IT-No concealment penalty if exp. claimed in current year and withholding taxes deposited in subsequent year
IT : Provision of sec. 40(a)(i) would be deemed to have been substantially complied with if taxes withheld from payment made to non-resident were deposited subsequent to the previous year in which expenditure was claimed by assessee. Hence, concealment penalty would not be leviable
Facts
• Assessee paid fee for technical services to non-resident without deduction of TDS which was liable to disallowance under section 40(a)(i).
• Assessee had however deposited TDS before due date of filing Income-Tax Return.
• However, disallowance was not made by assessee of the FTS amount in return though non-deduction of TDS was reported by tax auditor in Form 3CD accompanying the return.
• Penalty imposed under section 271(1)(c) in respect of deduction of FTS "falsely claimed". Penalty upheld by CIT(A). Hence the instant appeal was filed against CIT(A)'s decision to ITAT.
Held
• The relevant provision (section 40(a)(i)) provides for the disallowance of specific sums payable to non-residents, where tax, deducible at source under Chapter VII-B, has not been deducted and deposited to the credit of the Central Government within the time prescribed under section 200(1).
• Further, the section is not absolute in its terms, and provides for the allowance thereof in the year of payment, i.e., where the tax stands deducted and paid after expiry of the time prescribed under section 200(1).
• There is, as such, no reference or correlation with the due date of the filing of the return by the assessee-deductor under section 139(1).
• The deposit of TDS subsequently would operate as a mitigating factor.
• Though admittedly of little consequence in-so-far as the claim for deduction (as made per the return of income) for the relevant year is concerned in view of the clear language of the provision, it serves as a substantial compliance thereof.
• No doubt, it does not explain the basis of the claim for the current year; the provision itself providing for the contingency and consequence of delayed payment, deferring the claim to the year of actual payment – the fact remains that the deduction becomes exigible for the subsequent year.
• The terms of section are not absolute, so as to render the subsequent payment of TDS as of no consequence. The assessee would be entitled to claim the deduction for the immediately succeeding year, and which it has ostensibly not. In terms of the provision itself, therefore, it becomes a case of satisfaction of the principal condition for deduction, i.e., the payment of TDS, though subsequently.
• It is this that prompted us to state of the provision as having been substantially complied with. It would decidedly be a different matter if the provision made no such exception, as in that case there would be no question of the principal condition of the payment having been met and, thus, of the assessee being substantially compliant. This, therefore, serves as a valid explanation under Explanation (1B) to section 271(1)(c).
• Thus, assessee's appeal was allowed and penalty was deleted.
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[2013] 33 taxmann.com 603 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'D'
Dynatron (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Range - 8(1), Mumbai
I. P. BANSAL, JUDICIAL MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
IT Appeal No. 2415 (Mum.) of 2011
[ASSESSMENT YEAR 2003-04]
[ASSESSMENT YEAR 2003-04]
MAY 29, 2013
Ajay R. Singh for the Appellant. Mrs. R.M. Madhavi for the Respondent.
ORDER
Sanjay Arora, Accountant Member - This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-16, Mumbai ('CIT(A)' for short) dated 22.02.2011, partly allowing the levy of penalty u/s.271(1)(c) of the Income Tax Act, 1961 ('the Act' hereinafter) in its case for the assessment year (A.Y.) 2003-04 vide order dated 30.03.2009.
2.1 Opening the arguments for and on behalf of the assessee, it was submitted by the ld. AR, its counsel, that penalty u/s.271(1)(c) stood levied by the Assessing Officer (A.O.) on three counts, i.e., depreciation on motor car (Rs. 0.01 lakhs); royalty payment (Rs.6.20 lakhs); and fees for technical services (Rs. 4.53 lakhs). It is only the last amount which concerns the present appeal inasmuch as the assessee stands allowed relief by the first appellate authority qua the first two amounts, and which has not been appealed against by the Revenue. With regard to the facts in relation to the fees for technical services (FTS), the disallowance has been effected u/s.40(a)(ia) on account of non-payment of TDS. The said section has, in fact, suffered amendments, as by Finance Act, 2010 w.e.f. 01.04.2010, so that the disallowance no longer obtains where the tax deductible has been paid to the credit of the Central Government on or before the due date of the filing of the return u/s.139(1) of the Act. In the instant case, the TDS in the required sum of Rs. 95,333/-, though payable by 30.05.2003, stood paid by 20.11.2003, i.e., before the due date of filing the return of income u/s.139(1), being 30.11.2003. The said amendment has, in fact, been considered as retrospective by the hon'ble Calcutta High Court in the case of CIT v. Virgin Creations (in ITA No.302 of 2011 dated 23.11.2011), placing a copy of the same on record. Under these circumstances, no penalty ought to have been levied; the disallowance being only on account of a technical default of delay in payment.
2.2 The ld. DR, on the other hand, would submit that the assessee's case fails on the ground of bona fides, inasmuch as the tax was not deducted and paid in spite the tax auditor reporting per his report that the tax at source was deductible. Further, though not eligible as per the clear mandate of law, it claimed the deduction for the current year, which was eligible to it only for the subsequent year. It is the return of income for the current year, per which the impugned deduction had been claimed, that the assessee is required to explain in the penalty proceedings. Further, how could the assessee at the relevant time, i.e., the filing of its return of income, predicate a subsequent amendment in law and that too retrospectively, so as to now claim relief on its basis. The assessee's case is de hors any explanation, with its bona fides in doubt, also for the reason that it makes no mention of the payment in the return. It was only on being pointed out by the A.O. during the assessment proceedings, and it is not that every return is subject to scrutiny, that the assessee accepted its mistake and agreed for the disallowance. The default of concealment or furnishing inaccurate particulars of income has to be considered with reference to the return of income as filed. Accordingly, the penalty has been rightly confirmed by the ld. CIT(A).
3. We have heard the parties, and perused the material on record.
3.1 At the outset, we express our displeasure and discountenance the argument advanced and/or the position assumed by the assessee's counsel before us. The disallowance under reference is u/s. 40(a)(i), i.e., qua the payment to a non-resident, and not u/s.40(a)(ia). Not only did he, thus, mislead the court on facts, the legal plea raised, i.e., with reference to the deposit of TDS before the due date of the filing of the return of income for the relevant year, is misplaced inasmuch as there is no reference to this date in the relevant provision, either with regard to the allowance for the year to which the liability relates or for a subsequent year. The ld. DR also, we are afraid to say, did not bring this fact to our notice; rather, argued the matter on the basis as if the disallowance under reference was u/s. 40(a)(ia).
The relevant provision (s. 40(a)(i)) provides for the disallowance of specific sums payable to non-residents, where tax, deducible at source under Chapter VII-B, has not been deducted and deposited to the credit of the Central Government within the time prescribed u/s.200(1). Further, the section is not absolute in its terms, and provides for the allowance thereof in the year of payment, i.e., where the tax stands deducted and paid after expiry of the time prescribed u/s.200(1). There is, as such, no reference or correlation with the due date of the filing of the return by the assessee-deductor u/s.139(1), with reference to which the assessee pleads its case before us. The terms of the section are clear. What, therefore, is relevant is the explanation that the assessee has furnished for the default under reference leading to the disallowance in its case.
3.2 In our view, the facts as stated by the ld. CIT(A), rather than being adverse to the assessee, as far as the levy of the penalty u/s.271(1)(c) is concerned, favour it. This is as it is clear that the assessee was of the clear view that tax was not deductible on the said payment. Accordingly, neither any tax stood deducted, nor paid to the credit of the Central Government. It is only subsequently, on being so pointed out by the tax auditor, that the said default came to light, and the assessee realized his mistake in having not deposited the tax on the impugned sum. The matter stands duly reported by the tax auditor in his report u/s.44AB, and which accompanies and forms part of the assessee's return of income. How could, therefore, it be said that the assessee has not disclosed the correct particulars of its income. Further, following the advice of its tax advisor, as it appears to us, tax has also been deposited to the account of the Government on 20.11.2003, prior to the filing of the return for the relevant year on 27.11.2003. True, the assessee ought to have, in view of the deeming provision of section 40(a)(i), disallowed the same suo moto per its return of income, also stating the reasons that lead to the default in the first place. So however, it cannot be denied that there was nothing false in the assessee's claim of deduction inasmuch as the tax stood deducted, albeit belatedly, and credited to the account of the Central Government. The assessee, as apparent, was under the bona fide belief that having deposited the tax prior to the due date of the return for the relevant year, no disallowance qua the same was exigible. It is open to the assessee to raise a legal claim. However, as long as the primary facts stand clearly and correctly stated in the return of income, and only with reference to which the Revenue gathers the information leading to the disallowance, it can be said that pressing a claim which is not sustainable in law ought not to lead to levy of penalty. It is for this reason that the assessee's stand of having deposited the tax prior to the date of the filing of the return for the relevant year becomes relevant. The deposit of the tax establishes the assessee's bona fides in the matter, so that the disallowance becomes at best a technical default, leading to a disallowance for one year and a corresponding allowance for the immediately succeeding year. Though a proper note, explaining its stand, in our view, would have been the proper course for the assessee to follow, so as to avoid any adverse inference, in our view, the bona fides of the assessee's conduct are exhibited by the payment of TDS soon after the default stood brought to its notice by its tax auditor, per the auditor's report which forms part of its return. The same would weigh in favour of the assessee, so as to constitute a reasonable explanation in terms of Explanation (1B) to section 271(1)(c), saving penalty.
3.3 We may clarify, we are acutely aware, that it could well be argued, and not without merit, that merely because a claim (per the return of income) is a legal claim, or has a legal aspect to it - which would be in each case - the same by itself cannot be a cause for non levy of penalty in every case, as where there is no valid basis for the same (i.e., the legal claim). That is, the claim must rest on some reasonable premises or basis, i.e., have some basis to it. In CIT v. Escorts Finance Ltd. [2010] 328 ITR 44 (Del), the hon'ble court found the assessee's claim u/s.35D, said to be based on the opinion of its Chartered Accountant, a tax expert, as without basis in view of the clear language of the provision, extending the benefit of the said deduction to an industrial company, while the assessee-respondent was admittedly a finance company. In CIT v. Zoom Communication (P.) Ltd. [2010] 327 ITR 510 (Del.), the claim was qua income-tax, barred by section 40(a)(ii), so that the plea of 'omission' was considered as not acceptable. In CIT v. Usha International Limited [2013] 214 Taxmann.com 519 (Del), again, the claim was u/s.35CCA, which was found as de hors any basis. Penalty u/s.271(1)(c) of the Act was accordingly confirmed in all these cases by the hon'ble court, confirming thus that furnishing of a plausible explanation for default continues to be the building block or an essential ingredient for saving levy penalty u/s.271(1)(c) of the Act, and would apply even in respect of legal claims and, further, even after the decision in the case of CIT v. Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR 158 (SC), which decision was considered in these cases.
