may 2020 - the chamber of tax consultants · advertisement rates per insertion fourth cover page...

May 2020 | The Chamber's Journal | 3 |

Editorial Vipul B. Joshi .........................................................................5

From the President Vipul K. Choksi .......................................................................8

SPECIAL STORY

Landmark Supreme Court Rulings

Section 68 – PCIT vs. NRA Iron & Steel (P) Ltd. (2019) 412 ITR 161 (SC) — Rahul Hakani .............................................................11

Analysis of the Supreme Court decisions on Section 14A — K. Gopal ......................................................................23

Benami Act – Applicability of the judgments rendered under old law — Dharan Gandhi ..........................................................43

Analysis of decision in case of New Delhi Television Ltd. vs. DCIT [Civil Appeal No. 1008 of 2020] — Devendra Jain & Radha Halbe ...............................47

Retrospective application of amendment intended to mitigate hardships – Section 40(a)(ia) — Viraj Mehta ................................51

Section 292B & 292BB – Validation of Mistakes and Limitation — Paras S. Savla, Pratik B. Poddar & Harsh R. Shah................................................................55

When in doubt, always favour the Revenue? Analysis of Judgment in CC vs. Dilip Kumar & Company — Harsh Kapadia ........66

Section 28(iv) and 41(1)— CIT vs. Mahindra & Mahindra Ltd. (2018) 404 ITR 1 (SC) — Ketan Vajani ....................70

ContentsVol. VIII | No. 8 | May – 2020

Important ruling dealing with registration of Charitable Trust — Ajay Singh ............................75

Direct Taxes

High Court — Paras S. Savla, Jitendra Singh & Nishit Gandhi ..........................................................................80

Tribunal — Neelam Jadhav, Neha Paranjpe & Tanmay Phadke..............................................................87

International Taxation

Case Law Update — Tarunkumar Singhal & Dr. Sunil Moti Lala ..........92

Indirect Taxes

GST – Recent Judgments & Advance Rulings — Naresh Sheth & Jinesh Shah ....................................97

Service Tax – Case Law Update — Rajiv Luthia & Keval Shah ....................................109

Corporate Laws

Case Law Update — Makrand Joshi ..................... 117

Other Laws

FEMA Update & Analysis — Mayur Nayak, Natwar Thakrar & Pankaj Bhuta ...............................122

Best of The Rest — Rahul Sarda ............................128

The Chamber News — Ketan L. Vajani & Haresh P. Kenia......................132

i

ADVERTISEMENT RATESPer Insertion

Fourth Cover Page (Colour) ` 15,000Second & Third Cover Page (Colour) ` 13,500Ordinary Full Page (B&W) ` 7,500Ordinary Half Page (B&W) ` 3,500Ordinary Quarter Page (B&W) ` 1,750(Special discount on bulk inside colour pages)

Exclusive of GSTFull advertisement charges should be

paid in advance.

The Chamber of Tax Consultants3, Rewa Chambers, Ground Floor, 31, New Marine Lines, Mumbai – 400 020 Phone : 2200 1787/2209 0423/2200 2455 E-Mail: [email protected] • Website : http://www.ctconline.org.

The Chamber's Journal

DISCLAIMEROpinions, views, statements, results, replies, etc., published in the Journal are of the respective authors/contributors.

Neither The Chamber of Tax Consultants nor the authors/contributors are responsible in any way whatsoever for any personal or professional liability arising out of the same.

MEMBERSHIP FEES & JOURNAL SUBSCRIPTION — FOR THE F.Y. 2020-21

Sr. No.

Membership Type Fees GST 18%

Total

1. Life Membership Fees ` 15,000 2,700 17,7002 Ordinary Membership Fees -

Yearly (April to March)` 2,500 450 2,950

3. Admission Fees – Ordinary Membership

` 750 135 885

4. Associate Membership Fee Yearly (April to March)

` 7,500 1,350 8,850

5. Admission Fees – Associate Membership

` 1,000 180 1,180

6. Student Membership including E-Journal (April to March)

` 500 90 590

7. Journal Subscription Life Members

` 1,350 0 1,350

8. Journal Subscription Non-Members

` 2,500 0 2,500

9. Journal Subscription Student Members

` 1,000 0 1,000

Editor & Editorial Board

2019-2020Chairman of

Editorial Board V. H. Patil

Editor Vipul B. JoshiAsst. Editors

Ajay Singh Ameya Kunte

Haresh Chheda Manoj Shah

Nishit Gandhi Paras K. Savla

Rakesh Upadhyay Sanjay Parikh Vikram Mehta

Yatin VyavaharkarMembers

A. S. Merchant K. Gopal

Keshav Bhujle Kishor Vanjara Pradip Kapasi

Chairman Bhadresh Doshi

Ex-Officio Vipul K. Choksi

Anish M. Thacker

READER'S SUGGESTIONS AND VIEWS: We invite the suggestions and views from readers for improvement of The Chamber's Journal. Kindly send your suggestions on [email protected].

Managing Council 2019-20

President

Vipul K. ChoksiVice President

Anish M. Thacker

Hon. Jt. Secretaries Ketan L. Vajani • Haresh P. Kenia

Hon. Treasurer Imm. Past President Parag S. Vedi Hinesh R. Doshi

Members Ashok L. Sharma Nilesh S. Vikamsey Bhadresh K. Doshi Paras K. Savla Devendra H. Jain Paresh P. Shah Heneel K. Patel Pranav P. Kapadia Hitesh R. Shah Rahul K. Hakani K. Gopal Rajesh L. Shah Kishor D. Vanjara Rajesh P. Shah Mahendra B. Sanghvi Varsha R. Galvankar Maitri P. Savla Yatin K. Desai Mehul R. Sheth

Vipul B. Joshi – Editor

No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from The Chamber of Tax Consultants.

No part of the contents of the Journal should be used as, or be regarded as a substitute for, professional advice.

Non-receipt of the Journal must be notified within one month from the date of publication, which is 12th of every month.

CHAMBER'S E-JOURNAL SUBSCRIPTION

FOR THE F.Y. 2020-21Membership Type Fees GST

18%Total

E-Journal Subscription - Life Members (Yearly)

700 126 826

E-Journal Subscription - Non-Members (Yearly)

1,000 180 1180

E-Journal Subscription - Single Journal

200 36 236

DISCO UNT25% fo r 12 i nse r t i ons15% fo r 6 i n se r t i ons 5% fo r 3 i n se r t i ons

| 4 | The Chamber's Journal | May 2020

Journal Committee 2019-20Chairman

Bhadresh DoshiVice Chairman Mandar Telang

Ex officio Vipul K. Choksi • Anish M. Thacker

Advisor Past President K. Gopal Vipin Batavia

Office Bearer Haresh Kenia

Managing Council Member Maitri SavlaConvenors

Bhavik Shah Toral Shah

Members Ameya Kunte Nikita Badheka Atul Bheda Pankaj Majithia Aumkar Gadgil Rakesh Upadhyay Bharat Vasani Rajkamal Shah Dharan Gandhi Sachin Maher Janak Vaghani Sanjay Gajra Kush Vora Sanjeev Lalan Makarand Joshi Sanjeev Shah Mitesh Majethia Tanmay Phadke Naresh Ajwani Viraj Mehta

ii

The New “Normal”

Never in the recent memory, a month has passed soooooo slooooowly, and I am sure so will be the case with all readers. This pandemic of COVID -19 and its aftermath has broken so many records and has so many firsts to its credit that to list them down itself will be a herculean task. No event in the recent civilisation had so much all pervasive effects, affecting almost all spheres of human life world over; be it from the perspective of health – individual, local, national and international level, medical science and healthcare, all sectors of trade, commerce, industry – including international trade and economy, large scale poverty and unemployment, etc. It has also created many social and humane issues, which were not even thought before.

Anyway, in last over 60 days, there has been glut, nay, onslaught and overdose, of information and discussions on various aspects concerning COVID 19. Even the greatest institutions are grappling to comprehend and to have clear understanding about its effects and are not yet clear/ certain on any aspect. And who else but the self styled pundits and gurus have great field days of giving sermons and opinions – raging form from doomsday/ apocalypse prophesy to the utopia of Brave New World (with apology to Aldous Huxley) and the hapless, frustrated and gullible herds believe each word as a gospel truth. The truth, it appears, is that nobody is really equipped to even fathom the magnitude of the current situation, much less to predict future with any certainty!

But one thing is clear. It is certainly a wake-up call, a clear warning, to the mankind; either mend the ways of living or perish. As it is said, “History repeats, but the price doubles!” In this case, the price, if the lessons are not learnt and the history is to repeat, will not be possible to be paid or even evaluated. On the other hand, this event should serve as eye opener and, in fact, an opportunity to pause and re-examine the entire living system and life philosophy; and to use the words of the noted jurist, Mr. Harish Salve, Senior Advocate, an opportunity to press the ‘reset’ key!

But let’s enjoy some guess work game about the new ‘normal’ - the phrase which is going to be the Phrase of the Year.

Editorial

May 2020 | The Chamber's Journal | 5 | iii

At International Level

- The survival of the fittest, literally

- The survival of the quickest, to adapt to the new world order,

- The survival of the meanest, to seize the opportunity for financial gains – after all, ultimately, it boils down to money power; “the whole thing is that ke bhaiya subse bada rupaiya!”

- The survival of the shrewdest, to settle the scores – the evergreen flavour of international diplomacy

- The survival of the most creditable and accountable international bodies and agencies; WHO appears to be a clear failure

- The survival of the self-dependents / independents {“atma nirbhar” – another buzz word which is going to catch up the flavour of the season}. The days of protectionism are ahead!

At National Level

- Seizing the opportunity for consolidation, new reforms and bold actions across the board, while shedding undesirable laws and practices, which otherwise would not have been possible in ‘normal’ times!

- Strong centre with weakened states, at least in short and medium terms

- Versions 1.0, 2.0, 3.0, 4.0, etc. are no longer confined to software versions; they also indicate the phases of lockdowns!

At society level

- The social distancing – the phrase which will be in competition for the title “The Phrase of the Year’, though the better term is ‘physical distancing’ - will be the norm with ridiculous heights; but at the cost of losing the warmth and the personal element in interacting in person. The sight, like paying condolences through passing cars in front of the grieving widow, is quite a moving and unnerving sight!

- The ‘western’ handshake is out and our Indian ‘namste’ is in!

- Almost total dependence and surrender to ‘the good, the bad and the ugly’ - the internet! People will become more individualistic doing their most of the daily activities, including business, profession or vocation, confined to their homes

| 6 | The Chamber's Journal | May 2020 iv

- Schools will become historic monuments, with the charms of schools becoming part of the school lore and nostalgia.

At individual level

- The good old grandma’s saying: “The health is wealth” is going to be new mantra and a part of nursery rhyme! Getting rid of unhealthy lifestyle and adopting healthier one will not remain a matter of luxury or choice but will become a matter of necessity and survival.

- New value system, revised philosophy, with fresh approach and look towards the priorities of life, the way of living and enjoying life as also co-existing with others, including other living beings, the environment and the Nature.

- Adapting to frugal living, which may become the new cool thing. The concept of minimalist lifestyle is here to stay and may become fashionable!

- Substantial upheavals at professional, business and employment level but, hopefully, will eventually bounce back with shrewd reforms and actions by the government, albeit, with the support of the industry and, of course, of the citizens. Of course, adapting to the new environment quickly and innovatively will be of advantage.

But apart from such ‘fun game’, it is better not to think, analyze or conclude much at this stage. So relax! There is so much to enjoy in the meanwhile from what we already have, instead of running after what we don’t have!

After all, there is no lockdown in the life clock; it’s ticking!

This is the second issue of e publication of the CTC Journal. While the first e issue of the journal in the history of the CTC - for April 2020 - was, at that time, planned and perceived as only as one month exception /aberration, unfortunately, it seems, it may not remain as an exception; at least for the time being. Whether it also will be a part of ‘the new normal’? Can’t say!

I hope the readers will find this month’s Special Story – Landmark Supreme Court Rulings – the assorted decisions of the Apex Court, as a refreshing change in this era of proliferation of webinars!

Vipul B. Joshi Editor

May 2020 | The Chamber's Journal | 7 | v

Dear Members,

I am writing this communication on the 50th day of the lockdown and we are not sure as to for how many days or months, this would continue. The Prime Minister Shri Narendra Modi yesterday in his speech mentioned that ‘lockdown 4.0’ would be announced before 17th May with revised guidelines. We all will have to learn to live with all the necessary precautions associated with the containment of the dreaded Corona Virus and social distancing for a reasonable period of time.

The total Covid 19 cases detected world over, as on date, are 43.96 lakh and deaths are at 2.96 lakh. Exactly one month ago when I wrote my communication . the cases world over, were 14.5 lakh and deaths, about 83,000. Both the figures have tripled in one month’s time ! In India the cases have increased manifold. One month back, in India, there were 5300 cases and deaths, 164. As against that, there are about 74,000 cases and about 2400 deaths. Not only the number of cases but also the rate at which they are increasing, is a cause for concern. This is despite all the efforts to keep the pandemic under control. Prayers to the Almighty seems to be the only remedy for the end of this pandemic.

The global and Indian economy are both very badly affected due to the Covid 19 pandemic. It has rendered so many persons especially daily wage earners, jobless in India. Due to this, a large population of such class, has migrated to their home towns. Even if the Industry and businesses have to start all over again, the requisite human resources may not be available immediately. So, this could be a big challenge in front of all the industries as well as businesses once they restart There are so many other complex problems which have badly impacted the economy. It may take at least a year for the economy to come back on track.

The Prime Minster, with a view to revive the economy and make India self-reliant, has launched the ‘Atma Nirbhar Bharat Abhiyan’ or ‘Self Reliant India Movement’. Under this, the Government with a view to revive the economy has announced economic package of Rs 20 lakh crore. Only part of the reliefs have been announced so far which are mainly relating to MSME sector. Non-salary TDS rates have been reduced by 25% which would improve cashflow

From the President

| 8 | The Chamber's Journal | May 2020 vi

in the hands of the taxpayers. Due dates for filing of tax returns have been extended till 30th November and the Vivad se Vishwas Scheme also has been extended till 31st December.

The Law and Representation Committee continues to do fantastic work and made two important representation during the month of April. As per the Finance Act ,2020, an assessee has option of filing tax return at lower rate of tax without claiming exemptions/deduction. However there was no related amendment in respect of lower TDS to be deducted by an employer in case an employee avails lower deduction of tax. The representation was made in this regard and our representation was immediately considered and necessary amendment made. Another representation was made on Relaxation of certain provisions under the Companies Act and Rules made there under and some provisions of Secretarial Standard.

Despite the lockdown, enthusiasm of all the committee Chairmen has not receded a bit. During the month of April as many as 30 webinars were organized by all the committees. Two of these webinars were jointly organized one with the Bombay Chartered Accountants Society and another with Riverus. Nearly 10,000 professionals took benefit of this webinar. Compliments to all the Chairmen and their respective teams for their efforts! The overwhelming response which these webinars got, was due to the fact that the selection of topics was appropriate and the learned speakers who were invited are professionals of eminence. Needless to say that the quest of the professionals to sharpen the saw during the lockdown was also one the reasons for such a huge response to the webinars. Chamber is indeed fortunate that the eminent professionals as well as the members from the judiciary accepted our invitation. To illustratively name a few of them; Vice Presidents of the ITAT Shri Pramod Kumar and Shri G. S. Pannu, former CBDT member Shri Akhilesh Ranajan, Former Delhi High Court judge Shri R. V. Easwar. Shri Saurabh Soparkar and Shri S. Ganesh, both senior advocates and CA Dinesh Kanabar.

Holding of Webinars is going to be the way of conducting seminars going forward. The Direct Tax Committee and International Tax Committee have organized lecture series on Important Supreme Court Judgements and Study Course on International Taxation respectively and for both the courses , eminent professionals have been invited. They have met with a very encouraging and positive response by way of very good registration.

The IT connect committee and especially the committee Chairperson, CA Maitri Savla, need to be complimented for her monumental efforts in making these webinar happen. She and the committee are the backbone of these webinars and are working tirelessly. Kudos to Maitri and her team. Needless to mention that the Chamber staff especially Hitesh Shah and Pradip Nambiar are working equally hard for these webinars. In fact, the Chamber started webinars in 2016, realising that webinars would be the way forward. Before lockdown itself the Chamber had done 21 webinars. Thus we were all prepared for the webinars during the lockdown and therefore we could do so many webinars in a seamless manner.

May 2020 | The Chamber's Journal | 9 | vii

Another praiseworthy initiative by the IT Committee in collaboration with the Research Publication Committee is the e publication on Working from Home. The publication was released within 15 days from the date of its conceptualization and has got very good response from all the corners. All the authors; CA Dinesh Tejwani, CA Alok Jajodia, CA Mitesh Katira and CA Jigar Shah need to be complimented for their untiring efforts and completing the publication in a record time which is so well received

This issue of the Journal is on the Important Supreme Court Judgements which are very important to study and analyse at any point of time. I compliment the Chairman and the Committee for thinking of this topic and also the authors for their selfless contribution.

I would like to sign off with a very meaningful and positive quote in the current situation

You're going to go through tough times - that's life. But I say, 'Nothing happens to you, it happens for you.' See the positive in negative events

- Joel Osteen

VIPUL K. CHOKSI President

| 10 | The Chamber's Journal | May 2020 viii

Special Story — Section 68 – PCIT vs. NRA Iron & Steel (P) Ltd. (2019) 412 ITR 161 (SC)

SS-VIII-1 May 2020 | The Chamber's Journal | 11 |

Rahul Hakani, Advocate

Section 68 – PCIT vs. NRA Iron & Steel (P) Ltd. (2019) 412 ITR 161 (SC)

1. IntroductionThe decision of the Hon'ble Supreme Court in PCIT vs. NRA Iron & Steel (P) Ltd ( 2019) 412 ITR 161 (SC) has reiterated the cardinal principles underlying Section 68 which require an Assessee to prove identity, genuineness of credit entry and creditworthiness of giver and applied them for sustaining an addition in respect of share application monies/share premium/share capital u/s 68 in the hands of investee company. The said decision has created lot of buzz and gained immense traction for the following reasons :

(i) The decision is of the top-most court of India and the issue of addition u/s 68 has been decided against the Assessee. Thus, a general perception is created that said decision will be relied upon by the Department in every case dealing with share application money ignoring the facts of a particular case.

(ii) It was generally understood that in view of the decision of the Supreme Court in CIT vs. Lovely Exports Pvt Ltd [2008] 216 CTR 195 (SC) if an assessee furnishes PAN No and ITR’s of subscriber (ie documentary evidence issued by the Income Tax department itself) and if the shareholder is found to be bogus then the addition will be made in the hands of the shareholder. However, the Supreme Court in PCIT vs. NRA Iron & Steel (P) Ltd (supra) has

confirmed the addition in the hands of the investee company in case of fictitious/non-existent shareholders and thereby shifted the goal-post.

(iii) The decision of the Supreme Court is an ex-parte decision where the Assessee was not represented. Moreover, in an ex-parte decision, the Supreme Court has reversed the concurrent findings of three appellate authorities ie CIT(A), ITAT and the High Court which is not a very usual practice. The Supreme Court in it’s decision has only analysed the Profit & Loss Account for deciding the capacity of share subscribers to make investment. It is felt that had the Assessee been represented then even the Balance Sheet would have been considered for deciding the credit-worthiness. Also, more emphasis would have been laid on the earlier decision of the Supreme Court in CIT vs. Lovely Exports Pvt Ltd [2008] 216 CTR 195 (SC) compelling the court to extensively deal with the said decision one way or the other rather than just giving a passing reference to said decision. In-fact in case of certain companies which were found non-existent, it was possible that there would have been change of name or registered addresss, etc which the assessee could have brought on record. It is felt that the Supreme Court should have at-least considered appointing an Amicus Curaie as


SS-VIII-2| 12 | The Chamber's Journal | May 2020

the issue before the Supreme Court affects large no of Assessee’s across the country.

In any event, the norm now would be to deal with the ratio of said decision and consider its applicability to the facts of each case. Hence, an attempt is made herein-after to understand the scope and effect of the said decision of the Supreme Court and also deal with certain legal issues which arise from it.

2. Factual matrix of the caseThe Assessee Company i.e NRA Iron & Steal Pvt Ltd in its Return showed that money aggregating to ` 17,60,00,000/- had been received through Share Capital/Premium during the Financial Year 2009-10 from several companies situated at Mumbai, Kolkatta, and Guwahati. The shares had a face value of ` 10 per share, were subscribed by the investor companies at ` 190 per share.

Assessee was called upon to furnish details of the amounts received, and provide evidence to establish the identity of the investor companies, credit-worthiness of the investors and the genuineness of the transaction. The AO issued a detailed questionnaire to the Assessee to provide information with respect to the amount of ` 17,60,00,000 shown to have been received as Share Capital/Premium from various legal entities. The AO gave various opportunities to the A.R. of the Assessee to attend the proceedings, and file necessary clarification on the queries raised. The AO had issued summons to the representatives of the investor companies. Despite the summons having been served, nobody appeared on behalf of any of the investor companies. The Department only received submissions through dak, which created a doubt about the identity of the investor companies. Thereafter, the AO independently got field enquiries conducted with respect to the identity and credit-worthiness of the investor companies, and to examine the genuineness of the transaction. Enquiries were made at Mumbai, Kolkatta, and Guwahati where these Companies were stated

to be situated. The result of the enquiry can be summarized as under :

- No reply received from certain companies..

- Addresses of certain companies were wrong.

- Investor not found/available at the given addressee.

- In case of replies filed through Dak, there was no justification for paying huge premium. Also the returned income disclosed was very meagre income or NIL income.

- Almost none of the investor Companies filed their Bank statement.

On the basis of the detailed enquiries conducted, the A.O. held that the Assessee had failed to prove the existence of the identity of the investor companies and genuineness of the transaction. The AO held that the Assessee had failed to discharge the onus by cogent evidence either of the credit worthiness of the so-called investor-companies, or genuineness of the transaction.

Before CIT(A), Assessee relied upon CIT vs. Lovely Exports (P.) Ltd. Divine Leasing & Financing Ltd. [2007] 158 Taxman 440/[2008] 299 ITR 268 and order of Supreme Court dismissing SLP against said order wherein it was held that the Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notice.

The CIT(A) vide Order dated 11.04.2014 deleted the addition made by the A.O. on the ground that the Respondent had filed confirmations from the investor companies, their Income Tax Return, acknowledgments with PAN numbers, copies of their bank account to show that the entire amount had been paid through normal banking channels, and hence discharged the initial onus under Section 68 of the Act, for establishing the credibility and identity of the shareholders.



The ITAT dismissed the appeal, and confirmed the order of the CIT(A) vide Order dated 16.10.2017 on the ground that the Assessee had discharged their primary onus to establish the identity and credit-worthiness of the investors, especially when the investor companies had filed their returns and were being assessed.

The Delhi High Court passed ex-parte order as assessee was not represented. The High Court dismissed the Appeal filed by the Revenue vide the Impugned Order dated 26.02.2018. Against the said order of the Hon'ble Delhi High court, the Department had filed appeal to the Supreme court. The SLP was converted into Appeal and was heard Ex-parte. Review petition filed for re-call of order and de novo hearing was also dismissed as Assessee could not give cogent explanation for non-attendance. [2019] 418 ITR 449 (SC).

3. Ratio laid down by the Supreme Court 3.1 The Supreme Court enunciated following

Legal principles (paras 8 to 11 and para 14) where sums of money are credited as Share Capital/Premium :

i. Investments made by the introduction of share capital or share premium is included u/s 68.

ii The practice of conversion of un-accounted money through the cloak of Share Capital/Premium must be subjected to careful scrutiny. This would be particularly so in the case of private placement of shares, where a higher onus is required to be placed on the Assessee since the information is within the personal knowledge of the Assessee.

iii. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make

the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. With respect to the issue of genuineness of transaction, it is for the assessee to prove by cogent and credible evidence, that the investments made in share capital are genuine borrowings, since the facts are exclusively within the assessee's knowledge.

iv. The Assessing Officer is duty bound to investigate the credit-worthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders.

v. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established.

3.2 Applying the above legal principles to the facts of the case before it, the Supreme Court held as under :

“12. In the present case, the A.O. had conducted detailed enquiry which revealed that :

i. There was no material on record to prove, or even remotely suggest, that the share application money was received from independent legal entities. The survey revealed that some of the investor companies were non-existent, and had no office at the address mentioned by the assessee. :

For example:

a. The companies Hema Trading Co. Pvt. Ltd. and Eternity Multi Trade Pvt. Ltd. at



had filed a return for ` 5,850 but invested in shares to the tune of ` 90,00,000 in the Assessee Company – Respondent, etc.

iii. There was no explanation whatsoever offered as to why the investor companies had applied for shares of the Assessee Company at a high premium of ` 190 per share, even though the face value of the share was ` 10/- per share.

iv. Furthermore, none of the so-called investor companies established the source of funds from which the high share premium was invested.

v. The mere mention of the income tax file number of an investor was not sufficient to discharge the onus under Section 68 of the Act.

13. The lower appellate authorities appear to have ignored the detailed findings of the AO from the field enquiry and investigations carried out by his office. The authorities below have erroneously held that merely because the Respondent Company – Assessee had filed all the primary evidence, the onus on the Assessee stood discharged.

The lower appellate authorities failed to appreciate that the investor companies which had filed income tax returns with a meagre or nil income had to explain how they had invested such huge sums of money in the Assesse Company -Respondent. Clearly the onus to establish the credit worthiness of the investor companies was not discharged. The entire transaction seemed bogus, and lacked credibility.

The Court/Authorities below did not even advert to the field enquiry conducted by the AO which revealed that in several cases the investor companies were found to be

Mumbai, were found to be non-existent at the address given, and the premises was owned by some other person.

b. The companies at Kolkatta did not appear before the A.O., nor did they produce their bank statements to substantiate the source of the funds from which the alleged investments were made.

c. The two companies at Guwahati viz. Ispat Sheet Ltd. and Novelty Traders Ltd., were found to be non-existent at the address provided.

The genuineness of the transaction was found to be completely doubtful.

ii. The enquiries revealed that the investor companies had filed returns for a negligible taxable income, which would show that the investors did not have the financial capacity to invest funds ranging between Rs. 90,00,000 to Rs. 95,00,000 in the Assessment Year 2009-10, for purchase of shares at such a high premium.

For example:

Neha Cassetes Pvt. Ltd. - Kolkatta had disclosed a taxable income of ` 9,744/- for A.Y. 2009-10, but had purchased Shares worth ` 90,00,000 in the Assessee Company.

Similarly Warner Multimedia Ltd. – Kolkatta filed a NIL return, but had purchased Shares worth ` 95,00,000 in the Assessee Company – Respondent.

Another example is of Ganga Builders Ltd. – Kolkatta which



non-existent, and the onus to establish the identity of the investor companies, was not discharged by the assessee.”

3.3 Thus, in sum and substance the decision of the Supreme Court is that wherever AO carries out inquiries, which creates doubt

over the identity of the investor-companies or their creditworthiness or on genuineness of transactions then it is necessary for the assessee to submit evidence to explain and remove the doubts created by inquiries and evidence brought by the AO on record.

4. As the decision of the Supreme Court is of 5th March, 2019, same has been considered subsequently by the High Court and the tribunals in several cases.

4.1 Following are certain decisions in favour of the Assessee after considering the decision of the Supreme Court in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra).

Pr. CIT vs. Aditya Birla Telecom Ltd. (2019) 263 Taxman 539 (Bom.)(HC)

In this case investor was a front company/special purpose vehicle created by a group for making investment in the Assessee company. The AO doubted the genuineness of the transaction. The department relied upon the decision of Supreme court in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra) to content that S. 68 was applicable as genuineness was not proved. The High court held that merely because the investment was considerably large and several corporate structures were either created or came into play in routing the investment would not be sufficient to brand the transaction as colourable device. It was held that charging high premium so that holding companies shareholding don’t dilute is a valid justification.

PCIT v Ami Industries (India) (P.) Ltd. [2020] 116 taxmann.com 34 (Bom)(HC)

It was held that “22. In NRA Iron & Steel (P.) Ltd. (supra), the Assessing Officer had made independent and detailed inquiry including survey of the investor companies. The field report revealed that the shareholders were either non-existent or lacked credit-worthiness. It is in these circumstances, Supreme Court held that the onus to establish identity of the investor companies was not discharged by the assessee. The aforesaid decision is, therefore, clearly distinguishable on facts of the present case.” It was also held that Assessee is not required to prove the source of source.

ITO v. Commitment Financial Services (P.) Ltd. [2020] 113 taxmann.com 565 (Del)(Trib) [ASSESSMENT YEAR 2012-13]

In this case directors did not appear. However it was held that decision of Supreme court in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra) was not applicable as assessee had filed financials and Bank statement of Investor which proved genuineness and credit-worthiness of Investors and Investor company had replied to notices u/s 133(6). Addition under section 68 could not be sustained merely on account of non-production of directors of company without bringing any other contrary material on record.



DCIT v. Acro Exports Trade (P.) Ltd. [2019] 111 taxmann.com 51 (Mum)(Trib)

In this case the AO neither carried out any investigation nor issued notices u/s. 133(6) or summons u/s. 131(1) to examine the veracity of documents furnished by the assessee. It was held that unless, the AO carried out further investigations to ascertain true nature of transactions, he cannot come to the conclusion merely on the basis of documents submitted by the assessee. Therefore, after considering relevant facts, the decision rendered by Hon'ble Supreme Court in the case of PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra) has no application, where the AO has not carried out any inquiries.

Prime Comfort Products (P.) Ltd. v. ACIT [2019] 179 ITD 647 (Del)(Trib)

It was held “21. Lastly, the judgments relied upon by the Ld. DR are not applicable on the facts of the case as discussed above, as the entire share application money and premium received by the assessee company stands proved by the assessee company and also by the subscribing company, which has even proved the source of money given to the assessee company. Here it is not case of any accommodation entry provider nor there is any report of investigation wing nor has any inquiry been conducted by the Assessing Officer to allay or rebut the evidences filed by the assessee company or by the subscribing company. Thus, ratio of all these judgments will not apply in the present case.”

Baba Bhootnath Trade & Commerce Ltd. v. ITO (2019) 199 TTJ 423 (Kol.) (Trib). (Assessment Year 2012-2013)

In this case identity, creditworthiness and genuineness of the share applicants was proved by producing the PAN details, bank account statements, audited financial statements and Income Tax acknowledgments and the investors have shown the source of source & personally appeared before the AO in response to s. 131 summons.

It was held that “The judgement in PCIT vs. NRA Iron & Steel ( 2019) 103 taxmann .com 48 (SC) is distinguished on facts stating that in the said decision the AO had made extensive enquiries and from that he had found that some of the investor companies were non -existent which is not the case in the assessee.”

Agson Global Pvt. Ltd. v. ACIT ( 2019) 76 ITR 504 (Delhi)(Trib)

In this case all investors are assessed & have filed confirmations with trail of funds and AO did not make further inquiry into the documentary evidences or verify the trail of source of fund

Hence, it was held that decision in PCIT v NRA Iron & Steel (P.) Ltd. (Supra) was not applicable. It was also held that that Photocopies of blank share transfer forms, blank signed receipts etc necessary for transfer of shares found with assessee are not admissible as evidence u/s 61 of Evidence Act and not incriminating in nature.

ITO v. Axisline Investment Consultants (P.) Ltd. [2019] 178 ITD 402 (Kol)(Trib)

It was held that AO had not made any independent inquiry to disprove the documentary evidence produced by the Assessee. Infact Assessee had proved source of source also.



4.2 Following are certain decisions against the Assessee after considering the decision of the Supreme Court in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra).

M.A. Projects (P.) Ltd. v. DCIT [2019] 109 taxmann.com 173 (Delhi - Trib.) [ASSESSMENT YEAR 2011-12]

In this case, Assessee had submitted source of source being Reserves and surplus of Investee Company. ITAT held that transaction was not genuine as Reserve and Surplus of investor company were mainly consisting of share premium, the funds were mainly invested in loans and advances and investments and profits were meagre. Also the investee company did not have significant activity to justify high premium charged by it. According to me, the decision has failed to appreciate that in the facts before it, identity of investor was established. Further, charging high premium does not ipso fact attract the provisions of Section 68. Also, making investment of share premium or borrowings cannot make the transaction non-genuine. It appears that the decision of Supreme Court is PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra). has not been correctly applied to the facts of the case.

Par Excellence Leasing and Financial Services (P.) Ltd.v.ACIT [2020] 115 taxmann.com 38 (Del)(Trib) [ASSESSMENT YEARS 2010-11 TO 2012-13]

In this case, field enquiries in respect of share applicant companies revealed that such companies never existed in given addresses. To disprove the findings of AO assessee failed to produce the controlling persons as well as bank statements of investors.

ITO v.Synergy Finlease (P.) Ltd. [2019] 177 ITD 160 (Del)(Trib)

In this case Assessee had produced all documentary evidences including Asst orders of Investor companies. Assessee also produced directors. ITAT confirmed addition by holding that investors did not have creditworthiness as they had meagre income and they did not deserve to receive huge share premium. ITAT also doubted genuineness as all investor companies as they had deposits in their bank accounts immediately before making the investment.

4.3 An analysis of the decisions decided in favour of the Assessee would show that though in principle they hold that Assessee is not required to prove source of source but still most of the decisions have given a finding that in the facts before them the Assessee has also proved Source of Source. It appears that the impact of the decision of the Supreme Court in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra) is such that in-order to give satisfactory explanation of the credit entries to the Income tax authorities and the Courts and to prevent an adverse

order, Assessee’s may have to invariably dive into the pool of proving source of source.

5. The decision of the Supreme Court in in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra). has raised two important legal issues ie firstly whether Assessee is required to prove the source of source even prior to applicability of first proviso to Section 68 ie AY 2013-2014 and secondly as to the applicability of the decision of Supreme Court in CIT vs. Lovely Exports(P) Ltd (Supra) ie whether it still holds the field or



is overruled or is diluted and if it still holds the field than can the decision of Supreme Court in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra) be held as per-incuriam ie a decision decided without referring to a statutory provision or a precedent

5.1 Whether Assessee is required to prove the source of source u/s 68.

5.1.1 The Supreme Court in its decision has recorded the issue determined by them as under :

“8.1 The issue which arises for determination is whether the Respondent /Assessee had discharged the primary onus to establish the genuineness of the transaction required under Section 68 of the said Act.”

Thus the Supreme Court have not dealt with the legal issue of proving Source of Source but only examined the genuineness of the transaction before it on the basis of facts before it.

5.1.2 The Bombay High Court in PCIT vs. Ami Industries (India) (P.) Ltd. [2020] 116 taxmann.com 34 (Bom)(HC) has after considering the decision of the Supreme court in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra). held that “It is also a settled proposition that assessee is not required to prove source of source.” However, the Bombay High Court in finally upholding the deletion of addition also recorded that the Assessee had in the facts of the present case also proved the source of source.

5.1.3 However, it may also be noted that at para 12(iv) of the said decision of the Supreme Court it is recorded that “Furthermore, none of the so-called investor companies established the source of funds from which the high share premium was invested”. This para has not been reproduced by the Bombay High Court in its order.

5.1.4 Thus, a fair and harmonius conclusion on this aspect would be that a) Assessee is not required to prove the source of source u/s 68 even after the said decision of the Supreme Court and b) If the A.O. doubts the veracity of the primary documentary evidence supplied by the Assesee and brings positive evidence on record to show that the transactions are not genuine or doubts the capacity of the share subscriber on the basis of it’s bank statements and Accounts, then Assessee and the investor will have to satisfy the A.O. with respect to source of funds of the investor for making the investment.

5.2 Applicability OF the decision of Supreme Court in CIT vs. Lovely Exports(P) Ltd (Supra).

5.2.1 At the outset, the decision in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra) cannot be said to be per-incurium on the ground that it has not considered the Supreme court decision in CIT vs. Lovely Exports(P) Ltd (Supra). This is so because at last sentence of para 4 of the decision, the Court has clearly recorded the decision of the Supreme court in CIT vs. Lovely Exports(P) Ltd (Supra). Last sentence of Para 4 is as under

“The SLP filed against the judgment was dismissed.”

5.3.2 However according to me a strong case exist to contend that the Supreme court in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra) has shifted the goal post as set in CIT vs. Lovely Exports(P) Ltd (Supra) and thus before doing so the matter should have been referred to a larger bench. I have reached this conclusion for the following reasons :

(i) It appears that the Supreme Court has wrongly treated the Supreme Court decision in Lovely Exports as a mere



dismissal of SLP without a speaking order where no law is laid down. This is manifested from the fact that it did not deal with the findings given by Supreme Court in Lovely exports (P) Ltd’s case but has given it a passing reference only and rather considered only some observations from the Judgement of the Hon'ble Delhi High Court which were unsuccessfully challenged in the Hon'ble Supreme Court. Where an SLP is dismissed without being converted into an appeal, it’s effect is explained by the Supreme Court in Kunhayammed vs. State of Kerala [2000] 245 ITR 360 (SC)

“If the order refusing leave to appeal is a speaking order, i.e., gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of article 141. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country. ………….”

(ii) Thus if the decision of Supreme court in CIT vs. Lovely Exports(P) Ltd (Supra) is a speaking order then it is the declaration of law. According to me it is a speaking order. The relevant portion is reproduced as under :

“2. Can the amount of share money be regarded as undisclosed income under section 68 of IT Act, 1961?.We find no merit in this Special

Leave Petition for the simple reason that if the share application money is received by the Assessee Company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment".

Perusal of the above extract manifests that the Supreme Court in-fact framed a question of law for it to answer. Thereafter it also answered the said question of law. Hence, it’s a speaking order where it is held that the addition if any in case of bogus shareholders of a private company (as Lovely Exports (P) Ltd was a private company) was to be made in the hands of the shareholder. Also, the observations of the Supreme Court need to be understood in the context of findings rendered by the High Court. The High Court’s decision reported in CIT vs. Divine Leasing & Finance Ltd./Lovely Exports (P) Ltd [2008] 299 ITR 268 (Delhi) while dealing with the case of Lovely Exports (P) Ltd held

"Thus, the question is whether in the present case, the Assessing Officer had material to conclude that the share applicants in questions did not exist. …………………. It is seen that the Assessing Officer did not carry out any inquiry into the income-tax record of the persons who have given the PAN No./Ward No. in order to ascertain the non-existence of the share applicants in question..”

