Volume : 38 Part : 10 January, 2015 C O N T E N T Scaa-ahm.org/Pdf/Journal/Journal-48.pdfAhmedabad...

Ahmedabad Chartered Accountants Journal January, 2015 565

Volume : 38 Par t : 10 January, 2015E-mail : [email protected] Website : www.caa-ahm.org

Ahmedabad Chartered Accountants Journal

C O N T E N T S To Begin with

MananamComing out of Difficulty..................................................................... CA. Keyur Thakkar.................... 567

Editor ialReligion, whether cause or solution to the Terrorism...........................CA. Ashok Kataria ....................568

From the President............................................................................CA. Shailesh C. Shah.................569

Ar ticles

Sections 40(a)(ia) and 201(1) : Amendments byFinance Act, 2012, Whether apply retrospectively ?............................CA. Jayesh C. Sharedalal...........570

Brief analysis on levy of penalty u/s 271(1)(c), 271AAA and271AAB of the Income Tax Act, 1961................................................Adv. Tej Shah............................. 578

Direct Taxes

Glimpses of Supreme Court Rulings................................................... Adv. Samir N. Divatia................585

From the Courts..................................................................................CA. C.R. Sharedalal &CA. Jayesh Sharedalal............... 586

Tribunal News.....................................................................................CA. Yogesh G. Shah &CA. Aparna Parelkar.................. 589

Unreported Judgements......................................................................CA. Sanjay R. Shah....................594Controversies......................................................................................CA. Kaushik D. Shah................. 596Judicial Analysis..................................................................................Adv. Tushar P. Hemani................599

FEMA & International Taxation

Withholding Taxes in respect of payments made to non-residentin the l ight of Instruction No. 2/2014.................................................CA. Dhinal A. Shah.....................606

FEMA Updates................................................................................... CA. Savan A. Godiawala............610

Indirect Taxes

Service Tax

Service Tax Decoded..........................................................................CA. Punit R. Prajapati................612Recent Judgements............................................................................. CA. Ashwin H. Shah...................616

Value Added TaxRecent Judgements and Updates........................................................ CA. Bihari B. Shah.....................618

Corporate Law & Others

Business Valuation..............................................................................CA. Hozefa Natawala.................620Corporate Law Update.......................................................................CA. Naveen Mandovara.............622

From Published Accounts ................................................................ CA. Pamil H. Shah..................... 625

From the Government ......................................................................CA. Kunal A. Shah..................... 626

Association News.............................................................................. CA. Abhishek J. Jain &CA. Nirav R. Choksi...................627

ACAJ Crossword Contest....................................................................................................................628

Ahmedabad Chartered Accountants Journal January, 2015566

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


In this voyage of life, generally there is a smoothsail ing. The vehicle one drives seems underoptimum control . The roads and the overallenvironment are providing excellent path and allexpected convenience. One feels that this is the galatime of life. One’s own endeavors to get ahead inthis voyage could be a part of a race, but whenthere is that inner feel of God’s touch, it turns intoGrace. That eternal feel of happiness becomes theway of life. One feels the fragrance of spring in lifeand virtually walks on the rose petals.

Uncertainty and change is an unavoidable andimmortal truth of life, an inevitable part of thejourney. All of a sudden, an unforeseen speedbreaker brings down one’s l i fe vehicle. Anunimagined situation happens which is so difficultto digest. Sudden unexpected storm shatters thebeauty of one’s spring of life. It could be the loss ofnear and dear one, unthinkable betrayal or anythingcompletely never thought of or any unfavorablesituation.

People try to console you, try to help you to comeout of that difficulty. But as it is rightly said, “Noone can save us or No one may, if one doesn’t havethe willingness to walk on the path on one’s OWN”.People can help only to re-balance your vehicle,but to cross over the speedbreaker; one has to startagain the vehicle to move on in the life journey.

In tough times, one may get upset with God. Onemay start l oosing the Fai th in the Inf ini teIntelligence. But all that one need, to get over thedifficulty is to develop a positive approach towardsit, to align oneself with the Infinity. When Godsolves your problems, you get faith in his abilities

MananaM

Coming out of Difficulty

CA. Keyur [email protected]

but when God doesn’t solve your problems, itmeans he has faith in your abilities. Pain andsufferings come to awaken one’s greatest Self, tomake one understand the perfect lyrics of lifesongand ultimately to make one strive to become a betterand stronger person.

God’s magnificient effluence is the panacea formany tough times. One gets closer to God, One’sOWNSELF, during the difficulties. The Innerpower and utmost faith in God keeps one alive.One lets the difficulty feel that it’s difficult to stayhere. Through the tough times, He/She attains moreserenity and divineness. One feels that I need to behappy with my luck and that let one feel lucky. Atthe end, one who experiences and gets overdifficulties are the chosen and closest of God.Remember, God’s wish and human efforts togethercan conquer any fault in one’s stars.

D ifficulty

I bet

F rom this point

I am going to set

C lassic example of

U surping with

L ove and

T ender care

Y ou gonna feel difficult.

“Life doesn’t listen to your logic. It doesn’t botherabout your logic. Life has its own logic. It moves inits own way. You have to listen to the life” - OSHO


Religion, whether cause or solutionto the Terror ism

Over the period of last one month, two incidentshave sent a shock wave across the globe. OnDecember, 16, 2014, a group of militants enteredthe Army Public School in Peshawar, Pakistan andmercilessly gunned down about 150 students andteachers. The attack on innocent school childrenhas horrified the world and is considered to be thedeadliest terror attack in Pakistan’s history.

In another brutal and barbaric incident, gunmenshot dead more than 12 people in Paris when theyattacked French Satirical magazine Charlie Hebdo.Four of magazine’s wel l known cartoonist,including its editor, were killed in the attack. Themasked attackers opened fire with assault rifles andexchanged shots with police in the street outsidebefore escaping. This attack on media house is alsobelieved to be the deadliest in France since 1961.

These two attacks within a period of less than 30days are seen as attacks on humanity and freedomof expression. Every nation of the world hascondemned the attacks and expressed solidarity. Aquestion arises, why each and every nation in theworld is finding it difficult to attain peach andharmony? Why every human being is becomingso intolerant that he is not able to come to the termsof life by accepting people as they are and in theprocess of trying to change things to his orderkilling innocent people?

The only reason that people are not able to accepteach other in the way they are is their ignorance.People all over the world are clamouring for peacetoday. Governments are adopting ways and meansto explore the possibilities of finding peace. Inpursuance of thi s, they have set up WorldOrganizations and Institutions. Little do they realize

Editor ialthat peace and contentment cannot be brought aboutmerely by regulating the outward conduct of thenations or resetting the external pattern of things.At best, they may achieve a temporary cessation ofovert hostility, but internally there still remainsbitterness and enmity. When any person is not atpeace within, will always be a cause of disruptionand destruction to the society.

It’s unfortunate that such attacks, quite often, areassociated to some colour or religion. If we trulyunderstand the meaning of religion we wouldappreciate that only religion can help in stoppingsuch incidents. It is only when persons are not ableto understand their religion; they are causing suchbarbaric havoc all over the world. According to averse in the Quran, killing of an innocent humanbeing is like killing the entire humankind. In thelight of this verse it can be said that the incident ofPeshawar school attack was equivalent to killingentire humankind 150 times over. Without a doubtthere cannot be a crime more heinous than this,against the scriptures, where people fai l tounderstand in its entirety.

The true purpose of any religion is to allow a humanbeing to evolve. The solution, therefore, lies in thewell conceived rehabilitation of the individualpersonality, since individuals form the society andthe nation. If the individual undergoes an innertransformation and begins to entertain feelings oflove and affection for others, then there is bound tobe peaceful and healthy coexistence in the world.Religion helps to bring about this transformation inindividuals. Wi thout such personal i tyreconstruction, no external plan or scheme cansucceed in establishing peace in the world.

Namaste,

CA. Ashok [email protected]


Dear Esteemed Readers,

Happy new year to all of you.

December and January are the months ofrecognition of citizen’s contribution to the nationfor the Government of India. The President’s Officeon 24th December 2014 announced the BharatRatna, India’s highest civilian honour to PanditMadan Mohan Malaviya (posthumously), a freedomfighter and founder of Benaras Hindu Universityand to the former Prime Minister Atal BihariVajpayee. Bharat Ratna being conferred on Pt.Madan Mohan Malaviya and Atal Bihari Vajpayeeis a matter of great delight. Country’s highesthonour to these illustrious stalwarts is a f ittingrecognition of their service to the Nation. Pt. MadanMohan Malaviya is remembered as a phenomenalscholar and freedom fighter who lit the spark ofnational consciousness among people wherasAtal j i is one of the tal lest pol i ti cal leadersIndependent Indian has seen. His contribution toIndia is invaluable.

The month of January also marks the home comingof Mahatma Gandhi. Pravasi Bharatiya Divas (PBD)is celebrated on 9th January every year to mark thecontribution of Overseas Indian community in thedevelopment of India. January 9 was chosen as theday to celebrate this occasion since it was on thisday in 1915 when Mahatma Gandhi, the greatestPravasi, returned to India from South Africa, ledIndia’s freedom struggle and changed the lives ofIndians forever. This year the occasion is moreimportant as it marks the 100 years of Gandhi’shome coming. As the moment is special there couldnot be a better time to highlight Gandhian thoughtand principles not just in India but among the globalcommunity as wel l . In fact, the ini tiati ve tocommemorate Gandhiji’s return to India from SouthAfrica would truly be a tribute if it is helpful in givingthe right signal and direction to go back theGandhian values and principles. A l l StateGovernments along with the Union Government are

From the PresidentCA. Shailesh C. Shah

[email protected]

trying to en-cash upon the upcoming PravasiBharatiya Divas to woo NRI and PIO entrepreneursto invest in six flagship programs, including DigitalIndia, Make in India, Clean Ganga Campaign,Swacchh Bharat and skills development initiative.Let’s hope that such programs not just make thingsappear good but truly make India a prosperousnation.

At the Association, in our role of helping theGovernment and also in furtherance of our duty ofproper representations to rationalize tax laws, wehave submitted a well-thought out Pre-BudgetMemorandum to the Ministry of Finance for UnionBudget 2015-16. The Memorandum has beenprepared after incorporating suggestions receivedf rom members. The cricket season at theAssociation has arrived. The first match betweenPresident XI and Secretary XI was won by SecretaryXI. The second match was played between CAAssociation and Baroda Branch of WIRC of ICAIat Motera Stadium on 4th January 2015. I heartilycongratulate Team CAA on victory by 33 runs andalso for retaining the rotating trophy. The third matchof the Association is to be held against IT BarAssociation Ahmedabad on 1st February 2015. Iwish Team CAA a great game and hope that theycontinue with their winning streak. On 11th Januarythe Association has, for the first time, organizedcricket tournament with tennis ball so as to enablesenior members participate, apart from the regularcricket matches that are held over the years. Otherthan cricket, the activities at the Association were abuzz that included programs like Study circle onVAT Audit and Brain Trust Meeting on Controversialissues under Income Tax.

I also wish all members and their family a veryhappy and safe Uttarayan.

With regards

CA. Shailesh C. ShahPresident


1. Introduction:Section 40(a)(ia) is a rigorous provision inIncome Tax Act. If an assessee is hit by thesaid section he may end up paying substantialincome tax and his liquidity may be in jeopardy.This section is of recent origin and was broughton statute in the year 2005. However theshackles of the section have been loosed byway of introduction of ‘provisos’ from time totime. One such ‘proviso’ was inserted byFinance Act, 2012 and made applicable from01-04-2013 i.e. ITAY 2013-14. A questionarises whether the said ‘proviso’ appliesretrospectively. In other words in the on-goingscrutiny assessments or appellate proceedingscan the assessee plead that the assessee shouldget the benefit of this proviso?

2. ‘Proviso’ inser ted by Finance Act 2012:Finance Act, 2012 amended section 40(a)(ia)and section 201(1) by inserting proviso to theeffect that if the payee has paid the incometax on the sum on which the payer ought tohave deducted TDS but not deducted it, thenthe payer of the sum would not be held as anassessee in default u/s 201(1). For the purposesof Section 40(a)(ia) the TDS would be deemedto have deposited on the date of filing of returnof income by the payee and consequently noaddition can be made u/s 40(a)(ia).The following procedure has been laid downu/s 201(1) and 40(a)(ia) for giving effect tothe amendments made by Finance Act 2012.(a) The payee should file his return of income

u/s 139.(b) The payee should declare such sum on

which no TDS has been deducted bydeductor, in his return of income.

(c) The payee should pay the amount ofIncome Tax due on such sum declared inthe return of income.

(d) The payee should furnish the certificatein Form No. 26A obtained f romChartered Accountant, declaring theabove mentioned facts.

3. Whether the ‘Proviso’ inserted by FinanceAct 2012 is retrospective?The insertion of ‘proviso’ in section 40(a)(ia)by Finance Act, 2012 w.e.f. 1- 4-2013, maybe interpreted to mean that this amendedprovision will apply for and from assessmentyear 2013-14 and not to earlier assessmentyears. The other view could be that theamendment brought out by the Finance Act,2012 w.e.f 1-4-2013 in Section 40(a)(ia) ofthe Act is curative in nature and it will applyretrospectively w.e.f. 01-04-2005.To decide this issue, we have to go to thehistory of the provisions of Section 40(a)(ia),which was inserted by Finance (No. 2) Act,2004 w.e.f. 1-4-2005 as under:-“Amount not deductible.40. Notwithstanding anything to the contrary

in sections 30 to 38, the fol lowingamounts shal l not be deducted incomputing the income chargeable underthe head “Profits and gains of businessor professions”,-

(a) … …(ia) any interest, commission or brokerage, fees

for professional services or fees fortechnical services payable to a resident,or amounts payable to a contractor or sub-contractor, being resident, for carrying outany work (including supply of labour forcarrying out any work), on which tax isdeductible at source under Chapter XVII-B and such tax has not been deducted or,after deduction, has not been paid duringthe previous year, or in the subsequent yearbefore the expiry of the time prescribedunder subsection (1) of section 200:

Provided that where in respect of any such sum,tax has been deducted in any subsequent yearor, has been deducted in the previous year butpaid in any subsequent year after the expiryof the time prescribed under sub-section (1) ofsection 200, such sum shall be allowed as adeduction in computing the income of theprevious year in which such tax has been paid.

Sections 40(a)(ia) and 201(1) :Amendments by Finance Act, 2012,Whether apply retrospectively? CA. Jayesh C. Sharedalal

[email protected]


Sections 40(a)(ia) and 201(1) : Amendments by Finance Act, 2012, Whether apply retrospectively?

Explanation:- For the purposes of this sub-clause:-(i) “commission or brokerage” shall have

the same meaning as in clause (i) of theexplanation to section 194H;

(ii) “fees for technical services” shall havethe same meaning as in Explanation 2 toclause (vii) of sub-section (11) of section9;

(iii) “professional services” shall have thesame meaning as in clause (a) of theexplanation to section 194J;

(iv) “work” shall have the same meaning asin explanation-III to section 194C;”Subsequently, in sub-clause (ia) thewords, ‘rent and royalty’ has been insertedby the Taxation Laws (Amendment) Act,2006 w.r.e.f. 1-4-2006 and similarly inExplanation sub-clause (v) & (vi) wereinserted as under:-

“(v) “rent” shall have the same meaning asin clause (i) to the explanation to section194-1;

(vi) “royalty” shall have the same meaningas in explanation 2 to clause (vi) of sub-section (1) of section 9;”

Thereafter the section was amended by theFinance Act, 2008, and by the Finance Act,2010 w.e.f. 1-4-2010 making changes whichhave been held by courts to be applicableretrospectively.Thereafter, by the Finance Act, 2012 thefollowing “Proviso” has been inserted in sub-clause (ia) w.e.f. 1-4-2013 as under:-“Provided further where an assessee fails todeduct the whole or any part of the tax inaccordance with the provisions of ChapterXVII-B on any such sum but is not deemed tobe an assessee in default under the first provisoto sub-section (1) of section 201, then, for thepurpose of this sub-clause, it shall be deemedthat the assessee has deducted and paid thetax on such sum on the date of furnishingreturn of income by the resident payee referredto in the said proviso.”One will find from the above provision of Section40(a)(ia) of the Act, amended by Finance Act,2012, that the payment of expenses as specifiedin this provision, on which tax is deductible atsource under Chapter XVII-B of the Act andthe assessee has not deducted the tax but the

deductee has shown such sum as an income inhis return of income u/s 139 and also paid theamount of tax due on such sum, then it is deemedto be considered as if the same is deducted byassessee and paid by him before the due date ofreturn of income u/s 139. It means that theexpenses related to the same will be allowedwhile computing the income chargeable underthe head ‘profits and gains of business orprofession’.While br inging this amendment by FinanceBill, 2012, the object was explained in NotesOn Clauses and the relevant Clause-11 wasexplained as under [342 ITR 153(St.)]:-NOTES ON CLAUSES“Clause 11 of the Bill seeks to amend section40 of the Income-tax Act relating to amountsnot deductible.It is proposed to insert a new proviso to sub-clause (ia) of clause (a) to the aforesaid section40 so as to provide that where an assessee failsto deduct the whole or any part of the tax inaccordance with the provisions of ChapterXVII-B on any such sum but is not deemed tobe an assessee in default under the first provisoto sub-section (1) of section 201, then, for thepurposes of this sub-clause, it shall be deemedthat the assesseee has deducted and paid thetax on such sum on the date of furnishing ofreturn of income by the resident payee referredto in the said proviso.”A new proviso has also been inserted to Ses.201(1) by the Finance Act, 2012 w.e.f. 1-7-2012.Further, while br inging this amendment byFinance Bill, 2012, the object was explainedin Notes On Clauses and the r elevantClause-77 was explained as under [342 ITR196(St.)]:-“Clause 77 of the Bill seeks to amend section201 of the Income-tax Act relating toconsequences of failure to deduct or pay.It is proposed to insert a new proviso in sub-section (1) of the aforesaid section 201 so asto provide that any person, including theprincipal officer of a company, who fails todeduct the whole or any part of the tax inaccordance with the provisions of this Chapteron the sum paid to a resident or on the sumcredited to the account of a resident shall notbe deemed to be an assessee in default inrespect of such tax if such resident-


(i) Has furnished his return of income undersection 139;

(ii) Has taken into account such sum forcomputing income in such return ofincome; and

(iii) Has paid the tax due on the incomedeclared by him in such return of income,

And the person furnishes a certificate to thiseffect from an accountant in such form as maybe prescribed.”Furthermore, both the above Amendmentswer e explained in M emor andumExplaining the provision in Finance Bill,2012 as under [342 ITR 260(St.)]:-

“E. RATIONALIZATION OF TAXDEDUCTION AT SOURCE (TDS) ANDTAX COLLECTION AT SOURCE (TCS)PROVISIONS

I. Deemed date of payment of tax by theresident payeeUnder the existing provisions of Chapter XVII-B of the Income-tax Act, a person is requiredto deduct tax on certain specified payments atthe specified rates if the payment exceedsspecified threshold. In case of non-deductionof tax in accordance with the provisions of thisChapter, he is deemed to be an assessee indefault under section 201(1) in respect of theamount of such non-deduction.However, section 191 of the Act provides thata person shall be deemed to be assessee indefault in respect of non/short deduction of taxonly in cases where the payee has also failedto pay the tax directly. Therefore, the deductorcannot be treated as assessee in default inrespect of non/short deduction of tax if thepayee has discharged his tax liability.The payer is liable to pay interest under section201(1A) on the amount of non/short deductionof tax from the date on which such tax wasdeductible to the date on which the payee hasdischarged his tax liability directly. As there isno one-to-one correlation between the tax tobe deducted by the payer and the tax paid bythe payee, there is lack of clarity as to when itcan be said that payer has paid the taxes directly.Also, there is no clarity on the issue of the cut-off date, i.e. the date on which it can be saidthat the payee has discharged his tax liability.In order to provide clarity regarding dischargeof tax liability by the resident payee on paymentof any sum received by him without deduction

of tax, it proposed to amend section 201 toprovide that the payer who fails to deduct thewhole or any part of the tax on the paymentmade to a resident payee shall not be anasssessee in default in respect of such tax insuch resident payee-(i) has furnished his return of income under

section 139;(ii) has taken into account such for computing

income in such return of income; and(iii) has paid the tax due on the income

declared by him in such return of income,and the payer furnishes a certificate to thiseffect from an accountant in such form as maybe prescribed.The date of payment of taxes by the residentpayee shall be deemed to be the date on whichreturn has been furnished by the payer.It is also proposed to provide that where thepayer fails to deduct the whole or any part ofthe tax on the payment made to a resident andis not deemed to be an assessee in defaultunder section 201 (1) on account of paymentof taxes by such resident, the interest undersection 201(1A)(i) shall be payable from thedate on which such tax was deductible to thedate of furnishing of return of income by suchresident payee.Amendments on simi lar l i nes are alsoproposed to be made in the provisions ofsection 206C relating to TCS for clarifying thedeemed date of discharge of tax liability bythe buyer or licensee or lessee.”

