Ahmedabad Chartered Accountant Journal December, 2023 537 Volume : 47 Part : 09 December, 2023 E-mail : [email protected] Website : www.caa-ahm.org Ahmedabad Chartered Accountant Journal In this Issue Contents Author's Name Page No. - caaahmedabad Journal Committee Shah Rajni Mangaldas Kataria Ashok Chhugamal Shah Karan Dhirenbhai Sheth Prakash Bharatkumar Chairman Convener E. C. Representative Past President Members Shah Rutvij Pankajkumar Desai Maulik Sharadbhai Choksi Nirav Rameshbhai Shah Jignesh Jaswantlal Shah Monish Suketu Shah Rushabh Mayank - Art of Giving Miss Riya Riken Patel 539 Editorial CA. Rajni M. Shah 540 From the President CA. Shivang Chokshi 541 Articles IIT Big Data Unleashed : The Unprecedented Surge in GST Notices CA. Yash Shah 542 Loans and Investments by Company CA. Kaushik Patel & 545 CS Drishti Kshatriya CBDT instruction post Abhisar Buildwell Pvt Ltd (SC) - Is it well built ? CA. Jayraj P. Dhakan 553 Direct Taxes Glimpses of Supreme Court Rulings Adv. Samir N. Divatia 559 From the Courts CA. Jayesh Sharedalal 561 Tribunal News CA. Yogesh G. Shah & 566 CA. Aparna Parelkar Unreported Judgements CA. Sanjay R. Shah 572 Judicial Analysis Advocate Tushar Hemani 573 Controversies CA. Kaushik D. Shah 578 FEMA & International Taxation FEMA & International Taxation CA. Dhinal A. Shah & 580 CA. Hardik Khatri FEMA Updates CA. Dr. Savan R. Godiawala 583 Indirect Taxes GST and VAT Judgments and Updates CA. Bihari B. Shah & 584 CA. Vishrut R. Shah Advance Ruling under GST CA. Monish S. Shah 586 Corporate Law & Others Corporate Law Update CA. Naveen Mandovara 593 GujRERA Corner CA. Manan Doshi 595 Capital Markets CA. Karan P. Vora 597 From Published Accounts CA. Pamil H. Shah 602 From the Government CA. Ashwin H. Shah & 605 CA. Kunal A. Shah IT Corner CA. Darshil Surana 606 Association News CA. Mayur H. Modha & 609 CA. Prakash B. Nandola ACAJ Crossword Contest 612
538 Ahmedabad Chartered Accountant Journal December, 2023 Attention Members / Subscribers / Authors / Contributors 1. Journals are carefully posted. If not received, you are requested to write to the Association's Office within one month. A copy of the Journal would be sent, if extra copies are available. 2. You are requested to intimate change of address to the Association's Office. 3. Subscription for the financial year 2023-24 is ` 1500/-, single copy ` 150/- (if available). 4. Please mention your membership number in all your correspondence. 5. While sending Articles for this Journal, please confirm that the same are not published / not even meant for publishing elsewhere. No correspondence will be made in respect of Articles not accepted for publication, nor will they be sent back. 6. The opinions, views, statements, results published in this Journal are of the respective authors / contributors and Chartered Accountants Association, Ahmedabad is neither responsible for the same nor does it necessarily concur with the authors / contributors. 7. Life Membership/Annual Membership and Other Fees F. Y. 2023-24 Amount in ` Basic GST Total 1. Admission Fees 500 90 590 2. Annual Membership Fees a. If Paid Prior to june 30 of each financial year : i. In case of membership (of ICAI) for a period of less than or equal to five years 600 - 600 ii. In case of membership of (ICAI) for a period more than five years, 750 - 750 b. If paid after june 30 of each financial year : i. In case of membership (of ICAI) for a period of less than or equal to five years, 720 - 720 ii. In case of membership of (ICAI) for a period of more than five years 900 - 900 3. Life Membership Fees i. In case of membership (of ICAI) for a period of less than or equal to five years 4000 720 4720 ii. In case of membership of (ICAI) for a period more than five years 7500 1350 8850 4. Brain Trust Membership Fees a. Individual Membership Fees i. In case of membership (of ICAI) for a period of less than or equal to five years 800 144 944 ii. In case of membership of (ICAI) for a period more than five years 1200 216 1416 b. Flexi Firm/Corporate Membership Fees*** 2400 432 2832 *** Registered Firm/Corporate can nominate any two participants from their firm for each Brain Trust Meeting. Additional Representatives can be nominated @1200/- plus GST per participant subject to maximum of 20 participant per firm Published By CA. Rajni M. Shah, on behalf of Chartered Accountants Association, Ahmedabad, 2nd Floor, Darshak, 14/A, Swastik Society, Opp. Shrey Hospital, Navrangpura, Ahmedabad - 380 009 Phone : +91 79 40392596 While every effort has been made to ensure accuracy of information contained in this Journal, the Publisher is not responsible for any error that may have arisen. Professional Awards The best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law and Auditing' and 'Allied Laws and Others' will be awarded the Trophies/ Certificates of Appreciation after being vetted by experts in the profession. Articles and reading literatures are invited from members as well as from other professional colleagues. Printed : Pratiksha Printer, Ahmedabad Mobile : 98252 62512 E-mail : [email protected]
Ahmedabad Chartered Accountant Journal December, 2023 539 Giving is a boon- more to the giver than the receiver. Back to days when I was in grade 12, I was waiting on a street for someone special with a pastry in my hands. The person I was expecting to meet texted me that he would take some time in appearing. So, there I was, standing with that pastry in the middle of a busy street of Ahmedabad, trying to observe as many people as I could, from those who happened to pass by. After a while, my attention was caught by a boy walking behind his mother. Their appearance said that they were poor and probably homeless. May be like one of those labourers who live on the footpaths. I wondered ‘what would I do with a life like that.’ This boy was following his mother’s footsteps and carrying a typical, steel made, 4 storeyed tiffin. Much likely for children of his age to do so, he was swaying the tiffin in a circular movement. At a point of time, the centripetal force dominated the tiffin and the boxes fell open on the road. He silently wished that his mother should not see this, else she would be mad at him. However, it was obvious for the lady to notice the fallen boxes and the wasted food. The little kid started crying before his mom could react. Next moment, the lady was beating him. I don’t think any of us can even imagine the importance of food in their life. I gave the pastry in my hand to that little boy- that was the least I could do at that moment. The boy and his mother managed to smile a bit and walked away. The little boy continued looking at me till they reached the Art of Giving Miss Riya Riken Patel [email protected] end of the street, till he could see me no more. I was left behind empty handed and full hearted. The whole scene revolved in my mind till I slept that day. I thank God that in this relation of giving and taking, I fortunately happened to be a giver. It is rightly said that the size of a life is measured not by its duration but by its donation. I have had pastries before but none of it is as sweet as the joy of giving. Our urge to provide makes us humanly. Our urge to provide is our motivation.If everyone thinks positively in their lives to share whatever they possess which is not in use in their daily lives and gives to those in need, I am sure many of the problems will get eradicated. Bridging the gap between the Haves and the Have nots seems to be the ultimate solution to many problems. Provide not just things but time, support, advice. Give not just food but happiness to not just our children but all the fellow beings with whom we share this globe. And I bet that with ±„é{ñ±ÜUéÅæéÏ}¢ in our sub conscious mind, the world will be a better place to live on. ❉ ❉ ❉
540 Ahmedabad Chartered Accountant Journal December, 2023 Are you still bullish ? Are you still bullish?..A question that is being asked everywhere right from road side tea stalls to conference rooms. Over the last few months, the equity markets in our country have witnessed a great upside with the bulls having it there way, all thanks to the latest election results which has attracted the trust and confidence of the investors in general. The victory in three states which acted as a semi final before the final in May 2024 has given an expectation of yet another stable government at the center in the forthcoming general elections. Apart from the election victory, there have been several other factors as well which have contributed in this rally some of them being the cleaning up of the books of the Public Sector Banks and bright future of PSU companies. As far as the economy is concerned, the claims of the opposition that the unemployment has increased wide spread and that inflation is soaring high have become nothing but “Moye Moye” moments for them. The public at large has witnessed substantial growth and development in the last decade. A comparision of the unemployment figures and inflation on a decade wise basis would go on to show that the situation has improved as compared to the decade before 2014. It is a fact that both unemployment and inflation have been in existence since independence and will probably remain in existence for decades to come but what is important is the improvement in these numbers. As they say, Rome was not built in a day and therefore it is of paramount significance that we are moving in the right direction as a country. The recent GDP figures with the growth at 7.6% also quite suggest that the day is not far when we shall achieve the magical dream figure of 5 Trillion Dollar economy to only be the third country in the world to achieve the same. The sharp upside rise underlines the fact that economic growth has come on the back of robust economic demand. All this put together have helped the Sensex to breach the 70,000 mark and continue to hold the same. However, the past experience teaches us that though the markets have adopted an upward trend, it is not going to flow in a single direction. It is therefore significantly important for the investors to choose Need over Greed and thereby cultivate the art of selling in the stock market. Investors need to take informed decisions rather than emotionally dealing based solely on FOMO and whatsapp suggested tips. This will help them to celebrate the earnings rather than watching their portfolio increase only in numbers and then wiping off all the gains in a short time like a house of cards. Investors have all the reasons to be BULLISH. ❉ ❉ ❉ CA. Rajni M. Shah Editorial [email protected]
Ahmedabad Chartered Accountant Journal December, 2023 541 Respected Members I am writing this message on the last day of 2023. As the calendar year has come to an end, I wish you all an amazing 2024 with good health, wealth and happiness. The month of December has been an eventful month in form of study and sports. We organised a cricket match on December 9th 2023 between President XI and Secretary XI at H L College of Commerce Cricket Ground. The event saw great participation of almost 30 members and each team was equally divided. The teams played 25 overs each on season ball wherein the President XI won by 47 runs. The primary reason for organising such sporting events is for camaraderie amongst members but when your team wins convincingly, it is even better! December is a very important month for CAA as it celebrates its foundation day which is on December 15th. The association completed 72 years of its existence and we organised a half day seminar at Hotel Crown Plaza on 16.12.2023 which was attended by over 100 people. The event was one of a kind with faculties like Senior Adv. Tushar Hemani and Adv. Uchit Sheth who imparted their knowledge on litigation issues in field of Income Tax and GST respectively. Post lunch we had an interesting session on Equtiy Market and Investments in which we had panel consisting of Janki Patel from Kunvarji, Prit Nagar sheth an Educationist and Investor and our very own Past President CA Yamal Vyas. It is interesting to note that the Sensex soared from 50k to 60k in 158 days in 2021 and from 60k to 70k in 2023 in 551 days. The DII inflows contributed to 523k crores whereas the FII had negative contribution. This goes to show the self-reliance of our country in Equity. In 2023 itself Gujarat added 11.3 lakhs new demat accounts. USA has kept federal interest rates on hold looking at the ease in inflation but there is a rate cut due next year. This could mean more money would enter the robust Indian economy. Role of CA in helping their client’s make the right choice of investments in growing their wealth has also increased manifold. With 54 reports, 2023 has been the busiest year for SEBI. This shows that even though market regulators have been vigilant, there is investor optimism which not only helps in wealth creation but also wealth management. This has opened up a whole new sector for us as CA to be consultants in investment advising. The infrastructure of India is also progressing at a rampant space with multiple projects coming in Renewable Energy, Semi-Conductor production, EVs, Real Estate, Auto and Healthcare. There is tremendous potential for work in catering to these areas of business in forms of subsidy, financing the projects, government liaison etc. The government is also coming up with many projects in field of tourism by reviving heritage properties. There is immense potential of consultancy in this line of work which is niche and yet related to the core services which can be provided by a CA firm. There are multiple programs in upcoming months for professional development of the members. In January we have planned a seminar on mergers and acquisition, non-resident taxation and a conference is planned at Nepal from 8-12 January 2024 with ICAI Ahmedabad Branch. It is the first time that we will be having guests from the Institute of Chartered Accountants of another country. We look forward to some of the best times in the Land of Himalayas. ❉ ❉ ❉ From the President From the President From the President CA. Shivang Chokshi [email protected]
542 Ahmedabad Chartered Accountant Journal December, 2023 Introduction In the intricate dance between taxpayers and the tax authorities under the GST regime in India, the spotlight recently shifted to a dramatic deluge of Show Cause Notices (SCNs), akin to a wave crashing upon the shores of financial accountability, inundated businesses across the nation. These notices, like musical notes in a complex composition, demanded attention, requiring taxpayers to step into the limelight and explain the nuances of their financial performances.In September 2023, the government sent out a ton of notices to businesses, kind of like a flood of letters asking them to explain their finances& tax positions. These notices were serious and required businesses to come forward and talk. The idea of sending these notices is not new.It is a time-tested principle of natural justice (audialterampartem meaning ‘let the other side be heard’) and that no person can be adjudged guilty without being allowed to answer charges against such person. Now, let’s talk about why this happened in September 2023. So, basically the government introduced a new computer system (IIT Big Data) to automatically generate these notices, and they went out like a storm to businesses all over the country. It felt like the officers weren’t really paying attention and were blindly following this unique situation without looking at the actual discrepancies. The May/Shall Dispute u/s 73 of the CGST Act, 2017 Section 73(1) dwelnes/delves into the determination of taxes unpaid, short-paid, refunds erroneously received, or input tax credit wrongly availed or utilized, excluding instances of fraud or willful misstatement or suppression of facts. In such cases, the Proper Officer is mandated to issue a notice to the concerned person, prompting them to explain why they shouldn’t pay the specified amount, inclusive of interest under section IIT Big Data Unleashed : The Unprecedented Surge in GST Notices CA. Yash Shah [email protected] 50 and a penalty as per the Act.Rule 142(1)(a) of the CGST Rules, 2017 supplements this by obliging the Proper Officer to electronically serve a summary in Form GST DRC-01 alongside the notice issued under Section 73 of the CGST Act, 2017. A significant twist in the narrative arises with Rule 142(1A), introduced through Notification No. 49/2019 on 9th Oct 2019. This rule initially mandated that the Proper Officer must communicate tax, interest, and penalty details ascertained before serving a notice under section 73(1) or section 74(1). However, a subsequent amendment via Notification No.79/2020 dated 15th Oct 2020 replaced the word “shall” with “may.” The crux of the matter lies in the question of whether this change renders the rule optional or maintains its mandatory nature. The ambiguity arising from the shift in language adds a layer of complexity to the compliance landscape. The Limit According to Section 73(2) of the CGST Act, 2017, the proper officer is mandated to issue a show cause notice (SCN) at least three months before the deadline specified in Section 73(10). As per Section 73(10), the proper officer must pass an order under subsection (9) of Section 73 within three years from the due date of filing the annual return for the relevant financial year or within three years from the date of an erroneously claimed refund, considering any representations. It is noteworthy that the due date for filing the annual return for FY 2017-18 was extended to 5th and 7th February 2020, as outlined in Notification No. 06/2020- Central Tax. Consequently, based on the statutory provisions, the last date for issuing the order under Section 73(10) could have been 5th or 7th February 2023.
