CAA journal july 2019

Ahmedabad Chartered Accountants Journal

E-mail : [email protected] Website : www.caa-ahm.org - caaahmedabad
Volume : 43 Part : 4 July, 2019
C O N T E N T S


To Begin with
- Keys for Joy.......................................................................Dr. Nilesh V. Suchak................... 187
Editorial ............................................................................................CA. Nirav R. Choksi......................188
From the President............................................................................CA. Anand S. Sharma...................189
Articles

Decoding of Presmuptive Taxation u/s. 44AD.....................................CA. Jignesh Parikh........................190

Blockchain and its use cases...............................................................CA. Abhishek Jain.........................199
Fund Raising Strategies for Companies..............................................CA. Karan Vora..........................203
Direct Taxes

From the Courts..................................................................................CA. C.R. Sharedalal &
CA. Jayesh C. Sharedalal...........207
Tribunal News.....................................................................................CA. Yogesh G. Shah &
CA. Aparna M. Parelkar............. 210
Unreported Judgements......................................................................CA. Sanjay R. Shah....................216

Controversies.......................................................................................CA. Kaushik D. Shah....................220
Judicial Analysis...................................................................................Adv. Tushar Hemani....................224

FEMA & International Taxation
India-China DTAA amended to incorporate BEPS related provisions...CA. Dhinal A. Shah &
CA. Sagar V. Shah.........................232
FEMA Updates................................................................................... CA. Savan R. Godiawala..............234

Indirect Taxes
GST & VAT Judgments and Updates................................................... CA. Bihari B. Shah &
CA. Vishrut R. Shah.......................236

Corporate Law & Others
Corporate Law Update.......................................................................CA. Naveen R. Mandovara............239
Allied Laws Corner..............................................................................Adv. Ankit M. Talsania...................242

From Published Accounts .................................................................CA. Pamil H. Shah..................... 248
From the Government ......................................................................CA. Ashwin H. Shah &
CA. Kunal A. Shah........................250
New Delhi Times................................................................................CA. Aniket S. Talati.................... 252
Association News.............................................................................. CA. Shivang R. Chokshi &
CA. Ketan G. Mistry....................254


Ahmedabad Chartered Accountants Journal July, 2019 185

Journal Committee
CA. Nirav R. Choksi CA. Sarju Mehta
Chairman Convenor
Members
CA. Ashok K. Kataria CA. Atul R. Shah
CA. Darshan A. Shah CA. Jayesh Sharedalal
CA. Nitesh J. Jain CA. Rajni M. Shah
CA. Ronak M. Khandwala CA. Shailesh C Shah
Ex-officio
CA. Anand S. Sharma CA. Shivang R. Chokshi CA. Ketan G. Mistry
Attention
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Professional Awards
The best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law and Auditing' and 'Allied
Laws and Others' will be awarded the Trophies/ Certificates of Appreciation after being vetted by experts in the
profession. Articles and reading literatures are invited from members as well as from other professional colleagues.
Published By
CA. Nirav Choksi, on behalf of Chartered Accountants Association, Ahmedabad, 1st Floor, C. U. Shah Chambers,
Near Gujarat Vidhyapith, Ashram Road, Ahmedabad - 380 014. Phone : 91 79 27544232
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186 Ahmedabad Chartered Accountants Journal July, 2019

Keys for Joy


Dr. Nilesh V. Suchak
[email protected]
Joy or bliss cannot be purchased from shop. There are no medicines in the world that can be purchased
from chemist to get joy or bliss. There is no hospital anywhere that can operate upon us and give true
joy or bliss.
Things or objects or persons cannot ever give perennial joy. They can give us transient feeling of
happiness but it is a myth. The true joy or bliss is within all of us and unfortunately, we have been
searching for it outside in things or objects or persons or situations.
Keys are small but can open much bigger locks. Similarly, the keys to joy can solve many problems that
we face in life. The following keys for joy or bliss are time tested and are suggested by all those who
have practiced them.
1. Accept the circumstances without any reaction.
2. Have vision for looking at good qualities of others
3. Avoid criticism of others
4. Avoid arrogance of action (Akartrutvabhav)
Many of us feel disturbed or perturbed or unhappy because we do not accept the situations or
circumstances or event as they occur. Even though we know that many situations are beyond our control,
some of us grieve over them. We should remember that we are the instruments in the hands of God and
things may not ever happen according to our wishes. If we learn the art of accepting the situations as
they are without grieving over them and without any adverse reactions, we shall realize that the fountain
of joy is within all of us and not outside.
A habit of looking at good qualities of others and absorbing them by practice in our life will give
abundant joy. This habit of looking at goodness around us will make us feel that world is full of good
persons and their good deeds. If we learn this art of searching virtues of people, we shall sow virtues in
our mind and the mind will feel good, will think good, and will guide us in right direction for living
joyful life. We uplift ourselves with every positive thought that we dwell upon. Serenity of mind,
gentleness, silence, self-control and good feelings for others will lead to charming personality.
Criticism of others takes away lot of our quality time. It is like filling the mind with dirt of others. If we
sow dirt in our mind, there will never be fragrance of joy in our mind. Back biting or criticism of others
robes us of invaluable time and takes away our joy. Every person has some virtues. God has not made
any person without a single virtue. However, if we look at vices of others, we sow grudge, vices and ill
will in our mind. We know the rule that “As we sow, so shall we reap”. Hence, if we sow vices in our
mind, we shall reap a crop full of vices in our life. Resentful, hateful, blaming, unforgiving, critical, and
condemning thoughts in mind will have a devastating effect on our personality.Constant practice of
avoiding criticism by speech, action and thought will lead us to a state of constant joy and will also save
us from so many problems.
We should be good to others without an arrogance of action. We should think that we are fortunate that
God has chosen our hands for being good. This key of Akartrutvabhav will save us from greed, arrogance,
and ego and lead to bliss.
We should carefully observe and understand the effect of positive and negative thoughts in our mind to
realize that purity of mind brings joy and negativity brings grief.
I have learnt about these keys from my Guru respected Shri Bharatbhai J. Shah of Aadarsh Amdavad
who continues to experience and share joy even at the age of 73.


Ahmedabad Chartered Accountants Journal July, 2019 187

Editorial [email protected]



One more month of compliances has gone by. One more month of late night work pressures is awaited.
This has now become a regular feature in a practicing Chartered Accountants professional life. But at the
same time we must be at peace because we have work. In this scenario of global and national downturn
in businesses, we are still in business albeit in a different manner. It is our supreme responsibility to stand
shoulder to shoulder with our clients. This time shall pass soon. Our great nation is equipped to face any
challenge and overcome triumphantly at the end.

In the ever evolving scenario of technology, the ICAI has introduced one more technology based
compliance which shall become a very important tool in identifying fake / fraudulent certificates or
attestations. With the advent and more appropriate use of UDIN, the menace of frauds in our profession
will be addressed. Let us all make effective use of this facility. It will surely have some teething troubles,
but it has long term advantages which are for betterment of the profession.

Another dimension of the practice which shall change forever is the faceless scrutiny assessment. This
new initiative of the Income tax department is in alignment with the zero corruption policy of this
government. Though the focus of the government is on ease of doing business, probably faceless scrutiny
assessments may lead to complex issues. Though the intention of the government is praiseworthy, only
the actual implementation of the process shall tell us about it effectiveness. No side wants unnecessary
litigations to pile up. Our courts are as such having a huge backlog. This should not add to the cases
already pending. The phase I shall cover few cities and in later phases the entire country will be covered
under these new rules. The potential issues which are being envisioned are galore but the positive effects
of the same have far reaching impact on the psyche of the taxpayer and a professional. All involved in the
process of return filing and advisory shall have to keep this aspect in mind that they have absolutely no
direct influence on the assessing officer. The client will also become more careful and will try and avoid
on any kind of tax evasion.

Another virtue of the online GST and Income tax e-assessment is that it has opened up lots of opportunity
for young professionals. Now they need not fear direct interaction with the assessing officers and can put
forth their case in the language and in the manner they want to. All will be judged on the basis of merits
only. This new era will ultimately culminate with grass root level changes in the Income tax which is
being worked upon by a team of experts at the Centre. So with the two most important taxes, Direct &
Indirect, getting a total overhaul, the scenario for professionals will ultimately change drastically. It would
be taxing times for all of us, but our profession and professionals are capable enough to weather all
storms. We have endured and managed to crack the most difficult educational course of the commerce
faculty and therefore such changes will also not hamper us in any manner.
As a Journal Committee Chairman I request that the members keep on sharing their knowledge among
other members of the association. A special request to the senior members of the profession to kindly
encourage and guide the younger members to contribute articles related to our profession.
Feel free to write back to us on the official email ID of the association. Your feedbacks are very important
for us and we always look forward to qualitative and meaningful suggestions given to us.
On Behalf of Editorial Board

Regards
CA. Nirav R. Choksi


188 Ahmedabad Chartered Accountants Journal July, 2019

From the


President

CA. Anand S. Sharma
[email protected]
Dear Members, 900 members registered for the Seminar and as
always interpretation expertise which speaker
We all witnessed the first ever full time women possess benefited members to understand the
Finance Minister NirmalaSitharamansince
independence presentingtheunion budget for intricacies involved through lucid interpretation of
Financial Year 2019-20 from the House of clauses by the eminent speaker.
Parliament. Tax Gurus found the budget to be It’s my pleasure to announce that sub group
mediocre and very little as expected was fulfilled committee for RERA was formed under Profession
by Modi 2.0 Government. None the less the budget Development Committee to ensure that Association
did foresee some major changes giving impact to help the members and non-members who are
long term economic strategy by announcing involved in practice pertaining to RERA
Rs.70,000crores support for recapitalization to compliances and advisory. The committee
Public Sector Bank, sectorial increase in FDI limits successfully launched the program on RERA which
including focus was seen on controlling inflation was attended by members.
and Fiscal deficit.Undoubtedly the Government is We were honored to have RERA Authorities, CCM
all committed by its moves to make India’s economy CA AniketTalati& CA HaritDhariwal as penal
robust and their willingness to see the New India speakers to discuss various issues that members are
are seen in their efforts and moves. facing in compliances of the Act. All penal speakers
lucidly explained and there was over whelming
We Chartered Accountants, as fraternity have
always remained part of Nation Building Activities response from members as their grievances and
issues were addressed by the Authority from the dais.
and we all are committed towards better and New
India. Interim Budged was announced on 7 July I would like to take and opportunity that with efforts
th
and as committed to precedence followed by of Membership Development Committee we are
Associationthroughoutthe years to deliver the best able to add 63 new members to the association at
Union Budget Booklet within 3 days of the budget the month end.Also, on behalf of the Membership
was also successful this year. With the untiring Development Committee, I would like to request
efforts of Publication Committee and contributors you that kindly spread the message of online
to the Union Budget Booklet of the Chartered enrolment and payment to the non-members. By
Accountants Association, the booklet was made digitalizing the process on enrollment, we have
available to members within 3 days of presentation ensured that it becomes easy for anyone willing to
of the Union Budget. I specially acknowledge join the association, at any time he wants to. I am
Chairman of Publication Committee CA Shailesh hopeful with the help of members of CA
C Shah and team for being dedicated to ensure Association we will be able to increase the strength
quality and timeliness of releasing the booklet. of CA Association by enrolling new members, and
There was unprecedented response to buy the more and more people will be able to take the
booklet and I am feeling proud to state that we could benefits of the same.I take privilege on behalf of
sell more than 11,500 copies within 3 days. Office Bearers that we are imbibed and have a single
intentionto work towards betterment for Members.
We professional have to be equipped with all the Ending with Acharya Chanakya’s quote “We should
resources to tackle the new changes and
compliances that are increasing day by day. not fret for what is past, nor should we be anxious
Association have always been keen to ensure that about the future; men of discernment deal only with
the present moment.”
members get adequate knowledge by way of study
circle, group discussion and Brain Trust. Association Jai Hind !!!
organized Post Budget Session which was delivered
CA. Anand Sharma,
by Senior Advocate Shri SaurabhSoparkar. Nearly
President

Ahmedabad Chartered Accountants Journal July, 2019 189

Decoding of Presmuptive

Taxation u/s. 44AD
CA. Jignesh Parikh
[email protected]
Preamble to be income of the assessee under the Hear “Profits
and gains of business or profession.” Moroever this
Sections 44AD and 44AE were inserted by the
section has overriding effect over sections
Finance Act, 1994 with effect from April 1, 1994.
28 to 43C,
The object for introducing this scheme had been
explained by the Central Board of Direct Taxes Before Proceeding further, following terms are
(CBDT) in its Circular No. 684 dated June 10,1994. important to understand.
Wherein, it is stated that the Estimated Income
Eligible Assessee
Method of assessment for certain categories of
business is prevalent in several countries. The Tax The Presumptive Taxation Scheme of Section
Reforms Committee has also recommended gradual 44AD can be adopted by following persons.;
introduction of the Estimated Income Method in a. Resident Individual
certain areas to facilitate better tax compliance. b. Resident Hindu Undivided Family
Accordingly, sections 44AD and 44AE had been c. Resident Partnership Firm (Not being Limited
inserted in the Income- tax Act with a view to Liability Partnership)
providing for a method of estimating income from Further the advantage of this section can be
the business of civil construction or supply of labour obtained if the assessee as referred above should
for civil construction work having a turnover or gross not have claimed deduction under any of
receipts not more than Rs. 40 Lakh and from the the sections 10A, 10AA, 10B, 10BA or deduction
business of plying, hiring or leasing trucks owned under any provisions of section 80 HH to 80
by a tax payer owning not more than 10 trucks. RRB in the relevant assessment year.

Thereafter, the Section 44AD was amended by the Eligible Business
Finance (No. 2) Act, 2009 w.e.f. April 1, 2011,
The Scheme of Section 44AD is designed to give
which provided applicability of this section to
advantage to the ‘Eligible Assessees” engaged in
“eligible assessee” and for “eligible business”.
any business except the following business :
Major amendments to the said section are further
i. the business of plying, hiring or leasing goods
carried out by the Finance Act 2016 that would
carriages referred to in section 44AE; and
revamp the entire scheme of presumptive taxation
ii. whose total turnover or gross receipts in the
effective from the Assessment Year 2017-18
previous year does not exceed an amount
Section 44AD of two crore rupees.
Under section 44AD in the case of an eligible Further as per sub section 6 the provisions of this
assessee engaged in an eligible business, 8 % / section (which has overriding effect over subsection
6% of the total turnover or gross receipts of the 1 to 5 of Section 44AD) Section 44AD of the
assessee in the previous year on account of such Income Tax Act, 1961 will not be applicable to
business or, as the case may be, a sum higher following;
than the aforesaid sum claimed to have been
i. a person carrying on profession as referred to
earned by the eligible assessee, shall be presumed
in sub-section (1) of section 44AA;
190 Ahmedabad Chartered Accountants Journal July, 2019

Decoding of Presmuptive Taxation u/s. 44AD
ii. a person earning income in the nature of audited if his total sales, turnover or gross receipts
commission or brokerage; or exceed one crore rupees. However, if an eligible
person opts for presumptive taxation scheme as per
iii. a person carrying on any agency business.
section 44AD(1) of the Act, he shall not be required
Following professions are treated as specified to get his accounts audited if the total turnover or
profession for the purpose of section 44AA and gross receipts of the relevant previous year does
they need to maintain their books of accounts and not exceed two crore rupees. The higher threshold
other documents as specified; for non-audit of accounts has been given only to
· Legal assessees opting for presumptive taxation scheme
· Medical under section 44AD.’
· Engineering To give effect to the above clarification of the
· Architectural CBDT, Finance Act, 2017 has inserted new proviso
· Accountancy to section 44AB to provide that the eligible assessee
· Technical Consultancy under section 44AD need not get his books of
· Interior Decoration account audited under this section:
· Authorised Representative
a. if he declares profits and gains for the previous
· Film Artist
year in accordance with the provision of section
· Company Secretary
44AD(1); and
· Information Technology
b. his total sales, turnover or gross receipts do not
Turnover Limit for Section 44AB and 44AD
exceed Rs. 2 crores in such previous year
The turnover limit for the eligible business is
The amendment has been made effective from 1-
increased from one crorer to two crorer rupees,
4-2017 and will accordingly, applicable to the
However the limit under section 44AB for the Tax
assessment year 2017-18 and subsequent
Audit has not been increased in case of business.
assessment years.
The same has been clarified now vide the press
release dated 20th June 2016 as under; Applicability of tax Audit under different scenarios
‘Section 44AB of the Income-tax Act (‘the Act’) Let us understand the applicability of tax Audit u/s
makes it obligatory for every person carrying on 44AB read with Section 44AD. Fro that Le’s first
business to get his accounts of any previous year Analyze Section 44AB.
Sr. Clause of Person When required to get accounts
No. section 44AB audited in terms of section 44AB
1. Clause (d) Every person carrying on If he claims his profits and gains from such
profession referred to in profession are lower than 50% of his gross receipts
section 44AA(1) profits from for the previous year in question and his total
which are assessable on income exceeds the maximum amount which is
presumptive basis under not chargeable to income-tax in any previous year
section 44ADA
2. Clause (b) Every person carrying on If his total gross receipts from profession exceed
profession [other than those Rs. 50 lakhs in any previous year
covered by clause (d)
of section 44AB]

3. 2nd proviso Every person who derives Section 44AB does not apply to such person &
to section income of the nature referred to hence no need to get accounts audited u/s 44AB
44AB in section 44B or section 44BBA


Ahmedabad Chartered Accountants Journal July, 2019 191

Decoding of Presmuptive Taxation u/s. 44AD
4. Clause (c) Every person carrying on If he claims his profits and gains from such business
business profits of which are are lower than the amount deemed to be profits
assessable on presumptive basis and gains under the said section
under section 44AE or section
44BB or section 44BBB

