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Published by caaahmedabad, 2019-11-18 03:51:53



Ahmedabad Chartered Accountants Journal

E-mail : [email protected] Website : - caaahmedabad

Volume : 43 Part : 5 August, 2019


To Begin with

- Let's Start in a Small Way.................................................. CA. Ajit C. Shah......................... 259
Editorial ............................................................................................CA. Nirav R. Choksi......................260
From the President............................................................................ CA. Anand S. Sharma...................261


Taxation Laws (Amendment) Ordinance, 2019....................................CA. Kaushik Khona.......................262

Establishment of Branch Office (BO)/ Liaison Office (LO)/
Project Office (PO) in India by foreign companies under
FEMA provisions................................................................................. CA. Parag Shah.........................275

Direct Taxes

Glimpses of Supreme Court Rulings....................................................Adv. Samir N. Divatia...................279

From the Courts.................................................................................. CA. C.R. Sharedalal &
CA. Jayesh C. Sharedalal...........281

Tribunal News.....................................................................................CA. Yogesh G. Shah &
CA. Aparna M. Parelkar............. 285

Controversies.......................................................................................CA. Kaushik D. Shah....................289

Judicial Analysis...................................................................................Adv. Tushar Hemani....................291

FEMA & International Taxation

India-China DTAA amended to incorporate BEPS related provisions... CA. Dhinal A. Shah &
CA. Sagar V. Shah.........................301

FEMA Updates................................................................................... CA. Savan R. Godiawala..............303

Indirect Taxes

GST & VAT Judgments and Updates................................................... CA. Bihari B. Shah &
CA. Vishrut R. Shah.......................305

Corporate Law & Others

Corporate Law Update....................................................................... CA. Naveen R. Mandovara............308
Allied Laws Corner..............................................................................Adv. Ankit M. Talsania...................315

From Published Accounts ................................................................. CA. Pamil H. Shah..................... 323

From the Government ......................................................................CA. Ashwin H. Shah &
CA. Kunal A. Shah........................326

New Delhi Times................................................................................CA. Aniket S. Talati.................... 329

Association News.............................................................................. CA. Shivang R. Chokshi &
CA. Ketan G. Mistry....................313

Ahmedabad Chartered Accountants Journal August, 2019 257

CA. Nirav R. Choksi Journal Committee CA. Sarju Mehta
Chairman Members Convenor

CA. Ashok K. Kataria Ex-officio CA. Atul R. Shah
CA. Darshan A. Shah CA. Shivang R. Chokshi CA. Jayesh Sharedalal

CA. Nitesh J. Jain CA. Rajni M. Shah
CA. Ronak M. Khandwala CA. Shailesh C Shah

CA. Anand S. Sharma CA. Ketan G. Mistry


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 2019-20 is ` 1500/-, single copy ` 150/- (if available).

4. Please mention your membership number in all your correspondence.

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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. 2019-20 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 180 1180
a. Individual Membership Fees
i. In case of membership (of ICAI) for a period of less than or equal to five years 1000

ii. In case of membership of (ICAI) for a period more than five years 1200 216 1416

b. Flexi Firm/Corporate Membership Fees*** 3000 540 3540

*** Registered Firm/Corporate can nominate any two participants from their firm for each Brain Trust Meeting. Additional
Representatives can be nominated @1500/- plus GST per participant subject to maximum of 20 participant per firm

Professional Awards

The best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law and Auditing' and 'Allied
Laws and Others' will be awarded the Trophies/ Certificates of Appreciation after being vetted by experts in the
profession. Articles and reading literatures are invited from members as well as from other professional colleagues.

Published By

CA. Nirav Choksi, on behalf of Chartered Accountants Association, Ahmedabad, 1st Floor, C. U. Shah Chambers,
Near Gujarat Vidhyapith, Ashram Road, Ahmedabad - 380 014. Phone : 91 79 27544232
No part of this Publication shall be reproduced or transmitted in any form or by any means without the permission
in writing from the Chartered Accountants Association, Ahmedabad.
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.

Printed : Pratiksha Printer, Ahmedabad Mobile : 98252 62512 E-mail : [email protected]

258 Ahmedabad Chartered Accountants Journal August, 2019

Let's Start in a Small Way

CA. Ajit C. Shah
[email protected]
I am sure you all will agree with me when I say that all of us are responsible for the present state of our
environment and we owe a duty towards it. Our government is taking various measures to make our
country a better and clean nation. Be that on front of cleanliness, traffic awareness, health consciousness
and many other measures. The government and its agencies cannot alone achieve the object unless we
take onus on ourselves and make our positive contribution to whatever the government is doing. Here
are few points where we can work upon and I am sure our small effort will bring significant change
around us.

Spread the Idea of Cleanliness: We often find that people are spitting, littering and urinating in public
places. The number is huge. Beyond the fact that it is shameless to be doing so, it also pollutes the
environment. We clean our houses but unfortunately treat streets and city as a dumping yard for our
waste. This will only make our city a dump yard. We need to take action where we not just stop this if
we are doing but also make people aware of the idea of using a dustbin.

Help Others: Chivalry and sensitivity can come in the form of helping, assisting or guiding elderly
people, senior citizens, children, blind people and women wherever and whenever they need – while
crossing the streets, roads, at payment booths, in public transport like train, bus even at the places of
leisure and entertainment. Let them go ahead of you, offer them your seats in train or bus, help them
carry bags. The examples may look to be very simple but we hardly practice. In fact we run away from
such situations whenever we find it. We have become so busy in our life that we have forgotten to be
happy by helping others. These small steps not just give us a joy and satisfaction but in fact in a long run
purify our mind and prepare us for bigger things to achieve in life.

Traffic Sense: Now a days, it has become a menace to walk on roads because most of us do not follow
the traffic rules. As a pedestrian, we also have a responsibility to walk on the pavement and watch for the
green signal before we cross roads on a zebra crossing. As drivers we should follow the rules, follow
proper lane driving and maintain distance from vehicle in front of us. These may appear to be very basic
steps but if all follow, it will bring a remarkable change in our society.

Be on time: It is said that the busiest of people find time for everything. The reason is they manage their
time well. Assign time to all activities of the day for personal and professional meetings, for completion
of assignments, for staff in the office and members of the family. This will surely make your life more

Small steps to begin with:

· Don’t litter. Carry a small bag with you at all times that will stop excess use of plastic bags.

· Help other.

· Observe traffic rules.

· Make a commitment - Never to be late.

Ahmedabad Chartered Accountants Journal August, 2019 259

Editorial [email protected]

By the time this communiqué reaches your office, we would have completed the audits or
would be on the verge of completing the audits. As we turn our attention from the audits and
return filings, which comprises of core practice area for many of us, to other practice areas,
one thought which I wish all of us should ponder upon. Are we all over dependent on traditional
practice areas?

By now we must be convinced that the compliance based practice is now becoming a routine
process driven activity for many of us. We are not getting the job satisfaction which this
practice used to give us in earlier times. Blame it on the methodology of work followed at our
office, the complacency of the client or their accountants or the time bound process driven
compliance work which has no more challenges left or our own selves who do not wish to
venture in newer avenues for the fear of reducing in work or income.

Accept it or not, the technology is fast replacing the human mind. There is no need to remember
sections or sub sections when the same are available at your finger tips. Even the education
based system seems to be changing itself from the old style of mugging up things to concept
clarity. The stress is more on clarity of things and understanding the process rather than
remembering the smallest details.

These are different times for professionals because it’s changing very fast. These are not
difficult times. I assume the larger picture is still the same only the process has changed.
Earlier the physical copies and seminars were keeping us updated. Now the soft copies,
messages and the online lectures are doing the same job. And these mediums are doing it
rather more efficiently because, one they are available in abundance and two that they are
available wherever and whenever needed. The only downside of this is that there is no
authenticity regarding most of the messages. But fortunately enough we normally don’t fall
prey to fake messages purely because we have been trained to go to the root of the matter,
verify the evidences and only then agree to something.

As a Journal Committee Chairman I request that the members keep on sharing their knowledge
among other members of the association. A special request to the senior members of the
profession to kindly encourage and guide the younger members to contribute articles related
to our profession.

Feel free to write back to us on the official email ID of the association. Your feedbacks are
very important for us and we always look forward to qualitative and meaningful suggestions
given to us.

On Behalf of Editorial Board

CA. Nirav R. Choksi

260 Ahmedabad Chartered Accountants Journal August, 2019

From the CA. Anand S. Sharma
[email protected]
with Brain Trust seminar on Tax Audit. We
Dear Members, conducted 2nd Brain Trust Meeting on Issues on
Tax Audit & Reporting in Form 3CD by CA Tejas
India celebrated its 73rd Independence Day and our Mehta & CA Malay Deliwala on 21st August, 2019
Prime Minister from the ramparts of Red Fort which had tremendous response and both the
delivered a 92 minutes speech to the nation talking speakers’ enlighted members with newly introduced
about the hitches in the growing Indian economy and amended clauses in Tax Audit reporting.
and how India can overcome all obstacles to Income Tax Department expected Association to
become a $5 Trillion Economy. Giving his speech jointly organize aware ness program on Charitable
he indicated and stressed on benefits of small Trust Filing of TDS Return. Professional
family, defense and investing 100 lakh crore on Development Committee of Association
Infrastructure. Since the ball has started rolling, successfully conducted joint program on 22nd
there is a big indication of expansion of the economy August. Apart from this, Association also organised
and we Chartered Accountants will also get benefit joint seminar with Gujarat Chamber of Commerce
to contribute by catering to the needs of compliance and Industries on SabkaVishwas Scheme, 2019
for the citizens. If all sets up for the growth of the addressed by Shri Ajay Jain, Chief Commissioner
Economy our fraternity will have to play a bigger CGST,Ahmedabad on 5th September, 2019.
role in nation building activities and thereby we
also need to equip ourselves with growing I would like to take and opportunity that with efforts
competition and complexities to deal with various of Membership Development Committee we are
newsectors havebeen opened up for our fraternity able to add 85 new members to the association at
and we see and witness that our members the month end. Also, on behalf of the Membership
flourishing and delivering expertise in these Development Committee, I would like to request
emerging segments other than Tax and Assurance. you that kindly spread the message of online
enrolment and payment to the non-members. By
As the role of professional is spreading its wings, a digitalizing the process on enrollment, we have
set of new responsibilities has to be addressed by ensured that it becomes easy for anyone willing to
Chartered Accountants to meet the requisite demand join the association, at any time he wants to. I am
of compliances and complications. PM Modi hopeful with the help of members of CA
envisions digitization and hence we see a major Association we will be able to increase the strength
change in our compliances. We have to keep thrust of CA Association by enrolling new members, and
on information technology development to meet the more and more people will be able to take the
demands of different portals for filings under various benefits of the same. I take privilege on behalf of
Acts. We notice that forms and Returns of Income Office Bearers that we are imbibed and have a single
Tax, Companies Act, GST are on different portals intention to work towards betterment for Members.
having different language and different versions of
programs. We are in a constant changing Ending with Acharya Chanakya’s quote “Never
environment with introduction of new mechanisms settle for anything less than what you deserve. It’s
like faceless assessments in Income Tax.Hence, we not pride, its and self respect”
Chartered Accountants not only need to upgrade our
hardware requirements but even software skills are Jai Hind !!!
to be updated to fulfill the various compliances.
CA. Anand Sharma,
Since we are heading towards busy tax season we President
wanted to take opportunity for benefiting members

Ahmedabad Chartered Accountants Journal August, 2019 261

Taxation Laws (Amendment)
Ordinance, 2019

The Smallest Tax Code –affecting Business CA. Kaushik Khona
restructuring Big way- A Business perspective [email protected]

The morning of 20th September, 2019 was perhaps perceived. Hence the Budget 3 on 20th September
the most unexpected and fascinating mornings in 2019 was a huge relief. The taste of this 3rd Budget
the recent times. (the Ordinance) was felt much sweeter as we were
chewing the bitter pill since long.
Off late, we the fellow countrymen have been
burdened with lot of negativity engulfing India, like The big changes announced were followed up with
the Indian Automobile Industry affected by worst issue of Ordinance promulgated by the Honourable
de-growth over a decade, India revising its GDP President of India, which is summarized as under:
numbers downwards, Crude prices in for a shock-
rise due to ARAMCO facility damaged in Saudi 1. Reversal of tax on Buy back announced
and also tension between US & Iran, Indian prior to 5th July, 2019: (Section 115QA).
DomesticAviation passenger growth reduced to 3%
in August, 2019 as compared to August, 2018 after It was a relief, although to very few listed
seeing the imputed growth since February 2019 corporates who had announced Buy back prior
(also due to closure of Jet) for the first time after to 5th July, 2019 and had not yet completed the
almost 3 years of continuous growth of a CAGR Buy back. These companies included few listed
of around 15% to 18%, the Manufacturing and companies who had already made public
Service sector growth showing decline and announcement before 5th July 2019 and
concerns- and the list goes on. included large companies like Infosys, Orbit
Exports, Aurion Pro Solutions, Action
And suddenly an unexpected Diwali celebrations Construction Equipments, Nava Bharat
and Christmas Carols started ringing- so they say. Ventures, GE Shipping and GEECEE Ventures
and who were provided with a rude shock in
The Honourable Finance Minister- Mrs. the finance bill No 2, 2019 which is now an
Sitharaman in her press conference revealed a path Act of Parliament had made it mandatory to
breaking news affecting almost all business set up tax the buy back in the hands of the Companies
in India. Suddenly India got a third budget in the which had announced the Buy Back of shares
calendar year 2019 and this time it was a real one- before 5th July, 2019 and who had fully not
though the shortest one. The earlier two were given completed the process by that date. The
a pass as they did not provide any direction. The Ordinance provided the relief- a logical and
first one was any case a pre-election budget and much awaited where the companies who had
more of a memorandum and expectedly a non- made public announcement before 5th July,
issue. While the second one presented on 5th July, 2019 were now exempt from the provisions
2019 after NAMO-2 was sworn in- had high hopes requiring them to pay Dividend Distribution tax
but failed miserably on delivery- as people on the buyback of shares as proposed and as
per law – enacted by the passing of the Finance
Act, no.2, 2019.

262 Ahmedabad Chartered Accountants Journal August, 2019

Well, whether the businesses in India consider Taxation Laws (Amendment) Ordinance, 2019
the above changes and push for the changes or
not, is important but not as much to know that Besides these FPIs constituted as AOP or BOI
the Government is reading the pulse of shall not be liable to pay enhanced surcharge
Businesses and is eager to make changes which on tax payable on any income by way of capital
will atleast reduce negativity if not infuse gains arising from transfer of any securities
Stimulus and positivity to the economy. including derivatives. As securities held by FPIs
are always treated as capital asset, enhanced
It really feels good when Government becomes surcharge shall not be levied even if securities
Human. are held by FPIs for trading purposes.

2. The Higher surcharge of 25% and 37% on Further amendment in the nature of clarification
the income by way of Short term capital gains has also been made to provide that the enhanced
and Long term capital gains on sale of Equity surcharge shall not be applicable even for the
Shares, units of Equity oriented Funds and units purposes of deduction of tax at source from
of business trusts earned by Individuals, HUF, income of a non-resident as referred to in
Association of persons (AOP), Body of Section 111A and 112A. Maximum surcharge
Individuals (BOI) and Artificial Jurisdiction on such income shall not exceed 15%.
person (AJP) will be restricted to 15% only
for the top income slab. As we are all aware This measure of the Government was an
the Government had enhanced the rate of acknowledgement of need to reverse a not so
surcharge with an intention to tax the high net- correct decision taken in Finance Act, No. 2,
worth individuals but this decision severely and 2019.
adversely affected the Foreign Portfolio
Investors (FPIs) who invest in India through a 3. MAT rates reduced from 18.5% to 15% for
non-corporate organization structure, like AOP Companies which continue to avail
or BOI or Trust. exemptions and deductions.

