HIGH COURTS MADHYA PRADESH HIGH COURT

Uma Shree Tour and Travels

v.

State of Madhya Pradesh & Ors. [Sheel Nagu & Sunita Yadav JJ] Writ Petition No. 2333 OF 2022

Date of Decision: February 2, 2022

Writ—maintainability of—Registration— Cancellation of without opportunity of hearing being provided as alleged by petitioner—question of fact involved— Disputed question of fact cannot be gone into in a writ—Therefore, petitioner to avail remedy u/s 30 of the Act for revocation of registration—Petition disposed of

The petitioner had earlier filed an appeal u/s 107 of CGST Act, 2017 against the impugned order passed u/s 29 of the said Act which became infructuous for the reason that appeals u/s 107(1) are only against the orders passed by the adjudicating authorities. Hence, this by way of writ petition, petitioner assails the order of cancellation of registration passed u/s 29 of the CGST Act, 2017. In this regard, petitioner contended that no opportunity of being heard was given to him and the order of cancellation of registration was never served upon him and therefore, he could not avail statutory remedy u/s 30 for seeking revocation of the cancellation of registration. But the impugned order reveals that a show cause notice was issued in response to which the petitioner preferred a reply which was also taken into account. In this context, Hon’ble Court held that the contention that impugned order was not served on the petitioner involves disputed questions of fact specially in the face of unavailed remedy u/s 30 which enables a person aggrieved by an order of cancellation of registration to apply for revocation within 30 days and also confers jurisdiction on the competent authority to condone the delay if there is sufficient cause. The present Writ Petition disposed off.

BOMBAY HIGH COURT

Dee Vee Projects Ltd.

v.

Union of India & Ors.

[Sunil B. Shukre & Anil S. Kilor, JJ] Writ Petition No. 2693 OF 2021

Date of Decision: February 11, 2022

Blocking of Electronic Credit ledger—Exercise of powers under Rule 86A of CGST Rules, 2017—Electronic Credit Ledger cannot be blocked for an amount which is more than the amount found to be fraudulent or wrongful availment—Order passed by officer blocking more ITC was not independent as compelled by commands of Senior Officer—Settled principle of administrative law not followed while passing the impugned order—Petition partly allowed quashing the order – Sections 62, 63, 64, 67, 73, 74 & 83 of CGST Act, 2017

Petitioner has filed this writ petition for quashing of action of blocking of Electronic Credit Ledger. Electronic Credit Ledger was blocked by the Deputy Commissioner. In this regard, petitioner contends that the credit amount available in the ECL being the property of the petitioner, its blocking amounts to illegal provisional attachment of the property u/s 83 of the CGST Act, 2017 which can be done only if any proceeding is pending or initiated under any of sections such as sections 62, 63, 64, 67, 73 and 74. The procedure under the provisions of Rule 86A was also not followed.

Hon’ble Court held that action has been taken by Deputy Commissioner holding the rank above an Assistant Commissioner, who was duly authorised by the Commissioner to initiate action under Rule 86-A of the CGST Rules, 2017. For invoking the power under rule 86- A, there is no necessity that proceeding under any of the said sections is initiated and, any order passed under Rule 86-A cannot be treated as the order amounting to the provisional attachment of property u/s 83 of CGST Act. Further, such blocking of the ECL cannot be for an amount which is more than the amount found to be fraudulently availed. Moreover, exercise of powers under Rule 86-A made by respondent was not independent as the officer was compelled to obey the commands of its superior and this non- following of well established principle of administrative law making the order illegal. Thus, the Hon’ble court quashed the impugned order of blocking of Electronic Credit Ledger and partly allowed the present petition.

DELHI HIGH COURT

Karamjeet Jaiswal

v.

Commissioner of Central Taxes GST Delhi East

[Manmohan, Navin Chawla, JJ] CWP No. 2408 OF 2022

Date of Decision: February 8, 2022

Provisional attachment—Seeking direction to release the immovable properties and de- freeze bank account—Orders neither renewed nor any fresh orders of attachment passed except a SCN issued U/s 74 of CGST Act, 2017—Provisional attachment ceased to have effect after one year –– Writ petition disposed of—Section 83 of CGST Act, 2017

Petitioner has filed this Writ petition seeking direction to the Respondent to release the property and defreeze the accounts of the Petitioner. The Petitioner is neither a taxable person as defined under Section 2(107), CGST Act, 2017 nor registered under the CGST Act, 2017. He states that the provisional attachment of the bank accounts of the petitioner ’s daughter has already been quashed by this Hon’ble Court. The major contention was that the provisional attachment order, in any event, has ceased to have effect after the lapse of one year. On the other hand, Respondent states that the impugned attachment orders have neither been renewed nor any fresh orders of attachment have been passed. However, a show-cause notice has been issued to the Petitioner and admitted that every provisional attachment ceases to have effect after the expiry of a period of one year. Consequently, the Hon’ble Court allows as prayed by the petitioner. Writ Petition disposed of.

TRIPURA HIGH COURT PODDER AND PODDER INDUSTRIES

PVT. LTD

v.

STATE OF TRIPURA AND OTHERS

[INDRAJIT MAHANTY & S.G. CHATTOPADHYAY, JJ]

WP(C) No.285 of 2022

 Date of Decision: March 29, 2022

E- way bill—expiry of—Goods in question covered by proper documents—Expiry of e way bill due to technical problem in the vehicle—Held such goods could not be stopped from entering the state—Instead an ‘undertaking’ could have been taken for informing assessing officer to comply with required steps—Petitioner to appear before Gate officer with a n undertaking an the latter to release the goods and vehicle

In this case the goods were in transit from one state to another. The required documents were being carried along with. On the way the vehicle in which the goods were being carried faced some technical problems. The e-way bill expired and the vehicle was detained. The driver was informed about the seizure of the goods. Hence a writ is filed seeking release of the vehicle and the goods.

The Hon’ble Court has observed that in a case where there is no doubt that a transaction is made between 2 register dealers and is covered by proper documents .Even if the they e-way bills has expired just before entry into the State such vehicle could not be stopped. Instead an undertaking can be taken from the buyer or the seller and the Assessing Officer can be informed accordingly to make necessary compliance. The writ is disposed of directing the petitioner to appear before the Check Gate Officer along with an undertaking and the Check Gate Officer shall release the goods and vehicle thereby.

CALCUTTA HIGH COURT

Shivaco Associates & Anr. v.

Joint Commissioner of State Tax & others [Amrita Sinha, J]

WPA No.54 of 2022

Date of Decision: March 11, 2022

Inverted duty structure—Claim of ITC u/s 54(3) of CGST Act wherein input and output goods are same—Denial by authorities based on circular dated 31/3/2020—Held circular is meant to supplement law and not supplant law—no distinction is made by legislature in respect of goods wherein input and output supplies remain same—refund is permissible in respect of all cases where input tax is higher than the output tax

The petitioner’s claim on the unutilized input tax credit was rejected. The said refund was sought under Section 54(3) of CGST Act as the rate on inputs stood higher than the rate on output supply.

The petitioner ’s claim was rejected by the Authority relying on a circular issued by the Board i.e. Circular No.135/2020-GST dt. 31.03.2020 where it is mentioned that the taxpayers cannot claim refund in terms of Clause 2 of Section 54(3) of the CGST Act in case where the input and output supplies remain the same. After the appeal was rejected the writ was being filed before the Hon’ble High Court.

The Hon’ble Court has held that any circular issued under Section 168 of the Act is only for the purpose of bringing uniformity in the implementation of the Act. The Act does not restrict refund only in respect of supplies which are different at the input and output stage. There is no reason why the benefit of a cumulative ITC should not be passed to the petitioner. A Circular cannot supplant or implant any provision which is not available in the Act. The circular in question is imposing a restriction to release certain benefits which are provided under the Act.

The circular is creating a class inside the class, which is impermissible according to the Act and refund is permissible in respect of all cases where input tax is higher than the output tax. The circular is curtailing the said benefit and making the refund permissible only if the input and output supplies are different .This amounts to over-reaching the provisions given in the Act.

It cannot be said that the legislature was unmindful of the fact that there may be instances where input tax supplies are same. On the contrary, the legislature consciously has not created any distinction for allowing refund in cases where input tax is more than output tax. The said benefit is applicable to all similar cases. Therefore, the impugned orders are hereby quashed and the petitioners are entitled refund as claim.

GUJARAT HIGH COURT

Khodiar Export Import

v.

State of Gujarat

[JB Pardiwala & Ms. Nish Thakore, JJ]

R/Special Civil Application No.5220 of 2022

Date of Decision: March 16, 2022

Registration—Natural Justice—Non filing of returns—Cancellation of registration—Order challenged for being non speaking—Appeal dismissed by holding that on basis of spot visit made by officer, restoration appeal is disallowed—Held principles of natural justice violated—Ground absent in SCN considered for dismissal of appeal—No chance to reply to the notice given—Restoration allowed on filing of returns and payment of interest and penalty

The registration of the firm was cancelled on the ground of not filing of return as the firm was unable to file few monthly returns and payment of tax is a prerequisite before acceptance of the returns on the GST Portal. The order of cancellation was non-speaking order which was challenged before the Appellate Authority. The Appellate Authority also dismissed the appeal by holding that on the basis of the spot visit made by the Officer the appeal for restoration is dismissed. The Hon’ble

Court has held that it is unable to understand how the Appellate Authority behind the back of the firm would have taken into consideration the report of the spot visit undertaken by the Respondent No.3 for the purpose of dismissing the appeal. The firm was not given a chance to reply to the notice put forward. The ground which is not at all in the show cause notice has been considered and the appeal has been dismissed. The entire procedure followed by the respondent and the Appellate Authority is against the principles of natural justice. The petitioner is allowed to file returns along with payment of interest and penalty. The GST registration will have to be revived.

ALLAHABAD HIGH COURT

A.S. Enterprises

v.

Commissioner of State Tax, U.P. & 2 Ors. [Saumitra Dayal Singh, J]

W.P. No.1126 of 2021

Date of Decision: April 1, 2022

Detention of goods—Onus to prove malafides—A part of Goods in transit detained for being without documents—Subsequently documents produced by driver—Acceptance declined by authorities—Complete invoices produced by petitioner at time of SCN— No genuiness doubted- no enquiry held to establish malafides—Held onus on department to prove ingenuiness now—Seizure, confiscation, demand and penalty based on no cogent material—Impugned orders set aside

The goods were being transported from Punjab to Gwalior. Since the value of goods was below Rs.50,000, issuance of e-way bills was not required. However, the goods were checked in the State of U.P. where a part of consignment was found covered by the documents produced and the respondent detained the remaining part for not being covered with any invoice or documents. It is alleged by the petitioner that it was due to inadvertence of the driver that the entire documents were not produced at the time of physical verification. On realizing his mistake, the driver produced the remaining documents but the authorities declined to accept them. A show cause notice was issued and the petitioner presented original invoices to establish the genuineness of the transaction. The authorities imposed tax and penalty on account of absence of such documents required to be produced at the stage of interception.

It is held, that no enquiry has been conducted by the authorities to doubt the transaction. The petitioner has discharged the onus at the stage of show cause notice itself. Thereafter it is for the authorities to lead evidence to establish that the goods in question are related to bogus transaction or otherwise .Thus seizure and confiscation and demand of tax and penalty is based on no cogent material and evidence. The impugned orders are set aside and petition is allowed.

ORISSA HIGH COURT

Ajaj Ahamad

v.

State of Odisha [S.K. Panigrahi, J.]

B.A. No. 6498 of 2021

Date of Decision: April 4, 2022

Bail- Fraudulent ITC—In custody for alleged offence to the tune of Rs 5 crore for over 1 year—Bail application filed— Held: Respondent has not contended that enlargement of accused would cause hurdle in investigation—Seriousness of crime not to deter courts in granting bail—In custody for over one year—Only bread earning son of the family—No justification for holding him in custody—Bail granted subject to conditions

After a search enquiry was conducted on firm Rs.X’, the petitioners’ firm was allegedly found availing fraudulent ITC from the sham subsidiary of Firm Rs.X’. The petitioner was arrested for availing ITC to the tune of Rs.5,00,00,000. A bail is sought in this regard.

It is held that there is no justification for classifying offences into different categories and refusing bail on the ground that the offence belongs to a particular category. It is not in the interest of justice that petitioner should be in jail for indefinite period. Though the offence alleged is a serious one it should not deter this court from granting bail when there is no serious contention given by the respondent that petitioner’s bail would interfere with the trial. Considering the fact that the petitioner is the only bread earning son of a family and has been in custody for over a year now, there is no justification for his detention any longer.

The bail is allowed subject to conditions.

MADHYA PRADESH HIGH COURT

Technosteel Infraprojects Pvt. Ltd.

v.

State of Madhya Pradesh & Ors.

[Sheel Nagu & Maninder S. Bhatti, JJ]

Writ Petition No. 6118 OF 2021

Date of Decision: March 30, 2022

E-way Bill—Address wrongly mentioned— Intention to evade tax—Section 129 of CGST Act, 2017—Held : Mistake in question is bonafide—Principle of parity invoked—Writ allowed

The Petitioner had to get goods delivered outside the state. For this purpose, a tax invoice and E way bill was generated. However, the address on the E-way bill was mentioned at registered office of the consignee at Jabalpur, instead of Rewa and thus, the Revenue Authorities initiated proceedings u/s 129 of CGST Act, 2017 which ultimately imposed additional tax as well as penalty against the petitioner and the appeal against the said order was also dismissed. It is alleged by the petitioner that the mistake while generating E-way bill was an inadvertent human error and there was no intention to evade the tax, when the vehicle number which was transporting the goods was same.

