JOURNAL AUG 23

Ahmedabad Chartered Accountant Journal August, 2023 269 Volume : 47 Part : 05 August, 2023 E-mail : [email protected] Website : www.caa-ahm.org Ahmedabad Chartered Accountant Journal In this Issue Contents Author's Name Page No. - caaahmedabad Journal Committee Shah Rajni Mangaldas Kataria Ashok Chhugamal Shah Karan Dhirenbhai Sheth Prakash Bharatkumar Chairman Convener E. C. Representative Past President Members Shah Rutvij Pankajkumar Desai Maulik Sharadbhai Choksi Nirav Rameshbhai Shah Jignesh Jaswantlal Shah Monish Suketu Shah Rushabh Mayank - Simple ways to Control Stress CA. Riddhi Sheth 271 Editorial (Guest) CA. B. M. Shah 272 From the President CA. Shivang Chokshi 274 Articles Section 56(2)(x) - Measures to prevent generation and circulation of CA. Utsav Hirani 275 unaccounted money Trademark Distinctiveness Dr. Omkar Acharya 285 Direct Taxes Glimpses of Supreme Court Rulings Adv. Samir N. Divatia 288 From the Courts CA. Jayesh Sharedalal 289 Tribunal News CA. Yogesh G. Shah & 292 CA. Aparna Parelkar Unreported Judgements CA. Sanjay R. Shah 297 Judicial Analysis Advocate Tushar Hemani 301 Controversies CA. Kaushik D. Shah 306 FEMA & International Taxation FEMA & International Taxation CA. Dhinal A. Shah & 307 CA. Hardik Khatri FEMA Updates CA. Dr. Savan R. Godiawala 310 Indirect Taxes GST and VAT Judgments and Updates CA. Bihari B. Shah & 311 CA. Vishrut R. Shah Advance Ruling under GST CA. Monish S. Shah 314 Corporate Law & Others Corporate Law Update CA. Naveen Mandovara 319 GujRERA Corner CA. Manan Doshi 321 Capital Markets CA. Karan P. Vora 324 From Published Accounts CA. Pamil H. Shah 329 From the Government CA. Ashwin H. Shah & 332 CA. Kunal A. Shah IT Corner CA. Rushabh Shah 334 Association News CA. Mayur H. Modha & 336 CA. Prakash B. Nandola ACAJ Crossword Contest 340

270 Ahmedabad Chartered Accountant Journal August, 2023 Attention Members / Subscribers / Authors / Contributors 1. Journals are carefully posted. If not received, you are requested to write to the Association's Office within one month. A copy of the Journal would be sent, if extra copies are available. 2. You are requested to intimate change of address to the Association's Office. 3. Subscription for the financial year 2023-24 is ` 1500/-, single copy ` 150/- (if available). 4. Please mention your membership number in all your correspondence. 5. While sending Articles for this Journal, please confirm that the same are not published / not even meant for publishing elsewhere. No correspondence will be made in respect of Articles not accepted for publication, nor will they be sent back. 6. The opinions, views, statements, results published in this Journal are of the respective authors / contributors and Chartered Accountants Association, Ahmedabad is neither responsible for the same nor does it necessarily concur with the authors / contributors. 7. Life Membership/Annual Membership and Other Fees F. Y. 2023-24 Amount in ` Basic GST Total 1. Admission Fees 500 90 590 2. Annual Membership Fees a. If Paid Prior to june 30 of each financial year : i. In case of membership (of ICAI) for a period of less than or equal to five years 600 - 600 ii. In case of membership of (ICAI) for a period more than five years, 750 - 750 b. If paid after june 30 of each financial year : i. In case of membership (of ICAI) for a period of less than or equal to five years, 720 - 720 ii. In case of membership of (ICAI) for a period of more than five years 900 - 900 3. Life Membership Fees i. In case of membership (of ICAI) for a period of less than or equal to five years 4000 720 4720 ii. In case of membership of (ICAI) for a period more than five years 7500 1350 8850 4. Brain Trust Membership Fees a. Individual Membership Fees i. In case of membership (of ICAI) for a period of less than or equal to five years 800 144 944 ii. In case of membership of (ICAI) for a period more than five years 1200 216 1416 b. Flexi Firm/Corporate Membership Fees*** 2400 432 2832 *** Registered Firm/Corporate can nominate any two participants from their firm for each Brain Trust Meeting. Additional Representatives can be nominated @1200/- plus GST per participant subject to maximum of 20 participant per firm Published By CA. Rajni M. Shah, on behalf of Chartered Accountants Association, Ahmedabad, 2nd Floor, Darshak, 14/A, Swastik Society, Opp. Shrey Hospital, Navrangpura, Ahmedabad - 380 009 Phone : +91 79 40392596 While every effort has been made to ensure accuracy of information contained in this Journal, the Publisher is not responsible for any error that may have arisen. Professional 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. Printed : Pratiksha Printer, Ahmedabad Mobile : 98252 62512 E-mail : [email protected]

Ahmedabad Chartered Accountant Journal August, 2023 271 In simple words, stress means pressure created on mind due to any situation, whether created by oneself or by other person. In today’s world, stress is an inseparable part of everyone’s life. One of the contributing factors causing the death of youngsters due to suicide or heart attack or stress which is like a silent killer. Even besides casualty, stress contributes to a large number of health complications which could be physical or mental.There are many factors which causes stress like desire, competition, jealousy etc. Though stress is an inevitable part of everybody’s life, the way we respond to it makes a huge impact to our overall well-being. A same situation can be more or less stressful to different persons. But a person’s response to a particular situation can make all the differences. There are various keys or ways by which one can control stress. Some of the ways to control stress are: - Keep away from desire:Desire is a wish of becoming owner of any new thing which we see in outside world. E.g. Nowadays due to online marketing and social media platform, everyone desires to purchase any new thing which he/she sees, whether it is useful for or not. For those who are not financially stable, they get stress about how to get that thing. So, by controlling such wish and applying mindfulness one can keep stress under control. - Not to be jealous of others: Stress and jealously are very much interrelated. Jealously is like a candle. Just as candle becomes smaller by giving light to other, but the thing which gets light of candle does not become smaller. Similarly, the person who gets jealous of another person gets keeping smaller but, it does not make difference to that another person. Jealously can be of any thing, whether wealth, looks, work related etc. So, by remaining CA. Riddhi Sheth [email protected] Simple ways to Control Stress satisfied by what we have and avoiding jealously it can make a positive impact on one’s mind and it helps to control stress. - Holding no grudges:When one holds on to a grudge, it does more harm to the person holding it, than the others as it develops negative energy in the body and such negative energy gives birth to stress. In Ramayana, even though due to Kaikeyi, Shri Ram was sent in exile for 14 years but still he did not hold any grudge against her and so he was more respectable and adorable to all. Thus, by leaving grudges behind, one can lead a stressful life. - Yoga:Even though, yoga is a gift given to world by India, still many people underestimate the power and the benefits of yoga. Yoga encourages mental and physical relaxation, which helps reduce stress and anxiety. It calms your mind and body and encourage mindfulness. It is the only exercise which we can perform at anytime, anywhere and even 5 minutes of doing it every day, can provide multifold benefits and can keep stress at bay. There is a quote in Sanskrit which truly explains how stress is bad for our body and why it is necessary to control it. ô™¼¢²¢p 發¢²¢E çÏ¢‹Îé}¢¢~¢æ ç±çà¢c²¼ï ¢ 發¢Îãç¼ çÝ…èü±æ 癋¼¢Îãç¼ …è±Ý}¢ì ¢¢ As per this proverb, there is difference of only one dot in the spelling of 癋¼¢ (stress) and 發¢ (funeral pyre). The pyre burns the dead body whereas the stress burns down the whole life. Thus, in modern times keeping our approach of life simple and not getting distracted by other people’s success is the biggest stress buster. ❉ ❉ ❉

272 Ahmedabad Chartered Accountant Journal August, 2023 NEP 2020 and higher education, where are we today? The National Education Policy 2020 is a bold and forward-looking initiative of the Central Government aimed at transforming the entire education spectrum of India. The policy envisages radical reforms encompassing every aspect of education with the ultimate goal of making India a global knowledge superpower to be built on the edifice of equity, quality and inclusiveness. Though the policy covers the entire education system from the Anganwadis to higher education, the latter sector is worth focusing on, in order torealise the dream of making India a superpower by the end of two decades. In this backdrop, let us make an attempt to broadly decipher the key recommendations of the NEP. One of the major targets is to increase the Gross Enrolment Ratio (GER) from the current level of 26.3% to 50% by 2035. Even this single milestone needs all the stakeholders like the Central Government and its agencies, State Governments, Universities, standalone colleges, and the self-financed institutions to significantly alter a large part of the existing structure andbring abouta completely new ecosystem as envisaged in NEP 2020. The timeline prescribed is 2030 for full implementation of NEP 2020. If done successfully, the major outcomes would be higher level of employability skills of the graduates, a larger pool of knowledge workers, skill development leading to creativity and innovations, holistic education with a thrust on practical learning thus benefiting the society and country as a whole towards higher growth. It is heartening to know that all the stakeholders have been active in radically rethinking the old framework through planned actions towards implementation of the NEP recommendations. University Grants Commission (UGC) has taken several positive steps during 2022 and 2023, such as liberalizing the framework for granting autonomy to stand-alone colleges thus enabling them to bring reforms in their academics and operations. Such colleges can design their own curricula and pedagogy in alignment with global practices. Several such measures have been taken by the UGC to offer greater regulatory freedom to HEIs for quicker implementation of NEP 2020. Choice Based Credit System, multi-disciplinary courses and programmes, introduction of four-year undergraduate programmes, facilitating online and hybrid mode of learning, and rationalization of credit structure are a few initiatives taken by the UGC. In Gujarat, the State Government has moved rapidly in the implementation of NEP by forming a taskforce consisting of senior academics and subject experts, setting up of Standard Operating Procedures (SOPs) for time-bound implementation of the NEP and extending status of Center of Excellence (COE) to seven private universities based on their performance and future plans. Similar steps have been taken in several other states. It has been almost three years since the introduction of NEP. It is time to review the progress in the holistic implementation of NEP so far along with reviewing the speed and direction of changes to come in the near future. Even while the NEP targets complete implementation by 2030, looking at the current status, it seems certain that there is no readiness to achieve the target. The reasons for this state of affairs is not hard to guess. First, the HEIs still operate under the old governance and control environment. They are still not ready for fouryear UG Programmes as well as higher credits of 176 from the year 2023-24. This will need additional faculty resources as well as infrastructure, which institutions may find hard-pressed to organize. Second, the teacher student ration is still way below expected norms. . In the grant-in-aid colleges, the teacher student ratio in non-science colleges is as high as 1:150 against the norms of 1:30 (1:20 for Science and CA. B. M. Shah Guest Editorial bm.shahahduni.edu.in

Ahmedabad Chartered Accountant Journal August, 2023 273 Engineering Programmes). This is a result of the Government not filling vacant positions over the years. Due to this the class size sometimes goes beyond 100 students making it extremely difficult for faculty to focus on teaching and learning. Third, with respect to granting autonomy, there is no sense of urgency or clarity of purpose on the part of the stakeholders such as the managements, HEIs and affiliating Universities. This will eventually either slow down the pace of implementation or defeat the entire purpose of autonomy. Lack of accreditation is also partly responsible for this state of affairs. . Not many HEIs are ready for accreditation or are not eligible due to insufficient resources and poor performance, when compared with the criteria prescribed by accreditors like NAAC and NBA. Fourth, the Government and regulating agencies still want to have control over many aspects of operations such as faculty appointments, student admissions, course design, pedagogy and conducting of examinations. The HEIs have little freedom to experiment and innovate to enhancethe quality of education. Many laudable recommendations like the Academic Bank of Credit, multiple entry and exits, learning flexibility and multidisciplinarity require great freedom and autonomy. As of now it seems a daunting task to move fast to achieve all the milestones within thestated timeline. Finally, one of the boldest recommendations of NEP in the form of abolishing the concept of affiliation is nowhere near consideration. It appears that the University system does not wish to let go of the power, authority and the position it has been brutally enjoying unmindful of the massive damage being done to higher education. In this backdrop, some of the private universities have made a modest beginning towards implementation of all key recommendations ahead of public universities. It is a fact that in order to reach the target of 50% GER by 2035, the private universities are going to play a significant role. Many of them have well thought-out plans to compete with global universities provided they gain academic, operational, and financial autonomy. This process of giving freedom has not yet gained momentum and there are valid reasons too. Not all private universities are focused on quality, affordability, and inclusivity; the three pillars of education fora new India. Several of them are merely rent seekers and operate purely on commercial considerations. As a consequence, the good ones have been deprived of the requisite autonomy to enable them to find a place in the national and international ranking. It is indeed a pity that not many Indian higher education institutions find place in global rankings. We have to be happy to find only a handful of institutions figuring in the rankings and that too towards the tail end of it. For instance, there is no Indian institution in the first hundred and only two IITs in the first two hundred ranks of the current cycle of QS Rankings. It is high time that all stakeholders gear up for faster implementation of NEP 2020 through bold decisions breaking the worn-out barriers that have hindered the growth of higher education in India. It is only then that India can rapidly recover from the missed opportunity of capitalizing on talent and intellectual resources of the country for the good of its citizens, society, and the economy as a whole. CA Bhupendra M. Shah Registrar, Ahmedabad University ❉ ❉ ❉ Guest Editorial

274 Ahmedabad Chartered Accountant Journal August, 2023 Respected Members, I would like to start this message with a personal note. The past month has been one of the toughest month for me. I lost my father on 29th July. The love and support I have received from the CA fraternity and especially the Tea club members has been beyond words. I take this opportunity to thank all who have been by my side in this time of difficulty. The pain caused due to loss of parent at any age is immeasurable. We are what we are is because of them. We are so busy growing up, we forget that even they are growing old. However, I was fortunate enough that due to the choices I have made in life, I was able to be by his side and give him all the happiness I could which included taking the post as President of CAA. However, this episode of life has given me a lot of new perspectives to think. One of the most important trait is to defeat procrastination. There are so many things which we take for granted including life itself. Does that mean that we can be hands-on in every task every time? Will it ever be that all that is thought of is completed? I got my answer in the word satisfaction. From creating to-do list on a daily basis to weekly and monthly targets and reviewing them on timely basis helps a lot. Sometimes taking a step back and relaxing yourself is equally necessary. 15th August was celebrated with Ahmedabad Branch of WIRC of ICAI with multiple events like cleanliness drive, Flag Hoisting and drama Mere Sapnoka Bharat India @ 2047. Talent Evening on August 23rd was organised after a span of over 5 years and we got phenomenal response in terms of over 28 participations and attendance of over 400 people. Under leadership of CA Raju Shah and his team along with rigorous efforts of CA Mihir Pujara, CA Uday Shah and CA Chandrakant Pamnani the event was a huge success and members enjoyed the evening which lasted for about 3.5 hrs. The participation in singing, dancing, instrument playing and mimicry was from age 9 to age 72. The judges Dr.Tejal Pathak and Kajari Shah had a wonderful time enjoying the show and a hard time participants. The day was equally historic from the national view point as Chandrayaan 3 landed on the moon and ISRO made our country proud. CAA would like to congratulate ISRO on this phenomenal achievement. It shows that persistency with improvement eventually pays good results as seen in our profession. Along with all the members, I now look forward to the upcoming audit season and wish all members to give full justice to the profession. I am confident that all of you will work responsibly keeping in mind the brotherhood amongst the fraternity. ICAI under leadership of our beloved CA Aniket Sunil Talati has organised GloPac – A Global Profession Accountants Convention in our state of Gujarat at Mahatma Mandir Convention and Exhibition Centre Gandhinagar from 24th-26th November 2023. It is a great opportunity for members to interact with global accountancy community. The convention aims to bring together stake holders such as thinkers, policy makers, standard setters, industry & commerce groups and financial institutions from across the world to ponder upon and debate on the current issues and future trends concerning the accountancy profession. I urge all the members to take advantage of this opportunity and attend the event which is happening in our vicinity. Wishing you and your family the best of health and happiness. ❉ ❉ ❉ From the President From the President From the President CA. Shivang Chokshi [email protected]

Ahmedabad Chartered Accountant Journal August, 2023 275 Legislative History Before even constitution of the Constitution of India, and even before the Income Tax Act, 1961 the Income Tax Act, 1922 was already there per which taxes where collected, this was essentially in the British Era. The background of income tax law in India can be traced back to the preamble of the Constitution of India. The preamble states that India is a sovereign, socialist, secular, democratic republic. This means that the government has the power to levy taxes in order to raise revenue and fund its activities. Article 265 of the Constitution further reinforces this power by stating that “no tax shall be levied or collected except by authority of law.” This means that the government cannot levy a tax without first passing a law that specifically authorizes it. This means that each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament of the State Legislature. Entry 82 of the Seventh Schedule to the Constitution lists “taxes on income other than agricultural income” as a subject on which the Parliament has exclusive power to legislate. Backed by the said entry, Income Tax, 1961 (“the Act”) was enacted by the Parliament. The Income Tax Act, 1961 is the main law that governs income tax in India. It was enacted by the Parliament in 1961 and has been amended numerous times since then. The Act defines income, sets out the rates of tax, and prescribes the procedures for assessment nd collection of tax. History of Section 56(2)(x) The Gift-tax Act of 1958 in India made all gifts taxable, subject to certain exemptions. However, due to its inability to generate significant revenue and combat tax evasion, it was repealed effective from 1-10-1998 by the Finance (No. 2) Act, 1998. Instead, it was Section 56(2)(x) - Measures to prevent generation and circulation of unaccounted money CA. Utsav Hirani [email protected] believed that the Income-tax Act could sufficiently handle potential tax evasions. Contrarily, the absence of the Gift-tax Act saw many influential individuals accumulating substantial wealth under the guise of “gifts.” These received sums were not being taxed, leading to a loophole in the tax system. To address this, section 56(2) of the Incometax Act was fortified with deeming provisions. Specifically, clause (v) was added to section 56(2) by the Finance (No. 2) Act, 2004, effective from 1-4-2005. It stated that any monetary sum exceeding ` 25,000 received by an individual or Hindu Undivided Family (HUF) would be considered taxable income under “Income from Other Sources.” However, genuine gifts from relatives, marriage gifts, and some specified situations were exempted from taxation. By 1-4-2007, this threshold was revised to ` 50,000. Further reforms took place on 1-10-2009, expanding the taxable bracket to include undervalued immovable or other properties. By 1-6-2010, clause (viia) was introduced, expanding the taxable entities to firms and companies for shares received from other companies, if the value exceeded ` 50,000 and was below fair market value. Another addition, clause (viib), was introduced by 1-4- 2013 to monitor and tax companies issuing shares at a premium higher than their fair market value. However, the measures for individuals, HUFs, and companies were still found wanting in terms of effectiveness. To address this and ensure all assessees were adequately covered, clause (x) was introduced into section 56(2) on 1-4-2017, superseding all previous provisions except for clause (viib). Currently, only clauses (viib) and (x) of section 56(2) are operational, governing the taxability of presumed income. This article aims to delve deeper into the intricacies of clause (x) in section 56(2) of the Incometax Act.