So, however, in the instant case, the deposit of TDS subsequently would operate as a mitigating factor. Though admittedly of little consequence in-so-far as the claim for deduction (as made per the return of income) for the relevant year is concerned in view of the clear language of the provision, it serves as a substantial compliance thereof. No doubt, it does not explain the basis of the claim for the current year; the provision itself providing for the contingency and consequence of delayed payment, deferring the claim to the year of actual payment - the fact remains that the deduction becomes exigible for the subsequent year. The terms of section are thus, as afore-noted, not absolute, so as to render the subsequent payment of TDS as of no consequence. The assessee would be entitled to claim the deduction for the immediately succeeding year, and which it has ostensibly not. In terms of the provision itself, therefore, it becomes a case of satisfaction of the principal condition for deduction, i.e., the payment of TDS, though subsequently. It is this that prompted us to state of the provision as having been substantially complied with. It would decidedly be a different matter if the provision made no such exception, as in that case there would be no question of the principal condition of the payment having been met and, thus, of the assessee being substantially compliant. This, therefore, serves as a valid explanation under Explanation (1B) to section 271(1)(c).
3.4 We may also, before parting, state that though the assessee may not have explained its case in this manner; the counsel, rather, misleading the court, the same is firstly borne out of the relevant law as well as the assessee's conduct; it stating the primary facts in the course of the assessment proceedings itself, and on which no doubt has been expressed by the Revenue at any stage. In our clear view, therefore, this is not a fit case for levy of the penalty u/s. 271(1)(c) qua the non deduction of tax on the FTS payment of Rs. 4,52,538/-. We decide accordingly.
4. In the result, the assessee's appeal is allowed.
IT-Profit from dealing in shares is business income if transactions are carried out methodically with profit motive
IT : Where purchase and sale transactions in shares were entered into by assessee on regular and systematic basis with profit motive, income arising from said transactions was to be taxed as 'business profits'
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[2013] 33 taxmann.com 207 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'B'
Mafatlal Fabrics (P.) Ltd.
v.
Additional Commissioner of Income-tax-1(2)*
B. R. MITTAL, JUDICIAL MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
IT APPEAL No. 2236 (Mum.) of 2011
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
MARCH 22, 2013
Section 28(i), read with section 45, of the Income-tax Act, 1961 - Business income - Chargeable as [Shares dealings] - Assessment year 2007-08 - Assessee-company was engaged in purchase and sale of shares - During relevant year, assessee filed its return declaring income from sale of shares under head capital gains - Revenue authorities opined that said income was liable to be taxed as 'business income' - It was noted that Board's resolution authorised assessee-company to set apart a corpus of Rs. 100 crores for trading in shares which represented intention to carry out activities of purchase and sale of shares on business lines - It was also apparent that purchase and sale transactions in shares were entered into on regular and systematic basis with profit motive which only constituted business - Further long-term capital gain, was a small amount as against amount declared as short-term capital gain which though not conclusive, yet again a strong indicator as to shares being not intended to be held by way of investments - Whether in view of aforesaid, impugned order passed by authorities below was to be upheld - Held, yes [Para 6.5] [In favour of revenue]
FACTS
| ■ | The assessee-company was engaged in purchase and sale of shares. During relevant year, the assessee filed its return declaring income from sale of shares under head capital gains. | |
| ■ | The revenue authorities opined that said income was liable to be taxed as 'business income'. | |
| ■ | The assessee filed instant appeal mainly contending that the revenue had not rendered any definite and separate findings in the matter, even as the matter was essentially factual, resting their conclusions solely on the findings for the preceding year, i.e., assessment year 2006-07. |
HELD
| ■ | The issue under reference essentially involves determination of the character of the shareholding by the assessee, i.e., whether as 'investment' or as 'trading stock', for resale at a profit, as soon as a profit opportunity arises on the horizon. In case of shares, where the market is volatile, so that a profit opportunity may arise immediately or soon after acquisition, prompting one to sell, i.e., may have no direct correspondence with the time period over which an 'investment' can be said to 'ripe' or 'mature' to yield capital appreciation, the matter assumes an added complexity. This is as a profit motive characterises both trade as well as investment. It is in fact this character of the share market, which also inflicts other commodity markets as well, that draws investors, traders and speculators alike to the share market, to make a killing or earn a handsome profit. An investor may yet not sell, though a sale, under such circumstances, cannot be conclusive. At the same time, just because the transactions are few in number, is no reason and, in any case, no final proof that the acquisition is a capital asset. | |
| ■ | The law is trite, and even a single transaction could be a transaction in the nature of a trade. An intention (as to acquisition) has, nevertheless, to be inferred, and it is this that marks or defines the motive behind the transaction, distinguishing a 'capital asset' from a 'trading stock'. In other words, no hard and fast rules and/or guidelines could be laid down, and a decision, thus, would need to be taken, in each case, considering and on the conspectus of the case. [Para 6.1] | |
| ■ | The assessee is a company, which comes into being only on a defined charter (Articles and Memorandum of Association), and is incorporated presumably only for some defined business/es. As such, prima facie, it could only be considered to be in the business of either making investments or trading in shares. The number, or volume of transactions, on which the assessee seeks to rest its case, emphasizing on a lower volume with reference to the immediately preceding year, may, thus, not be of much consequence. | |
| ■ | Further, it may also be relevant to state, though a final conclusion could be given only on an examination of the scope of activities in detail, that investment as a business is what an investment company or a mutual fund engages in, employing experts in the field, who as a part of their job engage in the in-depth study and research of investments on the touchstone of risk (viz. sovereign risk, industry risk, business risk, financial risk, etc.) and return, i.e., the growth potential over the short and long term, on the basis of the various parameters attendant thereon. It is for this reason, i.e., the change in the profile and the scope of the activity, that the investment activity in the case of an individual is vastly different from that of a company, where it is adopted as a business or as a part of its business. [Para 6.2] | |
| ■ | The investment in shares as on 31-3-2006 has been found by the Tribunal to represent the stock-in-trade of the assessee-company. That being the case, the profit or loss arising on the sale of these shares would only be in the nature of business income. This is only consequential and, rather, a natural corollary to the said shares having been determined as the assessee's stock-in-trade. In fact, unless some supervening circumstances are shown, the monies realised on such sale, that are ploughed back in the purchase of fresh shares, would also qualify for being considered as stock-in-trade, being only the deployment of its working capital funds in business, which the assessee-company has been found to be carrying. The assessee's claim that these shares have not been sold during the current year, i.e., continue to be held in stock is, ex facie, incorrect, as it was observed that several such shares earned capital gains earned during the year. [Para 6.3] | |
| ■ | The assessee would seek to distinguish the transactions for the current year vis-a-vis that for the previous year relevant to assessment year 2006-07, stating that the Tribunal for that year was unduly influenced by the Board resolution authorising such transactions. It may not be particularly necessary, unless of course the finding is shown as not well founded or contrary to the primary facts, to determine the character of the profit/income a new on each new purchase. True, there is no bar for an investor to trade and vice versa, so that the past may not necessarily be a good or reliable guide for the future. However, even as observed by the Bench during hearing, the case at hand is one of a company, a corporate entity, which can proceed only on the basis of, and under, certain parameters and norms. The Board resolution assumes significance in this respect, authorising the company to set apart a corpus of Rs.100 crores for trading in shares. | |
| ■ | It projects the mind and the will of the company, which can function only through its Board, even as observed by the Commissioner (Appeals), besides represents the 'intention'. Further, this (resolution) was followed by, and coupled with, purchase and sale transactions in shares on a regular, systematic basis, carried out with profit intent or motive, and which only constitutes 'business', i.e., by definition. One is thus, unable to see as to how the finding as to the same - the said conduct - as constituting a 'business' for the preceding year as not either well founded, as being alleged, or as not applicable for the current year, for which the concurrent finding of the Revenue is of like behaviour/conduct. | |
| ■ | The assessee claims to have executed only 89 transactions during the year. However, the said number would not be of much consequence or import. In fact, it may well be that the company considers the environment as not conducive for any investment in shares for the time being, and switches wholly or partly to the debt market, placing funds in more secured, i.e., lower risk, avenues. This would bring down the continuing investment or trading activity to near suspension, though to little effect. | |
| ■ | Further the 'long-term capital gain', i.e., the profit on shares held for more than 365 days was a small amount as against amount declared as 'short-term capital gain' which though not conclusive, yet again a strong indicator as to the shares being not intended to be held by way of 'investments', implying a holding, i.e., generally speaking, for a considerable period of time, over which only an investment is or can normally be expected to yield a reasonable return in an efficient market. | |
| ■ | It may not be necessary under the circumstance to examine as to what percentage of shares purchased during the year are held in stock as at the year-end vis-a-vis that sold during the year itself. This is as the carried over 'investments' have been held as 'stock-in-trade' and even the stock purchased out of their sale proceeds have been held as trading stock. What is the appropriate time for the sale of shares, and which, thus, determines its holding period, would be a business decision, guided, apart from the prevailing market price, an assessment of the risk and return factors attending their holding or exposure therein, including anticipated price movement of the relevant scrip. The holding period would not, thus, carry any additional significance under such circumstances. [Para 6.4] | |
| ■ | In view of the foregoing, it is opined that the profit returned as short-term capital gain by the assessee-company for the year stands rightly assessed by the revenue as business income, even as found by the Tribunal for the immediately preceding year. [Para 6.5] | |
| ■ | In the results the assessee's ground of appeal was to be rejected. |
CASES REFERRED TO
Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 2).
A.B. Koli for the Appellant. Girish Dawe for the Respondent.
ORDER
Sanjay Arora, Accountant Member - This is an Appeal by the Assessee arising out of the Order by the Commissioner of Income Tax (Appeals)-2, Mumbai ('CIT(A)' for short) dated 31.01.2011, dismissing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2007-08 vide order dated 16.11.2009.
2. Vide its first two grounds, the issue pressed is the disallowance of expenditure, at Rs. 5,74,703/-, by applying section 14A of the Act read with rule 8D of the Income Tax Rules, 1962 ('the Rules' hereinafter) even as the assessee's contends of no direct nexus of the relevant expenditure with the income claimed exempt. Before us, the assessee's prayer was for restoration of the matter back to the file of the Assessing Officer (A.O.) to examine the same in light of the decision by the hon'ble jurisdictional high court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.), while the ld. DR relied on the orders by the authorities below.
3. We have heard the parties, and perused the material on record.
3.1 In fine, while the assessee makes out a legal plea before us, seeking a remission back to the file of the AO, the Revenue objects on the ground that the stated consideration for the same has already been met by the first appellate authority, examining the matter only in light of the binding decision by the hon'ble jurisdictional high court (supra) being relied upon by the assessee before us, rendering his decision on facts, and qua which the assessee has been unable to demonstrate any infirmity.
