JOURNAL MAY 2024

Ahmedabad Chartered Accountant Journal May, 2024 77 Volume : 48 Part : 02 May, 2024 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 Vaja Rashmin Shashikant Choksi Nirav Rameshbhai Chairman Vice-Chairman Convener Parmar Gaurav Ramjibhai Shah Ashwinkumar Himatlal E. C. Representative Past President Members Shah Shailesh Chandrakant Shah Monish Suketubhai Shah Rutvij Pankajkumar Mehta Ujal Sureshchandra - Celebrate My Life - Don't Mourn My Death CA. Nirav Choksi 79 Editorial CA. Rajni M. Shah 80 From the President CA. Riken Patel 81 Articles Startup Valuation : Essential Techniques and Influencing Factors CA. Gaurav R. Parmar & 82 CA. Milan G. Shah Which Mega Event Doesn't Need Sponsorship ? : Understanding the GST Impacts on Sponsorship CA. Tarjani Shah 84 ‘Deposits’ - the ‘firewall law’ for funding under the Companies Act, 2013 Premnarayan R. Tripathi 87 Direct Taxes Glimpses of Supreme Court Rulings Adv. Samir N. Divatia 90 From the Courts CA. Jayesh Sharedalal 91 Tribunal News CA. Yogesh G. Shah & 96 CA. Aparna Parelkar Unreported Judgements CA. Sanjay R. Shah 102 Judicial Analysis Advocate Tushar Hemani 105 Controversies CA. Kaushik D. Shah 112 FEMA & International Taxation FEMA & International Taxation CA. Dhinal A. Shah & 120 CA. Hardik Khatri FEMA Updates CA. Dr. Savan R. Godiawala 124 Indirect Taxes GST and VAT Judgments and Updates CA. Bihari B. Shah & 126 CA. Vishrut R. Shah Advance Ruling under GST CA. Monish S. Shah 128 Corporate Law & Others Corporate Law Update CA. Naveen Mandovara 134 GujRERA Corner CA. Manan Doshi 137 Capital Markets CA. Karan P. Vora 139 From Published Accounts CA. Pamil H. Shah 143 From the Government CA. Ashwin H. Shah & 145 CA. Kunal A. Shah IT Corner CA. Margik H. Doshi 147 Association News CA. Prakash B. Nandola & 149 CA. Ashish Sharma ACAJ Crossword Contest 152

78 Ahmedabad Chartered Accountant Journal May, 2024 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 2024-25 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. 2024-25 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 750 - 750 ii. In case of membership of (ICAI) for a period more than five years, 800 - 800 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, 900 - 900 ii. In case of membership of (ICAI) for a period of more than five years 960 - 960 3. Life Membership Fees i. In case of membership (of ICAI) for a period of less than or equal to five years 8000 1440 9440 ii. In case of membership of (ICAI) for a period more than five years 10000 1800 11800 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 1000 180 1180 ii. In case of membership of (ICAI) for a period more than five years 1500 270 1770 b. Flexi Firm/Corporate Membership Fees*** 3600 648 4248 *** Registered Firm/Corporate can nominate any two participants from their firm for each Brain Trust Meeting. Additional Representatives can be nominated @1800/- 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 May, 2024 79 CELEBRATE MY LIFE – DON’T MOURN MY DEATH - In the end we all will be stories Such a hard-hitting fact of one’s life. After your death, you will be just a story for those alive and remembering you. So can’t we have good stories for them to relive. It’s easier said than done for the family members or well-wishers of the bereaved, to celebrate the life of the deceased rather than mourn the death. But realistically and idealistically speaking, aren’t we advised to keep faith in god and heal with time whenever any near or dear one passes away. But does anyone give you any Mantra for this healing. I believe the mantra is to Celebrate the Life of the deceased. Think about the best times you had with that person. Believe that he is alive and still around and had he been around, what would you have done together. Continue doing that and perhaps that would be the greatest tribute to the wonderful life which that person must have lived. Even his soul would rest in peace when he will see his near and dear ones happy. Life is always full of pleasant and unpleasant memories. Dump the unpleasant one and cherish each pleasant moment you have spent with the deceased. This thought of “celebrating life” would also make you understand the very purpose of your life when you are alive. Every moment of your life is precious. There is only thing which is sure in your life and that Celebrate My Life - Don't Mourn My Death CA. Nirav Choksi [email protected] is your death. You need to reconcile with that fact and live as if every moment is the last one. This will help your family members to celebrate your life. They will be contended that you have lived your life to the fullest with no regrets. Yes, there are lot of pressures and stress amongst which we are leading our present lives. But find time out of those pressures and stress for your family and friends. Perhaps this very virtue of yours of devoting time towards them will be remembered by them after your demise and somehow they may cling on to the pleasant memories and live peacefully in your absence. We take a lot of efforts to financially secure our family in our absence. We take the utmost care for them so that their living standards are not affected. But we never plan for their emotional well being. I believe during your life time, you must on numerous occasions tell them to celebrate your life and not mourn your death. Perhaps this very idea of yours will be well considered and understood by them in your absence and also help them heal quicker & better. Give them the moments, give them the memories, given them the reasons to “Celebrate Your Life & Not Mourn Your Death” “Live Life King Size” ❉ ❉ ❉ æȶĸ, ęĒŃĝęőøĈĭńĐĮęˈĭđń ||

80 Ahmedabad Chartered Accountant Journal May, 2024 Wealth Concentration - Redistribution of Wealth Wealth redistribution - an idea tossed up during ongoing election campaign by one party borrowing this idea from USA was rebutted by other party and labelled it as ‘dangerous’. This had rattled the political arena before the end of a weeks-long election battle to cherry pick the next government. That concentration of capital is a problem, that marginalised sections must get a leg-up, that efforts must be made to address inequalities of opportunity, expand the pie, is beyond debate However the implementation of such a scheme shall achieve the desired success only if everyone thinks of paying it back to the society. Also, it is not necessary that the help is only in form of money. It may be in the form of meeting the educational needs or medical help or financial support. It is necessary to bridge the gap between the have and have nots. It is of paramount importance to derive satisfaction from helping others. It may be practically difficult to find the needy but if we have a look at our surroundings every one will be able to find opportunities to do something or the other to help a person in need. The great architect Frank L Wright had said – “Give me the luxuries of life and I will willingly do without the necessities. By itself, luxury and necessity are two ‘apparent’ extremes. I am using the word ‘apparent’ because in the words of world’s greatest scientist – Albert Einstein, apparent is a ‘relative term’ - one man’s luxury can be other’s necessity and vice versa. So, at the end of the day, it is the perception of a person which defines the distinction between the two words. Because, whether it is a diamond-studded, pink gold, limited edition Cartier wrist watches or a cheap quartz watch, both will show the same time! But it is human nature which is not contented and as a result, the quest for superlatives is never-ending. Even the government has been proactively taking steps to help those in need but it may not be sufficient in a large country like ours. For certain individuals in our society, looking at the status and position it may not be difficult to get good amount of financial resources to help others. However at the same time it is also extremely important to make sure that such persons are not getting over dependent on such financial helps. It is therefore necessary to create job opportunities for such persons so that indirectly their families also grow with an increase in their standard of living. Let’s hope that though the redistribution of wealth scheme as thought by an NRI and circulated by one political party may not be implementable in reality but an approach by each individual to help those in need may create a beautiful society to live in. ❉ ❉ ❉ CA. Rajni M. Shah Editorial [email protected]

Ahmedabad Chartered Accountant Journal May, 2024 81 Dear Esteemed Members, As we step into the vibrant month of May, there is a sense of excitement and anticipation in the air. The nation is abuzz with the fervor of the Lok Sabha elections, a time that embodies the essence of our democracy. Amidst this political fervor, we also find ourselves navigating the scorching summer heat, a true testament to the resilience and spirit of our community. Adding to the excitement of the season is the ongoing IPL cricket mania. This annual extravaganza of sport not only entertains but also unites us, providing moments of joy and camaraderie. Whether you’re a die-hard fan or a casual observer, the IPL has a way of bringing us together in celebration of athletic excellence and sportsmanship. Our CA Association was no exception to this cricket fever. We successfully organized the CAAA Summer Cricket League 2024, marking a special celebration of 40 years of sports activity within our association. This milestone underscores our commitment to promoting physical fitness and camaraderie among our members. Amidst these dynamic events, our CA Association has remained steadfast in its commitment to professional development and knowledge sharing. I am pleased to share that our various Study Circle initiatives have continued to thrive, equipping our members with the latest insights and expertise. These sessions are designed to ensure that we stay ahead of the curve, particularly in the ever-evolving landscape of direct taxes and compliance. I am particularly thrilled to announce the success of the 5th Version of the Direct Tax Home Refresher Course (DTHRC). With 73 registrations, this course has garnered an enthusiastic response from our members. The DTHRC is meticulously crafted to provide comprehensive knowledge on direct taxes, preparing us for the upcoming return filing and audit season. Your active participation and eagerness to learn underscore the strength and unity of our association. Moreover, the concept of Hybrid mode for Study Circle meetings has received an overwhelming response. This innovative approach allows us to blend the advantages of in-person interactions with the convenience of virtual participation, making our sessions more accessible and inclusive. Your positive feedback and engagement in these meetings highlight our collective commitment to continuous learning and professional excellence. I am pleased to share that during the month, I, along with other office bearers and members of the Direct Tax Legal and Representation Committee, had the opportunity to meet with senior officers of the Income Tax Department. We had constructive discussions with the Principal Chief Commissioner of Income Tax and the Director General of Income Tax Investigation. As we move forward, let us embrace the opportunities and challenges that lie ahead with enthusiasm and determination. Our association thrives on the active involvement and dedication of each member, and I am confident that together, we will continue to achieve new heights. Stay cool, stay engaged, and enjoy the IPL season! Warm regards, CA. Riken Patel President - CAA ❉ ❉ ❉ From the President From the President From the President CA. Riken Patel [email protected]

82 Ahmedabad Chartered Accountant Journal May, 2024 Overview In recent years, India has emerged as a global hub for startups, driven by a burgeoning entrepreneurial ecosystem, increased internet penetration, and substantial venture capital investments. The Indian government’s initiatives, such as Startup India and Digital India, have further fuelled this growth, creating a fertile ground for innovation and entrepreneurship. India has emerged as the 3rd largest ecosystem for startups globally with over 1,12,718 DPIIT-recognized startups across 763 districts of the country as of 03rd October 2023. However, with the rapid increase in the number of startups, the challenge of accurately valuing these earlystage companies has become more pronounced. The Indian startup landscape is characterized by high growth potential but also significant uncertainty and risk. Valuing a startup is both an art and a science, combining quantitative financial models with qualitative assessments of a company’s potential. Unlike established firms, startups often lack substantial historical financial data, making traditional valuation methods challenging to apply. This article delves into the key methodologies used in startup valuation, factors influencing these valuations, and the unique challenges faced in this process. Key Valuation Methodologies 1. Discounted Cash Flow (DCF) Analysis The DCF method involves projecting the startup’s future cash flows and discounting them back to their present value using a discount rate that reflects the investment’s risk. This approach is theoretically sound but practically difficult for startups due to the high uncertainty in future cash flows and the determination of an appropriate discount rate. Steps in DCF Analysis - Project the startup’s free cash flows for a forecast period (usually 5-10 years). - Estimate a terminal value for cash flows beyond the forecast period considering growth rate as at specified number of year. Startup Valuation : Essential Techniques and Influencing Factors CA. Gaurav R. Parmar [email protected] - Choose an appropriate discount rate, often derived from the weighted average cost of capital (WACC). For deriving the discount rates one has to considercost of equity, risk free returns, Beta to the businesses - Calculate the present value of projected cash flows and the terminal value. 2. Comparable Company Analysis (CCA) This method involves valuing a startup based on the valuation multiples of similar public companies or recent transactions of comparable startups. Commonly used multiples include the price-toearnings (P/E) ratio, enterprise value-to-sales (EV/ Sales), and enterprise value-to-EBITDA (EV/ EBITDA). Venture Capital Investors (VCs) often value newly born companies by this method. Multiple is usually calculated on the basis of data of matured companies without alteration/ adjustment to make it specific to Startups. Steps in CCA: - Identify a group of comparable companies. - Determine the appropriate multiples for these companies. - Apply these multiples to the startup’s financial metrics to derive its valuation. 3. Precedent Transactions Analysis Similar to CCA, this method looks at recent transactions involving similar companies. The idea is to use the valuation metrics from these transactions to value the startup. This method is particularly useful in identifying market trends and investor sentiment. Steps in Precedent Transactions Analysis: - Identify recent transactions of valuations and investments in similar companies. - Consider the size of the transactions. - Understand the market trends and investors sentiment for similar transactions and compare same with the valuation of target company. CA. Milan G. Shah [email protected]

Ahmedabad Chartered Accountant Journal May, 2024 83 4. Venture Capital (VC) Method Popular among VCs, this method involves estimating the post-money valuation based on the expected return on investment (ROI) at exit. It requires assumptions about the exit valuation, the timeline to exit, and the required ROI. Steps in VC Method - Estimate the startup’s potential exit value. - Determine the required ROI. - Calculate the post-money valuation by discounting the exit value by the required ROI. - Subtract the investment amount to get the premoney valuation. 5. Risk Factor Summation Method This method adjusts a base value of the startup using risk factors associated with startups, such as management risk, market risk, technology risk, and financial risk. Each risk factor is scored, and the scores are summed to adjust the base value up or down. Steps in VC Method - Identify the base value of the target entity - Identify the risk associated and score the same - Apply the risk factor to the base value Factors Influencing Startup Valuation 1. Market Size and Growth Potential Investors are keen on startups operating in large, growing markets. The potential for market expansion increases the startup’s future revenue prospects, thereby enhancing its valuation. 2. Business Model and Revenue Streams A clear, scalable business model with diversified revenue streams reduces risk and increases valuation. Subscription-based models or those with recurring revenue are particularly attractive. 3. Traction and Milestones Achieved Demonstrable progress, such as user growth, revenue generation, and strategic partnerships, can validate the startup’s business model and reduce perceived risk, leading to higher valuations. 4. Competitive Landscape The startup’s position relative to competitors and its ability to maintain competitive advantages influence its valuation. Strong intellectual property or a unique value proposition can enhance valuation. 5. Management Team The experience and track record of the startup’s management team significantly impact valuation. A strong team can execute the business plan effectively, attracting higher valuations. 6. Funding Environment The broader economic environment and the state of the venture capital market affect startup valuations. During periods of economic growth and high investor confidence, valuations tend to be higher. Challenges in Valuing Startups 1. Lack of Historical Data Startups typically have limited operating histories, making it difficult to forecast future performance accurately. This lack of data increases the uncertainty in valuations. 2. High Uncertainty and Risk Startups face numerous risks, including market, product, technology, and execution risks. Quantifying these risks and incorporating them into valuation models is challenging. 3. Subjectivity in Assumptions Many assumptions in startup valuations, such as growth rates, discount rates, and terminal values, are highly subjective. Different analysts can arrive at vastly different valuations based on their assumptions. 4. Dynamic Nature of Startups Startups evolve rapidly, with frequent pivots in business models and strategies. This dynamic nature makes it difficult to use static models for valuation, requiring continuous updates and adjustments. Upshot Valuing a startup is a complex process that combines quantitative methods with qualitative judgments. Understanding the various methodologies and factors influencing valuation is crucial for investors and entrepreneurs alike. Despite the inherent challenges, a thorough and thoughtful approach to valuation can provide valuable insights into a startup’s potential and help guide investment decisions. In the rapidly changing landscape of startups, staying informed and adaptable is key to navigating the uncertainties and capturing the opportunities in the world of venture investing. ❉ ❉ ❉ Startup Valuation : Essential Techniques and Influencing Factors

84 Ahmedabad Chartered Accountant Journal May, 2024 The IPL 2024 has once again attracted top-tier sponsors, showcasing the immense value and reach of the tournament. Tata leads the pack as the title sponsor with a staggering investment of Rs. 2,500 crore. Associate partners My11Circle, Angle One, Rupay, and CEAT have collectively contributed Rs. 1,485 crore. On the broadcasting front, Disney Star Network has secured the rights for Rs. 23,575 crore, while Jio Cinema has taken the digital streaming partnership for Rs. 23,758 crore (figures sourced from Google). Sponsorship services refer to the support provided by one entity (the sponsor) to another entity (the recipient, such as an event organizer) in exchange for the promotion of the sponsor’s name, brand, products, or services. This support can be in the form of financial assistance, products, or other resources. Sponsorship services are commonly used in various events and activities, including sports, cultural festivals, educational conferences, and entertainment events, to gain visibility and enhance the sponsor’s brand reputation. Sponsorship services mean when one group (the sponsor) supports another (the sponsored) with money or other help in exchange for getting advertised. This help could be money, goods, or services. A ‘taxable person’ under GST, is a person who carries on any business at any place in India and who is registered or required to be registered under the GST Act. However, ‘Person’ under GST as per section 2(84) includes, individuals, HUF, company, firm, LLP, an AOP/ BOI, any corporation or Government company, body corporate incorporated under laws of foreign country, co-operative society, local authority, government, trust, artificial juridical person. Which Mega Event Doesn't Need Sponsorship ? : Understanding the GST Impacts on Sponsorship CA. Tarjani Shah [email protected] Vide Notification No. 13/2017 dated 28th June, 2017, the Central Government had notified that “Services provided by way of sponsorship” to any ‘body corporate’ or ‘partnership firm’ by “any person” to “any ‘body corporate’ or ‘partnership firm’ located in the taxable territory” the whole of central tax leviable under section 9 of the said Central Goods and Services Tax Act, shall be paid on Reverse Charge basis by the recipient of the such services. Sponsorship services fall under the Reverse Charge Mechanism (RCM), but it is necessary to examine the supplier’s and recipient’s types of constitution to determine whether the transaction will be subject to RCM. GST Implications: Under the GST regime in India, the taxation of sponsorship services depends on the nature of the recipient: - Body Corporate or Partnership Firm: When sponsorship services are provided to a body corporate or a partnership firm located in a taxable territory, the tax liability falls under the Reverse Charge Mechanism (RCM). The recipient (body corporate or partnership firm) is responsible for paying the GST. - Other than Body Corporate or Partnership Firm: When sponsorship services are provided to Other than Body Corporate or Partnership Firm, the tax is paid under the Forward Charge Mechanism (FCM). The service provider is responsible for collecting and remitting the GST. Let us understand it by an example:

