Prayagraj Tax Conference 2018

Organised by


In Association With



Bishop Johnson School, M. G. Marg, Civil Lines Allahabad


Saturday 24th & Sunday 25th November 2018

THEME : Role of Tax Professionals in Fiscal Laws


Saturday, 24th November 2018

08.30 AM to 9.30 AM Registration

09.30 AM to 11.30 AM Inaugural Session

Chief Guest : Hon’ble Mr. Justice Ashok Bhushan, Judge, Supreme Court of India

Guests of Honour : Hon’ble Mr. Justice Vineet Saran, Judge, Supreme Court of India

: Hon’ble The Chief Justice of Allahabad High Court

: Hon’ble Senior Judge of Allahabad High Court

MOC : CA. Jamuna Shukla, & Mr. Arvind Shukla, Advocate, Varanasi

11.45 AM to 01.45 PM 1st Technical Session :

  1. Restrictions on Cash Transactions under various provisions of the Income-tax Act 1961
  2. Taxation of Capital Gains in case of Securities & Real Estate Transactions
  3. Recovery of Taxes under the Income-tax Act 1961

Chief Guest : Hon’ble Judge of Allahabad High Court

Chairman : Dr. K. Shivaram, Senior Advocate, Mumbai

Panellists : Mr Ashok Kumar Tripathi, CIT (Appeals), Allahabad

: Mr. Rahul Agrawal, Advocate, Allahabad

: CA. Rajesh Mehta Chairman (Central Zone), Indore

: Mr. Anand Kumar Pandey, Advocate, Varanasi

: Mr Anand Godbole, Advocate, Allahabad

MOC & Introduction of Subjects : Mrs. Sakshi Khanna, ACA, Allahabad

01.45 PM to 02.45 PM Lunch Break

02.45 PM to 05.00 PM 2nd Technical Session :

  1. Admissibility of ITCUnder GST
  2. Implications of GSTin case of e-Commerce

Chief Guest : Hon’ble Justice Rajesh Bindal, Judge, Punjab & Haryana High Court

Chairman : Mr. M. L. Patodi, Advocate, Kota

Panellists : Mr. Vikram Chawla, Advocate, Saharanpur

: CA. Venkatramani, Bengaluru

: Mr. D. K. Gandhi, Advocate, Ghaziabad
: Mr. Sanjay Pathak, Jt. Commissioner, GST

MOC & Introduction of the Subject : Mrs. Stuti Saggi, Advocate, Allahabad

05.00 PM onwards High Tea

Note: All Technical Session are Interactive Sessions

Sunday, 25th November 2018

09.00 AM to 10.30 AM Breakfast

10.30 AM to 12.30 Noon 3rd Technical Session :

  1. Assessment of Charitable Trusts, Educational Institutions and Medical Hospitals
  2. Money Laundering and Taxation after Demonetisation

Chief Guest : Hon’ble Miss Justice Bharti Saprum Judge, Allahabad High Court, Allahabad.

Chairperson : Mrs. Prem Lata Bansal, Senior Advocate, Delhi

Panellists : CA. Rano Jain, (Mrs.), New Delhi

: Mrs. Shilpi Satyapriya Satyam, Advocate, Delhi

: Mr. V. P. Gupta, Advocate, Delhi

: CA. A. K. Srivastava, Delhi 
: Mr. Subachan Ram, PCIT, Allahabad

MOC & Introduction of Subjects: Mr. Siddharth Pathak, Advocate, Allahabad

12.30 Noon to 01.45 PM 4th Technical Session

Subject : Unbiasing Genders at work places – An ethical – Legal perspective

Chairperson : Mrs. Rekha Sharma, National Council for Women, New Delhi

Panellists : Prof. Geetika, Chairperson, Women Grievance Cell, MNNIT, Allahabad. 

: Mrs. Sumitra Chowdhry, Advocate, Delhi

: Mrs. Anjo Jain, Advocate, New Delhi.

: Mrs. Shilpi Mitchell, Educationist, Allahabad

MOC & Introduction of the Subject : Mrs. Pooja Talwar, Advocate, Allahabad

01.45 PM to 02.30 PM Lunch Break

02.30 PM to 04.30 PM 5th Technical Session

Sub: a) Inspection, Search, Seizure & Arrest under GST

b) Penalties under GST

Chief Guest : Hon’ble Justice S. D. Singh Judge of Allahabad High Court, 

Chairman : Dr. M. V. K. Moorthy Advocate, Hyderabad

Panellists : CA. Siddheshwar Yellamali, Bengaluru

: CA. Dharmendra Srivastava, Kanpur

: Mr. Rakesh Agrawal, Advocate, Ghaziabad

: Dr. Naveen Rattan, Advocate, Amritsar

: Mr. Tarun Gulati, Advocate, New Delhi

MOC & Introduction of the Subjects: Mr. Harsh Vardhan Gupta, Advocate, Allahabad

4.30 PM to 5.00 PM Valedictory Session

Delegate Registration Fees : ₹ 2,000/- up to 15-10-2018; ₹ 2,500/- from 16-10-2018 up to 31-10-2018 and ₹ 3,000/- from 1-11-2018

Bank Details : Indian Overseas Bank, Civil Lines, Allahabad

Name of Account : PRAYAGRAJ TAX CONFERENCE – 2018; 
A/C No. : 035001000062798; 
IFSC : IOB0000350

  1. For Delegate Registration Please Contact: 
    Mr. Arvind Mishra – 9839503498 Mr. Arvind Gupta – 9415207624
  2. We are arranging for SANGAM SNAN early morning on Sunday, 25th November 2018 All the delegates interested in taking a holy dip in Sangam may give their names to: Mr. K.K. Mishra, 9415214681 / Mr. Pawan Kumar Mishra, 9389468193
  3. Preferred Hotels nearby the Venue:
Name Rate Contact No.
Hotel Kanha Shyam ₹ 6,500/- 0532-2560123
Hotel Legend ₹ 6,000/- 7080305807
Hotel Yatrik ₹ 5,500/- 0532-2260921
Hoteo Millineum Inn ₹ 5,000/- 7233885888
Hotel Ravisha Continental ₹ 5,000/- 7388200886
Hotel UR ₹ 3,000/- 9839686876
Hotel Milan Place ₹ 4,000/- 0532-2421505
(All hotels are within 1-2 kms. of the venue)

It is suggested that Hotel Booking may be done online as the rates are much cheaper than the discounted rates offered by them over the counter:

For Accommodation please contact: 
Mr. Sanjay Kumar – 9415216798; Mr. Himanshu Misra – 7905952125; Mr. Vimal R. Ralph – 9451789367


Mr. Ganesh Purohit National President, AIFTP, Jabalpur, 9425154914

Mr. Sanjay Kumar, Chairman, AIFTP (NZ), Allahabad, 9415216798

Mr. Ajit Dhawan, Conference Chairman, ITBA, Allahabad, 9415218681

Mr. Arvind Mishra, Convenor, ITBA, Allahabad, 9839503498

Dr. Ashok Saraf, Deputy President, AIFTP, Guwahati, 9435009811

Mr. Arvind Gupta, Vice Chairman, President UPTBA, Azamgarh, 9415207624

Mr. Madhurendra Nath, Vice Chairman, President ITBA, Allahabad, 9415267915

Prof. Tanuj Nandan, School of Management, MNNIT Allahabad, 9919622767

Mr. V. P. Gupta, Vice President, AIFTP (NZ), New Delhi, 9810052890

Mr. Pankaj Ghiya, Secretary General, AIFTP, Jaipur, 9829013626

Mr. Jamuna Shukla, Secretary, AIFTP (NZ), Varanasi, 9450361366

Mr. Sourabh Singh Gahlaut, Secretary, UPTBA, Lucknow, 9415002138

Pradhan Mantri Rojgar Protsahan Yojna (PMRPY)

(This Scheme has been extended for another three years)

The Importance and Scope of PMRPY

The country has witnessed an anomaly of sorts in the few last year. Despite trends and demographics being highly in favour of the country, and especially so for as far as the youth are concerned the figures that have translated have been alarming. The growth of jobs has not been to start of with. Accompanying this was the fact that the rate of growth of jobs has not been consistent. The last decade has seen an actual decline in the people employed in the labour force, and an alarming drop in the female population engaged. The greatest cause of concern perhaps. Has been the fact that the unemployment rate among the youth has been especially high. This is even true for those who have a minimum of a secondary level of education.

To help streamline processes and also incentive and improve the situation in organisations, the Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) has been a significant step in not just encouraging organisations to employe a greater number of people, but also facilitates bringing otherwise unaccounted employees into their books. The key deliverable of this scheme is that the government will pay the 8.33% contribution for all new employees for the first three years of their service.

Who Stands to Benefit?

There is a direct benefit to employers who will receive support from the government in this regard. The situation of unemployment also stands to get direct redressal through this instrument. What is of greatest significance is the fact that all workers will now stand to have access to a more sound social security cover.

Who does this cover?

Any employee who prior to April 2016, has not been employed in an establishment that is registered under the Employee Provident Fund Organisation (EPFO) and does not have a UAN is covered. However, the employee must not have a salary exceeding ₹ 15,000/- per month.

Who is eligible?

  • It is mandatory that the organisation have a LIN (Labour Identification Number) allotted to them. This is available through the Sharm Suvidha Portal. This is over and above the customary registration with the Employee Provident Fund Organisation (EPFO).

  • The new employees should have been added to the existing reference base by August 2016. In the case of new establishments or those who have just registered, the reference base is maintained at zero.

  • This is only applicable to those whose salary is under ₹ 15,000/- per month. The Employee Provident Fund Organisation (EPFO) portal will help facilitate payments in the event that the employee does not possess a UAN.

  • The contribution can be availed by the employee through the government for a period of three years as long as three years as long as the employee remains in the same organisation.

Latest Amendment to the PMRPY Scheme: dated 24th of April, 2018

Government of India will pay the full employer’s contribution (EPF and EPS both) as admissible from time to time w.e.f. – 1-4-2018 for a period of three years to the new employees and to existing beneficiaries for their remaining period of three years through EPFO. The terminal date for registration of beneficiary through establishment is 31st March, 2019.

Goods (Sales) return claim vis-à-vis Movement of Goods


The facts are that the dealer is retailer in plumbing items. The buyers are householders. The goods are sold to them by invoice. However, in case of change in goods or design or non-fitting into the requirement, the customer returns the goods back to the dealer. The dealers prepare credit notes and enter the same in the books. However, being small items and dealing with householders, there are no debit notes from the customers nor proof of any movement of returned goods. The authorities are objecting to allow the return claim on the ground that goods return documents and debit notes are not available. Whether the said objection is justified?


Normally, under Sales Tax laws, claim of goods return is allowed subject to time limit etc.. This is a special concession, since there is ultimately no sale of such goods.

Under Sales Tax laws, generally no particular requirements about satisfying the goods return claim are notified. The claim is to be supported by satisfactory proof which will depend upon facts of each case. The requirement of supporting will depend upon the nature of business. In case of retailers who are normally dealing with household consumers, there cannot be all sequential documents like debit note, goods movement proof etc.. Further these goods are sold to consumers in nearby area wherein there will not be any movement by way of transport etc.. The return deliveries may be by way of hand delivery or bringing the goods by way of local conveyance like taxi or own vehicles etc..

Further, such customers will not be maintaining accounts so as to provide debit notes etc..

Therefore, the documents maintained by the selling dealer should be considered for successful claim. The entries in the books of accounts of the seller as well as stock records, if any, of the selling dealer will be strong supporting material.

The goods return claims are based on facts of each case and cannot be put into any straight jacket requirements. Recently, Hon. Calcutta High Court had an occasion to deal with such issue. Reference can be made to the judgment in case of MIRC Electronics Ltd. v. Deputy Comm. Commercial Tax, Corporate Div. and others (56 GSTR 429)(Cal). In this case the short facts narrated by Hon. High Court are as under:

“According to the petitioner, the petitioner would sell the goods and raise invoices on retailers who would, from time to time, cancel some of the concluded purchases by issuing written requests for cancellation. The petitioner claims that since most of the retailers did not have adequate space to store the goods, the goods would remain with the petitioner in the petitioner’s godown and lots thereof would be removed by the retailers as per their convenience. The petitioner claims that nothing in the West Bengal Value Added Tax Act, 2003 obliges a dealer claiming sales return or cancellation of invoice to demonstrate that the goods had physically left the godowns of the dealer and were subsequently physically carried back by the purchaser to the dealer.”

After observing about nature of dispute, Hon. High Court has held as under:

“If the Act of 2003 does not discard a sales return merely on the ground that transport documents in respect thereof are not available, the Board could not have discredited that part of the petitioner’s claim merely on the ground that the petitioner could not produce any transportation documents evidencing either the initial transportation of the goods to the buyers or the subsequent receipt of the goods from the buyers.

The petitioner has appended the particulars detailing the invoices of the goods covered by the sales returns and cancelled documents claim. Once the invoice number is disclosed, the relevant invoice can be tallied to ascertain the identity of the goods covered thereby. If there are matching records to show the cancellation of the sale of the same goods and subsequent records to show the sale of the very same goods to a third party, that may suffice for the purpose of establishing any sales return within the meaning of Section 2(55)(b) of the Act of 2003.”

Thus, the goods return claim cannot be put into any straight jacket formula. It depends upon facts of each case. However, the overall situation is that if the goods return is accounted in the books of seller and further that the goods are available in stock or subsequently sold, then it will be sufficient evidence for allowing the claims.

In case of retailer querist, the above criteria will apply. It appears that retailer has accounted the goods return. Along with other evidences like subsequent sale of such goods, there is sufficient supporting for goods return claim. The non-availability of debit notes or transport proof etc. cannot affect the claim. The objection of the authorities is not justified.

Query No. 1: (Depreciation on income assessed under other sources)

The main object of the company is to carry on the business of the construction. However, construction business was not carried on. The querist has purchased the wind mill and received the charges for use of electricity. Whether income can be assessed a business income or income from other sources. If income is assessed as income from other sources, the depreciation is allowable?


From the fact, it is clear that the company has not started construction business but received electricity charges by letting out wind mill; which is presumed to be not business of the company.

So whatever electricity charges received would be assessed as “Income from other sources” under section 56(2)(ii) of the Income tax Act, 1961.

Section 57 of the Act, provides that the income chargeable under the head “Income from other sources” shall be computed after making deductions mentioned in that section.

Clause (ii) of section 57 provides for deduction, which reads as under:

“in the case of income of the nature referred to in clauses (ii) and (iii) of sub section (2) of section 56, deductions, so far as may be, in accordance with provisions of sub clause (ii) of clause (a) and clause (c) of section 30, section 31and sub sections (1) and (2) of section 32 and subject to provisions of section 38”.

Thus, the company is entitled for depreciation allowance on the said income.

Query No. 2: (Single Transaction in the course of business)

The main object of the company is leasing of the premises. However, the company is having only one property as investment which is shown in the books of account. The said property is leased to a third party, whether the income of leasing of premises can be assessed as income from house property or business income. If the consolidated agreement is entered into for leasing of property and furniture can the AO bifurcate the expenses as a income from other sources and property income.


The main object of the company is leasing of the premises. The company is having only one property shown as investment in the books of account and the said property is given on lease to third party as per the object of the company. Therefore, income from leasing is to be shown under the head “Profits and gains of business or profession”.

Lord Clyde L P. observed in Balgownie Land Trust Ltd. v. I.T. [14 TC 684} “A single plunge may be enough, provided it is shown to the satisfaction of the Court that the plunge is made in the waters of trade, —–“ quoted with approval in G. Venkataswamy Naidu & Co. v. CIT [35 ITR 594 (SC)]

If it is proved with other surrounding circumstances that leasing of premises is a business, then, the Assessing Officer has no right to bifurcate income, if it is through consolidated agreement with furniture.

Query No. 3: (Developers position on renting & selling of flats)

Assessee is a developer of housing complex. He intends to sell the all the flats in a building constructed. However latter on instead of selling flats assessee gave them on the rent. Under which head of income such rental income would be taxable? Further if sells such flats after 7/8 years to same tenants. Whether sale proceeds would be taxed as business income or capital gains?


Though, the assessee being a developer and developed housing complex with intention to sell the flats. Due to circumstances, he could not sell the flats and therefore he has rented out the same,. The income from renting outould be assessed under the head “Income from house property”.

Later on, if he disposes of the flats after 7/8 years to the same tenants, the gain from such flats would be assessed as business income or capital gains, would depend on the facts. If the flats are shown in the books of account as stock-in-trade, it would be assessed as business income. But, if those flats are shown as investment, then, it would be assessed as capital gains.

Query No. 4: (Applicability of section 179 of the I.T. Act)

AO passes an order u/s. 179(1) of the Act whereby directors of the concerned Pvt. Co. are jointly and severally held liable for payment of outstanding demand of such Pvt. Co. in which they are directors. Can such directors prefer a writ petition before the Hon’ble High Court challenging the said order? Whether, before initiating recovery proceedings u/s. 179 against directors in respect of dues of a company, it is essential for the revenue to establish that such recovery cannot be made against the company? Whether directors can be made liable for such tax dues of a company even if such non recovery can not be attributable to any gross neglect, misfeasance or breach of duty on the part of directors?


Section 179(1) reads as under:

Notwithstanding anything contained in the Companies Act, 1956 where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company can not be recovered, then, every person who was director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company”

This sub section was tested by the Bombay High Court in Dinesh T. Tailor v. TRO [326 ITR 85], wherein the Court has observed as under:

By sub section (1) of section 179, every person who is director of a private company at any time during the relevant previous year is jointly and severally liable for the payment of tax due from the company, if such tax cannot be recovered. Though the liability of the directors is made joint and several the provision is attracted only when tax can not be recovered from the company. It is only if the tax cannot be recovered from the company that every person who was director of the company at any time during the relevant previous year becomes jointly and severally liable”.

However, the Department has to comply the condition precedent to recovery as held by the Bombay High Court in Madhavi Kerkar v. ACIT [403 ITR 157] The Court, in the said judgment has held as under:

That the Department acquired or get jurisdiction to proceed against the directors of the private limited company, only after it had failed to recover the dues from the company, it was a condition precedent for the Assessing Officer to exercise jurisdiction under section 179(1) against the director of the company. The jurisdictional requirement was not satisfied by a mere statement in the order that recovery proceedings had been conducted against the defaulting company but it had failed to recover its dues. Such a statement should be supported by mentioning briefly the types of efforts made and the results. The notice under section 179(1) did not indicate or give any particulars in respect of the steps taken by the Department to recover the tax dues of the defaulting company and failure thereof. In the letter sent in response to the notice, questioning the jurisdiction of the Department, the petitioner had sought details of the steps taken by the Department to recover the tax dues of the defaulting company and failure thereof. In the letter sent in response to the notice, questioning the jurisdiction of the Department, the petitioner had sought details of the steps taken by the Department and had pointed out that the defaulting company had assets of over Rs. 100 crores. Admittedly, no particulars of steps taken to recover the dues from the defaulting company were communicated to the petitioner nor indicated in the order. At no time had the petitioner been given a chance to meet the Department’s case that it had taken steps to recover the amount from the defaulting company so as to meet the jurisdictional condition precedent before passing of an order under section 179(1). The order was set aside since the condition precedent was not satisfied….”.

Thus, it is necessary that revenue should prove first that no recovery would be made from the company.

Query No. 5: (AO has no jurisdiction to change book profit)

Assessee changed its method of providing depreciation from ‘Straight Line Method (SLM) to “Written Down Value (WDV) during the year under consideration which resulted into shortfall in depreciation. Such shortfall was charged to P & L Account. AO disallowed claim of such additional depreciation on the count that Sec. 205 of the Companies Act does not entitled an assessee to claim depreciation for earlier years placing reliance on “McDowell and Co. v. CTO – 154 ITR 148”. Whether the change in method of accounting for depreciation was in accordance with Accounting Standards issued under the Companies Act? Whether AO has jurisdiction to go behind the “book profits” shown in P & L Account except to the extent of prescribed adjustments once it is found that books of accounts are certified by authorities under the Companies Act? What is the treatment of income on account of change in the method of depreciation? What is the treatment of additional claim / write back of depreciation in the books of account upon change in the method calculating the same?


Para 15 of Accounting Standard (AS 6) : “Depreciation Accounting” as per Companies (Accounting Standards) Rules, 2006 reads as under:

“The method of depreciation is applied consistently to provide comparability of the results of the operation of enterprise from period to period. A change from one method of providing depreciation to another is made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.. When such a change in the method of depreciation is made, depreciation is recalculated. In accordance with the new method from the date of asset coming into use. The definition or surplus arising from retrospective re-computation of depreciation in accordance with the new method is adjusted in the account in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency is charged in the statement of profit and loss account. In case the change in the method result in surplus, the surplus is credited to the statement of profit and loss. Such a change is treated as a change in accounting policy and its effect is quantified and disclosed”..

