Ahmedabad Chartered Accountants Journal May, 2023 57 Volume : 47 Part : 02 May, 2023 E-mail : [email protected] Website : www.caa-ahm.org Ahmedabad Chartered Accountants 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 Rushabh Mayank - Mastering the Art of Balancing Personal and Professional Growth CA. Shivang Chokshi 59 Editorial CA. Rajni M. Shah 60 From the President CA. Shivang Chokshi 61 Articles GST on Housing Society - How much and how far applicable CA. Harsh Mehta 62 Is ITR date extension justified ? Possible solution of this permanent controversy CA. Tejas K. Andharia 67 Direct Taxes Glimpses of Supreme Court Rulings Adv. Samir N. Divatia 68 From the Courts CA. Jayesh Sharedalal 69 Tribunal News CA. Yogesh G. Shah & 74 CA. Aparna Parelkar Unreported Judgements CA. Sanjay R. Shah 79 Judicial Analysis Advocate Tushar Hemani 83 Controversies CA. Kaushik D. Shah 89 FEMA & International Taxation Fiscally Transparent Entities (FTEs) and treaty eligibility – CA. Dhinal A. Shah & 91 An Unsolved Enigma CA. Hardik Khatri FEMA Updates CA. Dr. Savan R. Godiawala 94 Indirect Taxes GST and VAT Judgments and Updates CA. Bihari B. Shah & 95 CA. Vishrut R. Shah Advance Ruling under GST CA. Monish S. Shah 97 Corporate Law & Others GujRERA Corner CA. Manan Doshi 103 Capital Markets CA. Karan P. Vora 106 From Published Accounts CA. Pamil H. Shah 110 From the Government CA. Ashwin H. Shah & 113 CA. Kunal A. Shah IT Corner CA. Rushabh Shah 114 Association News CA. Mayur H. Modha & 116 CA. Prakash B. Nandola ACAJ Crossword Contest 124
58 Ahmedabad Chartered Accountants Journal May, 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 Accountants Journal May, 2023 59 In today’s demanding world, professionals find themselves constantly juggling with many things. With multiple roles and commitments, they must navigate through the entanglement of their personal and professional lives. Balancing personal growth and professional growth along with managing the relationships in both arenas can be a daunting task. The roles they play, be it of an employer, employee, spouse, community member etc. require time,effort and mindfulness. Few things that would help manage such a juggle are: 1) Prioritization and time management Following the time management matrix as pointed by Stephen Covey would help a great deal as one can divide the work in 4 quadrants, that being: i) URGENT AND IMPORTANT: Do the task yourself as soon as possible. ii) IMPORTANT BUT NOT URGENT: Do as soon as (i) is over with, if needed put a reminder for them so they do not get shifted to the first quadrant. iii) URGENT BUT NOT IMPORTANT: DELEGATE such tasks to save time and energy. iv) NOT URGENT NOT IMPORTANT: ELIMINATE such tasks to save time and energy. Thus, by prioritizing one can complete all the important tasks along with ensuring that none of the aspects of professional or personal life is ignored. 2) Setting boundaries It is said, half of the troubles of life are from saying “yes” too quickly or not saying “no” quickly. Saying “No” will help set boundaries, preserve energy from unwanted tasks and save time for priority matters. CA. Shivang Chokshi [email protected] Mastering the Art of Balancing Personal and Professional Growth 3) Delegation, collaboration, and support Accepting the fact that one cannot work alone is always important and there comes in delegation and collaboration. Delegating the work to colleagues, family members and sharing the credits and responsibilities is a good way of staying light on mind and yet accomplishing the tasks at hand. Asking for help or support shouldn’t be considered weakness or not knowing but should be considered as win-win for all parties involved. 4) Accept the WABI-SABI way! WABI-SABI is a Japanese term that captures the idea that imperfections make things perfect. Striving for perfection in every area of life is a recipe for frustration and disappointment. Embracing imperfections helps alleviate self-imposed pressure and be realistic about the situation at hand. 5) Self-care Healthy state of mind and body is very important to carry on with the juggling and multi-tasking required by the professionals, so time out with self is very important, in form of hobbies, social activities, meditation, workout etc. which recharges and rejuvenates the mind and body. In conclusion, successfully juggling multiple responsibilities requires resilience, flexibility, and collaboration. Balancing personal and professional growth, managing relationships, and maintaining overall well-being can be challenging. But by adopting these strategies and taking things slow and steady, professionals can achieve a sense of balance and mastery in their juggling act. It may take a while but remember, slow and steady always wins the race. ❉ ❉ ❉
60 Ahmedabad Chartered Accountants Journal May, 2023 United we stand, divided we fall! The past few months have been quite turbulent as far as our profession has been concerned and the news of our professional brothers being convicted of misdoings or getting arrested have been doing rounds more frequently than it should be. This makes us think as to whether we as a profession are moving in the right direction? Whether the young and budding chartered accountants are following the footsteps of their seniors who had always strived for excellence in profession? A recent incident showed that many of our professional brothers are alleged to be involved in the bogus donation scandal and had acted as a conduit for money laundering. It really pains our heart to see the youth going down such a slippery path.It is a bitter truth that our young generation is fighting the inner battle of virtues v/s. vices and in the process, getting disgusted, frustrated and exhausted. As a result, we are fast losing the ‘agents of our change’. I feel scared that our ‘demographic dividends’ are getting diverted / destructed, thanks to the happy-go-lucky attitude and easy options. It is therefore the extreme need of the hour for the leadership to take corrective steps to ensure the gangrene does not develop into deadly cancer. The greatest challenge before the leadership today is to harness the enormous potential of our youth power in positive / constructive channels. Or else, this ‘demographic dividend’ is a double edged sword – It can protect also, and it can destruct also. Such acts have also given a chance to the babus at large to extrapolate such incidents over to the profession at large and thereby defame the entire community. Even the day to day issues raised by many practicing professionals seem to be falling on deaf ears and it prima facie appears to have been ignored by pinpointing a few miscreants. It is therefore incumbent upon the torch bearers now to represent the profession strongly before the government authorities and have the voice heard across the table rather than bowing down. It is time we talk with our head held high and let the eye meet the eye. It is time we as a profession unite and make our voice heard similar to other professions in the country or other trade unions in the country. However this should also not be seen as encouraging people to create road blocks. On a lighter note, Chartered Accountants were the first to be included in the Service tax net and advocates still remain outside the purview of GST. ❉ ❉ ❉ CA. Rajni M. Shah Editorial [email protected]
Ahmedabad Chartered Accountants Journal May, 2023 61 To begin with, I am grateful to the CA Association and its members for putting faith in me for this position. I would like to share that My grandfather Shri Rajnikant Chokshi served CAA as president in 1973 and 50 years later I got this opportunity. As a community of Chartered Accountants we have shared responsibilities to uphold the law and be a partner in progress of the country. I along with my team members have chartered a vision for the upcoming year of this 73 year old prestigious Association. The primary goal is to increase the brand value of CAA. We have been regularly doing seminars, study circle meetings, brain trust seminars and many fellowship programs. In May, we have taken part in the Direct Tax Home Refresher Series which is a 12-Webinar program on various topics being conducted jointly with 8 other associations across the country. We have also planned several study circle programs on various topics related to allied laws like PMLA, Black Money Act etc. A Residential Refresher Course is planned at Nathdwara Rajasthan from 23-25 June. 3 Group Discussion meetings on daily Income-tax issues, Audit and Sec 68/69 r.w. Sec 270 followed by Lecture from learned faculty is arranged. A panel discussion on how challenges can be converted to opportunities for SME CA is planned. Enrichment through publications in form of handbooks for ready reference is under works. It is very important to understand the needs of members of the association to make the participation more vibrant for which there is an exercise which will be undertaken to understand the issues faced by members on day to day basis and circulations in form of flyer, draft submissions and other such knowledge sharing activities through email will be done. The CAA can try to be a conduit between the member and the government by doing regular meetings with authorities to understand their issues and also represent member ordeals. The year is planned with lots of activities both educational and non-educational in form of entertainment and fellowship events. To achieve all of the above and much more I plan to work hand in hand with ICAI, our dear President ICAI, CA. Aniket Talati, Chairperson, Ahmedabad Branch ICAI, CA. Anjali Chokshi and Vice-chairperson, WIRC, CA. Hitesh Pomal who all are members of this Association!! I appeal to all readers that the Association needs participation of young members in all its activities so they can take maximum benefit of the expertise of senior members. Our Association, as I know has robust group of CA’s who are very dedicated to the association and work wonderfully as a team. This team work quality can be very beneficial to young members in practice and in industry. To conclude, I would just say I am excited about the opportunities that lie ahead of us and to serve you all as President of the CAA. I am looking forward to working with each one of you to build stronger and vibrant community of chartered accountants in Ahmedabad. ❉ ❉ ❉ From the President From the President From the President CA. Shivang Chokshi [email protected]
62 Ahmedabad Chartered Accountants Journal May, 2023 ❖ Introduction Co-operative Housing Societies are entities registered under the co-operative laws of the respective States. “Housing society” means a society, the object of which is to provide its members with maintenance and management of the common amenities and services. Simply put these are a collective body of persons, supplying certain services to its members, be it collecting statutory dues from its members and remitting to statutory authorities, maintenance of the building, security etc. ❖ Societies which may be registered under Gujarat Co-operative Societies Act, 1961 A society, which has as its object the promotion of the economic interests or general welfare of its members, or of the public, in accordance with cooperative principles, or a society established with the object of facilitating the operations of any such society, may be registered under this Act; Provided that it shall not be registered if, in the opinion of the Registrar, it is economically unsound, or its registration may have an adverse effect upon any other society, or it is opposed to, or its working is likely to be in contravention of public policy. ❖ Applicability of GST At present the GOODS AND SERVICE TAX ACT, 2017, has no scope for differential treatment based on Profitability. Unlike in income tax law, where there is benefit for non-profit organization, in GST same rules are applicable whether an organisation makes profit or not. ❖ Definitions under GST Act which attracts the taxability to co-operative societies As per Section 7 expression “supply” includes– All forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, GST on Housing Society - How much and how far applicable ? CA. Harsh Mehta [email protected] rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; Section 2(84) “Person” includes a co-operative society registered under any law relating to cooperative societies or Society as defined under the Societies Registration Act, 1860 Sec 2(31) “Consideration” in relation to the supply of goods or services or both includes (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government. Sec 2(17) “Business” includes provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members; A co-operative society (being a person as defined above) provides services to its member in the form of facilities or benefits to it member (in course of business) for a consideration. Hence based on above definition and concept of supply cooperative society also gets covered under GST. ❖ Whether Cooperative Society is liable for registration under GST? When the aggregate turnover of a Cooperative Societies in a financial year exceeds twenty lakh rupees, such Cooperative Societies become liable for Registration under GST as per Sec 22.(1) of CGST Act. That means if the collection of money for maintenance charges by society exceeds Rs 20 Lakhs per annum then the Society need to be Registered under GST. Aggregate turnover (total receipts) of the Housing Societies includes all mode of recipets of the
Ahmedabad Chartered Accountants Journal May, 2023 63 society such as society maintenance charges from its members, receipts from investments, income receipts from advertisement board, receipts from mobile towers in premises, Share transfer fee from members, receipts from special purpose use of common area by member (for example marriage function, parties, etc). Thus, Co-operative Housing Society or Residential Welfare Association Turnover (including exempted GST on Housing Society - How much and how far applicable receipts) of which crosses Rs 20 Lakhs per annum become liable for Registration under GST and should charge GST from its members. ❖ REGISTRATION UNDER GST Limit for registration under GST for providing services is Rs. 20,00,000. Whereas, for goods, the limit has increased to Rs.40,00,000 w.e.f 01/ 04/2019. However, for Housing Societies’ the following table suggests registration criteria. Scenario Condition Liable to take Aggregate Turnover Monthly Contribution per member per month registration 1 Less than Rs. 20 lakhs Less than Rs.7500 No 2 Less than Rs. 20 lakhs More than Rs.7500 No 3 More than Rs. 20 lakhs Less than Rs.7500 No* 4 More than Rs. 20 lakhs More than Rs.7500 Yes *No Other Taxable services given by the society ❖ Chargeability and payment of tax on monthly subscription Further, if the aggregate turnover of such Housing Society/ Residential Welfare Association is up to Rs 20 lakh in a financial year, then such supplies would be exempted from GST even if charges permember are more than Rs 7500. A Housing Society / Residential Welfare Associationshall be required to pay GST on monthly subscription / contribution charged from its members if such subscription is more than Rs 7500 per member and the annual turnover of Residential Welfare Association by way of supply of servicesand goods is also Rs 20 lakh or more. ✑ Let’s understand the Implication of GST with different scenario:- Scenario Contribution Total Receipts Receipts Total Registration Taxable Tax @18% (Per Member Contribution other than (Taxable) Receipts Needed Income Per Month) by Members Contribution Like (Total (Yes/No) Receipts Rental for Aggregate (Exempted) Advertise- Turnover Like Inter- ment Per Year) est Income Hoarding 1 6000 1900000 0 0 1900000 No 0 0 2 7550 1600000 0 0 1600000 No 0 0 3 6500 2200000 0 0 2200000 No 0 0 4 6500 1900000 600000 0 2500000 No 0 0 5 7599 1850000 700000 0 2550000 Yes 1850000 333000 6 7599 1850000 0 750000 2600000 Yes 2600000 468000 7 4000 1500000 0 600000 2100000 Yes 600000 108000 8 0 0 2700000 0 2700000 No 0 0 9 0 0 0 2200000 2200000 Yes 2200000 396000 10 7550 2200000 0 0 2200000 Yes 2200000 396000 11 4000 1750000 0 0 1850000 No 0 0 7501 100000 12 4000 1750000 0 0 2550000 Yes 800000 144000 7501 800000 13 4000 1700000 100000 100000 2050000 Yes 250000 45000 7501 150000 ❖ Treatment of different kinds of receipts:- The different kind of receipts by a society can be categorised as under: a. Maintenance fees: These are the contributions by Members of the Society (for an equal amount or
64 Ahmedabad Chartered Accountants Journal May, 2023 proportionately based on the built-up area) for common maintenance of the society such as paying for cleaning, security, admin, accounts audit etc. If the Aggregate turnover of the society is more than Rs. 20 Lac (without any other income) then this income shall be exemptedsubject to limit of Rs. 7500 per month per member. b. Other income: Any income not falling under the criteria of Maintenance fees are considered as other income. If the Aggregate turnover of the society is more than Rs. 20 Lac (which includes other income) and the Maintenance Fees collected is less than Rs. 7500 per month per member, then only other income will be taxable. c. Exempted receipt: Certain receipts of the society are non-taxable even if the aggregate turnover of the society is more than Rs. 20 Lakhs (with or without other income). In order to give more clarity, following are certain examples of receipts and their nature of taxability: Type of Receipt Description Maintenance fees Other income Maintenance and Society may be paying for some security, Included. Service Charges admin, accounts audit etc. And hence it is Exempted if it is taxable subject to limit of Rs. 7500. less than Rs. 7500 Sinking Fund Setting aside revenue over a period of time Included. to fund a future capital expense. Taxable. Non Occupancy These are typical charges for let out Property. Included. Charges These are not applicable commonly. Taxable. Parking Charges Generally charged to members for using Included. space on Parking. Its purely one to one basis Taxable. and not for common use. Share Transfer Fees It is usually charged for share transfer Included. especially in case of sale of Property. It is Taxable. occasional and on one to one basis. Water Charges for When Water charges arecollectedby Society common utilities. from the Members on proportionate basis, deposits the same to the Government, it is acting only like a collection agent and it is not Exempted considered as Society’s receipt. Chances are that these are already taxed by Government’s Arms at sourceand hence society is not required to charge tax on it. When society is collecting a monthly/quarterly/ Included. yearly contribution of an approx. amount from Taxable. the members towards water charges to be deposited to government. Water Charges – When society has allowed members to use Included. Individual use certain limit of water (as in the case of boring Taxable. facility) and charges for any excess use of water above the free limit, such receipts are taxable income. GST on Housing Society - How much and how far applicable