Ahmedabad Chartered Accountant Journal December, 2023 543 However, a subsequent development altered this timeline. Through Notification No. 13/2022-Central Tax dated 5th July 2022, the time limit for issuing the order under Section 73(10) was further extended up to 30th September 2023. This extension grants additional time for due diligence, consideration of representations, and the fair adjudication of cases related to unpaid or short-paid taxes or wrongly availed or utilized input tax credits, aligning with the principles of procedural fairness and compliance within the GST framework. Further, CBIC, through powers conferred by Section 168A of the CGST Act, 2017, issued Notification No. 09/2023-Central Tax dated 31st March 2023 and extended the timelimit for issuance of Show Cause Notices and passing Orders under Section 73 of the CGST Act as under: Financial Revised Time Revised Time Year Limit for Issuance Limit for of Show Cause Issuance Notice of Order 2017-18 30th September 31st December 2023 2023 2018-19 31st December 2023 31st March 2024 2019-20 31st March 2023 30th June 2024 As these timelines were approaching fast department issued notices in haste, being in the final days of the extended time limit for notice issuance. These notices are issued without proper relied-upon documents or findings being communicated to the taxpayers and appear to be based on mere autopopulated numbers which may not be reliable in most notices. Issues Early on, technical issues on the GST portal posed obstacles for businesses and taxpayers, leading to complications in meeting tax obligations and errors in GST returns. Despite the government’s assurance of leniency for genuine mistakes during the initial implementation, the Tax Department has initiated inquiries and issued numerous notices related to the financial year 2017-18. These notices span various issues, including alleged shortfalls, reversals of input tax credit due to form mismatches, and output GST liability. Notably, the challenges of this tax reform journey, where each notice unfolds like a chapter in a legal thriller, exploring the complexities faced by taxpayers in the evolving GST landscape. Some of the issues are as follows: - GSTR-9 Discrepancies: Notices are issued based on GSTR-9 filed for FY 2017-18, overlooking corrections made in GSTR9/9C and DRC-03 filings. The oversight in considering rectifications raises concerns about the accuracy of the notices. The annual return is always considered as a change maker return or correction adopter return where taxpayer can go and file the annual return which is different from monthly returns and pay the appropriate differential duties along with interest to avoid the future risk of litigation. Even though that additional payment being made, still the department had not looked upon that and issued the notices carrying the difference again. - ASMTProceedings Oversight: In cases where ASMT 10 notices are issued, the response filed in ASMT 11 and the subsequent order in ASMT 12 are often disregarded. The lack of integration in considering filed responses and orders raises questions about procedural adherence. ASMT-12 is considered to be a closure to a particular deliberation on the issue being settled in terms of revenue as well as on the basis of submissions being made by the taxpayer, still after the issuance of such order, again notices have come in nature of non-compliance of provisions which is totally against the intention of the legislature to do so. - Incomplete ASMT Proceedings: Notices are issued even when ASMT-10 notices receive replies in ASMT-11, but the proceedings are not concluded (ASMT-12 order pending). The issuance of notices without acknowledging ongoing proceedings under Section 61 of the CGST Act raises procedural concerns. The matters which are already in progress have been ignored and fresh starting of the proceeding have been initiated, duplicating the efforts at both the ends to suffer at the paucity of time which businesses usually face and complain about. IIT Big Data Unleashed : The Unprecedented Surge in GST Notices
544 Ahmedabad Chartered Accountant Journal December, 2023 - DRC-01 Challenges: DRC-01 notices, issued under Section 17(5) of CGST/SGST, exhibit shortcomings by not considering specific exclusions outlined in Section 17(5). Notices based solely on HSN codes in GSTR-2A, irrespective of taxpayer credit actions and irrespective of the nature of business of the taxpayer, highlight a lack of nuanced understanding. The ad hoc nature of reversals as canvased in the notices which are without at legal parameters in place, bringing on the nature of levy absenting the reason behind such reversal requirement, creates an atmosphere of distrust amongst the trade community, also the rules pertaining to reversals under Rule 42 & 43 seems weird and without any legal backing. - GSTR 3B vs. Table 8A of GSTR 9 Discrepancies: Notices are consistently issued based on differences in ITC between GSTR 3B and Table 8A GSTR 9, disregarding the unavailability and inapplicability of GSTR 2A for FY 2017-18. Ignoring the conditions stipulated in Section 16(2) during this period raises concerns about the accuracy and fairness of the notices. The mechanism the match the credit as reflected by the vendor has come w.e.f 9th October 2019, still the government expects the taxpayer to match the same thing even for financial year 2017-18 without having that option available with the taxpayer, which shows the sheer intent of the government for wrong method & approach of collection of taxes. - No proper Officer: The notices which are being issued on the last dates of ending in a month which has put restrictions on the authority to generate fresh notice, have categorically been accepted by authorities to be generated and served by the system which has been developed by software companies. The board has vide various circulars – Circular 03/03/ 2017-GST dated 05th July 2017 & Circular 31/05/ 2018-GST dated 09th February 2018 which gives power to proper officers to issue notices under section 73 and 74 of the Act along with some monetary limits set out, which seems to be missing here, where notices are issued by system technology and has not been designated as proper officer. - Mode of delivery of Notices: The notices which are issued to the taxpayers, has always raised a controversy as to whether they are required to regularly visit the common portal to check whether they have been issued the notice or not, or whether it should get communicated with the media which is in place in terms of electronic media or physical delivery or publication media. It becomes very crucial to see various high court rulings in favor of revenue, claiming uploading of notice on portal, is equivalent to serving the show cause notice, while other high courts, held in against. Guidelines Instruction No. CCT/0707/10/2023 dated 11-10-2023 issued in Gujarat, whichis directed to drop the proceedings in the case which are mentioned above. So, we can expect that suitable arrangements be made to prioritize the disposal of the few categories of cases as explained above by dropping the demand if the above-stated defects/ weaknessesare found as highlighted above. - If an audit has been conducted and the software issues a notice, it will bedismissed. Similarly, if proceedings under section 61 have been completed and the software generates a notice for the same matters, it is necessary to discard the notice concerning the scrutinized matters. - In cases where proceedings under section 70 (summons) had been done and if a notice covering the same matters is issued, it must be dropped to the extent of those matters. - Similarly, if proceedings under section 74 have been completed or are pending, and a notice is issued covering the same subject matter, the notice shall be dropped to the extent of those matters. - In situations where DRC-03 or DRC-07 has already been processed, and a notice covering the same subject matter is issued, the notice should be dropped to the extent of those matters. IIT Big Data Unleashed : The Unprecedented Surge in GST Notices Continued to page 560
Ahmedabad Chartered Accountant Journal December, 2023 545 Preamble: In the Company form of organisation which is governed by Companies Act, 2013 (‘the Act’), it is of utmost importance to know for all the stakeholders where a Company is deploying its funds. Section 185 of the Act is an important provision in order to govern the deployment of funds by the Companies to its Directors or their relatives. This also ensures transparency and avoid any conflict of interest. Another Section 186 of the Act deals with rules and regulations in respect of giving loans, or giving guarantee or security in respect of loans by Company to another body corporate, or acquiring securities of another body corporate and aims at safeguarding the interest of shareholders, creditors and other stakeholders of the Company. At the same time, auditors of the company are required to verify and report on certain matters in their statutory audit report and report under CARO, 2020. In this article, the relevant provisions of the Companies Act, 2013 and Income Tax Act, 1961 as well as Auditors Reporting responsibilities are discussed. Section 185: Loans to directors etc.: Section 295 of the Companies Act, 1956 (Now Section 185 of the Companies Act, 2013) Exempted Private Limited Companies from the purview of Loan to Directors etc. However, under the Companies Act, 2013, the exemption to Private Companies is available subject to certain conditions. Applicability of the Section: Section 185 of the Act is applicable to ALL the Companies except following types of Companies subject to fulfilment of certain conditions: 1. Private Limited Companies: Section 185 shall not apply to a private company, if all the following conditions are satisfied: Loans and Investments by Company CA. Kaushik Patel [email protected] i. in whose share capital no other body corporate has invested any money i.e. there is no Corporate Shareholder; ii. which has borrowing from Banks or Financial Institutions or any Body Corporate less than twice the Paid-up Share Capital or Rs. 50 crore whichever is lower; and iii. Has no default in repayment of such borrowings subsisting at the time of making transactions under this section. [Notification No. 464(E) dated 5th June, 2015.] 2. Nidhi Companies: Section 185 shall not apply, provided the loan is given to a director or his relative in their capacity as members and such transaction is disclosed in the annual accounts by a note. [Notification No. 465(E) dated 5th June, 2015.] 3. Government Companies: Section 185 shall not apply to Government Company in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security under the section. [Notification No. 463(E) dated 5th June, 2015.] Provisions of the Section: Section 185(1) prohibits any direct or indirect, advancement of loan, including any loan represented by a book debt to, or giving any guarantee or providing any security in connection with any loan taken by following: CS Drishti Kshatriya [email protected]
546 Ahmedabad Chartered Accountant Journal December, 2023 Loans and Investments by Company (i) Director of lending Company or its holding Company (ii) Partner of Director of lending Company or its holding Company (iii) Relative (as per Section 2(77) of Companies Act, 2013) of Director of lending Company or its holding Company (iv) Firm in which Director of lending Company or its holding company is partner (v) Firm in which Relative of Director of lending Company or its holding company is partner Illustration: Suppose, X Ltd is the lending company. X Ltd is a subsidiary ofY Ltd, the Holding Company. In such case, following shall be the permissible persons for providing loan/ guarantee/ security: Mr. P (Director of X Ltd)–No Mrs. P (Spouse of Mr. P) – No Mr. Q (Partner of Mr. P)–No Mrs. Q (Spouse of Mr. Q) –Yes Mr. R (Director of Y Ltd) – No Mrs. R (Spouse of Mr. R) –No Mr. S (Partner of Mr. R) –No Mrs. S (Spouse of Mr. S)–Yes PQ & Co. (where Mr. P is a Partner) – No QZ & Co. (where Mr. Q is a Partner) – Yes RS & Co. (where Mr. R is a Partner) – No SW & Co. (where Mr. S is a Partner) – Yes PZ& Co. (where Mrs. P is a Partner) – No Section 185(2) permits any direct or indirect, advancement of loan, including any loan represented by a book debt to, or giving any guarantee or providing any security in connection with any loan taken by any person in whom any of the director of the company is interested i.e.: (i) Private Company of which Director of lending Company is a Director (ii) Private Company of which Director of lending Company is a Member (iii) Any Body corporate in which Director(s) of lending Company are holding not less than 25% of total voting power (iv) Any Body Corporate which is accustomed to act with the directions of Board of Directors of lending Company subject to passing of prior special resolution by the Company where Explanatory Statement shall include full disclosure / particulars and other relevant facts of the loans/ securities/ guarantee and the confirmation that the loans would be utilized by the Borrowing Company for its principal business activities. Illustration for computing voting power in point (iii) above: Mr. A holds 50% Equity shares of ABC Ltd. which in turn is holding 60% Equity shares in DEF Ltd. 20% Equity shares of GHI Ltd. is held by DEF Ltd. Mr. A’s voting power shall be - 50% in ABC Ltd; 50% - 30% in DEF Ltd. [50% * 60%] and - 6% IN GHI Ltd. [50% * 60% * 20%] Accordingly, ABC Ltd and DEF Ltd. shall be the persons in whom director of the company is interested. GHI Ltd. will not be deemed to be the persons in whom director is interested. Exemptions: The restrictions of section 185 shall not apply in following circumstances: (a) loan to a managing or whole-time director as a part of service conditions applicable to all employees; or under a scheme approved by special resolution; or DEF Ltd ABC Ltd GHI Ltd A 60% 20%
Ahmedabad Chartered Accountant Journal December, 2023 547 (b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan; or (c) any loan by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or (d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company. Provided that the loans made under point (c) and (d) above are utilised by the subsidiary company for its principal business activities only. Other provisions: a) Company can advance loan to any other Entity other than mentioned above without complying formalities of Special Resolution subject to provisions of Section 186. b) This Section is not applicable to the Companies which in the ordinary course of its business provide loan however it has to charge interest at a rate not less than Bank rate. c) In the term ‘directly or indirectly’, the Indirect Loan means that the Company shall not give a loan through the agency of one or more intermediaries. [Fredie Ardeshir Mehta (Dr.) v Union of India (1989) 2 CLA 244 (Bom): (1991) 70 Comp Cas 210 (Bom): (1991) 1 Comp LJ 437 (Bom) ] For example, Company A borrows from Company B and gives loan to Company C then it will be considered as indirect loan from Company B to Company C. d) The section 185 is applicable only at the time of granting the loan and any change in circumstances thereafter will not make the section applicable. Thus, Section 185 will not be attracted in respect of a loan given to an employee, who does not fall within the ambit of specified persons as listed above, but who subsequently becomes a member of a Board, because at the time of the loan, no contravention is involved. If the private limited company has given loan/ guarantee or security provided to any of the person, if the loan/guarantee given or security provided was earlier exempted from the provisions of Section 185, it will continue to be exempted. However, it cannot give further loan without complying with the provisions of Section 185. e) The term ‘Accustomed to act’ is not defined in the Companies Act, 2013. However,the concept of Shadow director as used in Section 741(2) of English Companies Act,1985 can be used for understanding the term `Accustomed to act according to the directors or instructions of’. In the judgment in case of Re Hydrodam (Carby) Ltd. 1994 MILLETT J has said: “To establish that a defendant is a shadow director of a company it is necessary to allege and prove: i. Who are the directors of the company, whether de facto or de Jure; ii. That the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so; iii. That those directors acted in accordance with such directions; and iv. That they were accustomed so to act. What is needed is first, a board of Directors claiming & purporting to act as such; and secondly a pattern of behavior in which the board did not exercise any discretion or judgment of its own but acted in accordance with the directions of others.” Thus applying the above principle, it can said that a mere holding subsidiary relationship between two companies will not ipso facto establish that one is accustomed to act according to the direction or instructions of others. Tests laid down by MILLET J in Loans and Investments by Company
548 Ahmedabad Chartered Accountant Journal December, 2023 Re Hydrodam (Carby) Ltd. Case, are Factually satisfied. Penal provisions: If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section, (i) the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees; (ii) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees; and (iii) the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both. Section186: Loan and Investment by Company Section 186 of the Act is in place of Section 372A of the Companies Act, 1956 which had exempted Private Limited Companies. Applicability of the Section: Section 186 is applicable to ALL types of companies including private limited companiesirrespective of their size. Provisions of the Section: As per Section 186(1) of the Act, a company shall, make investment through not more than two layers of investment companies. However, following transactions shall not attract the restriction of layers: (i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country; (ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force. Section 186(2) of the Act provides that a Company may: - lend / provide security/ guarantee to any person, other body corporate or acquire by way of subscription securities of another body corporate only up to 60% of paid-up capital, free reserves and securities premium account OR 100% of free reserves and securities premium account, whichever is more; - lend at the interestrate which must not be lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan. only after passing a resolution at a meeting of the Board of Directors with the consent of all the Directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained. In case, the amount of loan or guarantee or providing security or acquisition of security exceeds the said limit, prior approval by means of Special Resolution passed at a General meeting shall be necessary. It is pertinent to note that the limit includes in aggregate amount of investment, lending & providing securities / guarantee so far made/provided along with amount of proposed Investments, lending & providing securities / guarantee. ‘Free reserves’ would mean those reserves which, as per the latest audited balance sheet, are free for distribution as dividend and shall include balance to the credit of securities premium account but not include share application money. Exemptions: i. Where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement passing a Special resolution on exceeding the Loans and Investments by Company
Ahmedabad Chartered Accountant Journal December, 2023 549 limits prescribed shall not apply provided that the company shall disclose the details of the such loans or guarantee or security or acquisition in the financial statement. ii. Section 186 except for sub-section (1) is not applicable: a) To loan made or guarantee / security provided by Banking Company or Insurance Company or Housing Finance Company in ordinary course of business or Company engaged in business of financing of companies or providing Infrastructural facilities OR acquisition made by NBFC or Investment Company. b) Any investment: · made by an NBFC registered under Chapter IIIB of the Reserve Bank of India Act and whose principal business is acquisition of securities (exemption shall be in respect of its investment and lending activities); · made by a company whose principal business is the acquisition of securities i.e. investment company · made in shares allotted on rights basis by a body corporate pursuant to Section 62(1)(a) of the Companies Act, 2013. Some important points: i. As per the provisions of the Section 186(7) of Act, the Company which is not exempted from the provisions of section 186, as per section 186(11), cannot give interest free loan. ii. No company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting. iii. Every company giving loan or giving a guarantee or providing security or making an acquisition under section 186, shall keep a register in Form MBP-2 which shall be kept at the registered office of the Company and open to inspection at such office. iv. The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security. v. Two layers of investment companies would mean the flow of investment from a holding company to its 2nd step-down subsidiary. However, for computing the number of layers under this rule, one layer which consists of one or more wholly owned subsidiary (WOS) or subsidiaries shall not be taken into account. vi. Investment in Mutual fund and Government securities falls outside purview of Section 186 as the same are not issued by body corporate. Most of the mutual funds are constituted by ‘Trusts’ under Indian Trust Act. Such trusts are not body corporate. vii. The word ‘person’ does not include any individual who is in employment of the Company. Thus, loan to employees is not covered under Section 186. viii. Courts have held in various judgements that credit extended to customers beyond normal credit period may be considered in the nature of loans and hence provisions of the Section may get attracted to such book debts also. Penal provisions: If a company contravenes the provisions of section 186, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twentyfive thousand rupees but which may extend to one lakh rupees. Additional Disclosure in Financial StatementSchedule III to the Companies Act,2023 Loans and Investments by Company
