Query: Liability in case of co-operative commercial society

The querist is premises co-operative society. It has industrial galas and members carry on commercial activity in the same. It is considering itself as exempt from GST on the ground that the monthly maintenance charges are less than ₹ 7,500/- p.m. per member. The society (Querist) seeks to know wether the exemption claimed is correct and if not, the incidental issues may be answered as specified below.


Issue 1. Querist is not charging GST as Maintenance charges are below ₹ 7500/- per month, per member. The actual Maintenance charges are ₹ 2750/-. Issue is, whether Exemption of GST available to Commercial Society or Not?

Reply 1: The exemption of ₹ 7500/- per member, per month is available in respect of Co-operative Housing Society. This is clear from relevant entry.

The relevant entry is entry 77 in Notification No.12/2017 -Central Tax (Rate) dated 28.6.2017.

The said entry is reproduced below for ready reference.

Sl. No.

Chapter, Section, Heading, Group or Service Code (Tariff)

Description of Services




Heading 9995

Service by an unincorporated body or a non- profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution –

(a) as a trade union;

(b) for the provision of carrying out any activity which is exempt from the levy of Goods and service Tax; or

(c) up to an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex.

(Subsequently ₹ 5000/- changed to ₹ 7500/-)



As per clause (c), the exemption of ₹ 7500/- is restricted to housing society or Residential Complex.

Having this clear position, exemption of ₹7500/- is not available to industrial premises co-operative society, as the said society is a premises society and not housing society.

Issue 2. If GST is to be paid for past period, whether GST has to be paid along with interest and penalty?

Reply 2: Paying voluntarily before any notice is issued will save Querist from penalty. In other words paying tax and applicable interest voluntarily will be advisable and penalty will not be applicable.

Issue 3. Now, Querist Society has decided for Major Repair work of whole building and Querist has to pay huge amount of GST on Major Repairs expenses. Can the Querist get credit of GST paid on Major Repairs of the building or tower repairing? Such credit can be carried till what time?

Reply 3: Yes. Tax paid on repair/ maintenance is eligible for ITC. However, such expenses should be debited to Income & Expenditure A/c as expenses and should not be capitalised in Building A/c etc..

ITC can be used without limitation of time and it can be used till it is exhausted.

Issue 4. If applicable and Querist charges GST on the Maintenance charges to members, being a commercial society, whether GST paid on Maintenance and Repairs is allowed as input credit or not?

Reply 4: Yes, as stated above, ITC is available on repair/ maintenance expenses. Credit so available on repair expenses can be utilised till it gets absorbed. There is no time limit on use of same.

ITC in credit ledger can be used for discharge of any outward liability.

Issue 5. Input Credit will be adjusted without any time period? Or Querist has to utilize in same financial year?

Reply 5: The ITC can be used for any future period till it gets fully exhausted. There is no time limit for use in same financial year etc..

Issue 6. Whether credit of GST on Major Repairs can be adjusted against liability on rent received for Mobile Tower or not?

Reply 6: Yes. The ITC on major repairs can be used against liability on tower rent.

Issue 7: If GST is paid by Querist on maintenance charges, can recipient members get input credit of GST amount in current period?

Reply 7: The GST charged for period from 1.4.2020 to 31.3.2021 will not pose any problem in claiming the ITC by recipient members as it will be before September, 2021. The issue may arise for the period prior to 1.4. 2020. Normally, the credit can be taken for year ended 31.3.2020 till due date for filing return of September, 2020. For period from 1.4.2019 to 31.3.2020, Querist will be required to collect GST by issue of Debit note in current period. There is debatable issue in respect of claiming ITC based on debit note.

Section 16(4) of CGST Act is amended from 1.1.2021. The amended section 16(4) reads as under:

“16. Eligibility and conditions for taking input tax credit.

‘(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.”

Based on amended section, it is believed that the ITC can be claimed as per Financial year of debit note, irrespective of year of invoice. As per above view since debit notes are raised in current period the credit can be taken in current period.

However, recently the Gujarat AAR has given Advance Ruling in case of M/s. I-TECH PLAST INDIA PVT. LTD. (2021-VIL-205-AAR) in which it is held that the debit note is to be related to year of invoice, irrespective of above amended position of section 16(4) of CGST Act. According to same the ITC to be taken as per time limits applicable to period of invoice and not as per period of debit note.

The Advance Ruling is not binding on other cases. However, it has persuasive value and the department authority may follow the same.

The net result is that the position is debatable. However, I am of opinion that the recipient can take ITC as per period of debit notes and if at all any issue arises it can be contested based on above amended position. With respect, Gujarat AAR may be reconsidered in future.

Issue 8. What is the interest and penalty amount for non-payment of GST as above?

Reply 8: If paid voluntarily before issue of notice, there will not be question of penalty. However the interest will be payable @ 18% p.a.

Here also there is debatable position. One can take a view that since the tax is collected by Debit note in current period and paid in time limit of said period of collection, no interest can be attracted.

However, looking to Scheme of CGST Act, the interest is contemplated from the period in which tax was payable. The tax was payable in respective previous periods. The delay therefore should attract interest. In my opinion the interest is payable. However even if it is not paid in current period, there will not be any issue. Since tax liability is paid the interest gets crystallised as per such date. There is no interest on interest. So even if not paid and department raises any objection in future querist can defend the same as not payable, as per position explained above. If at all interest payable is assessed, the quantum will be same, as payable today and querist can pay the same at that time. If on conservative view querist wants to pay in the return of current period along with tax then interest can not be adjusted against ITC and querist has to discharge the same by cash payment.

Issue 9. Which heads come under GST exemption list like Maintenance charges, Water charges, Electricity charges, Sinking Fund, Non Occupancy charges, & Interest and penalty for late payment by members, Property Taxes, Equitable charges as per the Bye Law, etc?

Reply 9: Water charges, property tax will be out of levy of GST. Electricity is not charged separately hence it will get merged in maintenance charges and will be liable to GST.

In respect of sinking fund, there are two views, one saying the same being advance against future repair, it is taxable. The other view is that it is in nature of deposit and hence tax to be paid as and when used towards services.

In my view, taking conservative view, it will be better to charge GST on sinking fund. The recipient will be entitled to ITC, hence no actual burden on members. Other items are liable to GST.

Query No. 1

In case of Trust Registration under section 10(23C) or may be under section 12AA and wanting approval under section 80G will have to file form no. 10A twice? i.e. once for the trust registration and another for section 80G?


It depends upon the Fact. The Finance Act 2020 inserted a new clause (ac) in section 12A(1) of the Income tax Act, 1961 with effect from April 01,2021.

Further, a new Notification No. 19/2021 dated 26-03-2021 has been issued to give effect to procedure for application of the clause (ac) of section 12A(1) of the Income Tax Act.

Clause (ac) of sub-section (1) of section 12A of the Income Tax Act states that notwithstanding anything contained in clause (a) to (ab), the person in receipt of the income who intends to claim benefit of section 11 & 12 is to make application in prescribed form to PCIT or CIT for registration of the trust. The forms as prescribed for this purpose are Form No. 10A & 10AB. In simple words, every trust who intends to claim benefit u/s 11 & 12 shall make application in Form No. 10A or 10AB, as the case may be, to PCIT or CIT for registration of trust. The procedure for registration was earlier specified in section 12AA. However, section 12AA has been withdrawn now and section 12AB has now been inserted for making effective the registration procedure of trusts. Thus, all trusts which were earlier registered u/s 12A or 12AA shall now have to obtain fresh registration u/s 12AB.

The time limits for registration under section 12A(1)(ac) and section 12(AB) are as under:

Sub-clause of clause (ac) of section 12A(1)

Category of Entity

Time limit for filing application for registration

Applicable Form


Trusts or institutions which are having existing registration u/s 12A or 12AA (Migration from section 12A/12AA to section 12AB)

Within 3 months from 1st April, 2021 i.e. up to 30th June, 2021

Form 10A


Trusts or institutions which are registered under section 12AB and the period of the said registration is due to expire

Atleast 6 months before the expiry of the said period

Form 10AB


New trusts or institutions which have been granted provisional registration under section 12AB (Trusts opting for provisional to final registration for 5 years)

Atleast 6 months before the expiry of the provisional registration or within 6 months of commencement of its activities, whichever is earlier

Form 10AB


Trusts or institutions whose registration has become inoperative due to first proviso to section 11(7) of the Act. Registration u/s 12A or 12AA shall become inoperative from the date on which the trust or institution is granted registration u/s 10(23C)

At least 6 months before the commencement of the assessment year from which the said registration is sought to be made operative

Form 10AB


In any other case (including fresh provisional registration or claiming approval u/s. 80G)

Atleast 1 month before commencement of the previous year relevant to assessment year from which the said registration is sought

Form 10A

What is the validity period of registration under section 12AB

In case of trusts or institutions which are having existing registration u/s 12AA shall apply for registration u/s 12AB online by June 30, 2021 in Form 10A. The validity of registration u/s 12AB shall be for 5 years. However, provisional registration shall be granted for a period of 3 years.

For this purpose, CBDT has issued vide aforesaid Notification making it mandatory for all the trusts/ societies/institutions registered under section 12A and 80G to obtain fresh registration. So, if he trusts / societies / Institutions apply for new registration under section 12AB or migration from section 12A/12AA to section 12AB alongwith obtaining approval under section 80G then, they may apply simultaneously in Form no. 10A.

Query No. 2

The AO had issued refund by mistake on regular assessment. Now he has issued notice under section 154 of the Act, to rectify the mistake, by way of demanding the amount with interest, whether can he charge interest, if yes under which section?


The accrual of interest is automatic under section 220(2) of the Act, and it is made more specific in section 220(3) which provides that the power to grant extension of time for payment of tax in installments would be without prejudice to the levy of interest under section 220(2).

The Karnataka High Court in Biyer Rubber (P) Ltd vs. ACIT [241 ITR 877] has explained that, the nature of interest is compensatory and therefore, the liability which has been created by the statute in respect of “tax, interest and penalty” has to be discharged within the time specified in the notice of demand and any non payment or late payment thereof has to be compensated by paying the interest as provided under section 220(2). If parliament has competence to levy interest for non payment or late payment of tax, then, after the liability is determined, if certain amount of interest is payable, the power to recover and make a provision for levy of interest for non payment of such amount is ancillary and incidental to the main power for levy of tax. Section 220(2) is not violative of article 14 and 19(1)(g) of the constitution. Section 220(2) is valid.

Thus interest on refund could be charged only after complying sub section(2) of section 220 by the AO. Section 220(2) reads as under:

“If the amount specified in any notice of demand under section 156 is not paid within the period limited under sub- section (1), the assessee shall be liable to pay simple interest at one per cent for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in sub- section (1) and ending with the day on which the amount is paid:”

Query No. 3

On the following facts, when TDS has to be deducted?

  • Stamp Duty paid on March 30, 2021

  • Agreement executed on March 31, 2021

  • Agreement Register on April 15, 2021.


Section 195(1) reads as under:

“Any person responsible for paying to a non- resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head” Salaries]) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or ‘by any other mode, whichever is earlier, deduct income-tax thereon at the rates in ‘force”:

Thus it depends upon the fact whether account of the payee is credited first or payment is made first. On the basis of which tax has to be deducted.


  1. Mutuality Concept

Facts : The applicant is a club is and a non-profit organization established by the British in the year 1868 as a literary and scientific society. The members contribute by way of subscription fees and infrastructure development fund which is used for the purposes of provision of services and goods and a reading room, library, chambers for accommodating family and guests, a bar and sports facilities. The applicant outsources catering services who supply foods and beverages and run a super market within the premise of the applicant. These facilities are only available for use by the members. These outsourced agencies charge GST on their supplies of food, beverages and sale of goods to members. The applicant bears the cost of such goods and services from the subscription fees paid by the members.

The applicant sought advance ruling on the following questions:

  1. Whether amount collected as membership subscription fees paid by the members of the applicant towards facilities provided by the applicant are liable as supply of service under GST?

  2. Whether amount collected as infrastructure development fund for the development and maintenance of the facilities provided by the applicant are liable as supply of service under GST?

Observations & Findings : We have considered the submissions made by the applicant in their application for advance ruling. We also considered the issues involved, on which advance rulings are sought by the applicant, relevant facts and the applicant’s interpretation of law.

We observe that the Hon’ble Supreme Court judgment in the case of M/s. Calcutta Club Limited [AIR 2019 SC 5310] is fully applicable on the applicant. We also observe that Section 108 of Finance Act 2021 brought in a retrospective amendment in Section 7 of CGST Act, 2017, which is reproduced below:

  1. Amendment of section 7.

In the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the Central Goods and Services Tax Act), in section 7, in sub-section (1), after clause (a), the following clause shall be inserted and shall be deemed to have been inserted with effect from the 1st day of July, 2017, namely:-

“(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

Explanation.-For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;”.

Ruling : The applicant is not liable to pay GST on subscription fees and Infrastructure development fund collected from the members and this ruling is subject to the amendment to the CGST Act by section 1 of the Finance Act 2021, as and when it is notified.

[2021 (4) TMI 1112 – AAR, Karnataka – M/s Bowring Institute]

  1. Reverse Charge Mechanism /Rate of tax

Facts : The applicant is engaged in the business of sand mining and have been granted mining lease for extraction of sand at Basti District. The said product is classifiable under tariff heading 2505, leviable to GST @5%. During the lease period of five years the applicant has to pay lease rent as per mutually agreed terms and conditions.

The applicant has sought an advance ruling on the following questions:-

  1. What shall be the classification of service provided by the Government of Uttar Pradesh to M/s. Ajay Kumar Singh in accordance with the Notification No. 11/2017-CT (Rate) dated 28.06.2017 read with annexure thereof.

  2. Whether the said service can be classified under Chapter number 9973 as “Licensing services for the right to use minerals including its exploration and evolution” or any other service under the said chapter.

  3. What shall be the rate of GST on given services provided by the Government of Uttar Pradesh to M/s. Ajay Kumar Singh for which royalty is being paid.

Observations & Findings : The liability of payment of GST liability on the amount of royalty paid to the Government is on the Service recipient i.e. the applicant in the instant case, in terms of Sl. No. 5 of Notification No. 13/2017 -Central Tax (Rate) dated 28-06-2017.

Mining lease service granted by Government, on payment of royalty as applicable, there is transfer of right to exploit the minerals lying under the lease hold area and to appropriate the exploit. On examining the aforesaid nature of the service being received by the applicant vis-a-vis classification of service, the impugned service received by the Applicant from the State Government merits classification under the head “Licensing services for the right to use minerals including its exploration and evaluation” at Serial No. 257, Heading 9973, Group 99733.

On reading of the Notification No. 27/2018-Central Tax (Rate) dated 31.12.2018 and Minutes / Agenda / Proposal/ Discussion of the GST council, we are of the view that the service received by the applicant from State Government is liable to be taxed @ 18%.

Ruling : The service under the question would be classifiable under “Licensing services for the right to use minerals including its exploration and evaluation” at Serial No. 257, Heading 9973, Group 99733, sub heading 997337 of “annexure: Scheme of Classification of Service” to the Notification No. 11/2017-C.T. (Rate) dated 28.06.2017 (as amended) and attracts 18% GST.

[2021 (3) TMI 643 – AAR, Uttar Pradesh – M/s Ajay Kumar Singh]

  1. Taxable Supply

Facts : The applicant is providing services such as loading, unloading, packing, storage or warehousing of Agricultural produce including wheat that are being imported by any importer or trader through the Karaikal Port.

