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C A Shah D J
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Section 54F relief remains despite commercial use of residential house
The sole issue before us is whether the building in question constructed by the assessee on which exemption u/s 54F of the Act has been claimed is a residential building as claimed by the assessee or a building constructed for commercial use. As can be seen from the assessment order the Assessing Officer has come to a conclusion that the building is not a residential building basically for the reason that the building is used for a school. However, only because the building is used as a school cannot change the nature and character of the building from residential to commercial. Even a residential building can be used as a school or for any other commercial purpose but the relevant factor to judge is whether the construction made is for residential house or for commercial purpose. If the building has been constructed for residential use with all amenities like kitchen, bath room etc., which are necessary for residential accommodation then even if it is used as a school or for any other commercial purpose, it cannot lose its character as a residential building.
However, if the construction is made in such a way that it is not normally for residential use but purely commercial use, then it cannot be considered to be a residential house. Therefore, the primary fact which is required to be examined is whether the building has been constructed for residential use or not. This can be verified from the approved plan and architectural design of the building. However, the plan of the constructed building has not been brought on record either before the revenue authorities or before us. Therefore, it is difficult to arrive at a conclusive finding with regard to the nature of the building. In the aforesaid view of the matter, we are inclined to remit the matter back to the file of the Assessing Officer who shall conduct necessary enquiry to find out the exact nature of construction i.e., whether it has been constructed for residential use or for commercial use. If the building has been constructed for residential use with all amenities, which are necessary for a residential accommodation, then exemption u/s 54F cannot be refused only because it is being used as a school subsequently.
Residential house' does not mean a single residential house
So far as the view of the Assessing Officer that exemption u/s 54F of the Act will be available only in respect of one flat is concerned, we do not agree with the same. Law is well settled that ' a residential house' does not mean a single residential house. Even where the assessee constructs or receives a number of flats adjacent to each other or in different floors of the same building then also the assessee would be entitled for exemption u/s 54F of the Act. In this context, we rely on a decision of the Hon'ble Jurisdictional High Court in case of CIT vs. Syed Ali Adil, judgment dated 20-12-2012 in ITTA No.410 of 2012. In view of the above, the matter is remitted to the file of the Assessing Officer who shall decide the issue afresh after affording a reasonable opportunity of being heard to the assessee in the matter.
INCOME TAX APPELLATE TRIBUNAL, HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND
SRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No.67/Hyd/2013- Asstt. Year 2007-08
N. Revathi vs- ITO
Date of Hearing: 12-03-2014
Date of Pronouncement: 02-04-2014.
ORDER
PER SAKTIJIT DEY, J.M:
This appeal of the assessee is directed against the order dated 20th November, 2012 passed by the CIT (A)-III, Hyderabad pertaining to assessment year 2007-08.
2. The assessee has raised as many as 9 grounds. Ground Nos. 1 and 9 being general in nature, do not require any adjudication.
3. At the outset, the learned AR submitted that he does not want to press ground No.2. Hence, this ground is dismissed as not pressed.
4. The only issue in ground Nos. 3 to 7 is with regard to the denial of claim of exemption u/s 54F of the Act.
5. Briefly the facts are, the assessee an individual originally filed her return of income for the impugned assessment year on 30-7-2007 declaring total income of Rs.3,34,215/-. In the said return of income, the assessee declared long term capital gain from sale of two properties but at the same time claimed exemption u/s 54 of the Act at Rs.1,09,78,307 and Rs.16,24,370/- in respect of both the properties sold. However, subsequently, the assessee filed revised return of income on 31-3-2009 withdrawing her claim of exemption u/s 54F amounting to Rs.16,24,370/- in respect of one of the property sold.. During the scrutiny assessment proceedings, the Assessing Officer called upon the assessee to submit construction account, valuation report from Registered valuer and building approval plan and other information with regard to the newly acquired property against which the assessee claimed exemption u/s 54F of the Act. In response to the query made by the Assessing Officer, the assessee explained that she along with her sister were owners of a plot of land having 50% share each. They decided to construction of residential building over the said plot of land consisting stilt plus 5 floors. So far as the cost of construction of building is concerned, the assessee submitted a report from a registered valuer who valued the cost of construction of the building at Rs.2,16,50,000/-
6. It was contended by the assessee that till 31/10/2007, the assessee on an estimate has spent an amount of Rs.1,09,78,307 towards construction of the building which has been claimed towards exemption u/s 54 of the Act. From the approved plan, the Assessing Officer noticed that the building consists of two flats in each floor connected by a corridor. Thus, if the building is of five floors, then the total number of flats will be ten i.e. five flats each belonging to the assessee and her sister. The Assessing Officer therefore was of the view that the assessee is eligible for exemption u/s 54F of the Act only for one flat. He therefore deputed the Inspector of Income-tax to make a spot enquiry for verifying the assessee's claim. The Inspector of Income-tax after visiting the premises submitted his report on 23-12-2009 wherein he stated that the structure existing is not a residential house but a commercial building being used for a school by name 'Sanskriti'. He stated that the school is a semi residential one and the assessee and her friend are running the school in the said premises and the Inspector observed that the building is having class rooms, big hall and a play area for children in the cellar of the premises.
7. The Assessing Officer on the basis of the report of the Inspector concluded that the building constructed by the assessee against which exemption u/s 54F has been claimed is not a residential house and accordingly he completed the assessment by disallowing the claim of exemption u/s 54F of the Act. Being aggrieved of the assessment so made, the assessee preferred an appeal before the CIT (A). It appears from the order of the CIT (A) since even after affording several opportunities given to the assessee, none appeared on behalf of the assessee, he proceeded to decide the appeal ex parte on the basis of the materials available before him. The CIT (A) ultimately disposed of the appeal by confirming the view of the Assessing Officer with following findings:-
"5.2 I have considered carefully the facts and evidence. It is a matter of record that the Inspector of the Assessing Officer visited the building and found that the property in question was actually a commercial building housing a school by the name "Sanskruti". This very fact clearly indicates that the appellant has deliberately falsified the information and even submitted a wrong valuation report. There is no ambiguity in the Act that only investment in residential property is covered under section 54F. The term "residential" clearly implies usage as a 'home'. A commercial property consisting of class rooms, play area cannot be acquitted with a residential property. It has clearly been designed and is being used as a school.
5.3 Accordingly, I have no hesitation in confirming the order of the Assessing Officer. He is also directed to make a report on the conduct of the registered valuer and send a report to his senior officer for action."
8. The learned AR strongly contesting the finding of the Assessing Officer as well as the CIT (A) contended that there cannot be any dispute to the fact that the building constructed is a residential building. Referring to the valuation report of the registered valuer a copy of which is at page-2 of the paper book, the learned AR submitted that the registered valuer has clearly mentioned that the property is situated in a residential area. Further, referring to the same valuation report of the registered valuer, it was contended that the registered valuer at page-20 of his report has clearly described the property as a residential building. The learned AR submitted that the construction of the building was completed by March, 2008. Hence the building was completed in all respects by the end of financial year 2007-08. Referring to the report of Inspector of Income-tax, the learned AR submitted that even the Inspector of Income-tax while submitting his report on 23/12/2009 has categorically stated that the school has started functioning six months back which makes it clear that no school was functioning in the said residential building during the relevant assessment year. It was therefore contended by the learned AR that denial of exemption u/s 54F on the conclusion that it is not a residential building is without any basis.
9. The learned DR, on the other hand, strongly relying upon the orders of the revenue authorities submitted that the enquiry conducted by the Assessing Officer through the Inspector of Income-tax clearly revealed the fact that the constructed building is not a residential house as envisaged u/s 54F of the Act but is a commercial building. Therefore, assessee is not entitled for exemption u/s 54F of the Act.
10. We have heard the submissions of the parties and perused materials on record as well as orders of the revenue authorities. The sole issue before us is whether the building in question constructed by the assessee on which exemption u/s 54F of the Act has been claimed is a residential building as claimed by the assessee or a building constructed for commercial use. As can be seen from the assessment order the Assessing Officer has come to a conclusion that the building is not a residential building basically for the reason that the building is used for a school. However, only because the building is used as a school cannot change the nature and character of the building from residential to commercial. Even a residential building can be used as a school or for any other commercial purpose but the relevant factor to judge is whether the construction made is for residential house or for commercial purpose. If the building has been constructed for residential use with all amenities like kitchen, bath room etc., which are necessary for residential accommodation then even if it is used as a school or for any other commercial purpose, it cannot lose its character as a residential building.
11. However, if the construction is made in such a way that it is not normally for residential use but purely commercial use, then it cannot be considered to be a residential house. Therefore, the primary fact which is required to be examined is whether the building has been constructed for residential use or not. This can be verified from the approved plan and architectural design of the building. However, the plan of the constructed building has not been brought on record either before the revenue authorities or before us. Therefore, it is difficult to arrive at a conclusive finding with regard to the nature of the building. In the aforesaid view of the matter, we are inclined to remit the matter back to the file of the Assessing Officer who shall conduct necessary enquiry to find out the exact nature of construction i.e., whether it has been constructed for residential use or for commercial use. If the building has been constructed for residential use with all amenities, which are necessary for a residential accommodation, then exemption u/s 54F cannot be refused only because it is being used as a school subsequently. So far as the view of the Assessing Officer that exemption u/s 54F of the Act will be available only in respect of one flat is concerned, we do not agree with the same. Law is well settled that ' a residential house' does not mean a single residential house. Even where the assessee constructs or receives a number of flats adjacent to each other or in different floors of the same building then also the assessee would be entitled for exemption u/s 54F of the Act. In this context, we rely on a decision of the Hon'ble Jurisdictional High Court in case of CIT vs. Syed Ali Adil, judgment dated 20-12-2012 in ITTA No.410 of 2012. In view of the above, the matter is remitted to the file of the Assessing Officer who shall decide the issue afresh after affording a reasonable opportunity of being heard to the assessee in the matter.
12. In the result, the appeal is treated as allowed for statistical purposes.
Order pronounced in the court on 02-04-2014.
Decoding Of Charges under Companies Act, 2013 With Rules Framed Thereunder
CS Pankaj Kumar Singhal
Charges denotes the security on the assets given to ensure the repayment of the loan etc. and sometimes is a pre-requisite conditions imposed by the granter to avail the said facility. It may on the present or future assets of the company.However, this is also a truth that due to the least control and cost, some of the person/ corporate group has taken undue advantage and made fraud with the general public. Further, prior to the introduction of "The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Referred herein after as SARFAESI), the banks was normally not very keen and take instant action for the recovery in case of default in payment. For the same reasons, percentage of Non Performing Assets was also increasing. Thanks to the government long vision and introduction of SARFAESI. Under SARFAESI, interest of the financial institutions have been duly cared and has given such rights as may enabled them to take instant action as well as relief.
Although, under The Companies Act, 2013, the provisions are on the same line of action as was in The Companies Act, 1956, however, some relaxation relating to period of submission has been provided in case of creation/ modification of charges.
To give complete understanding, initially author has tried to sum up the complete provisions in a chart form with a brief discussion on one case law. Author has also tried to the basic provisions of SARFAESI which may have an effect on the right and process of the charge holder under The Companies Act 2013.
The respective provisions of The Companies Act, 2013, in relation of Charges has been covered under Chapter VI (Covering Section 77 to Section 87) read with rules in relation to the same i. e. Companies (Registration of Charges) Rules, 2014. Various forms which have been provided are CHG 1 to CHG 10.
Definitions:-
Under the Companies Act, 2013:-
Section 2(9) "banking company" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;
Section 2(16) "charge" means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage;
Section 2(30) "debenture" includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not;
Section 2(39) "financial institution" includes a scheduled bank, and any other financial institution defined or notified under the Reserve Bank of India Act, 1934;
Section 2(72) "public financial institution" means—
(i) the Life Insurance Corporation of India, established under section 3 of the Life Insurance Corporation Act, 1956;
(ii) the Infrastructure Development Finance Company Limited, referred to in clause (vi) of sub-section (1) of section 4A of the Companies Act, 1956 so repealed under section 465 of this Act;
(iii) specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;
(iv) institutions notified by the Central Government under sub-section (2) of section 4A of the Companies Act, 1956 so repealed under section 465 of this Act;
(v) such other institution as may be notified by the Central Government in consultation with the Reserve Bank of India:
Provided that no institution shall be so notified unless—
(A) it has been established or constituted by or under any Central or State Act; or
(B) not less than fifty-one per cent. of the paid-up share capital is held or controlled by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments;
Section 2(74) "Register of Companies" means the register of companies maintained by the Registrar on paper or in any electronic mode under this Act;
Section 2(75) "Registrar" means a Registrar, an Additional Registrar, a Joint Registrar, a Deputy Registrar or an Assistant Registrar, having the duty of registering companies and discharging various functions under this Act;
Under Companies (Registration of Charges) Rules, 2014:-
Rule 2(e) "Regional Director" means the person appointed by the central government in the ministry of Corporate Affairs as a Regional Director.
Analysis (in tabular form) of the Provisions of "The Companies Act, 2013" is as under:-
| Rule and Sub rule No. | Provides for | Section of Companies Act, 2013 | Important Provision in Rules |
| 3(1)- (4) | Registration of creation or modification of charge | Section 77,78,79 Section 77 – Duty to register charges etc. Section 78- Application for registration of charge. Section 79- Section 77 to apply in certain matters. | Charge particulars duly signed with the Company and the charge holder with copy of instrument of charge for creation or modification shall be filed with Registrar in CHG-1 (for other than debentures) or Form CHG-9 (for debentures including rectification) within a period of 30 days from the date of creation/ modification of charge. If, the Company fails register the above said form within the period of 30 days, charge holder itself can submit the said form. If Company fails to register the charge within the period of 30 days, additional fee is to be paid. |
| 4 (1)- (2) | Condonation of delay (By Registrar of Companies) | First proviso to sub-section (1) of Section 77 and Section 78 Section 77 – Duty to register charges etc. Section 78- Application for registration of charge. | Registrar being satisfied that the company had sufficient cause for not Filling the particulars of charge with in thirty days, allow such registration within three hundred days of creation of charge by paying additional fees. Application for condonation shall be made in form CHG-10 and supported by a declaration by the secretary or director of the company that delay shall not affect the rights of creditors. |
| 5 | Application of Rules in Certain matters. Section 79 – Application of section 77 in certain matters | Provisions of rule 4 shall apply to the property acquired under such charge or modification of charge. | |
| 6 (1)- (3) | Certificate of registration | Sub section (2) of section 77 Section 77 – Duty to register charges etc. | Registrar shall issue certificate of registration in form CHG-2, where charge is registered under section 77(1) or 78. Registrar shall issue certificate of modification in form CHG-3, where charge is registered under section 79. This certificate issued shall be conclusive evidence that all rules are compiled. |
| 7 (1)- (2) | Register of charges | Section 81 Section 81 – Register of charges to be kept by the Registrar | The particulars of charge maintained on MCA portal at www.mca.gov.in/MCA21 shall be deemed to be register of charges for the purpose section 81 and shall be open to inspection by any person. |
| 8 (1)- (2) | Satisfaction of charge | Sub section (1) of 82, 83 Section 82 – Company to report satisfaction of charge. Section 83- Power of Registrar to make entries of satisfaction of charges and release in absence of intimation from company. | Company on payment or satisfaction of charge intimate registrar within thirty days of such payment made in Form CHG-4. In case of delay same procedure is to be followed like incase of Register of charges. Certificate of satisfaction of shall be issued by registrar in Form CHG-5. |
| 9 | Appointment intimation | Sub section (1) of section 84 Section 84 – Intimation of appointment of receiver or manager | Appointment or cessation of the receiver or manager subject to charge shall be intimated to Registrar by filing Form CHG-6. |
| 10(1)-(4) | Company's register of charges | Sub section (1) of section 85 Section 85 – Company's register of charges | Register of charges is maintained in Form CHG-7 by every company at its registered office, in which all charges of the company are kept. Entries therein shall be made forthwith after the creation/ modification/satisfaction. Entries in the said register are to be authenticated by Director or Secretary of the company or any person authorized by the board. Register is to be maintained and preserved permanently. Instrument creating/ modification of charge is to preserved for eight years from the date of satisfaction of charge. |
| 11 | Register open for Inspection | Sub section (2) of section 85 Section 85 – Company's register of charges | Register of Charges and the Instrument of Charges kept by the company shall be open for inspection during business hours by (a) any member or creditor of the company without fees: (b) by any other person on payment of fees, (Amount has not been specified*)subject to such reasonable restrictions as the company may, by its articles, impose. |
| 12(1)-(3) | Condonation of delay by Central Government | Section 87 Section 87 – Rectification by Central Government in register of charges | The Registrar shall not register the instrument creating/ modifying charges, if the same is filed after 300 days of its creation/ modification. In case of satisfaction of charges, this period is 30 days. Registrar shall register the same only if condoned by Central Government. Application for condonation shall be made in form CHG-8 Order passed by the central government shall be submitted with the registrar in Form INC 28 as per the conditions stipulated in the said order. |
Some specific notes including ambiguity for above purpose are as under:-
1) It is the prime responsibility of the availing facility to file form CHG; however, if the company does not file the same, the charge holder is also at liberty to file the said form. It is in the form of facility and not an obligation. As it is facility, Charge holder cannot be prosecuted for non submission of CHG form
2) No registration for charge by way of hypothecation of motor vehicles is required, however disclosures of such hypothecation charges with fact of not registration (as is not required) is to be mentioned in the balance sheet.
3) * Amount of fees may be decided by framing the policy by the company itself, however as per the opinion of the author, it must be justifiable.
4) The expression Mortgage has not been defined under the Act. 2013. Reference of the same needs to be taken from the Act, 1956 and Transfer of Property Act, 1882.
Case law:-
Corporation Bank vs Registrar of Companies and Ors (1998 93 Comp Cas 415 CLB)
ORDER
S. Balasubramanian, Chairman dated 17 February, 1997
1. The Corporation Bank (hereinafter referred to as "the petitioner") has filed this petition under Section 141 of the Companies Act, 1956 (hereinafter referred to as "the Act"), seeking extension of time for filing the particulars of modification of charge executed with Dhanalakshmi Consolidated Industries Limited (hereinafter referred to as "the company").
2. The facts alleged in the petition are that the company borrowed a sum of Rs. 50 lakhs from the petitioner against the security of vehicles, machinery and equipment belonging to the company which were to be let out by the said company to any party on hire or lease, by executing a hypothecation agreement dated February 12, 1987, and the same was duly registered with the Registrar of Companies, Tamil Nadu, Madras. The said charge was modified by executing two hypothecation agreements both dated May 20, 1988, by hypothecating (a) all the movables belonging to the company both existing and proposed to be purchased and thereby creating a floating charge and (b) all the present as well as the future book debts, outstanding monies, receivable claims, bills, contracts, engagements, securities, investments, etc., by way of first charge. The said modification of charges should have been filed with the Registrar of Companies as required under Section 135 of the Act within 30 days after execution. The second opposite party ("the company") failed to submit Form No. 8 in spite of repeated requests by the petitioner. Under these circumstances, the petitioner was obliged to file the relevant Form No. 8 with the Registrar of Companies, Tamil Nadu, Madras, on March 20, 1989, after a delay of nine months. In view of the delay in filing the modification of charge, the Registrar of Companies did not take the same on record. Hence, this petition had been filed by the petitioner seeking extension of time to file the charges as envisaged under Section 141 of the Act.
3. On the basis of the notice published by the petitioner in this connection, the Syndicate Bank (SB) and the New Bank of India (NBI) have filed objections before the Company Law Board (CLB). According to NBI, the said bank had advanced a sum of Rs. 30 lakhs under a cash credit facility to the company on its executing necessary documents in favour of NBI and the company has failed to repay the dues to NBI and as such a suit was filed against the company by the NBI in the High Court of Judicature at Madras on February 20, 1990, and the said suit is still pending. According to NBI, all items of assets which have been included in the modification of charge filed by the petitioner had been included in the hypothecation deed executed in favour of NBI on February 29, 1988, by the company and as such if the delay is condoned it would affect the rights of the NBI.
4. The Syndicate Bank (hereinafter referred to as "SB"), has in its objection stated that it has created a charge for over Rs. 5 crores on certain valuable properties of the company and the extension of time if granted in this case, would adversely affect the SB. It has also submitted that under Section 135 of the Act it is only the company which is entitled to register a charge and not the petitioner. The company has also objected to the granting of extension of time, on the ground that the petitioner has already filed a winding up petition against the company in 1988 and the company has also filed a suit seeking certain declarations, against the petitioner. Further, the hypothecation agreements dated May 20, 1988, which are sought to be registered were not executed on the said date as there was nothing to warrant such executions of such documents. It is further averred that these documents have probably been obtained in blank forms while other documents were executed and the company never intended to create any fresh charge over any assets other than those that have already been given as security earlier. Accordingly, the company has prayed for dismissal 'of the petition.
5. The matter was finally heard on February 15, 1996, when the advocates appearing on behalf of the objectors contended that if the extension of time is granted and the modification of charge is registered, it would affect their rights in terms of the charges created in their favour by the company and as such the extension should not be granted. Counsel for the company contended that when the company questions the authenticity/genuineness of the charge, the Company Law Board should not grant extension of time. The authorised representative of the petitioner stated that as long as the petitioner is in position to satisfy the Company Law Board the reasons for the delay in not registering the modification in time, the delay should be condoned irrespective of whether there are any objections or not from other alleged charge holders. The petitioner honestly believed that the company itself would register the modification in time and only when the petitioner realised that the company failed to do so, without any loss of time, the petitioner filed the modification of charges and as such there was no avoidable delay on the part of the petitioner in filing the modification and as such the delay be condoned.
6. I have gone through the pleadings and heard the arguments of the authorised representative of the petitioner bank and learned counsel for the objectors and the company. The issues that arise for consideration are (i) whether I should go into the validity of the charge which is denied to have been executed by the company; (ii) whether the petitioner has given sufficient justification for condoning the delay in filing the modification and (iii) if the extension is granted whether it would affect the interest of the objectors.