So the assessee has changed method depreciation from SLM to WDV and shortfall (deficiency) is charged to profit and loss account as per accounting standard. Thus prepared accounts is per schedule VI of the Companies Act, 1956 (i.e. schedule III of the Companies Act, 2013) and certified by the authorities under the Companies Act. Therefore the Assessing Officer has no jurisdiction to go behind the “book profit” shown in P & L account except to the extent of prescribed adjustment mentioned under section 115JB of the Income tax Act, 1961. As per the Supreme Court in Apollo Tyres Ltd. v. CIT [255 ITR 273],while interpreting similar provision under section 115J of the Act, the Court has held that

The Assessing Officer, while computing the books profits of a company under section115J of the Income tax Act, 1961, has only the power of examining whether books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Expiation to section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words” in accordance with the provisions of Part II and III of Schedule VI to the Companies Act”, in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the Company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in the manner provided by the Act and the same is scrutinized and certified by the Statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirement of the Companies Act. Sub-section (1A) if section 115J does not empower the Assessing Officer to embark upon a fresh enquiry to regard to the entries made in the books of account of the company”

This view has been reaffirmed by the Supreme Court in Malyala Manorama Co. v. CIT [300 ITR 251].

Redevelopment of old Co-operative Societies is of great interest for its members when houses/units of the society have become uneconomical, show sign of aging or are in dilapidated condition. Redevelopment of houses is the best economical option for the society members and builders/developer as the members get new bigger houses with several amenities and builders can make cost effective construction by utilising unused potential of the land of the society located in good area.

In case of redevelopment process the builder/developer demolishes existing society construction which may be old and construct new structure on the same land. Thus, the builder gives new construction to the existing members with many amenities and also sells new additional units built by it to new buyers in the market.

A. Model of Redevelopment

The society registered under the Co-operative Societies Act is owner of the land and generally it enters into agreement with the developer for reconstruction of new building/units, whereby members of the society grant their consent to the society.

Under redevelopment model,

  1. The members of society get newly constructed houses with extra space and with certain amenities. Generally each member gets additional money from the builder and also gets fixed rental amounts for temporary accommodation. In certain cases, the society gets corpus fund also from the builder.

  2. While the builder gets consideration in two forms, inter alia, (i) from the existing members/tenants of the society by way of development rights over the land to construct new building including the permission to construct additional flats/units, and (ii) money consideration from buyers against sale of new flats.

Thus, the above referred transactions are generally involved in model of redevelopment of society and taxability of such transactions depend upon terms and conditions of each agreement. is discussed in following paragraph. Considering general terms and conditions of agreement, I have expressed my view with respect to taxability of transactions involved in Redevelopment model.

B. Taxability of Transactions involved in Redevelopment Model under GST law

  1. Transfer of Development Rights (TDR) to the Developer

In above referred chain of events, the first transaction would be Transfer of Development Rights (TDR) by the society to the developer.

1.1 As per Section 9 of the CGST Act, the supply of goods or services or both is the taxable event. The term ‘supply’ as defined under Section 7(1)(a) of the CGST Act includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Further, as per Section 7(2)(a), activities or transactions specified in Schedule III shall not be treated as a supply of goods nor a supply of services notwithstanding anything contained in Section 7(1) of the said Act.

1.2 Thus, following are essentials to treat a transaction as supply under Section 7(1):

  1. A transaction with respect to goods or service or both is by way of sale or exchange or transfer or barter or lease or licence or rental or in any other such form;

  2. There must be consideration; and

  3. Such transaction must be in course or furtherance of business.

1.3 As per Section 2(31) of the CGST Act, ‘Consideration’ in relation to the supply of goods or services or both includes any payment made or to be made whether in money or otherwise in respect of the supply of goods or services or both whether by the recipient or by any other person. Further, as per Section 2(17) of the CGST Act, ‘Business’ includes provision of the facility or benefits by the society to its members.

1.4 Thus, ‘transfer of development rights’ by the society to the builder is a transaction of supply because when the society transfers development rights to the builder/developer including permission to construct and sale additional flats, the existing society members get consideration from such builder in form of new structure with more space, rental amount for temporary accommodation, and fund to the corpus of society. Further, this transaction may also be looked at from other angle, the developer supplies construction services to existing members of the society against the development rights including permission construct and sale new flats to new buyers.

1.5 Before we examine under which entry of Schedule II the supply of TDR would fall, it is pertinent to examine whether transaction of TDR can be treated as ‘sale of land’ or not. If, TDR is considered to be ‘sale of land’ it is out of the purview of GST law in view of Section 7(2)(a) read with entry no. 5 of Schedule III of the CGST Act.

1.6 Section 2(52) of the CGST Act defines the term ‘goods’ as “every kind of movable property other than …” and the term ‘service’ as “anything other than goods …”. The land is immovable property and therefore, it is not ‘good’ under the GST law. But it is very important to understand what immovable property includes within its scope with respect to land.

The term ‘immovable property’ is not defined under GST law. As per The General Clauses Act, 1987, definition of ‘immovable property’ includes land, benefits arising out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. As per Registration Act, 1908, ‘immovable property’ includes land, building, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which attached to the earth, but not standing timber, growing crops nor grass. Therefore, it is clear that benefit arising from the land is immovable property. A land has various rights attached to it and one of such rights is ‘transfer of development right’ (TDR). In case of Chheda Housing Development Corporation v. Bibijan Shaikh Farid, 2007 (2) BomCR 587; MANU/MH/0070/2007, the Hon. Bombay High Court has held that TDR being a benefit arising from the land, it is immovable property. When there is ‘sale of land’ there will be transfer of all interests and rights in the property/land. As per Section 54 of the Transfer of Property Act, 1882 to constitute a sale, one of the preliminary conditions is that there must be transfer of ownership from one person to another, i.e., all rights and interest in the properties which are possessed by that person are transferred by him with his free consent to another person.

In case of redevelopment process, the society does not transfer the ownership of land to the developer. Only Development Rights coupled with interest to reconstruct the building with additional units and to sell such additional units is being transferred by the Society to its developer, and therefore, in view of Section 54 of the Transfer of Property Act, 1954 it is not the sale of land.

Therefore, in my view, though TDR is immovable property, it cannot be considered as ‘sale of land’.

1.7 Now, it is to be determined under which entry of Schedule II of the CGST Act the activity of transfer of development would fall in case of redevelopment. In my view such transaction of transfer of development rights coupled with interest to sell additional units is nothing but a licence given by the society to the developer. In law such licence is recognised as licence coupled with interest. Such interest is restricted to construct the building and the additional flats for sale. Therefore in my view, the activity of transfer of development rights by the society to the developer is nothing but a supply of services covered under Entry No. 2(a) of 
Schedule II, which says ‘any lease, tenancy, easement, licence to occupy land is a supply of service.’

A licence is defined in Section 52 of the Indian Easements Act and a lease is defined in Section 105 of Transfer of Property Act. For the purpose of deciding whether a particular transaction is a lease or a licence, the question of intention of the parties is to be determined, and the intention has to be inferred from the circumstances of each case. Whether it is the creation of an interest in immovable property or a right to possess it that distinguishes a lease from a licence. The conduct of the parties before and after the creation of relationship is of relevance for finding out their intention. The description given by the parties may be evidence of the intention, but is not decisive.

A lease under the provisions of Transfer of Property Act envisages transfer of exclusive possession to a lessee with interest in the property transferred. A lessor is entitled to rent and to reclaim possession at the end of the lease period and/or on breach of the terms of the lease. In a TDR, what is transferred is the non-exclusive possession of the land. However, no interest in the land is transferred and neither any rent is payable by the Developer for such possession. Further, both lease and license are modes of transfer of property in presenti 
and by their very nature cannot be of a future property.

Therefore, it is apparent that a TDR transaction is only a licence coupled with a limited interest on the constructed property (fruits of the possession) without any interest in the land.

1.8 In view of foregoing discussion, activity of transfer of development rights to the developer is a supply of service and GST is payable on such transaction.

  1. Availing Services by the Developer from Local Authorities

In one of the stages of redevelopment process, the builder has to get registration for development, plan passing, permissions from Local Authority (Municipality). Thus, services of plan passing, registration for development, etc., are rendered by the Municipality to the Developer and such services are as per power entrusted to it under Twelfth Schedule prescribed under Article 243W to the Constitution of India. As per Notification 12/2017-CGST (Rate), dated 28-6-2017, services rendered by Municipality are exempted. Therefore, the developer shall not bear any tax burden on availing such services from the Municipality.

However, services availed by the developer from its architects, designers, contractors, etc. shall be subject to GST.

  1. Supply of New Units to existing members & Supply of Additional Units to new buyers, by Developer

3.1 Construction activity carried out by the developer for the existing members of the society is a supply of service. For providing such construction services, the developer gets consideration from the society in form of development rights over the land including the permission to construct the additional flats. Therefore, such transaction of supply of construction of new flats by the developer to the existing buyers is supply of services and is subject to GST.

3.2 While the service of construction provided by the builder to new flat buyers is concerned, consideration received by the developer from new buyers is in form of money. Therefore, such activity of construction for new buyers is also supply of services and GST is payable, subject to condition that such consideration received by the developer from the new buyers before receipt of completion certificate or first occupation, whichever is earlier as per Entry no. 5(b) of Schedule II of the CGST Act. However, if, the consideration received from the new buyers after receipt of completion certificate or first occupation, whichever is earlier, supply shall not be taxable in view of Entry no. 5(b) of Schedule II read with Entry no. 5 of Schedule III of the CGST Act.

C. Time of Supply

It is very crucial to determine time of supply because the liability to pay GST arises at the time of supply. In case of supply of services, the time of supply is to be determined in accordance with Section 13 of the CGST Act.

However, by virtue of provisions of Section 148 of the CGST Act, the Government has issued Notification No. 4/2018-Central Tax (Rate), dated 25-1-2018, whereby the liability to pay GST in case of supply of development rights and supply of construction service has been deferred till the allotment of units vide conveyance deed or allotment letter or similar instrument.

Accordingly, in case of redevelopment of society, (a) the registered person being society, who transfers development right to the developer against consideration in the form of construction service; and (b) the registered person being a developer, who supplies construction service to the supplier of development rights against consideration in form of transfer of development rights, are liable to pay GST on supply of said services at the time when the said developer transfers possession or the right in the constructed building to the person supplying development rights by entering into a conveyance deed or similar instrument like allotment letter. Thus, both the parties, the society and the developer are liable to pay GST when a conveyance deed is executed or allotment letter is issued, as the case may be.

So far as supply of additional flats is made by the developer to new buyers, the time of supply is to be determined in accordance with Section 13 of the CGST Act and invoices are to be issued by the developer in accordance with provision of Section 31(5) of the said Act.

D. Valuation of Supply and Rate of Tax

As per Section 15(1) of the CGST Act, value of supply of services shall be the transaction value, which is the price actually paid or payable for the said supply of services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

As per Section 15(4), where the transaction value of supply of services cannot be determined, the same is to be determined in accordance with Rules of Determination of Value of Supply.

In case of redevelopment model as discussed above, transaction value of supply of service cannot be determined as the price is not the sole consideration, and therefore, it is to be determined in accordance with prescribed Valuation Rules. As per Rule 27 of the CGST Rules, where the supply of service is for a consideration not wholly in money, like in the present case, the taxable value of supply of development right and supply of construction service shall be the open market value. In case, open market value is not ascertainable then the supplier has to arrive at the value equivalent to consideration in money. If the same is also not possible then the value of supply of service of like kind is to be taken into consideration. If the value is not determinable under any of these options, the value of supply is to be determined by the application of Rule 30 and Rule 31 of the CGST Rules. As per Rule 30, the value of service shall be one hundred and ten per cent of the cost of provision of such service. Where the value of supply of service cannot be determined in accordance with Rule 27 or 30, the same shall be determined using reasonable means consistent with the principle and the general provisions of Section 15 and the provisions of chapter of Valuation Rules.

As per Notification No. 11/2017-CGST (Rate), dated 28-6-2017 read with similar Notification of respective States, the rate of GST on Construction Service is 18%. In case of sale of flats to new buyers, the value charged by the developer includes undivided share of the land, and therefore, the value of such supply shall be 1/3rd of the total amount charged by the builder from the new buyer. Therefore, effective rate of GST is 12% on total value of such supply. However, so far as supply of services to the existing members is concerned, the rate of GST is 18% without deduction of land or undivided share of land because the land is owned by the society. In my view only development rights were transferred to the developer and at no point of time the land was not conveyed to the developer, and therefore, deemed deduction of land value is not be allowable with respect to services supplied to the existing members.

E. Conclusion

In above article I have discussed the taxability of redevelopment of society considering the general terms of the agreement of redevelopment. Though, Notification 4/2018 (supra) determines time of supply, the intention of legislature to levy tax on activity of transfer of development rights transpires therefrom. In my view, not only taxability but valuation of such transaction will always be a matter of litigation.

[Source : Paper printed in Paper Book of National Tax Conference, Thane, held on 6th & 7th October, 2018]


All power is within you, you can do, anything and everything. Believe in that do not believe that you are weak. You can do anything and everything, without even the guidance of any one. Stand up and express the divinity within you …, within each of you there is the power to remove all wants and all miseries.

Swami Vivekananda

THE CENTRAL GOODS AND SERVICES TAX (AMENDMENT) ACT, 2018 AND THE INTEGRATED GOODS AND SERVICES TAX (AMENDMENT) ACT, 2018 have received President’s assent on 29/08/2018. (NO. 31 and 32 OF 2018)..

In GST Law, about 46 major Amendments are carried out in Definitions, Provisions related to Supply, Levy and Collection of Taxes under GST, Composition Scheme under GST, Time and Value of Supply under GST, Input Tax Credit, Registration, Tax Invoice, Credit and Debit Notes, Returns, GST Practitioner, Payment of Tax, Refunds, Recovery of Tax, Appeals to Appellate Authority and Appellate Tribunal and in Transitional Provisions.

Section 1(2) of the said both Acts states that save as otherwise provided, the provisions of this Act shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint:

Provided that different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision.

The amendments to Act is not yet made effective and shall be brought in to force by notification.

In this article I have discussed all these amendments.


Amendment to Section & No.



Section 2(4)

CBIT and NAPA excluded from Adjudicating Authority

a) CBEC was earlier excluded from adjudicating authorities. After change of name of CBEC to CBIT (Central Board of Indirect Taxes and Customs), CBIT instead stands to be excluded.

b) National Anti-profiteering Authority referred in section 171(2) is to be excluded from adjudicating authorities.

As a result, now remedy of appeal will not be available for orders passed by this authority. Writ needs to be preferred against such orders.


Sec. 2(17) (h)

Business to include all activities of race club

a) Activities of Race club fall within ambit of actionable claim, which specifically is included in goods. But the definition of service defined it as service. Hence in the context of “race club” the term “service” has been replaced by “activities”.

b) Further the activities of licensed book maker were earlier not included in definition of Business. Only the activities of race club were included. Hence the definition of business under S. 2(17)(h) has been expanded to include following activities:

a) Activities of race club

i) By way of totalisator

ii) License to book Maker

b) Activities of Book Maker

Impliedly activities of race club should hence forth be classified in Entry 453 of Schedule III @ 18%


Sec. 2(18)

Definition of ‘Business Vertical’ is omitted. Uptil the amendment, the dealer was allowed to take separate registration for business vertical. Now the separate registration is proposed qua place of business within the State.


Sec. 2(35)

Cost Accountant

In GST law, prior to amendment the term cost accountant meant cost accountant as defined in section 2(1) (c) of the Cost and Works Accountants Act. However the term is defined in section 2(1) (b) of the Cost and Works Accountants Act Instead. Hence typographical error is sought to be corrected.


S. 2(69)

Local Authority to include Development Board under Article 371J

In Article 371J, development board of 6 backward districts of Karnataka has been empowered to be envisaged by President to ensure equitable distribution of State funds for the welfare of these backward districts.

The state of Karnataka requested to include development board in the definition of local authority so that this development board may enjoy similar privileges as the other local authorities. Hence the development board constituted under Article 371J has been specifically included in the definition of Local Authority.



Services to include facilitating or arranging transactions in securities

Although ‘securities’ has been excluded from the definition of ‘goods’ and ‘services’ in the CGST Act, facilitating or arranging transactions in securities is liable to GST.

This was clarified recently through a detailed FAQ on Banking and Insurance wherein it has been clarified that if some service charges or service fees or documentation fees or broking charges or such like fees or charges are charged in relation to transactions in securities, the same would be a consideration for provision of service and chargeable to GST.

An Explanation has been inserted in order to remove any doubts.


Section 7

Schedule II for classification excluded from Supply

Classification of certain specified activities or transactions (which qualify as a supply under the CGST Act) either as supply of goods or supply of services is supposed to be done in Schedule II. However, it is observed that clause (d) being part of the subsection defining the term ‘supply’ leads to a situation where an activity listed in Schedule II would be deemed to be a supply even if it does not constitute a supply as per clauses (a), (b) and (c) of sub-section (1). Hence, clause (d) of sub-section (1) as it existed is omitted and a new sub-section (1A) in section 7 is inserted.

In Schedule I, Permanent transfer/ disposal of business assets without consideration where ITC has been taken is considered supply. But there was school of thought that in Schedule II in situations in clause 4(a) & (b) also ambit of supply was extendable. It would have created unnecessary litigation.

Now the amendment has made it clear that if it a supply under main section 7, then only Schedule II has to be used to classify said supply as that of goods or that of service.

Heading of Schedule II has been amended retrospectively to include words ‘Or transactions’ after the words ‘Activities’.


Sch I Para (4)

Import of Service by non-taxable person also taxable

Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business, without consideration is taxable.

The word taxable person is omitted. This amendment is to ensure that import of services by entities which are not registered under GST (say, they are only making exempted supplies) but are otherwise engaged in business activities is taxed when received from a related person or from any of their establishments outside India.


Schedule III, Cl. 7

Supply of goods from one non-taxable territory to another:

Following insertion is made in Schedule III

7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into the taxable territory.

It is sought to exclude from the tax net such transactions which involve movement of goods, caused by a registered person, from one non-taxable territory to another non-taxable territory.

It is sought to keep international trading of goods from one country to another country outside the GST purview. Hence if a person sitting in India wishes to buy goods from China and sell it to USA, it shall neither be treated as supply of goods nor as supply of services.

However procurement of service outside India and also its further supply to some person in territory outside India has not been excluded. Hence amendment should provide for supply of services from one non-taxable territory to another also. If this amendment is not done, while the subscription of service may be treated as imports but for provision of service in intermediary capacity, the place of supply shall be in India u/s 13(8) (b) and the transaction shall get taxed.

The instances where place of supply is outside India, it shall be inter-State supply u/s 7(5) and also zero rated supply u/s 16, being export of service, resulting cash flow issues arising from refunds, if such amendment regarding services is not given effect to.


Schedule III, Cl. 8

Supply of goods in course of import (Warehouse, High Sea Sale) included in Schedule III

8 (a) Supply of warehoused goods to any person before clearance for home consumption.

(b) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption.

Explanation.- For the purposes of this clause, the expression “warehoused goods” shall have the meaning as assigned to it in the Customs Act, 1962 (52 of 1962)

It is sought to ensure that there is no double taxation of transactions where supply of goods occurs in the course of high sea sales and sale of warehoused goods, before clearance for home consumption. It was observed that in case of supply of goods as high seas sales and sale of warehoused goods, before being cleared for home consumption, IGST was being levied twice, once under the Customs Tariff Act, 1975 (read with the IGST Act) and then for a second time, on clearance for home consumption under the IGST Act. Since double taxation needs to be avoided, Circulars were issued to state that IGST would be payable only once at the time of clearance of goods for home consumption. However, it is imperative that such situations are squarely mentioned as ‘no supply’ in Schedule III.

Article 286 bars to tax supply in course of import.????? By State only and not by parliamentAlready Customs Circulars 33/2017-Cus dated 1-8-2017 and Circular 3/1/2018-IGST dated 25-5-2018 also exhorted that no tax under GST shall be charged till the clearance for home consumption. At the point of clearance entire value addition shall get taxed.

Position due to clarification given by CBIC for the period 1-7-2017 to 31-3-2018 still is in limbo, unless these amendments are made retrospectively effective.


Sec. 9(4)

Reverse Charge on inward supplies from unregistered persons to be taxed for specified class of registered persons:

Old section 9(4) which has been deferred till 30-9-2018 has been repealed and substituted by new section 9(4) as under :

The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of taxable goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Section 9 (4), which mandates that all registered persons shall pay the tax on reverse charge basis on purchases made from unregistered persons, is presently under suspension. This subsection is being omitted for trade facilitation.

Instead, it is proposed to take an enabling power for the Government to notify a class of registered persons who would be liable to pay tax on reverse charge basis in case of receipt of goods from an unregistered supplier.

Fall out:

a) The term unregistered supplier is not defined under the law. The words used in present law are “supplier, who is not registered”.

b) RCM is sought to be applied only to “class of registered persons” and not all the registered persons. The class of registered persons may be

i) persons receiving goods or services falling under specific headings

ii) persons engaged in specified outward supplies

iii) Persons having inward supplies more than specified percentage


Section 10(1)

Composition Scheme with extended limit and scope of services:

Amendment is to clarify that composition tax shall be paid in lieu of tax payable u/s 9(1). In present law, reference to section 9(1) is missing. Even nomenclature of amount paid under composition scheme is not “tax”. The amendment aims to provide for these misses.