To address the concerns of FPIs and to 4. New provisions of Section 115BAA and
encourage investment in the capital market, the section 115BAB introduced:-
Finance (No. 2) Act, 2019 has been amended
through Taxation Laws (Amendment) These new provisions can be summarized to
Ordinance, 2019 to withdraw the enhanced say that Provisions of Section 115BAA are
surcharge from tax payable on income arising introduced in relation to the existing company
under section 111A, 112A and 115AD(1)(b). where the choice is given to the existing
companies to choose a lower rate of tax of 22%
Thus, the enhanced rate of surcharge (i.e., 25% (effective rate of 25.168%) with the condition
or 37%) shall not be levied on individual, HUF, that they will not avail any exemption/ incentive
AOP, BOI and Artificial Juridical Person in under the specified sections. While the
respect of tax payable on income arising from provisions of Section 115BAB provide new tax
transfer of following long-term or short-term regime for a new domestic company to be
capital assets: formed which will be engaged in manufacture
of an article or a thing and related research and
a. Listed equity shares distribution activity only where the choice is
given to these newly formed companies
b. Listed units of equity oriented mutual fund (formed on or after 1.10.2019) to choose a
lower rate of tax of 15% (effective rate of
c. Listed units of business trust 17.16%) with the condition that they will not
avail any exemptions/ incentives under the

Ahmedabad Chartered Accountants Journal August, 2019 263

Taxation Laws (Amendment) Ordinance, 2019 4. The difference in the form of Dividend
distribution tax applicable only to
specified sections). And in both the cases, they Companies is now the only differentiation-
will not be liable to MAT. (music to the ears) between a corporate set up and a non-
corporate set up. This element of
The common man perspective of the new differentiation may then be partially
provisions is that the Government has reduced addressed by seeking higher drawal of
the tax on corporates from hither to 25% / 30% MD remuneration in a company, after
and effective peak rate of 29.12% and 34.944% considering the applicable effective tax rate
respectively to: in the hands of Individuals drawing MD
a. A rate of 15% (effective rate of 17.16%)
for a new companies to be engaged in While the above perception may be prima facie
manufacturing with NO MAT and correct- there are a lot of issues which need to
be considered before jumping to the above
b. A tax rate of 22% (effective rate of conclusion.
25.168%) with NO MAT for existing
companies engaged in business. With these changes provided by the Ordinance,
whether to consider these changes and make
So with an Ordinance running into 10 pages, changes in the business structure, the following
the Government recreated a history and has will be key issues to be decided. The answers
forced all the Business entities and to each of these questions would determine the
Professionals alike to rethink on the business next course of action:
strategies more so on the structure and entity
through which the Business is being carried Issues that require to be considered before
out. deciding course of action in relation to
Structuring/ restructuring:
With the above news- prima facie – there is a
perception that: 1. For a business which is presently carrying
on business as non-corporate Assessee like
1. The business which is hitherto carried on Partnership firm or LLP or Proprietary.
in the set up as Companies attracted by
provisions of Section 115BA should be a. Ownership structure
now converted to fall under the regime of
Section 115BAA. b. Nature of business- manufacturing, non-
2. Any new business of manufacturing by
Domestic set up may be now taken up c. Size of Operations- present and in
under the structure of a Company and perceivable future: Turnover.
under the provisions of Section 115BAB
d. What is typically difference between the
3. The MAT and AMT were perhaps trying Book profits as per the Books of accounts
to create neutrality between a corporate set and the net Increase in operating cash flow
up and a non-corporate set up will now be and cash flow after financing operations-
a point of differentiation as the Companies as calculated by Indirect cash flow method?
under the provisions of Section 115BAA
and Section 115BABA will not attract e. Whether there is any vision of growth in
MAT while non-corporate assessees like future? By way of any major expansion or
firms will still attract AMT.

264 Ahmedabad Chartered Accountants Journal August, 2019

adding vertical integration project either Taxation Laws (Amendment) Ordinance, 2019
forward or backward integration –
involving investments? l. To make the analysis further meaningful

f. What is the owners/ partners requirement i. Discounted cash flow method (DCF)
of take home of the profits by way of may be used by using appropriate
drawings or otherwise? Interest rate (Discounting factor).

g. Whether there is any vision to take the ii. Industry EBIDTA benchmarking may
business to next level by either getting the be carried out
business listed with SME platform of NSE
or by merging the same into a Company iii. Industry PE (Price – earning) be used
or providing exit to the existing promoters to compare the Profitability of the
by pitching on valuation of Business business vis a vis the capital employed
(to check if the Business is as per the
h. Whether the growth cycle or the Working Market benchmark or not) and Book
capital cycle restricts the promoters from value Earning (BV/E) may be used as
withdrawing any profits from the business Benchmark to identify the impact of
valuation of the business for retained
i. What has been the taxable profits as per earnings also
normal tax provisions and Book profits and
AMT paid in the past and what are the iv. Further in order to arrive at total tax
projections for the same for atleast 5 years impact, the tax at the business entity
going forward level as also the tax payable at the
individual partner level for the
j. Whether the business is in a mode where remuneration or other pay outs made
year after year the payments of AMT are to the Promoters/ partners/ proprietor
made and the set off of the AMT does not be tabulated.
seem to be immediately feasible
considering the projections for the next 5 2. For Corporate Businesses:
Similarly in a case where the business is
k. In short, detailed projections for the Sales owned by corporate set up analysis is
and Profits (EBIDTA, Interest, required as per the list above. In such
depreciation (as per Accounts), analysis the above points to the extent
depreciation (as per Income tax), Tax (cash applicable to a Corporate- and with
expenses), total tax , net profit and the cash applicability of MAT instead ofAMT need
flow along with calculation of Taxable to be considered. In such analysis, the
Income under normal provisions and issues are little less challenging because in
calculation of Book profit for the purpose any case the business entity is a Company
of calculation of AMT and also impact of and is already working with the corporate
carried forward and brought forward of philosophy including on the aspects
loss under normal income tax provisions relating to the payment of MD
and Book profit calculation are made for remuneration, Dividend payout ratio, and
atleast next 5 years to arrive at the Book profit – vis-à-vis disposable cash
projections of tax payable, tax credit, available. Besides it would be also
carried forward losses, etc. worthwhile to understand:

Ahmedabad Chartered Accountants Journal August, 2019 265

Taxation Laws (Amendment) Ordinance, 2019 differential is hugely in favour of a change
in Corporate structure, then considering the
a. Whether the Company has plans to get Risk factors as listed below, a decision
itself listed in future if it is not already could be taken. Besides considering the
listed variables involved into decision making
process, the decision of whether the
b. Whether the company believes on the business restructuring so as to change the
concept of Valuation on the basis of structure or tax scheme be made, the
profits ploughed back- with a Price to answer will be derived on case to case basis
Book value multiple etc. considering the final evaluation matrix as
mentioned above.
c. The Dividend Payout ratio as also
Profit capitalization for issue of Bonus Impact of new tax rates:
Let us understand the impact of the changes on the
d. Whether ESOP and sweat equity will tax rates – with slight details as per Illustrative chart
be issued? of tax rates and effective tax rates – post the
Changes as per ordinance are provided in table A
If after all the analysis and calculating the below:
present value of the Tax saved together
with Present value of Enterprise value

Table A : Tax payable under different scenarios (for Illustration purpose)


Sr Type of company Tax rate with SC and cess Income Income >1 r Income >2 r Income >5 r Income above
upto 1 cr and below 2 cr and below 5 and below 10 cr 10 cr

Tax at Rs. Tax at Rs. Tax at Rs. Tax at Tax at 20 cr
5 cr Rs.10 cr
1 crore 2 cr 56758000
13728000 27638000 28.38%
1 Domestic Mfg company 27.46% 27.64%

formed after 1.3.2016 26%/27.82%/27.82%/27.82%/29.12% 2600000 5382000

(section 115BA) Effective rate 26.00% 26.91%

2 Domestic company having 26%/27.82%/27.82%/27.82%/29.12% 2600000 5382000 13728000 27638000 56758000
26.91% 27.46% 27.64% 28.38%
turnover of upto Rs.400 cr in 26.00%

FY 2017-18

Effective rate

3 Domestic Company having 31. 2% /3 3.3 84 % /33. 38 4% / 3120000 6458400 16473600 33165600 68109600
turnover of Rs 400 cr and 33. 384% /34 .944 % 31.20% 32.29% 32.95% 33.17% 34.05%
more in FY 2017-18
Effective rate

4 Domestic Company taking 25. 168% /25. 168% /25. 168% / 2516800 5033600 12584000 25168000 50336000
25.17% 25.17% 25.17% 25.17% 25.17%
option of Section 115BAA 25. 168% /25 .168 %

(any business- not restricted

to Mfg) Effective rate

5 Domestic Manufacturing 17. 16% /17. 16% /17. 16% /17 .16% / 1716000 3432000 8580000 17160000 34320000
17.16% 17.16% 17.16% 17.16% 17.16%
Company formed after 17.16%

30.9.2019 and opting Section

115BAB Effective rate

6 Partnership firms/ LLP 31. 2% /3 4.9 44 % /34. 94 4% / 3120000 6614400 17097600 34569600 69513600
Effective rate 34.944%/34.944% 31.20% 33.07% 34.20% 34.57% 34.76%

7 Proprietary Unit (normal 32. 175 % /3 5.8 8% /39 % /4 2.7 44% / 3217500 6951750 19256250 40628250 83372250
32.18% 34.76% 38.51% 40.63% 41.69%
resident individual (other 42.744%

than senior citizen and Super

Senior citizen) Effective rate

266 Ahmedabad Chartered Accountants Journal August, 2019

Taxation Laws (Amendment) Ordinance, 2019

Technical analysis of the Tax Provisions:

Now for a more technical understanding of the new provisions, please consider the chart below in table B:

Table B: for A.Y.2020-21 onwards:

Particulars Newly Inserted Newly Inserted Existing provisions Normal provisions Normal provisions for a
Section 115BAA Section 115BAB of Section 115BA for a Company Company (turnover
(turnover upto above Rs.400 cr in FY
Rs. 400 cr in FY 2017-18

Company Registered Any existing company On or after 1st Or or after 1st Any Existing Any Existing company
October, 2019 March, 2016 company

Beginning year A.Y.2020-21 A.Y.2020-21 A.Y.2017-18 Any Any

Choice Any year of choice From the 1st year of From the 1st year Any Any
of setting up of the
from A.Y.2020-21 onwards setting up of the new new company


Turnover criteria No Such condition No Such condition No Such condition Turnover in 2017-18 Turnover in2017-18 is more
should not exceed than Rs. 400 cr
Rs. 400 cr

Restrictive No Such condition Engaged only in Engaged only in No Such Condition No Such Condition
Condition 1 No Such Condition business of business of No Such Condition No Such Condition
No Such Condition manufacturing/ manufacturing/ No Such Condition No Such Condition
Restrictive No Such Condition production of any production of any No Such Condition No Such Condition
Condition 2 article or thing and article or thing and
Restrictive No Such Condition research in relation to research in relation to No Such Condition No Such Condition
Condition 3 or distribution of such or distribution of such
article of thing article of thing
Restrictive manufactured or manufactured or
Condition 4 provided by it provided by it

Restrictive Commence No Such Condition
Condition 5 Manufacturing on or
before 31.3.2023

Not formed by split up No Such Condition
or reconstruction of a
business already in
existence. (exception:
rehabilitation under
section 33B

Does not use any No Such Condition
previously used
machinery or plant with
exception in relation to
imported machinery or
plant which was not
used in India and on
which no depreciation
was allowed in India.
Exception : Use
machinery or plant not
exceeding 20% of total
value of machinery or
plant used by the

Does not use any No Such Condition
building which was
previously used as a
hotel or convention
Centre as defined in
clause (a) and clause
(b) of sub section 6 of
Section 80ID.

Ahmedabad Chartered Accountants Journal August, 2019 267

Taxation Laws (Amendment) Ordinance, 2019

Particulars Newly Inserted Newly Inserted Existing provisions Normal provisions Normal provisions for a
Section 115BAA Section 115BAB of Section 115BA for a Company Company (turnover
(turnover upto above Rs.400 cr in FY
Rs. 400 cr in FY 2017-18

Restrictive No Such Condition No Relief/ Deduction/ No Relief/ Deduction/
Condition 6 (See
list of exemption under exemption under

Provisions of Section Provisions of Section

10AA, or Section 32 (1) 10AA, or Section 32

(iia) or Section 32AD or (1)(iia) or Section 32AD

Section 33AB or or Section 33AB or

Section 33ABA or Section 33ABA or

Section 35 (2AA)(ii) or Section 35 (2AA)(ii) or

section 35 (2AA) (iia) or section 35 (2AA) (iia)

section 35 (2AA(iii) or or section 35 (2AA(iii)

section 35 (2AB) or or section 35 (2AB) or

section 35AD or section section 35AD or section

35CCC or Section 35 35CCC or Section 35

CCD or any section CCD or any section

under heading C of under heading C of

Chapter VIA (other than Chapter VIA (other

Section 80JJAA)(See than Section 80JJAA)

narration below) (See narration below)

Restrictive Condition 7 No Such Condition No set off of any loss No set off of any loss

carried forward from carried forward from

earlier A.Y. if such loss earlier A.Y. if such

is attributed to above loss is attributed to

clauses as mentioned in above clauses as

Restrictive condition 6. mentioned in

(In fact this being Restrictive condition

applicable for new 6.

company the question of

having carried forward

loss is not applicable)

Restrictive No Such Condition Depreciation determined Depreciation determined
Condition 8 in a manner as may be in a manner as may be
prescribed (for other prescribed (for other than
than in clause 32 (i)(iia)) in clause 32 (i)(iia)) that
that is no additional is no additional
depreciation is allowed. depreciation is allowed.

Restrictive No Such Condition Loss will be deemed to Loss will be deemed to
Condition 9
have been allowed and have been allowed and

given effect and no given effect and no

further deduction for further deduction for

such loss shall be such loss shall be

allowed for any allowed for any

subsequent years subsequent years

Restrictive No Such Condition Ordinary profits to be No Such Condition No Such Condition No Such Condition
Condition 10 determined by the AO
in case the business
arranged in a manner
that company is
expected to generate
higher than ordinary

Restrictive No Such Condition If transactions between No Such Condition No Such Condition No Such Condition
Condition 11 Parties under section
92BA- then calculate
Arm’s length pricing
as per Section 92F (ii)

268 Ahmedabad Chartered Accountants Journal August, 2019

Taxation Laws (Amendment) Ordinance, 2019

Particulars Newly Inserted Newly Inserted Existing provisions Normal provisions Normal provisions for a
Section 115BAA Section 115BAB of Section 115BA for a Company Company (turnover
(turnover upto above Rs.400 cr in FY
Rs. 400 cr in FY 2017-18

Reversal of Choice Once opted cant withdraw Once opted cant Once Opted Cant
withdraw withdraw

MAT NIL NIL Applicable now at 15% Applicable now at 15% Applicable now at 15%
(instead of 18.5%) (instead of 18.5%) (instead of 18.5%)

Effective tax rates:

Upto 1 cr 15.60% 15.6% 15.6%

Rs.1cr-Rs.10cr 16.692% 16.692% 16.692%

Above Rs.10cr 17.472% 17.472% 17.472%

Normal tax 22% 15% 25% 25% 30%

Effective tax
rates: normal

Upto Rs. 1 cr 25.168% 17.16% 26% 26% 31.2%

Rs. 1cr-Rs.10cr 25.168% 17.16% 27.82% 27.82% 33.384%

Above Rs.10cr 25.168% 17.16% 29.12% 29.12% 34.944%

• Narration in relation to Specified exemption and deductions are follows:


Section 10AA Deduction for units established in Special Economic Zones (SEZ)

Section 32(1)(iia) Additional depreciation in respect of new plant and machinery

Section 32AD Deduction for investment in new plant and machinery in notified backward areas

Section 33AB Deduction in respect of tea, coffee or rubber business

Section 33ABA Deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in India
Section 35(1)(ii)
Deduction for donation made to approved scientific research association, university college or other institutes for doing scientific
research which may or may not be related to business

Section 35(1)(iia) Deduction for payment made to an Indian company for doing scientific research which may or may not be related to business

Section 35(1)(iii) Deduction for donation made to university, college, or other institution for doing research in social science or statistical research

Section 35(2AA) Deduction for donation made to National Laboratory or IITs, etc. for doing scientific research which may or may not be related to

Section 35(2AB) Deduction for capital expenditure (excluding cost of land and building) on scientific research relating to business of bio-technology
or manufacturing any article or thing

Section 35AD Deduction in respect of capital expenditure incurred in respect of certain specified businesses, i.e., cold chain facility, warehousing
facility, etc.

Section 35CCC Deduction for expenditure on agriculture extension project

Section 35CCD Deduction for expenditure on skill development project

Part C of Chapter VI-A Deduction in respect of certain incomes other than specified under Section 80JJAA

In this chart the study is only in relation to the long term capital gains, Interest received from
Normal Business Incomes accruing to Domestic Income company specified under section 194LC,
Companies and the Special incomes – liable to Interest in the nature and extend referred in Section
special treatment under specific provisions and 194LD and Section 194LBA, profit from Life
special tax rates are not examined. For example- Insurance business, etc. are not subject matter of
the Income in nature of short term capital gains, analysis hereinbelow in Table B. The Chart

Ahmedabad Chartered Accountants Journal August, 2019 269

Taxation Laws (Amendment) Ordinance, 2019 4. If the present surcharge prescribed at 10% on
the tax rates applicable for section 115BAA
provides detailed technical analysis of the newly and Section 115BAB are increased, then
inserted provisions of Section 115BAA and section decision taken now on the basis of 10%
115BAB together with existing provisions of surcharge may prove wrong.
Section 115BA and provisions generally applicable
to Companies which are not affected by any of the 5. There is an assumption in the analysis that even
above mentioned provisions. when we migrate to provisions of Section
115BAA, the MAT credit hitherto available
Word of Caution - Risk Factors: will be available for set off. However on 2nd
October 2019, CBDT has come up with
While we have been provided with a major change Circular no 29 of 2019, clarifying that in the
in the tax rate regime, some of the major issues event the Company chooses to migrate to
which could affect our decision are still not clarified provisions of Section 115BAA, then the MAT
or may be modified later which would affect our Credit pending unutilized thus far, would no
decision today. Some of these relevant issues are: longer be available.

