Volume : 38 Part : 08 November, 2014 C O N T E N T Scaa-ahm.org/Pdf/Journal/Journal-46.pdfby...

Ahmedabad Chartered Accountants Journal November, 2014 449

Volume : 38 Par t : 08 November, 2014E-mail : [email protected] Website : www.caa-ahm.org

Ahmedabad Chartered Accountants Journal

C O N T E N T S To Begin with

MananamDivine Wealth and Perennial Joy.......................................................... Dr. Ni lesh Suchak.....................451

Editor ialIts' learning time.................................................................................CA. Ashok Kataria .................... 452

From the President............................................................................CA. Shailesh C. Shah.................453

Ar ticles

Taxation Issues Relating to Key Man Insurance Policy........................CA. Chandrakant Thakkar..........454

Direct Taxes

Glimpses of Supreme Court Rulings................................................... Adv. Samir N. Divatia................461

From the Courts..................................................................................CA. C.R. Sharedalal &CA. Jayesh Sharedalal............... 462

Tribunal News.....................................................................................CA. Yogesh G. Shah &CA. Aparna Parelkar.................. 465

Unreported Judgements......................................................................CA. Sanjay R. Shah....................469Controversies......................................................................................CA. Kaushik D. Shah................. 472Judicial Analysis..................................................................................Adv. Tushar P. Hemani................475

FEMA & International Taxation

FEMA Updates................................................................................... CA. Savan A. Godiawala............481

Indirect Taxes

Service Tax

Service Tax Decoded..........................................................................CA. Punit R. Prajapati................482Recent Judgements............................................................................. CA. Ashwin H. Shah...................487

Value Added TaxRecent Judgements and Updates........................................................ CA. Bihari B. Shah.....................489

Corporate Law & Others

Business Valuation..............................................................................CA. Hozefa Natawala.................491Corporate Law Update.......................................................................CA. Naveen Mandovara.............494

From Published Accounts ................................................................ CA. Pamil H. Shah..................... 496

From the Government ......................................................................CA. Kunal A. Shah..................... 498

Association News.............................................................................. CA. Abhishek J. Jain &CA. Nirav R. Choksi...................499

ACAJ Crossword Contest....................................................................................................................500

Ahmedabad Chartered Accountants Journal November, 2014450

AttentionMembers / Subscr ibers / Authors / Contr ibutors1. Journals are carefully posted. If not received, you are requested to write to the Association's

Office within one month. A copy of the Journal would be sent, if extra copies are available.2. You are requested to intimate change of address to the Association's Office.3. Subscription for the Financial Year 2014-15 is ` 400/-. Single Copy (if avai lable) ` 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 wil l 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 i t 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 Katar ia,on behalf of Chartered Accountants Association, Ahmedabad, 1st Floor, C. U. Shah Chambers, NearGujarat Vidhyapith, Ashram Road, Ahmedabad - 380 014.Phone: 91 79 27544232Fax : 91 79 27545442No part of this Publication shall be reproduced or transmitted in any form or by any meanswithout the permission in writing from the Chartered Accountants Association, Ahmedabad.While every effort has been made to ensure accuracy of information contained in this Journal,the Publisher is not responsible for any error that may have arisen.

Professional AwardsThe best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law andAuditing' and 'Allied Laws and Others' will be awarded the Trophies/ Certi ficates of Appreciationafter being vetted by experts in the profession.

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

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

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

Journal CommitteeCA. Ashok Kataria CA. Pitamber Jagyasi

Chairman ConvenorMembers

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

Ex-officioCA. Shailesh Shah CA. Abhishek Jain


I am to share the treasure Divine Weal th as isnarrated in Bhagawad Geeta. Lokmanya Tilak prayseveryone that one should not fai l to thoroughlyunderstand the ancient science of l i fe of ahousehold, or of worl dl y l i fe enunciated i nBhagawad Geeta, as early as possible in one’s l ife.Mahatma Gandhi says that when disappointmentstares me in the face and all alone, I see not one rayof l ight, I go back to the Bhagawad Geeta. Inspiredby statements of stalwarts like Lokmanya Tilak andMahatma Gandhi, I started getting gl impses ofGeeta and teachings thereof and can tel l wi thconfidence that it is a treasure of wealth that can beuseful to us in every walk of life irrespective of ourcaste or creed. A l i ttle practice of some of thepreaching thereof can free us from fear and someof the good quali ties narrated therein can enrichour l i fe to be able to enjoy perennial joy. Forexample, Lord Krishna states in 13th and 14th versesof Chapter 12 the kind of devotee who is dear tohim. Lord states that he who hates none, who isfriendly and compassionate to all , who is free fromattachment and egoism, balanced in pleasure andpain, and forgi vi ng, ever content, steady i nmedi tati on, sel f -control led, possessed of f i rmconviction, with mind and intellect dedicated to Me,he, My devotee, is dear to me. It is my experiencethat even i f we practice some of these qualities inlife, we will be bestowed with joy.

I l ist out the fol lowing twenty six divine wealthnarrated in first three verses of Chapter 16 of Geetawith English Translation thereof after the Sanskritwords.

1. Abhayam - Fearl essness; 2.Sattvasamshuddhih - Purity of mind or heart; 3.Jnanayogavyavasthitih - Steadfastness in the Yoga-of-Knowledge or equanimity (evenness of mind)in gain and loss, in honour and dishonour, praiseand blame etc.; 4. Danam – Charity or giving awayone’s own thing in a disinterested manner, as amatter of duty to others; 5. Damah- Control of

MananaM

Divine Wealth and Perennial Joysenses; 6. Yajnah - Sacrifice; 7. Svadhyayah - Studyof sacred scriptures and of the self; 8. Tapah –Austerity, consists in suffering hardships, such ashunger, thi rst, cold, heat and rain etc., andknowingly tolerance of hardships happily, whiledi scharging one’s duty, and earning one’sl ivel ihood; 9. Arjavam – Straightforwardness orsimplicity in dealings; 10. Ahimsa – Non-Violenceor harmlessness; 11. Satyam – truth through one’smind, speech and actions; 12. Akrodhah – absenceof anger; 13. Tyagah – Renunciation or havingdetachment f rom the worl d; 14. Santi h –peacefulness or tranqui l l i ty or absence ofdi stractions; 15. Apaishunam – Absence oftendency of exposing the fault of others; 16. Dayabhutesu – Compassion for al l ; 17. Aloluptvam –Non-covetousness; 18. Mardavam – Gentleness orlack of sternness, viz. Mildness of mind, even forthose who, have feel ings of enmity towards him,and who trouble him; (Arjavam is used when thereis prominence o the body while Mardavam is usedwhen there is prominence of mind); 19. Hrih –Shame or hesitation; 20. Achapalam – modesty orabsence of fickleness; 21. Tejah – Radiance or Thepower 9vigour), of great men and strivers (endowedwith divine traits), whose company enables sinnersto renounce their sins and be engaged, in virtuousactions; 22. Ksama – forgiveness; 23. Dhrtih –forti tude or unwavering steadiness by which oneremains balanced, in favourable and unfavourablecircumstances; 24. Saucham – External and internalpurity; 25. Adrohah – Absence of malice, hatred orgrudge, even towards those, who behave asenemies; 26. Natimanita – Absence of pride or totalnegation of pride.

The above stated qualities belong to one born withthe Divine Wealth or these, are the marks of him,who is endowed wi th divine nature. This is theexhaustive l ist of noble traits of a cultured manliving the spiritual way-of-life according to SwamiChinmayananda. Let us try to imbibe above statedtraits for eternal joy.

Dr. Nilesh [email protected]


Recently the Chartered Accountants Associationorganized a study series on the topic of Income TaxAssessment Proceedings. The series was like anyother series spread over four to five meetings,attended by about 35 participants and led by verygood faculties from the Association. I t washeartening to see almost hundred percentattendances of members in all the meetings whomade sure that they not just attended the programbut also actively participated. It clearly highlightedthat all the participants were attending for the sheerjoy of learning without any concern whether theprogram carried any CPE credit or not. All thegatherings of the program were truly a delight andevery member took it as an opportunity to add tothe knowledge on the topic and improve upon hisskills.

Over the years it is seen that not all educationalseminars are attended with this kind of attitude. Asthe months of November and December approachthe professional brethrens check their studycalendars and those who find themselves runningbehind the minimum required hours of study asmandated by the profession’s apex body, the Instituteof Chartered Accountants of India, they shift theirpriorities to complete the calendar rather than tryingto learn new things. The manner in which variousprograms are arranged including CPE Melas toenable members complete their CPE requirementseems to be a mockery of the entire system wheremost of the members are only concerned withachieving the target of minimum number of hoursagainst their membership number rather thanimproving and increasing their level of knowledge.Let us truly admit that this mockery is because ofall of us as members despite best of efforts put inby the Institute.

Editor ialI ts' learning time

[email protected]

How often have we come across the debates anddiscussions, more importantly within ourselves, thattime is changing very fast and one who would liketo sustain in the profession shall have to changewith the changing environment. Those who willnot be able to adapt to the changing scenario shallbe left with no other option but to perish. The onlyway to move on with the changing times is to keeponeself abreast of al l happenings and latestknowledge. The question arises when most of usare aware that the focus needs to be more on learningnew things rather than accomplishing the objectiveof filling up the numbers, why many of us are beingso lethargic in our approach to learn or relearn. It isfound that though members clearly understand it isinevitable to have a regular study to survive in theprofession somehow, many are found too reluctantin their approach.

The Institute through its regions, branches, chaptersand CPE study circles is offering varied range ofprograms that cater all kinds of academic needs ofthe members. More particularly, this time of the yeargives an opportunity to all members not just tocomplete the CPE requirement but also have arelook and reconsider the areas where one needs togrow and embark upon new avenues apart fromrelearning the old subjects, ultimately adding to theoverall development. When so many programs areavailable to choose from, the focus needs to beshifted from CPE requirement to enrich ourselveswith latest updates.

Let us start learning rather than fooling ourselvesof learning.

Namaste,

CA. Ashok Kataria


Dear Esteemed Readers

Wishing you al l Happy and pr osper ous NewVikram Samvat 2070.

After enjoying the diwali hol idays the period ofrelaxation for all Chartered Accountants is now over.With the extension of the return filing date in caseof tax audit assessees, most of us have enjoyed ashort break amidst tax audi t assignments in themonth of October. Again, all of us will have to begear up for finalizing the pending tax audit reportsand simul taneously be ready to appear beforeincome tax authori ties to get the assessmentscompleted.

Swachchh Bharat and black money are the twowords that have become talk of the nation duringthe recent past. Unaccounted money on whichincome tax is not paid is popularly known as theblack money. What comes around goes into thinair or, preferably, in a Swiss bank account. Todaynobody knows— not me, not you, not thegovernment- how much money is lying abroad. Thehighest body of India’s chambers of commerce,Assocham, once said that the black money figurewas $ 2 tri ll ion, meaning more than India’s GDP.Whatever may be the figure of black money, theprime minister of India has assured to the peopleof India that he would not leave any stone unturnedand bring back the black money to India.

Mahatma Gandhi said ”I wil l not let anyone walkthrough my mind with their dirty feet.” He devotedhis whole li fe to this effort. It is only because ofthis, a social media campaign ‘Swachchh Bharat’was launched by the Prime Minister, while speakingfrom Rajghat on 2nd October, where he nominatednine celebrities to join in this campaign and askedto form a chain in the similar manner. He alsorequested everyone to take an oath of cleanliness.This is an issue beyond pol i tics, and everybodyneeds to join in, despite different associations. It isa welcome step by the present government. Whatis important to see is that it extends for more than aday, and becomes a part of our everyday li fe.

From the PresidentCA. Shailesh C. Shah

[email protected]

Cleanliness has always been a tug of war betweenpeople and the authorities. Public at large complainsthat local authorities have not done enough incleaning the streets and sewers, while the authoritiesblame that i t is the ‘habits’ of people to throw trashout in the open. A solution to this problem couldbe to work together with a collective effort.

A change in mindset of people of India is moreimpor tant than anything else. Cleanliness beginsat home. We should first start cleaning up our homeas a family wherever necessary. It is not somebodyelse’s responsibi l i ty but our own. Governmentneeds to provide enough waste bins, dr ainagesystems, toilets etc. Recycling, separating dry andwet waste, rehabil itating our dumping groundscould be the things we could look forward to.

Swachchh Bharat campaign needs to be set as anandolan, a movement, rather than just a governmentprogram. Our PM has rightly asked the people toparticipate, by contributing two hours a week forthis.. To set an example he himself has taken thebroom in his hand. We should also not lose thisoppor tunity to clean India not only from ‘outside’but al so f r om our ‘inside’. Star t i ng f r omourselves, let us clean our country of the vices ofcorruption, communalism, gender inequality andcasteism in thought and in act.

On 2nd November a Diwal i get together wasar ranged to exchange gr eet ings amongst themembers and their family members. More than300 people par ticipated in the get together. Thegovernment has begun working on the blueprintfor i ts first ful l-fledged Union Budget early nextyear. We at the Association are also planning tosubmi t the pre budget memorandum to theGovernment. I request you to send your suggestions,issues if any for the Pre Budget Memorandum.

With regardsCA. Shailesh C. ShahPresident


1. Objectives of Key Man Insurance Policy:Key man insurance policy was used as animportant mode for saving tax and tool toretain good employees in an organisation. Itwas one of the important tools to retainefficient employees like ESOP and hence, itwas part of good HR policy. Following arethe main advantages or objectives of Key maninsurance policy.

(a) To reward right employee in a manner,employee gets incentive for best servicesrendered by him/her.

(b) It is possible to retain experienced,efficient, proven, educated employee forlonger period in the interest of theorganization.

(c) To provide job satisfaction to rightemployees who are working in theinterest of the organization.

(d) To have conti nui ty of servi ces ofemployees working with devotion andto have personal i nvol vement anddedication of employees covered underEmployer Employee Benefit Scheme.

(e) To provide wel fare measures to thedependents of employees on prematuredeath.

Though it has excellent objectives, i t wasonly seen as instrument of saving Income tax.

2. Issues under Income Tax Act for Key ManInsurance Policy:As I said earlier inspite of having some verygood objectives enumerated herein above, theKey man insurance policy is always seen astax saving instrument and hence, i t i snecessary to know tax related issues of saidpolicy. The tax related issues of Key maninsurance policy are to be discussed from twoangles viz. from employer’s view point and

from employees view point. Let us discussthe issues in detail from both the angles. Assuch fol lowing three questions are veryrelevant under Income tax Act, 1961 inconnection with Key man insurance policy.

Q. 1 Whether premium paid by employer underEmployer Employee Benefi t Scheme isdeductible as an expenditure to the employerunder the Income tax Act, 1961?

Q. 2 What would be the taxability under Incometax Act,1961 of amount received byemployee on maturi ty of pol icy underEmployer Employee Benefit Scheme?

Q.3 What would be the taxability under Incometax Act, 1961 of employee on assignment ofpolicy under Employer Employee BenefitScheme?

The answers of above questions are discussedin detail as under.

Ans.1.

Considering the objectives of Key maninsurance policy discussed herein above, itcan be concluded that employer is going toget benefit both directly and indirectly byopting for taking policy under EmployerEmployee Benefi t Scheme under whichemployer will propose and pay the premiumfor said policy. The deduction of premiumpaid by employee is possible u/s 37(1) ofIncome tax Act, 1961. To get the deductionu/s 37(1), we have to analyze the provisionsof section 37(1).

Section 37(1) says that any expenditurewhich is not covered by section 30 to 36 andexpenditure which is not of capital in natureor personal in nature and which is incurredwholly and exclusively for the purpose ofbusiness or profession shall be allowed asbusiness expendi ture from the income

CA. Chandrakant [email protected]

Taxation Issues Relating toKey Man Insurance Policy


Taxation Issues Relating to Key Man Insurance Policy

chargeable under the head “Profits and gainsof business and profession”.

Taking into consideration above provision,we can conclude as under.

· The expendi ture by way of payment ofi nsurance premi um under Empl oyerEmployee Benefit Scheme is not coveredu/s 30 to 36 of Income tax Act, 1961.

· The expendi ture of paying Insurancepremium under Employer Employee BenefitScheme is not capital in nature.

· The expendi ture of paying Insurancepremium under Employer Employee BenefitScheme is not personal in nature.

· The expenditure of paying premium underEmployer Employee Benefi t Scheme isincurred whol ly and exclusively for thepurpose of business as organization is goingto get the benefi ts as envisaged in theobjectives of policy enumerated herein above.

· While reaching to above conclusions, I haverel i ed upon fol l owi ng deci si ons andprinciples so as to contend that expenditureof payi ng Insurance premi um underEmployer Employee Benefi t Scheme isallowable under section 37(1) of Income taxAct,1961.

(a) Generally speaking, any insurance premiumpaid by the assessee for the insurance ofemployee i s part of employee wel faremeasure and i s al l owabl e as businessexpenditure under the head “”Profits andgains of business and profession” on theground of commercial expediency i ncomputing the taxable profits and gains ofbusiness or profession, as per the generalprovisions of Section 37(1) of the Income-tax Act. For the insurance premium in respectof the li fe insurance premium on account ofthe policy of the employee or the insurancepremium on account of insurance taken forthe policy under the concept of EmployerEmpl oyee Benef i t Scheme, the taximplication would be the same. In both thesituations i.e. normal insurance premium on

employee’s l i fe or on the insurance policytaken under Employer Employee Policy thetax implication would be the same and thuspremium paid under Employer Employeei nsurance Pol i cy would be al lowabl ebusiness expenditure.

(b) As the quantum of the amount payable inrespect of Employer Employee benef i tinsurance premium may be substantial one,it would be better to examine the provisionsof Section 37(1) together with certain decidedcase Laws so as to know from employer’sview poi nt the possi bi l i ty of getti ngdeduction of premium paid under EmployerEmployee Benefit Scheme as expenditure.The word “Wholly” under Section 37(1)refers to the quantum of expenditure whilethe world “exclusively” refers to the motive,objective and the purpose of the expenditure.Hence, to enable the amount to be allowedas deduction under Section 37(1) of theIncome-tax Act. 1961 the terminology“whol l y and excl usi vel y’” has to beexamined in detail. The words “wholly andexclusively” do not mean “necessari ly”.Generally speaking, it is for the businessmanto decide whether or not any expenditureshould be incurred during the course of i tsbusiness. Such expenditure may be incurredby the businessman voluntari ly and that i tmay not be necessary at al l . But i f suchexpenditure is incurred for promoting orprotecting or running the business, theassessee can cl aim deduction of suchexpendi ture under Section 37(1), of theIncome-tax Act, 1961, even though there maybe no compell ing necessity to incur suchexpenditure. The principle laid down in thisPara has been considered by Honorable apexcourt in the case of Sassoon J David & Co.Ltd. v. CLT (1979) I 18 ITR 261 (SC).