3.2 We have given our careful consideration to the matter. We are inclined to accept the assessee's plea. No doubt, what the Revenue states before us is correct and, in fact, not disputed; the ld. CIT(A) has examined the disallowance as made and being agitated before him from the stand point of 'reasonableness', even as advocated by the hon'ble jurisdictional high court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), drawing extensively from the said decision (refer para 3, pages 2-5 of his order). While admitting that technically speaking rule 8D would not have a strict or direct application for the current year, being not retrospective, he has considered the disallowance as worked out in accordance therewith as justified under the circumstances. In fact, no case has been made out by the assessee against his decision on merits, i.e., the quantum of disallowance.
So, however, the tribunal has for the immediately preceding year, i.e., AY 2006-07 (in ITA No. 903/Mum./2010 dated 02/11/2011/copy on record), upholding the Revenue's case, held the activity of purchase and sale of shares and units of mutual funds, as being undertaken by the assessee, and only qua which it earns the exempt income by way of dividend (at Rs. 34.39 lacs), or at least principally, as constituting a separate 'business'. This business has not been suspended by the assessee and continues for the current year, irrespective of its scale, the assessee having earmarked separate funds for the same. The dividend income that arises to the assessee is only in the course of such business. That being the case, the matter would be required to be revisited for examining the same from this stand point. Is the said business run in a separate division and, if so, what are its expenses? Are the earmarked funds, borrowed or represent own capital? Put succinctly, the earning of dividend that arises in the course of investment activity cannot be considered at par with where it is earned on shares held as trading stock. Such shares are liable to be sold at any time, i.e., when a profit opportunity arises on the horizon, so that the earning of dividend becomes or is rendered incidental. This is as the dividend income arises not on the basis of the holding period, but on the accident of the holding of the stock as on the cut-off date, i.e., on which the dividend is declared. The return and risk attributes attending their holding in the short term perspective far out-weigh any consideration for holding the same for dividend, with the market in fact invariably discounting and factoring in the 'dividend information' as well. The issue, under the circumstances, thus reduces to determining as to what could reasonably be considered as the actual income earned from dividend, i.e., as against assuming the entire receipt as income, and which cannot, in our view, be determined on the basis of a pre-determined, generalized formula, de hors the facts of the case, viz. the quantum and profile of relevant expenditure, etc. We are also aware that a part of gains have been considered as long term capital gains, and a part of dividend would have arisen in respect of such shares as well. Is the assessee's activity a composite activity, would be a relevant question in this regard and, in any case, the activity being accepted as an investment activity to that extent, separate considerations would apply for disallowance in respect thereof.
3.3 In this view of the matter, in our opinion, the matter is required to be restored back to the file of the A.O. for fresh adjudication on merits, in respect of disallowance, if any, to be made u/s.14A, in accordance with law, and after allowing the assessee a reasonable opportunity to present its case before him. We decide accordingly. Grounds 1 & 2 of the assessee's appeal are thus allowed for statistical purposes.
4. The principal issue in appeal, agitated by the assessee per its grounds 3 to 5, is the character of the income arising on the transactions by way of purchase and sale of shares, entered into by the assessee-company during the relevant year, i.e., whether as sale of 'capital assets', so as to be considered as 'short term capital gains' - the holding period being less than 365 days, or as 'business income'. Both the authorities below having found the said profit to be on trading account, the assessee is in second appeal.
5.1 Before us, the main thrust of the assessee's arguments was that the Revenue has not rendered any definite and separate findings in the matter, even as the matter is essentially factual, resting their conclusions solely on the findings for the preceding year, i.e., A.Y.2006-07, referred to supra. No doubt, for that year, the said finding has since received the approval or the benediction of the Tribunal, the basis of the tribunal's decision was the Board resolution passed by the assessee-company in respect of the relevant activity. With due respect, the tribunal had laid over-emphasis on the word 'trade' occurring in the relevant resolution; the same having been used in a generic sense to signify or denote transactions of purchase/sale in shares, which by itself cannot be considered as conclusive of the matter, for, among others, the reason that even shares held as investments would only be purchased and sold. In fact, the assessee has categorized the corresponding investment in shares in its accounts as 'investment', since inception, and which, though not conclusive of the matter, ought to be accorded due weight. Coming to the facts specific to the current year, the total number of purchase & sale transactions is only 89, which cannot be regarded as large by any standard. Further, the bulk of the profit under reference, i.e., Rs. 43.70 lacs, arises on shares with a holding period of over 3 months. There are no multiple entry points or exits, as would be apparent from the statement of share transactions enclosed. Under the circumstances, the income ought to be regarded as short term capital gain, the principle of res judicata being not applicable to the proceedings under the Act.
5.2 The ld. DR, on the other hand, would submit that minor variations apart, and which are bound to be there from year to year, there is nothing much to distinguish the transactions for the current year from that for the preceding year, and which have been found by the tribunal, as a matter of fact, to constitute a trading activity. The onus to draw distinction, if any, is in any case, on the assessee, and which it has not discharged, so that the Revenue authorities were well justified in adopting the inferential findings for the immediately preceding year.
6. We have heard the parties, and perused the material on record.
6.1 The issue under reference essentially involves determination of the character of the shareholding by the assessee, i.e., whether as 'investment' or as 'trading stock', for resale at a profit, as soon as a profit opportunity arises on the horizon. In case of shares, where the market is volatile, so that a profit opportunity may arise immediately or soon after acquisition, prompting one to sell, i.e., may have no direct correspondence with the time period over which an 'investment' can be said to 'ripe' or 'mature' to yield capital appreciation, the matter assumes an added complexity. This is as a profit motive characterises both trade as well as investment. It is in fact this character of the share market, which also inflicts other commodity markets as well, that draws investors, traders & speculators alike to the share market, to make a killing or earn a handsome profit. An investor may yet not sell, though a sale, under such circumstances, cannot be conclusive. At the same time, just because the transactions are few in number, is no reason and, in any case, no final proof that the acquisition is a capital asset. The law is trite, and even a single transaction could be a transaction in the nature of a trade. An intention (as to acquisition) has, nevertheless, to be inferred, and it is this that marks or defines the motive behind the transaction, distinguishing a 'capital asset' from a 'trading stock'. In other words, no hard and fast rules and/or guidelines could be laid down, and a decision, thus, would need to be taken, in each case, considering and on the conspectus of the case.
6.2 We may now proceed to examine the facts of the case. Our first observation, as we begin our objective assessment qua facts, is that the assessee is a company, which comes into being only on a defined charter (Articles and Memorandum of Association), and is incorporated presumably only for some defined business/es. As such, prima facie, it could only be considered to be in the business of either making investments or trading in shares. The number, or volume of transactions, on which the assessee before us seeks to rest its case, emphasizing on a lower volume with reference to the immediately preceding year, may, thus, not be of much consequence. Likewise, would be the impact of the holding period on the categorization of these shares and units as 'investments' or as 'trading stock'. Further, it may also be relevant to state, though a final conclusion could be given only on an examination of the scope of activities in detail, that investment as a business is what an investment company or a mutual fund engages in, employing experts in the field, who as a part of their job engage in the in-depth study and research of investments on the touchstone of risk (viz. sovereign risk, industry risk, business risk, financial risk, etc.) and return, i.e., the growth potential over the short and long term, on the basis of the various parameters attendant thereon. It is for this reason, i.e., the change in the profile and the scope of the activity, that the investment activity in the case of an individual is vastly different from that of a company, where it is adopted as a business or as a part of its business. Why, a venture capital, a mutual fund or an investment bank does exactly this. Rather, high worth individuals or even corporates seeks such concerns to deploy their investible surplus to maximize their profits.
6.3 Our second observation is that the investment in shares as on 31/03/2006 has been found by the tribunal to represent the stock-in-trade of the assessee-company. That being the case, the profit or loss arising on the sale of these shares would only be in the nature of business income. This is only consequential and, rather, a natural corollary to the said shares having been determined as the assessee's stock-in-trade. In fact, unless some supervening circumstances are shown, the monies realised on such sale, that are ploughed back in the purchase of fresh shares, would also qualify for being considered as stock-in-trade, being only the deployment of its working capital funds in business, which the assessee-company has been found to be carrying. The assessee's claim that these shares have not been sold during the current year, i.e., continue to be held in stock is, ex facie, incorrect, as we observe several such shares in the detail of the capital gains earned during the year, viz. Amatex India Ltd., Bharat Electrical, Divi's Labora, Hindustan Zinc Ltd., etc to name just a few.
6.4 Before us, the ld. AR would seek to distinguish the transactions for the current year vis-a-vis that for the previous year relevant to AY 2006-07, stating that the tribunal for that year was unduly influenced by the Board resolution authorising such transactions. In our view, it may not be particularly necessary, unless of course the finding is shown as not well founded or contrary to the primary facts, to determine the character of the profit/income anew on each new purchase. True, there is no bar for an investor to trade and vice-versa, so that the past may not necessarily be a good or reliable guide for the future. However, even as observed by the Bench during hearing, the case at hand is one of a company, a corporate entity, which can proceed only on the basis of, and under, certain parameters and norms. The Board resolution assumes significance in this respect, authorising the company to set apart a corpus of Rs.100 crores for trading in shares. It projects the mind and the will of the company, which can function only through its Board, even as observed by the ld. CIT(A), besides represents the 'intention' referred to by us earlier (para # 6.1). Further, this (resolution) was followed by, and coupled with, purchase and sale transactions in shares on a regular, systematic basis, carried out with profit intent or motive, and which only constitutes 'business', i.e., by definition. We are thus unable to see as to how the finding as to the same - the said conduct - as constituting a 'business' for the preceding year as not either well founded, as being alleged, or as not applicable for the current year, for which the concurrent finding of the Revenue is of like behaviour/conduct.
The assessee claims to have executed only 89 transactions during the year. We have already stated that the said number would not; the transactions being carried out as a part of business, be of much consequence or import. A business would not be rendered as not so, where it is done on a lower scale, even as a lower number of transactions does not imply a lower volume, as one could have entered into a lower number, though larger, transactions. These are essentially business decisions, i.e., when and how much to buy, and likewise for the sale. In fact, it may well be that the company considers the environment as not conducive for any investment in shares for the time being, and switches wholly or partly to the debt market, placing funds in more secured, i.e., lower risk, avenues. This would bring down the continuing investment or trading activity to near suspension, though to little effect. We may though also clarify that the stated number is not correct; the same being only the number of scrip-wise transactions, considering purchase and sale as one. Rather, a number of shares purchased during the year stand not sold by the year-end, and which are nevertheless purchase or business transactions, alebit without any income implication for the current year. This argument, thus, would be to no effect.