Hon’ble Court while relying upon the decision in the case of Robbins Tunnelling and Trenchless Technology (India) Pvt. Ltd. vs. The State of M.P. and others, held that the mistake in question being bonofide this Court invoking the principle of parity, and quashed the impugned orders. Writ petition allowed.

MADRAS HIGH COURT

Golden Cashew Products Private Limited

v.

The Commercial Tax Officer & Ors.

[C.Saravanan, J]

Writ Petition No. 33124 OF 2019

Date of Decision: February 3, 2022

Tran-1—Denial of ITC—ITC denied on account of technical error as alleged by petitioner—Contrarily, Tran-1 stood unsubmitted as per respondent—No proof submitted regarding timely submission as alleged—Held: ITC credit lying unutilized before the introduction of GST to be refunded back by way of credit in the electronic cash register

In the present case, the petitioner was required to file form GST TRAN-1 on or before 27.12.2017 which stood extended from time to time and petitioner did not file the same within time. Instead, the petitioner sent a representation dated 15.03.2019 to the Commercial Tax Officer stating that it came to know that there was a technical error only through the findings of the order and decided to claim Input Tax Credit by resubmitting form TRAN-1 as per Notification No. 48/2018– Central Tax. Petitioner also appeared before the Commercial Tax Officer who informed that the petitioner was not entitled to the benefit for the reason that the due date to file form TRAN- 1 had been extended upto 31.03.2019 as per Order No. 1/2019 dated 31.01.2019 and it was applicable only for a certain class of registered persons who could not submit declaration in GST TRAN-1 within due date on account of technical difficulties in the common GST portal. In this regard, Respondents contended that on verification of the GST portal, it was found that no such return was filed by the petitioner within the period i.e. before due date and therefore, the petitioner was asked to resubmit the letter alongwith evidence for having entered TRAN-1 in GSTN portal as stipulated in the circular of the Government. Respondents further contended that without submitting any evidence on account of technical/system error faced by the petitioner while submitting TRAN-1 to the jurisdictional/proper officer, the petitioner has clandestinely claimed to reopen TRAN-1 and therefore, the proper officer was not able to forward the petitioner’s claim to the nodal officer.

After hearing the contentions of both sides, the Hon’ble Court held that if Input tax credit was lying un-utilized in the CENVAT account or VAT returns prior to the implementation of GST, such amount cannot be denied for being utilized for discharging the tax liability under the respective GST enactments. It further decided to dispose of this Writ Petition by directing the jurisdictional officer to examine the petitioner’s CENVAT account or VAT returns and ascertain whether any such credit was lying un-utilized as on 30.06.2017 and if such credit existed in the CENVAT account or VAT returns of the petitioner, the amount shall be either refunded back by way of credit in the Electronic Cash Register of the petitioner or allowed to be transitioned notwithstanding the fact that the petitioner may have failed to file TRAN-1 in time.

GUJARAT HIGH COURT

Arya Metacast Pvt. Ltd. & Another

v.

State of Gujarat & Another

[J.B.Pardiwala, Nisha M. Thakore, JJ]

R/Special Civil Application No. 2787 of 2022

Date of Decision: March 17, 2022

Provisional attachment—Amidst other properties laptop, mobile phone and documents seized u/s 83 of the Act—Such seizure contested against—Held: Power u/s 83 draconian in nature—Formation of opinion of commissioner to be strictly adhered to—Demat account and current account being valuable assets for business – Provisional attachment qua the stock of goods, two demat accounts and current account set aside.

The respondents initiated the search proceedings u/s 67 of the Gujarat GST Act, 2017 at the business premises of the writ applicants on the suspicion that they had shown ingenuine purchases from fictitious firms. Orders of provisional attachment of various properties were passed. Apart from the other properties, the respondent authorities have also seized the mobile phone, laptop and other documents from the business premises of the writ applicants by passing the seizure order. The writ applicants have made representation followed by subsequent reminders, but the same are not responded. In this regard, Petitioner contended that exercise of power for ordering the provisional attachment must be preceded by formation of an opinion by the Commissioner that “it is necessary so to do for the purpose of protecting the interest of the Government revenue”. He further submitted that while exercising such power of provisional attachment of the properties of the taxable person including bank account, demat account is draconian in the nature and such condition of forming opinion by the Commissioner should be strictly adhered to before passing order of provisional attachment. Petitioner relied upon the decision of the Supreme Court in the case of Radhe Krishan Industries Vs. State of Himachal Pradesh reported in (2021) 6 SCC 771 And has further drawn attention to the Circular bearing No. CBEC-20/16/05/2021-GST dated 23.02.2021, whereby the CBIC has laid down various guidelines for provisional attachment of the property u/s 83 of the CGST Act, 2017.

On the other hand, It is submitted by the Respondent that in order to protect the interest of Revenue respondents have provisionally attached various properties of the writ applicants in exercise of power conferred u/s 83 of the Act.

The Hon’ble Court held that inspite of the guidelines to be adhered while exercising powers conferred upon the respondent authority under Section 83 of the GST Act. Respondent has also provisionally attached the demat account and current account which are the valuable assets of the writ applicants, more particularly, raw material and the finished goods are valuables which are also necessary for running of the business of the applicants. The Hon’ble Court quash and set aside the order of the provisional attachment qua the stock of goods, two demat accounts as well as current account of the writ applicants is concerned. So far the release of electronic items including Mobile Phone, laptop and other documents seized during the search proceedings are concerned, same is also directed to be released forthwith on condition that the writ applicants shall file an undertaking thereby declaring that the aforesaid goods electronic items including mobile phone, laptop and other seized documents shall be retained in its original form and shall not be disposed of pending the investigation.

ALLAHABAD HIGH COURT

Calcutta South Transport Co.

v.

State of U.P. & Another

[Surya Prakash Kesarwani & Jayant Banerji, JJ]

Writ Tax No. 406 of 2022

Date of Decision: March 28, 2022

Detention of truck—Petitioner/transporter leased truck which was intercepted and detained during transit of goods—Tax and penalty stood unpaid by owner—Order of confiscation of truck u/s 130 passed without hearing—Writ filed—Held: Considering the contention that the said vehicle stood detained without any valid confiscation order causing undue harassment, order of release passed— Cost imposed on respondents

The petitioner is engaged in the business of leasing trucks and other vehicles on hire freight basis to various transporting entities. In the course of its business, the petitioner has given on hire the aforesaid truck in question to one Company (‘hirer’) for the purpose of transportation of goods from Delhi to Vijayawada (Andhra Pradesh). In the course of journey, the aforesaid truck was passing through the State of Uttar Pradesh when it was intercepted by the respondent, who found that some of the goods loaded in the truck are over and above those covered by invoices, therefore, he issued an order of detention in MOV-06. Since neither the owner of the goods nor the transporter, i.e., the hirer, came forward to deposit the tax and penalty as demanded by order dated 31.10.2020, respondent initiated proceedings u/s 130 of the CGST/UPGST Act, 2017 for confiscation of the truck in question. In this regard, a notice in GST MOV-10 was issued to the petitioner fixing the date for hearing. Immediately on the receipt of the aforesaid notice, the petitioner submitted an application before the respondent bringing to his notice the entire facts and requested to release the truck. However, in the meantime, the respondent without affording any opportunity of hearing to the petitioner, passed an order of confiscation in GST MOV-11.

Feeling aggrieved with the aforesaid order, petitioner approached the Hon’ble Court Seeking release of detained goods alongwith the vehicle. In this regard, Hon’ble Court held that about 18 months have passed since the detention of the aforesaid truck without any valid order for confiscation or any proceeding of confiscation in existence, yet, the truck in question is being detained by the respondent arbitrarily, illegally and un-authorisedly, resulting in harassment of the petitioner. For all reasons stated above, Hon’ble Court allowed the writ petition with cost and directed the respondents to release forthwith the truck.

The taxability of royalty paid on mining operations is an old issue continuing from the Service tax regime to GST regime. The intelligence officers of DGGSTI, have gathered information from the State Government offices about the exploration of Minerals from the Mining lease and issuing show cause notices for the recovery of Service Tax on royalty paid to the State Government in the pre GST period.

– Ramesh Chandra Jena

The show cause notices are based on the payment of royalty made to the Government in respect of exploration and disposal appears to be covered under the definition of “Taxable Services” under Section 65B(51) of the Finance Act,1994. The recovery process has been initiated by the department in terms of the provisions of Finance Act, 1994, Central Excise Act, 1944 and rules made thereunder are validated under Section 174(2) of the CGST Act, 2017.

Concept of Royalty

Royalty is fee or consideration paid to the property owner for the right to use the property or patentee for the use of a patent or property against money obtained on sold of each patent or value of extract resources during the licensed period. Royalties are agreed upon as a percentage of gross or net revenues obtained from the use of an asset so authorised by the party assets owns. In terms of Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 the holder of mining lease shall pay royalty in respect of any mineral removed / consumed. The Hon’ble Supreme Court in the case of State of Orissa and others v. M/s Steel Authority of India Ltd. (AIR 1998 SC 3052), the Apex Court opined that Section 9(1) of the MMDR Act, 1957 also contemplates the levy of royalty on the mineral consumed by the holder of a mining lease in the leased area, hence processing of mineral amounts to consumption and, therefore, the entire mineral is eligible to levy of royalty.

Service Tax on Royalty

With effect from 1’st April’2016 amendments have been made to levy of Service Tax on Royalty under Reverse Charge Mechanism, on the Services provided by Government to business entities to bring leasing of Natural Resources like Mining etc. in the Service Tax net. According to the Central Board of Excise and Customs (CBEC), when the Government grants license to a business entity to exploit a natural resources from the mines, it is a taxable service, and hence liable for service tax. In terms of Notification No.30/2012-ST dated 20.06.2012 read with amended Notification No.7/2015- ST dated 01.03.2015, the Central Government imposed the service tax on mining royalty under reverse charge. Under reverse charge, business entities have to pay Service Tax on the amount of mining royalty paid to the Government.

The Central Board of Excise and Customs (CBEC) had issued Notification Nos. 22/2016- ST, 24/2016-ST both dated 13.04.2016 and Circular No. 192/02/2016-Service Tax dated 13.04.2016 dealing with applicability of service tax on services provided by Government or a local authority, whereas the said circular clarifies that any activity undertaken by the Government against a consideration constitutes service, even if such activity was undertaken as a statutory or mandatory requirement under any law. Service tax was also applicable on any payment, in lieu of any permission or license granted by the Government. The said Circular clarified that the service tax will be payable on right to use natural resources in view of rule 7 of point of Taxation Rules’2011 as amended vide Notification No. 24/2016-ST dated 13.04.2016. Thus as per the clarification given under the said Circular and Notification, the royalty to be paid by mining lease holder as per provisions of the Mines and Minerals (Development and Regulation) Act, 1957 was subject to payment of service tax w.e.f. 01.04.2016.

Controversy on Royalty whether it is ‘Tax’ or ‘Service’

Royalty is not a payment in respect of any taxable service at all and it is imposed under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 in respect of any mineral “removed or consumed” by the holder of a mining lease from the leased area, at the rate specified in the Second Schedule. Clearly, therefore, royalty is a price of wining minerals from the land and represents the State’s share in this respect and the levy of Service Tax is illegal.

The levy of tax on royalty is the disputed issue in the erstwhile Service Tax regime and there was conflicting decisions of the Apex Court on the matter of tax on royalty. The question of mining royalty whether tax or not is pending before the Supreme Court on account of conflicting decisions and the same decisions are summarised as under:

The Hon’ble Supreme Court in the case of India Cement Ltd. & Ors. v. State of Tamil Nadu

& Ors. – [(1990) 1 SCC 12], (Seven judge Bench of Supreme Court) held that royalty is a tax and royalty is separate and distinct from land revenue and that it is not related to land as a unit. On the other hand, royalty is payable on the proportion of the minerals extracted and it has relationship to mining as also to the mineral won from the mine under a contract by which royalty is payable on the quantity the mineral extracted. In this sense royalty was viewed as a kind of tax linked either directly or indirectly to the intrinsic economic value of a mineral realized through sale by the lessee.

The Apex Court in the case of State of West Bengal v. Kesoram Industries Ltd. & Ors. [(2004) 10 SCC. 201], (Five Judge Bench of Supreme Court) held that Royalty on mineral rights is not a tax on land but a payment for the user of land. Royalty is paid to the owner of land who may be a private person and may not necessarily be state. A private person owing the land is entitled to charge royalty but not tax. The lessor receives royalty as his income and for the lessee the royalty paid is an expenditure incurred. Royalty cannot be tax.

The Supreme Court in its decision in Mineral Area Development Authority v. M/s. Steel Authority of India & Ors., (2011) 4 SCC 450 has referred to a Bench of nine learned Judges, the core issue as to whether royalty is in the nature of a tax and whether the majority decision in the State of West Bengal v. Kesoram Industries Ltd. & Ors., (2004) 10 SCC 201 could be read as departing from the law laid down in the seven Judge Bench decision in India Cement Ltd. & Ors. v. State of Tamil Nadu & Ors., (1990) 1 SCC 12.

In view of two conflicting decisions of the Apex Court, aforesaid two conflicting decisions rendered in case of India Cement Ltd (supra) and Kesoram Industries (supra) and made request to the Hon’ble Chief Justice of India to constitute a Nine judge Bench to answer the reference, one of the reference referred there to is whether the royalty is in the nature of a tax.

The reference has not been answered as yet by the nine judges Bench and the answer whether the royalty is a tax has not been conclusively decided. So the matter is res integra.

