National Tax Conference

Organised by

ALL INDIA FEDERATION OF TAX PRACTITIONERS (WESTERN ZONE) 
Jointly with 
GOODS AND SERVICES TAX PRACTITIONERS ASSOCIATION OF MAHARASHTRA
AURANGABAD BRANCH OF WIRC OF ICAI • TAX PRACTITIONER’S ASSOCIATION, AURANGABAD

on

Saturday, 16th February, 2019 and Sunday, 17th February, 2019
at
ICAI Bhavan, Gut No. 72, Beed Byepass Road, Near MIT College, Aurangabad – 431 005

The Western Zone of All India Federation of Tax Practitioners is pleased to announce the 2 day National Tax Conference at ICAI Bhavan, Gut No 72, Beed Byepass Road, Near MIT College, Aurangabad – 431 005 on Saturday, 16th February, 2019 and Sunday, 17th February, 2019.

The venue of “Aurangabad” was chosen after much thought and request from our members. Aurangabad is a city in Maharashtra State. The city is a tourism hub, surrounded by many historical monuments, including the Ajanta and Ellora Caves comprising ancient rock-cut Buddhist shrines which are UNESCO World Heritage Sites, as well as 17th-century marble Bibi ka Maqbara shrine, (replica of the Taj Mahal), Battlements surround the medieval Daulatabad Fort and Shivaji Maharaj Museum, dedicated to the Maratha King Shivaji, displays war weapons and a coin collection, Panchakki, Ghrishneshwar temple (Jyotirling) and many more… The current day Aurangabad offers a wonderful opportunity to step back to past history.

The NTC is packed with a lot of learning. To enrich the participants with the knowledge, papers covering recent developments in Direct & Indirect tax laws have been selected to be discussed at the Conference. The historical monuments will make learning a pleasure, and NTC will enable good networking and create long-term intangible assets of fond memories.

DETAILED PROGRAMME

Day 1

Time

Event

Coverage

Chairman

Speaker

9.00 a.m. to 9.55 a.m.

Registration & Breakfast

10.00 a.m. to 11.15 a.m.

Inaugural session

Chief Guest / 
Guest of Honour

Hon’ble Mr. Justice S. V. Gangapurwala, Judge, Bombay High Court

11.15 a.m. to 11.35 a.m.

Tea Break

11.35 a.m. to 01.05 p.m.

First Technical session:
Income Tax

Private Trust – Succession Planning, Wills and Taxation Aspects thereof

Shri N. M. Ranka, 
Sr. Advocate, Jaipur

CA. Anup Shah Mumbai

01.05 p.m. to 02.00 p.m.

Lunch Break

02.00 p.m. to 03.30 p.m.

Second Technical session: GST

Taxation of Intermediary Services in GST

Ms. Nikita Badheka 
Advocate, Mumbai

CA. Sagar Shah, Pune

03.30 p.m. to 03.50 p.m.

Tea Break

03.50 p.m. to 05.20 p.m.

Third Technical session:
Income Tax

Prosecution – Recent Developments, consequ-ences on Independent Directors / Legal Heirs

Ms. Premlata Bansal, 
Sr. Advocate, Delhi

Shri Rahul Hakani, Advocate, Mumbai

Day 2

09.00 a.m. to 09.50 a.m.

Breakfast

10.00 a.m. to 11.30 p.m.

Fourth Technical session:
GST

Recent Developments in ITC

Shri C. B. Thakar, Advocate, Mumbai

Shri Dinesh Tambde Advocate, Mumbai

11.30 a.m. to 11.45 a.m.

Tea Break

11.45 a.m. to 01.45 p.m.

Brains’ Trust Session

Direct Tax & Indirect Tax

For Indirect Tax:
CA. Umesh Sharma, Aurangabad & 
Mr. M. L. Patodi, Advocate, Kota

For Direct Tax:
CA Harish Motiwalla Mumbai, & CA M. R. Hundivala, Aurangabad

01.45 pm to 1.55 pm

Vote of Thanks

01.55 p.m. to 03.00 p.m.

Lunch Break

Fees for Members of above Associations/Non-Members

Super Early Bird Fees 
Registration on or before 15-1-2019

Early Bird Fees 
Registration between 16-1-2019 to 31-1-2019

Regular Fees 
Registration from 1-2-2019

Members

₹  4,200/- + 756 (18% GST) = ₹  4,956/-

₹  4,600/- + 828 (18% GST) = ₹  5,428/-

₹  5,000/- + 900 (18% GST) = ₹  5,900/-

Non-members

₹  5,000/- + 900 (18% GST) = ₹  5,900/-

₹  5,500/- + 990 (18% GST) = ₹  6,490/-

₹  6,000/- + 1,080 (18% GST) = ₹  7,080/-

Accompanying Spouse Fees – ₹  2,500/-+ ₹  450 (18% GST) = ₹  2,950/-

The fees include, course material, delegate kit, Meals : Breakfast / Lunch / High Tea & Dinner on 16-2-2019 & breakfast & lunch on 17-2-2019

Bank details for sending registration

NAME OF BANK ACCOUNT:

ALL INDIA FEDERATION OF TAX PRACTITIONERS (Western Zone)

CORPORATE ADDRESS:

215, Rewa Chambers, 31 New Marine Lines, Mumbai – 400 020

BANK NAME:

CANARA BANK

BANK ADDRESS:

New Marine Lines, Mumbai – 400 020

BANK BRANCH:

New Marine Lines

BANK A/C NO.

1389101053451

ACCOUNT TYPE:

Saving

NEFT / IFSC CODE.

CNRB0001389

NOTES : a) In case of online Payment, please intimate on email [email protected]

b) We have arranged the Tour to Ellora / Daulatabad Fort & Grishneshwar Temple for those interested (on advance intimation & payment before 15-1-2019)

Date : 15-2-2019 from 11 am to 6 pm – Cost per person : ₹  1,200./-

c) NEC Meeting will be held on 16-2-2019 from 5.45 pm at ICAI Bhavan

STAY : Suggested Hotels with whom rates have been negotiated are listed hereunder:

(Payment details of Hotels would be put up shortly on website. In the meantime members can e-mail the preferred Hotel)

Name of Hotel

Star Category

Location

Charges (Per Day per Room – Including Breakfast )

Distance from venue of Conf.

Welcomhotel Rama International

5

R-3 Chikalthana,Jalna Road, 
Town Center, MGM, Aurangabad,

Single : ₹  5000/- plus GST 18% Double : ₹  5750/- plus GST 18%

5 Km.

The One

3

F – 21, Town Centre, CIDCO, Jalna Road, Aurangabad, Maharashtra 431003

Single : ₹  3,000/- plus GST 18% 
Double : ₹  3,500/- plus GST 18%

4 Km.

Hotel VITS

4

Vedant Nagar, Railway Station Road
Aurangabad 431005

Single : ₹  2,800/- plus GST @ 18%
Double : ₹  3,200/- plus GST @ 18%

2.5 Km.

Amar Preet

4

Jalna Road, Amarpreet Chowk, Aurangabad, Maharashtra 431 001

Single : ₹  3,000/- plus GST 18%
Double : ₹  3,500/- plus GST 18%

3 Km.

Hotel Keys

3

Padampura Circle, Station Road, 
P.O. Krant Chowk, Aurangabad 431 005

Single : ₹  3000/- plus GST 18% 
Double : ₹  3,500/- plus GST

2.5 Km.

Hotel Manor

3

Kranti Chowk, Opp Rani Lakshmi Bai Park, Aurangabad, Maharashtra 431 001

Single : ₹  3,000/- plus GST 18% 
Double : ₹  3,500/- plus GST 18%

3 Km.

Connectivity

Aurangabad airport is directly air-linked to major cities like Mumbai, Delhi, Kolkata, Hyderabad, Chennai & Bengaluru. The airport is conveniently located at a distance of around 10 km. east of the town.

Two trains leave daily from Mumbai for Aurangabad. Tapovan Express departs Mumbai early morning and arrives Aurangabad by late afternoon, while the Devgiri Express is an overnight train. Several luxury and State buses too run between Mumbai and Aurangabad that extends up to Ajanta/Ellora Caves.

For any query or assistance relating to room booking please contact :
Mr. Deepak R. Shah, Conference Chairman, 9820148536

For any further enquiries relating to NTC, please contact

Dr. Ashok Saraf, National President, 9864020679

Smt. Nikita R. Badheka, Dy. President, 9821037885

Shri Bhaskar B. Patel, Vice President, 9979733033

Shri Anand Kumar Pasari, Secretary General, 9431125350

Shri Santosh Gupta, Hon. Jt. Secretary, 9890033480

Shri Chirag S. Parekh, Hon. Treasurer, 9821634128

Shri Kishor Vanjara, Member, NEC, 9820186480

Shri Deepak R. Shah, Chairman, AIFTP (WZ), 9820148536

Shri Pravin R. Shah, Vice Chairman, AIFTP (WZ), 9821476817

Shri Salil R. Lodha, Hon. Secretary, AIFTP (WZ). 9820149302

Shri Hemant Parab, Hon. Jt. Secretary, AIFTP (WZ), 9820310091

Dr. Shashank Dhond, Hon. Jt. Secretary, AIFTP (WZ), 9825006479

Shri Avinash Lalwani, Hon. Treasurer, AIFTP (WZ), 9821118801

Shri Pradip Kapadia, President, GSTPAM, 9821029082

Shri Sachin Lathi, Chairman, Aurangabad Branch of WIRC of ICAI – 9823330901

Shri Shankar Rao Ambilkar, Chairman, TPA – 9422203091

Shri Anand Partani, Co-ordinator, Aurangabad, (AIFTP (WZ), 9850503051

E-mail: [email protected]m

Employees’ Provident Fund Act / Scheme

1) Employees’ Provident Fund is set up under the Central Act viz., Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, in the year 1952.

2) It is applicable throughout the country (except Jammu & Kashmir).

3) It is applicable to almost all establishments falling under the industries / class of establishments, wherein 20 persons are employed.

4) In the case of cinema theatres workers it is applicable to such establishments wherein 5 persons are employed.

5) Benefits to an employee are provided through the schemes framed under the Act.

6) Provident Fund benefits are provided under the Employees’ Provident funds Scheme, 1952

7) Pensions benefits are provided under the Employees’ Pension funds scheme, 1952

8) Insurance benefits are provided under the Employees’ Deposit Linked Insurance Scheme, 1976 (Minimum Benefit ₹  2,50,000/- & maximum benefit up to to ₹  6,00,000/-)

9) A member of Employees’ Provident fund is automatically eligible for pension and Insurance benefits without paying any additional amount of contribution.

Applicability

i) Every establishment which is a factory engaged in any industry specified in Schedule 1 and in which 20 or more persons are employed and

ii) Any other establishment employing 20 or more persons which Central Government may by notification, specify in this behalf (Infancy period of 3 years has been withdrawn by ordinance, w.e.f. 22-9-1997)

iii) Any establishment employing even less than 20 persons can be covered voluntarily u/s. 1(4) of the Act.

iv) Any establishment registered under Co-operative Societies Act, 1912, or any State Act of Co-operative Societies, employing 50 or more employees and working without the aid of power.

v) The Employees’ Provident Fund act is applicable to the cinema theatre employing 5 or more workers.

A. If an establishment consists of different departments / branches, whether located in the same place or in different places, all such departments or branches are treated as part of the same establishment.

B. The Act continues to apply even if the number of employees fall below 20.

Eligibility

1. Any person who is employed for work of an establishment or employed through contractor in or in connection with the work of an establishment where salary is less than ₹  15,000/-p.m. and optionally covered where salary exceeds ₹  15,000/- p.m. (w.e.f. 1st Sept., 2014).

2. Any person who is classified as disabled employee under new para 82 of the Employees’ Provident Fund Scheme, 1952 and working in the private sector, with monthly wages up to ₹  25,000/- p.m. provided they are appointed on or after 1-4-2008.

3. Any person who is classified as International Worker under new para 83 of the Employees’ Provident Fund Scheme, 1952.

A contribution of P.F is to be deducted on

1. Basic Wages.

2. Dearness Allowances. (Special Allowance in Maharashtra).

To compute 20 or more employees following employees are counted

The permanent, temporary, full time, part time, casual, time – rated, piece – rated employees, contract employees, persons employed in various departments, head office, branches, sales offices, godowns or any other different places etc. and sales representatives are counted for computing the employment strength. Apprentices engaged under the Apprentices Act, 1961 are not counted for the purpose of applicability.

Contribution rates w.e.f 1st April 2017

Employee’s Contribution 12% and

Employer’s Contribution 12% plus 1.00% = 13.00%

From employers contribution out of 12% contribution 8.33% is deposited in the Employees’ pension Fund subject to a ceiling that the contribution payable by the employer be limited to the amount payable on his pay of ₹  15,000/- pm hence maximum contribution under Employee’s Pension Fund will be ₹  1,250/-. And balance 1.00% includes administrative charges and EDLI Contribution.

Provident Fund Challans consist following Accounts and Rate of Contribution w.e.f 1st June 2018

A/c. No.

Employer’s Contri-bution

Employee’s Contri-bution

Total 
Contri-bution

I

3.67%

12%

15.67%

II***

0.50%***

0.50% ***

X

8.33%

8.33%

XXI

0.50%

0.50%

Total Contribution

13.00%

12%

25.00%

Penal Provisions

Liable to be arrested without warrant being a cognisable offence

Defaults by employer in paying contributions or inspection/administration charges attract imprisonment up to 3 years and fines up to ₹  10,000/- (S.14).

For any retrospective application, all dues have to be paid by employer with damages up to 100% of arrears. Contribution payment liability upon the employer for both the shares payable, but for restrictive provisions contained in para.32 of the EPF scheme 1952, the employer is RESTRAINED from recovering “EMPLOYEE SHARE” of contribution for the past period.

Rules & Regulations for Loan, Advance & Withdrawal from Employees’ Provident Fund Scheme

Minimum Service Limit for EPF Loan

Did you find yourself eligible for partial withdrawal of EPF? Do you have one of the above reasons? Yes? Still, you may not get the PF money. There is minimum service condition for each cause.

No Minimum Service Limit

• Medical Treatment

• Calamity

• Pre retirement

Minimum 5 Years of Service

• Home or Plot Purchase

• Construction of House

• Alteration or Addition in Home

Minimum 7 Years of Service

• Marriage

• Education

Minimum 10 Years of Service

• Home Loan Repayment

• Home Repair

Rules of PF withdrawal before leaving the job

You can take the non-refundable loan from the EPF account. But it does not mean that you should prefer this option. Never try to touch the retirement fund.

You can withdraw the PF money if you leave the job and remain unemployed for 2 months. Even in some circumstances you can get PF money just after leaving the job. But to withdraw amount from EPF during the job, you have to fulfil many conditions.

1. You have to fulfil the minimum service need. The best part is the duration of the service is total. Duration of each job is added to this calculation, given you have transferred your PF account to the new job. Now you can transfer the PF amount easily with the introduction of UAN.

2. There is a limit on the amount you can withdraw. It can be up to 36 times of your wages (basic+DA). The maximum amount for withdrawal depends upon the reason of PF withdrawal.

3. You need to give proof of the reason you have mentioned.

Let us see the conditions of partial PF withdrawal for each purpose

PF withdrawal for marriage

• You can withdraw from the EPF account on the occasion of marriage. The marriage can be of yourself, sister, brother, son or daughter.

• The minimum service period for this advance is 7 years.

• You can withdraw up to 50% of the total employee contribution. You can use this reason 3 times in your life.

• Marriage invitation card along with the application should be submitted through the employer.

PF withdrawal for education

• You can withdraw fund for the education of self and children.

• You should have completed a total service of 7 years.

• You can get up to 50% of the employee contribution.

• This option can be used 3 times in a lifetime.

• You should attach bona fide certificate duly indicating the fees payable from the educational institution.

PF Advance for Medical Treatment

• You can take an advance from PF account for the treatment of self, spouse, children and parents.

• There should be hospitalisation for more than a month. If the claimant is an employee, he should have taken leave from the organization.

• You can avail advance in case of TB, leprosy, paralysis, cancer, mental derangement or heart ailment without the hospitalization.

• You have to give the certificate from the doctor stating the hospitalization need. In case of above mentioned disease you need to give the certificate from specialist doctor.

• You can take 6 times of wages (basic+DA) or total employee share, whichever is less.

• There is no limit on the frequency.

Purchase Home or Construction using PF Money

• Buying home or plot is one of the most important decisions of life. We invest most of our savings on this. But do you want to compromise with your retirement years. Think about this before applying for PF withdrawal.

• You can withdraw from PF for the purchase of a home or construction of the house only once.

• You must have completed 5 years in service.

• Property should be registered in the name of self or jointly with spouse.

• There should not be any joint owner of property other than the spouse.

• You can get 36 times of wage (basic+DA) for this purpose.

• You need to give a filled declaration form with the application.

EPF Loan for buying a Plot

• PF money can be also used for buying a plot.

• You can avail the withdrawal facility for purchase of plot only once.

• You must have completed 5 years in service.

• There should not be any co-owner of the property other than the spouse.

• You can get 24 times of wages (basic +DA).