Thus, the Delhi High Court held that the Department could not prove that the share subscribers were non-



existent. Therefore in Departments Appeal to Supreme Court, the Supreme Court has impliedly held that assuming department’s contention is right that the shareholders are bogus, even then the addition can be made only in the hands of the shareholder and not the investee company.

(iv) Prior to the decision of the Supreme Court in in PCIT vs NRA Iron & Steel (P.) Ltd. (Supra) the Delhi high Court in CIT vs. Nova Promoters & Finlease (P) Ltd [2012] 342 ITR 169 (Delhi) has interpreted the decision of the Supreme Court in CIT vs. Lovely Exports(P) Ltd (Supra) and held that where AO has made enquiries then addition has to be made in the hands of the investee company. Said interpretation was followed in CIT vs. Navodaya Castles (P.) Ltd. (2014) 367 ITR 306(Del)(HC), and PCIT vs. NDR Promoters [2019] 410 ITR 379 (Delhi) wherein it was held

“12. The present case would clearly fall in the category where the Assessing Officer had not kept quiet and had made inquiries and queried the respondent-assessee to examine the issue of genuineness of the transactions.”

However the Bombay High in CIT vs. Orchid Industries Pvt. Ltd. (2017) 397 ITR 136 (Bom.) (HC) had dealt with the following substantial question of law

“6.3 Whether on the facts and in the circumstances of the case and in law, orders of the Tribunal was perverse in deleting the addition of ` 95,00,000/- made u/s. 68 of the Act, relying only on the documentary evidence

produced by the Respondent Company while ignoring the key factor that these entities were not traceable at their given addresses.

6.4 Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in not appreciating the observations made by the Delhi High Court in Nova Promoters and Finlease Pvt. Ltd. 18 Taxman.com 217 wherein the Court has observed that cases of this type cannot be decided only on the basis of documentary evidences above and there is need to take into account the surrounding circumstances. “

The High Court after following the decision of Supreme Court in CIT vs. Lovely Exports(P) Ltd (Supra) and its own decision in CIT vs. Gagandeep Infrastructure Pvt Ltd [2017] 394 ITR 680 (Bom)(HC) which had followed Lovely Exports (P) ltd’s decision] decided the issue in favour of the Assessee.

Thus, different High Courts had interpreted the decision of Supreme Court in CIT vs. Lovely Exports(P) Ltd (Supra) differently.

5.2.3 To sum up, Supreme Court has in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra) upheld the law laid down in CIT vs. Nova Promoters & Finlease (P) Ltd. However, the other set of decisions were not given emphasis or were not argued vociferously for the simple reason that Assessee was not represented. However, as pointed out above, if decision of the Supreme Court is CIT vs. Lovely Exports(P) Ltd (Supra) is given it’s correct interpretation as per it’s letter and spirit then the Supreme Court



has indeed shifted the goal post in NRA Iron & Steel (P) Ltd’s case and thereby there exist two conflicting decisions. Hence, in an appropriate case before the Supreme Court, Assessee may make a request for referring the issue “as to in whose hands share application monies can be taxed u/s 68” to the larger bench albeit with the difficulty that NRA Iron & Steel (P) Ltd case has made reference, though a passing reference, to the decision in Lovely Exports(P) Ltd case, or a best case scenario could be where a matter is before a three judge bench of the Supreme Court, then the Assessee may expound the ratio of Lovely Exports (P) Ltd as said bench won’t be bound by either of the cases. As far as the High Court, ITAT, CIT(A) and A.O. are concerned they will have to follow the Supreme Court decision in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra) being a subsequent decision and which has also considered Supreme Court decision in CIT vs. Lovely Exports (P) Ltd (Supra) and make/uphold addition of share subscription monies in the hands of investee u/s 68. However, it needs specific mention that the Judgement of the Hon'ble Supreme Court in the case of NRA Iron and Steel (supra) has been passed without considering certain other crucial judgements of the very same court which would have a definite bearing on the issue.

6 Remand of Appeal to AO for fresh adjudication

One of the practical difficulties which arise after the first Appeal in subsequent appeals is that the Department may request in every case where AO has not carried out investigation to remand the appeal back to AO for fresh adjudication in view of decision of Supreme Court in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra).

It goes without saying that prayer for such mechanical remand cannot be granted.

Where AO has made addition on the basis of documentary evidence filed by the Assessee without doubting their veracity then in such cases there should not be any remand to AO for making independent enquiries. However, where on appreciation of documentary evidence the Appellate authorities discover inconsistencies of such magnitude that require independent investigation by AO, then such cases may be remanded. Further, where case pertains to accommodation entry providers and AO has not done any independent enquiry then Appellate authorities may consider giving one more opportunity to the AO to meet the end of justice. Recently the Mumbai Tribunal in ITO vs. Citymaker Builder Pvt. Ltd. (ITA No.4589/Mum/2017, dt. 11.06.2019)(AY. 2012-13) (Mum)(Trib) after considering the decision in PCIT vs. NRA Iron & Steel (P.) Ltd. (Supra) allowed revenue’s appeal by setting aside the matter to AO for fresh adjudication as according to the ITAT authorities had not done even the bare minimum for verifying the genuineness of the transaction and adopted a very casual approach.

7 Way Forward(i) Assessee must focus more on facts rather

than Law.

(ii) Besides usual documentary evidences such as PAN, ITR’s of Share-subscribers, Assessee must bring on record the details from the Company Law department ie ROC regarding the current status of the company and it’s current directors.

(iii) To prove the identity and genuineness , Assessee may request AO to call for Assessment orders of Shareholders from the AO of shareholder or file RTI asking whether the shareholder is assessed to tax.

(iv) Where Shareholder has meagre income, and the bank statement reflect meagre balance before deposit of money for investing in Assessee, then Assessee will have to prove the source of source.



(v) Merely charging high premium will not be determinative of addition u/s 68 but where the investor and investee do not have existing business activities commensurate with the investment then it will be incumbent upon Assessee to justify the charging of huge premium.

(vi) Mere non-appearance of shareholder may not be determinative of addition u/s 68 but if same is coupled with investigation of AO finding shareholder as non-existent then addition u/s 68 will be confirmed. In such situation Assessee may obtain current status of Company from ROC as many times it is found that the registered address has undergone change or there is change in the name of the company. Assessee may also try to obtain fresh confirmations from the investors.

(vii) Where AO is relying on findings of investigation wing or incriminating statements to contend that shareholders are accommodation entry providers then Assessee has to ask from the AO all the

evidences and statements which are relied against it and ask for an opportunity of cross-examination. Assessee must also try to ascertain if the incriminating statements are subsequently retracted.

(viii) Assessee must provide a cogent explanation of how it came in contact with the share-subscribers. Where shares are subsequently bought back by the company, Assessee must give a cogent explanation for such buy-back.

(ix) Where it is alleged that shareholders have small offices and very less staff which is not commensurate with the quantum of investment, the Assessee must try to ascertain the objects of the Shareholder in case of Corporate entity to justify that the business of share-holder does-not require big office or huge staff. Similarly where it is alleged that there are common directors or there is one controlling person, then a cogent explanation from the investor for investing through various entities will help the Assessee.

mom

Special Story — Analysis of the Supreme Court decisions on Section 14A


K. Gopal, Advocate

Analysis of the Supreme Court decisions on Section 14A

IntroductionSection 14A of the Income Tax Act, 1961 (“the Act”) has remained a contentious issue since its inception and consumed a considerable amount of precious time of judiciary. Though, the sole intent behind its insertion was to get over the decisions of the Supreme Court in the cases of “CIT vs. Indian Bank Limited [1965] 56 ITR 77 (SC), CIT vs. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation vs. CIT [2000] 242 ITR 450 (SC) which categorically laid down that entire expenditure would be allowed in the case of one indivisible business giving rise to taxable and exempt income, the section is often seen to be used by overzealous tax officers as one of the effective tools to make additions leading to huge demands deviating from its spirit and literal interpretation. This attitude has resulted in enormous litigation and compelled the legislature to bring certain provisions on the statute book. In the last couple of years, the Supreme Court delivered detailed decisions interpreting section 14A. The decision handed down in the case of “Maxopp Investments Ltd & others vs. CIT (2018) 402 ITR 640(SC)” in addition to other two decisions in the case of “Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (2017)394 ITR 449 (SC)” and “CIT vs. Essar Teleholdings Ltd. (2018) 401 ITR 445 (SC)” indeed completed the trilogy and addressed the core controversies pertaining to the section. The

present article analyses all the three decisions at great length. With this brief background, let’s begin our journey with the decision of “Godrej & Boyce Manufacturing Company Ltd. vs. DCIT [2017] 394 ITR 449 (SC)”.

I. Godrej & Boyce Manufacturing Company Ltd vs. DCIT (2017) 394 ITR 449 (SC)

Brief Facts1. The Assessee was engaged in the business

of manufacture of steel furniture, security equipment, typewriters, electrical equipment and a host of other related products. It was also a promoter of various other companies and invested its funds in such companies in order to maintain control of such concerns as sister concerns. The Assessee filed its return of income for the AY 2002-03 declaring a total loss of ` 45,90,39,210/-. In the said return, it had claimed dividend income of ` 34,34,78,686/- as exempt. Dividend income to the extent of 98% of the said amount was contributed by the Godrej group companies and only 0.05% amounting to ` 1,71,000/- was received from non-Godrej group companies. Further, a sum of ` 66,79,000/- constituting 1.95% of the aforesaid dividend income was received from mutual funds. It was admitted fact that a substantial part of the



investment in the group companies was in the form of bonus shares which did not involve any fresh capital investment or outlay. The facts on record revealed that on the first day of the previous year relevant to the A.Y. 2002-2003 i.e. 1st April, 2001, the investment in shares and mutual funds was amounting to ` 127.19 crore whereas as on 31st March, 2002, the investment was at ` 125.54 crore. The reduction in the quantum of investment shows that there were no fresh investments made during the year under consideration.

2. During the course of assessment proceedings, the AO disallowed the interest expenditure to the extent of ` 6,92,06,000/- holding the same to be attributable for earning the dividend income of ` 34,34,78,686/-. The said interest expenditure was worked out from the total interest expenditure on a notional basis in the ratio of the cost of the investments in shares and units of mutual funds to the cost of the total assets appearing in the balance sheet. Here, it is important to note that, in the earlier assessment years also the issue of allowability of interest expenditure had cropped up. In the A.Y. 1998-1999, the appellant received dividend income of ` 11,41,34,093/- and the AO notionally allocated ` 1,47,40,000/- out of the total interest expenditure of ` 34,64,89,000/- as referable for earning such dividend income. Thus, the AO disallowed such interest expenditure u/s 14A. In appeal, the CIT(A) allowed exemption of the entire dividend income on the ground that the AO had failed to show any nexus between the investments and the borrowed funds. Further, on appeal by the Department, the ITAT confirmed the appellate order and the same attained finality.

3. Further, in the A.Y 1999-2000 and 2001-2002 also the AO restricted an exemption

u/s 10(33) of the Act by disallowing the interest expenditure notionally by holding that the same is attributable for earning dividend income. On appeal, the CIT(A) deleted the disallowance u/s14A and allowed the appeal of the appellant for the A.Y. 1999-2000 and 2001-02. Being aggrieved of the appellate order, the Department preferred an appeal before the ITAT. The ITAT upheld the orders of the CIT(A) and the same attained finality.

4. The assessment order passed for the year under consideration [i.e. A.Y. 2002-03] was challenged before the CIT(A). During the course of appellate proceedings, the Assessee contended that as on 31st March, 2002, the Assessee had sufficient interest free fund of ` 280.64 crore in the form of share capital (` 6.55 crore) as well as Reserves and Surplus (` 274.09 crore) to meet the investment of ` 125.54 crore as on that day. Further, it was also contended that as on 01st April, 2001, the Assessee had total interest free funds of ` 270.51 crore in the form of share capital (` 6.55 crore) and Reserves and Surplus (` 263.96 crore) as against its investment of ` 127.19 crore as on 1st April, 2001. The said fact established that the Assessee had sufficient interest free funds available for the purpose of making the investments. Thus, there should not be any disallowance of interest expenditure u/s 14A of the Act. The CIT(A) accepted the contention of the Assessee and reversed the assessment order following the orders of CIT(A) and ITAT in earlier years. The said order of the CIT(A) was challenged by the Department before the ITAT. The ITAT vide its order dated 26th August, 2009 reversed the appellate order and allowed the appeal of the Department. The ITAT following its decision in the case of ITO vs Daga Capital Management (P.) Ltd. (2009) 117 ITD 169 (Mum.) (SB), held



that sub-Sections (2) and (3) of Sec 14A though introduced by Finance Act, 2006 w.e.f 01.04.2007 are procedural in nature and have retrospective effect. The ITAT noted that the AO had not examined the correctness of the claim with reference to the accounts of the Assessee as per the provisions of Sec 14A(2). Thus, the proceedings were remanded back to the AO for a fresh examination on the basis of the provisions of Sec 14A(2) of the Act.

Proceedings before the High Court:5. Being aggrieved by the order of ITAT,

the Assessee preferred an appeal before the High court u/s 260A of the Act challenging the action of ITAT in invoking the provisions of sec 14A of the Act and thereby computing the disallowance under Rule 8D.

6. The Assessee, in addition to the appeal u/s 260A of the Act, filed a Writ Petition under Article 226 of the Constitution of India before the Hon’ble High Court. Both, appeal as well as writ petition were heard and disposed of together. The Assessee’s main contention before the High Court was as under:

i. Sec 14A cannot be invoked in respect of dividend income from shares and mutual fund income for the reason that for the provision to be attracted, income must be exempt from tax or must be tax-free which it has been urged, is not the case;

ii. Even if a literal interpretation of Sec 14A suggests that the provision applies because income from dividends and mutual funds is not to be included while computing the total income u/s 10(33), a literal interpretation of the provisions would

give rise to unintended consequences and must, therefore, be disregarded;

iii. The provisions of sub-Secs (2) and (3) of Sec 14A and of rule 8D are not retrospective and can have no application to assessment year 2002-03;

iv. Sub-Secs (2) and (3) of Sec 14A are arbitrary and violative of Article 14 of the Constitution;

v. The provisions of rule 8D are ultra vires sub-Sec (2) of Sec 14A and are even otherwise arbitrary and violative of Article 14; and

vi. On the facts of this case, there was no factual basis for effecting the disallowance and an order of remand by the Tribunal was not warranted.

7. Hon’ble Bombay High Court vide its judgment dated 12th August, 2010, disposed off appeal as well as writ petition. It nixed the constitutional validity to the Sec 14A of the Act and rejected the challenge to the Rule 8D on the ground that sub-Sec (2) does not ipso facto enable the AO to apply the method prescribed by the Rules straightaway without considering whether the claim made by the Assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The AO must, in the first instance, determine whether the claim of the Assessee in that regard is correct and the determination must be made having regard to the accounts of the Assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the Assessee, that the Legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the



Supreme Court on several grounds. The same were formulated by the Hon’ble Court in the following manner.

(a) Irrespective of the factual position and findings in the case of the Appellant, whether the phrase "income which does not form part of total income under this Act" appearing in Sec 14A includes within its scope dividend income on shares in respect of which tax is payable u/s 115-O of the Act and income on units of mutual funds on which tax is payable u/s 115-R.

(b) Whatever be the view on the legal aspects, whether on the facts and in the circumstances of the Appellant's case and bearing in mind the unanimous findings of the lower authorities over a considerable period of time (which were accepted by the Revenue) there could at all be any question of the provisions of Sec 14A in the appellant's case."

9. The Assessee’s contention before the Hon’ble Supreme court:-

i. Sec 14A of the Act pertains to disallowance of expenditure relatable to an item of income on which tax has not been paid. According to the learned counsel, Sec 14A applies only in situations where income is tax free; non-taxable and there is no incidence of tax per se. Dividend on shares is subjected to tax u/s 115-O of the Act whereas returns of units or mutual funds is subjected to tax u/s 115R. The fact that the tax on such dividend is paid by the dividend paying company and not by the recipient of the dividends, is of no consequence.

Assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the Assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the Rules. For, it is only in the event of the AO not being so satisfied that recourse to the prescribed method is mandated by law. Sub-Sec (3) of Sec 14A provides for the application of sub-Sec (2) also to a situation where the Assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. However, the operation of the sub Sec (2) and (3) inserted vide Finance Act, 2006 is prospective. Hon’ble High Court, further, held that Sec 14A of the Act has to be construed on a plain grammatical construction thereof and the said provision is attracted in respect of dividend income referred to in Sec 115-O as such income is not includible in the total income of the shareholder. Sub-Secs (2) and (3) of Sec 14A of the Act and rule 8D of the Rules, would, however, not apply to the AY 2002-03 as the said provisions do not have retrospective effect. Notwithstanding the above the High Court upheld the remand as made by the ITAT to the AO though for a slightly different reason. The High Court held that the tax paid u/s 115-O of the Act is an additional tax on that component of the profits of the dividend distributing company which is distributed by way of dividends and that the same is not a tax on dividend income of the Assessee.

Proceedings before the Hon’ble Supreme Court8. The Assessee challenged the High Court’s

order dated 12th August, 2010, before the



ii. The income by way of dividend referred to in Sec 115-O of the Act or income received in respect of units from the UTI or of mutual funds, is only one specie of dividend income which is exempted u/s 10(33) of the Act whereas other species of such (dividend) income, say for example, dividend from foreign companies is still liable to tax. As tax has already been paid on such dividend, though by the dividend paying company, Sec 14A will not apply to exclude expenditure incurred to earn such dividend income as the said income, really, is not tax-free.

iii. There is a discernible correlation between Sec 10(33) and Sec 115-O of the Act inasmuch as both the Sections were inserted in the Act by the Finance Act, 1997. When the earlier status was restored by the Finance Act, 2002 shareholders once again became liable for tax on dividends which position continued until the provisions of Sec 10(33) of the Act [engrafted as Sec 10(34)] and Sec 115-O were reintroduced by the Finance Act, 2003 with effect from 1st April, 2003. Therefore, both the Sec 10(33) and Sec 115-O of the Act constitute a composite scheme for taxation of dividend income wherein the legislative policy is clear that dividend, though to be taxed in the hands of the company distributing the same, is not to be included in the total income of the recipient Assessee. The mere fact that the amount is not to be included in the total income of the recipient Assessee, would not attract the provisions of Sec 14A of the Act, inasmuch as the cardinal test is whether the dividend income is

tax-free or not. The person paying the tax, is not relevant for the aforesaid purpose.

iv. The Assessee contended that literal interpretation of Sec 14A must be avoided and relied on the ratio laid down by the Hon’ble Supreme Court in the case of K.P. Varghese vs. ITO (1981) 131 ITR 597 (SC). It was specifically contended by the Assessee that tax on the dividend paid is not a tax on profits out of which dividend is distributed inasmuch as u/s 115-O of the Act dividend can be paid either from accumulated profits or current profits. In fact, Sec 205 of the Companies Act permits payment of dividend out of accumulated profits in the year though the company may have incurred losses. It was pointed out to the Court that the dividend paying company would be charged to tax u/s 115-O of the Act even in a case where no tax is payable under the regular provisions of the Act because its entire income, say, is otherwise eligible for deductions. In other words, tax u/s 115-O of the Act is payable by the dividend paying company even when no tax is payable on the income of such company under the regular provisions of the Act.

10. The contentions raised on behalf of the Department:-

i. The insertion of Sec 14A in the Act was to offset several judicial pronouncements holding that in case of an Assessee earning income which is both includible and non-includible in the total income, the entire expenses would be permissible as deduction, including, expenses



pertaining to income not includible in the total income. To substantiate this argument reliance was placed on the Memorandum explaining the provisions of the Finance Bill, 2001. The position, is further made clear, by Circular No. 14 issued by the C.B.D.T. explaining the said purpose of the Finance Act, 2001.

ii. The Department traced the history of the Amendments to Sec 14A of the Act and, in particular, to the insertion of sub-sections (2) and (3) thereof by the Finance Act of 2006. The purpose of insertion of sub-Sections (2) and (3), as explained in the Memorandum explaining the provisions of the Finance Bill 2006, was also referred to contend that from the said Memorandum it is clear that sub-Sections (2) and (3) had been introduced as the existing provisions of Sec 14A did not provide any method of computation of expenditure incurred to earn an income which does not form a part of the total income. It was, therefore, submitted that the legislative intent behind enactment of Sec 14A and sub-Sections (2) and (3) thereof was to combat situations where tax incentives given by way of non-inclusion of different categories of income under the head "Income which do not form part of the total Income" was actually used to reduce the tax payable on the total income.

iii. It was contended that even though Income from dividend falls under the head "Income from Other Sources" specifically provided for u/s 56 of the Act, dividend income referred to in Sec 115-O of the Act is excluded from the provisions of deductions

contained in Sec 57 inasmuch as such income does not form a part of the total income in view of Sec 10(33) of the Act. The Sec 14A reiterates a fundamental principle enshrined by the Act that expenses are allowable only to the extent that they have a nexus to the earning of taxable income or income which forms a part of the total income.

iv. Addressing the contention raised by the Assessee relying on the provisions of Sec 115-O of the Act, it was submitted that the said Sec levies an additional income tax on the profits of a company which has been declared and distributed to its shareholders in the form of dividend. No credit of such additional income tax paid by the company is available either to the company or the shareholders [Sec 115-O(4)]. Such additional income tax paid by the company does not also endure any benefit to the shareholders receiving the amount of dividend distributed by such company. The amount of such dividend does not form part of tax paid dividend in the hands of the shareholders. In fact, pointing to the provisions of Sec 115-O(5) it is argued that under the said provisions a shareholder cannot claim deduction in respect of the dividend received by it/him from a dividend paying company on which tax has been paid by the said company u/s 115-O(1) of the Act. The liability to pay tax u/s 115-O in respect of the dividend is on the dividend paying company and the shareholder/Assessee has no connection with the same. Such an Assessee is not required to include the dividend amount in his/its total



income for the purposes of charge to tax. In such a situation, the expenditure incurred for earning the said income cannot be allowed.

v. A supplemental argument was raised by the Department relying on the provisions of Sections 194, 195, 196C and 199 contained in Chapter XVII of the Act which deals with "Collection and Recovery of Tax" including tax on dividend income received by a shareholder. All the said provisions, noticeably, exclude dividend received u/s 115-O. As the provisions of the aforesaid Sections of the Act contemplate deduction of tax payable by the shareholder on the dividend income, however, to the exception of dividend income u/s 115-O. Thus, it is crystal clear that the additional income tax paid u/s 115-O by the dividend paying company cannot assume the character of tax paid on dividend income by the Assessee shareholder. This position, is further fortified by the provisions of Sec 115-O(4), reference to which has already been made earlier. Specific reference was made to Sec 199 of the Act which provides for credit to be given for the tax deducted at source on dividend paid. If the tax paid on dividend u/s 115-O is on income earned by the shareholder, Sec 199 would have also provided for deduction of tax at source in respect of the dividends paid u/s 115-O of the Act to the Assessee.

vi. The arguments raised by the Assessee based on earlier years the appellate orders for the Assessment Years 1998-1999, 1999-2000 and 2001-2002 granting the benefit of full

deduction on interest expenditure, it was submitted that each assessment year has to be reckoned separately; there is no estoppel and, furthermore, sub-Secs (2) and (3) of Sec 14A having been introduced by the Finance Act of 2006, the Tribunal and the High Court was fully justified in remanding the matter to the AO for a de novo consideration in the light of the provisions contained in sub-Secs (2) and (3) of Sec 14A of the Act.

11. Observations and Finding of the Hon’ble Supreme Court:-

i. The object behind the introduction of Sec 14A of the Act by the Finance Act of 2001 is clear and unambiguous. The legislature intended to check the claim of allowance of expenditure incurred towards earning exempted income in a situation where an Assessee has both exempted and non-exempted income or includible or non-includible income. While there can be no scintilla of doubt that if the income in question is taxable and, therefore, includible in the total income, the deduction of expenses incurred in relation to such an income must be allowed, such deduction would not be permissible merely on the ground that the tax on the dividend received by the Assessee has been paid by the dividend paying company and not by the recipient Assessee, when u/s 10(33) of the Act such income by way of dividend is not a part of the total income of the recipient Assessee. A plain reading of Sec 14A would go to show that the income must not be includible in the total income of the Assessee. Once the said condition is satisfied, the expenditure incurred in earning



the said income cannot be allowed to be deducted. The Sec does not contemplate a situation where even though the income is taxable in the hands of the dividend paying company the same to be treated as not includible in the total income of the recipient Assessee, yet, the expenditure incurred to earn that income must be allowed on the basis that no tax on such income has been paid by the Assessee. Such a meaning, if ascribed to Sec 14A, would be plainly beyond what the language of Sec 14A can be understood to reasonably convey.

ii. The argument to avoid a literal interpretation of Sec 14A of the Act relying on K.P. Varghese (supra) was rejected with an observation “We do not see how the aforesaid principle of law in K.P. Varghese (supra) can assist the Assessee in the present case. The literal meaning of Sec 14A, far from giving rise to any absurdity, appears to be wholly consistent with the scheme of the Act and the object/purpose of levy of tax on income. Therefore, the well-entrenched principle of interpretation that where the words of the statute are clear and unambiguous recourse cannot be had to principles of interpretation other than the literal view will apply. In this regard, the view expressed by this Court in CIT vs. Calcutta Knitwears (2014) 362 ITR 673 (SC) may be usefully noticed…”

iii. Hon’ble Supreme Court further held that so far as the species of dividend income on which tax is payable u/s 115-O of the Act is concerned, the earning of the said dividend is tax free in the hands of the Assessee and

not includible in the total income of the said Assessee. If that is so, the operation of Sec 14A of the Act to such dividend income cannot be foreclosed. The fact that Sec 10(33) and Sec 115-O of the Act were brought in together; deleted and reintroduced later in a composite manner, also, does not assist the Assessee. The above, actually fortifies the situation that Sec 14A of the Act would operate to disallow deduction of all expenditure incurred in earning the dividend income u/s 115-O which is not includible in the total income of the Assessee.

iv. The Apex Court accepted the contention that the provisions of Sections 194, 195, 196C and 199 of the Act, quoted above, would further fortify the fact that the dividend income u/s 115-O of the Act is a special category of income which has been treated differently by the Act making the same non-includible in the total income of the recipient Assessee as tax thereon had already been paid by the dividend distributing company. The other species of dividend income which attracts levy of income tax at the hands of the recipient Assessee has been treated differently and made liable to tax under the aforesaid provisions of the Act. In fact, if the argument is that tax paid by the dividend paying company u/s 115-O is to be understood to be on behalf of the recipient Assessee, the provisions of Sec 57 should enable the Assessee to claim deduction of expenditure incurred to earn the income on which such tax is paid. Such a position in law would be wholly incongruous in view of Sec



10(33) of the Act.

v. Hon’ble Supreme Court after analysing the facts and legal position concluded that no disallowance is warranted for the AY 2002-03. Sub-Sections (2) and (3) of Sec 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the AO is not satisfied with the claim of the Assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the AO, what the law postulates is the requirement of a satisfaction in the AO that having regard to the accounts of the Assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the Assessee. It is only thereafter that the provisions of Sec 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.

vi. The Apex Court, reaffirmed the golden rule of consistency in these words “While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC) .”

12. Comments

i. The Hon’ble Supreme Court has based its decision on the basic principle that net income becomes part of the total income which is taxable and only that part of the expenditure is allowed to be deducted to determine the net income which is expended towards earning taxable income. Consequently, no part of the expenditure incurred towards earning income which is not part of the total income is to be deducted for determining the total income. It has put to rest the proposition advanced by the Assessee that the dividend is not a tax free income and thus, the provisions of 14A do not apply. As per the Hon’ble Supreme Court the pre-condition to trigger Section 14A is whether the said income is part of the total income or not. Section 14A is not attracted with that income which is part of the total income. The income by way of the dividend does not fall in that category.

ii. The contention of the Assessee that while interpreting the provisions of Section 14A the principle of literal interpretation should not be applied stands rejected by the Apex Court.

iii. The Apex Court has reemphasised the rule of consistency by explaining the same through the decision in the case of Radhasoami Satsang vs. CIT (supra).

II. CIT vs. Essar Teleholdings Ltd. [2018] 401 ITR 445 (SC)

Brief Facts 1. Assessee before the Hon’ble Supreme

Court was a Limited Company and



filed the return of income for the A Y 2003-04 on 01.12.2003 declaring a loss of ` 69,92,67,527/-. As the Assessee was in receipt of both taxable and non-taxable dividend income, the dividend on investment exempt u/s 10(23G) was considered by the AO for the purpose of disallowance u/s 14A. Hence, proportionate interest relating to investment on which exemption u/s 10(23G) is available as per the working amounting to ` 26 crores was disallowed u/s 14A r.w.s. 10(23G) of the Act.

2. The Assessee filed an appeal before CIT(A) which was partly allowed by CIT(A) vide order dated 05.03.2009. Therefore, the Assessee preferred a further appeal before the ITAT. The ITAT allowed the appeal of the Assessee relying on the Bombay High Court's judgment in the case of Godrej and Boyce Manufacturing Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom). The ITAT held that Rule 8D is only prospective in nature and thus, the same is not applicable in the year under consideration. The ITAT set aside the order of CIT(A) and restored the issue, back to the AO for de novo adjudication without invoking the provisions of Rule 8D.

3. The Department challenged the order passed by the ITAT before the Hon’ble Bombay High Court. The Hon’ble High Court following its earlier judgment of Godrej and Boyce Mfg. Co. Ltd. (supra) dismissed the appeal of the Department. Being aggrieved by the decision of High Court, the Department preferred an appeal before the Hon’ble Supreme Court contending that the applicability of the provisions of Rule 8D is retrospective in nature and thus, the same are applicable in the year under consideration.

4. Submissions of the Department :-

i. The provisions of Sec 14A of the Act being clarificatory in nature and Rule 8D, a procedural provision which provided only a machinery for the implementation of sub-Secs (2) and (3), Rule 8D is retrospective in nature. The machinery provisions by which the charging Section is to be implemented or workable are to be given retrospective effect, which is co-terminus with the period of operation of the main charging provision. The charging Section i.e. Sec 14A admittedly being retrospective, the machinery provision, i.e. Rule 8D has also to be retrospective. The Department placed reliance on the judgments of the Apex Court in case of CWT vs. Sharvan Kumar Swarup & Sons (1994) 210 ITR 886 (SC), CIT vs. Gold Coin Health Food (P.) Ltd (2008) 304 ITR 308 (SC) and CIT vs. Calcutta Knitwears (2014) 362 ITR 673 (SC)

5. Assessee’s Reply to the Department’s submissions :-

i. The provisions inserted by Rule 8D are new provision for computing the expenditure which can in no manner be retrospective. The same was made applicable by Fifth Amendment Rules, 2008 providing in Clause 2 i.e. "they shall come into force from the date of their publication in the official gazette". The CBDT vide its circular dated 28.12.2006 while explaining the substance of the provision of sub-Sections (2) and (3) of Sec 14A clearly mention that the aforesaid provisions were to be applicable from the assessment year 2007-2008 onwards.



Hence, Rule 8D, which is framed to give effect to the provisions of sub-Section (2) and (3) cannot operate from any date prior to the assessment year 2007-2008.

ii. It was further contended that Rule 8D has been amended by Income Tax (14th Amendment Rules, 2016) w.e.f. 02.06.2016 by which a new methodology of computing the expenditure in relation to income which does not form part of the total income has been brought in place. In the event, the argument is accepted that Rule 8D is retrospective, which rule shall hold the field, whether Rule 8D as inserted w.e.f. 24.03.2008 or one which has been substituted w.e.f. 02.06.2016. The amendment made w.e.f. 02.06.2016 reinforces that the methodology of computing the expenditure in relation to income which does not form part of the total income is prospective and has been changed w.e.f. 02.06.2016, no other interpretation is permissible. It was pointed out that subordinate legislation is ordinarily prospective and Rule 8D being subordinate legislation can have no retrospective effect.

6. Observations and Findings of the Hon’ble Supreme Court

i. Important Principles of Statutory Interpretation: The legislature has plenary power of legislation within the fields assigned to them, it may legislate prospectively as well as retrospectively. It is a settled principle of statutory construction that every statute is prima facie prospective unless it is expressly or by necessary implications made to have

retrospective operations. Legal Maxim "nova constitutio futuris formam imponere debet non praeteritis", i.e. 'a new law ought to regulate what is to follow, not the past', contain a principle of presumption of prospectively of a statute.

ii. There cannot be any dispute to the preposition that machinery provision of taxing statute has to give effect to its manifest purposes. But the applicability of the machinery provision whether it is prospective or retrospective depends on the content and nature of the Statutory Scheme. The Hon’ble Supreme Court relied on the Constitution Bench decision in the case of CIT vs. Vatika Township (P.) Ltd. [2014] 367 ITR 466(SC) to hold that sub-Sections (2) and (3) to Sec 14A and Rule 8D can operate prospectively only. The method for determining the amount of expenditure brought in force w.e.f. 24.03.2008 has been given a go-bye and a new method has been brought into force w.e.f. 02.06.2016, by interpreting the Rule 8D retrospective, there will be a conflict in applicability of 5th & 14th Amendment Rules which clearly indicates that the Rule has a prospective operation, which has been prospectively changed by adopting another methodology.

iii. Applying the principles of statutory interpretation for interpreting retrospectivity of a fiscal statute and looking into the nature and purpose of sub-Sec (2) and sub-Sec (3) of Sec 14A as well as purpose and intent of Rule 8D coupled with the explanatory notes in the Finance Bill, 2006 and the departmental understanding



as reflected by Circular dated 28.12.2006, we are of the considered opinion that Rule 8D was intended to operate prospectively.

7. Comments

The Apex Court in this decision has underlined the difference between machinery provisions which are merely procedural and those provisions which create an additional charge on the Assessee, though they are procedural. The Apex Court explains the difference between the procedures laid down in rule 8D and the reason why it was held to be retrospective. The provisions of sub-sections 2 and 3 of Section 14A and Rule 8D are perspective because they create an additional charge on the Assessee.

III. Maxopp Investement Ltd. vs. CIT [2018] 402 ITR 640 (SC)

Brief Facts:1. The Assessee was engaged in the business

of finance, investment and dealing in shares and securities. It held shares/securities in two portfolios i.e as an investment on capital account and as a trading assets for the purpose of acquiring and retaining control over investee group company “Max India Ltd.”, a widely held quoted public limited company. The profit and loss arising on sale of shares / securities held as an 'investment' were returned as income under the head 'capital gains', whereas any profit and loss arising on sale of shares / securities held as 'trading assets' was regularly offered and assessed to tax as business income under the head 'profits and gains of business or profession'.

2. The Assessee filed return of income for the relevant assessment year 2002-03, declaring income of ` 78.90 lakhs. The Assessee

being consistent with the treatment regularly followed did not disallow the interest expenditure to the extent relatable to investment in shares of Max India Limited, yielding tax free dividend income. According to the Assessee, the dominant purpose of investment in shares of Max India Ltd was to acquire/exercise and retain control and not earn dividend income. The dividend income earned on shares of Max India Ltd was only incidental to the holding of such shares.

3. During the course of assessment proceedings, the AO made disallowance u/s 14A by apportioning the total interest expenditure in the ratio of investment in shares of Max India Ltd. (on which dividend was received) to the total amount of unsecured loan. The AO, however, restricted disallowance u/s 14A to the amount of dividend received and claimed exempt income. On appeal, the CIT(A) uphold the action of the AO. The Assessee, therefore, preferred an appeal before the ITAT. The ITAT in view of conflicting decisions of various Benches by the Tribunal, with respect to interpretation of Sec 14A, constituted a Special Bench in the case of ITO vs. Daga Capital Management (P) Ltd. (2009) 117 ITD 169 (Mum). The appeal of the Assessee was also tagged and heard by the aforesaid Special Bench.

4. The Special Bench held that the investment in shares representing controlling interest did not amount to carrying on of business and, therefore, interest expenditure incurred for acquiring shares in group companies was hit by the provisions of Sec 14A.

5. On further appeal against the aforesaid order of the Special Bench, the High Court also held that the expression 'in relation to' appearing in Sec 14A is synonymous



with 'in connection with' or 'pertaining to', and, that the provisions of Sec 14A apply regardless of the intention/ motive behind making the investment. Thus, the Court maintained a proportionate disallowance of the expenditure incurred by the Assessee.

6. The Apex Court while dealing with the issue involved in the above-mentioned Assessee’s case referred to facts of another appeal filed by the Department in the case of CIT vs. State Bank of Patila [2017] 391 ITR 218 (P & H). In the said decision, the Respondent bank filed a return declaring an income of about ` 670 crores which was selected for scrutiny. In the said return, the Assessee claimed an exemption with respect to the dividend income of ` 11.07 crores u/s 10(34) & (35) and net interest income of ` 1.12 crores u/s 10(15)(iv)(h) of the Act. The total exempt income claimed in the return was ` 12,19,78,015/-. The Assessee while claiming an exemption contended that the investment in shares, bonds, etc. constituted its stock-in- trade and the same was not made only for earning tax free income. The tax free income was only incidental to the Assessee's main business of sale and purchase of securities. Therefore, no expenditure was incurred for earning such exempt income. The expenditure would have remained the same even if no dividend or interest income had been earned by the Assessee from the said securities and that no expenditure on proportionate basis could be allocated against exempt income. The AO restricted the disallowance to the amount which was claimed as exempt income and added the same to the Assessee's income by applying sec 14A. The AO accordingly applied rule 8D for determining the expenditure to be disallowed as per sec 14A. He computed the exempt income as claimed

by the Assessee, namely, about ` 12.20 crores. The AO found the total expenses allocated against exempt income to be ` 40.72 crores, but held that the same should not exceed the exempted income and, therefore, he restricted the expenses to the extent of exempt income claimed by the Assessee i.e. about ` 12.20 crores and added the same to the Assessee's income.

