The dawn of new year 2016 while ushering in a new era of global competitiveness to the learned members of professional fraternity, has also perpetuated an irreparable loss to the entire nation with the sudden & sad demise of the most venerable top most judicial officer Justice S. H. Kapadia, in Mumbai on 5-1-2016. His loss cannot simplicities be to the family members but a profusely effectuating one to the total Indian judicial world. A legend in judiciary a rare gem of virtues of integrity & upright in vision & thoughts. The Court whichever he adorned is a school of learning to every advocate. Junior or senior at the Court is respected & treated alike. A person of versatile knowledge & voracious reader. I always cherish the sweet memories of arguing before a great legal luminary in a number of briefs both for citizens as well as state. I as individual counsel closely known as also the National President of All India Federation of Tax Practitioners convey heartfelt condolences to the members of bereaved family and simultaneously feel proud to have been associated with a such a widely respected Justice to whom we pay rich Tributes to his glorious life as the unquestionable lover of impartiality & unshaken faith in Justice.

Dr. M. V. K. Moorthy,

Advocate and National President, AIFTP

On 5th January, 2016, the nation was stunned by painful reality of passing away of former Chief Justice of India, Hon’ble Mr Justice S. H. Kapadia. 5th January, 2016 has left behind a multitude of grief stricken judiciary, the lawyers, the litigants and the entire nation.

Born into a poor Parsi family, just after India’s independence, starting the career as Class-IV employee, rose higher and higher through his inhumanly hard work to become one of the most finest Judges of the country.

He always led an ethical and moral life. In the initial stage of practice as lawyer, he fought for the poor and downtrodden people. He gave up a lucrative professional career at his prime, in favour of judgeship.

He was not only a model Judges but also a symbol of inspiration and a role model of all professionals. He was a Judge of impeccable integrity.

He was fond of the tax laws. He used to say if one can master the tax laws, one can master any law. He was well conversant with principles of economics and accountancy. He delivered various landmark judgments on taxation side whilst sitting in the Bombay High Court such as IPCA Laboratories, 251 ITR 416 (Bom), K K Doshi, 245 ITR 849 (Bom), Shirke Construction, 246 ITR 429 (Bom), Sudershan Chemicals, 245 ITR 769 (Bom), Indo Nippon, 245 ITR 384 (Bom).

Even in the Supreme Court, he showed his affinity for the subject by sitting on the tax Bench throughout his tenure and passed several landmark judgments such as Morgan Stanley, 292 ITR 416 (SC) (Transfer Pricing), Lakshmi Machine Works, 290 ITR 667 (SC) (Sec 80HHC), Hundai Heavy Industries Co. Ltd, 291 ITR 482 (SC) (offshore supply profits), GE India Technology Centre (P) Ltd, 327 ITR 456 (SC) (Scope of Sec 195 TDS) etc. In fact, Justice Kapadia chose to end his illustrious career with the Vodafone Case, 341 ITR 1 (SC), the most celebrated case in tax jurisprudence.

Not only in taxation side, he laid down the law in many important cases such as 2G case, Sahara case, in arbitration law. He also delivered the judgement upholding the constitutional validity of the revolutionary right to Education Act. These judgments will be the legacy of Chief Justice Kapadia for the several decades to come.

Hon’ble Mr. Justice Kapadia, though is not with us in flesh and blood, his relentless perseverance, compassion and dedication to cause of justice will live on for all time to come. He will be remembered with great reverence and feeling of indebtedness. To adopt the ethics and moral values set by him will be the great tribute to this legendary personality.

May the departed soul rest in peace in the Vicinity of God and we pray the almighty to give strength to the family and legal fraternity to bear this irreparable loss.

Prem Lata BansalSenior

Advocate & Deputy President, AIFTP


I was shocked to learn about the sad demise of our beloved Hon’ble Mr. Justice Shri. S. H. Kapadia.

Ever seems he was appointed on 8th October, 1991, as a judge of the Bombay High Court I had the privilege of appearing before him in some of my matters.

Prior thereto, he was the standing counsel for the Income Tax Dept., and therefore he had a soft corner in his heart for the tax Bar. As a presiding judge at the High Court as well as the Supreme Court he was very meticulous and perfect in his approach. While in the High Court he was a regular judge reaching the court premises daily much before its schedule time. Apparently he was a strict follower of the letter of law without having any regard as to the status of the parties before him or the counsel arguing the matter; he was very considerate when a junior was to argue a matter. While delivering the judgments he as a good judge considered all aspects of the points / controversy involved. That habit gave him an opportunity to have a judicial activism and contribution towards the development of law.

In one of the conference arranged by AIFTP when I welcomed him to the venue he immediately recalled his association with the Bombay Bar and enquired about some of the counsel who used to appear regularly before the tax Bench. In fact he publicly recalled my meeting him while addressing the inaugural session.

He was one of the few chiefs amongst many Chief Justices not to accept any Govt. posting after retirement on 29th Sept, 2012. He enjoyed his short retired life while being with his family and friends without any constraint of a judicial luminary.

He leaves behind hundreds of his followers apart from his family. Being one of the Shining Star amongst the judiciary he will be remembered for his pro-active judicial activism towards law development and the Ld. Judgments.

For such a great departed soul I pray God Almighty bestow eternal peace.

P. C. Joshi.
Advocate & Past President, AIFTP.

I have heard and met Hon’ble Mr. Justice S. H. Kapadia at the National Convention at Mumbai in 2002 while laying down Presidents in favour of my successor dear Dr. K. Shivaram. He was a Hon’ble Judge of the Bombay High Court. I found him simple, sober with deep knowledge of tax, accountancy and other laws. Later, I met him at Delhi after elevation to the Supreme Court at the National Convention. On spotting me, he ordained to keep up with the Ranka Best Conference and other awards to inspire and recognise, who work in educational field. I had the pleasure and privilege to argue an appeal of a co-operative society for two days. Strange, while concluding his Lordship remarked. We have been benefited by your vast experience. I saluted with folded hands and bowed down. In him I found replica of Justice J. S. Verma, Former Chief Justice of India. Unfortunately the God almighty snatched at tender age of 68. I pray Lord Mahaveera to confer peace on the departed soul and give strength to the family and legal fraternity to bear the irreparable injury. My heartfelt condolences.

Shri N. M. Ranka
Senior Advocate and Past President, AIFTP

I was saddened to know that Hon’ble Mr. Justice S.H. Kapadia has gone on his heavenly abode on 5th January, 2016. He was a very sober & simple man and having in-depth knowledge particularly of tax laws. While he was in his office, he had given very remarkable judgments on various issues. I had the opportunity of meeting him personally when I was National President of All India Federation of Tax Practitioners. We have been benefited by his vast experience. He was a man who will be remembered by the tax fraternity for years together.

I covey my heartfelt condolences and pray to Almighty to grant peace to the departed soul and strength & courage to the bereaved family to bear this irreparable loss in this hour of grief.

M. L. Patodi
Advocate and Past President, AIFTP

For those who personally knew Mr. Justice Sarosh H. Kapadia, he was the epitome of simplicity. He would never tolerate any lax conduct by any professionals appearing before him.

His life story is an inspiration for many. From a Class IV employee to starting practice as a junior in the chamber of a labour lawyer to trying securities scam matters as Special Judge in Bombay High Court and deciding large tax disputes as a Judge in Bombay High Court and as the Chief Justice of India, stand out as the true examples of how hard working and versatile he was.

Like many of his colleagues he did not ‘retire’ after crossing the age of retirement, but worked till the last day in his life. There can be no doubt that the legal fraternity will miss him presence and guidance, and much more in Mumbai.

May his soul rest in peace.

J. D. Nankani
Advocate & Immediate Past President, AIFTP

Chief Justice Sarosh Homi Kapadia – A tribute

1. Justice Kapadia was the first Chief Justice born in free and independent India (29th September, 1947). This corresponds to his approach in all judicial matters – free and independent in his thinking and in the pronouncement of judgments – not afraid to dissent where necessary. He was enrolled as an advocate of the High Court at Bombay at the age of 27 years, comparatively an old age for such enrolment, but this was because he had to support himself and his family by engaging himself in an employment prior to qualifying as an advocate. Even to educate himself and to go to college, he had to provide his own finance. He did not have a godfather in the profession. Mr. R. A. Gagrat, a fearless solicitor, who used to take on the most difficult cases – which others shied away from – appreciated lawyer Kapadia’s dedication to the profession and took interest in his progress. He later devilled in the Chambers of

Mr. Feroze Damania, a leader in the field of labour law. Under his tutelage he developed as a very persuasive lawyer. As an advocate, he handled a variety of different types of litigations and was also a Counsel on the panel of tax lawyers of the Central Government in the High Court. He was meticulous in preparation of cases and was fair in presenting them.

2. In October 1991, he was appointed as an Additional Judge of the High Court at Bombay and was made permanent in March 1993. Ten years later, he was transferred as Chief Justice of the Uttaranchal High Court at Nainital where he was greatly admired. Four months thereafter, he was elevated as a judge of the Supreme Court of India, superseding several other judges on account of his integrity, dedication to work and humility. Six and half years later, on 19th May, 2010 to be precise, he assumed office as Chief Justice of India and held that post for almost two and half years. September was an important month in his life – he was born, enrolled as a lawyer and demitted office as Chief Justice in that month! The care which he took in reading his briefs as a lawyer was also displayed in reading the cases which came before him for decision and Counsel often found that a fact overlooked by him was noted by the Judge. No one could ever question his complete integrity and dedication to the cause of justice. In keeping with his interest in Hinduism and Buddhism, he was also an ascetic in his social life and did not encourage “free mixing” with others in any way, as he believed that it may affect or appear to affect his independence of decision. He toned up the administration in the Supreme Court.

3. He was in great demand as a speaker at various functions and freely expressed his views on several occasions, but he never let this part of his activity in any way affect his full attendance in Court. In the field of tax law, he delivered many path breaking judgments. In Smifs Securities Ltd. 348 ITR 302, he held that goodwill “created” in the process of amalgamaton was an asset in respect of which depreciation was available under section 32 of the Income-tax Act. In Lovely Exports 319 ITR 5 (report of Supreme Court Cases), he held that share subscription money received by a company, if unaccounted, could be added under section 68 not as the income of the company but, if at all, of the subscriber. In TRF Ltd. 323 ITR 397, he upheld an assessee’s right to claim deduction for a bad debt which had been written off without having to prove that it had, in fact, become bad. in Ponni Sugar & Chemicals Ltd. 306 ITR 392 in deciding the thorny issue as to whether a subsidy was on revenue or capital account, he held that it was the object for which the subsidy was given which was the determining factor. Finally, a reference may be made to two decisions which he decided by applying the law, as it stood, even though the facts may have tempted a lesser person to take a contrary view. The first decision is that of Walfort Share & Stock Broker Pvt. ltd. 326 ITR 1 where he upheld a dividend stripping transaction and also laid down important guidelines as to when the disallowing provisions of section 14A can be invoked. In Vodafone’s case 341 ITR 1, he laid down the oft quoted dictum of looking at and not looking through a transaction. The fact that the decision may result in foreign and non-resident assessees avoiding Indian tax did not deter him in holding what was the position in law.

4. Kapadia J’s decision (2006 6 SCC 613), dissenting from the view of his two senior colleagues, in the Lalu Prasad fodder scam case evidenced the high regard he had for the time tested principle that justice must not only be done but be seen to be done. His boldness was also evident in his striking down the appointment of P. J. Thomas (2011 4 SCC 1) as Chief Vigilance Commissioner, a decision which caused some embarrassment to the UPA Government.

5. He never sought any favours from the Government, either as a post retirement benefit or in the form of residential accommodation. He believed that each of the three branches – legislative, executive and judiciary – has its own independent roles to play and one should not encroach on that of the other. In memorable words, he said “Judges must eschew any suggestions that duties of the judiciary are owed to the electorate; they are owed to the law which is there for peace, order and good governance”.

6. In the early hours of 5th January, 2016 he passed away (even before he had completed the biblical life span of three score and ten years) as calmly as he had always lived his life. He has left behind him his aged grieving parents, his devoted wife and children and numerous professional and friends who admired a man who never succumbed to the temptations which life offers.

Sohrab Erach Dastur,
Sr. Advocate

Source: The Chambers Journal, Volume 4, No 4, Page 10

Passing away of Justice Kapadia was a sad day for the Indian Judiciary and the country.

Chief Justice Kapadia was an exceptional person, judge and human being. He brought back respect for the Supreme Court with his sterling integrity, his landmark judgments, and for all those connected with Tax he brought “Taxation issues” back into the Chief Justice’s Court. He was a great contributor to IFA.

My late father and myself were fortunate to have known him personally, and I will miss him deeply. His life story from his junior days as an Advocate without privileged connections to becoming the Chief Justice of India is an inspiration to many. The country has lost a great judge and above all a highly ethical human being.

May his soul rest in peace and may God give his family the strength to bear this irreparable loss.

Porus F. Kaka
Senior Advocate & President,
International Fiscal Association

On the sad demise of Justice Kapadia, the nation as a whole and legal fraternity in particular, has lost a rare legal gem. His attitude towards work, his sense of humility, impeccable integrity and compassion makes him a symbol of inspiration and role model for all professionals. Though he came from a humble background, through sheer dint of hardwork and perseverance, he rose to the highest post in the judiciary. He proved that you don’t need to have a godfather to succeed in the legal profession. He became very popular because of his even handed approach and ability to quickly grasp the core point in any dispute. He used to say that if one can master the income tax law, one can master any law. He took notice of junior advocates and encouraged them. Justice Kapadia restored the faith of people in judiciary.

We pray that the departed soul rest in peace and may the Almighty give strength to his family and legal fraternity to bear this irreparable loss.

Subhash S. Shetty
Advocate & President – ITAT Bar Association, Mumbai

Chief Justice Kapadia : Inspiring story of journey from clerk to Chief Justice

“What is noteworthy is that Chief Justice Kapadia comes from a very humble and poverty – stricken back ground. His father had grown up in a Surat orphanage and had worked as a clerk while his mother Katy was a homemaker. The family could barely make ends meet. However, while the parents were poor, they were persons of great principles. From a tender age, Kapadia was taught never to accept obligation from any one and always live an ethical and moral life. “

Note: Those who desire to read more may visit



We are trading in packing material, made of plastic, like bottles, containers etc. The goods are sold to different food products manufacturing industries. Goods are also kept in Mall for Sale or sold online to individual customers. We are charging and paying VAT at the rate of 5% on the sales of these products since according to us these goods are covered by the Notification issued by the Government of Maharashtra for Industrial Inputs and Packing Material. Our view is supported by the Bombay High Court judgment in the case of M/s Samruddhi Industries, STR No. 20 of 2006, Judgment dated 23-12-2014. The Investigation Department paid surprise visit to us. They are of the view that these products are covered by residuary entry attracting tax at 12.5%. They wanted us to file revised returns and pay tax at 12.5%. On our refusal they have taken prohibitory action u/s. 35 of The MVAT Act, 2002 and have attached our bank accounts and debtors. Kindly advise.


A. The Section 35 vests a drastic power in administrative authorities. The decisions of the administrative authorities under section 35 have to be reviewed under much stricter standard than other administrative orders and the onus of justification of the Order should be on the administrative authority who passed the Order

B.1 The Section 35 of the MVAT Act reads as follows:

35. Provisional attachment to protect revenue in certain cases:—

(1) If during the course of inquiry in any proceedings including, proceedings related to recovery of any amount due, in respect of any person or dealer or during any inspection or search in relation to the business of any person or dealer under this Act, the Commissioner is of the opinion that for the purpose of protecting the interests of the revenue it is necessary so to do, then he may, notwithstanding anything contained in any law for the time being in force or any contract to the contrary, attach provisionally by order in writing any money due or which may become due to such person or dealer from any other person or any money which any other person holds or may subsequently hold for or on account of such person or dealer:

Provided that, the Commissioner shall specify in his order the amount of money to which the order applies:

Provided further that, the Commissioner may, by an order, revoke such order, if the dealer furnishes, to the Commissioner, a bank guarantee, in such time, for such period, as may be specified, in the said order.

(2) Every such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of service of the order issued under sub-section (1):

Provided that, the Commissioner may, for reasons to be recorded in writing, extend aforesaid period by such further period or periods as he may think fit, so, however that the total period of extension shall not in any case exceed two years.

(3) The powers under this section shall be exercised by the Commissioner himself or the Additional Commissioner having jurisdiction over the entire State or, as the case may be, by any Joint Commissioner to whom the Commissioner has delegated such powers by a notification published in the Official Gazette

(4) Where an order under sub-section (1) is served upon any person, provisionally attaching any money, then such person shall be personally liable, so long as the attachment order is not revoked or has not ceased to have effect, to pay to the Commissioner, the amount of money so attached

(5) If the said person or the dealer makes an application in the prescribed form to the Commissioner within fifteen days of the date of service of the order specified in sub-section (1), or as the case may be, within fifteen days of the date of service of the order extending the period under sub-section (2), then the Commissioner, after affording such person or dealer a reasonable opportunity of being heard, and, having regard to the circumstances of the case, may confirm, modify or cancel the order.

(6) An appeal against any order passed under sub-section (5) shall lie with the Tribunal and all other provisions of section 26 shall apply accordingly.

B.2 Section 35 embodies the powers of provisional attachment as granted by the State Legislature to the administrative authorities under the MVAT Act. The provision is invokable in cases where it is necessary to “protect the interests of Revenue”

B.3 The Section 35 does not expressly provide for a pre-decisional hearing, but provides for a post-decisional hearing as well as an appellate mechanism.