(c) The expendi ture by way of payment ofInsurance Premi um under Empl oyerEmployee Insurance Pol icy is definitelyincurred for safeguarding the businessnecessity of the employer in spite of the fact


that there may be no compelling necessity toincur such expenditure. In the case of FasterInvestments Ltd. v. CIT (1951) 20 ITR I (SC)and British Insulated and Helsby Cables Ltd.v. Atherton (1926) AC 205-221, Courts haveeven held that if money was expended “‘notof necessity” to the trade, but voluntarily andon the ground of commercial expediency andin order indirectly to facil i tate the carryingon the business, such expenditure would beallowed as deductible business expenditure.

(d) On the question as to whether the Premiumpaid under Insurance policy is an allowablededucti on or not, the L i fe InsuranceCorporation of India about four decades agoreferred the matter even to the Central Boardof Direct Taxes (CBDT), New Delhi for theirconsidered opinion. The CBDT vide theirletter No. 35/I2/64-1T dated 3.2.1964 gavethe following reply:-

“If the assessee firm taking out the insurancepolicy is able to establish before the Income-tax Officer that the premium paid on suchinsurance is an expenditure laid out whollyand exclusively for the purpose of business,it wil l be entitled to the deduction u/s 37(1)of the Income-tax Act, 1961. The Matterwill, however, depend upon the facts of suchcase.”

(e) The Supreme Court of India in the case ofJ.K. Woollen Manufacturers v. CIT (1961)72 ITR 612 also made very interesting andperti nent observations wi th regard todeducibil i ty of business expenditure. Therelevant extract is as under:-

“ The question as to whether an amountclaimed as expendi ture was laid out orexpended whol ly or exclusively for thepurpose of business, profession or vocationas required under Section 10(2) (XV) of theIncome-tax Act,1922 (Section 37(1) ofIncome Tax Act,1961) has to be decided onthe facts and in the light of the circumstancesof each particular case. But as observed bythis court in Swadeshi Cotton Mills Co. Ltd,v. Commissioner of Income-tax, the final

conclusion on the admissibi l i ty of anallowance is one of law. In the present case,both the Appellate Assistant commissionerand the Appellate Tribunal rejected the viewof the Income-tax Officer that the rate ofcommission paid to Shri Vaish was not fixedon account of business considerations butthere was some col lateral reason. Butconsidering the practice in similar businessconcerns, the Appel l ate Assi stantCommissioner expressed the view that therate of 12.5% commission was reasonableand the allowance was, therefore, restrictedto half of the amount claimed by the assessee,the vi ew of the Appel l ate Assi stantCommissioner has been affi rmed by theIncome-tax Appellate Tribunal. The case ofthe assessee, however, is that a higher rateof commission of 25% was fixed for Shri J.P.Vai sh because the mi l l was ol d anddilapidated and it never made profit of evena lakh of rupees in die past and that the rateof 25% was fixed in order to create speciali nterest of the general manager foraccomplishment of the task entrusted to him.In our opinion, neither the High Court northe Appellate Tribunal has applied the properlegal test in this case. “

(f) Similarly, in the case of CIT v. Walchand &Co. Pvt. Ltd. 65 ITR 381 (SC) it was heldby the court that in applying the test ofcommercial expediency for determiningwhether an expendi ture was wholly andexclusively laid out for the purpose ofbusiness, reasonableness of the expenditurehas to be adjudged from the point of view ofthe businessman and not from the view pointof Income-tax department.

(g) Various courts in the past have held that theexpenditure which has actually been incurredin the assessment year for the purpose of thebusiness, that expendi ture attracts theprovi si ons of a l egi t i mate deducti onpermissible under Section 30 to 37 of the Act,and the assessee shal l be enti t l ed todeduction. Likewise, in the absence of fraud,



the question whether a transaction had theeffect of a judicious transaction or whetherit was indispensable or necessary for theassessee to enter into the transaction are allrel evant for determi ni ng whether theexpenditure relating to that transaction shouldbe allowed under s. 37 of the Act. Thus, themost important consideration in such casesis whether the expenditure has been incurredsolely for the purpose of the business and ifi t has been so incurred, then it wil l not bematerial that i t was an invalid or improperexpenditure.

(h) Similarly, the Supreme Court of India in thefamous decision of CIT v. Dhanraigirji RaiaNarasingirJi (1973) 91 ITR 544 held that “Itis not open to the department to prescribewhat expenditure an assessee should incurand in what circumstances he should incurthat expenditure. Every businessman knowshis interest best”

(i) The word “wholly and exclusively” whichare used in s. 37(1) have been interpreted indifferent styles by the judiciary from time totime. However, the most classic analysis andjudicial interpretation of these words havebeen done in the famous decision of SreeMeenakshi Mills Ltd. v. CIT (1963) 49 ITR156. The relevant extract is reproducedhereunder;-

The words “whol l y and excl usi vely”pointedly signify that the expenditure shouldbe completely devoted to the business. It neednot be essential, necessary, or compell ing: itmay be optional and purely voluntary. But itmust be commercially expedient and shouldhave the aim or the conti nuance andfurtherance of the business and an eventualaugmentation for stabilisation of profits.

(j) The following observation of Viscount CaveL.C. in Atherton’s case was approved by thesupreme court in Eastern Investment Ltd. v.Commissioner of Income-tax wherein it washeld that:

“a sum of money expended, not of necessityand with a view to a direct and immediate

benefit to the trade, but voluntari ly and onthe grounds of commercial expediency, andin order indirectly to facil i tate the carryingon of the business, may yet be expendedwholly and exclusively for the purpose ofthe trade”, can be adopted as the bestinterpretation of the crucial words of section10(2)(XV) of Income tax Act,1922. Theimprudence of the expendi ture and i tsdepressing effect on the taxable profits wouldnot deflect the applicabil i ty of the taxableprofits would not deflect the applicabili ty ofthe section. The acid test i s. “Did theexpendi ture fal l on the assessee in hischaracter as trader and was it for the purposeof the business”.

(k) The meaning of this test cannot be betterstated than in the fol lowing words of LordDavey in Strong & Co. v. Woodifield:-

“It is not enough that the disbursement ismade in the course of, or arises out of, or isconnected with, the trade or is made out ofthe profits of the trade. It must be made forthe purpose of earning the profits.”

(l) Similarly, the Hon’ble Judges of the KeralaHigh Court in the case of CIT v. StandardFurniture Co. Ltd. (1978) 116 ITR 751 gavea very interesting analysis of the theme“Expenditure laid out or expended whollyand exclusively for the purposes of suchbusiness”. The relevant extract is reproducedbelow for easy reference:-

“I have already stated that a sum of moneymay be spent not because of necessity or witha view to direct and immediate benefit tobusiness, but i f the expenditure is made onthe ground of commercial expediency andindirectly to facil itate the carrying on of thebusiness, i t may sti ll be expenditure madewholly and exclusively for the purpose ofthe business and so fal l within the ambit ofsection 10(2) (XV) of the Indian Income TaxAct,1922. This view is borne out by thedecision of the Australian High Court inNevill and Co. Lid. v. Federal Commissioner



of Taxation (56 ‘ CLR 290) where LathamC.J. observed at page 101 as fol lows:

‘No expendi ture, strictly and narrowlyconsidered, in i tsel f actual l y gains orproduces income. It is an outgoing, not anincoming. Its character can be determinedonly in relation to the object which the personmaking the expenditure has in view. If theactual object is the conduct of the businesson a profitable basis with that due regard toeconomy which is essential in any wel lconducted business, then the expenditure (ifnot a capital expenditure) is an expenditurei ncurred i n gai ni ng or producing theassessable income. I f i t i s not capi talexpendi ture, i t should be deducted inascertaining the taxable income of thetaxpayer’.”

(m) In l ight of the above mentioned case laws, Iam of the view that the payment made by theEmployer of an amount towards payment of“Premium” under the Employer EmployeeInsurance Policy should be an allowablebusiness deduction in terms of section 37(1)of the Income-tax Act, 1961.

(n) Almost identical case connected with thepayment of insurance premium for insuranceof Director’s services was decided by theBritish Courts. The relevant details are asunder:-

“Policy insuring against loss of director’sservices - Payment to company under policy- A l imited company took out a policy ofinsurance in the sum of £ 15,000 for thebenefit of the company, to cover loss ensuingon the death or injury by accident of adirector whose special qualifications andexperience were of value to the company.The director was ki l led by an accident, andthe sum assured was paid to the company,which distributed it among the share-holders:HELD, af f i rmi ng the deci si on ofMACNAGHTEN. J. that the sum of £ 15,000must be treated as a payment on revenueaccount, and not as capital, and therefore, i twas assessabl e when recei ved by a

shareholder to income-tax and to sur-tax. Thedirector concerned was rendering serviceswhich greatly increased the company’srevenue, and the sole purpose of insuring wasto protect the company against an expectedfall in income if his services were no longeravailable. The expected fall in revenue wasreflected in the amount of the policy, butwhether that estimate was right or not wasimmaterial - IRC v. D.H. WILL IAMSEXECUTORS -1943) I I ITR Suppl . 84(CA). The appeal preferred against thisdecision came before the House of Lords(VISCOUNT SIMON LC. LORD ATKIN,LORD THANKERTON. LORDRUSSELL OF WLI.OWEN AND LORDPORTER) and on 29th February, 1944, theHouse of Lords confirmed the decision ofthe Court of Appeal.”

I am sure above discussion of provisions ofsection 37(1) of Income tax Act,1961 andbased on decisions enumerated herein above,it leads to a conclusion that expenditureincurred by an employer for payment ofpremium paid for Employer EmployeeBenef i t Scheme wi l l be an al l owableexpenditure under section 37(1) of Incometax Act,1961.

It is necessary to execute an agreement byan employer wi th employee and to passresolution in case of employer being companyor LLP etc. The above documents arerequired to justify the business needs and toclaim premium paid as business expenditure.

Ans. 2

Considering the provisions of section10(10D) of Income tax Act,1961 prevail ingas on date, the income received by anemployee on maturi ty under EmployerEmployee Benefit Scheme was exempt uptillFi nance Act,2013 and af ter Fi nanceAct,2013, it has become taxable in the handsof employee eventhough policy has beenassigned to an employee by an employer. Tocome to such conclusion, we have to analysethe provisions of section 10(10D) of Income



tax Act ti l l Fi anance Act,2013 whi chprovided that any sum received under a l i feinsurance pol icy including the bonus isexempt but such exemption is not availableto any sum received under a KeymanInsurance policy from Finance Act,2013.Someone may argue that when employeereceives the sum on maturity whether the saidreceipt is the sum under a Keyman Insurancepol icy when pol icy was assigned to anemployee. However, i t is to be noted that thereference of any sum received under KeymanInsurance policy is for money received byan employer for which policy has not beenassigned because moment policy is assigned,Keyman pol i cy looses i ts character ofKeyman Insurance policy and becomes thenormal l i fe insurance policy and hence, theamount received by the employee on maturityfor which policy has been assigned prior tomaturity is exempt u/s 10(10D) of the Incometax Act,1961 ti ll Finance Act,2013.

However, the Finance Act 2013 has madean amendment to the provisions of section10(10D) for amount received by an employeeunder a Keyman Insurance pol i cy onassignment as not exempt u/s 10(10D) forwhich the amendment is as under.

Explanation 1 to section 10(10D) is amendedby which a Keyman Insurance policy whichhas been assigned to a person during its term,with or without consideration, shall continueto be treated as a Keyman Insurance policyfor the purposes of clause (10D) of section10. In view of above amendment, i t wil l betreated as sum received under a KeymanInsurance policy and hence, the contentionwhich earlier was taken and explained in paraherein above saying that Keyman policy afterassignment was becoming normal policy, nomore val id and hence, the shel ter ofcontention of change of nature of policy onassignment would not be available and itwould be taxable to the employee if assignedprior to maturity and if i t is not assigned, it

would be taxable in the hands of the employeras per current provision of section 10(10D).

I t i s al so argued by some people thatEmployer Employee Benefit Scheme is nota Keyman Insurance policy by nomenclatureand hence, the amendment in FinanceAct,2013 wi l l not affect the exemptionavailable to an employee when he receivesthe sum on maturity for which policy hasbeen assigned is not correct in my opinionbecause the words Keyman Insurance policyhas been defined vide Explanation 1 to section10(10D) of Income tax Act,1961. For thepurpose of clarity and understanding, theExpl anati on 1 to Section 10(10D) i sreproduced herein below.

Explanation 1: “ For the purposes of thisclause Keyman Insurance policy means a lifeinsurance policy taken by a person on thelife of another person who is or was theemployee of the first mentioned person or isor was connected in any manner whatsoeverwi th the business of the first mentionedperson or is or was connected in any mannerwhatsoever with the business of the firstmentioned person and includes such policywhich has been assigned to a person, at anytime during the term of pol icy, wi th orwithout consideration.”

In view of the above definition of KeymanInsurance policy under the Income Tax Act,1961, the nomencl ature of Keymaninsurance pol icy or Employer EmployeeBenefit Scheme is of no significance. Thepolicy under Employer Employee Benefit isalso taken by a person on the l i fe of otherperson who is or was employee of thecompany and hence, by deeming definitionit becomes the sum received by an employeeunder Keyman Insurance policy and hence,would be taxable in the hands of employeeeven af ter assignment of pol i cy underEmployer Employee Benefit Scheme.

Ans.3

As such till Finance Act,2013 on assignmentof policy under an Employer Employee



Benefit Scheme, the surrender value of thepolicy was taxable as perquisite of employeeunder section 17 of the Income tax Act,1961.However, to avoid the tax as perquisite, theemployee can pay the surrender value ofpolicy to the employer to avoid taxabil i tyunder section 17 as perquisite. In my humbleopinion, when amount received at the timeof maturity becomes taxable in the hands ofemployee even after assignment as perFinance Act,2013, but the amendmentshould be made in section 17 to avoid doubletaxation in the hands of the employee viz.once at the time of assignment and anotherat the time of receipt of money at the time ofmaturity. Representation should be made toFinance ministry in this regard. Now let usanalyse the provisions of perquisites in detailso far as assi gnment of pol i cy underEmployer Employee Benefit is concerned.

So long as the Employer - Employee Policyis not assigned in favour of the employee,then no Income-Tax i s payable by theemployee as he has not received or enjoyedany benefit. Hence, the question of treatingit as a perquisite in the hands of the employeewould not arise at al l . It is crystal clear thatno benefit is passed to the employee then uptosuch period it wil l not be a Perquisite in thehands of the employee. No amount to betaxable as a perquisite in the hands of theemployee prior to assignment. The premiumsso paid by the employer cannot be treated asa Perquisite so long as the benefits direct orindirect are not enjoyed by the employee. Iwould l ike to refer the views of the Hon’bleSupreme Court in the case of CIT v. Russell53 1TR 91 that i f a person has no interest orright, then it is not a perquisite. The absenceof contingent right to the employee wouldresult into in., tax l iabil i ty to the employeeby way of Perquisite.

Controversy:

The controversy which arises is whether thisamendment is retrospective or prospective. Theemployers who had taken the key man insurance

under pretext that on assignement of policy, i tloses its character of key man insurance policyand hence, it is exempt u/s 10(10D) on receipt ofthe same but before they receive the money undersaid policy, the law is amended and hence, itbecomes taxable on receipt of said sum toemployee if policy is assigned. This type ofamendment is nothing but breach of promissoryestoppel. The Government was aware of suchtax saving measures undertaken by people whichwas within four corners of the law consideringprovisions prevail ing at that time. Since highestpolicies were sold by LIC of India, a Govt.undertaking promising that sum received undersaid policy would be exempt u/s 10(10D) to anemployee if policy was assigned by employer infavour of employee and people relying on saidpromise had taken policy feels cheated with thisamendment. Now it wil l open a pandoras box oflitigation and will lead to additions in the incomeof employees if policy is assigned in his favour.In my humble opinion the said amendmentshould be prospective by clarifying that all keyman insurance policies would be taxable in thehands of employees on receipt of sum even afterassignment of such policy for policy taken on oraf ter the date of amendment and notretrospectively.

Conclusions:

Following conclusions can be drawn from entirearticle and provisions of the law as on date.

· Premium paid under key man insurancepolicy is deductible expense u/s 37(1) ofIncome Tax Act,1961.

· The employer employee benefit policy is alsoto be considered as Key man insurancepolicy as per definition of key man insuranceof policy.

· Even af ter assignment of pol i cy, sumreceived under key man insurance policy onmaturity is taxable in the hands of employees.

· If key man insurance policy is not assigned,then sum would be received by employer andit wil l be taxable in the hands of employer.

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Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

Contempt of Cour t – Cr iminalContempt:

Being a member of the Bar, it was the appellant’sduty not to demean and disgrace the majesty ofjustice dispensed by a court of law. It is a case whereinsinuation of bias and predetermined mind hasbeen leveled by a practicing lawyer against threeJudges of High Court. Such casting of bald, oblique,unsubstantiated aspersions against the Judges of theHigh Court not only causes agony and anguish tothe judges concerned but also shakes the confidenceof the public in the judiciary in its function ofdispensation of justice. The judicial process is basedon probity, fairness and impartial i ty which isunimpeachable. Such an act especially by themembers of the Bar who are another cog in thewheel of justice is highly reprehensible and deeplyregretted. Absence of motivation is no excuse.

The apology means a regretful acknowledgmentor an excuse for failure. An explanation offered toa person affected by one’s action that no offencewas intended, coupled with the expression of regretfor any that may have been given. Apology shouldbe unquestionable in sincerity. It should betempered with a sense of genuine remorse andrepentance, and not a calculated strategy to avoidpunishment.