• You need to give a copy of the purchase agreement.

• You should give a declaration with the application.

Alteration or addition in the House

• You must have completed 5 years in service.

• At least 5 years after the construction of house.

• You can get 12 times of wages.

• Property should be owned by you or jointly with the spouse. Only once in service.

• Alteration proof is required.

• Repair of House.

• All the conditions are similar to the alteration of house except you have to wait at least 10 years after the construction of house.

Lockout of the Company

• If you are not getting wage for last two months and your company is locked out or closed for at least 15 days, you can take a loan from EPF.

• You can get the amount equal to your unpaid wages.

• There must have a balance in employee contribution.

• You can check your PF balance through various methods.

• If closure has been for more than 6 months, you can also use the employer’s contribution. (Do you wait for such a long time)

Withdrawal Prior To Retirement

• You must have completed 57 years of age

• Retirement should be after one year.

• You can get up to 90% of the total provident fund balance.

• You need to give a certificate from the employer stating the date of retirement.

In case of Calamity

• There is no condition of minimum service.

• You have to give certificates of damage from competent authority. You can get up to 50% of the employee share.

• No other condition.

The Form and process of applying for PF Advance

To get the partial amount of EPF you have two ways to apply. The first way is the preferred one. In both the method you need to attach a declaration form with the application if you are taking advance for the following purposes.

• Flat or plot purchase

• House construction

• Alteration or addition

• Repair of the house

Option 1

Now, you have a very easy way to partially withdraw the EPF amount. The EPFO has come with a simple new EPF withdrawal Form 31 (new). This form requires very little information.

The best thing about this form is that it does not require the approval from the employer. Yes! You can directly submit this form to the regional PF office. But to use this easy 
facility, you need UAN activated and KYC done.

Option 2

If you can’t get advance through the first method, you can apply through the employer.

You should use form 31 for the advance through the employer. You can download this form from the EPFO website.

Time to get the PF Advance

The application submitted through the first method would take less time. You can expect money within a week. But the second method can take up to one month. It depends upon your employer’s promptness. Some regional PF offices take more time.

QUERY 1 : Redevelopment of Cooperative Housing Societies and implications

QUERIST: ABC Soc represented by CA Nikunj Parmar, Mumbai

QUERY

1. Querist is a co-operative society governed by the Maharashtra Co-operative Societies Act, 1960. Querist is going for redevelopment of its society.

2. No development agreement has been signed as of now. However, Querist wishes to get an opinion on the potential GST implications in the proposed redevelopment activity.

REPLY

Development rights given by Querist to the developer

3. There is currently a raging controversy as to whether “development rights” are even covered by the GST Act, being interest in land. The controversy revolves around whether Parliament and the State Legislatures have the legislative competence under Article 246A to levy tax on land or interest in land. Another aspect is whether the exclusion of “sale of land” from GST (per Schedule III of the Act) would include a transaction which is a barter and not a sale of interest in land.

4. We are of the view that no GST is payable on the grant of development rights by the Querist to the Developer even if one does not go into the above controversy. Section 7 of the GST Act reads:

7. Scope of supply

(1) For the purposes of this Act, the expression “supply” includes–

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”.

… [Emphasis supplied]

5. Thus, every supply is not subject to GST. It is only a supply which is “in the course or furtherance of business” which is made amenable to the tax.

6. Now it is our view that a co-operative housing society is not in the “business” of granting development rights. The term “business” is defined in Section 2(17) of the Act. Relevant clauses of the definition are set out herein-below:

“2(17). “business” includes–

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;”

7. Profit motive is an essential requirement of the definition of “business”. In State of Andhra Pradesh vs. H. Abdul Bakshi [(1964) 15 STC 644], the Supreme Court has held:

“The expression “business” though extensively used is a word of indefinite import, in taxing statutes it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure.”

8. Sub-clause (a) of Section 2(17) ends with the words “whether or not it is for a pecuniary benefit”. These words have been undoubtedly introduced to get over the observations in H. Abdul Bakshi (supra) relating to profit motive. However, for an activity to fall in sub-clause (a), an activity must be a “trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity”.

9. A co-operative housing society is formed by a group of persons with a view of domestic house-keeping of the units in which they reside. A residence is the most personal and cherished of all possessions of man. Due to shortage of land, the concept of co-operative housing was developed wherein a building is constructed by a group of persons and each is given a unit to reside in the said building. This group of persons pool their resources to manage the affairs of the building, like maintenance, repairs, cleaning etc. But these functions are ultimately domestic in nature. Any person who purchases a residence will have to carry out maintenance, repairs and cleaning of that residence. This does not mean that he is engaged in any “trade” or “commerce” as such. If this is true, the mere fact that instead of a single person constructing house for himself and maintaining it, a group of persons have come together and perform the same domestic house-keeping services between themselves will not bring the activity within the formulation of “business”.

10. The Bombay High Court has had the occasion of determining whether redevelopment of a society is a “business” of the society in Mohinder Kaur Kochar vs. Mayfair Housing (P) Ltd [(2013) 1 MahLJ 389. The question arose in context of the word “business” used in the Maharashtra Co-operative Societies Act, 1961, which is in fact left undefined in that Act. The Court said:

“It is thus clear that respondent No. 4, by the very nature of its object, had purchased land and got the flats constructed in accordance with the provisions of the Ownership Flats Act and the Rules made thereunder. The object of the society was not to engage in the business of real estate and demolition of buildings, as it was in Marconi’s case (supra). When the Society was formed in or about year 1965, it had purchased land and got the flats constructed and allotted the same to its members. After more than 40 years, when respondent No. 4-Society has undertaken the project of re-development of its property, it cannot be said that respondent No. 4-Society has engaged in the business of redevelopment, i.e., as has specifically been held by this Court in the decision dated 7 March, 2011 in Vardhaman Developers Limited vs. Thailambal Cooperative Housing Society Ltd., wherein the learned Single Judge observed as under:—

“Section 91 (of the Act) brings within its purview disputes touching inter alia the constitution, management or business of a society. Now in the present case, the process of redevelopment of the Society by the Developer does not constitute the business of the society within the meaning of section 91. The demolition of the existing building and the reconstruction of the building of the society is not the business of the society. Section 91 is therefore not attracted.” “

11. In State of Punjab vs. Guno Majra Coop. Agriculture Service Society [(2000) 9 SCC 210], it was held:

“It is not disputed that the respondent Society is the Agriculture Service Society and it has got its own bye-laws. The members of the Society are agriculturists, who require manure, fertilisers and implements for cultivation. The object for which the respondent Society was formed is to render service to its members for carrying out agricultural activities. One of the objects of the Society, as indicated in the bye-law, is to make arrangement for supply of agricultural requirements for its members as well as to supply manure, fertilisers, improved seeds, insecticides and other production requisites with a view to promote increased agricultural production. Another object of the Society is to give loans and also to give manure, fertilisers and improved seeds to its members on credit on “no-profit-no-loss” basis. Under the bye-laws, it is not permissible for the respondent Society to sell fertilisers in open market or to anybody else other than its members. From the aforesaid functions of the Society it is apparent that there is no commercial or business activity involved when the Society distributes and supplies fertilisers to its members. The purpose for which the Society has been formed is to help its members in the matter of cultivation. In fact, fertilisers purchased by the Society are for supply and distribution to its members and not for any commercial or business activity. In the absence of any business activity, the respondent Society could not be said to be a “dealer” within the meaning of clause 2(f) of the Order and, therefore, they were not required to take licence under clause 7 of the Order. We are in agreement with the views taken by the High Court.”

… [Emphasis supplied]

12. Though the Court has made observation about profit motive, the other factors which have been taken into consideration are the object of the society to serve the members and that this is not a commercial or business activity. The fact that sub-clause (a) of definition of “business” has made profit motive irrelevant does not matter. Commercial nature is still required. Where the assessee was formed with a view of spreading the message of Shirdi Sai Baba, the activity of sale of books carried out by the assessee was held not be a “business”. It is pertinent to note that the sales tax statute considered by the Supreme Court in that case specifically made profit motive irrelevant. However, the Supreme Court held that commercial nature is still required for an activity to be called “trade” or “business” even if profit motive is irrelevant [CST vs. Sai Publication Fund (2002) 4 SCC 57]. Therefore, sub-clause (a) is not applicable to Querist because of lack of commercial nature in Querist’s objects and activities.

13. There is one more reason why sub-clause (a) is not applicable. If one observes carefully, a separate clause has been specifically enacted for clubs, associations and societies. This is sub-clause (e). A provision of goods and services by a society to its members for consideration is treated as a “business”. Since sub-clause (e) specifically deals with societies and associations, the specific clause will apply and not a general clause like sub-clause (a). Thus, co-operative societies, if at all covered by the definition of “business”, can only fall within sub-clause (e) and not in any other sub-clause.

14. In our considered opinion, even though sub-clause (e) was brought to cover societies, the transfer of development rights by Querist to the Developer will still not be caught within sub-clause (e). Firstly, sub-clause (e) only declares the provision of goods and services to members as a “business”. There is no reference to third persons. In this case the transfer of development rights is to a third party, who is the Developer, who is not a member of the society. As such, the transfer of development rights to a third person is not a “business” of society even under sub-clause (e).

15. Secondly, profit motive has not been made irrelevant in sub-clause (e). The definition very specifically restricts the irrelevance of profit motive only to sub-clause (a) and does not mention anything about profit motive in sub-clause (e). Thus, the intention of the Legislature is very clear: the judgment of H. Abdul Bakshi (supra) requiring profit motive continues to be applicable to cases covered by sub-clause (e) though they may not be relevant for cases covered under sub-clause (a).

16. Thirdly, the judgment of the Supreme Court in Sai Publication Fund (supra) applies as much to sub-clause (e) as it applies to sub-clause (a). Unless there is commercial nature in the activity carried out by the society, there is no question of it being said to be in “business”. Pure domestic housekeeping not being a commercial activity, the Querist is not engaged in any “business”.

17. The UK High Court has also taken a similar view in Yarburgh’s Children’s Trust vs. CCE [(2002) STC 207]. In that case, a playgroup was formed for young children of working women, including from disadvantaged backgrounds, with a non-profit making object, run as a co-operative venture between trained staff and parents and supervised by a committee in which parents pre-dominate. It was held to be lacking the commercial nature which is implicit in the definition of “business”. It is pertinent to note that the UK VAT Act definition of business also contains a clause which is almost identical to sub-clause (e). It was held that since the word “business” indicates some underlying commercial nature, a “provision by a club, association or organisation (for a subscription or other consideration) of the facilities or advantages to its members” must also be on commercial basis before it can be said to be a “business”. Where the activities of an association, even in its dealings with members, are not inherently commercial in nature, there can be no “business” notwithstanding the deeming provisions in the definition of “business” in the UK VAT Act. The UK High Court did make a distinction between profit-motive and commercial nature and held that even if profit-motive is considered irrelevant, the activities of the playgroup are simply not commercial in nature.

18. Fourthly, the ordinary meaning of “business” requires a systematic and organised activity. A one-off isolated transaction is not considered to be a “business” [State of Gujarat vs. Raipur Manufacturing Co. Ltd. (AIR 1967 SC 1066)]. To overcome the said decision, the Legislature has inserted sub-clause (c) which makes volume, frequency, continuity or regularity irrelevant. However, it is pertinent to note that sub-clause (c) is linked only to sub-clause (a) and applies only to cases which would have otherwise have fallen in sub-clause (a) if there was presence of volume, frequency, continuity or regularity in that activity. That is why sub-clause (c) specifically talks about “activity or transaction in nature of sub-clause (a)”. As discussed above, the activities of a co-operative housing society are not in the nature of those described in sub-clause (a) and hence sub-clause (c) does not apply.

19. When we come to sub-clause (e), one must note that the Legislature has not made volume, continuity, frequency and regularity irrelevant. Thus, the law declared by the Supreme Court in the case of Raipur Manufacturing (supra) continues to be applicable to cases which fall within sub-clause (e). The transfer of development rights in this case is a one-off event. It cannot be said to be “business” of the Querist.

20. The transfer of development rights thus cannot be said to be in “course” or “furtherance” of “business” of Querist, there being no “business” to start with. Therefore, no tax is payable by the Querist on any transfer of development rights. There is no liability on the Developer also to pay any tax on development rights, since there is no reverse charge liability.

Flats constructed by the Developer for society members

21. The construction service provided by the Developer for members is taxable since the Developer is in “business” of construction and he is providing services to society members. The valuation of this service will be done under Rule 27 of the CGST Rules because the Querist is not giving any consideration to the Developer for the construction services in money. The consideration is in form of development rights which is non-monetary consideration.

22. Rule 27 of the CGST Rules reads:

27. Value of supply of goods or services where the consideration is not wholly in money.-

Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,-

(a) be the open market value of such supply;

(b) if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply;

(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;

(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order.”

23. Valuation exercise under Rule 27 starts with the determination of the “open market value” of the supply. The term “open market value” is defined in the Explanation appended to Chapter IV of the CGST Rules:

“open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.

24. It is apparent from this definition of “open market value” that it cannot be applied to construction services. Every construction contract is peculiar and the valuation of one contract cannot be adopted for the valuation for some other contract.

25. At this stage, one must note that the agreement value of the construction contracts entered into with outside purchasers who will be giving full money consideration, cannot be used as open market value for the construction services provided to society members. The definition of “open market value” uses the words “such supply at the same time as the supply being valued is made”. “Such supply” means that the supply which is being valued and the supply which is contemporaneous and whose value is sought to be adopted as open market value must be identical. The supply which is made to the society members is not identical to the supply being made to outside purchasers. The supply which is made to society members is a supply of goods and labour which is used in the construction. However, the supply which is made to outside purchasers is a supply of goods, labour as well as interest in land. No interest in land is involved in the construction services provided to society members, since the society members are themselves owners of the land. In other words, the Developer is a developer for outside purchasers, but he is only a contractor qua the society members.

26. If “open market value” is not available, Rule 27(b) directs us to see if the money equivalent of the consideration is available and adopt it as value of supply if it is available. Now the consideration for construction services provided to Querist is the “permission” given by the Querist to the Developer to enter its land without being prosecuted for trespass, permission to build flats, permission to sell these to its own customers, ending with the covenant to transfer interest in land to the ultimate purchaser. This complex bundle of licences and rights is known by the simplistic term “development rights”. There is no mechanism to value this complex bundle. Since, these development rights cannot be monetarily valued, no monetary equivalent as contemplated by Rule 27(b) is available.

27. When Rules 27(a) and (b) are not applicable, we have to go to Rule 27(c). Accordingly, we must determine whether “value of supply of goods or services of like kind and quality” is available. The term “supply of goods or services of like kind and quality” is defined in the Explanation to Chapter IV:

“ “supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.”

28. In our considered view, Rule 27(c) cannot also be applied to construction services. The pricing of the construction services provided by each builder or developer contains various variables like location, demand, quality of construction, distance from schools etc. It is impossible to apply this “supply of goods or services of like kind or quality” formula to construction services generally. Two complexes built side-by-side will have significant pricing and quality differences.

29. Therefore, Rules 27(a), (b) as well as (c) are inappropriate for valuation of services provided by the Developer to Querist. We have to then go to Rule 27(d) which directs us to apply the valuation principles contained in Rule 30. Rule 30 of the CGST Rules reads as under:

30. Value of supply of goods or services or both based on cost.-

Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.”

30. It is our firm view that Rule 30 is most appropriate and convenient for valuation of services provided by the Developer to Querist. According to this rule, valuation is to be carried out by taking the cost of provision of services and adding 10% markup. Thus, value of supply is cost-plus-10% or 110% of the total cost of provision of the supply.

31. The Developer should therefore calculate total cost for provision of construction services, including the material which goes into the provision of services and then add 10% of this cost to arrive at the value of supply. GST should be paid on the value of supply at 18% (that is, 9% Central Goods and Services Tax and 9% Maharashtra Goods and Services Tax) on such value.

32. The Developer should not take any land deduction with respect to construction services provided to Querist. Land deduction of 1/3rd of agreement value as per the Tariff Notification No. 11/2017-Central Tax (Rate) dated 28-6-2017 is available only if transfer of property in land or undivided share in land takes place while providing construction services. Since Querist itself owns the land, there is no question of any transfer of property in land or undivided 
interest in land from Developer to the Querist.

Flats constructed for outside purchasers

33. With respect to flats which are purchased for outside purchasers, GST is payable on the agreement value. However, land deduction of 1/3rd of the agreement value is available under Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017.

Input tax credit to Developer

34. Schedule II Para 5(b) of the GST Act states that the following will be treated as a supply of services:

“construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier”.

35. The usage of the words “entire consideration” in para 5(b) makes it amply clear that where even part of the consideration is not received before the completion certificate or the first occupation, whichever is earlier, no GST can be levied.

36. However, Para 5(b) Schedule II does not require a Flat Purchase Agreement to be made before the completion certificate or first occupation, whichever is earlier. Where a flat is sold to an investor on the basis of an allotment letter and some consideration is received before the completion certificate or first occupation, whichever is earlier, then GST will still be applicable even if the flat purchase agreement is not entered into till after the completion certificate or first occupation, whichever is earlier.

