CA Chintan Vajani

  1. Introduction
    1. Technology has become disruptor in every sector including Financial Sector. Blockchain is one of several emerging technologies alongside artificial intelligence, the internet of things and 5G mobile networks., which are expected to drive new levels of digital transformation and disruption in the years ahead. Crypto assets (popularly known as crypto currency / NFT) has been the most hyped application of blockchain technology which pose a challenge for policymakers in a wide range of areas including tax policy.
    2. Some countries have started to respond to these challenges by issuing guidance on the treatment of crypto assets. However, in most countries, and in the emerging academic literature, there is often a lack of comprehensive guidance or a framework for the treatment of these assets for tax purpose, with any guidance generally being partial or incomplete. This lack of guidance may be driven in part by the complexity of defining the tax treatment for these assets in a way that covers their different facets, as well as their rapidly changing nature.
    3. In India also indecisiveness on regulatory front continued till date except in respect of taxation. Hon’able FM in her Budget 2022 speech mentioned that the magnitude and frequency of transactions

      in virtual digital assets (“VDA”) have made it imperative to provide for a specific tax regime. Accordingly, provisions relating to taxation of VDA were proposed in Finance Bill 2022.

  2. Taxation in India
    1. Prior to amendment made by Finance Act 2022, different tax treatments were accorded to income from VDA. The tax treatment was determined considering the crypto asset as similar to shares and securities and accordingly income from the same was offered to tax either as ‘Profits and gains from business or profession’ or as ‘Capital Gain’ after claiming expenditure allowable under relevant heads. Further, such income was also considered for set off under respective heads and inter-heads adjustment.
    2. The Government has introduced specific provision relating to taxation of VDA through Finance Act 2022 which is effective from 1st April 2023. Section 115BBH has been inserted as charging section for taxing income from transfer of VDA. It also provides for allowance / disallowance / set off of expenditure / loss from such income. Section 2(47A) inserted to define VDA. Expl to Sec 56(2)

      (x) involving VDA requiring deduction of tax at source. Salient features of these provisions have been summarised herein below.

      has been amended to include VDA in the definition of property and section 194S has been inserted to track the transaction

    3. Section 2(47A) of the Act defines VDA in an exhaustive manner. As per the section, VDA means –
      1. any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
      2. a non-fungible token or any other token of similar nature, by whatever name called;
      3. any other digital asset, as the Central Government may, by notification in official gazette specify
    4. Further, central government is empowered to include / exclude any digital assets to / from the definition of VDA. The government has excluded gift card or vouchers, mileage points, reward points, loyalty points redeemable only to obtain goods or services or discount on goods or services.1
    5. To tax gift of VDA in the hands of recipient, explanation to section 56(2)

      (x) has been amended to include VDA into the definition of Property. Here it is imperative to note that section 56(2)(x) seeks to charge income on the basis of receipt of property without consideration or for an inadequate consideration vis-à- vis fair market value of the property.

    6. Section 115BBH has been inserted as charging section. It also provides for computation mechanism in respect of income from transfer of VDA. The salient feature of this section is as under
      1. 30% tax on income from transfer of VDA
      2. No deduction in respect of any expenditure or loss, except cost of acquisition of that VDA is allowed.
      3. Loss arising from transfer of VDA shall not be allowed to be set off against any other income or gain or gain from other VDA. Further, such loss is not allowed to be carried forward in succeeding year.
      4. For the purpose of this section, the word ‘transfer’ shall have meaning defined in section 2(47) of the Act irrespective of the fact that whether VDA is capital asset or not.
    7. Section 194S has been inserted with effect from 1st July 2022 to provide for deduction of tax from payment on transfer of VDA. The salient feature of the same is as under:
      1. Any person responsible for making payment to resident in connection with transfer of VDA to deduct tax @ 1% of consideration for transfer of VDA.
      2. Tax to be deducted at the time of credit or at the time payment whichever is earlier.
      3. In case of overlapping with Section 194O,2 deduction of tax under section 194S.
      4. CBDT empowered to issue guidelines for the purpose of removing difficulty.
  3. Issues and grey areas
    1. The world over, different approaches were considered for characterisation of crypto assets. While majority of countries refers to them as intangible assets, some considers them as commodities or financial instruments3. However, in India, Government has refrained from characterising VDA as property or capital asset and applying computation mechanism of respective heads of income. Instead, Government has provided separate charging section and computation mechanism. Though this approach has provided certainty in relation to tax rate and computation of income, it has still left many issues and grey areas open for interpretations and litigations. Some of these issues and grey areas are discussed hereunder.

      Heads of Income

    2. Classification of income under the heads of income is critical as each head of income provides for computation provisions which bears relationship to nature of the charge. Under the scheme of

      the Act, different heads of income provide for different valuation approaches, different tax timing, different provision relating to determining consideration and cost viz., deemed consideration, cost of acquisition under specific mode of asset acquisition under capital gain etc.

    3. The introduction of section 115BBH as charging section and computation provision outside the heads of income, raises a question whether the income from transfer of VDA is a headless income? Because, in case of income from unknown sources covered under section 68 to 69D similar issue arose and judiciary has taken contradictory views.
    4. In respect of income from VDA also classification of income under different head will provide different results. E.g. In case income from transfer of VDA, which were originally received as gift, is classified as ‘Capital gain’, cost to the previous owner may be claimed as cost of acquisition u/s 49. However, if the same is classified as ‘Income from other sources’, benefit of cost to previous owner shall not be available.

      Exclusion of Foreign currency from VDA

    5. Indian currency and foreign currency have been excluded from the definition of VDA. Further, Indian currency and foreign currency shall have meaning assigned to it under FEMA.
    6. As remarked by ex-finance minister Mr Arun Jaitley in parliament that India doesn’t accept cryptocurrencies as a form of legal tender. However, there is neither any regulatory framework at present which say so nor any notification of RBI which excludes virtual currencies of VDA from the definition of currency under FEMA. Recently, The Central African Republic has become the second country in the world after El Salvador to give legal tender status to Bitcoin4.
    7. It raises a question, whether Bitcoin can be considered as foreign currency under FEMA and if so, can be excluded from the definition of VDA?

      Initial Coin Offering to employee as ESOP

    8. Like ESOP many companies, specifically Crypto exchange start ups have started providing ICO as a part of employee compensation plan similar to ESOP. This raises a further debate as to whether the VDA given to employees structured similar to ESOP shall be taxable as income from other sources u/s 56(2)(x) or as income from salary.
    9. As per Clause (iii) of section 17(2) perquisite includes the value of any benefit or amenity granted to or provided free of cost or at concessional rate to an employee who is director, or is having substantial interest in the company, or whose income from salary exceeds Rs. 50,000.
    10. Before introduction of clause (iiia)5 of section 17(2) vide Finance Act 1999, the department relying on the Board Circular6 use to take a position that the stock option granted to an employee at a concessional price constitutes perquisite under section 17(2)(iii). A similar view can be considered in the matter of receipt of ICO structured as ESOP. However, question relating to valuation of such ICO shall remain open as currently no valuation rules have been notified in this regard.
    11. If one were to take other view and seek to tax the same u/s 56(2)(x), the question shall arise whether the receipt of ICO is without consideration or in exchange of consideration of providing services to the company. In later case the receipt of ICO may escape the tax net.
    12. Another issue shall arise with respect to gain on subsequent transfer of VDA received as ESOP. In respect of ESOP taxation, section 49AA provides that fair market value considered for determining perquisite value as per Rule 3(8) of the Income Tax Rules shall be taken as cost of acquisition. However, in respect of VDA there is no such provision to exclude fair market value of VDA considered as perquisites. Only deduction allowed under section 115BBH is cost of acquisition. In such case, income from VDA considered as value of perquisite may be taxed twice, once at the time of receipt of VDA as perquisite and subsequently at the time of transfer of such VDA by employee with deduction of value of perquisite already taxed as cost of acquisition.

      Expenditure incurred on Transfer of VDA

    13. When VDA transaction are executed on crypto exchanges, normally transaction fee is collected in the range of 0.2% to 0.5% of the transaction value7. However, deduction in respect of these expenses shall not be allowed as deduction while computing income from transfer of VDA due express provision in sub-section 2 of section 115BBH.

    14. For the purpose deduction of tax at source u/s 194S, CBDT has clarified that the tax required to be withheld under section 194S of the Act shall be on the “net” consideration after excluding GST/charges levied by the deductor for rendering services8. This circular is issued by CBDT for the purpose of removal of difficulty under specific power given under section 194S. In section 115BBH there is no such power given to CBDT. Hence, deduction of expenditure incurred on transfer of VDA based on above circular may not be available while computing income under section 115BBH.

      Gift of VDA

    15. Section 115BBH seek to levy tax on transfer of VDA and the word ‘transfer’ shall have meaning assigned to it under section 2(47) of the Act. Section 47 excludes gift as transfer for the purpose of capital gain. But this exclusion is not available under section 2(47). So at the time of gift of VDA, charge of tax is created under section 115BBH in the hands of the donor. However, in the absence of receipt of consideration and absence any provision relating to computation of deemed consideration u/s 115BBH, the same may not be taxable.
    16. In the hands of recipient of such gift, VDA shall be treated as income u/s 56(2) (x) if difference between fair market value and consideration exceeds Rs. 50,000. For recipient of gift a question may arise as to whether the income from VDA shall be taxed at the rate of 30% as provided u/s 115BBH or as per applicable slab rate. Because 30% tax rate provided u/s section 115BBH to tax income from transfer of VDA, whereas u/s 56(2)(x) charge is provided on receipt of the property. For recipient of gift, income arise not from transfer of property but on receipt of the property and hence income shall be taxed at applicable slab rate / tax rates.

      Exchange of VDA with another VDA

    17. In crypto trading / investment, cryptocurrency swap is a routine feature. Because some cryptocurrencies are having ready convertibility into fiat currency whereas some cryptocurrency doesn’t have ready convertibility of fiat currency. In such scenario a question shall arise as to how to tax such transaction.
    18. When one VDA is exchanged for another VDA it attracts the charge u/s section 115BBH, as the exchange is covered in the definition of ‘transfer’ u/s 2(47) of the Act. But question shall arise with respect to determining consideration of VDA transferred, because there is no valuation mechanism prescribed u/s 115BBH.
    19. For the purpose deduction of tax at source u/s 194S, CBDT has provided guidance in FAQ no 2 of Circular no 13 of 2022 regarding determining value of consideration when one VDA is exchanged for another VDA. As per the guidance provided, exchanges required to convert non-primary VDA into primary VDA and accumulated primary VDA shall be converted into monetary terms at the FAQ no 4 of Circular No 13 of 2022  price prevailing at 00.00 hours of the day by placing market order at 00.00 hours.
    20. However, this guidance shall not be applicable u/s 115BBH. Further, this may not be helpful for determining consideration for the purpose of section 115BBH also. Because many time VDA swap / exchange transactions are executed peer to peer like off market share transaction. Further, there is no regulated crypto exchanges. One cryptocurrency may have different price on different crypto exchanges9. E.g. Buy rate of Ethereum varies on various exchanges ranging from Rs. 1,33,999 on WazirX to Rs. 1,55,819 on InstaCrypto on the same day10.


    21. While the provision relating to manner of taxation and tax rates have been incorporated into the Act, there is no guidance available on valuation of VDA. Aspect of Valuation of VDA remains of utmost importance considering the various issues dealt with supra.