276 Ahmedabad Chartered Accountant Journal August, 2023 Settled principle of Law Before we delve into the matter further, specific attention is drawn to Article 20 (1) of the Constitution of India 1950 which states as follow- (1) No person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law at the time of the commission of the offence. Basis the above extracts it can be fairly concluded that the law cannot be applied retrospectively unless it is specifically provided at the time of its enactment. The presumption with respect to an enactment is that, unless there is something in it to show that it means otherwise, it deals with future contingencies, and does not annul or affect existing rights and liabilities or vested rights, or obligations already acquired under some provisions of law although its effect is that it does not affect an existing right as well. If an enactment expressly provides that it should be deemed to have come into effect from a past date, it is retrospective in nature. It then operates to affect existing rights and obligations, and is construed to take away, impair or curtail, a vested right which had been acquired under some existing law. If an enactment is intended to be retrospective in operation, and also in effect, the legislature must expressly, and in clear and unequivocal language, say so, in the enactment itself. A retrospective operation is not given to a statute, so as to impair an existing right or obligation, otherwise than as regards matters of procedure unless that effect cannot be avoided without doing violence to the language of the enactment. This is also in confirmation with the Rule of Beneficial Construction, in the Maxwell’s Interpretation of Statutes, 12th Edn. the statement of law relating to its operation is stated as: “Perhaps no rule of construction is more firmly established than thus - that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards matters of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only. The rule has, in fact, two aspects, for it, “involves another and subordinate rule, to the effect that a statute is not to be construed so as to have a greater retrospective operation than its language renders necessary”. Judicial Pronouncement by the Apex Court of India in Union Of India vs M/S. Ganpati Dealcom Pvt. Ltd. ... on 23 August, 2022 Para 17.10 - It is well settled that the legislature has power to enact retroactive/retrospective civil legislations under the Constitution. However, Article 20(1) mandates that no law mandating a punitive provision can be enacted retrospectively. Further, a punitive provision cannot be couched as a civil provision to by¬pass the mandate under Article 20(1) of the Constitution which follows the settled legal principle that “what cannot be done directly, cannot be done indirectly” Conclusion Para 18.1 In view of the above discussion, we hold as under: (a) Section 3(2) of the unamended 1988 Act is declared as unconstitutional for being manifestly arbitrary. (b) Accordingly, Section 3(2) of the 2016 Act is also unconstitutional as it is violative of Article 20(1) of the Constitution. (c) In rem forfeiture provision under Section 5 of the unamended Act of 1988, prior to the 2016 Amendment Act, was unconstitutional for being manifestly arbitrary. (d) The 2016 Amendment Act was not merely procedural, rather, prescribed substantive provisions. Further, GarikapattiVeeraya Vs. N. Subbiah Choudhry (SC) states as “The golden rule of construction is that, in the absence of anything in the enactment to show that it is to have retrospective operation, it cannot be so construed as to have the effect of altering the law applicable to a claim in litigation at the time when the Act was passed” From the above, judicial pronouncements it is extremely clear that the law cannot be applied on retrospective basis. Similarly, with regards to Section 56(2)(x) in the matter of Benudhar Gokuldas Biswal vs. National E Assessment Centre, New Delhi (ITAT Mumbai – 2023) it was held that – “Assessee has purchased the flat vide agreement dated 13.07.2009 and the section 56(2)(x) was not in the statute book, and also it is well settled principle of Law that a charging section cannot Section 56(2)(x) - Measures to prevent generation and circulation of unaccounted money

Ahmedabad Chartered Accountant Journal August, 2023 277 be pressed into service retrospectively unless it is specifically provided for by the legislature. The provisions of Sec. 56(2)(x) of the Act are incorporated in the Finance Act 2017 with the prospective applicability from A.Y. 2017-18 and the transactions entered into prior to 1.04.2017 would not suffer any implications of the section. In the transaction of purchase of flat is vide agreement dated 13.07.2009 and it was registered on 14-7-2017 in the F.Y. 2018-19. Merely because the first payment of Rs.2 lakhs was made on 8-10-2009 subsequently after date of agreement, the revenue cannot rely on the second proviso to section 56(2)(x) of the Act and tax the difference in stamp duty value of flat as per SRO and purchase consideration as per agreement. Since the section 56(2)(x) of the Act is not applicable to the assessee, as the agreement was entered prior to 104-2017, hence the second proviso cannot be made applicable and the assessee cannot be fastened the liability in the light of second proviso to section 56(2)(x) - Direct the AO to delete the addition and allow the grounds of appeal in favour of the assessee.” Accordingly, as per the author’s view, the provisions of the said section will not be applicable retrospectively. Provisions of clause (x) of Section 56(2) of the Act Clause (x) provision was established under the Finance Act, 2017, effective from 1-4-2017. It replaced clauses (vii) and (viia), which earlier addressed the taxability of presumed income for individuals, HUFs, firms, and companies. The main objective behind introducing clause (x) was to provide an all-encompassing regulation that would address all assessees obtaining properties at values below their fair market value or without any consideration. In essence, clause (x) provision outlines: 1. Applicability: The provision applies to every category of assessees. 2. Timeline: Only properties or money received during the relevant fiscal year are considered. 3. Source: The property or money can be received from any individual or collective entity. 4. Criteria for Taxability: The provision is triggered when: · An individual receives a sum of money exceeding ` 50,000 in total. · An immovable property is obtained either without consideration or at a value lower than its stamp duty value by more than ` 50,000. · Any property, barring immovable ones, is received without any consideration or at a value less than its fair market value by more than ` 50,000. 5. Valuation for Immovable Property: For immovable properties, the benchmark is the stamp duty value as stipulated by either the Central or State Government, subject to an exemption of either ` 50,000 or 10% of such value, whichever is higher. If partial consideration is paid before the agreement’s date through account payee cheque or electronic clearing, the valuation would pertain to such prior date to the agreement date. Assessees also have the right to challenge this valuation under section 50C(2). 6. Valuation for Other Properties: For all other types of properties, the fair market value should be ascertained as per Rules 11U and 11UA of the Income-tax Rules. 7. Definition of Property: For the purposes of this provision, “property” refers to capital assets as defined in Clause (vii) of section 56(2). This includes immovable property (land or building), shares, securities, jewelry, archaeological finds, drawings, paintings, sculptures, artworks, and bullion. 8. Exemptions: Money or properties received from relatives or under specific situations outlined in the clause are exempt from this presumed income provision. The term “relative” is defined in Clause (e) of the Explanation to Clause (vii) of section 56(2). This revamped provision seeks to ensure that all forms of under-valued or non-valued properties and sums of money are aptly taxed, thereby minimizing loopholes and potential tax evasion. Issues relating to Section 56(2)(x) of the Income Tax Act, 1961 GENERAL ISSUES 1. Meaning of the term ‘Any Person’ or persons The term “any person” as referenced encompasses the definition provided in section 2(31) of the Act. Section 56(2)(x) - Measures to prevent generation and circulation of unaccounted money

278 Ahmedabad Chartered Accountant Journal August, 2023 This includes individuals, Hindu Undivided Families (HUFs), companies, firms, Associations of Persons (AOP) or Bodies of Individuals (BOI), regardless of incorporation status, local authorities, and all artificial juridical entities. As such, the scope of this section is extensive, capturing every scenario where an assessee receives property from another individual or entity 2. Whether a non resident receiving any money or property out of India is chargeable to tax? For residents of India, global income, including money or property received anywhere in the world, is taxable. Thus, under Section 56(2)(x) of the Act, any money or property acquired by a resident, even outside India, is treated as taxable deemed income. Further, arriving at fair market value and considering the fact that there is no “jantri” in foreign countries – is a challenge. Conversely, for non-residents, only the income earned, accrued, or received within India is subject to tax. So, even with the deeming provision of section 56(2)(x), only money or property obtained within India will be taxed. Money or property received by a non-resident outside India remains non-taxable, regardless of whether the source of that income or property is a resident in India. 3. Meaning of the term ‘Any sum of money’ The provisions initially addressed only monetary receipts and excluded those in kind. This limitation was evident in Clauses (v) and (vi) of section 56(2) of the Act, which did not encompass the receipt of other types of properties. As a result, the scope of the section was expanded with the introduction of Clause (vii) and the current Clause (x) to include both immovable and movable properties. To illustrate, the decision by the Hon’ble Supreme Court in the case of H. H. Sri Rama Verma v. CIT (1991) 187 ITR 308 (SC) is noteworthy. In the context of section 80G, the court ruled that deductions are permissible only for sums paid, excluding donations made in kind, such as shares. Similarly, the ITAT Delhi Bench, in the case of ITO v. Vital Communication Ltd., ITA No. 2448/Del/2007, determined on 15-6-2016, emphasized that within the purview of section 68, “any sum” pertains solely to entries denoting the receipt of money, not shares. 4. Amount chargeable under the section The section stipulates that a sum of money, an immovable property, or any other property becomes taxable when the aggregate value or benefit of each category surpasses ¹ 50,000. Furthermore, if the value exceeds ¹ 50,000, the entire amount is subject to tax, not just the portion that exceeds the ¹ 50,000 threshold. 5. Whether Buy Back of shares is considered as receipt of property? When a company buys back its own shares, it’s not considered as receiving property or shares. The shares do not exist after buyback. As a result, such transactions don’t fall under the purview of the said provisions. This perspective is corroborated by the verdict given by the ITAT Mumbai Bench in the case of M/s. Vora Financial Services P. Ltd. v. ACIT, ITA No. 532/Mum/2018 (ITAT Mumbai). The provisions of restructuring of the business are very detailed and cannot be covered in one single issue. The same shall covered in the future. TERM “WITHOUT CONSIDERATION” 1. What do you mean by the phrase “Without Consideration”? In legal terms, “consideration” should be interpreted as having tangible value, distinguishing it from sentiments like natural affection or love. In various situations, there might be ambiguity about whether money or property has been exchanged with or without consideration. Resolving such issues necessitates a thorough assessment of the responsibilities and rights of both parties involved in the transaction. Section 25 of the Indian Contract Act, 1872 and Section 122 of the Transfer of Properties Act, 1882 plays a vital role in such determinations. 2. What is the treatment for receipt of bonus shares? Bonus shares are issued based on the shares already held by a shareholder, so it’s not accurate to classify them as received without consideration. This perspective is upheld by the ITAT Mumbai Bench in the case of Dr. Rajan Pai (2016) 48 ITR (Trib.) 170. Section 56(2)(x) - Measures to prevent generation and circulation of unaccounted money

Ahmedabad Chartered Accountant Journal August, 2023 279 3. What is the treatment for receipt of Right Shares? Right shares are allotted based on a shareholder’s original holdings, so it’s inappropriate to consider them as allotted without consideration or below the fair market value. Consequently, the stipulations of Section 56(2)(x) of the Act don’t apply, provided that the shares are subscribed proportionately by all subscribers. Additionally, given the explicit provisions of Section 55(2)(aa)(iii), the cost of acquisition for these shares is recognized as the actual price paid by the shareholder. This amount isn’t adjusted by the sum of deemed income as prescribed in section 49(4) of the Act. This indicates that the applicability of section 56(2)(x) wasn’t intended for such cases. This viewpoint is further corroborated by the ITAT Mumbai Bench in the case of Sudhir Menon HUF v. ACIT (2014) 148 ITD 260 (Mum.) 4. Whether the alimony or money received at the time of divorce ? In divorce cases, any money received by the wife or children serves as compensation for relinquishing all past and future claims. There is no “Transfer”. As such, it is not deemed as received without consideration and, therefore, is not taxable. This perspective is supported by the ruling of the ITAT Delhi Bench in the case of ACIT v. Meenakshi Khanna (2013) 143 ITD 744 (Del). 5. Whether amount or property received by a Partner on retirement or change in constitution of the firm is amount received without consideration? Amount or property received at time of retirement or on reconstitution of the firm on surrendering his or her right, title and interest, will not be without consideration and therefore, same will not taxable in terms of section 56(2)(x). This view is supported by decision of Hon’ble Supreme Court in the case of Sree Narayana Chandrika Trust v. CIT (2003) 261 ITR 279(SC) and ITAT Pune Bench in the case of Smt. Vasumati Prafullachand Sanghavi v. Dy. CIT (2018) 168 ITD 585 has also held accordingly.The legislature, with the belief that giving a capital asset to a retiring partner should result in levy of capital gains tax, enacted the erstwhile s. 45(4). The section, inter alia, provided that such a transfer of a capital asset to a retiring partner shall be taxable as income in the hands of the partnership and the fair market value shall be deemed as the full value of consideration for the purposes of computation u/s 48. 6. Compensation received on road accidents, air crash, rail accidents or other mishaps? Amounts received due to rail, road or plane accidents aren’t considered as funds received without consideration. These amounts are paid in adherence to the legal obligations of either the Railway Authorities or Insurance Companies. Consequently, such amounts aren’t subject to tax as deemed income under section 56(2)(x) of the Act. 7. Money received in lieu of threat, blackmail, extorsion ? The funds received lack a valuable or legal basis, and as a result, in accordance with section 56(2)(x), the sum is considered to be deemed income. The same is chargeable under section 28 – Income from Business and Profession. 8. Amount received for medical treatment in response to a public appeal – consider crowd funding scenarios Nowadays, it’s common for individuals facing financial hardships to publicly solicit funds for medical treatments, either for themselves or their children. This is commonly known as “Crowd Funding”. In response, donations often pour in from anonymous well-wishers. The question arises: are these collected funds, even if wholly utilized for the specified medical purpose, taxable under section 56(2)(x) of the Act? According to the wording of Section 56(2)(x), these funds are taxable, regardless of their intended and actual use. However, if the donations are directly made to the treating hospital or channelled through a charitable trust, they aren’t subjected to tax in the hands of the beneficiary. Section 56(2)(x) - Measures to prevent generation and circulation of unaccounted money

280 Ahmedabad Chartered Accountant Journal August, 2023 IMMOVABLE PROPERTIES 9. What does “Immovable Property” mean ? According to the explanation given for the term “property” in Clause (d) of Explanation to section 56(2)(vii), immovable property is defined as any land, building, or both. The same explanation also uses the term “capital asset”. Based on this, some argue that if a property doesn’t fall under the definition of “capital asset” as detailed in section 2(14), then it shouldn’t be considered under the umbrella of “property”, making section 56(2)(x) inapplicable. This would include agricultural land, stock-in-trade, and personal assets among others. However, this perspective might not hold water. The term “capital asset” seems to have been employed in the definition of “property” more as a general reference than as a restrictive term based on its definition in section 2(14) of the Act. This interpretation was affirmed by the ITAT Jaipur Bench in the case of ITO vs. Trilok Chand Sain, ITA No. 449/JP/2018 dated 7th January 2019, which was specifically in the context of agricultural land. The Bench concluded that the definition of “capital asset” in section 2(14) of the Act isn’t pertinent when considering section 56(2)(vii) of the Act. However, the interpretation of it being land or building or both – can be given a stricter view basis the statutes of interpretations specifically with regards to this section. However, there are contrary decisions in this aspect. 10. Are “Leases” covered ? The definition of ‘immovable property’ specifies it as land, building, or a combination of both. Consequently, lease rights or other rights in immovable property don’t fall within this definition. It’s a recognized legal principle that land and building are distinct entities compared to lease rights or other related rights in the land or building. Therefore, if an assessee only receives rights, these aren’t encompassed by section 56(2)(x). This also implies that the process of determining stamp duty valuation isn’t relevant in such scenarios. Highlighting this, the ITAT Mumbai Bench’s decision in the case of Atul G. Puranik v. ITO (2011) provides relevant insight. In this context, concerning section 50C—which uses comparable language—it was determined that the transfer of leasehold rights in land doesn’t fall under section 50C. As a result, stamp duty valuation isn’t applicable. This legal interpretation was further endorsed by the Bombay High Court in the case of CIT v. Greenfield Hotel and Estates Pvt. Ltd. (2016). In numerous instances where an assessee has transferred a booking for a flat to a builder, debates have arisen regarding whether this represents a separate right or property as opposed to the flat when it is eventually acquired. However, as per the authors belief a reasonable view must be taken in such matters. 11. Receipt of immovable property without consideration before 1-10-2009 The introduction of clause (vii) in section 56(2) extended the ambit to include both immovable and movable properties in addition to the previously taxable sum of money. As a result, any property received without consideration before this amendment, for instance, on 06.06.2009 via a registered sale deed, wasn’t subjected to tax. This position was affirmed in the case of Shailendra Kamalkishore Jaiswal v. ACIT (2018). Attention is also drawn to the “Settled principle of law” which discusses on the retrospective applicability of the law. 12. Transfer of Immovable Property for a consideration prior to 1-4-2014 Before the revision of clause (vii) in section 56(2) effective from 1-4-2014, only the receipt of immovable property without any consideration was considered taxable. Thus, when a property was acquired for a certain consideration, even if that was below the stamp duty valuation, the difference wasn’t added to the taxable income. This stance was supported in the case of Keshavji Bhuralal Gala v. ACIT (2018). Section 56(2)(x) - Measures to prevent generation and circulation of unaccounted money