Sub-section (1) of Section 12 of the Act and theExplanation attached thereto enables the court toremit the punishment awarded to committing thecontempt of court on an apology being made to thesatisfaction of the court. However, an apologyshould not be rejected merely on the ground that itis qualified or tendered at a belated stage if theaccused makes it bona fide. A conduct which abusesand makes a mockery of the judicial process of thecourt is to be dealt with iron hands and no personcan tinker with it to prevent, prejudice, obstruct orinterfere with the administration of justice. There

can be cases where the wisdom of rendering anapology dawns upon only at a later stage.Undoubtedly, an apology cannot be defence, ajustification, or an appropriate punishment for anact which tantamounts to contempt of court. Anapology can be accepted in case where the conductfor which the apology is given is such that it can be‘ignored without compromising the dignity of thecourt’, or it is intended to be the evidence of realcontrition. It should be sincere. Apology cannot beaccepted in case it is hollow; there is no remorse;no regret; no repentance, or if it is only a device toescape the rigour of the law. Such an apology canmerely be termed as ‘paper apology’.

[Bal Kishan Giri vs. State of Uttar Pradesh(2014) (7 SCC 280)]

Capital Gains – Transfer – Exemption:

In normal circumstances, the entire property cannotbe said to have been sold at the time when anagreement to sell is entered into. However, lookingat the provisions of Sec.2(47) of the Act, whichdefines the word ‘transfer’ in relation to a capitalasset, if a right in the property is extinguished byexecution of an agreement to sell, and that right istransferred to someone, it would amount to transferof a capital asset. An agreement to sell in respect of acapital asset had been executed on December 27,2002, for transferring the residential house and a sumof Rs.15 lakhs had been received by way of earnestmoney. The sale deed could not be executed becauseof pendency of the litigation between the testator’sson on the one hand and the appellants on the otheras to the validity of the WILL under which theproperty devolved upon the appellants. By virtue ofan order passed in the suit, the appellants wererestrained from dealing with the residential house.In the circumstances, for a justifiable reason, which

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contd. on page no. 468


Interpretation of StatutesC.I .T. v/s. Calcutta Knitwears : (2014)267 CTR 105 (SC) : (2014) 362 ITR 673(SC)

Issue:

How the interpretation of statutes is to be done,particularly taxing statutes ?

Held:

It is time and again reiterated that the Courts, whileinterpreting the provisions of a fiscal legislationshould neither add or subtract a word from theprovisions of instant meaning of the sections. It maybe mentioned that the foremost principle ofinterpretation of fiscal statutes in every system ofinterpretation is the rule of strict interpretation whichprovides that when the words of the statute areabsolutely clear and unambiguous, recourse cannotbe had to the principles of interpretation other thanthe literal rule. Once the literal rule is departed, thenany number of interpretations can be put to astatutory provision, each Judge having a free playto put his interpretation as he likes. This would bedestruction of the office of fiscal legislations whichimpose economic duties and sanctions.

In taxing statutes, even if the literal interpretationresults in hardship or inconvenience, it has to befollowed. Thus, the language of a taxing statuteshould ordinarily be read and understood in thesense in which it is harmonious with the object ofthe statue to effectuate the legislative intention. Ataxing statute should be strictly construed.Commonsense approach, equity, logic, ethics andmorality have no role to play. Nothing is to be readin, nothing is to be implied; one can only look fairlyat the language used and nothing more and nothingless.

CA. C. R. [email protected]

Addition on estimation basis : No penaltyu/s 271(1)(c) : Naresh Chand Agrawalv/s. CIT (2014) 265 CTR 306 (All) : (2013)ITR 514 (All)

Issue :

Whether penalty can be levied when income isdetermined on estimation basis ?

Held:

In the instant case nothing was concealed by theassessee. It was the A.O. who has rejected the booksof account in the second round and applied the eightpercent net profit rate prescribed u/s. 44 AD. In theinstant case turnover is more than 40 Lacs, so,section 44 AD is not applicable, none the less theA.O. was inspired with the provision of Section 44AD and made the addition by estimating the netprofit rate @ 8 percent, Rejection of the books ofaccount allowed the A.O. to make the addition onestimate basis. When the addition is made onestimate basis, no penalty u/s. 271(1) (c) can beimposed.

Cancellation of Registration u/s. 12 AA(3) held invalid - Tamil Nadu Cr icketAssociation v/s. Director of Income Tax(Exemptions) (2014) 265 CTR 277 (Mad): (2014) 98 DTR (Mad) 299

Issue:

Whether cancellation of registration granted u/s.12 AA is proper?

Held :

When the assessee was granted registration, therevenue recorded its satisfaction that the objects areof charitable purpose.

The assessee is a member of BCCI which in turn isa member of ICC. BCCI allots matches withvisiting foreign teams and one day international

From the Courts

CA. Jayesh C. [email protected]

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matches to various member crickets associationswhich organise the matches in their stadia. Thefranchises conduct matches in the stadia belongingto the State Cricket Association. The StateAssociation is entitled to all in-stadia Sponsorshipadvertisement and beverage revenue and it incursexpenses for the conduct of the matches. BCCIearns revenue by way of sponsorship and mediarights as well as franchisee revenue for IPL and itdistributes 70 percent of the revenue to the membercricket associations. Thus assessee is also recipientof the revenue. Thus for invoking Section 12 AAr./w. S. 2(15) revenue has to show that the activitiesare not fitting with the objects of the Associationand that the dominant activities are in the nature oftrade commerce and business. By the volume ofreceipts one cannot draw the inference that theactivity is commercial.

It was held that:

For the cancellation of registration u/s. 12 AA (3)all that is insisted upon is the satisfaction as to,whether the activities of the trust or institution aregenuine or not and whether the activities are beingcarried on in accordance with the objects of the trust;if a particular activity of the institution appeared tobe commercial in character, and it is not dominant,then it is for the A.O. to consider the effect of sec.11 in the matter of granting exemption on particularhead of receipt and the mere fact that the said incomedoes not fit in with sec. 11 would not, by itself leadto the conclusion that the registration granted u/s.12AA is bad and hence to be cancelled.

Arbitrary and illegal action by A.O. forrecovery : Director of I .T. (Exemption)v/s. I .T. A.T. I ncome Tax AppellateTr ibunal (2014) 265 CTR 337 (Bom.)

Issue:

Whether attachment and withdrawal from BankAccount by A.O. in a case is proper?

Held:

The action of the revenue, in particular the A.O.was in defiance of the directions of the Court inUTI Mutual Fund v/s. ITO (2012) 249 CTR 190

(Bom.) wherein the Court interlia directed therevenue that no recovery of tax should be madebefore expiry of time limit for filing an appeal beforethe higher forum has expired. The Court also hasdirected that when the bank account has beenattached the revenue would not withdraw theamount unless it has furnished a reasonable priornotice to the assessee to enable the assessee to seekrecourse to a remedy in law. The action of therevenue in not only attaching the bank accountbut withdrawing the money from the bank beforethe expiry of the time limit for filing appeal wasonly with a view to foreclose the option of theassessee of obtaining a stay from the Tribunal. Theassessee had received the order of the CIT (A) onlyon 16 Nov, 2013 (Saturday). Assessee had 60 daystime limit to prefer appeal there-from. However, therevenue attached the bank account of the assesseeon 18th November 2013, itself i.e. within two daysof communication of the order of the CIT (A) toassessee. Further, not only the bank account hasbeen attached on 18th November, 2013 but theamounts were forcibly withdrawn on that date itselffrom the bank so as to completely foreclose theremedy available to the assessee under the Act.Therefore, the above action on the part of the A.O.was against the elementary principles of rule of law.The State is expected to act fairly. The undue hasteon the part of the A.O. in recovering a sum of Rs.159.84 corers were not only contrary to the bindingdecisions of the Court but also shocking to thejudicial conscience. The entire action appears tohave been directed to make Tribunal and assesseehelpless so that no relief can be granted in favourof assessee. Leaving aside the case laws in favourof assessee, on first principle itself no appellateauthority and much less the Tribunal can be silentspectator to the arbitrary and illegal actions on thepart of the A.O., so as to frustrate the legal processprovided under the Act.

It was held that:

There is no reason to interfere will be order passedby the Tribunal directing the revenue to refund theamount of Rs. 159.84 cores to the assessee.

From the Cour ts

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Dividend and interest on bonds & Sec.14 A : Canara Bank v/s. Asst. CIT (2014)265 CTR 385 (Kar )

Issue :

When dividend and interest credited directly inAssessee’s bank account, whether provisions of sec.14 A are attracted?

Held :

The income is derived by the dividends u/s.10 (33)and interest on tax free bonds u/s. 10 (15) (h) andinterest on long term finance to infrastructurecompanies u/s 10 (23G). In other words, the personswith whom the amounts are invested by theassessee and crediting the amount to the assessee’saccount by way of bank transfer. Therefore nohuman agency is involved in collecting thesedividends and interest for which the assessee hasto incur expenditure. This is the consequence ofcomputerization online transaction through NEFTRTGS and also demat accounts. The assessingauthority should take note of these developmentsin deciding whether any expenditure is incurred inearning the said income. The discussion by theassessing authority clearly demonstrates theseaspects have not been taken note of and the notionalexpenditure is calculated pre modernization.Therefore, when the assessee has not incurred anyexpenditure for realizing the income, the questionof holding that 2 percent of the gross total incomeis expenditure and that has to be added back to theincome is unsustainable in law.

Penal ty u/s. 272-B: wr ong /nonquotation of P.A. Nos. in TDS Return:Maximum Rs. 10,000/- only. C.I .T. v/s.DHTC L ogist i cs L td. (2014) 221Taxman 83 (Delhi) (Mag)

Issue :

What is the maximum penalty leviable for missingor incorrect P.A. Nos. in TDS Return.

Held :

A.O. found that in 30706 cases P.A. N. was missingor incorrectly stated by deductor. He imposed penaltyof RS. 10,000/- for each default and, thus, penalty

From the Cour ts

of Rs. 30,70,60,000/- (Rupees Thirty CorersSeventy Laces and Sixty Thousand) was levied. Itwas found that CBDT had clarified that penalty u/s.272-B is linked to person, i.e. deductor, and not tonumber of defaults regarding P.A. No. quoted inreturn. Therefore maximum penalty of RS.10,000/-could be imposed on deductor. (CBDT’S letter No.275/24/2007 I.T. (B), Date: 5/8/2008.

Power of Tr ibunal to examine case fromnew approach projected by Assessee -CIT v/s. Smt. Sanghamitra Bharali (2014)265 CTR 555 (Gau)

Issue :

Is an assessee entitled to project the case from afresh angle?

Held :

The issue is subject matter of appeal vis-a-visexamination of issue from a new angle. Scope ofthe relief sought for by an assessee in appealdetermines the subject matter of appeal. If thesubject matter remains the same, the new caseprojected by the assessee to obtain relief sought forin respect of such subject matter should be permitted.Assessee is not precluded from raising a newcontention in the appeal, and the Tribunal is notprecluded from examining and determining thatcontention merely on the ground that the same wasnot put forward at the earl ier stages of theproceeding in the assessment and in the first appeal.In an appeal before the Tribunal, an assessee is freeto make a fresh approach, present his case from adifferent perspective and raise new grounds insupport of the relief sought for by him. Fact that hehad failed to make approach before the first appellateauthority should not stand in the way of his makingin new approach. If the subject matter remain thesame the new case presented by him to obtain reliefsought for in respect of such subject matter shouldin permitted. In the instant case, the A.O. rejectedthe long term capital gain shown by the assessee asbogus. There was no restriction on the power ofthe Tribunal to examine the correctness of suchrejection from angle different from the one adoptedby the A.O. or the first appellate authority.

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Apollo Tyres L td. v. ACIT 149 ITD 756(COC) : Assessment year: 2008-09 OrderDated: 7thMarch, 2014

Basic Facts

The assessee in order to understand the technical/manufacturing process being fol lowed formanufacturing of tyres by AE located in SouthAfrica, had deputed some of its employees to itsAE.Deputed employees remained on payroll ofassessee but worked for AE namely DTIPL andthe salary of those employees were paid by assessee.However, same was subsequently recovered fromDTIPL without a markup by way of a debit note.TPO opined that aforesaid expenditure was forservices rendered by way of deputation ofemployees by the assessee to DTIPL, and,therefore, i t was an international transaction.Accordingly, the TPO found that the assessee oughtto have charged a markup of 5 per cent in additionto reimbursement of actual expenses. The TPO thusmade adjustment to total reimbursement fromDTIPL. The DRP confirmed said adjustment.

Issue

Whether reimbursement received from AE inrespect of deputed employee can be said to betowards services rendered to the AE.

Held

The assessee claimed that the deputation of itsemployees was only to learn technique ofmanufacture and marketing of the associateenterprises. The assessee also claimed that all theemployees deputed remainedon the payroll of theassessee. Revenue had submitted that if the wholeidea was to learn the technique of the associateenterpri ses, then there was no need forreimbursement of the expenditure incurred by theassessee. In the common parlance it is assessee’sresponsibility to provide sufficient technical training

on its own expenditure. The very fact that theexpenditure in the nature of salary, travell ingallowance, etc. was reimbursed by the associateenterprises clearly shows that the employees of theassessee has rendered some kind of services to theassociate enterpri ses. Unless there was acommercial value in the services rendered by theemployees deputed by the assessee, there was nooccasion for the AEs to reimburse the expenditureincurred by the assessee. Therefore, the contentionof the assessee that the employees were deputedonly for the purpose of learning the technique ofthe associate enterprises may not be justified.

On such finding the TPO without considering anycomparable of using or discussing the propermethod to be used as per the Act made adjustmentof 5% mark up on reimbursement of expenditureconsidering the same to be not consistent with arm’slength price.The Tribunal hence held that beforemaking any adjustment the services rendered bysimilarly placed industries needs to be determinedon the basis of the appropriate method prescribedin the Act. Since the lower authorities have notconsidered the comparable cases, the orders of thelower authorities were set aside and the matter wasremanded back to the fi le of the AO for freshdisposal..

DCIT V. S.P.Real Estate Developers (P.)L td. 149 ITD 617(Hyd) - AssessmentYear : 2008-09 Or der dated: 12th

February, 2014

Basic Facts

The assessee is a company engaged in the businessof development and sale of real estate. The assesseehad taken up a real estate development project. Inthe assessment proceedings the AO disallowedexpenditure by invoking provisions of section40(a)(ia) of the Act. In expenditure so disallowedwas actually paid and was not outstanding at the

CA. Yogesh G. [email protected]

Tribunal News

CA. Aparna [email protected]

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end of the previous year. Further the expendituredisallowed was not claimed by the assessee in thecomputation of total income. The expenditure wasadded to the closing stock of Work-in-progress. Theassessee had filed appeal to the CIT(A) who alsoupheld the order of the AO. Accordingly theassessee is in appeal before the tribunal.

Issue

Whether when an expenditure is not debited topr ofi t and loss account, can the same bedisallowed by invoking the provisions of Section40(a)(ia)?

Held

The Hon’ble ITAT following the decision ofHon’ble Andhra Pradesh High Court in the case ofCIT vs. PEC Electricals (P.) Ltd. directed the AOnot to disallow the expenditure if TDS has beenremitted by the assessee before the due date of filingof the return of income. Further, Tribunal held thatif the expenditure is not debited to Profit and loss a/c, the same could not be disallowed by invokingthe provisions of section 40(a)(ia). Accordingly, thisissue was remitted back to the file of AO to decideafresh in the light of observations.

ACIT (TDS) V. Infosys BPO 150ITD 132(BANG.) - Assessment Year : 2007-08 &2008-09 Order Dated: 28th June, 2013

Basic Facts

A survey u/s 133A of the Act was conducted at thebusiness premises of the Assessee. The salarystructure of the employee was examined by the AOfor deduction u/s 192 of the Act. As per its practice,the Assessee included component of leave travelconcession (LTC) and medical reimbursement inmonthly payments to employee irrespective of statusof utilization. If the employee submits proof ofhaving incurred the expenditure towards medicaltreatment then the sum paid or Rs.15000/-whichever is less is excluded from salary. If noproof of expendi ture was submitted by theemployee then the entire sum paid was consideredfor deducting tax under section 192. Similarly ifthe employee submits proof regarding utilizationof the component toward leave travel and subject

to the conditions laid down in sec 10(5) of the Actread with Rule 2B of the Rules, the assessee doesnot consider the leave travel to the extent exemptas salary for the purpose of deduction of tax atsource. The AO considered the assessee as assesseein default in respect of the portion of exemptionclaimed towards LTC and Medical reimbursementfor the reason that the payments had preceded theactual incurring of the expenses and the paymentought to have been only by way of reimbursement.The CIT(A) held in favour of the assessee hencedepartment is in appeal before the Tribunal.

Issue

Whether, amount towards LTC & Medicalexpenses should be paid only after expenditurehas been incur red by the assessee?

Held

The case of the AO is that LTC and Medicalreimbursement should be paid at the time whenexpenditure is incurred or after the expenditure isincurred by way of reimbursement and not at anearlier point of time. If it is so paid, then even thoughthe payment would not form part of taxable salaryof an employee, the employer has to deduct tax atsource treating it as part of salary, is contrary to theprovisions of sec.192(3) of the Act. The ITAT heldthat the reliance placed by the AO on the expression“actually incurred” found in section 10(5) of theAct and proviso(iv) of sec 17(2) of the Act cannotbe sustained. According to the tribunal interpretationof the word “actually paid” is not relevant whileascertaining the quantum of tax to be deducted u/s192 since the employers obligation is only to makea ‘estimate’ of the income under the head “salaries”and such estimate has to be bona fide estimate. Theassessee considered exclusion in respect of paymenttowards medical expenditure and leave travel afterverifying the details and evidence furnished by theemployees. No exemption is granted in the absenceof details and/or evidence. The exemption inrespect of medical expenditure is restricted toexpenditure actually incurred by the employees, orRs. 15,000/- whichever is lower. Further, theexemption is granted even if the payment precedesthe incurrence of expenditure. The requirements/

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conditions of section 10(5) and proviso to section17(2) were meticulously followed before extendingthe deduction/exemption to an employee. Everyeffort was made by the assessee to comply with therequirements of section 192. Accordingly thetribunal held that no tax can be recovered from theemployer on account of short deduction of tax atsource under section 192 if a bona fide estimate ofsalary taxable in the hands of the employee is madeby the employer.

DCIT vs. Velti India (P.) L td.[2014] 163TTJ 691 - Assessment Year : 2009-10Order Dated: 27th February, 2014

Basic Facts

The assessee-company incurred carrier expenditureby making payments to BSNL and Clickatel inorder to transmit bulk SMS data. Clickatel is theservice provider similar to BSNL, situated in SouthAfrica. The AO invoked the provisions of section40(a)(i), since the assessee did not deduct TDS onthe payments made to Clickatel. The AO ignoredthe submissions of the assessee that no technicalservices are involved in utilizing the services ofClickatel, South Africa and it is not payment of feesfor technical services. The CIT(A) deleted thedisallowance made by the AO against which theRevenue is in appeal.