7. As far as the first issue regarding the contention of the company that it has not executed the modification of charge on the said date is concerned, I do not consider it necessary to go into the validity of the charge, A reading of Section 141 of the Act clearly shows that what the Company Law Board has to satisfy itself is that the delay in registering charges within the prescribed period was accidental or due to inadvertence or to some other sufficient cause or is not of a nature as to prejudice the position of creditors or shareholders of the company or on other grounds that are just and equitable. There is nothing in the section to indicate that the Company Law Board should also be satisfied about the validity of the charge. Reference may be made to the decision of Heathstar Properties Ltd., In re [1966] 36 Comp Cas 768 (Ch. D), wherein a similar case arose regarding validity of charge and the court held, with reference to Section 101 of the English Companies Act, which more or less contains the same provision as Section 141 of our Act that (page 776) :
"There is no reference there to the court being satisfied as to the validity of the charge, and it would have been very simple to insert such a reference if it had been intended. What Section 101 does, is to give the court power in certain circumstances to substitute its own time-limit for the time-limit in Section 95, but apart from that it leaves Section 95 to operate as if the application to register had been made in time."
8. Thus, considering the legal position as explained above, I do not consider that it is necessary for me to go into the validity of the charge before granting extension of time. The company is always at liberty to challenge the validity in a proper forum and registration of the charge does not take away its right in this connection.
9. As far as the second issue is concerned, it is always the person who creates the charge who files the charge for registration and very rarely the charge holder files the charge for registration. In this case, it is the charge-holder viz., the petitioner who filed the modification after a delay of nine months on the ground that the company failed to do so in spite of repeated requests. Considering the facts and circumstances of the case, I am of the view that the grounds given by the petitioner seeking for condonation of delay in filing the modification are sufficient and as such I am inclined to condone the delay.
10. In regard to the third issue, it is seen that the hypothecation deed executed in favour of NBI on February 29, 1988, is prior in time to the modification of charge sought to be registered by the petitioner now. As far as Syndicate Bank is concerned, the hypothecation deed which is yet to be registered is dated April 27, 1989. This bank has already filed a petition under Section 141 for extending the time for filing the charges up to August 28, 1989 (the date on which charges were filed with the ROC). In other words, the charges created in favour of this bank by the company are yet to be registered. In view of the provision of Section 141(3) of the Act which reads:
"Where the Company Law Board extends the time for the registration of a charge, the order shall not prejudice any rights acquired in respect of the property concerned before the charge is actually registered."
11. The extension of time sought to register the modification if granted will not in any way affect the rights of the objectors.
12. In view of the above, I am satisfied that it is just and equitable that the delay is condoned and the time for filing the modification of charge is extended as prayed for subject to payment of costs referred to herein.
13. This Bench therefore hereby order:
That the delay in filing the particulars of modification of charge on May 20, 1988, is hereby condoned and the time for filing the same is extended up to March 20, 1989, subject to payment of Rs. 1,000 (rupees one thousand only) as costs under Section 141(2) of the Act to the Registrar of Companies, Madras, Tamil Nadu.
Some basic provisions of SARFAESI:-
Section 5 of SARFAESI provides for Acquisition of rights or interest in financial assets as under:-
(1) Notwithstanding anything contained in any agreement or any other law for the time being in force, any securitisation company or reconstruction company may acquire financial assets of any bank or financial institution–
(a) by issuing a debenture or bond or any other security in the nature of the debenture, for consideration agreed upon between such company and the bank or financial institution, incorporating therein such terms and conditions as may be agreed upon between them; or
(b) by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them.
(2) If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section (1) by the securitisation company or the reconstruction company, such securitisation company or reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets.
(3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers-of-attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the securitisation company or reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, securitisation company or reconstruction company, as the case may be, had been a party thereto or as if they had been issued in favour of the securitisation company or reconstruction company, as the case may be.
(4) If, on the date of acquisition of financial assets under sub-section (1), any suit, appeal or other proceeding of whatever nature relating to the said financial assets is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) the same shall not abate, or be discontinued or be, in any way, prejudicially affected by reason of the acquisition of financial assets by the securitization company or reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the securitization company or reconstruction company, as the case may be.
(5) On acquisition of financial assets under sub-section (1), the securitization company or reconstruction company, may with the consent of the originator, file an application before the Debt Recovery Tribunal or the Appellate Tribunal or any court or other authority for the purpose of substitution of its name in any pending suit, appeal or other proceedings and on receipt of such application, such Debts Recovery Tribunal or the Appellate Tribunal or Court or Authority shall pass an orders for the substitution of the securitization company or reconstruction company in such pending suit, appeal or other proceedings. (* amended and inserted with effect from the date of publication in official gazette i. e. 04th January, 2013)
35. The provisions of this Act to override other laws
The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
37. Application of other laws not barred
The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force.
Process of Creation/ Modification of charge is as under:-
1) Conduct a Board meeting to arrive at a positive decision to avail the facility including security of Charges. In the said business of availing facility, authority to execute necessary documents is also required to be given.
2) File extracts of the said resolution with the Registrar of Companies in form MGT 14 within 30 days of its passing.
3) Execute necessary documents for availing the facility including the security being given.
4) Make entries in the register of Charges maintained in form CHG-7 forthwith after the creation/ modification/ satisfaction and get it authenticated by Director or Secretary of the company or any person authorized by the board.
5) Submit form CHG-1 (for other than debentures) or Form CHG-9 (for debentures including rectification) with the prerequisite fees within a period of 30 days from the date of creation/ modification of charge. After due compliance, Registrar shall issue certificate of registration in form CHG-2, where charge is registered under section 77(1) or 78 or in form CHG-3, where charge is registered under section 79.
6) If CHG-1 (for other than debentures) or Form CHG-9 (for debentures including rectification) is not being submitted within the period of 30 days, however within the period of 300 days, prepare an application for condonation in form CHG-10 which shall be supported by a declaration by the secretary or director of the company that delay shall not affect the rights of creditors. After due compliance, Registrar shall issue certificate of registration in form CHG-2, where charge is registered under section 77(1) or 78 or in form CHG-3, where charge is registered under section 79.
7) If CHG-1 (for other than debentures) or Form CHG-9 (for debentures including rectification) is after 300 days, prepare an application for condonation in form CHG-8 and submit the same with Regional Director having territorial jurisdiction over the registered office of the company under The Companies Act, 2013.
8) File the above said application in form GNL1 and after hearing, pay the requisite penalty imposed by the Regional Director having territorial jurisdiction over the registered office of the company. Normally 15 days time is being given for the payment of penalty.
9) After payment of requisite penalty, submit the Chalans with Regional director office with the covering letter containing request to issue and order allowing condonation of delay.
10) Submit the order issued by the regional director with the ROC within the stipulated time given in the order itself in form INC 28.
11) After the approval of the form INC 28, get the form CHG-1 (for other than debentures) or Form CHG-9 (for debentures including rectification) approved. After due compliance, Registrar shall issue certificate of registration in form CHG-2, where charge is registered under section 77(1) or 78 or in form CHG-3, where charge is registered under section 79.
Process of Satisfaction of Charge is as under:-
1) Gets the letter of satisfaction from the bank containing declaration that there are no dues towards the facility provided.
2) Conduct a Board meeting to consider the letter of satisfaction and after taking note of the same in the said board meeting pass the resolution containing authorization to file form CHG-4 with letter of satisfaction as an attachment. It must be noted that the said form CHG-4 is required to be submitted within 30 days of satisfaction. The period of 300 days is applicable in case of creation/modification of charges only and for satisfaction of charges, there is no relaxation of time period.
3) Make entries in the register of Charges maintained in form CHG-7 forthwith after the satisfaction and get it authenticated by Director or Secretary of the company or any person authorized by the board.
4) Submit form CHG-4. After due compliance, Registrar shall issue certificate of registration of satisfaction in form CHG-5.
5) If CHG-4 is not being submitted within the period of 30 days, prepare an application for condonation in form CHG-8 and submit the same with Regional Director having territorial jurisdiction over the registered office of the company under The Companies Act, 2013.
6) File the above said application in form GNL1 and after hearing, pay the requisite penalty imposed by the Regional Director having territorial jurisdiction over the registered office of the company. Normally 15 days time is being given for the payment of penalty.
7) After payment of requisite penalty, submit the Chalans with Regional director office with the covering letter containing request to issue and order allowing condonation of delay.
8) Submit the order issued by the regional director with the ROC within the stipulated time given in the order itself in form INC 28.
9) After the approval of the form INC 28, get the form CHG-4 approved. After due compliance, Registrar shall issue certificate of registration of satisfaction in form CHG-5.
Penal Provisions under "The Companies Act, 2013":-
Section 86 of The Companies Act, 2013 provides the punishment as under:-
If any company contravenes any provision of this Chapter, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.
Further, Section 77(3) of The Companies Act, 2013 speaks about the non consideration of non registered charges by the liquidator or creditor and speaks as under:-
(3) Notwithstanding anything contained in any other law for the time being in force, no charge created by a company shall be taken into account by the liquidator or any other creditor unless it is duly registered under sub-section (1) and a certificate of registration of such charge is given by the Registrar under sub-section (2).
Compoundable Offence:-
Clearly, the non-compliance is a compoundable offence within the meaning of Section 441 of The Companies Act, 2013.
Conclusion:-
The author is of the view that the scope of compliance are on the same line of actions as were under the Companies Act, 1956, however, is also of the view that the implications of the SARFAESI should have been made more clear than of the present situations. Though, there is requirement of disclosure in the financial assets of the company, the same may help in determining the status about secured loans, the provisions might have been made more stringent keeping in view of the interest of the financial institutions and creditors.
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts has made to provide authentic information, it is suggested to cross-check the relevant sections, rules under the Companies Act, 2013. The observations of the author are personal view and the author does not take responsibility of the same and this cannot be quoted before any authority.
(Author – CS Pankaj Kumar Singhal, FCS, LL.B. is a Company Secretary in Practice, Delhi and can be contacted at singhalkap@gmail.com)
Direct Tax updates – Recent Judgements – From Courtroom
CA Abhay Agrawal
Tribunal1. Subsequent commercial-use cannot disentitle Sec 54F exemption if building constructed for residential-purpose: Relevant factor to judge is whether construction is made for residential house or commercial purpose, merely because building used as a school cannot change nature and character of building from residential to commercial; Also holds that law is settled that 'a residential house' does not mean a single residential house; Sec 54F exemption entitled even where assessee constructs or receives a number of flats adjacent to each other or in different floor of same building; Relies on jurisdictional HC ruling in Syed Ali Adil. [N. Revati v. ITO (ITA 67/Hyd/2013) (Hyd ITAT) dated 2 April 2014]
2. 30 days share-holding period, a yardstick distinguishing between business income & STCG: ITAT rules that profit on sale of shares held for less than 30 days should be treated as 'business income' and if held for more than 30 days should be treated as STCG; Observes that differentiation of share transactions as business income or capital gains is a vexed issue, stresses that devising yardstick to distinguish between trading and investment activity based on periodicity of holding is important especially in case of assessee maintaining dual portfolio. [Gurumukh J Sukhwani (ITA 79/PN/2011) (Pune ITAT) dated 30 April 2014]
3. Assessee's accounts cannot determine income accrual, no tax liability on hypothetical income: Income cannot accrue merely on ground that assessee follows mercantile system of accounting; mere tax deduction at source cannot be a test for determining income; Accrual happens when assessee has legal right to claim the income, where no income has accrued, there cannot be tax liability on hypothetical income; While Schedule VI to Companies Act requires income accrued but not due to be part of profits for accounts, concept of "accrued but not due" contradictory for IT Act purpose as what was not due could not have accrued; Relies on Madras HC ruling in Lucas Indian Services Ltd. [Addl CIT v. Shri Vinay V. Kulkarni (ITA 2363/PN/2012) (Pune ITAT) dated 29 April 2014]
High Court
4. Holds share income as capital gains, weighs 'investment' approach over short duration: HC holds income from share sale-purchase transaction as capital gains considering entire facts, applying frequency, object, volume etc tests; Reiterates that no straight jacket formula available to decide transactions' nature, all facts, circumstances ought to be considered; Relies on SC ruling in P. Mohammed Mirakhan. [CIT v. Devasan Investment Pvt Ltd (ITA 1102/2011) (Del HC) dated 16 April 2014]
5. Lays down principles on PMS (Portfolio Management Scheme) income-classification; Rules taxation under capital gains: HC lays down tests / principles to determine characterization of share transactions under discretionary PMS; Agreement terms do not indicate investor's intention to make profits, at best embodies intention to appoint an agent with limited liability, who will invest on behalf of the investor and nothing more; Assessee's intention must be inferred holistically, from the conduct of the assessee, the circumstances of the transactions, and not just from the seeming motive at the time of depositing money. [Radials International v. ACIT (ITA No.485/2012) (Del HC) dated 25 April 2014]
6. Section 68 – Addition could not be on account of share application money, only on basis of any third party statement: Addition under section 68 on basis of statement made by third parties stating that the alleged companies were engaged in providing accommodation entries in lieu of commission; However, said third party statement was made behind back of assessee and no opportunity of being heard or cross-examining third parties was provided to assessee; Assessing Officer could not bring any material to disapprove genuineness of confirmation, affidavits and various details furnished by assessee; [CIT v. Supertech Diamond Tools (P) Ltd [2014] 44 taxmann.com 460 (Rajasthan HC) dated 12 December 2013]
7. Upholds disallowance on cross cheque payment; Account payee cheque mandated u/s 40A(3): RBI circular dated January 23, 2006, directs banks that 'account payee cheques' to be credited to payee's account only, unlike crossed cheques which is negotiable and can be endorsed; In view of intention of legislature to trace the constituent of money, Sec. 40A(3) made more stringent by way of amendment substituting 'crossed cheque' with 'account payee cheque' w.e.f. July 13, 2006. [Rajmoti Industries v. ACIT (Tax Appeal 105/2014) (Guj HC) dated 1 April 2014]
Supreme Court
8. Dismisses Revenue's SLP; HC held computer peripherals entitled to 60% depreciation: SC dismisses Revenue's SLP against Delhi HC judgment; HC had allowed assessee's depreciation claim @ 60 % on computer peripherals like CD writer, Printer, Network Cables, Switches, isolators etc; HC had relied on its own ruling in BSES Rajdhani Power Limited [CIT v. Birlasoft Ltd (SLP (Civil) 20645/ 2012) dated 14 February 2014]
9. Lays down law on criminal proceedings for non-filing of tax return: SC dismisses appeals filed by Sasi Enterprises and its partners Jayalalitha (Tamil Nadu Chief Minister) and N. Sasikala against initiation of criminal proceedings; IT Dept initiated criminal proceedings u/s 276CC of Income Tax Act for non filing of firm's income tax return; SC interprets scope of Sec 276CC and its proviso, says benefit of proviso available only on 'voluntary filing' and not after detection of failure to file return. [Sasi Enterprises v. ACIT [2014] 41 taxmann.com 500 (SC) dated 30 January 2014]
10. Confirms 271(1(c) penalty; Holds "voluntary disclosure", "amicable settlement" as irrelevant plea: Statute does not recognize defences like 'avoiding litigation' and 'buying peace of mind' under Explanation 1 to Sec 271(1)(c); AO shall not be carried away by assessee's plea like "voluntary disclosure", "buy peace", "avoid litigation", "amicable settlement", etc. to explain away its conduct; Burden to rebut the presumption of concealment raised by Expl. 1 to Sec. 271(1)(c) was on assessee; Principles laid in SC rulings of Dharmendra Textile Processors and Atul Mohan Bindal correctly applied by Revenue; SC confirms HC ruling [Mak Data P. Ltd. v. CIT (358 ITR 593) dated 30 October 2013]
(Author may be reached at ca.abhayagrawal@gmail.com)
Change the Culture of Organization to Face the Future of Your Business
Why this Article?
The 'Technolization' of normal human life has brought about a sea change in patterns of thinking, living, time allotment, sleeping, family management and many more aspects of human life. Through this article, I have tried to analyze and bring forward few important aspects of human lives around us. The topic is vast but I thought of at least giving it a headstart to discuss the basics and their impact on business and industries.
We are in an era where the time has arrived when business is affected by the day-to-day psychology of human beings. Current business environment is becoming more and more prone to changes in thinking pattern of society and people at large. The thinking and interaction patterns of human beings are influenced by the changing technology and the internet world (digital world). Let's analyze some aspects of business and how they are impacted and what we can do here.
Customer Satisfaction and Expectations: The change in customer perception and requirements for goods and services plays a big role in success or failure of an organization. Changing role of technology in the lives of customers, society and market at large plays key role nowadays in their demand about a particular kind of product or service. I mean, goods or services of old times become irrelevant and obsolete, while at the same time people start realizing that some new kind of product(s) or service(s) are needed.
For example, Newspaper Distribution (Physical) is witnessing a steep decline year on year. Refer to the article at this link: http://www.theguardian.com/media/2010/jun/17/newspaper-circulation-oecd-report .
The sole reason behind this is that more and more people prefer to rely on their smart phones and laptops for their news needs. They can select the type of news they want to see in their RSS feeds.
Role of Entrepreneurs in Fulfilling Customer Expectations: Perception of the sellers of goods and services should also change accordingly. This is where entrepreneurs come into picture. They observe the society with a 'need', they keep contacts alive, they see the behavioral changes of people around them. They are people who are pioneers of change. They think about what can be done to fulfill these needs or requirements (in fact, the need that arose because of advancements in technology and internet usage).
Role of your employees in changing world: Not necessarily entrepreneurs, but anyone from your workforce can come up with these kinds of thoughts about your existing line of services or products. How you can bring about change and what your organization can do in order to grow. Which product is facing decline in turnover and what may be the reasons behind such fall? Whether the product is outdated for the current generation? Whether they are not needed anymore? And so on…
Day by day, managers and leaders of the business are becoming busier and busier, hence the role of your employees in generating ideas and innovations cannot be undermined. And a good leader learns from everyone (given that his/her ego does not become a hurdle in his/her learning process). Please note that ignoring ideas means ignoring opportunities and ignoring growth of the business you lead. Some years from now, it should not happen that you regret not accepting ideas that you could have adopted way back but now you can't because it's too late.
Let's take example of Car Manufacturing Corporations like Maruti, Hyundai, Toyota, Nissan, Tata, Mahindra etc. They need to analyze as to what would be the impact of introduction of electric cars? What if Japan comes up with such technological breakthrough and will start making electric cars from 2015 onwards? The world is a global village and the demand of their cars will definitely catch pace all over the world as far as they are cost effective. Now, some smart brains from your workforce comes up with an idea that we should explore making electric cars with the help of Germany Car manufacturers or technology providers. Now, unless you have created an environment where your employees can speak freely to the leaders, this idea would not be passed on to top management and ultimately all will suffer.
I see these kinds of problems more as cultural and behavioral problems. Unless they get over these petty issues and our personal egos, Indian corporates are not going to see a strong growth phase. (Am talking about passive, non-dynamic, old thinking organizations where dictatorial leaders are leading the business)
There is fundamental need to change culture of Indian organizations so that -
- It becomes more employee friendly
- It becomes more serious towards innovation culture and ready to accept new and creative ideas
- Managers and leaders (young and seniors, both) become more receptive to new ideas and voice of young population (because ultimately young population is going to use those products and services, so it is more likely that they are more aware about taste of the market)
- Paradigm shift in thinking (It's not necessary that what we have been doing for very long period of time is all true and acceptable, it may lead you to bankruptcy if you don't listen to the new market needs, changing culture and changing society)
How much you capitalize out of these ideas is upto you (as a leader). You need to evaluate the following while introducing open culture of interaction, respect and togetherness -
- Whether you have made your employees and workforce as profit partners? (Do they share any % in profits of the organization?)
- If they don't know whether their efforts are going to be rewarded, then likeliness is that they will keep the ideas to themselves and won't even bother about your organization's progress by conveying such ideas. Even if they convey the idea and the manager rejects the idea once, they may not even bother to come again and convince you or any senior. (The employee will think rather than wasting my time on convincing about my ideas, let me finish my work early and go home and watch TV, it's that simple!!!)
- The employee won't even bother about convincing the pros and cons about the ideas. If his manager says "I don't think this idea can work." The employee will say "Ok!!" (He says to himself– "I swear I won't bother to convey my idea next time. Why will one bother about company's progress when he knows he is not going to participate in the profits of the business).Even if the idea is not workable, reason out properly why it will not work. As a manager or leader if you are not sure then ask your team members or consultant about how that idea can work or can be implemented. [Again the question comes is of Ego, especially male leaders are prone to this mistake. I should appreciate women leaders and assure them of their likeliness of progress in future also because whenever they are in doubt, they immediately ask others to clarify their doubts without bothering about their ego (in most of the cases)]
- Why this mentality? Because they (employees) are not owners, shareholders are owners of the organization.
- Whether you have made communication channel open? (Whether you have made it possible for workforce to communicate their ideas and views to the top?)
- Whether you have given comfort level to your workforce to open up easily and suggest what they think. Whether they fear about expressing themselves? Whether the immediate managers are responsive and open to this type of culture?
- Are they fearless while communicating their thinking or they fear criticism or skeptical approach from managers and leaders of the organization (Always remember one powerful Quote 'If you keep doing what you were doing, you will keep getting what you were getting. So Always foster an environment of creativity and idea sharing)
- Last but not the least 'Is your organization a Family? Or it's a political workplace?' Answer to this question plays a big role in success or failure or progress or stagnation of your business.
What I understand is that there is a 'HUMAN' side to everything in business and profession also. If we start to observe the things in humanistic attitude and humanistic view, you will be able to see everything from that angle and bring change in your organization. Ultimately what we are concerned about is growth of the business and profession. If analysis of human side of business makes you grow, do that.
In current times, human beings are becoming lesser and lesser connected to their inner self and hence their personal happiness is also undergoing a decline phase. That's the reason they are not satisfied with their life and seek happiness from here and there. If you compare past and present, what do you observe? In past, there were lesser theatres, lesser pubs, lesser recreation centers, lesser number of health clubs, lesser number of picnic spots and tours and travel agencies. Increase in these type of activities itself indicates that people are seeking happiness from outside and not within.
To conclude there are five takeaways lessons from the above article
- Technology changes affects every aspect of life and every existing business on the planet
- Your Employees have the innovation power and can contribute to a great extent in facing the situation
- Culture of organization plays a big role in idea and creativity exchange
- Leaders can learn from anyone in the organization (no matter what their pay and position is) provided the ego does not come in between
- Women leaders are going to rock the future. (My analysis of male vs. female leaders). So, all women aspiring leaders, I wish you best luck!!
- Always remember, "There is a difference between a Human Being and 'BEING HUMAN'". The more the people understand this fact, the higher are the prospects of a wholesome progress!!!