Therefore, the question of royalty whether a tax is pending before the larger Bench of nine judges of the Supreme Court. If the Supreme Court holds that mining royalty itself is tax there would not be service and again on mining royalty as the tax cannot imposed on it. Once royalty is decided as tax, it cannot be said to be a service simultaneously.

Service Tax on Royalty stayed by the Hon’ble Supreme Court

The Hon’ble High Court of Rajasthan in the case of Udaipur Chamber of Commerce and Industry v. Union of India, reported in 2018(8) G.S.T.L.470 (Raj.) held that “Taking into consideration all these principles relating to “consideration”, we are of considered opinion that the royalty is nothing but a “consideration” to have mining operations in the leased area on execution of a mining lease. It is a part of agreement arrived between the parties to have lease of a mining area to undertaking mining operations. The royalty being “consideration” certainly places assignment of right to use natural resources deposited in the leased area as a “service” as defined under Section 65B(44) of the Act of 1994, according to which, any activity carried out by a person for another for consideration is a service. The finding arrived by us as above is sufficient to say that the notification dated 13-4-2016 is not at all in conflict with its enabling Act i.e. the Finance Act, 1994 and the same does not suffer from any illegality.”

The above judgement of the Rajasthan High Court has been stayed by the Hon’ble Supreme Court in the case of Chamber of Commerce and Industry v. Union of India, reported in 2018(10) G.S.T.L.J167 (S.C.) held that “Until further orders payment of service tax for grant of mining lease/royalty by the petitioners shall remain stayed.”

In another case the Hon’ble Supreme Court in the case of Tamanna Begum v. UOI in Special Leave to Appeal (c) Nos. 3150-3155/2018, held that the decision on 5-02-2018 in the same letter and spirit.

Further, the Hon’ble Supreme Court in the case of Barwala Royalty Co. & others v. The State of Haryana in Writ Petition (C) No.1119/2021, on 20-10-2021 on the same issue has maintained the same letter and spirit and has granted stay on the demand of Service Tax on royalty until further orders.

Service Tax on Royalty stayed by the Various Hon’ble High Courts: Subsequent to the Hon’ble Supreme Court’s Stay Order of Levy of Service Tax on ‘Royalty” other High Courts also issued interim stay order for the levy / collection of Service Tax on Royalty in the following cases:

1. The Hon’ble High Court Bombay at Goa in the case M/s Goa Mining Association and Anr v. Union of India vide Writ Petition No.1076 of 2016 dated 22.08.2017.
2. The Hon’ble High Court of Gujarat in the Case M/s Gujmin Industry Association v. Union of India, reported in 2019(20) G.S.T.L. 11(Guj.) vide Order dated 19.09.2018.
3. The Hon’ble High Court of Karnataka in the case M/s Zeenath Transport Company v. Principal Addl. Director DGGI, in Writ Petition 148059 /2020 and Order dated 25.01.2021.
4. The Hon’ble High Court of Jharkhand while disposing a bunch of writ petition on levy of Service Tax / GST on Royalty in quarrying stones for removed or consumed by the holder of a mining lease from the leased area has been stayed reported in 2021 (3) TMI 601-Jharkhan High Court.

GST on Royalty

The taxable event under GST is ‘supply’ of goods or services. The term ‘supply’ has been defined under section 7 of the CGST Act in an inclusive manner and includes all activities undertaken for consideration except activities prescribed under Schedule II and Schedule III.

The issue of taxability of royalty paid on mining operations is continuing into the GST regime as well because the statutory liability for payment of GST on such Government services is covered under Reverse Charge Mechanism. FAQ issued by the CBEC for levy of GST on Royalty has clarified the issue and accordingly it is assumed that the Royalty other charges collected by the Government the consideration for rights granted to use the natural resources is “taxable services”. The activity of rights to use natural resources is treated as supply of services and the licensee is required to pay tax on the amount of consideration paid in the form of royalty or any other form under reverse charge mechanism.

The rate schedule was earlier amended to impose GSTon royalty from January 1, 2019, the tax research unit of the Central Board of Indirect Taxes and Customs (CBIC)clarified that the tax would also be applied from July 1, 2017 and December 31, 2018. GST came into force on July 1, 2017. The rate of tax on royalty prescribed vide Notification No.11/2017- Central Tax (Rate)

, dated against item No.17 under Heading No.997337 @ 18% as rate applicable on the rate of goods i.e. minerals and whatever is the rate of tax on minerals, the same rate has been accepted as tax on Royalty. There are several advance Rulings has passed on GST rate on royalty.

Advance Rulings

1. In Re – M/s KSF -9 Corporate Services Ltd- AAR-Ruling No. KAR ADRG 03/2020, reported in 2020-TIOL-65-AAR- GST, held that “we find that Kuvempu University is an establishment of the State Government. Therefore, Kuvempu University is not liable to discharge tax under reverse charge basis. Hence the applicant is liable to discharge GST @ 18% (9% CGST + 9% KGST) on forward charge mechanism on the said supply of manpower services.”
2. In Re- M/s NM D C Ltd, AAR-Ruling No.KAR ADRG 69/ 2019-reported in 2019-TIOL-397-AAR-GST, held that “Royalty paid in respect of Mining lease is a part of consideration payable for licensing services for right to use minerals including exploration and evaluation falling under Heading 9973 – is taxable at the rate applicable on supply of like goods involving transfer of title in goods up to 31.12.2018 and taxable at 9% CGST and 9% SGST from 01.01.2019 under residual entries of Sr. no. 17 of 11/2017-CTR as amended: AAR”
3. In Re- M/s Raj Quarry Works, AAR- Ruling No. GUJ/GAAR/ R/2020/09.held M/s. Raj Quarry Works, Tulsi Gam, Taluka Savali, Vadodara having a GSTIN : 24AADFR5577NIZN, is a partnership company filed an application for Advance Ruling under Section 97 of VGST ACT,17 and Section 97 of the CGST Act,2917 in FORM GST ARA-01 discharging the fee of Rs. 5,000/- each under the CGST Act and the SGST Act.M/s. Raj Quarry Works is carrying out mining activity on a plot of land leased from the government of Gujarat. The applicant is quarrying “BLACK TRAP” products used for concrete mixing and sells it to the customers. BLACKTRAP material attracts GST at 5% under Heading 2517 in Schedule-I of the CGST Act, 2017.
4. In Re- M/s Uttarakhand Development Corporation- AAR- Ruling-reported in 2020-TIOL-123, No.2020-TIOL-123- AAR- GST, held that Royalty payable to Govt. of Uttarakhand in respect of Reta, Bazri  & Boulders extracted as per permission of govt. authorities is chargeable to tax under RCM at the same rate as on supply of like goods involving transfer of title in goods i.e. 5% and w.e.f 01.01.2019 @18%: AAR”
5. In Re– M/s Penguin Trading and Agencies Limited, AAAR- Ruling No. ARA/Odisha/BBSR/2019/10/11660A dated 23 08 2019, observed that GST rate applicable against Sl.No. 17 item of Notification No. 11/2017 prior to 01.01.2019 is applicable to unlike or leasing of goods and held that the amendment carried out vide Notification No.27/2018 –C.T. (Rate) dated 31.12.2018, which restricted the same rate applicable to supply of goods. we hereby order that licensing services for the right to use minerals including its exploration and evaluation received by the Applicant is taxable @ 18 % [9 % CGST and 9 % OGST] during 07/ 2017 to 12/2018. Thus, the reference from the Odisha Authority for Advance Ruling stands disposed of accordingly.

Due to conflicting views of rate of GST on royalty by the various Advance Ruling authorities, the GST Council in it’s 45th meeting held on 17th September’2021 has recommended the services by way of grant of mineral exploration and mining rights attracted GST rate of 18% w.e.f. 01.07.2017.

GST on Royalty has stayed by the Hon’ble Supreme Court

The Hon’ble Supreme Court in the case of Lakhwinder Singh v. Union of India- reported in [2021]131taxmann.com 168 (S.C.), 18% GST on Royalty has stayed the payment of service tax on mining lease until further orders.

Conclusion

Thus, the taxability of Royalty on mining operations or explorations is the matter of litigation with regard to whether it is “service’ or ‘tax ‘in the pre-GST period. The said issue is pending before the larger Bench of nine judges of the Supreme Court in respect of Service Tax liability in the pre-GST Period. The recovery of the service tax on Royalty on mining lease has been stayed by the Supreme Court. Similarly, whether the taxability of royalty on account of mining operations it is ‘goods’ or ‘services’ is also matter of conflicting views of the Authority of Advance Rulings. The litigation of tax on royalty is very long pending unsettled issue in the Indian taxation system and continuing from Service tax regime into GST regime as well.Under the above circumstances the field formations should not harass to the taxpayers by initiating recovery process of tax on account of royalty on mining operations as service tax or GST when the recovery of service tax or GST has been stayed by the Hon’ble Supreme Court.

(This Article was published in Souvenir of National Tax Conference held on 26th & 27th February 2022 at Kolkata)

“Whatever you believe, that you will be, If you believe yourselves to be ages, ages you will be tomorrow. There is nothing to obstruct you.” — Swami Vivekananda

Various problems are cropped up during GST i.e. ‘Good & Simple Tax’ regime. Out of the same now let us discuss regarding taxability of incentive, discount and liquidated damages under the said Act.

As per GST Law, definition of Services says – Services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination for which a separate consideration is charged.

INCENTIVE

Here it is pointed out that as that of VAT Law, GST Law doesn’t speak about ‘incentive” specifically. But the Assessing Officers are taxing the same under the ambit of GST Law as the same is related to supply of Goods or Services.

Here is the case of a works contractor, who, having completed the work before the schedule time was eligible to get incentive from the concerned Executive Engineer as per agreement. He has disclosed the entire turnover in his returns those he has received towards execution of the works contract. The Executive Engineer when made payment of the incentive amount didn’t deduct TDS from the Gross Payment towards payment of incentive. The Tax Payer also didn’t disclose the same in its return filed under the GST Law as the incentive was neither coming under the ‘goods’ nor ‘services’. The Assessing Officer issued notice to the Tax Payer to reconcile the WAMIS data with that of the returns filed by him and file revised return accordingly. In response to the notice the Tax Payer replied that there was no discrepancy hence filing of revised return doesn’t arise. The Proper Officer sent SCN u/s.73 of the Act with GST DRC-01 stating therein the tax and interest payable for the escaped turnover. Thereafter the AO sent the DRC- 07 mentioning the tax, interest and penalty payable for not including the incentive amount and making payment of GST thereon. The Tax Payer carried on correspondences with the concerned contractee accordingly. The contractee wrote a letter to his higher authority with a copy to the Tax Payer as under:-

“In this matter it is to put forth that, incentive is an award system in a contract which comes into operation only after completion of all forms of supply of goods or services or both such sale, transfer, bater, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course of furtherance of business under Clause-7(1) of SGST and CGST Act.

It is not a perquisite for this supply in contrast to the inference made by the GST assessing authority. For an Agency to be eligible for incentive neither he has to supply any goods nor render any services. It becomes operational once the work is completed before stipulated date of completion. No further work is done or measurement is taken in order to receive incentive. It is a Reward system of Government. The incentive is allowed by the Government in token of acceptance of the efforts of the Agency who saves the Government from time over run of the Project.

Because this is only a reward therefore neither its value is included in the estimate nor amount put to tender. There is no instance of refund of GST in case penalty is levied over a work when the Agency delays the work. The averment made by GST authority for supply of the service at a higher performance is an implied conclusion which has no direct mention in the Law. In this matter the term “Supply” is from the point of view of the person who is supplying and not the person who is receiving the supply. Hence Sec- 12(2)(C) of the GST Rules may not be applicable in this case as incentive is neither a supply of ‘Good’s nor ‘Service’.

Considering these aspects GST was not allowed during release of the incentive to the Agency. However, if it is found pertinent to charge GST on incentive, then it may so be directed for taking action at this end.”

That the AO without considering the submissions of the Tax Payer when passed order imposing tax, interest and penalty on it, the Tax Payer has raised the submissions in the First Appeal as under:-

Section-2(31)(a) ‘Consideration’- any payment made or to be made, whether in money or otherwise. In respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government”.

Section-2(52) ‘Goods’-means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

Section-2(102) ‘Services’-means anything other than goods, money, and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Section-2(119) ‘Works Contract’-means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, revocation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

Section-7(1)(a) ‘Supply’ includes- all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course of furtherance of business.

Section-15(2)(c) Value of taxable supply shall include- incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services.

In the FAQ released by CBIC on 15/12/2018 it has been clarified at Q No.7 as under:-

Whether post-supply discounts or incentives are to be included in the transaction value?

“Ans. Yes. However, where the post- supply discount is established as per the agreement which is known at or before the time of supply and where such discount specifically linked to the relevant invoice and the recipient has reversed input tax credit attributable to such discount, the discount is allowed as admissible deduction under Section 15 of the CGST Act.”

The CBIC in Circular No.92/11/2019- GST dated 07th March, 2019 declared as under:-

“Therefore the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as supply under GST (except activities mentioned in Schedule I of the said Act).”

The Advance Ruling Authority of Karnataka vide No.KAR- ADRG- 76/2018 dated-24/09/2019 in case of M/s KwalityMobikes Private Ltd. have held that :-

“The volume discount received on purchases in form of credit note without any adjustment of GST is not liable for GST.

1. The volume discount received on retail (on sales) in the form of credit note without any adjustment of GST is not liable for GST.
2. Since the amount received in the form of credit note is actually a discount

   and not a supply by the applicant to the authorized supplier, the applicant need not issue tax invoice for this transaction”.

