THE VIEWS 3 JULY, · PDF file4 AMAR AGARWALA SECRETARY 9830064050 [email protected] 5...

THE VIEWS JULY, 20113

INDEX

Particulars Page

Executive Committee and Subcommittes 2011-12 4 - 5

From the Government and Judiciary -

a) Direct Tax

* CA K.K.Chhaparia and CA Siddharth Jhajharia 6 - 8

b) Indirect Tax

* CA Rohit Surana 9 - 10

c) Company Law, CA Regulations and SEBI

* CA Sumit Binani and CA Priyanka Chhawchharia 11 - 13

Extracts Of Minutes Of Meeting Held At Central Processing 14 - 15Centre Of Income Tax Department At Bengaluru

MCA Swims in Green Water 16 - 18* CS Mamta Binani

Apparent Contradictions in Three Judgements of the Supreme 19 - 23Court on Capital & Revenue Expenditure and their Reconciliation* Subash Agarwal, Advocate

Winner dont have any time to place blame, they are too busy getting ready for the next challenge.


EXECUTIVE COMMITTEE ANDSUBCOMMITTES 2011-12

NAME DESIGNATION MOBILE NO. EMAIL

1 SANTOSH CHORARIA PRESIDENT/CONVENOR 9831207932 [email protected]

2 VINAY KUMAR SHRAFF IPP 9830061359 [email protected]

3 C. S. SARDA VICE-PRESIDENT 9830026790 [email protected]

4 AMAR AGARWALA SECRETARY 9830064050 [email protected]

5 RANJIT AGARWAL JT. SECTERARY 9830140211 [email protected]

6 JYOTI MANDAL TREASURER 9830221850 [email protected]

7 B. L. RATHI MEMBER 9831030153 [email protected]

8 G. R. GUPTA MEMBER 9830037546 [email protected]

9 MAMTA BINANI MEMBER 9831099551 [email protected]

10 MANISH GADIA MEMBER 9830328772 [email protected]

11 MANOJ BANTHIA MEMBER 9830868717 [email protected]

12 MOHIT BHUTERIA MEMBER 9331026475 [email protected]

13 R. K. BIDASARIA MEMBER 9433090662 [email protected]

14 SEEMA CHORARIA MEMBER 9831618823 [email protected]

15 SIDDHARTH JHAJHARIA MEMBER 9831201469 [email protected]

16 SUNIL SINGHI MEMBER 9830322640 [email protected]

17 SURENDRA SURANA MEMBER 9331879520 [email protected]

PAST PRESIDENTS (EX-OFFICIO MEMBERS)

NAME MOBILE NO. EMAIL

1 K. M. TAPURIAH 9830037651 [email protected]

2 R. C. SURANA 9331022544 [email protected]

3 SUSHIL LADIA 9433112912 [email protected]

4 TULSI RAM TIBREWALA 9830080444 [email protected]

5 B. L. PATNI 9831066217 [email protected]

6 R. S. KYAL 9339052121 [email protected]

7 M. S. TAPURIAH 9830280660 [email protected]

8 K. K. CHHAPARIA 9830044407 [email protected]

9 R. C. JHAWER 9830220544 [email protected]

10 VINAY KUMAR SHRAFF 9830061359 [email protected]


SUB COMMITTEES 2011-2012

Committee Chairman Vice-Chairman Convenor

Direct taxes R. C. JHAWER VIJAY SARAWAGI PRADEEP KAPOOR(983022054) (9432360990) (9830037345)([email protected]) ([email protected]) ([email protected])

Indirect Taxes VINAY SHRAFF PRADEEP MODI ROHIT SURANA(9830061359) (9433033882) (9836663781)([email protected]) ([email protected]) ([email protected])

Corporate Law B. L. PATNI AJAY TANTIA SUMIT BINANI(9831066217) (9831126492) (9830810003)([email protected]) (ajay.tantia@gmai l.com) ([email protected])

Audit & Assurance TULSI RAM TIBREWALA KSHITIZ PATNI VIVEK NEWATIA(9830080444) (9830645485) (9831088818)([email protected]) ([email protected]) ([email protected])

Building R. C. SURANA VINOD JAIN S. L. AGARWAL(9331022544) (9830027203) (9331008588)( [email protected]) ([email protected]) ( lalagarwalco@gmail .com)

Management RANJIT AGARWAL RUPI KHEMKA PRIYANKA CHHAWCHHARIADevelopment (9830140211) (9830993307) (9903003850)& Soft Skills ([email protected]) ([email protected]) ([email protected])

Information M. S. TAPURIAH PANKAJ JHAWER MANISH GADIATechnology (9830280660) (9748786250) (9830328772)

([email protected]) ([email protected]) ([email protected])

Capital markets K. M. TAPURIAH AMIT DALMIA ANIL SINGHI(9830037651) (9831188853) (9830149662)([email protected]) (j [email protected]) ([email protected])

International Law R. S. KYAL K SEKHAR ROHIT BIYANIand taxation (9339052121) (9830019869) (9874600237)

([email protected]) ([email protected]) ([email protected])

Magazine & Publication K. K. CHHAPARIA SURENDRA SURANA SIDDHARTH JHAJHARIA(9830044407) (9331879520) (9831201469)([email protected]) ([email protected]) ([email protected] )

Fellowship & Excursion R. S. KYAL BAL KISHAN PODDAR DEEPAK AGARWAL& Outstation Seminar (9339052121) (9830030738)

([email protected]) ([email protected])

Membership & SUSHIL LADIA PRANAV KEDIA MUKESH BANKADirectory (9433112912) (9903587930) (9831229567)

(sushil ladia@hotmail .com ) ([email protected])


FROM THE GOVERNMENT AND JUDICIARY

DIRECT TAX(Compiled by : K.K.Chhaparia, FCA , Siddharth Jhajharia, FCA)

A) Direct Tax Notifications

Sub : Income Tax Officer Bound To AcceptReturn Even If Total Income Is Less Than 5 Lacs

[Ref : ORDER [F.NO. 142/09/2011-SO(TPL)], DATED 25-7-2011]

1. The Central Board of Direct Taxes hadexempted a certain class of persons fromthe requirement of furnishing a Returnof income under sub-section (1) ofsection 139 of the Income-tax Act, 1961for the assessment year 2011-12, videNotification SO No. 1439 (E), dated 23-6-2011, subject to the conditions specifiedin the Notification.

2. It has come to the notice of the Board thatin some Income-tax offices. Returns ofIncome are not being received by thestaff on the ground that an individual withless than Rs. 5 lakhs of income is notrequired to furnish his return of income.

3. Necessary instructions may be issued tothe officers and staff concerned to acceptReturns of Income from those taxpayerswho wish to file their Return of incomeeven if they satisfy the conditions of theabove-mentioned notification.

B) Court Judgements (Direct Tax)

CIT vs. Gopal Purohit (Unreported, SupremeCourt)

Sub : Tests to determine whether shares gainsassessable as STCG or business profits

The Supreme Court vide order dated15.11.2010 dismissed the Department’s SpecialLeave Petition against the judgment of theBombay High Court in CIT vs. Gopal Purohit 228CTR 582 (Bom) where it was held that :

(a) it was open to an assessee to maintaintwo separate portfolios, one relating to

investment and another relating tobusiness of dealing in shares,

(b) that a finding of fact had been arrived atby the Tribunal as regards the two distincttypes of transactions namely, those byway of investment and those for thepurposes of business,

(c) that there should be uniformity intreatment and consistency when facts andcircumstances are identical particularly inthe case of the assessee and

(d) that entries in books of account alone arenot conclusive in determining the natureof income though they have a bearing.

Comments : In this case the return was filedwith STCG of Rs 5,00,12,879/- and LTCG of Rs6,65,02,340/- . The AO treated this income asBusiness Incom. The ITAT held the same asCapital Gains. The Revenue lost this casebasically on the ground that they couldn’tfurnish any justif ication for adopting adivergent approach for the assessment year inquestion. Interestingly, there have beenjudgements wherein the courts have upheldthe divergent view taken by the AO asregarding treatment of Capital Gains. Forinstance in the case of CIT vs Sutlej Cotton OilSupply Agency Pvt Ltd [100 ITR 706(SC)], theCapital Gains claimed by the assessee was treatedas ‘adventure in the nature of trade’ on theground that loan was taken for purchase ofshares and investment was made in non-dividendpaying companies. Recently C.B.S.T had alsoissued Circular No. 4/2007 dated 15.06.2007 toidentify whether transactions are Capital Gainsor ‘adventure in the nature of trade’. The issue ishighly debatable.