Ahmedabad Chartered Accountants Journal May, 2023 65 Common Services Service charge for using facilities like Club Included. House, Swimming Pool, which are commonly Taxable. charged to all members are covered under Maintenance fees Repairs Fund These are contribution from all Members, at the Included. rate fixed at the General Body Meeting from time Taxable. to time, (subject to the minimum of 0.75 percent per annum of the construction cost of each flat) for meeting expenses of normal recurring repairs. Interest on Default It is not for any common use but its charges Included. case to case basis. Taxable. Charges for using Use of Common Space such are banquets and Included. common space gyms for use by Member or Outsidermay be Taxable. charged by the society. And as it is on case to case basis, it is not covered under Maintenance fees. Non-Agricultural Tax It is to be paidon all lands annually that have Exempted been used for any other purposes other than farming. As it is collected by society and deposited to Government, it is not taxable. Income on Renting These are not common services and are mostly Included. Mobile Tower etc mostly to be given to Business entities, therefor Taxable. these are chargeable to Tax. In case the Society is not registered under GST, then the same shall be subject to RCM (after 1st April 2018 Property Tax on When society is paying property tax from the Exempted common area existing fund. When society is collecting the share of Exempted property tax from individual member on a proportionate basis and depositing that exact amount to Government, then the Society is only acting as agent. When society is collecting a monthly/quarterly/ Included. yearly contribution of an approx. amount from Taxable. the members towards Property Tax. Taxable Heads Exempted Heads Maintenance and Service Charges Property tax Parking Charges Electricity Supply from MCGM only Non-Occupancy Charges Water Supply from MCGM Only Sinking Fund Non-Agricultural Tax Repair Fund Share Transfer Fees Tower or other Rent Interest or Penalty GST on Housing Society - How much and how far applicable
66 Ahmedabad Chartered Accountants Journal May, 2023 ✑ Let’s underst and the Implication of GST with different scenario for exemption and taxability Scen- Repairs Water Contribu- Parking Club Total Exem- Exem- Non Taxable ario and Charges tion to Charges house receipt ption ption Taxable Mainte- Agent sinking Eligi- Amount nance Service fund ble 1 7300 0 0 0 0 7300 7300 7300 0 0 2 7300 600 0 0 0 7900 7300 7300 600 0 3 7300 600 700 0 0 8600 8000 0 600 8000 4 7300 600 700 800 0 9400 8000 0 600 8800 5 7300 600 700 800 500 9900 8500 0 600 9300 6 7300 0 700 800 0 8800 8000 0 0 8800 7 7300 0 0 800 0 8100 7300 0 7300 800 8 7300 0 0 0 600 7900 7300 0 0 7900 9 7300 0 0 0 150 7450 7450 0 7450 0 ❖ Rate of Tax The society is liable to collect tax at the rate of 18% if the aggregate turnover exceeds 20 lakhs ❖ Input Tax Credit (ITC) Allowed: If the Society becomes liable to pay GST, it is allowed to take Input Tax Credit under Sec 16 (1) of CGST Act subject to conditions for taking input tax credit. Housing Society is entitled to ITC in respect of taxes paid by them on capital goods (generators, water pumps, lawn furniture etc.), goods (taps, pipes, other sanitary/hardware fillings etc.) and input services such as repair and maintenance services – Lift AMC, Housekeeping, Security, Fire AMC, Repairs &Maintenance, Contract staff, Accounting & Auditing Services and other such services. ❖ Applicability of Reverse Charge Mechanism Tax liability under Reverse Charge as defined under Sec 2(98) of CGST Act also applicable. That means tax shall be payable by the Housing Society when supplies are received which are notified Services asper Sec 9(3) of CGST Act like services of Goods Transport Agency, Advocate Services etc. and supplies from Un-registered Person under Sec 9(4) of CGST Act. The society can claim ITC on tax paid under RCM. ❖ Eligibility for Composition Scheme Housing Society is not eligible for Composition Scheme. ❖ Statutory Compliances: - Returns: Society are also liable to file monthly returns i.e. GSTR-1, GSTR-2, GSTR-3 , Annual returns etc. - Invoices: Society is required to change the invoice format of monthly/quarterly/yearly bills invoiced to the members. Society should mention the GSTIN No, the tax collected and so on in the invoice issued by it. - Books of Accounts: Society is liable to prepare and maintain proper books of accounts. It would also be liable to audit if the aggregate turnover exceeds the threshold limit of audit. Also to maintain proper Records of Supply & Expenses and preserve such Records for 72 Months. ❖ Conclusion If the aggregate turnover exceeds Rs. 20 Lakhs cooperative society are compulsorily required to get registered, there is no other exemption for registration. Also in GST regime hosing society are eligible to claim ITC on inward supply made by it, which was not allowed earlier, this would benefit the society in the form of reduction in cost. The society can transfer this benefit to its member is the form of reduction of maintenance charges collected from its member after due a detailed the cost benefit analysis available to the society under GST. ❉ ❉ ❉ GST on Housing Society - How much and how far applicable
Ahmedabad Chartered Accountants Journal May, 2023 67 Almost every year, dispute arises as to the extension of non-audited Income Tax Return filing due date and consequent extension of audited Income Tax Return filing due date also. Many professional consultants’ associations across the nation make representations to the government every year for this matter, although it’s a different matter that it’s a primary duty of business / trade associations to make such representations. Following table shows the extended dates for some of the previous years. Assessment Original Extended Relevant Year Due Date Due Date Circular Etc. AY 2021-22 31/07/2021 31/12/2021 CBDT Cir. No.17/2021 AY 2020-21 31/07/2020 10/01/2021 Press Release 30/12 AY 2019-20 31/07/2019 31/08/2019 225/157/2019/ITA.II AY 2018-19 31/07/2018 31/08/2018 225/242/2018/ITA.II AY 2017-18 31/07/2017 05/08/2017 Not Available AY 2016-17 31/07/2016 05/08/2016 225/195/2016/ITA.II AY 2015-16 31/07/2015 07/09/2015 225/154/2015/ITA.II But why such extensions are needed every year? And what is the possible solution to this permanent controversy? Section 139(1) says that the non-audited case ITRs are to be filed latest by 31st July of relevant assessment year. And assessment year starts form 1st April. So, intention of the parliament while enacting this provision can be said as – the person should get the time of 4 months (From 1st April to 31St July). But the milliondollar question is – “are the all ITR filing utilities and schemas made available on 1st April every year?” Further, the last date of filing TDS return for quarter 4 of relevant financial year is specified as 31st May following that quarter end. So, effect in Form no. 26AS arrives nearly by 10th of June each year. Further, from AY 2021-22, AIS and TIS are issued by the income tax department. So, matching the data with these two reports has become one more timeconsuming task. Most of the data in AIS and TIS comes from Statement of Financial Transaction (SFT) filed by various entities. And the last date of filing such SFT is 31st Mayimmediately following thefinancial year in which the transaction is registered or recorded. So, practically the person who wants to file the return efficiently can get the Form 26AS, AIS and TIS nearly by 15th June. And such person remains with only 1.5 months’ time to file the return of income. So, it is very natural that time extension is expected by the common people. Now, suppose, even the time is extended for such cases, that time is actually taken from the remaining 3 months’ time frame available for filing ITRs of audited cases. So, the income tax department might be of the opinion as under. 1. Person files his return on its own without taking help of tax professionals. Means common man is so expert in ITR filing matter. 2. Persons are fully aware about all their financial transactionsand make their accounting also and the person does not need to tally its data with the data mentioned in Form no. 26AS, AIS and TIS. 3. Tax professionals are magicians which can file any number of ITRs within this very short period of 1.5 months. And they can work for 24 hours constantly during this period of 1.5 months. 4. Out of 4 months’ time envisaged by the Act (1st April to 31st July) to file the return, income tax department deserves to have first 2.5 months available for itself and remaining 1.5 months’ time is more than enough for the taxpayers to file the returns of income. Is ITR date extension justified? Possible solution of this permanent controversy. CA. Tejas K. Andharia [email protected] Continued to page 68
68 Ahmedabad Chartered Accountants Journal May, 2023 80P(4)-IT Act-Credit Society not Coop. Bank When the assessee society is giving only credit to its members it cannot be said to be coop. bank under Banking Regulation Act wherein the activities altogether different as it includes credit to public at large. It was entitled to 80P(2). PCIT v Annasaheb Patil Mathandi Kamgar Sahakari (2023) (150 taxmann.com 173) 153A-Unabated Assessments and Incriminating Material If a search has been carried out the AO u/s 153A, all PENDING assessments/reassessments will stand abated so that if no incriminating material is found during the search, the AO assumes jurisdiction to not to make any additions to the completed /unabated assessments. However, the AO can reopen u/s 147, subject to fulfillment of the conditions therein. PCIT v Abhisar Buildwell P Ltd (2023) ( 149 taxmann.com 399) Glimpses of 4 Advocate Samir N. Divatia [email protected] Sec 45 r.w.s. 2(47)- Reconstitution of Firm & Transfer under IT Act There was reconstitution of the firm and revaluation of land & building which was credited to the account of the partners in their profit sharing ratio. Held, when this revalued amount was available for withdrawal by the partners, it was in effect distribution of assets to the partners. The word “otherwise” in sec 45(4) takes into its sweep not only the cases of dissolution of firm but also subsisting partners transferring the assets in favour of retiring partners. The decision in case of A.M. Naik Associates (265 ITR 346) (Bom) affirmed. CIT v. Mansukh Dyeing & Printing Mills (2023)(145 taxmann.com 290) ❉ ❉ ❉ 5 Rulings 6 God knows who is correct and who is incorrect in demanding such time extension or in rejecting such time extension in this matter, but following are the possible solutions of this permanent controversy. 1. Introduction of clause in the Income Tax Act itself which provides for issuance of all ITR filing utilities as on 31st March itself and non-compliance of that must result into automatic extension of due date by that latency period. 2. If a person can make calculation of TDS by 30th April (7th April for TCS) and can pay it by that date, why can’t that person file a TDS/TCS return by 7th May? So, the due date of filing TDS/TCS return of the 4th quarter must be reduced to 7th May immediately following that quarter. 3. Last date of filing SFT must also be reduced to 30th April or 7th May immediately following the end of that financial year. 4. Form No. 26AS, AIS and TIS must be updated and made smoothly available on the portal latest by 15th May. 5. To encourage the early filing some incentives can also be given by the government to early birds. For example, 2% instead of 4% education cess for those persons who file the return of income by 30th June. If government open heartedly wants to implement its Minimum Government Maximum Governance slogan, then above are some of the suggestions to be implemented first in this matter. It must not forget that one of canon out of the four canons of taxations is the canon of convenience. ❉ ❉ ❉ Continued from page 67 Article : Is ITR date extension justified? Possible solution of this permanent controversy
Ahmedabad Chartered Accountants Journal May, 2023 69 Foreign Exchange Loss on forward contracts. Pr. CIT v/s. Simon India Ltd (2023) 450 ITR 316 (Del) Issue: Whether foreign exchange fluctuation loss on unmatured, matured and cancelled forward contracts is allowable as a deduction? Held: “The Revenue’s contention is unmerited. There is no dispute that the forward contracts were entered into by the assessee to hedge against foreign exchange fluctuations resulting from inflows/outflows in respect of the underlying contracts for provisions of consultancy and project management. Coincidently, the assessee is not dealing in foreign exchange. Clearly, the said transactions were to hedge against the risk of foreign exchange fluctuations and thus, fall within the exceptions of proviso (a) to section 43(5) of the Act. The forward contracts were to guard against any loss on account of future exchange fluctuations in respect of inflows and outflows relating to contracts for execution of the works entered into by the assessee.” “It is material to note that there is no allegation that the assessee has not been following the system of accounting consistently. In CIT v/s. Woodward Governor India P. Ltd. (supra), [321 ITR 254 (SC)], the Supreme Court had referred to Accounting Standard - 11. In terms of Accounting Standard-11, the exchange difference arising on foreign currency transactions are necessary to be recognized as income or expense in the period in which they arise, except in cases of exchange differences arising on repayment of liabilities for acquiring fixed assets.” Donation given for Public Welfare. Pr. CIT v/s. Mysore Minerals Ltd (2023) 450 ITR 647 (Kar) Issue: Whether donation given to local authority for construction of ring road is allowable expenditure u/s 37(1)? Held: “The substantial questions of law involved in this appeal have already been answered in favour of the assessee by the Supreme Court in Sri Venkata Satyanarayana Rice Mill Contractors Co. v/s. CIT [1997] 223 ITR 101 (SC). Para 10 of the judgment reads as under (Page 111 of 223 ITR).” “From the aforesaid discussion it follows that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee’s business or which results in the benefit to the assessee’s business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister’s Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee’s business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of assessee’s business”. CA. Jayesh C. Sharedalal [email protected] From the Courts 11 12
70 Ahmedabad Chartered Accountants Journal May, 2023 Reassessment (old law): Erroneous factual background. Rajeshwar Land Developers Pvt. Ltd. v/s. ITO and Others (2023) 450 ITR 108 (Bom) Issue: When details of expenses are filed in original scrutiny assessment and the ‘reasons recorded’ did not give any particulars as to the failure on part of the assessee, whether notice u/s 148 is valid? Held: “Allowing the petition that during the original scrutiny assessment the Assessing Officer had looked at all the documents on record and had stated so in the assessment order. The assessee had submitted details of all expenses, a list of creditors and details of purchasers in response to the notices under sections 142(1) and 143(2). The details such as steel purchase, electrical materials, plumbing, labour charges, etc. were provided in detail. Even the queries in respect of other expenses, unsecured loans were furnished. In the assessment order also, it was stated that the reply, details, clarifications and explanation filed by the assessee were considered. Therefore, the reasons given ought to have specified the failure on the part of the assessee to disclose fully and truly all material facts. It was not enough to reproduce the language of the statutory provision. The reasons did not give any particulars as to the failure on the part of the assessee. It was nowhere stated that the second page of Note -15 was not part of the assessment record. Furthermore, it was not explained as to how the second page came to be missed. Even when this fact was stated by the assessee, while disposing of the objections, the Assessing Officer did not state that the second page of the note was not available. The notice for reopening of the assessment and the order rejecting the assessee’s objections were on anerroneous/factual ground without looking at the relevant page. Since the foundation for reopening the assessment on the facts was erroneous, apart from various other legal challenges that arose, the notice and consequent order were quashed and set aside.” (emphasis supplied) From the Courts Applicability of section 13(3) for payments made to related party. CIT (Exemptions) v/s. Shri Ramdoot Prasad Seva Samiti Trust (2023) 450 ITR 288 (Raj) Issue: Whether the exemption u/s 11 could be denied simply because of the transactions between the assessee trust and related persons? Held: “Section 11 of the Income Tax Act, 1961, pertains to income from property held for charitable and religious purposes. Section 13 on the other hand pertains to cases where section 11 would have no application. Sub-section (1) of section 13 provides that nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof under specified circumstances. Sub-section (2) of section 13 provides that without prejudice to the generality of the provisions of clause (c) and clause (d) of sub section (1), the income or the property of the trust or institution or any part thereof shall for the purposes of that clause would be deemed to have been used or applied for the benefit of a person referred to in sub-section (3), as provided in clause (a) to (h) of sub section (2).” “Clause (g) would be applicable in a case where any income or property of a trust or institution is diverted during the previous year in favour of any person referred to in sub section (3). Sub section (3) in turn relates to persons or institutions which are closely related such as the author of the trust or the founder of the institution, any trustee of the trust or manager of the institution etc. Clause (g) would apply where any income or property of the trust or institution is “diverted” during the previous year in favour of any person referred to in sub-section (3). The crux of this provision is diversion of income. Mere transaction of sale and purchase between two related persons would not be covered under the expression “diversion” of income. Diversion of income would arise when the transaction is not at arm’s length and the sale or purchase price is artificially inflated so as to cause under advantage to other person and divert the income.” 13 14