    22. Further, determination of valuation of VDA shall remain a tricky affair considering unregulated nature of crypto space, highly volatile market, different rates on different exchanges on the same day etc. In the absence of valuation rules, applicability of provision of section 17(2) (iii), section 56(2)(x) and charge u/s 115BBH in case of exchange of one VDA for another VDA will pose a challenge.

4. Conclusion

The Indian Govt has taken first step by providing taxation scheme in respect of VDA. However, considering the complex and opaque nature of cryptocurrency industry, it will raise many more issues to resolve, which only time and courts will resolve.

  1.  Notification No 74/2022 dated 30.06.2022
  2. Sec 194O – TDS on payment by e-commerce
  3. Para 2.3 of OECD report on Taxing Virtual Currency issued in 2020.
  4. Central African Republic adopts bitcoin as legal tender (
  5. Which later on omitted and inserted as clause (vi)
  6. Circular No 710, dated 07.1995
  7. It’s not just tax — here are other fees that crypto traders need to watch out for | BusinessInsider India
  8. FAQ no 4 of Circular No 13 of 2022
  9. Why bitcoin prices are different on each exchange (
  10. BitcoinRates : Get bitcoin rates from all bitcoin exchanges in Last accessed on 31.08.2022


  1. On 30/10/16 it was a day of Dipavali Festival. It is the tradition in Gujarat and other states to restart the business after 5 days of Dipavali Festival i.e. on Labhpancham. As the fifth and sixth day after Dipavali were not auspicious, the business was restarted from 07/11/2016.

    On 08/11/16 after banking hours, the Prime Minister announced at 8:00 p.m. the decision of his Cabinet to cancel currency notes of Rs.1000/- and Rs.500/- after midnight i.e. after 12 p.m. 09/11/16 was declared to be a bank holiday. The time for deposit of cancelled currency notes was given upto 30/12/16. It was learnt from the news papers that in hurry many persons bought Gold or invested in immovable properties etc. of their cancelled currency notes.

  2. In the beginning people were scared to go to the banks for deposit of the cancelled currency on account of theft of money, long queue in the banks etc.
  3. While framing the assessment order for 2017-18, in most of the cases the addition has been made of the entire amount deposited in the banks during this demonetization period without considering the facts of the case. In many cases assessee could prove the possession of such notes by giving cogent evidences, still the addition has been made i.e.
    1. Where there was enough cash on hand on 31/03/16 or 08/11/16.
    2. Where there was withdrawal from the bank and redeposit of the withdrawn amount during demonetization.
    3. There was enough cash on hand as well as income earned before demonetization but the return of income was filed late for AY 2017- 18.
    4. In some cases, cash deposited in the bank during the entire year was added.
    5. In some cases, the assessee who is engaged in the business of E-wallet i.e. transfer of money in the cases of small workers who are not having PAN, Aadhar Card and the amount is transferred by charging token commission as per RBI Rules and Guideline, the entire cash deposited was added.
    6. In the cases of Assessees engaged in the business of Petrol/ Diesel where there was extension by circulars for accepting cancelled currency notes.
    7. Where the assessee was engaged in the business of e-booking i.e. Air ticket, hotel booking, site seeing booking, car rental etc. where the payment was received by cash from the concern parties, which was deposited in the bank account during demonetization period.
    8. Amount received as sale consideration on 08/11/16 from 8:00 p.m. to 12:00 p.m. or the sale took place before 08/11/16 and the payment was received on 08/11/16 and deposited in the bank account by cash.
    9. Where the assessee is NRI who used to visit India regularly since many years and the foreign currency was exchanged on the Airport (for which there was no proof) and such NRI having no other income except investment income in India and cash was deposited in his absence.
    10. Where the assessee was having only salary income but maintaining books of accounts regularly but there being no provision of uploading balance sheet in case of salaried persons and cash available with such person and cash of other family members was deposited in the account of the salaried person.

      There may be other such reasons where the transaction of the person was genuine but cash was deposited on account of demonetization.

  4. Addition has been made u/s.68 where the books of accounts are maintained and u/s.69 where the books of accounts are not maintained.
  5. Relevant decisions are given here under in relation to such addition.
  6. Decisions in relation to various issues
    1. Decision in relation to redeposit of amount withdrawn from the bank Where the amount was withdrawn from the bank and redeposited in the bank account during demonetization period the following decisions can be relied.
      1. Jaya Aggarwal v. ITRO 165 DTR 97 Delhi TS-5175-HC-2018(Delhi)-O AY 1998-99 Date of order 13/03/18

        Addition u/s.68 – Withdrawal for acquisition of property returned after seven months was deleted.

        HC held that addition u/s 68 of amount re-deposited was unjustified, noting that one should not consider and reject an explanation as concocted and contrived by applying the prudent man’s behavior test; Principle of preponderance of probability as a test is to be applied and is sufficient to discharge the onus. Probability here means likelihood of anything to be true.

      2. Moongipa Investment Ltd. v. ITO 70 DTR 132 ITAT Delhi

        While deciding this case, ITAT relied on the decision of ACIT v. Baldevraj Charia & Others ITAT Delhi. The deposit out of withdrawal was within 15 months from the date of withdrawn. The addition was made because there was time gap between the date of withdrawal and date of deposit. It was held that the amount cannot be added.

      3. ACIT v. Baldevraj Charla & ORS 121 TTJ 0366 Delhi TS-5893-ITAT-2008(Delhi)-O Date of order 29/12/08

        ITAT – Merely because there was a time gap between the withdrawals and corresponding cash deposits, the assessee’s explanation cannot be rejected, and hence the addition confirmed by the learned CIT(A) is not correct.

      4. Gurpreet Singh v. ITO 40 ITR 467 Chandigarh ITAT TS-5480-ITAT-2015(Chandigarh)-O

        ITAT noted that nothing was brought on record that the amount was utilized by the assessee which was withdrawan from the bank account. ITAT relied on jurisdictional HC decision reported in in the case of Shiv Charan Dass [1980] 126 ITR 263 (P&H), and restored the issue to the AO’s file with directions to re- decide this issue by giving the assessee a reasonable and sufficient opportunity of being heard and to pass a reasoned order on the assessee’s submissions.

      5. Sudhirbhai Pravinkant Thaker v. ITO 44 ITR 135 Ahmedabad ITAT TS-6605-ITAT-2015 (Ahmedabad)-O

        Addition cannot be made on speculation that the amount might have been utilized for any other purpose and was not available with the assessee for making the deposits. It is not open to the lower authority to make the addition on the basis that the assessee failed to explain the source of deposits.

      6. DCIT v. Veena Avasthi Lucknow ITAT TS-10298-ITAT-2018 (Lukhnow)-O ITAT held that there is no law in the country which prevents citizens from frequently withdrawing and depositing his own money.
    2. Where there was time gap of redeposit
      1. Gordhan v. ITO Delhi ITAT TS-6602-ITAT-2015(Delhi)-O

        ITAT held that no addition can be made on the ground of time gap of 5 months between the date of cash withdrawal and re-deposit, unless the AO demonstrates that the amount in question has been utilized for any other purpose.

      2. DCIT v. Nikhil Nanda Delhi ITAT ITA No. 3644/Del/2013

        AY 2009-10 Date of Order 18/03/2015

        Relying on the decisions of ACIT vs. Baldevraj Charla, 121 TTJ (Del) 366 and Moongipa Investment Ltd. vs. ITO in ITA No. 2605/Del/2007. The case was decided in favour of the assessee.

    3. No law prohibits to keep bank withdrawal in cash
      1. ITO v. Mrs. Deepali Sehgal Delhi ITAT TS-6737-ITAT-2014(Delhi)-O

        Date of order 05/09/14

        It was held by ITAT that nothing was mentioned by the AO that the amounts withdrawn were utilized anywhere else. It is not mandatory under any law of the land that an individual has to keep his/ her savings in the bank account only and not as cash in hand.

      2. ITO v. Baburao K Pisal Mumbai ITAT TS-6767-ITAT-2014(Mumbai)-O

        ITAT held that source of deposit in the bank account is important and there is no prohibition to keep cash out of bank withdrawal.

        No provision in the Act requiring that cash once withdrawn has to be re- deposited immediately if not utilized. Once the source of these cash deposits is not in doubt, the same cannot be termed as unexplained.

    4. Addition in relation to deposit by cash in the bank account out of cash on hand on 01/04/2016

      Judgment in relation to this issue Asst. CIT v. Siddhartha Bhargava ITA No.2508/Kol/2017/ITAT Kolkatta

      Assessee made deposit out of cash balance brought forward from earlier year hence the addition was deleted.

    5. Addition made when return of income filed late
      1. CBDT issued circular dated 24/11/17 and directed the I T Authorities to keep in mind the issues at the time of framing the assessment order i.e.
        • When cash on hand is increased by filing a revised return by increasing cash sales and reducing closing stock.
        • When the return of income is filed for the year ended on 31/03/15 and 31/03/16 late and in which substantial cash on hand is shown.
      2. In many cases it is noticed that assesses are habitual defaulters in filing their return late every year. In many cases it is noticed that the return is filed before few days of time barring limit. In such cases additions are made on account of this circular.

      Judgment :

      Nand Kumar Taneja v. ITO TS-8479-ITAT-2019(Delhi)-O

      Cash deposit during demonetization period but returns were filed in time. ITAT held in assessee’s favour, it held that mere cash deposit in bank account after the date of demonetization, i.e., 08.11.2016 does not mean that the cash- in-hand as on 31.3.2015 and 31.03.2016 duly shown in the balance sheet and disclosed to the department in the respective income tax returns filed much earlier, is unexplained.

      Note : As per my view even if the returns for earlier years and current year (AY 2017-18) were late, it can be said that the assessee is a habitual defaulter but when the source of income is accepted, cash deposited out of the income cannot be rejected.

    6. Addition out of cash receipt from business and cash on hand
      1. Cash available out of cash sales before Dipavali and cash sales on 7th and 8th of November as well as on the date of announcement of cancellation of currency notes i.e. on 8th November. Many assesses opened the shop from 8:00 p.m. to 12:00 p.m. still additions were made.
      2. When the assessee furnished necessary proof in the form of bill of sales for the period before Dipavali and after Dipavali, proof of payment of VAT on such sales and also furnished quantity account which proved that the stock was reduced on account of sales, still additions were made.

        As per section 285BA if the sale consideration is less than Rs.2 Lakh, the assessee is not required to furnish the information to the I T Department. In such circumstances how the sales can be denied? Comparison of sales by the assessing officer with the sales made in the previous year and current year and if the sales were higher than previous year, the additions were made.

      3. It is known that in cash sales / cash memo, name and address of the purchaser is not required to be mentioned. This was held in the case of 75 ITR 33 Bombay

        Jessaram Fetehchand (R.B.) (Sugar Dept.) v. CIT

        Thus assessee committed no mistake in not writing the name of the buyer if the sale amount was less than Rs.2 Lakh.

      4. When the assessee is liable to audit and there is no qualification by the Chartered Accountant in the Audit report, then why the addition should be made rejecting such books of account?
      5. In many cases it is noticed that VAT assessment orders are received in which sales and purchases of the assessee are accepted. Thus, when the purchases and sales of the assessee have passed through Lab Test of VAT, then the assessing officer has to accept the trading result of the assessee.
      6. ACIT v. M/s. Hirapanna Jewellers Visakhapatnam Bench ITA No. 253/ Viz/2020 AY 2017-18

        Facts of this case are given in details as it is relevant in many cases.

        • In this case the appellant deposited Rs.5720000/- of high denomination notes in the bank.
        • The amount represented cash sales

          + advance received on 08/11/16 on the day of demonitisation before 12:00 pm.

