Ahmedabad Chartered Accountants Journal
E-mail : [email protected] Website : www.caa-ahm.org - caaahmedabad
Volume : 43 Part : 4 July, 2019
CONTENTS
To Begin with
- Keys for Joy.......................................................................Dr. Nilesh V. Suchak................... 187
Editorial ............................................................................................CA. Nirav R. Choksi......................188
From the President............................................................................ CA. Anand S. Sharma...................189
Articles
Decoding of Presmuptive Taxation u/s. 44AD..................................... CA. Jignesh Parikh........................190
Blockchain and its use cases...............................................................CA. Abhishek Jain.........................199
Fund Raising Strategies for Companies.............................................. CA. Karan Vora.......................... 203
Direct Taxes
From the Courts.................................................................................. CA. C.R. Sharedalal &
CA. Jayesh C. Sharedalal...........207
Tribunal News.....................................................................................CA. Yogesh G. Shah &
CA. Aparna M. Parelkar............. 210
Unreported Judgements...................................................................... CA. Sanjay R. Shah.................... 216
Controversies.......................................................................................CA. Kaushik D. Shah....................220
Judicial Analysis...................................................................................Adv. Tushar Hemani....................224
FEMA & International Taxation
India-China DTAA amended to incorporate BEPS related provisions... CA. Dhinal A. Shah &
CA. Sagar V. Shah.........................232
FEMA Updates................................................................................... CA. Savan R. Godiawala..............234
Indirect Taxes
GST & VAT Judgments and Updates................................................... CA. Bihari B. Shah &
CA. Vishrut R. Shah.......................236
Corporate Law & Others
Corporate Law Update....................................................................... CA. Naveen R. Mandovara............239
Allied Laws Corner..............................................................................Adv. Ankit M. Talsania...................242
From Published Accounts ................................................................. CA. Pamil H. Shah..................... 248
From the Government ......................................................................CA. Ashwin H. Shah &
CA. Kunal A. Shah........................250
New Delhi Times................................................................................CA. Aniket S. Talati.................... 252
Association News.............................................................................. CA. Shivang R. Chokshi &
CA. Ketan G. Mistry....................254
Ahmedabad Chartered Accountants Journal July, 2019 185
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
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Published By
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186 Ahmedabad Chartered Accountants Journal July, 2019
Keys for Joy
Dr. Nilesh V. Suchak
[email protected]
Joy or bliss cannot be purchased from shop. There are no medicines in the world that can be purchased
from chemist to get joy or bliss. There is no hospital anywhere that can operate upon us and give true
joy or bliss.
Things or objects or persons cannot ever give perennial joy. They can give us transient feeling of
happiness but it is a myth. The true joy or bliss is within all of us and unfortunately, we have been
searching for it outside in things or objects or persons or situations.
Keys are small but can open much bigger locks. Similarly, the keys to joy can solve many problems that
we face in life. The following keys for joy or bliss are time tested and are suggested by all those who
have practiced them.
1. Accept the circumstances without any reaction.
2. Have vision for looking at good qualities of others
3. Avoid criticism of others
4. Avoid arrogance of action (Akartrutvabhav)
Many of us feel disturbed or perturbed or unhappy because we do not accept the situations or
circumstances or event as they occur. Even though we know that many situations are beyond our control,
some of us grieve over them. We should remember that we are the instruments in the hands of God and
things may not ever happen according to our wishes. If we learn the art of accepting the situations as
they are without grieving over them and without any adverse reactions, we shall realize that the fountain
of joy is within all of us and not outside.
A habit of looking at good qualities of others and absorbing them by practice in our life will give
abundant joy. This habit of looking at goodness around us will make us feel that world is full of good
persons and their good deeds. If we learn this art of searching virtues of people, we shall sow virtues in
our mind and the mind will feel good, will think good, and will guide us in right direction for living
joyful life. We uplift ourselves with every positive thought that we dwell upon. Serenity of mind,
gentleness, silence, self-control and good feelings for others will lead to charming personality.
Criticism of others takes away lot of our quality time. It is like filling the mind with dirt of others. If we
sow dirt in our mind, there will never be fragrance of joy in our mind. Back biting or criticism of others
robes us of invaluable time and takes away our joy. Every person has some virtues. God has not made
any person without a single virtue. However, if we look at vices of others, we sow grudge, vices and ill
will in our mind. We know the rule that “As we sow, so shall we reap”. Hence, if we sow vices in our
mind, we shall reap a crop full of vices in our life. Resentful, hateful, blaming, unforgiving, critical, and
condemning thoughts in mind will have a devastating effect on our personality.Constant practice of
avoiding criticism by speech, action and thought will lead us to a state of constant joy and will also save
us from so many problems.
We should be good to others without an arrogance of action. We should think that we are fortunate that
God has chosen our hands for being good. This key of Akartrutvabhav will save us from greed, arrogance,
and ego and lead to bliss.
We should carefully observe and understand the effect of positive and negative thoughts in our mind to
realize that purity of mind brings joy and negativity brings grief.
I have learnt about these keys from my Guru respected Shri Bharatbhai J. Shah of Aadarsh Amdavad
who continues to experience and share joy even at the age of 73.
Ahmedabad Chartered Accountants Journal July, 2019 187
Editorial [email protected]
One more month of compliances has gone by. One more month of late night work pressures is awaited.
This has now become a regular feature in a practicing Chartered Accountants professional life. But at the
same time we must be at peace because we have work. In this scenario of global and national downturn
in businesses, we are still in business albeit in a different manner. It is our supreme responsibility to stand
shoulder to shoulder with our clients. This time shall pass soon. Our great nation is equipped to face any
challenge and overcome triumphantly at the end.
In the ever evolving scenario of technology, the ICAI has introduced one more technology based
compliance which shall become a very important tool in identifying fake / fraudulent certificates or
attestations. With the advent and more appropriate use of UDIN, the menace of frauds in our profession
will be addressed. Let us all make effective use of this facility. It will surely have some teething troubles,
but it has long term advantages which are for betterment of the profession.
Another dimension of the practice which shall change forever is the faceless scrutiny assessment. This
new initiative of the Income tax department is in alignment with the zero corruption policy of this
government. Though the focus of the government is on ease of doing business, probably faceless scrutiny
assessments may lead to complex issues. Though the intention of the government is praiseworthy, only
the actual implementation of the process shall tell us about it effectiveness. No side wants unnecessary
litigations to pile up. Our courts are as such having a huge backlog. This should not add to the cases
already pending. The phase I shall cover few cities and in later phases the entire country will be covered
under these new rules. The potential issues which are being envisioned are galore but the positive effects
of the same have far reaching impact on the psyche of the taxpayer and a professional. All involved in the
process of return filing and advisory shall have to keep this aspect in mind that they have absolutely no
direct influence on the assessing officer. The client will also become more careful and will try and avoid
on any kind of tax evasion.
Another virtue of the online GST and Income tax e-assessment is that it has opened up lots of opportunity
for young professionals. Now they need not fear direct interaction with the assessing officers and can put
forth their case in the language and in the manner they want to. All will be judged on the basis of merits
only. This new era will ultimately culminate with grass root level changes in the Income tax which is
being worked upon by a team of experts at the Centre. So with the two most important taxes, Direct &
Indirect, getting a total overhaul, the scenario for professionals will ultimately change drastically. It would
be taxing times for all of us, but our profession and professionals are capable enough to weather all
storms. We have endured and managed to crack the most difficult educational course of the commerce
faculty and therefore such changes will also not hamper us in any manner.
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
Regards
CA. Nirav R. Choksi
188 Ahmedabad Chartered Accountants Journal July, 2019
From the CA. Anand S. Sharma
President [email protected]
Dear Members, 900 members registered for the Seminar and as
always interpretation expertise which speaker
We all witnessed the first ever full time women possess benefited members to understand the
Finance Minister NirmalaSitharamansince intricacies involved through lucid interpretation of
independence presentingtheunion budget for clauses by the eminent speaker.
Financial Year 2019-20 from the House of
Parliament. Tax Gurus found the budget to be It’s my pleasure to announce that sub group
mediocre and very little as expected was fulfilled committee for RERA was formed under Profession
by Modi 2.0 Government. None the less the budget Development Committee to ensure that Association
did foresee some major changes giving impact to help the members and non-members who are
long term economic strategy by announcing involved in practice pertaining to RERA
Rs.70,000crores support for recapitalization to compliances and advisory. The committee
Public Sector Bank, sectorial increase in FDI limits successfully launched the program on RERA which
including focus was seen on controlling inflation was attended by members.
and Fiscal deficit.Undoubtedly the Government is
all committed by its moves to make India’s economy We were honored to have RERA Authorities, CCM
robust and their willingness to see the New India CA AniketTalati& CA HaritDhariwal as penal
are seen in their efforts and moves. speakers to discuss various issues that members are
facing in compliances of the Act. All penal speakers
We Chartered Accountants, as fraternity have lucidly explained and there was over whelming
always remained part of Nation Building Activities response from members as their grievances and
and we all are committed towards better and New issues were addressed by the Authority from the dais.
India. Interim Budged was announced on 7th July
and as committed to precedence followed by I would like to take and opportunity that with efforts
Associationthroughoutthe years to deliver the best of Membership Development Committee we are
Union Budget Booklet within 3 days of the budget able to add 63 new members to the association at
was also successful this year. With the untiring the month end.Also, on behalf of the Membership
efforts of Publication Committee and contributors Development Committee, I would like to request
to the Union Budget Booklet of the Chartered you that kindly spread the message of online
Accountants Association, the booklet was made enrolment and payment to the non-members. By
available to members within 3 days of presentation digitalizing the process on enrollment, we have
of the Union Budget. I specially acknowledge ensured that it becomes easy for anyone willing to
Chairman of Publication Committee CA Shailesh join the association, at any time he wants to. I am
C Shah and team for being dedicated to ensure hopeful with the help of members of CA
quality and timeliness of releasing the booklet. Association we will be able to increase the strength
There was unprecedented response to buy the of CA Association by enrolling new members, and
booklet and I am feeling proud to state that we could more and more people will be able to take the
sell more than 11,500 copies within 3 days. benefits of the same.I take privilege on behalf of
Office Bearers that we are imbibed and have a single
We professional have to be equipped with all the intentionto work towards betterment for Members.
resources to tackle the new changes and
compliances that are increasing day by day. Ending with Acharya Chanakya’s quote “We should
Association have always been keen to ensure that not fret for what is past, nor should we be anxious
members get adequate knowledge by way of study about the future; men of discernment deal only with
circle, group discussion and Brain Trust. Association the present moment.”
organized Post Budget Session which was delivered
by Senior Advocate Shri SaurabhSoparkar. Nearly Jai Hind !!!
CA. Anand Sharma,
President
Ahmedabad Chartered Accountants Journal July, 2019 189
Decoding of Presmuptive CA. Jignesh Parikh
Taxation u/s. 44AD [email protected]
Preamble to be income of the assessee under the Hear “Profits
and gains of business or profession.” Moroever this
Sections 44AD and 44AE were inserted by the section has overriding effect over sections
Finance Act, 1994 with effect from April 1, 1994. 28 to 43C,
The object for introducing this scheme had been
explained by the Central Board of Direct Taxes Before Proceeding further, following terms are
(CBDT) in its Circular No. 684 dated June 10,1994. important to understand.
Wherein, it is stated that the Estimated Income
Method of assessment for certain categories of Eligible Assessee
business is prevalent in several countries. The Tax
Reforms Committee has also recommended gradual The Presumptive Taxation Scheme of Section
introduction of the Estimated Income Method in 44AD can be adopted by following persons.;
certain areas to facilitate better tax compliance. a. Resident Individual
Accordingly, sections 44AD and 44AE had been b. Resident Hindu Undivided Family
inserted in the Income- tax Act with a view to c. Resident Partnership Firm (Not being Limited
providing for a method of estimating income from
the business of civil construction or supply of labour Liability Partnership)
for civil construction work having a turnover or gross
receipts not more than Rs. 40 Lakh and from the Further the advantage of this section can be
business of plying, hiring or leasing trucks owned obtained if the assessee as referred above should
by a tax payer owning not more than 10 trucks. not have claimed deduction under any of
the sections 10A, 10AA, 10B, 10BA or deduction
Thereafter, the Section 44AD was amended by the under any provisions of section 80 HH to 80
Finance (No. 2) Act, 2009 w.e.f. April 1, 2011, RRB in the relevant assessment year.
which provided applicability of this section to
“eligible assessee” and for “eligible business”. Eligible Business
Major amendments to the said section are further The Scheme of Section 44AD is designed to give
carried out by the Finance Act 2016 that would advantage to the ‘Eligible Assessees” engaged in
revamp the entire scheme of presumptive taxation any business except the following business :
effective from the Assessment Year 2017-18
i. the business of plying, hiring or leasing goods
Section 44AD carriages referred to in section 44AE; and
Under section 44AD in the case of an eligible ii. whose total turnover or gross receipts in the
assessee engaged in an eligible business, 8 % / previous year does not exceed an amount
6% of the total turnover or gross receipts of the of two crore rupees.
assessee in the previous year on account of such
business or, as the case may be, a sum higher Further as per sub section 6 the provisions of this
than the aforesaid sum claimed to have been section (which has overriding effect over subsection
earned by the eligible assessee, shall be presumed 1 to 5 of Section 44AD) Section 44AD of the
Income Tax Act, 1961 will not be applicable to
following;
i. a person carrying on profession as referred to
in sub-section (1) of section 44AA;
190 Ahmedabad Chartered Accountants Journal July, 2019
Decoding of Presmuptive Taxation u/s. 44AD
ii. a person earning income in the nature of audited if his total sales, turnover or gross receipts
commission or brokerage; or exceed one crore rupees. However, if an eligible
person opts for presumptive taxation scheme as per
iii. a person carrying on any agency business. section 44AD(1) of the Act, he shall not be required
to get his accounts audited if the total turnover or
Following professions are treated as specified gross receipts of the relevant previous year does
profession for the purpose of section 44AA and not exceed two crore rupees. The higher threshold
they need to maintain their books of accounts and for non-audit of accounts has been given only to
other documents as specified; assessees opting for presumptive taxation scheme
under section 44AD.’
· Legal
· Medical To give effect to the above clarification of the
· Engineering CBDT, Finance Act, 2017 has inserted new proviso
· Architectural to section 44AB to provide that the eligible assessee
· Accountancy under section 44AD need not get his books of
· Technical Consultancy account audited under this section:
· Interior Decoration
· Authorised Representative a. if he declares profits and gains for the previous
· Film Artist year in accordance with the provision of section
· Company Secretary 44AD(1); and
· Information Technology
b. his total sales, turnover or gross receipts do not
Turnover Limit for Section 44AB and 44AD exceed Rs. 2 crores in such previous year
The turnover limit for the eligible business is The amendment has been made effective from 1-
increased from one crorer to two crorer rupees, 4-2017 and will accordingly, applicable to the
However the limit under section 44AB for the Tax assessment year 2017-18 and subsequent
Audit has not been increased in case of business. assessment years.
The same has been clarified now vide the press
release dated 20th June 2016 as under; Applicability of tax Audit under different scenarios
‘Section 44AB of the Income-tax Act (‘the Act’) Let us understand the applicability of tax Audit u/s
makes it obligatory for every person carrying on 44AB read with Section 44AD. Fro that Le’s first
business to get his accounts of any previous year Analyze Section 44AB.