5. Clause (e) Every person carrying on If his total income exceeds the maximum amount
first proviso business where the provisions which is not chargeable to income-tax in any
of section 44AD(4) are previous year
applicable in his case
Section 44AB shall not apply to the person who
declares profits and gains for the previous year in
accordance with section 44AD(1) and his total
sales, turnover or gross receipts, as the case may
be, in business does not exceed Rs. 2 crore [first
proviso to section 44AB]
6. Clause Every person carrying on any If his total sales, turnover or gross receipts , as the
(a)1 agency business case may be, in business exceed or exceeds Rs. 1
crore in any previous year
7. Clause Every person carrying on business If his total sales, turnover or gross receipts , as the
(a)1 who is earning income in the case may be, in business exceed or exceeds Rs. 1
nature or commission or brokerage crore in any previous year

8. Clause Every person carrying on Gross receipts of profession and business not to
(a)1 profession referred to in section be clubbed for computing the limits of Rs. 1 crore
44AA(1) who is also carrying [clause (a)] and/or Rs. 50 lakhs [clause (b)].
on any business Account of profession to be audited if clause (b)or
(d) of section 44AB applies. Accounts of business
to be audited if total sales, turnover or gross
receipts, as the case may be, in business exceed or
exceeds Rs. 1 crore in any previous year since
section 44AD is not applicable to person carrying
on profession referred to in section 44AA(1)
9. Clause (a) Every "eligible assessee" (as Assessee not eligible to opt for section 44AD.
defined in section 44AD) Therefore, he must get his accounts audited in terms
carrying on "any eligible of section 44AB(a) since his turnover exceeds Rs.
business" (as defined in section 2 crores and thus exceeds Rs. 1 crore limit in clause
44AD) turnover of which (a).
exceeds Rs. 2 crores in any
previous year
10. Clause (a) Every assessee who is not an If total sales, turnover or gross receipts , as the case
"eligible assessee" as defined may be, in business exceed or exceeds Rs. 1 crore
in section 44AD i.e. LLPs, in any previous year
companies, AOPs, BOIs, AJPs
11. Clause (a) Every non-resident assessee not If total sales, turnover or gross receipts , as the case
covered by section 44AE or 44B may be, in business exceed or exceeds Rs. 1 crore
or 44BB or 44BBA or 44BBB in any previous year


192 Ahmedabad Chartered Accountants Journal July, 2019

Decoding of Presmuptive Taxation u/s. 44AD
Relevant Para of Guidance Note on Tax Audit purposes of determining whether or not the
of ICAI accounts of such firm are required to be
“5.20 A question may arise in the case of an audited for purposes of section 44AB.”
assessee carrying on business and at the same From the perusal of above one can conclude
time engaged in a profession as to what are following;
the limits applicable to him under section a. Tax audit u/s 44AB is applicable to an assessee
44AB for getting the accounts audited. In (assuming he is not an eligible assessee) where
such a case if his professional receipts are, turnover of business exceeds Rs. 2 crores -
say, rupees fifty four lakhs but his total sales, Clause (a) of section 44AB. Now the issue is if
turnover or gross receipts in business are, say, such assessee is carrying out three business and
rupees ninety two lakhs, it will be necessary having turnover of Rs 70 L in each business.
for him to get his accounts of the profession Now the total turnover is Rs 2.10 Cr which
and also the accounts of the business audited exceeds the limit of Rs 2 Cr. The question here
because the gross receipts from the profession is the limit of Rs 2 Cr is to be applied business
exceed the limit of rupees twenty five lakhs. wise or turnover of all business is required to be
If however, the professional receipts are, say, clubbed. Though section 44AD talks about
rupees twenty one lakhs and total sales ‘eligible business’ however looking towards para
turnover or gross receipts from business are, 5.21 of the guidance note on Tax Audit, it
say, rupees eighty six lakhs it will not be appears that turnover of all businesses need to
necessary for him to get his accounts audited be considered. However at this juncture one
under the above section, because his gross may refer to the contrary judgment of
receipts from the profession as well as total Honourable Karnataka High Court in Asstt.
sales, turnover or gross receipts from the CIT v. Dr. K. Satish Shetty [2010] 188
business are below the prescribed limits. Taxman 32, The Karnataka High Court held
5.21 It may, however, be noted that in cases where that the conjoint reading of the provisions of
the assessee carries on more than one business section 44AB and section 2(13) (definition of
activity, the results of all business activities ‘business’) “does not show anywhere that in
should be clubbed together. In other words, case assessee is carrying on many businesses,
the aggregate sales, turnover and/or gross then the aggregate of businesses has to be
receipts of all businesses carried on by an arrived at and thereafter, the same is
assessee would be taken into consideration required to be audited.” The Court further
in determining whether the prescribed limit observed that “......section 44AB does not show
(Presently Rs. 1 crore w.e.f. A.Y. 2013-14) or contemplate that all businesses are
as laid down in section 44AB has been required to be consolidated for working out
exceeded or not. However, where the the aggregate of turnover.” The practical
business is covered by section 44B or 44BBA difficulty in applying this judgment is the
turnover of such business shall be excluded. moment one puts Rs 2.10 Cr as turnover (Refer
Similarly, where the business is covered by the above example) in the turnover column in
section 44AD or 44AE and the assessee opts return of income, either system may not allow
to be assessed under the respective sections to upload the return or if allows then notice u/s
on presumptive basis, the turnover thereof 139 may come treating the return as defective as
shall be excluded. So far as a partnership firm in the ITR there is no provision to enter the
is concerned, each firm is an independent eligible businesswise turnover and profitability
assessee for purposes of Income-tax Act. details. However in the above example assuming
Therefore, the figures of sales of each firm the assessee is an “eligible assessee” and all three
will have to be considered separately for businesses are “eligible business” and he decides


Ahmedabad Chartered Accountants Journal July, 2019 193

Decoding of Presmuptive Taxation u/s. 44AD
to offer the income u/s 44AD, he would be facing liable for Tax Audit as per Section 44AB
the same practical difficulty as discussed above provided his turnover exceeds Rs 1 Cr.
and the same difficulty under both the scenario e. For instance, a person may have gross receipts
is precisely because the ITR does not allow to of Rs. 80 lakhs from civil construction business
enter business wise details. and of Rs. 40 lakhs from trading in scrap and
b. Tax audit u/s 44AB is applicable to an eligible Rs. 70 lakhs from garment manufacture. Each
assessee who opts for section 44AD benefit for of the three businesses has turnover/gross
Assessment Year 2017-18 or subsequent years receipts of less than the limit of Rs. 2 crores.
and then opts out of section 44AD in violation Each of them is an eligible business. If assessee
of section 44AD(4) and whose total income opts for section 44AD for all of them, then
exceeds the maximum amount not chargeable anyway he will not be liable to tax audit.
to tax - New clause (e) of section 44AB. However if the total of all these three business
c. There is ambiguity as to what happens when exceed 2 Cr Rs then the scenario will be as per
an assessee eligible to opt for section 44AD para ‘a’ above. If he does not declare 8% of
for AY 2017-18 or subsequent years does not turnover/gross receipts (6% in case of digital
opt for section 44AD under the amended turnover) from any of his three businesses, he
provisions. Alternatively let’s assume the will be liable to comply with section 44AA/
assessee commences new business in AY 19- section 44AB if his total income exceeds
20 and prefers not to opt for the Section 44AD. taxable limit. If even one of those three
Here assessee does not opt at all for section businesses has turnover exceeding Rs. 2 crore,
44AD under the amended provisions as distinct it will not be an eligible business and for that
from opting in and opting out. - One view is business section 44AB will have to be complied
that since section 44AD is a special provision with in terms of section 44AB(a). So, the
and that section 44AD(4) has been substituted practice of clubbing turnover/gross receipts of
and the same covered under new clause (e) and all businesses to see if the limit of Rs. 2 crore
the reference to section 44AD having been in section 44AB(a) is exceeded is required to
omitted from clause (d) of section 44AD, the be applied ignoring the business which for
assessee will not be covered under section which Section 44AD is applied.
44AD. Other view is that he will be covered f. Suppose an individual is carrying on business
under section 44AB(a) The second view seems (shop selling legal books) and profession
to be the better view in view of the new first (lawyer). Gross receipts for business Rs.
proviso inserted in section 44AB by the 95,00,000 and gross receipts for profession
Finance Act, 2017 with effect from assessment [covered by section 44AA(1)] Rs. 49,00,000
year 2017-18 which reads as under; for assessment year 2017-18. In this case,

“Provided that this section shall not apply to neither accounts of business nor accounts of
the person, who declares profits and gains for profession are to be got audited under section
the previous year in accordance with the 44AB. Here, section 44AD will not apply to
provisions of sub-section (1) of section business as person is carrying on profession
44AD and his total sales, turnover or gross referred to in section 44AA(1). Hence, audit
receipts, as the case may be, in business does will not apply regardless of whether the person
not exceed two crore rupees in such previous declares minimum income of 8% of gross
year:” receipts (6% in case of digital turnover) of
business in his return of income as his turnover
d. Thus if an ‘eligible assessee’ who commences
or gross receipts does not exceed the limit of
a new ‘eligible business’ say in AY 2019-20
Rs. 1 crore stipulated by section 44AB(a).
and does not opt for Section 44AD would be



194 Ahmedabad Chartered Accountants Journal July, 2019

Decoding of Presmuptive Taxation u/s. 44AD
g. Suppose in the above case, gross receipts from This amendment may also lead to unnecessary
business is Rs. 95 lakhs and gross receipts from harassment from the pro-revenue Assessing Officers
profession is Rs. 51 lakhs. In that case, while carrying out assessment of individual partners.
compulsory tax audit shall apply to audit of Since the amended section 44AD presumes that
accounts of profession as well as that of business. partners’ salary and interest on capital are deemed
h. Suppose in the example as referred in Para ‘f’ if to have been allowed in the hands of the firm, an
an assessee is earning income from commission Assessing Officer may deem that the amounts
and also dealing in stationery business then as drawn by the partners from the firm on personal
per subsection 6 of Section 44AD, the provisions account as income in the hands of the partners and
of Section 44AD are not applicable. Meaning tend to tax the same.
th
thereby if Mr X has earned commission of Rs Payment of Advance Tax by 15 March
25 L and has incurred losses in stationery The amended scheme mandates payment of
business to the tune of Rs 2 L and turnover of advance tax on onetime basis, to be paid on or
the stationery business is Rs 10 L in that case, before 15th March in each financial year. Non-
the assessee is not liable to get the books of payment of advance tax would lead to payment of
accounts audited as neither Section 44AB applies interest under sections 234B and 234C of the
( total turnover does not exceed Rs 1 Cr) and Income-tax Act. This is another deterrent
also Section 44AD is not applicable (as per amendment in the Finance Act, 2016 which makes
subsection 6 of Section 44AD). Hence he is not the scheme unviable.
required to get the books of accounts audited.
Restriction on Availing the Scheme
i. Assessee can maintain books of account for
Amended Sub section 4 and Sub section 5 of
one business on cash basis and for other
Section 44AD provides as under;
business on mercantile business however the
‘(4) Where an eligible assessee declares profit for
practical difficulty is in the ITR the assessee
any previous year in accordance with the
has not been given the option disclose method
provisions of this section and he declares profit
of accounting business wise.
for any of the five assessment years relevant to
Remuneration to Partners and Interest on Partners’
the previous year succeeding such previous year
Capital in case of Firm being Eligible Assessee
not in accordance with the provisions of sub-
Till Financial Year 2015-16 under scheme of section (1), he shall not be eligible to claim the
presumptive taxation, a partnership firm was benefit of the provisions of this section for five
allowed to claim deduction of interest on capital assessment years subsequent to the assessment
and partners’ salary from the presumptive income. year relevant to the previous year in which the
It would be more logical to presume that this benefit profit has not been declared in accordance with
was initially made available to partnership firms the provisions of sub-section (1).
inasmuch as they were liable to tax at the maximum
(5) Notwithstanding anything contained in the
marginal rate, i.e., 30.9% (including cess) and those
foregoing provisions of this section, an eligible
deductions claimed from the firm were subjected
assessee to whom the provisions of sub-section
to tax in the hands of the individual partners. But
(4) are applicable and whose total income
the Finance Act, 2016 has done away with this more
exceeds the maximum amount which is not
commonsensical provision by omitting proviso to
chargeable to income-tax, shall be required to
sub-section (2) of Section 44AD.
keep and maintain such books of account and
As per the said amendment while computing the other documents as required under sub-section
income of Firm all the deductions under sections (2) of section 44AA and get them audited and
30 to 38, including interest on partners capital and furnish a report of such audit as required
partners’ salary are deemed to have been allowed. under section 44AB.’



Ahmedabad Chartered Accountants Journal July, 2019 195

Decoding of Presmuptive Taxation u/s. 44AD
The above provision postulates as the following : than the value adopted or assessed or assessable by
a. The assessee should have declared profit as per any authority of a State Government for the purpose
section 44AD for any previous year; and of payment of stamp duty in respect of such
transfer, the value so adopted or assessed or
b. The assessee should have declared profit not
assessable shall, for the purposes of computing
in accordance with section 44AD in any of the
profits and gains from transfer of such asset, be
five assessment years succeeding the previous
deemed to be the full value of the consideration
year in which profit was declared as per
received or accruing as a result of such transfer.
section 44AD as per condition (a).
The open ended coverage of section 44AD(1) is
If above two conditions are satisfied, such assessee
puzzling since sale of immovable property held as
shall not be eligible to claim the benefits of
stock in trade governed by section 43CA is not
Section 44AD for five assessment years subsequent
brought within the provisions of section 44AD.
to the assessment year in which profit was not
Section 44AD starts with non-obstante clause by
declared as per section 44ADas given in condition
saying that the provisions would prevail over sections
(b) above.
28 to 43C of the Act. The applicability of the section
Further from plane reading of the provision, it is
is however optional. Only when the taxpayer opts
understood that the restrictions provided in sub-
for the provisions of section 44AD, it would prevail
section (4) shall not be applicable to the assessees
over the provisions of sections 28 to 43C.
having business income for the first time during the
‘Total turnover or gross receipts’ appearing in
financial year 2016-17 and declare income below
section 44AD includes the deemed sales
the limits prescribed under sub-section (1) of
(i.e., deemed full value of consideration received)
section 44ADfor the AY 2017-18.
as contemplated under section 43CA.
Sub Section 5 will be applicable if following
Unfortunately, what amounts to total sales, turnover
conditions are satisfied.
or gross receipts for the purpose of section 44AA/
a. An eligible assessee to whom the provisions 44AB/44AD is not defined in respective sections.
of sub-section (4) are applicable; and Further, these sections are not made subject to
b. The total income of that assessee has exceeded section 43CA. In absence of specific provision/
the maximum amount which is not chargeable explanation making section 43CA applicable to
to income-tax. section 44AA/44AB/44AD, in determination
In other words, sub-sections (4) and (5) are mutually of ’total sales, turnover or gross receipts’ the natural
inclusive. Provisions of sub-section (4) shall not be meaning should prevail as was prevailing prior to
applicable to an assessee who never opted for the introduction of section 43CA. [For elaborate
scheme in any of the earlier previous years, as it discussion on interpretation of terms ‘total sales,
provides that the eligible assessee should have turnover or gross receipts’ one may refer to ICAI
declared profits as per section 44AD for any Guidance Note on Tax Audit under section 44AB].
previous year. Under this situation, assessees who Therefore, applicability of provisions of section
have never ever opted for the scheme till the AY 44AA regarding maintenance of books of account
2016-17 can enjoy the benefits of the scheme even & section 44AB regarding audit of account of
by showing lesser profits for the subsequent business should be decided without any reference
assessment years. to or influence of section 43CA. Similarly, new
provision of section 43CA should not apply in
Section 43CA r.w.Section 44AD
cases governed by section 44AD for assessment of
According to Section 43CA where the
presumptive profits on sale of land/building.
consideration received or accruing as a result of the
One may argue that section 44AD starts with
transfer by an assessee of an asset (other than a
“Notwithstanding anything to the contrary
capital asset), being land or building or both, is less
contained in sections 28 to 43C….” meaning

196 Ahmedabad Chartered Accountants Journal July, 2019

Decoding of Presmuptive Taxation u/s. 44AD
thereby, indirectly, section 44AD is subject to and in the absence of any other contrary material /
section 43CA. This is not correct interpretation. evidence, the cash deposits could not be taxed as
Further, the terms ’total sales, turnover or gross unexplained or undisclosed income of the assessee.
receipts’ are fiscal facts and cannot include deeming The court held that there was no substantial question
fiction created by section 43CA which categorically of law in the appeal and hence upheld the order of
apply only ‘for the purpose of computing profits the tribunal.
and gains from transfer of asset’. Section 44AD vis a vis sections 43B
This section is meant for taxing sale of immovable Panaji Tribunal in the case of Good Luck
assets held as stock in trade for value less than the Kinetic v. ITO
value adopted for stamp duty purposes by State
Interpretation of Sections relating to presumptive
Government authorities. Section 43CA is not
taxation and section 43B of the Act: Admittedly,
controlled by the presumptive provisions contained
once the presumptive tax provision is applied, 5%
in section 44AD.
of the total turnover is deemed to be the profit and
Section 44AD r.w. Section. 40(a)(ia) gains of business chargeable to tax under the head
In ITO v. Mark Construction [2012] 23 ‘Profits and gains of business or profession’. It only
taxmann.com 398 (Kolkata) the assessee engaged means that the deduction allowable under sections
in civil construction disclosed profits exceeding 8% 28 to 43C is deemed to have been already granted
by opting for section 44AD provisions. In the to the taxpayer.
assessment, the Assessing Officer called for books However, a perusal of the provisions of section 43B
of account of the assessee and the assessee took a shows that the said provision is a “restriction” on
plea that the income was offered under the allowance of a particular expenditure
section 44AD and hence maintenance / production representing statutory liability and such other
of books of account was not compulsory. The expenses, unless same has been paid before the due
Assessing Officer made addition of Rs. 32,62,140 date of filing the return. The fact was that the
by invoking section 40(a)(ia). The tribunal held that statutory liability in the present case had not been
since the assessee has disclosed profits more than paid before the due date of filing the return.
8% of the gross receipts, no disallowance under
Non-obstante clauses in the sections relating to
section 40(a)(ia) could be made.
presumptive taxation and section 43B of the Act:
Section 44AD vis a vis sections 68/69 The opening words in section 44AF are
Similarly, whether a taxpayer declaring income “notwithstanding anything to the contrary contained
under section 44AD could be subjected to tax under in sections 28 to 43C”. Section 43B also has the
sections 68 /69 for the amounts credited in his bank opening words as “notwithstanding anything
account became an issue in CIT v. Surinder Paul contained in any other provisions of this Act”.
Anand [2010[ 48 DTR (P. & H.) 135. The non-obstante clause in section 43B has far
In the assessment, the assessee was asked to explain wider amplitude because it uses the words
the cash deposit in his bank account and finally an “notwithstanding anything contained in any other
addition of Rs.14,95,300 was made to the returned provisions of this Act”. Therefore, even assuming
income. The Court held that the assessee having that the deduction is permissible or the deduction is
opted for presumptive provision is exempted from deemed to have been allowed under any other
maintaining books of account. It held that the provisions of this Act, the control placed by the
assessee is under an obligation to explain individual provisions of section 43B in respect of the statutory
entry of cash deposit only when such entry had no liabilities still holds precedence over such
nexus with the gross receipts of the business. The allowance. This is because the dues to the crown
assessee claimed both before CIT (A) and tribunal have no limitation and have precedence over all
that the said amount was part of business receipts other allowances and claims.