B.4 The nature of the powers vested in the administrative authorities under Section 35 are draconian in nature. Decisions taken under the Section 35 have to be subjected to a much stricter standard of review than other administrative decisions and the onus should be on the administrative authority who exercises such powers to show that the decision taken by it are valid. The authors cite the following factors in support of these propositions:

Extraordinary and drastic power

B.5 The Section 35 provisions relating to provisional attachment by the Revenue are analogous to Order 38 Rule 5 of the Code of Civil Procedure, 1908 which deals with “Attachment before judgment”. With respect to the powers enshrined in Order 38 Rule 5, the Supreme Court has observed in Raman Tech. & Process Engg. Co. & Anr. v. Solanki Traders [(2008) 2 SCC 302]:

“5. The power under Order 38 Rule 5 CPC is a drastic and extraordinary power. Such power should not be exercised mechanically or merely for the asking. It should be used sparingly and strictly in accordance with the Rule. The purpose of Order 38 Rule 5 is not to convert an unsecured debt into a secured debt. Any attempt by a plaintiff to utilise the provisions of Order 38 Rule 5 as a leverage for coercing the defendant to settle the suit should be discouraged. Instances are not wanting where bloated and doubtful claims are realised by unscrupulous plaintiffs by obtaining orders of attachment before judgment and forcing the defendants for out-of-court settlements under threat of attachment.

6. A defendant is not debarred from dealing with his property merely because a suit is filed against him. Shifting of business from one premises to another premises or removal of machinery to another premises by itself is not a ground for granting attachment before judgment. A plaintiff should show, prima facie, that his claim is bona fide and valid and also satisfy the court that the defendant is about to remove or dispose of the whole or part of his property, with the intention of obstructing or delaying the execution of any decree that may be passed against him, before power is exercised under Order 38 Rule 5 CPC. Courts should also keep in view the principles relating to grant of attachment before judgment [See Premraj Mundra vs. Md. Manech Gazi (AIR 1951 Cal 156) for a clear summary of the principles]”

B.6 Thus the power under Order 38 Rule 5 has been described as “extraordinary and drastic” by the Apex Court with an admonition to not allow that power to be used as a “leverage to force out-of-court settlements”.

B.7 Be it noted that the Legislature did not intend that a power like the one enshrined in Section 35 be used to arm-twist dealers into paying taxes on mere difference of opinion as to the classification of goods. It is also not possible to accept that the Legislature could have contemplated a power to provisionally attach bank accounts and debtors when the High Court has already settled the point of interpretation.

B.8 Therefore, the Revenue has to lead strict proof as to the necessity for invoking such a power in a case where the only issue is that of classification of goods.

The Revenue is the judge, prosecutor and the litigant in cases of provisional attachment

B.9 It be noted that the Courts which are empowered to adjudicate the pleas for “attachment before judgment” under Order 38 Rule 5 are impartial tribunals. The Civil Courts are not administrative tribunals which are under the complete control of the Government. However, in case of section 35 of the MVAT Act, a draconian power has been vested entirely in administrative officials. The Commissioner and his delegates, who are interested parties in the proceedings involving tax assessments, have been given the roles of the prosecutor as well as the Judge.

B.10 In the United Kingdom, there is no power of provisional attachment before making an assessment. The Budget 2014 sought to give Her Majesty’s Revenue and Customs (hereinafter “HMRC”) the power to seize bank accounts directly from the taxpayers. Following a public outcry over bypassing the Civil Courts and vesting the adjudicative and confiscatory power in an administrative agency, the House of Commons referred the proposals to the Treasury Committee. The Petitioner seeks to draw attention to the Report of the Treasury Committee of the House of Commons of the Parliament of the United Kingdom wherein the Treasury Committee took a stern view of untrammelled powers in hands of administrative authorities:

“HMRC’s Debt Recovery Powers

237. …..Mr. Haskew gave some examples of the sorts of errors HMRC had been making:

One of our members recently had a letter from HMRC threatening distraint on his assets because he had not paid a tax liability, and the letter he got said his tax liability was nought. HMRC was chasing someone and threatening distraint on a tax that was ostensibly due of nothing.


Another last week was an employer who was being threatened with a collector coming round to collect assets to cover the debt. The debt had been paid in full in January, and this was the end of March.

238. HMRC has, in the past, committed errors on a much larger scale. For example, in 2007, HMRC lost two computer discs containing Child Benefit data which included the name, address, date of birth, National Insurance number and, where relevant, bank details of 25 million people.


244. The proposal to grant HMRC the power to recover money directly from taxpayers’ bank accounts is of considerable concern to the Committee. It could develop into a return to Crown preference by stealth. The Committee considers a lengthy and full consultation to be essential. The greater detail provided by the Government on 6th May will need further and extensive examination, and the Committee will take further evidence on this. Giving HMRC this power without some form of prior independent oversight — for example by a new ombudsman or tribunal, or through the courts — would be wholly unacceptable.

245. The Chancellor argues that this measure can be justified because the Department for Work and Pensions already has the right to take money directly from people’s bank accounts to pay child maintenance. However, the parallel is not exact: in those cases, DWP is acting as an intermediary between two individuals. HMRC would be acting not as an intermediary between two individuals but rather in pursuit of its own objective of bringing in revenue for the Exchequer.

246. This policy is highly dependent on HMRC’s ability accurately to determine which taxpayers owe money and what amounts they owe, an ability not always demonstrated in the past. Incorrectly collecting money will result in serious detriment to taxpayers. The Government must consider safeguards, in addition to those set out in the consultation document, to ensure that HMRC cannot act erroneously with impunity. These might include the award of damages in addition to compensation, and disciplinary action in cases of abuse of the power.

247. The ability directly to have access to millions of taxpayers’ bank accounts raises concerns about the risk of fraud and error, and this should also be covered by the consultation.”

… (Emphasis supplied)

The Chapter relating to the HMRS’s debt recovery powers, from which the above extracts have been taken, are set out in Paras 226 to 247 of the Report of the Treasury Committee on Budget 2014.

C.12 The British Parliament finally enacted the debt recovery powers vide Section 51 read with Schedule 8 of the Finance Act (No. 2) 2015. It is pertinent to note that the power to attach and recover from bank accounts is available in the United Kingdom only qua “established debts” and not for provisional attachment before assessment (as under Section 35 MVAT Act). The section 51(2)(5) of that Act defines an “established debt” as a debt which is due and payable after all possibility of reversal on appeal has passed. It is submitted that the British Parliament has enacted a lengthy list of safeguards to protect innocent taxpayers even where the tax has been finally assessed and after the time table of appeal has passed. A summary of the same have been set out in the ‘Issue Briefing: Direct Recovery of Debts dated 5th August, 2015’ which was published by the HMRC just after the Finance Act (No. 2), 2015 received Royal Assent.

C.13 Similarly in the United States, no power of provisional attachment is vested in the Internal Revenue Service for recovering tax dues before assessment. The strict requirements of the “due process clause” of the United States Constitution has ensured that property cannot be seized in the United States without a Civil Court’s blessings (except in some limited cases like seizing properties of drug cartels, crime syndicates etc. to paralyse their functioning). The power of attachment can only be invoked when the assessment has been completed and the tax is legally due. [See Clause of the Section 3: “Levy and Sale” of the Part 5 of Chapter 17 of the IRS Manual]. See also the judgment of the United States Supreme Court in United States vs. National Bank of Commerce [472 US 713 (1985)] where that Court says that “Under the succeeding SS. 6322 the lien generally arises when an assessment is made…” and also generally summarises the procedure for seizing any asset.

C.14 The Section 35 ousts the Civil Court’s traditional jurisdiction over matters of attachment before judgment and vests it in an administrative authority. Since the administrative officers under the MVAT Act are the judge, prosecutor as well as an interested party and exercise extraordinary powers which will always affect the property and trade rights of taxpayers, the onus of justifying the provisional attachment is squarely on the Revenue.

Powers granted under Section 35 directly affect the fundamental rights of the person under Article 19(1)(g)

C.14 Be it noted that the powers granted under the Section 35 of the MVAT Act directly affect the fundamental right to trade and profession guaranteed under Article 19(1)(g) of the Constitution of India in all cases. Bank Accounts and Accounts Receivable (i.e. Debtors) constitute vital sources of working capital. Working capital is an absolute essential for any running business. A business cannot survive if its ability to access its working capital is paralysed. When any kind of attachments is levied on Bank Accounts and Accounts Receivable, the ability to pay off creditors is also seriously jeopardised leading to erosion of creditworthiness and trade reputation. It is also well known that the power of provisional attachment is frequently used to harass even those dealers who lawfully pay all taxes and do not engage in any kind of tax evasion. The Revenue exerts immense pressure through raids and provisional attachments for extracting unassessed taxes and terrorise the dealers into filing revised returns which will foreclose the right to appeal what is in substance an admission of an unassessed demand.

C.15 The authors submit that the right to trade under the Article 19(1)(g) includes a right to protection from arbitrary actions which threaten the survival of business.

C.16 In Gandhi Trading v. Assistant Commissioner of Income Tax [(1999) 239 ITR 337 (Bom)], this Hon’ble Court held:

“The power of attachment under this section is in nature of attachment before judgment under the Code of Civil Procedure. It is a drastic power. It should, therefore, be exercised with extreme care and caution. It should not be exercised unless there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of the whole or any part of his property with a view to thwart the ultimate collection of the demand. Moreover, attachment should be made of the properties and to the extent it is required to achieve the above object. It should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee. Attachment should be made as far as possible of immovable properties if that can protect the Revenue. Attachment of bank accounts and trading assets should be resorted to only as a last resort. In any event, attachment under section 28-IB should not be equated with attachment in the course of recovery proceedings.”

C.17 The Section 281B of the Income-tax Act, 1962 allows the attachment of any “property” instead of only “monies due and payable or which would become due and payable” under Section 35 of the MVAT Act. In the context of the wider provisions of Section 28-1B, this Hon’ble Court noted the detrimental effect of such attachment on a running business and held that immovable properties should be attached before bank accounts and debtors are attached. The Section 35 of the MVAT Act thus places a far greater burden on the taxpayers than the contemporary provisions in other tax laws inasmuch there is no option to provisionally attach immovable property.

C.18 The Report on the Standing Committee on Finance (2005-06) 14th Lok Sabha on The Taxation Laws (Amendment) Bill, 2005 which inserted the Sections 28BA in the Customs Act, 1962 and the Section 11DD in the Central Excise Act, 1944 which deal with the powers of provisional attachment under those Acts may also be seen. With respect to the powers of provisional attachment, the Standing Committee observed :

59. The Committee note that though the proposal to incorporate provisions enabling for provisional attachment of property in the Customs as well as the Central Excise Acts is akin to the existing provisions under the Income-tax Act, serious apprehensions and misgivings have been expressed, particularly by the representatives of the Trade and Industry include, the adverse effect the move may have on business activities of manufacturing units and the possibility of harassment in the hands of tax officials owing to enhanced powers.

60. The Committee’s questioning on the means by which such concerns are to be addressed evoked the response from the Ministry that administrative instructions would be issued to effectively address the apprehensions expressed. As informed by the Ministry, the administrative instructions would clearly stipulate that the Commissioner of Customs/Excise would order attachment of property only upon receipt of a report from the jurisdictional Deputy/Assistant Commissioner, which would be in the nature of ‘speaking order’ detailing the reasons, evidence, and justification for the provisional attachment. Also, the value of the property attached would be equal to the duty liability only; the possibility of attaching movable property would be considered only if the duty liability is not covered by attaching the immovable property; and the personal properties of Directors/Properties would not be provisionally attached on any count. The Government have also expressed in clear terms that the move ‘will not hamper the manufacturing activities’ and ‘the business activities of the assessees will carry on in the normal fashion’.

The relevant portion of the Report of the Standing Committee relating to provisional attachment occur in the Paragraphs 51 to 61 of the Report. Circular No. 874/12/2008-CX dated 30-6-2008 (Excise), and Circular 10/2008-Cus dated 30-6-2008 (Customs) were issued by the Central Board of Excise and Customs laying down a lengthy procedure relating to the powers of provisional attachment when those provisions relating to that power were inserted in the Customs Act, 1962 and the Central Excise Act, 1944.

C.20 It is in the very nature of the power under Section 35 to impair the fundamental right under Article 19(1)(g) and the Constitutional right under Article 300A. Hence it is necessary that the onus should be on the Revenue to justify the provisional attachment.

Post-decisional hearing/appellate mechanism contemplated by the Section 35 is not an adequate safeguard

C.20 The Section 35 does not provide for a pre-decisional hearing, but envisages a post-decisional hearing and an appellate mechanism to contest the levy of provisional attachment. It is a settled proposition in administrative law that an appeal from an administrative decision is not as effective as a pre-decisional hearing. In Institute of Chartered Accountants vs. L K Ratna [(1986) 4 SCC 537], the Supreme Court observed:

“17. It is then urged by learned counsel for the appellant that the provision of an appeal under Section 22-A of the Act is a complete safeguard against any insufficiency in the original proceeding before the Council, and it is not mandatory that the member should be heard by the Council before it proceeds to record its finding. Section 22-A of the Act entitles a member to prefer an appeal to the High Court against an order of the Council imposing a penalty under Section 21(4) of the Act. It is pointed out that no limitation has been imposed on the scope of the appeal, and that an appellant is entitled to urge before the High Court every ground which was available to him before the Council. Any insufficiency, it is said, can be cured by resort to such appeal. Learned counsel apparently has in mind the view taken in some cases that an appeal provides an adequate remedy for a defect in procedure during the original proceeding. Some of those cases as mentioned in Sir William Wade’s erudite and classic work on Administrative Law 5th Edn. But as that learned author observes (at p. 487), “in principle there ought to be an observance of natural justice equally at both stages”, and

“If natural justice is violated at the first stage, the right of appeal is not so much a true right of appeal as a corrected initial hearing: instead of fair trial followed by appeal, the procedure is reduced to unfair trial followed by fair trial.”

And he makes reference to the observations of Megarry, J. in Leary v. National Union of Vehicle Builders [(1971) Ch 34, 49] . Treating with another aspect of the point, that learned Judge said:

“If one accepts the contention that a defect of natural justice in the trial body can be cured by the presence of natural justice in the appellate body, this has the result of depriving the member of his right of appeal from the expelling body. If the rules and the law combine to give the member the right to a fair trial and the right of appeal, why should he be told that he ought to be satisfied with an unjust trial and a fair appeal? Even if the appeal is treated as a hearing de novo, the member is being stripped of his right to appeal to another body from the effective decision to expel him. I cannot think that natural justice is satisfied by a process whereby an unfair trial, though not resulting in a valid expulsion, will nevertheless have the effect of depriving the member of his right of appeal when a valid decision to expel him is subsequently made. Such a deprivation would be a powerful result to be achieved by what in law is a mere nullity; and it is no mere triviality that might be justified on the ground that natural justice does not mean perfect justice. As a general rule, at all events, I hold that a failure of natural justice in the trial body cannot be cured by a sufficiency of natural justice in an appellate body.”

The view taken by Megarry, J. was followed by the Ontario High Court in Canada in Re Cardinal and Board of Commissioners of Police of City of Cornwall [(1974) 42 DLR (3d) 323]. The Supreme Court of New Zealand was similarly inclined in Wislang vs. Medical Practitioners Disciplinary Committee [(1974) 1 NZLR 29], and so was the Court of Appeal of New Zealand in Reid vs. Rowley [(1977) 2 NZLR 472] .

18. But perhaps another way of looking at the matter lies in examining the consequences of the initial order as soon as it is passed. There are cases where an order may cause serious injury as soon as it is made, an injury not capable of being entirely erased when the error is corrected on subsequent appeal. For instance, as in the present case, where a member of a highly respected and publicly trusted profession is found guilty of misconduct and suffers penalty, the damage to his professional reputation can be immediate and far-reaching. “Not all the King’s horses and all the King’s men” can ever salvage the situation completely, notwithstanding the widest scope provided to an appeal. To many a man, his professional reputation is his most valuable possession. It affects his standing and dignity among his fellow members in the profession, and guarantees the esteem of his clientele. It is often the carefully garnered fruit of a long period of scrupulous, conscientious and diligent industry. It is the portrait of his professional honour. In a world said to be notorious for its blase attitude towards the noble values of an earlier generation, a man’s professional reputation is still his most sensitive pride. In such a case, after the blow suffered by the initial decision, it is difficult to contemplate complete restitution through an appellate decision. Such a case is unlike an action for money or recovery of property, where the execution of the trial decree may be stayed pending appeal, or a successful appeal may result in refund of the money or restitution of the property, with appropriate compensation by way of interest or mesne profits for the period of deprivation. And, therefore, it seems to us, there is manifest need to ensure that there is no breach of fundamental procedure in the original proceeding, and to avoid treating an appeal as an overall substitute for the original proceeding.”

… (Emphasis supplied)

C.24 In K. I. Shepherd v Union of India [(1987) 4 SCC
431], the Supreme Court observed:

“16. ….it is common experience that once a decision has been taken, there is a tendency to uphold it and a representation may not really yield any fruitful purpose.”