ISSUE

Whether carr ier payments made to the Afr icancompany were fees for technical services subjectto tax deducted at source.

HELD

The Hon’ble ITAT held that the nature of servicesrendered by non-resident i.e. M/s Clickatel is onlyto transmit bulk SMS. The nature of serviceprovided by Cl ickatel requires no technicalknowledge and what was rendered was justtransmission of data which requires no technicalskill. The finding of the CIT (A) that carrier whichis a medium for sending bulk SMS and as suchcannot be considered to be rendering any technicalservice. The CIT(A) held that Clickatel, which is anon-resident carrier, rendered services outside Indiaand no part of the payment made to Clickatel is

chargeable to tax in India. In the circumstance theHon’ble ITAT did not find any good reason tointerfere with the decision of the CIT(A) in holdingthat payment made by the assessee to Clickatel isnot fees for technical services and no TDS isrequired to be made.

Four Soft (P.) L td. Vs. DCIT 164 TTJ561 (Hyd) - Assessment Year : 2007-08Order Dated: 28thMarch, 2014

Basic FactsThe assessee company was engaged in providingservices in enterprise solutions by operating softwareproducts and services in ITES sector for the logisticsand supply chain management market place. Duringthe relevant assessment year the assessee entered intointernational transactions with AE as well as non-AEs. In order to benchmark the internationaltransactions, the assessee adopted TNMM. A searchwas carried out in the public data bases which yielded27 comparable companies with weighted averagearithmetic mean of 14.2 per cent. Since assessee’soperating margin was shown at 14.76 per cent asagainst 14.2 per cent of the comparable companies,the price charged for the international transactionswith AEs was claimed to be within arm’s lengthrange. In transfer pricing proceedings, TPO havingrejected the TP study submitted by the assessee,proceeded to search data bases for selecting newcomparables. In the process the TPO selected 26companies as comparables with an average marginof 26.36 per cent. The TPO further computed theoperating margin for the transactions with AEs andnon-AEs and also allocated the bad debts such as R& D to the AE segment which apparently were inrespect of third party transactions only. Accordingly,certain addition was made to assessee’s ALP. Theassessee challenged the additions proposed in the draftassessment order by fil ing objections with theDispute Resolution Panel (DRP). The DRP rejectedalmost all the contentions of the assessee with regardto the transfer pricing issues except in respect one ofthe comparables selected by the TPO. Thus, the DRPgranted partial relief to assessee.

IssueWhether the companies selected by the TPOcould be considered for working out the ALP

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in r espect of the assessee’s inter nat ionaltransactions.

Held

The Tribunal after reviewing the objections takenby the assessee in respect of companies selected bythe TPO as comparables. noted that as per the TPOorder the assessee has been categorized as softwaredevelopment service provider.Therefore theTribunal concluded that assessee being a softwaredevelopment service provider, a company whichderives income from both product and softwareservices cannot be treated as comparable. Theyfurther also held that considering the size of theassessee a company also cannot be considered ascomparable having regard to the enormity of its size,turnover, brand value, scale of operation, diversifiedactivities and ownership of intangibles.

Toscana Lasts L td. Vs. ITO164 TTJ145(Del) - Assessment Year : 2000-01Order Dated: 12thMarch, 2014

Basic Facts

In the assessment order u/s 143(3), the AO haddisallowed administrative expenses paid to oneparty, unsaleable stock written off and unpaidexpenses. The AO initiated penalty proceedingsunder section 271(1)(c ) and levied penalty underthat section. The CIT(A) confirmed the penalty solevied. The assessee is accordingly in appeal beforethe Tribunal.

Issue

Whether penalty levied for the additions madeis justified ?

Held

The tribunal found that the assessee had filed theagreement, debit note for expenses & ledger accountof the party to whom administrative expenses werepaid as also the confirmation of the party. TheRevenue had not disputed the genuineness of thosedocuments. Further the facts of this payment wasdisclosed in the Return of income as well as in theaccounts and auditor had also discussed the samein audit report. Accordingly the tribunal held thatthe claim was transparent and there was noconcealment. Regarding inaccurate particulars thetribunal held that since the assessee has huge carriedforward losses & had filed NIL return, there cannotbe a motive or incentive for the assessee to makeany bogus claim in the return of income. In respectof stock written off the tribunal held that just becausethe assessee failed to obtain approval from theExcise authorities the claim cannot be said to bebogus. As far as write off, the tribunal held thatpenalty cannot be levied by simply stating thatliability is unascertained. The Tribunal accordinglyheld that there is no concealment of income or filingof any inaccurate particulars of income for whichpenalty should be levied particularly in view of thefact that assessee had huge accumulated losses.

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Tr ibunal News

48

contd. from page 461 Glimpses of Supreme Cour t Rulings

was not within the control of the appellants, theycould not execute the sale deed and the sale deedwas registered only on September 24,2004, after thesuit challenging the validity of the WILL, had beendismissed. On the facts and in view of the definitionof the term ‘transfer’, some right in respect of thecapital asset had been transferred in favour of thevendee and, therefore, some right which theappellants had, in respect of capital asset in question,had been extinguished because after execution of theagreement to sell it was not open to the appellants tosell the property to someone else in accordance withlaw. A right in personam had been created in favour

of the vendee, in whose favour the agreement to sellhad been executed and who had also paid Rs.15 lakhsby way earnest money. The intension of theLegislature in enacting Section 54 is to give theassessee relief in the matter of payment of tax onlong-term capital gains. The appellants were entitledto relief u/s 54 of the Act in respect of the Long termcapital gains which they had earned in pursuance oftransfer of their residential property and used forpurchase of a new asset/residential house.

[Sanjeev Lal vs. CIT (2014)( 365 ITR 389)]

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In this issue we are giving gist of a very importantjudgment of Hon’ble Gujarat High Court in thecase of Shanti Enterpr ise, where in spite ofassessee succeeding before Tribunal and Hon’bleCourt in quantum proceedings, the departmentrefused to pass an order deleting penalty on theground of limitation u/s 275(1A) of the Act due towhich the assessee had to move Hon’ble GujaratHigh Court by filing a writ petition.

We hope readers would find it useful.

In the High Cour t of Gujarat at Ahmedabad

Special Civil Application No. 5717of 2014

Shanti Enterpr ise… … Petitioner (s)

Versus

Asstt. Commissioner of Income Tax & 1… …Respondent(s)

Appearance:Mr. J.P. Shah, Sr. Advocate with Mr. Manish J.Shah, Advocate for the PetitionerM r.Sudhi r M . M ehta, Advocate for theRespondent

Coram : Honourable Mr. Justice Jayant Patel

and

Honourable Mr. Justice C.L . Soni

Date : 17/10/2014

Gist only

Facts :

The writ petition was filed under article 226 of theConstitution of India with a request to set-aside theorder rejecting the revision petition filed by thepetitioner u/s 264 of the Act and also to quash theorder levying penalty u/s 271(1)(c) passed by thefirst respondent and also to claim refund of penaltyof Rs.1.13 crores with interest. The brief facts areas under:

CA. Sanjay R. [email protected]

Unreported Judgements

i) The petitioner fi led his return of incomedeclaring loss of Rs.4.63 lakhs for A.Y. 2005-06, A.O. completed assessment u/s 143(3) ofthe Act on 31/12/2007 by making addition ofRs.3.02 crores on account of suppression ofsales and Rs.8.11 lakhs on account of unprovedsales return. On appeal against the said orderthe petitioner lost before CIT(A) and it filed anappeal before ITAT.

ii) Pending the appeal before ITAT, the assessingofficer imposed upon the petitioner penalty ofRs.1.13 crores by order dated 12/3/2010 u/s271(1)(c) of the Act.

iii) The Tribunal allowed the quantum appeal ofthe petitioner by order dated 22/2/2011. In themeanwhi le the amount of penal ty wasrecovered from the petitioner by adjustingagainst refund due to petitioner for A.Y. 2004-05.

iv) Against the order of Tribunal in quantum,department filed an appeal before Hon’ble HighCourt which was dismissed on 13/9/2012 as aresult of which the petitioner thus becameentitled to refund of the penalty with interest.

v) The petitioner wrote many letters to thedepartment to refund the penalty. However,since it did not yield any result, the petitionerfiled revision application u/s 264 of the Actagainst the order of penalty, which came to berejected by the Commissioner on the groundof delay.

vi) Before Hon’ble High Court, the petitionercontended that since it succeeded before theTribunal in quantum by virtue of provisions ofsection 275(1A) of the Act, the respondents


were required to delete the penalty and refundthe amount of penalty.

Rival Contentions

i) The department contended that the petitionerhad made request to cancel the penalty only on3/8/2012 and by that time, more than six monthshad already lapsed after the order of the Tribunaland therefore no order cancelling penalty couldhave been made u/s 275(1A) of the Act. It alsocontended that though the petitioner was servedwith the order of the penalty, still however, tocover up the lapse on the part of the petitionerof not preferring revision petition before CITit said that it was not served with the order ofthe penalty.

ii) The petitioner contended that having succeededbefore the Tribunal in quantum, it is entitled torefund of the penalty amount recovered fromit. Such obligation of refunding the amount ofpenalty flows from the provisions of section275(1A) of the Act. It also contended that afterdepartment lost before High Court in quantum,it was expected of the department to make anorder of cancelling the penalty and to refundthe penalty amount recovered as required u/s275(1A) of the Act even without making theclaim for refund of penalty amount. It was alsocontended that the assessee is entitled to suchrefund of penalty as a result of the order passedin favour of the assessee in the appeal or in anyother proceedings under the Act. It was onlywhen the request made by the petitioner forrefund of penalty amount was not acceded to,the petitioner was constrained to file the revisionapplication u/s 264 of the Act against the orderof penalty. The Commissioner rejected therevision application on the ground of delayinstead of doing justice to the petitioner bydi recting the refund of penal ty. TheCommissioner ought to have entertained therevision application or exercised the otherpowers under the Act for refund of the penaltyespecially when the very base of imposing

penalty upon the petitioner was removed bythe order of the Tribunal and confirmed by theHigh Court in the quantum proceedings.

iii) The Advocate on behal f of departmentcontended that the powers u/s 275(1A) of theAct are not for the purpose of refund of penaltyamount on account of subsequent orders passedin appeal of the assessee. According to him, ifthe petitioner wanted the powers u/s 275(1A)to be exercised for cancelling the penalty, thepetitioner was required to move the concernedauthority within a period of six months asprovided in the section. According to him therefund of penalty amount is not automatic buttimely action is required for getting the orderof penalty cancelled. Since, such claim was notmade within the time limit, the petitioner evencannot claim interest on the amount of penalty.Further, the petitioner did not file appeal againstthe order of penalty and present petition is tochallenge the order passed in the revisionapplication. Since CIT has found that nosufficient cause was made out by the petitionerfor condoning delay in fi ling the revisionapplication, this court may not interfere withthat discretionary order of Commissioner inexercise of the powers under article 226 of theConstitution of India.

Decision of the Hon’ble High Cour t

The Court recorded the following facts and held asunder:

i) The order of the penalty was made against thepetitioner on the basis of the assessment ofincome u/s 143(3). The order of penalty waspassed when quantum appeal of the petitionerwas pending before Tribunal, who subsequentlyallowed the appeal of the petitioner and as aresult of which the order of the AssessingOfficer containing the addition was quashed.The Hon’ble High Court observed that penaltyimposed by the department u/s 271(1)(c) wasrequired to be cancelled by making necessary

Unrepor ted Judgements


order u/s 275(1A) of the Act and the penaltyamount recovered from the petitioner wasrequired to be refunded to the petitioner. TheHon’ble Court held as under :

“8. What is provided by section 275(1A) isthat the order imposing or enhancing orreducing or cancelling the penalty maybe passed on the basis of the assessmentas revised by giving effect to the order inappeal. The concerned authority was thusrequired to make speci fic order ofcancelling the penalty by giving effect tothe order in appeal made in favour of thepetitioner. However, failure of assessingofficer or concerned authority to passsuch order would not mean that theassessee has no right of refund on hisbecoming successful in appeal against theorder of assessment. Further, if there isfailure to exercise power under section275(1A) within outer limit of six months,the assessee would be justi fi ed inapproaching before this Court underArticle 226 of the Constitution. In ourview, word ‘MAY’ should be construed tocreate an obligation upon the authorityto pass consequential order uponconclusion of the litigation”.

9. … … … … … … … … … .

10. Though time limit of six month is providedfor the order contemplated to be passedof imposing, enhancing, reducing,cancell ing penal ty or dropping theproceedings for imposition of penalty forgiving effect to any order passed in appeal,but when such order is to be passed infavour of the assessee, time limit forpassing such order by the concernedofficer should not come in the way of theassessee for cancelling the penalty on hisgetting success before the higher forumin appeal merely because the concerned

officials failed to discharge his duty orgiving effect to the order made in theappeal in favour of the assessee.

11. We find that when the petitioner hadapproached the Commissioner undersection 264 of the Act, seekingcancel lation of penal ty, instead ofrejecting his revision application, on theground of delay, the petitioner could havebeen given relief by making necessaryorder for cancelling penalty for givingeffect to the order made in the appeal inhis favour.

12. In above such view of the matter, we findthat since the concerned authorities whowere under obligation to pass necessaryorder for cancellation of penalty by givingeffect to the order made in favour of thepeti ti oner since fai led in passingnecessary order for cancelling of penaltyand for refund of the penalty amount tothe petitioner, the petitioner is justified ininvoking the powers of this Court underArticle 226 of the Constitution of Indiaseeking direction to the respondents torefund the amount of penalty by givingeffect to the order made in the appealpreferred by the petitioner and confirmedby this Court.”

As regards claim of interest on the amount tobe refunded, the same was considered in favourof the assessee u/s 244A by following decisionof the Hon’ble Supreme Court in the case ofSandvik Asia Ltd. v/s CIT reported in (2006)2 SCC 508 and accordingly the Hon’ble HighCourt admitted the writ petition and directedthe department to refund the penalty amountof Rs.1.13 crores within a period of two monthsfrom the date of receipt of this order with intereston such amount of penalty as per the provisionsof section 244A(1)(b)of the Act.

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Unrepor ted Judgements


Issue:The Assessee Co. has made payment of Employees’Contribution of PF & ESI by a small delay of 7days on account of financial difficulties. The A.O.has treated employees’ contribution as Income u/s2(24)(X) read with sec. 36(1)(va) of the IncomeTax Act & has disallowed the said expenditure incomputing the Total Income of the Assessee.

Proposition:It is proposed that if employees’ contribution is notdeposited by the due date prescribed under therelevant Acts & is deposited late, such contributionto PF & ESI will be eligible as deduction even ifthe payment is deposi ted after the due datementioned under the relevant Acts but before thedue date of filing the return u/s 43B of the IncomeTax Act, 1961.

View Against the proposition:Let me refer to Section 2(24)(X) of the Income TaxAct, 1961; any sum deducted from the salary ofthe employee as his contribution to any providentfund or superannuation fund or ESI or any otherapproved welfare fund of such employee shall betreated as an income of the employer.

Conditions for allowance under Sec 36(1)(va):

· Contributions to any provident fund orsuperannuation fund or any fund set up underEmployees’ State Insurance Act, 1948 or anyother fund for welfare of such employees,received from employees if the same are creditedto the employee’s account in relevant fund orfunds before due date under the respective Acts.

Let me refer to the case of National PlasticIndustries Ltd. Vs. ITO 11 SOT 415 (Mumbai)wherein the appel lant deposited employees’contribution towards PF & ESIC after due date asprescribed under respective legislations. As per theprovision of section 2(24)(X), employees’contribution is deemed to be the Income of theAssessee and if the contribution is deposited within

the due date under the respective Acts, Assesseewill be allowed deduction under section 36(1)(va)of the Act. The provisions of Sec. 43B are notattracted in case of employees’ contribution towardsPF and ESIC. Therefore, time-limit can not beextended beyond the due dates as prescribed inrespective Act. So, deduction for employees’contribution deposited belatedly but before the duedate of filing of return can not be allowed.

When the matter came up before the Supreme Court,it was argued in the case of CIT vs. Alom ExtrusionsLtd. (319 ITR 306) that Sec. 43B(b) speaks onlyabout employer’s contribution and therefore deletionof second proviso to Sec. 43B w.e.f. assessmentyear 2004-05 has no impact on the employees’contribution, which is governed by Sec. 36(1)(va).Therefore employees’ contribution remitted beyondstipulated date (and the grace period of 5 days) isnot allowed as deduction.

In the case of ACIT vs. Viraj Forgings Ltd. 20 SOT129, it was argued that if any payment towardsprovident fund, ESIC or any other Welfare fund ofthe employee received by the assessee from any ofhis employees to which Sec. 2(24)(X) is applicable,deduction under section 36(1)(va) shall not beeligible if the Assessee does not credit an employees’contribution to the employee’s account in therelevant fund or funds on or before due date or thegrace period, if any allowed under the relevant law,whichever is later and since sums are disallowableunder section 36(1)(va), Provisions of Sec. 43Bwould not come into play.

Gujarat High Court’s order dated 26-12-2013 intax appeal No. 637/2013 in the case of CIT vsGujarat Road Transport Corporation held thatwith respect to the sum received by the assesseefrom any of his employees to which provisions ofsub-clause(X) of clause (24) of Section (2) applies,the assessee shall be entitled to deduction incomputing the income referred to in Section 28 withrespect to such sum credited by the assessee to the

CA. Kaushik D. [email protected].

Controversies


employees’ account in the relevant fund or fundson or before the “due date” mentioned in theexplanation to Section 36(1)(va). And if such sumswere not credited by the assessee to the employees’accounts in the relevant fund or funds (ProvidentFund and ESI Fund) on or before due date as perthe explanation to Section 36(1)(va) of the Act,Assessee will not be allowed deduction.

View in Favour of the proposition:Jurisdictional Hon’ble ITAT, Ahmedabad, Bench-C, ITA-2757/A’bad/2010 in the case of New AsarvaChemical Industries Pvt. Ltd. dated 17.01.2011 heldthat employees’ contribution towards PF-ESIdeposited after the due date prescribed under therelevant Act but before the due date for furnishingthe Return of Income under Sub Sec.1 of Sec. 139of the Act are allowable u/s 36(1)(va) read with Sec.2(24)(X) and Sec. 43B of the Act.