Sr. Clause of Person When required to get accounts
No. section 44AB audited in terms of section 44AB
1. Clause (d) Every person carrying on If he claims his profits and gains from such
profession referred to in profession are lower than 50% of his gross receipts
section 44AA(1) profits from for the previous year in question and his total
which are assessable on income exceeds the maximum amount which is
presumptive basis under not chargeable to income-tax in any previous year
section 44ADA
2. Clause (b) Every person carrying on If his total gross receipts from profession exceed
profession [other than those Rs. 50 lakhs in any previous year
covered by clause (d)
of section 44AB]
3. 2nd proviso Every person who derives Section 44AB does not apply to such person &
to section
44AB income of the nature referred to hence no need to get accounts audited u/s 44AB
in section 44B or section 44BBA
Ahmedabad Chartered Accountants Journal July, 2019 191
Decoding of Presmuptive Taxation u/s. 44AD
4. Clause (c) Every person carrying on If he claims his profits and gains from such business
business profits of which are are lower than the amount deemed to be profits
5. Clause (e) assessable on presumptive basis and gains under the said section
first proviso under section 44AE or section
44BB or section 44BBB
6. Clause
(a)1 Every person carrying on If his total income exceeds the maximum amount
business where the provisions which is not chargeable to income-tax in any
7. Clause of section 44AD(4) are previous year
(a)1 applicable in his case
Section 44AB shall not apply to the person who
8. Clause declares profits and gains for the previous year in
(a)1 accordance with section 44AD(1) and his total
sales, turnover or gross receipts, as the case may
9. Clause (a) be, in business does not exceed Rs. 2 crore [first
proviso to section 44AB]
10. Clause (a)
11. Clause (a) Every person carrying on any If his total sales, turnover or gross receipts , as the
agency business case may be, in business exceed or exceeds Rs. 1
crore in any previous year
Every person carrying on business If his total sales, turnover or gross receipts , as the
who is earning income in the case may be, in business exceed or exceeds Rs. 1
nature or commission or brokerage crore in any previous year
Every person carrying on Gross receipts of profession and business not to
profession referred to in section be clubbed for computing the limits of Rs. 1 crore
44AA(1) who is also carrying [clause (a)] and/or Rs. 50 lakhs [clause (b)].
on any business Account of profession to be audited if clause (b)or
(d) of section 44AB applies. Accounts of business
to be audited if total sales, turnover or gross
receipts, as the case may be, in business exceed or
exceeds Rs. 1 crore in any previous year since
section 44AD is not applicable to person carrying
on profession referred to in section 44AA(1)
Every "eligible assessee" (as Assessee not eligible to opt for section 44AD.
defined in section 44AD) Therefore, he must get his accounts audited in terms
carrying on "any eligible of section 44AB(a) since his turnover exceeds Rs.
business" (as defined in section 2 crores and thus exceeds Rs. 1 crore limit in clause
44AD) turnover of which (a).
exceeds Rs. 2 crores in any
previous year
Every assessee who is not an If total sales, turnover or gross receipts , as the case
"eligible assessee" as defined may be, in business exceed or exceeds Rs. 1 crore
in section 44AD i.e. LLPs, in any previous year
companies, AOPs, BOIs, AJPs
Every non-resident assessee not If total sales, turnover or gross receipts , as the case
covered by section 44AE or 44B may be, in business exceed or exceeds Rs. 1 crore
or 44BB or 44BBA or 44BBB in any previous year
192 Ahmedabad Chartered Accountants Journal July, 2019
Relevant Para of Guidance Note on Tax Audit Decoding of Presmuptive Taxation u/s. 44AD
of ICAI
purposes of determining whether or not the
“5.20 A question may arise in the case of an accounts of such firm are required to be
assessee carrying on business and at the same audited for purposes of section 44AB.”
time engaged in a profession as to what are
the limits applicable to him under section From the perusal of above one can conclude
44AB for getting the accounts audited. In following;
such a case if his professional receipts are,
say, rupees fifty four lakhs but his total sales, a. Tax audit u/s 44AB is applicable to an assessee
turnover or gross receipts in business are, say, (assuming he is not an eligible assessee) where
rupees ninety two lakhs, it will be necessary turnover of business exceeds Rs. 2 crores -
for him to get his accounts of the profession Clause (a) of section 44AB. Now the issue is if
and also the accounts of the business audited such assessee is carrying out three business and
because the gross receipts from the profession having turnover of Rs 70 L in each business.
exceed the limit of rupees twenty five lakhs. Now the total turnover is Rs 2.10 Cr which
If however, the professional receipts are, say, exceeds the limit of Rs 2 Cr. The question here
rupees twenty one lakhs and total sales is the limit of Rs 2 Cr is to be applied business
turnover or gross receipts from business are, wise or turnover of all business is required to be
say, rupees eighty six lakhs it will not be clubbed. Though section 44AD talks about
necessary for him to get his accounts audited ‘eligible business’ however looking towards para
under the above section, because his gross 5.21 of the guidance note on Tax Audit, it
receipts from the profession as well as total appears that turnover of all businesses need to
sales, turnover or gross receipts from the be considered. However at this juncture one
business are below the prescribed limits. may refer to the contrary judgment of
Honourable Karnataka High Court in Asstt.
5.21 It may, however, be noted that in cases where CIT v. Dr. K. Satish Shetty [2010] 188
the assessee carries on more than one business Taxman 32, The Karnataka High Court held
activity, the results of all business activities that the conjoint reading of the provisions of
should be clubbed together. In other words, section 44AB and section 2(13) (definition of
the aggregate sales, turnover and/or gross ‘business’) “does not show anywhere that in
receipts of all businesses carried on by an case assessee is carrying on many businesses,
assessee would be taken into consideration then the aggregate of businesses has to be
in determining whether the prescribed limit arrived at and thereafter, the same is
(Presently Rs. 1 crore w.e.f. A.Y. 2013-14) required to be audited.” The Court further
as laid down in section 44AB has been observed that “......section 44AB does not show
exceeded or not. However, where the or contemplate that all businesses are
business is covered by section 44B or 44BBA required to be consolidated for working out
turnover of such business shall be excluded. the aggregate of turnover.” The practical
Similarly, where the business is covered by difficulty in applying this judgment is the
section 44AD or 44AE and the assessee opts moment one puts Rs 2.10 Cr as turnover (Refer
to be assessed under the respective sections the above example) in the turnover column in
on presumptive basis, the turnover thereof return of income, either system may not allow
shall be excluded. So far as a partnership firm to upload the return or if allows then notice u/s
is concerned, each firm is an independent 139 may come treating the return as defective as
assessee for purposes of Income-tax Act. in the ITR there is no provision to enter the
Therefore, the figures of sales of each firm eligible businesswise turnover and profitability
will have to be considered separately for details. However in the above example assuming
the assessee is an “eligible assessee” and all three
businesses are “eligible business” and he decides
Ahmedabad Chartered Accountants Journal July, 2019 193
Decoding of Presmuptive Taxation u/s. 44AD liable for Tax Audit as per Section 44AB
provided his turnover exceeds Rs 1 Cr.
to offer the income u/s 44AD, he would be facing
the same practical difficulty as discussed above e. For instance, a person may have gross receipts
and the same difficulty under both the scenario of Rs. 80 lakhs from civil construction business
is precisely because the ITR does not allow to and of Rs. 40 lakhs from trading in scrap and
enter business wise details. Rs. 70 lakhs from garment manufacture. Each
of the three businesses has turnover/gross
b. Tax audit u/s 44AB is applicable to an eligible receipts of less than the limit of Rs. 2 crores.
assessee who opts for section 44AD benefit for Each of them is an eligible business. If assessee
Assessment Year 2017-18 or subsequent years opts for section 44AD for all of them, then
and then opts out of section 44AD in violation anyway he will not be liable to tax audit.
of section 44AD(4) and whose total income However if the total of all these three business
exceeds the maximum amount not chargeable exceed 2 Cr Rs then the scenario will be as per
to tax - New clause (e) of section 44AB. para ‘a’ above. If he does not declare 8% of
turnover/gross receipts (6% in case of digital
c. There is ambiguity as to what happens when turnover) from any of his three businesses, he
an assessee eligible to opt for section 44AD will be liable to comply with section 44AA/
for AY 2017-18 or subsequent years does not section 44AB if his total income exceeds
opt for section 44AD under the amended taxable limit. If even one of those three
provisions. Alternatively let’s assume the businesses has turnover exceeding Rs. 2 crore,
assessee commences new business in AY 19- it will not be an eligible business and for that
20 and prefers not to opt for the Section 44AD. business section 44AB will have to be complied
Here assessee does not opt at all for section with in terms of section 44AB(a). So, the
44AD under the amended provisions as distinct practice of clubbing turnover/gross receipts of
from opting in and opting out. - One view is all businesses to see if the limit of Rs. 2 crore
that since section 44AD is a special provision in section 44AB(a) is exceeded is required to
and that section 44AD(4) has been substituted be applied ignoring the business which for
and the same covered under new clause (e) and which Section 44AD is applied.
the reference to section 44AD having been
omitted from clause (d) of section 44AD, the f. Suppose an individual is carrying on business
assessee will not be covered under section (shop selling legal books) and profession
44AD. Other view is that he will be covered (lawyer). Gross receipts for business Rs.
under section 44AB(a) The second view seems 95,00,000 and gross receipts for profession
to be the better view in view of the new first [covered by section 44AA(1)] Rs. 49,00,000
proviso inserted in section 44AB by the for assessment year 2017-18. In this case,
Finance Act, 2017 with effect from assessment neither accounts of business nor accounts of
year 2017-18 which reads as under; profession are to be got audited under section
44AB. Here, section 44AD will not apply to
“Provided that this section shall not apply to business as person is carrying on profession
the person, who declares profits and gains for referred to in section 44AA(1). Hence, audit
the previous year in accordance with the will not apply regardless of whether the person
provisions of sub-section (1) of section declares minimum income of 8% of gross
44AD and his total sales, turnover or gross receipts (6% in case of digital turnover) of
receipts, as the case may be, in business does business in his return of income as his turnover
not exceed two crore rupees in such previous or gross receipts does not exceed the limit of
year:” Rs. 1 crore stipulated by section 44AB(a).
d. Thus if an ‘eligible assessee’who commences
a new ‘eligible business’ say in AY 2019-20
and does not opt for Section 44AD would be
194 Ahmedabad Chartered Accountants Journal July, 2019
g. Suppose in the above case, gross receipts from Decoding of Presmuptive Taxation u/s. 44AD
business is Rs. 95 lakhs and gross receipts from
profession is Rs. 51 lakhs. In that case, This amendment may also lead to unnecessary
compulsory tax audit shall apply to audit of harassment from the pro-revenueAssessing Officers
accounts of profession as well as that of business. while carrying out assessment of individual partners.
Since the amended section 44AD presumes that
h. Suppose in the example as referred in Para ‘f’if partners’ salary and interest on capital are deemed
an assessee is earning income from commission to have been allowed in the hands of the firm, an
and also dealing in stationery business then as Assessing Officer may deem that the amounts
per subsection 6 of Section 44AD, the provisions drawn by the partners from the firm on personal
of Section 44AD are not applicable. Meaning account as income in the hands of the partners and
thereby if Mr X has earned commission of Rs tend to tax the same.
25 L and has incurred losses in stationery
business to the tune of Rs 2 L and turnover of Payment of Advance Tax by 15th March
the stationery business is Rs 10 L in that case,
the assessee is not liable to get the books of The amended scheme mandates payment of
accounts audited as neither Section 44AB applies advance tax on onetime basis, to be paid on or
( total turnover does not exceed Rs 1 Cr) and before 15th March in each financial year. Non-
also Section 44AD is not applicable (as per payment of advance tax would lead to payment of
subsection 6 of Section 44AD). Hence he is not interest under sections 234B and 234C of the
required to get the books of accounts audited. Income-tax Act. This is another deterrent
amendment in the Finance Act, 2016 which makes
i. Assessee can maintain books of account for the scheme unviable.
one business on cash basis and for other
business on mercantile business however the Restriction on Availing the Scheme
practical difficulty is in the ITR the assessee
has not been given the option disclose method Amended Sub section 4 and Sub section 5 of
of accounting business wise. Section 44AD provides as under;
Remuneration to Partners and Interest on Partners’ ‘(4) Where an eligible assessee declares profit for
Capital in case of Firm being Eligible Assessee any previous year in accordance with the
provisions of this section and he declares profit
Till Financial Year 2015-16 under scheme of for any of the five assessment years relevant to
presumptive taxation, a partnership firm was the previous year succeeding such previous year
allowed to claim deduction of interest on capital not in accordance with the provisions of sub-
and partners’ salary from the presumptive income. section (1), he shall not be eligible to claim the
It would be more logical to presume that this benefit benefit of the provisions of this section for five
was initially made available to partnership firms assessment years subsequent to the assessment
inasmuch as they were liable to tax at the maximum year relevant to the previous year in which the
marginal rate, i.e., 30.9% (including cess) and those profit has not been declared in accordance with
deductions claimed from the firm were subjected the provisions of sub-section (1).
to tax in the hands of the individual partners. But
the Finance Act, 2016 has done away with this more (5) Notwithstanding anything contained in the
commonsensical provision by omitting proviso to foregoing provisions of this section, an eligible
sub-section (2) of Section 44AD. assessee to whom the provisions of sub-section
(4) are applicable and whose total income
As per the said amendment while computing the exceeds the maximum amount which is not
income of Firm all the deductions under sections chargeable to income-tax, shall be required to
30 to 38, including interest on partners capital and keep and maintain such books of account and
partners’ salary are deemed to have been allowed. other documents as required under sub-section
(2) of section 44AA and get them audited and
furnish a report of such audit as required
under section 44AB.’
Ahmedabad Chartered Accountants Journal July, 2019 195
Decoding of Presmuptive Taxation u/s. 44AD than the value adopted or assessed or assessable by
any authority of a State Government for the purpose
The above provision postulates as the following : of payment of stamp duty in respect of such
transfer, the value so adopted or assessed or
a. The assessee should have declared profit as per assessable shall, for the purposes of computing
section 44AD for any previous year; and profits and gains from transfer of such asset, be
deemed to be the full value of the consideration
b. The assessee should have declared profit not received or accruing as a result of such transfer.
in accordance with section 44AD in any of the
five assessment years succeeding the previous The open ended coverage of section 44AD(1) is
year in which profit was declared as per puzzling since sale of immovable property held as
section 44AD as per condition (a). stock in trade governed by section 43CA is not
brought within the provisions of section 44AD.
If above two conditions are satisfied, such assessee Section 44AD starts with non-obstante clause by
shall not be eligible to claim the benefits of saying that the provisions would prevail over sections
Section 44AD for five assessment years subsequent 28 to 43C of theAct. The applicability of the section
to the assessment year in which profit was not is however optional. Only when the taxpayer opts
declared as per section 44ADas given in condition for the provisions of section 44AD, it would prevail
(b) above. over the provisions of sections 28 to 43C.
Further from plane reading of the provision, it is ‘Total turnover or gross receipts’ appearing in
understood that the restrictions provided in sub- section 44AD includes the deemed sales
section (4) shall not be applicable to the assessees (i.e., deemed full value of consideration received)
having business income for the first time during the as contemplated under section 43CA.
financial year 2016-17 and declare income below Unfortunately, what amounts to total sales, turnover
the limits prescribed under sub-section (1) of or gross receipts for the purpose of section 44AA/
section 44ADfor the AY 2017-18. 44AB/44AD is not defined in respective sections.
Further, these sections are not made subject to
Sub Section 5 will be applicable if following section 43CA. In absence of specific provision/
conditions are satisfied. explanation making section 43CA applicable to
section 44AA/44AB/44AD, in determination
a. An eligible assessee to whom the provisions of ’total sales, turnover or gross receipts’ the natural
of sub-section (4) are applicable; and meaning should prevail as was prevailing prior to
introduction of section 43CA. [For elaborate
b. The total income of that assessee has exceeded discussion on interpretation of terms ‘total sales,
the maximum amount which is not chargeable turnover or gross receipts’ one may refer to ICAI
to income-tax. Guidance Note on Tax Audit under section 44AB].
Therefore, applicability of provisions of section
In other words, sub-sections (4) and (5) are mutually 44AA regarding maintenance of books of account
inclusive. Provisions of sub-section (4) shall not be & section 44AB regarding audit of account of
applicable to an assessee who never opted for the business should be decided without any reference
scheme in any of the earlier previous years, as it to or influence of section 43CA. Similarly, new
provides that the eligible assessee should have provision of section 43CA should not apply in
declared profits as per section 44AD for any cases governed by section 44AD for assessment of
previous year. Under this situation, assessees who presumptive profits on sale of land/building.
have never ever opted for the scheme till the AY
2016-17 can enjoy the benefits of the scheme even One may argue that section 44AD starts with
by showing lesser profits for the subsequent “Notwithstanding anything to the contrary
assessment years. contained in sections 28 to 43C….” meaning
Section 43CA r.w.Section 44AD
According to Section 43CA where the
consideration received or accruing as a result of the
transfer by an assessee of an asset (other than a
capital asset), being land or building or both, is less
196 Ahmedabad Chartered Accountants Journal July, 2019
thereby, indirectly, section 44AD is subject to Decoding of Presmuptive Taxation u/s. 44AD
section 43CA. This is not correct interpretation.
and in the absence of any other contrary material /
Further, the terms ’total sales, turnover or gross evidence, the cash deposits could not be taxed as
receipts’ are fiscal facts and cannot include deeming unexplained or undisclosed income of the assessee.
fiction created by section 43CA which categorically
apply only ‘for the purpose of computing profits The court held that there was no substantial question
and gains from transfer of asset’. of law in the appeal and hence upheld the order of
the tribunal.
This section is meant for taxing sale of immovable
assets held as stock in trade for value less than the Section 44AD vis a vis sections 43B
value adopted for stamp duty purposes by State
Government authorities. Section 43CA is not Panaji Tribunal in the case of Good Luck
controlled by the presumptive provisions contained Kinetic v. ITO
in section 44AD.
Interpretation of Sections relating to presumptive
Section 44AD r.w. Section. 40(a)(ia) taxation and section 43B of the Act: Admittedly,
once the presumptive tax provision is applied, 5%
In ITO v. Mark Construction [2012] 23 of the total turnover is deemed to be the profit and
taxmann.com 398 (Kolkata) the assessee engaged gains of business chargeable to tax under the head
in civil construction disclosed profits exceeding 8% ‘Profits and gains of business or profession’. It only
by opting for section 44AD provisions. In the means that the deduction allowable under sections
assessment, the Assessing Officer called for books 28 to 43C is deemed to have been already granted
of account of the assessee and the assessee took a to the taxpayer.
plea that the income was offered under
section 44AD and hence maintenance / production However, a perusal of the provisions of section 43B
of books of account was not compulsory. The shows that the said provision is a “restriction” on
Assessing Officer made addition of Rs. 32,62,140 the allowance of a particular expenditure
by invoking section 40(a)(ia). The tribunal held that representing statutory liability and such other
since the assessee has disclosed profits more than expenses, unless same has been paid before the due
8% of the gross receipts, no disallowance under date of filing the return. The fact was that the
section 40(a)(ia) could be made. statutory liability in the present case had not been
paid before the due date of filing the return.
Section 44AD vis a vis sections 68/69
Non-obstante clauses in the sections relating to
Similarly, whether a taxpayer declaring income presumptive taxation and section 43B of the Act:
under section 44AD could be subjected to tax under The opening words in section 44AF are
sections 68 /69 for the amounts credited in his bank “notwithstanding anything to the contrary contained
account became an issue in CIT v. Surinder Paul in sections 28 to 43C”. Section 43B also has the
Anand [2010[ 48 DTR (P. & H.) 135. opening words as “notwithstanding anything
contained in any other provisions of this Act”.