C.25 Similarly, in H. L. Trehan v. Union of India [(1989) 1 SCC 764], the Apex Court noted:

“12. It is, however, contended on behalf of CORIL that after the impugned circular was issued, an opportunity of hearing was given to the employees with regard to the alterations made in the conditions of their service by the impugned circular. In our opinion, the post-decisional opportunity of hearing does not subserve the rules of natural justice. The authority who embarks upon a post-decisional hearing will naturally proceed with a closed mind and there is hardly any chance of getting a proper consideration of the representation at such a post-decisional opportunity.

C.26 It is submitted that even if a subsequent appeal is provided to the Tribunal, the second appeal becomes more of a hassle than a remedy given the nature of the provisional attachment. The attachment under Section 35 is levied on bank accounts and accounts receivable which has the potential of paralysing the entire business activity immediately. Thus, a two-staged post-decisional hearing may be an adequate safeguard where attachment is levied on immovable properties, but not where attachment brings the very survival of business into question.

C.27 The authors submit that in addition to vesting the power of attachment in an administrative authority who has an interest in attaching properties of citizens to fulfil its own revenue targets and also excluding a pre-decisional hearing, the Section 35 provides an inadequate opportunity of being heard. It is therefore necessary that the decisions under Section 35 are scrutinised against a stricter standard than other administrative decisions.

A. An Order for Provisional Attachment should not be passed if immovable properties can cover the potential tax liability

C.1 Attachment of immovable properties does not affect a running business. The authors submit that no provisional attachment should be levied at all when the immovable properties of the dealer are sufficient to satisfy the potential tax demand. Unlike monies and accounts receivable, there is no danger that an immovable property will be siphoned off out of the jurisdiction of the tax authorities.

C.2 Under Section 57 of the MVAT Act, the Commissioner has sufficient powers to declare any transfer of property to defraud revenue void. Hence, even if the ownership of immovable properties change before the assessment order is passed, the transfer can be declared void after the assessment order is passed.

C.3 The Customs and Excise Circulars dated 30-6-2008 which direct that a pre-decisional hearing be given to taxpayers before invoking the powers of provisional attachment enjoin upon the Revenue Officers to attach the immovable properties first and then the bank accounts and the accounts receivables (according to the law laid down in Gandhi Trading). To allay the fears of siphoning off of properties while the pre-decisional hearing is pending, the Government has directed its officials to invoke the powers of declaring transfers to defraud Revenue (while pre-decisional hearing is pending) void to deal with such cases.

C.4 We advise you to immediately challenge the attachment before the High Court even if the alternate remedy is provided.

Deduction under Rule 58(1A) of MVAT  Rules, 2005

Query: We have purchased a plot of vacant land for the purpose of development and construction of a residential tower, but there existed a Petrol Pump at one corner of the plot and unless we get the Petrol Pump vacated and merged the plot it was not possible to start construction and we have paid a lump sum to the owners of Petrol Pump to vacate the plot and then started construction of residential tower, somewhere in 2007 and a good number of Flats have been booked before 1st April, 2010.

For the agreements registered after 1st April, 2010, we have opted for composition scheme of 1%.

Now for the assessment of all the years we have claimed the amount paid to owner of Petrol Pump as the additional cost of land u/r. 58(1A) while the assessing officer says that the total amount paid for land shall only be the cost of land as per Rule 58(1A).

Since we have paid a very handsome amount to the owners of Petrol Pump our whole working is disturbed.

Kindly advise whether the Assessing Authority is correct. Kindly also advise any case law on the subject?


The issue involved is about deduction towards land cost from total contract for sale of Residential Premises. The said deduction is provided by Rule 58(1A) in MVAT Rules. In fact the said Rule is now amended and the amended Rule reads as under:

58(1A) In case of a construction contract, where along with the immovable property, the land or, as the case may be, interest in the land, underlying the immovable property is to be conveyed, and the property in the goods (whether as goods or in some other form) involved in the execution of the construction contract is also transferred to the purchaser such transfer is liable to tax under this rule. The value of the said goods at the time of the transfer shall be calculated after making the deductions under sub-rule(1) and the cost of the land from the total agreement value.

The cost of the land shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995, as applicable on the 1st January of the year in which the agreement to sell the property is registered.

Provided that, after payment of tax on the value of goods, determined as per this rule, it shall be open to the dealer to provide before the Department of Town Planning and Valuation that the actual cost of the land is higher than that determined in accordance with the Annual Statement of Rates (including guidelines) prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995. On such actual cost being proved to be higher than the Annual Statement of Rates, the actual cost of the land will be deducted and excess tax paid, if any, shall be refunded.”

Thus the deduction towards cost of land is to be as per above Rule i.e., as per ready reckoner rate. No addition on account of other items is allowable.

If at all higher value then ready reckoner value is to be claimed it can be done by bringing certificate as stated in 2nd proviso i.e., from Department of Town Planning and Valuation.

The validity of above Rule is already upheld by Hon. Bombay High Court in case of
M/s. Confederation of Real Estates Developers’ Association of India – Maharashtra & others (Writ Petition No. 4520 of 2014 & others dated 30-4-2015). Hon. High Court has held as under:

“5. Grounds of challenge are that the impugned notification and the trade circulars are in express conflict with the observations of the Supreme Court in the case of “Larsen and Toubro Limited vs. State of Karnataka and Another” (2014) 1 SCC 708 and other pronouncements of this High Court and the Supreme Court. It is being submitted that amended Rule 58 fails to arrive at true and correct value of goods at the time of incorporation in the works contract and tends to indirectly tax immovable property and along with goods. Though Rule 58(1A) makes allowance for deduction of cost of land, it compels determination in accordance with guidelines appended to Annual Statement of Rates, prepared under the provisions of Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 (hereinafter referred to as Bombay TMV Rules, 1995), as would be applicable on 1st January of calendar year in which agreement of sale is to be registered, and as such, profit relatable to transfer of land would not be deductible from the total contract value. The Amended Rule 58(1A) of the MVAT Rules also does not give allowance to deductions on account of consideration for acquisition of FSI / TDR, payments towards eviction of tenants, clearance of encroachment on land. While Rule 58(1)(h) permits deduction of profit relatable to supply of labour and service, amended rule does not provide for profit relatable to third element, namely, the land and the object of taxing of value of goods at the time of incorporation, as such, gets blurred. Trade Circular dated 21st February, 2014 restricts options to only one from the four methods given and no other option such as, ‘cost plus gross profit’ is admissible. Various other arguments have been advanced to contend that the Rule is deficient to provide for many things involved. Arguments are also advanced contending that Trade Circulars tend to be ambiguous and do not clarify many issues while they purport to answer the questions. According to the petitioners cost plus gross profit method is viable and practicable.

6. The petitioners further contend that Rule 58(1B) of the MVAT Rules, seeks to enact a wide and arbitrary categorisation. Stage wise percentage provided under rule 58(1B) has no basis, either for stage or for percentage of construction. According to them, percentage of material on which taxes are sought to be levied is on higher side and it is unfair and unconstitutional. The percentage prescribed is not in tune with ground realities and technical considerations. According to the petitioners, though prescription of table has been modelled on recommendations of Public Works Department, the same is insufficient and would not be applicable to the cases of developers. There is huge difference in the contracts with the Public Works Department and the nature of work of the developer, viz., Public Works Department contract provides for escalation, which is not the case with the developer. It is further contended that presumptions underlying the table under rule 58(1B) that work is done on site as per stage given, yet it would not necessarily represent the way construction is carried out, in stages and in the sequences, for, it may be combination of various stages or activities may be simultaneous and as such, the table would not be able to give correct determination of value of work done at the time of entering into an

In this respect there were elaborate arguments, as well as deep consideration by Hon’ble Bombay High Court. Assuming that there may be some chances that valuation of goods may not be correct or some portion of immovable property may get taxed, the overall view of Hon’ble High Court is that the rules are for uniformity and hence cannot be said to be invalid or unconstitutional. Hon’ble High Court recorded its reasons, amongst others in following words;

62. This Court is to consider validity of provisions valuing taxable goods for the purpose of charging duty. While enacting a measure to serve as a standard as levy, the legislation may not contour it along with the lines which spell out the character of the levy itself. Viewed from this standpoint, it is not possible to accept the contention that because the levy of MVAT is a levy on transfer of goods in a works contract, the value of goods must be limited to cost plus profit. The broader based standard may be adopted and would be within authority and power of legislation. A standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of levy.

63. There is further consideration that the value shall be arrived at, assessed and ascertained on the modality as has been referred to under Rule 58(1)(1A) and (1B) of the MVAT Rules. The value is a measure of tax and Rule 58 provides for determination of value of goods to be arrived at after deductions there from, referred under the rule/formulae. Values and items as referred to under Rule 58(1), 58(1A) and 58(1B) are criteria for computing value of subject of tax at various stages as have been referred to under the Rules. Table under Rule 58(1B) specifies the stages and value at the stages. The computation of value is to be done in accordance with the terms of the same. It is intended to determine value of goods and provides basis for determining such value. The value has to be ascertained and determined in such a manner as is prescribed and shall be value of the subject of tax for the purpose of charging MVAT. The legislature, while enacting amended rules, did not intend to create a scheme materially different from the one in the previous rule 58(1A) of the MVAT Rules. The object and purpose remained the same and so did original principle at the core of the scheme, and has been made more exible and wider.

64. The first essential characteristic of MVAT is it is a tax on transfer of property in goods, secondly, uniformity of incidence is also a characteristic of the tax and thirdly the collection of tax. MVAT can be imposed on assessable value determined with reference to transfer of goods at the stage as referred to in the table. It is legislature’s power to legislate in respect of the basis for determining the measure of tax. The computation being made strictly in accordance with the express provisions under the rules, there is no warrant for confining the value as sought to be submitted by the assessee. It is open for the legislature to adopt any basis for determining the value of a taxable article. The measure for assessing the levy need not correspond completely to the nature of levy, and no fault can be found with the measure so long as it bears nexus with the charge.

67. The amended provisions define a measure of charge and the standard adopted by the legislature for determining value which may require / press for broader base than that on which the charging proceeds. By now, it is well-settled that stage of collection need not in point of time synchronise with the transfer of property in goods for as is being a long standing position that in our country levy has status of constitutional concept while the point of collection is to be located where the statute declares it. Taking into account this, the valuation of tax being made at the stages is a convenient mode for point of collection. It would not be necessarily confused with the nature of tax. Rule 58(1B) envisages a method of valuation of tax at the stages as have been referred to under the table for collection of the same. In order to overcome various difficulties, to have the value of taxable articles for the purpose of MVAT, the legislature or its delegate has prescribed table giving stages for the purpose of computation of value of subject of tax. This appears to have been provided in order to have uniformity and to avoid vagaries, disparity or inconvenience from case to case. The same has been incorporated after deliberation and consultation with concerned departments and would not be liable to be termed as

Thus the deduction on account of payment to Petrol Pump owner etc. cannot be claimed in addition to Reckoner value. If at all possible obtain certificate from Department of Town Planning for higher valuation and in such case the higher deduction will be eligible.

Deduction for cost of land vis-à-vis Rule 58(1A) of MVAT Rules, 2005

A developer entered into an agreement with a Co-operative Society to redevelop their building having four floors and started construction of a residential tower of 10 floors after obtaining the Commencement Certificate from Municipal authorities.

All the old members have been promised to get 15% extra space of flat and a lump sum payment of
20,00,000/- each out of which certain amount shall be deposited by the members in Corpus Fund to Society towards increased maintenance expenses.

Now the query is whether the amount of
20,00,000/- paid to each member can be considered as cost of land and allowed as deduction u/r. 58(1A).

Kindly advise?


The issue is similar to one discussed above. No such deduction can be allowable. However, the certificate for higher value can be obtained from Department of Town Planning and Valuation, so as to get higher deduction.

1. The service tax is levied in terms of the Chapter V of the Finance Act, 1994, w.e.f. 1-7-1994. Though service tax is being levied on various services since 1994, no separate enactment has been created providing for levy and collection of service tax. In the absence of there being any separate enactment exclusively providing for service tax, the tax is being levied in terms of Chapter V of the Finance Act, 1994.

2. The provisions relating to service tax have been substantially amended by the Finance Act, 2012 w.e.f. 1-7-2012. Under the new scheme of service tax (post negative regime), there are no different entries prescribing specifically the various services which are taxable. Now, the expression ‘service’ has been defined under Section 65B(44) of the Finance Act, 1994. The definition of ‘service’ reads as under:

“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—

i. A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

ii. Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or

iii. A transaction in money or actionable claim;

iv. A provision of service by an employee to the employer in the course of or in relation to his employment;

v. Fees taken in any court or tribunal established under any law for the time being in force.

3. From the above definition. it is evident that an activity that constitute sale cannot be considered as being in the nature of service. This definition is in tune with the judgment of the Hon’ble Supreme Court in the case of M/s.Imagic Creative Pvt. Ltd. vs. Commissioner of Commercial Taxes and others (reported in 12 VST 371) wherein the Hon’ble Court was pleased to hold that service tax and VAT are mutually exclusive.

4. Section 66B is the charging section providing for of levy of tax @ 14% on the value of taxable services provided or agreed to be provided by one person to another excluding the services specified in the negative list. It may be noted that in addition to the basic rate of 14%, the Swachh Bharat Cess (SBC) at the rate of 0.5% of the taxable value is leviable. The effective rate of tax would thus be 14.5% .

5. About sixteen services so far have been specified as falling under the negative list under Section 66D of the Finance Act, 1994. The list of services prescribed under the negative list are not liable to tax. Further the Government is empowered to exempt the taxable services from payment of service tax under Section 93(1) of the Finance Act, 1994. Accordingly a notification No. 25/2012, dated 20-6-2012 has been issued exempting about 47 services from payment of tax. An assessee is required to verify the negative list as well as the above said notification, so as to find out whether services so provided are taxable or not.

6. Therefore all the services other than falling under the negative and exempted list would be considered as taxable services and accordingly tax is leviable at the appropriate rate on the consideration received by the provider of service. It is also pertinent to mention here that certain services specified under Section 66E have been considered as “Declared Services”. The works contracts and the food/beverages/drinks served in restaurants are among the list of services included under the ambit of ‘declared services’.

7. The Section 67 is the provision relating to valuation of taxable services. In case where the provision of service is for a consideration which cannot be ascertained, the consideration so taxable can be determined in the manner prescribed under Service Tax (Determination of Values) Rules, 2006.

8. The Government has issued a notification bearing No. 33/2012, dated 20-6-2012 providing for basic exemption up to ten lakhs received in any financial year. However, for purpose of being eligible to basic exemption of ten lakh, the turnover during the preceding financial year should not exceed ten lakh. For the purpose of computing basic exemption limit, the value of taxable services which are exempt from tax would not be taken into consideration. It may be noted that the service receivers paying tax under the reverse charge mechanism in terms of notification issued under Section 68(2) of the Act, are not entitled for basic exemption of Rs. 10 lakh as provided for under notification bearing No. 33/2012, dated 20-6-2012. Further services provided under a brand name or trade name whether or not registered, are not eligible for exemption under the above notification.

9. Normally, the service tax is payable by the provider of service. However, as per Section 68(2) of the Finance Act, the service tax can be collected from the receiver of service under the reverse charge mechanism. It may be noted that initially the scheme of service tax was made applicable only to the provider of service. In other words, the service tax was leviable only in the hands of the service provider. However, a provision was made in Rule 2(d) of Service Tax Rules providing for levy of service tax in the hands of the receiver of service. The levy of service tax in the hands of the receiver of service in terms of Rule 2(d) of the Service Tax Rules, 1994 was challenged before the Hon’ble Supreme Court. The Hon’ble Supreme Court in the case of M/s.Laghu Udyog Bharati v. Union of India (reported in 2 STR 276) was pleased to declare the provisions of Rules 2(d)(xii) and (xvii) of service tax Rules as ultra vires the provisions of the charging Section 66 of the Finance Act, 1994.

10. To get over the judgment of the Hon’ble Supreme Court, the provisions of Sections 66 and 68 of Finance Act, 1994 were amended providing for levy of tax in the hands of the receiver of the service. The Rule 2(1)(d) of the Service Tax Rules, provides for the list of services where the tax is payable by the receiver of service and accordingly all the provisions of the Finance Act would mutatis mutandis apply as if the service receiver has provided the services which are taxable. For details of the services which are subject to tax in the hands of the receiver of service under the reverse charge mechanism, the notification bearing No. 30/2012, dated 20-6-2012 may be looked into.

11. It is also pertinent to mention here that the Government has also issued a notification bearing No. 26/2012, dated 20-6-2012 providing for abatement in respect of certain services specified in the said notification. The service tax has to be paid on the percentage as fixed for the respective services at appropriate rate and subject to complying with the conditions laid down in the said notification against each service.

12. The Section 69 read with Rule 4 of Service Tax Rules, 1994 deals with registration. The Superintendent of the Service Tax is the competent authority to issue the registration certificate. A separate registration is required to be obtained for each place of business. However, where an assessee is having a centralised accounting system or centralised billing system, a single registration can be obtained which is called a centralised registration. However, in respect of centralised registration, the Commissioner is the competent authority to issue the certificate of registration. The concerned authority is required to issue the registration certificate within 7 days from the date of receipt of the application. In case, the authority does not issue the certificate within 7 days from the date of receipt of the application, the registration is deemed to be have been granted.

13. The Section 70 provides for filing of returns by the assessee. Normally the assessee has to himself assess the tax payable and file returns accordingly. The Central Excise Officer in terms of Section 72 is empowered to make an assessment to the best of judgment where an assessee fails to file a return or assess the tax payable in accordance with the provisions of law.

