/s State of Tamil Nadu34 VST 273 (SC), that:

If as per contract the transfer of title to the goodswas to take place only on delivery of goods atthe customer’s place and that the customer’sobligation to pay would arise only after thedelivery had been so effected, then in such casetransportation charges as well as insurance willform part of sale price.

“In the instant case, the obligation to payfreight was clearly on the appellant as therewas no sale at all, unless the goods weredelivered at the premises of the buyer and inorder to so deliver, the assessee necessarily hadto incur freight charges.”

Above decision is very important in CSTLaw and as per sec 2(h) of CST Act,

“Sale price means………….other than the costof freight or delivery or the cost of installationin cases where such cost is separately charged:

Because of this judgement, if contract is forDelivery at premises of buyer and till that timeall risk is on seller and property in goodstransferred at buyer’s place then even underCST Act, freight and insurance will form partof sale price.

3.3. Any services rendered to customer afterdelivery, whether value of such serviceshould be included in sale price for thepurpose of calculation of tax liability?

An authorised dealer and a selling agent ofmotor cycles, was collecting handling or servicecharges for registration with RTO and forarranging smart card to customer.

Whether handling charges collected by dealercan form part of sale price and whether dealeris required to pay VAT on such amount or not.

VAT Demystified


Bombay High Court in the case ofADDITIONAL COMMISIONER OFSALES TAX, VAT III, MUMBAI vs.SEHGAL AUTORIDERS PVT. LTD.[2011] 43 VST 398 (Bom) has held that thegoods which formed the subject-matter of thecontract between the respondent and its buyerwere in a specific and deliverable state. Thetransfer of property in the goods in pursuanceof the sale contract took place against thepayment of the price of the goods. The serviceof facilitating the registration of the vehicleswas rendered by the seller-respondent to thebuyer and in rendering that service, the selleracted as an agent of the buyer. Since they didnot constitute a sum charged for anythingdone by the seller in respect of the goods atthe time of or before the delivery thereof,such sum cannot be treated as sale price.

3.4. When customer supplied free material ormaterial like tools, dies, moulds, etc., free ofcost to the assessee to enable it tomanufacture, whether value of suchmaterial can form part of turnover ofmanufacture for determining sale price?

In the case of V.S Engineering P Ltd. v/sState of Andhra Pradesh 68 VST 87 (AP)

Back Ground of the case:

The petitioner-dealer was engaged inmanufacture of railway sleepers and ballast, andmanufactured mono block pre-stressedconcrete sleepers for broad gauge in accordancewith the drawings and specifications issued bythe South Central Railways. The dealer wassupplied fastenings, malleable cast iron insertsand high tensile strength wire (strands) free ofcost, to be incorporated in the concrete sleepers.Both the assessing officer as well as all theauthorities including the Tribunal rejected theclaim of the dealer that its activity ofmanufacture and supply of the mono blockconcrete sleepers to the South Central Railways,was a works contract and held that the dealer’ssupply was sales of mono block concretesleepers and that the dealer was liable to paytax on the value of the free issue material, viz.,

fastenings, malleable cast iron inserts and hightensile strength wire (strands), which wereincorporated and became part of the sleepers.On a revision petition.

Held, allowing the petition, that the cost pricethat was paid to the dealer did not include thevalue of free issue material, and the dealer hadnot collected any sales tax and the railways hadnot paid any amount on the value representingthe free issued material. In that view of thematter, the sale price, for the purpose of section5 of the Andhra Pradesh General Sales Tax Act,1957 was the the actual consideration that wasreceived or receivable by the dealer alone thatcould be the basis for levy of sales tax. Thevalue of free issued materials used in themanufacture of sleepers would not form partof turnover of the manufacturer under section2(1)(s) of the Andhra Pradesh General SalesTax Act, 1957.

Case of Ts Tech Sun (India) Ltd. v/s Stateof Uttar Pradesh and others 15 VST 599(SC)

Back Ground of the case:The assessee manufactured plastic automobilecomponents as per design and specificationsgiven. The customer supplied tools, dies,moulds, etc., free of cost to the assessee toenable it to manufacture automobilecomponents.

Held, that amortisation costs of the toolingswere not to be included in the sale price of thecomponents for the purpose of trade tax underthe U. P. Trade Tax Act, 1948.

4. Conclusion:

I have tried to discuss different situation underwhich VAT is liable on sale price, there may bemany more situations where dispute may arisein determining sale price of goods, under LocalAct as well as under CST Act.

❉ ❉ ❉

VAT Demystified


CA. Bihari B. [email protected].

[II] IMPORTANT JUDGMENTS:

[A] Important judgment on billing transactiondelivered by Hon. Gujarat High Court incase of Madhav Steel Corp. vs. State ofGujarat.

Issue:

Whether The Hon. Tribunal was right in lawin holding that the appellant was not entitledto get the Input Tax Credit u/s. 11 of the Acton the ground that the vendor’s registrationwas cancelled ab initio?

Facts:

The appellant has claimed the tax credit onthe purchases made from Shree Bhavani IspatBhavnagar and is disallowed as vendor’sregistration certificate has been cancelled abinitio. The appellant has preferred an appealbefore the Appellate Authority and afterrejection of the appeal by the first AppellateAuthority, the appellant has preferred a furtherappeal before the Hon. Tribunal and the Hon.Tribunal has confirmed the assessment madeby the Assessing Officer of disallowing thetax credit. The appellant has gone before theHon. Gujarat High Court and the Hon.Gujarat High Court has confirmed theTribunal’s order on the ground that the salestransaction of the appellant were found to benon-genuine and it appeared that these wereonly billing activities and no error has beenconsidered by the A. O. as well as the Hon.Tribunal in denying the Input Tax Credit.

The decision is very much useful to allPractitioners because many cases are pendingbefore various appellate stages and thereforeimportant paragraphs are reproducedhereunder for the benefit of the readers.

[i] It is vehemently submitted by the learnedadvocate appearing on behalf of the appellantsthat the learned Tribunal has materially erredin confirming the assessment order denying

input tax credit claimed by the respectiveappellants solely on the ground that thevendor’s registration from whom the respectiveappellants have purchased the goods, has beencancelled retrospectively and ab-initio.