7. The CIT (Appeals) by the said notice for enhancement u/s 251 enquired of the Assessee its obligation to maintain the securities. The Assessee replied that the investment in shares and bonds was not made under any obligation under the Banking Regulation Act, 1949, but that it was dealing in shares and bonds as a trader which was permitted by Sec 6 of the Banking Regulation Act, 1949. The CIT (Appeals) held that in view of sec 14A the Assessee was not to be allowed any deduction in respect of income which is not chargeable to tax. The Assessee had incurred interest expenditure and administrative expenditure for earning its income both exempt and non-exempt. The AO had wrongly restricted the disallowance to the extent of exempt income claimed by the Assessee to ` 12.20 crores and that the entire sum of ` 40.72 crores should have been disallowed.

8. The ITAT set aside the order of the AO and of the CIT (Appeals). The contention on behalf of the Assessee was that as it held the securities as stock-in-trade the income earned therefrom was only incidental to its business and that, therefore, the provisions of sec 14A were not attracted. The Tribunal referred to a CBDT Circular No.18/2015 dated 02.11.2015 which states that income arising from the investment of a banking concern is attributable to the business of banking which falls under the head "Profits and gains of business and profession". The



circular states that shares and stock held by the bank are stock-in-trade and not investment. Referring to certain judgments, which we will also refer to, and the earlier orders of the Tribunal, it was held that if shares are held as stock-in-trade and not as an investment even the disallowance under rule 8D would be nil as rule 8D(2)(i) would be confined to direct expenses for earning the tax exempt income.

9. Proceedings before Delhi High Court in the case of Maxopp:

Before the High Court, the Assessee contended that the expenditure in respect of investment made in shares of operating companies for acquiring and retaining a controlling interest therein should not be hit by sec 14A. Further, it was contended that the provisions of sub-sec (2) & (3) of sec 14A, as well as Rule 8D, are prospective in nature.

10. Findings and Observations of the High Court in the case of Maxopp:

i. The Assessee’s main contention that dominant purpose and intention have a major role to play in invoking provisions of Sec 14A of the Act was rejected with the observation that “We do not agree with the submission of the learned counsel appearing on behalf of the Assessees that a narrow meaning ought to be ascribed to the expression "in relation to" appearing in Sec 14A of the said act. The context does not suggest that a narrow meaning ought to be given to the said expression. It is pertinent to note that the provision was inserted by virtue of the Finance Act, 2001 with retrospective effect from 01/04/1962. In other words, it was the intention of Parliament that it should appear in

the statute book, from its inception, that expenditure incurred in connection with income which does not form part of total income ought not to be allowed as a deduction. The factum of making the said provision retrospective makes it clear that Parliament wanted that it should be understood by all that from the very beginning, such expenditure was not allowable as a deduction. Of course, by introducing the proviso it made it clear that there was no intention to reopen finalised assessments prior to the assessment year beginning on 01/04/2001. Furthermore, as observed by the Supreme Court in Walfort Share & Stock Brokers (P.) Ltd. (supra), the basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure and on the same analogy, the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, it's associated or related expenditure would also not be permitted to be debited against other taxable income.

ii. The Supreme Court held that the expression "in relation to" appearing in Sec 14 A of the said act cannot be ascribed a narrow or constricted meaning. If we were to accept the submission made on behalf of the Assessees then sub-Sec (1) would have to be read as follows:-

"For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the Assessee with the main object of earning income which does not form part of the total income under this Act."



That is certainly not the purport of the said provision. The expression "in relation to" does not have any embedded object. It simply means "in connection with" or "pertaining to". If the expenditure in question has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act. In Walfort Share & Stock Brokers (P.) Ltd. (supra), the Supreme Court made it very clear that the permissible deductions enumerated in Sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax. The Supreme Court further, clarified that if an income like dividend income is not part of the total income, the expenditure/deduction related to such income, though of the nature specified in Sections 15 to 59, cannot be allowed against other income which is includable in the total income for the purpose of chargeability to tax.

iii. It was the Assessee’s contention that the words "expenditure incurred" as appearing in Sec 14A(1) clearly mean that there must be actual expenditure. Of course, the actual expenditure must be for earning the exempt income. It was pointed out that we do not subscribe to the narrow interpretation sought to give to the words "in relation to" which the learned counsel for the Assessees is espousing. Thus, we will have to consider the argument of the Assessees in respect of the expression "expenditure incurred" in the context of the expenditure being

in connection with or pertaining to income which does not form part of the total income under the said Act. Further, a reference was made to the decision of the Punjab & Haryana High Court in the case of CIT vs. Hero Cycles Ltd. [2010] 189 Taxman 50 wherein it was observed that:-

"Disallowance u/s 14A requires finding of incurring expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance u/s 14A cannot stand."

iv. It was contended that unless and until there was the actual expenditure for earning the exempted income, there could not be any disallowance u/s 14A. The expression "expenditure incurred" refers to actual expenditure and not to some imagined expenditure we would like to make it clear that the 'actual' expenditure that is in contemplation u/s 14A(1) of the said Act is the 'actual' expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made u/s 14A of the said Act.”

11. Proceedings before Hon’ble Punjab and Haryana High Court:

i. The Department carried the matters in appeal before the Hon’ble Punjab and Haryana High Court. Hon’ble High Court relied on the decision of the Apex Court in the case of Walfort Share and Stock Brokers (p) Ltd. [2007] 289 ITR 48 (SC) and held that “As noted by the Supreme Court, the intention of the Parliament, therefore, was not to allow deduction in respect of any expenditure by the Assessee



in relation to income which does not form part of the total income under the Act. Sec 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. As also held by the Supreme Court, the mandate of sec 14A is to curb the practise to claim a deduction of expenses incurred in relation to exempt income against taxable income and avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The Supreme Court held that if an income like dividend income is not a part of the total income, the expenditure/deduction, though of the nature specified in Sections 15 to 59 but related to the income not forming part of total income, could not be allowed against other income includable in the total income for the purpose of chargeability to tax. The income by way of dividend and interest received on the securities held by the respondent/Assessee is, admittedly, not taxable income and an exemption in respect thereof was claimed by the Assessee under Sec 10(34) and (35). Had any expenditure been incurred in earning such income, it would have to be disallowed in view of Sec 14A. There is no quarrel with these aspects. The issue under consideration before High Court was whether the Assessee incurred any expenditure to earn the dividend or interest arising from such securities which are held as a stock in trade.

ii. The Hon’ble High Court held that in the fact under consideration the

Assessee has not held the shares for the purpose of earning dividend income and the same are held as a stock in trade with an intention to earn the profit which is to be offered for the tax as “Income from Business and Profession”. The Dividend income earned by the Assessee is incidental to the business of purchase and sale of shares and thus, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from the deduction. The High Court uphold the order of ITAT and dismissed the department’s appeal.

12. Proceedings before the Hon’ble Supreme Court

The Apex court analysed the facts of cases before it and identified the issues. The same were resolved with the following observations and findings:-

i. In the first instance, it needs to be recognised that as per Sec 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the Assessee "in relation to income which does not form part of the total income under the Act". It is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would



then be considered as incurred in respect of other income which is to be treated as part of the total income.

ii. There is no quarrel in assigning this meaning to Sec 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on the one hand or the Punjab and Haryana High Court on the other hand, have agreed in providing this interpretation to Sec 14A of the Act. The entire dispute is as to what interpretation is to be given to the words 'in relation to' in the given scenario, viz. where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee company was not to earn a dividend. We have two scenarios in these sets of appeals. In one group of cases, the main purpose for investing in shares was to gain control over the investee company. Other cases are those where the shares of investee company were held by the Assessees as stock-in-trade (i.e. as a business activity) and not as an investment to earn dividends. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not.

iii. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the Assessees would apply while interpreting Sec 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an Assessee may not be relevant. No doubt, the

Assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Sec14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Sec 14A of the Act. This is so held in Walfort Share & Stock Brokers (P.) Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom.

iv. "The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of Sec 14A. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened u/s 14A."

v. The Delhi High Court, therefore, correctly observed that prior to the introduction of Sec 14A of the Act,



the law was that when an Assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Sec 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab & Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as an investment in the investee company, may be for the purpose of having a controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the Assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed.

vi. What happens when the shares are held as 'stock-in-trade' and not as 'investment', particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. This Circular

takes note of the judgment of this Court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business or banking. Therefore, the income arises from such investments is attributable to the business of banking falling under the head 'profits and gains of business and profession'. On that basis, the Circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to income tax under the head 'income from other sources' or it is to fall under the head 'profits and gains of business and profession'. The Board, going by the decision of this Court in Nawanshahar case, clarified that it has to be treated as income falling under the head 'profits and gains of business and profession'. The Board also went to the extent of saying that this would not be limited only to co-operative societies/Banks claiming deduction u/s 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies.

vii. From this, Punjab and Haryana High Court pointed out that this circular carves out a distinction between 'stock-in-trade' and 'investment' and provides that if the motive behind purchase and sale of shares is to earn a profit, then the same would be treated as trading profit and if the object is to derive income by way



of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the Assessees as 'stock-in-trade' and not as 'investment'. We proceed to discuss this aspect hereinafter.

viii. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-in-trade', the certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Sec 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Sec 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share & Stock Brokers (P.) Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned.

ix. It was observed by the Hon’ble Supreme Court that the Punjab and

Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though the theory of dominant intention applied by the High Court is not acceptable. It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the Assessee to deal in those shares as a business proposition. Whether the dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the Assessee, though the Assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the Assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the Assessee and the Assessee alone. Therefore, even at the time of investing into those shares, the Assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the Assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though the law in this respect has been clarified hereinabove.



x. Finally, after referring to the language of Sec 14A(2) of the Act r.w.r Rule 8D, the Hon’ble Supreme Court held that before applying the theory of apportionment, the AO needs to record satisfaction as to why the suo moto disallowance u/s 14A made by the Assessee is not correct.

13. Comments

i. This decision of the Apex Court puts to rest the proposition raised by the Assessee that before invoking the provisions of Section 14A, intention and the dominant motive to hold shares as stock in trade are crucial. Hon’ble Supreme Court after analysing the statuary provisions and analysing earlier decisions has not agreed to the same.

ii. Hon’ble Supreme Court has further put to rest the controversy with respect to applicability of Section 14A on dividend received from the shares and securities held as stock in trade which is the source of more than one species of income which includes taxable as well as exempt income. The concept of apportionment of expenditure prescribed in the case of Walfort Stockbrokers (supra) has been held to be the right method to invoke Section 14A.

iii. Hon’ble Supreme Court while upholding the applicability of provisions of Section 14A to dividend-yielding shares and securities which are held as stock and trade has upheld the decision of the Honourable Punjab and Haryana High Court in the case of State Bank of Patiala. The decision of the Honourable was based on a circular issued by the CBDT. The circular granted relief to Assessee

who are in the banking business. The moot question is whether the banking companies can still take advantage of the circular issued by the board. In my view, if the government as a policy wants to grant benefit to the banking industry, the benefit of the circular can be granted by the Assessing officer. For other Assessees also, there are many shades of grey where the exempt income springs out of the shares and securities held as stock in trade. After this decision of the Apex Court, there are the decisions of the Tribunal which are both for and against the Assessee.

ConclusionThis discussion is incomplete without ascertaining the effect of these decisions post Finance Act, 2020 from the assessment year 2020-21. With the return of taxation of dividend in the hands shareholders and dilution of provisions of Section 115O the issues settled in these case laws may become academic. However, it is pertinent to note that since Section 14A continues to remain a part of the statute book, the principles such as satisfaction on part of an assessing officer before the invocation of Rule 8D or theory of apportionment mentioned under Rule 8D as laid down by the Supreme Court in its aforesaid decisions will continue to hold field in relation to different species of exempt income.

Evidently, these amendments have eliminated “economic double taxation” enabling domestic companies to achieve wealth maximisation for their shareholders by reducing the overall cost of capital. This vital aspect will encourage domestic companies to attract more capital in the form of equity in near future and enable them to revive businesses in the backdrop of existing COVID-19 pandemics which has damaged world economy to a great extent.

mom

Special Story — Benami Act – Applicability of the judgments rendered under old law


Dharan V. Gandhi, Advocate

Benami Act – Applicability of the judgments rendered under old law

The Benami Transactions (Prohibition) Act, 1988, was originally enacted in the year 1988 with 9 sections. The old Act was considered as a toothless tiger as there were no adjudication provisions or rules prescribed. Thereafter, in 2016 vide the Benami Transactions (Prohibition) Amendment Act, 2016, the original Act was given a completely new avatar by enlarging the Act to 72 sections and by providing administrative and machinery provisions. The biggest controversy which has arisen in this arena is whether the amendments brought out by the 2016 Act is prospective or retrospective in nature, which is now seized with the Apex Court.

In today’s article, I shall be dealing with two judgments of the Apex Court rendered in the year 2019 in context of Benami law viz. Smt. P. Leelavathi vs. V. Shankarnarayana Rao reported in 263 Taxman 105 (SC) and Mangathai Ammal vs. Rajeswari reported in 414 ITR 358(SC). In these judgments, the dispute was between two private parties and the issue was whether the property belonging to one of the party is benami property or not. This dispute pertain to the period when the amended Act had not kicked in. It would be pertinent to understand the application of such judgments to the amendments and in the present article an attempt is made in this regard.

Firstly, the important principles laid down by the Court in these judgments are brought out

hereunder:

1. Burden of proving that a particular sale is benami and the apparent purchaser is not the real owner, always rests on the person asserting it to be so. This burden has to be strictly discharged by adducing legal evidence of a definite character which would either directly prove the fact of benami or establish circumstances unerringly and reasonably raising an inference of that fact.

2. While considering whether a particular transaction is benami in nature, the following six circumstances have to be taken as a guide:

a. the source from which the purchase money came;

b. the nature and possession of the property, after the purchase;

c. motive, if any, for giving the transaction a benami colour;

d. the position of the parties and the relationship, if any, between the claimant and the alleged benamidar;

e. the custody of the title deeds after the sale; and



f. the conduct of the parties concerned in dealing with the property after the sale.

3. Source of money had never been the sole consideration. It is merely one of the relevant considerations but not determinative in character. The true character of the transaction is governed by the intention of the person who has contributed the purchase money.

4. The Court in case of Leelavathi also held that financial assistance cannot be considered as a benami transaction.

5. More importantly, the Court had an occasion to deal with the retrospective application of the Amendment Act of 2016 in case of Magathai. While dealing with the amendment to section 3(2), the Court held that such amendment is not retrospective in nature.

Whilst laying down the above principles, the Court followed its earlier judgment in case of Jaydayal Poddar vs. Mst. Bibi Hazra [1974] 1 SCC 3; Thakur Bhim Singh vs. Thakur Kan Singh [1980] 3 SCC 72; Binapani Paul vs. Pratima Ghosh [2007] 6 SCC 100 and Valliammal vs. Subramamam [2004] 7 SCC 233.

It will now be pertinent to understand the applicability or otherwise of the above principles in context of the amended Act. Let us decipher the same as under:

Burden of proof One of the important finding of the Court is regarding burden of proof. It states that burden of proof is on the one asserting the property to be a benami one. This judgment is in context of the old law and in case of dispute between two private parties. If the same is imposed in context of the amended Act, it would mean that the

burden of proof would be on the Department to show that the property in question is a benami one and that too beyond reasonable doubt.

It would be pertinent to visit section 24 of the amended Act. As per section 24, the Initiating Officer (‘IO’) on the basis of material in his possession, has to record a reason to believe that any person is a benamidar in respect of a property and require such person to show-cause as to why such property should not be treated as a benami one. Further, if the IO is of the opinion that person in possession of the benami property may alienate the property during the period, he may provisionally attach such property. After making such inquires and calling for such reports or evidence as IO deems fit and taking into account all relevant materials, he may treat such property as benami one and refer the matter to the Adjudicating Authority (‘AA’).

Thus, from the above, it appears that IO only needs to form a reason to believe based on the material in his possession and that it is the duty of the owner to demonstrate that the property is not a benami one. The term ‘reason to believe’ is very well known to us as it has been subject matter of interpretation in context of section 147 of the Income-tax Act, 1961. There the Courts have held that at the time of forming reason to believe, one need not come to a conclusive finding. Thus, what flows from the above is that the initial burden of proof is on owner of the property and not the Department and once the initial burden is discharged the same shifts onto the Department, who then has to prove beyond reasonable doubt that the property is a benami one - same logic which is prevalent in context of section 68 of the Income-tax Act, 1961. This view has been taken by the Appellate Tribunal for SAFEMA, FEMA, PMLA, NDPS, PBPT Act in case of Akashdeep vs. Manpreet Estates LLP [2019] 105 taxmann.com 187 (PBPTA – AT).



Retrospective or prospective application of the amendments As I see, there are two types of amendments brought out by amendment Act of 2016 in the Benami Act. One is where the administrative machinery has been put in place i.e. procedure of assessment, appeal and prosecution. The other type of amendments is what is broadly understood as the substantive provisions which includes change in the meaning of the term ‘benami transaction’ and other substantive provisions like confiscation of the property, prohibition on retransfer etc.

In so far as the latter breed of provisions are concerned, the same are to be construed as prospective in nature thereby not attracting to the transactions concluded before the commencement of the Amendment Act. This was, in fact the view taken by the Apex Court in case of Mangathai (supra). Though the same was in context of omission of section 3(2) of the old Act, the same was held to be prospective in nature. Thus, the new definition which is broader in ambit than the earlier one, will not apply to transactions concluded earlier. Similarly, the other provisions like confiscation etc. will not apply retrospectively.

This view has also been taken by the Rajasthan High Court in case of Niharika Jain vs. UOI [2019] 107 taxmann.com 272 (Raj), Bombay High Court in case of Joseph Isharat vs. Rozy Nishikant Gaikwad 2017 (5) ABR 706 and Calcutta High Court in case of M/s. Ganpati Dealcom Pvt. Ltd. vs. UOI [2019] 112 taxmann.com 367 (Cal).

In so far as the administrative machinery provisions are concerned, the same in my view are again prospective in nature meaning thereby that the same cannot be employed to visit a transaction entered prior to the commencement of the Amendment Act. Firstly, these provisions are not procedural in nature and they affect the substantive rights of the person. This is because, as a result of an order passed by the Adjudicating Authority, the property is liable for confiscation

u/s 27 of the amended Act. Such confiscation itself is prospective in nature and therefore, there cannot be an administrative process set into motion to confiscate a property prior to the commencement of the confiscation provision itself. Confiscation provisions are penal in nature and therefore, they cannot be retrospective in nature.

Further, under the original Act, there were no provisions to acquire a benami property as no rules were prescribed in this regard. This void was filled in by the amendment Act. Such procedural sections providing for right to appeal and right to appear before an authority and right to issue show-cause notice cannot be mere procedural in nature. Such provisions cannot be retrospective as held by the Calcutta High Court in case of Ganpati Dealcom Pvt. Ltd. (supra).

It may be pertinent to note that the judgment of the Calcutta High Court has been stayed by the Supreme Court, though the ratio laid down is still binding.

Definition of the term benami transactionThe Apex Court in the judgments discussed earlier have laid down certain important principles on identification of benami transaction. Now that the definition of the term ‘benami transaction’ has been amended, can those principles be applied in interpreting the new definition? I have split up the discussion in two parts based on the finding of the Apex Court as under:

1. Motive/ intention The Apex Court has held that source of

fund is not the sole consideration, one has to also consider the motive or intention of the parties behind such transaction. This was in context of the definition of the term ‘benami transaction’ u/s 2(a) of the old Act which defined such transaction as any transaction in which property is transferred



the prosecution proceedings under the amended Act.

2. Financial assistance The Apex Court in case of Leelavathi

also held that financial assistance cannot be considered as a benami transaction. This finding of the Apex Court will be helpful even under the amended law. Section 2(9)(A), while defining the term benami transaction states that a property which is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person. Where such consideration is paid by the owner out of the financial assistance received from another person, then such transaction cannot be considered as a benami transaction, as in such case, it cannot be said that the consideration is paid or provided by another person. This view is also taken by the Apex Court in case of Pawan Kumar Gupta vs. Rochiram Nagdeo [(1999) 4 SCC 243].

Thus, the application of the judgments rendered under the old law while interpreting the amended law will depend upon the facts of the case and the nature of amendments and there cannot be any rigid rule in this regard.

mom

to one person for a consideration paid or provided by another person; Thus, it was this simple definition without any exception which necessitated the Apex Court to lay down certain other important conditions to treat the transaction as benami transaction. However, the amended Act has provided a very wide and broad definition in section 2(9), which not only contains various types of benami transactions but also certain exceptions. Further, this definition is exhaustive in nature and does not warrant for any interference. In this scenario, it will be difficult to apply the motive/ intention test to the new definition. Further, section 2(9)(A) which deals with the transaction where the consideration is provided by another person, also contains condition of benefit of the real owner.

One may note that section 53 of the amended Act which provides for punishment for entering into benami transaction, is attracted in a case where such transaction is entered in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors. Thus, motive of the transaction becomes important in

Special Story — Analysis of decision in case of New Delhi Television Ltd. vs. DCIT [Civil Appeal No. 1008 of 2020]


Devendra Jain & Radha Halbe, Advocates

Analysis of decision in case of New Delhi Television Ltd. vs. DCIT [Civil Appeal No. 1008 of 2020]

Reassessment under section 147 has always been a contentious issue. The various aspects of reassessment – what constitutes reasons to believe, tangible material, change of opinion, full and true disclosure etc. have been the subject matter of litigation in a vast majority of cases. The present article analyses the recent decision of the Hon’ble Supreme Court where some principles have been reiterated and some new principles have been laid down.

Brief facts of the caseThe assessee, NDTV was an Indian company engaged in running television channels and had various subsidiaries around the world. It had one such subsidiary in United Kingdom (UK) that had issued step up coupon bonds in July, 2007 for USD 100 million which were to be redeemed after five years at a premium of 7.5%. However, subsequently the bonds were redeemed in advance at a discounted price of USD 74.2 million in November 2009.

In the course of assessment u/s 143(3) for AY 2008-09, the assessing officer held that the UK subsidiary having no substantial existence, could not have raised such a huge amount without the assessee agreeing to furnish guarantee for the repayment along with interest. Though the assessee had never actually issued any such

guarantee, the assessing officer did not believe this and although he did not doubt the validity of the transaction, he imposed guarantee fee @ 4.68% to comply with the arm’s length requirement. Thus an addition of ` 18.72 crores was made to the income of the assessee.

On the last day of the six years period, on March 31, 2015, the assessment was reopened on the ground that the transaction of issue of bonds of USD 100 million by the UK subsidiary was a sham transaction and represented an arrangement where the undisclosed income of assessee was brought back to India by circuitous round tripping. The basis for such belief was the findings by Dispute Resolution Panel confirming the proposed addition made in subsequent A.Y. 2009-10 for moneys raised by the assessee through its Netherland subsidiaries. Assessing officer also relied upon certain complaints by a minority shareholder alleging that money received by UK subsidiary was ultimately shifted to asseesee via Mauritius subsidiary. Furthermore, the UK subsidiary itself was placed under liquidation on 28.03.2011. Hence it was alleged that the assessee had failed to make full and true disclosure of all material facts.

The assessee vide its objections to the reasons recorded, raised several contentions that there was no reason to believe as to escapement of income,

SS-VIII-37



that it was a case of change of opinion and that since there was no failure to make full and true disclosure of material facts, the notice issued beyond four years was barred by limitation.

While disposing these objections, the assessing officer held that there was non-disclosure of material facts and that the case of the assessee would fall within the second proviso to Section 147 of the Act as income was derived through its foreign subsidiary and hence the extended period of 16 years would be applicable.

The assessee then filed a writ petition under Article 226 before the Hon’ble Delhi High Court which held that there was non disclosure of material facts by the assessee and hence the reopening was valid. Against the High Court Order the assessee filed a civil appeal before the Supreme Court.

In the Supreme Court:

The Apex Court framed three main issues:

1. Whether it can be said that the assessing officer had reason to believe about escapement of income?

2. Whether the disclosure by assessee during first assessment proceeding can be said to be full and true?

3. Whether the impugned notice can be considered as the one invoking second proviso to section 147?

1. Reason to believeRegarding the first issue, the court held that information which comes to the notice of the assessing officer after completion of assessment for that year can definitely form tangible material to invoke section 147 even if a detailed assessment was completed for that year. Since the reopening was based on the material disclosed

in assessment proceedings for subsequent year, it was considered to be sufficient basis for existence of reason to believe for invoking section 147.

While coming to this conclusion, the Hon’ble court relied on its earlier decisions in Claggett Brachi Co. Ltd. vs. CIT [1989 Supp (2) SCC 182], M/s Phool Chand Bajrang Lal and Another vs. ITO and Another (1993) 4 SCC 77 and Ess Kay Engineering Co.(P) Ltd.v. CIT [(2001) 10 SCC 189].

2. Full and true disclosureThe Court then went to analyse whether there was any failure on part of the assessee to disclose fully and truly all material facts. It was apparent from the records of the case that the revenue was aware of the entities which subscribed to the convertible bonds. It was the revenue’s case that it was unaware about the amount of subscription by each entity and the management structure of these entities. The Court noted that in the course of assessment proceedings relating to the subsidiaries, before the same assessing officer,the details of addresses and the consideration pa id by each of the bondholders were submitted.The Court relied on its earlier decision in Calcutta Discount Co. Ltd. vs. ITO and Another [AIR 1961 SC 372] to hold that the onus on the assessee to make full and true disclosure is limited to disclosure of primary facts only however, disclosure of the facts that can be termed as secondary facts is not mandatory for the assessee. The Court thus held that the assessee had disclosed all primary facts before the assessing officer and it was not required to give any further assistance to the assessing officer by disclosure of other facts. It was for the assessing officer at this stage to decide what inferences should be drawn from the facts of the case. In the present case the assessing officer on the basis of the facts disclosed to him, did not doubt the



genuineness of the transaction set up by the assessee. This the assessing officer could have done even at that stage on the basis of the facts which he already knew. Without conducting any investigation thereon, it was not for the revenue to allege that the assessee had not fully and truly disclosed material facts. Hence the revenue cannot take benefit of the extended period of limitation of 6 years.

One interesting aspect of the case was that, before the High Court, the revenue, in their counter affidavit, had relied upon the second proviso to section 147 and submitted that the issue of disclosure of material facts was not relevant. Hence the Apex Court held that the revenue can not be now permitted to orally argue the issue of non disclosure of material facts by assessee.

3. Applicability of second proviso to section 147

The third and final issue for determination before the Court was whether the reopening notice could be said to have been invoking the second proviso to section 147 in the given set of facts which would extend the time limit for initiation of reassessment up to 16 years. This plea was rejected by the High Court and the revenue had not appealed against the same before the Apex Court. However, the Apex Court noted that respondent is entitled to defend the order even on a ground which may have been decided against it by the High Court.

Then the Court noted that the notice as well as the reasons were silent about the applicability of the second proviso to section 147. It was only while rejecting the objections of the assessee that reference has been made to the second proviso in the order of disposal of objections. The Court held that because the assessee was never put to notice about the revenue’s intention to invoke second proviso to section 147, the same could

not be invoked in the process of rejection of objections. If the revenue had issued a notice to the assessee stating that it relies upon the second proviso, the assessee would have had a chance to show that it was not deriving any income from any foreign asset or financial interest in any foreign entity, or that the asset did not belong to it or any other ground which may be available. The Court held that if the revenue was to rely upon the second proviso and wanted to urge that the limitation of 16 years would apply, then in the notice or at least in the reasons in support of the

notice, the assessee should have been put to notice that there venue relies upon the second proviso. The Court held that no assessee should be taken by surprise without giving him a proper opportunity to defend himself on the wrongdoings he is alleged of and if such actions are upheld it will lead to the violations of the principles of natural justice which is impermissible in the eyes of law. The Court did not express any opinion on merits about the applicability of second proviso to section 147 but held that in the facts of the case since the notice issued and the reasons recorded for reopening were silent about the second proviso, the revenue cannot raise that plea in the order disposing the objections or in the counter affidavit before the High Court.

ConclusionThus, the Court held that though the assessing officer had valid prima facie reasons to believe that income has escaped assessment, in the absence of failure on the part of the assessee to disclose fully and truly the primary facts, the notice issued beyond four years was barred by limitation. Further, the Court held that the said notice could not be said to have been invoking the second proviso to section 147 and hence the Court did not decide the merits of applicability of second proviso in the facts of the case. The Court observed that the revenue may issue fresh notice



issue already examined in the assessment is valid tangible material for initiation of proceedings u/s 147

• When the transaction is proved to be bogus, the assessee cannot said to have disclosed all material facts fully and truly in the course of the first round of assessment.

• An assessee can only be expected to disclose the primary facts and not the secondary facts or the inferences to be drawn from the primary facts.

• No side can orally urge on the arguments not mentioned in the petition or counter-affidavit.

• An assessee should be put to notice of the intentions of the revenue as to which provisions of law are proposed to be invoked against it, so as to provide an opportunity to fairly present its case.

• Respondent in an appeal is entitled to defend the order of lower court even on a ground which may have been decided against it by the lower court.

mom

relying on the second proviso to section 147 if otherwise permissible under law.

It may be noted that the second proviso to section 147 has been inserted by the Finance Act, 2012 w.e.f. 1-7-2012. The present case pertains to A.Y. 2008-09. In Brahm Datt vs. ACIT [W.P.(C) 1109/2016](Del.), Hon’ble Delhi High Court has held that the insertion of second proviso to section 147 vide the Finance Act, 2012 has a prospective application and that it cannot be used to re-open those matters that have already attained finality (In that case assessment year was 1998-99 which was already barred by limitation on the date of amendment). It will be interesting to see how the applicability of the amendment is considered for those assessment years (like in this case A.Y. 2008-09) which fall prior to the date of amendment but where the reopening was not already barred by limitation on the date of amendment.

Thus, to sum-up the article, the key takeaways of the decision are:

• An assessee cannot object to the initiation of reassessment proceeding merely because the earlier assessment was a detailed one.

• Specific and reliable information received post completion of assessment about an

Special Story — Retrospective application of amendment intended to mitigate hardships – Section 40(a)(ia)


CA Viraj Mehta

Retrospective application of amendment intended to mitigate hardships – Section 40(a)(ia)

I. IntroductionIssue before the Apex Court in case of Calcutta Export Company (‘the Respondent’) was to consider whether amendment made by Finance Act, 2010 in section 40(a)(ia)1 of the Income Tax Act, 1961 (‘the Act’)was retrospective in nature or not. Such issue has been a matter of debate before various judicial authorities. Apex Court in the aforesaid case has analysed the provision and held that the amendment was curative in nature and hence, should be given retrospective operation from the time of the insertion of the section. Apex court has provided guiding principles in the determination of whether an amendment can be construed as prospective or retrospective.

II. Facts of the Casea. Respondent is a manufacturer and exporter

of casting materials. For the AY 05-06, respondent paid export commission to an agent after deducting tax at source. However, the said TDS was paid on 01.08.2005 i.e. after the end of financial year but before the due date of filing income tax return.

b. Case was selected for scrutiny and the assessment u/s 143(3) of the Act was completed. Ld. Assessing Officer disallowed export commission2 paid by the Respondent u/s 40(a)(ia) as tax ought to have been deposited by the Respondent before the end of the financial year i.e. 31.03.2005 in terms of the provisions of Section 40(a)(ia) of the IT Act as it stood then.

c. Commissioner of Income Tax (Appeals) allowed the respondents appeal holding that the commission amount is eligible for deduction for the aforesaid assessment year.

d. Revenue’s appeal before the Income Tax Appellate Tribunal and the High Court was dismissed.

e. Aggrieved by the said order, Revenue filed appeal before the Hon’ble Supreme Court.

III. Issue before the Hon’ble Supreme Court?

Whether the amendment made by the Finance Act, 2010 in Section 40(a)(ia) of the IT Act is retrospective in nature ?

1. Finance Act, 2010 amended Section 40(a)(ia) of the Act to provide that no disallowance shall be made if TDS is deposited before due date of filing return of income as specified in section 139(1) of the Act.

2. Export Commission was paid on 07th July 2004, 07th September 2004 and 07th October 2004.



IV. Hon’ble Supreme Court’s Decisiona. The purpose for bringing said amendment

is to ensure tax compliance. The fact that the intention of the legislature was not to punish the assessee is further reflected from a bare reading of the provisions of section 40(a)(ia).

b. It only results in shifting of the year in which the expenditure can be claimed as deduction. In a case where the tax deducted at source was duly deposited with the Government within the prescribed time, the said amount can be claimed as a deduction from the income in the previous year in which the TDS was deducted. However, when the amount deducted in the form of TDS was deposited with the Government after the expiry of period allowed for such deposit then the deductions can be claimed for such deposited TDS amount only in the previous year in which such payment was made to the government.

c. With a view to mitigate this hardship, section 40(a)(ia)was amended by the Finance Act, 2008. The assessees after the amendment in 2008 were classified in two categories; (i) those who have deducted that tax during the last month of the previous year and (ii) those who have deducted the tax in the remaining eleven months of the previous year. It was provided that in case of assessees falling under the first category, no disallowance under section 40(a) (ia) shall be made if the tax deducted by them during the last month of the previous year has been paid on or before the last day of filing of return in accordance with the provisions of section 139(1) for the said previous year. In case, the assessees are falling under the second category, no disallowance under section 40(a)(ia) where the tax was deducted before the

last month of the previous year and the same was credited to the government before the expiry of the previous year. The net effect is that the assessee could not claim deduction for the TDS amount in the previous year in which the tax was deducted and the benefit of such deductions can be claimed in the next year only.

d. The amendment though addressed the concerns of the assessees falling in the first category but with regard to the case falling in the second category, it was still resulting into unintended consequences and causing grave and genuine hardships to the assessees who had substantially complied with the relevant TDS provisions by deducting the tax at source and by paying the same to the credit of the Government before the due date of filing of their returns under section 139(1).

e. The disability to claim deductions on account of such lately credited sum of TDS in assessment of the previous year in which it was deducted, was detrimental to the small traders who may not be in a position to bear the burden of such disallowance in the present assessment year.

f. In order to remedy this position and to remove hardships which were being caused to the assessees belonging to such second category, amendments have been made in the provisions of section 40(a) (ia) by the Finance Act, 2010.

g. The Finance Act, 2010 further relaxed the rigors of section 40(a)(ia) to provide that all TDS made during the previous year can be deposited with the Government by the due date of filing the return of income. However, the Memorandum explaining the provisions of the Finance Bill, 2010 expressly mentioned as follows:



"This amendment is proposed to take effect retrospectively from 1-4-2010 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years."

h. TDS results in collection of tax and the deductor discharges dual responsibility of collection of tax and its deposition to the government. Strict compliance of section 40(a)(ia) may be justified keeping in view the legislative object and purpose behind the provision but a provision of such nature, the purpose of which is to ensure tax compliance and not to punish the tax payer, should not be allowed to be converted into an iron rod provision which metes out stern punishment and results in malevolent results, disproportionate to the offending act and aim of the legislation.

i. Legislature can and do experiment and intervene from time to time when they feel and notice that the existing provision is causing and creating unintended and excessive hardships to citizens and subject or have resulted in great inconvenience and uncomfortable results. Obedience to law is mandatory and has to be enforced but the magnitude of punishment must not be disproportionate by what is required and necessary. Legislative purpose and the object of the said amendments were to ensure payment and deposit of TDS with the Government.

j. The purpose of the amendment made by the Finance Act,2010 is to solve the anomalies that the insertion of section 40(a)(ia) was causing to the bona fide tax payer. The amendment, even if not given operation retrospectively, may not materially be of consequence to the revenue when the tax rates are stable and uniform or in cases of big assessees having substantial turnover and equally huge

expenses and necessary cushion to absorb the effect.

k. However, marginal and medium taxpayers, who work at low gross product rate and when expenditure which becomes subject matter of an order under section 40(a)(ia) is substantial, can suffer severe adverse consequences if the amendment made in 2010 is not given retrospective operation i.e., from the date of substitution of the provision. Transferring or shifting expenses to a subsequent year, in such cases, will not wipe off the adverse effect and the financial stress. Such could not be the intention of the legislature. Hence, the amendment made by the Finance Act, 2010 being curative in nature required to be given retrospective operation i.e., from the date of insertion of the said provision.

l. The amended provision of section 40(a)(ia) should be interpreted liberally and equitable and applies retrospectively from the date when section 40(a)(ia) was inserted i.e., with effect from the assessment year 2005-06 so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates.

m. Since the assessee has filed its returns on 01-08-2005 i.e., in accordance with the due date under the provisions of section 139, hence, is allowed to claim the benefit of the amendment made by Finance Act, 2010 to the provisions of section 40(a)(ia) of the Act.

V. ConclusionApex Court decision has laid to rest the controversy of prospective vs. retrospective application of an amendment which is curative in nature. This is a welcome decision of the Apex Court which resolves the controversy. Moot principle which Apex Court lays down is that



(c) amendment made by Finance Act (No.2), 2019 in section 201 to the proviso to section 201(1) to extend the benefit to a deductor, even in respect of failure to deduct tax on payment to non-resident & amendment in section 40(a) where an assessee fails to deduct tax on sums paid to a non-resident, but is not deemed to be an assessee in default under section 201(1), then it shall be deemed that the assessee has deducted and paid the tax & therefore no disallowance u/s 40(a).

(d) amendment made by Finance Act (No.2), 2019 in section 276CC tomake the legislative intention clear and to include the self-assessment tax, if any, paid before the expiry of the assessment year, and tax collected at source for the purpose of determining tax liability.

(e) amendment made by Finance Act, 2020 in section 55 to provide that in case of a capital asset, being land or building or both, the fair market value of such an asset on 1st April, 2001 shall not exceed the stamp duty value of such asset as on 1st April, 2001 where such stamp duty value is available.

mom

when an amendment seeks to clarify a position in law or such amendment being curative in nature; then it should be given retrospective operation i.e. from the date of insertion of such provision. Statutory amendment being declaratory, curative or clarificatory in nature has to be applied retrospectively from the insertion of the provision. As per Article 141 of Constitution of India, law laid and declared by Supreme Court is binding on all courts; hence, principle laid down in the said case can be applied to other provisions of the Act as well. Few examples where one can interpret that the amendment can be said to be applied retrospectively i.e. from the insertion of the section on the ground that such amendments are curative/clarificatory/explanatory in nature:-

(a) amendment made by Finance Act, 2018 in section 43CA, 50C & 56 to provide that no adjustments shall be made in a case where the variation between stamp duty value and the sale consideration is not more than five percent of the sale consideration.