The applicant have filed an application seeking an Advance Ruling on “Whether exemption provided in SI.No.54(e) under Heading 9986 of GST Notification No.12/2017-Central Tax (Rate) dated 28.06.2017 while rendering services such as loading, unloading, packing, storage or warehousing of imported agricultural products including wheat, to any importer or trader.’

Observations & Findings : On perusal of the Notification 12/2017 Central Tax (Rate) dated 28.06.2017, it is clear that for getting eligibility for exemption under SI.No.54 (e) covered under Heading 9986 the services of loading, unloading, storage or warehousing have to fulfill the conditions mentioned therein i.e. the Services need to be relating to cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel raw material or other similar products or agricultural produce.

It is further seen that the term “agricultural produce” has been defined in the same said Notification as below:

“(d) “agricultural produce” means any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products, on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market;”

It is very clear from the agreement, that the applicant is providing the services of loading, unloading, packing, storage or warehousing in respect of the ‘wheat’ which is procured from the farmers from the foreign country and after getting imported into India at Karaikal Port is destined to importer’s factory for further processing and it is not destined to the primary market as required for the services to be classified under sl. No. 54 (e) of Heading 9986 of the said exemption Notification. Therefore, the said services rendered by the applicant in the instant case are not eligible for the exemption under the said Notification.

Ruling : The services of loading, unloading, packing, storage or warehousing rendered by the applicant after the cargo of ‘Wheat’ imported from a foreign country, reaches the Karaikal Port, are not eligible for the Exemption provided in SI.No.54(e) under Heading 9986 of the Notification No. 12/2017 – Central Tax (Rate) dated 28.06.2017.

[2021 (3) TMI 914 – AAR, Puducherry – Karaikal Port P Ltd.]


  1. Composite Supply

Facts : The Appellant is a private limited company having various regional offices in various states. They are engaged in supply of Billboards, Building Wraps, Fleet Graphics, Window Graphics, Trade Show Graphics, Office Branding, In-store Branding, Banners, Free Standing Display Units and Signage Graphics. These products are hereinafter referred to as ‘trade advertisements’. The printing of trade advertisements is carried out by the Appellant on Poly Vinyl Chloride (‘PVC’) material. The various types of PVC material on which printing is carried out are Frontlit Flex, Back Lit Flex, Block out Flex, Vinyl (self-adhesive) and Foam Board, all falling under Chapter 39 of the Customs Tariff Act, 1975 (CTA). The customers desirous of getting images/ written text/ trade monograms printed from them place a purchase order on them. The said purchase order spells out the type and specifications of the material on which the trade advertisement (provided by the customer) is to be printed.

On an application for Advance Ruling, the AAR has ruled as follows:

  1. The printing of content provided by the recipient on the PVC materials of the appellant and supply of printed trade advertising material to the recipient is a composite supply, and ‘Supply of service of printing’ is the principal supply.

  2. The classification of the service is SAC 998912 and the applicable tax rate is 9% CGST + 9% SGST as per Sl.No.27/27 (ii) of Notification No.11/2017 CT(Rate) dated 28.06.2017 & G.O. (Ms)No.72 dated 29.06.2017 No.II(2)/CTR/532(d-14)/2017 for the period 01.07.2017 to 13.10.2017 and thereupon the applicable rate is 6% CGST & 6% SGST as per Sl.No. 27(i) of Notification No. 11/2017- CT(rate) dated 28.06.2017 as amended & G.O.(Ms) No.72 dated 29.06.2017 No.II(2)/CTR/532(d-14)/2017 as amended.

Aggrieved by the above decision, the Appellant has filed the present appeal.

Observations & Findings : The appellant are primarily engaged in printing of trade advertisements in the media required by the recipient. They have stated that they procure the media, on own account, in which the content of trade advertisements provided by the recipient is required to be printed and the final supply of the Trade Advertisement’ is made. The main contention of the appellant is that their supply is a single supply of Trade Materials’, i.e. goods and not composite supply involving goods and printing services, of which ‘Printing service’ is the predominant supply’; that as per the statutory definition of ‘Services’ under the GST ACT, ‘anything other than goods’ are services. Therefore, they contend that primarily, it is to be established that the supply is not that of ‘goods’ and the LA has not stated how their supply is not supply of goods but have gone to state that the supply is a ‘Composite Supply’. They have also contended that even if the supply is considered as Composite supply involving supply of material and supply of printing service, the predominant supply of ‘goods’ in form of trade advertisement is the ‘principal supply’ and printing is ‘ancillary, to the dominant supply of goods in form of trade advertisement.

It is evident from the Purchase Order issued by their clients for ‘Printing’ the ‘Copyrighted Digital Content of the client’ in the desired material. The material blanks’ owned by the appellant are transferred to the client as Trade Advertisement material’ after undertaking Printing of the Content of the client on the blanks. The appellant is vested with and undertakes the printing of the content, the copyright of which rests with the recipient and the copyright always rests only with the client and the appellant do not have any propriety rights to the content. The content is never owned by the appellant, while the property in ‘blanks’ held by the appellant, on printing of the received content is transferred to the client. Thus the appellant do not have the whole propriety right on the final product-trade advertisement material’ supplied by them to their clients. In such a situation, we hold that in the case at hand, in the execution of the printing contract, the property held by the appellant in blanks stands transferred as ‘Trade Advertisement Material’ and therefore the activity is a contract for work or service only and not a contract of sale of goods.

Order : We do not find any reason to interfere with the Order of the Advance Ruling Authority in this matter. The subject appeal is disposed of accordingly.

[2021 (3) TMI 499 – Appellate AAR, Tamilnadu – Macro Media Digital Imaging P Ltd.]

  1. Time and Value of Supply

Facts : The appellant is a Board constituted under Uttar Pradesh Avas Evam Vikas Parishad Adhiniyam, 1965 and entrusted with the work to execute housing and improvement schemes in the State, whether chalked out by itself or by any local authority. Further, as per Section 46 of the Uttar Pradesh Avas Evam Vikas Parishad Adhiniyam, 1965, the applicant may also undertake the execution of any housing or other building project at the request of the State Government on such terms and conditions as may be agreed upon. This work is popularly known as “Deposit Work”.

The appellant receives funds, in advance, for said “Deposit Work”, with certain prefixed conditions such as:

  1. All the money should be used for execution of particular project only and not for any other purpose.

  2. If any interest is earned on the money received for execution of the project, the same will be transferred back in the head of account from which it was drawn.

As per the appellant the said fund received can neither be classified as “Advance Payment” nor as “Loans”, but can only be classified as “Deposit”. Further the appellant can use the funds only in the execution of earmarked project. Accordingly, the appellant submitted an application for Advance Ruling and sought Advance Ruling on the following issues : –

  1. What is the time of supply in case of Deposit Works’ being executed by the applicant-whether it is the time of receipt of funds from the client government department or the time when expenditure incurred towards execution of the work is debited to Deposit Works account’?

  2. What shall be the value of supply in aforementioned two alternatives?

The AAR ruled that:

  1. As regard to the first question it was ruled by the Authority that “The time of supply in case of ‘Deposit Works’ being executed by the applicant will be the time of receipt of funds from the client government department.”

  2. With reference to the value of the supply it was ruled by the Authority that “The value of the supply, on the advance payment received by the applicant, will be the amount of advance received by the applicant towards that particular work/supply.”

Aggrieved with the aforesaid ruling, the appellant filed this appeal application before the Appellate AAR.

Observations & Findings : In respect to the advance received by the appellant, for the said deposit work, is to be treated as “Advance Payment” received for the said work or as “Deposit”, we observe that as per the appellant the money received for the said “deposit work” to be treated as “deposit” in terms of proviso of Sub Section (31) of Section 2 of the CGST Act, 2017 which is as under:-

“Provided that a deposit given in respect of supply of goods or service or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply”

As regard to the appellant’s contention regarding proviso of Sub Section (31) of Section 2 of the CGST Act, we observe that the proviso itself makes it clear that if the deposit are applied towards consideration for the said supply then such deposit will be treated as payment towards said supply. Accordingly, in our opinion, the said proviso envisages a condition wherein the funds are not at all used for the provision of service and in such case no GST will be applicable on it. However, in the instant case the appellant have themselves informed that once any expenditure is incurred towards execution of the earmarked project, the advance amount, received by them, get debited. This itself shows the applicability of GST on the said amount and now the only question left to decide, is the time and value of the supply.

We observe that in term of Section 13 Sub Section 2 (a) and 2 (b), the time of supply of services shall be the earliest of the following:-

  1. the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed, or

  2. the date of provision of service, if the invoice is not issued within the period prescribed, or

  3. the date of receipt of payment.

Coming to the value of taxable supply in case of advance payment, we observe that explanation given in the sub Section 2 of Section 13 of the CGST Act, 2017 provides that-:

Explanation– For the purpose of clause (a) and (b)-

(i) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment.”

From the above discussion we observe that issue has been aptly clarified and the Authority of Advance Ruling has correctly ruled that the value of the supply, on the advance payment received by the applicant, will be the amount of advance received by the applicant towards that particular work/supply.

Order : The Ruling passed by the AAR, Uttar Pradesh, is just and proper and merits no interference.

[2021 (3) TMI 802 – Appellate, AAR, Uttar Pradesh – Uttar Pradesh Avas Evam Vikas Parishad]





[Dr. Dhananjaya & Y. Chandrachud, JJ]

Civil Appeal No.1155 of 2021

Date of Decision: April 20, 2021

Provisional attachment – Power u/s 83 – Draconian power to attach any property but should be exercised considering points like forming opinion before passing order – order ought to be in writing – live nexus should exist between attachment order and protecting interest of revenue – merely cause proceedings are pending or concluded against another party , order of attachment cannot be passed

An appeal is filed before the Supreme Court challenging the orders of provisional attachment issued by the Joint Commissioner for attaching the receivables of the appellants while invoking Sec.83 of CGST Act. It is also questioned if the writ filed for challenging the impugned order was maintainable under Article 226 of the Constitution of India.

The Apex Court has observed that the High Court had erred in saying that the petition is not maintainable as under the GST Act the Appellate Authority can entertain appeals only against order of adjudication authority and not the Commissioner, so the appellant had no other remedy but to file a writ to challenge the impugned order.

The Apex Court has observed that the power of provisional attachment is draconian in nature and in its exercise any property belonging to taxable person including a bank account may be attached. However, certain steps must proceed such an order:

Opinion of the Commissioner should be formed before ordering provisional attachment and it must bear approximate and live nexus to protect the interests of the Govt. revenue. Such an order has to be in writing in observance of the rules on the manner of the attachment by the Commissioner. The exercise of unguided discretion will leave the business activities to the peril of arbitrary power. The Apex Court has held that merely because the proceedings were pending/concluded against another taxable entity, power U/s 83 cannot be attracted against the appellant.








Date of Decision: April 28, 2021

Opportunity of hearing—non compliance of Subsection 4 of Section 74 of CGST Act, 2017—Assessment order is short of compliance of mandatory provision of S. 74(4) of the Act before passing of—Thus set aside for deviation from mandatory provision as well as violation of natural justice

It is argued that the impugned order of assessment should be set aside as it is short of mandatory provision of S 75(4) of CGST Act. As per the said provision, when an adverse action is to be taken against the assessee, an opportunity of hearing is to be provided to the assessee. Therefore, the Hon’ble court has held that since the aforesaid provision was not complied with, the impugned order is set aside for deviating from mandatory provision of law as well as violation of natural justice.






Criminal Miscellaneous Bail Application No. 6304/2021

Date of Decision: May 17, 2021

Bail—Fraudulent ITC—Bogus firms created by petitioner, a CA by profession—Bail denied on account of non appearance in pursuant to show cause notices issued—Absconding for over a year—Mastermind behind the crime—Application rejected

A bail application has been filed by the petitioner a CA by profession, for availing wrongful ITC be creating 38 fake firms. The bail is declined for the reason that the petitioner was absconding for a year; and he is the master mind behind the scam since he is a CA.






Criminal Miscellaneous Bail Application No. 5882/2021

Date of Decision: May 4, 2021

Bail—Fraudulent ITC—Chartered Accountant instrumental in creating bogus firms—Bail granted on account of the fact that the applicant has already been in custody for a period of 1 year 5 months and has a child.

It is contended that petitioner was instrumental in registration of 11 fake firms and availed input tax credit to the tune of ₹ 146 crores. It is also contended that petitioner was aware as he was filing GST returns of non-existent firms. A bail application is filed. Considering that the Chartered Accountant has remained in custody for a period of one year and five months and that petitioner is also having a child, bail is granted on condition of furnishing a bond and sureties.






CRL. O.P. NO. 7672 OF 2021

Date of Decision: April 30, 2021

Bail—Middleman for procuring details of defunct units and getting registration –Fake invoices involved in filing statutory returns—Full awareness of the said act—Cannot take plea of being mere middleman—Not that it has been in custody for a length of time—Nexus with many administrative people cannot be ruled out for which full-fledged investigation is required—bail not granted

The petitioner was acting as a middleman by procuring details of defunct companies for getting them registered. The details were further given to a person to raise fake invoices which were used to file statutory returns. Thus the petitioner has caused huge loss to public exchequer. The offence is cognizable and non bailable u/s 132 of CGST Act.

Dismissing the petition, It is held that the petitioner was well aware that the said credentials were to be used for fake/fraudulent transactions. The petitioner cannot feign ignorance on this aspect. The petitioner cannot absolve himself from the said offence by holding a lifeline that he is only a middleman.

Without his role as middleman, the whole crime could not have been perpetrated. The nexus of many persons within the administrative framework could not be ruled out and a proper investigation is necessary to unearth the larger conspiracy involved behind the above. It is not as if the petitioner has been under incarceration for a long length of time. Hence, the prayer for grant of bail by the petitioner cannot be acceded to.






W.P. (C) 1150/2020 & CM APPL. 3814/2020

Date of Decision: May 27, 2021

Transitional credit—Tran 1—Inadvertent error—Form TRAN 1 filed within prescribed time—Error in filing details—Transitional credit denied thereof—Held by Hon’ble court that a genuine mistake should not lead to extinguishing of right granted under A-300 of the Constitution—Respondents directed to either open online portal for rectification or accept manual documents

Undisputedly, the Petitioners filed the TRAN-1 Form within the prescribed time, however, they were precluded from claiming their transitional credit on account of inadvertent error on their part due to filling in of wrong details or omissions. The Hon’ble court has held that a genuine mistake should not result in the Petitioners’ losing out on their accumulated credit which is protected by Article 300A of the Constitution. Respondents are directed to either re-open the online portal so as to enable the Petitioners to file TRAN-1 Form electronically, or to accept the same manually on or before 30th June, 2021.





[G.R. Swaminathan , J]

W.P.(MD)No.15967 of 2020

Date of Decision: March 8, 2021

Works contract—Enhanced GST rate—Contract between petitioner and respondent municipal corporation envisaged tax component @ 2% and 5% in pre GST era—Contract price stood inclusive of cost, profit and tax—Tax component enhanced to 12% with coming of GST—Reworking of contractual terms required—writ filed—Held that reworking has to be done in terms of paragraph 10(a) of the government order since the bills specified number of items and price of each item separately—moreover government policy envisaged that such additional tax burden to be borne by purchaser and not contractor—Therefore, rework to be done within the period specified in the order—Petition allowed

The petitioner entered into a contract with Tamil Nadu Water Supply and Drainage Board for laying Under Ground Sewerage works. In pre GST regime, the contract mentioned that deduction at source towards sales tax shall be made at 2% for civil works contract and at 5% for all other works contract. After GST Regime came into force, all the works contract for construction activities came to be taxed at 12%. Therefore, it became necessary to re-work the terms of the contract. Hence a writ is filed.