It is submitted that the learned Tribunal hasmaterially erred in not relying upon the decisionof the Tribunal in the case of M/.s. Shree KiranOil Mill rendered in Second Appeal No. 640/2009 in which it was held that the tax creditclaimed cannot be disallowed after the date ofpublication of particulars of cancellation of suchdealer where registration certificate of thevendor is cancelled retrospectively. It issubmitted that in the present case the AssessingOfficer/ Deputy Commissioner, disallowed theappellant’s claim of input tax credit on thepurchases made from M/s. Shree Bhavani Ispatand M/s. Mangal Enterprise on the ground thatthe registration certificates of the aforesaidvendors were cancelled ab initio for billingactivity. It is submitted that however AssessingOfficer as well as the learned Tribunal has notproperly appreciated the fact that as such whenthe appellant made purchases from the aforesaidtwo vendors, they were having their validregistrations under the Act as well as CST Actand as such the sale transactions were recordedin the account of books of the vendors and eventhe payments were made through cheques. Itis submitted that as such the appellants alsoproduced the relevant documentary evidencessuch as invoices, weigh bridge, stock registerand copy of the account to prove that in factthe transactions between the appellants and theaforesaid two vendors were genuine purchases.

[ii] It is further submitted by the learned AGPappearing on behalf of the State that in thepresent case the Assessing Officer as well asthe learned Tribunal have not disallowed theinput tax credit on the purchases made by therespective appellants from their vendors M/s.Shree Bhavani Ispat and M/s. MangalEnterprise solely on the ground that the

VAT - Recent Judgementsand Updates


vendors’ registration have been cancelledretrospectively and cancelled ab initio. It issubmitted that over and above the fact thattheir respective vendors failed to prove theirpurchases from different 23 dealers andtherefore, they were not in a position to sellany goods to the respective appellants in thepresent case i.e. to the dealers herein, there isa specific finding given by the AssessingOfficer that as such the respective appellants/dealers have failed to prove by cogentevidences that in fact the sale transactionswere genuine and/or there were movement ofgoods. It is submitted that therefore when therespective appellants/dealers have failed toprove the genuineness of the sale transactionsand actual movement of goods, the findingrecorded by the Assessing Officer as well asthe learned Tribunal that the sale transactionsare not genuine and there were only billingactivities only for the purpose of getting thetax credit and looking to the modus operandiof evading the taxes, both the AssessingOfficer as well as the learned Tribunal haverightly denied the input tax credit claimed bythe respective appellants claimed under section11 of the ACT. It is submitted that as such thedenial of input credit claimed by the respectivedealers/appellants is absolutely in consonancewith the provisions of the Act moreparticularly section 11 of the Act.

It is submitted that as such the onus is uponthe dealer, who claimed the input tax credit,to prove the genuineness of the transactions,which the appellants/dealers have failed toestablish and prove. It is submitted thattherefore in the facts and circumstances of thecase, the decision of the Tribunal in the caseof M/s. Kiran Oil Mill is not rightly appliedby the Assessing Officer as well as the learnedTribunal.

It is submitted that accordingly in the abovecircumstances, the government suffers hugerevenue loss. The Government cannot collecttax on sale by A to C as it is neither recordedin the books of account of A nor C. However,the Government is less concerned abouttransaction between A & C as C does notdemand input tax credit on its purchases quaA. Further as regards the transaction betweenB & C, as B is involved in billing activities,

so normally it will not deposit the tax collectedfrom C in the Government Treasury. B is adealer engaged in billing activities. Afterregistration, B issues bogus bills oncommission basis. So before revenueauthorities come to know about the activitiesof B, B would have earned a huge amount ofcommission. Normally B does not file return.After a certain period when B believes thatnow it may get caught by the revenue, Bapplies for cancellation of registration. Manytimes it is found that dealer B (engaged inbogus billing) is absconding.

[iii] Now, so far as the contention on behalf of theappellants/dealers that as, when theypurchased the goods from the aforesaid twovendors, both the aforesaid two vendors werehaving the registration and their registrationcame to be cancelled subsequentlyretrospectively and therefore, they cannot bedenied the input tax credit on the purchasesmade by them, made from the aforesaid twovendors is concerned, it is required to be notedthat in the present case the input tax credit/shave not been denied solely on the Aforesaidground. The input tax credit has/have beendenied also on the ground that the respectiveappellant/s – dealer/s have failed to prove theactual physical movement of the goodsalleged to have been purchased by them fromthe aforesaid vendors and therefore, it is heldthat there was no actual physical movementof the goods and therefore, the sale transactionis/are not genuine And it was only billingactivities to defraud the government.

[iv] Considering the above facts and circumstancesof the case and when the appellant/s – dealer/shave failed to satisfy/prove the actual physicalmovement of the goods alleged to have beenpurchased by them from the aforesaid twovendors on which the input tax credit havebeen claimed and when the sale transactionsare found to be not genuine and it appears thatthere were only billing activities, we are of theopinion that no error has been committed bythe Assessing Officer as well as learnedTribunal in denying the input tax credit. Underthe circumstances, as such the proposedsubstantial questions of law referred to hereinabove are answered against the appellant/s –dealer/s and in favour of Revenue.

VAT - Recent Judgements and Updates


[B] The important judgment delivered by the Hon.Tribunal in case of M/s. Keshav Till Factory& M/s. Shyam Industries on wide meaningof Manufacturing Activities.

Issue:

In case of M/s. Keshav Till Factory, theappellant is carrying on the business of buyingnatural Till and after processing the same, theappellant is selling it. It is mechanically driedand after removing the husk by process ofwashing through caustic soda, pure till isexported.

The question is whether this process is amanufacturing activity or not?

In case of Shyam Industries, the appellant isalso an Exporter in the commodity of HuldSesame (H.S). The appellant has purchasednatural sesame seeds from various dealers andthe same are being cleaned through machineriesand thereafter Natural Sesame Seeds (NSS) arebeing graded to the required specimen by theForeign Buyers. The said grading dependsupon the shape and size of the NSS. ThereafterNSS is washed through caustic soda. The entireprocess is done mechanically. After washingthrough caustic soda, the NSS enters into theprocess of drying and after drying, the upperlayer is removed from the NSS and is convertedinto H.S. The question is whether the aboveprocess is a manufacturing activity or not?

The decision is very much important in dayto-day practice and therefore the importantparagraphs of the judgment are reproducedhereunder for the benefit of the readers.