550 Ahmedabad Chartered Accountant Journal December, 2023 As per General Instruction for preparation of Financial Statement of a Company required to comply with AS or Ind AS as per Division I or Division II, respectively of Schedule III to the Companies Act, 2013, the company shall disclose the following: 1. Utilisation of Borrowed funds and share premium A.) Where a company has advanced or loaned or invested funds to any other person or entity, including foreign entities (Intermediaries) that the Intermediary shall: i. directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the company (Ultimate Beneficiaries) or ii. provide any guarantee, security or the like to or on behalf of the Ultimate Beneficiaries, the company shall disclose the following: I. date and amount of fund advanced or loaned or invested in Intermediaries with complete details of each Intermediary. II. date and amount of fund further advanced or loaned or invested by such Intermediaries to other intermediaries or Ultimate Beneficiaries along with complete details of the ultimate beneficiaries. III. date and amount of guarantee, security or the like provided to or on behalf of the Ultimate Beneficiaries. IV. declaration that relevant provisions of the Foreign Exchange Management Act, 1999 (42 of 1999) and the Companies Act has been complied with for such transactions and the transactions are not violative of the Prevention of MoneyLaundering Act, 2002 (15 of 2003). B.) Where a company has received any fund from any person or entity, including foreign entities (Funding Party) with the understanding that the company shall: i. directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (Ultimate Beneficiaries) or ii. provide any guarantee, security or the like to or on behalf of the Ultimate Beneficiaries, the company shall disclose the following: I. date and amount of fund received from Funding parties with complete details of each Funding party. II. date and amount of fund further advanced or loaned or invested in other intermediaries or Ultimate Beneficiaries along with complete details of the other intermediaries’ or ultimate beneficiaries. III. date and amount of guarantee, security or the like provided to or on behalf of the Ultimate Beneficiaries. IV. declaration that relevant provisions of the Foreign Exchange Management Act, 1999 (42 of 1999) and Companies Act has been complied with for such transactions and the transactions are not violative of the Prevention of Money-Laundering Act, 2002 (15 of 2003). 2. Following disclosures shall be made where Loans or Advances in the nature of loans are granted to promoters, directors, KMPs and the related parties (as defined under Companies Act, 2013,) either severally or jointly with any other person, that are: (a) Repayable on Demand; or (b) Without specifying any terms or period of repayment : Current Period Previous Period Type of Amount % of Amount % of Borrower Outstanding Total Outstanding Total Promoters Directors KMPs Related Parties Total Loans and Investments by Company
Ahmedabad Chartered Accountant Journal December, 2023 551 Reporting by Auditor-Section 143(1) of The Companies Act, 2013 : As per Section 143(1)(j) of the Act read along with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, it is the duty of the auditor to report his views and comments on: i.) whether the management has represented that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the company to or in any other person or entity, including foreign entities (“Intermediaries”), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the company (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; ii.) Whether the management has represented, that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been received by the company from any person or entity, including foreign entities (“Funding Parties”), with the understanding, whether recorded in writing or otherwise, that the company shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries Reporting under The Companies (Auditor’s Report) Order, 2020 (CARO, 2020) Every report made by the auditor u/s 143 of The Companies Act, 2013 on the accounts of every company audited by him, to which CAROapplies shall contain the matters specified in paragraphs 3 and 4 of the Order, as the case may be. Accordingly in respect of loans and investments by a company, the auditor is required to report on following points: 1. As per Paragraph 3(iii) Whether during the year the company has made investments in, provided any guarantee or security or granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties, if so: (a) whether during the year the company has provided loans or provided advances in the nature of loans, or stood guarantee, or provided security to any other entity [not applicable to companies whose principal business is to give loans], if so, indicate- (A) the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures and associates. (B) the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to parties other than subsidiaries, joint ventures and associates (b) whether the investments made, guarantees provided, security given and the terms and conditions of the grant of all loans and advances in the nature of loans and guarantees provided are not prejudicial to the company’s interest; (c) in respect of loans and advances in the nature of loans, whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular; (d) if the amount is overdue, state the total amount overdue for more than ninety days, and whether reasonable steps have been taken by the company for recovery of the principal and interest; Loans and Investments by Company
552 Ahmedabad Chartered Accountant Journal December, 2023 (e) whether any loan or advance in the nature of loan granted which has fallen due during the year, has been renewed or extended or fresh loans granted to settle the overdue of existing loans given to the same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by fresh loans and the percentage of the aggregate to the total loans or advances in the nature of loans granted during the year [not applicable to companies whose principal business is to give loans]; (f) whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment, if so, specify the aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters, related parties as defined in clause (76) of section 2 of the Companies Act, 2013; 2. As per Paragraph 3(iv) In respect of loans, investments guarantees and security, whether provision of section 185 and 186 of the Companies Act have been complied with, if not, the details thereof are to be provided. Relevant Provisions of the Income Tax Act, 1961 : As per Section 2(22)(e) of the Income Tax Act, 1961, any payment by way of loans and advances by a closely held company to its shareholders holding not less than 10% of the voting power or to any concern in which such shareholder is a member or a partner, and in which he has a substantial interest shall be considered as deemed dividend, to the extent to which the company in either case possess accumulated profits for the purpose of taxability in the hands of shareholder. Summing up, Optimum utilisation of financial resources of the company is important function of management along with the compliance of the provisions of the Companies Act, 2013 at the same time the implications under Income Tax Act are also required to be considered. For auditors of the company the reporting responsibilities are onerous as they have to give opinion on various matters in connection with loans and investments made by the company as also the compliance of provisions of sections 185 and 186 of the Companies Act,2013. Hence proper understanding of provisions relating to loans and investments by the company by our members in practice or in industries is very important. It should be noted that in case of Companies which are NBFCs engaged in the activities of giving loans or making investments, the provisions of Reserve Bank of India Act and directions issued by the RBI are required to be additionally complied with. ❉ ❉ ❉ Loans and Investments by Company
Ahmedabad Chartered Accountant Journal December, 2023 553 1. Introduction 1.1. Supreme Court (SC) in case of Pr CIT vs Abhisar Buildwell Pvt Ltd (459 ITR 212) held that in absence of incriminating material found during search, the assessment u/s 153A in respect of unabated assessment year cannot be framed. The Supreme Court in turn approved preposition laid down in case of Kabul Chawla (380 ITR 573) and Saumya Construction (387 ITR 529). In this process the SC at para 14(iv) saved power of revenue to issue notice u/s 147. On August 23, 2023 CBDT in exercise of power u/s 119 issued instruction to field authority. In this paper we’ll try to understand legality or otherwise of said instruction in light of applicable legal provision and judicial pronouncement. 2. Ratio decidendi vs Obiter dicta 2.1. It is well settled position of law that what is binding under Article 141 of constitution is ratio decidendi not obiter dicta. To determine what constitute ratio decidendi the important tool is to look at question formulated by court. The issue/question formulated by SC in Abhisar Buildwell for its adjudication is 5. We have heard learned counsel for the respective parties at length. The question which is posed for consideration in the present set of appeals is, as to whether in respect of completed assessments/unabated assessments, whether the jurisdiction of AO to make assessment is confined to incriminating material found during the course of search under section 132 or requisition under section 132A or not, i.e., whether any addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132 A of the Act, 1961 or not. CBDT instruction post Abhisar Buildwell Pvt Ltd (SC) - Is it well built ? CA. Jayraj P. Dhakan [email protected] 2.2. SC affirming the view of high court ultimately held; 11…However, it is required to be noted that as per the second proviso to Section 153A, the assessment or re-assessment, if any, relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search under section 132 or making of requisition under section132A, as the case may be, shall abate. As per sub-section (2) of Section 153A, if any proceeding initiated or any order of assessment or reassessment made under sub-section (1) has been annulled in appeal or any other legal proceeding, then, notwithstanding anything contained in subsection (1) or section 153, the assessment or reassessment relating to any assessment year which has abated under the second proviso to sub-section (1), shall stand revived with effect from the date of receipt of the order of such annulment by the Commissioner. Therefore, the intention of the legislation seems to be that in case of search only the pending assessment / reassessment proceedings shall abate and the AO would assume the jurisdiction to assess or reassess the ‘total income’ for the entire six years period/block assessment period. The intention does not seem to be to re-open the completed/unabated assessments, unless any incriminating material is found with respect to concerned assessment year falling within last six years preceding the search. Therefore, on true interpretation of Section 153A of the Act, 1961, incase of a search under section 132 or requisition under section 132A and during the search any incriminating material is found, even in case of unabated/
554 Ahmedabad Chartered Accountant Journal December, 2023 completed assessment, the AO would have the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material collected during the search and other material which would include income declared in the returns, if any, furnished by the assessee as well as the undisclosed income. However, in case during the search no incriminating material is found, in case of completed/ unabated assessment, the only remedy available to the Revenue would be to initiate the reassessment proceedings under sections 147/48 of the Act, subject to fulfilment of the conditions mentioned in sections 147/148, as in such a situation, the Revenue cannot be left with no remedy. Therefore, even in case of block assessment under section 153A and in case of unabated/completed assessment and in case no incriminating material is found during the search, the power of the Revenue to have the reassessment under sections 147/148 of the Act has to be saved, otherwise the Revenue would be left without remedy. 12. If the submission on behalf of the Revenue that in case of search even where no incriminating material is found during the course of search, even in case of unabated/ completed assessment, the AO can assess or reassess the income/total income taking into consideration the other material is accepted, in that case, there will be two assessment orders, which shall not be permissible under the law. At the cost of repetition, it is observed that the assessment under section 153A of the Act is linked with the search and requisition under sections 132 and 132A of the Act. The object of Section 153A is to bring under tax the undisclosed income which is found during the course of search or pursuant to search or requisition. Therefore, only in a case wherethe undisclosed income is found on the basis of incriminating material, the AO would assume the jurisdiction to assess or reassess the total income for the entire six years block assessment period even in case of completed/unabated assessment. As per the second proviso to Section153A, only pending assessment/reassessment shall stand abated and the AO would assume the jurisdiction with respect to such abated assessments. It does not provide that all completed/unabated assessments shall abate. If the submission on behalf of the Revenue is accepted, in that case, second proviso to section 153A and sub-section (2) of Section 153A would be redundant and/or rewriting the said provisions, which is not permissible under the law. 13. For the reasons stated hereinabove, we are in complete agreement with the view taken by the Delhi High Court in the case of Kabul Chawla (supra) and the Gujarat High Court in the case of Saumya Construction (supra) and the decisions of the other High Courts taking the view that no addition can be made in respect of the completed assessments in absence of any incriminating material. 2.3. The observation of SC ..the power of the Revenue to have the reassessment under sections 147/ 148 of the Act has to be saved, otherwise the Revenue would be left without remedy……However, the completed/unabated assessments can be re-opened by the AO in exercise of powers under sections 147/148 of the Act, subject to fulfilment of the conditions as envisaged/mentioned under sections 147/148 of the Act and those powers are saved cannot be said to be ratio decidendi and is obiter dicta because the question pose before apex court was not on availability of non-availability of reassessment provision when search is conducted. Even in absence of such obiter dicta, the power of revenue to reopen the assessment (to give effect to addition which is not privy to incriminating material) are always saved (subject to fulfilment of jurisdictional condition) and no one can or has dispute over it. CBDT in its instruction 1/2023 at para 1 admitted substantive question CBDT instruction post Abhisar Buildwell Pvt Ltd (SC) - Is it well built ?
Ahmedabad Chartered Accountant Journal December, 2023 555 before SC was the civil appeal pertained to the scope and ambit of section 153A/153C of the Income-tax Act, 1961 3. Instruction 1/2023 3.1. CBDT in order to provide tax certainty to tax payer, in exercise of power of S.119, issued direction to field authority. The direction can be summarized under; A. Completed/unabated assessment - action u/ s 148/147 need to be taken in the situation stated by the Court in the para 14(iv) of the said order in view of section 150 of the Act. These would be governed by new regime i.e 148A. B. The time limit for the issue of notice u/s 148 is dispensed with in view of provisions of Section 150 of the Act. C. The monetary limits (50 lacs) applicable at present would apply while reopening assessment of earlier years. D. Action would be required to be taken under sections 147/148 of the Act read with section 150 of the Act, in cases pending before any appellate authority and depending on the decision, as and when the appellate orders are passed under sections 251, 254, and 260A of the Act. 4. Section 119 4.1. Section 119(1) empowers board to issue instruction for proper administration of act. First proviso divest CBDT to issue instruction which requires any income tax authority (read AO) to make a particular assessment. Discretion to frame or not to frame assessment is exclusive arena of AO. Provision of S.119(2) is bit different as it states CBDT may relax inter alia, provisions of S.147, 148 through instructions. Hence, in so far as instruction relaxes the provision (in favour of assessee) of S.147/148, it can be issued however, the same cannot be issued for directing to make particular assessment. The instruction runs contrary to letter and spirit of S.119 as much as it direct AO to make particular assessment in particular manner. 5. Section 148 5.1. Post 2021, the reopening could either information (risk management strategy, audit objection, order of court) based under explanation 1 or event based (search or survey is conducted) under explanation 2 to S.148. To claim benefit of explanation 2, it is necessary to have search conducted after 01.04.2021 however the search sought to be covered under instruction u/s 148 is conducted prior to 01.04.2021 and accordingly, explanation 2 cannot be invoked and reopening needs to be tested on touchstone of explanation 1 to S.148 more particularly under item information which requires action in consequence of the order of a Tribunal or a Court. 5.2. The phrase in consequence of came for consideration before Allahabad high court in Pt. Hazari Lal vs. ITO (39 ITR 265) wherein it held; ….On this aspect of the case, we have had some difficulty as we have not found that the exact scope and meaning of the expression “in consequence of” has, at any place, been denned or laid down in any decision by the courts. In the dictionary, the expression “in consequence of” has been equated with “as result of” (see A New English Dictionary by Sir James A.H. Murray, Volume II, containing the letter “C”, edited by W.A. Cragie, Henry Bradley and C.T. Onions) or “by reason of” or “as the effect of” (see Webster’s New International Dictionary, Volume I, Second Edition). We have not been able to derive much assistance from these meanings given in the dictionaries. That there is some remote connection between the notice issued under section 34 to the petitioner for the assessment year 1946-47, and the finding of the Appellate Assistant Commissioner that the sum of Rs. 12,800 was not the income for the assessment year 1947-48, cannot be denied. The finding that this sum was not the income for the assessment year 1947-48 can lead to the conclusion that it may be income for some other year, and, amongst those some other years, would be included the assessment year 1946-47. Thus a remote connection between the notice issued under section 34 and the finding recorded by the Appellate Assistant Commissioner of Income-tax CBDT instruction post Abhisar Buildwell Pvt Ltd (SC) - Is it well built ?
556 Ahmedabad Chartered Accountant Journal December, 2023 does exist, but we are unable to accept the view that such a remote connection by itself can satisfy the requirement that the action taken must be “in consequence of” the finding……All that the finding could indicate was that, possibly, if this sum represented income, it had escaped assessment in some year prior to the assessment year 1947- 48. Thus all the main factors, on the basis of which action under section 34(1)(a) of the Income-tax Act could be taken by the Income-tax Officer, had to be found by him quite independently of the finding recorded by the Appellate Assistant Commissioner of Income-tax……The issue of the notice did not automatically or directly follow from the finding which was recorded by the Appellate Assistant Commissioner of Income-tax. In fact, the finding recorded by the Appellate Assistant Commissioner may have been a reason why the Income-tax Officer thereafter started looking for material on the basis of which he could come to believe that the provisions of section 34(1)(a) were applicable to the assessment of the petitioner for the assessment year 1946-47. The actual applicability of section 34(1)(a) to the assessment of the petitioner for the year 1946-47 did not arise as a result of the finding recorded by the Appellate Assistant Commissioner. It appears to us, therefore, that the present notice dated 4th January, 1956, issued to the petitioner cannot be said to be action taken by him in consequence of or to give effect to the finding or direction contained in the order under section 31 passed by the Appellate Assistant Commissioner on 20th July, 1955. It appears to us that an application of these remarks of Collins, M.R., to the expression “in consequence of”, which, as we have said above, has been equated with “as a result of” leads to the same view which we have expressed above. In the present case, there was clearly a break between the finding of the Appellate Assistant Commissioner of Income-tax in respect of one assessment year and the action of the Incometax Officer in issuing the notice under section 34(1)(a) in respect of a different assessment year. The break was that the Income-tax Officer had to rely on entirely new facts, which did not exist in the finding, in order to arrive at the belief which could justify the issue of the notice. These new facts, which he had to take into account for his belief, were, as we have mentioned, the omission or failure on the part of the petitioner to make a full and true disclosure of facts necessary for his assessment, that the sum of Rs. 12,800 was income liable to income-tax, and that this income had been earned in the previous year relevant to the assessment year 1946-47. It was clearly an actual effective break as there was intervention of new facts. The predominant and effective cause for the issue of the notice was based on the independent new facts and not on any belief based on the finding recorded by the Appellate Assistant Commissioner of Income-tax. Consequently, applying the principle laid down by Collins, M.R., it would appear that we must hold that the action of issuing the notice under section 34(1)(a) for the assessment year 1946-47, was not the result of the finding recorded by the Appellate Assistant Commissioner of Income-tax in the appeal in respect of the assessment year 1947-48. Mathew, L.J., in the same case, indicated what he considered was the effect of the word “results”. He said. This remark gives an indication that the action of the Income-tax Officer could be said to be in consequence of the finding if it could be the probable or the natural consequence of it. As we have indicated earlier, the reassessment for the assessment year 1947-48, by the Income-tax Officer vras certainly the probable and the natural consequence of the order of the Appellate Assistant Commissioner but the issue of the notice for the assessment year 1946-47, was not the probable or natural consequence of the finding. It was, in fact, the consequence of independent facts which the Income-tax Officer had reason to believe. In this connection, we may also refer to the remarks of Mr. Justice Channel… …. In the case before us, if the issue of the notice under section 34 for the year 1946-47 could have CBDT instruction post Abhisar Buildwell Pvt Ltd (SC) - Is it well built ?