The Hon’ble court has held that this contract price included cost factor, profit margin and tax component (TNVAT and Excise Duty).The Government itself has taken a policy decision that this additional tax burden will have to be borne only by the purchaser and not by the contractor. It can be seen there from that the bill of quantities contains number of items and for each item, the petitioner had quoted a particular rate. Thus, it will not be difficult to arrive at the exact price for each item after deducting the tax component.

The reworking has to be done only in terms of paragraph No.10(a) of the said Government Order and Paragraph No.10(c) of the said Government Order will be applicable only if along with the tender notification, the TWAD Board has also enclosed their schedule of rates. In the case on hand, no such schedule of rates was enclosed.

Hence, the contention of the petitioner that the quotation in the instant case was on itemwise basis is sustained. The respondents are directed to rework the terms of the contract and enter into a revised agreement with the petitioner. The entire exercise shall be concluded within a period of eight weeks from the date of receipt of a copy of this order.






WRIT PETITION No.11168/2018

Date of Decision: June 2, 2021

Vires—Rule 31A(3) of CGST Rules—Petitioner is a race club providing services of a totalisator for money collected through bet and redistributing it to the winner while retaining its commission on the service so delivered—Rule 31A (3) as amended indicates collection of GST on entire bet amount—Vires challenged—Held that neither the said Rule is defined as a taxable event under the Act nor charging section confers any such power—Therefore, Rule 31A(3) is struck down being ultra vires

The petitioner is a company carrying on a business of race club. It conducts horse racing and facilitates betting by the punters. The price money is distributed by petitioners to the winning punter and out of the amount Commission is set apart to be taken by the petitioners.

After the CGST regime began, an amendment was brought into Rule 31A by insertion of Rule 31A(3) to the CGST Rules. The amendment made GST payable by the petitioners on the amount of bet that gets into the ‘totalisator;. It is this amendment that is called in question on the ground that the Rule is made beyond the powers conferred under the CGST Act thereby seeking a consequential declaration that the CGST and KSGST be restricted only to the Commission that the petitioners get on holding the amount in the totalisator for a brief period.

The Hon’ble court has held that the Totalisator is only a system that holds the bet money for a short period in a fiduciary capacity which would be available for distribution among the winner who placed his stake. The totalisator is brought under a taxable event without it being so defined under the Act nor power being conferred in terms of the charging section 9 of the Act.

The issue is answered in favour of the petitioners striking down Rule 31A(3) of the CGST Rules and Rule 31A of the KSGST Rules as being contrary to the CGST Act and hold that the petitioners are liable for payment of GST on the commission that they receive for the service that they render through the totalisator and not on the total amount collected in the totalisator – petition allowed.






WRIT PETITION No.8046/2021

Date of Decision: April 21, 2021

Electronic credit ledger—blocking of—continuance beyond one year of passing of order—Held order of blocking of credit ledger cannot continue beyond one year after imposition of order in light of Rule 86-A(3) of CGST Rules

The petition is filed challenging the blocking of credit ledger and its continuance beyond one year. Without entering into the merits of the order of blocking of the credit ledger, in light of Rule 86-A (3), restriction in blocking of electronic credit ledger cannot be extended beyond one year from the date of imposing it. Therefore, the unblocking of credit to the electronic credit ledger is ordered herewith.






W.P.(MD)No.3855 of 2021 And W.M.P.(MD)Nos.3082 & 3132 of 2021

Date of Decision: March 24, 2021

Bail—offence u/s 132 of CGST Act—observing that petitioner kept in custody for 6 days, remitted a sum towards tax dues, time yet to be taken for completion of investigation—no purpose to be served with re-arrest—interim bail made is therefore, absolute

The petitioner was arrested for the offences u/s 132(1)(a) of the CGST Act, 2017 and Sections 9 and 9A of the Central Excise Act. It is argued that the case of the petitioner falls under the above mentioned sections which is the non cognizable offence. It is observed that the petitioner was kept in the custody for 6 days, remitted a sum towards tax dues. The investigation by the respondents does not appear to be over as yet. Earlier the petitioner was asked to appear before the respondents twice a week. The court has viewed the re-arrest of the petitioner will not solve any purpose interim bail granted to the petitioner is now made an absolute.






W.P.(C) No.15058 of 2021

Date of Decision: June 7, 2021

Condonation of delay—Section 107(4)& Rule 108(3)—Appeal filed within time but rejected on grounds of delayed supply of certified copy of impugned order—Order set aside by Hon’ble Court on grounds of substantial compliance—mere delay in supply of certified copy cannot come in way of justice—explanation tendered is plausible—Courts should be liberal in condoning in these Covid times—petition allowed

The petitioner had filed an appeal before Appellate Authority within the time prescribed, though the certified copy of order appealed against was supplied after 7 days of delay. The appeal was rejected on grounds of delay for not being presented within the limitation period. It is held that difficulties faced in obtaining certified copies are known. Reason for delay ought to have been accepted by the Appellate Authority. Since downloaded copy was submitted within time and the explanation tendered is plausible, mere delay in enclosing certified copy should not come in way of justice. Writ is thus allowed.






W.P. No. 10350 of 2020

Date of Decision: November 11, 2020

Composite scheme—whether applicable to previous year under VAT regime as contemplated u/s 10(1) of GST Act—held while calculating tax liability under section 10(1) of GST Act, turnover of ‘previous year’ is to be taken into account in extending benefit under GST Act– contention of petitioner that previous year being under VAT regime is to be excluded is wrong—intention of legislature to include previous year falling under VAT regime is clear from the word of the clause—therefore, there is no illegality in including the previous year’s turnover—writ is dismissed.

The petitioner had paid tax under composite scheme under section 10(1) of GST Act from the quarter ending September 2017, which postulated payment of 1% of GST on the turnover if turnover for preceding year is less than 50 lakhs. The respondent rejected the claim contending that the turnover for the ‘Previous Year’ under the Vat Regime was about 2 crores and that Tax amounting to 28% from July 1, 2017 was payable. A writ is filed.

The petitioner argues that the word ‘preceding financial year’ has no relevance for taxes paid for the financial year 2017-18 as the provisions of GST Act are not retrospective in operation. Moreover, the turnover after July 2017 is less than 1 crore.

If the intention of the legislature was to exclude the declarations made under VAT Regime, it would have found place in section 10(1) of the Act itself. Therefore, the turnover of the previous year under VAT Regime has to be reckoned for extending benefit under GST Regime. Such a narrow interpretation cannot be given to exclude the tax liability of previous year. Therefore, there is no illegality in taking in to consideration the previous year’s turnover under VAT regime for the purpose of extending benefits under the composite scheme.

It has been seen by one and all mostly the practitioners who are there in the practice from the era of General Sales Tax, Central Excise Act and Customs Act and the Service Tax which first came in 1994, the provisional attachment being there in the relevant statute.

The General Sales Tax Act or the Value Added Tax Act has a provision with respect to provisional attachment which speaks that a provisional attachment may be issued by the officer concerned with the approval of the Commissioner when the proceedings of assessment under the relevant sections are in pendency. The proceedings under the relevant sections are different under the different States enactments.

So far as the Central Excise Act is concerned, Section 11(DDA) deals with provisional attachment to protect revenue in certain cases which speaks of that the Central Excise Officer may attach provisionally for the purpose of protecting the revenue with the prior approval of the Principal Commissioner of Central Excise or Commissioner of Central Excise during the pendency of assessment / adjudication proceedings also specifies the period as 6 months which can be extended by the concerned Commissioners which however shall not exceed a period of two years and this section also speaks of the settlement commission.

Similarly the Customs Act 1961 also comprises of a similar provision i.e. section 28(BA) which is akin to the Central Excise Act except for the officer concerned. So also the Service Tax has also a similar provision i.e. section 73(c) to be invoked by an officer who is acting as service tax officer.

The Income Tax Act also has a section for provisional attachment which speaks of about attaching a property before passing any assessment order and this section is section 281 (1) (B) and its speaks of the assessing officer who may get the approval by the Chief Commissioner or Commissioner as the case may be.

All these sections either under the General Sales Tax Act or under the Value Added Tax law or under the Central Acts i.e. Central Excise Act, Customs Act, Service Tax Act or the Income Tax Acts are very clear and they speak of one thing that the officer has to get permission from the superior authority i.e. the Principal Commissioner or Chief Commissioner with reference to Central Acts and the State Commissioner with reference to the State Acts.

For this purpose, I would like to analyze what is meant by property as defined in the above sections. The word “property” has been defined to mean any property belonging to any person having custody or control of it, or having any proprietary right therein or interest, or having a charge on it. Property means property of a tangible nature, whether real, including money and including wild creatures which have been tamed or are ordinarily kept in captivity, and any other wild creatures or their carcasses if, but only have been reduced into possession which has not been lost or abandoned or are in the course of being reduced into possession, but not including mushrooms growing wild or any land or flowers, fruit or foliage of a plant growing wild on any land. I have borrowed this definition from HALSBURY, 4th Edn. Vol. 11, Para 1309, Pg. 703. The definition thus amply is clear that property includes money as well as bank accounts and hence the attachment with regard to the bank accounts or the money in hand should be treated as property.

Now let us come to section 83 of the Goods and Services Tax Act 2017 prior to amendment which speaks as follows:

“Section 83. Provisional attachment to protect revenue in certain cases:-

(1) Where during the pendency of any proceedings under section 63 or section 63 or section 64 or section 67 or section 73 or section 74, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue, it is necessary so to do, he may, by order in writing attach provisionally any property, including bank account, belonging to the taxable person in such manner as may be prescribed

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

This section is clear enough to provide that during the pendency of any proceedings under section 62 or 63 or 64 or section 67 or section 73 or section 74 if the “Commissioner is of the opinion for the purpose of protecting the interest of government revenue” he may by order in writing attach any property of the assessee and every such provisional attachment shall cease to have effect after the expiry of one year from the date of order made under sub section (1).

So this section is crystal clear to enlighten that not the adjudicating authority but Commissioner has to pass an order to provisionally attach if he is of the opinion that the interest of Government revenue would be at Stake. There are some judgements of different High Courts and to quote some are the Kolkata High Court as held in Amazonite Steel Pvt Ltd., vs. Union of India that it is incorrect on the authorities after the expiry of one year to attach the bank account which has been attached provisionally or by issuing a fresh order on provisional attachment, provided the issue of fresh order requires a fresh review.

The Gujarat High Court in the case of Pranit Hem Desai vs. Additional Director General and Ors without entering into any other controversy had observed that the writ petitions were filed on the short the ground that during the period between July 2017 and May 2019 total ITC availed by the writ Petitioner is less than the tax paid and it appears that the interest of Government revenue is not at stake and therefore the provisional attachment of Bank account was held to be illegal and the Hon’ble High Court has set aside the provisional attachment.

The Punjab and Haryana High Court in the case of UFB India Global Education vs. Union of India held that the effect of section 83 shall come to an end as soon as proceedings pending in any of the provisions in section 63 or section 64 or section 67 or section 73 or 74 are completed and the property or bank account of taxable person cannot remain attached under order passed under section 83.

The Gujarat High Court in the case of Kushal Ltd vs. Union of India has held that the sine qua non for exercise of powers under section 83 is that proceedings should be pending under section 62 or section 63 or section 64 or section 67 or 73 or section 74. When the GST authorities conducted a search under section 67 upon assessee and thereafter the provisional attachment under section 83 has been issued, as, on the date when the orders of provisional attachment came to be made, the basic requirement for exercise of powers under section 83 of the GST Act was not satisfied. Therefore the provisional attachment of bank account cannot sustained.

The Delhi High Court in the case of Proex Fashion Pvt Ltd. vs. Government of India and Ors held that the order attaching the bank account giving reference to section 71 is without authority as section 71 is not at all recorded in the provision. Similarly the Gujarat High Court in the case of Kanal Enterprises vs. State of Gujarat [2020 (9) TMI 879-Gujarat High Court] held that there is no power vested in the authorities to invoke the provisions of Section 83 during the pendency of proceedings under section 71 (1) of the Act.

The Hon’ble Supreme Court has also held in the case of M/s. Radha Krishna Industries vs. State of Himachal Pradesh and Ors which case went from the High Court of Himachal Pradesh in which the Hon’ble Supreme Court has held the provisional attachment order was passed before the proceedings against the appellants were initiated under section 74 of the Himachal Pradesh GST Act and section 83 of Himachal Pradesh GST Act requires that there must be pendency of proceedings under section 62 assessment of non filers of returns or section 63 assessment of unregistered persons or section 64 similar assessment in certain special cases or section 67 power of inspection of search and seizure or section 73 determination of tax in no fraud cases or section 74 determination of tax in fraud cases, against taxable person whose property is sought to be attached. The Hon’ble Supreme Court has also held that While conditioning the exercise of the power on the formation of an opinion by the Commissioner that “for the purpose of protecting the interest of the government revenue, it is necessary so to do”, it is evident that the statute has not left the formation of opinion to an unguided subjective discretion of the Commissioner. The formation of the opinion must bear a proximate and live nexus to the purpose of protecting the interest of the government revenue. Therefore the High Court was clearly in error to direct the assessee to file an appeal as section 107(1) does not refer to section 83 and has rendered the judgement in favour of the assessee.

The Central Government after scanting a very bad taste has thought it fit to amend section 83 which speaks as under:

Amendment to section 83:-

In Section 83 of the Central Goods and Services Tax Act, for sub-section (l), the following sub-section shall be substituted, namely :-

“(l) Where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue it is necessary so to do, he may, by order in writing, attach provisionally, any property, including bank account, belonging to the taxable person or any person specified in sub section (lA) of section 122, in such manner as may be prescribed”.

And this particular amendment was done prior to the judgement by the Hon’ble Supreme Court.

The difference between old section and the amended provision is instead of sections 62 or 63 or 64 or 67 or 73 or 74, the Central Government has incorporated Chapter 12, Chapter 14 or Chapter 15 to include all the provisions falling under the respective Chapters, probably the Central Government contemplated the amendment before the decision of Hon’ble Supreme Court, to this section as expedient and accordingly brought it into force through Finance Act 2021. The amended section has also included taxable person or any person specified in section (lA) of Section 122 and it is crystal clear that the amended provision includes all the provisions pertaining to the filing of returns, inspection, search and seizure and also the assessment in section 83 and the net result is that this a drastic provision to hit the belt of business and registered person.

The reason for the Central Government to amend section 83 is that no person should hoodwink the Government revenue, the pre condition i.e. the Commissioner should be satisfied that the person or the assessee’s action would cause loss of revenue to the State and the other condition is that the Commissioner has to give the order in writing and it shall have the effect of one year.

Now coming to the present position let us visualize how the leakage of the revenue legitimately payable to the Government would be prevented or tightly stitched. We are witnessing cases with regard to improper use of ITC, though the GST Act is an advantageous to the dealers nevertheless certain anti social elements are found taking undue advantage of the Act itself. The burden of paying the taxes would always be on the consumer as this is the indirect tax system and the advantage is taken by some of the assessees or persons who are meddling with the provisions of the Act and who are raising fake invoices and claiming ITC though the GST Act and section 83 are draconian in nature but I feel that section 83 is harsh as it speaks of any property including bank account but does not specify any amount or the amount as felt by the officer to have evaded.

