[aaykarbhavan] Judgments and information. and judgment attached

IT: Rule of consistency would not come in way of allowing/disallowing deduction under section 35D; authorities have to consider whether assessee has fulfilled all conditions of section for relevant assessment year

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[2013] 40 taxmann.com 349 (Gujarat)

HIGH COURT OF GUJARAT

Gujarat Power Corporation Ltd.

v.

Additional Commissioner of Income-tax*

M.R. SHAH AND MS. SONIA GOKANI, JJ.

TAX APPEAL NOS. 210 & 212 OF 2013†

AUGUST  13, 2013 

Section 35D of the Income-tax Act, 1961 - Preliminary expenses [Rule of consistency] - Assessment years 2003-04 and 2004-05 - Assessing Officer disallowed deduction claimed by assessee under section 35D on ground that all conditions mentioned in section 35D were not fulfilled/satisfied - On appeal, Commissioner (Appeals) allowed deduction on ground that such deduction had also been granted in earlier assessment years - Tribunal quashed order of Commissioner (Appeals) holding that when it had been found by Assessing Officer that all conditions of section 35D were not satisfied, rule of consistency would not come in way - Whether if Tribunal was of opinion that rule of consistency would not come in way, it was required to consider aforesaid issue on merits and consider whether with respect to relevant assessment years all conditions mentioned in section 35D were fulfilled/satisfied or not - Held, yes [Para 8] [Matter remanded]

S.N. Divatia for the Appellant.

ORDER

 

M.R. Shah, J. - Admit. Present Tax Appeals are admitted to consider the following question of law:—

"Whether on the facts and in the circumstances of the case as well as in law, the Appellate Tribunal was justified in upholding the disallowance of deduction of Rs.28,20,192/- under section 35D of the Act?"

2. In the facts and circumstances of the case, Shri Sudhir Mehta, learned counsel waives service of notice of admission on behalf of respondent as he has already appeared in other appeals arising out of impugned judgment and order but with respect to other questions of law.

3. In the facts and circumstances of the case and for the reasons stated hereinbelow, as we propose to remand the appeals to the learned Income Tax Appellate Tribunal (hereinafter referred to as "the learned ITAT") to consider the aforesaid question afresh, present appeals are taken up for final hearing today.

4. Tax Appeal No.210 of 2013 has been preferred by the assessee challenging the impugned judgment and order passed by the learned ITAT in I.T.A No.84 of 2007 with respect to the Assessment Year 2003-04 insofar as disallowance under section 35D of the Income Tax Act,1961 (hereinafter referred to as "the Act") is concerned. Similarly Tax Appeal No.212 of 2013 has been preferred by the assessee challenging the impugned judgment and order passed by the learned ITAT passed in ITA No. 1468 of 2007 with respect to the Assessment Year 2004-05, which is also with respect to disallowance under section 35D of the Act.

5. The grievance which is voiced in the present Tax Appeals by Shri Divatia, learned counsel appearing on behalf of the assessee is that as such in the earlier years i.e. Assessment Years 1995-96 and 2000-01 similar benefit was given and the deduction under section 35D of the Act was allowed and consequently CIT(Appeals) quashed and set aside the orders passed by the learned Assessing Officer permitting deduction under section 35D of the Act. However, learned Tribunal has set aside the orders passed by CIT(Appeals) by observing that rule of consistency will not come in the way and thereafter further considering the aforesaid issue on merits, whether, in fact, all the conditions mentioned in section 35D of the Act are fulfilled or not, has set aside the orders passed by the CIT(Appeals) by observing that as such CIT(Appeals) has not upset the findings given by the Assessing Officer with respect to the non-fulfilment of all the conditions mentioned in section 35D of the Act. It is submitted as such even CIT(Appeals) also did not consider whether all the conditions mentioned in section 35D of the Act are fulfilled or not It is submitted that, therefore, either the learned ITAT ought to have remanded the matter to CIT(Appeals) to consider the aforesaid issue on merits or the learned ITAT ought to have itself considered the aforesaid issue on merits. Therefore, it is requested to remand the appeals to the learned ITAT to consider the aforesaid issue on merits and to consider on merits whether in the present case all the conditions mentioned in section 35D of the Act were satisfied/fulfilled or not. He has stated at Bar that the appellants would be satisfied, if the appeals are remanded to the learned ITAT to consider the aforesaid issue i.e. disallowance under section 35D of the Act on merits and to consider whether in the present case all the conditions mentioned in section 35D of the Act are satisfied or not.

6. Shri Sudhir Mehta learned counsel appearing on behalf of the Revenue is not in a position to dispute that as such neither CIT (Appeals) nor the learned ITAT has considered the aforesaid issue on merits i.e. whether in the present case all the conditions mentioned in section 35D of the Act are satisfied or not. Therefore, he has requested to pass appropriate order considering the aforesaid facts and circumstances of the case.

7. Having heard learned counsel appearing for the respective parties and considering the impugned order passed by the learned ITAT as well as CIT(Appeals), it appears that CIT(Appeals) as well as the Assessing Officer held that all the conditions mentioned in section 35D are not fulfilled/satisfied and, therefore, made disallowance of the amount claimed under section 35D of the Act. CIT(Appeals), solely on the basis of granting such allowance with respect to the Assessment Years 1995-96 and 2000-01, granted the benefit under section 35D of the Act. However, in appeal the learned ITAT has observed that as with respect to the Assessment Years in question, it has been found by the Assessing Officer that all the conditions of section 35D of the Act are not satisfied, rule of consistency would not come in the way and, therefore, the learned ITAT, by impugned order, has set aside the order passed by CIT(Appeals).

8. Shri Divatia, learned counsel appearing on behalf of the assessee is justified in making grievance that if the learned ITAT was of the opinion that rule of consistency will not come in the way, in that case, the Tribunal was required to consider the aforesaid issue on merits and consider whether in the present case and with respect to the Assessment Years all the conditions mentioned in section 35D of the Act are fulfilled/satisfied or not. Under the circumstances, appeals are required to be remanded to the learned ITAT to consider the aforesaid issue on merits and to consider whether with respect to assessment years in question, all the conditions mentioned under section 35D of the Act are satisfied or not.

9. In view of the above, and for the reasons stated above, both the appeals succeed in part. Both the appeals are remanded to the learned ITAT to consider the aforesaid issues i.e. the disallowance under section 35D of the Act on merits and to consider whether with respect to the assessment years in question all the conditions mentioned in section 35D of the Act are fulfilled/satisfied or not and whether the assessee would be entitled to amortization of the expenses as claimed or not.

10. With this, both these appeals are allowed to the aforesaid extent and are accordingly disposed of.

VARSHA

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*Matter remanded.

†Arising from orders of ITAT in IT Appeal Nos. 84 & 1468 of 2007.

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Pawan Singla , LLB

M. No. 9825829075

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IT: Rule of consistency would not come in way of allowing/disallowing deduction under section 35D; authorities have to consider whether assessee has fulfilled all conditions of section for relevant assessment year

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[2013] 40 taxmann.com 349 (Gujarat)

HIGH COURT OF GUJARAT

Gujarat Power Corporation Ltd.

v.

Additional Commissioner of Income-tax*

M.R. SHAH AND MS. SONIA GOKANI, JJ.