In the assessment, the assessee was asked to explain
the cash deposit in his bank account and finally an The non-obstante clause in section 43B has far
addition of Rs.14,95,300 was made to the returned wider amplitude because it uses the words
income. The Court held that the assessee having “notwithstanding anything contained in any other
opted for presumptive provision is exempted from provisions of this Act”. Therefore, even assuming
maintaining books of account. It held that the that the deduction is permissible or the deduction is
assessee is under an obligation to explain individual deemed to have been allowed under any other
entry of cash deposit only when such entry had no provisions of this Act, the control placed by the
nexus with the gross receipts of the business. The provisions of section 43B in respect of the statutory
assessee claimed both before CIT (A) and tribunal liabilities still holds precedence over such
that the said amount was part of business receipts allowance. This is because the dues to the crown
have no limitation and have precedence over all
other allowances and claims.
Ahmedabad Chartered Accountants Journal July, 2019 197
Decoding of Presmuptive Taxation u/s. 44AD Preamble to each ICDS specifies that in case of a
conflict between the provisions of the Act and
Under these circumstances, the Tribunal held that ICDS, and then the provisions of the Act will
the disallowance made by the AO by invoking the prevail. Also, such assessee are not required to
provisions of section 43B of the Act in respect of maintain any books of accounts and follow any
the statutory liabilities was in order, even though method of accounting, the provisions of section
the taxpayer’s income had been offered and assessed 145(1) does not apply to such assessee and ICDS
under the provisions of section 44AF of the Act. are notified under section 145 of the Act. Hence,
ICDS shall not apply to taxpayers covered by
This perhaps is the first decision of its kind, wherein presumptive scheme of taxation like section 44AD,
the Court has analyzed the unique situation of 44AE, 44ADA, 44B, 44BB, 44BBA, etc. Further,
two non-obstante clauses meeting head-on against for the purposes of proper and efficient
each other. The Tribunal has held that the non- administration of ICDS, it is also clarified that ICDS
obstante clause having wider amplitude will prevail shall not apply to Individuals, HUFs, partnership
over the other. This case also emphasizes and firms and LLPs who are not required to get their
reiterates the principle that the dues to the crown accounts audited under section 44AB of the Act.’
have no limitation and have precedence over all
other allowances or claims. Concluding Remarks on Section 44AD
As such, applying section 43B of the Act to It is to be seen whether the above amendments except
presumptive taxation would defeat the basic purpose increasing the threshold limit of eligible business,
of bringing the provisions relating to presumptive would benefit small and medium enterprises; because
taxation in the statute book, which was to do away once an assessee opts under this section, he has to
with maintenance of books of account and making declare 8% / 6% profits on the gross receipts for
the compliance simpler for the SMEs. Section 43B continuous period of five years. Further, in case of
came into effect from 1983 with a non- eligible firm, no remuneration / Interest paid to
obstante clause against the whole Act. But it needs partners would be allowed as deductions. Hence
to be noted that section 44AF was not a part of the many assessees would prefer not to opt under this
law at that time. Section 44AF was brought into section and would prefer to maintain the books of
the Statute books effective from 1997 clearly account and get them audited. This is a retroactive
overriding sections 28 to 43C (which include or backward step in “widening the tax base” and
section 43B). Therefore, it could be presumed that “ease of doing business.Whether this provision
while enacting section 44AF, the legislation has would enable or disable ease of doing business? Let
purposely placed a non-obstante clause with an the bureaucrats answer these questions.
intention to override section 43B. The Tribunal
seems to have ignored this intent of the legislation. Disclaimer
ICDS and Section 44AD, 44AE, 44ADA, 44B, The contents of this document are solely for
44BB, 44BBA, etc. informational purpose. It does not constitute
professional advice or a formal recommendation.
FAQ 2 Does ICDS apply to non-corporate taxpayers While due care has been taken in preparing this
who are not required to maintain books of account document, the existence of mistakes and omissions
and/or those who are covered by presumptive herein is not ruled out. Neither the compiler nor
scheme of taxation like s.44AD, 44AE, 44ADA, editor nor publisher and its affiliates accepts any
44B, 44BB, 44BBA, etc.? liabilities for any loss or damage of any kind arising
out of any inaccurate or incomplete information in
These sections 44AD, 44AE, 44ADA, 44B, 44BB, this document nor for any actions taken in reliance
44BBA etc. deals with a situation where assessee thereon.
is engaged in business and provides special
mechanism for computing income under the Head hhh
“Profits & Gains from business” in terms of special
deeming provisions for income and deductions.
198 Ahmedabad Chartered Accountants Journal July, 2019
Blockchain and its use cases
From a Chartered Accountant’s perspective CA. Abhishek Jain
[email protected]
Basic of Blockchain
Blockchain System:
First of all, blockchain is not cryptocurrency though
its primary applications where in cryptocurrency. The Blockchain system’s task is to ensure that all
Blockchain is more of a concept than a technology, these individual copies are consistent with each
its inception was from the concept of Accounting other, that the local copies which every node has
and Auditing (Ledger System, Logs or trail of data), are identical, and these copies are always updated
Information technology (Information Systems, based on the global information i.e., if this node
Information Portals), Security and Identity wants to enter some information to this blockchain
management (Cryptography), Mathematics then such information will get updated to all the
(Hashing and Algorithm). copy of the blockchain that every node possess.
The architectural platform of blockchain supports
This gives a clear indication that CA must be a strong consistency among the local replica local
prepared with the concept of blockchain because information that every node has.
who knows accounting and auditing more than what
we Chartered Accountants. We may not know the Key Components of blockchain
technology or algorithm but we know what is the
business processes, accounting and auditing. · Decentralized Computing
Definition · Cryptography (hashing)
Blockchain is a decentralized computation and · Chronological Ledger
information sharing platform which enables
multiple authoritative domains which do not trust · User Access (restricted / unrestricted)
each other to cooperate, coordinate and collaborate
in a rational decision-making process. · Security
Blockchain is a cryptography-based software · Trust building tool (Consensus)
technology which functions as a distributed ledger
that is heavily secured due to its attributes of peer · Cooperate, coordinate and collaborate tool
to peer verification and authentication. Leveraging between Participants. (Protocol for
this technology to apply it in real world situations Commitment)
where a secured record is required for transactions,
documents or any other sensitive information will Public vs Private Blockchain
lead to higher productivity and security.
A Public Blockchain is a permission less
blockchain. Anyone can join the blockchain
network, they can read, write, or participate with a
public blockchain. Public blockchains are
decentralised andno one has control over the
network. They are secure in that the data can’t be
changed once validated on the blockchain.
Ahmedabad Chartered Accountants Journal July, 2019 199
Blockchain and its use cases • Cryptocurrencies/Store of value -
On the other hand, a Private Blockchain is a What is my account balance?
permissioned/federation blockchain. Permissioned
networks place restrictions on who is allowed to • Digital Identity -
participate in the network and in what transactions.
When people get into blockchain, there’s a natural Who are you and how have you changed over
discussion about what kind of blockchain, because time?
blockchain comes in many different varieties.
• Digital representation of a property/
We must be more concerned about private Tokenization –
blockchain as a chartered accountant because this
is where the bigger role of our expertise is required. Who owned this car over time?
• Tracking provenance of food or drugs –
What country & postal code did this chicken
come from?
In the real world the choice for the business leaders
regarding the technology will not be clear, but the
potential for the technology is immense. Companies
need to proceed deliberately but cautiously, in the
context of a through cost benefit analysis. There is
no magic formula which fits all purpose.
Let’s understand what is Smart Contracts Blockchain – Applications in Industries and Use
Cases
A smart contract allows individuals and enterprises
to exchange data in a trusted, conflict-free manner Blockchain in Finance
without relying on a third party like a bank, lawyer
or notary. o Payments and Remittance
It is a self-automated computer program that can Transactions can occur directly between two
carry out the terms of any contract. parties on a frictionless P2P basis. The
technology’s application for overseas
Mostly based on objective conditions precedent “If, transactions has the potential to reduce risk,
then” criteria transaction costs and to improve speed,
efficiency and transparency.
Let’s see where Blockchain Good For?
Blockchain is a solution which is looking for
problems. Blockchain may be used for many things
where there are many people involved and they
don’t trust each other.
200 Ahmedabad Chartered Accountants Journal July, 2019
o Issuance, Ownership and Transfer of Blockchain and its use cases
Financial Instruments
Blockchain in Government
A blockchain-based securities market allows
traders to buy or sell stocks directly on o Asset registration
exchanges or directly to other market
participants in a P2P manner without the A blockchain framework enables government
intermediation services provide by a broker or agencies to increase the accuracy and efficiency
clearing house. of publicly held records by linking ownership
of an asset to a single, shared ledger without
o Clearing and Settlement Latency disrupting existing registry data.
On the blockchain, the entire lifecycle of a o Identity services
trade, including its execution, clearing and
settlement can occur at trade level, lowering Blockchain enables government agencies to
post-trade latency and reducing counterparty create a single, trustworthy collection of digital
identity documents. These documents make it
Blockchain in Healthcare easier for government officials to reconcile data
conflicts and provide citizens with control over
o Cost Containment their own identity.
The block chain can be filtered to identify and o Fraud prevention and compliance
alert about specific activity on the chain,
monitoring, using patterns, can include data that Blockchain creates a shared and trusted ledger
represents a doctor, consumer, drugs, that sequentially appends cryptographically
procedures, all can to tokenized and added to secure data. The ledger is only accessible to
the chain. trusted parties, giving government
administrators the assurance that they’re
• Building a rule base using best practices, working with data that’s up-to-date, accurate
ICD codes, medical procedures and other and nearly impossible to manipulate.
costs can be monitored and audited using
blockchain. o Supply Chain
o Smart Contracts Blockchain makes the precise location of an
object — and its accompanying digitized
Smart contracts would automatically pay documentation — part of a traceable permanent
providers when conditions of service are record giving government full visibility of the
established such as: supply chain.
• Validation that a service was received by a Recent Developments in Blockchain
registered Medicaid patient
Blockchain as a service (BaaS) using the cloud
• Service was provided by a properly
registered doctor & provider Blockchain as a Service (BaaS) is required because
enterprises are working on their own blockchain
• Neither party is on a known list of past solution, it is not always feasible to create, maintain
participants in any fraud and manage an individual blockchain solution. A
cloud-based service provider manages all the
necessary tasks and activities to keep the
infrastructure agile and operational.
Ahmedabad Chartered Accountants Journal July, 2019 201
Blockchain and its use cases Blockchain and the Internet of Things
Interoperability between blockchains IoT adoption is increasing the number of devices
and sensors that gather data, and many parties are
There are new blockchain networks showing up, typically involved in a business transaction based
which leads to new chains that offer different on that data. Blockchain enables safe record-
speeds, network processing, use-cases. Blockchain keeping through an immutable ledger, and permits
interoperability aims to improve information sharing decentralized operations and transactions while
across diverse blockchain networks. These cross- preserving trust between all players in the value
chain services improve blockchain interoperability chain.
and also make them more practical for day-to-day
usage. The Transactional Capabilities among the IOT
enabled intelligent devices can facilitate the
Government blockchains emergence of newer business models, using IOT
with blockchain in various Enterprise or
We expect to witness a rise in the use of federated Government blockchain may result in huge data
blockchain by the government and semi compilation and its authenticity.
government bodies as Blockchain gives more
customizable, Transparency, Agility, and Hybrid blockchains
immutability to the transactions. Federated
blockchains are similar to private blockchains, but The hybrid blockchain works by providing the
with a simple twist: instead of one organization better features and functionality of both public and
controlling it, many authorities can control the private blockchain. Hybrid blockchains stand out
blockchain and pre-select nodes. Some of the use by offering a customizable solution and also making
cases of federated blockchain by government proper use of what blockchain has to offer –
include insurance claims, financial services, characteristics such as transparency, integrity and
Revenue Records, Allocation of land and supply security. To name several use-cases of hybrid
chain management. blockchain: Internet of Things (IoT), banking,
supply chain, enterprise services.
Enterprise Blockchain
Blockchain is the future.
Enterprise blockchain is evolving to be a scalable
and developable solution. The growth of blockchain Let’s be ready to leverage this technology!
will happen in different phases in which the
captivating use cases willbe explored, discovered, hhh
then implemented on a more massive scale. Despite
early stages, blockchain will be a disruptive
technology that will fundamentally transform
various industries in the next 5–10 years, bringing
$3 trillion of market value for enterprise blockchain
worldwide by 2030.
202 Ahmedabad Chartered Accountants Journal July, 2019
Fund Raising Strategies
for Companies
Financials markets are fundamental in the economic CA. Karan Vora
development of a country. They provide financial [email protected]
resources required by the entrepreneurs for the long Here we, as Chartered Accountants, can help
term sustainable growth. Developing well- entrepreneurs by maximizing the value of their
functioning financial markets is the central focus business.A C.A. can guide the client in the way that
of Government of India and Reserve Bank of India the business can achieve optimal capital structure and
and various reforms have been introduced to generate maximum value.
liberalize, regulate and enhance the financial Following are the different instruments that can be
markets which has streamlined various sources used for fund raising considering the life cycle of
from which entrepreneurs can raise funds. business.
Financial markets can be used to raise long term Start-up Stage:
debt, short term debt or equity to fund a business. Start-up stage is the first and riskiest stage of
The combination of debt and equity that a company business cycle. Providing proof of product, raising
uses to finance its business is known as capital money, hiring staff, establishing market presence
structure of the company. are some of the challenges faced by entrepreneurs
at this stage. The decisions made at this stage can
Debt comprises of short term and long-term impact the company for many years to come.
instruments like bank loans and debentures. Debt is Own Money & Friends and family: A venture can
advantageous from tax purpose as interest payments be initially funded by Entrepreneur’s own
offer tax shield. Raising debt also allows company resources, also called bootstrapping. Entrepreneur
or business to retain control of business. Debt is can also raise funds from 3Fs (friends, family and
generally considered a cheaper source of capital. fools) at minimum cost of capital. The business
Equity on the other hand is an expensive instrument survives through internal cash flows and
considering that the owner parts with the ownership reinvestmentof profits.This is one of the most
stake in the company. Equity holders have a claim popular approach for small businesses as owners
on future earning and value of the company.
For capital structure the Modigliani–Miller (M&M)
theorem is considered prominent theoretical
framework. M&M model advocates that in perfect
market with no taxes, no transaction costs and with
perfect information, the capital structure is irrelevant.
However, in real world with imperfections and by
relaxing the perfect market assumptions it can be
demonstrated that the capital structure is relevant in
maximizing the value of business. Due to taxes,
agency costs, bankruptcy costs and information
asymmetry in the real world the capital structure of
the company is critical for valuation of the company.
Ahmedabad Chartered Accountants Journal July, 2019 203
Fund Raising Strategies for Companies and to support operations. VCs also give valuable
guidance, consultation and business connections to
can maintain the control of their business. This startup. VC funding is also beneficial as it can be
approach also ensures that the expenditure is attracted without any security cover and can give
controlled cautiously. Bootstrapping also allows good visibility to start up. On the other hand, VC
entrepreneurs to focus on customers instead of funds look for high returns and may put pressure to
investors, thereby increasing focus on business and perform in short time frame. This can interfere with
eventually profitability. No outside investors on the management of the business.
board also leaves entrepreneurs with flexibility in
deciding exit options. Bank Financing: Commercial banksare financial
institutions which perform the functions of accepting
Angel Investors: Angel investor is someone who deposits from public and giving loans and earning
lends funds to the owner of the business in lieu of interest.Banks charge higher rate of interest from the
convertible debt or ownership equity. They may be borrowers compared to depositors to make profits.
high net worth individuals who invest in early stage Commercial banks provide funds to businesses for
startups to help them take off or support them in early long-term as well as short term. Banks provide long
stages of operations. Investments by angel investors term loans in form of term loans, loan against property,
are generally risky and comprise a very small equipment financing, vehicle loans, etc. and short
percentage of angel investor’s portfolio.Also meaning term loans in form of cash credit, letter of credit,
that angel investors have well diversified portfolios. export finance, overdraft, bank guarantee, working
Angel investors provide fund to startups when others capital demand loans, etc.Indian banks are regulated
fear to lend. Indian Angel investors, CIIE, ISB by Reserve Bank of India.
Angels are some examples of angel investors.