14. Further, Section 72A empowers the Commissioner to order audit of the books of account of an assessee in certain circumstances specified under the said provision.

15. The assessee has to pay tax by 5th of the succeeding month. In case of payment of tax through internet banking, the due date for payment of tax is the 6th of the succeeding month. However, as per Rule 6(1) of Service Tax Rules, 1994 where an assessee is an individual or proprietary or partnership concern, the tax can be paid quarterly. The tax payable for the month of March has to be paid by 31st of the same month. It may be noted that as per Rule 6(2) of Service Tax Rules, an assessee has to pay service tax through internet banking only unless the Assistant Commissioner or the Deputy Commissioner as the case may be having jurisdiction over the place of business of the assessee, allows the assessee for the reasons recorded in writing to deposit the service tax by any other mode other than by way of internet banking.

16. All the assessees have to file returns electronically half yearly by 25th of the succeeding month after the end of the half year as per Rule 7 of Service Tax Rules, 1994. As per Rule 7B of Service Tax Rules, 1994 an assessee can file revised return within 90 days from the date of filing of return if there is any mistake or omission in the return filed.

The revised return cannot be filed where the issue involves legal interpretation relating to rate of duty or valuation. As per Rule 7C of the Service Tax Rules, there is a provision for levying fee in the case of delay in filing the returns. The quantum of fee depends upon the period involved. However, the fee cannot exceed
Rs. 20,000.

17. The limitation for issuing the notice for demand of tax by the suthority is 18 months from the relevant date as per Section 73(1) of the Finance Act, 1994. However, in the case of suppression of facts and wilful non-payment of tax with an intention to evade tax, the authority is empowered to issue notice within a period of 5 years from the relevant date. An assessee can pay tax voluntarily or on the basis of tax ascertained by the authorities and inform the authority in writing. In such an event as per Section 73(3) of the Finance Act, the authority shall not issue any notice under Section 73(1) of the Finance Act. Where the tax is paid voluntarily no penalty is imposable under the provisions of the Act as per explanation 2 to Section 73(3) of the Finance Act, 1994. In this connection, reliance can be placed on the decision of the Hon’ble Tribunal in the case of Bangalore Vihara Kendra vs. Commissioner of Central Excise (reported in 45 VST 265). Also see the decisions of the Hon’ble Tribunal reported 19 STR 276 and 24 STR 574. The provisions of Section 73(3) have no application to the cases involving suppression of turnover/wilful mis-statement etc. by an assessee with an intention to evade tax. However, interest has to be paid at the appropriate rate under Section 75 of the Finance Act.

18. As per Section 74(1) of the Act, the authority is empowered to rectify any mistake apparent from the records within a period of 2 years from the date on which the order was passed.

19. Interest is levied for delay in payment of service tax under Section 75 of the Finance Act, 1994. At present interest is levied @ 18% p.a. However the rate of interest is reduced by 3 per cent in case the value of service provided in a financial year does not exceed 60 lakhs during the any of the financial year covered by notice or during the last preceding financial year.

20. For delay in paying service tax or for non-payment of service tax other than by way of reason of fraud or collusion, wilful mis-statement of facts, a penalty of 10% is levied under Section 76(1) of the Finance Act. However, if the assessee pays the service tax along with the interest within 30 days from the date of service of notice under Section 73(1), no penalty is levied. It may be noted that in case the service tax along with the interest is paid within 30 days from the date of the receipt of the adjudication order passed by the authority, the penalty shall be 25% of the tax subject to the condition that the penalty of 25% is also paid within the 30 days from the date of receipt of the order.

21. There are also other penal provisions provided for under Section 77(1) of the Act for violating various provisions of law. In some cases, the penalty is fixed at
Rs. 10,000/- and in respect of other offences a penalty of Rs. 200/- per day during which such failure continues or
Rs. 10,000/-, whichever is higher can be levied by the authority.

22. As per Section 78(1), a penalty equivalent to tax can be levied by the authority where there is an allegation of suppression of facts and wilful non-payment of tax etc. with an intention to evade payment of tax. However, as per the first proviso to Section 78 of the Finance Act, 1994, a penalty to the extent of 15% is leviable where the tax along with the interest is paid within 30 days from the date of receipt of the notice under the proviso to Section 73(1) of the Finance Act. Further in case, the tax along with interest and 25% of the penalty is paid within 30 days from the date of receipt of an order passed by the adjudicating authority, then in such case the penalty is restricted to 25%.

23. The Section 80 of the Finance Act,1994 which empowers the authorities to waive penalty imposable under Section 76, Section 77 and first proviso to sub-section (1) of Section 78 of the Act, where the assessee proves that there was reasonable cause for non-complying with the provisions of law has been omitted by Finance Act, 2015. Henceforth the authorities have no power to waive the penalty levied under various provisions of Finance Act, 2014.

24. The Section 84 provides for filing of an appeal by the Department before the Commissioner (Appeals) in a case where any order is passed by an officer below the rank of Commissioner. However, an appeal can be preferred by the Department only after an order is passed by the Commissioner of Central Excise suo motu examining the order passed by the lower authority and thereafter directing the lower authority to file appeal before the Appellate Authority. Such order directing the lower authorities to file appeal has to be passed by the Commissioner within 3 months from the date of the communication of the order of the adjudicating authority. The adjudicating authority or the officer authorised in that behalf has to file an appeal before the Appellate Authority within 30 days from the date of receipt of the order passed by the Commissioner directing the authority to file appeal.

25. It is relevant to mention here that there is no revisional power conferred on the authorities under the scheme of the Finance Act, 1994 relating to Service Tax, to revise the order passed by the lower authority. The only remedy for the Department is to prefer an appeal in the manner provided for under the provisions of the Finance Act.

26. An appeal can also be filed by an assessee before the Commissioner (Appeals) under Section 85(1) of the Finance Act, 1994 against an order passed by an officer subordinate to the Commissioner, within 60 days from the date of receipt of the order passed by the lower authority. The Commissioner (Appeals) is empowered to condone delay up to 30 days only.

27. Further, an appeal can be preferred under Section 86(1) of the Finance Act before the Hon’ble CESTAT by an assessee within a period of 90 days from the date of receipt of the order passed by the Commissioner (Appeals) or any order passed by an officer of the rank of Commissioner. It may be noted that the Department is also entitled to file appeals before the Hon’ble CESTAT against the order passed by the Commissioner (Appeals) or any order passed by an officer of the rank of Commissioner. However, the appeal can be preferred by the Department subject to the permission being granted by the Committee of Chief Commissioners or Committee of Commissioners as the case may be. The limitation for filing of the appeal by the Department before Hon’ble CESTAT is 4 months from the date of receipt of the order by the Committee of Chief Commissioners or Committee of Commissioners as the case may be. It is pertinent to mention here that there is no restriction placed on the Hon’ble CESTAT in the matter relating to the condonation of delay in filing the appeal.

28. As per Section 35F of the Central Excise Act as amended by Finance Act, 2014, an assessee is required to deposit 7.5% of the disputed duty or the penalty as the case may be for maintaining an appeal before the Commissioner (Appeals) filed against an order passed by an Officer below the rank of the Commissioner. In case of appeals (first appeal)filed before the Hon’ble Tribunal against an order passed by the Officer of the rank of Commissioner, an assessee is required to deposit 7.5% of duty or penalty as the case may be for maintaining appeal before the Hon’ble Tribunal. In a case of second Appeal filed before the Hon’ble Tribunal against the order passed by the Commissioner (Appeals), an assessee is required to deposit the 10% of the duty or penalty as the case may be for maintaining appeal before the Hon’ble Tribunal. On compliance with the above statutory deposits for maintaining appeals before the respective appellate forums, the balance duty or the penalty as the case may be stands stayed till the disposal of the appeals by the above appellate forums.

29. For filing an appeal before the Hon’ble CESTAT the appellant is required to pay appeal institutional fee in the following manner.

a. Where disputed duty/penalty/interest is
Rs. 5 lakh and below, the appeal fee is Rs. 1,000/-

b. Where disputed duty/penalty/interest is more than
Rs. 5 lakh and not exceeding Rs. 50 lakh, the appeal fee is Rs. 5,000/-

c. Where disputed duty/penalty/interest is more than
Rs. 50 lakh the appeal fee is Rs. 10,000/-

30. It may be noted that no appeal institutional fee is payable in respect of appeals filed before the Commissioner (Appeals) under Section 85(1) of the Finance Act. An amount of
Rs. 500/- is to be paid for filing miscellaneous/condonation petitions before the Hon’ble CESTAT.

31. A further appeal under Section 35G of the Central Excise Act, which is made applicable to service tax provisions, can be filed before the Hon’ble High Court within 180 days from the date of receipt of the order passed by the Hon’ble CESTAT. However, where an issue relates to rate of duty/valuation, an appeal has to be filed before the Hon’ble Supreme Court directly against the order passed by the Hon’ble CESTAT. The Hon’ble Karnataka High Court in the case of Commissioner of Service Tax, Service Tax Commissionerate, Bangalore v. Scott Wilson Kirpatrik (India) Pvt. Ltd. (reported in 43 VST 9) was pleased to hold that in respect of the issue relating to rate of duty and entitlement of exemption under any notification, an appeal lies before the Hon’ble Supreme Court under Section 35L of the Central Excise Act, 1944 and an appeal under Section 35G before the Hon’ble High Court is not maintainable in such cases.

[Source: Article published in Souvenir of 18th National Convention held on 26th and 27th December, 2015 at Hyderabad]

1. Introduction

The Central Government brought out a comprehensive legislation named “The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015” (Black Money Law-BML) as part of its abiding commitment of tracking down and bringing back the black money stashed out of India. BML contains 88 sections and has become operative from 1st July, 2015
vide Notification no. 56/2015. The Government has notified (Notification No. G.S.R. 529 (E) dated 2nd July, 2015) the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015 (the Black Money Taxation Rules) containing the timelines and procedures of the disclosure in relation to the undisclosed foreign assets.

A one-time compliance scheme which is part of the Act was explained vide Circular No. 12 of 2015 dated 2nd July, 2015, to facilitate voluntary declaration of undisclosed foreign assets on or before 30th September, 2015 and providing time for payment of tax up to 31st December, 2015. In this regard, two circular Nos. 13 of 2015 dated 6th July, 2015 and No. 15 of 2015 dated 3rd September, 2015 have been released in question and answer format to clarify various issues relating to this one-time compliance scheme.

1.1 It is extremely important to understand the nuances of this legislation to analyse whether the avowed objective would be achieved without any unintended consequences. G-20 summit of 2008 and the subsequent meetings identified the tax leakages in large proportions and all economies in Europe, US and other countries gave a clarion call to conduct multilateral attack on unearthing black money and taxing the same with requisite penal consequences. In this backdrop exchange of information became very critical and India spearheaded with Tax Information Exchange Agreements (TIEA) with various countries with whom already Double Taxation Avoidance Agreements (DTAA) exist. The existing articles dealing with Exchange of Information (EOI) in DTAAs have been replaced with more elaborate and effective procedure of EOI. In this direction Government of India brought in Prevention of Money Laundering Act, 2002 (PMLA). India signed the Multilateral Competent Authority Agreement (MCAA) to facilitate automatic exchange of information. This pact is signed by as many as 60 countries as of now and the number is likely to increase in the years to come. In order to step up and accelerate this mission, Government has come up with Black Money Law. In this article, I propose to deal with this topic of Black Money Law in the following modules:

a. Scope of the Legislation

b. Assessee, Undisclosed Asset located outside India and Basis of charge

c. Tax Management including Appeals

d. Penalties and prosecution

e. One-time Compliance scheme

f. Amendment in Prevention of Money Laundering Act, 2002 (PMLA) & Amendment in Foreign Exchange Management Act, 1999 (FEMA)

g. Issues

2. Scope of the legislation

BML applies to all persons who are resident and ordinarily resident as per sec. 6(6) of the Income-tax Act, 1961. Hence, it does not apply to non-residents and not ordinarily residents. As per section 1, this Act maybe called The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. It extends to whole of India and shall come into force on the 1st of April, 2016. However, the Central Government through a notification preponed the effective date to 1st of July, 2015.

3. Assessee, Undisclosed Asset located outside India and Basis of charge

• “Undisclosed asset located outside India” means an asset (including financial interest in any entity) located outside India:

– held by the assessee in his name or in respect of which he is a beneficial owner


– he has no explanation of the source of investment in such asset


– the explanation given by him, is in the opinion of the Assessing Officer unsatisfactory.

• “Undisclosed foreign income and asset” means a total amount of undisclosed income of an assessee from a source located outside India and the value of an undisclosed asset located outside India, as referred to in section 4 of this Act.

• “Assessee” means a person being a resident other than not ordinarily resident in India within the meaning of clause (6) of section 6 of the Income-tax Act, by whom tax in respect of undisclosed foreign income and assets, or any other sum of money, is payable under this Act and includes every person who is deemed to be an assessee in default under this Act.

• 2(15) of this Act says “all other words and expressions used herein but not defined and defined in Income-tax Act shall have the meanings respectively assigned to them in that Act”.

Hence, any word not defined in this Act, shall have the meaning assigned to such word in Income-tax Act, 1961 (ITA).

• The term “person” is not defined in this Act and accordingly the definition of term “person” under the ITA is to be adopted and so it will include individual, HUF, company, firm, AOP, BOI, Local Authority and every Artificial Judicial Person.

3.1 Section 3 is the charging section which provides that every assessee for every assessment year commencing on or after 1st of April, 2016 (AY 2016-17 onwards) shall be charged a tax at the rate of 30 per cent against total undisclosed foreign income and asset of that previous year. An undisclosed foreign asset located outside India shall be charged to tax in the previous year in which such asset comes to the notice of the Assessing Officer.

It is to be noted that an undisclosed foreign asset is brought to taxation in the year in which it is noticed by the Assessing Officer. Whereas, undisclosed foreign income can be brought to tax only when it is converted into an asset and not otherwise. In other words, if undisclosed foreign income is spent by the assessee which pertains to an earlier year prior to this Act coming into force, the same cannot be brought to tax as per Section 3. Only when such undisclosed foreign income of the earlier years which is available in the form of an asset such as deposits or bank balance, the same would be treated as undisclosed foreign asset and taxed in the year in which it is noticed by the AO.

3.2 Section 4 of this Act defines the scope of total undisclosed foreign income and asset to be aggregate of

a) the income from source located outside India which has not been disclosed in the return of income within the time specified in Explanation to sub-section (1), or under sub-section (4) or sub-section (5) of Section 139 of the ITA or no return has been filed in respect of such source.

b) the value of an undisclosed asset located outside India

It is to be examined whether a tax authority under this Act can consider a source of foreign income as undisclosed only after the expiry of time limits for filing return of income as per Section 139(1) or belated return under Section 139(4) or revised return under Section 139(5).

Section 4 which defines the scope provides that an income from source located outside India will become undisclosed only after the time limits of returns as mentioned above have been exhausted. Can it be understood that till such time limits of returns have not been exhausted such source of income cannot be classified as undisclosed for the purpose of this Act?

It is provided that any variations made to income from a source outside India in the assessment or re-assessment of an assessee in accordance with provisions of the head Profits and Gains of Business or Profession or Income from Other Sources or a transfer pricing adjustment under Section 92C shall not be included in the total undisclosed foreign income under this Act.

3.3 As per Section 5 of this Act, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee, whether or not the same is allowed under the provisions of the ITA. The value of undisclosed asset located outside India shall be reduced by income which has been assessed in the period prior to the assessment year to which this Act applies or such income which is already assessed under this Act (BML). While reducing the value of undisclosed foreign asset, the amount of deduction shall be inflated in the same proportion as the assessable/assessed income bears to the total cost of the asset.

The value of undisclosed foreign asset shall be taken at “Fair Market Value” determined as per Valuation Rules in the previous year in which such asset comes to the notice of the officer or the cost whichever is higher.

4. Tax Management

There is no requirement to file a separate return under BML. The Assessing Officer shall serve a notice on the assessee on obtaining any information regarding undisclosed foreign income or asset from an Income tax authority under ITA or any authority under any law or on coming of any information to his notice, requiring the assessee to produce accounts documents or other evidence as per Section 10 of this Act. As per Section 11, a time limit for completion of assessment or re-assessment is set as two years from the end of financial year in which the notice under sub-section (1) of Section 10 was issued by the Assessing Officer.

It is obvious that there will be two assessment orders in respect of single previous year, one under Section 143(3) of ITA and another under Section 10(3) of BML.

All the appellate mechanisms like CIT (Appeals), ITAT, High Court and Supreme Court is put in place similar to what we have under the ITA. Rectification of mistakes, revision of orders and recovery mechanism is also put in place in the same manner what is available under the ITA.

5. Penalties and prosecution

Chapter IV (Sections 41 to 47) deals with penalties and Chapter V (Sections 48 to 58) deals with offences and prosecutions. Penalties and prosecution prescribed under this Act are summarised as under:



Prosecution (if any)

Attempt to evade tax, interest and penalty

300% of the Tax Payable

3 years – 10 years

Failure to disclose foreign asset or income in the return of income **

Rs. 10 Lakh

6 months – 7 years

Attempt to evade payment of tax, interest and penalty

Amount of Tax arrear

3 months – 3 years

Subsequent offences under this Act — where a person commits the second (or subsequent) offence

3 years – 10 years Plus Fine Rs. 5 lakh to
Rs. 1 crore

Person makes false statement or delivers false evidences

6 months – 7 years

Abetment to make and deliver false return, account, statement or declaration relating to tax payable

6 months – 7 years

If assessee fails to answer any question, sign a statement he is legally bound to or fails to produce books and supporting evidences

Rs. 50,000 to Rs. 2,00,000

**Failure to report bank accounts with a maximum balance of up to
Rs. 5 lakh at any time during the year will not entail penalty or prosecution.