Ahmedabad Chartered Accountants Journal July, 2019 197

Decoding of Presmuptive Taxation u/s. 44AD
Under these circumstances, the Tribunal held that Preamble to each ICDS specifies that in case of a
the disallowance made by the AO by invoking the conflict between the provisions of the Act and
provisions of section 43B of the Act in respect of ICDS, and then the provisions of the Act will
the statutory liabilities was in order, even though prevail. Also, such assessee are not required to
the taxpayer’s income had been offered and assessed maintain any books of accounts and follow any
under the provisions of section 44AF of the Act. method of accounting, the provisions of section
This perhaps is the first decision of its kind, wherein 145(1) does not apply to such assessee and ICDS
the Court has analyzed the unique situation of are notified under section 145 of the Act. Hence,
two non-obstante clauses meeting head-on against ICDS shall not apply to taxpayers covered by
each other. The Tribunal has held that the non- presumptive scheme of taxation like section 44AD,
obstante clause having wider amplitude will prevail 44AE, 44ADA, 44B, 44BB, 44BBA, etc. Further,
over the other. This case also emphasizes and for the purposes of proper and efficient
reiterates the principle that the dues to the crown administration of ICDS, it is also clarified that ICDS
have no limitation and have precedence over all shall not apply to Individuals, HUFs, partnership
other allowances or claims. firms and LLPs who are not required to get their
accounts audited under section 44AB of the Act.’
As such, applying section 43B of the Act to
presumptive taxation would defeat the basic purpose Concluding Remarks on Section 44AD
of bringing the provisions relating to presumptive It is to be seen whether the above amendments except
taxation in the statute book, which was to do away increasing the threshold limit of eligible business,
with maintenance of books of account and making would benefit small and medium enterprises; because
the compliance simpler for the SMEs. Section 43B once an assessee opts under this section, he has to
came into effect from 1983 with a non- declare 8% / 6% profits on the gross receipts for
obstante clause against the whole Act. But it needs continuous period of five years. Further, in case of
to be noted that section 44AF was not a part of the eligible firm, no remuneration / Interest paid to
law at that time. Section 44AF was brought into partners would be allowed as deductions. Hence
the Statute books effective from 1997 clearly many assessees would prefer not to opt under this
overriding sections 28 to 43C (which include section and would prefer to maintain the books of
section 43B). Therefore, it could be presumed that account and get them audited. This is a retroactive
while enacting section 44AF, the legislation has or backward step in “widening the tax base” and
purposely placed a non-obstante clause with an “ease of doing business.Whether this provision
intention to override section 43B. The Tribunal would enable or disable ease of doing business? Let
seems to have ignored this intent of the legislation. the bureaucrats answer these questions.
ICDS and Section 44AD, 44AE, 44ADA, 44B, Disclaimer
44BB, 44BBA, etc. The contents of this document are solely for
FAQ 2 Does ICDS apply to non-corporate taxpayers informational purpose. It does not constitute
who are not required to maintain books of account professional advice or a formal recommendation.
and/or those who are covered by presumptive While due care has been taken in preparing this
scheme of taxation like s.44AD, 44AE, 44ADA, document, the existence of mistakes and omissions
44B, 44BB, 44BBA, etc.? herein is not ruled out. Neither the compiler nor
These sections 44AD, 44AE, 44ADA, 44B, 44BB, editor nor publisher and its affiliates accepts any
44BBA etc. deals with a situation where assessee liabilities for any loss or damage of any kind arising
is engaged in business and provides special out of any inaccurate or incomplete information in
mechanism for computing income under the Head this document nor for any actions taken in reliance
“Profits & Gains from business” in terms of special thereon.
deeming provisions for income and deductions. i i i



198 Ahmedabad Chartered Accountants Journal July, 2019

Blockchain and its use cases



CA. Abhishek Jain
[email protected]

From a Chartered Accountant’s perspective Blockchain System:
Basic of Blockchain The Blockchain system’s task is to ensure that all
these individual copies are consistent with each
First of all, blockchain is not cryptocurrency though other, that the local copies which every node has
its primary applications where in cryptocurrency. are identical, and these copies are always updated
Blockchain is more of a concept than a technology, based on the global information i.e., if this node
its inception was from the concept of Accounting wants to enter some information to this blockchain
and Auditing (Ledger System, Logs or trail of data), then such information will get updated to all the
Information technology (Information Systems, copy of the blockchain that every node possess.
Information Portals), Security and Identity The architectural platform of blockchain supports
management (Cryptography), Mathematics a strong consistency among the local replica local
(Hashing and Algorithm). information that every node has.

This gives a clear indication that CA must be Key Components of blockchain
prepared with the concept of blockchain because · Decentralized Computing
who knows accounting and auditing more than what
· Cryptography (hashing)
we Chartered Accountants. We may not know the
technology or algorithm but we know what is the · Chronological Ledger
business processes, accounting and auditing.
· User Access (restricted / unrestricted)
Definition · Security

Blockchain is a decentralized computation and · Trust building tool (Consensus)
information sharing platform which enables
· Cooperate, coordinate and collaborate tool
multiple authoritative domains which do not trust
between Participants. (Protocol for
each other to cooperate, coordinate and collaborate
Commitment)
in a rational decision-making process.
Public vs Private Blockchain
Blockchain is a cryptography-based software
A Public Blockchain is a permission less
technology which functions as a distributed ledger
blockchain. Anyone can join the blockchain
that is heavily secured due to its attributes of peer
network, they can read, write, or participate with a
to peer verification and authentication. Leveraging
public blockchain. Public blockchains are
this technology to apply it in real world situations
decentralised andno one has control over the
where a secured record is required for transactions,
network. They are secure in that the data can’t be
documents or any other sensitive information will
changed once validated on the blockchain.
lead to higher productivity and security.



Ahmedabad Chartered Accountants Journal July, 2019 199

Blockchain and its use cases
On the other hand, a Private Blockchain is a • Cryptocurrencies/Store of value -
permissioned/federation blockchain. Permissioned
What is my account balance?
networks place restrictions on who is allowed to
participate in the network and in what transactions. • Digital Identity -
When people get into blockchain, there’s a natural Who are you and how have you changed over
discussion about what kind of blockchain, because time?
blockchain comes in many different varieties.
• Digital representation of a property/
We must be more concerned about private Tokenization –
blockchain as a chartered accountant because this
Who owned this car over time?
is where the bigger role of our expertise is required.
• Tracking provenance of food or drugs –
What country & postal code did this chicken
come from?

In the real world the choice for the business leaders
regarding the technology will not be clear, but the
potential for the technology is immense. Companies
need to proceed deliberately but cautiously, in the
context of a through cost benefit analysis. There is
no magic formula which fits all purpose.















Let’s understand what is Smart Contracts
A smart contract allows individuals and enterprises
to exchange data in a trusted, conflict-free manner
without relying on a third party like a bank, lawyer
or notary.
Blockchain – Applications in Industries and Use
It is a self-automated computer program that can Cases
carry out the terms of any contract.
Blockchain in Finance
Mostly based on objective conditions precedent “If,
then” criteria o Payments and Remittance

Let’s see where Blockchain Good For? Transactions can occur directly between two
parties on a frictionless P2P basis. The
Blockchain is a solution which is looking for
technology’s application for overseas
problems. Blockchain may be used for many things
transactions has the potential to reduce risk,
where there are many people involved and they
transaction costs and to improve speed,
don’t trust each other.
efficiency and transparency.


200 Ahmedabad Chartered Accountants Journal July, 2019

Blockchain and its use cases
o Issuance, Ownership and Transfer of Blockchain in Government
Financial Instruments
o Asset registration
A blockchain-based securities market allows
A blockchain framework enables government
traders to buy or sell stocks directly on
agencies to increase the accuracy and efficiency
exchanges or directly to other market
of publicly held records by linking ownership
participants in a P2P manner without the
of an asset to a single, shared ledger without
intermediation services provide by a broker or
disrupting existing registry data.
clearing house.
o Identity services
o Clearing and Settlement Latency
Blockchain enables government agencies to
On the blockchain, the entire lifecycle of a
create a single, trustworthy collection of digital
trade, including its execution, clearing and identity documents. These documents make it
settlement can occur at trade level, lowering easier for government officials to reconcile data
post-trade latency and reducing counterparty conflicts and provide citizens with control over

their own identity.
Blockchain in Healthcare
o Fraud prevention and compliance
o Cost Containment
Blockchain creates a shared and trusted ledger
The block chain can be filtered to identify and
that sequentially appends cryptographically
alert about specific activity on the chain,
secure data. The ledger is only accessible to
monitoring, using patterns, can include data that
trusted parties, giving government
represents a doctor, consumer, drugs,
administrators the assurance that they’re
procedures, all can to tokenized and added to
working with data that’s up-to-date, accurate
the chain.
and nearly impossible to manipulate.
• Building a rule base using best practices,
o Supply Chain
ICD codes, medical procedures and other
costs can be monitored and audited using Blockchain makes the precise location of an
blockchain. object — and its accompanying digitized
documentation — part of a traceable permanent
o Smart Contracts record giving government full visibility of the
supply chain.
Smart contracts would automatically pay
providers when conditions of service are Recent Developments in Blockchain
established such as:
Blockchain as a service (BaaS) using the cloud
• Validation that a service was received by a
Blockchain as a Service (BaaS) is required because
registered Medicaid patient
enterprises are working on their own blockchain
• Service was provided by a properly solution, it is not always feasible to create, maintain
registered doctor & provider and manage an individual blockchain solution. A
cloud-based service provider manages all the
• Neither party is on a known list of past
necessary tasks and activities to keep the
participants in any fraud
infrastructure agile and operational.


Ahmedabad Chartered Accountants Journal July, 2019 201

Blockchain and its use cases
Interoperability between blockchains Blockchain and the Internet of Things

There are new blockchain networks showing up, IoT adoption is increasing the number of devices
which leads to new chains that offer different and sensors that gather data, and many parties are
speeds, network processing, use-cases. Blockchain typically involved in a business transaction based
interoperability aims to improve information sharing on that data. Blockchain enables safe record-
across diverse blockchain networks. These cross- keeping through an immutable ledger, and permits
chain services improve blockchain interoperability decentralized operations and transactions while
and also make them more practical for day-to-day preserving trust between all players in the value
usage. chain.

Government blockchains The Transactional Capabilities among the IOT
enabled intelligent devices can facilitate the
We expect to witness a rise in the use of federated
emergence of newer business models, using IOT
blockchain by the government and semi
with blockchain in various Enterprise or
government bodies as Blockchain gives more
Government blockchain may result in huge data
customizable, Transparency, Agility, and
compilation and its authenticity.
immutability to the transactions. Federated
blockchains are similar to private blockchains, but Hybrid blockchains
with a simple twist: instead of one organization
The hybrid blockchain works by providing the
controlling it, many authorities can control the
better features and functionality of both public and
blockchain and pre-select nodes. Some of the use
private blockchain. Hybrid blockchains stand out
cases of federated blockchain by government
by offering a customizable solution and also making
include insurance claims, financial services,
proper use of what blockchain has to offer –
Revenue Records, Allocation of land and supply
characteristics such as transparency, integrity and
chain management.
security. To name several use-cases of hybrid
Enterprise Blockchain blockchain: Internet of Things (IoT), banking,
supply chain, enterprise services.
Enterprise blockchain is evolving to be a scalable
and developable solution. The growth of blockchain Blockchain is the future.
will happen in different phases in which the
Let’s be ready to leverage this technology!
captivating use cases willbe explored, discovered,
then implemented on a more massive scale. Despite
early stages, blockchain will be a disruptive
technology that will fundamentally transform
various industries in the next 5–10 years, bringing
$3 trillion of market value for enterprise blockchain
i i i
worldwide by 2030.














202 Ahmedabad Chartered Accountants Journal July, 2019

Fund Raising Strategies
for Companies



CA. Karan Vora
[email protected]

Financials markets are fundamental in the economic Here we, as Chartered Accountants, can help
development of a country. They provide financial entrepreneurs by maximizing the value of their
resources required by the entrepreneurs for the long business.A C.A. can guide the client in the way that
term sustainable growth. Developing well- the business can achieve optimal capital structure and
functioning financial markets is the central focus generate maximum value.
of Government of India and Reserve Bank of India
Following are the different instruments that can be
and various reforms have been introduced to
used for fund raising considering the life cycle of
liberalize, regulate and enhance the financial
business.
markets which has streamlined various sources
from which entrepreneurs can raise funds.

Financial markets can be used to raise long term
debt, short term debt or equity to fund a business.
The combination of debt and equity that a company
uses to finance its business is known as capital
structure of the company.
Debt comprises of short term and long-term
instruments like bank loans and debentures. Debt is
advantageous from tax purpose as interest payments
offer tax shield. Raising debt also allows company
or business to retain control of business. Debt is
generally considered a cheaper source of capital.
Equity on the other hand is an expensive instrument
considering that the owner parts with the ownership Start-up Stage:
stake in the company. Equity holders have a claim Start-up stage is the first and riskiest stage of
on future earning and value of the company. business cycle. Providing proof of product, raising
For capital structure the Modigliani–Miller (M&M) money, hiring staff, establishing market presence
theorem is considered prominent theoretical are some of the challenges faced by entrepreneurs
framework. M&M model advocates that in perfect at this stage. The decisions made at this stage can
market with no taxes, no transaction costs and with impact the company for many years to come.
perfect information, the capital structure is irrelevant. Own Money & Friends and family: A venture can
However, in real world with imperfections and by be initially funded by Entrepreneur’s own
relaxing the perfect market assumptions it can be resources, also called bootstrapping. Entrepreneur
demonstrated that the capital structure is relevant in can also raise funds from 3Fs (friends, family and
maximizing the value of business. Due to taxes, fools) at minimum cost of capital. The business
agency costs, bankruptcy costs and information survives through internal cash flows and
asymmetry in the real world the capital structure of reinvestmentof profits.This is one of the most
the company is critical for valuation of the company. popular approach for small businesses as owners


Ahmedabad Chartered Accountants Journal July, 2019 203

Fund Raising Strategies for Companies

can maintain the control of their business. This and to support operations. VCs also give valuable
approach also ensures that the expenditure is guidance, consultation and business connections to
controlled cautiously. Bootstrapping also allows startup. VC funding is also beneficial as it can be
entrepreneurs to focus on customers instead of attracted without any security cover and can give
investors, thereby increasing focus on business and good visibility to start up. On the other hand, VC
eventually profitability. No outside investors on funds look for high returns and may put pressure to
board also leaves entrepreneurs with flexibility in perform in short time frame. This can interfere with
deciding exit options. the management of the business.
Angel Investors: Angel investor is someone who Bank Financing: Commercial banksare financial
lends funds to the owner of the business in lieu of institutions which perform the functions of accepting
convertible debt or ownership equity. They may be deposits from public and giving loans and earning
high net worth individuals who invest in early stage interest.Banks charge higher rate of interest from the
startups to help them take off or support them in early borrowers compared to depositors to make profits.
stages of operations. Investments by angel investors Commercial banks provide funds to businesses for
are generally risky and comprise a very small long-term as well as short term. Banks provide long
percentage of angel investor’s portfolio. Also meaning term loans in form of term loans, loan against property,
that angel investors have well diversified portfolios. equipment financing, vehicle loans, etc. and short
Angel investors provide fund to startups when others term loans in form of cash credit, letter of credit,
fear to lend. Indian Angel investors, CIIE, ISB export finance, overdraft, bank guarantee, working
Angels are some examples of angel investors. capital demand loans, etc.Indian banks are regulated
by Reserve Bank of India.
Growth Stage: During growth stage the
entrepreneur has already established the proof of Companies can use bank funds as per the conditions
product. In this stage the businesses experience sales prescribed by the bank. Long term loans are
growth and the cash flows begin to improve. generally given for Capital expenditures and short-
Revenues start covering ongoing expenses and the term loans can be utilized for working capital.Banks
business may see profitability. Streamlining require borrowers to pay only the principal and
operational efficiencies, dealing with market interest amount on a loan unlike equity capital,
competition and increasing the profit volume are where companies pay share in profits to
some challenges faced at this stage by businesses. shareholders. Bank loans are generally easier to
attain due to large number of schedule banks and
Venture Capital(VC): Venture capital provided by
are one of the cheapest source of funds.However,
VC funds to small emerging businesses that are in
the borrowers must make periodic payments to their
the early stage and have high growth potential.
banks and there is very low flexibility. Failure to
Venture capital funds are made up from funds of
service the debt may classify the account as NPA
high net worth individuals, investment banks and
and may lead to seizure of company’s assets and
any other financial institutions.Venture capital funds
punitive actions by bank.
invest in equity in exchange for an ownership stake
in early-stage companies.Business looking for NBFCs and other Financial Institutions: Non-
venture capital has to submit a business plan to a Banking Financial Company(NBFC) is a company
venture capital fund, which will perform due registered under Companies Act engaged in the
diligence and then may invest as per fund business of loans and advances and acquisition of
requirement. VC funding is widespread in new securities.Their activities are similar to banks
technology firms like Uber and Facebook. however they can’t raise money through CASA
(Current Account Savings Account) deposits and are
Start-ups that are based on an innovative technology
subject to lenient regulatory norms by RBI compared
or business model may resort to VC funding. These
to banks. NBFCs can raise funds from foreign
funds can be used by start-ups to take off business