Ahmedabad Chartered Accountant Journal May, 2024 85 Which Mega Event Doesn't Need Sponsorship ? : Understanding the GST Impacts on Sponsorship Sponsorship Service to a Body Corporate (Reverse Charge Mechanism - RCM) ABC Corp, a body corporate located in Mumbai, Maharashtra, sponsors a sports event organized by XYZ Sports Management, a service provider based in Delhi. Since the sponsorship service is provided to a body corporate located in a taxable territory, the tax has to be paid by ABC Corp under the reverse charge mechanism (RCM). Sponsorship Service to an Individual (Forward Charge Mechanism - FCM) Mr. Rajiv, an individual residing in Hyderabad, Telangana, sponsors a cultural event organized by CultureFest Events, a service provider based in Mumbai, Maharashtra. Since the sponsorship service is provided to an individual, the supply of service would attract normal charge, and the tax will be paid by CultureFest Events under the forward charge mechanism (FCM). The place of supply is always crucial in deciding whether IGST, CGST, SGST, or UTGST will be charged. It depends on the place of supply and the supplier’s location. Place of supply 12(7) is extracted here with for ready reference (7) The place of supply of services provided by way of,- (a) organisation of a cultural, artistic, sporting, scientific, educational or entertainment event including supply of services in relation to a conference, fair, exhibition, celebration or similar events; or (b) services ancillary to organisation of any of the events or services referred to in clause (a),or assigning of sponsorship to such events,- (i) to a registered person, shall be the location of such person; (ii) to a person other than a registered person, shall be the place where the event is actually held and if the event is held outside India, the place of supply shall be the location of the recipient. Explanation . -Where the event is held in more than one State or Union territory and a consolidated amount is charged for supply of services relating to such event, the place of supply of such services shall be taken as being in each of the respective States or Union territories in proportion to the value for services separately collected or determined in terms of the contract or agreement entered into in this regard or, in the absence of such contract or agreement, on such other basis as may be prescribed. The registration status of the person at the place of supply plays an important role as a deciding factor. Understanding this can be clarified through examples. For a Registered Person - Rajiv, a registered person in Bangalore, Karnataka, hires an event management company from Mumbai, Maharashtra, to organize a cultural festival in Goa. Since Rajiv is a registered person, the place of supply is the location of Rajiv (i.e., Bangalore, Karnataka). Therefore, IGST will be charged. - An educational institution based in Chennai, Tamil Nadu (registered), organizes a scientific conference in Hyderabad, Telangana, with the help of an event organizer from Delhi. The place of supply is Chennai, Tamil Nadu, because the educational institution is a registered person. As a result, IGST will be charged. For an Unregistered Person - Nikita, an unregistered individual from Jaipur, Rajasthan, hires a sports management company from Pune, Maharashtra, to organize a marathon event in Mumbai, Maharashtra. Since Nikita is unregistered, the place of supply is the place where the event is actually held, which is Mumbai, Maharashtra. Therefore, CGST and SGST will be charged as the place of supply is within the same state.

86 Ahmedabad Chartered Accountant Journal May, 2024 Event with Multiple Locations - A media company, registered in Lucknow, Uttar Pradesh, organizes a film festival in both Mumbai, Maharashtra, and Bangalore, Karnataka, with an event management firm from Hyderabad, Telangana. The place of supply will be in each of the respective states (Maharashtra and Karnataka) in proportion to the value for services as per the contract. IGST will be charged if there is a single consolidated charge and no specific proportion in the contract. If specified in the contract, IGST will be apportioned according to the value of services in Maharashtra and Karnataka. GST on Donor Name Displays in Charitable Organizations (Circular No. 116/35/2019-GST dated 11th Oct,2019) The issue has been examined regarding the levy of GST on the display of a donor’s name or nameplates in charitable organizations. When individual donors provide financial help or donations to institutions like religious institutions, charitable organizations, schools, hospitals, orphanages, and old age homes, these institutions often place a nameplate or similar acknowledgment in their premises to express gratitude. If the donor’s name is displayed in a way that expresses gratitude and public recognition of the donor’s act of philanthropy, and it is not aimed at giving publicity or promoting the donor’s business, then it is not considered a supply of service for a consideration (donation). There is no obligation (quid pro quo) on the part of the recipient of the donation to provide any service in return. Therefore, there is no GST liability on such considerations. Examples where there is no taxable supply: - “Good wishes from Mr. Rajesh” printed underneath a digital blackboard donated by Mr. Rajesh to a charitable Yoga institution. - “Donated by Smt. Malati Devi in the memory of her father” written on the door or floor of a room or any part of a temple complex which was constructed from such donation. In these cases, there is no taxable supply, and hence no GST is applicable. Compliance needs to be followed when the sponsorship service is covered under the Reverse Charge Mechanism: Reporting in GSTR-1 (Outward Requirement): The supplier needs to mark “Supply covered under RCM” when filling out their GSTR-1. Reporting in GSTR-3B (Liability Shift): The liability to pay GST shifts from the service provider to the service recipient. This will be reflected in both the payment section and the ITC table of GSTR-3B. Even if the supplier is not registered, but the recipient is a body corporate or partnership firm located in the taxable territory, they need to pay RCM through self-declaration, even if it is not reflected in auto populated transactions. End Note: Ensuring Sponsorship’s GST Compliance Success From IPL to FIFA, from small exhibitions to Vibrant Gujarat, sponsorship plays a crucial role in the success of events. Whether it’s an educational event or an ICAI conference, the importance of managing sponsorships cannot be overstated. When raising invoices, it is essential to ensure compliance with relevant regulations. One common misconception is that all sponsorship transactions fall under Reverse Charge Mechanism (RCM). This is a myth; each transaction must be evaluated to determine its chargeability. ❉ ❉ ❉ Which Mega Event Doesn't Need Sponsorship ? : Understanding the GST Impacts on Sponsorship

Ahmedabad Chartered Accountant Journal May, 2024 87 Introduction For a business entity’ (body), ‘capital’ is the ‘soul’. Companies generally raise funds by issuing shares and debentures. However, for augmenting funds without diluting control, a prevalent method and practice is through acceptance of funds in form of ‘deposits’ from directors, relatives, members, and from public. A deposit is a short-term loan provided to a company to address immediate financial needs. The individual who provides this loan is called the ‘depositor,’ and by lending the money, becomes a creditor of the company. This article outlines the governing rules, intricacies and nuances of the provisions related to company deposits, aiming to carefully utilize this avenue of raising funds. ‘Deposits’ are regulated and governed by Sections 73 to 76A of the Companies Act, 2013 (‘the Act’), enshrined under Chapter V of the Act, in conjunction with the Companies (Acceptance of Deposits) Rules, 2014 (‘the Rules), as amended. These regulations are designed to enhance the have ‘checks-andbalances’, transparency, ensuring depositor’s protection, and maintaining financial discipline within companies. This article provides an in-depth analysis of these statutory provisions and their practical implications. Learning from history and past financial scandals, the regulations puts a complete ban on accepting deposits from ‘public’, except for ‘eligible companies’ meeting specified criteria. Eligible companies should have a defined net assets and turnover. To safeguard depositors’ interests, the ‘deposits’ regulation examines how Indian companies can raise funds in the form of ‘deposits’ by ensuing transparency and depositor rights by outlining conditions, defining eligible companies, exempted deposits, acceptance ‘Deposits’ - the ‘firewall law’ for funding under the Companies Act, 2013 Premnarayan R. Tripathi [email protected] prohibitions, eligible depositors, punitive measures, and compliance requirements. Meaning ‘Deposit’ is defined under Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014. The definition is very wide as it includes ‘all money’ received by a company as a deposit, loan, or in any other form, except certain specified amounts or transactions. The rule provides an exclusive list of the exempted transactions or amounts and are generally termed as ‘Exempted Deposits’. Although these Exempted Deposits are not considered as ‘deposits’, hence, not required adherence of procedural compliances, all such exempted deposits are still required to comply with annual reporting and disclosure requirements. Accordingly, a detailed understanding of the ‘deposits’ and ‘exempted deposits’ is essential. Section 73: Prohibition on Acceptance of Deposits from Public “Companies cannot accept deposit, except in manner provided in this section” Though the section starts with the stipulation prohibiting acceptance of deposits from public, it infers and allows acceptance of ‘deposits’ from ‘members’ of the company. Key requirements include: 1. Approval of members by Ordinary Resolution: Companies should obtain approval through a resolution passed at a general meeting to accept deposits from members.

88 Ahmedabad Chartered Accountant Journal May, 2024 2. Issuance of Circular: A circular (in form DPT-1) encompassing comprehensive details about the company’s financial position, credit rating, and other relevant information such as existing deposits should be issued to members and to be filed with the concerned Registrar of Companies (RoC). 3. Deposit Repayment Reserve Account: Companies (accepting deposits from members) are required to deposit at least 20% of the deposits maturing during the financial year in a designated Deposit Repayment Reserve Account. 4. Certificate: A certificate certifying that the company has not defaulted on the repayment of deposits accepted either before or after the commencement of this Act, or on the payment of interest on such deposits. In cases where a default had occurred, the company has made good the default and a period of 5 (five) years has passed since the date of making good the default. [aforesaid point No. 2, 3 & 4 are not applicable to a private company which accepts from its members monies within limits and terms mentioned in the later part of this article, however, such company is required to file the details of monies so accepted to the RoC in Form DPT-3] Provisions of the Section 74 and 75 of the Act are not discussed in this article, as at present, it lost its relevance as it pertains to the deposits accepted before commencement of the Act and the Rules (i.e. before year 2014). Section 76 of the Act allows certain ‘public companies, meeting specific criteria, to accept deposits from the public. “Only eligible public companies can accept deposits from public” Eligible Public Company means companies having: - Net worth: minimum Rs.100 Crores; - Turnover: minimum Rs.500 Crores; and - Prior consent of members in general meeting by a Special Resolution Other mandatory requirements: 1. Credit Rating: Such Public companies should obtain a minimum investment grade rating from a recognized credit rating agency (Every Year) 2. Creation of charge: Companies within 30 days from accepting secured deposits should create a charge and file requisite form with the RoC. Analysis As per ‘deposits’ provisions, a private company can accept ‘deposits’ ONLY from its Members and NOT from Public. Limits of accepting deposits: - Private Company: From Members - 100%* (from Public – Not allowed) - Public Company: - Eligible Company: From Members - 10%* and From Public - 25%* - Non-Eligible Company: From Members - 35%* and From Public – Not allowed *Aggregate of the paid up share capital, free reserves and securities premium account It is pertinent to note that the maximum limit on deposits accepted from ‘members’ does not apply to the following categories of private companies: (i) A start-up private company for 10 (ten) years from its incorporation date. (ii) A private company that meets all of the following criteria: (a) It is not an associate or subsidiary of any other company. (b) Its borrowings from banks, financial institutions, or any corporate entity are less than twice its paid-up share capital or Rs. 50 (Fifty) Crore, whichever is lower. ‘Deposits’ - the ‘firewall law’ for funding under the Companies Act, 2013

Ahmedabad Chartered Accountant Journal May, 2024 89 (c) It has not defaulted on the repayment of such borrowings at the time of accepting deposits under Section 73. Tenure of Deposits: A company can accept deposits for a period of 6 months to 36 months. However, a company may accept (or renew) such deposits for repayment earlier than 6 months if the following conditions are met: - The deposit does not exceed 10% of the aggregate of the company’s paid-up share capital, free reserves, and securities premium account. - The deposit is not repayable earlier than 3 months from the date of acceptance or renewal. Section 76A: Consequences for Non-Compliance Fine: If a company accepts deposits in contravention of manner or conditions of deposits’ regulations, the company will be liable to pay (in addition to the repayment of the deposits) a fine of Rs. 1 Crore or twice the amount of the deposit, whichever is lower, with a maximum limit of Rs. 10 Crores AND Imprisonment: Officer-in-default shall be punishable with imprisonment up to 7 (seven) years and a fine (Rs.25 Lacs to Rs.2 Crores). Return of Deposits to be filed with the RoC In the arena of corporate compliance, the annual filing of Form DPT-3 has become a crucial topic, attracting significant attention from businesses and professionals. As companies navigate the regulatory guidelines set by the Ministry of Corporate Affairs (MCA) in India, understanding and fulfilling the DPT-3 filing requirement has become important. Form DPT-3, known as the “Return of deposits”, mandates, amongst others, filing of even those particulars which are not deposits’ i.e. Exempted Deposits [enlisted in Rule 2(1)(c) of the Companies (Acceptance of Deposit) Rules, 2014]. It requires companies to disclose details of deposits accepted and provide information about transactions that do not qualify as deposits under Rule 2(1)(c) (comprising of around 19 types of transactions). Form DPT-3 is a web-based form and is required to be filed with the ROC by 30th June on yearly basis. Conclusion The Companies Act, 2013, along with the detailed Rules, has created a robust regulatory environment for the acceptance of deposits by companies. These provisions protect depositors’ interests while ensuring that companies maintain financial discipline. Adherence to these regulations helps companies build trust and credibility with stakeholders, contributing to the overall stability of the financial system. Compliance with these regulations is indispensable as contraventions in acceptance of deposits are noncompoundable (leading to prosecutions of officerin-default) and thereby invites special attention of compliance officers, management, Board of Directors and professionals associated with such companies. Let’s be vigilant and nurture the compliance habit… ❉ ❉ ❉ ‘Deposits’ - the ‘firewall law’ for funding under the Companies Act, 2013

90 Ahmedabad Chartered Accountant Journal May, 2024 Unexplained Money – S 69A of IT Act – Other valuable article The assessee carried on business as carriage contractor for bitumen loaded from Oil companies destined for delivery to various divisions of road construction departments. The issue related to tax on undelivered/short delivered portion of deliverable goods. For the purpose of Sec.69A the deeming effect of the provision will apply only if the assessee is owner of the impugned goods, for any article to be considered as valuable article u/s 69A, it must be intrinsically costly and it will not be regarded as valuable if huge mass of non-precious and common place articles is taken into account for imputing high value. A bailee who is a common carrier, is not an owner of the goods. Further, in case of an entrustment to the carrier otherwise than under a contract of sale of goods also, the possession of the carrier would not convert it into the owner of the goods. Therefore, someone having mere possession and without legal ownership or title over the goods will not be covered within the ambit of sec.69A. Nevertheless, an assessee may be also regarded as deemed owner if possession is imputed on the assessee and no other person having a better claim is contesting the assessee’s claim. If article is to be found valuable, then in small quantity it must not just have some value but it must be worth a good price or worth a great deal of money. D.N. Singh vs CIT (2024) (3 SCC 378) Evidence Act 1872 – Burden of Proof There is a clear distinction between burden of proof and standard of proof. This distinction is well known to civil as well as criminal students. While inquiring into whether a facts is proved, the sufficiency of evidence 4 Advocate Samir N. Divatia [email protected] Glimpses of Rulings is to be seen in the context of standard of proof which in civil cases is by preponderance of probability. Govt. of GOA vs Maria JulietaD’souza (2024) (3 SCC 523) TDS – Commission or Brokerage – Cellular Mobile Telephone Service Provider – S 194H of I.T.Act. It is settled that the expression “acting on behalf of another person” postulates the existence of a legal relationship of principal and agent between the payer and the recipient or payee. Whether in law the relationship between the parties is that of principal – agent is answered by applying Sec.182 of the Contract Act, 1872. The obligation to deduct at source in terms of sec.194H arises when the legal relationship of principal – agent is established. Agency in terms of said sec.182 exists when the principal employs another person, who is not his employee, to act or represent him in dealings with a third person. An agent render services to the principal. The agent does what has been entrusted to him by the principal to do. It is the principal he represents before the third party and not himself. As the transaction by agent is on behalf of the principal whom the agent represents, the contract is between the principal and the third parties. Agency is a triangle relationship between the principal agent and the third party. The following factors should be considered to examine this relationship :- (a) The essential characteristic of an agent is the legal power vested with the agent to alter his principal’s legal relationship with a third party and the principal’s co-relative liability to have his relations altered. 5 6 Continued from page 123