J. K. Industries Limited v CIT [Unreported,I.T.A.No. 649 of 2004 (Cal.)]

Sub : Interest free loan given to subsidiary out


of its own fund – whether interest paid byHolding Company be disallowed- ForeignTravel expenditure of director’s wife – whethercan be disallowed

It is not the legal obligation that always andnecessarily determines the deductibility ofany expenditure under the head business .Commercial expediency is also a factor ofsignificance. Thus, the borrowed fundadvanced to a third party should be forcommercial expediency if it is sought to beallowed under section 36(1)(iii) of the Act.

On Appeal it was directed to A.O. byHonorable HC to not to deduct any amountfrom expenditure on the ground that interest-free loan was given to its sister concerns fromthe borrowed fund when the profit was far inexcess and entire deposits were made in thesaid account . Following the same yardstickdisallowance of foreign travel expenditure ofthe spouse of the appellant ’s ManagingDirector who accompanied her husband onbusiness visits amounting to Rs.7,44,549/- isalso set aside.

Kanubhai M Patel HUF vs Hiren Bhatt Or HisSuccessors To Office [ 334 ITR 25 (Guj)]

Sub : Meaning of “Issue” for Issue of Noticeu/s 148 of the I.T Act

In this case, the notices were signed on31.03.2010, whereas the same were sent tospeed post centre for booking on 07.04.2010.It was held that merely signing the notices on31.03.2010 cannot be equated with issuanceof notice as contemplated u/s 149 of the Act.

Comments : The date of issue would be the dateon which the same were handed over forservice to the proper officer, which in the factsof the present case would be the date on whichthe said notices were actually handed over tothe post office for the purpose of booking forthe purpose of effecting service on thepetitioners. Till the point of time the envelopesare properly stamped with adequate value ofpostal stamps, it cannot be stated that theprocess of issue is complete.

C) By Tribunal

Kanubhai Ramji bhai Makwana vs ITO. [135 TTJ364 (Ahmd.)]

Sub : Whether provision of section 40(a)(ia)as amended by Finance Act, 2010 with effectfrom 14-2010, which has newly been insertedby Finance (No. 2) Act, 2004, with effect from1-4-2005, is remedial in nature, designed toeliminate unintended consequences whichmay cause undue hardship to taxpayers andis clarificatory in nature and, therefore, hasto be treated as retrospective with effect from1-4-2005, date on which section 40(a)(ia) hasbeen inserted by Finance (No. 2) Act, 2004

Held : The amendments brought out in section40(a)(ia) from time-to-time were clarificatoryand when an amendment is declaratory andclarif icatory in nature, the presumptionagainst its retrospectivity is not applicable andamendments of this kind only declare. It is nodoubt true that, ordinarily, a statute, andparticularly when the same has been madeapplicable with effect from a particular dateshould be construed prospectively and notretrospectively. But this principle will not beapplicable in a case where the provisionconstrued is merely explanatory, clarificatoryor declaratory, it cannot be disputed that theobject of the explanation is to explain themeaning and intendment of the Act itself. Inview, of the above discussion, it was to beconcluded that that the provision of section40(a)(ia) as amended by the Finance Act, 2010with effect from 1-4-2010, which has newlybeen inserted by the Finance (No. 2) Act, 2004,with effect from 1-4-2005 is remedial innature, designed to eliminate unintendedconsequences which may cause unduehardship to the taxpayers and is clarifactoryin nature and, therefore has to be treated asretrospective with effect from 1-4-2005, thedate on which section 40(a) (ia) has beeninserted by the Finance (No. 2) Act, 2004.

D) Unreported Judgements/Orders

ACIT vs. M/s. South Asia Electricity Holding Ltd.


[ITA No. 1433/Ko1/2009; ‘A’ Bench]

Sub : Explanation to Section 73 – “PrincipalBusiness” Analyzed

It was held that -

(i) Memorandum of Association of company,its past history, current deployment of itscapital break- up of income earned during yearwould all help in determining principalbusiness of company

(ii) Merely because income/loss in dealing inshares in one particular year is more thanincome/ loss from principal business ofassessee of granting loans and advances, itcannot be said that principal business ofassessee is not that of granting loans andadvances .

Comments : The above judgement is in line withthe principle laid down in DCIT vsVenkateshwar Inv. & Finance (P) Ltd [92 TTJ1129 (Cal)]. However the term ‘principalbusiness’ is nowhere defined in the Act andhave always been prone to litigations. Forinstance – In Kanoria Investments (P) Ltd [232ITR 7] and Offshore India Ltd. [15 ITD549(Kolkata)], “Fund Criteria” was held to bedetermining factor to determine principalbusiness.

In Melville Finvest Ltd. Vs JCIT [89 ITD 528(Hyd]and JCIT vs Haldia Investments Ltd. [85 ITD212(Kolkata)], “Income Criteria” was held tobe determining factor to determine principalbusiness.

Balwant Rai Wadhwa vs. ITO [I.T.A No. 74806/Del/ID; (ITAT Delhi)]

Sub : Despite service of s. 148 notice in time,non-supply of ‘Reasons For Reopening’ withintime renders the reopening void

Date of Order 14.01.2011

In respect of AY 2001-02. the AO served noticeu/s 148 on 28.3.2008 within the limitationperiod. However, the recorded reasons weresupplied on 15.5.2008 after the limitationperiod. The assessee argued before the

Tribunal that in the light of the observation inHaryana Acrylic vs. CIT 308 ITR 38 (Del), if thereasons for reopening were not served on theassessee within 6 years, the reopening wasvoid. HELD upholding the challenge:

( i ) U/s 149(1)(b) a notice u/s 148 cannot beissued after the issue of 6 years from theend of the AY. In Haryana Acrylic vs. CIT308 1TR 38 it was held that a notice u/s148 without the communication of thereasons there for is meaninglessinasmuch as the AO is bound to furnishthe reasons within a reasonable time. Itwas held that a case where the notice hasbeen issued within the said period of sixyears but the reasons have not beenfurnished within that period is hit by thebar of limitation because the issuance ofthe notice and the communication andfurnishing of reasons go hand-in-hand.The expression ‘within a reasonableperiod of time’ as used in GKNDriveshafts 259 ITR 19 (SC) cannot bestretched to such an extent that itextends even beyond the six yearsstipulated in s. 149;

(i i) As the issuance of the s. 148 notice andthe communication and furnishing ofreasons go hand in hand, the reasonshave to be supplied to the assesseebefore the expiry of period of 6 years. Ifthis is not done, the validity of the s. 148notice cannot be upheld. In anyproceeding, whether civil or criminal, asummons issued without a copy of theplaint or complaint has to be construedas if no valid service of notice has beeneffected upon the defendant orrespondents

Comments : This is an interesting judgementwhich lays down that even “reasons have tobe supplied” within time limit. In practical life,however, it is seen that the reasons aresupplied quite late by A.O, sometimes merelya week before the Assessment Order has beenpassed.


INDIRECT TAX(Compiled by : Rohit Surana, ACA)

over to Customs - Both the authorities belowhave based their opinions and findings onfacts cumulatively to arrive at a conclusion thatthe gold seized was the smuggled goods liableto be confiscated: both the authorities belowhave based their opinions and findings on allthese facts cumulatively to arrive at aconclusion that the gold seized was thesmuggled goods liable to be confiscated forhaving been smuggled in contravention of theprovisions of the Customs Act and those whopurchased the gold, including the presentappellant, did so with an intention to makeprofit knowing fully well that the same weresmuggled. Difference in the purity of gold,anomaly found in the bills produced by allthose persons at the time of retracting thestatements made in their affidavits andpositive evidence presented before thedepartment in the form of total matchingquality of the goods seized, cumulatively ledthese authorities and particularly the Tribunalto arrive at such a conclusion. This Court seesno reason to interfere with the said order,which is well reasoned and appeases the logic

B) Service Tax

M/s Cygnus Apparel (P.) Ltd.