(Insights by CA Rajesh Pabari, for feedback please reach me at carajeshpabari@gmail.com or +919022780919)
Companies (Removal of Difficulties) Second Order, 2014 – Dated 2-6-2014 – Companies Law
MINISTRY OF CORPORATE AFFAIRS
ORDER
New Delhi, the 2nd June, 2014
S.O. 1428(E).— In exercise of the powers conferred by sub-section (1) of Section 470 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following Order to remove certain difficulties that have arisen in giving effect to the provisions of Section 73 of the said Act, namely:—
1. (1) This Order may be called the Companies (Removal of Difficulties) Second Order, 2014.
(2) It shall come into force at once.
2. Jurisdiction, Powers, authority and functions of Company Law Board.- Until a date is notified by the Central Government under sub-section (1) of Section 434 of the Companies Act, 2013 (18 of 2013), the Company Law Board constituted in pursuance of sub-section (1) of Section 10E of the Companies Act, 1956 (1 of 1956) shall exercise the jurisdiction, powers, authority and functions under subsection (4) of Section 73 of the Companies Act, 2013 (18 of 2013).
[F. No. 2/8/2014-CL-V ]
AMARDEEP SINGH BHATIA,
Jt.Secy.
AO can make Rule 8D disallowances if claim isn't satisfactory and cogent reasons are recorded
June 11, 2014[2014] 45 taxmann.com 367 (Kolkata - Trib.)
IT-I : Assessing Officer can make disallowance under rule 8D of 1962 Rules only when he is not satisfied with correctness of claim of expenditure made by assessee and such a satisfaction has to be an objective one based on cogent reasons
IT-II : A claim of interest on capital borrowed for purpose of business can be disallowed only where borrowing is for acquisition of an asset intended for extension of an existing business
IT-III : Where assessee gave a boiler on lease in earlier year rental income from which was duly declared in return of income, said boiler being a part of block of assets, assessee's claim for depreciation in respect of same was to be allowed under section 32(1)(ii)
Regards
NEW DELHI, JUNE 12, 2014: THE issue before the Bench is - Whether for the purpose of determining the time frame for completion of the assessment proceedings, the date on which the requisition under Section 132A is made, would not be material and the time period must run from the date when AO is in a position to proceed with the assessment proceedings and conclude the same. And the verdict goes in favour of the assessee.
Facts of the case
Assessee derives commission income from purchase and sale of properties and from the trading of transistor parts. It also worked as an informer for DRI. CBI conducted a search and seized cash of Rs. 1.12 crores. DIT (Inv.) issued warrant of authorization u/s 132A to CBI to deliver the books of account, documents and the assets seized by CBI during the search.
Assessee filed a petition before Special Judge requesting for release of cash seized by CBI. The Special Judge dismissed the petition of assessee and directed CBI to transfer the seized amount to Income Tax Department.
Assessee filed return declaring an income of Rs. 1.13 crores for AY 2002-03 which included Rs. 90 lacs from seized by CBI in response to notice issued u/s 158BC. AO made assessment considering the whole amount seized as undisclosed income for the block period. AO also completed assessment for AY 2002-03 separately determining the income at Rs. 90 lacs.
CIT (A) as well as ITAT both dismissed the appeals of the assessee. Before Hon'ble High Court, the question of law framed was that whether tribunal was justified to validly conclude that block period was 1.4.1996 to 21.03.2013 despite the fact that section 158BA specifically provides block period ends on the date on which, requisition was made u/s 132A and as such, the correct block period was 1.4.1996 to 18.9.2001. Whether the tribunal was justified in determining undisclosed income at Rs. 1.14 crores despite the fact that block period on the facts of the case comprised of the period 1.4.1996 to 18.9.2001 and not block period determined by the tribunal as 1.4.1996 to 21.03.2003 and whether the cash award received by assessee from DRI is to be treated as undisclosed income.
Assessee contended that the Block Period, as defined under Section 158B of the Act, means the period comprising of previous years relevant to six assessment years preceding the previous year in which search u/s 132 was conducted or requisition u/S 132A was made and also includes the period up to the date when such requisition was made. Tribunal erred, while upholding that the block period ended on 21.03.2003, as the requisition u/s 132A of the Act was made on 18.09.2001 and therefore, the block period must end on 18.09.2001. The date of execution of warrant of authorization u/s 132A cannot be held to be the date on which requisition u/s 132A was made. Regarding addition of Rs. 22.50 lacs, it was stated that it was a part of the cash rewards aggregating Rs. 27.00 lacs received from DRI.
Revenue contended that the requisition mentioned u/s 158B(a) relates to the date of the execution of the authorization issued u/s 132A. As per Explanation 2 to Section 158BE of the Act, the requisition is deemed to have been executed on the actual receipt of the books and accounts or other documents by the Authorized Officer. The block period ended on 21.03.2003 as the requisition u/s 132A was said to be complete on 21.03.2003 when the physical delivery of the amount seized by CBI and other documents were handed over to the tax authorities enabling the Assessing Officer to issue a notice under Section 158BC of the Act.
After hearing both the parties, the High Court held that,
++ Block period has been defined to mean the period comprising previous years relevant to the six assessment years preceding the previous year in which search u/s 132 is conducted or requisition u/s 132A is made. It also includes a part of the previous year till the date when the search u/s 132 is conducted or such requisition u/s 132A is made. DRI issued a warrant of authorization u/s 132A, on 18.09.2001, and the Income Tax Authorities received the books of accounts and other documents on 21.03.2003. On 28.05.2003, the Assessing Officer issued a notice to the assessee under Section 158BC of the Act to file a return of undisclosed income for the block period of 01.04.1996 to 21.03.2003;
++ The moot question is whether the Block period should end on 18.09.2001 (i.e. the date of the requisition) or on 21.03.2003 (i.e. the date on which the records were received). The words used in Section 158B(a) and Section 158BE(1) are different. Whereas, Section 158B(a) refers to making of requisition, the specific words being: "or any requisition was made under Section 132A … or requisition was made", Section 158BE(1) refers to execution of authorizations, the specific words being: "authorizations ….. for requisition under Section 132A…. was executed". The Legislature has, thus, consciously used different expressions in Section 158B(a) and Section 158BE. It is settled law that where a statute uses different words, it would be presumed that the Legislature intended the same to express different meanings. It, certainly, cannot be presumed that the Legislature had consciously used different expressions to mean the same thing. Moreover, a construction deriving support from different phraseology in different sections of a statute may be negated on considerations that it will lead to unreasonable or irrational results;
++ On a plain reading of Section 158B(a) and Explanation 2 to Section 158BE, it is difficult in accepting that the expression "requisition was made" must be read to mean the same as "authorizations for requisition was executed";
++ The provision of Section 158BE(1) relates to the period of limitation within which the order of block assessment must be passed u/s 158BC. The purpose of Section 158BE (1) is to specify sufficient time within which the AO is expected to complete the exercise of assessment pursuant to the material that has been found against the assessee. The date on which the AO comes into possession of the assets and books of accounts of the assessee, would be relevant for determining the said period. AO cannot be expected to proceed and conclude the exercise of assessment in absence of the requisite records, documents and assets that form the basis on which the assessment proceedings are to be conducted under Chapter XIVB of the Act. For the purpose of determining the time frame for completion of the assessment proceedings, the date on which the requisition under Section 132A is made, would not be material and the time period must run from the date when AO is in a position to proceed with the assessment proceedings and conclude the same. The focus of Section 158BE(1) is fixation of the time frame for completion of the assessment. This is, clearly, not the focus of Section 158B(a);
++ The income, that is, received/receivable after the date of search and seizure would not be represented by the assets that are found during the search and seizure operations and certainly, would not be assessable to tax as undisclosed income for that period. There is, thus, good reason for the Block Period to be defined as a period prior to the date of search or prior to the date when the authorized officer finds reason to believe that the assets/materials already found, represent undisclosed income. The Parliament in its wisdom has, therefore, defined Block Period u/s 158B(a), to include the period up to the date of commencement of the search under section 132 or the date on which the requisition u/s 132A is made. Therefore, there is no reason to read the expression "requisition was made" to not mean the date on which the authorized officer made the requisition but to mean the date when he received the records/assets pursuant thereto. In view of the same, the Block Period adopted by AO was not in accordance with the provisions of the Act, the assessment made by the Assessing Officer would also required to be reviewed;
++ Assessee produced a letter from DRI stating that the assessee was the recipient of cash rewards. AO doubted the letter from DRI and held that the assessee had failed to prove a corelation between the cash found and the cash rewards claimed by him. Assessee had given details of the cash rewards received by him including the names of the officers who had given the said cash rewards to the assessee. The affidavit filed by the assessee could not have been rejected summarily without verifying the facts from the relevant authority. Thus, matter is remanded back to AO.
Assessee derives commission income from purchase and sale of properties and from the trading of transistor parts. It also worked as an informer for DRI. CBI conducted a search and seized cash of Rs. 1.12 crores. DIT (Inv.) issued warrant of authorization u/s 132A to CBI to deliver the books of account, documents and the assets seized by CBI during the search.
Assessee filed a petition before Special Judge requesting for release of cash seized by CBI. The Special Judge dismissed the petition of assessee and directed CBI to transfer the seized amount to Income Tax Department.
Assessee filed return declaring an income of Rs. 1.13 crores for AY 2002-03 which included Rs. 90 lacs from seized by CBI in response to notice issued u/s 158BC. AO made assessment considering the whole amount seized as undisclosed income for the block period. AO also completed assessment for AY 2002-03 separately determining the income at Rs. 90 lacs.
CIT (A) as well as ITAT both dismissed the appeals of the assessee. Before Hon'ble High Court, the question of law framed was that whether tribunal was justified to validly conclude that block period was 1.4.1996 to 21.03.2013 despite the fact that section 158BA specifically provides block period ends on the date on which, requisition was made u/s 132A and as such, the correct block period was 1.4.1996 to 18.9.2001. Whether the tribunal was justified in determining undisclosed income at Rs. 1.14 crores despite the fact that block period on the facts of the case comprised of the period 1.4.1996 to 18.9.2001 and not block period determined by the tribunal as 1.4.1996 to 21.03.2003 and whether the cash award received by assessee from DRI is to be treated as undisclosed income.
Assessee contended that the Block Period, as defined under Section 158B of the Act, means the period comprising of previous years relevant to six assessment years preceding the previous year in which search u/s 132 was conducted or requisition u/S 132A was made and also includes the period up to the date when such requisition was made. Tribunal erred, while upholding that the block period ended on 21.03.2003, as the requisition u/s 132A of the Act was made on 18.09.2001 and therefore, the block period must end on 18.09.2001. The date of execution of warrant of authorization u/s 132A cannot be held to be the date on which requisition u/s 132A was made. Regarding addition of Rs. 22.50 lacs, it was stated that it was a part of the cash rewards aggregating Rs. 27.00 lacs received from DRI.
Revenue contended that the requisition mentioned u/s 158B(a) relates to the date of the execution of the authorization issued u/s 132A. As per Explanation 2 to Section 158BE of the Act, the requisition is deemed to have been executed on the actual receipt of the books and accounts or other documents by the Authorized Officer. The block period ended on 21.03.2003 as the requisition u/s 132A was said to be complete on 21.03.2003 when the physical delivery of the amount seized by CBI and other documents were handed over to the tax authorities enabling the Assessing Officer to issue a notice under Section 158BC of the Act.
After hearing both the parties, the High Court held that,
++ Block period has been defined to mean the period comprising previous years relevant to the six assessment years preceding the previous year in which search u/s 132 is conducted or requisition u/s 132A is made. It also includes a part of the previous year till the date when the search u/s 132 is conducted or such requisition u/s 132A is made. DRI issued a warrant of authorization u/s 132A, on 18.09.2001, and the Income Tax Authorities received the books of accounts and other documents on 21.03.2003. On 28.05.2003, the Assessing Officer issued a notice to the assessee under Section 158BC of the Act to file a return of undisclosed income for the block period of 01.04.1996 to 21.03.2003;
++ The moot question is whether the Block period should end on 18.09.2001 (i.e. the date of the requisition) or on 21.03.2003 (i.e. the date on which the records were received). The words used in Section 158B(a) and Section 158BE(1) are different. Whereas, Section 158B(a) refers to making of requisition, the specific words being: "or any requisition was made under Section 132A … or requisition was made", Section 158BE(1) refers to execution of authorizations, the specific words being: "authorizations ….. for requisition under Section 132A…. was executed". The Legislature has, thus, consciously used different expressions in Section 158B(a) and Section 158BE. It is settled law that where a statute uses different words, it would be presumed that the Legislature intended the same to express different meanings. It, certainly, cannot be presumed that the Legislature had consciously used different expressions to mean the same thing. Moreover, a construction deriving support from different phraseology in different sections of a statute may be negated on considerations that it will lead to unreasonable or irrational results;
++ On a plain reading of Section 158B(a) and Explanation 2 to Section 158BE, it is difficult in accepting that the expression "requisition was made" must be read to mean the same as "authorizations for requisition was executed";
++ The provision of Section 158BE(1) relates to the period of limitation within which the order of block assessment must be passed u/s 158BC. The purpose of Section 158BE (1) is to specify sufficient time within which the AO is expected to complete the exercise of assessment pursuant to the material that has been found against the assessee. The date on which the AO comes into possession of the assets and books of accounts of the assessee, would be relevant for determining the said period. AO cannot be expected to proceed and conclude the exercise of assessment in absence of the requisite records, documents and assets that form the basis on which the assessment proceedings are to be conducted under Chapter XIVB of the Act. For the purpose of determining the time frame for completion of the assessment proceedings, the date on which the requisition under Section 132A is made, would not be material and the time period must run from the date when AO is in a position to proceed with the assessment proceedings and conclude the same. The focus of Section 158BE(1) is fixation of the time frame for completion of the assessment. This is, clearly, not the focus of Section 158B(a);
++ The income, that is, received/receivable after the date of search and seizure would not be represented by the assets that are found during the search and seizure operations and certainly, would not be assessable to tax as undisclosed income for that period. There is, thus, good reason for the Block Period to be defined as a period prior to the date of search or prior to the date when the authorized officer finds reason to believe that the assets/materials already found, represent undisclosed income. The Parliament in its wisdom has, therefore, defined Block Period u/s 158B(a), to include the period up to the date of commencement of the search under section 132 or the date on which the requisition u/s 132A is made. Therefore, there is no reason to read the expression "requisition was made" to not mean the date on which the authorized officer made the requisition but to mean the date when he received the records/assets pursuant thereto. In view of the same, the Block Period adopted by AO was not in accordance with the provisions of the Act, the assessment made by the Assessing Officer would also required to be reviewed;
++ Assessee produced a letter from DRI stating that the assessee was the recipient of cash rewards. AO doubted the letter from DRI and held that the assessee had failed to prove a corelation between the cash found and the cash rewards claimed by him. Assessee had given details of the cash rewards received by him including the names of the officers who had given the said cash rewards to the assessee. The affidavit filed by the assessee could not have been rejected summarily without verifying the facts from the relevant authority. Thus, matter is remanded back to AO.
Commission earned by NR agent for services rendered abroad couldn't be taxed in India in absence of its PE here
June 14, 2014[2014] 45 taxmann.com 406 (Chennai - Trib.)
IT/ILT : Where assessee paid commission to its foreign agents for rendering services abroad, in view of fact that those agents did not have PE in India and, moreover, services rendered were not in nature of technical service, income could not be said to accrue or arise in India and, thus, assessee was not liable to deduct tax at source while making payments to said agents
June 6th, 2014
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S. 2(47)(v): Transfer under a development agreement takes place on handing over possession. Capital gains are chargeable to tax even if no consideration is received by assessee
In AY 2003-04, the assessee entered into an agreement with Bhavya Constructions pursuant to which he agreed to transfer the land in consideration of the developer giving him four flats in the developed area. The assessee received a token advance and handed over possession of the land. The developer obtained the approval of the municipality to the plan for construction on the property. The AO held that the capital gains was assessable in AY 2003-04 while the assessee claimed that the same was assessable in AY 2004-05 when the consideration was received. The CIT(A) upheld the claim of the AO. The Tribunal (included in file), relying on Chaturbhuj Dwarkaddas Kapadia 260 ITR 491 (Bom), Dr.T. K. Dayalu 202 Taxman 531(Kar) & Maya Shenoy 124 TTJ (Hyd) 692, held that as the assessee had handed over possession of the property to the developer, it was a clear case of transfer by exchange within the meaning of s.2(47)(v) read with s. 53A of the Transfer of Property Act. It was held that the fact that the consideration was received in a later year was not relevant. On appeal by the assessee to the High Court, HELD dismissing the appeal:
The assessee's contention that no transfer takes place on the date of the agreement and handing over of possession if consideration is not received by the assessee is not acceptable because s. 53A of the Transfer of Property Act, 1882, which is engrafted in the definition of "transfer" in s. 2(47) of the Income-tax Act does not contemplate any payment of consideration. Payment of consideration on the date of agreement of sale is not required. It may be deferred for a future date. The element of factual possession and agreement are contemplated as transfer within the meaning of the aforesaid section. When the transfer is complete, automatically, consideration mentioned in the agreement for sale has to be taken into consideration for the purpose of assessment of income for the assessment year when the agreement was entered into and possession was given. Here, factually it was found that both the aforesaid aspects took place in the previous year relevant to the assessment year 2003-04. Hence, the Tribunal has rightly held that the appellant is liable to pay tax on the capital gain for the assessment year.
Contrast with the view taken in Binjusaria Properties (ITAT Hyd), Fibars Infratech (ITAT Hyd), General Glass108 TTJ 854 (Mum) etc that if the willingness of the developer to perform his obligations cannot be ascertained, there is no "transfer" u/s 2(47)(v) r.w.s. 53A. See also Charanjit Singh Atwal (ITAT Chd
Form No. INC-27 for conversion of company from public to private
General Circular No. 18- Dated: 11 June, 2014
Government of India
Ministry of Corporate Affairs
Subject:- Clarification for filing of form No. INC-27 for conversion of company from public to private under the provisions of Companies Act, 2013-reg.
Attention of the Ministry has been drawn to difficulties being faced by stakeholders while filing form INC-27 for conversion of a public company into a private company. The relevant provisions of Companies Act, 2013 (second proviso to sub-section (1) and sub-section (2) of section 14) have not been notified. In view of this, the corresponding provisions of Companies Act, 1956 (Proviso to sub-section (1) and sub-section (2A) of Section 31) shall remain in force till corresponding provisions of Companies Act, 2013 are notified. The Central Government has delegated such powers under the Companies Act, 1956 to the Registrar of Companies (ROCs) vide item No. (c) of the notification number S.O. 1538(E) dated the 10th July, 2012 and this delegated power remains in force. Applications for such conversions, therefore, have to be filed and disposed as per the earlier provisions.
- This issues with the approval of the Competent Authority.
File No. MCA 21/72/2014 -e.Gov.
(Sanjay Kumar Gupta)
Deputy Director
Ph: 23384657
Clarification on Share Transfer Forms executed before 01.04.2014 and Delegation of powers by board under rule 6(2)(a)
General Circular No. 19/2014- Dated 12th June, 2014
Government of India
Ministry of Corporate Affairs
Subject: Clarifications on Rules prescribed under the Companies Act, 2013 – Matters relating to share capital and debentures- reg.
Government has received representations from Industry Chambers, Professional Institutes and other stakeholders seeking clarifications on matters relating to 'share capital and debentures' under the relevant provisions of the Companies Act, 2013 (Act) read with relevant rules, which have come into force with effect from 1st April, 2014. The representations have been examined and clarifications on the following points are hereby given:-
(i) Share Transfer Forms executed before 1st April, 2014:- In view of prescription of new Securities Transfer Form as per Form SH-4 with effect from 1st April, 2014, the companies and other stakeholders have sought clarity with regard to Share Transfer Forms executed before 1st April, 2014 as per earlier Form 7B but which are yet to be accepted/ registered by companies.
The matter has been examined and it is clarified that since transaction relating to transfer of shares is a contract between two or more persons/ shareholders, any share transfer form executed before 1st April, 2014 and submitted to the company concerned within the period prescribed under relevant section of the Companies Act, 1956 needs to be accepted by the companies for registration of transfers. In case any such share transfer form, executed prior to 1st April, 2014, is not submitted within the prescribed period under the Companies Act, 1956, the concerned company may get itself satisfied suitably with regard to justification of delay in submission etc. In case a company decides not to accept the share transfer form, it shall convey the reasons for such non-acceptance within time provided under section 56(4)(c) of the Act.
(ii) Delegation of powers by board under rule 6(2)(a): Clarification has been sought whether the powers of the Board provided under rule 6(2) (a) of Companies (Share Capital and Debentures) Rules, 2014 with regard to issue of duplicate share certificates can be exercised by a Committee of Directors.
The matter has been examined in light of the relevant provisions of the Act, particularly sections 179 & 180 and regulation 71 of Table "F" of Schedule I and it is clarified that a committee of directors may exercise such powers, subject to any regulations imposed by the Board in this regard.
This issues with the approval of the competent authority.
No. 1/4/2013-CL-V
Yours faithfully
(Kamna Sharma)
Assistant Director (Policy)
How to improve Bank Audit Appointment System?
CA Nitesh More
PRESENT APPOINTMENT SYSTEM:
A) Every year, ICAI forward the Bank Branch Auditors' Panel to Reserve Bank of India. The said panel was classified into following three lists by RBI:-
i. List of auditors stationed at cooling period (applicable to 33 centres viz., Mumbai, Kolapur, Pune, Solapur, Thane, Kolkata, Chennai, Coimbatore, Delhi/New Delhi, Ajmer, Bikaner, Jaipur, Kota, Udaipur, Ahmedabad, Vadodara, Surat, Hyderabad, Chandigarh, Raipur, Faridabad, Gurgaon, Panchkula, Panipat, Sonipat, Bangalore, Ernakulam, Indore, Nagpur, Ludhiana, Jodhpur, Bhilwara and Ghaziabad.) of two years after completion of their cycle of 4 years of branch statutory audit – this list was not forwarded to any of the banks.
ii. List of continuing auditors who have yet to complete their cycle of 4 years of allotment of bank branch statutory audit – this list was forwarded by RBI to respective banks.
iii. List containing balance names has been forwarded to all the Public Sector Banks to select their branch statutory auditors. This implies that such applicants have got an equal chance of selection as branch statutory auditor with all the 25 public sector banks.