II. Disallowance of business expenditure onaccount of non-deduction of tax on paymentto resident payeeA related issue to the above is the disallowanceunder section 40(a)(ia) of certain businessexpendi ture l i ke interest, commission,brokerage, professional fee, etc. due to non-deduction tax. It has been provided that in casethe tax is deducted in subsequent previous year,the expenditure shal l be allowed in thatsubsequent previous year of deduction.In order to rationalise the provisions ofdisallowance on account of non-deduction oftax from the payments made to a resident payee,it is proposed to amed section 40(a)(ia) toprovide that where an assessee makes paymentof the nature specified in the said section to aresident payee without deduction of tax and isnot deemed to be an assessee in default undersection 201 (1) on account of payment of taxes



by the payee, then, for the purpose of allowingdeduction of such sum, it shall be deemed thatthe assessee has deducted and paid the tax onsuch sum on the date of furnishing of return ofincome by the resident payee.These beneficial provisions are proposed to beapplicable only in the case of resident payee.”I t is clear ly mentioned in MemorandumExplaining the Provisions of Finance Bill,2012 that the amendment is a ‘Beneficialprovision’. A beneficial amendment in Sectionof the Act may be defined as an amendment toremove hardship caused to the taxpayers, whichmade the provision unworkable or unjust in aspecific situation, and is of beneficial nature and,therefore, has to be treated as retrospective.Supreme Cour t : Hindustan Coca colaBeverages P. L td. vs. CITSupreme Court decision in the case ofHindustan Coca cola Beverages P. Ltd. vs.CIT (293 ITR 226) as per which, no interestu/s 201(1A) and penalty u/s 271C can belevied when the tax has been deposited by thedeductee in case of non deduction of TDS bydeductor. The relevant para of the said decisionis reproduced as under:-“… . It is required to note that the Departmentconceded before the Tribunal that the recoverycould not once again be made from the taxdeductor where the payee included the incomeon which tax was alleged to have been shortdeducted in its taxable income and paid taxesthereon. There is no dispute whatsoever thatPradeep Oil Corporation had already paid thetaxes due on its income received from theappellant and had received refund from the taxDepartment. The Tribunal came to the rightconclusion that the tax once again could notbe recovered from the appellant (deductor -assessee) since the tax has already been paidby the recipient of income.… .… .Be that as it may, Circular No. 275/201/95-IT(B) dated January 29,1997, issued by theCentral Board of Direct Taxes, in our consideredopinion, should put an end to the controversy.The circular declares “no demand visualizedunder section 201(1) of the Income - tax Actshould be enforced after the tax deductor hassatisfied the officer-in-charge of TDS, that taxesdue have been paid by the deductee - assessee.However, this will not alter the liability to charge

interest under section 201(1A) of the Act till thedate of payment of taxes by the deductee -assessee or the liability for penalty under section271C of the Income - tax Act.”What is the hardship removed?It is apparent that that Section 40(a)(ia) asamended by the Finance Act, 2012 w.e.f 1-4-2013, is remedial in nature, designed toeliminate unintended consequences which maycause undue hardship to the taxpayers andwhich make the provision unworkable orunjust in a specific situation, and is of beneficialnature and, therefore, has to be treated asretrospective with effect from 1st April, 2005,the date on which section 40(a)(ia) has beeninserted by the Finance Act, 2012.As before the amendment it was the case thaton one side deductor has not deducted and paidthe TDS on such sum which has been paid todeductee and on the other side, the deducteehas paid the tax on such sum on which TDShas not been deducted by deductor. Now, forclaiming the expendi ture as al lowable,deductor has to deduct and pay TDS. It meansthat the tax which was due from the deducteeis already received by the government.The intension of Government is not to collectthe double tax on the same amount. Thisamendment has been brought in for removingthe double taxation effect on the same sum,which causes undue hardship to the deductor.A beneficial provision is generally passed tosupply an obvious omission or to clear up doubtsas to the meaning of the previous Act and thisview has been held in Keshavlal Jethalal Shahv. Mohanalal Bhagwandas, [AIR 1968 SC1336, 1339]. Further Hon’ble apex court in thecase of CIT v. Podar Cement Pvt. Ltd., (1997)226 ITR 625, 652 (SC) settled that if a statute iscurative or merely beneficial of the previous law,retrospective operation is generally intended.Further more in similar circumstances, Hon’bleapex court in the case of Allied Motors (P). Ltd.v CIT (1977) 224 ITR 677,687 (SC) held thatthe amendment will not serve its object in sucha situation unless it is construed as retrospective.The Hon’ble apex court held as under:-“The departmental understanding alsoappears to be that section 43B, the proviso andExplanation 2 have to be read together asexpressing the true intention of section 43B.Explanation 2 has been expressly made



retrospective. The first proviso, however,cannot be isolated from Explanation 2 and themain body of section 43B. Without the firstproviso, Explanation 2 would not obviate thehardship or the unintended consequences ofsection 43B. The proviso supplies an obvious,omission. But for this proviso the ambit ofsection 43B becomes unduly wide bringingwithin its scope those payments, which werenot intended to be prohibited from the categoryof permissible deductions.In the case of Goodyear India Ltd. v. State ofHaryana (1991) 188 ITR 402, this court saidthat the rule of reasonable construction mustbe applied while construing a statute. A Literalconstruction should be avoided if it defeats themanifest object and purpose of the Act.Therefore, in the well known words of JudgeLearned Hand, one cannot make a fortress outof the dictionary; and should remember thatstatutes have some purpose and object toaccomplish whose sympathetic and imaginativediscovery is the surest guide to their meaning.In the case of R.B. Jodha Mal Kuthiala v. CIT(1971) 82 ITR 570, this court said that oneshould apply the rule of reasonableinterpretation. A proviso which is inserted toremedy unintended consequences and to makethe provision workable, a proviso which suppliesan obvious omission in the section and isrequired to be read into the section to give thesection a reasonable interpretation, requires tobe treated as retrospective in operation, so thata reasonable interpretation can be given to thesection as a whole.This view has been accepted by a number ofHigh Courts. In the case of CIT v. ChandulalVenichand (1984) 209 ITR 7, the Gujarat HighCourt has held that the first proviso to section43B is retrospective and sales tax for the lastquarter paid before the filing of the return for theassessment year is deductible. This decision dealswith assessment year 1984-85. The CalcuttaHigh Court in the case of CIT v. Sri JagannathSteel Corporation (1991) 191 ITR 676, has takena similar view holding that the statutory liabilityfor sales tax actually discharged after the expiryof the accounting year in compliance with therelevant statute is entitled to deduction undersection 43B. The High Court has held theamendment to be clarificatory and, therefore,retrospective. The Gujarat High Court in theabove case held the amendment to be curative

and explanatory and hence retrospective. ThePatna High Court has also held the amendmentinserting the first provisos to be explanatory inthe case of Jamshedpur Motor Accessories Storesv. Union of India (1991) 189 ITR 70. It has heldthe amendment inserting first proviso to beretrospective. The special leave petition from thisdecision of the Patna High Court was dismissed(see [1991] 191 ITR (St.)8). The view of the DelhiHigh Court, therefore, that the first proviso tosection 43B will be available only prospectivelydoes not appear to be correct. As observed byG.P. Singh in his Principles of StatutoryInterpretation, 43B wil l be available onlyprospectively does not appear to be correct. Asobserved by G.P. Singh in his Principles ofStatutory Interpretation, 4th Edn., page 291. “Itis well settled that if a statute is curative or merelydeclaratory of the previous law, retrospectiveoperation is generally intended.” In act theamendment would not serve its subject in such asituation, unless it is construed as retrospective.The view, therefore, taken by the Delhi High Courtcannot be sustained.”Based on the above analogy, in my view theamendment brought out in Section 40(a)(ia)of the Act by Finance Act 2012 is beneficialand when an amendment is beneficial in nature,the presumption against i ts retrospectiveapplication is not permissible.

4. Recent decisions: [Copies available onCAA website www.caa-ahm.org]Raj eev kumar Agar wal v. JCI T : [45taxman.com 555 (Agra)][ ITA Nos.337 & 338/Agra/2013. ITAYs:2006-07 & 2007-08]“8. With the benefit of this guidance from

Hon’ble Delhi High Court, in view oflegislative amendments made from time totime, which throw l ight on what wasactually sought to be achieved by this legalprovision, and in the light of the aboveanalysis of the scheme of the law, we are ofthe considered view that section 40(a)(ia)cannot be seen as intended to be a penalprovision to punish the lapses of nondeduction of tax at source from paymentsfor expenditure- particularly when therecipients have taken into account incomeembedded in these payments, paid duetaxes thereon and filed income tax returnsin accordance with the law. As a corollary



to this proposition, in our considered view,decl ining deduction in respect ofexpenditure relating to the payments of thisnature cannot be treated as an “intendedconsequence” of Section 40(a)(ia). If it isnot an intended consequence i.e. if it is anunintended consequence, even going byBharti Shipyard decision (supra), ”removing unintended consequences tomake the provisions workable has to betreated as retrospective notwithstanding thefact that the amendment has been giveneffect prospectively”. Revenue, thus, doesnot derive any advantage from special benchdecision in the case Bharti Shipyard (supra).

9. On a conceptual note, primary justificationfor such a disallowance is that such a denialof deduction is to compensate for the lossof revenue by corresponding income notbeing taken into account in computation oftaxable income in the hands of the recipientsof the payments. Such a policy motivateddeduction restrictions should, therefore, notcome into play when an assessee is able toestablish that there is no actual loss ofrevenue. This disal lowance doesdeincentivize not deducting tax at source,when such tax deductions are due, but, sofar as the legal framework is concerned, thisprovision is not for the purpose ofpenalizing for the tax deduction at sourcelapses. There are separate penal provisionsto that effect. Deincentivizing a lapse andpunishing a lapse are two different thingsand have distinctly different, and sometimesmutually exclusive, connotations. When weappreciate the object of scheme of section40(a)(ia), as on the statute, and to examinewhether or not, on a “fair, just and equitable”interpretation of law- as is the guidance fromHon’ble Delhi High Court on interpretationof this legal provision, in our humbleunderstanding, it could not be an “intendedconsequence” to disallow the expenditure,due to non deduction of tax at source, evenin a situation in which correspondingincome is brought to tax in the hands of therecipient. The scheme of Section 40(a)(ia),as we see it, is aimed at ensuring that anexpenditure should not be allowed asdeduction in the hands of an assessee in asituation in which income embedded insuch expenditure has remained untaxed due

to tax withholding lapses by the assessee. Itis not, in our considered view, a penalty fortax withholding lapse but it is a sort ofcompensatory deduction restriction for anincome going untaxed due to taxwithholding lapse. The penalty for taxwithholding lapse per seis separatelyprovided for in Section 271 C, and, section40(a)(ia) does not add to the same. Theprovisions of Section 40(a)(ia), as theyexisted prior to insertion of second provisothereto, went much beyond the obviousintentions of the lawmakers and createdundue hardships even in cases in which theassessee’s tax withholding lapses did notresult in any loss to the exchequer. Nowthat the legislature has been compassionateenough to cure these shortcomings ofprovision, and thus obviate the unintendedhardships, such an amendment in law, inview of the well settled legal position to theeffect that a curative amendment to avoidunintended consequences is to be treatedas retrospective in nature even though it maynot state so specifically, the insertion ofsecond proviso must be given retrospectiveeffect from the point of time when the relatedlegal provision was introduced. In view ofthese discussions, as also for the detailedreasons set out earlier, we cannot subscribeto the view that it could have been an“intended consequence” to punish theassessees for non deduction of tax at sourceby declining the deduction in respect ofrelated payments, even when thecorresponding income is duly brought totax. That will be going much beyond theobvious intention of the section.Accordingly, we hold that the insertion ofsecond proviso to Section 40(a)(ia) isdeclaratory and curative in nature and it hasretrospective effect from 1st April, 2005,being the date from which sub clause (ia)of section 40(a) was inserted by the Finance(No. 2) Act, 2004.M/s Bansidhar Construction v. ITOWard 9(2), Ahmedabad[ITA 907/Ahd/2011 IATY 2007-08]With respect to two cases namelyAmrishbhai Pancholi (Rs. 50,000) and inGeo Dynamic (Rs. 31,427), we find thatCIT(A) has noted that TDS was notdeposited by the Assessee. We find that



the Co-ordinate Bench in the case of RajivKr. Agarwal vs. ACIT (supra) has heldas under:-Section 40(a)(ia) of the Income-tax Act,1961 - Business disallowance - Interest,etc., paid to resident without deductionof tax at source (Second proviso) -Assessment year 2006-07 - Whetherinsertion of second proviso to section40(a)(ia) with effect from 1-4-2013 isdeclaratory and curative in nature andit has retrospective effect from 1-4-2005,being date from which sub-clause (ia)of section 40(a) was inserted by Finance(No. 2) Act, 2004 - Held, yes [Para 9][In favour of assessee]

8. In the present case before us, the ld. A.R.has not placed any material on record todemonstrate that the 2 payees, namelyAmrishbhai Pancholi and Geo Dyanmichad offered the amounts received fromAssessee as its income and has paid thetax on such income. Further, we find thatthe decision of the Co-ordinate Benchwas not avai lable before A.O andCIT(A). We therefore feel that the issuewhere the Assessee has not deducted TDSbut the payee has paid the taxes needs tobe re-examined by the A.O in the light ofthe aforesaid decision of Agra Tribunaland therefore set aside the issue to the fileof A.O for him to decide the issue in thelight of decision of Agra Tribunal and inaccordance with law. Needless to state,that A.O shall grant adequate opportunityof hearing to the Assessee. We thus partlyal low this ground of Assessee forstatistical purposes.”In the following decisions also it has beenheld that the proviso inserted by FinanceAct 2012 is retrospectively applicable.Shri G.Shankar, V. ACIT[ITA No.1832/Bang/2013(Assessmentyear: 2005-06)]DCIT, Ci rcle 1, Udipi v. AnandaMarkala[2014] 48 taxmann.com 402 (Bangalore- Trib.)So far as section 201(1) is concerned,Finance Act 2012 has simultaneouslyinserted ‘Proviso’ to the above effect. Said

amendment has been held to beretrospectively applicable in the followingdecision:M/s. Bhar ti Auto Products v. CIT- I I ,Rajkot [ITA Nos. 391 &392/Rjt/2011:ITAYs 2009-10 & 2010-11][(2013)157 TTJ (Rajkot) (SB) 1]

“45 … … … ..Keeping in view the fact that thefirst proviso to sub-section (6A) of section206C not only seeks to rationalize theprovisions relating to collection of tax atsource but is also beneficial in nature inthat it seeks to provide relief to the collectorsof tax at source from the consequencesflowing from non/short collection of tax atsource after ensuring that the interest of theRevenue is well protected, we have nohesitation to hold that the said provisowould apply retrospectively and thereforeto both the assessment years under appeal.We therefore direct the assessee to appearbefore the Assessing Officer along withrelevant documents as stipulated by the firstproviso to subsection (6A) of section 206Cwithin two months of the date on whichthis order is pronounced upon which theAO shall examine the claim of the assesseein the light of the said provisions and passappropriate order accordingly inconformi ty wi th law after givingreasonable opportunity of hearing to theassessee. Thus the issue raised in additionalground no. 3 stands restored to the file ofthe AO with the aforesaid observations.”

5. Course of Action:Assessee’s who have failed to deduct TDSshould obtain certificate from Payee in FormNo. 26A. This form is a certificate containingvarious details of payee about the filing ofreturn of income by it / him, inclusion ofamount paid by payer wi thout TDS incomputing its / his income, and payment ofincome tax thereon. The form has to be certifiedby a chartered accountant. This form shouldbe filed during the course of assessment /appellate proceedings of the payer along withthe claim for not invoking section 40(a)(ia) fornon deduction of income tax (TDS).

❉ ❉ ❉



1. The framers of the statute while ensuring thecollection of tax from the assessees, weremindful of having a watch dog in the name of“penalty” so that such assessees give their fairshare to the exchequer. The purpose ofintroducing penalty provisions was to makesure that not only does the assessee display atrue and fair picture of his income and expenses,but also that if he fails to do so, an extra sumof money may be recovered to deter him fromdoing so.

2. With this background, we now move ahead tothe major sections for levy of penalty which weroutinely deal with, i.e. penalty u/s 271(1)(c)and u/s 271AAA. Section 271AAB is relativelynew. We will also go through various case lawswhich aid in interpreting the penalty provisionsunder different circumstances.Section 271(1)(c) reads as under,“271 (1) If the Assessing Officer orthe Commissioner (Appeals) or theCommissioner in the course of anyproceedings under this Act, is satisfied thatany person—(c) has concealed the particulars of hisincome or furnished inaccurate particularsof such income, orhe may direct that such person shall pay byway of penalty,(iii) in the cases referred to in clause (c) inaddition to tax, if any, payable by him, a sumwhich shall not be less than, but which shallnot exceed three times, the amount of taxsought to be evaded by reason of theconcealment of particulars of his income orthe furnishing of inaccurate particulars ofsuch income.Therefore the two important limbs of levyingpenalty under the above section are that theassessee must have either concealed the

particulars of his income or furnishedinaccurate particulars of such income. The AOshould firstly record his satisfaction in theassessment order itself which finds suchconcealment or inaccurate particulars of incomeas held by the Hon’ble SC in Varkey Chacko(203 ITR 885). The AO must imperativelymention in the notice as to whether penalty isbeing levied for having concealed the particularsof income or furnishing inaccurate particularsof such income, failing which the order levyingpenalty will be held to be illegal as held by theHon’ble Gujarat High Court i n ManuEngineering Works (122 ITR 306) and NewSorathia Eng. Co. (282 ITR 642).

3. What tantamounts to concealment ofparticulars of income or furnishinginaccurate particulars of income has alwaysremained a subject matter of controversybetween the tax payer and the department. Nostraight jacket formula can be laid for inferringso, but if the assessee either fails to disclosethe primary particulars or furnishes thoseparticulars in an inaccurate fashion, the sameattracts penalty. For instance, if the assesseemakes a claim for deduction of expenditure orsuppresses the income earned which on theface of it is illegal, penalty is leviable.

4. However if the assessee after disclosing theprimary facts claims something as genuine asper his interpretation but which is notallowable as per the department, penalty is notleviable. A mere making of a claim which isnot sustainable in law itself will not amount tofurnishing inaccurate particulars of income –Reliance Petroproducts (322 ITR 158). TheHon’ble SC has gone to the extent of sayingthat even i f the assessee acting under abonafide belief as to a particular claim beingfalse in nature, but which was later retracted

Brief analysis on levy of penaltyu/s 271(1)(c), 271AAA and 271AABof the Income Tax Act, 1961.

Advocate Tej [email protected]


by filing a revised return, the same does notattract penalty – Price Waterhouse CoopersP. Ltd. (348 ITR 306) and Ms. Sania Mirza(219 Taxmann 133). A return cannot be falseunless there is an element of deliberateness init. If there was an omission to include a certainitem in return of turnover on a bona fide beliefthat it was not taxable, the return was not false– Cement Marketing Co. of India Ltd (124ITR 15). Although recently the Hon’ble SCin Mak Data (358 ITR 593) has held that thequestion is whether the assessee has offeredany explanation for concealment of particularsof income or furnishing inaccurate particularsof income. If the assessee fails to offer anycogent explanation and merely offers theincome to buy peace, penalty is leviable.

5. Therefore the gist is that once primary factsnecessary for computation of income aredisclosed and the claim in the eyes of theassessee is based on a cogent explanation andinterpretation of the prevailing statute, thenpenalty cannot be levied in view of the abovejudgments. However that does not give rightto the assessee from claiming somethingabsolutely untenable in the eyes of law. It isthe duty of every tax payer to fully and trulydisclose the particulars in such a manner so asto enable the AO to quantify the taxableincome.

6. Moving ahead, we find there are 7 explanationsto the above section. However we will bediscussing only Explanations 1, 5 and 5A asthey are more in application and dispute.

7. Explanation 1 reads as under:

Where in respect of any facts material to thecomputation of the total income of any personunder this Act,—(A) such person fails to offer an explanation

or offers an explanation which is foundby the [Assessing] Officer or the[Commissioner (Appeals)] [or theCommissioner] to be false, or

(B) such person offers an explanation whichhe is not able to substantiate [and failsto prove that such explanation is bona

fide and that all the facts relating to thesame and material to the computationof his total income have been disclosedby him],

then, the amount added or disallowed incomputing the total income of such personas a result thereof shall, for the purposes ofclause (c) of this sub-section, be deemed torepresent the income in respect of whichparticulars have been concealed.The onus of proving that there is no concealmentlies with the assessee once the AO recordsprimary reasons for concealment in view of thedeeming provisions of Explanation 1. A claimunsubstantiated without a cogent explanationwould invite the wrath of the AO in the form ofpenalty. Therefore not only has the assessee tooffer an explanation, but the same has to bebacked by a potent explanation which led theassessee to make such a claim which is allowablein the eyes of law. A glaring fact which emergesout is that Explanation 1 can be applied only tocases involving ‘concealment of income’ andnot in cases involving ‘furnishing inaccurateparticulars of income’. The reason for the sameis the deeming f i ction provided in theconcluding para says, “be deemed to representthe income in respect of which particulars havebeen concealed”. The words ‘inaccurateparticulars have been filed’ have no mentionand therefore it cannot be applied to those cases.However no case law on this particular aspecthas been out yet. But it can nonetheless becontended.

8. Explanation 5 reads as under:-

Where in the course of a [search initiatedunder section 132 before the 1st day of June,2007], the assessee is found to be the ownerof any money, bullion, jewellery or othervaluable article or thing (hereafter inthis Explanation referred to as assets) and theassessee claims that such assets have beenacquired by him by utilising (wholly or in part)his income,—(a) for any previous year which has ended

before the date of the search, but the

Br ief analysis on levy of penalty u/s 271(1)(c), 271AAA and 271AAB of the Income Tax Act, 1961.


return of income for such year has notbeen furnished before the said date or,where such return has been furnishedbefore the said date, such income hasnot been declared therein ; or

(b) for any previous year which is to end onor after the date of the search,

then, notwithstanding that such income isdeclared by him in any return of incomefurnished on or after the date of the search,he shall, for the purposes of imposition of apenalty under clause (c) of sub-section (1) ofthis section, be deemed to have concealed theparticulars of his income or furnishedinaccurate particulars of such income,[unless,—(1) such income is, or the transactions

resulting in such income are recorded,—(i) in a case falling under clause (a),

before the date of the search ; and(ii) in a case falling under clause (b),

on or before such date,in the books of account, if any,maintained by him for any source ofincome or such income is otherwisedisclosed to the [Chief Commissioner orCommissioner] before the said date ; or

(2) he, in the course of the search, makes astatement under sub-section (4) of section132 that any money, bullion, jewellery orother valuable article or thing found inhis possession or under his control, hasbeen acquired out of his income whichhas not been disclosed so far in his returnof income to be furnished before theexpiry of time specified in sub-section (1)of section 139, and also specifies in thestatement the manner in which suchincome has been derived and pays thetax, together with interest, if any, in respectof such income.]

Therefore the mandate of Explanation 5 is that

Firstly there has to be a search at the premisesof the assessee. - If the search action is takenat some other assessee’s premise, andconsequent to the same the assessee is issued

a notice either u/s 153C or 148, Explanation 5ab initio will not apply – M.N. Rajaraman(2009) 109 ITD 362.Secondly the assessee is found to be the ownerof any money, bullion, jewellery or othervaluable article or thing. - If what is foundduring search is not money, bullion, jewelleryor other valuable article or thing, thenExplanation 5 will not apply. For example, ifcertain documents are found suggestive of anyundisclosed income or some undisclosed booksof accounts – Vrajlal T. Gala [2013] 33taxmann.com 620.If the above conditions are satisfied, only thenpenalty is leviable as per clauses (a) and (b).a) This clause has been divided into 2 parts.

The former refers to, “for any previousyear which has ended before the date ofsearch, but the return of income for suchyear has not been furnished before thesaid date” and the latter refers to, “wheresuch return has been furnished before thesaid date, such income has not beendeclared therein” or

b) For any previous year which is to end onor after the date of the search,

In such cases, regardless of the fact that suchincome is declared in any return filed on or afterthe date of search, penalty shall be imposed.However there are exceptions to the aboveclauses. If the assessee carves out any of theexceptions, then penalty shall not be imposed.These exceptions read as under:(1) Such income is, or the transactions

resulting in such income are recorded,-(i) In a case falling under clause (a),

before the date of the search; and(ii) In a case falling under clause (b), on

or before such date,in the books of accounts or such incomeis disclosed to the Chief Commisioner/Commissioner before the said date; or

(2) He, in the course of the search, makes astatement u/s 132(4) that any money,bullion.. found in his possession has beenacquired out of his income which has not



been disclosed so far in his return ofincome to be furnished before the expiryof time specified in 139(1), and alsospecif ies the manner in which suchincome is derived and pays the tax withinterest in respect of such income.

Let us take a hypothetical example tounderstand clauses (a) and (b) of theexplanation and the exemptions available. Asearch action takes place on the premises ofan assessee on 4th July, 2010. Therefore F.Y.2009-10 (i.e. A.Y. 2010-11) has ended beforethe date of search, whereas F.Y. 2010-11 (i.e.A.Y. 2011-12) is yet to end after the date ofsearch. Hence the former situation would begoverned under clause (a) whereas the lattersituation would be governed by clause (b).Under clause (a) i f the return is yet notfurnished then he can claim exemption frompenalty in either of the ways, i.e. -i) I f the assessee has recorded such

transactions in the books of account; orii) Such income is disclosed to the Chief

Commissioner /Commissioner; oriii) He in the course of search… pays the tax,

together with interest, if any in respect ofsuch income.

Under clause (a) if the return is furnished butsuch income is not declared, then he can claimexemption in the following way, i.e. –i) He in the course of search… pays the tax,

together with interest, if any in respect ofsuch income.

