1. Adjustment of tax paid in wrong head

Clerk of petitioner, paid CST in the head of State Sales Tax. Central tax authorities (of course of State) levied interest and penalty for short payment of CST. Hon’ble Calcutta HC held that adjustment was to be made only when taxes paid in excess or short paid were credited into a known account or fund and could be easily adjusted. Of course, this ratio would not apply in case of inter-departmental adjustment or completely different types of taxes. The revenue on the other hand contended that this kind of adjustment was not possible. According to it, it may be true that the CST and ST were directly credited into the Consolidate Fund of the State. Nevertheless, CST was an item under List-1 Entry 92-A of the Seventh Schedule to the Constitution over which Parliament had exclusive power to legislate and sales tax falls under List-II Entry-54 over which the State Legislature had exclusive power. This proposition was based on the Mysore HC judgment reported in 20 STC 20 which was not applied in the present facts of the case.

2. A subsequent Circular No. 9 of 2006 dt. 19th October 2006 issued by the Central Govt. took care of the exact situation as obtained in the present case. Relevant paragraph of the said circular read as under:

“Thus a tax payable under the West Bengal Value Added Tax 2003 can be given credit under the same act although the challans has been used under the West Bengal Sales Tax Act, 1994 or under the CST Act, 1956. Similarly a tax meant for deposit under the CST Act, 1956 may be given credit under the same Act although challans used for such deposit is either under the West Bengal Value Added Tax Act, 2003 or The West Bengal Sales Tax Act, 1994. Likewise a tax required to be deposited under the West Bengal Sales Tax Act, 1994 may be given credit under the same act, although the challans for the purpose has been used inadvertently under the West Bengal Value Added Tax Act, 2003 or the CST Act, 1956.”

Accordingly, the revenues pedantic and very technical approach was rejected and writ petition was allowed.

Hindustan Unilever Ltd. v. Dy. Commr. CT (2015) 50 PHT 150 (Cal)

2. Clarification issued by the Commissioner of the Commercial Taxes, Karnataka

3. Facts – Negative facts – Burden of Proof

In the present case, fact of ‘sale’ by a dealer not recorded as purchase by the appellant. Books of accounts not found at the time of survey. Assessing authority issued show-cause notice and rejected clarification given by the appellant and imposed tax. Tribunal on appeal after consideration of the case law cited by the appellant held that the burden of proof as contained in Section 16 of the Act 2008 has been proved by the appellant-dealer. The bonafide dealer is not responsible to prove negative facts. Accordingly, the Tribunal held that the First Appeal Order does not deserve to be supported and therefore it is set-aside and the appeal is allowed.

Maa Mahamaya Alloys Pvt. Ltd. v. C.C.T 2015 NTN (Vol. 57) Tribunal 80

4. Karnataka Sales Tax Act, 1957 – Entry 25 of Schedule-VI

In the present case, constitutional validity of Entry 25 of Schedule-VI to the Karnataka Sales Tax Act, 1957, pertaining to “Processing and supplying of Photographs, photo prints and photo negatives” was the subject-matter of the appeal. It was the third endeavour to resurrect the said entry, when on the first two occasions, the steps taken by the State were declared as impermissible. Even this time the HC has dumped the amendment as unconstitutional. However, the reasons advanced by the HC in all three rounds were different. While travelling through the historical facts which led to the issue at hand, we shall clear the whole controversy involved inasmuch as in respect of works contract levy of tax power of State Legislature is derived under Article 366 clause 29-A r/w Entry No. 54 list II of the Constitution and by virtue of Clause 29A of Article 366, the State legislature is now empowered to segregate the goods part of the works contract and imposed sales tax thereon. It may be noted that Entry 54, List II of the Constitution of India, empowers the State Legislature to enact a law taxing sale of goods. Sales tax, being a subject-matter into the State list, the State Legislature has the competency to legislate over the subject. In view of this legal position, the Apex Court comprising of three Judges undertook the journey of its own 15 cases and set-aside the HC judgment by observing that the HC has not dealt with the matter in its correct perspective and even not dealt with various facets of the issue and allowed the appeal of the State holding that Entry 25 of Schedule-VI of the Act is constitutionally valid. For detailed legal analysis, readers are advised to go through the entire text of the long judgment.

State of Karnataka etc. v. M/s Pro Lab And Ors. etc. 2014-15 (19) KCTJ 275 and 2015 NTN (Vol. 57)-102

5. Limitation

The revision application filed by the Commissioner was delayed by 175 days and prayer was made to condone it. No reasons were cited in the affidavit for the period in between 90 days of serving the order except for stating that there was a shortage of employees in the office and there was no permanent State Representative. The HC following the judgment of the Apex Court in the case of Postmaster General v. Living Media India Ltd. 2012 (3) SCC 563 held that the work of no Dept. can be left unattended only for the reason that there was a shortage of employees or that the officer was not posted in a particular post. Therefore, the delay in filing the revision went totally unexplained. Accordingly, the revision application praying of condonation of delay was rejected and revision too was dismissed as barred by time.

Commissioner, CT, U.P., Lucknow 2015 NTN (Vol. 57) – 47 (All)

6. lis When Commences – Right to appeal when arises

Accrual of right of appeal is the date of initiation of proceedings and not the decision itself. Right of appeal is a vested right and accrues to the litigant as and from the date lis commences. Such right is actually exercised when the adverse judgment is pronounced. Lis can be said to have arisen as soon as proceedings start and when the authority called the assessee for evidence. The lis cannot be said to have started merely on the filing of the return. The lis cannot be said to have arisen on issuance of mere notice because (i) the assessee could not accept the notice and there could be no objection from his side; (ii) the assessee would not have appeared to contest the assessment; (iii) the critical relevant date of the initiation of the proceedings and the decision itself. Therefore, following the Apex Court judgments the Tribunal held the intention of the Apex Court to make such observations was that lis is to be determined from the date when objection has been made by the party to the litigation.

2. In the present case decided by the Punjab Value Added Tax Tribunal in the context of Section 62(5) of the PVT Act, 2005 which referred to the payment of 25% of the tax, penalty and interest. Earlier, it was taken that the appeal could be entertained on the payment of 25% of tax, penalty and interest. But it never referred, if the appellant was also to make the payment of 25% of the “additional demand.” Consequently, the present amendment to the section was brought on the statute book as a clarificatory provision so as to include 25% additional demand of tax, penalty and interest. It is in the context of the section, the above legal position was explained by the Tribunal and the case was decided in favour of the revenue.

Indian Sucrose Ltd. v. State of Punjab (2015) 50 PHT 141 (Pvt.)

7. Notification and its effective date

Allahabad HC held that it was a settled position in law that the taxing statute was generally prospective in nature and if it has to be made retrospectively, it has to be specifically provided. The facts of the case related to the A.Y. 1997-98 (Central). Assessee dealt in manufacture and sale of electronic goods and was granted Eligibility Certificate (EC) under the provision of Section 4A of the U.P. Trade Tax Act, 1948. The first sale was made on 5-5-1997 under Notification No. 781 dt. 31-3-1995 issued u/s 8 of the CST Act, which entitled the assessee to exemption / rebate on the tax for the first 10 years of the production / sale. However, exemption or rebate in the rate of tax on any transaction of sale shall not exceed 5% of the sale price and it shall be as percentage of the rate of tax normally applicable under the U.P. Act. The Notification dt. 31-3-1995 was amended by another notification dt. 5-5-1997 thereby substituting the words “under the U.P. Act” by the words “under the Act”. Tribunal by its order impugned refused the benefit of exemption / reduction in tax to the assessee for the relevant year 1997-98 on the ground that the use of the word “U.P. Act” in Column 4 of Annexure-I to the Notification dt. 31-3-1995 appeared to be a clerical mistake and that in view of the subsequent amendment made by the Notification dt. 5-5-1997 the said mistake stood rectified which would be operative from 1-4-1995 itself. The HC held that the amendment to the Notification dt. 31-3-1995 brought about by means of the Notification dt. 5-5-1997 shall be effective from 5-5-1997 and would not apply retrospectively w.e.f. 1-4-1995 as held by the Tribunal. Accordingly, the revision was allowed.

Super Cassette Industries Ltd. v. Commissioner of Trade Tax, Lucknow 2015 NTN (Vol. 57) – 48 (All)

8. Opportunity of hearing and notice

In the present case, two points were for the consideration of the Punjab Value Added Tax Tribunal, viz. (i) Opportunity of hearing and (ii) Notice for imposition of penalty. As per section 61 of the PVT Act, 2005, opportunity of hearing is to be given before imposition of penalty. The penalty was imposed on 8-8-2012 and notice was issued on 29-8-2012. Thus, it was no notice in the eye of law after levying the penalty first. As regards reversal of input credit on transfer of stocks to branches, the assessee had not reversed ITC completely as per the provisions of section 19(3) of the Act. The Assessing Officer without giving proper notice, reversed the same and levied penalty on the assessee. The Tribunal held: as regards ITC on the capital goods, the AO did not give his opinion as to at what rate ITC was admissible upon the capital goods. Order passed thus completely lacks application of mind. Consequently, penalty was also set-aside and the AO was directed to decide the case afresh on both the above issues. Accordingly, the appeal was decided.

Hawkins Cookers Ltd. v. State of Punjab (2015) 50 PHT 189 (Pvt).

9. Refund of excess amount of tax paid

In writ petition filed before the Allahabad HC, the main grievance of the petitioner was that refund of the excess amount of tax of pre deposit amounted to ` 16.6 crore paid under protest in compliance of interim order of the Supreme Court and be application for rectification of mistake apparent on record has been rejected. The HC on examination of the case allowed the writ petition by holding that not passing an order of refund when the amount is found due to be refundable would amount to be judicial misconduct. The rectification application filed was rejected mechanically without application of mind, the same order too was set-aside. All in all, the refund was required to be granted by allowing writ petition within a period of 6 weeks from the date of production of a certified copy of the Order.

Sony India Pvt. Ltd. v. State of U.P. & 2 Ors. 2015 NTN (Vol. 57) -125 (All)

10. Sale its Ingredients

In order to constitute ‘sale’ three ingredients must be present i.e. (i) mutual consent between the parties competent to contract, (ii) transfer of property in goods and (iii) transfer of ownership along with valuable consideration. In the present case, goods were supplied as free of cost returned back after fitment. Questioned goods “Child parts” supplied as free cost to the appellant. Appellant contended that excise duty was leviable on the assessable value i.e. the value of ‘manufactured goods’ whereas sales tax was charged on the taxable value of goods against consideration. The appellant sent back such ‘Child parts’ by fixing it in automobile plastic component supplied back. No tax charged on the value of child parts. The Assessing Authority (AO) imposed tax on supply of such child parts by treating it as sale. First Appellate Authority remanded the matter back to the AO. Aggrieved with the remand order, the dealer filed the present appeal. The Tribunal in appeal placed reliance on the judgment in the case of Devidas Gopal Krishna And Ors; Commissioner of sales tax, U.P. v. Satya Industrial Corporation (1994) UPTC 1149 and observation of the Supreme Court in the case of M/s Moriroku UT India Pvt. Ltd. v. State of U.P. (2008) 15 VST 559 (SC) and held that no valuable consideration was received on supply of questioned goods “Child parts” received as “free of cost” from the buyer for fitments in the manufactured goods supplied by the appellant again to the buyer. No transfer in property in questioned goods passed from buyer to the appellant. Ownership remained with the buyer company which provided “free of cost” supply of question goods to the appellant. Insurance of such question goods was made at the end of the buyer company supplying it as free of cost to the appellant. Hence, on facts, tax deleted as imposed by the AO on supply of “child parts” by treating it as “sale”. Accordingly, appeal allowed.

Mori Roku Ut Pvt. Ltd. v. C.C.T. 2015 NTN (Vol. 57) – Tribunal-52

11. Time barred assessment

In this case, Respondent intentionally withheld legitimate purchase tax due to be deposited as per the admitted turnover in the returns. There was delay in framing the assessment on the part of the Dept. Amount withheld whether can be recovered by enacting new law / provision after the expiry of period of limitation as prescribed in the law itself. The HC followed State of Punjab And Ors. v. Patiala Co-Op. Sugar Mills Ltd. and held in the negative.

State of Punjab & Ors. v. Fazilka Co-Op. Sugar Mills Ltd. (2015) 50 PHT 128 (P&H)

12. Whether “Surgical Cotton” commercially different and distinct product ?

In the present case, the fact was production of surgical cotton from raw cotton by process of transformation whether amounts to manufacture, was held in the affirmative and whether “Surgical Cotton” was commercially different and distinct product was held in the affirmative, in the context of Schedule Entry “Cotton including absorbent cotton wool 1.P” and whether liable to exemption of tax under Notification u/s 2(27) of the Rajasthan Sales Tax Act, 1994, also held in the affirmative.

Mamata Surgical Cotton Industries v. AC (Anti Evasion), Rajasthan (2015) 65 S.T.A. 122 (SC)

13. Words and Phrases – “Tax Due”

Section 23(5) of the Delhi Sales Tax Act deals with the situation where a dealer fails to furnish returns in respect of any period by the prescribed date. In such eventuality, the Commissioner is mandated to, after giving the dealer a reasonable opportunity of being heard, make a best judgment assessment. Consequently after due notice and opportunity to the dealer a best judgment assessment was made on 26-3-1985 by the Assessing Authority whereby the petitioner was directed to pay a sum of ` 52,39,763 under the said act and by a separate order of the same date, the petitioner was required to pay a sum of Rs. 5,92,469 under the CST Act, 1956. However, in neither case was any interest levied by the assessing authority u/s. 27(1) of the said Act. The writ petition was directed against the order dt. 13-2-1994 passed by the Sales Tax Appellate Tribunal. The point in issue related to the chargeability of interest u/s. 27(1) where the petitioner did not file any return in respect of the year 1980-81. The petitioner had also not deposited any tax during the currency of that year. Provisions of section 23(5) were invoked and best judgment assessment framed where under petitioner was directed to pay a sum of ` 52,39,763 under the Delhi Sales Tax Act, and a sum of ` 5,92,469 under the CST Act, 1956.

2. The expression “tax due” as appearing in section 27(1) of the Delhi Sales Tax Act to be read in relation to the provisions of section 21(3) thereof. Section 21(3) of the said act has clear reference to the furnishing of a return. Moreover, it has reference to the full amount of tax due from a dealer under the act “according to such return”. In other words, the tax which is set to be due u/s. 27(1) of the said act must be the tax which is due “according to the return”. If no return is filed then there could be no “tax due” within the meaning of section 27(1) of the act r/w section 21(3) thereof. The tax which is ultimately assessed is the tax which becomes due on assessment and if this tax so assessed is not paid even after the demand is raised then the dealer would be deemed to be in default and would be liable to pay interest u/s 27(2) of the said act. But till such tax is assessed no interest can be levied on such a dealer, who has not filed a return u/s 27(1) of the said act.