(b) amendment made by Finance Act, 2018 in section 80JJAA to rationalize the deduction of 30% by allowing the benefit for a new employee who is employed for less than the minimum period during the first year but continues to remain employed for the minimum period in subsequent year.

Special Story — Section 292B & 292BB – Validation of Mistakes and Limitation


Paras S. Savla, Pratik B. Poddar and Harsh R. Shah, Advocates

Section 292B & 292BB – Validation of Mistakes and Limitation

Section 292B was implanted in the Income Tax Act, 1961 (‘the Act’) to shield the return of income, assessment, notices etc from becoming invalid due to any mistake, defect or omission contained therein, if such return, assessment, notice etc, were in substance and effect in conformity with the intent and purpose of the Act. The intention thereby being to condone procedural irregularities.

Section 292BB on the other hand deems notices issued by the department to be served in time and manner as provided in the Act, in case the Assessee has appeared in any proceeding or co-operated in any inquiring in relation to the assessment and the Assessee is precluded from taking any objection in relation to service of notice. However the exception being that the Assessee should have raised an objection before the completion of the assessment or reassessment.

We have attempted to analyze few recent Supreme Court Cases with this regard in detail.

PCIT vs. I-Ven Interactive Limited (2019) 110 taxmann.com 332 (SC)

Facts• The Assessee filed its return of income for

AY 2006-07 on 28 Nov 2006 under the E module scheme and hard copy of the

return was filed on 5 Dec 2006. There had been name change and change in address of the company, the return of income was filed mentioning the new address.

• The return of income was processed under section 143(1) of the Act. Later notice under section 143(2) was issued to the Assessee on 5 Oct 2007. This notice was sent to the address available as pet the PAN database, which was the old address. Another notice under section 143(2) was issued on 25 July 2008 to the same address as available in the PAN database.

• Thereafter multiple notices were sent under section 142(1) along with questionnaire calling for various details and the same were duly served on the Assessee company on the new address.

• In response to the notices the representative of the company appeared and participated in the proceedings before the Assessing Officer (‘AO’). However the Assessee challenged the notice issued under section 143(2) on the ground that the said notice was not served and it was never received by the Assessee Company and that the subsequent notices served were beyond the period of limitation.

SS-VIII-45



• The AO completed the assessment under section 143(3) by making certain disallowances.

• Assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [‘CIT(A)’] who held that the AO did not assume valid jurisdiction under section 143(2) and hence the assessment was invalid. The CIT(A) relied upon the communication dated 6 Dec 2005, wherein as per the Assessee it had communicated the change in address to the AO.

• The Department preferred an appeal before the Income Tax Appellate Tribunal (‘ITAT’) which was dismissed. The order passed by the ITAT was confirmed by the High Court and the department preferred an appeal before the Supreme Court.

Arguments by the Revenue• The Revenue argued that AO had sent the

notice under section 143(2) to the Assessee as per the available address as per the PAN database and that there was no intimation by the Assessee in respect to change of address. Thus it can be said to be sufficient compliance of relevant provisions of the Act.

• It was alleged that, the AO never received the alleged communication dated 6 Dec 2005 communicating the change in address and that the Assessee Company was unable to produce the said communication.

• It was further argued that the CIT(A) had merely relied upon the above alleged communication which was not forthcoming and was never produced. Therefore the AO was justified in sending the notice to the address as available in the PAN database.

Arguments by the Taxpayer• Change of address and change in name was

intimated to the registrar of companies in Form 18

• The AO was in knowledge of the new address, as it was evident from the fact that the assessment orders for AY 2004-05 and 2005-06 were sent at the new address.

• Thus, the AO was aware of the new address and hence the notice ought to be sent to the new address.

Ruling of the Apex Court• The Court took note of the following,

o The alleged communication of 6 Dec 2005 intimating the AO about the new address was not forthcoming and the same was not produced even before Supreme Court. Further in the affidavit filed before the Supreme Court, the Assessee stated that the said communication was not available.

o The only document available was Form 18 filed with the ROC, but the same cannot be said to be intimation to the AO in respect of change in address.

o No application was made by the Assessee to change the address in the PAN database.

• Considering the above facts, the Court held that in absence of any intimation to the AO with respect to change in address, the AO was justified in issuing the notice at the address available as per PAN database.

• With respect to notice under section 143(2) dated 5 Oct 2007, the Court held that once the notice is sent within the



period prescribed in the proviso to Section 143(2) of the Act, actual service of the notice upon the Assessee would be immaterial.

• In relation to filing of return of income with the new address, the court held that mere mentioning of new address in return of income is not enough, without specifically intimating the same to the AO and also without getting address changed in the PAN database.

• With respect to argument of the Assessee that the assessment orders for 2004-05 and 2005-06 were sent to the new address, the apex court held that the reasoning has been sufficiently explained by the Revenue.

• Considering the above reasons the Apex Court quashed the orders passed by the High Court, ITAT and CIT(A) and remanded the matter back to the CIT(A) to consider the appeal on merits.

Sky Light Hospitality LLP vs. ACIT [2018] 92 taxmann.com 93 (SC)

Facts• The Assessee a private limited company

was converted into LLP from company on 13.05.2016 under Limited Liability Partnership Act, 2008. It was previously called M/s Sky Light Hospitality Pvt Ltd. (‘the company) and after conversion known as M/s Sky Light Hospitality LLP (‘the LLP’).

• The return of income for AY 2010-11 was processed under section 143(1). Later the assessment was re-opened based on certain information received from investigation unit.

• The report of the investigation wing also stated the fact of conversion of the

company into an LLP. Peculiar and specific details relating to transactions between the assessee and third party was mentioned in the report. Reference was made to contribution of ` 35 crores towards capital in another concern. As per Profit and Loss account, the assessee had suffered loss of ` 3.27 crores and the net capital had decreased to ` 31.72 crores. The assessee as per Tax Evasion Report had not been able to satisfactorily explain source of ` 35 crores. Hence as per the ‘reasons to believe’ this amount of ` 35 crores had escaped from assessment. The reasons further referred to purchase of land at Bikaner for ` 79,56,530/-. Source of money for purchase of this land had not been satisfactorily explained before the Investigation Unit. A portion of the report was reproduced in the reasons to believe furnished to the Assessee. Notice under section 148 was issued in the name of the company.

• Writ petition was filed in the High Court against impugned 148 notice and impugned order rejecting the objection against the 148 notice.

Arguments by the Taxpayer• The Taxpayer alleged that notice u/s

148 was addressed and issued to the company which had ceased to exist and was dissolved on 13 May 2016, and hence notice issued to a dead juristic person is invalid and void in the eyes of law.

• Section 292B of the Act is inapplicable as issue of notice in name of the Assessee is a jurisdictional pre-condition.

• There is lack of live nexus and “reasons to believe” are mere reasons to suspect that do not establish that income had escaped assessment.



the Revenue. No prejudice was caused to the Assessee.

• The High Court distinguished the case Spice Infotainment Ltd vs. CIT [2012] 247 CTR 500 (Delhi), stating that there the re-assessment order which was passed in the name of the erstwhile amalgamated company was challenged in writ petition. It was not a case where notice under section 148 was declared as void and invalid, but a case where the assessment order was in name of a juristic person which has ceased to exist. The order was in the name of a non-existing person and hence void and illegal.

• The High Court held that human errors and mistakes cannot and should not nullify proceedings which are otherwise valid and no prejudice had been caused. This is the effect and mandate of Section 292B of the Act.

• In relation to reasons to believe, the High Court was satisfied that it clearly established a live link and connect with the inference drawn that income has escaped assessment. The evidence and material on record justified the issuance of notice under section 148 of the Act.

Ruling of the Apex Court• The Apex Court has dismissed the Special

Leave Petition filed by the Assessee, holding that in the peculiar facts of this case wrong name given in the notice was merely a clerical error which could be corrected under Section 292B of the Income Tax Act.

• It may be worth mentioning that Supreme Court has not discussed the case in detail, but while dismissing the Special Leave Petition, clarified it in one paragraph.

Arguments by the Revenue• Error or mistake in addressing the notice

under Section 148 of the Act to the company was not a jurisdictional error, but an irregularity and procedural lapse. Hence Section 292B is applicable.

• Reasons to believe are elaborate and detailed and reflect honest and objective belief that income has escaped assessment.

Ruling of the High Court• In relation to validity of notice issued in

the name of the company, the court held that there was substantial and affirmative material/evidence on record to show that issue of notice in the name of the company instead of LLP was a mistake.

• The fact of conversion from company to LLP had been noticed and mentioned in following documents. Even PAN no. of the LLP was mentioned in some on the below documents.

- Tax evasion report of the investigation wing

- Reasons to believe recorded by the AO

- Approval obtained from the Principal Commissioner

- Order under section 127 of the Act.

• The only mistake was in the notice issued under section 148, which did not record the fact of conversion. There was no doubt and debate that the notice was meant for the petitioner and no one else. Legal error and mistake was made in addressing the notice.

• The fact that notice was addressed to the company which had been dissolved, was an error and technical lapse on the part of



CIT vs. Laxman Das Khandelwal [2019] 108 taxmann.com 183 (SC)

Facts• The Assessee is an individual carrying

on the business of brokerage. Search and seizure operation was conducted under section 132 of the Act in FY 2009-10. The Assessee filed its return of income on 24 Aug 2011 declaring total income of ` 9,35,130/-. Assessment was completed after making various additions determining the total income at ` 30,32,06,543/- vide assessment order dated 23 Dec 2011.

• Aggrieved by the said addition the Assessee preferred an appeal before the CIT(A). The Assessee challenged the assessment order on a legal ground that notice under section 143(2) was not issued prior to completion of assessment, hence the assessment order was void.

• The CIT(A) held that the Assessee had participated in the assessment proceedings and had not objected the fact of non-issuance of notice under section 143(2) during the assessment. It thus dismissed the legal ground raised by the Assessee by invoking the provisions of section 292BB of the Act and held that Assessee is precluded from raising an objection at the appellate stage.

• On merits the CIT(A) provided certain relief to the Assessee. The Revenue filed an appeal against the order of the CIT(A), whereas the Assessee filed cross objections on ground of jurisdiction as well as on merits.

Arguments by the Revenue• Assessment being completed under 153A,

there is no requirement of issue of notice u/s 143(2).

• There is no prescribed format for issuing of notice, the notice is actually issued in the proforma marked as “ITNS-33” which is a non-statutory notice. Once the Assessee is put to notice and given opportunity to attend office the requirement of section 143(2) is complete, whether notice is issued in profoma "ITNS-33", or in any other format.

• The AO had communicated his intention to scrutinize the return by way of two letters and afforded opportunity to the assessee to produce necessary accounts, documents or evidence. Therefore, the requirement, if any, of section 143(2) has been satisfied.

Arguments by the Taxpayer

• AO was required to issued notice under section 153A(1) in respect of six assessment years immediately preceding the assessment year relevant to the previous year in which search was conducted i.e. AY 2004-05 to 2009-10.

• Assessment for AY 2010-11 i.e. the search year was completed under section 143(3), hence a notice under section 143(2) was to be issued mandatorily. Non issuance of notice u/s 143(2) prior to completion of assessment is not a curable defect.

• Section 292BB applies only in a case of improper service of notice, it does not save a defect of non-issue of notice u/s 143(2).

• Purpose of issue of notice u/s 142(1) (format ITNS 32) and notice u/s 143(2) (format ITNS 33) are different, as provided in the section itself.

Ruling of the Tribunal• Year under consideration being the search

year, notice u/s 153A was neither required to be issued, nor was issued in the case



of the Assessee. The return of income was furnished on 24.08.2011, as per the provisions of section 139 of the Act.

• Notice u/s 142(1) and u/s 143(2) are meant for different purpose, it cannot be replaced by one another. Notice u/s 142(1) may be issued even prior to filing the return of income, whereas notice u/s 143(2) can be issued only after filing of the return of income.

• Requirement of issue of notice u/s 143(2) of the Act is embodied in the provisions of section 143(3) of the Act itself. Therefore, the issue involved in the impugned appeal under consideration is covered by the decision of Apex Court in the case of ACIT vs Hotel Blue Moon (2010) 321 ITR 362 (SC). Non-issue of notice u/s 143(2) prior to completion of assessment is not a curable defect as held by the Apex court.

Ruling of the High Court• Aggrieved by the order of the Tribunal

the revenue filed an appeal before the High Court. The High Court dismissed the appeal upholding the order of the Tribunal. Placing reliance on the decision of the Apex court in the case of ‘Hotel Blue Moon’, the High Court held that no substantial question of law arose for consideration.

Ruling of the Apex Court• The law on the point as regards

applicability of the requirement of notice under Section 143(2) of the Act is quite clear from the decision in Hotel Blue Moon's case (supra).

• The scope of the Section 292BB is to make service of notice having certain infirmities to be proper and valid if there was requisite participation on part of the Assessee. It is,

however, to be noted that the Section does not save complete absence of notice. For Section 292BB to apply, the notice must have emanated from the department. It is only the infirmities in the manner of service of notice that the Section seeks to cure. The Section is not intended to cure complete absence of notice itself.

• Since no notice under section 143(2) of the Act was ever issued by the department, the Supreme Court confirmed the findings of the High Court and Tribunal.

Maruti Suzuki India Ltd. AY 2011-12 [ SLP (Civil Diary) no. 14106 of 2018]

Facts• The Assessee filed its return of income

for AY 2011-12 on 28 Nov 2011. The Delhi High Court approved a scheme of amalgamation w.e.f 1 Apr 2012 vide its order dated 29 Jan 2013. Pursuant to the said order the erstwhile entity, M/s Suzuki Powertrain India Ltd.(“SPIL”) ceased to exist in the eyes of law w.e.f 17 Mar 2013 i.e. the date on which amalgamation was taken on record by the registrar of companies.

• The fact of amalgamation/merger of the erstwhile entity with M/s Maruti Suzuki India Ltd (‘MSIL’) was duly intimated to the revenue authorities as under:

- Letter filed with the JDIT(TP), Circle-50(1) on 3 April 2013

- Letter filed with the ACIT, Circle-50(1) on 8 April 2013

- Letter filed with the Add. CIT, Range VI on 8 April 2013

- Letter filed with the CIT-II, on 8 April 2013



- Letter filed with the ACIT, Circle-51(1) on 18 April 2013

• The AO made certain addition on account of Transfer Pricing and Corporate Tax in the draft order which was objected before the DRP.

• Post DRP directions the AO framed an assessment vide order dated 29 Dec 2015 in the hands of M/s Suzuki Powertrain India Ltd. which amalgamated with the Assessee company. In the impugned order the name of the non-existent entity was followed by “Amalgamated with M/s Maruti Suzuki India Ltd.”.

• The income tax computation and the notice u/s 274 r.w.s 271(1)(c) was also in the name of the non-existent entity.

• The final assessment order was challenged before the Tribunal.

Arguments by the Taxpayer• Assessment made by the AO on the

Amalgamating company is void ab initio. Since the erstwhile entity dissolved and ceased to exist as a legal entity in the eyes of law from 17.03.2013 i.e. the date on which the amalgamation was taken on record by the Registrar of Companies, no proceedings can be initiated/continued in the name of non- existent entity, viz. M/s Suzuki Powertrain India Ltd. on or after the said date.

• Even though the fact of amalgamation was within the knowledge of the revenue authorities, notices were issued in the name of the non-existent entity

- Notice dated 7 Nov 2014 issued by AO u/s 143(2) r.w.s 142(1) of the Act.

- Notice dated 10 July 2014 issued by Add DIT, TPO u/s 92CA(2)

- Notice dated 1 Aug 2014 issued by Add DIT, TPO

- Show cause notice dated 21 Jan 2015 issued by JCIT, TPO u/s 92CA(2)

• Merely mentioning in the final assessment order, the name of the successor entity after the name of the erstwhile/non- existent assessee did not and could not validate the invalid assessment proceedings, continued in the name of the non- existent entity, without issuing formal notices and bringing on record that the successor is an amalgamated entity.

• Mere participation by the amalgamated company in the assessment proceeding would not cure the defect as the assessment framed in the name of a nonexistent entity would tantamount to jurisdictional defect, thus making it void ab initio

• For the purposes of Section 170 (2) of the Act, two assessment orders will have to be passed: one in the name of MSIL itself for the AY in question and the other again in the name of MSIL indicating that the said assessment order is being passed under Section 170 (2) of the Act in respect of its tax liability as successor in interest of the Amalgamating company

Arguments by the Revenue• Assessee filed the return of income in the

name of M/s Suzuki Powertrain India Ltd. and the notice u/s 143(2) r.w.s. 142(1) of the Act was issued to the Assessee who had filed the return of income and the assessment was also framed in the name of the person who filed the return.

• AY involved was AY 2011-12 and the scheme of amalgamation was approved on 29 Jan 2013. Therefore the income was



earned by the erstwhile entity and AO has rightly assessed the income in its hand.

• As per sec 170(1) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession. Since the scheme was approved w.e.f 1 Apr 2012, the erstwhile entity was to be assessed for previous years ending on or before 31 Mar 2012. Hence the AO has rightly assessed income in the hands of the erstwhile entity.

• Before the High Court the revenue urged that the error, if at all, was a mere mis-description of the party in the assessment order and nothing more. AO has taken care to mention that it has since been amalgamated with MSIL

• Record of the assessment proceedings shows that the Assessee participated in it fully and raised no objection as to the continuation of the proceedings on the ground of lack of jurisdiction. Section 292B of the Act provided that the Assessee is precluded from questioning the assessment order on the ground that it was passed in the name of a non-existent entity

Ruling of the Tribunal• It is clear that when the assessment order

was passed, the erstwhile entity was not in existence. The aforesaid fact was also in knowledge of the department as the Assessee had informed vide various letters.

• The AO in spite of knowing this fact framed the assessment in the name of the non-existing entity and this irregularity is not curable.

• Further it is clear from the provisions of Section 170(2) of the Act that in the case of amalgamation, the assessment must be made on the successor i.e. the

amalgamated company and not on the predecessor i.e. amalgamating company. Therefore, the assessment framed by the AO vide order dated 29.12.2015 on the amalgamating company i.e. M/s Suzuki Powertrain India Ltd. which was not inexistence on the date of passing the assessment order was not valid and as such the same is quashed.

Ruling of the High Court• High Court relying upon the decision

of the Spice Infotainment Ltd. vs. CIT [2012] 247 CTR 500 (Delhi) and CIT vs. Dimension Apparels (P.) Ltd. [2015] 370 ITR 288 (Del), upheld the Tribunals order answering the substantial question of law in favour of the Assessee.

Ruling of the Apex Court• Against the decision of the Revenue filed

an SLP before the Apex Court, the same was dismissed in view of order passed by the Apex Court in the case of Spice Infotainment Ltd (Civil Appeal no. 285 of 2014).

Pr. CIT vs. Maruti Suzuki India Ltd. AY 2012-13 [(2019) 107 taxmann.com 375 (SC)]

Facts• Notice u/s 143(2) followed with notice

u/s 142(1) was issued in the name of the erstwhile company. The TPO passed an order u/s 92CA(3) making adjustment in respect of payment of royalty.

• Subsequently a draft assessment order was passed in the name of “SPIL (amalgamated with MSIL)”. MSIL filed its objections before the DRP as a successor in interest. The Grounds before the DRP did not allude to the objection that the draft assessment order was passed in the name of “SPIL (amalgamated with MSIL)”



or that this defect would render the assessment proceedings invalid.

• The DRP passed its order in the name of MSIL (as successor in interest of erstwhile SPIL since amalgamated). The Final assessment order was passed pursuant to the DRP direction but in the name of “SPIL (amalgamated with MSIL)”.

• The Assessee preferred an appeal before the Tribunal raising objections that the assessment proceedings were continued and the final assessment order was passed in the name of a non-existent entity.

• The Tribunal set aside the order passed by the AO and the same was also approved by the High Court following its earlier decision passed for AY 2011-12.

• Against the order passed by the High Court the Revenue has preferred an appeal before the Apex Court.

Arguments of the Revenue• Names of both the amalgamated company

and the amalgamating company were mentioned in the assessment order.

• Even on the hypothesis that the assessment order was framed incorrectly in the name of the amalgamating company, it would amount to a "mistake, defect or omission" which is curable under Section 292B when the assessment is, "in substance and effect, in conformity with or according to the intent and purpose" of the Act.

• There was effective participation of the Assessee in the assessment proceedings and no prejudice was caused to any of the parties.

• In Spice Infotainment the final order referred only to the erstwhile entity and there was no mention of the resulting

company. In distinction, in the present case both the draft and final assessment orders name of both the companies are mentioned.

• Issuance of notice u/s 143(2) to SPIL cannot be considered to be a jurisdictional defect when the assessment order categorically mentions names of both the entities. Further the decision of Skylight Hospitality confirmed by the Apex court that defect in recording name of the erstwhile entity in a notice under section 148 was a procedural defect and a mistake curable u/s 292B. Hence there is no jurisdictional defect.

• Though the doctrine of merger does not apply when a Special Leave Petition is dismissed before the grant of leave to appeal, where an order rejecting a Special Leave petition is a speaking order and reasons have been assigned for rejecting the petition, the law stated or declared in such an order will attract Article 141. Consequently, orders of the Apex court in the case of Skylight Hospitality and Spice Infotainment appear to be in direct conflict.

Arguments of the Taxpayer• Upon a scheme of amalgamation being

sanctioned, the amalgamated company is dissolved without winding up, in terms of Section 394 of the Companies Act 1956. The amalgamating company ceases to exist in the eyes of law [Saraswati Industrial Syndicate Ltd.v CIT [1990] 186 ITR 278 (SC)]

• The amalgamating company cannot thereafter be regarded as a "person" in terms of Section 2(31) of the Act 1961 against whom assessment proceedings can be initiated and an assessment order passed



• The jurisdictional notice under Section 143(2) of the Act, pursuant to which the assessing officer assumed jurisdiction to make an assessment was issued in the name of SPIL, a nonexistent entity, and was invalid.

• Order passed by the TPO in the name of SPIL, a non-existent entity was invalid in the eyes of the law. Since SPIL ceases to be an eligible assessee, there was no requirement to pass a draft assessment order and hence the final order is passed beyond the period of limitation.

• In terms of Section 170(2) of the Act, once the amalgamation is effective, assessment in respect of the income of the amalgamating company upto the appointed date has to be in the name of the amalgamated company as successor in interest of the amalgamating company.

• Delhi High Court has held in Spice Entertainment (supra) that an assessment framed in the name of the amalgamating company, which ceased to exist in the eyes of law, was invalid and untenable in law. Such a defect would not be cured in terms of Section 292B of the Act. Further, the fact that the amalgamated company participated in the assessment proceedings would not operate as estoppel

• Further the case is covered by Assessee’s own case for AY 2011-12.

• The decision of Skylight Hospitality is distinguishable and not applicable since it was rendered in its own peculiar facts.

Ruling of the Apex Court• Though, for AY 2011-12, leave was not

granted by this Court, reasons have been assigned by this Court for rejecting the Special Leave Petition. The law declared

would attract the applicability of Article 141 of the Constitution.

• In relation to the reliance by the revenue on the decision of Skylight Hospitality, the Apex Court held as under:

- All the material on record including the tax evasion report suggested that there was no manner of doubt that the notice was always intended to be issued to the successor entity. Hence, while dismissing the Special Leave Petition this Court observed that it was the peculiar facts of that case which led the court to accept the finding that the wrong name given in the notice was merely a technical error which could be corrected under Section 292B

- There is no conflict between the decisions of this Court in Spice Infotainment (supra) and in Skylight Hospitality LLP

• In the current case the notice under Section 143(2) under which jurisdiction was assumed by the assessing officer was issued to a non-existent company. The assessment order was issued against the amalgamating company. This is a substantive illegality and not a procedural violation of the nature adverted to in Section 292B

• In the present case, despite the fact that the assessing officer was informed of the erstwhile company having ceased to exist as a result of the approved scheme of amalgamation, the jurisdictional notice was issued only in its name. The basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation.



• Further participation in the proceedings by the appellant in the circumstances cannot operate as an estoppel against law.

• The Department appeal was thus dismissed with a detailed reasoning. The Apex court however refrained from deciding on the argument by the Assessee that the erstwhile entity was not an eligible assessee and the final assessment order was passed beyond limitation.

Conclusion It might seem that the Hon’ble Supreme Court may be developing an approach based on ‘balance of convenience’ to decide matters when procedural lapses are giving rise to jurisdictional questions. However this may not be true.

Section 292BB validates improper service of notice. The only exception being an objection raised before completion of assessment/reassessment. Hence principle of estoppel may apply unless specifically objected. However, total non-issuance of notice cannot be cured by section 292BB as there could have been no improper service until notice is issued.

In juxtaposition with Section 292BB; Section 292B validates mistakes/errors in returns, assessments, notices, summons if it is in substance and effect in conformity with intent of the Act. There is no exception in this case. Section 292B is

too broad and can rescue department of its errors/mistakes, without any safeguard to an Assessee.

In Skylight Hospitality LLP, the Apex court applied section 292B to cure the mistake which was made while issuing reopening notice u/s 148, whereas, in Maruti Suzuki’s case the scope of section 292B was restricted. One may observe that in Sky Light’s case the department was not diligent at the first stage of issuance of notice u/s 148. Whereas in Maruti Suzuki’s case the department was diligent, having knowledge, to mention both names i.e. amalgamating company as well as amalgamated company. Maybe the logic of two assessments u/s 170 weighed more. It may be noted that section 292B does not start with a non-obstante clause and hence entire scheme of the Act needs to be seen while applying 292B. As, the department had not acted in accordance with law all throughout the proceedings, the Apex Court did not treat it as a mistake which could be cured by Section 292B.

In fact the Supreme Court had not specifically discussed either section 292B or 292BB in Iven Interactive Limited (supra). Even without referring to those sections, the principle and intention of those sections was applied in spirit.

In the hindsight the decisions give an impression that Hon’ble Supreme Court had applied some checks and balances to render proper justice.

mom

Special Story — When in doubt, always favour the Revenue? Analysis of Judgment in CC vs. Dilip Kumar & Company


Harsh M. Kapadia, Advocate

When in doubt, always favour the Revenue? Analysis of Judgment in CC vs. Dilip Kumar & Company

I. Introduction“If two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted”. Observed in CIT vs. Vegetable Products Ltd. [1973] 88 ITR 192 (SC), this legal principle is a well-accepted rule of construction of taxing statutes. However, it appears that the 5-Judge Constitutional Bench of the Supreme Court in Commission of Customs vs. Dilip Kumar & Company (2018) 9 SCC 1 (‘Dilip Kumar’), has overturned this principle, causing a great hue and cry. Though delivered under the Customs Act, 1962, the law laid down has far reaching impact across all taxing statutes, including the Income-tax Act, 1961.

In this context, let us analyse the nuances of the principles contained in interpretation of taxing statutes and see if the Constitutional Bench has indeed unsettled the law laid down in Vegetable Products.

II. Taxing StatutesA statute is a will and intent of the Legislature which is portrayed in the form of words. However, language is at best an imperfect

instrument for the expression of human thought. Thus, the principles of interpretation of statute come in handy, so as to bring out the intent of the Legislature. Every taxing statutes comprises different kinds of provisions, having distinct and specific nature and purpose e.g. charging provisions, machinery provisions, exemption provisions, penal provisions, etc. Different rules of interpretation apply for different kinds of provisions, so as to decipher its meaning, scope and extent.

III. Issue Before The CourtIn Dilip Kumar, the issue before the Supreme Court was whether the assessee could claim benefit of the concessional import duty in terms of a prescribed notification. The assessee, in support, relied on a 3-Judge decision in Sun Export Corporation (1997) 6 SCC 564, which had laid down that ‘in case of two views possible, it is well-settled, that one favourable to the assessee in matters of taxation has to be preferred’. The revenue denied the claim. Correctness of the ratio in Sun Export was being tested before the Constitutional Bench in Dilip Kumar’s case.

Analysis and impact of the 5-Judge Constitutional Bench’s decision in CC vs. Dilip Kumar & Company on Rules of Interpretation



It is noteworthy that the Supreme Court has in its judgment used the words exemption notification, exemption clause and exemption provisions interchangeably and their findings apply to all the forms of a statute.

IV. Conclusion of The Court “(1) Exemption notification should be interpreted

strictly the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.

(2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue.

(3) The ratio in Sun Export Case (supra) is not correct and all the decisions which took similar view as in Sun Export Case (supra) stands overruled.”

V. Reasons

Exemption Notification/Provision – Strict ConstructionThe Supreme Court based its conclusion on legal as well as economic rationale. It held that in light of Article 265 of the Constitution of India, the taxing statute has to be interpreted strictly and the State cannot, at their discretion, levy tax without the authority of law. However, it also observed that equity has no place in interpretation of a tax statute. Giving an economic rational, it also expressed that exemptions from taxation tend to increase the burden on the other unexempted class of tax payers and therefore, a person claiming exemption has to establish that his case squarely falls within the exemption notification, and while doing so, a notification should be construed against the subject in case of ambiguity. A liberal construction of an exemption notification would inequitably shift the burden to the other tax payers and thus, undesirable.

Stages of Interpretation for Exemption Notification/ProvisionThe Supreme Court held that the interpretation of an exemption notification might require a combination of strict as well as liberal interpretation, depending on the stage of applicability which is being interpreted. It stated that mandatory requirements of exemption clause should be interpreted strictly and once an assessee falls within the ambit of the exemption, the directory conditions can be condoned, if there is sufficient compliance with the main requirements.

Charging Provisions vs. Exemption ProvisionsStipulating the difference between a charging provision and exemption provision, the Supreme Court held that any ambiguity in a charging provision should enure to the benefit of the assessee, whereas, any ambiguity in an exemption clause must be conferred in favour of revenue. Exemption can be availed only by those assesses who demonstrate that the benefit squarely falls within the exemption provision and they satisfy all the precedent conditions.

VI. FATE OF CIT vs. VEGETABLES PRODUCTS

The Supreme Court has reiterated the well-established position that “if the words in a taxing statute (not exemption clause) are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject” and this principle has remained unchanged since the past 63 years. When overruling Sun Exports, the Supreme Court has not overturned the principle laid down by that case but has denied its application in so far as interpretation of an exemption notification. Therefore, the principle of law laid down in Vegetables Products still holds good.

VII. WHAT ABOUT BENEFICIAL PROVISIONS?

Exemption Beneficial Provision vs. Exemption Non-Beneficial ProvisionThough all exemption provisions provide for exception from tax, yet there are some species



which aim in providing certain incentives to assessees in order to achieve a larger goal for the nation. The entire purpose of such exemption provisions is not to exempt tax, but to encourage / provide incentive to assessees, for the betterment of the State. Therefore, in view of the author, there can be two kinds of exemption provisions, viz. ‘Exemption Beneficial Provisions’ and ‘Exemption Non-Beneficial Provisions’. Although, the ultimate goal of both is to give concession to the tax payer, nevertheless, intention for enactment is separate and distinct. For example, section 10(2A) and section 10AA of the Income-tax Act, 1961. The former gives an exemption from tax to avoid double taxation of the same income. On the other hand, section 10AA encourages assessees to set up units in SEZs for the purpose of growth in exports and with a view to attract foreign and domestic investments. Thus, this section should be considered as an ‘Exemption Beneficial Provision’, while the former be regarded as an ‘Exemption Non-Beneficial Provision’.

Sections 10(2), 10(2A), 10(34), 10(50), are few illustrations of an ‘Exemption Non-Beneficial Provisions’ whereas sections 10B, 10AA, 32AD, 54F, 80G, 80-IA, 80-IB, 80-IE, etc. can be considered as ‘Exemption Beneficial Provisions’.

Rules of Interpretation for ‘Exemption Beneficial Provisions’It is a well-established rule of construction that where the object of an exemption provision is to give some incentive or benefit to an assessee, then such provisions are be construed liberally, wherein an interpretation which accomplishes the legislative intent should be adopted. A narrow construction of the exemption provisions which defeats the object cannot be preferred and it has to be given a wider construction which promotes the object. See Supreme Court decisions in Bajaj Tempo Limited vs. CIT (1992) 196 ITR 188, CIT vs. Shaan Finance (1998) 231 ITR 308, CIT vs. Straw-Board Manufacturing Co. (1989) 177 ITR 431 et al, all of which were dealing with ‘Exemptional Beneficial Provisions’.

VIII. CAN DILIP KUMAR APPLY TO ‘EXEMPTION BENEFICIAL PROVISIONS’?

The question before the Constitutional Bench in Dilip Kumar’s case was the rule of construction to be applied while interpreting Exemption Notification No. 20 of 1999 dated 28-02-1999 issued under section 25(1) of the Customs Act, 1962 for concessional import duty rates. This notification is neither a beneficial provision nor does it incentivize the assessees / the nation.

To say that Dilip Kumar applies even to exemptional beneficial provisions, will indeed frustrate the purpose and intent of beneficial provisions. Suppose an assessee is contemplating to set up an industrial unit in the North Eastern States for the overall growth and development of those states. He shall also be entitled to claim benefits under section 80-IE of the Act. If Dilip Kumar is applied to interpret section 80-IE as well, then that assessees will naturally be disheartened from setting up the unit in those states, thereby, defeating the purpose of enacting the said provision. Hence, applying Dilip Kumar to beneficial provisions is therefore, neither called for, nor desirable.

Treatise on 'Principles of Statutory Interpretation' by Justice G.P. Singh, (14th ed.) has too juxtaposed the rule of interpretation in case of different types of exemption provisions. It expresses that in case of any ambiguity while interpreting an exemption provision / notification which has a beneficent object, then the same should be construed liberally.

Therefore, depending on the nature of an exemption provision of a taxing statute, rules of construction may vary. Having a single rule to construe all kinds of exemption provisions is not correct. Exceptions to the levy of tax for providing incentives, have to be given a beneficial construction so as to bring out the intent of the Legislature. Laying down that exemption provisions (in totality) are to be construed strictly and the benefit of doubt, if any should go against the assessee, will turn out to be an incorrect



principle of law.

Accordingly, the ratio of Bajaj Tempo and others, has also not been reversed or overturned. Despite referring to and discussing numerous precedents, Bajaj Tempo or others have not even been referred to in Dilip Kumar. Hence, Dilip Kumar cannot not apply for interpreting beneficial exemption provisions.

The principle of law laid down in CIT vs. Sun Engineering Works (1992) 198 ITR 297 (SC) is quite apt in this scenario. Findings in Dilip Kumar cannot be read divorced from its context, i.e. rule of construction for ‘Exemption Non-Beneficial Provision’.

IX. AftermathsRevenue authorities have on many occasions relied on Dilip Kumar and argued that in case of ambiguity, the benefit should go against the assessee and thus, sought to deny not only all exemption provisions including beneficial deductions / exemptions, but also charging provisions.

In so far as interpretation of beneficial exemption provisions, a liberal reading of the provisions has been preferred by our courts, who did not accept revenue’s reliance on Dilip Kumar. The Madras High Court in Venkata Dilip Kumar vs. CIT [2019] 419 ITR 298 was not impressed by revenue’s reliance on Dilip Kumar in support of the contention that exemption under section 54 of the Act should be interpreted strictly and the burden of proof of its applicability would be on the assessee. It preferred a beneficial construction of the provision and granted the deduction to the assessee as he had substantially complied with the

requirement of the section. In PCIT vs. Aarham Softronics (2019) 412 ITR 623, the Supreme Court granted deduction under section 80-IC of the Act to the assessee after giving a purposive interpretation to the provision and relying on Dilip Kumar.

In respect of charging provisions, our courts have been quick to identify the difference between charging and exemption provisions and have clarified on many occasions that in case of ambiguity in charging provisions, benefit should always go to the assessee. See CIT(E) vs. Shiv Kumar Sumitra Devi (2020) 269 Taxman 163 (All), Omprakash Gupta vs. ACIT (IT(SS) No. 277/Ind-17), Benares Hotels sv. DCIT (2020) 115 taxmann.com 39 (Varanasi) and Cinestaan Entertainment vs. ITO (2019) 177 ITD 809 (Del).

X. ConclusionAnxiety, if any caused in the minds of tax payers due to the judgment of the Constitutional Bench is unwarranted, as Dilip Kumar does not bring about any change in the law laid down in Vegetable Products. The ratio that if two interpretations of a charging provision are possible, then benefit should go to the assessee still holds good. On the other hand, exemption provisions have to be construed strictly and in case of ambiguity, view which favours the revenue must be adopted. It is also true that the rule of construction of exemption provisions sustained in Dilip Kumar should not apply to beneficial provisions, which otherwise deserve a liberal interpretation so as to advance the object of the provision and fulfill the aims to be achieved thereby.

mom

Special Story — Section 28(iv) and 41(1)— CIT vs. Mahindra & Mahindra Ltd. (2018) 404 ITR 1 (SC)


CA Ketan Vajani

Section 28(iv) and 41(1)— CIT vs. Mahindra & Mahindra Ltd. (2018) 404 ITR 1 (SC)

The significance of Supreme Court decisions cannot be undermined since the same are binding and final as far as all the parties to the dispute are concerned. The view adopted by the Supreme Court on any given issue is the Law of the Land and has to be respected by all the forums in the judicial hierarchy. No doubt, the Landmark decisions of the Supreme Court is one of the repeated special stories for the Chamber’s Journal at some periodic intervals. The current issue again deals with some of such landmark decisions of the recent past. This article seeks to deal with one such decision of the Hon. Supreme Court in the case of CIT vs. Mahindra & Mahindra Ltd. (2018) 404 ITR 1 (SC) that arose from the decision of the Hon. Bombay High Court in the case of CIT vs. Mahindra & Mahindra Ltd. (2003) 261 ITR 501 (Bom).

The Issue before the Supreme Court The issue before the Supreme Court was as regards the applicability of provisions of section 28(iv) and/or section 41(1) of the Act in respect of the waiver of loan taken by the assessee for the acquisition of a capital asset.