TAX APPEAL NOS. 210 & 212 OF 2013†

AUGUST  13, 2013 

Section 35D of the Income-tax Act, 1961 - Preliminary expenses [Rule of consistency] - Assessment years 2003-04 and 2004-05 - Assessing Officer disallowed deduction claimed by assessee under section 35D on ground that all conditions mentioned in section 35D were not fulfilled/satisfied - On appeal, Commissioner (Appeals) allowed deduction on ground that such deduction had also been granted in earlier assessment years - Tribunal quashed order of Commissioner (Appeals) holding that when it had been found by Assessing Officer that all conditions of section 35D were not satisfied, rule of consistency would not come in way - Whether if Tribunal was of opinion that rule of consistency would not come in way, it was required to consider aforesaid issue on merits and consider whether with respect to relevant assessment years all conditions mentioned in section 35D were fulfilled/satisfied or not - Held, yes [Para 8] [Matter remanded]

S.N. Divatia for the Appellant.

ORDER

 

M.R. Shah, J. - Admit. Present Tax Appeals are admitted to consider the following question of law:—

"Whether on the facts and in the circumstances of the case as well as in law, the Appellate Tribunal was justified in upholding the disallowance of deduction of Rs.28,20,192/- under section 35D of the Act?"

2. In the facts and circumstances of the case, Shri Sudhir Mehta, learned counsel waives service of notice of admission on behalf of respondent as he has already appeared in other appeals arising out of impugned judgment and order but with respect to other questions of law.

3. In the facts and circumstances of the case and for the reasons stated hereinbelow, as we propose to remand the appeals to the learned Income Tax Appellate Tribunal (hereinafter referred to as "the learned ITAT") to consider the aforesaid question afresh, present appeals are taken up for final hearing today.

4. Tax Appeal No.210 of 2013 has been preferred by the assessee challenging the impugned judgment and order passed by the learned ITAT in I.T.A No.84 of 2007 with respect to the Assessment Year 2003-04 insofar as disallowance under section 35D of the Income Tax Act,1961 (hereinafter referred to as "the Act") is concerned. Similarly Tax Appeal No.212 of 2013 has been preferred by the assessee challenging the impugned judgment and order passed by the learned ITAT passed in ITA No. 1468 of 2007 with respect to the Assessment Year 2004-05, which is also with respect to disallowance under section 35D of the Act.

5. The grievance which is voiced in the present Tax Appeals by Shri Divatia, learned counsel appearing on behalf of the assessee is that as such in the earlier years i.e. Assessment Years 1995-96 and 2000-01 similar benefit was given and the deduction under section 35D of the Act was allowed and consequently CIT(Appeals) quashed and set aside the orders passed by the learned Assessing Officer permitting deduction under section 35D of the Act. However, learned Tribunal has set aside the orders passed by CIT(Appeals) by observing that rule of consistency will not come in the way and thereafter further considering the aforesaid issue on merits, whether, in fact, all the conditions mentioned in section 35D of the Act are fulfilled or not, has set aside the orders passed by the CIT(Appeals) by observing that as such CIT(Appeals) has not upset the findings given by the Assessing Officer with respect to the non-fulfilment of all the conditions mentioned in section 35D of the Act. It is submitted as such even CIT(Appeals) also did not consider whether all the conditions mentioned in section 35D of the Act are fulfilled or not It is submitted that, therefore, either the learned ITAT ought to have remanded the matter to CIT(Appeals) to consider the aforesaid issue on merits or the learned ITAT ought to have itself considered the aforesaid issue on merits. Therefore, it is requested to remand the appeals to the learned ITAT to consider the aforesaid issue on merits and to consider on merits whether in the present case all the conditions mentioned in section 35D of the Act were satisfied/fulfilled or not. He has stated at Bar that the appellants would be satisfied, if the appeals are remanded to the learned ITAT to consider the aforesaid issue i.e. disallowance under section 35D of the Act on merits and to consider whether in the present case all the conditions mentioned in section 35D of the Act are satisfied or not.

6. Shri Sudhir Mehta learned counsel appearing on behalf of the Revenue is not in a position to dispute that as such neither CIT (Appeals) nor the learned ITAT has considered the aforesaid issue on merits i.e. whether in the present case all the conditions mentioned in section 35D of the Act are satisfied or not. Therefore, he has requested to pass appropriate order considering the aforesaid facts and circumstances of the case.

7. Having heard learned counsel appearing for the respective parties and considering the impugned order passed by the learned ITAT as well as CIT(Appeals), it appears that CIT(Appeals) as well as the Assessing Officer held that all the conditions mentioned in section 35D are not fulfilled/satisfied and, therefore, made disallowance of the amount claimed under section 35D of the Act. CIT(Appeals), solely on the basis of granting such allowance with respect to the Assessment Years 1995-96 and 2000-01, granted the benefit under section 35D of the Act. However, in appeal the learned ITAT has observed that as with respect to the Assessment Years in question, it has been found by the Assessing Officer that all the conditions of section 35D of the Act are not satisfied, rule of consistency would not come in the way and, therefore, the learned ITAT, by impugned order, has set aside the order passed by CIT(Appeals).

8. Shri Divatia, learned counsel appearing on behalf of the assessee is justified in making grievance that if the learned ITAT was of the opinion that rule of consistency will not come in the way, in that case, the Tribunal was required to consider the aforesaid issue on merits and consider whether in the present case and with respect to the Assessment Years all the conditions mentioned in section 35D of the Act are fulfilled/satisfied or not. Under the circumstances, appeals are required to be remanded to the learned ITAT to consider the aforesaid issue on merits and to consider whether with respect to assessment years in question, all the conditions mentioned under section 35D of the Act are satisfied or not.

9. In view of the above, and for the reasons stated above, both the appeals succeed in part. Both the appeals are remanded to the learned ITAT to consider the aforesaid issues i.e. the disallowance under section 35D of the Act on merits and to consider whether with respect to the assessment years in question all the conditions mentioned in section 35D of the Act are fulfilled/satisfied or not and whether the assessee would be entitled to amortization of the expenses as claimed or not.

10. With this, both these appeals are allowed to the aforesaid extent and are accordingly disposed of.

VARSHA

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*Matter remanded.

†Arising from orders of ITAT in IT Appeal Nos. 84 & 1468 of 2007.

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IT: Insurance money received on loss of production is not eligible for deduction under section 80-IA

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[2013] 40 taxmann.com 399 (Madras)

HIGH COURT OF MADRAS

Commissioner of Income-tax

v.

Gangothri Textiles Ltd.*

MRS. CHITRA VENKATARAMAN AND K. RAVICHANDRABAABU, JJ.

TAX CASE (APPEAL) NO. 2596 OF 2006†

OCTOBER  30, 2012 

Section 80-IA of the Income-tax Act, 1961 - Deductions - Profit and gains from infrastructure undertaking [Computation of deduction] - Assessment year 1998-99 - Assessee suffered fire accident on 11-3-1996 - It subsequently made claim before insurance company and admittedly, same was compensated - Assessee claimed that insurance money was paid to it for loss of production due to accident and, therefore, same would be considered for grant of relief under section 80-IA - Whether given fact that fire accident had taken place as early as 11-3-1996 and there being no nexus between claim before insurance company and subsequent loss arising out of industrial activity, compensation could be considered for purpose of granting relief under section 80-IA - Held, no [Para 4] [In favour of revenue]

CASES REFERRED TO

 

Rollatainers Ltd. v. Dy. CIT [2000] 111 Taxman 221 (Delhi)(Mag.) (para 2).