Sub : Whether Service Tax is leviable onComputer Embroidery Work

Yes, computer embroidery work ismanufacturing activities and not taxableservice under BAS

The definition of BAS as provided undersection 65(105)(zzb) read with section 65(19)of the Finance Act, 1994, does not include anyactivity that amounts to manufacture ofexcisable goods. It also mentions thatexcisable goods has the meaning assigned toit in clause (d) of section 2 of the Central ExciseAct, 1944 and manufacture has the meaningassigned to it in clause (f) of section 2 of theCentral Excise Act, 1944. The Supreme Courtin the case UOI v. Nandi Printers (P.) Ltd. 2001

A) Customs

Plastvel Industries Vs CC, Trichy (ChennaiCESTAT, Dated: April 20, 2011)

Sub : Can Weekly bulletin be relied upon forlevy of duty

Customs - Valuation - Enhancement of valuebased on Platt’s price - In the case of RadheyShyam Ratanlal Vs CC Mumbai = (2009-TIOL-66-SC-CUS) , the Apex Court has held thatcontemporaneous documents like weeklybulletin of spices market indicating higherprice, relied upon by the department, can beaccepted for the purpose of enhancement ofvalue - No merit in the appeal. :

M/s Textoplast Industries Vs AdditionalCommissioner of Customs (Bombay HighCourt, Dated: July 6, 2011)

Sub : Penalty on Partners

For the purpose of imposing a penalty, theadjudicating authority under the Customs Act,1962 may in an appropriate case impose apenalty both upon a partnership firm as wellas on its partners - Matter remanded to CESTAT

Balaji Impex Vs UOI (Bombay High Court,Dated: July 1, 2011)

Sub : Natural Justice principal to be followedby Department

Merely because there was a special drive toclear a backlog of matters that would affordno justification for the department not tocomply with fundamental principles of naturaljustice: High Court

Efficiency in the disposal of quasi judicialproceedings is important but, that cannot beat the cost of overriding fundamentalprinciples known to the law of the land

Ishwarlal Narbheram Soni Vs CC (Gujarat HighCourt, Dated: July 1, 2011)

Sub : Retraction of Statement

Customs - Gold detained by Police handed

THE VIEWS JULY, 20111 0

(127)ELT 645 held that “the mere fact that therate of duty on printed cartons was NIL byreason of exemption would not make printedcartons non-excisable goods”. The SupremeCourt again in the case ofCCE Hyderabadv. Vazir Sultan Tobacco Co. Ltd. 1996 AIR 3025at page 10 has observed that if by virtue ofexemption the rate of duty was reducedto NIL the goods specified in the Tariff wouldstill be regarded as excisable. Further theSupreme Court in the case of All IndiaFederation of Tax Practitioners v. UOI [2007] 10STT 166 laid down a test that where goods arespecified in the schedule they are excisable.

Embroidery work is a manufacturing activityfalling under Chapter heading 5810 of theCentral Excise Tariff Act. Once the activity is amanufacturing activity of goods specifiedunder Central Excise Tariff Act, the said activityis not covered in the purview of BAS. Whenthe activity is not a taxable service, theprovisions of Notification No. 8/2005 – ST,dated 1-3-2005 cannot be applied. The saidnotification can be applicable only in caseswhere the activity of the service provider doesnot amount to “manufacture” within themeaning of clause (f) of section 2 of the CentralExcise Act, 1944 (1 of 1944).

M/s BASP Industries Vs CCE, Mumbai (MumbaiCESTAT , Dated: June 7, 2011)

Sub : Service Tax paid on telephone installedat partner’s residence

Service Tax paid on telephone installed at thepartner ’s residence is also Cenvatable -department have not undertaken anyinvestigation to prove that the telephoneservice was used for other than businesspurpose - they have also not refuted thecontention of the appellant that Income Taxdepartment has accepted such expenditure asbusiness expenditure:

C) Central Excise

Hindustan Coca-Cola Beverages Pvt Ltd Vs CCE,Thane (Mumbai CESTAT, Dated: March 25,2011)

Sub : Duty on samples

Prima facie the applicants do not have anyliability to pay duty on the samples drawn bythem for testing purposes and retained thesame in their factory - Pre-deposit waived andstay granted

M/s ALA Chemicals Vs CCE, Thane (MumbaiCESTAT, Dated: May 3, 2011)

Sub : Remission on work-in-progress goodsand semi-finished goods

In CEA, 1944, work-in-progress goods andsemi-finished goods are not defined -common parlance meaning to be used - goodswhich do not attain finality are called as work-in-progress / semi-finished goodsintermediate goods - Benefit of remissionavailable u/r 21 of CER, 2002 - Appeal allowedwith consequential relief

CCE & CC, Nashik Vs Prakash Products(Mumbai CESTAT , Dated: March 14, 2011)

Sub : Abatement when a unit is closedcontinuously for a period of 15 days or more

Abatement under rule 10 of Pan MasalaPacking Machines (Capacity Determinationand Collection of Duty) Rules, 2008 - rulemakes it very clear that if a unit is closedcontinuously for a period of 15 days or more,the benefit of abatement will be available -Nowhere does the rule stipulate that theclosure should take place within a calendarmonth itself - there is no dispute that the unitwas closed continuously for a period of 15days even though the closure overlapped inOctober - November and again in November -December - unit wil l be entitled for theabatement for the period of closure - Revenueappeal rejected.

Celebrate what you have accomplished, but raise the bar a little higher each time you succeed–Mia Hamm


COMPANY LAW, CA REGULATIONS AND SEBI(Compiled by : Sumit Binani, ACA, Priyanka Chhawchharia, ACA)

Fee for Form1A has been raised to Rs.1,000/- fromRs.500/-. Point number 8 has been inserted to givethe option of certif ication by a PracticingProfessional. In case the form is being certified bya Practicing Professional, only one name has to beentered in Point number 9. Point number 11 hasbeen inserted to specify the name of any existingcompany with a similar name, from which a NoObjection is to be taken. Point number 13 has beeninserted with the provision for approval from thegovernment in case any Company is to beassociated with Central Government, StateGovernment or Local Authority.

In case the form is certified by a practicingprofessional, it will be approved automatically. If notso certified, it will be approved by the concernedofficer at the Office of the ROC. New points have beenintroduced for verification as under :

That the search facility on the MCA Portal hasbeen used for checking the resemblance ofname with any existing Company or LLP.That the name is not in violation ofthe provisions of Emblems and Names(Prevention of Improper Use) Act, 1950.That the proposed name is not offensive toany section of people.That the Proposed name is such that its use bythe company will not constitute an offenceunder any law for the time being in forceThat all the mandated requirements of therespective Act/regulator, such as IRDA, RBI,SEBI, MCA, etc. have been complied with(applicable only in case proposed nameincludes words like Insurance, Bank, StockExchange, Venture Capital, AssetManagement, Nidhi, Mutual Fund, Finance,Investment, Leasing, Hire purchase etc. or anycombination thereof).An undertaking to be fully responsible for theconsequences, in case the name issubsequently found to be in contravention ofthe provisions of section 20 and 21 of theCompanies Act, 1956 and the prescribedguidelines.

The certifying profssional has too certify that:1. All required attachment(s) have been

completely attached to the form.

A) MCA CircularsSub : Filing of Balance Sheet and Profit and LossAccount in XBRL mode

[General Circular Nos. 43/2011 & 57/2011 dated07.07.2011 & 28.07.2011 respectively]

F inancial statements of companies for filing inXBRL mode shall have to be certif ied by theStatutory Auditor of the Company besides thesignatories as mentioned in Sec 215 of theCompanies Act, 1956. Also in case of delay in filingthe accounts in XBRL mode, the additional fee levyhas been exempted till 30.09.2011 to companieswho have been mandated to file their annualaccounts in XBRL mode in the first phase.

This above has been subsequently modified and it isnow informed that verification and certification ofthe XBRL document financial statements in e-formswould continue to be done by authorised signatoryof the company as well as professionals like practisingChartered Accountant, Company Secretary & CostAccountant. The additional fee exemption date isnow modified upto 30.11.2011 or within 60 days ofthe due date of filing, whichever is later.

Sub : Integration of DIN with Designated PartnershipIdentification Number (DPIN) under LLP Act

[General Circular No. 44/2011 dated 08.07.2011]

The Ministry has decided to issue oneidentification number to an individual for thepurpose of acting as a Director or DesignatedPartner as the case may be instead of the earlierpractice of issuing separate identificationnumbers. It has been decided that with effect from9.7.2011, no fresh DPIN will be issued. If a personhas been allotted DIN, the said DIN can be used asDPIN and vice versa. In case a person has beenissued both DIN and DPIN, the DPIN will standcancelled and DIN will be used for all the purposesunder Companies Act and LLP Act. Also for allexisting DIN/DPIN holders who have not furnishedtheir PAN are required to do so in a prescribedmanner on or before 30.09.2011 else heavy penaltywill be levied.

Sub : Name Availability Guidelines, 2011

[General Circular Nos. 45/2011 & 48/2011 dated08.07.2011 & 22.07.2011 respectively]


2. The search facility available on the portal ofMinistry of Corporate Affairs (MCA) forchecking the resemblance of the proposedname(s) with the companies and LLPsrespectively already registered or the namealready approved has been used.

3. The proposed name is not an undesirablename under the provision of section 20 of theCompanies Act, 1956 and also is in conformitywith Name Availability Guidelines, 2011.