Ahmedabad Chartered Accountant Journal December, 2023 557 followed the finding of the Appellate Assistant Commissioner without the intervention of any new facts or circumstances and as a result of only those facts and circumstances which themselves directly flowed from the competent finding of the Appellate Assistant Commissioner of Income-tax, it could have been held that the action of issuing the notice was the consequence of the finding of the Appellate Assistant Commissioner. On the other hand, what we find is that the finding of the Appellate Assistant Commissioner of Income-tax was only remotely connected with the issue of the notice inasmuch as it may be held that it was because of that finding that the Income-tax Officer started looking for material to find out in respect of which year he could possibly issue notice under section 34(1)(a) of the Income-tax Act. The issue of the notice itself did not follow the finding or other facts which necessarily arose out of that finding 6. Selective applicability of S.149 6.1. In case where escapement is less than or likely to be less than 50 lacs, the case cannot be reopened as provisions of S.149(1)(b). This threshold found place in CBDT instruction however instruction is silent about applicability of first proviso to S.149(1). The first proviso states that where limitation expired under erstwhile S.148 cannot be reopened under the extended time limit.It appears to be intention of CBDT that while deciding limitation, benefit of first proviso shall not be factored into. On contrary, CBDT took shelter of provision of S.150 to bypass the limitation (even ten years also).In other words the instruction is self-contrary in sense that on hand case below 50 lacs escapement granted immunity in view of provision of S.149(1) and on other hand nongranting benefit of first proviso to S.149(1). 7. Applicability of S.150 7.1. CBDT instruction seeks to derive validity from provision of S.150(1) by branding passing observation of SC as “finding or direction” of court. For S.150(1) to apply the notice must be issued in consequence of or to give effect to any finding or direction and the order A. in question must be passed by any authority in any proceeding under income tax act or B. by a Court in any proceeding under any other law. 7.2. As per prescription of S.116 supreme court is not income tax authorities and hence condition stated at item A above fails and to fall under point B the order through which direction emanates should be proceeding under any other law (i.e other than income tax act). The order passed by apex court in Abhisar Buildwell is related to proceeding under income tax law and cannot be covered under item B above. Hence, provisions of S.150 wrongly invoked by CBDT. Finding 8.1. Assuming that SC order fall within purview of “income tax authority” but then it must satisfy the test of “finding or direction”. The word direction explained by SC in ITO vs. Murlidhar Bhagwan Das (52 ITR 344) as; ….What does the expression ‘finding’ in proviso to sub-section (3) of section 34 of the Act mean? ‘Finding’ has not been defined in the Income-tax Act. Order XX, rule 5, of the Code of Civil Procedure reads: ‘In suits in which issues have been framed, the court shall state its finding or decision, with the reasons therefor, upon each separate issue, unless the finding upon any one or more of the issues is sufficient for the decision of the suit.’ Under this Order, a ‘finding’ is, therefore, a decision on an issue framed in a suit. The second part of the rule shows that such a finding shall be one which by its own force or in combination with findings on other issues should lead to the decision of the suit itself. That is to say, the finding shall be one which is necessary for the disposal of the suit. The scope of the meaning of the expression ‘finding’ is considered by a Division Bench of the Allahabad High Court in Pt. Hazari Lal v. Income-tax Officer, Kanpur [1960] 39 ITR 265 , 272 (All.). There, the learned judges pointed out: CBDT instruction post Abhisar Buildwell Pvt Ltd (SC) - Is it well built ?
558 Ahmedabad Chartered Accountant Journal December, 2023 ‘The word “finding”, interpreted in the sense indicated by us above, will only cover material questions which arise in a particular case for decision by the authority hearing the case or the appeal which, being necessary for passing the final order or giving the final decision in the appeal, has been the subject of controversy between the interested parties or on which the parties concerned have been given a hearing.’ 8.2. Appropriate would be refer observation of Allahabad high court in Pt. Hazari Lal vs ITO (39 ITR 265) wherein it held; …the word “finding” had nowhere been defined in the Income-tax Act, nor had its scope been indicated and we should, in interpreting this word as used in the proviso, take into account the meaning attributed to that word in common use and should not draw any aid from the word as denned or as limited by the provisions of the Code of Civil Procedure. The word “finding” in law has a definite meaning and that is indicated by the provisions of the Code of Civil Procedure where it is indicated that a finding is a decision of a court on material questions in issue. Issues are framed on material questions of fact or law and the decision of the court recorded on such issues has been called a “finding”. We do not think that there is any other wider meaning of the word “finding” in common use which can be applied to this word as used in the proviso to section 34(3). The word “finding” cannot be interpreted so as to include within it any statement of fact contained in a decision irrespective of whether that fact was or was not material to the decision and whether the court or the tribunal, when recording the decision, had any occasion to hear parties on that question of fact and to record a decision on it instead of merely reciting it as a statement of fact. The word “finding”, interpreted in the sense indicated by us above, will only cover material questions which arise in a particular case for decision by the authority hearing the case or the appeal which, being necessary for passing the final order or giving the final decision in the appeal, has been the subject of controversy between the interested parties or on which the parties concerned have been given a hearing… 8.3. The finding recorded by SC as to saving of powers u/s 147 cannot said to be decision of court on material question of fact of law. The material question of law before SC is whether in absence of incriminating material addition u/s 153A can be made for unabated assessment? Accordingly, test of “finding” fails. Direction 9.1. At best the observation of SC stated above is classified as “finding” and not “direction” because direction cannot be open ended and must be case/assessee specific apart from fact that it requires positive compliance and when action is left to the option and discretion of AO whether or not to take action, it cannot be described as “direction”. (Pavan Morarka vs ACIT – 136 taxmann.com 2 – Bombay High Court) 10. Conclusion 10.1. Read as whole the CBDT, through instruction, laid substantive legislation which is otherwise exclusively reserved for parliament. Whilst the damage made by instruction 1/2022 is not cured the board came out with present instruction which runs contrary to commitment of less litigation and fails to meet well settled principle and test stated above and would invite second round of litigation. ❉ ❉ ❉ CBDT instruction post Abhisar Buildwell Pvt Ltd (SC) - Is it well built ?
Ahmedabad Chartered Accountant Journal December, 2023 559 Difference between inadmissibility and voidness – Insufficient stamped document The admissibility of an instrument in evidence is distinct from its validity or enforceability in law. Section 2(g) of the Contract Act provides that an agreement not enforceable by law is said to be void. The admissibility of a particular document or oral testimony, on the other hand, refers to whether or not it can be introduced into evidence. 45. An agreement can be void without its nature as a void agreement having an impact on whether it may be introduced in evidence. Similarly, an agreement can be valid but inadmissible in evidence. For instance, A and B may enter into an agreement by which B is restrained from undertaking a particular trade. This agreement would be void under Section 27 of the Contract Act but this does not impact its admissibility in evidence should A attempt to enforce it against B. The court will not enforce the agreement between the parties because it is void but the agreement is nonetheless admissible in evidence. 46. When an agreement is void, we are speaking of its enforceability in a court of law. When it is inadmissible, we are referring to whether the court may consider or rely upon it while adjudicating the case. This is the essence of the difference between voidness and admissibility. The term “admitted in evidence” refers to the admissibility of the instrument. Sub-section (2) of Section 42, too, states that an instrument in respect of which stamp-duty is paid and which is endorsed as such will be “admissible in evidence.” The effect of not paying duty or paying an inadequate amount renders an instrument inadmissible and not void. Nonstamping or improper stamping does not result in the 26 Advocate Samir N. Divatia [email protected] Glimpses of Rulings instrument becoming invalid. The Stamp Act does not render such an instrument void. The non-payment of stamp duty is accurately characterised as a curable defect. The Stamp Act itself provides for the manner in which the defect may be cured and sets out a detailed procedure for it. It bears mentioning that there is no procedure by which a void agreement can be “cured.” [Civil Appeal No. 1599 of 2020 dtd. 13.12.2023] Advocate’s Authority to make concession/ admission It is solemn duty of an advocate not to transgress the authority conferred on him by the client. It is always better to seek appropriate instructions from the client or his authorized agent before making any concession which may directly or remotely affect the rightful legal right of the client. The advocate represents the client before the court and conducts proceeding on behalf of the client. He is the only link between the court and the client. Therefore, his responsibility is onerous. He is expected to follow the instructions of his client rather than substitute his judgment. Generally admissions of fact made by a counsel are binding upon their principal as long as they are unequivocal, where however, doubt exists as to a purported admission, the court should not be vary to accept such admissions until and unless the counsel or the advocate is authorized by his principal to make such admissions. Furthermore, a client is bound by a statement or admission which he or his lawyer was not authorized to make. A lawyer generally has no implied or apparent authority to make an admission or statement which would directly surrender or conclude the substantial legal rights of his client unless such an admission or statement is clearly a proper step in accomplishing the purpose for which the lawyer was employed. We hastened to add neither the client nor 27
560 Ahmedabad Chartered Accountant Journal December, 2023 the court is bound by the lawyers statement or admissions as to matters of law or legal conclusions. ……. We may add that in some cases lawyers can make decisions without consulting the client. While in others the decision is reserved for the client. To conclude “an advocate in the discharge of his duty knows but one person in the world and that person is his client. Hindu Succession Act – Sec.6 as subs.wef 9.9.2005 – effect of The applicability of law declared in Vineeta Sharma (2020) (9 SCC 1) to a sub-judice matter in which preliminary decree has been passed and final decree yet to be passed. Held, when law governing parties has been amended before conclusion of final decree proceedings, the same must be considered and appropriately applied by the court. Therefore, after this decision, the allotment of due share in favour of daughter must be in accordance with the law. i.e. in equal share with any son(s). Prashanta Kumar Sahoo vs Charulata Sahoo [2023] (9 SCC 641). Effect of judgment of superior courts “Broadly speaking, every judgment of superior court has three segments namely, (1) the facts and the point at issue (2) the reasons for the decision (3) final order containing the decision. The reasons for the decision or the ratio decidendi is not the final order containing the decision. In fact, in a judgment of the Supreme Court, though the ratio decidendi may point to a particular result, the decision (final order relating to relief) may be different and not a natural consequence of the ratio decidendi of the judgment. This may happen either on account of any subsequent event or the need to mould the relief to do complete justice in the matter. It is the ratio decidendi of a judgment and not the final order in the judgment, which forms a precedent.” A judgment of an authority only in regard to its ratio which is required to be discerned and a decision cannot be regarded as an authority in regard to in its conclusion alone or even in relation to what could be deduced therefrom. Suneja Towers Pvt Ltd vs Anita Merchant (2023) (9 SCC 194). ❉ ❉ ❉ 28 29 Glimpses of Rulings Continued from page 544 Article : IIT Big Data Unleashed : The Unprecedented Surge in GST Notices - If invoices have not been issued for the supply of goods or services, and proceedings under section 122 have been carried out, any notice issued for the same cases will be dropped. Notices based on HSN/SAC of blocked credits should be subject to officer verification, and if the person is legitimately doing business in such HSN/SAC, the notice in such cases will be dropped. Furthermore, before issuing the show-cause notices, the proper officer should properly examine the case or discrepancy and then accordingly should act. Now, the show cause notices issuedare purely based on digits,andthe relevant provisions thatare contravened by the noticeeare not mentioned. Conclusion Furthermore, the plea is made for the exercise of the extensive powers vested in the proper officer under various sections of the GST framework, such as the scrutiny of returns (section 61) and audit (sections 65 and 66). This proactive engagement could potentially obviate the need for direct issuance of show cause notices, promoting a more streamlined and collaborative resolution process. Such an approach aligns with the overarching goal of fostering a business-friendly environment and minimizing adversarial interactions between taxpayers and tax authorities. As we move forward, a balanced and nuanced application of statutory provisions will contribute to the overall effectiveness and fairness of the GST compliance framework. In conclusion, the impending deadline of 31.12.2023 for the issuance of show cause notices of FY 2018-19 under section 73 of the CGST Act necessitates a proactive and judicious approach. It is hoped that due consideration will be given to addressing the concerns raised, leading to a reduction in potential litigation. Views expressed are strictly personal and cannot be considered as a legal opinion in case of any query. For feedback or queries email us [email protected]. ❉ ❉ ❉
Ahmedabad Chartered Accountant Journal December, 2023 561 Penalty in search cases for search after 01/ 07/2012. Pr. CIT v/s. Jai MaaJagdamba Flour Pvt. Ltd. (2023) 455 ITR 74 (Jarkhand) Issue: Can penalty be levied u/s 271(1)(c) where a search has been initiated after 1st July 2012? Head Notes: “Since the search was conducted on September 3, 2014, i..e after July 1, 2012 the assessee’s case was covered by Section 271AAB and the Assessing Officer should have initiated proceedings and levied penalty under section 271AAB(1)(c) and not under section 271(1)(c). On the date of search the due date to furnish the return for the assessment year 2014-15 had not expired and the assessee had furnished the return on November 30, 2014. The assessee had not admitted any income in the statement recorded under section 132(4) nor had paid any taxes on the admitted income. Therefore, the case of the assessee was not governed by Section 271AAB(1)(a) or (b) but fell under section 271AAB(1)(c) where the minimum penalty prescribed is 30 per cent, and maximum penalty is 90 per cent of undisclosed income. Whether incriminating document was found or not was immaterial since the law mandated that the penalty if any should have been levied under section 271AAB. There was no infirmity in the order of the Tribunal affirming the order of the Commissioner (Appeals).” Transfer of a case under section 127 Sanjay Gandhi Memorial Trust v/s. CIT(E) Delhi (2023) 455 ITR 164 (Del) Issue: Whether e-assessment scheme and faceless assessment scheme do not modify the power under section 127 to transfer cases? Held: Head Notes: (i) “That the contention of the assessee that the requirement of “prior approval” of the Central Board of Direct Taxes (As stipulated in notifications dated September 12, 2019 and August 13, 2020) had been violated was untenable since the transfer of the assessees’ cases fell under section 127 and not under those notifications. The power of transfer under section 127 was not in any manner denuded by the faceless assessment scheme when the transfer of cases were sought to be made from a jurisdictional Assessing Officer under one Principal Commissioner of another Assessing Officer under a different Principal Commissioner who did not exercise concurrent jurisdiction over the cases. The assessments of the assesses herein had been transferred only for the purposes of coordinated investigation and meaningful assessment. The transfer of cases of the assesses would also not be violative of the guidelines dated September 17, 2020 issued by the Central Board of Direct Taxes, since the transfer of cases were for the purposes of better co-ordination and meaningful assessments. The guidelines were limited for the purpose of compulsory selection of return of income for complete scrutiny during the financial year 2020-21 and did not in any manner curtail or control the power of transfer under section 127. No final view had been or could be taken without a fair and adequate opportunity given to the assessee to explain that they were not connected in any manner with the searched parties for the purpose of assessment during the assessment proceedings. Consequently, there were no adverse civil consequences against the assessees. There were sufficient reasons to justify CA. Jayesh C. Sharedalal [email protected] 81 From the Courts 82