1. Claim of depreciation in such manner as may The relevant paragraphs of Circular 29 on this
be prescribed: When the provisions of Section aspect is reproduced below:
115BA were introduced, similar language was
used – however no separate mechanism of “5.2 As regards allowability of brought
claim of depreciation was provided. It is forward MAT credit, it may be
however possible and feared that the noted that as the provisions of section
Government may prescribe completely 115JB relating to MAT itself shall
different method of calculating depreciation not be applicable to the domestic
where the rates or method may be different company which exercises option
from the present rates andAppendix. If in future under section 115BAA, it is hereby
the rates or method are changed to affect clarified that the tax credit of MAT
adversely, the tax savings that are contemplated paid by the domestic company
presently may vanish or may diminish and exercising option under section
hence any decision that may be evaluated will 115BAA of the Act shall not be
have to consider the above contingency. available consequent to exercising of
such option.
2. In future the normal tax rate which is presently
prescribed at 22%/25%/30% may undergo 5.2.1 Further, as there is no time line
change- and if they are reduced the notional within which option under section
benefit which is perceived at present may not 115BAA can be exercised, it may be
remain if the tax rates as provided now for noted that a domestic company
Section 115BAA and Section 115BAB are not having credit of MAT may, if it so
correspondingly reduced. desires, exercise the option after
utilizing the said credit against the
3. If in future the tax rate applicable to Firms and regular tax payable under the
Individuals or the surcharge which is increased taxation regime existing prior to
substantially on the tax rate applicable to promulgation of the Ordinance.”
Individuals taxed at higher bracket are reduced,
without corresponding reduction in the rates 6. If the decision is based on the difference of
as provided now for Section 115BAA and impact of tax between MAT applicable to
Section 115BAB, then decision taken on the Companies and AMT applicable to non-
basis of differential rates of taxes may prove corporates- and if due to MAT being not
wrong- in retrospect.

270 Ahmedabad Chartered Accountants Journal August, 2019

Taxation Laws (Amendment) Ordinance, 2019

applicable under the option available, if the Now, if the Government clarifies something
business decides to change structure from Non- which is against the assumed position, then the
corporate to Corporate structure and if in future decision taken would turn out to be wrong.
the AMT is also given a go by decision purely Hence it is desirable that the clarification on
on the basis of MAT- AMT may prove to be this aspect is provided by the Government now,
wrong. without delay.

7. There is a provision In the ordinance in clause 8. Exercise of option for applicability under
3 where it is provided that : section 115BAA or Section 115BAB;

“ © in Sub section (4) , after the proviso, the The provisions imply that the option for making
following proviso shall be inserted, namely:- provisions of Section 115BAA to be applicable,
should be exercised on or before the due date
“Provided further that where the person specified under sub section 1 of section 139.
exercises option under section 115BAB, the This can be applied in any year commencing
option under this section may be withdrawn: from financial year relevant to A.Y.2020-21.

In the said inserted proviso above, it is felt that On the other hand the option to make
there is typographical error in mentioning provisions of Section 115BAB applicable
115BAB above instead of 115BAA and with should be exercised on or before the due date
that assumption, it is felt that the Assessee specified under sub section 1 of Section 139.
Domestic Company which is hitherto taxed This has to be applied in relation to the first of
under Section 115BA can now opt for Section the returns of Income for any previous year
115BAA. This is the logical assumption relevant to the Assessment year commencing
because that Assessee Domestic Company on or after 1st Day of April 2020. The above is
could not have option under section 115BAB better understood as under:
which is applicable only for the new company,

Particulars New Company incorporated on New Company incorporated on 1st
1st December 2019 and Commercial December 2019 and Commercial
Production commenced on 1st March, Production commenced on 1st May,
2020 2020

1st return due A.Y.2020-21 A.Y.2020-21

1st return actual filed for A.Y.2020-21 A.Y.2021-22

Due date for exercising option 30th September, 2020 30th September, 2020

Note: Once the company is incorporated the carry out distribution of such article or thing so
return is required to be filed irrespective of manufactured. Hence if the basic condition is
whether the company has commenced the violated, then theAssessee runs a risk of not only
Commercial production. being liable to taxed at a higher rate- but also
liable to risk of not getting the benefits of
9. What if the Company applying provisions exemptions, deductions, carry forward and set
of Section 115BA or Section 115BAB also off of losses which it would have been eligible
undertakes activities other than if it had preferred normal provisions – other than
manufacturing? Section 115BA or Section 115BAB.

The provisions of the above Sections are very 10. Whether the production of an article or a
clear that the Company to be eligible under these thing got done through job worker or
respective provisions shall not undertake any contract manufacturer is eligible as having
activity other than Manufacture of article or thing carried out manufacture or production by
and carry out research in relation thereto and the Company itself?

Ahmedabad Chartered Accountants Journal August, 2019 271

Taxation Laws (Amendment) Ordinance, 2019 (b) Bringing into existence of a new and
distinct object or article or thing with a
The term “Manufacture” is defined in the Act different chemical composition or
itself in Sub section 29BA of Section 2. Hence integral structure.
it will be dangerous to interpret anything
different. Hence an article or a thing got manufactured
through job worker/ contract manufacturer
The term manufacture is defined as: cannot be eligible to held as manufacture by
the Company if that company sells the product
“Manufacture” with its grammatical so received as is basis without any further
variations, means a change in a nonliving processing.
physical object or article or thing-
Now, let us understand the impact by way
(a) Resulting in transformation of the of an illustration which is in Table C.
object or article or thing into a new and
distinct object or article or thing having
a different name, character and use; or

Particulars Year 1 Financial result of M/s ABC P ltd Year 8 Year 9 Year 10 Rs. Cr
Business MFG MFG + MFG + MFG + total
Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Trading Trading Trading
Financial Year (Accounting year) 2013-14 MFG MFG MFG MFG MFG MFG 2020-21 2021-22 2022-23 90
Turnover 50 131
Cash profit -10 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 500 500 500 -41
Book depreciation 5 100 150 300 450 300 400 30 20 20 126
Book profit -15 -20 -30 -20 10 40 50 14 14 14 -36
Income tax depreciation 25 14 14 14 14 14 14 16 6 6
Taxable Income (Normal) -35 -34 -44 -34 -4 26 36 6 4 4
Brought forward taxable loss 22 20 15 12 10 8 24 16 16
Carried forward Taxable loss -35 -42 -50 -35 -2 30 42 -92 -68 -52
Break up of normal IT loss -35 -77 -127 -162 -164 -134 -68 -52 -36
Loss -77 -127 -162 -164 -134 -92
NetNormal taxable income 10 30 60 80 80 80 80 68 52 36
tax at say 34.5%
Break up of Book profit loss 25 47 67 82 84 54 12 0 00
year wise
Loss -35 -77 -127 -162 -164 -134 -92 -68 -52 -36
whichever lower 10 20 30 20 0 0 0 0 0 0
Cumulative 5 14 14 14 4 0 0 0 0 0
5 14 14 14 0 0 0 0 0 0
5 19 33 47 47 47 47 47 47 47

METHOD A :year wise determination of lower of Depreciation or loss- (principle of decision in the case of [2009] 27 SOT 152 (Mumbai) IN

THE ITAT MUMBAI BENCH ‘A’ in Amline Textiles (P.) Ltd. v.Income-tax Officer, Ward 3(1)-1, Mumbai applied

Brought forward 0 5 19 33 47 47 21

Addition 5 14 14 14 0 0 0

Set off 0 0 0 0 0 26 21

carried forward 5 19 33 47 47 21 0

Taxable Book profit 0 00 0 0 0 15 16 6 6

Book profit tax

(say at 18.5%) 0 0 0 0 0 0 2.775 2.96 1.11 1.11 0

Mat tax paid 2.775 2.96 1.11 1.11

MAT Credit 2.775 5.735 6.845 7.955

272 Ahmedabad Chartered Accountants Journal August, 2019

Taxation Laws (Amendment) Ordinance, 2019

METHOD B; aggregating depreciation and book loss year on year and then taking lower of the two for set off

Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 total

Trading Trading Trading

Loss 10 30 60 80 80 80 80 80 80 80 0

Depreciation 5 19 33 47 51 25 0 0 0 0 0

Net taxable book profit 11 16 6 6 39

Book profit tax 0 00 0 0 2.035 2.96 1.11 1.11 7.215
(say at 18.5%)

Mat tax paid 2.035 2.96 1.11 1.11

MAT Credit 2.035 4.995 6.105 7.215

If continues under 2.035 2.96 1.11 1.11
normal provisions 0 0 00
Pay tax - MAT
Pay tax - Normal 2.035 2.96 1.11 1.11 7.215
total tax out go

If opts for Section 115BAA 0 0 00
Pay tax - MAT 0 0 00
Pay tax - Normal 0 0 0 00
total tax out go

Tax savings by opting 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 total
for Section 115BAA 0 0 0 0 0 0 2.775 2.96 1.11 1.11 7.955
Method A 0 0 0 0 0 0 2.035 2.96 1.11 1.11 7.215
Method B

In the above case it is beneficial for anAssessee The decision to shift to Provisions of Section
company to opt for provisions of Section 115BAA in case of existing Companies and /
115BAA from the financial year relevant to or to set up a new company to qualify under
A.Y.2020.21. In real life situation, the issues provisions of Section 115BAB is thus a huge
that will be required to be considered will be challenging management decision and should
many and hence this process is more of an be taken duly documented with the assumptions
Arithmetical puzzle coupled with Business and facts considered as also the risk factors as
Acumen of forecasting the business and profits already highlighted above.
in future and also evaluating the right
discounting factor.

There is also another way of evaluating the options –which may be considered as under:

Particulars Company Company LLP Individual
(115BAA) (115BAB)

Effective tax rate at peak slab 17.16% 25.168% 34.94% 42.74%

Cash disposal profit as % of 50% 50% 50% 50%
Profit Before tax

Valuation of Business – as factor 4 times 4 times 3 times 2 times
of profit deployed in business

Business Profit (PBT) 100 100 100 100

Ahmedabad Chartered Accountants Journal August, 2019 273

Taxation Laws (Amendment) Ordinance, 2019

Particulars Company Company LLP Individual
(115BAA) (115BAB)
34.94 42.74
Tax paid 17.16 25.17 65.06 57.26
74.83 15.06
Profit after tax 82.84 24.83 15.06 8.26
21.19 8.26
Balance cash available 32.84 3.64 0
50.00 50.00 0
Dividend -17.16% of cash gross up 28.03 3.03 50.00
Tax 4.81 31.84 0
18.16 34.94
Balance Profit ploughed back 50.00 50.00 15.06 42.74
200.00 50.00 8.26
Tax on Dividend in Individuals 3.99 218.162 150.00
at 14.25% 165.06 50.00
Net tax 25.96 108.26

Net cash with Promoters 24.04

Balance profits with the Business 50.00

Enhanced valuation of business 200.00

Enhance of Enterprise value + 224.04
promoter profit

The above chart is worked with assumption Summary:
that entire profit is not in cash- the profit earned Government has been averse to increasing the
will be also deployed in increase of working exemptions/ deductions and incentives even
capital or repayment of borrowings etc and generally. Hence if one wants to set up a new
hence it is assumed that 50% of PBT is in cash. business, the above trend should be also considered.
Generally – the cash available is much less in On the above basis, it appears that the Tax relief by
real life scenario. way of introduction of Section 115BAA and
Section 115BAB are salutary provisions and all
Besides it is also assumed that the business things being equal the same may be considered after
valuations are a factor of a multiple of profits calculating the impact as discussed above.
ploughed back into business. The valuation
factor is generally higher in corporate structure hhh
than in LLP and the valuation factor is lowest
in case of Proprietary concerns.

274 Ahmedabad Chartered Accountants Journal August, 2019

Establishment of Branch Office (BO)/ CA. Parag Shah
Liaison Office (LO)/ Project Office [email protected]
(PO) in India by foreign companies
under FEMA provisions ‘Liaison Office’ means a place of business to
act as a channel of communication between the
I. Introduction principal place of business or Head Office or
by whatever name called and entities in India
To encourage as well as regulate the but which does not undertake any commercial
establishment of place of business in India by /trading/ industrial activity, directly or indirectly,
foreign entities, the Reserve Bank of India has and maintains itself out of inward remittances
drafted provisions under the Foreign Exchange received from abroad through normal banking
Management Act, 1999 pertaining to channel.
establishment of Branch Office (BO)/ Liaison
Office (LO)/ Project Office (PO) in India by Permitted Activities
foreign companies. The term “foreign
company” is defined as a body corporate The permitted activities for a BO of a foreign
incorporated outside India and includes a firm company in India are as under:
or other association of individuals. - Export/import of goods
- Providing professional or consultancy
II. Relevant Provisions
1. Foreign Exchange Management services
(Establishment in India of a branch office - Carrying out research work in which the
or a liaison office or a project office or any
other place of business) Regulations, 2016 parent company is engaged
2. FED Master Direction No.10/2015-16 - Promoting technical or financial
dated 01/01/16 (Updated as on 29/03/19)
on “Establishment of Branch Office (BO)/ collaborations between Indian companies
Liaison Office (LO)/ Project Office (PO) and parent or overseas group company
or any other place of business in India by - Representing the parent company in India
foreign entities” and acting as buying/ selling agent in India
- Providing services in Information
III. Layout of the article Technology and development of software
in India
This article is divided into three major parts: - Providing technical support to the products
1. Provisions pertaining to establishment of supplied by parent/group companies
- Representing a foreign airline/shipping
BO/ LO of a foreign company in India; company
2. Provisions pertaining to establishment of
The permitted activities for an LO of a foreign
PO of a foreign company in India; and company in India are as under:
3. Provisions commonly applicable to BO/ - Representing the parent company/ group

LO/ PO. companies in India
- Promoting export/ import from/ to India
IV. Provisions pertaining to establishment of - Promoting technical/ financial collaborations
BO/ LO of a foreign company in India
between parent/ group companies and
‘Branch Office’ in relation to a company, companies in India
means any establishment described as such by
the company.

Ahmedabad Chartered Accountants Journal August, 2019 275

Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO)
in India by foreign companies under FEMA provisions

- Acting as a communication channel between Eligibility Criteria of foreign company for
the parent company and Indian companies establishment of BO/ LO

Requirements Establishment of BO Establishment of LO
Profit making track record
Immediately preceding 5 financial Immediately preceding 3 financial
Net Worth years in the home country years in the home country

> USD 100,000 or equivalent > USD 50,000 or equivalent

Net Worth is the total of paid-up capital and from the date of the approval letter, the approval
free reserves, less intangible assets as per the would lapse.
latest Audited Balance Sheet or Account
Statement certified by a Certified Public There are separate provisions for establishment
Accountant or any Registered Accounts of BO/ LO in India by foreign banks and
Practitioner by whatever name called. insurance companies and establishment of BO
in the Special Economic Zones (SEZs) to
An applicant which is not financially sound and undertake manufacturing and service activities.
is a subsidiary of another company may submit
a Letter of Comfort (LOC) from its parent/ Opening of bank account by BO/LO
group company, subject to the condition that
the parent/ group company satisfies the A BO may approach any AD Category-I Bank
prescribed criteria for net worth and profit. in India to open an account for its operations in
India. The permitted Credits and Debits to the
Procedure for application for establishment account are as under:
of BO/ LO
a. Credits
A foreign company desiring to establish a BO i. Funds received from Head Office
or an LO in India should submit an application through normal banking channels for
in Form FNC to a designated Authorised meeting the expenses of the office; and
Dealer Category-I bank along with the ii. Any legitimate receivables arising in
prescribed documents mentioned in the Form the process of its business operations.
and the LOC, wherever applicable.
b. Debits
The AD Category-I bank would co-ordinate i. Expenses incurred by the BO; and
with the RBI for allotment of Unique ii. Remittance of profit/winding up
Identification Number (UIN) to each BO/LO. proceeds.
After receipt of the UIN from the RBI, the AD
Category-I bank issues the approval letter to An LO cannot maintain more than one bank
the non-resident entity for establishing BO/LO account at any given time without the prior
in India. permission of the RBI. The permitted Credits
and Debits to the account are as under:
The validity period of an LO is generally for
three years, except in the case of Non-Banking a. Credits
Finance Companies (NBFCs) and those i. Funds received from Head Office
entities engaged in construction and through normal banking channels for
development sectors, for whom the validity meeting the expenses of the office;
period is two years only. ii. Refund of security deposits paid from
LO’s account or directly by the Head
An applicant which has received a permission Office through normal banking
for setting up of a BO/LO shall inform the channels;
designated AD Category-I bank as to the date iii. Refund of taxes, duties etc., received
on which the BO/LO has been set up. from tax authorities, paid from LO’s
bank account; and
In case the BO/LO for which approval has iv. Sale proceeds of assets of the LO.
been granted is not opened within six months