37. As aforesaid, if no consideration is taken before first occupation or completion certificate (whichever is earlier), then no GST will be leviable. However, the flip side of this position is that the Developer will not be entitled to any input tax credit under Section 17(2) read with Section 17(3) in respect of those flats on which no GST has been paid. This credit disqualification will have to be computed proportionately.

38. We must clarify here that with respect to flats which are constructed for society members, the taxable event will arise as soon as the agreement is entered into. As discussed earlier, the consideration for construction services is the grant of development rights by the Querist to the Developer. This grant is effected by contract. Since development rights are in the nature of immovable property, the transfer will be effected as soon as the Development Agreement is entered into. The consideration in form of development rights having been received before first occupation or completion certificate, the construction services provided to the society members will be taxable in hands of the Developer. This also means that credit will be available with respect to the goods and services which go into the construction of the flats for society members as well as proportionate common area and facilities.

Hardship allowance, Alternate accommodation allowance, Transport allowance

39. These allowances are in nature of supply of money which is considered to be neither goods nor services under the GST Act [See Sections 2(52) and 2(102) of the GST Act]. These allowances are consideration ultimately for the grant of development rights, but the consideration flows from the Developer to the Querist in the form of supply of money. No tax is leviable in the hands of the Developer or the Querist with respect to such allowances.

QUERY 2 : Classification of quilts and validity of circulars on classification

QUERIST: XYZ represented by Adv. Saurav Singh, Mumbai

QUERY

FACTS

1. Querist is engaged in the manufacturing as well as trading of various textile products. The product in issue in this opinion is the “polyester quilt”.

2. The Polyester quilt is a quilt made up of polyester yarn filling. The quilting process is done by needling the quilt in specific patterns to keep the filling in place.

3. Quilts are used as a type of thick blanket to protect from lower temperatures in the nights of winter as well as where the room temperatures may drop during the night due to air-conditioning.

4. Querist is classifying these products under Entry 224 of Schedule II of the GST Tariff and paying 12% rate of tax currently.

5. Acting on certain inputs, the Chief Commissioner, Haryana had conducted investigations at the premises of one Oyester Knit Pvt. Ltd. (“Oyester”). An order has been passed against the said Oyester demanding 28% rate of tax under Entry 213 of Schedule III of the GST Tariff from 1-7-2017 to 13-11-2017 and 18% rate of tax under Entry 438 of Schedule III for the period thereafter. This order has been published into a “Modus Operandi Circular No. 3/2018-19” with directions to all officers within the jurisdiction of the Haryana Commissionerate to retrieve data of all sales involving polyester/synthetic quilts and “take action” against dealers charging lesser amount of tax.

QUERY

6. Querist seeks our opinion on whether the Circular has classified the goods correctly and the legal options for contesting the Circular as such.

REPLY

7. Quilts are dealt with by the following entries in the GST Tariff:

Entry No. and Schedule

Customs Tariff Heading (“CTH”) and Tariff description

Rate of tax

1-7-2017 to 21-9-2017

224

Schedule II1

9404

Products wholly made of quilted textile materials.

12%

438

Schedule III2

9404

Coir mattresses, cotton pillows, mattress and quilts.

18%

213

Schedule IV3

9404

Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered.

28%

22-9-2017 to 13-11-2017

257A

Schedule I4

9404

Cotton quilts of sale value not exceeding ₹  1000 per piece.

5%

224A

Schedule II5

9404

Cotton quilts of sale value exceeding ₹  1000 per piece.

12%

224

Schedule II6

9404

Products wholly made of quilted textile materials.

12%

438

Schedule III7

9404

Coir mattresses, cotton pillows, mattress and quilts.

18%

213

Schedule IV8

9404

Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered.

28%

14-11-2017 till date

213

Schedule IV

[Omitted vide Notification No. 41/2017 – CT(R) dated 14-11-2017]

9404

Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered.

28%

438

Schedule III

[Substituted vide Notification No. 41/2017 – CT(R) dated
14-11-2017]

9404

Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered [other than coir products (except coir mattresses), products wholly made of quilted textile materials and cotton quilts].

18%

8. We are of the view the product in issue will be covered by Entry No. 224 of Schedule II (“Products wholly made of quilted textile materials”) which falls in CTH 9404. Technical literature on the subject clarifies that “quilted textile material” means any textile material which undergo the process of quilting. As to difference between “quilted textile materials” and “quilts”, it seems that a quilted textile material is a sub-category of quilts. “Quilts” is a genus of which “quilted textile material” is a species. Quilts which undergo the further and special process of quilting (i.e., needling of the quilt at specific intervals in a pattern to hold together the cover and the filling) are known as “quilted textile material”. Not every quilt is in fact quilted. In other words, not every quilt undergoes this particular process of quilting and there are many quilts available in market which are simply needled at the borders and not quilted in the manner indicated above. Polyester being a textile material and the product in question being wholly composed of quilted textile materials, the product exactly fits into this entry.

9. It is well settled that taxing entries are to be understood as contemplated by the trade. This product will therefore be classified under Entry No. 224 of schedule II and will attract 12% from 1-7-2017 to date.

10. The entry relating to cotton quilts cannot apply to this product since there is no cotton involved. That leaves us with Entry No. 213 of Schedule IV which was omitted on 14.11.2017 and Entry No. 438 of Schedule III which was substituted with effect from 14-11-2017. The Entry No. 213 of Schedule IV reads as follows:

“Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered.”

Entry No. 438 of Schedule III which was substituted from 14-11-2017 reads as:

“Mattress supports; articles of bedding and similar furnishing (for example, mattresses, quilts, eiderdowns, cushions, pouffes and pillows) fitted with springs or stuffed or internally fitted with any material or of cellular rubber or plastics, whether or not covered [other than coir products (except coir mattresses), products wholly made of quilted textile materials and cotton quilts].”

11. Entry No. 213 of Schedule IV and Entry No. 438 of Schedule III, extracted above, are almost similar expect for the exclusion of “products wholly made of quilted textile materials” in the latter entry. These words were not present in the Entry No. 213 of Schedule IV before the omission of that entry with effect from 14-11-2017. Before 14-11-2017, there was some ambiguity as to whether a polyester filled quilt will be classified as a “product made of quilted textile material” classifiable under Entry 224 of Schedule II or as a “articles of bedding and similar furnishing (for example,….. quilts,…) …..stuffed or internally fitted with any material” in Entry No. 213 of Schedule IV. This ambiguity has been taken away after 14-11-2017 by specifically excluding products wholly made of quilted textile material from Entry 438 of Schedule III. However, this change is merely clarificatory in nature. Even before 14-11-2017, the product in issue will be classified as a product wholly made up of “quilted textile material” in Entry No. 224 of Schedule II being specific description as against Entry No. 213 of Schedule IV which is only a general description.

12. In the view that we have taken, Entry No. 213 of Schedule IV (before omission on 14-11-2017) or Entry No. 438 of Schedule III will not become redundant. There are certain types of quilts which cannot come in any other entry. For example, the quilts covered by CTH 9404 90 11 are quilts which are filled with feathers. Such quilts cannot come in entries relating to cotton quilts. They are also not covered by the entry relating to “quilted textile material”, feather not being a textile material, but an animal/bird product.

13. As far as the circular is concerned, we find that there is no discussion at all on Entry No. 224 of Schedule II “products made wholly of quilted textile material”. Furthermore, though the Chief Commissioner, Haryana has noticed that the “products made wholly of quilted textile material” have been excluded from Entry No. 438 of Schedule III, after 14-11-2017, but the main body of the circular only discusses the Entry No. 213 of Schedule IV which was in effect before 14-11-2017. As we have already stated, the Entry No. 213 of Schedule IV also does not cover this before 14-11-2017. However, the Chief Commissioner, has not paid any attention to the meaning of “products made wholly of quilted textile materials” and has not applied his mind to the issue of specific entry versus general entry issue.

14. Furthermore, the circular itself is a species not known to law. The circular reveals that certain investigations were conducted at the premises of Oyester and the Chief Commissioner, Haryana has gratuitously volunteered his views on the classification on the basis of the information received during that investigation. A bare reading of the circular shows that the circular is in fact an order which has been issued in the specific case of Oyester and the Chief Commissioner, Haryana for reasons unprecedented and best known to himself has chosen to publish an order passed against a single entity as a circular. This conduct is completely unlawful and amounts to a gross abuse of power.

15. From the circular it is not clear as to whether any notice was issued to Oyester calling upon Oyester to explain the issue of classification involved in the circular. There is no recording in the circular as to whether Oyester has put forth any factual and legal arguments relating to the issue. It is merely the Chief Commissioner’s own views which is recorded in extenso without any reference to any evidence which may have been led by Oyester itself on the issue of classification. We must point out that a taxpayer has much higher rights in law than what the Chief Commissioner, Haryana has sought to accord to Oyester in this case. In a classification dispute, it is the burden of Revenue to prove that the classification adopted by the taxpayer is wrong. It is also settled law that as long as the classification adopted by the taxpayer is reasonable, that classification is not to be disturbed by Revenue. Furthermore, liberal interpretation must be given to taxing entries if specific entry with a lower rate of tax is in conflict with a general entry with a higher rate of tax. Evidence in the form of certificates from experts and trade parlance must be adduced in a classification dispute. It is ultimately the trade understanding of the product which is adopted as a legal understanding.

16. In this case, the Chief Commissioner, Haryana has not taken any evidence from experts and has not gone into the trade parlance at all. Indeed, such evidence cannot be led and considered in administrative functions like issuance of circulars. Classification is a quasi-judicial dispute, which must take place in a quasi-judicial forum. Such quasi-judicial dispute cannot be adjudicated upon through circulars, since there is no provision nor occasion to consider expert evidence relating to trade understanding etc.

17. It is also well-settled that circulars are binding upon Assessing Officers. Therefore, when such circulars are issued, the Assessing Officer has no option but to follow it. Thus, taxpayers, including the Querist, will not get any opportunity of leading evidence and proving trade understanding of the product even at the assessment stage because the issue has been foreclosed by the Chief Commissioner, Haryana through this circular.

18. It is true that an appeal may be preferred against the assessment orders; however, the burden of proof will be reversed in appeal and pre-deposit requirement will be imposed for entertaining the appeal. In such a case, it is only under the writ jurisdiction of the High Court that such circulars can be challenged.

19. We are also of the view that the Chief Commissioner, Haryana had no authority at all to issue such circular. Section 168 allows only the Central Board of Indirect Taxes and Customs to issue orders, instructions and directions which are considered binding under the Act. There are no powers vested in any Chief Commissioner to issue any circular.

20. Furthermore, unlike Section 37B of the Central Excise Act, even the Board does not have power to issue instructions on classification of goods and services under the GST Act. The power to issue instructions under Section 168 is restricted to “implementing the Act”. It is well settled that these words only give power to regulate procedural and administrative details of implementation. Section 37B of the Central Excise Act specifically granted the power to issue circulars with respect to classification, but that power has been consciously omitted by the Legislature in the GST Act. It cannot be said that the Chief Commissioner, Haryana has any better power than the Board itself.

21. We are therefore of the view that the product in question is liable to be taxed under Entry 224 of Schedule II and will attract tax at 12%. The only option before Querist and other traders dealing with this product is to challenge this circular under Article 226 before the Punjab and Haryana High Court. An appeal against any assessment order following this circular will not be an adequate alternate remedy.

Transitional credit to builders under GST Act

Query

The builders carrying on construction on their own for selling of premises are considered as contractors. Under earlier VAT regime they were liable to pay tax under VAT and service tax separately. Under VAT there were different methods available for discharge of liability. When GST came into operation from 1-7-2017, there are transitional provisions for taking credit of ITC involved in stock as on 30th June, 2017. The builders have claimed set off in relation to existing stock of raw materials like cement etc. as well as on the materials used in construction and constructed portion is lying as stock without sale. Now the authorities are raising issue that the constructed portion is in a nature of immovable property and not goods and hence transitional ITC is not eligible and asking for reversal of the same. Kindly explain whether above view is correct and what is the correct position?

Reply

It is true that to avoid double burden the GST Act has provided for carry forward of ITC lying in closing stock as on 30th June, 2017. The relevant provisions are referred to as transitional provisions. The said provisions are contained in chapter XX of GCST Act. There are different categories for claiming ITC. If any excess ITC or refund was as per any return as on 30th June, 2017, then it was to be carried forward without much difficulty. However under VAT era there were composition schemes for builders and generally such schemes were with the condition that the builders will not claim set off on the purchases. Therefore, in such cases, there were no occasions that the builders have claimed set off. Reference can be made to the typical 1% composition scheme available to builders under MVAT Act in Maharashtra. The builders were liable to pay tax at 1% on the agreement value or stamp duty value and the builders were not eligible for ITC. Such builders had stock as on 30-6-2017. It is also fact that under GST to the extent of work done in GST period, the taxable person has to pay the tax irrespective of the fact whether on the stock or purchases ITC is availed or not.

Under Transitional provisions, a scheme is made to allow ITC to the persons who were earlier paying tax at a fixed rate or at fixed amount. The builders, who were paying tax under composition, will fall under this category as they pay the tax at fixed rate. Section 140(6) is relevant for the said purpose. The said section is reproduced below for ready reference.

“(6) A registered person, who was either paying tax at a fixed rate or paying a fixed amount in lieu of the tax payable under the existing law shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely: (i) such inputs or goods are used or intended to be used for making taxable supplies under this Act; (ii) the said registered person is not paying tax under section 10; (iii) the said registered person is eligible for input tax credit on such inputs under this Act; (iv) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of inputs; and (v) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.”

Thus, the builders falling under above category are entitled to take ITC in respect of inputs. The term ‘Input’ is defined in section 2(59) of CGST Act as under:

“(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.”

‘Goods’ is defined in section 2(52) of CGST Act as under:

“(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;”

The objection appears to be based on above definitions. In respect of constructed portion in stock the authorities are interpreting that such stock is not in form of goods but immovable property and therefore not eligible for ITC under Section 140(6).

However the above view cannot be said to be justified. Any definition in taxing statute is subject to context.

For example, section 2 of the CGST Act, defining above terms, reads as under:

“2. In this Act, unless the context otherwise requires,––“

Thus, even under CGST Act, the definitions are subject to context. Reference can be made to the judgment of Hon. Supreme Court in case of Printers Mysore Ltd. (93 STC 95)(SC). In this case the issue was that the assessee wanted to purchase newsprint for printing and publishing newspaper against C form. The said claim was disallowed on the ground that newspaper is specifically excluded from the definition of ‘goods’ in CST Act. Since goods purchased against C form are required to be used in manufacture of goods for sale and since newspaper is not goods, the benefit of C form was denied. However Hon. Supreme Court upheld the claim of the assessee observing that the definition is to be read subject to context and the purpose of the Act. Similar position should apply in relation to interpretation of section 140(6).

Therefore, while applying interpretation to section 140(6), context is required to be seen. It is fact that the builders are liable under GST also. As per general understanding, if the constructed portion in stock is sold after 1-7-2017 before Occupation Certificate or first occupation, then such sale is liable to levy of GST in the category of ‘Service’. Thus, the constructed portion can be said to be floating stock so far as GST Act is concerned. Had it been categorised as immovable property then as a building, it would not have been covered under GST Act by virtue of entry 5 in Schedule III. Thus, even if in normal interpretation such constructed portion is considered to be immovable property, for the purpose of GST Act, it is goods and should remain eligible for ITC.

Further the transactions of the builders are in the category of ‘works contract’ and further specified as service under entry 5(b) of Schedule II to CGST Act. The definition of ‘works contract’ in section 2(119) of CGST Act is as under:

“(119) Works contract means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.”

The definition provides that transfer of property can be as goods or in some other form. Thus, the nature of transfer of property in construction is as goods or in some other form amounting to goods. Therefore, considering the context and purpose, the constructed portion in stock can be considered as goods and not immovable property.

It is also settled principle of law that the provisions should be interpreted keeping in mind the purpose of the Act. The GST is based on principle of tax on value addition. There is no intention to levy double tax. The transitional provisions are meant to avoid double taxation and that is why the ITC is allowed on stock on which tax will be paid in the GST period. If such ITC is not allowed, there will be heavy unexpected burden on the builders. Therefore, there cannot be said to be intention to disallow ITC on the stock which is going to be sold under GST period.

Looking from all above angles it is fair and justifiable for the authorities to allow the ITC. Also legally the ITC is eligible as the provisions are to be read in the context and purpose of the Act.

Are Provisions of section 50CA and section 56(2)(x) applicable to buyback of shares? i.e., is it possible to buy back the equity shares, at a price which is lower than the fair market value, without any incidence of tax?

Answer

No. For Buy back of shares section 115QA of the Income tax Act, 1961 is applicable. Section 115QA(1) reads as under:

Notwithstanding anything contained in any other provision of this Act, in addition to the Income tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy back of shares (not being shares listed on a recognized stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income tax at the rate of twenty per cent on the distributed income

Explanation – For the purpose of this section –

(i) “Buy back” means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies;

(ii) “Distributed income” means the consideration paid by the company on buyback of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed —————–“.