B).RBI forward these list to every Banks.
C) The statutory branch auditors are selected by the respective banks.
PROBLEMS IN PRESENT SYSTEM & THEIR SOLUTIONS
A) PROBLEM: Category IV) CA firms gets very less proportion of bank audit. Many CATEGORY II) / III) Firms are not getting appointments even after 4-5 years. Many Firms are not getting appointments even after 6-7 years.
SOLUTION: i) Bank Branch audit can be equally allotted on the basis of principal of "One Firm, One Bank Branch Audit based on size of bank branch & size of firm" or other similar principal (As discussed below under head "suggestions by CA Nitesh More" point 1 to 5) or
ii) BANKS SHOULD BE GIVEN SMALL LIST as discussed in point 6 below under head "suggestions by CA Nitesh More".
B) PROBLEM: There is communication from members that GANGS take considerations for getting appointments (without proof).There is communication from members that Bank staffs take considerations for getting appointments (without proof). (Kindly note that I do not certify this problem. I do not take any responsibility for communication of this problem. Kindly further investigate the problem).
SOLUTION: BANKS SHOULD BE GIVEN SMALL LIST as discussed in point 6 below.If bank is given list of CAs according to their requirements, than Bank staffs will have to appoint the auditor in that list. This will automatically reduce the chances of corruption prevailing in the system, if any.
C) PROBLEM: Practically auditors have comparatively less time to audit, say 7-8 days. Large distance of auditor & bank branch results loss of valuable time of auditor as well as loss of money of bank in transportation. More than 20 to 100 Crore's of rupees are expended in transportation cost by bank which has no value, neither to auditor nor to banks. In some cases, CAs are being alleged for not able to identify NPAs, which arises due to less time given for Bank Branch Audit.
SOLUTIONS: APPOINTMENTS BY TAKING "MAPPING TECHNOLOGY" as discussed in point 7 below.
SUGGESTIONS
1) NO OF BANK BRANCHES & CA FIRMS: There are about 25,400 eligible CA Firms for Bank branch audit (Total no of CA Firms: 31000, out of which about 5,600 are not eligible) & there are about 32,000 bank branch, which require audit.
2) DIVISION OF BRANCHES ON THE BASIS OF SIZE: All branches should be divided into category I, II, III & IV on the basis of sizes.
3) ALLOTMENT OF AUDIT ON THE BASIS OF SIZES: Audit for Category l branch should be allotted to Category I CA firm & so on. Under existing system, category IV CA Firm has less chance to get bank audit.
4) NO COOLING PERIOD: There should not be cooling period on the basis of place, as many firm shift to non cooling place during cooling period.
5) PRINCIPAL OF ALLOTMENTS: Bank Branch audit can be equally divided among all firms so that all firms get bank audit, may be on the basis of principal of "One Firm, One Bank Branch Audit on the basis of size of bank branch & CA Firm" or other similar principal.
6) BANKS SHOULD BE GIVEN SMALL LIST: Banks should be sent list on the basis of its requirements. Suppose, if a Bank has 100 total branches which require audit: CATEGORY I BRANCH: 30, CATEGORY II BRANCH: 20, CATEGORY III BRANCH: 10, & CATEGORY IV BRANCH: 40. Such bank should not be sent whole list, but a small list, say list of 100 Firms according to size of CA Firms & branch size. This will reduce the discretion of Bank to allot audit. This discretion has created so many problems under existing system, WHICH CAN BE CONTROLLED BY IMPLEMENTING THIS SINGLE SUGGESTIONS.
7) APPOINTMENTS BY TAKING "MAPPING TECHNOLOGY": IT Technology can be used to appoint auditors. MAPPING COCEPT CAN BE USED TO SAVE THE TRANSPORTATION COST AS WELL AS TIME OF AUDITOR. By using mapping technology, the auditor who is near to the branch, can be appointed as branch auditor. Distance can be known in terms of km. easily & with less cost. With expenditure of even 1 Lakh, 20 to 100 crores of rupees expended by bank can be saved.
PVAT – Reversal of Input tax credit on sale of bye products amounts to double taxation
Reversal of Input tax credit on sale of bye products amounts to double taxation and also exceeds the outer limit of taxability prescribed under the Act Specially in Sheller Trade which is clear cut violation of Article 286 of the Constitution of India.
As we all are aware of this fact that while framing the assessment of Sheller trade the taxable person are unnecessarily burdened with the tax liabilities by making the reversal on the sale of bye products beside this other reversals were made by the Designated Officers by quoting section 19(4) and 19(5) of the Punjab VAT Act, 2005 which is infact not permissible in terms of Article 286 (3) which lays down that
"If a State law contains provisions contrary to the limitations so laid down, the effect of Article 286(3) read with section 15 of the Central Sales Tax Act would be to automatically modify the State law in so far as it relates to declared goods and to bring such law in conformity with the said provisions."
Article 286(3), as it appears after the Sixth Amendment of the Constitution, but before the Constitution ( Forty Sixth) Amendment Act, 1982 places certain limitations on the taxing power of a State. It says:
" Any law of a State shall in so far as it imposes or authorities the imposition of, a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce, be subject to such restrictions and conditions in regard to the system of levy, rates and incidents of the tax as Parliament may by law specify."
It means that the Parliament may declare particular goods to be of special importance in inter-State trade or commerce. The Parliament may place restrictions and conditions on a State law imposing tax on the sale or purchase of such goods. The restrictions and conditions to be prescribed by the Parliament by law should be related to the system of levy, rates and other incidents of the tax. In accordance with this provision the Parliament has enacted sections 14 and 15 of the Central Sales Tax Act, 1956.
"Section 15 (a) is to the effect that every sales tax law of a State, in so far as it relates to imposition of tax on the sale or purchase of declared goods, would be subject to two limitations namely, (i) the tax payable under such law in respect of sale or purchase price thereof, and (ii) such tax shall not be levied at more than one stage. If a State law contains provisions contrary to the limitations so laid down, the effect of Article 286(3) read with section 15 of the Central Sales Tax Act would be to automatically modify the State law in so far as it relates to declared goods and to bring such law in conformity with the said provisions."
But by making the reversals which create the liability of more than five percent which is outer limit for levy of tax on declared goods is totally in contradiction with section 15(a) of the Central Sales Tax Act, 1956 and with Article 286 (3) of the Constitution of India Here it is worthwhile to mention that if any law made by the state which is in contradiction with section 15 of the Central Sales Act, 1956 then the State Law will automatically modify as per the CST Act.
In the Light of Section 19(4) Designated Officers are levying the tax on the closing stock at the end of Financial year which is infact not permissible under the provisions of the Act
As taxable event is sale or purchase of goods and tax can be levied on the transactions which is within the purview of Sale or purchase as per the scheme of the Punjab Vat Act, 2005 and no tax can be levied on the closing stock.
Department is taking the stand that at the end of the year the stock left must be taxed without appreciating the provision of the Punjab VAT Act, 2005 which deals with the admissibility of input tax credit but the authority are levying the tax on the stock and even if we assume that the same is admissible when the goods are sold or used in manufacturing even then the figure of input tax credit is allowed as carried forward which too can be adjusted with the liability of that specific year in terms of section 15 of the Punjab VAT Act 2005.
Here it is worthwhile to mention that section 15 of the CST Act creates restrictions and section 15 of the Punjab Vat Act deals with the situations of net tax payable by a taxable person after adjusting the excess input tax credit.
In the light of Section 19(5) of the Punjab Vat Act, Designated Officer are making the reversal on rice manufactured from paddy or paddy sold in the course of inter state trade or commerce.
By virtue of Section 19 (5) the ITC cannot be reversed as section 15(b) & 15(c) of the Central Sales Act, 1956 creates restrictions which are as under:
Section 15(b) where a tax has been levied under that law in respect of the sale or purchase inside the State of any declared goods and such goods are sold in the course of inter-State trade or commerce, and tax has been paid under this Act in respect of the sale of such goods in the course of inter State trade or commerce, the tax levied under such law shall be reimbursed to the person making such sale in the course of inter-State trade or commerce in such manner and subject to such conditions as may be provided in any law in force in that State;
Section 15 (c) where a tax has been levied under that law in respect of the sale or purchase inside the State of any paddy referred to in sub-clause (i) of clause (i) of section 14, the tax leviable on rice procured out of such paddy shall be reduced by the amount of tax levied on such paddy.
Avowedly section 15 was designed to override and control the State power to tax and the existing tax provisions in the State laws prevailing in the Indian Union in respect of declared goods. The States must have been reluctant that their taxation laws, and budgets, be bridled by an overriding Central provision. That is why section 15 as originally enacted could not be brought into force alongwith the other provisions of the Act. It was delayed and deferred while the other provision of the Act were brought into force w.e.f. 5th Jan, 1957, section 15 was held over in the cold storage. Even actual taxation of inter- State sales came into effect from 1st July, 1957 but section could not be brought into force. Not that the Central Government willfully withheld giving effect to these provisions; a long list of notifications issued by the Central Government in an attempt to bring Section 15 into force would prove its sincerity thereabout.
But unfortunately the States are making the laws which are totally in contradiction with the CST Act and thereafter innocent dealers will be burdened without any reasons.
Here it is worthwhile to mention that violation of section 15 (a) of the Central sales Tax Act automatically results in contravention of Article 301 of the Constitution of India which deals with restriction related to freedom of trade or commerce.
(Author – J S BEDI Advocate, Email: bediadvocate@yahoo.co.in, Mobile: 98140-66336)
Section 188 – Related Party Transaction under Companies Act, 2013
CA Gaurav Mittal
Section 188 of Companies Act 2013 is about Related Party Transactions and applicable to both Private and Public limited company and is applicable from 1St April 2014.
What we will be discussing in below article:-
- Definition/Meaning of Related Party
- Transactions which are deemed as related party transactions
- Nature of approvals required
- Disclosure norms
- Consequences of non-compliance
DEFINITION OF RELATED PARTY
Section 2(76), read with relevant rules made there under, defines a related party as under:
"Related party", with reference to a company, means -
Point 1, 2, 3 , 5 & 9
These clauses include the relatives also.
a) A Director or A key Managerial Person or their relative.
b) A firm in which Director, Manager or his relative is a partner.
c) A Public Limited company in which Director or Relative hold more than 2 % of Share Capital.
d) Director Or relative of Holding, Subsidiary or Associate company.
Point 4 & 5
These clauses only include the Director and Manager.
a) A company (Pvt. or Public) in which Director or manager is Director or Member.
b) A senior management person in the company or its subsidiary, holding or Associate.
Point 6, 7 & 8
a) A body corporate or a Person on advice or directions of whom BOD is accustomed to act.
b) A holding, subsidiary or associate of such company.
c) A fellow subsidiary.
CRUX
Other Than Individuals who are related party.
- A firm, in which a director, manager or his relative is a partner
- A private company in which a director or manager is a member or director
- A holding, subsidiary or an associate company
- A fellow subsidiary
- A public company in which a director or manager is a director or holds along with his relatives, more than 2 percent of its paid-up share capital
- Anybody-corporate whose BODs, MD or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager
MEANING OF
Relative
A) Husband and Wife.
B) Members of HUF.
C) Mother and Father.
D) Grandmother and Grandfather. (Dada And Dadi)
E) Maternal Grandmother and Grandfather. (Nana And Nani)
F) Son and Daughter.
G) Spouse of Son and daughter.
Key Managerial Personnel (KMP) - "Key managerial personnel", in relation to a company, means — (i) the Chief Executive Officer or the Managing Director or the Manager (ii) the Company Secretary (iii) the Chief Financial Officer; and (iv) such other officer as may be prescribed [section 2(51) of the 2013 Act]
Transactions Regarded as Related Party Transactions.
Any transaction between a Company and its related party relating to:
a. sale, purchase or supply of any goods or materials.
b. selling or otherwise disposing of, or buying, property of any kind;
c. leasing of property of any kind;
d. availing or rendering of any services;
e. appointment of any agent for purchase or sale of goods, materials, services or property;
f. such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and
g. underwriting the subscription of any securities or derivatives thereof, of the company.
NATURE OF APPROVAL
By BOD
- Every company needs to seek the approval of its Board of Directors for entering into any related party transaction, as listed above, irrespective of the capital of the company or the value of the transaction.
- Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.
By BOD + Prior Special Resolution
- Paid-up share capital of the company is equal to or exceeds Rs. 1 Crore,
- The value of transaction individually or taken together with previous related party transactions during a financial year, exceeds 5 percent of the annual turnover or 20 percent of the net worth of the company as per the last audited financial statements of the company, whichever is higher,
- The transaction relates to appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding Rs. 1 Lakh.
- The transaction relates to remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding Rs. 10 Lakhs.
- No member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.
- In case of wholly owned subsidiary, the special resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between wholly owned subsidiary and holding company.
EXEMPTIONS
The above mentioned provisions will not be applicable in case of transactions entered into by the company in its ordinary course of business, which are on arm's length basis.
MEANING OF ORDINARY COURSE OF BUSINESS
The phrase "ordinary course of business" is not defined under the Companies Act 2013 or rules made there under. It seems that the ordinary course of business will cover the usual transactions, customs and practices of a business and of a company. In its guidance to auditors, the ICAI has included following few examples of transactions that are considered outside the entity's normal (or ordinary) course of business:
- Complex equity transactions, such as corporate restructurings or acquisitions.
- Transactions with offshore entities in jurisdictions with weak corporate laws. ? The leasing of premises or the rendering of management services by the entity to another party if no consideration is exchanged.
- Sales transactions with unusually large discounts or returns.
- Transactions with circular arrangements, for example, sales with a commitment to repurchase.
- Transactions under contracts whose terms are changed before expiry.
The assessment of whether a transaction is in ordinary course of business is very subjective, judgmental and can vary on case-to-case basis giving consideration to nature of business and objects of the entity. The purpose of making such assessment is to determine whether the transaction is usual or customary to the company and/ or its line of business. Companies should consider variety of factors like size and volume of transactions, arms-length, frequency, purpose, etc, to make this assessment.
MEANING OF ARM LENGTHS PRICE
"Arm's length transaction" means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.
Most commonly used guidance in this regard under income tax provisions is given in international and domestic tax laws in context of transfer pricing regime. One may even refer to rules for registered valuers wherein valuation methodologies are prescribed for registered valuers. It should be noted that these guidelines are not conclusive and have only persuasive value. One may consider various qualitative and quantitative assessments to determine arm's length.
For example, let's assume a bank whose normal course of business provides 9% rate to its customers for placing fixed deposit for a two-year tenure. It offers 9.25%, higher rate, to all its group employees. One may argue that the same is not at arm's length. Alternatively, one may argue that banks devise different strategies for various categories of customers. Employee population of entire group provide a significant customer-base for the bank and hence providing higher rate is in accordance with business strategy and meets the criteria of arm's length. The arm's length assessment is subjective exercise and requires judgment after considering various parameters.
PRACTICAL DIFFICULTIES REGARDING SECTION 188
Q. How do we handle related party contract cases wherein the Company has only husband and wife as both Directors and members in a Company?
These types of Companies have to bring in two outsiders as shareholders giving one share each and pass special resolutions for all related party contracts in a General Meeting and file E Form No.MGT14 and register such special resolutions. This is the only way these contracts could be regularized at least for the time being till the Ministry comes out with some relaxations/clarifications.
Q. A corporate group has several foreign subsidiaries. Will provisions in relation to related parties apply to foreign companies as well?
The term 'company', as defined under the Companies Act 2013, is a company incorporated under this Act or any previous company law. Company incorporated under the relevant legislation of a foreign country is not a 'company' under Companies Act 2013. However, transactions by Indian company with a foreign company, which is a subsidiary, associate, fellow subsidiary, joint venture of the same venture or company under control of same promoter, would be covered, based on understanding of combined reading of revised clause 49 and Companies Act 2013.
The term 'company', as defined under the Companies Act 2013, is a company incorporated under this Act or any previous company law. Company incorporated under the relevant legislation of a foreign country is not a 'company' under Companies Act 2013. However, transactions by Indian company with a foreign company, which is a subsidiary, associate, fellow subsidiary, joint venture of the same venture or company under control of same promoter, would be covered, based on understanding of combined reading of revised clause 49 and Companies Act 2013.
Q. What assessment is required of the existing RPTs, if any?
All companies are required to comply with requirements in relation with RPTs, prospectively from the date of applicability of underlying regulation. Any default will be regarded as non-compliance and may attract penal provisions under the Companies Act 2013. Following actions are recommended to avoid any risk of default:
- Companies should carefully review its related parties under the regulations and identify all existing and new related parties together with all existing and new contracts, arrangements and transactions, etc. Amongst other matters, the manner of dealings shall cover aspects relating to determination of key terms including arm's length price.
- An immediate dialogue needs to be initiated with the audit committee to assess and confirm their expectations from the policy and review/approval protocols. A careful evaluation of existing and proposed RPTs is not unwarranted.
Q. Definition of related parties is very wide. What are the key actions which management and Auditor should take to ensure a robust process for identifying related parties?
Under New Companies Act, 2014 the Directors are required to file form MBP-1 which requires disclosure of his interest in other companies, firms and other related party.
The company and Auditor can rely on such documents and the onus of burden of proof would be on Director in case of any discrepancy.
Q. Under the regulations, no member of the company is permitted to vote on a special resolution to approve any contract or arrangement which may be entered into by the company, if such a member is a related party. Does the bar from voting apply to all shareholders who are related parties or only those related parties who are conflicted?
In cases where shareholders are 'related' in some way or the other with the company (but are neither the intended transacting party nor interested in the transaction directly or indirectly that has been put up for approval) it will be inappropriate to interpret the law to say that all such shareholders are prohibited from voting. The principles of "majority of minority" voting must not result in any unfair advantage to the minority. However, plain reading of the regulations would suggest all related parties shall abstain from voting, whether related or unrelated. Consultation with legal experts might be required to ascertain intent of these provisions.
Q. Many companies have existing contracts or MOUs or other arrangement entered into, prior to introduction of these new regulations but the underlying transactions are likely to be operationalised in period after the introduction of the new regulations. Would such contracts require a review and approval of the audit committee/board or the shareholders, as the case may be, considering effective execution in the period after introduction of the new regulations?
MOUs are merely an understanding and not a definitive contract or arrangement. Clearly, these would require rigor of review under the new framework, prior to execution of definitive agreement. In relation to other contracts or arrangements, covered above, although differing views may exist when evaluating the manner of how regulations have been made, it would be improper to assume that such contracts or arrangements are not required to go through rigor of review now required considering these are operationalised only under the new regime of regulations.
CONSEQUENCES OF NON COMPLIANCE
If any related party transaction or contract is entered without seeking Board's and/or members' approval and if the same is not ratified by the Board and/or members as the case may be, within 3 months at a meeting, then the contract or transaction will be voidable at the option of the Board and if the transaction is with any related party to any director or is authorized by any other director, then the concerned directors are liable to indemnify any loss incurred by the company.
ii. Additionally, the company can also proceed against a director or employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement.
iii. Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall –
(a) in case of listed company, be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-, or with both; and
(b) in case of any other company, be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-.
iv. One is disqualified to be a Director for five years if he is convicted of an offence dealing with related party transactions under Section 188 during the last preceding five years.
(Author may be contacted at mittalgaurav05@gmail.com)
Other Articles by the Author-
MGT-10 form needs to be filed physically
General Circular No. 17, Dated: 11 June, 2014
Subject:- Filling of MGT-10- clarification-regarding.
In continuation of General Circular No. 06/2014 dated 29.03.2014 and 09/2014 dated 25.04.2014 , I am directed to inform you that stakeholders are required to fill Form MGT-10 physically, get it duly signed/ certified by a professional and file it alongwith other required enclosures as attachments with the prescribed General E-Form No. GNL-2. This temporary arrangement will continue till an E-Form for MGT-10 is made available. Fee applicable for MGT-10 will be as per the Table of Fees prescribed in Companies (Registration Offices and Fees) Rules, 2014.
2. This issues with the approval of the Competent Authority.
(Sanjay Kumar Gupta)
Deputy Director
Ph: 23384657
Postal Ballot under Companies Act, 2013
CS M. Kurthalanathan
Postal Ballot under Companies Act,2013Section 110 of the Companies Act,2013 and Rule 22 of the Companies (Management and Administration ) Rules,2014 deals with Postal Ballot.
Postal Ballot – Business:
A company shall transact the following business only by means of Postal Ballot;
| Section | Description |
| 13 | Alteration of the objects clause of the memorandum and in the case of the company in existence immediately before the commencement of the Act, alteration of the main objects of the memorandum |
| 2 (68) | Alteration of articles of association in relation to insertion or removal of provisions which are required to be included in the articles of a company in order to constitute it a private company |
| 12(5) | Change in place of registered office outside the local limits of any city, town or village. |
| 13(8) | Change in objects for which a company has raised money from public through prospectus and still has any unutilized amount out of the money so raised |
| 43(a)(ii) | Issue of shares with differential rights as to voting or dividend or otherwise |
| 48 | Variation in the rights attached to a class of shares or debentures or other securities |
| 68(1) | Buy-back of shares by a company |
| 151 | Election of a director |
| 180(1)(a) | Sale of the whole or substantially the whole of an undertaking of a company |
| 186(3) | Giving loans or extending guarantee or providing security in excess of the limit |
A company may transact any other business by postal ballot instead of transacting at a general meeting except:
- ordinary business and
- any business in respect of which directors or auditors have a right to be heard at any meeting.
If a resolution is assented to by the requisite majority of the shareholders by means of postal ballot, it shall be deemed to have been duly passed at a general meeting convened in that behalf.
Procedure to be followed for conducting Postal Ballot:
Notice to Shareholders:
Where a company is required or decides to pass any resolution by way of postal ballot, it shall send a notice to all the shareholders, along with a draft resolution explaining the reasons there for and requesting them to send their assent or dissent in writing on a postal ballot because postal ballot means voting by post or through electronic means within a period of 30 days from the date of dispatch of the notice.
Mode of dispatch:
The notice shall be sent either :
- by Registered Post or speed post, or
- through electronic means like registered e-mail id or
- through courier service for facilitating the communication of the assent or dissent of the shareholder to the resolution within the said period of thirty days.
Publish advertisement:
An advertisement shall be published at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and having a wide circulation in that district, and at least once in English language in an English newspaper having a wide circulation in that district, about having dispatched the ballot papers and specifying therein.