If section 83 is worded in such a manner and passion that the attachment of bank accounts should be limited to the concerned amount, found to have been avoided or taking advantage of the provisions of the GST Act causing loss to the Government revenue, then it ought to have been a more systematic provision.

Of course, it is difficult for one to assess what would be the amount that a person would have hoodwinked but at the same time if a genuine person is harassed by attaching the bank account, then such person would be deprived of his livelihood and also be deprived of to any business activities. This is how I feel that the provision is harsh in nature which is violative of articles 14, 19(1)(g) and 21 of Constitution of India.

Another interesting fact is that the section refers to a period of one year and if the Government feels that one year provisionally attaching the bank account or any other property would save the entire issues. But I have seen number of cases where the investigation, search and seizure etc., runs for years together and this provision is advantageous and also disadvantageous in a way that if the bank account of a person is attached and that persons somehow manages and closes his eyes for a period of one year, then according to this provision, the bank account has to necessarily be lifted from the provisional attachment so also in the case of any other property. The only complementary avenue to this is that another provisional attachment notice may be given before expiry of the first provisional attachment notice but I feel that without there being anything in the section, the implementation of section 83 would leave neither here nor there after expiry of one year.

There is a lacuna in this section according to me and may be it is advantageous to the persons whose property are attached to come out of this. The amount proposed to provisional attachments has to specified and assessments on the person who are trying to cause loss to the government revenue should done within a period of one year and where the assessment has not been done in one year, then an extension by fresh notice may be issued and probably that may be the whole idea behind framing this section. But, for the above cited situations I am of the strong opinion that the provisional attachment should be there which has been there from several years onwards only to sustain the legality and not to frustrate.

I would like to quote a case in which I have appeared before the Andhra Pradesh High Court where a provisional attachment was ordered pursuant to issuance of show cause notice and have challenged the provisional attachment and the Hon’ble High Court while disposing of the writ petition has directed that the Petitioner shall deposit the amounts received from the educational institutions received through account payee cheques also communicating to the Commercial Tax Officer and the Petitioner should deposit the account payee cheques in terms of the affidavits with the Axis Banks within a period of one week, the assessment order should be communicated to the Petitioner and such should be informed to the bank and the Commercial Tax Officer should communicate the assessment order immediately after he has passed to the Petitioner and inform the respondent bank and set aside the impugned order garnishee notice. The Petitioner has received the cheque from the educational institutions and has deposited the same in another bank other than the one which was specified by the Hon’ble Court and has withdrawn the money and the department has filed a contempt which was in favour of the department which went to the Hon’ble Supreme Court and the Hon’ble Supreme Court has dismissed the appeal and ultimately the Petitioner has to remit to the department concerned. This in the case of M/S. HARE RAM CORPORATION, KRISHNA DIST. vs. PRL. SECY., REV. CTII DEPT & 2 ORS. in W.P. No. 41273/2015 and this is the first case of provisional attachment in which I have appeared and the Petitioner has betrayed not only me but also the department and the Hon’ble High Court and I have given up Vakalat and someone has appeared in the contempt case.

The reason for mentioning the above case is to bring to the notice of the beloved members of example of using advantage of the situations which cannot be predicted by anyone of us. There are certain people who would try to hoodwink the government revenue that is legitimately payable to the government but tried as to not be paid.

So in my humble opinion the provisional attachment shall prevail there, of course with certain modifications which I have specified and if those modifications are carried out to the provision, I feel that the section would be advantageous to the revenue and also to the dealers / assessees.

Hope I have thrown much light in this article with analysis of the section and if any suggestions are there, I welcome them as it would definitely enhance my legal knowledge.

|| Jai Hind||

We all are aware about various amendments in respect of taxation of construction of complex – ‘Builders & Developers’ wef 1.4.19. These amendments have brought in sweeping changes in the tax rates, ITC [for promoter- opting for old scheme], JDA/redevelopment and RCM provisions amongst others. In this article the term ‘new scheme’ is used to refer to the provisions of taxation of transactions in respect of ‘builder & developers’ in view of Notifications 3/2019 to 7/2019 w.e.f. 1.4.2019. The RCM provision is applicable to the builder and developer who has opted for new scheme and not applicable to old scheme.

On introduction of new scheme by the Govt., builders and developers are required to follow certain conditions provided in the Notification 3/2019. One such condition is that the Promoter -builders and developer is required to acquire 80% of inputs and input services from registered person (RP) and on short fall of the same, tax is to be paid by the said promoter- builder & developer under RCM @ 18%. This requisite procurement of 80% of inputs and input services from RP is required to be calculated project wise and not at the entity level.

To implement this condition, vide notification no. 03/2019 dated 29th March, 2019 a new entry ‘39’ in Notification 11/2017 dt 28.06.17 is inserted wef 1.4.19.

Please view below the entry 39 and rate of the tax of the same.

Sr. No. Description of entry Rate of tax
Entry 39 [chapter 99] Supply of services other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI) by an unregistered person to a promoter for construction of a project on which tax is payable by the recipient of the services under sub- section 4 of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017), as prescribed in notification No. 07 / 2019- Central Tax (Rate), dated 29th March, 2019, published in Gazette of India vide G.R.S.no. 690, dated 29th March, 2019.

Explanation. –

This entry is to be taken to apply to all services which satisfy the conditions prescribed herein, even though they may be covered by a more specific chapter, section or heading elsewhere in this notification.

9% CSGT + 9% SGST

Further, vide notification no. 7/2019 dt. 29.3.2019 inserted entry no 2 in respect of RCM on cement and entry no 3 in respect of RCM on capital goods. The RCM on cement is @28% [as per present rate] and on capital goods as per prescribed rate of tax on goods procured from unregistered person. The RCM on such goods is required to be paid in the month in which cement/capital goods is procured.

Please view the entry 2 and entry 3 of the Notification no 7/2019

Sr. no. Category of supply of goods and services Recipient of goods and services
2 Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, at items (i), (ia), (ib), (ic) and (id) against serial Promoter. number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended. Promoter
3 Capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) supplied to a promoter for construction of a project on which tax is payable or paid at the rate prescribed for items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended. Promoter

While examining the calculation 80% of inward supplies and services to be from RP, from the total inwards supplies, one first need to exclude service by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI), electricity, high speed diesel, motor spirit, natural gas. The RCM paid on GTA, security, Advocate and on Director etc needed to be considered as supplies from RP. Accordingly, threshold of 80% of inwards supplies is to be computed.

By inserting such provision, Govt. has restricted builder to compulsorily avail input and input services from the RP to the extent of 80% and pay RCM in case of any shortfall. This will regularise and promote the purchases from RP. Since the builder is not eligible to claim ITC under the new scheme, the tax realisation to an extent, on the input/input services, is ensured by the Revenue. This will also discourage builder & Developer to effect inward supplies from URP in order to save money.

An example will help understanding the computation of the RCM payable:

Total inward supplies (input and input Service) XXX
Less TDR/FSI/Salami etc XXX
Less HSD, Electricity, motor spirit, natural gas XXX
Balance (For RCM) 100%

Example 1

A promoter purchased 50% of input and input services from registered supplier. 15% Cement & 20 % other input & input services received from unregistered person, during financial year 2020-21. Pl. see following 3 scenarios:

Particulars Scenario 1 Scenario 2 Scenario 3
(a) Promoter is required to purchase at least 80% from registered person. (after deducting TDR/FSI/Salami, HSD, Electricity, motor spirit, natural gas) 100% 100% 100%
(b) His Inward supplies from registered supplier are 70% 63% 70%
(c) purchase of Cement from unregistered person (irrespective of % total purchase) 15% 15%
(d) Other material purchases from unregistered person 15% 22% 30%
Total purchase from RP [Cement & other RP supplies] 85% 78% 70%
Liable to pay under RCM on shortfall Nil 2% 10%

Observation Scenario 1 of the above example

Any value of Cement purchased from an unregistered person by a promoter would be liable to pay RCM irrespective of the threshold limit. In the above example, purchases from registered supplier is 70%, promoter is liable to pay RCM on 10% of short fall, however RCM on cement is compulsorily required to be paid if purchased from URP. Hence, RCM is paid on cement on 15, aggregating RP inward supplies at 85%. Thus, it results in paying in excess of 5% over and above 80%. In new scheme builders is not eligible to claim ITC including RCM, hence additional burden, in this case on 5% inward supplies, is additional cost on account of compulsory RCM on cement.

Observation of Scenario 2 of the above example

In this case the value of inward supply from RP is 63% & RCM is paid on cement on 15%. Thus, the total RP is 78%. Accordingly, RCM on the other mandatory purchases is on 2% @18%.

Observation of Scenario 3 of the above example

Value of the other materials (ie other than cement) purchased from an unregistered person by a promoter would be liable to pay RCM : In the above example, purchased from registered supplier is 70%, promoter is liable to pay RCM on 10% of short fall. In the said example promoter is not additionally burden by 5% as other purchase of other material from URP as the case of scenario 1.

Example 2

– Inputs and input services on which tax is paid by promoter under reverse charge under sec 9(3) shall be deemed to have been procured from registered person.

(a) Promoter is required to purchase at least 80% from registered person. 100%
(b) His inward supply from registered supplier is (including from registered composition person) 60%
(c) He is liable to pay under RCM for total purchase of Capital goods from unregistered person (irrespective of % total inward supplies) 15%
(d) Input services on which tax is paid under reverse charge under sec 9(3) 13%
Total Purchase from RP 88%
Liable to pay under RCM on shortfall a-(b+c+d) No shortfall as total of (b+c+d is 88%) that crossed limit of 80% NIL

Purchase from Composition Dealers: Input & input services from composition dealer shall be considered as purchase from registered person even if paying taxes under composition scheme.

How to pay RCM

The tax liability on the shortfall of inward supplies from unregistered person so determined shall be added to his output tax liability in the month not later than the month of June following the end of the financial year ie due date of Form 3B of June. Moreover, such RCM, which is not eligible as ITC, have to report as ‘ineligible credit’ in GSTR-3B in table 4(d)(2) -‘others’. Please note that the RCM on the purchase of cement and capital goods is to be discharged along with filing periodic return [monthly/ quarterly] in GSTR-3B at the applicable rate whereas on the other inward supplies; the RCM @18% is to be paid after reviewing the same for the previous FY while filing the GSTR – 3B for the month / quarter of June of the succeeding year.

The object of this article is to discuss certain issues that are likely to arise in this respect. Therefore, we first reproduce the FAQ’s dated 7.5.2019 and 14.5.2019 issued in respect of payment of RCM by Builders and Developer covered by the ‘new scheme’.

FAQ’s dt 7.5.2019

FAQ no. FAQ Answer
8 Does a promoter/ builder have to purchase all goods and services from registered suppliers only? A promoter shall purchase at least eighty percent. of the value of input and input services, from registered suppliers. For calculating this threshold, the value of services by way of grant of development rights, long term lease of land, floor space index, or the value of electricity, high speed diesel, motor spirit and natural gas used in 5 construction of residential apartments in a project shall be excluded.
9 If value of purchases as prescribed above from registered supplier is less than 80%, what would be the applicable GST rate on such purchases? Promoter has to pay GST @ 18% on reverse charge basis on all such inward supplies (to the extent short of 80% of inward supplies from registered supplier) except cement on which tax has to be paid (by the promoter on reverse charge basis) at the applicable rate, which at present is 28% (CGST 14% + SGST 14%)

FAQ’s dt 14.5.2019

5 In case of a Real Estate Project, comprising of Residential as well as Commercial portion (more than 15%), how is the minimum procurement limit of 80% to be tested, evaluated and complied with where the Project has single RERA Registration and a single GST Registration and it is not practically feasible to get separate registrations due to peculiar nature of building(s)? The promoter shall apportion and account for the procurements for residential and commercial portion on the basis of the ratio of the carpet area of the residential and commercial apartments in the project.
15 The condition in Notification No. 3/2019 specifies that 80% of inputs and input services should be procured from registered person. What about expenditure such as salaries, wages, etc. These are not supplies under GST [Sl. 1 of Schedule III]. Now, my question is, whether such services will be included under input services for considering 80% criteria? Services by an employee to the employer in the course of or in relation to his employment are neither a goods nor a service as per clause 1 of the Schedule III of CGST Act, 2017. Therefore, salaries and wages paid by promoter to his employees will not be relevant for the minimum purchase requirement of 80% .
17 Whether the condition of receiving 80% of inputs and input services from the registered person shall be applicable if the developer opts to continue to pay tax at the old rates of 12%/8% in respect of an ongoing project? No, if the developer opts to continue to pay tax at the old rates of 12%/8% in respect of an ongoing project, the condition of receiving 80% of inputs and input services from the registered person doesn’t apply.
18 Whether the inward supplies of exempted goods / services shall be included in the value of supplies from unregistered persons while calculating 80% threshold? Yes. Inward supplies of exempted goods / services shall be included in the value of supplies from unregistered persons while calculating 80% threshold.
19 Whether the purchase of Land from an unregistered person shall be required to be included in the value of Input and Input Services for the purpose of calculation of 80% threshold? No. As per Schedule III, Entry No 5, of CGST Act, sale of land is not a supply. In addition, as per 5th proviso to entries at Sl. No. (i), (ia), (ib), (ic) and (id) against Serial No 3 in the Notification No.11 / 2017-CTR dated 28.06.2017 as amended by Notification No. 3 / 2019-CTR dated 30/03/2019, transactions by way of grant of development rights, long term lease, FSI etc. are not required to be included in the value of Input and Input Services for evaluation of criteria of 80% from registered persons.


We now turn to some other issues on the subject.

  1. While calculating the threshold of 80% of inward supplies from RC one may have question in respect of accounting head(s) that may be considered for the purposes. Moreover, the inwards supplies may have supplies in respect of exempt or NIL rated supplies. Whether such supplies would be forming part of 80%?

    It may be noted that the notification (read the explanation provided in the notification 3/2019 dt 29.3.2019) provides that the data is to be maintained on project-wise basis. The project is to be considered as per the registration under the “RERA”. Therefore, the expenditure for the project / site will have to be considered for the purposes. Such inward supplies may include some exempt supplies say water or non-GST supplies say electricity. The issue would be to see if these are from registered vendors. The general principal is the input which otherwise may not attract GST would also not attract RCM and hence the same may not constitute for the calculation of 80%. However, one may notice that the FAQ No. 18 dt 14.5.19 does mention it to be considered.

    The next issue is in respect of the other overheads and common expenses e.g. professional fees paid for accounting or accounting software, which is/are not directly related to a particular site / project. Such input and input services, if allocated to a particular project will have to be considered as part of project for threshold of 80%. However, if they remain common expenses; say general administration etc. will not be part of the computation of 80%.

  2. RCM is required to be paid in respect of URP inward supplies other than on cement and capital goods not later than June following the end of the financial year.

  3. In view of the provision in a case where book of accounts is not finalised till June 2021 and some expenses gets provided in the books of account as of 31.3.2021 as finalised the account such inward supplies will have to be considered. However, in a case where the invoice of the year is booked and accounted for subsequent period the same may not constitute part of the threshold computation of 80%.