        • No KYC was obtained because the bills amount was less than Rs. 2 Lakh.
        • As per plea of the department even on the day of Dhanteras, Akshaytritya and Ughadi festival,the cash sales were between 1.5 to 2 Crore.
        • The assessee issued 270 bills on 08/11/16 between 7:50 to 11:58 am

      which was of about Rs.4.71 Crore.

      • CCTV footage was not available as the search was after 15 days of deposit of money.
      • It was the view of the department that bills prepared were black money of assessee and his friends.
      • It was the plea of the assessee that on account of demonetization there was tremendous rise in sale.
      • In appeal it was plea of the assessee that in entire Vishakhapatnam there was tremendous rush in the shops of Goldsmiths on account of demonetization. Everybody was interested in exchanging old currency notes against gold.
      • Assessee disclosed the receipts as business receipt which was offered for tax hence section 68 was not applicable. If addition was made u/s.68, it would amount to double taxation.
      • The assessee was not having any other income except business income.
      • The assessee relied on the following decisions
        1. CIT v. Vishal Export Overseas Ltd Gujarat High Court

          ITA No.2471/2009 dated 03/07/12

        2. CIT v. Kailash Jewellers House ITA No.613/2010
      • The assessee produced newspaper cutting and stated that he was a reputed dealer in the city.
      • It was revenue receipt and offered for tax.
      • CIT(A) relied on the above two Gujarat High Court decision and held against the department stating that decision given in the case of Durgaprasad More and Sumati Dayal were not applicable in the case of the assessee. The amount was credited in the books of the assessee so it cannot be said that it was unexplained deposit. Thus, the addition was deleted by CIT(A).
      • In the appeal by the department in ITAT, it was the argument of the department that it was not possible to prepare 270 bills of 4.71 Crore in a short span of time.
      • It was a sham transaction.
      • Dr. relied on the following decisions
        1. S L Kale Khan 50 ITR 1 SC
        2. P Mohankala 161 Taxman 169
        3. Deviprasad 72 ITR 194 SC
        4. Oceanic Products Exporting Co. v. CIT 241 ITR 495 Kerala
        5. Anil Kumar Singh v. CIT 84 ITR 307 Calcutta
      • Assessee reiterated the argument that it was double taxation of income and the books of accounts were accepted.
      • Section 68 explain
      • In this case the assessee explained source which was in the form of

      sales. Bills of sales were prepared. This amount was offered as revenue receipt. Stock register was maintained by the assessee and no difference was found even at the time of survey. Stock will increase on account of purchases and decrease on account of sales. If no mistake is found in the stock register, then sales have to be accepted. AO accepted sales. AO as well as DDIT accepted books of accounts of the assessee. Audit u/s.44AB was carried out in which details of stock was mentioned.

      • Finding of ITAT on page 12
      • There was sufficeint cash balance on hand on account of sales. Reliance was placed on the judgement of CIT v. Associated Transport Pvt Ltd 212 ITR 417. As per this judgement there was sufficient cash than the amount deposited in the bank so it is not undisclosed source. It cannot be called concealed income.
      • Another case of cash on hand reported in Lalchand Bhagat Ambica Ram v. CIT 37 ITR 288 SC was

        considered. It was held inthis case that when the books of accounts are not challenged and books of accounts are genuine no addition can be made.

      • Laxmi Rice Mills v. CIT reported in 97 ITR 258 Patna (High denomination notes decision)

        As held in this case, when it is not proved that the books of accounts of the assessee are not genuine then the source of income is well disclosed.

        • Decision relating to opening stock

          PCIT 20 Delhi v. Ashitkumar reported in 124 123 Delhi

          In this case ITAT decided that when the sales are made out of opening stock then the amount cannot be considered as income from other sources. In this case even in the previous years stock purchases and sales were accepted.

        • Judgements given in the case of Durgaprasad More and Sumati Dayal were decided on the basis of circumstancial evidences and in absence of direct evidence, the decisions were given in favour of the department. While in the case of the assessee, assessee produced proof of stock, sales and proved that there was sufficient stock with the assessee. Thus, the case of the assessee was different from the above two cases and distingvisable.

      In the case of P Mohankala 161 Taxman 169 and Deviprasad Vishwanath 72 ITR 94 SC, in both the cases cash was not offered for income hence both the cases were decided against the assessee but these cases were not applicable in the case of the assessee.

      Thus the judgment was given in favour of the assessee.

      There was no name, phone no. or address of the purchaser as the same was below Rs.2 Lakh and not mandatory as per I T Act.

    7. Business transaction only GP addition
      1. When the assessing officer disagree with the amount of cash deposit during demonetization period by the assessee, then at the most, he can reject the trading result and make GP addition by passing a speaking order. This was held in the case of Subhash Chand Sharma v. ITRO Agra ITAT TS-8323- ITAT-2019
      2. When the assessee sales his stock in trade and the assessing officer disagree with the sale consideration, in such cases, the entire sale consideration cannot be added. This was held in the case of ITO v. Diplomat Leasing & Finance Pvt Ltd, ITA No.5929/2010 Delhi, Date of pronouncement: 09.12.2011.
      3. When the assessing officer disagree with the sales of the assessee, the entire sale consideration cannot be added. The sale consideration includes cost of purchase. When it is not proved that even the purchases were made out of unaccounted money, only element of net profit out of such sales can be added. It was held in the case of Man Mohan Sadani v. Commissioner of Income-Tax reported 304 ITR 52 (MP). While giving this decision the MP High Court considered the decision given in the case of CIT v. President Industries [2002] 258 ITR

      654 (Guj) (para 4).

      • Thus when the assessee is able to prove that it was business transaction, then the assessee will not be required to pay tax as per section 115BBE.
  7. Concept of Real Income Section 5 of the Income Tax Act
    1. As per section 5 of the Income Tax Act which deals with scope of total income. As per wording of this section, income is taxable at the time of accrual, receipt or at the time of receivable.
    2. Income Tax is levied on income earned by the assessee and not on sales.
    3. Land mark decision given by Honorable Supreme Court in this regard can be relied by the assessee are given here under.

i. 46 ITR 144 S.C. CIT v. Shoorji Vallabh

As per this judgment, if the income does not result at all, there cannot be tax, even though book keeping entry is made about a “hypothetical income”, which does not materialize. A mere book keeping entry cannot be income, unless income has actually resulted.

ii. 225 ITR 746 S.C. Godhra Electricity Co. Ltd. v. CIT

As held in this case,no real income had accrued to the assessee-company in respect of those enhanced charges of electricity. As held by Tribunal that the claim at the increased rate as made by the assessee-company in the books represented only hypothetical income but not represent income which had really accrued to the assessee-company during the relevant previous years.

8. Courts decisions in relation to cancellation of currency notes

  1. Mehta Parikh & Co v. CIT 30 ITR 181 SC

    Supreme Court allowed the appeal of the assessee. Supreme Court found that on 12/01/1946 the assessee was having cash balance of Rs.69891/-. ITAT rejected explanation of the assessee for 30 notes on pure surmises. ITAT committed mistake while giving the judgment when it was not having any evidence and also failed to give any logic for confirming addition of Rs.30000/-. As the assessee gave reasonable explanation, addition of Rs.30000/- was deleted.

  2. Kanpur Steel Co Ltd v. CIT 32 ITR 56 Allahabad

    While giving the judgment High Court held that when the assessee accepted Rs.1000/- notes it did not know that it will be required to give explanation hence it failed to maintain records of such notes received. As the ordinance of cancellation of notes was issued, assessee was required to explain receipt of these notes. Explanation of the assessee was satisfactory. ITAT rejected explanation of the assessee for Rs.25000/- on the basis of doubt and presumption but it had no material to reject the claim of assessee. The addition was deleted and decision was given in favor of the assessee.

  3. Gur Prasad Hari Das v. CIT 47 ITR 634 Allahabad

    While giving this judgment, Allahabad High Court held that if the department presumed that it was the income of the assessee from other sources, the department has to give evidences for that. Either ITAT should accept the explanation of the assessee or give reasons for not accepting the explanation of the assessee. Thus the ITAT committed mistake while deciding this case.

    The High Court gave judgment in favour of the assessee and deleted the remaining amount confirmed by ITAT.

  4. Madhuri Das Narian Das v. CIT 67 ITR 368 Allahabad

    This case pertains to AY 1946-47. By

    ordinance of 1946 currency notes of Rs.1000/- were demonetized. Assessee deposited 28 notes of Rs.1000/- in the bank. Assessing officer added Rs.28000/- in the income of the assessee. CIT(A)

    confirmed the order of assessing officer. ITAT accepted explanation of the assessee for 22 notes and confirmed addition of Rs.6000/-.

    Allahabad High Court decided the case in favour of the assessee and held that, ITAT passed the order on the basis of suspicious and conjecture which was not proper.

  5. Mathurdas Gokuldas v. CIT 102 ITR 425 Bombay

    In this case,assessee deposited 238 such

    notes in the bank. Assessing officer added Rs.138000/- in the income of the assessee under the head income from other sources. Accounting year of the assessee was calendar year i.e. from 1st January to 31st December. As per provision in the I T Act, for making such addition, the accounting year to be considered was financial year.

    The assessee deposited notes of Rs.1000/- on 19/01/46 which can be added for the FY 1945-46 relevant to AY 1946-47 while considering the accounting year of the assessee being calendar year, the assessing officer added this amount in AY 1947-48. Thus on technical ground the addition made in AY 1947-48 was deleted.

  6. Nareshkumar Tulshan v. Fifth ITO 11 ITD 537 Bombay

    This case was decided against the

    assessee because the facts of the case were very bad. Assessee deposited

    102 notes of Rs.1000/- in the bank. Explanation of the assessee was that it was out of cash balance of the company in which he was a managing director and the amount pertained to business activities of previous years.

    Survey operation was carried out on 23/09/80 in the business premises of the assessee and his statement was recorded during survey operation. In the statement he explained that the amount was withdrawn from the firm in which he was a partner. Statement of the assessee was not consistent hence appeal was dismissed by CIT(A) and ITAT. Even during hearing before ITAT assessee could not prove that the amount belonged to the firm.

  7. Narendra G Goradia v. CIT 234 ITR 571 Bombay HC

    In this case the assessing officer accepted

    36 notes and remaining 164 notes were not accepted and made addition of Rs.164000/- u/s.68. CIT(A) reduced the addition from Rs.164000/- to Rs.104000/-.

    It was plea of the assessee before ITAT that he was a commission agent he was required to pay freight on behalf of different parties which was reimbursed by his clients. This explanation was not found satisfactory by ITAT and it confirmed the order of CIT(A).

    High court accepted the plea of the assessee on the basis of facts of this case and decided the case in favour of the assessee.

    There is no provision in the law or in practice of business to maintain list of currency notes received against sales and its denomination. This is also not practicable. Such amount cannot be added u/s.68.

  8. Sreelekha Banerjee and Others v. CIT 49 ITR 112 SC

    The assesseewas a colliery and a coal raising contractor. The assessee

    deposited 51 notes of Rs.1000/-. In her explanation she stated that she was required to pay 30000/- to 40000/- exps. every week hence this amount was kept cash with her. This amount was out of cash on hand which was kept at the head office of the assessee.

    This explanation of the assessee was not accepted by the AO.

    1. There was contradiction in the statement of the assessee that this amount was cash on hand.
    2. There was no detail regarding withdrawal from different banks and payments made from such withdrawals.
    3. Bank accounts were not furnished by the assessee.
    4. No details were maintained for personal exps. by the assessee.
    5. Assessee was having business at different places and having her bank account there, still why the cash was kept at head office. There was no reply by the assessee of this query.