Ahmedabad Chartered Accountants Journal May, 2023 71 Issue of draft assessment order and show cause notice. Kottex Industries Pvt. Ltd. v/s. NFAC (2023) 450 ITR 685 (Guj) Issue: When draft assessment order was not served, is there a violation of natural justice? Held: “Since the challenge to the assessment order under section 147 read with section 144B was that it was passed in violation of principles of natural justice and was contrary to the procedure prescribed for faceless assessment under section 144B it could be challenged by invoking the extraordinary jurisdiction under article 226 of the constitution of India. It was not disputed that the draft assessment order was not forwarded to the assessee, with the show cause notice as required according to the procedure prescribed under section 144B(1)(xvi)(b). The assessment order and the notice of demand under section 156 were quashed and set aside. The matter was remanded to the Assessing Officer who shall issue a show cause notice along with the draft assessment order granting an opportunity of personal hearing to the assessee as prescribed under section 144B.” Reassessment: condition precedent: Verification of information. Asam Sreenivasa Reddy v/s. ITO & Another (2023) 450 ITR 244 (AP) Issue: What are the obligations on the assessing Officer under section 148A(b) and (d) qua the verification of information? Held: “Under section 148A(b) and (d) of the Act, the expression “shall verify” mandates proper verification by the Assessing Officer of the information collected through sources, such as Central Information Branch and Annual Information Return. The Revenue should not treat the verification procedure as an empty formality, especially having regard to the instructions issued by the Central Board of Director Taxes, dated August 22, 2022.” “That a notice under clause(d) of section 148A of the Act was issued to the assessee based on information that the income chargeable to tax for the assessment year 2015-16 had escaped assessment within the meaning of section 147 of the Act. The notice indicated that the information from the Central information Branch was that in Andhra Bank, Kaikalur, an amount of Rs. 25,00,000 was deposited in six transactions, while from the Annual information Return, the information was that in Andhra Bank, more than Rs. 10,00,000 was deposited under one account totalling to Rs. 26,00,000. Adding both the transactions, the assessee was asked to show cause for the deposit of Rs. 51,00,000. A perusal of the explanation by the assessee and the material would show that the assessee only had one bank account in the Andhra Bank at Kaikaluru. To prove that he had no other account at the Kaikaluru Branch, in which he had deposited Rs. 26,00,000 would be practically impossible. A negative fact cannot be proved. On the other hand, if there were material to show that the assessee had another bank account, it would be useful for the respondent to verify it and place material in support of it. Apart from that, the Annual Information Return did not mention the bank account number or the branch of the Andhra Bank in the show cause notice. In such an event, it would be difficult for the assessee to explain the deposit of Rs. 26,00,000. In respect of information furnished under Central Information Branch, the assessee was able to explain the deposits made in the assessment year 2015-16, which tallied with the figures mentioned in the notice. The order under section 148A and the consequent notices were not valid.” (emphasis supplied) Reassessment Information should have a robust and live link with the alleged escapement. Dr. Mathew Cherian v/s. ACIT (2023) 450 ITR 568 (Mad) Issue: Whether the assessing Officer has to establish proper nexus of information in his possession with probable escapement of tax? 15 16 17 From the Courts
72 Ahmedabad Chartered Accountants Journal May, 2023 Held: “As on April1, 2021, the scheme of reassessment under the Income Tax Act, 1961 law has undergone a sea change. While the provisions earlier required the officer to have “reason to believe” that there had been escapement of income from tax, what is now required is “information” that suggests escapement of income from tax. Section 148A stands activated only if the Income tax Department is in possession of “information”, which suggests that income chargeable to tax has escaped assessment. The definition of “information” is wide and could include just about any material in the possession of the officer. However, the caveat is that such information must enable the suggestion of escapement of tax. Then again, the mandate cast upon the officer under section 149A(d) is that he has to decide whether it is a “fit case” for issue of a notice for reassessment, upon a study of the material in his possession, including the response of the assessee. Thus, not all information in the possession of the officer can be construed as “information” that qualifies for initiation of proceedings for reassessment, and it is only such “information” that suggests escapement and which, based upon the material in his possession, that the officer decides as “fit” to trigger reassessment, that would so qualify. The “information” in the possession of the Department must prima facie, satisfy the requirement of enabling a suggestion of escapement from tax. This is not to say that the sufficiency or adequacy of the “information” must be tested, as such an analysis would be beyond the scope of jurisdiction of the court in writ jurisdiction. However whether at all the “information” gathered could lead to a suggestion of escapement from tax can certainly be ascertained. For the purposes of such ascertainment and to determine “fitness” to reassess, the materials gathered must be seen in the context of the allegation of tax evasion, taking assistance of decided cases to ascertain whether or not the allegation is sustainable. In the present regime of reassessments, an Assessing Officer must be able to establish proper nexus of information in his possession, with probable escapement from tax. No doubt the term used is “suggests”. That is not to say that any information, however tenuous, would suffice in this regard and it is necessary that the information has a live and robust link with the alleged escapement.” Difference between “salary” and “professional income”. Dr. Mathew Cherian v/s ACIT (2023) 450 ITR 568 (Mad) Issue: Whether the rules and regulations mentioned in the agreement between doctors and hospital would conclude that it a contract of employment? Held: “The Assessing Officer had come to the conclusion that the hospital exercised total control over the doctors in regard to their timings of work, holidays, call duties based on the exigencies of work, termination, entitlement to private practice, increments and other service rules. However, the agreements between the hospital and the assessee revealed the following terms: (i) The doctors were referred to as consultants and fell within the category of visiting consultants or full time consultants, as against part time and special category consultants who also attended the hospital. (ii) The remuneration paid was of a fixed amount along with a variable component depending on the number of patients treated and was termed “Salary”. (iii) The consultants were not entitled to any statutory service benefits such as provident fund, gratuity, bonus, medical reimbursement, insurance or leave encashment. (iv) Working hours were stipulated as 8.a.m. to 5.p.m. and the consultants were expected to be available on call in the night. (v) They were permitted a month’s vacation and leave on a caseto case basis and depending on need. (vi) Private practice was permitted in the case of both categories, upon the satisfaction of certain conditions, such as service of two years in the hospital and other conditions. (vii) The hospital did not exercise any control, intervention or direction over the exercise of professional duties by the assessee. (viii) The assessee were wholly responsible for professional indemnity insurance and the hospital did not indemnify the doctors from any manner of claims. The intention of the parties appeared to engage in a relationship as equals. The hospital, on the one hand, and the professional. On the other, engaged in a relationship where the former provided the administrative infrastructure and facilities 18 From the Courts
Ahmedabad Chartered Accountants Journal May, 2023 73 and the latter, the professional skill and expertise to result in a mutual rewarding result. The fact that the remuneration paid was variable and the doctor were not entitled to any statutory benefits also pointed to the absence of an employer-employee relationship. The mere presence of rules and regulations did not lead to a conclusion of a contract of service. Rules and regulations are necessary to ensure that the workplace functions in a streamlined and disciplined fashion. Thus, the mere existence of an agreement that indicated some measure of regulation of the service of the doctors, could not lead to a conclusion that they were salaried employees. The fact that the doctors held full responsibility for their medical decisions and actions and the hospital bore no responsibility in this regard was also of paramount importance, relevant to determine the nature of the relationship as being one of equals, rather than one of master servant.” Interpretation of Taxing Statutes. Muthoot Leasing and Finance Ltd (2023) 450 ITR 496 (SC) Issue: Whether the ratio of judgements relating to one tax enactment can be applied as a precedent in a case relating to another tax enactment? Held: Taxation depends upon the language of the charging section and what is brought to tax within the four corners of the charging section. Therefore, one should be careful and cautions when applying the ratio of judgements relating to one tax enactment as a precedent in a case relating to another tax enactment. This rule of caution is important and should not be overlooked, especially when the language of the enactment and the object and purpose of the enactment are different. High Court’s interference in finding of facts Muthoot Leasing and Finance Ltd v/s. CIT(SC) (2023) 450 ITR 496 (SC) Findings of fact generally recorded by the Tribunal are treated as conclusive. The High Court can interfere with findings of fact while deciding a substantial question of law when the findings are not supported by the material on record, so as to be treated as perverse. For this, however, the High Court must frame a separate substantial question of law and only then interfere with the findings of fact recorded by the Tribunal, while applying strict parameters. “Held, allowing the appeals, that the High Court did not frame a specific substantial question of law and thus, interference with the findings of fact was unwarranted. This did not mean that the tax authorities were not entitled to examine the surrounding facts and circumstances to ascertain the true character and nature of the transaction regardless of the nomenclature given by the parties. However, remanding the matters to the Assessing Officer for fresh adjudication and to reexamine all the transactions keeping in mind the dictum laid down in Sahara India Savings and Investment Corporation Ltd. [2010] 321 ITR 371 (SC) and State Bank of Patiala [2016] 283 ITR 244 (SC) to rule out cases where camouflage or subterfuge had been adopted to avoid payment of interest tax, would entail not only looking at the documents but also several other factors, which would mean getting information and ascertainment of facts in detail from the assessee and the hirer. Hence at this distant point of time, it would not be appropriate to pass an order of remand. Also, the Act had ceased to operate with effect from March 31, 2000. Therefore, the additions made by the Assessing Officer were to be set aside and the orders passed by the Tribunal deleting the additions in the case of the assessee and other cases were to be upheld.” ❉ ❉ ❉ 19 20 From the Courts
74 Ahmedabad Chartered Accountants Journal May, 2023 Schindler China Elevator Company Ltd. V ACIT148Taxmann.com 79 (Mum) Assessment Year : 2018-19 & 2019-20, Order dated : 24th January 2023 Basic Facts The assessee was a non-resident company incorporated in China and was engaged in the business of supply of elevators and escalators, which included design and manufacturing. During the year under consideration, the assessee considered receipts from (Delhi Metro Rail Corporation Limited/ Maharashtra Metro Rail Corporation limited) DMRCL and MMRCL as not taxable in India and claimed a refund of taxes deducted at source. During the assessment proceedings, the assessee as required submitted that it did not have any permanent establishment in India and therefore, no part of the income earned by the assessee could be taxed in India by virtue of the provisions of article 7 of the DTAA. Further its contract was offshore supply of escalators and elevators only. The title to the goods passed outside India and payment thereof was also received outside India, therefore the transaction of sale was not taxable in India.The AO did not agree with the submissions of the assessee and proceeded to tax 5 per cent of the total receipts from DMRCL/ MMRC as income from composite contract liable for taxation in India on the ground that the consortium of the assessee and SIPL was Association of Persons (“AOP”) within the meaning of section 2(31) of the Act. the contract was composite &indivisible which could not be split up into supply &commissioning parts, the consortium was liable to be assessed as an AOP & no benefit of India-China DTAA could be afforded to the association, the offshore supplies had been made by the assessee on the Indian port of disembarkation basis and the delivery of the goods was to be taken as having been made in India. Therefore, the profits from supplies made by the assessee on CIF basis are liable to be taxed in India on the ground that the sale is completed in India. The DRP upheld the findings of the AO that the contracts were completely composite contracts, which could not have any other interpretation in terms of dividing the same into separate segments. The assessee is in appeal before Tribunal against the final order passed in conformity with DRP directions. Issue: Whether since assessee did not carry out any operations in India in respect of its scope of work, income earned by assessee from offshore supply of escalators and elevators would not be taxable in India ? Held Though, the AO vide draft assessment order treated the consortium as an AOP under the Act, however, proceeded to make the addition only in the hands of the assessee. The DRP did not go into the question of AOP and upheld the addition in the hands of the assessee on a substantive basis. On one hand, the revenue treated the agreement with DMRCL and MMRCL as a composite contract, while on the other hand, no separate assessment has been made in the hands of the consortium as an AOP. In coming to the aforesaid conclusion, the revenue has placed heavy reliance on the scope of the contract, which is, design, manufacturing, supply, installing, testing, commissioning. However, the revenue did not consider the other parts of the contract agreement, which clearly demarcates the description of work, the consideration, and the currency in which the same is to be paid to each of the consortium members. It was the plea of the assessee that the goods were transferred on a CIF basis. In this regard, tribunal referred to the copy 7 CA. Yogesh G. Shah [email protected] CA. Aparna Parelkar [email protected] Tribunal News
Ahmedabad Chartered Accountants Journal May, 2023 75 of sample invoices forming part of the paper book from which it was evident that the same are in the name of DMRCL and MMRCL and the transaction is on a CIF basis. Therefore, in the case of CIF, the property in goods passes on to the buyer at the port of shipment. Though the Cost, Insurance, and Freight, etc., are met by the seller but the property in the goods gets transferred to the buyer at the port of shipment. The buyer incurs all risks of loss of or damage to the goods from the port of shipment. Therefore, the title in property in the goods shipped by the assessee in the foreign port was transferred at the port of shipment itself. Since the assessee did not carry out any operations in India in respect of its scope of work, therefore, it was held that the income earned by the assessee from the offshore supply of escalators and elevators to DMRCL and MMRCL is not taxable in India. Accordingly, the AO was directed to delete the addition made in the hands of the assessee. Legatum Ventures Ltd. V ACIT, 149Taxmann.com436 (Mum) Assessment Year: 2018-19,Order dated: 15th March 2023 Basic Facts The assessee is a company incorporated in the United Arab Emirates and is mainly involved in investment activities. During the AY 2018-19, the assessee had sold shares of an Indian company (I Co). It filed its return of income for declaring nil income and long-term capital loss on sale of I Co shares after applying the provisions of first proviso to section 48 of the Act. In the assessment proceedings, the AO observed that since the assessee was a foreign company and had sold unlisted shares of I Co (a private company), section 112(1)(c)(iii) of the Act was applicable for the computation of capital gains, which specifically excluded the provisions of first and second proviso to section 48 of the Act. Accordingly, the AO computed long-term capital gains as per the provisions of section 112(1)(c)(iii) of the Act without giving effect to the first and second proviso to section 48 of the Act. The assessee objections against the draft order were rejected by DRP hence the assessee is before the Tribunal against the final order passed by the AO. Issue Whether where ingredients of section 112(1)(c)(iii) are satisfied i.e. (a) sale of unlisted shares of Indian company (b) by a non-resident/foreign company and (c) giving rise to long term capital gains, then capital gains is required to be computed as per manner provided under section 112(1)(c)(iii) and second proviso to section 48 would not be applicable ? Held The Tribunal found that though the section 112 deals with the determination of tax payable by the assessee on thetotal income which includes any income arising from the transfer of a long-term capital asset chargeable under the head “capital gains”. However, in thecase of a non-resident (not being a company) or a foreign company, subclause (iii) of clause (c) to sub-section (1) also provides the mode ofcomputation of capital gains. The aforesaid section further provides a taxrate of 10% on the capital gains so computed. Therefore, tribunal was of considered opinion that section 112(1)(c)(iii) is a special provision for the computation of capital gains, in case of a non-resident, arising from thetransfer of unlisted shares and securities. While, on the other hand, section 48of the Act is a general provision, which deals with the mode of computation ofcapital gains in all the cases of transfer of capital assets. Further, section112(1)(c)(iii) of the Act does not provide for re-computation of capital gainsfor levying tax rate of 10%. As per Tribunal it is a wellsettled rule of interpretation that if a special provision is maderespecting a certain matter, that matter is excluded from the general provisionunder the rule which is expressed by the maxim “Generallia specialibus nonderogant”. Further, it is also a wellsettled rule of construction that when, inan enactment, two provisions exist, which cannot be reconciled with eachother, they should be so interpreted that, if possible, the effect should begiven to both. As per Tribunal, if the submission of the assessee that in the presentcase the income chargeable under the head “capital gains” is to be computedonly as per section 48 of the Act is accepted, then the same would render thecomputation mechanism provided in section 112(1)(c)(iii) of the Actcompletely otiose and redundant. Accordingly, the tribunal did not find merits in the Tribunal News 8