[i] After discussing the definition of“Manufacture” under the Gujarat Vat Act, theappellant had relied on the decision of Hon’bleGujarat High Court in the case of M/s. LaxmiOil Mills Ltd. vs. Commissioner of Sales Tax,Ahmedabad 92 STC 174 which can be saidto be directly on the issue involved in thepresent appeals and the definition of the word‘manufacture’ under the Gujarat Sales TaxAct, 1969 was considered therein. It was heldthat section 2(16) gives a very wide definitionof manufacture and includes several activitiessuch as extracting, collecting, altering,ornamenting, finishing or otherwiseprocessing. It also excludes several processing

activities mentioned in rule 3 of the GujaratSales Tax Rules, 1970, though these mayamount to manufacture as commonly known.It was therefore held that the ordinary meaningof the word manufacture would be of norelevance and the statutory meaning given tothe word manufacture under sub-section (16)of section 2 is required to be considered ineach case. If the nature of goods is changedby the process which are covered by thedefinition given in section 2(16), then it wouldamount to a manufacturing process.

Based on the aforesaid decisions, relied uponby the appellant, it is quite clear that for thepurpose of interpretation firstly the definitiongiven under the statute has to be looked into.Applying the above principles, if the definitionof manufacture is taken into considerationthen it is quite evident that the processundertaken by the appellant i.e. cleaning,drying and brushing with chemicals andremoving of upper layer (fotri) of NSS as perthe requirement of the customer andconverting it into either dehusk till or HS,squarely falls within the four corners of thedefinition of ‘manufacture’ as provided u/s.2(14) of the Act. When the process carriedout by the appellant squarely falls within thecategories stated in the definition of‘manufacture’ then the requirement to see orexamine as to whether a new, distinct anddifferent commodity emerges or not also doesnot arise.

In the light of the foregoing discussion,provisions of Gujarat Vat and position of law,the Tribunal is of the view that the respondentsare not justified in holding that the processundertaken by the appellant does not amountto manufacture, the Tribunal, therefore,reverses their finding and holds that theactivity undertaken by the appellant clearlyamounts to manufacture and hence theappellants are held to be entitled to input taxcredit of raw materials, processing materials,fuel and capital goods in consonance with theprovisions contained in section 11 of theGujarat Vat Act. Since the appellants succeedon the main issue and the levy of tax is notjustified, there is no question of charging anyinterest or levy of penalty on this count.

❉ ❉ ❉

VAT - Recent Judgements and Updates


add


CA. Hozefa [email protected]

Given that the most business valuations are typicallyconducted under the premise of a going concern,the appraiser may decide that the asset approach isinappropriate for determining an indication of value.However, the appraiser may test if the company isworth more in liquidation as opposed to as a goingconcern by utilizing an asset approach.

Following figure shows a business value based onasset approach.

Valuation Balance Sheet

Companies Act, 2013 draft Rules cover most ofthe frequently used methods of valuation as well aspermit valuers to apply other methods as appropriateand justified. The Rules provides that the valuationof any asset as on valuation date shall be made inaccordance with any one or more of the followingmethods: (Sr. No. 1, 7 and 9 are fundamentallybased on asset approach. Value may be determinedusing methods mentioned in Sr. No. 2, 8 and 10based on asset approach or other approaches)

1. Net asset value method

2. Market Price method

3. Yield method / Profit Earning Capacity Value(PECV)

4. Discounted Cash Flow Method (DCF)

5. Comparable Companies MultiplesMethodology (CCM)

Business Valuation

Approaches to Valuation

Asset Approach

The Asset Approach

The Asset-based valuation approach involvesmethods of determining a company’s value byanalyzing the value of a company’s assets. Thisapproach often serves as a valuation floor since mostcompanies have greater value as a going concernthan they would if liquidated, i.e., the present valueof future cash flows generated by the assets usuallyfar exceed the liquidation value of those assets. Thisdifference between the asset value and goingconcern value is normally attributable to“intangibles”. An exception to this might be a low-margin business in a competitive industry that ownsits immovable properties, which has appreciatedover time due to its development value. In this case,the asset value may exceed the going concern valueof the business.

Asset approach is generally preferred to valueintangible asset (like brands, patents, goodwill etc)of the business. (We will go through valuation ofintangible assets in next article)

This methodology is likely to be appropriate for abusiness whose value derives mainly from theunderlying value of its assets rather than its earnings,such as property holding and investment business.This method may also be appropriate for a businessthat is not making an adequate return on assets andfor which a greater value can be realized byliquidating the business and selling its assets. Netasset values, which are of great relevance inindustries such as utilities, manufacturing andtransport that are dependent on physicalinfrastructure and assets, may not have particularsignificance in industries such as informationtechnology, pharmaceutical that are driven byintangibles not recorded in the books.


6. Comparable Transaction Multiples Method(CTM)

7. Price of Recent Investment method (PORI)

8. Sum of the parts valuation (SOTP)

9. Liquidation value

10. Weighted Average Method

11. Any other method accepted or notified by theReserve Bank of India, Securities andExchange Board or Income Tax Authorities.

12. Any other method(s) that the valuer may deemfit to adopt in the given circumstances of thecase, provided that adequate justification foruse of such method(s) (and not any of themethods above) must be included in the report.

CCI guidelines, 1990 (para 6.1) state that “The netasset value, as at the latest audited balance-sheetdate, will be calculated starting from the total assetsof the Company or of the branch and deductingthere from all debts, dues, borrowings andliabilities, including current and likely contingentliabilities and preference capital, if any. In otherwords, it should represent the true “net worth” ofthe business after providing for all outside presentand potential liabilities. In the case of companies,the net asset value as calculated from the asset sideof the balance-sheet in the above manner will becross checked with equity share capital plus freereserves and surplus, less the likely contingentliabilities.”

Assets Valuation Methodology

Net Assets value represents owners’ value whichis arrived at after reducing all external liabilities andpreference shareholders claims, if any, from theaggregate value of all assets, as valued and statedin the Balance Sheet as on valuation date.

Some adjustments may be considered dependingupon the particular case while arriving at net assetvalue. Few are listed below:

· Contingent Liabilities

The amount of Contingent Liabilities asdisclosed in the financial statements of theentity needs to be adjusted from the value ofnet assets. If necessary, legal opinion regardingsustainability of claims or contingent liabilitiesshould be called for. Some examples ofContingent liabilities are:

1. Tax demands (income tax, excise, VAT etc)

2. Claims from customers

3. Contractual obligations

4. Matters referred to Arbitrations

5. Labour related issues

· Contingent Assets

If the company has made escalation claims,insurance claims or other similar claims, thenthe possibility of their recovery should becarefully made on a fair basis, particularlyhaving regard to the time frame in which theyare likely to be recovered. The likely cost to beincurred for realizing the amount needs to beadjusted.