Under clause (b) he can claim exemption frompenalty in either of the ways, i.e. –i) I f the assessee has recorded such

transactions in the books of account; orii) Such income is disclosed to the Chief

Commissioner /Commissioner; oriii) He in the course of search… see sub-

section 2.

Some of the important judgments on thisaspect:

i) Radha Kishan Goel (278 ITR 454) -“Even if the manner of deriving suchincome has not been disclosed in the

statement made u/s 132(4), penalty is notleviable”. This has been followed by theHon’ble Gujarat High court in MahendraC. Shah (299 ITR 305).

ii) S.D.V. Chandru (266 ITR 175) – “Inrespect of earlier years which have endedbefore the date of search, if the assesseehas disclosed in the statement made u/s132(4), penalty is not leviable.” This viewis affirmed by the Kolkatta ITAT in CIT v/s Avinash Ch. Gupta [2011] (44 SOT 85).

iii) CIT v/s Kanhaiyalal (299 ITR 19) - Ifthe disclosure of the asset has been made,then the assessee cannot be prohibitedfrom showing that the income related toany one or more of the previous yearsbefore the date of the search, at the painof the immunity conferred by clause (2)of Explanation 5 being taken away.However the Hon’ble Ahmedabad ITATin K ir it Dahyabhai Patel takes a viewcontrary to the aforesaid.

iv) Prem Arora [2012] 24 taxmann.com260 (Delhi) – Original return of incomeof income u/s 139 cannot be consideredfor the purpose of levying penalty forsearch assessments u/s 153A.Concealment of income has to be seenwith reference to additional incomebrought to tax over and above incomereturned by assessee in response to noticeissued under section 153A and, therefore,once returned income under section 153Ais accepted by Assessing Officer, it canneither be a case of concealment ofincome nor furnishing of inaccurateparticulars of such income

Therefore by and large courts throughout havetaken a view that even if the income which isthe subject matter of dispute has not beendisclosed in the original return of income, andwhen such income is unearthed during searchand if the assessee discloses such income inhis statement recorded u/s 132(4) and pays thetax together with interest, immunity should begranted from levying penalty.



Explanation 5A reads as under:

Where, in the course of a search initiatedunder section 132 on or after the 1st day ofJune, 2007, the assessee is found to be theowner of—(i) any money, bullion, jewellery or other

valuable article or thing (hereafter inthis Explanation referred to as assets)and the assessee claims that such assetshave been acquired by him by utilising(wholly or in part) his income for anyprevious year; or

(ii) any income based on any entry in anybooks of account or other documents ortransactions and he claims that suchentry in the books of account or otherdocuments or transactions represents hisincome (wholly or in part) for anyprevious year,

which has ended before the date of searchand,—(a) where the return of income for such

previous year has been furnished beforethe said date but such income has notbeen declared therein; or

(b) the due date for filing the return ofincome for such previous year hasexpired but the assessee has not filed thereturn,

then, notwithstanding that such income isdeclared by him in any return of incomefurnished on or after the date of search, heshall, for the purposes of imposition of apenalty under clause (c) of sub-section (1) ofthis section, be deemed to have concealed theparticulars of his income or furnishedinaccurate particulars of such income.]What transpires is that now even books ofaccounts, documents and transactions havebeen included within the ambit which wasabsent in the previous explanation.The sine qua non for levying penalty underthis explanation amongst other things isi) The previous year must have ended

before the date of search. If the previousyear is still pending as on the date ofsearch, explanation 5A cannot be

invoked and penalty cannot be levied u/s271 (i)(c) – Dy. CIT v/s Satish M. Patel(I.T.A No. 256 (Ahd) of 2012 dated 20-07-2012) which was fol lowed byDineshkumar Ambalal Patel 2013 (35taxmann.com 180);

ii) Return of income too must have beenfurnished before the date of search andsuch income has not been declared; and

iii) Due date for filing the return of incomefor such previous year should haveexpired but the assessee has not filed thereturn. However i t has not beenmentioned as to whether return should beconsidered as filed u/s 139(1) or 139(4).Therefore I would take a view that theextended time limit u/s 139(4) can cometo the rescue of the assessee if he missesthe former one – Gope M. Rochlani[2014] 49 taxmann.com 46.

A situation may arise wherein search takesplace after the previous year has ended but thedue date of filing of return of income u/s 139(1)has not yet expired. In such a case, theprovisions of S. 271AAA will apply.

S. 271AAA reads as under:

(1) The Assessing Officer may,notwithstanding anything contained inany other provisions of this Act, direct that,in a case where search has been initiatedunder section 132 on or after the 1st dayof June, 2007 43[but before the 1st day ofJuly, 2012], the assessee shall pay by wayof penalty, in addition to tax, if any,payable by him, a sum computed at therate of ten per cent of the undisclosedincome of the specified previous year.

(2) Nothing contained in sub-section (1)shall apply if the assessee,—(i) in the course of the search, in a

statement under sub-section (4)of section 132, admits theundisclosed income and specifiesthe manner in which such incomehas been derived;



(ii) substantiates the manner in whichthe undisclosed income wasderived; and

(iii) pays the tax, together with interest,if any, in respect of the undisclosedincome.

(3) No penalty under the provisions ofclause (c) of sub-section (1) of section271 shall be imposed upon the assesseein respect of the undisclosed incomereferred to in sub-section (1).

(4) The provisions of sections274 and 275 shall, so far as may be,apply in relation to the penalty referredto in this section.

Explanation.—For the purposes of thissection,—(a) “undisclosed income” means—(i) any income of the specified previous year

represented, either wholly or partly, byany money, bullion, jewellery or othervaluable article or thing or any entry inthe books of account or other documentsor transactions found in the course of asearch under section 132, which has—

(A) not been recorded on or before the dateof search in the books of account orother documents maintained in thenormal course relating to such previousyear; or

(B) otherwise not been disclosed to the ChiefCommissioner or Commissioner beforethe date of search; or

(ii) any income of the specified previous yearrepresented, either wholly or partly, byany entry in respect of an expenserecorded in the books of account orother documents maintained in thenormal course relating to the specifiedprevious year which is found to be falseand would not have been found to be sohad the search not been conducted;

(b) “specified previous year” means theprevious year—

(i) which has ended before the date ofsearch, but the date of filing the return

of income under sub-section (1)of section 139 for such year has notexpired before the date of search andthe assessee has not furnished the returnof income for the previous year beforethe said date; or

(ii) in which search was conducted.]This section starts with a non obstance clause.Penalty in cases of undisclosed income foundduring the course of search was dealt byExplanations 5 (where search before 1st June,2007) and 5A (where search after 1st June,2007). However from 1st June, 2007 the samewill be dealt by either Explanation 5 or S.271AAA as per the facts of the case.The sine qua non for invoking this section isthat:i) Search should have taken place after 1st

June, 2007 but before 1st July, 2012.ii) The previous year would be the one

which has either ended on the date ofsearch where the date of filing of returnu/s 139(1) has not expired; or the year inwhich the search is conducted.

iii) Any money, bullion… etc. as mentionedabove has been found and not beenrecorded in the books of accounts; or notdisclosed to the Commissioner or ChiefCommissioner before the date of search;or not disclosed in the statement recordedu/s 132(4).

Therefore if an assessee in a casei) where the previous year has ended, admits

and substantiates during the course ofsearch u/s 132(4) the manner of earningthe undisclosed income and pays the taxalongwith interest; or

ii) where the previous year is pending, either,has recorded the undisclosed income inthe regular books of accounts maintainedby him or discloses such undisclosedincome to the Commissioner or the ChiefCommissioner; or admi ts andsubstantiates during the course of searchu/s 132(4) the manner of earning theundisclosed income and pays the taxalongwith interest.



If the assessee discloses the undisclosedincome found during the course of search u/s132(4), explains the manner of deriving suchincome and pays the amount of tax alongwithinterest then no penalty under this section canbe levied.

Some authorities on this aspect:

a) Si ta Ram Gupta ([2014] 48taxmann.com 327). Concr eteDevelopers [2013] 34 taxmann.com 62.- There is no specific format /procedureprescribed in the Act for specifying andsubstantiating an undisclosed income. Ifthe statement of the assessee, specifyingthe manner in which the undisclosedincome was derived (eg. the source ofsuch undisclosed income), did not faceany rebuttal or rejection at the hands ofthe Assessing Officer, then penalty cannotbe levied.

b) Neerat Singal [2013] 37 taxmann.com189 - When authorized officer had notraised any query during course ofrecording of statement u/s 132(4) aboutthe manner in which undisclosed incomehad been deri ved and about i tssubstantiation, Assessing Officer was notjusti f i ed in imposing penal ty u/s271AAA.

c) A.N. Annamalaisamy (HUF) [2013] 38taxmann.com 440 – Where theadditional amount of undisclosed incomewhich was not disclosed during the filingof return but the same was disclosed byway of revised return which was filedbefore completing assessment, and theassessee had paid the tax alongwithinterest alongwith the manner of earningsuch undisclosed income, no penalty canbe levied.

Section 271AAA applies in cases where theprevious year has ended or pending as on thedate of search whereas Explanation 5A appliesonly in cases where the previous year hasended as on the date of search. But what wouldapply in a case where the previous year has

ended on the date of search is dealt in thefollowing manner:S. 271AAB reads as under:(1) The Assessing Officer may,

notwithstanding anything contained inany other provisions of this Act, directthat, in a case where search has beeninitiated under section 132 on or afterthe 1st day of July, 2012, the assesseeshall pay by way of penalty, in additionto tax, if any, payable by him,—

(a) a sum computed at the rate of ten per centof the undisclosed income of the specifiedprevious year, if such assessee—

(i) in the course of the search, in a statementunder sub-section (4) of section 132,admits the undisclosed income andspecifies the manner in which suchincome has been derived;

(ii) substantiates the manner in which theundisclosed income was derived; and

(iii) on or before the specified date—(A) pays the tax, together with interest, if

any, in respect of the undisclosedincome; and

(B) furnishes the return of income for thespecified previous year declaring suchundisclosed income therein;

(b) a sum computed at the rate of twenty percent of the undisclosed income of thespecified previous year, if suchassessee—

(i) in the course of the search, in a statementunder sub-section (4) of section 132, doesnot admit the undisclosed income; and

(ii) on or before the specified date—(A) declares such income in the return of

income furnished for the specifiedprevious year; and

(B) pays the tax, together with interest, if any,in respect of the undisclosed income;

(c) a sum which shall not be less than thirtyper cent but which shall not exceedninety per cent of the undisclosedincome of the specified previous year, ifit is not covered by the provisions ofclauses (a) and (b).



(2) No penalty under the provisions ofclause (c) of sub-section (1) of section271 shall be imposed upon the assesseein respect of the undisclosed incomereferred to in sub-section (1).

(3) The provisions of sections274 and 275 shall, as far as may be,apply in relation to the penalty referredto in this section.

Explanation.—For the purposes of thissection,—(a) “specified date” means the due date of

furnishing of return of income undersub-section (1) of section 139 or the dateon which the period specified in thenotice issued under section 153A forfurnishing of return of income expires,as the case may be;

(b) “specified previous year” means theprevious year—

(i) which has ended before the date ofsearch, but the date of furnishing thereturn of income under sub-section (1)of section 139 for such year has notexpired before the date of search andthe assessee has not furnished the returnof income for the previous year beforethe date of search; or

(ii) in which search was conducted;(c) “undisclosed income” means—(i) any income of the specified previous year

represented, either wholly or partly, byany money, bullion, jewellery or othervaluable article or thing or any entry inthe books of account or other documentsor transactions found in the course of asearch under section 132, which has—

(A) not been recorded on or before the dateof search in the books of account orother documents maintained in thenormal course relating to such previousyear; or

(B) otherwise not been disclosed tothe [Principal Chief Commissioner

or] Chief Commissioner or [PrincipalCommissioner or] Commissioner beforethe date of search; or

(ii) any income of the specified previous yearrepresented, either wholly or partly, byany entry in respect of an expenserecorded in the books of account orother documents maintained in thenormal course relating to the specifiedprevious year which is found to be falseand would not have been found to be sohad the search not been conducted.]

Sub Section (1) to this section deals with 3circumstances under which penalty is leviableat the rates of 10%, 20% and 30 to 90% underclauses (a), (b), and (c) respectively. We willnot be dealing with clauses (a) and (b) as theyare very clear. As far as clause (c) is concernedit deals with all cases other than those fallingunder clauses (a) and (b). Those shall mean toinclude cases in which the assessee in astatement under sub-section (4) of section 132,does not admit the undisclosed income; doesnot substantiate the manner in which theundisclosed income was derived; and also doesnot on or before the specified date declare suchincome in the return of income furnished forthe specified previous year and pay the taxalong with interest in respect of the undisclosedincome.

It is worthwhile to note that if the assessmentfor a previous year which is pending or hasended before the date of search, penalty underthis section will be levied only to the extent ofthe “undisclosed income” found during thecourse of search as defined above. In cases ofany other income unearthed during finalassessment proceedings and not by way ofsearch, penalty will not be levied under thissection but the provisions of S. 271(i)(c) willapply.

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Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

National Tax Tr ibunal:

The newly created court/tribunal would have to beestabl ished in consonance wi th the sal ientcharacteristics and standards of the court which issought to be substituted. This would mean that thenewly constituted court/tribunal will be deemed tobe invalidly constituted, ti l l i ts members areappointed in the same manner, and till its membersare entitled to the same conditions of service as wereavailable to the Judges of the court sought to besubstituted. Thus, Sections 5,6,7,8 and 13 of theNTT Act are illegal and unconstitutional on the basisof the parameters laid down by the decisions of theconstitution benches of the Supreme Court and onthe basis of recognised constitutional conventionsreferable to the Constitutions framed on theWestminster model of Government. In the absenceof the aforesaid provisions of the NTT Act whichare held to be unconstitutional, the remainingprovisions are rendered otiose and worthless, andas such, the provisions of the NTT Act as a whole,are hereby set aside.

The jurisdiction to decide substantial questions oflaw vests under our Constitution, only with the HighCourts and the Supreme Court, and cannot be vestedin any other body as a core constitutional valuewould be impaired thereby. Hence, the NationalTax Tribunal Act is unconstitutional, being theultimate encroachment on the exclusive domain ofthe superior courts of record in India.

[Madras Bar Association vs. Union of Indiaand another (2014) 10 SCC 1)]

Sect ion 13 r.w.s. 11 – Denial ofexemption(sub-section (1)(d)):

High Court by impugned order held that in case ofa chari table trust, i t was only income frominvestment or deposit which had been made in

violation of Sec.11(5) that was liable to taxed andthat violation u/s 13(1)(d) does not tantamount todenial of exemption u/s 11 on total income ofassessee-trust.

[CIT vs. Fr. Mullers Charitable Institutions(2014) (227 Taxman 369)]

Business Expenditure – Allowability ofI llegal payments:

Assessee entered into a contract with foreigncompany for import of furnace oil – It got performedcontractual obligations arising from said contractexecuted through its sister concern, against paymentof certain consideration – Assessee claimed saidpayment as commission – High Court by impugnedorder held that though assessee got contractexecuted through its sister concern, but subsequentpurchases from sister concern of very furnace oil,its storage and consequent sale were in completebreach of Solvent, Raffinate & Slop (Acquisition,safe, storage & preservation of Use in automobiles)– Order,2000 and, thus, any deduction u/s 37(1)could not be allowed to assessee for said payment– whether Special Leave Petition filed by assesseeagainst impugned order was to be dismissed.

[Overseas Trading & Shipping Co. (p) Ltd. Vs.Asst. CIT (2014) (227 Taxman 370)]

Service of notice:

High Court by impugned order held that since noticeu/s 143(2) had been served upon assessee on verynext working day as due date being Sunday, therewas sufficient compliance of first proviso toSec.143(2) and notice was valid – whether SLPfiled by assessee against impugned order was to bedismissed – Held yes.

[Gujarat State Plastic Manuf. Association vs. Dy.DIT, Ahmedabad (2014) (227 Taxman 380)]

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Capi tal Gain: L ong Ter m: Date ofPurchase how to be considered:Mrs. Madhu Kaul v/s CI .T.(2014) 363 ITR 54 (P& H)

Issue:

How the date of purchase of a f lat is to beconsidered – date of allotment or any other date?

Held :

Assessee had sold the flat on July, 5, 1989.

The flat was allotted to the asessee on June, 7, 1986,by a letter- conveyed to the assessee on June 30,1986. The assessee paid the first installment on July,4, 1986, there by conferring a right upon theassessee to hold a flat, which was later identifiedand possession was delivered on a later date. Themere fact that possession was delivered later didnot detract from the fact that the allotee wasconferred a right to hold the property on issuanceof an allotment letter. The payment of the balanceinstallments, identification of particular flat anddelivery of possession were – consequential acts,that related back to and arose from the rightsconferred by the allotment letter.

Peak Theory explainedC.I .T. v/s. Fer tilizer Traders(2014) 222 Taxman 162 (All) (Mag) : 98DTR (All) 323

Issue :

How the peak theory is to be considered.

Held :

The peak theory is defined in the Sampath I Yangon’sLaw of Income Tax, Vol. 3, 9th Edition, Page 3547.Accordingly where a single credit or number ofcredits appear in the books in the account of any

CA. C. R. [email protected]

particular person side by side with a number ofdebits, they should all be arranged in serial order;that a credit following a debit entry should be treatedas referable to the latter to the extent possible andthat, not the aggregate but only the “peak” of thecredit should be treated as own. To give a simpleexample, suppose there are credits in the assessee’sbooks of account of Rs.5000 each 18th October,1990 and again on 5th November 1990 but there isa debit by way of repayment shown on 27th

October, 1990, the explain will be that the creditappearing on 5th November, 1990 has or could havecome out of the withdrawal/repayment on 27th

October, 1990. This plea is generally accepted as itis logical and acceptable (Whether the creditor is agenuine party or not), provided there is nothing inthe material on record to show that a particularwi thdrawal /repayment could not have beenavailable on the date of subsequent credit.

A refinement or extension of the plea occurs whenthe credit appears not in the same account but inaccounts of different persons. Even then, if thegenuineness of all the persons is disbelieved andall the credits appearing in the different accountsare to be held to be the assessee’s own money, theassessee wi l l be enti tl ed to set-of f and adetermination of the peak credit after arranging allthe credits in the chronological order.

Burden of ProofC.I .T. v/s. Chanakya Developers(2014 ) 222 Taxman 164 (Guj .) (Mag.)

Issue :

Whether Supply of address and PA No. Of personsbooking flat is sufficient discharge of burden onthe part of the assessee?

From the Courts

CA. Jayesh C. [email protected]

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Held :

Assessee received certain amount from four personson account of booking of flats. In order to establishgenuineness of transactions, assessee suppliedaddress and PAN of concerned persons to AssessingOfficer. Assessing Officer, however, rejectedassessee’s explanation and added said amount toits taxable income. Tribunal opined that sinceassessee had discharged primary onus cast on it,Assessing Officer should have made inquiry u/s.133 (6). In absence of any inquiry, Tribunal deletedimpugned addition.

High Court held that no substantial question of lawarises from Tribunal’s Order.

Application of Section 41(1)CIT v/s. Bhogilal Ramj ibhai Atara(2014) 222 Taxman 313 (Guj .)

Issue :

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

Held :

Sec. 41 (1) would apply in a case when there hasbeen remission or cessation of liability during theyear under consideration subject to the conditionscontained in the statute being fulfilled. Additionallysuch cessation or remission has to be during theprevious year relevant to the assessment year underconsideration.

In the instant case both elements are missing. Therewas nothing on record to suggest that there wasremission or cessation of liability that too duringthe previous year relevant to the assessment year2007-08. It is undoubtedly a curious case. Eventhe liability itself seems under serious doubt. TheA.O. undertook the exercise to verify the recordsof the so called creditors. Many of them were notfound at all in the given address. Some of themstated that they had no dealing with the assessee.

In one or two cases, the response was that theyhad no dealing with the assessee nor did they knowhim. Of course, these inquiries were made exparteand in that view of the matter, the assessee wouldbe allowed to contest such findings. Nevertheless,even if such facts were established through bi parteinquiries the liability as it stands perhaps holds thatthere was no cessation or remission of liability.Therefore, the amount in question cannot be addedback as a deemed income u/s. 41(1).

This is one of the strange cases, where even if thedebt itself is found to be non-genuine from the veryinception at least in terms of Sec.41 (1) there is nocure for it. Therefore, the appeal fi lled by therevenue was liable to be dismissal.

Discretionary Trust : Meaning of : Rightof BeneficiaryC.W.T. v/s. Estate of L ate HM MVikramsinhj i of Gondal (2014) 363 ITR679 (SC)

Issue :

What is the meaning of Discretionary Trust andwhat are the rights of the beneficiaries?

Held :

On the subject, Supreme Court has held as under:

A discretionary trust is one which gives abeneficiary no right to any part of the income ofthe trust property, but vests in the trustees adiscretionary power to pay him, or apply for hisbenefit, such part of the income as they think fit.The trustees must exercise their discretion as andwhen the income becomes available, but if they failto distribute in due time, the power is notextinguished, so that they can distribute later. Theyhave no power to bind themselves for the future.The beneficiary thus has no more than a hope thatthe discretion will be exercised in his favour.

From the Cour ts

6867


Applicabil ity of Sec. 14A : Claim ofexempt income is a mustCIT v/s. Cor r tech Energy (P) L td.(2014) 223 Taxman 130 (Guj .)

Issue :

A claim of exempt income is a prerequisite forapplicability of Sec. 14A?

Held :

Assessee invested certain borrowed money inshares. A.O. disallowed amount by applying Rule8 D.

CIT(A) confirmed the disallowance observing thatthe assessee made investment in shares which wouldresult into tax free dividends.

Tribunal held that the assessee had not claimed anyexempted income in this year. In such a situationSec.14A could have no application. The Tribunaldeleted the addition made u/s. 14 A.

On appeal to High Court, it is held that :-

Section 14A(1) provides that for the purpose ofcomputing total income under Chapter IV, nodeduction shall be allowed in respect of expenditureincurred by the assessee in relation to income whichdoes not form part of the total income under theAct. In the instant case, the Tribunal has recordedthe finding of fact that the assessee did not makeany claim for exemption of any income frompayment of tax. It was on this basis that the Tribunalheld that disallowance u/s.14A could not be made.In the process Tribunal relied on the decision ofDivision Bench of Punjab and Haryana High Courtin case of CIT v/s. Winsom Textile Industries Ltd.(2009) 319 ITR 204 in which also the Court hadobserved that when the assessee did not make anyclaim for exemption, Section 14-A could have noapplication.

Thus, no Question of law arose.

From the Cour ts

Char itable v/s. Commercial Activity.Director of Income Tax v/s. SabarmatiAshr am Gaushala Tr ust (2014) 223Taxman 43 (Guj .)

Issue :

When aims and objects were charitable and profitearned was incidental the trust would loseexemption u/s.11?

Held :

Assessee was registered with object of breedingcattle and to improve quality of cows and Oxen. Itgenerated considerable income from activity of milkproduction and sale. A.O. denied benefit ofexemption u/s.11 on ground that it was earningprofit over years and activities were commercial innature, CIT(A) confirmed the same.

Tribunal reversed decision of revenue authoritiesholding that assessee was entitled to exemption u/s.11 and since aims and objects of assessee trustwere chartiable and profit earned from said activitieswere incidental in nature, it was not hit by Sec.2(15).

High Court held that :

Objects of trust clearly established that same werefor general public utility and profit making wasneither aim nor object of trust. Merely becausewhile carrying out activities for purpose of achievingobjects of trust certain incidental surpluses weregenerated, would not render activity in nature oftrade, commerce of business. Accordingly order ofTribunal was upheld.