Thus, this section starts with non-obstante clause. Therefore for buyback of shares, section 50CA or section 56(2)(x) will not apply. Section 115QA provides for levy of tax @ 20% on the difference between amount paid by the company for purchase of shares from its shareholders and the amount paid for subscription of the shares. The tax would be payable by the company on the distributed income. In the hands of shareholders the same shall be exempt under section 10(34A) of the Act,

Rule 40BB of the Income tax Rules, 1962 provide for determination of fair market value of the shares of unlised company. So, the company will have to pay tax on the fair market value of shares as determined under the said rule.

Query No. 2 : [Property sold by HUF but purchased in the name of co-parcener – No benefit u/s. 54F]

A property owned by the HUF was sold for ₹  80,00,000/-. The new house property was purchased in the name of co-parcener (daughter). Whether HUF is entitled to get benefit under section 54F of the Income-tax Act, 1961 as co-parcener is a part of the HUF?

Answer

No. In Vipin Malik (HUF) v. CIT [330 ITR 309] the Delhi High Court held that the agricultural land which was sold of by the assessee – HUF and the flat purchased in the co-operative society was not in the name of the HUF. The flat was in the individual name of V along with his mother. To claim the benefit of section 54F, the residential house which was purchased or constructed had to be of the same assessee whose agricultural land was sold. Therefore, there was no question of section 54F of the Act.

Thus, it is clear that under the Income-tax Act HUF is a separate entity than the Co-parcener (individual). Therefore no benefit would be available, if HUF invests in the name of co-parcener.

Query No. 3 : [Penalty u/s. 271AAC]

As per section 270A in the case of misreporting of income the penalty leviable is 200% of the amount of tax payable. In case the income is assessed u/s. 68 to 69D, the tax payable is 60% of income. So now in this case what will be levy of penalty?

Answer

Section 115BBE provides for taxing income under sections 68 to 69D. The section prescribes a flat rate of 60% for all income brought to tax for lack of proof as to the source under sections 68 to 69D, plus surcharge @ 25% of the tax. This would mean that such income would be taxed on standalone basis, whose aggregate income including such income falling under the provisions falls below taxable limit.

Section 115 BBE(2) provides that no deduction would be allowed for any expenditure or allowance or set off of any loss against receipt of gross amount.

Section 270A would not be applicable for such incomes. But section 271AAC would be applicable for such incomes, which provides for penalty @ 10% of the tax payable on such incomes. The proviso to the said section provides that no penalty shall be levied in respect of such incomes, if the assessee has included in his return of income furnished under section 139 and tax is paid under section 115BBE on or before the end of the relevant previous year.

Query No.4 : [Receipt of Share Application Money]

Assessee-company had received share application money from various companies by cheque. AO recorded statement of directors of such companies which had applied for shares of the assessee company. Such statements were recorded behind the back of the assessee and in spite of categorical request for cross examination of such directors; no such cross examination was granted. Finally, such statements were used against the assessee and addition was made u/s. 68 in respect of such share application. Whether statements of directors of concerned companies recorded behind the back of the assessee can be taken as evidence against the assessee without allowing the sufficient opportunity of cross-examination to the assessee? What are the consequences of breach of principles of natural justice? Whether self-serving statements of such directors obviate documentary evidence available on record.

Answer

No. The Supreme Court in Lovely Exports Ltd. [216 CTR 195] held that when share application money received from the shareholders whose name and PA Nos. are on record then the Assessing Officer is free to proceed to reopen the assessment of the shareholders and no addition should be made in the hands of the company. Similar observation you would find in CIT v. Steller Investment Ltd. [251 ITR 263 (SC)].

So, on the basis of above Supreme Court Judgments and without supplying the statements of directors who have subscribed the shares of the assessee company, no addition could be made in the hands of the company, who has received application money.

Query No. 5 : [Penalty u/s. 271AAB(1A)]

During the course of search income declared pertaining to the previous year for which the return was not filed and was not due or that pertains to the broken period in the year in which the search took place. The ROI was filed post search disclosing the undisclosed income and taxes and interest due have been paid on or before filing the ROI. In view of this whether penalty u/s. 271AAB(1A) is mandatory?

Answer

No. It is optional. Section 271AAB(1A) provides that notwithstanding contained in any other provisions of this Act, the Assessing Officer may direct, that in case where search has been initiated under sections 132 on or after the date on which the Taxation Laws (Second Amendment) Bill, 2016 receive the assent of the President, the assessee shal pay by way of penalty, in addition to tax, if any payable by him:

a) A sum computed @ 30% of the undisclosed income of the specified previous year, if the assessee –

i) In the course of search, in a statement u/s. 132(4) admits the undisclosed income and specifies the manner in which such income has been derived.

ii) Substantiates the manner in which the undisclosed income was derived and

iii) On or before due date of furnishing return of income or the date on which the period specified in the notice issued u/s. 153A for furnishing return,.

A) Pays the tax, together with interest, if any, in respect of the undisclosed income and

B) Furnishes the return of income for specified previous year declaring such undisclosed income thereon:

b) If it is not covered above, a penalty @ 60% of undisclosed income..

As per section 271AAB(3), the provisions of sections 274 and 275 shall apply in relation to the penalty referred to in this section.

As life on a planet is supposed to evolve gradually as per theory of evolution by Darwin, similarly all factors and forces related thereto get evolved over a period of time and ‘Law’ bears no distinction.

We all have seen n number of notifications, circulars, office orders and trade notices that had been issued by Central Government and State Governments, though mostly out of knee-jerk reaction primarily. However there is a gradual shift that indirect tax law has assumed after the inception of GST in India. One such area of concern and of discussion in this paper is radical shift in the approach of administration of tax as far as displacement of focus from penal provisions to punitive provisions is concerned. When on one hand it is right of Government to collect taxes, on the other hand it is also a prerogative of Government to prevent any leakage thereof by way of evasion (colourable device) and of discouragement to its attempt or abetment hence. The enforcement wings of GST departments have been working in cyclone mode quite lately and such manner of working of authorities do provide that as professionals, we should be well aquantined with provisions so as to enable us, how to deal a possible arrest case both conceptually and realistically. Though people getting arrested and later on being released on bail is an age old law/practice however in this paper we have tried to cover periphery of law of arrest w.r.t. GST r/w Cr.P.C (sections 41 to 60) i.e. why, when, who and how etc., of such punitive provisions.

What technically is an arrest?

Arrest implies “apprehension of a person by legal authority so as to cause deprivation of liberty especially in response to a criminal charge”.

Why does the need for arresting a person arise?

The answer can be multifold and some suitable scenarios could be for better investigation of case, to prevent the person from absconding, to prevent the possibility of tampering with evidence, to prevent intimidating the witness to case. We are on to a very important question i.e.:

Who can get arrested?

The answer lies in words that where GST Commissioner has reason to believe that a person has indulged in any offence as per first quadruplets of section 132 of GST law i.e.,

1. Supplies any goods/ services without any invoice or issues a false invoice with a intention to evade tax.

2. Issues any invoice or bill without supply of goods/services in violation of the provisions of GST leading to wrongful availment or utilisation of input credit or refund of tax.

3. Avails input credit on the bills or invoices on which there will no supply of Goods and Services as mentioned in Para–2.

4. Collects any GST but does not submit it to the Government within 3 months.

Who is authorised to arrest somebody?

Only Commissioner can authorise an officer to arrest a person in four cases (supra). All the field officers are not automatically empowered to take a decision in the matter of arrest and use the powers since the “arrest” in itself is a very sensitive matter. Here authors are of the concerned view that arrest can be of a natural person only hence if any offence is committed by any corporate or distinct legal entity then the person in charge or control may be implicated under arrest provisions.

Can CGST/SGST officers seek assistance from other departments?

Yes, the GST authorities empowered with the power of arrest may require the assistance and services of other law enforcing and other agencies with respect to completing the task and for this purpose it is provided that all officers of police, railway, custom, land revenue and village officials are required to assist the GST officers in enforcing an arrest proceeding.

How the provisions of arrest are executed?

Well, here several legal terminology would necessitate the just and proper understanding answer to this question. One should be well versed with concepts of;

• Monetary limits to invoke wrath of arrest process

• Cognisable and Non-cognisable offences

• Bailable and non-bailable Offences

• Notice, summon and warrant

• Custody and arrest

We shall deal with above concepts individually hereinafter:

Firstly, only such cases of offense u/s. 132(1) to 132(4) can be implicated for arrest where amount of tax evaded is INR 2 crore or more however where monetary quantum involved for tax evasion is found to exceed or equal INR 5 crore then difference in treatment of arrest law crops in.

Secondly, offences restricted between tax evasion value of ₹  2 crore to ₹  5 crore have been treated to be as non-cognisable offences and any offence carrying monetary value greater than equal to ₹  5 crore shall be treated as cognisable offence. A person can be arrested for non-cognisable offence only after issue of warrant by competent authority/court but for cognisable offences an arrest could be made even without issuance of warrant.

Thirdly, all non-cognisable offences are bailable however cognisable offences are non-bailable. Now what does the term non-bailable offense indicate? Please be informed that non-bailable offences does not mean that bail cannot be granted rather it imply merely that bail is to be granted by court, not as a matter of right but as a subject of higher degree of discretion.

Fourthly, legal fiction has created fine difference between a notice, a summons and a warrant. The fundamental variance among them lies in the purpose of their usage. While a notice is issued to seek certain information or document from addressee but a summon is issued to enforce personal appearance of the addressee. Still, the warrant is issued for taking somebody under arrest apprehension. The question of handcuffing the person by authorities is also subject to warrant issued by court in this regard specifically.

Lastly, to take someone under custody is different from arrest in so much that in every arrest there is custody but not vice versa.

Are there any rights provided to arrestee?

In law, there is principle of “presumption of innocence till he has proven guilty” it requires a person arrested to be treated with humanity, dignity and respectfully till his guilt is proved in terms of Article 21.

PATH BREAKING CITATION

D. K. BASU V. STATE OF W.B (1997) 1 SCC 416

Due to frequent instances of police atrocities and custodial deaths. The Hon’ble Supreme Court of India issued some guidelines which were required to be mandatorily followed in all cases of arrest or detention. Some of the principal guidelines are as under :

• Right to be informed of the grounds of arrest under sec. 50 of CRPC and Article 22 of Indian Constitution, it’s a fundamental right to be informed.

• A right to see the warrant under Sec. 75 of CRPC. Warrant of arrest should fulfil certain requirements such as it should be in writing, signed by the presiding officer, should have seal of court, Name and address of the accused and offence under which arrest is made. If any of these is missing, warrant is illegal and challengeable.

• Right of arrested person to meet an advocate of his choice during interrogation

• Arrested person has a right to inform a family member, relative or friend his arrest u/s. 50 of CRPC.

Arrested person has right not to be detained for more than 24 hrs., without being presented before magistrate, it is to prevent unlawful and illegal arrests. This right is fundamental right under Article 22 of Indian Constitution and supported under section 57 and 76 of CRPC.

• Arrested person have right to be medically examined (Secs. 54, 55A)

• Arrested person has right to remain silent under Section 20(3) of Indian constitution so that police can’t extract self-incriminating statement from a 
person without will or without his consent.

To conclude, the main idea for discouragement of evasion of tax remains :

[Source: Article printed in Souvenir of 21st National Convention 2018 held from 22nd to 23rd December, 2018 at Guwahati]

Goods and Services Tax (GST) has now become reality in our country w.e.f. 1-7-2017. It is the biggest Indirect tax reforms which our country has ever witnessed since Independence. Multiple taxes levied by different States/UT in their own unique way have now become history. Implementation of GST is said to be the game changer for the Indian Economy. Now, more than a year has been passed since the implementation of this law in India. We have seen many ups and downs during the transitional phase of this new law. The GST law in the country is basically governed by its mother Act called Central Goods and Services Tax Act 2017. Apart from it, the Integrated Goods and Services Tax Act, 2017 and State/UT Goods and Services Tax Act, 2017 is also governing the law. Further corresponding rules are also notified by the Government under the respective Acts.

In contrast to GST, Income Tax Law in India is an age old law which is in existence prior to Independence. Presently, it is being governed by the Income-tax Act, 1961 and the corresponding rules made thereunder. After implementation of GST, Direct Tax collection of the country is expected to grow remarkably. The main reasons for such growth are the avoidance of cascading effect of taxes and availability of Input Tax Credit. If a person is a service provider then the income tax liability is going to increase as he can take credit on goods which earlier was a cost to him, resulting in a decrease in cost and increase in profit. Similarly, if a person is trader he can take credit on the services availed for business which earlier was a cost to him, resulting in decrease in cost and increase in profit. Hence income tax will increase. In fact after GST implementation we have seen significant growth in the number of income tax assessees and overall collection of tax.

This article is an attempt made to discuss and analyse the impact of Income tax assessment of Business Income on the GST liability of the assessee and the vice-versa.

Relationship between GST & Income Tax – How it becomes closer now?

Prior to the implementation of GST, as many as 11 types of Indirect tax laws prevailed in the country. We never tried to analyse and discuss the impact of assessment under those laws on Income Tax assessment and vice-versa. In fact assessments under the Income tax law is going on even today also and the provisions of the erstwhile Indirect Tax laws has been followed or taken into consideration by the assessees as well as the income tax authorities. Now, a question may thus arise as to why the GST law has become so special that one needs to discuss and understand its impact on Income Tax assessment and vice-versa. In order to answer this question it becomes crucial to first understand the limitations under which the assessing officers where working under the erstwhile indirect tax laws:

  1. No Centralised database available: Different States were having their own VAT laws and online portal for filing of returns etc. which the Income Tax officer either could not access or had limited access. So there was always a problem of matching of data reported between the Income Tax law and the VAT law of the State/UT.

  2. Non-PAN based Registration: Some States/UT even allowed registration under their State/UT taxation laws even without obtaining PAN number of the assessee. As a result it was very difficult to have a complete trail and track of such assessees who were paying indirect tax only.

  3. Lack of Co-ordination: Earlier there seems to be some lack of co-ordination between tax officials at the Centre and the State in respect of exchange of information /database etc., which resulted in escapement of tax liability either side.

  4. Multiple threshold limits: There were multiple threshold limits prevailing for different Indirect tax laws and further the same was also not uniform State wise. The unscrupulous assessees were taking advantage of the same and thereby defrauding revenue.

  5. Reference to other taxation law was minimal: The earlier tax laws were having one more problem wherein the reference to the other Central laws including Income tax law was minimal which sometimes created problem for the tax officials to pull the unscrupulous assessees.

After implementation of GST, the above stated problems has been mitigated to large extent thereby the GST officers are now having database of Income-tax assessees and Income- tax officers are tapping the facts and figures reported under the GST law. Information sharing is made quite easy. Let’s discuss and analyse how the above problems have been mitigated with the introduction of GST:

  1. Introduction of GSTN: The Government has launched GST with a dedicated digital system, called GST Network (GSTN), to manage all GST related things online from a single portal. This also makes it simple for businesses to maintain proper tax records and calculate their tax liability correctly. Income tax department can also easily figure out the tax liability of a particular person or business by comparing their returns for the details of total turnover to find out any discrepancy and catch tax evaders.

  2. PAN based registration mandatory: Goods and Services Tax law has made it compulsory to have Permanent Account number for obtaining registration. Even the assessees residing in tax exempted States (like Meghalaya, Nagaland, Manipur etc. etc.) need to have PAN number compulsorily to get GST registration. Now, by having such PAN based registration, value of total turnover reported in all the returns under GST, whether it is CGST or SGST will be reported to Income-tax Department by GSTN.

  3. Proper Co-ordination between Centre and State: The use of complete technology is the key feature of the Goods and Services Tax law. Right from obtaining registration to the filing of annual return, assessment demand and recovery everything is online. Centralised software is prepared for this. So now, there will be no more State control on it which led to allow the tax officials to exchange database freely with proper co-ordination. Moreover, the annual return format under GST in Forms 9 & 9A categorically ask for the details of demand paid under GST. It means the details of such demand and recovery payment under GST will also be now available to the Income-tax dept.

  4. Single or Limited Threshold Limits: Under the earlier tax regime, we have witnessed separate threshold limit for Central Excise, Service tax and VAT law. It was quite confusing. Now, under GST there is a single threshold limit for registration (except for special category States as notified) which is very clear and no ambiguity persists.

  5. Reference to other taxation laws: If one carefully reads the provisions of Central Goods and Services Tax, 2017 it can easily be identified that the following sections has got reference to Income Tax law which means the Govt. is very clear to avoid any contradiction in the two laws and trying to reconcile & synchronise the laws as much as possible. Let’s have a cursory look at the provisions of Income-tax Act 1961 referred in the GST law:

Sl. No.

Section of CGST Act, 2017

Relevant Provision

Remarks

1.

2(6)

Definition of “Aggregate Turnover”

“aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number (under Income-tax Act, 1961), to be computed on all India basis but excludes Central tax, State tax, Union territory tax, Integrated tax and cess.

2.

2(12)

Definition of “Associated Enterprise”

Shall have the same meaning as prescribed u/s. 92A of the Income-tax Act, 1961

3.

2(31)

Definition of “Input Service Distributor”

Office having same Permanent Account number (under Income-ax Act, 1961)

4.