76 Ahmedabad Chartered Accountants Journal May, 2023 assessee’s submission that its case was governed under two provisions of the Act,then it has the right to choose to be taxed under the provision which leaves him with a lesser tax burden. In the present case, the capital gains has to be computed only by reference to provisions of section 112(1)(c)(iii) of the Act. Further, it cannot be disputed that if as per section 112(1)(c)(iii), the 1st and 2nd proviso to section 48 of the Act are not given effect, the assessee will havea long-term capital gains from the sale of unlisted sharesof the Indian company. Therefore, Tribunal did not find any infirmity in the orders passed bythe lower authorities taxing the long-term capital gains as per section 112(1)(c)(iii) of the Act. Shri Venkateshwara Educational Institute V ITO (Exemption) 149 Taxmann.com 220 (Kol) Assessment Year : 2017-18, Order dated : 17th February 2023 Basic Facts the assessee is engaged in running an educational institution and registered u/s 12A/12AA of the Act. The AO framed the assessment u/s 143(3) of the Act accepting the returned income thereby accepting the claim of the assesse u/s 10(23C)(iiiad) of the of the Act. The CIT(E ) found from assessment records that the assessee had earned income from dividend, interest & sale of investment and after reducing expenses for running school & other misc. expenses had declared surplus. The CIT(E) observed that since there is no receipt from educational institution/activities, the exemption u/s 10(23C)(iiiad) of the Act has wrongly been allowed thereby rendering the said assessment framed as erroneous and prejudicial to the interest of the revenue.The assessee has submitted that for determining eligibility of exemption u/s 10(23C)(iiiad) of the Act aggregate annual receipt from the educational activities was to be considered in lieu of gross receipts. The Ld. CIT(E) after considering the reply of the assessee and after analyzing the provision of section 10(23C)(iiiad) came to the conclusion that AO has wrongly allowed the exemption u/s 10(23C)(iiiad) of the Act. Issue Whether since as per trust deed assessee was engaged solely for running school in which no fee was being charged from students and it had accumulated surplus for purpose of future application to set up schools, provisions of section 10(23C)(iiiad) were applicable to assessee. HELD The Tribunal found from the trust deed that the assessee is solely formed for the purpose of establishing schools and educational institutions and there was no dispute that it was engaged in running an educational institution. The assessee is engaged in running school in which no fee is being charged from the students due to severe poverty and backwardness and the local resident are not sending their children to schools and has incurred expenses on connected with running and maintenance of the school. The Tribunal accordingly accepted assessee’s contention that it was engaged solely for educational purposes and not for the purpose of profit. Further since the receipt from the aggregate annual receipt from educational institution is less than Rs. 1 crore, the provisions of Section 10(23C)(iiiad) of the Act are applicable and consequently the income of the institution is exempt from tax. The Tribunal also took note that though the assessee trust has total receipt by way of dividend, interest, and capital gain on sale of shares on mutual fund, but the funds are being accumulated in order to improve the infrastructure of the school and also to construct the new schools in accordance with the aims and objectives of the assessee trust.The assessee has surplus approximately 53.65% of receipts for the purpose of future application which was accumulated in order to set up schools and educational institutions after applying 38% of the gross receipt in running and maintenance of the educational institution. Under these facts and circumstances, it was held that the provisions of section 10(23C)(iiiad) are applicable and consequently the income of the institution is exempt as the assessee trust has satisfied all the conditions as prescribed under the provisions of section 10(23C)(iiiad) of the Act. Besides there is no allegation by the CIT(E) that the assessee is involved in any other activity for profit and not for educational purposes. Accordingly, they set aside the order of CIT(E) and allowed the appeal of the assessee. 9 Tribunal News
Ahmedabad Chartered Accountants Journal May, 2023 77 Valsad District Central Co-operative Bank Ltd. V.ACIT150 Taxmann.com 72 (Surat) Assessment Year 2015-16, Order dated 27th February 2023 Basic Facts : during assessment proceedings, the AO noted that theassessee had debited gratuity expenses in its profit and loss account. However, the assessee did not have approval of the Commissioner ofIncome Tax for its gratuity fund. Accordingly, the assessee was asked to furnish party wise details of expenses on account of Group Gratuity Insurance premium. The assessee replied that it had made payment to the LIC and it was not provision for gratuity, hence the same was allowable u/s 36(1)(va) or alternatively u/s 37. The AO rejected the assessee claim since the fund was not approved and since section 36(1)(va) was a specific section, deduction u/s 37 being general section was not allowable. The assessee carried the matter to the CIT(A) who upheld the AO’s order. The assessee is before the Tribunal. Issue: Where payment was made to LIC Department in gratuity scheme which was approved by Commissioner but necessary certificate was not available, whether since deduction had been claimed by assessee consistently and deduction was allowed to assessee, same is allowable in this year ? Held: The Tribunal found that the scheme was operative from 31.3.1976. There was actual payment and not provision. Further the assessee has been claiming deduction since inception and it was also allowed the deduction year after year. The Tribunal also noted the Gujarat High Court decision in case of the assessee wherein the reassessment proceedings were quashed with the observation that the gratuity fund was approved by the Commissioner of Income tax. However, since the scheme was framed back in 1976 itself, the assessee does not have the order so passed by the Commissioner of Income-Tax. It is just because the assessee is not able toprove the copy of the approval, the claim has been denied to the assessee. The Tribunal also found that the employer bank does nothave any control over the funds of the irrevocable trust created exclusively for the benefit of the employees and that the assessee had absolutely no control over the fund created by the LIC for the benefit of the employees of the assessee and further all the contribution made by the assessee in the said fund ultimately came back to the Bank Employees Gratuity Fund. The Tribunal was of the view that this claim of the assessee is allowable on the plea ofconsistency. The Hon’ble Supreme Court in the case of Radhasaomi Satsang (supra) held that the assessments are quasijudicial and each assessment year being a unit, what is decided in one year may not apply in the following year, but where a fundamental aspect permeating through the different A.Y.s has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. Accordingly, the deduction was granted to the assessee. DCIT v. Total Oil India (P.) Ltd. 149 Taxmann.com 332 (Mum) (SB) Order dated 20th April 2023, Assessment Year 2016-17 Basic Facts : The assessee, an Indian domestic company, declared/ paid dividend during the AY 2016-17. As one of the shareholders of the assessee was a non-resident, the assessee raised a plea that the rate at which tax under section 115-O of the ITA was to be paid could not be more than the rate at which dividend could be taxed in the hands of the non-resident shareholder (in India) under the India-France tax treaty. In the course of appellate proceedings, the matter reached before the Mumbai Bench of the Tribunal. The assessee relied on earlier rulings (Giesecke & Devrient India Pvt Ltd vs. ACIT [2020] 120 taxmann.com 338 (Del-Trib.) and DCIT vs. Indian Oil Petronas Pvt. Ltd [2021] 127 taxmann.com 389 (Kolkata-Trib.) of the co-ordinate Bench of the ITAT wherein, it was held that: - The rate of tax prescribed in the tax treaty had to be applied in preference to the higher rate of tax prescribed under section 115-O of the Act. - Payment of DDT under section 115-O of the Act by the domestic company was for and on behalf of 10 11 Tribunal News
78 Ahmedabad Chartered Accountants Journal May, 2023 the shareholder and in discharge of shareholders’ liability to pay tax on dividend distributed. - Section 115-O of the Act was purely for administrative convenience of collection of tax on dividends. The liability to DDT under the Act, falls on the company distributing dividend, is not relevant as it is a tax on dividend earned by the shareholders and therefore, the applicable rate of dividend tax set out in the tax treaties was applicable in the cases of non-resident recipients of dividend. The Mumbai Bench of the ITAT did not agree with the aforesaid rulings of the co-ordinate Bench and the matter was referred to the Special Bench of the ITAT. Further, the Revenue in other casesmade an application for reference of a similar issue to the Special Bench. Issue: Where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts additional income-tax (tax on distributed profits) referred to in section 115-O of the Income-Tax Act, 1961 (in short ‘the Act’), whether such additional income-tax payable by the domestic company shall be at the rate mentioned in Section 115-O of the Act or the rate of tax applicable to the non-resident shareholder(s) with reference to such dividend income” Held: The natural meaning of the term ‘Dividend’, meaning portion of profits received by the shareholder out of the company’s profits as return on the share capital subscribed by the shareholder. If dividend was said to be share of profits declared as distributable among the shareholders, it did not mean that the character of the profits distributed by the company as dividend retained the same character when it reached the hands of the shareholders Though dividend is income in the hands of the shareholder, its taxability need not necessarily be in the hands of the shareholder. The sovereign has the prerogative to tax dividend, either in the hands of the recipient of the dividend or otherwise. Section 115-O of the Act creates a charge to additional income-tax on any amount declared, distributed, or paid by domestic company by way of dividend for any AY. It is a tax on ‘distributed profits’ and not a tax on “dividend distributed’. Section 115-O of the Act is a code by itself, in so far as levy and collection of tax on distributed profits. The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed, or paid as dividends and no further credit shall be claimed by the company or by any other person in respect of the amount of tax so paid. No deduction under any other provision of Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under section 115-O(1) or the tax thereon. Chapter XII D is a complete code in itself on DDT. The provisions of TDS and TCS specifically provide that these are payments on behalf of the payee i.e., the person liable to pay income tax on the sum paid. It provides for discharge for the payer on payment to the credit of Central Government of the amounts due to the payee. Such provisions are absent in the entire scheme of Chapter XII D of the Act. These provisions show that shareholder does not enter the domain of DDT at all. A reading of Article 10 of the model OECD tax treaty shows that dividends paid by a company which is a resident of a contracting state, say India to a resident of the other Contracting State (say France) may be taxed in that other state (France). However, if the beneficial owner of the dividend is a resident in France, the tax socharged shall not exceed specified percentage. The first condition is that the non-resident in France should be taxed in India. The tax treaty has to be considered from the recipient’s taxability perspective. DDT is paid by the domestic company resident in India. It is a tax on its income and not tax paid on behalf of the shareholder. Hence, the domestic company under section 115-O of the ITA does not enter the domain of tax treaty at all.If a domestic company has to enter the domain of tax treaty, the countries should have agreed specifically in the tax treaty to that effect. In the India-Hungary tax treaty, the contracting states have extended the treaty protection. In view of the above, the Special bench of the ITAT held that: • Where dividend is declared, distributed or paid by a domestic company to a non-resident Tribunal News Continued to page 82
Ahmedabad Chartered Accountants Journal May, 2023 79 In this issue, we are giving gist of a decision rendered by I.T.A.T., Ahmedabad in August, 2022, in the case of Integra Engineering India Ltd. vs. ACIT in ITA No.1316/ Ahd/2016, wherein following important issues were discussed. (i) Allowability of bad debt as business loss/ loss incidental to business. (ii) Bad debt written off in the books of accounts and its allowability. (iii) Long Term Capital Loss in respect of equity shares of a subsidiary company, which went into liquidation. (iv) Exemption from tax payable on long term capital gain on transfer of land pursuant to the order of BIFR. We hope the readers would find the same useful. Annexure In the Income Tax Appellate Tribunal “B” Bench , Ahmedabad Before Shri P.M. Jagtap, Vice-President and Ms. Suchitra Kamble, Judicial Member ITA No.1316/Ahd/2016 Assessment Year: 2007-08 Integra Engineering India Ltd. Vs. The ACIT, Circle -4, [Formerly known as Schlafhorst Baroda. Engineering (India) Ltd.] Halol, Dist. Panchmahal. (Appellant) (Respondent) Assessee by : Shri Yogesh G. Shah, AR Revenue by : Shri Alokkumar, CIT DR Date of hearing : 06.07.2022 Date of pronouncement : 24.08.2022 GIST Only In the above appeal, following four major issues were discussed: (i) Allowability of bad debt as business loss/ loss incidental to business. (ii) Bad debt written off in the books of accounts and its allowability. (iii) Long Term Capital Loss in respect of equity shares of a subsidiary company, which went into liquidation. (iv) Exemption from tax payable on long term capital gain on transfer of land pursuant to the order of BIFR. Facts of the Case: 1. Facts in relation to Issue No.(i): The assessee had advanced an amount of Rs.1,36,72,000/- to its subsidiary company namely, Gujarat Textronic Limited (GTL). This amount was written off because GTL became defunct and no amount was recovered from its liquidator. The main purpose for the assessee to invest in the equity shares of GTL as well as to advance amount to it was to oversee that the manufacturing cost of the yarn remained below its import cost, so that it remained cost effective for the company. The assessee was able to establish the business purpose for advancing such loan to its subsidiary, which it claimed that it was for purchase of material, and thus, for working capital. The assessee also relied on the decision of the Hon’ble Gujarat High Court in the case of CIT vs. GMDC Limited - 314 ITR 322 and the decision of Supreme Court in the case of S.A. Builders – 288 ITR 1. It was also pointed out that the amounts were written off in the books by way of resolution passed by the Board CA. Sanjay R. Shah [email protected] Unreported Judgements
80 Ahmedabad Chartered Accountants Journal May, 2023 of Directors of assessee, and thus, should have been considered as business loss. The Department did not allow the same on the ground that the assessee is not engaged in the business of advancing loan, and therefore, provisions of section 36(1)(vii) r.w.s. 36(2) are not satisfied and assessee cannot claim the deduction. The Tribunal, after considering the submissions, decided the ground in favour of assessee in following term. “7. We have heard both the parties and perused all the material available on record. It is pertinent to note that though the assessee has stated that the intention of the assessee to give advances to its subsidiary for making capital and subsidy but the intention was to control the operation of the GTL and to oversee that the manufacturing cost of the yarn clearer remained below its import cost which has to be economical/cost effective for the assessee. Thus, the advances were intended to have a smooth running of manufacturing activities of the assessee company taking into account the cost effectives while investing in the equity shares of GTL. Thus, the same cannot be stated as advance given for acquisition of capital and hence it was rightly treated as bad debt as well as business loss/loss incidental to business by the assessee when GTL became defunct and it was impossible to recover the amount on its liquidation. Thus, ground no.1 is allowed.” 2. Facts in relation to Issue No.(ii): The fact relating to this issue is that, an amount of Rs.69.33 lacs was outstanding for more than six years for which details of debits were given during the course of assessment proceedings. Despite the efforts of the assessee, the debtors never responded for payment due to the fact that they largely comprised of textile mills which were either closed down or changed ownership. In the original order dated 24.08.2022, this issue was decided against the assessee on the ground that no efforts were made by the assessee to recover the said amount. However, in the miscellaneous application filed by the assessee, the issue was heard afresh Unreported Judgments and thereafter, in the second round, vide order dated 12.05.2023, the same was allowed by the Tribunal on the ground that the amount was actually written off in the books of accounts against the provisions made in the earlier year, such provision having already been disallowed in the earlier year. 3. Facts in relation to Issue No.(iii): The assessee has invested in the equity shares of its subsidiary company i.e. GTL, which is a subsidiary of the assessee. The said company went into liquidation and the assessee did not get any amount against the equity share held by it. The assessee worked out indexed cost of acquisition in respect of such shares and calculated long term capital loss of Rs.1.59 crore in its return of income. The Assessing Officer held that since there is no transfer, it is a capital loss, and hence, not allowable u/s.45 to 48 of the Act. The assessee relied on the decision of the Hon’ble Supreme Court in the case of Kartikeya V. Sarabhai vs. CIT - 94 Taxman 164 and decision of the Hon’ble Gujarat High Court in case of CIT vs. Jay Krishna Harivallabhdas - 112 Taxman 683. A Board resolution writing off such amount was also produced. The CIT(A) decided against the assessee. The Tribunal, following the decision of the Hon’ble Gujarat High Court in case of CIT vs. Jay Krishna Harivallabhdas ‘supra’ held as under: “14 ….. ….. ….. ….. The Hon’ble Gujarat High Court in case of CIT vs. Jay Krishna Harivallabhdas (Supra) held that once a conclusion is reached that extinguishment of rights in shares on liquidation of a company is deemed to be transfer for operation of section 46(2) read with section 48, it is reasonable to carry that legal fiction to its logical conclusion to make it applicable in all cases of extinguishment of such rights, whether as a result of some receipt or nil receipt, so as to treat the subjects without discrimination. Where there does not appear to be ground for such different treatment the Legislature cannot be presumed to have made deeming provision to bring about such anomalous result. The Hon’ble Gujarat High Court further observed that the thrust of the provisions of