Further on, the 'long term capital gain', i.e., the profit on shares held for more than 365 days is, at Rs. 6.66 lacs only, as against Rs. 50+ lacs declared as 'short term capital gain'. Though not conclusive, this is again a strong indicator as to the shares being not intended to be held by way of 'investments', implying a holding, i.e., generally speaking, for a considerable period of time, over which only an investment is or can normally be expected to yield a reasonable return in an efficient market. It may not be necessary to under the circumstance examine as to what percentage of shares purchased during the year are held in stock as at the year-end vis-a-vis that sold during the year itself. This is as the carried over 'investments' have been held as 'stock-in-trade' and even the stocks purchased out of their sale proceeds have been held by us as being trading stock, and of having, rather, opined that even investment itself is liable to be held as a business. What is the appropriate time for the sale of shares, and which, thus, determines its holding period, would be a business decision, guided, apart from the prevailing market price, an assessment of the risk and return factors attending their holding or exposure therein, including anticipated price movement of the relevant scrip. The holding period would not, thus, carry any additional significance under such circumstances.
6.5 We are, in view of the foregoing, of the clear view that the profit returned as 'short term capital gain' by the assessee-company for the year stands rightly assessed by the Revenue as business income, even as found by the tribunal for the immediately preceding year. Further, the matter being factual, we have not referred specifically to the decisions cited by the parties before us - none of which though is in relation to a company, though have gone through by us, to find the same as not applicable. We decide accordingly.
6.6 Finally, the assessee, during hearing, clarified that the figure of Rs. 51,07,700/- is wrongly mentioned in its ground of appeal (# 3), and that it disputes the gain/profit only to the extent of Rs. 43,69,929/-. This is as securities transaction tax stands paid on share transactions yielding profit to the extent of Rs. 7,37,771/-, so that it is in any case liable to be taxed at the concessional rate of 10% on such profit. Subject to the said contention made before us by the A.O., our observations, though based on the assessee's overall conduct, so that the same is considered to constitute 'business', our decision shall be restricted to the gain being disputed by the assessee, i.e., Rs.43,69,929/-.
7. The assessee's last and sixth ground is in respect of disallowance of Rs. 8,81,800/-u/s. 40(a)(ia) of the Act. The same was not pressed at the time of hearing, so that the same is being dismissed as not pressed. We decide accordingly.
8. In the result, the assessee's appeal is partly allowed for statistical purposes.
Sunil *In favour of revenue.
CBDT announces Rules for notification of agricultural extension projects under sec. 35CCC
INCOME-TAX (FOURTH AMENDMENT) RULES, 2013 - INSERTION OF RULES 6AAD & 6AAE AND FORM NOS.3C-O & 3CP
NOTIFICATION NO. 38/2013[F.NO.142/30/2012-SO(TPL)]/SO 1393(E), DATED 30-5-2013
In exercise of the powers conferred by section 295 read with sub-section (1) of section 35CCC of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-
1. (1) These rules may be called the Income-tax (Fourth Amendment) Rules, 2013.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. In the Income-tax Rules, 1962, (hereinafter referred to as the "said rules"), after rule 6AAC, the following rules shall be inserted, namely:-
"6AAD. Guidelines for approval of agricultural extension project under section 35CCC.
(1) The agricultural extension project shall be considered for notification if it fulfils all of the following conditions namely:-
| (i) | the project shall be undertaken by an assessee for training, education and guidance of farmers; | |
| (ii) | the project shall have prior approval of the Ministry of Agriculture, Government of India; and | |
| (iii) | the expenditure (not being expenditure in the nature of cost of any land or building) exceeding an amount of twenty-five lakh rupees is expected to be incurred for the project. |
(2) An assessee, before undertaking any agricultural extension project, shall make an application for notification of such project under sub-section (1) of section 35CCC, in duplicate, in Form No. 3C-O, to the Commissioner of Income-tax or the Director of Income-tax, as the case may be, having jurisdiction over the assessee.
(3) The assessee shall also send a copy of the application in Form No.3C-O to the Member (IT), Central Board of Direct Taxes (hereinafter referred to as the CBDT) accompanied by the acknowledgement receipt, as evidence of having furnished the application form in duplicate, in the office of the Commissioner of Income-tax or the Director of Income-tax, as the case may be, having jurisdiction over the case.
(4) The application shall be accompanied by the following, namely :--
| (a) | a detailed note on the agricultural extension project to be undertaken by the assessee; | |
| (b) | details of the expenditure expected to be incurred on the project and expected date of completion of the project; and | |
| (c) | a letter approving the project and specifying the amount of expenditure expected to be incurred on the project from the Ministry of Agriculture, Government of India. |
(5) If any defect is noticed in the application referred to in sub-rule (2) or if any relevant document is not attached thereto, the Commissioner of Income-tax or the Director of Income-tax, as the case may be, shall, before the expiry of one month from the date of receipt of the application in his office, intimate the defect to the applicant for its rectification.
(6) The applicant shall remove the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, as may be extended by the Commissioner of Income-tax or the Director of Income-tax, as the case may be, so however, that the total period for removal of defect does not exceed thirty days, and if the applicant fails to remove the defect within such period so allowed, the Commissioner of Income-tax or the Director of Income-tax, as the case may be, shall send his recommendation for treating the application as invalid to the CBDT.
(7) On receipt of recommendation of the Commissioner of Income-tax or the Director of Income-tax, as the case may be, under sub-rule (6), the CBDT, if satisfied, may pass an order treating the application as invalid.
(8) If the application form is complete in all respects, the Commissioner of Income-tax or the Director of Income-tax, as the case may be, may make such inquiry or call for such documents from the assessee as he may consider necessary for satisfying himself regarding the genuineness of the current and proposed activities of the assessee, and send his recommendation to the CBDT for grant of approval or rejection of the application before the expiry of the period of two months to be reckoned from the end of the month in which the application form complete in all respects was received in his office.
(9) The CBDT may, before notifying an agricultural extension project under section 35CCC, call for such documents from the assessee, as it considers necessary, and may also get any inquiry made for verification of the genuineness of the activities of the assessee.
(10) The CBDT may, within a period of three months from the end of the month in which it receives the report referred to in sub-rule (8) from the Commissioner of Income-tax or the Director of Income-tax, as the case may be, under sub-section (1) of section 35CCC, issue a notification in Form No. 3CP to be published in the Official Gazette specifying the agricultural extension project subject to conditions mentioned in rule 6AAE or such other conditions, as it may deem fit, to be effective for such period not exceeding three assessment years or pass an order rejecting the application.
(11) If the CBDT is satisfied with the activities of the agricultural extension project during the period of notification, it may notify the said project for a further period.
(12) A copy of the notification issued under sub-rule (10) or sub-rule (11) shall be sent to the applicant, Ministry of Agriculture, Government of India, the Commissioner of Income-tax or the Director of Income-tax, as the case may be, the Department of Agriculture of the concerned State, and the Agricultural Technology Management Agency (ATMA) of the concerned District(s).
(13) The CBDT may rescind the notification issued under sub-rule (10) or sub-rule (11) at any time, if it is satisfied that the assessee has ceased its activities or its activities are not genuine or are not being carried out in accordance with all or any of the relevant provisions of the Act or this rule or rule 6AAE or are not being carried out in accordance with all or any of the conditions subject to which the notification was issued.
(14) An order treating the application as invalid or rejecting or rescinding the notification shall not be passed unless the assessee has been given an opportunity of being heard in the matter.
(15) A copy of any order invalidating or rejecting the application or rescinding the notification shall be sent to the applicant, Ministry of Agriculture, Government of India, the Commissioner of Income-tax or the Director of Income-tax, as the case may be, the Department of Agriculture of the concerned State, and the Agricultural Technology Management Agency (ATMA) of the concerned District(s).
6AAE. Conditions subject to which an agricultural extension project is to be notified under section 35CCC.
(1) The assessee undertaking agricultural extension project shall maintain separate books of account of the agricultural extension project notified under sub-section(1) of section 35CCC, and get such books of account audited by an accountant as defined in the Explanation below sub-section (2) of section 288.
(2) The audit report referred to in sub-rule (1) shall include the comments of the auditor on the true and fair view of the books of account maintained for agricultural extension project, the genuineness of the activities of the agricultural extension project and fulfillment of the conditions specified in the relevant provisions of the Act or the rules or the conditions mentioned in the notification issued under sub-rule (10) or sub-rule (11) of rule 6AAD.
(3) The assessee shall not accept an amount exceeding the amount as approved in the notification from the beneficiary under the eligible agricultural extension project for training, education, guidance or any material distributed for the purposes of such training, education or guidance.
(4) The assessee shall not get any direct or indirect benefit from the notified agricultural extension project except the deduction of the eligible expenditure in accordance with the provisions of section 35 CCC of the Act, rule 6AAD and this rule.
(5) All expenses (not being expenditure in the nature of cost of any land or building), as reduced by the amount received from beneficiary, if any, incurred wholly and exclusively for undertaking an eligible agricultural extension project shall be eligible for deduction under section 35CCC :
Provided that any expenditure incurred on the agricultural extension project which is reimbursed or reimbursable to the assessee by any person, whether directly or indirectly, shall not be eligible for deduction under section 35CCC.
(6) The assessee shall, on or before the due date of furnishing the return of income under sub-section (1) of section 139, furnish the following to the Commissioner of Income-tax or the Director of Income-tax, as the case may be, namely:—
| (a) | the audited statement of accounts of the agricultural extension projects for the previous year along with the audit report and amount of deduction claimed under sub-section (1) of section 35CCC; | |
| (b) | a note on the agricultural extension project undertaken by it during the previous year and the programme of agricultural extension project to be undertaken during the current year and the financial allocation for such programme; and | |
| (c) | a certificate from the Ministry of Agriculture, Government of India, regarding the genuineness of the agricultural extension project undertaken by the assessee during the previous year. |
(7) If the Commissioner of Income-tax or the Director of Income-tax, as the case may be, is satisfied that the,---
| (a) | assessee has not maintained separate books of account for the agricultural extension project or has not got such books of account audited by an accountant in accordance with sub-rule (1); | |
| (b) | assessee has not furnished the documents referred to in sub-rule (6); | |
| (c) | assessee has ceased to carry out activities of agricultural extension project; | |
| (d) | activities of agricultural extension project of the assessee are not genuine; or | |
| (e) | activities of the agricultural extension project are not being carried out in accordance with the relevant provisions of the Act or the rules or the conditions subject to which the notification was issued, |
he may, after making appropriate inquires, furnish a report on the circumstances referred to in clause (a) to (e) to the CBDT for appropriate action as per the provisions of sub-rule (13) of rule 6AAD.".