Hon’ble Karnataka High Court in the case of ANZInformation Technology P. Ltd. followed by earlierdecision in the case of CIT vs. Sabari Enterprises,298 ITR 141 (Kar.) held that deposits made by theemployer of the employees’ contribution belatedlycan not be treated as “ Income “ of the assessee u/s36(1)(va) read with Sec. 2(24)(X) in view ofprovisions of Sec. 43B of the Act.

Hon’ble Delhi High Court in the case of CIT vs.AIMIL l td. (Delhi), ITA No. 106/2008 dated23.12.2009 held that amount received by anassessee from employees towards PF Contributionetc. shall be “ Income “. Sec. 36(1)(va) providesthat if such sums are credited to the employeesaccount in the relevant fund on or before due datespecified in the legislation, the assessee shall beentitled to a deduction. The Second Proviso to Sec.43B(b) provides that any sum paid by the assesseeas an employer by way of contribution to anyProvident Fund shall be allowed as deduction onlyif paid on or before due date specified in Sec.36(1)(va) of the Act. After the Omission of theSecond Proviso w.e.f. 01.04.2004, the deductionis allowable under the First Proviso if the paymentis made on or before due date for furnishing thereturn of Income.

As regards employer’s and employees’ contributiontowards PF/ESI, ITAT Ahmedabad Benches have

been consistently following the decision of Hon’bleDelhi High Court in the case of CIT vs. P.M.Electronics Ltd., 220 CTR 635 (Delhi), whereinfollowing the decision of Hon’ble Apex Court inthe case of CIT vs. Vinay Cement Ltd. CTR (SC)268, the Hon’ble Madras High Court in NexusComputer (P) Ltd. 219 CTR (Mad.) 54 holding thatemployer/employees’ contribution towardsProvident Fund if payments are made after the duedate prescribed under the Employees ProvidentFund Act and Rules made thereunder and beforethe due date for furnishing the Return of Incomeunder Sub Sec. 1 of Sec. 139 of the Act areallowable under Sec. 36(1)(va) read with Sec.2(24)(X) and Sec. 43B of the Act.

Summation:Delhi High Court in case of CIT vs. AIMIL (2010)35 DTR 68 (Del.) held that i f the employees’contribution is not deposited by the due dateprescribed under the relevant Acts and is depositedlate, the assessee can get the benefit if the actualpayment is made before the return is filed. Sumdeducted by employer as employees’ contributionto PF & ESI shall be eligible as deduction even ifthe payment is deposited after due date mentionedunder the relevant Acts but before the due date offiling the return.

Due date of Deposit of PF as per the Provident Fundand Miscellaneous Provisions Act, 1952 is 15 daysfrom the end of the month in which deduction ismade. However, 5 days grace period is allowed fordeposit of the same. i.e. 20 days from the end ofthe month instead of 15 days.

Due date of Deposit of ESI as per the EmployeesState Insurance Act is 21 days from the end of themonth in which deduction is made. No grace Periodis provided in this case.

In the case of CIT vs. Modi Spinning & WeavingMills Co. Ltd. (2007) 292 ITR 479 (Del.) it is heldthat a payment within grace period allowed by therelevant legislation should be treated as payment intime.

In case of CIT vs. Usha (India) Ltd. (2009) 184Taxman 83 (Del.) and CIT vs. Lakhani RubberUdyog Ltd. (2009) 184 Taxman 236 (P&H) it isheld that Payments made to Provident Fund and

Controversies


ESI within grace period under relevant StatutoryActs cannot be disallowed under Section 43B.

In case of Alom Extrusion Ltd. 319 ITR 306, 185TAXMAN 416 it was held that “ the deletion ofsecond proviso to Section 43B by the Finance Act2003 is retrospective and it would operate with effectfrom 01/04/1988. Therefore, by way of the firstproviso, an incentive/relaxation was sought to begiven in respect of tax, duty, cess or fee by explicitlystating that if such tax, duty, cess or fee are paidbefore the date of filing the return under the Act (duedate), then the assessee(s) would be entitled todeduction. However, this relaxation/incentive wasrestricted only to tax, duty, cess or fee. It did notapply to contributions to labour welfare funds. Thereason appears to be that the employer(s) should notsit on the collected contributions and deprive theworkmen of the rightful benefits under the socialwelfare legislations by delaying payment ofcontributions to the welfare funds. However theSecond Proviso resulted in implementation problems,which resulted in the enactment of the Finance Act,2003, deleting the second proviso and bringing aboutuniformity in the first proviso by equating tax, duty,cess and fee with contribution to welfare funds. Oncethis uniformity is brought about in the first provisoin the Finance Act, 2003, which is made applicableby the Parliament only with effect from 01/04/2004,would become curative in nature and hence it wouldapply retrospectively with effect from 01/04/1988.Secondly, it may be noted that in the case of AlliedMotors (Pvt.) Ltd. vs. CIT/1997/224 ITR 677/97, thescheme of Section 43B came to be examined.”

“The Court, in the case of Allied Motors (Pvt.) Ltd.224 ITR 677 (SC) (Supra), held that when a provisois inserted to remedy unintended consequences andto make the section workable, a proviso whichsupplies an obvious omission in the section andwhich proviso is required to be read into the sectionto give it a reasonable interpretation, it could beread to be retrospective in operation, particularly togive effect to the section as a whole. Accordinglythe first proviso to Section 43B was curative innature and hence, retrospective in operation witheffect from 01/04/1988”.

Hon’ble Supreme Court in the case of CIT vs. VinayCement Ltd. reported in 213 CTR (SC) 268 heldthat Contribution made to Provident Fund beforefiling the return could not be disallowed u/s 43B ofthe Income Tax Act.

If the employees’ contribution is not deposited bythe due date prescribed under the relevant Acts andis deposited late, the employer not only pays intereston delayed payment but can incur penalties also,for which specific provisions are made in theProvident Fund Act as well as ESI Act. Therefore,the Act permits the employer to make the depositwi th some delays, subject to the aforesaidconsequences. In so far as the Income Tax Act isconcerned, the Assessee can get the benefit if theactual payment is made before the return is filed, asper the principle laid down in Vinay Cement.

Ahmedabad Tribunal also took note of the SpecialBench decision of ITAT, Chennai Branch in caseof Kwality Milk Foods Ltd., 100 ITD 199 held that“even in respect of Employees Contributioncollected by Employer, if such payments are madeover by the due date of filing the Return of Income,they would be eligible for deduction u/s 36(1)(va)read with Section 43B of the Act.”

It is submitted that there is judicial controversywhich is not yet settled in respect of whetheremployees’ contribution to PF & ESI which istreated as Income in the hands of employer, if it ispaid late but before the last date for filing the Returnof Income, deduction would be allowed? We haveon one hand the decision of Supreme Court in thecase of CIT vs Alom Extrusions Ltd. (319 ITR 306)which held that in such a situation the deductionwould not be allowed. However, we also havedecision in the case of Vinay Cement 213 CTR 268which has laid down the principle that if the actualpayment is made before the due date of filing ofreturn, deduction will be allowed. In my humbleopinion, when two views are possible then the onewhich is favourable to the Assessee shall be adoptedand hence employees’ contribution to PF & ESIshould be allowed as deduction u/s 43B of theIncome Tax Act, 1961.

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Controversies


Tax treatment of Government Subsidy

DCIT v. Inox Leisure L td.(351 ITR 314) (Guj)

xxx…

8. Having thus heard learned counsel for theparties with respect to question No.1, we maynotice the relevant features of the incentivescheme of the State Government. The preambleto the resolution records that based on the newtourism policy and in order to give boost totourism sector by attracting higher investmentin the areas with tourism potential and togenerate employment opportunities, the StateGovernment has introduced the packagescheme of incentives for tourism projects forthe period 1995 to 2000. Under Clause 3 ofthe scheme, only a new tourism uni t orexpansion of an existing unit was made eligiblefor incentives. It was further provided that thenew project should have separately identifiablecapi tal investment and should not be anexpansion of the existing project. Expansionof an existing project would also be eligiblefor incentives provided the existing tourism unitincreases its investment in fixed capital orcapacity by at least 50% or more. Clause 4.4of the scheme defines ineligible investmentwhich included the working capital, goodwill,pre-operative expenses etc. Clause 4.5 defineseligible capital investments to include lands asrequired for the project, building used foreligible unit including administrative buildingetc., plant and machinery, the cost ofdevelopment of the environment of the locationof the eligible unit, installation charges etc.

xxx…

Advocate Tushar [email protected]

Judicial Analysis

10. From the above noted provisions of the schemeit can be clearly seen that the entire purpose ofgranting tax exemption was for giving the boostto the tourism sector. This was to be achievedby attracting higher investment in areas withtourism potential. In order to achieve suchpurpose, exemption from various taxes as maybe applicable was granted. It is true that theexemption was to be computed in terms of taxotherwise payable by the industry. However,the purpose of such exemption was to meet withthe capital outlay already undertaken by theassessee. This clearly comes out from variousprovisions of the scheme. For example, thescheme was applicable only to the new projector to a existing project provided investment infixed capital or capacity was increased atleastby 50%. Thus, the very eligibility for seekingexemption was linked with new investmentbeing made in fixed capital. Further though thescheme envisaged a certain period spanning for5 to 10 years during which such exemptioncould be availed depending on the category ofthe unit, such exemption would cease themoment the total incentives touched 100% ofthe eligible capital investments. In other words,the upper limit of total incentive which the unitcould receive from the State Government in theform of tax waiver would not exist 100% ofthe eligible capital investment regardless of theresidue of the period of its exemption eligibilityas per the scheme. From the combined readingof salient features of the scheme, we have nodoubt in our mind that the incentive was beingoffered for recouping or covering a capitalinvestment or outlay already made by theassessee.


11. In case of Sahney Steel & Press Works Ltd.(supra) the Apex Court held and observed thatthe character of the subsidy in the hands of therecipient whether revenue or capital will haveto be determined having regard to the purposefor which the subsidy was given. It is of coursetrue that the said decision, certain sales taxexemption was treated as revenue in nature.However, the said decision came up forconsideration subsequently before the ApexCourt in case of Ponni Sugars & ChemicalsLtd. (supra) wherein it was observed that thecharacter of receipt of a subsidy in the handsof the assessee has to be determined withrespect to the purpose for which the subsidy isgranted. In other words, one has to apply thepurpose test. The point of time at which thesubsidy is paid is not relevant. The source isimmaterial. If the object of the subsidy is toenable the assessee to run the business moreprofitably then the receipt is on revenueaccount. On the other hand, if the object of theassistance under the scheme is to enable theassessee to set up a new unit or expand theexisting unit then the receipt of subsidy wouldbe of capital account.

12. Considering the above decision of the SupremeCourt and applying the ratio laid down thereinto the scheme under consideration, we are ofthe opinion that the Tribunal committed noerror.

xxx…

Johnson Matthey India (P) L td. Vs. Addl. CIT(ITA No. 952/Del/2011, dated 12th August, 2014)

xxx…

8. Having gone through the orders of theauthorities and material available on record. Wef ind that the assessee was awarded anentitlement certificate under Rule 28C of theHaryana General Sales Tax Rules, 1975. Thiscerti ficate entitled the assessee to a taxconcession for a period of ten years. The sales

tax subsidy as per the assessee was granted byHaryana Government to the assessee under theinitiative of Government to promote investmentin certain areas of Haryana. The assesseeclaimed that since i t had establ i sh i tsmanufacturing unit in Manesar (Haryana), itbecame eligible for the said incentive as capitalreceipt which during the year was Rs.2,00,64,000/-. The sales tax concession isavailable to such industrial unit which dulyfulfills the prescribed conditions shown underRule 28C of Haryana General Sales Tax Rules,1975 Section 25A of the Haryana GeneralSales Tax Act deals with deferment of tax andprovides that the State Government may deferpayment of tax by specified class of industriesin the interest of industrial development of theState.. From the decisions relied upon, we findthat the Delhi Bench of the Tribunal in the caseof Maruti Suzuki India Ltd. vs. ACIT (supra)has occasion to examine the objective of thegrant of similar subsidy by the Industrial Policy1999 issued by the Department of Industries,Govt. of Haryana as well as the related rules ofHaryana General Sales Tax Rules 1975 andthe decision of High Powered Committee at itsmeeting on 14.6.2001 granting sales tax onconcession, whereby the assessee was requiredto pay 50% of the tax collected and retain 50%.The Delhi Bench has also examined entitlementcertificate issued to the assessee under Rule 28C of the Haryana General Sales Tax Rules 1975to avail the sales tax concession to be allowed.The Delhi Bench of the Tribunal has alsodiscussed several decisions cited before itincluding decision of Hon’ble Supreme Courtin the cases of Ponni Sugars and Chemical Ltd.(supra) and in the case of Sahney Steel andPress Works Ltd. (supra). The bench has alsodiscussed the decision of Hon’ble SupremeCourt in the case of Seaham Harbour DockCo. vs. Crook (1931) 16 TC 333. For a readyreference para 47 to 48 of the said decision ofDelhi Bench of the Tribunal in the case of

Judicial Analysis


Maruti Suzuki India Ltd. (supra) are beingreproduced hereunder :-

xxx…

9. Discussing the issue in detail the Delhi Benchof the Tribunal in the above cited case of MarutiSuzuki India Ltd. has decided the issue infavour of the assessee with this finding that thesubsidy in question viewed from the angle ofprovisions of section 25A of the HaryanaGeneral Sales Tax Act read with Industrialpolicy 1999 of the Govt. of Haryana, are partof capital receipt given by the State Govt. forthe purpose of meeting the objective ofIndustrial Policy 1999 to attract investment andto ensure growth of the existing industries sothat they can generate employment in industrialand allied sector by 20% It was held that theentire package of incentive and concessionshould be read as focusing and providingincentive for investment of industrial sector toachieve effective, meaningful and speedydevelopment of the State.

10. In the case of Maruti Suzuki India Ltd. theassessee had received sales tax subsidy of Rs.16,04,04,733/- during the asstt. year 2005-06.According to the assesee the said receiptrepresented to be capital in nature. Therefore itshould be excluded from the taxable income.Before the Ld. CIT(A) the subsequent decisionof Hon’ble Supreme Court in the case of CITvs. Ponni Sugars and Chemical Ltd. (supra)was cited and the Ld. CIT(A) following theratio of the said decision of Hon’ble SupremeCourt decided the issue in favour of the asseseewhich was questioned by the revenue beforethe Tribunal. It was argued that their lordshipof Hon’ble Supreme Court in the case of PonniSugars and Chemicals Ltd. (supra) have againreiterated that the purpose for which the subsidyis given is only relevant for determining itsnature. The purpose of subsidy was to promoteindustrial development in the State bypromoting an establishment of new industrialuni t or substantial expansion of existing

Judicial Analysis

industrial units. Almost similar are the facts inthe present case before us as well as similar arethe industrial pol icy 1999 issued by thedepartment of industries, Govt. of Haryana andthe relevant rule 28C of General Sales Tax Rule1975 as applicable in the case of presentassessee, whereby the assessee was requiredto pay 50% of the tax collected and retain 50%subject to other conditions. Similarly in the caseof present assessee was issued entitlementcertificate under Rule 28C of the Haryana SalesTax Rule 1975 to avail the sales tax concessionduring the period. The Hon’ble Supreme Courtin the case of Ponni Sugars & Chemicals Ltd.has laid down some principles after elaboratelydiscussing its earlier judgment in the case ofM/s. Sahney Steel & Press Works (supra). Inview of those principles the Tribunal in the caseof Maruti Suzuki has decided an identical issuein favour of the assessee under almost similarfacts of the case. Following the said decisionwe in the present case decide the issue infavoaur of the assessee with this direction tothe AO to allow the claimed sale tax subsidyreceipt amounting to Rs.2,00,64,000/- receivedby the assessee during the year as capital receiptfor the assessment. Ground No. 2 is thusallowed.

xxx…

New Chemic I ndustr ies L td. v. ITO (I TANO.7181/MUM/2012, dated 04/08/2014)

xxx…

2. The first ground is with respect to amount ofRs.20.00 lacs received as cash subsidy fromState Government under the MaharashtraPackage Scheme of Incentives 1988, whichwas considered as income by the A.O. Inappeal it was the claim of the assessee that thesame cannot be taxed as the receipt is in thenature of capital receipt. Reliance was placedon several decisions to contend that the saidamount cannot be treated as revenue receipt.After considering the submissions of theassessee and after going through the conditions


of the scheme, Ld. CIT(A) has come to theconclusion that the receipt is in the nature ofcapital. However, relying upon the provisionsof Explanation 10 to section 43(1) which isadded w.e.f. 1/04/1999, Ld. CIT(A) has cometo a conclusion that the value of the assets isrequired to be reduced to the extent of subsidyand accordingly he has directed the AO toreduce the amount of subsidy from the assetsand depreciation should be allowed afterreduction of such amount.

3. The assessee is aggrieved, hence, has raisedGround No.1.

4. We have heard both the parties and theircontentions have carefullybeen considered. Itwas pleaded by Ld. AR that this issue is directlycovered by the decision of Mumbai Tribunalin following cases:

1. Decision dated 17/09/2010 in ITA No.1629/Mum/09 in the case of Godrej Agrovit Ltd. Vs.ACIT, copy placed on record and our attentionwas drawn to the following observations:

xxx…

“In the case of P.J.Chemicals Ltd. (supra),Hon’ble Supreme Court in the context ofsection 43(1) of the Act has held that if a subsidyis granted wi th the object of inducingentrepreneurs to move to backward area andestablish industry and where subsidy is grantedas percentage of fixed capital cost taken as basisfor determining the subsidy, that would onlybe a measure adopted under the Scheme toquantity subsidy. The Court therefore held thatit was not a payment directly or indirectly tomet any portion of the actual cost. Languageof Explanation 10 to section 43(1) is alsoidentical; and therefore, by virtue of insertionof Explanation 10, it cannot be said that decisionin the case of P.J. Chemicals (supra.) has beensuperseded by amendment in law. This is tilereasoning adopted by Vishakhapatnam Benchof ITAT. Respectfully following the same, wehold that the amount of subsidy cannot be

reduced from the block of asset for computingdepreciation. With regard to the arguments oflearned Departmental Representative thatproviso to Explanation 10 makes it clear thatirrespective of the nature of the subsidy, amountof subsidy has to be reduced from the actualcost of capital asset, we are of the view that thesame is applicable in a case where subsidy isgranted with an intention to subsidize the costof the capital in the form of capital asset andwhere some of capital assets are depreciableasset and some are not capital asset on whichdepreciation can be allowed. It is only in suchsituation that apportionment has to be made tothe cost of depreciable asset. For the reasonsstated above, we allow ground No. I raised bythe assessee.