Ahmedabad Chartered Accountant Journal August, 2023 281 Attention is also drawn to the “Settled principle of law” which discusses on the retrospective applicability of the law. MOVABLE PROPETRY The complexities of this topic surpass those related to immovable properties. As we progress through ever-evolving eras, the section in question has expanded to include virtual digital assets. In bygone times, tangible assets like land, buildings, and gold served as primary investment choices for earlier generations. Yet, current trends indicate a distinct pivot, with younger investors being drawn to contemporary financial avenues, including stock markets, cryptocurrencies, and derivatives. Some even regard derivatives as a savvy investment strategy. Considering these shifting dynamics, it’s reasonable to expect future amendments to this section, ensuring it remains relevant with emerging financial instruments. Nonetheless, in this article, the author will focus on the pressing issues of the present day. 1. What is “property other than immovable property” The term ‘Property’ for the purposes of section 56(2)(x) of the Act is explicitly defined to encompass immovable property, shares and securities, jewelry, archaeological collections, drawings, paintings, sculptures, other artworks, and bullion. Consequently, assets not explicitly listed within this definition, such as vehicles, electronic devices, furniture, air tickets, and the like, are excluded. Thus, the acquisition of these non-enumerated assets would not be subject to taxation as presumptive income under this provision. 2. Loans taken, whether can be considered as taxable? If a loan is procured without interest, it should not be regarded as income. This perspective is supported by the case of [CIT vs Saran Pal Singh (HUF) 237 CTR (P & H) 50]. When funds are received with specific instructions to invest them, and if these funds are distinctly maintained and invested in the name of the donor, the recipient shouldn’t treat the received amount as taxable income. This was established in [Ms. Sannidhi C. Patel v. ITO, ITA No. 6232/Mum/2011 decided on 17-12-2014]. A receipt cannot be taxed u/s 56(2)(vi) merely on conjecture or surmises. The AO has to prove beyond doubt that a particular receipt is taxable as income. Merely because the person who paid the amount does not initiate any action for recovery of money is not sufficient for making addition - [Nilesh Janardan Thakur v. ITO (2018) 168 ITD 143 (Mum)]. If a loan is secured without a binding repayment agreement in place, the Assessing Officer (AO) might see the loan amount as income. However, it was held that in the absence of a legally enforceable repayment contract, such amounts can’t be classified as income. This is evident from [ITO v. Paramveer Abhay Sancheti (2018) 95 taxmann.com 258 (Nag.)]. In situations where a liability is erased from accounts, and the taxpayer fails to verify the legitimacy of that liability through confirmatory documents, such an amount should be viewed as income. This was confirmed in [Panna S. Khatau v. ITO, ITA No. 3596/Mum/2012 decided on 3-7-2015] 3. Fair Market Value of movable property – issues with regards to Valuation The fair market value of movable property is essentially the price it might command if sold in the open market on the valuation date. However, determining this value, especially for assets like archaeological collections, drawings, paintings, sculptures, and artworks, can be challenging. Different evaluators might arrive at varying assessments, and in some instances, the discrepancies between valuations could be significant. 4. Valuation of unquoted equity shares The valuation of unquoted equity shares, as of 1-4-2018, must be conducted according to Rule 11UA of the Income Tax Rules. As per this rule, the Fair Market Value (FMV) is ascertained based on the fair market value of the assets owned by the company. This makes the process intricate and can lead to potential disputes. Moreover, Section 56(2)(x) - Measures to prevent generation and circulation of unaccounted money

282 Ahmedabad Chartered Accountant Journal August, 2023 when a company issues shares, the valuation as per Clause (viib) of section 56(2) should be determined by Rule 11UA(2), which provides for different criteria. This can be based either on the book value of assets or the Discounted Free Cash Flow method. This implies that the rules provide different valuation bases for companies issuing shares versus the shareholders receiving them. 5. Valuation in case of Preference Shares The valuation of preference shares requires an estimation of the price they would command if sold on the open market. To validate this, a valuation report must be procured from either a Merchant Banker or a Chartered Accountant. Challenges arise when one shareholder transfers these shares to another. In such cases, justifying the determined price can be problematic, and it may not always be practical for the shareholder to secure a valuation report from a Merchant Banker or Chartered Accountant. INTERPLAY OF FEMA, INCOME TAX AND COMPANIES ACT – IN CASE OF VALUATION Valuation in this realm presents a sophisticated challenge. Distinct legislative acts, including the Companies Act of 2013, the SEBI Act of 1992, FEMA of 1999, and the Income Tax Act of 1961, each introduce their unique valuation criteria. The divergence isn’t limited to methodologies alone; the professionals eligible to certify these valuations vary as well. There’s a growing urgency for the Finance Ministry to harmonize these scattered stipulations to ensure more fluid transactions. Moreover, the author asserts that contemporary financial tools have become remarkably complex, encompassing facets like Embedded Derivatives. Though these are covered by Section 56(2)(x), prevailing methodologies lack uniformity, and the existing tax provisions don’t capture their nuanced complexities. Such a backdrop underscores the need for a thorough regulatory overhaul. Additionally, the financial landscape has expanded beyond domestic boundaries. A surge of NRIs are investing within India while many Indians explore investment opportunities abroad. Likewise, several PE and VC funds are capitalizing on diverse prospects in India. Furthermore, during business restructuring, when shares are transferred between affiliate companies, these valuation concerns become increasingly prominent. Interplay of Valuation · The transactions of issue / transfer of equity instruments of a company would involve valuation to be carried out by a valuer in order to comply with the regulatory requirements under the Companies Act 2013, Securities and Exchange Board of India Act 1992, Income-tax Act 1961 and FEMA Act 1999 and the regulations framed thereunder · Each of these Acts read with its underlying regulations have laid down specific provisions dealing with valuation requirements in terms of the person eligible to carry out valuation, pricing guidelines / formulae, etc. · Though under each of these regulations, the objective is to ensure that transactions are done at an arms-length pricing, different guidelines / formulae have been laid down by different regulations and therefore sometimes result in arriving at different fair values for the same transaction. Interplay of Valuation under FEMA with Companies Act, 2013 · The requirement of valuation by a ‘Registered Valuer’ under the Co Act 2013 is a welcome change as it ensures consistency in valuation process being followed by the valuers and to arrive at an independent bias-free value · Since the objective of FEMA regulations is to ensure that transactions in shares of companies between resident and non-resident are carried out based on determination of an arms-length price, it is imperative to bring FEMA regulations at par with Co Act 2013 with regards to valuation being carried out by a Registered Valuer Section 56(2)(x) - Measures to prevent generation and circulation of unaccounted money

Ahmedabad Chartered Accountant Journal August, 2023 283 Interplay of Valuation under FEMA with Income Tax Act, 1961 - Section 56(2)(x) and section 50CA of the Incometax Act, 1961 (‘IT Act’) deals with taxability of income arising as a result of transfer of shares or securities of company at less than fair market value - Rule 11UA(1)(c) of Income-tax Rules, 1962 (‘IT Rules’) prescribes the methodology for determining the FMV of shares / securities of listed and unlisted companies for the purpose of section 56(2)(x) and section 50CA - Under FEMA NDI Rules, the pricing for unquoted equity shares needs to be determined based on internationally accepted valuation methodologies of valuation on an arm’s length basis and therefore the fair value of unquoted equity shares under FEMA NDI Rules and under aforesaid rule of IT Rules would generally differ RELATIVE 1. Gift received by any member of HUF from HUF Gift received by any member of HUF from the HUF is exempt as HUF consists of only relatives specified in section 56(2)(vii). [Veenitkumar Rahgavjibhai Bhalodia v. ITO (2011) 12 ITR 616 (Rajkot); DCIT v. Ateev V. Gala, ITA No. 1906/ Mum/2014 dated 19-4-2017]. ITAT Ahmedabad Bench in the case of Gyanchand M. Bardia v. ITO, ITA No. 1072/Ahm/2016 decided on 21-2- 2018 however, has taken a contrary view in view of the fact that in the context of HUF individual has been mentioned as relative whereas in the case of individual HUF is not included as relative. 2. Gift received by HUF from any member of HUF Funds or property received by an HUF from its members are not subject to taxation. However, if the gift is received from the mother of the Karta, who is not an HUF member, it is taxable. The ITAT Delhi Bench, in the case of Subodh Gupta (HUF) v. Pr. CIT (2018) 169 ITD 60, upheld this stance. For HUF purposes, the definition of a relative explicitly encompasses any HUF member. 3. Gift received from mother’s sister’s son The son of one’s maternal aunt is not considered a relative under section 56(2)(v). Thus, gifts received from him are taxable according to the Act. This position was confirmed by the ITAT Chennai Bench in the case of ACIT v. Masanam Veerakumar (2013) 143 ITD 664. 4. Gift received from nephew and niece Gifts received from an uncle (either maternal or paternal) are exempt from tax. However, gifts given by a nephew or niece to their uncle are taxable. OCCASION OF MARRIAGE 1. What is occasion of marriage and reasonable time ? The term “on the occasion of marriage” isn’t limited to the specific day of the wedding. It encompasses related marriage ceremonies and periods closely surrounding the marriage date. This interpretation was upheld in the case of CGT v. Budur Thippiah (1976) 103 ITR 189 (AP). 2. Gift received by the individual Gifts received by an individual on the occasion of their own marriage are exempt from tax. However, if a gift is given in the name of the father during his daughter’s wedding, it will be taxable in hands of father. This was affirmed in the case of Rajinder Mohan Lal v. Dy. CIT, with ITA No. 224 of 2013 (P&H) decided on 1-8-2013. IN CONTEMPLATION OF DEATH 1. What does it mean ? The criteria for a ‘gift in contemplation of death’ are stipulated in section 191 of the Indian Succession Act, 1925. It mandates two conditions: first, the donor should be in ill health and anticipated to pass away soon, and second, the possession of the property must be transferred to the recipient while the donor is still alive. This interpretation was upheld by the ITAT Chennai Bench in the case of F. Susai Raju v. ITO in 2017 (163 ITD 533). Section 56(2)(x) - Measures to prevent generation and circulation of unaccounted money

284 Ahmedabad Chartered Accountant Journal August, 2023 PRIVATE DISCRITIONARY TRUST 1. Property received by or from private discretionary Trust Section 56(2)(x) of the Act explicitly states that any gift received by a Trust, which is solely established for the benefit of a relative of the individual, is exempt from tax. However, the section doesn’t clearly address the scenario where the Trust distributes money to its beneficiaries. Ideally, such distributions from the Trust to its beneficiaries shouldn’t be taxable since the funds in the Trust inherently belong to these beneficiaries. They would be receiving their due share. Yet, the ambiguity in the section might lead to potential legal disputes, similar to situations seen with HUFs. The above were the intricate issues that a practicing chartered accountant might face on daily basis in his practice. However, there are gamut of issues involved at the time of restructuring activities that take place in a business organization. Such activities are very common during these days as the organizations look for organic and in-organic growth. Further, the organizations are now-a-days plan to amalgamate, convert, spin – offor demerge the undertakings of the businesses in order to manage the core businesses or basis the succession plan that is formulated or merely for the better governance from the perspective of the laws. Concluding Remarks We can fairly conclude that there are complexities involved with this particular section and it requires fair amount of professional acumen to deal with such matters. In the contemporary financial landscape, the Prevention of Money Laundering Act, 2002 (PMLA) has encompassed the role of Chartered Accountants (CAs) under its stringent regime, emphasizing their pivotal duty to combat money laundering activities. One provision that has gained significant traction in this regard is Section 56(2)(x) of the Income Tax Act, 1961. There is a rising concern that this provision can be exploited to camouflage the illicit origin of funds, thereby posing a challenge to the detection of money laundering maneuvers. To elucidate, a plausible scenario could involve the acquisition of an immovable asset via a proxy entity, typically a shell company. This establishment might then retain the services of a Chartered Accountant for the requisite regulatory compliances and tax submissions. In such cases, the CA might be oblivious to the clandestine nature of the transaction. In light of the mandate set by the PMLA, Chartered Accountants must be well-versed with the potential pitfalls of money laundering and should proactively institute measures to counteract them. Such measures encompass: · Client Due Diligence: to institute rigorous processes to ascertain and authenticate the identity of their clientele. · Transactional Scrutiny: They must endeavor to comprehend the underlying objective of any transaction and rigorously interrogate its legitimacy. · Source Verification: A paramount responsibility lies in probing and validating the provenance of the funds in question. · Suspicious Transaction Reporting: Any transaction that arouses suspicion, irrespective of its value, should be promptly reported to the competent authorities. Furthermore, Chartered Accountants should invoke their professional acumen and discernment in all advisory capacities. In situations laden with ambiguity or uncertainty, it would be prudent for them to adopt a conservative approach and liaise with the relevant oversight bodies. It is imperative to underscore that the legal landscape related to money laundering is evolving rapidly, characterized by its heightened stringency. Any noncompliance by Chartered Accountants could lead to dire repercussions, inclusive of penal consequences. The content of this document is a result of a comprehensive understanding of the mentioned laws and should be considered as an interpretative guide. It does not possess any legal enforceability and is devoid of any binding authority. ❉ ❉ ❉ Section 56(2)(x) - Measures to prevent generation and circulation of unaccounted money

Ahmedabad Chartered Accountant Journal August, 2023 285 *Source: https://trademarkfactory.com/faq/what-are-genericdescriptive-suggestive-arbitrary-and-fanciful-trademarks Dear reader, The awareness of intangible assets is growing more and more today. Compared to the past, we are much more aware of the existence of a certain intangible substance which, together with the material substance, constitutes the value of society. Determining the value of an enterprise’s intangible assets on a global scale is becoming increasingly important. An obvious part of intangible assets is also a trademark. The trademark is now much more important for companies, also due to globalization. It is an essential part of the company’s intangible assets, which is very often underestimated and therefore, it is necessary to choose the right procedure for determining the value of all its components. As a result of globalization and comprehensive marketing strategies; trademark valuation methods gradually beginning to unite around the world. Hence, herein he articles talks about the types of Trademarks and what are strong marks and what are weak. Strong Trademark and Weak Trademark Definition of Trademark As per Section 2(zb) of Trademarks Act, 1999 as under:- - Trade Mark means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include shape of goods, their packaging and combination of colors. Trademark strength and it’s importance - The nature of a mark, particularly its relative strength or weakness, will have a direct bearing on its performance in the market and on its scope of legal protection. A “strong” mark is a mark that is highly distinctive, thus immediately identifying the owner as the source of the covered products or Trademark Distinctiveness services. When a mark is scarcely distinctive, then the mark is considered “weak.” In general, the stronger a mark is, the easier it is for the mark to be eligible for registration and to obtain protection from unauthorized use and registration by others. How is a mark’s strength or weakness gauged? - The relative strength or weakness of a mark may be gauged by placing the mark on a spectrum, also called a hierarchy of marks. The types of marks discussed below range from the weakest to the strongest. Source: https://www.vividip.com/news-notes/2020/7/22/ suggestive-trademarks-the-sweet-spot-in-brand-naming GENERIC TRADEMARK - A generic word is what the public understands to be the common name of the product or service in question—for example, “clock” is a generic word for timepieces. Such words can never be appropriated by a single party as trademarks for the products or services they signify, since the public perceives and uses them solely as common nouns or terms and all parties offering “clocks” should be able to use that term. Generic words or phrases are not registrable or protectable in relation to the products or services they signify. A term that was not generic originally can, under certain circumstances, become generic when a majority of the relevant consuming public comes to consider it the name of the product. Examples of originally Dr. Omkar Acharya [email protected]

286 Ahmedabad Chartered Accountant Journal August, 2023 valid trademarks that have become generic in many jurisdictions – where they are no longer protected – are ASPIRIN and CELLOPHANE. - Generic word is the weakest form of a brand. In most cases, it’s not a brand AT ALL. It’s just a common name everyone uses for the particular product or service you offer. You cannot Trademark brands that are generic because if you were allowed to own a monopoly over a generic name, it would mean that nobody else could sell versions of the same product or service—simply because, to do so, they’d have to stop calling their products and services what they are. - Xerox is actually a proper trademark and is not synonymous to photocopying process. The company name is Rank Xerox Ltd. This company has faced a long running battle to stop its name from being declared as generic as there is no relevance of the mark “XEROX” in context with photocopy services but the mark acquired secondary meaning related to photocopy services and for that it is now very generic for the same services. - For example, if you sell ice cream, you can’t go and trademark the term “ICE CREAM.” You can’t trademark the word “BICYCLE” if you sell bicycles. If you are a fitness trainer, you can’t trademark the phrase “FITNESS TRAINER.” And so on. *Source: https://bonamark.com/content/my-trademark-registrable DESCRIPTIVE TRADEMARK - These marks are a step up from generic marks in that they no longer use the common word for the product or service itself. Instead, they use words that do nothing but clearly describe a feature or characteristic of the product or service. For example, you can’t trademark the term “COLOR” if you sell printers. Likewise, if you sell legal services, you can’t trademark “FLAT FEE.” - In general, a descriptive mark is a word (or words) that merely describe a product or its ingredient, quality, characteristic, function, feature, purpose or use. An example of a merely descriptive mark would be COLD AND CREAMY for ice cream. Marks of this type are generally not granted trademark protection. Merely laudatory terms such as “best” or “quality” also are generally not registrable. In some jurisdictions, surnames are treated as descriptive marks. However, what is initially a descriptive word may later become protectable as a trademark if it acquires secondary meaning. In other words, if a descriptive word is used and advertised exclusively as a trademark for a sufficient period of time, it may, in addition to having the primary meaning that is descriptive of the product, come to identify the mark as being associated with a single source of origin for that product. Examples of descriptive words that have acquired secondary meaning and become protectable as trademarks are SHARP for televisions and HOLIDAY INN for hotel services etc. - In most countries, you would not be able to register a descriptive mark as a trademark. The reason why The Trademarks Office does not like descriptive trademarks is that if you were allowed to own a monopoly over such marks, it would mean that nobody else could sell their versions of products or services with the same features or characteristics—simply because to do so, they’d have to stop referring to these features and attributes by their common names. This can create confusion and unnecessary roadblocks for competitors. SUGGESTIVE TRADEMARK - They are a step up from descriptive marks. They ALLUDE to features and characteristics of your products and services but in a much more clever way. A suggestive mark hints at or suggests the nature of a product or service or one of its attributes without actually describing the product or service. Here are just a few examples of suggestive patterns: “BED, BATH & BEYOND” for house wares and furniture items, “PHOTOSHOP” for image Trademark Distinctiveness