3. In Appendix-II of the said rules, after Form No. 3CN, the following forms shall be inserted, namely:-
"FORM NO. 3C-O
[See rule 6AAD]
Application form for approval under sub-section (1) of section 35CCC of the Income-tax Act, 1961
| 1. | (i) Name and address of the applicant. | |
| (ii) Address of the principal place of business/ registered office of the assessee. | ||
| (iii) PAN of the assessee. | ||
| (iv) Date of incorporation of the company/ partnership firm/proprietary concern. | ||
| (v) Enclose a copy of the Memorandum, Articles of Association. | ||
| (vi) If the agricultural extension project of the company was notified earlier under sub-section(1) of section 35CCC, mention the notification number and date of the latest notification and furnish a copy of the same. | ||
| (vii) Nature of business | ||
| (viii) If notification issued under sub-section(1) of section 35CCC was rescinded in the past, mention reasons on account of which the notification was rescinded. | ||
| [Enclose a copy of the Order(s) rescinding notification(s)]. | ||
| (ix) Date from which notification of agricultural extension project is requested for. | ||
| (x) Expected date of completion of project. | ||
| 2. | Purpose of the agricultural extension project(Give a brief write up on the requirement of agricultural extension project indicating the objectives of the project, stages of implementation, expected results and usefulness of the Project.) | |
| 3. | Details of expenses (other than land or building) expected to be incurred for agricultural extension project. | |
| 4. | Amount, if any, proposed to be charged from each beneficiary of agricultural extension project. | |
| 5. | Agricultural extension projects undertaken by the applicant: | |
| (i) agricultural extension projects undertaken by the assessee during last five years, if any along with their current status. | ||
| (ii) Details of agricultural extension projects which have been taken up in past and which are underway on the date of filing of application. | ||
| 6. | Whether the agricultural extension project approved by Ministry of Agriculture, Government of India. | |
| (Enclose a copy of letter obtained from the Ministry of Agriculture, Government of India) | ||
| 7. | Details of Return of Income filed for the last three Assessment years: |
| Assessment Year | Turnover/Gross receipts | Total Income | Tax Payable as per return | Tax Paid | Assessed Income Details | |
| 8. | Enclose copy of audited annual accounts of the assessee/accounts of the assessee for the last three years. | |
| 9. | Whether any Penalty under Section 271(1)(c) was levied on the assessee during the last five years and details thereof. | |
| 10. | Whether any tax demand is outstanding on the date of filing application. |
Certified that the above information is true to the best of my knowledge and belief.
| Place | Signature | |
| Date | Designation | |
| Full Address |
FORM NO.3CP
[See rule 6AAD]
Form for notification of agricultural extension project under sub-section (1) of section 35CCC of the Income-tax Act, 1961
| 1. | Name, address and PAN of the applicant | |
| 2. | Title of the agricultural extension project | |
| 3. | Purpose of the agricultural extension project | |
| 4. | Reference No. and date of the application | |
| 5. | Date of commencement of the agricultural extension project | |
| 6. | Duration of the agricultural extension project in months | |
| 7. | Assessment year(s) for which the agricultural extension project is being notified (not exceeding three years) | |
| 8. | Total expenses likely to be incurred for the agricultural extension project (other than cost of land or building) | |
| 9. | Amount, if any, to be charged from each beneficiary of agricultural extension project | |
| 10. | Conditions, if any, subject to which agricultural extension project is notified. |
| Place : | (Signature) |
| Date : | (Name and Designation) |
Copy to :
(1) the applicant.
(2) Ministry of Agriculture, Government of India.
(3) Commissioner of Income-tax / Director of Income-tax.
(4) The Department of Agriculture of the concerned State.
(5) The Agricultural Technology Management Agency (ATMA) of the concerned District(s).".
RBI issues revised Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions
REVIEW OF PRUDENTIAL GUIDELINES ON RESTRUCTURING OF ADVANCES BY BANKS AND FINANCIAL INSTITUTIONS
CIRCULAR DBOD.BP.BC.NO.99/ 21.04.132/2012-13, DATED 30-5-2013
As indicated in paragraph 81 (extract enclosed as Annexure) of the Monetary Policy Statement 2013-14 announced on May 3, 2013, 'Prudential guidelines on restructuring of advances by banks/financial institutions' have been revised taking into account the recommendations of the Working Group (Chairman: Shri B. Mahapatra) constituted in this regard and the comments received on the draft guidelines issued vide DBOD.BP.BC.No. /21.04.132/2012-13 dated January 31, 2013.
2. The revised instructions are given in the Annex, enumerating only the changed principles/instructions on the subject. Thus, these guidelines should be read in conjunction with instructions on the subject contained in Part B of the Master Circular DBOD.No.BP.BC.9/21.04.048/2012-13, dated July 2, 2012 on 'Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances', which is an updated compilation of 'Prudential Guidelines on Restructuring of Advances' dated August 27, 2008 and subsequent circulars and mail-box clarifications issued on the subject.
Extract from Monetary Policy Statement 2013-14
IV. Regulatory and Supervisory Measures
Prudential Guidelines on Restructuring of Advances by Banks/Financial Institutions
81. It was announced in the SQR that the recommendations of the Working Group (Chairman: Shri B. Mahapatra) to review the existing prudential guidelines on restructuring of advances by banks/financial institutions as also the comments/suggestions received in this regard were under examination and the draft guidelines would be issued by end- January 2013. Accordingly, the draft guidelines were issued on January 31, 2013 for comments till February 28, 2013. Taking into account the comments received, it has been decided to:
• issue the prudential guidelines on restructuring of advances by banks/financial institutions by end-May 2013.
ANNEX
Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions
1. Withdrawal of Regulatory Forbearance
1.1 Existing guidelines in terms of paragraph 14.2 of the Master Circular on 'Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances' dated July 2, 2012 (MC on IRAC Norms 2012) allow regulatory forbearance on asset classification of restructured accounts subject to certain conditions, i.e. standard accounts are allowed to retain their asset classification and NPA accounts are allowed not to deteriorate further in asset classification on restructuring. The asset classification benefit is also available on change of date of commencement of commercial operation (DCCO) for projects under infrastructure sector as well for projects under non-infrastructure sector (paragraphs 4.2.15.3 and 4.2.15.4 of MC on IRAC Norms 2012).
1.2 Though international practice varies, the Working Group (WG) recommended that the RBI may do away with the regulatory forbearance regarding asset classification on restructuring of loans and advances in line with the practice followed in several jurisdictions. However, in view of the current domestic macroeconomic situation as also global situation, this measure could be considered say, after a period of two years. Nevertheless, the WG felt that extant asset classification benefits in cases of change of DCCO of infrastructure project loans may be allowed to continue for some more time in view of the uncertainties involved in obtaining clearances from various authorities and importance of the sector in national growth and development.
1.3 RBI has decided to accept the above recommendation and give effect to this from April 1, 2015. Accordingly, the extant asset classification benefits available on restructuring on fulfilling certain conditions will be withdrawn for all restructurings effective from April 1, 2015 with the exception of provisions related to changes in DCCO in respect of infrastructure as well as non-infrastructure project loans (please see paragraph 2). It implies that a standard account on restructuring (for reasons other than change in DCCO) would be immediately classified as sub-standard on restructuring as also the non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per the extant asset classification norms with reference to the pre-restructuring repayment schedule.
2. Change in DCCO
2.1 In terms of extant instructions contained in paragraphs 4.2.15.3 and 4.2.15.4 of MC on IRAC Norms 2012, standard infrastructure and non-infrastructure project loans could retain the standard asset classification on restructuring if the DCCO is changed within a period of two years (for infrastructure projects) and six months (for non-infrastructure projects) from the original DCCOs subject to certain conditions.
2.2 It is observed that there are occasions when the completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc. All these factors, may lead to delays in project implementation and involve extension of DCCO and in many cases restructuring/reschedulement of loans by banks. Therefore, as recommended by the WG, it has been decided to continue with the extant asset classification benefits in cases of restructuring on account of change of DCCO of infrastructure project loans, until further review.
2.3 Banks have represented that non-infrastructure projects also face similar genuine difficulties in achieving the DCCO as in the case of infrastructure projects and the extant benefit available on change of DCCO of non-infrastructure projects should also continue for some more time. The above representations have been examined by us and it has been decided that the existing asset classification benefit available to non-infrastructure projects under implementation on restructuring due to extension of DCCO in terms of paragraph 4.2.15.4 of MC on IRAC Norms 2012 will continue to be available until further review.
2.4 Banks have also represented that the instruction that a loan for a non- infrastructure project would be classified as NPA if it failed to commence commercial operations within six months from the original DCCO, even if it was regular as per record of recovery {paragraph 4.2.15.4 (ii) of MC on IRAC Norms 2012}, was not commensurate with a longer period of two years extended to infrastructure project loans under similar condition {paragraph 4.2.15.3 (ii) of MC on IRAC Norms 2012} and, therefore, a commensurate longer period may also be extended to non-infrastructure loans in view of the similar extraneous reasons for delay in achieving DCCO. It has been decided to accept their request and extend the prescribed period of 'six months from the original DCCO' to 'one year from the original DCCO' within which a non-infrastructure project will have to commence commercial operation for complying with the provisions of paragraph 4.2.15.4 (ii) of the MC on IRAC Norms 2012. Consequently, if the delay in commencement of commercial operations extends beyond the period of one year from the date of completion as determined at the time of financial closure, banks can prescribe a fresh DCCO and retain the "standard" classification by undertaking the restructuring of accounts in accordance with the provisions in this regard provided the fresh DCCO does not extend beyond a period of 2 years from the original DCCO.
2.5 Banks have to make provision on their restructured standard infrastructure and non-infrastructure project loans as per paragraph 3 below apart from provision for diminution in fair value due to extension of DCCO/restructuring of loans.
2.6 Paragraphs 4.2.15.3 (v) and 4.2.15.4 (iv) of the MC on IRAC Norms 2012 state that for the purpose of these guidelines, mere extension of DCCO would also be treated as restructuring even if all other terms and conditions remained the same. Banks have represented to us that this provision renders any subsequent change in DCCO or restructuring of an infrastructure and non-infrastructure project loan, even within the allowed periods of time for retaining asset classification benefit on change of DCCO {paragraphs 4.2.15.3 (ii) and 4.2.15.4 (ii) of MC on IRAC Norms 2012}, as repeated restructuring. This issue has been examined and it has been decided that mere extension of DCCO would not be considered as restructuring, if the revised DCCO falls within the period of two years and one year from the original DCCO for infrastructure projects and non-infrastructure projects respectively. In such cases the consequential shift in repayment period by equal or shorter duration (including the start date and end date of revised repayment schedule) than the extension of DCCO, would also not be considered as restructuring provided all other terms and conditions of the loan remain unchanged. As such project loans will be treated as standard assets in all respects, they will attract standard asset provision of 0.4 per cent.
2.7 It has also been represented to us that commercial real estate (CRE) projects also face problems of delay in achieving DCCO for extraneous reasons. Further, as mere extension of DCCO as per extant instructions would be treated as restructuring in such cases, banks are averse to financing incomplete projects if there is a delay in the original DCCO. Therefore, it has been decided that mere extension of DCCO even in the case of CRE projects would not be considered as restructuring, if the revised DCCO falls within the period of one year from the original DCCO and there is no change in other terms and conditions except possible shift of the repayment schedule and servicing of the loan by equal or shorter duration compared to the period by which DCCO has been extended. Such CRE project loans will be treated as standard assets in all respects for this purpose without attracting the higher provisioning applicable for restructured standard assets. However, as before, the asset classification benefit would not be available to CRE projects if they are restructured.