Facts of the Case The relevant facts of the case were as under :

1. The assessee was manufacturer of Jeeps. The assessee decided to expand its jeep product line by including two new models. For the purpose of expanding the business, the assessee had entered into an agreement dated 18-6-1964 with Kaiser Jeep Corporation (KJC) of America. As per the agreement, KJC agreed to sell the dies, welding equipment and die models to the assessee for the price of $ 6,50,000/-.

2. During the relevant period, there was an acute shortage of foreign exchange reserves in the country and accordingly the assessee was not in a position to arrange the foreign exchange for the purpose of payment to the supplier. In view of this situation, KJC agreed to provide loan to the assessee @ 6% interest repayable after 10 years in installments. The assessee obtained necessary approval from the Reserve Bank of India (RBI) and government in relation to the loan from KJC.

3. Later on, another company namely American Motor Corporation (AMC) took over the KJC. As a part of the corporate takeover scheme, it was decided that AMC will waive the principal amount of



loan advanced by KJC to the assessee. Accordingly, the AMC agreed to cancel the promissory notes issued by the assessee in favour of KJC as and when they got matured. The assessee was communicated about the arrangement vide letter dated 17-2-1976.

4. The assessee filed its Return of Income for A.Y. 1976-77 on 30-6-1976. As per the Return filed, the assessee showed the amount of ` 57,74,064/- as cessation of its liability towards the American Motor Corporation. The assessee claimed that the said amount is not in the nature of Income.

5. The assessing officer, however, concluded that with the waiver of the loan amount, the credit represented income of the assessee. The assessing officer concluded that the loan arose from business dealings and therefore when the waiver took place, credits received by the assessee no longer represented liability but they became part of business income. Accordingly, the assessing officer held that the sum of ` 57,74,064/- was taxable under Section 28 of the Income Tax Act, 1961.

Before CIT (A) The assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [the CIT (A)] against the said order of the assessing officer. After perusal of the matter, the CIT (A) dismissed the appeal and upheld the order of the assessing officer. The CIT (A) took a view that with the waiver of loan, a benefit was received by the assessee and, therefore, the sum of Rs. 57,74,064 was taxable as income under s. 28(iv) of the Act as such benefit was obtained in the course of business and the monetary value of that benefit was income.

Alternatively, the CIT(A) took a view that the waiver of the loan amount of ` 57,74,064 amounted to remission of trading liability and consequently the said amount was taxable under s. 41(1) of the IT Act.

The CIT(A) further held that, in any case, the assessee had purchased the toolings with the help of the loan which the assessee received from KJC and since the assessee had written off the cost of toolings and got the benefit of depreciation allowance over a period of 9 years amounting to ` 27,29,585 on waiver of the loan, the said amount of ` 27,29,585 had to be adjusted or set off against the amount of ` 57,74,064/-

Before the Income-tax Appellate Tribunal Being aggrieved with the order of the CIT (A), the assessee preferred an appeal before the Hon. Income-tax Appellate Tribunal. On the facts of the case, the Tribunal concluded that there was one contract of purchase of the tools and that purchase consideration was paid vide promissory notes.

As regards applicability of section 28(iv), the Tribunal concluded that as per the language of section 28(iv), it is applicable only to benefits or perquisites received by the assessee in kind. Since in the case of the assessee, the benefit of waiver was received by the assessee by cash and not in kind, the provisions of section 28(iv) cannot apply to the assessee.

Further, as regards section 41(1) of the Act, the Tribunal held that even section 41(1) of the Act was not applicable in the case of the assessee because the purchase consideration was in relation to a capital asset and the same was never debited to the profit and loss account by the assessee. Further, the assessee had never incurred the trading liability since the toolings purchased was not stock in trade and accordingly no trading liability had ceased to exist.



Considering these facts, the Tribunal held that both section 28(iv) and section 41(1) of the Act cannot be applied in the case of the assessee. Accordingly, the Tribunal set aside the order of the CIT (A) and allowed the appeal of the assessee.

Before the Hon. Bombay High Court Against the order of the ITAT, the revenue filed a Reference before the Hon. High Court at Bombay. The Department argued before the High Court that on waiver of the loan the assessee got the toolings without payment and therefore a benefit accrued to the assessee out of business transaction. This benefit was taxable under section 28(iv) of the Act. As regards section 41(1), the Department argued that the toolings purchased by the assessee was on revenue account and the toolings constituted stock in trade of the assessee. The toolings were purchased as a part of trading activity and the assessee had incurred a trading liability of ` 57,74,064/- when it entered into agreement for purchase of toolings. Consequently, on remission of the same, section 41(1) of the Act stood attracted. The Department also alternatively argued that the assessee had received depreciation allowance for 9 years amounting to ` 27,29,585/- which should be adjusted against the amount of ` 57,74,064/-.

Per Contra, the assessee argued that the assessee had imported toolings as part of plant and machinery and not as trading goods. The assessee has not received any deduction in respect of ` 57,74,064/- and hence the provisions of section 41(1) cannot apply. Even assuming that the assessee had received the benefit of deduction or allowance, such deduction was not in respect of any loss, expenditure or trading liability. As regards section 28(iv), it was contended that the said section also does not apply since the section was applicable to benefits or perquisites received

in kind and does not apply to cash receipts. The assessee relied on the decision of the Supreme Court in CIT vs. Mafatlal Gangabhai & Co. (P) Ltd. (1996) 219 ITR 644 (SC) and also the judgments in the case of CIT vs. Alchemic (P) Ltd. (1981) 130 ITR 168 (Guj); CIT vs. New India Industries Ltd. (1993) 201 ITR 208 (Guj).

The Hon. Bombay High Court held that the income which can be taxed u/s. 28(iv) must not only be referable to a benefit or perquisite but it must be arising from business. Further, it was categorically held that section 28(iv) does not apply to benefits in cash or money. The High Court also took cognizance of the fact that in this case, AMC agreed to forego the principal amount of loan as a part of takeover arrangement with KJC to which the assessee was not a party. The waiver of the principal amount was unexpected. Accordingly, such waiver would not constitute business income.

As regards section 41(1) of the Act, the High Court observed that in the present case, the pre-requisite of section 41(1) is not applicable because the assessee has not obtained a deduction in any of the assessment year for a loss, expenditure or trading liability. The Department’s argument that the assessee had got allowance in respect of depreciation of ` 27,29,585/- was also not considered favourably since the remission for depreciation was not an issue before the High Court. The High Court observed that section 41(1) was enacted to overcome the decisions where it was held that remission was not income. The High Court also followed the decision of the Hon. Madras High Court in the case of CIT vs. A.V.M. Ltd. (1984) 146 ITR 355 (Mad) where it was held by the Hon. Madras High Court that every deposit money does not constitute trading receipt. Finally, the High Court held that section 41(1) is not applicable. One of the factors in holding so was that the toolings constituted capital asset and not stock in trade.



Revenue’s Appeal to the Supreme Court Against the judgment of the Bombay High Court, the Revenue filed the appeal to the Hon. Supreme Court. The arguments of the Department before the Hon. Supreme Court was on similar lines as the arguments made before the Hon. Bombay High Court. The argument of the assessee was also almost similar but some specific contentions were that the transaction of purchase of goods and the transaction of obtaining loan from KJC were two independent transactions. The only relationship that survived after the supply of toolings was that of a lender and borrower. The remission was not in respect of unpaid purchase consideration but in respect of the loan obtained by the assessee.

Supreme Court’s conclusion on Section 28(iv)The Hon. Supreme Court observed that as per section 28(iv) “the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of a profession” is chargeable to income tax under the head Profits and Gains of Business or Profession.

The Hon. Supreme Court held that on a plain reading of the clause (iv) of section 28 prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28(iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. Since the very first condition for applicability of section 28(iv) that the benefit shall be in some other form than money was not satisfied in the case of the assessee, the Supreme Court held that the section is not applicable.

Supreme Court’s conclusion on Section 41(1)Similarly, as regards section 41(1) of the Act, the Supreme Court held that on perusal of the said provision, it is evident that it is sine qua non

that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the Act. The Supreme Court observed that the objective behind this section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to the deduction allowed earlier in case of remission of such liability. The Supreme Court also observed that there is difference between ‘trading liability' and ‘other liability'. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. In the instant case, the remission is that of other liability and not trading liability.

Since on the facts of the case, the assessee has not got any allowance or deduction in respect of loss, expenditure or trading liability incurred by the assessee, the Supreme Court held that there is no force in the argument of the revenue that the case of the assessee would fall under section 41(1) of the Act.

Conclusion The ratio of the Supreme Court is clear and unambiguous that where the waiver is not of a trading liability the provisions of section 41(1) cannot apply. Similarly, on section 28(iv) it is clear that the said section applies only where the benefit is received in some other form rather than in the shape of money.

In the case of Mahindra & Mahindra the loan was acquired for the purpose of acquisition of a fixed asset and not for the purpose of acquisition of stock in trade. The ratio of the Supreme Court



will be applicable only in such facts of the case. If, however, a loan is obtained for the purpose of working capital needs of the assessee, it seems that it would be difficult to take a shelter under this decision. The readers are requested to note that in such a situation, the ratio of the Hon. Bombay High Court decision in the case of Solid Containers Ltd. vs. DCIT (2009) 308 ITR 417 (Bom.) would continue to apply and the waiver of such a loan will result in an income under section 28(iv) of the Act.

The Bombay High Court, while giving this judgment has relied on the decision of the Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344 (SC) wherein the Hon’ble Supreme Court has laid down that if the amount is received in the course of trading transactions, even though it is not taxable in the year of receipt as being of capital character, the amount changes its character when the amount becomes the assessee’s own money because of limitation or by any other statutory or contractual right. Where the

assessee received deposits in the course of trading transactions, the amount of such credit balances which were barred by limitations and which were written back by the assessee to the P&L a/c were to be assessed as the assessee’s income.

One must appreciate that the judgment of the Hon. Supreme Court in the case of Mahindra & Mahindra does not negate the earlier decision of the Supreme Court in the case of T.V. Sundaram Iyengar, which has not been cited or discussed while deciding the case of Mahindra & Mahindra. Both the decisions work in different field and both decisions hold good depending on the facts of the case.

I express my sincere gratitude to the Journal Committee of the Chamber to enable me with this opportunity to deal with a very important decision of the Hon. Supreme Court. I must admit that I have enriched myself with a wealth of knowledge while executing this assignment.

mom

Special Story — Important ruling dealing with registration of Charitable Trust


Ajay Singh, Advocate

Important ruling dealing with registration of Charitable Trust

Ratio

A newly registered Trust is entitled for registration u/s 12AA of the Act, on the basis of its objects, without any activity having been undertaken:The Hon Court dealt with the issue of registration of trust u/s. 12A & 12AA of the Act. The Supreme court laid down some important legal principles in context to registration of a newly registered trust. The decision also deals with basic principles related to powers of Commissioner/DIT(E) to reject the applications for registration. Though the decision needs to be read in context of the facts of the case, however the decision will go a long way in understanding the basic legal -principles in relation to registration of trust. This will also resolves unwanted litigation in relation registration process of a trust.

There were cases of three assessee’s clubbed together before the Supreme Court namely ;

A. M/S. ANANDA SOCIAL AND EDUCATIONAL TRUST - Assessee Appeal bearing Civil Appeal no - 5437-5438/2012 arising out of order from High

Court of Karnataka ITA No.44/2006 dt. 9.11.2010 ; ITA no. 24/2008 dt 7/12/2010.

B. FOUNDATION OF OPHTHALMIC & OPTOMTRY RESEARCH EDUC – Dept Appeal bearing Civil Appeal no – 4702/2014 arising out of order from HIGH COURT OF DELHI AT NEW DELHI reported in (2013) 355 ITR 361 [ITAT appeal ITA No.202/DL/2009. Dt 16.08.2012]

C. SAI ASHISH CHARITABLE TRUST - Dept Appeal bearing Civil Appeal no - 1727/2020 arising out of order from HIGH COURT OF DELHI AT NEW DELHI, ITA 98/2015 dt 08.04.2015 [ITAT appeal in ITA No. 5501/DEL/2012, dated 20/6/2014]

Thus I will deal with each case independently as on perusal of lower court orders it is noticed that facts revolving around each case is different. Also the Hon SC has decided each case independently though in a common order :

M/S. ANANDA SOCIAL AND EDUCATIONAL TRUST vs. THE COMMISSIONER OF INCOME TAX & ANR. dated 19/2/2020; Supreme Court [3 Judge Bench]



A. M/S. Ananda Social and Educational Trust

FactsThe assessee filed an application in Form no 10A on 9/1/2002 seeking registration u/s. 12A of the Act. The registration u/s. 12A of the Act was rejected vide order dt 28/6/2002. The assessee challenged the order before the Tribunal in the appeal against the order of the DIT (Exemption) rejecting the registration u/s 12A of the Act. The Tribunal vide order dated 26/8/2005 granted relief to the assessee and directed the DIT(Exemption) to grant registration u/s 12A to the assessee. The Revenue carried the matter to Jurisdictional High Court. The Hon’ble High Court vide order dated 9/11/2010 set aside the order of the Tribunal and restored the order passed by the DIT (Exemption) rejecting the application for seeking registration u/s 12A. The present Civil appeal is arising out of the above order of High Court.

Brief facts of the case are that the assessee filed an application in Form no 10A on 9/1/2002 seeking registration u/s. 12A of the Act. The Assessee trust was created on 10/1/1980 and was registered under the Karnataka Societies Registration Act. Assessee trust was conducting social, educational and cultural activities and also established medical college and nursing college. The DIT(E) rejected the application on the ground that the earlier Association had not obtained registration before transferring the assets and liabilities to the present trust. There was no approval from commissioner for such transfer. There was violation u/s. 11A(1)(d) of the Act in relation to donations received. Further amounts of the trust were made use for personal benefit of the chairman as such there was violation u/s. 13 of the Act. Therefore based on the material on record the High Court observed that the assessee’s activity was nothing but profit making activity. On these grounds the registration was refused. The Hon. High Court after referring to Form 10A, 12A and 12AA observed that section 10(22) itself

was deleted w.e.f 1-4-1999 therefore the claim of the respondent assessee that its predominant object is to propagate education will be of no avail to the assessee. The true accounts are not maintained nor produced. The donation was not even accounted in the books of accounts of the assessee trust, there was misappropriation of the trust funds etc. The court observed that it would be incumbent upon the assessee to show that the activity of education done by them would attract the definition of charity as contemplated u/s. 10(22) subsequent to 1-4-1999. Secondly it is not the case of the assessee trust that they are imparting education in the institution is on charitable grounds and nothing else. If a portion of the trust funds are diverted for other charitable purposes, especially in the light of the members of the trust taking benefit of the said funds would indicate that there is gross violation of sec 13 of the Act. The court held that the Tribunal instead of looking in to the above grounds on basis of which the DIT(E) rejected the application of the assessee trust proceeded erroneously holding that the DIT(E) was not able to point out any activity of the assessee was not charitable. The court held that the Tribunal failed to consider that there was deletion of sec 10(22) of the Act as on the date of consideration of the application by DIT(E). Further the certificate issued cannot be valued for a indefinite period. The renewal of registration or considering a fresh application of the applicant for registration u/s. 12A would entirely depend upon the activity carried on by the institution and management of its funds by the trustees and genuineness of its activities carried on under the previous year or years as the case may be depending upon the information sought by the authority and furnished by the applicant. Thus decided the appeal in favour of the Revenue dept.

The Hon. SC dismissed the Assessee’s appeal by observing that the reasons assigned by the High Court in passing the impugned order need no interference as the same are in consonance



with law. Further that there is no merit in these appeals. Thus the order of High court is upheld. This was a case where the trust was already carrying on certain activities and from material available on record the dept was able to point out various violation in the activities carried on by the trust and its management, thus on facts the grounds stated by DIT(E) for refusal to register the trust u/s. 12A of the Act is upheld.

The second appeal is arising from assessment order, the Hon’ble High Court vide order dt 7/12/2010 remanded the matter in respect of all the assessment years to the record of the AO with the direction to look into the record and examine the entitlement of the assessee to claim exemption u/s 11 of the Act in the light of the fact that registration u/s 12A granted by the Tribunal vide order dated 26/8/2005 was set aside by the Hon’ble High Court vide order dt 9/11/2010. The case was remitted back to the AO for redoing the whole exercise and the substantial question of law raised in the revenue’s appeal and contentions of both parties were kept open vide order dated 7/12/2010. As there was no merit in the appeal the same was also dismissed by Supreme Court.

B. Foundation of Ophthalmic & Optomtry Research EDUC

Brief FactsIn the present case, the trust was formed as a society on 30.05.2008 and it applied for registration on 10.07.2008 i.e. within a period of about two months. No activities had been undertaken by the respondent Trust before the application was made. The Commissioner rejected the application on the sole ground that since no activities have been undertaken by the trust, it was not possible to register it, presumably because it was not possible to be satisfied about whether the activities of the trust are genuine. The Appellate Tribunal, Delhi reversed the orders of the Commissioner. The Revenue Department approached the High Court by way of filing an

appeal. The High Court upheld the order of the Tribunal and came to the conclusion that in case of a newly registered trust even though there was no activities, it was possible to consider whether the trust can be registered u/s. 12AA of the Act. The appeal before the SC has been preferred by the Director of Income Tax against the order passed by the Delhi High Court holding that a newly registered Trust is entitled for registration under section 12AA of the Income Tax Act, 1961 on the basis of its objects, without any activity having been undertaken.

Arguments of DeptIt was argued that the Commissioner is required to be satisfied about two things – firstly that the objects of the trust and secondly, its activities are genuine. If there have been no activities undertaken by the trust then the Commissioner cannot assess whether such activities are genuine and therefore, the Commissioner is bound to refuse the registration of such a trust.

HeldThe Hon. court observed that Section 12AA of the Act empowers the Principal Commissioner or the Commissioner of the Income Tax on receipt of an application for registration of a trust to call for such documents as may be necessary to satisfy himself about the genuineness of activities of the trust or institution and make inquiries in that behalf; it empowers the Commissioner to there upon register the trust if he is satisfied about the objects of the trust or institution and genuineness of its activities. Section 12AA undoubtedly requires the Commissioner to satisfy himself about the objects of the trust or institution and genuineness of its activities and grant a registration only if he is so satisfied. The said section requires the Commissioner to be so satisfied in order to ensure that the object of the trust and its activities are charitable since the consequence of such registration is that the trust is entitled to claim benefits under sections 11



Income Tax – (2001) 247 ITR 18. However, the facts in Self Employers Service Society (Supra) suggest that the Commissioner of Income Tax had observed that the applicant for registration as a Trust had undertaken activities which were contrary to the objects of the Trust. The SC court further observed that the view of Kerala High court does not commend itself. In the result, the judgment of the High Court of Delhi was upheld. The appeal of dept was dismissed.

C. Sai Ashish Charitable Trust

Brief FactsThe Assessee Trust was created on 26th September, 2009 to carry out the various charitable activities had applied for registration u/s. 12A and 80G of the Act on 17th February, 2012, using the appropriate statutory forms. The registration was denied on the ground that activities of the Trust did not match with the donations received consequently, held that it was not eligible. The Commissioner, therefore, refused the registration of the Trust.

The Income Tax Appellate Tribunal reversed the decision of the Commissioner of income Tax on the basis of the judgment of the Delhi High Court in case of Director of Income Tax vs. Foundation of Ophthalmic & Optometry Research Education Centre, (2013) 355 ITR 361 (Del).

Following the above referred Judgement and the judgement of Allahabad High Court in the case of Commissioner Income Tax vs. R.S. Bajaj Society (2014) 222 Taxman 111 (Allahabad) it was held that, the Registration Authorities are not required to verify the activities of the Trust while granting the registration and is to satisfy only about the genuineness of the object and whether they qualify for registration as a ‘Charitable Trust’.

Held In the present case, what has been found is that the Trust had not spent any amount of its income

and 12 of the Act. In other words, if it appears that the objects of the trust and its activities are not genuine that is to say not charitable the Commissioner is entitled to refuse and in fact, bound to refuse such registration.

The purpose of section 12AA of the Act is to enable registration only of such trust or institution whose objects and activities are genuine. In other words, the Commissioner is bound to satisfy himself that the object of the Trust are genuine and that its activities are in furtherance of the objects of the Trust, that is equally genuine. Since section 12AA pertains to the registration of the Trust and not to assess of what a trust has actually done, we are of the view that the term ‘activities’ in the provision includes ‘proposed activities’. That is to say, a Commissioner is bound to consider whether the objects of the Trust are genuinely charitable in nature and whether the activities which the Trust proposed to carry on are genuine in the sense that they are in line with the objects of the Trust. In contrast, the position would be different where the Commissioner proposes to cancel the registration of a Trust under sub-section (3) of section 12AA of the Act. There the Commissioner would be bound to record the finding that an activity or activities actually carried on by the Trust are not genuine being not in accordance with the objects of the Trust. Similarly, the situation would be different where the trust has before applying for registration found to have undertaken activities contrary to the objects of the Trust.

The court also referred to the judgment of the Allahabad High Court in IT Appeal No.36 of 2013 in case of Commissioner of Income Tax-II vs. R.S. Bajaj Society (2014) 222 Taxman 111 (Allahabad) which had taken the same view as that of the Delhi High Court.

The court also referred to a contrary view taken by the Kerala High Court in the case of Self Employers Service Society vs. Commissioner of



for charitable purposes. This is a case of not carrying out the objects of the Trust and not a case of carrying on activities contrary to its object. These circumstances may arise for many reasons including not finding suitable circumstances for carrying on activities. Undoubtedly the inaction in carrying out charitable purposes might also become actionable depending on other circumstances.

The Hon Supreme court relied on the reasons stated in earlier matter (Foundation of Ophthalmic & Optometry Research Education Centre), wherein it has been held that the object of the provision in question is to ensure that the activities undertaken by the Trust are not contrary to its objects and that a Commissioner is entitled to refuse registration if the activities are found contrary to the objects of the Trust.

In these circumstances, the Hon Court decided to dismiss the appeal of the revenue dept however it was left upon the Commissioner of Income Tax to consider the issue by exercising his powers under sub-section (3) of section 12AA, if the facts justify such actions.

Accordingly the appeal of the revenue dept was dismissed.

Summary a. Based on the material on record the Pr.

CIT/CIT should be satisfied about the genuineness of the trust’s activity before granting registration;

b. the statute does not prohibit or enjoin the Commissioner from registering Trust solely based on its objects, without any activity, in the case of a newly registered Trust;

c. The renewal of registration or considering a fresh application for registration u/s. 12AA would entirely depend upon the activity carried on by the institution and management of its funds by the trustees

and genuineness of its activities carried on under the previous year or years as the case may be depending upon the information sought by the authority and furnished by the applicant;

d. the term ‘activities’ in the provision includes ‘proposed activities’;

e. A Commissioner is bound to consider whether the objects of the Trust are genuinely charitable in nature and whether the activities which the Trust proposed to carry on are genuine in the sense that they are in line with the objects of the Trust;

f. Where the Commissioner proposes to cancel the registration of a Trust under sub-section (3) of section 12AA of the Act. There the Commissioner would be bound to record the finding that an activity or activities actually carried on by the Trust are not genuine being not in accordance with the objects of the Trust;

g. Even after the trust or institution is granted registration the Commissioner if satisfied about the activities actually carried on by the Trust are not genuine may cancel registration by exercising his powers under sub-section (3) of section 12AA of the Act

Conclusion By virtue of Article 141 of the Constitution of India, the judgments pronounced by the Supreme Court have the force of law and are binding on all the Courts in India. The judgement being rendered by a Bench of 3 Judges, it will be also binding on the division Bench of Supreme Court. Thus in the ongoing proceedings and upcoming one’s, the ratio of the above decision will be helpful. However the ratio of the above decision has to be read in context of the fact before it as held in CIT vs. Sun Engineering Works (P.) Ltd. (1992) 198 ITR 297 (SC).

mom

Direct Taxes — High Court

ML-568| 80 | The Chamber's Journal | May 2020

1 Tvl. Sanmac Motor Finance Ltd. vs CCIT & Others, Writ Petition no. 12500 of 2010 & M.P. No.1 of 2010, Hon’ble Madras High Court, order dt. 10-02-2020

Waiver of Interest u/s 234 A, 234B, 234C – application to CCIT u/s 119 – CBDT notification – Assessee was not specifically covered by any of the situation contemplated in the notification –Assessee entitled for a partial relief dehors the above notification – Assessee company was legally incapacitated from making any payments as it was ordered to be wound up. [A.Y. 1995-96, 1996-97, 1997-98] Assessee Company was engaged in business of sale of motor vehicles and also operated as a Non-Banking Financial Company (NBFC). It filed regular returns for the Assessment Years 1995-96, 1996-97 and 1997-98.

For Assessment Year 1995-96, Assessee declared taxable income of ` 79,17,837/- and had paid advance tax of ` 38,75,000/- and adjusted the TDS of ` 22,635/- in their returns. The assessment was completed which was challenged by the Assessee. The Commissioner of Income Tax (Appeals) remanded the case

back for re-computation. Thereafter an order dated 14.09.2000 was passed by the JCIT and a total income of ` 1,09,32,490/- was assessed, determining tax payable at ` 50,28,945/-. After adjusting the payment already made, demand of ` 11,31,310/- was raised.

For the Assessment Year 1996-97, assessment was reopened. As against the net loss of ` 10,244/-, a positive income of ` 67,80,870/- was assessed determining the tax liability at ` 31,27,945/-. As Assessee had not paid any advance tax, interest under Section 234A and 234B for a sum of ` 13,93,893/- and ` 16,08,338/- was imposed.

For the Assessment Year 1997-98, based on best judgment method total income was assessed at ` 3,27,34,870/- and was required to pay a tax of ` 1,00,90,165/. Assessee was also called upon to pay interest under Section 234A and 234B of the Income Tax Act, 1961 for an amount of ` 21,69,372/- and ` 52,97,303/- respectively.

Assessee Company had encountered difficulties in servicing the deposits to its depositors as a result of which it faced several hardships including arrest of its Managing Director T. Arunachalam. All the other directors and principal and responsible officers of the Company resigned, as a result of which the interest of the company could not be protected. The official liquidator also failed to protect the Company.

Paras S. Savla, Jitendra Singh, Nishit Gandhi, Advocates

DIRECT TAXESHigh Court


ML-569 May 2020 | The Chamber's Journal | 81 |

Though Assessee accepted the tax liability it prayed for waiver of interest under Sections 234A, 234B and 234C of the Income Tax Act, 1961 before Chief Commissioner of Income Tax (‘CCIT’), on the ground that at the time when the reassessment proceedings were taken up pursuant to remand order of Commissioner of Income Tax (Appeals) for the Assessment Year 1995-96 and notice for Assessment Year 1996-97 and notice for Assessment Year 1997-98 were issued under Section 148, the Company was already undergoing financial strains and was on the verge of being wound up before Honourable High Court. By the time the re-assessment orders were passed for the Assessment Year 1996-97 and Assessment Year 1997-98 on 26.03.2002, the Company had been directed to be wound up by an order dated 18.06.2001 of the Court. However the said order was set aside by a Division Bench of the court only on 27.10.2006 under Sections 391-394 of Companies Act, 1956 and after that the Company was revived and the tax that was re-determined pursuant order dated 14.09.2000, 26.03.2002 and 26.03.2002 respectively were paid to the credit of the Income Tax Department on 27.01.2007. It was submitted that when the orders were passed nobody represented the interests of the Company. With great difficulty the Company had been revived.

However the CCIT rejected the application filed for waiver of interest on the ground that the case of the Company did not fall within any of the circumstances specified in the Central Board of Direct Taxes Notification dated 26.06.2006 bearing reference F. No. 400/29/2002-IT(B), and further the company had sufficient liquidity to pay the advance tax and income tax and therefore it cannot be stated that the Company encountered any hardship to pay the tax or file the returns on time.

Assessee Company aggrieved by the order passed by CCIT filed a writ petition before the High Court. A co-ordinate bench of the Court had

held that, unless the Assessee’s case falls within the ambit and scope of the Circular, the Chief Commissioner would have no power to reduce or waive interest under Sections 234A, 234B and 234C. The Court observed that Section 119 of the Income Tax Act, 1961 has been incorporated to grant waiver from payment of interest in case of genuine hardship. Therefore, the Central Board of Direct Taxes (‘CBDT’) had given power to issue instructions and direction to be followed while granting waiver of interest. This power was either exercised by the Board and/or by senior officers of the Income Tax Department like the CCIT. The Court observed that the case of the Assessee Company was not specifically covered by any of the situation contemplated in the notification. Therefore, no fault can be found with the impugned order of the CCIT as he was bound by the notification though the Assessee Company was ordered to be wound up by an order of the Court. The Court observed that CBDT while issuing the notification had not factored a situation like the present case where an Assessee was legally incapacitated from making any payments as it was ordered to be wound up. It was under a legal disability. The Court held that the Assessee Company was entitled for a partial relief dehors the above notification. The date of winding up dates back to the date of petition and during the said period, there was a legal disability to pay the tax by the company as the official liquidator obtained leave of the company court under the Companies Act, 1956. Since the CCIT had no power to grant waiver of interest in the light of the specific instruction of the Central Board Of Direct Taxes, the Court in the exercise of its power under Article 226 of the Constitution of India can order waiver applying the legal principles applicable in the case of winding up of a company. The effect of an order of winding up was to put the company into the hands of the official liquidator for completing the process of liquidating it. Till an order of the Court for distribution of the company’s



assets is obtained and assets are distributed, the properties of the company continue to be that of the company. The company under liquidation continues to exist as a juristic personality only till an order under Section 481 of the Companies Act, 1956 is passed for its eventual dissolution. It is only thereafter, the company ceases to exist in the eye of law. Thus, during the period in dispute between 18.06.2001 and 27.10.2006, the Assessee Company by itself was under a disability and could not discharge any liability without the permission of the court. The Court further observed that in this case no attempt was made for recovery of tax from the company by the Income Tax Authorities by obtaining suitable orders from the court nor the official liquidator took any steps in that direction. The Court took note of the fact that the Assessee Company was facing a threat of being wound up apart from threat of arrest of its directors. The Company had also demonstrated that there was an en mass resignation by the directors of the company on account of financial difficulties which plagued the company and that the company was unable to defend itself effectively in these proceedings. The Managing Director of the company was also later arrested and was remanded to judicial custody. During the aforesaid period, the company had become a shell company. Thus, the company was handicapped from paying the tax that was re-assessed as it was ordered to be wound. At that stage, the interest of the Company was to be represented by the Official Liquidator before the Income Tax Authorities by filing appeal against the re-assessment orders who failed to do so. The Court stated that, prior to the winding up of the company, the Income Tax Authorities also could have participated in liquidation proceedings by either supporting or opposing the winding up of the company. Perhaps, no steps were taken by the Income Tax Department to recover the arrears of tax which came to be determined since the company was ordered to be wound up. The Court observed that eventually, an order was passed

on 27.10.2006 whereby a scheme of arrangement for reconstruction and revival of operation of the company was ordered so as to bind on all the secured creditors, unsecured creditors, depositors and members of the company. It is only pursuant to that order that the Official Liquidator was directed to transfer the accounts of the company and relevant books to the Sponsors to enable the latter to settle the claims of the creditors immediately. The Court thus waived the interest under Section 234A, Section 234B and Section 234C of the Income Tax Act, 1961 for the period between 18.06.2001 and 27.10.2006 and directed the AO to compute the balance interest and communicate to the Company within a period of 30 days. The Court further directed the Company to pay the amount determined by AO within 15 days thereafter, with a caveat that, in case, of non-payment, the relief granted shall come to an end sine die and the CCIT order shall stand revived.

2 Pace Vision vs The Income Tax Department by ACIT, Criminal Petition No. 101902 of 2014, Hon’ble Karnataka High Court, order dt. 24-02-2020

Offence punishable u/s 276C – prosecution for failure to file return – Prior approval of CCIT sought by CIT before passing sanction order u/s 279 – As order of CIT being influenced by CCIT, prosecution not maintainableOn 29.03.2014, the Assistant Commissioner of Income Tax had filed a complaint under Section 200 of Code of Criminal Procedure alleging that the Taxpayers have committed offences punishable under Section 276CC of Act, as regards non-filing of Income Tax returns in terms of Sections 139(1), 142(1) or 153 of Act, which provides for filing of returns of income. The Taxpayer was a partnership firm consisting of two partners and was engaged in the business which resulted in taxable income. However, no



return of income was filed in the year 2009-10 on or before due date. A survey was conducted under Section 133A of the Act and it is only on 30.08.2013 that the Income Tax returns were filed by the Taxpayer after a delay of 1430 days. Considering the non-filing of the return to be deliberate, willful and with an intention to avoid scrutiny by the Income Tax Department, giving rise to statutory presumption under Section 278E, the Department directed to initiate criminal action. It issued a show cause notice on 28.10.2013 which was replied by the taxpayer and further reply was also submitted on 30.12.2013. In furtherance thereof the Commissioner of Income Tax, Belagavi issued the sanction in terms of Section 279 of the Act, on 12.03.2014. In the said sanction, it was stated that prior approval of the Chief Commissioner of Income Tax, Panaji dated 10.03.2014 for launching prosecution under Section 276CC is obtained and placed on record. On the basis of the said sanction the proceedings were initiated against the taxpayer in Criminal Complaints before the Magistrate. The Magistrate took cognizance and it was this cognizance that the Taxpayer was aggrieved. The Taxpayer filed petitions before the High Court seeking quashing of the said complaints. It was urged that the sanctioning authority in terms of Section 279 is the Commissioner of Income Tax. Therefore, there was no need for the Commissioner to take permission or approval from the Chief Commissioner of Income Tax, Panaji, and as a result the entire proceedings initiated against the Taxpayer are not only misconceived but are initiated at the direction of an authority who is not the sanctioning authority in terms of Section 279 of the Act and therefore not maintainable.

The Department argued that a meaningful reply of letter dated 26.12.2014 indicates that the Commissioner of Income Tax has considered all relevant parameters obtained legal opinion and on that basis has satisfied itself that prosecution has to be initiated against the Taxpayers and it is only by way of abundant caution that the approval

of the Chief Commissioner of Income Tax was sought. As per the Department, the approval by the Chief Commissioner of Income Tax was a mere formality and in pursuance thereto on 12.03.2014 sanctioning order was passed. It was submitted that that a comparison of the order dated 12.03.2014 with a letter dated 26.02.2014 would indicate that the contents of both……. except for ……..are identical on that basis thereof it was submitted that there is no influence exerted by the Chief Commissioner of Income Tax for initiating prosecution.

The question for consideration before the Court was whether the sanction order dated 12.03.2014 is one which could be said to have been influenced by the superior authority and or whether the procedure followed by the Commissioner of Income Tax, is not in accordance with applicable law.

The Court observed that the sanctioning authority under Section 279 of the Income Tax Act, is either the Principal Commissioner or the Commissioner or Commissioner (Appeals). Though the heading to the said provision refers to Principal Chief Commissioner or Chief Commissioner, Section 279(1) does not make any reference to the Chief Commissioner. The proviso, however, refers to the powers of the Principal Chief Commissioner or Chief Commissioner to issue such instructions or directions to the authorities as he may deem fit for institution of proceedings under this Section. The Court held that the sanctioning authority being the Commissioner of Income Tax there was no need for the said Commissioner of Income Tax to have written to the Chief Commissioner of Income Tax to seek for approval. Having so written in the event of the Chief Commissioner of Income Tax refusing the permission sought for, the entire exercise of the Commissioner of Income Tax would be rendered superfluous; though the order dated 26.02.2014 would indicate the subjective satisfaction of the Commissioner of Income Tax. The satisfaction would be dependent



on the approval of the Chief Commissioner of Income Tax. Only if the Chief Commissioner of Income Tax accorded approval for prosecution than the satisfaction of the Commissioner of Income Tax could be considered and acted upon by sanctioning prosecution. However, if the Chief Commissioner of Income Tax were to refuse permission then the Commissioner of Income Tax though satisfied could not initiate any proceedings due to the non approval by the Chief Commissioner of Income Tax. The Court held that the though the contention of Taxpayers about influenced by the Chief Commissioner of Income Tax may not be entirely correct but, however, the matter does merit consideration since no sanction could be given and prosecution initiated if the Chief Commissioner of Income Tax refused permission. Basis this the Court held that the order dated 12.03.2014, can, therefore, be said to be an order of the Chief Commissioner of Income Tax, rather than the Commissioner of Income Tax. A Chief Commissioner of Income Tax is not the sanctioning authority as per the Act. The Court went further to hold that even approval dated 10.03.2014 does not indicate any application of mind by the Chief Commissioner of Income Tax nor is it signed by the Chief Commissioner of Income Tax. Hence, even if it were to be assumed that Chief Commissioner of Income Tax was the sanctioning authority there was no subjective satisfaction by the Chief Commissioner of Income Tax for granting such sanction. In view of the above reasoning, the Court held that the procedure and methodology followed by the Commissioner of Income Tax was not as contemplated under Section 279 of the Act. The sanction order being passed with prior approval for the Chief Commissioner of Income Tax, was not tenable in law and therefore entire proceedings initiated cannot be countenanced in law. The Court quashed the sanction letter dated 12.03.2014 and the criminal proceedings launched thereafter. The Department counsel sought liberty to initiate fresh proceedings against the Taxpayers

and other related entities, to which the Court held that no such liberty was required as there was no limitation period, and the sanctioning order was being quashed only on technical grounds and not on merits. The Court did clarify that the department would be free to initiate any proceedings in accordance with law.

3 Kesharwani Sheetalaya Sahsaon vs CIT, Income tax appeal no. 17 of 2007, Hon’ble Allahabad High Court, order dt. 24-02-2020

Cash Credit u/s 68 – Capital brought in by the partner in the firm – addition cannot be made in the hands of the firm (AY 1999-2000) The Assessee, a partnership firm having sixteen partners was engaged in the business of cold storage. For the assessment year 1999-2000, the assessee filed a return of income on 01.11.1999 declaring an income of ` 36,92,056/-. The case was selected for scrutiny and notices under Section 143(2)/142(1) of the Act were issued. The Assessing Officer noted certain credits in the names of the partners mentioned as agricultural income. The Assessing Officer held the credits as unproved and made an addition u/s 68 of the Act relying upon a decision of the very same court in CIT vs. Kapur Brothers – (1979) 118 ITR 741 (All). An appeal was filed by the assessee against the said order before the Commissioner of Income Tax (Appeals), Allahabad, which was partly allowed and the addition made by the Assessing Officer under Section 68 of the Act with regard to the cash credits in the names of the partners in their capital accounts was deleted. The deletion of the cash credits was made on the ground that the partners had shown agricultural income in their returns. It was taken note of that the partners were identifiable and separately assessed to tax and the firm had explained the source of investment as agricultural income of the partners, therefore, if at all additions were to be made, then the same had to be made in the



hands of the partners and not in the hands of the firm. The said order was reversed by the Tribunal in an appeal filed by the Department holding that credits in the names of partners as agricultural income were not proved within the meaning of Section 68. The assessee approached the High Court against the said order.