3. In view of the above legal position, it is evident that the impugned order dt. 13-2-1994 is not in accordance with the Constitution Bench judgments of the Supreme Court i.e. J.K. Synthetics Ltd. v. CTO (1994) 4 PHT 450 (SC), Maruti Wire Industries Pvt. Ltd. v. STO (2001) 17 PHT 414 (SC) (FB) and State of Rajasthan v. Ghasilal AIR 1965 SC 1454.

Pure drinks (New Delhi) Ltd. v. The Members Sales Tax Tribunal (2015) 50 PHT 169 (Del)

D. H. Joshi,
Advocate

Change in shareholding patten requires Bank’s approval

In reference to SARFAESI Act, 2002, every Securitisation Company / Reconstruction Company (SC / RC) is required to obtain prior approval of the Reserve Bank for any substantial change in its management. The expression “substantial change in management” means the change in the management by way of transfer of shares or amalgamation or transfer of the business of the company. Hence, one of the terms and conditions stipulated to the SC/RCs, while granting them the Certificate of Registration, states that prior approval of Reserve Bank will have to be taken by the SC/RCs for any change in their shareholding pattern.

Further all SC/RC companies may require RBI approval for changes in the shareholding pattern related to : (a) any transfer of shares by which the transferee becomes a sponsor (b) any transfer of shares by which the transferor ceases to be a sponsor and (c) an aggregate transfer of ten per cent or more of the total paid-up share capital of the SC/RC by a sponsor during the period of five years commencing from the date of certificate of registration..

Circular No. RBI/2014-2015/476 DNBR(PD)CC.No. 01/SCRC / 26.03.001 / 2014-2015 dtd. 24-2-2015.

NBFCs Raising Money by Private Placement of Non Convertible Debentures (NCDs)

NBFCs for resource planning should cover the planning horizon and the periodicity of private placement and the policy is to be approved by the Board. The following issues shall be governed: :

i. Minimum subscription per investor shall be ` 20,000 (Rupees Twenty thousand);

ii. Issuance of private placement of NCDs shall be in two separate categories;

(a) Maximum subscription of less than ` 1 crore and

(b) A minimum subscription of ` 1 crore and above per investor;

iii. Limit of 200 subscribers for every financial year, for issuance of NCDs with a maximum subscription of less than ` 1 crore, shall be fully secured;

iv. No limit on the number of subscribers in respect of issuances with a minimum subscription of ` 1 crore and above; the option to create security in favour of subscribers will be with the issuers. The unsecured debentures shall not be treated as public deposits as defined in NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 1998.

v. An NBFC (excluding Core Investment Companies) shall issue debentures only for deployment of funds on its own balance sheet and not to facilitate resource requests of group entities / parent company / associates.

vi. An NBFC shall not extend loans against the security of its own debentures (issued either by way of private placement or public issue).

All tax exempt bonds offered by NBFCs are exempted from the applicability of the circular. All NCDs of maturity up to one year as per the guidelines on Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010, dated June 23, 2010, by Internal Debt Management Department, RBI shall be applicable.

Circular No. RBI/2014-15/475 DNBR (PD) CC No. 021/03.10.001/2014-15 dated 20-2-2015

Sections 10(4) & 11(1) of the FEMA: Risk Management and Inter Bank Dealings: Foreign Currency (FCY) – INR Swaps

All eligible residents can enter into FCY-INR swaps to hedge exchange rate and/or interest rate risk exposure arising out of long-term foreign currency borrowing or to transform long-term INR borrowing into foreign currency liability, subject to guidelines. Further, swap transactions, once cancelled, shall not be rebooked or reentered. Also to permit greater flexibility to the residents borrowing in foreign currency where the underlying is still surviving, the client, on cancellation of the swap contract, may be permitted to re-enter into a fresh FCY-INR swap to hedge the underlying but only after the expiry of the tenor of the original swap contract that had been cancelled.

Circular No. RBI/2014-15/469A.P. (DIR Series) Circular No. 78 dated 13-2-2015

Ss.10(4) & 11(1) FEMA, 1999 : Foreign Direct Investment in Pharmaceuticals sector – Clarification

FDI policy for pharmaceutical sector has been reviewed and it has now been decided with immediate effect that there would be a special carve out for medical devices which was earlier given the same treatment as pharmaceutical sector. FDI up to 100% is permitted under the automatic route in for manufacturing of medical devises and is applicable to Greenfield Projects (100% Automatic) and Brownfield Projects (100% Government). This circular has also defined the definition of Medical Devices.

Circular RBI/2014-15/441 A.P. (DIR Series) Circular No. 70 dated 2-2-2015.

S. 10(4) & 11(1): FEMA Act, 1999 Foreign investment in India by Foreign Portfolio Investors

All future investment in Government securities by registered Foreign Portfolio Investors (FPIs) shall be required to be made in Government bonds with a minimum residual maturity of three years. Accordingly, all future investments by an FPI within the limit for investment in corporate bonds shall be required to be made in corporate bonds with a minimum residual maturity of three years. Further, all future investments against the limits vacated when the current investment runs off either through sale or redemption, shall be required to be made in corporate bonds with a minimum residual maturity of three years. FPIs shall not be allowed to make any further investment in liquid and money market mutual fund schemes. There is no lock-in period and FPIs shall be free to sell the securities (including those that are presently held with less than three years residual maturity) to domestic investors.

Circular RBI/2014-15/448 A.P.(DIR Series) Circular No. 71 dated 3-2-2015

S. 6(3) and S. 47(2) Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) (Amendment) Regulations, 2015

RBI permission necessary to acquire or transfer of immovable property in India not exceeding five years except for lease by citizens of certain countries like Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau or Hong Kong.

Notification No. FEMA. 335/2015-RB dated 4-2-2015

Ss. 10(4) & 11(1) FEMA, 1999 Foreign investment in India by Foreign Portfolio Investors

FPIs shall be permitted to invest in Government securities, the coupons received on their existing investments in Government securities. These investments shall be kept outside the applicable limit (currently USD 30 billion) for investments by FPIs in government securities. AD Category – I banks shall ensure reporting of such investments as may be prescribed from time to time.

RBI/2014-15/453 A.P. (DIR Series) Circular No. 72 dtd. 5-2-2015

Ss. 10(4) & 11(1) FEMA, 1999 Foreign investment in India by Foreign Portfolio Investors

The Reserve Bank has issued a clarification about the applicability of investment by FPI :

Any fresh investments shall be permitted in any type of debt instrument in India with a minimum residual maturity of three years. Accordingly, FPIs shall not be allowed to make any further investment in CPs.

FPIs shall not be allowed to make any further investments in debt instruments having minimum initial/residual maturity of three years with optionality clause exercisable within three years.

FPIs shall be permitted to invest in amortised debt instruments provided the duration of the instrument is three years and above.

Further any clarification above shall not be in conformity with the provisions of the A.P. (DIR Series) Circular No. 71 dated February 3, 2015.

RBI/2014-15/460 A. P. (DIR Series) Circular No.73 dated 6-2-2015

Ss.10 (4) & S.11(1) FEMA Act, 1999 – Import of goods into India

The RBI liberalise and simplify the procedure to dispense the requirement of submitting request in Form A-1 to the AD Category–I Banks for making payments towards imports into India as they need to obtain all the requisite details from the importers and satisfy itself about the bona fides of the transactions before effecting the remittance by persons, firms and companies for making payments, exceeding USD 5,000 or its equivalent towards imports into India.

RBI/2014-15/467 A. P. (DIR Series) Circular No. 76 12-2-2105.

Sujeet Karkala,
Advocate

Definition – Authorised Officer

A definition inserted defining various under Section 2 of the FEMA 1999 a new sub clause (cc) been inserted defining “Authorised Officer” means an officer of the Directorate of Enforcement authorised by Central Government u/s. 37A. Under previous Act no such officer was defined but the new provisions makes an insertion enplaning the scope of authorised person.

S. 6 Capital Account Transactions

Sub-section (2) sub-cl (a) has been replaced with a new clause (a), under previous clause “any class or classes of capital account transaction which are permissible” now this “any class or classes of capital account transaction involves debt instrument, which are permissible.” As per the new insertion “debt instrument” has been inserted.

A new sub-clause (c) has been inserted after sub clause (b) of sub-section (2) of Sec. (6) stating “any conditions which may be placed on such transaction“. This clause explains any conditions can be placed on capital account transactions for any person who may sell or draw foreign exchange to or from authorised person.

An amendment has been made to the proviso after sub-section (2) sub-cl (b) by inserting “Central Government” as earlier proviso only includes Reserve Bank of India in not imposing any restrictions on drawal of foreign exchange for payments due on account of amortisation of loans or for depreciation of direct investments in the ordinary course of business which now also includes Central Government.

A new clause (2A) has been inserted which states

The Central Government may in consultation with the Reserve Bank of India, prescribe –

(a) Any class or classes of capital account transactions, not involving debt instrument, which are permissible ;

(b) The limit to which foreign exchange shall be admissible for such transactions; and

(c) Any conditions which may be placed on such transactions.

Section 6 sub-section (3) has been omitted which explains the list of regulations prohibit, restricts or regulate by RBI.

A new sub section (7) has been inserted which defines “debt instrument” which means any instruments as may be determined by the Central Government in consultation with the RBI.

Under Section 18, the word adjudicating Authorities” has been replaced by “Competent Authority”.

A new section 37A deals with Special Provisions relating to assets held outside India in contravention to Section, has been inserted for all the assets being hold outside in India in contravention to Section 4 of the Act after Section 37 of the Foreign Exchange Act, 1999 which states that

1) Authrorise Officer who has reason to believe that any property situated outside India contravene section 4 of the Act may by writing, order, seize value equivalent of foreign exchange in India of the immovable property but such seizure cannot be made in a case where the aggregate value of such foreign exchange, foreign security or any immovable property, situated outside India, is less than the value.

2) The order of seizure to be placed before the Competent Authority, appointed by the Central Government not below the rank of Joint Secretary to the Government of India within thirty days from the date of such seizure.

3) The Competent Authority within one hundred and eighty days from the date of seizure after giving an opportunity to be head shall dispose of the petition.

An explanation is inserted explaining the computing of one hundred eighty days, the period of stay granted by court shall be excluded and a further period of at least thirty days shall be granted from the date of communication of vacation of such stay order.’

S.46.Power to make Rules for Central Government by notification to carry out the provisions of the act.

A new sub clause (aa) has been inserted under sub section 2 which also covers debt instrument covered by sub section 7 of section 6.

Also a sub clause (ab) been inserted that includes the the permissible classes of capital account transactions in accordance with sub-section (2A) of section 6 and the limits of admissibility of foreign exchange, and the prohibition, restriction or regulation of such transactions

Also after sub clause (g) a new sub clause (gg) has been inserted which states the aggregate value of foreign exchange referred to in sub-section (1) of section 37A;’’.

S. 47. deals Power to make regulation by Reserve Bank of India to carry out the provisions of the Act as well as the rules under this sub section 2 sub clause (a) has been replaced by including debt instruments as the permissible classes of capital account transactions under sub- section (7) of Section (6) the limits of admissibility of foreign exchange for such transactions, and the prohibition, restriction or regulation of such capital account transactions under section 6

A new sub clause (ga) has been inserted after sub clause (g), which includes export, import or holding of currency or currency notes.

Under Section 47 a new sub section (3) has been inserted which includes ll regulations made by the Reserve Bank before the date on which the provisions of this section are notified under section 6 and section 47 of this Act on capital account transactions, the regulation making power in respect of which now vests with the Central Government, shall continue to be valid, until amended or rescinded by the Central Government.

Prevention of Money Laundering Act, 2002

Under section 2 Sub section (1) sub cl (u) which has been extended by including the value of property within India in case of property situated outside India, define “Proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of such property or where such property is taken or held outside the country, then the property equivalent in value held within country.

Clause (y) defined schedule Offence , in sub-clause (ii), for the words “thirty lakh rupees”, the words “one crore rupees” been substituted.

S.5 Attachment of Property involved in Money-laundering, in sub-section (1), in the second proviso, for the word, brackets and letter “clause (b)”, the words “first proviso” shall be substituted.

S. 8 :Adjudication

sub-section (3), in clause (b), for the words “Adjudicating Authority”, the words “Special Court” shall be substituted;

a new sub section (8) has been inserted which stated that Where a property confiscated to the Central Government under sub-section (5) which deals with attachment of property involved in Money Laundering, the Special Court may direct the Central Government to restore such confiscated property or part thereof of a claimant with a legitimate interest in the property, who may have suffered a quantifiable loss as a result of the offence of money laundering:

Provided that the Special Court shall not consider such claim unless it is satisfied that the claimant has acted in good faith and has suffered the loss despite having taken all reasonable precautions and is not involved in the offence of money laundering.

S.20: Retention of Property:

sub-section (5), for the words “the Court or the Adjudicating Authority, as the case may be”, the words “Special Court” shall be substituted;

Sub section 6 instead of the word “Court”, the words “Special Court” shall be substituted; further the clause amended that the Directors or any officers authroised by him n thus behalf has reason may withhold the release of any such property instead of the words “ninety days from the date of”, the words “receipt of” shall be inserted.

S. 21 : Retention of Records:

sub-section (5), deals with after passing of an order of confiscation “under sub-section (5) or sub-section (7) of section 8” has been replaced with “or release under sub-section (5) or subsection (6) or sub-section (7) of section 8 or section 58B or sub-section (2A) of section 60” shall be substituted;

Sub-section (6), –– (a) for the words, brackets, figures and letters “under sub-section (6) of section 8 or by the Adjudicating Authority under section 58B or sub-section (2A) of section 60”, the words, brackets and figures “Adjudicating Authority under sub-section (5) of section 21” shall be substituted;

S.60 Attachment, seizure and confiscation, etc of property in contracting state or India in sub-section (2A), for the words “Adjudicating Authority”, the words “Special Court” shall be substituted.

Sujeet S. Karkala,
Advocate

In this article, an attempt has been made to analyse the some of the key proposals related to Customs Laws.

1. Rationalisation of Penalty Provisions:

• Proper Officer under Customs Department may serve SCN for recovery of duties not levied/ short levied for reasons other than that of collusion, wilful mis-statement or suppression of facts, within one year from relevant date1. In case the assessee pays duty with interest, SCN shall not be served.

Now, one proviso is proposed to be inserted to Section 28 (2) of the Customs Act, 1962 for non-imposition of penalty provided full duty along with interest is paid within 30 days from the date of receipt of SCN. Further, it is proposed that in such a case, the proceedings would be deemed to be concluded.

• Further, in cases of short payment/non-payment due to collusion, wilful mis-statement or suppression of facts by the importer or exporter or agents or employees thereof and SCN is already issued, the noticee may pay accepted duty in full or part with interest and penalty @ 25% of the duty amount within 30 days from the date of receipt of SCN2. In such a case, the proceedings are deemed to be concluded for the accepted duty amount.