2.8 Further, banks have also represented that DCCO of infrastructure projects under the public private partnership (PPP) models may get extended because of shift in Appointed Date (as defined in the concession agreement) due to the inability of the Concession Authority to comply with the requisite conditions, and such extension in DCCO is treated as restructuring, even though borrower may have no control over shift in Appointed Date. In view of this, it has been decided to allow extensions in DCCO due to aforesaid reasons, not to be treated as restructuring, subject to following conditions:
| (a) | The project is an infrastructure project under PPP model awarded by a public authority; | |
| (b) | The loan disbursement is yet to begin; | |
| (c) | The revised date of commencement of commercial operations is documented by way of a supplementary agreement between the borrower and lender; and | |
| (d) | Project viability has been reassessed and sanction from appropriate authority has been obtained at the time of supplementary agreement. |
2.9 In all the above cases of restructuring where regulatory forbearance has been extended, the Boards of banks should satisfy themselves about the viability of the project and the restructuring plan.
2.10 For the purpose of these guidelines, 'Project Loan' would mean any term loan which has been extended for the purpose of setting up of an economic venture. Infrastructure Sector is a sector as defined in extant RBI circular on 'Definition of Infrastructure Lending'. Borrowers must envisage a 'date of completion' and a 'Date of Commencement of Commercial Operations (DCCO)' for all projects at the time of financial closure and that should be formally documented. These should also be documented in the appraisal note by the bank during sanction of the loan.
2.11 It is also clarified here that the provisions contained in paragraph 4.2.15.5 (ii) of MC on IRAC Norms 2012 regarding not treating an account as a restructured account on account of any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, subject to certain conditions, will continue to remain effective.
3. General Provision on Restructured Standard Accounts
3.1 In terms of circular DBOD.No.BP.BC.94/21.04.048/2011-12, dated May 18, 2011, banks are required to make a provision of 2.00 per cent on restructured standard accounts for different periods depending on the way an account is classified as restructured standard account, i.e. either abinitio or on upgradation or on retention of asset classification due to change in DCCO of infrastructure and non-infrastructure projects.
3.2 Till such time the regulatory forbearance on asset classification is dispensed with, in order to prudently recognise the inherent risks in restructured standard assets in the interregnum, the WG had recommended that the provision requirement on such accounts should be increased from the per cent 2 per cent to 5 per cent. This may be made applicable with immediate effect in cases of new restructurings (flow) but in a phased manner during a two year period for the existing standard restructured accounts (stock).
3.3 As an immediate measure, the RBI increased the provision on restructured standard accounts to 2.75 per cent from 2.00 per cent vide circular DBOD.No.BP.BC.63/21.04.048/2012-13, dated November 26, 2012. It has now been decided to increase the provision to 5 per cent in respect of new restructured standard accounts (flow) with effect from June 1, 2013 and in a phased manner for the stock of restructured standard accounts as on March 31, 2013 as under:
| • | 3.50 per cent - with effect from March 31, 2014 (spread over the four quarters of 2013-14) | |
| • | 4.25 per cent - with effect from March 31, 2015 (spread over the four quarters of 2014-15) | |
| • | 5.00 per cent - - with effect from March 31, 2016 (spread over the four quarters of 2015-16) |
4. Provision for Diminution in the Fair Value of Restructured Advances
4.1 At present, in terms of paragraph 11.4 of MC on IRAC Norms 2012, detailed guidelines on the need for and method of calculation of diminution in the fair value of the restructured advances have been laid down.
4.2 The WG was of the view that the current instructions relating to calculation of diminution in fair value of accounts was appropriate and correctly captured the erosion in the fair value. Therefore, the same might be continued. It also recommended that the option of notionally computing the amount of diminution in fair value of small accounts at 5 per cent of the total exposure at small/rural branches in respect of all restructured accounts where the total dues to bank(s) are less than Rs. one crore, may be provided on a long term basis.
4.3 We have also received comments from various stakeholders that the option of notionally calculating diminution in fair value of small accounts where total dues to bank(s) are less than Rs. one crore may be extended to all kinds of branches.
4.4 It has been decided to accept the above recommendation and suggestion; accordingly, the option of notionally computing the amount of diminution in the fair value of small accounts at 5 per cent of the total exposure at small/rural branches in respect of all restructured accounts where the total dues to bank(s) are less than Rs. one crore would be available to all branches till a further review in this regard.
4.5 While the WG was of the view that the current instructions relating to calculation of diminution of fair value of accounts was appropriate and correctly captured the erosion in the fair value, it has come to our notice that on a few occasions there are divergences in the calculation of erosion in the fair value by banks. In terms of our extant instructions, the erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. Fair value of the loan before restructuring will be computed as the present value of cash flows representing the interest (at the existing rate charged on the advance before restructuring) and the principal, discounted at a rate equal to the bank's BPLR or base rate (whichever is applicable to the borrower) as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring. Fair value of the loan after restructuring will be computed as the present value of cash flows representing the interest (at the rate charged on the advance on restructuring) and the principal, discounted at a rate equal to the bank's BPLR or base rate (whichever is applicable to the borrower) as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring.
4.6 Illustratively, divergences could occur if banks are not appropriately factoring in the term premium on account of elongation of repayment period on restructuring. In such a case the term premium used while calculating the present value of cash flows after restructuring would be higher than the term premium used while calculating the present value of cash flows before restructuring. Further, the amount of principal converted into debt/equity instruments on restructuring would need to be held under AFS and valued as per usual valuation norms. Since these instruments are getting marked to market, the erosion in fair value gets captured on such valuation. Therefore, for the purpose of arriving at the erosion in the fair value, the NPV calculation of the portion of principal not converted into debt/equity has to be carried out separately. However, the total sacrifice involved for the bank would be NPV of the above portion plus valuation loss on account of conversion into debt/equity instruments. The promoters' sacrifice requirement would be based on the total sacrifice amount as calculated above.
4.7 Banks are therefore advised that they should correctly capture the diminution in fair value of restructured accounts as it will have a bearing not only on the provisioning required to be made by them but also on the amount of sacrifice required from the promoters. Further, there should not be any effort on the part of banks to artificially reduce the net present value of cash flows by resorting to any sort of financial engineering. Banks are also advised to put in place a proper mechanism of checks and balances to ensure accurate calculation of erosion in the fair value of restructured accounts.
5. Criteria for Upgradation of Account Classified as NPA on Restructuring
5.1 In terms of extant instructions contained in paragraph 11.2.3 of MC on IRAC Norms 2012, all restructured accounts which have been classified as non-performing assets upon restructuring, would be eligible for upgradation to the 'standard' category after observation of 'satisfactory performance' during the 'specified period.' Further, 'specified period' and 'satisfactory performance' have been defined in the Annex 5 of the Master Circular ibid.
5.2 The WG observed that in some cases of restructuring with moratorium on payment of principal as well as major portion of interest, the accounts were upgraded on the basis of payment of interest on only a small portion of the debt, say FITL, for the specified period. Such account may still have inherent credit weakness as payment of interest on a small portion of loans does not give evidence of 'satisfactory performance'.
5.3 The WG has therefore recommended that 'specified period' should be redefined in cases of restructuring with multiple credit facilities as 'one year from the commencement of the first payment of interest or principal, whichever is later, on the credit facility with longest period of moratorium. Further, the WG also recommended that the accounts classified as NPA on restructuring by the bank should be upgraded only when all the outstanding loans/facilities in the account perform satisfactorily during this specified period, i.e. principal and interest on all facilities in the account are serviced as per terms of payment.
5.4 Accordingly, it has been decided that the specified period should be redefined as a period of one year from the commencement of the first payment of interest or principal, whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package.
5.5 Consequently, standard accounts classified as NPA and NPA accounts retained in the same category on restructuring by the bank should be upgraded only when all the outstanding loan/facilities in the account perform satisfactorily during the 'specified period', i.e. principal and interest on all facilities in the account are serviced as per terms of payment during that period.
6. Benchmarks on Viability Parameters
6.1 As per extant instruction vide paragraph 11.1.4 of the MC on IRAC Norms 2012, no account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined by the banks based on the acceptable viability benchmarks determined by them, which may be applied on a case-by-case basis, depending on the merits of each case. RBI had illustrated a few viability parameters in this regard, without giving any benchmarks for each parameter (ref: Paragraph 3.4 under Annex 4 of MC on IRAC Norms 2012).
6.2 The WG recommended that RBI may prescribe the broad benchmarks for the viability parameters based on those used by CDR Cell; and banks may suitably adopt them with appropriate adjustments, if any, for specific sectors.
6.3 It is felt that broad benchmarks prescribed in this regard will be helpful to banks to devise their own benchmarks for viability. However, as different sectors of economy have different performance indicators, it will be desirable that banks adopt these broad benchmarks with suitable modifications.
6.4 Therefore, it has been decided that the viability should be determined by the banks based on the acceptable viability parameters and benchmarks for each parameter determined by them. Illustratively, the broad viability parameters may include the Return on Capital Employed, Debt Service Coverage Ratio, Gap between the Internal Rate of Return and Cost of Funds and the amount of provision required in lieu of the diminution in the fair value of the restructured advance. The benchmarks for the viability parameters adopted by the CDR Mechanism are given in the Appendix and individual banks may suitably adopt them with appropriate adjustments, if any, for specific sectors while restructuring of accounts in non-CDR cases.
7. Viability Time Period
7.1 Currently, time period for attaining viability has been prescribed as one of the conditions for special asset classification benefit on restructuring. For this purpose, paragraph 14.2.2 (ii) of the MC on IRAC Norms 2012 prescribes the condition that the unit should become viable in 10 years, if it is engaged in infrastructure activities, and in 7 years in the case of other units.
7.2 The WG felt that the prescribed time span of seven years for non-infrastructure borrowal accounts and ten years for infrastructure accounts for becoming viable on restructuring was too long and banks should take it as an outer limit.
7.3 In line with the WG's recommendation, it has been decided that banks should ensure that the unit taken up for restructuring achieves viability in 8 years, if it is engaged in infrastructure activities, and in 5 years in other cases.