5.1 In respect of prosecution proceedings Section 54 of this Act prescribes that a culpable mental state on the part of the accused shall exist. The onus is on the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution.

Explanation provides that “culpable mental state” includes intention, motive or knowledge of a fact or belief in, or reason to believe, a fact.

Section 54(2) of the Act provides that a fact is said to be proved only when the Court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability.

6. One-time Compliance scheme – Chapter VI (Sections 59 to 72)

Circular No. 12 of 2015 dated 2nd July, 2015 was issued by CBDT to explain the substance of One-time Compliance scheme. A declaration under Chapter VI can be made in respect of undisclosed foreign assets of a person who is a resident other than not ordinarily resident as per Section 6(6) of the ITA. The salient features of the compliance scheme are as under:

• A declaration may be made by a person in respect of any undisclosed asset located outside India and acquired from income chargeable to tax under the ITA in respect of which he failed to furnish a return under Section 139 of the ITA or failed to disclose such income in the return filed or such income escaped assessment by reason of omission or failure on the part of such person to make a return or to disclose fully and truly all material facts necessary for the assessment.

• Person making a declaration shall pay tax at the rate of 30 per cent of the value of such undisclosed asset. In addition, he has to pay another 30 per cent to the value of asset towards penalty. This special rate of tax and penalty specified under the compliance provisions will override any rates specified under the ITA or annual Finance Acts.

• BML shall come into force on 1st April, 2016. However, in exercise of its power to remove difficulties under Section 86 of the Act, the Central Government by an order has clarified that that Act shall come into force on 1st July, 2015 and accordingly compliance provisions under Chapter VI also come into effect from 1st July, 2015.

• Central Government has notified 30th September, 2015 as the last date for making the declaration before the designated Principal Commissioner or Commissioner of Income-tax. It is also notified that 31st December, 2015 as the last date by which the tax and penalty amounting to 60 per cent of the value of the undisclosed asset shall be paid.

• Form 6 has been prescribed as form for declaration under Chapter VI of the Act.

• Designated Principal CIT/CIT will issue an intimation in the proforma annexed to the circular to the declarant by 31-10-2015, whether any information in respect of the declared asset has been received by the competent authority on or before 30th June, 2015 as per Exchange of Information Article of a DTAA.

• In case of any such information being received on or before 30th June, 2015 as mentioned above, the declarant shall file revised declaration in Form 6 excluding such asset against which the information was already received by the Revenue. However, it is clarified that the declarant shall not be liable to any consequences under the Act in respect of any asset which has been duly declared but has been found ineligible for declaration as Central Government had prior information on such asset. However, such information will be used under the provisions of the Income-tax Act.

• Revised declaration shall be filed within 15 days from the date of receipt of intimation from the designated Principal Commissioner/Commissioner

• However, in all cases declarant is required to pay the requisite tax and penalty on the assets eligible for declaration latest by 31st December, 2015.

• After the intimation of payment by the declarant, the designated Principal CIT/ CIT will issue an acknowledgement in Form 7 within 15 days of such intimation of payment by the declarant against the accepted declaration.

6.1 Declaration not eligible in certain cases

No declaration under Compliance window can be made in respect of any undisclosed foreign asset which has been acquired from income chargeable to tax under the ITA for assessment year 2015-16 or any earlier year in the following cases:

a) Where a notice under Sections 142/ 143(2)/148/153A or 153C in respect of such assessment years and proceedings are pending before the AO and such notice has been served upon the person on or before 30th June, 2015.

b) Where a search has been conducted under Section 132 or requisition has been made under Section 132A or a survey has been carried out under Section 133A of the ITA in a previous year and the time for issuance of notice under Section 143(2) or Section 153A or Section 153C for the relevant assessment year has not expired.

c) Where any information has been received by the competent authority under a DTAA on or before 30th June, 2015 in respect of such undisclosed foreign asset.

d) A person in respect of whom proceeding for prosecution of any offence punishable under Chapter IX (Offences relating to Public Servants) or Chapter XVII (Offences against property) of the Indian Penal Code or under Unlawful Activities (Prevention) Act or the Prevention of Corruption Act are pending, shall not be eligible to make declaration under Chapter VI.

6.2 Instances where declaration shall be invalid

In the following situations, a declaration shall be void and shall be deemed never to have been made:

a) If a declarant fails to pay the entire amount of tax and penalty within the specified date i.e. 31-12-2015.

b) Where the declaration has been made by misrepresentation or suppression of facts or information.

If the declaration is held to be void and is deemed to have been never made then, all penalties and prosecution provisions shall apply. Any tax or penalty paid against such invalid declaration shall not be refundable under any circumstances. This would be the most dangerous situation for a declarant of having lost money in the form of tax and penalty; he would be susceptible to all penalty and prosecution provisions.

6.3 Valid declaration — benefits to the declarant

In respect of a valid declaration, the following consequences will be there:

a) The amount of undisclosed asset in the asset declared shall not be included in the total income of the declarant in any of the income tax assessments.

b) The contents of the declaration shall not be admissible in evidence in any penalty or prosecution proceedings under the ITA, Wealth Tax Act, FEMA, Companies Act or Customs Act.

c) The value of the asset shall not be chargeable to wealth tax in any assessment years.

d) A declarant will not be entitled to affect the finality of the completed assessments on account of declaration of undisclosed foreign asset.

7. Amendment in Prevention of Money Laundering Act, 2002 (PMLA)

The PMLA has been amended to include tax evasion and non-payment of interest and penalties as determined under the BML as ‘scheduled offences’.

7.1 Amendment in Foreign Exchange Management Act, 1999 (FEMA)

The Finance Act, 2015 has amended FEMA by inserting section 37A to provide for seizure of Indian assets equivalent to value of foreign exchange, foreign securities or immovable properties situated outside India and held in contravention of section 4 of FEMA.

8. Issues

BML though brought in with a very laudable objective there are issues and concerns that are coming up from law abiding genuine tax payers. Some of these need urgent attention of the law makers and deserve redressal at the earliest opportunity. Some of the vital issues are as under:

a) Returning Indians

b) Valuation rules – whether it is wealth tax or income tax?

c) Compliance window – too short a period

d) Overlapping Claims- BML vs. ITA

The above issues are dealt with at length as under:

8.1 Returning Indians

It is commonly known that many IT professionals who worked in USA and opened 401K pension accounts have never reported them to Indian tax authorities after they became residents on returning back. Such individuals have to face the rigours of BML as such undisclosed foreign pension accounts are undisclosed assets under BML. Plans where contributions vest immediately and subscribers are certain to get their money will have to make disclosure of such balances under BML. Even future benefit plans would be covered under BML. In US there are also schemes known as Individual Retirement Accounts (IRA). Even these accounts come under the scanner of BML, if not declared by the account holders on turning residents in India. Question No. 3 in clarifications issued by CBDT on 3rd September vide Circular no. 15 clarifies that such pensions received abroad after a person becoming a resident are taxable in India and the same may be declared under Chapter VI of the Act (one-time compliance) if not declared in the returns filed in India earlier.
It was further clarified that the person is not entitled to any credit of taxes paid, if any, in the foreign country.

If such pension amounts which are taxable in India were spent out, what would be the course of action for such person? In other words, the income pertaining to the period prior to commencement of BML earned abroad and spent is not available in the form of any asset today. In such case there is no undisclosed asset available as on today for declaration. Clarification is required for such cases.

8.2 Valuation rules – is it wealth tax or income-tax?

In respect of an undisclosed foreign asset the valuation is prescribed to be higher of Fair Market Value (FMV) or cost of acquisition of the asset. In respect of FMV the declarant must obtain a report from a valuer recognized by the foreign Government. In most of the foreign countries there is no system of empanelling valuers by the respective Governments similar to the system what we have in India. In this scenario it would be a challenge for the declarant to get his undisclosed foreign assets valued by a recognized Government valuer, failing which his declaration would become invalid. This would lead to totally undesirable consequences of getting exposed to penalties and prosecution. A clarification is urgently required to sort out this impractical restriction.

In respect of a foreign bank account the valuation rules prescribe that the sum of all the deposits made in the account with the bank since the date of opening of the account after removing such deposits made out of withdrawals from the same account. In case any declaration is already made in respect of such bank account, the sum of all deposits made in the account since the date of such declaration. It is a challenge for the declarant to get the bank statements for all the years since opening of the bank account. Generally foreign banks do not keep data beyond ten years of the past period.

In respect of unquoted equity shares, the formula prescribed by the valuation rules is the net asset value on the basis of FMV of all the assets of the investee company. It is a practical difficulty in obtaining FMV of all the assets of the investee company.

In the category of any other asset whether an intangible asset is covered is to be clarified. If so, valuation report of an intangible asset is a subjective issue.

It is a debatable issue whether the levy of tax under BML is an income tax or wealth tax. Considering FMV of an asset and applying an income tax rate is a legally questionable issue. If such asset which is declared at its FMV and taxes were paid, is sold, such FMV would become the cost of acquisition and the period of holding shall start from the date of declaration of such asset under Chapter VI of the BML. (Question No. 5 of Circular 13)

8.3 Compliance window- too short a period

It is widely thought that the timelines given for the compliance window is too short, especially when a declarant has to cull out details of the past beyond ten years (as there is no time limit under BML) and ensure that his declaration is properly filed and treated as valid. The time limit of three months given from 1st July to 30th September is too short for a person to prepare the documents and come clean. Any hurried approach of compiling data could prove out to be disastrous in case the declaration is filed with incorrect details unknowingly, as the very declaration will become invalid.

In view of paramount significance that BML commands in the present scenario, it is highly appropriate to extend the deadline by at least another three months.

8.4 Overlapping claims — BML vs. ITA

In case a declaration is found to be void under Section 68 of the Act then the tax and penalty paid would not be refunded. As the declaration is held to be void in such a case the Assessing Officer may issue notice under the normal provisions of the Act. As of now the tax would be collected again under the normal provisions in respect of undisclosed assets and there is no mechanism under the BML to claim refund or set-off of taxes paid in respect of a wrong declaration. This is a severe hardship a declarant has to face which requires redressal from CBDT.

9. Conclusion

This piece of legislation is extremely important in view of severe penalties and prosecution for those assessees who want to come clean through the compliance window. This article is meant to initiate brainstorming on this important topic.

[Source: Article published in Souvenir of 18th National Convention held on 26th and 27th December, 2015 at Hyderabad]

The taxpaying public expects the officers and staff of the Income-tax Department to be courteous, fair and reasonable in performing their duties while administering the Income-tax Law.

2. The present Government appears to be seriously concerned with the image of the Department. It is keen to develop a non-adversarial tax regime, that is easy, effective and efficient, where the tax officers and the taxpayers discharge their respective functions and perform their duties in harmony with and mutual respect of each other. To develop a non-adversarial tax regime, the Central Board of Direct Taxes (CBDT) has recently been highly proactive. Nearly thirty instructions have been issued from time-to-time since July, 2014. Some of the old instructions have been revised, consolidated and issued vide office memorandum No. 279/Misc/52/2014-15 dated 7-11-2014. The following aspects of developing a tax friendly and non-adversarial tax regime have been specifically highlighted therein:

(i) Observing punctuality and cleanliness as the basic requirements of an efficient and taxpayer centric organisation.

(ii) Honouring appointments given to the taxpaying public which should not be cancelled or postponed without any unavoidable reason.

(iii) High-pitched assessments should be avoided. It is the responsibility of the supervisor of the tax officer to ensure improvement in quality assessment by issuing directions u/s 144A of the Income-tax Act. The Principal Commissioners of Income-tax (CsIT) and the CsIT are required to supervise the work of their subordinates to ensure due discharge of their functions.

(iv) The Board’s Instruction Nos. 15 and 16 of 2008 dated 4-11-2008 provides for the inspection of the scrutiny assessment orders by the supervisor of the tax officer on a quarterly basis and lays down the procedure. The supervisory authorities are required to ensure that these instructions are followed both in letter and spirit.

(v) The scope of enquiry in cases selected for examination through CASS system should be limited to the verification of the pre-determined issues only. For making a comprehensive examination of the accounts, prior approval of the Principal CIT/DIT is necessary.

(vi) Refunds of excess tax may be granted notwithstanding a mismatch of data pertaining to tax deducted at source, and based on evidentiary documentation submitted by the taxpayer in accordance with CBDT’s Instruction No. 5 of 2013 dated 8-7-2013.

(vii) Recovery of tax demand, its stay of collection or permitting payments in installments should be done in accordance with CBDT’s earlier Instruction No. 1914 of 1993 dated 2-12-1993.

(viii) The CIT (Appeals), while remanding the case to the tax officer should specify the aspects which need to be verified.

(ix) Even where the tax effect is above the threshold limits set by the CBDT (above ` 10 lakhs now), the second appeal by the Department to the Income-tax Appellate Tribunal should be filed only if there is a good chance of winning on the merits of the case.

(x) Decision to file an appeal by the Department to the High Court on a substantial question of law will be taken by a collegium of two Chief Commissioners of Income-tax (CCsIT) including the jurisdictional CCIT.

(xi) Taxpayers’ grievances should be disposed off within the time period specified under the Citizens Charter.

(xii) Issuance of summons by the tax officers for gathering information should be issued only in critical cases, specifying in the summons the matter in issue and whether the taxpayer is called as a witness or in connection with his own case.

3. The CBDT has also advised the officers to follow the above instructions scrupulously. Disciplinary action will be initiated if they are not adhered to.

4. The latest instructions as summarised above were issued on 7-11-2014. Unfortunately, even after more than one year, very little change in the overall conduct of the officers is discernible by the taxpayers in the discharge of their duties and responsibilities. We, therefore, need to look into the basic causes which are responsible for the inadequate response to the emphasis being given towards developing a non-adversarial tax regime.

Ten action points for 2016-17

5. In order to improve implementation of the goal of a non-adversarial tax regime and make the overall conduct of the offices more taxpayer friendly, ten points are identified for action by the CBDT during the F.Y. 2016-17 and for public debate and discussion. Each of them also provides its own justification.

(i) Fix realistic revenue collection targets

6. The fixation of unrealistic annual revenue collection targets is the main cause of the present adversarial system of tax administration and comparatively ineffective supervision and control by the senior officers. The targets should not be fixed with reference to the expenditure requirements of the Government or with a view to reduce fiscal deficit to a pre-targeted level but they should be fixed on the basis of scientific forecasting techniques. In the past, the revenue targets used to be prepared by CBDT keeping in view the past trend of tax collections and the expected increase in national income during the year. The estimates prepared by the CBDT used to be reviewed by the Department of Economic Affairs in the Central Government’s Ministry of Finance. No other consideration weighed in fixing the targets. If the expenditure requirements were larger than the expected revenues, additional levies were imposed through the annual Finance Act.

7. With the artificial high revenue targets allocated down the line up to the level of each tax officer, unfair and unauthorised means become necessary by making unrealistic assessments, enforcing recovery of disputed taxes by coercive methods, non-issue of tax refunds for indefinite periods and by several other undesirable means. The supervisory officers are not able to exercise effective control over their subordinate officers as they become equally responsible for collecting the unrealistic targets. The Computer Processing Centre does not process returns involving large tax refunds. They are processed after a long interval and refunds issued with the prior approval of the CIT or the CCIT depending upon the quantum of the refund involved. The recent instruction issued in 2015 to issue all refunds up to ` 50,000/- is also symptomatic. Why should even a single refund, irrespective of its size, be withheld and not issued to the taxpayer? It is his right. How can the mandatory and legally binding requirement of issuing every refund within a reasonable time of say three months, contained in section 240 of the Act, be enforced except by the taxpayers filing writ petitions in the High Courts and thereby incurring avoidable litigation, expense and spoiling relations with the Department?

(ii) Amend Prevention of Corruption Act

8. The Prevention of Corruption Act needs to be immediately amended to clarify the difference between graft and a genuine error in decision making. The fear of bona fide quasi-judicial decisions being criticized and action taken under the Prevention of Corruption Act is one of the principal demoralising factors preventing the fair exercise of judicial discretion by the officers.

(iii) Preventing legal disputes in assessments

9. The tax disputes on questions of law have been raised by filing appeals by the Income-tax Department. This is despite CBDT’s instructions and the fact that the Supreme Court and various High Courts have held that where an appeal on a question of law has not been filed to the High Court or an SLP (Special Leave Petition) to the Supreme Court by the Income-tax Department, it cannot be filed in a subsequent case. But even then the appeals/SLPs are filed in several subsequent cases.