      In appeal proceedings it was noticed that when the amount of Rs.51000/- was deposited in the bank, on the same day she withdrew Rs.45000/- from the bank. Thus the addition of the assessing officer was confirmed.

      The Supreme Court decided the case against the assessee and held in its judgment that there were not enough evidences regarding assessee having Rs.51000/- demonetized notes in her cash on hand and looking to the facts of the case the addition was confirmed and the case was decided against the assessee.

  9. Sri Sri Nilkantha Narayan Singh v. Commissioner Of Income-Tax, Bihar And Orissa

    20 ITR 8 PATNA

    In this case the assessee furnished details of withdrawal for last 7 years and explained that the high denomination notes were out of withdrawal which was available with him. It was held that in such circumstances, explanation of the assessee should be accepted.

9. Taxing of income u/s.115BBE by Circular in the middle of the year. How far it is legal ?

  • For the first time from AY 2013-14 section 115BBE was introduced. AS per this section when the addition is made u/s.68 and 69A to 69D, tax will be levied at 30%.
  • On 15/12/16 by noitification this rate was increaded from 30% to 83.25% (I T + Surchage etc.)
  • If the material / goods were sold before 15/12/16 but the payment was received in cash after 15/12/16 whether the assessee will be hit by this section ?
  • When the bill was issued, VAT was recoved from the buyer and deposited in the account of Government and the stock was reduced.
  • In many case VAT assessment orders are passed and all the sales and purchased of the dealer are accepted. Thus, it has passed the testing laboratory of Government Department.
  • When one department has accepted the transactions of the assessee, whether the other Government department can reject such transactions?
  • Certain decisions in this regard are given here under :
  1. CIT, West Bengal v/s. Isthmian Steamship Lines 20 ITR 572 SC

    Date of Decision: 12 November 1951

    In this case the issue was regarding carry forward of unabsorbed depreciation. Unabsorbed depreciation for AY 1938- 39 was carried forward and claimed to be allowed to be carried forward for subsequent years.

    Amendment made in the ACT wef 01/04/1940 in relation to carry forward of depreciation was applicable for AY 1940-41. Thus, it was held that unabsorbed depreciation from year 1939-40 could be carried forward for subsequent assessment years. Appeal of the department was dismissed.

  2. CIT, Bombay v. SCINDIA Steam Navigation Co Ltd. 42 ITR 589 SC

    Date of Decision: 06 April 1961

    In this case the issue was regarding section 10(2)(vii) of the I T Act 1922. Excess compensation was received for the loss of machinery or plant in respect of which depreciation was allowed. The question was regarding applicability of section 10(2)(vii) whether the amendment made was retrospective?

    It was held by Honorable Supreme Court that the fourth proviso to section 10(2)(vii) inserted by the Income-tax (Amendment) Act, 1946, which came into force on May 5, 1946, was not retrospective and was not in force on April 1, 1946, and, therefore, did not apply to the assessment for the assessment year 1946-47.

  3. Karimtharuvi Tea Estates Ltd Kottayam v. State of Kerala 60 ITR 262 SC

    Date of Decision: 15 December 1965

    The issue in this case was relating to Section 1(3) of Kerala Surcharge on Taxes Act, 1957. It was held that any amendment in the Act which come into force after the first day of April of a Financial year do not apply to the assessment for that year, even if the assessment is actually made after the amendment come into force. Act came into force on 1-9-1957. Act not being retrospective in operation, it cannot be regarded as law in force at the commencement of the year of assessment 1957-58. Act not applies to assessee in assessment year 1957-58.

  4. CIT(CENTRAL)-I, New Delhi v. Vatika Township Private Limited 367 ITR 466 SC

    Date of Decision: 15 September 2014

    In this case the issue was regarding charging surcharge in block assessments which was introduced by Finance Act 2002 for the first time. The levy was not applicable to block assessments pertaining to period prior to 01/06/2002. The amendment was not retrospective and levy could not be imposed for the period prior to 01/06/2002.

  5. Gautam Sarabhai and Others v. Commissioner Of Income-Tax, Gujarat 52 ITR 921 (Guj)

    December 7, 1962

    In this case the issue was regarding taxing dividend income. Definition of dividend u/s. 2(6A)(C) was amended by Finance Act 1955. As per amendment distribution of dividend to shareholders out of accumulated profit was considered as dividend and made subject to tax.

    Thus, this provision was applicable for AY 1955-56. Accounting year of the assessee was calendar year 1954. It is a settled law that the Income Tax Act as amended at the date of the relevant Financial act, applies for the purpose of assessment and any alteration which comes into force on the 1stof April of a Finance year must apply to the assessment for that year.             


In this article I have tried to cover only certain issues and limited decisions due to constrain of space. Decision against the assessee may be there. Every case is to be looked from the fact of each case.

I am thankful to the organizers for giving me this opportunity to share my views. I specially thank my dear friend Mr. Samir Jani to write the article which will be useful in the appellate proceedings as most of the appeals relating to demonitisation period are not heard or partly heard.

CA R.V. Shah

  1. Hon’ble Supreme Court in its judgment dated 16th August, 2021 in Criminal Appeal No. 838 of 2021, arising out of SLP (Cr.1) No. 5442/2021 has observed that:
    1. Personal liberty is an important aspect of Constitutional mandate;
    2. Occasion to arrest an accused during investigation arises when custodial investigation becomes necessary, or
    3. It is a heinous crime; or
    4. Where there is a possibility of influencing witnesses or,
    5. Accused may abscond.

      Merely because an arrest can be made because it is lawful does not mandate that arrest must be made. A distinction must be made between the existence of power to arrest and justification for exercise of it. If arrest is made in a routine manner it can cause incalculable harm to the reputation and self-esteem of a person. If an Investigation Officer has no reason to believe that the accused will abscond or disobey summons and has, in fact, throughout cooperated with investigation, then there is no compulsion on the Officer to arrest the accused.

  2. The Board has examined the above judgment and has issued the guidelines with respect to arrest under CGST Act, 2017.
  3. Conditions Precedent to Arrest:

    Section 132(1) of CGST Act, 20417 deals with punishment of offences specified therein. Section 69(1) gives the power to the Commissioner to arrest a person where he has reason to believe that the alleged Offender has committed any offence specified in Section 132(1)(a) or clause (b) or clause (c) or clause (d) which is punishable under Section 132(2)(i) or clause (ii) of sub-section 132(1) or sub- section (2) of Section 132 of CGST Act, 2017. Therefore, before arresting a person, the legal requirement must be fulfilled. The reason to believe to arrive at a decision to place an offender under arrest must be unambigious. The reasons to believe must be based on credible materials.

    The power to arrest must be exercised carefully since arrest impinges on personal liberty of an individual. The arrest should not be made in a routine and mechanical manner. Even if all the legal conditions precedent to arrest mentioned in Section 132 of CGST Act, 2017 are justified, that will not mean that arrest must be made. Once the legal ingredients of the offence are made out by the Commissioner or the competent authority if the answer to any or some of the following questions is in affirmative.

    1. Whether credible information received of the person concerned in the non-bailable offence.
    2. Whether arrest is necessary ensure proper investigation of the offence.
    3. Whether the person, if not restricted, is likely to temper the course of further investigation or is3 likely to tamper with evidence or intimidate or influence witnesses.
    4. When a person is mastermind or key operator in effecting proxy / benami transaction in the name of dummy GSTIN or non-existent persons etc. for passing fraudulent input tax credit etc.
    5. Unless such person is arrested, his presence before the investigation Investigation officer Officer cannot be ensured.

    The approval to arrest should be granted only where the intention to evade tax or commit act leading to availment or utilization of wrongful Input Tax Credit or fraudulent refund of tax or failure to pay amount collected as tax as specified in Section 132(1) of the CGST Act, 2017 is evident and element of mensrea / guilty mind is palpable.

    Thus, there must be proper investigation and prevent the possibility of tampering with or intimidating or influencing witnesses exists. These are the relevant factors before deciding to arrest a person. Arrest should not be resorted to in cases of technical nature, i.e., where the demand of tax is based on a difference of opinion regarding interpretation of law. The prevalent practice of assessment could also be one of the determining factors while ascribing intention to evade tax to the alleged offender. Other factors influencing the decision to arrest could

    be if the alleged offender is cooperating in the investigation such as compliance to summons, furnishing of documents called for, voluntary payment of tax, extending cooperation in investigation and not giving evasive replies.

  4. Procedure for Arrest

Principal Commissioner / Commissioner shall record on file after considering the nature of offence the rule of person involved and evidence available, his reason to believe that the person has committed an offence as laid down in Section 132 and may authorize an Officer of Central Tax to arrest the concerned person. The provisions of the Code of Criminal Procedure, 1973 read with Section 6D(3) of the CGST Act relating to arrest and the procedure must be adhered to. It is, therefore, necessary all the officers are familiar with the provisions of the Code of Criminal Procedure, 1973 (CPC).

The arrest memo must be in compliance with the decision of Supreme Court in case of D.K. Basu v. State of West Bengal 1997 (1) SCI 416 (Para 35). Format of arrest memo has been prescribed under Board’s Circular No. 126/47/2019-GST, dated 23rd December, 2019. The arrest memo has been prescribed under Board’ Circular No. 128/47/2019. It should indicate relevant Section (i) of CGST Act, 2017 or other laws attracted to the case and to the arrested person and inapplicable provisions should be struck off.

Further, the grounds of arrest must be explained to the arrested person and this fact must be mentioned in the arrest memo.

A nominated or authorized person of the arrested person should be informed immediately and this fact shall be mentioned in the arrest memo.

Arrest and Bail in relation to Offences

The date of arrest and time of arrest shall be mentioned in the arrest memo and it should be given to the person arrested under proper acknowledgment.

A separate arrest memo has to be made and provided to arrested person. The arrested person should be informed immediately and this fact be mentioned in the arrest memo.

Attention is also invited to Board Circular No. 122/41/2019-GST dated 5th November, 2019 which makes generation and quoting of Document Identification Number (DIN) mandatory on communication issued by the Officers of CBIC to taxpayers and other concerned persons for the purpose of investigation. Any lapse in this regard will be viewed seriously.

There are certain modalities which should be complied with at the time of arrest and pursuant to an arrest. It should include the following:

  1. A woman should be arrested only by a woman officer in accordance with Section 46 of Code of Criminal Procedure, 1973.
  2. Medical examination of an arrested person should be conducted by a medical officer in the service of Central or State Government and in case the medical officer is not available by a registered medical practitioner as soon as the arrest is made.
  3. If an arrested person is female, then such an examination shall be made only by the female medical officer and in case of non-availability of female medical officer, then by a female registered medical practitioners.

It shall be the duty of the person having the custody of an arrested person to take reasonable care of health and safety of the arrested person.

Arrest should be made with minimal use of force and publicity and without violence. The person arrested should be subjected to reasonable restrict to prevent escape.

Post arrest formalities

  1. Separate procedure is outlined for different categories of offences as listed in Section 132(4) and (5) of CGST Act, 2017.

    In cases, where are person is arrested under Section 69(1) of CGST Act, 2017 for an offence specified under Section 132(4) of the CGST Act, 2017, the Assistant Commissioner of Deputy Commissioner is bound to release a person on bail against a bail bond. The bail conditions should be informed in writing to the arrested person and also on telephone to the nominated person or persons so arrested. The arrested person should be allowed to talk to the nominated person.