Companies can use bank funds as per the conditions
Growth Stage: During growth stage the prescribed by the bank. Long term loans are
entrepreneur has already established the proof of generally given for Capital expenditures and short-
product. In this stage the businesses experience sales term loans can be utilized for working capital.Banks
growth and the cash flows begin to improve. require borrowers to pay only the principal and
Revenues start covering ongoing expenses and the interest amount on a loan unlike equity capital,
business may see profitability. Streamlining where companies pay share in profits to
operational efficiencies, dealing with market shareholders. Bank loans are generally easier to
competition and increasing the profit volume are attain due to large number of schedule banks and
some challenges faced at this stage by businesses. are one of the cheapest source of funds.However,
the borrowers must make periodic payments to their
Venture Capital(VC): Venture capital provided by banks and there is very low flexibility. Failure to
VC funds to small emerging businesses that are in service the debt may classify the account as NPA
the early stage and have high growth potential. and may lead to seizure of company’s assets and
Venture capital funds are made up from funds of punitive actions by bank.
high net worth individuals, investment banks and
any other financial institutions.Venture capital funds NBFCs and other Financial Institutions: Non-
invest in equity in exchange for an ownership stake Banking Financial Company(NBFC) is a company
in early-stage companies.Business looking for registered under Companies Act engaged in the
venture capital has to submit a business plan to a business of loans and advances and acquisition of
venture capital fund, which will perform due securities.Their activities are similar to banks
diligence and then may invest as per fund however they can’t raise money through CASA
requirement. VC funding is widespread in new (Current Account Savings Account) deposits and are
technology firms like Uber and Facebook. subject to lenient regulatory norms by RBI compared
to banks. NBFCs can raise funds from foreign
Start-ups that are based on an innovative technology
or business model may resort to VC funding. These
funds can be used by start-ups to take off business
204 Ahmedabad Chartered Accountants Journal July, 2019
Fund Raising Strategies for Companies
investments and up to 100% foreign investment is to business. In general PE backed IPOs also
permitted.Theygenerally offer loans for equipment outperform market returns. However attracting PE
lease finance, hire purchase finance, personal loans, fund is a lengthy exercise and takes considerable
vehicle financing, working capital loans, housing effort and time. Also, PE firms have a say in the
loans, loans against shares and investment, etc. important decisions of business which may lead to
their interference with the management. Black
NBFCs can fund transactions which banks can’t Stone, Softbank, Sequoia, Saif partners are some
do, for example funding against shares. SMEs can examples of PE firms.
avail business loans with or without offering a
collateral security on business loans.NBFC and Initial Public Offering (IPO): Initial public offering
other financial institution can provide loans for (IPO) is a type of offering in which equity shares of
variety of purposes and can be quite useful for a company are sold toretail (individual) investorsas
growing businesses. Moreover, loans from NBFCs well asinstitutional investors. An IPO transforms a
can be availed within lesser time than from banks company into a public listed company.Further
and are generally more flexible in conditions on issuance of shares by a public listed company is called
usage. However, NBFCs funding is more FPO, follow on public offer. Securities and Exchange
expensive than the bank loans with higher rate of Board of India (SEBI) is the regulatory body for IPOs
interest and businesses may prefer that only when and companies have to comply with the SEBI Issue
bank funding is not easily available. of Capital & Disclosure requirements Regulations,
2009 and the listing agreement.IPO is underwritten
Expansion Stage: Business at this stage will see and managed by one or more merchant bankers who
slower rate of growth compared to growth phase also arrange for the shares to be listed on stock
usually due to entry of new competitors and market exchange. IPOs pricing is done by book building
saturation. Companywill now require topenetrate process or fixed pricing and they are marketed by
the market further or expand to new consumer base investment bankers by way of roadshows and
or new geographies to grow the business further. advertising.
Private Equity (PE): Private equity funds are capital An IPO provides the company with access to funds
pools that are to be invested in companies having for its growth and expansion. Companycan raise
potential for growth.Institutional funds and additional funds in the future through FPO. IPO
accredited investors generallyprovide capital to can be exit option for PE or VC investors who can
private equity funds forsubstantial durations and sell their stake to public. There is no servicing in
look for high internal rate of return. PE funds once IPO and the funds remain with the listed entity. IPO
formed will generally be sector specific, have ticket is also very beneficial for the promoters as their
size preference and invest in the company for a equity stake now gets publically valued. However,
period of usually 4 to 5 years.PE funds look for raising equity through IPO is very expensive and
suitable exit from the company at the end of IPOs can only be planned when stock market is
investment time frame. PE fund can exit by way of favorable. Also, certain business families do not
IPO of the company, secondary sale, merger and favor IPOs as once public, a lot of informationhas
acquisition, repurchase by promoter or liquidation. to be shared and disclosures are to be made to public
from time to time.
Companies that avail funds through private equity
can utilize the funds to finance new technology, Project finance: Project finance involves funding of
make acquisitions, expand working capital, repay long term infrastructure and industrial projects.Special
debt, strengthen balance sheet etc. PE finance allows Purpose Vehicles (SPV) are created to obtain project
companies access to funds without conventional finance by the promoters of parent company who
financial mechanisms where they may need to offer seek funding. While the parent company or promotes
collateral or get favorable credit rating. PE funds bring equity into SPV, asingle bank or consortium
also offer fund managers expertise and connections of banks or financial institutions lend money for a
Ahmedabad Chartered Accountants Journal July, 2019 205
Fund Raising Strategies for Companies companies who do not enjoy good credit rating may
find the bond offering an expensive instrument.
particular project to the SPV. Repayment is done from
the cash flows generated by the project and project Debentures: Debentures are long term debt
assets are held by lenders as collateral. Risk instruments that are used to raise additional capital
identification, allocation and financial modelling are from the general public. Individuals, banks,
key aspect of project finance. corporates and primary dealers invest in debentures.
Debentures may be secured or unsecured and
Roads, Power Plants, Airports, SEZs are projects backed by the integrity and the creditworthiness of
funded by way of project finance.Project finance the issuer. Each debenture has fixed face value or
enables the sponsors to raise debt over and above par value and interest has to be paid on debentures
the capacity of the sponsor/parent andSPVs are at a predetermined rate of interest. They have to be
created to shield the sponsor from project failure. redeemed after a fixed period of time and are issued
Project finance an expensive instrument with by large corporations and government. Various
complex structure. Careful risk allocation is critical types of debentures are secured, unsecured,
to manage involvement of multiple parties and redeemable, irredeemable, convertible and non-
technical, economic and political risks associated convertible debentures.
with the project.
Funds raised through debentures are used by
MaturityStage: Companies that reach maturity companies for a specific purpose or planned
stage find that the markets have saturated and sale expansion. Companies who enjoy good credit rating
may become stagnant or slowly begin to may find debentures an excellent low cost source of
decrease.The profit margins also get thinnerand funds. The payment of interest on debentures is
reducing cost of finance and operations should be obligatory even when the company incurs a loss and
a major focus area.Businesses will still try to expand this may create stress on financials in tough times.
themselves by reinventing themselves or investing
in new technologies or emerging markets. Commercial Paper(CP): Commercial Paper is an
unsecured short-term debt instrument issued in the
Bond offering: A bond is a debt instrument used form of a promissory note for a period of minimum
by a company or government to raise funds for a 7 days and maximum of up to one year. Individuals,
definite period. Individuals as well as institutions banking companies, other corporate bodies
like banks, insurance companies, etc. can invest in (registered or incorporated in India) and
bonds depending upon the type of bond. Bondsare unincorporated bodies, non-resident Indians and
usually rated bycredit rating agencies. These ratings foreign institutional investors etc. can invest in CPs.
are published and used by investors to assess the They are not secured by collateral and only large
financial strength of issuer. Bonds are like a loan corporates with high credit rating can issue
and carry an interest rate that has to be paid regularly Commercial Papers. CPs are usually sold at a
at fixed intervals to the investor. Bonds have a discount from face value and carry higher interest
specified maturity period upon completion of which repayment rates than bonds. They are redeemed at
the borrower/issuer has to return money to the par and can be issued in denomination of Rs.5 lacs
lender/investor. Bonds are issued by companies, or multiples thereof.
municipalities, states and sovereign governments.
Large banks or corporations can issue CPs to cover
Companies that raise capital through bonds can use short-term receivables and meet short-term financial
the funds to run their business, buyother companies obligations. Hence, companies need not keep large
or to pay off older debts or loans. When acompany cash reserves on hand and can raise short term funds
issues bonds it does not give investors any ownership thru commercial paper. The companies who enjoy
stake in the company unlike shares. Company can good ratings may find this source cost effective as
therefore keep the control of the business. On the well.
other hand government bonds are one of the most
popular instrument of financing fiscal deficit used hhh
by countries across the world. However, the
206 Ahmedabad Chartered Accountants Journal July, 2019
From the
Courts
CA. C. R. Sharedalal CA. Jayesh C. Sharedalal
[email protected] [email protected]
Reopening after four years: Change of Held:
31 opinion The Act made no distinction between professional
Dempo Brothers Pvt. Ltd. v/s. Asst. CIT or paid directors and directors holding a large
(2018) 403 ITR 196 (Bom) shareholding stake in the company. Section 179(1)
only gave jurisdiction to the Assessing Officer to
Issue: proceed against a director when he was unable to
recover the dues of the company from it. It was
What are the conditions to be fulfilled for reopening not, therefore, open to the Assessing Officer to read
after four years? conditions into section 179(1) and ignore the strict
rule of interpretation of fiscal statutes which
Held: prohibited reading anything in the statute not
expressed therein.
If the primary facts were placed before the
Assessing Officer, he would have been in a position That before the Assessing Officer assumed
to take a decision there upon and it could not amount jurisdiction, efforts to recover the tax dues from the
to failure on the part of the assessee to withhold to company should have failed and such efforts and
furnish the material particulars. The assessee had failure of recovery ought to have been mentioned in
placed on record the necessary information for the the notice, however briefly. That would have given
purpose of assessing the income as regards the on opportunity to the noticee to object on the facts,
transfer of shares. Production of form 29B under and if there was merit in the objection, the
rule 40B was a requirement at the time of original Department could have taken action to recover from
assessment and during the scrutiny assessment, the the company before any order under section 179(1)
assessee was specifically called upon to respond to adverse to the noticee was passed. Therefore, stating
certain queries, which the assessee did. What was the particulars of efforts made and the failure to
sought to be done by the Assessing Officer in recover the dues from the company in the notice
reopening of the assessment by issuing notice under under section 179(1) was a sine qua non for
section 148 after a period of four years was on a proceeding further, but also would have given an
mere change of opinion and the reason of non opportunity to the assessee to have stated why the
furnishing of the form was only an attempt to efforts were inadequate or improper. Admittedly, the
exercise a non- existent power. The assessee did notice itself did not indicate any particulars of the
not fail to disclose all the material facts necessary failed efforts to recover the dues from the company.
for the assessment,
Depreciation: Trial run of machinery
32 Sec. 179: Opportunity to the Directors
Mehul Jadavji Shah v/s. Deputy CIT 33 Pr. CIT v/s. Larsen and Toubro Ltd.
(2018) 403 ITR 201 (Bom) (Bom) (2018) 403 ITR 248 (Bom)
Issue: Issue:
What are the conditions to be fulfilled e.g. informing Whether Depreciation on machinery in allowable
director of steps taken to recover the tax from the even though there is gap of time after trial run?
company before issue of notice u/s 179?
Ahmedabad Chartered Accountants Journal July, 2019 207
From the Courts Procedure for notices etc. on third party
Held: 35 i.e. other than the party searched.
Pr. CIT v/s. N.S. Software (Firm)
Once a plant commences operation, even if the (2018) 403 ITR 259 (Del)
product is substandard and not marketable, the
business can be said to have been set up. Mere Issue
breakdown of machinery or technical snags that What should be the procedure for assessing third
may have developed after the trial run which had party i.e. a person other than the party who is
interrupted the continuation of further production searched?
for a period of time cannot be held to be a ground Held:
to deprive the assessee of the benefit of depreciation. Even whilst the Assessing Officer of the party in
respect of whom search was conducted and that of
The Tribunal held that once the plant commenced the third party under section 153C might be the
operations and a reasonable quantity of product was same, nevertheless at the stage of sending a notice
produced, the business was set up even if the product under section 153C, the Assessing Officer had to
was substandard and not marketable. It directed the record a specific reason or reasons why the material
Assessing Officer to verify the period of use and seized from the other person had a nexus with the
restrict depreciation to 50 per cent, if the Assessing assessee to whom the notice under that provision
Officer found that the machinery was used for less was addressed. This had never happened in the
than 180 days during the year under consideration. assessee’s case. In the absence of any incriminating
On Appeal to High Court it was held that the materials, the previous years’ assessments could not
assessee was entitled to depreciation. be disturbed. The failure of the Assessing Officer
to record a specific satisfaction how the recovered
34 Dividend u/s 2(22) (e) & Exemption material belonged to the assessee in the note that
Dr. T.J. Jaikish v/s. CIT preceded the notice issued under it, vitiated the
(2018) 403 ITR 256 (Ker) assessments.
Issue: 36 Two views and section 263
Agasthiya Granite P. Ltd. v/s. Asst. CIT
Whether dividend taxed u/s 2(22)(e) is entitled to (2018) 403 ITR 279 (Mad)
exemption?
Issue:
Held: Whether CIT has power u/s 263 when there are
two views possible on the issue?
Exemption available from total income in
accordance with section 10(34) of the Income Tax Held:
Act, 1961 is on “any income by way of dividends The view taken by the Assessing Officer was clearly
referred to in section 115-O of the Act”. Section supported by decisions of the Madhya Pradesh and
115-O specifically speaks of an additional income Bombay High Courts. The view taken by the
tax being levied on the amounts disbursed as Assessing Officer was a plausible view. If it resulted
dividend by a company. What is exempted from in loss of revenue, it could not be treated as
being included in the total income is that amount prejudicial to the interests of the Revenue for the
disbursed by a company as dividend, which has purpose of invoking the power under section 263
been taxed under section 115-O of the Act. The of the Act. Moreover, the fact that two views existed
Explanation puts it beyond the pale of doubt and was evident from the order of reference passed by
excludes section 2(22)(e) from the expression of the Full Bench. Therefore, the Commissioner could
dividend for the purposes of Chapter XII-D, not have invoked the power under section 263, as
containing sections 115-O to 115Q. Deemed two views had existed and the Assessing Officer
dividends are not exempted since there is no had adopted one of the two plausible views.
payment of additional tax under section 115-O of
the Act.
208 Ahmedabad Chartered Accountants Journal July, 2019
Attachment and recovery without From the Courts
37 proper procedure is invalid proviso to section 2(15) of the Act. Therefore, the
Sunflower Broking Pvt. Ltd. v/s. Tribunal had rightly concluded that the restriction
Deputy C.I.T (2018) 403 ITR 305 (Guj) created by the first proviso to section 2(15) of the
Act did not operate against the assessee and
Issue: therefore the activity of the assessee, even though
What should be the procedure to be followed for a it might have involved an activity in the nature of
valid attachment and recovery? trade, commerce or business, would fall within the
ambit of general public utility and therefore be a
Held: charitable purpose under section 2(15) of the Act.
When the income tax authority had taken an action
as strong as attachment of the bank account of the 39 Cash Credit and Source of source
assessee and withdrawing a sizable sum of more than PR. CIT v/s. Veedhata Tower Pvt. Ltd.
Rs. 19 lakhs from the bank account unilaterally, the (2018) 403 ITR 415 (Bom)
least that was expected of him was to ascertain that
the notice was duly dispatched and received by the Issue:
assessee. Thus, the authority effected recovery from How the provisions of Sec. 68 are to be applied?
the bank account of the assessee without following
due process. It was true that, the assessee ought to Held:
have applied to the Assessing Officer or to the The proviso to section 68 of the Act was introduced
appellate authority for keeping the additional tax by the Finance Act, 2012 with effect from April 1,
demand in abeyance, which the assessee did not do. 2013 and therefore it would be effective only from
Nevertheless, this would not enable the authorities the assessment year 2013-14 onwards and not for
to ignore the legal requirements before effecting the earlier assessment years. The Tribunal found that
recovery. Under the circumstances, the recovery of the assessee had discharged the onus which was
Rs. 19,22,770/- made by he respondent was illegal. cast upon it in terms of the preamended section 68
The respondent had not set up a case that the assessee of the Act by filing the necessary confirmation
was a chronic defaulter, a person who may ultimately letters of the creditors, their affidavits, their full
not be able to pay the dues if the appeal were addresses and their permanent account numbers.
dismissed or that there were other assessments or The finding of fact was not shown to be perverse.
appeals pending, in which sizeable tax demands were Since there was no obligation to explain the source
held up. The assessee should get the benefit of stay of the source prior toApril 1, 2013, assessment year
pending the appeal on depositing 15 per cent of the 2013-14, no substantial question of law arose from
disputed tax dues. The respondent should therefore the order of the Tribunal.
refund 85 per cent of the sum of Rs. 19,22,770/-
recovered from the assessee and retain 15 per cent Investment out of surplus funds and Sec.
thereof by way of tax, pending the outcome of the
assessee’s appeal. 40 14-A
Pr. CIT v/s. Sintex Industries Ltd
38 Sec. 2(15) and limit of Rs. 10 lacs (2018) 403 ITR 418 (Guj)
CIT v/s. Shri Balaji Samaj Vikas Samiti
(2018) 403 ITR 398 (All) Issue:
How the provisions of the 14A are to be invoked if
Issue: investments are out of surplus funds?
How the provisions of Sec. 2(15) are to be applied
for computing limit set out in Proviso to section Held:
2(15)? The investment made by the assessee was not out
of interest bearing funds. The assessee already had
Held: its own surplus funds, out of which investment was
The activity performed by the assessee was made. The Assessing Officer was not justified in
inseparably linked to the “charitable purpose” of making the disallowance under section 14A of the
providing mid-day meals at village schools. The Act and thereafter determining the expenses in
total receipts of the assessee were below the limit respect of interest and administrative expenses of
of Rs. 10 lakhs as stipulated under the second Rs. 24,37,500 under section 14A of the Act read
with rule 8D.
hhh
Ahmedabad Chartered Accountants Journal July, 2019 209
Tribunal
News
CA. Yogesh G. Shah CA. Aparna M. Parelkar
[email protected] [email protected]
DCIT v. PPFAS Asset Management (P.) that in the case of business or profession newly set
up, or a source of income newly coming into
19 Ltd. 105 taxmann.com 103 (Mum) existence, in the said financial year, the previous
Assessment Year:2013-14, Order dated: year shall be the period beginning with the date of
13March, 2019 setting up of the business or profession or, as the
case may be, the date on which the source of income
Basic Facts newly come into existence and ending with the said
financial year. However, it was observed that unless
The assessee was an asset management company a business is ready to commence business, it is not
incorporated on 8-8-2011. It was required to obtain set up.