Further in spite of GST Council recommending the limit of 1.5 crores in its meeting dated 10-11-2017, there was no corresponding amendment in law which provided for maximum limit at 1 crore only. The law is being amended to enhance the composition limit to 1.5crore

In the press release it was mentioned that maximum limit shall be increased to 2 crore and actual limit for composition scheme shall be enhanced to 1.5 crores. This seems to be left out.

Following 2nd proviso to section 10(1) is incorporated:

Provided further that a person who opts to pay tax under clause (a), clause (b) or clause (c) may supply services of value not exceeding ten percent of turnover in the preceding financial year in a State or Union territory or five lakh rupees, whichever is higher

At present, registered persons engaged in the supply of services (other than restaurant services) are not eligible for composition scheme. As a result, manufacturers and traders supplying services are unable to opt for the scheme even if its percentage is very small as compared to the supplies of goods. With a view to enable these taxpayers to avail of the benefit of composition scheme, a new proviso is being added in order to allow them to be eligible for the scheme even if they supply services of value not exceeding 10% of the turnover in the preceding financial year in a State/Union territory or ₹ 5 lakhs, whichever is higher.

In 23rd Council meeting dtd 10-11-17 press release number 116, interest on deposit was sought to be totally excluded for the purpose of composition scheme, hence 10% and Rs. 5 lakhs cap in such cases is not in sync with Council decision.

It is necessary that this amendment should be made retrospective, because many small retailers, who earn miniscule amount from Display income from FMCG products etc., would get hit below the belt, unless extension is granted from day 1.

Section 10(2)(a) is being amended to provide that The registered person shall be eligible to opt under sub-section (1), if—

(a) he is not engaged in the supply of services, save as provided in sub-section (1)

This is a consequential amendment, as a new proviso is being added to section 10 (1) which allows the registered person to opt for the scheme even if they supply services of value not exceeding 10% of the turnover in the preceding financial year in a State/Union territory or ₹ 5 lakhs, whichever is higher

13 & 14.


Time of Supply for goods and services under Forward Charge

In present law, invoice is required to be issued for the goods before the last day for issuance of invoice u/s 31(1)/31(2). Since issuance of invoice u/s 31 is required in many other cases, the law is being amended to provide that invoice is required to be issued on or before the last date for issuance of invoice u/s 31.


a) Issuance of Revised Invoice within 1 month from the date of issuance of registration certificate for the period beginning with the effective date of registration till the date of issuance of certificate of registration [u/s 31(3)(a)] shall not hit time of supply;

b) In case of continuous supply of goods, issuance of invoice at the time issuance of statement or receipt of payment u/s 31(4) shall meet the test of time of supply also.

c) In case of continuous supply of service, issuance of invoice at the time of due date of payment or date of receipt of payment or completion of payment u/s 31(5) shall meet the test of time of supply also.

d) In case of cessation of supply of service before completion u/s 31(6), the time of cessation of supply shall be the time of supply.

e) In case of goods sent for approval u/s 31(7), the date of removal shall not be the time of supply but the 6 months from the date of removal or the date of issuance of invoice, whichever is earlier.

Time of supply u/s 31(3) (f) is also not in synchronization with time of supply under reverse charge mentioned in section 12(3) and 13(3). This aspect seems to be left out.


Expl to section 16(2)(b)

Supply provided on the direction of registered person to cover services also U/s 16(2)(b)

Receipt of goods or services is a pre-condition for availing ITC. For goods, there is already explanation inserted below S. 16(2) (b) that supply provided to recipient or any other person on the direction of registered person shall be deemed to be received by registered person.

For services, explanation is being expanded to provide that it shall be deemed that registered person has received services where the services are provided by the supplier to any person on the direction of and on account of such registered person;

If catering is done by supplier on the direction of some person who takes orders for getting done catering, the ITC shall be available to the person who takes order and not the customer who places order.

However, if services provided by the supplier are not on account of the registered person, the ITC shall not be available. Hence the invoice raised by the supplier should mention that though services are being provided to some other person but are being provided on account of registered person.



S. 17(2)

Reversal of ITC for exempt supplies to exclude Sch III supplies

Reversal of ITC is required u/s 17(2) read with section 17(3) for exempt supplies which cover Schedule III supplies, being non-taxable supply.

Now section 17(2) is amended to provide that no reversal of ITC is required for Schedule III supplies except sale of land and building.

Hence no ITC reversal shall be required for :

1. Services by an employee to the employer in the course of or in relation to his employment.

2. Services by any court or Tribunal established under any law for the time being in force.

3. (a) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities;

(b) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or

(c) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or a State Government or local authority and who is not deemed as an employee before the commencement of this clause.

4. Services of funeral, burial, crematorium or mortuary including transportation of the deceased.

6. Actionable claims, other than lottery, betting and gambling.

7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into the taxable territory.

8. (a) Supply of warehoused goods to any person before clearance for home consumption.

(b) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption.


Section 17(5)

Changes in Prohibitive List of ITC

ITC prohibitions stand relaxed or removed due to amendment

a) ITC on Motor Vehicle for transportation of persons having approved seating capacity of more than 13 passengers. However ITC on vessel and aircraft shall not be available unless used for transportation of goods or further supply or imparting training or transportation of money for banking company or financial institution.

In earlier clause, ITC was denied on motor Vehicle excluding motor vehicle for transportation of passengers. However now ITC is being denied only for motor vehicles for transportation of persons. Hence ITC on motor vehicles for transportation of goods shall be allowed as there is no specific exclusion for transportation of goods.

b) ITC on vessel or aircraft for further supply of vessel or aircraft or used for transportation of goods or imparting training or transportation of money for banking company or financial institution. As per Official Comments ITC on vessel and aircraft shall be denied only when used for personal purposes.

c) Irrespective of the prohibitions placed u/s 17(5), ITC shall be available for provision of goods or services (i.e. food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, renting or hiring of motor vehicles, vessels and aircraft referred to in S.17(5) (a), life insurance and health insurance, membership of club, health and fitness centre, travel benefits extended to employees on vacation such as leave or home travel concession), where it is obligatory for employer to provide to its employees goods or services under any law for the time being in force.

Instances of provisions of facilities to Employees under law

As per section 46 of Factories Act, canteen facility is mandatory where number of workers is more than 250.

As per section 48 of Factories Act, any factory employing more than 30 women workers should provide for crèche facility.

ITC prohibition imposed [S. 17(5)(aa)]

Services of

a) general insurance,

b) servicing,

c) repair and maintenance

in so far as they relate to motor vehicles, vessels and aircraft for which the credit is not available in accordance with provisions u/s. 17(5)(a)

Hence ITC for general insurance, servicing and repair shall not be available for

a) Motor Vehicle for transportation of person up to 13 persons

b) Vessel

c) Aircraft in accordance with provisions u/s 17(5)(a)

ITC shall however be available for general insurance, servicing and repair for

a) Motor Vehicle for transportation of person up to 13 persons

b) Vessel

c) Aircraft

Used for

Transportation of goods

Further supply of motor vehicle, vessel, aircraft

Imparting training

Transportation of money for banking company or financial institution

ITC shall also be available for general insurance, servicing and repair for

a) Motor Vehicles not for transportation of persons

b) Motor Vehicles for transportation of more than 13 persons

Amendments made to section 17(5) regarding renting of motor vehicle, life insurance and health insurance to avoid repetition:

Section 17(5)(b)(iii) is proposed to be deleted and merged with 17(5)(b)(i) to deny ITC on :

1. Renting or hiring of Motor Vehicle, Vessel and Aircraft referred to in S. 17(5)(a) [Hence ITC shall be allowed on renting of motor vehicle for transportation of more than 13 passengers or for transportation of goods]

2. Life Insurance

3. Health Insurance


Expl (c) to S.20

Turnover Calculation for distribution of ITC

Inadvertent omission to exclude CST under Entry 92A of Union list for calculation of turnover for the appropriation of ITC by Input service distributor is sought to be set right.

Similar amendment may be required in Explanation below R. 42(1)(i) also where aggregate value of exempt supplies and total turnover is defined



Registration limit for Special Category States

Objective is to enhance the exemption limit for registration in the special category States from ten lakh rupees to twenty lakh rupees.


Sec. 24(x)

Registration Requirement for Small E Commerce Operators relaxed

E-Commerce operators not required to collect tax u/s 52 henceforth are sought to be kept out of registration ambit unless they meet the registration limit.

Registration compliance burden for e-commerce operators, providing mere digital platform but not involved in payment aspect is sought to be reduced.

Separate registration for SEZ and Multiple places of business

Under originally enacted law, single registration was allowed qua State. Multiple registrations with in State were allowed only for different business verticals.

As per Comments along Proposals, Certain PSUs had requested for separate registration for their individual units in a State, a facility which was available prior to 1st July 2017.


Sec. 25(2)

Hence 2nd proviso is inserted in section 25(2) as under:

Provided further that a person having multiple places of business in a State or Union territory may be granted a separate registration for each such place of business, subject to such conditions as may be prescribed:

Hence grant of multiple registrations is subject to prescribed conditions.

While this amendment shall increase the self-imposed compliance burden, but it shall not increase the tax revenue of the government. Some small units might resort to splitting to avoid onerous provisions like audit etc.Transfer between these separate registrations shall also constitute supply.

Compulsory Separate registration for SEZ Units

Single SEZ Unit

Provided also that a person having a unit, as defined in the Special Economic Zones Act, 2005 (28 of 2005), in a Special Economic Zone or being a Special Economic Zone Developer shall be granted a separate registration as distinct from his units located outside the Special Economic Zone in the same State or Union territory:

Multiple SEZ Units

Provided also that a person having more than one unit, as defined in theSpecial Economic Zones Act, 2005 (28 of 2005), in a Special Economic Zone shall be granted a separate registration for each such unit, subject to such conditions as may be prescribed.

As per proviso to Rule 8, a person having a unit(s) in a Special Economic Zone or being a Special Economic Zone developer shall make a separate application for registration as a business vertical distinct from his other units located outside the Special Economic Zone:

Proviso to Rule 8 does not compulsorily require separate registration for each unit of SEZ in case of Multiple Units of SEZ, while proviso to section 25(2) requires it mandatorily.

Suspension of Registration pending cancellation

Once a registered person has applied for cancellation of registration, the proper officer may temporarily suspend its registration till the procedural formalities for cancellation are completed. This measure would relieve the taxpayer of continued compliance burden under the law till such time as the process of allowing cancellation of registration is completed.

22 & 23

Amendment reads, “Provided that pending cancellation of registration, the proper officer may suspend the registration of the person subject to such conditions and limitations as may be prescribed.”

Filing of registration cancellation application under REG-16 [Rule 20] is required to be followed by cancellation order in REG-19 [Rule 22(3)] within 30 days from application. Within 3 months from REG-19, final return u/s 45 GSTR-10 is required to be filed.

There is no provision for deemed cancellation after 30 days unlike deemed registration u/s 25(12). Hence pending the issue of REG-19, it is being proposed to provide for suspension of registration so that compliance burden gets axed.

But when number is kept in suspension, amendment to GSTR-1 etc. should not be withheld; otherwise it will have adverse impact on ITC to which such dealers’ customers are entitled to.


S. 34(1) & 34(3)

Consolidated Credit/Debit Notes

Prior to the amendment to GST law, one credit/debit note was required to be issued against every invoice. Now section 34(1) and 34(3) is amended to provide for issuance of one or more credit or debit notes against one or more tax invoices.

The purpose is to permit consolidated credit/debit notes for financial year.

It is necessary that corresponding changes should be made to GSTN portal and GSTR-1 template to accommodate such types of consolidated credit/debit notes.


Sec. 35(5)

Government department to be kept out of purview of GST Audit

As per section 35(5), audit is required where turnover of registered person exceeds Rs. 2 crores. Ministry of Defence has represented that the annual accounts of Canteen Stores Department (CSD) are internally audited by the Controller of Defence Accounts (CDA) and therefore, should not be subject to audit by a Chartered Accountant or a Cost Accountant. Thus, it is provided that any department of the Central or State Government / local authority which is subject to audit by CAG need not get their books of account audited by any Chartered Accountant or Cost Accountant.

Hence proviso has been added to section 35(5)as under:

Provided that nothing contained in this sub-section shall apply to any department of the Central Government or a State Government or a local authority, whose books of accounts are subject to audit by the Comptroller and Auditor-General of India or an auditor appointed for auditing the accounts of local authorities under any law for the time being in force.


Sec. 39(9)

Amendment Return

Amendments to sub section 1 and 7 are on account of new system of return uploading proposed by the Government.

Section 39(9) allows rectification of any omission or furnishing of incorrect particulars in subsequent return not beyond 20th October of next financial year.

There is no provision for amending the same return.

Section 39(9) is amended to take care of amendment return in prescribed form just like pre GST regime to enable correction of inadvertent mistakes


Sec. 43A

New Return filing Procedure

43A. Procedure for furnishing return and availing input tax credit. –

(1) Notwithstanding anything contained in section 37 or section 38, the procedure for furnishing the details of outward supplies by a registered person, other than an Input Service Distributor or a non-resident taxable person or a person paying tax under the provisions of section 10 or section 51 or section 52 (hereafter in this section referred to as the ‘supplier’), and for verifying, validating, modifying or deleting such supplies by the corresponding registered person (hereafter in this section referred to as the ‘recipient’) in connection with the furnishing of return under section 39 shall be such as may be prescribed.

(2) Notwithstanding anything contained in section 41, section 42 or section 43, the procedure for availing of input tax credit by the recipient and verification thereof shall be such as may be prescribed.

(3) the procedure for furnishing the details of outward supplies by the supplier on the common portal, for the purposes of availing ITC by the recipient shall be such as may be prescribed.

(4) The procedure specified under sub-section (1) and sub-section (2) may include the following:-

(i) the procedure for furnishing the details of a tax invoice by the supplier on the common portal for the purposes of availing input tax credit by the recipient in terms of clause (a) of sub-section (2) of section 16;

(ii) the amount of tax specified in an invoice for which the details have been furnished by the supplier under clause (i) but the return in respect thereof has not been furnished and tax has not been paid shall be deemed to be tax payable by him under the provisions of this Act;

(iii) the procedure for availing ITC in respect of outward supplies not furnished under sub section (3) shall be such as may be prescribed and such procedure may include the maximum amount of ITC which can be so availed, not exceeding 20% of ITC available, on the basis of details furnished by the suppliers.

(v) for the purposes of these clauses, the supplier and the recipient shall be jointly and severally liable to pay tax or to reverse the input tax creditavailed against such tax, as the case may be;

(vi) the procedure and threshold for availing input tax credit by the recipient on the basis of invoice for which details have not been furnished by the supplier under clause (i) and recovery thereof; and

(vii) the procedure, safeguards and threshold of tax amounts in the invoices, the details of which can be furnished under clause (i) by a newly registered person or by a registered person who has defaulted in payment of taxliability, exceeding the amount of tax or the period of time specified in the rules.

The new return procedure has been divided into following limbs:

1. Availment of ITC on the basis invoice uploading instead of filing of return and tax payment by the supplier. This is based on unidirectional flow of invoices in GSTR-1 of suppliers.

2. Fixing the liability of supplier for tax payment for invoices uploaded by him

3. Circumstances where tax to be collected from recipient who has availed credit instead of collection from supplier uploading invoices

4. Joint and several liability of supplier for tax payable on invoices and reversal of ITC against tax not paid

5. Procedure for claiming ITC on the basis of invoices not uploaded by supplier.

6. Safeguards for new registrants and defaulters regarding credit on the basis of invoice uploading.


Sec. 48

Scope of functions of GST Practitioners expanded

Apart from filing of returns GST practitioners shall be authorized to perform other functions also such as filing refund claims, filing applications for cancellation of registrations etc.


Sec. 49(5)

Change in Logic of payment of taxes (in accordance with GSTN portal)

Uptil now, SGST/UTGST credit was utilized first towards payment of SGST/UTGST. Balance credit was utilized for payment of IGST. However the law is amended to provide that SGST/UTGST credit shall be utilized for payment of IGST only if the credit balance of central tax is not available for payment of IGST.

This amendment is required since the GST common portal has placed this restriction in the utilization of input tax credit of State tax/Union territory tax towards payment of integrated tax.

Prima facie, it appears that this is done to defy Delhi High Court Judgment in A&M Design dated 08-09-2017 which said that portal cannot override the law.

Proviso to section 49(5) is inserted to provide that credit on account of central tax, State tax or Union territory tax shall be utilised towards payment of integrated tax only after the input tax credit available on account of integrated tax has been first utilised fully towards such payment. This is being done to minimize fund settlement on account of IGST.


Sec. 49A & 49B

Government being empowered to decide order of utilization of ITC. Newly inserted sections state that utilisation of ITC may be made subject to certain conditions and also takes power to prescribe order of utilisation.

Sec. 49A states that

  • Notwithstanding anything contained in section 49,

  • ITC on account of CGST, SGST/UTGST

  • shall be utilised towards payment of IGST, CGST, SGST/UTGST, only after ITC available on account of IGST has first been utilised fully towards such payment.

New subsection 49B inserted is as under:

  • Notwithstanding anything contained in this section,

  • The Government may, on the recommendations of the Council,

  • prescribe the order of utilization of input tax credit

  • of integrated tax, central tax, State tax or Union territory tax, as the case may be,

  • towards payment of any such tax

The purpose of this sub section is provide enabling power for the Government to prescribe any specific order of utilization of input tax credit of any of the taxes

31, 32 & 33.

Sec. 54(8)

In 54(8), in clause (a) words ‘Zero-rated supplies’ have been replaced with words ‘Export or Exports’.

As per section 54(8)(a), in present form, refund for zero rated supply (including supply to SEZ units ) is required to be paid to applicant and not to be transferred to Consumer welfare fund. But in case of supply to SEZ Units after charging IGST, it is being proposed to allow ITC in the hands of SEZ Unit. (No such proposal in the 46 amendments notified, though section 16 provides for credit to all registered persons)

Further to bring consistency with policy matters and explanations given, receipt of payment for exports in Indian rupees wherever permitted by the Reserve Bank of India is also included in Expl. 2(c).

Receipt of payment in convertible foreign exchange is a pre-condition for export of service but not for export of goods. Export of service against payment in Indian rupees under present law does not qualify as zero rated supply. Normally against export of services, payment in Indian rupees is received from Nepal and Bhutan. Now it is being proposed to amend the definition of export of service to provide that even if payment is received in Indian rupees, where permitted by RBI, it shall be treated as export of service and can enjoy the refund.

It may be pertinent to mention that Service to Nepal and Bhutan are exempt but ITC on such services is not denied under Rule 42.

With this proposal services to Nepal and Bhutan in Indian Rupees, subject to permission by RBI, shall rank with exports against convertible foreign exchange.

Consequential Amendment has been made in definition of relevant date when defined with reference to export of services.

Relevant date in case of refunds for Inverted Duty Rate Structure [S. 54 Expl (2)(e)]

In case of inverted duty rate refunds, maximum period of 2 years to be counted from due date of furnishing of return u/s 39 for the period in which such claim for refund arises and not from the end of financial year in which such claim for refund arises. This amendment has been brought because as per section 54(3) refund is required to be applied for tax period and not for financial year. Since the relevant date was not in synchronization with section 54(3), the amendment has been brought.



Recovery of Tax

It is provided that recovery may be made from distinct persons present in different States / UTs in order to ensure speedy recovery from other establishments of the registered person.

Hence explanation below section 79 is being amended to provide that For the purposes of this section, the word person shall include “distinct persons” as referred to in sub-section (4) or, as the case may be, sub-section (5) of section 25.

This will enable government to recover tax from all the registrations under same PAN. So, an entity shall be liable not only for its own dues but also all other establishments covered by the same PAN.

35 & 36.

Sec. 107(6)/ 112(8)

Payment of Tax in Dispute to Appellate Authorities

At the time of Ist Appeal against the order of adjudicating authority, 10% of tax is dispute is required to be deposited u/s. 107(6). Now against this 10% of tax in dispute, Maximum cap of Rs. 25 crore is placed.

Against 2nd appeal, in addition to amount paid u/s 107(6), 20% of remaining amount of tax in dispute is required to be deposited u/s 112(8). Now a maximum cap of Rs. 50 crores is placed.

Hence at the stage of 2nd appeal 30% of the remaining amount of tax in dispute gets paid.


Sec. 140

Transitional Provisions [retrospectively amended with effect from 01/07/2017]

Amendment is being brought to deny credit of Education cess and Senior & High Secondary Education cess. This seems to be to justify stand taken in certain AARs and validated by High Courts. Since TRAN-1 has already been filed, this proposal shall result in genuine hardship to the tax payers and should not be done.


Sec. 143

Job Work

Non return of inputs by Job worker with in 1 year and non-return of capital goods by Job Worker in 3 years is taxable by treated as supply.