Ahmedabad Chartered Accountant Journal August, 2023 287 editing and collage making mobile application, “SCANSNAP” for save scanned images to a cloud service by simply scanning documents, “QUICKBOOKS” for accounting services, “AIRBUS” for airplanes and “NETFLIX” for streaming services. Suggestive marks hint at the relevant product or service without actually describing it; they possess an inherent element of sales appeal and will require less education of the public than coined or arbitrary marks. For this reason, generally, suggestive marks are entitled to meaningful but less extensive protection ARBITRARY TRADEMARK - Arbitrary marks are dictionary words used for products and services that have nothing to do with the terms. In many instances, being described as “arbitrary” can have negative connotations. But regarding the Trademarks Office, “arbitrary marks” are seen as a positive. - The most famous example is APPLE, as in the computer, phone, and software companies. While “apple” is a dictionary word, Apple the corporation is not in the business of selling apples, and neither are their competitors. For their products and services, “Apple” is an arbitrary mark. - Another example is “ADOBE.” Again, they sell software, not mud bricks. For software, “Adobe” is an arbitrary mark. CANON for cameras. Canon cameras do not shoot balls to destroy enemies’ fortresses. That’s why the name is random. DOMINOS may be a dictionary word, but it’s an arbitrary mark for pizza restaurants. FANCIFUL / COINED TRADEMARK - Fanciful marks are invented marks that have no meaning other than identifying specific products or services. For example, Kodak means nothing outside of it being a photography brand. - Twitter means nothing outside of it being the name of a left-wing social-media platform. Exxon means nothing outside of it being an oil company. Cisco, Walmart, Marlboro, Pepsi, and Audi are excellent examples of fanciful marks. Chances are the most popular brands you can think of qualify as fanciful trademarks. - Since a fanciful or coined mark has no inherent meaning, in the beginning a bigger effort in terms of advertising is necessary in order to educate the public as to the relationship between the invented word and the owner’s product or service. However, these marks enjoy the broadest scope of protection against third-party use. WELL-KNOWN TRADEMARK - A well-known trademark is a famous mark, logo, or symbol representing a brand and its hard-earned goodwill and reputation. A trademark becomes a well-known mark depending on the following:- · The degree of recognition it receives in the relevant sector; · The duration of recognition; · The extent & geographical area of recognition; and · The Value associated with it. - Once a trademark is registered as well-known, it is entitled to more protection than regular trademarks. Well-known trademarks enjoy a broader scope of protection and can be protected against similar or identical marks, even if they are used for different goods or services. Following are the Well-known Trademarks:- *Source: https://us-patent.info/news-and-events/trademarkbullying-defending-your-brand-or-vexatious-business-tactics/ attachment/famous-trademarks/ SIGNIFICANCE OF WELL-KNOWN TRADEMARK - The importance of a well-known trademark lies in the fact that they bring substantial commercial value to the trademark owners. Registration and unauthorized use of such a trademark is an infringement of the trademark. The unauthorized use of such a mark creates confusion about the quality of the product among consumers, damaging the brand’s reputation. Illegitimate imitation of trademarks is a punishable offense. DISCLAIMER The examples listed in the article are purely for educational purpose. It doesn’t implicate any other meaning beyond the article’s context nor does it influence any decision or proclamation of any Trademark or Brand. ❉ ❉ ❉ Trademark Distinctiveness

288 Ahmedabad Chartered Accountant Journal August, 2023 Natural Justice – Right to hearing – Administrative Law It is now a settled principle of law that the rule of audialterampartem applies to administrative actions, apart from judicial and quasi-judicial functions. It is also a settled position in administrative law that it is mandatory to provide for an opportunity of being heard when an administrative action results in civil consequences to a person or entity. Every authority which has the power to take punitive or damaging action has a duty to give a reasonable opportunity to be heard. An administrative action which involves civil consequences must be made consistent with the rules of natural justice. The rule that a party to whose prejudice an order is intended to be passed is entitled to a hearing applies alike to judicial tribunals and bodies of persons invested with authority to adjudicate upon matters involving civil consequences. It is one of the fundamental rules of our constitutional set-up that every citizen is protected against exercise of arbitrary authority by the State or its officers. Duty to act judicially would therefore arise from the very nature of the function intended to be performed : it need not be shown to be super-added. If there is power to decide and determine to the prejudice of a person, duty to act judicially is implicit in the exercise of such power. If the essentials of justice be ignored and an order to the prejudice of a person is made, the order is a nullity. That is a basic concept of the rule of law and importance thereof transcends the significance of a decision in any particular case. Any person prejudicially affected by a decision of the authority entailing civil consequences must be given an opportunity of being heard. 16 Advocate Samir N. Divatia [email protected] The old distinction between a judicial act and an administrative act has withered away. Even an administrative order which involves civil consequences must be consistent with the rules of natural justice. The expression “civil consequences” encompasses infraction of not merely property or personal rights but of civil liberties, material deprivations and nonpecuniary damages. In its wide umbrella comes everything that affects a citizen in his civil life. State Bank of India vs Rajesh Agarwal (2023) 6 SCC 1 Property Law – Evidence Act, 1872 – Estoppel and Acquiescence Doctrine of acquiescence is an equitable doctrine which applies when a party having a right stands by and sees another dealing in a manner inconsistent with that right, while the act is in progress and after violation is completed, which conduct reflects his assent or accord. He cannot afterwards complain. In the case of acquiescence, the representations are to be inferred from silence, but mere silence, mere inaction cannot be construed to be a representation and in order to be a representation it must be inaction or silence in circumstances which require a duty to speak and therefore, amounting to fraud or deception. However, acquiescence will not apply if lapse of time is of no importance or consequence. Whether there was acquiescence on part of the respondent and if so, whether lapse of time, if any, is of no importance or consequence, with reference to the factual position, the equity will follow the law and it would tilt in favour of law and further that to claim equity the party must explain previous conduct. Baini Prasad vs Durgadevi (2023) 6 SCC 708 ❉ ❉ ❉ 17 Glimpses of Rulings

Ahmedabad Chartered Accountant Journal August, 2023 289 Relevant date from which limitation for block assessment is to be counted: Anil Minda and others v/s. CIT (2022) 453 ITR 1 (SC) Issue: Whether the period of limitation of two years for the block assessment under section 158BC / 158BE would commence from the date of Panchnama last drawn or the date of last authorization? Held: “The relevant date from which limitation for a block assessment pursuant to a search operation is to be reckoned, would be the date on which the panchnama is drawn and not the date on which the authorization is issued. Block assessment proceedings are initiated on the basis of the entire material collected during the search and on the basis of the respective panchnama drawn. Therefore, the date of the panchnama last drawn can be said to be the relevant date and can be said to be the starting point of limitation of two years for completing the block assessment proceedings. If the date of the last authorization were considered for the purpose of starting point of limitation of two years, the entire object and purpose of Explanation 2 to section 158BE of the Income Tax Act, 1961 would be frustrated. There may be a number of searches. Thus, the date of the panchnama last drawn would be the relevant date for considering the period of limitation of two years and not the last date of authorization.” Application of mind by the sanctioning authority u/s 151: Godrej and Boyce Mfg Co. Ltd. v/s. ACIT (2023) 453 ITR 10 (Bom) Issue: What is the duty of Commissioner while sanctioning approval under section 151 of the Income Tax Act? Held: “Allowing the petition, that one of the reasons recorded for reopening the assessment under section 147 of the Income Tax Act, 1961 being the claim for deduction of the diminution in the value of investment in a subsidiary, had already been considered by the Principal Commissioner, who in his revision order under section 263 had dropped the proceedings initiated accepting the reply of the assessee and rejecting the audit objection. The Principal Commissioner had accorded the approval under section 151 which showed non application of mind by the Principal Commissioner while according to approval for reassessment without considering all documents including his own earlier order passed dropping proceedings under section 263. The notice under section 148 and the order passed on the objection of the assessee were quashed and set aside.” [The Supreme Court has dismissed the special leave petition filed by the Department against this decision: see [2023] 453 ITR 14 (SC) – Ed]. Write off of investment in subsidiary company abroad and its allowability u/s 115JB: Principal CIT v/s. Vaibhav Global Ltd (2023) 453 ITR 24 (Raj) Issue: Whether the Tribunal was justified in allowing the write off loss on account of investment made in one of the assessee’s submissions abroad? Held, dismissing the appeal, (i) That the assessee had made investment in its subsidiary company in order to expand its business with a view to earn higher profit and CA. Jayesh C. Sharedalal [email protected] From the Courts 41 42 43

290 Ahmedabad Chartered Accountant Journal August, 2023 therefore, the investment was driven by business expediency. (ii) That the Tribunal was justified in allowing the write off of such investment for the purpose of computing the books profits under section 115JB. According to the assessee write off of investment in its subsidiary company for the purpose of book profits under section 115JB was an actual write off of investment and not a mere provision for diminution in value of the investments which was accepted by the Tribunal. The Tribunal had found that during the assessment year 2009-10 the assessee had written back the provisions and then written it off and had held that therefore, for the year under consideration, this amount should not have been added back for computing the income under the provisions of section 115JB since it would amount to double disallowance. (iii) That on the issue of disallowance out of provision for doubtful loans to the assessee’s subsidiary the Tribunal had only remanded the matter to the Assessing Officer and decisions have also been rendered on such remand and therefore, no question of law arose.” [The Supreme court has dismissed the special leave petition filed by the Department against this decision: see [2023] 453 ITR 31 (SC)-Ed]. Reopening after four years when the assessee has made full and true disclosure: DCIT v/s. Sidhmicro Equities Pvt. Ltd. (2023) 453 ITR 35 (SC) Issue: Whether the reassessment notice is valid after four years when full and true disclosure is made on the issue on which reassessment is sought to be made? Held: 1. Delay condoned. 2. We are not inclined to interface with the impugned judgment for the reason that in this case the reopening is after four years and it is apparent that the assessee had made disclosure of payment and deduction of Rs. 3.6 crores while From the Courts computing capital gains in the regular assessment proceedings. 3. Recording the aforesaid, the special leave petition is dismissed. Mechanical way of recording satisfaction is not sustainable: CIT v/s. S. Goyanka Lime and Chemicals Ltd [2023] 453 ITR 242 (SC) Issue: If the Sanctioning authority merely wrote “Yes, I am satisfied”, whether is it a case of non application of mind and thus the sanction is improper? Held: Where the High Court, dismissing the Department’s appeal from the order of the Tribunal quashing notices issued under section 148 of the Income tax Act, 1961, held that while according sanction to reopen the assessment, the Joint commissioner had only recorded “Yes, I am satisfied” and that the mechanical way of recording satisfaction was clearly unsustainable, on a petition by the Department for special leave to appeal to the Supreme Court: The Supreme Court dismissed the petition. Principle of Re-Judicata versus Rule of Consistency: CIT Exemptions v/s. Swami Omkarananda Saraswati Charitable Trust [2023] 453 ITR 245 (All) Issue: Whether the income tax department can reagitate decided issues solely because each assessment is a separate year? Held: “To allow the Department to reagitate decided issues solely because each assessment year is a separate unit for which a fresh assessment order is to be passed, would be to make a mockery of judicial decision making. The primary need of good tax administration remains transparency, predictability and certainty. The assessee’s interest must be protected, and it must be assured of the same assessment process year after 44 45 46

Ahmedabad Chartered Accountant Journal August, 2023 291 year to grant to it an environment in which it may not only survive but may look to thrive.” Statutory notice must be clear and unambiguous: Jitendra Virwani v/s. JCIT [2023] 453 ITR 242 (Kar) Issue: What is the duty of a government officer when he issues a statutory notice to any citizen? Held: “As recorded hereinabove, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act. 2015 has been enacted to deal with the problem of black money, i.e. undisclosed foreign income and assets. Penalties defined in Chapter IV and the Punishments described in Chapter V, entail serious consequences. It is settled that when a citizen is called upon to answer a statutory notice, such notice must be clear and unambiguous; describe the violation committed by the notice, the material replied upon by the statutory authority, to enable the notice to submit his defence.” Reassessment after four years and failure to disclose fully and truly material facts when there is nodiscussion in assessment order. Cognisant Technology Solutions India Pvt. Ltd. v/s. ACIT [2023] 453 ITR 372 (Mad) Issue: Whether the assessment order should incorporate the discussion, by the Assessing Officer, of all the issues which he has verified? Held: “As observed in the case of Asianet Star Communications Pvt. Ltd. v/s. Asst. CIT [2020] 422 ITR 47 (Mad), W.P. No. 25328 of 2018 dated April 16, 2019, in an order of assessment the assessing authority would discuss only those issues on which there is a divergence of opinion with the assessee. It is not practical for the assessing authority to refer to and discuss every matter that has engaged his attention prior to formulation of the order as such an order of assessment would run to several reams. Thus, an order of assessment to be crisp and effective has to only detail those issues on which he disagrees with the petitioner and if a query had been raised in regard to a particular issue, that would suffice to demonstrate application of mind in that regard.” Section 153C: Amendment on 1st June 2015: ‘Belongs to’ and ‘Pertains to’ : ITO v/s. Vikram Sujitkumar Bhatia [2023] 453 ITR 417 (SC) Issue: Whether the amendment made in section 153C from 1st June 2015 would apply if the relevant search was conducted before this date? Held: “The submission that the amendment to section 153C by the Finance Act, 2015 brings into its fold assessee who were not so far covered by it and, therefore, affects their substantive rights and should not be made applicable retrospectively is not tenable. Even the unamended section 153C pertains to the assessment of income of any other person. The object and purpose of section 153C is to address persons other than the person in respect of whom search was conducted. Even under the unamended section 153C, proceedings against other persons (Other than the person in respect of whom search was conducted) were on the basis of the seizure of books of account or documents seized or requisitioned “belonging to” and such third persons. Therefore, if despite the fact that incriminating materials have been found in the form of books of account or documents or assets relating to them from the premises of the person in respect of whom search was conducted, such third persons were still not to be subjected to proceedings under section 153C solely on the ground that the search was conducted prior to the amendment, the very object and purpose of the amendment to section 153C, by way of substitution of the words “belongs or belong to” by “pertains or pertain to” would be frustrated. Any interpretation which may frustrate the very object and purpose of the statute shall be avoided by the court.” From the Courts 47 48 49 Continued to page 328

292 Ahmedabad Chartered Accountant Journal August, 2023 DCIT (Exemption) v. Gujarat Council of Science City 150TAXMANN.COM 310 (Ahd) Assessment Year:2013-14 to 2015-16, Order dated:20th March 2023 Basic Facts The assessee, trust was registered under the Societies Registration Act for advancement and promotion of science and Technology and dissemination of information relating to science and technology by developing science city project. The AO rejected assessee’s claim for exemption under section 11 for relevant assessment years 2013-14 to 2015-16, holding that the activities carried on by the assessee qualified as general public utility, carried out in a commercial manner and thus, did not qualify as a charitable activity in terms of section 2(15). On appeal, the CIT(A) held that the activity carried out by the assessee qualified as ‘education’, in terms of section 2(15), and thus the assessee was entitled to claim exemption under section 11/12. On appeal by revenue to the Tribunal: Issue: Whether the assessee is carrying out activities qualifying as education as used in section 2(15) of the Act so as to entitle it to claim exemption of its income u/s 11/12 of the Act. Held The assessee has argued that the term ‘education’ has not been interpreted by the Apex Courtcase of New Noble Educational Society 143 Taxmann.com 276(SC) for the purposes of section 2(15) defining charitable purpose to include education also. The Tribunal noted that in the case of Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC), on which the Apex Court had relied, museums were said to be imparting education in a wider sense and not in the narrower sense of systematic schooling or imparting instruction. Therefore, the contentions of the assessee that the decision of the Apex Court in the case of New Noble Educational Society (supra), did not apply to the facts of the present case was rejected; and accordingly tribunal held that in view of the narrow and restricted meaning given to the term ‘education’ as used in section 2(15), the activities carried out by the assessee being primarily to run as a science museum does not qualify as education. The appellant had contended that the Apex Court decision was applicable prospectively and hence not applicable to the years under consideration. While rejecting the appellant contention, the tribunal held that it is very clear from the Apex court decision that the prospective operation of the judgment is only in the cases involving the interpretation of the term ‘solely’ for the purpose of claiming exemption under section 10(23C)(vi). The prospective operation clearly is not for the meaning/ definition/scope of the term ‘education’ as used in section 2(15) defining charitable purpose.The Tribunal restored back the issue to the AO to determine whether the activities carried out by the assessee being in the nature of general public utility can be said to be commercial in nature so as to disqualify it from being categorized as charitable activities in terms of the first and second proviso to section 2(15) by following the guidelines laid down by the Apex Court for the said purpose. Krones Aktiengesells Chaft v. DCIT (International Taxation) 148 Taxmann.com 451 (Del) Assessment Year: 2011-12,Order dated: 30th December 2022 Basic Facts The assessee, German company, was engaged in developing and manufacturing, supply and installation 25 CA. Yogesh G. Shah [email protected] CA. Aparna Parelkar [email protected] 26 Tribunal News