· Qualifications & Notes to Accounts

Qualifications in the Auditors report and notesto accounts should also be given dueconsideration. If it calls for any adjustment, thesame should be carried out. e.g. diminution inthe value of long term investments not providedfor, provision for gratuity and leave encashmentnot made, provision for doubtful debts notmade, etc.

Different Techniques of Asset Valuation

Some of the most common techniques of valuationconsidered under this approach are to value abusiness enterprise on the basis of book value ofthe assets or Adjusted book value of the assets or atReplacement value or applying cost to createapproach or just deriving the liquidation proceeds.

Business Valuation


Book value or Adjusted book value:

Book value is simply a value based upon theaccounting books of the business. In simple term,Assets less liabilities equals the owners’ equity,which is the “Book Value” of the business.

Net Assets Value = Total Assets (excludingMiscellaneous Expenditure & Debit balance ofProfit & Loss account) – Total Liabilities

Or

Net Assets Value = Share Capital + Reserves(excluding revaluation reserves) — MiscellaneousExpenditure – Debit Balance of Profit & LossAccount

Adjusted book value is preferred over book valuebecause it involves reviewing each and every assetand liability on the company’s balance sheet andadjusting it to reflect its estimated market value.Depending on the mix of assets owned by thecompany, other types of appraisers (e.g., propertyvaluer, machinery and equipment valuer) mightneed to be consulted as part of the valuation process.In addition, it is important to consider intangibleitems that might not necessarily be reflected on thebalance sheet, but which might have considerablevalue to a user, such as trade names, patents, etc.The unrecorded and contingent liabilities are alsoconsidered at their fairly estimated value.

Is it possible for book value to be a reasonable proxyfor the true value of a business? For mature firmswith predominantly fixed assets, little or no growthopportunities and no potential for excess returns,the book value of the assets may yield a reasonablemeasure of the true value of these firms. For firmswith significant growth opportunities in businesseswhere they can generate excess returns, book valueswill be very different from true value.

Replacement value or Price of recent investment

Replacement value or price of recent investment is

method and Cost to create value:

a least value that a seller will insist from buyer whootherwise would have to expend for getting suchassets and creating such liabilities. It is a value atwhich the similar assets (and liabilities also) can bereplaced with existing assets of the business.

“Cost to create” value is basically from the viewpoint of the buyer or investor. In case of businesspurchase, the buyer or investor would like to knowthe cost that he may have to incur for purchase ofthe assets (and liabilities also) in similar conditionsor bringing the identical assets to the place of use.The cost to build similar intangible worth or assetfor the business is also considered. The value soderived can help him to negotiate a fair price.

Liquidation value or net realizable value

Generally, while offering a business for sell, a sellerwould like to know the least value of the businessthat he or she can get on just liquidating the businessassets. This value can help to negotiate a betterprice.

Liquidation analysis should be considered when thevalue of the business, on a control basis asdetermined by the income or market approaches, islow relative to the net asset value. Application ofthe liquidation approach must consider the expensesassociated with liquidation, including taxes, sellingexpenses and plant closing costs, and the risk andtiming related to the proceeds.

Asset Based Method may not be relevant in caseof companies operating in an industry where humanknowledge and creativity are more relevant ascompared to physical assets in value creation. Insuch cases, the Earnings Based Methods may beadopted. Net Assets Method may sometimes be usedas a backup to support the value arrived at as perother methods.

❉ ❉ ❉

Business Valuation


CA. Naveen [email protected]

(A) MCA UPDATES:1. Certification of E-forms/ non e-forms under

the Companies Act, 2013 by the PracticingProfessionals:

· The Ministry has clarified that where anyinstance of filing of documents, applicationor return or petition etc. containing false ormisleading information or omission ofmaterial fact or incomplete information isobserved, the Regional Director or theRegistrar, shall conduct a quick inquiryagainst the professionals who certified theform and signatory thereof including anofficer in default who appears prima facieresponsible for submitting false ormisleading or incorrect information pursuantto requirement of the prescribed Rules; 15days notice may be given for the purpose.

· The Regional Director or the Registrar willsubmit his/her report in respect of theinquiry initiated, irrespective of the outcome,to the E -Governance cell of the Ministrywithin 15 days of the expiry of period givenfor submission of an explanation withrecommendation in initiating action u/s 447and 448 of the Companies Act, 2013wherever applicable and also regardingreferral of the matter to the concernedprofessional Institute for initiatingdisciplinary proceedings.

· The E-Gov cell of the Ministry shall processeach case so referred and issue necessaryinstructions to the Regional Director/Registrar of Companies for initiating actionu/s 448 and 449 of the Act wherever primafacie cases have been made out. The E-Govcell will thereafter refer such cases to theconcerned Institute for conductingdisciplinary proceedings against the errantmember as well as debar the concernedprofessional from filing any document onthe MCA portal in future.

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

Corporate Law Update

2. One time opportunity for extension of Periodof Reservation of Name:· Many stakeholders had reserved names for

the purpose of Company incorporation with60 days prescribed validity expiring duringthe above mentioned period but they couldnot avail of the 60 days prescribed periodfor using the name to complete thecorresponding incorporation requirementsdue to the non-availability of services on

stthe MCA21 portal to stakeholders from 1thApril, 2014 to 28 April, 2014, hence, the

MCA has extended the validity ofreservation up to 31st May, 2014, of all such

stnames with due date of expiry between 1April, 2014 to 28th April, 2014.

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

3. Applicability of PAN requirement for ForeignNationals.· To remove the difficulties being faced by

Foreign Nationals while filing Incorporationform (lNC-7) due to mandatory requirementof submission of PAN details of intendingDirectors at the time of filing the applicationfor incorporation, the MCA has clarified thatPAN details are mandatory only for thoseforeign nationals who are required topossess “PAN” in terms of provisions of theIncome Tax Act, 1961 on the date ofapplication for incorporation.

· Where the intending Director who is aForeign National is not required tocompulsorily possess PAN, it will besufficient for such a person to furnish his/her passport number, alongwith undertakingstating that provisions of mandatoryapplicability of PAN are not applicable tothe person concerned.