The amendment is done that the period of one year or three years, as the case may be, may, on sufficient cause being shown, be extended by the Commissioner for a further period not exceeding one year and two years respectively



Sec. 2(6)

Export of Services: Refer to detailed discussion in clause 33 above.


Sec. 2(16)

Governmental Authority : ‘Panchayat’ also included in definition of governmental authority


Sec. 5(4)

Amendment to section for RCM. Refer to clause 11 above


Sec. 8(2)

Consequential amendment on deletion of concept of ‘business vertical’.


Sec. 12(8)

Place of supply in case of transportation of goods [S. 12(8)]

As per section 12(8)(b), The place of supply of services by way of transportation of goods, including by mail or courier to a person other than a registered person, shall be the location at which such goods are handed over for their transportation

Hence ocean freight on export of goods becomes taxable because foreign importer is not a registered person. But ocean freight was exempted by separate Notification dated 25-01-2018 till 30-09-2018. Now amendment proposes not to tax ocean freight by bringing change in law.


Proviso to S. 13(3)(a)

Place of Supply of Job Work for goods imported into India shall be outside India

It is proposed to not tax job work of any treatment or process done on goods temporarily imported into India and which are then exported after such process without being put to any use in India, other than that which is required for such repairs or treatment.


Sec. 17 (2A)

Regarding settlement of taxes by government under IGST and Compensation Cess; 50% to Central Govt. and 50% to States/UTs on ad-hoc basis and shall be adjusted against amount apportioned in sub-sections of this section.


Sec. 20(8)

Fifth proviso has been inserted to read, “Provided also that where the appeal is to be filed before the appellate authority or the appellate Tribunal, the maximum amount payable shall be Rs. fifty crore and one hundred crores respectively.”

This is to bring on par IGST provisions on the lines of amendment made to CGST Act.

[Though due care has been taken while doing this analysis, the delegates are requested to refer to exact amendment notification thereto.]


In a day, when you don’t come across any problems – you can be sure that you are travelling in a wrong path.

Swami Vivekananda


Goods and Services Tax (GST) is the biggest indirect tax reform since the independence of India. GST, which is brought by the Government with the moto of ‘One Nation One Market One Tax’ is perceived with idea of seamless flow of credit to the ultimate consumption State. GST has consolidated number of indirect taxes into one tax, thereby removing duplicity of taxes on the same value of transaction and with further object of removing the cascading effect in the form of tax on tax.

In the present article, we have discussed the implications of GST on Works Contract.

Works Contract – Pre-GST

‘Works Contract’, the name is enough to have all kinds of litigation coming to one’s mind right from whether the transaction is works contract or not, till determining the value of material or service portion in a contract or determining whether it is an inter-state works contract or intra state works contract or determining the correct tax rate for works contract. Under GST, the biggest single change in works contract is that the entire works contract has been deemed to be a supply of service. Before we discuss further about the implications on works contract under GST, let us discuss in brief, the works contract scenario under the Pre-GST regime.

Under the Pre-GST regime, works contract was not separately defined. Clause (b) of Article 366(29A) of the Constitution of India deemed a tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract to be a tax on sale or purchase of goods. The Courts on a number of occasions had judicially defined the term works contract as a contract which involves supply of material and labour and the property in material passes during the execution of contract. Thus, the States were empowered to levy VAT on value of material and the Centre was levying service tax on value of service in a Works Contract. The irony was that, if a dealer did not derive the value of material and labour involved in a works contract on actual basis, then both VAT and Service Tax were being levied on overlapping value of works contract resulting in levy of tax on up to 140% of the value of works contract. This led to cascading of taxes and ultimate increase in price to the customers.

Works Contract under the GST Regime

Works Contract under the Post-GST regime has been simplified. The Government has practically tried to remove the litigation under works contract, right from classification of a contract as a works contract to computing the value of material and labour and ending with rate of tax in case of works contract.

Meaning and Scope

“Works Contract” has been defined under section 2(119) of the CGST Act, 2017 as under:

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

For simplicity, any contract in relation to immovable property which involves supply of material and supply of service will be classified as a works contract. The language in definition is not very happy. However, the implications are that the work done for creating immovable property or in relating to immovable property will be works contract. It may so happen that, some works like, fitting out of furniture, may be movable by itself, but such work will be works contract as the definition is to be applied as per the specific instances given in the definition.

Though we presume that the interpretation of above definition will be simple and will not involve litigation, the issue cannot be considered to be so simple. There may be disputes about nature of contract, i.e., whether it is works contract or other then works contract.

Recently the Maharashtra Advance Ruling Authority has to deal with one such issue about installation of parking system in building in case of Precision Automotion and Robotics India Ltd. (GST-ARA-39/2017-18B-46 dated 13-6-2018). It is held to be works contract. In fact the argument from the revenue side was that such system is composite contract.

In the above AR the facts about actual work as mentioned in AR were as under:

“3. The Company is engaged in the business of design, manufacturing, procurement, erection and installation of various types of car parking system. Supply and installation of car parking system involves several components, out of which certain components are manufactured by the Company and remaining are bought out items. The Company undertakes the activity qua the following types of car parking systems;

• Stacker type parking system;

• Puzzle type parking system;

• Multi- level parking system;

– RCC type tower car parking system;

– Structure type tower car parking system;

– Level type parking system;

– CART type parking system;

– Stacker type parking system;

– Chess type parking system.”

After examining case laws and facts, learned AAR observed as under:

“The principles when seen in the light of the facts of the present case help us see thus-

• The impugned car parking system, be it installed on a vacant plot of land or in a building, does not result into supply as chattel. In fact, before installation, there can be no goods as such which could be called a ‘car parking system’.

• The system requires substantial work to be done at the site to be called as ‘car parking system’.

• Once made operational the ‘car parking system’ obtains a state of permanency. It is not such as can be easily removed from the existing place and put into place at some other location.

• The definition of ‘works contract’ under the GST Act is in relation to immovable property.

• We have already elaborately explained our opinion as to the facts at pages 6 and 7 order.

In view thereof, we are of the considered opinion that the transaction of supply and installation of a ‘car parking system’ would qualify as immovable property and thereby ‘works contract’ as defined in Section 2(119) of the CGST Act.”

Thus, the nature of transactions are to be decided considering the facts and the above definition. The work should either result in immovable property itself or it should be falling into instances mentioned in definition like fitting out, improvement etc. in relation to immovable property.

Thus, there will be transactions where caution will be required to be taken before classifying the transaction as works contract.

Contract for movable property

The next question which comes for consideration is whether any contract for movable property, which involves supply of material and labour, would be included in works contract. The answer is “no”. However, the said contract will qualify as a composite supply as defined under section 2(3) of CGST Act or a deemed supply of service as per entry 3 in Schedule II of CGST Act. The said entry reads as under:

“3. Treatment or process

Any treatment or process which is applied to another person’s goods is a supply of services.”

Under GST regime “works contract” has been deemed to be a supply of service. Thus any works contract in relation to an immovable property will attract the rate of tax applicable for supply of service.

With regard to Works Contract in relation to movable property, if it is any treatment or process which is applied to another person’s goods then it is again deemed to be a supply of service and rate of tax applicable to supply of service will be applicable.

Example: A mechanic carries out a treatment or process on a machinery of another person for repairs and painting. Such supply by the mechanic is deemed to be a supply of service. The entire consideration charged by the mechanic will be considered towards supply of service irrespective of the amount of goods involved in the supply.

Where a works contract does not relate to any treatment or a process as explained above, then the said works contract shall qualify as composite supply. A composite supply shall be classified as per principal supply comprised in such composite supply.

Example: A car manufacturing company contracts a design firm for designing a new car as well as manufacturing a prototype. The contract involves both supply of service of designing a car and supply of goods in the form of prototype car. Both the supplies are naturally bundled and are under one composite contract. However, here the principal supply would be of designing the car and hence the entire contract would be classifiable as supply of service.

Rate of Tax for a Works Contract

In case of works contract for immovable property, the Government has prescribed three rate structures as under:

• Notification No. 11/2017 Central Taxes (Rate) dated 28-6-2017provides for rate of CGST for Supply of Services. The said Notification has been amended from time-to-time.

• Initially there was only one rate of 18% GST for all kinds of Works Contracts covered under Section 2(119).

However, subsequently, various amendments have been made and the rate structure is broadly classifiable under two rate slabs: 12% and 18% respectively. Indicative rate schedule can be mentioned as under:

Entry 3 of Notification No.11/2017

Type of Works Contract

Rate of Tax (CGST + SGST)

Clause (ii)

Composite supply of works contract as defined in Section 2(119) of CGST Act, 2017.


Clause (iii)

Works Contract as defined in Section 2(119) supplied to Government, a local authority or a Governmental authority for road, bridge, tunnel etc.


Clause (iv)

Works Contract as defined in Section 2(119) supplied for

a) road, bridge, tunnel, or terminal…

b) a pollution control or effluent treatment plant, except located as a part of a factory…

c) a structure meant for funeral, burial or cremation of deceased

d) A civil structure for rehabilitation under the various schemes.


Clause (v)

Works Contract as defined in Section 2(119) supplied for:

a) railways, including monorail and metro;

b) a single residential unit otherwise than as a part of a residential complex;

c) low-cost houses up to a carpet area of 60 square metres in Affordable Housing Projects.

d) post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes;

e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages.


Clause (vi)

Other Works contracts for Government other than for use for commerce, industry etc.


Clause (vii)

Predominant Earth work contract for Government.


Clause (viii)

Offshore works contracts.


Clause (ix)

Works Contract Service as defined in Section 2(119) provided by sub-contractor to the main contractor providing service to Works Contract Service as defined in Section 2(119) provided by sub-contractor to the main contractor providing services specified in (iii) or (vi) to the Government or Local Authority or Government Entity


Clause (x)

Works Contract Service as defined in Section 2(119) provided by sub-contractor to the main contractor providing services specified in (vii) to the Government or Local Authority or Government Entity


Clause (xi)

Housekeeping, like plumbing


Clause (xii)

Other contracts


(Please refer to full notification for correct position)


GST shall be levied on transaction value which is the price paid or payable between two unrelated parties and price is the sole consideration. Works Contract would also be valued at the transaction value where transaction is between unrelated parties and price is the sole consideration.

Under Construction Flats/Premises

‘Sale of under Construction flats/premises’ is deemed to be service as per entry 5(b) in Schedule II which is reproduced below:

5. Supply of services

The following shall be treated as supply of service, namely:—

(a) renting of immovable property;

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

Explanation.—For the purposes of this clause —

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in 
case of non-requirement of such certificate from such authority, from any of the following, namely:

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure.”

Therefore, the sale of such flat will amount to service and not works contract. 
However practically it is works contract and in rate schedule also they are referred to as Works Contract.

In respect of the sale of such under-construction flats, where the underlying land or undivided share in the land is also transferred along with supply of goods and services, the value of works contract shall be two third of the agreement value including the land value. Prior to notifying the rate of tax, the Government had proposed to levy 12% rate of tax on sale of under-construction flats including the land value with no refund of overflow ITC. This had led to several representations being made from the construction industry to exclude land value from agreement value for the purpose of levy of GST. Though the Government has now excluded the land value at a fixed percentage of 33.33% (land abatement), but simultaneously increased the rate of tax from 12% to 18%. Thus, effectively there may not be any change in the calculations even after the notified land abatement.

Further, under the pre-GST regime, the land value deduction was allowed on actual basis taking the Ready Reckoner Rate for Stamp Duty as the basis for calculating the land value. Under the GST regime, the land abatement has been given at a fixed rate with no option to claim the deduction as per the actual land component in an agreement. This may be completely disadvantageous to developers in metro cities where the land value in an agreement can be as high as 60% – 80% of the agreement value. Further, in a broader sense, this may also mean that GST is being levied on sale of land despite specifically excluding the same from either Supply of Goods or Supply of Service.

The Ministry of Finance vide a press release dated 15th June 2017 had clarified that the developers are eligible for full ITC which was not available in Pre-GST period. Hence the said benefit shall be passed on to the customer to avoid any action under the Anti-profiteering provisions. However, the said clarification is vague in the sense it has not given any example, as to how can there be profiteering in cases were GST is now being levied even on the land value and low rated goods are liable to GST at a higher rate under works contract. However there is now order from Anti-Profiteering Authority in case of Pyramid Infratech Pvt. Ltd., Haryana (2018-VIL-06-NAA dt.18-9-2018), where in order is made to pass on transitional ITC to customers. Thus the situation is to be seen with relation to the sufficiency of data generated to avoid Anti-Profiteering Provision.

Expansion of Scope of Works Contract

Another important thing to understand under GST is that there were many kinds of works contract transactions which were not liable to VAT in pre-GST era for the sole reason that the consideration for such works contract was in kind, e.g., FSI, TDR, Development rights etc. In post GST regime, even these kind of works contract would be liable for GST. The value shall be arrived as per the valuation rules which is the open market value. For example, the redevelopment of old building will be liable to GST even when reconstructed flats are allotted to existing flat owners. The value shall be arrived at as per the open market value of such flats allotted free of cost.

Place of Supply

The place of supply is relevant to identify whether a transaction is intra-state supply or inter-state supply. In case of works contract for immovable property, the place of supply is governed by the specific rule which is location of the immovable property itself. If the location of the supplier and the place of supply are within same states, it will qualify as intra state supply and liable for CGST + SGST. On the other hand if the location of the supplier and the place of supply are in different states, it will qualify as inter-state supply and liable for IGST.

In case of treatment or process of goods belonging to other person, it will be governed by the general rule for place of supply of service i.e., the place of supply shall be the location of recipient of service.

Time of Supply

Time of supply means the point in time when goods/services are deemed to be supplied and accordingly tax needs to be discharged in that month. Once works contract is deemed to be supply of service, all the provisions for determining the time of supply for a service shall be applicable for works contract.

It is also relevant to note that works contract is one such service which majority of times will extend beyond a period of three months. Thus works contract service which is provided for more than three months under contract will fall under the category of continuous supply of service.

Time of supply for service of works contract (both continuous and non-continuous) service can be explained as under:

(A) Non-continuous supply of works contract service.


Time of Supply

(1) Invoice is issued in time

Earliest of the following, namely:-

Date of invoice

Date of payment receipt

(2) Invoice is not issued in time

Earliest of the following, namely:-

Date of completion of service

Date of payment receipt

(3) Sr. No. 1 & 2 not applicable

Date of receipt of services in receiver’s books of account

The time limit for issuing invoice in case of supply of non-continuous service is 30 days.

(B) Continuous supply of works contract service.


Time of Supply

(1) Date of payment ascertainable from contract

Due date of payment by the receiver, irrespective of date of invoice and payment receipt.

(2) Date of payment not ascertainable from contract

Earliest of the following, namely:-

Date of invoice

Date of payment receipt

(3) Payment linked to completion of event (milestone payments)

Time of completion of each milestone

The above provisions of time of supply will be equally applicable to any treatment or a process on the goods of other which is deemed to be a supply of service.

Input Tax Credit

The Input Tax Credit (ITC) under GST regime is available on all inputs and input services use in furtherance or course of business subject to certain conditions and restrictions.

In case of works contract, the works contractor shall be entitled to take ITC on all inputs and input service used in supplying the works contract service. For a business entity, the works contract service received for construction of immovable property shall not be available as ITC unless it is used for plant and machinery or for further supply of works contract service.


The issue of Works contract has somewhat become more simple for understanding. However till certain boundary line cases will arise where deciding nature of transaction will be 
necessary. It is expected that the taxation of works contract will be smooth as compared to earlier regime.

[Source : Article printed in Paper Book of National Tax Conference, Thane, held on 6th & 7th October, 2018

1. Introduction

As in judicial proceedings in Courts, the issues in the income-tax proceedings are also decided on the basis of evidences which include both oral and documentary. Oral evidences, include statements which are made before the income-tax authorities in relation to matters of inquiry, Search and Survey proceedings and may also include examination of the assessee or related parties. Documentary evidences include all documents produced before the income-tax authority for his verification/inspection. Oral and documentary evidences, inter alia, depending upon the circumstances include ‘Admissions’ which play a crucial role in any judicial proceeding. There is considerable importance of statements recorded during search and seizure operations, which is clear from the intent of Legislature as it thought fit to include a separate sub-section 132(4) for recording of statement during a search operation. Further section 292C has been inserted by the Finance Act, 2007 w.r.e.f. 1-10-1975 allowing presumption as to assets, books of account, etc., found during search u/s. 132 and requisition u/s. 132A. Later on by Finance Act, 2008 the ambit of section 292C has been enlarged by including presumption in case of Survey proceedings u/s. 133A w.r.e.f. 1-6-2002. The words ‘may be used in evidence in any proceedings’ appearing in section 132(4) are of great significance. The Legislature seems to be aware that some admissions may be made at the time of search which may be true, but for which sufficient corroborative evidence may not be found. Courts have taken note of the prevalence of tax evasion and black money in the economy and have urged, that while deciding matters under the Income-tax Act, they should not be oblivious to ‘notorious facts’ – Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667/59 Taxman 11 (SC) and CWT v. Rohtas Industries Ltd. [1968] 67 ITR 283 (Pat.). The well-settled position in this respect, as pointed out by the Court, is that while the revenue can use a statement recorded u/s. 132(4) as a piece of evidence against the person who has given the statement, such person can, however, retract the statement successfully if he proves that the statement was not given in a proper frame of mind or was given under duress and threat or under a mistaken belief of law. The revenue authorities are also required to corroborate the admission contained in the statement, with independent evidence.

2. Admissions as in Evidence Act

2.1 Statements recorded under various provisions of the Income-tax Act, are a vital tool in the hands of the income-tax authorities in their quest to establish certain factual and legal positions. Written statements are used as evidence in various proceedings under the Act. The word ‘statement’ is defined neither in the Income-tax Act nor in the Evidence Act, and, hence, it assumes its dictionary meaning of ‘something that is stated’.

2.2 Admissions are statements by a party of the existence of a fact which is relevant to an issue in dispute. An admission is a statement, oral or documentary, which suggests any inference as to any fact in issue or relevant fact and which is made by a party or by a person concerned with him in any of the ways as described under sections 18 to 23 of the Indian Evidence Act, 1872. It may be noted that the statement may be either denial or admission of a fact and at the same time it may be addressed to any one. Section 17 of the Indian Evidence Act, 1872 defines admission as an oral or documentary statement which suggests any inference as to any fact in issue or relevant fact. As per section 31 of the Indian Evidence Act, admissions are not conclusive proof of the matters admitted, but they may operate as estoppel under the provisions of the law as contained. For an admission to be effective, corroboration with third party evidence is required.

2.3 Admissions, though sometimes strong evidence, are, however, not conclusive proof of the facts admitted. But what a party himself admits to be true, may reasonably be presumed to be so, unless it is satisfactorily explained or successfully withdrawn. So long as they do not operate as estoppel, persons making admissions are at liberty to contradict them or to show that they are untrue or mistaken or made under a misapprehension. Thus, the effect of an admission is to shift the burden of proof to the party making the admission.

2.4 The Hon’ble Supreme Court in Basant Singh v. Janki Singh AIR 1967 SC 341, held that:

“An admission by a party in a plaint signed and verified by him in a prior suit is an admission within the meaning of section 17 of the Indian Evidence Act, 1872 and may be proved against him in other litigations… Section 17 of the Act makes no distinction between an admission made by a party in a pleading and other admissions.”

Considering the evidentiary value of an admission and the fact that an admission shifts the onus in terms of section 31 of the Evidence Act, the Supreme Court in Kishori Lal v. Mt. Chaltibai AIR 1959 SC 504 held that:

“. . . the admissions shifted the onus on to the respondent on the principle that what a party himself admits to be true may reasonably be presumed to be so and until the presumption was rebutted, the fact admitted must be taken to be established….’’ (p. 511)

3. Admissions – An analysis of

3.1 As discussed, admission is an extremely important piece of evidence and it is admissible against its maker. In regard to income-tax proceedings the admissions can be in various forms which may, inter alia, include:

(i) admissions or statements made in the returns of income;

(ii) replies or averments made in income-tax proceedings;

(iii) oral explanation which may be recorded in the form of statements;

(iv) averments and pleadings in appellate proceedings.

In the income-tax proceedings, generally oral evidences or explanations are recorded in the form of statements. These statements are recorded in the assessment proceedings or on various other occasions so as to be ultimately used in assessment of correct income. These statements can be of the assessee or of the witnesses. Recording of the oral evidence in the form of statements is also known as oral examination, the purpose of which is to elicit truth. This oral examination is generally at the instance of the income-tax authority.

3.2 There are certain provisions under the Income-tax Act, 1961, which empower the Income-tax authorities to record statement of the assessee, witnesses, loan creditors, trade creditors etc., on oath or otherwise in the course of assessment proceedings or in the course of search and seizure and survey operations, which are:

(a) Power regarding discovery, production of evidence, etc., u/s. 131: U/s. 131(1)(b) an income-tax authority is empowered for enforcing attendance of any person to examine him on oath. Section 131 of the Act confers powers of civil court under the Code of Civil Procedure, 1908 on A.O., JCIT, CIT, CIT(Appeals), Dispute Resolution Panel (DRP) as well as the CCIT. The authorities mentioned above can exercise such powers only in the course of proceedings, i.e., ‘when trying a suit’. The statement on oath of the assessee or witnesses can only be in respect of matters connected with the proceedings.