Now, in the above cases, it is proposed to reduce penalty of 25% of duty amount to 15% of duty amount.

• In view of proposed amendment to penalty provisions, transitional provisions are proposed to be introduced. Accordingly, in cases where SCN is issued but Adjudication Order is not passed before enactment of Finance Bill, 2015, the proceedings would be deemed to be concluded if duty, interest and penalty @ 25% or 15% of duty amount respectively is paid in full within 30 days from the date of enactment of Finance Bill, 2015.

2. Amendment to penalties for improper importation or export of dutiable goods

• If any person deals with goods in a manner that the goods become liable for confiscation or any person acquires possession of or is in any way involved in dealing with goods such as handling, depositing, harbouring, keeping, concealing, selling or purchasing which that person knows or has reason to believe, are liable to confiscation, then such a person is liable for specified penalties3.

• Currently, in case of dutiable goods other than prohibited goods, penalty, not exceeding 100% of the duty sought to be evaded on such goods or
Rs. 5,000/-, whichever is higher, shall be imposed. Now, it is proposed to amend the upper cap for such penalties from 100% to 10% i.e. penalties are proposed to be levied maximum upto 10% of the duty sought to be evaded or
Rs. 5,000/-, whichever is higher.

• Further, it is proposed that if duty alongwith interest on such improper import has been deposited within 30 days from the date of the communication of adjudication order, penalty shall be reduced to 25% of the penalty (i.e. effectively 2.50% of duty sought to be evaded).

• Similarly, in case of improper exports of goods i.e. if any person deals with dutiable goods other than prohibited goods in a manner which would render the goods liable for confiscation, presently, penalty is levied not exceeding 100% of the duty sought to be evaded on such goods or
Rs. 5,000/-, whichever is higher.

• Now, penalty criteria is proposed to be amended as penalty not exceeding 10% of duty sought to be evaded or
Rs. 5,000/-, whichever is higher.

• Yet again, it is proposed that if duty alongwith interest on such improper export has been deposited within 30 days from the date of the communication of adjudication order, penalty shall be reduced to 25%. Of the penalty (i.e. effectively 2.50% of duty sought to be evaded).

3. Amendment to provisions for Settlement Commission:

• Hitherto, Settlement Commission is given power to reopen completed proceedings if the same are connected with the case pending with Settlement Commission with the concurrence of the applicant and pass orders accordingly. The Settlement Commission is not allowed to reopen the case after expiry of 5 years from the date of application made to Settlement Commission.

• Now, the power given to reopen the cases to Settlement Commission is proposed to be withdrawn.

All the above amendments would be effective from the date of enactment of Finance Bill, 2015.

4. Facility of advance rulings extended to resident firms

• Presently, following persons may apply for advance ruling:

• A non-resident setting up a joint venture in India in collaboration with a non-resident or a resident;

• A resident setting up a joint venture in India in collaboration with a non-resident;

• A wholly owned subsidiary Indian company, of which the holding company is a foreign company, which proposes to undertake any business activity in India;

• A joint venture in India;

• A resident in case of imports from Singapore;

• A resident public sector company;

• A resident proposing to import goods under Chapter heading 9801 of the First Schedule to the Customs Tariff Act, 1975;

• A resident public limited company;

• A resident private limited company.

• Now, with effect from 1st March, 2015, even a resident firm has the facility to apply for advance rulings4. The term “firm” means Partnership Firm and includes Specified Limited Liability Partnership (LLP), Sole Proprietorship and One Person Company.

• With the aforesaid amendment, almost all business entities will be eligible to apply for the Advance Rulings.

CA. Prerana (Payal) Shah

In this article an attempt has been made to analyse the key provisions amended/proposed to be amended related to Central Excise Act and rules made thereunder:

1. Effective Rate of Duty

Standard ad valorem rate of duty of excise is being increased from 12% to 12.5% for most of the items. Similarly, duty of excise is increased from 12% to 12.5% for goods covered by the Medicinal and Toilet Preparations Act, 1955. However, the Education cesses of 3% applicable on the duty amount are being exempted. Therefore, the effective rate of duty for most of the items would be 12.5% in stead of 12.36%.

There is no increase in the concessional rates of duties of 2% or 6%.

(This amendment is effective from 1-3-2015)

2. Penalties

a. Presently, if duty has not been paid due to reasons like fraud/collusion/wilful misstatement/suppression of facts or contravention of any provisions with an intention to avoid duty, then penalty equal to the amount of duty involved is leviable. However, if details regarding such transactions are available then penalty would reduce by fifty per cent vide Section Also, if duty liability along with applicable interest has been paid, before issuance of show cause notice (SCN), the penalty shall get reduced to maximum up to 25% of the duty.

b. However, as per the proposed amendment, the availability of transaction in records will have no bearing on reduction of penalty. Moreover, in cases, where there is no involvement of factors like fraud, etc.; the penalty not exceeding 10% will be leviable. In such bona fide cases, if the duty along with interest, before issuance of SCN or within 30 days of SCN, no penalty would be leviable. In such cases, if the duty along with interest has been paid within 30 days of commnunication of the order, the penalty will get reduced to 2.5% of the duty amount.

c. Moreover, as per the proposed amendments, if the duty is wilfully evaded, the penalties shall be payable as under:

i. If the duty along with interest and reduced penalty is paid within 30 days of SCN, the penalty shall be 15% of the duty

ii. If the duty, interest and reduced penalty is paid within 30 days of the order, the penalty shall be 25% of the duty

iii. In other cases, 100% of the duty amount

The below table summarises the proposed changes pertaining to the penalty in cases involving mens rea and other cases:

The penalty under sections 37(4) and 37(5) have been increased from
Rs. 2,000 to Rs. 5,000.

The above changes shall be effective from the date of enactment of the Finance Bill, 2015 (The Bill).

Moreover, general penalty prescribed under rule 25 of Central Excise Rules, 2004 (CER) has been increased from
Rs. 2,000 to Rs. 5,000 w.e.f. 1-3-2015

3. Recovery of duties:

a. Presently, relevant date for the purposes of calculating time limit for recovery of duties is the date of filing return. However, the cases where return is filed belatedly are not covered. Now, it has been proposed that date of filing of return would be the relevant date irrespective whether the return was filed on time or belatedly. Moreover, in respect of interest not paid on duties, the relevant date is proposed to be the date of payment of duty.

b. Self-assessed duty liability as per return which has not been discharged by the assessee can be recovered without issuance of show cause notice as per the proposed introduction of a new sub-section (16).

The above amendments to come into effect from the date of enactment of the Bill.

4. Registration

a. Compulsory online registration: Application for registration or de-registration is made compulsory through online procedure at website www.aces.gov.in

b. Compulsory PAN based Registration

i. Applicants other than Government Departments intending for registering themselves under Central Excise shall compulsorily have their Permanent Account Number (PAN) failing which No Registration Certificate shall be issued.

ii. Existing temporary registrants other than Government Department shall apply for PAN based registration within 3 months failing which their temporary registration shall stand cancelled. Extension for time limit of 3 months can be provided by the jurisdictional authority for one month on the basis of reasons specified by the applicant. If the assessee makes application beyond 1 month then an opportunity of being heard shall be provided thereafter the jurisdictional authority shall pass an appropriate order.

c. Compulsory Details Required

i. Applicant shall mandatorily provide its mobile number and e-mail id in the application form for communication with the department. Also, existing registrants who have not provided its communication details shall submit amended application within 3 months

ii. Requirement of Business Transaction Numbers: Business Transaction Numbers obtained from other Governments or agencies are to be filled in the application form if they are already issued or the certificate should be amended after procuring such numbers. Certain examples of Business Transaction Numbers are provided such as Customs Registration No (BIN No.), Import Export Code (IEC) Number, State Sales Tax /(VAT) Number, Central Sales Tax Number, Company Index Number (CIN), Service Tax Registration Number. Existing registrants are required to amend its application accordingly within 3 months

d. Registration Certificate within 2 days: It has been provided that post verification of documents and premise the Registration Certificate shall be issued by the DC/AC within 2 days instead of 7 days of receipt of duly completed online application form.

e. Online Registration Certificate: Registration Certificate which is issued online shall be an adequate proof of registration. Applicants are now not required to take signature of issuing authority on the said Registration Certificate.

f. Submission of Documents: The applicant shall tender self attested copies of the following documents at the time of verification of the premises:

i. Plan of the factory premises;

ii. Copy of the PAN Card of the proprietor or the legal entity registered;

iii. Photograph and Proof of the identity of the applicant;

iv. Documents to establish possession of the premises to be registered;

v. Bank account details;

vi. Memorandum or Articles of Association and List of Directors; and

vii. Authorisation by the Board of Directors or Partners or Proprietor for filing the application by a third party.

g. Physical Verification

The authorised officer has been made responsible to verify the premises physically within 7 days from the date of receipt of application through online. If any error is found by the concerned authority or certain clarifications are required, the applicant shall rectify the same within 15 days from the date of intimation failing which registration shall stand cancelled. Also, the assessee would be given an opportunity to present his case against the cancellation and if the reasons provided are reasonable, the officer shall not cancel the registration.

If during physical verification it is found that the premise is non-existent, the registration shall stand cancelled. The applicant would also be provided an opportunity of being heard.

h. Change in Constitution

Change in the Constitution shall be intimated to the Jurisdictional Officer within 30 days by way of amendment in the registration details. Any change in the Constitution leading to change in PAN shall require a fresh Registration Certificate

i. Deregistration within 30 days

Earlier, if a registered person ceases to carry on the business he/she may de-register himself by physically submitting a declaration along with the Registration Certificate. However, now only filing of such application will suffice. If there are no dues pending against the person, the application for deregistration shall be approved within 30 days from the date of filing online declaration which shall be accordingly communicated to the assessee.

j. Cancellation of Registration

Earlier revocation/suspension of Registration could be done only if the holder of such certificate or any person in his employment, is found to have committed breach of any of the provisions of the Act or the rules made thereunder or has been convicted of an offence under section 161, read with section 109 or with section 116 of the Indian Penal Code (45 of 1860). However, now the Registration of an assessee may get cancelled due to the following reasons:

i. Where on verification, the premises proposed to be registered is found to be non-existent;

ii. Where the assessee does not respond to request for rectification of error noticed during the verification of the premises within fifteen days of intimation;

iii. Where there is substantial misdeclaration in the application form; and

iv. Where the factory has closed and there are no dues pending against the assessee.

The assessee shall also be provided a reasonable opportunity of being heard against the proposed cancellation by the AC/DC.

The above amendments shall come into effect from 1st March, 2015.

(Notification 7/2015-CE (NT) dated 1st March, 2015 w.e.f. 1st March, 2015)

5. Records can be maintained in electronic form

Rule 10 of the Central Excise Rules, 2002 provides for maintenance of daily stock account by every assessee having description of goods manufactured, opening balance, quantity produced or manufactured, inventory of goods, quantity removed, assessable value, the amount of duty payable and particulars regarding amount of duty actually paid. Also, first page and the last page of each such account book shall be duly authenticated by the producer or the manufacturer or his authorised agent. Now, assessees can maintain records in the electronic form provided that every page of the record shall be authenticated by a means of digital signature.

CBEC shall also specify conditions, safeguards and procedures to be followed by the assessee who wishes to preserve digitally signed records through notification.

The above changes will come into effect from 1-3-2015

6. Invoice can be signed digitally

With effect from 1-3-2015, Sub-rule (8) has been inserted under Rule 11 which lays down that invoice issued by a manufacturer under Rule 11 can be authenticated by means of a digital signature. However, if the duplicate invoice meant for transporter is digitally signed, then the hard copy of the duplicate invoice should be self-attested by the manufacturer. Also, the Board may, by notification, specify the conditions, safeguards and procedure to be followed by an assessee using digitally signed invoice.

7. Late filing Fees

If an assessee fails to submit any return or Annual Financial Information Statement or Annual Installed Capacity Statement referred to in Rule 12 within the prescribed time then penalty of
Rs. 100 per day subject to a maximum of Rs. 20,000 for the period of delay in submission of each such return or statement shall be levied.

Similar late fees has also been prescribed for the delay in filing returns required to be filed by 100% EOUs under Rule 17(3).

The above changes are in effect from 1-3-2015.

8. Power to impose restriction extended to registered importers

Rule 12CCC of Central Excise Rules, 2002 empowers the Central Government to specify the restrictions if there is evasion of duty or to prevent evasion of duty. However, the rule provided that such measures could be imposed for manufacturer, first stage and second stage dealer or an exporter. Now, such restrictions can also be provided by the Central Government for registered importer, with effect from 1-3-2015.

9. Applicability of Rules to the Importer

a. Rule 22 specifying the details to be furnished and audit of assessee are now been made applicable to importer who issues an invoice on which CENVAT credit can be taken also.

b. Rule 25 of Cenvat Credit Rules, 2002 which prescribes the reasons whereby goods can be confiscated and penalty can be levied. It has been amended to include importers in its gamut.

c. Importers who are issuing invoices need to prepare invoices as per Rule 11 of Central Excise Rules, 2002.

(Notification 8/2015-CE (NT) dated 1st March, 2015 w.e.f. 1st March, 2015)

10. Submission of Undetaking in lieu of Bond

Central Excise (Removal of Goods at Concessional Rates of Duty for Manufacture of Excisable Goods) Rules, 2001 allows Manufacturer to receive goods for specified use at concessional rate of duty. Earlier, to avail the exemption a general bond with surety or security was to be submitted. Now, submission of letter of undertaking is also allowed in case of specified Manufacturers.

(Notification 9/2015-CE(NT) dated 1st March, 2015 w.e.f. 1st March, 2015)

11. Settlement Commission

The case which is remanded back to the adjudicating authority for fresh adjudication, by a Court/Appellate authority/any authority, the same shall not be eligible for Settlement.

The above amendment will be effective post enactment of the Bill.

12. Advance Ruling

Section 23A of Central Excise Act, 1944 provides for the meaning of an applicant for the purpose of filing advance ruling application. The term “applicant” means a non-resident or resident, Indian or foreign company setting up joint venture in India.

Now resident firms shall also be eligible to apply for the advance ruling, as the term ‘applicant’ has been amended to include ‘resident firms’. Firms would include LLPs and sole proprietorship firms also.

Whether a firm is ‘resident’ or otherwise shall get determined in accordance with Income tax provisions.