Besides, the Tax Payer has cited the case law as under:-

That during the Service Tax regime the same view was taken towards receipt of “post-sale incentive/discount” as not taxable in the hands of the recipient. In case of Grey Worldwide (I) Pvt. Ltd-v.- Commissioner of Service Tax, Hon’ble CESTAT, West Zone, Mumbai held as under:-

“Therefore, it can be seen that the Tribunal has been consistently taking the stand that the incentives received by an advertising agency cannot be levied to service tax under the category of BAS. These amounts are in any case payable to the media as and when the claim is lodged and therefore, this amount cannot be construed as consideration received towards services rendered”.

DISCOUNT

Under the General sales Tax Act ‘sale price’ means the amount payable to a dealer as consideration for the sale or supply of any goods, less any sum allowed as cash discount according to ordinary trade practice, but including any sum charged for anything done by the dealer in respect of the goods at the time of, or before, delivery thereof.

Under the CST Act “sale price” means the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respective of the goods at the time of or before the delivery there of other than the cost of the freight or delivery or the cost of the installation in cases where such cost is separately charged.

Under the VAT Law ‘sale price’ means the amount of valuable consideration received or receivable by a dealer as consideration for the sale of any goods less any sum allowed as cash discount or trade discount at the time of delivery or before delivery of such goods but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before delivery thereof.

That even if “trade discount” has not been mentioned in the definition of “sale price” either under the Central Sales Tax Act or under the General Sales Tax Act, but the Hon’ble Courts while deciding the cases have categorically held that ‘trade discount’ will not form a part of sale price.

Few case laws on ‘trade discount’ of the erstwhile Acts are reproduced hereunder for appreciation:-

Orient Paper Mills Ltd -v.- State of Orissa reported in 35–STC-84(Ori.),

1. AdvaniOerlikon (Pvt.) Ltd. reported in 45-STC- 32(SC),
2. Deputy commissioner of Sales Tax (Law) Board of Revenue (Taxes) Ernakulam v. Motor Industries Co. reported in 53- STC-48(SC),
3. Deputy Commissioner of Sales Tax, Ernakulam -v.- Kerala Rubber & Allied Products reported in 90-STC- 170(SC),
4. T. V. Suranam Ayangar & Sons Ltd reported in 65-STC- 41(AP),
5. Mapra Laboratories Pvt. Ltd. -v.- State of Bihar & Others reported in 135-STC-157(Patna),
6. Commercial Taxes Officer, Circle-A, Jaipur -v.- Singhal Paints Limited (1998)-111-STC-27(RTT),
7. Mohan Breweries and Distilleries Limited -Versus- Commercial Tax Officer, Porur Assessment Circle, Chennai and Others (2005)-139-STC- 477(Mad.),
8. DCCT, Corporate Division v. MRF Ltd (2008) 14-VST- 124(WBTT),
9. Dey’s Medical Stores Limited -Versus- Commissioner, Trade Tax,U.P. (2004)134-STC-14 (Alld.),
10. IFB Industries Ltd.- v.- State of Kerala -(2012)49- VST-1(S.C.),
11. Southern Motors –Vrs- State of Karnataka and Others in the Civil Appeal Nos.10955-10971 of 2016 dated- 18/01/2017(SC)

LIQUIDATED DAMAGES

The meaning of ‘liquidated damages’ in common parlance is that the damages or a sum of money which is agreed upon in a contact to be paid by one party to the other in the event of breach of any term or condition of the contract. That means the terms of a contract specify a sum payable for non-performance, which amount is to be treated as a penalty or as liquidated damages. In the Finance Act, 1994 nowhere the liquidated damages were defined. Scope of supply is defined in section 7 and charging section (levy and collection) is governed by section 9 of CGST Act 2017.

Under the Indian Contract Act, 1872- ‘Liquidated Damages’ have not been defined. But by the combined reading of sec 73 and sec 74 of the said act some light can be thrown on the above subject. Then another question automatically comes to mind that whether liquidated damages and penalty are one and the same.

There is no definition of Liquidated damages under the CGST Act, 2017. According to Section-7 of the CGST Act the scope of ‘Supply’ is defined. If we will read section 7(1) after amendment as on 1.2.2019:-

Sec-7(1) defines the expression “supply”, which includes:-

1. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;(b) import of services for a consideration whether or not in the course or furtherance of business and; (c) the activities specified in Schedule I, made or agreed to be made without a consideration;

7(1A) defines – where certain activities or transactions, constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II. Schedule II only gives the classification of treatment of activities which are to be treated as supply of goods or supply of service. According to schedule II, Clause 5(e) says – agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Therefore Liquidated damages

are covered in the residual entry of services as there is no specific Service Accounting Code (SAC) for liquidated damages. It may be covered under the Heading “9997” (reference may be made to Central Tax (Rate) Notification No.11/2017 dated-28.06.2017) on which GST is payable comes @18%.

In view of above, it may be noted that a separate tax invoice should be issued by the field units against the deduction made from the invoice of the supplier on account of liquated damages. The field units charging liquidated damages shall issue Tax Invoice as per the GST Acts and the rules made thereunder. The example given under clause 8 of GST Circular No.3 under reference stands deleted.

The payment should be made net of invoice(s) received from the supplier and invoice(s) issued by the field unit in respect of the liquidated damages. In respect of any deduction in the invoice other than liquidated damages, the Credit Note needs to be issuedby the supplier.

Besides, the Circular No. 102/21/2019- GST play a vital role in determination of Liquidated Damages under the CGST Law. This Circular clarifies regarding applicability of GST on additional/penal interest and in case of EMIs (Equated monthly instalments) for repayment of Loan. Interest and penal fee charged by the banks for non-payment of EMI within the due date.

Let us discuss various Rulings of AARs on Liquidated Damages In GST, favoring it inclusion in entry No 35 as per clause 5(e) of schedule II:- (2018)(13) GSTL- 177(AAR- GST) (5) TMI-1332-AAR- Maharashtra.

The above decision of the AAR was upheld in the AAAR, Maharashtra reported in (2018)(17) GSTL-451(App. AAR- GST) 2018(9) TMI-1185(AAAR-Maharashtra)- In Re-Maharashtra State Power Generation Co. Ltd.

Similar Rulings are made by the AAR(s) in the following cases:

1. In re M/s. North American Coal Corporation India Private Limited (GST AAR Maharashtra); Advance Ruling No. GST-ARA-07/2018- 19/B-63; 11/07/2018,
2. In re Rashtriya Ispat Nigam Ltd (GST AAR Ansdhra Pradesh); Advance Ruling No. AAR 01/ AP/GST/2019; 11/01/2019, (3) In re M/s. Dholera Industrial City Development Project ltd. (GST AAR Gujarat); Advance Ruling No. GUJ/GAAR/R/2019/06; 04/03/ 2019,(4) In re Bajaj Finance Limited (GST AAAR Maharashtra); Order No. MAH/ AAAR/SS-RJ/24/ 2018-19; 14/03/2019

The view taken by various Courts/ Tribunals towards levy of ‘service tax’ on ‘liquidated damages’ during the earlier regime are as under:-

1. M.P. Poorva Kshetra Vidyut Vitaran Company Ltd – Versus- Principal Commissioner, CGST & C. EX., Bhopal, 2021 (46) G.S.T.L. 409 (Tri.- Del.),
2. South Eastern Coalfields Ltd. –v- Commissioner of Central Excise and Service Tax (CESTAT Delhi) [Appeal Number: Service Tax Appeal No. 50567 of 2019 Date of Judgment/ Order: 22/12/2020],
3. K.N. Food Industries Pvt. Ltd. -v.- Commissioner of CGST and Central Excise Kanpur [2019-TIOL-3651-CESTAT-ALL-2020(38) G.S.T.L. 60(Tri. – All.)],
4. Lemon Tree Hotel –v.- Commissioner, Goods and Service Tax [2020-TIOL- 1114-CESTAT-DEL (2020) (34) G.S.T.L. 220 (Tri. – Del.)].
5. Neyvali Lignite Corporation Lt.-v.- Commissioner of Customs, Central Excise & Service Tax, Chennai [2021] 128 taxmann.com 405 (Cennai CESTAT),
6. AmitMetaliks Limited-v.- Commissioner of CGST, Bolpur – 2020 (41) GSTL 325 (Tri. Kolkata),
7. Mormugao Port Trust-v.- Commissioner of Customs, Central Excise & ST, Goa – 2017 (48) STR 69 (Tri. Mumbai) which was confirmed by the Hon’ble Supreme Court reported in Commissioner- v.- Mormugao Port Trust – 2018 (19) GSTL J118 (SC),
8. GE T&D India Limited (Formerly Alstom T&D India Limited)-v.- Dy. Commissioner of Central Excise – 2020 (1) TMI 1096 – Madras High Court,
9. CST, Chennai v. Repco Home Finance Limited – 2020 (7) TMI 472 – CESTAT Chennai,
10. Ruchi Soya Industries Ltd –v.- Commissioner of Customs (CESTAT Delhi),
11. Central Board of Excise and Customs -v.- Larsen & Toubro Ltd. (2015) 39S.T.R. 913 (SC).

In case of South Eastern Coal Fields Ltd-v.-Commissioner of Central Excise & Service Tax (CESTAT, Delhi) it has been observed as under:-

“It is in this context and in the context of section 74 of the Contract Act, which the Supreme Court observed:

Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of parties pre- determined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract for predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated.

The Supreme Court also noticed that section 74 of the Contract Act merely dispenses with the proof of – actual loss or damages. It does not justify the award of compensation, when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good the loss or damage which actually arose or which the parties knew when they made the contract to be likely to result from the breach’. The Supreme Court also found that there was no evidence that any loss was suffered by the plaintiff in consequences of the default by the defendant, save as to the loss suffered by being kept out of possession of the property. The Supreme Court, therefore, held that plaintiff would be entitled to ST/50567/2019 retain only an amount of Rs. 1000/- that was received as earnest, out of amount of Rs. 25,000/-.

The conclusion drawn by the learned authorized representatives of the Department from the aforesaid decision of the Supreme Court that compensation received is ‘synonymous’ with ‘tolerating’ or that the Supreme Court acknowledged that in a breach of contract, one party tolerates an act or situation is not correct.

It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards consideration for tolerating an act leviable to service tax under section 66E(e) of the Finance Act.

The impugned order dated December 18, 2018 passed by the Commissioner, therefore, cannot be sustained and is set aside. The appeal is, accordingly, allowed.”

From the foregoing discussions it is thus open to the readers to argue their cases before the competent authority that GST is not leviable on incentives/ discounts/ liquidated damages as neither they can be termed as ‘goods’nor ‘services’ under the relevant provisions of GST Law. For the present it is a debatable question.

Hence, Indirect Tax (GST) Representation Committee of AIFTP is requested to bring the above matter to the knowledge of the FINMIN/CBIC/GST Council,as the case may be, for an amendment in the statute on the above aspects in order to avoid unnecessary disputes in future by misinterpreting the provisions of Law.

(This Article was published in Souvenir of National Tax Conference held on 26th & 27th February 2022 at Kolkata)

CA Kinjal Bhuta

The Finance Minister proposed 39 amendments in the Finance Bill 2022 vide a notice of amendments dated 23.03.2022. The Finance Bill, 2022 was passed in Loksabha on 25th March, 2022. Later, the Finance Bill, 2022 enacted on 30th March 2022 and therefore all the changes are part of Finance Act 2022 now. This article attempts to covers the major amendments to the Finance Bill 2022. Some of the amendments are not taken in depth as there are exhaustive articles on the topic scheduled for the same.

1. 1. Inclusions/exclusions to provisions of Updated Return
      1. Section 139(8A) was introduced to file updated returns. Second provision to section 139(8A) provides restrictions to filing of updated returns. It mentions that any case where search is initiated u/s. 132A or survey is conducted u/s. 133A, or when accounts or assets are requisitioned, updated return shall not be allowed to be filed for the relevant assessment year and preceeding two assessment years. Now the amendment to Finance bill, 2022 provides replaces ‘previous two assessment years’ with ‘any assessment year’. This would mean that for the above stated restricted circumstances, filing of updated return will not be allowed at all.
      2. Fourth provision is introduced to section 139(8A) which provides that a loss return can be updated if it is a return of income which means that the updated return should not be a loss return. In other words, an updated return cannot be used to show more losses in an already filed loss return, however if there is any additional income which has remained to be reported, that can be very well filed in the updated return.
      3. Fifth proviso is added section 139(8A) to provide that if as a result of filing an updated return for one of the years, if the loss claimed under chapter VI, or unabsorbed deprecation u/s.32, or tax credit carried forward u/s. 115JAA and 115JD is reduced for any subsequent years, then updated return shall have to be filed for each of such subsequent years. The idea behind this provision would be just to cover and correct the consequent losses which are connected and get affected by the losses of its previous years.
   2. Penalty and recomputation of income on claim of surcharge and education cessSection 40(a)(ii) states that any sum paid on account of any ‘rate’ or ‘tax’ levied on the profits or gains of any business or profession shall not be eligible as a deduction. Courts have upheld this view in a few judgments that provision of Section 40(a)(ii) does not expressly use the term ‘cess’ or ‘surcharge’ and accordingly, taxpayers could claim deduction on account of ‘cess’ or ‘surcharge’ under section 40.The Finance Bill 2022 proposed to insert an Explanation 3 with retrospective effect from assessment year 2005-06 that for Section 40(a)(ii), the term ‘tax’ shall include and be deemed to have always included ‘surcharge’ or ‘cess’. Accordingly, even for the past period, the deduction for ‘cess’ or ‘surcharge’ shall not be available.