Ahmedabad Chartered Accountant Journal August, 2023 293 of machinery for filling and packaging of beverage product. One KIPL was wholly owned subsidiary of the assessee in India and was primarily engaged in trading in machinery spares, undertaking engineering installation and commissioning projects, providing after sales service and marketing of products of its AEs. The AO opined that KIPL was wholly dependent on use of intangibles owned by the assessee in India and was sole selling and marketing agent of products of the assessee. Therefore, he held that KIPL should be treated as agency PE and income derived by the assessee should be attributable/effectively connected with such agency PE.On appeal, the CIT(A) upheld the order passed by the AO. On the assessee’s appeal to the Tribunal Issue Whether subsidiary of the assessee is dependent agent PE of the assessee in terms of the DTAA between India & Germany. Held The plant as supplied had to be made to specifications of each customer. The contracts for supplies were directly negotiated, concluded and signed by the assessee with the Indian customers, based on referrals made by KIPL as per its agreement with assessee. Supplies are made on CIF basis by the assessee directly to the customers who bore the responsibility with respect to clearing, forwarding, loading and unloading, transportation and insurance. KIPL is only required to co-ordinate the delivery and payment with the customer as part of its activities with respect to the order, for which it gets the commission. The allegation of the revenue that KIPL habitually secures and concludes orders on behalf of assessee was factually incorrect. KIPL was only undertaking marketing enterprise and contracts were finalized by the assessee and signed by the assessee outside India. Therefore, KIPL could not be said to be habitually securing and concluding order on behalf of the assessee. The Tribunal found from the financials that the commission income of KIPL is only Rs. 6.74 crores on total revenue of Rs. 59.08 crores which comes to around 11.5 per cent of total revenue which means that 89 per cent of the revenue of KIPL is from its own sources. Therefore, it could not be said that KIPL is Tribunal News economically dependent on the assessee. In so far a maintaining stock/inventory is concerned, as can be seen from the above, the assessee is maintaining its own trading inventory. The agreement shows that entrepreneurial risk is with the assessee and sharing of risk indicates that each party perform non-integrated business activities. The agreement with KIPL was effective from 2007 and current assessment year was 2011-12 which means that no adverse view has been taken by the revenue in the past and no adverse view has been taken by the revenue after the present assessment. The Tribunal noted that though the AO has heavily relied upon the TP Study Report of KIPL, but had not brought any evidence on record that KIPL has habitually secured orders for the assessee. None of the customers have been examined by the AO though the customers from India include renowned organizations like Nestle, Coco Cola, Pepsico etc. The observations made in TP study report of KIPL regarding scope of its business activities did not result in holding KIPL as DAPE of the assessee and, further, since KIPL had been remunerated by assessee for commission activities on arm’s length basis, no further attribution was required. Therefore, pursuant to specific exclusion of independent agent under article 5(5) of the DTAA, the case of assessee falls outside scope of PE. Saltwater Studio LLP V NFAC [TS-300-ITAT2023(Mum)] Assessment Year:2017-18, Order dated: 22nd May 2023 Basic Facts In the quantum appeal filed before Tribunal, the Tribunal has given part relief to the assessee and confirmed certain additions since assessee did not press the addition on following (i) Interest on income tax refund to the tune of Rs. 64,581/- (ii) to interest of late payment of TDS of Rs. 973/-, (iii) disallowance of expenses on estimate basis @0.6% i.e, Rs. 2,416/-. Thus, addition of total Rs. 67,970/- was not pressed before Tribunal, which was confirmed. Meanwhile, the AO levied penalty u/s 270A of the Act, wherein AOimposed 200% of tax which was held by him to be mis-reported at Rs. 2,44,110/-by order dated 06-08-2021 which has been challenged by the assessee before the Ld. CIT(A) 27

294 Ahmedabad Chartered Accountant Journal August, 2023 confirmed the same by passing the impugned order; and therefore the assessee being aggrieved, is before this Tribunal Issue Whether the assessee was liable to penalty u/s 270A for mis-reporting of income. Held The Tribunal noted the provisions of section 270A of the especially subsection 8 & 9 thereto. The AO has levied the higher penalty of 200% of tax payable of misreporting income. Then in such a scenario, as per the Tribunal, the AO has to bring the action/omission on the part of the assessee in the ken of sub-section (9) of section 270A of the Act, viz (a) to (f) of section 270A(9) of the Act. However, a reading of the reasons given by the AO to levy penalty for misreporting it was discerned by the tribunal that he has failed to spell out as to how the assessee’s case/additions falls within the ken of instances given in clause (a) to (f) of subsection (9) of section 270A of the Act. Since AO failed to bring the addition/disallowance he made in quantum assessment, under the ken of (a) to (f) of the subsection(9) of section 270A of the Act, the penalty levied for misreporting @ 200% could not be sustained because it is trite law that penalty provisions have to be strictly interpreted. And therefore, taking into consideration, the facts and circumstances of the case, the tribunal found that the levy of penalty by the AO u/ s 270A of the Act suffers from the vice of non-application of mind as well as violates principles of natural justice. And therefore, the penalty levied on addition of sustained quantum was directed to be deleted. Honda NDA Access India Pvt Ltd V DCIT TS318-ITAT-2023 (DEL) Assessment Year 2013-14, Order dated 14th June 2023 Basic Facts: Assessee was incorporated on Jul 17, 2012 in India as a subsidiary of Honda Access Corporation, Japan (HAC). For AY 2013-14, the AO held that Assessee did not commence its business operation and it was still in the process of incorporation as the Assessee had not made any investment for purchase of plant and machinery and recognised only interest income; Accordingly, the AO madedisallowances of group commission, business promotion, vehicle running expenses and R&D expenses. The CIT(A) confirmed the AO’s order and further CIT(A) enhanced the Assessee’s income by disallowing the loss allowed to be carried forward by the AO and also made the addition for interest income under the head Income from Other Sources; Issue: Whether on facts & circumstance of the case the assessee has commenced business in the year under consideration Held: ITAT opines that while determining the question of setting up of business, the nature of business undertaken by the Assessee is required to be examined and holds that the AO erred in construingthe nature of business of the assessee. The ITAT refers to the licence agreement with HAC evidencingthat the purpose of establishing the subsidiary in the form of Assessee was to procure, manufacture and assemble within India and selling world wide certain accessories developed by HAC for installation onsuch Honda products, thus as per Tribunal the nature of business activity of the assessee did not require immediate installation of any plant and machinery. The ITAT observes that Assessee had initiated the process of negotiations for the procurement of the parts from various vendors, as evidenced by the purchase order placed by the Assessee for supply of certain car covers and car floor mats, appearing as closing WIP ason Mar 31, 2013. The ITAT also notes that: (i) the brokerage and commission expenses were paid to property consultants for taking apartment on lease for the director or recruitment of employees, (ii) business promotion expenses were incurred towards vendor selection and development, (iii) vehicle running expenses were fuel expenses and maintenance expense on vehicles owned by Assessee and (iv) R&D expenses were towards samples of products for testing before placing purchase order. The Tribunal relies on jurisdictional HC rulingin Samsung India wherein relying in coordinate bench ruling in ESPN Software, it was held that business will “commence” with the first purchase of stock-in-trade and the date Tribunal News 28

Ahmedabad Chartered Accountant Journal August, 2023 295 on which the first sale is made is immaterial; Accordingly, allows Assessee’s appeal and sets aside the additions. Bilcare Limited [TS-344-ITAT-2023 (Pun)] Order dated 31st May 2023, Assessment Year 2016-17 Basic Facts: The assessee is engaged in the business of manufacturing of pharmaceutical packages and providing research-driven packaging solutions and clinical supplies services to leading pharmaceutical companies. During AY 2016-17, the assessee transferred the shares of its wholly owned subsidiary company in Singapore (S Co) to another foreign subsidiary company in Mauritius (M Co)based on the permission granted by High court of Singapore for total consideration of 1 Singapore Dollar (SGD). The investment was shown as a part of non-current investments in fixed assets. The assessee had not reflected the sale of S Co shares in books of account or audited financial statements. The assessee sought to claim the deduction of long-term capital loss (LTCL) arising on sale of S Co shares in the revised return of income as it had omitted to claim the same in the original return of income. In the assessment proceedings the AO denied the claim for deduction of LTCL for the reasons that the claim for allowance of capital loss was not made in the original return of income, that the revision of income was not warranted on account of bona-fide mistake or omission in the original return of income. The transaction was carried out between the assessee and another wholly owned foreign subsidiary company of the assessee. There was complete unity of control between the seller and purchaser, therefore, the transaction was not undertaken at arm’s length. The HC of Republic Singapore had not determined the actual sale consideration and the whole transaction was premeditated, was dubious transaction entered into with the intention of claiming loss for availing the benefit of losses on the basis of ratio laid down by the Supreme Court in case of Mcdowells. Aggrieved, the assessee filed an appeal before the CIT(A) who held that the claim made through revising the return of income was not valid in law.The claim made during the course ofassessment proceedings should be considered by the AO. Since the assessee had suffered the loss on investments made, the same should be allowed as capital loss applying the theory of real income. Aggrieved by the CIT(A)’s order, the Revenue filed an appeal before the ITAT. Issue: Whether on the facts & circumstances of the case the CIT(A) was right in allowing loss claimed in revised return which was not claimed in the original return of income. Held: The assessee had discovered, omitted to claim a genuine loss arising on sale of shares and, therefore, filed a revised return of income under section 139(5) within the prescribed time limit claiming the determination and carry forward losses. It was a valid revised return of income filed under section 139(5) of the ITA. • In case where the assessee filed return of loss within the prescribed time under section 139(1) of the Act, there was no bar under the provisions of the Act to claim higher loss during the course ofassessment proceedings nor were there any fetters on the AO to allow such higher loss. It was a settled position of law that whether the assessee is entitled to particular deduction or not, would depend upon the provisions of law relating thereto and not on the treatment given in the books of account. Itis also equally settled that the presence and absence of entries in the books of account is not decisive or conclusive on the issue. Thus, the reasoning of the AO that in the absence of entries in the books or balance sheet reflecting the sale of shares, loss could not be allowed as a deduction was not correct. The assessee had sold shares after seeking permission from the HC of Republic Singapore under section 259 of the Companies Act of Singapore. The transaction of investments made by the assessee in S Co and disinvestment of such shares was duly reported by the taxpayer to the RBI under the regulations of FEMA and the factum of investments made by the assessee in S Co was not in dispute. Thus, the transaction of sale of shares by the assessee to M Co was a real one and not a dubious transaction. The value of assets of S Co after deducting the amount charged to secured Tribunal News 29

296 Ahmedabad Chartered Accountant Journal August, 2023 creditors and debenture holders was nil. The AO could not disturb the apparent consideration by substituting the agreed consideration by fair market value (FMV) of the subject asset. It was only from AY 2018-19, the legislature had enacted provisions of section 50CA of the ITA by the Finance Act, 2017 In view of the above, the ITAT held that the reasons for disallowing the claim for determination of and carry forward of LTCL on sale of shares could not be sustained. Accordingly, loss arising from sale of S Co’s shares was allowable as a LTCL Mastek Ltd.v.DCIT 152 Taxmann.com 608 Order dated 26th July 2023, Assessment Year 2011-12, 2012-13 Basic Facts : The assessee is engaged in providing services in the life and annuity which is a vertical of the insurance sector. In order to expand its business in another vertical (property and casualty), the assessee decided to acquire STG (USA). Accordingly, it was decided to undertake the acquisition through Majesco Mastek, US (MMUS), a wholly owned US subsidiary of the assessee and acting as a distributor of software services capabilities of the assessee. The assessee issued a guarantee to ICICI bank, Canada, which in turn gave a loan to MMUS, which enabled the latter to pay the purchase consideration for the acquisition of STG (USA). Further, the assessee also decided to make an equity investment of USD 26 million in MMUS over a period of three years, which would interalia was to be used for repayment of loan, availed for payment of acquisition of STG (USA). During the course of assessment proceedings, the TPO/AO observed that the assessee has not benchmarked the provision for guarantee given by it on behalf of its AE. However, the AO held that providing guarantee to another company represents a service rendered on behalf of the other company. It involves shifting a considerable burden/ risk on the guarantee provider and such service would be required to be compensated on arms length basis. Accordingly, the AO/TPO made an upward adjustment of Rs. 65.08 lakhs by adopting a rate of 2.12% (being the average difference in coupon rate in respect of AA rated bonds and BBB rated bond. 5. In appeal, the CIT(A) upheld the addition by following the order rendered by CIT(A) for assessment years 2008-09, 2009-10 and 2010-11, which were rendered on identical set of facts Issue: Whether provision for guarantee is a international transaction Held: The Tribunal noted that the ITAT in assessee’s own case for preceding assessment year have held that providing of corporate/financial guarantee does not tantamount to an international transaction, and hence there is no requirement for benchmarking the same. However, Tribunal noted that the Allahabad High Court in the case of Jubilant Pharmoba Ltd. 146 taxman.com 319 (Allahabad) held that transaction of furnishing corporate guarantee to overseas AEs constitute an international transaction. Further, the Hon’ble Supreme Court in the case of Jubilant Pharmoba Ltd. vs. Additional CIT 146 taxman.com 318 (SC) also dismissed the SLP filed by the assessee against the order of High Court. Further, the Madras High Court in the case of PCIT vs. Radington India Ltd. 122 taxman.com 136 held that inherent risk cannot be ruled out in providing guarantees and hence adjustments are required for carrying commissions. Further, in the case of Rubani Ltd. 131 taxman.com 344, Ahmedabad ITAT held that corporate guarantee extended by assessee to its AE is an international transaction and corporate adjustment guarantee addition has to be made to an extent of 0.5% only. Similarly, the Bombay High Court in the case of Siro Clinpharm 131 taxman.com 73 (Mumbai Tribunal) held that corporate guarantee constitutes international transaction u/s. 92B of the Act and further the ITAT directed the Assessing Officer to adopt 0.5% as an arms length consideration for the corporate guarantee issued by the assessee in favour of its AE. 8. In view of the aforesaid decisions, the Tribunal held that extending of corporate guarantee to AE constitutes an “international transaction” and the AO was directed to adopt 0.5% as an arms length consideration for the corporate guarantee issued by the assessee in favour of its AE. ❉ ❉ ❉ Tribunal News 30

Ahmedabad Chartered Accountant Journal August, 2023 297 In this issue, we are giving gist of a recent decision rendered by the I.T.A.T., Ahmedabad in the case of ACIT vs. Gujarat Energy Transmission Corpn. Ltd. in ITA No.851/Ahd/2018 for the Asst. Year 2011-12, wherein the scope of Rule 27 of the ITAT Rules has been widely discussed. The AR has articulated well in support of the application made under Rule 27, which has been disposed off by the Tribunal relying on several decisions including that of Gujarat High Court in the case of Dahod Sahakari Kharid Verchan Sangh Ltd. vs. CIT reported in (2006) 282 ITR 32 (Guj.) and PCIT Vs. Sun Pharmaceuticals Industries Ltd. reported in (2017) 86 taxmann.com 148. We hope the readers would find the decision useful. Annexure In the Income Tax Appellate Tribunal “C” Bench, Ahmedabad Smt. Annapurna Gupta, Accountant Member and Shri T.R. Senthil Kumar, Judicial Member ITA No.851/Ahd/2018 Assessment Year: 2011-12 The ACIT, Vs. Gujarat Energy Transmission Vadodara Corpn. Ltd., Vadodara. (Appellant) (Respondent) Assessee by : Shri M.J. Shah, Shri Jimi Patel & Shri Rushin Patel, A.Rs. Revenue by : Shri A.P. Singh, CIT-DR Date of hearing : 21.06.2023 Date of pronouncement : 28.07.2023 GIST ONLY Facts of the case: 1. The assesse is a Public Sector Company engaged in the business of Transmission of Power. For the Assessment Year 2011-12, the assessee filed its Return of Income declaring total income of Rs. Nil after setting off brought forward losses of Rs.2,66,33,64,437/- and Book Profit u/s.115JB was returned at Rs.2,65,73,22,107/-. The return was subject to regular assessment u/s.143(3) of the Act vide assessment order dated 05.02.2014 wherein business income was assessed at Rs.3,09,99,15,987/- and income from other sources was assessed at Rs.4,06,94,000/- and the same were set off against brought forward loss and unabsorbed depreciation and assessed to Nil income. 2. Subsequently, the Assessing Officer noticed that the addition made on account of capital grants and subsidies under normal provisions to the extent of Rs.4,028.91 lakhs remained to be added to the book profit u/s.115JB and accordingly A.O. initiated reassessment proceedings by issuance of notice u/s. 148 dated 25.02.2016. 3. The assessee’s objection of reopening of assessment was overruled and the Ld. A.O. completed the reassessment by making addition on account of capital grants of Rs.4,082.91 lakhs in the computation under section 115JB of the Act. 4. Aggrieved against the same, the assessee filed an appeal before Ld. CIT(A) challenging both on the ground of reopening of assessment and addition made u/s.115JB of the Act by the A.O. The Ld. CIT(A) upheld the reopening of assessment is good in law and however deleted the addition made by the Assessing Officer following the decision in the case of ACIT Vs. Gujarat State Energy Generation Ltd. 5. Being aggrieved against the order of CIT(A), the Revenue filed appeal before the Tribunal challenging the deletion of addition made to book profit on account of capital grants amounting to Rs.4,028.91 lakhs. The assessee had not filed appeal against the order of CIT(A) before the ITAT. 6. However, during the course of hearing before the ITAT, assessee moved an application under Rule 27 of the ITAT Rules raising following grounds: “.10.It is humbly submitted that, the respondent in the present case, may kindly be allowed to CA. Sanjay R. Shah [email protected] Unreported Judgements

298 Ahmedabad Chartered Accountant Journal August, 2023 support the order appealed against on the ground decided against it by challenging the reopening notice u/s.148 of the Act. This right has been provided as per the aforesaid Rule 27 of the ITAT Rules, 1963. Reliance is placed on the binding judgement of the Hon’ble jurisdictional Gujarat High Court in the case of PCIT v. Sun Pharmaceuticals Industries Ltd. reported in (2017) 408 ITR 517 (Guj), wherein under identical circumstances, it was held that the Hon’ble ITAT was right in law in allowing the respondent assessee to raise the question of validity of the reopening notice taking recourse to Rule 27 of the ITAT Rules without the assessee having filed cross appeal or cross objection before the Tribunal against the order of the CIT(A). 11. On the ground challenging the reopening notice u/s. 148 by taking recourse to the aforesaid Rule 27, the respondent humbly submits that, the issue is squarely covered by the binding judgment of the Hon’ble jurisdictional Gujarat High Court in the case of associate concern, namely, Madhya Gujarat Vij Co. Ltd. v. ACIT reported in (2018) 94 taxmann.com 337 (Guj), wherein under identical circumstances, the Hon’ble Court had quashed the reopening notice. The relevant portions of the judgment are reproduced hereunder. “9. Adverting to rest of the cases where notices have been issued within a period of four years and also as an additional ground pressed into service in the cases where notices have been issued beyond the period of four years, we may examine the assessee’s contention of Assessing Officer recking up a scrutinized issue. 14. He finally worked out the assessee’s book profit under Section 115JB of the Act at Rs. 32.11 Crores. It can thus be seen that the Assessing Officer was of the opinion that instead of 10% of the government subsidy, 15% thereof should be reflected in the assessee’s books of account He accordingly made such additions in the normal computation of assessee’s income. While the Assessing Officer was so examining the assessee’s treatment to the Government grants and subsidies, he simultaneously also examined the assessee’s computation of Bookprofit under Section 1151B of the Act. Both issues were thus clearly interconnected and were Unreported Judgments not possible for consideration separately. The fact that the Assessing Officer did not make any similar upward revision of the assessee’s book profit under Section 115JB of the Act, that too without citing the reasons, would not mean that he had not examined the issue. 15. The Revenue’s contention could as well be that not making such an addition was an error on the part of Assessing Officer. The decision of the Assessing Officer being erroneous, is quite different from the failure of the Assessing Officer to notice a certain element of taxability. The former would have to be rectified through the process of revision or suo motu by the Commissioner [Appeals]; if one filed by the assessee. The latter may give rise to reopening of the assessment, subject to fulfillment of other conditions. In the present case, particularly when the assessee itself had carried the issue of upward revision in the normal computation of income the Commissioner as well could have in such appeal itself suo motu or if so urged by the Revenue, made amends, if there was any error in the order of assessment. This is however not the case where the Assessing Officer has not scrutinized the issue. 16. In view of such discussion, it is not necessary to examine assessee’s remaining two contentions of notices. Respective notices in all the petitions are therefore quashed. Petitions are disposed of accordingly.” 12. In this view of the matter, it is humbly submitted that, the reopening notice u/s. 148 of the Act dated 25.02.2016 as well as the consequent reassessment order are required to be quashed. 13. Without prejudice to the above contentions, it is humbly submitted that, even on the grounds of merits of the addition made, the issue is squarely covered in the favour of the assessee by the order of a co-ordinate bench of the ITAT dated 13.12.2016 in the case of associate concern, namely, Gujarat State Electricity Corp. Ltd. v. CIT in ITA No.950/Ahd/2015. 14. It is pertinent to note that, the said issue on merits of the addition is also covered by a recent order of this same bench of the ITAT dated 24.08.2022 in the assessee’s own case for A.Y. 2013-14 & 2014-15 in ITA Nos. 753 & 754/Ahd/2018, wherein the issue has been decided in the favour of the assessee.

