volume : 41 l part 11 l february, 2018 · simbhaoli sugars-obc scam 109 total 26,019 the...

Volume : 41 l Part 11 l February, 2018

Ahmedabad Chartered Accountants Journal February, 2018 577

Volume : 41 Part : 11 February, 2018

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

C O N T E N T S To Begin with

- Pleasant State of Mind is Heaven........................................Dr. CA. Nilesh V. Suchak...............579

Editorial - Banking Sector - A Concern..............................................CA. Ashok Kataria........................581

From the President.............................................................................CA. Kunal A. Shah.......................582

Articles

Addressing tax challenges of digitization - Introducing Virtual CA. Aparna ParelkarPermanent Establishment.................................................................... CA. Kajesha Shah.........................583

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.................. 591

Unreported Judgements......................................................................CA. Sanjay R. Shah.................... 595

Controversies.......................................................................................CA. Kaushik D. Shah....................600

Judicial Analysis..................................................................................Adv. Tushar P. Hemani................603

FEMA & International Taxation

Overview of US Tax Reform............................................................... CA. Dhinal A. Shah &CA. Sagar Shah.............................608

FEMA Updates.................................................................................. CA. Savan Godiawala..................611

Indirect Taxes

GST Updates.......................................................................................CA. Ashwin H. Shah.....................613

GST & VAT Judgments........................................................................ CA. Bihari B. Shah.......................616

Corporate Law & Others

Corporate Law Update.......................................................................CA. Naveen Mandovara...............619

Allied Laws Corner..............................................................................Adv. Ankit Talsania.......................623

From Published Accounts .................................................................CA. Pamil H. Shah..................... 627

From the Government ......................................................................CA. Kunal A. Shah........................629

Association News.............................................................................. CA. Riken J. Patel &CA. Maulik S. Desai .................. 631

ACAJ Crossword Contest......................................................................................................................632

- caaahmedabad

Ahmedabad Chartered Accountants Journal February, 2018578

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

month. A copy of the Journal would be sent, if extra copies are available.2. You are requested to intimate change of address to the Association's Office.3. Subscription for the financial year 2017-18 is ` 1500/-, single copy ` 150/- (if available).4. Please mention your membership number in all your correspondence.5. While sending Articles for this Journal, please confirm that the same are not published / not even meant for

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6. The opinions, views, statements, results published in this Journal are of the respective authors / contributorsand Chartered Accountants Association, Ahmedabad is neither responsible for the same nor does it necessarilyconcur with the authors / contributors.

7. Membership Fees :

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Basic GST TotalLife Membership 7500/- 1350/- 8850/-Entrance Fees 500/- 90/- 590/-Ordinary Membership Fees for the year 2016-17In case of Membership (of ICAI) for a period of less than 600/- 108/- 708/-or equal to five years,In case of Membership of (ICAI) for a period of more than five years, 750/- 135/- 885/-Brain Trust Membership Fees 1000/- 180/- 1180/-

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

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

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

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

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

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

Journal CommitteeCA. Ashok Kataria CA. Nirav Choksi

Chairman ConvenorMembers

CA. Darshan Shah CA. Gaurang ChoksiCA. Jayesh Sharedalal CA. Rajni Shah CA. Shailesh Shah

Ex-officioCA. Kunal Shah CA. Riken Patel


The following powerful saying shows how our thoughts become our destiny.

“Watch your thoughts, for they become words.

Watch your words, for they become actions.

Watch your actions, for they become habits.

Watch your habits, for they become character.

Watch your character, for it becomes your destiny.”

We should remember that love brings love, and hate brings hate. We should carefully observe and understandthe effect of positive and negative thoughts in our mind to realize that purity of mind brings joy andnegativity brings grief.

Penance of mind as narrated in Shrimad Bhagvad Gita brings lasting joy and feeling of extreme happinessthor cheerfulness. In 6 verse of Chapter 16 of Shrimad Bhagvad Gita, Lord Krishna states that there are

two kinds of beings in this world—those endowed with a divine nature and those possessing a demoniacnature. When we see goodness of the world, we rejoice and if we fill our mind with all the dirt of theworld, we inculcate habit of cursing others. Practice right thoughts, right actions, right habits, right charactershall maximize moments of life with pleasant state of mind. With this practice, mind will have less agitation.Mind without agitation is heaven on earth. Pleasant state of mind only can give us feeling of being inheaven. Let us all practice the art of making the state of mind pleasant and make this world more beautifulplace to live in.

❉ ❉ ❉


The month of February has been a nightmare for the banking sector, especially the public sector banks.The series of frauds and scams have surfaced during the last one month with a loss up to the tune of morethan 26000 crores to the banking system. The number of such huge scale is itself shocking. This includedthose perpetrated by jewellers Nirav Modi and Mehul Choksi, Rotomac’s Vikram Kothari, and SimbhaoliSugars.

Recent bank loan fraudsPersons, entities involved Rs crore

Vijay Mallya-Kingfisher bank loan fraud 9,000Nirav Modi- Mehul Choksi-PNB scam 12,700Rotomac-Vikram Kothari-BoB scam 3,695RP Info System-Shibaji Panja-Canara Bank-scam 515Simbhaoli Sugars-OBC scam 109

Total 26,019

The government’s reaction, which may have sprung from the desperation to act decisively, has added tothe woes of the distressed banking sector. The Central Bureau of Investigation, India’s has taken severalPNB employees in custody and the defaulters Modi-Choksi duo have fled the country and remainuntraceable. The probe has been extended to various other banks and chiefs of private sector banks arealso summoned. It is clear that the investigators are determined to fast tract the investigation and arewilling to go to any extent to connect the missing dots. The enthusiasm is welcome—till the time it doesn’tturn into a witch- hunt.

The fraud cases that have come to the light are an indication that Indian Banking sector is very vulnerable.Between 2014-15 and 2016-17, the total number of frauds reported in PSBs stand at 8,622, according toa submission in Parliament. A total of 1,146 staff were involved whereas in private sector banks 4,156frauds were reported involving 568 staff. Red flags are being either ignored by the bankers or the systemalerts themselves are failing, eroding the faith in the country’s financial system.

Such huge sum getting siphoned off by the fraudsters may not seem to affect a layman but in fact has ahuge impact on the economy. The losses inflicted on the banks due to scams and bad loans have a directbearing on the people of the country.

One, the taxes paid will now be diverted towards recapitalisation of banks, instead of welfare activities.Last year government announced recapitalisation of state-run banks to the tune of Rs 2.11 lakh crore, thisafter it had already infused Rs 1.18 lakh crore since 2008 into banks. These recapitalisations happen at thecost of various welfare schemes of the government.

Two, it leaves investor poorer. Since PNB scheme came to light, it shares have fallen more than 60%. Infact, other PSU banks too have been bruised, shaking confidence and trust of the investors.Three, it means less borrowing money available. According to news reports, PNB that’s been hit bythe scam has lost 10 times its 9-months net income of Rs 1,134 crore due to the recent scam . Banks withinadequate capital will be wary of fresh lending. This, in turn, impacts new borrowers making it harder forthem to get loans.To be sure, a clean-up of the Indian banking sector has anyway been long overdue. What is needed hereis a solid action plan between the government, regulator and investigating agencies whereby the bankerengaged in genuine business will have the confidence to do his work without the fear of being prosecutedbut guilty officials are not spared at any cost.

[email protected] Sector - A Concern

CA. Ashok Kataria


From the President

Dear Members,I hope that everyone of us has celebrated and enjoyedthe festival of colours . Holi is one of the most popularfestivals celebrated in India. Year on year, Holi arriveson the Poornima day (full moon day) in the month ofPhalguna (February – March). Think of Holi and whatcomes to our mind is colours, fun, entertainment, songsand drums. I also hope that as we splash and frolic inmultiple colours, may we accept the diversity of allpeople and grow together.Around the WorldTrump sets tariff on steel, aluminum imports, provokesglobal trade war. US President Donald Trump recentlysigned two proclamations that impose 25 per cent tariffon imported steel 10 per cent on aluminium, a movethat is likely to start a global trade war. The Uniongovernment has started working out an action plan toanalyse the impact of the recently imposed US tariffs onsteel and aluminium and on how to deal with it.Religions offer unityThere has been maximum bloodshed in the name ofreligion. Yet, religions, beyond all doubt, possess a deepunderlying fundamental unity. That unity springs fromdivine realisation of oneness of Spirit and essentialoneness of existence in the hierarchical ascent of creationfrom matter to energy, mind and spirit.That unity transcends innumerable diversities in the wayof life, belief system, practice of rites and rituals andsense of self-made divisiveness.Instead of finding fault with a different system, it callsfor mutual understanding with sincere quest and respect.If we seriously seek, we can find too many points ofadmiration in every religion, but our attitude to see theglass as half empty instead of half-full creates theproblem.From time immemorial, fanatic followers, misguidedmen and selfish opportunists of various religions haveadded fire to the powerful fuel of religions and causedheinous hatred and worst bloodshed.While, ironically, every religion advocates for peace anduniversal fraternity, fanatic followers with religiousbigotry have oftentimes shown religious intolerancedisregarding the fact that such bigotry springs fromspiritual ignorance and denial of the rightful entitlementof freedom of practising religion by everyone.Activities at the AssociationThe Study RRC at TGB Surat was successfully completed.All the participants took the benefit of all the six useful

CA. Kunal A. [email protected]

topics by speakers from Gujarat and Maharashtra.

For the very time CAA organised the celebration ofnd“Dhuleti” on 2 March,2018 jointly with Ahmedabad

Branch of WIRC of ICAI. Members enjoyed playingholi with different organic colours , music and deliciousfood. I thank all the members for gracing the Holifunction with their family members.A lecture meeting on Accounting and Taxation ofDerivative Transactions was organised and the programwas well attended by the participants.A Open House with Income tax department was organisedby CAA jointly with various organisations wherein Pr.Chief Commissioner of Income Tax (Gujarat) Shri A.K. Jaiswal , Madam Asha Agarwal – Chief Commissionerof Income Tax – II and Shri R.K. Srivastava – ChiefCommissioner of Income Tax – TDS, Gujarat along withtheir esteemed team of commissioners remained presentand responded to the queries of the taxpayers. In theaddress remark Pr. CIT Shri A.K Jaiswal urged thetaxpayers to maximum utilize their portal of grievanceson Gujarat Govt website. Further relating to the matterof payment of 20% of the demand till the disposal offirst appeal, department authorities assured that at thediscretion of PCIT, in genuine cases, payment of 20%can be reduced.After the GST regime , CAA has launched the firstpublication on FAQs on GST – A Hand book (including

thE-way Bill) on 12 March,2018 by the worthy hands ofPast President of ICAI CA Sunil H. Talati. My sinceregratitude and heartfelt congratulations to the Chairmanof the Publication Committee CA. Shailesh C. Shah andhis entire committee for the hard and sincere work. Ialso wish to express my thanks to the authors CA. PunitPrajapati, CA. Avinash Poddar and Dr. CA. NileshSuchak for their untiring efforts to make this possible ina short period for benefit of members at large.Now it’s time to gear up for the Statutory Bank BranchAudits and to refresh the norms relating to it, a lecturemeeting on Statutory Bank Branch Audit was organised

thby CAA on 12 March,2018 for the benefit of themembers at large.I would like to conclude with the following thoughts –“ Once you replace negative thoughts with positive ones,you’ll start having positive results.- Willie Nelson“Optimism is the faith that leads to achievement. Nothingcan be done without hope and confidence”.-HelenKellerLooking forward to your support and participation infuture activities of the Association.With best regards,CA. Kunal A. ShahPresident


Addressing tax challengesof digitization–IntroducingVirtual PermanentEstablishment

“The world’s largest taxi firm, Uber, owns no cars.The world’s most popular media company,Facebook, creates no content. The world’s mostvaluable retailer, Alibaba, carries no stock. And theworld’s largest accommodation provider, Airbnb,owns no property. Something big is going on.”

-Tom Goodwin

Something big is indeed going on and digitizationis changing the way business is done and the waymoney is made. Most transactions are now doneby using e-commerce, app stores, onlineadvertising, online payment services, cloudcomputing, participative networked platforms andthe likes.

Under the new digital business models, companiesare able to generate significant revenues in foreigncountries without the need to put up big offices orhave employees there. This results in avoidance oftax in source countries which follow the principleof physical presence based taxation rather thaneconomic allegiance. India being one such sourcecountry, loses its right to tax business profits thatare derived from its economy.

OECD under its BEPS Action Plan 1 has addressedtax challenges arising in digital businesses whereinseveral options such as tax nexus concept ofsignificant economic presence, Digital EqualisationLevy, withholding tax on certain types of digitaltransactions, etc. were discussed.

India vide Finance Act, 2016 has already introducedthe concept of ‘Equalisation levy’. With increasingneed to address tax challenges due to digitisation,Finance Bill, 2018 has proposed to adopt a newnexus rule for taxing business profits based on’significant economic presence‘(SEP) also knownas ’the virtual permanent establishment (PE)’whichwill change the fundamental of existing PEframework.

Finance Bill 2018 has proposed to insertexplanation 2A to clause (i) of sub-section (1) ofsection 9 of the Act to provide that SEP in Indiashall also constitute ‘business connection’. For thispurpose SEP shall mean:

(i) any transaction in respect of any goods, servicesor property carried out by a non-resident in Indiaincluding provision of download of data orsoftware in India if the aggregate of paymentsarising from such transaction or transactionsduring the previous year exceeds the amountas may be prescribed; or

(ii) Systematic and continuous soliciting of itsbusiness activities or engaging in interactionwith such number of users as may beprescribed, in India through digital means.

Such transactions or activities shall constituteSEP in India, whether or not the non-residenthas a residence or place of business in India orrenders services in India. Only so much ofincome as is attributable to the specifiedtransactions or activities to be deemed to accrueor arise in India and will be liable to tax in India.

BEPS Action Plan 1 proposes several factorsfor determination of SEP, out of which Indiahas adopted revenue-based and users-basedthreshold. Both the above stated factors fordetermination of SEP are mutually exclusiveand their threshold will be decided afterdiscussion with the stakeholders.

The introduction of SEP may serve as awelcome step for addressing tax challenges ondigitization but here are some implementationchallenges as have also been noted in BEPSAction Plan 1:

- Identification of activities: It will be difficultfor tax authorities to know that activities are

CA. Kajesha Shah CA. Aparna [email protected] [email protected]


taking place and to identify remote sellersand ensure compliance with domestic rules.

- Determining the extent of activities: Even ifthe identity and role of the parties involvedcan be determined, it may be impossible toascertain the extent of sales or other activitieswithout information from the offshore seller,as there may be no sales or other accountingrecords held in the local jurisdiction orotherwise accessible by the local revenueauthority.

- Information collection and verification: Toverify local activity, the market jurisdiction’stax administration may need to seekinformation from parties that have nooperations in the jurisdiction and are notsubject to regulation therein.

- Identification of customers: This could proveburdensome and a difficult task wherecustomers are able to disguise their location.

- Attribution of profits to Virtual PE: It isquestionable whether under current taxationprinciples it will be possible to assign anysubstantial amount of profit to a virtual PE.Today, PE profit attribution is aboutassigning tax base to the productionjurisdiction and not to the marketjurisdiction. Thus, there is a need to definethe method through which profits will beallocated to Virtual PE.

- Who is the taxpayer: From an enforcementperspective, it makes sense that thecompany collecting the revenue should betaxed. However, in case of group companies,if the company invoicing the revenue is amere shell company with no significantpeople functions, the tax liability should beshifted to the company actually gainingwithin the same group.

- Defining threshold: Defining properthreshold can address the above challenges.The revenue based and user based factorsadopted by India should ensure that SEPshould reflect only those contributions

which have added value and are resultingfrom closer and interactive relationshipswith customers. Further, it is also importantto underline that revenue must be linked todigital service. The revenues generated byphysical flow of goods shall not be relevantfor application of new threshold. Under theusers based threshold, the amount of timespent by users on a specific online platform,be it a website or an electronic application,would a better option as it would indicatelevel of use of infrastructure in specificjurisdiction.

- Equalization levy vis-a-vis. SEP:Equalization levy (EL) and SEP aremutually exclusive. SEP’s scope is muchwider than EL as under EL only specifiedservices (particularly online advertisement)are taxed at 6% on gross basis whereas SEPcovers each and every kind of servicethrough which revenue is generated insource country. Further, EL is not applicableto non-residents who have PE in Indiawhereas under SEP, tax will be leviable onlyin presence of virtual PE and thereafter,profits will be attributed to the PE whichwill be taxed at 40%.

It is proposed that India will re-negotiate the existingDTAAs for inclusion of the new nexus rule. Tillthat time, cross border business profits will continueto be taxed as per existing treaty rules. Thus, till thetime treaties are modified, taxpayers will be able toavail the benefit of DTAAs wherein the scope ofPE is narrower. However, non-treaty jurisdictionssuch as Hong Kong, Nigeria, etc. will be impactedby the proposed amendment.

Considering increased digital transactions this is awelcome change. However government has toaddress concerns or the issues highlighted aboveto make it effective and get its due share of taxeson digital transactions.

❉ ❉ ❉

Addressing tax challenges of digitization–Introducing Virtual Permanent Establishment


“Sale of Mineral Water” under LegalMetrology Act, 2009.

When ‘sale’ of food and drinks takes place in hotelsand restaurants, there is really one indivisiblecontract of service coupled incidentally with saleof food and drinks. Since it is not possible to dividethe “service element” which is the dominantelement, from the “sale element”, it is clear that suchcomposite contracts cannot be the subject matter ofsales tax legislation. However, vide insertion ofArticle 366(29-A)(f) supply by way of or as part ofany service of food or other article for humanconsumption is now deemed to be a sale of goodsby the person making the transfer, delivery orsupply.

Federation of Hotel and Restaurant Associationof India Vs. UOI (2018) 2 SCC 97

Interpretation of Statutes – ExternalAids

Statement of objects and Reasons and Preamble-Statement of objects and reasons accompanying abill, when introduced in parliament, cannot be usedto determine the true meaning and effect ofsubstantive provisions of the statute – The objectof a provision can certainly be used as an extrinsicaid to the interpretation of statutes and subordinatelegislation where there is ambiguity in the wordsused.