  2. The conditions will relate to execution of a personal bail bond and one surety of like amount given by a local person of repute, appearance before the Investigating Officer when required and not leaving the country without informing the officer. The amount to be indicated in personal bail bond and surety will depend upon the facts and circumstances of each case, inter alia, of the amount of tax involved. It should be ensured that the amount of Bail Bond / Surety should not be excessive and should commensurate with the financial status of the arrested person.
  3. If the conditions of the bail are fulfilled by the arrested person, he shall be released by the Officer concerned on bail forthwith. However, only in cases

    where the conditions for granting bail are not fulfilled, the arrested person shall be produced before the appropriate Magistrate without unnecessary delay and within 24 hours of arrest. If necessary, the arrested person may be handed over to the nearest police station for his safe custody, during the night under a challan, before he is produced before the Court.

  4. In cases, where a person is arrested under Section 69(1) of CGST Act, 2017 for an offence under Section 182(5) of the CGST Act, 2017, the Officer authorized to arrest the person shall inform such person of the grounds of arrest and produce him before the Magistrate within all 24 hours. However, in the event of circumstances, preventing the production of the arrested person before a Magistrate, if necessary, the arrested person may be handed over to nearest Police Station for his safe custody under proper challan and produced before the Magistrate on the next day and the nominated person of the arrested person may also be informed accordingly. In any case, it must be ensured that the arrested person should be produced before the appropriate Magistrate within 24 hours of the arrest, executive of the time necessary for journey from the place of arrest to the Magistrate Court.
  5. Formats of the relevant documentation, i.e., Bail Bond in the Code of Criminal Procedure, 1973 and the challan for handing over to the Police Station should be followed.
  6. After arrest of the accused, efforts should be made to file prosecution complaint under Section 132 of the Act, before the Competent Court at the earliest, preferably within 60 days of arrest, where no bail is granted. In all other cases arrest

    also, prosecution complaint should be filed within a definite time frame.

  7. Every Commissioner / Directorate should maintain a Bail Register containing the details of the case, arrested person, bail amount, surety amount etc. The money/ instruments/documents received as surety should be kept in safe custody of a single nominated office who shall ensure that these instruments / documents received as surety are kept valid till the bail is discharged.
  8. Report to be sent

    Pr. Director General (DGGI) / Pr. Chief Commissioner(s)/Chief Commissioner(s) shall send a report on every arrest to Member (Compliance Management) as well as to the Zonal Member within 24 hours of the arrest giving details as has been prescribed to maintain on All India record of assets made in the Zone shall be sent by the Pr. Chief Commissioner(s) / Chief Commissioner(s) to the Directorate General of GST Intelligence, Head Quarters, New Delhi in the format prescribed by the 5th of the succeeding month. The monthly reports received from the information shall be compiled by DGGI and a compiled zonewise report shall be sent to Commissioner (GST Investigation), CBIC by 10th of every year.

    Further, all such reports shall be sent only by e-mail and the practice of sending hard copies to the Board be stopped with immediate effect.

    The field formations are hereby directed to circulate these guidelines / instructions to all the formations under their charge for strict compliance. Difficulties, if any, in implementation of the aforesaid guidelines / instructions may be brought to the notice of the Board.

Narayan Jain, Advocate

The scope of Statement of Financial Transactions (SFT) under sec. 285BA has been expanded to widen the tax base. The Finance Act, 2020 has introduced section 285BB w.e.f. 1.6.2020 to provide that in addition to the information relating to TDS and TCS, advance tax, self-assessment tax, refund etc. the taxpayer shall be provided additional information such as sale/purchase of immovable property, share transactions etc. for computing correct tax liability. CBDT has granted extension of time for furnishing various reports vide Circular No. 16 of 2021 dated 29.08.2021. The notified persons will have to report the specified transactions in their SFT. Section 285BB, inserted by the Finance Act, 2020 w.e.f. 1.6.2020, provides for uploading in the registered account of assessee Annual Information Statement. The Finance Act, 2022 has substituted section 285B w.e.f. 1.4.2022. The provisions are explained in this article.

  1. Transactions for which statement of financial transaction or reportable account is required to be furnished: Under section 285BA, “statement of financial transaction or reportable account” is to be furnished as per Rule 114E in e-Form No. 61A for the Specified Financial Transactions registered or recorded by the concerned person/ party. The items to be reported by the specified persons are mainly the following:
    1. A banking company or a co-operative bank or banking institution to which the Banking Regulation Act, 1949 applies:
      1. Payment made in cash for purchase of bank drafts or pay orders or banker’s cheque of an amount aggregating to Rs.10 Lakhs or more in a financial year.
      2. Payments made in cash aggregating to Rs.10 Lakhs or more during the financial year for purchase of pre-paid instruments issued by Reserve Bank of India
      3. Cash deposits or cash withdrawals (including through bearer’s cheque) aggregating to Rs.50 Lakhs or more in a financial year, in or from one or more current account of a person.
    2. A banking company or a co-operative bank or banking institution to which the Banking Regulation Act, 1949 applies and / or Post Master General: Cash deposits aggregating to Rs.10 lakh or more in a financial year, in one or more accounts (other than a current account and time deposit) of a person.
    3. A banking company or a co-operative bank or banking institution to which the Banking Regulation Act, 1949 applies and Post Master General; Nidhi referred to in section 406 of the Companies Act, 2013 and Non-banking financial company which holds a certificate of registration under section 45-IA of the Reserve Bank of India Act: One or more time deposits (other than a time deposit made through renewal of another time deposit) of a person aggregating to Rs.10 lakh or more in a financial year of a person.
    4. A banking company or a co-operative bank or banking institution to which the Banking Regulation Act, 1949 applies or any other company or institution issuing credit card: Payments made by any person of an amount aggregating to (i) Rs. One lakh or more in cash; or (ii) Rs.10 lakh or more by any other mode, against bills raised in respect of one or more credit cards issued to that person, in a financial year.
    5. A company or institution issuing bonds or debentures: Receipt from any person of an amount aggregating to Rs.10 lakh or more in a financial year for acquiring bonds or debentures issued by the company or institution (other than the amount received on account of renewal of the bond or debenture issued by that company).
    6. A company issuing shares: Receipt from any person of an amount aggregating to ten lakh rupees or more in a financial year for acquiring shares (including share application money) issued by the company.
    7. A company listed on a recognised stock exchange purchasing its own securities under section 68 of the Companies Act, 2013: Buy back of shares from any person (other than the shares bought in the open market) for an amount or value aggregating to Rs.10 lakh or more in a financial year.
    8. A trustee of a Mutual Fund or such other person managing the affairs of the Mutual Fund as may be authorised by the trustee: Receipt from any person of an amount aggregating to Rs.10 lakh or more in a financial year for acquiring units of one or more schemes of a Mutual Fund (other than the amount received on account of transfer from one scheme to another scheme of that Mutual Fund).
    9. Authorised person as referred to in section 2(c ) of the Foreign Exchange Management Act, 1999: Receipt from any person for sale of foreign currency including any credit of such currency to foreign exchange card or expense in such currency through a debit or credit card or through issue of travellers cheque or draft or any other instrument of an amount aggregating to Rs.10 lakh or more during a financial year.
    10. Inspector-General appointed under section 3 of the Registration Act, 1908 or Registrar or Sub-Registrar appointed under section 6 of that Act: Purchase or sale by any person of immovable property for an amount of Rs.30 lakh or more or valued by the stamp valuation authority at Rs.30 lakh or more.
    11. Any person who is liable for audit under section 44AB : Receipt of cash payment exceeding Rs. 2 lakh for sale, by any person, of goods or services of any nature (other than those specified at Sl. Nos. 1 to 10, if any.).
  2. Annual Information Statement: Sec. 285BB was inserted in Income Tax Act by the Finance Act, 2020 and Rule 114-I was inserted in Income Tax Rules, 1962 w.e.f. 01.06.2020. The purpose is to promote transparency and simplification in filing of Income tax returns. The new Form 26AS (e-form) is an Annual Information Statement or AIS inserted w.e.f. 1.6.2020, will provide a complete profile of the taxpayer for a particular year. The CBDT may authorise the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems) or any person authorised by him to upload the information received from any officer, authority or body performing any function under any law or the information received under an agreement referred to in section 90 or section 90A of the Income- tax Act,1961 or the information received from any other person to the extent as it may deem fit in the interest of the revenue in the Annual Information Statement. The taxpayers are advised to properly go through the details of transaction contained in Form 26AS to ensure that no transaction is left out while preparing the computation/ return of income.
    1. Information in Annual Information Statement: The following information will contain in the Annual Information Statement:

      Part A: Permanent Account Number, Aadhaar Number, Name, Date of Birth/ Incorporation/ Formation, Mobile No., Email Address, and Address.

      Part B of Form 26AS will contain the following Information:

      1. Information relating to tax deducted or collected at source.
      2. Information relating to Specified Financial Transactions (SFT)
      3. Information relating to payment of taxes
      4. Information relating to demand and refund
      5. Information relating to pending proceedings
      6. Information relating to completed proceedings
      7. Any other information in relation to Rule 114-I(2)
    2. Objectives of Annual Information Statement: The main objectives of AIS are: Display complete information to the taxpayer; Promote voluntary compliance and enable seamless pre-filling of return and Deter non-compliance.
  3. Main Features of new AIS : These are the following:
    1. Inclusion of new information regarding Interest, Dividend, Securities transactions, Mutual fund transactions, Foreign remittance etc.
    2. De-duplication of information and generation of a simplified Taxpayer Information Summary (TIS) for ease of filing return (pre-filling will be enabled in a phased manner).
    3. Use of Data Analytics to populate PAN in non-PAN data for inclusion in AIS.
    4. To enable Taxpayer to submit online feedback on the information displayed in AIS and also download information in PDF, JSON, CSV formats.

    AIS Utility will enable taxpayer to view AIS and upload feedback in offline manner.

    AIS Mobile Application will enable taxpayer to view AIS and upload feedback on mobile.

  4. Important Steps for information processing steps for AIS Preparation are:
    1. PAN Population: In case no valid PAN is available in the submitted information, the PAN will be populated on matching Aadhaar Number and other key attributes.
    2. Information Display: Generally, the reported information is displayed against the reported PAN holder. The information display logic for specific information such as property, bank account, demat account etc. aims to show information to relevant PAN holders to enable review and submission of feedback
    3. Information De-duplication: In case where similar information is reported under different information types (e.g. reporting of interest/dividend in SFT and TDS) the information with lower value will be marked as “Information is duplicate / included in other information” using automated rules.
  5. Taxpayer Information Summary (TIS) preparation: The information category wise aggregated information summary for a taxpayer is prepared after deduplication of information based on pre-defined rules. It shows processed value (i.e. value generated after deduplication of information based on pre- defined rules) and derived value (i.e. value derived after considering the taxpayer feedback and processed value) under each information category (e.g. Salaries, Interest, Dividend etc.). The derived information may be used for pre- filling of Return.
  6. AIS Feedback: The taxpayer will be able to view AIS information and submit following types of response on the information:
    1. Information is correct
    2. Information is not fully correct
    3. Information relates to other PAN/ Year
    4. Information is duplicate / included in other information
    5. Information is denied or Customized Feedback

    Taxpayers are advised to furnish proper feedback to avoid complications in assessments.