N.V. Balaji for the Appellant. R. Venkatanarayanan for the Respondent.

JUDGMENT

 

Mrs. Chitra Venkataraman, J. - The Revenue is on appeal as against the order of the Income Tax Appellate Tribunal relating to assessment year 1998-99 by raising the following question of law:—

"Whether the insurance money received on loss of production is entitled for deduction under Section 80IA?"

2. It is seen from the facts herein that the assessee is stated to have suffered fire accident on 11.3.1996, which is relevant for the assessment year 1996-97. The assessee subsequently made claim before the insurance company and admittedly, the same was compensated. The assessee claimed loss on production due to the fire accident that took place on 11.3.1996. The Assessing Officer rejected the claim of the assessee by pointing out that the claim with the insurance company and the subsequent loss of the profit in the subsequent year was not at all connected. The Income Tax Officer held that mere commercial connection between the industrial undertaking would not be sufficient for grant of relief under Section 80IA of the Income Tax Act. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who allowed the appeal by holding that on perusal of the Surveyor's report, it was clear that the insurance money was paid to the assessee for the loss on production. In the circumstances, the Officer was directed to include the compensation as profit derived from the undertaking and compute the same for deduction under Section 80IA of the Act. Aggrieved by the same, the Revenue went on appeal before the Income Tax Appellate Tribunal. Before the Tribunal, evidently, the assessee was not represented either in person or through counsel. The Tribunal allowed the assessee's claim based on the decision of the Delhi Bench of the Tribunal rendered in the case of Rollatainers Ltd. v. Dy. CIT [2000] 111 Taxman 221 (Mag.), wherein it was held that the insurance claim received for goods damaged in transit had direct nexus with the industrial undertaking and hence, it was an allowable deduction under Section 80-IA of the Act. Aggrieved by the same, the Revenue is on appeal before this Court.

3. We agree with the submission of the learned Standing counsel for the Revenue that in the absence of any nexus shown between the compensation received and the business activities of the industrial undertaking, the compensation could not be held as derived from the undertaking for the purpose of inclusion under Section 80-IA of the Act.

4. As already seen in the preceding paragraph, the accident took place on 11.3.1996, which is relevant for the assessment year 1996-97. The assessment year in question relating to 1998-99. It is evident from the reading of the order of the authorities below that there were no materials produced by the assessee to substantiate the nature of the fire accident that had taken place to link it to the commercial activity to earn profit. Given the fact that the accident had taken place as early as 11.3.1996 and there being no material to link this accident and the nature of damage caused in the industrial activity and to the productivity of the company, rightly, the Assessing Officer held that there being no nexus between the claim before the insurance company and the subsequent loss arising out of the industrial activity, there could be no question including the compensation for the purpose of granting relief under Section 80-IA of the Act.

5. As far as the order of the Commissioner of Income Tax (Appeals) is concerned, the same was passed based on the Surveyor's report. There is absolutely no deliberation as to the compensation received having any connection whatsoever to the industrial activity of the assessee on its income earning aspect.

6. As far as the Tribunal's order is concerned, reliance placed on the decision of the Delhi Bench of the Tribunal rendered in the case of Rollatainers Ltd. (supra) is totally misplaced, since, as is evident from the order of the Tribunal, the case dealt with by the Delhi Bench related to the compensation received on the goods damaged while in transit. As far as the present case is concerned, even though we directed the assessee to produce the details regarding the fire accident and the policy, the assessee could not produce the same before this Court to substantiate its contention, and there being no material to substantiate the contention of the assessee linking the loss to the fire accident, we do not find any justifiable ground to accept the order of the Tribunal which is not based on factual findings. In the circumstances, we have no hesitation in accepting the plea of the Revenue, thereby, set aside the order of the Tribunal.

7. In the result, the above Tax Case (Appeal) is allowed. No costs.

VARSHA

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*In favour of revenue.

†Arising out of order of ITAT, in IT Appeal No. 208/Mad./2002 dated 17-5-2006.

IT : Assessment order passed under section 143(3) without serving notice to assessee under section 143(2)

within stipulated period of time, was invalid and, thus, deserved to be set aside

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[2013] 40 taxmann.com 490 (Allahabad)

HIGH COURT OF ALLAHABAD

Commissioner of Income-tax

v.

Pradeep Kumar Gupta*

R.K. AGRAWAL AND RAM SURAT RAM (MAURYA), JJ.

IT APPEAL NO. 25 OF 2001†

OCTOBER  30, 2012 

Section 143 of the Income-tax Act, 1961 - Assessment [Scrutiny assessment] - Assessment year 1997-98 - Assessee filed its return declaring certain income - Assessing Officer selected assessee's case for secrutiny assessment - Thereupon, assessment order was passed under section 143(3) - Assessee raised a plea that assessment order was invalid because notice under section 143(2) was not served within stipulated period of time - Tribunal accepted assessee's contention and set aside assessment order - Whether since revenue authorities did not controvert averments made in affidavit filed by assessee regarding non-service of notice, impugned order passed by Tribunal setting aside assessment, was to be upheld - Held, yes [Para 5] [In favour of assessee]

A. Kumar, A.N. Mahajan, B.J. Agarwal, D. Awasthi, G. Krishna, R.K. Upadhyay and S. Chopra for the Petitioner.

JUDGMENT

 

1. The present appeal has been filed under Section 260-A of the Income-tax Act,1961 hereinafter referred to as " the Act", against the order dated 20-10-2000 passed by the Income Tax Appellate Tribunal, Lucknow. The appeal has been admitted on the following substantial questions of law:—

"(1)		Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was correct in law in quashing the assessment order by treating it as bad in law?
(2)		Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was correct in law in not allowing sufficient time as well as opportunity to the Department to rebut the assessee's claim and in induce material/evidence in proof of service of notice under Section 143 (2) of the Income-tax Act,1961 within the stipulated time?"

2. Briefly stated the facts giving rise to the present appeal are as follows:

The present appeal is related to the assessment year 1997-98. The respondent-assessee is an individual. For the assessment year in question, he has filed his return of income on 29-10-1997 declaring a total income of Rs.40,890/-. The return was processed under Section 143 (1) (a) of the Act on 26-2-1998. It was taken up for random scrutiny. A notice under Section 143 (2) was issued on 31-8-1998 which was served on 11-9-1998. In the notice dated 31.8.1998 the hearing of case was fixed for 20-4-1999. Another notice dated 17-9-1999 was issued which was served on the assessee on 25-9-1999 and the date for hearing was fixed on 11-10-1999. The authorized representative of the assessee appeared. The Assistant Commissioner Income Tax, Kanpur vide order dated 28-3-2000 assessed the total income made in the assessment year in question at Rs.24,43,530. Feeling aggrieved the assessee preferred an appeal before the Commissioner of Income-tax(Appeals), Kanpur. One of the grounds taken in the appeal was that the notice dated 28-3-1998 was not served upon the assessee or his family member and the entire proceeding under Section 143 (3) was bad. The Commissioner of Income Tax(Appeals) did not accept this contention. He, however, partly allowed the appeal by reducing the assessed income by Rs.10,06000/-. Feeling aggrieved the assessee preferred an appeal before the Income-tax Appellate Tribunal, which vide order dated 20-10-2000 allowed the appeal. Before the Tribunal the assessee had filed his own affidavit dated 9-10-2000. In paragraphs 2 and 3 of the same he had stated as follows:—

"2. That the deponent confirms that for the assessment year 1997-98 notice dated 31-8-1998 under Section 143 (2) of the Act as alleged in the order was neither served on the deponent on 11-9-1998 and nor any family member of the deponent.