562 Ahmedabad Chartered Accountant Journal December, 2023 the administrative decision to transfer the cases of the assessee from the jurisdictional Assessing Officer to the Central Circle. The contention of the assesses that section 127 required that transfer of case orders could be made only if there were seized material against the assesses was untenable in law. Chintalapati Srinivasa Raju v/s, Securities and exchange Board of India (2018) 210 Comp Cas 285 (SC) distinguished. (ii) There was neither a challenge to clause (3) nor a challenge to the Central Board of Direct Taxes order dated August 13, 2020 passed under clause (3) of the Faceless Assessment Scheme, 2019, which excluded central charges and international taxation charges from the faceless assessment scheme. Consequently, when by way of a legal exercise of power under section 127 for the purpose of co-ordinated investigation, certain parties were centralized then as a legal consequence, they were no longer assessed under the faceless regime. Even under the central charges, the assessment proceedings were conducted through the e-proceeding functionality, and as such, the assessee or their authorised representatives would not be bound to physically appear before the Assessing Officer on each date of hearing. Therefore, no prejudice was caused to the assesses on account of their cases being transferred to the central circle. Section 127 to the extent it permitted transfer from one Assessing Officer under a Principal Commissioner to another Assessing Officer charges remained untouched and continued to apply in its pristine form, The cases of the assesses had been transferred to the Central Circle in accordance with law by way of the orders passed under section 127.” Tax deducted at Source: Assessee cannot be denied credit for tax deducted Milan Arvindbhai Patel v/s. ACIT (2023) 455 ITR 82 (Guj) Issue: In the circumstances that the tax though deducted has not been deposited in government treasury by the From the Courts deductor, can the deductee be subject to recovery proceedings? Held: Head Notes: “Section 205 of the Income Tax Act, 1961 provides that when tax is deductible at source, the assessee shall not be called upon to pay the tax himself to the extent to which the tax has been deducted from that income. Its applicability is not dependent upon the credit for tax deducted being given under section 199. The Department could not deny the assessee the benefit of tax deducted at source by the employer from his salary during the relevant financial years. Credit for tax deducted at source should be given to the assessee and if in the interregnum any recovery or adjustment was made by the Department, the assessee was entitled to the refund with statutory interest.” Application for claim of refund beyond the period of six years: Gee Cee Metals Pvt. Ltd. v/s. PCIT (2023) 455 ITR 211 (Uttrakhand) Issue: Whether a condonation application for refund of an assessment year prior to six years can be said to be barred by limitation and hence, it cannot be processed? Held: Head Notes: “It is well settled that, with the expiry of limitation, the law bars the remedy even if the right is not extinguished, When section 119(2) (b) of the Income Tax Act, 1961 authorizes the Central Board of Direct Taxes to issue instructions, directions or orders to the income tax authorities to admit an application, or claim for any exemption, deduction, refund, or any other relief under the Act after the expiry of the period of limitation specified by or under the Act, along with the said power goes the power to prescribe the conditions, upon which such delayed applications may be entertained. The Central Board of Direct Taxes has issued Circular No. 83 84
Ahmedabad Chartered Accountant Journal December, 2023 563 9 of 2015 [2015] 374 ITR (St.) 25) stating that no condonation application for claim of refund or loss shall be entertained beyond six years from the out of the assessment year for which such application or claim is made. This limit of six years shall be applicable to all authorities having powers to condone the delay in accordance with the prescribed monetary limits, including the Board. Held, dismissing the writ petition, that the rectification application could be filed by the assessee within four years of the expiry of the assessment year. Admittedly, the assessee did not do so. By resorting to clause 3 of Circular No. 9 of 2015, the assessee could have sought condonation of delay, in moving the rectification application by another two years. The assessee did not file the rectification application either within the period of limitation, or even within the period for which the delay could be condoned, i.e. upto six years. The assessee moved the rectification application only in the year 2021, i.e. after over twelve years. The application was barred by limitation.” Software licence subscription expenses: Capital or Revenue CGI Information systems v/s. ITO (2023) 455 ITR 270 (Kar) Issue: Whether the expenses incurred towards subscription of Microsoft licences is capital nature on the basis that the said software was an operating system software? Held: “It is not disputed that software licence fee is paid annually. The Revenue’s contention that software is embedded into personal computer and the computer has been treated as a capital expenditure, on the face of it, is untenable because there is no dispute withregard to expenditure which is an annual subscription charge. Once the payment is for a fixed period, it is obvious that the said software cannot be used after expiry of that year. In the case of Toyata Kirloskar Motors, this court has held that (Page 66 of 349 ITR): “….When the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, without renewing the licence or without paying the fee on such renewal, it is not possible to use thosesoftware in those circumstances the findings recorded by the authorities that the fee paid for obtaining the software and the licence and for renewing the same is to be construed as only revenue expenditure….” (emphasis; supplied) We are in respectful agreement with the authority in Toyota Kirloskar Motors. Hence, this question needs to be answered in favour of the assessee.” Delay in granting of refund: Assessee entitled additional interest on statutory interest or not. Bombardier Transportation India Pvt. Ltd. v/s. DCIT (TDS) (2023) 455 ITR 278 (Guj) Issue: Whether delay in payment of interest on refund under section 244A would entitle the assessee to claim interest on interest? Held: “With regard to the compensation which is being sought for non-payment of the statutory interest from the time, this court decided the appeal. Much is insisted upon. This court in Nima Specific Family Trust (supra) had noted various provisions and also the decision of the Gujarat High Court rendered in the case of Gujarat Fluorochemicals Ltd v/s. CIT [2015] 377 ITR 307 (Guj) to hold that there cannot be any direction for payment of interest on interest. The statute provided for interest on delayed refund under sub section (1) of section 244A, then newly inserted sub section (1A) provides for additional interest. Therefore, there cannot be any further directions for payment of interest over and above such statutory prescriptions and hence it had directed the cost of Rs. 1 lakh to the petitioner by way of compensation on the amount of interest which remained unpaid for long time.” From the Courts 85 86
564 Ahmedabad Chartered Accountant Journal December, 2023 Powers of Commissioner of Income Tax u/s 264 Ena Chaudhari v/s. ACIT & Others (2023) 455 ITR 284 (Cal) Issue: Whether the Commissioner has powers to allow the claim of exemption of income which was not so claimed by assessee in the return of income? Held: Head Notes: “For the assessment years 2007-08 and 2008-09 the assessee inadvertently offered to tax exempted income relating to dividend and long term capital gains and realised this only upon receipt of the order passed under section 143(1) of the Income Tax Act, 1961. Since the filing of the original return itself was delayed she could not file a revised return under section 139(5) for claiming deduction of the exempted income and therefore, she filed revision applications under section 264 before the Commissioner. The Commissioner held that since the orders passed under section 143(1) were not erroneous, that since the original returns of income were filed beyond the specified dates the assessee was debarred from filing revised returns and dismissed the revision applications. On writ petitions: Held that on the facts, the Commissioner had committed an error in law in dismissing the revision application of the assessee filed under section 264 by refusing to consider on the merits the claim of the assessee that the income in question was exempted from tax and not liable to tax and was included in her return as taxable income due to bona fide mistake and which she could not rectify by filing revised return since original return itself was belatedly filed and that she had no other remedy except filing of revision applications under section 264. The Commissioner while refusing to consider the claim of the assessee had misinterpreted and misconstrued the judgement in Goetze (India) Ltd. And also the scope of jurisdiction conferred upon him under section 264 by equating it with that of the jurisdiction of the Assessing Officer in considering the claim of any allowance or deduction claimed by an assessee in the return of income or without filing any revised return. The order of the From the Courts Commissioner under section 264 rejecting the revision applications of the assessee for the assessment years 2007-08 and 2008-09 were unsustainable and accordingly set aside. The matters were remanded back to the Commissioner for reconsideration [ Matter remanded].” Reassessment (Old regime) : Notice after four years which does not contain facts which were fully and truly not disclosed. ACIT v/s. Seshasyee Paper and Board Ltd (2023) 455 ITr 291 (Mad) Issue: Whether is it necessary that “reasons recorded” should contain a finding that there was a failure on part of assessee in disclosing fully and truly all material facts necessary for assessment? Held: Head Notes: “The existence of the “jurisdictional fact” is sine qua non for the exercise of power. Under the proviso to section 147 failure on the part of the assessee to fully and truly disclose all material particulars would constitute a “jurisdictional fact” for invoking the extended period of limitation and failure to record the existence of the above jurisdictional fact while invoking the extended period under the proviso would vitiate the entire proceeding. Held, dismissing the writ appeal that while furnishing the reasons for reassessment by its communication dated January 6, 2014, there was no finding that there was failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment. There was not even a whisper of an allegation that such escapement had occurred by reason of failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment. Moreover there was legislative affirmation of the view taken by the assessee by way of an amendment introduced to section 115JB of the Act with regard to the treatment of bad and doubtful debts whereby the position of law declared by the Supreme Court was neutralised with retrospective effect from April 1, 2010. The notice of reassessment for the assessment year 2006-07 was not valid. 87 88
Ahmedabad Chartered Accountant Journal December, 2023 565 Decision of the single judge of the Madras High Court in Seshasayee Paper and Boards Ltd v/s. Asst. CIT [2021] 435 ITR 625 (Mad) affirmed.” Application for stay of demand to be considered in a judicious manner by the Assessing Officer. ALM Industries v/s. DCIT (2023) 455 ITR 319 (All) Issue: Does the word “discretion” in section 220(6) give a blanket power to the Assessing Officer to reject the stay application? Held: Head Notes: “From a reading of section 220(6) of the Income Tax Act, 1961, it is clear that once an appeal has been filed under section 246 or 246A of the Act, it is the discretion of the Assessing Officer and subject to such conditions as he may think fit to impose in the circumstances of the case, to treat the assessee as not being in default in respect of the amount in dispute in the appeal. The presentation of the appeal within the statutory period cannot be treated as “assessee as not being in default” because it is clarified that discretion has been given to the Assessing Officer who has to impose a condition in each of such cases treating the assessee as not being in default in respect of the amount in dispute in the appeal. Thus, it is clear that mere pendency of an appeal will not give any benefit to an assessee. It is only upon the satisfaction having been recorded by the Assessing Officer and the condition being imposed by him in each of such cases that an assessee shall be treated to be not in default in respect of the outstanding demand of tax, which is matter of dispute in appeal. However, the word “discretion”, which occurs in the provision of law, does not give a blanket power to the Assessing Officer. He has to exercise his discretion within the four corners of law and while passing an order imposing a condition, he has to justify his action”. Validity of notice u/s 148 when order u/s 148A (d) does not contain any reference of reply of the assessee to the show cause notice. Shashank Garg v/s. ITO (2023) 455 ITR 347 (P & H) Issue: Whether notice u/s 148 is valid when the allegation of bogus expense mention in the order u/s 148 A(d) was not stated in the show cause notice as well as the order u/s 148A(d) did not contain the reference of reply of assessee to the show cause notice? Held: Head notes: “The order under section 148A(d) was silent on how the reply given by the assessee to the show notice under section 148A(b) was considered. Though the verification report had been uploaded on the portal of the Deputy Director it was not a part of the initial show cause notice and the amount in question received from the party had not been shown in the initial show cause notice. Therefore, the assessee had no occasion to file reply on that issue. The show cause notice issued under section 148A(b), the order passed under section 148A(d) and the notice issued under section 148 were set aside. Liberty was granted to the Assessing Officer to proceed against the assessee and the assessee was also at liberty to take remedies in accordance with law”. ❉ ❉ ❉ From the Courts 89 90
566 Ahmedabad Chartered Accountant Journal December, 2023 Adani Ports & Special Economic Zone Ltd. v. JCIT 157Taxmann.com 106 (Ahd) Assessment Year:2012-13, Order dated:30th November 2023 Basic Facts The necessary facts are that the assessee has been allotted land on lease basis by the Gujarat Maritime Board (GMB). The assessee accounted for the right to use leasehold land in the A.Y. 2011-12 at present value of future annual lease and claimed depreciation on the same @ 25% by treating the same as intangible assets. However, the AO disallowed the claim of depreciation by holding that the asset in the question is land property and there is no provision under section 32 of the Act to allow depreciation on land property. The AO further held that the assessee is also not eligible to claim depreciation by treating such leasehold land as intangible asset for the reason that the granting some types of ownership over the land cannot be equated with the phrase “Business or Commercial right” used under section 32(1)(ii) of the Act. Accordingly, the AO disallowed the claim of the depreciation on right to use leasehold land. On appeal by the assessee, the learned CIT(A) confirmed the disallowance made by the AO by following the order of his predecessor in the own case of the assessee for AY 2011-12. Being aggrieved by the order of the CIT(A), the assessee is in appeal before Tribunal. Issue: Whether depreciation is allowable on right to use leasehold land considering the same to be intangible asset ? Held I: The Tribunal noted that the issue has been decided in favour of the assessee by the coordinate bench of this tribunal in the own case of the assessee in ITA No. 122 & 167/AHD/2015 for AY 2011-12. The bench vide order dated 29-03-2023 held as under:13. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the recognition of the right to use lease hold land as intangible asset as per the statement of account and the same was not disputed by the Department at any stage. Thus, the claim of depreciation was correctly made and the same should have been taken into account by the Assessing Officer as well as CIT(A).Thus, ground no.5 and ground no.5.1 are allowed. Before the tribunal, no material has been placed on record by the Revenue to demonstrate that the decision of the Tribunal in own case of the assessee has been set aside/stayed or overruled by the Higher Judicial Authorities. Further, no material was placed on record to point out any distinguishing feature in the facts of the case of earlier AY and the year under consideration. Accordingly the Tribunal followed the order of the tribunal in the own case of the assessee and set aside the finding of the learned CIT(A) and directed the AO to delete the disallowance made by him. Thus, the ground of appeal raised by the assessee was allowed. DCIT v. Adani Power Ltd 156 Taxmann.com 274 (Ahd) Assessment Year: 2012-13 to 2016-17,Order dated: 29th September 2023 Basic Facts The assessee was engaged in setting up, owning and running of power plants. It had given loans to its AE at Singapore but had not charged any interest on the amounts advanced to its AE. During the year, the assessee received back part of the amount and balance amount was outstanding as on the end of 49 CA. Yogesh G. Shah [email protected] CA. Aparna Parelkar [email protected] Tribunal News 50
Ahmedabad Chartered Accountant Journal December, 2023 567 the year and the loans advanced had been treated as being in the form of quasi-equity investment. The TPO held that rate of 5.743 per cent was to be applied for computation of arm’s length interest amount liable to be received by the assessee from its AE and therefore, the TPO made an upward adjustment. The CIT(A) held that average rate of interest after considering average three months LIBOR which was worked out at 2.25 per cent as against 5.743 per cent adopted by AO would apply. On appeal to tribunal. Issue: Whether TP adjustment relating to interest charged on advance given to AE was justified ? Held: The Tribunal notes that there is no change in facts for the instant assessment year with that of the earlier assessment years 2010-11 and 2011-12. The CIT(A) determined the average rate of interest after considering average three months LIBOR which worked out at 2.25 per cent as against 5.743 per cent adopted by the AO with that of the preceding assessment years. Further the Tribunal in assessee’s own case for the earlier assessment years upheld the average interest rate determined by the CIT(A) and also followed other decisions of the Co-ordinate Benches in Kalpataru Power Transmission Ltd. v. Dy. CIT [2022] 142 taxmann.com 428 (Ahd. - Trib.), wherein it was held that where advances were given by assessee to its AEs and no interest was charged on these advances contending that they were not loans but were quasicapital in nature, since assessee was unable to substantiate same with evidence, advances were in nature of loans and transfer pricing adjustment made by charging interest applying LIBOR was justified. Similarly in the case of Soma Textile & Industries Ltd. v. Addl. CIT [2015] 59 taxmann.com 152/154 ITD 745 (Ahd. - Trib.), it was held that Comparable Uncontrolled Price (CUP) of quasicapital loan, cannot be NIL, unless it is only for a transitory period and de facto reward for said value of money is opportunity for capital investment or such other benefit. The Delhi High Court in the case of CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 Tribunal News taxmann.com 523/231 Taxman 401 has held that arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on the market determined interest rate applicable to currency in which loan has to be repaid. Therefore, the order of the CIT(A) was upheld and thereby the ground raised by both the revenue and assessee were dismissed. M/s. LG Electronics India Ltd. V ITO (TDS)TS-715-ITAT-2023 (Del) Assessment Year:2005-06 to 2011-12, Order dated: 21st November 2023 Basic Facts The assessee is wholly owned subsidiary of a Korean company and is engaged in trading, assembly, manufacturing, marketing and sales of electronics and home appliances. A survey operation under section 133A of the Act was conducted in the business premises of the assessee to verify the compliance of TDS provisions. Based on the documents and statements recorded from certain expatriate employees, the AO noted that during AYs 2005-06 to 2011-12, the assessee had entered into various international transactions with parent and other associated non-resident companies (AEs) for the purchase of raw materials, finished goods, capital goods, etc. The parent company & AEss had a business connection and Permanent Establishment (PE) in India. Hence, the income derived by them was taxable as business income in India. Therefore, the assessee was liable to deduct TDS under section 195(1) of the Act, while making payments to them. Since, the assessee had not deducted TDS on such payments, the AO initiated proceedings under section 201 of the Act. The AO treated the assessee as an assessee-in-default and raised demands under section 201(1)/201(1A) of the Act. Aggrieved, the assessee filed an appeal before the CIT(A), who held that the assessee’s TDS default was to be determined on the basis of income computed on a cost-plus basis, 20% on the payments made as salaries attributed to Indian operations of the parent. The same was on the basis that in the assessment proceedings of the parent & AEs it was held that they had PE in India & DRP held 51