276 Ahmedabad Chartered Accountants Journal August, 2019

Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO)
in India by foreign companies under FEMA provisions

b. Debits Procedure for application for establishment
Only for meeting the local expenses of the of PO
A foreign company desiring to establish a
Remittance of profit/surplus project office in India should submit an
application in Form FNC to a designated
BOs are permitted to remit outside India, the Authorised Dealer Category-I bank along with
profit of the branch net of applicable Indian the prescribed documents mentioned in the
taxes, on production of the relevant documents Form, wherever applicable.
to the satisfaction of the AD Category-I bank
through which the remittance is made. The validity period of the project office is for
the tenure of the project.
Reporting Requirements
The BO/LO should submit the AnnualActivity An applicant that has received a permission for
Certificate (AAC) as at the end of March 31 setting up of a PO shall inform the designated
along with the audited financial statements AD Category-I bank as to the date on which
including receipt and payment account to the the PO has been set up.
designated AD Category-I bank and a copy of
the same to the Director General of Income Tax In case the PO for which approval has been
(International Taxation), New Delhi, on or granted is not opened within six months from
before September 30 of every year. In case the the date of the approval letter, the approval
annual accounts of the BO/LO are finalized would lapse.
with reference to a date other than March 31,
the AAC along with the audited financial Opening of bank account by PO
statements may be submitted within six months
from the due date of the Balance Sheet to the Any foreign entity except an entity from
designated AD Category-I bank with a copy Pakistan which has been awarded a contract
to the Director General of Income Tax for a project by a Government authority/Public
(International Taxation), New Delhi. Sector Undertaking may open a bank account
with an AD Category-I bank without any prior
V. Procedure for establishment of PO of a approval of the RBI.
foreign company in India
AD Category-I banks can open non-interest
‘Project Office’ means a place of business in bearing foreign currency account for POs in
India to represent the interests of the foreign India subject to the following:
company executing a project in India but
excludes a Liaison Office. i. The PO has been established in India, with
the general / specific permission of Reserve
There is a general permission to foreign Bank of India, having the requisite
companies to establish POs in India, provided approval from the concerned Project
they have secured a contract from an Indian Sanctioning Authority concerned as per
company to execute a project in India. these Regulations.
Additionally, at least one of the following
conditions should be satisfied: ii. The contract governing the project
i. the project is funded directly by inward specifically provides for payment in foreign
remittance from abroad; or
ii. the project is funded by a bilateral or iii. Each PO can open two foreign currency
accounts, usually one denominated in USD
multilateral International Financing and other in home currency of the project
Agency; or awardee, provided both are maintained
iii. the project has been cleared by an with the same AD Category-I bank.
appropriate authority; or
iv. a company or entity in India awarding the iv. The permissible debits to the account shall
contract has been granted term loan by a be payment of project related expenditure
Public Financial Institution or a Bank in and credits shall be foreign currency
India for the Project. receipts from the Project Sanctioning
Authority and remittances from parent/

Ahmedabad Chartered Accountants Journal August, 2019 277

Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO)
in India by foreign companies under FEMA provisions

group company abroad or bilateral / Registration with police authorities
multilateral international financing agency.
v. The foreign currency accounts have to be Applicants from Bangladesh, Sri Lanka,
closed at the completion of the project. Afghanistan, Iran, China, Hong Kong, Macau
or Pakistan desirous of opening BO/LO/PO in
Remittance of profit/surplus India shall have to register with the state police
AD Category-I bank can permit intermittent
remittances by POs pending winding up / Transfer of assets of BO/LO/PO
completion of the project provided they are
satisfied with the bonafides of the transaction, Proposals for transfer of assets would be
subject to the production of the relevant considered by the AD Category-I bank only
documents. from BOs/LOs/POs who are adhering to the
operational guidelines such as submission of
Reporting Requirements AACs (up to the current financial year) at
regular annual intervals with copies endorsed
The PO is required to submit the Annual to DGIT (International Taxation), have
Activity Certificate (AAC) from the Statutory obtained PAN from IT Authorities and have
Auditor showing the project status and got registered with ROC under the Companies
certifying that the accounts of the project office Act 2013, if necessary. Also,
have been audited and the activities undertaken
are in conformity with the general/ specific i. Transfer of assets by way of sale to the JV/
permission given by the RBI to the designated WoS would be allowed by AD Category-
AD Category-I bank. I bank only when the non-resident entity
intends to close their BO/LO/PO
VI. Provisions commonly applicable to BO/ LO/ operations in India.
ii. A certificate is to be submitted from the
Prior approval of the RBI Statutory Auditor furnishing such details
as required.
An application from a person resident outside
India for opening of a BO/LO/PO in India shall iii. The assets should have been acquired by
require prior approval of the RBI in the the BO/LO/PO from inward remittances
following cases: and no intangible assets such as good will,
i. The applicant is a citizen of or is registered/ pre-operative expenses should be included.

incorporated in Pakistan; iv. Credits to the bank accounts of BO/LO/
ii. The applicant is a citizen of or is registered/ PO on account of such transfer of assets
would be treated as permissible credits.
incorporated in Bangladesh, Sri Lanka,
Afghanistan, Iran, China, Hong Kong or v. Donation by BO/LO/PO of old furniture,
Macau and the application is for opening vehicles, computers and other office items
a BO/LO/PO in Jammu and Kashmir, etc. to NGOs or other not-for-profit
North East region and Andaman and organisations may be permitted by the AD
Nicobar Islands; Category-I banks.
iii. The principal business of the applicant falls
in the four sectors namely Defence, Closure of BO/LO/PO in India
Telecom, Private Security and Information
and Broadcasting. However, there are Requests for closure of the BO / LO/ PO and
some cases in such sectors where prior allowing the remittance of winding up proceeds
approval is not required. of BO / LO/ PO should be submitted to the
iv. The applicant is a Non-Government designated AD Category-I bank by the BO/
Organisation (NGO), Non-Profit LO/ PO alongwith the relevant documents.
Organisation, Body/ Agency/ Department
of a foreign government. However, such hhh
approval is not required under specified

278 Ahmedabad Chartered Accountants Journal August, 2019

Glimpses of Advocate Samir N. Divatia
Supreme Court [email protected]
in pursuing two remedies consecutively, court may
21 Duty of Advocate to Court decline to condone delay in filing first appeal.

As a responsible office of the Court and an Rules of limitation not meant to destroy right if
importance adjunct of the administration of justice, parties. They are meant to see that parties do not
the lawyer undoubtedly owes a duty to the court as resort to dilatory tactics but seek remedy promptly.
well as to the opposite side. He has to be fair to Sufficient cause should be given liberal construction
ensure that justice is done. He demeans himself if so as to advance sustainable justice when there is
he acts merely as a mouthpiece of his client. no inaction, no negligence nor want of bona fides
which could be imputed to party seeking
Notwithstanding the easy access to information condonation of delay. This phrase is elastic enough
technology for research today, as compared to the to enable courts to apply law in meaningful manner
plethora of legal Digests which had to be studied which serve ends of justice. No hard and fast rule
earlier, reliance was placed upon a judgement based has been or can be laid down for deciding
on an expressly repeated Act by the present Act, applications for condonation of delay but over the
akin to relying on an overruled judgement. This years it is observed that liberal approach needs to
has only resulted in a waste of judicial time of the be adopted in such matters so that substantive rights
Court, coupled with an onerous duty on the Judges of parties are not defeated only on ground of delay.
to do necessary research. We would not be Doctrine and Maxims – Interest Reipublicae Up
completely wrong in opining that though it may be Sit Finis Litium – It is for the general welfare that a
negligence also, but the consequences could have period be put to litigation.
been fatal by misleading the Court leading to an
erroneous judgment. Bhivchandra Shankar More v Balu Gangaram
More and others (2019) 6 Supreme Court Cases
22 Ex-parte decree – time spent therein can
be considered as sufficient cause for 387
condonation of delay
23 Formation of substantial question of law
Generally delay in preferring appeals required to
be condoned in interest of justice, where there is When a substantial question of law can be said to
no gross negligence or deliberate inaction or lack have arisen, has been dealt with and considered by
of bonafides is imputed to party seeking this Court in Ishwar Dass Jain v SohanLal. In the
condonation of delay. If Court refuses to condone aforesaid decision, this Court has specifically
delay in time spent in pursuing remedy under Or. 9 observed and held:
R 13 CPC, defendant would be deprived of
statutory right of appeal in challenging decree on “10. Under section 100 CPC, after the 1976
merits – only in cases where defendant adopted Amendment, it is essential for the High Court to
dilatory tactics or where there is lack of bonafides formulate a substantial question of law and it is not
permissible to reverse the judgement of the first
appellate court without doing so.

Ahmedabad Chartered Accountants Journal August, 2019 279

Glimpses of Supreme Court Rulings 25 Review vis-à-vis order passed by High
Court overlooking the mandate of S.293
11. There are two situations in which interference
with findings of fact is permissible. The first When subject property was purported to be sold in
one is when material or relevant evidence is the certificate proceedings initiated by the department
not considered which, if considered, would for recovery of income tax dues of SK to the auction
have led to an opposite conclusion. purchaseV- SK objected against such purported sale
to V because no leave was obtained from the High
12. The second situation in which interference with Court which was overruled by the Chief CIT. At
findings of fact is permissible is where a finding this stage, application was filed by the IT Department
has been arrived at by the appellate Court by in the title suit praying for (a) condonation of the
placing reliance on inadmissible evidence omission to obtain leave of Court before putting the
which if it was omitted, an opposite conclusion property for sale and (b) leave be given to it to
was possible…. complete the said sale of the property in favour of V
and to give further effect thereto- on this application
13. In either of the above situation, a substantial the Single Judge of the High Court granted liberty
question of law can arise.” to the applicant to put up the said property along
with other joint properties, for sale. Thereafter, order
Without even challenging the sale deed by way of was passed by the single Judge in writ petition filed
behalf of the independent proceedings, in a suit filed against the purported sale relegating parties to address
by the plantiff seeking a declaration that he has in the alleged pending Civil suit no 471 of 1985 before
become the owner pursuant to the registered sale the district Judge at Delhi although it was dismissed
deed, it is always open for the defendant, who is much prior to the pronouncement of the judgement.
stranger to the sale deed, to raise a plea that either If the Civil suit was not maintainable as alleged in
sale deed is not binding to him or the same was view of S.293 no party could be left remediless and
without consideration or it was a nominal sale deed whatever the grievances the party has raised before
or void or fictitious, for that matter, collusive and the Court of law, has to be examined on its own
not intended to be acted upon. At the most, it can merits.
be said to be a family arrangement. Therefore, in
the facts and circumstance of the case, the same Sunil Vasudeva & Ord v Sunder Gupta [(2019)
was not required to be registered. 309 CTR (SC) 467]

Thulasidhara and Others v Narayanappa and
Others (6 SCC 409)

24 Validity of assessment in the case of 26 Reason to believe - Warrant of
amalgamating company Authorisation

Amalgamating company having ceased to exist as Warrant of authorisation was issued u/s 132 on
a consequence of approval of scheme of specific information that the society was engaged
amalgamation u/s 394 of the Companies Act, 1956. in dubious activity of siphoning off funds by
The assessment made against the amalgamating advancing loans to shell companies. Thereafter
company after issuing notice u/s 143(2) in the name documents and books of accounts of the assessee
of that company in spite of the fact that the were seized by passing an order u/s 133A. On writ
amalgamated company had already addressed a petition, the High Court upheld the proceedings on
communication to the AO intimating the fact of the ground that the warrant of authorisation was
amalgamation was void ab-initio. This is a based on definite information and discreet
substantive illegally and not a procedural violation verification and held that the order passed u/s 133A
of the nature adverted to in S.292B. was also in consonance with the provision of the
Act. SLP dismissed.
Pr CIT v Maruti Suzuki India Ltd (SC) [309
CTR 433] contd. on page no. 284

280 Ahmedabad Chartered Accountants Journal August, 2019

From the

CA. C. R. Sharedalal CA. Jayesh C. Sharedalal

[email protected] [email protected]

Taxability of interest on investment out to reopen an assessment, notice under section
148(1) has to be mandatorily issued to the assessee.
41 of share application money Further the Assessing Officer cannot complete the
CIT v/s. Shree Rama Multi Tech Ltd. reassessment without service of the notice so issued
(2018) 403 ITR 426 (SC) upon the assessee in accordance with section
282(1) of the Act read with Order V, rule 12 and
Issue: Order III, rule 6 of the Code of Civil Procedure,
1908. The onus is on the Revenue to show that
Whether interest income out of investment of share proper service of notice has been effected under
application money is taxable? How the same is to section 148 on the assessee or an agent duly
be treated? empowered by him to accept notices on his behalf.
The mere fact that an assessee or some other person
Held: on his behalf not duly authorized participated in
the reassessment proceedings after coming to know
If the share application money that is received is of them will not constitute a waiver of the
deposited in the bank in the light of the statutory requirement of effecting proper service of notice
mandatory requirement the accrued interest is not on the assessee under section 148 of the Act.
liable to be taxed and is eligible for deduction against Reassessment proceedings finalized by an
the public issue expenses. The issue of share relates Assessing Officer without effecting proper service
to capital structure of the company and hence of notice on the assessee under section 148(1) of
expenses incurred in connection with the issue of the Act are invalid and liable to be quashed.
shares are to be capitalized because the purpose of
such deposit is not to make some additional income Interest income eligible for exemption
but to comply with the statutory requirement, and
interest accrued on such deposit is merely incidental. 43 u/s 10A/10B
CIT v/s. Hewlett Packard Global Soft
Assessment u/s 148 and service of notice Ltd. (2018) 403 ITR 453 (Karn FB)

42 Mrs. Shubhashri Panicker v/s. CIT Issue:
(2018) 403 ITR 434 (Raj)
Whether Interest income on parked funds is eligible
Issue: for exemption u/s 10A/10B.

What are the requirements of service of notice in Held:
u/s 148 proceedings?
The incidental activity of parking of surplus funds
Held: with the banks or advancing of staff loans by such
special category of assessees covered under section
Under section 148 of the Income Tax Act, 1961, 10A or section 10B of the Act is an integral part of
the issue of notice to the assessee and service of their export business activity and a business
such notice upon the assessee are jurisdictional decision taken in view of the commercial
requirements that must be mandatorily complied
with. They are not mere procedural requirements.
For the Assessing Officer to exercise jurisdiction

Ahmedabad Chartered Accountants Journal August, 2019 281

From the Courts - is having received as cash receipt due to the waiver
of loan. Therefore the very first condition of section
expediency and the interest income earned 28(iv) of the Income Tax Act which says any
incidentally cannot be de-linked from the profits benefit or perquisite arising from the business shall
and gains derived by the undertaking engaged in be in the form of benefit or perquisite other than in
the export of articles as envisaged under section 10A the shape of money, is not satisfied in the present
or section 10B and cannot be taxed separately under case. Hence, in our view, in no circumstances, it
section 56. Gains of the undertaking including the can be said that the amount of Rs. 57,74,064/- can
incidental income by way of interest on bank be taxed under the provisions of section 28(iv) of
deposit or staff loans would be entitled to 100 the Income Tax Act.”
percent. exemption or deduction under section 10A
and section 10B. Such interest income arises in the 45 Condition for using power u/s 147/148
ordinary course of export business of the ITO v/s. Techspan India Pvt. Ltd.
undertaking even though not as a direct result of (2018) 404 ITR 10 (SC)
export but from the bank deposits, etc. and is
therefore eligible for 100 per cent. deduction. Issue:

44 Applicability of Sec. 28(iv) What are the conditions to be fulfilled before using
Commissioner v/s. Mahindra and power u/s 147/148?
Mahindra Ltd. (2018) 404 ITR 1(SC)
The language of section 147 of the Income Tax
Issue: Act, 1961 makes it clear that the Assessing Officer
has the power to reassess any income which has
What condition are to be fulfilled for applicability escaped assessment for any assessment year subject
of Sec. 28(iv). to the provisions of sections 148 to 153. However,
the use of this power is conditional upon the fact
Held: that the Assessing Officer has some reason to believe
that income has escaped assessment. The words “
“This first issue is the applicability of section 28(iv) reason to believe” in section 147 have to be
of the Income Tax Act in the present case, before interpreted schematically as a liberal interpretation
moving further, we deem it apposite to reproduce would have the consequence of conferring
the relevant provision hereinbelow. arbitrary powers on the Assessing Officer who
may even initiate reassessment proceedings merely
“28. Profits and gains of business or profession: - on his change of opinion on the basis of the same
The following income shall be chargeable to facts and circumstances which have already been
income tax under the head ‘Profits and gains considered by him during the original assessment
of business or profession”. proceedings. Such could not be the intention of the
Legislature. Doing so would have the effect of
(i) The value of any benefit or perquisite, giving the Assessing Office the power of review.
whether convertible into money or not, Section 147 confers the power to reassess and not
arising from business or the exercise of a the power to review. The provision was
profession;”. incorporated in the scheme of the Act so as to
empower the Assessing Officer to reassess any
On a plain reading of section 28(iv) of the Income income on a ground which was not brought on
Tax Act, prima facie, it appears that for the record during the original proceedings and escaped
applicability of the said provision, the income which his knowledge; and the fact would have material
can be taxed shall arise from the business or bearing on the outcome of the relevant assessment
profession. Also, in order to invoke the provisions order.
of section 28(iv) of the Income Tax Act, the benefit
which is received has to be in some other form rather
than in the shape of money. In the present case, it is
a matter of record that the amount of Rs. 57,74,064/

282 Ahmedabad Chartered Accountants Journal August, 2019

From the Courts

46 Interpretation of Section 158BD in the organization. There are various instances of
Tapankumar Dutta v/s. CIT perquisite such as concessional rent,
(2018) 404 ITR 28 (SC) accommodation provided by the employer, or any
sum paid by an employee in respect of an obligation
Issue: which was actually payable by the employer.