Ahmedabad Chartered Accountant Journal May, 2024 91 Reassessment on mere change of opinion not permissible even under the new scheme of reassessment. Knight Riders Sports Pvt. Ltd. v/s. ACIT (2023) 459 ITR 156 (Bom) Issue: Whether reassessment can be done on a mere change of opinion under the new scheme of reassessment? Held: “3. Petitioner is impugning a notice dated 17th March 2023 received under Section 148A(b) of the Income Tax Act, 1961 (“the Act”), the order dated 30th March 2023 passed under Section 148A(d) of the Act and the reassessment notice dated 30th March 2023 issued under Section 148 of the Act.” “17. The reason we say that there is a change of opinion is because once a query has been raised during the assessment and query has been answered and accepted by the AO while passing the assessment order, it follows that the query raised was a subject of consideration of the AO while completing the assessment. This would apply even if the assessment order has not specifically dealt with that issue. It is not necessary that an assessment order should contain reference and/ or discussion to disclose his satisfaction in respect of the query raised. As held in Aroni Commercials Ltd (supra) if an AO has to record the consideration bestowed by him on all issues raised by him during the assessment proceedings even where he is satisfied, then it would be impossible for the AO to complete all the assessment which are required to be scrutinized by him under Section 143(3) of the Act. 18. In our view, therefore, it would follow that the reopening of the assessment by the impugned notice is merely on the basis of change of opinion from that held earlier during the course of assessment proceedings that led to the passing of the assessment order dated 25th December 2018. In our view, this change of opinion does not constitute justification to believe that income chargeable to tax has escaped assessment.” Date of transfer of development rights. Darshana Anand Damle v/s. DCIT (2023) 459 ITR 60 (Bom) Issue: Whether granting of a licence for purpose of development of flats could not be said to be granting possession? Held: “10. This would also indicate that there was no failure to disclose any material fact. On that ground alone the notice dated 22nd March 2021 issued under Section 148 of the Act has to be quashed and set side. So also the impugned order dated 14th February 2022 disposing Petitioner’s objections. Moreover, the other co-owner’s case was also proposed to be reopened. The other co-owner Late Bharat Jayantilal Patel (since deceased) through legal heir Smt. Minal Bharat Patel had filed Writ Petition No.1612 of 2022 which came to be disposed on 10th February 2023. In that case, we could say identical reasons for reopening of the assessment was recorded. The Court after considering the submissions made and relying upon the judgment of the Apex Court in the case of Seshasayee Steels (P) Ltd. V Assistant Commissioner of Income Tax VI(2), Chennai, 2020 CA. Jayesh C. Sharedalal [email protected] 11 From the Courts 12

92 Ahmedabad Chartered Accountant Journal May, 2024 (115) taxmann.com 5 (SC) held that the assessee had only granted a licence to Developer who entered into assessee’s land for the purpose of development and that did not amount to ‘allowing the possession of the land’ as contemplated under Section 53A of the Transfer of Property Act, 1882 and therefore Section 2(47)(v) of the Act would not apply.The Court held that granting of a licence for the purpose of development of the flats and selling the same could not be said to be granting possession. The findings of the Court in Writ Petition No. 1612 of 2022 will squarely apply to the facts of this case as well.” (emphasis supplied to highlight the issue) Notice for assessment based on information from Insight Portal stating incorrect fact of not having given details in original assessment. Urban Homes Realty v/s. UOI (2023) 459 ITR 96 (Bom) Issue: If on facts of a case, Assessing Officer stating in his order u/s 148A(d) that the assessee did not provide details was found incorrect, can the notice u/s 148 be said to be invalid? Held: “In our view, all these findings are incorrect inasmuch as in the notice under section 142(1) issued on August 24, 2018, the petitioner was expressly called upon to submit all the details of all the properties purchased along with copies of purchase deed and copy of statement of the bank account from which the payment was made. In this reply dated September 7, 2018, the petitioner has given details of property purchased including copies of purchase deed. The purchase deed also contains details of payments made. In the assessment order dated November 29, 2018, the Assessing Officer has specifically stated that during the course of assessment proceedings the assessee submitted various details as called for. The details filed by the assessee are examined and placed on record and the computer Assisted Scrutiny Selection and ITS data have been verified from the details submitted by the assessee. The assessment order also states that From the Courts the case was selected for scrutiny by Computer Assisted Scrutiny Selection in view of large investment in property, among other things. Therefore, the Assessing Officer was certainly satisfied with all the details provided by the petitioner. If he has not, in other words, if the petitioner had not furnished copy of the statement of bank accounts from which the payment was made as mentioned in the notice dated August 24, 2018, certainly the Assessing Officer would not have passed the assessment order the way he had passed. Moreover, in the reply dated March 27, 2023 to the notice issued under section 148A(b), the petitioner has given details of the consideration paid for the property and the source of funds. Therefore, for the Assessing Officer to state in the impugned order dated March 31, 2023, that the petitioner did not provide the details or explain the source etc, is an incorrect statement.” Prosecution whenself-assessment tax paid late Heath Bio Tech Ltd v/s. DCIT (2023) 459 ITR 349 (P & H) Issue: Whether prosecution u/s 276C(2) can be initiated for delay in payment of tax thereby resulting in”an attempt to evade tax”? Held: “Petitioner No.1 is a registered firm, of which petitioner Nos.2 to 4 are the directors. The dispute is with regard to non-payment of the tax, in time which was selfassessed by petitioner No. 1, while filing the income tax return for the assessment year 2011-12. On September 29, 2011, petitioner No. 1 had filed income tax returns for the assessment year 2011-12, thereby declaring a gross total income of Rs. 6,72,05,864/- and the amount of aggregate tax was shown as Rs. 1,36,20,887/-. Thereafter, the said return was revised on October 22, 2012, and the amount of aggregate tax was shown as Rs. 1,50,81,728/-. However, the said tax amount was not paid in time. Thereafter, for non-payment of the tax amount, a notice dated October 21, 2014, (annexure P-4) was issued to the petitioner, calling upon them to show cause as to why prosecution under section 276C(2) of the Income Tax Act, 1961, be not initiated against them.” 13 14

Ahmedabad Chartered Accountant Journal May, 2024 93 “There is no debate on the issue of maintenance of the criminal proceedings simultaneously with the civil proceedings (in the present case levying of penalty, etc). However, while maintaining both these proceedings simultaneously, the one fact that must be present there that there was or has been a criminal intent in the mind of the accused right from the beginning. In the instant case, it is not in dispute that the income tax was self-assessed and payment of the same stands also made though belatedly. Thus, the question of evasion of tax does not arise in the present facts and circumstances. The facts and circumstances of the case further do not reveal that there was a deliberate and wilful default or evasion of tax on the part of the petitioners. Learned counsel for the respondent -Department is unable to show anything on record as to how and in what manner, the petitioners have ever tried to evade the tax particularly, when the same was duly shown andadmittedacknowledged while filing the income tax returns for the assessment year 2011-12.” Revision u/s 264 vis-à-vis grievance arising due to error of assessee. Smita Rohit Gupta v/s. Pr. CIT (2023) 459 ITR 369 (Bom) Issue: Whether the CIT should exercise his power u/s 264 and decide the matter on merits even if the assessee had made an error while filing the return of income? Held: “In the circumstances it is well settled that powers conferred under section 264 of the Act are very wide. The Commissioner is bound to apply his mind to the question whether the petitioner’s income was taxable and to what extent. Admittedly, the amount payable under the Income Declaration Scheme, 2016 has been paid. Section 188 of the finance Act, 2016, (Income Declaration Scheme 2016) provides that the amount of undisclosed income declared in accordance with section 183 shall not be included in the total income of the declarant for any assessment year under the Income Tax Act, if the declarant makes the payment of tax and surcharge referred to in section 184 and the penalty referred to in section 185, by the date specified under sub-section (1) of Section 187. The petitioner having paid the tax and surcharge and the penalty with interest, amount of undisclosed income cannot be included in the income of the declarant petitioner. Therefore, in our view, the Commissioner should have exercised his power under section 264 of the Act and decide the matter on merits.” DTAA between India and Cyprus: PE under Article 5(2)(g) CIT (International Taxation) v/s. Bellsea Ltd (2023) 459 ITR 375 (Delh) Issue: Whether the period of Stay in India for the purpose of collecting data and information necessary for tendering purpose and bid for contract i.e. before entering into contract has to be counted? Held: 5. Article 5(2)(g) of the India Cyprus Treaty reads as under:- “A building site, construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continues for a period of more than twelve months. “ 6. This Court in the case of National Petroleum Construction Company Vs. Director of Income Tax (International Taxation), 2016 SCC OnLine Del 571 has analysed a similar clause being Article 5(2)(h) of the India UAE DTAA. The relevant portion of the said judgment is reproduced hereinbelow: - 34. In terms of clause (h) of paragraph 2 of Article 5 of the DTAA, “a building site or construction or assembly project or supervisory activities in connection therewith” would also constitute a PE of an enterprise subject to that site, project or activity continuing for a period of atleast nine months. Clearly, the purpose of the said clause is also to include a building site or a construction or an assembly project as a PE by itself. On a plain reading, a PE constituted by a building site or a construction or an assembly project, would commence on the commencement of activities relating to the From the Courts 16 15

94 Ahmedabad Chartered Accountant Journal May, 2024 project or site. The said clause is also to be read harmoniously with paragraph 1 of Article 5 of the DTAA which necessarily entails a fixed place of business from which the business of an enterprise is carried on. Thus, a building site or an assembly project could be construed as a fixed place of business only when an enterprise commences its activity at the project site. An activity which may be related or incidental to the project but which is not carried out at the site in the source country would clearly not be construed as a PE as it would not comply with the essential conditions as stated in paragraph 1 of Article 5 of the DTAA. It is necessary to understand that a building site or a construction assembly project does not necessarily require an attendant office; the site or the attendant office in respect of the site/project itself would constitute a fixed place of business once an Assessee commences its work at site. Thus, for clause (h) of paragraph 2 of Article 5 to be applicable, it is essential that the work at site or the project commences - it is not relevant whether the work relates to planning or actual execution of construction works or assembly activities. Preparatory work at site such as construction of a site office, a planning office or preparing the site itself would also be counted towards the minimum duration of a PE under Article 5(2)(h) of DTAA. In a given case, establishment of an office or any work which directly serves the operations at site may also be construed as a part of the building site, or construction or assembly project. The essence of a PE under Article 5(2)(h) is a building site or a construction or assembly project and the activities of an enterprise relating thereto in the source country. xxx xxxxxxxxx 36. The aforesaid passage also clearly indicates that the duration of a permanent establishment would commence with the performance of business activities in connection with the building site or assembly project.” From the Courts Interpretation of statutes and function of Court Shah Originals v/s. CIT (2023) 459 ITR 385 (SC) Issue: What are the principles of interpretation followed by courts when there are some loopholes in law? Held: “10.1 In interpreting a section in a taxing statute, Lord Simonds, in the case St. Aubyn (LM) v. A.G.[6], observed that “the question is not at what transaction the section is according to some alleged general purpose aimed, but what transaction its language according to its natural meaning fairly and squarely hits.” Lord Simonds calls this “the one and only proper test.” Therefore, it is not the function of a court of law to give words a strained and unnatural meaning to cover loopholes through which the evasive taxpayer may find escape or to tax transactions which, had the Legislature thought of them, would have been covered by appropriate words[7]”. [6] (1951) 2 All ER 473, p. 485. [7] IRC v. Wolfson, (1949) 1 All ER 865, p. 868 (HL). Rectification application not disposed by AO: Writ Petition Afilias India Private Limited Vs. DCIT (2024) 460 ITR 220 (Delhi) Issue: Whether a Writ petition can be filed for disposal of a long pending rectification application? Held: “1. Learned counsel for the petitioner states that the Petitioner filed its return of income for the Assessment Year 2016-17, declaring a loss of Rs. 8,79,92,603/- whilst claiming refund of the taxes deducted at source to the tune of Rs. 99,99,460/- . On 15th April 2016, an intimation under section 143(1) of the IT Act, 1961 (‘the Act’) was issued whereby the petitioner was granted credit of taxes amounting to Rs. 45,54,693/- as against credit of Rs. 99,99,460/- claimed by the petitioner. He states 17 18

Ahmedabad Chartered Accountant Journal May, 2024 95 that on 20th March 2018, the petitioner filed a rectification application under Section 154 of the Act before the Assessing Officer for the relevant Assessment Year, however, the same has not been decided till date despite several reminder letters. 2. Issue notice. Mr.Sanjay Kumar, Advocate, accepts notice on behalf of the respondents. 3. Keeping in view the limited relief sought in the present writ petition, the same is disposed of with a direction to the respondent No. 1 to decide the petitioner’s rectification application dated 20th March, 2018 by way of a speaking order in accordance with law within eight weeks and consequential refund along with up to date interest, if any, be released in further eight weeks’ time.” Reasonableness of the Expenditure Indian Hume Pipe Co. Ltd v/s. CIT (2024) 461 ITR 341 (Bom) Issue: How is the reasonableness of an expenditure to be judged by the assessing officer? Held: “It is for the Assessing Officer to decide whether, any commission paid by the assessee to his agents is wholly or exclusively for the purpose of his business. The mere fact that the assessee establishes the existence of the agreement between him and his agent and the fact of actual payment does not take away the discretion of an officer to consider, whether such expenditure was made exclusively for the purpose of the business. The expenditure incurred must be for commercial expediency. However, in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure has to be adjusted from the businessman’s point of view and not from the Revenue’s perspective.” 10% adhoc disallowance sustained Arvindkumar v/s. ITAT and Others (2024) 461 ITR 383 ( P& H) Issue: Under what circumstances, an adhoc disallowance made by an assessing officer be sustained? Held: “With respect to the second aspect of sustaining of addition of Rs. 4,70,000/-, the Tribunal has observed that the Assessing Officer has disallowed 25 per cent. Of the expenses claimed under the head’s consumables, power/fuel, packing, freight, miscellaneous, telephone, conveyance, travelling etc., as no vouchers were produced for expenditure claimed as Rs. 47 lakhs. The Assessing Officer had given full opportunity to the assessee, who could submit evidence of expenditure of about Rs. 8 lakhs out of his claim of Rs. 54.92 lakhs. The Tribunal has further held that the disallowance was rightly restricted to one tenth of the expenditure, which had not been substantiated by the assessee, which comes to about Rs. 4,70,000/-. After going through the impugned judgement, this court is of the view that in this case, the Tribunal has rightly dismissed the appeal(s) of the assessee by appreciating the evidence in the right perspective. Moreover, the appellant assessee has not led any cogent and convincing evidence to prove his case. No substantial question of law arises for consideration in these appeals.” ❉ ❉ ❉ From the Courts 20 19

96 Ahmedabad Chartered Accountant Journal May, 2024 Ayesa Ingenieria Y Arquitecture S.A. V ACIT161Taxmann.com666 (Del) Assessment Year:2020-21 & 2021-22, Order dated:8th April 2024 Basic Facts : The assessee is a company incorporated in Spain, operated in India through its branch office which was providing engineering consultancy services. The AO observed that the assessee had paid certain amount to its head office which it categorized as reimbursement of salary expenses of expats. The AO proposed to disallow the said amount under article 7(3) of the India-Spain Double Taxation Avoidance Agreement (DTAA) considering such amount as fees for technical services (FTS). The assessee contended that the above payments were on cost-to-cost basis reimbursement and the same were allowable under article 7(3) of India-Spain DTAA. The Assessing Officer, however, passed the draft assessment order under section 144C(1) proposing to make addition on the ground that impugned payments made to head office by branch office were in the nature of FTS and the same were assessable in the hands of the assessee which had not been offered to tax. On appeal, the Dispute Resolution Panel upheld the order of the AO. On appeal to the Tribunal Issue: Whether reimbursement of salary of expatriate made by a branch office of a foreign company to its head office after deducted TDS on entire salary paid to expatriates can be disallowed under section 40(a)(i), considering the same to be FTS. Held: The Tribunal noted that it was the case of the revenue that the assessee has received the reimbursement amount for technical services and therefore it is FTS subject to TDS under section 195. Nothing was brought on record by the AO to show that Head Office has provided any technical services to the Branch Office and in consequence thereof has paid FTS. The assessee has submitted before the lower authorities as well as before Tribunal that Branch Office is the real and economic employer of expats which was evident from the employment contract entered into between the Branch Office and the expats. The Branch Office is responsible for payment of salary to the expats in India as well as outside India. These expats are working for the Branch Office under its complete supervision since many years and have become resident of India by virtue of their continuous stay for many years in India. The expats are paid salary by the Branch Office after deduction of applicable TDS thereon which is duly reflected in Form-16 and IT returns filed by the expats in India. Account within the prescribed time period. The decision of the Co-ordinate Bench of Delhi Tribunal in the case of Serco India Pvt. Ltd. v. DCIT rendered on 27-6-2023 in ITA No. 1432/Del/2016 was referred by the Tribunal wherein the Tribunal on similar set of facts held that where the assessee has deducted the tax at source under section 192 and deposited the same into the Govt. Account within specified time as prescribed under the Act, provisions of section 40(a)(i) are not applicable. In light of the factual matrix and legal position, the Tribunal following the decision of the Tribunal referred above, held that disallowance of salary cost reimbursement by Branch Office to the assessee by the AO under section 40(a)(i) is not justified as TDS has been duly deducted on entire salary payments to the expats and deposited into the Govt. 7 CA. Yogesh G. Shah [email protected] CA. Aparna Parelkar [email protected] Tribunal News