The Hon’ble High Court after considering numerous judgements observed that section 68 requires the Assessing Officer to satisfy itself of the source of the credit and if during the course of enquiry undertaken, the entries are found to be not genuine then the sum represented by such credit entry is to be added as income of the assessee. The satisfaction of the Assessing Officer thus forms the basis for invocation of the provisions of Section 68. This satisfaction, however, must not be illusory or imaginary but is required to be based on the facts and the evidence and on the basis of a proper enquiry of the material before the Assessing Officer.

Further under Section 68, the onus is on the assessee to offer explanation and where the assessee fails, an inference may be drawn that the credit entries represent income taxable in the hands of the assessee. This does not however absolve the responsibility of the Assessing Officer to prove that the cash credits constitute the income of the assessee. The onus on the assessee has to be understood with reference to the facts of each case and if the prima facie inference on the basis of facts is that the assessee's explanation is probable, the onus shifts to the Revenue. In a case where the integrity of the creditors is established and the entries are shown to be not fictitious, the burden would shift on the Revenue.

The Court distinguished in the case of Kapur Brothers supra, which forms the basis of the order passed by the Assessing Officer, that of the Tribunal, and reliance been placed by the Revenue. The Court observed that it was a case where the entries had been made in the books of account of the assessee firm about three

weeks prior to the end of the accounting period. Further different explanations furnished by the assessee at different stages of the proceedings were disbelieved for the reason that the assessee had failed to establish that the partners had actually deposited the money and that the entries were not fictitious. It was in view of the said facts that the court proceeded to answer the question referred to it by holding that the cash credit entries standing in the names of the partners in the account books of the firm could validly be treated as income of the firm from the undisclosed sources.

To the contrary considering the facts of case at hand, the Court held that the partners have shown the agricultural income in their personal returns of the past years which had been accepted by the department as such. The partners are all identifiable and separately assessed to tax. The source of investment having been explained, in the event the Assessing Officer was not satisfied the addition could have been considered in the hands of the partners and not in the hands of the firm. The Court thus held that the burden of proving the source of the credits having been sufficiently explained the addition could not have been made in the hands of the firm.

4 Sri Naval Kishore Khaitan vs PCIT, Writ Petition no 3187 of 2020, Hon’ble Andhra Pradesh High Court, order dt. 12-02-2020)

Powers u/s 131 – Summons stating not to depart until permission granted - Violates fundamental rights guaranteed under Part-III of the Constitution of IndiaIn this case earlier a notice under Section 148 of Income Tax Act, 1961 was issued by the Assistant Commissioner of Income Tax, Circle-1(1), Visakhapatnam on the ground that the income chargeable to tax for the assessment year 2012-13 had escaped assessment which



was challenged by the Assessee by filing a writ petition before Andhra Pradesh High Court. The said Writ Petition was dismissed on 24.12.2019. In furtherance to the said notice under Section 148, the ACIT issued the summons to the assessee under Section 131 of the IT Act, on 31.01.2020, asking the assessee to be present on 07.02.2020 at 2.30 p.m., to give evidence and to produce personally the books of accounts or other documents specified therein and not to depart until he grants permission to do so. Aggrieved, the Assessee again approached the Hon’ble High Court on the ground that the action of the ACIT directing the assessee not to depart until he grants permission to do so, is a patent violation of the Fundamental Rights guaranteed under Part-III of the Constitution of India. It was further stated that Section 131 of the IT Act does not enable the ACIT to issue such directions. The Court observed that the impugned summons shows that apart from asking the assessee to be present

on a particular day, the Assistant Commissioner also directed the assessee not to depart from the premises till he grants permission to do so. The Court was of the opinion that the summons to the extent of asking the assessee to be present for unlimited period till the time he obtains permission from the Assistant Commissioner, was highly unreasonable. The Court noted that though there is no infirmity in asking the Assessee to be present for enquiry, there was no justification on the part of the Assistant Commissioner in asking the assessee to be present for unlimited period. The Court hence directed the Assessee to co-operate with the enquiry initiated by the Assistant Commissioner and be present before the officer concerned on the day on which the officer asks the assessee to be present, till 7.00 p.m., or any other time earlier thereto specified by the officer concerned.

mom

Direct Taxes — Tribunal

May 2020 | The Chamber's Journal | 87 | ML-575

Reported Decisions

1 DCIT v. Motisons Buildtech (P.) Ltd. [ITA No:1323/JP/2018), order dated 20.02.2020 [2020] 116 taxmann.com 337 (Jaipur – Trib.)

Section 115J B: Gains from sale of agricultural land which is not a capital asset within sec. 2(14)(iii) could not be taxed separately u/s 115JB.

FactsThe Assessee is a private limited company and had sold an agricultural land. Since, the said land was out of the prescribed limits as mentioned u/s 2(14) of the Act, it did not constitute a capital asset and it was claimed that the transfer of the same did not result in capital gains. Accordingly, the Assessee claimed the profits as agricultural income as per the explanation 1 of Sec. 2(1A) and claimed the exemption. During the assessment proceedings, though the AO accepted the basic contention of the Assessee that gains of ` 3,01,19,198/- are not chargeable to tax as capital gains as per the provisions of Sec. 2(14)(iii) of the Act, he opined that the said gains are taxable under

the provisions of Sec. 115JB of the Act. Being aggrieved, the Assessee preferred an appeal before the CIT(A) and succeeded. Against the said order, the Revenue filed an appeal before the ITAT. After hearing both the sides, the ITAT held as under:

HeldThe ITAT after carefully perusing the facts and the order of the CIT(A). While deciding the issue, the ITAT observed that, there is no dispute that the said land was outside the prescribed limits and was not a capital asset in light of the provisions of Sec. 2(14)(iii). The agriculture land so sold by the assessee did not fall into the category as mentioned in item (a) or item (b) of sub clause (iii) of section 2(14) as this land was situated more than 17 KM from the municipal limit. The ITAT observed that by virtue of the definition of agricultural income as mentioned u/s 2(1A) read with Explanation 1, the income arising from the transfer of this land is agricultural income which is exempt u/s 10(1) of the Act and the provisions of Chapter XII-B of the Act do not operate to extend the scope of 'total income' as defined u/s 5 of the Act but only provides for an alternative mode for computing income. The ITAT relied on the

Neelam Jadhav, Neha Paranjpe & Tanmay Phadke, Advocates

DIRECT TAXESTribunal


| 88 | The Chamber's Journal | May 2020 ML-576

various judgements of co-ordinate benches and the particularly that of the special bench in the case of “Satlej Cotton Mills Ltd. vs. Asstt CIT [1993] 45 ITD 22 (Cal.) (SB)”. The ITAT finally held that, profits so derived from sale of the said land must be reduced from book profits determinable u/s 115JB of the Act. With the aforesaid observations, the ITAT allowed the appeal of the Assesse.

2 Anik Industries Ltd. vs. DCIT [ITA No:7189/Mum/2014 & 5234/Mum/2016] (Assessment Year: 2010-11 & 2012-13), Order dated 19.03.2020 [2020] 116 taxmann.com 385 (Mumbai – Trib.)

Section 45 –Compensation received by an existing partner on reduction of his share in the partnership firm does not trigger sec. 45(1) and consequently, there is no liability under the head “capital gains”.

FactsThe Assessee is a partner in M/s. Mahakosh Property Developers, erstwhile holding 30% share in the said Partnership Firm. During the year under consideration, the Assessee surrendered his profit sharing ratio to the extent of 5% share in favour of the existing partners and received ` 400 Lacs as compensation from them. The Assessee filed its return of income for the impugned assessment year on 13.10.2010 declaring the total income at 1019.10 Lacs. The return was selected for the scrutiny assessment wherein the AO asked the Assessee to establish as to why the amount of ` 400 Lacs received by it should not be taxed under the head “Capital Gains”. In response, the Assessee submitted that vide partnership deed dated 31.03.2010, the existing partnership firm got reconstituted by which the share of the Assessee was reduced from 30% to 25% and the rights were created in favour of the existing

partners by distributing the reduced share for which the compensation of ` 400 lacs was received. It was a stand of the assessee before the AO that the compensation received by it being a capital receipt, is not chargeable to tax as capital gains. However, the AO was not impressed with the submissions of the Assessee and framed the assessment proceedings by bringing the said compensation to tax as capital gains. Being aggrieved, the Assessee filed an appeal before CIT(A) without success. Thereafter, an appeal was preferred before the ITAT. After considering the submissions, the ITAT held as under:

HeldOn perusal of the facts under consideration, the ITAT held that the provisions of sec 45(4) are not applicable in this case as it is not a case of distribution of capital asset on dissolution of a firm. The present case is of a reduction in share of one partner which has been taken over by existing partners and the firm continued its business with the existing partners including the Assessee. Further, from the f inancial statements of the Assessee, the ITAT noticed that the Assessee had an opening balance of ` 2321.60 Lacs in the current account held with the firm. The amount received as compensation of ` 400 Lacs was credited to the said account on 31.03.2010 towards a reduction of profit sharing ratio from 30% to 25% and the closing balance was arrived at ` 1600 Lacs. The said adjustment was done on account of reconstitution of the firm and the same was routed through respective partners’ current accounts held with the firm. It was noted by the ITAT that the firm was constituted vide partnership deed dated 14.12.2004 and also reconstituted vide another partnership deed dated 31.03.2010 wherein the Assessee released its 5% share in favour of 5 existing partners to



the extent of 1% each and received ` 80 Lacs from existing partners. It was further observed by the ITAT that, the present case is neither the case of dissolution of firm nor the case of retirement. The business of the firm continued with existing partners including the Assessee with a new profit sharing ratio. After referring to various decisions, it was observed by the ITAT that during the subsistence of Partnership firm, partners do not have any interest in assets of the firm except share in profits. Further, it was noted that only on dissolution of firm or on retirement, partners are entitled to valuation of their shares in net assets of the firm. The compensation received by the Assessee from the existing partners on mere reduction of its share of profits in the partnership firm does not amount to any transfer u/s 2(47) of the Act and consequently, does not give any rise to capital gains. While coming to the said conclusion, the ITAT extensively referred to the decision of Karnataka HC in the case of CIT vs. P. N. Panjwani [2013] 356 ITR 676 (Kar). Ultimately, the ITAT deleted the addition as made by the AO and allowed the appeal of the Assessee.

3 Pandhes Infracon (P.) Ltd. vs. ACIT [SA No:184/Mum/2020] (Assessment Year: 2010-11), Order dated 24.04.2020 [2020] 116 taxmann.com 376 (Mumbai – Trib.)

Section 254- Complete stay of the balance demand of ` 2,91,05,660/- pertaining to the interest and penalty is granted by the ITAT in light of the existing COVID-19 pandemic to enable the Assessee to make payments to its labourers and employees and further to comply with the direction of collector asking the Assessee to make its building available for providing quarantine facilities.

FactsThe Assessee is a civil contractor, builder/developer and filed a stay application before the ITAT with a request to stay the balance demand of ` 2,91,05,660/-. For the present assessment year 2010-11, the return of income filed by the Assessee was scrutinised u/s 143(3) of the Act. Thereafter, the assessment was reopened. While concluding the reopened assessment, the AO made an addit ion of ` 33,93,97,197/- on account of “bogus purchases” and determined the total income at ` 50,94,56,524/- resulting in a huge demand of ` 6,47,75,090/- Being aggrieved, the Assessee filed an appeal before the CIT(A) but there was hardly any success as out of the total addition of ` 33,93,97,197/-, the CIT(A) deleted the addition to the extent of ` 5,09,09,688/-. Thereafter, the Assessee approached the ITAT and filed an appeal before it . Meanwhile, the AO initiated recovery proceedings and attached all the bank accounts of the Assessee. In addition, the AO issued garnishee notices to all the debtors u/s 226(3) of the Act. The work of the Assessee came to a halt. On account of the aforesaid factors, it was impossible for the Assessee to pay i ts labourers and employees wages and salaries in spite of the existing directions from the Government asking employers to pay the labourers, support staff and other employees, and to take care of them. In this backdrop, the Assessee sought the interference from the ITAT. During the course of the hearing, the Assessee apart from the abovementioned facts, pointed out to the ITAT that as per the directions of the Collector, the Assessee has to make available his partially completed building for providing quarantine facilities to the Covid 19 patients. It was further pointed out that the payments made pursuant to the reassessment proceedings covers the


| 90 | The Chamber's Journal | May 2020 ML-578

basic tax liability and the outstanding balance pertains to the interest and penalty. After hearing both the parties and perusing the material on record, the ITAT held as under:

HeldLooking at the urgency and the importance attached to the issue involved, the ITAT, at the request of the counsel through e-mail, conducted the hearing of the stay application by way of a video conference. The counsel for both the parties were heard at length by way of video conference. The ITAT took note of the existing situation of the Covid 19 pandemic, especially difficulties faced by poorer sections of the society and considered circulars dated 20.03.2020 and 23.03.2020 issued by Ministry of Labour and Employment, Government of India expecting co-operation from all employers by way of continuation of employments of and payments to all employees in the present scenario. The ITAT observed that due to the attachment of bank accounts and debtors, the Assessee is not in a position to make payments of overdue and current wages / salaries to its labourers and employees. The ITAT noted that the Assessee also has an arguable case on merits and it had already discharged the entire tax liability. It further observed that if the Assessee decides to avail benefits of “Vivad se Vishwas scheme”, there will not be a further liability as the basic tax liability on the addition of ` 33,93,97,197/- stands discharged. On the aforesaid observations, the ITAT stayed the balance demand ` 2,91,05,660/- till the disposal of the appeal or till the end of six months from the date of this order- whichever is earlier. However, the ITAT put certain conditions on the Assessee such as the funds will be first used towards payments of wages/salaries, amount available thereafter will be used for the

construction activity as necessary for providing quarantine facilities as per the directions of the collector and surplus if available will thereafter be used for carrying out construction activities of business. The ITAT asked the Assesse to give an undertaking to this effect in writing and further, directed to furnish a statement of utilisation of funds available on account of garnishee notices being lifted, within a period of 15 days from the order. It was also made it clear by the ITAT that the Assessee will co-operate in expeditious disposal of the appeal (the hearing is scheduled on 08.06.2020) and will not seek any adjournments. In the light of the aforesaid directions, the ITAT allowed the stay application of the Assessee by granting the complete stay on the recovery of the outstanding demand of ` 2,91,05,660/-.

Unreported Decisions

4 Bhimana Shrinivasa Rao vs. ITO [ITA No: 76 / Viz / 2019] (Assessment Year: 2015-16), Order dated 04.03.2020

Section 68 – Once the source of cash deposits stands explained, addition u/s 68 cannot be made on the suspicion that source of source is doubtful.

FactsThe case of the Assessee was subjected to the scrutiny assessment for the A.Y. 2015-16. During the course of assessment proceedings, the AO asked the Assessee to justify the cash of ` 5,13,000/- deposited on 30.03.2015 in his saving bank account with State Bank of Hyderabad. In response to the said query, the Assessee submitted that he had received a sum of ` 5,16,000/- from his son, Shri Bhimana Sujit Raviteja. It was further submitted that the said sum was received by the Assessee’s son as a



‘gift’ from his father law (Shri Adika Manohar Rao) on the occasion of his marriage with Dr. Mounica, daughter of Shri Adika Manohar Rao. It was further explained that the said gift was given by Shri Adika Manohar Rao from his accumulated savings. However, the AO was not satisfied with the abovementioned explanation of the Assessee and therefore added a sum of ` 5,13,000/- u/s 68 of the Act by observing that there were no sufficient withdrawals made by Shri Adika Manohar Rao in his bank account. On appeal before the Ld. CIT (A), the Assessee did not succeed. Later on, the Assessee preferred an appeal before the ITAT. After considering the arguments of both the parties, the ITAT held as under:

HeldThe ITAT observed that the cash deposited by the Assessee in his saving bank account amounting to ` 5,13,000/- was received from his son and the source of the same pertains to the gift received by his son from his father in law, Shri Adika Manohar Rao on the occasion of his

marriage with Dr. Mounica, daughter of Shri Adika Manohar Rao. Further, on perusal of the order of CIT (A), it was observed by the ITAT that Shri Adika Manohar Rao had withdrawn the sum of ` 16,75,000/- from 09.12.2013 to 13.03.2015 which was sufficient enough to meet the gift to the Assessee’s son. The ITAT noted that the AO did not doubt the genuineness of the gift received by Assessee’s son. However, the AO doubted the source of the source. The ITAT further, held that once the Assessee discharged his burden by placing evidence with respect to the receipt of gift by his son, the AO is not free to make an addition u/s 68 merely because he is not satisfied with the source of the source. The ITAT held that in the present case, the source of cash deposited in the bank as well as the occasion at which the gift was received by Assessee’s son were duly explained by the Assessee requiring no invocation of Sec. 68. On these observations, The ITAT deleted the addition of ` 5,13,000/- as made by the AO u/s 68 of the Act and allowed the appeal of the Assessee.

mom

International Taxation — Case Law Update


A. TRIBUNAL DECISIONS

1 Volkswagen Finance Pvt. Ltd. v. Income Tax Officer (IT) [TS-172-ITAT-2020(Mum)] - ITA No. 2195/Mum/2017 for AY 2015-16

Appearance fees paid to a celebrity for appearing in an event held in Dubai, which is focused for furtherance of business interests of the assessee in India and targeted towards the Indian customers of the assessee, the said relationship would result in a creation of a business connection in India and accordingly the appearance fees would be taxable u/s 9(1)(i)

Factsi) The Appellant (i.e. assessee) along with its

group entity namely Audi India, conducted an event in Dubai for the purpose of launch of a new model of an Audi car i.e. Audi A-8L. For the purpose of making the said event, a lavish event with special focus on HNI individuals and other existing customers of Audi cars, the assessee and Audi India entered into an agreement with a US entity for facilitating the appearance of Nicholas Cage (an Oscar-winning

celebrity, hereinafter referred as ‘celebrity) at the event. An appearance fees of USD 440,000 was paid to the celebrity outside India.

ii) As per the agreement, the celebrity was required to engage with the directors of Audi India for a Q&A session followed by socializing with the guests and interaction with Indian media. Further, the assessee and Audi India had full rights to use all the event footage/material/films/stills/interviews etc., capturing the celebrity’s presence, across all platforms for publicity on the internet, in press releases, news reports and social media. The assessee had explained that the event was specifically focused on the Indian customers in as much as that pursuant to the said event, Audi India would receive enquiries from potential customers based in India for purchase of the said Audi Car and the assessee would enable the customer to get the same financed from it.

iii) The AO concluded proceedings u/s 201 by holding that fees paid to the celebrity were in nature of “royalty” and, accordingly, the assessee was required to withhold taxes u/s 195. On appeal before the CIT(A),

CA Tarunkumar Singhal & Dr. Sunil Moti Lala

INTERNATIONAL TAXATIONCase Law Update

ML-580



the CIT(A) upheld the order of the AO and also observed that the said fees paid to the celebrity could also qualify as business income accruing or arising in India u/s 9(1)(i).

iv) Accordingly, the present appeal was filed by the assessee before the Tribunal.

Decisioni) The Tribunal, by relying on the Hon’ble

Supreme Court decision in case of R D Aggarwal & Co (1965) 56 ITR 20 (SC), observed that a business connection is not only a tangible thing like people or businesses but also includes a relationship, real or intimate, through which an income directly or indirectly, accrues or arises to the non-resident. Having interpreted the term business connection as above, the Tribunal then proceeded to analyse whether the income accruing to the celebrity on account of appearance in the event held in Dubai, had accrued or arisen, directly or indirectly on account of a business connection in India.

ii) The Tribunal held that the event conducted in Dubai and the resulting benefit of the said event in assessee’s business in India resulted in creation of a business connection through which the income accrued in the hands of the celebrity. The following factors were considered by the Tribunal for arriving at the above conclusion: -

a. The event was focused specifically for the Indian customers and the benefit of the said event were to be utilized for assessee’s business in India.

b. Assessee and Audi India had full rights to use all the event footage/material/films/stills/interviews etc., capturing the celebrity’s presence, across all platforms for publicity and

hence would be used by the assessee as a marketing tool in India.

c. The entire event expenses were claimed as business deduction u/s 37(1) by the assessee and Audi India as being incurred wholly and exclusively for their business purposes in India.

iii) The Tribunal further observed that in the present case the business connection in India is intangible inasmuch as it is a relationship rather than an object, but it is a significant business connection which has resulted in income accruing and arising to the non-resident and hence none of the judicial precedents would be applicable to such types of modern/evolving business models.

iv) The income was not covered under the India-USA DTAA provisions dealing with entertainers i.e. Article 18 since the activity was not exercised in India. Accordingly, the Tribunal held that the said fees were also taxable in India as per the provisions of “Other Income” article i.e. Article 23(3) of India-USA DTAA.

2 Sreenivasa Reddy Cheemalamarris v. Income Tax Officer (IT) - [TS-158-ITAT-2020(HYD)] - ITA No. 1463/Hyd/2018 for AY 2014-15

DTAA benefit cannot be denied solely on the ground that the assessee had not provided TRC if the assessee with circumstantial evidences demonstrates that he is a resident of the other state, and accordingly provisions of section 90(4) could be relaxed to that extent

Factsi) The Appellant (i.e. assessee) a non-resident

for AY 2014-15 had earned income from

ML-581



salaries from IBM India Pvt. Ltd. on which requisite taxes u/s 192 were deducted. The assessee filed its return of income and claimed exemption of the said income u/s 90 read with Article 15(1) of India-Austria DTAA.

ii) During the course of the assessment proceedings, the assessee was required to provide documentary evidences of the said income for which exemption was claimed, which inter alia included the tax residency certificate (hereinafter referred as ‘TRC’) from the Austrian authorities. However, the assessee was unable to obtain the TRC from the Austrian tax authorities despite best possible efforts. The AO denied the claim of the assessee for double taxation relief u/s 90 since the TRC was not provided during the assessment proceedings. On appeal by the assessee before the CIT(A), the CIT(A) upheld the order of the AO.

iii) Accordingly, the present appeal was filed by the assessee before the Tribunal.

Decisioni) The Tribunal observed that obtaining

a TRC from foreign tax authorities is generally a herculean task and hence the assessee cannot be obligated to perform an impossible task (i.e. obtaining the TRC from Austrian tax authorities in the present case). In view of the same, the Tribunal held that if the assessee with circumstantial evidences demonstrates that he is a resident of the other state, the provisions of section 90(4) ought to be relaxed and accordingly the claim of the assessee should not be rejected merely on the grounds of non-production of TRC.

ii) Further, the Tribunal, by relying on the decision of Tribunal (Ahmedabad Bench)

in case of Skaps Industries Pvt. Ltd. (TS-330-ITAT-2018(AHD), held that the provisions of section 90(4) cannot override the provisions of the relevant DTAA and accordingly if the conditions prescribed under the relevant DTAA are fulfilled, then the assessee cannot be denied the benefit of the DTAA.

3 Shri Paul Xavier Antony Samy v. Income Tax Officer (IT) - [TS-138-ITAT-2020(CHNY)] - I.T.A.No. 2233/Chny/2018 for AY 2015-16

Section 5 is subjected to other provisions of the Act and accordingly salary received in India for the services rendered outside India would not be taxed in India in view of section 15(a) and section 9(1)(iii).

Factsi) The Appellant (i.e. assessee) a non-resident

for AY 2015-16 had earned income from salaries from General Electric International Inc. in India (hereinafter referred to as ‘GE India’). The assessee was seconded by GE India for an overseas assignment in Australia from 30th August 2014. During the course of secondment, the assessee was employed by General Electric International Inc. in Australia (hereinafter referred to as ‘GE Australia’). The salaries for the employment with GE Australia were paid directly to the bank account of the assessee in India, by GE India on which requisite taxes were deducted by GE India u/s 192.

ii) The assessee filed the return of income declaring the income upto 30th August 2014 as taxable in India and the balance income received for the services rendered post 30th August 2014 were claimed as not taxable in India, since the services were rendered outside India.

ML-582



iii) The AO concluded the assessment proceedings by holding that the income received for the services rendered outside India would be taxable u/s 5(2)(a) since the said income was received in India. On appeal by the assessee before the CIT(A), the CIT(A) upheld the order of the AO.

iv) Accordingly, the present appeal was filed by the assessee the Tribunal.

Decisioni) The Tribunal observed that provisions of

section 5 stipulates that the said section is subjected to other provisions of the Act, which in the present case would be section 15.

ii) The Tribunal, on perusal of section 15, held that the salary is always taxable on accrual basis and also as per section 9(1)(ii), salary income could be deemed to accrue or arise in India, only if it is earned in India in respect of services rendered in India. Accordingly, the Tribunal held that the salary income for the services rendered outside India, though received in India, would not be taxable in India. The Tribunal also held that as per Article 15 India-Australia DTAA income from salaries should be taxed only in Australia and hence the said receipt was not taxable in India.

4 Sofina S.A. v. ACIT (IT) [TS-129-ITAT-2020(MUM)] - ITA No.7241/Mum/2018 for AY 2015-16

Provisions of explanation 5 to section 9(1)(i) of the IT Act i.e. indirect transfer of shares of an Indian company, cannot be read into the India-Belgium DTAA in absence of similar provisions in the DTAA itself.

Factsi) The appellant (i.e. assessee) was a tax

resident of Belgium. The assessee had subscribed to the preference shares of Accelyst Pte Ltd., (a company which was a tax resident of Singapore and hereinafter referred as ‘Accelyst Singapore’) totalling to 11.34% of its total shareholding. Accelyst Singapore in turn held 99.99% of the total shareholding of Accelyst Solutions Pvt. Ltd., (a company which was a tax resident of India and hereinafter referred to as ‘Accelyst India’).

ii) During the year under consideration, the assessee sold its entire stake in Accelyst Singapore (i.e. 11.34%) to Jasper Infotech Pvt. Ltd. (a company which was a tax resident of India). Jasper Infotech Pvt. Ltd. while discharging the consideration for the above mentioned transaction, withheld taxes u/s 195. The assessee filed its return of income declaring NIL income as per the provisions of Article 13(6) of India-Belgium DTAA (hereinafter referred as the ‘relevant DTAA’). By virtue of the said provision, gains from alienation of the said shares would be taxable in the state of the alienator i.e. Belgium.

iii) The AO concluded the assessment proceedings by holding that the shares of Accelyst Singapore derived their value substantially from the shares of Accelyst India and accordingly the transfer of shares of Accelyst Singapore would be taxable in India in terms of explanation 5 to section 9(1)(i). Further with respect to India-Belgium DTAA, the AO held that by virtue of the deeming fiction created by explanation 5 to section 9(1)(i), the shares of Accelyst Singapore were deemed to be situated in India and consequently Accelyst Singapore was deemed to be a tax resident of India. In light of the same, the AO

ML-583



applied Article 13(5) of the relevant DTAA to conclude that the transfer would be taxed in India. The assessee filed objections before the DRP, however, the DRP upheld the order of the AO.

iv) Accordingly, the present appeal was filed by the assessee before the Tribunal.

Decisioni) The Tribunal, by relying on the decision

of Andhra Pradesh HC in case of Sanofi Pasteur Holding SA v. Department of Revenue (2013) (30 taxmann.com 222), observed that by virtue of Article 13(5) of the relevant DTAA which inter alia provides that gains from alienation of shares in a company can be taxed in the State in which the said company is resident only if the following two conditions are satisfied viz.

a. the transfer of shares should represent participation of at least 10% in the capital stock of company; and

b. the company whose shares are transferred should be a resident of a contracting state i.e. either India or Belgium as per article 3(1)(c) of the relevant DTAA.

In view of the above, the Tribunal held that since the shares transferred by the assessee in the present case were of Accelyst Singapore, the pre-condition that the shares transferred should form part of the capital stock of a company which is a resident of a Contracting State i.e. India was not fulfilled and hence Article 13(5) would not be applicable in the present case.

ii) Further, the Tribunal observed that explanation 5 of section 9(1)(i) incorporates a ‘see-through’ approach i.e. if a person holds shares outside India, which derives its

value substantially from the assets located in India, the legislation deems such shares located outside India to be located in India for taxation purposes. However a similar ‘see through’ approach is not envisaged in Article 13(5) of the relevant DTAA (since words such as ‘directly or indirectly’ are not used in the said Article) and hence it cannot be deemed that the above mentioned transaction results in the transfer of shares of Accelyst India.

iii) In view of the above findings, the Tribunal held that the captioned transaction would be taxed in accordance with Article 13(6) of the relevant DTAA and hence not taxable in India.

mom

ML-584

Indirect Taxes — GST – Recent Judgments and Advance Rulings


A. WRIT PETITIONS

1. M/S GOKUL AGRO RESOURCES LTD. – GUJARAT HC (2020-TIOL-691-HC-AHM-GST)

Facts, Issue involved and Contention of the PetitionerGujarat High Court vide its judgement in the case of Mohit Minerals Pvt Ltd. [2020-TIOL-164-HC-AHM-GST] held that Entry No.10 of the Notification No.10/2017 -Integrated Tax (Rate) dated 28th June 2017 levying IGST under RCM on ocean freight is ultra vires Section 5(3) of the IGST Act, 2017 as well as Article 14 of the Constitution of India.

In light of above decision, the petitioner submitted that it had made payment of following amounts as IGST on ocean freight and since the notification has been struck down, they are entitled to refund of the said amount of IGST:

Financial Year Amount (Rs.)

2017-18 1,28,86,003

2018-19 3,02,47,487

2019-20 (Till Nov’19) 3,37,89,514

Total 7,69,13,004

The petitioner had sought a writ from the High Court for the purpose of aforesaid refund from tax authorities.

Discussion by and observations of HCSince the Notification has been struck down as ultra vires, as a consequence of the same, the writ applicant had sought refund of the amount paid towards the IGST. However, for this purpose, the writ applicant will have to prefer an appropriate application addressed to the competent authority. If any such application is preferred for the refund of the amount, the authority concerned shall immediately look into the same and pass an appropriate order in accordance with law keeping in mind the decision of this Court rendered in the case of Mohit Minerals (supra).

The competent authority shall not raise any technical issue with regard to the claim for refund of the IGST amount. This exercise is to be undertaken within a period of four weeks from date of receipt of order.

Decision of HCCourt allowed the petitioner to file a refund claim with the competent authority and thereby disposed of the writ petition.

CA Naresh Sheth & CA Jinesh Shah

INDIRECT TAXES

GST – Recent Judgments and Advance Rulings

ML-585



B. APPELLATE AUTHORITY OF ADVANCE RULING

2. TARUN REALTORS PRIVATE LIMITED – KARNATAKA AAAR (2020-TIOL-18-AAAR-GST)

Facts, Issue involved and contentions of the appellantAppellant (‘TRPL’) is developing a shopping mall- ‘Mantri Arena Mall’ that will include a hypermarket, multiple cinema theatre, departmental and retail stores, etc. Appellant will be leasing all units at the mall together with the right to use the staircases, common areas and other common facilities.

Appellant had sought advance ruling as to whether taxes paid on procurement of following goods and/or services are regarded as blocked credits under Section 17(5) of the CGST Act, 2017?

(a) Chillers, (b) Air Handling Unit (AHU), (c) Lift, Escalators and Travellator, (d) Water Treatment Plant (WTP), (e) Sewage Treatment Plant(STP), (f) High-Speed Diesel Yard (HSDY),(g) Mechanical Car Park(MLCP), (h) Indoor/Outdoor Surveillance System(CCTV), (i) D.G.sets, ( j) Transformers, (k) Electric wiring and fixtures, (l) Public Health Engineering(PHE), Fire-Fighting and water-management pump system.

Ruling of AARThe taxes paid on procurement of goods and/or services for installation of the installations as listed in the application are blocked credits under Section 17(5) of the CGST Act, 2017.

Appeal to AAARAggrieved by the ruling passed by AAR, appellant preferred an appeal to the appellate authority on following grounds:

• Section 17(5)(d) of the CGST Act provides that no ITC would be available in respect

of goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his account.

‘Plant and machinery’ is defined to mean apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

i. Land, building or any other civil structures;

ii. Telecommunication towers; and

iii. Pipelines laid outside the factory premises.

On a conjoint reading of the above, it can be deduced that all the installations can qualify as ‘Plant or Machinery’ under the CGST Act and accordingly taxes paid on procurement of goods or services for construction of plant or machinery on one’s account is available as Input tax credit and is not blocked under Section 17(5) of CGST Act.

• Explanation to Chapter V of the CGST Act defines i.e. “Plant and Machinery” under the GST Law but the same meaning cannot be assigned to the words “Plant or Machinery” used in Section 17(5) (d) of the said Act.

The Phrase “plant or machinery” is not defined under the GST laws; therefore, references must be drawn from the dictionary meanings ascribed to it under other laws and judicial pronouncements.

• Appellant relied on judicial pronouncements which attempt to determine whether an item is machinery

ML-586



or not and to justify their case that all the installations qualify as plant or machinery.

• Appellant also relied on the analogy of certain judicial pronouncements rendered under the erstwhile Cenvat credit laws wherein it has been held that Cenvat Credit of inputs/ input services used for construction is admissible.

• Appellant further relied on judicial pronouncements wherein a view has been taken that parts, components, accessories come into existence before the installation of machinery and credit of taxes paid on the same cannot be denied even if they become part of the immovable property after installation of the plant and machinery.

• Appellant then relied on the order passed by the High Court of Orissa in the case of Safari Retreats Pvt Ltd, and Another vs Chief Commissioner of CGST & Others wherein it was held that the petitioner is allowed to avail input tax credit on inputs like cement, plywood, paint, D.G sets, air-conditioning plants, lifts & escalators, electrical equipment, transformers, legal and professional services on the following grounds:

o Restriction of input tax credit on goods and/or services used in construction of plant or machinery in terms of section 17(5) of the CGST Act, 2017 leads to narrow interpretation of statute, which destroys the very object of the statue; and

o Since the output tax was remitted on rental income, the High Court held that restriction of input tax credits on inward supplies would lead to obscure interpretation of statute.

Discussions by and findings of AAARSection 16(1) implies that appellant is entitled to ITC of input tax charged on goods or services used by them in course of their business. However, this is subject to condition and restriction as provided in section 16(2) and 17(5) of the Act.

Section 17(5)(d) of CGST Act does not allow in general input tax credit for construction, reconstruction, renovation, addition, alteration or repair of an immovable property (other than plant or machinery) even when such goods or services are used in course or furtherance of business.

The exception to above restriction is regarding “Plant” or “Machinery”. The contention of the appellant is that definition of “Plant and Machinery” under Chapter V and Chapter VI of CGST Act cannot be assigned to the words “Plant or Machinery” used in Section 17(5) (d) of the said Act.

Applying the principles of statutory interpretation to the instant case, AAAR is of the opinion that the word ‘or’ in Section 17(5)(d) of the CGST Act can be read as ‘and’ as it appears to give effect to the intention of the legislature to allow input tax credit on the construction of plant and/or machinery.

Input tax credit on all the installations installed by the appellant will be restricted under Section 17(5) (d) of the CGST Act, 2017 even if they are used in course or furtherance of outward supply of renting.

Further, order passed by the Orissa High Court in case of “Safari Retreats Pvt. Ltd.” has been appealed against by Chief Commissioner of Central Taxes, Bhubaneshwar in SLP (C) no. 026696 and same is pending in Apex court. Since the order of High Court has not yet attained finality, the same does not have persuasive value.

ML-587



Ruling by AAARAAAR upheld the order passed by the AAR and appeal filed by the appellant stands dismissed in all counts.

C. AUTHORITY OF ADVANCE RULING

3. M/s T & D ELECTRICALS – KARNATAKA AAR (2020-TIOL-86-AAR-GST)

Facts, issue involved and query of the applicantApplicant is registered under GST and is a works contractor and wholesale supplier in Rajasthan. M/s Shree Cement Ltd., Rajasthan, has awarded the applicant a contract for electrical, instrumentation, and IT jobs (works contract) at township, Karnataka Cement Project (a unit of Shree Cement Ltd) in state of Karnataka. The job involves supply of material, work force and installation, testing and commissioning of the same. The basic value of contract is ` 297.85 lacs.

The invoices will be addressed to Karnataka cement Project (a unit of Shree Cement Ltd) in state of Karnataka. The contractor i.e. applicant does not have any premises in Karnataka as M/s Shree Cement Ltd, will only provide temporary small space for office & stores in their premises without any written documents.

Applicant has sought advance ruling for the following:

1. Whether separate registration is required in Karnataka state? If yes, whether agreement would suffice as address proof since nothing else is with the assesse and service recipient will not provide any other proof.

2. (a) If Registration is not required in Karnataka state and if they purchase goods from dealer of Rajasthan and want to ship goods directly from the premises of dealer of Rajasthan to township at

Karnataka then whether CGST & SGST or IGST would be charged by the dealer of Rajasthan?

(b) If Registration is not required in Karnataka state and if they purchase goods from dealer of Karnataka to use the goods at township at Karnataka then whether IGST or CGST & SGST would be charged by the dealer of Karnataka?

3. What documents would be required with transporter to transit/ship material at Karnataka site from dealer/ supplier of Rajasthan and in case of dealer/ supplier are of Karnataka. Advance ruling may kindly be issued in case of registration is required or not required in both the situation?

Applicant’s submissionsSection 22 of the CGST Act, 2017 provides requirement for registration according to which every supplier shall be liable to be registered under this Act in the State or States from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees.

According to Section 2(71) which defines ‘location of supplier of services’ and in the instant case the location of the applicant will be the state where his principal place of business is registered (unless he has a fixed establishment in the place where the services are supplied) i.e. Rajasthan.

Therefore, applicant is not required to have any separate GST Registration in Karnataka state.