SEBI approval for undertaking such business. In
return of income, the assessee claimed deduction The Hon’ble ITAT held that the assessee-company
of certain business expenses under section 37(1). It which was registered/incorporated on 8-8-2011 to
was noted by the AO that the assessee had received undertake business as an asset management
certificate granting registration from SEBI approving company to act as an investment manager for
scheme of Mutual Fund from 8-4-2013 which PPFAS Mutual Fund could not have commenced
enabled it to commerce business and since said its business until it received certificate of approval
approval was granted by SEBI after the end of from SEBI as provided under sub-regulation (2) of
financial year under consideration without which regulation 21 of the 1996 Regulation which was
the assessee could not do its business he held that granted by SEBI only on 17-10-2012. On 19-12-
the aforesaid expenses were not allowable as 2012, the assessee-company made an application
revenue/business expenses. The CIT(A), however, to SEBI for approval of the mutual fund scheme of
allowed assessee’s claim. Aggrieved, the revenue PPFAS Mutual Fund and received certificate from
preferred an appeal before the ITAT. SEBI granting registration for the mutual fund
scheme of PPFAS Mutual Fund on 8-4-2013.From
Issue then onwards its revenue streams could have started
but earning of an income is not a relevant criteria to
Whether, in case of an asset management arrive at a decision as to when the business of the
company, date of approval given by SEBI was assessee was set up and ready to commence
to be regarded as date on which assessee set up business. It is only on 17-10-2012that the assessee
its business and was ready to commence said business was set up and the assessee was ready to
business? commence its business satisfying the mandate of
section 3 to claim its expenses as business expenses
Whether expenses incurred for purpose of and it could be said that the previous year shall
business after said date of approval were eligible commence from 17-10-2012 when its business was
for deduction under section 37(1)? set up and ready to commence. Thus, the Hon’ble
ITAT held that the assessee would, therefore, be
Held entitled to claim expenses only with effect from 17-
The PPFAS Mutual Fund, the sponsor of the
Mutual Fund, got an in principal approval to set up
a mutual fund on 12-7-2011. The Hon’ble ITAT
noted that it is stipulated in the Proviso to Section 3
210 Ahmedabad Chartered Accountants Journal July, 2019
10-2012 and all the expenses incurred by the Tribunal News
assessee prior to 17-10-2012 cannot be allowed. It
was further held that all the expenses incurred in addition of Rs.1,83,41,082/- during reassessment.
the interregnum between 17-10-2012 when the The CIT(A) upheld the order of the AO. Aggrieved,
assessee business was set up and ready to the assessee preferred an appeal before the Hon’ble
commence its business till actual commencement ITAT.
of its business on 8-4-2013 shall be allowed as
normal business expenses provided other conditions Issue
for the allowability of those expenses as provided
vide applicable provisions of the Act are met. Whether exemption u/s 54EC can be claimed
Accordingly, the appeal was partially allowed in for relinquishing ‘right to life interest’ in
favour of the revenue. property?
Smt P.K. Vijayalakshmi v. ITO TS-406- Held
20 ITAT-2019 (Bang) The Hon’ble ITAT observed from the WILL of the
Assessment Year: 2011-12 assessee’s husband that it gave the assessee “right
Order dated: 28 June, 2019 to life interest” in the property without the right to
transfer the property and it gave the two nephews a
Basic Facts rightto transfer the immovable property. It was
further observed that the two nephews were parties
The assessee had acquired a property by way of to the sale deed of the property. The Hon’ble ITAT
WILL of her husband which mentioned that she noted that each of the nephews possessed a kind of
was given LIFE INTEREST in the property and right in the property which was transferred by virtue
subsequent to her death all properties devolve on of sale deed, which constitutes capital asset within
the nephews who had right title and interest over the definition of section 2 (14) of the Act. It was
the property. The assessee had declared long time held that theword “property” does not mean merely
capital gain on her share of receipt of consideration physical property, but also means right for any kind,
on transfer of the property after claiming indexed title or interest in it. If a person is an absolute owner
cost of acquisition and exemption u/s 54EC of of the property, it can be said that he has all rights
Rs.50,00,000 (RCEIC Bond), in the return of and interest in that property. It was held that “right
income for the assessment year 2011-12. All the to life interest” possessed by assessee is a right in
revenue records were in her name on the date of personam that has to be relinquished, in order to
transfer of the property. However,the other two absolutely transfer the property, with a clear title to
nephews of the assessee had also declared long time the buyers and unless assessee transferred the “right
capital gains after claiming indexed cost of to life interest”, property sold would not have been
acquisition and exemption u/s54EC for transferred to buyers in entirety, free of all/any
Rs.50,00,0000(REIC Bond) in their respective encumbrances. Further, since the WILL executed
returns of income. The AO was of the view that states clearly that the right to transfer vests only with
since on the date of transfer of property the assessee two nephews, they too possess a right in the
was the owner of the hands the entire capital gain property sold. The assessee had to relinquish her
was taxable in her hands and the exemption u/s “right to life interest” in the property for which the
54EC was to be restricted to Rs.50.00 lakhs.Hence two nephews have given a share of sale proceeds.
accordingly to the AO he had reason to believe that Thus, it was held by the Hon’ble ITAT that since
the income of Rs.1,00,00,000/- which was claimed each of the three vendors had received their
as exempt u/s 54EC by the nephews had escaped respective shares for sale of rights possessed by each
assessment for the AY: 2011-12 with the meaning one of them to the buyers, each one of them could
of section 147 of the IT Act, 1961, the AO made an claim exemption u/s 54EC independently.
Accordingly, the appeal was allowed in favour of
the assessee.
Ahmedabad Chartered Accountants Journal July, 2019 211
Tribunal News 139. On a plain and literal interpretation of the
aforesaid statutory provision, as per Tribunal there
Rajendra Pal Verma v. ACIT 104 was conscious, purposive and intentional providing
by the legislature of ‘date of furnishing the return
21 taxmann.com 303 (Mum) of income under section 139’cannot be substituted
Assessment Year: 2013-14 and narrowed down to section 139(1). The date of
Order dated: 12 March, 2019 furnishing of the return of income under section
139 would safely encompass within its sweep the
Basic Facts time limit provided for filing of the ‘return of income’
by the assessee under section 139(4) as well as the
The assessee had e-filed his return of income for revised return filed by him under section 139(5).
assessment year 2013-14 on 31-7-2013. Thereafter, As per Tribunal, sub-section (2) of section 54
the assessee filed a revised return of income on 15- contemplates two situations viz. (i) a case where
11-2014. Subsequently, in the assessment the assessee had utilized the amount of LTCG
proceedings, the AO observed that the assessee had towards acquisition of the new asset within a period
during the year under consideration sold an ‘old of one year before the date on which the transfer of
residential flat’ and the entire ‘Long-term capital the original asset took place or for the purchase or
gain’ (LTCG) on sale of the said ‘old residential construction of the new asset before furnishing the
flat’ was claimed by the assessee as exempt under return of income under section 139; AND (ii) a case
section 54. The assessee had purchased a new where the assessee had not utilized the amount of
residential flat as per an ‘agreement’ dated 29-12- the capital gain before furnishing the ‘return of
2014 with the builder/developer, as per which the income’ under section 139, there he shall be eligible
construction of the property was expected to be to claim exemption under section 54 towards
completed by September, 2017. The AO however, purchase of the ‘new asset’ within a period of two
observed that the assessee had failed to substantiate years after the date on which the transfer took place
his claim of exemption under section 54, hence, he or towards construction of a new asset within a
declined to allow the same on ground that neither period of three years from the date on which the
the assessee had invested the amount of the LTCG transfer took place, subject to a rider that he should
in the new residential flat nor deposited the same in have deposited the unutilised amount of capital gain
a Capital Gain Account Scheme (CGAS). On in a CGAS account with a specified bank by not
appeal, the CIT(A) held that the assessee was later than the ‘due date’ applicable in his case for
entitled for claim of exemption under section 54 furnishing the ‘return of income’ under sub-section
only to the extent he had invested the LTCG up to (1) of section 139. It was found by the tribunal that
the ‘due date’ as envisaged under section 139(1). the instant case clearly falls within the sweep of the
Aggrieved, the assessee preferred an appeal before aforementioned ‘first limb’ i.e. sub-section (1) of
the Hon’ble ITAT. section 54. As the assessee in the instant case had
utilized an amount much in excess of amount of
Issue LTCG on sale of the residential property up till the
date of filing of its revised return of income under
Whether the assessee would be entitled to claim section 139(5) on 15-11-2014, therefore, his claim
exemption under section 54 to extent of of exemption under section 54 in respect of the
investment of capital gain up to date of filing of investment made towards the purchase of the new
his revised return of income under section residential property up to the date of filing of the
139(5)? revised return of income under section 139(5) was
found to be in order
Held
As per the Tribunal the outer limit for the purchase
or construction of the new asset as per sub-section
(2) of section 54 is the date of furnishing of the
‘return of income’ by the assessee under section
212 Ahmedabad Chartered Accountants Journal July, 2019
Unitech Ltd v. DCIT104 taxmann.com Tribunal News
22 165 (Del) transaction of capital financing. Such a presumption
Assessment year: 2011-12 Order Dated: cannot change the character of transaction. Even
12th February, 2019 otherwise also, a capital receipt is not an income
under section 2(24) unless it is changeable to tax as
Basic Facts capital gains under section 45. Therefore, Hon’ble
ITAT rejected the department’s contention of
The assessee company had invested a certain sum recharacterising share application money pending
by way of subscription of equity share in its wholly allotment as loan till the period it is allotted after a
owned subsidiary, Nuwell Limited. The share reasonable time.Accordingly, the adjustment made
application money was advanced in the financial by the TPO was directed to be deleted.
year 2010-11 and during the year, the shares had
not been allotted. According to the TPO, any DCIT v. DLF Limited [TS-346-ITAT-
independent entity would not have left the amount
in the hands of another entity without the same 23 2019] Delhi
being converted into equity shares within the Assessment Year: 2008-09
reasonable period or would have received interest Order dated: 27 May, 2019
on the same. Accordingly, he proposed to charge
interest at the rate of SBI prime lending rate.On Basic Facts
appeal; the assessee submitted that the transaction
did not fall within the definition of international The assessee had shown gross income from SEZ
transaction under section 92B(1) as capital activities, and after reducing the cost of construction
financing was different from capital contribution. and allocation of common expenses, it had declared
The matter reached to the Hon’ble ITAT. eligible profit and claimed the deduction u/s.80IAB
for AY 2008-09. However, the AO took the view
Issue that the claim of deduction u/s.80IAB is not
allowable, predominantly in view of the fact that,
Whether any money advanced for acquisition the P&H High Court had held that acquisition of
of shares being a capital asset, can be treated as SEZ land was illegal and also the sale of building
capital financing or not? to a co-builder is neither a business activity nor one
of the authorized operations of SEZ. He also held
Held that the lease of land for 49 years to M/s. DLF Asset
Ltd. tantamount to transfer of land, which is an
The Hon’b’e ITAT noted that the transaction of impermissible activity in terms of Rule 11(9) of SEZ
subscribing of share application money is always Rules, 2006. Accordingly, he denied entire claim
on capital account and would become taxable to of deduction and added the same to the income of
the extent it impacts the income. It is only income the assessee. On further appeal, CIT(A) after
which is to be adjusted to the arm’s length price considering the facts & circumstance especially in
and not tax on capital receipt. AO has the light of the SC judgmentpassed in assessee’s
recharacterized the share application money as a case against the High court, allowed the assessee’s
loan simply because during the year the shares have claim.Aggrieved, Revenue filed an appeal before
been not allotted. Such recharacterization cannot Delhi ITAT.
be made unless there is an intention of the parties
or there is any arrangement, understanding or action Issue
in concert. If parties have treated it to be share
application money for subscription of shares, then Whether the activity of developing of building
onus is upon the AO to prove it contrary that it is an and subsequent transfer of bare shell to co-
international transaction. Here AO has drawn developer is an authorized operation under the
presumption on the ground that there was delay in SEZ Act entitling the assessee for the claim of
allotment of shares, hence it is an international deduction u/s 80IAB?
Ahmedabad Chartered Accountants Journal July, 2019 213
Tribunal News Banglore Development Authority v.
Whether, because a deduction is allowed to 24 DCIT 176 ITD 833 (Bang)
transferee developer in respect of profits derived Assessment Year: 2012-13
from operation and maintenance, the deduction Order dated: 22 March, 2019
for development of a SEZ would not be available
to the developer? Basic Facts
Held The assessee development authority a Statutory
body constituted under the state government filed
The tribunal found that one of the main reasons for its return of income after claiming exemption u/s
denying the claim ofbenefit u/s.80IAB by the AO 11 of the Act. The main objects, functions and
was that theownership of land on which SEZ has activities of the assessee were to procure the land
been developed is indispute in view of decision of and develop the same into layouts by undertaking
Hon’ble Punjab and HaryanaHigh Court. But as land development activities and conver the same
the operation of the order of the High court order into sales plots/sites/flats/houses. It was engaged in
was stayedby the Hon’ble Supreme Court as per the development of infrastructure facilities such as
the tribunal the claim cannot be denied blindly construction of flyovers, ring roads, underpasses,
relying upon the order of the Hon’bleHigh Court. grade separators etc. It was also engaged in
Further the AO had mainly disallowance the claim construction of commercial complexes. The AO
of deduction on the ground thatactivity of concluded that the objects and activities of the
developing of building and subsequent transfer of assessee does not fall under first five limbs of
bare shell to co-developer is not the authorized definition of charitable purpose as envisaged under
operations under SEZ Act. It was found by the section 2(15) of the Act. The AO held that the
tribunal that before undertaking theactivity of assessee was generating huge amount of profits year
development of SEZ, the assessee has after year from sale of sites and flats indicating that
obtainedapprovals from time to time so as to comply the assessee was carrying out the activities as
strictly within theprovisions of SEZ Act r.w.s. business venture rather than charitable organization.
80IAB of I.T. Act. The Board hasgranted approval The activities were akin to the activities carried out
not only to the assessee for building thebare shell by real estate companies, property developers,
but also to the co-developer after examining the infrastructure firm etc. He accordingly held that the
various clauses of MOUs dated 29.01.2007 and activities of the assesse were squarely fell under
20.03.2008. It was an undisputed fact that, firstly, the ambit of activities which were in the nature of
the area has been notified as Special Economic trade, commerce or business. Accordingly he denied
Zone vide notification dated 06.12.2006 and the claim of the assessee under section 11. The
19.03.2007; secondly, the assessee has been CIT(A) upheld the order of the AO.
approved as Developer by BOA vide letter dated
25.10.2006 and 14.12.2007; and lastly, the Issue
operation of developing of building has been
approved as authorized operations and as such the Whether proviso of section 2(15) of the Act was
income has been derived from developing and sale applicable to the case of the Assessee.
of bare shell building in SEZ. Accordingly, all the
conditions spelt out in Section 80IAB stands HELD
fulfilled.
The Hon’ble ITAT noted that assessee’s income
stream was mainly generated from sale of sites sold
214 Ahmedabad Chartered Accountants Journal July, 2019
in the layouts formed by the assessee. Besides this Tribunal News
the assessee earned rental income and income from
tax/cess collection. The tribunal noted that the the intent and purpose of planned development of
assessee was an entity created by an enactment of Bangalore City and not with the purpose of profit
state government and had huge income from the making. The activity of formation of layouts and
sale of sites. As per the tribunal just because the allotment of sites is only carried out with the primary
assesee was a statutory entity is cannot said to be and main object to ensure planning and development
exempt from income tax but the tribunal also noted of Bangalore city and not with the intention of
that quantum of income generated being large by making profit.
itself also would not mean that the organization is
created for the purpose of making profits. As per tribunal it is the basic motive behind the
activity, which is important to be considered whether
The tribunal upheld the assessee contention that its it is one with profit motive or not. Merely because
case was covered in one of the first five limbs of surplus is generated from a particular activity of a
section 2(15) being preservation of environment assessee society it cannot be said that such activity
(including watersheds, forest and wildlife), the is in the nature of trade, commerce or business and
Tribunal found that the asseesee incurred expenses what needs to be seen is the intent and purpose of
on planting of one crore seedlings in the green belt starting such activity. The tribunal found that the
area for improvement of the environment and also assessee’s embarkation of the activity of setting up
had expended on the development of lakes. In of residential layouts, including the activity of sale
respect activity of allotment of sites and flats to the of sites and flats, was definitely not with a view to
economically weaker sections of society, the earn profit but to ensure planned urban development
tribunal observed that Relief for the poor does not and also to accomplish a social objective of
necessarily mean giving something free of cost to providing an opportunity to economically weaker
the poor and it also includes providing them things sections of society to be able to own a residence on
at a concessional rate. The tribunal found that the their own.
rules that govern the allotment of sites were so
formed in order to facilitate the economically weaker The tribunal found that from 2003 the assessee was
sections of society to purchase these sites. And in granted approval under section 12A and its objects
the case of construction of flats, it was clear from had not undergone any change or modification since
the very scheme and the name thereof, that these its enactment. In other words, the Income tax
flats were meant only for the Economically Weaker Department had considered the assessee to be
Sections of society. covered by the provisions of section 2(15). Though
after introduction of proviso to section 2(15), the
The Tribunal also found that the assessee had carried Department had cancelled the registration granted
out activities that fell under head ‘advancement of u/s 12A vide order dated 8-11-2011 but the
general public utility like construction of frade registration was restored by a decision of the
separators, PRR Bridges on Flyovers, renovation coordinate Bench of the Tribunal.
and remodeling works, Maintenance of BBMP
facilities, development of lakes etc. The Tribunal Accordingly the tribunal held that the activities of
also found that the assessee was constituted with the assesse are not hit by the proviso to section 2(15).
hhh
Ahmedabad Chartered Accountants Journal July, 2019 215
Unreported
Judgements
In this issue we are giving gist of an important CA. Sanjay R. Shah
decision by the Hon’ble ITAT, Ahmedabad in the [email protected]
case of M/s Shri Rang Infrastructure (P) Ltd.,
wherein the Hon’ble Tribunal discussed the law Gist Only
about the limitation provided under the Act for
passing an order in the context of provisions of A. Facts of the case
section 201 (3) of the Act. It would be interesting
to the readers to understand the law in this regard i) In this case the issue was about the validity of
based on the decision of Madras High Court as well the order passed by the A.O. u/s 201 (1) & 201
as Hon’ble Supreme Court discussed in this (1A) of the Act in respect of failure of the
decision. assessee to deduct TDS on the amount of
Rs.3.08 crores lent by it to its shareholders
In the Income Tax Appellate Tribunal which were covered under the provisions of
‘C’ Bench, Ahmedabad section 2 (22) (e) of the Act. The A.O. issued
show-cause notice dated 27/1/2016 seeking
Before Shri Pradip Kumar Kedia, Accountant explanation on applicability of section 201 (1)
Member & for alleged default in non-deduction of TDS
and consequent liability of interest u/s 201
Shri Mahavir Prasad, Judicial Member (1A).TheA.O. thereafter passed the order dated
17/10/2016 raising tax liability u/s 201 (1) for
ITA No. 2266/Ahd/2017 Rs.30,89,000/- and interest u/s 201 (1A) for
Assessment Year : 2010-11 Rs.24,40,310/-.