Ahmedabad Chartered Accountant Journal May, 2024 97 Britannia Industries Ltd. v. DCIT161 Taxmann.com 393 (Kol) Assessment Year: 2018-19 Order dated: 14th December 2023 Basic Facts: The assessee contributed certain sum towards its CSR obligations to two hospitals in which its promoters were actively involved and claimed deduction of same under section 80G. The AO denied the deduction observing that the donation was not made voluntarily, and the assessee had chosen to make the same to related concerns covered under section 80G. The CIT(A) confirmed the order of the AO. On appeal to Tribunal Issue: Whether deduction u/s 80G can be granted to donation given as part of CSR Held: The provision of section 37, which deals with allowability of expenses incurred in the course of and for the purposes of business, is applicable only to the extent of computation of ‘Business Income’ under Chapter IV-C. Therefore, the Explanation 2 to section 37 which denies deduction for the expenses incurred on CSR initiative by way of deduction from computation of ‘Business Income’ cannot be read into Chapter VI, which is applicable for arriving at taxable income from the gross total income. Wherever the Legislature intended that CSR contributions to any specific charitable trusts should be denied deduction, necessary provisions were incorporated in the specified sub-clauses viz. sub-clauses (iiihk) and (iiihi). No such debar has been set out by the Legislature in any other sub-clauses of section 80G. As far as the reasoning given by the AO to deny the deduction is concerned, same has no relevance as the same is not borne out from the provisions contained in section 80G.Earlier the Kolkata Bench of the Tribunal while deciding a similar issue has held that since the Parliament intended restrictions to CSR expenditure spent by way of donations to only two funds/trusts, i.e., Swachh Bharat Kosh and Clean Ganga Fund, it automatically implies that there is no prohibition/ restriction in respect of claim of CSR expenses, in Tribunal News any other cases, which are otherwise eligible under section 80G. Therefore, it was held that the assessee is eligible for deduction claimed under section 80G. IPCA Laboratories Ltd v. DCIT 161 taxmann.com 511 (Mum) Assessment Year:2009-10 to 2014-15, Order dated: 8th April 2024 Basic Facts: The assessee was involved in the business of manufacture and marketing of pharmaceutical products. During the course of search conducted under section 132, the Assessing Officer found that the assessee had debited several expenses under the head ‘selling and marketing expenses’ which inter alia comprised of gifts, travelling expenses, hotel expenses and conference registration charges. Accordingly, he made disallowed entire sales promotion expenses. On appeal, the CIT(A) deleted the disallowance made by the AO. On the assessee’s appeal to the Tribunal: Issue: Whether expenditure incurred in relation to Doctor by a Pharmaceutical company are allowable in view of CBDT circular and decision of Supreme Court on Freebies Held The Tribunal noted that the Supreme Court in the case of Apex Laboratories Pvt. Ltd. v. DCIT 442 ITR 1 has held that incentives or freebies given to doctors was punishable as per the Circular issued by the Medical Council of India on 14-12-2019 under the MCI Regulations 2002 and was not allowable as deduction in terms of explanation (1) to section 37(1). While holding so, the Apex Court held that the CBDT Circular No. 5/2012 dated 1-8-2012 clarifying that the freebies given by pharmaceutical companies to medical practitioners was inadmissible as deduction under section 37(1) was clarificatory in nature. The said Circular was thus held to be effective from the date of implementation of Regulation 6.8 of the 2002 MCI Regulations i.e., from 14-12-2009. The Tribunal further noted that the Bombay High Court in the case of Abbott India Ltd. v. ACIT (WP No. 685 of 2016) dated 10-2- 2023, after considering the decision of Supreme Court held that, the expenditure incurred on freebies given 8 9

98 Ahmedabad Chartered Accountant Journal May, 2024 to doctors, prior to 14-12-2009, was not hit by the rigors of CBDT Circular No.5/2012 read with MCI regulations dated 14-12-2009 and was thus allowable business expenditure. It was accordingly held that the sales promotion expenses disallowed by the AO in this assessment year 2009-10 by invoking explanation (1) to section 37(1) was unjustified. Now coming to assessment year 2010-11 any sales promotion expenses incurred prior to 14-12-2009 i.e., from 1-4- 2009 to 13-12-2009 would be allowable. Being a pharmaceutical company, the assessee cannot advertise its products. However, the assessee is entitled to create awareness of its products by participating in exhibitions and organizing conferences and therefore the expenditure incurred for organizing the same would not fall within the ambit of CBDT Circular No.5/2012 read with MCI Regulations 2009. Likewise, any journals or periodicals printed and shared with customers, distributors, or medical practitioners to make them aware about the research behind manufacture of any new medication or its uses or effects in any particular disease also cannot be termed as ‘gifts’ given to doctors. However, the expenses, if any, incurred on travel and hotel accommodation of the doctors to attend these exhibitions or conferences would however be hit by the rigors of MCI Regulations, 2009. In respect of each of the expenses the Tribunal held as under: Expenses on Patient Detection/Education Camp & Camp expenses The expenses debited under this sub-head majorly comprised of medicine and testing kits, certain instruments purchased as required in medical camps. According to the AO, these medical kits like lipid profile test, sugar testing kit, thermometer, urine kits, pregnancy sticks etc., which were purchased for the camps were gifted to the doctors who attended the camp and thus held that this expenditure fell under the mischief of IMC regulations and accordingly disallowed the same in its entirety. The assessee had incurred camp expenses, which were noted to include venue charges, payment to field staff, taxi hire charges to staffs etc. The AO had disallowed 10 per cent of these expenses. The CIT(A) recorded a finding of fact that the expenses on Patient Detection were incurred for the benefit of patients and not the doctors and thus deleted the same. The CIT(A) noted that the expenses were incurred for various camps and included expenses incurred for travelling & refreshments of field staff or patients and thus was not related to doctors. Thus, tribunal upheld the CIT(A)’s action of deleting the disallowance made by the AO. Sponsorship Expenses The Tribunal noted that the revenue was unable to controvert the findings of the CIT(A) that the sponsorship expenses were paid to trade bodies/associations by the assessee to put up their banners and posters in their events as a measure of brand re-call. Therefore, it is to be held that the sponsorship expenses not having been incurred for the benefit of doctors but to create brand awareness about the assessee company was allowable as deduction under section 37(1). Participation in Symposiums/Exhibitions Expenses It was noted that the payments made by the assessee can be categorized into three categories viz., (a) payments made to institutions/trade bodies for registration, hiring of stall, designing, and erecting their stalls, (b) hotel expenses and (c) travelling expenses. It is opined that there is no such bar under the MCI regulations preventing the assessee from registering themselves at different symposiums, hiring and erecting stalls etc. The assessee showed that these expenses were paid to institutions/trade bodies. The expenses did not result in any benefit to the medical practitioners and thus could not be disallowed under section 37. With regard to hotel and travelling expenses, it was found that these expenses comprised of refreshments provided to doctors at hotels and their local conveyance to attend the symposiums. These expenses indeed benefitted the doctors and would tantamount to availing hospitality from a pharmaceutical company. Therefore, these expenses viz., (b) and (c), would fall under the mischief of MCI regulations and is required to be disallowed and added back under section 37(1). Doctor’s Meeting/Medical Awareness Expenses The Tribunal noted that the expenditure incurred for organizing the conference i.e., hiring of venue and making arrangements etc. cannot be said to be in nature of ‘freebies’ given to the doctors. The Tribunal News

Ahmedabad Chartered Accountant Journal May, 2024 99 registration/conference expenses paid for organizing such events for their brand awareness and dissemination of information and research, cannot be said to constitute ‘freebies’ to medical practitioners and thus is held allowable under section 37(1). As far as hotel and travelling expenses are concerned, it is found that these expenses comprised of refreshments provided to doctors who were the delegates at the conferences and reimbursement of their travelling expenses. These expenses indeed benefitted the doctors and would tantamount to availing hospitality from a pharmaceutical company. Therefore, felt within the ambit of MCI regulations and directed to be disallowed and added back under section 37(1). Brand Recall Purchases, HTC Expenses, CRM Expenses and Sales Promotion and Other Sales Promotion Expenses The AO disallowed the sales promotion and CRM expenses which were noted to comprise of expenses of value less than Rs.500 incurred by more than 4500 field staff of the assessee. According to the AO these expenses were incurred by the field staff to maintain cordial relations with medical practitioners and hence were in nature of freebies and were disallowed. On appeal, the CIT(A) have restricted the disallowance to 10 per cent of these expenses. The items of expenses incurred under these heads were of nominal value less than Rs.1000 on flowers, sweets, cup, aprons etc. The sales promotion articles which had their name and logo were given to customers, retailers, stockiest and distributors as a part of their brand awareness strategy. Likewise, flowers and sweets of nominal value would also be given by field staff on special occasions to their customer/stockiest/distributors. Also, some of these items were used by field staff to be given to doctors in the course of their visits. The MCI Notification dated 1-2-2016 has excluded nominal gifts valuing Rs.1000 and less from the mischief of MCI Regulations, 2009. This was also clarified by a public notice issued by Government of India dated 16-3-2022. In light of the foregoing and following the decision of this Tribunal at Bangalore in the case of Himalaya Drug Company v. CIT 124 taxmann.com 252, the disallowance made by the AO was directed to be deleted. Journals & Periodicals It was noted that these expenses were incurred for researching and printing literature or purchasing journals regarding the products and its related uses/effects. As noted earlier, these expenses do not result in any benefit or gifts given to the doctors. Thus, the disallowance on account of expenses incurred under this sub-head was deleted. Taxi Hire Charges These expenses related to the reimbursements of local taxi/conveyance expenses incurred by the sales employees/staff on their outstation visits. The AO disallowed on the ground that the details were not made available. The CIT(A) have restricted the same to 10 per cent of the expenses. The assessee showed that the assessee had twelve divisions and more than 4500 persons as field staff and therefore in light of the foregoing, the taxi hire charges incurred across the years was reasonable and not excessive. Having regard to the nature of expenses and overall facts, as these expenses were incurred by sales personnel of the assessee and not paid to any doctors or medical practitioners. The same were allowable. Field Printing Expenses It was noted these expenses related to printing of files, folders, pads, and pens which were understandably to be used by the field staff and also the doctors who were attending camps. Going by the nature of these expenses, it cannot be termed as ‘freebies’ given to doctors and hence the order of the CIT(A) deleting the same was upheld. Trade Relation Expenses and Gifts for Sales Promotion These expenses are noted to cover the cost of articles/ gifts purchased by field staff to be distributed to wholesalers/stockiest/business partners etc. As these were incurred on the distributors and stockists for the domestic marketing. Therefore, it is not incurred in relation to the doctors. Accordingly, the same was allowable. Air Ticket Expenses The air ticket expenses paid for doctors directly fell under the mischief of MCI Regulations 2009 and was thus not allowable as deduction under explanation (1) to section 37(1). Thus, the action of the AO disallowing the same in full was upheld. Tribunal News

100 Ahmedabad Chartered Accountant Journal May, 2024 Sunpack Barrier Films (P.) Ltd. v. ADIT 162 taxmann.com 200 (Ahd) Assessment Year 2021-22, Order dated 24th April 2024 Basic Facts : The assessee-company manufactured flexible films. It filed its income tax return for AY 2021-22 on 30.12.2021, opting for reduced taxation under Section 115BAA. The Central Processing Centre (CPC) calculated tax liability without considering section 115BAA, resulting in additional tax demand. The CIT(A) dismissed the appeal on the ground that the assessee failed to file Form 10- IC within the stipulated deadline as per Circular No. 06/ 2022 dated 17.03.2022. In the instant appeal, the assessee argued that Circular No. 19/2023 issued by CBDT provided for the condonation of delay in filing Form No. 10-IC for Assessment Year 2021-22, and it had met all conditions specified in said Circular, including timely filing of income tax return, selection of taxation under Section 115BAA, and electronic filing of Form No. 10-IC before deadline rendering it eligible for the concessional tax rate under section 115 BAA. Issue: Whether the assessee was entitled to benefits of section 115BAA Held: On going to the facts of the instant case, and the conditions as stipulated in Circular No. 19/2023 dated 23.10.2023, the tribunal noted that the assessee has fulfilled all the conditions as mentioned in the aforesaid Circular and the assessee has also filed Form No. 10- IC within the stipulated timelines as specified in the aforesaid Circular, and accordingly is eligible for claim of being taxed under Section 115 BAA. Accordingly, looking into the instant facts, the appeal of the assessee was allowed. AXIS Bank Limited v. ACIT TS-142-ITAT2024(Ahd)-TP, 161 taxmann.com 530 Order dated 10th April 2024, Assessment Year 2018-19 Basic Facts: During the year under consideration, the assessee had provided tier II loan to its UK based Associate Enterprise (AE). It had charged the interest at 3 months LIBOR plus 425 bps, resulting the interest rate of 6.09 per cent and the quantum of interest earned accordingly being Rs.9.04 crores. The TPO had made arm’s length price (ALP) adjustment of interest by taking interest rate as per comparable quotation of Bank of India as 6 months Libor plus 425 bps and added a spread of 200 bps towards letter of comfort (LOC) and considered 7.76 per cent as arm’s length interest rate. The DRP in turn restricted the adjustment towards LOC from 200 bps 1.0.2 per cent to 0.5 per cent.On the assessee’s appeal to the Tribunal. Issue: Whether where assessee had provided tier II loan to its UK based AE, interest rates prescribed under head Safe Harbour Rules as per rule 10TD(2A)(5)(v) i.e., 6 months LIBOR plus 400 bps could be accepted. Held: Bank guarantees entail risk, with the provider of guarantee having to pay the amount guaranteed on the default in payment of loan by the person guaranteed. Letters of comfort entail no such financial risk on the provider of the LOC. Therefore, both the TPO and the DRP had erred in equating LOC’s to bank guarantees. However, having said so it is also evident that LOC’s facilitate obtaining loans by entities on the assurance of their creditworthiness provided by the LOC provider. The person giving loan is assured about the creditworthiness of the party to whom loan is contemplated to be given. LOC’s are sought generally from parent companies who are in a position to provide an assurance of creditworthiness of their subsidiaries. In effect it establishes a parent company’s commitment to providing its subsidiary with the resources it needs to meet its financial obligations or get credit. Ultimately all boils down to how the letter of comfort is worded to understand the underlying import of the LOC vis-a-vis the liability shouldered by the provider of LOC. In the facts of the instant case the LOC is asked for by BOI in its quote to Axis Bank, UK but the format in which it is asked is not available. Nothing therefore can be said about the impact of the same on the interest to be charged on the loan transaction. In view of the same, though the adjustment made to the interest rate by the Assessing Officer/DRP treating the LOC as bank Tribunal News 10 11