568 Ahmedabad Chartered Accountant Journal December, 2023 that profits of the parent & AE was 20% mark-up on salary cost of the expatriate employee was attributable to PE of parent. Aggrieved, the assessee filed an appeal before the Tribunal. Issue Whether assessee is liable to deduct tax on the profit attributable to PE ? Held The ITAT noted that while passing orders under section 201(1)/201(1A) of the Act, the basis for computation of TDS default was payment to parent & AE towards purchase of raw materials, capital goods, spare parts, etc. However, subsequently, the position changed substantially as in case of payee entities, the DRP held that only parent had PE and no other AE had any PE in India. Even, the method of attribution of profit to the PE of parent company was changed from payment made towards purchase of raw material, finished goods, spare parts, etc., to a notional payment of 20% mark-up on certain salary cost of expatriate employees. As a result of the change in manner of attribution of profit to the PE, the demand raised by the AO got substantially reduced. Thus, the basis of attribution of profit to the payee, parent company, was purely notional, as it was the specific case of the assessee that it had not paid any salary cost of expatriate employees to parent company. It was the case of the assessee that on the salary cost paid to the expatriate employees, the assessee had deducted TDS under section 192 of the Act. When the assessee had not made any direct payment to the parent towards the salary cost of expatriate employees, there was no liability on the assessee to deduct tax on such notional payment. Moreso, the assessee had already deducted tax under section 192 of the Act in respect of salary cost of expatriate employees. When the basis of attribution of profit to the PE was a notional income, that too, based on a methodology adopted by DRP in case of payee, the assesee could not be expected to perform an impossible act of computing TDS on a notional payment, a part of which, was to be attributed towards profit of PE of parent. Further, the Tribunal in case of payee i.e., parent quashed the final assessment orders for non-implementation of DRP directions and Revenue had not filed any further appeals Thus, the factual position was that there was no tax liability on the payee, viz., parent in the AYs under consideration. Thus, on overall consideration of facts and materials on record, as per Tribunal, there being no obligation of the assessee to withhold tax under section 195 of the Act, the assessee could not be treated as an assessee in default under section 201 of the Act. In view of the above, the Tribunal directed the AO to delete the demands raised under section 201(1)/201(1A) of the Act for the AYs under consideration. DSD Noell GMBH v. DC/AC IT 157 Taxmann.com 64 (Del) Assessment Year 2011-12 to 2018-19, Order dated 21st November 2023 Basic Facts: The assessee, a tax resident of Germany, was engaged in the business of engineering, designing, manufacturing and installing plants for the Hydro Electric Power Projects. It had entered into an agreement with a company for carrying out hydro-mechanical works (HM Works) in relation to set up of Hydro Electric Power Project. During the years under consideration, the assessee had received consideration towards offshore supply of plant and equipment as well as for offshore services involving supply of related drawings design. The AO held that these receipts were taxable in India as FTS. On appeal, the CIT(A) upheld the addition made by the AO. On the assessee’s appeal to the Tribunal: Issue: Whether the off shore supply of plant & equipments and services taxable in India ? Held: The Tribunal found that it is not in dispute that during the relevant years, the assessee had supplied plant and equipment to HCC which were designed and manufactured outside India. The title to the said plant and equipment was duly passed on to the customer Tribunal News 52
Ahmedabad Chartered Accountant Journal December, 2023 569 outside India on FOB basis. The consideration for such offshore supplies was also received outside India in foreign currency either through letter of credit or through bank transfer. All activities such as manufacturing, fabrication, designing etc. of plant and equipment has been undertaken outside India. The assessee in order to substantiate the fact that the transfer of title and risk had happened outside India had submitted the proof together with documentary evidences by enclosing the copy of invoices, bill of lading, shipping documents etc. before the AO. Tribunal held that it had to be understood in a practical manner that the Defects Liability Clause would be incorporated in every contract to take care of a contingent event. This has got nothing to do with the passing of title to the equipment. It is opined that this is a normal clause which is incorporated in any contract especially the nature of contract undertaken by the assessee herein that there would always be some portion of the retention amount of the contracted value that would be retained by the buyer/user of machinery. In the instant case, the Clause 14.2 of the contract for offshore supplies states that assessee would be entitled to receive 95 per cent of contracted revenue at the time of shipment of such plant, equipment and spares and only 5 per cent of the revenue was to be payable on successful commissioning of the plant. Further, the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Limited reported in 288 ITR 408 (SC) had held that where the property in respect of the goods is transferred to the buyer outside India, the sale of such goods has to be regarded as having completed outside the taxable territories of India and hence, the income from such sale is not liable to tax in India. In view of the aforesaid observations and following the various judicial precedents, the Tribunal held that no part of consideration received outside India for offshore supplies of plant and equipment and spares could be deemed to accrue or arise in India as per section 9 in the hands of the assessee. Admittedly, there is no existence of any Permanent Establishment (PE) of the assessee in India. Such consideration would only be in the nature of business income not attributable to PE in India and, hence, not taxable under article 5 read with article 7 of the India Germany DTAA. Accordingly, there is no case to treat the receipt of such consideration for offshore supplies of equipment as income taxable in India. Hence, the AO was directed to delete the addition made on account of consideration received for offshore supplies of plant and equipment outside India. Taxability of offshore services It was not in dispute that the assessee indeed had supplied offshore drawings and designs together with the supply of plant and equipment. It was found that the contract for offshore services and the contract for the offshore supply of plant and equipment were entered on the same date and are inextricably connected because the supply cannot be made without the drawings. Admittedly, the drawings and designs could not be utilised by HCC to get the manufacturing of plant from another manufacturer. The drawings and designs made by the assessee are tailor made to suit the requirements of the plant and equipment supplied by the assessee. It is found that the AO had not disputed the position that the entire work related to the designs was carried out outside India and that the ownership in such designs was passed outside India. In view of the aforesaid observations, as per Tribunal it could be safely concluded that in the facts and circumstances of the instant case, the offshore services that primarily involve offshore supply of drawings and designs are inextricably linked with the offshore supply of plant and equipment and accordingly, the receipts from offshore services does not give rise to any income accruing or arising in India and therefore not taxable under the Act. Further, such consideration qualifies as business profits of the company in terms of the provisions of article 7 of the DTAA, which cannot be attributed to India for computing taxable income in India. Hence, income arising therefrom should be treated as nontaxable in India. Accordingly, the AO was to be directed to delete the addition made on account of FTS in respect of offshore designs and drawings for the various years under consideration. Tribunal News
570 Ahmedabad Chartered Accountant Journal December, 2023 ITO v. Chandrikaben Piyushkumar Patel 157 Taxmann.com 327 (Ahd) Order dated 22nd June 2022, Assessment Year 2012-13 Basic Facts: The assessee’s case was reopened on the information with the A.O. that the assessee had sold immovable property bearing survey no. 153(1), 153(2) situated at Bhopal, Ahmedabad but no return of income had been filed by the assessee during the year disclosing any gain on the same. That subsequently after calling for relevant information from the assessee during the reassessment proceedings and after considering the contentions made by the assessee to the effect that the impugned land did not qualify as capital asset u/s. 2(14) of the Act, since it was situated beyond 8 KM from the Ahmedabad Municipal Limits, the A.O. held that there was no truth in the contention of the assessee since the land was situated within 8 KM of the municipal limits of Ahmedabad. He therefore held that capital gain earned on the said transaction was liable to tax and accordingly made addition of the entire consideration received by the assessee of Rs. 1.20 crores to the income of the assessee, in the absence of any details in respect of the cost of acquisition of the asset being furnished by the assessee. The matter was carried in appeal before the ld. CIT(A) who held that the distance of the land had to be measured from the municipal limit of Ahmedabad as on the date of Gazette Notification issued by the CBDT spelling the limits of urbanization, on 06.01.1994. In this regard, he relied on the various decisions of the ITAT holding so. He accordingly directed the A.O. to measure the distance of the impugned land from the municipal limits of Ahmedabad as on 06.01.1994 and directed him further to make no addition in case the land was found to be situated beyond the 8 KM limit specified in the CBDT notification. Aggrieved by this order of the Ld. CIT(A) the Revenue has come up in appeal before tribunal Issue: Whether the directions given by the CIT(A) to the AO to measure the land as on date of notification tantamount to setting aside of the order ? Whether the distance of the land from municipal limits needs to be determined as on the date of sale or on the date of the CBDT notification ? Held: In respect of the Revenue’s plea that the CIT(A) had no power to set aside the issue, the Tribunal noted that in the impugned case, the CIT(A) had not set aside any issue for reconsideration but on the contrary had given his findings on the issue and proceeded thereafter to direct the A.O. to act upon these findings. He has given his finding that distance of the land for determining whether it is urban or rural land is to be measured from the municipal limits of Ahmedabad as on 06.01.1994, that is the date when the CBDT notification regarding urbanization was notified in the official Gazette. He has only directed the AO to determine the actual distance based on these findings and then accordingly deal with the adjustment to be made. There is clearly a difference between setting aside an issue to the A.O., which power the CIT(A) does not have as per Section 251 of the Act, and giving directions to the AO. An issue set aside to the AO is left for adjudication to him, while in a case giving directions, the issue is restored to the AO only for acting on the adjudication done by the CIT(A). In view of the above ground of appeal no. 1 & 2 raised by the revenue were dismissed. The Tribunal noted that the CIT(A) while holding that the distance is to be measured from the municipal limit as on 06.01.1994 has relied on the various decision of the ITAT Ahmedabad Bench on the issue .The Revenue had been unable to point out any contrary decision either of the Hon’ble High Court and Supreme Court in that regard. The tribunal therefore found no infirmity in the order of the CIT(A) who has followed the decision of the ITAT while holding that the distance of the land sold by the assessee is to be measured from the municipal limit of Ahmedabad as on 06.01.1994, that is the date of CBDT Notification specifying limits of urbanization, following the decision of the ITAT in several cases. Accordingly ground of the revenue was dismissed. Tribunal News 53
Ahmedabad Chartered Accountant Journal December, 2023 571 ACIT v. Sri Vijaya Visakha Milk Producers Company Ltd. 157 taxmann.com 389 (Visakhapatnam - Trib) Order dated 30th November 2023, Assessment Year 2011-12 & 2012-13 Basic Facts I : The assessee was a Producer Company engaged in the business of procuring milk from farmers through cooperative societies. The assessee debited an expenditure towards limited return on share capital which was calculated at 1 per cent of share capital. The AO disallowed the claim of the assessee on the ground that limited return on share capital was nothing but a maximum dividend payable/paid to the members of the assessee-producer company as authorized by the Articles of Association and hence it could not be considered as an expenditure and claimed as expenditure. On appeal, the Commissioner (Appeals) allowed the claim of the assessee. On appeal by revenue to the Tribunal: Issue I: Whether limited return as per section 581E of companies Act is maximum dividend and not a charge to profit allowable as expenses Held I: The Board of Management of the Producer Company (assessee-company) has authorized payment of 1 per cent limited return on the share capital to its Members which was as per the Articles of Association of the assessee-company. As per the provisions of section 581E, subsection-2 authorizes the Producer Company to make the provisions of limited return to every member on the share capital contributed. Further, from the plain reading of the definition of the term ‘limited return’ in section 581A(c) of the Companies Act, 1956, it is to be considered that the limited return is nothing but a maximum dividend payable/paid to the Members of the Producer Company as authorized by the Articles of Association and hence Tribunal noted that it cannot be considered as an expenditure and claimed as expenditure. It was not a charge to the P & L Account but only an appropriation of the profit and hence the tribunal held that AO rightly disallowed the same. Therefore, the ground raised by the revenue was allowed. Basic Facts II : The assessee-company in order to retain its milk producers / suppliers had paid certain gifts during the Annual General Meeting. The AO scrutinized the case and disallowed expenses related to gifts during the General Body Meeting. On appeal the CIT(A) allowed the appeal of the assessee. On appeal by revenue to the Tribunal. Issue II: Whether expenditure incurred at the Annual General meeting on gifts for the members is allowable as business expenditure. Held II The Tribunal noted that amounts of gifts were distributed at the time of AGM which is being gifted to the milk producers who were also Members of the assessee-company. It was also found that these gifts are made to the Members who were also suppliers of milk and are also shareholders of the assesseecompany. Hence Tribunal held that these expenditures are in the nature of business promotion expenditure which shall be allowed as deduction under section. 37. Therefore, they found no infirmity in the order of the CIT(A). Thus, the ground raised by the revenue was dismissed ❉ ❉ ❉ Tribunal News 54
572 Ahmedabad Chartered Accountant Journal December, 2023 In this issue, we are giving gist of an order passed by ‘SMC’ Bench of I.T.A.T., Ahmedabad in the case of Urmilaben Bharatbhushan Agarwal vs. ITO in ITA No.62/ Ahd/2020 for the Asst. Year 2011-12, wherein the issue was whether on the basis of admission of a searched party before the Settlement Commission about having received on-money can also invite addition in the hands of the assessee, who had purchased property from the searched party. Though there is not much discussion about the legal issue, the Tribunal has deleted the addition on the basis that the Assessing Officer had not allowed cross examination of the searched party on the ground that there was admission of the searched party before the Settlement Commission. Since cross examination of the party was not given, the Tribunal has deleted the addition. We hope the readers would find the decision useful. Annexure In the Income Tax Appellate Tribunal “SMC” Bench, Ahmedabad Ms. Suchitra Kamble, Judicial Member ITA No.62/Ahd/2020 Assessment Year: 2011-12 Urmilaben Bharatbhushan Vs. The Income Tax Agarwal Officer, Ward 5(3)(5), Ahmedabad. (Appellant) (Respondent) Assessee by : Shri Sudhir Mehta, Advocate Respondent by : Shri N.J. Vyas, Sr. DR Date of hearing : 01.09.2022 Date of pronouncement : 23.09.2022 Gist Only Facts of the Case: 1. The appeal was filed by the assessee with the following grounds: “1. That the learned Commissioner of Income Tax Appeal has grossly erred in not discussing the issue of re-opening of the assessment u/s.148. 2. The learned Commissioner of Income Tax (Appeals) has erred on facts as well as in law in confirming the additions of Rs.8,65,237/- made by the learned ITO, Ward 5(3)(5) u/s.69 of the I.T. Act. 3. That the appellant contends that all the documentary evidences in support of purchase of shop. The entire payment was made through cheques and there was no on money has been paid by the appellant. 4. That the CIT(A) as well as AO has placed reliance on information received from ACIT Central Circle 2(4), Ahmedabad which has no nexus to the appellant’s case.” 2. The case of the assessee was reopened u/s.147 vide notice u/s.148 on 26.03.2018 alleging that the assessee had paid cash of Rs.8,65,237/- towards the booking of Shop No.301, Swaminarayan Park, Narol-1, Ahmedabad from Dharmadev group. During the course of search in Dharmadev Group on 15.10.2013, an excel file “”PARK.1.xlsx”” was recovered from forensic image and it was found that there was a difference in receipts from receipts which were reflected in the books of accounts. The Assessing Officer, therefore, made addition of Rs.8,65,237/- considering as on money paid and treating the same as unexplained investment under Section 69 of the Act. 3. The Counsel of the Appellant took following objections before ITAT: (i) The Assessing Officer did not supply the reasons recorded for issuing reassessment notice, and therefore, the assessee could not file objections. CA. Sanjay R. Shah [email protected] Unreported Judgements Continued to page 577