  4. In case of residential complex, where there are many buildings with different RERA registration numbers [typically phase wise development] and have common Club house. Take a case where
    construction of club house is started after obtaining of completion certificate of some of buildings and some of the buildings are under construction. In a such case whether construction expenses related to Club house which is a common facility for the complex to be considered for computation of 80% threshold? Or, should we exclude expenses relating to the club house which do not have separate RERA registration as other buildings? The other view could be to calculate qua the area of the buildings which are under construction. The FAQs issued do not address this concern and a clarification is required. One may take a stand that the club house or internal roads etc are part of common facility and do not form a part of particular RERA registration and hence strictly reading the provision; the 80% threshold of inward supply from RP do not apply. Reader is to advised to take considered view in the matter since this may be litigative.

  5. As per the notification 3/2019 dt 29.3.2019, third proviso after the explanation clarified that 80% inwards supplies from RP are to be taken in to account till the date of issuance of completion certificate and not for the whole year qua that project. Take an example where project got completion certificate on 09.4.2021. It is common knowledge that some expenses are incurred even after the OC / completion certificate issued by the competent authorities. Such expenses e.g. the expenses on compound wall, garden, land scaping, common lobby and other beautification is typically done to post the OC. Looking it at the wordings of the notification; one may take a stand that the expenditure so incurred post issuance of OC which are directly relatable to a project will not constitute part of the 80% threshold. The revenue may argue that such expenditure which are typically accounted as a project expenditure for site and therefore should be included in the computation. A counter to this can be raised only based on the strict interpretation notification condition which has provided the manner of discharge of liability as well.

  6. As entry 39 is added vide notification no 3/2019 dt 29.3.2019 for the any inputs/input services other than TDR, on short fall of 80% inwards from RP then RCM @ 18% is required to pay. One would have observed that the certain inward supplies typically from URP are in respect of purchases of sand, gravel or broken or crushed stone etc. These items attract GST @5%. Similarly, input service of sub-contractor related to the affordable housing of tax rate @12%. However, if this were to be part of the URP which gets RCM attracted the rate of RCM @18%. This may highlight un-economical tax burden. One may however, notice that the scheme of RCM does allow / recognise URP inward supplies of 20%. Therefore, one may have to appreciate the facts of the matter to ascertain as to whether some such inward supplies would have borne higher taxes on account of RCM provision.

  7. Should the short fall of 80% is to considered Act wise ie IGST & CGST or only CGST/SGST? An interesting preposition is to examine as to whether the threshold of 80% to be applied on inwards supplies which are intrastate and interstate separately? The notifications as also illustrations given under notification 3/2019 do not speak about bifurcation to be made for intra state inward supplies. The notification speaks about inward supplies for the project therefore there is no need to work out the 80% threshold limit qua the intra state & qua the interstate supplies. The next question therefore is, when one does work out the short fall for the payment of RCM, under which act such payment be made, under CGST & SGST or under IGST. The scheme is silent about this. Therefore, the challenge is how can one identify the supply for which RCM payment is to be made. Take an example where shortfall of 9% is work out. That is to say, there are 29% inward supplies (other than cement, capital goods, TDR, FSI etc). This inward supplies of 29% comprises of both intra state and interstate supplies made from URP. The challenge, we discuss here is in respect of identifying intra state or interstate purchases out of the said 29% for payment of RCM. Once again depending on the facts of the matter, what is practically done is to pay tax under CGST & SGST. The practical stand is also taken with the common understanding that the revenue of GST in such case would be divided equally between the Centre and the State and hence would not cause any revenue implications.

  8. Whether RCM on Cement is to pay even after obtaining of completion certificate?

    It may be observed that the fourth proviso in notification 3 of 2019 provides that “notwithstanding anything contained hereinabove” and then goes on to provide RCM for purchase of cement as rate applicable to cement i.e. 28%. The earlier proviso mentions/ states that the threshold of 80% is to be worked out for supplies during the FY or part of the FY till the date of issuance of OC/ first occupation whichever is earlier. Therefore, the issue is would RCM on cement procured from URP post issuance of OC would still attract RCM? If one were to see the observations below illustration 3 in annexure III attached to the notification of 3 of 2019 one would noticed the following words:

    To fulfil his tax liability on the shortfall of 30 % from mandatory purchase, the promoter has to pay GST on cement at the applicable rate on reverse charge basis. After payment of GST on cement, on the remaining shortfall of 15%, the promoter shall pay tax @18% under RCM.

    Please see the highlights words above “after payment of GST on cement”. It appears the treatment of payment of RCM cement is specifically provided and not linked to the other “mandatory purchases”. If one were to accept this proposition, RCM on cement from URP post OC would also get attracted.


The provisions regarding payment of RCM regarding inward supplies in excess of threshold of 80% of total inward supplies is brought in with the objective of revenue to discourage the tendency to effect inward supplies from unregistered person when ITC is not available. The taxation of builders and developers under the erstwhile law and GST continues to be a vexed issue. Even the provisions regarding RCM are not exception to it. Some of the issues have been discussed herein above readers would have come across variants of these issues or would have come across some other issues. We look forward to resolution of this issues before it is too late.

The question as to whether “damages” are taxable in GST is one of the great controversies of the present regime. Justice Krishna Iyer explains the legal conception of “damages” in the following terms in Organo Chemical Industries v. Union of India1:

“38. What do we mean by “damages”? The expression “damages” is neither vague nor over-wide. It has more than one signification but the precise import in a given context is not difficult to discern. A plurality of variants stemming out of a core concept is seen in such words as actual damages, civil damages, compensatory damages, consequential damages, contingent damages, continuing damages, double damages, excessive damages, exemplary damages, general damages, irreparable damages, pecuniary damages, prospective damages, special damages, speculative damages, substantial damages, unliquidated damages. But the essentials are (a) detriment to one by the wrongdoing of another, (b) reparation awarded to the injured through legal remedies, and (c) its quantum being determined by the dual components of pecuniary compensation for the loss suffered and often, not always, a punitive addition as a deterrent-cum-denunciation by the law. For instance, “exemplary damages” are damages on an increased scale, awarded to the plaintiff over and above what will barely compensate him for his property loss, where the wrong done to him was aggravated by circumstances of violence, oppression, malice, fraud, or wanton and wicked conduct on the part of the defendant, and are intended to solace the plaintiff for mental anguish, laceration of his feelings, shame, degradation, or other aggravations of the original wrong, or else to punish the defendant for his evil behavior or to make an example of him, for which reason they are also called “punitive” or “punitory” damages or “vindictive” damages, and (vulgarly) “smart-money”. [See Black’s Law Dictionary, 4th Edn., pp. 467-648]”

Taxability of damages may arise in many contexts in GST. Before I go into the question of taxability, let us first understand the scope of the charging provision in GST.

GST is a levy most concerned with contracts. Indeed, the term “supply for consideration” which is the heart and soul of the charging provision in Section 7, is a statutory formulation which is part of the charging provisions of VAT/GST laws all over the world. Courts all over the world have understood this phrase to require a reciprocal bargain between a “supply of goods or services” and “consideration”, where a supply evokes consideration and vice versa. A supply of goods and services which will take place no matter whether consideration is payable, is not a supply “for” consideration. A musician playing by the road side to entertain bystanders who are not bound to pay him is not supplying any service for consideration Tolsma v. Inspecteur der Omzetbelasting Leeuwarden2.

The question therefore should always be whether damages is consideration given for any supply of goods and services. But things are seldom so simple in taxation law. If they are so, creativity of persons entrusted with implementation of revenue statutes is apt to turn a monkey into a tiger. I say this with the utmost respect to this creativity, for the simplicity of the charging provision has been complicated by a curiosity in Schedule II of the GST Act. Schedule II is supposed to be legislative declaration of what supply should be treated as a “supply of goods” and what supply should be treated as a “supply of services”. Para 5(e) of that Schedule II reads as follows:

“5. Supply of services – The following shall be treated as supply of services, namely:—

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;”

Are damages therefore consideration for “tolerating” an act or situation? The word “tolerate” is defined “to allow exist, or to be done or practiced, without authoritative interference or molestation” (Mills v. Silver)3 or to “put up with” (Budejovicky Budvar Narodini Podnik v. Anheuser-Busch Inc).4 One must at once note the words “agreeing to…” in the Para 5(e). Thus there must be an agreement to tolerate. We must not forget that the Para 5(e) is ultimately subject to the charging provision “supply for consideration”. Therefore, the agreement to tolerate must be “for” consideration. There must be a bargain to tolerate in exchange for consideration and the consideration must be payable to obtain the tolerance.

Let us now look at various fact situations in which damages may arise. A defames B and is sued by B for damages. Court awards such damages to B. Can it be said that there is any “agreement” by B to tolerate the defamation by A in exchange for B paying the damages? B has in fact not tolerated anything. It has dragged A to Court and made him pay. Where is the tolerance here? Furthermore, the damages are payable under Court orders and not under any agreement.

Damages arise in contractual matters in two ways: (i) Unliquidated damages and (ii) liquidated damages. The term “liquidated damages” is used when damages are stipulated in the contract itself. Where they are not so stipulated, then the damages are said to be “unliquidated”. The problem with unliquidated damages is the excess time consumed in litigation as compared to liquidated damages. In cases where the contract does not specify the exact quantum of damages payable, when there is a contractual breach, the affected party has to go to Court, prove the breach, the loss as well as the quantum necessary to compensate the loss. Per contra, when the contract specifies the event which is considered as the breach of the contract and the quantum which is payable on occurrence of such event, the affected party merely has to prove the breach. Proof of injury and quantum sufficient to compensate the injury are dispensed with, thus shortening the time of litigation. However, the quantum fixed in the contract must be a “genuine pre-estimate” of the loss caused and must be reasonable.

Again the question one must ask is whether a “genuine pre-estimate of the loss” can by any stretch of imagination be treated as “consideration” under the GST law? Assuming that this is so, simply because there is a liquidated damages clause in a contract, is there an agreement to tolerate anything in exchange for payment of liquidated damages?

Let us go back to examples, for this subject is best understood by examples than theoretical discussions. Suppose an employee leaves his employment before serving the notice period and some amount is payable by him to the employer as “notice pay recovery” due to this early abandonment. Now, a contract for employment is a contract which is not specifically enforceable in law.5 This means that Courts have never forced an employee to work somewhere against his will due to the fundamental rights protected under our Constitution and under the common law. I would ask myself, if the employee cannot be forced to work under the employer, then the employer is not tolerating anything in return for payment of the notice pay. He is bound to suffer, and he is merely receiving compensation. Whether or not the employee pays the notice pay amount, the employee cannot be stopped. When the law taxes an agreement to tolerate for consideration, what is required to be seen is whether there is any option to not tolerate. Does the employer have any option to not tolerate this act of early abandonment? If he does not, then how can the notice pay be consideration for tolerating that act? The employer has no remedy in law except damages in such a case.

A liquidated damages clause therefore ensures to the benefit of the person who demands them and to the detriment of the person who is paying them. It cannot be said that the person paying the liquidated damages has received any benefit from this arrangement. Reduction in litigation time is a boon to the person who is demanding the liquidated damages, and not to the person who is inflicted with it. In this case, the employer has reduced his litigation time. But has the employee received any benefit? It cannot be said that the employee has received any service if he has not received any benefit at the end of the day.

Now let us take the case of construction contracts where liquidated damages are payable if there is any delay in completion of work. Where time is of the essence, the aggrieved party has the right to terminate the contract if work is not completed on time. Section 55 of the Indian Contract Act states that a party can lawfully rescind a contract where time was the essence of the contract or the time element was regarded as so important by the parties as to make a breach of that element a valid ground for rescission of the contract. However, the law presumes that time is not of the essence in a contract for construction work6 or a contract for sale of immovable property7 and in fact a liquidated damages clause has been held to be an indicator that the parties did not intend to make time of essence. If the parties themselves never intended time to be of essence.

It is therefore necessary to find exactly what are the consequences in each case of a contractual breach and what is the effect of the liquidated damages clause. Principles of general law relating to damages have to be seen. Every case of liquidated damages presents different questions, but the underlying principle is that it is merely compensation and not “consideration” for anything. There is no “service” being supplied to anyone of tolerance or otherwise.

I have gone through the Advance Rulings in Maharashtra State Power Generation Company Limited 2018(13) G.S.T.L.177, the order of the Appellate Authority in that case reported in 2018 (17) G.S.T.L. 451 and another Advance Ruling in Bajaj Finance Limited 2019 (19) G.S.T.L.95. I have also gone through some other Advance Rulings. In all these rulings the law laid down by various Courts in other countries, as discussed above, has been ignored. Those are therefore not worth discussing.

This documents / evidence subject is very vast in its nature but I would limit my focus only to the subject of “Affidavits” aspect.

India has inherited a common law adversarial system of Courts from the British Colonial regime. It is a system wherein parties argue their side of the case and judicial / quasi-judicial officers (In Tax Matters) determine the issues and adjudicate the same on the basis of relevant laws, rules and precedents. The framework, so designed provides safeguard against injustice in the form of appeals, reviews and revisions as per the hierarchy of the courts (Tribunals, Appellate Authorities in case of Tax matters).

At the time of arguments, parties to the case will have to produce proper documentary evidences in support of the case. Now there are so many types of documents, depends upon case to case basis, required to be submitted before the authorities. In this article I am going to discuss one of them i.e. “Affidavit”. The document namely “Affidavit” is playing a vital role in any judiciary, especially in Indian judiciary at large. Now in this article we are discussing all about Affidavits which are drafted and submitted with various civil, criminal and taxation matters during the trial in court or before the quasi-judicial authority.

Definition of the term “Affidavit”

As per general clauses Act the term “Affidavit” defines as, the document that includes affirmation and declaration in the case of persons by law allowed to affirm or declare instead of swearing.

This is a voluntary statement and it includes a person’s declaration in writing that is signed by the deponent (A person who is making the affidavit) and it is to be accompanied by an oath (vis-à-vis the authenticity of the contents). In Latin, terms “Affidavit” means to “pledge ones faith”.

It is necessary that the “Affidavit” is taken to be sort of a written court testimony. Another way to think of an affidavit is as a sort of written court testimony. While doing an Affidavit, in a court of law, you are required to place your hand on a Holy Book and swear that you’re telling the truth and nothing but the truth, similarly on an affidavit, you do this in writing. You’re under oath, but you’re testimony is on paper. They are important in a way that the oral submission/evidence/testimony is only admissible before a judge but an affidavit can be used as an alternative to this.

In law, an affidavit is a written statement of facts by someone who has sworn to tell the truth, signed in the presence of a notary public or other legal authority (vis-à-vis the genuineness of the affiants signature or his identity is to be checked by the Notary Public or legal authority), and can be used as evidence in the courts.

In India Section 139, Order XIX of the Code of Civil Procedure and order XI of the Supreme Court Rules are the laws that govern “Affidavits”. The importance of affidavit has been upheld by the courts in many instances.

Matters to which affidavits shall be confined.

Under Rule 5 of Order XI of the Supreme Court Rules, it is stated that, “Affidavits shall be confined to such facts as the deponent is able of his own knowledge to prove, except on interlocutory applications, on which statements of his belief may be admitted, provided that the grounds thereof are stated.”

Contents of an Affidavit: (How to write an Affidavit?)

Affidavit is a legal document and hence there is a right way to write an affidavit. Affidavits can be completed by any person and it must be notarized before they are considered valid. As per my contention it is a basic six steps process which everyone may (strictly) follow while writing any “Affidavit”. Those are as follows.