Ahmedabad Chartered Accountant Journal May, 2024 101 guarantee cannot be upheld, at the same time, the assessee’s alternative argument of treating the interest rates prescribed under the head “safe harbour rules” i.e. Rule 10TD(2A)(5) can be accepted, which is six months LIBOR plus 400 bps. The Assessing Officer is to be directed to treat the said rate as ALP of the impugned international transaction and make adjustment accordingly. The assessee also contended that the assessee has charged upfront fees also at 1.25 per cent of the loans, and therefore, no adjustment on account of LOC is called. We are unable to agree with the same, since we have noted, even as per the quote of BOI, identical upfront fee of 1.25 per cent of the bank loan was charged. Therefore, the LOC was, over and above, charging of upfront fees, calling for a separate adjustment to the interest on account of the same. SREI Infrastructure Finance Ltd Vs. ACITTS288-ITAT-2024 (Kol) Order dated 29th April 2024, Assessment Year 2017-18 Basic Facts: The Assessee furnished its return of income for impugned AY 2017-18 under Section 139(1) and further revised it twice. In the final revised return, the TDS claim was Rs. 75.14 Cr. Assessee’s case was selected for scrutiny and an assessment order was passed. No interest under Section 244A was granted as there fund (which was essentially out of TDS was less than the total tax liability. Subsequently, an application for rectification under Section 154 was filed for correcting the MAT computation after giving set off for MAT credit under Section 115JAA. The Revenue passed a rectification order on Jul 12, 2022,and granted a refund of Rs. 25.72 Cr. which comprised the tax component of Rs. 25.07 Cr. and interest component of Rs. 65.28 Lac. Assessee filed an appeal against Section 154 order on the ground that the interest under Section 244A was granted only for 5 months instead of 70 months starting from Apr 01,2017. CIT(A) declined to deal with the issue observing that Assessee had not raised this issue in the rectification application and, therefore, there was no need for adjudication of the issue relating to interest under Section 244A. Aggrieved, this appeal is filed by the Assessee before ITAT. Issue: Whether the assessee was entitled to interest on refund from 1st April 2017 to the date of granting of refund Held: The Tribunal noted that assessee’s case falls under the category of sec. 244A(1)(a)(i) of the Act because there fund order to the assessee is out of the tax deducted at source upto 31.03.2017 and the assessee had furnished its original return u/s139(1) of the Act. Even though the assessee has revised the return but for the purpose of calculating interest, assessee’s return shall always be treated to be filed u/s. 139(1) of the Act. Though the refund in the present case has been awarded in the order u/s. 154 of the Act but even section 154 is also forming part of the fleet of other sections mentioned in sec. 244A(3) of the Act and that comes into action when a refund has already been granted but subsequent to the rectification order, the refund is increased or decreased then the interest given earlier also needs to be increased or decreased. However, in the instant case when the assessee was originally granted the refund no interest was given because the refund was less than 10% of the total tax liability. It was only in the rectification order dated 12.07.2022that the refund of tax component of Rs.25,06,86,616/- was given. After considering the facts and circumstances of the case, and also considering the set off of MAT credit available with the assessee as on the beginning of the assessment year, the Tribunal found sufficient merit in the contentions of the assessee that the interest u/s. 244Aof the Act in the case of the for AY 2017-18 needs to be computed from 01.04.2017 to the date of grant of refund. Accordingly, the effective issue raised in the appeal was allowed. In support of its view Tribunal relied on following judgements –(i) UOI Vs. Tata Chemicals ltd. [2014] 43 taxmann.com 240 (SC); (ii) CIT Vs. Birla Corporation ltd. [2016] 66 taxmann.com 276 (Cal); (iii) CIT Vs. Cholamandalam Investment & Finance Co. Ltd. [2008]Taxman 132 (Madras); (iv) CIT Vs. Ashok Leyland Ltd. [2002] 125 Taxman 1031 (Madras); (v) Pr. CIT Vs. Bank of India [2018] 100 taxmann.com 105 (Bom.) &(vi) ADIT (IT) Vs. Royal bank of Scotland N. V [2011] 130 ITD 305 (Kol). Accordingly, Tribunal held that the assessee was is entitled for interest on unpaid interest. ❉ ❉ ❉ Tribunal News 12

102 Ahmedabad Chartered Accountant Journal May, 2024 In this issue, we are giving gist of a recent order passed by ‘A’ Bench of I.T.A.T., Ahmedabad in the case of Parulben Vijayklumar Patel vs. ITO in ITA No.164/Ahd/ 2024 in respect of penalty u/s.270A for the Asst. Year 2017-18. Though the issue is decided in favour of assessee, on the basis of some peculiar facts, still the observations made by the Hon’ble Tribunal in respect of applicability of section 270A are interesting and can be useful to the members while representing the matter regarding penalty u/s.270A. Annexure In the Income Tax Appellate Tribunal “A” Bench, Ahmedabad Before Smt. Annapurna Gupta, Accountant Member & Shri Siddhartha Nautiyal, Judicial Member ITA No.164/Ahd/2024 Assessment Year: 2017-18 Parulben Vijaykumar Patel Vs. Income Tax Officer, Ahmedabad. Ward – 3(3)(1), (PAN: BLJPP8139A) Ahmedabad. (Appellant) (Respondent) Date of hearing : 09.05.2024 Date of pronouncement : 22.05.2024 GIST Only: Facts of the Case: 1. The Appellant is an individual who did not file return of income under Section 139 of the Act. The case was reopened by notice u/s.148 of the Act, in response to which, the Appellant filed return of income on 22.03.2022 declaring total income of Rs. 27,85,060/-, which included mainly income from capital gain of Rs.22,20,156/- and some other income. 2. The assessment was done on the declared total income of Rs.27,85,060/- by the Assessing Officer. The Assessing Officer initiated penalty proceeding u/s.270A for misreporting of income and levied penalty @ 200% of the tax payable on underreported income due to misreporting of income. 3. In appeal before the learned CIT(A) also, the Appellant was not successful and penalty u/s.270A @ 200% of the tax on the ground that Appellant had misreported her income was confirmed by CIT(A). Against the order of CIT(A), the Appellant filed appeal before the Tribunal. Contentions Before the Tribunal and Finding of the Tribunal: 4. The assessment has been done on the basis of return of income filed by the Appellant and the same has been accepted in toto without any variation, and therefore, there could not be any question of underreporting of income much less misreporting of income. 5. The capital gain had arisen because of the sale of the property and the purchaser of the property had deducted tax at source at the required amount of tax u/s.194-IA of the Act and the same was duly reflecting in Form No.26AS on the income tax portal. The return of income was not filed by the Appellant under the bona fide belief that since taxes have been deducted at source on such sale of property, there was no further requirement to file return of income and that the Department was in complete knowledge regarding such sale of property. 6. TDS was deducted and deposited with respect to almost 50% of the taxes payable on such sale of property, and therefore, this is not a fit case of CA. Sanjay R. Shah [email protected] Unreported Judgements

Ahmedabad Chartered Accountant Journal May, 2024 103 misreporting of income on the basis of which, penalty @ 200% can be confirmed. 7. The contention of the DR before the Tribunal was that, had the notice u/s.148 been not issued to the Appellant, this amount would have escaped taxation, and therefore, it is a fit case for levy of penalty u/s.270A. Decision of the Tribunal: 8. The Tribunal, after considering the rival contentions, held as under: “10. We have heard the rival contentions and perused the material on record. The issue for consideration before us is that whether penalty under Section 270A of the Act can be levied in the instant set of facts, when as per the assessee, she was under the genuine belief that since taxes has been deducted at source on such sale of property then there was no occasion to file return of income. Second issue for consideration before us is if penalty is leviable, then is the present case one of under-reporting of income, thereby attracting tax @ 50% on such underreported income or is it a case of misreporting of income, thereby attracting penalty @ 200% on the amount of tax payable on such misreported income under Section 271A(8) of the Act. 11. Section 270A provides for penalty for “underreporting of income” [penalty at fifty per cent, of tax payable on such under-reported income, under sub Section (7)] and “misreporting of income” [under sub Section (8) and (9), penalty at two hundred per cent, of tax payable on such income]. Penalty under sub Section (8) is independent of levy of penalty under sub Section (7) even if there is no under reported income. Under sub Section (1), the AO, Commissioner, Principal Commissioner or the Appellate Commissioner may direct that any person who has under-reported his income to pay penalty on such under-reported income. In our view, the mere fact that there is a provision for automatic levy of penalty does not mean that penalty has to be imposed. The Supreme Court in the case of Hindustan Steel Ltd. vs. Assistant Commissioner, held that a penalty should not be imposed merely because it is lawful to do so. Even if a minimum penalty is prescribed, the authority will be justified in not imposing penalty where the breach is merely technical or is based upon the bona fide belief that a particular provision has been complied with. The Supreme Court stressed the importance of not levying penalty where the assessee acts with “honest and genuine belief”.” 9. Thereafter, the Tribunal reproduced the provisions of section 270A of the Act and further observed as under: In the case of CIT vs. Om Prakash Mittal 273 ITR 326 (SC), it was held that the term “misrepresentation” implies that there is no true and fair disclosure. The Madras High Court in the case of P.M. Perianna Pillai vs. CIT 46 STC 94 has held that the act of making a false or misleading assertion about something, usually with the intent to deceive amounts to “misrepresentation’. The word “misrepresentation” denotes not just written or spoken words but also any other conduct that amounts to a false assertion. The assertion so made, an assertion that does not accord with the facts is also termed false representation. 10. The Tribunal further observed as under: “15. In our considered view, the case of the assessee does not fall under any of the specific provision content in Section 270A(2) of the Act which deals with various circumstances relating to “under reporting of income”. Therefore, since the assessee’s case does not fall under sub-Section (2) of Section 270A, then the benefit of sub-Section (6) to Section 270A is also not available to the assessee. Therefore, the next issue for consideration is whether the assessee’s case is one of misreporting of income and whether the case of assessee falls Unreported Judgements

104 Ahmedabad Chartered Accountant Journal May, 2024 specifically under sub-Section (a) to Section 9 dealing with “misrepresentation or suppression of facts”. Further, since subSection (a) to Section 270A specifically provides that “notwithstanding anything content in sub-Section (6)”, where underreported income is in consequence of misreporting thereof by any person, the penalty shall be equal to 200% of the amount of tax payable on such under reported income. In the instant facts, certain facts are noteworthy. The first fact is that the purchaser, at the time of sale of property, property taxes had been effectively deducted at source at approximately 50% of the amount of taxes payable on such sale consideration. Secondly, the assessee was, in the instant facts, under a bona fide believe that she was not liable to pay taxes on sale of property, when taxes had been withheld at source at the time of purchase by the purchaser of such property. Thirdly, the assessee was under the genuine belief that there is no misrepresentation or suppression of facts, since the purchaser of property had deducted taxes at the time of purchase and the entire transaction was duly reflecting in Form No. 26AS on the portal of the Department, which was within the knowledge of the Income Tax Department, therefore, there is no question as regards to any misrepresentation or suppression of facts, since the Department has not disputed the actual amount of sale consideration, which has been reported in Form No. 26AS. In our view, it would be a different matter if the Department would have alleged that there was a difference / mismatch between the sale consideration as reflecting in Form No. 26AS on which TDS has been deducted under Section 194-IA of the Act and the actual sale consideration which had been received by the assessee on such sale of land. That, in our view, it would have been a case of misrepresentation or suppression of facts. However, once the sale consideration is reported in Form No. 26AS on the Government website and the amount of sale consideration has not been challenged / disputed by the Department and taxes has been withheld on such sale consideration by the purchaser of property under Section 194-IA of the Act, then, in our view, this is not case of misrepresentation or suppression of facts. In the instant case, the assessee was under a bona fide believe that once the correct income flowing from sale of property is duly reflecting in Form No. 26AS on the Government website and taxes have been deducted at source by the purchaser of such property under Section 194-IA of the Act, the assessee was under no further obligation to file return of income disclosing sale of aforesaid property and pay any further taxes thereon. Looking into the instant facts, the intention of the assessee was not to misrepresent or suppress any facts and the return of income had not been filed under a bona fide belief that since the entire transaction has been correctly reported in Form No. 26AS on the website, there is no further requirement to file return of income and disclose such transaction in the return of income. 16. Accordingly, looking into the instant facts, we are of the considered view that this is not a fit case for levy of penalty under Section 270A of the Act.” 11. Thus, the appeal of the Appellant was allowed. ❉ ❉ ❉ Unreported Judgements

Ahmedabad Chartered Accountant Journal May, 2024 105 One time Lease Premium can be claimed as revenue expenditure. DCIT v. Sun Pharmaceutical Ind. Ltd. [2009] 329 ITR 479 (Gujarat) 6. The facts are not in dispute. The lease agreement entered into between the assessee and GIDC has been analyzed and relevant terms summarized by the Tribunal. It is not necessary to refer to the said terms in detail in the present proceedings. Suffice it to state that the Tribunal, on appreciation of the deed in question, has recorded following findings of fact : “It is not disputed that the land which has been leased out to the assessee did not cease to be belonging to GIDC, the lessor. The lease deed was registered because as per the Registration Act, it is compulsorily registrable, but it has not changed the ownership. It is not also disputed that the lease rent is very nominal and by obtaining this land by lease the capital structure of the company has not been changed. . . . . . Thus, by this payment the assets of the assessee company had not been increased because the land continued to be the land of GIDC. The benefit the assessee got is only of an advantage of carrying on the business more profitably by paying nominal rent on the land. The issue can be considered in another angle. It cannot be disputed that if the land is not obtained by the assessee it would not be possible for it to carry on the business.........” 7. The Tribunal has thus, after referring to two decisions of Supreme Court, held that the land in question was not acquired by the assessee. That merely because the deed was registered the transaction in question would not assume a different character. 5 Advocate Tushar Hemani [email protected] The lease rent was very nominal. By obtaining the land on lease the capital structure of the assessee did not undergo any change. The assessee only acquired a facility to carry on business profitably by paying nominal lease rent. 8. In light of the aforesaid findings of fact and the ratio of the apex Court decisions, the Court does not find this to be a case which warrants interference. Even the AO has recorded that the payment was for use of land. There is no legal infirmity committed by the Tribunal. xxx… 10. In the aforesaid facts and circumstances of the case, the Tribunal was justified in holding that the lease rent paid by the assessee to GIDC was allowable as revenue expenditure. The appeal is dismissed accordingly with no order as to costs. Coforge Ltd. v. ACIT [2021] 128 taxmann.com 99 (Delhi) Commuted/discounted one-time lease rent: - 14. It is relevant to note that, vis-à-vis this aspect of the matter, while the Tribunal has agreed with the appellant/assessee, the one-time lease rent was incurred by it to run its business both, effectively and efficiently, the Tribunal has gone on to hold that the amount involved should be spread over the tenure of the lease, albeit, in equal proportion. The reasoning of the Tribunal is given in paragraph 9.6 to 9.9 of the impugned orders; the same is extracted hereafter. ‘9.6 We have heard the rival submission and perused the relevant material on record. The assessee has filed a copy of the lease deed under reference. In terms of the lease deed, the assessee has made following payments to GNIDA: (a) one-time lease premium of Rs. 2,83,56,515/- Judicial Analysis 6

106 Ahmedabad Chartered Accountant Journal May, 2024 (b) commuted one time lease rent of Rs. 77,98,042/- 9.7 As far as payment of one-time lease premium is concerned, the assessee has capitalized the said amount in its books of account. The Ground No. 4 of the appeal of the Revenue is factually incorrect because the premium has already been capitalized by the assessee and the issue in dispute is only in respect of the commuted one timely lease rent. 9.8 The Ld. CIT(A) after considering the decisions on the issue of when a particular expenditure has to be considered as capital expenditure, in the case of Empire Jute Co. v. CIT 124 ITR 1 (SC); Lakshmiji Sugar Mills Co. P. Ltd. v. CIT 82 ITR 376 (SC) and Madras Auto Services (P.) Ltd. 233 ITR 468 (SC) allowed the claim of the assessee observing as under: “8.5.2 The appellant submitted that it had claimed deduction of Rs. 77,98,042 on account of payment of commuted lease rentals to Greater Noida Authority for Plot No. 2A taken on lease situated in Greater Noida Industrial Development Area District, Gautam Budh Nagar. The appellant had the option to either pay (a) the advance annual rent on yearly basis ; or (b) commuted one time lease rent for the period of lease and no lease rent would be payable by the appellant during the lease period. The appellant opted for option (b). The deed of lease was executed on 12th January, 2007. The lease term is of 90 years commencing from 12th January, 2007, with the right of the Greater Noida Industrial Development Authority reserved. It is submitted that the appellant under the lease deed with the Greater Noida Industrial Development Authority has agreed to develop SEZ in Greater Noida by constructing the project with integrated, ready to use office space and land and social infrastructure, etc. The appellant is obligated under the lease deed to complete the construction of the whole project and facilities within 7 years. It is submitted that the object and purpose of such lease deed, Judicial Analysis is only to facilitate IT Industries and IT enabled services and expansion of the business of the appellant. That apart from the aforesaid benefit, which is in the revenue field, there is no advantage in the capital field as there is no acquisition of any capital asset inasmuch the plot of land is not under the ownership of the appellant and remains the property of Greater Noida Industrial Development Authority. It is submitted that payment of commuted lease rentals did not result in creation of a capital asset having enduring benefit in the capital field. The amount in question was essentially revenue expenditure allowable deduction. 8.5.3 Hon’ble Supreme Court in the case of Empire Jute Co. v. CIT: 124 ITR 1, held that the test of enduring benefit is not certain or conclusive test in determining whether the expenditure is capital or revenue in nature and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The Supreme Court further laid down that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. 8.5.4 In the case of Lakshmiji Sugar Mills Co. P. Ltd. v. CIT : 82 ITR 376, Hon’ble Supreme Court held that the contribution made by the assessee under a statutory obligation for the development of roads which were originally the property of the Government and remained so even after the improvement had been done, being