(Notification 11/2015-CE (NT) dated 1st March, 2015 w.e.f 1st March, 2015)

13. CENVAT Credit

Following amendments would be effective from 1st March, 2015:

a. Time limit for availment CENVAT Credit on inputs and input services has been increased from 6 months to 1 year1 from the date of issuance of Cenvatable document.

b. Now, CENVAT Credit on inputs and capital goods is available to a job worker if goods are directly sent to job worker on the direction of manufacturer or service provider2.

c. The benefit of availment of CENVAT Credit on inputs as such or after being partially processed by a job worker is extended to include all subsequent job workers in a chain.

d. The benefit of availment of CENVAT Credit on capital goods is available provided capital goods are sent “as such” to the job worker. The time lag allowed for to and fro of capital goods is increased to 2 years as against 180 days for non-reversal of CENVAT Credit.

e. Henceforth, inputs and capital goods may be received at any place by manufacturer.

f. In case of export of goods or services, refund of CENVAT Credit is available subject to conditions vide Rule 5 of CENVAT Credit Rules, 2004. Now, the said Rule is amended to include the meaning of Export Goods as under:

“’export goods’ means any goods which are to be taken out of India to a place outside India.”3

g. Till now, definition of exempted goods4 and final products5 included only “excisable goods”. Therefore, CENVAT Credit was not allowed on inputs or input services used in or in relation to manufacture of exempted excisable goods6. However, now for the limited purpose of Rule 6 of CENVAT Credit Rules, exempted goods would include even non-excisable goods i.e. to say CENVAT Credit shall not be taken on input or input services used for manufacture of non-excisable goods7.

h. Rule 12AAA of CENVAT Credit Rules, 2004 relating to restrictions to prevent misuse of provisions of Cenvat Credit is made applicable to importers as well.

i. Till now, CENVAT Credit was recovered provided CENVAT Credit is availed as well as utilised wrongly8. However, now SCN may be issued for recovery of CENVAT Credit availed wrongly though not utilised.

j. All credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to be in the following order:

i. Opening balance first

ii. Admissible credits second

iii. Inadmissible credits last

Following amendment to be effective from 1st April, 2015:

In case of Partial RCM, CENVAT Credit is available on input services only when value of input services as well as Service tax is paid. Now, CENVAT Credit, in respect of Service tax payable by service recipient, is available on payment of Service tax and the same is delinked with payment for services made to service provider9.

(Notification 6/2015-CE (NT) dated 1st March, 2015)

CA Jayesh P. Gogri

The Finance Minister’s indirect tax proposals this time are introduced with a view to prepare the economy for the smooth transition to the new levy of GST in April 2016. A brief analysis of service tax proposals may be given hereunder:

1. Goods and Services Tax (‘GST’)

The Finance Minister has reaffirmed and shown his commitment to introduce India’s most awaited tax reform, the GST, effective 1st April, 2016. The Constitutional Amendment Bill has already been introduced in the Parliament to this effect.

In fact, on the indirect taxes front, proposals are largely directed towards GST implementation like simplification of Excise duty and Service tax rates by removing Education Cess and Secondary & Higher Secondary Education Cess as well as increase in rate of Service tax to 14% and also visible thrust on e-compliances in line with GST expectations etc.

2. Rate of Service Tax

With the overall objective of preparing the economy for a smooth transition to GST, it is proposed to tax services at the increased rate of 14%. The enhanced rate shall not be subject to Education Cess. In indirect taxes, the FM has done away with the levy of education cess, which has been subsumed into the enhanced rate of 14%.

Thus, the Effective service tax rate is increased from the existing rate of 12.36% to 14%.

The change in rate of Service Tax would be effective from a date to be notified after the enactment of the Finance Bill, 2015. Till such time the levy of existing rate of Service Tax of 12.36% including ‘Education cess’ and ‘Secondary & Higher Education cess’ shall be continued to be levied.

With the objective of financing and promoting Swachh Bharat initiatives, Swachh Bharat Cess is likely to be imposed on all or any of the taxable services as may be notified at the rate of 2% of the value of taxable services.

This Cess shall be levied from a date to be notified by the Central Government in this regard, most probably this cess shall be levied on some high-end services which can support the Swachh Bharat Abhiyan of the Prime Minister.

3. Widening of tax base

a. Negative List pruned

The list of services in the Negative List is proposed to be reduced by bringing the following services within the ambit of taxation of services. The object behind it has been to widen the Service tax base and to include more services into the service tax net:

• Service provided by way of access to amusement facility providing fun or recreation by means of rides, gaming devices or bowling alleys in amusement parks, amusement arcades, water parks, theme parks or such other places.

• Service provided by way of admission to entertainment events of concerts, non-recognised sporting events, pageants, music concerts, award functions, if the amount charged is more than ` 500/- for right to admission to such an event;

• Services by way of contract manufacturing or job work production of alcoholic liquor for human consumption for a consideration;

• All services provided by the Government or local authorities to business entities.

These proposed changes shall come into effect from a date to be notified by the Central Government after the enactment of the Finance Bill, 2015.

b. Withdrawal of Exemptions

The following exemptions are proposed to be withdrawn by appropriate amendments in the Mega Exemption Notification No. 25/2012-ST, dated 20th June, 2012 effective 1st April 2015:

• Services provided to Government by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:

o A civil structure meant for use other than for commerce, industry, etc.

o A structure meant predominantly for use as an educational, clinical, or an art or cultural establishment.

o A residential complex predominantly meant for self-use or the use of their employees.

• Services by way of construction, erection, commissioning, or installation of original works pertaining to airports and ports;

• Services provided by performing artists in folk or classical art forms of music, dance and theatre for an amount greater than ` One lakh per performance;

• Services by way of transportation of foodstuff except milk, salt and food grain (including flour, pulses and rice);

• Services provided by mutual fund agents, distributors to mutual fund/asset management companies and marketing agents of lottery tickets;

• Services by way of making telephone calls from a public telephone (i.e. departmentally run, guaranteed public telephone and free telephone at airports and hospitals).

4. New Exemptions

The Finance Minister has proposed to provide the following new exemptions:

o Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail packing, labelling of fruits and vegetables;

o Service provided by a Common Effluent Treatment Plant operator for treatment of effluent;

o Life Insurance service provided by way of Varishtha Pension Bima Yojna (senior citizen);

o Service provided by way of exhibition of movie by the exhibitor (theatre owner) to the distributor or association of persons (consisting of such exhibitor as one of its members);

o Ambulance services provided by way of transportation of patient;

o Service provided by way of admission to a museum, zoo, national park, wild life sanctuary, and a tiger reserve;

o Exemption on GTA services provided to exporter for transportation of goods from Goods transport services for transport of organic manure by vessel, rail or road container freight station/inland container depot/from place of removal to land customs station.

All the above new exemptions shall come into effect from the 1st April, 2015.

5. Amendments in Valuation related aspects

a. The definition of the term ‘consideration’ amended to include

(i) Any reimbursable expenditure/cost incurred and charged by the service provider in the course of providing taxable services, except in prescribed conditions.

(ii) Any amount retained (viz. in addition to fee/commission) or discount received by lottery distributor or selling agent (i.e. difference between face value of lottery and procurement price of ticket).

The above amendments would be effective from enactment of the Finance Bill, 2015.

b. Inclusion of reimbursable expenses in the value of taxable services?

To overcome the decision of the Hon’ble Delhi High Court in Intercontinental Consultants, the definition of ‘consideration’ in Explanation to Section 67 has been suitably amended.

Delhi High Court in the case of Intercontinental Consultants & Technocrats (P) Ltd vs Union of India [2012] 28 Taxmann.com 213 (Delhi) has considered whether out of pocket expenses or reimbursable expenses incurred by the service provider in the course of providing the taxable services has to be included in the value of taxable services. The petitioner filed a writ petition before the High Court for quashing the show cause notice issued by the Service Tax Department for recovery of Service Tax on amount received as reimbursement of expenses such as hotel accommodation, travelling etc. under Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006.

Delhi High Court decided in favour of the Assessee, but the Department is in appeal before the Supreme Court against the decision of the High Court which is pending for disposal.

Thus, after the amendment in the definition of ‘consideration’ in Explanation to Section 67 there is no doubt that any expenditure incurred by the service provider for providing any taxable services has to be included in the value of taxable services unless specifically excluded and Service Tax would be chargeable on the total value including the reimbursable expenses incurred by the service providers.

However, the inclusion of reimbursable expenses for the period prior to this amendment is yet to be decided by the Hon’ble Supreme Court.

6. Introduction of Definitions

“Government”

Hitherto, the term “Government” has not been defined in the Act or the Notification. This has given rise to interpretational issues. To address such issues, definition of the term “Government” is now being incorporated in the Act to mean Central Government, State Government, Union Territory and its departments. But it would not include entities whose accounts are not required to be kept under Article 150 of the Constitution.

‘Service’

Definition of the term ‘service’ amended to include services provided by chit fund foreman for conducting a chit and distributor/selling agent of lottery for organising/conducting a lottery.

7. Rationalisation of Abatements

Service tax on transportation of goods and passengers

Effective 1st April 2015, uniform abatement of 70% is prescribed for transport by rail, road and vessel with a condition of non-availment of CENVAT credit on inputs, capital goods and input services. As a result, these services would be taxable at 30% of the service value.

In works contract valuation provisions, effective from 1st October 2014, there will be two slabs for computing taxable value of 40% and 70% instead of the existing three slabs of 40%, 60% and 70%.

Service tax on air transport of passengers

Effective 1st April 2015, service tax is payable on 60% (instead of 40 per cent) of service value in case of air transport services of passenger in other than economy class.

Service tax on chit fund service

Effective from 1st April 2015, Abatement is being withdrawn from chit fund service. Consequently, Service Tax shall be paid by the chit fund foremen at full consideration received by way of fee, commission or any such amount. They would be entitled to take CENVAT Credit.

8. Modification in Penal Provisions

(a) Section 76

Penal provisions in cases not involving fraud/collusion/or wilful misstatement or suppression of facts or contravention of any provision of the Act or rules with the intent to evade payment of service tax, have been proposed to be rationalised as under:

o Maximum penalty reduced from 50% to 10% of the Service tax amount in such cases;

o No penalty is to be paid if service tax and interest is paid within 30 days of issuance of notice under section 73(1);

o Reduced penalty equal to 25% of the penalty imposed, if the service tax, interest and reduced penalty is paid within 30 days of such order;

o If the service tax amount gets reduced in any appellate proceeding, then penalty amount shall also stand modified accordingly, and benefit of reduced penalty (25% of penalty imposed) shall be admissible if service tax, interest and reduced penalty is paid within 30 days of such appellate order.

(b) Section 78

Penal provisions in cases involving fraud/ collusion/or willful misstatement or suppression of facts or contravention of any provision of the Act or rules with the intent to evade payment of service tax, have been proposed to be rationalised as under:

o Penalty shall be 100% of service tax amount involved in such cases;

o Penalty equal to 15% of the service tax amount is to be paid if service tax, interest and reduced penalty is paid within 30 days of service of notice in this regard;

o Reduced penalty equal to 25% of the penalty imposed, if the service tax, interest and reduced penalty is paid within 30 days of such order;

o If the service tax amount gets reduced in any appellate proceeding, then penalty amount shall also stand modified accordingly, and benefit of reduced penalty (25% of penalty imposed) shall be admissible if service tax, interest and reduced penalty is paid within 30 days of such appellate order.

The existing benefit of reduced penalty in following specified situations stands withdrawn:

o 50% of the Service tax amount where true/complete details of transactions are available.

o 25% of the Service tax amount where value of taxable service does not exceed ` 60 lakhs and payment is made within 90 days from the date of communication of the order.

(c) Section 80

The existing provision for waiver of penalty in cases where assessee proves the reasonable cause for failure to pay service tax stands withdrawn (effective from enactment of the Finance Bill, 2015).

9. Section 78B – Transitionary provision

A new section 78B is being inserted to prescribe, by way of a transition provision, that,-

o Amended provisions of sections 76 and 78 shall apply to cases where either no notice is served, or notice is served under sub-section (1) of section 73 or proviso thereto but no order has been issued under sub-section (2) of section 73, before the date of enactment of the Finance Bill, 2015; and

o In respect of cases covered by sub-section (4A) of section 73, if no notice is served, or notice is served under sub-section (1) of section 73 or proviso thereto but no order has been issued under sub-section (2) of section 73, before the date of enactment of the Finance Bill, 2015, penalty shall not exceed 50% of the service tax amount.

10. Rebate Claims

Appeal against the order of Commissioner (Appeals) in matters relating to rebate of Service tax shall be filed with Central Government and not Tribunal, this shall be effective from enactment of the Finance Bill, 2015.

11. Rationalisation of Service Tax Rules, 1994

o In case of aggregator model, foreign aggregator of service can appoint a person representing the aggregator or any other person in India for the purposes of payment of service tax (effective 1st March 2015).

o Provisions for issuing digitally signed invoices have been added along with the option for maintaining the records in electronic form and their authentication by means of digital signatures.

12. Reverse Charge Mechanism

o Manpower supply and security services when provided by an individual, HUF, or partnership firm to a body corporate are being brought to full reverse charge. Currently, these are taxed under partial reverse charge mechanism.

o Services provided by mutual fund agents, mutual fund distributors and agents of lottery distributor are being brought under reverse charge consequent to withdrawal of the exemption on such services.

Accordingly, Service Tax in respect of mutual fund agents and mutual fund distributors services shall be paid by assets management company or, as the case may be, by the mutual fund receiving such services. In respect of sub-agents of lottery, Service Tax shall be paid by the distributor or selling agent of lottery.

These amendments would be effective 1st April, 2015.

13. CENVAT Credit

In case of partial reverse charge, the CENVAT credit can be availed by the service recipient as under:

o With respect to service tax to be paid by the service recipient, credit can be claimed on depositing the same with the Government Treasury.

o With respect to service tax charged by the service provider, credit can be claimed immediately on receipt of invoice. However, credit to be reversed if payment not made within a period of three months which can be re-availed on making payment.

These amendments would be effective 1st April 2015.

Further, the time limit for availment of CENVAT credit on input services is increased from six months to one year from the date of issuance of any of the specified documents.

14. Others

o Effective 1st March 2015 the scope of advance ruling is extended to cover all resident firms such as one person company, sole proprietor, partnership firm, etc.

o Effective from the date of enactment of Finance Bill, 2015 the recourse to settlement shall not be available in cases where proceedings are referred back in any manner to the adjudicating authority for fresh adjudication.

Mukul Gupta,
Naveen Garg,
Advocate

I. Amendment of section 271

Concealment Penalty leviable in cases covered by sections 115Jb and 115Jc

1. Introduction

1.1 Section 271(1)(c) of the income-tax Act provides for levy of penalty for concealment of income or furnishing inaccurate particulars of income. Clause (iii) to sub-section (1) of section 271 provides for imposition of penalty of an amount which shall not be less than the amount of tax sought to be evaded but which shall not exceed three times the amount of tax sought to be evaded by reason of the concealment of particulars of income or the furnishing of inaccurate particulars of such income.

1.2 Explanation 4 to section 271(1) defines the expression ‘amount of tax sought to be evaded’ for the purpose of section 271(1)(c)(iii). As per this Explanation, as amended by Finance Act 2002 w.e.f 1-4-2003, in the following situations it shall be deemed that amount of tax has been evaded:

(i) In any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income;

(ii) In any case to which Explanation 3 applies, means the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under section 148;

(iii) In any other case, where difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished.