      Now, the amendments to Finance Bill, 2022 has inserted a new sub-section (18) to section 155 to provide that the claim of ‘surcharge’ or ‘cess’ in any previous year shall be deemed as under-reporting of income. If an assessee has claimed the deduction on account of ‘surcharge’ or ‘cess in any previous year and such deduction is not allowable under section 40, it shall be deemed that assessee has under-reported income for such previous years for the purpose of Section 270A(3). Also, the exceptions in sub section (6) of section 270A shall not apply to such cases. The Assessing Officer has been empowered to re-compute the total income of the assessee for such a previous year in which he claimed deduction of surcharge or cess. The income so computed shall be treated as under-reported income, and the assessee shall be liable to pay tax on it along with a penalty of 50% of the amount of tax payable on under-reported income.

      However, proviso to Section 155(18) provides relief from considering the addition so made as under-reported income, if the following conditions are satisfied:

      1. The assessee makes an application in the prescribed form and prescribed time to the Assessing Officer;
      2. The application is filed to request the AO for recomputation of the total income of the previous yearwithout allowing the deduction of surcharge or cess; and
      3. The assessee pays the amount due within the specified time.

Section 154 authorises the Income-tax authorities to rectify any mistake in the order. Sub-section (18) of Section 155 provides that the period of 4 years specified under Section 154(7) to be reckoned from the end of the previous year commencing on the 01-04-2021.

1. 3. Loss from Virtual Digital assets (VDAs)A new section 115BBH was introduced in the budget which sought to tax any income arising on transfer of VDAs. However, there were lot of concerns and open ended issues in the newly introduced provisions. There are various amendments therefore made to the Finance Bill, 2022 to reduce such uncertainties and provide clarifications at appropriate places.
      1. No set off of losses from transfer of one VDAs from gain of another VDAs Finance Bill, 2022: The sub section (2) of section 115BBH deters setting off loss under any other head of income from the VDAs income and also prohibits the loss on account of transfer of VDAs to be adjusted against income from any other head of income. To be specific, sub clause (b) of section 115BBH (2) provided that ‘no set off of losses from transfer of the VDAs shall be against income computed under any other provisions of this Act’. The sub-section also provides that loss from transfer of VDAs shall not be allowed to be carried forward to succeeding assessment years.Finance Act, 2022: The word ‘other’ in the clause (b) created a perception that loss from transfer of VDAs can be set off against gains from transfer of VDAs. The amendment made in the Finance Bill, 2022 removes the word ‘other’ and now clarifies that even the loss from transfer of one class of VDAs shall not be allowed to be adjusted against income from transfer of another or same class of VDAs. This amendment clarifies that no loss whatsoever shall be allowed to be adjusted and therefore the taxpayer will not be able to take benefit of set off of losses from VDAs internally with same stream income too. This amendment mirrors the intention of the government as had also been mentioned by them several times in the past that they would not like to encourage any transactions from VDAs and therefore the same shall be taxed exhaustively, without conferring any benefits, exemptions, deductions etc.
      2. Transfer definition u/s. 2(47) to apply to VDAs held in any formFinance Bill, 2022: Section 115BBH provides that income from transfer of VDAs shall be taxed under that section. Therefore, the definition of the word ‘transfer’ becomes imperative to tax the VDAs income. The definition of transfer becomes applicable only account of transfer of any capital asset. So, the issue was that whether if the VDAs are not retained by the taxpayer as a capital asset then in that case whether the income from transfer of such VDAs shall be taxed under the computation method provided u/s. 115BBH.Finance Act, 2022: Sub section (3) is now introduced to section 115BBH which provides that the definition of transfer shall apply to any VDAs, whether held as capital asset or not. As a consequence of this amendment, it has been clarified that any income on transfer of VDAs shall be taxed under section 115BBH only even if the character of income falls under other heads of income like Income from Business or Profession or Income from other sources.
      3. Over-riding provisions enabled for sub- section (1) of section 115BBHFinance Bill, 2022: Section 115BBH when introduced was brought about with two sub-sections. Sub section (1) provided the rate of tax of 30% of income on account of transfer from VDAs whereas sub-section (2) provided the computation mechanism. Sub section (2) started with a non-obstante clause. However similar ‘notwithstanding provisions’ were not made in sub-section (1). Absence of non-obstante clause in sub- section (1), instilled a doubt that, absence of such provisions would mean that lower tax may be applied in certain cases, if the Income Tax Act provides for lower tax rate in some other sections.Finance Act, 2022: To reduce the air of confusion, over-riding provisions are also introduced under sub section (1). Therefore, this would mean that notwithstanding any provisions of the Act, the tax rate of 30% shall apply to any income arising on account of transfer of VDAs.
      4. Income from transfer of VDAs shall be taxed even in case there is not cost of acquisitionFinance Bill, 2022: The computation mechanism under section 115BBH (2) provides that no deduction or expenditure shall be allowed to be reduced from income on transfer of VDAs except the cost of acquisition. It has been held by various courts especially in case of B C Srinivasa Shetty (5 Taxman 1) by Apex Court that if there is no cost of acquisition, the computation mechanism of capital gains fails. There was an apprehension that in cases where VDAs are not acquired by way of cost, whether computation mechanism under section 115BBH will fail.Finance Act, 2022: It is therefore now clarified by adding the words ‘if any’ after cost of acquisition of provisions are produced in the section. This implies that whether there is any cost or not, the income from transfer of VDAs shall be computed as per the section.
      5. TDS to be deducted even when consideration of VDAs is received in kindSection 194S was introduced in the Finance Bill, 2022 which provided that any person who is responsible to pay to a resident, any sum by way of consideration. The provisions as regard to his provided that payer shall ensure that tax is paid on this transfer. The amendment clarifies that tax is required to be deducted by the payer also, and only ensuring that tax is paid is not enough. Therefore, this amendment basically makes it abundantly clear that payer has to deduct tax as per section 194S whether the payment is by way of a sum or in kind.
      6. TDS can be deducted under other sections too apart from 194SSub section (4) of section 194S provides that when tax is deducted u/s. 194S for a particular transaction, then no tax shall be deducted or collected under any other section. This sub-section is now omitted and therefore, that would mean that deduction or collection of tax at source can be done under other sections too, even if the transaction is subject to TDS u/s. 194S.
   4. Clarification of TDS on Long term capital gains to non-residentsIn respect to TDS from the income of a non-resident person, Part II of Finance Act provides for 10% TDS from income by way of long-term capital gains referred to in section 112A. Capital gains upto Rs.1 lakh is exempted from tax as per section 112A. However, as per the literal reading of the TDS provisions, the tax was required to be deducted on the total long- term capital gains and not in excess of Rs. 1 lakh. It is now clarified that deduction of tax from the long-term capital gains shall be only in excess of Rs. 1 lakh.
   5. Cancellation provision introduced to provisionally approved institutionsThe Finance bill, 2022 had introduced fifteenth provision to section 10(23C) which empowers the PCIT or CIT for cancellation of approval of fund or institutions u/s. 10(23C) in case of certain prescribed circumstances. Now these provisions are extended to even the provisional registration granted
   6. Restriction on using exemptions u/s. 10(23C) and 10(46)The amendments to Finance bill, 2022 has provided that any institution cannot take the simultaneous benefit of exemption u/s. 10(46) and section 10(23C). So once an institution is notified u/s. 10(46), the approval granted u/s.10(23C) shall become inoperative.
   7. Books of account in digital form Books of account is defined u/s. 2(12A) of the Income Tax Act, 1961. The existing definition includes day books, ledgers, cash books etc. whether kept in written form or as print stored. Now it is provided that the definition shall also include books of account kept in electronic and digital forms. Therefore, books of account maintained on cloud, or on softwares shall now be considered as books of account. One has to be therefore more vigilant in the electronic accounts now maintained.
   8. Relaxation to resident unit holders for claim of exemption u/s.10(4D):Section 10(4D) provides exemption of income for certain incomes of specified funds. One such condition for category III AIF Fund located in IFSC was that all of its units are managed by non-residents. The provisions are now relaxed with the amendment, to provide that even if the non-resident unit holder becomes resident the exemption shall continue provided that unit holder does not hold more than 5% of the total units of that fund.
   9. The provider of perquisite or benefit has to deduct TDS u/s. 194RSection 194R was introduced by the Finance Bill 2022, which stated that provider of any benefit or perquisite to a resident, whether convertible into money or not, arising from business or the exercise of a profession, shall, before providing such benefit or perquisite to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite. To remove confusion on how section 194R is to be complied with, the following changes has been made:
      1. the words “ensure that tax has been deducted” in section 194R, are replaced with words “ensure that tax required to be deducted has been deducted”;
      2. the provision of section 194R, as originally proposed, is renumbered as sub-section (1);
      3. sub-section (2) is inserted to empower the CBDT to issue guidelines for removal of difficulties if any difficulty arises in giving effect to the provisions of the section;
      4. Sub-section (3) is inserted to provide that guidelines issued by the CBDT under section 119 for removal of difficulties shall be binding on the assessee and the assessing authority.

CBDT guidelines will presumably provide guidance on how to ensure that tax has been deducted if the benefits or perquisites are in kind and what shall be the value of such benefit or perquisite. As has been the practice over the last few years, most likely the CBDT will issue these guidelines through a Circular.

10. Avoidance of repetitive appealsThe Finance Bill 2022 introduced a new section 158AB for the new provision relating to avoidance of repetitive appeals. Section 158AB allows avoidance of repetitive appeal before Income-tax Appellate Tribunal or to the Jurisdictional High Court. Such a decision to avoid the repetitive appeal is taken by the collegium. On receipt of communication from the collegium, the PCIT/CIT may direct the AO to make an application to the ITAT or the High Court in a prescribed form within 60 days from the date of receipt of the order of CIT(A) or within 120 days from the date of receipt of the order of Tribunal.Following changes in Section 158AB are now made:
    1. It expressly provides that the provisions of section 158AB shall override the respective provisions providing time limits and procedural directions for filing an appeal to ITAT or the High Court;
    2. The time limit within which the application is to be filed with the ITAT has been increased to 120 days from 60 days;
    3. It is also expressly provided that all the provisions of Appeal to ITAT and Appeal to High Court of Chapter XX shall apply, as the case may be, when an appeal is being filed under section 158AB (4).
11. Time limit for completion of assessment in search and requisition casesThe Finance Act, 2021 had introduced a sunset clause and accordingly, the provisions of section 153A were made inapplicable from 01-04-2021. Section 153B provides a time limit for completion of assessment and reassessment in search or requisition cases. The time limit provided under sub-section (1) is 21 months from the end of the financial year in which the last authorisation of search or requisition was executed. The provisos to sub-section (1) provide for reduced time limits for different assessment years.Sixth proviso to sub-section (1) of section 153B is added which provides that the completion date of such assessments. The limitation period for completion of assessment in search/requisitioned cases is given in the below table:

Date of search	Limitation period
Before 01.04.2019 till 31.03.2020	Within 12 months from the end of the financial year in which last of the authorisations for search/requisition was executed
Between 01.04.2020 to 31.03.2021	On or before 30-09-2022
On or after 01.04.2021	Within 12 months from the end of financial year in which notice was sent (as per section 153 for assessments to be now done under section 147)

12. Extension of timelimit of assessments for AY 2020-21 Section 153 provides time limits to completion of assessments, re- assessments and re-computations under various provisions. The amendment seeks to increase time limit to complete assessments for AY: 2020-21 u/s. 143(3) or 144 of the Act from existing 12 months to 18 months. The amendment is made only for assessments of AY: 2020-21.
13. Application of income for the benefit of interested personsHitherto, section 10(23C) did not have any provision similar to section 13(1)(c) regarding benefits to interested parties. The Finance Bill 2022 inserted twenty-first proviso imposing restriction to apply the income of a 10(23C)(iv)/(v)/(vi)/(via) institution for the benefit of an interested person referred to in section 13(3). Such income shall be deemed to be the income of the said institution which has provided the benefit. However, the Finance Bill inadvertently mentioned that such benefit should become income of that person to whom the benefit is provided. Now the same is corrected by providing that such income shall be deemed to be the income such fund or institution of the previous year in which it is so applied.
14. Overriding effect to provisions of Section 115BBIThe Finance Bill 2022 introduced section 115BBI which provides that the income which does not enjoy exemption under section 11 is taxable at the rate of 30%. On the other hand, proviso to section 164(2)  providing for taxation of a charitable trust at maximum marginal rate (MMR) is not deleted. Hence, literally, both the provisions apply to a trust. Thus, it was not clear whether section 115BBI or section 164(2) should apply to a trust for taxation of certain incomes.It is now amended to provide that notwithstanding anything contained in any other provision of the Act, the specified incomes shall be taxable under section 115BBI. Thus, the provisions of section 115BBI would have an overriding effect over anything contrary contained in the Act.
15. No exemption if a person as referred to in section 13(3) receives gifts from trustSection 56(2)(x) deals with deeming provisions when a person receives gifts or acquires an immovable property or specified moveable assets without consideration or for inadequate consideration. Clauses (VI) and (VII) of proviso to Section 56(2)(x) provides exemption from applicability if any sum of money or any property is received:
    1. From any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in Section 10(23C); or
    2. From or by any trust or institution registered under section 12A/12AA/12AB.

    sThe amendment has now inserted a second proviso to section 56(2)(x) to provide that, the clauses (VI) and (VII) of the first proviso shall not apply if any sum of money or property has been received by any person referred to in section 13(3). Section 13 of the Act denies the benefit of exemption to a charitable or religious trust or institution if any part of its income or property is used or applied for the benefit of interested persons.