204 Ahmedabad Chartered Accountants Journal July, 2019

Fund Raising Strategies for Companies

investments and up to 100% foreign investment is to business. In general PE backed IPOs also
permitted.Theygenerally offer loans for equipment outperform market returns. However attracting PE
lease finance, hire purchase finance, personal loans, fund is a lengthy exercise and takes considerable
vehicle financing, working capital loans, housing effort and time. Also, PE firms have a say in the
loans, loans against shares and investment, etc. important decisions of business which may lead to
their interference with the management. Black
NBFCs can fund transactions which banks can’t
Stone, Softbank, Sequoia, Saif partners are some
do, for example funding against shares. SMEs can
examples of PE firms.
avail business loans with or without offering a
collateral security on business loans.NBFC and Initial Public Offering (IPO): Initial public offering
other financial institution can provide loans for (IPO) is a type of offering in which equity shares of
variety of purposes and can be quite useful for a company are sold toretail (individual) investorsas
growing businesses. Moreover, loans from NBFCs well asinstitutional investors. An IPO transforms a
can be availed within lesser time than from banks company into a public listed company.Further
and are generally more flexible in conditions on issuance of shares by a public listed company is called
usage. However, NBFCs funding is more FPO, follow on public offer. Securities and Exchange
expensive than the bank loans with higher rate of Board of India (SEBI) is the regulatory body for IPOs
interest and businesses may prefer that only when and companies have to comply with the SEBI Issue
bank funding is not easily available. of Capital & Disclosure requirements Regulations,
2009 and the listing agreement.IPO is underwritten
Expansion Stage: Business at this stage will see
and managed by one or more merchant bankers who
slower rate of growth compared to growth phase
also arrange for the shares to be listed on stock
usually due to entry of new competitors and market
exchange. IPOs pricing is done by book building
saturation. Companywill now require topenetrate
process or fixed pricing and they are marketed by
the market further or expand to new consumer base
investment bankers by way of roadshows and
or new geographies to grow the business further.
advertising.
Private Equity (PE): Private equity funds are capital
An IPO provides the company with access to funds
pools that are to be invested in companies having
for its growth and expansion. Companycan raise
potential for growth.Institutional funds and
additional funds in the future through FPO. IPO
accredited investors generallyprovide capital to
can be exit option for PE or VC investors who can
private equity funds forsubstantial durations and
sell their stake to public. There is no servicing in
look for high internal rate of return. PE funds once
IPO and the funds remain with the listed entity. IPO
formed will generally be sector specific, have ticket
is also very beneficial for the promoters as their
size preference and invest in the company for a
equity stake now gets publically valued. However,
period of usually 4 to 5 years.PE funds look for
raising equity through IPO is very expensive and
suitable exit from the company at the end of
IPOs can only be planned when stock market is
investment time frame. PE fund can exit by way of
favorable. Also, certain business families do not
IPO of the company, secondary sale, merger and
favor IPOs as once public, a lot of informationhas
acquisition, repurchase by promoter or liquidation.
to be shared and disclosures are to be made to public
Companies that avail funds through private equity from time to time.
can utilize the funds to finance new technology,
Project finance: Project finance involves funding of
make acquisitions, expand working capital, repay
long term infrastructure and industrial projects.Special
debt, strengthen balance sheet etc. PE finance allows
Purpose Vehicles (SPV) are created to obtain project
companies access to funds without conventional
finance by the promoters of parent company who
financial mechanisms where they may need to offer
seek funding. While the parent company or promotes
collateral or get favorable credit rating. PE funds
bring equity into SPV, asingle bank or consortium
also offer fund managers expertise and connections
of banks or financial institutions lend money for a
Ahmedabad Chartered Accountants Journal July, 2019 205

Fund Raising Strategies for Companies

particular project to the SPV. Repayment is done from companies who do not enjoy good credit rating may
the cash flows generated by the project and project find the bond offering an expensive instrument.
assets are held by lenders as collateral. Risk Debentures: Debentures are long term debt
identification, allocation and financial modelling are instruments that are used to raise additional capital
key aspect of project finance. from the general public. Individuals, banks,

Roads, Power Plants, Airports, SEZs are projects corporates and primary dealers invest in debentures.
funded by way of project finance.Project finance Debentures may be secured or unsecured and
enables the sponsors to raise debt over and above backed by the integrity and the creditworthiness of
the capacity of the sponsor/parent andSPVs are the issuer. Each debenture has fixed face value or
created to shield the sponsor from project failure. par value and interest has to be paid on debentures
Project finance an expensive instrument with at a predetermined rate of interest. They have to be
complex structure. Careful risk allocation is critical redeemed after a fixed period of time and are issued
to manage involvement of multiple parties and by large corporations and government. Various
technical, economic and political risks associated types of debentures are secured, unsecured,
with the project. redeemable, irredeemable, convertible and non-
MaturityStage: Companies that reach maturity convertible debentures.
stage find that the markets have saturated and sale Funds raised through debentures are used by
may become stagnant or slowly begin to companies for a specific purpose or planned
decrease.The profit margins also get thinnerand expansion. Companies who enjoy good credit rating
reducing cost of finance and operations should be may find debentures an excellent low cost source of
a major focus area.Businesses will still try to expand funds. The payment of interest on debentures is
themselves by reinventing themselves or investing obligatory even when the company incurs a loss and
in new technologies or emerging markets. this may create stress on financials in tough times.
Bond offering: A bond is a debt instrument used Commercial Paper(CP): Commercial Paper is an
by a company or government to raise funds for a unsecured short-term debt instrument issued in the
definite period. Individuals as well as institutions form of a promissory note for a period of minimum
like banks, insurance companies, etc. can invest in 7 days and maximum of up to one year. Individuals,
bonds depending upon the type of bond. Bondsare banking companies, other corporate bodies
usually rated bycredit rating agencies. These ratings (registered or incorporated in India) and
are published and used by investors to assess the unincorporated bodies, non-resident Indians and
financial strength of issuer. Bonds are like a loan foreign institutional investors etc. can invest in CPs.
and carry an interest rate that has to be paid regularly They are not secured by collateral and only large
at fixed intervals to the investor. Bonds have a corporates with high credit rating can issue
specified maturity period upon completion of which Commercial Papers. CPs are usually sold at a
the borrower/issuer has to return money to the discount from face value and carry higher interest
lender/investor. Bonds are issued by companies, repayment rates than bonds. They are redeemed at
municipalities, states and sovereign governments. par and can be issued in denomination of Rs.5 lacs

Companies that raise capital through bonds can use or multiples thereof.
the funds to run their business, buyother companies Large banks or corporations can issue CPs to cover
or to pay off older debts or loans. When acompany short-term receivables and meet short-term financial
issues bonds it does not give investors any ownership obligations. Hence, companies need not keep large
stake in the company unlike shares. Company can cash reserves on hand and can raise short term funds
therefore keep the control of the business. On the thru commercial paper. The companies who enjoy
other hand government bonds are one of the most good ratings may find this source cost effective as
popular instrument of financing fiscal deficit used well.
by countries across the world. However, the i i i

206 Ahmedabad Chartered Accountants Journal July, 2019

From the


Courts

CA. C. R. Sharedalal CA. Jayesh C. Sharedalal
[email protected] [email protected]

Reopening after four years: Change of Held:
31 opinion The Act made no distinction between professional
Dempo Brothers Pvt. Ltd. v/s. Asst. CIT
or paid directors and directors holding a large
(2018) 403 ITR 196 (Bom)
shareholding stake in the company. Section 179(1)
Issue: only gave jurisdiction to the Assessing Officer to
proceed against a director when he was unable to
What are the conditions to be fulfilled for reopening
recover the dues of the company from it. It was
after four years?
not, therefore, open to the Assessing Officer to read
Held: conditions into section 179(1) and ignore the strict
If the primary facts were placed before the rule of interpretation of fiscal statutes which
Assessing Officer, he would have been in a position prohibited reading anything in the statute not
to take a decision there upon and it could not amount expressed therein.
to failure on the part of the assessee to withhold to That before the Assessing Officer assumed
furnish the material particulars. The assessee had jurisdiction, efforts to recover the tax dues from the
placed on record the necessary information for the company should have failed and such efforts and
purpose of assessing the income as regards the failure of recovery ought to have been mentioned in
transfer of shares. Production of form 29B under the notice, however briefly. That would have given
rule 40B was a requirement at the time of original on opportunity to the noticee to object on the facts,
assessment and during the scrutiny assessment, the and if there was merit in the objection, the
assessee was specifically called upon to respond to Department could have taken action to recover from
certain queries, which the assessee did. What was the company before any order under section 179(1)
sought to be done by the Assessing Officer in adverse to the noticee was passed. Therefore, stating
reopening of the assessment by issuing notice under the particulars of efforts made and the failure to
section 148 after a period of four years was on a recover the dues from the company in the notice
mere change of opinion and the reason of non under section 179(1) was a sine qua non for
furnishing of the form was only an attempt to proceeding further, but also would have given an
exercise a non- existent power. The assessee did opportunity to the assessee to have stated why the
not fail to disclose all the material facts necessary efforts were inadequate or improper. Admittedly, the
for the assessment, notice itself did not indicate any particulars of the

32 Sec. 179: Opportunity to the Directors failed efforts to recover the dues from the company.
Mehul Jadavji Shah v/s. Deputy CIT
Depreciation: Trial run of machinery
(2018) 403 ITR 201 (Bom) 33 Pr. CIT v/s. Larsen and Toubro Ltd.
Issue: (Bom) (2018) 403 ITR 248 (Bom)
What are the conditions to be fulfilled e.g. informing Issue:
director of steps taken to recover the tax from the Whether Depreciation on machinery in allowable
company before issue of notice u/s 179? even though there is gap of time after trial run?


Ahmedabad Chartered Accountants Journal July, 2019 207

From the Courts

Held: Procedure for notices etc. on third party

Once a plant commences operation, even if the 35 i.e. other than the party searched.
product is substandard and not marketable, the Pr. CIT v/s. N.S. Software (Firm)
(2018) 403 ITR 259 (Del)
business can be said to have been set up. Mere
breakdown of machinery or technical snags that Issue
may have developed after the trial run which had What should be the procedure for assessing third
interrupted the continuation of further production party i.e. a person other than the party who is
for a period of time cannot be held to be a ground searched?
to deprive the assessee of the benefit of depreciation. Held:
Even whilst the Assessing Officer of the party in
The Tribunal held that once the plant commenced
respect of whom search was conducted and that of
operations and a reasonable quantity of product was
the third party under section 153C might be the
produced, the business was set up even if the product
same, nevertheless at the stage of sending a notice
was substandard and not marketable. It directed the
under section 153C, the Assessing Officer had to
Assessing Officer to verify the period of use and
record a specific reason or reasons why the material
restrict depreciation to 50 per cent, if the Assessing
seized from the other person had a nexus with the
Officer found that the machinery was used for less
assessee to whom the notice under that provision
than 180 days during the year under consideration.
was addressed. This had never happened in the
On Appeal to High Court it was held that the
assessee’s case. In the absence of any incriminating
assessee was entitled to depreciation.
materials, the previous years’ assessments could not
Dividend u/s 2(22) (e) & Exemption be disturbed. The failure of the Assessing Officer
34 Dr. T.J. Jaikish v/s. CIT to record a specific satisfaction how the recovered
(2018) 403 ITR 256 (Ker) material belonged to the assessee in the note that
Issue: preceded the notice issued under it, vitiated the
assessments.
Whether dividend taxed u/s 2(22)(e) is entitled to
exemption? Two views and section 263
Held: 36 Agasthiya Granite P. Ltd. v/s. Asst. CIT
(2018) 403 ITR 279 (Mad)
Exemption available from total income in
Issue:
accordance with section 10(34) of the Income Tax
Whether CIT has power u/s 263 when there are
Act, 1961 is on “any income by way of dividends
two views possible on the issue?
referred to in section 115-O of the Act”. Section
115-O specifically speaks of an additional income Held:
tax being levied on the amounts disbursed as The view taken by the Assessing Officer was clearly
dividend by a company. What is exempted from supported by decisions of the Madhya Pradesh and
being included in the total income is that amount Bombay High Courts. The view taken by the
disbursed by a company as dividend, which has Assessing Officer was a plausible view. If it resulted
been taxed under section 115-O of the Act. The in loss of revenue, it could not be treated as
Explanation puts it beyond the pale of doubt and prejudicial to the interests of the Revenue for the
excludes section 2(22)(e) from the expression of purpose of invoking the power under section 263
dividend for the purposes of Chapter XII-D, of the Act. Moreover, the fact that two views existed
containing sections 115-O to 115Q. Deemed was evident from the order of reference passed by
dividends are not exempted since there is no the Full Bench. Therefore, the Commissioner could
payment of additional tax under section 115-O of not have invoked the power under section 263, as
the Act. two views had existed and the Assessing Officer
had adopted one of the two plausible views.


208 Ahmedabad Chartered Accountants Journal July, 2019

From the Courts

Attachment and recovery without proviso to section 2(15) of the Act. Therefore, the
37 proper procedure is invalid Tribunal had rightly concluded that the restriction
Sunflower Broking Pvt. Ltd. v/s.
created by the first proviso to section 2(15) of the
Deputy C.I.T (2018) 403 ITR 305 (Guj) Act did not operate against the assessee and
therefore the activity of the assessee, even though
Issue:
What should be the procedure to be followed for a it might have involved an activity in the nature of
valid attachment and recovery? trade, commerce or business, would fall within the
ambit of general public utility and therefore be a
Held: charitable purpose under section 2(15) of the Act.
When the income tax authority had taken an action Cash Credit and Source of source
assessee and withdrawing a sizable sum of more than 39 PR. CIT v/s. Veedhata Tower Pvt. Ltd.
as strong as attachment of the bank account of the
Rs. 19 lakhs from the bank account unilaterally, the (2018) 403 ITR 415 (Bom)
least that was expected of him was to ascertain that Issue:
the notice was duly dispatched and received by the How the provisions of Sec. 68 are to be applied?
assessee. Thus, the authority effected recovery from Held:
the bank account of the assessee without following The proviso to section 68 of the Act was introduced
due process. It was true that, the assessee ought to by the Finance Act, 2012 with effect from April 1,
have applied to the Assessing Officer or to the 2013 and therefore it would be effective only from
appellate authority for keeping the additional tax the assessment year 2013-14 onwards and not for
demand in abeyance, which the assessee did not do. earlier assessment years. The Tribunal found that
Nevertheless, this would not enable the authorities
the assessee had discharged the onus which was
to ignore the legal requirements before effecting the cast upon it in terms of the preamended section 68
recovery. Under the circumstances, the recovery of of the Act by filing the necessary confirmation
Rs. 19,22,770/- made by he respondent was illegal. letters of the creditors, their affidavits, their full
The respondent had not set up a case that the assessee addresses and their permanent account numbers.
was a chronic defaulter, a person who may ultimately The finding of fact was not shown to be perverse.
not be able to pay the dues if the appeal were
Since there was no obligation to explain the source
dismissed or that there were other assessments or of the source prior to April 1, 2013, assessment year
appeals pending, in which sizeable tax demands were 2013-14, no substantial question of law arose from
held up. The assessee should get the benefit of stay the order of the Tribunal.
pending the appeal on depositing 15 per cent of the
disputed tax dues. The respondent should therefore Investment out of surplus funds and Sec.
recovered from the assessee and retain 15 per cent 40 14-A
refund 85 per cent of the sum of Rs. 19,22,770/-
Pr. CIT v/s. Sintex Industries Ltd
thereof by way of tax, pending the outcome of the (2018) 403 ITR 418 (Guj)
assessee’s appeal. Issue:

38 Sec. 2(15) and limit of Rs. 10 lacs How the provisions of the 14A are to be invoked if
investments are out of surplus funds?
CIT v/s. Shri Balaji Samaj Vikas Samiti
(2018) 403 ITR 398 (All) Held:
Issue: The investment made by the assessee was not out
How the provisions of Sec. 2(15) are to be applied of interest bearing funds. The assessee already had
for computing limit set out in Proviso to section its own surplus funds, out of which investment was
2(15)? made. The Assessing Officer was not justified in
making the disallowance under section 14A of the
Held: Act and thereafter determining the expenses in
The activity performed by the assessee was respect of interest and administrative expenses of
inseparably linked to the “charitable purpose” of
Rs. 24,37,500 under section 14A of the Act read
providing mid-day meals at village schools. The with rule 8D.
total receipts of the assessee were below the limit
i i i
of Rs. 10 lakhs as stipulated under the second