  7. AIS Feedback Processing: The AIS Feedback processing approach is as under:
    1. The feedback provided by assessee will be captured in the Annual Information Statement (AIS) and reported value and modified value (i.e. value after feedback) will be shown separately.
    2. The feedback provided by assessee will be considered to update the derived value (value derived after considering the feedback from taxpayer) in Taxpayer Information Summary (TIS)
    3. Information assigned to other PAN/ Year in AIS will be processed and information will be shown in the AIS of the taxpayer using automated rules.
    4. In case the assigned information is modified/denied, the feedback will be processed in accordance with Risk Management Rules and High Risk

    feedback will be flagged for seeking confirmation from the information source.

  8. Date for furnishing Form 61A: Form 61A is required to be furnished by 31st May of the immediately following year from the end of Financial year.
  9. Whether the annual information return now known as “statement of financial transaction or reportable accounts” once filed can be rectified: Section 285BA(4) provides that where the prescribed IT authority considers that the statement of financial transaction or reportable accounts (earlier known as annual information return) furnished u/s 285BA(1) is defective, he may intimate the defect to the person who has furnished such statement and give him an opportunity of rectifying the defect within a period of 30 days from the date of such intimation or within such further period, which, on application made on this behalf, the concerned Income tax authority may extend. If the defect is not rectified within the said period, the provisions of Income Tax Act shall apply as if such person had furnished inaccurate information in the statement”

    Upto 31.8.2019, if the statement was not rectified within the time prescribed, such statement was treated as an invalid statement and the provisions of the Income tax Act would apply as if such person had failed to furnish the statement.

  10. Can a notice be served for filing of statement of financial transaction or reportable accounts: Section 285BA(5) as amended provides that where a person who is required to furnish a statement of financial transaction or reportable account has not furnished the same within the prescribed time, the prescribed IT authority may serve upon such person a notice requiring him to furnish such statement within a period not exceeding 30 days from the date of service of such notice.
  11. Whether an assessee, while filing his income tax return, is required to furnish information relating to statement of financial transaction or reportable accounts: Form No. ITR-2, 3, 4, 5 and 6 require an assessee to furnish information relating to statement of financial transaction or reportable accounts in Schedule AIR of the Return form, and the assessee is obliged to furnish such information, in view of the provisions of section139(6).
  12. Penalty for failure to furnish statement of financial transaction or reportable accounts: U/s 271FA, if a person who is required to furnish an annual information return now known as “statement of financial transaction or reportable accounts” u/s 285BA(1), fails to furnish such statement within the prescribed time u/s 285BA(2), the concerned I.T. authority may direct that such person shall pay by way of penalty, w.e.f. 1.4.2018, a sum of Rs.500 for every day during which the failure continues.

    Further as per proviso to section 271FA,

    w.e.f. asst. year 2014-15, if a person who is required to furnish annual information return now known as “statement of financial transaction or reportable accounts” fails to do so and assessing officer issues a notice requiring him to furnish the said statement within the time specified in the notice u/s 285BA(5), but the person does not file the said statement within the time specified in the notice, w.e.f. 1.4.2018, a penalty of Rs. 1000 for every day during which the failure continues may be levied u/s 271FA from the date specified in the notice till the date of filing of such statement.

  13. Rules prescribed regarding furnishing of the statement of financial transaction or reportable accounts: As per rule 114E,

    the “statement of financial transaction or reportable accounts” is to be furnished in Form No. 61A (e-form) within the prescribed time after the end of each financial year, to the agency authorised by the CBDT.

    The Form No. 61A shall be furnished electronically.

  14. Furnishing of correction statement if such person discovers any inaccuracy in the information provided in the Statement of Financial Transaction or Reportable Account u/s 285BA: With effect from asst. year 2015-16 as per section 285BA(6) provides that if any person having furnished a Statement of Financial Transaction or Reportable Account u/s 285BA(1), comes to know or discovers any inaccuracy in the information provided in the statement, he shall within a period of 10 days inform the Income tax authority or other authority or agency referred to in sec. 285BA(1), the inaccuracy in such statement and furnish the correct information in such manner as may be prescribed.

    Section 285BA(7) provides that the Central Government may by making rules require certain class of persons referred to in section 285BA(1) to get them registered and the manner in which the information should be maintained by such persons and the due diligence to be carried out.

  15. Additional information provided in Form 26AS as per section 285BB: In addition to the information relating to TDS and TCS, advance tax, self-assessment tax, refund etc. the taxpayers are being provided additional information such as sale/purchase of immovable property, share transactions etc., dividend, interest etc. for computing correct tax liability.

    For this purpose, w.e.f. 1.6.2020, section 285BB has been introduced to mandate the prescribed Income-tax authority or the person authorised by such authority to upload in the registered account of the assessee, a statement in such form and manner and setting forth such information, which is in the possession of an Income-tax authority, and within such time, as may be prescribed. Consequently, section 203AA has been omitted w.e.f. 1.6.2020.

  16. Whether constituent entity of an international group is required to maintain and furnish specified records: With effect from asst. year 2017-18, a constituent entity of an international group, referred to in section 286, shall also keep and maintain prescribed information and document in respect of the international group and shall furnish the same with the prescribed authority in the prescribed manner within the due date of filing of return of income u/s 139(1). However for the asst. year 2017-18, the date of filing such report has been extended till 31st March, 2018. Failure to do so shall attract penalty u/s 271AA.
  17. Whether non-resident having a liason office in India is required to file any document with Income Tax authorities u/s 285: With effect from 1.6.2011, as per newly introduced section 285, a non-resident person having a liason office in India is required to file a statement in prescribed form providing details of activities carried out by the liason office in India within 60 days from the end of the financial year.
  18. Whether Indian concern is required to furnish information for transfer of its capital asset due to transfer of shares of a foreign company: The Finance Act, 2015 with effect from 1.4. 2016, has inserted Section 285A which provides that where any share or interest in a company or entity registered or incorporated outside India derives directly or indirectly its value substantially from the assets located in India as referred to in the Explanation 5 to section 9(1)(i) and such company or as the case may be, entity holds such assets in India through or in an Indian Concern then any such Indian concern for the purpose of determination of income accruing or arising in India, u/s 9(1)(i) is required to furnish within prescribed time to the prescribed income tax authority the relevant information or document in prescribed form and manner.
  19. Statement to be submitted by producers of cinematograph films or persons engaged in specified activity: As per sec. 285B, as substituted, w.e.f. 1.4.2022 any person carrying on the production of a cinematograph film or engaged in any special activity that is event management, documentary production, production of programmes for telecasting on television or over the top platforms or any other similar platform, sports event management, other performing arts or other notified activities during the whole or any part of any financial year shall, in respect of the period during which such production or specified activity is carried on by him in such financial year, furnish within the prescribed period, a statement in the prescribed form to the prescribed income tax authority in the prescribed manner, containing particulars of all payments of over Rs.50,000 in the aggregate made by him or due from him to each such person as is engaged by him in such production or specified activity.

Prior to the amendment only person carrying on production of cinematograph film were required to furnish such statement within 30 days from the end of the FY or within 30 days from the date of completion of the production of the film.

(Narayan Jain is former Secretary General and National Vice President of AIFTP and also member of NEC for 2022 & 2023. He is author of the books “How to Handle Income Tax Problems” and “Income Tax Pleading & Practice” with CA Dilip Loyalka.

Brand Reminders
Industry Practice

In various industries like FMCG, Pharma, e-commerce various items such as pen, diary, calendar, paper weight, lamp set, wall clock, pen drive, etc. with product logo/ brand name is given to customers as ‘brand reminders’. Generally, the cost of such products is not very high say, less than Rs. 1,000 per piece.

The brand reminders are low value items, it being the belief of the Company that the benefits of the recall value created by the product is more than its cost.

Question to examined

Whether such distribution of items as brand reminders to the customers can be considered as benefit or perquisite in the hands of customer and hence liable to TDS u/s 194R ?

Analysis of applicability of S. 194R

The overall intent of distributing brand reminders is to promote company’s products / advertisement and not be considered as a gift or benefit/perquisite in the hands of the recipient. The advertisement/brand recall would occur as and when the recipient uses the product and may also occur continuously on account of the product being visible to the recipient as also to other visitors in the premises.

The brand reminders distributed by the company  to   customers  contain  the logo/branding of the company and hence the recipient of the same will not be in a position to subsequently sell the same – it can only be sold for scrap value.

The Income Tax Act is silent on valuation of a benefit or perquisite. Wilkins (Inspector of Taxes) v. Rogerson [1963] 49 ITR 395 (CA) in the context of valuation of perquisite held as follows –

Suit which cost £15 was gifted to the employee. The employee never acquired any rights either against his employers or against the tailor supplying the suit and that only the value of the suit was includible in his hands which was £ 5 only. This value was determined on the basis that what he could get for it if he sold it as soon as he had received it.

As can be observed from the above extract of the court ruling, for determining the value of perquisite in the hands of the employee the emphasis is given to the price at which the item received as a perquisite can be sold. Since the brand reminders carrying logo of product or company, will not have any buyer and consequently, can only be sold at scrap value, the value of the benefit or perquisite would be nominal.

However, ignoring the principle of considering the fair value of the benefit or perquisite in the hands of the recipient CBDT has prescribed valuation principles, which states as follows –

Question 5 of the CBDT circular:

“How is the valuation of benefit/perquisite required to be carried out?

The valuation would be based on fair market value of the benefit or perquisite except in following cases: –

  1. The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In the case the purchase price shall be the value for such benefit/perquisite.
  2. The benefit/perquisite provider manufacture such items given as benefit/perquisite, then the price that it charges to its customers of such items shall be the value for such benefit/perquisite.

It is further clarified that GST will not be include for the purpose of valuation of benefit/ perquisite for TDS under section 194R of the Act.”

As can be observed from the above extract, the CBDT Circular requires adoption of purchase price for items purchased by the Company. The items distributed as brand reminders would be customized and made to order by third party vendors for the company and may be catagorised as purchased by the Company and consequently, following the Guidelines (CBDT Circular) the cost to the company of the brand reminders would be considered as value of the benefit or perquisite in the hands of the recipient.

The concept of considering cost to the company as fair value is logical when it comes to off the shelf items as the fair value of the benefit (viz. resale price in the hands of the recipient) is likely to be equivalent to price paid by the company. Whereas in the case of brand reminders, company may pay a premium for getting its name/logo printed on the product and it has a reverse impact on the price (resale value) of the product – once name/logo is printed nobody would purchase such a product (e.g. why will someone purchase a T-Shirt/ Pen/Mug with name of a company or product advertisement on it). The product can only be distributed by the company for brand promotion. Therefore, to consider cost to the company as the value of benefit or perquisite in the hands of customers would be unjustified.

194R(2) only empowers CBDT to prescribe guidelines to remove difficulties. However, specifying a valuation mechanism contrary to the principles applicable for determining the value of perquisites and benefits would be an unjustified method of resolving a possible difficulty. The specified valuation rules would have the effect of arbitrarily increase the value of benefit or perquisite multifold. To summarise, CBDT in the process of removing difficulties cannot expand the scope (in terms of quantum of benefit or perquisite) of S. 194R – specifying a valuation mechanism contrary to applicable principles and which leads to unjust result. It is for the legislature, if it so chooses, to specify a method of valuation which increases revenue – which is effectively, the levy of a tax.

Alternatively, in the context of CBDT circular prescribing valuation mechanism the word ‘purchase’ should be understood to refer to purchase of products that can be purchased off the shelf (general commodity available in the market) and would not include customised products made as per the specific needs and requirement of the Company, which has the name/logo of the company/brand embossed on it and consequently, significantly deteriorates its saleability and selling price. Therefore, in the context it should be held that brand reminders are not covered by specific valuation rules.