10(2) – proviso

Composition levy

Provided that where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section.

5.

16(3)

Manner of Input Tax Credit

Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

6.

17(4)

Apportionment of credit and blocked credit

Provided further that the restriction of fifty per cent shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.

7.

25(6)

Procedure for registration

Every person shall have a Permanent Account Number issued under the Income tax Act, 1961 in order to be eligible for grant of registration

8.

71(2)(v)

Access to business premises

The income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961

9.

150(1) (d)

Obligation to Furnish Income Tax Return

an income tax authority appointed under the provisions of the Income-tax, 1961.

Impact of assessments under Income- tax Act

Financial Year 2017-18 is the first year wherein the three quarters starting from 1st July, 2017 and ending on 31st March, 2018 will be covered under the GST regime. Since GST operates on the basis of PAN based registration only so the Income Tax dept. would readily have all the data for these three quarters. However, the data reported under the Income-tax through ITR and Tax audit report would cover figures for all the four quarters i.e., for full financial year including non-GST regime. So in the first year this will pose some mismatch problems and will be subject to reconciliation.

Further the Income-tax dept., is nowadays working in complete E-environment (ITBA/ITD) including filing of appeals online. So it is assumed that human interference or intervention no more exists and everything is being taken care by the system based on certain sets of pre-defined parameters. However, certain exceptions to this are there where manual selection of scrutiny cases taken up. Nowadays, the system will prompt message even for a minor mismatch. If the quantum involved is material, then the system will even not dare to pick up the case for scrutiny under Computer Assisted Scrutiny Selection. (CASS)

However, from the F.Y. 2018-19 onwards there will be no such problem of mismatch in turnover because the whole period would be under GST net only. So in the coming period who knows the Government may introduce a reconciliation statement of turnover under Income-tax v. GST turnover in the ITR forms as well as TAR forms itself so that unnecessary scrutiny selection may be avoided.

The impact of Income-tax assessment on the GST liability of the assessee cannot be denied. Although the time period for completion of assessment is different under each law. But still the author believes that weapon of re-assessment/escapement assessment is always open to the depts. to raise demand. There are so many areas where an order passed under the Income-tax law may create trouble for an assessee from the GST point of view. However, it is also practically not feasible to discuss and analyse each and every such situation here. So we will take some hypothetical situations/examples to extend our discussions:

  1. Non-obtaining of GST registration for exempted goods & services & reporting thereof to the GST authorities

An assessee may not have obtained GST registration due to the fact that its goods or service are either exempted or not liable to GST. But at present there is no reporting mechanism in the Income-tax returns or tax audit report to state or explain the reason for non-obtaining of GST registration. So this may land assessee in trouble whereby the Income-tax officer may refer the matter to GST authorities for further investigation and assessee needs to offer explanation thereto.

  1. Non-obtaining of GST registration due to threshold limit and reporting thereof to GST authorities

There may also be a situation where an assessee is having turnover of goods and services below the threshold limit of registration as specified u/s. 22 of the CGST Act, 2017. But when one calculates the ‘aggregate turnover’ as defined u/s. 2(6) there may arise liability to obtain registration. Under GST often assessee commits mistakes in not considering items like saving bank interest, fixed deposit interest, interest on loans, dividend, debenture Interest etc.(which otherwise are exempt) in the aggregate turnover for calculating the threshold limit. But all these facts and figures will be readily available with the Income-tax officer and the assessee may be liable to pay GST on the turnover which he/she was expecting to be exempted otherwise because of the threshold exemption. The Income-tax authority will exchange all such data with the GST department and defaulters are likely to receive notice for registration under GST.

  1. Disallowance of Expenditure of personal nature u /s. 37

Section 37 of the Income-tax Act, 1961 puts a bar on claiming expenses of personal nature while calculating profit and gain from business of profession. Nowadays, it is a common phenomenon in Income- tax assessment proceedings where an Income-tax officer tries to disallow certain percentage of genuine business expenses on the ground of being personal in nature. Once expenditure is disallowed on this ground, it will have a far reaching impact on the GST liability of the assessee as well.

Section 16 of the CGST Act, 2017 also puts a bar on claim of ITC on any goods or services which are not related to or for the furtherance of business or are of personal nature. Thus disallowance of business expenses under Income-tax apart from attracting income tax liability will also be subject to tax under GST. Under GST, the assessee needs to reverse ITC claimed earlier and also liable pay interest @24% on such reversal. The matter does not end here. The ITC reversal will also not be consequently allowed as business expenditure under the income-tax law as being personal in nature and will again be subject to income tax. However, interest payment under GST on such reversal of ITC should be allowed in view of our discussion in the later paras hereunder. Thus it will really be a costly affair to the assessee. Common heads of such expenses can be cited as – Tours & Travelling, Mobile Phone bills, Vehicle repairs and Maintenance, Vehicle Insurance, Guest House maintenance etc., etc.

  1. Payment of liability u/s. 43B v. Set off with ITC

In computation of income under the head Profits and gains of business or profession, some of the expenses are allowed under Income-tax Act 1961 and can be claimed by the assessee only in the year in which the payment is actually made. This section has got overriding effect on the other provisions of the I.T. Act. However, the section shall not apply to any sum which is paid on or before the due date of filing of return of income as stipulated under Section 139(1) of the Act.

Further the said section also laid down the types of expenses which are allowable on actual payment basis. Clause (a) of said section refers to one such type viz: any sum payable by the assessee by way of tax, duty, cess or fee, (by whatever name called, under any law for the time being in force). So it can be easily understood that GST payable is well covered under the clause (a) of the said section. Now, here couple of questions come up for our consideration-

  1. Whether merely payment made through challan under GST is sufficient or actual set off of such payment lying in cash ledger with the outstanding liability is necessary?

  2. Whether set off of outstanding liability at the year end with the Input Tax credit available subsequently will be considered as payment made?

In order to answer the above questions it becomes necessary to understand the provision of GST law first. The provisions of section 49 of the CGST Act, 2017 explicitly state that payment of tax means payment made through electronic credit ledger or electronic cash ledger. So it is pertinent to note that GST law considers the payment of liability only when it gets offset with the balance lying in cash ledger or credit ledger. This means that until and unless liability is offset the amount will not be considered to be paid.

But the author is of view that as far as GST payable at the end of the previous year is paid through challan (before the due date of filing return of income u/s. 139(1)) it is all right and deduction can be claimed u/s. 43B based on such payment challan. Once the assessee has paid the amount through challan and money is credited & lying in the cash ledger under GST then there should not be any problem because the assessee has already parted with the money by appropriating it to the exchequer’s account. So the author believes that actual set off of such payment with the GST liability may not be necessary for claiming deduction u/s. 43B because we have to read section 43B with the legislative intent behind introduction of this section. However, since GST is a new law so the matter is yet to be tested judicially.

But the real problem will arise in the situation where outstanding liability is not paid through challan rather it is offset with the available input tax credit of the subsequent period(s). In such a situation whether such set off will be considered as payment made or paid u/s. 43B of the I.T. Act, 1961? Will Income-tax officer allow such expenses in computing Profit from Business and Profession?

It has been decided in various judicial pronouncements that payment under section 43B will not only cover actual payment but also constructive payment as well as book adjustments and set off. Let’s discuss a few of them as follows:

Constructive Payments

Sales tax deferment – If the sales tax (‘ST’) law provides that where deferred ST/ST is deemed to have been converted into loan it is to be treated as actual payment, the same will be treated as paid.

– Mahalaxmi Bricks Mfg Mldg & Fab Ind. (P.) Ltd. 273 ITR 190 (P&H)

– Circular No. 496, dated 25-9-1987, 196 ITR, St 53. and Circular No. 674, dated 29-12-1993, 205 ITR ST 119

Set off

The Hon’ble Kolkata High Court in the case of CIT v. National Standard Duncan Ltd. 260 ITR 97 held that where the Bombay Sales Tax Act, 1959 and the rules there under allows the assessee to set-off sales tax paid on the purchase of raw material used for the finished products, then such assessee would be entitled to set off or adjustment of its liability to pay sales tax payable on the sale of such finished products, availing such set-off by the assessee should be treated as actual payment of sales tax liability for Section 43B purposes.

Book adjustments

The Hon’ble Jharkhand High Court held that book adjustments constitute “actual payment” for Section 43B – CIT v. Shakti Spring Industries (P) Ltd.[2013] 219 Taxman 124.

So based on the above discussed judicial precedents one can understand that if the outstanding GST liability is being set off with the input tax credit available in the next period then there should not be question of disallowance under section 43B of the I.T. Act. However, GST being a new law in the country so the author believes that the said proposition is yet to be tested by the judiciary in the light of the provisions of the GST law.

  1. Interest and late fee paid under GST

The provisions of interest and late fee under GST are operating quite effectively since its inception. Delay in payment of tax and delay in filing tax return under GST attracts interest and late fee. Now, a question arises whether such interest and late fee are allowable expense under the Income-tax law? In the earlier laws also there was the concept of interest and late fee payment. The same was also tested by the judiciary and held that interest being compensatory in nature is an allowable expenditure and late fee was however a vexed issue and was a matter of dispute. So the author opines that the same proposition is going to hold good under the GST regime as well.

The issue of delay in the payment of indirect tax law is directly covered by the judgment of Hon’ble Apex Court in the case of Lachmandas Mathura v. CIT reported in 254 ITR 799 (SC) in favour of assessee on the ground that interest being not penal in nature rather it is compensatory in nature and thus allowable u/s. 37(1).

So far as payment of late fee under Indirect tax law is concerned it is a settled position that only those expenses which are penal in nature and incurred for an offence or which is prohibited by law are not allowed as deduction u/s. 37(1). But late fee payment as the name suggest is not a penalty. It is thus an allowable expense. At the same time one can argue that the late fee is nothing but cost of default made and also not compensatory in nature so it is basically in the nature of penalty only. The Hon’ble Supreme Court in case of Swadeshi Cotton Mills Ltd. v. CIT, (1967) ITR 57 (SC) held that where the amount paid is partly penal and partly compensatory, the amount to the extent that it is compensatory could be allowed as deduction. The author is of the opinion that the late fee is not a penalty and thus it should be allowed deduction as normal business expenditure. In this matter one can also refer section 234E of the Income- tax Act whereby assessees are paying late fee on account of failure to submit TDS statements timely and the same is allowed on the ground not being penal in nature.

  1. Demand paid under GST- Is allowable Business expenditure u/s. 37?

With the introduction of e-Way bill mechanism under GST, the tax dept. is seen pro-active in levy of tax and penalty for any contravention or departure from statutory compliances. Furthermore the provisions of levy of tax and penalty is also being invoked in case of evasion of tax is detected. Under GST law tax paid on account of demand and recovery is also not allowed to be set off with any other liability under the GST. So here comes a question to our mind that whether such tax payment which remains unadjusted would be allowable business expenditure under the Income-tax law?

In this respect it is pertinent to first discuss here the position under the earlier laws. Service tax audit by the departmental officers was a common phenomenon for all the assessees. Often the departmental officers raised service tax demand which the assessee was required to pay in spite of the fact that the same was never collected from the service receiver. After making the demanded payment of service tax, the assessee got immunity from service tax penal proceedings. But this led to one new battle between the assessee and the Income-tax dept. The Income-tax dept. denied the service tax payment claim of the assessee as business expenditure. This situation created litigation between the assessee and the dept. The Hon’ble Gujarat High Court in case of Commissioner of Income Tax-III v. Kaypee Mechanical India (P.) Ltd. [(2014) 45 taxmann.com 363 (Gujarat)] had an occasion to deal one such issue wherein the Court dismissed the Revenue’s appeal and held that where assessee had not collected and deposited service tax but on being pointed out, deposited same, amount being expended by assessee in course of business was allowable as business expenditure.

The revenue on the other hand placed reliance upon the judgment of the Apex Court in case of Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350. However, the Hon’ble Gujarat High Court took the view that payment of demanded tax cannot be equated with payment of penalty. Thus the decision in case of Haji Aziz & Abdul Shakoor Bros. (supra) was distinguishable.

Now, the instant judgment of Gujarat High Court on eligibility of service tax as a business expenditure u/s. 37(1) of the Income-tax Act, 1961 is going to have a far reaching impact under the GST law as well. Nowadays, assesses are very prompt in making payment of the demanded amount in order to get relief from the mandatory penalties under the GST law. Thus this judgment will certainly encourage assessees to make the payment of legitimate demand raised by the tax dept. because the fear of disallowance under Income-tax law of such payment no more exists now. This will surely minimise litigations.

Apart from above points, the impact of IT assessment on the GST liability of an assessee may also be understood from the following perspective:

  • Methods of Accounting under Income-tax can be either cash or accrual but under GST it is can be accrual only. So it may create mismatch and GST authority can invoke jurisdiction to examine the same.

  • Related Party transactions and its valuation under Income-tax are done at arm’s length price or FMV but under GST transaction value is allowed. So the difference in valuation mechanism may also sometimes disturb an assessee.

  • Point of revenue recognition under Income Tax (as per AS/ICDS) v. Time of Supply under GST (Sections 12 & 13) is also an area where difference of opinions is likely to exist. So it may also allow GST authorities to check whether there is revenue leakage at all.

  • Details of expenses paid to GST registered entities and non-GST registered entities as envisaged under clause 44 of Form-3CD (since deleted) and ITR-6 will also be an eye catcher to the tax dept. The dept. will try to trace such unregistered entities doing voluminous transactions and are therefore liable for registration under GST.

Impact of assessments under GST

The exercise of assessment is generally taken up by the tax dept. once annual return is filed by the assessee. The due date for filing 1st Annual Return under GST for the F.Y. 2017-18 covering the period 1-7-2017 to 31-3-2018 is presently fixed as 31st December, 2018. So till that time it is more or less confirmed that assessment is not going to take place. However, chances of assessment like provisional assessment (Section 60), assessment of non-filers (Section 62) etc., etc., even without furnishing of annual return cannot also be ruled out. Likewise impact of Income-tax assessment on GST liability of an assessee the reverse is also possible. The impact of GST assessment on the income tax liability of an assessee is now closer due to the free flow of information or exchange of data between the two departments. There may be various areas where an assessment under GST may impact income tax liability. But for the sake of convenience we will discuss some hypothetical situations as follows:

  1. Reversal of Input Tax Credit on Goods or Services:

In GST assessment or audit proceedings the input tax credit claim of an assessee will be the core area to be examined by the authorities. The Tax dept. will try to disallow ITC either on the ground of not being in the furtherance of business or personal in nature or due to blocked nature as specified u/s 17 of the CGST Act, 2017. Once an input tax credit is disallowed owing to personal in nature then it may impact the income tax liability of an assessee. The Income-tax dept. will try to examine the eligibility of such expenses on which input was claimed on the touchstone of section 37 of the Income- tax Act, 1961. Though each department is independent and has their independent process of enquiry, assessments etc. but still once the information related to disallowance of ITC of personal nature is shared with the Income-tax dept. then it will give them a grip to examine the matter further. Once the income tax department, after proper findings, comes to a conclusion that such expenses on which GST dept. disallowed input credit are personal in nature then additions under Income Tax law is inevitable. Further question of levy of penalty u/s. 271(1) (c) may also come into play. Thus the assessee may face double burden one under GST by way of reversal of ITC and other under Income tax by way of addition of such expenses to the income of the assessee. So in this way GST assessment may impact IT assessment of an assessee.

  1. Reversal of Input Tax Credit on Capital Goods

After implementation of GST it has become our habit to claim input tax credit on capital goods as well. The rule for eligibility of ITC on capital goods is similar to those of goods and services as discussed above i.e. for furtherance of business and not of blocked nature. Further separate formulae have been prescribed under rule 43 of the CGST Rules, 2017 where there is common use of such capital goods partly for business purposes and partly for personal purposes. Also it is noteworthy to mention that an assessee availing input credit on capital goods is not entitled to claim depreciation under the I.T. Act, 1961 to the extent of such input claimed. Now, the real challenge will arise in cases where the GST assessing officers/audit party disallow input claim of an assessee on the ground that capital asset is personal in nature or for not in the course of furtherance of business. In such a scenario the assessee will face following problems:

  • Reversal of ITC being personal in nature on capital goods under GST will also not be an allowable expense under section 37 of the I.T. Act.

  • Depreciation already claimed on the cost of such capital asset will be subject to further scrutiny by the I.T. dept. and if asset found personal in nature then such depreciation will also be disallowed u/s. 32 of the I.T. Act.

  • Question of levy of penalty 
    u/s. 271(1) (c) under Income-tax Act may also come into play.

  1. Cases booked under Anti-profiteering clause:

Under section 171 of the CGST Act, 2017 specific provisions on Anti-profiteering have been legislated. The anti-profiteering provisions are inherently designed to protect consumers by restricting the companies to benefit unjustly on account of any reduction in GST rates or enhancement in tax credit pool. So once GST officer makes up his mind to pull an assessee under anti-profiteering clause and the charges are framed and confirmed then in such scenario the Income tax dept. will also try to invoke its jurisdiction. The Income-tax dept. would try to find out whether due to such undue profit or gain there has been a commensurate increase in the income tax liability of the assessee at all.