3. That the deponent confirms that after filing of the return on 29-10-1997 as per personal knowledge of the deponent there was no service of notice within 12 months period."

The Tribunal gave time to the Departmental Representative to file counter affidavit but no counter affidavit was filed by the Department nor any prayer was made for granting of any further time. The Tribunal proceeded to decide the appeal. It came to the conclusion that the notice dated 31-8-1998 was not served upon the assessee, as the averments made in the affidavit filed by the assessee were uncontroverted. The Tribunal, therefore, allowed the appeal and set aside the assessment order on the ground that the notice under Section 143(2) of the Act was not served within the stipulated period of time.

3. We have heard Sri Shambhu Chopra, learned Senior Standing Counsel for the Revenue.

4. Sri Chopra, learned Standing Counsel submitted that the Tribunal ought to have given one opportunity to the Departmental Representative to file the counter affidavit and to produce the record. Therefore, the order of the Tribunal requires to be set aside and the matter be remanded back.

5. We are unable to accept this submission. It was for the Departmental Representative to have requested the Tribunal to grant some further time. For the reasons best known the Departmental Representative did not seek any further time to file counter affidavit or to produce the record to controvert the averments made in the affidavit filed by the assessee regarding non service of the notice. Further it is unbelievable that the notice which was issued on 31-8-1998, the date of hearing would have been fixed as 20-4-1999 i.e. after more than seven months. This also casts suspicion on the issue and service of the notice itself. For the aforesaid reason we are of the considered opinion that the order passed by the Tribunal does not suffer from any legal infirmity.

6. The appeal fails and is dismissed.

IT : If there was no transfer of interest and money paid to retiring partner was only towards capital invested and profit thereon, question of money paid towards goodwill would not arise

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[2013] 40 taxmann.com 395 (Kerala)

HIGH COURT OF KERALA

Oberon Trading Corpn.

v.

Income-tax Officer, Ward-1(2), Thiruvananthapuram*

DR. MANJULA CHELLUR AND A.M. SHAFFIQUE, JJ.

IT APPEAL NOS. 248 AND 255 OF 2013†

OCTOBER  7, 2013 

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Payment to retiring partner] - Assessment year 2004-05 - In partnership firm new partners were inducted and initial partners retired in four subsequent years one after another - Partners who retired from partnership firm took their initial investment and profit, if any, payable - Similarly, if a partner was accountable for any loss in a particular assessment year, that would also be worked out at time of retiring from partnership business - Whether since there was no transfer of any interest, question of making payment of money each year towards goodwill would not arise and, thus, Tribunal was justified in disallowing goodwill claimed by assessee - Held, yes [Paras 3 & 4] [In favour of revenue]

FACTS

 

■		The assessee was originally a partnership firm of four partners and involved in the business of pharmaceutical distribution.
■		During the course of its business, three new partners were introduced and all initial four partners retired one after the other, from the partnership firm in the successive years and ultimately three new partners remained in the firm. The firm continued to run the business.
■		The assessee firm claimed deduction of amount paid to the retiring partners on transfer of in any particular assessment year. The claim was allowed.
■		The assessment got reopened suo motu by the Commissioner under section 263. He disallowed the claim.
■		On appeal, the Tribunal disallowed the claim opining that there was no question of payment of any goodwill to a retiring partner, as the partnership continued to be a firm carrying on the business without any change in the nature of business by using the earlier name.
■		On appeal filed before High Court:

HELD

 

■		When one partner retires from the business, there is no severance of status so far as the partnership is concerned, as the retiring partner would take his capital investment and retire from partnership and the others continue to carry on the business. By adopting this method, four partners, who decided to go out of the business, have not transferred the entire business concern to the new partners, but have chosen to continue for some time and at their leisure, they retired from partnership one after the other. Therefore, the assets and liabilities of the firm continued as such without any change including tangible and intangible. Share of the capital came to be paid to the retiring partner and it cannot be treated as cost paid to the retiring partner towards acquisition of any right from him. Partner who retire from the partnership firm takes its initial investment and profit, if any, payable to him. Similarly, if he is accountable for any loss in a particular assessment year, that would also be worked out at the time of retiring from partnership business. [Para 3]
■		In that view of the matter, there is no transfer of any interest and the money paid is only towards the share of the capital invested by that partner along with some profit, if any, and nothing beyond that. Therefore, the question of each year some money paid towards the goodwill would not arise in the facts of the present case. Therefore, the Income Tax Appellate Tribunal was justified in disallowing goodwill claimed by the appellant assessee. [Para 4]

CASE REVIEW

 

B. Raveendran Pillai v. CIT [2011] 332 ITR 531[2010] 194 Taxman 477 (Ker.) (para 3) distinguished.

CASES REFERRED TO

 

B. Raveendran Pillai v. CIT [2011] 332 ITR 531/[2010] 194 Taxman 477 (Ker.) (para 3).

Anil D. Nair, J.R. Prem Navaz and R. Sreejith for the Appellant. Jose Joseph for the Respondent.

JUDGMENT

 

Manjula Chellur, CJ. - Heard learned counsel for the appellant. We have also gone through the orders of the Income Tax Appellate Tribunal.

2. Appellant, a partnership firm, involved in the business of pharmaceutical distribution, filed these two appeals. According to appellant firm, long back the firm came to be established. During the course of its business new partners were introduced and all partners, one after the other, retired from the partnership firm in the successive years commencing from the assessment year 2004-2005. Appellant firm claimed depreciation on transfer of so called goodwill paid to the partner, who was retiring in that particular assessment year. Though this came to be allowed, subsequently the assessment came to be reopened under Section 263 of the Income Tax Act. But it got reopend suo motu by the Commissioner of Income Tax under Section 263 of the Act.