U/s. 131(1A), special powers have been conferred on the Director General or Director or Joint Director or Assistant Director or Deputy Director for the purpose of making any enquiry or investigation where such authority has reason to suspect that any income has been concealed or is likely to be concealed by any person within his jurisdiction, even when no proceedings are pending against such persons. The authorities are empowered with all such powers as contained u/s. 131(1) which include ‘power to enforce attendance and examine on oath’. The power vested under this sub-section is only to make enquiries and investigation and not basically meant to obtain any disclosure or surrender of concealed income.

(b) Search and Seizure: U/s. 132(4) an authorized officer during search can examine on oath any person who is found to be in possession of any books of account, documents, money, bullion, jewellery, etc. Statement made by such person during such examination may thereafter be used in evidence in any proceedings.

(c) Power of Survey u/s. 133A(3)(iii): Under this section, an income-tax authority, if he considers it necessary, is empowered to ‘record the statement of any person which may be useful for or relevant to any proceedings under the Act’. The expression ‘income tax authority’ for the purposes of this section, has been defined in the Explanation to section 133A. The CCIT and DRP are not covered in the definition of ‘income tax authority’ for the purposes of section 133A. Besides the other authorities specifically mentioned in section 131, the definition also includes Tax Recovery Officer and an Inspector of Income-tax. The Inspector of Income-tax is only an authority for the purpose of exercising powers to inspect the books of account or other documents or to make extracts or copies of the same. However, there is no power with the Inspector to record statement in a general Survey (i.e. other than Marriage/ any ceremony related Survey) which must be done by the authorities other than Inspector. In this connection, reference may be made in the case of Harshad L. Thakkar v. Asstt. CIT [2005] 3 SOT 277 (Mum.). A further important point of distinction is that the words used in section 133A(3)(iii) is ‘statement’ and not ‘statement on oath’ as is u/s. 131(1). Further, in Paul Mathew & Sons v. CIT [2003] 263 ITR 101/ 129 Taxman 416, it has been held that the A.O. has no jurisdiction to record statement on oath u/s. 133A during the course of survey and that whatever may be the statement recorded by the A.O., it has no evidentiary value since the A.O. is not authorized to administer oath and record sworn statement u/s. 133A. This decision has been followed in Kurrunem Vehil Financiers (P.) Ltd. v. Dy. CIT [2005] 2 SOT 402 (Coch.). Hence, the authorities have no jurisdiction to extract confession or surrender u/s. 133A and even if they do so, it has no evidentiary value as the statement is not a sworn statement. However section 133A(5) specifically empowers the statement to be used in evidence as stated hereinafter.

(d) Power of Survey u/s. 133A(5): When after the function or the ceremony is over, the income-tax authority considers necessary to assess the scale of expenditure, he may record the statement which may thereafter be used in evidence in any proceedings under the Act.

It is seen that both sections 132(4) and 133A(5) provide that statements recorded under those provisions will have evidentiary value. However, it is well-settled law that though statements recorded will have evidentiary value, yet such statements are not always conclusive proof since the person 
making the statement can rebut and retract.

3.3 At this juncture, it would be relevant to point out that the statements which are recorded by administering oath are presumed to be carrying truth in view of the provisions of section 181 and section 193 of the Indian Penal Code which provide for imprisonment if the false statement is given. When it is so, no one would like to be punished knowingly and, hence, it is but logical to accept a sworn statement or the statement taken on oath as revealing the truth. Admissions play a very important role in the income-tax proceedings, as they generally bind the maker. In the absence of any denial or explanation therefore, an admission is almost conclusive regarding the facts contained therein. They generally dispense with the requirement of adducing further evidence or proof to support a fact. Though section 31 of the Indian Evidence Act, 1872 states that admissions are not conclusive proof of the matters admitted, yet admissions in the absence of rebuttal may conclude an issue. Under the Income-tax Act also admissions bind the maker when these are not rebutted or retracted. Some important judgments of the Supreme Court explain the concepts and relevance of Admissions and Rebuttal or retraction of admitted facts, as under:

(i) Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 (SC): Their Lordships while observing that admission is an extremely important piece of evidence, held that, it cannot be said to be conclusive and the maker can show that it was incorrect. [Also refer S. Arjun Singh v. CWT [1989] 175 ITR 91/[1988] 41 Taxman 272 (Del.)].

(ii) Narayan Bhagwantrao Gosavi Balajiwale v. Gopal Vinayak Gosavi AIR 1960 SC 100: The Hon’ble Supreme Court held that an admission is the best evidence that an opposite party can rely upon and, though not conclusive, yet could be decisive of the matter unless successfully withdrawn or proved erroneous.

(iii) Satinder Kumar (HUF) v. CIT [1977] 106 ITR 64 (SC): It was held that it is true that an admission made by an assessee constitutes a relevant piece of evidence but if the assessee contends that in making the admission he had proceeded on a mistaken understanding or on misconception of facts or on untrue facts such an admission cannot be relied upon without first considering the aforesaid contention.

(iv) Avadh Kishore Das v. Ram Gopal AIR 1979 SC 861: It was held that evidentiary admissions are not conclusive proof of the facts admitted and may be explained or shown to be wrong, but they do raise an estoppel and shift the burden of proof on to the person making them. The Supreme Court further held that unless shown or explained to be wrong, they are an efficacious proof of the facts admitted.

4. Admission vis-a-vis Retraction

4.1 Burden to prove the ‘Admission’ as incorrect is on the maker and in case there is a failure of the maker to prove that earlier stated facts were wrong, his earlier statements are sufficient to conclude a matter. However, if retraction is proved sufficiently the earlier stated facts or admissions, lose their effect and relevance as a binding evidence and the income-tax authorities cannot conclude a matter on the basis of such earlier statement alone. At the same time, bald retractions of earlier admissions will not be enough and even after retraction such earlier statements / admissions cannot automatically become nullities. Merely because a statement is retracted, it cannot become as involuntary or unlawfully obtained. For any retraction to be successful in the eyes of law the maker has to show as to how earlier recorded statements do not state the true facts or that there was coercion, inducement or threat while recording his earlier statements.

4.2 In the course of search and seizure operations, an attempt is often made by the Officials to extract information and evidences about undisclosed income. The assessee, on the contrary, sometimes complain about being pressurized to give confessions and disclosure of extra income. It is also a matter of fact in most of the cases that the authorities try to obtain and record Statement of the nature they would like to record. The persons making the Statements are made to sign on the statements and other documents. The confessional statement may bind the assessee, as it is on record. However in such cases, retraction is possible. In any case, for the A.O. to add the income disclosed or confessed, the same must be corroborated with materials on record and if the assessee can demonstrate on the basis of facts that statement was not correct, there is no question as to why retraction should not be allowed. Looking at the nature of Departmental actions in search and survey proceedings, the Statements made at those times, are subsequently retracted in some cases. However, as explained by Courts and Tribunals, in case of Retraction assessee needs to prove by legally acceptable evidence that admission, or confession in statement given during search or survey was involuntary or was tendered under coercion or duress.

5. CBDT Instruction dated March 23, 2003

In the light of the statements recorded followed by retractions on the ground of coercion and threat in the course of Search and Survey operations, the Board issued the Instructions F. No. 286/2/2003 – IT (Inv.) dated March 23, 2003 stating as follows:

“Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess undisclosed income during the course of the search and seizure and survey operation. Such confession, if not based on credible evidence, are taken/retracted by the concerned assessees while filing return of income. In these circumstances, confession during the search and seizure and survey operation do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income-tax department. Similarly, while recording statement during the course of search and seizure operation, no attempt should be made to obtain confession as to the undisclosed income.”

6. Treatment of Loose Papers/ Loose Sheets

In this context we may refer the following decisions

a) The Punjab and Haryana High Court in CIT v. Atam Valves (P.) Ltd. [2009] 184 Taxman 6 (P&H) held that loose sheets by itself may not be enough to justify addition on estimated basis even though the explanation of the assessee is found unbelievable and circumstances may be pointing otherwise. The stand of the assessee in this case was that the loose slips recording wage payment did not represent payment of wages during the year in question, but were for the earlier year. The Assessing Officer did not accept the explanation and made an addition without bringing any other material on record and this precisely worked against the revenue. Retraction cannot be confronted by loose papers found in premises without any other supportive evidence.

b) In Asstt. CIT v. Ravi Agricultural Industries [2009] 117 ITD 338 (Agra) (TM) the premises of the assessee was subjected to a survey under section 133A during the course of which the revenue authorities found certain loose papers on which some numerical entries were recorded. At the time of survey, one of the partners of the firm agreed to surrender the amount mentioned in loose papers as an unexplained investment. Subsequently, the said partner retracted from the statement made. The Assessing Officer made addition to the assessee’s income on the basis of loose papers without any other supportive evidence. The Commissioner (Appeals) deleted the addition. The Tribunal held that when partner had retracted from his statement, the impugned addition made by the Assessing Officer should have been supported by enough material in the possession of the Department. Since loose papers did not conclusively establish that they pertained to business transactions of the assessee-firm, the Tribunal held that the Commissioner (Appeals) was justified in deleting the addition. Thus, the Tribunal upheld the order of the Commissioner (Appeals) and the decision was rendered in favour of the assessee.

c) In this connection reliance is placed on the decision of the Supreme Court in State v. Ganeswara AIR 1963 SC 1850 holding that absence of corresponding entry in the account of the opposite party precludes the alleged transaction. It is not the case of the AO that there is corresponding entry in the assessee’s account supplying corroboration.

d) According to the law declared by the Supreme Court any presumption of transaction on some vague, tenuous and dubious entries in a sheet of paper is not rational and hence not legal unless there is corroboration by corresponding entry in regular accounts of both the parties to the transaction. Furthermore, the Supreme Court has also held that the loose sheets cannot be account books of a party. Even if it is taken as an informal accounting it is not the record of the assessee. The settled position of law in short is that if the subject matter of controversy is founded on material like a loose sheet or loose sheets of stray entries it is invalid being based on inadmissible evidence. They have no probative value in the absence of some corroborative primary evidence of the reality of such transaction shown in the noting in such loose sheets of paper. Reference is made to Mahasay v. Narendra AIR 1953 SC 431.

e) In CBI v. V. C. Shukla (1998) AIR SC 410 loose sheets have been ruled out as of any evidentiary value. As a matter of fact as held by the Supreme Court in umpteen number of cases entries in the loose sheets is of no evidence value. Even assuming such entries as correct and authentic they cannot without independent evidence fix a liability upon a person. In that connection the court also referred to Section 9 of the Evidence Act and observed that even if such entries are admissible under the said provisions to support an inference about correctness of the entries still such entries would not suffice without supportive independent evidence. In the said case of CBI v. V. C. Shukla (1998) AIR SC 410 loose sheets have been ruled out as of any evidentiary value. Their Lordships went to the length of saying that even correct and authenticated entries in the books of account of one party cannot without independent evidence of their truth fix a liability upon another person. In that connection it is observed that even assuming the entries in loose sheets to be admissible under Section 9 of the Evidence Act as to the correctness of the entries, still those entries would not be sufficient without support of independent evidence. So according to their Lordships even entries in the books of account need corroboration before acting against the third party on the basis of any entry in the books of account of a person. The position in the case of scribbling in disparate loose sheets can hardly bargain for a better treatment.

f) In the Third Member case of Amar Jeet Singh Bhashi (HUF) v. ACIT (2003) 263 ITR (AT) 75 (Del.), it was held that any noting in the loose sheet is no evidence by itself. There has to be something more.

g) In following cases the Tribunal Benches have held that merely on the basis of entries in loose sheets there cannot be an addition – S. K. Gupta v. Dy. CIT [1999] 63 TTJ 532 (Del), Shri Ram Bhagwandas Raheja v. Asstt. CIT [ITA (S&S) No. 118/Mum/1996, Bench “B”, Order dated 23rd September, 1998], Ashwani Kumar v. ITO [1992] 42 TTJ (Del.) 644 : [1991] 39 ITD 183 (Del.), Kishenchand Shobhrajmal v. Asst. CIT [1992] 42 TTJ (Jp) 423 : [1992] 41 ITD 97 (Jp), D. A. Patel v. Dy. CIT [2001] 70 TTJ (Mumbai) 969 : [2000] 72 ITD 340 (Mumbai), Satnam Singh Chhabra v. DCIT [2002] 74 TTJ (Lucknow) 976. Therefore, merely loose sheets or diaries found in the course of search, may not be sufficient for the Revenue to prove that the entries represent undisclosed income of the assessee.

h) Further Mumbai Bench of the ITAT in the case of D. A. Patel v. Dy. CIT [2001] 70 TTJ (Mum.) 969 : [2000] 72 ITD 340 (Mum.) held that in case of discovery of sheets of papers disclosing loan given by an assessee and interest due thereon, during search, the assessee could not be saddled with tax liability.

i) In Smt. Bommana Swarna Rekha v. Asstt. CIT [2005] 147 Taxman 59 (Vishakhapatnam) (Mag.), on search in the premises of the husband of the assessee, a piece of paper was seized which was without any name, date or signature. The Assessing Officer treated part of transaction mentioned in the loose paper as relating to the assessee and made certain addition in her hands as unexplained expenditure. It was held that the onus was on the Assessing Officer to prove that transaction as stated in the said loose paper. Since the Assessing Officer did not bring any cogent evidence or material on record which might prove that the part of transaction stated in paper, representing transactions was entered by the assessee during the period of block assessment, the addition was deleted.

j) In CIT v. Kailash Chand Sharma [2005] 146 Taxman 376 (Raj.), the Assessing Officer made addition on the basis of some loose papers found during search. The assessee contended that the same belonged to his maternal aunt in connection with sale of agricultural land. Although the lady did not appear before the A.O. for cross-examination, yet the person who authored the document appeared and confirmed the contents of the transaction. It was held that the A.O. failed to discharge the onus of making further enquiry and the Tribunal deleted the addition as the facts showed that the transaction did not relate to the assessee.

k) In CIT v. C.L. Khatri [2006] 282 ITR 97/[2005] 147 Taxman 652 (MP), on the basis of loose slip not bearing any date and also not stating as to which period they related, no estimate of household expenses on such loose slip could be made for a particular year. In the absence of any other evidence, the estimate of household expenses in a particular year with reference to income of later year or future year was arbitrary and illogical. The Tribunal was held to be justified in deleting the additions.

l) In CIT v. P. V. Kalyansundaram [2006] 282 ITR 259 (Mad.)/155 Taxman 454 (Mad.), the assessee had shown purchase of land for ₹ 4.10 lakh, which amount was depicted in cash flow statement. A statement was recorded of the seller on the date of search, which revealed that he received ₹ 34.85 lakh for the sale. Later, the seller filed an affidavit that the amount received was only ₹ 4.10 lakh. In a further sworn statement, the seller again stated that he received the amount of ₹ 34.85 lakh. Accordingly, an addition of ₹ 30,75,005 was made as undisclosed income representing the difference of purchase consideration disclosed by the assessee and amount stated to have been received by the seller. The Commissioner (Appeals) deleted the addition made on conflicting statements. The Tribunal dismissed the appeal of the revenue and affirming the decision of the Tribunal, the High Court observed that the burden of proving the actual consideration in such a transaction was that of the revenue which it did not discharge.

m) U/s. 132(4A), presumption is only on the basis of ‘books of account’ or ‘documents’ or ‘assets’ found in the course of search. Loose sheets are not books of account or documents. Therefore, presumption cannot be raised on the basis of noting on loose sheets.

n) In S. P. Goyal v. Dy. CIT [2002] 82 ITD 85 (Mum.) (TM), the Tribunal has held that “. . . loose papers cannot be termed as books of an assessee maintained for any previous year. Loose sheet of paper torn out of a diary could not be construed as books for the purpose of section 68. Addition could not be made simply on the basis of certain notings on loose sheets of a diary without any corroborative evidence in the form of extra cash, jewellery or investment outside the books. The loose papers appear to be part of a 1992 diary. However, these loose papers consist of pages torn out from March, April, November and December. There is no closing balances or opening balances and there is no reconciliation of these entries. Therefore, it cannot be termed as books maintained by the assessee during the previous year. . . . The loose paper in itself has got no intrinsic value. It does not represent negotiable instrument that can be exchanged for a sum of ₹ 60 lakh. When it is a mere entry on a loose sheet of paper and if the assessee claims that it was only a planning, not supported by actual cash, then there has to be circumstantial evidences to support that this entry really represent cash of ₹ 60 lakh. There is no such evidence found by the Revenue in the form of extra cash, jewellery or investment outside the books.”

o) The presumption is discretionery and not mandatory or conclusive: The presumption u/s. 132(4A) can be rebutted. Before raising the presumption u/s. 132(4A), the A.O. is bound to consider whether after considering the surrounding facts and circumstances of the case the above presumption validly arises. This presumption is similar to the nature of presumption in section 114 of the Indian Evidence Act, 1872, in which the Court may presume existence of certain facts, having regard to the circumstances of particular case. “The Court may presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business, in their relation to the facts of the particular case.”

p) Presumption u/s. 132(4A) requires independent corroborative evidence: In Atul Kumar Jain v. Dy. CIT [1999] 64 TTJ (Delhi) 786, the Tribunal held that the seized paper being not corroborated by any independent evidence cannot be considered as a document in proof of investment in house property, and, accordingly, this paper is liable to be ignored.

q) In Devilal Gherilal Shah v. Dy. CIT [1995] 52 TTJ (Ahd.) 618, the Tribunal held that no date or name is mentioned on the seized paper. In such a case, it is very difficult to say that the assessee purchased gold ornaments and, therefore, he should be assessed in respect of the amount mentioned therein as unexplained investment made by him. In the absence of cogent evidence on record, the addition could not be sustained.

r) In the case of J. R. C. Bhandari v. Asstt. CIT [2003] 133 Taxman 44 (Jd.), it was observed that in the absence of any iota of evidence on record to fasten the liability on the assessee in respect of receipt of the amounts mentioned in the entry noted on a loose sheet which was found in the possession of a third person whose statement was also not on record, addition in the hands of the assessee on the basis of said loose sheets was not legally sustainable. This view was also supported by the decision in the case of Niranjan Kumar Agarwal [IT Appeal No. 658/C/98/Kol.].

In absence of any cogent evidence or corroboration in support of the entries in loose sheets, no adverse conclusion can be drawn against the assessee on mere guess and pure suspicion.

7. Some important decisions

7.1 Abdul Qayume v. CIT [1990] 184 ITR 404/ 48 Taxman 157 (All.): The Allahabad High Court opined that an admission or an acquiescence cannot be the foundation for an assessment where the income was returned under an erroneous impression or misconception of law. It is always open to an assessee to demonstrate and satisfy the authority concerned that a particular income was not taxable in his hands and that it was returned under an erroneous impression of law. The principle can be applied in a case where the disclosure made u/s. 132(4) did not match with the material collected in search.

7.2 Asstt. CIT v. Jorawar Singh M. Rathod [2005] 94 TTJ (Ahd.) 867: [2005] 148 Taxman 35 (Ahd. – Trib.) (Mag.): In this case, the assessee stated in retraction that during recording of statement, he was under constant threat of penalty and prosecution and was confused about various questions asked by the search party about documents, papers, etc., of other persons found from his premises. He declared sum under pressure which was evident from the fact that no such corroborative evidence, asset or valuables were found in form of immovable or movable properties from his residence in support of the amount of disclosure which was later on retracted but not accepted by the department. The Tribunal observed:

“…It is true that simple denial cannot be considered as a denial in the eyes of law but at the same time it is also to be seen (that) the material and valuables and other assets are found at the time of search. The evidence ought to have been collected by the revenue during the search in support of the disclosure statement. It is settled position of the law that authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee under a mistake, misconception or on not being properly instructed, is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected [S. R. Koshti v. CIT [2005] 193 CTR (Guj.) 518]. . . . In the light of above discussion, we apply the ratio of Apex Court in the case of Durga, supra, [CIT v. Durga Prasad More [1973] CTR (SC) 500], i.e., test of human probabilities. We do not find any material on record on which basis it can be said that the disclosure of the assessee of ₹ 16 lakhs is in accordance with law or in spirit of section 132(4)…”. (P. 872)

7.3 Surinder Pal Verma v. Asstt. CIT [2004] 89 ITD 129 (Chd. ITAT): The Chandigarh Bench of the Tribunal took a realistic view of the facts and circumstances in which disclosure is generally made in search and seizure proceedings. It was observed:

“It is well known fact that the confessional statements made during the search are often vulnerable on the ground that the person giving such statements remain under great mental strain and stress. They also do not have the availability of relevant details, documents and books of account at the time of giving such statements in the absence of which precise information relating to the mode of utilisation of such income and the year of such investment cannot be correctly furnished. The assessees are, therefore, entitled to modify/clarify the statements after verifying the necessary details from the relevant records at later point of time.” (p.24)

7.4 Asstt. CIT v. Ramesh Chandra R. Patel [2004] 89 ITD 203 (Ahd.) (TM): It was accepted that the assessee had a right to retract but that has to be based on evidence brought on record to the contrary and there must be justifiable reason and material accepting retraction i.e., cogent and sufficient material have to be placed on record for acceptance or retraction. All that has to be done by the assessee if he is to retract the statement which was recorded in the presence of witnesses unless there is evidence of pressure or coercion. The facts of each case have to be considered to reach the conclusion whether retraction was possible or not as there can be no universal rule.