1.3 As per section 115JB(1), where in the case of a company, the tax payable on the total income as computed under the Act in respect of any previous year relevant to the assessment year commencing on or after 1-4-2012 is less than 18.5 per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 18.5 per cent. This is known as Minimum Alternate Tax (MAT).

Thus, it can be said that in case of a company tax payable shall be higher of the following –

(i) 18.5 per cent of the book profit;

(ii) Tax on total income computed as per normal provisions of the Income-tax Act.

1.4 In the case of companies at the time of assessment tax on income under normal provisions and as per MAT provisions is computed and compared. If the amount of tax payable under the MAT provisions comes higher, then the same is levied on the company. However, there may be some additions to normal income. In such a case, a question arises as to whether concealment penalty under section 271(1)(c) can be levied for the additions so made.

1.5 In the following decisions it has been held that penalty u/s. 271(1)(c) cannot be levied on additions/disallowances made under the general provisions if tax is ultimately payable on Book Profits:

i. CIT v. Nalwa Sons Investments Ltd. (2010) 327 ITR 543(DEL)(HC). The SLP against the above decision was dismissed by the Apex Court in CIT v. M/s Nalwa Sons Investment Ltd on 4-5-2012 Special Leave to Appeal (Civil) No(s). 18564/2011.

ii. Unisons Hotels Ltd. vs. DCIT (2013) 40 taxmann.com 237 (Del.)(HC).

iii. CIT s. Aleo Manali Hydro Power Ltd. (2013) 29 taxman 90 (ALL)(HC)(Mag.)

iv. CIT v. Artemis Biotech Ltd. ITA No. 230/M/2004 dtd. 30-4-2007 (Bom)(HC)

v. ACIT v. Atcom Technologies Ltd. ITA No. 2578/MUM/2008 dtd. 3-8-2012 (Mum)(Trib.)

vi. M/s. Ruchi strips & Alloys ltd v. DCIT ITA No. 6940/M/2008 DTD 21/1/2011 (MUM)(TRIB.)

vii. BSEL Infrastructure Realty Ltd. v. ACIT (2012) 137 ITD 61(Mum)

1.6 Thus all the courts were unanimous in its decision on the said issue. To overcome these overwhelming judicial precedents, the Finance Bill, 2015 proposes to substitute Explanation 4 to section 271(1)(c) so as to provide that penalty will be levied on additions made under general provisions if they constitute concealment or inaccurate particulars even if the tax is ultimately paid on the Book Profits.

2. Scheme of the proposed amendment

Clause 68 of the Bill seeks to amend section 271 of the Income-tax Act relating to failure to furnish returns, comply with notices, concealment of income, etc. by substituting existing Explanation 4 by new Explanation 4 to provide that the amount of tax sought to be evaded shall be determined in accordance with the following formula–

(A – B) + (C – D) where

A = amount of tax on the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC;

B = amount of tax that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished;

C = amount of tax on the total income assessed as per the provisions contained in section 115JB or section 115JC;

D = amount of tax that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished:

The first proviso provides that where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished on any issue is considered both under general provisions and under the provisions contained in section 115JB or section 115JC, such amount shall not be reduced from total income assessed while determining the amount under item D.

The second proviso further provides that where the provisions contained in section 115JB or section115JC are not applicable, the item (C – D) in the formula shall be ignored.

It is further proposed to provide that where in any case the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, the amount of tax sought to be evaded shall be determined in accordance with the formula contained in clause (a) with the modification that the amount to be determined for item (A – B) in that formula shall be the amount of tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income.

It is also proposed to provide that where in any case to which Explanation 3 applies, the amount of tax sought to be evaded shall be the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under section 148. These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to assessment year 2016-17 and subsequent years.

3. Reason/Purpose of Amendment

3.1 As per the Memorandum explaining the provisions of the Finance Bill, the amendment is carried out for following reasons:

i) Problems have arisen in the computation of amount of tax sought to be evaded where the concealment of income or furnishing inaccurate particulars of income occurs in the computation of income under provisions of section 115JB or 115JC of the Act and also under the provisions other than the provisions of section 115JB or 115JC of the Act.

ii) Further, as pointed out courts have held that penalty under section clause (c) of sub-section (1) of section 271 cannot be levied in cases where the concealment of income occurs under the income computed under general provisions and the tax is paid under the provisions of section 115JB or 115JC of the Act.

iii) Tax paid under the provisions of section 115JB or 115JC over and above the tax liability arising under general provisions is available as credit for set off against future tax liability. Understatement of income and the tax liability thereon under general provisions results in larger amount of such credit becoming available to the assessee for set off in future years. Therefore, where concealment of income, as computed under the general provisions, has taken place, penalty under clause (c) of sub-section (1) of section 271 should be leviable even if the tax liability of the assessee for the year has been determined under provisions of section 115JB or 115JC of the Act.

4. Critical analysis of the Amendment

Ambiguity in the second proviso.

4.1 The second proviso provides that where the provisions contained in section 115JB or sections 115JC are not applicable, the item (C-D) in the formula shall be ignored. The language of this proviso is unclear and ambiguous as it lead to two distinct interpretations as under:

(i) Whether the non-applicability is attached to the status of the assessee thereby the proviso implying that the item (C-D) is to be ignored in case of non-corporate assessee such as individuals, firms etc. or;

(ii) Whether the non-applicability means that where assessee being a company is liable to pay tax under general provisions and not on book profits, then the item (C-D) is to be ignored.

4.2 The implication of the first interpretation is that in the case of a corporate assessee even if the tax is paid under general provisions , penalty u/s. 271(1)(c ) would be levied on adjustments made to book profits by the Assessing Officer i.e penalty u/s. 271(1)(c ) would be levied on both, adjustments made under general provisions as well as adjustments made to book profits even when tax is payable under general provisions.

4.3 The implication of the second interpretation is that in the case of corporate assessee where tax is payable under the general provisions, then no penalty u/s. 271(1)(c) would be levied on adjustments made to book profits by the Assessing Officer.

4.4 It appears that the second interpretation is the correct interpretation as the object and purpose of the amendment is to levy penalty u/s. 271(1)(c) on additions made under general provisions when tax is ultimately payable on book-profits and not vice versa. However, this issue may not be free from controversy and it is important that the same is clarified in the Act or by means of a circular.

The amendment is prospective or retrospective?

4.5 Another issue which may arise consequent to this amendment is whether the said amendment is clarificatory/declaratory and thus would have retrospective effect or the amendment is prospective in nature as the same is applicable from 1-4-2016. Some of the arguments that can be raised in support of retrospectivity are as under:

4.5.1 Every statutory provision for imposition of penalty has two distinct components:—

(i) That which lays down the conditions for imposition of penalty.

(ii) That which provides for computation of the quantum of penalty.

Section 271(1)(c) and clause (iii) relate to the conditions for imposition of penalty, whereas, on the other hand, Explanation 4 to section 271(1)(c) relates to the computation of the quantum of penalty.

4.5.2 Though retrospectivity is not to be presumed and rather there is presumption against retrospectivity, according to Craies (Statute Law, 7th Edn.), it is open for the Legislature to enact laws having retrospective operation. This can be achieved by express enactment or by necessary implication from the language employed. If it is a necessary implication from the language employed that the legislature intended a particular section to have a retrospective operation, the courts will give it such an operation. In the absence of a retrospective operation having been expressly given, the Courts may be called upon to construe the provisions and answer the question whether the Legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant : (i) general scope and purview of the statute; (ii) the remedy sought to be applied; (iii) the former state of the law; and (iv) what it was the Legislature contemplated.

The present amendment clarifies that the same is remedial in so much so that none of the Courts appreciated the vital aspect that as tax paid under the provisions of section 115JB or 115JC over and above the tax liability arising under general provisions is available as credit for set off against future tax liability, understatement of income and the tax liability thereon under general provisions results in larger amount of such credit becoming available to the assessee for set off in future years. Hence, the amendment is to be given a retrospective effect as it is clarificatory and not substantive.

4.5.3 The Apex Court in the case of CIT v Gold Coin Health Food P. Ltd. (2008) 304 ITR 308(SC) clinches the issue of retrospectivity in the present case. The Apex Court in CIT v. Prithipal Singh and Co. (2001) 249 ITR 670 (SC) had held that where there is no taxable income or tax assessed for payment then penalty u/s. 271(1)(c) is not leviable. This decision resulted in the amendment of Explanation 4 by Finance Act 2002 w.e.f. 1-4-2003 so as to provide that penalty would be leviable even when the returned loss is reduced or converted into profit. The Apex Court in the case of Virtual Soft Systems Ltd. v. CIT (2007) 289 ITR 83 (SC) held that the amendment to Explanation 4 by Finance Act, 2002 was prospective and not retrospective. However this decision came to be overruled by the larger bench of the Apex Court in the decision of CIT v Gold Coin (supra) wherein it was held that the amendment is clarificatory. The present amendment is on similar lines and would thus be retrospective.

4.6 Some of the arguments that can be raised against retrospectivity are as under:

4.6.1 There is nothing in the Finance Bill to indicate that the amendment is clarificatory. In fact the Finance Bill unequivocally states that the effective date of the amendment is 1-4-2016.

4.6.2 The existing provisions of Explanation 4 were clear and unambiguous and hence there cannot be any case of obvious omission. In fact all the courts were unanimous in holding that on interpretation of Explanation 4 and sub-section (iii) of section 271(1)(c) penalty on additions made under general provisions is not applicable if tax is payable on book profits.

4.6.3 The Apex Court in the case of CIT v. Gold Coin Health Food P. Ltd. (supra) while deciding the issue of retrospectivity in the context of amendment brought by Finance Act 2002 considered CBDT Circular No 204 dtd. 24-7-1976 reported in (1977) 110 ITR (St) (21, 48) and recommendations of the Wanchoo Committee which stated that penalty was leviable in case of loss also and said circular was holding the field prior to the amendment brought about by the Finance Act, 2002 and thus the amendment was held to be clarificatory. The present amendment does not reiterate the position of law as declared by any statutory circular etc. issued prior to the amendment. Also the Notes on Clauses of the Finance Bill, 2002 stated that the amendment to Explanation 4 was clarificatory. Whereas the Notes on Clauses relating to the present amendment doesn’t state so.

4.6.4 The Delhi High Court in CIT v. Nalwa Sons Investments Ltd. (supra) has considered the effect of the decision of the Apex Court in CIT v. Gold Coin (supra) and held that the situation dealt with by the Apex Court was different. The relevant observation is as under:

“The income of the assessee was thus assessed under section 115JB and not under the normal provisions. It is in this context that we have to see and examine the application of Explanation 4.

Judgment in the case of Gold Coin Health Food (P.) Ltd. (supra), obviously, does not deal with such a situation. What is held by the Supreme Court in that case is that even if in the Income-tax return filed by the assessee losses are shown, penalty can still be imposed in a case where on setting off the concealed income against any loss incurred by the assessee under other head of income or brought forward from earlier years, the total income is reduced to a figure lower than the concealed income or even a minus figure. The court was of the opinion that ‘the tax sought to be evaded’ will mean the tax chargeable not as if it were the total income. Once, we apply this rationale to Explanation 4 given by the Supreme Court, in the present case, it will be difficult to sustain the penalty proceedings. Reason is simple. No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it is the deemed income assessed under section 115JB of the Act which has become the basis of assessment as it was higher of the two. Tax is thus, paid on the income assessed under section 115JB of the Act. Hence, when the computation was made under section 115JB of the Act, the aforesaid concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all.”

The above decision of the Delhi High Court has been affirmed by the larger bench of the Apex Court, Apex Court in CIT v. Nalwa Sons (2012) 12 Taxmann.com 184 (SC).

5. Conclusion

The amendment will affect lot of cases pending at the appellate stages where the issue of penalty on additions made under general provisions in case of tax payable on book profits is involved if the amendment is held to be retrospective. The Finance Minister in his speech stated that he desired to give sufficient time to enable taxpayers to arrange their affairs in tune with the amendments and therefore the incumbent establishment would not resort to restrospective amendment. It is therefore expected that there should be specific clarification to avoid controversies. Also, the possible ambiguity in the second proviso may be taken care of in the Act or may be clarified by the CBDT.

II. Amendment of section 271D and section 271E

Penalty for failure to comply with the provisions of sections 269SS and 269T

1. Introduction

1.1 Sections 271D/271E of the Income-tax Act, 1961 as it stands today levy penalty for accepting/repaying loan or deposit, except otherwise than, by an account payee cheque or account payee bank draft, or through electronic transfer through a bank account.

1.2 The incumbent establishment in furtherance of its initiative to curb generation of black money, has proposed to amend the said sections so as to provide that penalty shall be levied for accepting/paying from/to any person any sum of money, whether as advance or otherwise, in relation to transfer of an immovable property (whether or not such transfer takes place) except otherwise than by way of specified modes.

2. Existing provision

2.1 The existing provision contained in section 271D of the Income-tax Act provides that if a person accepts any loan or deposit in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so accepted.

2.2 Thus, section 269SS prohibited acceptance of (i) loan or (ii) deposit otherwise than by a mode prescribed therein and violation of section 269SS entailed a penalty u/s. 271D.

2.3 The existing provision contained in section 271E of the Income tax Act provides that if a person repays any loan or deposit referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so repaid.

2.4 Thus section 269T prohibited acceptance of (i) loan or (ii) deposit otherwise than by a mode prescribed therein and violation of section 269T entailed a penalty u/s 271E.

3. Proposed Amendment

3.1 Clause 69 of the Bill seeks to amend section 271D to provide that if a person accepts any loan or deposit or specified sum referred to in section 269SS in contravention of the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so accepted. Similarly, clause 70 of the Bill seeks to amend section 271E to provide that if a person repays any loan or deposit or specified advance referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified advance so repaid.

3.2 Thus clause 69 and clause 70 of the Bill makes not only acceptance/repayment of loan or deposit in contravention of sections 269SS/269T subject to penalty but also acceptance/repayment of specified sum/specified advance in contravention of section 269SS/section 269T subject to penalty.

3.3 This amendment is made as a consequence of substitution of existing section 269SS and section 269T by clause 68 and clause 69 of the Finance Bill respectively. The said clauses effectively prohibit even acceptance/repayment of a specified sum/specified advance otherwise than by an account payee cheque or account payee bank draft or online transfer through a bank account. The term specified sum is defined in Explanation (iv) to section 269SS as any sum of money receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place. Similarly the term specified advance is defined in Explanation (iv) to section 269T as any sum of money in the nature of advance, by whatever name called, in relation to transfer of an immovable property, whether or not the transfer takes place.’.