3. The only question that needs our attention in the present appeal is whether money paid as transfer of goodwill to a partner, who was retiring, could be claimed as depreciation in that assessment year by the partnership firm? According to learned counsel for the appellant, Tribunal was not justified in disallowing such claim opining that under common law, partnership firm may not be a legal entity, though under the Income Tax Act it is an independent and separate assessable unit. Facts in the present case are to the effect that initially four partners constituted the partnership firm in the business of pharmaceuticals and continued so. Later, three partners entered and the partnership consisted of seven partners. Subsequently, in four consecutive assessment years earlier four partners one by one retired from the partnership firm. According to appellant assessee, in each assessment year whatever amount payable to the retiring partner as a goodwill claimed as depreciation has to be allowed and Tribunal was not justified in opining that there is no question of payment of any goodwill to a retiring partner, as the partnership continues to be a firm carrying on the business without any change in the nature of business by using the earlier name. The learned counsel places reliance in the case of B. Raveendran Pillai v. CIT [2011] 332 ITR 531/[2010] 194 Taxman 477 (Ker.). On perusal of the above case, we note that so far as the present case and the case referred to by the learned counsel, the facts are entirely different because the entity that was transferable in that case was a proprietary concern and not a partnership. Similarly, the entity came to be transferred to new proprietary without retaining the same name of the old proprietary concern, i.e., the hospital. Apart from the said fact, one has to see difference in the facts of the present case. We are not concerned with the partnership firm where there is no transfer of interest in the partnership firm entirely to the new partners at a time. It is a case where four partners constituted the partnership firm initially and added three more partners and then continued partnership firm with seven partners and later on in each successful assessment year one after the other the initial four partners came to retire from the business and at the end of the fourth year, only three new partners continued to run the business of pharmaceuticals. The question is whether the previous owner has transferred goodwill to the appellant assessee and the benefit derived from the appellant assessee is retention of continued trust of the customers, who were customers of the previous owners. When one partner retires from the business, there is no severance of status so far as the partnership is concerned, as the retiring partner would take his capital investment and retire from partnership and the others continue to carry on the business. By adopting this method, four partners, who decided to go out of the business, have not transferred the entire business concern to the new partners, but have chosen to continue for some time and at their leisure, they retired from partnership one after the other. Therefore, the assets and liabilities of the firm continued as such without any change including tangible and intangible. Share of the capital came to be paid to the retiring partner and it cannot be treated as cost paid to the retiring partner towards acquisition of any right from him. Partner who retire from the partnership firm takes its initial investment and profit, if any, payable to him. Similarly, if he is accountable for any loss in a particular assessment year, that would also be worked out at the time of retiring from partnership business.

4. In that view of the matter, there is no transfer of any interest and the money paid is only towards the share of the capital invested by that partner along with some profit, if any, and nothing beyond that. Therefore, the question of each year some money paid towards the goodwill would not arise in the facts of the present case, therefore, the Income Tax Appellate Tribunal was justified in disallowing goodwill claimed by the appellant assessee.

Accordingly, the appeal is dismissed.

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{jalgaoncas} Business standard news updates 22-1-2014

CS A Rengarajan business opportunities India slips on global map for SAHIL MAKKAR New Delhi, 21 January When chief executive officers ( CEOs) of global companies were asked to rate three countries that would contribu

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business opportunities

India slips on global map for SAHIL MAKKAR New Delhi, 21 January When chief executive officers ( CEOs) of global companies were asked to rate three countries that would contribute largely to their overall growth, India fared slightly poorer than last year, according to the 17th Annual Global CEO Survey by PricewaterhouseCoopers. However, compared to their global counterparts, Indian CEOs were more upbeat about growth, with about half saying they were " very confident" of growth prospects in the next 12 months. In the survey, seven per cent of global CEOs reposed their trust in India, compared with 10 per cent last year. For Brazil, the number slipped from 15 to 12 per cent. While that for China rose from 31 to 33 per cent, Russia stuck to last year's figure of seven per cent. "China remains robust, thanks to vast foreign exchange reserves and extensive reform measures introduced by the central government. But Brazil is suffering from a huge debt hangover and India has been slow to open up its markets," says a report based on the survey. "Russia is unduly reliant on commodity exports and South Africa's growth has been impeded by heavy regulation." India has faced criticism over its dilly- dallying over foreign direct investment in organised retail and its policy to tax companies retrospectively. Scams such as those related to the allocation of second- generation telecom spectrum and coal block licences have further marred its image. Last year's report had identified Indian market as "decelerating", while those in Brazil, Indonesia and South Africa were said to be "accelerating". CEOs say now, they are exploring growth in countries beyond Brazil, Russia, India, China and South Africa ( BRICS), adding they see good prospects in Indonesia, Mexico, Turkey, Thailand and Vietnam through the next three to five years. The US, Germany and the UK have been ranked high on the list. Against half the Indian CEOs confident of growth though the next year, the corresponding number for global CEOs stood at only 39 per cent. From both the segments, 43 per cent felt the global economy would improve in the next one year. Asked whether they were paying a fair share of tax, 88 per cent of Indian CEOs agreed, against the global average of 75 per cent. While 57 per cent of Indian CEOs are expected to increase headcount in the coming year, only 13 per cent said they would cut jobs. The corresponding figures for global CEOs stood at 50 per cent and 20 per cent, respectively. Looking ahead The report said though an increasing number of CEOs felt the global economy was looking up, they continued to send out mixed signals. Last year, while advanced economies were struggling, emerging economies surged; this year, while advanced economies are returning to the growth path, growth in some emerging economies is decelerating "CEOs have begun to regain confidence. They've successfully guided their companies through recession and now, more CEOs feel positive about their ability to increase their revenues and prospects for the global economy," said Dennis M Nally, chairman of PricewaterhouseCoopers International. "However, CEOs also acknowledge generating sustained growth in the post- crisis economy remains a challenge, especially as they deal with changing conditions such as slowing growth in emerging markets." Nally added worries continued to loom large, with CEOs sending a clear message to governments about their concerns about over- regulation, fiscal deficits and tax burdens. Growth drivers Over 80 per cent of international CEOs believe technological advances will transform their businesses in the next five years. About 60 per cent feel demographic shifts, and an equal number feels a shift in global economic power, will drive their growth during this period. For the survey, 1,344 CEOs, across 68 countries, were interviewed between September 9 and December 6, 2013. The majority of these interviewees were from the Asia- Pacific. From India, Apollo Hospital's Preetha Reddy and ICICI Bank's Chanda Kochhar were included the list of those interviewed face- toface; the rest were interviewed through post, telephone and online. WORLD ECONOMIC GROWTH MIXED SIGNALS India has slipped on the global benchmark for the world's three most important foreign countries for business, suggests an annual report by PwC. The survey report says while last year advanced economies were struggling; emerging economies surged. This year sawa reversal of fortunes. However, more CEOs believe their companies will do much better than last year. A snapshot: US 36 India 49 China & Hong Kong 48 Mexico 51 Russia 53 S. Korea 50 Germany 33 Australia 34 CEOs' confidence in their companies growth prospects ( in terms of revenue) in 2014 ( in %) CEOs confident about revenue growth prospects over the next 12 months ( in %) Three most important countries for overall growth in 2014 ( in %) '04 ' 05 ' 07 ' 08 ' 09 ' 10 ' 11 ' 12 ' 13 ' 14 Source: PwCs 17th Annual Global CEO Survey. Report is based on interviews of 1,344 CEOs in 68 countries Indian CEOs World CEOs In the next 12 months ( in %) GROWTH PROSPECTS Very confident To increase jobs Will decline vs GLOBAL ECONOMY COST CUTS HEADCOUNT IN COMING YEAR THREAT 49 39 83 76 69 57 50 Will improve 43 44 5 7 Have cut cost in 2013 Will do in the next 12 months Exchange rate 84 volatility 60 Over regulation 82 72 Bribery and 65 corruption 58 Availability 70 of key skills 52 2013 2014 US 23 30 Germany 12 17 UK 7 10 China 31 33 Japan 5 7 Indonesia 7 7 Mexico 5 5 Russia 7 7 Brazil 15 12 India 10 7 64 20 13 To shed jobs 60 45 30 15 0 31 41 52 50 21 48 36 31 40 39 Seven per cent of global CEOs repose their trust in India, compared with 10 per cent last year: PwC survey