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

4. Extension of validity period for namesreserved as on 31st March, 2014.· In continuation of the General Circular No.

11/2014 dated 12/05/2014, approval of the


Competent Authority is hereby conveyed toextend continuity of all reserved names as

ston 31 March 2014 for another fifteen daysperiod from the date of issue of this circular.[General Circular-13/2014 dated 23/05/2014]

5. Clarifications on Rules prescribed under theCompanies Act, 2013 – Matters relating toappointment and qualifications of directorsand Independent Directors. :(i) Section 149(6)(c): “pecuniary interest in

certain transactions” :—· The MCA has clarified that in view of the

provisions of section 188 which take awaytransactions in the ordinary course ofbusiness at arm’s length price from thepurview of related party transactions, an‘ID’ will not be said to have ‘pecuniaryrelationship’ under section 149(6)(c) insuch cases.

· It is also clarified that ‘pecuniaryrelationship’ provided in section149(6)(c) of the Act does not includereceipt of remuneration, from one ormore companies, by way of fee providedunder sub—section (5) of section 197,reimbursement of expenses forparticipation in the Board and othermeetings and profit related commissionapproved by the members, in accordancewith the provisions of the Act.

(ii)Section 149: Appointment of ‘IDs’:· Explanation to section l49(1l) clearly

provides that any tenure of an ‘ID’ on thedate of commencement of the Act shallnot be counted for his appointment/holding office of director under the Act.In view of the transitional period of oneyear provided under section 149(5), it ishereby clarified that it would be necessarythat if it is intended to appoint existing‘IDs’ under the new Act, suchappointment shall be made expresslyunder section l49 (10)/ (11) read withSchedule IV of the Act within one yearfrom 13th April, 2014, subject tocompliance with eligibility and otherprescribed conditions.

(iii) Section l49(10)/(11) – Appointment of ‘IDs’for less than 5 years:-· The MCA has clarified that section l49(10)

of the Act provides for a term of “up to

five consecutive years” for an ‘ID’. Assuch while appointment of an ‘ID’ for aterm of less than five years would bepermissible, appointment for any term(whether for five years or less) is to betreated as a one term under sectionl49(10) of the Act. Further, under sectionl49 (11) of the Act, no person can holdoffice of ‘ID’ for more than ‘twoconsecutive terms’. Such a person shallhave to demit office after two consecutiveterms even if the total number of years ofhis appointment in such two consecutiveterms is less than 10 years.

· In such a case the person completing‘consecutive terms of less than ten years’shall be eligible for appointment onlyafter the expiry of the requisite coo1ing—off period of three years.

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

· The MCA has clarified that in view ofthe specific provisions of Schedule IV,appointment of ‘IDs’ under the new Actwould need to be formalized through aletter of appointment even in case ofappointment of existing ‘IDs’ .[General Circular-14/2014 dated 09/06/2014]

6. Clarification regarding maintaining registerin new format [sub-section (9) of section 186]:· The Ministry has clarified that registers

maintained by companies for loans/guarantee/security/making acquisitionpursuant to sub-section (5) of Section 372Aof Companies Act,1956 may continue asper requirements under these provisions andthe new format prescribed vide Form MBP-2 shall be used for particulars entered insuch registers on and from 01/04/2014.

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

7. Applicability of PAN requirement for ForeignNationals :· In continuation of the General Circular No.

12/2014 dated 22.05.2014 regards theabove subject, the MCA has clarified thatthe provisions of the said Circular areapplicable to a Foreign National who is asubscriber / promoter at the time ofincorporation of the Company.



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

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


8. Filling of MGT-10:

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

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


9. Clarification for filing of Form No. INC-27for conversion of company from public toprivate under the provisions of CompaniesAct, 2013:· As the relevant provisions of Companies Act,

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

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

· Applications for such conversions,therefore, have to be filed and disposed asper the earlier provisions.


10. Clarifications on Rules prescribed under theCompanies Act, 2013 – Matters relating to

(i) Share Transfer Forms executed before 1

share capital and debentures :

st

April, 2014:—

· In case of the Share Transfer Formsexecuted before 1st April, 2014 as perearlier Form 7B but which are yet to beaccepted / registered by companies, theMCA has clarified since the transactionrelating to transfer of shares is a contractbetween two or more persons /shareholders, any share transfer form

thexecuted before 15 April, 2014 andsubmitted to the company concernedwithin the period prescribed underrelevant section of the Companies Act,1956 needs to be accepted by thecompanies for registration of transfers.

· In case any such share transfer form,stexecuted prior to 1 April, 2014, is not

submitted within the prescribed periodunder the Companies Act, 1956, theconcerned company may get itselfsatisfied suitably with regard tojustification of delay in submission etc.

· In case a company decides not to acceptthe share transfer form, it shall conveythe reasons for such non-acceptancewithin time provided under section56(4)(c) of the Act.

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

· The MCA has clarified that the powers ofthe Board provided under rule 6(2)(a) ofcompanies (Share Capital andDebentures) Rules, 2014 with regard toissue of duplicate share certificates canbe exercised by a Committee ofDirectors, subject to any regulationsimposed by the Board in this regard.

[General Circular-19/2014 dated 12/06/2014]11. Clarification with regard to voting through

electronic means:· The MCA has noticed that compliance with

procedural requirements, engagement ofDepository Agencies and the need for clarityon matter like demand for poll/postal ballotetc will take some more time. Accordingly, ithas decided not to treat the relevant provisions

stas mandatory till 31 December, 2OI4.


❉ ❉ ❉



AS – 29 Provisions, Contingent Liabilities andContingent Assets

Annual Report 2013-14

Chemfab Alkalis Limited

Provisions involving substantial degree ofestimation in measurement are recognized whenthere is a present obligation as a result of past eventsand it is probable that there will be outflow ofresources. Contingent Liabilities are not recognised,but are disclosed in the notes. Contingent assets areneither recognised nor disclosed in the financialstatements.

South Indian Bank

In accordance with Accounting Standard 29,Provisions, Contingent Liabilities and ContingentAssets specified in Companies (AccountingStandards) Rules, 2006, the Bank recognizesprovisions when it has a present obligation as a resultof a past event, it is probable that an outflow ofresources embodying economic benefits will berequired to settle the obligation and when a reliableestimate of the amount of the obligation can bemade.

Provisions are determined based on managementestimate required to settle the obligation at thebalance sheet date, supplemented by experience ofsimilar transactions. These are reviewed at eachbalance sheet date and adjusted to reflect the currentmanagement estimates. In cases where the availableinformation indicates that the loss on thecontingency is reasonably possible but the amountof loss cannot be reasonably estimated, a disclosureis made in the financial statements.