Laurel Energetics Private Limited Vs. SEBI(2017) 8 SCC 541

Capital or Revenue/Trading/BusinessReceipt under Income Tax Act, 1961.

Primary test which is adopted to differentiatebetween capital and revenue expenditure remainsthe same, namely, the enduring nature test. It meanswhere the expenditure is incurred which givesenduring benefit, it will be treated as capitalexpenditure. In contradistinction to the cases where

Glimpses of SupremeCourt Rulings

Adv. Samir N. [email protected].

34 expenditure of concurrent and reoccurring natureis incurred and the latter would belong to revenuefield. Technical information and know-how areintangible. They have different and distinctcharacter from tangible assets. In case where thereis a transfer of ownership in the intellectual propertyrights or in the license, it would clearly be a capitalexpenditure. However, when no such rights aretransferred but the arrangement facilitates grant oflicense to use those rights for a limited purpose orlimited period, the courts have held that in such asituation, the royalty paid for use of such technicalinformation or know-how would be in the natureof revenue expenditure as no enduring benefits isacquired thereby.

If the technical know-how obtained under theagreement for which technical fee/royalty is paid isfor a limited period and only right to use the technicalknow-how is there during the agreement with noright of acquisition, coupled with the fact that thesaid technical know-how is utilized for improvisingthe existing business, the expenditure would betreated as revenue expenditure.

There is no single test or principle or rule of thumbwhich is paramount. It is ultimately a question oflaw, but a question which must be answered in thelight of all the circumstances which are reasonableto take in to account, and the weight which mustbe given to a particular circumstances in a particularcase, must depend on common sense rather thanon strict application of any single legal principle.The idea of “once for all” payment and “enduringbenefit” are not be treated as something akin tostatutory conditions; nor are the notions of “capital”or “revenue” a judicial fetish. What is “capitalexpenditure” and what is “revenue” are not eternalvarieties of business.

Honda SIEL Cars India Limited Vs. CIT,Ghaziabad (2017) 8 SCC 170

35

36

contd. on page no. 590


Reopening : Change of opinion : JivrajTea Company v/s. Deputy CIT (2017)394 ITR 422 (Guj)

Issue :

Whether reopening of assessment u/s 147 ispermissible on change of opinion?

Held :

During the course of scrutiny assessmentproceedings, the Assessing Officer had alreadyexamined the details with respect of the purchasesmade from the sister concerns and the price paid tothose sister concerns. Specific queries raised by theAssessing Officer were answered satisfactorily bythe assessee and the assessee also justified thepurchases from the sister concerns and the purchaseprice paid to the sister concerns. The subsequentre-opening on the very ground was a mere changeof opinion by the subsequent Assessing Officer.Therefore, the notices to reopen the assessmentcould not be sustained and were to be quashed.

Re-opening of assessment u/s 147 :Change of opinion of subsequentAssessing OfficerDIT (INTL Tax) v/s. Rolls Royce Indl.Power (I) Ltd. (2017) 394 ITR 547 (Del)

Issue :

Can subsequent Assessing Officer reopen anassessment u/s 147 on change of opinion?

Held :

The pre-condition for invoking the provisions ofsection 147 of the Income Tax Act, 1961 did notexist. During the course of the original assessmentunder section 143(3), the previous Assessing Officerhad examined the nature of the transactions and thepayments received therefore by the assessee. Thereopening was not based on any new material. The

CA. C. R. [email protected]

view taken by the successor Assessing Officer on

the same material was nothing but a change ofopinion. Once the assessee had discharged theburden of not only producing the account booksand other documents, but also the specific materialrelevant to the assessment, it was for the assessingauthority to draw proper inferences of fact and lawand the assessee could not further be called uponto do so. The assessee had discharged its burdenof disclosing fully and truly all the material factsbefore the Assessing Officer during the originalassessments. There was no basis for the successorAssessing Officer to conclude that “no opinionwith regard to taxation” of the payments receivedfor the services rendered had been formed by thepredecessor Assessing Officer. The assumption ofjurisdiction under section 148 was not valid.

Duty of Income Tax Authorities to guideassessee : Kalindee Rail Nirman(Engineers) Ltd. (2017) 394 ITR 684(Raj)

What should be the duty of the Income TaxAuthorities in respect of the tax matters of theAssessee?

Held :

The authorities under the Income Tax Act, 1961are under an obligation to act in accordance withlaw. Tax can be collected only as provided underthe Act. If an assessee, under a mistake,misconception or not being properly instructed, isover assessed, the authorities under the Act arerequired to assist him and ensure that only legitimatetaxes due are collected. Section 237 of the Act doesnot specify that an assessment order must be madeand that some amount must be found to be payableas tax and that some amount in excess of thatamount should have been paid. Under section 254of the Act, the Appellate Tribunal may, after givingboth the parties to the appeal an opportunity of being

From the Courts

CA. Jayesh C. [email protected]

heard, pass such orders thereon as it thinks fit. The

101

102

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power of the Tribunal in dealing with appeals isthus expressed in the widest possible terms. Thepurpose of the assessment proceedings before thetaxing authorities is to assess correctly the taxliability of an assessee in accordance with law.

Interpretation of statues : Meaning ofwords viz. “In any other case” and “Asthe case may be” in Sec. 244(A)(1) andSec. 244 A(1)(b).Preeti N. Agarwala v/s. Chief CIT(2017) 394 ITR 557 (Delhi)

Issue :

How the words “In any other case” and “As thecase may be” in Sec. 244 (A)(1) and 244A(1)(b)are to be interpreted.

Held :

The sum refundable to the assessees as a result ofthe waiver of interest order passed by the ChiefCommissioner was a definite sum that was wronglydeducted from the assessee as interest. Even if therewas no express statutory provision for payment ofinterest, the Government could not avoid itsobligation to reimburse the lawful monies togetherwith accrued interest for the period of undueretention. The words “any other case” were not tobe interpreted restrictively and could includesituations such as in the assessees’ cases. Clause(b) of section 244A (1) stipulated that “in any othercase” the interest payable should be calculated atthe rate of one half per cent, for every month orpart of a month comprised in the period or periodsfrom the date “or, as the case may be” dates of the“tax or penalty” to the date on which refund wasgranted. This had to be read with the expression“refund of any amount that becomes due” occurringin section 244A (1). When the entire sub-section(1) of section 244 (A) (1) was read as a whole,the legislative intent did not appear to limit theexpression “any amount becomes due” occurringin section 244A (1) or the expression in any othercase” occurring in section 244(1)(b) only to tax andpenalty. The words “as the case may be” referredto the period for which the interest became payableand that the period was said to be the dates of

From the Courts

payment of tax or penalty to the date on which therefund was granted. That did not mean that anamount other than tax or penalty could not beincluded in the expression “in any other case”. Itwas only reflective of the periods for which suchinterest became payable. The disjunctive “or”between the words “period” and “periods”indicated that “in any other case” interest would becalculated for every month or part of a monthcomprised in the period or periods from the dateon which the refund was granted. The Explanationunder clause (b) of section 244A (1) clarified theexpression “the dates of payment of the tax orpenalty”. It was not intended to and did not whittledown the ambit of section 244A (1)(b). There wasnothing in the provision which prohibited thepayment of interest on the amounts of refund dueto the assessee as a result of the waiver of interestunder section 220 (2A). The assessee were entitledto interest under section 244A (1)(b) on the amountof interest refunded, from the date of recovery tillthe date of payment.

Genuineness of GIFT : Applicability ofSec. 56(2) : Gift from relative : ProofsnecessarySunil Thomas v/s. ITO(2017) 394 ITR 619 (Ker)

Issue :

How to establish that a gift received is exempt u/s56(2)?

Held :

The assessee, a director of a private limited companyhad declared a total income of Rs. 1,95,000/- forthe assessment year 2009-10. Pursuant to a scrutinyassessment, it was found that the assessee hadshown income from other sources as nil and hadclaimed deduction under section 56(2) of the Actin respect of cash gifts received from his non-resident brother. Various opportunities were givento the assessee to prove the required conditionsunder section 68, the identity of the creditor wasshown. In so far as the genuineness of thetransaction and the capacity of the creditor wereconcerned, the assessee had only produced

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documents which evidenced that the money wastransferred to him from his brother through banks.No evidence whatever was produced by theassessee to prove that his brother had the capacityto gift the amounts. The Income Tax Officerassessed the amounts as the income of the assessee.The authorities concurrently arrived at theconclusion that the assessee had failed to prove therequired conditions under section 68. On Appeal:

Held, dismissing the appeal, that though the assesseehad established the identity of the creditor, he hadnot succeeded in establishing either the genuinenessof the transactions, the capacity or thecreditworthiness of the creditor. The genuinenessof the transactions and the creditworthiness of thecreditor ought to have been proved by the assesseeby producing necessary documents with respect tothe monetary ability of the creditor to make suchsubstantial gifts to the assessee. Such documentswere not made available at any stage of theproceedings to prove the requirements under section68 of the Act. The assessee had not discharged hisburden of proof. The three lower authorities hadnot committed any illegality justifying interference.

What is the procedure to be adoptedby Department in u/s 147/148proceedings.Simaben Vindorai Ravani v/s. ITO(2017) 394 ITR 778 (Guj)

Issue :

What is the procedure to be adopted by Departmentin u/s 147/148 proceedings?

Held :

After a notice for reassessment has been issued anassessee is required to file the returns and seekreasons for issuance of such notice. The AssessingOfficer is then bound to supply the reasons withina reasonable time. On receipt of reasons, theassessee is entitled to file preliminary objections toissuance of notice and the Assessing Officer is undera mandate to dispose of such preliminary objectionsby passing a speaking order, before proceeding withthe assessment in respect of the assessment yearfor which notice has been issued.

Held, that the order of reassessment passed withoutdisposing of the objections of the assessee was notvalid.

Share application money : Genuineness: Three testsCIT v/s. Gagandeep Infrastructure Pvt.Ltd. (2017) 394 ITR 680 (Bom)

Issue :

What are the three tests to be applied to examinethe genuineness of share application money?

Held :

The three essential tests laid down by the courts,namely, the genuineness of the transactions, identityand the capacity of the investors of the shareapplication money along with the premium, hadall been examined by the Appellate Tribunal andon facts found satisfied. If the Department took theview that the amount of share application moneyhad been received from bogus shareholders, then itwas for the assessing authority to proceed byreopening the assessment of such shareholders andassessing them to tax. It did not entitle theDepartment to add the money received to theassessee’s income as unexplained cash credit.

CIT v/s. Lovely Exports (P) Ltd. [2009] 319 ITR(St.) 5(SC) relied on

(ii) That the proviso to section 68 of the IncomeTax Act, 1961 had been introduced by theFinance Act, 2012 with effect from April 1,2013 and thus was effective only from theassessment year 2013-14 onwards and not forthe assessment year 2008-09 in question.Parliament did not introduce the proviso tosection 68 with retrospective effect nor did theproviso so introduced stated that it wasintroduced “For removal of doubts” or that itwas “declaratory”. Therefore it was not opento give it retrospective effect.

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Reassessment order without disposingassessee’s objections : Invalid :Martech Peripherals P. Ltd. v/s.Deputy CIT (2017) 394 ITR 733 (Mad)

Issue :

When assessee has taken objections in u/s 147proceedings, whether without disposal of the same,order passed is valid?

Held :

The assessee’s return of income for the assessmentyear 2008-09 was processed under section143 (1)of the Income Tax Act, 1961. On May 7, 2012, theassessee was served with a notice under section 148of the Act, stating that a reduction in investmentsin mutual funds was found in the balance sheet ofthe company, but, in the computation of income,the assessee had not offered any gain or loss onaccount of the sale of investments in mutual funds.The assessee raised objections against thereassessment stating that the redemptions of theinvestments was at par. Without waiting for theobjections to be disposed of, the Assessing Officerpassed the reassessment order bringing to tax thesum received by the assessee as share applicationmoney. On a writ petition.

Held, allowing the petition, that the objections filedby the assessee to the notice for reopening of theassessment not having been disposed of, theassessment order could not be sustained.

Requirement of Sec. 132 and Sec.133-ALiberty Marine Syndicate Pvt. Ltdv/s. CIT (2017) 394 ITR 277 (Orissa)

Issue :

What are the essentials to invoke power u/s 132and Sec. 133-A?

Held :

Before taking a decision for a search and seizureaction as contemplated under the provisions ofsection 132 or section 133-A of the Income tax Act.1961, it is the bounden duty of the competentauthority to be satisfied before invoking the

jurisdiction. If the competent authority is of theopinion that the assessee is flouting the provisionsof the Act and if in that situation he comes to theconclusion that it is necessary to resort to theprovision of section 132, then it cannot be said thatthere is no reason to resort to the provision of section132.

Section 132 of the Income Tax Act, 1961 conferspower upon the authority for search and seizure.The provision stipulates power upon the authoritywho must have information in his possession and itis he who must have reason to believe. It is, howevernot the Commissioner who does the actual searchand seizure. This is left to the person whom heauthorizes to carry out the search. It follows,therefore, that the seizure of books of account,documents, money, bullion, jewellery or othervaluable articles would be dependent on the personso authorized being of the opinion that they wouldbe useful in any income tax proceeding. Therefore,the inspecting officers cannot seize documents, etc.by themselves but must be guided by theCommissioner. The things can be seized only afterthe Commissioner has seen them and has come tobe of the opinion that they are relevant and useful,or else he must set out in the warrant of authorizationparticulars of such documents, books of account.etc.

The difference in between the wordings of clauses(a) and (b) of sub-section (1) of Section 132 of theAct, 1961 is that under clause (a) action may betaken if a person is searched with a summons toproduce or cause to be produced, specified booksof account or other documents and fails to do so.But in clause (b) the basis is somewhat different. Inthe latter case, the Commissioner must have reasonto believe that the person to whom a summons hasbeen issued under clause (a) or might be issued,will not produce or cause to be produced any booksof account or documents which will be useful andrelevant to an income tax proceeding.

Under clause (b), unless summons under clause(a)has been issued, no specification is possible. In sucha case the basis is that the assessee will suppressbooks of account and documents which will be

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required. The income tax authorities require thepower furnished by clause (b) for the very reasonthat they do not know what the relevant books ofaccount and documents are, and are afraid that theywill be concealed or suppressed. The power ofseizure under section 132 shall be exercised inaccordance with sub-rules (2) to (14). Sub-rule (2)provides that the commissioner must first of allrecord his reason for issuing a warrant of authority.It then provides as to what should be the form ofsuch warrant and the commissioner after goingthrough the relevant records will reduce the reasonsin writing for the future exercise and as such underthe law, it is the Commissioner or the competentauthority who must have reason to believe that theassessee would not produce certain books of accountor document is called upon to do so, and it is hewho must be of the opinion that they are relevantfor the purpose of any income tax proceeding, underthese underlying principles the power conferredU/s.132 is to be exercised by the competentauthority.

Sec. 263 : Commissioner’s powersexplainedCIT v/s. Kwality Steel SuppliersComplex (2017) 395 ITR 1 (SC)

Issue :

How the powers of commission u/s 263 of the I.T.

Held :

There has to be a proper application of mind by the

Act are to be applied?

Commissioner to come to a firm conclusion that theorder of the Assessing Officer is erroneous andprejudicial to the interests of the Revenue within themeaning of section 263 of the Income Tax Act, 1961.Thus, two conditions need to be satisfied for invokingsuch a power by the Commissioner, which are : (a)the order of the Assessing Officer sought to be revisedis erroneous and (b) it is prejudicial to the interestsof the Revenue. At the same time, this provisioncannot be invoked to correct each and every type ofmistake or error committed by the Assessing Officer.The order of the Assessing Officer cannot be termedprejudicial simply because the Assessing Officeradopted one of the courses permissible in law and ithas resulted in loss of revenue, or where two viewsare possible and the Assessing Officer has taken oneview with which the Commissioner did not agree.Where two views are possible and the AssessingOfficer has taken one view and the Commissionerdoes not agree with the view taken by the AssessingOfficer, the assessment order cannot be treated as anorder erroneous or prejudicial to the interests of theRevenue. While exercising the revisionaryjurisdiction, the Commissioner is not sitting in appeal.

Malabar Industrial Co. Ltd. v/s. CIT [2000] 243ITR 83 (SC) relied on.

CIT v/s. Arvind Jewellers [2003] 259 ITR 502 (Guj)approved.

❉ ❉ ❉

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Remedies for Breach of Contract

U/s. 73 of the Contract Act, the party who suffersbreach of contract is entitled to “compensation forany loss or damage caused to him thereby” fromthe party who has broken the contract. There mustbe causal connection between the breach of contractand the loss sustained by the party who suffers thebreach. The common sense test of causation iswhether a breach of contract is sufficientlysubstantial cause of the plaintiff’s loss. In regards

37

contd. from page 585 Glimpses of Supreme Court Rulings

to remoteness of damage, in chitty contracts it isstated that the important issue is whether a particularloss was within the reasonable contemplation of theparties.

Kanchan Udhyog Limted Vs. United SpritsLimited (2017) 8 SCC 237

❉ ❉ ❉

From the Courts


ACIT vs. Vishnu Packaging [2017] 168ITD 103 (AHD)Assessment Year: 2012-13 Order dated:

th15 November, 2017

Basic Facts

The assessee is a manufacturer of pan masala. Theassessee claimed a deduction in respect of the goodsproduced by the assessee which, in terms of a courtorder under the Prevention of Food AdulterationAct, had to be destroyed as it was found the saidgoods had magnesium carbonate, a knowncarcinogenic substance, in excess of permissiblelimits. The AO declined this claim of deduction byinvoking the provisions of Explanation to Section37(1), which lays down that any expenditureincurred by the assessee for the purpose which isan offence or which is prohibited by law shall notbe deemed to have been incurred for the purposeof business, and, is, accordingly not admissible asdeduction in computation of business income.Aggrieved by the order of AO, the assesseeappealed before the CIT(A) and the CIT(A)reversed the action of the AO by holding that thedestruction of stock containing impermissible levelsof magnesium carbonate was a loss incurred duringthe course of bonafide business and is not hit byExplanation to Section 37(1). Aggrieved by theorder of CIT(A), revenue appealed before the ITAT.

Issue

Whether explanation to section 37(1) can beinvoked in assessee’s case?