7.5 Hiralal Maganlal & Co. v. Dy. CIT [2005] 96 ITD 113 (Mum.): The Tribunal did not agree that there were facts to justify retraction for the following reasons:

(i) The assessee had stated in the statement that he was giving the statement voluntarily without any undue influence, threat or coercion.

(ii) The statement had been recorded in the presence of witnesses and that, too, after consultation with the Chief Accountant.

(iii) The assessee had not produced any contemporaneous record or evidence, oral or documentary, to substantiate the allegation.

(iv) The answers given by him were quite coherent and did not indicate that he was in a confused state of mind when his statement was recorded.

(v) Before making the statement, the papers recovered from his residence were taken by him to firm’s office for consultation with his trusted men.

(vi) The answers given by the assessee with regard to the nature of documents and other relevant matters were in his specific knowledge.

(vii) At the time of hearing, the assessee denied any force or coercion.

In the words of the Tribunal in Hiralal Maganlal & Co.’s case (supra) retraction is not possible if:

“the assessee fails to prove the incorrect or erroneous nature of the facts admitted or stated in the statement at the earliest possible opportunity from the statement/confession. However, further corroboration of retracted statement is necessary where the assessee established at the earliest possible opportunity by leading reliable evidence and proving thereby the erroneous or incorrect nature of the facts admitted or confessed and also where the evidence available on record is inconsistent with the confession/statement.”

Also refer Pangamban Kalanjoy Singh v. State of Manipur AIR 1956 SC 9.

7.6 ITO v. Bipin Faraskhana [2000] 73 ITD 334 (Ahd.): Held that, mere retraction of statement by filing an affidavit would not absolve the assessee from the consequences of sworn testimony recorded u/s. 132(4) which was fully corroborated by documents and records found at the business premises.

7.7 Dy. CIT v. Bhogilal Mool Chand [2005] 3 SOT 211 (Ahd.): In this case the Tribunal stated :

“It is settled law that admission by a person is a good piece of evidence though not conclusive and the same can be used against the person who makes it. The reason behind this is, a person making a statement stops the opposite party from making further investigation.”

7.8 Asstt. CIT v. Anoop Kumar [2005] 94 TTJ (Asm.) 288: The AO worked out the income on the basis of seized material which was less than the income declared in statement u/s. 132(4). The assessment was, however, made on the income confessed in the statement. The Tribunal observed:

“…It is also a fact that total income so computed by the Assessing Officer falls below the income disclosed u/s. 132(4). It is not the case of the department that the difference in the income assessed and income disclosed u/s. 132(4) represents some other concealed income. Therefore, it is clear that there is no material available with the department to justify the addition so far as the difference between the income computed by the Assessing Officer and income disclosed u/s. 132(4). In other words, the so-called disclosure u/s. 132(4) is bald and has no legs to stand and in such a case retraction is justified… Thus, the view that emerges is that the ultimate addition to be made in a case would depend on the facts and circumstances of the case and not purely on the disclosure made under section 132(4), which also stood retracted subsequently…”. (p. 292)

7.9 Karam Chand v. Asstt. CIT [2000] 73 ITD 434 (Chd.): Held that, statement made by the assessee u/s. 132(4) read with Explanation 5 to section 271(1)(c) can be retracted by the assessee but such going back should be on sufficient ground.

7.10 Gyan Chand Jain v. ITO [2001] 73 TTJ (Jodh.) 859: Held that it is not the position of law that no addition can be made on the basis of an admission at all, but the position of law is that the person making an admission is not always bound by it and sometimes can get out of its binding purview if that person can explain concisely with supportive evidence/material or otherwise that the admission made by him earlier is not correct or contains a wrong statement or that the true state of affairs is different from that represented therein and so, the same should not be acted upon for fastening tax liability which should rather be fixed on the basis of correct/true facts, as ascertained from material on record. Unless it is explained as stated above, the admission does retain its binding nature for the person who makes the admission and the same may, if considered reasonable in view of other facts on record and following the principles of pre-ponderance of probability, form the basis of fastening liability.

7.11 Asstt. CIT v. Jauste Tandoll & Co. [2002] 77 TTJ (Pune) 117: The Pune Bench of the Tribunal took a very pragmatic view of the situation in which statement/ confession was made. The following observations are relevant:

“…There is every likelihood of a statement tendered to or recorded by the search officer on the search day being incoherent or at variance with subsequent statements tendered to or recorded in any further or collateral proceedings, but to make the addition in the returned income or to put such person to sufferance or to adverse consequences on such statement is not justified in law. All that is stated by any deponent on the search day should not be taken as the truth, the whole truth and nothing but the truth. Such statements indubitably have evidentiary value and credibility in law, but the same should be viewed with great caution, particularly when the same are denied, varied or retracted or established by the defendant to have been obtained or given under mental stress, coercion, undue influence or due to any other abnormal condition and circumstances etc,. . . .” (p. 124)

7.12 T. S. Kumarasamy v. Asstt. CIT [1998] 65 ITD 188 (Mad.): It was held by the Tribunal that though there was a retraction of admission on the part of the assessee, one year later, enough good reasons were not given by him for retracting from his voluntary admissions. Consequently, in the absence of any cogent reason with credible evidence, the Court rejected the plea of the assessee that those admissions were made under coercion or duress and were not voluntary. Drawing support from the decision of the Supreme Court in the case of Surjeet Singh Chhabra v. Union of India [1997] 1 SCC 508 the Tribunal disallowed plea of retraction of the assessee on the ground that neither the ground of coercion or duress nor the ground of involuntary statement was proved to have existed at the time of recording of the statement. This decision of the Tribunal goes to indicate that admissions or confessions made in the statements recorded during search or survey, without there being any other evidence to support such admissions, can successfully be made use of to assess the income, unless they are proved to be involuntary or are proved to have been taken under duress, coercion, misconception, etc.

7.13 Hotel Kiran v. Asstt. CIT [2002] 82 ITD 453 (Pune): It is settled law that admission by a person is a good piece of evidence though not conclusive and the same can be used against the person who makes it. The reason behind this is a person making a statement stops the opposite party from making further investigation. This principle is also embedded in the provisions of the Evidence Act. But the statement recorded u/s. 132(4) is on a different footing. The Legislature in its wisdom has provided that such a statement may be used as evidence in any proceedings under the Act. However, there are exceptions to such admission where the assessee can retract from such statement/admission. The first exception exists where such statement is made involuntarily, i.e., obtained under coercion, threat, duress, undue influence, etc. But the burden lies on the person making such allegation to prove that the statement was obtained by the aforesaid means. The second exception is where the statement has been given under some mistaken belief either of fact or of law. If he can show that the statement has been made on mistaken belief of facts, that the facts on the basis of which admission was made were incorrect.

7.14 Shri Krishan v. Kurukshetra University AIR 1976 SC 376: It was held that while recording a statement, the maker of the statement has to be made aware of his legal rights. Admission made in ignorance of legal rights or under duress is not held to be binding.

7.15 ITO v. Smt. Ratan Devi Dugar [1987] 20 ITD 483 (Jp.): Statements and admissions made therein also lose their relevance if it is held that the search proceedings were carelessly and negligently conducted.

7.16 Deepchand & Co. v. Asstt. CIT [1995] 51 TTJ (Bom.) 421: Statements recorded during search proceedings which continued for an unduly long period also cannot be considered to be free, fearless and voluntary. In such circumstances, statements can be successfully retracted, contending that they were recorded under pressure and force.

7.17 Manharlal Kasturchand Chokshi v. Asstt. CIT [1997] 61 ITD 55 (Ahd.): Proof of threat or coercion is necessary for valid retraction. The allegation that the assessee was tortured and harassed by the search team and was forced into making an admission is not enough. The Mumbai Tribunal, in the case of Param Anand Builders (P. ) Ltd. v. ITO [1996] 59 ITD 29, has held that allegations of torture and harassment were unacceptable when independent witnesses were present at the time of search. Mere filing of a letter retracting the statement was not held to be rebuttal of the presumption that what is admitted is true. The Tribunal’s observations were also based on the fact that the ‘Panchas’ had not brought any harassment to the notice of the higher authorities.

7.18 CIT v. Chrestian Mica Industries Ltd. [1977] 109 ITR 324 (Cal.): The admission of fact by the counsel which constitutes substantive evidence against his client, cannot be considered as conclusive and it is still open to the assessee to prove that such admission is wrong.

7.19 Dy. CIT v. Ratan Corpn. [2005] 145 Taxman 503 (Guj.): On the basis of confessional statement obtained due to pressure which the assessee retracted from, the addition made for on-money was deleted. The Tribunal observed that in view of retraction, the Assessing Officer should have made enquiries from the shop owners who were supposed to have paid on-money to the assessee which he did not. As such undue significance cannot be given to the statement made before the authorities during search operation. It is not uncommon that the authorities put pressure for getting admission.

7.20 Ms. Aishwarya K. Rai v. Dy. CIT [2007] 104 ITD 166 (Mum.) (TM): A search was conducted at the place of the assessee. In statement of the father of the assessee recorded u/s. 132(4), he admitted of having paid ₹ 50 lakhs of on-money for the purchase of flat. During post-search operations, he denied having paid any such on-money and stated that the earlier statement was made under duress. The A.O., however, on the basis of earlier statement and on considering a comparable case of purchase of flat in the same building made the addition in block assessment. The subsequent statement given by the father had been accepted and the addition made was deleted. The comparable case cited by the AO was not of a direct purchase from the builder but it was a purchase after construction from a third party and as such it was not considered as a comparable case to the purchase made from the builder by the assessee at the booking stage.

7.21 Retraction of earlier admitted facts puts the AO on the guard : Retraction of earlier admitted facts puts the AO on the guard and he may not suppose to accept them (retractions) without probe or cross-examination. Generally, as compared to a subsequent statement whereby earlier admitted facts or positions are retracted, the first statement may be presumed to be more reliable for the reason that such was the statement which was recorded first in point of time and was made on the spot. Possibility of an afterthought or to concoct an explanation and fabricate the evidence in subsequent statement cannot be ruled out. A retraction to have any evidentiary value must preferably be in a statement not only denying the earlier stated facts but explaining the reasons for making a statement earlier and giving substituted facts in support of retraction. Total and bald denial of what has been stated in the previous statement cannot be said to be effective and it shall at best be deemed merely as a plea of denial which may not be of much help. Further, retraction to be effective and credible, should be intimated to the income-tax authority at the earliest when the matters are still alive. Retractions made after the lapse of a considerable time are liable to be rejected because of possibility of concoctions and fabrication of evidences.

7.22 Power to examine on oath : Section 133A does not empower any ITO to examine any person on oath; so statement recorded under section 133A has no evidentiary value and any admission made during such statement cannot be made basis of addition – Commissioner of Income-tax, Salem v. S. Khader Khan Son [2012] 25 413 (SC) affirming the decision of Madras High Court in CIT v. S. Khadar Khan Son [2008] 300 ITR 157 (Mad.).

7.23 No addition merely on the basis of the statement during survey No addition can be made under section 69B merely on the basis of the statement during survey in respect of renovation of office show room if the statement had been retracted and there was no evidence of any expenditure found in the survey – Asstt. CIT v. Smt. Usha Rani Talla [2010] 6 ITR (Trib.) 37 (Delhi).

7.24 Alleged Accommodation entries : Where no material was found in search proceedings to establish that all companies documents relating to which were found during search were dummy and assessee had managed and controlled their affairs and moreover revenue had failed to prove that assessee earned commission income on alleged accommodation entries, alleged commission provided by said companies could not be assessed in hands of assesse.

In the above case, following a search proceedings, the assessee disclosed an additional income in return filed under section 153A. The Assessing Officer, however, levied penalty under section 271AAA on the ground that such additional income was not offered in return filed under section 139(1). Where offer of additional income was made voluntarily by assessee in disclosure petition under section 132(4) followed by filing of return under section 153A, assessee was entitled for immunity from levy of penalty under section 271AAA – DCIT v. Sagar Mal Nahta [2017] 82 344 (Kolkata – Trib.)/[2016] 179 TTJ 493 (Kolkata – Trib.).

7.25 Unexplained investments (Advance) : Where director of assessee-company in course of search admitted unaccounted payment to certain persons on account of advance against land purchased but said transaction could not be materialised and advance was returned back, no addition on account of undisclosed income should be made – Shree Ram Balaji Developers & Infrastructure (P.) Ltd. v. Assistant Commissioner of Income-tax, Central Circle-3, Jaipur* [2017] 88 364 (Jaipur – Trib.).

8. Reasons and Manner of Retraction

8.1 Generally, as explained earlier, the statements made earlier are retracted when the maker contends that earlier admissions:

(i) were untrue; or

(ii) were on a mistaken understanding, misconception; or

(iii) were not voluntary; or

(iv) were under mental stress, undue influence, pressure or coercion.

8.2 Retraction or rebuttal of earlier statements/admitted facts can be:

(a) in the form of statement which is recorded later on; or

(b) in the form of a letter; or

(c) in the form of a sworn in affidavit filed.

8.3 While there may be reasons for retraction, such retraction should be made at the earliest opportunity. As soon as the assessee becomes aware that his initial stand or admission is incorrect or false, it is open for him to change that stand. But it is absolutely essential that such change, in order to be effective, should be intimated to the AO at the earliest possible time when the matters are still alive, before they attain finality and before limitation sets in.

8.4 Submission of revised return u/s. 139(4) is also a form of retraction, but which is statutorily provided for. However, belated return cannot be revised. Section 139(4) of the Income-tax Act, 1961 provides:

“(4) Any person who has not furnished a return within time allowed to him under sub-section (1), or within the time allowed under a notice issued under sub-section (1) of section 142, may furnish the return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier”.

9. Retraction by a sworn in affidavit

9.1 Averments in the form of affidavit : When the assessee submits averments in the form of affidavit before the authorities, it casts a serious responsibility on him to state the facts in true and correct manner. The opposite party is entitled to cross-examine the deponent of the affidavit. The scope of affidavit is confined to such facts, which the deponent has direct knowledge of. The affidavit shall not unnecessarily set forth matters of hearsay or argumentative nature. Providing a point by way of filing an affidavit is not violative of the principles of natural justice so long as the witness is made available to the opposite party. Though retractions would be effective in all the manners discussed above, yet, comparatively speaking, like a subsequent statement recorded on oath by the concerned income-tax authority, retractions by way of affidavit filed on oath or affirmation attested by the Notary/Oath Commissioner are considered to be more effective for the simple reason that in the eyes of law they carry more value in view of the specific provisions of the Indian Penal Code as contained in sections 181, 191 & 193 which provide for prosecution in case of false statements given on oath.

9.2 Affidavit – which is a solemn and voluntary declaration or statement of fact in writing, relating to matters in question and sworn or affirmed and signed by the deponent before a person or officer duly authorized to administer such an oath or affirmation – should show the circumstances under which admission was made and the grounds for which the admission is incorrect. Necessary supporting evidences to support the correct facts need to be filed. When by a sworn statement or affidavit facts admitted, in an earlier statement which was recorded on oath, are retracted the Assessing Officer may like to examine the maker carefully.

9.3 Ingredients of affidavit: Every affidavit should clearly express how much is the statement of the deponent’s knowledge and how much is a statement of his belief and the ground of belief must be stated with sufficient particularity to enable the Court/Administering Authority to judge whether it would be safe to act on the deponent’s belief. When the affidavits filed by the party bear only the verification that they were sworn on oath and the contents of the affidavits were admitted by them to be correct without giving source of knowledge or information, the verification makes the affidavits meaningless and valueless as noted in the case of Babu Lal v. Motilal, AIT 1953 MB & 2 (Gwalior benefit). The onus to prove mala fide lies heavily on the person alleging it. Facts constituting mala fide have to be supported by affidavits stating that they have ‘come to the knowledge’ of the deponent. The nature and source of knowledge is to be disclosed with sufficient particularity. Affidavit will not be one as required by law if the above ingredients are missing, stated the Supreme Court categorically in Suckwinder Pal Bipan Kumar v. State of Punjab. AIR 1982 SC 65.

9.4 Deponent is liable to be cross-examined: Regarding the retraction made by way of an affidavit it is important to note that mere filing of an affidavit even before the Court will not conclusively make the earlier admissions ineffective because an affidavit is only a statement in respect of the matter in the personal knowledge and in respect of affidavit the deponent is liable to be cross-examined. On furnishing of an affidavit, the Assessing Officer is entitled to cross-examine the deponent and the assessee can be required to produce the deponent in person for cross-examination. If the assessee fails to comply with such cross-examination, affidavit can be ignored. However, if the Assessing Officer fails to cross-examine the deponent the statement made in the affidavit becomes unchallengeable. Reference can be made to the important decision of the Supreme Court in the case of Mehta Parikh & Co. v. CIT [1956] 30 ITR 181 (SC) where it was held that it will not be open to the revenue to challenge the statements made by the deponent in their affidavits later on, if no cross examination with reference to the statements made in the affidavits is done. The decisions in L. Sohanlal Gupta v. CIT 33 ITR 786 (All.) and Malva Knitting Works v. CIT 107 ITR 379, 381 (MP) were also relied upon.

9.5 False affidavit is criminal offence: It will be appreciated that making an incorrect or false affidavit is criminal offence. It has been held in the case of Baban Singh vs. Jagdish Singh AIR 1967 SC 68 that where a false affidavit is sworn, the offence would fall u/s. 191 and 192 of the Indian Penal Code 1860. Hence an affidavit has to be considered as a piece of evidence. The importance and relevance of the averments made in the affidavit cannot be brushed aside without really having any material to contradict the same. It is matter of common knowledge that even in Courts the affidavits are furnished and relied upon.

9.6 Wherever supporting evidence is not possible or not available, an affidavit should be furnished before the authorities. The same is usually accepted unless the authority has any material to controvert the statements contained in such affidavit. Rule 10 of Appellate Tribunal Rules, 1963 also provide that where a fact is alleged, which cannot be borne out by, or is contrary to the record, it shall be stated clearly and concisely and supported by a duly sworn affidavit. In this context following cases are also relevant:

L. Sohanlal Gupta v. CIT [1958] 33 ITR 786 (All.) – The Tribunal was not entitled to reject the affidavit filed by the assessee on the mere ground that he had produced no documentary evidence; if it was not accepted as sufficient proof, the assessee should have been called upon to produce documentary evidence or he should have been cross-examined to find out how far his assertions in the affidavit were correct. [also refer – Malwa Knitting Works v. CIT [1977] 107 ITR 379 at page 381 (MP)]

CIT v. Lunar Diamonds Ltd. [2006] 281 ITR 1 (Del.) – The assessee had filed an affidavit stating that it had not received the notice and the High Court sustained the order of the Tribunal, which had held that under these circumstances, the burden was upon the Department to prove that notice was served upon the assessee within the prescribed time. The Department had failed to prove its case in this regard. The Tribunal 
was right in setting aside the order of assessment. No substantial question of law arose from its order.

10. Conclusion

While making initial admissions by way of statement or otherwise one has to take ample precautions and before making admissions one should understand the facts and issues properly. One should not make initial admissions in a huff or in a casual or light hearted manner because, subsequently, it may not be easy for him to retract or disown them. Further, instead of retracting initial statements or admissions in a bald manner, one has to bring on record cogent reasons or evidences, because in the absence of this even after retraction matters may be decided against him on the basis of initial statement itself. There is unanimity on the legal issue that the statement recorded u/s. 132(4) has evidentiary value, as provided in the Act itself that it can be used in evidence but no such condition exists in respect of a statement recorded u/s. 133A except in a matter falls u/s. 133A (5). At the same time, statements recorded u/s. 132(4) cannot be presumed to contain truth and nothing else but truth. The Board has instructed that ‘AO should rely upon the evidences/materials gathered during the course of search/survey operation or thereafter, while framing the relevant assessment orders’. Just as there is no law that statement/confession given on wrong facts is always binding, similarly, there is no provision that the statement/confession can, in no circumstance, be retracted. The income disclosed or confessed must have co-relation with material on record. If an assessee can demonstrate on the basis of facts that the statement was not correct, there is no reason as to why such retraction should not be allowed.