Ahmedabad Chartered Accountants Journal May, 2023 81 section 46(2) is that though there is no transfer of the asset on its distribution by the company on its liquidation and such distribution cannot be computed under the head “Capital gains”, the same even has to be computed under that ‘head, when it comes to assessing the shareholder. A shareholder who has incurred total loss in a transaction of sale of shares would be entitled to claim set off or carry forward, as may be, in respect of capital loss suffered, by virtue of section 45 read with sections 48, 71 and 74. There is, therefore, no reason why a shareholder who in distribution of assets has not received any deemed consideration in satisfaction of his rights and interests in the holding and has thereby suffered a total loss, cannot claim the benefit of set off or carry forward of the loss suffered by him. Otherwise, a startling and unjust situation may arise where the receipt of even one paise would enable him to claim set off or carry forward of capital loss as worked out under section 48, while, a shareholder who is a shade worse off and gets nothing in the event of such total loss should be denied the effect of section 46(2) read with sections 71 and 74 of the Act and be put to a perpetual loss. Therefore, even where the receipt is “nil” on the date of distribution on the liquidation of the company, the case of such shareholder will fall under section and the deemed full value of the consideration for the purpose of section 48 will be regarded as “nil” and on that basis the income chargeable under the head “Capital gains” has to be computed under section 48. Therefore, when the assessee company ensures that the assessee company will not gain any consideration in future as the subsidiary company was in liquidation, the assessee Company has rightly claimed for Long Term Capital Loss. This fact was totally ignored by the CIT(A) as well as by the Assessing Officer. Thus, the CIT(A) was not right in disallowing the Long Term Capital Loss. Ground No. 4 is allowed.” 4. Facts in relation to Issue No.(iv): The assessee claimed exemption from long term capital gain earned on transfer of land and submitted that there was sanctioned scheme of BIFR, which was passed on 16.08.2005. The assessee has filed e-return which does not allow the assessee to claim any such exemption in the form of return itself. The assessee wrote a separate letter to the Assessing Officer to grant exemption in respect of the said long term capital gain while assessing him on the ground that the BIFR scheme allowed the assessee to claim long term capital gain on such transfer of land as exempt under the provisions of the Income Tax Act and since BIFR order has overriding powers over the provisions of the Income Tax Act, it should have been allowed the deduction of the aforesaid long term capital gain. The Assessing Officer and CIT(A) both disallowed the claim. The Learned CIT(A) disallowed the claim on the ground that the claim is not originating from the original or revised return, and hence, following decision of Hon’ble Supreme Court in the case of Goetz (I) Limited vs. CIT (2006) 284 ITR 323, the same cannot be considered and the claim of the assessee cannot be allowed. The Tribunal, after considering the above contentions, decided the issue in favour of the assessee in the following terms. “17. We have heard both the parties and perused all the relevant material available on record. The CIT(A) has given a categorical finding that the order of BIFR was passed on 16.08.2005 and return of income was filed by the assessee on 29.10.2007 after the order of BIFR. The assessee has disclosed LTCG in the return of income at Rs.13,94,50,634/- which after set of with business loss of the current year and brought forward has been reduced to nil. The CIT(A) further observed that undisputedly the assessee has not filed any revised return of income under Section 139(5) of the Act for rectification of any errors or omissions. It may be noted that the letter filed for claiming LTCG clearly set out the said fact which was totally ignored by the Assessing Officer as well as the CIT(A). Thus, the observations of the CIT(A) that revised return of income was never filed disclosing LTCG does not sustain. The decision of Hon’ble Supreme Court in case of Goetz (I) Ltd. vs. CIT (2006) 284 ITR 323 was not at all considered in its true spirit in the Unreported Judgments
82 Ahmedabad Chartered Accountants Journal May, 2023 present assessee’s case. The Ld. AR relied upon the decision of Hon’ble Gujarat High Court in case of CIT vs. Mitesh Impex 46 taxmann.com 30 which is apt in the present case wherein it is held that though the assessee did not raise a claim in the return for deduction u/s 80IB & 80HHC, it was entitled to raise the claim before the CIT(A) for the first time. If a claim though available in law is not made either inadvertently or on account of erroneous belief of complex legal position, such claim cannot be shut out for all times to come, merely because it is raised for the first time before the appellate authority without resorting to revising the return before the AO. Courts have taken a pragmatic view and not a technical one as to what is required to be determined in taxable income. In that sense assessment proceedings are not adversarial in nature. In fact in present case, the assessee made a claim during the assessment proceedings itself before the Assessing Officer which was totally ignored by the Assessing Officer. The decision of Hon’ble Supreme Court in case of Goetz (I) Ltd. vs. CIT (2006) 284 ITR 323 was not at all considered in its true spirit in the present assessee’s case. Therefore, ground no.5 is allowed.” ❉ ❉ ❉ Unreported Judgments Continued from page 78 Tribunal News shareholder(s), which attracts additional income-tax (Tax on Distributed Profits) referred to in section 115-O of the ITA, such additional income-tax payable by the domestic company shall be at the rate mentioned in section 115-O of the Actand not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant tax treaty with reference to such dividend income. • The sovereign has prerogative to extend the treaty protection to domestic companies paying DDT through the mechanism of tax treaties. • Hence, the tax treaty does not get triggered at all when a domestic company pays DDT under section 115-O of the Act. Shree Ganesh Intermediary P Ltd v. PR.CIT TS-236-ITAT-2023 (Ahd)-TP Order dated 24th April 2023, Assessment Year 2014-15 Basic Facts : The CIT assumed power under section 263 of the Act, as the issues for which the assessee’s case was selected for scrutiny were not inquired at all by the AO. One of the issues for which the case was selected was large specified Domestic Transactions as per Form no.3 CEB. The AO had not referred the assessee’s case to TPO for this purpose. As per the assessee though the case was not referred to the TPO, the AO had made necessary enquiry in this matter. As per CIT, the AO was compulsory required to make reference to the TPO as per CBDT instructions in this respect. Accordingly, the CIT held that the assessment was erroneous causing prejudice to the Revenue hence he directed the AO to make fresh assessment. ISSUE: Whether were AO has not referred the case to the TPO, the assessment order so passed was erroneous causing prejudice to the Revenue ? Held: The CBDT circular no.3 of 2016, directs the AO to make reference to the TPO when one of the reasons for scrutiny assessment is the involvement of Transfer pricing issue. The Tribunal also referred to the Delhi High Court decision in case of Ranbaxy laboratories 345 ITR 913, wherein it has been held that not referring the case to TPO in such circumstance would tantamount to the order being erroneous causing prejudice to the Department. The Tribunal did not find any merits in the distinguish which the assessee tried to make with the decision of the Delhi High Court supra. The tribunal also rejected the assessee’s plea that it was procedural lapse. The Tribunal accordingly upheld the CIT’s order holding that the assessment order was erroneous thereby causing prejudice to the Department. ❉ ❉ ❉ 12
Ahmedabad Chartered Accountants Journal May, 2023 83 No reassessment u/s 153A/C of a completed assessment if no incriminating material found in Search. Pr. CIT v. Abhisar Buildwell (P.) Ltd. [2023] 149 taxmann.com 399 (SC) [24-04-2023] 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. 6. It is the case on behalf of the Revenue that once upon the search under Section 132 or requisition under Section 132A, the assessment has to be done under Section 153A of the Act, 1961 and the AO thereafter has the jurisdiction to pass assessment orders and to assess the ‘total income’ taking into consideration other material, though no incriminating material is found during thesearch even in respect of completed/unabated assessments. 7. At the outset, it is required to be noted that as such various High Courts, namely, Delhi High Court, Gujarat High Court, Bombay High Court, Karnataka High Court, Orissa High Court, Calcutta High Court, Rajasthan High Court and the Kerala High Court have taken the view thatno addition can be made in respect of completed/unabated assessments in absence of any incriminating 1 Advocate Tushar Hemani [email protected] Judicial Analysis material. The lead judgment is by the Delhi High Court in the case of Kabul Chawla (supra), which has been subsequently followed and approved by theother High Courts, referred to hereinabove. One another lead judgment on the issue is the decision of the Gujarat High Court in the case of Saumya Construction (supra), which has been followed by the Gujarat High Court in the subsequent decisions, referred to hereinabove. Only the Allahabad High Court in the case of Pr. Commissioner Of Income Tax v. Mehndipur Balaji, 2022 SCC OnLine All 444 : (2022) 447 ITR 517 has taken a contrary view. 7.1 In the case of Kabul Chawla (supra), the Delhi High Court, while considering the very issue and oninterpretation of Section 153A of the Act, 1961, has summarised the legal position as under: Summary of the legal position 37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: i. Once a search takes place under Section 132 of the Act, notice under Section 153 A(1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place. ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise.
84 Ahmedabad Chartered Accountants Journal May, 2023 iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the ‘total income’ of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs “in which both the disclosed and the undisclosed income would be brought to tax”. iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other postsearch material or information available with the AO which can be related to the evidence found, it does not mean that the assessment “can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material.” v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word ‘assess’ in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word ‘reassess’ to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO. vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. 7.2 Thereafter in the case of Saumya Construction (supra), the Gujarat High Court, while referring thedecision of the Delhi High Court in the case of Kabul Chawla (supra) and after considering the entire schemeof block assessment under Section 153A of the Act, 1961,had held that in case of completed assessment/unabated assessment, in absence of any incriminating material, no additional can be made by the AO and the AO has no jurisdiction to re-open the completed assessment. In paragraphs 15 & 16, it is held as under: 15. On a plain reading of section 153A of the Act, it is evident that the trigger point for exercise of powers thereunder is a search under section 132 or a requisition under section 132A of the Act. Once a search or requisition is made, a mandate is cast upon the Assessing Officer to issue notice under section 153A of the Act to the person, requiring him to furnish the return of income in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made and assess or reassess the same. Since the assessment under section 153A of the Act is linked with search and requisition under sections 132 and 132A of the Act, it is evident that the object of the section is to bring to tax the undisclosed income which is found during the course of or pursuant to the search or requisition. However, instead of the earlier regime of block Judicial Analysis
Ahmedabad Chartered Accountants Journal May, 2023 85 assessment whereby, it was only the undisclosed income of the block period that was assessed, section 153A of the Act seeks to assessee the total income for the assessment year, which is clear from the first proviso thereto which provides that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years. The second proviso makes the intention of the legislature clear as the same provides that assessment or reassessment, if any, relating to the six assessment years referred to in the subsection pending on the date of initiation of search under section 132 or requisition under section 132A, as the case may be, shall abate. Sub-section (2) of section 153A of the Act provides that if any proceeding or any order of assessment or reassessment made under sub-section (1) is annulled in appeal or any other legal provision, then the assessment or reassessment relating to any assessment year which had abated under the second proviso would stand revived. The proviso thereto says that such revival shall cease to have effect if such order of annulment is set aside. Thus, any proceeding of assessment or reassessment falling within the six assessment years prior to the search or requisition stands abated and the total income of the assessee is required to be determined under section 153A of the Act. Similarly, subsection (2) provides for revival of any assessment or reassessment which stood abated, if any proceeding or any order of assessment or reassessment made under section 153A of the Act is annulled in appeal or any other proceeding. 16. Section 153A bears the heading “Assessment in case of search or requisition”. It is well settled as held by the Supreme Court in a catena of decisions that the heading of the section can be regarded as a key to the interpretation of the operative portion of the section and if there is no ambiguity in the language or if it is plain and clear, then the heading used in the section strengthens that meaning. From the heading of section 153, the intention of the legislature is clear viz., to provide for assessment in case of search and requisition. When the very purpose of the provision is to make assessment in case of search or requisition, it goes without saying that the assessment has to have relation to the search or requisition. In other words, the assessment should be connected with something found during the search or requisition, viz., incriminating material which reveals undisclosed income. Thus, while in view of the mandate of sub-section (1) of section 153A of the Act, in every case where there is a search or requisition, the Assessing Officer is obliged to issue notice to such person to furnish returns of income for the six years preceding the assessment year relevant to the previous year in which the search is conducted or requisition is made, any addition or disallowance can be made only on the basis of material collected during the search or requisition. In case no incriminating material is found, as held by the Rajasthan High Court in the case of Jai Steel (India) (supra), the earlier assessment would have to be reiterated. In case where pending assessments have abated, the Assessing Officer can pass assessment orders for each of the six years determining the total income of the assessee which would include income declared in the returns, if any, furnished by the assessee as well as undisclosed income, if any, unearthed during the search or requisition. In case where a pending reassessment under section 147 of the Act has abated, needless to state that the scope and ambit of the assessment would include any order which the Assessing Officer could have passed under section 147 of the Act as well as under section 153A of the Act. Judicial Analysis
86 Ahmedabad Chartered Accountants Journal May, 2023 8. For the reasons stated hereinbelow, we are incomplete 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), taking the view that no addition can be made inrespect of completed assessment in absence of anyincriminating material. 9. While considering the issue involved, one has toconsider the object and purpose of insertion of Section 153A in the Act, 1961 and when there shall be a block assessment under Section 153A of the Act, 1961. 9.1 That prior to insertion of Section 153A in the statute, the relevant provision for block assessment was under Section 158BA of the Act, 1961. The erstwhile scheme of block assessment under Section 158BA envisaged assessment of ‘undisclosed income’ for two reasons, firstly that there were two parallel assessments envisaged under the erstwhile regime, i.e., (i) block assessment under section 158BA to assess the ‘undisclosed income’and (ii) regular assessment in accordance with the provisions of the Act to make assessment qua income other than undisclosed income. Secondly, that the ‘undisclosed income’ was chargeable to tax at a special rate of 60% under section 113 whereas income other than ‘undisclosed income’ was required to be assessed under regular assessment procedure and was taxable at normal rate. Therefore, section 153A came to be inserted and brought on the statute. Under Section 153A regime, the intention of the legislation was to do away with the scheme of two parallel assessments and tax the ‘undisclosed’ income too at the normal rate of tax as against any special rate. Thus, after introduction of Section 153A and in case of search, there shall be block assessment for six years. Search assessments/ block assessments under Section 153A are triggered by conducting of a valid search under Section 132 of the Act,1961. The very purpose of search, which is a pre requisite/trigger for invoking the provisions of sections 153A/153C is detection of undisclosed income by undertaking extraordinary power of search and seizure, i.e., the income which cannot be detected in ordinarycourse of regular assessment. Thus, the foundation formaking search assessments under Sections 153A/ 153Ccan be said to be the existence of incriminating material showing undisclosed income detected as a result of search. 10. On a plain reading of Section 153A of the Act, 1961, it is evident that once search or requisition is made, amandate is cast upon the AO to issue notice under Section 153 of the Act to the person, requiring him to furnish the return of income in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made and assess or reassess the same. Section 153A of the Act reads as under: xxx… 11. As per the provisions of Section 153A, in case of asearch under Section 132 or requisition under Section 132A, the AO gets the jurisdiction to assess or reassess the ‘total income’ in respect of each assessment year falling within six assessment years. However, it is required to be noted that as per the second proviso toSection 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 ofthe search under Section 132 or making of requisition under Section 132A, as the case may be, shall abate. Asper 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 appealor any other legal proceeding, then, notwithstanding anything contained in sub-section (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 Judicial Analysis
Ahmedabad Chartered Accountants Journal May, 2023 87 intention of the legislation seems to be that in case of search only the pending assessment/ reassessment proceedings shall abate andthe AO would assume the jurisdiction to assess orreassess the ‘total income’ for the entire six yearsperiod/block assessment period. The intention does notseem to be to re-open the completed/unabated assessments, unless any incriminating material is foundwith respect to concerned assessment year falling within last six years preceding the search. Therefore, on true interpretation of Section 153A of the Act, 1961, in case ofa search under Section 132 or requisition under Section 132A and during the search any incriminating material is found, even in case of unabated/completed assessment, the AO would have the jurisdiction to assess or reassessthe ‘total income’ taking into consideration the incriminating material collected during the search andother material which would include income declared in thereturns, 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 remedyavailable to the Revenue would be to initiate the reassessment proceedings under sections 147/48 of the Act, subject to fulfilment of the conditions mentioned insections 147/148, as in such a situation, the Revenue cannot be left with no remedy. Therefore, even in case ofblock assessment under section 153A and in case of unabated/completed assessment and in case no incriminating material is found during the search, thepower of the Revenue to have the reassessment undersections 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 incase of search even where no incriminating material isfound during the course of search, even in case ofunabated/completed assessment, the AO can assess orreassess the income/total income taking into consideration the other material is accepted, in that case,there will be two assessment orders, which shall not bepermissible under the law. At the cost of repetition, it isobserved that the assessment under Section 153A of theAct 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 searchor requisition. Therefore, only in a case where the 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 Section 153A, only pending assessment/reassessment shall standabated and the AO would assume the jurisdiction withrespect to such abated assessments. It does not provide that all completed/unabated assessments shall abate. Ifthe submission on behalf of the Revenue is accepted, inthat case, second proviso to section 153A and subsection(2) of Section 153A would be redundant and/or rewriting the said provisions, which is not permissible underthe law. 13. For the reasons stated hereinabove, we are incomplete 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. 14. In view of the above and for the reasons statedabove, it is concluded as under: i) that in case of search under Section 132 or requisition under Section 132A, the AO assumes the jurisdiction for block assessment under section 153A; ii) all pending assessments/reassessments shall standabated; iii) in case any incriminating material is found/ unearthed, even, in case of unabated/ Judicial Analysis