Contingent assets, if any, are not recognized or

Claris Lifescience Limited

Provisions involving substantial degree of

disclosed in the financial statements.

estimation in measurement are recognized whenthere is a present obligation as a result of past eventsand it is probable that there will be an outflow ofresources. Contingent liabilities are not recognizedbut are disclosed in the notes to the financialstatements. Contingent assets are neither recognizednor disclosed in the financial statements.

CMC Limited

A provision is recognized when the Company hasa present obligation as a result of past events and itis probable that an outflow of resources will berequired to settle the obligation in respect of whicha reliable estimate can be made. Provisions(excluding retirement benefits) are not discountedto their present value and are determined based onthe best estimate required to settle the obligation atthe balance sheet date. These are reviewed at eachBalance Sheet date and adjusted to reflect thecurrent best estimates. Contingent liabilities aredisclosed in the note 28.1. Contingent assets arenot recognized in the financial statements.

ICICI Bank Limited

The Bank estimates the probability of any loss thatmight be incurred on outcome of contingencies onthe basis of information available up to the date onwhich the financial statements are prepared. Aprovision is recognized when an enterprise has apresent obligation as a result of a past event and itis probable that an outflow of resources will berequired to settle the obligation, in respect of whicha reliable estimate can be made. Provisions aredetermined based on management estimates ofamounts required to settle the obligation at thebalance sheet date, supplemented by experience ofsimilar transactions. These are reviewed at each

CA. Pamil H. [email protected]

balance sheet date and adjusted to reflect the current

From Published Accounts


management estimates. In cases where the availableinformation indicates that the loss on thecontingency is reasonably possible but the amountof loss cannot be reasonably estimated, a disclosureto this effect is made in the financial statements. Incase of remote possibility neither provision nordisclosure is made in the financial statements. TheBank does not account for or disclose contingentassets, if any.

Reliance Industries Limited

Provision is recognized in the accounts when thereis a present obligation as a result of past event(s)and it is probable that an outflow of resources willbe required to settle the obligation and a reliable

From Published Accounts

(i) In case of listed companies :(a) Issue andtransfer of shares including CCPS and CCDshall be as per the SEBI guidelines;(b) Thepricing guidelines for FDI instruments withoptionality clauses shall continue to be inaccordance with A.P. (DIR Series) Circular No.86 dated January 9, 2014, i.e., the non-residentinvestor shall be eligible to exit at the marketprice prevailing on the recognised stockexchanges subject to lock-in period asstipulated, without any assured return.

(ii) In case of unlisted companies : The issue andtransfer of shares including CCPS and CCDwith or without optionality clauses shall be at aprice worked out as per any internationally

estimate can be made. Provisions are not discountedto their present value and are determined based onthe best estimate required to settle the obligation atthe reporting date. These estimates are reviewed ateach reporting date and adjusted to reflect thecurrent best estimates.

Contingent liabilities are disclosed unless thepossibility of outflow of resources is remote.

Contingent assets are neither recognized nordisclosed in the financial statements.

❉ ❉ ❉

accepted pricing methodology on arm’s lengthbasis. Thus, the guiding principle will be thatthe non-resident investor is not guaranteed anyassured exit price at the time of making suchinvestment/agreement and shall exit at a fairprice computed as above at the time of exitsubject to lock-in period requirement asapplicable in terms of A.P. (DIR Series)Circular No. 86 dated January 9, 2014.

For full text refer to: A.P. (DIR Series) Circular No.4

http://www.rbi.org.in/scripts/BS_Circular IndexDisplay.aspx?Id=9106

❉ ❉ ❉

contd. from page 290 FEMA Updates


From the Government

CA. Kunal A. [email protected]

required to be satisfied by the service providersonly. Service recipient will not be required toestablish satisfaction of this condition by theservice provider.(For full text refer

thNotification 08/2014, dated 11 July,2014)

4) Notification regarding amendment inService Tax Rules,1994

a) In the said notification following servicesare brought under Reverse ChargeMechanism with immediate effect:-

i) service provided by a Director to abody corporate( the word company isbeing replaced by the word bodycorporate);

ii) service provided by Recovery Agentsto Banks, Financial Institutions andNBFC.

b) Mandatory e-payment of service tax for allthe assesses w.e.f. 01/10/2014.

(For full text refer Notification 09/2014,thdated 11 July,2014)

5) Notification regarding amendment inNotification No. 30/2012

The notification amends the entry 7(b) ofnotification no.30/2012, whereby in case ofrenting of motor vehicle, where the serviceprovider does not take abatement, the portionof service tax payable by the service providerand service receiver will be modified as 50%each instead of 40 % and 60% respectively witheffect from 01-10-2014. (For full text refer

thNotification 10/2014, dated 11 July,2014)

Income Tax

1) Notification regarding changes in form3CA. 3CB and 3CD

CBDT has substituted Form no. 3CA, 3CBand 3CD by making changes in the IncomeTax Rules,1962 which shall come into forcefrom the date of their publication in the OfficialGazette. (For full text refer Notification no.33, dated 25/07/2014)

Service Tax

1) Notification regarding amendments inMega Notification no.25/2012

The said notification seeks to amend withimmediate effect certain existing entriesgranting exemption on specified services andinserting new entries for granting exemptionfrom service tax on specified services.

( For full text refer Notification 06/2014,thdated 11 , July,2014)

2) Notification regarding amendments inNotification no.12/2013

Amendment in Notification No.12/2013 –Procedure for SEZ related exemption has beensimplified with immediate effect.