Sub : Waiver of approval of Central Governmentfor payment of remuneration to professionalmanagerial person by companies having no profitsor inadequate profits


No approval of Central Government will berequired to be obtained by a listed company andits subsidiary if the concerned managerial personsatisfies the conditions prescribed.

Sub : Online incorporation of companies within 24 hours


With effect from 11th August, 2011, an option ofincorporating a limited company online within 24hours will be available with the possibility of digitalincorporation certificate being generated onlineimmediately upon submission of incorporationdocuments in the prescribed manner. The onlineoption casts a lot of responsibility & penal actionsin case of default on the practising professionalwhile offering an opportunity.

Sub : Simplified Procedure for obtaining confirmationof Inter State Shifting of Registered Office & also forRectification of Register of Charges

[General Circular Nos. 50/2011 & 51/2011 both dated25.07.2011]

To ensure speedy confirmation of inter-stateshifting of registered office and relevant changein memorandum of association, the approvingfunction is being planned to be delegated to therespective ROCs with effect from last week ofSeptember, 2011. The work related to rectificationof register of charges under Sec 141 of theCompanies Act, 1956 is also being planned to bedelegated to ROCs from the existing purview ofthe Company Law Board.

Sub : Simplified Online Approval of CentralGovernment under Section 297 of the CompaniesAct, 1956


Approval of Central Government can now be soughtif the proposed contract has been approved byshareholders vide special resolution. As per the newprocedure, online application will be required to bemade in a new e-form with the prescribed fee. Allrelevant terms of contract including details of boardand special resolution shall have to be captured inthe e-form. Very minimal physical humanintervention is required and the Government, by thismove, reposes great trust & confidence on thedeclarations and certifications made by the Company,its Directors and the practising professional.

Sub : Guidelines for RDs/ROCs in the matter ofScheme of Arrangement/Amalgamation


Detailed and comprehensive guidelines has beenissued to the RDs and ROCs prescribing the timelines,process to be followed & issues to be examined beforereplying to the Hon’ble High Court for matterspertaining to scheme of arrangement andamalgamation. Practising Professionals may preparethemselves accordingly while dealing with such cases.

Sub : Scrutiny inspection and investigation in allwinding up cases


The management of many companies file winding uppetition after committing major violations under thelaw. Winding up of such companies are also being filedby the creditors. In order to curb such mal practices,the Ministry has directed all RDs, ROCs and OLs andissued necessary instructions for scrutiny inspectionand investigation in all winding up cases being filedhenceforth with suitable monitoring mechanism.

B) CA Regulations :Sub : Amendment in Council General Guidelines, 2008

[Announcement No. ICAI/ESB/2011/01 dated29.07.2011]

All the members of Institute of CharteredAccountants of India (ICAI) are hereby informedthat in terms of the Council decision taken at its306th Meeting held on 7th - 8th June, 2011, theChapter-XII (Minimum Audit Fee in respect ofAudit) of the Council General Guidelines, 2008appended to the ICAI publication titled “ TheChartered Accountants Act, 1949” has beenrepealed with effect from 7th June, 2011


Subj : Definition of Relative in Chapter-IV of theCouncil General Guidelines, 2008[Announcement No. ICAI/ESB/2011/02 dated29.07.2011]All the members of the Institute of CharteredAccountants of India (ICAI) are hereby informedthat in terms of its decision taken at the 299thMeeting of the Council held on 27th – 28th October,2010, it has been decided that the term “relative”for the purpose of Chapter-IV of Council GeneralGuidelines, 2008 (Opinion on Financial Statementswhen there is substantial interest) will have thesame meaning as assigned to it in AS-18. Accordingly, the Chapter IV of the Council GeneralGuidelines, 2008 as appended to the ICAI publicationtitled “The Chartered Accountants Act, 1949 “ ismodified and modified version shall read as under - Chapter IV : Opinion on financial statements whenthere is substantial interest4.0 A member of the Institute shall not express hisopinion on financial statements of any business orenterprise in which one or more persons who arehis “relatives” within the meaning of AccountingStandard (AS - 18) has / have, either by themselvesor in conjunction with such member, a substantialinterest in the said business or enterprise. Explanation : For this purpose and for the purpose ofcompliance of Clause (4) of Part I of the SecondSchedule to the Chartered Accountants Act, 1949, theexpression “substantial interest” shall have the samemeaning as is assigned thereto under Appendix (9) tothe Chartered Accountants Regulations, 1988." This decision shall be in force with effect from 28thJune, 2011

Sub : Multipurpose Empanelment Form 2011-12[Announcement dated 29.07.2011]This is to inform that Multipurpose Empanelment formfor the year 2011-12 (including form for empanelmentof Bank Branch Auditors for the year 2011-12) hasbeen hosted on the website www.meficai.org today.Last date for submission of online applicationson www.meficai.org is 27th August, 2011.

C) SEBI :New Takeover Regulations based on therecommendations of Takeover RegulationsAdvisory Committee has been approved.[Press Release No. 119/2011]The major ones being, a) Initial trigger threshold

increased to 25 % from the existing 15 %; b) Thereshall be no separate provision for non-competefees and all shareholders shall be given exit at thesame price; c) In cases of competitive offers, thesuccessful bidder can acquire shares of otherbidder(s) after the offer period without attractingopen offer obligations; d) Voluntary offers havebeen introduced subject to certain conditions; e)A recommendation on the offer by the Board ofTarget Company has been made mandatory;

As regards definition of control and offer size, theBoard decided as under:

f) Existing definition of control shall be retainedas it is; g) The minimum offer size shall be increasedfrom the existing 20 % of the total issued capital to26 % of the total issued capital.

The Board did not accept the recommendation ofTRAC to provide for delisting pursuant to an offerand proportionate acceptance.

Mode of supplying Annual Reports by listed entitiesto shareholders

[Press Release No. 119/2011]

As part of green initiative to contain theenvironmental cost incurred by listed entities insupplying hard copies of full annual reports to allshareholders, it has been decided that listedentities shall supply:

soft copies of full annual reports to all thoseshareholders who have registered for the samehard copy of abridged annual reports to othershard copies of full annual reports to thoseshareholders who request for the same

Amendment to the SEBI (Prohibition of InsiderTrading) Regulations, 1992

[Press Release No. 119/2011]

The Board approved amendment to the SEBI(Prohibition of Insider Trading) Regulations, 1992mandating certain disclosures to be made bypromoters and persons who are part of promotergroup of a listed company. The amendment relatesto initial disclosures relating to their shareholding atthe time of becoming promoter or part of promotergroup; and also continuous disclosures wheneverthere is a change in their holdings exceeding Rs. 5lakh in value or 25,000 shares or 1% of totalshareholding or voting rights, whichever is lower.Presently, similar disclosures are required to be madeby the directors and officers of the company.


EXTRACTS OF MINUTES OF MEETING HELD ATCENTRAL PROCESSING CENTRE OF INCOME TAX

DEPARTMENT AT BENGALURU

ABOUT THE Central Processing Centre (CPC) :

1. The present strength of the IT departmentin the CPC is 35. In addition to this, about150 people from Infosys also operate fromthe CPC. Returns are processed in a batchmode. It can process more than 100,000returns per day. Almost 40% of the totalreturns filed in the country are currentlybeing processed by the CPC.

2. The CPC presently processes the e-returnsfiled in the country and also the physicalreturns filed in Karnataka and Goa.

3. E f i led returns are pre- f i l tered beforeprocess ing . The CPC processes thosereturns where there is TDS credit can begiven as per CBDT guidelines issued fromtime to time Wherever TDS credit cannotbe given as per guidelines issued by CBDTand ver i f icat ion of TDS cert i f icates arerequired, the e-return is transferred to thejur isd ict ional assess ing of f icer forprocessing.

4. The CPC does not have the powers to passorders giving effect to appeal orders oraudit objections. These powers lie only withthe respective field officers.

5. The CPC can be contacted on the toll freenumber 1800 425 2229 and on the email [email protected].

6. CPC has already finished processing of alleligible returns (as mentioned in 6 above)where ITR-Vs have been received by it orwhere returns are f i led us ing d ig i ta lsignature for A.Y. 2010-11. The status ofprocess ing can be seen on the E- f i l ingwebsite. The average return processingtime was 93 days for that year.