10. The remedy lies in the Legal and Research Wing of the Income-tax Department, which is responsible for authorising departmental SLPs to the Supreme Court, after consulting the Ministry of Law to circulate Board’s decision on a legal issue decided by the High Court in the form of a quarterly bulletin for the use of officers and the taxpayers alike. This practice used to be followed in the past by the issue of quarterly Tax Bulletins by the CBDT but for inexplicable reasons, discontinued in about the 1970’s. Apart from reducing tax litigation, the revenue collections will also improve because about 99% taxpayers, who are not selected for scrutiny assessment, will, by and large, follow Board’s view on the questions of law in filing their tax returns to avoid their subsequent selection for detailed examination. The recent decision of the Board to make two Chief Commissioner in multi Chief Commissioners’ charges to agree to the filing of the appeal to the High Court will also become more effective and serve the purpose of reducing tax litigation if they are made aware of the CBDT’s views on the earlier cases decided by the High Courts/Supreme Court. Where a judgment of the Apex Court is not acceptable to the CBDT, it should be so stated and the tax payers informed that the law will be amended on that issue in due course.

11. Fortunately, the CBDT has recently set up a separate Unit at New Delhi to apprise the officers of the decision of the Government on every substantial question of law decided by a High Court and the Supreme Court of India. The communications of this unit should also be made available to the public as was the practice in the past.

12. In every appeal/SLP filed by the Department to the High Court/Supreme Court, every earlier adverse judgment quoted therein should be commented as to whether any SLP against it was filed to the Supreme Court or not. In fact, the High Courts and the Supreme Court should not admit a departmental appeal unless the proposed action is taken by the Department.

(iv) Encourage settlement of cases through Income-tax Settlement Commission

13. There are seven Benches of the Income tax Settlement Commission, each consisting of three senior CCsIT, who, u/s. 245B(3) of the Act, are appointed by the Central Government amongst persons of integrity and outstanding ability, having special knowledge of, and, experience in, problems relating to direct taxes and business accounts. The Commission passes orders of assessments by agreement with the applicant-taxpayer within 18 months of the end of the month in which the settlement application is filed. The applicant has to make a true and full disclosure of his income and pay the entire tax and interest before filing the settlement application. The orders of settlement are final and conclusive as provided in section 245-I of the Act. This optional route of avoiding tax litigation and improving tax collections is very promising and should be encouraged.

14. At present, the intake of settlement applications is inadequate. It will substantially increase if the following four steps are taken:-

(a) Immediate withdrawal of the departmental instructions by the CBDT, requiring the CsIT to evaluate each order of settlement passed by the Commission and file writ petitions to the High Court wherever the orders are not considered acceptable. There are instances where even the jurisdiction of the Commission to admit a settlement application has been challenged in a writ petition and the matters are pending in the High Courts/Supreme Court for years on end. Such instructions tantamount to the Department expressing lack of faith and confidence in the judgments of its own senior officers of the Department. This is particularly so when they compute the income in accordance with the provisions of the Income-tax Act and the Department is represented by a very senior departmental representative of the rank of a Commissioner of Income-tax at every stage of the case before the Commission right from the admission of the application to the passing of the final order of settlement. Apart from withdrawing the aforementioned instruction, the pending writ petitions particularly on jurisdictional issues need to be withdrawn forthwith.

(b) Issue of clarifications on contentious issues of procedure.

To avoid litigation and ensure certainty and predictability with regard to the admission and disposal of settlement applications, there is an urgent need to issue clarifications on contentious issues in consultation with the Ministry of Law.

(c) Encouraging taxpayers to settle their tax liabilities.

Recently, the Central Board of Excise and Customs, under the same Department of Revenue as the CBDT, has issued Instruction vide letter F.No. 275/72/2014-CX.8A dated 19-6-2015 requiring all Chief Commissioners of Central Excise, Customs and Service-tax to issue, in every case, immediately after the issuance of a show cause notice, a separate letter to the noticee taxpayer informing him about the scheme of the settlement of cases so that he may avail of the same if he so desires and does not indulge in avoidable tax litigation with the Department. The format of the letter has also been attached with the said instruction. It is a very important step to prevent tax ligation. In order to create similar awareness about settling the tax liabilities on the income tax side by the Income tax Settlement Commission, the CBDT should also require the tax officers to issue similar letters in search cases after notices u/ss. 153A/153C of the Income-tax Act are issued. Other potential tax litigation cases involving contentious issues of doubtful benefit to the Revenue e g., bogus cash credits, bogus investments in company shares etc. should also be covered for encouraging settlements by the Commission.

(d) Encouraging taxpayers with undisclosed foreign bank accounts to file settlement applications.

There are several hundred cases, which became known to the Government before 1st July, 2015, of the taxpayers having undisclosed foreign bank accounts or assets. They were not eligible to file declarations u/s. 59 of the Black Money (Undisclosed Foreign Income Assets) And Imposition of Tax Act, 2015. But they were eligible to file settlement applications where detection had taken place before the coming into force of the said Act to assess the said income was taken or could be taken under the Income- tax Act, 1961 in which the legal provisions for settlement existed in Chapter XIX-A of the Act. In several cases criminal prosecutions have been launched and the Commission cannot grant them the immunity. Since such persons could not avail of the benefit of the declarations u/s. 59 of the said Act, it is only fair that they should not be denied the benefit of paying their due tax and interest before the Commission. On filing of settlement application and payment of tax and interest, the prosecution complaint, if filed, should be withdrawn. The Government may give such an assurance in the interest of revenue and to avoid prolonged criminal litigation.

(v) Time bound redressal of grievances through digital control

15. The Government is seriously concerned with the redressal of grievances within a time-bound programme. For this purpose, instructions are being issued from time to time, the latest being the immediate issue of refunds of up to ` 50,000/-. Non-issue of refund is not the only grievance. There are many others. To name a few, they are:-

(a) Not giving the correct credit for prepaid taxes.

(b) Delays in giving effect to appellate orders.

(c) Ignoring issue of refunds for years together.

(d) Issue of refunds without inclusion of interest payable thereon.

(e) Where refund with interest is given, tax deducted at source is rarely included in Form 26AS of the taxpayer who does not get the credit in his assessment of the relevant year.

(f) Non-adjustment of moneys seized during the course of search that remain deposited in the personal deposit account of the CIT indefinitely.

16. Most of the taxpayers consider them as kneejerk reactions, expressed through occasional instructions of the CBDT. They are not complied with as a matter of routine in every case in the absence of an effective and functional system of accountability. The redressal of grievances of every type should be controlled through a computer. Every grievance could be filed on line and registered in the computer system of the Department. A number for every grievance should be immediately generated by the computer that should be communicated to the taxpayer. He should also be informed of the likely time for the redressal of his grievance with the name of the person and his e-mail particulars to whom he should contact if the grievance is not redressed. Normally, the control over the redressal of the grievance should be exercised by the immediate superior officer of the tax officer as also by the CIT or the CCIT. Non-redressal, without a reasonable cause, should be a black mark, both in the career growth of the tax officer as well as of his superior, besides exposing them to other consequences.

(vi) Copy of order sheet entry to be attached with each assessment order

17. Despite instructions that the scrutiny in CASS selected cases should be confined to the items identified by the computer, scrutiny is made, in most of such cases in a routine manner and seeking large amount of information from the taxpayer. Assessments are made in most of the cases towards the fag end of the limitation period for making the assessments. A lot of time is spent in appeal proceedings on the issue of whether or not a reasonable opportunity was given to the assessee to produce the required material or not and whether additional evidence under Rule-46A of the Income-tax Rules, 1962 should be admitted at the appeal stage or not. by the tax officer. Remand reports are routinely called for by the CsIT resulting in avoidable delays in the disposal of appeals. It is suggested that the tax officer should be made to attach an attested photo copy of the order sheet along with the assessment order which will, inter alia, state the issues that were thrown up by CASS and were required to be verified. This will considerably reduce the scope for making unrealistic assessments and avoid the consequent tax litigation.

(vii) Encouraging the filing of voluntary returns

18. There are lakhs of taxpayers who do not file tax returns and pay their taxes voluntarily. The main fear is harassment at the hands of the tax officers. Once the prospective taxpayer comes on the record of the Department, the harassment consists not only of making unrealistic assessments but also involve levy of penalty and criminal prosecution. Even the foreign companies, who file their returns of income voluntarily are being proceeded against for prosecution. The fear of criminal prosecution is the biggest discouragement for the prospective taxpayers to file their tax returns voluntarily and pay their due taxes. It is suggested that through a public notification, the Government should make it clear that persons filing their tax returns voluntarily will not be criminally prosecuted. Where prosecution proceedings are under contemplation, they should be dropped and where such proceedings have been launched, they should be withdrawn with the permission of the Courts.

(viii) Make one year’s time limit for disposal of First Appeal subject to administrative control u/s 250(6A) of the Act

19. Sub-section (6A) of section 250 of the Act provides time limit “for disposal of appeal within a period of one year from the end of the financial year in which the appeal is filed, wherever it is possible”. The expression “wherever it is possible” has made the provision virtually meaningless with regard to the time limit for disposal of appeals. Most countries regard the First Appeal (normally called “objection against assessment”) as an extension of the process of determination of tax liability by the tax officer and the process is completed within a few months. In our neighbouring country- Bangladesh, which had the same income-tax law as in our country till 1947, the First Appeal is deemed to be allowed if not disposed of within 150 days of the end of the month in which the appeal is filed. No disputed tax is required to be paid. [Please refer to section 156(6) of the Income-tax Ordinance, 1984 of Bangladesh].

20. Unfortunately, in our country, in many cases, it takes several years as much as 10 years or more, for the First Appeal to be disposed of. We, in India should, like in other countries, take effective steps towards recognising the right of every taxpayer to know his final income-tax liability within a reasonable time since income tax is an annual tax. It is suggested that the period of one year should be made mandatory and wherever the appeal is not disposed of, it should be deemed to have been allowed unless the Chief Commissioner of Income-tax, for reasons to be recorded in writing, specifies that the appeal, though fixed for hearing, could not be disposed of within the stipulated period for reasons beyond the control of the CIT(A). Similar recommendation has also been made by the Tax Administration Reforms Commission to the Government.

(ix) Provide specific appeal to the Tribunal against refusal to grant stay of disputed tax by the CIT(A) even without the pendency of the quantum appeal – section 253

21. Coercive action to effect recovery of the disputed tax by such draconian methods like attachment of bank accounts without prior notice, even while the appeal is pending before the CIT(A), has been a source of major tax litigation. This is also perhaps the biggest source of harassment and spoiler of the fair name of the Income-tax Department. Following the judgement of the Hon’ble Supreme Court in the case of ITO v. M.K. Mohammed Kunhi (1969) 71 ITR 815 (SC), several High Courts have held that the CIT(A) has also the inherent and implied powers to grant stay/instalments arising out of the assessment order in appeal before him, till the disposal of appeal by him, though it is not specifically mentioned in the statute. Some of the judgments are as under:-

(i) V. N. Purushothaman v. Agricultural ITO (1984) 149 ITR 120 (Ker.)

(ii) Prem Prakash Tripathi v. CIT (1994) 208 ITR 461 (All.)

(iii) Debashis Maulik v. CIT (1998) 231 ITR 737 (Cal.)

(iv) Smita Agarwal v. CIT (2010) 321 ITR 491 (All.)

(v) Jagdish N. Hinduja v. CIT (2011) 59 DTR 333 (Karn.)

(vi) UTI Mutual Fund v. ITO (2012) 345 ITR 71 (Bom.)

(vii) Maheswari Agro Industries v. UOI (2012) 346 ITR 375 (Raj.)

22. Unfortunately, the CsIT(A) are routinely rejecting the stay applications leaving the assessees totally at the mercy of the tax officers or forcing them to take a highly expensive route of filing writ petitions before the High Court. Recently, the Hon’ble Delhi Bench of the Income Tax Appellate Tribunal, in the case of Employees Provident Fund Organization, ITA No. 1766 dated 10-4-2015 (2015) 153 ITD 642 (Del.), has held that an assessee can file an appeal to the Tribunal against the refusal of the CIT(A) to grant stay even though quantum appeal has not been filed before it.

It should be provided, in law, that there shall be no collection of disputed tax till the disposal of the First Appeal by the CIT(A). Section 281B providing for provisional attachment to protect the interest of revenue is adequate against the alienation of interest in the assets of the tax payers during the pendency of the appeal. This will also ensure that high demand appeals are disposed of expeditiously.

23. Alternatively, to place the matter beyond any doubt, the law should be amended to give specific power to the CIT(A) and the administrative CIT to decide the stay application of the assessee pending disposal of appeal before him. This will require consequential amendment to section 220(1) withdrawing the power of granting stay/instalment where the assessee has filed an appeal before the CIT(A). The Assessing Officer will of course continue to exercise the power to grant stay/instalment in cases where no appeal has been filed before the CIT(A).

24 Section 253 of the Act may be suitably amended to provide for an appeal before the Tribunal against the CIT(A)’s order refusing to grant stay of demand even if the quantum appeal has not been filed before the Tribunal and is pending with the CIT(A).

25. Pending amendment of law, stay of recovery of disputed tax demand should be granted by the Assessing Officer till the disposal of the First Appeal where the assessed income is say more than twice the returned income. This is in accordance with Board’s own Instruction No. 96 dated 21-8-1969. It has been held by several High Courts that this Instruction is not superseded by Board’s subsequent Instruction No. 1914 of 1993 dated 2-12-1993. Following are some of the judgments where it has been so held.

(i) N. Rajan Nair v. ITO (1989) 165 ITR 650 (Ker.);

(ii) Mrs. R. Mani Goyal v. CIT (1996) 217 ITR 641 (Del.);

(iii) I.V.R. Constructions Ltd v. ACIT (1998) 231 ITR 519 (AP);

(iv) Volvoline Cumins Ltd. v. DCIT (2008) 307 ITR 103 (Del.);

(v) Soul v. DCIT (2010) 323 ITR 315 (Del.) and

(vi) Taneja Developers and Infrastructure Ltd v. ACIT (2010) 324 ITR 247 (Del.)

None of the judgments appears to have been appealed against to the Supreme Court by the Income Tax Department and, therefore, they represent the law of land. In order to avoid needless litigation, Board may issue Instructions to the tax officers stating that Board’s Instruction No. 96 of 21-8-1969 should be followed and where stay has been granted, the CsIT (A) must dispose of the appeal within a year of its having been filed.

(x) Write off and scaling down of tax arrears

26. More than ` 8 lakh crores of income tax arrears are outstanding. This figure is increasing by 15 to 20% every year. With the enlarged scope of computerisation and taking over of several functions by the computers, the officers can devote some time on a regular basis to attend to the scaling down and writing off of irrecoverable tax arrears. It will also bring in the much needed revenue to the Government. Most of the tax arrears are the consequence of high pitched assessments which the defaulters may pay, in part, as full and final settlement of the tax arrears due from them. This is referred to as the scaling down of the outstanding demand. Then there are the cases where taxpayers have suffered losses or otherwise the tax arrears are irrecoverable in the absence of any assets out of which, recovery can be effected. There is no provision in the Income-tax Act for write off or sealing down of tax arrears. However, In 1956, the then Union Cabinet under the Prime Ministership of Late Shri Jawahar Lal Nehru had approved the writing off of irrecoverable tax arrears and scaling down of unrealistic demands to a reduced figure depending upon the value of the assets of the defaulters. The scaling down is subject to a true and complete statement of assets of the defaulter and if some more assets are found later on, the order of scaling down becomes inoperative. In respect of write off of irrecoverable demand, the Department does not lose its legal right up to the period of limitation provided in the Limitation Act to recover the demand if some assets are found. The CBDT used to write off the irrecoverable demand and scale down the arrears where part recovery of tax was possible. With the vast increase in the number of defaulters and the size of tax arrears, the writing off/scaling down work has practically stopped. The recoverable content of the tax arrears is also being ignored. It is suggested that the Principal CCsIT being of the rank similar to that of the members of the CBDT, this work can be delegated to them after getting approval of the present Union Cabinet. Only cases, say with tax arrears of ` 50 crores and above, may come to the Board for being written off/scaling down. This will ensure improvement in collections and more importantly, cleaning up of the accounting records of the Income-tax Department.

27. We have mentioned the 10 action points above which, if implemented in the F.Y. 2016-17, will go a long way in improving the conduct of the officers towards the taxpayers and in promoting the non-adversarial tax regime in the Department which is the top most priority of the present Government.

[Source: Article printed in Souvenir of one day seminar organised by ITAT Bar Association, New Delhi on 16th January, 2016]

The European Court of Justice has very recently ruled that “Bitcoin” has to be treated on par with traditional currencies for the purposes of exemptions enjoyed by transactions involving traditional money or currency under the European VAT laws.
[See Skatteverket v. David Hedqvist (Judgment dated 22nd October, 2015 in Case C-264/14)]. That judgment effectively silences a long debate throughout the European Union on the subject and brings some much-needed clarity.

A word about Bitcoin: Bitcoin is an unregulated virtual currency, which is used for payments between individuals who are willing to use it as a means of payment. Bitcoin is properly described as an “Internet phenomenon” with no single issuer and no Central Bank or Government or inter-Government organisation issues or controls it.

Half-way accross the world, the Internal Revenue Service of the United States has characterised Bitcoin as “property”. It is submitted that there is nothing new in this: the common law has always recognised all sorts of money – rather all sorts of things – as “property”. The Internal Revenue Service however did not go so far as to describe Bitcoin as “money” itself.

On the other hand, the American Courts do not seem to have made up their minds on what is the real nature of Bitcoin. Caselaw relating to Bitcoin is still sparse and the authors were not able to lay their hands on any judgments apart from those of the Trial Courts in the US discussing whether Bitcoin is money or not.