Ahmedabad Chartered Accountants Journal July, 2019 209

Tribunal


News

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

DCIT v. PPFAS Asset Management (P.) that in the case of business or profession newly set
19 Ltd. 105 taxmann.com 103 (Mum) up, or a source of income newly coming into
Assessment Year:2013-14, Order dated:
existence, in the said financial year, the previous
13March, 2019 year shall be the period beginning with the date of
setting up of the business or profession or, as the
Basic Facts
case may be, the date on which the source of income
The assessee was an asset management company newly come into existence and ending with the said
incorporated on 8-8-2011. It was required to obtain financial year. However, it was observed that unless
SEBI approval for undertaking such business. In a business is ready to commence business, it is not
return of income, the assessee claimed deduction set up.
of certain business expenses under section 37(1). It
The Hon’ble ITAT held that the assessee-company
was noted by the AO that the assessee had received
which was registered/incorporated on 8-8-2011 to
certificate granting registration from SEBI approving
undertake business as an asset management
scheme of Mutual Fund from 8-4-2013 which
company to act as an investment manager for
enabled it to commerce business and since said
PPFAS Mutual Fund could not have commenced
approval was granted by SEBI after the end of
its business until it received certificate of approval
financial year under consideration without which
from SEBI as provided under sub-regulation (2) of
the assessee could not do its business he held that
regulation 21 of the 1996 Regulation which was
the aforesaid expenses were not allowable as
granted by SEBI only on 17-10-2012. On 19-12-
revenue/business expenses. The CIT(A), however,
2012, the assessee-company made an application
allowed assessee’s claim. Aggrieved, the revenue
to SEBI for approval of the mutual fund scheme of
preferred an appeal before the ITAT.
PPFAS Mutual Fund and received certificate from
Issue SEBI granting registration for the mutual fund
Whether, in case of an asset management scheme of PPFAS Mutual Fund on 8-4-2013.From
company, date of approval given by SEBI was then onwards its revenue streams could have started
to be regarded as date on which assessee set up but earning of an income is not a relevant criteria to
its business and was ready to commence said arrive at a decision as to when the business of the
business? assessee was set up and ready to commence
business. It is only on 17-10-2012that the assessee
Whether expenses incurred for purpose of
business was set up and the assessee was ready to
business after said date of approval were eligible
commence its business satisfying the mandate of
for deduction under section 37(1)?
section 3 to claim its expenses as business expenses
Held and it could be said that the previous year shall
commence from 17-10-2012 when its business was
The PPFAS Mutual Fund, the sponsor of the
set up and ready to commence. Thus, the Hon’ble
Mutual Fund, got an in principal approval to set up
ITAT held that the assessee would, therefore, be
a mutual fund on 12-7-2011. The Hon’ble ITAT
entitled to claim expenses only with effect from 17-
noted that it is stipulated in the Proviso to Section 3

210 Ahmedabad Chartered Accountants Journal July, 2019

Tribunal News

10-2012 and all the expenses incurred by the addition of Rs.1,83,41,082/- during reassessment.
assessee prior to 17-10-2012 cannot be allowed. It The CIT(A) upheld the order of the AO. Aggrieved,
was further held that all the expenses incurred in the assessee preferred an appeal before the Hon’ble
the interregnum between 17-10-2012 when the ITAT.
assessee business was set up and ready to
Issue
commence its business till actual commencement
of its business on 8-4-2013 shall be allowed as Whether exemption u/s 54EC can be claimed
normal business expenses provided other conditions for relinquishing ‘right to life interest’ in
for the allowability of those expenses as provided property?
vide applicable provisions of the Act are met.
Accordingly, the appeal was partially allowed in Held
favour of the revenue.
The Hon’ble ITAT observed from the WILL of the
assessee’s husband that it gave the assessee “right
Smt P.K. Vijayalakshmi v. ITO TS-406- to life interest” in the property without the right to
20 ITAT-2019 (Bang) transfer the property and it gave the two nephews a
Assessment Year: 2011-12
rightto transfer the immovable property. It was
Order dated: 28 June, 2019 further observed that the two nephews were parties
to the sale deed of the property. The Hon’ble ITAT
Basic Facts
noted that each of the nephews possessed a kind of
The assessee had acquired a property by way of right in the property which was transferred by virtue
WILL of her husband which mentioned that she of sale deed, which constitutes capital asset within
was given LIFE INTEREST in the property and the definition of section 2 (14) of the Act. It was
subsequent to her death all properties devolve on held that theword “property” does not mean merely
the nephews who had right title and interest over physical property, but also means right for any kind,
the property. The assessee had declared long time title or interest in it. If a person is an absolute owner
capital gain on her share of receipt of consideration of the property, it can be said that he has all rights
on transfer of the property after claiming indexed and interest in that property. It was held that “right
cost of acquisition and exemption u/s 54EC of to life interest” possessed by assessee is a right in
Rs.50,00,000 (RCEIC Bond), in the return of personam that has to be relinquished, in order to
income for the assessment year 2011-12. All the absolutely transfer the property, with a clear title to
revenue records were in her name on the date of the buyers and unless assessee transferred the “right
transfer of the property. However,the other two to life interest”, property sold would not have been
nephews of the assessee had also declared long time transferred to buyers in entirety, free of all/any
capital gains after claiming indexed cost of encumbrances. Further, since the WILL executed
acquisition and exemption u/s54EC for states clearly that the right to transfer vests only with
Rs.50,00,0000(REIC Bond) in their respective two nephews, they too possess a right in the
returns of income. The AO was of the view that property sold. The assessee had to relinquish her
since on the date of transfer of property the assessee “right to life interest” in the property for which the
was the owner of the hands the entire capital gain two nephews have given a share of sale proceeds.
was taxable in her hands and the exemption u/s Thus, it was held by the Hon’ble ITAT that since
54EC was to be restricted to Rs.50.00 lakhs.Hence each of the three vendors had received their
accordingly to the AO he had reason to believe that respective shares for sale of rights possessed by each
the income of Rs.1,00,00,000/- which was claimed one of them to the buyers, each one of them could
as exempt u/s 54EC by the nephews had escaped claim exemption u/s 54EC independently.
assessment for the AY: 2011-12 with the meaning Accordingly, the appeal was allowed in favour of
of section 147 of the IT Act, 1961, the AO made an the assessee.



Ahmedabad Chartered Accountants Journal July, 2019 211

Tribunal News

Rajendra Pal Verma v. ACIT 104 139. On a plain and literal interpretation of the
21 taxmann.com 303 (Mum) aforesaid statutory provision, as per Tribunal there
was conscious, purposive and intentional providing
Assessment Year: 2013-14
Order dated: 12 March, 2019 by the legislature of ‘date of furnishing the return
of income under section 139’ cannot be substituted
Basic Facts and narrowed down to section 139(1). The date of
furnishing of the return of income under section
The assessee had e-filed his return of income for
139 would safely encompass within its sweep the
assessment year 2013-14 on 31-7-2013. Thereafter,
time limit provided for filing of the ‘return of income’
the assessee filed a revised return of income on 15-
by the assessee under section 139(4) as well as the
11-2014. Subsequently, in the assessment
revised return filed by him under section 139(5).
proceedings, the AO observed that the assessee had
As per Tribunal, sub-section (2) of section 54
during the year under consideration sold an ‘old
contemplates two situations viz. (i) a case where
residential flat’ and the entire ‘Long-term capital
the assessee had utilized the amount of LTCG
gain’ (LTCG) on sale of the said ‘old residential
towards acquisition of the new asset within a period
flat’ was claimed by the assessee as exempt under
of one year before the date on which the transfer of
section 54. The assessee had purchased a new
the original asset took place or for the purchase or
residential flat as per an ‘agreement’ dated 29-12-
construction of the new asset before furnishing the
2014 with the builder/developer, as per which the
return of income under section 139; AND (ii) a case
construction of the property was expected to be
where the assessee had not utilized the amount of
completed by September, 2017. The AO however,
the capital gain before furnishing the ‘return of
observed that the assessee had failed to substantiate
income’ under section 139, there he shall be eligible
his claim of exemption under section 54, hence, he
to claim exemption under section 54 towards
declined to allow the same on ground that neither
purchase of the ‘new asset’ within a period of two
the assessee had invested the amount of the LTCG
years after the date on which the transfer took place
in the new residential flat nor deposited the same in
or towards construction of a new asset within a
a Capital Gain Account Scheme (CGAS). On
period of three years from the date on which the
appeal, the CIT(A) held that the assessee was
transfer took place, subject to a rider that he should
entitled for claim of exemption under section 54
have deposited the unutilised amount of capital gain
only to the extent he had invested the LTCG up to
in a CGAS account with a specified bank by not
the ‘due date’ as envisaged under section 139(1).
later than the ‘due date’ applicable in his case for
Aggrieved, the assessee preferred an appeal before
furnishing the ‘return of income’ under sub-section
the Hon’ble ITAT.
(1) of section 139. It was found by the tribunal that
Issue the instant case clearly falls within the sweep of the
aforementioned ‘first limb’ i.e. sub-section (1) of
Whether the assessee would be entitled to claim section 54. As the assessee in the instant case had
exemption under section 54 to extent of utilized an amount much in excess of amount of
investment of capital gain up to date of filing of LTCG on sale of the residential property up till the
his revised return of income under section date of filing of its revised return of income under
139(5)? section 139(5) on 15-11-2014, therefore, his claim
of exemption under section 54 in respect of the
Held
investment made towards the purchase of the new
As per the Tribunal the outer limit for the purchase residential property up to the date of filing of the
or construction of the new asset as per sub-section revised return of income under section 139(5) was
(2) of section 54 is the date of furnishing of the found to be in order
‘return of income’ by the assessee under section



212 Ahmedabad Chartered Accountants Journal July, 2019

Tribunal News

Unitech Ltd v. DCIT104 taxmann.com transaction of capital financing. Such a presumption
22 165 (Del) cannot change the character of transaction. Even
Assessment year: 2011-12 Order Dated:
otherwise also, a capital receipt is not an income
th
12 February, 2019 under section 2(24) unless it is changeable to tax as
capital gains under section 45. Therefore, Hon’ble
Basic Facts
ITAT rejected the department’s contention of
The assessee company had invested a certain sum recharacterising share application money pending
by way of subscription of equity share in its wholly allotment as loan till the period it is allotted after a
owned subsidiary, Nuwell Limited. The share reasonable time.Accordingly, the adjustment made
application money was advanced in the financial by the TPO was directed to be deleted.
year 2010-11 and during the year, the shares had
not been allotted. According to the TPO, any
DCIT v. DLF Limited [TS-346-ITAT-
independent entity would not have left the amount
in the hands of another entity without the same 23 2019] Delhi
being converted into equity shares within the Assessment Year: 2008-09
Order dated: 27 May, 2019
reasonable period or would have received interest
on the same. Accordingly, he proposed to charge
Basic Facts
interest at the rate of SBI prime lending rate.On
appeal; the assessee submitted that the transaction The assessee had shown gross income from SEZ
did not fall within the definition of international activities, and after reducing the cost of construction
transaction under section 92B(1) as capital and allocation of common expenses, it had declared
financing was different from capital contribution. eligible profit and claimed the deduction u/s.80IAB
The matter reached to the Hon’ble ITAT. for AY 2008-09. However, the AO took the view
that the claim of deduction u/s.80IAB is not
Issue
allowable, predominantly in view of the fact that,
Whether any money advanced for acquisition the P&H High Court had held that acquisition of
of shares being a capital asset, can be treated as SEZ land was illegal and also the sale of building
capital financing or not? to a co-builder is neither a business activity nor one
of the authorized operations of SEZ. He also held
Held
that the lease of land for 49 years to M/s. DLF Asset
The Hon’b’e ITAT noted that the transaction of Ltd. tantamount to transfer of land, which is an
subscribing of share application money is always impermissible activity in terms of Rule 11(9) of SEZ
on capital account and would become taxable to Rules, 2006. Accordingly, he denied entire claim
the extent it impacts the income. It is only income of deduction and added the same to the income of
which is to be adjusted to the arm’s length price the assessee. On further appeal, CIT(A) after
and not tax on capital receipt. AO has considering the facts & circumstance especially in
recharacterized the share application money as a the light of the SC judgmentpassed in assessee’s
loan simply because during the year the shares have case against the High court, allowed the assessee’s
been not allotted. Such recharacterization cannot claim.Aggrieved, Revenue filed an appeal before
be made unless there is an intention of the parties Delhi ITAT.
or there is any arrangement, understanding or action
Issue
in concert. If parties have treated it to be share
application money for subscription of shares, then Whether the activity of developing of building
onus is upon the AO to prove it contrary that it is an and subsequent transfer of bare shell to co-
international transaction. Here AO has drawn developer is an authorized operation under the
presumption on the ground that there was delay in SEZ Act entitling the assessee for the claim of
allotment of shares, hence it is an international deduction u/s 80IAB?


Ahmedabad Chartered Accountants Journal July, 2019 213

Tribunal News

Whether, because a deduction is allowed to Banglore Development Authority v.
from operation and maintenance, the deduction 24 DCIT 176 ITD 833 (Bang)
transferee developer in respect of profits derived
Assessment Year: 2012-13
Order dated: 22 March, 2019
for development of a SEZ would not be available
to the developer?
Basic Facts

Held The assessee development authority a Statutory
body constituted under the state government filed
The tribunal found that one of the main reasons for
its return of income after claiming exemption u/s
denying the claim ofbenefit u/s.80IAB by the AO
11 of the Act. The main objects, functions and
was that theownership of land on which SEZ has
activities of the assessee were to procure the land
been developed is indispute in view of decision of
and develop the same into layouts by undertaking
Hon’ble Punjab and HaryanaHigh Court. But as
land development activities and conver the same
the operation of the order of the High court order
into sales plots/sites/flats/houses. It was engaged in
was stayedby the Hon’ble Supreme Court as per
the development of infrastructure facilities such as
the tribunal the claim cannot be denied blindly
construction of flyovers, ring roads, underpasses,
relying upon the order of the Hon’bleHigh Court.
grade separators etc. It was also engaged in
Further the AO had mainly disallowance the claim
construction of commercial complexes. The AO
of deduction on the ground thatactivity of
concluded that the objects and activities of the
developing of building and subsequent transfer of
assessee does not fall under first five limbs of
bare shell to co-developer is not the authorized
definition of charitable purpose as envisaged under
operations under SEZ Act. It was found by the
section 2(15) of the Act. The AO held that the
tribunal that before undertaking theactivity of
assessee was generating huge amount of profits year
development of SEZ, the assessee has
after year from sale of sites and flats indicating that
obtainedapprovals from time to time so as to comply
the assessee was carrying out the activities as
strictly within theprovisions of SEZ Act r.w.s.
business venture rather than charitable organization.
80IAB of I.T. Act. The Board hasgranted approval
The activities were akin to the activities carried out
not only to the assessee for building thebare shell
by real estate companies, property developers,
but also to the co-developer after examining the
infrastructure firm etc. He accordingly held that the
various clauses of MOUs dated 29.01.2007 and
activities of the assesse were squarely fell under
20.03.2008. It was an undisputed fact that, firstly,
the ambit of activities which were in the nature of
the area has been notified as Special Economic
trade, commerce or business. Accordingly he denied
Zone vide notification dated 06.12.2006 and
the claim of the assessee under section 11. The
19.03.2007; secondly, the assessee has been
CIT(A) upheld the order of the AO.
approved as Developer by BOA vide letter dated
25.10.2006 and 14.12.2007; and lastly, the Issue
operation of developing of building has been Whether proviso of section 2(15) of the Act was
approved as authorized operations and as such the applicable to the case of the Assessee.
income has been derived from developing and sale
HELD
of bare shell building in SEZ. Accordingly, all the
conditions spelt out in Section 80IAB stands The Hon’ble ITAT noted that assessee’s income
fulfilled. stream was mainly generated from sale of sites sold



214 Ahmedabad Chartered Accountants Journal July, 2019

Tribunal News

in the layouts formed by the assessee. Besides this the intent and purpose of planned development of
the assessee earned rental income and income from Bangalore City and not with the purpose of profit
tax/cess collection. The tribunal noted that the making. The activity of formation of layouts and
assessee was an entity created by an enactment of allotment of sites is only carried out with the primary
state government and had huge income from the and main object to ensure planning and development
sale of sites. As per the tribunal just because the of Bangalore city and not with the intention of
assesee was a statutory entity is cannot said to be making profit.
exempt from income tax but the tribunal also noted
As per tribunal it is the basic motive behind the
that quantum of income generated being large by
activity, which is important to be considered whether
itself also would not mean that the organization is
it is one with profit motive or not. Merely because
created for the purpose of making profits.
surplus is generated from a particular activity of a
The tribunal upheld the assessee contention that its assessee society it cannot be said that such activity
case was covered in one of the first five limbs of is in the nature of trade, commerce or business and
section 2(15) being preservation of environment what needs to be seen is the intent and purpose of
(including watersheds, forest and wildlife), the starting such activity. The tribunal found that the
Tribunal found that the asseesee incurred expenses assessee’s embarkation of the activity of setting up
on planting of one crore seedlings in the green belt of residential layouts, including the activity of sale
area for improvement of the environment and also of sites and flats, was definitely not with a view to
had expended on the development of lakes. In earn profit but to ensure planned urban development
respect activity of allotment of sites and flats to the and also to accomplish a social objective of
economically weaker sections of society, the providing an opportunity to economically weaker
tribunal observed that Relief for the poor does not sections of society to be able to own a residence on
necessarily mean giving something free of cost to their own.
the poor and it also includes providing them things
The tribunal found that from 2003 the assessee was
at a concessional rate. The tribunal found that the
granted approval under section 12A and its objects
rules that govern the allotment of sites were so
had not undergone any change or modification since
formed in order to facilitate the economically weaker
its enactment. In other words, the Income tax
sections of society to purchase these sites. And in
Department had considered the assessee to be
the case of construction of flats, it was clear from
covered by the provisions of section 2(15). Though
the very scheme and the name thereof, that these
after introduction of proviso to section 2(15), the
flats were meant only for the Economically Weaker
Department had cancelled the registration granted
Sections of society.
u/s 12A vide order dated 8-11-2011 but the
The Tribunal also found that the assessee had carried registration was restored by a decision of the
out activities that fell under head ‘advancement of coordinate Bench of the Tribunal.
general public utility like construction of frade
Accordingly the tribunal held that the activities of
separators, PRR Bridges on Flyovers, renovation
the assesse are not hit by the proviso to section 2(15).
and remodeling works, Maintenance of BBMP
facilities, development of lakes etc. The Tribunal
also found that the assessee was constituted with
i i i