How the provisions of Sec. 158 BD are to be Time limit for penalty order: Sec.
48 275(1)(a)
Held: J. Srinivasan v/s. Asstt. CIT
(2018) 404 ITR 51 Mad)
A perusal of section 158BD of the Income Tax Act
makes it clear that the Assessing Officer needs to Issue:
satisfy himself that the undisclosed income belongs
to any person other than the person with respect to Which are the two time limits for finalizing penalty
whom the search was made under section 132 or proceedings?
whose books of account or other documents or
assets were requisitioned under section 132A. The Held
very object of the section 158BD is to give
jurisdiction to the Assessing Officer to proceed It is seen that there are two limbs to clause (a) of
against any person other than the person against section 275(1). The section makes it clear that, no
whom a search warrant is issued. Although section order imposing a penalty shall be passed after the
158BD does not speak of “recording of reasons” expiry of one of the two periods, which have been
as postulated in section 148, but since proceedings mentioned therein, which expires later than the
under section 158BD may have monetary other. The first time-limit is until the expiry of the
implications, such satisfaction must reveal mental financial year, in which, the assessment proceedings
an dispassionate thought process of the Assessing during which, penalty proceedings initiated are
Officer in arriving at a conclusion and must contain completed. The period stipulated in the second
reasons which should be the basis of initiating the time limit is until the expiry of six months from the
proceedings under section 158BD. end of the month, in which, the order of the
Commissioner of Income Tax (Appeals), in respect
What is the meaning of perquisite u/s of appeals is received by the Commissioner of
Income Tax or Principal Commissioner of Income
47 17(2) of I.T. Act Tax.
Addl. CIT v/s. Bharat V. Patel
(2018) 404 ITR 37 (SC) (1) Retrospective transfer u/s 127:

Issue: 49 (2) Waiver before officer not having
What is the meaning of perquisite u/s 17(2) of the CIT v/s. Lalitkumar Bardia
I.T. Act? (2018) 404 ITR 63 (Bom)

Held: Issue:

The word “perquisite” in common parlance may (1) Whether transfer u/s 127 can be made with
be defined as any perk or benefit attached to an retrospective effect?
employee or position besides salary or remuneration.
Broadly speaking, these are usually non cash (2) Waiver before officer not having jurisdiction is
benefits given by an employer to an employee in valid?
addition to entitled salary or remuneration. It may
be said that these benefits are generally provided Held:
by employers in order to retain talented employees
Transfer of proceedings under section 127 of the
Act cannot be retrospective so as to confer

Ahmedabad Chartered Accountants Journal August, 2019 283

From the Courts Held:

jurisdiction on a person who does not have it. The assessee sold 7.38 acres of agricultural land,
Section 127 of the Act does not empower the in his individual capacity as well as through a
authorities under the Act to confer jurisdiction on a power agent and the total consideration received
person who does not have jurisdiction with was Rs. 5,31,02,160/-. The assessee claimed that
retrospective effect. Section 127 does not validate the capital gains that arose on the sale of the land
notices or orders issued without jurisdiction, even were exempt on the ground that they arose on sale
if they are transferred to a new officer by an order of agricultural land. The claim to exemption was
under section 127. not accepted by the Assessing Officer on the ground
that the assessee had not adduced any evidence of
A waiver would mean a case where a party decides carrying out agricultural activities in the land and
not to exercise its right to a particular privilege, that the income was only Rs. 65,300 for such a
available under the law. However, non exercise of huge extent of land for the assessment year 2010-
the right or privilege will not bestow jurisdiction 11.
on a person who inherently lacks jurisdiction.
Therefore, the principle of waiver cannot be If the land was recorded as agricultural land in the
invoked so as to confer jurisdiction on an officer revenue records, the presumption that it was
who is acting under the Act when he does not have agricultural land would enure in favour of the
jurisdiction. The Act itself prohibits an officer of assessee and the onus to disprove the presumption
income tax from exercising jurisdiction under was on the Department. Apart from the revenue
section 158BC, unless he is an Assessing Officer. records classifying the land as agricultural land, the
This limit in the power of the Income Tax Officer Assessing Officer has accepted the agricultural
in exercise of jurisdiction is independent of the income declared from the property for the
conduct of any party. Waiver can only be of assessment year 2010-11 and had completed the
irregular exercise of jurisdiction and not of lack of assessment. Merely because the property fetched
jurisdiction. an income of only Rs. 65,300 during the relevant
assessment year was not a ground to discredit the
50 Agriculture Land: assessment by itself, which had determined the
CIT v/s. Ashok Kumar Rathi character of the land to be agricultural land. No
(2018) 404 ITR 173 (Mad) question of law arose.

Issue: hhh

Which proofs are sufficient to hold that the land is
agricultural land?

contd. from page 280 Glimpses of Supreme Court Rulings

Adarsh Credit Co-operative Society Ltd v Joint proof necessary to record commission of
Director of Income Tax (Investigation) &Ors delinquency – Rule relating to appreciation of
[(2019) 309 CTR (SC) 168 evidence on two proceedings is also not similar –
Further, in criminal law, burden of proof is on
27 Service law – Departmental Enquiry prosecution to prove guilt of the accused beyond
reasonable doubt, whereas in departmental enquiry,
The object of criminal trial is to inflict appropriate penalty can be imposed on a finding recorded on
punishment on offender, while purpose of enquiry the basis of ‘preponderance of probability’ –
proceedings is to deal with delinquent Moreover, acquittal by Court of competent
departmentally and to impose penalty in accordance jurisdiction in a judicial proceedings does not ipso
with the service rules – Degree of proof necessary facto absolve delinquent from liability under
to convict offender is different from the degree of disciplinary jurisdiction


284 Ahmedabad Chartered Accountants Journal August, 2019


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

ACIT vs. Kemwell (P.) Ltd.106 Held

25 196 (Bang) The Hon’ble ITAT held that Tax Sparing Credit, in
Assessment Year: 2009-10 Order dated: the context of double tax avoidance conventions,
12th April 2019 refers to the provisions in the DTAA’s between
contracting States which give enjoin the residence
Basic Facts country to give credit not only for taxes actually
paid in the source country but also for taxes which
For the year under consideration, the assessee would have been paid but for the tax incentives
received dividend from a company in Cyprus. In granted in the source country’s domestic law.
accordance with Article 25 of India-Cyprus DTAA Attracting and encouraging new businesses is
the assessee claimed relief of the tax payable on definitely a tool to implement the cause of economic
the said income in Cyprus. However, the tax was development and giving incentives in the nature of
not paid on the said income in Cyprus since exemption from liability to tax in respect of
incentive was given by the Cyprus Government on dividends is a very elementary method by which
dividend for economic development. The AO resources could be garnered to be invested in new
rejected assessee’s claim holding that the evidence business etc., thereby promoting economic growth
relied upon by the assessee indicated the general and development. The rationale for providing
conditions congenial to foreign investments but it exemption by itself is proof that it was for no other
failed to prove that the exemption for dividend purpose other than to promote economic activity
income was provided as an incentive for economic and hence economic development reasoning given
development. On appeal, the CIT(A) took a view by the CIT(A) was correct and thus order passed
that India-Cyprus DTAA did not cast the burden by him did not require any interference
of proving that the tax exemption was in respect of
economic development on the claimant let alone 26 ITO v/s Dinesh Madhavlal Patel 108
establishing that the tax exemption was in relation 211 (Ahd)
to ‘special’ economic development. The CIT(A) Order dated: 14th August 2019
allowed the assessee’s claim by holding that giving
tax incentive in respect of dividend income, Cyprus Basic Facts
was definitely contributing to the promotion of its
economic development and thus no other specific With a view to reduce the income tax litigation, the
evidence was mandated by law. Aggrieved, the CBDT vide circular dated 8th August 2019 has
revenue preferred an appeal before ITAT. further liberalized its policy for not filing appeals
against the decisions of the appellate authorities in
Issue favour of the taxpayers wherein tax involved is
below certain threshold limits. In adherence to the
Whether relief can be claimed under Article 25 said circular, the Ahmedabad Bench of Tribunal
in respect of taxes which would have been paid fixed hearing of 628 appeals and CO with tax effect
in the source country but were not actually paid of Rs.50 lacs or less. In the proceedings to dispose
due to the incentive provided by the source of these appeals, the revenue contended that the
county’s domestic law ?

Ahmedabad Chartered Accountants Journal August, 2019 285

Tribunal News But the Tribunal made is clear that the appellants
shall be at liberty to point out the cases which are
said circular is not clearly retrospective in as much wrongly included in the appeals so summarily
as it specifically states in para 4 that the said dismissed, either owing to wrong computation of
modifications shall come into effect from the date tax effect or owning to such cases being covered
of issue of this Circular and accordingly, department by the permissible exceptions- or for any other
appeals filed after the said date shall not be reason, and the Tribunal would take appropriate
entertained. remedial steps in that regard.

Issue Shri Harish Narinder Salve vs. ACIT

Whether circular dated 8th August 2019 is 27 ITA No. 2285/Del/2016 (Del) As reported
applicable to department appeals pending as on on
the date of issue of circular ? Assessment Year: 2011-12 Order dated:
13th August 2019
Basic Facts
The Hon’ble ITAT held that the concession
extended by the CBDT not only applies to the Assessee being an advocate, claimed scholarship
appeals to be filed in future but it is also equally expenditure in the return of income for the year under
applicable to the appeals pending for disposal as consideration. The said scholarship was paid to
on now as the circular dated 8th August 2019 is students in pursuance of an agreement with
not a standalone circular but is to be read in University of Oxford. The AO was of the view that
conjunction with the Circular No. 3/2018. As per the said expenditure is not allowable under section
the Tribunal, the circular merely replaces para 3 & 37 of the Act. Accordingly, the assessee’s
5 of the earlier circular and all other portions of the contention of holding it as wholly and exclusively
circular no. 3 of 2018 (supra) have remained intact. incurred for the purposes of profession wasn’t
The portion which has remained intact includes accepted. On first appeal, the CIT(A) did not allow
paragraph 13 of the aforesaid circular which is read the said expenditure under section 37 but held it to
as follows: be capital in nature as the same would give an
enduring benefit to the profession of assessee. The
13. This Circular will apply to SLPs/ appeals/ cross assessee being aggrieved preferred second appeal
objections/ references to be filed henceforth in before ITAT.
SC/HCs/Tribunal and it shall also apply
retrospectively to pending SLPs/ appeals/ cross Issue
objections/references. Pending appeals below
the specified tax limits in pare 3 above may be Whether scholarship expenditure incurred by
withdrawn/ not pressed. an advocate is in the course of furtherance of
business would be allowable under section 37(1)
In view of the above the Tribunal held that the of the Act.
relaxation in monetary limits for departmental
appeals, vide CBDT circular dated 8th August Held
2019(supra) would be applicable to the pending
appeals in addition to the appeals to be filed The Hon’ble ITAT held that considering the nature
henceforth. Resultantly, all the department appeals and scale of profession, assessee is a noted
with the tax effect of less than Rs. 50 lacs which international lawyer who hasset up a scholarship
were pending in addition to the appeals to be filed for creating his visibility in international arena and
henceforthwere to be dismissed as withdrawn as his social standing. Further, the said expenditure
the same are found to be non-maintainable and the has increased lot of value of the CV of the assessee
related cross objections were dismissed as as evident from the action of government of
infructuous. Singapore in appointing him on certain committees

286 Ahmedabad Chartered Accountants Journal August, 2019

of repute. The ITAT held that allowability of Tribunal News
expenditure should be judged from the mindset of
the assessee and accordingly, there was a nexus Held
between the expenditure incurred and the
professional services rendered. Further, the student By placing reliance over the decision of
to whom scholarship was granted also helped him Jurisdictional High Court in the case of Pr. CIT v.
in a famous case of Vodafone. Thus, in the Ekta Co-operative Credit Society Ltd. [91
professional field there are innovative ways 42] and CIT v. Jafari Momin Vikas
visualized by the professional to make themselves Co-operative Credit Society Ltd [ 49
visible in the professional circle and to build their 571], the ITAT held that the benefit of section
own professional profile for generating higher and 80P(2)(a)(i) cannot be denied in the cases of co-
value added business. Thus, the said expenditure operative credit societies in view of their functions
was held to be revenue in nature as it was a routine of providing credit facilities to the members and
day-to-day expenditure incurred by the assessee for the same is not hit by the provisions of section
promoting his professional profile Resultantly, the 80P(4). Resultantly, the order of CIT(A) in granting
assessee’s claim under section 37(1) was allowed the relief to the assessee is upheld.
and the AO was directed to delete the disallowance.
Adity Medisales Ltd. v. DCIT 176 ITD/
ACIT v/s People’s Co-Op. Credit Society
29 105 209 (Ahd)
28 Ltd 177 ITD 25/107 53 Assessment Year:2009-10 Order dated:
(Ahd) (SB) 29th March, 2019
Assessment Year: 2007-08 to 2009-10
Order dated: 18th April 2019 Basic Facts

Basic Facts The assessee was engaged in the business of trading
of the medicines manufactured by M/s.Sun
For the year under consideration, the assessee being Pharmaceuticals Industries Ltd (SPIL). The
a co-operative credit society, providing credit assessee had paid/credited interest to the account
facilities to its members filed its return of income of SPIL on its outstanding credit for delay in
and claimed deduction under section 80P(2)(a)(i). discharge of outstanding liability. The assessee, on
The AO denied the said deduction by contending the other hand, had not charged any interest from
that the assessee is into the business of banking and its debtors for sales carried out by it nor did SPIL
is being hit by the provisions of section 80P(4). On paid any interest to its creditor for outstanding
appeal, the CIT(A) allowed the deduction and held liabilities. The AO held that payment of interest on
the issue in favour of the assessee. Aggrieved, the outstanding credit to SPIL was nothing but an
revenue preferred an appeal before ITAT. arrangement with SPIL who were also alleged to
be controllers of the assessee-company. The AO
Issue accordingly disallowed the aforesaid interest being
the difference between interest earned by the
Whether a co-operative credit society , in view assessee-company from various resources and paid
of its function in providing credit facilities to its to SPIL.
members is into the business of banking and is
it not being impeded or hit by the provisions of On appeal, the CIT(A) ruled in favour of the
section 80P(4)? assessee. Aggrieved, the revenue preferred an
appeal before the ITAT.
Whether this co-operative credit society is
carrying on the Banking business and acting as Issue
a co-operative bank in view of section 5 of
Banking Regulation Act 1949 and section 2 of Whether interest paid by the assessee to its
NABARD Act 1981? creditors could be disallowed under section
40A(2)(a) if no interest was being charged by it
from its debtors?

Ahmedabad Chartered Accountants Journal August, 2019 287

Tribunal News option price. The option price was stipulated to be
such that the investor gets the original investment paid
Held on subscription to the FCCDs plus a return of 18
percent per annum. DuringAY 2011-12, the assessee
The Hon’ble Gujarat High Court in assessee’s own received interest from one of the three investee
case for AY 1997-98 (TA No. 559 of 2009) and companies, and that too for the first half of the year.
the Hon’ble ITAT Ahmedabad Bench in assessee’s No other investee company paid any interest to the
own case for AY 2005-06 and AY 2006-07 (ITA assessee. After due follow up by the assessee, the
Nos. 1665 and 1666 of 2009) had held the same assessee decided to waive its right to receive the
issue in favour of the assessee opining that the onus interest under a mutual agreement with the investee
for the application of Section 40A(2)(a) of the Act companies, considering the downturn in the real
is on the revenue which was not discharged by it. estate market. During the assessment proceedings,
As also, it was held that since interest on unsecured TPO held that as the assessee were to earn an assured
borrowings is always higher than the rate of interest return of 18 percent, such 18 percent should be
paid to the banks or financial institutions from where considered as an arm’s length price/compensation
the loans raised are secured loans, payment of instead of the coupon rate of 4 percent. Consequently
interest to creditor at higher rate is reasonable and the TPO computed arms length adjustment with
hence, disallowance u/s 40A(2)(a) could not be respect to interest income. The matter was carried to
made even though no such payment of interest was the DRP by the assessee. DRP noted that as per
made to the assessee by its debtors. Respectfully Article 11 (1) and (2) of Indo- Cyprus DTAA, interest
following the judgements of the Hon’ble Gujarat income is chargeable to tax on paid basis. In case of
High Court and the co-ordinate bench of the the assessee if it is assumed that interest accrues to
Hon’ble ITAT in assessee’s own case for earlier the assessee, it has not been paid to the assessee.
years, the Hon’ble ITAT held that merely because Therefore, interest income cannot be brought to tax
the assessee-company is paying huge interest on in hands of the assessee unless it is paid to the
outstanding credit balance to SPIL while no interest assessee. Further, the DRP found force in contention
is being charged by the assessee from its debtors, it of the assessee that imputing interest income in hands
cannot be the justifiable reason for resorting to the of non-resident assessee when it has not been claimed
disallowance of interest. Thus, the appeal of the by the Indian payer to have accrued/arisen or paid in
revenue was dismissed. favour of the assessee shall lead to unintended
consequences of erosion of tax base as such interest
DCIT v. M/s TMW ASPF i Cyprus expenses shall be tax deductible in hands of Indian
company which are subject total @30% whereas it
30 Holding Company Ltd. shall be taxable in hands of recipient assessee @1
TS-768-ITAT-2019(Del)-TP 0% as DTAA. TP provisions are not intended to be
Assessment year: 2011-12 Order Dated: applicable under such circumstances. In view of the
9th August 2019 above the DRP held that TP adjustment is not called
for in the present case. Aggrieved the department is
Basic Facts in appeal before the Tribunal.