Held

The Hon’ble ITAT held that the assessee has usedcarcinogenic substance much in excess ofpermissible limits resulting in manufacture ofproduct with substantial health hazards and that isthe reason that the related stocks had to be destroyedby the law enforcement agencies. The expenses on

manufacturing such a noxious product, whetherdeliberately or inadvertently cannot, therefore, beallowed as deduction under section 37(1) onaccount of disabling provisions of Explanation 1to Section 37(1). The assessee had taken a plea thatno penalty was imposed on it nor any proceedingsinitiated. Against which the Tribunal held that aslong as expenditure is incurred for a purpose whichis prohibited by law, it is immaterial whether penaltywas imposed or any other proceedings formanufacturing the said product were initiated or not.As per the ITAT,what was more disturbing was theindifferent attitude of the assessee to the possibledamage their products could have caused andwithout any remorse or regret of its conduct, claimbusiness deduction of expenses incurred onproducts, which could have seriously endangeredhealth of the consumers of their products. Thus,invoking the Explanation 1 to Section 37(1), theITAT held the claim of the assessee as legallyinadmissible.

Arnav Gruh Ltd. vs. DCIT[2017] 168ITD 518 (MUM)Assessment Year: 2009-10 and 2010-11

thOrder dated: 15 December, 2017

Basic Facts

The assessee is a company engaged in the businessof builder and property developer. During theassessment proceedings, the AO noticed that theassessee has received an amount as share from jointventure, which was not taxable, whereas, theassessee has debited expenditure towards interestand finance charges. The AO called upon theassessee to explain why expenditure attributable toearning exempt income should not be disallowed.It was submitted by the assessee that it has notearned any exempt income during the year to sufferdisallowance under section 14A of the Act. The

Tribunal News

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

assessee submitted that since it has voluntarily made

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disallowance u/s 14A in the computation of totalincome, no further disallowance was called for. TheAO rejected the contention of the assessee and heldthat disallowance under section 14A has to be madein accordance with rule 8D. Being aggrieved, theassessee appealed before the CIT(A). The CIT(A)agreed on the part that the AO has not recordedany satisfaction however at the same time held thatsuch lapse or omission on the part of the AO isprocedural lapse and can be corrected by the firstappellate authority, since, his powers are co–terminus with that of the AO. Thus the CIT(A)quantified the disallowance under section 14A.Being aggrieved by the order of CIT(A), assesseeappealed before the Hon’ble ITAT.

Issue

Whether satisfaction to be recorded by AO u/s.14(2) can be substituted by satisfaction recordedby first appellate authority on the basis that hispower is co-terminus with that of AO?

Held

The Hon’ble ITAT held that in the course ofassessment proceedings, the AO except recordinga vague and general observation that thesubmissions of the assessee was not found tenablehas not recorded any satisfaction as to why the claimof the assessee with regard to the disallowancemade by it under section 14A is not correct. Further,the ITAT held that it is the AO who has to recordhis satisfaction with regard to the correctness ofassessee’s claim before proceeding to disallowexpenditure under section 14A. Therefore, whenthe statutory provisions mandate a particular act tobe done by a particular Authority in a particularmanner, it has to be done by that authority in thatmanner only or not at all. Thus, the satisfaction tobe recorded by the AO under section 14A(2) cannotbe substituted by the satisfaction recorded by thefirst appellate authority, even, accepting the fact thathis power is co–terminus with that of the AO. Thatbeing the case, the AO could not have done any

M/s. Microfirm Capital Pvt. Ltd. vs.

further disallowance u/s 14A r/w rule 8D.

DCIT168 ITD 301 (KOL)Assessment Year: 2013-14 Order dated:

th30 November, 2017

Basic Facts

The assessee is a company and is in the business ofinvestment and financing. The AO noticed that thecompany had allotted 2,05,000 shares, 0.1%redeemable non-cumulative preference shares(hereinafter ‘RNCPS), of a face value of Rs.10/-each, at a premium of Rs.1,990/- per share,redeemable on expiry of 10 years from the date ofallotment at a redemptions price of Rs.5,200/- perpreference share. The assessee filed a valuationreport from a CA as required under Rule11UA(c)(c), in support of the valuation of RNCPSof Rs.10/- at a premium of Rs.1,990/-.The AOconsidered the valuation report and applied Section56(2)(viib) of the Act. The AO arrived at aconclusion that the assessee has receivedconsideration for issuance of shares in excess ofthe face value of such shares and that the assesseecould not substantiate the fair value during thecourse of assessment proceedings. He determinedthe market value of the preference shares issued atRs.1285.41/- per share as against the market valueof Rs.2,000/- per share determined by the assesseeand the difference was added as income. Beforethe CIT(A), the assessee submitted that noopportunity was given by the AO and a show causenotice should have been given. The CIT(A) grantedopportunity to the assessee to submit its objectionson the issue of valuation of RNCPS. Afterconsidering the remand report of the AO andsubmissions made by the assessee, the CIT(A) heldthat Section 56(2)(viib) of the Act, applies to thefacts of the case as the words used is “shares” whichalso includes preference shares.

Issue

Whether redeemable non-cumulativepreference shares are excluded from ambit ofsection 56(2)(viib)?

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Held

Before the Hon’ble ITAT the assessee contendedthat RNCPS are quasi debt instruments and notshares per se and hence these RNCPS are notcovered by the provisions of Section 56(2)(viib) ofthe Act, which was introduced to deal with equityshares.The Hon’ble ITAT held that Section56(2)(viib) of the Act covers all types of shares.The argument of the assessee that RNCPS is aquasi-debt and that it was not the intention of thelegislature to bring such instruments within theambit of this Section, is devoid of merit. Also theargument of the assessee that economicconsideration that are related to capital formation,employment, industrialisation etc. should lead topurposive and liberal interpretation of the Sectionwas rejected by the ITAT. Resultantly, assessee’sappeal was dismissed and it was held that RNCPScannot be excluded from the ambit of Section56(2)(viib) of the Act.

DDIT vs. Credit Agricole Corporate &Investment Bank 89 taxmann.com 345(MUM)Assessment Year: 2005-06 Order dated:

th5 January, 2018

Basic Facts

The assessee is a non- resident company engagedin corporate and investment banking, operating inIndia through branches in Mumbai and Delhi.During the assessment proceedings, the AO foundthat the HO/branches were in receipt of income onfour counts i.e. interest paid on subordinated loanto HO, Interest paid on Nostro account, Fee fortechnical services and payment towards softwareassistance and FTS for software services rendered).In its reply, to the query raised by the AO, theassessee stated that the branch and the head officewere the same entity and the payments made underthe heads interest/commission received from theHO/branches was payment to self or was receiptfrom self and that the sums in question were nottaxable. However, the AO did not agree with theassessee and held that as per the provision of Article7 of the DTAA while computing the income of thebranch income had to be considered separately and

the payments made under various heads was taxableas FTS as pert Art.13(4) of the DTAA since theassessee had not produced necessary evidences toshow that the expenses were not on cost basis.Finally, the AO held that the said were taxable asthe income of the HO and that same were FTStaxable under Article 13(2) of the Indo French TaxTreaty. The CIT(A) held that the payments madeby the Branch in India are only the reimbursementof expenses incurred by the HO/regional centersand held that that the same was not taxable as incomearising to the HO in India. The CIT(A) deleted theaddition made by AO. Aggrieved, the revenuepreferred an appeal before the ITAT.

Issue

Whether payment made to HO, non-residentcompany by an Indian branch towards allocationof expenses could not be treated as FTS as therewas no proof that HO had specifically made theknowledge available to assessee ?

Held

The Hon’ble ITAT held that assessee had madepayment to the HO towards allocation of expensesincurred by the HO. Therefore, such an expenditurecannot be treated as FTS nor can the HO be treatedto have rendered any services to the assessee. Itwas pure and simple allocation of expenses amongvarious group entities. There is nothing on recordto prove that the HO had made available knowledgeto the India branch by performing activitiesspecifically for the India Branch. Considering thesefacts the ITAT held that the order of the CIT(A)does not suffer from any legal or factual infirmity.Relying on the judgment of the Hon’ble Delhi HighCourt in case of Steria (India) Ltd., the ITATdismissed the ground raised by the AO.

CYIENT Ltd. v. DCIT 89 taxmann.com309 (HYD)Assessment Years: 2004-05, 2006-07, and

th2007-08 Order dated: 29 December,2017

Basic Facts

The assessee company is engaged in the businessof development of digitized Geographic Database

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Tribunal News

and other software through its Associate enterprisein Noida. Assessee had entered into an internationaltransaction with its AE which was in excess to 5crore. Hence, case was referred to TPO u/s 92CAfor determination of ALP who proposed anadjustment to the total income of the assessee. TheAO passed the Assessment order in accordance withTPO’s order by making an adjustment to the totalincome of the assessee.

Aggrieved by the order, assessee preferred anappeal before higher authorities and the matterreached the Tribunal. Hon’ble ITAT in his orderhas set aside the issue to the file of TPO with thedirection to reconsider the issue in accordance withits directions. Consequent to the Hon’ble ITAT’sorder, the TPO had suggested adjustment ofdifferential amount in accordance with Tribunalsdirections. Pursuant thereto, AO passedconsequential order raising demand.

Aggrieved, assessee preferred objection beforeDRP, who opined that the order passed consequentto the directions issued by Hon’ble ITAT, is not anorder at the first instance and therefore, the DRP isnot empowered to issue directions on the issuearising from the said order.

Issue

Whether it is obligatory for the AO to pass adraft assessment order and not a final ordereven in case of a remand by Hon’ble ITAT?

Held

As evident from the TPO’s consequential order thatthe issue was set aside by the Tribunal not merelyto correct mathematical errors in calculations but itis to reconsider the issue in accordance withdirections of Hon’ble ITAT and the TPO hadreconsidered the various facts before proposing theadjustments. Hon’ble ITAT held that, wherever,AO/TPO exercise their discretion after verificationand pass an order, it is incumbent upon them togive the assessee and opportunity to present its caseor to appeal against such order. Further, section144C of the Act specifies that AO first has to passthe draft assessment order and the choice is withassessee either to approach DRP or the CIT(A).

Only if the assessee chooses to prefer an appealbefore the CIT(A), can the AO pass the finalassessment order.

Therefore, the AO shall pass a draft assessmentorder even in case of remand by ITAT.

National Oil Well MaintenanceCompany vs. DCIT[2017] 89taxmann.com 24 (ITA No. 732/Jp/2015)(Jaipur)Assessment Year: 2012-13 Order dated:

th27 November, 2017

Basic Facts

The assessee-company entered into contract withtwo companies namely ‘OIL’ and ‘GAIL’ forproviding cementing services in respect ofexploratory as well as development wells whichhad been planned to be drilled during the contractualperiod. The assessee filed its return wherein incomewas offered for tax under section 44BB. The AO,however, opined that assessee’s income was liableto be taxed under section 44DA.The CIT(Appeals)upheld the order of AO. Aggrieved, the assesseepreferred an appeal before the ITAT.

Issue

Whether the consideration for provision ofcomprehensive cementing services throughequipment, material and personnel as describedabove will qualify as fees for technical servicesor qualify for exclusion from technical servicesunder Explanation 2 to section 9(1)(vii)?

Held

The Hon’ble ITAT referred to the Hon’ble SupremeCourt decision in the case of ONGC Ltd. andCBDT Circular no.1862 dated 22-10-1990 whereinit is held that mining operations and the expressions“mining projects” or “like projects” occurring inExplanation 2 to section 9(1) of the Act would coverrendering of service like imparting of training andcarrying out drilling operations for exploration ofand extraction of oil and natural gas and hencepayment made under such agreement to a nonresident/foreign company would be chargeable to

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Recently, we have seen many decisions where theissue of share capital by funds flowing from shellcompanies has been a matter of controversy and inmajority of the cases the same are decided againstthe assessee even at the level of Tribunal. Thedepartment taking support of these decisions is alsotrying to make additions u/s 68 of the Act in respectof even genuine cases of raising of share capital byclosely held companies,in spite of the fact that theassessee has been able to discharge the onusexpected of him u/s 68 of the Act. Recently,Ahmedabad Tribunal in one such case has givenquite elaborate decision laying down the parameterswhich should be considered for deciding thetaxability u/s 68 of the Act in respect of the issue ofshare capital by the companies.

We hope the readers would find the same useful.———————————————————

In the Income Tax Appellate TribunalAhmedabad - “C” Bench

Before Shri Rajpal Yadav, Judicial Member

and

Shri Amarjit Singh, Accountant MemberITA NO. 3619/Ahd/2015Asstt. Year : 2011-12

M/s Deem Roll Tech Ltd. Vs DCIT, Cir. 1 (1) (2)C/o Vinit Moondra CA Ahmedabad201, SarapOpp : Navjivan PressAshram RoadAhmedabad 380 014PAN : AABCD 9176 A(Appellant) (Respondent)

Assessee by : Shri P.F. Jain, ARRevenue by : Shri Rajdeep Singh, Sr. DR

Date of Hearing : 08/01/2018Date of Pronouncement : 01/03/2018

CA. Sanjay R. [email protected]

Unreported Judgements

Gist Only

A. Facts of the Case:

The assessee company is engaged inmanufacturing of Iron and Steel Roll. It filedits return of income declaring a total income ofRs.3.46 crores. During the year the assesseehad introduced new share capital of Rs.50Lakhs. The A.O. directed the assessee to provethe same u/s 68 of the Act. The shares wereoffered at a premium of Rs.1980/-. The assesseefiled complete details in respect of the shareapplicants and also pointed out that all theamounts were received through bankingchannels by account paying cheques. The PANand return copies of the applicants as well astheir confirmations were also filed. The A.O.however, asked the assessee to produce all theseapplicants before him. On failure of assesseeto do so, the A.O. made an addition of Rs.35Lakhs out of Rs.50 Lakhs of share capitalintroduced by the assessee.

B. Rival Contentions:

The A.R. of the assessee made reference tovarious case laws of the Hon’ble Gujarat HighCourt as also other High Courts to buttress thepoint that the assessee having discharged theonus as expected of him u/s 68 of the Actmerely on the ground of non-production of theparties should not suffer such additions u/s 68.The A.R. mainly relied on the followingdecisions:

i) CIT Vs. Oasis Hospitalities P.Ltd. andOthers, 333 ITR 119 (Delhi)

ii) CIT Vs. STL Extrusion P.Ltd., 333 ITR269 (MP)

iii) CIT Vs. Creative World Telefils Ltd., 333ITR 100 (Mum)


iv) CIT Vs. Ask Brothers Ltd., 333 ITR 111(Kar)

v) Pr. Commissioner of Income Tax vs.Softline Creations P. Ltd. 387 ITR 636(Delhi)

vi) CIT vs. Kamdhenu Steel & Alloys Ltd.248 CTR 33 (Delhi)

D.R. relied on case law in favour of department.

C. Decision:

The Hon’ble Tribunal gave the reasoning foraccepting the contentions of the assessee whichis reproduced hereunder verbatim:

“7. We have duly considered rival contentionsand gone through the record carefully.Before we embark upon an inquiry on thefacts of the present appeal, in order to findout whether the share capital and sharepremium money received by the assesseeduring the year is required to be treatedas its unexplained credit and deserves tobe added under section 68 of the IncomeTax Act, 1961,we deem it appropriate tobear in mind certain basic principles/testspropounded in various authoritativepronouncements of the Hon’ble HighCourts and Hon’ble Supreme Court. It isalso pertinent to observe that both thesides have made reference to a largenumber of decisions. We do not deem itnecessary to recite and recapitulate thembecause that would make this orderrepetitive and bulky. We take cognizanceof some of them. It is pertinent to observethat in so far as companies incorporatedunder Indian Companies Act areconcerned, whether private limited orpublic limited companies, they raise theirshare capital, through shares thoughmanner of raising share capital in privatelimited company on one hand and publiclimited company on other hand, would bedifferent. The share capital and sharepremium are basically irreversible receiptsor credits in the hands of the companies.

Share capital is considered to be cost ofshares on equivalent amount issued andpremium is considered as extra amountcharged by the company for issue of thatcapital. In the case of private limitedcompany, normally shares are subscribedby family members or persons known/close to the promoters. Public limitedcompany, on the other hand, generallyraised by public issue inviting generalpublic at large for subscription of theseshares. Yet, it is also possible that in thecase of public limited company, the sharecapital is issued in close-circuit. Whencompanies incorporated under theCompanies Act raise their capital throughshares, various persons would apply forshares and then give share applicationmoney. This amount received from suchshare holder would naturally be creditedin the books of accounts of the assessee.Once the alleged share capital is creditedto the accounts of the assessee, then roleof section 68 would come. It is pertinentto take note of this section. It reads asunder:

“Where any sum is found credited in thebooks of an assessee maintained for anyprevious year, and the assessee offers noexplanation about the nature and sourcethereof or the explanation offered by himis not, in the opinion of the officer,satisfactory the sum so credited may becharged to income tax as the income ofthe assessee of that previous year.”

8. A perusal of the section would indicatethat basically this section contemplatesthree conditions required to be fulfilled byan assessee. In other words, the assesseeis required to give explanation which willexhibit nature of transaction and alsoexplain the source of such credit. Theexplanation should be to the satisfactionof the AO. In order to give such type ofexplanation which could satisfy the AO,



the assessee should fulfill three ingredientsviz. (a) identity of the share applicants, (b)genuineness of the transaction, and (c)credit-worthiness of share applicants. Asfar as construction of section 68 and tounderstand its meaning is concerned,there is no much difficulty. Difficulty ariseswhen we apply the conditions formulatedin this section on the given facts andcircumstances. In other words, it has beenpropounded in various decisions thatsection 68 contemplates that there shouldbe a credit of amounts in the books of anassessee maintained by the assessee, (b)such amount has to be a sum receivedduring the previous year, (c) the assesseeoffers no explanation about the nature andsource of such credit found in the books,or (d) the explanation offered by theassessee is not, in the opinion of theAssessing Officer, satisfactory. TheHon’ble Delhi High Court in the case ofCIT v. Novadaya Castles (P.) Ltd. 367 ITR306 has considered a large number ofdecisions including the decision ofHon’ble Supreme Court in the case of CITVs. Durga Prasad [1971] 82 ITR 540(SC). According to the Hon’ble DelhiHigh Court basically there are two sets ofjudgments. In one set of case, the assesseeproduced necessary documents/evidenceto show and establish identity of the share-holder and bank account from whichpayment was made. The fact that paymentwas received through bank channels, filednecessary affidavit of the shareholders orconfirmations of the directors of theshareholder company. But thereafter nofurther inquiry was made by the AO. Thesecond set of cases are those where therewas evidence and material to show thatthe shareholder company was only apaper company having no source ofincome, but had made substantial andhuge investments in the form of shareapplication money. The assessing officer

has referred to the bank statement,financial position of the recipient andbeneficiary assessee and surroundingcircumstances.