88 Ahmedabad Chartered Accountants Journal May, 2023 completed assessments, the AO would assume the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/ unabated assessments, no addition can be made by the AO inabsence of any incriminating material found during the course of search under Section 132 or requisition under Section 132A of the Act, 1961. 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 Actand those powers are saved. The question involved in the present set of appeals and review petition is answered accordingly in terms ofthe above and the appeals and review petition preferred by the Revenue are hereby dismissed. No costs. DCIT vs M/S U.K. Paints (Overseas) Ltd. [2023] 150 taxmann.com 108 (SC) [25-04- 2023] In this batch of appeals, the assessments in case of each Assessee were under Section 153-C of the Income Tax Act, 1961 (forshort, ‘the Act’). As found by the High Court in none of the casesany incriminating material was found during the search eitherfromthe Assessee or from third party. In that view of the matter, assuch, the assessments under Section 153-C of the Act are rightly set aside by the High Court. However, Shri N Venkataraman, learned ASG appearing on behalf of the Revenue, taking the clue from someof the observations made by this Court in the recent decision inthe case of Principal Commissioner of Income Tax, Central -3 Vs. Abhisar Buildwell P. Ltd., Civil Appeal No. 6580/2021, more particularly, paragraphs 11 and 13, has prayed to observe that the Revenue may be permitted to initiate re-assessment proceedings under Section 147/148 of the Act as in the aforesaid decision, the powers of the re-assessment of the Revenue even in case of the block assessment under Section 153-A of the Act have been saved. As observed hereinabove, as no incriminating material was found in case of any of the Assessees either from the Assessee or from the third party and the assessments were under Section 153-C of the Act, the High Court has rightly set aside the Assessment Order(s). Therefore, the impugned judgment and order(s) passed bythe High Court do not require any interference by this Court. Hence, all these appeals deserve to the dismissed and are accordingly dismissed. However, so far as the prayer made on behalf of the Revenue topermit them to initiate the re-assessment proceedings is concerned, it is observed that it will be open for the Revenue to initiate the re-assessment proceedings in accordance with law and if it is permissible under the law. With this, all these appeals are dismissed/disposed of. ❉ ❉ ❉ 2 Judicial Analysis
Ahmedabad Chartered Accountants Journal May, 2023 89 CA. Kaushik D. Shah [email protected]. Controversies Issue Whether exemption under section 54EC is eliminated while computing book profit under section 115JB? Proposition The provisions of section 115JB of the Income-Tax Act, 1961 (“Act”), read with Explanation 1 provides the manner in which ‘Book profits’ shall be computed.Book profit is computed by taking into consideration the net profit declared in the Profit and Loss Account of the assessee prepared in accordance with the provisions of Schedule 6 of Companies Act and thereafter permissible adjustments in the form of additions and deductions are provided. The book profit shall be computed by eliminating the amount of income-tax paid or payable. Hence, it is proposed that in the absence of any provision for exclusion of capital gains in the computation of book profit under section 115JB, the assessee is not entitled to the exclusion claimed. Moreover, as book profit is computed by eliminating the amount of income tax paid or payable, assessee will not be entitled to the deduction under section 54EC for computing the book profit under section 115JB of the Act. View against the proposition Extract of the relevant provision is as under - According to section 115JB of Income Tax Act, 1961, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year is less than 15% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of incometax at the rate of 15%. - As per Explanation 1 to Section 115JB “book profit” for the purposes of Section 115JB means net profit as shown in the statement of profit and loss prepared in accordance with Schedule III to the Companies Act, 2013 as increased and decreased by certain items prescribed in this regard. Here, it is provided to eliminate the amount of income-tax paid or payable to compute the book profit. In the case of Commissioner of Income-tax-III, Chennai v. Metal & Chromium Plater (P.) Ltd 415 ITR 123 (Mad.) (HC), the assessee had claimedan exemption under section 54EC of the Act. However, the Assessing Officer computed MAT liability disallowing the exemption under section 54EC by placing reliance upon the judgments of Hon’ble Apex Court in the case of Apollo Tyres, Bombay High Court in the case of Veekaylal Investment, Kerela High Court judgment in the case of N.K Bose. Subsequently, appeals were filed before CIT(Appeals) and the Income tax Appellate Tribunal, at the instance of the Assessee and thereafter the Revenue which were decided in favour of the Assessee. The revenue thereafter, filed an appeal before Hon’ble Madras High Court to assail the Tribunal’s order. The High Court observed that provisions of sub-section (5) of section 115 JB open the tax liability under MAT to the applicability of all other provisions contained in the Income tax Act except if specifically barred by that section itself. S.115 JB (5) reads as follows; ‘(5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section” Placing reliance on the provision of Section 115-JB(5), the High Court further opined that the adjusted book
90 Ahmedabad Chartered Accountants Journal May, 2023 profits would be further eligible to the benefits set out in the other provisions of the Act. View in favour of the Proposition The provisions of section 115JB of the acts does not include any provision for exclusion of capital gains in the computation of book profit. Hence any exemption in capital gain or any deduction should not form a part of book profit. Moreover, the book profit is computed by eliminating the amount of income-tax paid or payable. Hence, assessee will not be entitled to the deduction under section 54EC for computing the book profit under section 115JB of the Act. The judgment pronounced in the case of Commissioner of Income-tax-III, Chennai v. Metal & Chromium Plater (P.) Ltd 415 ITR 123 (Mad.) (HC)goes by the plain and literal reading of 115JB(5) and invites the applicability of other provisions of the Actfor computation of MAT liability of the companies. However, if one goes through the legislative background for the enactment of this provision, it appears the provision was introduced to make applicable provisions relating to interest, penalty and assessment in other parts of the Income Tax Act and not for computation of book profits which is specifically governed by 115 JB(1). Hence, in an alternative opinion, the computation of MAT Liability part finds its place within the meaning of ”save as otherwise provided in this section” and not within the meaning of “other provisions of the Act”. This view is supported by the judgment of Hon’ble Gujarat High Court in the case of Ganesh Housing Corporation v. DCIT. In this case, the Hon’ble High Court refused to allow deduction under section 80- IB(10) for computation of book profit under section 115- JB. It further held that computation provisions are specifically governed by sub-section (1) and subsection (5) would not apply with respect to computation mechanism under MAT. Further in the CBDT Circular No. 13 of 2001, dated 9- 11-2001, it has been clarified that 115JB(5) has been enacted to make applicable all provisions of the Act except for substitution of tax payable and the manner of computation of book profits under the provision. In the case of N.J. Jose & Co. (P.) Ltd. v. Assistant Commissioner of Income-tax 321 ITR 132, the assessee claimed the exemption under section 54E in computing book profit under section 115J which was rejected and the book profit was computed by including long-term capital gains for the purpose of assessment under section 115J. The Bombay High Court in the decision in CIT v. Veekaylal Investment Co. P. Ltd., [2001] 249 ITR 597 also took the view that capital gainsis part of profit which cannot be excluded in the computation of book profit. However, in the absence of any provision for exclusion ofcapital gains in the computation of book profit under the above provision, the assessee is not entitled to the exclusion claimed. Summation Decision taken in the case of Ganesh Housing Corporation v. DCIT (supra) has set the benchmark for key matter of this controversy. In this case, the Hon’ble High Court refused to allow deduction for computation of book profit under section 115-JB. It further held that computation provisions are specifically governed by sub-section (1) and subsection (5) would not apply with respect to computation mechanism under MAT. Also, if exemptions/deductions provisions are held to be applicable for computation of MAT Liability, then the purpose behind introduction of MAT which was to tax zero- taxing paying companies at a minimum tax rate, would become otiose. However, even after the decision, the issue is still highly debatable because there are two different possible interpretations of section 115 JB (5). However the decision taken in case of Ganesh Housing Corporationv. DCIT(supra) and the CBDT Circular No. 13 of 2001, dated 9-11-2001 has made it clear that exemptions will not be available while computing the book profits under section 115JB. In view of above, in my humble opinion, Assessee is not eligible to claim deduction under section 54EC while computing book profit under section 115JB. ❉ ❉ ❉ Controversies
Ahmedabad Chartered Accountants Journal May, 2023 91 In this article, we have tried to provide a brief understanding of fiscally transparent entities (FTEs), issues arising while claiming treaty benefits for FTEs, OECD’s position on FTE and India’s stand on allowability of treaty benefits to FTEs. 1. Background : - As per condensed version of commentary of OECD Model Tax Convention on Income and on Capital, 2017 (OECD MTC) FTE is an entity whose income is not taxed at entity level but in the hands of the beneficiary. - The relevant text of commentary explaining the term “fiscally transparent” is as under : “The concept of “fiscally transparent” used in the paragraph refers to situations where, under the domestic law of a Contracting State, the income (or part thereof) of the entity or arrangement is not taxed at the level of the entity or the arrangement but at the level of the persons who have an interest in that entity or arrangement.” - The type of entities that are typically covered includes partnerships, trusts, foundations, S Corps (which have elected for ‘check the box regime’) etc. - For example, in certain countries, the income of discretionary trust is taxable at trust level whereas income of specified / determinate trust is taxable in the hands of beneficiaries. Accordingly, in a scenario where the income is directly taxable in the hands of beneficiaries (and not in the hands of trust),the trust is regarded as “fiscally transparent” entity. 2. Issue being faced while claiming treaty benefit in case of FTEs and OECD’s position in respect of FTEs for claiming treaty benefit: - It is pertinent to note that treaties are generally drafted keeping in mind the taxability of individuals, companies and body corporates and may not provide the treatment of income earned by an entity which is regarded as “fiscally transparent” in either of the countries. The concepts of FTEs has evolved over a period of time however, still there remains an uncertainty as to the tax treatment and treaty eligibility in respect of income earned by such FTEs. - To claim treaty benefit, the entity should qualify as “person” under the tax treaty. Further, such “person” needs to be “resident of contracting state”. Incompatibility in tax treaty arises where the classification of the FTE is different in source state vis-à-vis state of residence. For example, the entity is classified as separate legal entity in the source state whereas it is regarded as “fiscally transparent” in the state of residence. Thereby, posing a challenge to access the tax treaty leading to double taxation (e.g., income first being taxed in the hands of FTE in source state where such FTE is regarded as taxable unit and again the said income being taxed in the hands of beneficiary in the state where such FTE is tax resident). - In this context, firstly, it becomes necessary to evaluate whether the FTEs would be regarded as a “person” for the purpose of tax treaty. After which, it is to be determined whether the FTE would be regarded as a “resident of contracting state”. Fiscally Transparent Entities (FTEs) and treaty eligibility – An Unsolved Enigma CA. Dhinal A. Shah [email protected] CA. Hardik Khatri [email protected]
92 Ahmedabad Chartered Accountants Journal May, 2023 - In this regard, BEPS Action Plan 2 – Neutralising the Effects of Hybrid Mismatch Arrangements addresses the issues of income earned by FTEs and provides to extend treaty benefit in appropriate cases. Also, under the said Action Plan it has been ensured that FTEs are not used for double non-taxation purposes. - Further, Article 3 (Part II – Hybrid Mismatches) of BEPS Action Plan 15 – Multilateral Instrument (MLI) also provides for availability of treaty benefit to fiscally transparent entities. The relevant extracts of the clauses of the said article is as under : “1. For the purposes of a Covered Tax Agreement, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting Jurisdiction shall be considered to be income of a resident of a Contracting Jurisdiction but only to the extent that the income is treated, for purposes of taxation by that Contracting Jurisdiction, as the income of a resident of that Contracting Jurisdiction.” - OECD MTC provides that if the income of FTE is taxable in the country where it is constituted (be it in the hands of owners or beneficiaries), it should be entitled to treaty benefits for such income. 3. Overview of tax treaties entered into by India having regard to the concept of FTE and judicial precedents in the context of treaty eligibility : - In context of tax treaties entered into by India, practices of the country are not uniform. Some illustrative differences are as under : o Category A - As per India – UAE tax treaty following are regarded as “person”: an individual, a company, and any other entity which is treated as taxable unit under the taxation laws in force in the respective Contracting states; As per India-UAE tax treaty, does not provide to treat partnership firm, trusts etc. as person. Accordingly, partnership firms, trust etc. which are treated as fiscally transparent entity may not get covered under the definition of “person”. o Category B - As per India – UK tax treaty following are regarded as “person”:an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States; India-UK tax treaty specifically provides body of person would be considered as “person”. Interestingly, under India-UK tax treaty, Article 4 (Fiscal Domicile) provides that that in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in UK as the income of a resident, either in its hands or in the hands of its partners or beneficiaries (similar to OECD MTC). o Category C - As per India – USA tax treaty following are regarded as “person”:an individual, an estate, a trust, a partnership, a company, any other body of persons, or other taxable entity; As per India-USA tax treaty, the term “person” has been defined very widely to include trust, partnership, any other body of persons may get covered under the definition of “person”. Clause similar to Article 4 of India-UK tax treaty is also present in India-USA tax treaty. - In most of the tax treaties, only a person who is “liable to tax” / “subject to tax” is considered as a “resident” under the tax treaty. The objective of including the requirement “liable to tax” under the tax treaty is to ensure that only those persons who are resident of that state could potentially be exposed to double taxation should be given treaty protection. Strictly speaking, since FTE is not “liable to tax” in its own capacity, it may not meet the criteria of “resident” of the Contracting State where it is legally constituted. Fiscally Transparent Entities (FTEs) and treaty eligibility – An Unsolved Enigma
Ahmedabad Chartered Accountants Journal May, 2023 93 - Judicially, treaty eligibility for FTEs has been a subject of litigation. In this regard, the litigation originated from the landmark judgment of Hon’ble Mumbai Tribunal in the case of Linklaters LLP vs. DCIT (ITA No. 4896 and 5085 / Mum / 2003). In this case, the Assessing Officer (AO) had denied treaty benefit on the ground that taxpayer firm was FTE and was thus not liable to tax in UK in its own right. Mumbai Tribunal allowed treaty benefit to UK partnership firm and held that so long as entire profits of the partnership firm are taxed in UK, whether the taxable income is determined in relation to personal characteristics of the partners or in the hands of the firm directly, the taxpayer shall be regarded as “person resident in UK”. - Similar view was rendered by Hon’ble Mumbai Tribunal in the case of DDIT vs. A. P. Moller (ITA No. 5825/Mum/2006). In this case, Hon’ble Tribunal held that FTE being a partnership firm of Denmark is eligible for treaty benefit considering that entire income is taxable in the hands of partners who were tax residents of Denmark. - However, recently, in the case of ABC In re (AAR Nos. 1358 to 1362 of 2012) treaty benefit was denied to Dutch tax resident who had invested in India through two funds incorporated in Netherlands (registered with SEBI).It was held that the said funds are not taxable unit under Netherlands tax laws and hence, they were neither person nor resident of Netherlands in terms of tax treaty. Also, in case of Schellenberg Wittmer, In re (AAR No. 1029 of 2010), treaty benefit was denied to Swiss partnership firm even when the partners were tax resident of Switzerland and income was taxable in the hands of partners. 4. India’s position on FTEs : - India has expressed its reservations in respect of commentaries of OCED MTC in respect of FTE. India does not agree with the OCED’s view that if a country disregards an entity for tax purposes and levies tax on its beneficiaries then the FTE should be entitled for the treaty benefit. The OECD MTC records this reservation as follows: India does not agree with the view expressed in paragraph 7 of the Commentary on Article 1that the term “income derived by or through an entity or arrangement” includes income derived by or through an entity that may not be a resident of either of the Contracting States. India considers that this term includes only such income that is derived by or through entities that are resident of one or both Contracting States. - Further, in respect of Article 3 of MLI (in respect of Hybrid Mismatches), India has expressed its reservations on application of Article 3 to covered tax agreements (CTAs). - The debate as to whether FTE should be eligible for treaty benefit is likely to surge given the India’s reservations in OECD MTC and on applicability of Article 3 of MLI to CTAs and also considering the recent judicial precedents holding that FTEs are not eligible for treaty benefit. The comments in article are personal views of authors and purely a matter of interpretation. The above views are not binding on any regulatory or tax authorities. ❉ ❉ ❉ Fiscally Transparent Entities (FTEs) and treaty eligibility – An Unsolved Enigma