The place of supply, in case of work contract services, shall be the location at which immovable property (construction site) is located as per Section 12(3)(a) of IGST Act 2017.

Section 10 of IGST Act determines the place of supply of goods. Dealer in Rajasthan has to charge CGST & SGST when the goods purchased by the applicant are shipped to project site in

ML-588



Karnataka under Bill to Ship to transaction in terms of 10(1)(b) of the IGST Act. The dealer in Karnataka has to charge IGST when the goods purchased by the applicant are shipped to project site in Karnataka under Bill to Ship to transaction in terms of 10(1)(b) of the Act, 2017.

Discussions by and observations of AARThe first question is whether separate registration is required to execute the contract in Karnataka or not. In the instant case, the applicant intends to supply goods or services or both from their principle place of business, which is located in Rajasthan. The applicant has only one principle place of business, for which registration has been obtained and does not have any other fixed establishment. Therefore, the location of supplier is nothing but principal place of business in Rajasthan. There is no requirement for a separate registration in Karnataka for execution of the contract.

The second question consists of two parts i.e. a & b. In situation (a) the supplier i.e. dealer in Rajasthan and the recipient of goods are situated in same state of Rajasthan and hence the supply becomes intra-state supply in terms of Section 8 of IGST Act 2017 and the said supply gets covered under Bill-To-Ship-To transaction in terms of Section10(1)(b) of IGST Act. Thus, CGST & SGST has to be charged by the dealer.

In situation (b) the supplier i.e. dealer is situated in Karnataka and recipient of goods is situated in state of Rajasthan. Hence the supply becomes inter-state supply in terms of Section 7(1) of IGST Act and the said supply is covered under Bill-To-Ship-To transaction in terms of Section10(1)(b) of IGST Act. Thus, IGST has to be charged by the dealer.

In both the situation (a) & (b) applicant has to charge IGST in their invoices addressed to M/s Karnataka Cement Project (a unit of Shree Cement Ltd).

Ruling of AARIn respect of question (1), there is no requirement for a separate registration in Karnataka for execution of the contract in Karnataka.

In respect of question (2)(a), dealer in Rajasthan has to charge CGST & SGST when the goods purchased by the applicant are shipped to project site in Karnataka under Bill to Ship to transaction.

In respect of question (2)(b), dealer in Karnataka has to charge IGST when the goods purchased by the applicant are shipped to project site in Karnataka under Bill to Ship to transaction.

In respect of question (3), no ruling given as it is not covered under Section 97(2) of the CGST Act.

4. M/s. KARDEX INDIA STORAGE SOLUTION PRIVATE LIMITED– KARNATAKA AAR (2020-TIOL-56-AAR-GST)

Facts, Issue involved and Query of the ApplicantApplicant imports storage solutions and vertical storage solutions (machines) from Germany and distributes them to Industrial customers all over India. Presently, applicant is transporting the imported goods from the port of import to applicants registered place of business at Bangalore and then supplying the same to the customer’s place. Due to this process of transportation, applicant has come across various logistic problems and found it costly. In the view of this, the applicant intends to import goods to the port nearest to the customer’s place and supply the same to customer’s location directly from the port of import.

Applicant has sought an advance ruling in respect of the following issues:

1. Whether the applicant can take credit of IGST paid on import of goods?

ML-589



2. Whether applicant can issue tax invoice with IGST to the customer?

3. Whether applicant needs to obtain registration in the state where the port of clearance is located?

Applicant’s submissionsAs per the section 11(a) of the IGST Act 2017, the place of supply in case of import of goods is the location of importer. According to Importer Exporter Code, the location at which importer files the bill of entry for clearance of goods and where the importer is registered under GST is treated as location of the importer. Thus the applicant contended that location of the importer is the place of business of the importer and not the state in which the port of import is located unless the importer has some permanent establishment or business place there.

As per the section 7(2) of IGST Act 2017, the supply of goods imported into the territory of India, till they cross the custom frontiers of India, shall be treated as an inter-state supply. As per the provisions of IGST Act, 2017 though the imported goods are supplied directly from the port of import to the customer’s place, it is deemed that the imported goods are received at the registered place of business of the importer and then supplied to the customer’s place.

Thus applicant is of the view that there is no need to shift the imported goods physically to the place where the registration is obtained and further there is no need to take registration in the state where the port of import is located. In support of this, the applicant has placed reliance on the Rulings of Advance Ruling Authority, Maharashtra in case of

a) M/s Aarel Import Export Private Limited.

b) M/s Sonkamal Enterprises Private Limited.

Discussions by and observations of AARApplicant, being importer of storage solutions and vertical storage solutions (machines) from Germany, is liable to pay the integrated tax on goods imported into India as per the provisions of section 3 of Customs Tariff Act, 1975 on the value as determined under the aforesaid Act.

Section 20 of IGST Act read with Section 16 of the CGST Act, 2017 provides that IGST paid on import of goods can be utilized as the credit of the input tax on such imported goods is in course or furtherance of his business. It is admitted by the applicant that imported goods are further supplied to various industrial customers in India and this implies that imported goods are used in the course or furtherance of his business. Hence the applicant is entitled to claim the credit of IGST paid on imported goods.

Applicant is having permanent business establishment only in the state of Karnataka and has obtained GST registration in the state of Karnataka. The supply of goods, where the location of the supplier and the place of supply are in two different states, two different Union territories or a state and a Union territory shall be treated as inter-state supply of goods and the supply of goods where the location of the supplier and the place of supply of goods are in the same state or same Union territory shall be treated as intra-state supply.

The place of supply in case of import of goods is the location of importer and in case of the applicant the location of the importer is the state of Karnataka where the applicant is registered under GST.

Hence imported goods supplied directly from the port of import to the customer located in other states or Union territories other than state of Karnataka, shall be treated as inter-state supply of goods. If the applicant supplies the goods to the customers within the state of Karnataka, such

ML-590



transaction shall be treated as intra-state supply liable to CGST and SGST.

Applicant is the registered dealer in the state of Karnataka and uses this same GSTIN in the bill of entry for import of goods and also for the payment of IGST on imported goods. No provisions under the CGST or SGST or IGST Act mandates any person to obtain the registration again in the place of port where applicant obtain the custom clearance for further supply of goods. Hence, there is no need for applicant to obtain the separate registration in the state where port of clearance is located, if he does not have an establishment in that state and effecting supplies from that location.

Ruling of AARIn respect of question (1), applicant is eligible to claim credit of IGST paid on import of goods.

In respect of question (2), applicant can issue tax invoice with IGST to the customer for the inter-state supply when goods are directly dispatched from the port of import and invoicing done from the registered place of business.

In respect of question (3), applicant need not obtain registration in the state where the port of clearance is located.

5. M/S.CLAY CRAFT INDIA PRIVATE LIMITED – RAJASTHAN AAR (2020-TIOL-64-AAR-GST)

Facts, issues involved and query of the applicantApplicant is a private limited company engaged in the manufacture of bone China crockery, Transfer Sheet Decalcomania, Other Utensils Item, Moulds and Die etc. Applicant presently has six directors in its board of directors and that they are performing their duties and responsibilities as required under laws. Each one of them is working at different level of management and is in charge

of production, quality checks, dispatch, accounts, etc. respectively.

Applicant has sought advance ruling in respect of the following questions:

1. Whether GST is payable under Reverse Charge Mechanism; the salary paid to director of the company who is paid salary as per contract?

2. Whether the situation would change from (1) above if the director also is a part time Director in other company also.

Applicant’s contentionsSalary paid to directors is being booked under ‘Income from salary’ by the directors in their Income tax returns. Services provided by employee to employer is covered under Schedule III of CGST Act and therefore not liable to tax.

Directors working as whole time director are as good as an employee and are being treated at par with the employees. Company is deducting EPF from their salaries and all other benefits given to them are at par with the other employees. Whole time directors are de-facto employees. Hence the services provided by them to the company are squarely covered under Schedule lll.

Further, the term ‘employee’ has not been defined under the CGST Act and hence the interpretation has been obtained from other sources. As per Cambridge dictionary, employee is a person who is paid to work for someone else.

Section 2(94) of the Companies Act 2013 defines “director” to include a director in the employment of the company (inclusive definition). Employee, when appointed as director, will be occupying position as a director. DCA has clarified that employee can also be appointed as director of company.

Directors of the company are appointed by Board of Directors and are given various responsibilities thereby bringing them under definition of

ML-591



employee. Further definition of employee under Employee’s Provident Fund Scheme covers whole time director as well.

It is quite clear that director of company is in employment of the company and there exists employer-employee relationship.

Jurisdictional Officer’s contentionsServices provided by the directors to the company is not covered under Schedule lll as the director is not the employee of the company and the consideration paid to the director is in relation to the services provided by the director to the company.

Discussion by and Observations of AARConsideration paid in form of commission and salary to directors is towards services provided by them to the applicant. Applicant is already discharging GST under RCM on commission paid to the director.

Consideration paid to directors for supply of services to company is specifically covered under entry 6 to Notification no. 13/2017 – Central tax (Rate) dated 28.06.2017 which provides that company / body corporate in taxable territory is liable to pay GST under reverse charge on services supplied by director of the company / body corporate.

Consideration paid to directors is against supply of services by directors to company and is not covered under Schedule III as directors are not the employees of the company.

Authority also rejected the relevance of the case laws citied by the applicant as the liability to pay GST under RCM is required to be discussed on the basis of existing provisions of the GST law.

Ruling of AARIn respect of question (1), consideration paid to the directors by the applicant company will attract GST under RCM as it is covered under entry

no.6 of Notification no 13/2017 Central Tax (Rate) dated 28.6.2017.

In respect of question (2), situation will remain same as above and will attract GST under RCM.

6. M/S. RAJEEV BANSAL AND SUDERSHAN MITTAL – UTTARAKHAND AAR (2020-TIOL-61-AAR-GST)

Facts, issue involved and submissions made by ApplicantApplicant, a partnership firm registered with GST, was formed for constructing and selling a residential / commercial building at village - Manoharpur, Jwalapur, Hardwar (‘the project’). The project map was approved by competent authority. Total area of the project was 1.25 lakhs sq. ft. out of which 85 thousand sq. ft. was constructed up to date of transfer.

Applicant entered into an agreement (‘said agreement’) with M/s. Ronav infrastructure (‘Buyer’) for transfer of business as a going concern with main assets consisting of land, incomplete flats constructed thereon and approved map. Pursuant to the said agreement, the project was taken over by buyer for further completion and selling of completed building. Further a separate sale deed was executed for transfer of flats as required under the state laws for ` 21.8 crores on 24.10.2019.

Applicant had sought advance ruling as to whether exemption under Entry No. 2 to Notification No. 12/2017-CT(R) dated 28.06.2017 (‘said notification’) is available with respect to said agreement which covers transfer of under construction project.

Discussions by and observations of AAREntry No.2 of the said notification provides for ‘Nil’ rate of tax for services by way of transfer of a going concern, as a whole or an independent part thereof.

ML-592



The term business as defined u/s 2(17) of CGST Act includes-

“(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business”

Thus, the term business includes acquisition of goods / services for commencement of business.

Term ‘transfer of going concern’ in a simple way can be described as transfer of running business which is capable of being carried on by the purchaser as an independent business.

Internationally accepted guidelines issued by His Majesty’s Revenue and Customs (HRMC) to treat transfer of business as going concern are as under:

• The asset must be sold as a part of ‘business’ as a ‘going concern’

• The purchaser intends to use the assets to carry on the same kind of business as the seller

• Where only part of a business is sold, it must be capable of separate operation

• There must not be a series of immediately consecutive transfers

Applicant had come into existence for construction of residential / commercial complexes and selling thereof. They have sold under construction building as a whole situated at village – Manoharpur, Pargana- Jwalapur, District- Hardwar with its all assets and transfer the rights of the same to the buyer including the approved map. Buyer has purchased the under construction building to carry on same kind of business since they themselves are engaged in construction of residential / commercial premises and selling thereof. Further as on date there is no series of immediate consecutive transfers of the said businesses.

Ruling of AARTransfer of business as a going concern is to be treated as supply of service and shall be exempt vide Entry 2 to Notification No. 12/2017-CT(R) dated 28.06.2017.

7. SRI TAGHAR VASUDEVA AMBRISH – KARNATAKA AAR (2020-TIOL-84-AAR-GST)

Facts, issue involved and query of the applicantApplicant along with four others has collectively let out a Residential complex to M/s D. Twelve Spaces Pvt. Ltd. (herein called as “Company”) which is engaged in the business of providing affordable residential accommodation to students on a long-term basis (starting from 3 months to 11 months).

Along with accommodation, the company also provides other amenities like maintenance, Food, Wi-Fi, security services which is generally called as a Paying Guest Accommodation.

Applicant has sought advance ruling for the following:

1. Whether exemption prescribed under Entry no. 13 of 9/2017-Integrated tax (R)dated 28.06.2017 can be sought and the lessors (here applicant) need not charge GST while issuing invoice for the lease service to M/s D Twelve Spaces Pvt. Ltd.?

2. Whether lease service falls under the exemption and can be described as 'Services by way of renting of residential dwelling for use as residence' as listed in the aforesaid notification?

Applicant’s submissionsSection 7 of the CGST Act defines the scope of supply. The expression “supply” includes all forms of supply such as lease; rental made or agreed to be made for a consideration by a person in the course or furtherance of business.

ML-593



Entry 2(b) of Schedule II provides that any lease or letting out of the building including a commercial, industrial, or residential complex for business or commerce, either wholly or partly, is a supply of service.

Entry 13 to Notification No. 9/2017-Integrated tax (R) dated 28.06.2017 provides that “Services by way of renting of residential dwelling for use as residence” is exempt from GST.

M/s D. Twelve Spaces Pvt. Ltd has entered into sub lease agreement with students for providing them residential accommodation with living amenities, security, entertainment facilities, etc. M/s D. Twelve Spaces Pvt Ltd was of the view that rental accommodation service does not attract GST and hence lessor (applicant) should not charge GST when issuing invoice for lease services.

Discussions by and observations of AARThe copy of lease deed entered between the lessors, of which the applicant is one of them and the Company shows very clearly that lessors have collectively leased out their premises by way of single agreement. This clearly shows that the contract is for the entire property and the lessors have pooled their individual properties into a single one and then leased to the company. Terms and conditions is common for entire property. Consideration for contract is settled at ` xxxx per month. This clearly shows that properties are pooled by the lessors and sharing of the rent is only an apportionment of the common income.

The agreement also proves that the entire property is let out as the lessee (Company) has taken the total property from the lessors and has a right to sub-lease to any third party.

Regarding the nature of the transaction, it is seen from the agreement that lessors are providing the service of leasing/ renting of the immovable property for a consideration for following reasons:

• The lessor is providing the right to use the immovable property without transfer of ownership of the immovable property for a consideration. This is in course or furtherance of business and hence would constitute as a “supply” under Section 7(1) of CGST Act, 2017. Further, this would be a supply of service as per Entry 2(b) of Schedule II.

• Hence the lessor, is providing services of leasing of a building for business or commerce to the company. The applicant is not individually providing the services, but as a group of person they are providing the services.

Since applicant is not providing service to company, but as a part of the group, for the transaction between the group and company, the invoice needs to be raised by the group. The transaction between individuals and group is a different transaction as the individuals are distinct from the group. It is suffice here to rule that question relating to charging or not charging GST for transaction between applicant and company does not arise as applicant himself is not effecting supply directly to the company.

Entry No. 13 of No. 9/2017-Integrated tax (R) dated 28.06.2017 provides that “Services by way of renting of residential dwelling for use as residence” are exempt from GST. The contract of the applicant group with the company indicates that what is given is an immovable property consisting of only 42 rooms with attached toilets as per the layout of the leased premises. It does not fit into the meaning of a dwelling which means a house. They are like hotel rooms and the entire leased premises of 42 rooms cannot be termed as residential dwelling. Even if the same is given on rent for residential purposes, the services provided is not for use as residence by the lessee. Rooms given on rent would not amount to residential dwelling and hence entry

ML-594



is not applicable for the transaction of lessor with the lessee.

Ruling of AARIn respect of question (1), exemption prescribed under Entry no. 13 of 9/2017-Integrated tax (R) dated 28.06.2017 cannot be extended and the lessors (as an entity) have to charge GST while issuing the invoice for the lease services to M/s D Twelve Spaces P Ltd., provided they are registered under GST.

In respect of question (2), lease services do not fall under the exemption “Services by way of renting of residential dwelling for use as residence” as listed in Entry no. 13 of 9/2017-Integrated tax (R) dated 28.06.2017.

8. M/S. FOM ALUMINIUM MACHINES PRIVATE LIMITED - KARNATAKA AAR (2020-TIOL-52-AAR-GST)

Facts, issue involved and query of the applicantApplicant is a subsidiary of M/s FOM Industries s.r.l., Italy, a manufacturer of aluminum working machinery. Applicant is engaged in business of Importing, Trading & Serving of Aluminum & UPVC working Machinery. These machines are used for manufacturing Aluminum doors, Windows & Facades.

Applicant Identifies the potential customers in India, by using their sales representative, personnel and refers the said customers to the parent company in Italy. Applicant stocks & sells the small and medium category of machines that have been imported, to Indian customers. Applicant also books the orders for bigger machines which are directly supplied/ shipped to the identified Indian customers by the parent company in Italy.

Applicant gets sales commission / marketing fee as per clause envisaged in agreement with the parent company for booking direct supply order.

Applicant has sought advance ruling in respect of the following questions:

1. Does export of services attract IGST under RCM?

2. Do the services constitute as Intermediary services?

3. Is IGST paid under RCM eligible to ITC?

4. Provision in GST Returns to show the transactions.

5. IGST is not been collected from Customers and is absorbed as Cost – impact on the transaction value?

Discussion by and Observations of AARApplicant is involved in three business activities:

• Importing, stocking and selling machines in own name;

• Book orders for parent company for sale of machines and earn sales commissions;

• Identify probable customers for M/s. Universal Pack s.r.l., Italy by marketing their products and earn monthly 4000 euros irrespective of result of said marketing.

The Reverse Charge Mechanism is nothing but shifting the tax liability on to the receiver. In the instant case the applicant is undoubtedly, a supplier and hence the question of levy of IGST on export of services, under RCM does not arise.

Applicant, as an agent of their parent company M/s FOM Industries s.r.l. Italy, books the orders form the Indian Customers, which are supplied directly to Customers by the parent company in Italy. Applicant gets sales commission for the direct sales orders booked. It is observed from the agreement that the applicant is the sole agent of their parent company for the SAARC are and gets the commission for sale orders booked. Therefore, the applicant is undoubtedly an agent of the

ML-595



parent company under this type of transaction.

Further, applicant has entered into agency agreement with M/s. Universal Pack s.r.l. Italy to promote and develop the sale of machines produced by suppliers for the markets in SAARC area. Applicant receives quarterly 12,000 euros and gets a commission of 5% on first five machines sold. Applicant is undoubtedly an agent of the supplier under this type of transaction.

As per 2(13) of the IGST Act, “intermediary” means a broker, an agent or any other persons, by whatever name called, who arranges or facilitates the supply of goods or services or both between two or more persons, but does not include a person who supplies such goods or services or both on his own account. Further as per Section 13(8) (b) of the IGST Act 2017, the place of supply of “intermediary services” shall be the location of the supplier of services.

Applicant acts as an agent in the instant case for parent company as well as for M/s. Universal Pack. Therefore, supply of services of the applicant squarely falls under the definition of intermediary services and thereby the supply is in taxable territory. Thus the supply is taxable, under forward charge mechanism.

IGST is levied on import of Goods as part of customs duty and is collected under the Customs Act 1962. The IGST paid on clearance of imported goods by the applicant is available as ITC to the applicant. Further, import of services attract IGST and the concerned importer has to discharge the said liability under RCM and is available as ITC to the importer of services. In instant case applicant is not importing any service and hence payment of IGST under RCM does not arises.

Ruling of AARIn respect of question (1), export of services by the applicant, if any, do not attract IGST under RCM, as the applicant himself is the supplier for the said services.

In respect of question (2), services provided by the applicant is squarely covered under the definition of intermediary service and accordingly is taxable under forward charge mechanism.

In respect of question (3), since applicant is not liable to pay IGST under RCM, question of availing ITC does not arise.

No ruling is given in respect of (4) and (5) question as they are not covered under section 97(2) of the CGST Act 2017 and hence out of the jurisdiction of the authority.

mom

ML-596

Indirect Taxes — Service Tax – Case Law Update


1 Aargus Global Logistics (P) Ltd vs. Union of India

[2020] 116 taxmann.com 381 (Delhi)

Background facts of the caseThe present writ petition was filed to seek directions quashing Rule 5A of the Service Tax Rules, 1994 by declaring that it is in conflict with various provisions of the Finance Act, 1994, and it is beyond the rule- making power of the Government and ultra vires the Finance Act, 1994.

In the alternative, the Petitioner seeks a writ of Certiorari declaring Rule 5A of the Service Tax Rules, 1994 as having lapsed w.e.f. 01.07.2017 i.e. after introduction of the CSGT, 2017, on the premise that there is no saving of the said provision under the CGST Act

Arguments put forthThe Petitioners submitted as under: -

a) The rule making power does not specifically grant the power to the CG to make a rule of the kind framed in Rule 5A.

b) Chapter V of the Finance Act, 1994 - which brought in the service tax regime, stands omitted. Thus, the provisions of Chapter

V of the Finance Act, 1994 do not survive on the enactment of the CGST Act. It was submitted that Clauses (d) and (e) of Sub Section (2) of Section 174 have to be read in conjunction. Therefore, what is not affected by the omission of Chapter V of the Finance Act, 1994, is the "duty, tax, surcharge, fine, penalty, interest" which were due, or may become due even after the enactment of the CGST Act.

c) It was further submitted that such "duty, tax, surcharge, fine, penalty, interest" could be only in respect of, and arising out of proceedings already initiated, and ongoing proceedings on the date of enactment of the CGST Act. In this regard, learned Senior Counsel for the Petitioner has laid special emphasis on the use of the words "in respect of the any such duty, tax, surcharge, penalty, fine, interest, right, privilege, obligation, liability, forfeiture or punishment, as aforesaid" contained in Clause (e), as also the words "and any such investigation, inquiry, verification……" used in the same clause

d) Further, the failure of the Parliament to mention the word "Rules", along with the Finance Act, 1994 in Section 174 (2), according to the Petitioner, means that the Service Tax Rules were not saved even

CA Rajiv Luthia & CA Keval Shah

INDIRECT TAXES

Service Tax – Case Law Update

ML-597



for the purpose of enforcing the saving provisions

The Union of India submitted as under: -

a) The rule making power is already provided u/s 94 of the Finance Act 1994 and the repeal and savings clause as already provided u/s 174 of the CGST, 2017 is with a specific purpose to initiate all investigations, inquiry, audits etc.

Decisiona) Referring to Section 94 of the FA, 1994

it would be seen that the CG has been empowered to make Rules for carrying out the provision of Chapter V of the FA, 1994, which contains the provisions in relation to levy of service tax. Therefore, the CG is empowered to make rules with a view to enforce and recover service tax. Section 94(2) opens with the words "In particular, and without prejudice to the generality of the foregoing power….".

b) The specific aspects in respect of which the Rules may be framed as enumerated in clauses (a) to (m) of Section 94(2) do not take away the general and omnibus power to make Rules conferred by the opening words of Section 94 (2). The Parliament consciously while enumerating the specific matters in respect of which Rules may be framed, preserved the general Rule making power of the CG. The only statutory limitation placed on the said Rule making power is that the Rule(s) should be framed for the purpose of enforcing the service tax regime. Therefore, the power of the CG to frame rules for carrying out the provisions of the service tax regime was exhaustive, and there is absolutely nothing to suggest that the said power did not encompass the power to frame a Rule of the kind as Rule 5A.

c) As far the arguments with respect to repeal and savings clause, it has been observed that Clause (e) expressly empowers the Competent Authorities to initiate and institute even fresh proceedings under the omitted chapter V of the Finance Act, 1994 and the rules framed thereunder, despite the said omission by Section 173 of CGST Act. This is clear from the use of the expression "may be instituted, continued or enforced………" in Clause (e) of Section 174 (2) of the Act. Clause (d) of Section 174 (2) saves "any duty, tax, surcharge …….. as are due or may become due……". There is nothing to suggest that the "duty, tax, surcharge" etc. should relate to proceedings initiated under, inter alia, Chapter V of the Finance Act, 1994 before the coming into force of the CGST Act, and not to proceedings initiated under the enactments after the coming into force of the CGST Act.

Thus, no merits were found in the Petition and the same was dismissed

2 S Gopal Kamath vs. Commissioner of CCE & ST, Cochin

[2019] 102 taxmann.com 147 (Bangalore - CESTAT)

Background facts of the caseThe revenue issued SCN to assessee alleging that it was utilizing the input service for providing output taxable service of clearing and forwarding agent as well for trading and proposed to raise demand upon it.

The Adjudicating Authority dropped the demand proposed in the SCN. It was held that to be an exempted service, it must be a taxable service under the FA, 1994. It was further held that the trading activity was a non-taxable service. Therefore, it could not be an exempted service.

ML-598



The Revisional Authority opined that as per rule 2(e) of the CCR, 2004 'exempted services' means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act. Therefore, service on which no service tax was leviable under section 66 could be termed as 'exempted service'.

Further, during the period April 2004 to December 2005, the assessee availed CENVAT credit on Mobile Phone Bills. The Adjudicating Authority held that out of credit of ` 26,404 taken by the assessee, credit of ` 7,783 was not admissible as the telephone was not installed in the business premises up to 10-9-2004. He further held that the balance of ` 18,621 availed after 10-9-2004 was admissible in view of the decision of the Tribunal in the case of Indian Rayon & Industries Ltd. vs. CCE [Appeal No. E/2280/2006, dated 23-8-2006]. The Revisional Authority upheld the demand on the ground that the aforesaid order of the Tribunal was appealed before the Gujarat HC.

Arguments put forthThe appellant submitted as under: -

a) Rule 2(e) of CCR,2004 defines 'exempted services' means taxable services which are exempt from the whole of the service tax leviable thereon and include services on which no service tax is leviable u/s 66 of the Finance Act

b) Without any statute categorizing the trading as a service, it cannot be held that it is an 'exempted service'

c) The CENVAT Credit eligibility is determined on the basis of use of input service for providing output services and there is no need for installation of such phones in the premises of output service providers.

The revenue submitted as under: -

a) Rule 2(e) of the CCR, 2004 defines 'exempted services' means taxable services which are exempt from the whole of the service tax leviable thereon and includes services on which no service tax is leviable u/s 66 of the Finance Act. Therefore, service on which no service tax was leviable u/s 66 could be termed as 'exempted service’.

Decisiona) To be an exempted service, the activity

should be a service. Without any statute categorizing the trading as a service, it cannot be held that it is an 'exempted service'.

b) Commissioner in the Revision order has upheld this demand only on the ground that the said decision of CESTAT was challenged in Gujrat HC. However, the ld Commissioner has not produced evidence that the cestat order is stayed. Under these circumstances, the contentions in the O-I-A are not valid and upholding of demand is incorrect. Further, as long as the input services are utilized for the purpose of providing the output services, credit is admissible

Accordingly, the appeal filed by Assessee was allowed and the revenue appeal was dismissed.

3 CCE, Rajkot vs. M/s Reliance Industries Ltd.

2019-TIOL-1593-CESTAT Ahmedabad

Background facts of the caseThe respondent company is engaged in the manufacture of both dutiable goods namely, Motor Spirit, High Speed Diesel, Liquefied Petroleum Gas, Petrochemical and exempted

ML-599



goods namely, SKO for PDS and LPG for PDS, etc. They availed Cenvat credit of duty/tax paid on inputs, input services and capital goods used by it in the manufacture of final products & maintain separate accounts in terms of rule 6 of CCR,2004. They do not avail Cenvat credit of duty/tax paid on input and input services exclusively used by it in the manufacture of exempted goods.

They also receive common input services, which are used in the manufacture of both dutiable and exempted goods. They did not maintain separate accounts for apportionment of common credits between manufacture of dutiable goods and exempted goods and therefore, computed the credit to be reversed on common input services in terms of formula prescribed under Rule 6(3A) of the CCR and has filed necessary declaration for this purpose.

They computed the reversal of credit on common input services by apportioning the total Cenvat credit, taken on input services during the financial year between the exempted goods and dutiable goods since, Rule 6(3A)(c)(iii) as existed during the relevant period used the expression 'total Cenvat credit’. However, they contended that what was required to be apportioned, was only the credit common to the manufacture of dutiable and exempted goods and not the "total Cenvat credit". Therefore, on recalculation of reversal of cenvat credit by taking only common input service as total Cenvat credit, they filed refund claim for the excess amount reversed by them.

The Adjudicating authority rejected the refund claim, however, the CCE(Appeals) allowed the appeal and refund. The revenue is therefore with the present appeal before the CESTAT.

Arguments put forthThe revenue submitted as under: -

a) As regards the merits of the case, It was submitted by AR that under Rule 6(3A)

(c)(iii) of CCR,2004, the term 'N’ for the purpose of formula for calculating reversal of Cenvat credit, it is total Cenvat credit of input service to be considered. Therefore, the respondent has rightly reversed the credit hence, there is no question of any refund.

b) He further submits that amendment in Rule 6(3A) brought by Notification No. 13/2016-CE dated 01.03.2016 is prospective and cannot be applied retrospectively.

The respondent submitted as under: -

a) That from the plain and conjoint reading of sub-Rule (1)(2)(3) of Rule 6 of CCR,2004, it becomes clear that said Rule came into play when the manufacturer manufactures but different kind of goods i.e. one being dutiable goods and other being exempted goods. That as per Rule 6(1), credit of only those input/ input service which are used in the manufacture of exempted goods are not allowed. However, the same does not apply to the input/ input service used in the manufacture of dutiable goods. Further as per Rule 6(2), the assessee can avail credit only on such input/ input service which are used in or in relation to manufacture of dutiable final product. As per Rule 6(3), the manufacturer opting not to maintain separate accounts, can opt to pay an amount in terms of the formula prescribed in sub-Rule (3A).

b) That in so far as the common input/input service is concerned, Rule 6 envisages that the same shall be apportioned on the basis of turn-over of dutiable and exempted goods. It is in this context that the expression "total Cenvat credit taken" used in Rule 6(3A)(c)(iii) refers to the total Cenvat credit on common input services alone and not the total Cenvat credit on all input services.

ML-600



c) The CG amended the CCR,2004 and issued a clarification to the effect that reversal was required to be computed only by considering credit on common input services. It is a settled law that laid down by the Constitutional Bench in the case of Vatica Township Pvt. Limited vs. CIT – 2015 (1) SCC 1 that statute that is declaratory (enacted to remove doubts) or curative will operate retrospectively.

d) The Apex Court in the case of Aphali Pharmaceuticals Limited vs. State of Maharashtra – 1989 (44) ELT 613 (SC) that it is unjust to decide or respond to any part of law without examining the whole of law. This principle squarely applies to the facts of the present case inasmuch as if Rule 6 is read and interpreted in its entirety. The expression "total Cenvat credit taken" used in Rule 6(3A)(c)(iii) of CCR, cannot be interpreted other than a reference to total Cenvat credit taken on common input services. Any other interpretation would result in violence to the provisions of the said Rule.

e) That formula prescribed under Rule 6(3A) of CCR,2004, substituted with effect from 01.04.2016 is applicable retrospectively as the same was clarified in the TRU Circular No. 334/8/2016-TRU dated 29.02.2016.

Decision a) From the reading of Rule 6(1), it is clear

that only in respect of input or input service used in exempted goods are not allowed. That means input or input service used in taxable service/dutiable goods, Cenvat credit is allowed.

b) Sub-rule (2) of Rule 6 is only as an option that if any input or input services used in exempted goods, credit should not be allowed and only with this intention some

mechanisms for expunging Cenvat credit attributed only to the exempted goods are provided.

c) Nowhere in Rule 6 it is provided that the input or input service used in dutiable goods shall not be allowed. The Revenue is only interpreting the term "total Cenvat credit" provided under the formula. If the whole Rule 6(1)(2)(3) is read harmoniously and conjointly, it is clear that "Total Cenvat Credit" for the purpose of formula under Rule 6(3A) is only total Cenvat credit of common input service and will not include the Cenvat credit on input/ input service exclusively used for the manufacture of dutiable goods.

d) If the interpretation of the Revenue is accepted, then the Cenvat credit of part of input service even though used in the manufacture of dutiable goods, shall stand disallowed, which is not provided under any of the Rule of CCR, 2004.

e) The Government has substituted the sub-rule (3A), when anomaly was noticed. The legislators very consciously substituted the Rule with intention to give a clarificatory nature to the provision of sub-rule (3A) so as to make it applicable retrospectively. It was all along not the intention of the Government to deny Cenvat credit on the input/ input service even though used in the dutiable goods. Keeping the said view in mind, the substitution in sub Rule (3A) of Rule 6 was made. Therefore, the substituted provision of sub-Rule (3A) shall have retrospective effect being clarificatory.

f) In the case of GOI vs. Indian Tobacco Association, the Hon'ble SC held that "the word "substitute" ordinarily would mean "to put (one) in place of another"; or "to replace". By the reason of the amendment, no substantive right has been taken away

ML-601



nor any penal consequence has been imposed. Only an obvious mistake was sought to be removed thereby." As per this interpretation of the Hon'ble SC, the sub Rule (3A) being substitution shall have a retrospective effect and will be applicable for all time since when the Rule was enacted.

4 M/s MGF Event Management vs. CCE, Delhi

2020-TIOL-345-CESTAT Delhi

Background facts of the caseThe appellant is operating parking areas in five Malls by way of providing parking to the patrons/visitors of shopping malls and collecting parking fees for which they have appointed an outside agency (herein after referred to as the Third Party Agency) for managing the parking area who is collecting "Parking Fees" on behalf of the appellants and remitting the proceeds to them.

The third-party agency raises the invoice for operating cost and its management fee and charges Service tax on these amounts and pays the remainder amount of gross collection on monthly basis after deducting its direct operating cost and management fee. Parking income is recorded as revenue by the appellant in its books of accounts. The income earned from parking fees belongs to them entirely and nothing is remitted to the mall owners from the collections made or otherwise.

An audit of the appellant was conducted by the service tax department and on the basis of the audit, SCN’s were issued for the period October,2005 to March,2012 to the appellants alleging that the activity of the appellant amounted to 'management, maintenance or repairs' which was leviable to service tax as per the provisions of Finance Act, 1994.

Arguments put forthThe appellant submitted as under: -

a) Activity of providing parking facility in the Malls was not taxable as Mall owners did not receive any payment or consideration and were not recording any transaction in their financial records. They are only concerned with the hassle-free parking and are not charging any amount for providing the parking space to appellant. There is, therefore, no provision of services by them to the mall owners and no service provider & recipient relationship existed between them.

b) There has been no arrangement or agreement to provide "Management, Maintenance or Repair Services"; they are working on principal to principal basis; there was no intention for provision of services in the nature of management, maintenance or repair services and the only essence was to provide a hassle free parking; no consideration flows from Mall owners to the appellant.

c) There is no privity of contract between the person who is paying the parking charges and the Mall owners. There should be a direct link between provision of services and consideration received; consideration of Service may be provided by the third party who is interested in the service to be provided to the participant i.e. consideration should either flow from beneficiary or from a third person on behalf of the beneficiary.

d) They were conducting own business as they are operating the parking area by employing own resources and labour and they are bearing all the related expenses on their own account and booking the same as business expenses; they are not managing the parking facilities for the mall

ML-602



owners but rendering parking services to the visitors or customers of the mall.

e) They are also in arrangement with the mall owners for operating, managing and letting out of kiosks, space etc. for the purpose of advertisements in the respective five malls & service tax under taxable category "Sale of Space" and "Renting of immoveable property" which was duly accepted by the department. Similarly, upon the parking charges, no Service Tax is being discharged as no amount is paid to the Mall owners and hence department adopted a biased approach and challenged the same commercial arrangement for creating demand on parking income under "Management, Maintenance or Repair Services". It is further added that dual approach of the department upon same commercial transaction is unjustified.

f) In the present case, the Mall owners also find it more commercially viable to give space to the appellant for managing the parking on its own, account instead of bearing the cost and expenses of the managing the parking space themselves. They claimed that renting of immovable property service more appropriately classifies the transaction but as no consideration is charged under this category, they cannot be made liable for service tax.

The respondent submitted as under: -

a) It was highly improbable that there was no agreement between the appellant and the mall owners as no mall owner would allow unhindered activities at the will of the lessee/occupants of the premises without any preconditions and without any financial consideration.

b) It is admitted that parking space in the malls belong to the mall owners and it cannot be accepted that the applicant has been given permission to use such valuable space without any consideration. It is also an admitted fact that the applicant is incurring huge liabilities in managing and maintaining the parking space including the costs paid to the third-party agency through which the appellant was managing the parking facilities

c) As the third party agency was paying service tax on the invoices issued to the appellant, the appellant in turn was also liable to pay service tax for the same service which it was providing to the mall owners for which the consideration was in terms of receipts of the parking fees collected from the visitors

Decision a) We cannot accept the appellant's plea that

huge parking space area was given to the appellant without any agreement with respect to financial consideration or without an agreement with respect to contingent liabilities with respect to theft, injuries, fire or other liabilities. It is difficult to believe that such an enormous responsibility was given without any agreement.

b) The activity of the appellant is covered within the definition of 'management, maintenance or repairs'. It is not necessary that the service recipient, which are the mall owners in this case should receive any pecuniary consideration from the service. Even a service without any direct pecuniary benefit to the service recipient is also a service. Even if we take that the interest of the mall owners is that the appellant should provide a hassle-free parking, it is a service to the mall owners by the appellant.