9. Let us take into consideration observationsmade by the Hon’ble Delhi High Courtin the case of Softline Creations P Ltd.(supra) while taking note of judgment ofHon’ble Delhi High court in the case ofCIT Vs. Fair Finvest Ltd., 357 ITR 146(Delhi). Hon’ble Delhi High Court madefollowing observations:

“….. This court has considered theconcurrent order of the Commissioner ofIncome-tax (Appeals) as well as theIncome-tax Appellate Tribunal. Both theseauthoritie primarily went by the fact thatthe assessee had provided sufficientindication by way of permanent accountnumbers, to highlight the identity of theshare applicants as well as produced theaffidavits of the directors. Furthermore, thebank details of the share applicants toohad been provided. In the circumstances,it was held that the assessee hadestablished the identity of the shareapplicants, the genuineness oftransactions and their creditworthiness;The Assessing Officer chose to proceedno further but merely added the amountsbecause of the absence of the directors tophysically present themselves before him.

The Income-tax Appellate Tribunal hasrelied upon a decision of this court in CITv. fair Finvest Ltd. [2013] 357 ITR 146(Delhi), wherein somewhat similarcircumstances, it was stated as follows(page 152):

“This court has considered thesubmissions of the parties. In this case thediscussion by the Commissioner ofIncome-tax (Appeals) would reveal thatthe assessee has filed documentsincluding certified copies issued by theRegistrar of Companiesin relation to the



share application, affidavits of thedirectors, Form 2 filed with the Registrarof Companies by such applicantsconfirmations by the applicant forcompany’s shares, certificates by auditorsetc. Unfortunately, the Assessing Officerchose tobase himself merely on thegeneral inference to be drawn fromthereading of the investigation report and thestatement of Mr.Mahesh Garg. To elevatethe inference which can be drawn on thebasis of reading of such material intojudicial conclusions would be improper,more so when the assessee producedmaterial. The least that the AssessingOfficer ought to have done wasto enquireinto the matter by, if necessary, invokinghis powers under section 131 summoningthe share applicants or directors. No effortwas made in that regard. In the absenceof any such finding that the materialdisclosed was untrustworthy or lackedcredibility the Assessing Officer merelyconcluded on the basis of enquiry report,which collected certain facts and thestatements of Mr. Mahesh Garg that theincome sought to be added fell within thedescription of section 68.

Having regard to the entirety of facts andcircumstances, the court is satisfied thatthe finding of the Tribunal in this caseaccords with the ratio of the decision ofthe Supreme Court in Lovely Exports(supra)”

10. We also deem it appropriate to take noteof some of observations of the Hon’bleDelhi High Court from the decision ofFair Finvest Ltd. (supra). The Hon’bleCourt has noticed proposition laid downby the Hon’ble Delhi High Court in thecase of CIT Vs. Victor Electrodes Ltd., 329ITR 271 (Delhi) regarding non-productionof share applicants before the AO. The

…In this connection the observation of the

followingobservations are worth to note:

jurisdictional High Court in case ofDwarkadhish Investment (Supra) arequite relevant where the court hasobserved that it is the revenue which hasall the power and wherewithal to trace anyperson. Further in the case of CIT vs.VictorElectrodes Ltd. 329 ITR 271 it hasbeen held that there is no legal obligationon the assessee to produce some Directoror other representative of the Director orother representative of the applicantcompanies before the A.O. Thereforefailure on part of the assessee to producethe Directors of the share applicantcompanies could not byitself have justifiedthe additions made by the AO particularlywhen the seven share applicant companiesthrough their present Directors have nowagain filed fresh affidavits confirming theapplication and allotment of shares withrespect to the total amount of Rs.45 Lacs.It is observed that no attempt was madeby the AO to summon the Directors of theshare applicant companies. Moreover, itis settled law that the assessee need notprove the “source of source”. Accordinglyit was incumbent upon the department tohave enforced attendance of Shri MaheshGarg or the erstwhile Directors of theshare applicant companies and confrontedthem with the evidences & affidavits reliedupon by the appellant and there upongiven opportunity to the assessee to crossexamine these applicants.”

11. In the light of the above, let us examinethe facts of the present case. A noticeunder section 143(2) providing anopportunity to make submission in supportof return of income was served upon theassessee on 28.9.2012. Thereafterquestionnaire under section 142(1) wasissued on 26.12.2012. The AO has passedassessment order on 21.2.104. Heexpected the assessee to producedepositors on 14.2.2014 just in a few days



before finalization of the assessment order.The Hon’ble Delhi High Court in all thesecases have propounded that if the assesseehas discharged primary onus bysubmitting confirmation, bank statements,copies of income-tax returns, PAN datathen it would be construed that theassessee has discharged primary onus putupon it by virtue of section 68. It is the AOwho has to carry out investigation anddemonstrate that these materials are notsufficient for discharging the onus castupon assessee by section 68. No such stepshave been taken by the AO. He simplyassumed that since the assessee wasdirected to produce applicants and it failedto produce, therefore, everything is to beconstrued as manipulated. The Hon’bleDelhi High Court did not approve suchsteps at end of the assessee. We also makereference to the decision of the Hon’bleDelhi High Court in the case of CIT Vs.


Goel Sons Golden Estate Pvt. Ltd.,rendered in Tax Appeal No.212 of 2012dated 11.4.2012. It is also pertinent toobserve that share applicants in thepresent case are individuals fromsurrounding areas. They are not shell-companies from Kolkatta, who areindulged in providing accommodationentries. Taking into consideration all thesefacts, we are of the view that the AO failedto carry out any inquiry for falsifyingevidence submitted by the assessee insupport of its explanation. Therefore, weallow this ground of appeal and delete theaddition of Rs.35,00,000/-.”

D. The other ground being of insignificant amount,the same is not reproduced here.

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tax under the provisions of section 44BB and notsection 44D. On the basis of the above the Tribunalheld that the provision of comprehensive cementingservices is directly associated with drillingoperations and inextricably connected withprospecting, extraction or production of mineral oil.Accordingly, the payment would fall in theexclusion from “Fees for technical services” byvirtue of explanation 2 to section 9(1)(vii). As theconsideration would not qualify as fees for technicalservices, the applicability of section 44DA was ruledout at the threshold itself. Accordingly, the

contd. from page 594 Tribunal News

provisions of section 44BB was held applicable tothe case. On the basis of the Delhi High Courtdecision in case of OHM Ltd 212 taxmann 440held that even after amendment in Finance Act 2010section 44BB being more specific provision shallprevail over section 44DA.

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surmises. There must be definite and positivematerial to indicate that the parties have suppressedthe prevailing rate. Then the enquiries that the AOcan make, would be for ascertaining the going rate.He can make a comparative study and an analysis.In that regard, transaction of identical or similarnature can be ascertained by obtaining the requisitedetails. However, there also the AO must safeguardagainst adopting the rates stated thereinstraightaway. He must find out whether the propertywhich has been let out or given on leave and licencebasis is of a similar nature, namely, commercial orresidential. He should also satisfy himself whetherthe rate obtained by him from the deals andtransactions and documents in relation there to canbe applied or whether a departure therefrom can bemade. Before the AO determines the rate by theabove exercise or similar permissible process he isbound to disclose the material in his possession tothe parties. He must not proceed to rely upon thematerial in his possession and disbelieve the parties.The satisfaction of the AO that the bargain revealsan inflated rate based on fraud, emergency,relationship and other considerations makes itunreasonable must precede the undertaking of theabove exercise.

Where the owner of the property received interest-free security deposit, which was highlydisproportionate to the monthly rent charged, it wasinferred by the Revenue to be a device to circumventliability to income tax so that notional interest, itwas held, could be treated as income from houseproperty in CIT Vs. K. Streetlite ElectricCorporation (2011) 336 ITR 348 (P&H) afterreferring McDowell and Co. Ltd. Vs. CTO (1985)154 ITR 148 (SC) for the inference that a measureof tax avoidance cannot be ignored by the AO. Thehigh court felt that the rent could be the amountthat can be reasonably expected to be paid from

ControversiesCA. Kaushik D. Shah

[email protected].

year to year. The High Court also referred to the

Income from House Property

Issue:

Section 22 is the charging section for Income fromHouse property and mandates that the Annual valueof a property shall be chargeable to Income-taxunder the head “Income from House property”,with certain expectations.

Section 23 gives a mechanism to determine the ALVof the property for the purposes of section 22. Asper section 23 the annual value of property shall bedeemed to be under clause (a), the sum for whichthe property might reasonably be expected to be letout from year-to-year or under clause (b) when theproperty or any part thereof is let out and the actualrent received or receivable by the owner in respectthereof is in excess of the sum which is referred toin clause (a), then the amount so received orreceivable would be deemed to be the annual valuefor the purposes of section 22.

In many of cases substantial amount of interest-freesecurity deposit is being taken by the landlord andannual/monthly rent is fixed on the lower side.

Proposition:

When the assessee, as landlord has received a hugeamount of security deposit from the tenant, notionalinterest cannot be added to ALV.

View against the proposition:

In the event a security deposit collected andrefundable interest free and the monthlycompensation shows a total mismatch or does notreflect the prevailing rate or the attempt is to deflateor inflate the rent by such methods, the AO is notprevented from carrying out necessary investigationand enquiry. He must have cogent and satisfactorymaterial in his possession which will indicate thatthe parties have concealed the real position. He mustnot make a guess work or act on conjectures and


Controversies

decision of the Bombay High Court in CIT Vs. J.K. Investors (Bombay) Ltd. (2001) 248 ITR 723(Bom), where such notional income was notaccepted as part of rental income, but this decisionwas distinguished on the ground that it was not acase where an abnormal deposit was received tocircumvent the law for avoiding tax. The HighCourt, however, had not appreciated that there isno avoidance of tax because the assessee is boundto account the income earned from security depositas its income.

View in favour of proposition:-

Any deposit received from the tenant for propertyis a capital receipt and thus, it cannot be treated asincome. Further while determining the actual rent,no notional interest on such deposit should beconsidered. The Delhi High Court in CIT Vs. AsianHotels Ltd. (2008) 168 Taxman 59 (del) held thatin the absence of any specific provision similar toone under the Wealth Tax Act, 1957, it is notpermissible to consider notional interest as incomeeither u/s. 23 or as one which is chargeable u/s.28(iv).

Section 23(1)(a) requires determination of the “fairrent” being “the sum for which the property mightreasonably be expected to let from year to year”. Ifon inquiry AO finds that the actual rent received isless than the “fair/market rent”because the assesseehas received abnormally high interest free securitydeposit, he can undertake necessary exercise in thatbehalf. However, by no stretch of imagination, thenotional interest on the interest free security can betaken as determinative factor to arrive at the “fairrent”. The ALV fixed by the Municipal Authoritiescan be the basis of adopting the ALV for purposesof section 23. Also in determining the reasonable/fair rent, extraneous circumstances may inflate/deflate the “fair rent” (CIT Vs. Moni Kumar Subba(2011) 333 ITR 38 (Del)(FB). See also CIT Vs.ShasthaPharmaLaboritiesPvt. Ltd. (2013) 355 ITR316 (Kar.), CIT Vs. Tip top Typography (2014) 48taxmann.com 191 (Bom) (2014) 90 CCH 0007Mum HC)

The aforesaid conclusion is correct. We may recordthat permissibility of adding notional interest into

actual market rent received was not approved bythe Calcutta High Court in the case of CIT Vs. SatyaCo. Ltd. [(1997)] 140 CTR (Cal) 569] andcategorically rejected in the following words:

“There is no mandate of law whereby the AO couldconvert the depression in the rate of rent into moneyvalue by assuming the market rate of interest onthe deposit as the further rent received by way ofbenefit of interest-free deposit. But s. 23, as alreadynoted, does not permit such calculation of the valueof the benefit of interest-free deposit as part of therent. This situation is, however, foreseen bySchedule III to the WT Act and it authorisescomputation of presumptive interest at the rate of15 per cent. as an integral part of rent to be addedto the ostensible rent. No such provision, however,exists in the Act. That being so, the act of the AO inpresuming such notional interest as integral part ofthe rent is ultra vires the provision of s. 23(1) andis, therefore, unauthorised. Though what has beenurged on behalf of the Revenue is not to be brushedaside as irrational, yet the contention is notacceptable as the law itself comes short of tacklingsuch fact-situation.”

This view of the Calcutta High Court has beenaccepted by a Division Bench of this Court as wellin the case of Commissioner of Income Tax Vs.Asian Hotels Limited [(2008) 215 CTR (Del.) 84]holding that the notional interest on refundablesecurity, if deposited, was neither taxable as profitor gain from business or profession under Section28(iv) of the Act or income from house propertyunder Section 23(1)(a) of the Act. Rationale givenin this behalf was as under:

ITA No.499 of 2008 with ITA No.803 of 2007,ITA No.1113 of 2008, ITA No.388 of 2010, “Aplain reading of the provisions indicates that thequestion of any notional interest on an interest freedeposit being added to the income of an assessedon the basis that it may have been earned by theAssessee if placed as a fixed deposit, does not arise.Section 28(iv) is concerned with business incomeand is distinct and different from income from houseproperty. It talks of the value of any benefit onperquisite, “whether convertible into money or not”


arising from “the business or the exercise of aprofession.” It has been explained by this Court inRavinder Singh that Section 28 (iv) can be invokedonly where the benefit or perquisite is other thancash and that the term “benefit or amenity orperquisite” cannot relate to cash payments. In theinstant case, the AO has determined the monetaryvalue of the benefit stated to have accrued to theassessed by adding a sum that constituted 18%simple interest on the deposit. On the strength ofRavinder Singh, it must be held that this rules outthe application of Section 28 (iv) of the Act.

Section 23(1)(a) is relevant for determining theincome from house property and concernsdetermination of the annual letting value of suchproperty. That provision talks of “the sum for whichthe property might reasonably be expected to letfrom year to year.” This contemplates the possiblerent that the property might fetch and not certainlythe interest in fixed deposit that may be placed bythe tenant with the landlord in connection with theletting out of such property. It must be rememberedthat in a taxing statute it would be unsafe for theCourt to go beyond the letter of the law and try toread into the provision more than what is alreadyprovided for. The attempt by learned counsel forthe Revenue to draw an analogy from the WealthTax Act, 1957 is also to no avail. It is an admittedposition that there is a specific provision in theWealth Tax Act which provides for considering ofa notional interest whereas Section 23(1)(a) containsno such specific provision.”

Summation:

Though per se, the notional interest on the interest-free security deposit can not be taken as thedeterminative factor to arrive at a ‘fair rent’ sincethe provisions of section 23(1)(a) do not mandatethis, as per the majority of judicial views, if AOfinds that the actual rent received is less than the‘fair/market rent’ because of the reason that theassessee has received abnormally high interest-freesecurity deposit and thereby, the actual rent receivedis less than the rent which the property might fetch,he can undertake necessary exercise in that behalfto fix the ALV u/s 23(1) of the Act. In the event the

rent control legislation is applicable to the premisesin question, then the AO has to undertake theexercise contemplated by the rent control legislationfor fixation of standard rent.

The Hon’ble Bombay High Court in CIT v. TipTop Typography [2014] 48 taxmann.com 191/[2015] 228 Taxman 244/[2014] 368 ITR 330(Bombay) clarified this as follows:

“In order to determine annual value of property,municipal rateable value may not be binding onAssessing Officer but that is only in cases where heis convinced that interest free security deposit andmonthly compensation do not reflect prevailing rateand, in such a case, Assessing Officer can himselfresort to enquire about prevailing rate in locality.

The market rate in the locality is an approvedmethod for determining the fair rental value but itis only when the Assessing Officer is convinced thatthe case before him is suspicious, determination bythe parties is doubtful that he can resort to enquireabout the prevailing rate in the locality. Themunicipal rateable value may not be binding onthe Assessing Officer but that is only in cases ofafore-referred nature.”

Though the notional interest on interest free securitydeposit cannot be directly added to the rentalincome to determine ALV of the property, yet thetotal mismatch between interest free security depositcollected and the monthly rent fixed can be areasonable indicator for the AO to investigate furtherinto the matter to arrive at the fair ALV by makingnecessary enquiries. [CIT v. Moni KumarSubba[2011] 10 taxmann.com 195/199 Taxman301/333 ITR 38 (Delhi)(FB)].

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Controversies


Agreement to Sale vs Transfer – Some usefulJudgments

CIT v. Balbir Singh Maini [2017] 398 ITR 531(SC)

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18. Section 53A, as is well known, was inserted bythe Transfer of Property Amendment Act, 1929to import into India the equitable doctrine of partperformance. This Court has in ShrimantShamrao Suryavanshiv. Pralhad BhairobaSuryavanshi [2002] 3 SCC 676 stated as follows:

“16. But there are certain conditions which arerequired to be fulfilled if a transferee wantsto defend or protect his possession underSection 53-A of the Act. The necessaryconditions are:

(1) there must be a contract to transfer forconsideration of any immovable property;

(2) the contract must be in writing, signed bythe transferor, or by someone on his behalf;

(3) the writing must be in such words fromwhich the terms necessary to construe thetransfer can be ascertained;

(4) the transferee must in part-performance ofthe contract take possession of the property,or of any part thereof;

(5) the transferee must have done some act infurtherance of the contract; and

(6) the transferee must have performed or bewilling to perform his part of the contract.”