94 Ahmedabad Chartered Accountants Journal May, 2023 APConnect - Online application for Full Fledged Money Changers and non-bank Authorised Dealers Category-II The Reserve Bank of Indiaissued the following Directions. Reference: A.P. (DIR Series) Circular No. 25 dated March 6, 2006, containing instructions for AD - Category II licence/reporting, the Master Direction on Money Changing Activities dated January 01, 2016 (updated from time to time) containing guidelines on issuance and renewal of FFMC licence and on money changing activities as well as the Master Direction on Money Transfer Service Scheme (MTSS) dated February 22, 2017 (updated from time to time) containing guidelines for Indian Agents under MTSS. A software application called ‘APConnect’ has been developed for processing of application for licencing of FFMC, non-bank AD Cat-II, authorisation as MTSS Agent, renewal of existing licence/authorisation, for seeking approval as per the extant instructions and for submission of various statements/returns by FFMCs and non-bank AD Cat II. The application can be accessed at ‘https://apconnect.rbi.org.in/entity’. The APConnect application broadly consists of the following facilities/functionalities: i. Registration and licensing of new companies as well as existing Authorised Persons (FFMC / nonbank AD Cat-II / NBFC eligible for AD Cat-II) ii. Registration of new Branches iii. Registration of Temporary Money Changing Facilities iv. Registration of franchisees v. Authorisation as Indian Agents under MTSS vi. Upgradation of FFMC to non-bank AD Cat-II vii. Renewal of Licences viii. Opening of Foreign Currency Accounts ix. Opening of Nostro Accounts for eligible entities x. Voluntary Surrender of Licence xi. Write-off of foreign currency notes xii. Submission of Returns/Statements Existing FFMCs/non-bank AD Category-II shall register themselves on the APConnect application within three months from the date of issue of this circular, through the weblink indicated above. Subsequent to registration on APConnect, requests for various other facilities/ approvals listed above and submission of returns by the entities shall be done through the APConnect application. The FFMCs and non-bank AD Cat-II shall adhere to the instructions issued by the Reserve Bank, in this regard, from time to time. On receipt of confirmation from the Regional Office of the Reserve Bank regarding generation of licence through APConnect, the existing FFMCs/non-bank AD Cat-II shall surrender their existing licence to the respective Regional Office of the Reserve Bank. Eligible entities, desirous of applying for fresh FFMC/ non-bank AD Category II/MTSS Agent licence/ authorisation shall submit their application only through APConnect. The directions contained in this circular have been issued under Section 10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and were without prejudice to permissions/approvals, if any, required under any other law. Source:RBI/2023-24/13A.P. (DIR Series) Circular No.01, dated April 6, 2023 For full text refer:https://www.rbi.org.in/Scripts/ BS_CircularIndexDisplay.aspx?Id=12485 ❉ ❉ ❉ CA. Dr. Savan R. Godiawala [email protected] FEMA Updates 3
Ahmedabad Chartered Accountants Journal May, 2023 95 [I] IMPORTANT CASE LAWS: (SUPREME COURT/ HIGH COURT) [1] Issue: High Court directs authority to restore registration of assessee who didn’t file returns due to ill health. Case Laws: TS Events and Management v. Commissioner of CGST Delhi [2023] 149 taxmann.com 172 (Delhi). Facts: The department issued a Show Cause Notice (SCN) calling upon the petitioner to show cause as to why the GST registration not be cancelled on account of failure to file returns for a continuous period of six months. The petitioner didn’t file reply due to ill health and the department cancelled the registration since the petitioner neither responded to SCN nor appeared for a personal hearing. It filed appeal against the cancellation order but the same was rejected as the Appellate Authority found that the petitioner had not shown sufficient cause for allowing revocation of cancellation of his registration. Therefore, it filed writ petition before the High Court. Held: The Hon’ble High Court noted that the impugned order was passed dismissing appeal on ground of now showing sufficient cause for evoking cancellation of registration. The Court also noted that the petitioner was sole proprietor and he was suffering from ill-health during period of pandemic. Due to this reason, he was unable to respond to SCN or to appear personally before concerned officer. Moreover, he had fully discharged its tax liability and no amount was outstanding which was evident from the cancellation order. Therefore, the Court held that the petition was allowed considering mitigating circumstances and the impugned order was to be set aside. The Court also directed to restore registration and allowed petitioner to seek waiver of penalty for late filing of returns which was partly occasioned on account of cancellation. [2] Issue: HC set aside order rejecting application of cancellation of registration being passed without application of mind. Case Laws: Parshant Timber v. Commissioner of Delhi Goods and Services Tax [2023) 149 taxmann.com 217 (Delhi) Facts: The Petitioner had made an application praying that his registration to be cancelled and the reason for seeking cancellation of the registration was disclosed as ‘Discontinuous of business/Closure of Business’. The department issued notice which stated that ‘Please reply ASNT 10 and pay due tax with interest and penalty’. The Petitioner didn’t respond to the notice and the application was rejected by the department without providing any reasons. It filed writ petition before the High Court to challenge the rejection of cancellation application and contended that he has a right to seek cancellation of registration on ground of closure of business. GST and VAT Judgments and Updates CA. Vishrut R. Shah [email protected] CA. Bihari B. Shah [email protected]
96 Ahmedabad Chartered Accountants Journal May, 2023 GST and VAT - Judgements and Updates Held: The Hon’ble High Court noted that the business was closed and cancellation of GST registration was sought and therefore, returns were not filed for subsequent period. However, the impugned order stating reply as considered had been passed without application of mind as no reply was filed by the petitioner. Moreover, the impugned order was unsustainable as it did not disclose any reason. The Court also noted that the show cause notice was cryptic and did not mention particular reason for rejecting application of petitioner. Therefore, the Court held that the petition was allowed and Authority was directed to cancel registration from date requested. [3] Issue: Principles of natural justice were not in violation when assessee had no bonafide intention to produce documents: HC: Case Laws: Debabrata Das v. Additional Commissioner, Central Goods and Services Tax and Central Excise [2023] 149 taxmann.com 133 (Calcutta) Facts: The Petitioner was aggrieved by the Order-inOriginal passed by the Additional Commissioner and it filed writ petition stating that the said order was passed without giving any reasonable opportunity of hearing to the Petitioner. The department contended that the notice was issued following which reply was submitted after lapse of almost 10 months. It was also contended that multiple opportunities of personal hearing were granted but adjournment was sought on account of non-availability of relevant details and on account of COVID. Held: The Hon’ble High Court noted that on each and every occasion the petitioner replied to the notices and requested adjournment on account of nonavailability of necessary details from his accountant. Thereafter, order-in-original was passed against which no appeal was preferred and after expiry of period to file appeal the writ petition was filed seeking relief. The Court observed that there was not any violation of principles of natural justice since adjournments were sought all along but the necessary documents were never produced before the authority either in person or via virtual mode. Thus, it was held that matter was not required to be remanded for reconstitution as conduct of assessee did not appear to be bona fide and there was no violation of principle of natural justice. [4] Issue: Non-submission of reply to SCN can’t be a ground for cancellation of registration: HC: Case Laws: Agarwal Construction Company v. Commissioner of State Tax [2023] 149 taxmann.com 42 (All) Facts: The Petitioner was engaged in business of civil construction was registered under GST Act. The GST Department issued a show cause notice directing the petitioner to furnish a reply to notice within seven working days from the date of service of the notice. The reply was not submitted and the registration was cancelled by the department. The Petitioner filed writ petition challenging order whereby GST registration had been cancelled on ground that it failed to submit reply to show cause notice. Held: The Hon’ble High Court noted that in the instant case, the cancellation order was self-contradictory as in one line it was stated that petitioner had submitted his reply to the show cause notice while in the very next line it was noted that petitioner had not submitted reply to the show cause notice. Moreover, the Court observed that in case of Technosum India Pvt. Ltd. v. Union of India (2022) 145 taxmann.com 653 (All), this court held that nonContinued to page 105
Ahmedabad Chartered Accountants Journal May, 2023 97 1) No GST exemption on accommodation to pilgrims outside religious place by Charitable Trust GUJ/GAAR/R/2023/18 Dated 26th April 2023. NANDINIASHRAM TRUST FACTS: - The applicant is Ahmedabad based Nandini Ashram Trust which provides accommodation to pilgrims who visit the Ambaji Temple and the room rent is Rs 1,000 per day. It is also engaged in providing a wide range of professional consulting services such as architecture, engineering, planning, urban design, landscape, sustainability, research and art, building design, interior design, surveying, environmental sciences, project management and project economics. - It is registered under the Bombay Public Trust Act and holds Certificate u/s. 12AA - The applicant wishes to claim benefit of Notification No 9/2017 IGST( R) which allows registered trust holding 12AA certificate to be exempt from GST - Further it also relies on tweet dated 18th July 2022 wherein it states that Sarai’s run by religious trust or charitable trusts are exempt from GST irrespective of rent. Question Asked : - It moved to AAR to seek advance ruling on whether it needs GST registration? - Whether the services come under the purview of GST regime. Discussion & Findings: - In terms of Sr. No. I of the Notification No. 12l2017-CT(Rate), supra, services by an entity registered under section 12AA of the Income Tax Act, 1961, by way of charitable activities is exempted. The applicant claims that he falls within the ambit of a similar serial number I and l4 of notification No.9/2017-IT (Rate) which as is mentioned is parimateria to the serial number mentioned above. However, we find that the notification defines ‘charitable activities’ to include (i) public health, (ii) advancement of religion spirituality, yoga (iii) advancement of educational programmes or skill development and (iv) preservation of environment including watershed, forests and wildlife. The applicant, is a registered trust under the Bombay Charitable Trust Act. They hold 12AA certificate issued by the Income Tax Authorities and in terms of the trust deed, as per applicant, they provide accommodation to the pilgrims who visit the Ambaji Temple for which they charge room rent @ Rs. 1000/- per day. However, there is nothing on record to substantiate the claim that all the accommodation granted are to the pilgrims visiting the Ambaji Temple - Above findings are substantiated by chapter 39 of the GST flyer’ relating to Gst on Charitable and Religious Trusts wherein it is mentioned as follows: This notification makes the exemption to charitable trusts available for charitable activities more specific. While the income - from only those activities listed above is exempt from GST, income other than those mentioned above is taxable. Thus, therecould CA. Monish S. Shah [email protected]
98 Ahmedabad Chartered Accountants Journal May, 2023 be manyservices provided by the charitable trusts which may not be considered as charitable. The indicative list of such services could be renting of premises by suchentities, grant of sponsorship and advertising rights during conduct of events/functions Further, it was examined in terms of serial number 13(b) of the notification, as mentioned supra. We find that the exemption is for the activity of renting of precincts of a religious place meant for general public, which is a) Owned or managed by an entity registered as a charitable or religious trust under Section 12AA of the Income-tax Act, 1961 (hereinafter referred to as the Income-tax Act) or b) A trust or an institution registered under sub-clause (v) of clause (23c) of section 10 Of the Income-tax Act or c) A body or an authority covered under clause (23BBA) of section 10 ofthe said income tax Act Further, as per the proviso, the exemption is not applicable in respect of three situations, wherein one of the situations is renting of rooms where charges are one thousand rupees or more per day. - Under chapter 39 of the GST flyer, relating to GST on Charitable and Religious Trusts, the clarification given in respect of the said activity is as under; Thus, the law gives a limited exemption to renting of only religious precincts or a religious placemeant for general public, by the entity registered under Section 12AA of the income tax Act. As par clause (zc) of the said notification, the term “general public”means “the body of people at large sufficiently defined by some common quality of public or impersonal nature “. The term “religious place as per’ the clause (zy) of the said notification means “a place which is primarily meant for conduct of prayers or worship pertaining to a religion, mediation, or spiritually”. Dictionary meaning of “precincts” is an area within the walls or perceived boundaries of the particular building or place, an enclosed or clearly defined area of ground around a cathedral, church, temple. College, etc. This implies that if immovablepropertiesowned by charitabletrusts like marriage hall, Convention hall, rest house for pilgrims, shops; situated within the premises ofa religious place are rented out, income from letting out of such property is exemptfrom GST. However, this exemption will not be available if charges for renting of rooms exceeds 1000 per day or charges for renting of premises /kalyanmandapam exceed 10,000 per day or renting of shops/premisesfor business purposes exceed 10,000 per month. So also if such properties are not situated in the precincts of religious place meaning thereby not within the walls or boundary walls of the religious place, income from such letting out will lose the exemption and income from it will be liable to GST - The representative of the petitioner on being asked whether the said places rented to pilgrims is located within the precincts of Ambaji Temple. – The reply was in Negative - The representative was further asked whether the Trust managing Ambaji Trust is the same which governs the Nandini Ashram – The reply was Negative Conclusion / Order/ Judgment - Considering the facts mentioned that neither the Trust being managed by Ambaji Temple nor it being in the precincts of Ambaji trust it was amply clearly held that the benefit of Sr. No 13 of the notification is not available - Further, since the Ashram is liable to pay tax in terms of Sec 22 of the CGST Act, 2017 every supplier shall be liable to be registered from where he makes a taxable supply of Goods or Services or both, if his aggregate turnonver in a financial year exceeds threshold limit. Remarks - Modernisation is a key this days. Staying in hotels inn guest house have been quite common. Luxury has become inevitable. The Dharamshala’s as we name it are not well equipped which are in the precincts itself. Further, the number of the pilgrims Advance Ruling under GST
Ahmedabad Chartered Accountants Journal May, 2023 99 they can handle is also limited. This days the government on one hand is trying to Resurrection and make religious places attractive to attract more tourists/ pilgrims and on other hand such advance ruling will only go to increase the cost spent by the pilgrim. The more he spends for stay lesser he will have for Donation. - Ideally Dharamshala’s must be made exempt. 1000/- rupees a day is a normal tariff these days. Looking at the limit it should be increased further those within certain vicinity of the precincts must also be considered for such exemptions where the sole purpose is to serve the pilgrims. - It is time that CBIC thinks on rationalisation and also on the issue raised due to the decision taken in the 45th Council meeting in this regards. - Tourism helps to generate revenue if the GST rates are reduced or removed it will boost the people visiting such Dharamshalas. - Further since the credit of the said Hotel/ Inn/ Guest House will not be taken by the person staying unless it is for Business purposes or for in furtherance of Business. Taxing such low budget Hotels/ Inn/ Guest Houses/ Dharamshala makes it for Medium Class Citizen to be unnecessarily taxed. However, any charges collected about reasonable rate may be taxed leading to taxing the rich and not the poor . 2) No GST on subsidized food to employees in factory/corporate office Advance Ruling No. GUJ/GAAR/R/2023/14Dated 31/03/2023 Cadila Pharmaceuticals Ltd Facts - The applicant is engaged in the business of manufacture, supply and distribution of various pharmaceutical products. The applicant has employed around 2745 full time permanent employees in their factory and corporate office. They are also registered under the Factories Act, 1948. - The applicant provides canteen facility to its employees at the factory and its corporate office. The reasons provided by the applicant for providing the aforementioned facility is that in terms of section 46 of the Factories Act, 1948, they are mandated to provide and maintain canteen for the use of its employees. - Since the factory premises is located far away from the city limits, the applicant provides canteen facility by appointing a canteen service provider [ for short – CSP]. The employees are issued an ID card while joining which can be used to avail this canteen facility. They are charged only for the days on which an employee has punched his ID card and a pre-determined percentage is deducted from the salary payable to the respective employee. - The applicant has further set up the canteen facility in a demarcated area within its factory premises & also at their corporate office. The scope of work agreement [SOW], depicting the responsibilities of the applicant vis-a-vis that of the CSP is as under: Responsibility of the Applicant Responsibilityof the CSP Provide suitable premises for kitchen to Regularly preparing and serving breakfast, lunch and prepare food. dinner Provide utensils and other equipment’s necessary Fortnightly prepare and fix menu for preparing food. Make available power, water and infrastructure facility Maintain food safety. Hygiene& cleanliness. Provide vehicle for pickup of food & sending Selecting appropriate staff for maintaining the kitchen empty vessels back to the kitchen. and providing food. Provide vehicle for pick-up of food & sending Maintain proper record of receipt, issues, consumption, empty vessels back to the kitchen. and stock. etc Follow Proper Procedure System parameters Advance Ruling under GST