Ahmedabad Chartered Accountant Journal August, 2023 299 In view of whatever is stated hereinabove, it is most humbly prayed of your honours that the reopening notice u/s. 148 dated 25.02.2016 may kindly be quashed as invalid and bad in law and in the alternative, the present appeal may kindly be dismissed on merits by sustaining the deletion of the addition.” 7. The learned CIT, DR, however, opposed the admission of the application under Rule 27 after distinguishing the decisions relied upon by the ARs. The Tribunal, thereafter, held as under, while admitting the application under Rule 27 filed by the assessee. Decision: “8. We have given our thoughtful consideration and perused the materials available on record including the submissions filed by the Revenue and Rule 27 application filed by the assessee. Non-filing of cross objection by the Assessee/ Revenue and filing Application under Rule 27 of the ITAT Rules is no more res integra as held by the Jurisdictional High Court in the case of PCIT Vs. Sun Pharmaceuticals Industries Ltd. reported in [2017] 86 taxmann.com 148 as follows: “.11. To put the controversy beyond doubt, Rule 27 of the Rules makes it clear that the respondent in appeal before the Tribunal even without filing an appeal can support the order appealed against on any of the grounds decided against him. It can be easily appreciated that all prayers in the appeal may be allowed by the Commissioner (Appeals), however, some of the contentions of the appellant may not have appealed to the Commissioner. When such an order of the Commissioner is at large before the Tribunal, the respondent before the Tribunal would be entitled to defend the order of the Commissioner on all grounds including on grounds held against him by the Commissioner without filing an independent appeal or cross-objection. 12. Rule 27 of the Rules is akin to Rule 22 Order XLI of the Civil Procedure Code. Sub-rule (1) provides that any respondent, though he may not have appealed from any part of the decree, may not only support the decree but may also state that the finding against him in the Court below in respect of any issue ought to have been decided in his favour; and may also take any cross-objection to the decree which he could have taken by way of an appeal. In case of Virdhachalam Pillai v. Chaldean Syrian Bank Ltd. AIR 1964 SC 1425 in context of the said Rule the Supreme Court observed as under: “32. Learned Counsel for the appellant raised a short preliminary objection that the learned Judges of the High Court having categorically found that there was an antecedent debt which was discharged by the suit-mortgage loan only to the extent of Rs. 59,000/- and odd and there being no appeal by the Bank against the finding that the balance of the Rs. 80,000/- had not gone in discharge of an antecedent debt, the respondent was precluded from putting forward a contention that the entire sum of Rs. 80,000/ - covered by Exs. A and B went for the discharge of antecedent debts. We do not see any substance in this objection, because the respondent is entitled to canvass the correctness of findings against it in order to support the decree that has been passed against the appellant.” 13. Likewise, in case of S. Nazeer Ahmed v. State Bank of Mysore AIR 2007 SCW 766 it was held and observed as under: “7. The High Court, in our view, was clearly in error in holding that the appellant not having filed a memorandum of cross-objections in terms of Order XLI Rule 22 of the Code, could not challenge the finding of the trial court that the suit was not barred by Order II Rule 2 of the Code. The respondent in an appeal is entitled to support the decree of the trial court even by challenging any of the findings might have been rendered by the trial court against himself. For supporting the decree passed by the court, it is not necessary for a respondent in the appeal, to file a memorandum of cross-objections challenging a particular finding that is rendered by the trial court against him when the ultimate decree itself is in his favour. A memorandum of cross-objections is needed only if the respondent claims any relief which had been negatived to him by the trial court and in addition to what he has already been given by the decree under challenge. We have therefore no hesitation in accepting the submission of the learned counsel for the appellant that the High Court was in error in proceeding on the basis that the appellant not having filed a memorandum of crossobjections, was not entitled to canvass the correctness of the finding on the bar of Order II Rule 2 rendered by the trial court.” Unreported Judgments

300 Ahmedabad Chartered Accountant Journal August, 2023 14. Similar issue came-up before Division Bench of this Court in case of Dahod Sahakari Kharid Vechan Sangh Ltd. v. CIT [2006] 282 ITR 321/ [2005] 149 Taxman 456 (Guj.) in which the Court observed as under: “17. Taking up the second issue first, the Tribunal has committed an error in law in holding that the assessee having not filed cross-objection against findings adverse to the assessee in the order of Commissioner (Appeals), the said findings had become final and remained unchallenged. The Tribunal apparently lost sight of the fact that the assessee had succeeded before the Commissioner (Appeals). The appeal had been allowed and the penalty levied by the assessing officer deleted in entirety. In fact, there was no occasion for the assessee to feel aggrieved and hence, it was not necessary for the assessee to prefer an appeal. The position in law is well settled that a cross objection, for all intents and purposes. would amount to an appeal and the cross objector would have the same rights which an appellant has before the Tribunal. 18. Section 253 of the Act provides for appeal to the Tribunal. Under subsection (1), an assessee is granted right to file an appeal; under subsection (2), the Commissioner is granted a right to file appeal by issuing necessary direction to the assessing officer; sub-section (3) prescribes the period of limitation within which an appeal could be preferred. Section 253(4) of the Act lays down that either the assessing officer or the assessee, on receipt of notice that an appeal against the order of Commissioner (Appeals) has been preferred under sub-section (1) or subsection (2) by the other party, may, notwithstanding that no appeal had been filed against such an order or any part thereof, within 30 days of the notice, file a memorandum of cross objections verified in the prescribed manner and such memorandum shall be disposed of by the Tribunal as if it were an appeal presented within the period of limitation prescribed under sub-section (3). Therefore, on a plain reading of the provision, it transpires that a party has been granted an option or a discretion to file cross objection. 19. In case a party having succeeded before Commissioner (Appeals) opts not to file cross objection even when an appeal has been preferred by the other party, from that it is not possible to infer that the said party has accepted the order or the part thereof which was against the respondent. The Tribunal has, in the present case, unfortunately drawn such an inference which is not supported by the plain language employed by the provision. 20. If the inference drawn by the Tribunal is accepted as a correct proposition, it would render Rule 27 of the Tribunal Rules redundant and nugatory. It is not possible to interpret the provision in such manner. Any interpretation placed on a provision has to be in harmony with the other provisions under the Act or the connected Rules and an interpretation which makes other connected provisions otiose has to be avoided. Rule 27 of the Tribunal Rules is clear and unambiguous. The right granted to the respondent by the said Rule cannot be taken away by the Tribunal by referring to provisions of Section 253(4) of the Act. The Tribunal was, therefore, in error in holding that the finding recorded by the Commissioner (Appeals) remained unchallenged since the assessee had not filed cross objections.” 8.1. Thus we entertain the application filed by the Assessee under Rule 27 of the ITAT Rules by following the series of Judgments rendered by the Jurisdictional High Court in the case of Dahod Sahakari Kharid Vechan Sangh Ltd. and in the case of S. Nazeer Ahmed (cited surpa). Thus the Revenue’s objection in entertaining the Application under Rule 27 is hereby rejected.” 8. Thus, the application filed by the assessee under Rule 27 was admitted and then the ground was taken up for adjudication against reopening of the assessment, which was decided against the assessee by the CIT(A) even though the assessee had not filed appeal against the order of CIT(A) on dismissal of ground relating to the provisions of section 147 before the Tribunal. 9. Thereafter, the issue of the jurisdiction assumed by the Assessing Officer for reopening u/s.147 was also decided in favour of assessee on the ground of change of opinion, and therefore, the appeal of Department was dismissed on the ground that the provisions of section 147 were wrongly invoked by the Assessing Officer. ❉ ❉ ❉ Unreported Judgments

Ahmedabad Chartered Accountant Journal August, 2023 301 Vague and scanty reasons are bad in law. Bharatkumar Nihalchand Shah vs ITO Special Civil Application No. 5353 of 2022, dated 07/03/2023 5. Without going into any aspect on the merits of reopening, the ground of assailment by the petitioner-assessee that the reasons are cryptic and that they did not furnish details, on the basis of which the petitioner could defend his case, merited acceptance. Looking at the reasons again, what is only stated by the Assessing Officer is that, “From the data made available under Project Falcon, it is seen that the assessee has created a profit/loss of Rs. 74,62,860/-”. Both buying and selling of trades have been are executed at the Bombay Stock Exchange”. This statement is a non-detailed and completely escapist. It does not give any fact regarding the transactions or other attendant facts except saying that assessee had engaged in the trading at the Bombay Stock Exchange to create profit or loss. Though styled as reasons, the ground of reopening is unreasoned. 6. The necessity to incorporate reasons in the administrative, quasi judicial or judicial orders are repeatedly emphasised by the supreme court. In Assistant Commissioner, Commercial Tax Department, Works Contract and Leasing, Kota vs. Shukla and Brothers [(2010) 4 SCC 785], it was stated that the requirement of providing reasons can never be disposed with, “The increasing institution of cases in all Courts in India and its resultant burden upon the Courts has invited attention of all concerned in the justice administration system. Despite heavy quantum of cases in Courts, in our view, it would neither be permissible nor possible to state as a principle of 10 Advocate Tushar Hemani [email protected] Judicial Analysis law, that while exercising power of judicial review on administrative action and more particularly judgment of courts in appeal before the higher Court, providing of reasons can never be dispensed with. The doctrine of audi alteram partem has three basic essentials. Firstly, a person against whom an order is required to be passed or whose rights are likely to be affected adversely must be granted an opportunity of being heard. Secondly, the concerned authority should provide a fair and transparent procedure and lastly, the authority concerned must apply its mind and dispose of the matter by a reasoned or speaking order. This has been uniformly applied by courts in India and abroad.” (para 10) 6.1 In S. N. Mukherjee vs. Union of India [(1990) 4 SCC 594], the insistence of and importance of recording reasons for decision by the administrative authorities and Tribunals was justified by observing that, “administrative process will best be vindicated by clarity in its exercise”. It was stated in Assistant Commissioner, Commercial Tax Department, Works Contract and Leasing, Kota (supra) that in exercise of powers of judicial review, the concept of reasoned order has been equally enforced by the courts in India. Absence of reasons by the administrative authorities and the Tribunals, would render the order liable to judicial chastisement. The reasons are necessary to enable the appellate or higher courts to exercise their jurisdiction appropriately. 6.2 It was then observed in Assistant Commissioner, Commercial Tax Department, Works Contract and Leasing, Kota (supra), “….It is the reasoning alone, that can enable a higher or an appellate court to appreciate the

302 Ahmedabad Chartered Accountant Journal August, 2023 controversy in issue in its correct perspective and to hold whether the reasoning recorded by the Court whose order is impugned, is sustainable in law and whether it has adopted the correct legal approach. To sub-serve the purpose of justice delivery system, therefore, it is essential that the Courts should record reasons for its conclusions...” (para 12) 6.3 Recording of reasons in order is essential feature of dispensation of justice. In Kranti Associates Private Limited and Another vs. Masood Ahmed Khan and Others [(2010) 9 SCC 496], the supreme court stated that order passed by the quasi judicial authority or even administrative authority affecting the rights of the parties must speak and that is must not be like the “inscrutable face of a sphinx”. 6.4 The principles for recording reasons came to be summarised by supreme court in Kranti Associates Private Limited (supra), “a. In India the judicial trend has always been to record reasons, even in administrative decisions, if such decisions affect anyone prejudicially. b. A quasi-judicial authority must record reasons in support of its conclusions. c. Insistence on recording of reasons is meant to serve the wider principle of justice that justice must not only be done it must also appear to be done as well. d. Recording of reasons also operates as a valid restraint on any possible arbitrary exercise of judicial and quasi-judicial or even administrative power. e. Reasons reassure that discretion has been exercised by the decision maker on relevant grounds and by disregarding extraneous considerations. f. Reasons have virtually become as indispensable a component of a decision making process as observing principles of natural justice by judicial, quasi-judicial and even by administrative bodies. g. Reasons facilitate the process of judicial review by superior Courts. h. The ongoing judicial trend in all countries committed to rule of law and constitutional governance is in favour of reasoned decisions based on relevant facts. This is virtually the life blood of judicial decision making justifying the principle that reason is the soul of justice. i. Judicial or even quasi-judicial opinions these days can be as different as the judges and authorities who deliver them. All these decisions serve one common purpose which is to demonstrate by reason that the relevant factors have been objectively considered. This is important for sustaining the litigants’ faith in the justice delivery system. j. Insistence on reason is a requirement for both judicial accountability and transparency. k. If a Judge or a quasi-judicial authority is not candid enough about his/ her decision making process then it is impossible to know whether the person deciding is faithful to the doctrine of precedent or to principles of incrementalism. l. Reasons in support of decisions must be cogent, clear and succinct. A pretence of reasons or ‘rubber-stamp reasons’ is not to be equated with a valid decision making process. m. It cannot be doubted that transparency is the sine qua non of restraint on abuse of judicial powers. Transparency in decision making not only makes the judges and decision makers less prone to errors but also makes them subject to broader scrutiny. (See David Shapiro in Defence of Judicial Candor (1987) 100 Harward Law Review 731-737). n. Since the requirement to record reasons emanates from the broad doctrine of fairness in decision making, the said requirement is now virtually a component of human rights and was considered part of Strasbourg Jurisprudence. See (1994) 19 EHRR 553, at 562 para 29 and Anya vs. University of Oxford, 2001 EWCA Civ 405, wherein the Court referred to Article 6 of European Convention of Human Rights which requires, “adequate Judicial Analysis

Ahmedabad Chartered Accountant Journal August, 2023 303 and intelligent reasons must be given for judicial decisions”. o. In all common law jurisdictions judgments play a vital role in setting up precedents for the future. Therefore, for development of law, requirement of giving reasons for the decision is of the essence and is virtually a part of “Due Process.” ( para 47) 6.5 In Sant Lal Gupta and Others vs. Modern Cooperative Group Housing Society Limited and Others [(2010) 13 SCC 336], the supreme court stated importance of reasons referring to other decisions on the point thus, “The reason is the heartbeat of every conclusion. It introduces clarity in an order and without the same, the order becomes lifeless. Reasons substitute subjectivity with objectivity. The absence of reasons renders an order indefensible/ unsustainable particularly when the order is subject to further challenge before a higher forum. Recording of reasons is principle of natural justice and every judicial order must be supported by reasons recorded in writing. It ensures transparency and fairness in decision making. The person who is adversely affected must know why his application has been rejected.” (para 27) 6.6 On the basis of the propositions laid down in different decisions by the supreme court above referred and others, the following legal principles on the point in issue may be enlisted, (i) “Reasons” are of paramount importance. “Reasons” are heartbeat of every conclusion. It introduces clarity in any order. Without the reasons, the order is lifeless. (ii) The concept of reasoned judgment has become an indispensable part of basic rule of law and, in fact, is a mandatory requirement of procedural law. (iii) It is only clarity of thoughts that leads to proper reasoning, which becomes a foundation of a just and fair decision. (iv) Insistence for recording of reasons is intended to subserve the wider principle that justice must not only be done but it must also seen to have been done. The reasons are requirement for ensuring judicial accountability. (v) Reasons reflect candidness on part of decision maker. The decision making process becomes transparent by virtue of reasons. In absence,, it is impossible to know whether the person deciding the issue is faithful to the doctrine of precedent or to the principles of incrementalism. (vi) Reasons in support of decisions must be cogent, clear and succinct. A pretense of reasons or “rubber-stamp reasons” cannot be equated with a valid decision-making process. (vii) Reasons also facilitate the process of judicial review by superior courts. 7. In light of the above discussion highlighting the indispensability of reasons in the order passed by any authority administrative, quasi judicial or judicial, when it comes to exercise of powers under sections 147 and 148 of the Income Tax Act, 1961, there has to be a greater thrust for necessity of recording reasons. The entire exercise of reopening hinges on the reasons recorded by the Assessing Officer. It is the ‘reasons’ which weigh with him. 7.1 When the concluded assessment is to be revisited with by the Assessing Officer, recording of reasons for exercise of such powers has to be viewed as vested rights for the assessee. While exercising powers under the Act to reopen the assessment, the Assessing Officer would harbour reasons to believe that on particular set of facts, the income had escaped assessment and tax was not paid in relation to the year under consideration. 7.2 All the reasons which hold good in the eye of and with the Assessing Officer must be made known to the assessee. Assessee has right to refute the reasons for reassessment by filling objections. Unless the Assessing Officer appropriately delineates and communicates the reasons for reassement, right of the assessee to file objections would remain an eye-wash. Judicial Analysis