8. Incentive for Quick Implementation of Restructuring Package
8.1 In terms of extant instruction contained in paragraph 14.2.1 of MC on IRAC Norms 2012, during the pendency of the application for restructuring of the advance with the bank, the usual asset classification norms would continue to apply. However, as an incentive for quick implementation of the package, if the approved package is implemented by the bank as per the following time schedule and subject to fulfilment of certain conditions, the asset classification status may be restored to the position which existed when the reference was made to the CDR Cell in respect of cases covered under the CDR Mechanism or when the restructuring application was received by the bank in non-CDR cases:
| (i) | Within 120 days from the date of approval under the CDR Mechanism. | |
| (ii) | Within 90 days from the date of receipt of application by the bank in cases other than those restructured under the CDR Mechanism. |
8.2 In case of non-CDR restructurings, asset classification benefit is available in case the restructuring package gets implemented within 90 days from the date of receipt of application. As 90 days period after receipt of application is considered insufficient for properly ascertaining the viability of the account, the WG recommended that the period for quick implementation under non-CDR mechanism including SME Debt Restructuring mechanism should be increased to 120 days from the date of application.
8.3 Accordingly, it has been decided that the incentive for quick implementation of the restructuring package in non-CDR cases would henceforth be available, if the approved package is implemented by the bank within 120 days from the date of receipt of application. There is no change in the time period as regards CDR mechanism.
8.4 However, it is clarified that no such incentive would be available on withdrawal of regulatory forbearance on restructuring with effect from April 1, 2015, except in cases of restructuring by change of DCCO of infrastructure and non-infrastructure project loans as specified in this circular.
9. Roll over of Short-Term Loans
9.1 As per existing instruction contained in Sl. No. (iv) under 'Key Concepts' in Annex 5 to Master Circular on IRAC Norms 2012, a restructured account is defined as one where the bank, for economic or legal reasons relating to the borrower's financial difficulty, grants to the borrower concessions that the bank would not otherwise consider. Restructuring would normally involve modification of terms of the advances/securities, which would generally include, among others, alteration of repayment period /repayable amount/the amount of instalments/rate of interest (due to other than competitive reasons). In view of this definition, any roll-over of a short term loan will be considered as 'restructuring'.
9.2 The WG recommended that RBI may clarify that the cases of roll-over of short term loans, where proper pre-sanction assessment has been made, and the roll-over is allowed based on the actual requirement of the borrower and no concession has been provided due to credit weakness of the borrower, then these might not be considered as restructured accounts. However, if such accounts are rolled-over more than 2 times, then third roll-over onwards the account would have to be treated as a restructured account. Besides, banks should be circumspect while granting such facilities as the borrower may be availing similar facilities from other banks in the consortium or under multiple banking.
9.3 It has been decided to accept the recommendation. However, it is clarified that Short Term Loans for the purpose of this provision do not include properly assessed regular Working Capital Loans like revolving Cash Credit or Working Capital Demand Loans.
10. Promoters' Sacrifice
10.1 In terms of extant instruction contained in paragraph 14.2.2.(iv)of MC on IRAC Norms 2012, one of the conditions for eligibility for regulatory asset classification benefit on restructuring is that promoters' sacrifice and additional funds brought by them should be a minimum of 15 per cent of banks' sacrifice. The term 'bank's sacrifice' means the amount of "erosion in the fair value of the advance". It is also prescribed that promoters' sacrifice may be brought in two instalments and it may be brought in different forms as indicated therein.
10.2 The WG recommended that RBI may consider a higher amount of promoters' sacrifice in cases of restructuring of large exposures under CDR mechanism. Further, the WG recommended that the promoters' contribution should be prescribed at a minimum of 15 per cent of the diminution in fair value or 2 per cent of the restructured debt, whichever is higher.
10.3 It has been decided that promoters' sacrifice and additional funds brought by them should be minimum of 20 per cent of banks' sacrifice or 2 per cent of the restructured debt, whichever is higher. This stipulation is the minimum and banks may decide on a higher sacrifice by promoters depending on the riskiness of the project and promoters' ability to bring in higher sacrifice amount. Further, such higher sacrifice may invariably be insisted upon in larger accounts, especially CDR accounts. The promoters' sacrifice should invariably be brought upfront while extending the restructuring benefits to the borrowers.
11. Conversion of Debt into Equity/Preference Shares
11.1 At present vide paragraphs 15.1, 15.2 & 15.3 of MC on IRAC Norms 2012, there is no regulatory cap on the percentage of debt which can be converted into equity/preference shares on restructuring of advances, subject to adherence to statutory requirement under Section 19 of the BR Act 1949 and relevant SEBI regulations.
11.2 The WG recommended that conversion of debt into preference shares should be done only as a last resort and such conversion of debt into equity/preference shares should, in any case, be restricted to a cap (say 10 per cent of the restructured debt). It also recommended that any conversion of debt into equity should be done only in the case of listed companies.
11.3 It has been decided to accept the recommendation and banks should be guided accordingly.
12. Right of Recompense
12.1 In terms of existing instruction contained in paragraph 5.7 under Annex 4 of the MC on IRAC Norms 2012 all CDR approved packages must incorporate creditors' right to accelerate repayment and borrowers' right to pre-pay. The right of recompense should be based on certain performance criteria to be decided by the Standing Forum.
12.2 The WG recommended that CDR Standing Forum/Core Group may take a view as to whether their clause on 'recompense' may be made somewhat flexible in order to facilitate the exit of the borrowers from CDR Cell. However, it also recommended that in any case 75 per cent of the amount of recompense calculated should be recovered from the borrowers and in cases of restructuring where a facility has been granted below base rate, 100 per cent of the recompense amount should be recovered.
12.3 The WG also recommended that the present recommendatory nature of 'recompense' clause should be made mandatory even in cases of non-CDR restructurings.
12.4 Accordingly, it has been decided that all restructuring packages must incorporate 'Right to recompense' clause and it should be based on certain performance criteria of the borrower. In any case minimum 75 per cent of the recompense amount should be recovered by the lenders and in cases where some facility under restructuring has been extended below base rate, 100 per cent of the recompense amount should be recovered.
13. Personal Guarantee of Promoters
13.1 As per the extant restructuring guidelines, personal guarantee by the promoter is one of the necessary conditions (paragraph 14.2.2 of MC on IRAC Norms 2012) for the asset classification benefit except when the unit is affected by external factors pertaining to the economy and industry.
13.2 As stipulating personal guarantee will ensure promoters' "skin in the game" or commitment to the restructuring package, the WG recommended that obtaining the personal guarantee of promoters be made a mandatory requirement in all cases of restructuring, i.e. even if the restructuring is necessitated on account of external factors pertaining to the economy and industry. It also recommended that corporate guarantee cannot be a substitute for the promoters' personal guarantee.
13.3 Accordingly, it has been decided that promoters' personal guarantee should be obtained in all cases of restructuring and corporate guarantee cannot be accepted as a substitute for personal guarantee. However, corporate guarantee can be accepted in those cases where the promoters of a company are not individuals but other corporate bodies or where the individual promoters cannot be clearly identified.
APPENDIX
Broad benchmarks for the viability parameters
| i. | Return on capital employed should be at least equivalent to 5 year Government security yield plus 2 per cent. | |
| ii. | The debt service coverage ratio should be greater than 1.25 within the 5 years period in which the unit should become viable and on year to year basis the ratio should be above 1. The normal debt service coverage ratio for 10 years repayment period should be around 1.33. | |
| iii. | The benchmark gap between internal rate of return and cost of capital should be at least 1per cent. | |
| iv. | Operating and cash break even points should be worked out and they should be comparable with the industry norms. | |
| v. | Trends of the company based on historical data and future projections should be comparable with the industry. Thus behaviour of past and future EBIDTA should be studied and compared with industry average. | |
| vi. | Loan life ratio (LLR), as defined below should be 1.4, which would give a cushion of 40% to the amount of loan to be serviced. |
| LLR= | Present value of total available cash flow (ACF) during the loan life period (including interest and principal) |
| Maximum amount of loan |
ST-Non-compliance with pre-deposit order leads to dismissal of appeal
ST : If assessee does not comply with pre-deposit order, his appeal is liable to be dismissed
■■■
[2013] 31 taxmann.com 301 (Ahmedabad - CESTAT)
CESTAT, AHMEDABAD BENCH
Pestonjee Bhicajee
v.
Commissioner of Central Excise, Rajkot*
B.S.V. MURTHY, TECHNICAL MEMBER
ORDER NO. A/10195/WZB/AHD/2013
APPEAL NO. ST/266 OF 2012
APPEAL NO. ST/266 OF 2012
JANUARY 11, 2013
Section 83 of the Finance Act, 1994 read with section 35F of the Central Excise Act, 1944 - Application of certain provisions of Excise Act - Deposit, pending appeal, of duty demanded or penalty levied - Assessee sought extension of time in making pre-deposit, which was granted - But, it neither made pre-deposit nor made any representation on due date for compliance - HELD : Due to non-compliance with pre-deposit order, appeals were liable to be dismissed [Para 2] [In favour of revenue]
Shiv Kumar for the Respondent.
ORDER
1. Vide stay order No. S/1992/WZB/AHD/2012 dated 13/09/2012, the appellant was directed to deposit the entire amount of service tax and report compliance on 9-11-2012. When the matter came up for compliance, appellant had written a letter, which was received on 8th November, 2012, seeking extension of time since there was a family dispute going on. Accordingly, extension of time was granted up to 11/01/2013.
2. Today when the matter came up for ascertaining compliance, neither there was any report of compliance for having deposited the amount nor any representation on behalf of the appellant. Accordingly stay application as well as appeals are rejected for non-compliance with the stay order as provided under Section 35F of Central Excise Act, 1944 made applicable to service tax matters.
■■ *In favour of revenue.
IT-Mere intimation by ITO won't seal the fate of trust registration, unless CIT passes an order to dispose it off
IT : A communication or even an order signed by Income-tax Officer cannot be treated as disposal of application under section 12AA
■■■
[2013] 33 taxmann.com 326 (Kolkata - Trib.)
IN THE ITAT KOLKATA BENCH 'B'
Pravat
v.