4. Reason/Purpose for bringing the amendment

4.1 The Finance Minister during his budget speech stated that while finalising tax proposals he has adopted certain broad themes. The first and foremost pillar of his tax proposal theme was “ Measures to curb black Money”. It is no secret that black money eats into the vitals of our economy and society. It is equally true that the problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully. In our country transactions in real estate generates lots of black money. In the direction of curbing generation and utilisation of black money in real estate transactions, the Finance Bill proposed to amend the provisions of sections 269SS and 269T of the Income-tax Act so as to prohibit acceptance or re-payment of advance in cash of ` 20,000 or more for any transaction in immovable property. Consequently the Finance Bill also proposed to provide a penalty of an equal amount in case of contravention of such provisions.

4.2 Also, there are judicial precedents wherein it has been held that advance given against property could not be treated as loan or deposit covered within the purview of section 269SS and therefore, no penalty under section 271D is leviable. Hence, it was necessary to widen the scope of provisions of section 269SS and section 269T to include transactions relating to immovable property.

4.3 The provisions of section 271D and section 271E are covered by section 273B which provides immunity from penalty in case of a reasonable cause. In Commissioner of Income Tax v. Raj Kumar Sharma (2007) 294 ITR 131 (Raj), Narotam Singh Mann v. Income Tax Officer (2004) 90 TTJ (Asr.) 683, Assistant Commissioner of Income Tax v. Vinman Finance & Leasing Ltd. (2008) 115 ITD 115, Harpal Singh v. Assessing Officer (2008) 12 DTR (Jd)(Trib.) 529, Narayan Ram Chhaba v. Income Tax Officer & Anr. (2005) 96 ITD 163 (Jd)(TM) penalty has been deleted u/ss. 271D/271E r.w. section 273B.

5. Effective date

According to the Finance bill the amendment will take effect from 1st June, 2015.

III. Insertion of new section 271FAB

Penalty for failure to furnish statement or information or document by eligible investment fund

1. Introduction

1.1 In the case of offshore funds, under the existing provisions, the presence of a fund manager in India may create sufficient nexus of the offshore fund with India and may constitute a business connection in India even though the fund manager may be an independent person. Therefore, apart from taxation of income received by the fund manager as fees for fund management activity, income of off-shore fund from investments made in countries outside India may also get taxed in India due to such fund management activity undertaken in, and from, India constituting a business connection. Obviously such a tax regime would be detrimental or at least create roadblocks in the efforts of the present establishment to infuse more and more foreign investments in India for the growth of India.

1.2 Further, there are a large number of fund managers who are of Indian origin and are managing the investment of offshore funds in various countries. These persons are not locating in India due to the above tax consequence.

1.3 In order to facilitate location of fund managers of offshore funds in India a specific tax friendly regime has been proposed by virtue of introduction of new section 9A by clause 6 of the Finance Bill in the Act in line with international best practices with the objective that, subject to fulfilment of certain conditions by the fund and the fund manager-

(i) The tax liability in respect of income arising to the fund from investment in India would be neutral to the fact as to whether the investment is made directly by the fund or through engagement of fund manager located in India; and

(ii) That income of the fund from the investments outside India would not be taxable in India solely on the basis that the fund management activity in respect of such investments have been undertaken through a fund manager located in India.

1.4 Section 9A requires that every eligible investment fund shall, in respect of its activities in a financial year, furnish within ninety days from the end of the financial year, a statement in the prescribed form to the prescribed income-tax authority containing information relating to the fulfilment of the above conditions or any information or document which may be prescribed.

1.5 In case of non furnishing of the prescribed information or document or statement as required under section 9A, a penalty of ` 5 lakh shall be leviable on the fund by virtue of section 271FAB.

2. Proposed Amendment

Clause 71 seeks to insert a new section 271FAB of the Income-tax Act relating to penalty for failure to furnish statement or information or document by an eligible investment fund. It is proposed to provide that if any eligible investment fund which is required to furnish a statement or any information and document under sub-section (5) of section 9A fails to furnish such statement or information and the document within the time prescribed under that sub-section, the income-tax authority prescribed under the said sub-section may direct that such fund shall pay, by way of penalty, a sum equal to five hundred thousand rupees.

3. Reason/Purpose for introduction of section 271FAB

3.1 The second pillar of taxation proposals theme of the Finance Minister this year is job creation through revival of growth and investment and promotion of domestic manufacturing and ‘Make in India’. In this direction it is proposed to undertake a series of steps to attract capital, both domestic and foreign.

3.2 The present taxation structure has an inbuilt incentive for fund managers to operate from offshore locations. The managers taking care of off-shore fund houses were forced to manage their investment activity from outside India due to the fear of adverse tax consequences in respect of income of such fund houses. To encourage such offshore fund managers to relocate to India, this finance bill proposes to modify the Permanent Establishment (PE) norms to the effect that mere presence of a fund manager in India would not constitute PE of the offshore funds resulting in adverse tax consequences.

3.3 Thus a new section 9A has been proposed whereby the income of the fund houses may not be taxable subject to the fulfilment of conditions mentioned therein.

3.4 Sub-section (5) of Section 9A casts a liability on such eligible fund houses to furnish statement, information or documents, as required, within a period of 90 days from the end of the financial year. These statements, information and documents would be relating to compliance of various terms and conditions contained in section 9A.

3.5 As section 9A effectively makes an exception to the rule, it is very important that the conditions contained therein are strictly adhered to and no wrongful advantage is taken. Thus, in order to ensure that the eligible fund house complies with reporting requirements as specified in sub-section (5) of section 9A, section 271FAB is proposed to be inserted to provide for penalty of ` 5 lakhs in case of non-compliance.

3.6 Further section 273B is proposed to be amended to include the reference of the proposed new section 271FAB relating to penalty for failure to furnish information or document by eligible investment fund.

4. Effective date of Amendment

This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

IV. Insertion of new section 271-I

Penalty for failure to furnish information or furnishing inaccurate information under section 195

1. Introduction

The Finance Act 2008, had inserted sub-section (6) to section 195 which required any person referred to in sub-section (1) of section 195, responsible for making cross-border payments which are chargeable to tax to furnish information relating to such payment in Form Nos. 15CA and 15CB read with Rule 37BB. However, no penalty was provided for non-furnishing of information.

2. Proposed Amendment

Clause 73 of the Bill seeks to insert a new section 271-I in the Income-tax Act relating to penalty for failure to furnish information or for furnishing inaccurate information under section 195. It is proposed to insert a new section 271-I so as to provide that if a person, who is required to furnish information under sub-section (6) of section 195, fails to furnish such information; or furnishes inaccurate information, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one lakh rupees.

3. Reason/Purpose of Amendment

3.1 The person responsible for making cross-border payment was required to furnish information as envisaged in Form 15CA and 15CB while making such payments, as per section 195(6) of the Act.

3.2 The mechanism of obtaining information in respect of remittances fulfils twin objectives of ensuring deduction of tax at appropriate rate from taxable remittances as well as identifying the remittances on which the tax was deductible but the payer has failed to deduct the tax. Therefore, obtaining of information only in respect of remittances which the remitter declared as taxable defeats one of the main principles of obtaining information for foreign remittances i.e. to identify the taxable remittances on which tax was deductible but was not deducted.

3.3 In view of this, the said sub-section (6) of Section195 is proposed to be substituted by clause 48 of the Finance Bill with effect from the 1st day of June, 2015 to provide that the person responsible for paying any sum, whether chargeable to tax or not, to a non-resident, not being a company, or to a foreign company, shall be required to furnish the information of the prescribed sum in such form and manner as may be prescribed.

3.4 Further, currently there is no provision for levying of penalty for non-submission/inaccurate submission of the prescribed information in respect of remittance to non-resident.

3.5 Hence, for ensuring submission of accurate information in respect of remittance to non-resident, section 271-I is inserted in the Act to provide that in case of non-furnishing of information or furnishing of incorrect information under sub-section (6) of section 195 of the Act, a penalty of one lakh rupees shall be levied.

3.6 However, the provisions of section 273B of the Act are suitably amended to provide that no penalty shall be imposable under this new provision if it is proved that there was reasonable cause for non-furnishing or incorrect furnishing of information under sub-section (6) of section 195 of the Act.

4. Cause of concern

The amendment to section 195(6) which requires disclosure of payments to non-residents even if the same may not be chargeable to tax is likely to have wide ramifications. It may be in the interest of the revenue but will cause undue hardship to the citizens. It raises several questions such as whether payment to non-residents for hotel booking on web-sites, payment to non-resident when on tour abroad etc. would require disclosures as most citizens would not be aware of such provisions and compliance would be cumbersome. Also, it is not clear whether new rules will be notified or existing rules will continue. It is important that the rules provide sufficient exemptions from disclosures. Penalty provision for non-compliance of section 195(6) when the payment to non-resident is not chargeable to tax require to be postponed till information of such new provision is properly disseminated to the public at large. Also, where certificate is obtained from an accountant it makes no sense to penalise an honest taxpaying citizen for incorrect furnishing of information. Of course provisions of Section 273B may come to the rescue of the taxpayer but why at the first place a citizen should go through the penalty proceedings when he is not at fault.The Hon Supreme Court in MotilalPadampat Mills Ltd. v. State of Uttar Pradesh reported in (1979) 118 ITR 326(SC) observed as follows “It must be remembered that there is no presumption that every person knows the law. It is often said that everyone is presumed to know the law, but that is not a correct statement: there is no such maxim known to the law”. Hence ignorance of law may be shown as a reasonable cause. Useful reference may also be made to the Full-Bench decision of Delhi Tribunal in Kaushal Diwan v. ITO (1983) 3 ITD 342 (Del.)(TM)(Trib.)

5. Effective date of Amendment

This amendment will take effect from 1st June, 2015.

V. Amendment of section 272A

Penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections, etc.

1. Introduction

The provisions of section 272A of the Act provide for penalty for non-compliance with various procedural requirement under the Income-tax Act. The Government deductors/collectors i.e. Drawing and Disbursing Officer (DDO)are allowed to make payment of tax deducted/collected by them through book entry under the existing mechanism. The DDO, thereafter, intimates such amount to the concerned officer who credits the amount to the credit of Central Government through book entry. The concerned officers were required to furnish detail of payment made through book entry in the prescribed Form 24G. However, the compliance was not effectively done by the concerned officers resulting into delay in furnishing of the TDS/TCS statement by the DDO. In order to improve the reporting of payment of TDS/TCS made through book entry and to make existing mechanism enforceable, sections 200 and 206C of the Act is proposed to be amended by Finance Bill, 2015 to ensure timely furnishing of information by the concerned officer. Further, to ensure compliance of this proposed obligation of filing statement, section 272A of the Act is proposed to be amended by Finance Bill, 2015 so as to provide for a penalty of ` 100 for each day of default during which the default continues subject to the limit of the amount deductible or collectible in respect of which the statement is to be furnished.

2. Proposed Amendment

Clause 74 of the Bill seeks to amend section 272A of the Income-tax Act relating to penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections, etc. The proposed amendment seeks to insert a new clause (m) in sub-section (2) of section 272A to provide that if any person fails to deliver or cause to be delivered a statement within the time as may be prescribed under sub-section (2A) of section 200 or sub-section (3A) of section 206C, then, such person shall pay, by way of penalty, a sum of one hundred rupees for every day of such default. It is also proposed to amend first proviso to sub-section (2) of the said section so as to provide that the amount of penalty for failure to file statements under sub-section (2A) of section 200 or under sub-section (3A) of section 206C shall not exceed the amount of tax deductible or tax collectible, as the case may be.

3. Reason/Purpose for Amendment

3.1 Under the existing scheme of payment of TDS and TCS, Government deductors / collectors are allowed to make payment of tax deducted/collected by them without production of challan i.e., through book entry. For payment of tax deducted/collected through book entry, the Drawing and Disbursing Officer (DDO) intimates the TDS/TCS amount to the Pay and Accounts Officer or the Treasury Officer or the Cheque Drawing and Disbursing Officer (PAO/TO/CDDO) who credits the TDS/TCS amount to the credit of Central Government through book entry. For generating credit for TDS/TCS paid through book entry by the Government deductors, Rule 30 and Rule 37CA of the Income-tax Rules, 1962 provide that the PAO/TO/CDDO shall file the detail of payment of TDS/TCS made through book entry in the prescribed Form 24G.

3.2 There was no specific section in the Act to enforce timely filing of the same by the concerned officer. Delay in furnishing of the Form 24G resulted into delay in furnishing of the TDS/TCS statement by the DDO. In order to improve the reporting of payment of TDS/TCS made through book entry and to make existing mechanism enforceable, sections 200 and 206C of the Act is proposed to be amended by clause 50 and clause 53 respectively of the Finance Bill to ensure timely furnishing of information by the concerned officer by providing that where the tax deducted [including paid under section 192(1A)] / collected has been paid without the production of a challan, the PAO/ TO/CDDO or any other person by whatever name called who is responsible for crediting such sum to the credit of the Central Government, shall furnish within the prescribed time a prescribed statement for the prescribed period to the prescribed income-tax authority or the person authorised by such authority by verifying the same in the prescribed manner and setting forth prescribed particulars.

3.3 To ensure compliance of this proposed obligation of filing statement, it is proposed to amend the provisions of section 272A of the Act so as to provide for a penalty of ` 100/- for each day of default during which the default continues subject to the limit of the amount deductible or collectible in respect of which the statement is to be furnished.

3.4 The penalty u/s. 272A is subject to the protection of reasonable cause u/s. 273B. In Commissioner of Income Tax v. Gordhanbhai Jethabhai (1994) 205 ITR 279 (Guj.), Superintending Engineer v. Income Tax Officer (1996) 54 TTJ (Jp) 608 , Royal Metal Printers (P.) Ltd. v. Additional Commissioner of Income-Tax, (Tds) Range 3, Mumbai [2010] 37 Sot 139 (Mum.), Harsiddh Construction (P) Ltd. v. Deputy Commissioner of Income Tax (2001) 70 TTJ (Ahd.) 266 & Sudershan Auto & General Finance v. Commissioner of Income- tax (1998) 60 ITD 177 (Del.) penalty u/s. 272A(2) has been deleted on account of reasonable cause.

4. Effective date of Amendment

The amendment will take effect from 1st June, 2015

VI. Insertion of new sectionS 285A and 271GA

Furnishing of information or documents by an Indian concern in certain cases and penalty for failure to furnish such information or documents

1. Introduction

The Finance Bill, 2015 has proposed a new section 285A casting a responsibility on the Indian entity, through or in, which the Indian assets are held by the foreign company or the entity whose value is substantially derived by the Indian assets. The Indian entity is obligated to furnish information relating to the transaction having the effect of directly or indirectly modifying the ownership structure or control of the Indian entity, or documents as required. Section 271GA is proposed to be inserted to provide for penalty to the tune of 2% of the value of transaction or INR 5,00,000, as the case may be, in the event of failure to furnish such information or document by the Indian entity.