Ahmedabad Chartered Accountants Journal July, 2019 215

Unreported


Judgements

CA. Sanjay R. Shah
[email protected]

In this issue we are giving gist of an important Gist Only
decision by the Hon’ble ITAT, Ahmedabad in the
A. Facts of the case
case of M/s Shri Rang Infrastructure (P) Ltd.,
wherein the Hon’ble Tribunal discussed the law i) In this case the issue was about the validity of
about the limitation provided under the Act for the order passed by the A.O. u/s 201 (1) & 201
passing an order in the context of provisions of (1A) of the Act in respect of failure of the
section 201 (3) of the Act. It would be interesting assessee to deduct TDS on the amount of
to the readers to understand the law in this regard Rs.3.08 crores lent by it to its shareholders
based on the decision of Madras High Court as well which were covered under the provisions of
as Hon’ble Supreme Court discussed in this section 2 (22) (e) of the Act. The A.O. issued
decision. show-cause notice dated 27/1/2016 seeking
explanation on applicability of section 201 (1)
In the Income Tax Appellate Tribunal for alleged default in non-deduction of TDS
‘C’ Bench, Ahmedabad and consequent liability of interest u/s 201
Before Shri Pradip Kumar Kedia, Accountant (1A).The A.O. thereafter passed the order dated
Member & 17/10/2016 raising tax liability u/s 201 (1) for
Shri Mahavir Prasad, Judicial Member Rs.30,89,000/- and interest u/s 201 (1A) for

Rs.24,40,310/-.
ITA No. 2266/Ahd/2017
Assessment Year : 2010-11 ii) The assessee preferred an appeal before
CIT(A) and took principal ground that the
ITO (TDS) Vs. M/s Shri Rang order passed on 17/10/2016 for the default
Gandhinagar Infrastructure (P) Ltd.
committed for A.Y. 2010-11 was passed
th
Block No.14, 4 Floor Syamvan
beyond ‘6’ years from the Financial Year in
Udhyog Bhavan, B/h Vrundavan Hotel
which such default was committed and hence
Sector-11 Koba Circle,
barred by limitation u/s 201(3). CIT(A)
Gandhinagar-382011 Post-Koba
following Gujarat High Court decision in the
Dist. : Gandhinagar –
case of Tata Teleservices 66 Taxman.com 157
382 007
decided in favour of the assessee.
PAN : AAICS9126J
iii) Aggrieved by the order of CIT(A), revenue
Appellant Respondent preferred appeal before Hon’ble Tribunal.
Appellant by : Shri L.P. Jain, Sr. D.R.
B. Contentions before Hon’ble Tribunal
Respondent by : Shri M.K. Patel, A.R.
1. The DR contented that show-cause notice for
Date of Hearing : 15/07/2019
default was issued on 27/1/2016 which is
Date of Pronouncement : 04/09/2019
within ‘6’ years from the end of the Financial

216 Ahmedabad Chartered Accountants Journal July, 2019

Unreported Judgments
Year, in which the default was committed and case of the assessee. A reference was made to
continued by the assessee as contemplated u/s the decision of Tata Teleservices vs. UOI
194 of the Act. The said limitation period was (2016) 66 taxmann.com 157 (Gujarat) to
thereafter enlarged from ‘6’ years to ‘7’ years buttress its claim for counting the period of six
by the amendment carried out in section 201 years for the purposes of computation of
(3) by Finance Act (No. 2) 2014 w.e.f. 1/10/ limitation. The AR thus submitted that the
2014. The DR thus submitted that when the CIT(A) has rightly held the action of the AO to
date of show-cause notice issued in a be time barred and thus does not call for
continuing default was falling within limitation interference. The AR, in the alternative,
period, the period available for passing the order submitted that in case of incongruence with the
u/s 201 (1) was ‘7’ years from the end of the view marshaled by the CIT(A), the issue
Financial Year and since the order has been requires to be restored back to the file of the
passed before the end of that period, the same CIT(A) for adjudication of claim of the assessee
was not barred by the limitation. He also for non-applicability of sec. 2 (22) (e) on merit
distinguished the Gujarat High Court decision as the same has not been decided at all.
in the case of Tata Teleservices (supra) on the
C. Held
ground that in that case the cause of action was
not available at the time when it was started The Hon’ble Tribunal referred to the provisions
since the same had become time barred when of section 201 (3) alongwith the amendments
the show-cause notice was issued in that case. made from time to time and held as under :
Whereas in the present case, the default “9.1Section 201(3) provides that no order shall be
committed by the assessee was existing and made sub section (1) deeming a person to be
continuing on the date of issue of show-cause an ‘assessee in default’ for failure to deduct tax
notice and therefore the law applicable on the from a person resident in India at any time after
date of issue of show-cause notice would apply the expiry of seven years from the end of
for determining the period of limitation. financial year in which the payment is made or

2. The A.R. on the other hand referred to the credit is given. It is the case of the assessee that
provision of section 201 (3) of the Act and aforesaid period of limitation of seven years
has been made effective w.e.f. 01.10.2014 and
submitted that at the time of payment made or
credited giving resulting into alleged default i.e. thus would apply to default committed
in F.Y. 2009-10, the assessee was governed by thereafter (towards non-deduction etc.) and
the pre-substituted provision of section 201 (3) hence the pre-amended period of six years
whereby a period of ‘6’ years was provided. would continue to apply to the case of the
Further, it was submitted that issuance of show- assessee, as the default relates to pre-amended
cause notice within the time frame of ‘6’ years period. On the other hand, it is the case of the
is not enough. The law enjoined for passing Revenue that the amended period of seven
order within the period of six years. Period of years would become applicable as the enhanced
seven years enlarged w.e.f. 01/10/2014 by limitation period will have to be reckoned for
Finance (No.2) Act 2014 is from specific date all pending matters where default under s.
201(1)/201(1 A) continues and subsists. It is
and would thus apply to default committed after
further case of the Revenue that once the
that date and in respect of Financial Year 2014-
15 onwards and hence cannot apply to the show-cause notice has been issued within the
alleged default concerning F.Y. 2009-10 in the pre-amended period of six years i.e. at the time


Ahmedabad Chartered Accountants Journal July, 2019 217

Unreported Judgments

of existence of default, it was entitled to avail cases because in our opinion it is somewhat
the extended period of seven years as limitation inapt to describe section 34 with its many
is only a procedural law. amendments and validating sections as a
section of repose. Under that section there is
9.2 A bare reading of sub section (3) to section
no repose till the tax is paid or the tax cannot
201 suggests that the aforesaid sub section was
be collected. What the law does by prescribing
substituted by Finance (No. 2) Act2014 w.e.f.
certain periods of time for action is to create a
01.10,2014 whereby the limitation period for
bar against its own officers administering the
passing the order has been extended to seven
law. It tries to trim between recovery of tax and
years from the relevant financial year in which
the possibility of harassment to an innocent
the payment is made or credit is given in
person and fixes a duration for action from these
substitution of erstwhile six years period. As
two points of view. These periods are
per the pre-amended provisions, the order under
occasionally readjusted to cover some cases
s. 201(1) could be passed by 31.03.2016
which would otherwise be left out and hence
whereas as per the substituted provisions, the
these amendments.”
Revenue was entitled to make the order on or
before 31.03.2017. Thus, the order dated 9.4 Applying the principles the Hon’ble High
17.10.2016 has been passed as per the limitation Court observed that the period prescribed in
available under post-amended provision which the un-amended section 275 cannot be
however stands barred by limitation specified described as a statute of repose. It further held
under pre-amended law. The question that is that,
to be decided is whether the amended provision
“It has also been held that this provision is a
would apply to the present case or the original
procedural one. Learned counsel for the
provision would apply to the present case.
assessee contended that he had acquired vested
Thus, interpretation of sec. 201(3) has been
right of the penalty proceedings having to be
called into question.
completed within two years from the
9.3 In the context, it may be worthy to note a assessment and that the said vested right could
decision of the Hon’ble Madras High Court in only be affected by express retrospective
the case of ChettinadCorpn. (P.) Ltd. (1983) amendment Section 275 being only in the
141 ITR 693 (Mad.) where the Hon’ble High nature of a procedural provision, there is no
Court has referred to Hon’ble Apex Courts question of any vested right accruing to any
observations in the case of S.C. Prashar v. assessee by reason of the assessment being
VasantsenDwarkadas [1963] 49 ITR 1 as completed on. any particular date. It is now
under:- well- settled that there is no vested right in any
procedural matter. In the present case, therefore,
“... we wish to say a few words about the well-
the extended period of limitation would alone
known principle that subsequent changes in the
apply.”
period of limitation do not take away an
immunity -which has been reached under the 10. In the light of principles laid down by the
law as it was previously. In this sense statutes Hon’ble Supreme Court and Hon’ble Madras
of limitation have been picturesquely described High Court as aforesaid, we have to examine
as ‘statutes of repose’. We were referred to whether the period prescribed under the
many cases in which this general principle has unamended sec. 201(3) cannot be considered
been firmly established. We do not refer to, these as statute of repose or a procedural one. Section


218 Ahmedabad Chartered Accountants Journal July, 2019

Unreported Judgments
201(3) deals with law of limitation. Law of totally misplaced as right of the Revenue to pass
limitation has been held to be procedural law order has already become time barred at time
always having retrospective effect unless the of amendment by Finance (No. 2) Act 2014 in
amended statute provides otherwise as noted that case. Thus, with the lapse of time a
in CIT vs. Sadhuram (1981) 127 ITR 517 (Pun. substantive right had already accrued to the
&Har.). The sub-section (3) under assessee which could not be taken away by a
consideration before us providing limitation subsequent amendment. The limitation already
cannot be termed as substantive law much less barred could not be revived by later
a statute of repose. When it is not so termed, amendment. This is not the factual situation in
the exposition emanating from the above that the instant case as noted earlier. The other
in such cases of adjective law or procedural decisions relied upon by assessee are also
statute, amended provisions would apply. It is clearly distinguishable as the issue in the instant
a trite proposition that neither Assessee nor case relates to law of limitation which is
Revenue should be given a step-motherly procedural one. The ratio of decision of
treatment. Hence, it is equitable to held that Hon’ble Supreme Court in Brij Mohan vs. CIT
Revenue can claim benefit of extension of time 120 ITR 30(SC) is also not applicable as no
under limitation provision provided by way of return has been filed by the assessee in the
amendment, since at the time of amendment, a instant case and the default is not merely
valid cause of action was continuing and committed in this case but is also continuing.
subsisting and limitation was not concluded.
14. The issue is thus decided against the assessee
11. The show-cause notice in the instant case was and in favour of the Revenue. The order of the
duly issued within the period of six years at CIT(A) therefore requires to be set aside on
which time the default in deduction of TDS this score. We however note in the same vain
was both committed as well as continuing and that the CIT(A) has not adjudicated the issue
therefore the assessee, in our view, cannot seek on merits. The matter is accordingly remanded
immunity from the applicability of sec. 201(1) back to the CIT(A) for adjudication for
for alleged default where the order has been applicability of sec. 2(22)(e); sec. 194 and
passed within seven years as provided in consequent application of sec. 201(1) and s.
amended law. 201(1A) on merits in accordance with law after
taking note of the relevant facts on record. It
12. While holding so, we agree to the contentions
shall be open to the assessee to adduce
raised on behalf of Revenue that CIT(A) has
evidences and make representations before
wrongly observed that the cause of action had
CIT(A) on aspects concerning merits of
ceased and the applicability of sec. 201(1) had
applicability of sec. 201(1/201(1A) in the facts
already become time barred at the time of
of case.
amendment and thus extended time limit could
not be conferred on AO. The assessee has no 15. In the result, the appeal of Revenue is allowed
where contended or demonstrated on facts that for statistical purpose.”
TDS return was filed and thus the case was
not time barred as wrongly assumed.

13. The reliance placed on behalf of assessee on i i i
the decision of Tata Teleservices (supra) in




Ahmedabad Chartered Accountants Journal July, 2019 219

Controversies





CA. Kaushik D. Shah
[email protected].

Issue Whereas section 40(a)(ia) of the Act provides:

40……….
Whether TDS liability arises when provision is
mode for an estimated expenditure. (a)…………..

(ia) [Thirty percent of any sum payable to a
Proposition
resident], on which tax is deductible at source under
XYZ Ltd is an assessee company doing business Chapter XVII-B and such tax has not been deducted
of construction of Projects, follows the contract or, after deduction, [Has not been paid on or before
completion method i.e Project completion method the due date specified in sub-section (1) of section
of Accounting and prepared its financial statements 139]
accordingly. To arrive at the true and correct income
‘Provided that where in respect of any such sum,
it has made provision for certain expenses which
tax has been deducted in any subsequent year or,
were to be incurred in future. As the bills were not
has been deducted in the previous year but paid in
received for the said expenses for provision, the
any subsequent year after the expiry of the time
assessee company has not made TDS on the said
prescribed under sub-section (1) of section 200, such
provision expenses The AO proposes to disallow
sum shall be allowed as a deduction in computing
the said provision for expenses u/s 40(a) (ia) of the
the income of the previous year in which such tax
Income Tax Act 1961. It is proposed that provision
has been paid.”
made for estimated expenditure is not subject to TDS
provision. Thus when provision is made for expenses
wherever applicable tax has to be deducted and in
Views against the Proposition
this case as the tax has not been deducted, section
Chapter XVII Part B of the Income tax Act deals 40(a)(ia) comes into play and the proposition for
with Deduction of Tax Source. Wherein by various disallowance as per AO is applicable.
sections it has been provided to deduct tax at source
on different payments relating to expenses and Views in Favor of the Proposition
under various sections explanation as under has The ITAT Kolkata Bench ‘B’ in the case of Bengal
been provided. Peerless Housing Dévet Co. Ltd V/S DCIT Circle
“Explanation”- For the purpose of this section, 7(1) Kolkata ITA No. 2414 & 2459 (kol.) of 2017
where any income by way of interest on securities Asset Year 2012-13 vide order dated 31-12-2018
is credited to any account, whether called “Interest has held as under:
payable account” or “ Suspense account “ or by 2 “Recognition of contract revenue and expenses
any other name, in the books of account of the are done by the contract or sby following either
person liable to pay such income, such crediting percentage of completion method or completed
shall be deemed to be credit of such income to the contract method. The completed contract
account of the payee and the provision of this section method is also known as project completion
shall apply accordingly. method. In percentage completion method the


220 Ahmedabad Chartered Accountants Journal July, 2019

Controversies
revenue and contract costs associated with the expenses and entire sales receipts in the profit
construction contract shall be recognized as &loss account. Since in project completion
revenue and expenses respectively by reference method, the entire expenses and entire sales
to the stage of completion of the contract should be shown, therefore, it is necessary for
activity at the end of the accounting period. the assessee to make provision for estimated
expenditures which are to be incurred in
- Whereas incompleted contract method, which
subsequent years on account of minor/
is also known as project completion method,
miscellaneous work. If the assessee does not
there venue and expenses are recognized at
make provision for estimated expenditures, like,
the time of substantial completion of the project.
exp. on minor/miscellaneous work, then in that
The substantial completion of the project means
case assessee will not be able to show true profit
the project should be completed by and large,
and loss, in it profit and loss account. As pointed
except to some ancillary and minor/
out, in project completion method, the assessee
miscellaneous work, which can be completed
prepares profit and loss account and other
in subsequent years. Another feature of project
financial statements once in life of a project,
completion method is that, in this method, the
therefore, these estimated expenditures, like,
financial statements, that is, profit and loss
expenditure on minor/miscellaneous work, can
account and’ balance sheet is prepared once in
not be shown next year. Another important
the life of the project there fore it is necessary
point is that in project completion method, the
to make the provision in the book so account
assessee has shown entire sales/revenue
for expenses like ancillary and minor/
therefore he is entitled to record the entire
miscellaneous work, which are yet to be
expenses which had been incurred by him or
completed or to be completed in subsequent
to be incurred to earn the said entire sales/
years. The assessee company is following
revenue. Therefore, in order to derive the true
project completion method and made provision
net profit in project completion method it is
for expenses on account of ancillary and minor/
necessary to show these estimated
miscellaneous work, which is to be completed
expenditures, like, expenditure on minor/
in subsequent years.
miscellaneous work. Hence, the treatment made
- The Assessing Officer, in the assessee’s case by the assessee in respect of estimated
under consideration has not disputed the expenditures, like, expenditure on minor/
method, which has been adopted by the miscellaneous work, in its books of account is
assessee. The assessee as a matter of accepted.
consistency has been following the project
2 Now since the expenditure are estimated only
completion method. In project completion
and work will be executed against these
method, as pointed out earlier the assessee
expenses in subsequent years therefore, the
prepares balance sheet, profit and loss account
payee is not known hence it is not possible for
and other financial statement once in a life of
assessee to deduct TDS on these estimated
the project i.e. for a particular project the
expenditure, like, Exp. on minor/miscellaneous
financial statements consisting profit and loss
work, which is to be completed in years to
account and balance sheet is prepared only
come. Therefore, this is a kind of condition
once in a life of the said project. Therefore, if
which is mandated by the project completion
the assessee is of the view that his project has
method that the financial statements of a
substantially completed and only some minor/
particular project is to be made once in a life of
ancillary and miscellaneous works are pending,
the project, on completion of substantial
which is yet to be completed, in that situation,
activity, therefore, the assessee does not have
the assessee prepares financial statements, in
any option but to make estimate for expenditure
that year it self and will show the entire
Ahmedabad Chartered Accountants Journal July, 2019 221