2. Decision in the case of Capital Food ExportPvt. Ltd., vs. ACIT , 139 ITD 584 (Mum). Ourattention was drawn to the fol lowingobservations:

xxx…

3.2 We have perused the records and consideredthe rival contentions carefully. The dispute isregarding treatment of subsidy received by theassessee f rom the Government in thecomputation of depreciation on plant andmachinery. The AO reduced the subsidyamount from the cost of plant and machineryand accordingly depreciation was disallowedto that extent. CIT(A) confirmed the order ofAO. On careful perusal of record we find thatthere is nothing on record to show that subsidyhad been granted by the govt, towards anyspecific asset or plant and machinery. The letterdated 22.12.2006 referred to by the Id. CIT(A)only shows that subsidy was for setting up of aunit for manufacture of ready to eat foods. Theletter does not show that the subsidy had beengiven speci f ical ly to acquire any asset.Therefore, merely because amount receivedhad been utilized for acquisition of plant andmachinery, it cannot be said that subsidy wasto meet cost of any asset. It is a settled legal

Judicial Analysis


position that only subsidy granted specificallytowards a particular asset has to be reducedfrom cost of that asset while computingdepreciation. Since there is no material to showthat the subsidy in this case had been grantedto meet cost of plant and machinery thedisallowance of depreciation corresponding tosubsidy cannot be upheld. The order of CIT(A)is, therefore, set aside and claim of the assesseeis allowed”.

5. However, on the other hand, Ld. DR reliedupon the order passed by Ld. CIT(A).

6. In this view of the situation, after hearing boththe parties we found that, the issue raised bythe assessee is di rectl y covered by theaforementioned two decision. No contrarydecision was brought to our noti ce.Respectfully following the same we decideGround No.1 in favour of the assessee.

xxx…

M/s. Gloster Jute Mills L td. v. ADdl.CIT (ITANo.687/Kol/2010, dated 02/07/2014)

7. We have heard the rival submissions andperused the material available on record. Ld.Counsel of the assessee submitted that this issueis squarely covered in favour of the assesseeby the decision of the Hon’ble Punjab &Haryana High Court in the case of CIT –vs.-Sh. Sham LalBansal in ITA No. 472 of 2010,wherein i t had been held that interest subsidyreceived under TUF Scheme is capital in nature.Ld. Counsel for the assessee has furthersubmitted that this issue is covered in favour ofthe assessee by the decision of the Hon’bleApex Court in the case of CIT – vs.-PonniSugars & Chemicals Ltd. reported in (2008)306 ITR 392 (SC) wherein it has been heldthat it is the purpose of the incentive whichdecides its nature and not the modality or thesource thereof. That this issue is also favourablycovered by the decision of Hon’blejurisdictional High Court in the case of CIT –vs.-Rasoi Ltd. (2011) 335 ITR 438 (Cal .),

wherein it has held that subsidy received forexpansion of capacities, modernization andimproving the marketing capabilities to tide overthe crises for promotion of industry in the stateis to be treated as capital in nature. Thatsimilarly, the issue is covered in the case ofShree Balaji Alloys &Ors. –vs.- CIT (2011)333 ITR 335 (J&K) wherein it has been heldthat excise duty refund and interest subsidyreceived for the purpose of eradication ofunemployment in the state by acceleration ofindustrial development and removingbackwardness of the area that lagged behindin industrial development is to be treated ascapital receipt.

xxx…

9. We have carefully considered the submissions.We f ind considerable cogency in thesubmissions of the ld. Counsel of the assessee.We f ind that identical i ssue under theTechnology Upgradation Fund Scheme (inshort ‘TUFS’) of Ministry of Texti les wasconsidered by the Hon’ble Punjab & HaryanaHigh Court in ITA No. 472 of 2010 videdecision dated 17.01.2011. Hon’ble High Courthas considered and held the issue as under: -

xxx…

Thus we find that on identical issue the matterhas been decided in favour of the assessee. Inthese circumstances, we are of the opinion thatas held hereinabove in order to sustaincompetitiveness in the domestic as well asinternational markets and overall long-termviability of the industry, the concerned Ministryadopted the TUFS scheme envisagingTechnology Upgradation of the Industry.Hence, the subsidy received in this regard fallsinto capital field. Hence respect fully followingthe precedent as above we set aside the orderof the ld. CIT(Appeals) and decide the issue infavour of the assessee.

❉ ❉ ❉

Judicial Analysis


Add


CA. Savan A. [email protected]

M emor andum of I nst r uct ions forOpening and Maintenance of Rupee /Foreign Cur rency Vostro Accounts ofNon-resident Exchange Houses

It has been decided to permit remittances to thePrime Minister’s National Relief Fund through theExchange Houses subject to the condition that theremittances are directly credited to the Fund by thebanks and the banks maintain full details of theremitters.

Accordingly, the Annex to the A.P. (DIR Series)Circular No 88 dated January 9, 2014, listing thepermissible transactions has been modified, detailedguidelines are annexed to this circular. All otherinstructions issued vide A.P. (DIR Series) CircularNo. 28 [A. P. (FL/RL Series) Circular No. 02] datedFebruary 6, 2008, as amended from time to time,will remain unchanged.

For Full Text refer to A.P. (DIR Series) CircularNo. 35 http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9273&Mode=0

Foreign Exchange Management Act,1999 (FEM A) For eign Exchange(Compounding Pr oceedings) Rules,2000 (the Rules) - Compounding ofContraventions under FEMA, 1999

In accordance with A.P. (DIR Series) Circular No.117 dated April 4, 2014 and the Foreign Exchange(Compounding Proceedings) Rules, 2000 notifiedby the Government of India vide G.S.R.No.383(E) dated 3rd May 2000, as amended from time totime regarding delegation of powers to the RegionalOffices of the Reserve Bank of India to compoundthe contraventions of FEMA, partial modificationthereof, it has been decided to delegate furtherpowers to Regional Offices as under:

Sr. FEMA Regulation Brief Description ofNo. Contravention

1 Regulation 10 A Delay in submission of(b)(i) read with form FC-TRS onparagraph 10 of transfer of shares fromSchedule I to Resident to Non-FEMA 20/2000-RB Resident.dated May 3, 2000

2 Regulation 10 B(2) Delay in submission ofread with paragraph form FC-TRS on10 of Schedule I to transfer of shares fromFEMA 20/2000-RB Non-Resident todated May 3, 2000 Resident.

3 Regulation 4 of Taking on recordFEMA 20/2000-RB transfer of shares bydated May 3, 2000 investee company, in

the absence of certifiedform FC-TRS.

The work of three divisions of Foreign InvestmentDivision (FID) viz. Liaison/ Branch/ Projectoffice(LO/ BO/ PO) division, Non Resident ForeignAccount Division (NRFAD) and ImmovableProperty (IP) Division has been transferred to FED,CO Cell, Reserve Bank of India, 6, Sansad Marg,New Delhi- 110001 with effect from July 15, 2014.Accordingly, the officers attached to the FED, COCell, New Delhi office are now authorised tocompound the contraventions as under:

Sr. FEMA Brief Description ofNo. Notification Contravention

1 FEMA 7/2000- Contraventions relating toRB, dated acquisition and transfer of3-5-2000 immovable property outside

India

FEMA Updates

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contd. on page no. 493


CA. Punit R. [email protected]

- Service tax, interest and penalty underthis section are paid.

- Such payment is to be made beforenotice is served on the assessee.

- Central Excise Of f i cer shal l beinformed of such payment in writing.

3. On completion of above mentionedconditions,

- Central Excise Officer shall not serveany notice under section 73(1) of the Act;and

- Proceedings in respect of the service taxso paid shall be deemed to have beenconcluded.

It means that once such payment of servicetax, interest and penalty has been paid,Central Excise Officer can’t even servenotice for such service tax and propose toimpose various penalties. Thus, litigationcan’t be even initiated by the departmentat all. Further, proceeding in respect ofservice tax paid is deemed to have beenconcluded and hence department can’tfurther compel the assessee to comply withother provisions say for example furnishthe return along with payment late fees.

4. Records required to be maintained by anassessee in accordance with any law or inabsence of such requirements invoicesrecorded by the assessee in books ofaccounts shall be considered as specifiedrecords. It means that if transactions areproperly recorded in the regular books ofaccounts, benefit of reduced penalty underthis provision is available.

Service Tax Decoded

Penalties

People don’t follow a law unless penalties pinchon failure to follow. As rightly said, law withoutpenalty is a toothless tiger and no one takes itseriously. Service Tax law is not an exception.Various penalties are prescribed for contraventionsof various provisions of Chapter V of The FinanceAct, 1994 (the Act) and related rules.

I . Penalty under Section 73(4A) of the Act

During the course of any audit, investigationor verification by the department, it may befound that any service tax has not been levied/paid, short levied/short paid or erroneouslyrefunded. In such situation assessee may preferto accept the liability and pay service tax alongwith the interest. In such situation assessee mayalso pay penalty equal to 1% of such tax, foreach month of default, subject to maximum25% of the tax. Some points and issues forconsideration are as follows.

1. This is a reduced penalty to avoid theli tigation where assessee accepts theservice tax liability and ready to dischargethe same along with interest. As assesseeis ready to discharge the dues, reducedpenalty is being provided for such assessee.Many a time 1% per month may not be asubstantial amount and assessee can affordthe same as compare to cost and risk oflitigation to avoid the penalties in total.

2. Following conditions are stipulated to getthe benefit of such reduced penalty.

- True and Complete detai l s oftransactions are available in specifiedrecords.


5. It is not necessary that assesse accept allthe liabilities of service tax which is notpaid in opinion of the department. Assesseemay opt to accept the liability in full or inpart and benefit of this section will beavailable to the assessee for the part ofservice tax accepted by him.

6. Benefit of reduced penalty under thisprovision is available even if service taxwas not paid intentionally.

I I . Penalty under Section 76 of the Act

Service tax is required to be paid periodicallyin terms of provisions of the Finance Act, 1994.Any person who is liable to pay service taxfails to pay such tax within due date, shall alsopay in addition to such tax and interest on thattax, a penalty under Section 76 of the Act.Penalty of Rs. 100 per day for every day duringwhich such failure continues or at the rate of1% of such tax, per month whichever is higheris required to be paid. However, total amountof the penalty shall not exceed 50% of the tax.

1. Penalty under Section 76 of the Act doesnot require mens rea i.e. culpable mentalstatus of assessee. In other words penaltyunder this section may be levied even ifnon-payment/short-payment was notintentional.

2. Even if there is delay of a day in thepayment of service tax, proceeding toimpose the penalty under this section maybe initiated.

3. From the reading of the illustration givenin the Section 76 it is clear that amount of1% p.m. is to be computed for each dayand not for entire month or part thereof.

4. Once the delay is occurred, such penaltyis mandatory in nature. Unless benefit ofreasonable cause, as provided in theSection 80 is available, penalty under thissection may be levied.

5. Once the penalty is to be imposed, it is notopen to reduce the quantum of the penalty.Penalty under Section 76 either can bewaived off fully under section 80 or to beimposed in full as for the amount quantifiedin accordance with Section 76. As decidedby the Hon’ble Gujarat High Court in thecase of CCE&C V. Port Officer [2010(19)STR 641] quantum of penalty can’t bereduced.

6. Amount of this penalty depends uponperiod of delay in making payment ofservice tax. Amount of penalty under thissection doesn’t increase once the paymentof service tax is paid. In case of litigationor in doubt, if assessee chooses to payservice tax, even under protest, quantumof this penal ty may be restricted tosubstantial level.

I I I . Penalties under Section 77 of the Act

Under section 77 of the Act, various penaltiesare prescribed for contraventions of the variousprovisions of the Finance Act, 1994 and rulesmade there under. Such penalties are listedbelow.

1. If person who is liable to pay service taxor required to take registration fails to takeregistration shall liable to pay penalty uptoRs. 10000/- [Section 77(1)(a)]. Thispenalty may also be imposed if a personfails to take registration where his aggregatevalue of taxable service in a financial yearexceeds Rs. 9 Lacs as provided in TheService Tax (Registration of SpecialCategory of Persons) Rules, 2005.

2. If person fails to keep, maintain or retainbooks of account and other documents asrequired in accordance with the Act or rulesmade thereunder shall be liable to penaltyupto Rs. 10000/- [Section 77(1)(b)].

3. If any person fails to furnish information,produce documents or appear before theCentral Excise Officer on summon, he

Service Tax Decoded


shall be l iable to a penalty which mayextend to Rs. 10000/- or Rs. 200 per dayfor every day during which fai lurecontinues, whichever is higher [Section77(1)(c)]. It may be noted that not onlyassessee but anyone may be required tocomply with such provisions and hencepenalty may also be imposed on him evenif he is not required to pay service tax oreven investigation inquiry etc. is not beingconducted against him.

4. If person who is required to pay servicetax electronically, through internet banking,fails to pay tax electronically, he shall beliable to penalty upto Rs. 10000/- [Section77(1)(d)]. It is worth noting that w.e.f. 01-10-2014, as provided in Rule 6(2) of theService Tax Rules, 1994 every assessee,without any threshold l imit shall payservice tax electronically through internetbanking.

5. If person who issues invoice with incorrector incomplete details or fails to account foran invoice in his books of accounts shallbe liable to a penalty upto Rs. 10000/-[Section 77(1)(e)]. In terms of Rule 4(1)of the Service Tax Rules, 1994 everyperson providing taxable service shall issuean invoice and such invoice shall containcertain details as provided in the said rules.If invoice don’t contain any of such details,penal ty under this provision may beimposed.

6. Practically, it may not possible to providepenalties for each and every contraventionof the law. Section 77(2) of the Actprovides residual penalty upto Rs. 10000/- for any contravention of the provision ofthe Act or rules made thereunder where nopenalty is separately provided.

IV. Penalty under Section 78 of the Act

If service tax is not paid intentionally, higherpenalty is payable under section 78 of the Act.

If tax is not paid or short paid or not levied orshort levied or short paid or erroneouslyrefunded by reason of fraud or collusion orwillful mis-statement or suppression of facts orcontravention of any of the provisions of theAct or rules made thereunder with intent toevade payment of service tax, person liable topay such tax shall also liable to a penalty equalto amount of service tax i.e. 100%.

1. Penalty under this section is 100% of theservice tax. However, if true and completedetails of transactions are available in thespecified records, penalty shall be reducedto 50% of the service tax.

2. Further, if such details are available andservice tax, interest and penalty under thissection is paid wi thin 30 days fromcommunication of order, penalty is to bereduced further to 25%.

3. For small tax payers i.e. whose value oftaxable services does not exceed Rs. 60Lacs during any of the years covered inthe notice, period of 90 days is availableinstead of 30 days as stated above.

4. If penalty is payable under this section,penalty under section 76 is not payable i.e.both the penalties are mutually exclusive.

5. Once the intent to evade tax has beenproved, quantum of penalty under thissection can’t be reduced below theprescribed limit as held by Hon’ble GujaratHigh Court in the case of CommissionerV. Target Polymers Pvt. Ltd. [2011 (22)STR 267].

V. Penalty under Section 78A of the Act

Practically companies don’t contravene butmanagement or employee contravene.Company suffers penalties due to deeds ofmanagement and employees of the company.Section 78A stipulates personal penalties ondirector, manger, secretary or other officers ofthe company who at time of contravention was

Service Tax Decoded


in charge of and was responsible for conductof business of such company and wasknowingly concerned with such contravention.He shall be liable to a penalty upto Rs. 1 Lac.

1. Personal penalty on director etc. underSection 78A may be imposed wherecompany has committed any of thefollowing contraventions:

- evasion of service tax; or

- issuance of service without provision ofservice; or

- availment and utilization of CENVATcredit without receipt of taxable serviceor excisable goods; or

- fai lure to pay collected service taxbeyond a period of six months.

2. Personal penalty can be imposed only ifsuch person was knowingly concernedwith contravention. If he proves that thecontravention has been happened withouthis knowledge, personal penalty can’t beimposed under this Section.

3. Proceeding for imposition of personalpenalty on director etc. is independent ofproceeding for companies. Generally,single common Show Cause Notice isbeing issued wherein personal penalty isproposed on an individual. Such a showcause notice is required to be served onthe person on whom such penalty isproposed to be imposed. Further, suchperson is also required to submit his replyof show cause notice in his personalcapacity in addition to a reply filed by thecompany. Even separate appeal is requiredby to be f i led by such person in hispersonal capaci ty chal lenging orderimposing penalty under Section 78A. Ifsuch penalties are not challenged by thedirector in his personal capacity, he willhave to pay such penalty even if companysucceeds in the proceeding.

4. Onus of proof that whether a director etc.was knowingly concerned wi th thecontravention is on the department.

VI . Penalties under the CENVAT Credit Rules,2004

Rule 15 of the CENVAT Credit Rules, 2004prescribes confiscation and penal ties i fCENVAT credit is taken or utilized wronglyor in contravention of the provisions of theCENVAT Credit Rules, 2004. If CENVATcredit is taken or utilized wrongly, then;

1. in terms of Rule 15(1), inputs or capitalgoods on which such credit is taken shallbe liable to confiscation.

2. in terms of the Rule 15(1), such personshall be liable to a penalty not exceedingthe duty or service tax on such goods orservices or Rs. 2000/- whichever is greater.As it is clear from the wordings of the Rule,amount prescribed is the maximum limitof penalty and considering the situation,such quantum of penalty may be reduced.

3. If such credit is taken with intent to evadepayment of service tax, then, provider ofoutput service shall also liable to penaltyin terms of the provisions of Section 78 ofthe Act.

VII .Waiver of penalty – Section 80

Contravention may have happened due toreasonable cause and penalty in such cases isnot justified. Section 80 of the Act providesthat if any failure referred to in Section 76 or77 in the said provisions but there wasreasonable cause for the failure, no penalty shallbe imposable on the assessee.

1. Term “reasonable cause” is not defined inthe Act. It is a question of fact and may bedecided in case to case basis. Question ofinterpretation of law, newly implemented/amended law, different opinion by variouscourts, revenue neutrality, facts known tothe department, proper disclosure to

Service Tax Decoded


department, illness of proprietor or keymanagement personnel, bona fide belief,misguiding opinion by consultants etc. maybe considered a reasonable cause.