ITO (TDS) Vs. M/s Shri Rang ii) The assessee preferred an appeal before
Gandhinagar Infrastructure (P) Ltd. CIT(A) and took principal ground that the
Block No.14, 4th Floor Syamvan order passed on 17/10/2016 for the default
Udhyog Bhavan, B/h Vrundavan Hotel committed for A.Y. 2010-11 was passed
Sector-11 Koba Circle, beyond ‘6’ years from the Financial Year in
Gandhinagar-382011 Post-Koba which such default was committed and hence
Dist. : Gandhinagar – barred by limitation u/s 201(3). CIT(A)
382 007 following Gujarat High Court decision in the
case of Tata Teleservices 66 Taxman.com 157
PAN : AAICS9126J decided in favour of the assessee.
Appellant Respondent iii) Aggrieved by the order of CIT(A), revenue
preferred appeal before Hon’ble Tribunal.
Appellant by : Shri L.P. Jain, Sr. D.R.
B. Contentions before Hon’ble Tribunal
Respondent by : Shri M.K. Patel, A.R.
1. The DR contented that show-cause notice for
Date of Hearing : 15/07/2019 default was issued on 27/1/2016 which is
Date of Pronouncement : 04/09/2019 within ‘6’ years from the end of the Financial
216 Ahmedabad Chartered Accountants Journal July, 2019
Year, in which the default was committed and Unreported Judgments
continued by the assessee as contemplated u/s
194 of the Act. The said limitation period was case of the assessee. A reference was made to
thereafter enlarged from ‘6’ years to ‘7’ years the decision of Tata Teleservices vs. UOI
by the amendment carried out in section 201 (2016) 66 taxmann.com 157 (Gujarat) to
(3) by Finance Act (No. 2) 2014 w.e.f. 1/10/ buttress its claim for counting the period of six
2014. The DR thus submitted that when the years for the purposes of computation of
date of show-cause notice issued in a limitation. The AR thus submitted that the
continuing default was falling within limitation CIT(A) has rightly held the action of the AO to
period, the period available for passing the order be time barred and thus does not call for
u/s 201 (1) was ‘7’ years from the end of the interference. The AR, in the alternative,
Financial Year and since the order has been submitted that in case of incongruence with the
passed before the end of that period, the same view marshaled by the CIT(A), the issue
was not barred by the limitation. He also requires to be restored back to the file of the
distinguished the Gujarat High Court decision CIT(A) for adjudication of claim of the assessee
in the case of Tata Teleservices (supra) on the for non-applicability of sec. 2 (22) (e) on merit
ground that in that case the cause of action was as the same has not been decided at all.
not available at the time when it was started
since the same had become time barred when C. Held
the show-cause notice was issued in that case.
Whereas in the present case, the default The Hon’ble Tribunal referred to the provisions
committed by the assessee was existing and of section 201 (3) alongwith the amendments
continuing on the date of issue of show-cause made from time to time and held as under :
notice and therefore the law applicable on the
date of issue of show-cause notice would apply “9.1Section 201(3) provides that no order shall be
for determining the period of limitation. made sub section (1) deeming a person to be
an ‘assessee in default’ for failure to deduct tax
2. The A.R. on the other hand referred to the from a person resident in India at any time after
provision of section 201 (3) of the Act and the expiry of seven years from the end of
submitted that at the time of payment made or financial year in which the payment is made or
credited giving resulting into alleged default i.e. credit is given. It is the case of the assessee that
in F.Y. 2009-10, the assessee was governed by aforesaid period of limitation of seven years
the pre-substituted provision of section 201 (3) has been made effective w.e.f. 01.10.2014 and
whereby a period of ‘6’ years was provided. thus would apply to default committed
Further, it was submitted that issuance of show- thereafter (towards non-deduction etc.) and
cause notice within the time frame of ‘6’ years hence the pre-amended period of six years
is not enough. The law enjoined for passing would continue to apply to the case of the
order within the period of six years. Period of assessee, as the default relates to pre-amended
seven years enlarged w.e.f. 01/10/2014 by period. On the other hand, it is the case of the
Finance (No.2) Act 2014 is from specific date Revenue that the amended period of seven
and would thus apply to default committed after years would become applicable as the enhanced
that date and in respect of FinancialYear 2014- limitation period will have to be reckoned for
15 onwards and hence cannot apply to the all pending matters where default under s.
alleged default concerning F.Y. 2009-10 in the 201(1)/201(1 A) continues and subsists. It is
further case of the Revenue that once the
show-cause notice has been issued within the
pre-amended period of six years i.e. at the time
Ahmedabad Chartered Accountants Journal July, 2019 217
Unreported Judgments cases because in our opinion it is somewhat
inapt to describe section 34 with its many
of existence of default, it was entitled to avail amendments and validating sections as a
the extended period of seven years as limitation section of repose. Under that section there is
is only a procedural law. no repose till the tax is paid or the tax cannot
be collected. What the law does by prescribing
9.2 A bare reading of sub section (3) to section certain periods of time for action is to create a
201 suggests that the aforesaid sub section was bar against its own officers administering the
substituted by Finance (No. 2) Act2014 w.e.f. law. It tries to trim between recovery of tax and
01.10,2014 whereby the limitation period for the possibility of harassment to an innocent
passing the order has been extended to seven person and fixes a duration for action from these
years from the relevant financial year in which two points of view. These periods are
the payment is made or credit is given in occasionally readjusted to cover some cases
substitution of erstwhile six years period. As which would otherwise be left out and hence
per the pre-amended provisions, the order under these amendments.”
s. 201(1) could be passed by 31.03.2016
whereas as per the substituted provisions, the 9.4 Applying the principles the Hon’ble High
Revenue was entitled to make the order on or Court observed that the period prescribed in
before 31.03.2017. Thus, the order dated the un-amended section 275 cannot be
17.10.2016 has been passed as per the limitation described as a statute of repose. It further held
available under post-amended provision which that,
however stands barred by limitation specified
under pre-amended law. The question that is “It has also been held that this provision is a
to be decided is whether the amended provision procedural one. Learned counsel for the
would apply to the present case or the original assessee contended that he had acquired vested
provision would apply to the present case. right of the penalty proceedings having to be
Thus, interpretation of sec. 201(3) has been completed within two years from the
called into question. assessment and that the said vested right could
only be affected by express retrospective
9.3 In the context, it may be worthy to note a amendment Section 275 being only in the
decision of the Hon’ble Madras High Court in nature of a procedural provision, there is no
the case of ChettinadCorpn. (P.) Ltd. (1983) question of any vested right accruing to any
141 ITR 693 (Mad.) where the Hon’ble High assessee by reason of the assessment being
Court has referred to Hon’ble Apex Courts completed on. any particular date. It is now
observations in the case of S.C. Prashar v. well- settled that there is no vested right in any
VasantsenDwarkadas [1963] 49 ITR 1 as procedural matter. In the present case, therefore,
under:- the extended period of limitation would alone
apply.”
“... we wish to say a few words about the well-
known principle that subsequent changes in the 10. In the light of principles laid down by the
period of limitation do not take away an Hon’ble Supreme Court and Hon’ble Madras
immunity -which has been reached under the High Court as aforesaid, we have to examine
law as it was previously. In this sense statutes whether the period prescribed under the
of limitation have been picturesquely described unamended sec. 201(3) cannot be considered
as ‘statutes of repose’. We were referred to as statute of repose or a procedural one. Section
many cases in which this general principle has
been firmly established.We do not refer to, these
218 Ahmedabad Chartered Accountants Journal July, 2019
201(3) deals with law of limitation. Law of Unreported Judgments
limitation has been held to be procedural law
always having retrospective effect unless the totally misplaced as right of the Revenue to pass
amended statute provides otherwise as noted order has already become time barred at time
in CIT vs. Sadhuram (1981) 127 ITR 517 (Pun. of amendment by Finance (No. 2) Act 2014 in
&Har.). The sub-section (3) under that case. Thus, with the lapse of time a
consideration before us providing limitation substantive right had already accrued to the
cannot be termed as substantive law much less assessee which could not be taken away by a
a statute of repose. When it is not so termed, subsequent amendment. The limitation already
the exposition emanating from the above that barred could not be revived by later
in such cases of adjective law or procedural amendment. This is not the factual situation in
statute, amended provisions would apply. It is the instant case as noted earlier. The other
a trite proposition that neither Assessee nor decisions relied upon by assessee are also
Revenue should be given a step-motherly clearly distinguishable as the issue in the instant
treatment. Hence, it is equitable to held that case relates to law of limitation which is
Revenue can claim benefit of extension of time procedural one. The ratio of decision of
under limitation provision provided by way of Hon’ble Supreme Court in Brij Mohan vs. CIT
amendment, since at the time of amendment, a 120 ITR 30(SC) is also not applicable as no
valid cause of action was continuing and return has been filed by the assessee in the
subsisting and limitation was not concluded. instant case and the default is not merely
committed in this case but is also continuing.
11. The show-cause notice in the instant case was
duly issued within the period of six years at 14. The issue is thus decided against the assessee
which time the default in deduction of TDS and in favour of the Revenue. The order of the
was both committed as well as continuing and CIT(A) therefore requires to be set aside on
therefore the assessee, in our view, cannot seek this score. We however note in the same vain
immunity from the applicability of sec. 201(1) that the CIT(A) has not adjudicated the issue
for alleged default where the order has been on merits. The matter is accordingly remanded
passed within seven years as provided in back to the CIT(A) for adjudication for
amended law. applicability of sec. 2(22)(e); sec. 194 and
consequent application of sec. 201(1) and s.
12. While holding so, we agree to the contentions 201(1A) on merits in accordance with law after
raised on behalf of Revenue that CIT(A) has taking note of the relevant facts on record. It
wrongly observed that the cause of action had shall be open to the assessee to adduce
ceased and the applicability of sec. 201(1) had evidences and make representations before
already become time barred at the time of CIT(A) on aspects concerning merits of
amendment and thus extended time limit could applicability of sec. 201(1/201(1A) in the facts
not be conferred on AO. The assessee has no of case.
where contended or demonstrated on facts that
TDS return was filed and thus the case was 15. In the result, the appeal of Revenue is allowed
not time barred as wrongly assumed. for statistical purpose.”
13. The reliance placed on behalf of assessee on hhh
the decision of Tata Teleservices (supra) in
Ahmedabad Chartered Accountants Journal July, 2019 219
Controversies
Issue CA. Kaushik D. Shah
[email protected].
Whether TDS liability arises when provision is
mode for an estimated expenditure. Whereas section 40(a)(ia) of the Act provides:
Proposition 40……….
XYZ Ltd is an assessee company doing business (a)…………..
of construction of Projects, follows the contract
completion method i.e Project completion method (ia) [Thirty percent of any sum payable to a
of Accounting and prepared its financial statements resident], on which tax is deductible at source under
accordingly. To arrive at the true and correct income Chapter XVII-B and such tax has not been deducted
it has made provision for certain expenses which or, after deduction, [Has not been paid on or before
were to be incurred in future. As the bills were not the due date specified in sub-section (1) of section
received for the said expenses for provision, the 139]
assessee company has not made TDS on the said
provision expenses The AO proposes to disallow ‘Provided that where in respect of any such sum,
the said provision for expenses u/s 40(a) (ia) of the tax has been deducted in any subsequent year or,
Income Tax Act 1961. It is proposed that provision has been deducted in the previous year but paid in
made for estimated expenditure is not subject to TDS any subsequent year after the expiry of the time
provision. prescribed under sub-section (1) of section 200, such
sum shall be allowed as a deduction in computing
Views against the Proposition the income of the previous year in which such tax
has been paid.”
Chapter XVII Part B of the Income tax Act deals
with Deduction of Tax Source. Wherein by various Thus when provision is made for expenses
sections it has been provided to deduct tax at source wherever applicable tax has to be deducted and in
on different payments relating to expenses and this case as the tax has not been deducted, section
under various sections explanation as under has 40(a)(ia) comes into play and the proposition for
been provided. disallowance as per AO is applicable.
“Explanation”- For the purpose of this section, Views in Favor of the Proposition
where any income by way of interest on securities
is credited to any account, whether called “Interest The ITAT Kolkata Bench ‘B’ in the case of Bengal
payable account” or “ Suspense account “ or by Peerless Housing Dévet Co. Ltd V/S DCIT Circle
any other name, in the books of account of the 7(1) Kolkata ITA No. 2414 & 2459 (kol.) of 2017
person liable to pay such income, such crediting Asset Year 2012-13 vide order dated 31-12-2018
shall be deemed to be credit of such income to the has held as under:
account of the payee and the provision of this section
shall apply accordingly. “Recognition of contract revenue and expenses
are done by the contract or sby following either
percentage of completion method or completed
contract method. The completed contract
method is also known as project completion
method. In percentage completion method the
220 Ahmedabad Chartered Accountants Journal July, 2019
revenue and contract costs associated with the Controversies
construction contract shall be recognized as
revenue and expenses respectively by reference expenses and entire sales receipts in the profit
to the stage of completion of the contract &loss account. Since in project completion
activity at the end of the accounting period. method, the entire expenses and entire sales
should be shown, therefore, it is necessary for
- Whereas incompleted contract method, which the assessee to make provision for estimated
is also known as project completion method, expenditures which are to be incurred in
there venue and expenses are recognized at subsequent years on account of minor/
the time of substantial completion of the project. miscellaneous work. If the assessee does not
The substantial completion of the project means make provision for estimated expenditures, like,
the project should be completed by and large, exp. on minor/miscellaneous work, then in that
except to some ancillary and minor/ case assessee will not be able to show true profit
miscellaneous work, which can be completed and loss, in it profit and loss account.As pointed
in subsequent years. Another feature of project out, in project completion method, the assessee
completion method is that, in this method, the prepares profit and loss account and other
financial statements, that is, profit and loss financial statements once in life of a project,
account and’balance sheet is prepared once in therefore, these estimated expenditures, like,
the life of the project there fore it is necessary expenditure on minor/miscellaneous work, can
to make the provision in the book so account not be shown next year. Another important
for expenses like ancillary and minor/ point is that in project completion method, the
miscellaneous work, which are yet to be assessee has shown entire sales/revenue
completed or to be completed in subsequent therefore he is entitled to record the entire
years. The assessee company is following expenses which had been incurred by him or
project completion method and made provision to be incurred to earn the said entire sales/
for expenses on account of ancillary and minor/ revenue. Therefore, in order to derive the true
miscellaneous work, which is to be completed net profit in project completion method it is
in subsequent years. necessary to show these estimated
expenditures, like, expenditure on minor/
- The Assessing Officer, in the assessee’s case miscellaneous work. Hence, the treatment made
under consideration has not disputed the by the assessee in respect of estimated
method, which has been adopted by the expenditures, like, expenditure on minor/
assessee. The assessee as a matter of miscellaneous work, in its books of account is
consistency has been following the project accepted.
completion method. In project completion
method, as pointed out earlier the assessee Now since the expenditure are estimated only
prepares balance sheet, profit and loss account and work will be executed against these
and other financial statement once in a life of expenses in subsequent years therefore, the
the project i.e. for a particular project the payee is not known hence it is not possible for
financial statements consisting profit and loss assessee to deduct TDS on these estimated
account and balance sheet is prepared only expenditure, like, Exp. on minor/miscellaneous
once in a life of the said project. Therefore, if work, which is to be completed in years to
the assessee is of the view that his project has come. Therefore, this is a kind of condition
substantially completed and only some minor/ which is mandated by the project completion
ancillary and miscellaneous works are pending, method that the financial statements of a
which is yet to be completed, in that situation, particular project is to be made once in a life of
the assessee prepares financial statements, in the project, on completion of substantial
that year it self and will show the entire activity, therefore, the assessee does not have
any option but to make estimate for expenditure
Ahmedabad Chartered Accountants Journal July, 2019 221
Controversies recognized the entire income from the project
and the same is credited in the books of
on minor/miscellaneous work. When the account. Therefore in the assessee’s case under
expenses are estimated, the payee is not known, consideration, since the assessee has disclosed
hence, without knowing the payee, it is not its entire project receipts of its ‘Anahita’project
possible to deduct TDS. in the assessment under consideration,
therefore, all the expenses incurred or to be
The department is in appeal against the amount incurred in connection with the said project
deleted by the Commissioner (Appeals) on the were also taken into account so as to arrive at
ground that the assessee has not submitted bills the correct net profit from this project.
and vouchers. It is noted that the assessee has
furnished all the bills and vouchers relating to - According to Hon. I.T.A.T Considering the
said expenditure, therefore the stand of the entirety off acts and circumstances of the case
revenue that bills and vouchers have not been and the material on record, the stand of the
submitted by the assessee is not tenable hence revenue can not be upheld, therefore, the
the contentions of the revenue that the assessee Assessing Officer is directed to delete the
has not submitted or produced the bills and addition. The order of the Commissioner
vouchers is not acceptable. It is also noted that (Appeals) in respect of deletion is also upheld,
the accounts of the assessee were duly audited since this amount pertains to purchase of raw
by the statutory auditor, therefore, the allegation materials. therefore, no TDS is attracted. Hence,
of the revenue, about non availability of bills the appeal filed by the revenue is dismissed and
and vouchers appears to be not correct and that filed by the assessee is allowed.”
therefore, the appeal of the revenue is dismissed.