Ahmedabad Chartered Accountant Journal May, 2024 107 expenditure incurred for running of the business efficiently and conveniently and not for acquiring a capital asset was of revenue nature and not of a capital nature. 8.5.5 In the case of Madras Auto Service (P.) Limited (233 ITR 468) the assessee tenant had spent the amounts in question in order to construct a new building after demolishing the old building. The new building, however, from inception was to belong to the lessor and not to the assessee. The assessee, however, had the benefit of the existing lease in respect of the new building at the agreed rent for a period of 39 years The assessee claimed deduction for the entire amount spent on construction of the building as revenue expenditure. Hon’ble Supreme Court in the said case observed: “In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the assessee in the present case did not get any capital asset by spending the said amounts The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure.” 8.5.6 The above decisions of Apex Court are squarely applicable in the case of the appellant. In the case of the appellant, also it did not acquire title/ownership of any capital asset. The plot of land on which construction would be carried on by the appellant under the lease deed of 99 years, would remain the property of Greater Noida Industrial Development Authority at all times. In lieu of incurring the expenditure, the appellant would be entitled to enjoy the property as a tenant under long term lease. Such an advantage even though, enduring in nature, could not be regarded as in the capital field as the expenditure only facilitates the carrying out of business more efficiently and profitably by making available suitable premises for the business of the appellant. The expenditure on account of commuted lease rentals paid by the appellant company has been incurred in respect of premises used wholly and exclusively for the purposes of the business of the company; and the same represents commuted payment in lieu of regular lease rental and hence is in the nature of revenue expenditure. In view of the above, the AO has erred in making the disallowance of the commuted lease rentals. The appeal is allowed in this ground no. 7 of appeal. Since appeal is allowed in ground No. 7 of appeal, therefore, the plea of the appellant in ground no. 8 of appeal is infructuous and not necessary to be adjudicated.” 9.9 We find that the Ld. CIT(A) has distinguished the expenditure in the capital field and expenditure incurred only to facilitate the carrying of the business more efficiently and profitably, which is revenue in nature. The one-time premium paid by the assessee has already been considered by the assessee as capital expenditure. The assessee had the option to pay the lease rental on year-to-year basis or as a one-time expenditure. The assessee has substituted the revenue expenditure which was to Judicial Analysis

108 Ahmedabad Chartered Accountant Journal May, 2024 be paid on year-to-year basis and the nature of the expenditure remained same though it has been paid as a composite payment. Thus, it is clear that the expenditure incurred by the assessee is not capital expenditure. The expenditure was to be incurred on year to year basis for the period of lease of 90 years. The lesser gave the assessee two option. The first option was to pay on year to year basis and claim the same as revenue expenditure. The second option was provided by the lessor was to pay a composite amount for the period of lease as onetime payment. The lessor provided some benefit for making onetime payment. The assessee has chosen the second option and paid the entire lease rent of 90 years as composite onetime payment. Thus, in our opinion, the liability of 90 years has been paid in one year only. In such circumstances, the liability of lease rent relatable to year under consideration would be 1/90th of the amount paid and balance amount would be pre-paid advance rent only. The assessee is entitled to claim 1/90th of the amount every year till the period of lease of 90 years as revenue expenditure. Even according to the matching principles of income and expenditure the entire expenditure is not justified for allowance in one year (i.e. the year under consideration) when the income corresponding to expenditure of subsequent years will be reflected in relevant year only. The expenditure not being relatable to the year under consideration cannot be allowed as revenue expenditure in the instant year. For the year under consideration, only 1/90th of the amount of Rs. 77,98,042/- has been incurred wholly and exclusively for the purposes of the business for the year under consideration. Accordingly, we allow 1/90th of Rs. 77,98,042/- as revenue expenditure in the year and balance be characterized as advance rent in the financial statement as on 31-3- 2007. Accordingly, the Ground Nos. 3 & 4 of the appeal of the Revenue are partly allowed.’ [Emphasis is ours] 14.1As is evident from the reasoning adopted by the Tribunal, the Tribunal while finding no difficulty with the stand of the appellant/assessee that, although, paying commuted and discounted one-time lease rent gave the appellant/assessee an enduring benefit, it allowed the appellant/assessee to run its business effectively. 14.2Having said that the Tribunal, in our opinion, needlessly went on to direct that the amount incurred i.e. Rs. 77,98,042/- should be spread equally over the tenure of the lease. As correctly argued on behalf of the appellant/assessee, this was not the stand of the revenue before the Tribunal. The stand of the revenue was that the one-time lease rent amount paid to GNIDA was capital expenditure and not that it needed to be deferred over the tenure of the lease. As has been correctly argued on behalf of the appellant/ assessee, there is no concept of deferred revenue expenditure under the Act. An expenditure can be spread over a time span, only if it so provided, in the Act. Section 35DD of the Act, which we have discussed above, is one such example. The observations of the Supreme Court in Taparia Tools Ltd. (supra), being relevant in this regard, are extracted for the sake of convenience. ’14. The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. where amortization is specifically provided, such as Section 35-D of the Act. (Emphasis is ours) 15. What is to be borne in mind is that the moment [the] second option was exercised by the debenture holder to receive the payment upfront, liability of the assessee to make the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs. 55 per debenture. In Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC), this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date. Following passage from the aforesaid judgment is worth a quote: Judicial Analysis

Ahmedabad Chartered Accountant Journal May, 2024 109 “The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be disharged is not certain.” (Emphasis is ours) The present case is even on a stronger footing inasmuch as not only the liability had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year. 16. Judgment in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: “15..The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT, (1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. 16. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.” 17. Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally Judicial Analysis

110 Ahmedabad Chartered Accountant Journal May, 2024 revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period. 18. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of ‘Matching Concept’ is satisfied, which upto now has been restricted to the cases of debentures. 19. In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC); Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355/ 106 Taxman 601 (SC). 20. At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed. 21. In view of the aforesaid discussion, we are of the opinion that the judgment and the orders of the High Court and the authorities below do not lay down correct position in law. The assessee would be entitled to deduction of the entire expenditure of Rs. 2,72,25,000 and Rs. 55,00,000 respectively in the year in which the amount was actually paid. The appeals are allowed in the aforesaid terms with no orders as to costs.”’ 14.3We are also of the view that the Tribunal was wrong in applying the matching principle and directing that one-time lease rent should be spread equally over the tenure of the lease. As indicated hereinabove, the annual lease rent that the appellant/assessee was required to pay if it had chosen the said route, was Rs. 7,08,913/-. The commuted and discounted value of the one-time lease rent was eleven (11) times the annual rent; which in absolute terms was much lower than the amount that would have accrued as rent over the entire tenure of the lease i.e. 99 years. This was the option exercised by the appellant/assessee. As is evident, taking the present value or time value of the money into account, a lumpsum figure was proposed to the appellant/assessee for securing leasehold rights for 90 years. The lumpsum amount paid by the appellant/assessee, as adverted to above, was far less than the amount Judicial Analysis

Ahmedabad Chartered Accountant Journal May, 2024 111 that it would have to pay if it were to choose the other option i.e. pay the lease rent on an annual basis for 90 years at the rate of Rs. 7,08,913/-. 14.4The matching principle, which is an accounting concept, requires entities to report expenses, at the same time, as the revenue. In other words, the revenue is matched with the expense, in the income and expenditure statement, for a particular period. Given the facts obtaining in this case, the matching principle would have no applicability. The appellant/assessee chose to incur the liability of a crystallised amount in the period relevant to the AY in issue i.e. AY 2007-08, and therefore, it was entitled to seek deduction of the amount which fulfilled the following attributes. i. The expenditure was not in the nature of capital expenditure or a personal expense. ii. It was expended fully and exclusively for the purposes of the business and; iii. It did not fall within the realm of any provision of the Act which prohibited the appellant/ assessee from claiming this deduction. 14.5Thus, we are of the view that question Nos. (i) and (ii), as framed in ITA 215/2020, should also be decided in favour of the appellant/assessee and against the revenue. It is ordered accordingly. DCIT v. United States Pharmacopeia India (P.) Ltd. [2018] 94 taxmann.com 688 (Hyderabad - Trib.) 10. With regard to ground No. 3, CIT(A) had not followed the decision of the jurisdictional High Court in the case of Mrs. G. Seetha Kamraj v. CIT, we find from the record that in the present case, the assessee had entered into an agreement with ICICI Knowledge Park for lease of vacant land for 33 years for an annual lease amount varying from Rs. 16,901/- to Rs. 1,47,298/-. The assessee had also paid a one time consideration as lease premium of Rs. 99,03,750/-. In the present case, the assessee had paid the above sum as lease premium and claiming the same as revenue expenditure . Whereas in the case referred by the revenue in the ground is distinct from the present case as the assessee (Mrs. G. Seetha Kamraj) took on lease for 99 years a building from her husband and as per terms of the lease, assessee paid Rs. 5000 as premium for obtaining the lease and was to pay monthly rent of Rs. 300/- . The lease had also a right to create sub-lease and she created a sub-lease in favour of 3rd party. The assessee received a lump sum of Rs. 4,30,000/ - as consideration. It was stated to adjustable against monthly rent of Rs. 367.83. Ld. AO assessed the same as capital gain. The same was upheld by the Hon’ble High Court that on the facts and circumstances, construing the sub-lease agreement and holding the deposit of Rs. 4,30,000/- received by the assessee was a consideration for granting sub-lease of the assessee’s rights and not a payment of monthly rent in advance and as such was liable to tax as short term capital gains. In the present case, assessee had made the payment as premium and not received to consider the G. Seetha Kamraj’s case as they are not similar. Hence, we cannot consider G. Seetha Kamraj’s case in the present case as the same is not similar. However, the AR had relied on the various decisions which are presented before the CIT(A). These cases are similar to the present case in particular, the case of DCIT v. Sun Pharmaceuticals India Ltd. 329 ITR 479 (Guj.) are similar to the assessee’s case. It was held by the Hon’ble Gujarat High Court, dismissing the revenue appeal, that the tribunal had found that the land in question was not acquired by the assessee. Merely, because the deed was registered, the transaction in question would not assume a different character. The lease rent was very nominal. By obtaining the land on lease, the capital structure of the assessee did not undergo any change. The assessee only acquired a facility to carry on business profitably by paying nominal lease rent. The lease rent paid by the assessee to GIDC was allowable as revenue expenditure. In the present case, the assessee acquired the land on lease for 33 years, the capital structure did not go any change. The assessee has merely acquired the facility to carry on business profitably by paying nominal lease rent. The lease rent paid by the assessee was allowable as revenue expenditure. By relying on the above judgment, we are inclined to accept the order of CIT(A) and accordingly the grounds raised by the revenue are dismissed. ❉ ❉ ❉ Judicial Analysis 7

112 Ahmedabad Chartered Accountant Journal May, 2024 CA. Kaushik D. Shah [email protected]. Issue: Whether Sec 115BBE is applicable to all the income? 1. Section 115BBE This article aims at highlighting the provisions of Section 115BBE of the Income-tax Act, 1961 (Act), applicable from Asst. Year 2017-18 onwards and some practical concerns surrounding its applicability. 1.1 Certain unexplained cash credit, investment, expenditure, etc., are deemed as income under Section 68, Section 69, Section 69A, Section 69B, Section 69C and Section 69D of the Act and were earlier subject to tax as per the tax rate applicable to the taxpayer. As a consequence, in case of individuals, HUF, etc., no tax was levied up to the basic exemption limit and even if such income was higher than basic exemption limit, it could be levied at the lower slab rate. Section 68 As per section 68, where any sum is found credited in the books of an assessee maintained and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the A.O., the sum so credited may be charged to income tax as the income of the assessee of the relevant previous year. 2. Analysis for better understanding For the sake of better understanding, let us now ponder on the applicability of Section 115BBE of the Act with reference to the provisions of Section 68 of the Act dealing with unexplained cash credit. Section 68 of the Act provides inter alia that. if any sum is found credited in the books of a taxpayer and he either does not offer any explanation about nature and source of such sum, or the explanation offered by him is not satisfactory in the opinion of Assessing Officer; then such sum can be taxed as his income. Consider a scenario where an individual files his return of income, declaring income from tuition fees and avails the tax slab benefit. However, such individual is unable to substantiate the source of such income and the Assessing Officer rejects the explanation, being not properly explained to his satisfaction. Under such circumstances, the Assessing Officer may now be tempted to trigger the provisions of Section 115BBE of the Act read with Section 68 of the Act. This means that such income, though already offered to tax by the taxpayer, would be taxable at flat rate of 60 per cent on gross basis (i.e., without any deduction / allowance), (plus surcharge @ 25% on such tax and cess, as applicable). Thus effectively the rate comes to 77.25 per cent if such income is reflected in the return of income furnished u/s. 139. 3. Some Issues on Section 115BBE Section 68 basically applies to unexplained ‘cash credit’ like loans, deposits, advances, share capital, etc. The point to be considered is whether it will also apply to ‘income’ which is already offered to tax as normal income. If an Assessing Officer rejects taxpayer’s explanation surrounding the head of taxation (say, House Property v. Business Income or Income from other source, Business Income v. Capital Gains), being not to his satisfaction, whether Section 115BBE of the Act can still be triggered, empowering the Assessing Officer to inter alia deny all bona fide expenses / allowances as per Income Tax Act? In such a case, it may be argued that Section Controversies

Ahmedabad Chartered Accountant Journal May, 2024 113 115BBE of the Act is a machinery provision to levy tax on income and it should not enlarge the ambit of Section 68 of the Act to create a deeming fiction to tax any sum already credited / offered as income.. Such recourse is unwarranted, keeping in view the objective of introducing Section 115BBE of the Act, which was only to curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit. b) So far tax laws are concerned, it is difficult to predict the precise stand of the department, but one can take adequate measures to safeguard himself from the possible complications or hindrances that may arise. Such safeguards may be an endeavour to demonstrate substance over form; maintain proper documentation evidencing the nature and source of income, Ensuring that transactions are routed through normal banking channel, which will lend due credence and it will help in proving nature and source of amount and to prove that the transaction is bona fide. Views in favour of Assessee: 2.6 Whether A.O. can make an addition merely on the ground of non-appearance of the creditior/ donor In Atmaram J. Manghimalani (HUF) v. ITO 67 ITD 289 (Mum.): 62 TTJ (Mum.) 357 it had been held that mere non-appearance of the donor, in the absence of any evidence that donated amount represents undisclosed income of the appellant, no addition can be made. Same analogy may apply in case of loan. In Down Town Hospital Pvt. Ltd. [2004] 267 ITR 439 (Gau.), the High Court reviewed the case law on the subject and concluded, where the identity of the shareholders is established, the further requirement as to the source may not be expected, since the burden shifts to the Revenue once the identity is established. The above view has been followed in CIT v. STL Extrusion P. Ltd. [2011] 333 ITR 269 (MP); CIT v. Ambuja Ginning, Pressing & Oil Co. P. Ltd. [2011] 332 ITR 434 (Guj.), CIT v. K..C. Fibres Ltd. [2011] 332 ITR 481 (Del.), CIT v. Dwarkadhish Investment P. Ltd. [2011] 330 ITR 298 (Del.), CIT v. Winstral Controversies Petrochemicals P. Ltd. [2011] 330 ITR 603 (Del.); CIT v. Misra Preservers Pvt. Ltd. [2013] 350 ITR 222 (All.). The Delhi High Court in the case of CIT v. Value Capital Services P. Ltd [2008] 307 ITR 334 (Del.) held that department must show that investment made by subscribers actually emanated from coffers of assessee to be treated as undisclosed income of assessee. A review of the case laws would appear to indicate that the degree of responsibility in respect of share capital on the company may well be less, but it cannot disown the responsibility especially if it is a private company, where the shareholders may ordinarily be expected to be known to the company. The same issue came up before the Madras High Court before a different Bench in CIT . Gobi Textiles Ltd. [2007] 294 ITR 663 (Mad.) where the assessee had on the request of the Assessing Officer produced evidence regarding share capital contributions of more than Rs.1 lakh each. Salary certificates were produced to show their identity as well as capacity to subscribe for the shares. The identity of the shareholders was not in doubt. The Assessing Officer accepted the genuineness of one of the shareholders and added the share capital of nine others. The Commissioner (Appeals) not only confirmed the addition but also sustained the penalty. The Tribunal deleted the addition since the assessee had discharged the onus by the identification and proof as to source, so that the addition could only be taken as made on mere surmise. The finding of the Tribunal being one of fact, the High Court declined to interfere. It incidentally endorsed the reasoning of the Delhi High Court, in Sophia Finance Ltd.’s case [1994] 205 ITR 98 (Del.) for its conclusion, that the addition was not justified, since no enquiry was conducted by the Assessing Officer to discredit the claim of genuineness. The Chhattisgarh High Court in the case of ACIT v. Venkateshwar Ispat P. Ltd. [2009] 319 ITR 393 (Chhattisgarh) held that merely because notice issued to some shareholders was not responded, their share application money cannot be treated as unexplained amount u/s. 68. Where the assessee files the return of income of the share applicants and their loan confirmations,