COMMON MISTAKES THAT ARE NOTICED BY THECPC :

1. The statistics prepared by the CPC show thatthe most common reason for rectificationsbeing sought in respect of demands raised arefollowing types of mistakes committed whilepreparing and/or uploading the e-returns:

a) The private software used by tax payersdoes not generate accurate XML files. Attimes, the xml fi le generated by thesoftware does not pick up details ofcertain schedules, but only totals of thoseschedules.

b) Depreciation as per books of account isnot added back by taxpayer whiledepreciation as per Income-tax Act isclaimed as a deduction. This results indouble deduction being claimed.

c) Chapter VI-A deductions are not enteredproperly.

d) Mismatch of tax payments as entered inthe Return and as appearing in the Form26AS due to mistakes in entering BSRcode, SL no, Amount or date of deposit.Taxpayer has entered minor head as 400– regular payment of tax instead of minorhead 300-Self assessment tax

e) Wrong amounts of tax payments enteredinto the Return. It should be noted herethat the software matches the exactamount and even if there is a differenceof Re 1, the system will reject the amountentered by the tax payer and not givecredit.

f) Wrong PAN of tax deductee entered inthe system by the tax deductors

g) Wrong TAN of deductor entered in theReturn by the deductee

h) Wrong CIN details entered in the Return


2. Apart from the above, in many cases, thefollowing data is fed incorrectly in the Return:a) Email ID : It should be noted here that

the CPC’s software picks up the email IDas entered in the ITR form and not theone registered on the e-filing websitesince this would be the latest email

b) Bank account details : These must becorrectly entered in the Return. Theaccount number, BSR Code and MICR Codeare very important. Even if there is asingle digit difference, the ECS will nottake place successfully. Incorrect bankaccount or giving bank account that hasbeen closed would result in rejection ofRO while presenting.

c) Address of assessee : If the address iswrongly mentioned in the Return, therefund cheque and the Intimation sentto the assessee will be returnedunserved.

d) ITR-V not being sent : There are a largenumber of returns filed electronically forwhich ITR-V is not received by the CPC(around 7%). If the same is not receivedwithin time, the e-return will be treatedas void ab initio.

3. For Assessment Year 2009-10, as against 45.20lakh returns processed, rectificationapplications were received in 5% (2,24,753) ofthe cases, whereas for assessment Year 2010-11, as against 71.20 lakh returns processed,rectification applications were received onlyin 1.3% (90,698) of the cases.

REQUEST MADE BY CPC TO THE CA FRATERNITY :

1. Before making a call to the CPC on 1800 4252229 to address any query, please ensure thatthe following data are handy:a) PAN of the tax payerb) Date of Birth/Incorporation of the tax payerc) Communication Number mentioned on

the CPC generated document/mail/intimation received by the tax payer

If the above are not readily available, the callwill not be successful.

Also, in case the query is not resolvedimmediately, a ticket number can berequested for, on the basis of whichsubsequent follow up can be made.

2. At the time of data entry into the ITR form, asfar as TDS entries are concerned, there wasno need to fill in individual items appearingin a particular TDS certificate. The CPC was onlyconcerned with the total amount reported bya deductor against a particular TAN andwhether it is TDS on salaries or Other thanSalaries. If that amount and the TAN tallieswith the total amount of TDS reported by theconcerned deductee in his return against thesame TAN, then the CPC would grant creditfor the said TDS. It was not necessary tomention individual amounts contained inevery certificate. Similarly, it follows logicallythat a person can add up the total TDS as perthe 4 quarterly certificates from the sameDeductor, and show the total TDS for the yearagainst that Deductor.

EFFECTIVE MEETINGSMeetings are like double -edged sword - theyare either a waste of your time, or you can scaleup your business. It all depends on how effec-tive you are in conducting meetings.

Chanakya gives us some tips on this issue :

"He should declare without loss of time what is inthe king's interest." (5.4.11)

Thus we should :Have an Agenda - As Bill Gates wrote in hisbook, Business at the Speed of Thought,

"Those meetings that are planned well inadvance are the most effective ones."Come to the Point, ASAP ! - This is very criti-cal. Meetings need to be started off like anyother session. Be casual - ask the team aboutthe status of the project, find out if thereare any issues, offer tea, start the discussionetc. However as the meeting proceeds, it isvery necessary to come to the point ASAP!Most importantly, as the meeting comes toan end , make an action plan. Take decisionsand execute them.


MCA SWIMS IN GREEN WATERS

CS MAMTA BINANI, B.COM, FCSPRACTISING COMPANY SECRETARY &IMMEDIATE PAST CHAIRPERSON-EIRC OF ICSI

[email protected]

Our planet ‘Earth’….’Mother Earth’ as it ispopularly called is said to be in danger because ofthe green house emissions and the rampantdisappearance of the green cover. But I say that itis not the Earth which is in danger, it is us, thehuman beings who are in known danger and weneed to take all voluntary and forced steps towardssaving ourselves and our future generations fromthe perils of growing non-conducive mother earth.There are several steps being taken by all kinds ofbodies towards not only sensitizing people on theirresponsibility to the environment but also bringingin statutory compulsions directed towards savingthe precious environment.

It is a matter of pride that Ministry of CorporateAffairs has taken its right step towards thispertinent direction by bringing some breakthrough directions.

There are lakhs of companies registered inIndia. If not anything else, the Companies have toat least f i le their statutory papers. This wasconsuming tons & tons of paper.

1. Just going back to the history of the filing ofpapers and documents with the erstwhileDepartment of Company Affairs (now knownas Ministry of Corporate Affairs), the statutoryfilings alone used to be loaded with realms ofpaper. The annual reports, constituting of thebalance sheets, profit and loss account,directors’ report, auditor’s report etc. used tobe filed in three sets, not mentioning aboutthe other filings, for example, form nos. 8 &13 (creation, modification of charge) whichwas also required to be filed in three sets. Weall know that physical fi l ing is no moreallowed and be it annual reports of a largecompany or a small company, all of it is filed

electronically thereby not requiring theCompanies to print volumes of papers andthereby saving that many trees from being cut.THIS IN MY OPINION IS THE BIGGEST GREENINITATIVE TAKEN BY THE MCA.

2. Since 2006, electronic filings have brought asea change in the outlook of the scheme ofthings and though the Ministry did not termthis step as a green initiative but there isabsolutely no hesitation to say that MCA-21has been a pioneer in revolutionizing the waycorporates did their paper compliances withthe statutory body.

3. The filing issue was arrested well by MCA. Butthere was a still larger issue in front of themwhich had captured their attention and MCAwas working on it. The matter pertaining tohuge printing of ‘n’ number of annual reportswhich were required to be sent to eachshareholder every year. We all understand theimpact and usage of these annual reports. VideGeneral Circular No.17/2011, MCA brought outa change which had far reaching effect onsection 53 of the Companies Act, 1956 byleveraging and using sections 2, 4, 5 and 81 ofthe Information Technology Act, 2000. Thesesections give legal validity to compliancesdone through electronic mode.

Section 53 deals with service of documentson members by the Company. Keeping in view theabove, the Company would have complied withsection 53 of the Companies Act, 1956 if the serviceof documents has been made through electronicmode provided the Company has obtained the e-mail addresses of its members for sending thenotice/ documents/ annual reports through email.An advance opportunity has to be mandatorily


given to each shareholder to register their emailaddress and changes therein from time to time.

My suggestion would be to send printedinland letters to each shareholder intimating of theparticipation of the Company in the green initiativeof MCA and also mentioning specifically and inclear language about the requirement of theiremail addresses for facilitating sending of notices/documents/ annual reports by email. The Companymust also mention about the shareholder’s rightto receive the said papers even physically for whichthey have to specifically write to the Company. TheCompany will not charge for sending thedocuments in physical mode. In cases where anyshareholder has not registered his email addressfor receiving the papers etc. through email, thepapers will be sent by other modes of service asprovided under section 53 of the Companies Act,1956.

Towards sending the papers electronically, myview is, either the Company can use the services ofthe Registrar & Share Transfer Agents in sendingemails (the email addresses made available by theDepositories and R & T Agents), at a cost. Anothercould be to outsource to a data manager, hired forsuch purposes. The data manager could also begiven mandate for continuous upgradation andfeeding of email addresses & for this purposewriting to shareholders at intervals for their emailaddresses. Yet another could be to purchase a bulkemail software and send emails, inhouse. Thissoftware would also give report of the mail’sdeliverability and non-deliverability. MCA has notmentioned about the steps that the Company needsto take if the documents sent to an id, bounces/returns undelivered. As a matter of prudence, theCompany may write to those shareholders at theirphysical address about the said fact and askingfor their current/changed email id.

This year, for the larger benefit of theshareholders and to give the shareholders anopportunity to get accustomed, few Companies arealso thinking of sending the annual reportsphysically, in the usual manner (just that for thepurposes of section 53, UCP has been discontinuedby the Postal Department from 23.02.2011) and theirannual reports are carrying specific item in the

notes or by way of a loose leaflet about the GreenInitiative. In such cases, there is a particularmention being made to the shareholders for theirsubmission of email id’s and that after the date ofthe present year’s annual general meeting, theCompany will immediately thereafter adopt theGreen Initiative.