Ahmedabad Chartered Accountant Journal December, 2023 573 Orders / Notices / Communications without Document Identification Number (DIN) are invalid, illegal and non-est: Part-1. Smt Sharda Devi Bajaj vs DCIT (ITA No.3006/ DEL/2022) xxx… 8. Coming to the merits, of the ground as introduced, the issue is no longer res integra, as it is covered by several decisions of the coordinate Bench and in particular the decision dated 19.9.2022 in the case of M/s Brandix Mauritius Holdings Ltd. Vs. DCIT 2022 (11)TMI 34, which has been confirmed by the Hon’ble Delhi Court in the case of CIT (International Taxation-1), New Delhi vs. M/s Brandix Mauritius Holdings Ltd. 2023 (4) TMI 579. 9. The CBDT vide aforesaid Circular dated 14.8.2019 has mandated, Generation/ Allotment/ Quoting of computer generated Document Identification Number (DIN) in the body of all communications, in the nature of notices/summons/ letters/ correspondences as well as the orders passed. Para 3 of the Circular sets out, exceptional circumstances, in which such communications may be issued manually, with the rider that this shall be done only after recording reasons in writing in the file and with the prior written approval of the Chief Commissioner/Director of Income Tax. Para 4 of the Circular provides that any communication which is not in conformity with the requirement of Para 2 and Para 3 shall be treated as invalid and shall be deemed to have never been issued. 10. In the present case, it is not in dispute and otherwise, it is a matter of record that the order of the Assessing Officer does not bear any DIN. 26 Advocate Tushar Hemani [email protected] 11. It is not necessary to multiply authorities on the point. However, to the similar effect is the decision of the Hon’ble Bombay High Court in Ashok Commercial Enterprise vs. ACIT in WP Nos. 2595 of 2021 &Ors. Judgement dated 04.09.2023 and the Hon’ble Kolkata High Court in PCIT vs. M/s Tata Medical Centre Trust in ITAT/202/2023 Judgement dated 26.9.2023. 12. The Hon’ble Bombay High Court has inter alia held that subsequent generation of the DIN will not be sufficient as the requirement of the CBDT Circular, is quoting of the DIN, in the body of such communication and / or order. 13. On behalf of the Revenue reliance is placed on the communication dated 17.9.2019 which pertains to the roll out of facility for System generated Document (i.e. Intimation Letter) containing Document Identification number (DIN) for documents issued outside the system but uploaded manually in Income Tax Business Application (ITBA). 14. We are unable to see as to how the said communication can come to the aid of the Revenue. All that the communication states is about the provision of facility for generation of Intimation Letter containing Document Identification Number / Document Number (DIN/DN) for documents issued outside ITBA system but uploaded manually in Income Tax Business Application (ITBA). 15. From para 4 of the communication, it is clear that it pertains to the functionality to capture and uphold the letters, notices and orders issued manually and served on taxpayers by users due to any exceptional circumstances under Para 3 (i), (ii) and (iii) of the aforesaid Circular dated 14.8.2019. It is Judicial Analysis
574 Ahmedabad Chartered Accountant Journal December, 2023 not the case made out that there are any exceptional reasons recorded in these appeals as required by the Circular dated 14.8.2019. Thus, in our opinion, the said communication cannot come to the aid of the Revenue in the present Appeals. 16. In that view of the matter, the additional ground as raised has to succeed. In the face of this it is not necessary to go into the merits of other Grounds, as raised. M/s Gupta Domestic Fuels (Nagpur) Ltd. Vs ACIT (61/NAG/2022) xxx… 6. We shall first deal with the question as to ‘whether such legal ground raised first time before the Tribunal can be admitted?’ more specifically when it was not raised before the first appellate authority but the subject matter of impugned orders assailed against. In this context, it shall suffice to quote that, the legal ground raised by these assessee’s is ascended out of the impugned orders and goes to challenge validity thereof. Admittedly no new facts are required to be investigated or verified for this purpose, therefore such being a bald legal ground requiring no examination of facts a fresh, in our considered view deserves admission in the light of ratio laid down by the Hon’ble Apex Court in ‘CIT Vs National Thermal Power Company Ltd.’ reported in 229 ITR 383 (SC), and Hon’ble Delhi High Court in ‘Gedore Tools Pvt Ltd. Vs CIT’ reported in 238 ITR 268. After due consideration of assessee’s plea and submission, we are satisfied that, omission to raise legal ground while filing present appeals were neither wilful nor unreasonable, for the reason we deem it fit to admit the same in the light of judicial precedents laid in ‘Jaora Sugar Mills Pvt. Ltd v CIT’ reported in 124 ITR 482 (MP), and ‘CIT v Western Rolling Mills Pvt. Ltd.’ reported at 156 ITR 54 (Bom) and ‘Jute Corporation of India Ltd. v CIT’ find placed in 187 ITR 688(SC) and ‘Ahmedabad Electricity Co. Ltd. v CIT’ reported in 199 ITR 351(Bom), ergo same stands admitted. Judicial Analysis 7. We observed that, in order to prevent manual practice of issuance of notice, order, summons, letter or any other correspondence [defined as ‘Communication’] and to maintain proper audit trail of all communication the CBDT in exercise of its power u/s 119 of the Act, vide circular No. 19/ 2019 dt. 14/08/2019 mandated the income tax authorities w.e.f. 01/10/2019 for generation, allotment and communication of computer generated DIN in relation to any assessment, appeals, orders, statutory or otherwise, exemptions, enquiry, investigation, verification of information, penalty, prosecution, rectification, approval etc. 8. Albeit para 2 of Circular mandates for DIN compliance, para 3 thereof provides five exceptional circumstances wherefore manual communication is permitted without initially complying with DIN requirement. However, such issuance of manual communication mandates the tax authorities to record reasons therefore and to obtain prior approval from CCIT/DGIT. In terms of para-5 it is also subjected for regularisation of DIN compliance within a period of 15 working days of such manual issuance. Here it is worthy to note that, any communication made not in conformity with or in violation of Para-2 save otherwise provided in Para 3 & 5 thereof, renders the communication as invalid and shall be deemed to have never been issued. 9. Not well, leave granted by para 3 comes with an obligated rider that, communication must state therein the reason for issue of such DIN less communication in terms of para 3(i) to 3(v) [as applicable] alongwith the Number & date of obtaining written approval of the Chief Commissioner / Director General of Income-Tax in a specified format. That is to say, the DIN less communication if issued without incorporating therein (1) applicable reasons from clause (i) to (v) and (2) number & date of approval sought from CCT/ DGIT and (3) in specified format [as laid in para 3], then such DIN less communication ispo-facto renders non-est in the eyes of law for outstepping the binding circulars irrespective of the fact of post 27
Ahmedabad Chartered Accountant Journal December, 2023 575 regularisation of DIN compliance made intimating the DIN to the assessee by separate letters within 15 days in terms of para 5 of the CBDT Circular (supra). 10. In view of the decision of Hon’ble Supreme Court in the case of ‘K.P. Varghese Vs ITO, Ernakulum (1981) 4 SCC 173 and in the case of ‘Back Office IT Solutions Pvt. Ltd. Vs UOI’ (2021) SCC online Del 2742, circulars issued by the CBDT binds the Revenue in their administration or implementation, and such circulars cannot be side-stepped causing prejudice to assessee by bringing to naught object for which such circulars are issued. A similar view finds fortified ‘CIT Vs Hero Cycles’ reported in 228 ITR 463 and reiterated in ‘UCO Bank Vs CIT’ 237 ITR 889 (SC) wherein it was held that circulars binds the tax authorities strictly. Further in the case of ‘CIT Vs Nayana P. Dedhia’ reported in 270 ITR 572 the Hon’ble Andhra Pradesh High Court held that guidelines issued by Board in exercise of powers in terms of section 119 of the Act relaxing rigours of law are binding on all the officers responsible for implementation of the Act and, therefore, bound to follow & observe all circulars, orders, instructions etc. 11. Insofar as the validity of orders issued without DIN is concerned, we find this issue is no-more resintegra by the ratio of Hon’ble Jurisdictional High Court of Bombay in WP 2595/2021 dt. 26/09/2023 ‘Ashok Commercial Enterprises Vs ACIT’, wherein their lordships vide para 18 have categorically held that, the communication of orders without quoting DIN therein are to be treated as invalid and deemed never to have been issued. The relevant para is reproduced hereunder; xxx… 12. Without disputing the application of aforestated ratio, the Ld. DR tried to displace the legal ground of the assessee arguing that, in relation to impugned orders under challenge, the tax authorities have duly communicated the DIN by a separate letter of intimation either alongwith DIN less communication on the very same day or immediately thereafter but within the prescribed period of 15 days therefrom in terms of para-5 of Circular (supra). This vehement argument of the Revenue however failed to evoke our concurrence for the reason of ratio laid by Hon’ble Calcutta High Court in ‘PCIT Vs Tata Medical Centre Trust’ decided in ITAT/202/2023-IA No. GA/1/2023, wherein their lordship after considering the factual position of intimating the computer generated DIN post issuance of DIN less order, has laid that, once the order is communicated to assessee in violation of para 2 and 3 of CBDT Circular (supra), post intimation of DIN in terms of para 5 would not cure the former DIN less communication. 13. Thus in our considered view, intimation of DIN by separate letters communicated within 15 days of issuance of former DIN less communication would be valid only if, former DIN less communication is issued incorporating therein the reason for issue of such DIN less communication in terms of para 3(i) to 3(v) [as applicable] alongwith the Number & date of obtaining written approval of the Chief Commissioner / Director General of Income-Tax in a specified format, and not otherwise. In the present bunch of appeals we note that, the impugned orders were subject matter of DIN compliance; however same are found communicated without mentioning or quoting therein (1) computer-generated DIN and (2) reasons and approval therefor. Thus impugned orders were communicated in violation of Para-2 & Para-3 of CBDT Circular (supra), hence rendered invalid as if it has never been issued, therefore ceases to have any effect in the eyes of law as non-est. 14. In the light of aforestated discussion and judicial precedents, we adjudicate the legal additional ground in favour of the assessee by holding that the impugned order passed by the Ld. FAA and assessment order passed in Sr. No. 6 to 19 are invalid and deemed to have never been issued as they failed to state the reason for issue of DIN less communication alongwith the Number & date of obtaining written approval of the CCIT/DGIT in a specified format. Therefore the Bench deem it unnecessary to devolve deeper into the merits of these cases. Judicial Analysis
576 Ahmedabad Chartered Accountant Journal December, 2023 Finesse International Design Pvt. Ltd. vs DCIT (ITA No.1298/Del/2021) 14. We have considered the rival submissions on the additional ground raisedtowards non quoting of DIN. It is desirable to prioritize adjudication of legal objectionon invalidity of assessment order attributable to alleged infringement of CBDTcircular since such objections are overwhelming and goes to the root of the matter. 15. The CBDT Circular no. 19/2019 casts obligations that every income taxauthority shall allot a new computer generated Document Identification Number (DIN) in respect of every communication by way of notice, order, letter or any correspondence issued by him to any other income tax authority or assessee or anyother person and such number should be quoted thereon. Para 2 of the Circular readsas; “In order to prevent such instances and to maintain proper audit trail of allcommunication, the Board in exercise of powers under 119 of the Income TaxAct,1961(hereinafter referred to as “ the Act”) has decided that no communication shall beissued by any income tax authority relating toassessment, appeals, orders, statutory orotherwise, exemptions, enquiry, investigation, verification of information, penalty, prosecution, rectification, approval etc. to the assessee or any other person, on or after the 1st day of October, 2019 unless a computer generated Document IdentificationNumber (DIN) has been allotted and is duly quoted in the body of such communication. Para 3 of the Circular enumerates for exceptional circumstances. 16. The CBDT circular also provides that any such order, notice, correspondence etc. which does not bear the DIN in the body of communication shall be treated asinvalid in the eyes of law and shall be deemed to have never been received. Theobligation is stated to be of substantial nature as explained by Jurisdictional High Court and other Hon’ble Court and Tribunals. 17. The issue thus raised in the additional ground is thus no longer res integra. The Hon’ble Delhi High Court in the case of CIT vs. Brandix Mauritius Holdings Ltd. (supra) clearly underscored the binding nature of CBDT Circular No.19/2019 dated 14.08.2019 and stated in unequivocal terms that the assessment order passed without DIN is unsustainable in law owning to failure of the Department to allocate DIN and such failure cannot be regarded as an error which can be corrected by taking recourse of section 292B of the Act. The Hon’ble Delhi High Court explained the binding effect of CBDT Circular and held that in the light of CBDT Circular, any communication issued by any Income-tax Authority relating to assessment, appeals, orders, statutory or otherwise, explanations, enquiry, investigation, verification of information, penalty, prosecution, rectification, approval etc. to the assessee or any other person on or after the first day of October, 2019 shall have no standing in law unless a computer generated Document Identification Number (DIN) has been allotted and is duly reflected in the body of such communication subject to exceptional circumstances referred to in para 3 of CBDT Circular. 18. The Hon’ble Calcutta High Court in PCIT vs. Tata Medical Center Trust (2023) 154 taxmann.com 600 (Cal.) after the closure of hearing, has also echoed the similar view in line with the judgment in the case of Brandix. In that case, revisionalorder under s. 263 of the Act was passed without DIN in the body of revision order. Tribunal upon examination of facts held that order passed under section 263 did not incorporate Document Identification Number (DIN) and was thus in violation of Circular No. 19 of 2019, dated 14-8-2019 which stated that any communication which was not in conformity with said Circular shall be treated as invalid and shall bedeemed to have never been issued - On appeal to High Court, revenue submitted that intimation letter should be treated as part and parcel of substantive order, however, in the intimation letter there was nothing mentioned as to why in substantive order DIN was not mentioned as mandated in Circular - In Miscellaneous Application proceedings, revenue could not answer a specific query as to how a DIN intimation letter along with manual order fulfils categorical requirement mandated by CBDT Circular and therefore, Tribunal came to conclusion that order passed under section 263 did not satisfy 28 Judicial Analysis
Ahmedabad Chartered Accountant Journal December, 2023 577 requirement mandated by CBDT Circular –In such backdrop, the Hon’ble High Court held that the appeal of revenue is devoid of substantial questionof law and thus liable to be dismissed. 19. The judgments, navigated above, emphasizes on the significance of strict adherence to provisions outlined the CBDT Circular. These rulings requires the income tax authorities to meticulously comply with the mandate of CBDT Circular inletter and spirit and sheds light on the significance of maintaining procedural integrity and upholding the principles of transparency and accountability in the realm of income tax assessments. The strict compliance of Circular is thus cardinal & integral to the validity of assessment. 20. It is an admitted position that the approval granted under s. 153D by the Addl. CIT to the draft assessment order is without issuance of DIN. In the backdrop ofnuanced judicial view, the approval under section 153D which is the fulcrum forpassing final assessment order dated 19.02.2021 in question is thus apparently non-est in law in the absence of DIN allocated to such communication at all. The final assessment order so passed under s. 153A in question on the basis of such invalid and non-est approval under section 153D is thus without sanction of law. The assessment order dated 19.02.2021 passed under s. 153A is thus liable to be quashed at threshold.Similarly, notice of demand under s. 156 without DIN and on the basis of non-estassessment order is also to be reckoned as a nullity. 21. Having held the assessment order passed is vitiated owning to non conformity with the CBDT Circular No.19 of 2019, we do not consider it necessary to go intoother aspect of objections raised on behalf of the assessee in its main grounds of appeal and additional grounds. 22. In conclusion, in the light of judgment delivered by Jurisdictional and other Hon’ble Courts, we see no difficulty to accept contentions on invalidity of assessment due of infringement of CBDT circular. Governed by the binding precedents, we holdin favour of the assessee and against the Revenue. ❉ ❉ ❉ Judicial Analysis Continued from page 572 Unreported Judgments (ii) The Assessing Officer passed reassessment order without hearing the assessee, and therefore, there was a breach of principles of natural justice. (iii) There was no opportunity of cross examination of the persons who made statement against the assessee was granted. (iv) The Assessing Officer had not provided the seized material to the assessee. (v) The admission on the part of Shri Umang Hiralal Thakkar before the Settlement Commission cannot be accepted in toto without confronting the same to the assessee. The assessee’s case is independent case and the assessee cannot be punished for higher tax liability on the basis of admission of third party. (vi) There is no other evidence on record to prove on money was paid to Shri Umang Hiralal Thakkar or concerned group. 4. The assessee, thus, denied that any on-money was paid to Dharmadev Group for purchase of shop. 5. The DR relied upon the assessment order and order of CIT (Appeals). HELD: 6. The Tribunal, vide Para 7 and 8 of the order, observed as under: “7. I have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee has given all the details related to purchase of property in the project of Swaminarayan Park and paid Rs.8,65,237/- in cash towards booking amount. This fact was never disputed, but the Assessing Officer analysed the same as assessee’s investment in the property in respect of on money to Dharmadev Infrastructure Limited. In fact, the details of cash payment were established by the assessee as the said amount was not paid in cash but through proper channel. Mere admission on the part of Shri Umang Hiralal Thakkar before the Settlement Commission, the assessee cannot be denied the cross examination of the said party. Thus, the Assessing Officer was not right in making addition on that basis. Therefore, appeal of the assessee is allowed. 8. In the result, appeal filed by the assessee is allowed.” ❉ ❉ ❉