Further, the second limb of the specific valuation rules specified by CBDT only apply when the Company is manufacturing the products. In the present case, the brand reminders are not manufactured by the Company. Hence, the second limb should not apply. In any case, the second limb specifies the price charged to the customer as the value of benefit or perquisite. As the brand reminders are distributed free of cost the price charged from the customer would be nil and consequently, if this limb is applied the value of benefit or perquisite would be nil.

As both the methods specified by CBDT do not apply, the valuation has to be based on the residuary method for valuation prescribed by the CBDT Circular which is the fair market value of benefit or perquisite. As stated earlier, brand reminders can only be sold at scrap value i.e. nominal value and consequently, the fair market value in the hands of a recipient customer will be nominal, on this basis the Company distributing the brand reminders will be only liable to deduct TDS if the aggregate value so computed exceeds Rs. 20,000 per annum.

To summarise, the brand reminders are for advertisement of the company. The brand reminders are not intended to be a benefit or perquisite in any case and do not result in any material/tangible benefit or perquisite to the customers. Therefore, if at all the scrap value of the brand reminders should be considered as the value of benefit or perquisite for deduction of TDS u/s 194R and not the cost of the brand reminders to the Company.

Free Physician Samples
Industry practice

  • Pharma Companies engages with different Healthcare professionals (Doctors, their staff, hospitals, etc. (“HCPs”)) for ethical promotion of their products and take various initiatives in disseminating medical knowledge/ information and updates to the HCPs in the area of their interest, which enables the HCPs to acquaint themselves with the new developments. This helps the HCPs to provide better service to the patients at large.
  • As a part of said collection and dissemination of information, Pharma Companies distribute free samples to the As required by the regulations the said samples have to be and are labelled with the phrase ‘Physician’s Sample – Not to be sold’.
  • The HCPs may be practising professionals, employees of a private/charitable hospital or employees of a government

Question to be examined

  • Whether distribution of free samples to the HCPs can be considered as benefit or perquisite in the hands of HCPs and hence liable to TDS u/s 194R?

Analysis of applicability of S. 194R

Section 194R(1) states that tax is required to be deducted by a person providing any benefit or perquisite to a resident if that benefit or perquisite inter alia is arising from the exercise of a profession.

The phrase ‘benefit or perquisite’ is not a defined term. Mumbai Tribunal in the case of Helios Food Improvers (P.) Ltd. v. DCIT1 has defined benefit and perquisite as follows –

“Further, the words “benefit” or “perquisite” have been used in this sub-section, which have to be read together and would draw colour from each other. Normally, the term “perquisite” denotes meeting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person and from the very beginning, the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person. In this view of the matter, the word “benefit” has also to be interpreted in the same manner

i.e. at the time of execution of the business transaction, the one party should give to the other party some irretrievable benefit or advantage”

As can be observed from the above extract of the Tribunal Ruling, benefit is defined to mean certain advantage and perquisite to mean a certain advantage given as a right or privilege of the recipient. Therefore, if there is no advantage to the recipient, there would be no perquisite or benefit.

The question as to whether the sample provided by a pharma company results into any benefit or perquisite to the HCP depends upon the purpose of providing the sample to the HCP and also on whether the HCP can use or en-cash the same or not and if not whether it still results in some advantage to the recipient HCPs.

The primary reason for providing free physician samples by Pharma Companies as held by the Supreme Court2 is only for the purpose of advertising of the product and thereby enhancing the sale of the product in the open market. It has been shown by research that the market of a pharmaceutical company is enhanced substantially by the distribution of free physician samples. In other words, the distribution of such physician samples serves as a marketing tool in the hands of the pharmaceutical companies

As captured in the Supreme Court ruling, the benefit from the physician samples is to the pharma companies in the form of advertising and increase in sales. The pharma companies do not have any obligation to provide any perquisite or benefit to the HCPs and in fact, do not distribute free samples with the objective of providing perquisite or benefit.

The Supreme Court also records that, it is further contended that the physician samples of patent and proprietary medicines, at the time they are manufactured, are statutorily prohibited from being sold by virtue of Section 18 of the Drugs Act read with Rule 65(18) of the Drug Rules and the breach of the Drug Rules invites prosecution under Section 27(d) of the Drugs Act, and also invites penalty under Section 27(c) of the Drugs Act.

As per Rule 96(1)(ix) of the Drugs & Cosmetics Rules, 1995, every drug intended for distribution to the medical practitioners as a free sample is required to contain a label on the container with the words “physician’s sample Not to be Sold “. Further sale of physician sample is an offense as per Sections 18(a)(VI) and 27(d) of Drugs and Cosmetics Act, 1940 read with Rule 65(18) of Drugs and Cosmetics Rule, 1945. It can entail fine or imprisonment depending upon nature of offense.

Therefore, though the physician’s samples are distributed free of cost, they cannot contribute a benefit or perquisite for the HCPs? The HCPs is only an intermediary for distributing the samples free of cost, to the patients – to people who need and use the medicines. This helps the pharma company to advertise, increase sales, demonstrate the efficacy of the medicine, etc. However, distribution of free physician samples to the patients does not yield any benefit or perquisite to the HCPs and consequently, the receipt of physician sample cannot be held to be a benefit or perquisite provided to the HCPs.

Once it is accepted that provisions discussed above of the Drug and Cosmetics Rules prohibit the HCP from selling the sample it is evident that the sample cannot be sold by the HCP and considering the inherent nature of the product, viz. medicine nor can the same be consumed by the HCP (who is not a patient). Accordingly, the ingredients of benefit or perquisite which is having a right to use and/ or enjoy is not available in a physician’s sample and consequently, physicians samples should be outside the scope of S. 194R.

Analysis of CBDT Circular

CBDT has issued guidelines u/s 194R(2) for removing difficulties in implementation of Section 194R in Question and Answer form. As an obiter in reply to Query 4 Whether sales discount, cash discount and rebates are benefit or perquisite? – CBDT has stated that, the relaxation (non-deduction of TDS on discounts) will not apply when free samples are given. Further, CBDT has given illustrations of transactions covered by S. 194R and without providing any basis or reasoning has inter alia included a transaction when a person gives medicine samples free to medical practitioners as a transaction liable u/s 194R. In arriving at the conclusion of applying section 194R, there is no discussion about the aspects discussed above. In fact, there is no discussion at all.

For the reasons mentioned above, free medical samples to HCPs should not be treated as a benefit or perquisite for the HCPs. S. 194R only empowers CBDT to issue guidelines for removing difficulties and not for expanding the scope of the Section. Supreme Court in the case of Madeva Upendra Sinai v. Union of India3 has held that, the ‘difficulty’ contemplated by the clause must be a difficulty arising in giving effect to the provisions of the Act and not a difficulty arising aliunde or an extraneous difficulty. Further, the Central Government can exercise the power under the clause only to the extent it is necessary for applying or giving effect to the Act, etc., and no further. It may slightly tinker with the Act to round off angularities, and smoothen the joints or remove minor obscurities to make it workable, but it cannot change, disfigure or do violence to the basic structure and primary features of the Act. In no case, can it, under the guise of removing a difficulty, change the scheme and essential provisions of the Act.

With all due respect the observations of the CBDT about supply of physician’s samples, free of charge, are seen to be contrary to the correct legal position and as a result in as much as the observations have the effect of expanding the scope of section 194R are also in excess of the jurisdiction conferred on CBDT. The power to make law is that of the legislature. The power to interpret laws is that of the Courts. The powers of CBDT relates only to the implementation of the law. For these reasons merely because of the observations in the CBDT circular supply of physician’s samples should not held to be liable to TDS.

Analysis of valuation aspect

The Income Tax Act is silent on valuation of a benefit or perquisite. As stated earlier – Wilkins (Inspector of Taxes) v. Rogerson [1963] 49 ITR 395 (CA) in the context of valuation of perquisite held that price at which the suit can be sold for determining the value of perquisite in the hands of the employee. Since the physician samples cannot be sold, the resale price is zero.

Also, since the physician  samples  being not for sale, it may be contended that, the physician samples are not marketable and consequently, the normal valuation rules like cost of production, etc. should not apply.

In view of the above it is plausible  to take a view that, even if the free samples are considered as benefit or perquisite in the hands of the HCP, the value of such benefit to HCP is Zero and hence there shall not be any liability to deduct tax.

The view is also supported by the valuation principles specified by the CBDT Circular (reproduced earlier).

The residuary method for valuation prescribed by the CBDT Circular is the fair market value of benefit or perquisite. As stated earlier, physicians samples cannot be sold and hence the fair market value of physician samples is zero. Also, there is no price that the manufacturer charges for the physician samples – as the samples are not sold. The Supreme Court and certain Tribunal rulings4 in the context of excise duty have held that, physician’s samples and the goods cleared for wholesale trade are not comparable and hence, the price charged for wholesale trade cannot be adopted for valuing physician samples. As the value is zero or in any case unascertainable the Company distributing physicians samples should not be liable to deduct TDS on supply of physician’s samples.

Even otherwise if healthcare professional is given a physician’s sample, if the same is considered as his income. The Healthcare professional will give these physicians sample free of cost to his patients for their use. The said expense (distribution) of physicians sample is incurred by healthcare professionals wholly and exclusively for the purposes of his profession and consequently, should be allowed as a deduction u/s 37(1) for computing his income chargeable under the head “Profits and gains of business or profession”. Hence, no additional tax incidence would be triggered even by bringing the free physician samples under the ambit of S. 194R.

In the context it would not be out of place to end with a quote from a celebrated ruling of the Bombay High Court [CIT v. Nagri Mills Co. Ltd. (33 ITR 681)] –

“We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed.

one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other.”

  1. (2007) 14 SOT 546 (Mum)
  2. Medley Pharmaceuticals Ltd. Versus the Commissioner of Central Excise 2011 (2) SCC 601

    Similar view – Eskayef Pharmaceuticals (India) Ltd. v. Commissioner of Income-tax [2000] 111 Taxman 561 (SC) – The object of distribution of the samples of the drugs to the doctors is to make them aware that such drugs are available in the market in relation to the cure of a particular affliction and, therefore, to persuade them to prescribe the same in appropriate cases.

  3. [1975] 98 ITR 209 (SC)
  4. Commissioner Of C. Ex., Bangalore-I Versus Bal Pharma Ltd 2011 (2) SCC 620

    Commissioner Of C. Ex., Calicut Versus Trinity Pharmaceuticals Pvt. Ltd. – 2005 (6) TMI 79 – CESTAT, Bangalore; Sun Pharmaceutical Industries v. CCE, Surat-II – 2005 (183) E.L.T. 42 (Tri. – Mumbai)


The objective behind interpreting laws is to clarify the ambiguous words and their meaning according to the intention of the legislation.

There are certain principles of interpretation which are exercised by the Courts for interpretation of statutes.

In this Article, a detailed discussion will be on the “Principle of Ejusdem Generis”, which is one of the principles of interpretation.

Meaning and definition of “Ejusdem Generis” “Ejusdem generis” is a Latin term and the meaning of it is “of the same kind and nature”.

Practical Application of Rule of Ejusdem Generis The Rule of Ejusdem Generis comes into picture whenever any legal provision comprises of general words which follows words of specific class or category and is to be applied to interpret the general words.

For instance, Explanation (baa) to Section 80HHC(3) of Income-tax Act, 1961 defines “profits of business” for the purpose of availing profit- linked deduction in respect of export business from gross total income under the aforesaid section.