ML-603



c) The plea of the appellant that no monetary consideration is being paid by the mall owners is without substance. They have been allowed to use space and collected parking fee. This is a valid consideration in terms of the service tax provisions as it is not necessary that the consideration should always be directly in the form of money. If the consideration is in terms of some benefit to the service provider which can be measured or converted into money it will constitute a valid consideration

d) Section 67(1)(i) clearly stipulates that where the consideration is not wholly or partly consisting of money, it would be such amount in money as, with the addition of service tax charged, is equivalent to the consideration. Thus, there is no doubt that the right to collect parking fees given by the mall owners is nothing but a consideration provided to the appellant by the mall owners and the measure of such consideration is the gross income generated through the parking fees.

e) As far as the business activity is concerned qua the appellant, it is operation of the parking area but when this activity is examined qua the mall owners, they are providing the service of 'management, maintenance or repairs' to the mall owners.

f) We accept the additional plea, the income shown in the balance sheet as parking fees will be considered as cum-tax value for determination of service tax. They will be eligible to avail the Cenvat credit of the service tax paid on input services, which have been provided to the appellant by third party agency or any other service providers in providing the said service of 'management, maintenance and repairs' of the parking area.

g) We remand the case to the Adjudicating Authority to re-determine the taxable demand, interest and penalties in the light of above findings.

mom

ML-604

Corporate Laws – Case Law Update


Company LawMr. Vinod Tarachand Agarwal (Liquidator of M/s J.R. Diamonds Pvt. Ltd. (“Company”)) vs. Registrar of Companies, Gujarat – (National Company Law Tribunal (Ahmedabad Bench)) dated 06.11.2019

Facts of the case• The company was struck off by order of

ROC dated 06.08.2018 due to non-filing of its financial statements and statutory returns.

• The company was under Corporate Interim Resolution Process (CIRP) as the tribunal had admitted the petition under IBC as on 13.02.2018 and thereafter by order dated 01.10.2018 Company gone into liquidation process and therefore liquidator took over the charge of the assets of the company.

• As stated by a liquidator, the status of the company was “Active” at the time of initiation of corporate Interim resolution process (CIRP) and during the liquidation process the status was changed to “struck off.”

• The Company was having assets over ` 81,26,35,384/- as on 31.03.2017

including its investment in preference shares of another firm which was matured and payment recovery is due for which a petition is pending before NCLT, Bengaluru at the time of strike off/deregistration.

Company appeal is filed seeking for the restoration of the name of the company in a statutory register of Companies, Gujarat.

ArgumentsIt was contended that the ROC did not follow the procedure prescribed u/s 248(1) of the Companies Act, 2013 and no statutory notice was received by the liquidator.

ROC opposed the present appeal contending that the company failed in filing its statutory returns for a continuous period of more than 2 years. Further ROC submitted that tribunal may pass appropriate order for restoration of the name subject to fulfilment of certain conditions.

HeldTribunal held that:

• Being a liquidator of the deregistered company, Mr. Vinod (Liquidator of the company) was competent to seek the

Makarand Joshi, Company Secretary

CORPORATE LAWS

Case Law Update

Corporate Laws – Company Law Update


restoration of the name of the company.

• No proceedings against such company could have been legally initiated nor have provisions of Section 248 of Companies Act, 2013 been invoked during such moratorium period as the court had already admitted the IBC petition u/s 9 of IBC and moratorium was declared u/s 14 of IBC. Therefore appeal filed is found to be in order and within time. This contention was supported by the decision1 of Hon’ble Delhi HC and circular no. 16 of 2016 dated 26.12.2016 issued by MCA clarifying that the provision of Section 248 may not be applicable in respect of such companies against which any prosecution for an offence is pending.

• The impugned action cannot be treated as legally valid and just action to strike off the name of the company during CIRP. Further, all such actions were not in confirmation with the provisions of Sec. 14 of IBC.

• In addition to the above, impugned action of struck off was an inoperative and void in law because of the provision of Section 238 of IBC is having an overriding effect on other law.

Hence, on above grounds, the impugned order dated 06.08.2018 to strike off was set aside and held just and equitable2 that the name of the company needs to be restored and name of the company should not be struck off if there is some pending litigation by or against the company.

ROC Gujarat was directed to restore the name of the company in its statutory register subject to compliance of conditions by company stipulated in the order.

SEBI

Ruling of SEBI Whole Time Member – Insider Trading

Type of Proceedings: Adjudicating Order

Name of Case : Rupeshbhai Kantilal Savla in the matter of Deep Industries Ltd.

A. Facts of The case(1) Deep Industries Ltd (“DIL”) had received

three contracts from ONGC during the year 2015-16. Following is the chronology of disclosure of the first contract, second contract and third contract to stock exchanges.

Particulars First Contract

Second contract

Third contract

Declaration of L-1 Bidder/Matching to EDR of L-1 Bidder

17/07/2015 18/08/2015 27/07/2015

Date of receipt of Notification of Awards of Work Contracts

02/09/2015 29/08/2015 13/10/2015

Date of communication by a company to Exchange

03/09/2015 03/09/2015 14/10/2015

ML-606

1. M.A. Panjawani vs. Registrar of Companies & Anr. (2015) 192 Comp. Case 380 Dec.2. Velamati Chandrashekhara Janardan rao vs. M/s Sree Raja Rajeswari Paper Mills Limited & Another (2016) 198

Comp. Cas. 335(AP)



(2) Mr. Rupeshbhai Kantilal Savla (hereinafter referred to as “Rupesh”), who was the Managing Director of DIL since June 01, 2009 and was also a promoter of the Company during the period July 17, 2015 to October, 14, 2015 and as such was an insider in terms of regulation 2(1)(g) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, (hereinafter referred to as “PIT Regulations, 2015”) had bought 1,79,510 shares in DIL during July 17, 2015 to October 14, 2015, the unpublished price sensitive information period (UPSI period).

B. ChargeConsidering the trading pattern of Rupeshbhai Savla and considering that he was insider, it is alleged that he was indulged in the act of insider trading by trading in the scrip of DIL while in possession of UPSI relating to the award of three contracts to the Company from ONGC. It is alleged that he has violated Section 12A(d) and (e) of SEBI Act read with Reg 4(1) of PIT Regulations 2015.

C. Arguments made by Rupesh1) Each of the contracts was received in the

ordinary course of business. None of them was material or price-sensitive.

2) Rupesh argued that fundamental flaw lies in comparing the size of each contract with the annual turnover of just the year in which the contract was signed although no income from the said contract was expected that year.

3) There was no finality as to whether the contract would indeed be awarded to

DIL, while seen from another angle, every other bidder too knew that DIL, a listed company was found L-1.

D. Held by SEBIReply to C1: Value of 1st and 2nd contract constituted 52.47% of the annual turnover of the company for FY 2015-16 and 87.65% of the annual turnover for FY 2014-15 i.e. immediately preceding financial year. Value of 3rd contract constituted 53.40% of the annual turnover of the company for the year FY 2015-16 and 89.21% of annual turnover for the year 2014-15. Considering the magnitude of the value of these three orders, the information relating to the bagging of these orders by DIL constituted price sensitive information and the same was likely to materially affect the share price of the company, once published. Thus, the contention of Rupesh that the value and the nature of these contracts could not have been considered as price sensitive information is dichotomous and stands belied.

Reply to C2: At the time of bagging of contract, it will never be possible to for a company to disclose the likely revenue to be earned, more particularly year-wise impact on the revenue of the company in future years. However, that would in no way undermine the pecuniary importance or the commercial implications of the contract on the future turnover or cash flow of the company. Therefore, a company earning a contract for an amount equivalent to a substantial portion of its turnover for the current year in itself would be a material price sensitive information.

Reply to C3: DIL enjoyed preferred empanelled status in ONGC. This is self- evident from the fact that, in respect of 2nd contract, DIL was asked to match the bid of the lowest bidder. Also where a company emerges L-1 there is hardly any further obstruction, unless a force majeure happens, from getting the contract. In view of the foregoing, SEBI rejected the contention of Rupesh and found that DIL being considered as L-1 bidder, i.e., the lowest bidder for the said three contracts was information material enough to have an impact on the share price of DIL.

ML-607

Corporate Laws – Company Law Update


SEBI did not see the instant matter as a case of non-disclosure rather the allegations pertained to trading by an insider during the period the price sensitive information was not disclosed.

3. IBCExcel Metal Processors Limited - Appellant vs. Benteler Trading International GMBH and Anr Respondent order dated 21 August, 2019 National Company Law Appellate Tribunal, (NCLAT) New Delhi

Facts of the Case • Benteler Trading International GMBH,

a German Company (‘Operational Creditor’) filed an application under Section 9 of the of Insolvency and Bankruptcy Code, 2016 (IBC) against Excel Metal Processors Private Limited (‘Corporate Debtor’) whose registered office is in Mumbai, alleging that the Corporate Debtor committed default in making the payment to an extent of US $1,258,219.42 inclusive of interest @ 15% per annum

• Before the application was filed before the National Company Law Tribunal (NCLT) Mumbai bench, a settlement agreement was entered between the parties wherein it was agreed that any dispute arising out of or in connection with this Agreement shall be finally decided in accordance with the arbitration rules of Federal Republic of Germany

• However, NCLT admitted the application and thereby Corporate Insolvency Resolution Process (CIRP) was initiated.

• An application of appeal was filed at NCLAT challenging the maintainability of the application in India

Question for considerationWhether the NCLT/NCLAT has the Jurisdiction to entertain application wherein the Parties has adopted the Foreign Law in the Agreement?

Arguments by the Appellant• Both the parties have entered into

agreement and submitted that as per the Agreement as the Office of the Respondent – Benteler Trading International GMBH is in Germany, any suit or case is maintainable only in the Court at Germany. No case can be filed in any Court in India

• Demand Notice was not served on them

• Operational creditor failed to produce any documents to prove that the Demand Notice was served. On this count alone the said petition is liable to be dismissed

• The Bank certificate filed by the respondent is issued by “Deutsche Bank AG” does not fall under the purview of Financial Institution or is not in consonance as prescribed under Section 3(14) of the IBC.

Arguments by the Respondent • Demand Notice was duly sent to the

Corporate Debtor

• As per the settlement agreement, the operational creditor has not initiated any proceedings under the Arbitration and has not raised any dispute under the Arbitration clause. Under the said agreement it is also stated that one remedy is available to the Petitioner independently invoke any court of law.

• It was stated that Operational Creditor is Foreign based company and does not have a business in India and not have a Bank account in India as defined under the IBC

ML-608



• As per the section 408 of Companies Act, 2013 the Central Government has notified and vested the power on the NCLT having requisite territorial jurisdiction to deal with the matter where the registered office of the Companies are situated.

• As per section 60 of the IBC, The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located.

• The Parties cannot derive advantage of the terms of the Agreement where Parties agreed that any suit or case being maintainable only in the Court outside India.

• As admittedly, the Registered Office of the ‘Corporate Debtor’ namely – Excel Metal Processors Private Limited is situated in Mumbai, the NCLAT dismissed the appeal and upheld the decision of NCLT.

mom

and it is settled law that the Bank certificate is not mandatory and an application can be filed under the Code by a Foreign Operational Creditor against the Corporate Debtor situated in India

Held• NCLAT stated that as it is now settled

and decided in Binani Industries Limited vs. Bank of Baroda and Anr. – those ‘Corporate Insolvency Resolution Process’/ insolvency proceedings is not a ‘suit’ or a ‘litigation’ or a ‘money claim’ for any litigation; No one is selling or buying the ‘Corporate Debtor’ a ‘Resolution Plan’; It is not an auction; it is not a recovery, which is an individual effort by the creditor to recover the dues through a process that had debtor and creditor on opposite sides; and it is not liquidation. The object is merely to get resolution brought about so that the Company do not default on dues.

ML-609

Other Laws — FEMA – Update and Analysis


CA Mayur Nayak, CA Natwar Thakrar & CA Pankaj Bhuta

OTHER LAWS

FEMA – Update and Analysis

In this article, we have discussed recent amendments made in FEMA through issuance of Notifications, A. P. (DIR Series) Circulars and Press Note issued by DPIIT. In addition to this, we have discussed few recent compounding orders reported by the Reserve Bank of India.

A. Update through A. P. (DIR Series) Circular

1. Investment by Foreign Portfolio Investors (FPI) in Government Securities: Medium Term Framework (MTF)- Revision of Investment Limits for FY 2020-21

In terms of Schedule 1 to the Foreign Exchange Management (Debt Instruments) Regulations, 2019 notified vide Notification No. FEMA. 396/2019-RB dated October 17, 2019, as amended from time to time and the relevant directions issued thereunder, the limits for FPI investments are fixed from time to time. The revised limits (in absolute terms) for the different categories, including the limits for corporate bonds announced vide A.P. (DIR Series) Circular No. 24 dated March 30, 2020, shall be as under:

Table 1: Investment limits for FY 2020-21` Crore

G-Sec - General

G-Sec – Long Term

SDL - General

SDL – Long Term

Corporate Bonds

Total Debt

Current FPI limits

2,46,100 1,15,100 61,200 7,100 3,17,000 7,46,500

Revised limit for the HY Apr -Sept 2020

2,34,531 1,03,531 64,415 7,100 4,29,244 8,38,821

Revised limit for the HY Oct 2020-Mar 2021

2,34,531 1,03,531 67,630 7,100 5,41,488 9,54,280

(Source: A. P. (DIR Series) Circular No. 30 dated 15th April 2020)

ML-610



B. Update through Notifications

1. Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 by Ministry of Finance vide Notification No. 1278(E) dated 22nd April 2020. - FDI Policy changes for acquisition after renunciation of rights, Single Brand Retail Trading Sector, Insurance Sector and FPI Investments.

A. Acquisition after renunciation of rightsIn Principal rule, after Rule 7, following rule 7A is inserted -

“7A. A person resident outside India who has acquired a right from a person resident in India who has renounced it may acquire equity instruments (other than share warrants) against the said rights as per pricing guidelines specified under rule 21 of these rules”.

B. Single Brand Product Retail TradingIn the principal rules, in Schedule 1, in the Table,-

(i) against serial number 15.3.1, in the entries under column (2), under sub-heading “Note”, in serial number (3), after the words “first store”, the words “or start of online retail, whichever is earlier” shall be inserted.

The revised note No. 3 will now read as under-

(3) Sourcing norms shall not be applicable up to three years from commencement of the business i.e. opening of the first store or start of online retail, whichever is earlier for entities undertaking single brand retail trading of products having 'state-of-art' and 'cutting-edge' technology and where local sourcing is not possible. Thereafter, condition mentioned at 15.3.1(e) above shall be applicable. A Committee under the Chairmanship of Secretary, DPIIT, with representatives from NITI Aayog, concerned Administrative

Ministry and independent technical expert(s) on the subject shall examine the claim of applicants on the issue of the products being in the nature of ‘state-of-art’ and ‘cutting-edge’ technology where local sourcing is not possible and give recommendations for such relaxation.

C. FDI in Insurance Sector (Para F.8)The changes in FDI Policy in Insurance Sector have been dealt with in detail in FEMA updates for March 2020.

D. Purchase of equity instruments by FPI of an Indian company through public offer or private placement

In the principal rules, in Schedule II, for the entries in clause (iii) of sub-paragraph (a) of paragraph 1, the following entries shall be substituted, namely:

“The FPIs investing in breach of the prescribed limit shall have the option of divesting their holdings within five trading days from the date of settlement of the trades causing the breach. In case the FPI chooses not to divest, then the entire investment in the company by such FPI and its investor group shall be considered as investment under Foreign Direct Investment (FDI) and the FPI and its investor group shall not make further portfolio investment in the company concerned. The FPI, through its designated custodian, shall bring the same to the notice of the depositories as well as the concerned company for effecting necessary changes in their records within seven trading days from the date of settlement of the trades causing the breach. The divestment of holdings by the FPI and the reclassification of FPI investment as FDI shall be subject to further conditions, if any, specified by Securities and Exchange Board of India and the Reserve Bank in this regard. The breach of the said aggregate or sectoral limit on account of such acquisition for the period between the acquisition and sale or conversion to FDI within the prescribed time, shall not be reckoned as a contravention under these rules.”

ML-611



(Source: Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 by Ministry of Finance vide Notification No. 1374(E) dated 27thApril 2020.)

C. Update through Press NotesThe Government of India has reviewed the extant FDI policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017 to provide that

a non-resident entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.

(Source: Ministry of Industry and Commerce Press Note No. 3 (2020) Series (FDI Section) dated 17th April 2020/ The Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 by Ministry of Finance vide Notification No. 1278(E) dated 22nd April 2020.)

D. Discussion of few recent compounding orders reported by RBI

1) Transfer or Issue of any foreign Security (Outbound Investment) (FEMA 120/2004-RB)

A. Method of funding not as per prescribed Regulations

Applicant Vahdam Teas Pvt. Ltd.

Compounding Application Number

C.A. No. 5056/2019

Compounding Authority Name

Foreign Exchange Department, Mumbai

Amount imposed under Compounding Order

` 1,072/-

Date of order 27th February 2020

Facts of the case The applicant had set-up a wholly owned subsidiary (WOS) viz. Vahdam Teas Global Inc. in USA on 08th January 2018.

The applicant had made investment of USD 100 into the WOS.

The investment was made by a CPA who had incurred the expenses on behalf of the applicant and the WOS issued 1000 shares to the applicant at USD 0.10 per share.

Selected Contravention Funding of overseas investment through a mode other than the permitted modes of funding: As per Regulation 6(3) of Notification No. FEMA 120/2004-RB, an Indian party is permitted to make Overseas Direct Investment in a JV/WOS outside India subject to the condition that investment under this regulation should be funded out of the prescribed sources mentioned in this regulation viz. from an EEFC account or Drawal of Forex from AD in India.

ML-612



Since in the present case the investment was made by the CPA on behalf of the applicant and the same was not a prescribed mode of funding as per Regulation 6(3). Thus, the applicant had contravened the provision of Regulation 6(3) of FEMA 120/2004-RB.

B. Receipt of shares without upfront payment as well as on deferred payment basis

Applicant Windlass Engineers and Services Pvt. Ltd.


C.A. No. 5010/2019




` 4,13,738/-


Facts of the case The applicant had set up an overseas Joint Venture ( JV) viz. Windlass International Limited (WIL) in British Virgin Island in the year 2015.

The overseas JV allotted equity shares to the applicant on 17th February 2016 for a total value of USD 23,76,146.40 against which the applicant made two remittances of USD 15,53,885.37 and USD 2,96,960 on 17th February 2016 and 07th June 2016, respectively.

Selected Contravention Receipt of shares without upfront payment as well as on deferred payment basis: Regulation 5(1) of the Notification No. FEMA 120/2004-RB states that save as otherwise provided in the Act, rules or regulations made or directions issued there under, or with prior approval of the RBI, no PRI shall make any direct investment outside India…

Receiving share certificates without making remittance or on deferred payment basis is not permitted under the Notification No. FEMA 120/2004-RB.

In the present case, the applicant had received share certificate for investment in overseas JV for which the applicant had not made any remittance from India. Also the applicant had received share certificates prior to the date of remittance. Thus, the applicant had contravened the provision of FEMA 120/2004-RB.

Comments FAQ No. 63 on Overseas Direct Investment issued by RBI (updated as on 19th September 2019), do not permit acquisition of foreign shares without upfront payment or on deferred payment basis.

ML-613



C. Making a foreign direct investment (FDI) in India through overseas direct investment (ODI) route

Applicant R Systems International Limited


C.A. No. 5041/2019




` 1,43,500/-

Date of order 03rd February 2020

Facts of the case The applicant had set up an overseas wholly owned subsidiary (WOS) viz. R Systems (Singapore) Pte Ltd in September 2000.

Subsequently, the WOS acquired another entity in Singapore namely IBIZ consultancy Pte Ltd during the year 2015. Later, during the year 2015 itself, IBIZ consultancy Pte Ltd acquired a stake in an Indian company viz. IBIZ consultancy Services Private Limited.

Selected Contravention Making a foreign direct investment (FDI) in India through overseas direct investment (ODI) route: Regulation 5(1) of the Notification No. FEMA 120/2004-RB states that save as otherwise provided in the Act, rules or regulations made or directions issued there under, or with prior approval of the RBI, no PRI shall make any direct investment outside India.

In the present case, acquisition of stake in IBIZ consultancy Services Private Limited by IBIZ consultancy Pte Ltd resulted in creation of an ODI-FDI structure. Thus, the applicant had contravened the provision of FEMA 120/2004-RB. The applicant subsequently acquired the shares of IBIZ Consultancy Services India Pvt. Ltd. thereby ending the ODI-FDI structure.

Comments FAQ No. 64 on Overseas Direct Investment issued by RBI (updated as on 19th September 2019) states as follows: The provisions of Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time, dealing with transfer and issue of any foreign security to Residents do not permit an Indian Party (IP) to set up Indian subsidiary(ies) through its foreign WOS or JV nor do the provisions permit an IP to acquire a WOS or invest in JV that already has direct/indirect investment in India under the automatic route. However, in such cases, IPs can approach the Reserve Bank for prior approval through their Authorised Dealer Banks which will be considered on a case to case basis, depending on the merits of the case.

ML-614



2) Transfer or Issue of Security by a Person Resident Outside India (Inbound Investment) (FEMA 20/2000-RB)

A. Transfer of Shares of an Indian company from NRI to NR without prior RBI approval

Applicant Ajoy Kumar Bose


C.A. No. 5047/2019




` 79,526/-


Facts of the case The applicant a Non-Resident Indian was allotted 4,598 equity shares of an Indian company as part of subscription to the Memorandum. Further, 80 equity shares were allotted on 10th October 2001 as further issue of shares.

However, the applicant transferred 4,598 and 80 equity shares to M/s Atrenta Inc. on 26th May 2011 and 17th October 2001 respectively.

Contravention Transfer of shares of an Indian company from NRI to NR without prior RBI approval: Regulation 9(2)(ii) of Notification No. FEMA 20/2000-RB stated as follows: a non-resident Indian may transfer by way of sale or gift, the shares or convertible debentures or warrants of an Indian company or units of an Investment Vehicle held by him or it to another non-resident Indian only.

Therefore, as per the then applicable FEMA provision, non-resident Indian (NRI) was permitted to sale the shares of an Indian company to another non-resident Indian (NRI) only. In the present case, the applicant being a non-resident Indian (NRI) had transferred the shares of an Indian company to another non-resident (NR) entity. Thus, applicant had contravened the provision of Regulation 9(2)(ii) of Notification No. FEMA 20/2000-RB.

Comments However, at present, as per Rule 13(1) of FEM (Non-Debt Instrument) Rules, 2019, NRI is permitted to transfer the shares of an Indian company by way of sale to any person resident outside India (PROI) subject to certain conditions.

mom

ML-615

Best of The Rest


1. Suit for specific performance - Conduct of Plaintiff – how far relevant – Clever ploys adopted by the Plaintiff.

On 12.10.1994, an agreement was entered into by the Petitioner with the Respondent under which the Respondent agreed to sell to the Petitioner a piece land and factory premises for consideration of ` 4,38,000/ . Earnest money of ` 1,00,000/ was paid by the Petitioner to the Respondent at the time of execution of the agreement. The date for performance of the contract was fixed under the agreement as 07.10.1996.

The Petitioner issued a legal notice dated 12.11.1996 claiming that when the date fixed for specific performance i.e. 07.10.1996 arrived, he approached the Respondent for the completion of the transaction at which time the Respondent disclosed about the pendency of some civil litigation with a third party, as an impediment for the execution of the sale deed. Therefore, the Petitioner claimed in the legal notice that the Respondent should furnish the details of all the litigation pending in respect of the said property and that if no litigation was pending, the Respondent should come forward to execute the sale deed within 15 days. As there was no response to the legal notice, the Petitioner filed a Civil Suit praying for a mandatory injunction to direct the Respondent to execute all documents of transfer of the property in question after receiving

the balance sale consideration. Since the suit was filed only for the relief of mandatory injunction, the Petitioner valued the suit only at ` 250 and paid a fixed court fee of ` 25.

The Respondent also took out an application for the dismissal of the suit on the ground that a suit for mandatory injunction was not maintainable for enforcing specific performance of an agreement of sale. The Trial Court held that the suit was one for specific performance of the agreement of sale and that the technical objection regarding the maintainability could be overcome by directing the Petitioner to pay the requisite court fee. The Petitioner prayed the requisite court fee and the Trial Court treated the suit as a suit for specific performance and decreed the suit. In first appeal filed by the Respondent, the decree was set aside and the same was confirmed by the High Court. The High Court held the suit as time barred.

On SLP filed by the Petitioner (original Plaintiff) before the Supreme Court, it was argued by the Petitioner that the Trial Court had treated the suit for mandatory injunction as one for specific performance and directed the Petitioner to pay the deficit court fee which was complied with by the Petitioner. Therefore, by virtue of Section 149 of the Code of Civil Procedure (“CPC”), such payment would have the same effect as if such fee had been paid in the first instance itself.

Rahul Sarda, Advocate

BEST OF THE REST

ML-616

Best of The Rest


The Supreme Court held that while it was true that Section 149 of CPC conferred a discretion upon the Court to allow a person to pay the whole or part of the court fee at any stage and once such discretion is exercised and payment of court fee is accordingly made, the document/ Plaint shall have the same force and effect as if such fee had been paid in the first instance, but the question was not of limitation alone.

The Supreme Court observed that though the legal notice was issued by the Petitioner on 12.11.1996, the plaint was presented only on 13.10.1999, (i.e. beyond three years of the date 7.10.1996 i.e. the date fixed under the agreement of sale for the performance of the contract) without giving any explanation for such delay. The relief sought in the plaint as it was originally presented, was for a mandatory injunction to direct the Respondent to receive the balance sale consideration and to get a document of transfer effected in favour of the Petitioner. Considering the manner in which reliefs were claimed, the Supreme Court held that the Petitioner was conscious of the nature of reliefs and accordingly paid the court fee. The Supreme Court observed that instead of addressing the issue as to whether the Petitioner could indirectly seek specific performance of an agreement of sale, by couching the relief as one for mandatory injunction and instead paying a fixed court fee as payable in a suit for mandatory injunction, the Trial Court treated the suit as one for specific performance and permitted the petitioner to pay deficit court fee by a convoluted logic. If the suit was actually one for specific performance, the Petitioner ought to have at least valued the suit on the basis of the sale consideration mentioned in the agreement. Such a dubious approach should not be allowed especially in a suit for specific performance, as the relief of specific performance is discretionary under Section 20 of the Specific Relief Act, 1963 and the Petitioner ought not to be allowed to take shelter under Section 149 CPC, especially when he filed the suit (after more than three years of the

date fixed under the agreement of sale) only as one for mandatory injunction, valued the same as such and paid court fee accordingly, but chose to pay proper court fee after being confronted with an application for the dismissal of the suit.

The Supreme Court observed that clever ploys could not always pay dividends and held that the conduct of a plaintiff was very crucial in a suit for specific performance. It was further held that a person who issued a legal notice on 12.11.1996 claiming readiness and willingness, but who instituted the suit only on 13.10.1999 and that too only with a prayer for a mandatory injunction carrying a fixed court fee relatable only to the said relief, will not be entitled to the discretionary relief of specific performance. Hence, the appeal Courts rightly set aside the decree of the Trial Court.

Atma Ram vs. Charanjit Singh – SLP (Civil) No. 27598 of 2016, dated 10.02.2020 – Supreme Court.

2. Insolvency and Bankruptcy Code – Demands raised by GST department for period prior to insolvency resolution – resolution plan providing reduced payment to GST department binding on all concerned – tax demand cannot be raised contrary to resolution plan.

A company named M/s Binani Cements Limited (“Binani”) suffered huge losses and was unable to pay the debts to Bank of Baroda, which preferred an insolvency application under section 7 of the Insolvency and Bankruptcy Code, 2016 (the “Code”) before the National Company Law Tribunal (the “NCLT”). The said application was admitted and bids were invited in respect of Binani by its Resolution Professional appointed by the NCLT. Claims were invited by the Resolution Professional from all creditors including from the GST department. The claim of GST department of ` 72.85 crores towards excise duty and service tax payable by Binani were admitted

ML-617

Best of The Rest


by the Resolution Professional. The resolution plan submitted by Ultra Tech was approved unanimously by the Committee of Creditors and the NCLT and upheld in further challenges. After taking over of Binani by Ultra Tech, Binani’s name was changed to M/s Ultra Tech Nathdwara Cement Ltd.

Despite the resolution plan having attained finality and having been executed, the GST department raised numerous demands on the Petitioner for the period prior to Ultra Tech taking over Binani. The Petitioner (M/s Ultra Tech Nathdwara Cement Ltd.) filed the Writ Petition challenging the demand notices issued by the Central Goods and Service Tax Department calling upon the Petitioner to pay GST for such period before it took over Binani under the provisions of the Code.

On behalf of the GST department, it was argued that it was not given an opportunity of being heard before the CoC at the time of finalising the resolution plan and hence the GST department is not bound by the same.

The Court held that it was the financial creditors who were given right to vote in the CoC whereas, the operational creditors such as the GST department did not have a right of audience. The purpose of the Code was to ensure that an industry under distress does not fade into oblivion and could be revived by virtue of the resolution plan. As per the amended provisions of Section 31 of the Code, an approved resolution plan has been made binding on the corporate debtor, its employees, members and all creditors including the Central Govt., any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force is owed. Thus, the Writ Petition was allowed.

Ultra Tech Nathdwara Cement Ltd. vs. UoI & Ors. – Civil Writ Petition No. 9480/ 2019, dated 07.04.2020 – Rajasthan High Court.

3. Reduced payment to a bank under a Resolution Plan – Is surety/ guarantor discharged for the balance amount? – Insolvency and Bankruptcy Code, 2016 and Indian Contract Act, 1872.

The Petitioner was a guarantor of credit facilities enjoyed by a company M/s Divya Jyoti Sponge Iron Private Limited (the “Company”) of which he was a director, from Punjab National Bank (the “Bank”). The company proceedings before the NCLT under the Code. By an order dated 13th March 2018, the NCLT approved a Resolution Plan in respect of the Company in such proceedings. Under such Resolution Plan, the liabilities of the Company as against the creditors of the companies were dealt with.

The Bank issued a notice dated 26th March 2019 to the Petitioner on the basis of the guarantee given by him, under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 on the basis of the guarantee and reported a default having been committed by the Petitioner to CIBIL for an alleged default of ` 12,62,11,278/- towards the Bank. Against this action of the Bank, the Writ Petition was filed.

The case of the Petitioner was that the Bank initiated proceedings against the Company before the NCLT for corporate insolvency resolution. The liability of the Company to the Bank being extinguished by virtue of the Resolution Plan sanctioned by the NCLT, and payment having been made to the Bank in terms of the Resolution Plan, the guarantee of the Petitioner to the Bank stood extinguished. The liability of the guarantor was co-extensive with that of the principal debtor and the principal debtor not having any liability to the Bank subsequent to the payment in terms of the Resolution Plan, it cannot be said that, the Petitioner-guarantor had any liability towards the Bank.

The Bank, on the other hand, argued that sanction of a Resolution Plan by the NCLT does

ML-618

Best of The Rest


not wipe away the liability of a guarantor or discharge the contract of guarantee.

The Court was concerned with the question as to whether the liability of the guarantor of the credit facilities enjoyed by a corporate debtor stand reduced/ extinguished on the secured financial creditor receiving the payments in terms of a Resolution Plan in respect of a company undergoing a process of Corporate Insolvency Resolution under the provisions of the Code. The Court observed that the Resolution Plan of the Company as approved by the NCLT did not deal with the personal guarantee that the Petitioner gave to the Bank. The Bank, as the secured financial creditor, received a haircut in respect of its claim as against the Company which was binding on it as full and final payment towards its claim against the Company.

The Court observed that a contract of guarantee, being a contract, is susceptible to discharge. A contract of guarantee would be discharged in any manner in which, a regular contract would stand discharged. Right to apply for insolvency does not arise out of a contract between the parties but was a statutory right. The financial creditor applying for initiation of the Corporate Insolvency Resolution Process may receive a portion of the claim as full and final settlement as against the corporate debtor, in accordance with the approved Resolution Plan. But, it cannot be said that, the financial creditor entered into a voluntary compromise with the corporate debtor with regard to the quantum of the claim. An approval of the resolution plan would not mean that the financial creditor entered into a composition with the corporate debtor, thereby impairing the right of the financial creditor to recover the balance amount from the guarantor of the corporate debtor.

The Court further held that in an insolvency proceedings initiated by a financial creditor under the Code, the financial creditor, while applying under Section 7, is not granting any release to the debtor and hence the question of discharge to the surety on that account did not arise under the provisions of the Indian Contract Act, 1872. The Corporate Debtor, in this case the Company, in a proceeding under Section 7 of the Code may stand discharged of its liability to its creditors but such a discharge being had in a proceeding for bankruptcy and insolvency, the same does not absolve the surety of the liability. The implied promise recognised under section 145 of the Indian Contract Act, 1872 is not impaired by any order that may be passed under the Code. Section 14 of the Code (Moratorium against proceedings) does not apply to a personal guarantor and the Code does not allow personal guarantors to escape their liability. An application under Section 7 of the Code, after the admission, does not result in any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the creditor to constitute a discharge of a surety under Section 133 of the Indian Contract Act, 1872. Hence, it was held that the liability of the guarantor of the credit facilities enjoyed by a corporate debtor would not stand reduced/ extinguished on the secured financial creditor receiving the payments in terms of a Resolution Plan. Hence, the Writ Petition was dismissed.

Gouri Shankar Jain vs. Punjab National Bank & Anr, dated 13th November, 2019 – Calcutta High Court.

mom

ML-619

The Chamber News


Though the Country is facing a lockdown due to Covid-19 pandemic, the Chamber has continued the journey of education through online webinars in this tough time. Important events and happenings that took place online between 1st April, 2020 to 30th April, 2020 are being reported as under :

I. PAST PROGRAMMES

Sr. No.

Date Speaker Topic

Commercial & Allied Laws Committee

1 07.04.2020 Mr. Ashwani Taneja New Benami Law

2 09.04.2020 Mr. Ashwani Taneja Complex and Practical issues arising under New Benami Law

3 10.04.2020 CA Bhavesh Vora NBFC - Understanding, Assessing & Implementing RBI Covid-19 Measures

4 14.04.2020 Dr. Rajendra Ganatra Impact of recent legal / regulatory changes in IBBI & RBI on CIRP - Way forward for corporates

5 17.04.2020 Dr. Chinmay Bhosale, Advocate WhatsApp usage amidst corona pandemic : Criminal consequences and precaution

6 18.04.2020 CA Ashwin Shah Changed Scenario Under RERA & Important Judicial precedents

CA Ketan L. Vajani & CA Haresh P. Kenia, Hon. Jt. Secretaries

THE CHAMBER NEWS

ML-620

The Chamber News


Sr. No.

Date Speaker Topic

7 22.04.2020 1) Workforce and Wage issues - Do's and Dont's- Mr. Anshul Prakash, Advocate. 2) Impact on commercial contracts, government tenders etc - Mr. Kingshuk Banerjee, Advocate. 3) Impact on lease transactions - Mr. Harsh Parikh, Advocate. Session Moderator- CA Paras Savla

Impact of Lockdown due to Covid-19 pandemic on employment contracts, commercial contracts and lease agreements including Force Majeure Aspect

Direct Taxes Committee

8 24.04.2020 Mr. Devendra Jain, Advocate Recent Important Decisions under Direct Tax

9 29.04.2020 CA Avinash Rawani Procedure and Issues in Online Submission of Form 13 u/s 197 of Income Tax Act, 1961

Indirect Taxes

10 13.04.2020 CA Yash Dhadda Important issues in relation to GST Annual Return & Audit for FY 2018-19

11 30.04.2020 CA Vinod Avtani & Gajendra Jain. Adv

Issues in Export of Goods & Refunds

International Taxation Committee

12 04.04.2020 CA Naresh Ajwani Discussion on Master Direction on Acquisition and Transfer of Immovable property, with practical case studies

13 06.04.2020 CA Sunil Maloo Finance Bill 2020 vs Finance Act 2020 - International Taxation Perspective

14 11.04.2020 CA Vishal Gada MLI in respect to India's DTAA

15 24.04.2020 CA Paresh Shah Cross Border ESOP - FEMA & Taxation issues

16 25.04.2020 Mr. Pramod Kumar, Vice President, ITAT, Mumbai

Contemporary Issues in International Taxation - Beneficial Ownership, Business Connection, Dividend Taxability, etc

ML-621

The Chamber News


Sr. No.

Date Speaker Topic

IT Connect Committee

17 07.04.2020 CA Dinesh Tejwani How to identify fake messages

18 08.04.2020 CA Sanjib Sanghi Major #WFH Issues and How to Mitigate it

19 13.04.2020 CA Anand Purana Work from Home - Tally

Membership & Public Relations Committee

20 10.04.2020 CA Jayant Gokhale and CA Sunil Kothare

COVID-19 Effects on Profession ( Jointly with Riverus)

21 16.04.2020 CA Rutvik Sanghvi NRI Taxation - FEMA and Investment

22 20.04.2020 Swami Amrutvadandas Whats most needed in Covid 19

23 23.04.2020 CA Naresh Sheth Important relevant amendments and priority compliances in GST on opening of lock out

24 27.04.2020 CA Rutvik Sanghvi NRI Taxation - FEMA and Investment - Part 2

25 29.04.2020 CA Dinesh Kanabar Future of Profession Post Covid ( Jointly with BCAS)

26 30.04.2020 CA Kaushal Parekh Tax & Restructing Aspects of Financial stress in corporates

Residential Refresher Course Committee

27 21.04.2020 Mr. S. P. Tulsian Equity Investment vis-a-vis Covid-19 Pandemic

Study Circle & Study Group Committee

28 08.04.2020 CA Ravikant Kamath Amendments at Enactment stage of Finance Bill 2020, Equalisation Levy and Covid 19 Tax Compliance Reliefs.

29 14.04.2020 Mr. K. Chytanya KK Analysis of Reasoned and Important INCOME TAX judgements of the Supreme Court

ML-622

The Chamber News


Sr. No.

Date Speaker Topic

30 20.04.2020 Mr. K. Chytanya KK Analysis of Reasoned and Important INCOME TAX judgements of the Supreme Court - Part 2

Student Committee

31 02.04.2020 CA Kalpesh Katira Income Tax Return Filing

32 03.04.2020 CA Mehul Shah Introduction to Audit

33 04.04.2020 CA Raj Khona GST Annual return & Audit

34 21.04.2020 Mr. Jatin Lodaya Soft Skills

mom

ML-623

| 178 | The Chamber's Journal | May 2020 136

may 2020 - the chamber of tax consultants · advertisement rates per insertion fourth cover page...

Documents