Details of Advertisement:
- a statement to the effect that the business is to be transacted by postal ballot which includes voting by electronic means;
- the date of completion of dispatch of notices;
- the date of commencement of voting;
- the date of end of voting;
- the statement that any postal ballot received from the member beyond the said date will not be valid and voting whether by post or by electronic means shall not be allowed beyond the said date;
- a statement to the effect that members, who have not received postal ballot forms may apply to the company and obtain a duplicate thereof; and
- contact details of the person responsible to address the grievances connected with the voting by postal ballot including voting by electronic means.
Place notice on website:
The notice of the postal ballot shall also be placed on the website of the company forthwith after the notice is sent to the members and such notice shall remain on such website till the last date for receipt of the postal ballots from the members.
Appoint Scrutinizer:
The Board of directors shall appoint one scrutinizer, who is not in employment of the company and who, in the opinion of the Board can conduct the postal ballot voting process in a fair and transparent manner.
Obligation of Scrutinizer:
- The scrutinizer shall be willing to be appointed and be available for the purpose of ascertaining the requisite majority.
- Postal ballot received back from the shareholders shall be kept in the safe custody of the scrutinizer and after the receipt of assent or dissent of the shareholder in writing on a postal ballot, no person shall deface or destroy the ballot paper or declare the identity of the shareholder
- The scrutinizer shall submit his report as soon as possible after the last date of receipt of postal ballots but not later than seven days thereof
- The scrutinizer shall maintain a register either manually or electronically to record their assent or dissent received, mentioning the particulars of name, address, folio number or client ID of the shareholder, number of shares held by them, nominal value of such shares, whether the shares have differential voting rights, if any, details of postal ballots which are received in defaced or mutilated form and postal ballot forms which are invalid.
- The postal ballot and all other papers relating to postal ballot including voting by electronic means, shall be under the safe custody of the scrutinizer till the chairman considers, approves and signs the minutes and thereafter, the scrutinizer shall return the ballot papers and other related papers or register to the company who shall preserve such ballot papers and other related papers or register safely.
- The assent or dissent received after thirty days from the date of issue of notice shall be treated as if reply from the member has not been received.
- The results shall be declared by placing it, along with the scrutinizer's report, on the website of the company.
The resolution shall be deemed to be passed on the date of at a meeting convened in that behalf.
The provisions of rule 20 regarding voting by electronic means shall apply, as far as applicable, mutatis mutandisto this rule in respect of the voting by electronic means.
Postal Ballot – Companies Act,1956 Vs Companies Act,2013:
| Companies Act,1956 | Companies Act,2013 |
| Section 192A of the 1956 Act deals with Postal Ballot | Section 110 of the 2013 act deals with Postal Ballot |
| It applies only to listed public companies | It applies to all companies |
Exemptions:
- One Person Company and
- other companies having members up to two hundred
are not required to transact any business through postal ballot
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts has made to provide authentic information, it is suggested that to have better understanding kindly cross-check the relevant sections, rules under the Companies Act,2013
NEW DELHI, JUNE 13, 2014: THE issues before the Bench are - Whether the value declared before the Settlement Commission by the seller of the property can bind the purchasers and Whether when the purchaser of the property declares the difference between the value of the property and the amount shown in its return of income before the Settlement Commission, the same amounts to concealment of income. And the verdict goes against the Revenue.
Facts of the case
The assessee is the wife of Mr. Gopal Gupta who was inducted as a director in a company known as D.J. Infrastructure Developers (P) Ltd., which was allotted hotel land at Motia Khan, New Delhi in an auction by the Delhi Development Authority. Thereafter shares were allotted to Gopal Infrastructures (P) Ltd., a group company of Gopal Gupta Group in the DJI. The total cost of land in the books was shown to be Rs 90 crores ., however, the AO considered the valuation at Rs 130 crores including a premium computed at Rs 40 crores . It was also the case of the Revenue that since 1/3rd of the shares in DJI were acquired by Gopal Infrastructures the share of the premium would be Rs 13.3 crores which was supposed to be paid by Sh. Gopal Gupta and his wife to the other Group from whom the said shares were acquired.
The issue was taken to the Settlement Commission which passed an order accepting the figure of Rs 16 crores.
In a writ, the Revenue contended that the sellers of the 1/3 rd share in the property had disclosed Rs 16 crores on this account in their statement of facts before the Settlement Commission, whereas the purchasers had disclosed only Rs 7.6 crores . The Revenue contended that this clearly amounted to non disclosure of income and should not have been accepted by the Settlement Commission.
The Counsel of the assessee submitted that the assessee and her husband had acquired 1/3 rd share in the property amounting to Rs 44.34 crores . Only an investment of Rs 36.73 crores was disclosed in their books and the remaining amount of Rs 7.61 crores was declared before the Settlement Commission. The Counsel also contended that going by the valuation of 1/3 rd share purchased by the assessee and her husband, as shown by the Revenue, this would create discrepancy in the valuation of the property amounting to Rs 158.9 crores as against Rs 133 crores , which has not been challenged by the Revenue itself.
Having heard the parties, the High Court held that,
++ we are of the view that the impugned order dated 21.05.2012 does not call for any interference. The fact that Smt. Lata Jain and Sh. Roshan Agarwal had together declared a sum of Rs 16 crores as undisclosed income in respect of the said transaction cannot, in our view, bind the respondent No.1 and her husband Sh. Gopal Gupta. The respondent No.1 and Sh. Gopal Gupta were not privy to the settlement application filed on behalf of Smt. Lata Jain and Sh. Roshan Agarwal . In any event, what the Settlement Commission has said in the order in respect of Smt. Lata Jain and Sh. Roshan Agarwal , is that as per their calculations the premium amount came to Rs 13.3 crores but since the applicants therein (Smt. Lata Jain and Sh. Roshan Agarwal ) had declared more than that, the disclosure needed no disturbance. It was also noted that Sh. Gopal Gupta had surrendered a lesser amount of Rs 6.5 crores . We may point out that Rs 6.5 crores had been disclosed in the initial statement given by Sh. Gopal Gupta at the time of the search and seizure operation and the figure was subsequently enhanced to Rs 7.61 crores at the time the application for settlement was made before the Settlement Commission. The Settlement Commission in its order dated 31.12.2010 did not fix any figure as to the amount of undisclosed amount. It only stated that since the amount declared by the applicants therein (Smt. Lata Jain and Sh. Roshan Agarwal ), was much more than what had been surrendered by Sh. Gopal Gupta and what had been computed by the Department, the disclosure made by them needed no disturbance;
++ it is evident from the discussion above that there is no dispute that the value of the property in question, even as per the Revenue, was Rs 130 crores . If a further sum of Rs 3 crores was added to it, to which nobody objected, by way of registration charges, the value would be Rs 133 crores . 1/3rd of this would come to Rs 44.34 crores . The respondent No.1 and her husband had disclosed Rs 36.73 crores as investment in the said property leaving a balance of Rs 7.61 crores which they declared as undisclosed amount in their settlement application. In other words, the full value of the 1/3rd share in the property has been accounted for. The Revenue cannot attempt to add anything more to this value in the absence of any concrete evidence. If the stand taken by the Revenue were to be accepted, then the value of the property, as mentioned above, would come to Rs 158.19 crores , which, as pointed out by Mr Tripathi , is nobody's case. In any event there is not an iota of evidence to indicate that the value of the property was anything but Rs 130 crores .
IT : Mere recording of fact that in course of search of third party, some documents related to assessee were seized and, hence, jurisdiction of concerned Commissioner was assigned, is no proper reasoning as required for issuing notice to initiate block assessment
■■■
[2014] 45 taxmann.com 296 (Karnataka)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax
v.
SSK Tulajabhavani Kalyan Mantap Kattd Samithi *
K.L. MANJUNATH AND B. MANOHAR, JJ.
IT APPEAL NO. 5013 OF 2009†
OCTOBER 9, 2012
Section 158BD, read with section 132, of the Income-tax Act, 1961 - Block assessment in search cases - Undisclosed income of any other person (Recording of reasons) - In course of search and seizure of house of one MM, some documents related to assessee were found and seized - Therefore, jurisdiction over assessee had been assigned by Commissioner and in view of provisions of section 158BD, notice under section 158BC was issued - Whether since there was no explanation offered by revenue for non-production of documents recording reasons, order of block assessment was to be set aside - Held, yes [Para 7] [In favour of assessee]
FACTS
| ■ | A search was conducted by the Revenue on the house of one MM and a huge cash was found in the house. It was contended by MM that a sum of Rs. 25 lakhs found during the search was that of the respondent Samithi which was running Kalyan Mantap. | |
| ■ | Notice under section 158BC, read with section 158BD was issued to the assessee in response of which assessee filed its return of income disclosing NIL income. | |
| ■ | The order of assessment was passed bringing tax on undisclosed income of Rs. 53.04 lakhs. | |
| ■ | On first appeal, the Commissioner (Appeals) confirmed Assessing Officer order. | |
| ■ | On second appeal, the Tribunal set aside the order of assessment on non-production of reasons recorded by the Assessing Authority even though more than an year time was granted to the revenue. | |
| ■ | A miscellaneous petition was filed thereafter by the revenue producing the Xerox copy of the satisfaction recorded by the Assessing Officer. It was dismissed on the ground that satisfaction recorded was not sufficient. | |
| ■ | On appeal : |
HELD
| ■ | The copy of the satisfaction recorded by the Assessing Officer, reads that in the course of search and seizure of the house of one MM, some documents related to assessee were found and seized. Therefore, the jurisdiction over the assessee had been assigned by Commissioner and in view of provisions of section 158BD, notice under section 158BC issued. On perusal of the same, it is found that no satisfactory reasons were assigned by the Assessing Officer in order to issue a notice under section 158BD as held by the Tribunal. In addition, it is also seen that the revenue did not show any reasons for non-production of the reasons recorded for the satisfaction of the Assessing Officer to issue notice under section 158BD before the Tribunal when time was granted for one year to the revenue to produce the same. Even in this appeal, no explanation is offered except stating that reasons were recorded. When there is no explanation offered by the revenue for non-production of the document before the Tribunal for more than an year and having held that reasons recorded would not constitute satisfactory reasons, it is to be held that there is no merit in this appeal. [Para 7] |
Y.V. Raviraj for the Appellant. Shashank S. Hegde for the Respondent.
JUDGMENT
K. L. Manjunath, J. - The revenue has preferred this appeal being aggrieved by the order passed by the Income Tax Appellate Tribunal dated 28.05.2008 passed in IT (SS) A. No. 38/Bang/2004 and also the rejection of Miscellaneous Petition filed by the appellant in M.P. NO.84/BANG/2008 dated 13.03.2009.
2. The facts leading to this appeal are as under:
"A search was conducted by the Revenue on the house of one M.M. Meharwade and a huge cash was found in the house. It was contended by M.M. Meharwade that a sum of Rs.25,00,000/- found during the search was that of the respondent which is a Samithi running Kalyan Mantap. Notice under Sec.158BC r/w Sec.158BD of the Income Tax Act, was issued to the respondent. Thereafter the assessee filed its return of income in response to the notice disclosing the income as nil. The order of assessment was passed bringing tax on undisclosed income of Rs.53,04,000/-by its order dated 19.06.2002, against which the assessee filed appeal before the appellate Commissioner, which order was confirmed."
3. Aggrieved by the concurrent findings, the assessee filed a second appeal before the Tribunal mainly contending that no satisfactory reasons were recorded by the Assessing Officer. Therefore, the Tribunal directed the revenue to produce the reasons recorded by the Assessing Authority to satisfy himself to issue notice to the assessee. More than an year time was granted to the revenue. In spite of such an opportunity, the revenue did not produce the satisfaction recorded by the Assessing Officer. Therefore the Tribunal drawing an adverse inference allowed the appeal of the assessee and set aside the order of assessment.
4. Thereafter a Miscellaneous Petition was filed by producing the xerox copy of the satisfaction recorded by the Assessing Officer. The Miscellaneous Petition also came to be rejected on the ground that in spite of sufficient opportunity granted to the revenue same was not utilized and there are no reasons to allow the Miscellaneous Petition. It was further held that the satisfaction recorded was not sufficient accordingly Miscellaneous petition came to be dismissed on merits also. These orders are called in question in this appeal.
5. The appeal was admitted on 08.03.2012 to answer the following substantial question of law:
"Whether the Tribunal was correct in holding that the Assessing Officer has not recorded a satisfaction for invoking Section 158BD of the Act without verifying the order sheet maintained by the Assessing Officer, wherein satisfaction has been recorded before issuing notice under Section158BC r/w 158BD of the Act and consequently recorded a perverse finding?"
6. We have heard the counsel for the parties. We have also seen the copy of the satisfaction recorded by the Assessing Officer, which reads as hereunder:
"There was search and seizure of the house of Shri M.M. Meharwade. In the course of said action some documents related to assessee were found and seized. Therefore the jurisdiction over the assessee has been assigned to the circle by the C.I.T. Hubli vide order No. RNo.109/CIT, HBL/99-2000 dated 8th March 2000. Therefore as in view of that the provisions of Section 158BD applied to the assessee. Notice U/s 158 BC issued."
7. On perusal of the same we are of the opinion, no satisfactory reasons are assigned by the Assessing Officer in order to issue a notice u/S 158BD as held by the Tribunal. In addition, we have also seen that the revenue did not show any reasons for non-production of the reasons recorded for the satisfaction of the Assessing Officer to issue notice U/S 158BD before the Tribunal when time was granted for one year to the revenue to produce the same. Even in this appeal, no explanation is offered except stating that reasons were recorded. When there is no explanation offered by the Revenue for non-production of the document before the Tribunal for more than an year and having held that reasons recorded would not constitute satisfactory reasons, we do not see any merits in this appeal. Accordingly, the question of law framed is answered against the revenue. In the result, the appeal is dismissed.
SB †Arising out of order of Tribunal in IT (SS) A No. 38/Bang/2004, dated 28-5-2008 and MP No. 84 (Bang.), dated 13-3-2009.
No reassessment on basis of report of DVO which merely casted doubt on valuation method opted by assessee
IT : Assessing Officer could not refer matter to DVO without books of account being rejected; no reopening assessment based upon incomplete report of DVO raising doubts only about assessee's methodology
Indian citizen taking employment abroad would be 'non-resident' in India if his stay in India is for 68 days only
IT/ILT : Assessee should be treated as an NRI since he had left India for employment outside India and his stay in India in previous year was only 68 days
Secretarial Audit Report Under Companies Act, 2013
Anil Kumar Popli, FCS
I. Section 204(1) of Companies Act, 2013 introduces concept of Secretarial Audit Report by Company Secretary in practice is a welcome step. It is a step towards good corporate governance and in line with the provisions of Clause 49-C(iii) of the Listing Agreement of Stock Exchanges i.e. part of Corporate Governance which states. The Board shall periodically review legal compliance reports prepared by the company as well as steps taken by the company to cure instances of non-compliances.The objectivity of secretarial audit is good and appreciated. However, the format of Secretarial audit report to some extent is vague in nature. The format of Secretarial Audit Report i.e. form no.MR-3 [pursuant to Section 204(1) of the Companies Act, 2013 and rule 9 of the Companies (Appointment and Remuneration personnel) Rules 2014] specifies examination of books, papers, minute books, forms and returns filed and other records maintained by the Company for the financial year ended on according to the provisions of Acts specified in the form in sub-clauses ((i) to (v) are good but last (vi) is blank which says mention the other laws as may be applicable specifically to the company and to report specific non compliances, observations, qualifications separately.
The author is very much concerned in respect of sub-clause (vi) which states …. (Mention the other laws as may be applicable specifically to the Company). It is, however, not specified what other laws are applicable to the Company.
There are numerous other laws that may be applicable to the Company. Some of the taxation, environmental and labour laws which may be applicable to majority of companies are enumerated herein below. It is surprising that the Act or rules do not specify what provisions or what laws are to be audited. It is up to the whims and prerogative of the Secretarial Auditor to choose what matters are to be audited and what not. It will definitely differ from one person to another as everybody has own view of audit. It is also not understandable that in cases where some other agency has conducted audit or special audit under some specific law, whether he has to rely on that or to conduct audit as per his knowledge and expertise. So, the author is of the view that this provision is totally vague in nature and do not serve any purpose. More so, it exceeds its jurisdiction.
For example, under Companies Act, financial audit in respect of financial statements is being done by Chartered Accountant and cost audit is being conducted by Cost Accountant under Companies (Cost Audit) Rules and in some cases special audit is being conducted under section 14 and 14AA of the Central Excise Act, 1944 or special audit of Service Tax under section 72A of the Finance Act or special audit in any other law is conducted by any other Agency, whether it would be appropriate that the Company Secretary should also re-audit and report his observations or qualifications in its report, as it is also covered under the definition of other laws. In the Secretarial audit report, there is no exception given to exclude the reporting on such matters which are under audit by other agencies. It is not clear whether Secretarial audit report should also cover the matters over and above other audits. It is, however, understandable that it is duty of Company Secretary who is in whole time employment to report legal compliance on other laws as may be applicable as defined under the provisions of Section 205 of the Companies Act, 2013 but audit of other laws is altogether different. It is also understandable that the Secretarial audit should review the compliance of other laws as may be discussed in the Board of Directors meeting. It is, however, not practical for the Secretarial auditor to audit numerous laws as may be applicable to the Company. It may be noted that any audit should be specific to the extent of compliance of specific provisions of law and no audit can be made in general. I do not understand the logic and objectivity of such a general audit.
Applicability of other laws
| Taxation laws | Labour laws | Environmental laws | Other laws |
| Income Tax Act, 1961 | The Factories Act, 1948 | Air (Prevention and Control of Pollution) Act, 1981 | FEMA, 1999 |
| Wealth Tax Act | Industrial Dispute Act | Water (Prevention and Control of Pollution) Act, 1974 | Foreign Trade (Development and Regulation Act, 1992 |
| Central Excise Act | Payment of Wages Act | The Noise (Regulation and Control) Rules 2000 | Indian Contract Act |
| Custom Act | Payment of Bonus Act | The Environment (Protection) Act 1986 | Sale of Goods Act |
| Service Tax | Workmen Compensation Act, | Petroleum Act and Rules | |
| Sales Tax Act including Value Added Tax Act of 2003 | Shop And Establishment Act | The Urban Land (Ceiling &Regulation Act | |
| Respective State Sales Tax Acts | Weekly Holiday Act, 1942 | Transfer of Property Act | |
| Professional Tax | Employees State Insurance Act, 1948 | Motor Vehicles Act | |
| Education Cess | Employees PF & Misc. Provisions Act, 1954 | Essential Commodities Act | |
| Research and Development Cess Act, 1991 | Payment of Gratuity Act | Information and Technology Act | |
| The Boiler Act and Gas Cylinders Act and Rules | Contract Labour (Regulation & Abolition Act) 1970 | Right to Information Act | |
| Maternity Benefit Act, 1961 | Constitution of India | ||
| Respective State Govt. Factories (Control of Major Industrial Accident Hazard) Rules 2002 | Micro, Small And Medium Enterprises Development Act, 2006 and many other Acts |
II. Check list and audit points of Secretarial Audit Report
Applicability- Every public company having a paid-up share capital of fifty crore rupees or more; or (b) Every public company having a turnover of two hundred fifty crore rupees or more are required to conduct secretarial audit from practicing Company Secretary.
All Private Companies, are however, exempt from purview of Secretarial Audit. The author is of the view that Private Companies fulfilling the above criteria should also be covered.
The author is of the view that this audit would be applicable from financial year 2014-15 onward.
Appointment of Company Secretary in Practice
There is no specific provision in the Act regarding appointment of Secretarial Auditor. Therefore, the appointment can be made either in Board or General Meeting. The resolution regarding appointment of Secretarial Auditor is required to be filed with the office of Registrar of Companies under the provisions of Section 117 read with Section 179(3) and rule 8(4) of The Companies (Meetings of Board and its Powers) Rules, 2014 in Form no.MGT-14 within 30 days from the date of appointment.
Powers and duties of auditors and auditing standards
Pursuant to provisions of Section 143(14) (b) of the Companies Act, 2013 the provisions of this Section shall mutatis mutandis apply to ..(b) the Company Secretary in practice conducting secretarial audit under section 204.
The Secretarial auditor shall have all the power and access to the books of accounts, financial statements and secretarial records whether kept at the registered office of the Company or at any other place and shall be entitled to require from the officers of the Company such information and explanation as he may consider necessary for the performance of his duties as auditor as specified in the provisions of Section 143 of the Act.
As per provisions of Section 143(12) of the Companies Act, 2013 notwithstanding anything contained in this section, if the auditor of a Company, in the course of performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committee against the Company by officers and employees of the Company, he shall immediately report to the Central Government within such time and in such manner as may be prescribed.
It is surprising that the format of Secretarial auditor report i.e. MR-3 missing any statement about involvement of any fraud or economic offence committed against the Company by its officers and employees of the Company.
Contents of Report - It should be in form no.MR-3 [pursuant to Section 204(1) of the Companies Act, 2013 and rule 9 of the Companies (Appointment and Remuneration personnel) Rules 2014]
The Secretarial auditor has to report on compliances of
i) The Companies Act, 2013 (the Act) and Rules made there under;
ii) The Securities Contracts (Regulation) Act, 1956 and rules made thereunder;
iii) Foreign Exchange Management Act, 1999 and the rules to the extent Foreign Direct Investment, Overseas Direct Investment and External Commercial borrowings;
iv) The Depositories Act, 1996 and regulations and bye-laws framed thereunder;
v) Various regulations and guidelines under Securities and Exchange Board of India
vi) .. (Mention the other laws as may be applicable specifically to the Company.
Further, examination and compliances of Secretarial standards issued y the Institute of Company Secretaries of India and on provisions of Listing Agreement.
Comments of Report in Board of Directors Report
As per provisions of Section 134(3)(f) of the Act, the Board of Directors are required to give explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by .. (ii) by the Company Secretary in practice in his secretarial audit report.
III. Jurisdiction of Companies Act and MCA to take action
In case of non compliance reported by CS in its report regarding other acts like labour laws, taxation laws and environmental laws, whether Registrar of Companies or MCA is empowered to take appropriate action against the Company or its officers in defaults under these laws. Obviously the ROC or MCA cannot take any action against any irregularity or non compliance of other laws except Companies Act, hence in such an eventuality whether MCA shall report the matter to other operating Agencies to take appropriate action and/or the matter ends here and if so what would be the use of audit of other laws.