304 Ahmedabad Chartered Accountant Journal August, 2023 7.3 Whether the reassessment powers are adverted to on objective basis, whether the element of assessment of income is noticed from the facts and whether formation of opinion by the Assessing Officer is based on some relevant facts or not, could be judged provided the reasons are properly recorded and the details are given with regard to reopening of assessment that the reasons to believe with the Assessing Officer must be reflected in recording of such reasons to be communicated to the assessee. 7.4 The cryptic way of recording of reasons like found in the instant case, would render the exercise of powers vitiated. With such vague reasons the respondent could be said to have failed to demonstrate that there was any escapement of income chargeable to tax. He could demonstrate such element, if he gives reasons for the same. Surani Steel Tubes Ltd.v.ITO[2022] 136 taxmann.com 139 (Gujarat) 7. Having heard the learned advocates appearing for the respective parties and having perused the material placed on record. The only question, which arises for consideration of this Court is whether the Assessing Officer was justified in issuing the impugned notices dated 30-3-2021/ 31-3-201 in reopening the assessment in exercise of powers conferred under section 147 of the Income Tax Act merely on the basis of information required from Investigation Wing and that too, based on search and survey carried out at premises of 3rd party? 8. The powers to reopen completed assessment under section 147 of the Income-tax Act, 1961 is conferred upon the Assessing Officer, if he has reason to believe that any income chargeable to tax has escaped assessment for Assessment Year. A bare reading of section 147 of the Incometax Act lays down the condition precedent of “reason to believe” of the Assessing Officer to invoke the power under section 147. It is well settled position of law that such belief that the income has escaped assessment has to be on the sole reasonable belief of the Assessing Officer himself and cannot be an opinion and / or belief of some other authority. This Court as well as the Supreme Court have on number of occasions held that a third party information is only an “information” and does not constitute “reason to believe” until and unless the third party information is subject to investigation and on the basis thereof, the Assessing Officer records independent reasons before issuing notice under section 148 of the Act. Thus, it is expected of the Assessing Officer that though the information / material is received from other sources, the Assessing Officer is required to consider the material on record in case of assessee by applying his independent mind and upon appreciation of such information /material on record, the Assessing Officer is further expected to form his independent opinion to arrive at satisfaction which constitutes “reason to believe” that income of the assessee, which otherwise was chargeable to tax has escaped the assessment for any assessment year. It is equally established principle of law that such reason to believe of the assessing authority, who disclose that the Authority alone had applied his independent mind, has to record his satisfaction and further such satisfaction has to be “independent” and not borrowed or a dictated satisfaction. 9. In the facts of the present case, the assessee was called upon to show cause as to why the income chargeable to tax for A.Y. 2014-15/A.Y. 2015-16 should not be reopened in terms of power conferred upon Assessing Officer under section 148 read with section 147 of the Income-tax Act. It is not in dispute that the assessment year under reconsideration are assessment years 2014-15 / 2015-16 and the impugned notice are dated 31-3- 2021/30-3-2021, which is issued beyond the period of 4 years. In fact, the scrutiny assessment under section 143(3) of the Act was made on 16.11.2016 determining the total income amounting to Rs. 85,440/-. Attention of the respondent Assessing Officer of the aforesaid fact has been drawn by the petitioner assessee by filing objection, however, the Assessing Officer has taken shield off “information” supplied by the Investigation Wing to form “reason to believe” during relevant assessment year. In particular, it is recorded by 11 Judicial Analysis

Ahmedabad Chartered Accountant Journal August, 2023 305 the Assessing Officer that the assessee has entered in financial transaction and made high value transaction of Rs.26,42,027/- and availed accommodation entry by way of bogus sales / purchases/ fictitious loan, which has resulted into escapement of income and has thereby rejected the objection raised by the assessee against reopening of assessment. This Court has closely gone through the orders rejecting the objection against reassessment as well as has also examined the reasons recorded by the Assessing Officer for reopening of the assessment in the case of the petitioner for AY 2014-15/A.Y. 2015-16. The reasons recorded by the Assessing Officer in so far as A.Y. 2014-15 is concerned are reproduced as under : xxx… 10. This Court has also taken into consideration the affidavit-in-reply filed by the Income-tax Officer, Ward -1, Gandhinagar. On appreciation of contents of the same, we could note that the entire base for reopening assessment is on the premise that there was “information” supplied by the Investigation Wing and the Assessing Officer has made cursorily reference to high value transaction of Rs.26,42,027/- as well as also referred to accommodation entry entered upon by the petitioner Company by way of bogus sales / purchases / fictitious loans etc. Thus, it appears that the reasons for reopening of the assessment in the case of petitioner Company for annual assessment year 2014-15/2015-16 by the Assessing Officer is based on the borrowed satisfaction and the Assessing Officer has not applied his independent mind to arrive at the conclusion that there was failure on the part of the assessee to disclose fully and truly all material facts. In fact, the Assessing Officer is under obligation to arrive at such conclusion that the assessee has failed to disclose all material facts and has to form independent opinion resulting into “reason to believe” with regard to escapement of income chargeable to tax in case of the petitioner. During the course of hearing, learned Senior Advocate for the Department has tried to improvise by referring to the original file of the Department to emphasize that there is tangible material on record to show that the petitioner Company has made purchase transaction of Rs.26,42,027/- and has availed accommodation entry by way of bogus sales / purchases / fictitious loans etc. with Disman Group of Company. In our opinion, in absence of specific details as regards particulars of nature of transaction basic details of information, clarity with regard to name of person with whom such transaction has been entered into, goes to the very root of the matter. The sole object of providing reasons for reopening of the assessment is to prima facie supply the relevant material to the assessee to meet with his case and at the same time, it reflects the basic ingredients of “reason to believe” for Assessing Officer to assume the jurisdiction under sections 147 and 148 of the Income-tax Act. At the same time, such non-recording of specific details lead us to belief that without proper application of mind, the Assessing Officer has solely and mechanically relying upon the information received from Investigation Wing, has issued impugned notice. Thus we are not convinced with the manner in which satisfaction is arrived at by the respondent, as recorded in the reasons supplied to the petitioner Company, for assuming jurisdiction to reopen the assessment of relevant A.Y. 2014-15/ 2015-16. 11. In our opinion, the condition precedent for resorting to the reopening of assessment under sections 147 of the Act are not satisfied in the present case. In overall view of the matter, we are not convinced with regard to the satisfaction arrived at by the respondent Assessing Officer to make out the case for reopening of assessment under section 147 of the Act for relevant A.Y. 2014-15/2015-16. ❉ ❉ ❉ Judicial Analysis

306 Ahmedabad Chartered Accountant Journal August, 2023 CA. Kaushik D. Shah [email protected]. Controversies Issue Whether business can claim depreciation if single asset out of entire block has not been put to use for a particular year under Income Tax Act, 1961? Proposition As per the relevant provisions of the Income-tax Act, 1961, deduction in respect of depreciation shall be made compulsorily.Amount of deduction to be claimed is to be calculated by applying relevant percentage on Written Down Value of block of asset. For an asset acquiredin the previous year, is put to use for less than 180 days, only 50% of allowable depreciation can be claimed.Hence, it is proposed that for the purpose of claiming depreciation, use of asset should be seen for the first year i.e., when the asset is purchased, thereafter only block of asset is to considered. View against the proposition As per Section 32 of the Act depreciation is allowable only if the assets are used for the purpose of business. As per Section 43(6)(c), Written Down Value of the asset is to be adjusted by adding value of new machinery acquired and by deducting the consideration received for sales of old machinery.It also states that for claiming depreciation the asset should actually be used by the assessee for the purpose of his business. It is to be noted that use includes passive use of asset. In the assessment year 1988-89, there was thorough change in the system of allowing of depreciation.Now depreciation was to be allowed on the block of assets and not upon the individual assets. Therefore, the individual assets had lost its identity and it has to be seen whether the assets of a particular block, were used or not. The learned Senior Departmental Representative in the case of Packwell Printers v. Assistant Commissioner of Income-tax [1996] 59 ITD 340 (JAB.)was of the view thatif the assets are not used, then no depreciation thereon can be allowed and the concept of block of assets was just to facilitate the computation of depreciation, but this concept could not be used by the assessee to claim depreciation an asset, which was not used for the purpose of business in the year under consideration. View in favour of the Proposition Section 32 of the Act mandates the assessee to take deduction for depreciation even if the same is not claimed in computation of income under the head of “profits and gains of business or profession”.Further, it is nowhere specified that if the asset is not used for the previous year, then its written down value should be reduced from the said block. In the case of Packwell Printers v. Assistant Commissioner of Income-tax [1996] 59 ITD 340 (JAB.), the assessee had three trucks and out of those only two were used in the previous year. The Assessing Officer disallowed the claim of depreciation for this truck, which was confirmed by the Commissioner (Appeals) in appeal. On second appeal, the assessee submitted that the depreciation was now to be allowed on the block of asset and not upon the individual assets, and consequently, depreciation in instant case had to be allowed on all the three trucks. In the ITAT Ahmedabad Bench’C’ Inductotherm (India) LTD. V. Deputy Commissioner of IncomeTax,assessee had scrapped a machinery and thereby that machine was not put to use. Scrap value of machinery was not yet ascertained hence nothing could be reduced from written down value of block Continued to page 331

Ahmedabad Chartered Accountant Journal August, 2023 307 Solving the riddle - Nuances of transactions undertaken with branch office (Part 2 – Transactions with branch office) In this article, the authors have delved into the intricacies of transaction undertaken between Indian entities and branch offices (viz. foreign branch of Indian Company and Indian branch of foreign company). Hope you find this article helpful in your professional practice. 1. Background : - There may be instances where Indian entities are required to make payments to : (a) Indian branch of foreign company; (b) Foreign branch of Indian company - In this article, we shall delve into some of the key issues which may be relevant for taxpayers in the context of transactions undertaken with Indian branch of foreign company and foreign branch of Indian company. 2. Key points to be considered in respect of transactions between Indian entity and branch office of Indian Company and Foreign Company: 2.1 Transaction between Indian entity and India branch of foreign entity : 2.1.1 Taxability of income of India branch of foreign company : o As discussed in our earlier article, Indian branch of a foreign entity can be regarded as “business connection” of foreign entity as per section 9(1)(i) of the Income-tax Act, 1961 (the Act).Further, from the perspective of Double Taxation Avoidance Agreement (DTAA), branch office may be regarded as Permanent Establishment (PE). o As per the provisions of section 9(1)(i) read with relevant DTAA, the income of branch office accruing or arising through / from such “business connection” / attributable to PE may be subjected to tax in India as income from business and profession. o Further, fact specific exercise needs to be undertaken to determine the income which can be regarded as attributable to “business connection” / PE in India. This is usually determined by undertaking functional, asset and risk (FAR) analysis. o Such income of Indian branch of foreign company would be taxable at the rate of 40%1 plus applicable surcharge and cess on net basis (i.e., post allowing deduction of eligible expenditure). Branch office would get credit of tax deducted / collected at source by the customers / vendors while discharging the final tax liability. Further, in determination of taxable income of Indian branch of foreign company, provisions of section 115JB (MAT provisions) will also have to be considered. 2.1.2 Obligations of India branch of foreign company in India2 : o The Indian branch of foreign company has to obtain Permanent Account Number (PAN) in India. o As per section 139(1) of the Act, every person being a company is required to furnish a return of income in the prescribed form on or before the specified due date. Section 2(17) of the Act defines “company” to mean any body corporate incorporated by or under the laws of country outside India. Therefore, the Indian branch of foreign company (being an FEMA & International Taxation CA. Dhinal A. Shah [email protected] CA. Hardik Khatri [email protected]

308 Ahmedabad Chartered Accountant Journal August, 2023 extension of foreign company) shall be required to file return of income in India. o The Indian branch of foreign company shall be liable to withhold / collect taxes under applicable provisions of the Act in respect of payments made to resident and non-resident and undertake necessary compliances in this regard (i.e., depositing taxes to the credit of central government, file returns in respect of tax deducted / collect at source, issue certificate in respect of tax deducted / collected at source). For this purpose, the Indian branch of foreign company may also be required to obtain Tax Deduction and Collection Account Number (TAN) in India. o Furnish tax audit report if the conditions prescribed under section 44AB are satisfied. o Furnish Form 3CEB and maintain transfer pricing documentation in respect of international transaction or specified domestic transaction. o Furnish PAN to the payers for deduction of tax at source (so that the payers do not apply higher withholding rate of 20% as per section 206AA of the Act). 2.1.3 Obligations of payer in respect of payments made to branch of foreign company : o Branch of foreign company shall be regarded as non-resident. Therefore, payment made to Indian branch of foreign company shall be regarded as payment to non-resident. o Further, considering that such branch is regarded to have “business connection” / PE in India, the payment made to such Indian branch of foreign company shall be subject to withholding under section 195 of the Act. The further question which arises is the amount on which the tax is required to be deducted at source under section 195 of the Act. o As per section 195 of the Act, any person responsible for paying any sum to nonresident shall be liable to deduct tax at rates in force. For non-resident earning income in India (other than special rate incomes), the prescribed rate of tax is 40% (plus surcharge and cess). However, one may note that the non-resident is liable to pay tax on the total income post claiming deduction of eligible expenditure. Therefore, the moot question is whether tax is required to be deducted at the rate of 40% (plus surcharge and cess) on gross basis (i.e., on the gross amount without reducing the expenditure) or on net amount (i.e., gross payment reduced by expenditure incurred by foreign company). o The tax authorities may argue that section 195 requires withholding of tax on “any other sum chargeable under the provisions of the Act” at rates in force. Further, entire payment made by payer to Indian branch of foreign company is chargeable to tax in India (though Indian branch may separately claim deduction of eligible expenditure). Therefore, tax authorities may urge that taxes shall be withheld on entire amount (i.e., on gross basis) at rates in force. Considering the same, it may be advisable that the Indian payer requires such branch to furnish lower withholding certificate obtained under section 197 of the Act. 2.2 Transaction between Indian entity and foreign branch of Indian entity : 2.2.1 Taxability of income earned by foreign branch of Indian company : o The foreign branch of Indian Company shall be regarded as “resident” under the provisions of the Act. Therefore, income of foreign branch of Indian Company and corresponding expenditure shall be taxable at rates applicable to Indian Company. o Further, Indian entity may claim credit of taxes paid by foreign branch in foreign country. For this purpose, relevant provisions of tax treaty may also be required to be considered (i.e., if the tax treaty provides exemption method or credit method). Necessary compliances shall also be required to be undertaken as per Rule 128 of Income-tax Rules, 1962. FEMA & International Taxation

Ahmedabad Chartered Accountant Journal August, 2023 309 o While there are no separate obligations is required to be undertaken by foreign branch of Indian Company in India, such foreign branch has to undertake necessary compliance as per the applicable laws of the foreign country. 2.2.2 Obligations of payer in respect of payments made to branch of foreign company : o Foreign branch of the Indian Company may not be regarded as “non-resident”.Therefore, the provisions of section 195 may not be applicable in respect of payment to be made to foreign branch of Indian Company. o In this regard, reference may be made to the judgment of Hon’ble Hyderabad ITAT in the case of M/s. Semantic Space Technologies Ltd. (ITA No. 824 & 915 / Hyd / 2010). The relevant extracts of the judgement of Hon’ble Hyderabad ITAT is reproduced under : “…it is decided issue that the status of branch office of assessee abroad is not “nonresident”. In such situation, the provisions of section 195 are inapplicable…” o Further, various judicial precedents (also in the context of transfer pricing disputes) have held that branch is not a separate entity in itself and is merely an extension of head office. Accordingly, in the given case, the foreign branch of Indian entity may be regarded as mere extension of Indian entity (and not a separate legal entity). Therefore, remittance made to foreign branch of Indian entity may be regarded as payment to Indian entity only. o Considering the same, evaluation shall be required to be made under the withholding provisions applicable while making remittances to a resident (i.e., section 194C, section 194J etc.). 3. Concluding thoughts : As summarized above, the transactions with branch office and compliances required to be undertaken in this regard requires evaluation from various perspectives (i.e., withholding, transfer pricing, etc.). The relevant provisions are not to be read in isolation but with applicable DTAA and other regulatory laws (such as exchange control regulations etc.). This article is for information purpose only and not a conclusive appraisal of all advancements in the legislation. This article is written with a view to incite the thoughts of a reader who could have different views of interpretation. Disparity in views, would only result in better understanding of the underlying principles of law and lead to a healthy debate or discussion. While judicious upkeep has been ensured, reliance should not be placed on the contents of this article without obtaining fact specific consultation from the advisors. (Footnotes) 1 Rate of surcharge shall be as under: Nil– if income does not exceed 1 crores; 2%– if income exceeds 1 crores but does not exceed 10 crores; 5%– if income exceeds 10 crores. 2 Please note that this para does not prescribe compliances to be undertaken by Indian branch of foreign company under other applicable regulatory laws (such as Companies Act, 2013 and extant exchange control regulations etc.) ❉ ❉ ❉ FEMA & International Taxation

310 Ahmedabad Chartered Accountant Journal August, 2023 Remittances to International Financial Services Centres (IFSCs) under the Liberalised Remittance Scheme (LRS) The Reserve Bank of India issued the following directions with respect to relevant instructions contained in A.P. (DIR Series) Circular No. 11 dated February 16, 2021 and A.P. (DIR Series) Circular No. 03 dated April 26, 2023 on “Remittances to International Financial Services Centres (IFSCs) in India under the Liberalised Remittance Scheme (LRS)”. Presently, remittances to IFSCs under LRS can be made only for making investments in securities in terms of A.P. (DIR Series) Circular No. 11 dated February 16, 2021. In view of the gazette notification no. SO 2374(E) dated May 23, 2022 issued by the Central Government, it is directed that Authorised Persons may facilitate remittances by resident individuals under purpose ‘studies abroad’ as mentioned in Schedule III of Foreign Exchange Management (Current Account Transactions) Rules, 2000 for payment of fees to foreign universities or foreign institutions in IFSCs for pursuing courses mentioned in the gazette notification ibid. Authorised Persons shall bring the contents of this circular to the notice of their constituents and customers.The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions/approvals, if any, required under any other law. Source:RBI/2023-24/45A.P. (DIR Series) Circular No. 06, dated June 22, 2023 For full text refer:https://rbi.org.in/Scripts/ BS_CircularIndexDisplay.aspx?Id=12518 Status of MIFOR as a Significant Benchmark The Reserve Bank of India drew attention to the RBI circular dated January 01, 2020 and December 01, 2022, notifying, inter-alia, the financial benchmarks administered by Financial Benchmarks India Pvt. Ltd. (FBIL) viz., Mumbai Interbank Forward Outright Rate (MIFOR) and Modified Mumbai Interbank Forward Outright Rate (MMIFOR) as ‘significant benchmark’. In light of the cessation of the publication/nonrepresentativeness of US Dollar London Interbank Offered Rate (USD LIBOR) settings after June 30, 2023, FBIL has been accorded approval to cease the publication of the MIFOR after June 30, 2023, in terms of provisions of the Financial Benchmark Administrators (Reserve Bank) Directions, 2019. Accordingly, the MIFOR administered by FBIL shall cease to be a ‘significant benchmark’ after June 30, 2023. The updated list of ‘significant benchmarks’ administered by FBIL is given below: i. Overnight Mumbai Interbank Outright Rate (MIBOR) ii. USD/INR Reference Rate iii. Treasury Bill Rates iv. Valuation of Government Securities v. Valuation of State Development Loans (SDL) vi. Modified Mumbai Interbank Forward Outright Rate (MMIFOR) The updated list of ‘significant benchmarks’ shall come into effect from July 01, 2023. Source: RBI/2023-24/46FMRD.FMSD.03/03.07.25/ 2023-24, dated June 23, 2023 For full text refer:https://rbi.org.in/Scripts/ BS_CircularIndexDisplay.aspx?Id=12519 ❉ ❉ ❉ CA. Dr. Savan R. Godiawala [email protected] 8 9 FEMA Updates