1] Title of the Affidavit

2] Statement of Identity

3] Statement of truth

4] Statement of facts (stick to the facts which are already enumerated anywhere in the other documents) (Every fact should be clearly and chronologically outlined)

5] Reiterate the statement of the truth

6] Sign before the Notary Public and get it Notarized from the Notary Public.

It is mandatory that, every person, making any affidavit, be described in such manner as it will help to identify him clearly, by stating his full name, his father’s name, his profession or trade, and the place of his residence(with full address).

It is also necessary that those statements that the affiant makes in the affidavit must be affirmed by the words “I affirm”.

The affidavit containing any statement of facts is to be divided into separate paragraphs which are serially numbered. Each paragraph shall refer to a distinct portion of the subject of the said affidavit.

When the affiant is not having sufficient knowledge of a fact himself but, he is informed about such fact by others, he must use the words “I am informed” and, he should add as “and verily that believe to be true”. When the statement rests on facts disclosed in documents, or copies of documents procured from any Court of Justice or other source, the affiant shall mention the source from which they were procured, and state his information or belief as to the truth of the facts disclosed in such documents.

You may follow following simple tips to make more effective Affidavits.

  • Keep legal language out of the affidavit as much as possible.

  • Keep the sentences short.

  • Keep the affidavit as short as possible.

  • Make sure that your thoughts are organized and they are in the proper order and clearly worded, if you are relating your actions in an event.

  • Do not use inflammatory language.

  • Leave any drama out of it; just state the plain and simple facts.

  • Proof read the affidavit for spelling errors and grammatical errors.

There are three elements which an affidavit must include to become official are as under:

1] The Written Oath where a person (the affiant) swears that the specific facts they wish to declare are true and correct to the best of his / her knowledge;

2] The Signature of the one making the written statement (the affiant) is must;

3] The Certification by a notary public or other qualified official stating that an oath affirming the truth of the statements in the affidavit was witnessed in person.

In 1910, Calcutta High Court in the case of Padmabati Dasi v. Rasik Lal Dhar [1] adhered strictly to Order XIX Rule 3 of the Code of Civil Procedure and laid down that every affidavit should clearly express how much is a statement of the affiant’s knowledge and how much is a statement of his belief, and the grounds of belief must be stated with sufficient particularity to enable the Court to judge whether it will be correct to rely on such belief.

In another case, M/s Sukhwinder Pal Bipan Kumar and others v. State of Punjab and other [2], this Court reiterated the afore mentioned principle and held that under Order XIX, Rule 3 of the Code of Civil Procedure it was mandatory for the affiant to disclose the nature and source of his knowledge and information with sufficient particulars. The Court also held that in a petition where allegations are not affirmed, as aforesaid, it cannot be regarded as supported by an affidavit as required by law.

Types of Affidavits

I believe that no one can restrict himself in any type of an Affidavit because there are lots of reasons where every Advocate has to draft an Affidavit in his day today’s practice for the client as per his requirements. Some of the most common examples are as follows.

  • Affidavit of name change

  • Affidavit of death

  • Affidavit of identity theft

  • Affidavit of age declaration

  • Affidavit of inheritance

  • HUF Affidavit

  • Affidavit of residence

  • Divorce affidavit

  • Child custody affidavit

  • Sworn statement affidavit

This is just scratching the surface of the different types of affidavits. The law is very complicated and there are dozens of other scenarios where you might be asked to draft/complete an affidavit for submission with various civil, criminal and taxation matters during the trial in court or before the quasi-judicial authority.

In Indian Law although an affidavit may be taken as proof of the facts stated therein, the Courts have no jurisdiction to admit evidence by way of affidavit. Affidavit is treated as “Evidence” within the meaning of Section 3 of the Evidence Act. However, it was held by the Supreme Court that an affidavit can be used as an evidence only if the Court so orders for sufficient reasons. Therefore an affidavit cannot ordinarily be used as evidence in absence of specific order of the Court.

Stamp duty required for Affidavits

There is a need to replace affidavits by Self-Declarations for all services in the public utilities/agencies. Affidavit is a declaration, and such, a declaration in itself is adequate for the purposes of law. Accordingly in Maharashtra, Vide Government Resolution, General Administration Department under reference dated 09 March 2015, it is necessary for that person to furnish a self-declaration on plain paper affixing his own photo stating his various facts as per the required Govt. work only. The forms for above mentioned “Self Declaration” and “Self Declaration for Self Attestation” will be as per pro forma “A” and pro forma “B” in the government Resolution under reference, General Administration Department, dated 09 March, 2015.

In any other cases stamp duty of Rs. 100/- (by way of non-judicial stamp paper) is required for Affidavits.

Formalization of an Affidavit

Every Affidavit should be a valid Affidavit. For an affidavit to be valid, it must be notarized. Since a notary is swearing that it is (affiant’s) your signature on the affidavit, the document must be signed in front of a notary. If the notary does not know you, he or she will ask to see your identification. The identification must be a valid form of photo identification such as a non-expired passport or driver’s license or PAN card or Aadhar or Govt. issued I Cards etc.

Consequences of False Affidavits

An affidavit is a written statement which the people making the statement solemnly affirmed (promised) is true. The solemn affirmation (promise) must be in the presence of a witness who is authorized by law to receive that affirmation (promise). The affidavit must be signed by both the person making the statement and the witness each in other presence. A person who makes promise is called an oath and secular alternative to an oath is called affirmation. The person who is signing the affidavit is called the affiant.

A false affidavit is one in which a person signs it and swears that the statements attested to in the document are true, complete and accurate are true, when such statements are in fact misleading or false. A person who files an affidavit has to show that he/she swore an oath before an officer of court or other Person. For e.g. If a plaintiff files a false affidavit even he/she knows that he/she was under oath when signing the affidavit. Then it is the responsibility of plaintiff to prove that statement contained in affidavit is true as per knowledge. Criminal proceeding may be initiated against guilty person by making an application u/s 340 Read with section 195 of CrPC 1973 before the criminal or civil court for giving false evidence.

Offences of perjury

When any person makes a false statement/false declaration in his pleading or files a false affidavit before the court of law or knowingly gives a false evidence to the court. It is a criminal offence u/s 191,193,195,199 of the Indian Penal Code, 1860 to make false affidavit in one’s pleadings or filing false affidavit or false document in evidence before the court of law. When false affidavit or false documents were given in any quasi-judicial or administrative proceedings, then a private complaint can be filed u/s 200 before competent magistrate. I am not going in section wise details of this Para for the sake of brevity of an article.


Affidavits impose their own cost on the citizens on buying stamp paper, locating a deed writer, payment to the Notary for attestation and of course, the time and efforts consumed in these processes. On the other hand, affidavits have no particular sanctity in law and the same function can be easily performed by declarations.

Attestation by the officials, thus, does not appear to be necessary. The affiant/signatory continues to be responsible for the statement made in the Affidavit. Government can impose penal liability for making wrong statements. Some of the Central Government agencies (passport, income tax etc.) have already adopted this practice.

Even though there are considerable provisions for the affidavits, there is still lack of awareness among general public about filing of Affidavits. There are so many Complaints against government institutions and departments demanding affidavits in spite of several instructions are issued from time to time by the Govt. Recently Hon’ble Prime Minister, Shri Narendra Modi has encouraged Government of taking self-declaration in lieu of Affidavits which goes on a long way to build trust between citizens and the government.

  1. Introduction

It was way back in 1961, when the Income Tax Act was enacted, the Government first deemed it fit to presume or deem certain transactions as income, profit or gains in the hands of the assessee. The government “deems” it fit to see income even where there may be not be really any income. The menace has been growing over the years. Even on a search in the website of Income tax department we find more than 100 sections dealing with deemed income and the ambit is being enlarged every year. Income is defined under Section 2(24) of the Income Tax Act which is an inclusive definition of income. This means that the Act specifically defines certain nature of receipts which are regarded as income of the assessee and there could be certain other nature of receipts which, though may or may not be in the nature of income, may also be regarded as or deemed as the income of the assessee.

  1. Notional Income or Deemed Income

One of the basic concepts of taxation is that a person can be taxed in respect of his real income, and not in respect of notional income that one could possibly have earned. The purpose of income tax is to levy a tax on a person’s income. The whole objective is to tax what a person earns. Unfortunately, our tax laws contain numerous provisions for taxation of notional income, which are not in consonance with the basic concept of taxing real income. Some of the provisions of deemed income are measures to prevent tax avoidance. For instance, the provision deeming the stamp duty valuation to be the sale consideration of the property for the purposes of computation of capital gains on sale of an immovable property is to check the practice of receipt of sale consideration for properties partly in black money. Such measures are, therefore, justifiable considering the purpose for which they have been enacted. There are certain receipts which are not real income but with the deeming fiction in the Act, are regarded as income and these kinds of income too are subject to income tax. Therefore, it is extremely important to understand the provisions of deemed income. Let us examine a few of them in this article.

  1. Section 2(22)(e): deemed dividend

If a Company (which is not a company in which public are substantially interested) makes any payment by way of loan or advance to a shareholder, who holds not less than 10% of the voting power in the company, such receipt will be deemed to be dividend income in hands of the receiving shareholder. This section also covers instances where, if such company gives loans or advance to any concern in which such shareholder is a member/partner beneficially holding at least 20% of its income, such receipt will also be deemed to be dividend income for the receiving shareholder. However, the amount of such deemed dividend will be restricted to the accumulated profits in the company. Thus, if a Pvt. Ltd. Company gives a temporary loan to one of its shareholders (say Mr. A) holding more than 10% of voting power, the said amount will be deemed as dividend income in the hands of Mr. A. Further, if a Pvt. Ltd. Company gives temporary loan to another company in which Mr. A owns more than 20% shares, the amount shall also be deemed as dividend income in the hands of Mr. A. Therefore, even if such shareholder has received temporary money from the company which he has returned to the company after a certain period of time, the receipt will be deemed to be his dividend and he will be required to pay tax on such ‘deemed income’.

  1. Section 7 : Incomes to be deemed to be received in the previous year

As per sec. 7 these include-(a) the annual accretion to the balance (or Interest) at the credit of employee participating in recognised provident fund account to the prescribed extent as per Rule 6A of Part A of Fourth schedule (b) Transferred balance in a recognised provident fund to the prescribed extent as per Rule 11(4) of Part A of Fourth schedule generally in case of reorganisation of unrecognised provident fund; (c) Contribution made by the Central Government or any other employer to the account of the employee under a pension scheme referred to in section 80CCD.

  1. Section 17(2): Sweet equity shares and other perquisites

Section 17(2) enumerates certain perquisites which are to be taxed in the hands of the employee. Section 17(2)(vi) provides to tax as income the value of any specified security or sweet equity shares allotted or transferred directly or indirectly, by the employer, free of cost or at the concessional rate to the assesseee. (It will be taxed as per relevant rules)

  1. Section 23(4) and 23(5) : House or Flat in occupation of the owner or held as stock in trade

Section 23(2) provides that where the property consists of a house or part of a house which (a) is in the occupation of the owner for the purposes of his own residence; or (b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house or part of the house shall be taken to be nil.

Section 23(4) provides deeming Where the property referred to in sub-section (2) consists of more than two houses (w.e.f. asst year 2010-21) —

  1. the provisions of that Sec. 23(2) shall apply only in respect of 2 of such houses, which the assessee may, at his option, specify in this behalf;

  2. the annual value of the house or houses, other than the 2 houses in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let.

Section 23 (5) provides that where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to 2 years (w.e.f. asst year 2010-21) from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nilThis means that after the end of the said period of 2 years from the end of financial year in which the certificate of completion of construction of the property is obtained, the income will be deemed from such property held as stock in trade.

  1. Deeming provisions of Section 41 and Sec. 59

The caption of section 41(1) is ‘Profits Chargeable to tax’. The section falls under Chapter IV – Computation of Income from Business or Profession. In business there are circumstances where a person might have incurred a liability but later on he need not have to pay it for one or other reason. The Income Tax Act brings to tax such liabilities which are no more payable. Section 41(1) brings in to its ambit benefit in cash or in kind obtained by a person by remission or cessation of liability. The only condition is that the person must have obtained a deduction or allowance in his computation of income for the said liability in any previous years. A person may write back liability in his books of accounts unilaterally, i.e. without consent of the payee or many a times a liability remains in existence continuously over reasonably long time and the payee does not write it back in his books of account then also section 41(1) comes into operation and benefit is brought back to taxation by income tax department.

Section 59: Provisions of section 59 are akin to provisions of section 41. It provides that the provisions of section 41(1) shall apply, so far as may be, in computing the income of an assessee under section 56, as they apply in computing the income of an assessee under the head “Profits and gains of business or profession”. As per Sec 59 where Asseessee had claimed any deduction or allowance in any previous years but later on he has received any amount of such allowances or Deduction in current financial year then such allowances shall be deemed to be Income of current financial year under Head Income from Other Sources. Where Asseessee had incurred any liability in past but successor of Assessee get remission of such liability than such remission shall be deemed to be Income of Successor under Head Income from Other Sources in current Financial Year.

  1. Section 43CA – Deemed sale consideration on Transfer of Immovable Property by developers/ promoters

Section 43CA, inserted by the Finance Act, 2013, applicable from FY 2013-14, provides that the profits on transfer of immovable property (land or building or both) held as stock-in-trade shall be computed on the basis of the stamp duty value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty. It is in line with Section 50C which is applicable for immovable property held in the nature of “capital asset” (discussed hereinafter). It has several complications for real estate developers following the percentage completion method. Section 43CA is applicable to all categories of assessees who deal in immovable property, as their business, being land or building or both. Thus, the provision of this section is applicable to Individual, Firm, HUF, Company or any other category of assessees. Further the section is applicable to all kind of immovable properties being Land or Building or both, held as stock in trade. It may be a commercial unit/ space/ shop/ flat, residential flat or plot, industrial building or plot, or agricultural land whether in rural or urban area etc. It is also applicable in case of transfer of ownership of immovable property even without registration of sale deed but by way of execution of sale agreement / Power of Attorney or by way of transfer with the regulatory authority or in any other manner. Section 43CA(3) further provides to adopt stamp duty value of the property assessable as on the date of entering into sale agreement instead of the value assessed as on the date of transfer of the property, where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of such transfer of asset are not the same.

Section 43CA(4) provides that stamp duty value of the property assessable as on the date of entering into sale agreement may be taken in a case where the amount of consideration or a part thereof has been received by any mode other than cash on or before the date of agreement for transfer of the asset.

Safe Harbour Rule : As per amendment made by the Finance Act, 2020, w.e.f. asst. year 2021-22 the difference between actual consideration and stamp duty valuation or fair market value to the extent of 10% shall be ignored for the purpose of computing income under section 43CA as well as section 50C. (Earlier for asst year 2019-20 and 2020-21 the permitted difference was upto 5 per cent).

In order to boost demand in the real-estate sector and giving benefit to the home buyers, Finance Ministry further increased the safe harbour from 10% to 20% under section 43CA for the period from 12th November, 2020 to 30th June, 2021 in respect of only primary sale of residential units of value up to Rs. 2 crore. Consequential relief by increasing the safe harbour from 10% to 20% has also been allowed to buyers of these residential units under section 56(2)(x) of the Act for the said period. Therefore, for these transactions, circle rate shall be deemed as sale/purchase consideration only if the variation between the agreement value and the circle rate is more than 20%. However it may be noted that the said concession of 20% does not apply under section 50C. The Government should consider extending the date for such concession for sale of flats etc. till 31st March, 2022 and it should be allowed to apply for promoters as well as others.