It is also a question "Whether MCA is over stepping its jurisdiction to cover or report the compliance or non compliance of other laws'. Whether reporting of other laws is justifiable under provisions of Companies Act, 2013 when there are specific laws and enactment and there are separate agencies to report thereon.
IV. Good Governance
The Secretarial audit is a step towards good governance and like the provisions of clause 49-c(iii) of Listing Agreement. As per the listing Agreement, the Board of Directors have to report compliance of other applicable laws and the deficiency or non compliance, need to be reported. The Board of Directors accordingly can take remedial measures and cure the same in near future. This is good corporate governance. As a matter of good corporate governance, if audit of other laws is to be done, that should be conducted based upon specific line of action and some standards should be fixed so that there is specific reporting of non compliance etc. The author is of the view that every audit report or a certificate should be specific in nature and should report specific compliance or non compliance. The general audit and general reporting of compliances of various laws may defeat the purpose of good governance. The author is of the further view that there should be audit of internal legal system and compliance of others laws by the Company. The auditor should review all the legal compliance report, if any, produced or discussed in the Board and also the mechanism of the Board how it cures or improves the legal compliance system and report thereon to give effect to good corporate practice and governance. The effort should be in line of development of legal system and emphasis should be on legal matters which basically effect the corporate restructuring and/or future contingencies on liability of the corporate in case of non-compliance.
In the present scenario the Secretarial audit report of each Company may differ. The management may take note of some laws as may be applicable to them and in the view of Company Secretary there might be many laws which may be applicable. There might be confusion and difference of opinion on applicability and reporting of certain laws in the Secretarial Audit Report. As per present format of Audit report, the scope of audit is much wider and even includes the financial audit which is part of other laws. Certainly, the objectivity of the Secretarial Audit Report is good corporate governance but somewhere the reporting of other compliance of other laws and its applicability in the Companies Act is not defined specifically. No secretarial auditor is in a position to conduct audit of all taxation, environment, labour and administrative laws and report his observations of each law in its report. No secretarial auditor is competent to conduct audit of environmental laws, energy audit and administrative laws audit. Such type of special audits can be done by Engineers and technical experts. It is out of the purview of scope of company Secretary. The attention of MCA is drawn on reporting on other laws.
V. Conclusion
In the perspective, introduction of Secretarial Audit Report by Company Secretary in practice is a welcome step. The secretarial audit will also boost the corporate compliance level and step towards good corporate governance. However, audit of other applicable laws needs to be amended to the extent specific compliance of specific provisions of laws. The format of Secretarial audit report needs amendment to include compliance of specific provisions of law instead general applicability of other laws.
(Author – Anil Kumar Popli, FCS, LLB is a Company Secretary in Practise from Delhi and can be contacted at akpopli@rediffmail.com)
Sum paid to unrelated party via banking route after deduction of tax at source couldn't be treated as bogus
IT: Where payment had been made through banking channels and tax was deducted at source and party was also not found to be related to assessee, Assessing Officer could not treat expense as bogus expense
HC deletes addition as variation in GP rates of current year and preceding years couldn't justify additions
IT: Addition to profit could not be made on account of suppressed job charges that exceeded profit ratio compared to other years
Frequent dealings in shares and absence of separate records trigger tax on resultant gains as business income
IT: Where there was short duration of holding of shares, and lack of clarity in account books, sale and purchase of shares would lead to business income and not short term capital gains
IT : Subsequent amendments or subsequent interpretation of statute is not a ground to reopen concluded assessments
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[2014] 45 taxmann.com 384 (Kerala)
HIGH COURT OF KERALA
Commissioner of Income-tax, Thiruvanathapuram
v.
B. Mohanachandran Nair*
DR. MANJULA CHELLUR, CJ.
AND A.M. SHAFFIQUE, J.
AND A.M. SHAFFIQUE, J.
IT APPEAL NO. 204 OF 2012†
OCTOBER 22, 2013
Section 147 of the Income-tax Act, 1961 - Income escaping assessment - General (Retro-amendment) - Assessment year 2002-03 - Whether subsequent amendment in section 80HHC and subsequent interpretation of statute by Apex Court can be a reason to reopen completed assessment under section 143(3) after expiry of four years - Held, no [Para 6] [In favour of assessee]
FACTS
| ■ | The assessment completed under section 143(3) was sought to be reopened after the expiry of four years from the end of the relevant assessment year on the ground that the assessee was not eligible for deduction under section 80HHC in view of the retrospective amendment made to the said provision by the 2005 amendment, and that loss from export of trading goods was to be set off against profits from export of manufactured goods in view of the judgment of the Apex Court. | |
| ■ | The first appellate authority dismissed the appeal. | |
| ■ | The Tribunal held that a situation as warranted under section 147 or 148 had not arisen. |
HELD
| ■ | First of all, on undisputed facts the assessee cannot be blamed for filing a return by contemplating a possible amendment to section 80HHC. Therefore, one cannot state that there was an escaped assessment of tax which could be reopened within a period of four years from the end of the relevant assessment year. Admittedly the amendment and the judgment relied upon by the Assessing Officer was subsequent to the finalisation of the assessment proceedings. It is trite law that such subsequent amendments or subsequent interpretation of the statute is not a ground to reopen concluded assessments. [Para 6] | |
| ■ | On a perusal of the assessment order no material was found to indicate that an eventuality as envisaged under the above proviso had occurred in the case to ignore the limitation period. | |
| ■ | Hence, the Assessing Officer was not justified in reopening the assessment. Accordingly, the appeal is dismissed. [Para 7] |
Jose Joseph for the Appellant.
JUDGMENT
A.M. Shaffique, J. - This appeal is filed by the Revenue challenging the order passed by the Income Tax Appellate Tribunal, Cochin Bench in I.T.A No. 152/2009. The issue relates to assessment year 2002-2003. The Tribunal allowed the appeal filed by the assessee on the ground that the Assessing Officer cannot take any action after expiry of four years, on the basis of the amended provision to Section 80 HHC of the Income Tax Act.
2. The facts as disclosed would indicate that the assessment under Section 143 (3) of the I.T Act completed on 22.8.2004 was sought to be reopened by notice issued under Section 148 of the Act on 26.3.2008. It was inter alia indicated that the assessee is not eligible for proviso deduction under Section 80 HHC in view of the retrospective amendment made to the said provision by the 2005 amendment, that loss from export of trading goods is to be set off against profits from export of manufactured goods in view of the judgment of the Supreme Court and deduction of 90% of margin on processing commission from the business profits was against the Supreme Court decision.
3. The assessee contended that the assessment cannot be reopened after four years. Assessing Officer rejected the said claim and assessed the total income. The matter was carried in appeal. One of the arguments raised by the appellant is that once the assessment is completed under Section 143(3) it ought to have been reopened before the expiry of four years from the end of the relevant assessment year as provided under proviso to Section 147 of the I.T Act. In so far the limitation period expired on 31.3.2007 and the notice is issued under Section 148 after the expiry date of limitation, the Assessing Officer had committed serious error of law in re-opening the assessment. The first appellate authority dismissed the appeal.
4. The assessee filed appeal before the Tribunal and it is held that in so far as the assessee has filed the return of income as per law in existence as on 1st day of April of the respective assessment year, it may not be possible to say that the assessee was negligent in filing the material fact as required by the subsequent retrospective amendment. It is found that no one can expect the assessee to anticipate an amendment in law in future and file the required material in advance. Hence the Tribunal came to a finding that there was no negligence on the part of the assessee in furnishing the return of the income and that subsequent amendment of law to section 80HHC and interpretation of the Supreme Court cannot be a reason for the assessing officer to reopen the completed assessment under section 143(3) after expiry of four years. Reference is made to the proviso to section 147, which clearly indicate that where an assessment under section 143(3) has been made for the relevant assessment year, no action can be taken under Section 147 after the expiry of four years from the end of relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or on failure to disclose fully and truly all material facts on receipt of notice under section 142(1) or Section 148 of the Act. The Tribunal therefore found that when admittedly the notice under Section 148 is issued after expiry of four years based on the amended provision to section 80HHC of the Act, it was found that a situation as warranted under Sections 147 or 148 had not arisen and hence dismissed the appeal.
5. The revenue raised the following substantial questions of law:
| "(i) | Whether the retrospective amendment of law and subsequent judgment of apex court after filing of the return of income and completion of assessment u/s.143(3) can be a basis for reopening for assessment u/s 147 of the Income Tax Act, 1961 | |
| (ii) | Whether on the facts and in the circumstances of the case and also in the light of the decisions noted in the grounds raised, is not the reassessment based on a retrospectively amended provision in accordance with law and the Tribunal is right in law in interfering with the assessment order?" |
6. We do not think that the above questions arise for consideration in the above appeal. First of all on undisputed facts the assessee cannot be blamed for filing a return by contemplating a possible amendment to Section 80-HHC of the Act. Therefore one cannot state that there was an escaped assessment of tax which could be reopened within a period of four years from the end of the relevant assessment year. Admittedly the amendment and the judgment relied upon by the Assessing Officer was subsequent to the finalisation of the assessment proceedings. It is trite law that such subsequent amendments or subsequent interpretation of the statute is not a ground to reopen concluded transactions. Admittedly the assessment had been completed under Section 143(3) of the Act and in order to reopen the same, necessarily it has to be done within a period of four years. The first proviso to section 147 reads as under:
"Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year".
7. On a perusal of the assessment order we do not find any material to indicate that an eventuality as envisaged under the above proviso had occurred in the case to ignore the limitation period.
Hence we do not think that the assessing officer was justified in reopening the assessment. Viewed in that manner, the questions of law raised by the revenue does not arise for consideration in the above appeal. Accordingly the appeal is dismissed.
LATA †Arising out of order of ITAT, Cochin Bench in IT Appeal No. 152/Coch./2009, dated 25-1-2012.
IT : Where assessee had submitted revised return within prescribed period of limitation as provided under section 139(5) claiming credit/refund of TDS, which was not made in original return, assessee was entitled to credit of TDS
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[2014] 42 taxmann.com 499 (Gujarat)
HIGH COURT OF GUJARAT
Manoharlal Agarwal
v.
Commissioner of Income-tax-3 & 1*
M.R. SHAH AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 7246 OF 2013
JUNE 24, 2013
Section 199, read with sections 139 and 264, of the Income-tax Act, 1961 - Deduction of tax at source - Credit for tax deducted - Assessment year 2010-11 - Whether where assessee had submitted revised return within prescribed period of limitation as provided under section 139(5) claiming credit/refund of TDS which was not claimed in original return, Commissioner was justified in not giving credit of TDS in revision application under section 264 filed by assessee - Held, no [Para 5.2] [In favour of assessee]
FACTS
| ■ | While submitting the E return of income for the relevant assessment year, the petitioner-assessee, by mistake, did not claim credit for TDS already deposited with the department. | |
| ■ | On receiving the intimation under section 143(1), the assessee came to know that there was a mistake in not claiming credit of the TDS. Thereafter, immediately within a period of two months, the assessee submitted the revised return claiming credit/refund of TDS. However, as the same was not accepted, the assessee preferred revision under section 264, which was rejected by the Commissioner. | |
| ■ | By way of the instant petition, the assessee prayed for an appropriate writ, direction and order to quash and set aside the impugned order passed by the Commissioner and to direct to grant credit for TDS on verification of the Form No. 26(AS). |
HELD
| ■ | It is required to be noted that even the Commissioner in the impugned order has stated that intimation order under section 143(1)(a) cannot be treated to be an order of assessment. In that case, it was open for the assessee to submit the revised return at any time before the expiry of one year from the end of the relevant assessment year. | |
| ■ | As the revised return submitted by the assessee is within the prescribed period of limitation as provided under sub-section (5) of section 139, it cannot be said that revised return submitted by the assessee was not within the limitation period. | |
| ■ | Considering the aforesaid facts and circumstances of the case, revised return submitted by the assessee was within the period of limitation prescribed and therefore, the same ought to have been considered by the authority. | |
| ■ | The department has taken too technical view and as such not justified in not giving the credit of TDS already deposited with the department, the particulars of which are mentioned in Form No.26(AS) for which revised return was submitted. | |
| ■ | Under the circumstances, petition is to be allowed by directing revenue to give credit and/or refund the TDS already deducted. [Para 5.2] |
R.K. Patel for the Petitioner. Ms. Paurami B. Sheth for the Respondent.
ORDER
1. Rule. Ms. Paurami Sheth, learned advocate waives service of notice of rule on behalf of respondents. In the facts and circumstances of the case and with the consent of the learned advocates for the respective parties, present application is taken up for final hearing today.
2. By way of this petition under Article 226 of the Constitution of India, the petitioner assessee has prayed for an appropriate writ, direction and order to quash and set aside the impugned order dated 14.2.2013 passed by the Commissioner of Income Tax, III, Ahmedabad and to direct grant credit for TDS on verification of the Form No.26(AS) at Annexure A.
2.1 The facts leading to the present petition in nutshell are as under:
2.2 That the petitioner -assessee E filed return of income for the assessment year 2010-11 on 15.11.2010 showing net income of Rs.1,72,700/-. However, due to the oversight, the TDS claim of Rs.29,326/- was not made in the original return of income although the income against such tax deduction was included in the computation of income. That assessee received the intimation under Section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"). As it was found that in the said intimation under Section 143(1) of the Act there was no grant of credit for TDS and consequently without grant of refund due to mistake of the assessee, a revised return was submitted on 10.3.2011 for the same taxable income with the only change being claim of TDS and consequent claim of refund. The assessee also filed application under Section 264 of the Act before respondent no.1 CIT(Gujarat)-III on dated 1.3.2011 praying for refund of amount for TDS claim, which was not made in the original return through assessee bona fide error. The petitioner-assessee also filed detailed written statement on dated 7.1.2013. However, vide order dated 14.2.2013 impugned in the present petition, respondent no.1 has dismissed the said revision under Section 264 of the Act mainly on the ground that original return of the income was a belated return. The respondent no.1 also observed that revised return filed by the assessee was non-est as it was not valid return under Section 143(1) of the Act and is based on the return filed by the assessee in which claims of TDS was admittedly not made by the assessee and hence it cannot be said that the intimation under Section 143(1) of the Act was admittedly not made by the assessee.
2.3 Feeling aggrieved and dissatisfied with the impugned decision/ order, the petitioner-assessee has preferred present Special Civil Application.
3. Shri R.K. Patel, learned advocate for the petitioner -assessee has vehemently that the impugned order under Section 264 of the Act is bad in law since credit for TDS and refund thereof is not granted to the petitioner inspite the parallel details of relevant Form No.26(AS), available with the revenue authorities at the time of processing of intimation under Section 143(1) as well as at the proceedings under Section 264 of the Act.
3.1 It is submitted that the respondent no.1 CIT has erred in dismissing the application of the petitioner on technical ground of original return not being filed in time and hence the revised return being incompetent in law ignoring the case law.
3.2 It is submitted that as such deduction of the TDS and consequently the credit of the same and the refund thereof is not disputed by the department. It is submitted that once the petitioner-assessee has deducted the TDS, the assessee is entitled to credit for the same and/or refund for the same. It is submitted that as such having realized the mistake of not claiming the credit/refund of TDS already deducted, the revised return was submitted within the prescribed period of limitation and therefore, the appropriate authority ought to have accepted the revised return and ought to have given the credit of TDS and/or refund the TDS, which is already deducted considering the contents of Form No.26(AS), which is at Annexure A to the petition.
4. Ms. Sheth, learned advocate for the respondents has tried to oppose the present Special Civil Application and support the impugned order passed by the respondent no.1-CIT, III, Ahmedabad. However, is not in a, position to dispute and in fact the department is not disputing that as such TDS has been deducted for which petitioner-assessee would be entitled to credit and/or refund. However, has submitted that as it was found that the original return was submitted belatedly and even in the return the assessee did not claim the credit and/or refund of TDS and as it was found that even revised return was beyond the period of limitation prescribed and therefore, non-est, no illegality has been committed by the either by the ITO or even by the respondent no.1 in dismissing the application under Section 264 of the Act. Relying upon the affidavit in reply filed on behalf of the respondents, it is requested to dismiss the present petition.
5. Heard the learned advocates for the respective parties at length. At the outset, it is required to be noted and it is not in dispute that in fact TDS has been deducted and the had been deposited with the department. However, by mistake and/or through oversight while submitting the E return, the petitioner -assessee did not claim credit for TDS already deposited with department in computation of the petitioner tax liability of the assessment year 2010-11. As soon as the petitioner-assessee came to know that there was a mistake in not claiming credit of the TDS on receiving the intimation under Section 143(1) dated 7.1.2011 immediately within a period of two months, the petitioner-assessee submitted the revised return claiming credit/refund of TDS which was already deposited with the department. However, as the same was not accepted, the petitioner -assessee preferred revision under Section 264 of the Act, which is rejected by the respondent no.1 vide impugned order. It appears that the revision is dismissed on the following three grounds.
| (i) | That the original return was belated. The same, therefore, could not have been revised. | |
| (ii) | The revised return was also beyond the period of limitation prescribed and the same was, therefore, non-est and | |
| (iii) | That the acceptance of the petitioner's return under Section 143(1) of the Act cannot be described as an order, which is subject to revision under Section 264 of the Act. |
5.1 It is not in dispute that the petitioner-assessee filed E return on 15.11.2010 and the intimation under Section 143(1) of the Act is dated 7.1.2011 and the petitioner assessee submitted the revised return on 10.3.2011. The said revised return was under sub-section (5) of the Section 139 of the Act, which reads as under:
If any person, having furnished a return under sub-section (1) or in pursuance of a notice issued under sub-section (1) of Section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.
5.2 It is required to be noted that even the respondent no.1 in the impugned order has stated that intimation order under Section 143(1)(a) cannot be treated to be an order of assessment. In that case, it was open for the assessee to submit the revised return at any time before the expiry of one year from the end of the relevant assessment year. As the revised return submitted by the assessee is within the prescribed period of limitation as provided under sub-section (5) of Section 139, it cannot be said that revised return submitted by the petitioner-assessee was not within the limitation period. Considering the aforesaid facts and circumstances of the case, we are of the opinion that revised return submitted by the petitioner assessee was within the period of limitation prescribed and therefore, the same ought to have considered by the authority. As stated above, as such it is not disputed by the department that in fact tax was not TDS and the same was not deposited with the department and it is not disputed that as such petitioner -assessee is not entitled to credit for the TDS already deposited with the department, particulars of which are mentioned in form no.26 (AS), which is at Annexure A to the petition. In view of the above, we are of the opinion that the department has taken too technical view and as such not justified in not giving the credit of TDS already deposited with the department, the particulars of which are mentioned in Form No.26(AS) at Annexure A, for which revised return was submitted. Under the circumstances, petition is to be allowed by directing concerned respondent to give credit and/or refund the TDS already deducted as per the particulars mentioned in Annexure A to the petition.
6. In view of the above and for the reasons stated above, petition succeeds and the respondents, more particularly, respondent no.2 is hereby directed to give credit for TDS already deposited with the department as per the particulars mentioned in Form No.26(AS) (Annexure A to the petition). Rule is made absolute to the aforesaid extent. In the facts and circumstances of the case, there shall be no order as to costs.
LATARegards,
Pawan Singla , LLB
M. No. 9825829075 IT: Where revaluation of assets of partnership firm and credit of revalued amount to capital account of partners in their respective profit sharing ratio did not entail any transfer as defined under section 2(47), gains on revaluation could not be brought under tax net
IT: Where return of assessee was just processed under section 143 (1), and where after recording reasons, Assessing Officer had issued notice under section 148, reassessment proceedings were validly initiated
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[2014] 45 taxmann.com 359 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'C'
Ravinshankar R. Singh
v.