Ahmedabad Chartered Accountant Journal August, 2023 311 [I] IMPORTANT JUDGMENT (SUPREME COURT): [1] Issue: Madras High Court order classifying ‘Nycil Prickly Heat Powder’ not as medicine or drug but as Medicated Talcum Powder/Toilet Powder liable to higher rate of tax affirmed. (Kerala General Sales Tax Act, 1963). Case Laws: Heinz India Limited VS. The State of Kerala [2023- VIL-51-SC] Facts: The assessee is a dealer registered under the Act. The assessee classified its product ‘Nycil Prickly Heat Powder’ falling under entry for drugs and medicines. However, the revenue classified impugned product as cosmetics liable to tax at higher rate. The Kerala and Madras High Court affirmed the view of the revfenue. Being aggrieved, the assessee filed present appeal before the Supreme Court. Decision of the Supreme Court: The Supreme Court held that the expression ’including’ used in Entry 127 of the first schedule to KGST Act, 1963 has the effect of brining in an entirely different product, which ordinarily may not have been in the same class i.e. medicated powder. To rule out any ambiguity, the legislature specifically referred to a sub-class of medicated powders, i.e. medicated talcum powder. Such specific entries have not come up for consideration, before this Court. Predominantly, the courts have ruled out that in the context of broad descriptions such as cosmetics or medications, if there are medical ingredients, in a product, which is meant as a curative or prophylactic product, it would be classifiable as drugs or medicines. However, the specifically by the legislature in this case, rules out that possibility. The Hon. Court further held that the terms ‘includes’ has been construed as broadening the sweep of a provision, and at the same time restricting its amplitude to the meanings ascribed in the statute. The use of the term ‘includes’ after talcum powder, followed by ‘medicated talcum powder’ can lead to only one inference that the clear legislative intent was that all kinds of talcum powders, which contained medications (irrespective of the proportion, or at any rate, not containing predominant proportions) should necessarily be treated as cosmetics, falling under Entry 127. The Supreme Court held that the clear legislative intent, of inserting a carefully worded entry, which was a ‘hybrid’ one, i.e. describing an article contained medical ingredients, as well as those used for cosmetics, and yet placing such a creature in the category of cosmetics, ruled out altogether any interpretive scope of classifying it as a medical preparation, or drug or medicine. Similarly the TNGST, 1959 was consciously amended to include talcum powder, whether or not medicated in the specific entry or class of entries, enumerating cosmetics. Hence, like in the Kerala Case, the plain meaning of that taxation head or entry had to be given, as there was no ambiguity. Consequently, the findings recorded by the High Courts are justified. The impugned orders of respective High Courts came to be upheld and assessee appeal came to be dismissed. (Note: This issue is alive in GST). [2] Issue: Taxability of pan masala or gutka/gutkha under state enactments – Whether State Legislatives CA. Vishrut R. Shah [email protected] CA. Bihari B. Shah [email protected] GST and VAT Judgments and Updates

312 Ahmedabad Chartered Accountant Journal August, 2023 GST and VAT - Judgements and Updates were competent to levy taxes on the sale or purchase of the commodities subjected to additional excise duty (Delhi Sales Tax Act, 1975) Case Laws: M/s. Trimurthi Fragrances (P) Ltd. VS. State of N.C.T. of Delhi [2023-VIL-53-SC]. Facts: This judgment disposes of appeals arising from judgments of three High Corts, on the question of taxability of pan masala or gutka / gutkha [Which is spelt differently in regional contexts as ‘gutka’ or ‘gutkha’ or ‘guhtka’. For convenience, this is hereafter referred to uniformly as ‘gutkha’], under state enactments. The appellants unsuccessfully argued that state legislatures were not empowered to levy sales tax on those articles, in view of the provision in the Constitution enabling the Union to levy additional duties of excise and further that in any case, the rate of state tax cannot exceed the limit prescribed by the Central Sales Tax Act, 1956. Decision of the Supreme Court: Three issues were raised before the Supreme Court which are decided as under. Issue-1: Whether State Legislatures were competent to levy taxes on the sale or purchase of the commodities subjected to additional excise duty: The Supreme Court held that the Full Bench of the Andhra Pradesh High Court had examined the interface between the APGST Act, and the provisions of the CET Act, in the context of whether gudaku was subjected to sales tax levy, as the dealers had contended that it was tobacco, and therefore, exempt under the local law. The Full Bench ruling considered the local enactments, and sub-headings in Chapters 21 and 24 Of the CET Act, and held that although gutkha falls within the term ‘pan masala’, since no additional duty of excise is levied on it, yet it could be held that gutkha was exempt from state sales tax. Gutkha fell within the wide language of the said expression. However sub-heading 2404.40 ‘Chewing tobacco and preparations containing chewing tobacco’ was a general sub-head. It is a settled rule of interpretation that a specific reference prevails over a general entry. In view of the specific head ‘pan masala’ in Chapter 21, that item was excluded from the general sub-head 2404.40 ‘Chewing Tobacco’ and preparations containing chewing tobacco’. The court also concluded that though ‘gutkha’ fell within the term ‘pan masala’ in Chapter 21 under sub-head 21.06 yet as it is not subjected to additional duty, an essential condition envisaged by the explanation for claiming exemption, is lacking. Further, the question urged with respect to efficacy or validity of notifications introducing as entries in a schedule and subjecting them to tax, when those articles are part of the statute or are exempted from taxation. The assessee’s contentions therefore, fail on this point. Assessee appeals came to be dismissed. Issue-2: Whether pan-masala was an exempted item, being ‘tobacco’? The Supreme Court held that the CET Act itself made a distinction between pan masala. Whether it contained tobacco, ir not, and all forms of tobacco. Right from 1995, the distinction in the CET Act between pan masala (Chapter 21) and tobacco (Chapter 24), had been made. The definition of pan masala also clarified that despite one of its ingredients beign tobacco, it would nevertheless be a separate article. On a plain application of the interpretive rules, especially Rule 3(a) it is clear that the heading which provides the most accurate description has to be followed. In the present case, there is no doubt, that before 2001, pan masala and gutkha fell within Chapter 21, as pan masala, regardless to whether they contained tobacco. Goods classifiable under Chapter 24 i.e. tobacco items were more general; also they did not include pan masala. Issue-3: Applicable rate of tax: In view of the restrictions under Section 15 CST Act, 1956 neither gutkha nor pan masala were ‘declared goods’ under Section 14 of the CST Act. The Supreme Court held that the amendment to the CET Act did not become part of Section 14(ix).

Ahmedabad Chartered Accountant Journal August, 2023 313 The goods under the relevant sub-headings of the CET Act they were not part of the provisions introduced to the Finance Act, 1988. Therefore, the subsequent changes made introducing 2404.40 in the CET Act do not affect or change the CST Act. Consequently gutkha and pan masala are not covered under sub-heading 2404.40 so far as CST Act is concerned. Resultantly the arguments of the assessees that the rate of local tax, cannot exceed the limit under the CST Act, are rejected as unmerited. (Live issue of GST) [II] IMPORTANT CASE LAWS: [1] Issue: Penalty Order rightly set aside when no discrepancy was found between goods mentioned in invoice and e-way bill: SC: Case Laws: Additional Commissioner Grade-2 v. Sleevco Traders [2023] 152 taxmann.com 418 (SC) Facts: The department detained goods and vehicle of the assessee and levied penalty on the ground that documents were not proper without considering the submission of assessee that Eway Bill had been generated by seller in bill to ship to model mentioning place of delivery of ultimate buyer in addition to consignee assessee. Therefore, it challenged the demand and filed writ petition. Held: The Hon’ble High Court noted that authorities ought not to have dragged assessee into litigation in absence of any intention to evade GST as all statutory documents were accompanying goods. The Court also set aside demand of GST and imposition of penalty on assessee since E-way Bill had been generated by seller in bill to ship to model by mentioning place of delivery of ultimate buyer in addition to consignee assessee, Therefore the levy of penalty was not sustainable since no discrepancy was found between goods mentioned in invoice and E-way Bill and cost was imposed on State which was payable to assessee. GST and VAT - Judgements and Updates The department filed special leave petition against the decision of High Court. The Apex Court noted that cost was rightly imposed on State since there was no infirmity in the judgment of the High Court. The Hon. Supreme Court also appreciated the decision of the High Court and dismissed the petition. [2] Issue: HC set aside ex-parte order since dept. didn’t consider bonafide reasons of illness of petitioner. Case Laws: Santosh Traders v. State of U.P. [2023] 152 taxmann.com 413 (Allahabad) Facts: A show cause notice was issued to petitioner under section 61 by which, demand of GST on a total receipt of Rs. 1,10,67,891 was made. Thereafter, an ex parte order was passed under section 74(9) setting apart tax already deposited and demand was raised. The petitioner filed appeal against ex parte order under section 107(1) but the appeal was dismissed on ground of limitation. It filed writ petition and contended that due to outbreak of COVID-19Pandemic in year 2020-21, the office of Auditor/Staff of petitioner’s firm was not working in routine manner and hence petitioner could not receive the notice nor did he reply to it. The petitioner also contended that he was also suffering from acute illness. Held: The Hon’ble High Court noted that the petitioner was not able to prefer appeal within prescribed period due to bonafide reasons and unavoidable circumstances. However, immediately after recovery, the appeal was preferred but the Appellate Authority dismissed appeal without taking into consideration aforesaid bona fide reasons. Therefore, in peculiar set of facts and circumstances, the reason for delay appeared to be bona fide and the impugned order was set aside. The Court remanded matter back with a direction to consider and adjudicate upon the appeal filed by the petitioner on merits. ❉ ❉ ❉

314 Ahmedabad Chartered Accountant Journal August, 2023 1) R&D services provided to the foreign company considered as export of service ADVANCE RULING NO. GUJ/GA ANW2O23/26 (IN APPLICATION NO. Advance Ruling/SGST& CGST / 2022 I AW 48) dated 12th July 2023 Facts: - M/s. Hilti Manufacturing India (P) Ltd., is engaged in the manufacture and supply of diamond cutting tools, other innovative tools required by the construction industry and providing in-house research & development service on diamond inserts - The applicant also has a separate Research and Development [for short - ‘R&D’] unit wherein activities are carried out for their own purposes as well as for other customers; that they carry out R&D activities on behalf of entities situated outside India i.e. on the product samples/goods sent by the foreign entities for R&D purposes and they submit a detailed report thereafter - The applicant is a part of Hilti group of entities, the principal company being Hilti Aktiengesellschaft, located at Feldkircherstrasse 100, Postfach 333, Principality of Liechtenstein, 9494 FL-9494, Leichtenstein [for short ,HAG’]. In the application before the advance authority, the applicant stated that they had entered into an agreement with HAG for carrying out various R&D activities on the product samples provided to the applicant in India. - The results of these activities undertaken by the applicant are then provided to the foreign company comprising of findings, performances, parameters, know-how, inventions, developed processes, objects and programs in the form of a report - The applicant further stated that they raise periodic invoices for such services on the foreign customer for which consideration is received in foreign currency; that the invoices raised is inclusive of IGST @ 18% on the taxable value; that they are discharging IGST on the R&D services provided to foreign companies - That as per the agreement with HAG they are required to conduct R&D, testing & engineering activities for developing new products & processes;the results are communicated to HAG by way of detailed reports;that prototypes required for performance testing are manufactured by the applicant. - They purchase raw material/consumables, etc. hire personnel and undertake R&D activities that certain material (which are not substantial) such as consumables/capital goods including tools, reference material such of competitor products, showpiece products, batteries are provided by HAG that this is made available only as a matter of convenience otherwise most of the materials can be sourced from third party. - That no service is performed on the consumables, tools, reference materials etc. received from HAG; that they further are consumed in the process of R&D, further prototypes on which testing activity is done gets exhausted in the process and is not supplied by the applicant to M/s. HAG - It is not mentioned in the agreement dated 18.3.2014 that the goods on which the applicant needs to carry out the R&D activities are supposed to be supplied by HAG. - Further, the applicant raises periodic invoices & the consideration is received by the applicant in convertible foreign currency CA. Monish S. Shah [email protected]

Ahmedabad Chartered Accountant Journal August, 2023 315 Advance Ruling under GST Proposed Understanding - Conjoint reading of sections 2(52). 2(102), 9( 1), 7( 1 )(a), of CGST Act, 2017, & section 5(l) of the IGST Act,20l7, clearly show that scientific R&D carried out by the applicant is not movable property & hence would qualify as service - That it would fall within the ambit of section 13(2) of the IGST Act, 2017 as service under GST - ‘location of supplier’ & ‘place of supply’ will determine whether the transaction is an intrastate supply or inter-state supply - R&D services provided to HAG by the applicant does not fall under any of the subsections from 3 to 13 of section 13 of IGST Act - The place of supply of the applicant’s R&D services would fall under the default provision of section 13(2) of IGST Act, 2017 is that when service is consumed outside India, tax is not leviable in lndia; that where goods ceased to exist in the form in which it has been supplied it cannot be said that the services have been provided in respect of goods even if it cannot be denied that services have been rendered on the goods - the applicant has satisfied the conditions stipulated u/s 2(6) of the IGST Act; - the location of the applicant is in India in terms of section 2( 15)(a) of IGST Act, 2017 - the recipient of services are located outside India in terms of Section 2(14) (d) of the IGST Act; - the export of service shall qualify as ‘zero rated supply’ and can be supplied without payment of IGST; - R&D services provided by the applicant would qualify as zero-rated supply in terms of section 16 of the IGST Act, 2017; as per section 13 of the IGST Act. - Place of supply of services shall be the location of the recipient in terms of Section 13(2). except for services specified under section (13) (3) of the IGST Act; that section (13) (3) of the IGST Act does not apply in this case; that as per section 13(3) (a) ofthe IGST Act, place ofsupply ofservice shall be the location where services are performed in case it is supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services. Or to a person acting on behalf of the supplier of services in order to provide the services. Question (i) Whether the services provided by the applicant to the entities located outside India is covered under Section 13 (2) of the Integrated Goods and Services Tax Act. 2017? (ii) Whether the services provided by the applicant is liable to Central Goods and Service Tax and State Goods and Service Tax or Integrated Goods and Services Tax or is it eligible to be treated as a ‘zero rated supply’ under Section 16 of the Integrated Goods and Services Tax Act, 2017? Findings and Arguments - Export of service is defined under section 2(6) of the IGST Act which is reproduced as under: – “export of services” means the supply of any service when, — (i) The supplier of service is located in India (ii) The recipient of service is located outside India (iii) The place of supply of service is outside India (iv) The payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India (v) The supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8; Explanation 1 of the Section 8 of the IGST Act For the purposes of this Act, where a person has, (I) an establishment in lndia and any other establishment outside India;

316 Ahmedabad Chartered Accountant Journal August, 2023 (II) an establishment in a State or Union territory and any other establishment outside that State or Union territory: or (III) An establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons. - Having gone through the sub-clauses 2 to 13 of section 13 of the IGST Act, 2017, mentioned supra. It is found that that sub-clause 4 to 13, are not related to the issue on hand. What is in contention is sub-clause 2 and 3 of section 13 of IGST Act, 2017. on examining section 13(3) (a), we find that the place of supply of services in respect of goods which are required to be made physically available by the recipient to the supplier, or to a person acting on behalf of the supplier of services in order to provide the services shall be the location where the services are actually performed. There are two proviso to this sub clause. - The first proviso states that when such services are provided from a remote Location by way of electronic means, the place of supply shall be the location where goods are situated at the time of supply of services. - The second proviso talks about a situation wherein goods which are temporarily imported into India for repairs or for other treatment or process further holding that clause 13(3) shall not be applicable in such cases. section 13(3)(b) further deals with a situation wherein services are supplied to an individual, represented either as the recipient of services or a person acting on behalf of the recipient, which require the physical presence of the recipient or the person acting on his behalf with the supplier for the supply of services - On the other hand, section 13(2) of the IGST Act, 2017, states that the place of supply of services shall be the location of the recipient of services, except for the services specified in sub-sections (3) to (13). The only proviso in this sub clause goes on to state that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services - Circular No. 103/22/2019-GST dated 28.6.201 9, following clarification has been issued viz. PIace of supply in case of performance based services is to be determined as per the provisions contained in clause (a) of sub-section (3) of Section 13 of the IGST Act and generally the place of services is where the services are actually performed. But an exception is carved out in case of services supplied in respect of goods which are temporarily imported into India for repairs or for any other treatment or Process and are exported after such repairs or treatment or process s without being out to any use in India, other than that which is required for such repairs or treatment or process. Further, In case of cutting and polishing activity on unpolished diamonds which are temporarily imported. into India are not put to any use in India, the place of supply would be determined as per the provisions contained in subsection (2) of Section 13 of the IGST Act - Vide Notification No. 0412019-lntegrated Tax dated 30.9.2019, CBIC has further clarified and states that The place of supply of services shall be the location of the recipient of services subject to fulfilment of the following conditions a) Supply of services from the taxable territory are provided as per a contract between the service provider located in taxable territory and service recipient located in non-taxable territory. b) Such supply of services fulfil all other conditions in the definition of export of services, except sub-clause (iii) provided at clause (6) of Section 2 of Integrated Goods and Services Tax Act, 2017 (13 of 2017). - The services provided by the applicant to HAG, is in respect of the following areas viz (A) Testing activities related to HAG items, specified in detail by HAG (B) Product development & engineering related to HAG items, specified by HAG Advance Ruling under GST