578 Ahmedabad Chartered Accountant Journal December, 2023 CA. Kaushik D. Shah [email protected]. Issue Whether capital gain should be exempted under section 54 when entirely invested in property under construction? Proposition In accordance to section 54 of the Income-tax Act, 1961 (“Act”), when an individual or HUF earns income by the way of capital gain on selling a residential house, they can claim exemption from the same while computing their tax liability if they have invested the proceeds in the acquisition, i.e., purchase or construction, of another residential property. However, to claim such exemption the new residential house property should be purchased either one year before the date of transfer or two years after the date of sale or transfer and the house property bought should be in India. In the case of constructing a new house, the individual is given an extended time period to construct a house, i.e., within three years of the date of transfer or sale. If the individual fails to construct or purchase a new house property within the stipulated period, he or she can deposit the capital gains proceeds in the Capital Gains Account Scheme in any public sector bank and avail of the exemption from this section. View against the proposition In the case of Yashovardhan Sinha v. Income-tax Officer, Ward-6(4), Patna [2016] 65 taxmann.com 31 (Patna - Trib.) from the receipt of Capital Gain, the assessee made investment in a property under construction. The CIT(A) disallowed this exemption claimed on the following grounds – a) that the new residential house was not completed by the date marking the expiry of three years from the date of the transfer,b) that the assessee had not deposited the unutilized capital gain in an account opened under the capital gains account scheme notified by the Central Government; c) that the entire amount paid towards the acquisition of the new flat had been after the due date of filing the return of income u/s. 139(1) as applicable in the assessee’s case; and d) that the new flat is in joint names of the assessee and his wife, Sunita Sinha Therefore, it was held that assessee being not eligible for deduction u/s.54 in view of the non-satisfaction of the primary condition of acquisition of house property within the time period stipulated u/s.54(1) View in favor of the proposition In the case of Assistant Commissioner of Incometax v. M. Raghuraman [2018] 91 taxmann.com 11 (Chennai - Trib.), the assessee invested the entire capital gain arising from sale of residential house in a new flat which was not completed, even though payment was made to the promoter. The possession of flat was not yet given to the assessee. The assessee claimed deduction under section 54 for the sale consideration which was reinvented in a new flat. However, such claim was disallowed by AO on grounds that in the absence of completion of construction such deduction is ineligible under section 54 but he Commissioner (Appeals) allowed the deduction on appeal. On appeal to the tribunal, the court held that Section 54(2) does not say that in case the assessee could not get possession of the property, Controversies
Ahmedabad Chartered Accountant Journal December, 2023 579 he is not entitled for exemption under section 54. The requirement of section 54 is that the capital gain shall be utilised or appropriated as specified in section 54(2). The assessee has complied with the conditions stipulated in section 54(2), therefore, the Commissioner (Appeals) has rightly allowed the appeal of the assessee. Hence, this Tribunal does not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. In the similar case of Bal Kishan Atal v. Assistant Commissioner of Income-tax, New Delhi,[2019] 104 taxmann.com 432 (Delhi - Trib.) the assessee sold a property and claimed a deduction for the sum utilised in the purchase of a residential flat and the sum invested in the Capital Gains Account Scheme. The Assessing Officer disallowed the deduction for the sum utilised in the purchase of a residential on the premise that assessee had not taken possession nor the purchase deed was executed within the period of three years. He also disallowed the deduction of the sum deposited in the capital gain account on the ground that assessee had not utilised the same within the prescribed period. However, the court on appeal held that assessee’s claim for exemption under section 54 where assessee sold a residential property and invested sale consideration in new residential flat and made payment to developer within prescribed time could not be denied merely because assessee could not obtain possession and got purchase deed executed within period of three years as Consumer Redressal Commission had put stay on developer. Summation Decision taken in the case of Bal Kishan Atal v. Assistant Commissioner of Income-tax, New Delhi, [2019] 104 taxmann.com 432 (Delhi - Trib.) has set the benchmark for key matter of this controversy The Delhi Tribunal in this instant case has held that where the exemption claimed by the assessee is genuine and fulfils all the criterias mentioned in the Act, should not be withdrawn on the basis of any mistake made the developer. The decision was supported by placing reliance on Commissioner of Income tax v.R.L Sood [2000] 108 Taxman 227 (Delhi) where it was held that merely because builder failed to hand over possession of flat within specified period, the assessee could not be denied benefit of benevolent provision of section 54 Referring and relying on the cases above, I humbly conclude by giving my opinion that where the assessee claims exemption in respect of investment made in property under construction and he fulfils all the conditions mentioned in the Act, the same should not be withdrawn merely on the basis of capital gains invested in property under construction or possession is not obtained because of default of the developer. ❉ ❉ ❉ Controversies
580 Ahmedabad Chartered Accountant Journal December, 2023 Tax neutrality in case of demerger where cash consideration is given to some shareholders (holding less than 25% stake) of the demerged entity 1. Background : - In today’s world of merger and acquisition, fulfilling the commercial requirements of the parties has become most important aspect of deals. For this purpose, it is necessary to structure the transaction in a manner that while commercial requirements of the parties are fulfilled, the transaction is undertaken in a tax and regulatory efficient manner. - Consider a case of hive-off of business where the investors wish to invest in a particular undertaking of the company. Complications are likely to arise in a scenario where some parties (holding miniscule shares) are require a complete exit (i.e., cash consideration) while the other parties require equity shares in such hived-off business undertaking of company. - One mode to achieve the desired commercial objective can be : o Step 1 - demerger of business into new company; o Step 2 - payment of cash consideration to the shareholders requiring complete exit; and o Step 3 - issuance of equity shares of the resulting company to the other shareholders. - In such a scenario, a question may arise as to whether payment of cash consideration to some shareholders and issuance of equity shares to other shareholders can be regarded as compliant with requirement of section 2(19AA) of the Income-tax Act, 1961 (the Act) which defines “demerger”. - In the light of this background, we have provided our thoughts on tax neutrality of “demerger” in a scenario where the resulting company discharges consideration by way of (i) cash such that the cash component does not exceed 25% of the total consideration and (ii) balance consideration is discharged by issuance of equity shares to the shareholders proportionately. Hope you find this article interesting. 2. Illustrative fact pattern : - Mr. X holds 20% stake in A Ltd. Mr. Y and Mr. Z each holds 40% stake in A Ltd. - A Ltd. is engaged in the business of manufacturing of “Textile” and “Advanced Material”; - Investor is willing to invest in “Advanced Material” business of A Ltd. Further, the investor wishes that the business undertaken should be transferred by taking blessing of Tribunal. - Mr. X wishes does not wish to hold equity stake in the resulting company and wishes to take an exit from advanced material business. - To accommodate the above commercial understanding, it is proposed that a new company (say “New Co.”) shall be incorporated and “Advanced Material” business undertaking shall be transferred to New Co. by way of demerger. - As against transfer of Advanced Material business undertaking, New Co. shall discharge consideration as under : o Payment of cash consideration to Mr. X for his 20% stake; o Issuance of equity shares to Mr. Y and Mr. Z in a proportionate manner. FEMA & International Taxation CA. Dhinal A. Shah [email protected] CA. Hardik Khatri [email protected]
Ahmedabad Chartered Accountant Journal December, 2023 581 - The above facts are diagrammatically summarized as under : - The limited issue which is subject matter of present article is regarding tax neutrality of the proposed demerger. 3. Discussion : - Section 2(19AA) of the Act defines the term “demerger”. - As per section 2(19AA), “demerger” means the transfer, pursuant to a scheme of arrangement by a demerged company1 of its one or more undertakings to any resulting company2 . Further, clause (i) to clause (vii) of section 2(19AA) provides various conditions which needs to be complied with for a transaction to be regarded as “demerger” under the provisions of the Act. - For the purposes of the present case, it is pertinent to refer clause (iv) and clause (v) of section 2(19AA) of the Act. These clauses have been reproduced under : (iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company; (v) the shareholders holding not less than threefourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger. - From the perusal of the above provisions, in respect of the present fact pattern, two views may emerge as to compliance with requirement of clause (iv) and clause (v) of section 2(19AA) of the Act. The key arguments under both the view have been summarized under : View 1 – Since consideration is not discharged wholly by issuance of shares, the condition specified in clause (iv) is not complied Demerger is not tax neutral: o Clause (iv) of section 2(19AA) of the Act requires that consideration is discharged by the resulting company by way of issuance of equity shares to the shareholders on proportionate basis. The tax department may argue that condition of clause (iv) is not complied with since the consideration to one of the shareholder is discharged by way of cash. o The definition of demerger as prescribed under section 2(19AA) of the Act is to be construed strictly. Clause (iv) of section 2(19AA) itself provides that the consideration is discharged by issuance of shares on proportionate basis and therefore, any other mode of discharge of consideration (say by way of cash etc.) may disentitle the transaction being qualified as “demerger” under the Act. o Further the condition of discharging the consideration on proportionate basis has not been satisfied since some shareholders have been issued cash and some shareholders have been issued equity shares. o The tax department may make a reference to the case of Gujarat High Court [Gautam Sarabhai Trust No. 31 (IT Reference No. 78 OF 1987)]. In this case, the consideration for amalgamation was discharged by way of issuance of shares and debentures. The tax department argued that the discharge of FEMA & International Taxation
582 Ahmedabad Chartered Accountant Journal December, 2023 consideration by way of debentures hampered the tax neutrality. Hon’ble Gujarat High Court agreed with the contention of tax department and disregarded the tax neutrality. Considering the same, it is arguable that where a specific mode (equity shares) and manner (proportionately) for discharging a consideration has been prescribed, the taxpayer has to abide by the same and any alternative mode and manner may hamper the tax neutrality. View 2 –clause (iv) and clause (v) of section 2(19AA) of the Act are to read jointly and on conjoint reading the conditions have been complied with and the demerger is tax neutral: o Clause (iv) of section 2(19AA) of the Act cannot be read in isolation. Clause (iv) of section 2(19AA) of the Act of the Act has to be read in conjunction with clause (v) of section 2(19AA) of the Act. o Clause (iv) of section 2(19AA) of the Act requires that consideration is discharged by issuance of shares on a proportionate basis. Clause (v) requires that 3/4th of the shareholders holding shares in the demerged company (i.e., A Ltd.) becomes shareholder in the resulting company (New Co.). Accordingly, the taxpayer may argue that the requirement to discharge the consideration on proportionate is complied with if : - Shareholders holding 3/4th of the shares of the demerged company become shareholder of the resulting company; - Shares are issued to such 3/4th shareholders on proportionate basis. Discharge of consideration by way of cash payment does not hamper the tax neutrality as long as the conditions of clause (iv) and clause (v) are cumulatively fulfilled. o It is arguable that the judgment of Hon’ble Gujarat High Court in the case of Gautam Sarabhai Trust (supra) was given in the facts of amalgamation. The same may not be of any relevance considering the express provisions contained in clause (v) of section 2(19AA) of the Act. o So long as the 3/4th shareholders holding shares of demerged company become shareholders of the resulting company and shares are issued to such shareholders on proportionate basis the conditions of section 2(19AA) of the Act are complied with and the tax neutrality is achieved. - The above arguments highlight the litigative nature of the issue and interpretational intricacies. Also, the surrounding facts pertaining to demerger and discharge of consideration through cash payment may also need evaluation in greater detail to reach at particular conclusion. 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. (Footnotes) 1 means the company transferring the business undertaking 2 means the company which acquires the business undertaking ❉ ❉ ❉ FEMA & International Taxation
Ahmedabad Chartered Accountant Journal December, 2023 583 ‘Fully Accessible Route’ for Investment by Non-residents in Government Securities – Inclusion of Sovereign Green Bonds Reference was drawn to the Press Release on ‘Issuance Calendar for Marketable Dated Securities for October 2023 - March 2024’ dated September 26, 2023, issued by the Reserve Bank, notifying, inter alia, the issuance calendar for Sovereign Green Bonds for the fiscal year 2023-24, and the Fully Accessible Route (FAR) introduced by the Reserve Bank, vide A.P. (DIR Series) Circular No. 25 dated March 30, 2020, wherein certain specified categories of Central Government securities were opened fully for non-resident investors without any restrictions, apart from being available to domestic investors as well. The Government Securities that are eligible for investment under the FAR (‘specified securities’) were notified by the Bank, vide circular no. FMRD.FMSD.No.25/14.01.006/2019-20 dated March 30, 2020, circular no. FMRD.FMID.No.04/14.01.006/ 2022-23 dated July 07, 2022 and circular no. FMRD.FMID.No. 07/14.01.006/2022-23 dated January 23, 2023. It has been decided to also designate all Sovereign Green Bonds issued by the Government in the fiscal year 2023-24 as ‘specified securities’ under the FAR. The Directions contained in this circular have been issued under Section 45W of Chapter IIID of the Reserve Bank of India Act, 1934 and are without prejudice to permissions/approvals, if any, required under any other law. These Directions shall be applicable with immediate effect. Source:RBI/2023-24/81FMRD.FMID.No. 04/14.01.006/ 2023-24dated November 8, 2023 For full text refer:https://rbi.org.in/Scripts/ BS_CircularIndexDisplay.aspx?Id=12563 Guidelines on import of silver by Qualified Jewellers as notified by – The International Financial Services Centres Authority (IFSCA) The Reserve Bank of India issued the following directions with reference to A.P. (DIR Series) Circular No.04 dated May 25, 2022, in terms of which AD Category-I banks have been permitted to remit advance payments on behalf of Qualified Jewellers as notified by International Financial Services Centres Authority (IFSCA) for eleven days for import of gold through India International Bullion Exchange IFSC Ltd (IIBX). Reference was also drawn to Notification No.35/2023 dated October 11, 2023 issued by DGFT, in terms of which, in addition to nominated agencies as notified by RBI (in case of banks) and DGFT (for other agencies), Qualified Jewellers as notified by International Financial Services Centres Authority (IFSCA) have been permitted to import silver under specific ITC(HS) Codes through IIBX. Accordingly, it has been decided that AD Category-I banks may allow Qualified Jewellers to remit advance payment for eleven days for import of silver through IIBX subject to the conditions as mentioned in A.P. (DIR Series) Circular No.04 dated May 25, 2022. AD Category-I banks may bring the contents of this circular to the notice of their constituents and customers concerned. The directions contained in this circular have been issued under Section 10(4) and Section 11(1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999) and are without prejudice to permissions/ approvals, if any, required under any other law. Source:RBI/2023-2024/83A.P. (DIR Series) Circular No. 07 dated November 10, 2023 For full text refer:https://rbi.org.in/Scripts/ BS_CircularIndexDisplay.aspx?Id=12565 ❉ ❉ ❉ CA. Dr. Savan R. Godiawala [email protected] 13 FEMA Updates 14
584 Ahmedabad Chartered Accountant Journal December, 2023 [I] IMPORTANT CASE LAWS: [1] Issue: Appeal against order u/s. 73 and 74 passed before 31.03.2023 allowed where the same was rejected solely due to expiry of limitation :HC: Case Laws: Pravat Kumar Choudhury v. Addl. STO [2023] 156 taxmann.com 312 (Orissa) Facts: The Petitioners approached the Orissa High Court to challenge the first appellate orders rejecting their appeals on the grounds of being time-barred under the CGST Act. Further, due to the nonconstitution of GST Appellate Tribunal, they were not able to seek alternative remedies under section 112 of the CGST Act. Held: In the meantime, during the pendency of their proceedings, the Ministry of Finance issued a Notification No. 53/2023-Central Tax, dated November 2, 2023, wherein amnesty scheme has been notified outlining a special procedure for filing appeals by taxable persons who were unable to meet the appeal deadline or facing rejection solely based on time limitation. The notification provided new time limit of January 31, 2024 for specified taxpayers subject to certain conditions. In light of this notification, the court sets aside the impugned orders and remands the matters to the Appellate Authority for further proceedings. [2] Issue: Demand issued on ground of non-payment of tax by supplier can’t sustain since recipient was composition dealer :HC: Case Laws: Rama Brick Field v. Addl. CIT Grade-2 [2023] 156 taxmann.com 252 (All). Facts: In the present case, the petitioner who had opted for composition scheme for the period of 01.10.2017 to 21.03.2019 received a notice from the GST department. It was alleged that one of its suppliers was found non-existence at the time of survey and demand of tax along with interest and penalty was raised. It filed writ petition against the demand and contended that no input tax credit was availed since it had opted for composition scheme. Held: The Hon’ble High Court noted that the disputed purchases pertained to period May, 2018, which fell under the period composition and question of taking credit would not arise. Moreover, the petitioner adduced evidence such as tax invoice, e-way bill, G.R., payment receipts etc. to show that purchases were made from registered dealer whose registration was cancelled in October, 2019. Also, it was noted that at time of transaction in question, seller was a registered firm under GST Act and at subsequent time, the seller was found non-existence, Thus, the Court held that the impugned order raising demand for entire amount of tax could not be sustained in eyes of law and matter was remanded back. [3] Issue: HC set aside order denying ITC & directed deptt. to give one more opportunity to prove claim of ITC. Case Laws: Geetha Agencies v. Dy. CST [2023] 156 taxmann.com 165 (Ker.) CA. Vishrut R. Shah [email protected] CA. Bihari B. Shah [email protected] GST and VAT Judgments and Updates