Income-tax Officer 21(3)(4), Mumbai-2*
R.C. SHARMA, ACCOUNTANT MEMBER
AND DR. S.T.M. PAVALAN, JUDICIAL MEMBER
AND DR. S.T.M. PAVALAN, JUDICIAL MEMBER
IT APPEAL NO. 5948 (MUM.) OF 2013
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
APRIL 4, 2014
I. Section 45, read with section 2(47), of the Income-tax Act, 1961 - Capital gains - Chargeable as (Firm/Partner, in case of) - Assessment year 2008-09 - During year under consideration, partnership firm, 'S', revalued its capital network rights - On basis of crediting of revaluation reserve to partners' capital account, Assessing Officer treated capital gains in hands of assessee, who was a partner in 'S' - During continuation of partnership, partners did not have separate rights over assets of firm in addition to interest in share of profits - After revaluation also, there was neither division of assets nor any realization of assets - Rights were property of partnership firm till date of conversion into company by operation of law as per Part IX of Companies Act - Whether since there was no official dissolution of firm and distribution on assets of firm among partners, provisions of section 45(4) would not be applicable to firm or to partner - Held, yes - Whether revaluation of assets of partnership firm and credit of revalued amount to capital account of partners in their respective profit sharing ratio did not entail any transfer as defined under section 2(47), hence, gains on revaluation could not be brought under tax net - Held, yes [Para 9.1] [In favour of assessee]
II. Section 147, read with section 143(1), of the Income-tax Act, 1961 - Income escaping assessment - General (In case of section 143(1) assessment) - Assessment year 2008-09 - Assessment of partner was reopened by issue of notice under section 147 on plea that assessee had not offered any capital gain on distribution of reserve on revaluation of assets of partnership firm - Original assessment was not framed under section 143(3), there was merely processing of return under section 143(1) - After recording reasons, Assessing Officer had issued notice under section 148 - Whether in view of these reasons and considering fact that return of assessee was just processed under section 143(1), there was nothing wrong in initiation of reassessment proceedings - Held, yes - Whether thus, ground taken by assessee challenging validity of reopening under section 147 was to be dismissed - Held, yes [Para 9] [In favour of revenue]
FACTS
| ■ | The assessee was a partner in Cable TV advertising network business, namely 'S' TV Network. | |
| ■ | During the assessment year 2008-09 the Assessing Officer observed that the partnership firm had revalued network rights and corresponding credit in respect of network rights was given to three partners including assessee thereby making assessee the owner of the network rights to the tune of Rs 10.5 crores. | |
| ■ | After revaluation of network right, revaluation reserve was credited to partners' capital account and the assets account was debited in the books of the partnership firm. | |
| ■ | The Assessing Officer held that the assessee had earned short term capital gain under section 45, accordingly brought Rs.10.50 crores as charged to tax. | |
| ■ | On appeal, the Commissioner (Appeals) confirmed the action of the Assessing Officer. | |
| ■ | On further appeal: |
HELD
| ■ | On going through the orders of the authorities below and from the record it was found that the assessee was one of the partner of partnership firm 'S' TV Network. During the year under consideration, the partnership firm has revalued its capital network rights on 1-5-2007. After revaluation of network right, revaluation reserve was credited to partners' capital account and the assets account was debited in the books of the partnership firm. Assessment of partner was reopened by issue of notice under section 147 on the plea that assessee has not offered any capital gain on distribution of reserve on the revaluation of the assets of the partnership firm. There is no dispute to the fact that original assessment was not framed under section 143(3), there was merely processing of return under section 143(1). After recording reasons, the Assessing Officer has issued notice under section 148. In view of these reasons and considering the fact that return of assessee was just processed under section143 (1), there is nothing wrong in the initiation of reassessment proceedings. Accordingly, ground taken by the assessee challenging the validity of reopening under section 147 is dismissed. [Para 9] | |
| ■ | On merits of the addition, it was found that merely on the basis of crediting of revaluation reserve to partners' capital account was treated by the Assessing Officer as capital gains in the hands of the assessee, who is a partner in 'S' TV Network. In the instant case, there is neither division of assets nor any realization of assets. Since there is no official dissolution of the firm and distribution on assets of the firm among the partners, even the provisions of section 45(4) will not be applicable to the firm or to the partner. Furthermore, since there is absence of word 'transfer' as envisaged under section 2(47), the charging provisions of section 45(1) will not be applicable, since the vesting of property in the company from the firm is not consequent to a transfer, however, it is statutory vesting of properties in the company as the firm is treated as private limited company by operation of law which results in change in a status of firm to company and no transfer of property is involved in the process. | |
| ■ | Crediting the amount of revaluation reserve to partner's capital account does not amount to transfer of partnership firm's assets to the individual partner. As per settled principle of law of partnership, during continuation of partnership, partners do not have separate rights over the assets of firm in addition to interest in the share of profits. On 31-5-2007, the said revaluation reserve was distributed amongst the partners in their profit share ratio. Thereafter on 7-1-2008, the partnership firm was converted into private limited company by operation of law under Part IX of the Companies Act. By noting these facts, the Assessing Officer concluded that assessee has earned capital gain of Rs.10.50 crores by revaluing the assets of the partnership firm on which he is liable to pay tax. There was no merit in the conclusion of the Assessing Officer insofar as there was no transfer of assets of partnership firm to the partner within the meaning of section 2(47), there was only revaluation of the asset of the partnership firm which was in the form of cable TV network rights. The revaluation of the assets by the partnership firm does not attract any capital gain. The revaluation of the assets of the partnership firm and credit of revalued amount to the capital account of the partners in their respective profit sharing ratio does not entail any transfer as defined under section 2(47). | |
| ■ | The assessee in his individual capacity was not the owner of the cable TV network rights which was owned by the partnership firm. Furthermore, rights were of such nature that it could not be owned by the different individuals in a piecemeal manner. The cable TV network rights were the rights arising out of various agreements entered into by the partnership firm with the outside parties in the course of business for distribution of cable TV signals. Had the partnership firm sold these assets to any third party, the department could have levied tax on such sale consideration. These rights were property of partnership firm till the date of conversion into the company by operation of law as per Part IX of the Companies Act. After conversion of the partnership firm into the private limited company by operation of law, the TV cable network rights became the property of the company as per provisions of section 575 of the Companies Act, which prescribes the provisions concerning the conversion of partnership firm into company. [Para 9.1] | |
| ■ | This issue of taxing such gain under section 45(4) has been decided by the Hon'ble jurisdictional High Court in the case of CIT v. Texspin Engg. & Mfg. Works [2003] 263 ITR 345/129 Taxman 1 (Bom.). In view of this decision of the Hon'ble jurisdictional High Court, there was no merit in the action of the lower authorities for bringing gains on revaluation under the tax net on revaluation of assets of partnership firm, which was distributed to the partner and thereafter partnership firm was converted into company by operation of law under Part IX of the Companies Act. [Para 10] | |
| ■ | In the result, appeal filed by the assessee is allowed in part. [Para 11] |
CASES REFERRED TO
Prashant S. Joshi v. ITO [2010] 324 ITR 154/189 Taxman 1 (Bom.) (para 6.2), CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236/[2010] 195 Taxman 117 (Bom.) (para 6.3), Sunil Siddharthbhai v. CIT[1985] 156 ITR 509/23 Taxman 14W (SC) (para 7), ITO v. Smt. Paru D. Dave [2008] 110 ITD 410 (Mum.) (para 7), ITO v. Fine Developers [2013] 55 SOT 122/[2012] 26 taxmann.com 202 (Mum.)(para 7) and CIT v. Texspin Engg. & Mfg. Works [2003] 263 ITR 345/129 Taxman 1 (Bom.) (para 9.1).
Vijay Mehta for the Appellant. A.C. Tejpal for the Respondent.
ORDER
R.C. Sharma, Accountant Member - This is an appeal filed by the assessee against the order of CIT(A) dated 18-9-2013 for the assessment year 2008-09, in the matter of order passed under Section 143(3) r.w.s. 147 of the I.T. Act.
2. Rival contentions have been heard and record perused.
3. Facts in brief are that assessee is a partner in Cable TV advertising network business, namely M/s Satellite TV Network. During the A.Y.2008-09 the AO observed that the partnership firm has revalued network rights and corresponding credit in respect of network rights was given to three partners including assessee thereby making assessee the owner of the network rights to the tune of Rs 10.5 crores. The AO further observed that in the ITR filed the assessee on the liability side of ITR increased by Rs 10.5 crore instead of disclosing the said amount under "Revaluation Reserve" and on asset side instead of disclosing the said rights under "Investment in shares of M/s Wire & Wireless Satellite Network Pvt Ltd" disclosed it as "Loans and Advances Recoverable". As per AO clearly the said rights has been transferred/relinquished by the assessee in favour of person from whom the said "Loans & Advances" are recoverable, calling for compliance under section 45 by the assessee.
4. On Assessing Officer's query to tax the same as short term capital gains u/s.45, the reply of the assessee was as under :—
'The revaluation of asset is not chargeable to tax and since Network Rights has been revalued, the same is not chargeable. Vide submission dated 09/01/2012 the assessee stated as, "the assessee is partner in M/s Satellite Cable TV Network with profit sharing ratio of 33.33 %, the nature of business of firm is to carry on Cable TV and Advertising Network, over a period of time the business of the firm was picked up and number of cable connections increased. Cable TV network connection is a commercial right of the firm and forms part of the intangible capital asset of the firm. The Firm decided to go in for revaluation of its Cable TV network rights before induction of investment by new partners. The assignment of revaluation was referred to M/s. S.N. Samdani & Associates, Mumbai, who are the Chartered Engineers and approved Government Registered Valuers. They have submitted the Valuation Report, stating that the Valuation of the Cable TV Network Rights of Finn is arrived at Rs.31.50 crore as on 1st May, 2007 by using Discounted Cash Flow method. They have furnished in their Valuation Report the various factors which are considered by them, in arriving at the above valuation. Consequent upon receiving the Valuation Report from the Approved Valuer, the Firm incorporated the revaluation value of Rs.31.50 crore of the Cable TV Network Rights, in the Books of Accounts on 1st May, 2007 debiting the Cable TV Network Rights and crediting the Revaluation Reserve Account. The Revaluation Reserve Account was transferred to capital accounts of the Partners, by crediting Rs.10.50 crore each to their respective capital accounts. Further, the Partnership Firm was converted into a Private Limited Company, under the provisions of Part IX of the Companies Act, 1956 w.e.f 7th January, 2008 vide the Certificate of Incorporation issued by the Registrar of Companies. The partners, became the members of the Company as subscribers to the Memorandum and Articles of Association of the Company. Total paid up capital of the Company is Rs. 6, 00, 000/ -which is divided into 60,000 equity shares of Rs.10/ - each All the assets and liabilities of the firm including the revalued Cable TV Network rights were transferred to the Company.
The capital account position of the Assessee in the Firm as on date of conversion of Firm into Company i. e. 06.01.2008 is as follows:
| 1 | Fixed Capital Account | 1,98,000/- | |
| 2 | Current Capital Account | 10,45,49,620/- |
Share allotted by the converted company to the Partner against the fixed capital:
| Fixed Capital Account | Rs.1,98,000/- | Company allotted 19,800 shares of Rs.10/- each | |
| Current Capital Account | Rs.1 0,45,49,620/- | Shown as liability in the books of the Company as unsecured loan |
Likewise the other two partners was allotted 19,800 shares each and remaining 600 shares were allotted to other four partners out of total 60,000 shares of the converted company.
There is no official dissolution of the Firm. The status of the Firm, is converted into company, by operation of law, and the Firm got the status of the company, by virtue of part IX of the Companies Act.
Under part IX of the Companies Act, when a partnership firm is treated as a limited company, the properties of the erstwhile firm vest in the limited company.
As established in judicial rulings, there is difference between vesting of the property and distribution of the property.
Vesting means the properties of erstwhile firm continues to exists as they are, with the company.
Whereas distribution on dissolution pre-supposes division, realization, encashment of assets.
In the present case, there is neither division of assets nor any realization of the assets. When there is no official dissolution of the Firm and distribution of assets among the partners, the provisions of s. 45(4) are not applicable to the Firm or to the partners.
Even the charging provisions of s. 45(1) are not applicable, since there is absence of word transfer as envisaged in s. 2(47), as vesting of the properties in the company from the firm is not consequent or incidental to a transfer. It is the statutory vesting of properties in the company as the firm is treated a limited company by operation of law, which results in change in status of firm to company, and no transfer of properties is involved in the process. Hence, there is no question of transfer involved in the process. So, when the provisions of s. 45(4) and s. 2. (47) are not specifically applicable in the present case, capital gains cannot be charged under s. 45(4). Further the provisions of s. 45(1) also is not applicable, since there is no transfer of assets from Firm to company and hence there is no question of any capital gains to be brought under tax net, within the meaning of either s. 45(1).
3.2 The assessee also submitted the judgment of CIT v. Texspin Engg. & Mfg. Works [2003] 180 CTR (Bom) 497: [2003] 263 ITR 345 (Bom): [2003] 129 Taxman 1 (Bom) placing reliance on the conclusion as drawn by the assessee from the said judgment which is as follows:
"Conversion of partnership firm into company under part IX of the Companies Act, did not attract the provisions of s. 45(4) as there was no distribution of capital assets on dissolution; provisions of s. 45(1) also could not be applied as the vesting of the properties of the firm in the company was not consequent or incidental to a transfer as contemplated by s. 45(1)".
3.3 The assessee further contended in the submission made on 9.1.2012 which is more or less on the same grounds as reproduced above however for sake of clarity the gist whereof is reproduced:
"There is no transferor and transferee as in the present case, there is no element of 'transfer' in the transaction between the Firm and partners, and hence there is no question of existence of terms transferee and transferor.
There is no distribution or division of any asset of firm, the firm is not dissolved as such only the status of the Firm has been changed into company by operation of law, the same assets and liabilities have been carried forward in the books of account of the company, and the same business has been continued by the company.
There is no sale, exchange or relinquishment of the asset or an extinguishment of rights in the hands of partner.
Section 48 of the Act which speaks about the mode of computation of capital gains also does not operate in the case of assessee as the cost of acquisition is Nil hence, there is no capital gains.
The assessee further submitted the judgment of Dy.CIT v. Manish M. Chheda [2009] 29 SOT 138 (Mum), dated 29.01.2009 wherein it was held as, Sec. 28(iv)-revaluation of assets by firm before conversion into a Company-Value of Shares received by partners in excess of their capital was not taxable."
Assessee further elaborately contended vide submission dated 24.3.2012 regarding non applicability of provisions of Sections 45(1), 45(3) and 45(4) of the Act and hence non taxability of the same. The submissions were on the same lines as submission on 9.1.2012 and 23.2.2012. Finally vide letter dated 23.10.2012 the assessee was asked to furnish the Audited Balance Sheet of the company formed after the conversion of the said partnership firm (M/s Satellite Cable Network) for A.Y.s 2008-09, 2009-10 and 2010-11 along with a detailed justification of the revaluation reserve created. The assessee duly attended and submitted the details vide submission dated 6.11.2012.
"The assessee is partner in M/s Satellite Cable TV Network which transmits TV signals through cable to the ultimate viewers. The subsidiary activity of the firm is to provide advertising service. The firm decided to go in for revaluation of its Cable Network Rights before the induction of new partners in the business. The assignment of revaluation was referred to M/s. S.N. Samdani & Associates, Mumbai, who are the Chartered Engineers and approved Government Registered Valuers. They have submitted the Valuation Report, stating that the Valuation of the Cable TV Network Rights of Firm is arrived at Rs.31.50 Crore as on 1st May, 2007 by using Discounted Cash Flow method. They have furnished in their Valuation Report the various factors which are considered by them, in arriving at the above valuation. Consequent upon receiving the Valuation Report from the Approved Valuer, the Firm incorporated the revaluation value of Rs.31.50 Crore of the Cable TV Network Rights, in its Books of Account on 1st May, 2007 by debiting the "Cable TV Network Rights Account" and crediting "Revaluation Reserve Account".
The balance of Rs.31.50 Crore in "Revaluation Reserve Account" in the Firm was credited to the Current Account of three partners of the Firm equally i.e. Rs.10.50 Crore each on 31st May, 2007 by passing the following accounting entry:
| Revaluation Reserve Account | Dr.31.5 cr. | |
| Rajeev B Gavi Current Capital A/c. | Cr. 10.5 cr. | |
| Ravishankar R Singh Current Capital A/c. | Cr. 10.5 cr. | |
| Prakash Patrick Dsouza Current Capital A/c. | Cr.10.5 cr. |
Latter on Satellite Cable TV Network was converted into company under the name and style of wire & wireless network Pvt. Ltd.'
However, the AO did not agree with the assessee's contention and held that assessee has earned short term capital gain under Section 45, accordingly brought Rs.10.50 crores as charged to tax.
5. By the impugned order, the CIT(A) confirmed the action of the AO, against which the assessee is in further appeal before us.
6. At the outset, learned AR opposed the reopening of the assessment under Section 147 by inviting our attention to the reasons recorded for reopening, which reads as under :—
| (i) | no capital gain tax was paid on distribution of reserve on revaluation of assets either by the firm or by the partners; | |
| (ii) | as per the provisions of the Income-tax Act, amount distributed on revaluation of assets among partners is liable to capital gains; and | |
| (iii) | during the period relevant to A.Y.2008-09, assessee has also received unsecured loans to the tune of approximately Rs.7 lakhs. |
6.1 As per the learned AR, the AO has mentioned that no capital gain tax was paid either by the firm or the partner, however, there is no clarity whatsoever as to where he wants to tax and why. The same amount cannot be taxed at both the places. Accordingly, as per learned AR, the reason No.1 recorded by the AO was vague and unsustainable in the law.
6.2 With respect to the second reason noted by the AO, the learned AR submitted that belief of AO was against the well settled legal position as the amount distributed on the revaluation of assets amongst the partners is not at all liable to capital gain tax and for this purpose, reliance was placed on decision of Hon'ble Bombay High Court in the case of Prashant S. Joshi v. ITO [2010] 324 ITR 154/189 Taxman 1.
6.3 With reference to the third reason recorded by the AO, learned AR contended that assessee had received unsecured loan of Rs.7 lakhs is factually incorrect. Insofar as the balance sheet for the last year and the current year is concerned, it no where indicates such loan was taken by the assessee. It was also argued by the learned AR that the addition made by the AO was beyond scope of the reassessment proceedings. The reason for initiating proceedings u/s.147 of the Act was to tax the receipt on account of alleged distribution on revaluation of assets which, however, was not brought to tax on being satisfied with the submissions made by the assessee. However, while computing income in the order passed u/s.143(3), the AO has brought to tax short term capital gain alleged to have received on 7-1-2008 upon transfer of individual asset to the limited company. As per learned AR, the reopening was made by the AO to bring to tax a particular income, however, in the reassessment order another income was brought to tax, which is impermissible in law as held by the Hon'ble Bombay High Court in the case of CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236/[2010] 195 Taxman 117. Accordingly, it was argued that the AO ingenuinely wanted to add some basis for reopening the completed proceedings. In view of the above, it was submitted that reopening was bad in law on more than one count and the same was requested to be quashed.
6.4 With regard to the merit of the addition, it was contended by the learned AR that revaluation of assets of partnership firm in the form of cable TV network rights were made as per the valuation report given by a chartered engineer and Government approved valuer. The revalution was carried out by passing necessary general entries in the books of the firm. After revaluation of assets of firm, the revaluation reserve credited in the respective account of the partners in their individual accounts. It was further pleaded that there was no transfer of any asset by the partnership firm to the partners at any stage and the cable TV rights for the partnership firm was always the property of the partnership firm.
7. Our attention was invited to the balance sheet of the partnership firm prepared on the preceding data of conversion i.e. on 6-1-2008. The said asset was very much part of the balance sheet of the partnership firm on that day. Our attention was also drawn to the trial balance of the partnership firm as on 7-1-2008, upon conversion of the partnership firm into company, the books of account of the company were drawn up, wherein assets of partnership firm was taken by the company as it is. In support of the proposition that no capital gain arose in favour of the partnership, reliance was placed in the decision of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W. In support of the proposition that revaluation of the asset of partnership and the credit of the revalued amount to the capital accounts of the partners in their respective sharing ratio does not entail any transfer as defined under section 2(47), reliance was placed on the decision of the coordinate bench in the case of ITO v. Smt. Paru D. Dave [2008] 110 ITD 410 (Mum)and in the case of ITO v. Fine Developers [2013] 55 SOT 122/[2012] 26 taxmann.com 202 (Mum).
8. On the other hand, learned DR relied on the findings recorded by the lower authorities and conclusions drawn by them.
9. We have considered rival contentions, carefully gone through the orders of the authorities below and found from the record that the assessee is one of the partner of partnership firm M/s Satellite Cable TV Network. During the year under consideration, the partnership firm has revalued its capital network rights on 1-5-2007. After revaluation of network right, revaluation reserve was credited to partners' capital account and the assets account was debited in the books of the partnership firm. Assessment of partner was reopened by issue of notice under Section 147 on the plea that assessee has not offered any capital gain on distribution of reserve on the revaluation of the assets of the partnership firm. There is no dispute to the fact that original assessment was not framed u/s.143(3), there was merely processing of return u/s.143(1). After recording reasons as discussed at para 6 hereinabove, the AO has issued notice u/s.148. In view of these reasons and considering the fact that return of assessee was just processed u/s.143(1), there is nothing wrong in the initiation of reassessment proceedings. Accordingly, ground taken by the assessee challenging the validity of reopening u/s.147 is dismissed.
9.1 On merits of the addition, we found that merely on the basis of crediting of revaluation reserve to partners' capital account was treated by the AO as capital gains in the hands of the assessee, who is a partner in M/s Satellite Cable TV Network. In the present case, there is neither division of assets nor any realisation of assets. Since there is no official dissolution of the firm and distribution on assets of the firm among the partners, even the provisions of Section 45(4) will not be applicable to the firm or to the partner. Furthermore, since there is absence of word "transfer" as envisaged under Section 2(47), the charging provisions of Section 45(1) will not be applicable, since the vesting of property in the company from the firm is not consequent to a transfer, however, it is statutory vesting of properties in the company as the firm is treated as private limited company by operation of law which results in change in a status of firm to company and no transfer of property is involved in the process. As per our considered view, crediting the amount of revaluation reserve to partners capital account does not amount to transfer of partnership firm's assets to the individual partner. As per settled principle of law of partnership, during continuation of partnership, partners do not have separate rights over the assets of firm in addition to interest in the share of profits. On 31-5-2007, the said revaluation reserve was distributed amongst the partners in their profit share ratio. Thereafter on 7-1-2008, the partnership firm was converted into private limited company by operation of law under Part IX of the Companies Act. By noting these facts, the AO concluded that assessee has earned capital gain of Rs.10.50 crores by revaluing the assets of the partnership firm on which he is liable to pay tax. We do not find any merit in the conclusion of the AO insofar as there was no transfer of assets of partnership firm to the partner within the meaning of Section 2(47), there was only revaluation of the asset of the partnership firm which was in the form of cable TV network rights. The revaluation of the assets by the partnership firm does not attract any capital gain. The revaluation of the assets of the partnership firm and credit of revalued amount to the capital account of the partners in their respective profit sharing ratio does not entail any transfer as defined under Section 2(47) as laid down by the coordinate bench in the case of Smt. Paru D. Dave (supra). It is not in dispute that assessee in his individual capacity was not the owner of the cable TV network rights which was owned by the partnership firm. Furthermore, rights were of such nature that it could not be owned by the different individuals in a piecemeal manner. The cable TV network rights was the rights arising out of various agreements entered into by the partnership firm with the outside parties in the course of business for distribution of cable TV signals. Had the partnership firm sold these assets to any third party, the department could have levied tax on such sale consideration. These rights were property of partnership firm till the date of conversion into the company by operation of law as per Part IX of the Companies Act. After conversion of the partnership firm into the private limited company by operation of law, the TV cable network rights became the property of the company as per provisions of Section 575 of the Companies Act, which prescribes the provisions concerning the conversion of partnership firm into company. This issue of taxing such gain u/s.45(4) has been decided by the Hon'ble jurisdictional High Court in the case of CIT v. Texspin Engg. & Mfg. Works [2003] 263 ITR 345/129 Taxman 1 (Bom.). The precise observation of the Hon'ble High Court was as under :—
"In this case, the erstwhile firm has been treated as a Limited Company by virtue of Section 575 of the Companies Act. It is not in dispute that in this case, the erstwhile firm became a Limited Company under Part IX of the Companies Act. Now, Section 45(4) clearly stipulates that there should be transfer by way of distribution of capital assets. Under Part IX of the Companies Act, when a Partnership Firm is treated as a Limited Company, the properties of the erstwhile firm vests in the Limited Company. The question is whether such vesting stands covered by the expression "transfer by way of distribution" in Section 45(4) of the Act. There is a difference between vesting of the property, in this case, in the Limited Company and distribution of the property. On vesting in the Limited Company under Part IX of the Companies Act, the properties vest in the company as they exist. On the other hand, distribution on dissolution presupposes division, realisation, encashment of assets and appropriation of the realised amount as per the priority like payment of taxes to the Government, BMC etc., payment to unsecured creditors etc. This difference is very important. This difference is amply brought out conceptually in the judgment of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49/2 Taxman 409. In the present case, therefore, we are of the view that Section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital assets is not satisfied. In the circumstances, the latter part of Section 45(4), which refers to computation of capital gains under Section 48 by treating fair market value of the asset on the date of transfer, does not arise."