100 Ahmedabad Chartered Accountants Journal May, 2023 - It is the applicant’s contention that since it is practically not possible to enter into a contractual agreement with every employee, the CSP has entered into an agreement with the applicant; that the applicant shall be paying full to the CSP in respect of goods served during the prescribed period on behalf of the employees; that a portion of the said amount is recovered from the employees and the remaining part is borne by the applicant; that the amount so borne by the applicant is treated as staff welfare expenses towards subsidized food served to employees - Presently the applicant is liable to pay CSP who raises invoices with GST @ 5% ; that the applicant does not avail input tax credit [ITC] on the GST component paid. Questions Asked (i) Whether the subsidized deduction made by the applicant from the employees who are availing food in the factory/corporate office would be considered as a’supply’ under the provisions of section 7 of the CGST Act, 2017 and the GGST Act, 2017? (ii) If yes. Whether GST is applicable on the amount deducted from the salaries of its employees? (iii) If yes, on what portion GST will be applicable i.e. amount paid by the applicant to the canteen service provider or only on the amount recovered from the employees? (iv) whether ITC of GST charged by the canteen service provider would be eligible for availment to the applicant? Discussion and Findings: - The first issue to be decided is whether the subsidized deduction made by the applicant from the employees who are availing food in the factory/ corporate office would be considered as a ‘supply’ under the provisions of section 7 of the CGST Act, 2017. Now, in terms of Section 7 of the CGST Act, 2017, supply means all forms of ‘supply’ of goods/services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. The exception being Schedule I, which includes the activities made or agreed to be made without a consideration and Schedule III, which includes activities which shall be treated neither as a supply of goods or services. The applicant’s case is that they employ 2745 persons who are full time employees and who have been provided with canteen facility in terms of section 46 of the Factories Act, 1948. We find that the applicant is paying GST @ 5% in terms of the invoices raised by the CSP. The applicants primary role is that he provides a demarcated space and that the amount is paid by him to the CSP [a part of which is collected from the employees] on behalf of the employees for administrative convenience. As is already mentioned, the applicant’s contribution is treated as staff welfare expenses in his books of accounts. - In terms of Circular No. 172/04/2022-GST, it is clarified that perquisites provided by the ’employer’ to the ’employee’ in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST when the same are provided in terms of the contract between the employer and employee. We find that factually there is no dispute as far as [a] the canteen facility is provided by the applicant as mandated in Section 46 of the Factories Act, 1948 is concerned; and [b] the applicant has provided [one page] a copy of the agreement for cafeteria /canteen services to employees wherein in terms of Para 14.3, it is stated as follows: “Policy: In corporate and plant locations, Cadila provides employees multiple options on the variety of food served. There are snacks, minimeals as well as regular balanced meals that are served. Meals and snacks are provided on a cost sharing basis while business meetings are borne by the Company. Type of Food / Timings Location Drink Meals Breakfast 8.00am to 9.00am Corporal/ Lunch 12.30 pm to 1.30 pm Plant Evening 6.30 pm to 7.00 pm Dinner 8.00 pm to 9.00 pm Business Tea and Cookies available on All meeting Meeting request Rooms Refreshments Advance Ruling under GST
Ahmedabad Chartered Accountants Journal May, 2023 101 - In view of the foregoing, we hold that the subsidized deduction made by the applicant from the employees who are availing food in the factory would not be considered as a ‘supply‘ under the provisions of section 7 of the CGST Act, 201 7. - Since the answer to the above is not in the affirmative, the ruling sought in respect of the second and the third question is rendered infructuous. - The appellant has sought a ruling for canteen services provided at his Corporate Office also - Ongoing through the website of the applicant https: //www.cadilapharma.com, the Corporate Office of the applicant is situated at Sarkhej-Dholka Road, Bhat, Ahmedabad, India, 382210. The factory of the applicant is located at Ankleshwar, Dholka, Kadi. The corporate office of the applicant is not located within the precincts of the factory. However, the corporate office would fall within the ambit of the term ‘establishment’ as defined under section 2(c) of the Gujarat Shops and Establishment (Regulation of Employment and Condition of Service) Act, 2019 - Further, section 23 of the said Act states as follows: - 23. The employer shall provide and maintain in the shop or establishment, wherein not less than one hundred workers are employed or ordinarily employed to maintain a canteen for the use of its workers; Provided that, if a group of shops or establishments decide to provide a common canteen, then the same shall be permitted by the Inspector by an order, subject to such conditions as may be specified in the order. - On a conjoint reading of the above, it is evident that [a] the canteen facility is provided by the applicant to the full time employees of its corporate office as mandated in Section 23 of the Gujarat Shops and Establishment (Regulation of Employment and Condition of Service) Act, 2019, is concerned; and [b] the applicant has provided [one page] a copy of the agreement for cafeteria /canteen services to employees. Hence, in terms of the clarification issued by the Board vide Circular No. 172/04/2022-GST, at para 5, we hold that the subsidized deduction made by the applicant from the employees who are availing food in the Corporate Office would not be considered as a ‘supply” under the provisions of section 7 of the CGST Act, 2017. - Again, since the answer to the above is not in the affirmative, the ruling sought in respect of the second and the third question is rendered infructuous. - The next question on which the applicant has sought ruling is whether Input Tax Credit of GST charged by the CSP would be eligible for availment by the applicant. - Input Tax Credit will be available to the appellant in respect of food and beverages as canteen facility is obligatorily to be provided under the Factories Act, 1948, read with Gujarat Factories Rules, 1963 and Gujarat Shops and Establishment (Regulation of Employment and Condition of Service) Act, 2019 as far as provision of canteen service for full time/direct employees working on permanent basis at the factory/corporate office is concerned. It is further held that the ITC on GST charged by the canteen service provider will be restricted to the extent of cost borne by the appellant only. Our view is substantiated by the Ruling of the Gujarat Appellate Authority for Advance Ruling order No. GUJ/GAAAR/Appeal/ 2022/23 dated 22.12.2022 in the case of M/s. Tata Motors Ltd, Ahmedabad. - In view of the foregoing, we hold that Input Tax Credit will be available to the appellant in respect of food and beverages as canteen facility is obligatorily to be provided under the Factories Act, 1948, read with Gujarat Factories Rules, 1963 as far as provision of canteen service for full time/ direct Conclusion and Ruling - The subsidized deduction made by the applicant from the employees who are availing food in the factory/corporate office would not be considered as a ‘supply’ under the provisions of section 7 of the CGST Act, 2017 and the GGST Act, 2017. Advance Ruling under GST
102 Ahmedabad Chartered Accountants Journal May, 2023 - 2 & 3. Since the answer to the above is not in the affirmative, the ruling sought in respect of the second and the third question is rendered infructuous. - Input Tax Credit (ITC) will be available to the applicant on GST charged by the service provider in respect of canteen facility provided to its direct employees working in their factory and the corporate office, in view of the provisions of Section 17(5Xb) as amended effective from 1.2.2019 and clarification issued by CBIC vide circular No. 17210412022-GST dated 6.7.2022 read with provisions of section 46 of the Factories Act, 1948 and read with provisions of Gujarat Factory Rules, 1963 and Gujarat Shops and Establishment (Regulation of Employment and Condition of Service) Act, 2019. ITC on the above is restricted to the extent of the cost borne by the applicant for providing canteen services to its direct employees, but disallowing proportionate credit to the extent embedded in the cost of goods recovered from such employees. Comments - The decision taken by the Gujarat AAR is relying on various other judgments and AAR Which were produced as under by the applicant a] Amneal Pharmaceuticals P Ltd [TS-569-AAAR (Guj)-2021 -GST] b] Troika Pharmaceuticals Ltd [Advance Ruling no. Guj/GAAR/fu22l38] [c] Cadila Healthcare [Advance Ruling Guj/ GAAFJFJZ2/191 [d] DishmanCarbogenAmcis Ltd [Advance Ruling Guj/GAAR/PJ2212021] [e] Dakshina Kannada Coop Milk Producers Union Ltd [2021 (8) TMI 352] [f] R J TolsmavsInspecteur der Omzetbe lasting Lee warden (C-16/93 (udgement of sixth Court. sixth chamber) [g] Bai Mumbai Trust [Commercial suit (l) MPI 23612017) [h] IIT [1976(38) STC 428 (Alt); [i] University of Delhi [AIR 1963 SC 1873] J] Circket Club of lndia [AIR 1969 SC276l [K] TATA Motors Ltd IGST-ARA-23/2019-2olB-46] [L] TATA Power Company Ltd [GST-ARA9912019-20/B-92) [m] Posco India Pune Processing Centre P Ltd [GST-ARA 36/18-19/B-l l0] [n] Jotun India P Ltd [2019 (10) TMI 482] [o] Troikaa Pharmaceuticals Ltd [Guj/GAAR/ N2022138) [p] Hindustan Coca Cola Beverages P Ltd 12014- TIOL-2460-CESTAT-Mum - It is a good gesture that when the Food is provided at subsidised rate it won’t be taxed and that ITC would also be available over and above the cost borne by the applicant for providing canteen services to its direct employees ❉ ❉ ❉ Advance Ruling under GST
Ahmedabad Chartered Accountants Journal May, 2023 103 De Registration of Project/Blocks under RERA There is as such no concept of “Deregistration” anywhere defined under The Real Estate (Regulation and Development) Act, 2016. However, the Gujarat RERA authority has significantly transformed regulatory landscape by allowing real estate projects having multi block registrations to “de register” Block/Blocks from its project considering demand contraction, cash flow constraints, price variation of key raw materials and supply chain disruptions owing to the Covid 19 pandemic. Order 33 as issued by the GujRERA is of utmost important in current scenario owing to the time limit specified in the said order. Let us discuss the provisions and order in detail. Order 33 issued by GujRERA states that, “Provisions of RERA Act requires the promoter of the registered real estate project to hand over the possession of completed real estate by the promised date. Considering the expected demand contraction due to Covid-19 situation, it is likely that the financial planning of many projects ending in FY 2021-22 to FY 2023-24 will require fresh consideration and may lead to revising the project execution plan. From amongst the projects registered with GujaratRERA, projects with multi block development plans would be in a position to revisit their development plan and may consider De-registration of Portion of their Inventory from the registered project through Alteration Application i.e. Bringing down the size of registered project by converting the registered project into a Phase of the approved layout plan. This should enable timely project development as per the revised schedule and improved financial viability of the projects (2303 Registered Projects being 48% of Ongoing: non completed projects are having multiple blocks). To enable the promoters to perform their obligations with the consumers, One time Project Alteration Application Fee is also waived for promoters applying for De-registration of identifiable separate portion of Project Inventory from registered project. Promoters opting for De-registration of identifiable separate portion of Project Inventory will have to make Project Alteration Application along with the consent of Allottees of Block considered for De-registration. Allottees belonging to Block/Blocks considered for De-registration may provide their consent by agreeing to revised allotment from amongst the continued project or by agreeing to accept cancellation of booking in compliance of AFS terms. This should give breather for the industry to chalk out their own plan to fulfil their promises to the consumers by making them achievable within the provisions of the act.” Plain reading of the order 33 suggest that the real estate projects whose end date falls between FY 2021-22 to FY 2023-24 are “eligible” for de registering the “Blocks” from its project. That is the projects whose end date falls not beyond 31/03/2024 are eligible to apply for de registration of blocks. Important things to note while de registering the blocks are: a. Application for de registering blocks to be made under Section 14 of the Act b. Consent of allotees to be taken who have booked in blocks to be de registered c. Consent of allotees agreeing to take revised allotment from amongst the continued project d. The application fees for such application is waived Does this mean that projects having end date beyond 31/03/2024 cannot apply for de registration or they can apply only after payment of application fees to be paid for application made u/s 14. In my humble view any real estate developer having end beyond 31/03/2024 CA. Manan Doshi [email protected] GujRERA Corner
104 Ahmedabad Chartered Accountants Journal May, 2023 GujRERA Corner can apply for de registering blocks from its project after payment of application fees. It remains to be seen how the remedy of de-registration evolves as RERA authorities deal with more such cases - specifically with respect to the questions of the standards applicable to determine whether de-registration is appropriate in a particular case, and the form and extent of remedies available to allottees. MahaRERA has allowed deregistration of a project in case of Turf Estate Joint Venture LLP v Kesari Realty and Others which is discussed in detail: An application by the promoter in the case of Turf Estate Joint Venture LLP v Kesari Realty and Others (Regulatory Case No. 1 of 2022, erstwhile Suo-motu Case No. 218 of 2022), the Maharashtra Real Estate Regulatory Authority (Authority) has proceeded to de-register a real estate project despite the fact that there is no provision in the Real Estate (Regulation and Development) Act, 2016 providing for such de-registration. Facts of the case: The application pertained to the real estate project, “DB Turf View” (Project), whichwas first registered by Turf Estate JV under Section 5 of the Act. Of the 27 allottees, Turf Estate JV, having obtained the consent of 2/3rdof the allottees, applied for change in the name of the promoter in terms of Section 15 of the Act. Such consent also included consent for change in the plan of the Project, from residential to commercial. Pertinently, 5 of the allottees did not consent to such change. The application for change in promoter was accepted by the Authority and Turf Estate Joint Venture LLP (Promoter) became the new promoter of the Project. An application for de-registration of the Project was subsequently made to the Authority by the Promoter. The Promoter indicated that the consent of 2/3rd of the allottees to this effect had been sought and received; allotments for such 2/3rd of the allottees (being 22 in number) had been cancelled and refunds made (where applicable); and the remaining 5 allottees were sent cheques containing the refund amounts with 9 percent interest. The 5 allottees who had not consented, however, refused to accept the refund and challenged the termination of their allotment by way of suits before the Bombay High Court (Court), which are presently pending adjudication. The allottees also filed writ petitions seeking orders prohibiting the Promoter from taking steps for de-registration of the Project. These writ petitions were disposed of by the Court with directions to the Promoter to re-file the application for de-registration to the Authority showing the allottees as respondents to enable the allottees to oppose the application. The Court kept the questions of jurisdiction and availability of the remedy of de-registration open. It is in deciding this re-filed application that the Authority passed the order for de-registration of the Project. Final order by MahaRERA: To answer the primary question of whether the Authority can de-register a real estate project on the request of the promoter, the Authority framed the supplementary question of whether the registration of a real estate project is granted in eternity. The Authority observed that this is not the case, considering that the Act provides for revocation of registration of a Project under Section 7 which indicates that the Act takes into account circumstances where a registration may lapse, but the project may remain incomplete. Relying on the legislative intent as evident from the Preamble (which is two-fold - promotion of the real estate sector and protection of consumer) and an overall view of the provisions of the Act, particularly the ones pertaining to situations where it is not possible to deliver what was originally planned or promised, the Authority accordingly held that de-registration could be allowed upon request by the Promoter. Further, the Authority observed that the Act envisages the commercial reality where major changes in respect of a project become necessary, and in such cases the Act makes the consent of two-third of the allottees a mandatory requirement. For instance, Sections 14 and 15 require the consent of 2/3rd of the project’s allottees other than the promoter for any alterations or additions to the sanctioned plans of a project and for the transfer or assignment of a promoter’s rights and liabilities, respectively. Borrowing from these provisions, the Authority held that any ‘inevitable’ changes made without malafide intent would stand the test of fairness and protection provided that the consent of 2/3rdof the allottees is obtained.