Summation
It is noted that if a business liability has
definitely arisen in the accounting year, the The Hon’ble Supreme Court in the case of Calcutta
deduction should be allowed although the Co. Ltd. v. CIT [1959] 37 ITR 1 it has held as under:
liability may have to be quantified and
discharged at a future date. What should be “The appellant bought lands and sold them in plots
certain is the incurring of the liability. It should fit for building purposes undertaking to develop
also be capable of being estimated with them by laying out roads, providing a drainage
reasonable certainty though the actual system and installing lights etc. When the plots were
quantification may not be possible. If these sold the purchaser paid only a portion of the purchase
requirements are satisfied the liability is not a price and undertook to pay the balance in
contingent one. In the assessee’s case under installments. The appellant in its turn undertook to
consideration the liability to pay the expenses carry out the developments within six months but
(estimated expenditure explained above) is time was not of the essence of the contract.
present in the assessment year under
consideration though it should be discharged In the relevant accounting year the appellant
at a future date. actually received in cash only a sum of Rs. 29,392
towards sale price of lands, but in accordance with
The assessee is following project completion the mercantile system of accounts adopted by it,
method and in this method the revenue is credited in its accounts the sum of Rs. 43,692
recognized when a substantial portion of the representing the full sale price of lands. At the same
construction work is completed although some time it also debited an estimated sum of Rs. 24,809
unfinished ancillary works may remain as expenditure for the developments it had
pending. The total expenditure in respect of undertaken to carry out, even though no part of that
such ancillary unfinished work is estimated and amount was actually spent. The Department
a provision is made in the books of account. disallowed the expenditure.
This principle is adopted when the assessee has
222 Ahmedabad Chartered Accountants Journal July, 2019
Held, (i) that the undertaking to carry out the Controversies
developments within six months from the dates of
the deeds of sale (which, in view of the fact that levying interest under section 201 (1 A) holding
time was not of the essence of the contract, meant a that the assessee had failed to deduct tax at source
reasonable time) was unconditional, the appellant in respect of the provision made under several heads
binding itself absolutely to carry out the same. That of income amounting to Rs. 15,07,25,637. The
undertaking imported a liability on the appellant Commissioner (Appeals) sustained the addition. On
which accrued on the dates of the deeds of sale, appeal:
though that liability was to be discharged at a future
date. It was thus an accrued liability and the Held, allowing the appeal, that according to the
estimated expenditure which would be incurred in scheme of tax deduction at source under Chapter
discharging the same could be deducted: from the XVII B, credit for the tax deduction at source is to
profits and gains of the business, and the amount to be given to the deductee. Thus the identification of
be expended could be debited in account the person from whose account Income-tax was
maintained in the mercantile system of accounting deducted at source is a pre-requisite condition so
before it was actually disbursed. The difficulty in as to make the provision for Chapter XVII-B
the estimation thereof did not convert the accrued workable. Tax deducted at source is considered to
liability into a conditional one because it was always be tax paid on behalf of the person from whose
open to the Income-tax authorities concerned to income the deduction was made and therefore credit
arrive at a proper estimate thereof having regard to is to be given to such person. Section 203(1) lays
all the circumstances of the case. down that for all tax deduction at source, the tax
deductor has to furnish a certificate to the person to
The expression “profits or gains” in section 10(1) whose account such credit is to be given. Therefore,
of the Income-tax Act has to be understood in its when the tax deductor cannot ascertain the payee
commercial sense and there can be no computation who is the beneficiary of a credit of tax deduction
of such profits and gains until the expenditure at source, the mechanism of Chapter XVII-B
incurred for the purpose of earning the receipts is cannot be put into service. The Assessing Officer
deducted therefrom whether the expenditure is was to verify whether the payee was identifiable
actually incurred or the liability in respect thereof and the amount payable to him was ascertainable.
has accrued even though it may have to be Then the assessee would be required to deduct tax
discharged at some future date.” at source in respect of such provision. However, if
payee was not identifiable, the provisions of
Further in respect of deducting tax at source let me Chapter XVII-B i.e., tax deduction at source, could
refer to the case of Apollo Tyres Ltd. v. Dy. CIT not be pressed into service and, therefore, the
[2017] .163 ITD 177/78 taxmann.com195 (Delhi- assessee was not required to deduct tax at source in
Trib.) wherein it was held as under: such a case. The Assessing Officer was to re
adjudicate the issue afresh after examining the
“A survey was conducted at the premises of the facts.”
assessee. Thereafter, the summons were issued
under section 131 of the Income Tax Act, 1961 Thus in my opinion the proposition of the AO to
asking for details and information for the financial disallow the expenses estimated can not be
years 2009- 10, 2010-11 and 2011-12, in response subjected to T.D.S.
to which, necessary details were furnished by the
assessee. Thereafter, the Assessing Officer passed hhh
an order raising a demand under section 201 and
Ahmedabad Chartered Accountants Journal July, 2019 223
Judicial
Analysis
Advocate Tushar Hemani
[email protected]
Mandate of limited scrutiny cannot extended so vouchers due to the nature of business and
as to make other additions. mostly estimated @3%. The case before us also
falls in the similar category and assessee was
5 Garine Chandramouli vs. ITO (ITA not able to maintain proper records and shown
No.429/HYD/2018) AY: 2014-15 dated profit @2%. For the sake of judicial precedent,
03-04-2019 we are intended to proceed with the estimation
but the issue before us is not on rejection of
xxx… books or estimation of income. Before us,
6. Considered the rival submissions and material whether limited scrutiny mandate can be
extended. As per the CBDT directive,
on record. The assessment was selected to Assessing Officer cannot do so without
verify the bank deposits and turnover of the following proper procedure. In the given case,
assessee whether they match. As the assessee Assessing Officer has made extensive
is in the business of purchase and sale of liquor assessment without mandate. Therefore, we
and electricals, it is a fact that assessee may not need to restrict ourselves to address this issue.
be able to maintain the sale bills as the sales are However, we direct the Assessing Officer to
mostly on across the counter. But the purchases accept the books of account since he has not
are from the registered source, mostly from found any discrepancies in verification of
Government agencies. It is not difficult to deposits and turnover as per limited mandate.
determine the actual sales. We notice that Even in case, Assessing Officer found
Assessing Officer has verified the expenses etc., discrepancy, he could have invoked Section 68.
which is not the mandate of limited scrutiny. Therefore, the ground raised by assessee is
The CBDT directives are binding on the allowed.
Assessing Officer and in case, Assessing
Officer finds that the assessment has to be made xxx…
on extensive basis due to the reason that there
are incidences of tax evasion found. Assessing Suresh Jugraj Muthavs Addl. CIT (ITA
Officer can extend the assessment by taking
due permission from CIT/Pr.CIT. In this case, 6 No. 05/Pun/2016) AY 11-12 dated 04/05/
there is no issue of any tax evasion and the 2018
Assessing Officer suo motto did the extensive
assessment even though the mandate was to 9. We heard both the parties and perused the
make limited scrutiny. orders of the Revenue on the legal issue raised
by the assessee. We have also considered the
6.1. Considering the facts of the case, the assessee decisions relied on by both the parties. It is an
could not submit the sales bills due to the undisputed fact that the reason for which the
natureof business and Assessing Officer has not case was picked up for limited scrutiny relates
found any discrepancy in the bank deposits and to the AIR information on the cash deposits in
turnover of the assessee. We are coming across the savings bank account. It is also an
so many cases of wine business, in which undisputed fact that the AO did not obtain the
assessees were not able to submit proper written approval of the concerned
224 Ahmedabad Chartered Accountants Journal July, 2019
Judicial Analysis
Commissioner before extending the scope of information received through AIR.
scrutiny to the interest disallowed and denial However, a case may be taken up for wider
of claim of deduction u/s.54 of the Act. Further, scrutiny with the approval of the
it is on record that the Board did not permit the administrative Commissioner, where it is
Assessing Officers to extend the scope of felt that apart from the AIR information
scrutiny to the issues other than the ones which there is a potential escapement of income
are authorised the Board in this regard under more than Rs.10 Lacs.
CASS. It is also a fact that judgment cited by
the Ld. DR for the Revenue in the case of 3. It has also been decided that in all the cases
BanqueNationale De Paris Vs. CIT 237 ITR which are picked for scrutiny only on the
518 (Bom.) was not issued in connection with basis of AIR information, the notice u/
the jurisdiction of the AO in matters relating to s.143(2) of Income Tax Act, 1961 should
extension of areas of scrutiny to the ones than clearly be stamped with “AIR” case.
the authorised ones by the Board. In this
connection, we perused the CBDT Instruction 11. Further, on perusing the orders of the Revenue,
No.7/2014, dated 26-09-2014 and find it we find the facts are similar to the ones already
relevant to extract the relevant lines. The same decided by the Pune Bench of the Tribunal in
reads as under : the case of M/s. S.F. ChouguleVs. JCIT (supra)
“4. In case, during the course of assessment is relevant to the facts present case of the
assessee. We therefore proceed toextract the
proceedings, it is found that there is potential relevant findings given by the Tribunal here as
escapement of income exceeding Rs.10 under :
lakhs (for non-metro charges, the monetary
limit shall be Rs.5 lakhs) on any other “10.The learned Authorized Representative for
issue(s) apart from the AIR/CIB/26AS the assessee pointed out that the assessee
information based on which the case was was engaged in road construction and
selected under CASS requiring substantial building of projects. He pointed out that
verification, the case, may be taken up for during the course of Survey on
comprehensive scrutiny with the 30.01.2008, the assessee had made a
approval of the Pr.CIT/DIT concerned. declaration of Rs.33,18,000/- + Rs.12
However, such an approval shall be lakhs + Rs.13,467/- which was included
accorded by the Pr.CIT/DIT in writing in the return of income filed by the
after being satisfied about merits of the assessee. He further stated that the case of
issue(s) necessitating wider and detailed assessee was picked up for scrutiny. The
scrutiny in the case. Cases so taken up for learned Authorized Representative for the
detailed scrutiny shall be monitored by the assessee brought to our attention, the
Jt. CIT/Addl.CIT concerned.” application made under the Right to
Information Act, as to the basis for
10. We also perused the CBDT letter dated 08-09- selection of case of the assessee for the
2010 which deals with selection of cases for relevant year under scrutiny. It was
scrutiny on the basis of data in AIR returns and specifically asked whether the case was
subsequent assessment proceedings. The selected for scrutiny under CASS. In reply,
instructions given in the said letter reads as the Central Public Information Officer
under : stated that the case of assessee was not
selected for scrutiny under CASS. Further,
“2. The above mentioned guidelines have been the assessee has asked as to why its case
reconsidered by the Board and it has been was selected for scrutiny since it was
decided that the scrutiny of such cases covered by relaxed scrutiny norms. In
would be limited only to the aspects of answer, it was pointed out that the case was
Ahmedabad Chartered Accountants Journal July, 2019 225
Judicial Analysis
selected for scrutiny, in view of guidelines said decision has been approved by the
for selection of scrutiny issue during Hon’ble High Court of Andhra Pradesh in
financial year 2010-11; copies of RTI CIT Vs. Smt. Nayana P. Dedhia (2004)
application and the reply are placed at 270 ITR 572 (AP). Further, he referred to
pages 20 to 22 of the Paper Book. The the ratio laid down by the Hon’ble High
learnedAuthorized Representative for the Court of Delhi in CIT Vs. Best Plastics (P)
assessee further referred to the criteria of Ltd. (2007) 295 ITR 256 (Del) for the
guidelines for income-tax scrutiny, copy of proposition that where the guidelines are
which is placed at page 23 and 24 of the laid down for selection of cases for scrutiny
Paper Book and reiterated that in the case and if the case of the assessee was taken
of assessee, Survey was carried out and up for scrutiny in violation of CBDT
criteria was fixed for not picking up the Instructions, then the assessment order has
case under scrutiny and the assessee clearly to be set aside. He further referred to the
fulfils the same. He further pointed out that decision of Hon’ble Bombay High Court
in case the criteria is not met with, then as in Bombay Cloth Syndicate Vs. CIT
per clause (g), the Assessing Officer can (1995) 214 ITR 210 (Bom) for the
select any return for scrutiny after proposition that the CBDT Instructions
recording reasons and after obtaining the were binding.
approval of CCIT/DGIT. In this regard, he
pointed out that no such approval was 11. The learned Departmental Representative for
received from the CCIT. Our attention was the Revenue on the other hand, pointed out that
drawn to the letter dated 13.05.2013 issued as per the guidelines of CBDT, the cases could
from the office of ACIT, Circle (1), Sangli, be selected, may be not through CASS. Our
wherein the Assessing Officer informed the attention was drawn to the order of Assessing
assessee that there was no record to show Officer, wherein he has elaborately dealt with
that previous approval of CCIT was the issue that income increased during the year
obtained to select the cases manually for only because of notional disallowance of
scrutiny for assessment year 2008-09. The expenses under section 40(a)(ia) of the Act and
learned Authorized Representative for the not because of declaration of additional income
assessee stressed that where the selection by the assessee. He stresses that the case was
was not through CASS but was manually selected under normal scrutiny proceedings and
made, then the previous approval of the excess expenditure of bad debts claimed by the
CCIT was compulsory. Referring to the assessee were disallowed by the Assessing
order of CIT(A), the assessee pointed out Officer. He then went into merits of the case. It
that the CIT(A) states that the case of was also stressed by the learned Departmental
assessee was selected through CASS and Representative for the Revenue that the
also mentions that the contention of declared income in the hands of assessee means
assessee would have been acceptable had the book profit.
the case been manually selected for
scrutiny. The learned Authorized 12. The learned Authorized Representative for the
Representative for the assessee further assessee in rejoinder pointed out that in the case
placed reliance on the ratio laid down by of assessee, he declared additional income
the Hyderabad Bench of Tribunal in Smt. during the course of Survey. He further pointed
Nayana P. DedhiaVs. ACIT (2003) 86 ITD out that the details of expenses were compared
398 (Hyd) for the proposition of binding by the Assessing Officer.
nature of CBDT circulars upon the IT
authorities. He further pointed out that the 13. We have heard the rival contentions and perused
the record. The preliminary issue raised in the
present appeal by way of ground of appeal
226 Ahmedabad Chartered Accountants Journal July, 2019
No.5 is against the validity of assessment made Judicial Analysis
in the hands of assessee. The assessee claims
that the case of assessee was not selected for return of income declaring income of Rs.
scrutiny under CASS but was selected 81,64,590/-. The case of authorities below is
manually. For selection of any return for that the assessee had not fulfilled the conditions
scrutiny manually by the Assessing Officer, the laid down in the guidelines for taking up the
requirement of guidelines issued for this case for scrutiny assessment year under
purpose for relevant assessment year was that consideration and hence, there was no merit in
the same should be after obtaining approval of the claim of assessee that it had fulfilled the
the CCIT /DGIT. Since no such approval was conditions laid down in guidelines. The whole
received from the CCIT / DGIT, the Assessing gamut of arguments and discussion in the orders
Officer had no jurisdiction to proceed with the of Assessing Officer and CIT(A) is on this
scrutiny assessment in the case of assessee. The account that the assessee had not fulfilled the
assessee had raised the issue before the conditions relating to Survey cases for financial
Assessing Officer and CIT(A) but the facet of year and the case of the assessee could be
argument beforethe authorities below was that picked up for scrutiny. The assessment order
the case of assessee could not be selected for was passed on 09.09.2010 and the appellate
scrutiny under CASS since in the case of order was passed on 04.01.2012. The assessee
Survey, certain conditions were laid down and thereafter moved an application under the Right
the assessee having fulfilled the said conditions, to Information Act, wherein a specific question
then no scrutiny could takes place in the hands asked was with regard to selection of scrutiny
of assessee. and other relevant information relating to
assessment year 2008-09. The specific question
14. In the facts of the case, Survey under section asked by the assessee was whether its case was
133A of the Act was carried out at the premises selected for scrutiny under CASS and in case
of assessee on 30.01.2008. During the course it was not selected under CASS and why the
of Survey, the assessee made declaration of same was picked up for scrutiny. The assessee
additional income of Rs.45,93,467/- which was also asked that under which norms the case was
offered as additional income over and above selected for scrutiny and whether relaxation in
the income to be returned for the year under selection of cases in which survey action was
consideration. The assessee claims that it had carried out on fulfilling the criteria was
disclosed the said additional income in its return available in the said norms or not. In reply, it
of income wherein the return was filed was stated that the guidelines / instructions were
declaring income of Rs.81,64,598/-. However, followed and since the guidelines were
the perusal of computation of income reflected confidential in nature, the copy of same could
that net profit shown in Profit & Loss Account not be provided. In reply to the next question
was Rs.11,62,084/- and certain disallowances whether the case was selected under CASS,
were made on account of personal expenses, the categorical answer was ‘No’. The said RTI
capital expenses and disallowances under reply further stated that the case was selected
section 40(a)(ia) of the Act at Rs.68,31,574/- for scrutiny in view of the guidelines contained
and other disallowances and the income was in F.No.225/93/2009/ITA.II.
aggregately shown at Rs.85,69,672/- The
Assessing Officer and CIT(A) thus, were of 15. The said guidelines for selection of scrutiny
the view that the assessee had not included the were published and it was pointed out that the
additional income of Rs.45,93,467/-, where said guidelines were only for the use of Officers
it had declared the business income at of Income Tax Department and the same could
only Rs.11,62,084/-, though it had filed the not be disclosed even under the RTI Act, 2005.