16. Validation of proceedings completed on predecessor entitySection 170 of the Income Tax Act relates to succession to business otherwise than on death. Finance Bill, 2022 had proposed that any proceedings initiated on the predecessor during a business reorganization would be deemed to have been initiated on the successor. “Business reorganization” was to be defined to mean the reorganization of business involving the amalgamation, demerger, or merger of business of one or more persons. Under the Finance Bill amendments, business reorganization is replaced with “succession” and the definition of business reorganization deleted from section 170. The amendments also provide that in the case of succession, any proceedings initiated against the predecessor during the succession are deemed to have been initiated against the successor.The term ‘succession’ is wider than the term ‘business reorganisation’. ‘Succession’ means an end of an entity carrying on the business, and its place has been taken by an entirely new entity to run, in continuity and as a going concern, the same business. Succession involves a change of ownership – the transferor goes out, and the transferee comes in. It connotes that the whole business is transferred and also implies that substantially the identity and the continuity of the business are preserved [CIT v. K. H. Chambers, (1965) 55 ITR 674 (SC)]. In a recent case, the Mumbai ITAT held that transfer of an undertaking by way of a slump sale will be considered as succession [ITO v. Archroma India (P.) Ltd. [2021] 124 taxmann. com 432]. Thus, the assessment or other proceedings initiated or completed on the predecessor in the event of succession shall be deemed to have been made on the successor.

Dharan Gandhi, Advocate

In life, it is evidenced that an action is initiated with a particular purpose, but with the passage of time, either the purpose changes or is lost. This is so often witnessed under the Income-tax Act, 1961 (‘Act’). A particular section is inserted with a particular object, but then the section gets amended over a period of time and the purpose seems to fade away.

Also, sometimes, it is seen that a particular section is introduced with a very limited scope, which may be constitutionally valid. But then, slowly and steadily, the scope of the section is expanded such that the section becomes very lethal and, in fact, unconstitutional. In hindsight, when one sees the pattern of amendments, it appears, that a long- term strategy was chalked out by the Government to slowly and steadily introduce some sweeping provisions, so that the same goes unnoticed or the same does not garner much attention. u/s

One of such instances is very recently witnessed and is subject matter of the present article.

New reassessment scheme

In the Finance Bill, 2021, the Hon’ble Finance Minister proposed sweeping changes in so far as the reassessment provisions are concerned. She proposed to introduce a completely new scheme with new jurisdictional requirements, new procedures and new time limits. In the Explanatory Memorandum to Finance Bill, 2021, it is stated that now the Department is driven by information received from third parties and that there is a need to completely reform the system of assessment or reassessment which will result in less litigation and would provide ease of doing business to taxpayers.

The Hon’ble Finance Minister in her Budget Speech, had stated that “I therefore propose to reduce this time-limit for re-opening of assessment to 3 years from the present 6 years. In serious tax evasion cases too, only where there is evidence of concealment of income of Rs. 50 lakh or more in a year, can the assessment be re-opened up to 10 years. Even this reopening can be done only after the approval of the Principal Chief Commissioner, the highest level of the Income Tax Department.”

Thus, vide Finance Act, 2021, the entire scheme of reassessment under the Act was replaced by a completely new scheme. In fact, even the provisions relating to search assessments u/s 153A and 153C of the Act are discontinued and all the assessments pursuant to search and survey are to be completed u/s 147 of the Act. There are several new jurisdictional requirements prescribed in section 147, 148, 148A, 149 and 151 of the Act as amended by Finance Act, 2021. The onus will be on the Assessing Officer (‘AO’) to demonstrate that all the jurisdictional requirements are satisfied to issue notice u/s 148 of the Act. Some of the important conditions which need to be fulfilled are as under:

• AO must have information in his possession which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year – first proviso to section 148
• Such information must be either an information in accordance with the risk management strategy formulated by the Board or based on audit objection or based on information which is received by the AO from some sources– Explanation 1 to section 148.
• Before issuing a notice u/s 148 of the Act, procedures u/s 148A have to be complied with which includes providing an opportunity of being heard to the assessee, by serving upon him a notice to show cause as to why a notice u/s 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment and after hearing the assessee, the AO has to pass a speaking order to decide whether or not it is a fit case to issue a notice u/s 148. All such steps are to be taken with the prior approval of the specified authority.
• Any reassessment after 1.4.2021 has to be with the approval of the specified authority as per section 151 of the Act. Further, different authorities are prescribed for approval if the assessment is sought to be reopened within 3 years and a case where it is sought to be reopened beyond 3 years.
• An assessment can be reopened only upto 3 years from the end of the relevant assessment year. If an Officer wants to reopen beyond 3 years and upto 10 years, then, certain additional conditions are required to be fulfilled by the AO which is discussed later on.

Whether applicable with effect from 1.4.2021?

The biggest tax controversy of the year 2021 was whether such amendments brought in by Finance Act, 2021, to replace the old reassessment provisions with the new provisions are applicable from 1.4.2021 or 1.7.2021. This is on account of notifications issued under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (hereinafter referred to as ‘TOLA’).

Section 3(1) of the TOLA, empowered the Central Government to extend the time-limit

and date of compliance of any action specified therein including issuing notice and according sanction under the Act. Utilising such power, the Government, inter alia, issued a Notification No. 20/2021 on 31.03.2021 which is the last day to issue notice u/s 148 of the Act under the old scheme. In the said notification, the due date to issue notices u/s 148 of the Act and to obtain sanction u/s 151 of the Act, which due dates were to expire on 31.03.2021 were extended by one month i.e., upto 30.04.2021. Another Notification bearing number 38/2020 dated 27.04.2021 was issued to further extend such dates to 30.06.2021. In both the notifications, the Government added an Explanation to the effect that for the purposes of such extension, one has to consider the provisions of section 148, 149 and 151 as it stood prior to its amendment by Finance Act, 2021; meaning thereby, such Notifications not only extended the time limit to issue notice u/s 148 of the Act but it also sought to revive the old provisions which were already repealed and substituted by the Finance Act, 2021.

Under the shelter of the above-mentioned notifications, Tax Department issued notices u/s 148 of the Act under the old law from 01.04.2021 till 30.06.2021. Such notices were challenged by way of thousands of writ petitions filed across various High Courts in India.

Barring one judgment, viz., single judge order of the Hon’ble Chhattisgarh High Court in case of Palak Khatuja vs. Union of India and Ors., W.P.(T) No. 149 of 2021, all other judgments by six different High Courts have held such notices to be bad in law and have held that the new reassessment provisions inserted by the Finance Act, 2021, are applicable from 01.04.2021. These judgments are as under:

• [2021] 439 ITR 1 (All.) Ashok Kumar Agarwal v. UOI;
• [2022] 441 ITR 207 (Del.) Mon Mohan Kohli v. ACIT;
• [2022] 440 ITR 300 (Raj.) Bpip Infra (P.) Ltd. v. ITO;
• [2022] 325 CTR 148 (Madras) Vellore Institute of Technology v. CBDT;
• [2022] 441 ITR 359 (Cal.) Bagaria Properties and Investment (P.) Ltd. v. UOI
• [2022] 135 taxmann.com 5 (Rajasthan) Sudesh Taneja v. ITO
• [2022] 137 taxmann.com 2 (Bombay) Tata Communications Transformation Services Ltd. v. ACIT

All the above judgments have held that, vide Finance Act, 2021, the old reassessment provisions have been repealed without any savings clause. By virtue of the notifications issued under TOLA, only the date to issue notice has been extended however, the notice has to be issued under the new law. Further, the explanation in the notification has been struck down as unconstitutional.

Amendments in section 149 of the Act by Finance Act, 2022

• Reassessment beyond 3 years – income represented in the form of asset

I have already brought out earlier, the extract of the speech of the Hon’ble Finance Minister while delivering Budget for the year 2021-22. It was stated that the time limit to reopen the assessment was reduced to 3 years from the existing 6 years. Only in case in serious tax evasion cases too, only where there is evidence of concealment of income of Rs. 50 lakh or more in a year, can the assessment be re-opened up to 10 years. Even this reopening can be done only after the approval of the Principal Chief Commissioner, the highest level of the Income Tax Department.

Such provisions are contained in section 149 of the Act. Section 149 deals with the time limits for issue of notices. Before amendment, it stated that, no notice u/s 148 shall be issued for the relevant assessment year,—

• if three years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b);
• if three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to rupees fifty lakh or more for that year.

The old time limits have changed from 4 to 6 and 16 years to 3 to 10 years. The outer limit for reopening the assessment is 3 years now. However, if the following conditions are fulfilled, then the assessment could have been reopened upto 10 years from the end of the relevant assessment year:

• AO has in his possession books of accounts
• or other documents or evidence
• Such documents etc. reveal that the income

  chargeable to tax has escaped assessment

• Such income is represented in the form of asset
• Income escaping assessment is Rs. 50 lakhs or more.

Thus, if all the above conditions are fulfilled, only then the assessment could have been reopened beyond 3 years and upto 10 years.

Such kind of provision also finds mention in fourth proviso to section 153A of the Act, which was inserted vide Finance Act, 2017. There again it was restricted to an income escaping assessment represented in the form of asset. Explanatory Memorandum to Finance Act, 2017, explained that, in order to protect the interest of the revenue in cases where tangible evidence(s) are found during a search or seizure operation (including 132A cases) and the same is represented in the form of undisclosed investment in any asset. Thus, the logic was to tax any undisclosed asset found during the course of search. Since, the search and reassessment provisions were merged, therefore, the same wordings were continued in the new section 149 of the Act.

Now, the Finance Act, 2022, has amended the said clause (b) of section 149(1). Instead of the condition that income should be represented in the form of asset, now the clause has been expanded to even include income in the form of

• asset,
• expenditure in respect of a transaction or in

  relation to an event or occasion; or

• an entry or entries in the books of account.

The explanatory memorandum to Finance Bill 2022, gives a very simple explanation in this regard i.e., “To bring clarification and align them with the intent”.

The implications of the above amendment are grave. The promise was to reopen an assessment beyond 3 years only if serious tax evasion cases were identified where the income escaping assessment was more than Rs. 50 lakh. Such serious tax evasion cases were cases, where the assessee is apparently found to be the owner of some undisclosed assets. However, this has now been expended to included income in the nature of expenditure in resect of a transaction or in relation to an event or occasion and most importantly any entry in the books of account. Each and every transaction is recorded in the books of account. Thus, almost everything gets covered by the impugned amendment. Clearly, the Legislature has gone back on the promise made. Now the Department can reopen any assessment beyond three years without there being any concealed or undisclosed asset by taking shelter under the last limb viz., any entry in the books of accounts.

Such an interpretation, in my humble opinion, cannot be accepted. Therefore, it would be pertinent to give contextual meaning to such words “any entry in books of accounts”. Since, the intent it to reopen only serious tax evasion cases, therefore, such entry in books of account should cover only cases where there is an allegation of accommodation entry or a bogus entry, which does not lead to any unearthing of any undisclosed asset. Similarly, the second limb which deals with expenditure in respect of transaction or an event, should be an undisclosed expenditure.

Thus, it can be seen that the slowly and steadily, amendments are made so as to go back on the promise made, and expand the scope of section to reopen.

In any case, the requirement of section 149(1) (b) of the Act, is that the AO needs to have in his possession, books of accounts or other documents or evidence. For the first time the word “evidence” has been used. Such words are used in contradistinction to the word “information” used in section 148 of the Act. Thus, to satisfy the conditions of section 149(1)(b) of the Act, the AO needs to have something more than mere information. The terms “books of accounts”, “documents” and “evidences” connotes different meaning, but the common thread running through all such terms is that it has be something more than information.

Apart therefrom, such documents, books etc. should “reveal” that income has escaped assessment; meaning thereby, from such documents, books etc., the AO should come to a certain conclusion that there is an income which has escaped assessment. Mere presumption, conjecture or a reason to believe that income has escaped assessment would not suffice.

Reassessment for AY 2021-22 and prior years

First proviso to section 149 is a clause which, in a sense, restricts the retrospective application of the new reassessment provisions. Proviso to section 149(1)(b) deals with reassessment of AY 2020-21 and earlier years. The new reassessment scheme is applicable w.e.f. 1.4.2021, therefore, it shall apply to all the reassessments taking place after 1.4.2021. In case of assessment years, prior to AY 2020-21, technically speaking, the same can be reopened for 10 years, though such years would be outside the scope of reassessment under the old regime. Therefore, the proviso to protect the assessee. It states that if assessment years, prior to AY 2020-21, could not have been reopened as on 1.4.2021 as being beyond 6 years under the erstwhile section 149(1)(b), then the same cannot be reopened under the proposed section 149(1)(b). Thus, AY 2014-15 would become time barred as on 31.03.2021 under the erstwhile section 149(1)(b). All years prior to and including AY 2014-15 cannot be reopened under the new provisions, though it will fall within the extended time limit of 10 years. Similarly, AY 2015-16 has become time barred on 31.03.2022, AY 2016-17 will become time barred on 31.03.2023 and so on and so forth.

Now, an amendment has been made in the said section. The amendment is concerning the search related assessments. The amendment now provides that no notice u/s 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified u/s 153A(1)(b) or section 153C of the Act, as the case may be, as they stood immediately before the commencement of the Finance Act, 2021.

If a search has been initiated u/s 132 of the Act on or after 01.04.2021, then assessments related to such search have to be made u/s 147 of the Act. Such assessments can be made for 10 years prior to the year of search u/s 149(1)(b) of the Act. However, under the old section 153A and 153C of the Act, an AO can go beyond six years only on fulfilling certain conditions as specified in fourth proviso to section 153A of the Act. Such proviso provides that in cases where an AO has in his possession books of account or other documents or evidence which reveal that the income, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in the relevant assessment year or in aggregate in the relevant assessment years, then he can reopen beyond 6 years. Thus, though under the amended provisions of section 149(1)(b) of the Act, an assessment can be reopened beyond 6 years even if the income is represented in the form expenditure or book entry, however, if such reopening is on account of search u/s 132 of the Act, and if it pertains to AY 2021-22 or prior years

and such reassessment is after 6 years from the end of the relevant assessment year, then to reopen such assessment, income escaping assessment has to be represented in the form of asset only.