114 Ahmedabad Chartered Accountant Journal May, 2024 the burden of the assessee stands discharged - CIT v. Jay Dee Securities and Finance Ltd. [2013] 350 TTR 220 (All.). The Delhi High Court in the case of CIT ¢. Orbital Communication (P) Ltd. [2010] 327 ITR 560 (Del.) held that where assessee has established the genuineness of the share transaction and the creditworthiness of the applicant, then mere failure to produce the creditor cannot be a ground for making addition u/s. 68. Also refer CIT v. Samir Bio Tech P. Ltd. [2010] 325 ITR 294 (Del.). However where information was obtained from investigation wing about accommodation entry providers and their modus operandi, and the list contained the name of the assessee to whom entry providers had provided entries, and further summons to such persons were not responded to, in such a case the affidavits filed by assessee after 2 years from entry providers to the effect that transactions were genuine, are of no evidentiary value. There is no duty on assessing officer to prove that monies emanated from coffers of assessee CIT v. Nova Promoters and Finlease (P) Ltd. 342 ITR 169 (Del.) Where a diary containing receipts not recorded in the books of account for a period of 2 months is found, can A.O. presume similar undisclosed receipts for the balance part of the year? In the absence of any other diary or note book for the remaining period, multiplying formula or estimate cannot be applied for the period, for which no omitted receipts were evidenced by slips or notebook or diary - Dr. R.M.L. Mehrotra 68 ITD 288 (Ahm.). Whether credits in rough cash book can be added u/s. 68 Where cash credits are recorded in the rough cash book of the assessee and there is no proper explanation, sec. 68 will apply and the credit amount will be assessable as income of the assessee - Haji Nazir Hussain v. ITO [2004] 271 ITR (AT) 14 (Del). However loose sheets of paper are not books. Central Bureau of Investigation v. V.C. Shukla [1998] 3 SCC 410. Treatment of Cash Credits in the case of Firms: There has been difference of judicial opinion on the issue of Treatment of Cash Credits in the case of Firms. The following cases are relevant - In CIT & Another v. Md. Perwez Ahmad & others [2004] 268 ITR 381(Pat.) - Where the Tribunal after having considered the material on record, had found that section 68 of the I.T. Act, 1961 was not attracted in the case for the reason that in this case credit in the books of account of the assessee firm, was on account of introduction of capital by the partners and the firm had failed to prove the amount credited in the books of account and as such it would be assessed in the hands of the partners as unexplained investments. The High Court held that this was a finding of fact and no substantial question of/ law arose from the order of the Tribunal. Whether A.O. can make addition u/s. 68 without making proper enquiry Section 68 of the Income-tax Act 1961, empowers the Assessing Officer to make enquiry regarding cash credit. If he is satisfied that these entries are not genuine he has every right to add these as income from other sources. But before rejecting the assessee’s explanation, A.O. must make proper enquiries and in the absence of proper enquiries, addition cannot be sustained - Khandelwal Constructions v. CIT 227 ITR 900 (Gau.). The assessee may seek assistance of section 131 of the Act for the purpose of proving its own case. Section 131 empowers the A.O. to exercise the same power as vested in a civil court for compelling attendance of witnesses. Further the assessee has the right to cross-examine. 2.28Right to cross-examine The assessee is also entitled to cross examine any person whose statement has been recorded by the A.O. and such statement is proposed to be used by the Á.Ï. - CIT v. Eastern Commercial Enterprises 210 ITR 103 (Cal.). The assessee had for its part produced the discharged hundis and also vouchers showing payment of interest. That is sufficient for the assessee to discharge its initial burden. It was for Controversies

Ahmedabad Chartered Accountant Journal May, 2024 115 the ITO to have examined the bankers when he wanted to rely on the statements obtained from them. The A.O. ought to have given an opportunity to the assessee to cross-examine them before taking into account the contents of those statements - CIT v. Gani Silk Palace [1988] 171 ITR 373 (Mad.). 3.3 Department also liable to prove the existence of unexplained investment The Allahabad High Court in the case of CIT v. Daya Chand Jain Vaidya [1975] 98 ITR 280 (All.) has held that merely because the assessee’s explanation regarding certain investments made by his wife and sons is not acceptable, the revenue cannot treat the investments as the undisclosed income of the assessee. The revenue should bring on record material from which it could be concluded that the investments were in fact made by the assessee. If this was not done, no amount could be added as the undisclosed income of the assessee. as the 3.5 In couse of search some notings were found indicating that the property = purchased by the assessee might have been purchased at a price higher than the price disclosed by the assessee Notings found during the course of search are only indicative but are not a conclusive evidence of the purchase price. In such a case the AO should conduct suitable enquiries and should make addition on the basis of findings of enquiries conducted by him. Addition made merely on the basis of notings found in the course of search without proper enquiry canno 3.6 Whether additions can be made on the basis of loose sheets and torn papers found in the course of the search? The principle laid down by the Supreme Court and various Tribunals is that as per section 34 of the Evidence Act, 1872 loose sheets of paper are not to be considered as ‘book’ and hence entries made therein are inadmissible as evidence and cannot be relied upon. Additions made merely on the basis of loose sheets and torn papers is not justified and Revenue has to bring some corroborative evidence to show that the loose papers and sheets actually show some transaction and that the assessee has earned income out of it, which is undisclosed from the department. The Revenue can tax only those receipts, which must have been proved to be income in the hands of the recipient, which must have been proved to be income in the hands of the receipient. Reference may be made to the decision of Supreme Court in CBI v. V.C. Shukla 1998 AIR Vol. 3 SC 410, wherein it was held that entries in the loose sheets, may not have any evidentiary value. In following cases the Tribunal have held that merely on the basis of entries in loose sheets there cannot be an addition - S. K. Gupta v. Dy. CIT [1999] 63 TT] 532 (Del), Shri Ram Bhagwandas Raheja v. Asstt. CIT [ITA (S&S) No.118/ Mum/1996, Bench “B”, Order dated 23rd September, 1998]. Ashwani Kumar v. ITO [1992] 42 TTJ (Del.) 644: [1991] 39 ITD 183 (Del.), Kishenchand Shobhrajmal v. Asst. CIT [1992] 42 TTJ (Jp) 423: [1992] 41 ITD 97 (Jp), D.A. Patel v. Dy. CIT [2001] 70 TTJ (Mumbai) 969: [2000] 72 ITD 340 (Mumbai), Satnam Singh Chhabra v. DCIT [2002] 74 TT] (Lucknow) 976. Further Punjab & Haryana High Court in the case of CIT v. Ravi Kumar [2007] 294 ITR 78 (P&H) have held that if assessee claims that loose sheets contains rough calculations, the onus is on the revenue to rebut with material evidence. Therefore, merely loose sheets or diaries found in the course of search, may not be sufficient for the Revenue to prove that the entries represent undisclosed income of the assessee. Further if entries are not in the handwriting of assessee or the Accountant, burden is on the Department to prove, beyond reasonable doubt that the entries represent the undisclosed income of the assessee. 3.13Higher stock declared to the bank 3.1 whether attracts addition u/s. 69 Reversing its earlier decision of Coimbatore Spinning and Weaving Co. Ltd. v. CIT [1974] 95 ITR 375 (Mad.), the Madras High Court in the case of CIT v. N. Swamy [2000] 241 ITR 363 (Mad.) observed that we find it little difficult to agree with the observations made in the case of Coimabatore Spinning & Weaving Co Ltd. v. CIT 95 ITR 375 Controversies

116 Ahmedabad Chartered Accountant Journal May, 2024 (Mad.) that the alleged Th practice said to be followed by business houses of declaring larger stocks to the banks for the purpose of getting higher loans or overdraft facilities has neither been shown to exist nor recognised in commercial circles or by courts, and even assuming that such a practice exists, the Tribunal is not expected to take judicial notice of such sub-standard morality on the part of the assessees so as to enable them to go back on their own sworn statements given to the banks as to the stocks held or hypothecated by them in the banks. It also held that the assessee’s income is to be assessed by the ITO on the basis of the material which is required to be considered for the purpose of assessment and ordinarily not on the basis of the statement which the assessee tmay have given to a third party unless there is material to corroborate that statement of the assessee given to a third party, even if it be a bank. The mere fact that the assessee had made such a statement by itself cannot be treated as having resulted in an irrebuttable presumption against the assessee. The burden of showing that the assessee has undisclosed income is on the revenue. That burden cannot be said to be discharged by merely referring to the statement given by the assessee to a third party in connection with a transaction which was not as directly related to the assessment and making es that the sole foundation for a finding that the hassessee has deliberately suppressed his income. On similar facts it was held in the case of CIT D. Relaxo Footwear [2002] 123 Taxman 322 (Raj.) that where the Tribunal accepted the assessee’s explanation that the stock statement submitted to bank was to make it easier for the assessee to have availed higher credit facility by inflating the stock position to the bank, it was justified in deleting addition on account of the discrepancy 3 betweenthe stock shown in the books of account It and the stock shown in the statement to the bank. The Jammu & Kashmir High Court in the case es of Ashok Kumar v. ITO 201 CTR (J&K) 178: 149 Taxman 479 (J&K) held that where stock shown ft in the books of account is properly verified and or valued as per cost, no addition should be made on account of inflated stock statement furnished s, to the bank. It is immaterial that the difference has arisen on account of higher valuation or on account ofdisclosing higher quantity to the bank - CIT Khan & Sirohi Steel Rolling Mills 200 CTR (All.) Dy 595, Pranab Kumar Dawn v. ITO ITA NO.668/ Kol/2010 dated 30-9-2010. Similar view has also been expressed by the Madras High Court in the case of CIT v. Apcom Computers (P) Ltd. [2007] 158 Taxman 363 (Mad.) 3.14Unexplained stock Where assessee had not maintained stock register and Assessing Officer, on verification of records of assessee, found certain excess stock of bearings, he was justified in making addition on account of that as unexplained investment, since it was obligatory for assessee to maintain stock register so that one was able to ascertain actual position of stock lying with the assessee in which he was trading - Sanjay Son of Dwarkadas Jajoo v. %CIT [2006] 154 Òàxman 101 (MP). Unexplained stock in trade is not covered by section 69 - Addl. CIT v. Danyabhai Pitamberdas & Co. [1974] Taxation 36(1) 25-26 (Guj.). However contrary view has been expressed in Ramanlal Kacharulal Tejmal v. CIT [1984] 146 ITR 368 (Bom.) in which stock declared to bank was in excess. (also refer the decision in the case of Smt. Amiya Bala Paul v. CIT 262 ITR 407 (SC) and provisions of section 142A). 4.2 Recently the Hon’ble ITAT Jaipur Bench in case of DCIT vs. Ramnarayan Biria 482/JP/2015 dated 30.09.2016 in the similar facts held that the excess stock is to be assessed as part of the normal stock and to be taxed under the head income from business. The relevant finding of the ITAT is as under:- “We have heard rival contentions and perused the material available on record. Undisputed facts emerged from the record that at the time of survey excess stock was found. It is also not disputed that the assessee is engaged in the business of jewellery. During the course of survey excess stock valuing Rs. 77,66,887/- was found in respect of gold Controversies

Ahmedabad Chartered Accountant Journal May, 2024 117 and silver jewellery. The Coordinate Bench in the case of Chokshi Hiralal Maganlal vs. DCIT, 131 TTà (Ahd.) 1 has held that in a cases where source of investment/expenditure is clearly identifiable and alleged undisclosed asset has no Independent.. Therefore, the first attempt of the assessing authority should be to find out link of undeclared investment/ expenditure with the known head, give opportunity to the assessee to establish nexus and if it is satisfactorily established then first such investment should be considered as undeclared receipt under that particular head. It is observed that there is no conflict with the decision of Hon’ble Gujarat High Court in the case of Fakir Mohd. Haji Hasan (supra) where investment in an asset or expenditure is not identifiable and no nexus was established then with any head of income and thus was not available for set off against any loss under any other head. Therefore, the Hon’ble Coordinate Bench held that where asset in which undeclared investment is sought to be taxed is not clearly identifiable or does not have independent identity but is integral and inseparable (mixed) part of declared asset, falling under a particular head, then the difference should be treated as undeclared business income explaining the investment. In the present case the excess stock was part of the stock. The revenue has not pointed out that the excess stock has any nexus with any other receipts. Therefore, we do not find any fault with the decision of the Id. CIT (A) directing the AO to treat the surrendered amount as excess stock qua the excess stock found.” the fact is that as per the provisions of sub section (2) of section 115BBE of the Act, which was amended by the Finance Act, 2016 w.e.f. 1.4.2017 which is applicable from the assessment year 2017-18 and subsequent years, there is a bar on set off of loss from A.Y. 2017-18, there is no bar to claim set off of loss up to A.Y. 2016-17. Therefore, even assuming for a moment that the A.O. has applied incorrect provisions of the Act, to tax cash found during the course of search, the assessee can always claim set off of brought forward loss from earlier years up to the assessment year 2016- 17, even if the same has been added under the provisions of sec. 68 to 69D of the Act. Therefore, we are of the view that the assessment order passed by the A.O, is neither erroneous nor prejudicial to the interest of the revenue, as there is no prejudice is caused to the revenue”. There is no specific provision which restrict set off of business losses against income brought to tax under section 69B. Interestingly, both section 69B and section 71 falls under the same chapter VI. In the absence of any provisions in section 71 falling under Chapter-VI which restrict such set off, in the instant case, set off of business losses against income brought to tax under section 69B cannot be denied. As per Madras High Court’s decision, the addition would be set-off against the business loss and the balance addition, if any, would form part of the total income and attract tax. Views Against the Assessee: 2.3 Burden of proof is on the assessee The Supreme Court in the cases of Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) and Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 *(SC) held that the law is well-settled that the onus of proving the source of a sum of money found to have been received by an assessee is on him. Where the nature and source of a receipt, whether it be of money or other property, cannot be satisfactorily explained by the assessee, it is open to the revenue to hold that it is the income of the assessee and no further burden lies on the revenue to show that the income is from any particular source. In the case of Shankar Industries v. CIT [1978] 114 ITR 689 (Cal.), the Calcutta High Court held that it is necessary for the assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof includes proof of the identity of his creditor, the capacity of such creditor to advance the money and lastly of the crec the genuineness of the transaction. Only after the assessee has adduced evidence to establish prima facie the aforesaid, the onus shifts to the department. 2.4 to prove Whether the burden genuineness of transactions as well as creditworthiness of creditor between assessee and creditor and/or creditor and sub-creditor is upon the assessee In Nemi Chand Controversies

118 Ahmedabad Chartered Accountant Journal May, 2024 Kothari v. CIT [2003] 264 ITR 254 (Gau.) the assessee who carried on the business of supply of bamboo had taken loans amounting to 4,35,000 and 5 lakhs during the previous year relevant to the assessment year 1992-93. The amounts were paid by cheques by the creditors to the assessee. The creditors received the said amount by way of loans from their sub-creditors (iii) That by means of cheques. The A.O. declined to treat the loan amount of 4,35,000 as genuine. As regards 5 lakhs he declined to treat the loan amount to the extent of 4,25,000 as genuine. The A.O. added the two amounts to the total income of assessee as income from undisclosed sources. The Tribunal set aside the order passed by the Commissioner (Appeals) and upheld the order of the A.O. on the ground that neither thesub-creditors nor the creditors in question had creditworthiness to advance the said loans. Where a particular business income of the sh tassessee has been estimated and determined, and orly in such a case certain cash credits are found, the als Assessing Officer may be precluded from adding ne the said unexplained cash credit as undisclosed income from the business, the income of which was determined on estimate basis. “But where the unexplained cash credits are not referable to or ,the business income of the assessee which was estimated, the Assessing Officer is not precluded from treating the unexplained cash credit as income from any other source - CIT v. Maditi Rajaiahgari Kistaiah [1979] 120 ITR 294 (AP). In Ramcharitar Ram Harihar Prasad v. CIT [1953] 23 ITR 301 (Pat.) it was held that adding up extra estimated profits as well as the amounts of cash credits was open to authorities only when there was material to show that assessee carried on an independent business apart from the business for which assessment was being made. TRoIn CIT v. Daluram Pannalal Modi [1981] 129 ITR ng 398 (MP) it was held that unless the assessee shshows by adducing satisfactory evidence that m the cash credits were referable to the undisclosed at income of the known or disclosed source, er namely, the business, income from which had al already been estimated, the Tribunal cannot S assume that once the business income was Sestimated, the unexplained cash credit is covered by the income so estimated. The Kerala High Court in the case of Oceanic Products Exporting Co. v. CIT [2000] 241 ITR 497 (Ker.) held that after the enactment of section 68, of the burden is placed on the assessee to prove a credit appearing in its books of account. That burden has to be discharged with positive material. When it is contended that a person has advanced money or had given a loan, it Ja has to be established that the person was not a man of straw and had the capacity to givethe money. A conclusion regarding credit-worthiness or otherwise is essentially one of fact. It does not give rise to a question of law unless it is established that the conclusion was contrary e to the materials on record. Section 68 gives Le statutory recognition to the principle that cash credits which are not satisfactorily explained may be assessed as income. (In this case, cash credits appeared in the names of illiterate and me nomadic fishermen who were not capable of Le lending huge amounts and who were not shown to have owned any assets worth the name, and who also gave different versions during their e examination from what they had given earlier in written statements. The High Court sustained the additions made). ot The Supreme Court in the cases of A. On Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 ot (SC); CIT v. M. Ganapathi Mudaliar [1964] 53 ITR of 623 (SC) held that where the assessee has failed nd to prove satisfactorily the source and nature of a on credit entry in his books, and it is held that the d. relevant amount is the income of the assessee, it is not necessary for the department to locate its of exact source. The Calcutta High Court in the case of CIT v. Precision Finance (P.) Ltd. [1994] 121 CTR (Cal.) õ. 20 held that it is for the assessee to prove the P) R. of the creditors, their creditworthiness and the genuineness of the transactions. Mere furnishing of the particulars is not enough. Where the enquiry of the ITO revealed that either the creditor was not traceable or there was no such Controversies