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7069


Guj arat Pipavav Por t L td. v. DCIT166TTJ159 (RAJ.)Assessment year : 2006-07 & 2007-08Order Dated: 23rd August, 2013

Basic Facts

The assessee-company carried on the business ofdeveloping, constructing, operating and maintainingthe port on Build, Own, Operate, Transfer (BOOT)basis. Assessee entered into two agreements withGujarat Maritime Board (GMB). First agreementwas lease and possession agreement by whichassessee was granted the right to use the foreshoreland and waterfront abutting against monthly rentand second was ‘concession agreement by whichassessee was granted right to use waterfront againstpayment of charges to be computed on basis ofactual throughputs achieved in the month.Theassessee made payment to GMB as wharfage chargeand deducted tax therefrom under section 194Jbeing in the nature of royalty. The AO held thatsuch payments were in nature of rent as defined insection 194-I and, therefore, the assessee wasrequired to deduct tax at source under section 194-I and not under section 194J. The AO treated theassessee as assessee in default and levied penaltyunder section 201(1) in addition to interest undersection 201(1A). On appeal, the Commissioner(Appeals) upheld the order of the AO.

IssueWhether Whar fage charges paid by assesseeunder “lease and possession agreement” forlease of premises granting the assessee r ight touse the foreshore land and water front can beconsidered as royalty under section 194J(c)?

HeldThe term ‘rent’ is defined in Explanation (i) to section194-I as any payment, by whatever name called,under any lease, sub-lease, tenancy or ‘any otheragreement’ for the use of (either separately or

together) any, inter alia, land, or building or landappurtenant to a building. It is, thus, clear that theterm ‘rent’ also includes any payment made underany agreement for the use of, either separately ortogether, any land or building. Keeping in view theaforesaid definition of ‘rent’, on careful perusal ofboth the agreements, namely, the lease & possessionagreement, and the concession agreement, it is clearthat the impugned payment shown by the assesseein its books of account as wharfage is, in substance,nothing but payment made for using the landtogether with structure on the margin or shore ofnavigable waters alongside of which vessels werebrought for the sake of being conveniently loadedor unloaded. Waterfronts are part of land and,therefore, any payment in lieu of its use wouldsquarely fall under the definition of rent as given insection 194-I (i). Hence, the CIT(A) has correctlyappreciated the factual and legal aspects of the case.His order in this behalf is, therefore, confirmed.Apropos the applicability of section 194J to theimpugned payments, i t was submitted by theassessee that impugned payments were in the natureof ‘royalty’ under section 194J(c). On perusal ofthe definition of ‘royalty’ as given in Explanation 2to clause (vi) of section 9(1), it is clear that the scopeof royalty is limited to consideration paid for transferof certain rights in respect of patent, invention,model , design, secret formula or process ortrademark or similar property, etc. The impugnedsum paid by the assessee does not fall under any ofthe clauses of Explanation 2 to clause (vi) of sub-section (1) of section 9. The assessee also couldnot establish as to how the impugned paymentsmade by the assessee fell under Explanation 2 toclause (vi) of sub-section (1) of section 194J. Inthis view of the matter, there was no basis with theassessee for deducting tax at source under section194J. The CIT(A) has rightly held that the assesseewas required -to deduct tax at source under section194-I.

CA. Yogesh G. [email protected]

Tribunal News

CA. Aparna [email protected]

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A.P. State Warehousing Corporation v.DCIT 150 ITD 485 (Hyd)Assessment Year : 2007-08Order dated:24thJanuary, 2014

Basic Facts

The assessee was carrying on the business of takinggodowns on lease from private parties and lettingthem to Food Corporation of India on guarantee. Itstored food-grains belonging to FCI, mainly ingodowns and handled and transported suchfoodgrains under its supervision by hiring men andmaterial wherever necessary. It claimed exemptionunder section 80-IB(11A). Claim of the assesseefor relief under section 80-IB(11A) had beendisallowed by the AO mainly on the ground thatthe activities of the assessee did not constitute an‘integrated’ activity and assessee having beenincorporated in 1958, and in the absence of anythingon record to substantiate that the assessee had takenup any new activity of handling and transportationof food grains subsequent to 2002, assessee wasnot entitled for relief under section 80-IB(11A),since relief under said section is available only forfive years from ‘initial year’.The CIT(A) upheldthe action of the AO denying the relief claimed bythe assessee under section 80-IB(11A).

Issue

Whether each new godown constructed forstorage of food grains is an under taking andeligible for section 80-IB relief?

Held

The assessee owns premises accommodatinggodowns at different places all over the State. Ineach area, it either constructs or offers an investorto construct new godowns, which the corporationtakes on lease. Each unit is an undertaking becausefood-grains are stored and handled and transportedthereto and therefrom. It may be noted that there isno restriction in section 80-IB that an existingbusiness unit cannot set up new undertakings tocarry on the integrated business of handling, storageand transportation of food grains. The godowns

where this business is to be carried on need not beowned by the assessee. Since each new godown isan undertaking in itself, assessee is entitled for suchrelief under Section 80-IB(11A) for five years inrespect of each such undertaking from the ‘initialyear’ in which it was set up.As regards the eligibilityof the activity of the assessee to the relief undersection 80-IB(11A), it is worthwhile to refer to theintention of the Legislature in introducing section80-IB(11A).It is evident that the insertion of sub-section (11A) is intended to encourage building ofstorage capaci ti es, by providing that anyundertaking engaged in integrated bulk handling,storage and transportation would be allowedhundred per cent deduction for the first five yearsand thirty per cent deduction for the next five years.Thus, Section 80-IB(11A) is applicable to incomederived from the integrated business of handling,storage and transportation of foodgrains. A perusalof the activities of the assessee in association withthe Food Corporation of India, clearly indicated thatit was engaged in the integrated business ofhandling, storage and transportation of food grains.The fact that the assessee had been carrying onsimilar business would not disentitle the assesseefrom claiming relief under section 80-IB(11A), inrespect of the new warehouses put to use after theintroduction of section 80-IB(11A), i.e. on or after1-4-2001. The assessee has furnished in the paper-book list of new godowns, which have been put touse by the assessee after 1-4-2001. Therefore, theassessee was entitled to deduction under section 80-IB(11A), in respect of income derived from newundertakings, i.e., warehouses, set up and operatedf rom 1.4.2001 for storage, handl ing andtransportation of food grains. Accordingly, theimpugned orders of the Commissioner (Appeals)were set aside on this issue for all the three yearsand the matter remitted to the file of the AO, with adirection to verify the claim of the assessee fordeduction under section 80-IA(11A) in respect ofnew undertakings set up after 2001, and allow thesame in accordance with law, and after giving dueopportunity of hearing to the assessee.

Tr ibunal News

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Jai Surgicals L td. v. ACIT 150 ITD 60(Del).Assessment Year : 2009-10 Order dated:26th June, 2014

Basic Facts

The assessee is engaged in the business ofmanufacture and export of surgical blades. Theassessee entered into transactions of payment of jobwork charges to a related party, viz. , M/s RazormedInc. during the financial year relevant to assessmentyear under consideration without obtaining priorapproval of the Central Government in accordancewith the provisions of section 297 of the CompaniesAct, 1956. The AO opined that as there was noprior approval to the job charges paid to M/sRazormed Inc., it was an offence and is prohibitedby law and accordingly, it triggered the Explanationto section 37(1) of the Act. This led to the additionof job work charges. The CIT(A) echoed theassessment order on this issue.

Issue

Whether offence or prohibition under lawshould be judged with ‘purpose’ of expenditureon a standalone basis divorced from fulfilmentor otherwise of procedural formalities attachedwith and necessar y for incur r ing of suchexpenditure?

Held

The assessee made payment for getting the jobwork done from its related concern, which isotherwise neither an offence nor prohibited by law,but committed a breach by not obtaining thenecessary approval from the Central Governmentin time. Thus, on one hand the payment is otherwisefor a lawful purpose, but the legality of thetransaction has been shadowed by not obtainingprior approval from the Central Government. TheHon’ble ITAT held that explanation to section37(1), which is a deeming provision, it is amplyborne out that it talks of disallowing any expenditureincurred by an assessee for ‘any purpose’ which iseither an offence or prohibited by law. So what iscontemplated for disallowance is an ‘expenditure’incurred ‘for any purpose which is either an offence

or which is prohibited by law’. In simple words,the investigation should be carried out to see theobject and consideration for the expendi tureincurred. If the purpose of the expenditure is eitheran offence or is prohibited by law, then it wouldsuffer disallowance. It means that the offence orprohibition under law should be judged with the‘purpose’ of the expenditure on a standalone basisdivorced from the fulfilment or otherwise of theprocedural formalities attached with and necessaryfor the incurring of such expenditure. When thelanguage of the Explanation is crystal clear and doesnot encompass the incurring of expenses for a lawfulpurpose, such as the job charges, within its ambit,it is wholly impermissible to import a furtherrequirement in the language of the Explanation tomake the otherwise lawful purpose as unlawful forlack of the prior approval of the CentralGovernment. Since such expenditure in itself isneither an offence nor prohibited by any law andthere is a valid and lawful quid pro quo for the same,the view canvassed in the CIT(A)’s was rejectedby Tribunal.

Director (Finance) Secretar iat, ShippingCorpn. of India L td. v. ITO [2014] 150ITD 516Assessment Year : 2004-05 to 2006-07Order dated: 30th May, 2014

Basic Facts

The assessee Shipping Corporation of India Limitedwas a Government of India Enterprise which wasengaged in the business of shipping. It ownedaround 90 ships which were plied all over theworld. In the course of its business, assessee alsohired ships to meet capacity requirements whereexigencies arose and such ships were taken oncharter from the non-resident owners of the ships,registered outside India. The AO held that no taxwas deducted by the assessee from the paymentsmade to the non-resident entities towards hire/timecharter charges during the relevant three assessmentyears. The hire/time charter charges paid by theassessee to the non-resident entities being in thenature of royalty (equipment royalty taking ship asan equipment), assessee was required to deduct tax

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58


at source from the said payment. Accordingly, hetreated the assessee as assessee in default andcharged interest under section 201(1).On appeal theCIT(A) held that the payments was not royalty butheld that provisions of section 44B would beapplicable. The CIT(A) directed the AO to considerthe relevant DTAA and allow appropriate relief.The AO determined 7.5 per cent of the gross amountas income of the shipowners liable to tax in Indiaas per the provisions of section 44B and treatedassessee as the assessee in default under section201(1) to that extent. He also levied interest undersection 201(1A) on the amount so determined.Onappeal to CIT(A) he dismissed the appeal. Theassessee is in appeal to the Tribunal.

Issue

Whether no order under section 201(1)/201(1A)can be passed when revenue has not taken anyaction against payee and fur ther time limit fortaking action against payee under section 147has also expired?

Held

The Tribunal following the Special Bench of theITAT in the case of Mahindra & Mahindra v. Dy.CIT [2009] 30 SOT 374 (Mum.) held that no orderunder section 201(1)/201(1A) can be passed wherethe revenue has not taken any action against thepayee and further the time limit for taking actionagainst the payee under section 147 has alreadyexpired. The question of treating the personresponsible for paying the income as the assesseein default by way of passing the order under section201(1) is inter alia tied with the tax liability of thepayee on such sum and if the liability of the payeeto tax does not exist or though the income ischargeable to tax but the liability of the payee totax has not been determined by passing any orderin his hands and further the time limit for takingaction on the payee under any provision has alsopassed out, the payee cannot be charged on suchincome and consequently the person responsiblefor paying the income cannot be treated as theassessee in default.

JCDECAUX Adver tising India (P) L td.Vs. DCIT 166 TTJ 121 (Del)Assessment Year : 2007-08 Order dated:8th September, 2014

Basic Facts

The assessee was incorporated in April, 2005 tocarry on the business of out of home advertisement,consisting of street furniture, bi ll boards andtransportation. The assessee was awarded its firstcontract by New Delhi Municipal Corporation(NDMC) in March, 2006 for construction of 197Bus Queue Corporation (BQSs) on Build-Operate-Transfer (BOT) basis. As per this contract, theassessee was required to undertake preliminaryinvestigations, study , design , finance, construct,operate and maintain BQSs at its own cost. Inconsideration, the assessee was al lowed tocommercially exploit the space allotted in theseBQSs by means of display of advertisement etc.,for a period of 15 years. The expenditure incurred&claimed by the assessee as deductible wasaccepted by AO as revenue expenditure but herefused to allow deduction on the ground that thebusiness of the assessee had not commenced. TheAO held that the business would commence onlywhen the BQSs would be ready for providing spacefor advertisement to the assessee, being the veryreason for which the assessee company entered intoan agreement with the NDMC. The CIT(A) upheldthe assessment order.

Issue

Whether all the revenue expenses incur reddur ing the year are eligible for deduction?

Held

The assessee was given contract in the precedingyear. Not only that, the assessee started the executionof contract in the preceding year itself by takingsteps, such as, entering into manufacturingagreement with a third person for manufacture andinstallation of BQSs on making advance payment.It can be said that the project of NDMC forconstruction of BQSs was not set up, but in so faras the assessee is concerned, it had certainlycommenced its business with the execution of

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contract awarded by NDMC. The authorities belowhave tagged the setting up of business with theprovision of space for advertisement by NDMC.This is certainly post commencement business stageof assessee. Such an event would mark thegeneration of actual income on commencement ofbusiness and cannot be construed as the setting upof business. The assessee’s business was set-upwhen it prepared itself for undertaking the activityof building BQSs on receipt of contract fromNDMC. It cannot be related to the completion ofconstruction of BQSs. As the setting up of thebusiness was over in the preceding year, at themaximum, entering into manufacturing agreementfor manufacture and installation of BQSs on 30th

March, 2006, not only the business of the assesseewas set up but had also commenced in the instantyear. As section 3 r.w.s. 4 refers to the starting ofprevious year from the date of setting up of a newbusiness, there is no hesitation in holding that thebusiness stood already set-up in the preceding yearand as such there can be no question of canvassinga view that the business would be set up in asubsequent year when BQSs would be ready forproviding space to the assessee for advertisement.Thus, the Hon’ble ITAT accepted the assessee’sclaim that the business was set up in the precedingyear. Accordingly, all the revenue expenses incurredduring the year become eligible for deduction.

DDIT v. JC Bamford Excavators L td.[2014] 150 ITD 553 (Del)Assessment Year : 2006-07 Order dated:14th March, 2014

Basic FactsThe assessee is a flagship company of JCB in UKwhich owns, develops and manufactures excavatorssold under the JCB brand name. It entered into aTechnology Transfer Agreement (TTA) &anInternational Personnel Assignment Agreement(IPAA)with its wholly owned subsidiary JCB IndiaLtd. The assessee received royalties/fees fortechnical services from JCB India which was offeredfor taxation at the rate of 15% as per DTAA. In termsof TTA read with IPAA, assessee also sent i tspersonnel to the plant of JCB India for solvingproblems relating to the licensed products. The

assessee had send eight employees ‘on deputationto JCB India’ and seven employees frequently visitedIndia mainly for reviewing the business of JCB India.In view of the deputation of these eight persons for aperiod of 90 days during the previous year relevantto the assessment year under consideration, the AOheld that they constituted services P.E of the assessee(named as JCB India) in India in terms of Article5(2)(k)(i) of the DTAA. AO held that it carried onthe business in India and royalties/fees for technicalservices received from JCB India was effectivelyconnected with such service PE and considered thesame as ‘Business Profits’ under article 7 of theDTAA. The CIT(A) held that since eight personsbecame the employees of JCB India on theirdeputation, the assessee did not have any PE in India.Resultantly, it was held that there could be nocomputation of income as per article 7 of the DTAA.IssueWhether JCB India constituted the assessee’sservice PE in India?HeldA close look at the prescription of article 5(2)(k)(i)divulges the requirement of a cumulative fulfilmentof the following requisites as a sine qua non forconstituting a PE of a resident of one State in theother State. The first essential is of furnishingservices including managerial services. The eightemployees sent on deputation to JCB India werebasical ly engaged in managing the overal loperations of JCB India including the qualitycontrol.The first condition thus stands satisfied. Thesecond essential is that the services should be otherthan those taxable under Article 13. As the entirecase of the AO rests on the foundation that theconsideration for such services is ‘taxable’ underarticle 7, which is definitely ‘other than Article 13’,this condition is also fully satisfied. The thirdessential that such services should be renderedwithin the other contracting state is also ful lysatisfied. The fourth essential states that suchservices should be rendered by the enterprise of thefirst state through its employees or other personnel.The question which arises here is that whether theseeight persons were the employees of the assessee

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contd. on page no. 615


In this issue we are giving gist of an importantdecision of Hon’ble Gujarat High Court in the caseof Santokben Sarmanbhai Jadeja v/s ITO,wherein the Hon’ble High Court held that in caseof an identical issue if the department has acceptedthe position and has not gone in further appeal, thenin succeeding year also on the identical issue, theycannot come in appeal before Hon’ble Court.

IN THE HIGH COURT OF GUJARAT ATAHMEDABAD

TAX APPEAL NO. 1768 of 2005

With


TO


HONOURABL E M R. JUSTI CE K .S.JHAVERI

and

HONOURABL E M R. JUSTI CE K .J.THAKER

====================================================================

SANTOKBEN SARMANBHAI JADEJAsince deceased Thro’ her legal heir

BHOJABHAI S. JADEJA … . Appellant(s)

Versus

INCOME TAX OFFICER… ..Opponent(s)

====================================================================

Appearance :

MR. RK PATEL, ADVOCATE for theAppellant(s) No.1

MR. PRANAV G. DESAI, ADVOCATE forthe Opponent(s) No.1

CA. Sanjay R. [email protected]

Unreported Judgements

Gist

Question

In all the three Tax Appeals in the questions wereas under:

Tax Appeal No. 1768 of 2005

“Whether the Tribunal’s conclusion in upholdingthe addi tion towards yield to the extent ofRs.2,12,000/- in the returned figure of agriculturalincome is on justifiable basis ?





Facts

The assessee has filed return of income on 17/06/1997 declaring total income of Rs.9,607/- and netagricultural income of Rs.6,96,573/-. As there wasescapement of the income, notice u/s 148 of theAct was issued,in response to which the assesseesaid that her return of income filed in originalassessment be considered as filed pursuant to u/s148 notice.

Thereaf ter, assessment order was passeddisallowing agricultural income and treating it asincome from other sources. Thereafter, the matter


went upto Tribunal, which partly allowed appealof the assessee. The assessee thereafter went inappeal before Hon’ble High Court and contendedthat in the earlier assessment year the income wasconsidered as agricultural income, but for only thisyear the same was not so considered. The assesseealso relied on the Hon’ble Supreme Court decisionin the case of CIT v/s Excel Industr ies L td. 358ITR 295. It also relied on the identical issue decidedby the Hon’ble Gujarat High Court in Tax AppealNo. 347 of 2002 and contended that since in theearl ier year the income was considered asagricultural income, the same has to be consideredas agricultural income also in the above three appealfor Assessment Years 1994-95, 1995-96 and 1996-97 .

Held

The Hon’ble Gujarat High Court quoted thefollowing paragraphs from the decision of Hon’bleGujarat High Court in tax Appeal No.347 of 2002:

“7. Heard the learned advocates appearing forthe parties and considered the submissions.Learned advocate Mr. Kar ia for therespondent – assessee has pointed out theobservations made by the Tribunal in para 4.2,which reads as under :

“4.2 On the basis of the entry in theDepreciation Table, the learnedcounsel contended that E Boats arerequired to be treated as machineryspare parts and not item of inventory(stock-in-trade) as contended by theAO. The learned counsel further statedthat in AY 1996-97 a similar showcause notice was issued by the AO tothe assessee company as to why anaddition on account of closing stock ofthe E-boats should not be made asmade in earlier asstt. year viz. AYs

1992-93 to 1995-96. The respondentcompany submitted a detailed replydated 17/12/1998 a copy whereof hasbeen placed at page 145 to 149 whereinit was explained that no addition isrequired to be made on account ofclosing stock of E-Boats and on thecontrary the respondent companywould get deduction which wouldentitle them to have income tax refund.The AO after considering the detailedreply so submitted by the assesseedropped the proposal of making theaddition on account of closing stock ofE-Boats for AY 1996-97. The learnedcounsel contended that no suchaddition made in AY 1997-98 also.”

“8. In that view of the matter, considering thefinding recorded by the Tribunal, we concurwith the view taken by the Tribunal and inview of fact that the earlier decision of thesame assessee was accepted by theDepartment, and therefore, only on thatground, the present appeals are deserve tobe dismissed. In the peculiar facts andcircumstances of the case, it may not betreated as precedent. The question in all theseTax Appeals is answered against theDepartment and in favour of the assessee.All these Tax Appeals are dismissed.”

The Hon’ble High Court, therefore, held that sincein the earlier year the income was assessed asagricultural income which was accepted by thedepartment, for these years also they should haveconsidered as agricultural income and hence theadditions made were deleted.

❉ ❉ ❉

Unrepor ted Judgements


Whether amount paid for compounding ofoffence is hit by explanation to section 37(1) ofthe Income Tax Act, 1961 and hence cannot beallowed as deduction while computing businessincome?Issue :The assessee M/s. XYZ Construction Co. Pvt. Ltd.paid compounding fees for regularizing constructionof building which was made in violation ofBuilding Regulations. The AO is of the opinion thatcompounding fees paid cannot be allowed asdeduction since it is covered by the explanation tosection 37(1) of the Income Tax Act, 1961.

Proposition :It is submitted the compounding fees is paid onlyfor violation of administrative regulations which getsrelaxed on payment of compounding fees. It is alsosubmitted that such payment is not against violationof law. The fact that the matter is compounded doesnot mean that there is admission of violation. It isfurther submitted that such payment is at the mostfor the breach of regulation under the relevant lawsand not laws themselves. In these circumstances,compounding fees paid in my opinion is not hit byexplanation to section 37(1) of the I.T. Act, 1961hence the same has to be allowed as deduction.

View against the Proposition :Let me refer to explanation to section 37(1) of theI.T. Act, 1961.

1] Prior to insertion of Explanation to section 37(1)by Finance (No.2) Act, 1998, the Courtsincluding the Hon’ble Apex Court have onvarious occasions been called upon to answerthe question, as to whether fines and penaltiespaid by the assessee could be allowed as adeduction while computing the income of theassessee and the Courts have consistently heldthat any expense which is paid by way of penaltyfor breach of law cannot be said to be an amountexpended wholly and exclusively for the

purposes of business – Haji Aziz & AbdulShakoor Brothers vs. CIT [(1961) 41 ITR 350(SC)]. However, in Pranav Construction Co. vs.ACIT [(1988) 61 TTJ (Mum.) 145] the Hon’bleMumbai Tribunal held that payment of extortionmonies and hafta by the assessee, a builder toanti social elements was an allowable businessexpenditure as strong circumstantial evidenceswere available to prove the genuineness of thepayments made by the assesseee.

In order to put the matter beyond reasonabledoubt and to disallow any expenditure incurredby the asessee for any purpose which is anoffence or which i s prohibi ted by lawExplanation to sub-section (1) of 37 of the Actwas inserted by the Finance (No. 2) Act, 1998,with retrospective effect form 1-4-1962 whichread as under :37(1)… …Explanation :“For the removal of doubts, it is hereby declaredthat any expenditure incurred by an assesseefor any purpose which is an offence or whichis prohibited by law shall not be deemed to havebeen incurred for the purpose of business orprofession and no deduction or allowance shallbe made in respect of such expenditure.”