CAG had refused to audit us in 2002: Tata Power

BS REPORTER New Delhi, 21 January Tata Power Delhi Distribution Ltd (TPDDL), one of the three private power distribution companies in Delhi, has said the Delhi government has failed to communicate the terms of reference for its audit by the Comptroller and Auditor General of India (CAG) despite repeated reminders. TPDDL also said the CAG had refused to appoint auditors to scrutinise its accounts on the company's own request made in 2002 soon after it started operation. "However, at that time, the CAG's stand was that since the discom is not a governmentowned company under section 617 of the Companies Act, the CAG cannot appoint astatutory auditor," the Tata Power subsidiary said in a statement. In 2002, the CAG had also turned down a similar request from the other two discoms —Reliance Infrastructureowned BSES Yamuna and BSES Rajdhani — said an executive close to the development. When contacted, a senior CAG official could not confirm whether a request from the discoms in 2002 for audit had been turned down by the auditor. He, however, justified the current audit by the CAG, which is likely to soon begin, arguing it is in " public interest". The audit was to begin on Monday but had to be halted after the discoms called the process illegal, he said. Delhi Chief Minister Arvind Kejriwal had requested the audit alleging the three discoms have manipulated accounts to seek tariff hikes. While the discoms have been opposing the audit, the CAG agreed after receiving a formal request from Delhi's Lieutenant Governor Najeeb Jung. The discoms have disputed the governments claim of revenue from Aggregate Technical and Commercial (AT& C) loss reduction. They have also rejected the allegations of undisclosed revenue from surplus power. Earlier this month, Kejriwal had slashed power tariffs for Delhi's 2.8 million domestic consumers by half through a 50 per cent subsidy announcement. The subsidy would cost Delhi government ₹ 260 crore in the current quarter ending March. The result of the audit could impact the subsidy handout. Says it hasn't received terms of reference for the current audit Delhi CM Arvind Kejriwal had requested the audit, alleging the three discoms have manipulated accounts to seek tariff hikes. While the discoms have been opposing the audit, the CAG agreed after receiving aformal request from Delhi's Lieutenant Governor.

 

DRAFT SUGGESTION BY THE MAYARAM PANEL Mayaram   panel  suggest  overhaul  of  FDI  rules   SURAJEET DAS GUPTA & INDIVJAL DHASMANA New Delhi, 21 January The country's foreign investment regime might see a major overhaul if the government accepts the draft recommendations of the Arvind Mayaram ( economic affairs secretary) committee. The committee has suggested that all individual foreign investments of up to 10 per cent of paid- up equity in alisted company be classified as foreign portfolio investment (FPI) and those above this limit be considered foreign direct investment ( FDI). At present, the size of investment is not a criterion for classification. According to sources, the committee has also suggested that the cap on aggregate default FPI in a company be set at 24 per cent. However, the investee company concerned could increase the limit to the sectoral cap allowed under automatic route. It could do so after its board passes a resolution, which is to be later approved by shareholders. For instance, in the telecom sector, foreign investment of up to 100 per cent is allowed but only 49 per cent can come through the automatic route. So, the FPI limit in telecom companies will be 24 per cent, but it could be increased to up to 49 per cent. The panel has also suggested that portfolio investment by a single investor should not exceed 10 per cent in the initial public offering (IPO), or follow- on public offering ( FPO), of a listed or to be listed company. Any foreign investment beyond the threshold of 10 per cent of paid- up equity capital in a listed company — and any foreign investment in an unlisted company — should be considered FDI. Foreign investment through a private arrangement also be treated as FDI. Besides, Investments by nonresident Indians ( NRIs) should not form part of these suggested definitions and should be reviewed separately, the panel has recommended. Analysts, however, seem sceptical about implementation of these suggestions. "The new FPI and FDI definitions, if accepted by the government, may be extremely difficult to implement. It will require fundamental amendments to several laws, such as the Sebi Act, Foreign Exchange Management Act, Securities Contracts ( Regulation) Act, Income Tax Act, etc," Punit Shah, co- head of tax at KPMG told Business Standard. These new definitions are not to apply to the current arrangements — such as the investment by Abu Dhabibased Etihad Airways in Jet Airways — since the panel has exempted existing deals from the new rules. Analysts also believe that it might be difficult to monitor FPI and FDI limits wherever there are separate sectoral caps. If FDI and FPI caps in a given sector are separately defined, exceeding the FPI cap of 10 per cent will convert the investment into FDI and sectoral caps may be breached. For example, for investment in stock exchanges, there is a 26 per cent cap on FDI but 23 per cent limit for foreign institutional investors. To avoid this problem, the panel has suggested that the default overall cap — for both FDI and FPI — be set at 49 per cent, if control of a company rests with Indians. Within that, the default FPI cap could be set at 24 per cent ( which could be raised up to 49 per cent). For full report, visit www. business- standard. com A) LISTED COMPANY |FPI is when foreign investment is up to 10% by individuals or individual entity |Investment beyond that be called FDI taken as FDI company be set at 24 % allowed under automatic route in the sector the company belongs to |Composite default foreign investment cap, comprising FDI and FPI, be set at 49 per cent where control rests with Indians |Sectors like insurance, media and defence to be exception to composite foreign investment rule NRIS | Not to be covered under this scheme. Their investments to be reviewed separately  oreign exchanges tempt Indian companies to list SACHIN P MAMPATTA & SAMIE MODAK Mumbai, 21 January Global exchanges are looking to egg Indian companies to explore the possibility of listing abroad, on the back of a regulatory shift towards easier norms for fund- raising abroad. Officials from two global exchanges have been in India in the past two months in the matter. London Stock Exchange and SIX Swiss Exchange have been here, talking to companies. Last month, officials from Zurich- base SIX Swiss held meetings with potential Indian issuers to list their securities on its platform. " We are eagerly looking at the development ( to allow Indian companies abroad sans a domestic Initial Public Offer). We understand the companies will have to list their depository securities ( DR) in the overseas market and not the common stock. On Six, DRs can also be part of the indices, which ensures after- market liquidity," said Marco Estermann, executive director. He said they were awaiting the fine print on listing abroad. SIX is the thirdlargest bourse in Europe. Switzerland has a rich pool of investable capital, due to its large pension and the private banking sector. Alastair Walmsley, head of equity primary markets at the London Stock Exchange Group, was in Mumbai earlier in the week, talking to companies. " At any given time, we would normally expect to have active dialogue with 1020 companies in India… I think the Sahoo committee recommendations will help in clarifying the regime and tangible demonstrations of India's commitment to liberalisation and to enabling its businesses to compete on a level playing field… There are companies that have said we are keen to raise capital internationally. We believe the listing regime is moving in the right direction," he said. The Sahoo committee recommended an easier regime for DRs. It is said to have asked for extending the ambit of such receipts to beyond common shares, including debentures and shares of private companies. The government has also allowed unlisted companies to raise money directly from foreign exchanges, through listing of securities even if they haven't first listed in India. The government modified the foreign direct investment policy to reflect this change in stance on December 6. There were two foreign equity issuances in 2013, which raised a total of $ 40 million or ₹ 219 crore, according to information from Prime Database. Another ₹ 32,542 crore was raised domestically through equity issues in 2013. This included initial public offers, follow- on public offers and offers for sale. INDIAN FIRMS' EQUITY FUND- RAISING ABROAD Amount raised ($ million) SOURCE: PRIME DATABASE Officials from LSE and SIX have been in India, talking to potential issuers to list securities on their platforms. PHOTO: REUTERS   Sinha not pleased as Sebi Bill seems stuck in limbo BS REPORTER Mumbai, 21 January Securities and exchange Board of India ( Sebi) Chairman UK Sinha has expressed concern over the lapse of the ordinance issued to give the market watchdog more powers to crack down on ponzi schemes. The Securities Laws (Amendment) Second Ordinance, 2013, promulgated by the government in July 2013, lapsed earlier this month. Following this, Sebi won't be able to pass attachment orders against entities from which it has to recover dues. While the ordinance was valid, Sebi had initiated about 300 attachment proceedings in about 60 different cases to recover about ₹ 2,000 crore from violators. Speaking on the sidelines of a National Stock Exchange interest rate futures launch on Tuesday, Sinha said, " After two rounds of ordinance, it could not be passed (by Parliament) and now, it has lapsed. This will have implications. Let us see how we proceed." He, however, said the regulations introduced during the ordinance period would remain valid. "It's on Parliament and the government to decide what powers they want to give to Sebi," he added. The Securities Laws (Amendment) Bill, 2013, which would have permanently given Sebi new powers, couldn't be passed during the winter session of Parliament. The Securities Laws (Amendment) Second Ordinance, 2013, had empowered Sebi with powers similar to those of the Income Tax Department, in terms of conducting search & seizure operations. It also gave Sebi the power to attach properties, disgorge ill- gotten gains and crack down on collective investment schemes. In the recent past, Sebi has notified several new regulations, including the Sebi ( Procedure for Search and Seizure) Regulations and Sebi (Settlement of Administrative and Civil Proceedings) Regulations, to avail of the new powers. Experts said the action taken by Sebi before the lapse of the ordinance would be valid. In December 2013, Finance Minister P Chidambaram had said the government might have to repromulgate the Sebi ordinance for "an unprecedented third time" if the Bill to replace the ordinance wasn't passed in the winter session of Parliament. "After two rounds of ordinance, it could not be passed ( by Parliament) and now, it has lapsed. This will have implications. Let us see how we proceed" UK SINHA, Sebi chairman REGULATORY SEE- SAW NJULY 2013N Government promulgates Securities Laws ( Amendment) Second Ordinance, 2013. It also presents the Securities Laws ( Amendment) Bill, 2013, in Parliament NAUGUST 2013N Sebi board forms an action plan to make use of new powers. Subsequently, it issues draft regulations on consent settlement, search and seizure NDECEMBER 2013N Parliament's standing committee defersadoption of draft on the Bill. Parliament fails to pass the Bill during the Winter session. Sebi, meanwhile, notifies new regulations, based on the ordinance NJANUARY 2014N The ordinance lapses on January 15; Sebi loses powers to attach properties, conduct search & seizure operations Regulator may not be able to issue fresh attachment orders