Controversies

on minor/miscellaneous work. When the recognized the entire income from the project
expenses are estimated, the payee is not known, and the same is credited in the books of
hence, without knowing the payee, it is not account. Therefore in the assessee’s case under
possible to deduct TDS. consideration, since the assessee has disclosed
its entire project receipts of its ‘Anahita’ project
2 The department is in appeal against the amount
in the assessment under consideration,
deleted by the Commissioner (Appeals) on the
therefore, all the expenses incurred or to be
ground that the assessee has not submitted bills
incurred in connection with the said project
and vouchers. It is noted that the assessee has
were also taken into account so as to arrive at
furnished all the bills and vouchers relating to
the correct net profit from this project.
said expenditure, therefore the stand of the
revenue that bills and vouchers have not been - According to Hon. I.T.A.T Considering the
submitted by the assessee is not tenable hence entirety off acts and circumstances of the case
the contentions of the revenue that the assessee and the material on record, the stand of the
has not submitted or produced the bills and revenue can not be upheld, therefore, the
vouchers is not acceptable. It is also noted that Assessing Officer is directed to delete the
the accounts of the assessee were duly audited addition. The order of the Commissioner
by the statutory auditor, therefore, the allegation (Appeals) in respect of deletion is also upheld,
of the revenue, about non availability of bills since this amount pertains to purchase of raw
and vouchers appears to be not correct and materials. therefore, no TDS is attracted. Hence,
therefore, the appeal of the revenue is dismissed. the appeal filed by the revenue is dismissed and
that filed by the assessee is allowed.”
2 It is noted that if a business liability has
definitely arisen in the accounting year, the Summation
deduction should be allowed although the
The Hon’ble Supreme Court in the case of Calcutta
liability may have to be quantified and
Co. Ltd. v. CIT [1959] 37 ITR 1 it has held as under:
discharged at a future date. What should be
certain is the incurring of the liability. It should “The appellant bought lands and sold them in plots
also be capable of being estimated with fit for building purposes undertaking to develop
reasonable certainty though the actual them by laying out roads, providing a drainage
quantification may not be possible. If these system and installing lights etc. When the plots were
requirements are satisfied the liability is not a sold the purchaser paid only a portion of the purchase
contingent one. In the assessee’s case under price and undertook to pay the balance in
consideration the liability to pay the expenses installments. The appellant in its turn undertook to
(estimated expenditure explained above) is carry out the developments within six months but
present in the assessment year under time was not of the essence of the contract.
consideration though it should be discharged In the relevant accounting year the appellant
at a future date. actually received in cash only a sum of Rs. 29,392
2 The assessee is following project completion towards sale price of lands, but in accordance with
method and in this method the revenue is the mercantile system of accounts adopted by it,
recognized when a substantial portion of the credited in its accounts the sum of Rs. 43,692
construction work is completed although some representing the full sale price of lands. At the same
unfinished ancillary works may remain time it also debited an estimated sum of Rs. 24,809
pending. The total expenditure in respect of as expenditure for the developments it had
such ancillary unfinished work is estimated and undertaken to carry out, even though no part of that
a provision is made in the books of account. amount was actually spent. The Department
This principle is adopted when the assessee has disallowed the expenditure.



222 Ahmedabad Chartered Accountants Journal July, 2019

Controversies
Held, (i) that the undertaking to carry out the levying interest under section 201 (1 A) holding
developments within six months from the dates of that the assessee had failed to deduct tax at source
the deeds of sale (which, in view of the fact that in respect of the provision made under several heads
time was not of the essence of the contract, meant a of income amounting to Rs. 15,07,25,637. The
reasonable time) was unconditional, the appellant Commissioner (Appeals) sustained the addition. On
binding itself absolutely to carry out the same. That appeal:
undertaking imported a liability on the appellant
Held, allowing the appeal, that according to the
which accrued on the dates of the deeds of sale,
scheme of tax deduction at source under Chapter
though that liability was to be discharged at a future
XVII B, credit for the tax deduction at source is to
date. It was thus an accrued liability and the
be given to the deductee. Thus the identification of
estimated expenditure which would be incurred in
the person from whose account Income-tax was
discharging the same could be deducted: from the
deducted at source is a pre-requisite condition so
profits and gains of the business, and the amount to
as to make the provision for Chapter XVII-B
be expended could be debited in account
workable. Tax deducted at source is considered to
maintained in the mercantile system of accounting
be tax paid on behalf of the person from whose
before it was actually disbursed. The difficulty in
income the deduction was made and therefore credit
the estimation thereof did not convert the accrued
is to be given to such person. Section 203(1) lays
liability into a conditional one because it was always
down that for all tax deduction at source, the tax
open to the Income-tax authorities concerned to
deductor has to furnish a certificate to the person to
arrive at a proper estimate thereof having regard to
whose account such credit is to be given. Therefore,
all the circumstances of the case.
when the tax deductor cannot ascertain the payee
The expression “profits or gains” in section 10(1) who is the beneficiary of a credit of tax deduction
of the Income-tax Act has to be understood in its at source, the mechanism of Chapter XVII-B
commercial sense and there can be no computation cannot be put into service. The Assessing Officer
of such profits and gains until the expenditure was to verify whether the payee was identifiable
incurred for the purpose of earning the receipts is and the amount payable to him was ascertainable.
deducted therefrom whether the expenditure is Then the assessee would be required to deduct tax
actually incurred or the liability in respect thereof at source in respect of such provision. However, if
has accrued even though it may have to be payee was not identifiable, the provisions of
discharged at some future date.” Chapter XVII-B i.e., tax deduction at source, could
not be pressed into service and, therefore, the
Further in respect of deducting tax at source let me
assessee was not required to deduct tax at source in
refer to the case of Apollo Tyres Ltd. v. Dy. CIT
such a case. The Assessing Officer was to re
[2017] .163 ITD 177/78 taxmann.com195 (Delhi-
adjudicate the issue afresh after examining the
Trib.) wherein it was held as under:
facts.”
“A survey was conducted at the premises of the
Thus in my opinion the proposition of the AO to
assessee. Thereafter, the summons were issued
disallow the expenses estimated can not be
under section 131 of the Income Tax Act, 1961
subjected to T.D.S.
asking for details and information for the financial
years 2009- 10, 2010-11 and 2011-12, in response
to which, necessary details were furnished by the
assessee. Thereafter, the Assessing Officer passed
an order raising a demand under section 201 and i i i








Ahmedabad Chartered Accountants Journal July, 2019 223

Judicial


Analysis

Advocate Tushar Hemani
[email protected]

Mandate of limited scrutiny cannot extended so vouchers due to the nature of business and
as to make other additions. mostly estimated @3%. The case before us also
falls in the similar category and assessee was
Garine Chandramouli vs. ITO (ITA not able to maintain proper records and shown
5 No.429/HYD/2018) AY: 2014-15 dated profit @2%. For the sake of judicial precedent,

03-04-2019
we are intended to proceed with the estimation
xxx… but the issue before us is not on rejection of
6. Considered the rival submissions and material books or estimation of income. Before us,
on record. The assessment was selected to whether limited scrutiny mandate can be
verify the bank deposits and turnover of the extended. As per the CBDT directive,
assessee whether they match. As the assessee Assessing Officer cannot do so without
is in the business of purchase and sale of liquor following proper procedure. In the given case,
and electricals, it is a fact that assessee may not Assessing Officer has made extensive
be able to maintain the sale bills as the sales are assessment without mandate. Therefore, we
mostly on across the counter. But the purchases need to restrict ourselves to address this issue.
are from the registered source, mostly from However, we direct the Assessing Officer to
Government agencies. It is not difficult to accept the books of account since he has not
determine the actual sales. We notice that found any discrepancies in verification of
Assessing Officer has verified the expenses etc., deposits and turnover as per limited mandate.
which is not the mandate of limited scrutiny. Even in case, Assessing Officer found
The CBDT directives are binding on the discrepancy, he could have invoked Section 68.
Assessing Officer and in case, Assessing Therefore, the ground raised by assessee is
Officer finds that the assessment has to be made allowed.
on extensive basis due to the reason that there
xxx…
are incidences of tax evasion found. Assessing
Officer can extend the assessment by taking Suresh Jugraj Muthavs Addl. CIT (ITA
due permission from CIT/Pr.CIT. In this case, 6 No. 05/Pun/2016) AY 11-12 dated 04/05/
there is no issue of any tax evasion and the 2018
Assessing Officer suo motto did the extensive 9. We heard both the parties and perused the
assessment even though the mandate was to orders of the Revenue on the legal issue raised
make limited scrutiny. by the assessee. We have also considered the

6.1. Considering the facts of the case, the assessee decisions relied on by both the parties. It is an
could not submit the sales bills due to the undisputed fact that the reason for which the
natureof business and Assessing Officer has not case was picked up for limited scrutiny relates
found any discrepancy in the bank deposits and to the AIR information on the cash deposits in
turnover of the assessee. We are coming across the savings bank account. It is also an
so many cases of wine business, in which undisputed fact that the AO did not obtain the
assessees were not able to submit proper written approval of the concerned
224 Ahmedabad Chartered Accountants Journal July, 2019

Judicial Analysis

Commissioner before extending the scope of information received through AIR.
scrutiny to the interest disallowed and denial However, a case may be taken up for wider
of claim of deduction u/s.54 of the Act. Further, scrutiny with the approval of the
it is on record that the Board did not permit the administrative Commissioner, where it is
Assessing Officers to extend the scope of felt that apart from the AIR information
scrutiny to the issues other than the ones which there is a potential escapement of income
are authorised the Board in this regard under more than Rs.10 Lacs.
CASS. It is also a fact that judgment cited by
3. It has also been decided that in all the cases
the Ld. DR for the Revenue in the case of
which are picked for scrutiny only on the
BanqueNationale De Paris Vs. CIT 237 ITR
basis of AIR information, the notice u/
518 (Bom.) was not issued in connection with
s.143(2) of Income Tax Act, 1961 should
the jurisdiction of the AO in matters relating to
clearly be stamped with “AIR” case.
extension of areas of scrutiny to the ones than
the authorised ones by the Board. In this 11. Further, on perusing the orders of the Revenue,
connection, we perused the CBDT Instruction we find the facts are similar to the ones already
No.7/2014, dated 26-09-2014 and find it decided by the Pune Bench of the Tribunal in
relevant to extract the relevant lines. The same the case of M/s. S.F. Chougule Vs. JCIT (supra)
reads as under : is relevant to the facts present case of the
“4. In case, during the course of assessment assessee. We therefore proceed toextract the
proceedings, it is found that there is potential relevant findings given by the Tribunal here as
escapement of income exceeding Rs.10 under :
lakhs (for non-metro charges, the monetary “10.The learned Authorized Representative for
limit shall be Rs.5 lakhs) on any other the assessee pointed out that the assessee
issue(s) apart from the AIR/CIB/26AS was engaged in road construction and
information based on which the case was building of projects. He pointed out that
selected under CASS requiring substantial during the course of Survey on
verification, the case, may be taken up for 30.01.2008, the assessee had made a
comprehensive scrutiny with the declaration of Rs.33,18,000/- + Rs.12
approval of the Pr.CIT/DIT concerned. lakhs + Rs.13,467/- which was included
However, such an approval shall be in the return of income filed by the
accorded by the Pr.CIT/DIT in writing assessee. He further stated that the case of
after being satisfied about merits of the assessee was picked up for scrutiny. The
issue(s) necessitating wider and detailed learned Authorized Representative for the
scrutiny in the case. Cases so taken up for assessee brought to our attention, the
detailed scrutiny shall be monitored by the application made under the Right to
Jt. CIT/Addl.CIT concerned.” Information Act, as to the basis for
selection of case of the assessee for the
10. We also perused the CBDT letter dated 08-09-
relevant year under scrutiny. It was
2010 which deals with selection of cases for
specifically asked whether the case was
scrutiny on the basis of data in AIR returns and
selected for scrutiny under CASS. In reply,
subsequent assessment proceedings. The
the Central Public Information Officer
instructions given in the said letter reads as
stated that the case of assessee was not
under :
selected for scrutiny under CASS. Further,
“2. The above mentioned guidelines have been the assessee has asked as to why its case
reconsidered by the Board and it has been was selected for scrutiny since it was
decided that the scrutiny of such cases covered by relaxed scrutiny norms. In
would be limited only to the aspects of answer, it was pointed out that the case was

Ahmedabad Chartered Accountants Journal July, 2019 225

Judicial Analysis

selected for scrutiny, in view of guidelines said decision has been approved by the
for selection of scrutiny issue during Hon’ble High Court of Andhra Pradesh in
financial year 2010-11; copies of RTI CIT Vs. Smt. Nayana P. Dedhia (2004)
application and the reply are placed at 270 ITR 572 (AP). Further, he referred to
pages 20 to 22 of the Paper Book. The the ratio laid down by the Hon’ble High
learned Authorized Representative for the Court of Delhi in CIT Vs. Best Plastics (P)
assessee further referred to the criteria of Ltd. (2007) 295 ITR 256 (Del) for the
guidelines for income-tax scrutiny, copy of proposition that where the guidelines are
which is placed at page 23 and 24 of the laid down for selection of cases for scrutiny
Paper Book and reiterated that in the case and if the case of the assessee was taken
of assessee, Survey was carried out and up for scrutiny in violation of CBDT
criteria was fixed for not picking up the Instructions, then the assessment order has
case under scrutiny and the assessee clearly to be set aside. He further referred to the
fulfils the same. He further pointed out that decision of Hon’ble Bombay High Court
in case the criteria is not met with, then as in Bombay Cloth Syndicate Vs. CIT
per clause (g), the Assessing Officer can (1995) 214 ITR 210 (Bom) for the
select any return for scrutiny after proposition that the CBDT Instructions
recording reasons and after obtaining the were binding.
approval of CCIT/DGIT. In this regard, he
11. The learned Departmental Representative for
pointed out that no such approval was
the Revenue on the other hand, pointed out that
received from the CCIT. Our attention was
as per the guidelines of CBDT, the cases could
drawn to the letter dated 13.05.2013 issued
be selected, may be not through CASS. Our
from the office of ACIT, Circle (1), Sangli,
attention was drawn to the order of Assessing
wherein the Assessing Officer informed the
Officer, wherein he has elaborately dealt with
assessee that there was no record to show
the issue that income increased during the year
that previous approval of CCIT was
only because of notional disallowance of
obtained to select the cases manually for
expenses under section 40(a)(ia) of the Act and
scrutiny for assessment year 2008-09. The
not because of declaration of additional income
learned Authorized Representative for the
by the assessee. He stresses that the case was
assessee stressed that where the selection
selected under normal scrutiny proceedings and
was not through CASS but was manually
excess expenditure of bad debts claimed by the
made, then the previous approval of the
assessee were disallowed by the Assessing
CCIT was compulsory. Referring to the
Officer. He then went into merits of the case. It
order of CIT(A), the assessee pointed out
was also stressed by the learned Departmental
that the CIT(A) states that the case of
Representative for the Revenue that the
assessee was selected through CASS and
declared income in the hands of assessee means
also mentions that the contention of
the book profit.
assessee would have been acceptable had
the case been manually selected for 12. The learned Authorized Representative for the
scrutiny. The learned Authorized assessee in rejoinder pointed out that in the case
Representative for the assessee further of assessee, he declared additional income
placed reliance on the ratio laid down by during the course of Survey. He further pointed
the Hyderabad Bench of Tribunal in Smt. out that the details of expenses were compared
Nayana P. DedhiaVs. ACIT (2003) 86 ITD by the Assessing Officer.
398 (Hyd) for the proposition of binding 13. We have heard the rival contentions and perused
nature of CBDT circulars upon the IT the record. The preliminary issue raised in the
authorities. He further pointed out that the present appeal by way of ground of appeal

226 Ahmedabad Chartered Accountants Journal July, 2019

Judicial Analysis

No.5 is against the validity of assessment made return of income declaring income of Rs.
in the hands of assessee. The assessee claims 81,64,590/-. The case of authorities below is
that the case of assessee was not selected for that the assessee had not fulfilled the conditions
scrutiny under CASS but was selected laid down in the guidelines for taking up the
manually. For selection of any return for case for scrutiny assessment year under
scrutiny manually by the Assessing Officer, the consideration and hence, there was no merit in
requirement of guidelines issued for this the claim of assessee that it had fulfilled the
purpose for relevant assessment year was that conditions laid down in guidelines. The whole
the same should be after obtaining approval of gamut of arguments and discussion in the orders
the CCIT /DGIT. Since no such approval was of Assessing Officer and CIT(A) is on this
received from the CCIT / DGIT, the Assessing account that the assessee had not fulfilled the
Officer had no jurisdiction to proceed with the conditions relating to Survey cases for financial
scrutiny assessment in the case of assessee. The year and the case of the assessee could be
assessee had raised the issue before the picked up for scrutiny. The assessment order
Assessing Officer and CIT(A) but the facet of was passed on 09.09.2010 and the appellate
argument beforethe authorities below was that order was passed on 04.01.2012. The assessee
the case of assessee could not be selected for thereafter moved an application under the Right
scrutiny under CASS since in the case of to Information Act, wherein a specific question
Survey, certain conditions were laid down and asked was with regard to selection of scrutiny
the assessee having fulfilled the said conditions, and other relevant information relating to
then no scrutiny could takes place in the hands assessment year 2008-09. The specific question
of assessee. asked by the assessee was whether its case was
selected for scrutiny under CASS and in case
14. In the facts of the case, Survey under section
it was not selected under CASS and why the
133A of the Act was carried out at the premises
same was picked up for scrutiny. The assessee
of assessee on 30.01.2008. During the course
also asked that under which norms the case was
of Survey, the assessee made declaration of
selected for scrutiny and whether relaxation in
additional income of Rs.45,93,467/- which was
selection of cases in which survey action was
offered as additional income over and above
carried out on fulfilling the criteria was
the income to be returned for the year under
available in the said norms or not. In reply, it
consideration. The assessee claims that it had
was stated that the guidelines / instructions were
disclosed the said additional income in its return
followed and since the guidelines were
of income wherein the return was filed
confidential in nature, the copy of same could
declaring income of Rs.81,64,598/-. However,
not be provided. In reply to the next question
the perusal of computation of income reflected
whether the case was selected under CASS,
that net profit shown in Profit & Loss Account
the categorical answer was ‘No’. The said RTI
was Rs.11,62,084/- and certain disallowances
reply further stated that the case was selected
were made on account of personal expenses,
for scrutiny in view of the guidelines contained
capital expenses and disallowances under
in F.No.225/93/2009/ITA.II.
section 40(a)(ia) of the Act at Rs.68,31,574/-
and other disallowances and the income was 15. The said guidelines for selection of scrutiny
aggregately shown at Rs.85,69,672/- The were published and it was pointed out that the
Assessing Officer and CIT(A) thus, were of said guidelines were only for the use of Officers
the view that the assessee had not included the of Income Tax Department and the same could
additional income of Rs.45,93,467/-, where not be disclosed even under the RTI Act, 2005.
it had declared the business income at The said application under the RTI Act and
only Rs.11,62,084/-, though it had filed the theorder under the RTI Act are placed at pages