The intention and the reason for the insertionof the Explanation was explained by theCentral Board of Direct Taxes in CircularNo.772, dated 23.12.1998 [ (1999) 235 ITR(St.) 35] in the following words :

“20 Disallowance of illegal expenses.—

20.1Section 37 of the Income-tax Act isamended to provide that any expenditureincurred by an assessee for any purposewhich is an offence or which is prohibitedby law shall not be deemed to have beenincurred for the purposes of business orprofession and no deduction or allowance

CA. Kaushik D. [email protected].

Controversies


shal l be made in respect of suchexpenditure. This amendment will resultin disallowance of the claims made bycertain assesses in respect of payments onaccount of protection money, extortion,hafta, bribes, etc., as business expenditure.I t i s wel l decided that unlawfulexpenditure is not an allowable deductionin computation of income.”

Thus, the Explanation was inserted with theintention to curb, rather than to act as a deterrentagainst, any one carrying on a profession,occupation or business in any illegal or illegitimatemanner. Now, after insertion of Explanation anypenalty/ fine or any expenditure incurred which isprohibited by law (Extortion money, hafta, bribes,etc. ) cannot be considered as an expenditure whollyand exclusively incurred for the purpose of business.It is also against public policy to allow the deductionof expenditure incurred under one statute which isin violation of provisions of another statute.Gareden Silk Mills L td. v/s. Asstt. CIT(2005) 2 SOT 856 (Ahd)

Assessee company took over business of apartnership firm – Department had launchedprosecution proceedings against partners oferstwhile firm who were now directors of assessee– Assessee paid compounding fees to CBDT andclaimed same as expenditure under section 37(1) –Since prosecution was launched against partnersof erstwhile firm, it was their personal responsibilityto face such prosecution and, therefore, deductionunder section 37(1) – being also hit by Explanationto section 37(1), was not allowable.

Payments made to Municipal Corporation forregularizing unauthorized construction carried outwithout obtaining necessary permission from theMunicipal Corporation were held to be penal innature and hit by the provisions of Explanation tosection 37(1) of the Act, Millennia Developers (P)Ltd. vs. Dy. CIT (2010) 322 ITR 401 (Karn)].Similar view is also taken by Hon’ble MumbaiTribunal in the case of Radhavallabh Silk Mills (P)Ltd. vs. Dy. CIT [(2007) 12 SOT 423 (Mum.)]

In CIT vs. Mamta Enterprise (266 ITR 356), byinvoking Explanation to section 37, compounding

fees for regularizing construction of building, theCourt held that compounding process cannot washaway sin of violation. The person would still be anoffender of law and hence compounding chargespaid still be treated as payment for infraction of lawnot deductible as expense in view of Explanation tosection 37. The Delhi High Court decision in LokeNath (Supra) was distinguished being decisionpertaining to period prior to insertion of Explanation.

View in favour of the Proposition:The decision of the Hon’ble Apex Court in the caseof Haji Aziz & Abdul Shakoor Brothers (supra)together with the Explanation to section 37(1) ofthe Act cannot be read as laying down an inflexiblerule of law that in all eventualities with regard todeductibility of fines and penalties, before invokingthe provisions of Explanation to section 37(1) ofthe Act, the assessing officer is required to examinethe scheme of the provision of the relevant statuteproviding for payment of such levies,notwithstanding the nomenclature of the levy givenby the statute, in order to find out whether thepayment made by the assessee is compensatory orpenal in nature. Where the amount paid by theassessee is only compensatory in nature that is tocompensate the Government for any delay inpayment of taxes, filing of belated returns, etc. thensuch payments are allowable under section 37(1)of the Act as there is no infraction of law by theassessee. On the other hand where the paymentmade by the assessee is partly compensatory andpartly penal in nature the assessing officer has tobifurcate the compensatory and penal componentof the payment made and the provisions ofExplanation could be invoked only with respect tothe component which is penal in nature PrakashCotton Mills (P) Ltd. vs. CIT [(1993) 201 ITR 684(SC)] and CIT vs. Ahmedabad Cotton Mfg. Co.Ltd [(1994) 205 ITR 163 (SC)].

Following the decision of Prakash Cotton Mills (P)Ltd. (supra), recently, the Hon’ble Himachal PradeshHigh Court in the case of , CIT vs. H.P. State ForestCorporation [(2010) 320 ITR 170 (H.P.)] held thatinterest paid by the assessee under section 17A ofthe H.P. Sales Tax Act though called as penalty wasnot payable as and by way of penalty but the same

Controversies


was by way of compensation to compensate the Statefor delay in payment as such the same was allowableunder section 37(1) of the Act. The Court further inthe judgement observed that taxing statutes normallyhave two imposts for delayed payments made bythe assessee. One is the imposition of interest, whichis automatic, the second is the imposition of penaltyfor which not only notice is required and thereuponif the assessee gives valid reasons for not depositingthe tax in time penalty need not be imposed, suchpayments are penal in nature and not allowable interms of Explanation to section 37(1) of the Act. Onthe other hand where the payment of interest isautomatic for the delayed period, the imposition iscompensatory in nature and allowable under the Act.

The Hon’ble Mumbai Tribunal in the case of,Goldcrest Capital Market Ltd. vs. ITO (2010) 2ITR (Tib.) 355 (Mum.)] While allowing the amountpaid by the member of the National Stock Exchange(“NSE”) to the Stock Exchange for violation ofregulations of the Exchange, held that members ofNSE are bound to abide by the rules, regulationsand bye-laws of the NSE However, such rules,regulations and bye-laws can be considered asregulations for controlling the internal, inter se,obligations and rights of the members of the NSEwhich every member of NSE would be obliged tofollow. A violation thereof cannot be treated asviolation of a statutory law or rule.

Summation :In many statutes, l aw i tsel f provides forcompounding of offence and on payment ofcompounding fees, person is discharged fromoffence committed. Issue may arise on coverage orotherwise of amount paid for compounding ofoffence within the scope of Explanation.

Now, in pre-amendment era, the preponderant viewof the Courts was that the moment compounding ofoffence is accomplished, the effect is that the personis placed in the position of an innocent person as ifhe had never committed crime. For instance, in thecase of CIT v/s. Loke Nath & Co. 147 ITR 624 theDelhi High Court al l owed deduction ofcompounding fees paid for regularizing constructionof building which was made in violation of buildingregulations. In Nanhmool Jyoti Prasad (123 ITR

269), the Allahabad High Court allowed deductionof fine paid by the assessee to avoid confiscation ofgoods imported without proper licence. Accordingto the Court, effect of payment of fine is that importgot regularized.Compounding fees paid to municipal corporationbecame an issue in CIT v. Mamta Enterprises [2004]266 356 (Karn.). One would have thought that thedescription of the amount as compounding fee andthe fact that the fee was paid only for violation ofadministrative regulations, which themselves wererelaxed on payment of compounding fees, shouldnot have militated against the deduction on the basisof guidelines laid down by the Supreme Court inPrakash Cotton Mills P. Ltd. v. CIT [1993] 201 ITR684 (SC). The Supreme Court in the light of theearlier precedent in Mahalakshmi Sugar Mills Co.v. CIT [1980] 123 ITR 429 (SC), requi redconsideration, whether the impost is compensatoryin nature, so as to be deductible. Where it hascomposite nature, both compensatory as well aspenal, the authorities are obliged to bifurcate thetwo components and allow what is compensatory.Compounding fees are ordinarily understood asbeing totally compensatory. It is essentially a natureof civil liability. The High Court, however, was ledby precedents relating to penalties and finesfollowing the decision in Haji Aziz and AbdulShakoor Brothers v. CIT [1961] 229 ITR 534 (SC).The word “compound” even in a legal senseindicates settlement by mutual concessions and isunderstood to abate a liability. Compounding is alsounderstood as condonation subject to a pecuniarypayment. Payment by way of compounding feesshould ordinarily be treated as allowable, if it is inthe course of a business, because any offencecapable of being settled in money terms cannot betreated on par with violation of law. In view of themultiplicity of laws, it is becoming more and moredifficult for a citizen not to tread on some rule orregulation of which he may not be aware. It is forthis reason that minor offences are made subjectmatter of compounding fees. Finally it is submittedthat the compounding fees paid is allowable asdeduction while computing business income notwithstanding explanation to sec. 37(1).

❉ ❉ ❉

Controversies


Recent decisions on Agr icultural Income

CIT vs. Dhiraj lal B. Vadalia [Tax Appeal Nos.1291 to 1299 of 2006, (Guj HC]

xxx…

2.1 While admitting these appeals on 27.06.2007,this Court has framed the following substantialquestion of law:

“Whether on facts and circumstances of thecase the Income Tax Appellate Tribunal wasright in law and on facts in holding that theactivity of growing roses, chikkus is anagricultural income exempt from tax?”

3. The facts of the present case are that during thecourse of assessment proceedings, theAssessing Officer observed that the incomefrom nursery was not allowable as exemptincome since the same could not be treated asagricultural income. Against the said order ofassessment, the assessee preferred appealsbefore the CIT(A) which were allowed, againstwhich, the Revenue preferred appeals beforeITAT which came to be dismissed and the orderof CIT(A) was upheld. Against the said orderof ITAT, the Revenue has preferred the presentTax Appeals.

4. Heard the learned advocates appearing for theparties and considered the submissions. TheTribunal vide impugned order has observed thatno material whatsoever has been brought bythe revenue on record to disbel ieve thecontention of the assessee about the cultivationof roses whereas the assessee has producedphotograph in support of his contention that hecultivated roses. The Tribunal observed that infact the revenue has not disputed the fact thatthe assessee had developed various varietiesof roses and made substantial investments inhis activity. The Tribunal has considered the

Advocate Tushar [email protected]

Judicial Analysis

decisions in the case of CIT vs. SoundaryaNursery (241 ITR 530) wherein the decisionin the case of CIT vs. Raja Benoy Kumar SahasRoy (32 ITR 466) was considered.

5. An identical issue also came up for considerationbefore this Court in Income Tax Reference No.40 of 2000 with Tax Appeal No. 24 of 2003,where this Court vide judgement and order dated11.11.2014 has observed as under:

“8. Considering the decisions ci tedhereinabove, we come to the conclusionthat a careful reading of the above clearlyshows that unless the assessee has carriedout the basic operations upon the land i.e.,tilling of the land, sowing of the seedsplanting, etc. requiring the expenditure ofhuman skill and labour upon the land, itcannot be said that the income earned bythe assessee is agricultural income. Further,it is also clear that subsequent operationswould also be agricultural operations iftaken in conjunction with basic operations.However, subsequent operations by itselfwould not be considered as agriculturaloperations. Hence, if any income is earnedby carrying out the subsequent operationswithout carrying out the basic operationsthen such income would not be consideredas agricultural income. The gist of thedecisions ci ted hereinabove furtherdeclares that the nature of the product isirrelevant. The agricultural product wouldnot only include products for sustenanceof human being but also products of utilityfor a trade and commerce.

9. In the present case, the plants have beengrown on land owned by the assessee. Theassessee during the course of growing andnurturing the plants on the land carried out


certain functions such as tilling the soil,weeding, watering, manuringetc andfinally the plants are made ready for sale.It goes without saying that all this involveshuman skill and effort. When plants areestablished in the soil only then they areshifted in suitable containers or appropriateplace in land.

11. Once the assessee had shown that theagricultural operations were carried outthen income from the sale of agriculturalproduce would amount to agriculturalincome. The judgment of Allahabad HighCourt in the case of Maharaja Vibhuti(supra) is distinguishable in as much as inthat case necessary facts were not on therecord for reaching a parti cularconclusion. In the said judgement theBench referred to two types of nurseries-one which may be maintained by a farmeras an aid or necessary adjunct to theprimary process of agriculture while theother one which may be maintained andrun as a business quite independently ofagriculture. After such discussion, theywent on to mention that there was nodiscussion of the type of nursery involved.In view of the same, the answer to thequestion was given in negative. Hence,that case does not help the Revenue.

13. Therefore on the facts of the case as wellas on the basis of the judicialpronouncements detailed above, we haveno hesitation in holding that the saleproceeds from the business of nurserycarried on by the assessee constituteincome from agriculture. Therefore thequestion of law framed in the referenceand the tax appeal is answered against theRevenue and in favour of the assessee.

Reference and appeal stand disposed offaccordingly.”

6. In that view of the matter, no elaborate reasonsare required and we answer the question infavour of the assessee and against the Revenue.

The present Tax Appeals are dismissedaccordingly.

DCIT vs. Best Roses Biotech (P.) L td. 17taxmann.com 56 (Ahd.)

Conclusion

6. Nature of Land in question: We have carefullyheard both the sides at some length. We havealso thoroughly perused the orders of authoritiesbelow in the light of compilation filed and thecase laws cited. Copy of the lease agreement isplaced before us through which the lease periodwas effective from 01-10-2002. The lessee, theassessee, was required to pay to the lessor a sumof Rs. 25 lakh as refundable deposited. TheLessee has agreed to pay a sum of Rs. 6 lakh asannual rent. There were three block of landparcel having area 2 - 46 - 86; 3 - 19 - 70; 3 - 07- 56 hector. The assessee had shown profit onsale of rose flowers and claimed the income asexempt u/s.10(1) of the Act. Certain facts werenarrated by the Assessing Officer that theagricultural land was acquired from theagriculturists on lease for a period of 25 years.Therefore it was not in dispute that the land inquestion is an agricultural land and not acommercial land, and that i t belonged toagriculturists, as many as, nine in numbers. Videlease agreement it was also verified that theproperty in question happened to be holding thecharacter of agricultural land. Revenue has notdisputed these facts but raised objectionprimarily in respect of the operation carried outby the assessee that whether an agricultureoperation or not.

6.1 Activity in question : The company haddeveloped a green house for the establishmentof a floriculture project. The company hadgrown good quality of rose flowers and alsoexported them abroad. It was explained that forthe plantation of roses a very well treated soil isrequired. The quality of the soil is thereforetested. Manures are mixed for preparing a basefor growing the rose plants. The company hasinstalled a proper drainage system. Certainoperations such as mixing of soil and watering

Judicial Analysis


of plants through drainage are explained. Thenthe activity of pruning and bending of growingplants carried out to get best size of rose buds.It has also been explained that pest control isalso required. Insecticides are sprinkled to savethe plants from any disease. From the facts asemerged from the compilation filed we havegathered that within green house the floricultureactivity comprises of growing of rose bydeploying hydroponics technique for thefarming of best quality roses. It is stated that theassessee has deployed a budding technical plant.Further it was explained that root stocks werebrought from the market and placed in the greenhouse. The plantation and the generation ofsapling was nothing but agricultural activity. Themother plant is otherwise reared on earth. Forrearing of mother plant human labour isinvolved. The tilling of soil, watering and otherprimary agricultural activity is the basicrequirement for the growing of the rose plants.Subsequently the saplings are planted on plastictrays, which were kept at the height 2-3 ft.placed on MS stand. It was explained that thepurpose of growing the rose plants at a heightis primarily to avoid the pest and to develop ina controlled atmosphere. By this method, therose plant is protected from climate, pest, as wellas other disease, to minimize the possibility ofdamage. The drainage system for watering theplants with the help of dipper is required. Thewatering of rose plants are also a technicalmethod to avoid excessive watering so that theroots of the rose plants should not get damaged.The commercial green housei.e. “bent canopy”is used for various benefits so that the sun-lightand the humidity level both can be maintained.For meeting the international demand, it isexplained, that the assessee-company adoptedbest measure to ensure best quality of rose.

6.2 Conditions of Agriculture operation - From theside of the respondent-assessee there wasdetailed discussion about the growing of roseplants and other connected agricul turaloperation carried out by the assessee. However,the objection of the Revenue was that the rose

Judicial Analysis

plants were not grown on the land, thereforethe generation of income was not directlyconnected wi th the operation of land.Somehow we are not agreeing with the saidproposi tion of the Revenue-departmentbecause on due consideration of the activityas explained to us, it is not justifiable to saythat the growing of rose plants at all is notconnected with the utilization of land. It is notin dispute that the agricultural land wasacquired by the assessee from agriculturists. Itis also not in dispute that mother plants arealways been grown on the agricultural land.

As far as ingredients of basic operation isconcerned the assessee’s case is that thetechnology deployed is (i) use of soil andoperation on soil (ii) use of particular soil typecontents i.e. coco peat, manure, etc. present inthe soil, (iii) drainage system as over wateringharms the roots as well as quality (iv) bendingshoots for maximizing the quality of roses, and(v) pest and diseases control for providingprotection to roses. Therefore we hold that theactivity which is connected with the landcultivation , such as ploughing of field, levelingof field, sowing of seed in the ploughed andleveled field, growing of plants, as case the maybe, plantation, manuring, watering, weeding-out of weeds, so and so forth. These agricultureoperations are said to be ‘basic cultivationactivity’ and thereafter an agriculturist has toperform ‘subsequent agriculture operation’,namely tending of grown plants, pruning,cutting or shaping and finally harvesting of crop.We have to clarify, as held by few honourablecourts as well, that the subsequent operationsought to be a continuation of basic Agricultureoperation. The fundamental requirement is thatit should remain connected with the basicagriculture operation.

6.3 Connected evidences - In support of the abovefactual background respondent assessee hasplaced vehement reliance on several certificatesissued by other government agencies, copiesplaced before us, listed below:-


- National Bank for Agriculture and RuralDevelopment (NABARD)

- Agricultural and Processed Food ProductsExport Development Authority (APEDA),Ministry of Commerce, Govt. of India.

- Gujarat Agro Industries Corporation Ltd.

- Navsari Agricultural University

- Additional Director of Horticulture (Fruits& Floriculture)

- Department of Horticulture, Gujarat State,Gandhinagar

- Certificate from Collector, Navsari

These certificates have thus certified that thegreen house floriculture units are eligible forbenefits in respect of electricity tariff whichare otherwise avai lable to mainstreamagricultural activities. The National Bank forAgricultural and Rural Development has statedthat the assessee’s unit is an integrated EOU,where the entire range of activities fromgrowing of flowers to packing, pre-cooling,cooling, transportation in reefer vans andeventual export is an undividable processwhich requires uninterrupted power supply andthe growing of flowers is l ike any otheragriculture pursuit. The Collector has alsoissued no objection in respect of extension offacilities which would otherwise available forany agricultural activity and directed that thefloriculture activity is a part of mainstreamagricultural activity. Rather in a letter, issuedby Horti cul ture Commissioner i t wasexpressed that it is not known as to how thisdoubt has arisen that floriculture is not ahorticultural activity and that the activity is anagricultural activity. Growing of flowers orornamental plants is floriculture similar toOlericul ture (growing of vegetable) andPoraology (growing of fruits).

6.4 An amendment in the Act - At this juncture,we may refer the amendment which took placein Section 2(1A) by an insertion ofExplanation (iii) which reads as under:-

“[(1A)] “agricultural income” means -

(a) any rent or revenue derived from landwhich is situated in India and is used foragricultural purposes;

(b) any income derived from such land by -

(i) agriculture; or

(ii) the performance by a cultivator or receiverof rent-in-kind of any process ordinarilyemployed by a cultivator or receiver ofrent-in-kind to render the produce raisedor received by him fit to be taken tomarket; or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or receivedby him, in respect of which no processhas been performed other than a processof the nature described in paragraph (ii)of this sub-clause;

Explanation 1 - For the removal of doubts, itis hereby declared that revenue derived fromland shall not include and shall be deemednever to have included any income arising fromthe transfer of any land referred to in item (a)or item (b) of sub-clause (iii) of clause (14) ofthis section.

Explanation 2 - For the removal of doubts, itis hereby declared that income derived fromany building or land referred to in sub-clause(c) arising from the use of such building orland for any purpose (including letting forresidential purpose or for the purpose of anybusiness or profession) other than agriculturefalling under sub-clause (a) or sub-clause (b)shall not be agricultural income.

Explanation 3 - For the purposes of this clause,any income derived from saplings or seedlingsgrown in a nursery shall be deemed to beagricultural income; ( relevant portions high-lighted)

6.5 After insertion of Expl. 3 by the Finance Act,2008 which is effective from 01-04-2009, theCBDT has issued a Circular No.1 of 2009

Judicial Analysis


dated 27th March, 2009, wherein i t wasclarified as under:-

“4.1 “Agricultural income” is defined in sub-section (1A) of section 2 of the Act tomean, inter alia, income derived from landwhich is situated in India and is used foragricultural purposes. Such agriculturalincome is exempt from tax under sub-section (1) of section 10 of the Income-taxAct, 1961. It has been held by judicialauthorities that whether income fromnursery operations constitutes agriculturalincome or not, will depend on the facts ofeach case. If the nursery is maintained bycarrying out basic operations on land andsubsequent operations are carried out incontinuation of the basic operations, thenincome from such nursery would beagricultural income not liable to tax undersection 10. However, if the nursery ismaintained independentl y wi thoutresorting to basic operations on land, thenincome from such nursery would not beagricultural income and would be liable tobe included in the total income.

4.2 With a view to giving finality to the issue,an Explanation in section 2 of theIncome-tax Act, has been insertedproviding that any income derived fromsaplings or seedlings grown in a nurseryshall be deemed to be agricultural income.Accordingly, irrespective of whether thebasic operation have been carried out onland, such income wil l be treated asagricultural income, thus qualifying forexemption under sub-section (1) ofsection 10 of the Act.

4.3 Applicability : This amendment has beenmade applicable with effect from 1stApril, 2009 and shall accordingly applyfor assessment year 2009-10 andsubsequent assessment years.”

Though the applicability of the said Explanationis effective from assessment year 2009-10 butthe intention about the eligibi l i ty can be

adjudged. With this legal back ground wetherefore hold that ‘basic/ primary agricultureactivity’ and ‘subsequent/ secondary agricultureoperations’ thus constitute an integratedagriculture activity. Primary as well Secondaryagriculture activity both carried out conjointlythus comprehend “Agriculture operation”. Soa nexus is needed between agriculture land withagriculture operation to treat an income asAgriculture income. On these parameters, in ourhumble opinion, one has to examine the factsof such cases so as to decide whether allegedagriculture activity do fall within the operationsdiscussed hereinabove to hold as AgricultureIncome to qualify for deduction u/s 10(1) of theAct. This aspect of availability of exemption tonursery has been duly considered in the case ofSoundarya Nursery (supra), wherein it washeld that the plants sold by the assessee-company in pots could be said to be a result ofprimary as well as subsequent operationcomprehended within the terms “agriculture”.Thus, it was held that the income generated fromgrowing of plants in pots and sale of seeds is anagricultural income. Likewise, in the case ofSoundarya Nursery (supra) the legalproposition laid down was that where saleproceeds of plants raised in nursery on landbelonging to assessee constitute nothing butagricultural income, it was clarified that byperusing clauses (a) and (b) the definition ofagricultural income in Section 2(1A), it is clearthat income must be derived from land whichis used for agricultural purpose. By referring(Raja Bahadur) Kamakhaya Narain Singh(supra), it was commented though it mustalways be difficult to draw the land, yet, unlessthere is some measures of cultivation of the land,some expenditure of skilled or labour upon it, itcan be said to be used for agricultural purposes.The decision of CIT v. Jyotikana Chowdhurani[1957] 32 ITR 705 (SC) has also beendiscussed.