Income escaping assessment spread over a period of more than 1 year

If an assessment is to be reopened beyond 3 years from the end of the assessment year, the threshold prescribed is Rs. 50 lakhs. Further, first two limbs of section 149(1)(b) talk about asset or expenditure in relation to an event etc. There might be some cases, where the income escaping assessment in the form of investment in asset or expenditure is less than Rs. 50 lakhs in a particular year but more than Rs. 50 lakhs if 2 or more years combined. As a result, a new subsection (1A) has been inserted. It states that notwithstanding anything contained in subsection (1), where the income chargeable to tax represented in the form of an asset or expenditurein relation to an event or occasion of the value referred to in section 149(1)(b), has escaped the assessment and the investment in such asset or expenditure in relation to such event or occasion has been made or incurred, in more than one previous years relevant to the assessment years within the period referred to in section 149(1)(b), a notice u/s 148 shall be issued for every such assessment year for assessment, reassessment or recomputation, as the case may be. Again, here the Legislature has backtracked from its promise. The statement of the Hon’ble Finance Minister was that an assessment can be reopened beyond 3 years, only if the income escaping assessment is more than Rs. 50 lakh. However, now they have amended the section wherein, an assessment can be reopened even if income escaping assessment is less than Rs. 50 lakh. It is pertinent to note that, section 149(1A) does not apply to income escaping assessment being in the nature of book entry.

The above demonstrates how, the Legislature slowly expands the scope of provisions thereby violating the promise or statement made. In such situations, the principles of “promissory estoppel” should apply with full force.

Provisions relating to taxation of charitable trusts or exemption provided to charitable trusts have been fine tuned in recent times for plugging many unaddressed issues.

Brief BackgroundThe term “charitable purpose” is defined in Section 2(15) in an inclusive manner. The objectives for which a charitable trust or institution is created deserves tax relief and there is no dispute about it. However, it is the last limb of the definition that is “advancement of any other object of general public utility is yet to be free from litigations.

The exemption to trusts or institution is available under the following two regimes:

Regime One: Any fund, institution, trust, any university, other educational institution, any hospital or other medical institution approval under sub-clauses (iv), (v), (vi) and (via) of Section 10(23C), and

Regime two: The trusts registered under Section 12AA/12AB

Section 11 provides for an exemption to trusts or institutions registered under Section 12AA/12AB. Similarly, Section 10(23C) provides an exemption to certain funds or institutions is approved under this provision.

An organization cannot simultaneously have approval / registration under both the sections and has to opt only for anyone form of approval / registration under Section 12AB.

Amendment to Section 12A(1)(b) and tenth proviso to Section 10(23C)Following tenth proviso shall be substituted for existing tenth proviso to clause (23C) of Section 10 by Finance Act, 2022 with effect from 1.4.2023.

Tenth proviso to Section 10(23C) provides that where the total income of the fund or institution or trust or any university or other educational institution or any hospital or other medical institution under both the regimes, without giving effect to Section 10(23C) or Section 11 and 12 exceeded maximum amount which is not chargeable to tax, such trust or institution or institution shall:

• keep and maintain books of account and other documents in such form and manner and at such place, as may be prescribed, and
• get its accounts audited in respect of that year before the specified date and furnish by that date, the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.

It is to be noted that this condition to maintain books of account is in addition to the conditions requiring the trust or institutions to get registration, audit of books of account and filing of the return of income. Thus, if the trust fails to comply with any of these conditions, the benefit of exemption under Section 10(23C) or Section 11 shall not be available.

Section 10(23C) is independent of Section 11 to 13. The objective is to amend Section 10(23C) to limit its scope and merge rest of the provisions contained therein with Section 11 to 13. 

Section 10(23C)(iiiad), University or other educational institutionIt applies to any university or other educational institution with effect from assessment year 2022-23. Any University or other educational institution existing solely for educational purposes and not for the purposes of profit and which is solely for educational purposes and not for the purposes of profit if the aggregate annual receipts from such University or Universities or educational institution or institutions do not exceed five crore rupees; or

Section 10(23C)(iiiae): Hospital or other institution providing medical relief for philanthropic purposes and not purposes of profitThis section applies to any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for the purposes of profit, if the aggregate annual receipts of the person from such hospital or hospitals or institution or institutions do not exceed five crores. 

Explanation

For the purposes of sub-clauses (iiiad) and (iiiae), it is clarified that if the person has receipts from University or Universities or educational or educational institution or institutions as referred to in sub-clause (iiiad), as well as from hospital or hospitals or institution or institutions as referred to in sub-clause (iiae), the exemptions under these clauses shall not apply, if the aggregate of annual receipts of the person from such University or universities or educational institution or institutions or hospital or hospitals or institution or institutions exceed five crore rupees.

Wholly or substantially financed by the  GovernmentThe term “wholly or substantially financed by the Government” would mean that the Government grant to such University or such other educational institution, hospital or other institution mentioned above exceeds 50% of the total receipts including any voluntary contributions received by it during the relevant previous year (Rule 2BBB).

These amendments have been brought to nullify the interpretation given in Children’s Education Society’s case [2013] 358 ITR 373 (Kar.) wherein it was held that each educational institution is a separate entity controlled under various statutes for various purposes. Similar view was found held in Vivekanand Society of Education and Research vs. CIT [IT Appeal No. 23 of 2014 dated 29th December, 2007 of Jammu and Kashmir]. The monetary limit and tax exemption of the income thus was applied with reference to each education institution. This amendment has been brought to nullify the interpretations given in the aforesaid cases.

The term hospital or other institution has not been defined hence the question would arise whether pharmacy and / or chemist shop would be considered as a part of the “hospital or other institution”. Similarly, educational institution has not been defined hence the question would arise when books and uniforms are sold by a store run by educational institution would be considered as “educational institution”.

Section 10(23C): Income of certain funds, trust or institutions (Clause 4): Existing Provision: Section 10(23C) exempts the income of certain funds, trust or institutions which fulfill various criteria. Once, such criteria is trusts or institutions which are approved by the prescribed authority. The said prescribed authorities will be Principal Commissioner or Commissioner. The amendment will be effective from 1st April, 2021.

Voluntary Contribution received by the temple, mosque, gurudwara etc. for repairsExplanation 1A: For the purposes of this  proviso, where the property held under trust or institution referred to in clause (v) includes any temple, mosque, gurudwara, church or other place notified in clause (b) of sub-section  (2) of Section 80G, any sum received by such trust or institution as a voluntary contribution for the purposes of renovation or repair of such temple, mosque, gurudwara, church or other place, may, at its option, be treated by such trust or institution as forming part of the corpus of the trust or institution as forming part of the corpus of that trust or institution, subject to the condition that the trust or institution.

• Applies such corpus only for the purpose for which voluntary contribution was made;
• Does not apply such corpus for making contribution or donation to any person;
• Maintains such corpus separately identifiable; and
• Invests or deposits such corpus in the form and modes specified under Section 11(5).

Explanation 1B:

For the purposes of Explanation 1A, where any trust or institution referred to in sub-clause (v) of Section 10(23C) has treated any of the conditions specified in clause (a) to (d) of the above Explanation is violated, such sum shall be deemed to be the income of such trust or institution of the previous year during which violation takes place.

Explanation 3 to Section 10(23C) amended with effect from 1.4.2023:

For the purposes of determining the amount of application under this proviso, where 85% of the income is not applied wholly and exclusively to the objects during the previous year but is accumulated or set apart, either in whole or in part, for application to such objects in subsequent years, such accumulated income shall not be included in the total income, if the following conditions are complied with:

• Furnish a statement to the Assessing Officer stating the purpose for which the income is being accumulated or set apart, which shall in no case exceed five years; in computing due to an order or injunction of any Court, shall be excluded.
• The money so accumulated or set apart is invested or deposited in the forms or modes specified is Section 11(5); and
• The statement referred to in clause (a) is furnished on or before the due date specified under Section 139(1) for furnishing the return of income of the previous year.

Explanation 4:

Any income referred to in Explanation 3, which

• is applied for purposes other than the objects for which the fund or institution or trust is established or ceases to be accumulated or set apart for application thereto, or
• Ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5) of Section 11; or
• Is not utilized for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of Explanation 3, or,
• Is credited or paid to any trust or institution or trust or university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via), shall be deemed to the income of the previous year;
  • In which it ceases to remain so invested or deposited under clause (a); or
  • In which it ceases to remain so invested or deposited under clause (b); or
  • Being the last previous year of the period, for which the income is accumulated or set apart under clause (a) of Explanation 3, but not utilized for the purpose for which it is so accumulated or set apart under clause (c); or
  • In which is it is credited or paid to any fund or institution or trust or any University or other educational institution or any hospital or any other medical institution under clause (d). 

Amount not deductible:

Section 40(a)(ia) and 40A(3) shall, mutatis mutandis, apply in computing the income chargeable under the head “profit and gains” of business or profession.

No deduction in respect of expenditure or allowances or set-off of any loss shall be allowed:

New 23rd proviso provides that for the purposes of computing income chargeable to tax under twenty second proviso, no deduction shall be allowed to the assessee under any other provisions of this Act.

This amendment will take effect from 1st April, 2023 and will accordingly, apply in relation to assessment year 2023-24 and subsequent assessment years.

In my view this proviso is harsh. Any loss of the trust or instituted be allowed to set off against the income of the subsequent year.

Section 11(1): Explanation 4 and Explanation 5inserted by Finance Act, 2021 with effect from 1.4.2022

Explanation 4: For the purposes of determining the amount of application under clause (a) or clause (b):

• Application for charitable or religious purposes from the corpus as referred to in clause (d) of this section shall not be treated as application of income for charitable or religious purposes.

  Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the amount or part thereof, is invested or deposited back, into one more of the forms or modes specified in sub-section (5) of Section 11 maintained specifically for such corpus, from the income of that year and the to the extent of such investment or deposit; and

• Application for charitable or religious purposes, from any loan or borrowing, shall not be treated as application of income for charitable or religious purposes.

  Provided that the amount not so treated as application or part thereof, shall be treated as application for charitable or

   religious purposes in the previous year in which the amount or part thereof, is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpus, from the income of that year and to the extent of such investment of deposit; and

• Application for charitable or religious purposes, from any loan or borrowing, shall not be treated as application of income for charitable purposes.

  Provided that the amount not so treated as application, or part thereof, shall be treated as application for charitable or religious purposes in the previous year in which the loan or borrowing or part thereof, is repaid from the income of that year and to the extent of such repayment.

  Repayment of debt incurred for the purpose of the trust or loan advanced by educational trust to students for higher studies amounted to application of income. The Circular issued by CBDT and various High Court’s decisions in this connections are nullified and application for charitable or religious purposes from any loan or borrowing shall not be treated as application of income for charitable or religious purposes.

Explanation 5:

It clarifies that the calculation of income required to be applied or accumulated during previous year shall be made without any set- off or deduction or allowance of any excess application of any of the year preceding the previous year.

 Section 11(1A)For the purposes of sub-section (1)

• Where a capital asset, being property held under trust wholly for charitable or religious purposes is transferred and the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held, then the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder:
  • The whole of the net consideration is utilized in acquiring the new capital asset, the whole of such capital gain;
  • Where only a part of the net consideration is utilized for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilized exceeds the cost of the assets transferred.

Explanation to this sub-section defines the meaning of “appropriate fraction”, cost of transferred asset” and the “net consideration”.

Section 11(1B)Where any income in respect of which an option is exercised under clause (2) of the Explanation to sub-section (1) is not applied to charitable or religious purposes in India during the period referred to in sub-clause (a) or, as the case may be, sub-clause (b) of the said clause, then, such income shall be deemed to be the income of the person in receipt thereof-

In the case referred in sub-clause (i) of the said clause of the previous year immediately following the previous year in which the income was received; or

• In cases referred to in sub-section (ii) of the said clause of the previous year immediately following the previous in which the income was received.

Requirement for filing Income-tax ReturnClause (c) of Section 139(4C) mandates that a trust or institution which is otherwise eligible for blanket tax exemption under Section (23C) meaning thereby an educational institution or hospital not being run for the purposes of profit, have to file the return where the total income before giving effect to the provisions of Section to exceeds the basic exemption limit.

Failure to furnish the Return of Income Section 272A(2)provides that failure to furnish the income-tax return under Section 139(4C) is liable for penalty of Rs. 100/- for every day during which the failure continues.

Requirement to maintain Books of Account – From A.Y. 2023-24Under the Income-tax Act, tax payers are required to maintain books of account and get them audited. The requirement to maintain books of account are prescribed under Section 44AA. However, there is no specific provision under the Act providing for the books of account to be maintained by trusts or institutions.

The Finance Bill, 2022 proposes an amendment to Section 12A(1)(b) and tenth proviso to Section 10(23C) to provide that where the total income of the trust or institution under both the regimes, without giving effect to exemption under Section 10(23C) or Sections 11 and 12 exceeds the maximum amount which is not chargeable to tax, such trust or institution shall maintain books of account and other documents in such form and manner and at such place, as may be prescribed.

The condition to maintain books of account is in addition to the conditions requiring the trust or institutions to get registration, audit of the books of account and filing of return of income. Thus, if the trust fails to comply with any of

these conditions, the benefit of exemption under Section 10(23C) or sections 11 and 12 shall not be available. 