There is still a huge populace of shareholderswhich do not have emai l id’s and manyshareholders of Companies are still not havingshares in the dematerialized mode. The Ministry’ssteps may force them to become tech driven andthis would be surely a welcome change in theirl ives too, just l ike the ways in which manyprofessionals transformed when MCA brought inelectronic filing.

I foresee that the Government may graduallymake giving of email id’s compulsory at the timeof filling up the forms for dematerialization of theirholdings, just like to obtain DIN, email id ismandatory. We are also aware that MCA hadfloated the draft of the Companies(dematerialization of Certificates) Rules, 2011 forpublic comments. These rules will make itmandatory for all public companies and theirsubsidiaries which have raised money by issue ofshares, debentures, by accepting public deposits,stock, bond or any other financial instruments frompublic (other than directors of the Company) toissue and keep such share certificates, debenturecertificates and certificates issued for receipt ofsuch deposits etc. in dematerialized form only.

I am sure after reading the above, we all mustbe in a position to appreciate the MCA’s move inall directions.

We can very well understand that not far arethe days when the Company will be able to sendto each shareholder, papers in electronic modealone, thereby minimizing, rather almost negatingthe need of using paper. This is a huge leap in notonly showing its firm commitment to saving theuniverse but also moving towards moreprofessionalism, transparency and the optimumuse of technology. It wi l l make storage andretrieval of documents so easy and theshareholders and stakeholders including analystscan use the data at ease.


4. Yet another step from the Ministry wastowards simplification of DIN rules videGeneral Circular No. 5/2011 by whichapart from making things simpler, theneed for physical submission of DINapplication form along with itssupporting documents has been doneaway with. Instead, along with the onlinegenerated DIN form, one has to scan thesupporting documents and it has to befiled as an attachment.

5. In a small way though, the GeneralCircular issued with regard to paymentof MCA fees is there in vogue with aninstruction to stop offline payments foramounts below Rs.50,000.00 (except 3cases where challan mode for paymenthas been allowed vide General Circulardated 27.05.2011). This is majorly doneto ofcourse fasten the approval processas banks follow T+1 for reporting onlinepayments. Let us see the greener aspect.Most of the payments unless it is forincrease in authorized capital of theCompany or for new Companyincorporation, would fall within theambit of less than Rs.50,000.00. Forphysical payments, challans wererequired in 3 sets and with onlinepayments, which is no more required.Hence, a small but important steptowards Green Initiative.

6. The Ministry vide General Circulars No.27/2011 and 28/2011 dated 20.05.2011brought out breath taking steps ,something which seemed to be farfetched but at the same time wasinevitable. These circulars spelled outparticipation by shareholders in generalmeetings through electronic mode andparticipation by directors in meetings ofBoard/Committee of Directors throughelectronic mode, respectively. Meetingscan be attended by way of videoconferencing, subject to compliance ofcertain conditions given in the circularsmentioned above, read with clarificationissued vide Circular No.21/2011 dated

02.05.2011. For board meetings, count byway of video conferencing will beallowed for the purposes of quorum.Every director will have to attend at leastone meeting personally in a financialyear. For General Meeting, it is very clearthat for quorum, members physicalpresence will only count. Ministry hasmade it mandatory for all l istedcompanies to provide video conferencingfacility for General Meetings from FY2012-2013 onwards and just to re-iterate,companies are under no obligation toprovide video-conferencing for BoardMeetings.

I am sure lot of working companies willbenefit immensely out of this bold initiativeof MCA. There will huge saving of costs andtime. Now-a-days, Boards of Companies aremulti cultured and constitutes of directorsfrom different states, nations and countries.Recognizing presence of way of videoconferencing is a welcome step as it willensure much larger participation,unhindered exchange of thoughts and mostvital, everything gets minuted… hey on thelighter side, each director attendingphysically or through video conferencing,gets their sitting fees too.

7. The MCA has vide General CircularNo.29/2011 initiated another green step.All certificates and standard lettersissued by the Registrar of Companies willnow be issued electronically under theDigital Signature of the Registrar ofCompanies. At present, these certificatesare issued physically under the manualsignature of ROC’s and issued by post.

8. Yet another greener move has been madeby allowing e-polling in postal ballot videNotification No. GSR (E) dated 30.05.2011.Quite a welcome step.

All in all, I admire the green dive being madeby MCA and my accolades for the same. In days tocome, the dive is going to get deeper and deeperand we all are going to get more and more tech-savvy. Thanks to MCA.


Apparent Contradictions in Three Judgementsof the Supreme Court on Capital & RevenueExpenditure and Their Reconciliation

SUBASH AGARWAL, ADVOCATE

[email protected]

1. INTRODUCTION

Sec. 37(1) of the Income Tax Act 1961, which is theresiduary section as for as the allowability of expensesunder the “Business head “ is concerned, providesthat the expenditure has to be incurred wholly andexclusively for the purposes of business and it shouldnot be in the nature of capital expenditure. Thuscapital expenditure is not an allowable expenditureeven if incurred for earning profits unless expresslyprovided in the “Act”. Similar provision as in sec. 37(1)was embodied in the Indian Income tax , 1922 in theform of sec. 10(2) (xv)

2. CONTROVERSY OVER CAPITAL AND REVENUEEXPENDITURE

The term “capital expenditure” having not beendefined either in 1961 Act or 1922 Act, controversyover capital and revenue expenditure has beenraging for decades. So thin becomes the dividingline between the two sometimes that the appellateauthorities and the judiciary faces a toughbalancing task and the assessee and the revenueauthorities are ultimately found locked in the seesaw game on the issue . It is not uncommon to findinstances where while the assessing officer refusesto treat an item of expenditure to be of revenuenature, the first appellate authority refuses to toehis line on appeal by the assessee.. Then on thedepartmental appeal, the Tribunal restores theorder of the A.O. which is negatived by the hon’bleHigh Court to be finally reversed by the hon’bleSupreme Court on the departmental appeal.

3. THE TROUBLESOME TRIO

The Hon’ble Supreme Court has in recent yearsrendered three important judgements on the issueof determination of capital and revenue expenditureand the year(s) of allowability of the expenditure heldto be of revenue nature but the benefit in respect ofwhich accrues over several years.

Some authors hold the view that the three decisions

are contrary , extremely difficult to reconcile andone would have to wait for another SC judgementfor the reconciliation of these three decisions.

Is it so?

The author feels that the three judgements, oncontrary, are either landmark judgementsinasmuch as they have given finality to theconfused picture by reconciling the diverseprecedents obtaining in a particular field or havereiterated the already decided position in theirrespective field and do not leave any question markon the issues tackled.

4. BRIEF FACTS AND THE DECISIONS:

The three judgements in question are –

a) Madras Auto Services (P) Ltd. (1998) 233 ITR468 (SC)

b) Madras Industrial Investment CorporationLtd. v. CIT (1997) 225 ITR 802(SC)

c) Aditya Minerals (P) Ltd. v. CIT [1999] 106Taxman 337(SC)

Brief facts of the judgements are :

a) Madras Auto Services (P) Ltd. (1998) 233 ITR468 (SC)

In this case, the assessee company investeda sum of Rs. 1,62,835/- and Rs. 50,937/- duringthe previous year relevant to the assessmentyear 1968-69 and 1969-70 respectively inconstructing a new building on a land acquiredon lease for 39 years. As per the terms oflease, the new building was to belong to thelessor and not to the assessee from inception.Before the ITO, the assessee claimed the saidexpenditure as capital loss. In the alternative,the assessee claimed depreciation on capitalinvestment; in the alternative, it claimeddeduction of the payments as businessexpenditure. Ultimately, the Tribunal held theexpenditure to be revenue expenditure and


allowed the same as deduction. Thecontention of the revenue that theexpenditure was capital expenditure wasnegatived by the Tribunal. On reference, theHigh Court upheld the view of the Tribunaland held that the two amounts constituterevenue expenditure. On further appeal bythe department, the hon’ble Supreme Court,relying upon the finding of the Tribunal thatthe rent as stipulated in the lease wasextremely low, observed-

“What advantage did the assessee get byconstructing a building which belonged tosomebody else and spending money for suchconstruction? The assessee got a long leaseof a newly constructed building suitable to itsown business at a very concessional rent…

The saving in expenditure was a saving inrevenue expenditure in the form of rent.Whatever substitutes for revenueexpenditure should normally be consideredas revenue expenditure. Moreover, theassessee in the present case did not get anycapital asset by spending the said amounts.The assessee, therefore, could not haveclaimed any depreciation. Looking to thenature of the advantage which the assesseeobtained in a commercial sense, theexpenditure appears to be revenueexpenditure.”