In United States v. Ulbricht [31 F. Supp. 3d 540], the defendant was charged with the offence of money-laundering. The defendant then relied on the IRS Notice to argue that since Bitcoin is merely property and not “currency” (which forms the basis of the money-laundering offence) he could not be called upon to answer that statute. The Federal District Court, SD New York noted that the money-laundering statute used the word “funds” and not “money”. Noting the close relationship between the words “funds” and “money”, the Court finally concluded that the sole reason for the existence of Bitcoin is to “pay for things” and that “it is digital and has no earthly form; it cannot be put on a shelf and looked at or collected in a nice display case”. The Court finally held that one can launder money using Bitcoin.

The Federal District Court for Texas went one step further and characterised Bitcoin as a “currency or a form of money” and investment in Bitcoin as “investment in money”
[Securities and Exchange Commission v. Shavers Fed. Sec. L. Rep. P.97, 596]. The Federal District Court, S.D. New York which avoided ruling outright that Bitcoin is money, subsequently recognised the principle by relying on the Shavers case.

In the Indian context, particularly in the indirect taxes, the question of whether Bitcoin is money or not will come up under the Sales Tax law as well as the Service Tax law. Section 2(7) of the The Sale of Goods Act, 1930 excludes “money” from the definition of “goods”. However, the term “money” itself is not defined. Darling J gives the most classic definition of “money” in Moss v. Hancock [(1889) 2 QB 111] :

“Money as currency, and not as medals, seems to me to have been well-defined by Mr. Walker in “Money, Trade and Industry” as “that which passess freely from hand-to-hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment for commodities.”

The Service Tax law defines “money”. However, it lays some stress on legal tender and other enumerated forms of instruments which Parliament considers as “money” for the purposes of the Service tax law. The definition ends with an “any other instrument” clause. The authors submit that it may be possible to include Bitcoin in this part of the definition. The Tax authorities will however contest this classification tooth and nail, and hence clarity from the Legislature or the Executive is required.

To conclude, while the world marches towards clarifying rules for the taxation of Bitcoin, India remains hopelessly behind. Canada and Australia have also issued guidelines on the taxation of Bitcoin. We hope that both the State and the Central Governments issue appropriate guidelines to clarify the rules for taxation of this new kind of currency.

Certain provisions of the Income-tax Act have given rise to substantial controversies and litigation. These provisions are being discussed herein. It is very much necessary and desirable that the Govt. should pay its immediate attention to suitably modify or clarify these provisions so as to avoid or reduce litigation in respect thereof.

1. Disallowance u/s. 14A r/w. Rule 8D of Income-tax Rules

Provisions u/s. 14A read with Rule 8D of Income-tax Rules have given rise to substantial controversies. Issues are whether Rule 8D is applicable retrospectively or prospectively from AY 2008-09, how dissatisfaction is to be recorded before invoking Rule 8D by the Assessing Officer, whether provisions are applicable even in case of stock-in-trade, whether disallowance can be made even more than the actual expenditure incurred, whether in a case where Assessing Officer is not satisfied with the amount of disallowance made by the assessee, mandatorily Rule 8D(2) is to be invoked or disallowance needs to be made on a reasonable or rationale basis, whether interest disallowance can be made even when the assessee has substantial funds of his own, whether disallowance can be made on account of interest even if the assessee has proved that all the loans have been taken only for the purpose of business, whether disallowance on account of administrative expenses at 0.5% is to be determined irrespective of facts of the case and the quantum of exempt income, whether in case of corporate assessees expenditure incurred on statutory compliances can also be considered for the purpose of disallowance or same should in any case be allowed, whether disallowance can be made even in the case where investments have been made for the purpose of commercial expediency in subsidiary or group companies, etc. The above controversy has arisen for the reason that Rule 8D provides for determination of disallowable of expenditure on ad hoc basis and no consideration for facts of the case are made by the AO. As a result, in many cases amount of disallowance determined by the AO, on the face of it, appears to be unreasonable and unjustified.

2. Reopening or revision of assessment

Section 147 of the Act empowers the Assessing Officer to reopen the finalised assessment. Similarly Section 263 of the Act empowers the Commissioner to order for revision of the Assessment Order. There are lot of controversies in regard to scope of above sections. In spite of the fact that provisions of Section 147 of the Act, requires specific reasons to be recorded by the Assessing Officer for his reasons to believe that income has escaped assessment, reasons are recorded by the Assessing Officer without proper application of mind and even without reference to specific material on the basis of which he has formed his belief that income has escaped assessment. Even in cases where proviso is applicable and assessment is reopened after the expiry of four years, no specific averment is made to the effect that there has been escapement of income on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Non-compliance of the requirement of provisions of Section 147 of the Act by the Assessing Officer for the purpose of issuing notice for reopening of the assessment has given rise to lot of controversies and the issue regarding reopening of assessment is a major cause of litigation. The casual approach adopted by the Assessing Officers is resulting in loss to the revenue as well as harassment to the assessees. It is very much necessary that the officers should be properly trained and guidance should be issued so as to check the menace for unwarranted reopening of the assessments by the Assessing Officers. Similarly, provisions of Section 263 of the Act are resorted to even in the cases where the issue has already been considered by the Assessing Officer in the course of assessment proceedings. Provisions of Section 263 have also been amended vide the Finance Act, 2015, w.e.f. 1-6-2015 by inserting Explanation 2 providing that in certain cases the orders passed by the Assessing Officer will be deemed to be prejudicial to the interest of revenue. This amendment is also likely to raise controversies and litigation as same are against the scope and purpose of main section. It is stated in this regard that provisions of Section 147 or Section 263 are being invoked in disregard to the factual position that the issue had already been examined and assessment order had been passed after scrutiny of the case. On account of internal instructions of the department, these provisions are being invoked in cases where audit objections have been raised by the Internal Audit or AGCR Audit irrespective of the fact whether such audit objections are valid in law or not. As a result lot of controversy and harassment is being caused. The observations of the Hon’ble Supreme Court in the case of Parashuram Pottery Works Co. Ltd. vs. Income-Tax Officer, (1977) 106 ITR 1 (SC) are not being honoured. The Hon’ble Supreme Court in above case had observed that: “It has been said that the taxes are the price that we pay for civilisation. If so, it is essential that those who are entrusted with the task of calculating and realising that price should familiarise themselves with the relevant provisions and become well-versed with the law on the subject. Any remission on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue at the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings.”

3. Provisions regarding taxability of capital gains

Section 45 of the Income-tax Act provides for taxability of capital gain in case of transfer of capital asset subject to other provisions relevant to the determination of capital gain i.e., Sections 45 to 55 of the Act. Lot of controversies have arisen in regard to taxability of capital gain with reference to meaning of “transfer”, “capital asset” and the year in which the transfer has taken place and with regard to other provisions related to exemption of capital gains in certain cases. Controversies have also arisen for the reason that specific provision has been made for determination of capital gains in a particular situation whereas there is no provision for the reverse situation. As regard to the meaning of term “capital asset”, though it has been held by the courts that the term has very wide scope and will include all rights and assets of the assessee, still controversies have arisen in the situation such as whether right to obtain the conveyance of the property is a capital asset, whether mortgage is a capital asset, whether an undertaking or running business is a capital asset or a fixed deposit held by an assessee is in the nature of capital asset. The issue had also arisen in the case of Vodafone International Holdings B.V. vs. Union of India (2012) 341 ITR 1 (SC), whether controlling interest in a company or control of the Holding Company over the subsidiary company is in the nature of capital asset or not u/s. 2(14), which defines the term capital asset. The term “transfer” has also remained a matter of controversy and particularly, the issue whether transfer is in one year or another year is continuously a controversial issue and in many circumstances litigation is going on in this regard, particularly, in the context of Real Estate Development Agreements. Section 45(2) provides that profit or gain arising from conversion of a capital asset into stock-in-trade is taxable as capital gain in the year in which such stock-in-trade is sold or otherwise transferred, though same is to be determined on fair market value of the asset on the date of such conversion. There is, however, no specific provision in regard to the situation where stock-in-trade is converted in capital asset by the assessee. Similarly, section 45(3) provides for determination of capital gain in case of transfer of capital asset by a partner to the firm on the basis of value of the asset recorded in the books of account of the firm, but there is no specific provision covering the reverse situation except case of dissolution of firm, which is covered in section 45(4) of the Act. Similarly, section 50 of the Act provides that in a case where depreciable asset is transferred at a value more than the written down value of the block of the asset, such excess amount will be chargeable to tax as short term capital gain. There is, however, no provision for allowability of loss either as a capital loss or as a business loss in the situation where total block of asset is transferred at a value which is lower than the written down value. In such a case there is also a doubt whether depreciation can be claimed u/s. 32 on the remaining value of the block in subsequent years, since there is no asset with the assessee which can be used in the business. Section 50B of the Act which provides for taxability of capital gain in case of slump sale is also a source of litigation so far as issue is whether transfer is on slump sale basis or on item wise basis for the reason that transferee in any case has to record entries in his books on the basis of item wise value for the purpose of claiming of depreciation and to record cost of acquisition. There is also controversy in regard to the expenditure which can be considered to be cost of improvement, particularly the interest cost incurred by the assessee on loan taken for the purpose of acquisition of the asset. There are many controversies in terms of sections 47 and 49 of the Act also which provides that the transactions will not be regarded as transfer and cost of previous owner will be taken as cost of acquisition by the assessee. As regards determination of indexed value in term of section 48 of the Act when asset has been inherited or received in succession by the assessee, whether in view of the language of Explanation defining the term “Indexed Cost of acquisition”, same is to be calculated from the year in which the asset was acquired by the assessee or from the year in which the asset was acquired by the original owner from whom it has been inherited to the assessee. Provisions of sections 54 and 54F of the Income-tax Act which provide for exemption in the cases where residential house has been purchased or constructed within the specified period, have also resulted in lot of controversies. In a case where a new house has been booked by the assessee with a builder and possession of which has been received after the expiry of specific period, it is an issue of controversy whether the condition will be deemed to have been complied with or not since possession has been received after the expiry of the specific period. In case of acquisition of flat from a builder, the issue has also been in controversy as regards the period of holding for the purpose of computation of capital gain at the time of sale, whether the period during which there was booking and payments had been made to the builder is to be counted as period of holding or only the period after getting the possession from the builder is to be considered for determination whether it is a long term asset or short term asset. Lastly the provisions of section 50C of the Act have opened a pandora box of controversies and number of issues have arisen in the context of applicability of section 50C of the Act determining the deemed sale consideration based on notification by the respective State Govt. for the purpose of levy of stamp duty. Applicability of deemed sale consideration is resulting in many situations in a harsh and unjustified tax liability. In many cases, actual sale consideration as on date is substantially lower than the notified rates and the assessees are facing serious problem in this regard, particularly for the reasons that for the purpose of payment of stamp duty, which is normally the liability of the purchaser, parties are not interested in litigating the same for the reason that the registration of documents will be delayed and accordingly, transaction will not be completed between the parties. Disputing the valuation in Income-tax proceedings is quite difficult and particularly when the returns are now being filed on-line and in the returns the notified rate as well as actual consideration are required to be given. The liability of additional tax will be automatically determined by the computer system and there will be a substantial dispute in regard to the matter. It is also a disputed issue whether value determined by a Departmental Valuation Officer on making reference by the Assessing Officer needs to be accepted by the Assessing Officer and by the assessee. It is also not clear whether provisions of section 50C will be applicable in the situation when asset is converted into stock-in-trade, asset is transferred to firm or asset is taken over by the Govt. in compulsory acquisition or in case of transfer of block of asset u/s. 50 or in the case of sale of undertaking u/s. 50B or for the purpose of making the investment in new residential house u/s. 54 or 54F of the Income-tax Act. The controversy has also arisen with reference to applicability of decision of the Hon’ble Supreme Court in the case of CIT vs. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) that capital gain is not chargeable in the situation when computation provision fails or cost of acquisition is nil, except in the cases which have been specifically provided for by way of amendments in Section 55 of the Act. Notwithstanding the decision of the Hon’ble Supreme Court in the case of K. P. Verghese vs. ITO (1981) 131 ITR 597 (SC) that sale consideration cannot exceed the actual value received by the assessee, in many circumstances dispute is raised by the Assessing Officers on the basis of vague or unreliable information and capital gain is determined on the basis of notional sale consideration which has not been received by the assessee. Last but not the least, there is a big controversy in the context of share transactions, whether the income is chargeable under the head “capital gain” or as “business income”. This controversy has taken a serious turn after amendment in Income-tax Act w.e.f. 1-10-2004 pursuant to levy of Securities Transaction Tax providing for exemption of long term capital gain in case of shares and for lower rate of tax for short term capital gain.

4. Taxability of deemed dividend u/s. 2(22)(e) of Income Tax Act.

Provisions of Section 2(22)(e) of the Act, were inserted in the Income Tax Act w.e.f. 31-5-1987 pursuant to omission of provisions of section 104 of the Income-tax Act, to check the tax evasion by closely held companies by not declaring the dividend but passing on the funds to the shareholders by way of loans or advances. These provisions have led to lot of controversies as regards determination of accumulated profits, taxability of the amount when loan is given to the concern, taxability of the amount, which is given as loan in earlier years and also the date on which the shareholding is to be determined, particularly in case of issue of shares on demerger or amalgamation of companies. The provisions have also proved to be very harsh where loans are given only for a short duration and same had been repaid by the shareholder. The Hon’ble Supreme Court has taken a view in case of Taru Lata Shyam vs. CIT 108 ITR 345 (SC) and Ms. P. Sarda vs. CIT 229 ITR 444 (SC) that notwithstanding the amount has been refunded, same is chargeable to tax as deemed dividend for the reason that repayment of loan is not excluded from the provisions of section 2(22)(e) of the Act. In many situation loan or advance is given to Group Companies in the normal course with a view to assist the Group Companies, but assessees are unintentionally caught under the provisions of section 2(22)(e) of the Act and have to litigate the taxability of the amount.

5. Levy of penalty u/s. 271(1)(c) of the Income-tax Act

Section 271(1)(c) of the Income-tax Act provides for levy of penalty in case the assessee has furnished inaccurate particulars or has concealed the income. The Assessing Officer as a matter of routine are initiating penalty proceedings and penalties are also being levied without proper consideration of facts and circumstances of the case and the scope of provisions for levy of penalty. Accordingly, the litigation is going on before appellate authorities in each case where penalty is levied. The issues for controversy in this regard are for scope and meaning of term “concealment” or “furnishing of inaccurate particulars”, whether concealment or furnishing of inaccurate particulars is intentional or for any other reason which may be a genuine mistake, whether the penalty is leviable where due disclosure has been made in the return by way of notes, whether penalty is leviable where issue is debatable, whether penalty is leviable where disallowance or addition is based on estimate made by the Assessing Officer or on a ad hoc basis. Penalty is also levied by Assessing Officer when income is assessed under different head or in a different year or in a case where claim had been made in the original return but same was surrendered suo motu in the revised return before initiation of assessment proceedings. Controversy is also for levy of penalty when disallowance is accepted by the assessee or where disallowance has been upheld in appeal by the appellate authorities. The issue for levy of penalty also arises in the cases where there are losses either under business head or capital gain and tax is payable on book profit and the tax liability of the assessee as per the return and as per assessment remains the same and no benefit for carry over of loss is available even in subsequent years.

6. Computation of book profit for levy of tax u/s. 115JB of the Act

Determination of Book Profit for the purpose of levy of tax under section 115JB (earlier sections 115J and 115JA) had been in controversy on number of issues and still controversies are going on with regard to the adjustment of amount of expenditure incurred in relation to exempt income excluded in computation of book profit, adjustment on account of “Provisions” made for liabilities by debited to Profit & Loss Account following the Mercantile System of accounting, adjustment on account of prior period expenses, adjustment in respect of bad debts written off against provisions which have been added back in earlier years and adjustment of loss on actual sale of securities adjusted against provision made for diminution in value of investments made and added in earlier years. Controversy is also in regard to adjustment on account of income or expense not credited or debited to Profit & Loss Account but specific note in respect thereof is given in the Accounts and such income or expense is directly taken or adjusted in Reserve in Balance Sheet. Normally a question arises where depreciation for earlier years is provided for by making adjustment in Reserve or capital gain on sale of asset is directly taken to Reserve, whether deduction is allowable in respect of such deprecation or capital gain is to be added in book profit. The issue also arises in regard to determination of “amount of loss brought forward or unabsorbed depreciation, whichever is less” to be adjusted in computation of book profit, whether to be determined on year-to-year basis or on the basis of cumulative figures.

7. Deemed speculation loss in respect of share transactions

Explanation to Section 73 of the Act provides that where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains”, and “Income from other sources” or a company the principal business of which is the business of trading in shares or banking or granting of loans and advances) consists the business of purchase and sale of shares of other companies, in such a case loss on sale and purchase of shares is to be deemed as speculative loss. The aforesaid Explanation has created controversy in certain cases and the provisions are applied by the Assessing Officers even beyond the intention behind inserting the Explanation. Accordingly, in many cases of genuine transactions for purchase and sale of shares also the Assessing Officers take a view that loss is in the nature of speculative loss. Controversy also arises in regard to the criteria to determine the scope of terms “mainly of income” or “principal business” Issue also arises whether granting of loans and advances in case of NBFC companies can be deemed to be main business or not. The issue has also arisen whether a transaction which is not of speculative nature in terms of section 43(5) of the Act being based on actual delivery of shares, can still be deemed to be speculative in view of this Explanation.