Case- laws

7. Certain decisions as cited from the side of theRevenue are in the context of business activity

Judicial Analysis


not connected with the land operation or notconnected with the basic agricultural operation.In fact, that is the distinction which has to bekept in mind while adjudicating upon the issueof assessabili ty of income as agriculturalincome. If in the primary sense, the agriculturaloperation denotes cultivation of a field or tillingof land or sowing of seeds or any other activityof cultivation of plant on agricultural land thensuch activity is nothing but an agriculturalactivity. If rearing of plant is connected withthe exploration of land then such activity isheld as an agricultural activity. Even thedecision of Proagro Seeds Co. Ltd. (supra) ascited from the side of the Revenue has clearlydrawn the distinction. It was found that in theabsence of basic agricultural operation, theincome earned was not an agricultural income.Therefore in the light of the specific facts ofthat case, a view was taken; but those factswere peculiar in nature, applicable to thatappeal only. That view of the Hon’ble courtmust not be generalized, but the guidelinesdepicted are to be regarded.

7.1 Before we conclude, it is worth to place onrecord a decision of ITAT Pune Benchpronounced in the case of K F Bio Plants (P.)Ltd. (supra) wherein one of us i.e. JudicialMember is the co-signatory and the issue wassquarely identical due to the fact that in thatappeal as well the income was from floricultureactivity. The said assessee was also sellingflowers and plants outside India. The plants,bulbs, tubers and seedlings were stated to beplanted in the soil and it was explained that suchactivity was normal agricultural activity likeplanting, cutting, weeding, tilling and wateringetc. In that case the plants were grown in thegreen house and nurtured by giving requisitesnourishment, light, humidity etc. Facts and thecircumstances under which the flowers arecultivated in that appeal being almost identicalhence a strong reliance is placed on the PuneBench decision. Further reliance has also beplaced on the decision of Soundraya Nursery(supra) in which as well the decision was based

upon the facts pertaining to primary as well assubsequent operation, held comprehend with in‘Agriculture’. Likewise, the decision of GreenGold Tree Farmers (P.) Ltd. (supra) also appliesfor the legal proposition that where measuresof cultivation of land were taken, expenditureis incurred on human labour and skil l tocultivate the land then in it’s root sense theactivity is ‘Agriculture activity’.

7.2 In fact assessee’s activity has already beenendorsed as an agriculture activity by severalother connected authorities certifying it as anagricultural operation. After an elaboratediscussion of the facts as wel l as lawpronounced by several courts, as also thedecisions now cited from the side of theRevenue, it is finally held that considering theadvancement of technology and the use of theadvanced equipment in cultivation; coupledwith the conventional cultivation method, puttogether, made the operation carried out by theassessee was agricultural operation in nature.Respectfully placing reliance on this decisionas also the few decisions cited hereinabove,we are of the considered view that the incomein question cannot be included in total incomebeing within the ambits of the provisions ofSection 10(1) of the Act. The view taken byLd. CIT(A) is hereby affirmed and this groundof Revenue’s appeal is dismissed.

ITO vs. Ashwin D. Mehta (HUF) [Tax AppealNos. 386 & 391 of 2000, (Guj HC)]

xxx..

1.1 The following substantial question of law wasraised whi le admi tti ng the appeals on15.11.2000:

“1. Whether the Appellate Tribunal is right in lawand on facts in directing the Assessing Officerto accept the agricultural income declared andnot to consider any part of the same as incomefrom other sources?

2. Whether the decision of the Tribunal is dehorsthe record and hence perverse?”

Judicial Analysis


3. The brief facts of the case are that during thecourse of assessment proceedings, theAssessing Officer had held that the agriculturalland owned by the assessee was about 8 acresonly and as such the assessee could not haveearned huge agricultural income from the saleof vegetables and other agricultural produce.The Assessing Officer accordingly made anaddition as assessee’s income from othersources which according to the AO wasintroduced in the books of account asagricultural income not liable to tax. On appeal,the CIT(Appeals) deleted the addition.

4. On appeal before the Tribunal by the revenue,by the impugned order, Tribunal dismissed theappeals and upheld the findings of CIT(A).Being aggrieved and dissatisfied with theimpugned order passed by the Tribunal, therevenue has preferred the present Tax Appealsfor consideration of the aforesaid substantialquestions of law.

5. Mr.Sudhir Mehta, learned advocate appearingfor the revenue has submitted that the Tribunalhas erred in directing the AO to accept theagricultural income declared and not toconsider any part of the same as income fromother sources. He submitted that the Tribunalhas not correctly appreciated the findings givenby the AO in his assessment orders.

6. Mr. S.N. Divatia, learned advocate appearingfor the assessee supported the impugned ordersand submitted that the same having beenpassed in accordance with law does not callfor any interference.

7. We have heard learned advocates for theparties and perused the records. The CIT(A)has observed that the assessee has givencomplete details about the income and alsoshown agricultural income in the books ofaccounts though the returns were not filedbecause the assessee was not having anyincome other than agricultural income. TheCIT(A) has held that since the agriculturalincome has been accepted by the revenue and

the AO has not been able to prove any othersource of income out of which the assesseecould have earned this income and the incomedeclared by the assessee has to be accepted.

7.1 The Tribunal has upheld the view taken bythe CIT(A) and observed further in para 7 thatit cannot be said that there has been anyviolation of Rule 46A of I.T. Rules as allegedby the learned DR while arguing his case. TheTribunal has observed that out of about 15000saplings of Eucalyptus trees/Nilgiri trees whichwere planted in 1982-83, it is quite reasonableto assume that atleast 5000 sapl ings ofEucalyptus trees/Nilgiri trees will grow intofull trees in the year 1990-91 relating to AY1991-92 which could be cut and sold becauseas per the certificate issued by the RangeForest Officer no permission is required forcutting and sale of Eucalyptus trees/Nilgiritrees.

7.2 In view of the aforesaid, we are of the opinionthat the Tribunal as well as CIT(A) are justifiedin coming to the conclusion that there is nomerit in the appeals filed by the Revenue. Theassessee HUF owns fertile agricultural landhaving i rrigation faci l i ties from whichagricultural income has been shown andaccepted by the revenue in earlier years alsoand the fact of assessee having been allotedagricultural land and 15000 Eucalyptus trees/Nilgiri trees in the year 1982-83 has beencertified by Range Forest Officer. We are incomplete agreement with the reasoningsadopted and findings of fact arrived at by thelower authorities.

8. We, therefore, answer the questions raised inthe present appeals in favour of the assesseeand against the department - revenue. Appealsare dismissed accordingly.

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Judicial Analysis


The Central Board of Direct Taxes (‘CBDT’), theapex administrative authority for the direct taxes inIndia, has issued Instruction No. 2/20141 to theIndian Tax Authorities on the issue of whether taxwithholding is required on the whole sum beingremitted to a non-resident (‘NR’) or only withreference to the portion of remittance representingthe sum chargeable to tax in India under the IncomeTax Laws.

Background

Presently under the Income Tax Laws, the taxdeducted at source (TDS) provisions of Section195(1) impose an obligation on any personresponsible for paying (‘payer’) to any NR anyinterest or any other sum chargeable to tax in India,to deduct taxes therefrom at the rates in force.However in a situation where the payer is of the viewthat a part of the entire amount is not chargeable.

In a situation where the payer is of the view that apart only of the entire amount paid to the NR ischargeable to tax under the Income Tax Laws, thepayer can make an application to the Tax Authoritiesunder section 195(2), to determine the appropriateportion of such sum which is so chargeable and itmay withhold tax in respect of the portion of the sumso determined as chargeable to tax.

If the payer fai ls to comply with above TDSobligations, the payer will be deemed to be anassessee-in-default under the Income Tax Laws andthere is an exposure to interest and penalty levy onthe payer.

There have been controversies in the past on:

a) Whether the withholding obligation is triggeredon payments made to NRs if the sum is notchargeable to tax under the Income Tax Laws.

b) Whether, with regard to the transactions (suchas those resulting in capital gains or trading

CA. Dhinal A. [email protected]

Withholding Taxes in respect ofpayments made to non-resident inthe light of Instruction No. 2/2014

receipts) where only the portion of totalremittance represents chargeable gain,withholding is required with respect to the grossamount or only the chargeable portion as mayrepresent the sum chargeable to tax.

These controversies led to a lot of confusionamongst the tax payers and the Income TaxDepartment. At this time, the Hon’ble SupremeCourt in the case of Transmission Corporationof Andhra Pradesh L imited v CIT2 came to therelief of the tax payers.

Hon’ble Supreme Court in this case held that theexpression ‘taxable income’ used in S. 195(1)applies to any sum payable to the Non-Residenteven if such a sum is a trading receipt in the handsof the payee, if the whole or part thereof ischargeable to tax under the Act. These provisionsare not only limited to the sums which are of ‘PureIncome’ nature. Based on this judgment, it wasrightly fel t that TDS is required to be madeu/s.195(1) only if the income is chargeable to tax(partly or wholly) under the Act and in cases where,the income itself is not chargeable to tax (Non-taxable income) question of making any TDSshould not arise.

Ruling of Karnataka High Cour t (HC) in thecase of Samsung Electronics and Others

The ruling of Hon’ble Supreme Court in the caseof Transmission Corporation of Andhra Pradeshprovided clarity that the obligation to withhold taxunder the Income Tax Laws is only limited to theincome chargeable to tax under the provisions ofthe Income Tax Act.

However, the decision of Karnataka HC in the caseof CIT v. Samsung Electronics Co. L td3 onceagain raised a controversy regarding the obligationsto withhold tax when the income is not chargeableto tax under the provision of the Income Tax Act.


Facts of the case

· One of the Taxpayers in the l itigation wasengaged in the development, manufacture andexport of computer software. The Taxpayerimported ‘shrink-wrapped’computer softwarefrom outside India for use in its business. Notax was with held in respect of such paymentson the ground the same cannot be treated asroyalty either under the Income Tax Act orunder the applicable Tax Treaty. However,theTax Authority held such payments to be in thenature of royalty and subject to deduction oftax at source under the Income Tax Act.

· As the Taxpayers were under a bona fide beliefthat the payments made to non-residents werenot chargeable to tax under the Income TaxAct or under an applicable Tax Treaty, theTaxpayers had not wi thheld tax on thepayments nor had they applied for an orderfrom the Tax Authority for not withholding tax.

· The ITAT ruled in the favour of the taxpayerholding that the payments made were not in thenature of royalty, based on the definition of‘royalty’ under the Income Tax Act or under therelevant Tax Treaty and, hence, were notchargeable to tax under the Income Tax Act andno tax was required to be with held on the same.

· However the department filed an appeal againstthis order before the Karnataka HC

Contention of the Taxpayer

· For the purpose of with holding tax on paymentsmade to non-residents, it needs to be firstdetermined whether such payments arechargeable to tax under the ITL. Since thepayments are made outside India and alsootherwise not chargeable to tax under the ITL,there is no necessity to with hold tax on suchpayments.

Contention of the depar tment

· The payments made to non-residents by theTaxpayers for the purchase of computersoftware for the purpose of resale are in thenature of royalty. It is not an outright sale of

goods since the copyright in the computersoftware remains with the transferor company.Since the definition of ‘royalty’ under the ITLas well as under the applicable Tax Treaties issimilar, the payments made to non-residents aretaxable as royalty.

· The Taxpayers cannot contend that no incomearises to the non-residents under the ITL withrespect to the payments made to such non-residents for the purchase of computer software.The Taxpayers are liable to deduct tax at sourceon payments made to non-residents under theITL

Ruling of the HC

· The Taxpayer's contentions that no incomearises to the non-residents cannot be acceptedin view of the decision of the Hon’ble SupremeCourt (SC) in the case of TransmissionCorporation of A.P. Ltd. v CIT (supra), whereinthe SC held that payments made to non-residents are subject to with holding tax unlessthe taxpayer obtains an order from the TaxAuthority for determination of appropriate withholding tax rate. In the absence of such anorder, the taxpayer is liable to with hold tax onthe entire income paid to the non-resident.

· The SC in i ts decision in the case ofTransmission Corporation of A.P. Ltd. haddeclared the legal position with respect to withholding tax on payments made to non-residents.The law declared by the SC is binding on allthe High Courts in India.

· Under the provisions governing deduction oftax at source on payments made to non-residents, taxes have to be with held on anypayment made to a non-resident which is inthe nature of income.

Karnataka HC has relied upon the decision of theHon’ble Supreme Court in the above case.However, the HC erred in interpreting the decisionof the Hon’ble Supreme Court. A reading of theruling of Hon’ble Supreme Court seems to suggestthat the obligation to with hold tax under the IncomeTax Act is limited only to income chargeable under

International Taxation


the provisions of the Income Tax Act. TheKarnataka HC took a converse view that anyremittance made to the NR would be subject to withholding tax under the Income Tax Act, regardlessof its chargeability to tax in India, unless a specificapplication is made to the Tax Authori ty fordetermination of tax to be withheld under theIncome Tax Act.

This decision again created confusion amongst thetax payers for withholding the taxes in case of thepayments made to the non residents which are notchargeable to tax. To settle this controversy onceand for all, Hon’ble Supreme Court in its landmarkruling in the case of GE India Technology CentrePvt. L td. v CIT4 held that with holding taxobligation in respect of payments to NRs apply onlyif the payments are chargeable to tax in India.

Ruling of Hon’ble Supreme Cour t in the caseof GE India Technology Centre Pvt. L td.

Facts of the case

· One of the Taxpayers in the l itigation wasadistributor of imported pre-packaged,shrinkwrapped, standardized software fromoutside India for subsequent sale to customersin India.

· No tax was with held in respect of suchpayments on the ground that they did notconstitute ‘royalty’, either under the Income TaxAct orunder the appl icable Tax Treaty.However, the Tax Authori ty held suchpayments to be in the nature of ‘royalty’ and,hence, subject to with holding of tax under theIncome Tax Act.

· The ITAT ruled in favour of the Taxpayers andheld that the payments made were not in thenature of ‘royalty’ and, hence, not chargeableto tax under the Income Tax Act and that thepayers were not liable to deduct tax at source.

· Aggrieved, the Tax Authority filed an appealbefore the Karnataka HC. For the first time,the Tax Authority raised the contention that thepayer is required to make an application to theTax Authority for determining the amount onwhich taxes are required to be with held and if

no such application is made then the payer isnot relieved of its obligation to deduct TAS.

· The Karnataka HC accepted the TaxAuthority’scontention by placing reliance onan earl i er SC decision in the case ofTransmission Corporation of A.P. Ltd. The HCheld that, since the Taxpayers had notapproached the Tax Authority for determiningthe quantum of amount taxable in India, taxeswere required to be with held.

· Aggrieved, the Taxpayers filed a special leavepetition before the SC to determine whethermere remittance to an NR, which is notchargeable to tax in India under the provisionsof the Income Tax Act or the applicable TaxTreaty, mandates with holding of taxes.

Ruling of the Hon’ble Supreme Cour t

· The provisions of the Income Tax Act state thattaxes will be with held on payments made toan NR when the remi ttance i s a ‘sumchargeable to tax’ in India under the IncomeTax Act. The said expression makes it clearthat the payer is required to withhold taxonlywhen the payments made are chargeable to taxin India, wholly or partly. If the payments madeare not taxable in the hands of the NR in India,the Tax Authority cannot initiate proceedingsfor collection of taxes and interest from theTaxpayers for not with holding any taxes.

· Further more, if the payer wants to with holdtax,not on the gross amount but on a lesseramount, on the footing that only a portion ofthe payment represents ‘income chargeable totax in India’ then, it is necessary to make anapplication before the Tax Authority and obtainthe order permitting with holding tax on thelesser amount. Therefore, only in case thepayer had a doubt about the propor tion ofincome taxable in India, the Tax Author ityneeds to be approached. Conversely, if thepayer has no doubt and believes that no partof the payment is chargeable to tax, withholding tax provisions do not apply.



· The Hon’ble Supreme Court held that if thepayer is fairly certain, then the payer can makeits own determination of the chargeable amountand restrict its tax with holding obligation tothe portion of amount chargeable to tax only.Accordingly the ruling of Karnataka HC in thecase of Samsung Electronics was reversed.

Incidentally, without noticing the decision ofHon’ble Supreme Court in the case of GE India, ina subsequent decision in the case of ChennaiMetropoli tan Water Supply and SewerageBoard5, the Madras HC ruled that, in the absenceof a specific with holding certificate from the TaxAuthority, the payer is obliged to withhold taxeson the entire amount of payment made to a NRrecipient which was a loss making company.

In light of above judicial precedents, clarificationswere being sought from the CBDT as to whetherthe tax is to be deducted on the whole sum beingremitted to every NR or whether the tax deductionmay be with respect to the portion representing thesum chargeable to tax, particularly if no applicationhas been made by the payer to the Tax Authority todetermine the sum on which tax is required to bewithheld. It is pursuant to this that the InstructionNo. 2/2014 has been issued by the CBDT.

Instruction No. 2 of 2014

The CBDT, after examining the matter in light ofthe decision of the issue [viz.,GE, TransmissionCorporation and CMWSSB(supra)], has directedthe subordinate Indian Tax Authority as follows:

· In a case where proceedings are initiatedagainst the payer for failure to withhold taxesunder the provision of the Income Tax Act,theTax Authority shall determine the appropriateproportion of the sum chargeable to tax underthe Income Tax Act to ascertain the tax liabilitywith respect to which the payer shall be deemedto be an AID. By implication, the payer can betreated as an AID only in respect of suchappropriate portion of the sum determined tobe chargeable to tax.

· Furthermore, the appropriate proportion of thesum will depend on the facts and circumstancesof each case.

· The appropriate portion needs to be determinedby the Tax Authority after taking into accountthe nature of remittances, income componenttherein or any other fact relevant to suchdetermination.

The instruction to the Indian Tax Authority is awelcome development for payers/tax deductors.This instruction clarifies that withholding taxliability of the payer is with reference to the sumchargeable to tax under the provisions of IncomeTax Act. Furthermore, the consequences of defaultproceedings for non-withholding under the Actwould be limited only to such tax liability.

Accordingly a payer cannot be treated as an assesseein default for non-withholding from paymentswhich are not chargeable to tax under the IncomeTax Act. This clarification is in line with the Hon’bleSupreme Court judgement in the case of GE India(supra).

Furthermore, in respect of remittances where onlya certain portion may be chargeable to tax in India,payers may determine the withholding tax liabilitywith reference to the chargeable portion of theremittance, if the payer is fairly certain about suchdetermination.

However, considering the consequences of taxwithholding default, the payer may prefer to becautious and may continue to approach the TaxAuthority where determination of chargeability orportion of the chargeable sum is not fairly certain.

(Footnotes)1Instruction No. 2/2014 [F.No.500/33/2013-FTD-I],Dated26 February 20142239 ITR 5873185 taxman 3134327 ITR 4565348 ITR 530

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CA. Savan A. [email protected]

Exter nal Commer cial Bor r owings(ECB) Pol i cy – Par k ing of ECBproceeds

A.P. (DIR Series) Circular No. 52 dated November23, 2011 relating to parking of proceeds of ExternalCommercial Borrowings (ECB). Eligible ECBborrowers are required to bring ECB proceeds,meant for Rupee expenditure in India for permittedend uses, such as, local sourcing of capital goods,on-lending to Self-Help Groups or for micro credit,payment for spectrum allocation, etc., immediatelyfor credi t to thei r Rupee accounts wi th ADCategory.

With a view to providing greater flexibility to theECB borrowers in structuring draw down of ECBproceeds and utilisation of the same for permittedend uses, i t has been decided to permit ADCategory -I banks to allow eligible ECB borrowersto park ECB proceeds (both under the automaticand approval routes) in term deposits with ADCategory- I banks in India for a maximum periodof six months pending utilisation for permitted enduses. The amended ECB policy will come into forcewith immediate effect and is subject to review. Allother aspects of ECB pol icy would remainunchanged.

For Full Text refer to A.P. (DIR Series) CircularNo. 39

http://rbi .org.in/scripts/BS_Ci rcular IndexDisplay.aspx?Id=9346

Foreign Direct Investment (FDI) in India– Review of FDI policy –Sector Specificconditions

In accordance to the Foreign ExchangeManagement (Transfer or Issue of Security by aPerson Resident outside India) Regulations,2000(the Principal Regulations) notified by the

Reserve Bank vide Notification No. FEMA. 20/2000-RB dated 3rd May 2000, wherebydescription of sectors/activities wherein the entrynorms, sectoral cap and other conditions for sectors/activi ties in which FDI is permitted underGovernment route and Automatic route arespecified.

· The Department of Industrial Pol icy andPromotion (DIPP), Ministry of Commerce &Industry, Government of India has beenupdating/notifying the FDI policy through issueof Consol idated FDI Pol i cy Ci rcular.Government has notified the latest FDI policychanges vide Consolidated FDI Policy Circularof 2014 dated Apri l 17. In order to bringuni formi ty in the sectoral classi f ication/conditionalities for FDI/foreign investment asunder the Consolidated FDI Policy Circularwith the FEMA Regulations, the position onAnnex B of Schedule 1 to Notification No.FEMA. 20/2000-RB dated 3rd May 2000, hasbeen sui tably revised by amending thenotification.


http://www.rbi.org.in/scripts/BS_Circular IndexDisplay.aspx?Id=9390

Foreign Direct Investment (FDI) in India– Review of FDI policy –Sector Specificconditions- Defence

· In accordance to the Foreign ExchangeManagement (Transfer or Issue of Security bya Person Resident outside India) Regulations,2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended fromtime to time. Foreign Direct Investment (FDI)up to 26 per cent is permitted under Government

FEMA Updates

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route in Defence industry subject to license underthe Industries (Development & Regulation) Act,1951. Proposals for FDI above 26 per centwould be subject to approval of CabinetCommittee on Security on case to case basis.

· Further, on a review, effective from August 26,2014, foreign upto 49% under government routeshall be permitted in defence sector subject tothe conditions specified in the Press Note 7(2014 Series) dated August 26, 2014

· Department of Industrial Policy and Promotion(DIPP) has now provided a list of defence itemsas f inal i sed by Department of DefenceProduction, Ministry of Defence and hasclarified that items not in the list would notrequire industrial license for defence purposes.

· The listed investee company engaged in defencesector, in accordance with the guidance providedby the Press Note 7 (2014 Series), shal limmediately al locate l imits for portfol ioinvestment for RFPI, NRI (not exceeding 10%)and FVCI within the default portfolio investmentlimit of 24% being permitted now and approachReserve Bank, Central Of f i ce, ForeignInvestment Division, Mumbai.


http://rbi .org.in/scripts/BS_Ci rcular IndexDisplay.aspx?Id=9391

Foreign Direct Investment (FDI) in India– Review of FDI policy – Sector Specificconditions- Railway Infrastructure

In accordance to the Foreign ExchangeManagement (Transfer or Issue of Security by aPerson Resident outside India) Regulations, 2000notified vide Notification No. FEMA 20/2000-RBdated May 3, 2000.

· In terms of Annex A of Schedule 1 to theNotification ibid, Foreign Direct Investment(FDI) is prohibited in activities / sectors not opento private sector investment e.g. Atomic Energy

and Railway Transport (other than Mass RapidTransport Systems).

· Department of Industrial Policy and Promotion(DIPP) has now permitted 100% FDI in railwayInfrastructure sector under automatic routesubject to conditions.

· FDI beyond 49 of the equity of the investeecompany in sensitive areas from security pointof view wil l be brought before the CabinetCommittee on Security (CCS) for considerationon a case to case basis.


http://www.rbi.org.in/scripts/BS_Circular IndexDisplay.aspx? Id=9392

Overseas Investments by AlternativeInvestment Funds (AIF)

In accordance to Regulation 26 of Notification No.FEMA.120/RB-2004 dated July 7, 2004 [ForeignExchange Management (Transfer or Issue of anyForeign Security) (Amendment) Regulations,2004] (the Notification), the provisions underA.P.(DIR Series) Circulars No. 49 and 50 datedApril 30, 2007 and May 04, 2007 respectively.