2. Proposed Amendments

2.1 Clause 76 of the Bill seeks to insert a new section 285A relating to furnishing of information by an Indian concern in certain cases. It is proposed to provide that where any share or interest in a company or entity registered or incorporated outside India derives, directly or indirectly, its value substantially from the assets located in India as referred to in the Explanation 5 to clause (i) of sub-section (1) of section 9, and such company or, as the case may be, entity holds such assets in India through or in an Indian concern, then, any such Indian concern shall, for the purposes of determination of income accruing or arising in India, under the clause (i) of sub-section (1) of section 9, furnish within the prescribed period to the prescribed income-tax authority the relevant information or document, in such manner and form as is prescribed in this behalf.

2.2 Consequently clause 72 of the Bill seeks to insert a new section 271GA relating to penalty for failure to furnish information or document under section 285A. It is proposed to provide that if any Indian concern which is required to furnish any information or document under the proposed section 285A, fails to do so, the Income-tax authority as may be prescribed in the said section 285A, may direct that such Indian concern shall pay, by way of penalty,– (i) a sum equal to two per cent. of the value of the transaction, in respect of which such failure has taken place, if such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern; (ii) a sum of five hundred thousand rupees in any other case.

3. Reason for the Amendment

3.1 The Bombay High Court in Vodafone International Holdings B.V. v. Union of India (2010) 329 ITR 126 (Bom.) had dismissed the writ petition of Vodafone and the Court rejected the argument of Vodafone that what was transferred was only shares of an Cayman Island Company i.e., foreign company and therefore, the argument that no capital gains will arise on sale of shares in foreign company was rejected.

3.2 Vodafone filed an appeal to the Supreme Court and Supreme Court in Vodafone International Holdings B. V. v Union of India (2012) 341 ITR 1 (SC) reversed the Bombay High Court decision. Supreme Court held that Assessing Officer in India had no jurisdiction to tax the transaction which took place outside India and what was transferred was the shares of a foreign company and not Indian Business.

3.3 The Finance Act, 2012 made retrospectively amendment in the definition of Transfer under section 2(47); Capital asset under section 2(14) and deemed accrual of income under Section 9 in order to affirm the judgment of Bombay High Court in the case of Vodafone and to nullify the Supreme Court judgment in the said case.

3.4 Under section 9, vide Finance Act, 2012 , Explanation 5 to section 9(1)(i) was inserted with retrospective effect from April 1, 1962. The said Explanation 5 read as under: “Explanation 5. For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.”

3.5 The present Finance bill provides a mechanism to determine “value substantially from assets in India”. These changes would require the Indian concern to furnish information or documents relating thereto.

3.6 Thus new section 285A is introduced to provide for furnishing of information or documents by the said Indian concern and new section 271GA is introduced to provide for penalty for failure to furnish information as required by Section 285A.

3.7 Further section 273B is proposed to be amended to include the reference of the proposed new section 271GA.

3.8 In the context of old section 285A penalty was deleted on the ground of ignorance of law. The Full Bench of the Tribunal in Kaushal Diwan v. ITO [1983] 3 ITD 432 (Delhi)(TM) had come to grips with a matter in which the assessee had pleaded ‘ignorance of law as excuse’ for his failure to furnish information under section 285A of the Income-tax Act on the prescribed proforma and a penalty under the provisions of section 285A(2) was imposed upon him on the failure to comply with the said provision. Per Shri P.V.B. Rao, Vice President …”It is trite law to mention that merely because there is a provision for levy of fine, fine must be imposed … The plea that the assessee was not aware of the legal requirements cannot be brushed aside and he be made liable to a fine on the ground that ignorance of law is no excuse. The old theory that ignorance of law is no excuse does not hold good in view of the complexity of laws in modern days. It is impossible for anyone let alone well informed people to know all the technicalities of law … .”

4. Effective Date of Amendment

These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent years.

Rahul K. Hakani,
Advocate

Sections 245A to 245L in Chapter XIX-A of the Income-tax Act, 1961 deal with the functioning of the Income-tax Settlement Commission that was set up through the Taxation Laws (Amendment) Act, 1975, i.e. 1st April, 1976 on the recommendation of the Direct Taxes Enquiry Committee, 1971, popularly known as the Wanchoo Committee.

2. Finance Bill, 2015 has proposed wide range changes in its functioning reversing some of the very progressive and forward looking changes made by the present Finance Minister only six months ago in October, 2014 through the Finance (No. 2) Act, 2014. If passed into law, they will make the Commission an unattractive forum for prospective applicants.

Filing of tax return made obligatory for voluntary applicants

3. Finance Act, 2007 had dispensed with the requirement of filing a tax return by deleting proviso (i) to section 245C of the Act. Finance (No. 2) Act, 2014 had further widened the scope of settlement applications by including the proceedings for assessment or re-assessment u/s. 147 on issue of notices u/s. 148 for the relevant years by amending Explanation (i) to section 245A(b) of the Act. The result of this amendment was that the a taxpayer, including a foreign company which has not filed the tax return under the bona fide belief that such requirement was not applicable to it in view of the appropriate tax having been deducted at source by the payer of income, could voluntarily approach the Settlement Commission for regularisation of past non-compliance after getting the notices u/s. 148 issued from the concerned Assessing Officer by representing that it had taxable income for those years. The proposed substitution of said Explanation (i) requires notice u/s. 148 to be issued only for one year and for other assessment year/years for which a notice u/s. 148 has not been issued, the applicant can approach the Settlement Commission only “if the return of income for the other assessment year or years has been furnished u/s. 139 or in response to a notice u/s. 142 of the Act”. Thus, the scope of notice u/s. 148 has been restricted to only one year and for other years valid returns u/s. 139 or 142(1) would have been filed.

4. The amendment proposed to be made appears even contrary to the explanatory notes which appear to give the impression that this is a beneficial amendment to obviate the need for issue of notices u/s. 148 for all the years for which, the settlement application is proposed to be made. This will be evident from the following explanatory note from page 24 of the Memorandum explaining the provisions of Finance Bill, 2015:-

“The existing provision contained in clause (b) of section 245A of the Act defines a case for the purpose of Chapter XIX-A as any proceeding for assessment under this Act, of any person in respect of any assessment year or assessment years which may be pending before an Assessing Officer on the date on which an application under sub-section (1) of section 245C is made. The Explanation to the said clause provides for deemed commencement of proceedings under different situations. Clause (i) of the Explanation to clause (b) of section 245A provides that the proceeding for assessment or reassessment under section 147 of the Act is deemed to commence from the date of issue of notice under section 148 of the Act. It has been observed that issue relating to escapement of income is often involved in more than one assessment year. In such case the assessee becomes eligible to approach Settlement Commission only for the assessment year for which notice under section 148 has been issued. Therefore, to take the proceeding for all other assessment years where there is escapement, the assessee becomes eligible only after notice under section 148 has been issued for all such assessment years.

5. In order to obviate the need for issue of notice in all such assessment years for commencement of pendency, it is proposed to amend clause (i) of the said Explanation to provide that where a notice under section 148 is issued for any assessment year, the assessee can approach Settlement Commission for other assessment years as well even if notice under section 148 for such other assessment years has not been issued. However, a return of income for such other assessment years should have been furnished under section 139 of the Act or in response to notice under section 142 of the Act”. (Emphasis supplied).

6. The requirement of filing the return of income did not exist and the assessee could, after issue of a notice u/s. 148 of the Act, make a settlement application as in search cases, where also, an application to the Settlement Commission can be made after notices u/s. 153A or 153C are issued and without filing the returns of income before the AO. The proposed amendment would pose challenges in approaching the Settlement Commission. The voluntary returns u/s. 139 can be filed only up to a period of two years from the end of the financial year and the issue of notice u/s. 142(1) of the Act can be issued only before the expiry of the time limit for the completion of an assessment; the applicant can approach the Commission only for the year for which the notice u/s. 148 is issued because he will not be able to fulfil the legal requirement of filing the valid returns of income for other years except for two years for which time limit for completion of assessments u/s. 153 is available.

7. What is the need for insisting on the filing of valid tax returns is not understood. The settlement application is akin to the return of income as has been held by the Supreme Court in the case of Brij Lal v. CIT (2010) 328 ITR 477 (SC). The relevant extracts of that judgment are reproduced below:-

“14. As held hereinabove, under Section 245C(1) read with Section 245C(1)(B)(ii) and Section 245C(1)(C)(b), the additional amount of income-tax payable is to be calculated on the aggregate of total income returned and the income disclosed in the settlement application as if such aggregate is the total income. Thus, the scheme of the said sections is based on computation of total income and in that sense we have stated that such application for settlement is akin to a return of income. The said provision deals with the total income….”

8. Keeping in view the fact that the Commission is a one time opportunity for several thousands of non-filers, owing each more than ` 10 lakhs of tax in aggregate for all the years to the State, the objective of law should be enable a person to file the settlement application covering all the years for which income has been omitted or is understated without any procedural restrictions whatsoever as is the case in other countries notably USA and UK from which the Wanchoo Committee borrowed the concept of settlement of income-tax and wealth tax cases.

9. Besides, the settlement application, without insisting on filing the return of income, does not cause any prejudice to the Income-tax Department. A look at the application form in Form No 34B prescribed by Rules 44C and 44CA of the Income-tax Rules read with the legal requirement of disclosing true and full income for each year as per section 245C(1) of the Act would reveal that settlement application has to contain all the information as is required in the return of income like the computation of income according to the Income-tax Act, and the supporting documents like the Profit and Loss Account, Balance Sheet etc. A copy of the application is made available to the CIT and he is heard before its admission by the Commission.

Recommendations against filing of tax return

10. It is, therefore, suggested that clause (i) of the Explanation to clause (b) of section 245A, as it exists at present should be retained without any modification. The proposed clause needs to be modified to bring in two more categories of cases that existed before the amendments by Finance Act, 2007, namely:

(i) Completed assessments where under-reporting of income is admitted by the applicant similar to section 245E of the Act (before its becoming inoperative with effect from 1st June, 2007)

(ii) Cases pending in appeal before the CIT (Appeals) or revision as was the position in the definition of the case in section 245A(b) before 1st June, 2007. If the cases set aside by CIT or the ITAT can come before the Commission, why cannot they come earlier? Income-tax is an annual levy. It will be both in the interest of the Revenue and the taxpayer, if the final determination is made at the earliest possible time.

Anomaly in providing two year limit of completion of assessment

11. Another amendment that needs re-consideration is in clause (iv) of the Explanation to clause (b) of section 245A of the Act. At present, Explanation (iv) of section 245A(b) is a deeming provision stating that for any case not covered by clauses (i) to (iii) of the Explanation, the proceedings for assessment shall be deemed to be concluded when, the assessment is made. The objective is to enable the taxpayer to approach the Settlement Commission for the years till the assessment proceedings are pending. This is to encourage voluntary compliance. The proposed amendment requires that the settlement application can be filed “from the date on which the return of income for that assessment year is furnished u/s. 139 or in response to a notice served u/s. 142 and concluded on the date on which the assessment is made; or on the expiry of two years from the end of the relevant assessment year, in case where no assessment is made”.

12. This amendment, apart from restricting the scope of the settlement application, creates an anomaly since the time limit for completion of an assessment involving transfer pricing adjustment, is not two years from the end of the relevant assessment year but is extended till the Dispute Resolution Panel decides the matter. In such cases, the Assessing Officer sends only a draft assessment order u/s. 144C and the settlement application can be filed for such a year till a reference to the Dispute Resolution Panel is decided.

13. Huge transfer pricing adjustments by the Transfer Pricing Officers have been one of the leading causes that have been responsible for causing great dissatisfaction amongst the taxpayers notably the non-resident taxpayers and foreign companies. Such disputes are so complex and complicated that in several cases, the assessments are set aside by the Tribunal u/s. 254 of the Act and remain pending thereafter for years together. Settlement Commission, which is statutorily required to make a final determination of income within a period of 18 months from the end of the month in which the settlement application is filed, would be a preferred forum for the taxpayers requiring finality and the Government should encourage the foreign companies and non-resident taxpayers, in particular, to approach the Commission.

14. The proposed amendment of restricting the jurisdiction of the Settlement Commission to “two years from the end of the relevant assessment year” needs to be relooked so as to remove the anomaly of the taxpayers in transfer pricing cases not able to approach the Commission.

Proposed amendment of section 245HA to provide for abatement

15. Vide clause 60 of the Finance Bill, 2015, clause (iiia) is proposed to be added to section 245HA(1) to provide that where a final order of settlement u/s. 245D(4) of the Act passed by the Settlement Commission does not provide for the terms of settlement, the settlement application filed by the taxpayer will abate. The consequences of abatement are specified in sub-sections (2) to (4) to section 245HA of the Act. The settlement application, on abatement, will go back to the Assessing Officer or any other income-tax authority before whom the proceeding was pending for the relevant year, at the time of making the application and that authority will deal with the assessment for that year in the normal course that may involve huge addition to the disclosed income, appeals, penalty and prosecution. It is indeed not understood as to the real objective of this amendment. Punishing the applicant for some omission of the Settlement Commission cannot be legally justified. In any case, of the 300 or 400 cases involving 1,200 to 1,500 assessments that are settled every year by the seven benches of the Commission, there may be very few cases where a high powered body like the Settlement Commission would omit to state the terms of settlement specified in section 245D(6) of the Act, namely, mentioning the demand by way of tax, penalty or interest, and grant of immunity from penalty and prosecution. In case, in any particular case, the terms of settlement are not mentioned, the omission can be rectified by the applicant or the revenue making a miscellaneous application to the Commission u/s. 245D(6A) of the Act and the Commission will be duty bound to rectify its order and provide for the terms of settlement. The proposed amendment does not, therefore, appear to serve any useful purpose and may be considered for deletion.

16. In fact, there is a need to clarify to providing that the applicant will be entitled to bring in to his account books the unrecorded disclosed income that is available with him at the time of admission of his application. The admission should be automatic. The applicant is prejudiced if his application is rejected since he pays the entire tax and interest before making the application.

17. To sum up, the present Finance Minister had made some very practical and useful amendments in his maiden budget enacted as Finance (No. 2) Act, 2014 and the applications to the Settlement Commission notably by foreign companies and their Indian subsidiaries had started increasing. That trend should have continued but for the proposed amendments discussed above. They need to be reconsidered for deleting them and make suitable changes as suggested above so as to encourage more and more voluntary compliance and voluntary payment of tax. Needless to add, there are about ` 6 lakhs crores of tax arrears and their size is increasing by about ` … in a fair and reasonable In the cases settled by the Commission there are hardly any tax arrears because the entire tax and interest is paid before making the settlement application on income which, by law, is required to be “true and full”.