Cancellation of Registration or approvalIt is the general law that registration once granted shall remain in force till the Commissioner cancels it. Under the existing provisions of the Income-tax Act, the registration can be cancelled if the Commissioner is satisfied that the activities of the trust or that the trust or institution has violated requirements of any other law which was material to achieve its objects. However, the Commissioner shall given an opportunity of being heard before the cancellation of registration of the trust. The following amendments to Section 12AB and fifteen proviso to Section 10(23C) to empower the authorities to cancel the registration. The registration or approval can be cancelled by the Principal Commissioner of Income-tax (Pr. CIT) or CIT can cancel the registration or approval can be cancelled.

• Final registration or provisional registration granted under clause (a) or clause (b) of Section 12AB(1);
• Final registration granted under clause (b) of Section 12AA(1);
• Institute approval under clauses (iv), (v), (vi) and (via) of Section 10(23C).

Circumstances under which registration or approval can be cancelled.

• PCIT or CIT has noticed one or more occurrence “specified violations” during any previous year;
• PCIT or CIT has received a reference from the Assessing Officer under second proviso to Section 143(3) for any previous year.
• Such a case has been selected in accordance with risk management strategy, formulated by the Board from time to time for any previous year.

Specified Violations: The following shall be considered as “specified violation”.

• If any income, derived from property held under trust wholly or in part for charitable or religious purposes, has been applied other than for the objects of the trust or institution.
• The trust or institution has income from profits and gains of business which is not incidental to the attainment of its objectives.
• Separate books of account are not maintained by such trust or institution in respect of the business which is incidental to the attainment of its objectives.
• The trust or institution has applied any part of its income from the property held under a trust for private religious purposes, which does not enure benefit of the public.
• The trust or institution established for charitable purposes has applied any part of its income for the benefit of any particular religious community or caste.
• Any activity being carried out by the trust or institution is not genuine or is not being carried out in accordance with the conditions subject to which it was registered.
• The trust or institution has not complied with the requirement of any other law for the time being in force as is material to achieve its objects, and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.

PCIT/CIT to satisfy himself about the occurrence or otherwise of any specified violation:

• The PCIT or CIT shall call for such documents or information from the Trust or institution or make such inquiry about the occurrence or otherwise of any specified violation. He shall pass an order in writing, cancelling the registration of such trust or institution after affording a reasonable opportunity of being heard for the previous year and all subsequent previous years, if he is satisfied that one or more specified violations have taken place.

  If the PCIT/CIT is not satisfied about the occurrence or more specified violations. In such as case, he shall pass an order in writing, refusing to cancel the registration of such trust or institution.

  PCIT/CIT shall forward a copy of the cancellation order or order refusing to cancel the registration, as the case may be, to the Assessing Officer and such trust or institution.

Time limit to pass cancellation order The cancellation order or order refusing to cancel the registration, as the case may be, shall be passed before the expiry of six months to be calculated from the end of the quarter in which the first notice is issued by PCIT or CIT, on or after 1st April, 2022 calling for any document or information or for making any inquiry.

Year of Taxability of unutilized Accumulated Income under Section 11(2)With effect from assessment year 2023-24, if a trust is not able to apply 85% of its income in a particular year, it can accumulate the shortfall to be used for religious or charitable purposes within the next five years.

The accumulation is allowed if the Assessing Officer is informed about the purpose of  accumulation and the period for the income is to be furnished in Form 10 on or before the due date for furnishing the return of income under Section 139(1).

The income set apart or accumulated has to be utilized in terms of the provisions of Section 11(2). However, the accumulated income is not applied and remains to be invested even after five years, in such a case, the amount or part of the accumulated income which has not been so utilized shall be treated as income of the trust of that previous year under Section 11(3). However, if the accumulated income is not utilized in the year immediately following the expiry of the 5 years period, the trust has one more year for utilization of accumulated funds. Though Section 11(2) provides a 5 years period for accumulation but by virtue of Section 11(3), the penal provisions are attracted only after the expiry of sixth year. The Act provide a one year grace period to utilize the income accumulated under Section 11(2). Therefore, if the accumulated income is not applied within 5 years, it shall be taxed in the sixth year.

The Finance Bill 2022, purposes to amend the provisions of section 11(3) of the Act to provide that any income referred to in Section 11(2) which is not utilized for the purpose for which it is so accumulated or set apart shall be deemed to be the income of such person of the previous year being the last previous year of the period, for which the income is accumulated or set apart but or not utilized for the purpose for which it is so accumulated or set apart.

Thus, after the proposed amendment, if the accumulated income is not applied within 5 years, the same shall be taxed in the 5th year itself.

Restriction on extending the benefit of specified personUnder Section 13, trusts or institutions registered under Section 12AA/12AB are required not to pass any unreasonable benefit to the trustee or any other specified person.

The Finance Bill, 2022 proposes to insert twenty- first proviso in Section 10(23C) of the Act to provide that where income or part of income or property of any trust or institution has been applied directly or indirectly for the benefit of any person referred to in Section 13(3), such income or part of income or property shall be deemed to be the income of such person of the previous year in which it is so applied. The provisions of Section 13(2)(4) and (6) of the Act shall also apply to trust or institution referred to in Section 10(23C).

Interested PersonThe following are interested person –

• The author of the trust or the founder of

  the institution;

• Any person who has made a total contribution upto the end of the relevant previous year of an amount exceeding Rs. 50,000;
• Where author, founder or substantial contributor is an HUF, a member of the HUF;
• Any trustee of the trust or manager of the institution;
• Any relative of such author, founder, substantial contributor, member, trustee, manager as aforesaid; and
• Any concern in which any of the persons referred to above has a substantial interest

Meaning of Relative
Relative in relation to an individual means

• His spouse;
• His brother or sister; 
• Spouses of the brother or sister;
• Brother or sister of his spouse;
• Spouses of brother or sister of his spouse;
• His lineal ascendant or descendant and of his spouse;
• Spouses of any of his lineal ascendant or descendant;
• Spouses of his spouse’s lineal ascendant or descendant;
• Any lineal descendant of his or his spouse’s brother or sister.

Meaning of substantial interestA person is deemed to have substantial interest in a concern if he (or along with interested persons as mentioned above) at any time during the previous year.

• Holds atleast 20% of equity share capital in the company; or
• Entitled atleast 20% of profits, in case of any other concern.

Benefit of medical or educational servicesWhere a charitable or religious trust is running a hospital or a medical institution, or an educational institution and it provides medical or educational services to interested persons, the value of medical / educational services to interested persons, the value of medical / educational services is deemed to be income of the trust or institution derived from property held under trust. The value of such services is chargeable to tax during the previous year in which such services are rendered. The exemption of Section 11 or Section 10(23C) shall not apply to the value of such services.

The income or the property applied for benefit of interested person:

The income or the property of the trust shall be deemed to have been applied for the benefit of interested person in the following cases.

• Loan without adequate interest or security

  An interested person is deemed to be benefitted if any part of the income or property of the trust or institution is (or continues to be) lent to any interested person for any period during the previous year without either adequate security or adequate interest or both.

• Use of property without any rent

  An interested person is deemed to be benefitted if any land, building or other property of the trust or institution is (or continues to be) made available for use by any interested person, for any period during the previous year without charging adequate rent or other compensation.

• Excess payment of salary

  Any interested person is deemed to be benefitted if any amount is paid by way of salary, allowance or otherwise during the previous year to any interested person, out of the resources of the trust or institution and the amount so paid is in excess of what may be reasonably paid for such services.

• Inadequate remuneration for services rendered

  An interested person is deemed to be benefitted if the services of the trust or institution are made available to an interested person during the previous year without adequate remuneration or other compensation.

• Excess payment for purchases

  An interested person is deemed to be benefitted if any share, security or other property is purchased by or on behalf of the trust or institution from an interested person during the previous year for consideration which is more than adequate consideration.

• Consideration of sales

  An interested person is deemed to be benefitted if any share, security or other property is sold by or on behalf of the person during the previous year for consideration which is less than adequate consideration.

• Diversion of income

  An interested persons is deemed to be benefitted if any income or property of the trust or institution is diverted during the previous year in favour of the interested person and the aggregate value of such income and property exceeds Rs. 1,000.

• Investment in a concern

  An interested person is deemed to be benefitted if any funds of the trust or institution are or continue to remain, invested for any period during the previous year, in any concern in which the interested person has a substantial interest. However, if the aggregate of funds invested in a concern, in which any interested person has a substantial interest, does not exceed 5% of capital of that concern, exemption under Section 11 will be denied only from the income arising to the trust form such investment. 

  In other words, in such a case, the exemption under Section 11 will not be denied for any income other than the income arises out the said investment. In Birla Charity Trust [1987] 34 Taxman 504 (Cal), the Hon’ble High Court held that if the funds of the trust are construed to include assets (other than money in hand or bank account), the same are not capable of being invested as such other assets of the trust, apart from money in hand or cash will have to be converted into money or cash before the same can be invested. Therefore, only cash and bank balances are included in the expression of “funds” for the purpose of section 13(2)(h).

ConclusionThe law of charitable trust/institution has been complicated frequent changes in law which makes compliance difficult. Lots of judgments of various Courts have been nullified by making amendments in various sections of charitable trust / institutions such as Section 10(23C) (iiiad), Section 10(23C)(iiiae), Section 11(1A), Section 11(2), capital gain etc. Litigations will increase considerably. Thus trust funds would be affected due to heavy tax demand. The law of charitable trust / institution could have been made simple and easy for various compliances.

“Take up one idea, make that one idea your life. Think of it, dream of it, Live on that idea let the brain, muscles, nerves, every part of your body be full of that idea, and just leave every other idea alone. This is the way to success.”   — Swami Vivekananda

Friends,

We have completed 100 days of the year 2022. The first initial days have been full of activities after a successful National Executive Committee Meeting at Kolkata. Today when I am writing this after a splendid One Day Conference at Bhubaneswar combined with Puri Darshan organised by Orissa Team of Eastern Zone on 15th April, 2022 and in this one month, we are having another day conferences at Vizag on 23-04-2022 and at Surat on 30-04-2022. Northern Zone is going to organise National Executive Committee Meeting with National Tax Conference at Srinagar on 10th, 11th & 12th of June, 2022. Number of webinars and other zonal conferences are being organised all over the country.

As we all are aware that we are passing through an era of change in laws, work, technology all over and in this context Federation has to work stronger and every members owes a duty to work for growth and welfare of every professional colleague within and outside the Family of All India Federation of Tax Practitioners and in scenario of significant changes taking place at National Level, time has come for all the individuals / Associations / Institutions to come together, think together, work together with hand holding each other for serving the Society & Nation and Federation has to play an important role as it accepts all kinds of Professionals into one Conglomeration with a single objective of providing a constructive role by the Federation to help professionals in achieving excellence in their professional life.

Friends I have received full support and immense co-operation from my fellow members in first three months of this term & I am sure & confident that the same support & co-operation shall be extended in the coming months also.

D. K. Gandhi

National President, A.I.F.T.P.

 

Dear Friends,

Wish you all a very happy Financial Year 2022-23. We all celebrated on 2nd April 2022 New Year’s Day as per “Hindu” calendar in several parts the country and remaining parts are celebrating it when I am writing this editorial. We all should be proud be of the diverse culture of our country which makes life colorful and makes celebration a 24/7 affair.

Hon’ble Bombay High Court has also confirmed the view taken by the Hon’ble Allahabad High Court, Delhi High Court and Rajasthan High Court and quashed the notices issued under section 148(1) of the Income tax Act,1961 (Hereinafter referred to as ‘the Act’) post 1st April, 2021 without following the procedure prescribed under section 148A the Act. The executive to overcome these decisions, has again tinkered with the provision of section 149 of the Act through Finance Act, 2022. This important topic is covered by Adv. Dharan Gandhi in his article which is part of this issue of the journal. As mentioned in my earlier editorial, the policy statement made by the Hon’ble Finance Minister, while introducing the Finance Bill, 2021 is substantially diluted with amendments introduced to section 149 of the Act through the Finance Act, 2022. The time limits to reopen an assessment which has reached finality has not been restricted to 3 years it has now been extended to 10 years. The statutory provisions, as the stand today, are bound to generate litigation.

The Russia-Ukraine war is causing economic hardship globally. When the world was slowly limping back to normal economic activity. The Russia’s aggression over Ukraine has pushed back the global economy into crisis. This is taking a huge toll on the smaller economies like Sri Lanka, Nepal etc. It is going to have an impact on our economy as well. The inflation is hurting the vulnarable sections of the society. It is the right time for the Union Government to consider to slash the GST rates on those items which effect the prices of essential comodities. As per figures made available by the Finance Ministry the direct tax collections have surpassed the target in the fiscal year 2021-22. The estimate made at Rs. 12.50 lakh crores( inclusive of corporate as well as personal income tax) was surpassed by actual collections at Rs. 13.63 lakh crores, which is 9.04% more than the target. This trend can be maintained if the rationalization of GST rates takes place. I am concsious of the fact that this has to be carried out through GST Council. At least this proposal should be considered in the fourth coming Council meeting.

The prevailing conditions do present uncertainties, but, the same will not be enough to put out the flame of hope. “Uncertainty, in the presence of vivid hopes and fears, is painful, but must be endured if we wish to live without the support of comforting fairy tales. It is not good either to forget the questions that philosophy asks, or to perusade ourselves that we have found indubitable answer to them. To teach men how to live without certainty, and yet without being paralyzed by hesitation, is perhaps the chief thing that philosophy, in our age, can still do for those who study it. Bertrand Russell in Introduction, the History of Western Philosophy.

In the present issue of the journal we are providing articles on several issues which are important and relevant for day to day practice. I thank all the esteemed professionals for taking out their valuable time to contribute to the AIFTP- Journal’s April, 2022 issue.