(For full text refer Notification 07/2014,dated 11th July,2014)

3) Notification regarding amendments inNotification no. 26/2012-abatement rates

The condition for availing abatement in caseof goods transport agency service is beingamended with immediate effect to clarify thatthe condition for non-availment of credit is


6) Notification regarding amendment inValuation of Works Contract

W.e.f. 01-10-2014 in Rule 2A of the ServiceTax (Determination of Value) Rules,2006 ,thecategory ‘B’ and ‘C’ of works contracts withpercentage of service portion of 70% and 60%respectively are proposed to be merged into onesingle category with 70% of service portion(For full text refer Notification 11/2014,

thdated 11 July,2014)

7) Notification regarding variable rate ofInterest

The said notification prescribes rate of Interestfor late payment of service tax. The rate ofinterest would vary depending upon the extentof delay from 18% to 30% (For full text refer

thNotification 12/2014, dated 11 July,2014)(w.e.f. 01-10-2014)

8) Notification regarding Point of TaxationRules

The first Proviso to rule 7 of the Point ofTaxation Rules(POTR) is amended to providethat point of taxation in case of reverse charge,will be the payment date or first day, after 3months from the date of invoice, whichever isearlier. (For full text refer Notification 13/

th2014, dated 11 July,2014)(w.e.f. 01-10-2014)

9) Notification regarding Amendment in Placeof Provision of Service Rules,2012.

i) In case of temporary import of goods intoIndia for repairs, Rule 4 will not apply ifthe goods are exported after repairs withoutbeing put to any use in the taxableterritory.ie. general rule 3 may apply andif service recipient is located outsidetaxable territory such services will not beliable to service tax.

ii) The definition of the word ‘Intermediary’is amended to include the intermediary ofgoods in its scope. Hence the commissionagent or consignment agent shall becovered in rule 9© of the POPR Rules.

iii) Services of hiring of Vessels (excludingyachts) and Aircraft are excluded from rule9(d).Thus, hiring of aircraft or vesselsirrespective of period of hiring is coveredby general Rule 3 i.e. the place of locationof the service receiver [Rule 9(d)]. (Forfull text refer Notification 14/2014, dated

th11 July,2014)( w.e.f. 01-10-2014)

10) Notification regarding Advance Ruling

The resident private limited company is beingincluded as a class of person for the benefit ofAdvance Ruling with immediate effect. (For

thfull text refer Notification 15/2014, dated 11July,2014)

11) Circular regarding Manner of Distributionof common input service credit

It is hereby clarified that the distribution ofcenvat credit for the purpose of rule 7(d) wouldnot be restricted to those units were the serviceare used but will be distributed in the ratio ofturnover in all cases irrespective of whethersuch common input service were used in allthe units or in some of the units. ( For full text

threfer Circular No. 178/2014, dated 11July,2014 )

Wealth Tax

1) CBDT has issued Instructions for filing upreturn of Net Wealth in FORM BB for AY 14-15.

(For full text refer www.incometaxindia.gov.in)

❉ ❉ ❉

From the Government


Association News

CA. Abhishek J. JainHon. Secretary

Forthcoming Programmes

Date/Day Time Programmes Speaker Venue

02.09.2014 5.30 p.m. to th4 Study Circle Meeting on CA. Chirag M. Shah H. K. College ConferenceTuesday 7.30 p.m. "Tax Audit - Reporting Hall, Ashram Road,

Requirement Compliance" Ahmedabad

CA. Nirav R. ChoksiHon. Secretary

Glimpses of events gone by:

A Lecture Meeting on “Technical Aspects of FinanceBill, 2014” was jointly held with Ahmedabad Branch ofWIRC of ICAI at Tagore Hall, Paldi, Ahmedabad on

th14 July, 2014.

Release of Budget Booklet of Finance Bill, 2014 (L to R CA. Aniket S. Talati, CA. Abhishek J. Jain,CA. Mukesh M. Khandwala, Speaker Shri Saurabh

N. Soparkar, CA. Shailesh C. Shah, CA. Atul R.

th5 Knowledge Clinic

th5 Knowledge Clinic is scheduled to be held on Friday, 29th August 2014 at the Association’s office from 3.30 pm to

Shah, CA. Vikash Jain)

4.30 pm. Members having queries on the subject of Professional Interest may send by email or by hand delivery on orndbefore 22 August 2014.

th3rd Study Circle Meeting held on 18 July 2014“Understanding Important Provisions of Budget 2014at H.K. College of Commerce Conference Hall,Ahmedabad.

(L to R, CA. Shailesh C. Shah, Speaker Dr. NileshSuchak, Speaker CA. Jignesh Shah, CA. Mehul Shah,

CA. Abhishek J. Jain)

❉ ❉ ❉


st31 July, 2014

To,The ChairmanCentral Board of Direct TaxesNew DelhiRespected Sir,Sub: Representation on changes in the utility/software for e-filing of tax audit report.1.0 Introduction1.1 The Revenue department has made e-filing

of the Tax Audit Report along with the incometax return mandatory from assessment year2013-14 and onwards vide notification dated

st01 May, 2013. The utility or software for e-filing of the tax audit report was introducedfor the first time in the month of July, 2013.

1.2 However, due to several discrepancies in thesaid utility, the same had undergone changesfor as many as 12 times on severalrepresentations being made by theprofessionals, after finding out inconsistenciesin the utility.

1.3 The CBDT has once again, vide notificationno. 33/2014 dated 25.07.2014 revised theformat of the Tax Audit Report to be furnishedby the assessees.

1.4 Out of the various changes suggested, one ofthe changes that would have a far reachingimpact is the change related to the compliancewith the TDS Provisions.

2.0 Issues relating to TDS/TCS in the NewFormat

2.1 In addition to the details of TDS/TCS, theAuditor is now required to disclose the amountshort deducted, TAN of the Assessee, Amounton which tax is deducted or collected, amountpaid and also details of amount of TDS/TCSnot paid by the Assessee. Earlier reporting wasonly of TDS but now it is been extended toTCS also. (Clause 34(a)).

2.2 In old 3CD form Auditor was not required toreport any late filing of TDS or TCS return.However vide Clause 34(b) Auditor has togive details of Late filing of TDS/TCS return.

2.3 In old 3CD from Auditor was not required toreport detail of Interest payable for delay inpayment of TDS/TCS. However vide Clause34(c) the Auditor has to give details of InterestPayable u/s 201(1A) and 206C (7).

3.0 Other Issues and Changes3.1 Apart from the changes in the TDS/TCS

Representation to CBDT on changes in Form No. 3CA, 3CB and 3CD

takeaways from the new Form 3CD include

reporting requirements, the other key

the following:1. Specifying the nature of documents

examined by the Auditor in the courseof tax audit.

2. A tabular format is specified for reportingof financial impact of changes in themethod of stock valuation.

3. Details of land or building transferred byassessee for less than stamp duty value(under section 43CA or under section50C) shall be reported in new Form 3CD

4. Old Form3CD required reporting ofinadmissible payments only when theywere debited to Profit and loss account.However, the new Form 3CD requiresreporting of following disallowablepayments, even if they are not debitedto profit and loss account[clause 21 ofPart B]:(i) Disallowance for TDS default under

Section 40(a)(ii) Disallowance for cash payments

under section 40A(3)(iii) Disallowance for provision for

gratuity under section 40A(7)(iv) Disallowance under Section 40A(9)(v) Particulars of any liability of a

contingent nature(vi) Amount of deduction inadmissible

under section 14A(vii) Interest inadmissible under the

proviso to section 36(1)(iii)5. The new Form seeks details of demand

raised or refund issued under any taxlaws (other than Income Tax Act, 1961and Wealth Tax Act, 1957) along withdetails of relevant proceedings.