The said application under the RTI Act and
theorder under the RTI Act are placed at pages
Ahmedabad Chartered Accountants Journal July, 2019 227
Judicial Analysis
20 to 22 of the Paper Book. The assessee has the approval of CCIT / DGIT. However, the
also placed the copy of guidelines issued for Assessing Officer vide letter dated
scrutiny, copy of which is placed at page 23 of 13.05.2013 has categorically mentioned that
Paper Book. The said guidelines were for use no previous approval of CCIT was obtained
of Income Tax Department, wherein selection to select the case manually for scrutiny for
criteria was provided which was applicable to assessment year 2008-09. In the above
all Income Tax returns at all stations. The circumstances, where the order has been
guidelines vis-à-vis survey cases are passed against the norms laid down by the
provided therein and vide clause (g), it is CBDT vide its guidelines which were
provided that the Assessing Officer may binding upon the Assessing Officer, then the
select any return for scrutiny after order passed by the Assessing Officer is bad
recording reasons and after obtaining the in law. The instructions issued by the CBDT
approval of CCIT / DGIT. The cases under are to be strictly followed by the authorities
this category should be selected, if there are i.e. Assessing Officer and in the absence of
compelling reasons and cases not selected the same, the assessment order passed in the
under CASS. These cases are watched by the case is annulled. Such is the proposition laid
CCIT / CIT for the quality of assessment. The down by the Hon’ble High Court of Andhra
said guidelines are as per F.No.225/93/2009/ Pradesh in CIT Vs. Smt. Nayana P. Dedhia
ITA.II. The reply under RTI also refers to the (supra) and the Hon’ble High Court of Delhi
said guidelines and admittedly,these guidelines in CIT Vs. Best Plastics (P) Ltd. (supra). In
were used to select the case of assessee for view thereof, we hold that where the
scrutiny. Further, the assessee also filed on Assessing Officer has failed to follow the
record letter dated 13.05.2013 issued by the guidelines issued for selecting the cases for
ACIT, Circle (1), Sangli, wherein in reply to scrutiny and in the facts of the present case,
the letter of assessee, it has been informed that where the case was selected manually for
there is no record to show that previous approval scrutiny, but no previous approval of CCIT
of CCIT / DGIT was obtained to select the case was obtained, then the Assessing Officer
manually for scrutiny for assessment year 2008- lacks jurisdiction to carry out the scrutiny
09. So, taking into consideration the said assessment in the present case and
correspondence which has come into existence accordingly, assessment order passed by the
after the date of passing of assessment order Assessing Officer is bad in law. Hence, we
and appellate order, the first thing to be taken hold so. Since the assessment order is held to
note of is that the case of assessee was not be bad in law, the issue on merits becomes
selected for scrutiny in CASS which is the reply academic and the grounds of appeal raised by
given in answer to RTI query as per letter dated both the assessee and the Revenue in their
12.04.2012. The second aspect is that the case respective appeals are infructuous. The appeal
of assessee was selected for scrutiny in view of assessee is thus, allowed and the appeal of
of the guidelines contained in F.No.225/93/ Revenue is dismissed.”
2009/ITA.II. The assessee has placed the copy
of said guidelines on record at page 23 of the Therefore, the Board circular do not permit the
Paper Book, wherein it is provided that the case AO from converting the limited scrutiny case
of any assessee may be selected for scrutiny like the present one to the unlimited one without
after recording reasons and after obtaining the the approval of Administrative Commissioner
approval of CCIT / DGIT. In other words, the of Income Tax.AO did not mention the reasons
case of assessee could be picked up for scrutiny for not taking such an administrative approval
manually but the same had to be after recording before making the said addition. As such, the
reasons for such an action and after obtaining Pune Bench of the Tribunal has already taken
228 Ahmedabad Chartered Accountants Journal July, 2019
Judicial Analysis
the favourable view in these matters in favour 16. Thus, evidently, the Income TaxAuthorities are
of the assessee. We do not understand why AO bound to observe and follow the instructions
failed to take approval for such conversion. of the Board. The operative word in section
Considering the settled nature of the issue, we 119(1) is ‘shall’. Judicial decisions have
allow the legal ground raised by the assessee recognized this position.
vide Ground No.1 and hold that the assessment
order passed by the AO is bad in law and void- 17. In the present case, the assessee’s case was
ab initio. Consequently, we find adjudication picked up for scrutiny on the basis of AIR
of other grounds by the assessee on merits information. The notice dated 21.09.2012
becomes academic. Therefore, the said (supra) was a stamped with ‘AIR Only’, in
grounds are dismissed are academic. compliance with para 3 of the CBDT
instruction (supra) dated 08.09.2010.
7 Gurpreet Kaur vs. ITO (ITA No. 87/Asr/
2016) AY 11-12 dated 24/03/2016) 18. The CBDT Instruction dated 08.09.2010, for
facility, is reproduced as under:
xxx…
“F.No.225/26/2006-ITA.II (Pt.)
13. The question is whether, firstly, the AO is bound
by the CBDT Instruction F.No.225/26/2006- Government of India,
ITA-II(Pt.) dated 08.09.2010 and as to whether Ministry of Finance
in the present case, while computing capital Department of Revenue
gain and denying benefit of section 54 to the Central Board of Direct Taxes,
assessee, the AO has contravened the said New Delhi, dated the 8th September, 2010
instructions, thereby rendering the assessment
order invalid; and secondly, as to whether the To
ld. CIT(A) is correct in upholding the All Chief Commissioners of Income Tax,
assessment order. All Directors General of Income Tax,
14. Section 119(1) of the Act reads as follows: Sir/Madam,
“The Board may, from time to time, issue such Subject: Selection of cases for scrutiny on the
orders, instructions and directions to other basis of data in AIR returns and subsequent
income-tax authorities as it may deem fit for assessment proceedings-regarding.
the proper administration of this Act, and such
authorities and all other persons employed in Reference is invited to Board’s letter of even
the execution of this Act shall observe and number dated 23rd May, 2007 regarding scope
follow such orders, instructions and directions of enquiry in the scrutiny cases selected only
of the Board.” on the basis of information received through
the AIR returns.
15. In ‘Crystal Phosphates Ltd. vs. ACIT’, 34 CCH
136 (Del. Trib.), it has been held that once the 2. The above mentioned guidelines have been
CBDT had issued instructions, the same have reconsidered by the Board and it has been
to be followed in letter and spirit by the AO. decided that the scrutiny of such cases
would be limited only to the aspects of
14. In ‘Amal Kumar Ghosh vs. Addl. CIT’, 361 information received through AIR.
ITR 458 (Cal.), it has been held that when the However, a case may be taken up for wider
department has set down a standard for itself, scrutiny with the approval of the
the department is bound by that standard and it administrative Commissioner, where it is
cannot act with discrimination. felt that apart from the AIR information
there is a potential escapement of income
15. No decision contrary to the above decisions more than Rs. 10 Lacs.
has been filed.
Ahmedabad Chartered Accountants Journal July, 2019 229
Judicial Analysis a separate agreement to sell and from whom,
the assessee had received a sum of Rs. 3 lakhs
3. It has also been decided that in all the cases at the time of agreement “for their examination
which are picked for scrutiny only on the in order to ascertain whether the agreement,
basis of AIR information, the notice u/s was finalized or cancelled”. The AO observed
143(2) of Income Tax Act 1961 should that this proceedings was limited to the extent
clearly be stamped with “AIR Case”. of the AIR information.
This should be immediately brought to the 23. Evidently, the matter of the other agreement to
notice of all the officers working in your sell does not stand covered in the AIR
region. information, which was regarding the cash
deposits of Rs. 25 lakhs, which the assessee
Yours faithfully, had adequately explained, as above. So, it was
(Ajay Goyal) obviously not within the purview of the AO to
Director (ITA.II)” ask the assessee to produce Smt. Balbir Kaur
and Smt. Kamaljit Kaur, or to make addition
19. As per the table at page-1 of the AO, the AIR of Rs. 3 lakhs, as was done.
information was regarding transaction of Rs.25
lakhs dated 31.3.2011 (Entry No.2 in the table 24. The assessee, as per para 3.1 of the assessment
is, as stated, merely a repetition of Entry No.1). order, had purchased a plot for Rs.11,92,500/-
According to para-3 of the assessment order, plus stamp duty of Rs.83,475/- on 28.07.2009.
the details of this are deposits of Rs.9.5 lakhs Since the assessee did not produce the two
on 07.05.2010, Rs.9.5 lakhs on 08.05.2010 ladies for examination, the AO held that the
and Rs. 6 lakhs in cash by the assessee in her plot purchased did not have any relation to the
savings bank account with OBC, Jalandhar. house sold and thus, the assessee had wrongly
claimed exemption under section 54 of the Act.
20. Para 2 of the CBDT Instruction states that the The AO made addition of Rs.11,92,000/- in
scrutiny of cases selected on the basis of the calculation of the assessee’s long term capital
information received through AIR returns gains.
would be limited only to the aspects of
information received through AIR. 25. This, again, does not come within the AIR
information, which is, to reiterate, with regard
21. As seen, the AIR information in the present to the cash deposits of Rs. 25 lakhs.
case was regarding cash deposits of Rs.25 lakhs
by the assessee in her savings bank account 26. So, these latter enquiries by the AO are not
with OBC. Meaning thereby, that the assessee aspects of the information received through
was required to explain the source of such cash AIR. The only aspect of such information was
deposits. The assessee explained the same as the source of the cash deposits, which stands
sale proceeds of her residential house adequately explained by the assessee, as above.
amounting to Rs.32.25 lakhs received from
Smt. Naunihal Kaur, the purchaser. Her this 27. In fact, what the AO did was to widen the
assertion was duly supported by a copy of the scrutiny. Now, para 2 of CBDT Instruction is
concerned sale deed. specific when it states that where it is felt that
apart from the AIR information, there is
22. Now, as per the CBDT Instruction, nothing potential escapement of income more than Rs.
further was to be gone into by the AO, since 10 lakhs, the case may be taken up for wider
the information received through AIR was the scrutiny with the approval of the administrative
cash deposits. However, the AO as noted in Commissioner.
paras 3.1 & 3.3 of the assessment order itself
asked the assessee vide letter dated 13.12.2013
to produce Smt. Balbir Kaur and Smt. Kamaljit
Kaur, with whom the assessee had entered into
230 Ahmedabad Chartered Accountants Journal July, 2019
Judicial Analysis
28. So, the proper course for the AO before making 8 Bholanath R. Shukla v. ITO [2009] 118
these additional enquiries would have been to ITD 552 (Mumbai)
take approval from the administrative
Commissioner to widen the scrutiny. This, xxx…
however, was not done and therefore, the action 8. We have considered the submissions made by
of the AO is violative of the CBDT Instruction.
both the sides, material on record and orders of
29. Apropos the ld. CIT(A)’s order, obviously the the authorities below. We find that the question,
ld. CIT(A) has erred in confirming the before us, is whether limited scrutiny proceedings
assessment order. The ld. CIT(A) had erred in and regular scrutiny proceedings are independent
view of the above observation of the Bench, in of each other or not and, therefore, notice issued
holding that the AO has not violated the CBDT for limited scrutiny under section 143(2) (i) can
Instruction. The ld. CIT(A) has gone wrong in enable the Assessing Officer to convert the
observing that the AO has limited his enquiries limited scrutiny into a regular scrutiny where time
to the source of cash deposits. True, the AO is to issue notice under section 143(2) (ii) has
duty bound to see whether the assessee has expired or not. We find that Legislature
correctly declared taxable value of the long term introduced limited scrutiny for a limited period
capital gains from the sale of her residential and provided for requirement of issue of notice
house. However, as noted, in a case like the therefore independently wherein the Assessing
present one, where it has been picked up for Officer was required to specify the specific
scrutiny on the basis of the AIR information, nature of enquiry whereas the provisions of
the CBDT Instruction has to be strictly abided regular scrutiny and time limit to issue notice for
by. Herein, since the AIR information was only that purpose were already on statute. We further
with regard to cash deposits of Rs. 25 lakhs find that the provisions of section 143(2)
and the assessee had duly and adequately provided that no notice under this sub-section
explained the source thereof, the AO, it cannot could be served on the assessee after the expiry
be gainsaid, transgressed his competency in of 12 months from the end of the month in which
issuing the further query and in asking the the return was furnished and, therefore, as per
assessee to produce Smt. Balbir Kaur and Smt. this proviso, both Notices under section 143(2)
Kamaljit Kaur, the executants of the other (i) or 143(2) (ii) are to be issued within such
agreement to sell which had nothing to do with specified time. We are further of the view that
the cash deposits. Moreover, it cannot, in view the provisions of section are clear regarding the
of the above discussion, at all be said that the issuance of notice for both types of scrutinizes
objections raised by the assessee were merely independently and limit has also been prescribed
to divert the attention of the AO to come to a for issuance of Notice under section 143(2) for
logical conclusion. The objections taken by the both types of scrutiny proceedings. Hence, we
assessee are well raised and the AO, at the cost are unable to agree with the contention of the
of the repetition, could not have gone beyond Revenue that Notice issued under section 143(2)
the specific CBDT Instruction. (i) can by-itself extend the time for the issuance
of Notice under section 143(2) (ii) , hence, for
30. For the above, finding merit in the grievance this reason, we hold that the Notice issued under
sought to be raised by the assessee by way of section 143(2) (ii) on 28-7-2003 is time-barred
Ground Nos. 1 & 2, the same are accepted. It and consequently, the assessment completed
is held that since the assessment order, passed under section 143(3) (ii) is also null and void .
ex-parte by theAO, was in violation of specific According, we quash the same. Thus, the
CBDT Instruction, the same is not legally additional ground, filed by the assessee, is
sustainable. The same is accordingly reversed. accepted.
xxx… hhh
Ahmedabad Chartered Accountants Journal July, 2019 231
India-China DTAA amended
to incorporate BEPS
related provisions
CA. Dhinal A. Shah CA. Sagar Shah
[email protected] [email protected]
1.1 Executive summary We have summarized below the key highlights
of the Protocol.
The existing India-China Double Taxation
Avoidance Agreement entered in 1995 (1995 1.2 Background
DTAA) has been amended by way of Protocol
to incorporate the Base Erosion and Profit In exercise of powers conferred under the
Shifting (BEPS) related treaty changes vide Indian Tax Laws (ITL), the Government of
Notification No. 54/2019. The Protocol will India (GoI) can enter into a DTAA with a
be effective in India for income earned on or foreign country or a specified territory. Further,
after 1April 2020. It may be noted that the 1995 any such DTAA can be amended through
DTAA was not subject to modifications bilateral negotiations between the countries by
pursuant to the Multilateral Instrument way of protocol to the existing DTAA.
(MLI)and the same was agreed to be amended
bilaterally. As a background, MLI will enable Pursuant thereto, a DTAA was signed with the
jurisdictions to swiftly and consistently Government of China and the same was
implement BEPS related treaty effective in respect of income derived in any tax
recommendations, between countries on the year commencing on or after 1 April 1995 for
principles of matching of their choices and will India and on or after 1 January 1995 for China.
be applied alongside the existing tax treaties.
As a backdrop, though China was a part of
The DTAA will now include BEPS related provisional list of DTAAs, as notified by India,
changes being: to be amended through MLI, the same was
(i) minimum standards of anti-abuse excluded during the final notification process.
Further, India was not notified by China under
provisions, i.e. the Preamble and the its list of DTAAs at all, which were subject to
Principal Purpose Test (PPT), change through MLI.
(ii) various changes to the definition of
Permanent Establishment (PE) to include It was clear that both India and China wanted
broader dependent agency PE rule and to have flexibility in terms of amendments
also the aggregation rule in order to which can be made to DTAA and not be
compute time thresholds when activities are restricted to the general positions as adopted
carried out by affiliates, under the MLI. Accordingly, to amend the
(iii) revised tie-breaker rule for dual resident existing 1995 DTAA, the current Protocol has
entities, been entered into by India and China to amend
(iv) treaty benefits to Fiscally Transparent the existing 1995 DTAA through bilateral
entities (FTEs), amongst others. negotiations to incorporate the BEPS related
treaty changes vide Notification No. 54/2019
Additionally, the Protocol also includes an and the same is effective in respect of income
update of the existing provisions for exchange derived in any tax year commencing on or after
of information aligned with the latest 1 April 2020 for India and on or after 1 January
international standards. 2020 for China.
232 Ahmedabad Chartered Accountants Journal July, 2019
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