b) Madras Industrial Investment CorporationLtd. v. CIT (1997) 225 ITR 802(SC)

In this case, the assessee- company wrote offRs. 22,500/- as discount allowed on issue ofdebentures on a proportionate basis over thetenure of debentures-Rs. 12,500/- pertainedto the proportionate portion of the totaldiscount of Rs. 3,00,000/- on debentureissued during the relevant previous year andRs. 10,000/- related to the amount writtenoff as discount on the previous issue. ITOdisallowed the claim of the whole of Rs.22,500/- on the ground that discount onbonds and debentures was not allowable asan expenditure. On appeal, the AAC held thatthe discount allowed at the time of the issueof the debentures was to be treated as a partof expenditure for such issue and allowed theclaim for Rs. 12,500/- but rejected the claimas regards Rs. 10,000/- on the ground that itrelated to discount on debentures issued inearlier year. Emboldened by the decision of

the AAC, the assessee contended before theTribunal, inter alia, that the AAC having heldthat discount allowed at the time of issue ofdebentures was to be treated as part of theexpenditure incurred on such issue, shouldhave further allowed a sum of Rs. 2,87,500/-being the balance of the total discount of Rs.3,00,000/-. The Tribunal held that theexpenditure of Rs. 3,00,000/- was incurredduring the relevant previous year and wasallowable as expenditure incurred for thepurpose of business. In the game of see-sawwith the revenue, the balance tilted againstthe assessee when on a reference by thedepartment, the Madras High Court held thatthe discount of Rs. 3,00,000/-did notrepresent any payment made to any one soas to constitute expenditure.

On appeal by the assessee -company againstthe decision of the High Court, the hon’bleSupreme Court reversed the said decision andheld that the discount allowed on issue ofdebentures is a revenue expenditure.

On the question, whether whole or part ofsuch expenditure was allowable in the yearin question, it held that the appellant isentitled to deduct a sum of Rs. 12,500/- outof the discount of Rs. 3,00,000/- in therelevant asst. year. The balance expenditureof Rs. 2,87,500/- cannot be deducted in theasst. year in question.

c) Aditya Minerals (P) Ltd. v. CIT [1999] 106Taxman 337(SC)

In this case, the assessee company obtaineda lease of and for 15 years for excavationpurposes. According to the agreement, theassessee was required to pay Rs.35/- per acreby way of rent per month. The annual rentworked out to Rs.10,752/-. The assesseedeposited with the lessor, the rent for theentire period of 15 years aggregating toRs.1,61,280/- by way of a guarantee for dueperformance of lease for 15 years. However,the deposit was adjustable against the rentof each month and it carried no interest.

For the assessment years in question theassessee claimed as business expenditure theannual rental of Rs.10,752/- paid to thelessor. The ITO held that the lease amountclaimed by way of deduction could not beallowed as revenue expenditure. On firstappeal, the AAC confirmed the disallowance.


The second appeal before the Tribunal wasalso unsuccessful. Appeal by the assesseebefore the hon’ble Andhra Pradesh High Courtalso failed, which after considering severalSupreme Court judgements came to theconclusion that the expenditure was incurredfor acquiring an asset or advantage ofenduring character and must, therefore, beheld capital in nature. The hon’ble SupremeCourt, in a brief judgement, affirmed thejudgement of the High Court.

Before proceding to reconcile the apparentlythree contrary decisions cited above, it ispertinent to discuss various tests courts haveevolved for determining capital and revenueexpenditure-

5. TESTS FOR DETERMINING CAPITAL AND REVENUE

One of the important test applied usually by thecourts was laid down by Lord Cave L.C. in BritishInsulated and Helsby Cables Ltd. v. Atherton(1925) 10 TC 155 (HL) at pg. 192, where thelearned Lord stated-

“When an expenditure is made, not only once andfor all but with a view to bringing into existence anasset or an advantage for the enduring benefit ofa trade, I think that there is very good reason (inthe absence of special circumstances leading to anopposite conclusion) for treating such anexpenditure as properly attributable not torevenue but to capital”.

The above test specifies the two basic elements ofa capital expenditure-

i) The expenditure is incurred once and for alland

ii) It creates an asset or brings advantage forthe enduring benefit.

But the test specified above is not of universalapplication. The parenthetical clause itselfprovides that the test will break down if there arespecial circumstances pointing to the contrary.

The Hon’ble Supreme Court in Assam BengalCement Co. Ltd. v. CIT (1955) 27ITR34 has laiddown the following tests-

1) Outlay is deemed to be capital when it ismade for the initiation of a business, forextension of a business, or for a substantialreplacement of equipment.

2) Expenditure may be treated as properlyattributable to capital when it is made not

only once and for all but with a view tobringing into existence an asset or anadvantage for the enduring benefit of a trade.If what is got rid of by a lump sum payment isan annual business expense chargeableagainst revenue, the lump sum paymentshould equally be regarded as a businessexpense, but if the lump sum payment bringsin a capital asset, then that puts the businesson another footing altogether.

3) Whether for the purpose of the expenditureany capital was withdrawn, or in other words,whether the object of incurring theexpenditure was to employ what was takenin as capital of the business. Again, it is to beseen whether the expenditure incurred waspart of the fixed capital of the business orpart of its circulating capital.

6. APPARENT CONTRADICTIONS IN THE THREEJUDGEMENTS

Following apparent contradictions are visible-

a) While on the one hand in Madras Auto’s case,the court holds the view that the cost ofconstruction of a new building on a landacquired on lease for 39 years is a revenueexpenditure, on the other hand in the Adityamineral’s case it held that the annual rent ofRs. 10,752/- for obtaining a lease of land for15 years for excavation purposes is anexpenditure for acquiring an asset oradvantage of enduring character andtherefore capital in nature.

b) In the Madras Auto’s case, the court holdsthe view that whatever substitutes forrevenue expenditure should normally beconsidered as revenue expenditure andtherefore did not ask for the proportionateallocation of the total expenditure over theperiod of lease. On the other hand, in theMadras Industrial Investment Corp.’s case itheld that the total amount of discount ondebentures is to be written off over thetenure of debentures.

7. RECONCILING THE APPARENT CONTRADICTIONS

(a) Both the cases operate in different fields.Madras Auto service’s case belong to the classof cases where assessee creates an asset ofan enduring nature but the asset so createddo not belong to the assessee. Test ofenduring benefit as discussed earlier is not ofuniversal application. Lord Radcliffe had


emphasised about the non-universality of thistest in Commissioner of Taxes v. NchangaConsolidated Copper Mines Ltd. (1965)58ITR241(PC) in the highly felicitous languageby stating that it would be misleading tosuppose that in all cases securing a benefitfor the business would be, prima facie, capitalexpenditure “so long as the benefit is not sotransitory as to have no endurance at all.”The Supreme Court had observed in AssamBengal Cement Co.’s case (supra) that whatis got rid of by a lump sum payment is anannual business expense chargeable againstrevenue, the lump sum payment shouldequally be regarded as a business expense.The Court, therefore, in the Madras AutoService’s case observed-

“Right from inception, the building was of theownership of the lessor. Therefore, byspending this money, the assessee did notacquire any capital asset. The only advantagewhich the assessee derived by spending themoney was that it got the lease of a newbuilding at a low rent. From the business pointof view, therefore, the assessee got the benefitof reduced rent. The High Court has, therefore,rightly considered this as obtaining a businessadvantage. The expenditure is, therefore, tobe treated as revenue expenditure.”

The Court relied upon the following cases (allSupreme Court decisions) which related to thesame field, in coming to the stated conclusion-

Lakshmi Sugar Mills Co. (P) Ltd. v. CIT(1971) 82I TR 376

L.H. Sugar Factory And Oil Mills (P)Ltd. v. CIT (1980) 125 ITR 293

CIT v. Associated cement CompaniesLtd. (1988) 172 ITR 257

CIT v. Bombay Dyeing AndManufacturing Co. Ltd. (1996) 219ITR 521

Aditya Mineral’s case, on the other hand, fallsaltogether in a different field where differentset of tests and precedents are applicable.Emphasizing upon the “method of arguing byanalogy” in such difficult situations, Justice P.N. Bhagwati in L. H. Sugar factory’s case(supra) observed-

“It was pointed out by Lord Radcliffe inCommissioner of Taxes v. NchangaConsolidated copper Mines Ltd.(1965)58

ITR 241(PC) that “ in considering allocationsof expenditure between capital and incomeaccounts it is almost unavoidable to arguefrom analogy.” There are always cases fallingindisputably on one or the other side of the lineand it is a familiar argument in tax courts thatthe case under review bears close analogy to acase falling on the right side of the line and musttherefore be decided in the same manner.”