The assessee, a private limited company incorporated Issue
in Cyprus, is in the business of making investments
in the real estate sector. The assessee, in the year Whether the notional/hypothetical interest
2008, had made investments in independent third income on FCCDs not taxable as per section 4
party companies (‘investee companies’) in India of the Act be subjected to Transfer pricing
engaged in real estate development, vide Fully regulations?
Compulsorily Convertible Debentures (FCCDs).As
per the inter-company agreement between the contd. on page no. 304
assessee and the AE, the assessee was entitled to a
coupon rate of 4 percent, and post-conversion of the
FCCDs into equity shares, the promoters of Indian
companies were to buy back shares at an agreed

288 Ahmedabad Chartered Accountants Journal August, 2019


Issue: CA. Kaushik D. Shah
[email protected].
Where vehicles are being purchased in the name of
director of assessee-company, whether such ITR 114 (Bom.) and other decisions of other High
assessee-company is entitled to claim depreciation Courts, held as under (page 293 of 337 ITR):
or interest on loan if it was proved that such vehicles
were utilized for business purposes of the Company? ‘In the facts of the present case, as noticed herein
above, all the authorities below have recorded that
Proposition: the assessee – company is a leasing company which
is engaged in leasing of plant and machinery, motor
Section 32, read with Section 37(1) of the Income cars, etc., to its clients. It is neither the case of the
TaxAct, 1961 - Depreciation –Allowance –Assessee assessee nor is there anything on record to indicate
claimed depreciation on vehicles and interest that the assessee uses the vehicles in question in its
expenditure incurred on loan for such vehicles. business of transportation or that the assessee is
Assessing officer disallowed claim of assessee on engaged in the business of hire. In the circumstances,
ground that vehicles were registered in name of the basic requirement for being entitled to depreciation
director – Whether assessee would be entitled for at the higher rate of 50% under entry no. III (2)(ii) of
depreciation as well as interest expenditure if assessee Appendix I to the rules is not satisfied by the appellant.
was able to prove that vehicles were under dominion In other words, the appellant does not pass the test
control of it and were utilized for its business for the applicability of entry no. III(2)(ii) ofAppendix
purposes – Held , yes – Whether since assessee had I to the rules, viz., the user of the vehicles in the
shown such vehicles in its block of assets, addition business of the assessee of transportation or the
made in respect of depreciation and interest business of hire. The tribunal was, therefore, justified
expenditure deserved to be deleted. in holding that the appellant is entitled to depreciation
at the rate of 33.33% and not at the rate of 50% as
It is proposed that when motor car is in the name of claimed by it.
director of the assessee company but payment is
made by the company and the motor car is used for In the light of the above discussion the question is
the purpose of depreciation then Assessee Company answered in affirmative, that is, in the favor of the
is entitled to claim depreciation. revenue and against the appellant-assessee. On the
facts and in the circumstances of the case, the
View Against The Proposition Income Tax Appellate Tribunal was right in law in
holding that the appellant was not entitled to
It is submitted that for the claim of depreciation as depreciation allowance under entry no. III(2)(ii)
per section 32 read with section 37(1) the assessee of Appendix I to the rules, in respect of vehicles
has to be the owner of the asset and must use the given on lease. The appeals are accordingly
asset for the purpose of business, thus, if the assessee dismissed with no order as to costs.
is not the owner of the asset he cannot claim
depreciation on the asset. Further it is submitted that Thus, if assessee is not owner of vehicle and vehicle
when the vehicle is registered in the name of the is not used for the business purpose of the assessee
assessee then only the assessee can claim then depreciation cannot be claimed.
depreciation and not anybody else. Let me refer to
Bombay High Court in the case of Kotak Mahindra View In Favour Of The Proposition:
Finance Ltd. v. Deputy CIT reported in [2004] 265
I am of considered opinion that the assessee would
be entitled for the allowance depreciation as well
as interest expenditure if the assessee is able to
prove that the vehicles were under the dominion

Ahmedabad Chartered Accountants Journal August, 2019 289

Controversies depreciation and the interest expenditure. We are
of considered opinion that the assessee would be
control of the assessee-company and were utilized entitled for the allowance depreciation as well as
for its business purpose in the light of the ratio laid interest expenditure if the assessee is able to prove
by the Hon’ble Supreme Court in case of Mysore that the vehicles were under the dominion control
Minerals Ltd (Supra)239 ITR 775. of the assessee-company and were utilized for its
business purpose. The contention of the assessee is
Let me refer to the decision in the case of CIT v. that the vehicles were utilized for business purpose
Aravali Finelease Ltd. 341 ITR 282 (Guj) in the and the assessee-company has shown in its block
said case the lordship held as under : of assets. We find that this contention of the assessee
is not considered by the authorities in the light of
We may notice that the company though registered the ratio laid by the Hon’ble Supreme Court in case
in the name of the director was used for the purpose of Mysore Minerals Ltd (Supra).
of business of the company, income derived from
leasing the vehicle was shown as income of the A further reference is also being made to the
company and the entire fund for the purchase of following judgements mentioned as under:
the vehicle had also gone from the coffers of the
company. I. In CIT vs. Dilip Singh Sardarsingh Bagga
[1993] 201 ITR 995, the Bombay High Court
Let me refer to the facts of the case : held that the registration under the Motor
Vehicles Act is not an essential pre requisite
The Assessing Officer disallowed the claim of the for the acquisition of ownership of the motor
assessee on ground that the vehicles were registered vehicles, but is an obligation cast upon an owner
in the name of the director. The assessee was a of the vehicle for the purpose of running
limited company it claimed depreciation on vehicles vehicles in any public place.
and interest expenditure incurred on bank loan for
such vehicles. II. In CIT (Addl.) vs. U.P State Agro Industrial
Corporation Ltd [1981] 127 ITR 97, this court
On appeal, the Commissioner (Appeals) confirmed held that the expression “building owned by
the order of the Assessing Officer. the assessee” in Section 32 of the Income Tax
Act, 1961, has not been used in sense of
On second appeal, the assessee submitted that property, complete title in which vests in the
vehicles were purchased in the name of director by assessee. The assessee will be considered to
the assessee-company and resolution to this effect be an owner of the building under Section 32
was duly made and that such vehicles were utilized if he is in the position to exercise the rights of
for the purposes of its business. I also rely on the the owner not on behalf of the person in whom
decision in the case of Munjal Sales Corpn. v. CIT . the title vests, but in his own light.

Summation: III. In CIT vs Aravali Finlease Ltd [2012] 341 ITR
282, the Hon’ble Gujarat High Court held that
As per the Section 32(1) of the Income Tax Act, the vehicle though registered in the name of
depreciation is allowable if the machinery is owned director was used for purpose of business of
wholly and partly by the assessee, however, the the company, income derived is from leasing
Hon’ble Supreme Court has further enlarged this the vehicle shown as income of the company
scope of word “own” in its judgement rendered in and the entire fund for purchase of vehicle has
case of Mysore Minerals Ltd. 239 ITR 775, wherein also gone from the coffers of the company and
the Hon’ble Apex court has held that the provisions therefore answered in favour of assessee.
should be so interpreted and the words used therein
should be assigned such meaning as would enable Thus, it is submitted that when the vehicle is
the assessee to secure the benefit intended to be purchased in the name of director but the payment
given by the Legislature to the assessee. It has been is made by the company, the vehicle is used in the
held that the terms “owned”, ”ownership” and business of the company then, company is entitled
“own” are generic terms. They have wide and also to claim depreciation.
narrow connotation. The meaning would depend
on the context in which the term is used. In the hhh
present case, the assessee has made submissions
that the cars were purchased in the name of Director
and such cars are utilized for the purpose of its
business. Therefore, the assessee is entitled for

290 Ahmedabad Chartered Accountants Journal August, 2019

Judicial Advocate Tushar Hemani
Analysis [email protected]

Some recent judgments on issues arising in the to such person. It is similarly provided in Section
search related assessments. 292C(1)(i). In other words, whenever a
document is found from a person who is being
9 Principal Commissioner of Income-tax searched the normal presumption is that the said
v. Himanshu Chandulal Patel [2019] 109 document belongs to that person. It is for the 202 (Gujarat) Assessing Officer to rebut that presumption and
come to a conclusion or “satisfaction” that the
16. On a plain reading of Section 153C, it is evident document in fact belongs to somebody else.
that theAssessing Officer of the searched person There must be some cogent material available
must be “satisfied” that inter alia any document with the Assessing Officer before he/she arrives
seized or requisitioned “belongs to” a person at the satisfaction that the seized document does
other than the searched person. It is only then not belong to the searched person but to
that theAssessing Officer of the searched person somebody else. Surmise and conjecture cannot
can handover such document to the Assessing take the place of “satisfaction”. [See: Pepsi Foods
Officer having jurisdiction over such other (P.) Ltd.’s case (supra)].
person (other than the searched person).
Furthermore, it is only after such handing over 17. We may refer to a decision of the Delhi High
that the Assessing Officer of such other person Court in the case of Pr. CIT (Central)-2 v. Index
can issue a notice to that person and assess or Securities (P.) Ltd. [2017] 86 84,
re-assess his income in accordance with the wherein, the Court observed as under:—
provisions of Section 153A. Therefore, before
a notice under Section 153C can be issued two “28.4 The Supreme Court also agreed with
steps have to be taken. The first step is that the the decision of the Gujarat High Court
Assessing Officer of the person who is searched in Kamleshbhai Dharamshibhai Patel
must arrive at a clear satisfaction that a document (supra) to the extent it held that “it is an
seized from him does not belong to him but to essential condition precedent that any
some other person. The second step is - after money, bullion or jewellery or other
such satisfaction is arrived at - that the document valuable articles or thing or books of
is handed over to the Assessing Officer of the accounts or documents seized or
person to whom the said document “belongs”. requisitioned should belong to a person
In the present cases it has been urged on behalf other than the person referred to in
of the petitioner that the first step itself has not Section 153A of the Act.” The Supreme
been fulfilled. For this purpose it would be Court observed: “This proposition of
necessary to examine the provisions of law laid down by the High Court is
presumptions as indicated above. Section correct, which is stated by the Bombay
132(4A)(i) clearly stipulates that when inter alia High Court in the impugned judgment
any document is found in the possession or as well.”
control of any person in the course of a search it
may be presumed that such document belongs 28.5 The above categorical pronouncement
of the Supreme Court cannot, by any

Ahmedabad Chartered Accountants Journal August, 2019 291

Judicial Analysis

stretch of imagination, be termed as 20. In the documents, which were seized during
obiter as has been suggested by Mr. the course of search, there may be some
Manchanda. Even the obiter dicta of the reference of the assessee, but that itself would
Supreme Court is binding on this Court. not be sufficient. It is necessary to show some
nexus on the basis of some cogent materials
29. The search in the case before the between the documents seized and the assessee.
Supreme Court was prior to 1st June
2015. Apart from the fact that the Anil Kumar Gopikishan Agrawal v.
Supreme Court approved the above
decision of the Gujarat High Court 10 Assistant Commissioner of Income-tax,
holding that the seized documents should Circle 3(2), Ahmedabad [2019] 106
‘belong’ to the other person, the legal 137 (Gujarat)
position in this regard where the search
has taken place prior to 1st June 2015 (II) Whether Section 153C of the Act as amended
has been settled by the decision of this w.e.f. 1st June, 2015 would be applicable to
Court in Pepsico India Holdings (P.) Ltd. cases where search is initiated prior to that date.
(supra). In Vinita Chaurasia (supra), this
Court reiterated the above legal position 19. Sections 153A and 153B of theAct are special
after discussing the decisions in Super provisions carved out by the Legislature for
Malls (P.) Ltd (supra) and Nau Nidh the purpose of assessment of cases pertaining
Overseas (P.) Ltd. (supra). The essential to sections 132 and 132A of the Act. These
jurisdictional requirement for assumption provisions were introduced with effect from
of jurisdiction under Section 153C of the 1.6.2003 under Chapter XIV of the Act, which
Act (as it stood prior to its amendment provides for procedure for assessment. The
with effect from 1st June 2015) qua the dispute in this case relates to applicability of
‘other person’ (in this case the assessees) the provisions of the section 153C of the Act
is that the seized documents forming the which came to be amended with effect from
basis of the satisfaction note must not 1-6-2015, to cases where search had been
merely ‘pertain’ to the other person but carried out prior to such amendment having
must belong to the ‘other person’. come into force. For the purpose of better
understanding the controversy involved in the
18. Having heard Mrs. Mauna Bhatt, the learned present case, it would be germane to refer to
senior standing counsel appearing for the the relevant statutory provisions, which as they
Revenue and having gone through the materials stood at the relevant time when the search
on record, we are of the view that there is no came to be conducted, read as under:
good reason for us to disturb the concurrent
findings recorded by the two revenue authorities xxx…
as regards the satisfaction arrived at by the
Assessing Officer without there being any 19.3 Thus, while prior to the amendment in section
cogent or tangible material. 153C of the Act, if the Assessing Officer of
the searched person was satisfied that any
19. Having regard to the materials on record, if the money, bullion, jewellery or other valuable
CIT, Ahmedabad and the Appellate Tribunal article or thing or books of account or
relied upon the decision of the Delhi High documents seized or requisitioned belong to
Court in the case of Pepsi Foods (P.) Ltd., then, or belongs to a person other than the searched
in our opinion, no error much less an error of person he was required to hand over the books
law could be said to have been committed in of account or documents or assets seized or
taking the view that there is no cogent material requisitioned to the Assessing Officer having
for arriving at the substantive satisfaction. jurisdiction over such other person, and that
Assessing Officer was required to proceed
against such other person in accordance with

292 Ahmedabad Chartered Accountants Journal August, 2019

Judicial Analysis

the provisions of section 153A of the Act and that the provisions of law as existing on the
asses or reassess his income. However, by date of recording of satisfaction by the
virtue of the amendment in section 153C of Assessing Officer of the person searched and
the Act which was brought into force with the date of issuance of notice under section
effect from 1st June, 2015, the scope of the 153C of the Act have to be followed.
section was widened by providing that if the
Assessing Officer of the searched person is 19.5 On behalf of the respective parties, reliance
satisfied that (a) any money, bullion, jewellery has been placed upon the decision of the
or other valuable article or thing seized or Supreme Court in Calcutta Knitwears (supra).
requisitioned belongs to; (b) or books of A perusal of the said decision of the Supreme
account or documents or documents pertain Court reveals that the question before the
to, or any information contained therein, relate Supreme Court was the stage at which the
to any person other than the searched person satisfaction note could be prepared. In the facts
he shall hand over the books of account or of the present case, we are concerned with the
documents or assets seized to the Assessing applicability of the amended provisions which
Officer having jurisdiction over such other are brought into force with effect from
person. The amendment further provided that 1.6.2015 as to whether the same would be
Assessing Officer shall issue notice and assess applicable to cases where the search was
or reassess the income of the other person in conducted prior to that date. Thus, the question
accordance with the provisions of section is what would be the relevant date for
153A, if, thatAssessing Officer is satisfied that applicability of the amended provision,
the books of account or documents or assets whether it has to be considered in the context
seized or requisitioned have a bearing on the of the date of search or date of recording of
determination of the total income of such other satisfaction by the Assessing Officer of the
person for the relevant assessment year or years searched person or the date of issuance of
referred to in sub-section (1) of section 153A. notice under section 153C of the Act.