Ahmedabad Chartered Accountants Journal July, 2019 227

Judicial Analysis

20 to 22 of the Paper Book. The assessee has the approval of CCIT / DGIT. However, the
also placed the copy of guidelines issued for Assessing Officer vide letter dated
scrutiny, copy of which is placed at page 23 of 13.05.2013 has categorically mentioned that
Paper Book. The said guidelines were for use no previous approval of CCIT was obtained
of Income Tax Department, wherein selection to select the case manually for scrutiny for
criteria was provided which was applicable to assessment year 2008-09. In the above
all Income Tax returns at all stations. The circumstances, where the order has been
guidelines vis-à-vis survey cases are passed against the norms laid down by the
provided therein and vide clause (g), it is CBDT vide its guidelines which were
provided that the Assessing Officer may binding upon the Assessing Officer, then the
select any return for scrutiny after order passed by the Assessing Officer is bad
recording reasons and after obtaining the in law. The instructions issued by the CBDT
approval of CCIT / DGIT. The cases under are to be strictly followed by the authorities
this category should be selected, if there are i.e. Assessing Officer and in the absence of
compelling reasons and cases not selected the same, the assessment order passed in the
under CASS. These cases are watched by the case is annulled. Such is the proposition laid
CCIT / CIT for the quality of assessment. The down by the Hon’ble High Court of Andhra
said guidelines are as per F.No.225/93/2009/ Pradesh in CIT Vs. Smt. Nayana P. Dedhia
ITA.II. The reply under RTI also refers to the (supra) and the Hon’ble High Court of Delhi
said guidelines and admittedly,these guidelines in CIT Vs. Best Plastics (P) Ltd. (supra). In
were used to select the case of assessee for view thereof, we hold that where the
scrutiny. Further, the assessee also filed on Assessing Officer has failed to follow the
record letter dated 13.05.2013 issued by the guidelines issued for selecting the cases for
ACIT, Circle (1), Sangli, wherein in reply to scrutiny and in the facts of the present case,
the letter of assessee, it has been informed that where the case was selected manually for
there is no record to show that previous approval scrutiny, but no previous approval of CCIT
of CCIT / DGIT was obtained to select the case was obtained, then the Assessing Officer
manually for scrutiny for assessment year 2008- lacks jurisdiction to carry out the scrutiny
09. So, taking into consideration the said assessment in the present case and
correspondence which has come into existence accordingly, assessment order passed by the
after the date of passing of assessment order Assessing Officer is bad in law. Hence, we
and appellate order, the first thing to be taken hold so. Since the assessment order is held to
note of is that the case of assessee was not be bad in law, the issue on merits becomes
selected for scrutiny in CASS which is the reply academic and the grounds of appeal raised by
given in answer to RTI query as per letter dated both the assessee and the Revenue in their
12.04.2012. The second aspect is that the case respective appeals are infructuous. The appeal
of assessee was selected for scrutiny in view of assessee is thus, allowed and the appeal of
of the guidelines contained in F.No.225/93/ Revenue is dismissed.”
2009/ITA.II. The assessee has placed the copy
Therefore, the Board circular do not permit the
of said guidelines on record at page 23 of the
AO from converting the limited scrutiny case
Paper Book, wherein it is provided that the case
like the present one to the unlimited one without
of any assessee may be selected for scrutiny
the approval of Administrative Commissioner
after recording reasons and after obtaining the
of Income Tax. AO did not mention the reasons
approval of CCIT / DGIT. In other words, the
for not taking such an administrative approval
case of assessee could be picked up for scrutiny
before making the said addition. As such, the
manually but the same had to be after recording
Pune Bench of the Tribunal has already taken
reasons for such an action and after obtaining
228 Ahmedabad Chartered Accountants Journal July, 2019

Judicial Analysis

the favourable view in these matters in favour 16. Thus, evidently, the Income Tax Authorities are
of the assessee. We do not understand why AO bound to observe and follow the instructions
failed to take approval for such conversion. of the Board. The operative word in section
Considering the settled nature of the issue, we 119(1) is ‘shall’. Judicial decisions have
allow the legal ground raised by the assessee recognized this position.
vide Ground No.1 and hold that the assessment
17. In the present case, the assessee’s case was
order passed by the AO is bad in law and void-
picked up for scrutiny on the basis of AIR
ab initio. Consequently, we find adjudication
information. The notice dated 21.09.2012
of other grounds by the assessee on merits
(supra) was a stamped with ‘AIR Only’, in
becomes academic. Therefore, the said
compliance with para 3 of the CBDT
grounds are dismissed are academic.
instruction (supra) dated 08.09.2010.
7 Gurpreet Kaur vs. ITO (ITA No. 87/Asr/ 18. The CBDT Instruction dated 08.09.2010, for
2016) AY 11-12 dated 24/03/2016)
facility, is reproduced as under:
xxx…
“F.No.225/26/2006-ITA.II (Pt.)
13. The question is whether, firstly, the AO is bound
by the CBDT Instruction F.No.225/26/2006- Government of India,
ITA-II(Pt.) dated 08.09.2010 and as to whether Ministry of Finance
in the present case, while computing capital Department of Revenue
gain and denying benefit of section 54 to the Central Board of Direct Taxes,
assessee, the AO has contravened the said New Delhi, dated the 8th September, 2010
instructions, thereby rendering the assessment To
order invalid; and secondly, as to whether the All Chief Commissioners of Income Tax,
ld. CIT(A) is correct in upholding the All Directors General of Income Tax,
assessment order.
Sir/Madam,
14. Section 119(1) of the Act reads as follows:
Subject: Selection of cases for scrutiny on the
“The Board may, from time to time, issue such basis of data in AIR returns and subsequent
orders, instructions and directions to other assessment proceedings-regarding.
income-tax authorities as it may deem fit for
Reference is invited to Board’s letter of even
the proper administration of this Act, and such
number dated 23rd May, 2007 regarding scope
authorities and all other persons employed in
of enquiry in the scrutiny cases selected only
the execution of this Act shall observe and
on the basis of information received through
follow such orders, instructions and directions
the AIR returns.
of the Board.”
2. The above mentioned guidelines have been
15. In ‘Crystal Phosphates Ltd. vs. ACIT’, 34 CCH
reconsidered by the Board and it has been
136 (Del. Trib.), it has been held that once the
decided that the scrutiny of such cases
CBDT had issued instructions, the same have
would be limited only to the aspects of
to be followed in letter and spirit by the AO.
information received through AIR.
14. In ‘Amal Kumar Ghosh vs. Addl. CIT’, 361 However, a case may be taken up for wider
ITR 458 (Cal.), it has been held that when the scrutiny with the approval of the
department has set down a standard for itself, administrative Commissioner, where it is
the department is bound by that standard and it felt that apart from the AIR information
cannot act with discrimination. there is a potential escapement of income

15. No decision contrary to the above decisions more than Rs. 10 Lacs.
has been filed.

Ahmedabad Chartered Accountants Journal July, 2019 229

Judicial Analysis

3. It has also been decided that in all the cases a separate agreement to sell and from whom,
which are picked for scrutiny only on the the assessee had received a sum of Rs. 3 lakhs
basis of AIR information, the notice u/s at the time of agreement “for their examination
143(2) of Income Tax Act 1961 should in order to ascertain whether the agreement,
clearly be stamped with “AIR Case”. was finalized or cancelled”. The AO observed
that this proceedings was limited to the extent
This should be immediately brought to the
of the AIR information.
notice of all the officers working in your
region. 23. Evidently, the matter of the other agreement to

Yours faithfully, sell does not stand covered in the AIR
(Ajay Goyal) information, which was regarding the cash
Director (ITA.II)” deposits of Rs. 25 lakhs, which the assessee
had adequately explained, as above. So, it was
19. As per the table at page-1 of the AO, the AIR
obviously not within the purview of the AO to
information was regarding transaction of Rs.25
ask the assessee to produce Smt. Balbir Kaur
lakhs dated 31.3.2011 (Entry No.2 in the table
and Smt. Kamaljit Kaur, or to make addition
is, as stated, merely a repetition of Entry No.1).
of Rs. 3 lakhs, as was done.
According to para-3 of the assessment order,
the details of this are deposits of Rs.9.5 lakhs 24. The assessee, as per para 3.1 of the assessment
on 07.05.2010, Rs.9.5 lakhs on 08.05.2010 order, had purchased a plot for Rs.11,92,500/-
and Rs. 6 lakhs in cash by the assessee in her plus stamp duty of Rs.83,475/- on 28.07.2009.
savings bank account with OBC, Jalandhar. Since the assessee did not produce the two
ladies for examination, the AO held that the
20. Para 2 of the CBDT Instruction states that the
plot purchased did not have any relation to the
scrutiny of cases selected on the basis of
house sold and thus, the assessee had wrongly
information received through AIR returns
claimed exemption under section 54 of the Act.
would be limited only to the aspects of
The AO made addition of Rs.11,92,000/- in
information received through AIR.
the calculation of the assessee’s long term capital
21. As seen, the AIR information in the present gains.
case was regarding cash deposits of Rs.25 lakhs
by the assessee in her savings bank account 25. This, again, does not come within the AIR
with OBC. Meaning thereby, that the assessee information, which is, to reiterate, with regard
was required to explain the source of such cash to the cash deposits of Rs. 25 lakhs.
deposits. The assessee explained the same as
26. So, these latter enquiries by the AO are not
sale proceeds of her residential house
aspects of the information received through
amounting to Rs.32.25 lakhs received from
AIR. The only aspect of such information was
Smt. Naunihal Kaur, the purchaser. Her this
the source of the cash deposits, which stands
assertion was duly supported by a copy of the
adequately explained by the assessee, as above.
concerned sale deed.
27. In fact, what the AO did was to widen the
22. Now, as per the CBDT Instruction, nothing
scrutiny. Now, para 2 of CBDT Instruction is
further was to be gone into by the AO, since
specific when it states that where it is felt that
the information received through AIR was the
apart from the AIR information, there is
cash deposits. However, the AO as noted in
potential escapement of income more than Rs.
paras 3.1 & 3.3 of the assessment order itself
10 lakhs, the case may be taken up for wider
asked the assessee vide letter dated 13.12.2013
scrutiny with the approval of the administrative
to produce Smt. Balbir Kaur and Smt. Kamaljit
Commissioner.
Kaur, with whom the assessee had entered into
230 Ahmedabad Chartered Accountants Journal July, 2019

Judicial Analysis

28. So, the proper course for the AO before making Bholanath R. Shukla v. ITO [2009] 118
these additional enquiries would have been to 8 ITD 552 (Mumbai)
take approval from the administrative
xxx…
Commissioner to widen the scrutiny. This,
8. We have considered the submissions made by
however, was not done and therefore, the action
both the sides, material on record and orders of
of the AO is violative of the CBDT Instruction.
the authorities below. We find that the question,
29. Apropos the ld. CIT(A)’s order, obviously the before us, is whether limited scrutiny proceedings
ld. CIT(A) has erred in confirming the and regular scrutiny proceedings are independent
assessment order. The ld. CIT(A) had erred in of each other or not and, therefore, notice issued
view of the above observation of the Bench, in for limited scrutiny under section 143(2) (i) can
holding that the AO has not violated the CBDT enable the Assessing Officer to convert the
Instruction. The ld. CIT(A) has gone wrong in limited scrutiny into a regular scrutiny where time
observing that the AO has limited his enquiries to issue notice under section 143(2) (ii) has
to the source of cash deposits. True, the AO is expired or not. We find that Legislature
duty bound to see whether the assessee has introduced limited scrutiny for a limited period
correctly declared taxable value of the long term and provided for requirement of issue of notice
capital gains from the sale of her residential therefore independently wherein the Assessing
house. However, as noted, in a case like the Officer was required to specify the specific
present one, where it has been picked up for nature of enquiry whereas the provisions of
scrutiny on the basis of the AIR information, regular scrutiny and time limit to issue notice for
the CBDT Instruction has to be strictly abided that purpose were already on statute. We further
by. Herein, since the AIR information was only find that the provisions of section 143(2)
with regard to cash deposits of Rs. 25 lakhs provided that no notice under this sub-section
and the assessee had duly and adequately could be served on the assessee after the expiry
explained the source thereof, the AO, it cannot of 12 months from the end of the month in which
be gainsaid, transgressed his competency in the return was furnished and, therefore, as per
issuing the further query and in asking the this proviso, both Notices under section 143(2)
assessee to produce Smt. Balbir Kaur and Smt. (i) or 143(2) (ii) are to be issued within such
Kamaljit Kaur, the executants of the other specified time. We are further of the view that
agreement to sell which had nothing to do with the provisions of section are clear regarding the
the cash deposits. Moreover, it cannot, in view issuance of notice for both types of scrutinizes
of the above discussion, at all be said that the independently and limit has also been prescribed
objections raised by the assessee were merely for issuance of Notice under section 143(2) for
to divert the attention of the AO to come to a both types of scrutiny proceedings. Hence, we
logical conclusion. The objections taken by the are unable to agree with the contention of the
assessee are well raised and the AO, at the cost Revenue that Notice issued under section 143(2)
of the repetition, could not have gone beyond (i) can by-itself extend the time for the issuance
the specific CBDT Instruction. of Notice under section 143(2) (ii) , hence, for
this reason, we hold that the Notice issued under
30. For the above, finding merit in the grievance
section 143(2) (ii) on 28-7-2003 is time-barred
sought to be raised by the assessee by way of
and consequently, the assessment completed
Ground Nos. 1 & 2, the same are accepted. It
under section 143(3) (ii) is also null and void .
is held that since the assessment order, passed
According, we quash the same. Thus, the
ex-parte by the AO, was in violation of specific
additional ground, filed by the assessee, is
CBDT Instruction, the same is not legally
accepted.
sustainable. The same is accordingly reversed.
i i i
xxx…
Ahmedabad Chartered Accountants Journal July, 2019 231

India-China DTAA amended
to incorporate BEPS
related provisions
CA. Dhinal A. Shah CA. Sagar Shah
[email protected] [email protected]

1.1 Executive summary We have summarized below the key highlights
The existing India-China Double Taxation of the Protocol.
Avoidance Agreement entered in 1995 (1995 1.2 Background
DTAA) has been amended by way of Protocol In exercise of powers conferred under the
to incorporate the Base Erosion and Profit Indian Tax Laws (ITL), the Government of
Shifting (BEPS) related treaty changes vide India (GoI) can enter into a DTAA with a
Notification No. 54/2019. The Protocol will foreign country or a specified territory. Further,
be effective in India for income earned on or any such DTAA can be amended through
after 1 April 2020. It may be noted that the 1995 bilateral negotiations between the countries by
DTAA was not subject to modifications way of protocol to the existing DTAA.
pursuant to the Multilateral Instrument
Pursuant thereto, a DTAA was signed with the
(MLI)and the same was agreed to be amended
Government of China and the same was
bilaterally. As a background, MLI will enable
effective in respect of income derived in any tax
jurisdictions to swiftly and consistently
year commencing on or after 1 April 1995 for
implement BEPS related treaty
India and on or after 1 January 1995 for China.
recommendations, between countries on the
As a backdrop, though China was a part of
principles of matching of their choices and will
provisional list of DTAAs, as notified by India,
be applied alongside the existing tax treaties.
to be amended through MLI, the same was
The DTAA will now include BEPS related
excluded during the final notification process.
changes being:
Further, India was not notified by China under
(i) minimum standards of anti-abuse
its list of DTAAs at all, which were subject to
provisions, i.e. the Preamble and the
change through MLI.
Principal Purpose Test (PPT),
It was clear that both India and China wanted
(ii) various changes to the definition of
to have flexibility in terms of amendments
Permanent Establishment (PE) to include
which can be made to DTAA and not be
broader dependent agency PE rule and
restricted to the general positions as adopted
also the aggregation rule in order to
under the MLI. Accordingly, to amend the
compute time thresholds when activities are
existing 1995 DTAA, the current Protocol has
carried out by affiliates,
been entered into by India and China to amend
(iii) revised tie-breaker rule for dual resident
the existing 1995 DTAA through bilateral
entities,
negotiations to incorporate the BEPS related
(iv) treaty benefits to Fiscally Transparent
treaty changes vide Notification No. 54/2019
entities (FTEs), amongst others.
and the same is effective in respect of income
Additionally, the Protocol also includes an
derived in any tax year commencing on or after
update of the existing provisions for exchange
1 April 2020 for India and on or after 1 January
of information aligned with the latest
2020 for China.
international standards.
232 Ahmedabad Chartered Accountants Journal July, 2019