2. Though “reasonable cause” i s verysubjective word, but once it is establishedthat there was a reasonable cause, penaltiesunder section 76 and 77, no penalty “shall”be imposed.

3. It is worth noting that benefit of Section80 is available only for the penaltiesimposable under section 76 and 77 and notfor the penalty imposable under Section 78of the Act. In any case penalty undersection 78 is imposable only if there wasevasion (i.e. intentional non-payment) ofservice tax and it is hard to envisageexistence of reasonable cause as well asintention to evade tax.

4. Burden of proof is on the assessee toestablish that there was a reasonable causefor the contravention.

VIII . Special Consideration

1. Imposition of penalties is not automatic.Show Cause Notice is required to beissued. Principles of natural justice are tobe followed. Chance of Personal Hearingshould be given and speaking order shouldbe passed.

2. As provided in the Section 83A of the Act,where any person is liable to a penalty, suchpenalty may be adjudged by the CentralExcise Officer conferred with such poweras CBEC may specify by notification inthe Official Gazette.

3. Separate Accounting Codes are prescribedfor payment of penalties for each categoryof services. Payment of penalties shouldbe made under such Accounting Codes.

4. Proper disclosure to the department mayavoid penalties. Whenever doubts prevails,assessee may survive penal ties and

Service Tax Decoded

extended period of limitation if departmentis properly informed.

5. Certain penalties like section 76 and 78depend on amount of service tax not paid/short paid etc. If service tax itself is notpayable, question of imposition of suchpenalties doesn’t arise.

6. In terms of Article 20(1) of the Constitutionof India, no person shall be subjected toany penalty greater than that which mighthave been inflicted under the law in forceat the time of the commission of offence.It means that if a provision of penalty hasbeen introduced or amount of penalty isincreased after the commission of anoffence, penalty can’t be imposed undernew provision or can’t exceed the limit asprovided in pre-amendment provision.

7. As clarified at Paragraph 12.5 of theCircular No. 97/8/2007-ST Dated 23-08-2007, in respect of demands for an amountupto one thousand rupees towards shortpayment/non-payment of service tax, if theservice provider, on the default beingpointed out, pays the service tax along withinterest within a period of one month ofthe default in payment, the penalty shouldbe waived, taking recourse to theprovisions under section 80 of the Act.

8. In terms of Section 73(3), a person on basisof his own ascertainment thereof or on thebasis of tax ascertained by a Central ExciseOfficer may pay service tax along withinterest, before service of notice andintimate the Central Excise Officer inwriting. On receipt of such intimation,Central Excise Officer shall not serveShow Cause Notice for such service taxpaid. As service of Show Cause Noticeitself is not possible, proceedings forimposition of penalties can’t be initiated atall. However, this benefit is not availableif service tax was not paid intentionally.

❉ ❉ ❉


CA. Ashwin H. [email protected]

H.M. Singh & Co. v. Commissioner ofCentral Excise, Customs & Service Tax[2014] 49 taxmann.com 417 (High Courtof Allahabad)

Where there was mass unawareness aboutliability to pay service tax and depar tment hadissued 200 notices to different service providerson same issue, there was no intention to evadeservice tax on par t of assessee (in not payingservice tax) and hence, penalties were notleviable.

Facts

Assessee paid service tax prior to adjudication .Department levied penalties under Sections 77 and78. Assessee argued that it had bona fide beliefabout non-taxabi l i ty and there was massunawareness about taxabi l i ty, as noted bydepartment itself and as evident from 200 noticesissued by department to various services provider.

Held

Assessee’s conduct in paying service tax even priorto adjudication was relevant factor. Since there wasmass unawareness, as even noted by departmentitself, there was no intention to evade service taxon part of assessee . Hence, penalty could not belevied.

Commissioner of Centr al Excise v.Mahendra Engineer ing L td [2014] 49taxmann.com 379 (H igh Cour t ofAllahabad)

Where, in invoices per taining to r epair oft r ansfor mer s, value of goods used (vi z.tr ansformer oil and component par ts) wereshown separately and sales tax/VAT was paidthereon, said goods will not form par t of valueof services

Service Tax -Recent Judgements

Facts

Assesee was providing services of repair oftransformers. Department argued that value ofconsumables like transformer oil and componentparts was includible in value of services and liableto service tax. Tribunal observed that : (a) in invoicesissued by assessee, value of goods used, such astransformer oil and service charges were shownseparately and (b) in respect of supply ofconsumables, sales tax/VAT was paid; andaccordingly, held that service tax would bechargeable only on service/labour component andvalue of goods used for repair would not beincludible in value of service.

Held

In view of judgment in CC & CE v. Balaji TirupatiEnterprises [2014] 43 taxmann.com 39/44 GST 163(All.), said goods shall not enter into value ofservices and hence demand was invalid.

Kishorkumar Gokaldas Developers &Promoters v. Commissioner of ServiceTax, (High Cour t of Madras) [2014] 49taxmann.com 279

Where delay in making pre-deposit directed byTr ibunal was caused due to slump inconstruction industr y and huge balance ofunsold flats, High Cour t condoned said delayand restored appeal before Tr ibunal.

Facts

Assessee engaged in construction business, wasfound to have not paid service tax on four projectsinvolving construction of residential complexes aswel l as commercial complexes. Departmentconfirmed demand of Rs. 3.8 crores with interestand penalty. Tribunal directed pre-deposit of Rs. 1crore and dismissed appeal when assessee failed topay pre-deposit even within extended period. On

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High Court’s direction, assessee made pre-depositof Rs. 1 crore and pleaded undue financial hardshipstating that construction industry is experiencing aslump and lot of flats were still unsold. Revenueleft it for court to pass appropriate orders.

Held

Pre-deposit ordered by Tribunal has been compliedwi th, though belatedly, and thus, interest ofRevenue is safeguarded. Considering plea of unduehardship, delay in making pre-deposi t wascondoned and appeal was restored before Tribunalfor disposal on merits.

Rekhaben M . Vaghela v. DeputyCommissioner of Service Tax [2014] 49taxmann.com 116 (Gigh Cour t ofGujarat)

While consider ing applications for condonationof delay, concepts such as ‘liberal approach’,‘justice or iented approach’, ‘substantial justice’cannot be employed to jettison substantial lawof limitation especially, in cases where Cour tconcludes that there is no justification for delay.

Facts

Assessees executed lease deed with a bank to leaseproperty owned by them and claimed separateassessments to service tax. Department demandedservice tax from assessees on ground that they wereproviding indivi sible service of renting ofimmovable properties jointly and collectively as‘Association of individuals’ and were, therefore,liable to pay service tax along with interest andpenalties .Tribunal dismissed assessee’s appeal asbarred by l imi tation. Assessee appl ied forcondonation of delay of 541 days in filing appealbefore Tribunal on ground that delay occurred dueto negligence of Chartered Accountant’s Office andthereupon, appeal was filed by another CharteredAccountant . Tribunal denied condonation onground that assessees’ story did not insti l lconfidence.

Held

Assessee’s versions were self-contradictory, asreasons stated in different affidavits were different.While considering applications for condonation ofdelay, concepts such as ‘liberal approach’, ‘justiceoriented approach’, ‘substantial justice’ cannot beemployed to jettison substantial law of limitationespecially, in cases where Court concludes thatthere is no justification for delay. In absence ofsufficient cause for delay, appeal was dismissed.

Dimensions Logistics Services (P.) L td v.Commissioner of Service Tax, [2014] 49taxmann.com 413, (H igh Cour t ofBombay)

Freight and destination charges (in respect ofclearance of goods at destination by foreignrecipient) cannot, pr ima facie, be included invalue of Clear ing and Forwarding Agent’sservices and cannot be charged to tax.

Facts

Assessee was registered as clearing and forwardingagent. Department raised demand based on figuresshown in ST-3 return and balance sheet figures.Assessee submitted that : (a) amount of freight couldnot form a part of value of service; (b) amountreceived as destination charges were in respect ofclearance of goods at destination by foreign serviceprovider and could not be charged to tax. In hearingstay petition, Tribunal prima facie expressed view :(a) as regards freight, in favour of assessee; and (b)as regards destination charges, in favour of revenue;and ordered pre-deposit .

Held

Taxability of destination charges was imminentlyarguable and there could not have been confirmationin that regard even at prima facie stage. Hence, pre-deposi t ordered by Tribunal was reducedaccordingly .

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Service Tax - Recent Judgements

3435


CA. Bihar i B. [email protected].

Statute Updates

[I] Impor tant Notifications / Circulars :[A] Scheme for Building Contractor :

The Govt. of Gujarat has issued a Notificationdated 14th Oct. 2014 for the benef i t ofUnregistered/Registered dealers doing thebusiness of Building Contractors/Developersfor taking the benefit for the payment of tax atthe lump sum rate and remission of interest andpenalty for the unregistered period. The gist ofthe notification is as under.

[i] The benefit of this scheme is available only tocivil works contractor whether registered orunregistered.

[ii] The assessment of such dealers shall be madeu/s. 34 of the GVAT Act and the interest andpenalty will be remitted to them for the non-payment of tax under Works Contract for theliable transactions w.e.f. 1.4.2006.

[iii] The benefit available to the dealers for theperiod starting from 1.4.2006 and not before.

[iv] The benefit will be given to the dealers even ifproceedings under assessment/re-assessment orrevision is in force.

[v] The dealers will be allowed to pay lump sumtax @ 0.6% on the total turnover u/s. 14A.

[vi] The liability of Purchase Tax u/s. 9 will be onsuch dealers if the goods are purchased fromthe unregistered dealers and no tax credit isavailable on the Purchase Tax payable.

[vii]If the goods purchased from out of GujaratState and used in works contract, then underthis circumstance, the applicable rate will bepaid by such dealers i.e. if cement is purchasedfrom OGS, the dealer has to pay 15 Vat ondeemed sale of cement and no remission willbe given on such purchase.

[viii] Such dealer has to pay the total tax during theperiod of this scheme.

[ix] The period of this scheme will remain in forcefrom 14.10.2014 to 180 days i.e. for 6 months.For that an application is to be made underprescribed form. The form is however still notprescribed.

[II] Imporant Judgments:[1] Judgment of Hon. Gujarat High Cour t in

case of Dhoraj ia Construction Co.Issue:Whether Dumper is Motor Vehicle and EntryTax is payable on import of dumper into theState of Gujarat?Facts:In case of Dhorajia Construction Co. v. Stateof Gujarat, the Hon. Gujarat High Court hastaken the view that dumper is a Motor Vehicleand therefore l i able to Entry Tax andaccordingly the Hon. Gujarat Vat Tribunal’sdecision is reversed.The assessee is a dealer registered under theAct. The assessee imported ‘dumper’ into thelocal area. According to the assessee, the saiddumper was not ‘motor vehicle’ as falling underimpugned entry and therefore, was not liableto entry tax on import of the said goods. Theassessing authority held that the dumper, thoughused in works contract, would still fall underentry of ‘motor vehicle’ and would becomeliable to pay entry tax. The Tribunal in secondappeal accepted the submissions of the assesseeby holding that dumper was not motor vehicleas commonly understood and therefore, wasnot liable to entry tax. Being aggrieved of thedecision of the Tribunal, the State filed SCAagainst the Tribunal decision.

Decision:The Hon. Gujarat High Court following theirearlier decision in case of Reliance IndustriesLtd. in SCA 11848 of 2005 dated 15.07.2011held that Dumper can fall under entry of motorvehicle liable to entry tax and therefore, theTribunal’s decision is not the correct decision.The Hon. High Court accordingly set aside theimpugned decision by holding that the assesseeis liable to pay entry tax on import of dumper.

VAT - Recent Judgementsand Updates


[2] Judgment of Hon. GVAT Tr ibunal in caseof Veeru TradersIssue:The enhancement of 100% made in salesturnover is removed and Penalty of Rs. 2000/-levied for not carrying Form No.402 isconfirmed.Facts:In this case the Hon. GVAT Tribunal removedthe enhancement made in the sales turnover at100% however, the penalty of Rs. 2000/- leviedfor not carrying Form No. 402 confirmed.The goods vehicle was intercepted by the mobilecheck post officer and on account of notfurnishing Form No. 402 the appellant wasdirected to pay tax of Rs. 44,155/- and penaltyof Rs. 68,232/-. The appellant was also directedto pay Rs. 2000/- by way of penalty for notcarrying Form No.402 with the goods vehicle.Subsequently, the place of business of theappellant was visited and it was observed thatthe appellant has issued parallel Bill No.12 andhence by estimating sales turnover for the BillNo. 1 to 12 was made and tax and penalty werelevied on such estimated sales turnover. TheHon. Tribunal considering facts of the case thatthere is a twice levy of Tax on Bill No. 1 to 11and 13 to 15 and hence the 100% enhancementwas removed. As regard the penalty levied onthe estimated sales turnover, the same was setaside as it was levied without issuing show causenotice before imposing penalty. However, thepenalty levied for not carrying Form No. 402with the goods vehicle, the same was confirmedby not accepting the explanation of the appellantthat there was a shortage of Form No. 402.

[3] Judgment of Hon. GVAT Tr ibunal in caseof City Tiles:Issue:Whether the Vat Department can do thereassessment on the basis of Show CauseNotice issued by the Central Excise Departmentfor enhancement of sales?Facts:In case of City Tiles, the Hon. GVAT Tribunalhas set aside the reassessment order passed onthe basis of show cause notice of the CentralExcise Department holding that it was passedwithout making any independent inquiry. Thegist of the judgment is as under.There was no additional dues payable as a resultof audit assessment order passed u/s. 34 of the

VAT - Recent Judgements and Updates

Vat Act. There was a search in the place ofbusiness of the appel lant by the ExciseDepartment and the show cause notice wasissued alleging that the appellant has evadedexcise duty by under invoicing the value of thegoods. The detailed reply was submitted to theExcise Department.The Ld. Assessing Authority based on the showcause notice issued by the Central ExciseDepartment initiated reassessment proceeding u/s. 35 of the Vat Act. The Ld. Assessing Officerpassed reassessment order merely relying on theshow cause notice issued by the ExciseDepartment. There was no independent inquirywas made by the Ld. Assessing Authority whileestimating the sales turnover relying on the showcause notice of the Excise Department. Theappellant contended before the Hon. Tribunalthat the reassessment order passed onpresumption that the appellant has undervaluedthe MRP based on show cause notice of theExcise Department, was wi thout anyindependent inquiry. The appellant relied onjudgment of Hon. Andhra Pradesh High Courtin the case of M/s. Alumeco India Extrusion Ltd.and another 27 VST 419. The appellant alsorelied on Supreme Court judgment in case ofM/s. K. T. Shabuli Yusuff 39 STC 478 and incase of M/s. Rajasthan Chemist Association 147STC 542. As regard to reassessment order passedwithout making independent inquiry by the Ld.Assessing Authority, the appellant relied on thejudgment of Hon. Gujarat High Court in caseof M/s. Futura Ceramic Pvt. Ltd. The Hon.Tribunal referred relevant provision of the Actand relying on the judgment held that theAssessing Officer has not made any attempt tocollect any information from Excise Department.The Hon. Tribunal further observed that pursuantto the show cause notice by the ExciseDepartment, no adjudication order is passed bythe Excise Department. The Assessing Officeris not justified in concluding that the appellanthas suppressed sales or the sales so made wereundervalued with a view to evade tax. The Hon.Tribunal held that the Authorities are not justifiedin reopening the assessment on the basis of showcause notice issued by the Excise Department.Accordingly the reassessment order passed onthe basis of show cause notice of the ExciseDepartment is set aside.

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CA. Hozefa [email protected]

process. Valuations can change dramatically overtime and they should if the information warrantssuch a change.

Multi period discounting Method (Discounted CashFlow - DCF)

This valuation approach, the most frequently usedvaluation technique, provides a “going concern”value, which is the value indicated by a company’sfuture economic capabilities. Using this technique,value is calculated by the summation of the presentvalue of projected cash flows for a determinedperiod, plus the present value of the residual orterminal value at the end of the projection period.

This method uses financial projections to determinethe value of business or value of ownership basedon future income for several periods (un stablegrowth period) and terminal value after expiry ofthat period (stable growth period). Then, a discountrate is employed to convert those future values backto a present value. The business life being dividedin to two phases: unstable growth period and stablegrowth period – it is also known as two stage modelof cash flow discounting. The model can beextended to three or four stage model based on thebusiness cycle.

The value of an undertaking really depends on itsfuture profits, cash flows for distributions and theassociated risks. Past results may serve as an aidfor estimating the likely future results; they cannotdetermine them. The advantage of this method isthat it can be used for businesses or assets withunstable earnings and non constant growth rates.But it is important that the discount rate being usedis appropriate for the income being discounted aseven a small change in the discount rate can haveconsiderable impact on the present value.

Business Valuation

The Income Approach

(DCF - Discounted Cash Flow Method)

It is unrealistic to expect or demand absolutecertainty in valuation.

All business transactions have many uncertainties,which unfortunately are not often satisfactorilyrecognized in a typical business valuation. Althoughwe are asked to give an opinion of value as a singleamount, the truth is that the value of a security,business, or asset is more property considered aprobability distribution with a range of values.Traditionally, the most common method of valuinga business has been to capitalize past profits basedon the concept that they are the best predictor forthe future. Discounting projections of the most likelycash flows for a period of years and terminal amount(the Discounted Cash Flows - DCF Method) is nowconsidered preferable as it is totally forward looking.However, it has its limitations. In particular, it isnot good at valuing many forms of intangible assetsespecially intellectual property that have potentialrather than demonstrated future cash flows. Suchitems have option characteristics such as the abilityto delay, expand, or abandon and are best dealt withby option pricing techniques such as the Black-Scholes or Binomial Model.

Business valuation through DCF is an estimationjob and uncertainty is invariably attached withestimation. So, the appraiser should concentrate onbuilding the best models they can with as muchinformation as they can legally access, trying tomake their best estimates of business specificcomponents and being as neutral as they can oneconomic variables like rate of interest or growthrate etc. As new information comes in, they shouldupdate thei r valuations to ref lect the newinformation. There is no place for false pride in this

Approaches to Valuation


Below formula is used to estimate a value usingthis approach:

Value =

WhereCF = cash flows,R = discounting rate,t = asset life

Using this method, we can derive value of equityholders by (i) choosing present value of free cashavailable to equity holders and (ii) choosing presentvalue of the cash flow avai lable to fi rm andsubtracting the present value of debts there from.Done right, the value of equity should be the samewhether it is valued directly (by discounting cashflows to equity at the cost of equity) or indirectly(by valuing the firm and subtracting out the valueof all non-equity claims). The primary differencebetween equity and debt holders in firm valuationmodels lies in the nature of their cash flow claims –lenders get prior claims to fixed cash flows andequity investors get residual claims to remainingcash flows.