19.4 Section 153C of the Act is a machinery 19.6 On behalf of the respondents it has been
provision which is inserted in the statute book contended that section 153C of the Act is a
for the purpose of carrying out assessments of machinery provision. In Calcutta Knitwears
a person other than the person searched under (supra), the Supreme Court has held that while
sections 132 and 132A of the Act. The moot interpreting a machinery provision, the courts
question that arises for consideration in the would interpret a provisions in such a way that
present case is as to what is relevant date from it would give meaning to the charging
which the amended provisions of section 153C provisions and that the machinery provisions
of the Act would be applicable. While the are liberally construed by the courts; and that
amended provisions have been expressly it is the duty of the court while interpreting the
brought into force with effect from 1.6.2015, machinery provisions of a taxing statute to give
the controversy in the present case arises effect to its manifest purpose, the section should
because the searches in all these case had been be liberally construed. The court has further
conducted prior to 1.6.2015, whereas the held that wherever the intention to impose
proceedings under section 153C of the Act liability is clear, the courts ought not to be
have been initiated after that date and it is in hesitant in espousing a commonsense
this backdrop that the validity of the impugned interpretation to the machinery provisions so
notices has been called in question. It is the that the charge does not fail. The machinery
case of the petitioners that the proceedings provisions must, no doubt, be so construed as
under section 153C of the Act are triggered would effectuate the object and purpose of the
by the search, and hence the provisions of law statute and not defeat the same. It is contended
as existing on the date of the search have to be that the legislature having the clear intent to
followed, while it is the case the respondents bring in persons other than the person searched

Ahmedabad Chartered Accountants Journal August, 2019 293

Judicial Analysis

within the ambit of section 153C of the Act not a case where by virtue of the amendment,
even if the books of account or documents there is merely a change in the procedural
seized or requisitioned pertain to or any provisions affecting the assessees who were
information therein relates to such other covered by the unamended provision. By the
person, the amended provisions should be so amendment, a new class of assessees are
construed as would effectuate the object and sought to be brought within the sweep of
purpose of the statute and not defeat the same, section 153C of the Act, which affects the
namely to tax the total income of the assessee. substantive rights of the assessees and cannot
be said to be a mere change in the procedure.
19.7 In Calcutta Knitwears (supra) the Supreme Since the amendment expands the scope of
Court has held that section 158-BD of the Act section 153C of the Act by bringing in an
is a machinery provision and inserted in the assessee if books of account or documents
statute book for the purpose of carrying out pertaining to him or containing information
assessments of a person other than the searched relating to him have been seized during the
person under sections 132 or 132A of theAct. course of search, within the fold of that
The court has referred to its earlier decision in section, this question assumes significance,
the case of J.K. Synthetics Ltd. v. CTO, [1994] inasmuch as in the facts of the present case,
4 SCC 276, wherein it has been held thus: as on the date of search, it was only if such
material belonged to a person other than the
“16. It is well known that when a statute searched person, that the Assessing Officer
levies a tax it does so by inserting a of the searched person could record such
charging section by which a liability is satisfaction and forward the material to the
created or fixed and then proceeds to Assessing Officer of such other person.
provide the machinery to make the However, subsequent to the date of search,
liability effective. It, therefore, provides the amendment has been brought into force
the machinery for the assessment of the and based on the amendment, the petitioners
liability already fixed by the charging who were not included within the ambit of
section, and then provides the mode for section 153C of the Act as on the date of the
the recovery and collection of tax, search, are now sought to be brought within
including penal provisions meant to its fold on the ground that the satisfaction note
deal with defaulters. … Ordinarily the and notice under section 153C of the Act have
charging section which fixes the been issued after the amendment came into
liability is strictly construed but that rule force. Therefore, this case does not relate to
of strict construction is not extended to the interpretation of the provisions of any of
the machinery provisions which are the sections, but relates to the stage at which
construed like any other statute. The the amended section 153C of the Act can be
machinery provisions must, no doubt, made applicable, as to whether it relates to
be so construed as would effectuate the the date of search; or the date of recording of
object and purpose of the statute and satisfaction by the Assessing Officer of the
not defeat the same. (See Whitney v. searched person; or the date of recording of
IRC, 1926 AC 37 (HL), CIT v. satisfaction by the Assessing Officer of the
Mahaliram Ramjidas, [1940] 8 ITR other person; or the date of issuance of notice
442, Indian United Mills Ltd. v. under section 153C of the Act.
Commr. of Excess Profits Tax, [1955]
27 ITR 20 (SC) and Gursahai Saigal 19.9 In the facts of the present case, the search
v. CIT, [1963] 48 ITR 1 (SC).)” was conducted in all the cases on a date prior
to 1st June, 2015. Therefore, on the date of
19.8 While it is true that section 153C of the Act the search, the Assessing Officer of the person
is also a machinery provision for assessment searched could only have recorded
of income of a person other than the person satisfaction to the effect that the seized
searched, in the opinion of this court, this is

294 Ahmedabad Chartered Accountants Journal August, 2019

Judicial Analysis

material belongs or belong to the other person. person, therefore, there would be no question
In the present case, the hard-disc containing of his again forming a satisfaction as required
in the information relating to the petitioners under the amended provisions of section
admittedly did not belong to them, therefore, 153C of the Act.
as on the date of the search, the essential
jurisdictional requirement to justify 19.11 In the opinion of this court, if a date other than
assumption of jurisdiction under section 153C the date of search is taken to be the relevant
of the Act in case of the petitioners, did not date for the purpose of recording satisfaction
exist. It was only on 1st June, 2015 when the one way or the other, it would result in an
amended provisions came into force that the anomalous situation wherein in some cases,
Assessing Officer of the searched person because the notices under section 153C of the
could have formed the requisite belief that Act were issued prior to the amendment, they
the books of account or documents seized or would be set aside on the ground that the
requisitioned pertain to or the information books of account or documents seized or
contained therein relates to the petitioners. requisition did not belong to the other person
though the same pertained to or the information
19.10 In this backdrop, to test the stage of contained therein related to such person,
applicability of the amended provisions, a whereas in other cases arising out of the same
hypothetical example may be taken. The search proceedings, merely because the notices
search is carried out in the case of HN Safal are issued after the amendment, the same
group on 4.9.2013. If the Assessing Officer would be considered to be valid as the books
of the searched person had recorded of account or documents seized or
satisfaction that some of the seized/ requisitioned pertain to or the information
requisitioned material belongs to a person contained therein relate to the other person. It
other than the searched person and forwarded could not have been the intention of the
the material to the Assessing Officer of the legislature to deal with two sets of identically
other person, had issued notice under section situated persons differently, merely because in
153C of the Act prior to the coming into force one case the Assessing Officer of the searched
of the amended provision. The notice under person records satisfaction as required under
section 153C of the Act was challenged section 153C of the Act prior to the coming
before the appropriate forum on the ground into force of the amended provisions and in
that the seized material does not belong to any another case after the coming into force
such other person and such issue was decided of the amended provisions.
in favour of such person on a finding that the
seized material does not belong to the other xxx…
person. Thereafter, in view of the amendment
in section 153C (1) of the Act, since the 19.14 Thus, it is the date of search that has been
books of account or documents did not belong considered to be the relevant date for the
to the other person but did pertain to him or purpose of applying the amended provisions
the information contained therein related to of section 153C(1) of the Act.
him, can the Assessing Officer of the
searched person once again record satisfaction 19.15 This court is of the considered view that the
as contemplated under the amended provision trigger for initiating action whether under
and forward the material to the Assessing section 153A or 153C of the Act is the search
Officer of such other person. The answer under section 132 or requisition under section
would be an emphatic “no” as the Assessing 132A of the Act and the statutory provisions
Officer of the searched person after recording as existing on the date of the search would be
the earlier satisfaction would have already applicable. The mere fact that there is no
forwarded the material to the Assessing limitation for the Assessing Officer of the
Officer having jurisdiction over the other searched person to record satisfaction will not
change the trigger point, namely, the date of
the search. The satisfaction of the Assessing

Ahmedabad Chartered Accountants Journal August, 2019 295

Judicial Analysis

Officer of the searched person would be based completed under section 158BC of the Act of
on the material seized during the course of the the searched person.
search or requisition and not the assessment
made in the case of the searched person, 19.18 The CBDT vide Circular No. 24/2015 dated
though he may notice such fact during the 31.12.2015 has accepted that these guidelines
course of assessment proceedings. Therefore, would apply to proceedings under section
whether the satisfaction is recorded 153C of the Act. Applying these guidelines,
immediately after the search, after initiation of it may be ascertained as to whether at the time
proceedings under section 153A of the Act or of or along with the initiation of proceedings
after assessment is framed under section 153A against the searched person under section
of the Act in the case of the searched person, 153A of the Act, the Assessing Officer of the
the trigger point remains the same, viz., the searched person could have recorded the
search and, therefore, the statutory provision requisite satisfaction that the books of
as prevailing on that day would be applicable. account or documents seized or requisitioned
While it is true that sections 153A and 153C pertain to or any information contained
of the Act are machinery provisions, but the therein relates to the other person. If no, in
same cannot be made applicable the opinion of this court, it is not permissible
retrospectively, when the amendment has for him to record such satisfaction at any other
expressly been given prospective effect. stage merely because at a later date the
Besides, though such provisions are machinery statutory provision came to be amended.
provisions, the amendment brings into its fold
persons who are otherwise not covered by the 19.19 It may be pertinent to note that vide CBDT
said provisions and therefore, affects the Circular No. 2/2018 dated 15.2.2018, it has
substantive rights of such person. In the been clarified that the amended provisions of
opinion of this court, the decision of the section 153A of the Act shall apply where
Supreme Court in M.A. Merchant (supra) search under section 132 of the Act is initiated
would be squarely applicable to the facts of or requisition under section 132A of the Act
the present case wherein it was held thus: is made on or after 1st day of April, 2017. It
xxx… is further stated therein that section 153C of
the Act has also been amended to provide a
19.17 In the opinion of this court, the test would be reference to the relevant assessment year or
whether at the first point of time when years as referred to in section 153A of the
satisfaction could have been recorded by the Income-tax Act. It is also stated therein that
Assessing Officer of the person searched, thus, the amendment will take effect from 1st
could he have recorded the satisfaction as April, 2017. Therefore, even the CBDT, in
envisaged under the amended provision. In the context of the amended provisions of
Calcutta Knitwears (supra), the Supreme section 153A of the Act, has clarified that it
Court has held that for the purpose of section would apply when search or requisition is
158BD of the Act, a satisfaction note is sine made after the date of the amendment.
qua non and must be prepared by theAssessing Evidently, therefore, even the amended
Officer before he transmits the records to the provisions of section 153C of the Act would
other Assessing Officer who has jurisdiction apply when search or requisition is made after
over such other person. The satisfaction note the amendment.
could be prepared at either of the following
stages: (a) at the time of or along with the 19.20 In Vatika Township (P.) Ltd., (supra), the
initiation of proceedings against the searched Supreme Court has discussed the general
person under section 158BC of the Act; (b) principles concerning retrospectivity and has
along with the assessment proceedings under observed that, of the various rules guiding
section 158BC of theAct; and (c) immediately how a legislation has to be interpreted, one
after the assessment proceedings are established rule is that unless a contrary
intention appears, a legislation is presumed

296 Ahmedabad Chartered Accountants Journal August, 2019

Judicial Analysis

not to be intended to have a retrospective very clearly in the terms of the Act, or arises
operation. The idea behind the rule is that a by necessary and distinct implication.
current law should govern current activities.
Law passed today cannot apply to the events 19.21 At this stage, reference may be made to the
of the past. If we do something today, we do following extract of the notes on clauses to
it keeping in view the law of today and in Finance Bill 2005 (II-A) explaining clause 46
force and not tomorrow’s backward whereby section 153B of the Act relating to
adjustment of it. The court has further held time-limit for completion of assessment under
that the legislations which modified accrued section 153A was sought to be amended:
rights or which impose obligations or impose
new duties or attach a new disability have to “This amendment will take effect
be treated as prospective unless the legislative retrospectively from 1st June, 2003 and will,
intent is clearly to give the enactment a accordingly, apply in relation to a search
retrospective effect; unless the legislation is initiated under section 132 or in relation to
for purpose of supplying an obvious omission books of account, other documents or any
in a former legislation or to explain a former assets requisitioned under section 132A after
legislation. The court pointed out that where 31st May, 2003”.
a benefit is conferred by a legislation, the rule
against a retrospective construction is Thus, when the legislature thought it fit to
different. If a legislation confers a benefit on make the amendment in section 153B of the
some persons but without inflicting a Act relating to time limit of assessment under
corresponding detriment on some other section 153A of the Act retrospective from a
person or on the public generally, and where particular date, it provided that such
to confer such benefit appears to have been retrospectivity would relate to cases where
the legislators’ object, then the presumption the search is initiated or books of account,
would be that such a legislation, giving it a documents or other assets are requisitioned,
purposive construction, would warrant it to from such date. Thus, even the legislature has
be given a retrospective effect. This exactly considered the initiation of search or making
is the justification to treat procedural of requisition as the trigger point for applying
provisions as retrospective. Where a law is the provisions of section 153B of the Act to
enacted for the benefit of community as a assessment under section 153A of the Act.
whole, even in the absence of a provision the Under section 153C of the Act also,
statute may be held to be retrospective in ultimately, assessment or reassessment is
nature. The court observed that in such cases, required to be made in accordance with
retrospectivity is attached to benefit the section 153A of the Act. Thus, when the
persons in contradistinction to the provision amended provisions of section 153C (1) of
imposing some burden or liability where the the Act have been brought into force with
presumption attaches towards prospectivity. effect from 1st June, 2015, it has to be
In the facts of the said case, the proviso added construed that such amended provisions
to section 113 of the Act was not beneficial would apply to a search initiated under section
to the assessee. On the contrary, it was a 132 or in relation to books of account, other
provision which was onerous to the assessee. documents or any assets requisitioned under
The court held that in such a case, one has to section 132A of the Act after 31st May, 2015.
proceed with the normal rule of presumption Consequently, in relation to searches carried
against retrospective operation. It further held out till 31st May 2015, it was not permissible
that the rule against retrospective operation for the Assessing Officer to assume
is a fundamental rule of law that no statute jurisdiction under section 153C of the Act as
shall be construed to have a retrospective amended with effect from 1st June, 2015.
operation unless such a construction appears xxx…

(IV) Which are the relevant Assessment Years
contemplated under Section 153A of the Act

Ahmedabad Chartered Accountants Journal August, 2019 297

Judicial Analysis

21. It may be noted that while the learned counsel of notice under that section is a search under
for the petitioners have not argued on the aspect section 132 or a requisition under section
of which would be the relevant assessment 132A of theAct. Notice is required to be issued
years contemplated under section 153A of the to the searched person calling upon him to file
Act in respect of which proceedings could be return of income for six assessment years
initiated under section 153C of the Act. immediately preceding the assessment year
However, in some of the petitions it has been relevant to the previous year in which such
contended that such six years have to be search is conducted or requisition is made.
computed in relation to the assessment year in Thus, insofar as computation of the six
which the notice under section 153C of the assessment years in respect of which notice is
Act has been issued and not in relation to the required to be issued is concerned, the relevant
assessment year in which the search came to date is the immediately preceding assessment
be conducted, and hence, the learned senior year relevant to the previous year in which such
standing counsel for the respondent has made search is conducted or requisition is made.
submissions in this regard.
21.3 Accordingly, in terms of clause (b) of sub-
21.1 Section 153C of the Act provides that after section (1) of section 153A of the Act, in case
recording satisfaction as provided therein, the of HN Safal Group, since the search is
Assessing Officer having jurisdiction over the conducted on 4.9.2013 the previous year in
other person shall proceed against each such which such search is conducted or requisition
other person and issue notice and assess or re- made is 1-4-2013 to 31-3-2014 and the
assess the income of the other person in assessment year relevant to such previous year
accordance with the provisions of section would be 2014-15; therefore, the six years
153A of the Act, if, that Assessing Officer is assessment years would be the six assessment
satisfied that the books of account or years preceding assessment year 2014-15
documents or assets seized or requisitioned which would be 2013-14, 2012-13, 2011-12,
have a bearing on the determination of the total 2010-11, 2009-10 and 2008-09. In case of
income of such other person. Sub-section (1) Barter Group and Venus Group, since the
of section 153A of the Act as it stood at the search is conducted on 4-12-2014 and 13-3-
relevant time when the search came to be 2015 respectively, the previous year in which
conducted provided that the Assessing Officer such search is conducted or requisition made
shall:- (a) issue notice to such person requiring is 2014-15 and the assessment year relevant
him to furnish within such period, as may be to such previous year would be 2015-16 and
specified in the notice, the return of income in therefore, the six assessment years preceding
respect of each assessment year falling within 2015-16 would be 2014-15, 2013-14, 2012-
six assessment years referred to in clause (b), 13, 2011-12, 2010-11 and 2009-10. Therefore,
in the prescribed form and verified in the in case any notices under section 153C of the
prescribed manner and setting forth such other Act which have been issued for assessment
particulars as may be prescribed and the years beyond the six assessment years referred
provisions of the Act shall, so far as may be, to hereinabove, such notices would be beyond
apply accordingly as if such return were a jurisdiction as the same do not fall within the
return required to be furnished under section six assessment years as contemplated under
139; (b) assess or re-assess the total income of section 153A of the Act.
six assessment years immediately preceding
the assessment year relevant to the previous 11 Principal Commissioner of Income-tax
year in which such search is conducted or v. Sunrise Finlease (P.) Ltd. [2018] 89
requisition is made. 1 (Gujarat)

21.2 On a plain reading of section 153A of the Act, By these appeals under section 260A of the Income
it is evident that the trigger point for issuance Tax Act, 1961 (hereinafter referred to as the “Act”),
the appellant- revenue has challenged the common

298 Ahmedabad Chartered Accountants Journal August, 2019

order dated 21.6.2017 made by the Income Tax Judicial Analysis
Appellate Tribunal, Ahmedabad Bench ‘B’
(hereinafter referred to as the “Tribunal”) in ITA powers under section 263 of the Act, directed
No.2483/Ahd/2014 and C.O. No.293/Ahd/2014, the Assessing Officer to frame a fresh
by proposing the following identically worded assessment. In the consequential proceedings,
questions in both the appeals, stated to be substantial the Assessing Officer finalized assessment on
questions of law: 11.12.2012 adding Rs.90,00,000/- towards
share application/share premium by placing
“(A) Whether the Appellate Tribunal has erred in reliance on the statement made by the assessee’s
law and on facts in upholding the order of the director, one Shri Riddhesh G. Bhandari,
CIT (A) deleting the addition of recorded under section 131 of the Act on
Rs.90,00,000/- under section 68 of the Act? 7.12.2009.