Apart from above points, the impact of GST assessment on the Income-tax liability of an assessee may also be looked from the following perspective:

  • Frequent violation of statutory compliances under the GST law and application of demand and recovery provisions against the assessee will definitely create a doubt in the mind of Income-tax authorities as well. So it will not be a surprise if IT dept. sets some monetary limit or parameters whereby cases having prescribed GST demand payment may be under one of the criteria for Computer assisted scrutiny selection (CASS).

  • Cases of bogus transactions /fake invoices under GST are coming to the knowledge of the authorities since recent past. The GST dept. has already unearthed huge GST revenue leakage on account of such transactions. So apart from the main culprit all the associated entities are likely to come under the radar of Income-tax dept. as well.

  • Cases of keeping long pending bogus creditors in the books of account will also be gradually reduced due to the fact that GST law does not allow input tax credit on such transactions which remains unpaid for more than 180 days. Moreover, the provision of disclosure under MSME Act, 2006 is also amended recently to protect the interest of the small and medium entities. So certainly it will put a bar on keeping bogus creditors in the books by unscrupulous assessees.

Concluding remarks

After implementation of GST law one thing is going to be certain that there will be a huge fall in the tax evasion. It has been noticed at times that businesses report a different value of stock in their annual VAT return as compared to their Income-tax return. This valuation is sometimes inflated to show higher profits to maintain the credit score against the loans taken from the bank, while on the other hand, many entities deflate the value of stock to attract less tax liability.

Under the GST law, every movement of taxable goods having invoice value above ₹  50,000/- is subject to generation of e-Way bill. Further every sale invoice (B2C) will also get uploaded on the GST portal. These invoices will, in turn, be referred to the buyer. But the return filed under the VAT law or CST laws do not require validation from the buyer. A major implication of this information sharing between I.T. & GST dept. would be that the tax evaders who window dress their books at the year end to lessen their tax liability will find it harder to do so. Such actions or window dressing were possible before as the Income Tax Department did not have any access to the data which is filed under the state VAT laws. However, under the new regime, GSTN will be the single repository to all these transactions and the Income-tax Department will have a clear picture of the total sales and purchases, and eventually the overall profitability, of every business. So it is clear that an upward assessment under one law is going to impact the liability of the assessee under the other law as well.

[Source: Article printed in Souvenir of 21st National Convention 2018 held from 22nd to 23rd December, 2018 at Guwahati]

“All subjects over which the sovereign power of a State extends are objects of taxation, but those over which it does not extend are, upon the soundest principles, exempt from taxation. This proposition may almost be pronounced self-evident.”

Chief Justice John Marshall of the US Supreme Court in McCulloch v. Maryland [17 US 316 (1819)]

Under English law, a law cannot be challenged as being unconstitutional for being extra-territorial in effect. Domestic tribunals will not hear any challenge to any law on the basis only that such a law has either extra-territorial operation or has no sufficient nexus with Great Britain. This is not because extra-territoriality is a unique concept which cannot be tested in British Courts. Rather, English Parliament is supreme and nothing is ultra vires its powers. The English Courts only apply a strong presumption that an Act of Parliament will not have extra-territorial effect till Parliament says so expressly or 
if such a result is a matter of necessary implication.

The law in India has developed on a different footing, primarily because of the limitations imposed by the Constitution. Article 245 reads:

245. Extent of laws made by Parliament and by the Legislatures of States

(1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State.

(2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra territorial operation.”

The current state of the law on this point is set out in the seminal decision GVK Industries v. ITO [(2011) 4 SCC 36]. In GVK Industries, the Supreme Court states:

“124. We now turn to answering the two questions that we set out with:

(1) Is Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for:

(a) the territory of India, or any part of India; or

(b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?

The answer to the above would be yes. However, Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes – events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like –that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians.

125. It is important for us to state and hold here that the powers of legislation of Parliament with regard to all aspects or causes that are within the purview of its competence, including with respect to extra-territorial aspects or causes as delineated above, and as specified by the Constitution, or implied by its essential role in the constitutional scheme, ought not to be subject to some a priori quantitative tests, such as “sufficiency” or “significance” or in any other manner requiring a predetermined degree of strength. All that would be required would be that the connection to India be real or expected to be real, and not illusory or fanciful.

126. Whether a particular law enacted by Parliament does show such a real connection, or expected real connection, between the extra-territorial aspect or cause and something in India or related to India and Indians, in terms of impact, effect or consequence, would be a mixed matter of facts and of law. Obviously, where Parliament itself posits a degree of such relationship, beyond the constitutional requirement that it be real and not fanciful, then the courts would have to enforce such a requirement in the operation of the law as a matter of that law itself, and not of the Constitution:

127. (2) Does Parliament have the powers to legislate “for” any territory, other than the territory of India or any part of it?

The answer to the above would be no. It is obvious that Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or may be expected to do so, within the territory of India, and also with respect to extra-territorial aspects or causes that have an impact on or nexus with India as explained above in the answer to Question 1 above. Such laws would fall within the meaning, purport and ambit of the grant of powers to Parliament to make laws “for the whole or any part of the territory of India”, and they may not be invalidated on the ground that they may require extra-territorial operation. Any laws enacted by Parliament with respect to extra-territorial aspects or causes that have no impact on or nexus with India would be ultra vires, as answered in response to Question 1 above, and would be laws made “for” a foreign territory.”

GVK Industries upholds the validity of a legislation even if the law is directed towards patently extra-territorial behaviour, as long as the law results in welfare of the Indian people. Now this is a dangerous doctrine, at least as applied to tax law. A tax will always accrue to the Indian Treasury and thus result in welfare of the Indian people. On that basis, effectively no tax law can be challenged at all on the basis of extra-territoriality.

In Vodafone International Holdings BV v. Union of India [(2012) 6 SCC 613], income tax was sought to be levied on transfer of shares outside India which resulted in the transfer of business in India. Radhakrishnan J., held that a tax law can have extra-territorial effect, as long as the Act imposing the tax conveys so in clear terms. Absent Parliamentary indication, the Courts 
will not interpret a law to have extra-territorial effect.

Article 265 says that no tax shall be levied or collected without the authority of law. The genesis of this article is in the principle that taxes cannot be levied without representation. That is, tax cannot be levied upon a people without their consent expressed through democratic means. The author submits Article 265 imposes an inherent limitation on the levy of tax on extra-territorial transactions. If a transaction is entered into by A and B, both non-citizen taxpayers resident in foreign territory and the transaction itself is not entered into in India, then the Indian legislature is not competent to tax it and recover the taxes from property which may be situate in India. Though the tax is ultimately for benefit of the Indian people, the cherished constitutional principle – no taxation without representation – would render such an enactment unconstitutional. In fact, such behaviour may even result into India becoming a pariah state in international commerce. In an increasingly inter-linked world, the rules of composite international trade and comity within nations requires one country to respect the sovereignty of another. Levying taxes with respect to property, objects and transactions within the sovereign jurisdiction of another nation and with no real nexus to India, or a fanciful nexus in other words, only because there is some means of recovery in India will only make the Indian state an object of distrust in the international community.

Now, the question which arises is: how far can the right to taxation go under the GST Act when it comes to extra-territorial causes and effects. The answer is much more complicated than a bare analysis of Article 245. For one, there is no settled law on the situs of a “supply”, the heart of the charging section. A “supply” can start with an “agreement to supply” and the stipulation of consideration, then the actual performance of a “supply”. It is clear that the GST Act cannot be ordinarily interpreted to tax a supply which takes place in a foreign country and where only consideration is paid in India. It may be constitutional for Parliament to enact such a tax, but the GST Act as enacted today does not levy such a tax. Similarly, merely because negotiations have been performed in India, the tax cannot be levied in India, for negotiations are not a “supply”.

There are some interesting issues which arise in this regard. Suppose A is importing certain goods into India from England. Before the goods cross the customs frontiers of India, A transfers the title of goods through a transfer of documents of title when the goods are on high seas to B, who is resident in Bangladesh and will take delivery there. Clearly the physical supply has happened from England to India. However, can the Revenue tax the transaction by holding that the contractual transfer has taken place in India, in as much the endorsement on the documents of title took place in Indian territory? The GST Amendment Act 2018 addresses this problem, but the Act is yet to be notified.

Such problems will keep on arising and pose challenging questions for the taxation field for quite some time. We can only hope that Parliament is proactive and fair in providing solutions to these problems, and not wait for the Supreme Court to settle these questions after a quarter-century.

[Source: Article printed in Souvenir of 21st National Convention 2018 held from 22nd to 23rd December, 2018 at Guwahati]

Let your preparations be wise, correct and of such kind that will lead to your true welfare, supreme good and lasting satisfaction and happiness. This must engage your active, enthusiastic attention throughout the period of your youth life.

Swami Vivekananda

Section 68 is one of the most powerful weapons now-a-days in the hands of Assessing Officer though it is a most debated provision. There were no provisions corresponding to section 68 in the 1922 Act. But the provisions contained in this section give a legislative recognition to a long line of judicial decisions on the point (CIT v. Hanuman Das Maheshwari (1975) Tax LR 109, 112 (Ori).

Under this section, any sum found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year.

Finance Act 2012 has inserted two provisos to section 68 w.e.f. 1-4-2013 (AY 2013-14). First proviso enlarges the onus of a closely held company and provides that if a closely held company receives any share application money or share capital or share premium or the like, it should also establish the source of source (i.e., the residents from whom such money is received)

2nd proviso provides that the 1st proviso will not apply if the receipt of sum (representing share application money or share capital or share premium etc.) is from a venture capital company or venture capital fund referred to in section 10(23FB).

Object of the Provision

A widely prevalent method adopted by the assessees to employ in their business their concealed profits while continuing to conceal their nature was the introduction into the books of sums of money shown as having been lent to them or deposited with them by a third party, or sometimes as their own capital contribution from capital resources. Abstraction of profits from business could have been made earlier by inflating expenditure or by understating receipts or by a combination of them. When liquid funds are needed for the business, the abstracted profit would be brought into the business in the shape of loan or capital by the device aforesaid. Sometimes the credit entry introducing the money is cancelled by corresponding debit entry – showing the alleged loan as repaid – either in the same accounting year or in a subsequent accounting year when the need for money has abated and the money can be withdrawn. When the cancellation occurs in the same accounting year, the alleged liability will not appear in the Balance Sheet and will escape assessment unless there is a close scrutiny by the officer.

Accordingly, the group of 6 sections i.e., section 68 to 69D have been introduced into the taxing enactment step-by-step in order to plug loopholes and in order to place certain situations beyond doubt even though there were judicial decisions covering some of the aspects. For example, even prior to introduction of Section 68 in the statute book, Courts had held that where any amounts were found credited in the books of an assessee in a previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was in the opinion of AO not satisfactory, the sum so credited could be charged to income tax as income of the assessee of the relevant previous year. This principle was approved by the Supreme Court in

A. Govindarajulu Mudaliar v. CIT (1958) 34 ITR 807 (SC)

Lakhmi Chand Baij Nath v. CIT (1959) 35 ITR 416 (SC)

Jamna Prasad Kanahiya Lal v. CIT (1981) 130 ITR 244 (SC)

& other cases.

Thus in effect, section 68 is only a statutory recognition of what was the state of law even prior to enactment of the 1961 Act.

Object of the Amendment by Finance Act 2012

As explained in the memorandum, certain judicial pronouncements have created doubts about the onus of proof and the requirements of the section, particularly in cases where the sum which is credited as share capital, share premium etc.

Judicial pronouncements, while recognising that the pernicious practice of conversion of unaccounted money through masquerade of investment in the share capital of a company needs to be prevented, have advised a balance to be maintained regarding onus of proof to be placed on the company. The Courts have drawn a distinction and emphasised that in case of private placement of shares, the legal regime should be different from that which is followed in case of a company seeking share capital from the public at large.

In the case of closely held companies, investments are made by known persons. Therefore, a higher onus is required to be placed on such companies besides the general onus to establish identity and creditworthiness of creditor and genuineness of transaction. This additional onus needs to be placed on such companies to also prove the source of money in the hands of such shareholder or persons making payment towards issue of shares, before such sum is accepted as genuine credit. If the Co. fails to discharge the additional onus, the sum shall be treated as income of the company and added to its income.

Thus in case of Private Limited Companies, higher onus is cast upon them to explain even source of source of the share application money / share premium etc.

Analysis of section 68

As per section 68, the unexplained amount is added back to the total income of the assessee and tax will accordingly be charged on the said sum.

Delhi High Court in the case of Yadu Hari Dalmia v. CIT (1980) 126 ITR 48 (Del.) has observed that “the whole history of the introduction of sections 68 to 69D and the judicial decisions bearing thereupon clearly establish the proposition that these sections are only clarificatory and that even otherwise an addition can be made towards income from undisclosed sources in respect, inter alia, of amounts of expenditure which the assessee is found to have actually incurred but not satisfactorily explained.”

The ingredients of section 68 are as under:

i) there must be books of an assessee maintained for any previous year,

ii) Any sum is found credited in the books of assessee,

iii) the sum so credited may be charged to income tax as the income of the assessee of that previous year if,

a) assessee offers no explanation about the nature and source of the sum credited in the books or,

b) the explanation offered by the assessee is not satisfactory in the opinion of Assessing Officer.

An unexplained cash credit could be either treated as undisclosed income of the business in respect of which the accounts are maintained or as the assessee’s income from undisclosed sources.

A. Any “sum” found credited

The word ‘sum’ used in the section is very exhaustive. It applies to all the credits by whatever name being called. As held by the Punjab & Haryana High Court in the case of G.R. Sriram v. CIT (1975) 98 ITR 337. The ultimate aim of the Court is to keep the intent of the legislature alive.

Thus the term ‘sum’ will include the amount credited in the books either on capital account or on revenue account. It may be share application or the purchases or the gifts or loan etc.

Additions in the partners Capital A/c – Whether firm is liable to explain and whether addition can be made to firm’s income u/s. 68.

a) Where the cash credit is found in the books of the firm, the following points are to be noted:

i) there is no distinction between the cash credit entry existing in the books of the firm whether it is of a partner or of a 3rd party,

ii) the burden to prove the identity, capacity and genuineness has to be on the firm,

iii) if the cash credit is not satisfactorily explained, the Assessing Officer is justified to treat it as income from undisclosed sources,

iv) the firm has to establish that the amount was actually given by the lender,

v) the genuineness and regularity in the maintenance of the account has to be taken into consideration by the taxing authorities,

vi) if the explanation is not supported by any documentary or other evidence, then the deeming fiction u/s. 68 can be invoked,

b) In that view of the matter, simply because the amount is credited in the books of the firm in the partner’s capital account, it cannot be said that it is not the undisclosed income of the firm and in all cases it has to be assessed as an undisclosed income of the partner alone (CIT v. Kishori Lal Santoshi Lal (1995) 216 ITR 9, 14 (Raj.), CIT v. Shiv Shakti Timbers (1998) 229 ITR 505, 510 (MP).

c) In CIT v. Metacam Industries (2000) 245 ITR 160 (MP), it is held that where the assessee firm had satisfactorily explained the credits standing in the name of its partners the responsibility of the assessee firm stands discharged. Once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee firm is over.