19. It is also well-settled by this Court that theprotection provided under Section 53A is onlya shield, and can only be resorted to as a rightof defence. RambhauNamdeoGajre v.Narayan BapujiDhgotra [2004] 8 SCC 614,para 10. An agreement of sale which fulfilled

Advocate Tushar [email protected]

Judicial Analysis

the ingredients of Section 53A was not requiredto be executed through a registered instrument.This position was changed by the Registrationand Other Related Laws (Amendment) Act,2001. Amendments were made simultaneouslyin Section 53A of the Transfer of Property Actand Sections 17 and 49 of the IndianRegistration Act. By the aforesaid amendment,the words “the contract, though required to beregistered, has not been registered, or” inSection 53A of the 1882 Act have beenomitted. Simultaneously, Sections 17 and 49of the 1908 Act have been amended, clarifyingthat unless the document containing the contractto transfer for consideration any immovableproperty (for the purpose of Section 53A of1882 Act) is registered, it shall not have anyeffect in law, other than being received asevidence of a contract in a suit for specificperformance or as evidence of any collateraltransaction not required to be effected by aregistered instrument. Section 17(1A) andSection 49 of the Registration Act, 1908 Act,as amended, read thus:

“17(1A).The documents containing contractsto transfer for consideration, anyimmovable property for the purposeof Section 53A of the Transfer ofProperty Act, 1882 (4 of 1882) shallbe registered if they have beenexecuted on or after thecommencement of the Registrationand Other Related Laws(Amendment) Act, 2001 and if suchdocuments are not registered on orafter such commencement, then theyshall have no effect for the purposesof the said Section 53A.”

“49. Effect of non-registration ofdocuments required to be registered.


No document required by Section 17or by any provision of the Transferof Property Act, 1882 (4 of 1882), tobe registered shall—

(a) affect any immovable property comprisedtherein, or

(b) confer any power to adopt, or

(c) be received as evidence of any transactionaffecting such property or conferring suchpower, unless it has been registered:

Provided that an unregistered documentaffecting immovable property and required bythis Act or the Transfer of Property Act, 1882(4 of 1882), to be registered may be receivedas evidence of a contract in a suit for specificperformance under Chapter II of the SpecificRelief Act, 1887 (1 of 1877) or as evidence ofany collateral transaction not required to beeffected by registered instrument.”

20. The effect of the aforesaid amendment is that,on and after the commencement of theAmendment Act of 2001, if an agreement, likethe JDA in the present case, is not registered,then it shall have no effect in law for thepurposes of Section 53A. In short, there is noagreement in the eyes of law which can beenforced under Section 53A of the Transfer ofProperty Act. This being the case, we are ofthe view that the High Court was right in statingthat in order to qualify as a “transfer” of a capitalasset under Section 2(47)(v) of the Act, theremust be a “contract” which can be enforced inlaw under Section 53A of the Transfer ofProperty Act. A reading of Section 17(1A) andSection 49 of the Registration Act shows thatin the eyes of law, there is no contract whichcan be taken cognizance of, for the purposespecified in Section 53A. The ITAT was notcorrect in referring to the expression “of thenature referred to in Section 53A” in Section2(47)(v) in order to arrive at the oppositeconclusion. This expression was used by thelegislature ever since sub-section (v) wasinserted by the Finance Act of 1987 w.e.f.01.04.1988. All that is meant by this expression

is to refer to the ingredients of applicability ofSection 53A to the contracts mentioned therein.It is only where the contract contains all the sixfeatures mentioned in Shrimant ShamraoSuryavanshi (supra), that the Section applies,and this is what is meant by the expression “ofthe nature referred to in Section 53A”. Thisexpression cannot be stretched to refer to anamendment that was made years later in 2001,so as to then say that though registration of acontract is required by the Amendment Act of2001, yet the aforesaid expression “of the naturereferred to in Section 53A” would somehowrefer only to the nature of contract mentionedin Section 53A, which would then in turn notrequire registration. As has been stated above,there is no contract in the eye of law in forceunder Section 53A after 2001 unless the saidcontract is registered. This being the case, andit being clear that the said JDA was neverregistered, since the JDA has no efficacy in theeye of law, obviously no “transfer” can be saidto have taken place under the aforesaiddocument. Since we are deciding this case onthis legal ground, it is unnecessary for us to gointo the other questions decided by the HighCourt, namely, whether under the JDApossession was or was not taken; whether onlya licence was granted to develop the property;and whether the developers were or were notready and willing to carry out their part of thebargain. Since we are of the view that sub-clause(v) of Section 2(47) of the Act is not attractedon the facts of this case, we need not go intoany other factual question.

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RatnaTrayi Reality Services (P.) Ltd. v. ITO[2013] 356 ITR 493 (Gujarat)

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13. In view of such legal position, we may revisitthe facts and ascertain for ourselves whether,on the basis of the reasons recorded by theAssessing Officer, it can be stated that he couldform a belief that income chargeable to tax hadescaped assessment. In our opinion, the

Judicial Analysis


Judicial Analysis

Assessing Officer has committed a grave errorin issuing impugned notice on the basis ofreasons recorded. As noted earlier, thepetitioner had first entered into MOU to form aconsortium of different entities to bid for a largepiece of land which would require sizableinvestment. The petitioner participated in suchauction proceedings. The bid was acceptedbeing the highest. Petitioner, thereupon, enteredinto an agreement to sale with the society.Ultimately, as per the terms of the agreementand the understanding between the petitionerand other signatories to the MOU at the instanceof the petitioner, the society entered into aseparate sale deeds in favour of various parties.We fail to see how the revenue can contendthat under such circumstances, there wasescapement of income under the head of shortterm capital gain.

14. Section 45 of the Act pertains to ‘capital gains’.Sub section (1) thereof provides inter alia thatany profits or gains arising out of transfer ofcapital asset affected in the previous year shallbe chargeable to income tax under the head‘Capital gains’ and shall be deemed to be theincome of the previous year in which thetransfer took place. Essentially, requirement ofattracting said provision to sub-section (1) ofSection 45 therefore, is the transfer of capitalasset. We fail to see how the revenue cancontend that the petitioner had transferred anycapital asset that too during the previous yearrelevant to assessment year under consideration.Merely because the petitioner entered into anagreement with the said society whichagreement contained a clause that the final saledeed would be executed in favour of such otherpersons as the petitioner may indicate, by itselfcannot give rise to a presumption that the landin question stood transferred in favour of thepetitioner on the date of such agreement ascontended by the revenue. The said agreementdated 08.04.2004 is a simple agreement to saleimmovable property. The petitioner had paidpart sale price at the time of execution of suchagreement. Substantial portion of the sale price

was yet to be paid. The petitioner was giveninstalments for doing so. The possession of theproperty was retained by the seller and was tobe handed over only upon full payment of saleconsideration. Merely because in addition tosuch terms the agreement also envisaged thatthe ultimate sale deeds may be executed infavour of the persons that the petitioner mayindicate, by no way would convert suchagreement to sale into one of sale deed.

15. Section 19 of the Transfer of Property Act onlyprovides that where, on a transfer of property,an interest is created in favour of a personwithout specifying the time when it is to takeeffect, or specifying that it is to take effectforthwith or on the happening of any eventwhich is certain, such interest is considered asa vested interest, unless a contrary intentionappears from the terms of the transfer. Even ifsuch provision is seen as creating a vestedinterest in the petitioner to ultimately purchasethe land in question, the transfer would becompleted only when actual sale deed takesplace. By merely creating a vested right in thepetitioner to compel the society to execute thesale deed at a later stage, would not by itselfamount to actual transfer of the property on thedate of the agreement. There may be variety ofsituations under which the ultimate sale deedmay not take place. For example, if thepetitioner itself fails to muster enough resourcesto pay the remaining sale price, the agreementto sale would fail. As per the terms ofagreement; the seller may either forfeit theearnest money or a portion of the saleconsideration deposited by the petitioner upfrontbut surely the sale would not be completed. Ina given case after the agreement to sale, bothparties may not ultimately execute the sale deedand cancel the agreement on mutually agreedterms. We can think of many other situationsdeveloping other situations between theagreement to sale and actual sale due to which,the final event of sale may never take place.The revenue’s attempt therefore to equate anagreement to sale to one of the transfer of


Judicial Analysis

property, in our opinion, lacked any valid basisin law.

16. Section 5 of the Transfer of the Property Act,which is more relevant for our considerationpertains to definition of transfer of property andreads as under:

“5. “Transfer of Property” defined-In thefollowing sections “transfer of property”means an act by which a living personconveys property, in present or in future,to one or more other living persons, [or tohimself] and one or more other livingpersons; and “to transfer property” is toperform such act.

[In this section “living person” includes acompany or association or body of individuals,whether incorporated or not, but nothing hereincontained shall affect any law for the time beingin force relating to transfer of property to or bycompanies, associations or bodies ofindividuals.]

17. Section 5 thus provides that transfer of propertymeans an act by which living person conveysproperty, in present or in future, to one or moreother living persons or to himself and one ormore other living persons. In the present case,the society had not, by virtue of agreement dated08.04.2004, transferred the property in favourof the petitioner. The society had only agreedto do so on certain terms and conditions. Mostimportant condition being that of the purchaserpaying remaining purchase price without whichthe sale could never be completed. In themeantime the possession of the land wasretained by the society. An agreement to salewithout there being anything more, obviouslycannot be equated with transfer of property.Section 5 of the Transfer of Property Act alsoenforces this view.

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Suraj Lamp & Industries (P.) Ltd. v. State of

2. The modus operandi in such SA/GPA/WILL

Haryana [2011] 340 ITR 1 (SC)

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transactions is for the vendor or person claimingto be the owner to receive the agreedconsideration, deliver possession of theproperty to the purchaser and execute thefollowing documents or variations thereof:

(a) An Agreement of sale by the vendor infavour of the purchaser confirming theterms of sale, delivery of possession andpayment of full consideration andundertaking to execute any document asand when required in future.

Or

An agreement of sale agreeing to sell theproperty, with a separate affidavitconfirming receipt of full price and deliveryof possession and undertaking to executesale deed whenever required.

(b) An Irrevocable General Power of Attorneyby the vendor in favour of the purchaseror his nominee authorizing him to manage,deal with and dispose of the propertywithout reference to the vendor.

Or

A General Power of Attorney by thevendor in favour of the purchaser or hisnominee authorizing the attorney holder tosell or transfer the property and a SpecialPower of Attorney to manage the property.

(c) A will bequeathing the property to thepurchaser (as a safeguard against theconsequences of death of the vendor beforetransfer is effected).

These transactions are not to be confused orequated with genuine transactions where theowner of a property grants a power of Attorneyin favour of a family member or friend tomanage or sell his property, as he is not able tomanage the property or execute the sale,personally. These are transactions, where apurchaser pays the full price, but instead ofgetting a deed of conveyance gets a SA/GPA/WILL as a mode of transfer, either at theinstance of the vendor or at his own instance.

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Judicial Analysis

Relevant Legal Provisions

7. Section 5 of the Transfer of Property Act, 1882(‘TP Act’ for short) defines ‘transfer of property’as under:

“5. Transfer of Property defined : In thefollowing sections “transfer of property”means an act by which a living personconveys property, in present or in future,to one or more other living persons, or tohimself [or to himself] and one or moreother living persons; and “to transferproperty” is to perform such act.”

Section 54 of the TP Act defines ‘sales’ thus:

“Sale” is a transfer of ownership in exchangefor a price paid or promised or part-paid andpart-promised.

Sale how made. Such transfer, in the case oftangible immoveable property of the value ofone hundred rupees and upwards, or in the caseof a reversion or other intangible thing, can bemade only by a registered instrument.

In the case of tangible immoveable property ofa value less than one hundred rupees, suchtransfer may be made either by a registeredinstrument or by delivery of the property.

Delivery of tangible immoveable property takesplace when the seller places the buyer, or suchperson as he directs, in possession of theproperty.

Contract for sale.-A contract for the sale ofimmovable property is a contract that a sale ofsuch property shall take place on terms settledbetween the parties.

It does not, of itself, create any interest in orcharge on such property.”

Section 53A of the TP Act defines ‘partperformance’ thus :

“Part Performance. - Where any personcontracts to transfer for consideration anyimmoveable property by writing signed by himor on his behalf from which the terms necessaryto constitute the transfer can be ascertained withreasonable certainty,

and the transferee has, in part performance ofthe contract, taken possession of the propertyor any part thereof, or the transferee, beingalready in possession, continues in possessionin part performance of the contract and hasdone some act in furtherance of the contract,and the transferee has performed or is willingto perform his part of the contract,then, notwithstanding that where there is aninstrument of transfer, that the transfer has notbeen completed in the manner prescribedtherefor by the law for the time being in force,the transferor or any person claiming under himshall be debarred from enforcing against thetransferee and persons claiming under him anyright in respect of the property of which thetransferee has taken or continued in possession,other than a right expressly provided by theterms of the contract :

Provided that nothing in this section shall affectthe rights of a transferee for consideration whohas no notice of the contract or of the partperformance thereof.”

8. We may next refer to the relevant provisions ofthe Indian Stamp Act, 1999 (Note: Stamp Lawsmay vary from state to state, though generallythe provisions may be similar). Section 27 ofthe Indian Stamp Act, 1899 casts upon theparty, liable to pay stamp duty, an obligation toset forth in the instrument all facts andcircumstances which affect the chargeability ofduty on that instrument. Article 23 prescribesstamp duty on ‘Conveyance’. In many Statesappropriate amendments have been madewhereby agreements of sale acknowledgingdelivery of possession or power of Attorneyauthorizes the attorney to ‘sell any immovableproperty are charged with the same duty asleviable on conveyance.

9. Section 17 of the Registration Act, 1908 whichmakes a deed of conveyance compulsorilyregistrable. We extract below the relevantportions of section 17.

“Section 17 - Documents of which registrationis compulsory.—(1) The following documentsshall be registered, namely:—

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Background

On 22 December 2017, US President DonaldTrump signed into law the Tax Cuts and Jobs Actof 2017 (TCJA) which has been described as themost significant US tax law change in a generation.

Overall, the tax changes are a net tax cut forcorporations, however more than a few companieswill end up paying more in taxes as a result of thechanges. A careful review of each companies’ factpatterns will be needed in order to estimate the post-law change after-tax cash flow for many companies.The new tax law contains a number of substantialchanges for companies doing business in the US,most of which will be effective 01 January 2018 forcalendar year taxpayers. The more significant changescan be separated into two different categories:(i)general corporate income tax changes; and (ii)international tax changes, both of which containprovisions to encourage investment in the US.

The more significant general corporate income taxchanges include:

- Reduction of the 35% US corporate incometax rate to 21%;

- Temporary immediate expensing for qualifieddepreciable property;

- Limitations on the ability to deduct related andunrelated party interest expense (30% ofEBITDA, changed to EBIT in 2022);

- Anti-hybrid rules that may disallow adeduction for certain related party interest androyalty payments;

- Limitation on utilization of net operating losses(NOLs) to offset only 80% of prospectivetaxable income, but NOLs can be carriedforward indefinitely (existing NOLs aregrandfathered); and

- Changes to deductibility of executivecompensation for certain public US companies.

CA. Dhinal A. [email protected]

Overview ofUS tax reform

CA. Sagar [email protected]

Most of these changes are intended to make theUS tax system more competitive on a global basis,in particular the rate reduction and immediateexpensing opportunity. The changes also had theeffect of adopting certain of the OECD’s BaseErosion and Profit Shifting (BEPS)proposals,including the increase limitation on interestdeductions and anti-hybrid provisions.

In addition to the changes above, the US modifiedits system of international taxation. The followingsummarize some of the key changes to theinternational tax rules:

- Limited participation exemption regime

- Imposition of a one-time transition tax on USpersons with untaxed offshore earnings, leviedat a 15.5% rate for cash/cash equivalents and8% rate for the balance (payable over eightyears)

- Reduced income tax rates for deemed intangibleincome earned from exports - 13.125% until2025(referred to as Foreign Derived IntangibleIncome, or FDII)

- Limitations on the ability to benefit from taxdeductions for certain payments made toforeign related parties (referred to as the BaseErosion and Anti-Abuse Tax, or BEAT), and

- New controlled foreign corporation(CFC) rulethat subjects deemed intangible income of aCFC to a residual US tax to the extent the CFCincome is not subject to high enough rate offoreign tax(referred to as Global Intangible LowTaxed Income, or GILTI)

For a company considering the location of amanufacturing facility, service shub or global rightsto intangible property, the incentivized tax rate of13.125% under the FDII regime maybe just enoughto encourage that investment to be made in the USrather than outside of the US (when taking other


considerations into account like infrastructure,education levels, the rule of law, etc.). Similarly,multinational corporation may think twice beforehousing functions, risks or intangible assets usedby the US outside of the US if the US companywill not benefit from a tax deduction upon makingpayments to foreign related parties under the BEAT(particularly if the jurisdiction of the foreign relatedparty is going to tax the payment). The new CFCrule should also discourage US multinationals frommoving intangible property offshore if the incomeearned from such IP is going to be subject to aresidual US tax under the GILTI regime, thusreducing any tax benefits from moving the IP.

We have summarized below the key TCJAprovisions affecting corporate tax base:

Provision Description

Net interest • Limits deduction to netexpense interest expense that exceedslimitation 30% of adjusted taxable income

(ATI) plus business interestincome.• Initially, ATI computedwithout regard to depreciation,amortization or depletion.Beginning in 2022, ATI wouldbe decreased by those items.

Expensing • Immediate deduction of(provided qualified property placed inunder Section service after September 27,168(k) bonus 2017 and before 2023.depreciation) • Increased expensing phases-

down starting in 2023 by 20percentage points for each ofthe five following years.• Eliminates original userequirement.• Taxpayers may elect to apply50% expensing for the first taxyear ending after September27, 2017.

Net operating • Limits NOLs to 80% oflosses (NOL) taxable income for losses

arising in tax years starting after2017.

Overview of US tax reform

• Generally repeals carry backprovisions• Allows NOLs to be carriedforward indefinitely, subject tointerest rate adjustment.

Domestic • Retains the 100% dividendsdividends received deduction forreceived members of the samededuction consolidated group, reduces(DRD) the deduction for dividends

received from a 20% ownedcorporation from 80% to 65%,and reduces the deduction forless than 20 percent ownedcorporations from 70% to 50%

Foreign • Domestic corporationsdividends allowed a 100% deduction forreceived the foreign-source portion ofdeduction dividends received from 10%(DRD) owned (vote or value) foreign

subsidiaries. • Deduction is notavailable for capital gains ordirectly-earned foreign income.

Amortization of • Requires amortization ofresearch and domestic research andexperimentation experimentation (R&E)expenditures expenditures over five years.