In view of the continued pandemic, it is suggested that the date for safe harbour should be extended till at least 31st March, 2022 and should be applied even for the purpose of section 50C.

  1. Section 50C – Deemed sale consideration on Transfer of Immovable Property

Section 50C was introduced by Finance Act, 2002 w.e.f 1.4.2003 which prescribes provisions of deemed income in the case of transfer of land or building or both held in the nature of “capital asset”. Where an assessee transfers/sells an Immovable Property (land or building or both) as his capital asset and the sale proceeds received or accrued as a result of such transfer is less than the “stamp duty value” of the property, adopted/ assessed or assessable by the stamp duty valuation authority of State Government, then the stamp duty value of the IP adopted/ assessed or assessable will be deemed to be the full value of consideration received on transfer of such Immovable Property. It has however been stated in 3rd proviso to sec. 50C with effect from assessment year 2021-22 that if the stamp duty value is more only upto 10% of the sale consideration then the deeming fiction will not apply. The limit was only 5% for asst year 2019-20 and 2020-21.

The assessee has an option to dispute/appeal the value adopted by the stamp valuation authority before the appellate authority or apply to the Assessing Officer to refer the valuation of the property to a Valuation Officer. Accordingly, the value derived at by the appellate authority or the departmental valuation officer (DVO), as the case may be, will be considered as the final sale consideration for this transaction.

  1. Section 50B(2)(ii): Slump Sale

The government has brought in amendment to Section 50B(2) to discourage tax avoidance schemes in case of slump sale. Section 50B(2) as amended by the Finance Act, 2021 with effect retrospectively w.e.f. asst year 2020-21, provides in relation to capital assets being an undertaking or division transferred by way of such slump sale-

  1. The net worth of the undertaking or the division as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purpose of section 48 and 49 and no regard shall be given to the provisions contained in the second proviso to sec. 48.

  2. Fair market value of the capital assets as on the date of transfer, calculated in the prescribed manner, shall be deemed to be the full value of consideration received or accruing as a result of transfer of such capital asset.

Sub section 3 provides that every assessee in the case of slump sale shall furnish a report in the prescribed form i.e. Form No, 3CEA from a Chartered Accountant before the specified date referred to in section 44AB indicating the computation of net worth of the undertaking or the division, as the case may be, and certifying that the net worth of the undertaking or the division has been correctly taken in accordance with provisions of section 50B.

In a situation where the sale consideration of the asset being transferred is lower than the deemed fair value so determined, then for the purpose of computing capital gains, the actual sale consideration is replaced by such deemed fair value. Till financial year 2019-20, for the purpose of business transfer pursuant to a slump sale, the tax law did not provide for any deemed fair valuation mechanism and thus, predominantly sale value disclosed by the seller would be the considered for computing capital gain tax.

Rule 11UAE for Computation of Fair Market Value of Capital Assets for the purposes of section 50B : CBDT vide Notification No.68/2021 dated 24/05/2021 notified Rule 11UAE of the Income Tax Rules, 1962 to compute the Fair Market Value (FMV) of Capital Assets for the purposes of section 50B of the Income-tax Act, 1961 for the purpose of computing the capital gains in case of an exchange of assets in a slump sale. For the purpose of clause (ii) of sub-section (2) of section 50B, the fair market value of the capital assets shall be the FMV1 determined under sub-rule (2) or FMV2 determined under sub-rule (3), whichever is higher.

  1. Section 56(2)(viib) – Issue of shares by Company – deemed income

When a Company (in which public are not substantially interested) receives any consideration, from a resident, for issue of shares exceeding the fair market value (FMV) of the share(s), the excess amount so received will be regarded as income of the company. The Company can arrive at the FMV of the shares of the company by calculating the same at Networth or Book value of the company. If the shares are issued at a price which is higher than the Net worth of the company, the same needs to be justified and supported by a valuation report as valued and certified by a certified valuer. The method of valuation is prescribed under Rule 11UA of the Income Tax Rules. In such cases, the company has actually received money against issue of its own shares at a premium, which essentially is a ‘Capital Account transaction’. The company does not earn any income when it issues share at a premium. However, by virtue of deeming fiction, the premium which is received in excess of the FMV of the shares of the company so determined will be deemed to be income of the company and tax will be payable on the same by the company. Therefore, it is important for the company to get their shares valued from a registered valuer whenever it issues share at a premium, higher than the FMV of the shares. It may be noted that this deeming fiction does not apply when the shares are issued to a non-resident.

  1. Section 56(2)(ix) – Forfeiture of advance money on failed negotiation

If an assessee has received any sum of money during the course of negotiation for transfer of a capital asset, which is in the nature of advance and if the negotiation does not result into a deal of transfer of the capital asset and if the assessee forfeits the advance money so received, the money so received will be deemed to be the income of the assessee. Earlier, this advance receipt would go on to reduce the cost of the capital asset but now the section is amended to state that the advance so received and forfeited will be regarded as the income of the assessee.

  1. Section 56(2)(x)

Section 56(2)(x), has come into effect from asst. year 2017-18 (in place of Section 56(2)(vii). It provides that receipt of the sum of money or the property received by a person without any consideration or upon crossing a particular threshold would be liable to tax in the hands of the receiver under the head ‘Income from other sources’. The taxation on gifts received by an Individual/ HUF is also governed by the provisions of clause (x) in Section 56(2) of the Income Tax Act.

Under the erstwhile provision of section 56(2)(vii), any sum of money or any property received without any consideration by any Individual or HUF was chargeable to income tax. Section 56(2)(viia), applicable upto asst year 2017-18, was applicable only to the Firm and Closely held company. Whereas, sec. 56(2)(x) is applicable to all kinds of the assessees.

The following receipts are to be taxed as deemed income:

  1. Any sum of money that is received without consideration, in aggregate exceeding Rs.50,000 during the financial year

  2. Any immovable property without any consideration, the stamp duty value of which exceeds Rs.50,000

  3. Any immovable property with the consideration which is less than stamp duty value by an amount exceeding Rs.50,000

  4. Any movable property (as defined and specified) without consideration where aggregate fair market value whereof exceeds Rs.50,000

  5. Any movable property (as defined and specified) for consideration which is less than fair market value by an amount exceeding Rs.50,000

Exceptions to Section 56(2)(x): Provision of section 56(2)(x) would not apply to any sum of money or any property received from any relative. Meaning of Relative as defined in section 56(2)(vii). Provisions of 56(2)(x) would also not be applicable to any sum of money or any property that is received from a relative as defined above and also under the following circumstances:

  1. On the occasion of an individual’s marriage

  2. By a will or by way of inheritance

  3. In the contemplation of death of the payer or donor, as the case may be;

  4. From any local authority that as defined in the Explanation to clause (20) of section 10

  5. From any fund/ foundation/ other educational institution/ university/ hospital/ other medical institution/ any trust or institution referred to in under section 10(23C)

  6. From or by any trust or institution that is registered under section 12A or section 12AA or section 12AB

  7. By any trust or fund or any institution or university or other educational institution or hospital or any other medical institution referred to in sub-clause (iv)/ (v)/ (vi) or sub-clause (via) of section 10(23C)

  8. by way of transaction not regarded as transfer under clause (i)/(iv)/ (v)/ (vi)/ (via) / (viaa)/ (vib)/ (vic)/ (vica) (vicb)/ (vid)/ (vii)/ (viiac)/ (viiad)/ (viiae)/ (viiaf) of section 47;

  9. From any individual by a trust created or established solely for the benefit of relative of the individual.

  10. from such class of persons and subject to such conditions as may be prescribed.

  1. Sec. 56(2)(x)(c): Transfer of property other than Immovable Property

Where an assessee transfers Shares (other than shares quoted on recognised stock exchange), for a consideration which is less than Fair Market Value (FMV) of the share, such FMV shall be deemed to be full value of consideration received as a result of such transfer. The FMV of the shares shall be determined in accordance with Rule 11UA of the Income Tax Rules. The FMV in normal circumstances be calculated at “Net Worth” or “book value” of the company. Again, in such a case, a shareholder is required to pay tax on the amount which he has neither actually received nor is he going to receive in future but on the amount which he is deemed to have received based on certain valuation principals.

  1. Sections 68 to 69D

Sections 68 to 69D are also provisions of deemed income and deal with Tax Treatment of Cash Credit, Unexplained investments, Unexplained money, Amount of investments not fully disclosed in books of account, Unexplained expenditure and Amount borrowed or repaid on hundi in cash under section 68, Section 69, Section 69A, Section 69B, Section 69C and Section 69D respectively. As per section 68, any sum found credited in the books of a taxpayer, for which he offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, may be charged to income-tax as the income of the taxpayer of that year. In case of a taxpayer being a closely held company (i.e., not being a company in which the public are substantially interested), if the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory if prescribed conditions are not fulfilled.

Section 68 -As per section 68, any sum found credited in the books of a taxpayer, for which he offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, may be charged to income-tax as the income of the taxpayer of that year. In case of a taxpayer being a closely held company (i.e., not being a company in which the public are substantially interested), if the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory if prescribed conditions are not fulfilled.

In case of a taxpayer being a closely held company (i.e., not being a company in which the public are substantially interested), if the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory, unless:

  1. the person, being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about the nature and source of such sum so credited; and

  2. such explanation in the opinion of the Assessing Officer has been found to be satisfactory.

The above provisions of share application money, share capital, etc., shall not apply if the person, in whose name such sum is recorded, is a venture capital fund or a venture capital company as referred to in section 10(23FB).

Conditions to be satisfied for applicability of section 68: Following conditions can be stated to attract the applicability of section 68 : Assessee has maintained ‘books; there has to be credit of amounts in the books maintained by the taxpayer of a sum during the year and the taxpayer offers no explanation about the nature and source of such credit found in the books or the explanation offered by the taxpayer in the opinion of the Assessing Officer is not satisfactory. If all these conditions exist, sum so credited may be charged to tax as income of the taxpayer of that year. Provisions applicable in case of closely held company have already been discussed above.

Sec. 69 Unexplained investments : Where in a year the taxpayer has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and he offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, then the value of the investments may be deemed to be the income of the taxpayer of such year.

Sec. 69A Unexplained money, etc.: Where in any year the taxpayer is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the taxpayer offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, then the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the taxpayer for such year.

Sec. 69B Amount of investments, etc., not fully disclosed in books of account: Where in any year the taxpayer has made investments or is found to be the owner of any bullion, jewellery or other valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the taxpayer for any source of income, and the taxpayer offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, then the excess amount may be deemed to be the income of the taxpayer for such year.

Sec. 69C Unexplained expenditure, etc.: Where in any year the taxpayer has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, then the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the taxpayer for such year. It may be noted that the aforesaid unexplained expenditure which is deemed to be the income of the taxpayer by virtue of section 69C shall not be allowed as a deduction under any head of income.

Sec. 69D Amount borrowed or repaid on hundi: Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account- payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the such amount. It will be treated as income for the year in which it was borrowed or repaid, as the case may be. However, it should be noted that if any amount borrowed on a hundi has been treated as income of any person by virtue of section 69D, then such person shall not be liable to be assessed again in respect of the same amount on repayment thereof. Amount repaid shall include the amount of interest paid on the amount borrowed.

  1. Section 115BBE: Tax rates applicable to amount charged to tax by virtue of sections 68, 69, 69A, 69B, 69C and 69D

As per Section 115BBE, income tax shall be calculated at 60% where the total income of assessee includes following income:

  1. Income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C or Section 69D and reflected in the return of income furnished under Section 139; or

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

Such tax rate of 60% will be further increased by 25% surcharge, 4% Education Cess i.e., the final tax rate now comes out to be 78% (including cess). Provided that 6% (10 per cent of tax of 60 per cent) penalty under section 271AAC may be imposed if the addition is made by the A.O.. However as per sec. 271AAC(2), it shall not be levied when the income under Section 68, 69, etc., has been included in return of income and tax has been paid on or before the end of relevant previous year.

No deduction in respect of any expenditure or allowance [or set off of any loss] shall be allowed to the assessee in computing his income referred to in clause (a) of sub-section (1) of Section 115BBE.

  1. Several other provisions for deemed income

In addition to above there are many other provisions in Income tax Act which include Income deemed to be received or accrued as incorporated in the scope of Income in Section 5; income deemed to accrue or arise in India (Sec. 9) determination of Arm’s Length Price (ALP) for transfer of goods, services and technology between Associated enterprises in International transactions (contained in Chapter X of Income Tax Act), Specified domestic transactions in section 92BA where the transactions are generally between related parties and aggregate of such transactions entered into by the assessee in the previous year exceeds Rs.50 crore; GAAR (Se. 95 to 102), MAT under sec. 115JB, AMT under sec. 115JC as well as other provisions. Section 292C provides for Presumptions as to assets, books of account found in course of search under sec. 132 and survey under sec. 133A.

  1. Taxation of Real Income

In landmark case of Poona Electric Supply Co. Ltd v. Commissioner Of Income-Tax, [1965] 57 ITR 521(SC) : 1965 SCR (3) 818, the Supreme Court held that Income-tax is a tax on the real income. It was observed: “As a business concern the real profit of the appellant had to be ascertained on the principles of commercial accountancy. As a licensee governed by the statute its “clear profit” was ascertained in terms of the statute and the schedule annexed thereto. The two profits are for different purposes-one for commercial and tax purposes and the other for statutory purposes in order to maintain a reasonable level of rates. The amounts for which deduction was claimed were a part of the excess amount paid to the assessee and reserved to be returned to the consumers. They did not form part of the assessee’s real profits, and therefore, to arrive at the taxable income of the assessee from the business, under s. 10(1) of the Income-tax Act, 1922 the said amounts had to be deducted from its total income. The income tax is a tax on the real income, that is the real profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear cut distinction between deductions made for ascertaining the profits and distributions made out of profits. It is a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that should be borne in mind is that between the real and the statutory profits, that is between the commercial profits and statutory profits. The latter are statutorily fixed for a specified purpose. The real profit of a businessman under s. 10(1) of the Income tax Act, 1922 cannot, obviously include the amounts returned by him by way of rebate to the consumers, under statutory compulsion, from the statutory profits.

Other relevant decisions / decision followed and cited in many cases including the following:

  1. Raja Bejoy Singh Dudhuria v. The Commissioner Of Income-Tax (1933) 35 BOMLR 811: The Bombay High Court emphasized the concept of real income in the context of payment of income tax. Lord Macmillan, speaking for the Bench said that the only ‘the real income’ of the taxpayer is to be taxed.

  2. Ratilal Daftari v. CIT, [1959] 36 ITR 18 (Bom)

  3. Murlidhar Himatsingha v. CIT [1966] 62 ITR 323 (SC),the decision in Ratilal Daftari was approved and it was reiterated that for purposes of assessment, the real income of the assessee has to be reached, which remains after deducting the amount that may be said to have been diverted and that what constitutes his real income only could be assessed.