· I t has been decided to permit an IndianAlternative Investment Fund (AIF), registeredwith Securities and Exchange Board of India(SEBI), to invest overseas in terms of theprovisions issued under the A.P. (DIR Series)Circulars No. 49 and 50 dated April 30, 2007and May 04, 2007 respectively.


http://www.rbi.org.in/scripts/BS_Circular IndexDisplay.aspx?Id=9396

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FEMA Updates


CA. Punit R. [email protected]

Service Tax Decoded

CENVAT Credit- Practical Issues

Credit is vital part in any Value Added Tax. A ValueAdded Tax can’t be even imagined without creditof taxes paid on input goods and services. Basicconcepts and fundamentals related to CENVATCredit are discussed in October, 2014 issue of thisjournal. Now, practical issues are discussed tounderstand the intricacies of provisions of theCENVAT Credit Rules, 2004 (CCR).

1. Mr. FRESH CA has total turnover of Rs. 8lacs during the year 2014-15. As his turnoveris below threshold limit of Rs. 10 lacs asspecified in Notification No. 33/2012-ST, hehas availed exemption for smal l serviceprovider. However, he has availed CENVATCredit inadvertently which is not allowed interms of above Notification. Can he still availbenefit of threshold exemption?

View:

CENVAT Credit is a substantial benefit and asubstantial benefit granted by the law shouldnot be taken away due to procedural violations.It is well settled law that if the CENVAT creditis taken but reversed without utilizing the same,it is as good as credit never taken. Hon’bleSupreme Court of India in the case ofChandrapur Magnet Wires P. Ltd. [1996 (81)E.L.T. 3 (S.C.)] upheld this principle. Hence,if CENVAT credit is taken inadvertently, but ifreversed, it is as good as credit never taken andbenefit of exemption notification wherein non-taking of CENVAT credit is a pre-conditionshould be available to the assessee.

In the case of Cool Collections [2013 (30)S.T.R. 303 (Tri. - Del.)], assessee filed the

refund claim for the service tax paid on groundthat his turnover was below threshold limit andhad reversed the CENVAT Credit taken. In thissituation Hon’ble Tribunal held that credit takenis not utilized and reversed and hence assesseeis entitled to benefit of exemption.

2. During December, 2014 Mr. GROWN CArealized that he is required to pay service taxw.e.f. 01-08-2014. He obtains registration on25-12-2014 and wants to pay tax for the period01-08-2014 to 30-11-2014. Central ExciseOfficer objects the CENVAT credit availableupto the period 25-12-2014 on the ground thatduring the said period, Mr. GROWN CA wasnot registered with the service tax department.Is contention of the Central Excise Officer iscorrect?

View:

Registration is not a pre-condition for availingCENVAT credi t. There is no rule in theCENVAT Credit Rules, 2004 which prohibitsuch credit and hence department can’t arguethat credit pertaining to the period beforeregistration is not allowed. Now, this principleis well settled and many cases are delivered infavour of the assessee. Recently, in the case ofmPortal India Wireless Solutions P. Ltd. [2012(27) S.T.R. 134], Hon’ble Karnataka HighCourt held that in the absence of a statutoryprovision which prescribes that registration ismandatory and that if such registration is notmade, the assessee is not entitled to the benefitof refund, benefit can’t be denied on suchground. Recently, similar view has been takenin the case of BEICO Industries P. Ltd. [2014(36) STR 551 Tri.-Ahd.].


Service Tax Decoded

3. For the period October, 2014 to December, 2014, Mr. Dual Processor has provided two types of servicesas follows.

Sr. Details Service 1 Service 2

1 Output Service Commercial Coaching and Event Management ServicesTraining Services

2 Service Tax Payable Rs. 12 Lacs Bill will be raised in January,2015, hence for this period taxpayable is Nil.

3 Input Services Nil Mandap Keeper Servicesexclusively used for EventManagement Service

4 CENVAT Credit for above Nil Rs. 10 Lacsmentioned Input Service

Can Mr. Dual Processor, for payment of service tax on Service 1, utilize CENVAT credit of Rs. 10 Lacsfor input services exclusively used for Service 2?

View: Once the credit is taken for the inputs, input services or capital goods, it becomes part and partialof credit pool. It loses its identity as credit of input or of input service or of capital goods. It becomes justa part of pool. Similarly, it loses its identity as credit of input service used for a particular output service.Once the credit is legally available and taken, it can be used for payment of service tax on any outputservice. Hence, credit pertaining to Mandap Keeper Services which is used for providing EventManagement Services can be used to discharge service tax liability on Commercial Coaching and TrainingServices.

Rule 3(4)(e) of the CENVAT Credit Rules, 2004 clearly provides that the CENVAT credit may beutilized for payment service tax on any output service.

4. Discuss whether CENVAT Credit in following cases is properly availed or not.

Sr. Nature of Credit Date of Date of Date of Payment Date of avail ingInvoice Receipt to Supplier CENVAT Credit

of Invoice

1 Input Service 01-12-14 05-12-14 15-11-14 01-12-14

2 Input Service on which 01-11-14 01-11-14 15-12-14 (Date of 01-11-14tax is payable under payment of ServicePartial Reverse Charge Tax under RCMMechanism is 1-11-14)

3 Input Service on which 01-11-14 01-11-14 15-12-14 (Date of 15-11-14tax is payable under payment of ServiceFull Reverse Charge Tax under RCMMechanism is 15-11-14)

View: In the terms of Rule 4(7) of the CCR CENVAT credit in respect of Input Service shall be allowed,on or after the day on which the invoice, bill or, as the case may be, challan referred in rule 9 is received.Hence, service recipient becomes eligible to take credit only if he has received the invoice. In the firstcase, as invoice is received on 5th December and service recipient becomes eligible to take credit onlyon 5th December and not before that date. Credit shall not be taken on 1st December.


Service Tax Decoded

In terms of the Second Proviso to Rule 4(7) ofthe CCR, if input service is covered underpartial reverse charge mechanism, credit shallbe allowed on or after the day on whichpayment is made of the value of input serviceand the service tax paid or payable as indicatedin invoice, bill or challan referred to rule 9.Hence, in second case, credit shall be allowedonly after the date when payment to serviceprovider for his services and payment of servicetax, to him and to government is made. Even ifpayment of service tax under partial reversecharge mechanism is made on 1st November,2014, as payment to service provider is madeon 15th December, 2014, credit shall not beallowed on or before 15th December, 2014.

Fortunately, w.e.f. 11th July, 2014 no suchrestriction is provided for the input servicescovered under Ful l Reverse ChargeMechanism. W.e.f. 11th July, 2014, Fi rstProviso to Rule 4(7) of the CCR clearlyprovides that credit for such input service isallowed after the service tax is paid. In thirdcase, as the service tax is paid on 15th

November, 2014, credit may be taken on thatday even if payment to supplier is made on 15th

December, 2014.

5. M/s. Late Ltd. has come up with followinginvoices for availing CENVAT Credit as on 14-12-2014. Please guide them whether CENVATcredit is allowable or not? Can they take crediton 14-12-2014?

Sr. Nature of Credit Date of Date of Date of Payment Date of avail ingInvoice Receipt to Supplier CENVAT Credit

of Invoice

1 Input Services 01-02-14 02-02-14 01-02-14 Not yet taken

2 Capital Goods 01-02-14 02-02-14 01-02-14 Not yet taken

3 Input Service 01-07-14 01-07-14 10-11-14 01-07-14

View: w.e.f. 1st September, 2014, in the termsof sixth proviso to Rule 4(7) of the CCR,provider of output service shall not takeCENVAT credit after six months of the date ofissue of any of the documents specified in sub-rule(1) of the rule 9, generally invoice issuedby provider of input service. In the first case,as period of six months from the date of invoicei.e. 1st February, 2014 is expired, credit maynot be availed on 14th December, 2014.Such limitation of six months is applicable inthe case of input services and inputs and not inthe case of Capital Goods. Hence, in secondcase, credit may be availed even after periodof six months from the date of invoice.In terms of the third proviso to Rule 4(7) of theCCR, except in the case of full reverse chargemechanism, if the payment of value of inputservice and the service tax as indicated in theinvoice is not made within three months fromthe date of invoice, the service provider whohas taken credit on such input service shall pay

an amount equal to credit taken. Once thepayment is made to supplier, credit may betaken again. Hence, in third case, credit isavai led properl y when avai led but oncompletion of three months from the date ofinvoice, amount equal to such credit is to bepaid and again on 10th November, 2014, creditof the same may be availed.

6. In terms of the Sixth Proviso to Rule 4(7), creditshall not be taken after 6 months from the dateof Invoice. In terms of third proviso to Rule4(7), if payment is not made to service provider,credit taken is required to be reversed and creditmay be taken once payment is made to serviceprovider. Mr. LAZY has made payment to hisservice provider after six month and by thattime eligibility to take credit has ceased asprovided under Rule 4(7). Is Mr. LAZY eligibleto take CENVAT after period of 6 months fromthe date of invoice?View: In terms of third proviso to Rule 4(7) ofthe CCR, if payment is not made to service


provider within three months from the date ofinvoice, credit if taken is required to be reversed.If payment is made after six months from thedate of invoice, limitation of six months asprovided in sixth proviso may debar serviceprovider f rom taking credi t (w.e.f . 1st

September, 2014).However, a favorable clarification is issued bythe department recently on 19th November,2014 vide Circular No. 990/14/2014-CX-8.CBEC has clarified that the limitation of sixmonths would apply when the credit is takenfor the first time on an eligible document. Itwould not apply for taking re-credit of amountreversed, after meeting the condi tionsprescribed in these rules.However, i t i s worth noting that thi sclarification would come to rescue only if firsttime credit is taken within three months. If credititself is not taken within three months andpayment is not made for six months andthereafter on payment credit is taken, thisclarification will not be helpful.

One doubt was also being raised that creditpertaining to amount of Retention Money beingretained by the service recipient and not paidto service provider within six months will belapsed or not? This reasoning adopted forcircular can also be useful in such cases andcredit will not be lapsed even if RetentionMoney is not paid within six months from thedate of invoice.

7. In terms of sixth proviso to Rule 4(7), CENVATcredit shall not be taken after the six monthsfrom the date of invoice. Mr. ACCURATE hastaken the credit within six months. Is Mr.ACCURATE also required to utilize the samewithin six month?View: Limitation of six months is providedonly for availing the credit and once the creditis properly taken it may be used at any timewithout any limitation period. There is noprovision which bar utilization of such creditwithin specific period.

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Service Tax Decoded

or of JCB India. A cursory look at the contents ofTTA makes it palpable that the assessee not onlyundertook to supply Know-How to JCB India, butalso ‘assistance’ by means of ‘engineering skills’ toenable it to manufacture the licensed products tothe standard of quality by incorporating suchspecification and features. Further it can be seenfrom the IPAA that the personnel to be providedby the assessee to JCB India were to act under thedirection of JCB India. The assessee company wasto be indemnified by JCB India for any and allclaims, liabilities, costs and expenses resulting fromor arising out of actions of these personnel whileunder their direction. The provision of IPAA makeit manifest that on the termination of the expatriateposting, the personnel will have to report back tothe parent company which will reemploy him.Further, i f during such deputation certaindisciplinary matters arise, those will be looked intoby the Group Director and not individual companyto which such personnel has been deputed (JCB

India).Further, eight persons, who were sent ondeputation to JCB India on secondment basis,continued to remain on the payroll of the assesseecompany and maintained their lien accordingly. Theabove narration of facts indicates that these eightpersons continued to remain as the employees ofthe assessee despite their deputation to JCB India.The fifth and last essential is that the activities shouldcontinue for a period or periods aggregating morethan ninety days within twelve-month period. Thereis no quarrel on the duration of stay of suchpersonnel of the assessee which admittedly is morethan ninety days within the twelve-months period.Thus, it is held that JCB India constituted a serviceP.E of the assessee in India.

The Tribunal further held that the amount ofroyalties or fees for technical services relating tothe PE would assume the character of ‘BusinessProfits on its arrival in Article 7.

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contd. from page 593 Tr ibunal News


CA. Ashwin H. [email protected]

Commissioner of customs & centralexcise Meerut-I v. Doon Institute ofI nfor mation & Technology (P) L td[2014] 45 taxmann.com 523 (High Courtof Uttarakhand)

Whether Computer har dwar e/sof twar et r aining entai l i ng employment or sel f -employment amounts to ‘vocational training’ ?

Facts:-

Assessee, providing training in computer relatedmatters, claimed exemption as ‘vocational traininginstitute’.

Held :-

Tribunal opined that though computer traininginstitute did not figure in Notification No. 24/2004-ST, since training in computer software andhardware was imparted to trainees to enable themto seek employment or to undertake sel f -employment, it was ‘vocational training’ and exemptunder Notification No. 24/2004-ST. Further it washeld that since skill pertaining to computer softwareand hardware is required to be acquired and oncesuch a skill is acquired, it throws open door of anoccupation relating to computer software andhardware, which entails employment or self-employment, therefore, assessee was a vocationaltraining institute in terms of Notification No. 24/2004-S.T. till 15-6-2005, when concept of computertraining institute was introduced and made ineligiblefor exemption.

Commissioner of Service Tax v. VijayTravels (Guj High Cour t) [ 2014 ] 51taxmann.com 72 (Gujarat)

‘Rent-a-cab’ service is defined as taxable serviceunder the Statute and artificial distinction made

Service Tax -Recent Judgements

of ‘r enting’ & ‘hir ing’ of the cab i s notsustainable.

Facts:-

The assessee had entered into an agreement withGujarat Secondary Education Board for supply ofvehicles. The said contract was entered into by theassessee wi th GSEB for the purpose oftransportation of papers/answer sheets, examiners,staff etc. The assessee also used its own cars andhad taken vehicles on rent from other persons aswell. The department found that the assessee hadnot been paying the service tax on value of taxableservices rendered by them.

Held:-

The High Court held that if a person is in continuousoccupation or employment and does not carry outany isolated act or transaction, such conduct andactivity would amount to ‘engaged in’ business;therefore, i f any person carries on continuousactivity of renting of a cab, i.e. letting for use incase of maxi cab or motor vehicle, such renting outof a vehicle would invite taxable service.

Guj ar at Bor osi l L imi ted Ver susCCE& ST, Surat 2014 (36) STR 808 (Ahmedabad – Tr ibunal)

Reverse charge mechanism – Section 66A of theFinance Act 1994 – ser vices received andconsumed outside India – services for ForeignCurrency Term Loan – Taxation of Services(Provided from Outside India and Received inIndia) Rules, 2006 – Amount of tax paid withinterest before issuance of SCN

42

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Facts:-

Assessee is engaged in the manufacture of glassproducts and obtained a Foreign Currency TermLoan from the Bank of Baroda Global SyndicationCentre through Bank of Baroda, and paid certainfees/ charges to foreign service providers forarrangement of ECBs (External CommercialBorrowings). On being pointed out by the officersof the Di rector General of Central ExciseIntel l igence (DGCEI) Ahmedabad that theappellant was liable to pay service tax on the fees/charges paid to foreign service providers underreverse charge mechanism.

Held:-

According to rule 3, if the services specified thereinare received by a recipient located in India for usein relation to business or commerce, then theseservices are deemed to have been provided fromoutside India and received in India. The TribunalHeld that for services specified in rule 3 of Importof Service Rules the place of consumption/receiptof service is immaterial, once the receipt of suchservice is located in India.

Commissioner of Centr al Excise,K anpur v. K unal Fabr i cator s &Engineer ing Wor ks [2014] 47tasmann.com 151 ( New Delhi –CESTAT)

Fabr ication of steel storage tanks, dozers andsettlers, steel structures, steel platforms, railing,foundation frames etc. and their erection and

installat ion is not cover ed under BusinessAuxiliary Services

Facts:-

The assessee is registered with Service TaxDepartment for providing Business AuxiliaryService and payment of service on the goodstransport agency. Department found that they hadundertaken repair and maintenance job in respectof which no service-tax had been paid and besidethis they had fabricated steel storage tanks, dozersand settlers, steel structures, steel platforms, railing,foundation frames etc. in their client’s factory andhad erected and installed the same, which wasBusiness Auxiliary Service in respect of which noservice-tax was paid. Department confirmeddemand with interest and penalty.

Held:-It was held that the activity which has beentreated by the Department as Business AuxiliaryService is fabrication of steel storage tanks, dozersand settlers, steel structures, steel platforms, railing,foundation frames etc. and their erection andinstallation in the factory. No sub-clause of section65(19) was found which covers this activity. Whilefabrication of tanks and steel structures beingmanufactured is not production or processing notamounts to manufacture, the erection andinstallation of tanks, dozers, settlers, and steelstructures is certainly not covered by any clause ofsection 65(19). Therefore, this activity of theassessee is not covered by the definition of BusinessAuxiliary Service and is not taxable.

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Service Tax - Recent Judgements

45


CA. Bihar i B. [email protected].

Statute Updates[I] Important Circulars/Notifications:[A] The Date for obtaining Audit Report under

section 63 of the GVAT Act is extended:The Commissioner of Commercial Tax videNotification dated 21.10.2014 has extended thedate for obtaining the Audit Report u/s. 63 ofGVAT Act for the year 2013-2014 upto31.01.2015.

[B] Amendment in pr ocedur e of f i l ing E-Return w.e.f. 15.10.2014:The Deputy Secretary to the Government hasissued a Notification dated 15.10.2014 foramendment in Rules for filing the return asfollows.[i] Every dealer (except the dealer who has

opted for Lump Sum payment of the tax u/s. 14, 14B, 14C, 14D i.e. small traderwhose turnover is less than Rs. 75.00 Lacsper year and purchases have been madefrom the State of Gujarat, dealers doing theworks contract business, dealers who arerunning Hotel & Restaurant, cateringbusiness) has to file a monthly return.

[ii] The dealer who is not manufacturer andnot doing any purchase or sale throughInterstate Transaction, also not dispatchinggoods to their outstation branches andconsignment agent and the dealer whohas not paid yearly tax more than Rs.60,000/- has to file the return quarterly.

[iii] Every Regd. Dealer who has obtained thecertificate of registration for the first time,shall furnish monthly return for first 12months.

[iv] Those dealer who has filed the monthlyreturn, shal l furnish the informationquarterly in Form No. 101C for the periodending 30th June, 30th Sept. 31st Dec. &31st March along with the return in respectof top 10 commodi ties and theconsol idated detai l s of remainingcommodities dealt with during that period.

[v] Every Regd. Dealer shall furnish the returnalong with the information in the Form to

be appended with respective return byuploading on the website of the FinanceDepartment and making filing of e-returncompulsory.

[vi] Regarding Audit Report:Every registered dealer who is requiredto obtain the audit report u/s. 63 shallwithin a period of thirty days from the dateof obtaining such report, submit thefollowing documents by uploading themon the website of the department as under.[i] Audit report in Form 217[ii] Scanned copy of the Statement of

Particulars duly signed by the specifiedauthority and its soft copy.

[iii]Scanned copies of the l ists of al lstatutory Forms and its soft copy.

[iv]Scanned copies of Statutory AuditReport and Statement of observations,comments and notes obtained fromChartered Accountant – and

[v] An undertaking in a specified mannerduly signed by the dealer or by a personreferred to in section 65.

[II] Important Judgments:[1] Agr imore Ltd. S.A. No.777 of 2011 decided

on 09.04.2013 (GVAT Tr ibunal)Issue:Claim of R.D. Resale of machinery, A. C.Motor Car and Telephone System is heldadmissible. Set Off in respect to steam used asprocessing material is also held admissible tothe appellant.Facts:The appellant sold machinery and other capitalassets like A. C. Motor Car and TelephoneSystem to M/s. Atulk Pharma which waspurchased by the appellant from M/s. CynemidAgro Ltd. vide deed of assignment dated31.12.1999 for total consideration of Rs.2,80,00,000/-. The R.D. resale claim of theappellant was disallowed. The claim of set offu/r. 42 in respect of purchase of steam was alsodisallowed in view of the Judgment of Hon.Tribunal delivered in case of M/s. Pandeshwara

VAT - Recent Judgementsand Updates


Industries Ltd. The appellant in second roundbefore the Hon. Tribunal contended that thedetails with regard to sale and purchase ofmachinery were submitted to the Ld. AppellateAuthority. The Hon. Tribunal referred deed ofassignment dated 31.12.1999 entered in tobetween the appellant and M/s. Cynemid AgroLtd. vide where by the machinery and otherassets were purchased for a total considerationof Rs. 2,80,00,000/-. The Hon. Tribunalobserved that the purchase of machinery andother assets were from the registered dealer andhence the appellant was not liable to pay taxon sale of such machinery and other assets. Asregard to the claim of set off in respect of steam,it is held that the decision in case of M/s.Pandeshwara Industries Ltd. has been reversedby the Hon. High Court in case of M/s. AmiPigment. The appellant has used steam asprocessing material in the manufacture oftaxable goods. The appellant is entitled to claimset off u/r 42 on purchase of steam.

[2] M/s. Shreenathji Oil Mills Misc. ApplicationNo. 13 of 2011 with S.A.No.12 of 2012decided on 22.04.2013 (GVAT Tr ibunal)Issue:The department directed to pay cost of Rs. 5000/- for inordinate delay in giving effect to theorder of the Hon. Tribunal. Second appeal filedfor claiming interest on refund is dismissed byholding that the applicant is not entitled tointerest on refund.Facts:Subsequent to the judgment dated 29.07.2002of the Hon. Tribunal in R.A. No.118 of 1988,the department did not pass any order givingeffect to the said judgment for a period of aboutnine years. The misc. application was filed on28.07.2011 in which it was prayed to direct thedepartment to pass order giving effect to thejudgment of the Hon. Tribunal and further it wasprayed for granting interest on refund. It wasalso prayed that there was contempt of court andclaimed cost of Rs. 25,000/- from the departmentfor unreasonable delay. Pursuant to the misc.application, the applicant was paid a refund ofRs. 45,350/- on 15.11.2011 by giving effect tojudgment of the Hon. Tribunal dated 29.07.2002.The second appeal was filed claiming interestof Rs. 58,820/- admissible on the amount ofrefund of Rs. 45,350/- paid vide order dated15.11.2011. The maintainability of the misc.

VAT - Recent Judgements and Updates

application was contended by the departmentrelying on the decision of the Hon. Tribunaldelivered in case of M/s. Vikas Export Industries.The applicant contended before the Hon.Tribunal that in view of section 65(6) and in viewof regulation 44 of the Tribunal, the Hon.Tribunal has inherent power of the court and inview of section 151 of the CPC, the misc.application is maintainable. The applicant reliedon the judgment of Hon. Supreme Court in caseof S. L. Kapoor AIR 1981 SC 136. Theapplicant relied on the following judgments.[i] M/s. Sandwik Asia Ltd. 280 ITR 643 (SC)[ii] M/s. Gujarat Flurochemcials Ltd. SCA

No. 12855 of 1994 decided on 03.07.2007(SC)

[iii] M/s. D. J. Wones 195 ITR 227 (GH)[iv] M/s. Castall Corporation (P) Ltd. 7 VST

552 (Ker)[v] M/s. Radhe Shyam Cotton Industries SCA

No. 9864 of 2011 dated 18.11.2011 (GH)The applicant in support to the contention thatthe appeal is continuous proceeding ofassessment relied on judgment of the Hon.Tribunal in case of M/s. Rolex Cables SA No.326 of 2004 decided on 11.09.2008. TheTribunal considering the submission of bothsides and referring judgments relied by theapplicant held that the applicant is not entitledto get interest on the amount of refund, becausethe department has paid interest within 90 daysfrom the date of determination of the amountof refund on 15.11.2011. Accordingly, thesecond appeal filed claiming interest on theamount of refund is dismissed.With regard to Misc. Application, the Hon.Tribunal observed that the department had paidrefund on 15.11.2011and hence the questionof directing of giving effect of the order ofHon. Tribunal dated 29.07.2002 does not arise.The Hon. Tribunal held that initiation ofcontempt proceeding also not arise, because theapplicant has first time moved application on13.06.2005 for giving effect of the order of theTribunal. However, the Hon. Tribunal held thatthe department should pay cost of Rs. 5,000/-to the applicant as the applicant has to file thismisc. application, because the department failedto give the effect to the judgment of the Tribunalfor almost nine years.