Ahmedabad Chartered Accountant Journal May, 2024 119 file, the first ingredient as to the identity of the creditor could not be said to tic have been established. If the identity of the 197 creditors has not been established, the question 68, of establishment of the genuineness of the e a transactions or the creditworthiness of the hat creditors does not and could not arise. Summation: In our opinion, the statutory provisions contained in Section 71 was applicable in the present case. By applying the decision in case of Fakir Mohmed Haji Hasan (supra) as explained in case of Radhe Developers Incia Ltd. (supra), the same cannot be declined. In the result, no question of law arises. Tax appeal is, therefore, dismissed.” It is also noted that in latest decision of Hon’ble Gujarat High Court in case of Krishnamegh Yarn Industries (supra) which has been brought to our attention by the Id CIT DR to support his contentions regarding applicability of section 69B, the earlier decision in case of Shilpa Dyeing and Printing Mills has been followed for setting off of losses under section 71 against such income. Further, Gujarat High Court in the case of CIT vs Shilpa Dyeing & Printing Mills (P) Ltd [2013] 39 taxman.com 3 (Gujarat)] on the issue of head or source of income, after considering its judgment in the case of Fakir Mohmed Haji Hasan 247 ITR 290 which was later clarified in the case of DCIT vs Radhe Developers India Ltd 329 ITR 1 held that surrendered income would be income from business only as held by Hon’ble ITAT. Also, in the case of Rajasthan High Court in CIT vs Ram Gopal Manda 359 ITR 389 [has also dismissed theDepartment’s appeal in which the ITAT affirmed Order of CIT (A) holding that income surrendered during survey was assessable as “Business Income” and not “Income from Other Sources” In the case of Shri Bhuvan Goyal vs DCIT ITA No: 1385/ Chd/2019 [on the issue of charging tax at 60% u/s 115BBE, on the issue of income from business transactions declared during search ( for which no documentary evidence was available with assesse) it is held that the AO was not justified in taxing income declared during search separately u/s 69 and charging tax u/s 115BBE when nothing was brought on record to substantiate that the assesse had made separate investment different from the income earned on real estate transactions recorded in pocket diary and found and seized during the course of search. The ITAT directed AO to charge tax at normal rate. In the case of Shri Pawankumar (HUF) and Others vs ITO ITA Nos: 371 to 375/Jodh/2018 the ITAT has followed above referred decision in the case of Shri Lovish Singhal ITA No: 143/Jodh/2018 and held that section 115BBEcannot be applied by invoking section 69 in respect of amounts surrendered during the course of survey since income was declared as income from business Further, the matter could be looked at from another perspective. The provisions relating to set off of losses are contained in Chapter-VI relating to aggregation of income and set off of losses. Whenever legislature desires to restrict set-off of loss or allowance of loss, in a particular manner, usually, the provisions are made in Chapter-VI such as non-allowance of business loss against salary income as provided in section 71(2A), and treatment of short- term or long-term capital losses. There is no specific provision which restrict set off of business losses against income brought to tax under section 69B. Interestingly, both section 69B and section 71 falls under the same chapter VI. In the absence of any provisions in section 71 falling under Chapter-VI which restrict such set off, in the instant case, set off of business losses against income brought to tax under section 69B cannot be denied. Furthermore also as per Madras High Court’s decision, the addition would be set-off against the business loss and the balance addition, if any, would form part of the total income and attract tax. Therefore, we are of the opinion that the CIT (Appeals) as well as the ITAT have committed error in refusing giving set off to the assessee under Section 71 of the act and accordingly, we allow these appeals by setting aside the order dated 28.02.2005 passed by the Income Tax Appellate Tribunal (the ITAT) and order dated 07.07.2014 passed by the Commissioner of Income Tax (Appeals) Ahmedabad [the CIT (Appeals)].” ❉ ❉ ❉ Controversies

120 Ahmedabad Chartered Accountant Journal May, 2024 Withholding on guarantee commission payment – Ambiguity persists (Part 2) 1. Background : - In Part 1 of our article, we understood about (i) basics of financial guarantee; (ii) ambiguity regarding its classification as “interest”; and (iii) withholding implications under domestic provisions of the Income-tax Act, 1961 (the Act). - In this part (Part 2), we shall understand about persisting ambiguity in respect of withholding tax implications on guarantee commission payments made to non-residents. Just to clarify, in this article, we are specifically concerned with a case where non-resident has provided guarantee to foreign bank / foreign financial lender and consequently, the Indian company makes payment of guarantee commission to nonresident. - For benefit of all, a quick summary of key steps pertaining to claiming of tax treaty is encapsulated under : o Step 1–For claiming treaty benefits, it is essential that non-resident payee provides tax residency certificate (TRC) to the payer. If the TRC does not contain the prescribed details than the payer shall also obtain Form 10F (electronic filing required) from the payee. o Step 2 – Determine whether the non-resident is eligible to claim the benefit of tax treaty (i.e., whether the non-resident qualifies as “person” and “resident” of the contracting state). o Step 3–Once the access to treaty is granted, it is relevant to determine the relevant article under the tax treaty under which the “income” of the non-resident shall be categorised. o Step 4–The tax treatment prescribed under the relevant article of the tax treaty shall be applied for determining withholding tax implications in respect of remittances to be made to non-resident and taxes are withheld from the remittances to be made to nonresident. Note : For the purpose of this article we assume that step 1 and step 2 is duly complied with i.e., the non-resident payee has provided relevant documents for claiming treaty benefit and the nonresident is eligible to claim treaty benefit - The most important step (after step 1 and step 2) while discharging the withholding obligations is to determine the relevant article of the tax treaty under which the non-resident is eligible to claim treaty benefit. - With regard to guarantee commission payments, guarantee payments are likely to fall under any one of the below article of the tax treaty : (a) “Interest” – If the guarantee payments falls under “interest” article of the tax treaty, then such payments are, generally, taxable at the gross rates provided under the tax treaty. (b) “Business Profits” – If the guarantee payments falls under “business profits” article of the tax treaty, then such payments would be taxable in India only if the non-resident has permanent establishment (PE) in India. If the non-resident payee has PE in India and such guarantee commission income is attributable to such PE, then it would be taxable as per the rates appliable to non-residents (i.e., 40% plus surcharge and cess). FEMA & International Taxation CA. Dhinal A. Shah [email protected] CA. Hardik Khatri [email protected]

Ahmedabad Chartered Accountant Journal May, 2024 121 (c) “Other Income” – If the guarantee payments falls under “Other Income” article of the tax treaty, then the taxability depends upon the scope of other income article (sometime such payment may be taxable in India and sometimes such payments may be taxable in the country of residence of non-resident only). However, if such payments are made taxable in India, the rate of tax would be 40% (plus applicable surcharge and cess). - The question arises at to which of the above article is the most appropriate categorisation for applying treaty benefits in respect of guarantee commission payment so that withholding can be undertaken at a correct tax rate. - In the light of above background, we shall now commence our discussion with regard to prevailing ambiguity in respect of guarantee commission payments to be made to non-resident. 2. Withholding tax implications in respect of payment of guarantee commission to nonresidents : 2.1 Whether guarantee income can be said to have been accrued or arisen or deemed to have been accrued or arise in India : - Before we jump on to the discussion as to the appropriate categorisation of “guarantee commission” under the tax treaty, one important aspect which needs to be analysed is whether the guarantee commission income can be said to be accrued or arisen in India. - As per section 4 of the Act, tax shall be charged in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of the Act in respect of the total income of the previous year of every person. Section 5(2) provides that the total income of any previous year of a person who is a non-resident shall include all income from whatever source derived which is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India during such year. - Interestingly, Hon’ble Mumbai Tribunal has dealt with the issue in the case of Capgemini S.A. vs. ADIT (ITA No.7198/Mum/2012). In this case, Capgemini S.A. has given corporate guarantee to French Bank on behalf of various worldwide subsidiaries. Two Indian subsidiaries were sanctioned credit facilities by Indian Branches of BNP Paribas for which Capgemini S.A. charged guarantee commission. In this case, Hon’ble Mumbai ITAT concluded that guarantee commission cannot be said to be accrued or arisen in India. - The said question also came up before Hon’ble Delhi Tribunal in the case of Johnson Matthey Public Ltd. (ITA No. 1143 / Del / 2016). The judgment of Capgemini S.A. (supra) was relied upon by the taxpayer in support of argument that the taxpayer was not required to withhold taxes. However, Hon’ble Delhi Tribunal dismissing the said argument of the taxpayer held that it is not the entering of the global corporate agreement outside India that occasions the assessee to charge the guarantee commission, but it is the act of the subsidiary in availing the loan that accrues the guarantee commission to the assessee. Since the loan transaction took place in India, it is not open for the assessee to contend that no income accrued to them in India.Further, Hon’ble Tribunal relying on the judgment of Hon’ble Apex Court in Kanchanganga Sea Foods (P.) Ltd. v. CIT (Civil Appeal Nos. 3844 - 3847 and 3849 - 3852 of 2003) held that the non-resident company had received the guarantee commission income in India. The reason for the said conclusion pertaining to “receipt” cannot be clearly understood from the judgment. For charge to arise on receipt basis, the receipt should be in India. While the question regarding the place where a particular item of income was received is a question of fact, the finding on a question of fact can be attacked in a reference of erroneous in law if there is no evidence to support it or if it is perverse. Reference may be made to the judgment of Hon’ble Gujarat High Court in the case of Dalichand Motichand vs. CIT in this regard (ITReference Nos. 3 of 1960 and 8 of 1961). FEMA & International Taxation

122 Ahmedabad Chartered Accountant Journal May, 2024 - Considering the judgments taking contrary views taken by Hon’ble Mumbai Tribunal and Hon’ble Delhi Tribunal, it becomes pertinent to undertake detailed evaluation on this issue and take a conscious call. Further, the observation of Hon’ble Delhi Tribunal stating that the act of raising finance by Indian Company leads to accrual of corporate guarantee in India seems difficult to be rebutted merely on the logic that the agreement was entered outside India and guarantee was given to a nonresident outside India. 2.2 Characterization of “guarantee commission” under tax treaty : - Characterization of corporate guarantee income under the tax treaty remains a contentious issue. Paragraph 3 to Article 11 of OCED Model Tax Convention defines the term ‘interest’ to mean “income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures.” The term designates, in general, income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in profits. In this regard, it is possible to put an argument that guarantee commission is payable in respect of debt-claim (being the loan obtained from the bank). Therefore, such “guarantee commission” may, arguably, be characterised as “interest”. However, Hon’ble Delhi Tribunal in the case of Johnson Matthey Public Ltd. (ITA No. 1143 / Del / 2016) took a contrary view. Hon’ble Delhi Tribunal held that the guarantor is a stranger to the privity of loan transactions since the contract of loan is a different from the contract of guarantee and hence, the expression of “debt claims of any kind” does not stand extended to the payment of guarantee commission. - Classification of guarantee commission under the “Business Profits” seems difficult if the foreign entity is not the business of providing guarantee. The tax authorities are likely to argue that guarantee was provided by the taxpayer is only for the limited purpose of securing loans to its subsidiaries and the recharge income is only an incidental one and hence, cannot be regarded as normal business activities. This view has been upheld by Hon’ble Delhi Tribunal in case of Johnson Matthey Public Ltd. (supra) and also in the case of Lease Plan India Pvt. Ltd.(ITA No. 6461 & 6462 / Del / 2015). Further, various judicial precedents from time to time have held that guarantee commission income cannot be regarded as “fees for technical services” (please refer judgment of Hon’ble Delhi Tribunal in the case of JCDecaux (ITA No. 1630/Del/2015). - Judiciaries seems to classify guarantee commission income is as “Other Income”. Reference can be made on the judgment of Johson Matthey (supra) and Lease Plan (supra). Typically, the “Other Income” article of tax treaty provides for taxability of such income in India if the income “arises” in India. In the judgment of Johnson Mathhey (supra), Hon’ble Tribunal concluded that guarantee commission can be said to have been “accrued” in India. However, Hon’ble Tribunal did not provide its finding as to whether such income can be said to have “arisen” in India. Technically, the term “accrue” and “arise” have different meanings attributed to them. While the “accrue” denotes the idea of growth or accumulation, the term “arise” connotes the idea of crystallization of the former into a definite sum that can be demanded as a matter of right. - Hon’ble Andra Pradesh High Court in the case of CIT vs. K N B Investments (P) Ltd. (ITTA Nos. 80 of 2000 and 14 of 2001) has held that there exists a distinction between the ‘accrual of income’, on the one hand, and ‘arising of income’ on the other. While accrual is almost notional in nature, the other is factual. Further, Hon’ble Supreme Court in the case of E D Sassoon & Co Ltd. vs CIT (Civil Appeal Nos. 3, 30 and 31 of 1953) has stated that while the word ‘arises’ means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. FEMA & International Taxation

Ahmedabad Chartered Accountant Journal May, 2024 123 - Considering the same, if the tax department classify guarantee commission under “Other Income” article of the tax treaty (wherein taxability is provided if the income arises in India), the taxpayers would like to argue that guarantee income is “arisen” on account of guarantee agreement entered into between non-resident entities outside India and relevant formalities have also been undertaken outside India (as per the judgment of Mumbai Tribunal in the case of Capgemini S.A. (supra). Therefore, the guarantee commission is not taxable under “Other Income” article. On the other hand, the tax department would argue that the place where the income has arisen is India since the borrowing has been undertaken by Indian entity which results in guarantee income for the non-resident. The issue being critical as well as fact sensitive requires detailed evaluation. Hope you found this article interesting. 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. ❉ ❉ ❉ FEMA & International Taxation Continued from page 90 Glimpses of Rulings (b) As the agent acts on behalf of the principal, one of the prime elements of the relationship is the exercise of a degree of control by the principal over the conduct of the activities of the agent. This degree of control is less than the control exercised by the master on the servant, and is different from the rights and obligations in case of principal to principal and independent contractor relationship. (c) The task entrusted by the principal to the agent should result in a fiduciary relationship. The fiduciary relationship is the manifestation of consent by one person to another to act on his or her behalf and subject to his or her control, and the reciprocal consent by the other to do so. (d) As the business done by the agent is on the principal’s account, the agent is liable to render accounts thereof to the principal An agent is entitled to remuneration from the principal for the work he performs for the principal. Bharti Cellular Ltd v ACIT And Another (2024) (462 ITR 247) (SC). ❉ ❉ ❉

124 Ahmedabad Chartered Accountant Journal May, 2024 Unauthorised foreign exchange transactions The Reserve Bank of India (RBI) has come across instances of unauthorised entities offering foreign exchange (forex) trading facilities to Indian residents with promises of disproportionate/exorbitant returns. On investigation, it has been observed that to facilitate unauthorised forex trading, these entities have taken recourse to engaging local agents who open accounts at different bank branches for collecting money towards margin, investment, charges, etc. These accounts are opened in the name of individuals, proprietary concerns, trading firms etc. and the transactions in such accounts are not found to be commensurate with the stated purpose for opening the account in several cases. It is also observed that these entities are providing options to residents to remit/deposit funds in Rupees for undertaking unauthorised forex transactions using domestic payment systems like online transfers, payment gateways, etc. In this context, attention of Authorised Dealer CategoryI (AD Cat-I) banks is invited to: a. Section 3 (a) of the Foreign Exchange Management Act (FEMA), 1999, in terms of which, no person shall deal in or transfer any foreign exchange or foreign security to any person not being an ‘Authorised Person’, unless under general or special permission of the Reserve Bank; b. Regulation 4 read with Schedule I of the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 (Notification No. FEMA 25/2000-RB dated May 3, 2000), as amended from time to time, in terms of which, a person, whether resident in India or resident outside India, may enter into a foreign exchange derivative contract with an authorised dealer or on recognised exchanges, only; c. Para 3 (1) of the Electronic Trading Platforms (Reserve Bank) Directions, 2018 dated October 05, 2018, in terms of which, no entity shall operate an Electronic Trading Platform (ETP) without obtaining prior authorisation of the Reserve Bank; d. Press releases dated February 03, 2022, September 07, 2022 and February 10, 2023 issued by the Reserve Bank, cautioning against unauthorised forex trading platforms; and e. ‘Alert List’ issued by the Reserve Bank containing names of entities which are neither authorised to deal in forex under FEMA, 1999 nor authorised to operate ETP for forex transactions under the Electronic Trading Platforms (Reserve Bank) Directions, 2018. There is a need for greater vigilance to prevent the misuse of banking channels in facilitating unauthorised forex trading. AD Cat-I banks are, therefore, advised to be more vigilant and exercise greater caution in this regard. As and when AD Cat-I banks come across an account being used to facilitate unauthorised forex trading, they shall report the same to the Directorate of Enforcement, Government of India, for further action, as deemed fit. AD Cat-I banks may bring the contents of this circular to the notice of their constituents and customers concerned. AD Cat-I banks may advise their customers to deal in forex only with ‘Authorised Persons’ and on ‘authorised ETPs’ and give wide publicity to the list of ‘Authorised Persons’ and the list of ‘authorised ETPs’ available on the RBI website. AD Cat-I banks are also advised to give publicity to the ‘Alert List’ and Press Releases issued by the RBI in this regard. 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: A.P. (DIR Series) Circular No.02 dated April 24, 2024 For full text refer: https://website.rbi.org.in/documents/ 87730/39710850/ A.P.+%28DIR+Series%29+Circular+No.02.pdf CA. Dr. Savan R. Godiawala [email protected] 3 FEMA Updates