• 15 year amortization for R&Econducted outside the US.• R&E specifically includesexpenses for softwaredevelopment.• Requires amortization forexpenses incurred in tax yearsbeginning after 2021.

Transition tax • One-time transition tax onpost-1986 earnings of 10%owned foreign subsidiariesaccumulated in periods of 10%US corporate shareholderownership.

• 15.5% rate on cash and cashequivalents, and 8% rate on theremainder.


Global • This provision is meant toIntangible Low discourage the location of high-Taxed Income value activities outside the US.(GILTI) • It functions as a mandatory

annual inclusion of globalintangible low taxed income(GILTI) determined on anaggregate basis for all controlledforeign corporations owned bythe same US shareholder, withpartial credits for foreign taxesproperly attributable to theGILTI amount.• The GILTI inclusioneffectively taxes foreignearnings in excess of a 10% rateof return on fixed assets at areduced rate by providing a50% deduction initially (subjectto certain limitations), reducedto 37.5% for tax yearsbeginning after 2025. At a 21%federal corporate tax rate, thededuction results in effectiverates of 10.5% and 13.125%respectively)

Foreign Derived • This provision is generallyIntangible designed to encourage locatingIncome (FDII) intangible assets in the US by

providing a lower effective taxrate on high-returns related toforeign sales. While thiscalculation is more complexthan GILTI, the calculation issimilar in that returns in excessof 10% of fixed assets form thebasis of the calculation.• This is achieved by providingdomestic corporations adeduction against foreign-derived intangible income(subject to certain limitations)of 37.5% initially, reduced to21.875% for tax yearsbeginning after 2025. At a 21%federal corporate tax rate, thededuction results in effective

rates of 13.125% and16.40625% respectively.

Base Erosion • The BEAT functions as aAnti-Abuse Tax minimum tax which will be(BEAT) paid by taxpayers with

significant payments to foreignrelated entities.• If certain thresholds are met(e.g., a global corporate groupwhich has a three-year annualaverage of at least $500 millionof gross receipts), BEAT islevied on an applicabletaxpayer’s taxable incomedetermined without regard tocertain deductible amountspaid or accrued to foreignrelated persons; depreciation oramortization on propertypurchased from foreign relatedpersons; and certainreinsurance payments toforeign related persons.• Generally 10% rate for taxyears beginning before 2026,and 12.5% thereafter (but 11%and 13.5% for banks andregistered securities dealers).

Concluding remarksOverall, the tax law changes are beneficial for mostcompanies. The significant corporate income tax ratereduction, the immediate expensing for qualifiedproperty purchases, FDII and the limited participationexemption regime could make up for the adverselaw changes like the interest expense limits, theBEAT and GILTI. We anticipate that the new lawswill encourage investment in the US, in particular inthe M&A space, and could encourage USmultinationals to invest off-shore when theinvestments makes sense from a business perspective.Thus, while corporate taxation is still a significantconsideration for any return on capital analysis, thegood news is that with respect to the US, it shouldbe less of a significant hindrance to investing in theUS, or outside of the US for US multinationals

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Overview of US tax reform


CA. Savan [email protected]

Master Direction – Foreign Investmentin India

Foreign Investment in India is regulated in terms ofclause (b) sub-section 3 of section 6 and section 47of the Foreign Exchange Management Act, 1999(FEMA) read with Foreign Exchange Management(Transfer or Issue of a Security by a Person residentOutside India) Regulations, 2017 issued videNotification No. FEMA 20(R)/2017-RB datedNovember 7, 2017. These Regulations are amendedfrom time to time to incorporate the changes in theregulatory framework and published throughamendment notifications.

2. Within the contours of the Regulations, ReserveBank of India also issues directions toAuthorised Persons under Section 11 of theForeign Exchange Management Act (FEMA),1999. This Master Direction lays down themodalities as to how the foreign exchangebusiness has to be conducted by the AuthorisedPersons with their customers/ constituents witha view to implementing the regulations framed.

3. Instructions issued on Foreign Investment inIndia and its related aspects under the FEMAhave been compiled in this Master Direction.The list of underlying circulars/ notificationswhich form the basis of this Master Directionis furnished in the Appendix.

4. Reporting instructions can be found in MasterDirection on Reporting (Master Direction No.18 dated January 1, 2016). The person/ entityresponsible for filing such reports shall be liablefor payment of late submission fee for anydelays in reporting.

5. It may be noted that, whenever necessary,Reserve Bank shall issue directions toAuthorised Persons through A.P. (DIR Series)Circulars in regard to any change in the

Regulations or the manner in which relativetransactions are to be conducted by theAuthorised Persons with their customers/constituents and/ or amend the MasterDirection issued herewith. This MasterDirection has been issued under sections 10(4)and 11(1) of the Foreign ExchangeManagement Act, 1999 (42 of 1999) and arewithout prejudice to permissions/ approvals, ifany, required under any other law.

FED Master Direction No. 11/2017-18 datedJanuary 4, 2018 (updated as on January 12,2018)

For Appendix and full text refer:https://rbi.org.in/Scripts/BS_View MasDirections.aspx?id=11200

Refinancing of External CommercialBorrowings

This refers to paragraph 2 of the Statement onDevelopmental and Regulatory Policies issuedalong with the Fifth Bi-monthly Monetary PolicyStatement for 2017-18. In terms of the extantprovisions in paragraphs 2.15 and 2.16 (xiii) ofMaster Direction No.5 dated January 1, 2016 on“External Commercial Borrowings, Trade Credit,Borrowing and Lending in Foreign Currency byAuthorised Dealers and Persons other thanAuthorised Dealers”, as amended from time to time,Indian corporates are permitted to refinance theirexisting External Commercial Borrowings (ECBs)at a lower all-in-cost. The overseas branches/subsidiaries of Indian banks are however, notpermitted to extend such refinance.

2. In order to provide a level playing field, it hasbeen decided, in consultation with theGovernment of India, to permit the overseasbranches/subsidiaries of Indian banks torefinance ECBs of highly rated (AAA)

FEMA Updates

20

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corporates as well as Navratna and MaharatnaPSUs, provided the outstanding maturity of theoriginal borrowing is not reduced and all-in-cost of fresh ECB is lower than the existingECB. Partial refinance of existing ECBs willalso be permitted subject to same conditions.

3. All other aspects of the ECB policy remainunchanged. AD Category - I banks may bringthe contents of this circular to the notice of theirconstituents and customers.

4. The aforesaid Master Direction No. 5 datedJanuary 01, 2016 is being updated to reflectthe changes.

5. The directions contained in this circular havebeen issued under section 10(4) and 11(2) ofthe Foreign Exchange Management Act, 1999(42 of 1999) and are without prejudice topermissions / approvals, if any, required underany other law.

A.P. (DIR Series) Circular No.15 dated January4, 2018

For full text refer to: https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11198

Risk Management and Inter-bankDealings: Revised guidelines relating toparticipation of a person resident inIndia and Foreign Portfolio Investor(FPI) in the Exchange Traded CurrencyDerivatives (ETCD) Market

This refers to Foreign Exchange Management(Foreign Exchange Derivative Contracts)Regulations, 2000 dated May 3, 2000 (NotificationNo. FEMA.25/RB-2000 dated May 3, 2000), asamended from time to time, A.P. (DIR Series)Circular No. 90 dated March 31, 2015 relating toparticipation of a person resident in India in theExchange traded currency derivatives (ETCD)market, A.P. (DIR Series) Circular No. 91 datedMarch 31, 2015 relating to participation of a ForeignPortfolio Investor (FPI) in the ETCD market.

2. Currently, persons resident in India and FPIsare allowed to take a long (bought) or short(sold) position in USD-INR upto USD 15

million per exchange without having toestablish existence of underlying exposure. Inaddition, residents & FPIs are allowed to takelong or short positions in EUR-INR, GBP-INRand JPY-INR pairs, all put together, upto USD5 million equivalent per exchange withouthaving to establish existence of any underlyingexposure.

3. It has now been decided to permit personsresident in India and FPIs to take positions (longor short), without having to establish existenceof underlying exposure, upto a single limit ofUSD 100 million equivalent across all currencypairs involving INR, put together, andcombined across all exchanges.

4. The onus of complying with the provisions ofthis circular rests with the participant in theETCD market and in case of any contraventionthe participant shall be liable to any action thatmay be warranted as per the provisions ofForeign Exchange Management Act, 1999 andthe regulations, directions, etc. issuedthereunder. These limits shall also be monitoredby the exchanges, and breaches, if any, maybe reported to the Reserve Bank of India.

5. All other operational guidelines, terms andconditions shall remain unchanged.

6. This circular has been issued under Sections10(4) and 11(1) of the Foreign ExchangeManagement Act, 1999 (42 of 1999) and iswithout prejudice to permissions/approvals, ifany, required under any other law.

A. P. (DIR Series) Circular No. 18 February 26,2018

For full text refer: https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/134APDIR26021839B2053698A94 BFDA0CA65D3936FFAF3.PDF

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FEMA Updates

22


CA. Ashwin H. [email protected]

Clarifications regarding GST in respect of certain services (Circular no 32/06/2018-GST)

GST Updates

Sr No ISSUE CLARIFICATION

Is hostel accommodation provided by Trusts 1to students covered within the definition ofCharitable Activities and thus, exempt underSl. No. 1 of notification No. 12/2017-CT(Rate).

Hostel accommodation services do not fall withinthe ambit of charitable activities as defined in para2(r) of notification No. 12/2017-CT(Rate).However, services by a hotel, inn, guest house, clubor camp site, by whatever name called, forresidential or lodging purposes, having declaredtariff of a unit of accommodation below onethousand rupees per day or equivalent are exempt.Thus, accommodation service in hostels includingby Trusts having declared tariff below onethousand rupees per day is exempt. [Sl. No. 14 ofnotification No. 12/2017-CT(Rate) refers]

Is GST leviable on the fee/amount chargedin the following situations/cases: –

(1) A customer pays fees while registeringcomplaints to Consumer DisputesRedressal Commission office and itssubordinate offices.These fees arecredited into State Customer WelfareFund’s bank account.

(2) Consumer Disputes RedressalCommission office and its subordinateoffices charge penalty in cash when itis required.

(3) When a person files an appeal toConsumers Disputes RedressalCommission against order of DistrictForum, amount equal to 50% of totalamount imposed by the District Forumor Rs 25000/-

whichever is less, is required to be paid.

Services by any court or Tribunal established underany law for the time being in force is neither a supplyof goods nor services. Consumer Disputes RedressalCommissions (National/ State/ District) may not betribunals literally as they may not have been set updirectly under Article 323B of the Constitution.However, they are clothed with the characteristicsof a tribunal on account of the following: -(1) Statement of objects and reasons as mentioned

in the Consumer Protection Bill state that oneof its objects is to provide speedy and simpleredressal to consumer disputes, for which aquasijudicial machinery is sought to be set upat District, State and Central levels.

(2) The President of the District/ State/NationalDisputes Redressal Commissions is a personwho has been or is qualified to be a DistrictJudge, High Court Judge and Supreme CourtJudge respectively.

(3) These Commissions have been vested with thepowers of a civil court under CPC for issuingsummons, enforcing attendance of defendants/witnesses, reception of evidence, discovery/production of documents, examination ofwitnesses, etc.

(4) Every proceeding in these Commissions isdeemed to be judicial proceedings as persections 193/228 of IPC.

(5) The Commissions have been deemed to be acivil court under CrPC.

2


GST Updates


Whether the services of elephant or camelride, rickshaw ride and boat ride should beclassified under heading 9964 (as passengertransport service) in which case, the rate oftax on such services will be 18% or underthe heading 9996 (recreational, cultural andsporting services) treating them as joy rides,leviable to GST@ 28%?

Elephant/ camel joy rides cannot be classified astransportation services. These services will attractGST @ 18% with threshold exemption beingavailable to small service providers. [Sl. No 34(iii)of notification No. 11/2017-CT(Rate) dated28.06.2017 as amended by notification No. 1/2018-CT(Rate) dated 25.01.2018 refers]

What is the GST rate applicable on rentalservices of self-propelled access equipment(Boom Scissors/ Telehandlers)? Theequipment is imported at GST rate of 28%and leased further in India where operatoris supplied by the leasing company, dieselfor working of machine is supplied bycustomer and transportation cost includingloading and unloading is also paid by thecustomer.

Leasing or rental services, with or without operator,for any purpose are taxed at the same rate of GSTas applicable on supply of like goods involvingtransfer of title in goods. Thus, the GST rate for therental services in the given case shall be 28%,provided the said goods attract GST of 28%. IGSTpaid at the time of import of these goods would beavailable for discharging IGST on rental services.Thus, only the value added gets taxed. [Sl. No17(vii) of notification No. 11/2017- CT(Rate) dated28.6.17 as amended refers].

4

Is GST leviable in following cases:(1) Hospitals hire senior doctors/

consultants/ technicians independently,without any contract of such personswith the patient; and pay themconsultancy charges, without therebeing any employer employeerelationship. Will such consultancycharges be exempt from GST? Willrevenue take a stand that they areproviding services to hospitals and notto patients and hence must pay GST?

(2) Retention money: Hospitals charge thepatients, say, Rs.10000/- and pay to theconsultants/ technicians only Rs. 7500/- and keep the balance for providingancillary services which include nursingcare, infrastructure facilities, paramediccare, emergency services, checking of

Health care services provided by a clinicalestablishment, an authorised medical practitioneror para-medics are exempt. [Sl. No. 74 ofnotification No. 12/2017- CT(Rate) dated28.06.2017 as amended refers].(1) Services provided by senior doctors/

consultants/ technicians hired by the hospitals,whether employees or not, are healthcareservices which are exempt.

(2) Healthcare services have been defined to meanany service by way of diagnosis or treatmentor care for illness, injury, deformity,abnormality or pregnancy in any recognizedsystem of medicines in India[para 2(zg) ofnotification No. 12/2017- CT(Rate)].Therefore, hospitals also provide healthcareservices. The entire amount charged by themfrom the patients including the retention

(6) Appeals against District Commissions lie to State

5

Commission while appeals against the StateCommissions lie to the National Commission.Appeals against National Commission lie to theSupreme Court.

In view of the aforesaid, it is hereby clarified thatfee paid by litigants in the Consumer DisputesRedressal Commissions are not leviable to GST.Any penalty imposed by or amount paid to theseCommissions will also not attract GST.

3


GST Updates


Appropriate clarification may be issuedregarding taxability of Cost Petroleum.

As per the Production Sharing Contract(PSC)between the Government and the oil exploration &production contractors, in case of a commercialdiscovery of petroleum, the contractors are entitledto recover from the sale proceeds all expensesincurred in exploration, development, productionand payment of royalty. Portion of the value ofpetroleum which the contractor is entitled to take ina year for recovery of these contract costs is called“Cost Petroleum”.

The relationship of the oil exploration and productioncontractors with the Government is not that of partnersbut that of licensor/lessor and licensee/lessee in termsof the Petroleumand Natural Gas Rules, 1959. Havingacquired the right to explore, exploit and sellpetroleum in lieu of royalty and a share in profitpetroleum, contractors carry out the exploration andproduction of petroleum for themselves and not as aservice to the Government. Para 8.1 of the ModelProduction Sharing Contract (MPSC) states that subjectto theprovisions of the PSC, the Contractor shall haveexclusive right to carry out Petroleum Operations torecover costs and expenses as provided in thisContract. The oil exploration and productioncontractors conduct all petroleum operations at theirsole risk, cost and expense. Hence, cost petroleum isnot a consideration for service to GOI and thus nottaxable per se. However, cost petroleum may be anindication of the value of mining or explorationservices provided by operating member to the jointventure, in a situation where the operating member isfound to be supplying service to the oil explorationand production joint venture.

temperature, weight, blood pressure etc.Will GST be applicable on such moneyretained by the hospitals?

(3) Food supplied to the patients: Healthcare services provided by the clinicalestablishments will include foodsupplied to the patients; but such foodmay be prepared by the canteens runby the hospitals or may be outsourcedby the Hospitals from outdoor caterers.When outsourced, there should be noambiguity that the suppliers shall chargetax as applicable and hospital will getno ITC. If hospitals have their owncanteens and prepare their own food;then no ITC will be available on inputsincluding capital goods and in turn ifthey supply food to the doctors and theirstaff; such supplies, even when notcharged, may be subjected to GST.

money and the fee/payments made to the doctorsetc., is towards the healthcare services providedby the hospitals to the patients and is exempt.

(3) Food supplied to the in-patients as advised bythe doctor/nutritionists is a part of compositesupply of healthcare and not separately taxable.Other supplies of food by a hospital to patients(not admitted) or their attendants or visitors aretaxable.

6


CA. Bihari B. [email protected].

[I] Important Judgment:

[i] Hon. High Court of Gauhati in case ofSonipur Solvex Ltd. regarding classificationof Goods.

Issue:

Whether Rice Bran and de-oiled Rice bran areone and same product and de-oiled Rice Branwould be covered under Entry No. 34 of PartA of Assam Vat Act?

Held:

Hon. High Court has decided that Rice branand de-oiled Rice bran are one and the sameproduct and would cover under Entry No. 34of Assam Vat Act.

This judgment is useful so far the dealers ofGujarat are concerned because in Gujarat somany rice mills are working and therefore thisjudgment will be useful to them.

Gist of the judgment is as under.

The assessee was engaged in the manufactureof rice bran oil from rice bran. After extractionof oil, the rice bran was sold as de-oiled ricebran, which was essentially used as cattle feed.

It claimed exemption from tax in respect of de-oiled rice bran under Entry No. 3 of the FirstSchedule of the Assam Value Added Tax, 2003[VAT ACT].

The Assessing Authority held that de-oiled ricebran was very much covered under Entry No.34 of Part A of the Second Schedule of the VatAct and was taxable at the rate of 4 per cent.