Commissioner of Income-tax, Asansol*
Pramod Kumar, ACCOUNTANT MEMBER
AND Mahavir Singh, JUDICIAL MEMBER
AND Mahavir Singh, JUDICIAL MEMBER
IT Appeal Nos. 688 & 689 (Kol.) of 2012
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
MARCH 26, 2013
Section 12AA of the Income-tax Act, 1961 - Charitable or religious trust - Registration procedure [Disposal of application] - Assessment year 2009-10 - Whether it is for Commissioner to dispose of application for registration, and order theron could not be passed by any other authority to which such powers may have been delegated - Held, yes - Whether, therefore, a communication or even an order signed by Income-tax Officer cannot be treated as disposal of application - Held, yes - Whether where period of six months from date of application had passed and no order had been passed by Commissioner, registration under section 12A should be deemed to have been granted - Held, yes [Para 7] [In favour of assessee]
FACTS
| ■ | The assessee, a society said to be working for public good in rural area, moved an application under section 12AA but instead of any adjudication on the said application, a communication was issued by the Income-tax Officer (Technical) in the office of the Commissioner informing the assessee that the assessee was declined registration under section 12AA and initial exemption under section 80G. |
Issue Involved
| ■ | Whether the communication sent by Income-tax Officer could be treated as disposal of assessee's application for registration under section 12AA? |
HELD
| ■ | An application made to a statutory authority, for his exercise of powers vested in him by the statute, can only be disposed of by him and not by any other person to whom he may like to delegate such an authority. A statutory power vested in an authority cannot be delegated by the authority to any other authority, unless there is a specific enabling provision to that effect in the statute itself. It is, therefore, beyond much controversy and debate that it was for the Commissioner to dispose of the application for registration, and the order thereon could not have been passed by any other authority to which such powers may have been delegated. The communication by the Income-tax Officer (Technical), therefore, does not have any authority of law. The assessee has not received any order rejecting the application under section 12A till date. It is, thus, also not in dispute that there is no other service of any other communication addressed to the assessee by the Commissioner. In these circumstances, the application under section 12AA cannot be treated to have been disposed of by the Commissioner. [Para 5] | |
| ■ | No reasons whatsoever have been given in the ITO's letter but he mentions that the application was considered 'sympathetically' and rejected. This kind of authoritarian approach and unwillingness to give legal reasons does not anyway befit conduct of any public authority in a democratic set up like ours, wherein rule of law is of paramount importance. It is not the sympathy, but the legal rights of the assessee, which should be subject-matter of consideration, and there is not even a whisper of those relevant considerations. The Income-tax Officer had, thus, even in sending this communication, which has no value in law sofaras disposal of application under section 12AA is concerned, shown complete lack of conduct befitting someone holding a public office to implement the provisions of a legal statute, i.e., Income-tax Act, 1961. [Para 6] | |
| ■ | Further, it is not open to the Commissioner to keep an application for registration under section 12A pending indefinitely, and when the application is not disposed of within a period of six months from the date of filing the application, the approval is deemed to have been granted. Clearly, in the instant case, the period of six months from the date of application has passed and no order has been passed by the Commissioner. Therefore, for this short reason alone, the registration under section 12A should be deemed to have been granted. [Para 7] |
CASES REFERRED TO
Bhagwat Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust v. CIT [2008] 111 ITD 175 (Delhi) (SB) (para 7).
P.K. Ray for the Appellant. Dilip K. Rakshit for the Respondent.
ORDER
ITA No. 688/Kol/2012
Pramod Kumar, Accountant Member - This is an appeal filed by the assessee and is directed against an order, or rather letter, dated 4th March 2009 issued by the Income Tax Officer (Technical) in the office of the Commissioner of Income Tax, Asansol, informing the assessee that the assessee is declined registration under section 12AA and initial exemption under section 80G of the Income Tax Act, 1961. The matter pertains to the assessment year 2009-10. Though the reference is made to Section 12A at some places, actual relevant provision is Section 12 AA.
2. The memorandum of appeal is said to have been presented in the Registry of this Tribunal on 27th April 2012, and registered on 30th April 2012, whereas the impugned and alleged order was issued on 4th March 2009. According to our registry noting, there is thus a delay of 1,093 days. Learned counsel has submitted a petition seeking condonation of delay and has also filed an affidavit in support of contentions therein. The assessee trust is in a remote village in Puralia district, an area said to be disturbed by certain anti social elements and movements, where even commuting from village to the Asansol is also a difficult task. It is explained before us that the assessee was following up with the Commissioner's office for consideration by the Commissioner, as against this rejection by the ITO (Technical), and thus a review of the matter. However, there was no response. It was also stated that as there was no regular Commissioner posted at Asansol, and the additional charge of this office was held by some other Commissioner of Income Tax posted elsewhere. The assessee could not even thus meet the Commissioner. It was in this backdrop and for these reasons that the delay is said to have taken place. Learned Departmental Representative did oppose the petition seeking condonation of delay but he had little to say when we asked him as to how a letter written by the ITO (Technical) can be treated as disposal of application by the Commissioner. We have considered all these factors, as also the content of the condonation petition and supporting affidavit, and we are of the view that this appeal is to be admitted and considered on merits.
3. To adjudicate on this appeal only a few material facts need to be taken note of. The assessee, a society said to be working for public good in rural area, moved an application under section 12 AA but instead of any adjudication on the said application, the Commissioner's office sent the following communication to the assessee, vide letter dated 4th March 2009, signed by the Income-ax Officer (Technical) :
Sub : Petition u/s 12 A for registration and u/s 80G for initial exemption - matter regarding.
Please refer to the above.
I am directed to inform you that Learned Commissioner of Income Tax, Asansol, has perused your cases sympathetically and not granted the registration under section 12A and exemption under section 80 G. This is for your information, please.
Sd/xx
(D K Saha)
Income Tax Officer (Technical)
For Commissioner of Income Tax, Asansol.
4. The short question that we are really required to consider is whether the aforesaid communication can be said to have been disposal of assessee's application for registration under section 12 AA, and in case we hold so, whether it can be sustainable in law on merits, as also in case we do not hold so, the consequences and corollaries of such a finding. We have heard the learned representatives on this issue, we have considered applicable legal position as also factual matrix of the case.
5. In our considered view, an application made to a statutory authority, for his exercise of powers vested in him by the statute, can only be disposed of him and not by any other person to whom he may like to delegate such an authority. A statutory power vested in an authority cannot be delegated by the authority to any other authority, unless there is a specific enabling provision to that effect in the statute itself. It is, therefore, beyond much controversy and debate that it was for the Commissioner to dispose of the application for registration, and the order thereon could not have been passed by any other authority to which such powers may have been delegated. The communication by the Income Tax Officer (Technical), therefore, does not have, in our humble understanding, any authority of law. A communication, or even an order, signed by the Income Tax Officer cannot be treated as disposal of application. Learned counsel has stated at the bar, and the departmental representative does not dispute that, the assessee has not received any order rejecting the application under section 12A till date. It is thus also not in dispute that there is no other service of any other communication addressed to the assessee by the Commissioner. In these circumstances, the application under section 12AA cannot be treated to have been disposed of by the Commissioner.
6. We have also noted that no reasons whatsoever have been given in the ITO's letter but he mentions that the application was considered "sympathetically" and rejected. This kind of authoritarian approach, and unwillingness to give legal reasons, does not anyway befit conduct of any public authority in a democratic set up like ours, wherein rule of law is of paramount importance. It is not the sympathy, but the legal rights of the assessee, which should be subject matter of consideration, and there is not even a whisper of those relevant considerations. Learned Income Tax Officer was thus, even in sending this communication, which has no value in law so far as disposal of application under section 12 AA is concerned, shown complete lack of conduct befitting someone holding a public office to implement the provisions of a legal statute i.e. Income Tax Act, 1961.
7. It is also important to bear in mind the fact that, as held by a Special Bench of this Tribunal in the case of Bhagwat Swarup Shri Shri Devraha Baba Memorial Shri Hari Pamarth Dham Trust v. CIT [2008] 111 ITD 175 (Delhi), it is not open to the Commissioner to keep an application for registration under section 12A pending indefinitely, and when the application is not disposed of within a period of six months from the date of filing the application, the approval is deemed to have been granted. Clearly, in the present case, the period of six months of the date of application has passed and no order has been passed by the Commissioner. Therefore, for this short reason alone, the registration under section 12A should be deemed to have been granted. We, therefore, uphold the grievance of the assessee and direct the Commissioner to grant registration under section 12A. The assessee gets the relief accordingly.
8. In the result, the appeal (ITA 688/Kol/12) is allowed.
9. As regards this appeal, it is against denial of initial exemption under section 80G, but, as learned representatives fairly agree, its outcome will depend on the outcome of ITA No. 688/Kol/12 which is on the same set of acts and which deals with the common consolidated order by the ITO (Technical) in the office of the Commissioner of Income Tax, Asansol.
10. As we have already upheld the grievance of the assessee, sofaras registration under section 12AA is concerned and admittedly whatever be the fate of assessee's grievance in the said matter, the same will follow on this issue as well, we uphold the grievance of the assessee on this issue as well. The Commissioner is, accordingly, directed to grant exemption under section 80G as well. The assessee gets the relief accordingly.
11. In the result, this appeal (689/Kol/12) is also allowed. To sum up, both the appeals are allowed.
ST-Sum incurred on delivery, servicing and installation of traded goods can't be charged to service tax
ST : Expenditure incurred by assessee towards delivery, servicing and installation expenses on UPS systems traded by it cannot be charged to service tax in its hands, as no services were rendered by assessee
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[2013] 33 taxmann.com 294 (Ahmedabad - CESTAT)
CESTAT, AHMEDABAD BENCH
XSIS Power Systems (P.) Ltd.
v.
Commissioner of Service Tax, Ahmedabad*
B.S.V. MURTHY, TECHNICAL MEMBER
ORDER NO. A/10190/WZB/AHD/2013
APPEAL NO. ST/153 OF 2011
APPEAL NO. ST/153 OF 2011
JANUARY 11, 2013
Section 65(39a) of the Finance Act, 1994 - Erection, Commissioning and Installation Services - Assessee was engaged in trading in UPS system - Assessee incurred expenditure towards delivery, servicing and installation expenses - Department sought levy of service tax on such expenses under "Erection, commissioning and installation services" - HELD : It was evident from show-cause notice and balance sheet that amount was actually expenditure incurred by assessee and there was no basis for conclusion that said amount was recovered from consumer and thereby, income for assessee - Service tax can be demanded only for services rendered and cost recovered from customer; it cannot be demanded from service receiver - Hence, demand was liable to be set aside [Paras 2 & 3] [In favour of assessee]
P. Gupta for the Appellant. Shiv Kumar for the Respondent.
ORDER
1. On going through the balance sheet of the appellant for the year 2007-08 and finding that appellant had incurred an expenditure of Rs. 5,01,290/- towards delivery, servicing and installation expenses and taking a view that this is the amount recovered by the appellant for providing erection, commissioning and installation services in respect of UPS being traded-by them, show-cause notice was issued to the appellants to show cause as to why they should not be held liable to pay service tax on this amount. This has culminated in the impugned order wherein demand for service tax has been confirmed and penalties have been imposed under various sections of the Finance Act, 1994.
2. After hearing both sides and going through the show-cause notice and balance sheet, I find that the amount is actually expenditure incurred by the appellant and there is no basis for the conclusion that this amount is recovered from consumer and thereby income for the appellant. Service Tax can be demanded only for the services rendered and cost recovered from the customer and not from the service receiver.
3. Therefore, demand for service tax cannot be sustained and accordingly is set aside. When there is no demand for service tax, there cannot be any penalty on the appellants also.
4. Accordingly appeal is allowed with consequential benefit, if any, to the appellant
Vineet *In favour of assessee.
Thanks & Regards,
CA AMRESH VASHISHT, FCA, LLB, DISA (ICAI)
__._,_.___
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