 

 

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CS A Rengarajan

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Who will audit THE AUDIT? TIOL-DDT 1153  14.07.2009  Tuesday THE CAG Audit has the consistent habit of not accepting the judicial verdicts and raising objections against the settled case laws. In respect of Rule 6 of the CENVAT Credit Rules, 2004 there are umpteen numbers of orders wherein it was held that once the credit attributable to the inputs used in exempted goods is reversed, there is no case for demand of 10% amount on the exempted goods. In some cases, the demand had reached such a ridiculous stage where the 10% amount would run into Crores while the credit taken was only a few thousand rupees. However, the Audit continued to raise such objections and provided much needed source of revenue for the consultants at the cost of material / manpower resources of the Government in handling such cases. A recap of these objections raised in earlier reports of CAG . 2006: 10.5.1 Six assessees in Bhopal, Kolkata III, IV, VII, Pune I and Raigad Commissionerates, availed Cenvat credit on inputs and used them in dutiable as well as exempted finished goods. No separate inventory was kept in respect of exempted category of goods. Assessees were therefore liable to pay sum of Rs. 10.94 Crore representing eight per cent of value of exempted goods cleared between April 2000 and June 2005. Three assessees had, however paid a sum of Rs.42 lakh , Rs.3 lakh and Rs.10 lakh representing reversal of actual credit availed on such inputs. This did not absolve assessee from responsibility of making payment of duty of Rs.10.94 crore . Differential amount of Rs.10.39 crore was required to be recovered. 2007: 10.1.1 M/s. Rashtriya Ispat Nigam Limited, M/s. Sponge Iron India Limited in Visakhapatnam I and Hyderabad III Commissionerates respectively and M/s. Tata Sponge Iron Limited, M/s. Orissa Sponge Iron Limited both in Bhubaneswar II Commissionerate, engaged in manufacture of iron and steel products, produced electricity in their captive power generation units and utilized it partly in the manufacture of their final products and partly sold it to Transmission Corporation of Andhra Pradesh Limited, residential colony, NESCO etc. The assessees availed cenvat credit on inputs such as water treatment chemicals, greases, lubricants, caustic soda, max treat, maxquat , alum etc., but did not maintain separate accounts. Assessees were liable to pay amount equivalent to eight per cent/ten per cent on the value of electricity sold. Instead assessees reversed proportionate credit on inputs. This led to short payment of Rs 12.27 crore during the period between April 2000 and March 2006. 2008: 3.1.6 M/s Ahlcon Paranteral (India) Ltd., in Jaipur I Commissionerate, availed of cenvat credit of excise duty of Rs. 22.52 lakh on furnace oil which was used in the production of dutiable as well as exempted products. Separate accounts were not maintained. Therefore, the assessee was required to pay Rs. 60.90 lakh being an amount equal to ten per cent of the assessable value of Rs. 6.09 crore of exempted goods cleared between July 2005 and March 2006. The assessee, however, reversed the cenvat credit of Rs. 7.80 lakh on a proportionate basis. Reversal of cenvat credit on proportionate basis was not correct as there was no provision in the Cenvat Credit Rules allowing reversal on this basis. This resulted in short payment of duty Rs. 53.10 lakh . The report for 2009 also contained such objections at Para 3.4.1, 3.4.2 and 3.4.3. The report also contained non-payment of 10% amount on electricity cleared for having availed credit on inputs like lubricants and paints. Perhaps in a move to put an end to such demands, Rule 6 has been amended in 2008 to provide for allowing proportionate reversal of credit which was not accepted by the CAG . STRANGELY, in 2009 CAG report, the audit claims as if this amendment in 2008 was an achievement by the audit, though all along they were against such proportionate reversal! Further, we all remember how the Audit was the reason for scores of show cause notices denying the 75% exemption for persons liable to pay service tax on Goods Transport Agency Service, which ultimately did not yield a single rupee to the exchequer. Further to curtail further menace, the Government issued a 37 B order, making the intentions clear and not to deny the exemption INSPITE OF THE CAG objections. Finally the exemption has been made unconditional. Now, in 2009 report for Service Tax, the Audit claims the amendment as the �IMPACT OF AUDIT� as if it is their achievement. In fact it should have been other way round �NEGATIVE IMPACT OF AUDIT�! Source � CAG's Audit Report No. 20 of 2009-10 - Union Government (Indirect Taxes) CAG has no respect for Supreme Court Here is a sample from the CAG's 2009 Report to Parliament: 3.2 Rule 4(2)(a) and (b) of the Cenvat Credit Rules, 2004 enunciates that cenvat credit in respect of capital goods received in the premises of the provider of output service at any time in a financial year shall be taken only for an amount not exceeding fifty per cent of the duty paid on such capital goods in the same financial year and the balance 50 per cent credit may be taken in any subsequent financial year. Rule 14 of the said rules provide that where the cenvat credit has been taken or utilised wrongly, the same alongwith interest shall be recovered. 3.2.1 M/s Bharti Airtel Ltd., in Hyderabad II Commissionerate, engaged in providing cellular phone services procured capital goods during the period from October 2006 to March 2007 and took full credit of Rs. 40.50 crore during 2006-07 on such capital goods even though they were eligible for taking credit only to the extent of Rs. 20.25 crore being 50 per cent of the duty paid. The excess credit of Rs. 20.25 crore taken by the assessee was recoverable along with interest of Rs. 58.32 lakh . On this being pointed out (January 2008), the department accepted the audit observation and reported (May 2008) that the assessee had paid Rs. 20.25 crore . The department further stated (May 2008) that the assessee had not utilised the excess availed credit, charging of interest on the credit lying unutilised was not warranted in view of judicial decisions of Punjab and Haryana High Court {2007 (214) ELT 173} [2006-TIOL-308-HC- P&H - CX] which was upheld by the Supreme Court also {2007 (214) ELT � A 50}. The reply of the department was contrary to the provisions of rule 14 