A conjoint reading of Entry No. 3of the FirstSchedule and Entry No. 34 of Part A of theSecond Schedule makes it clear that rice branis excluded from the list of exempted goodsand has been included in the list of goods

GST & VATJudgments

taxable. The question, therefore, is whether ricebran and de-oiled rice bran are one and the sameor different products. If both are one and thesame product, then de-oiled rice bran shall bea taxable goods. In the case of Oil Seeds, OilTrade and Industry’s Association v. State ofKarnataka [1998] 111 STC 234, the KarnatakaHigh Court after examining various reports bygiving cogent reasons has already held that ricebran and de-oiled rice bran are one and the sameproduct. The decision of the Karnataka HighCourt is directly on the point. Not only this,the decision of Karnataka High Court has alsobeen approved and followed by the CalcuttaHigh Court in the case of Sethia Oils Ltd. v.Assistant Commissioner, Commercial Taxes[2004] 137 STC 41. The Calcutta High Courthas even held that since there is no change inthe composition of rice bran and de-oiled ricebran , both the products are same and de-oiledrice bran is rice bran and nothing else. Afterperusing the decisions, one also finds incomplete agreement with the conclusion of boththe Karnataka High Court and Calcutta HighCourts is that rice bran and de-oiled rice branare one and same product.

The Learned Counsel for the Petitioner hasrelied upon a Division Bench decision dated06.10.2010 of the Karnataka High Courtrendered in Raichur Solvents Ltd. v. TheCommissioner of Commercial Taxes [S.T.A.No. 702/2010 dated 06.10.2010] Karnataka,wherein it is held that De-Oiled Rice Bran isalso included in the list of exempted goods i.e.First Schedule of Karnataka Sales Tax Act,1957. In that case, the issue was whether De-Oiled Rice Bran falls under First Schedule,which contains the list of exempted goods. InEntry No.5 of the First Schedule, mostlyproducts of animal feed including De-Oiled


Cake and feed supplements are mentioned. Nocattle feed is shown to be included from thisEntry. And since De-Oiled Rice Bran is usedas Cattle Feed in the form of cake, the DivisionBench comparing it with De-Oiled Cake, hasheld the same to be also in the list of exemptedgoods. But the Division Bench has nowhereheld that De-Oiled Rice Bran and Rice Bran,which is also essentially used as cattle feed,are different products. Unlike Entry No. 5 ofthe First Schedule of Karnataka Sales Tax Act,1957, the Assam State Legislature, in the Actof 2003, has consciously excluded Rice Branfrom similar Entry No. 3 of the list of exemptedgoods i.e. First Schedule and included it in thelist of goods taxable i.e. Second Schedule.

Held:

Meaning thereby, the State Legislature hasmade product ‘Rice Bran’ in any formtaxable. The Division Bench decision of theKarnataka High Court is, therefore,distinguishable and does not help thepetitioner.

[ii] Hon. Madras High Court in case ofMahaveer Trading Co. v. Asst.Commissioner has decided that input TaxCredit on purchase of Rep and Depb heldadmissible under the Tamilnadu ValueAdded Tax.

Facts:

The assessee is a dealer registered under theAct. The assessee claimed tax credit in respectof REP License and DEPB. The assessingofficer rejected the claim on the ground thatREP and DEPB are not goods falling underthe First Schedule. The assessing officer,accordingly, passed assessment orders andraised dues against the assessee. Beingaggrieved, the assessee filed writ petition beforethe Madras High Court.

Held:

The Hon. High Court held that the assessingofficer while issuing the notice, accepted thatDEPB licenses are considered as goods but

denied the relief to the assessee on the soleground that the goods do not fall under the FirstSchedule. If that is so, how the assessing officershould treat the transaction especially, when theassessee has taken a stand that the facts in thecase of Shah Kantilal Jayantilal, were entirelydifferent.

The Hon. High Court observed the importantaspect, which the assessing officer had failedto take into consideration is the advance rulinggiven by the authority under section 48A ofthe Act. The said ruling is binding on theassessing officer. The assessing officer cannotget over the advance ruling unless and until,the assessing officer is able to establish that thesaid ruling will not apply to the facts of thepresent case.

The Hon. High Court held that though the saidclarification would not be binding on theassessing officer, yet it should be of persuasivevalue, since it was clarified that if the dealersresold DEPB license, they have to pay tax andit is further clarified that in that event, they areeligible to input tax credit to the extent of DEPBlicense resold by them. The Hon. High Courtdirected that the assessing officer should re-consider the matter afresh taking note of thefactual issues. The assessment orders came tobe quashed and writ petitions came to beallowed.

[ii] Hon. Allahabad High Court in case ofGhoop Kishore Pramodkumar vCommissioner of VAT Tax has decided thatthe Raw Material purchase on Tax freebasis is used in the manufacturing of Goodsnot directly but ultimately exported,whether claim of Export Sales is correct ?

Facts:

The assessee is a dealer registered under theAct. The assessee purchased menthe oil on taxfree basis in terms of the exemption notification.The oil so purchased was used in manufactureof menthol. The goods manufactured by the

GST & VAT Judgments



CA. Naveen [email protected]

Corporate Law Update

1. Amendments to the Insolvency andBankruptcy Board of India (InsolvencyResolution Process for Corporate Persons)Regulations, 2016:

W. e. f. 07.02.2018, following amendmentshave been made:

a. The Resolution Professional shall appointtwo registered valuers to determine the fairvalue and the liquidation value of thecorporate debtor. After the receipt ofresolution plans, the resolutionprofessional shall provide the fair value andthe liquidation value to each member ofthe committee of creditors in electronicform, on receiving a confidentialityundertaking. The resolution professionaland registered valuers shall maintainconfidentiality of the fair value and theliquidation value.

b. The Resolution Professional shall submitthe information memorandum in electronicform to each member of the committee ofcreditors within two weeks of hisappointment as resolution professional andto each prospective resolution applicantlatest by the date of invitation of resolutionplan, on receiving confidentialityundertaking.

c. The Resolution Professional shall issue aninvitation, including the evaluation matrix,to the prospective resolution applicants. Hemay modify the invitation as well as theevaluation matrix. However, theprospective resolution applicant shall getat least 30 days from the issue of invitationor modification thereof, whichever is later,to submit resolution plans. Similarly, hewill get at least 15 days from the issue ofevaluation matrix or modification thereof,

whichever is later, to submit resolutionplans. An abridged invitation shall beavailable on the web site, if any, of thecorporate debtor, and on the web site, ifany, designated by the IBBI for thepurpose.

d. While the Resolution Applicant shallcontinue to specify the sources of fundsthat will be used to pay insolvencyresolution process costs, liquidation valuedue to operational creditors and liquidationvalue due to dissenting financial creditors,the committee of creditors shall specify theamounts payable from resources under theresolution plan for these purposes.

e. A Resolution Plan shall provide for themeasures, as may be necessary, forinsolvency resolution of the corporatedebtor for maximization of value of itsassets. These may include reduction in theamount payable to the creditors, extensionof a maturity date or a change in interestrate or other terms of a debt due from thecorporate debtor, change in portfolio ofgoods or services produced or rendered bythe corporate debtor, and change intechnology used by the corporate debtor.

f. The Resolution Professional shall submitthe resolution plan approved by thecommittee of creditors to the AdjudicatingAuthority, at least 15 days before the expiryof the maximum period permitted for thecompletion of the corporate insolvencyresolution process.

2. Notification regarding Exemption toGovernment Companies under section129(6) of Companies Act, 2013 fromrecognizing Deferred Tax Assets/ DeferredTax Liability under AS-22/Ind AS-12:


The provisions of Accounting Standard 22 orIndian Accounting Standard 12 relating todeferred tax asset or deferred tax liability shallnot apply, for seven years with effect from the1st April, 2017, to a Government companywhich:—

(a) is a public financial institution under sub-clause (iv) of clause (72) of section 2 ofthe Companies Act, 2013;

(b) is a Non-Banking Financial Companyregistered with the Reserve Bank of Indiaunder section 45-IA of the Reserve bankof India Act, 1934; and

(c) is engaged in the business of infrastructurefinance leasing with not less than seventyfive per cent. of its total revenue beinggenerated from such business withGovernment companies or other entitiesowned or controlled by Government.

[F. No. 17/32/2017-CL-V dated 05.02.2018]

3. Companies (Registered Valuers andValuation) Amendment Rules, 2018:

Vide the Companies (Registered Valuers andValuation) Amendment Rules, 2018, in theCompanies (Registered Valuers and Valuation)Rules, 2017, in rule 11, for the figures, letters

stand word “31 March, 2018”, occurring at bothththe places, the figures, letters and word “30

September, 2018” shall be submitted.

Now, the revised Rule 11 shall be read as under:

“Any person rendering valuation services underthe Companies Act, 2013, on the date ofcommencement of Companies (RegisteredValuers and Valuation) Rules, may continue torender valuation services without a certificateof registration under these rules up to 30thSeptember, 2018.

Provided that if a company has appointed anyvaluer before such date and the valuation orany part of it has not been completed before30th September, 2018, the valuer shall completesuch valuation or such part within three monthsthereafter.”

[F. No. 1/27/2013-CL-V (Part) dated09.02.2018]

4. NOTIFICATION OF PROVISIONS OFCOMPANIES (AMENDMENT) ACT,2017:

The Ministry of Corporate Affairs hasthappointed 09 February, 2018, as the date on

which the following provisions of Companies(Amendment) Act, 2017, shall come into force.


Sr. No. Sections of Companies Amended Section of Title(Amendment)Act, 2017 Companies Act, 2013effectivefrom 09.02.2018

1 Section 2 (except clause (i) Section 2 (except clause Definitions w.r.t Cost Accountant 2(28), Debentureand clause(xiii)) 6 andclause 87) 2(30), Financial Year 2(41), Holding Company 2(46),

Interested Director 2(49) (omitted), Key ManagerialPersonnel 2(51), Networth 2(57), Public Company2(71), Public Financial Institution 2(72), RelatedParty 2(76), Small Company 2(85), Turnover 2(91),have been amended. Definitions w.r.t. AssociateCompany & Subsidiary Company has not yet beennotified.

2 Section 3 Insertion of Section 3A Member severally liable in certain cases.

3 Section 7 Section 21 Authentication of Documents, Proceedings &Contracts.

4 Section 9 Section 35 Civil liability for mis-statements in prospectus.

5 Section 11 Section 47 Voting Rights.

6 Section 12 Section 53 Prohibition on issue of shares at discount.



7 Section 14 Section 62 Further issue of share capital.

8 Section 17 Section 76A Punishment in contravention of acceptance ofdeposits.

9 Section 27 Section 100 Calling of Extra-General Meeting.

10 Section 28 Section 101 Notice of Meeting.

11 Section 29 Section 110 Postal Ballot.

12 Section 32 Section 123 Declaration of Dividend

13 Section 34 Section 130 Re-opening of accounts on court’s or Tribunal’s order.

14 Section 35 Section 132 Constitution of National Financial reportingAuthority(NFRA).

15 Section 38 Section 136 Right of member to copies of audited financialstatement.

16 Section 41 Section 140 Removal, resignation of auditor and giving of specialnotice

17 Section 42 Section 141 Eligibility, qualifications and disqualifications ofauditors

18 Section 43 Section 143 Powers and duties of auditors and auditing standards.

19 Section 44 Section 147 Punishment on contravention of provisions relatingto appointment of auditors (Section 139 to Section146).

20 Section 45 Section 148 Central Government to specify audit of items of costin respect of certain companies.

21 Section 47 Section 152 Appointment of directors.

22 Section 48 Section 153 Application for allotment of DIN.

23 Section 50 Section 160 Right of persons other than retiring directors to standfor directorship.

24 Section 51 Section 161 Appointment of additional director, alternate directorand nominee director.

25 Section 53 Section 165 Number of directorships.

26 Section 59 Section 180 Restrictions on powers of Board.

27 Section 60 Section 184 Disclosure of interest by directors

28 Section 63 Section 188 Related Party Transactions

29 Section 64 Section 194 Prohibition on forward dealings in securities ofcompany by director or key managerial personnel(Omitted)

30 Section 64 Section 195 Prohibition on insider trading of securities (Omitted)

31 Section 72 Section 223 Inspector’s Report

32 Section 73 Section 236 Purchase of minority shareholding

33 Section 74 Section 247 Valuation by registered valuers

34 Section 77 Section 379 Application of Act to Foreign Companies

35 Section 78 Section 384 Debentures, Annual return, registration of charges,books of Account and their inspection


36 Section 79 Section 391 Application of section 34 to 36 and Chapter XX(Winding Up)

37 Section 82 Section 409 Qualification of president and Members of NationalCompany Law Tribunal(NCLT)

38 Section 84 Section 411 Qualification of Chairperson and Members ofNational Company Law Appellate Tribunal (NCLAT)

39 Section 85 Section 412 Selection of Members of NCLT & NCLAT

40 Section 90 Section 441 Compounding of certain offences

41 Section 91 Insertion of Section Factors for determining level of punishment & Lesser446A & 446B penalties for one Person Companies or Small

companies.

42 Section 92 Section 447 Punishment for fraud

43 Section 93 Section 458 Delegation by Central Government of its powers andfunctions


[F. No. 1/1/2018-CL-I dated 09.02.2018]

5. The Companies (Removal of Difficulties)Order, 2018:

Vide this order following changes have beeneffected in the Companies Act, 2013, in section169, in sub-section (1), :-

(i) before the proviso, the following provisoshall be inserted, namely:-

Provided that an independent director re-appointed for second term under sub-section (10) of section 149 shall be

removed by the company only by passinga special resolution and after giving hima reasonable opportunity of being heard:”;.

(ii) in the existing proviso, for the words“provided that”, the words “Providedfurther that” shall be substituted.

[F. No. 7/8/2016-CL-I dated 21.02.2018]

❉ ❉ ❉


State Bank of India (‘Financial Creditor’)issued a Possession Notice dated 18thNovember, 2016 under Section 13(4) ofthe SARFAESI Act, 2002 and takensymbolic possession of the secured assets.

3. Having failed to get relief from Hon’bleHigh Court of Madras, the ‘CorporateDebtor’ invoked Section 10 of the ‘I&BCode’ which was admitted, order of‘Moratorium’ was passed and an ‘InterimResolution Professional’ was appointed.

4. Even after declaration of the ‘Moratorium’,the Appellant- State Bank of India(‘Financial Creditor’) continued to takemeasure under SARFAESI Act, 2002 andproceeded against the property of the‘Personal Guarantor’ (1st Respondent) andissued Sale Notice on 12th July, 2017.

5. Being aggrieved the ‘Personal Guarantor’(1st Respondent), who is also the promoterof the ‘Corporate Debtor’ filed applicationbefore the Adjudicating Authority (NationalCompany Law Tribunal), Chennai, forstay of proceedings under SARFAESI Act2002, including the auction notice dated12th July, 2017. The AdjudicatingAuthority by impugned order dated 18thSeptember, 2017 observed that‘Moratorium’ prohibits transferring,encumbering, alienating or disposing of bythe ‘Corporate Debtor’ any of its assets orany legal right or beneficial interest therein.

6. In view of the provisions of ‘I&B Code’,Section 140 of the Indian Contract Act,1872 and the decision of the Hon’ble HighCourt of Madras, the AdjudicatingAuthority allowed the InterlocutoryApplication preferred by the ‘PersonalGuarantor’, and restrained the Appellant-

Allied Laws Corner

Adv. Ankit [email protected]

Insolvency and Bankruptcy Code

Recently the National Company Law AppellateTribunal in the case of State Bank of India vs. V.Ramakrishnan reported in 91 taxmann.com 68held that under the Insolvency and BankruptcyCode, Moratorium period is applicable not only tothe properties owned by the debtors but also to theproperties owned by the Personal Guarantor.

A. Facts of the Case :

1. Mr. V. Ramakrishnan (1st Respondent),Director of M/s. Veesons Energy Systems.Ltd. (“Corporate Debtor”) given personalguarantee and mortgagor of collateralsecurities of his assets with the Appellant-State Bank of India (“Financial Creditor”)against the facilities availed by the‘Corporate Debtor’. In view of thepersonal Guarantee given by Mr. V.Ramakrishnan (1st Respondent), he comeswithin the meaning of ‘Personal Guarantor’as defined under sub-section (22) ofSection 5 of the Insolvency andBankruptcy Code, 2016 (hereinafterreferred to as “I&B Code”)

2. The State Bank of India (“FinancialCreditor”) invoked its right underSecuritisation and Reconstruction ofFinancial Assets and Enforcement ofSecurity Interest Act, 2002, (hereinafterreferred to as “SARFAESI Act, 2002”)against the ‘Personal Guarantor’ underSection 13(2) on 4th August, 2015 forrecovery of Rs. 61,13,28,785.48/- from thesaid 1st Respondent as securities. Thenotice was challenged by the ‘CorporateDebtor’ before the Hon’ble High Court ofMadras, which was dismissed with costson 17th November, 2016. Thereafter, the


State Bank of India (‘Financial Creditor’)from proceeding against the ‘PersonalGuarantor’ till the period of ‘Moratorium’is over.

B. Findings of the National Company LawAppellate Tribunal :

1. ‘I&B Code, 2016’ is in three parts. Part I-‘Preliminary’ including the definitionsgiven therein applies to both Part II-‘Insolvency Resolution and Liquidation forCorporate Persons’ and Part III-‘Insolvency Resolution and Bankruptcyfor Individuals and Partnership Firms’.

2. As per Part II, ‘Insolvency Resolution’ and‘Liquidation Proceedings’ can be initiatedonly against the ‘Corporate Persons’ andnot against an individual, including‘Personal Guarantor’, as defined undersub-section (22) of Section 5 of the ‘I&BCode’ and reads as follows: -

“5. Definitions. % ………….(22)“personal guarantor” means anindividual who is the surety in acontract of guarantee to a corporatedebtor.”

3. For the purpose of sub-section (8) ofSection 5 of the ‘I&B Code’, thoughcounter-indemnity obligation in respect ofa guarantee, if disbursed against theconsideration for the time value of moneycomes within the meaning of ‘FinancialDebt’, no insolvency and liquidationproceeding can be initiated against the‘Personal Guarantor’ under Part II.