Undisputably, Aditya Minerals case fell on theother side of the line. It related to mininglease and therefore, hon’ble Andhra PradeshHigh Court in its judgement as reported in167ITR774 refused to take cognizance ofEmpire Jute Co. Ltd. v. CIT(1980)124 ITR1which was cited by the counsel for the assessee.It may be noted that the Supreme Court onfurther appeal by the assessee in this case gavea very short verdict as the five judge benchagreed fully with the A.P. High Court verdict.

The decision in Aditya Mineral’s case isreaffirmation of well settled principle in thecase of mining leases that expenditure foracquiring right over land to win minerals is ofcapital nature whereas the expenditureincurred for obtaining the right to acquire theraw material is of revenue character for beinglaid out for the acquisition of stock in trade.The Constitution Bench of the Supreme Courtin this case, in fact, resolved the apparentconflict between the judgements of its twobenches in Pingle Industries ltd. v. CIT (1960) 40ITR 67 and Gotan Lime Syndicate v. CIT (1966)59ITR718 on the basis of this principle.

The Court likened the case in hand, on facts,to Pingle Industries Ltd.’s case (supra) andheld that the sum of Rs.10,752/-p.a. at therate of Rs. 35/- per acre per month as indicatedby the lease deed was rent for the land thatwas leased. At para 4 pg. 338, it made followingimportant observations-” It is true that if acapital sum is arrived at and payment is madeevery year by chalking out the capital amountin various instalments, the payment does notlose its character as a capital payment if thesum determined was capital in nature.”

(b) The question of charging the expenditure,which has been held to be of revenue naturebut the benefit in respect of which is likely toaccrue over several years, in the year in whichit is incurred or to spread it proportionatelyover the period the benefit is derived, has


been another bone of contention betweenthe revenue and the tax payer.

Normally, excepting certain specificprovisions relating to amortisation of initialexpenses, the revenue expenses are allowedonly in year in which the expenses areincurred. In fact, there is no provision in theAct for allowing revenue expenses in a phasedor spread - out manner.

The Allahabad High Court in HindustanCommercial bank Ltd. (1952) 21 ITR 353 hadoccasion to examine a case where theassessee-bank had incurred certainexpenditure in opening 46 new branches andsub branches. Rs. 24,675/- was in relation toadvertisement etc. and Rs. 89,870/-represented salary, postage, telephoneexpenses etc. The Tribunal held Rs. 89,870/-as deferred revenue expenditure, spread itover 20 years and allowed deduction of 1/20th

of the amount in the relevant asst. year. Onreference, the Court held that there was nolegal justification for spreading out the sumover a period of 20 years and the wholeamount would be deductible in the year inwhich it was incurred.

More recently, the Bangalore Tribunal inBangalore Tool Works (P) Ltd. v. ITO (1993)47 ITD 604 held, in a case where the assesseeclaimed deduction of expenditure incurred inthe past, in subsequent assessment years asdeferred revenue expenditure, it was notentitled to deduction having failed to claimsuch expenditure in the year in which suchexpenses were incurred.

Whether in Madras Industrial InvestmentCorporation Ltd.’s case (supra) the SupremeCourt has deviated from this normal rule. Yes,it has, but at the same time it has given anew direction towards real income taxationwherever situation so permits. In this sense,this is a landmark judgement.

Does it follow that the normal rule is no morevalid? This is also not true. Deviation isallowed where the facts so warrant. In fact,the Supreme Court in this case itself observes-

“Ordinarily, revenue expenditure which isincurred wholly and exclusively for thepurpose of business must be allowed in itsentirely in the year in which it is incurred.It

cannot be spread over a number of years evenif the assessee has written it off in his booksover a period of years. However, the factsmay justify an assessee who has incurredexpenditure in a particular year to spread andclaim it over a period of ensuing years. In fact,allowing the entire expenditure in one yearmight give a very distorted picture of theprofits of a particular year.”

Supreme Court in this case, referred andsupported the Calcutta High Court judgementin Hindustan Aluminium Corporation Ltd.v. CIT (1983) 144ITR474 and Madhya PradeshHigh Court judgement in M.P.F inancialCorporation v. CIT (1987)165 ITR765.

In the former case, Calcutta High Courtupheld the claim of the assessee to spreadout a lump sum payment to secure technicalassistance and training over a period of 20years and allowed a proportionate deductionin the accounting year in question. In the latercase, the Madhya pradesh High Court heldthat where the issue of bonds is at a discount,the assessee is entitled to proportionatededuction spread over the period for whichthe bonds remain outstanding.

From the above discussion, it is clear that theSupreme Court by virtue of its judgement inMadras Industrial Investment Corporation’scase has laid new rule of spreading thedeferred revenue expenditure over the periodof benefit derived, where ever such periodcan be ascertained with certainty.

However, the Apex Court did not give anyruling for spreading over the cost ofconstruction over the lease period of 39 yearsin the case of Madras Auto Service’s casebecause the fight between the asseseecompany and the revenue from the inceptionwas over the treatment of expenditurebetween capital and revenue and thequestion of spread over was never raised.

8. CONCLUSION

It is now clear that the hon’ble Supreme Courthas been following a set pattern evolved over thedecades as far as the capital and revenueexpenditure is concerned. The incongruitiesbetween the different judgements are feltbecause of our inadequate appreciation of the factsand the rules to be applied thereon.


HOUSE PAGEMonth in Retrospect

On 28.05.2011, a CPE meeting was held on Recent Judgment on Direct Tax Laws and Recent Amendmentsin Service Tax Laws at Merchant Chamber of Commerce (MCC). CA R.C Jhawer chaired the meeting whileCA S.S Gupta and CA Vinay Shraff gave their deliberation. The well attended meeting was concluded by avery lively interactive session.

On 18.06.2011 a CPE meeting was held at MCC on Recent Amendments in TDS/TCS and XBRL which was theaddressed by CA Rajeev Khandelwal, New Delhi. The highlight was the XBRL demo presentation. Theovercrowded meeting was chaired by CA M.S Tapuriah.

On 25.06.2011, a CPE meeting was held at “The Conclave” on Motivation Talk- Adversity creates Opportunity.The powerful lecture cum presentation was delivered by CA Vinod Agarwal and the meeting was chairedby the new convener of Views Exchange Study Circle-EIRC, CA Santosh Choraria. The meeting was followedby a delicious dinner.

On 16.07.2011 a mega Conference was organized at “The Park Hotel” jointly with Central Kolkata CharteredAccountants Study Circle-EIRC on Emerging issues in Direct Taxes. The Conference was addressed byDr.Vinod Kr. Singhania, New Delhi (author of popular books published by Tax-man) and CA T.P Ostwal,Mumbai (Renowned expert on International Taxation). Sri S.V Mehrotra, Member ITAT, Kolkata Branchand CA Subodh Kr.Agarwal, Central Council Member, ICAI were the chairman at the two sessions.

Month in Prospect

On 06.08.2011 A CPE residential Seminar will be held at The Rose Valley Resort, Mandarmani on& 07.08.2011 Soft Skills.

On 17.08.2011 A CPE meeting will be held at Merchant Chamber of Commerce, 15B Hemanta BasuSarani on "Towards Professional Excellence".

On 20.08.2011 A CPE meeting will be held at Merchant Chamber of Commerce, 15B Hemanta BasuSarani on "Recent MCA Circulars & XBRL".

AWARDS

Views Exchange Chartered Accountants Study Circle was given the Second Best study circle awards by theEIRC of ICAI for the year 2010. The award was presented by CA G. Ramaswamy, President of ICAI.

NEW LIFE MEMBERS ENROLLED

Sl No. Name and address Occupation Proposed by

1 Jayesh Vora Share Market Analyst C.S.Sarda

2 Rohit Surana Practising C.A K.K.Chhaparia

3 Satish Patodia Practising C.A K.K.Chhaparia

4 Ajay Mitruka Practising C.A K.K.Chhaparia

5 Kanhaiya Agarwal Practising C.A K.K.Chhaparia

6 Sumit Binani Practising C.A Mamta Binani

7 Sachin Bajoria Practising C.A Deepak Agarwal

8 Dinesh Kr Dhandhania Tax Consultant K.K.Chhaparia

9 Sunil Kr Agarwal Practising C.A Ranjeet Agarwal

10 Rohit Biyani Service at KPMG Santosh Choraria


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THE VIEWS 3 JULY, · PDF file4 AMAR AGARWALA SECRETARY 9830064050 [email protected] 5...

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