10. In view of the decision of the Hon'ble jurisdictional High Court, as discussed above, we do not find any merit in the action of the lower authorities for bringing gains on revaluation under the tax net on revaluation of assets of partnership firm, which was distributed to the partner and thereafter partnership firm was converted into company by operation of law under Part IX of the Companies Act.
11. In the result, appeal filed by the assessee is allowed in part.
JYOTI*Partly in favour of assessee.
Regards,
Pawan Singla , LLB
M. No. 9825829075How to Prepare for Practical Subjects & Last Few Days Study Tips – For Students
Currently, football world cup 2014 is going on so let me start my article by giving you a simple example. If a football player just watches the football matches of his past performance and performances of the best players in the world, will he be able to perform during the actual matches? I don't think anyone reading this will think of 'Yes' as the answer. It will be simple two letter word 'NO'.
I have observed many CA students in the past who expected the answer of the above question to be 'Yes'. Not literally for football matches but will tell you how.
They used to read the questions and answers of the practical subjects, may be more than two-three times. They used to think that if we are taught something in classes/tuition's and if we read the same twice or thrice, that will be sufficient for passing the CA exams. But friends, it's not the truth, and the bitter truth is that this method doesn't work. The fact is that I have seen many students fail miserably because of this habit. I don't want you to make the same mistake(s) in your career and exams, so am writing this article for benefit of the student community.
It is indeed very simple technique for dealing with practical subjects, but not following this simple technique may cost you dearly. So, please follow this technique if you are logically convinced to apply the same. If you still don't understand please contact on my email id.
Continuing with the football game example, I would like to make it very clear at the beginning that a practical subject needs quite a lot amount of practice to master it, especially for CA final exams you should be aware about how much expertise institute expects from CA final students. I know many of you will say that it takes time to practice sums/practical problems. But, I suggest and recommend that it's better to practice 10 problems on your own rather than reading 50 questions and answers from solution book.
What is required is practice, practice and practice. I will tell you something which will convince you that what is being explained here is true.
I have heard someone say laughingly that "Even if we are taught 100 practical problems in classes, what we face in exam is 101st problem." What I want to convey is that, what you do in those three hours exam is to face and solve new problems by using your existing knowledge and experience. Now, what you can do about it? How you will make sure that you are able to face this situation of attempting and answering unknown problems.
(Now, that's exactly what is going on in the football match. This is the real match – facing new problem and solving it) Why am I trying to correlate the football game and your exams? Because it's your practical game and not something that you can mug up and vomit in papers.
I want to simply convey that you need to practice what you are actually going to do in exam hall. The steps mentioned in this article are steps I used to follow for my exam preparation. And believe me friends, till today nobody has ever told me a better method of learning and I am sure the method is going to help all of you immensely. These are simple formulae for success in practical papers.
Step 1: Read theory properly before practical problems: Before starting with any practical problems, read the theory of the chapter thoroughly and don't move on to practical problems unless you are very sure that you understood the theory well. Please note that theory comes as a savior in practical papers because it takes far less time to attend and write answers of theory questions as compared to solving practical problems of the same weightage in marks. Learning theory very well helps in attempting difficult and unknown questions.
Step 2: Formulae, formats, journal entries: From reference books or classes books, go through the basic formulae and formats that are given. If the chapter involves journal entries for different situations, then learn those journal entries and make mental notes of what are the practical aspects involved in the same like how you will do working and how the respective ledger accounts will be prepared, etc.
Step 3: Learning practical problems: Start understanding the simple problems by reading and noting how various calculations are made and try to figure out how the solution is arrived. Two or three problems can be tacked in this manner to acquaint you with the practical part. If you have already attended classes for the chapter, you can skip this step and directly move on to step 4 or 5.
Step 4: Practicing by yourself without referring to answers: Assuming that a reference books have simple problems in the beginning and tougher ones as you move ahead in the chapter, you will need to start solving the problems yourself from the 4th or 5th problem of the book in that particular chapter.
Note on tackling with the frustration: At first problem that you will tackle yourself, chances are that you will fail miserably; you may not even come to know how to start solution of this problem. Don't worry; this happens with everyone who tries to do something on their own. But keep doing it. This is the stage where you brain will try to do everything to look for simple solution for preparation of exams. The inner chatter will tell you to read the sums and go ahead. But keep note that it's a football game and unless you practice, you are not going to win the World Cup (yes, for a CA student it's more than India winning a World Cup).
Step 5: Facing the battles and keep progressing: This is the time when you need to challenge yourself for becoming better each time. Each time you take a new problem, create an exam type situation, and try to apply all your existing knowledge to solve the problem at hand. The process will make you better each time you try to apply your brain to solve the problem (puzzle). I used to take them as a kind of puzzle or challenge and tried to become better with each such practice.
It's better to face frustration in your reading leaves: Am not going to scare you but should tell you at this very moment that rather than facing this frustration in exam hall, face it while you have got the time to experiment. Sometimes you will be successful and sometimes you won't be able to solve the problems, but rest assured that the efforts won't go waste because the brain is already becoming smarter in this process and you will surely be benefited while facing actual situation where there will be new problems in front of you and you will be able to answer it with ease.
Step 6: Mastering the solutions: When you become confident about solving problems on your own, you can shift to another chapter. For getting the confidence, you need to check in the reference book or practice manual about lengthy problems. You should try those big and bulky questions also on you own because they are the real test of your abilities, all others were league matches and practice matches. These big lengthy problems are like semi-final and final matches. If you can do it to the extent of 80% accuracy, then nobody can stop you from getting good marks in that particular chapter. It's worth spending time on attempting those questions even if it takes one hour for one question.
Logic behind the method and scientific explanation:
- This is the process of elevating yourself from an intermediate student to the final level student
- In the process, your brain is adapting itself to solve the problems on its own and without looking at answers. While we have the habit of auditing and reading the practical problems, it gets habituated with that kind of practice and as a result becomes blank in exam and makes errors.
- Rather than spending time on reading 50 sums of a chapter two time over, it is recommended that you practice 10-15 sums on your own and then you can just go through the other new types of adjustments by reading. There is no need to go through 100 sums in a chapter. It will be sufficient if you fairly cover and attempt all range of problems on your own.
- The process is capable of long term learning and retention in the brain unlike the ordinary process where you will forget the matter within seven or fifteen days.
- It's very important to have grip on using your calculator also. You should be able to carry our calculator operations without looking at the calculator. You should at least have that much practice for practical subjects. It will save at least 15 minutes in each paper which can bring about 7-10 marks difference in each practical paper.
How to Study in Last Few Days before Exams
First, Plan your days. Keep two days before exams for the first paper
Second, You are left with another twelve days. Divide the twelve days into two parts which gives you 24 parts.
Third, You will need to divide the parts for each subjects. Suppose other six subjects will get 4 parts each. (4 half days each)
Fourth, in each half day, you need to revise 1/4th portion of a subject. It means if your 1/4th portion contains 4 chapters, that means you need to finish revision of one chapter in 1.25 hours. (Assuming that you will study for 10 hours a day).
Fifth, Dont study single subject for whole day. Shuffle subjects. You can divide the day in four parts and apply the above method. Or at least you can divide the time slots for two subjects if not four.
Sixth, Before start of the chapter, keep a watch on time. You need to finish the same in 1.25 hours. You will become very effective in your approach. Your mind will not wander.
Seven, Take enough sleep. Dont compromise on sleep. There is a deep science behind need for adequate sleep. So never compromise on sleep. Especially when practical subjects exams, take at least 7 hours sleep. And believe me, investing 1 more hour in sleep is better than reading 1 more hour. (Just imagine, how that 1 hour will matter as against your whole year study?) Invest that time on sleep and your mind will recollect whatever has been prepared in past. Proper sleep affects retrieval power and it makes your mind more calm.
Eight, While going to exam, calm your mind by using any methods, Breathing exercise, meditation etc. Rest for ten mins before leaving home. This will improve retrieval power of brain.
Nine, In exams, write only qualitative contents. Dont drag your answers thinking that the length is not according to the marks. Its not necessary to give two page answer for 5 marks question. Even if you answer qualitatively in half page or one page. The same will serve purpose.
Ten, Try your level best to complete 100 marks paper, you have 1.7 minutes for each mark. Calculate, you have got 8.5 minutes for answering five marks question. You need to recall only the qualitative content answer in those allowed time and produce on paper. Don't even waste few seconds writing unnecessary explained answers.
(Insights by CA Rajesh Pabari – email carajeshpabari@gmail.com or WhatsApp +919022780919)
Disallowance of input tax credit on the ground that seller is bogus or cancelled dealer
The system of VAT was introduced in the sales tax law to bring more transparency, efficiency, to remove tax cascading etc. The difficulties which may arise in any system comes to picture only when the system is practically implemented.
One of the major difficulties being faced by the dealers is the disallowance of input tax credit by the revenue on the ground that the dealer from whom the goods have been purchased is a bogus dealer or whose certificate has been cancelled, as a result of which, it is claimed by the revenue that since no tax has been paid by such cancelled or bogus dealer, therefore no corresponding tax credit is available to the purchaser.
Section 13(12) of the Punjab VAT Act, 2005 has been amended w.e.f. 15.11.2013 to the effect that Input tax credit in no case shall exceed the amount of tax on the purchase of goods, actually paid in the Government treasury. This amendment is prospective and its effect has not been made retrospective. So this amendment would not have any effect on the cases before 15.11.2013.
Now there are certain points in relation to the disallowance of input tax credit on the ground of purchaser being a cancelled and bogus dealers, which need some light so as to keep the principle of fairness alive in the assessment proceedings, while disallowing any input tax credit.
Disallowance in case of bogus dealers: I have seen many cases where assessing officers pass an assessment order stating that the dealer from whom the goods have been purchased are bogus dealers. Now the bogus dealer has not been defined in the Punjab VAT Act. In general terms one would understand that a bogus dealer would be a person who is dealing in the bogus/ fraudulent transaction of sale and purchase or who fraudulently has collected the tax on his sales, but not paid the same with the Government.
No mechanism to know whether a person is genuine dealer or not: Now while dealing with any person, how one can come to know whether the person from whom he is purchasing the goods, is a genuine dealer or a not, is a question which remains unanswered, as there is no mechanism provided by the Department so as to get to know that the person from whom he is purchasing the goods has deposited the tax collected from him in the Government treasury.
The Department also has not provided/published any list of such bogus dealers, from where an assessee may come. The assessee comes to know only at the time of assessment proceedings that the person from whom he has purchased the goods is a bogus dealer declared by the Department.
In the absence of such a mechanism, every person has a right to believe that a person to whom the registration has been granted by the Department itself, is a genuine dealer, as the registration is granted after due verification by the Department officials.
Principle of fairness must be adopted: Now, in such a scenario, during the assessment proceedings, before disallowing input tax credit to the purchaser on the ground that the person from whom he has purchased the goods is a bogus dealer, the principle of fairness and justice demands that such person must be confronted with the evidence that how such person is a bogus dealer.
When an officer records a finding in his assessment order that a seller of goods is a bogus dealer, this is purely a finding of fact. Now, it must be remembered that finding of fact has to be a legal finding of fact, and what is a legal finding of fact has been very well explained by Punjab & Haryana high Court in the judgement Pehr Chand & Sons vs State of Punjab 30 STC 211 as follows:
"A finding of fact in order to be binding has to be a legal finding of fact. For instance, a finding of fact which is based on no evidence is no finding of fact. Similarly, a finding of fact based on irrelevant evidence and a finding of fact based on evidence partly relevant and partly irrelevant, would be no answer to the contention of the assessee that such a finding is vitiated and is no finding in the eyes of law"(para 32 of the judgement).
Thus the officer concerned must produce an evidence to establish a fact that a dealer concerned is a bogus dealer. However, having said that, it should also be noted that the onus is on the assessee in first place to prove that he has made genuine purchases and therefore he must also produce the evidences to prove the genuineness of his purchases from the so called bogus dealers, i.e. he must produce VAT invoices, proof of payment, and proof of movement of goods or other circumstancial evidences which may prove his purchase as genuine.
However it should be noted that once the evidences as to genuineness of purchases are produced, the onus must shift on the officer concerned to rebut the same.What happens most of the time is the AOs without rebutting the evidences produced by the assessee, makes disallownace of input tax credit, as if they are bent upon doing so, ignoring the fact that they are also acting as quasi judicial authorities and have to abide by the principles of judiciousness.
At this juncture, the Judgement of our jurisdictional Punjab & Haryana High Court in the well known case Gheru Lal Bal Chand vs State of Haryana clearly which has laid down the principle that seller is an agent of Government and input tax credit cannot be disallowed to the genuine purchaser on the ground that seller has not deposited the tax with the Government treasury, unless some fraudulent, collusion or connivance is proved between the seller or its predecessors and the purchaser, will come to rescue the assessee from any unfair disallowance of input tax credit.
However, all in all in my view if only the principle of fairness and justice is adopted by the quasi judicial authorities during the assessment proceedings, most of the problems and litigations would disappear and it would also increase the tax collection of revenue.
to be continued…….
In the next Article disallowance of input tax credit in case of cancelled dealers would be discussed.
(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar Cty (Punjab), Email: amit@amitbajajadvocate.com, M +919815243335)
Disallowance of input tax credit on the ground that seller is bogus or cancelled dealer-part II
Another situation which in many of the cases under the Punjab VAT, which dealers are facing is the disallowance of input tax credit on the ground that the registration of seller of the goods has been cancelled or normally it is stated in the assessment orders that the person from whom goods have been purchased is a cancelled dealer.
No disallowance in the absence of proper mechanism: In such situation the most important thing which must be noted is, whether the registration was cancelled after the date of purchase in question or before such date.
If a purchase is made from a person whose registration has already been cancelled before such purchase, then tax credit of tax paid on such purchase cannot be denied to the purchaser of goods, unless due procedure for cancellation of registration is followed as provided in the law, for e.g. publication of cancellation in newspapers or in official gazette, as required in rule 13(6) etc,.
The reason for it is that unless there is a mechanism whereby a person can verify about the factum of cancellation of registration and unless the due process as prescribed under the law for the cancellation is followed, benefit of input tax credit cannot be disallowed. This view is supported by the verdict of Delhi high Court in Shanti Kiran India Pvt. Ltd. vs Commissioner of Trade and Taxe Deptt. st. Appll. 34-39 of 2012.
Disallowance of ITC in cases where cancellation is subsequent to the date of purchase: In many of the cases, input tax credit is disallowed on the ground that since, the registration certificate of seller has been cancelled and such seller has not paid any tax on his sale of goods, despite the fact that at the time when the purchase was made from seller, then the registration of the said seller was active.
In such type of cases no disallowance of input tax credit can be made where purchase was made during the period when seller's registration certificate was active, it is immaterial that seller has paid tax or not. A purchaser of goods cannot be expected to become tax auditor of his seller and moreover for the irregularities committed by the seller, purchaser should not be placed in a dis-advantageous position.
Moreover as explained in earlier article on the same issue, the seller's liability continues untill the date of cancellation of his registration. Therefore, Department preserves the right to collect tax from the seller concerned for his sales tax liability, till the date of his cancellation of registration. In such case department can recover the tax sooner or later from the seller on the sales made by him. In such a scenario it will be unfair to ask purchaser to pay tax i.e. by disallowing ITC, which is the primary liability of seller concerned to pay.
Seller's liability to pay sales tax is primary liability: At this juncture it is very important to understand that whenever a seller makes sale of goods, the liability to pay tax on his sales is his primary liability to pay the tax irrespective of the fact whether he has or has not collected the tax on his sales from buyer.
The above view is supported by the Supreme Court's verdict in Tata Iron & Steel Co., Ltd. v. State of Bihar [1958] 9 STC 267 (SC); AIR 1958 SC 452, wherein, a Constitution Bench of the Supreme Court, while considering the provisions of the Bihar Sales Tax Act, 1947, observed that the primary liability to pay sales tax, so far as the State is concerned, is on the seller"
It was observed by SC in above case as follows:
"From the point of view of the economist and as an economic theory, sales tax may be an indirect tax on the consumer, but legally it need not be so. Under the 1947 Act the primary liability to pay the sales tax, so far as the State is concerned, is on the seller. The circumstance that the 1947 Act, after the amendment, permitted the seller who was a registered dealer to collect the sales tax as a tax from the purchaser does not do away with the primary liability of the seller to pay the sales tax."
Why purchaser should be asked to pay primary of liability of seller in the absence of fraud or connivance: Thus once it is clear that primary liability to pay sales tax is of the seller concerned, therefore if he makes a default in payment of taxes, then the purchaser should not be asked to pay the primary liability of the seller, unless some fraudulent or connivance is proved between seller and purchaser.
A registered dealer's liability to pay tax under the Punjab VAT Act, 2005 continues until his registration certificate is cancelled. If, however, such dealer's liability continues till that date, so also would the advantages continue, which accrue to him by reason of his registration, as also those would continue, which would accrue to others by reason of their dealing with him.
The above observation was made by Bombay High Court in Suresh Trading Co. vs State of Maharashtra [1981] 48 STC 207 (Bom.), which was subsequently upheld by the Supreme Court.
Moreover Supreme Court in the above noted case also made following observation:
"The High Court noted that the effect of disallowing the deductions claimed by the respondents was, in substance, to tax transactions which were otherwise not taxable. The condition precedent for becoming entitled to make a tax free resale was the purchase of the goods which were resold from a registered dealer and the obtaining from that registered dealer of a certificate in this behalf.
This condition having been fulfilled, the right of the purchasing dealer to make a tax free sale accrued to him. Thereafter to hold, by reason of something that had happened subsequent to the date of the purchase, namely, the cancellation of the selling dealers' registration with retrospective effect, that the tax free resale had become liable to tax, would be tantamount to levying tax on the resale with retrospective effect.
In our view, the High Court was right. A purchasing dealer is entitled by law to rely upon the certificate of registration of the selling dealer and to act upon it. Whatever may be the effect of a retrospective cancellation upon the selling dealer, it can have no effect upon any person who has acted upon the strength of a registration certificate when the registration was current".
Effects of amendment in section 13(12): Section 13(12) of Punjab VAT Act, 2005 has been amended w.e.f. 15.11.2013 prospectively so as to provide that input tax credit shall not exceed the tax actually payable in the Government Treasury. Would that mean, if seller does not deposit tax in the Government treasury, the corresponding input tax credit will not be available to the purchaser?
In my view unless and until a mechanism is provided by the Government to enable the buyer of goods to know whether tax has been paid by the seller in the Government Treasury, no input tax credit can be disallowed on the basis of section 13(12), because in the absence of such a mechanism, it will be iniquitous to place an onerous burden on the purchaser to keep vigil over the seller whether he has deposited any tax in the treasury or not. Without providing any mechanism to the purchaser, he is indirectly asked to become a tax auditor of the seller, which is clearly unfair and inequitable.
The above view is also supported by Delhi High Court's verdict in Shanti Kiran case (supra) in the following terms:
"In the present case, section 9(1) grants input-tax credit to purchasing dealers. Section 9(2), on the other hand, lists out specific situations where the benefit is denied. The negative list, as it were, is restrictive and is in the nature of a proviso. As a result, this court is of the opinion that the interpretation placed by the Tribunal that there is statutory authority for granting input-tax credit, only to the extent tax is deposited by the selling dealer, is unsound and contrary to the statute. It is also iniquitous because an onerous burden is placed on the purchasing dealer-in the absence of clear words to that effect in the statute-to keep a vigil over the amounts deposited by the selling dealer. The court does not see any provision or methodology by which the purchasing dealer can monitor the selling dealer's behavior, vis-a-vis the latter's VAT returns. Indeed, section 28 stipulates confidentiality in such matters."
In nut shell, the need of the hour is to develop a system or mechanism to enable buyers to get to know about the taxes deposited by sellers and the cancellation of dealers. Such mechanism can be provided with the help of e-governance. A form like 26AS, provided by the Income Tax Department, to get to know the credit of one's TDS, must be provided to bring down litigation and proper implementation of the amended law.
For Part-I of the article click at below link:
Implement Tax Audit Report in Service Tax / Excise
In its pre-budget memorandum 2014 Institute of Chartered Accountants (ICAI) has suggested that the provision of Excise/Service tax audit by Chartered Accountant be introduced, similar to the Tax Audit Under Income Tax Act 1961 and VAT audit under various states.
ICAI has further suggested that Excise/Service Tax Audit in line with the Income-Tax Audit be introduced for traders/ manufacturers/ service providers having a turnover of goods/services of more than 1 crores. The Tax-audit under section 44AB of the Income-tax Act, 1961 is a very powerful tool to unearth frauds, ensuring compliance and checking revenue leakage. A similar audit in the area of indirect taxes would capture a major portion of the businesses and check significant revenue leakage.
ICAI has also submitted The Preliminary draft of audit report under Excise / service tax alongwith its pre-budget memorandum 2014.
Source- Pre-Budget Memorandum – 2014 on Direct Taxes by The Institute Of Chartered Accountant Of India, New Delhi
Increase Basic Service Tax Exemption Limit to Rs. 25 Lakh
Basic Exemption Limit for Small Service Providers
In Its pre-budget memorandum-2014 on Indirect taxes Institute of Chartered Accountants of India (ICAI) has suggested that Current Service Tax Exemption Limit of Rs. 10 Lakh should be increased to Rs. 25 Lakh. It has submitted as follows :-
The service tax exemption limit for small service providers in terms of Notification No. 33/2012 ST dated 20.06.2012 is currently limited to Rs.10,00,000/-. It is proposed to extend the exemption limit due to the following reasons:
(i) Small service providers are poor, uneducated and mainly in the unorganized sector.
(ii) Limit was not enhanced since 1st April, 2008
(iii) After 1.7.2012 post Negative list era, more services are under the ambit of service tax, which earlier was not includible in the exemption limit.
Suggestion
It is suggested to extend the exemption limit to Rs.25,00,000/-.
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