8. Exemption in respect of income of Charitable Trusts and Societies

Section 2(15) of the Income-tax Act, which defines the term “charitable purpose” was substituted vide Finance Act, 2008 w.e.f. AY 2009-10 to provide that advancement of object of general public utility shall not be a charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce or business. The aforesaid amendment had given rise to lot of litigation for the reason that in many cases in order to carry on the charitable object it is necessary to charge a small fee or consideration for the services rendered. Such an activity cannot be said to be in the nature of trade, commerce or business just for the reason that fee or charges are being recovered. Dispute had even arisen in case of Institute of Chartered Accountants of India in respect of rendering of various services for charge of the fee. The Courts have held that if the activities are being carried on as part of charitable object, it cannot be said to be in the nature of trade, commerce or business. Vide Finance Act, 2015 w.e.f 1-4-2016 by way of proviso to section 2(15) it is being provided that such activities will not be deemed to be trade, commerce or business, if same are undertaken in the course of carrying on the objects of general public utility, provided the aggregate receipts from such activities do not exceed 20% of total receipts of Trust or Institution. The proviso will also not resolve the issue as controversy is in regard to the nature of the activities as such, whether in the nature of trade, commerce or business, if some fee is charged would continue. Further, condition of 20% will also not resolve the issue as in many cases, the activities of charitable nature have to be carried on by the Trusts or Societies on the basis of recovery of charges from general public and it is not always possible to run the activities if charges not made. Condition that receipt for these activities should not exceed 20% of total receipts would mean that at least 80% of total receipt should come from donations or from any other source, which may not be possible. Controversy in cases of Trusts are also being raised by the Department on account of various other reasons such as that whether section 11(1) exemption is available in respect of income derived from the property only and not in respect of income received as a result of activities or even donations, whether accumulated funds have been applied for particular purpose, whether there was violation in investment pattern, whether loans given to any other charitable institutions is application of income, whether shortfall in income over expenditure can be met out of corpus funds, etc. Controversies have also arisen in the cases of educational institutions and hospitals, which institutions claim exemption under section 10(23C) of the Act. Many time approvals to such educational institutions and hospitals are not being granted or renewed by Commissioners on the ground that their activities are resulting in surplus. In regard to this issue recently the Hon’ble Supreme Court in the case of Queen’s Educational Society vs. CIT (2015) 372 ITR 699 (SC) has held that a surplus arising from activities would not mean that institution is being carried on “for profit”. It can now be expected that this issue will not be raised by the department. The controversy also arises in cases of charitable trusts or institutions in regard to certain activities which the Department considers to be of business nature. Exemption in respect of receipts from such activities is not allowable on the ground that separate accounts have not been maintained in terms of section 11(4A) of the Income-tax Act. On this ground the Department has raised issue even in respect of income from chemist shop and lab charges recovered in a hospital or a canteen or stationery shop run in a school. Even in respect of transportation facilities provided to students in a school this issue has been raised. Issue has also been raised in certain cases, where auditorium has been given on normal hire charges by a charitable institution as a part of carrying on its charitable activities.

9. Deduction of tax at source under various provisions

The Income-tax Act requires deduction of tax at source under provisions of sections 192 to 195 of the Act. Controversies have arisen in respect of nature of transactions, whether tax is deductible therefrom or not and the rate at which tax is deductible. Though CBDT has issued certain circulars with regard to scope of provisions but controversies are there. In various circumstances alleging non-deduction of tax at source demands are raised on account of tax, penalty and interest. Expenses are also disallowed u/s. 40(a)(i) or 40(a)(ia) of the Act. These demands or disallowance of expenses give rise to litigation. The controversy also arises in regard to liability for deduction of tax at source in the cases where provisions for expenses are made in accounts at the year end. It is also a controversial issue whether tax is deductible u/s. 194I of the Act from payments made to hotels for stay of employees or for holding any seminar, conference etc., considering the same as rent. Controversy also arises in certain cases whether tax is deductible on gross amount or on the amount of income and also whether tax is deductible from reimbursement of expenses. In the context of section 195 of the Act, which is applicable to remittances made to non-residents or to foreign parties, there have been substantial litigation as regards the liability of an assessee under above section and also as regards the scope of payments which are subject to TDS under section 195 of the Act. Scope and meaning of terms “fee for technical services” and “royalty” in terms of DTAAs and provisions of section 9(1)(vi) and (vii) are source of big controversy and litigation. Even payments of commission for import or export to foreign parties rendering services in their countries are being contended by the department to be in the nature of “fee for technical services”. Irrespective of provisions of section 5(2) of the Act which provides for taxability of income of a foreign party which has accrue or arises in India, all the payments which can be said to be in the nature of “fee for technical services” are being claimed subject to taxability in India and, therefore, subject to TDS u/s. 195 of the Act irrespective of the fact that the foreign party has no existence in India and no services are rendered in India and by no stretch of imagination by a common sense it can be said that income of the foreign party should be chargeable to tax in India. The difficulty has further been aggravated by the provisions of section 206AA of the Act which requires the foreign party to obtain PAN. Any foreign party which is not having a regular dealing in India would not obtain PAN in India and would obviously not file return of income also. In such a case, undue tax liability is levied by the department on the payers and even proceedings are taken for not deduction of tax at source. Controversy also arises in the cases where the Indian party has taken a reasonable and bona fide view that tax is not deductible and has made remittance without deduction of tax at source after filing necessary forms i.e. Form 15CA and 15CB whereas subsequently the department contends that tax should have been deducted. The controversy for deduction of tax at source which had arisen in the case of Vodafone International Holdings B.V. vs. Union of India (2012) 341 ITR 1 (SC), is a glaring example to the level of dispute or the liability, which an Indian party may suffer on account of subsequent allegation for non-deduction of tax at source by the department.

10. Transfer Pricing issues

Substantial litigation is presently going on in regard to determination of ALP under section 92C of the Income-tax Act in relation to “international transactions”. Adjustment in ALP is made almost in every case of substantial amount and demand is raised. Reference to Dispute Resolution Panel does not prove to be effective in resolving the issues. Various Benches of ITAT are burdened with large number of cases of transfer pricing adjustments. Controversies are in regard to a particular method to be applied, selection of comparables, determination of average, whether adjustment is to be made only with reference to international translations or is to be made in total profit on TNMM basis, whether adjustment is also to be made on notional basis on account of interest, share premium etc. More controversies and litigation are going to arise in the coming time for the reason that domestic transactions have also been included in the scope of provisions of section 92C of the Act.


In conclusion, it is stated that efforts have been made herein to list major controversies presently going on under the provisions of Income-tax Act. Apart from controversies listed hereinabove, there are many more issues which are subject matter of controversies and litigation. The issue for consideration by the Govt. authorities is that why so many controversies are there in the provisions of Income-tax Act. Any new section added in the Act or even any amendment made, results in controversy and litigation. It can be submitted that the controversies are broadly arising for two reasons, firstly, drafting of relevant provisions are not being made after full consideration of necessary circumstances. Language is not finalised and after due deliberation with the stakeholder. Most of the amendments are made through Finance Bill in a secretively manner. As a result, language is not perfect so as to lay down the clear legal proposition. Amendments are also not made in consonance with the business requirements. Therefore, same leads to litigation being unreasonable and unjustified. Secondly, main issue of litigation is lack of proper guidelines for implementation and the applicability of legal provisions in the facts and circumstances of the assessees. Attitude of the Assessing Officers invariably is to impose the liability on the assessees even though he at his heart may not be convinced with the legal interpretation being adopted by him. The Assessing Officers, most of the times, are working for fear of audit objections and allegation of not acting in the interest of the department. In order to resolve the controversies, it is very much necessary that there should be a proper and effective mechanism at CBDT level to clarify the issues from time-to-time and issue necessary guidelines for the Assessing Officers so as to bring uniformity in the approach of the Assessing Officer. The Committee which may be entrusted this important job at CBDT level should also have representation from profession and industry and any clarification or guidelines should be issued after thorough and careful consideration adopting reasonable and justified approach and not only the approach as a tax gatherer. Long back there used to be Direct Taxes Advisory Committee having similar composition. The Committee should also consider the judgments of High Courts or even of Tribunal and after a reasonable thought position of the Govt. should be clarified and all the litigation, if it is not in consonance with the stand of the department, should be withdrawn. It may also be stated in this context that the adjudication process provided in the Act with a view to avoid controversies and litigation such as provisions of section 264 for revision by CIT, provisions of section 144C regarding reference to Dispute Resolution Panel and provisions of sections 245 and 245R for reference to Authority for Advance Ruling are also not serving the effective purpose as on date for the reason that the authorities referred above are primarily looking at the point of the department. Reasonable and justified approach is not being adopted keeping in view the purpose and object of the provisions under which the authorities were constituted. It may be stated in the past that certain effective measures are necessary on the part of the Govt. to avoid the controversies and to reduce the litigation which is very much necessary and desirable in the interest of the department and also the assessees and to make the business like environment to boost even foreign investments in order to make the policy of the Govt. “Make in India” successful and also to “ease of doing business”.

I end with sincere request, become RTI friendly; provide some percentage of your time and money in service of the nation through spread of RTI.

[Editorial Note: CA Narayan Varma expired on 24-12-2015. May his soul rest in peace.]

The Right to Information Act, 2005 is a potent piece of legislation under the Constitution. One can say that the Constitution is made effective through the legislation such as the RTI. The maxim POWER to EVERY CITIZEN is actualised through this one law more than any other or for that matter even all other laws put together.

Mahatma Gandhi once said:

“The true source of right is duty”

How true, our law is named “The Right to Information” but really it is duty to information.

RTI Act became effective on 12-10-2005. In this year, it completes 10 glorious years.

When one treats RTI as something basic to the democracy, one way of looking is that decade is not a long period and it has further to become more effective but other way of looking is that to survey and find out how much it has achieved and progressed and how much it has failed.

Nani Palkhivala in one of his talks said:

“One of the main reasons for India’s backwardness and stunted development is that we as a nation have no sense of time at all. We are individually intelligent and collectively foolish. It is characteristic of us that in our national language the word ‘KAL’ is used to denote yesterday and tomorrow. I attribute this absence of time sense to two factors. We were the first country in the world to evolve the concepts of eternity and infinity: against the backdrop of eternity what does the waste of even several decades matter? Secondly, we were the first to evolve the doctrine of reincarnation: if you waste this life you will have several more in which to make good.”

The word ‘KAL’ is unique. To me it seems the word was coined to understand philosophically life as a whole – beginning (yesterday) and ending (tomorrow) – from birth to death. It could go even beyond birth and death – i.e. of previous life before birth and future life beyond death.

You can’t change the past but the future will always be there for you to make what you want out of it. Let us all join in making RTI movement universal in this country especially because we have just crossed ten years of its operation. It is said: A car’s WINDSHIELD is so large and the Rear view Mirror so small because our PAST is not as important as our FUTURE. Let us march making RTI all pervasive.

As said above, India celebrates 10 years of the practice of the right to information. In this decade, this law, one critical to Indian democracy, has established the citizen’s right to make informed choices, not just once every five years, but every single day. Governments at the Central and state levels have been forced to concede to the democratic principle of sharing power. An estimated five to eight million applications are filed every year, making it clear how popular the law is. The more than 50 RTI users who have been killed bear testimony to just how much the act threatens vested interests. In posterity, those studying governance in independent India will be able to mark the patterns of a pre- and post-RTI era. It is, therefore, important to understand the immense contribution of the ordinary Indians who battled for years to get the entitlement and, since 2005, to implement the law.

Powerful and relevant local struggles can organically grow into national movements that enrich democratic practice. The demand for information was brilliant in its simplicity. People honed it locally on the nerve centres of unaccountable power. These demands for details of expenditures on roads, of life-saving medicines in hospitals, of disappearing rations, sent shockwaves through the establishment and shook the foundation of bureaucratic governance. The RTI has proved its efficacy from the panchayat to Parliament. Cutting through red tape and bureaucratic prevarication, it has exposed entrenched vested interests in policymaking and implementation, and undermined officials’ impunity in perpetuating both grand and mass corruption.

The RTI has been India’s most powerful “weapon of the weak”, enabling citizens everywhere to question and hold to account the legislature, executive and judiciary.

They have exposed misdeeds by governments across the board, in the delivery of basic services, in land and mining, as well as grand corruption in arbitrary contracts, like in the allocations of 2G spectrum and coal blocks.

In October 2015, PM Narendra Modi addressed the 10th annual convention of the Central Information Commission. He said:

“It is the common man’s right to question Government and this is the foundation of democracy,” Modi said, asserting that the Right to Information (RTI) could only be effective if it brought policy change. Adding that there is no place for secrecy in this day and age, Modi said, “The process of accessing information should be transparent, timely and trouble-free. Delayed information does not help solve the problem but increases it. Timely information can halt a wrong decision. We will emphasise this,” he said. Modi’s remark comes at a time when activists have criticised the Government’s implementation of the RTI Act. The transparency watchdog CIC has over 35,000 pending complaints and a waiting period of over a year.

Former PM Manmohan Singh had used the convention to highlight the drain on public exchequer due to “vexatious and frivolous” complaints. However, PM Modi chose to strike a positive note exhorting Government officials to analyse the RTIs being filed in their departments and effect policy changes to ensure good governance.

“If a question is asked by a citizen, there must be some issue in Government that the need for question arose. A small RTI question can force you to change policy,” Modi said.

We are the professionals – minimal less than 1% of total population of India. We are intellectual, we are prosperous individuals. I believe on us lies the responsibility of strengthening the democracy. While we devote our time to the profession and earn money, it is our duty to give some time and some money to the needy and deprived citizens. You may provide money to them but more important is to guide them to get their rights to achieve through RTI. They must become empowered citizens which RTI leads to.

Bill Gates said:

With affluence comes responsibility — why I give

He further writes:

“At the headquarters of our foundation in Seattle, each floor has a quotation etched in glass. On one of the floors is a saying attributed to Mohandas Karamchand Gandhi: “the best way to find yourself is to lose yourself in the service of others.”

These words of the Mahatma have a featured place in our building because they get at something very basic about philanthropy. They remind us that any search for real purpose in life must take us outside of ourselves.

Perhaps this statement resonates with me because I grew up hearing versions of it at home. My mother and father spoke often about the importance of giving back to the community, whether through volunteer work or financial contributions. They never let us forget that our relative affluence came with a deep responsibility to assist those who had not been born so lucky.

What’s more, I could tell from a very early age that even as my parents gave, they received. It was clear that they derived real satisfaction and a sense of belonging from their advocacy work and their donations to various causes”.

Before I end, I quote Justice V. R. Krishna Iyer “Ignorance is not bliss but bondage and knowledge is not folly but duty, if government by the people is to possess the semblance of reality, the battle for information swaraj needs awareness missiles”.

I end with sincere request, become RTI friendly; provide some percentage of your time and money in service of the nation through spread of RTI.

All my affectionate fellow members, brothers and sisters at Bar.

It is a fortnight ago, I have assumed the reigns of a great premier professional organisation as its National President and my predecessor Shri J. D. Nankani must feel happy to have been relieved of the enormous responsibility and duties that the Post would inherently carry. Not unknowing of the feelings of my predecessor when he was elected and assumed the charge of National President, but my sincere sense of feeling and experience having already witnessed the great sacred duty as also the responsibility of the National President while officiating during the absence of my predecessor, one thing I can definitely say is that it is a seat of thorns but not of roses. Nevertheless, I am a person of strong Will, with no shy of taking up the responsibility and leading the great organisation.

I have projected my thoughts, ideologies and such of the programmes during my tenure as the President, first and foremost programme, I have advocated is mankind is our business to say and mean that everyone should strive hard for inclusion of more and more new members into the fold and also to organise many more educative and informative seminars even in nook and corner of the country, as it is imminent that the time for start of GST era is very nearer to us when every learned member of the Federation shall be in a position to feel that he is well prepared and equipped with necessary technical knowhow to meet the challenges. It is our prime motto that the Federation is known for achieving, excellence, education and ethics in profession which will be in our belief possible only through more and more learning.

It is a matter of great privileged pride that the periodical journals of the Federation for the benefit of the members for updating their knowledge are very much praised and commended by the judges of the Supreme Court also as to the manner in which the judgments rendered by the judiciary in the country on tax laws of both direct and indirect are being digested in a more efficacious and lucid form.

It is also very much gratifying to notice that more than 90 invitees from our Federation are attending the Income Tax Appellate Tribunal Platinum Jubilee Celebrations being organised by Government of India through Ministry of Law and Justice on 24th & 25th of January, 2016 and the way in which the invitation is extended to large number of invitees from Federation is really a feather in the cap of the Federation and it is all hopeful that the same trend would continue in times to come. Efforts in all sincerety and honesty would be employed to achieve more subscriptions from the members to the journal and simultaneously necessary corrective steps would be initiated to assure that every subscriber to receive the journal.

We also take this opportunity to appeal to the learned members of the Federation to contribute mindboggling articles for being published in the journals. Appeal is also being made to the members in every State and in every zone to hold Study Circle meetings every month to provide necessary infrastructural training to them/members especially in urban and semi urban places to enable them to gear up to practice the new laws. Some other beneficial programmes/schemes are in offing which I would place before the members in my next addition o presidential communiqué. Here I would like to salute the Chief Editor and all the learned members of the Journal Committee for their dedicated service to the Federation and society, for, but for their selfless and dedicated service, the journal would not be successful.

I once again convey my regards and respects to one and all for reposing hilarious confidence in me to head and lead the institution.

Dr. M. V. K. Moorthy
National President