[Source : Article printed in Paper Book of National Tax Conference, Thane, held on 6th & 7th October, 2018]

Penalties and Prosecutions under the Income-tax Act, 1961

Chapter XXI of the Income-tax Act containing sections 270 to 275 provides for levy of penalties under the Income-tax Act in respect of various defaults committed by an assessee such as, concealment of income, failure to furnish return, failure to provide required information or attend proceedings and failure to comply with provisions regarding deduction of tax at source or certain other requirements under the Act. Similarly, Chapter XXII of the Act containing sections 275A to 280D provides for prosecution for various defaults committed by an assessee under the Income-tax Act relating to filing of return, disclosure of income or failure to deposit tax deducted or collected at source. In this article efforts are being made to discuss the provisions regarding penalties and prosecution in relation to concealment of income and evasion of tax.

Levy of Penalty u/s. 271(1)(c) – up to A.Y. 2016-17

Section 271(1)(c) of the Act has been governing the levy of penalty for concealment of income or for furnishing inaccurate particulars up to A.Y. 2016-17. Thereafter, levy of penalty for concealment of income is being governed by provisions of section 270A read with section 270AA of the Income-tax Act. Section 276C deals with the prosecution in case of evasion of tax. Accordingly, the scope of aforesaid provisions is being discussed hereinafter.

Under section 271(1)(c) of the Income-tax Act, penalty is leviable equal to the amount of tax and it may extend up to 3 times of the tax, in a case where the assessee has concealed the income or has furnished inaccurate particulars. The scope of terms “concealment of income” and “furnishing of inaccurate particulars” have been subject matter of litigation in large number of cases. The important point in this context has been, whether concealment of income or furnishing of inaccurate particulars needs to be intentional or not. In other words, whether there should be mens rea of the assessee in this regard. There has been a long line of judgments of Hon’ble Supreme Court, viz., CIT v. Anwar Ali (1970) 76 ITR 696 (SC); Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC), K.C. Builders v. ACIT (2004) 265 ITR 562 (SC) T. Ashok Pai v. CIT (2007) 292 ITR 11 (SC) and Dilip N. Shroff v. JCIT (2007) 291 ITR 519 (SC)wherein it was held that to levy the penalty conscious concealment of income or furnishing of inaccurate particulars was necessary. In the case of Union of India v. Dharmendra Textile Processors & Ors. (2008) 306 ITR 277 (SC), the Hon’ble Supreme Court had taken a different view and it was held that penalty is a civil liability and, therefore, wilful concealment is not an essential ingredient as it would be in the case of prosecution u/s. 276C of the Income-tax Act. The position, however, was again clarified by the Apex Court in subsequent decisions in the cases of CIT v. Atul Mohan Bindal (2009) 317 ITR 1 (SC) and UOI v. Rajasthan Spinning and Weaving Mills (2009) 238 ELT 3 (SC) that deliberate concealment or furnishing of inaccurate particulars is necessary to levy penalty u/s. 271(1)(c) of the Act. Subsequently, the issue regarding levy of penalty has also been considered by the Supreme Court in the cases of CIT v. Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158 (SC) and PriceWaterhouseCoopers (P) Ltd. v. CIT (2012) 348 ITR 306 (SC). In the case of Reliance Petroproducts Pvt. Ltd., the Hon’ble Supreme Court has been pleased to observe to the extent that making an incorrect claim in law cannot tantamount to furnishing of inaccurate particulars even if the claim has not been accepted by the Assessing Officer. In the case of PriceWaterhouseCoopers (P) Ltd., the Hon’ble Supreme Court deleted the penalty even in the circumstances when provision for gratuity made in the books of account which was clearly disallowable was not disallowed by the assessee in the return of income though disclosure in this regard had been made in Tax Audit Report. The Hon’ble Supreme Court considered that it was a bona fide and unintentional error. In regard to the matter, reference can also be made to the decision of Hon’ble Supreme Court in the case of MAK Data Pvt. Ltd. v. CIT (2013) 358 ITR 593 (SC) wherein the Hon’ble Supreme Court has held that even if the assessee has surrendered an income during the course of assessment proceedings, it would not absolve the assessee from explaining his conduct.

In regard to the matter there have been large number of decisions of various High Courts considering different circumstances and coming to the conclusion whether penalty is leviable or not for concealment of income or for furnishing inaccurate particulars in the specific facts of the case. Broad principles emerged from the decisions are that no penalty is leviable if the assessee has made due disclosure in respect of facts or there has been bona fide mistake in the return, the issue has been debatable, disallowance has been made on ad hoc basis, income has been charged under different heads, dispute is relating to year of taxability, claim was made based on case law or on the basis of advice of the counsel etc., where it has been shown by the assessee that he had acted in a bona fide manner. Penalty, however, has been held to be leviable where claim has been made against clear provisions of law or the claim has been bogus or the assessee has intentionally concealed the particulars of income or has furnished inaccurate particulars. As an example, reference can be made to following latest decisions of High Courts:

PCIT v. Dhariwal Industries Ltd. ITA No. 1133 of 2016 (Bom.) decided on 4-9-2018

In the facts of above case the assessee had claimed benefit u/s. 80-IA of the Act and had also considered sales tax incentive as capital receipt and had claimed 100% depreciation on some items based on certain judicial decisions prevailing at the time of making the claim. Particulars were duly disclosed in the return. In the circumstances, the Hon’ble High Court held that it could not be said that assessee had furnished inaccurate particulars or had concealed his income within the meaning of section 271(1)(c) of the Act.

CIT v. M/s. L&T Finance Ltd. ITA No. 1363 of 2015 decided on 4-6-2018 (Bom.)

The Hon’ble High Court held that merely allegation by the Assessing Officer that there has been concealment of income or furnishing of inaccurate particulars is not sufficient to levy penalty. He should give a finding as to what particulars of income have been concealed or what particulars of income are inaccurate. The words ‘concealment’ or ‘inaccurate particulars of income’ have to be read strictly.

DIT v. Nomura India Investment Fund Mother Fund (2018) 404 ITR 636 (Bom.)

The assessee did not set-off brought forward long term capital loss in respect of shares against long term capital gains earned during the year which was claimed as exempt u/s. 10(38) of the Act and he had given a note in the return reserving his right to carry forward the loss. The Hon’ble High Court held that provisions of section 271(1)(c) can only be invoked upon satisfaction of the ingredients as laid down in the said section. In the present case the assessee had disclosed in its return the loss sustained by him and had also given a note in the return reserving its right to carry forward the same. The note was given keeping in mind the interpretation of section 10(38) of the Act and the action of the assessee was bona fide.

Sundaram Finance Ltd. v. ACIT (2018) 403 ITR 407 (Mad.)

The assessee claimed depreciation showing the transaction as of purchase and lease back of equipment whereas it was, in fact, a finance transaction and no asset was in existence. The assessee had withdrawn the claim of depreciation during the course of assessment proceedings. It was held that penalty was leviable as it was an admitted fact that depreciation was claimed on an asset which was not in existence.

Rajnish Jain v. CIT & Anr. (2018) 402 ITR 12 (All.)

The assessment of the assessee was reopened on the basis of information regarding accommodation entries provided by the broker in the form of purchase and sale of shares resulting in capital gains. The assessee during the course of assessment proceedings surrendered income equal to consideration received on sale of shares subject to non-initiation of penalty proceedings u/s. 271(1)(c) of the Act. The Assessing Officer added the amount and also levied the penalty. Penalty was upheld by the High Court observing that surrender was not relevant and genuineness of the transaction has also been dispelled by lower authorities.

Levy of Penalty u/s. 270A – W.e.f. A.Y. 2017-18

With effect from A.Y. 2017-18, penalty will be leviable with reference to

“Under-reported income” u/s. 270A of the Act. In view of change in the terminology, it is necessary to understand the impact of change in the terminology used in new section. Sub-section (3) provides for determination of quantum of under-reported income in different circumstances such as when the assessee has filed the return or has not filed the return or assessment had earlier been made. In short, the quantum of under-reported income is the difference between the assessed income and the returned income or the income reassessed and the income assessed in earlier order. In a case where the assessee has claimed loss, the difference between the loss claimed and loss assessed will be deemed to be under-reported income.

Sub-section (6) provides that certain amounts included in the taxable income will not be considered to be under-reported income and such amounts are:

(a) the amount of income in respect of which the assessee has offered an explanation to the satisfaction of the Assessing Officer, Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be, that explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;

(b) the amount of under-reported income has been determined on the basis of estimate by the Assessing Officer on the ground that though the accounts are correct and complete but the income cannot properly be deduced therefrom;   

(c) the amount of under-reported income is determined by making a further addition in the amount of estimated disallowance made by the assessee and the assessee had disclosed all the facts material to the addition or disallowance;

(d) the amount of under-reported income represents the addition on account of adjustment in ALP in respect of international transactions and the assessee had maintained information and documents as prescribed u/s. 92D and had disclosed all the material facts relating to the transactions; and

(e) the amount of undisclosed income is on account of search operation and penalty in respect thereof is leviable u/s. 271AAB.

As per sub-section (7) penalty is leviable equal to 50% of the amount of tax payable on under-reported income.

Sub-section (8) provides that in case under-reported income is in consequence of any mis-reporting thereof by the assessee penalty will be leviable equal to 200% of the amount of tax payable on under-reported income.

Sub-section (9) provides for circumstances when under-reported income shall be deemed to be income as a consequence of misreporting of income and such circumstances are :

(i) Misrepresentation or suppression of facts;

(ii) Non-recording of investments in books of account;

(iii) Claiming of expenditure not substantiated by any evidence;

(iv) Recording of false entry in books of account;

(v) Failure to record any receipt in books of account having a bearing on total income;

(vi) Failure to report any international transaction or deemed international transaction or any specified domestic transaction to which Chapter X applies.

Section 270AA has also been inserted along with section 270A in the Act. This section provides for immunity to be granted by the Assessing Officer to an assessee from imposing of penalty u/s. 270A and also from initiation of prosecution proceedings u/s. 276C or 276CC of the Act in case the assessee makes payment of tax as well as of interest as per order of assessment within the period specified in the notice of demand and no appeal is filed against the assessment order.

Analysis of provisions of sections 270A and 270AA of the Act

Though provisions of sections 270A and 270AA have been inserted in the Act, as stated in the memorandum, with the intention to rationalise and provide objectivity, certainty and clarity in penalty provisions, it appears ongoing through the provisions that same will not serve the intended purpose. In this regard, it may be stated that:

  1. Under the old provisions of section 271(1)(c) of the Act the quantum of income concealed or the income for which inaccurate particulars were furnished was to be decided on the basis of satisfaction of the Assessing Officer subject to explanation as is given by the assessee and disclosure made in the return in regard to the same. The aforesaid provisions have been subject-matter of substantial litigation. As per sub-section (3) the quantum of under-reported income is required to be determined straightaway on the basis of difference between the returned income and the assessed income. Same, however, is subject to provisions of sub-section (6) which provides for circumstances when the amount will not be considered to be under-reported income. Each of the circumstances provides for satisfaction of the Assessing Officer as regards the bona fideand disclosure of material facts by the assessee. Hence, new provisions cannot be said to be simplified and certain. Same litigation will continue.

  2. Sub-section (9) provides for circumstances when under-reported income shall be deemed to be income as a consequence of misreporting of income. Such circumstances are like misrepresentation, suppression of facts, non-recording of entries, claim of expenditure not substantiated by evidence, recording of false entries, etc. These circumstances cannot be said to be such circumstances, in respect of which there will be no litigation. In fact, the term ‘misrepresentation’ will have same meaning as furnishing of inaccurate particulars and ‘suppression of facts’ will have same meaning as ‘concealment’. Accordingly, the scope of litigation appears to be same as it has 
    been earlier and may be even more than that.

  3. On the basis of reading of provisions of section 270A of the Act, it appears that the amount will not be in the nature of under-reported income in case the Assessing Officer is satisfied as regards explanation of the assessee. In case the Assessing Officer is not satisfied, he is likely to allege that under-reported income is as a consequence of misrepresentation, suppression or false recording of transaction. Hence, there will be no income as such in the nature of under-reported income liable for penalty at the rate of 50% of tax.

  4. In terms of section 270AA of the Act one gets the impression that in case the assessee makes payment of tax and interest within the time period provided in the notice of demand, the Assessing Officer will grant immunity and no penalty will be leviable. The aforesaid section, however, further provides that immunity will not be available in the circumstances when under-reported is as a consequence of mis-reporting of income. The Assessing Officer in most of the cases will allege that under-reported income is as a consequence of mis-reporting of income. Therefore, immunity will not be available to the assessee and he has to litigate the matter as regards merits of the disallowance and also levy the penalty.

In view of above, it can be said that litigation will continue even under the new provisions inserted in the Act.

Prosecution Provisions for Evasion of Tax

Section 276C of the Act provides that if a person wilfully attempts in any manner whatsoever to evade any tax, penalty or interest chargeable or imposable or under-reports his income, he shall, without prejudice to any penalty that may be imposable on him under other provisions of the Act, be punishable:

(i) In a case where amount sought to be evaded or tax on under-reported income exceeds ₹ 25 lakh, with rigorous imprisonment for a term which shall not be less than 6 months but which may extend to 7 years and with fine;

(ii) In any other case with rigorous imprisonment for a term which is not less than 3 months but which may extend to 2 years and with fine.

The Explanation to section 276C specifies the scope of the term “wilful attempt to evade any tax, penalty or interest chargeable or imposable under this Act” and provides that it will include the case where any person:-

(i) has in his possession or control books or other documents containing false entry; or

(ii) makes or causes to be made any false entry in the books or documents; or

(iii) wilfully omits or causes to be omitted any relevant entry; or

(iv) causes any other circumstances which will have the effect of enabling such person to evade any tax, penalty or interest.

As a matter of principle a person is liable for prosecution for an offence only when he has committed an offence with conscious mind and with mala fide intention. In other words, there should be mens rea in committing the offence.

Section 278E of the Act, however, provides that in any prosecution for an offence under the Act which requires a culpable mental state on the part of the accused, the Court shall presume the existence of such mental state, but it shall be a defence for 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. The section further provides “culpable mental state” includes intention, motive or knowledge of a fact or belief in, or reason to believe a fact. Sub-section (2) further provides that for the purpose of this section, fact is said to be proved only when the court believes it to exceed beyond reasonable doubt and not merely when its existence is established by a preponderance of probability.

The scope of section 278E of the Act came up for discussion before the Hon’ble Supreme Court in the case of Prakash Nath Khanna v. CIT (2004) 266 ITR 1 (SC) in the context of prosecution proceedings u/s. 276CC of the Act which was for the failure to file return of income. The Hon’ble Court observed that in terms of section 278E the court has to presume the existence of culpable mental state. Absence of such mental state can be pleaded by the accused as a defence. The aspect whether the accused has been able to prove absence of such mental state will depend upon the facts of the case. In the case of Selvi J. Jayalalithaa v. ACIT (2007) 290 ITR 55 (Mad.) wherein the Constitutional validity of the provisions of section 278E were also challenged. The Hon’ble Court held that provisions of section 278E were not violative of Articles 14, 20 and 21 of the Constitution merely for the reason that section presumes the culpable mental state of the assessee.

In this regard, reference can also be made to the provisions of section 277 of the Act which provides for prosecution in a case where a person makes a statement in any verification under the Act or delivers account or statement which is false or which he knows or believes to be false or does not believe to be true. As per above, section also provides for rigorous imprisonment of not less than 6 months which may extend to 7 years and also with fine, in case the amount of tax which would have been evaded exceeds ₹ 25 lakh and of not less than 3 months, which may extend to 2 years and with fine in other cases. Reference can also be made in this regard to section 279 of the Act which provides that prosecution proceedings shall be launched only with the previous sanction of the Pr. Commissioner or Commissioner or Commissioner (Appeals) or the appropriate authority. Sub-section (2) further provides that an offence can also be compounded by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General either before or after the institution of proceedings. In this regard, CBDT has issued guidelines from time-to-time for compounding of offence on payment of compounding fee and other charges.

Section 278B provides that in case of a company, firm or AOP/BOI every person in charge and responsible for the conduct of business shall be deemed to be guilty of the offence. Company shall be punished with fine and other person with punishment as per provisions of the Act. Further, Section 278C provides that in case of HUF, Karta and also any other member, with whose consent and connivance default has been committed, shall be deemed to be guilty.

With a view to elaborate and understand the scope of above provisions of Income-tax Act, broad legal propositions are being discussed hereunder with reference to relevant case law.

Person with whose consent and connivance default has been committed

In the case of Om Prakash Katyal and Ors. v. Union of India (2009) 310 ITR 174 (Patna), it was held that the Director or person who was not involved in day-to-day activities and was not responsible for the act, could not be prosecuted. In the case of Sri Kumarasagaran Chinniah v. ITO, Cr. Petition No. 6577 of 2015 decided on 
1-10-2015 by Karnataka High Court, it was held that since the petitioner was non-executive director and was not involved in day-to-day activities, he could not be prosecuted. In the case of Union of India v. Nalinidevi and Anr. (2008) 304 ITR 382 (MP) also the High Court held that the partner who was not playing active role in the business of the firm could not be considered liable for prosecution.

Law as on date of default is applicable

In the case of Punjab Business and Supply Co. Pvt. Limited and Anr. v. ITO and Anr. (1991) 188 ITR 550 (P&H), it was held that law as on date of default is applicable.

Sanction for launching of prosecution

It was held by Hon’ble Supreme Court in the case of Mansukhlal Vithaldas Chauhan v. State of Gujarat (1997) 7 SCC 622 (SC) that:

(i) The order of sanction must ex facie disclose that the sanctioning authority had considered the evidence and other material placed before it.

(ii) The sanctioning authority has to apply its own independent mind.

(iii) Discretion should be shown to have not been effected by any extraneous consideration.

(iv) Sanction is a weapon to ensure discouragement of frivolous and vexatious prosecutions and is a safeguard for the innocent but not a shield for the guilty.

It has also been held by the Supreme Court in the case of ACIT v. Velliappa Textiles Ltd. (2003) 263 ITR 550 (SC) that Act does not provide that the Commissioner has to necessarily afford an opportunity to be heard before deciding to initiate proceedings and absence of an opportunity to be heard will not make the order of sanction void or illegal. The Hon’ble Supreme Court has also held in the case of Superintendent of Police (CBI) v. Deepak Chowdhary and Ors. AIR 1996 SC 186 that grant of sanction is an administrative function and, therefore, it does not require an opportunity of hearing should be given to the accused before granting the sanction.

In the case of Krishnaswami Vidhyakumar v. PCIT (2018) 404 ITR 442 (Mad.) sanction was given by Pr. DIT, who was not included at the relevant time in the Authorities who were empowered to grant sanction and therefore, it was held that he could not grant the sanction.

Circumstances in which Commissioner cannot grant sanction

As per Section 279(1A) sanction for prosecution will not be granted by Commissioner in a case where penalty imposed or leviable on the assessee u/s. 270A or 271(1)(iii) of the Act has been reduced or waived by an order u/s. 273A.

Prosecution will not be sanctioned against a person who has attained the age of 70 years in view of Circular of CBDT dated 7-2-1991. It has been held in the case of Pradip Burman v. ITO (2016) 382 ITR 418 (Del.) that in the facts of that case the petitioner had not reached the age of 70 years at the time of committing the offence and, therefore, prosecution proceedings could be initiated.

Whether proceedings can be launched even before completion of assessment proceedings

It has been held by the Supreme Court in the case of P. Jayappan v. ITO (1984) 149 ITR 696 (SC) that assessment proceedings and criminal proceedings are independent proceedings. Accordingly, criminal proceedings can be launched even before completion of assessment proceedings. In that case reassessment proceedings were pending at the time of institution of criminal proceedings. It was observed by the Hon’ble Court that the Court will, however, have the discretion to postpone or drop the proceedings if in its view disposal of any proceedings under the Income-tax Act which have bearing on the proceedings before it is imminent.

Relevance of findings in appeal on merits in criminal proceedings

In the case of Uttam Chand v. ITO (1982) 133 ITR 909 (SC), the Hon’ble Supreme Court held that once the Tribunal has held in the facts of the case that the firm was a genuine firm prosecution proceedings could not be launched on the basis that the firm was not genuine. Similarly, in the case of Yogendra Prasad and Others v. State of Bihar and Ors. (2009) 309 ITR 28 (Patna), it was held that once the liability determined on assessment was set aside by the Tribunal, prosecution proceedings for non-payment of tax could not be sustained. Similarly, in the case of G. L. Didwania v. ITO (1997) 224 ITR 687 (SC), it was held that if the allegation against the assessee that he has made false statement in the return has been set aside by the Tribunal, criminal proceedings on that ground cannot be sustained. Similarly, in the case of K. C. Builders v. ACIT (2004) 265 ITR 562 (SC), it was held that if the addition made in the assessment order is deleted, penalty cannot stand and subsequently prosecution for evasion of tax cannot be proceeded with. Allahabad High Court in the case of Kohli Brothers Colour Lab (P) Ltd. v. UOI vide its judgment dated  20-7-2017 in Petition No. 2480 of 2006 held that once the penalty imposed has been set aside by the Tribunal, criminal proceedings does not survive. To the same effect are the decisions in following cases.