B. Books of an Assessee

For making addition u/s. 68, existence of books of an assessee is a condition precedent.

a) The expression “books of the assessee” refers to the assessee whose books show the credit entry. The emphasis is on the word “assessee” meaning thereby that such books have to be the books of the assessee himself and not of any other assessee (Shanta Devi v. CIT (1988) 171 ITR 532 (P&H) Anand Ram Raitani v. CIT (1997), 223 ITR 544) (Gau)

b) In Sunder Lal Jain v. CIT (1979) 117 ITR 316 (All.), in the assessment of a partner, the mere fact that the cash credit entries had been found in the books of the firm of which he was the partner was held immaterial, because the books in which such entries had been found were those of a different assessee i.e., the partnership firm. Such a case may be covered by section 69, for section 68 to apply, a cash credit entry, it was pointed out, has to be found in the books of the individual partner who is the assessee.

c) Books of account must be of assessee himself and not of any other assessee. In Smt Shanta Devi v. CIT (1998) 171 ITR 532 (P&H), it was held that a perusal of section 68 would show that the expression “books” has been used with reference to the word “assessee”. Thus books of account of a partnership firm cannot be considered to be the books of account of the partner. Any cash credit shown therein cannot be brought to tax as income u/s. 68 in the hands of partner.

d) Bank passbook is not the books of account for the purpose of section 68. In CIT v. Bhai Chand H Gandhi 141 ITR 67 (Bom.), it was held that the passbook supplied by the bank to the assessee cannot be regarded as the book of the assessee, i.e., a book maintained by the assessee or under his instructions.

e) Now the question arises as to what may be termed as the “books” of the assessee. As per section 2(12A) of Income-tax Act, books includes ledgers, day books, cash books, whether kept in the written form or as print out of the data stored in floppy, disk, tape or any other electromagnetic data storage device.

f) In CBI v. V.C. Shukla & Ors (1998) 3 SCC 410 popularly known as Jain Hawala Case, Supreme Court held that books ordinarily means a collection of sheets of paper or other material blank, written, printed, fastened or bound together so as to form a material whole. Loose sheets or scraps of paper cannot be termed as book 
for they can be easily detached and replaced.

g) In SP Goyal v. Deputy CIT (2002) 82 ITD 85 (TM), it is held that mere entry on loose sheet of paper not supported by actual cash cannot be considered to be sufficient evidence to treat the same as cash credit u/s. 68 of the Act.

h) In Satnam Singh Chhbra v. Deputy CIT (2002) 74 TTJ (Luck.) 976, it is held that loose paper cannot be construed as books and therefore, section 34 of the Evidence Act would not apply and therefore, it cannot be the basis for addition.

i) In Prarthana Construction (P) Ltd. v. DCIT (2001) 70 TTJ (Ahd.) 122, it is held that addition on the basis of loose papers without any corroborating evidence cannot be the basis for addition.

j) In S. K. Gupta v. DCIT (1999) 63 TTJ (Del.) 532, it is held that addition made on the basis of loose sheet and torn papers found during the search were unwarranted.

k) Though the loose sheets are not books of account but it is a fact that such loose slips, papers, diaries or documents have been a source of information for large additions and often become contentious issues in post search assessment / block assessment as to the extent of reliance to be placed and the evidentiary value of such loose papers or documents normally found during search.

l) In Atul Kumar Jain v. DCIT (1999) 64 TTJ 786 (Del), the documents was found showing ₹  1,050/- spent on marriage which was deciphered as ₹  10.50 lakh. On evidentiary value of the document, Tribunal held as under:

“The word “document” has been defined in section 32 of Indian Evidence Act to mean – any matter expressed or described upon any substance by means of letters, figures or marks or by more than one of those means, intended to be used or which may be used for the purpose of recording that matter. The word “document” has also been similarly defined in the general clauses Act. According to the Hon’ble Supreme Court in the case of Ramji Dayawala & Sons (P) Ltd. v. Invert Import (AIR 1981 SC 2085) mere proof of handwriting of a document would not tantamount to a proof of all the contents or the facts stated in the document, if the truth of the facts stated in a document is in issue………….. the truth or otherwise of the facts or contents so stated would have to be proved by admissible evidence i.e. by the evidence of those persons who can vouch safe for the truth of the facts in issue” (Pg. 801 & 802).

“Further Hon’ble Supreme Court in the case of Mohd Yusuf (Sir) v. D Air, (AIR 1968 Bom 112) has observed that the contents contained in a document is hearsay evidence unless the writer thereof is examined before the Court. The Hon’ble Court, therefore, held that the attempt to prove the contents of the document by proving the signatures in the handwriting of the author thereof is to set at naught, the well recognised rule that heresay evidence cannot be admitted………… The said paper therefore, does not come within the compass of the definition of the word “document” to be used as an evidence. The papers seized therefore, has no evidentiary value and accordingly, the same cannot form the basis for assessing the undisclosed income.” (Pg. 802)

m) Evidentiary Value of a statement recorded u/s. 132(4)

Statement recorded u/s. 132(4)can be used in evidence in any proceeding under the Income-tax Act. By virtue of newly inserted Explanation (with effect from 
1-4-1989) to section 132(4), such statement cannot be confined only to the books of account, other documents or assets found as a result of search etc. because Explanation permits interrogation of persons not only in relation to the books of account etc. found as a result of search but also on any other matter relevant for any proceeding under the Act. In that view of the matter if a partner of the firm whose premises were searched, comes forward to disclose about non-entry of the excess stock in the registers during the search, which took place prior to the insertion of the said Explanation, there is no reason why the ITO shall not make use of it even though there is no actual verification of the stock, where the statement was made by the partner voluntarily and was not obtained by coercion or intimidation (V. Kunhambu & Sons v. CIT (1996) 219 ITR 235, 241-42 (Ker.).

n) Presumption u/s. 132(4A) cannot be availed u/s. 48

The presumption arising u/s. 132(4A) does not override or exclude section 68, i.e., it does not obviate the necessity to establish by independent evidence the genuineness of the cash credit u/s. 68. The presumption arising u/s. 132(4A) applies only in relation to provisional adjudication contemplated u/s. 132(5). For this limited purpose, the legislature has provided u/s. 132(4A) that the books of account etc. seized from the possession of the assessee shall be presumed to belong to the assessee if they are found in the possession or control of the assessee during the course of search.

o) It is not necessary that books of account must be rejected before making addition u/s. 68 of the Act. In Devinder Singh v. ACIT (2006) 101 TTJ 505 (ASR), ITAT has held that there is nothing in section 68 that books of account must be rejected before making an addition u/s. 68 of the Act. This is an independent and deeming provision and will apply if the assessee fails to offer an explanation of the source of particular receipt of credit appearing in the books of account or if the explanation given by the assessee is found to be not satisfactory by the Assessing Officer.

C. Explanation about nature and source of cash credit

The issue of cash credit has always been a matter vexed litigation. Section 68 enacts a golden rule of evidence which is not in dispute i.e., if any sum is found credited in the books of accounts of the assessee, the onus is on him to explain the said entry. The principal embodied in section 68 is only a statutory recognition of what was always understood to be the law based upon the rule that the burden of proof is on the taxpayer to prove the genuineness of borrowing since the relevant facts are exclusively within his knowledge.

The expression “nature and source” in section 68 has to be understood together as a requirement of identification of the source and the nature of the source, so that the genuineness or otherwise could be inferred. Hon’ble Supreme Court in Kalekhan Mohd Hanif v. CIT, 50 ITR 1 (SC) pointed out that the onus on the assessee has to be understood with reference to the facts of each case and proper inference drawn from the facts. The law after section 68 is not different. If the prima facie inference on the fact is that the assessee’s explanation is probable, the onus will shift to the Revenue.

The Department often acts on a confirmatory letter as evidence, the onus does not get discharged merely by confirmatory letters as held by Calcutta High Court in CIT v. Commercial & Industrial Co. (P) Ltd. (1991) 187 ITR 596 (Cal.), nor does the fact that the amount received by an account payee cheque makes it sacrosanct (CIT v. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal.). Even the particulars from assessment records of the creditor may not be sufficient as observed in CIT v. Korlay Trading Co. Ltd. (1998) 238 ITR 820.

However, affidavits filed by the assessee cannot be rejected outrightly without cross-examination as was found by the Apex Court in Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC). It is pointed out that where assessee’s accounts are accepted as genuine, it is ordinarily not possible to show that the credits therein do not come from the sources attributed for them.

Burden of Proof

The satisfaction of the Assessing Officer is the basis of invocation of provisions of section 68. The onus is on the assessee to offer explanation as to the source and nature of the cash credit where any sum is found credited in his books of account.

Once the assessee has proved identity and credit worthiness of the creditors and the genuineness of the transactions, his burden stands discharged and the burden then shifts to the Revenue to show that though covered by cheques, the amount in question, actually belonged to, or was owned by the assessee himself.

In Kamal Motors v. CIT (2003) 131 Taxmann 155 (Raj.), it is held that the responsibility is on the assessee to discharge the onus that the cash creditor is a man of means to allow the cash credit.

Ingredients of assessee’s onus – It is necessary for the assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof includes proof of the identity of his creditor, the capacity of such creditor to advance the money and lastly the genuineness of the transaction. Only after the assessee had adduced evidence to establish prima facie the aforesaid, the onus shifts on the Department. Merely establishing the identity of the creditor is not enough (Nemi Chand Kothari v. CIT (2003) 264 ITR 254, 261 (Gau.).

Mere filing of confirmatory letters does not discharge the onus that lies on the assessee (CIT v. United Commercial & Industrial Co. (P) Ltd. (1991) 187 ITR 596, 599 (Cal.).

Mere furnishing of the particulars is not enough. Mere payment by Account Payee Cheque is not sacrosanct, nor can it make a non-genuine transaction genuine (Hindustan Tea Trading Co. Ltd. v. CIT (2003) 263 ITR 289, 297 (Cal.).

The Law does not compel the doing of impossibilities

But at the same time, law does not expect the impossible on the part of taxpayer as pointed out in LIC of India v. CIT (1996) 219 ITR 410 (SC), although pronounced in a different context. What is material is that the explanation should be prima facie reasonable. If it is so, it cannot be rejected on mere surmises as has been held in CIT v. Bedi & Co. Pvt. Ltd. (230 ITR 580)(SC). The affidavits filed cannot be rejected out rightly without cross-examination as was found by the Supreme Court in Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC).

Materials, relevant & irrelevant – What evidence will, in a particular case, be sufficient to establish assessee’s representation, as also, what material is relevant or not relevant would depend on the facts of each case. The Evidence Act embodies the principles of relevancy in sections 5 to 16. Though the Evidence Act is not applicable to proceeding under the Income-tax Act, the principles that emerge from these sections are that anything which has a bearing on the question at issue before the judicial Tribunal would be a relevant fact (CIT v. Sahib Ganj Electric Cable (P) Ltd. 1978 (115 ITR 408, 414, 415)(Cal).

The Assessing Officer’s rejection, not of the explanation of the assessee but of the explanation regarding the source of income of the depositor, cannot buy itself lead to any inference regarding the non-genuine or fictitious character of the entries in the assessee’s books of account (Sarogi Credit Corporation v. CIT (1976) 103 ITR 344, 349-50 (Pat).

Various decisions on burden of proof would indicate, that the ultimate inference in such cases is to be drawn from the facts and the preponderant probability of such explanation. In an often-repeated passage in Hasti Mal(s) v. CIT (1963) 49 ITR 273 (Mad.), it was pointed out that after a lapse of decade, the assessee should not be placed upon the rack and called upon to explain not merely the origin and source of a capital contribution, but also the origin of the origin and the source of the source as well. The difficulty in proving an explanation is a fact, which cannot be ignored.

In CIT v. P. K. Noorjehan (1999) 237 ITR 570 (SC), the assessee was unable to explain the source of investment for purchase of a property attributed to the amount left by the assessee’s step father, which could not be established by the assessee. Considering her age and the circumstances in which she was placed, Tribunal held that the mere fact that she was unable to establish the source, did not justify addition. High Court also endorsed the view of the Tribunal. Satisfaction in the opinion of the Assessing Officer certainly involves an element of discretion in drawing an inference from the facts and circumstances of a particular case. It was this view of the High Court which was endorsed by the Supreme Court, when it affirmed the decision of the High Court. In other words, the inference should rest upon the credibility of the explanation rather than the materiality of evidence.

Gujarat High Court in DCIT v. Rohini Builders (2002) 256 ITR 360 (Guj.) held that mere identification of the source of the creditors even without evidence as to the nature of income could justify acceptance, where the assessee has given the GIR Nos. / PAN of the creditor and also shows that the amounts were received by account payee cheques.

Shifting of Onus to the Department

Lord Hansworth M.R. in Stoney v. East Bourne R. D. Council (1927) 01 CH. 367, 397 has observed “there can only be sufficient evidence to shift the onus from one side to the other if the evidences sufficiently prima facie to establish the case of the party on whom the onus lies. It is not merely a question of weighing feathers on the one side or the other, and on saying that if there were two feathers on one side and one on the other that would be sufficient to shift the onus. What is meant is, that in the first instance, the party on whom the onus lies must prove his case sufficiently to justify a judgment in his favour if there is no other evidence.”

When, however, in a case where the entries stands in the name of an independent 3rd party, the burden will lie upon the assessee to establish the identity of the said party and to satisfy the Assessing Officer that the entry is real and not fictitious. This is the law under 1961 Act which makes no distinction in credit entries recorded in own account or 3rd party’s account. Where however the identity of the 3rd party and his capability is established the initial burden which lies upon him can be said to have been discharged by him. It will, not, thereafter, be for the assessee to explain further how or in what circumstances the 3rd party obtained the money and how or why he came to make the deposit of the same with the assessee. The burden will shift onto the Department to show why the assessee’s case cannot be accepted and why it must be held that the entry, though purporting to be in the name of the 3rd party still represent the income of the assessee from a suppressed source. In order to arrive at such a conclusion, however, the Department has to be in possession of sufficient and adequate material (Orient Trading Co. Ltd. v. CIT (1963) 49 ITR 723 (Bom), Sarogi Credit Corporation v. CIT (1976) 103 ITR 344 (Pat).

No burden on the Department to show that income was derived from a particular source where there is an unexplained cash credit it is open to the Assessing Officer to hold that it is income of the assessee and no other burden lies on the Assessing Officer to show that income is from any particular source. It is for the assessee to prove that even if the cash credit represents income, it is income from a source which has already been taxed (CIT v. Devi Prasad Vishwanath Prasad (1969) 72 ITR 194 (SC).

Explanation offered by the assessee how to deal with – An explanation prima facie reasonable cannot be rejected on capricious or arbitrary grounds. Explanation given by the assessee should be considered objectively by the officer before he takes a decision to accept or reject it.

i) as explained by the Supreme Court in Sreelekha Banerjee v. CIT (1963) 49 ITR 112 (SC), if the explanation given by the assessee shows that the receipt is not of income nature, the Department cannot “convert good proof into no proof” or otherwise act unreasonably and reject it. On the other hand, if the explanation is unconvincing, the same may be rejected and an inference drawn that the amount represents undisclosed income either from a disclose or an undisclosed source.

ii) The explanation given by the assessee cannot be rejected arbitrarily or capriciously, without sufficient grounds, on suspicion or on imaginary or irrelevant grounds (Sona Electric Co. v. CIT (1985) 152 ITR 507 (Del.), Roshan Di Hatti v. CIT (1977) 107 ITR 938 (Del.).

iii) Where the assessee furnishes full details regarding the creditors, it is up to the Department to pursue the matter further to trace these and examine their credit worthiness. This has been pointed out in CIT v. Orissa Corporation (P) Ltd. (1986) 159 ITR 78 (SC). The Assessing Officer cannot accept the explanation in part in reject it in part. This is established in Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC) and Lalchand Bhagat Ambikaram v. CIT (1959) 37 ITR 288 (SC).

iv) The Department cannot treat an item of credit as income by merely rejecting the explanation put forward by the assessee and even where the assessee explanation has been rejected correctly, it does not necessarily or invariably mean in all cases, an addition to the assessee’s income. These two aspects are seen from the Supreme Court decisions in Homy Jahangir Gheesta v. CIT (1961) 41 ITR 135 and CIT v. Bharat Engineering & Construction Co. (1972) 83 ITR 187 (SC) respectively.

D. The sum so credited “may” be charged to Income-tax

In the Bill introduced in Parliament, the clause was read : the sum so credited shall (i) be deemed to be income of the assessee; and (ii) shall be chargeable to income tax as the income of the previous year. The word “shall” occurring at two places was replaced by the word “may” at the instance of the Select Committee in order to enable the Assessing Officer to have the power to assess any 3rd person, in case, it is found that the sum so credited in books belonged to the said 3rd person and not to the assessee. It was observed : “the committee are of the view that where there is evidence to show that the amount belongs to some other person, the Assessing Officer should have power to access that person. Therefore, the fact that the explanation offered by the assessee is not satisfactory should not invariably force the Assessing Officer to treat it as income of the assessee. The clause has been amended accordingly and read as “the sum so credited may be chargeable to Income-tax as the income of the assessee”.

The section uses the word ‘may’ which gives discretion to the Assessing Officer. It is not necessary that in all cases for the amount to be treated as assessee’s income – CIT v. Noorjahan P.K. (1999) 237 ITR 570 (SC) affirming CIT v. Noorjahan (123 ITR 03); DCIT v. Rohini Builders (256 ITR 360); Nitesh Rolling v. CIT (258 ITR 278).

The word ‘may’ denotes the discretion of the Assessing Officer that he can make an addition or cannot make an addition – Umesh Electricals v. ACIT (2011) 131 ITD 127 (Agra-Trib.)(TM).

While considering the explanation of the assessee, the Assessing Officer cannot act unreasonably and his satisfaction that a particular transaction is not genuine must be based on relevant factors and on a just an reasonable inquiry – Sumati Dayal v. CIT (214 ITR 801) (SC), Rajshree v. CIT (256 ITR 331).

Further the fiction created u/s. 68 to 69C cannot, by itself, be extended to penalty proceeding to raise of presumption of concealment of income – CIT v. Baroda Tin (221 ITR 661).

E. Share Application Money / Share Capital

The term “any sum” found credited in the books of assessee takes within its ambit the sum credited on revenue account or on capital account. The issue whether a company has the same responsibility as regards money received towards its share capital as for other cash credits continues to be a matter of controversy with a number of decisions on the subject.

Where an assessee Co. represents that it had issued shares on receipt of share application money when the amount so received would be credited in the books of account of the assessee. In such cases, the Assessing Officer would be entitled to enquire, and it would indeed be his duty to do so, whether the alleged shareholders do in fact, exist or not. If the shareholders exists then possibly, no further inquiry need be made but if the Assessing Officer finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons. The use of the words “may be charged” in section 68 clearly indicate that Assessing Officer would then have the jurisdiction, if the facts so warrant to treat such a credit to be the income of assessee (CIT v. Sofia Finance Ltd. (1994) 205 ITR 98, 104 (Del FB).