(B) Whether the Appellate Tribunal has erred in xxx…
law and on facts in holding the assessment
order passed under section 143(3) consequent 5. Insofar as proposed question [A] and [D] are
to an order under section 263, as invalid for concerned, as can be seen from the impugned
want of approval under section 153D? order passed by the Tribunal, the Tribunal has
found as a matter of fact that no incriminating
(C) Whether on facts of the case and in law, the evidence against the assessee was either found
lack of approval under section 153D would or seized during the course of the search so as
invalidate the assessment order and was not a to attract the provisions of section 153A
curable defect? proceedings. The Tribunal has placed reliance
upon the decision of the jurisdictional High
(D) Whether the Appellate Tribunal was correct Court in the case of Pr. CIT v. Saumya
in holding the assessment to be invalid on Construction (P.) Ltd. [2016] 387 ITR 529/
account of no incriminating material found [2017] 81 292 (Guj.), for the
during search, even though there is no such proposition that section 153A of the Act does
requirement in section 153A, and the not apply in the absence of any incriminating
provision of the first proviso to section evidence being found/seized during the course
153(A)(1) requires assessment/re-assessment of the search.
for all the six assessment years preceding the
relevant assessment year to be done and by 6. This court in the case of Saumya Construction
the virtue of the second proviso to section (P.) Ltd. (supra), has held that in view of the
153A(1), all pending assessments on the date mandate of sub-section (1) of section 153A
of search stand abated necessitating fresh of the Act, in every case where there is a
assessments for all the six assessment years?” search or requisition, the Assessing Officer is
obliged to issue notice to such person to
2. The assessment year is 2007-08 and the furnish returns of income for the six years
relevant accounting period is the previous year preceding the assessment year relevant to the
2006-07. In this case, the assessee, a company, previous year in which the search is conducted
engaged in share trading and financial activities, or requisition is made. However, any addition
filed its return of income on 11.9.2007 stating or disallowance can be made only on the basis
income of Rs.84,030/-, which culminated into of material collected during the search or
initiation of proceedings under section 153A requisition.
of the Act. The assessee filed a return on
18.6.2009 reiterating the very income disclosed 7. In the facts of the present case, the Tribunal
earlier. The Assessing Officer framed has recorded a finding of fact to the effect that
assessment under section 153A of the Act on no incriminating material had been found
24.12.2009 accepting the same. The during the course of the search proceedings
Commissioner of Income Tax, in exercise of and that the statement of the director which is
stated to have been recorded during the course

Ahmedabad Chartered Accountants Journal August, 2019 299

Judicial Analysis negative language, that is to say, if the statute
enacts that it shall be done in such a manner
of search under section 131 of the Act, and and in no other manner, it has been laid down
which forms the basis for the impugned that those requirements are in all cases,absolute,
addition, was recorded much later on and that neglect to attend to them will invalidate
7.12.2009. In the light of the above cited the whole proceeding. In Vijay Narayan Thatte
decision, it was not permissible for the v. State of Maharashtra [2009] 9 SCC 92, the
Assessing Officer to make any addition under Supreme Court has held that it is well settled
section 153A of the Act when no that when a statute is couched in negative
incriminating material had been found during language it is ordinarily regarded as peremptory
the course of the search. and mandatory in nature. The Supreme Court,
in some decisions has held that merely because
8. In the above view of the matter, the view a provision of law is couched in a negative
adopted by the Tribunal being in consonance language implying mandatory character, the
with the view taken by this court in the above same is not without exceptions. However, the
referred decision, it cannot be said that the present case deals with the interpretation of a
impugned order passed by the Tribunal suffers taxing statute. It is well settled that a taxing
from any legal infirmity so as to give rise to a statute has to strictly construed, therefore, from
question of law. the language employed in section 153D of the
Act, the requirement of obtaining the prior
9. As regards proposed questions [B] and [C] viz., approval of the Joint Commissioner has to be
whether lack of approval under section 153D regarded as mandatory in nature.
would invalidate the assessment order and was
not a curable defect, it may be noted that section 11. In the facts of the present case, as the
153D of the Act mandates that no order of assessment order has been passed by an
assessment or reassessment shall be passed by Income Tax Officer, the requirement of
an Assessing Officer below the rank of Joint obtaining the prior approval of the Joint
Commissioner in respect of each assessment Commissioner under section 153D of the Act
year referred to in clause (b) of sub-section (1) was absolute. The Tribunal, however, has
of section 153A or the assessment year referred recorded a finding of fact that there is nothing
to in clause (b) of sub-section (1) of section on record to indicate that the prior approval
153B, except with the prior approval of the of the Joint Commissioner was obtained. As
Joint Commissioner. In the present case, the a natural corollary therefore, in the absence
assessment order has been passed by an Income of the requirement of prior approval of the
Tax Officer, who admittedly is an officer below Joint Commissioner being satisfied, the whole
the rank of Joint Commissioner; therefore, the proceeding would stand invalidated. The
provisions of section 153D of the Act would Tribunal was, therefore, wholly justified in
be applicable. Section 153D starts with the holding that the impugned order of assessment
words “No order of assessment or reassessment would stand vitiated in view of non-
shall be passed....”. In other words, the language compliance of the provisions of section 153D
employed in the provision is couched in the of the Act. On this count also, therefore, the
negative and therefore, there is a prohibition appeal, does not merit acceptance.
against passing of an assessment or
reassessment order, except with the prior hhh
approval of the Joint Commissioner.

10. In Shin-Etsu Chemical Co. Ltd. v. Aksh
Optifibre Ltd. [2005] 7 SCC 234, the Supreme
Court has observed that if the requirements of
a statute which prescribes the manner in which
something is to be done are expressed in

300 Ahmedabad Chartered Accountants Journal August, 2019

UAE issues Guidance on
Economic Substance Rules

CA. Dhinal A. Shah CA. Sagar Shah
[email protected] [email protected]

1. Executive summary jurisdiction other than the UAE and the date of
the end of its financial year. The time and form
On 11 September 2019, the United Arab for this notification is yet to be specified by the
Emirates (UAE) issued Ministerial Decision No. Regulatory Authority.
215 of 2019 containing guidance for businesses In addition to the notification, licensees carrying
on compliance with the Economic Substance out a relevant activity are required to submit a
Regulations (ESR), enacted inApril. Businesses report to the RegulatoryAuthority including the
in the UAE should review the ESR and type of relevant activity conducted, amount and
associated guidance to determine whether they type of income, operating expenses, assets, and
are subject to the ESR requirements and the employee information. This report must be
related notification and reporting requirements. submitted no later than 12 months after the last
day of the end of each financial year
2. Detailed discussion commencing on or after 1 January 2019, in the
2.1 Background form approved by the RegulatoryAuthority (also
yet to be specified).
On 30 April 2019, the UAE enacted the ESR Non-compliance may result in administrative
in Resolution No. 31 of 2019. Any natural or penalties for failure to meet the economic
juridical person licensed by a competent substance test (up to AED 50,000 in the first
licensing authority in the UAE (licensee) that financial period, and up to AED 300,000 in
carries out any relevant activity is subject to subsequent financial periods), administrative
the ESR. Relevant activities are banking, penalties for failure to provide information (up
insurance, investment fund management, to AED 50,000), spontaneous exchange of
shipping, lease-finance, distribution and service information, and potentially deregistration.
centers, headquarters and intellectual property On 11 September 2019, the UAE Ministry of
(IP) activities. Finance issued Ministerial Decision No. 215
Companies engaged in relevant activities in the of 2019 (guidance) containing further
UAE must satisfy three tests to comply with information on how the ESR may be met. Some
the ESR: of the key clarifications are highlighted below.
(i) be directed and managed in the UAE for 2.2 Definition of a license
A license includes a commercial license,
the specific activity; certificate of incorporation, or other form of
(ii) perform core income generating activity permit required to be procured before carrying
out an activity in the UAE.
(CIGA) in the UAE for the specific 2.3 Companies must derive income to be subject
activity; and to the ESR
(iii) have an adequate level of qualified Only companies deriving income from the
employees, premises and annual operating relevant activities in the UAE must meet the
expenditures. requirements in the ESR.
Licensees must notify the Regulatory Authority
of whether they are carrying out a relevant
activity. If they are, the notification should
include whether the gross income in relation to
the relevant activity is subject to tax in a

Ahmedabad Chartered Accountants Journal August, 2019 301

UAE issues Guidance on Economic Substance Rules

2.4 Exempt companies addition, the guidance states that the resources
The ESR determines that commercial companies of a third-party service provider in the UAE
in which the Government of the State, or the will be taken into consideration to determine
Government of any Emirate of the State, or any the adequacy of a licensee’s resources, but there
governmental authority or body of any of the must be no double counting if the service is
same has any direct or indirect ownership in its provided to more than one licensee carrying
share capital shall be exempted from the ESR. out a relevant activity in the UAE.
The guidance clarifies that 51% ownership is 2.9 Sector-specific guidance
required for this exemption to apply. The guideline outlines information on holding
companies, headquarter and high-risk IP
2.5 Submission of information notification businesses. The key clarifications are:
The Guidance clarifies that the licensee shall, - Companies whose activities are limited to
with effect from 1 January 2020, submit the
notification to the Relevant Authorities. The holding equity participation are not
specific deadline, form and manner in which required to carry out CIGA in the UAE.
the notification must be submitted is yet to be - Holding companies that undertake a
determined by the Regulatory Authority. relevant activity other than solely receiving
Further guidance is expected. income from equity interests (i.e., dividends
and capital gains) do not benefit from the
2.6 “Directed and managed” test reduced ESR. The licensee must meet the
An adequate number of board meetings must full substance requirements associated with
be held and attended in the UAE to meet the relevant activities it carries out.
requirements in the ESR. The adequate number - An entity carrying out headquarter
depends on the level of the relevant activity activities is tested based on the activities it
being carried out by the licensee. The guidance performs, and not on its position within the
clarifies that it is expected that at least one group structure.
meeting should be held in the UAE per
financial year. These meetings must be recorded 3. Further guidance expected
in written minutes, signed by attendees
physically present in the UAE and kept in the The determination of whether the economic
country. If the licensee is managed by an substance requirements are met is made by the
individual (i.e., general manager or CEO), these Regulatory Authorities, who are expected to
requirements apply to such individual. adopt a “strict yet pragmatic approach” to the
application of the rules.
2.7 Meaning of “adequate” and “appropriate”
The UAE guidance states that what is adequate To determine if the licensee meets the
or appropriate for each licensee depends on the requirements of the ESR, various factors may
nature and level of the relevant activities. The be considered in the decision, such as the CIGA
guidance indicates that the ESR is not intended being carried out and the adequate level of
to impose requirements that businesses engage employees or other resources, taking into
more employees or incur more expenditures consideration the fluctuation of resources
than what is needed. Instead, a licensee should needed during the course of a financial year,
maintain sufficient records to demonstrate the the time sheets and hours spent by employees
adequacy and appropriateness of the resources to conduct the CIGA, and the average revenue
utilized and expenditures incurred. per employee.

2.8 Additional clarification on outsourcing Further guidance is expected to determine the
activities RegulatoryAuthority to which the notifications
The guidance clarifies that a licensee may and reports should be submitted. Those
outsource CIGA to a related party in the UAE. authorities will determine the form and manner
Moreover, the licensee must be able to of these reports.
demonstrate that outsourcing to third-party or
related-party service providers is not being done hhh
to circumvent compliance with the ESR. In

302 Ahmedabad Chartered Accountants Journal August, 2019

FEMA CA. Savan Godiawala
Updates [email protected]

12 External Commercial Borrowings domestically for capital expenditure as also by
(ECB) Policy – Rationalisation of End- NBFCs for on-lending for the same purpose.
use Provisions For repayment of Rupee loans availed
domestically for purposes other than capital
The Reserve Bank of India made an announcement expenditure and for on-lending by NBFCs for
regarding the External Commercial Borrowings the same, the minimum average maturity period
(ECB) Policy. of the ECB is required to be 10 years.

The circular pertained to Authorized Dealer It has been decided to permit eligible corporate
Category-I (AD Category-I) banks and drew their borrowers to avail ECB for repayment of
attention to paragraphs 2.1.(v) and 2.1.(viii) of Rupee loans availed domestically for capital
Master Direction No.5 dated March 26, 2019 on expenditure in manufacturing and infrastructure
the above subject in terms of which, inter alia, ECB sector if classified as SMA-2 or NPA, under
proceeds cannot be utilised for working capital any one time settlement with lenders. Lender
purposes, general corporate purposes and banks are also permitted to sell, through
repayment of Rupee loans except when the ECB assignment, such loans to eligible ECB lenders,
is availed from foreign equity holder for a minimum except foreign branches/ overseas subsidiaries
average maturity period of 5 years. Further, on- of Indian banks, provided, the resultant external
lending for these activities out of ECB proceeds is commercial borrowing complies with all-in-
also prohibited. cost, minimum average maturity period and
other relevant norms of the ECB framework.
2. Based on the feedback from stakeholders and
with a view to further liberalise the ECB 3. The prescribed minimum average maturity
framework, it has been decided, in consultation provision, as above, for the aforesaid end-uses
with the Government of India, to relax the end- will have to be strictly complied with under all
use restrictions.Accordingly, eligible borrowers circumstances.
will now be permitted to raise ECBs for the
following purposes from recognised lenders, Source:RBI/2019-20/20 A.P. (DIR Series) Circular
except foreign branches/ overseas subsidiaries No. 04 dated July 30, 2019
of Indian banks, subject to paragraph 2.2 of
the direction ibid: For full text refer:
ECBs with a minimum average maturity period
of 10 years for working capital purposes and Foreign Exchange Management
general corporate purposes. Borrowing by
NBFCs for the above maturity for on lending 13 (Deposit) (Amendment) Regulations,
for the above purposes is also permitted. 2019 – Acceptance of Deposits by issue
of Commercial Papers
ECBs with a minimum average maturity period
of 7 years can be availed by eligible borrowers The Reserve Bank of India made an amendment to
for repayment of Rupee loans availed the Foreign Exchange Management Regulations,

Ahmedabad Chartered Accountants Journal August, 2019 303

FEMA Updates Management (Transfer or Issue of Security by a
Person Resident outside India) Regulations, 2017
The circular pertained to Authorised Dealers (ADs) – FEMA 20(R), already allow investments in CPs
and drew their attention to the Foreign Exchange issued by the Indian Companies.
Management (Deposit) Regulations, 2016 notified
vide Notification No. FEMA 5(R)/2016-RB dated With a view to bring in consistency in statutory
April 1, 2016, as amended from time to time and provisions/regulations relating to Commercial
the relevant directions issued thereunder. Papers (CPs), it is advised that sub-regulation (3)
of Regulation 6 of FEMA 5(R)/2016-RB has been
It is advised that Sub-regulation (3) of Regulation deleted vide GOI Notification No. FEMA 5(R)(2)/
6 of the above Regulations, in terms of which a 2019-RB dated July 16, 2019.
Company may accept deposits through issue of
Commercial Paper (CP), has been reviewed vis-à- Source:RBI/2019-20/44 A.P. (DIR Series) Circular
vis other Statutes/Regulations – notably Section 45 No. 06 dated August 16, 2019
U(b) of RBI Act, 1934 describing CP as one of the
Money Market Instruments and Section 2(c) of For full text refer:
Companies (Acceptance of Deposits), Rules 2014 BS_CircularIndexDisplay.aspx?Id=11664
which excludes any amount received against issue
of, inter alia, CPs from definition of deposits. It has hhh
also been considered that Foreign Exchange

contd. from page 288 Tribunal News

Held cases, namely Pramerica ASPF II Cyprus Holding
Ltd (Pramerica ASPF II Cyprus Holding Ltd v
The Hon’ble ITAT agreed with the contention of DCIT, ITA 1824/2016, Bombay HC) and Siemens
the assessee that two events i.e. conversion of Aktiengesellschaft (DIT v. Siemens
FCCDs into equity shares on completion of Aktiengesellschaft, ITA 124/2010, Bombay HC).
specified term and post-conversion sale of equity Based on the above, the Hon’ble ITAT while
shares to the promoters at annualized 18 or 19 upholding the DRP order held that only the interest
percent on return on investment were futuristic and which has actually been received can only be
contingent events. Accordingly the Hon’ble ITAT subject matter of taxation and no TP adjustment
ruled that the AO/TPO, at no point, established that can be made on some hypothetical receivable
notional interest satisfy the test of income arising amount which was contingent upon certain event
or received under the charging provisions of the which has actually not been taken place during the
Act. The ITAT emphasised that if income is not year.
taxable in terms of section 4 of the Act, then the
provisions contained in Chapter X (relating to hhh
transfer pricing) cannot be made applicable.
Consequently, the ITAT ruled that the income
chargeable to tax can only be subjected to the
transfer pricing implications. While passing the
above order, the ITAT considered various court

304 Ahmedabad Chartered Accountants Journal August, 2019

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