6. The new 3CD requires whether theassessee is liable to pay indirect tax likeexcise duty, service tax, sales tax, customduty etc., and if yes the registrationnumber is to be provided. How can theauditor be in the position to verifywhether provisions of various indirectlaws are applicable to an assessee whoseaccounts are audited u/s 44AB of theIncome Tax Act.

7. Clause 21(a) now requires theinformation to be given with regard toamounts debited to Profit and LossAccount, being in the nature of capital,personal and advertisement expenditure.As far as advertisement expenditure is


concerned, the details should bepertaining only for that expenditurewhich is not allowable as per theprovisions of the Income Tax Act, 1961.

4.0 Impact of the above changes on CharteredAccountants

4.1 Looking to the above changes, theresponsibility of the Auditor is much moreonerous now. In fact, signing the tax auditreport would mean that he is certifying thatadequate tax has been deducted at source anddeposited in time on ALL payments on whichTDS is applicable. The Auditor and his staffcannot be expected to check each and everytransaction, particularly where the volume oftransactions is very large.

4.2 Going a step further, what about transactionsnot entered in the books of account, willinglyor otherwise, on which TDS is applicable. Thefact remains that we are ‘watch dogs andnot blood hounds.

4.3 It would have been reasonable to fix athreshold limit, say Rs. 50,000/- or Rs.1,00,000/- and the Auditor could be asked tocertify that TDS provisions in respect ofpayments exceeding the prescribed limit havebeen duly complied with.

4.4 This action of the Department is arbitrary,highly unreasonable and patently unjust. Theproposed changes relating to the provision ofTDS/TCS echoes and unfair and unjust attitudeof the Department since what is intended isshifting of the responsibility of the AssessingOfficer on to the Professionals. The RevenueDepartment cannot run away from theresponsibility cast upon them and at the lastmoment shoulder the entire responsibility onthe professionals or the assessees.

4.5 This conduct of the Department would causeextreme hardship, irreparable loss, prejudice,distress and harassment to the professionals.

4.6 This is not the first occasion when changesare made at the eleventh hour, making lifedifficult for the assessee, CharteredAccountants and tax consultants.

4.7 Further, this change in the requirement wouldimpose additional responsibility on thoseclients who were punctual and have already

thfiled their tax audit report before 25 July,2014 using the old utility. Would that meanthose assessees need to re-file their tax auditreport? Would it mean that the responsibilityof the department is now being cast on theprofessionals? The answers seem to have been

5.0

lost in the dark.

Other Issues5.1 Apart from the aforesaid issues, there are

several burning issues which continuouslyhaunt the tax payers and the Professionalcommunity.

5.2 The format/schema for e-filing of the incometax returns is also not provided in time. Thereare several issues relating to processing ofreturns at CPC, Bengaluru which remainunsolved. Several representations have beenmade, which have fallen on deaf ears.

5.3 All put together, the powers conferred inSection 119 of the Income Tax Act, 1961 aremeant for specific purpose of properadministration of law, efficient managementof work of assessment and collection ofrevenue and to relax procedures in law to avoidgenuine hardship, whereas, the changes madein the procedure are more rigorous, harsh andcaused extreme hardship, agony and distressto assessees as well as the tax professionals.

5.4 The typical bureaucratic approach of the CBDTand the Revenue Department is not onlyviolative of good conscience and equity butalso infringing and abridging the legal andfundamental rights of public at large. It hasalways been a practice of the CBDT to imposecompliance part without a proper applicationof mind and that too at the very last moment.

5.5 Further, India being a vast countrycharacterized by features like illiteracy,unavailability of power supply, poor internetconnectivity as well as coverage, thesuggestions roped in by the CBDT altogetherfail at the grass root level.

5.6 Thus it is a matter of great concern not onlyfor the Professional but also for the public atlarge and therefore; immediate interferenceof CBDT is warranted.

6.0 SUGGESTIONS6.1 Being aggrieved by the arbitrary, unreasonable,

excessive, colorable action of the CBDT, it ishereby suggested to delete the aforesaidchanges relating to TDS and keep the same toan extent that is practicable for the assesseesas well as the Chartered Accountants.

6.2 As regards the other changes, it is suggestedto postpone the changes for a year so as togive enough time for understanding therequirements demanded for.

Thanking you,Yours truly,

CA. Rajni Shah Shailesh C. ShahChairman President

Legal and Representation C.A. Association,Committee – Direct Taxes Ahmedabad

❉ ❉ ❉

Representation to CBDT on changes in Form No. 3CA, 3CB and 3CD

Across

1. In case of construction services, completioncertificate is to be obtained from_____________ Authority.

2. Post SFCP tax payer can freely ____________his overseas wealth into USA and enjoy theliquidity in USA.

3. Delay in filing return can result in _______

Down

4. Be _________ is the goal of our life.

years of imprisonment.

5. Success is a fight between you and___________.

6. According to Section 66E(b) of the FinanceAct, 1994 the term “Construction” includes, notonly new construction but ___________,alteration, replacement or remodeling of any

ACAJ Crossword Contest # 4

existing structure also.

Notes:

1. The Crossword puzzle is based on previous


issue of ACA Journal.

2. Three lucky winners on the basis of a drawwill be awarded prizes.

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

ACAJ Crossword Contest # 3 - SolutionAcross1. Works Contract 2. Place3. Employees 4. YearToYear

Down5. StockOption 6. Three7. Facebook 8.

Winners of ACAJ Crossword Contest # 3

1.

MetroMan

❉ ❉ ❉

CA. C. H. Pamnani

2. CA. Hardik Vora

3. CA. Hitesh Mandani

4. Members may submit their reply eitherphysically at the office of the Association orby email at [email protected] on orbefore 31/08/2014.

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

journal single colour - caa-ahm.orgcaa-ahm.org/Pdf/Journal/Journal-42.pdf · every individual is...

Documents

Transcript of journal single colour - caa-ahm.orgcaa-ahm.org/Pdf/Journal/Journal-42.pdf · every individual is...