In CIT v. Steller Investment Ltd. (1991) 192 ITR 287 (Del.), it is held that even if it is assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee which view has been upheld by the Supreme Court reported in (2001) 251 ITR 263 (SC). However Calcutta High Court in CIT v. Ruby Traders & Exporters Ltd. has distinguished the decision on the ground that the Supreme Court has only refused leave on the ground that the High Court decision had endorsed the Tribunal conclusion on the facts.

Thereafter, a consistent view has been taken by the various High Courts in various cases that where the assessee has furnished all the relevant documents i.e., name and addresses of the shareholders, PAN, share allotment letter, share certificates, ITRs of the creditors, bank account etc. i.e., where the assessee has proved the identity and credit worthiness of the creditor and genuineness of the transaction then no addition can be made in the hands of assessee. If the Assessing Officer is not satisfied then the addition can be made in the hands of share subscriber (CIT v. Divine Leasing & Finance Ltd. (2008) 299 ITR 268 (Del.).Once the assessee proved these ingredients, the burden shifts to the Department to show that the amount received in account payee cheque is unexplained liable to be taxed u/s. 68.

Sometimes it so happens that the assessee furnished all the details regarding share capital but the Assessing Officer does not make any inquiry though he is empowered to issue summons u/s. 131 and to enforce the attendance of the creditors. In these circumstances, the blame cannot be totally shifted to the assessee and the presumption of concealment of income cannot be made taking such an extreme view. In number of cases, Hon’ble Delhi High Court has held that it is not the responsibility of the assessee company to produce the shareholders, no adverse view can be drawn u/s. 68 merely on the ground of non-production of party by the assessee company. Some of these cases are as under :

CIT v. Dwarkadhish Investment Pvt. Ltd. (2011) 330 ITR 298 (Del.)

CIT v. Oasis Hospitalities Pvt. Ltd. (2011) 333 ITR 119 (Del.)

CIT v. Victor Electrodes Ltd. (2010) 329 ITR 231 (Del.)

Madhuri Investments Pvt. Ltd. v. ACIT ITA No. 110 of 2004 dated 18-2-2006 (Kar.)

CIT v. Kamdhenu Steel & Alloys Ltd. & Ors (2014) 361 ITR 220 (Del.)

CIT vs Creative World Telefilms Ltd. (2011) 333 ITR 100 (Bom.)

CIT v. Lovely Exports (P) Ltd. (2008) 216 CTR 195 (SC) (2008) 6 DTR 308 (SC)

CIT v. Value Capital services Pvt. Ltd. (2009) 221 CTR 511 (Del.) (2008) 307 ITR 334 (Del.)

CIT v. Electro Polychem Ltd. (2007) 294 ITR 661 (Mad.)

Jaya Securities Ltd. v. CIT (2008) 166 Taxman 7 (All.)

CIT v. Goelsons Golden Estate Pvt. Ltd. ITA No.212/2012 (Del.)

CIT v. Fair Finvest Ltd. (2013) 357 ITR 146 (Del.)

CIT v. Winstral Petrochemicals (P) Ltd. (2011) 330 ITR 603 (Del.)

CIT v. Dalmia Brothers ITA No.298 of 2012(Del.) order-dated 16-5-2012

CIT v. Expo Globe India Ltd. (2014) 361 ITR 147 (Del)

ACIT v. Pancham International (P) Ltd. ITA No.50/Del/2011, order-dated 23-11-2012 (Del, ITAT)

ITO v. Batra Jewels (P) Ltd. ITA No.2921/Del/2010 order-dated 18-5-2012 (Del, ITAT)

CIT v. Gangeshwari Metal Pvt. Ltd. 361 ITR 10 (Del.)

CIT v. Goa Sponge & Power Ltd. ITA No.16/2012, order dated 13-2-2012(Bom.)

ITO v. HI Tech Accurate Communication Pvt. Ltd. ITA No.1125/2012, order dated 1-6-2012 (Del. ITAT)

ITO v. M/s. Jansampark Advertising & Marketing Pvt. Ltd. ITA No. 4839/Del/2009 dated 14-6-2013

Uphar Alloys Pvt. Ltd. v. ITO ITA No.4511/Del/2010 dated 27-9-2013

ITO v. Texfab Marketing Ltd. ITA No.1177/Del/2012 dated 5-10-2012

F. Gifts

The inference of genuineness of gift does not readily follow merely on identification of the donor on receipt of money through banking channels. His capacity to make a gift is equally relevant. In fact, the credibility of such gift except where it is proved beyond doubt, would appear to be relevant as held by the Supreme Court in CIT v. P. Mohan Kalan (2007) 291 ITR 278.

Where a gift is claimed to have allegedly received from donors who are not relatives and there was also no occasion for such gifts, the mere fact that they were received from banking channel cannot justify acceptance. In view of widespread practice of money laundering through foreign gifts, authorities may be justified in putting the assessee to strict proof, especially when they are not from the close relatives and it is for this reason that gifts from non-relatives are now subject to tax by deeming them as income.

G. Demonetisation & Section 68

8th November 2016 was the eventful day when the phase of Indian Economy changed. 86% of the total Indian currency consisting of 1000 rupee and 500 rupee note was intended to be replaced by new 2000 rupee and 500 rupee notes.

Demonetisation aimed to strengthen the fight against corruption, black money and the activities of terrorists, antisocials and antinationals, using fake currency. Hon’ble Prime Minister called upon the masses to participate in this Maha Yagya and join “the festival of honesty and celebration of integrity”.

Demonetisation brought with it many tax implications. In order to check black money, Government followed two approaches: persuasive and punitive. Under the persuasive approach, Govt. floated amnesty schemes both for getting foreign black money from abroad as well as in India. The persons who did not avail the amnesty scheme, have made themselves liable to penal action under the punitive provisions.

Amnesty scheme under the Black Money Act for foreign income

a) For such money a new Act titled as “Undisclosed Foreign Money and Assets (Imposition of Tax) Act 2015” (Black Money Act in short) was enacted for foreign tax evaded incomes. The Black Money Act provided one time tax compliance window for undisclosed foreign income and assets for those who wished to come clean in respect of their hidden income and wealth. A limited window was opened for this purpose with effect from 1-6-2015 to 30-9-2015 for those who wished to disclose, followed by payment of tax at 30% and an equal amount by way of penalty with the stipulation that no exemption, deduction, set off of carried forward losses etc. shall be permitted under the new legislation. On disclosure, immunity from prosecution was granted. During the 3 month period, only 644 taxpayers availed the scheme and only ₹  2438 crore could be collected as tax.

b) Negotiations have been done with foreign countries for collecting information regarding tax evaders and repatriation of their tax evaded income to India. For this purpose, agreements have been reached with most of the countries by entering into Tax Information Exchange Agreements for exchange of information regarding Indians who have money in such countries.

Efforts to tap domestic black money

a) Government floated Income Disclosure Scheme for domestic taxpayers which was available for 3 months i.e., from 1-6-2016 to 30-9-2016. Under the scheme, declarant had to pay 45% tax and penalty on undisclosed wealth brought to books. Under the scheme, total disclosure of ₹  55,000 crore was made and the tax of ₹  24,750 crore was collected.

b) 2nd Amnesty scheme was floated through Taxation Laws (2nd Amendment) Act 2016. Government came-up with an income disclosure scheme called Pradhan Mantri Garib Kalyan Yojna (PMGKY) 2016 which allowed people to deposit money in their account till 1-4-2017 by paying 50% of the total amount – 30% as tax, 10% as penalty and 33% of the taxed amount i.e., 10% as Garib Kalyan Cess. Half of the remaining deposit i.e., 25% of original deposit would not be allowed to be withdrawn for 4 years

c) To penalise the persons who did not avail income disclosure scheme ended on 30-9-2016 or PMGKY 2016 till 31-3-2017, the Government introduced section 115BBE on 24-11-2016 w.e.f. 1-4-2017 to provide for the tax on an unexplained income during the window. Section runs as under:

115BBE. (1) Where the total income of an assessee,—

(a) includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or

(b) determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a),

the income-tax payable shall be the aggregate of—

(i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent; and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance [or set off of any loss] shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) 65 [and clause (b)] of sub-section (1).

Thus according to this provision, the assessee has to pay the tax @ 60% on undisclosed income referred to in section 68 to 69D and against the said income, no deduction in respect of any expenditure or allowance or set off of any loss is available.

Simultaneously, section 271AAC is also introduced by the Taxation Laws (2nd Amendment) Act 2016 w.e.f. 1-4-2017, according to which assessee shall be liable to penalty @ 10% in respect of income determined u/s. 68 to 69D for any previous year. As per the proviso to section 271AAC, no penalty shall be levied in respect of income referred to in section 68 to 69D to the extent such income is included by the assessee in the return of income furnished u/s. 139 and the tax u/s. 115BBE has been paid on or before the end of relevant previous year.

It is also provided that where the penalty is levied u/s. 271AAC then no penalty shall be imposed u/s. 270A.

d) On 18-11-2016, Government cautioned Jan Dhan Account Holders that they will be prosecuted under the Income-tax Act for allowing misuse of their bank account through deposit of black money in ₹  500/1000 notes during the 50 days window till December 30.

e) As per study of demonetisation impact

(i) 86% of the total currency (₹  15.44 lakh crore worth of notes) went out of circulation,

(ii) ₹  15.28 lakh crore banned notes were deposited in bank accounts before the expiry of December 31, 2016 deadline,

iii) ₹  56 lakh more Indians joined the rank of tax assessees, who filed tax returns ₹  2.33 crore in 2015-16 whereas ₹  2.79 crore people filed return in 2016-17,

iv) ₹  17.92 lakh individuals have been identified whose tax profile does not match the cash deposit made by them after demonetisation,

v) 488% jump in number of suspicious transactions in bank and other financial institutions. The comparative figures are

2015-16 : ₹  1.06 lakh

2016-17 : ₹  4.73 lakh (₹  23.22 lakh accounts)

vi) 5100 notices for suspicious cash deposits have already been issued. ₹  42,463 crore was deposited in about ₹  48 lakh Jandhan Accounts.

i)

On November 8, 2016

₹  45.637 crore

ii)

After announcement of demonetisation decision in 45 days

₹  87,100 crore

Difference

₹  42.463 crore

vii) The huge cash deposits in banks brought down their borrowing cost, leading to a decline in interest rates across the Board.

viii) ₹  17.73 lakh cases were detected where cash transactions did not match tax profile.

f) Very significant impact of demonetisation had been the strong signal of the Govt. decision to take stringent measures to combat corruption and black money. Following measures are adopted:

i) Benami Transaction Act – Benami Transaction (Prohibition Act) enacted in the year 1988 was almost a dead Act, which has been rejuvenated by the Government in 2016 by making it an effective and meaningful legislation by bringing significant amendments in it. As per the PMO report, property worth ₹  3,400 crore has been seized under the amended benami law.

ii) Spurt in search, seizure and survey operations – There has been considerable increase in search, seizure and survey operations leading to seizure of more assets/cash and detection of undisclosed income

Search and seizure operation

Financial Year

Premises searched

Value of properties seized

Tax realized ()

2010-11 to 2013-14

2,167

3,063

48,299

2014 to 2017-18

2,725

3,940

52,705

Surveys carried out

Nos.

Financial Years 2011-14

17,571

Financial Years 2014-18

35,470

(taken from Government’s published figures from time-to-time)

Aforesaid tables reveal that there has been considerable increase in search seizure and survey operations.

iii) Banning of cash transactions above ₹  3 lakh – Govt. has discouraged the cash transactions as under:

A. Cash payment for revenue expenditure – Section 40A(3)

Expenditure for which cash payment has been made to a person in a day exceeds ₹  10,000/- shall be disallowed under PGBP.

(Subject to permissible Cash payments under Rule 6DD)

B. Cash Payment for capital expenditure – Section 43

Expenditure for which cash payment has been made to a person in a day exceeds ₹  10,000/- shall not be included in actual cost which means no depreciation will be allowed in respect of such payment.

C. Cash donations under section 80G

No deduction of donation made in cash shall be allowed under section 80G of the Act in case the sum exceeds ₹  2,000/-.

D. Presumptive taxation under section 44AD

Receipts through Cash : 8% of the sales will be deemed as income. Receipts through Bank : 6% of the sales will be deemed as income.

E. Loan or Deposit taken in Cash (incl. receipts for immovable property)-269SS

Loan or deposit taken in cash shall be less than ₹  20,000 otherwise 100% penalty.

F. Loan or deposit repaid in Cash (incl. w.r.t. immo property)-269T:

Repayment of loan or deposit shall be less than ₹  20,000 otherwise 100% penalty.

G. Limit on Cash transactions – Section 269ST:

No person shall receive an amount equal to or more that ₹  2,00,000 in cash:

• In aggregate from a person in a day; or

• In respect of a single transaction; or

• In respect of multiple transactions relating to a single event.

Otherwise 100% penalty will be levied.

Permitted modes for above transactions: Account payee cheque, Account payee draft or ECS (Electronic Clearing System)

Various steps have been taken to identify the tax evaders. The Government’s intention to fight black money is loud and clear. It is equipped with adequate authority to deal with the black money holders stringently. All the escape routes for the tax evaders have been closed. In such circumstances, the role of tax practitioners also become loud. We all are supposed to give our Aahuti for nation building.

[Source: Article printed in Souvenir of 21st National Convention 2018 held from 22nd to 23rd December, 2018 at Guwahati]

Guwahati the 16th day of January, 2019

Dear Colleagues,

A happy new year and good wishes for Lohri, Pongal, Bihu and Makar Sankranti.

The 21st National Convention of the Federation, ‘Saarthi’, was held on 22nd and 23rd of December, 2018 at Guwahati in a grand way. Friends, we organised Saarthi with a clear vision to strengthen the bond of togetherness amongst the members and it was very heartening to see that our members transgressing geographical, cultural and professional barriers, mingled with one another, strengthening the bond and spirit of togetherness. I am happy to say that we have been successful in our mission.

For the first time, the incumbent National President took the oath of office at the Inaugural Session of the Convention itself and the oath was administered by Hon’ble Mr. Justice Deepak Gupta, Judge, Supreme Court of India. Names of all the office bearers of the Federation were announced at the first National Executive Meeting of the Federation for the year 2019 on 21st December, 2018 itself at Guwahati. All the sub-committees were also constituted and notified on the same day. For the first time, the dates and places of the two day conference to be held during the year 2019 were also announced. Before the start of the year itself, the dates and places for the AIFTP International Study Tour for the year 2019 were also announced. It is heartening to note that all the sub-committees have started working from the first day of January itself and one day seminars have also been organised in different places in the month of January itself. With a view to spread the wings of the Federation to the remotest parts of the country, I have requested all the zones of the Federation to organise seminars, study meetings and other programmes at places where the same has not been done in the past. We have to take the Federation to the remotest places of the country so that our professional colleagues at those places may also take the benefit of the activities of the Federation. In this process, the East Zone of the Federation jointly with Jaipur District Bar Association has organised a one day Tax Seminar at Jaipur on 23rd January, 2019. In fact, it was very heartening to see nearly 100 delegates from Odisha participating in the 21st National Convention at Guwahati.

During the year 2019, we shall try our best to increase the membership strength of the Federation by at least 1,000 members. The Membership Development Committee under the chairmanship of Mr. Kewalramani is working hard in this direction. We shall also try and see that the members, who in the past were very active, but for some reason are not taking active part in activities of the Federation, are again involved in the Federation activities during the year 2019.

Friends, the chief guest at the 21st National Convention at Guwahati, Hon’ble Mr. Justice Deepak Gupta emphasised the need on the maintenance of standards of professional conduct and etiquettes by members of the Federation. The Federation has already framed standards of professional conduct and etiquettes for the members of the Federation and I shall appeal to all the members of the Federation to follow the said standards scrupulously. I have also found that the attendance of some of the members of the National Executive Committee is very poor, which may be because of the various difficulties and professional commitments. However, in this process, we not only lose the fellowship opportunity with the members but also the views, advice and suggestions of the members of the National Executive Committee. I hope and trust that the members of the National Executive Committee shall make all endeavours to attend the meetings of the National Executive Committee.

Friends, the year 2019 is going to be very important inasmuch as the same is an election year. After the introduction of Goods and Services Tax in 2017, lots of difficulties and inconveniences have been faced in the implementation of GST. Recently, the Government has taken number of steps to streamline the implementation of Goods and Service Tax and I am sure that in the year 2019, the implementation of GST shall be streamlined and the same shall lead to better compliance.

We are also taking steps for submitting representations to appropriate authorities for filling up the vacancies in the Income Tax Appellate Tribunal as well as elevation of the members of the Income Tax Appellate Tribunal and those practising in the taxation side as Judges of High Courts. Since in the coming years, the tax litigation is going to increase manifold, it will be in the interest of all that persons who are conversant with tax laws, are also elevated as Judges of High Courts so that tax cases can be disposed of expeditiously.

Friends the first two days of National Tax Conference is going to be held at Aurangabad on 16th and 17th of February, 2019. The organisers are working very hard to make the conference a grand one. I request you all to participate in the said conference and make it a grand success.

With best wishes.

Dr. Ashok Saraf
National President