Formula to get a value of a firm:

Where,FCFE = free cash flows available to capital / equityholders

Ke= Cost of equity capital OR expected rate of returnon equity capital (often estimated using the CAPM)t = asset life

So, the fundamentals to estimate value under thistechnique are cash flows and discounting rate. Here,cash flow includes estimated cash flow duringgrowth period as well as terminal value upon stablebusiness life.

Calculating FCFF and FCFE

Cash flows are key to discounted cash flowvaluations. Deriving free cash flow invariably needsto decide the growth pattern of the business first. Akey assumption in all discounted cash flow modelsis the period of high growth and the pattern ofgrowth during that period. In general, we can makeone of four assumptions:o there is no high growth, in which case the

business is already in stable growtho there will be high growth for a period, at the

end of which the growth rate will drop to thestable growth rate (2-stage)

o there will be high growth for a period, at theend of which the growth rate wil l declinegradually to a stable growth rate(3-stage)

o Each year will have different margins anddifferent growth rates (n stage)

The cash flow for life span of business will includegrowth period cash flow and terminal value (i.e.stable period cash flow which is also known as cashflow for constant growth rate period). Cash flowsfor stable period, two stage or three stage periodsare calculated as per below:

Business Valuation

t = n

t = 1

CF t

(1 + R) t

Value of Firm = CF to Firm t

(1+ WACC) tt =1

t= n

FCFF - Free Cash Flow to Firm FCFE - Free Cash Flow to Equity


Terminal Value OR value for stable growth period

Also, we need terminal value at the end of thegrowth stage. The most common method ofestimating the terminal value is to apply a singlestage free cash flow model at a point of time whengrowth settles down to its long run level. This“constant” growth rate is called a stable growth rateand logically, cannot be higher than the growth rateof the economy in which the firm operates. Whena firm’s cash flows grow at a “constant” rate forever,the present value of those cash flows (terminal valueat the point of stable growth) can be written as:

Business Valuation

Value=Expected Cash Flow Next Per iod / (r-g)

where,r = Discount rate (Cost of Equity or Cost of Capital)g = Expected growth rate

This terminal value can be calculated using singleperiod capital ization method or through usingrelative method applying appropriate multiple orderiving liquidation value.

We will go through the importance and calculationsof discounting rate in next article.

❉ ❉ ❉

contd. from page 481 FEMA Update

2 FEMA 21/ Contraventions relating to2000-RB, acquisition and transfer ofdated 3-5-2000 immovable property in

India

3 FEMA 22/2000- Contraventions relating toRB, dated establishment in India of3-5-2000 Branch office, Liaison

Office or project office

4 FEMA 5/2000- Contraventions fallingRB, dated under Foreign Exchange3-5-2000 Management (Deposit)

Regulations, 2000

The powers to compound the contraventions atParagraph 2 and Paragraph 3 above have beendelegated to all Regional Offices (except Kochi andPanaji) and FED, CO Cell, New Delhi respectively

without any limit on the amount of contravention.Kochi and Panaji Regional offices can compoundthe above contraventions for amount ofcontravention below Rupees one hundred lakh(Rs.1,00,00,000/-). The contraventions of Rupeesone hundred lakh (Rs.1,00,00,000/-) or more underthe jurisdiction of Panaji and Kochi RegionalOffices and all other contraventions of FEMA willcontinue to be compounded at Cell for EffectiveImplementation of FEMA (CEFA), Mumbai, ashitherto.

For Full Text refer to A.P. (DIR Series) CircularNo. 36 http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9286&Mode=0

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“Arise, awake, sleep no more; within each of you there is thepower to remove all wants and all miseries. Believe this,

and that power will be manifested.

- Swami Vivekanand


CA. Naveen [email protected]

(A) MCA Updates:

1. Const i tut ion of a Nat ional Advisor yCommittee on Accounting Standards:

The Ministry has constituted a committee toadvise the Central Government on theformulation and laying down of accountingpolicies and accounting standards for adoptionby companies or class of companies under theCompanies Act, till the constitution of NationalFinancial Reporting Authority or for a periodof 1 year from the date of this notification.

[F. No. 1/5/2001-CL.V (Part V) dated 18/09/2014]

2. Companies (Audi t and Audi tor s)Amendment Rules, 2014:

Rule 10A has been inserted after the Rule 10of the Companies (Audit and Auditors) Rules,2014:

10A: For the purposes of clause (i) of sub-section (3) of section 143 for the financial yearscommencing on or after 1st April, 2015, thereport of the auditor shall state about existenceof adequate internal financial controls systemand its operating effectiveness.

Provided that auditor of a company mayvoluntarily include the statement referred to inthis rule for the financial year commencing onor after 1st April, 2014 and ending on or before31st March, 2015.”

[F. No. 1/33/2013-CL-V-Part dated 14/10/2014]

3. Companies (Accounts) Amendment Rules,2014:

Following provisions have been inserted, in theRule 6, after the existing proviso, of theCompanies (Accounts) Rules, 2014:

Corporate Law Update

Provided further that nothing in this rule shallapply in respect of preparation of consolidatedfinancial statement by an intermediate wholly-owned subsidiary, other than a wholly-ownedsubsidiary whose immediate parent is acompany incorporated outside India:

Provided also that nothing contained in this ruleshall, subject to any other raw or regulation,apply for the financial year commencing fromthe 1st day of April, 2014 and ending on the31st March, 2015, in case of a company whichdoes not have a subsidiary or subsidiaries buthas one or more associate Companies or Jointventures or both, for the consolidation offinancial statement in respect of associatecompanies or joint ventures or both, as the casemay be.

[F. No. 1/19/2013-CL-V-Part dated 14/10/2014]

4. Clar ification with regard to Trust/Trusteeas a par tner in the L imi ted L iabi l i tyPar tnerships (LLPS):

The MCA has clarified that for the purposes of“Real Estate Investment Trust” (REIT) or“Infrastructure Investment Trust” (lnvITs) orsuch other trusts set up under the regulationsprescribed under the Securities & ExchangeBoard of India Act, 1992, it is not barred for atrustee, being a body corporate, to holdpartnership in an LLP in its name without theaddition of the statement that it is a trustee.

[General Circular 37/2014 dated 14/10/2014]

5. Right of per sons other than r et i r ingdirectors to stand for directorship - Refundof deposi t under sect ion 160 of theCompanies Act, 2013 in cer tain cases:


As the provision is silent for the treatment ofthe deposit of Rs. 1 lakh received under section160(1) of the Companies Act, 2013, if thedepositor fails to secure more than 25% of thetotal valid votes.

The Ministry has clarified that in such cases,the Board of directors of section 8 companiesis to decide as to whether the deposit made byor on behalf of the person failing to secure morethan twenty-five percent of the valid votes is tobe forfeited or refunded.


6. Clar i f i cat ion on mat ter s r elat ing toConsolidated Financial Statement (CFS):

The Ministry has clarified that Schedule III tothe Act read with the applicable AccountingStandards does not envisage that a companywhile preparing its CFS merely repeats thedisclosures made by it under stand-aloneaccounts being consolidated. In the CFS, thecompany would need to give all disclosuresrelevant for CFS only.


7. Clar ification under section 164(2) of theCompany Act, 2013:

The Ministry has clarified that in case ofCompanies, who have fi led their BalanceSheets and Annual Returns on or after 01/04/2014 but prior to launch of the CLSS-2014,disqualification under 164(2)(a) of theCompanies Act, 2013, shall apply only forprospective defaul ts, i f any, by suchCompanies.


8. Amendment in Schedule VI I of theCompanies Act, 2013:

The Ministry has inserted the followings; in theSchedule VII of the Companies Act, 2013:

a. The words “including contribution to theSwach Bharat Kosh set up by the central

government for the promotion ofsanitation” af ter the words “andsanitation�.

b. The words “including contribution to theClean Ganga Fund set up by the centralgovernment for rejuvenation of riverGanga” after the words “and water”.

This has been done with the objective to includethe contributions to ‘Swachh Bharat Kosh’ and‘Clean Ganga Fund’ under the CSRframework.

[F. No. 1/18/2013-CL-V dated 24/10/2014]

(B)SEBI UPDATES:

1. Revision of propr ietary position limits ofnon-bank stock br oker s for cur r encyderivatives contracts:

The SEBI has clarified the followings:

(i) Position limits stated at para 12.(a) of SEBIcircular CIR/MRD/DP/20/2014 dated June20, 2014 shall be the total limits availableto the stock brokers for taking positions onproprietary basis and for positions of theirclients.

(ii) Para 12.(b) of SEBI circular CIR/MRD/DP/20/2014 dated June 20, 2014 shall beread as under:

Proprietary open position limit s of a stockbroker, who is not a bank, across all contractsin a permitted currency pair shall be higher of(a) 15% of the total open interest in the currencypair, or (b) USD 50 million /EUR 25 million /GBP 25 mi l l ion / JPY 1000 mi l l ion, asapplicable.

[CIR/MRD/DP/30/2014 dated 22nd October,2014]

❉ ❉ ❉

Corporate Law Update


AS –2 Valuation of Inventor ies (Revised)

Notes For ming Par ts of The FinancialStatements For The Year Ended 31st March,2014

Chemfab Alkalis Limited

Inventories are valued at the lower of cost (net ofcenvat where applicable) and net realizable value.Cost includes cost of purchase, cost of conversion,and other costs incurred in bringing the inventoriesto there present location and condition and is net ofcredit under Cenvat scheme and VAT whereapplicable. The methods of determination of costof various categories of inventory are as follows.

- Raw Materials, Fuel and Stores and Spares –On weighted average basis.

- Finish goods and Work in process at lower ofcost, which includes appropriate productionoverheads and Net Realizable value, the Costbeing determined on weighted average basis.

Excise duty payable on manufactured finishedgoods held in the factory is included in the value ofclosing stock wherever applicable.

Due allowance is estimated and made by theManagement for slow moving / non-moving itemsof inventory, wherever necessary based on thetechnical assessment and such allowances areadjusted against the closing inventory value.

Ravi Kumar Distiller ies Limited

Inventories are value at lower of cost and estimatednet realizable value after providing for cost of

obsolescence and other anticipated losses,wherever considered necessary. Cost includes taxes,duties and al l incidental expenses di rectlyattributable to the purchases.

Celebr ity Fachions L imited

a. Raw Material and Components are valued atlower of Cost or Net Realizable Value. Cost ofthe said is computed by applying SpecificIdentification Method.

b. Work in Process and Finished Goods are valuedat lower of Cost or Net Realizable Value. Costof these inventories includes costs ofConversion and other costs incurred in bringingthem to the present location and condition.

Abhishek Corporation

Raw Material, Work in Process, Finished Goods isvalued at Cost or Net Realizable value whicheveris lower. Waste stock is valued at market value/netrealizable value. Cost comprises of all cost ofpurchase, cost of conversion and the cost incurredin brining the inventory to present location andcondition. Cost formulae used are “First in FirstOut”.

Patel Engineer ing L td.

Stores, embedded goods and spare parts and workin progress are valued at cost (weighted averagemethod) and contract rates respectively. Work inProgress in respect of project development andbuildings held as stock-in-trade are valued at costor net realizable value, whichever is lower.

CA. Pamil H. [email protected]

From Published Accounts


Bannar i Amman Spinning Mills L td.

Raw Materials and stores & spares: At costdetermined on First in First out basis or net realizablevalue, whichever is lower.

Finished goods and by products: At cost or netrealizable value, whichever is lower. The cost hasbeen measured on the weighted average cost basisand includes cost of purchase, cost of conversionand other costs incurred in bringing the inventoryto their present location and condition.

Stock in process: At estimated weighted averagecost basis.

Bajaj Corporation L td.

i) Stock of raw material and packing materials isvalued at cost or net realizable Value whicheveris lower. Cost is arrived at on Weighted Averagebasis.

ii) Stock of work in progress and Finished goodsis valued at the cost or net realizable valuewhichever is lower.

iii) Stock of Traded Goods is valued at lower ofcost and net realizable value. Cost is determinedon weighted average basis.

K.P.R. Mill L imited

Inventories are valued at the lower of cost (e.g. onFIFO / specific identification method) and the netrealizable value after providing for obsolescenceand other losses, where considered necessary. Cost

From Published Accounts

includes all charges in bringing the goods to thepoint of sale, including octroi and other levies,insurance and receiving charges. Work-in-progressand finished goods include appropriate proportionof overheads and, where applicable, excise duty.

CMC L imited

Inventories include stock in trade, finished goods,stores and spares and work-in-progress.

i) Inventories are valued at the lower of cost (onFirst in First out basis in respect of stock-in-trade mainly comprising equipment for resale/on weighted average basis in respect of finishedgoods mainly comprising Education andTraining material ) and the net realizable valueafter providing for obsolescence and otherlosses, where considered necessary. Costincludes all charges in bringing the goods tothe point of sale, including octroi and otherlevies, transit insurance and receiving charges.

ii) Inventories of stores and spares are valued atcost, net of provision for diminution in thevalue. Cost is determined on weighted averagecost basis.

iii) Work-in-progress comprises cost ofinfrastructural facil i ties in the process ofinstallation at customer’s sites. These valued atthe cost paid/payable to sub-contractors.

❉ ❉ ❉

"Do not figure out big plans at first, but, begin slowly, feel yourground and proceed up and up."

- Swami Vivekanand


CA. Kunal A. [email protected]

From the Government

for the period from 01/04/2014 to 30/09/2014from 25th October, 2014 to 14th November,2014. (Refer order no. 2/2014, dated 24th

October, 2014)

2. Circular regarding levy of service tax onactivities involved in relation to inwardremittances from abroad to beneficiar ies inIndia through MTSOs (Money TransferService Operator )

The issue relating to levy of service tax on theactivities involved in the inward remittance hasnow been clarified through this circular asunder:-

- No service tax shall be payable on theamount of remittance from abroad to india.

- The Indian bank or other entities acting asan agent( including sub-agents) to MTSOwill fall in the category of intermediary andshall be liable to pay service tax on thecommission or fees received in relation toservice provided by them to MTSO.

- Service tax applies on currency conversionin such cases in terms of Service Tax(Determination of Value) Rules. Even theservice provider has an option to payservice tax at prescribed rates in terms ofRule 6(7B) of the service tax rules 1994.

(For full text refer Circular no. 180/2014, dated14th October, 2014)

❉ ❉ ❉

Income Tax

1. Circular regarding approval of long termbonds and rate of interest for the purposeof section 194LC of the Income tax Act

CBDT hereby conveys the approval of centralgovernment for the purposes of section 194LCin respect of the issue of long term bondincluding long term infrastructure bond byIndian companies which satisfy the followingconditions:-

- The bond issue is at any time on or after 1st

day of October, 2014 but before the 1st dayof July, 2017,

- The bond issue by the Indian companyshould comply the FEMA regulations,

- The bond i ssue should have a loanregistration number issued by the RBI,

- The term “long term” means that the bondto be issued should have original maturityterm of three years or more.

Thus any bond issue, which satisfies the aboveconditions, would be treated as approved bythe Central Government for the purposes ofsection 194LC. (Section 194LC relates toIncome by way of Interest from IndianCompany)

(For full text refer Circular no. 15/2014, dated17th October,2014)

Service Tax

1. The CBDT hereby extends the date of filingthe half yearly service tax return in form ST-3


Association News

CA. Abhishek J. JainHon. Secretary

CA. Nirav R. ChoksiHon. Secretary

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For thcoming Programmes

Date/Day Time Programmes Speaker Venue

01.12.2014 5.00 p.m. to Important Amendments and Priyam R. Shah K. V. Patel Hall,Monday 7.00 p.m. Issues under GVAT Ahmedabad branch of

WIRC of ICAI,Naranpura, Ahmedabad

20.12.2014 8.00 a.m. to Cricket Match - - Sardar Patel Stadium,Saturday 1.00 p.m. President XI Vs. Secretary XI Navrangpura, Ahmedabad

04.01.2015 8.00 a.m. to Cricket Match - - Motera Stadium, Ground -B,Sunday 1.00 p.m. CAA Ahmedabad Vs. Motera, Ahmedabad.

Baroda Branch of WIRC of ICAI

01.02.2015 8.00 a.m. to Cricket Match - - Sardar Patel Stadium,Sunday 1.00 p.m. CAA Ahmedabad Vs. IT Bar Navrangpura, Ahmedabad

Association Ahmedabad

Glimpses of events gone by:1. On 9th October 2014, 5th Study Circle Meeting was held on the topic of “Service Tax – Practical

Issues” at H.K. College of Commerce Conference Hall, Ashram Road, Ahmedabad.

(L to R CA. Naishal Shah, Speaker CA.Punit R. Prajapati, CA. Shailesh C. Shah,

CA. Mehul Shah and CA. Abhishek J. Jain)

Participants at Study Circle Meeting

2. On 2nd November 2014 Diwali Get Together was organised at Aangan Party Plot, Ahmedabad.


Across

1. The common ground of all _______________is Human Value.

2. Due to mechanism of _________ credit, theservice provider pays service tax only on thevalue addition made by him.

3. Section 50C which substitutes considerationreceived on sale of capital asset by stamp dutyvaluation is applicable in case of a ________ .

Down

4. In today’s era, ______ and ______ sector isbackbone of the economy of any country.

5. Cenvat Credit cannot be denied on eventmanagement service where such event is heldat ________, calling it as an event for religiouspurpose

6. Root cause of Forensic Auditing is _______.

ACAJ Crossword Contest # 7

Notes:

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

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

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

ACAJ Crossword Contest # 6 - SolutionAcross1. Forgiveness 2. Creative3. Depreciation

Down4. Articles 5. Human6. Stamp and seal

❉ ❉ ❉

Winners of ACAJ Crossword Contest # 6

1. CA. Riken Patel

2. CA. Gaurang Choksi

3. CA. Riddhi Sheth

4. Members may submit thei r reply ei therphysically at the office of the Association orby email at [email protected] on orbefore 30/11/2014.

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

Volume : 38 Part : 08 November, 2014 C O N T E N T Scaa-ahm.org/Pdf/Journal/Journal-46.pdfby...

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Transcript of Volume : 38 Part : 08 November, 2014 C O N T E N T Scaa-ahm.org/Pdf/Journal/Journal-46.pdfby...