  • M/s. Raj Bricks Field and Ors. v. ITO, CRR No. 440 of 2002 decided on 5-2-2002 (P&H).

  • ITO v. Nandlal and Co. & Vishram & Ajayprakash & Veer Radios (2012) 341 ITR 646 (Bom.).

  • M/s. Prem Tailor and Anr. v. ITO, Crl. Misc. No. M-22921 of 2011 (O&M) decided on 27-8-2012 (P&H).

  • Ashok Kumar Jhunjhunwala v. State of Bihar (2009) 310 ITR 160 (Patna).

  • Harkawat and Company v. Union of India (2010) 328 ITR 624 (MP).

  • Shashi Chand Jain v. UOI (1995) 213 ITR 184 (Bom.).

  • CIT v. Nayan Builders and Developers (2014) 368 ITR 722 (Bom.).

  • CIT v. Dr. Harsha N. Biliangady (2015) 379 ITR 529 (Karn.).

  • Smt. Malti Mishra v. State of Uttar Pradesh and Anr. (2018) 401 ITR 327 (All.).

In regard to the matter, reference can also be made to the decision of Hon’ble Supreme Court in the case of Radheshyam Kejriwal v. State of West Bengal (2011) 333 ITR 58 (SC) wherein it has been held that when a person has been exonerated on merits, criminal proceedings on the same facts and circumstances cannot be allowed. In the case of Vijay Kumar Mallik v. CIT (2017) 397 ITR 130 (Patna), the assessee had claimed that criminal proceedings could not be proceeded with against him since SLP filed by him before the Supreme Court is pending. The Hon’ble Court held that all the lower authorities had decided against him on merits including the High Court and pendency of SLP does not mean that he has been exonerated.

Prosecution proceedings on the basis of abatement

It has been held in the case of Navarathna & Co. v. State (1987) 168 ITR 788 (Mad.) that merely preparing return and statement on the basis of the accounts placed before the Chartered Accountant would not mean that there has been abatement or conspiracy. Therefore, proceedings cannot be launched against the Chartered Accountant.

Power of the Court to reduce punishment

The issue had come up before the Supreme Court in the case of State of Maharashtra v. Jugamander Lal, AIR 1966 SC 940, whether the Court can reduce the punishment in case the section is specifically providing the same. The Court held that using the expression “shall be punishable” the legislature has made it clear that offender shall not escape the punishment. Accordingly, the Court cannot reduce or do away with the punishment provided under the law. In the case of Modi Industries Ltd. v. B.C. Goel (1983) 144 ITR 496 (All.) also the Hon’ble Court held that Court has no power to reduce the punishment prescribed by the statute. In the case of Satwant Singh Mehta v. ITO 2017 397 ITR 45 (P&H), the facts were that the assessee was convicted and sentenced to undergo rigorous imprisonment for a period of two years in the case filed for one assessment year. The assessee was also convicted in the case filed for another assessment year and both the sentences were ordered to run concurrently. In these circumstances, the Hon’ble High Court reduced the sentence in the second case by the period for which he had already undergone the sentence.

If two views are possible as regards prosecution on the basis of evidence and material, prosecution is not warranted.

It has been held in the case of K. Prakashan v. P. K. Surenderan (2008) (1) SCC 258 that in case the lower Court has acquitted the person on the basis of evidence, Appellate Court will not reverse a judgment of acquittal only because the another view is possible on the basis of same evidence. Similarly in the case of UOI v. Bhupendra Singh (2009) 318 ITR 270 (MP), the High Court held that Appellate Court could not reverse the order of acquittal if the same is based on evidence on record and the view taken is a possible and reasonable view.

In conclusion, it is stated that subject of penalty and prosecution even in relation to concealment of income and evasion of tax is very vast and has multiple issues involved therein. Only main issues concerning therewith have been discussed herein.

[Source : Paper printed in Paper Book of National Tax Conference, Thane, held on 6th & 7th October, 2018]

  1. Tax Laws

Tax laws are complicated, complex, highly technical and beyond understanding of a commoner. Interpretation of tax laws is very much painful and difficult. Lately, there has developed a tendency to amend tax laws frequently and retrospectively. It is not a healthy sign. It is immoral and unethical. It does not very much affect the national exchequer, but puts a greater injury to a citizen of this great democracy. It shakes faith of the tax payers in tax laws and prompts them to resort to unethical practices.

1.1 Tax, Corporate and regulatory laws are strict. Frequent amendment of the Act and the Rules and a plethora of decisions of the Honourable Supreme Court, High Courts and Tribunals apart from instructions, directions and circulars of the competent authorities have been noticed. Conflicting views are expressed by various High Courts and it takes long years to have an authoritative interpretation. Retrospective amendment is made to nullify the effect of the interpretation of the Supreme Court. There appears a tug-of-war between the legislators and the judiciary, crushing honest tax payers.

1.2 Language is not simple and understandable. There are “Explanations”, “Provisos”, “Subject to”, “Notwithstanding anything contained in”, deeming fictions, provisions/phrases which lead to litigation. Such provisions are impacting the ease of doing business and cause impediments in free trade. Predictability and certainty is absent. Discretionary power vests with the tax administrators. There are apparent and patent conflicts, overlapping, different interpretations and convergence in tax laws, inviting long drawn litigation at all levels, with waste of time, energy, money and uncertainties.

  1. Changes

“The Indian Income-tax Act, 1922” simple, short and easy to understand, was replaced by highly complex, complicated and bulky “The Income-tax Act, 1961” with 298 sections, sub-sections, clauses, sub-clauses, provisos, explanations, 14 schedules, rules, regulations, circulars, instructions, etc. That apart frequent massive amendments, insertions, alterations, deletions by the amending Acts and annual Finance Act, many with retrospective effect from 1962. Chapter XXI has been inserted conferring power to impose 35 types of penalties on non-compliance and technical defaults. Tax payer has been loaded with a burden to submit statements and information. Tax, however, with passage of time rate of tax has been made moderate to 30% and with deductions, allowances, etc. net rate may reach 22% only. Now remains only income-tax with interest, surcharge and power to levy penalty, fees, collection and recovery and prosecution. Provisions relating to Tax Deductions at Source have been widened with liability to collect treating as “assessee-in-default” with interest, penalty and disallowance of the expenditure u/s. 40a(ia). Sections 285 and 285A have been inserted and expanded requiring furnishing of information or statement or documents, with an intention to cross-check. Section 44AB for compulsory audit has been made stricter requiring extensive scrutiny, examination, information, verification, certification etc. Efforts have been made to streamline, but compliances and obligations have increased tremendously. Returns, appeals etc., are online. Refunds for smaller amount is automatic and with expedition. But records are in a mess and rectifications are not automatic and smooth. One has to rush before battery of officers and human face could not be eliminated. For some assessments a tax payer may have to appear and satisfy multiple assessors.

2.1 "One Nation – One Tax" – Namely "Goods & Services Tax" has been introduced from 1st July, 2017, along with GST rules. In the GST regime, the Union and the States including Union Territory with legislature will concurrently levy Central GST (CGST) and State GST (SGST), Union Territory (UTGST) on inter-state supply of goods or services while Union will have exclusive power to levy Integrated GST (IGST) on inter-state supply and also on supply in the course of import into the territory of India. GST subsumes all existing taxes and duties on goods and services except certain items. Certain essential goods have been exempted. 5 multi-taxed basic rates @ 0%, 5%, 12%, 18% and 28% have been made applicable. Power to reduce vests with the States. Law is simple but compliances are cumbersome and online, within specified period. One may have to obtain several registrations with obligation to file returns monthly / annually and payment of taxes, assessments, audit etc. Some returns are to be filed within a few days of next month. Sale invoices have to be in the prescribed format. There would be phenomenal rise in the cost of compliance. Small traders would suffer the pinch. However, if efficiently administered would cut-down prices by 1 to 2%. Anti-profiteering provision would take care of the consumers. In my view it should have been levied and collected by Union as income-tax and distributed between the various States. That would have been better for the tax administrators and the stake-holders. Its wings are expanding.

2.2 The Modi Government gave golden opportunity to declare under “Income Declaration Scheme, 2016” on payment of 45% by way of tax, interest and penalty and bring 55% in the normal channel with all immunities, even from Benami Transaction Prohibition Act, apart from facility of making payment by instalments, with net tax effect of 41% and odd. Tax payers had become daredevils and very few sensible persons availed of it. It proved as an utter failure and was an ‘illusion’. The tax payers were under the bona fide belief that as and when they want to convert black to white, would pay advance-tax, deposit in bank, declare in the regular return and tax liability would be only 30% with no penalty. The tax payers were under ‘delusion / confusion’.

2.3 The Taxation Laws (Second Amend) Act, 2016 with effect from 1-4-2017 substituted existing Section 115BBE providing tax on incomes referred to in section 68 or section 69, 69A, 69B or 69C or 69D of the Act from 30% to 60%, with no set off of any loss. In view of the declaration that bank notes of denomination of ₹ 500 and ₹ 1,000 ceased to be legal tender with effect from November 9, 2016, it gave an opportunity to pay tax with heavy penalty so that the remaining part of the declared income legitimately comes into the formal economy. The amendments to section 271AAB and the introduction of sub-section (1A) provide to that end that, in a case where search has been initiated under section 132 on or after December 15, 2016, the assessee shall pay by way of penalty 30 per cent of the undisclosed income of the specified previous year, if the assessee in a statement under section 132(4), admits the undisclosed income and specified the manner in which such income has been derived and on or before the specified dates pays the tax, together with interest, if any, and furnishes the return of income for the specified previous year declaring such undisclosed income therein. In other cases the penalty shall be at 60 per cent. Thus in search cases the liability for tax, interest, surcharge and penalty may be 143.25% of undisclosed income (Tax 60 % + Surcharge 15% + Cess 2.25 % = 77.25% + Penalty u/s. 271AAC – 6% + Penalty u/s. 271AAB(1A) – 60%), apart of hanging the sword of prosecution. It may be ‘confiscatory’, but valid and legal as evasion of tax is a social crime. Evaders have no sympathy. It is terrorism. Tax payers must come to senses.

2.4 In order to achieve the object of ‘less cash’ transactions, section 40A(3) was amended reducing the amount payable to ₹ 10,000/- instead of ₹ 20,000/- in a single day to a person. A new section 269ST has been inserted by the Finance Act, 2017 with effect from April 1, 2017, i.e., applicable for assessment year 2017-18 and subsequent years, whereby no person shall receive an amount of ₹ 2 lakh or more, in aggregate from a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account. Some exceptions have been provided. To make this section effective, penalty for failure to comply with the provision has been provided u/s. 271DA, in a sum equal to the amount of such receipt.

2.5 A fourth proviso to sub-section (1) of section 153A was inserted by the Finance Act, 2017 with effect from April 1, 2017, i.e., applicable for assessment year 2017-18 and subsequent years, to provide that notice under the section can be issued for an assessment year or years beyond the sixth assessment year already provided up to the tenth assessment year if (i) the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income which has escaped assessment amounts to or is likely to amount to ₹ 50 lakh or more in one year or in aggregate in the relevant four assessment years (falling beyond the sixth year); (ii) such income escaping assessment is represented in the form of asset; (iii) the income escaping assessment or part thereof relates to such year or years. The amended provisions of section 153A shall, however, apply where search under section 132 is initiated or requisition under section 132A is made on or after April 1, 2017.

2.6 To stop circulation of black / corrupted money, to eliminate fake currency and to check its use in terrorism activities, strongman – Shri Narendra Modi – declared demonetisation at 8.00 p.m. on 8th November, 2016, declaring existing 500 and 1000 rupee currency notes as illegal tender from 9th November except for specified purposes. The old currency to be converted into new currency by banking channels up to December 30, 2016. The Specified Bank Notes Cessation of Liabilities Ordinance, 2016 was promulgated on December 30, 2016. Many traders accepted old currency from 8th night and onwards showing invoices for sale in earlier dates and deposited in the Banks with connivance of bank officials. Notices have been issued and the assessees have been required to disclose cash amount deposited from 9th November and onwards. The income-tax officials are well-equipped to make scrutiny, examination, verification and if unsatisfied would deem as income u/ss. 68, 69 etc. with liabilities as above stated. It has caused ‘threats’ and ‘turmoil’.

2.7 Prevention of Corruption Act failed to book corrupt and prosecute successfully. Modi Government amended “Prohibition of Benami Property Transactions Act, 1988” w.e.f. 1-11-2016. It is very wide and meaning of benami transactions have been expanded. It may be stated that the term “property” for the purpose of benami transaction has been defined very widely and it includes assets of any kind whether movable or immovable, tangible or intangible, corporeal or incorporeal and includes any right or interest of legal documents or instruments evidencing title to or interest in the property. It also provides, in case property has been converted in any other form then the property in converted form or sale proceeds of the same will also be deemed to be benami property. It shall cover all “benami transactions” which are not bona fide transactions. Income-tax Department has been entrusted with the job of initiation and adjudication. Right to confiscate vests in the Central Government apart from prosecution. Special Courts shall try and conclude trial within 6 months. Laloo Yadav’s family and his daughter Meesa have been prosecuted. Necessity would be its efficient and expeditious implementation. Many searches have been conducted by the Enforcement Directorate and prosecutions launched. It is a ‘tragedy’.

2.8 New concept of penalty in cases of “under reporting” and “mis-reporting” of income have been introduced from 1-4-2017 with insertion of Section 270A. On “under-reported income” and “mis-reported income” penalty would be 50% and 200% of such income respectively. Many illustrations and exceptions have been inserted. Immunity from penalty and prosecution in case of “un-reporting” would be available u/s. 270AA on fulfilment of specified conditions. It is advisable for the Authorised Representatives / Return preparers / Chartered Accountants / Tax Advocates to be vigilant, cautious, careful and not casual, while auditing, examination of accounts, supporting vouchers, bank statements, other transactions, etc., and to report carefully and make all possible additions, disallowances while computing true and correct income. Requisite information, disclosure of primary and relevant facts for computing income without concealment or misrepresentation be furnished along with the return or by a separate letter immediately after filing of the return, to avoid penal provisions u/s. 270A of the Act. If for any reason non-reporting is noticed, make application to AO, pay the due tax, do not prefer appeal and seek immunity from penalty and prosecution. Purchase peace.

2.9 Taking undue advantage of Section 10(38), a fairly large number of unscrupulous assessees indulged in shady deals through shell companies, understated purchase price, over-stated sale consideration (unreal) and sought and got exemption from long term capital gains. More than two lakh such companies were detected, resulting in assessment / re-assessment with tax, penalty, interest and some prosecutions. To curb this menace and to put a stop to such abusive acts, to check revenue loss, to discourage diversion of investment in financial assets, the Finance Act, 2018 withdrew the exemption on transfers on and after the 1st day of April, 2018. A new section 112A in the Act has been inserted from 1-4-2018 to provide that long term capital gains arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, shall be taxed at 10 per cent of such capital gains exceeding one lakh rupees. It will be applicable to such long term capital gains, if (i) in a case where long term capital asset is in the nature of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and (ii) in a case where long term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, securities transaction tax has been paid on transfer of such capital asset.

2.10 To regulate housing sector Real Estate Regulation Act has been enacted to curb misuse of funds received on booking of apartments, strict audit by Chartered Accountants, for registration, maintenance of accounts, bank accounts, and heavy interest on delay or default. Prevention of Money Laundering Act was activated and enforced with full vigour and many persons have been roped in, resulting in confiscation of ill earned tax evaded money and assets.

  1. Challenges

The last two years have been years of fear, illusion, delusion, confusion, threats, turmoil, tragedy and terrorism, to weed out black money and corruption, which are anti-social acts. It is advisable for the Authorised Representatives / Return preparers / Chartered Accountants / Tax Advocates / Corporate Advisors to be vigilant, cautious, careful and not casual, while auditing, examination of accounts, supporting vouchers, bank statements, other transactions, etc. and to report carefully and make all possible additions, disallowances while computing true and correct income. Requisite information, disclosure of primary and relevant facts for computing income without concealment or misrepresentation be furnished along with the return or by a separate letter immediately after filing of the return, to avoid penal provisions. If for any reason “non-reporting” is noticed, to purchase peace, pay the due tax and seek immunity from penalty and prosecution. Compliance requirements under GST, Income-tax, Companies Act, SEBI, etc. are fairly large to be complied in very short time and all over the year. Professionals would have to be more attentive, alert and active.

3.1 The assessment is civil liability. Penalty is quasi-criminal in nature and prosecution is criminal. Provisions of search, seizure, rate of tax on undisclosed income, prosecutions etc. have been made more strict and stricter from year to year. It has become an annual phenomena. It is advisable to follow the law, comply the procedure and discharge liability inaccordance with law. Forget about leakages, loopholes and evade due and correct taxes. Create tax culture. Be law abider and not breaker. Tax advisors must function as torch-bearers and encourage, inspire, instigate and advice tax payers to be on the right side. One should be peaceful not hounded by tax collectors. Take caution from provision contained in Section 271J for imposition of penalty and prosecution u/s. 278 for abatement.

  1. Compliances

It is solemn duty of tax payers as also tax administrators to understand intricacies of law, to comply with its provisions and procedure and to act in accordance with law. It is two way traffic. Taxpayer alone is not to be singled out or inflicted with penalty on non-compliance. Tax administration is expected to be respectful and sympathetic towards tax payers. They should also be transparent and accountable and should not abuse or misuse the powers conferred under the Act. To maintain discipline, decorum and to avoid chaos and arbitrariness ‘Judicial Discipline’ has been built-up by the judicial precedents, judge made law. The basic object is to bring in consistency; to avoid unwanted litigation, which is costly and full of uncertainties; to avoid harassment of taxpayers; to eliminate denial of justice and to put a closure to the controversy.

4.1 In Bhopal Industries Ltd. v. I.T.O. (1960) 40-ITR-618 (S.C.), the Supreme Court observed: If a subordinate Tribunal refuses to carry out directions given to it by a superior Tribunal in the exercise of its appellate powers, the result will be chaos to the administration of justice. Such refusal is in effect a denial of justice, and is further more destructive of one of the basic principles in the administration of justice based as it is in this country on a hierarchy of courts. The Supreme Court in Union of India v. Kamlakshi Finance Corporation Ltd. – AIR 1992 S.C. 711 at 712 emphasised : “The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax Laws”. The Apex Court again in Assistant Collector v. Dunlop India Ltd. (1985) 154-ITR-172 stated : “the judicial system works only if someone is allowed to have the last word and that last word, once spoken, is loyally accepted. The better wisdom of the court below must yield to the higher wisdom of the court above”.

4.2 “Judicial Discipline” deserves to be followed religiously and its sanctity must be understood. It is painful that despite plethora of decisions commencing with Bhopal Industries, the AO and CIT(A) and few of the members of the Tribunal are flouting judicial discipline and committing contempt. It is high time that appellate authorities correct the errant authorities with heavy hand. It is being noticed that the Supreme Court and High Courts are taking indiscipline seriously. Recently on 24-4-2018 the Hon’ble Supreme Court in U.O.I. v. Prithvi Singh dismissed the appeal with cost of ₹ 1 lakh. However there remains non-compliance by tax administration.

4.3 The Central Board of Direct Taxes must keep a watch and vigil and take serious disciplinary action against the wrong doers. Malady must go. Law is Supreme – Not the Tax Authorities. Taxpayer and tax authority are on equal footing. Compliance should be on both sides. Non compliant officers should also be dealt seriously and severely. There should be no discrimination. Alas, politeness and normal courtesy upkeep of standards, talent and judicial acumen are becoming things of the past. Unhealthy ego is increasing. One is prone to misuse. One has to be honest to oneself to the greatest possible degree and maintain absolute total integrity, morality and ethics. The phenomena has intensified by continual interference of multiple higher authorities and fixation of target. Taxpayers are fastened with “responsibility”, “obligation” and “duties” – not “rights”, which have become a dream. It is apparent that artificial assessments are framed to create huge unrecoverable paper demand with coercive recovery. Challenges & lack of compliances are on the part of tapayers as well as tax administrators. Taxpayers / tax consultants and tax administrators are two sides of the same coin, if any part is deficient / non-compliant, economy would suffer.

4.4 Such being tax litigation scenario on large number of representations and directions of Commission, section 254(2B) was inserted by Finance Act, 1999 w.e.f. 1-6-1999, which provides : “The cost of any appeal to the Appellate Tribunal shall be at the discretion of that Tribunal”. Statistics show that over 19 years, in negligible few cases cost commensurate with the expenditure, damages, compensation has been awarded by the Tribunal. Even if specific ground is raised and forcefully argued, discretion is not judiciously and judicially exercised. Even High Courts are slow in awarding cost / exemplary costs. However, it is heartening to note that some Benches of the Tribunals, High Courts and Supreme Court finding uncurable malady have started awarding token cost. It is high time to realise “Professional Social Responsibility”. Be an active partner in building the nation. Serve the taxpayers faithfully and carry them to the right path. Be prepared for it.

[Source : Article printed in Paper Book of National Tax Conference, Thane, held on 6th & 7th October, 2018]