4. Part III relates to ‘Insolvency Resolutionand Bankruptcy for Individuals andPartnership Firms’, including a person whois ‘Personal Guarantor’. For the saidreason, in a case where proceeding hasbeen initiated against the ‘CorporateDebtor’, if simultaneous proceeding is tobe initiated against the ‘PersonalGuarantor’ for bankruptcy proceedings, anapplication relating to the ‘Insolvency

Resolution or Bankruptcy’ of a ‘PersonalGuarantor’ of such ‘Corporate Debtor’require to be filed before the sameAdjudicating Authority (NationalCompany Law Tribunal) hearing the‘Insolvency Resolution Process’ or‘Liquidation Proceedings’ of a ‘CorporateDebtor’. This is, as apparent from sub-sections (2) & (3) of Section 60 of the ‘I&BCode’, which is quoted below: -

“60. Adjudicating Authority forcorporate persons. % …………….(2) Without prejudice to sub section(1) and notwithstanding anything tothe contrary contained in this Code,where a corporate insolvencyresolution process or liquidationproceeding of a corporate debtor ispending before a National CompanyLaw Tribunal, an applicationrelating to the insolvency resolutionor bankruptcy of a personalguarantor of such corporate debtorshall be filed before such NationalCompany Law Tribunal. (3) Aninsolvency resolution process orbankruptcy proceeding of a personalguarantor of the corporate debtorpending in any court or tribunalshall stand transferred to theAdjudicating Authority dealing withinsolvency resolution process orliquidation proceeding of suchcorporate debtor.”

5. Therefore, a ‘Financial Creditor’, includingAppellant-State Bank of India, if intendsto proceed against the ‘Personal Guarantor’of the ‘Corporate Debtor’, may file anapplication relating to ‘Bankruptcy’ of the‘Personal Guarantor’ before the sameAdjudicating Authority (‘Division Bench,Chennai’ herein). Though, Part III of the‘I&B Code’ has not yet notified but theAdjudicating Authority is vested with all

Allied Laws Corner


the powers of the Debt Recovery Tribunal(Adjudicating Authority under Part III) ascontemplated under Part III of the ‘I&BCode’ for the purpose of sub section (2) asapparent from sub-section (4) of Section60 of the ‘I&B Code’ as quoted below: -

“60. Adjudicating Authority for corporatepersons. % (4) The NationalCompany Law Tribunal shall bevested with all the powers of the DebtRecovery Tribunal as contemplatedunder Part III of this Code for thepurpose of sub-section (2).

6. Section 14 of the ‘I&B Code’ empowersthe Adjudicating Authority to declare‘Moratorium’ for prohibiting all of thematters as stipulated thereunder and quotedbelow :

“14. Moratorium. % (1) Subject toprovisions of sub sections (2) and (3),on the insolvency commencementdate, the Adjudicating Authority shallby order declare moratorium forprohibiting all of the following,namely:—

(a) the institution of suits orcontinuation of pending suits orproceedings against thecorporate debtor includingexecution of any judgment,decree or order in any court oflaw, tribunal, arbitration panelor other authority;

(b) transferring, encumbering,alienating or disposing of by thecorporate debtor any of its assetsor any legal right or beneficialinterest therein;

(c) any action to foreclose, recoveror enforce any security interestcreated by the corporate debtorin respect of its propertyincluding any action under theSecuritisation and

Reconstruction of FinancialAssets and Enforcement ofSecurity Interest Act, 2002;

(d) the recovery of any property byan owner or lessor where suchproperty is occupied by or in thepossession of the corporatedebtor.

(2) The supply of essential goods or servicesto the corporate debtor as may be specifiedshall not be terminated or suspended orinterrupted during moratorium period.

(3) The provisions of sub-section (1) shall notapply to such transactions as may benotified by the Central Government inconsultation with any financial sectorregulator.

(4) The order of moratorium shall have effectfrom the date of such order till thecompletion of the corporate insolvencyresolution process:

Provided that where at any time during thecorporate insolvency resolution processperiod, if the Adjudicating Authorityapproves the resolution plan under sub-section (1) of section 31 or passes an orderfor liquidation of corporate debtor undersection 33, the moratorium shall cease tohave effect from the date of such approvalor liquidation order, as the case may be.”

7. On bare perusal of the aforesaidprovisions, it is clear that not onlyinstitution of suits or continuation ofpending suits or proceedings against the‘Corporate Debtor’ are prohibited fromproceedings, in terms of clause (b) of sub-section (1) of Section 14 of the ‘I&BCode’, transfer, encumbrance, alienation ordisposal of any of its assets of the‘Corporate Debtor’ and/ or any legal rightor beneficial interest therein areprohibited. Clauses (c) & (d) of sub-section(1) of Section 14 of the ‘I&B Code’prohibits recovery or enforcement of any

Allied Laws Corner


security interest created by the corporatedebtor in respect of its property includingthe property occupied by it or in thepossession of the ‘Corporate Debtor’

8. Sub-section (1) of Section 31 relates to‘approval of resolution plan’, which readsas follows: -

“31. Approval of resolution plan. % (1) Ifthe Adjudicating Authority is satisfiedthat the resolution plan as approvedby the committee of creditors undersub-section (4) of section 30 meetsthe requirements as referred to in sub-section (2) of section 30, it shall byorder approve the resolution planwhich shall be binding on thecorporate debtor and its employees,members, creditors, guarantors andother stakeholders involved in theresolution plan.”

Allied Laws Corner

9. From the aforesaid provisions, it is clearthat ‘Resolution Plan’ if approved by the‘Committee of Creditors’ under sub-section(4) of Section 30 and if the same meets therequirements as referred to in sub-section(2) of Section 30 and once approved bythe ‘Adjudicating Authority’ is not onlybinding on the ‘Corporate Debtor’, but alsoon its employees, members, creditors,guarantors and other stakeholders involvedin the ‘Resolution Plan’, including the‘Personal Guarantor’.

10. In view of the aforesaid provisions, it isheld that the ‘Moratorium’ will not onlybe applicable to the property of the‘Corporate Debtor’ but also on the‘Personal Guarantor’.

❉ ❉ ❉

assessee was not directly exported by him butwas ultimately exported. According to theassessee, since the goods manufactured fromthe goods purchased on exemption basis wereultimately exported, the condition of theexemption notification stood complied.

Held:

The Allahabad High Court held that one of theprimary eligibility conditions to qualify forexemption placed by the exemption notificationis that the manufactured goods are exported outof India. A plain reading of the terms of thenotification establishes that the primary issuewhich must govern the grant exemption is theexport of the manufactured goods. Thenotification neither mandates nor provides thatthe manufacturer himself export the goods outof India. The emphasis is on the manufacturedgoods being exported and not that themanufactured goods have ultimately beenexported out of India.

contd. from page 617 GST & VAT Judgments

The Hon. High Court held that the reasoningwhich weighed with the department to denyrelief to the assessee on the score cannot besustained. However, the matter cannot end here.The issue as to whether the manufactured goodshave moved in the course of export cannot bedetermined on the basis of the exemptionnotification since this would principally haveto be answered with reference to the provisionsencapsulated in section 5 of the CST, 1956.The matter has not been examined from theview of section 5(3) and there has been noconsideration of the ‘same goods’ principleflowing from the said provision nor has therebeen an examination of an inextricable linkbetween the first purchase and ultimate export.Both these aspects of the matter would thereforemerit a consideration of the entire issue afresh.The revision application came to be allowedby remand.

❉ ❉ ❉


CA. Pamil H. [email protected]

From Published Accounts

Taxes on income - Annual Report 2016-17

Claris Lifesciences Limited

Current taxes

Current income tax assets and liabilities at theamount expected to be recovered from or paid tothe taxation authorise. The tax rates and tax lawsused to compute the amount are those that areenacted or substantively enacted, at the reportingdate.

Current income tax relating to items recognisedoutside statement of profit and loss (either in othercomprehensive income or in equity). Current taxitems are recognised in correlation to the underlyingtransaction either in OCI or directly in equity. Themanagement periodically evaluates positions takenin the tax returns with respect to situations in whichapplicable tax regulations are subject tointerpretation and establishes provisions whereappropriate.

Deferred taxes

Deferred tax is provided using the balance sheetmethod on temporary difference between the taxbase of assets and liabilities and their carryingamounts for financial reporting purposes at thereporting date.

Deferred tax liabilities are recognised for all taxabletemporary differences, except, when the deferredtax liability arise from the initial recognition ofgoodwill or an asset or liability in a transaction thatis not a business combination and, at the time ofthe transaction, affects neither the accounting profitnor taxable profit or loss.

Deferred tax assets are recognised for all deductibletemporary differences, the carry forward of unusedtax credits and any unused tax losses. Deferred taxassets are recognised to the extent that it is probablethat taxable profit will be available against which

the deductible temporary differences, and the carryforward of unused tax credits and unused tax lossescan be utilised, except when the deferred tax assetrelating to the deductible temporary difference arisefrom the initial recognition of an asset or liability ina transaction that is not a business combination and,at the time of the transaction, affects neither theaccounting profit or loss.

The Group recognises tax credits in the nature MATcredit as an asset only to the extent that there isconvincing evidence that the Group will pay normalincome tax during the specified period, i.e., theperiod for which tax credit is allowed to be carriedforward. In the year in which the Group recognisestax credits as an asset, the said asset is created byway of tax credit to the statement of profit and loss.The Group reviews such tax credit asset at eachreporting date and writes down the asset to the extentthe Group does not have convincing evidence thatit will pay normal tax during the specified period.Deferred tax includes MAT tax credit.

Any deferred tax asset or liability arising fromdeductible or taxable temporary difference in respectof unrealised inter-Group profit or loss oninventories held by the Group in different taxjurisdictions is recognized using the tax rate of thejurisdiction in which such inventories are held.

The carrying amount of deferred tax assets isreviewed at each reporting date and reduced to theextent that is no longer probable that sufficienttaxable profit will be available to allow all or partof the deferred tax asset to be utilised. Unrecogniseddeferred tax assets are re-assessed at each reportingdate and recognised to the extent that it has becomeprobable that future taxable profits will allow thedeferred tax assets to be recovered.

Deferred tax assets and liabilities are measured atthe tax rates that are expected to apply in the yearwhen the asset is realised or the liability is settled,


From Published Accounts

based on tax rates (and tax laws) that have beenenacted or substantively at the reporting date.

Deferred tax relating to items recognised outsidestatement of profit and loss is recognised outsidestatement of profit and loss (either in othercomprehensive income or in equity). Deferred taxitems are recognised in correlation to the underlyingtransaction either in OCI or directly in equity.

Deferred tax assets and deferred tax liabilities areoffset if a legally enforceable right exists to set offcurrent tax assets against current tax liabilities andthe deferred taxes relate to the same taxable entityand the same taxation authority.

Gayatri Projects Limited

i) Current Tax

Provision for Current tax is made based on theliability computed in accordance with therelevant tax rates and provisions of Income TaxAct, 1961 I as at the balance sheet date andany adjustments to taxes respect of the previousyears, penalties if any related to income tax areincluded in the current tax expense.

ii) Deferred Taxes

Deferred Tax is the tax expected to be payableor recoverable on differences between thecarrying amount of the assets and liabilities forfinancial reporting purpose and thecorresponding tax bases used in computationof taxable profit. Deferred tax issued arerecognized and carried forward only to theextent that there is a reasonable certainty thatsufficient future taxable income will beavailable against which such Deferred TaxAssets can be realized.

Current and deferred tax is recognized in profitor loss, except to the extent that it related toitems recognized in other comprehensiveincome or directly in equity. In this case, thetax is also recognized in other comprehensive

Visa Steel Ltd.

income or directly in equity, respectively.

2.2.10 Income Tax –

The income tax expense or credit for the period isthe tax payable on the current period’s taxableincome based on the applicable income tax rate foreach jurisdiction adjusted by changes in deferredtax assets and liabilities attributable to temporarydifferences and to unused tax losses.

The current income tax change is calculated on thebasis of the tax laws enacted or substantivelyenacted at the end of the reporting period.Management periodically evaluates positions takenin tax return with respect to situations in whichapplicable tax regulation is subject to interpretation.It establishes provisions where appropriate on thebasis of amounts expected to be paid to the taxauthorities.

Deferred income tax is provided in full, using theliability method, on temporary differences arisingbetween the tax bases of assets and liabilities andtheir carrying amounts in the separate financialstatements. However, deferred tax liabilities are notrecognised if they arise from the initial recognitionof goodwill. Deferred income tax is also notaccounted for if it arises from initial recognition ofan asset or liability in a transaction other a businesscombination that at the time of the transaction affectsneither accounting profit nor taxable profit (taxloss). Deferred income tax is determined using taxrates (and laws) that have been enacted orsubstantially enacted by the end of the reportingperiod and are expected to apply when the relateddeferred income tax asset is realised or the deferredincome tax liability is settled.

Deferred tax assets are recognised for all deductibletemporary differences and unused tax losses onlyif it is probable that future taxable amounts will beavailable to utilise those temporary differences andlosses.

Deferred tax liabilities are not recognised fortemporary differences between the carrying amountand tax bases of investment subsidiaries and interest



From the Government

CA. Kunal A. [email protected]

Income Tax

Centralised Communication Scheme, 2018.

The CBDT hereby makes the following schemefor centralized issuance of notice, namely.

- The Centralized Communication Scheme,2018 and shall come in to force on the date ofits publication in the Official Gazette.

- Issue and service of notice-

(1) The Centralised Communication Centreshall issue notice to any person requiringhim to furnish information or documentsfor the purpose of verification ofinformation in his possession.

(2) The notice shall be issued under digitalsignature of the designated authority.

(3) The notice shall be served by delivering acopy by electronic mail, or by placing acopy in the registered account on the portalfollowed by intimation by Short MessageService.

(4) The information or documents called forunder sub-paragraph (1) shall be furnishedon or before the date specified in the noticeas specified in paragraph 4.

(5) The designated authority shall also runsustained campaign to ensure complianceby way of sending electronic mails, ShortMessage Service, reminders, letters andoutbound calls.

- Response to notice-

(1) The Centralised Communication Centremay prescribe a machine readablestructured format for furnishing theinformation or documents by the personin response to the notice issued undersubparagraph (1) of paragraph 3.

(2) The Principal Director General of Income-tax (Systems) or the Director General ofIncome-tax (Systems) shall specify theprocedure, formats and standards forfurnishing response to the notices.

- No personal appearance-

No person shall be required to appearpersonally or through authorised representativebefore the designated authority at theCentralised Communication Centre inconnection with any proceedings.

- Power to specify procedure and processes-

(1) The Principal Director General of Income-tax (Systems) or Director General ofIncome-tax (Systems) shall specify fromtime to time, procedures and processes foreffective functioning of the CentralisedCommunication Centre, including thefollowing matters, namely:-

(a) format and procedure for issue ofnotice;

(b) receipt of any information or documentfrom the addressee in response tonotice;

(c) mode and format for issue ofacknowledgment of the responsefurnished by the addressee;

(d) provision of web portal facilityincluding login facility, tracking statusof verification, display of relevantdetails, and facility of download;

(e) call centre to answer queries andprovide support services, includingoutbound calls and inbound callsseeking information or clarification;


(f) managing administration functionssuch as receipt, scanning, data entry,storage and retrieval of informationand documents in a centralised manner;

(g) grievance redressal mechanism in theCentralised Communication Centre.

- Definitions:-

In this scheme, unless the context otherwiserequires,—

a) “Act” means the Income-tax Act, 1961 (43of 1961);

b) “Director General” means the DirectorGeneral of Income-tax appointed undersub-section (1) of section 117 of the Actand authorised by the Board in this behalf;

From the Government

c) “Principal Director General” means thePrincipal Director General of Income-taxappointed under sub-section (1) of section117 of the Act and authorised by the Boardin this behalf;

d) “Designated authority” means the income-tax authority prescribed under sub-section(1) of Section 133C of the Act who is incharge of the Centralised CommunicationCentre;

e) “Portal” means the web portal of theCentralised Communication Centre.

(Notification No. SO 771(E) [No.12/2018(F.NO.370142/22/2017-TPL)], Dated 22-2-2018)

❉ ❉ ❉

contd. from page 628 From Published Accounts

in joint arrangement where the Group is able tocontrol the timing of the reversal of the temporarydifferences and it is probable that the differenceswill not reverse in the foreseeable future.

Deferred tax assets and liabilities are offset whenthere is a legally enforceable right to offset currenttax assets and liabilities and when the deferred taxbalances relate to the same taxation authority.Current tax assets and tax liabilities are offset wherethe Company has a legally enforceable right to offsetand intends either to settle on a net basis, or to realisethe asset and settle the liability simultaneously.

Current and deferred tax is recognised in profit orloss, except to the extent that it relates to itemsrecognised in other comprehensive income ordirectly in equity. In this case, the tax is alsorecognised in other comprehensive income ordirectly in equity, respectively.

❉ ❉ ❉


Association News

CA. Maulik S. DesaiHon. Secretary

CA. Riken J. PatelHon. Secretary

Glimpses of Past Events

Dhuleti Celebrations with CAA MembersLecture Meeting by CA. Nayan Kothari onStatutory Bank Branch Audit

Release of Union Budget Booklet by the worthyhands of Senior Advocate Shri Saurabh Soparkar

Speech by Senior Advocate Shri SaurabhSoparkar on Union Budget

Large Audience at Budget Meeting bySenior Advocate Shri Saurabh Soparkar

3rd Brain Trust cum Workshop Meeting byCA. Sujal Shah on Valuation of Shares


Across

1. The corporate veil can be lifted if it is foundthat the company is acting as an _______ ofthe shareholders though it has got legal entity.

2. _______ comes only when vision is backedby action.

3. In the Finance Bill 2018, it is proposed toincrease the lockin period of the bonds u/s 54EC

Down4. The HUF with all its incidents is a creature of

from three to _____ years.

______ and cannot be created by act of parties.5. In the Union Budget 2018-19, new explanation

2A to section 9(1)(i) is proposed to be addedby which significant _______ presence of anon resident in India shall constitute as businessconnection in India.

6. In Union Budget 2018, standard deduction ofRs. _______ thousand is proposed for salaried

ACAJ Crossword Contest # 46

taxpayers.

Notes:1. The Crossword puzzle is based on previous

issue of ACA Journal.

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

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

4. Members may submit their reply eitherphysically at the office of the Association orby email at [email protected] on orbefore 01/04/2018.

5. The decision of Journal Committee shall be final

ACAJ Crossword Contest # 45 - Solution

and binding.

Across1. Supply 2. Non resident3. Happy

Down4. Subsequent 5. Revival

Winners of ACAJ Crossword Contest # 45

1.

6. Thirty

❉ ❉ ❉

CA. Parin Kapadia

2. CA. Falguni Anada

1 5

4 6

2

3