18. If the objective of any good tax legislation is to collect revenue and not create disputed demand which remains uncollected for years on end, voluntary compliance needs to be encouraged. More and more errant persons should be enabled to avail of the one time in life opportunity, without any limitations and restrictions, of going to the Settlement Commission and to come back to the path of rectitude in their subsequent compliance with tax laws by getting their incomes settled in a fair and reasonable manner by Senior Chief Commissioners of Income-tax, which, as per section 245B (2) of the Act, are to “be appointed by the Central Government from amongst persons of integrity and outstanding ability, having special knowledge of, and, experience in, problems relating to the direct taxes and business accounts”.

S. R. Wadhwa,
Advocate

I. Revision of orders erroneous and prejudicial to the interests of revenue – Amendments proposed to section 263

1. Introduction

As per section 263 of the Income-tax Act, 1961 (the “Act”), the Commissioner (and the Principal Commissioner on or after 1st June, 2013) have revisionary powers in respect of orders passed by the Assessing Officer (AO) if the former considers the impugned order “erroneous in so far as it is prejudicial to the interests of the revenue”. The revisionary powers include passing of order enhancing or modifying or cancelling the assessment and directing a fresh assessment. For invoking the provisions of this section, two conditions need to be satisfied as held in the case of Malabar Industrial Co. Limited v. CIT [2000] 243 ITR 83 (SC). These two conditions are as follows: (i) order must be erroneous; and (ii) order must be prejudicial to interests of revenue.

Section 263 has been subject matter of much controversy as regards when an order can be said to be erroneous and whether such error has resulted in the order being prejudicial to the interests of the revenue.

2. Proposed amendment

Clause 65 of the Finance Bill, 2015 proposes to introduce a new Explanation to section 263(1) which provides as follows:

“Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,—

(a) the order is passed without making inquiries or verification which should have been made;

(b) the order is passed allowing any relief without inquiring into the claim;

(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or

(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”

The reason for this amendment, as stated in the Memorandum explaining provisions of Finance Bill, 2015 (the “Memorandum”) is to provide clarity on the issue – [2015] 371 ITR (St.) 292, 342.

3. Analysis of amendment

Clause (a) of Explanation 2: This clause provides that section 263 can be invoked and an order can be revised if it is passed “without making inquiries or verification which should have been made”. Judicial opinion on whether lack of enquiry by AO alone constitutes sufficient cause for invoking revisionary powers under section 263 is divided. In CIT v. Vikas Polymers [2010] 194 Taxman 57 (Del.) (HC), the Delhi High Court held that mere lack of inquiry by the AO is not sufficient for revision under section 263. Similarly, in Institute of Chartered Accountants of India v. DIT [2011] 136 TTJ 548 (Del.) (Trib.), it was held that non-examination of an issue by AO does not, per se, make the assessment order prejudicial to interest of revenue for revision.

However, with the insertion of this clause (a), this position is now sought to be reversed and the Legislature seeks to affirm the ratio in Anil Kumar v. ACIT [2005] 147 Taxman 5 (Mag.) (Del.) (Trib.) that AO was not justified in accepting gifts without making further enquiry about creditworthiness of donors as well as source of funds making revision under section 263 justified.

The proposed amendment gives power to the Commissioner or the Principal Commissioner to sit in judgement over the adequacy of the enquiries or verification which the AO has made. In Salora International Ltd. v. Addtl. CIT [2005] 2 SOT 705 (Delhi) (Trib.), it was held that merely because from a perfectionist point of view, it is felt that some more enquiries and verifications could have been made by AO while making assessment/assessment order cannot be declared to be erroneous and prejudicial to interest of revenue. In my view, with effect from 1st June 2015, the ratio this decision may not be good.

An order allowing a particular deduction/claim of an assessee after verification of the AO may still be open to revision under section 263 if the Commissioner or the Principal Commissioner opines that verification which ought to have been made by the AO has not been so made. While the provisions of section 263 did not originally visualize substitution of judgement of the AO with that of the Commissioner as held in Antala Sanjaykumar Ravjibhai v. CIT [2012] 135 ITD 506 (Rajkot) (Trib.) and Manish Kumar v. CIT [2012] 134 ITD 27 (Indore) (Trib.), the new amendment, if enacted, would, in my view, have this effect.

For instance, an order under section 143(3) is to be passed by the AO “after hearing such evidence as the assessee may produce and such other evidence as the AO may require on specified points, and after taking into account all relevant material which he has gathered”. But, even after doing so and after proper application of mind by the AO, the order cannot be said to be immune from revision as the scope of further enquiry/ verification may not, in many cases, be ruled out which may be a subjective matter. To my mind this clause would bestow on an administrative authority in exercise of revisionary oversight jurisdiction, powers usually vested in an appellate authority under appellate jurisdiction in a fiscal law.

Clause (b) of Explanation 2: As per this clause, an order shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, it is passed allowing any relief without inquiring into the claim.

In Bharat Overseas Bank Ltd. v. CIT [2013] 152 TTJ 546 (Chennai) (Trib.), it was held when the impugned order was silent on the claim made by assessee, and allowed such claim, without any discussion, such an order was erroneous and prejudicial to the interest of revenue. This decision is sought to be affirmed with clause (b).

It is important to note that the term “relief” has been used many times in the Act but not defined. Every deduction or exemption availed by an assessee would in a general sense be relief but whether the Legislature has sought to include the same under this clause (b) may be a debatable issue. This is because the term “relief” is used in contradistinction with the terms “exemption”, “deduction” etc. at various places in the Act. In my opinion, even if a view is taken that the term “relief” does not cover exemptions and deductions, non-verification of such relief may satisfy the requirements of clause (a), and hence, the impugned order may even otherwise be open to revision under section 263.

It is often seen that during scrutiny assessments, the AO calls for details regarding major items and passes an order based on his verification of these items while omitting the insignificant ones. After the amendment, in my view, even such orders may be revised by the Commissioner or the Principal Commissioner in so far as these unverified items.

This clause can be a major cause of litigation for assessees in whose cases assessment orders are revised under section 263 because no details were called for by the AO.

But, what is the position if the AO after calling for relevant details accepts the contention of the assessee but does not deal with the issue in the assessment order? This issue was considered by the Bombay High Court in Idea Cellular Ltd. v. DCIT & Ors. [2008] 301 ITR 407 (Bom.) (HC) and in CIT v. Fine Jewellery (India) Ltd, ITA No. 296 of 2013 dated 3rd February, 2015 wherein it was held that the fact that assessment order is silent on a point does not mean that there is no application of mind by AO if he has raised a query during the assessment proceedings and assessee has replied, and revision under section 263 was not permissible under these circumstances. In my view, this position continues to hold good even post the amendment.

Clause (c) of Explanation 2: As per this clause, any order which has not been made in accordance with any order, direction or instruction issued by the Board under section 119 can be subject matter of revision under section 263. It is settled law that the orders, directions and instructions issued by the Board are binding on the AO. Therefore, it is now proposed to be provided that orders of AO which are in violation of such orders, directions and instructions would be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue.

Under section 119, the Board may also issue directions etc. which are in favour of the assessee. One consequence of this amendment could be that failure to follow such directions which are favourable to the assessee could also satisfy the requirements of this section after the amendment takes effect. This is because vide the proposed Explanation 2, the Legislature seeks to widen the meaning of expression “erroneous in so far as it is prejudicial to the interests of the revenue” and does not make a distinction between direction etc. which are favourable to the assessee and the ones which are not.

The question that arises is whether the proposed amendment can be read in this manner and revision of orders under section 263 justified even in cases where the AO has passed an order ignoring a direction favourable to the assessee. In my view, the answer to this question would be no as such an interpretation would not satisfy condition (ii) mentioned in the Supreme Court decision of Malabar Industrial Co. Limited (supra).

Also, a situation may arise as to whether an order can be revised under this section if it is contrary to a Board direction but in line with a High Court or Supreme Court judgement. It is now settled that instructions or circulars which are contrary to the law declared by Supreme Court or High Court cannot override judicial declaration of law as was held in the case of Hindustan Aeronautics Limited v. CIT [2000] 243 ITR 808 (SC). Therefore, in my view, if the order of the AO is in accordance with the decision of High Court or the Supreme Court, then revision under section 263 should not be permissible notwithstanding that that order is contrary to a Board direction, instruction or order. This view has also been taken by the Calcutta High Court in the case of Bhartia Industries Ltd. v. CIT [2013] 353 ITR 486 (Cal.), and in my view, continues to be good law.

Clause (d) of Explanation 2: This clause proposes to give to the Commissioner or the Principal Commissioner the power to exercise revisionary power if an order has not been passed in accordance with any decision of the jurisdictional High Court or Supreme Court which is prejudicial to the assessee whether such decision is rendered in the case of the assessee or any other person.

This clause is applicable only when an order has been passed in ignorance of a Supreme Court decision or a jurisdictional High Court decision. The amendment does not seek to cover situations wherein the AO passes an order in ignorance of a non-jurisdictional High Court decision.

A question arises as to whether an order can be revised under section 263 if subsequent to the passing of such order, there is a contrary decision of the jurisdictional High Court or the Supreme Court on a particular issue. The assessee may contend that if a particular decision is not available for consideration of the AO, it is impossible for him to pass his order “in accordance with” such decision. However, in this regard, it is also important to note the decision in CIT v. Dr. K. Ramachandran [2004] 139 Taxman 320 (Mad.) (HC) wherein it was held that “record” would mean record which was available to the AO at the time of passing of assessment order, and would include records available with the Commissioner at time of passing of order under section 263. A similar view was taken in Star India Limited v. Addtl. CIT [2012] 14 ITR (T) 106 (Mum.). On the basis of these decisions, in my view, revision under section 263 may be permissible even if subsequent to the AO’s order, a Supreme Court decision or a jurisdictional High Court decision is rendered deviating from the position taken by the AO.

The amendment is proposed to take effect from 1st June, 2015 i.e. on or after this date, the Commissioner or the Principal Commissioner, as the case may be, would have the enhanced powers under this section subject to sub-section (2) and sub-section (3). In my view, this Explanation 2 should also apply to orders of AO which are passed before 1st June, 2015.

Though the intended reason for the new Explanation is to “provide clarity”, it has substantially enhanced the power vested in the Commissioner and Principal Commissioner under this section, and such enhanced powers, in my view, would lead to heightened litigation against the revision orders.

A corresponding amendment could also have been made in section 264 to expressly provide assessees the benefit of revision due to subsequent decisions of higher courts. However, the assessees should still be entitled to the same in light of the Gujarat High Court decision in Parshuram Pottery Works Co. Ltd. v. WTO [1975] 100 ITR 651 (Guj.) (HC).

II. Sanction before issuance of notice under section 148 – Substitution of section 151

1. Introduction

Under the existing provisions of section 151, the AO is required to obtain sanction before issuance of notice under section 148. The authority from which sanction is to be obtained depends on (i) whether scrutiny under section 143(3) or under section 147 has been made earlier or not, (ii) whether notice is proposed to be issued within or after four years from the end of relevant assessment year, and (iii) the rank of the AO proposing to issue notice.

2. Proposed amendment

The existing section 151 has been sought to be replaced by a new section 151 which provides that for issuance of notice under section 148 within a period of up to four years from the end of relevant assessment year, the approval of Joint Commissioner shall be required and that of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner if the issuance of notice under section 148 is beyond four years from the end of relevant assessment year.

3. Analysis of amendment

The new provisions introduced vide Clause 35 of the Finance Bill, 2015 seek to do away with two of the existing abovementioned three criteria. After the enactment of this section, the only criteria that would need to be considered, is the time within which the assessment is sought to be reopened under section 147. If the reassessment is proposed within four years, the approval of Joint Commissioner would be required and in other cases i.e. after four years, the approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall be required.

The amended provision reverts to the position prevailing prior to 1st April 1989 where the competent authority for according approval for reopening of assessment depended only on the number of years elapsed from the assessment year sought to be reopened. That position was altered by the Direct Tax Laws (Amendment) Bill, 1987 – [1987] 168 ITR (St.) 301, 330 – and is now proposed to be done away with.

The reason for this amendment as stated in the Memorandum is to bring simplicity in the provision – [2015] 371 ITR (St.) 292, 340. However, one effect of this amendment is that, now sanction would be required even if the assessment is proposed to be reopened within a period of four years even when no assessment under section 143(3) or under section 147 had been made earlier. This is a marked change from the existing provision wherein no prior sanction is required if the assessment is sought to be reopened within four years and no assessment either under section 143(3) or under section 147 had been made for that year.

This amendment is proposed to take effect from 1st June, 2015.

Thus, if the sanction under section 151 is obtained and notice under section 148 is issued before this date, the existing provisions would govern the case. Similarly, for sanction obtained and notice under section 148 issued on or after this date, the substituted provisions would govern the case.

However, a question may arise as to the position wherein the sanction is obtained before 1st June, 2015 and notice under section 148 issued after this date. Take for instance the case of ABC Limited where no assessment either under section 143(3) or under section 147 is earlier made for Assessment Year 2009-10 and the AO proposes to reopen the assessment on 29th May, 2015 (last working day of that month). As per the existing provisions of section 151(2), the AO (lets assume the Assistant Commissioner) is required to obtain sanction of the Joint Commissioner before issuance of notice under section 148. Therefore, if the notice is issued on 29th May, 2015 itself, the notice would be valid (subject to satisfaction of other conditions such as “reason to believe” etc.) as sanction is duly obtained from the appropriate authority as on the relevant date.

Now one needs to analyse as to whether the reopening would be valid if after recording his reasons on 29th May, 2015 and sending the same to the Joint Commissioner for approval on the same day, the sanction is obtained on 1st June, 2015 and the AO issues the notice thereafter. In such a case, at the time of recording reasons and at the time of sending the case of approval, the proper authority for obtaining sanction was the Joint Commissioner. However, at the time of issuance of notice, due to amended provisions, the appropriate authority for obtaining sanction is changed to Principal Chief Commissioner/ Chief Commissioner/ Principal Commissioner/ Commissioner. Whether in such a case, the impugned notice can be said to be invalid for want of sanction from appropriate authority?

In this regard, it is important to note the wording of the proposed amendment:

“151. (1) No notice shall be issued under section 148 by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer, that it is a fit case for the issue of such notice.”

Thus, with effect from 1st June, 2015, there is a provision in the statute which prohibits issuance of notice under section 148 without the sanction of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner after expiry of four years from the end of the relevant assessment year. The requirement of sanction is with respect of date of issuance of notice under section 148, and hence, in my view, the law as on such date should be considered for examining whether appropriate sanction has been obtained or not. Therefore, the impugned notice in the instant case should not be said to be valid.

Though this amendment is being brought in to bring in simplicity in matters of obtaining sanction for reopening cases and is for the benefit of the revenue, it also has the effect of protecting the assessee from needless harassment even in cases where detailed assessment has not been earlier made and reopening is proposed within four years by mandating the AO to obtain prior sanction even in such cases.

Rahul R. Sarda,
Advocate