of the Cenvat Credit Rules, which stipulated charging of interest where cenvat credit had been taken wrongly. Further, the anomalous situation which had cropped up due to above judicial pronouncements needs to be remedied by making the relevant provisions more explicit and unambiguous, as otherwise the provisions of the said rule with regard to recovery of interest were not enforceable in any case even though the assessees commit breach of the provisions by taking 100 per cent instead of 50 per cent credit on capital goods in the year of their procurement. Is the CAG suggesting yet another retrospective legislation? CAG has a lot of respect for CESTAT (especially if the decision is favourable) Here is another sample from the CAG's 2009 Report to Parliament: 3.6 Dual benefit by taking credit on inputs and collecting duty on exempted final products; Rule 6 of the Cenvat Credit Rules, 2004, envisages that where an assessee manufactures final products, part of which are chargeable to duty and part of which are exempt but avails of credit of duty on inputs meant for use in both the categories of final products and does not maintain separate accounts, he shall pay an amount equivalent to eight per cent (ten per cent from 10 September 2004) of the price charged for the exempted goods. The amount so payable is in lieu of cenvat credit availed of on inputs used in the manufacture of exempted goods and hence the liability is to be borne by the manufacturer itself. The Ministry also clarified on 9 September 2002 that where a manufacturer debits an amount equal to eight per cent in terms of rule 6 of the Cenvat Credit Rules, 2002, and collects it from the buyers, then the amount so collected should be deposited to the credit of the Government. Further, the CESTAT in the case of M/s Vimal Moulders (India) Ltd . {2004 (164) ELT 302} = 2003-TIOL-244-CESTAT-DEL had held that the amount of eight per cent paid by the manufacturer but collected from the customer was to be deposited with the Government as per the provisions of section 11 D of the Central Excise Act. Here the CAG wants the amount of 8% (or 10%) collected from the buyer to be deposited with the Government, based on a CESTAT Order. If it suits them, Audit is prepared to accept a CESTAT order and if it doesn't, they will not accept even a Supreme Court Order. Incidentally, the CESTAT order, relied on by CAG is no more valid. The Larger Bench of the Tribunal, in the case of Unison Metals Ltd - 2006-TIOL-1337-CESTAT-DEL-LB - had clearly held that the 8% collected was already paid to the Government and there was no requirement of a second payment. Government seems to have accepted this view and this should have been closed at least after the Larger Bench Decision. Even the Board reacted though a little late with a Circular No. 870/08/2008- CX ., Dated: May 16, 2008, wherein it after referring to the Larger Bench decision in the Unison case clarified that, as long as the amount of 8% or 10% is paid to the Government in terms of erstwhile rule 57CC of the Central Excise Rules, 1944 or rule 6 of the CENVAT Credit Rules, the provisions of section 11D shall not apply even if the amount is recovered from the buyers. DDT had covered this issue extensively in DDT 124 on 30 05 2005 and DDT 869 21.05.2008 So there is a Larger Bench Decision in 2006 and there is a Board Circular in 2008 and CAG in 2009 says, �Eureka� blissfully ignorant about either of them! And the CAG's Report is submitted to Parliament! And the CAG is a very honourable man � so are they all; all his auditors! It is time we do an audit of THE AUDIT to find out the amount of time and money wasted due to frivolous and ignorant Audit objections!

SEBI imposes Penalty for short­collection/non-collection of margins from clients in Equity and Currency Derivatives segments

Posted In SEBI | Notifications | No Comments »

Circular No. CIR/DNPD/7/2011    August 10, 2011
Sub: Short-collection/Non-collection of client margins (Derivatives Segments)

1. In consultation with BSE, MCX-SX, NSE and USE, it has been decided that Stock Exchanges shall levy penalty specified hereunder on trading members for short­collection/non-collection of margins from clients in Equity and Currency Derivatives segments:

For each member
'a'	Per day Penalty as %age of 'a'
(< Rs 1 lakh) And (< 10% of applicable margin)	0.5
(≥ Rs 1 lakh)     Or (≥ 10% of applicable margin)	1.0

Where a = Short-collection/non-collection of margins per client per segment per day

2. If short/non-collection of margins for a client continues for more than 3 consecutive days, then penalty of 5% of the shortfall amount shall be levied for each day of continued shortfall beyond the 3rd day of shortfall.

3. If short/non-collection of margins for a client takes place for more than 5 days in a month, then penalty of 5% of the shortfall amount shall be levied for each day, during the month, beyond the 5th day of shortfall.

4. Notwithstanding the above, if short collection of margin from clients is caused due to movement of 3% or more in the index (close to close value of Nifty/Sensex for all equity derivatives) and in the underlying currency pair (close to close settlement price of currency futures, in case of all currency derivatives) on a given day, (day T), then, the penalty for short collection shall be imposed only if the shortfall continues to T+2 day.

5. All instances of non-reporting shall amount to 100% short collection and the penalty as applicable shall be charged on these instances in respect of short collection.

6. If during inspection it is found that a member has reported falsely the margin collected from clients, the member shall be penalized 100% of the falsely reported amount along with suspension of trading for 1 day in that segment.

7. The penalty shall be collected by the Stock Exchange within five days of the last working day of the trading month and credited to its Investor Protection Fund.

8. SEBI shall examine implementation of this circular during inspection of the Stock Exchange.

9. This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act 1992, read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

10. The circular shall come into force from September 1, 2011.

11. This circular is available on SEBI website at www.sebi.gov.in under the category "Derivatives- Circulars".

Yours faithfully,

Sujit Prasad
General Manager
Derivatives and New Products Department
022-2644-9460
sujitp@sebi.gov.in

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