  4. Godhra Electricity Co. Ltd. (1997) 225 ITR 746 (SC);

  5. CIT v. Sujata v. Manohar and G.B. Pattanaik (1999) 236 ITR 315 (SC);

  6. Acit, Central Circle-7, New Delhi. v. Anil Kumar Sharma, B3, Agcr Enclave, New Karkardooma, New Delhi

  7. K. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 (Trib.)

  8. State Bank of Travancore v. CIT, [1986] 158 ITR 102 (SC).The real income theory was accepted by the Apex Court.

  9. Southern Technologies Limited v. Joint CIT, Coimbatore [2010] 320 ITR 577 (SC)

  10. CIT v. Shoorji Vallabhdas & Co. 46 ITR 144 (SC);

  11. CIT v. Chemosyn Ltd 371 ITR 427 (Bom)

  12. CIT v. Chamanlal Mangaldas & Co. 39 ITR 8 (SC)

  13. CIT v. Chamanlal Mangaldas & Co. 29 ITR 987 (Bom)

  14. CIT v. Harivallabhadas Kalidas & Co. 39 ITR 1 (SC)

  15. CIT v. Virtual Soft Systems Ltd 404 ITR 409 (SC)

  16. CIT v. Lakshmi Machine Works 290 ITR 667 (SC)

  17. Miss Dhun Dadbhoy Kapadia v. CIT 63 ITR 651 (SC)

  18. CIT v. Bokaro Steel Ltd 236 ITR 315 (SC)

  1. Deeming provision has to be interpreted strictly

It is settled principle of interpretation of tax statute that a deeming provision has to be interpreted strictly in terms of the language employed. It is also a cardinal principle of interpretation of taxing statute that a deeming fiction over a deeming fiction cannot be applied.

  1. Notional Income or Deemed Income should not be taxed, Real income should only be taxed

The Government should find out the ways of curbing the trend of tax avoidance. It would do well if only real income is taxed under Income Tax Act. The Courts have also held in many cases that Real income should only be taxed. Therefore growing of taxing of deemed or notional income is not justified.

(Narayan Jain is former National Vice President of AIFTP and author of the books “How to Handle Income Tax Problems” and “Income Tax Pleading & Practice” with CA Dilip Loyalka).


Benjamin Franklin has rightly said that “In this world, nothing is certain except death and taxes”.

Any sudden death of a family member disrupts the entire family and any liability to pay taxes further burdens the family. It is pertinent to note that not only the alive but also the dead are required to file Income-tax return and pay their taxes.

Upon death of a person, his legal representatives to whom his estates pass on is liable for compliances and to pay any tax liability / tax arrears.

Before discussing the said provision of legal representatives, would like to mention that definition of the word legal representative is provided in Section 2(29) of the Income-tax Act, 1961 (hereinafter referred to as “Act”). Section 2(29) of the Act adopts definition from the section 2(11) of the Code of Civil Procedure, 1908: ‘Legal representative’ means a person who in law represents the estate of a deceased person and includes any person who inter-meddles with the estate of the deceased and where a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the party so suing or sued. The term legal representative includes an heir, executors, administrator or other legal representative.

It is important to note here that a legal representative assessed under this section 2(29) of the Act is different from a representative assessee to whom section 160 to 167 of the Act applies. A legal representative does not fall within any of the categories of representative assessee enumerated in section 160 of the Act.

The legislative history of the term ‘legal representative’ corresponds to section 24B of the Income-tax Act, 1922 (herein after referred to as “IT Act”) which was as follows:

24B: Tax of deceased person payable by representative:

  1. Where a person dies, his executor, administrator or other legal representative shall be liable to pay out of the estate of the deceased person to the extent to which the estate is capable of meeting the charge of tax assessed as payable by such person, or any tax which would have been payable by him under this Act if he had not died.

The aforesaid section remained unchanged since its enactment till 1961. The above language made legal representative liable only for the tax assessed on, or payable by, deceased and casts no personal liabilities on the legal representative and did not deal step by step with the various stages of proceedings at the time of death.

The Income-tax Act, 1961 split up the charge of tax on the legal representative of the deceased assessee into two section, i.e. Section 159 and Section 168. These sections are redrafted provisions relating to the assessment of legal representative of the deceased persons contained in section 24B of Income-tax Act, 1922.

Provisions of Section 159 of the Income-tax Act, 1961 enables assessment being made and levy taxes on the income earned by the person who was alive during a previous year but died before the assessment proceedings could be completed. Death of a person does not relinquish him from the tax liability, his legal representative shall be obliged to pay any tax which the person would have paid had he been alive. This section is a machinery section and cannot be construed as to impose a tax liability on legal representative.

The Supreme Court of India dealing with section 24B of the IT Act, which is in pari materia with section 159 of the Act held in CIT v. Amarchand N. Shroff (1963) 48 ITR 59 (SC) that the personality of the deceased assessee, which ceased after his death, is extended for the duration of the entire previous year in the year of death. Therefore, the income received by him before his death and that received by his heirs and legal representatives after his death but in that previous year becomes assessable to income tax in relevant previous year

  1. Manner of computation of total income and filing of Income tax return of Deceased Person

Income of the deceased person for the purpose of computation can be categorized into following two:

  1. Income earned from 1 April till date of his death; and

  2. Income earned after his date of death.

Therefore, in the financial year in which the person died, two income-tax returns shall be filed. One by the legal representative till the date of his death under section 159 of the Act and thereafter as legal representative / executors for income on his estate under section 168 of the Act. [B. D Gupta & Sons v. ITO – 70 SOT 16 (Delhi Tribunal)]

  1. Income earned before the date of death

The income-tax return will be required to be filed as if the deceased had not died in the same manner and extent as the deceased did for income earned before the death. The legal representatives of the deceased person are liable file return of income and pay advance tax instalments, self-assessment tax, interest etc., for the period starting from the April 1st of the financial year up to the date of the death.

However, the liability of the legal representative shall be limited to the estate dwelled upon him, ie, he is not required to pay anything out of his pocket.

Income-tax return shall be filed in the PAN of the deceased person, however under the capacity of legal representative.

  1. Income earned after the date of death

Income earned after the date of death – income accruing on the estate of the deceased is taxable in the hands of executor under section 168 of the Act. However, section 168 is applicable only in case where the is a Will (Testate death).

In case of an intestate death (i.e. there is no valid Will) of a person, the estate of the deceased falls into the hand of legal heir as per the law of succession, who would be the legal representatives and liable under section 159 of the Act.

In case of a testate death (where valid Will is created before the death) income earned after the date of death shall be taxable under section 168 of the Act in the hands of the Executor / Administrator. [CIT v. P. Manonmani (245 ITR 48) Madras Tribunal – full bench].

Explanation to section 168 provides that “executors” includes an administrator or other person administering the estate of a deceased person.

The executor shall be assessed in respect of the income of the estate separately from his personal income. Thus, there would be a requirement to obtain a separate PAN to file Income-tax return in the capacity of an executor.

In case where there is more than one executor, the income of the estate of a deceased person shall be chargeable to tax as if the executor were an association of persons “AOP”. The executor would continue to be chargeable to income-tax under section 168 of the Act until the estate of the deceased is distributed completely to the beneficiaries thereof. In case of Navnit Lal Sakarlal v. CIT [193 ITR 16 (SC)] it is held that until estate of the deceased person is distributed, income from estate will be taxable in the hand of executors as per section 168 of the Act.

If the estate is partially distributed in a given year, then, the income from the assets so distributed gets excluded from the income of the estate (executor) and gets included in the income of the legatee. Legatee is chargeable to tax on income after the date of distribution. Even, if the executor is the sole beneficiary, it does not necessarily follow that he receives the income in latter capacity. The executor retains his dual capacity and hence, he must be assessed as an executor till the administration of the estate is not completed except to the extent of the estate applied to his personal benefit in the course of administration of the estate.

The residential status of the executor shall be decided according to the residential status of the deceased person during the year in which his death took place. The executor has the right to recover or to retain the amount utilized for payment of liability of the deceased person.

Therefore, income up to the date of death shall be assessable under section 159 of the Act on the legal representatives of the deceased. However, from the date of death till completion of administration of the estate and distribution of the property, it shall be assessable under section 168 of the Act in the hands of the executor or administrator.

Apportionment of income

The section 159 of the Act creates legal fiction only for the purpose of assessment proceedings for that year. Any income accrued during the year of death, may be apportioned up to the date of death and legal representative may be charged in respect of the income which accrued to the deceased up to the date of death. But certain income such as dividend do not accrue from day to day. If a dividend becomes payable after the death, a part thereof up to the period of death cannot be treated as income of the deceased.

  1. Assessment proceedings

On the death of an assessee, the legal representative of the deceased is deemed to be an assessee. All the proceedings taken against the deceased before his death are deemed to have been taken against the legal representative and would continue against the legal representative. Similarly, any proceedings, though not commenced, but could have been initiated against the deceased, had he survived, can be taken against the legal representative. The liability of the legal representative would be confined to the extent to which the estate of the deceased is capable of meeting the liability.

If the assessee died before the assessment proceedings were completed, the assessing officer is required to bring the legal representative of the deceased on record and proceed from the stage where it was as on date of death of the assessee. [CIT v. Dalumal Shyanumal (2005) 276 ITR 62 MP HC]

In the case of Savita Kapila, legal heir of late Shri Mohinder Paul Kapila v. ACIT (2020) (273 Taxman 148 (Delhi HC) held that the legal heirs of the deceased assessee are under no obligation to inform the income-tax department about the death of taxpayer and therefore, whether the PAN record was updated or not or whether the department was made aware by the legal representatives or not is irrelevant. However, with a view to avoid unnecessary litigation, it would be prudent for the legal representative or the executor as legal heir to register on the income-tax e-filing portal.

In case where death of an assessee occurs post completion of hearing but before making an assessment order, the non-issuance of notices to the legal representatives does not invalidate the assessment order in the name of deceased. This principle shall not hold good, if the assessee is already dead on the date of issuance of notice. In other words, notice cannot be issued in the name of a dead person and such notice will be null and void and proceedings cannot be continued against the legal representatives.

If there are more than one legal representative / executor, notice should be served on all of them. CIT v. Jayprakash Singh (1996) 85 Taxman 407 (SC). However, it would be sufficient if the assessing officer after diligent inquiry ascertain legal representative / executor and serve them the notice, who represent the estate of the deceased. Any omission or defect in notice may render assessment order an irregular, but not void and illegal.

  1. Reassessment Proceedings

In the case of reassessment on the deceased person, the notice for reassessment must be issued to the executor who have been appointed under the Will, and in case of intestate death, on administrator in the capacity as legal representative.

Sub-clause (a) of clause (2) of section 159 states any proceedings taken against the deceased before his death shall be deemed to have been taken against the legal representative. Reassessment relates to the income which is alleged to have been received by the deceased while he was alive and have escaped assessment. Therefore, said legal representative / executors shall be liable to pay any sum which the deceased person would be liable to pay in the like manner and to the same extent as the deceased.

  1. Refund receivable by the deceased

The legal representative of the deceased assessee is liable to receive the refund of the deceased in the same manner as he is liable to pay for any taxes.

Income-tax refund can be received when it was claimed / it was ordered and thereafter only it can be received. Any interest on the said income-tax refund shall be treated as income of the legal representative / heir in their individual capacity and not as in their legal representative capacity. [PV Chandran v. CIT (2001) 114 Taxman 599 Kerala High Court]

  1. Penalty Proceedings

The word “any sum” has been substituted in section 159 of the Act in place of word “any tax” which occurred in old section 24B of the IT Act so as to cover not only tax payable but also any penalty or interest. Therefore, the legal representatives of the deceased can by liable to pay penalty on behalf of the deceased assessee pursuant to the provisions of Section 159(1) of the Act. Further, section 159(4) of the Act states only “tax’. Hence joint reading of clause (4) and clause (1) suggests that only “tax” would be payable (if any) by legal representative and Penalty is quasi-criminal liability hence legal representative would not be liable.

Issuance of penalty notice could be either before the assessee dies or after his death. In case, if penalty proceedings were already initiated while assessee was alive, the same could be continued against the legal representative under section 159(2)(a). In case of Tapati Pal v. CIT (2002) (124 Taxman 123), High Court of Calcutta held that penalty proceedings for a default committed by deceased can be started or continued against the legal representative.

In case of Jai Narain Upadhyay v. ACIT (2012) (148 TTJ 529), Lucknow Tribunal held that if during the pendency of the penalty proceedings, assessee dies and no fresh notice is issued to the legal representatives, the penalty order passed will not be sustainable in view of the violation of principles of natural justice.

In case of ITO v. V. P. Sharma (2006) (154 Taxman 34), Delhi Tribunal held that penalty proceedings cannot be initiated against legal representative by taking recourse to section 159(2)(b).

In case of CIT v. Dr. KGC Verghese (2019) 416 ITR 155, Madras Tribunal, held that, as per section 271(1)(c) penalty can be levied only on that person who has concealed the particulars of income or filed inaccurate particulars of income. The use of the words ‘such person’ in section 271(1)(c) clearly mandates the authority to levy penalty only on the same person who has filed the return of income and concealed the particulars or filed inaccurate particulars in such return. In the present case, return was filed by the deceased, but penalty has been levied on the legal representatives. In the case on hand, return has been filed by the deceased assessee, against whom, no penalty proceedings have been initiated and levied any sum. Penalty was not levied on the same person. It was held that, no penal proceedings had been initiated against assessee, when he was alive and, moreover, assessment had not been done in hands of legal representative, penalty could not be levied on legal representative

Though above ruling was in the context of old penalty provisions, but the same analogy can be applied in the new penalty provisions also.

The penalty proceedings can be initiated against the legal representatives in case of concealment of any income of the deceased or on account of failure to file the correct Income-tax return or for failure to discharge the tax liability in his capacity as a legal representative.

  1. Search proceedings against a dead person

Any proceedings taken against the deceased before his death shall be deemed to have been taken against the legal representatives and may be continued against the legal representatives from the stage at which it stood on the date of the death of the deceased.

  1. Prosecution

The provision of section 159 of the Act does not enables initiating prosecution proceedings against legal representative for offence committed by the deceased. The prosecution for any offence would abate with the death of the deceased.

  1. Recovery of Tax

As per Section 159(6) of the Act states that the tax liability of the legal representative / heir of the deceased shall be limited to the estate of the deceased person.

  1. Hindu Undivided Family (HUF)

HUF is a legal entity and not a nature personal or living person who can die and hence cannot be regarded as deceased person. Section 159 and 168 are applicable only to a natural person. Further, on the death of Karta of HUF, the individual holding position of Karta dies and not the HUF. On the death of Karta of HUF, it cannot be said that family also died, nor the Karta can leave a Will in respect of properties held by HUF. The surviving member of the HUF have right under the Hindu law and under law of succession.


Filing of Income-tax return of the deceased / assessment proceedings may become a herculean task as practically it could be difficult to obtain details of income as the legal representatives may not be aware of the activities done by the deceased prior to his death.

Further, in case of any pending tax litigation or tax arrears and if the assets of the deceased do not have sufficient liquidity then the legal representative might be left with no other choice but to sell the assets in order to remit the liabilities.

If the legal heirs sell the inherited property, the amount will be charged to tax under the head Capital Gains as long term or short-term Capital Gain depending upon the period of holding. For the purpose of ascertaining the holding period, the period of holding of deceased shall also be considered and accordingly benefit of indexation will be available. Section 56(2) of the Act specifically excludes any sum received without consideration as a gift, under a Will or by way of inheritance from the purview of income tax.

The legal heirs merely by being aware of the provisions of Income-tax and following procedural formalities can save huge amount of interest and penalty.

A key point to be remembered is that PAN is an important identification document therefore legal heirs should only after completion of all the necessary tasks such as filing of income tax returns, closing bank accounts of the deceased and transferring assets, surrender the PAN Card of the deceased person by writing an application to the Assessing Officer under whose jurisdiction PAN is registered. The letter should contain the reasons for surrender, name, PAN, date of birth of the deceased and a copy of death certificate.