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CA. Hozefa [email protected]

However, in many cases the capital structure of thebusiness may change over time. In other cases, thetax rate faced by the firm may be expected to changeover time (as firm goes from loss to profit, or specialtax subsidies expire etc.). In other cases, the firmmay be able to obtain subsidized financing from agovernment agency for the project. In all of thesecircumstances, these types of things mean that theWACC for the business will change, and may evenchange each year of the business life. Incorporatingthese types of factors into a WACC calculation ispossible, but very complicated. Under, DCF, thenormal assumption is that the WACC is the samefor each cashflow and each year of the business.

These more complicated situations are more easilyhandled by using Adjusted Present Value (APV).APV is based on the following:

APV = NPV of business assuming it is all equityfinanced + NPV of financing effects

Essential ly, APV breaks the total value of thebusiness into parts:

One part is the value assuming no debt is used, andthen you add on the extra value created from usingdebt in the capital structure.

In the adjusted present value (APV) approach, weseparate the effects on value of debt financing fromthe value of the assets of a business. In contrast tothe conventional approach, where the effects of debtfinancing are captured in the discount rate, the APVapproach attempts to estimate the expected valueof debt benefits and costs separately from the valueof the operating assets. In general, using debt tofund a firm’s operations creates tax benefits (becauseinterest expenses are tax deductible) on the plus side

Business Valuation

Academic Refresher : Income Approach

The Income Approach

(APV - Adjusted Present Vaule Method)

Many experts believe that the estimate value ofbusiness determined from using discounted cashflow method is not free from the limitations of usingWACC as a discounting rate. It is rare that the debtequity ratio in the business remains constant. Thebetter way is to find the value of firm ignoring thedebt in capital and to add the tax benefit proposedon debt creation.

Technically, an APV valuation model looks similarto a standard DCF model . However, insteadof WACC, cash flows would be discounted at theunlevered cost of equity, and tax shields at eitherthe cost of debt or with the unlevered cost of equity.APV and the standard DCF approaches should givethe identical result if the capital structure remainsstable.

Normal NPV calculation using DCF:

NN

WACCCF

WACCCF

WACCCFinvestmentNPV

)1()1()1( 221

where, in a simple situation:

ratetax1debtoftcosdebtequity

debtequityoftcosdebtequity

equityWACC

Using debt for financing has a tax advantagebecause the interest payments are tax deductible.This tax deductibility is a source of value for thefirm. In the normal NPV calculation using DFCmethod, this additional value is accounted for inthe WACC.

Approaches to Valuation


and increases bankruptcy risk (and expectedbankruptcy costs) on the minus side.

In the adjusted present value approach, we estimatethe value of the firm in three steps. We begin byestimating the value of the firm with no leverage.We then consider the present value of the interesttax savings generated by borrowing a given amountof money. Finally, we evaluate the effect ofborrowing the amount on the probability that thefirm will go bankrupt, and the expected cost ofbankruptcy. Being no specific laws for bankruptcy,the third portion in not much used in India.

The value of the firm can also be written as thesum of the value of the un-levered firm and theeffects (good and bad) of debt.

Firm Value = Un-levered Firm Value + PV of taxbenefits of debt - Expected Bankruptcy Cost

In practice, normal ly bankruptcy cost is notconsidered while determining value as per thismethod. And so, the formula for calculating APVis,

V = EBIT (1 – t) / (Ke – g) + DT

Where,

EBIT (1 - t) = earnings before Interest but after tax

Ke = Cost of Equity

DT = tax savings on debts

g = growth rate

The benefit of APV is that it breaks the problemdown into the value of the business itself (asbusiness is financed with equity) and the value ofthe financing (whereas the effect of financing istaken account of in the WACC when calculatingregular NPV in DCF). This makes APV flexibleenough to cover many different types of real-worldfinancing possibilities such as: tax rates that change

each year, amount of debt increases or decreaseeach year, government agency subsidizes interestpayments for a certain number of years, new debtmust be issued at some future time and that willinvolve flotation costs, etc. In each of these casesthe NPV of the business under 100% equityfinancing would remain the same, and the value ofthe specific financing arrangement would simplybe calculated separately.

APV has generally applicability in transactions thatinvolve a structured financing, l ike leveragedbuyouts (LBOs), project financing and real estatefinancing.

Some people believe that APV is preferable from amanagerial point of view as it shows directly thesources of value created by a business (i.e. howmuch is from running the actual business, howmuch is from the financing arrangements, howmuch value is created by a government subsidyetc.). However, note that calculating NPV basedon an estimated WACC is still, by far, the mostcommon business valuation approach used byfirms.

As written by Prof. Pablo Fernández, APV, WACCand FLOWS TO EQUITY APPROACHES to firmValuation, all these three methods of valuation (ifused correctly) always yield the same result. In aarticle “Cost of Capital, Optimal capital structure,and value of Firm: An Empirical Study of IndianCompanies”, the researcher Shri Raj S Dhankar andShri Ajit S Boora, came on the conclusion that thereis no significant relationship between change incapital structure and the value of a firm, at the microlevel. This is because of the fact that the value of afirm is affected by a multiplicity of factors andcapital structure is just one of them.

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Business Valuation


CA. Naveen [email protected]

Latest Judgments:

1. SEBI’s order in the matter of Yash DreamReal Estate L imited:[WTM/PS/53/WRO-II/RLO/DEC/ 2014]Facts of the case:The Company had issued Unsecured OptionallyFully Convertible Bonds (Unsecured OFCBs)to 45,005 persons and mobilized funds to thetune of ›76,34,19,703. It had mobilized fundsunder its sixty eight (68) schemes. It wasobserved that the Board of Directors of Yash hadapproved the resolution to raise the funds byissuing OFCB on August 11, 2008. With thissingle resolution, the company had admittedlyraised funds from 45,005 persons and themobilization still continued.The application form for the unsecured OFCBsas circulated by Yash does not contain the nameof the person to whom it is issued; the sameindicates that the issue is not a privateplacement. All mobilization of funds from fiftyor more investors should be classified as apublic issue requiring the company to make anapplication to list its securities.The raising of funds from 45,005 persons byissue of unsecured OFCBs prima facie has tobe construed as a public offer. Having madesuch public offer, the Company ought to havefiled the Prospectus with RoC under Section60 of the Companies Act, 1956.Consequentially, Yash has also prima facie notcomplied with the provisions of section 56(1)and 56(3) of the Companies Act, 1956, whichrefers to the matters that are to be stated in theprospectus and the documents (i .e., thememorandum containing salient features of theprospectus) that should accompany theapplication form inviting subscription.Hence, the mobil ization of funds by Yashthrough Unsecured Optional l y Ful l y

Corporate Law Update

Convertible Bonds (Unsecured OFCBs), areprima facie in contravention of provisions ofthe SEBI Act, 1992, the Companies Act, 1956read with the Companies Act, 2013, the SEBI(Issue of Capital & Disclosure Requirements)Regulations, 2009 and the Securities andExchange Board of India (Debenture Trustee)Regulations, 1993.The Company was required to comply withthe followings:1. Apply for and obtain the Listing Approval

for the securities with a stock exchange.2. If no approval is granted by the Stock

Exchange, then repay the amounts to theinvestors/applicants.

3. Keeping the amounts in a separate bankaccount.

4. Issue the securities only in dematerializedform.

Conclusion:SEBI was of the opinion that it should beimposed that:a. directing them jointly and severally to

refund the money collected through theissue of redeemable preference shares thatare impugned in this Order, along withinterest that is promised to the investors ;

b. directing them to not to issue prospectusor any of fer document or i ssueadvertisement for soliciting money from thepublic for the issue of securities, in anymanner whatsoever, either directly orindirectly, for an appropriate period;

c. directions restraining them from accessingthe securities market and prohibiting themfrom buying, selling or otherwise dealingin securities for an appropriate period;

d. directing them and other companies inwhich their directors hold substantial orcontrolling interest, to not to access thecapital market for an appropriate period.


Time of 21 days was provided to theCompany and its promoters and directorsfrom the date of receipt of this Order, tofile their reply, if any, to this Order.

2. Vidar bha Industr ies L imi ted vs. SEBI[Appeal No. 386 of 2014]:Facts of the case:The appellant (The Company) has failed toobtain the SCORES authentication done fromSEBI (an online electronic system for resolutionof investors grievances i.e., SCORES). In itsreply to the show cause notice, appellant hadcontended that it is not a listed company andhence the requirements of circular dated April17, 2013, were not applicable to the appellant.Further, the penalty of Rs. 2 lacs imposed onthe Company was very high.While investigating the matter, the SEBI revealedthat some time in the past appellant had appliedfor delisting and thereafter no further steps weretaken. As a result, it is not in dispute that theshares of appellant company still continue to belisted on the stock exchanges.Conclusion:Violation of SEBI circular for which penaltyimposable under Section 15HB of SEBI Act isRs. 1 lac per day or Rs. 1 crore whichever isless. Thus, in the present case, as against penaltyof Rs. 1 crore imposable against the appellant,the AO of SEBI has imposed penalty of Rs. 2lac which cannot be said to be arbitrary,excessive or unreasonable, hence, the appealof the Company was dismissed.

3. Posh Expor ts Pr ivate L td. vs. Registrar ofCompanies, New Delhi [Order of Hon’bleHigh Cour t of New Delhi in the matter ofCo. Petition 207/2014]:Facts of the case:The present petition was filed under Section560(6) of the Companies Act, 1956 forrestoration of the name of the company M/sPosh Exports (P) Ltd in the Register of theRegistrar of Companies.The Petitioner Company was incorporated on12.05.1997, as a private limited company.The Company had not fi led the necessarydocuments with the Register of Companies and

further decided to take steps in the presentpetition and seek revival of the company. Whenthe documents i.e., Annual Returns and BalanceSheet, etc., were sought to be filed on websiteof the Ministry of Corporate Affairs, theDirectors came to know that name of thePetitioner Company has been struck off for thefailure to file requite statutory documents.Further, the name of the Company was struckoff vide notice dated 23.06.2007.The Petitioner Company has filed its affidavitthat the non-filing of the aforesaid Annual Returnand the Balance Sheets was because the parttime Accountant of the Petitioner Company, whowas dealing with the aforesaid work, left theemployment of the Petitioner Company.In view of the Affidavit filed by the PetitionerCompany, the Registrar of Companies does nothave any objection with the restoration of thename of the company subject to the filing of allstatutory documents i.e., Annual Returns fromthe years 1999 to 2013 and Balance Sheets ason 2000, 2003 to 2013 and also the otherdocuments with the requisite fee as well asadditional fee as applicable on the date of actualfiling of the documents.

Conclusion:The petition was allowed subject to paymentof costs of Rs. 75,000/-, the name of thePeti tioner Company was restored on theRegister of the Registrar of Companies subjectto the Company f i l l ing al l the statutorydocuments and returns for the outstandingperiod along wi th the prescribed fees inaccordance with the law.

4. Objections by the creditor in the matter ofScheme of Amalgamation of MonarchResearch and Brokerage Pr ivate L imitedand M onarch Proj ect and FinmarketsL imited wi th Networ th Stock Br okingL imited [High Cour t of Bombay]:Facts of the case:The objector had filed a suit before the SmallCauses Court and the same was decided bythe Hon’ble Court. The transferee companypreferred an appeal against the decree of the



Small Causes Court. The objector again filed across appeal against the same, but it was notserved to the transferee company and as on thedate of this case, the enti re amount asadjudicated by the Small Causes Court waspaid/adjusted/secured.Conclusion:Objections were rejected by the Hon’ble HighCourt of Bombay on the following grounds:a. Where entire claim of objector-creditor had

already been adjudicated and adjudicatedamount had been fully adjusted/secured,objector would have no locus to raise anyobjection to scheme of amalgamation.

b. Merely because an enquiry of SEBI ispending against transferor companies, thatfact would not by itself render a schemeunfair or unjust.

c. The company court, while considering ascheme of amalgamation, should notanalyze accounts of companies in depthunless something manifestly illegal or malafide is noticed.

d. After amalgamation, post merger net worthof transferee company would becomemuch more healthier and stronger andvarious objections raised by objector didnot make out any ground for decliningsanction to scheme. Further, theoverwhelming majority of shareholdershad approved scheme and hence, theScheme was not found to be unjust andunfair to objecting creditor nor did itadversely affect interest of other creditors,hence, the scheme was sanctioned.

5. Akriti Global Traders Ltd. vs. SEBI [AppealNo. 78 of 2014]Facts of the case:The appellant held 94,71,709 shares of SRS RealInfrastructure Limited (‘SRS”) representing4.71% shares of the total equity shares issuedby SRS. Pursuant to a scheme of amalgamationapproved by the Delhi High Court theshareholders of SRS including appellant becameentitled to receive additional shares of SRS.Accordingly, additional shares were received by

appellant on two dates i.e. on February 14, 2013and February 21, 2013. The percentage ofshareholding increased to 8.15%.The appellant made disclosures to BSE underregulation 29(1) of SAST Regulations, 2011,however, it was delayed by 120 days. Similarly,disclosures made under regulation 29(2), wasdelayed by 128 days. No disclosure was madeto the company as provided under regulation29(1),(2) and (3) of SAST Regulations, 2011.Adjudicating Officer (AO) after taking intoconsideration all mitigating factors imposedpenalty of Rs. 4.5 lakhs upon appellant, as theappellant failed to made disclosures of same torelevant stock exchanges within the prescribedtime limit.The appellant filed the appeal to challenge theaforesaid order of AO.Conclusion:The appeal was dismissed on the followinggrounds:a. Obligation to make disclosures under the

provisions contained in SAST Regulations,2011 as also under PIT Regulations, 1992would arise as soon as there is acquisitionof shares by a person in excess of the limitsprescribed under the respective regulationsand it is immaterial as to how the sharesare acquired.

b. Penalty for violating regulation 29(1) at therate of Rs.1 lakh per day would be morethan Rs. 1 crore. Similarly, penalty forviolating regulation 29(2) at the rate of Rs.1 lakhs per day would be more than Rs. 1crore. As against the above, af terconsidering all mitigating factors, AO hasimposed composite penalty of Rs.4.5 lakhswhich cannot be said to be excessive orunreasonable.

c. Penal liability arises as soon as provisionsunder the regulations are violated and thatpenal liability is neither dependent uponintention of parties nor gains accrued fromsuch delay.

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AS –16 Bor rowing Costs Annual repor t 2013-14

Hindustan Media Venture L imitedBorrowing cost includes interest, amortization ofancillary costs incurred in connection with thearrangement of borrowings and exchangedi f ferences ari sing f rom foreign currencyborrowings, other than arising on long term foreigncurrency monetary items, to the extent they areregarded as an adjustment to the interest cost.Borrowing costs di rectly attributable to theacquisition, construction or production of an assetthat necessarily takes a substantial period of time toget ready for its intended use or sale are capitalizedas part of the respective asset. All the borrowingcosts are expensed in the period they occur.

Adani Power L imitedBorrowing costs includes interest on borrowingsand amortization of ancillary costs incurred forborrowings. Such costs to the extent not directlyrelated to the acquisition of qualifying assets arecharged to the Statement of Profit and Loss overthe tenure of the borrowings. Borrowing costs thatare attributable to construction / acquisition ofqualifying assets are capitalized as part of the costof such assets up to date the assets are ready fortheir intended use.

Indian Oil Corporation LimitedBorrowing costs that are attributable to the acquisitionand construction of the qualifying assets arecapitalized as part of the cost of such assets. Aqualifying asset is one that necessari ly takessubstantial period of time to get ready for intendeduse. All other borrowing costs are charged to revenue.

K.P.R. Mill L imitedBorrowing costs include interest, amortization ofancillary costs incurred and exchange differencesarising from foreign currency borrowings to theextent they are regarded as an adjustment to theinterest cost. Costs in connection with the borrowingof funds to the extent not directly related to theacquisition of qualifying assets are charged to the

Statement of Profit and Loss. Borrowing costs,allocated to and uti lized for qualifying assets,pertaining to the period from commencement ofactivities relating to construction /development ofthe qualifying asset up to the date of capitalizationof such asset are added to the cost of the assets.Capitalization of borrowing costs is suspended andcharged to the Statement of Profit and Loss duringextended periods when active development activityon the qualifying assets is interrupted.

Manugraph India L imitedBorrowing costs di rectly attributable to theacquisition or construction of qualifying assets arecapitalized. Other borrowing costs are recognizedas expenses in the period in which they are incurred.In determining the amount of borrowing costs eligiblefor capitalization during a period, any income earnedon the temporary investment of those borrowings isdeducted from the borrowing costs incurred.

Ankit Metal and Power L imiteda) Borrowing costs and its related expenses that

are directly attributable to the acquisition,construction or production of a qualifying assetis capitalized as part of the cost of that asset.Other borrowing costs are recognized as anexpense in the period in which they are incurred.

b) Net exchange gain/loss on foreign currencyborrowings to the extent considered as anadjustment to interest cost attributable to thefinance cost.

CMC L imitedBorrowing costs include interest; amortization ofancillary costs incurred and exchange differencesarising from foreign currency borrowings to theextent they are regarded as an adjustment to theinterest cost. Costs in connection with the borrowingof funds to the extent not directly related to theacquisition of qualifying assets are charged to theStatement of profit and Loss over the tenure of theloan. Borrowing costs, allocated to and utilized forqualifying assets, pertaining to the period fromcommencement of activities relating to construction

CA. Pamil H. [email protected]

From Published Accounts


CA. Kunal A. [email protected]

From the Government

Income Tax

1) Noti f icat ion r egar ding amendment inIncome tax rulesThe CBDT hereby makes the following rulesfurther to amend the Income-tax Rules, 1962.After rule 2BBA the rule 2BBB shall beinserted, which is enumerated as under:-“2BBB.Percentage of Government Grant forconsidering universi ty, hospi tal etc. assubstantially financed by the Government forthe purposes of clause (23C) of section 10. Forthe purposes of sub-clauses (iiiab) and (iiiac) ofclause (23C) of section 10, any university orother educational institution, hospital or otherinstitution referred therein, shall be consideredas being substantial l y f i nanced by theGovernment for any previous year, i f theGovernment grant to such university or othereducational insti tution, hospital or otherinstitution exceeds fifty percent of the totalreceipts including any voluntary contributions,of such universi ty or other educationalinstitution, hospital or other institution, as the casemay be, during the relevant previous year.”.(Notification No. 79, dated 12/12/2014)(They shall come into force from the date oftheir publication in the Official Gazette.)

2) Circular regarding income tax deductionfrom salar ies dur ing FY 2014-15The said circular contains the rates of deductionof income-tax from the payment of incomechargeable under the head “Salaries” duringthe financial year 2014-15 and explains certainrelated provisions of the Act and Income-taxRules, 1962.(For full text refer circular no. 17, dated 10/12/2014)

Service Tax

1) Circular regarding audit of the service taxassessees by the officers of Service Tax andCentral Excise Commissionerates Central Government hereby inserts clause (k)in sub-section (2) of section 94 which isreproduced below:- “(k) imposition, on persons liable to pay servicetax, for the proper levy and collection of tax,of duty of furnishing information, keepingrecords and the manner in which such recordsshall be verified.”(For full text refer circular no.181, dated 10/12/2014)

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contd. from page 625 From Published Accounts

/ development of the qualifying asset upto the dateof capitalization of such asset are added to the costof the assets. Capitalization of borrowing costs issuspended and charged to the Statement of profitand Loss during extended periods when activedevelopment activity on the qualifying assets isinterrupted.

Nagar june Fer tilizers and Chemicals LimitedBorrowing costs that are attributable to theacquisition or construction of qualifying assets arecapitalized as part of the cost of such assets. Aqualifying asset is one that necessari ly takessubstantial period of time i.e. more than twelvemonths to get ready for its intended use. All other

borrowing costs are charged to the Statement ofProfit & Loss.

Archidply Industr ies LimitedBorrowing cost di rectl y attributable to theacquisition or construction of qualifying asset isbeing capital ized. Other borrowing costs arerecognized as expenses in the period in which theyare incurred. In determining the amount ofborrowing costs eligible for capitalization during aperiod, any income earned on the temporaryinvestment of those borrowings is deducted fromthe borrowing costs incurred.

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Association News

CA. Abhishek J. JainHon. Secretary

CA. Nirav R. ChoksiHon. Secretary

❉ ❉ ❉

For thcoming Programmes

Date/Day Time Programmes Venue

17.01.2015 9:30 a.m. to Blood Donation Camp At the office ofSaturday 1 p.m. the Association

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

Glimpses of events gone by:

1. On 20th December 2014, a Cricket Match washeld between President XI & Secretary XI atSardar Patel Stadium, Navrangpura, Ahmedabad.

2. On 3rd January 2015, Brain Trust Meeting washeld on the topic of “Controversial Issues underthe Income Tax Act” at ATMA Hall , AshramRoad, Ahmedabad.

3. On 4th January 2015, a Cricket Match was held between CAA Ahmedabad & Baroda Branch of WIRCof ICAI at Motera Stadium, Ahmedabad.

(L to R CA. Abhishek J. Jain, CA. Nirav R.Choksi, CA. Shailesh C. Shah, Speaker ShriTushar Hemani-Advocate, CA. Kunal A.Shah, CA. Rutvij P. Shah, CA. Ronak M.

Khandwala)

CAA won the match. The Team celebrating after retaining the Rotating Trophy


Across

1. Under section 54EC, assessee cannot becharged to capital gains when short term gainof _________ capital asset gets invested.

2. The slogan given by P.M. on the IndependenceDay.

3. Risk free return is the return expected by equityholder where default risk is ______.

Down

4. The ultimate goal of a human being is to be________.

5. Section 54EC requires the assessee to make theinvestment within 6 months from the date of_______.

6. NRIs and returnee NRIs both are at par withresidents and are l i able to___________________.

ACAJ Crossword Contest # 9

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 # 8 - SolutionAcross1. Sattvasamshuddhih 2. Deductor3. Penalty

Down4. Terminal 5. Mind6. Employees

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Winners of ACAJ Crossword Contest # 8

1. CA. Naresh Patel

2. CA. Ajit Shah

3. CA. Gaurang Choksi

4. Members may submit thei r reply ei therphysically at the office of the Association orby email at [email protected] on orbefore 31/01/2015.

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

Volume : 38 Part : 10 January, 2015 C O N T E N T Scaa-ahm.org/Pdf/Journal/Journal-48.pdfAhmedabad...

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Transcript of Volume : 38 Part : 10 January, 2015 C O N T E N T Scaa-ahm.org/Pdf/Journal/Journal-48.pdfAhmedabad...