This Explanation emphasizes that certain receipts of income should be excluded from the profits of business. One of such exclusion enshrined in Explanation (baa) is receipts by way of “brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits”.

So here   general   word   is   “charges”   which is following specific words i.e. “brokerage, commission, interest, rent”. Now, how should the word “charges” be interpreted. The word “charges” is to be interpreted by applying the Rule of Ejusdem Generis.

In-depth analysis and practical applicability of the rule is discussed as follows:

What does Rule of Ejusdem Generis envisage? The Rule of Ejusdem Generis provides that when a list of specific words are being followed by the general words in a section, sub-section, proviso or a clause of a statute then the general words are interpreted in a way so as to restrict them to include the items or things which will be of same type as those of the specific words.

Applicability of Rule of Ejusdem Generis

The Rule of Ejusdem Generis would apply as a canon for interpretation of statutes only if following conditions are satisfied cumulatively:

Condition No.1: The provision must consist of specific words and general words


Condition No.2: The specific words should be followed by general words


Condition No.3: The specific words should constitute a distinct genus/class/category


Condition No.4: There must be an intention of the statute to restrict the meaning of the general words to the genus/class of the specific words it follows.

If all these conditions are satisfied cumulatively then the meaning of the general words will be restricted to same class/category of the specific words.


Let us understand this rule with an example.

For instance, a provision of a particular legislation makes a reference to words like “car, trucks, tractors, bikes and other motor-powered vehicles”. So here specific words are “car, trucks, tractors and bikes” which are constituting a distinct genus or class of land transport vehicles and general words are “other motor-powered vehicles”.

Therefore, the conditions for applying the Rule of Ejusdem Generis are fulfilled.

So, by applying this rule, the meaning of “other motor-powered vehicles” will be restricted to the same class or category of land transport vehicles constituted by the specific words i.e. car, trucks, tractors and bikes.

In other words, “other-motor-powered vehicles” will not include any air plane or ship because the specific words preceding the aforesaid general words are constituting distinct class of land transport vehicles.

CIT v. Divya Jewellers (P.) Ltd. [2014] 368 ITR 671 (Allahabad High Court)

Allahabad High Court has defined the Rule of Ejusdem Generis in the case of CIT v. Divya Jewellers (P.) Ltd. The High Court have envisaged that:

“Ejusdem generis rule is the rule of generic words following more specific ones. The rule is that when general words follow specific words of the same nature, the general words must be confined to the things of the same kind as those specified. The specified words must form a distinct genus or category. The rule reflects an attempt to reconcile incompatibility between specific and general words.” [Para No.13]

Specific words must constitute distinct genus/ class

In order to invoke the application of this rule there must exist a distinct genus, class or category of the specific words.

In the recent case of B. Rudragouda v. ACIT [IT Appeal Nos. 314 & 315 of 2020] dated 15.04.2021, Bangalore Bench of ITAT held that

“Ejusdem Generis rule being one of the rules of interpretation, only serves, like all such rules, as an aid to discover the legislative intent; it is neither final nor conclusive and is attracted only when the specific words enumerated, constitute a class, which is not exhausted and are followed by general words and when there is no manifestation of intent to give broader meaning to the general words.” [Para No. 16]

Intention of the statute to restrict the meaning of the general words

Another condition to be fulfilled for applying the Rule of Ejusdem Generis is that there must be an intention of the statute to restrict the meaning of the general words to the genus/class of the specific words it follows.

This intention can be found out when the statute deliberately uses the words of specific class/ category which are followed by the general words. And if the Court will go in contrary to that intention and gives wider meaning to the general words then the purpose of the legislation will be defeated.

In the case of Lilawati Bai v. Bombay State, the Supreme Court observed that

“Where the context and the object and mischief of enactment do not require restricted meaning to be attached to words of general import, the Court must give those words their plain and ordinary meaning.”

CIT v. Divya Jewellers (P.) Ltd. [2014] 368 ITR 671 (Allahabad High Court)

Facts of the case

Assessee was manufacturer and exporter of gold jewellery and was also manufacturing jewellery for others on job work basis. Assessee claimed profit-linked deduction in respect of export business under section 80HHC of the Income-tax Act, 1961. The formula for computing profit-linked deduction is derived in Section 80HHC(3) which is as follows:

Export Profit (Profit-linked deduction) = Profits of business * Export Turnover


Total Turnover

The assessee included job work charges in the profits of the business which is the numerator of the above formula.

Legal Provisions Involved

Explanation (baa) to section 80HHC(3) defines “profits of business” and emphasizes that certain receipts of income should be excluded from the profits of business. Explanation (baa) is reproduced as follows:

“Explanation. – For the purpose of this section,— . . .

(baa) ‘profits of the business’ means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by—

  1. ninety per cent. of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and
  2. the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India ;”

Assessing Officer’s action

The Department by invoking clause (1) of Explanation (baa) excluded job work charges from the profits of business on the context that receipts by way of charges are required to be specifically excluded from the profits of business for the purpose of computation of profit-linked deduction.

Findings and Observations of the High Court

  • It was found that receipt by way of job work charges were integral part of core business activity.
  • The  High   Court   observed   that   the word “charges” used in sub-clause of Explanation (baa) is found in the company of expressions like “brokerage”, “commission”, “interest”, “rent”.
  • By applying the rule of ejusdem generis, it was concluded that in sub-clause (1) of clause (baa), the word “charges” are preceded by the words of specific nature, such as brokerage, commission, interest, rent, etc. These specific words formed a distinct genus or category inasmuch as all those items relate to receipts earned by an assessee from non-core business activity. In such circumstances, the meaning of the word “charges” should be restricted to the distinct category formed by the specific words e. brokerage, commission, interest, rent, etc. If so, the word “charges’ should be confined to those charges which do not form integral part of the core business activity of the assessee.
  • In the present case, the job work charges included by the assessee in the profit of business for the purpose of computing profit-linked deduction were forming an integral part of its principal business.


  • Therefore, it was held that the job work charges received by the assessee-company for the job works undertaken as in the nature understood in this case could not be held as similar to the word “charges” provided in sub-clause (1) of clause (baa) of the Explanation given under section
  • Accordingly, it was held that job work charges would form part of operational income and had to be included in profits of business for computation of deduction under section 80HHC.


The Article aims at discussing some of the pertinent income-tax issues prevailing in the Gem & Jewellery industry. The article will be useful for businesses, consultants, chartered accountants and advocates connected with the Gem & Jewellery industry. The Article considers and analyses important judicial pronouncements relevant to the Gem & Jewellery industry.

Table of Contents


  1. Introduction
  2. The Income-tax Law
    • Businesses
    • Investors/Users
  3. Issues for consideration
    • Associations in the Gem & Jewellery Industry
    • Special Economic Zones & Export Oriented Unites
    • Bogus Purchases & Unexplained Income
    • Certain Deductions
    • Transfer Pricing
    • Chapter VI-A Deductions
    • Treatment of Wastage
    • Survey, Search & Seizure cases
  4. Dénouement

1. Introduction

In January 2021, India’s gold & diamond industry added approximately 7.5 percent to India’s GDP & 14 percent to India’s total produce exports, the gem & jewellery segment is likely to employ approximately 8.23 Mn people by 2022, from approximately 5 Mn in the year 2020. According to MMR study report, the Indian Gem & Jewellery market was valued at

25.30 Bn in the year 2020 with a CAGR of 18.46 per cent over past five years.

According to the data for 2020, Indian women currently own 21733 tonnes of gold. This is approximately 11 percent of the Worlds gold. Further, diamonds were first mined in India, For centuries, India was the only place one could find these precious stones. The earliest known reference to diamond is a Sanskrit manuscript, dated from 320-296 B.C. This shows the history of India vis-à-vis the Gem & Jewellery Industry.

Given the precious nature of stones and ornaments. These are always in the radar of the Income-tax Department, as such precious stones and gold bars can be misused to conceal income.

2. The Income-tax Law

2.1. Businesses

Taxpayers engaged in the business of trading, manufacturing, mining, processing, cutting, polishing et cetera of gem and jewellery have to offer the income under the head “Profits & Gains from Business or Profession”

Where the business is a Partnership Firm or a Limited Liability Partnership, the profits will be taxed at the rate of 30 per cent plus applicable surcharge and cess.

In case of a Company, the applicable rate shall be 25 per cent plus applicable surcharge and cess. A domestic company, subject to conditions mentioned under section 115BAA of the Income- tax Act, 1961(Act) can avail the reduced tax rate of 22 per cent plus applicable surcharge and cess. Similarly, a domestic company satisfying the conditions mentioned under section 115BAB of the Act can avail the reduced tax rate of 15 per cent plus applicable surcharge and cess.

Vide Finance Act, 2012, (2012) 345 ITR (St) 001 section 206C(1D) of the Act was introduced. According to the Memorandum explaining the provisions of the Finance Bill, 2012 (2012) 342 ITR (St) 234, Under the existing provisions of the Income-tax Act, tax is required to be collected at source by the seller at the specified rate on certain goods like alcoholic liquor, tendu leaves, scrap etc. at the time of sale. In order to reduce the quantum of cash transaction in bullion and jewellery sector and for curbing the flow of unaccounted money in the trading system of bullion and jewellery, it is proposed to provide that the seller of bullion and jewellery shall collect tax at the rate of 1 per cent of sale consideration from every buyer of bullion and jewellery if sale consideration exceeds two lakh rupees and the sale is in cash. This would be irrespective of the fact whether buyer is a manufacturer, trader or purchase is for personal use.

2.2. Investors/Users

Prior to the amendment of 1972, “jewellery” was not an exclusion to “personal effects”, thereby not covered under the definition of “Capital Asset”.

Post amendment, as per section 2(14) of the Act, “jewellery, other than stock in trade, is considered as a capital asset. As per explanation 1 to section 2(14) (ii) of the Act, “jewellery” includes—

  1. ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;
  2. precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;

The Hon’ble Supreme Court in the case of H.H. Maharaja Rana Hemant Singhji v. CIT [1976] 103 ITR 61 (SC) on a close scrutiny of the context in which the expression ‘personal effects’ occurs shows that only those effects can legitimately be said to be personal which pertain to the assessee’s person. In other words, an intimate connection between the effects and the person of the assessee must be shown to exist to render them ‘personal effects’. The enumeration of articles like wearing apparel, jewellery, and furniture mentioned by way of illustrations in the definition of ‘personal effects’ also shows that the Legislature intended only those articles to be included in the definition which were intimately and commonly used by the assessee.

The Hon’ble Madras High Court in the case of CIT v. Smt. Saroj Goenka [1983] 140 ITR 88 (Mad) held that loose diamonds could be said to be ‘personal effects’ held by the assessee so as not to attract capital gains tax on their sale.

Therefore, where jewellery is held for more than 36 months from the date of purchase, the same will attract Long term Capital Gains tax and where it is held for less than 36 months, the same will attract Short-term Capital Gains.

Further, it is important to note that, jewellery is included in the definition of property for the purpose of section 56 (2)(x) of the Act which is an anti-abusive provision. Therefore, transfer/ gift of jewellery to any person other than a relative as defined under section 56 of the

Act, for no consideration (gift) or for a short consideration of more than Rs. 50,000/- will attract section 56(2)(x) in the hands of the recipient.

3. Issues for consideration

Some of the issues and controversies pertaining to Income-tax in the Gem & Jewellery Industry are as under:

3.1. Associations in the Gem & Jewellery Industry

As per section 2(15) of the Act, charitable purpose, inter alia, subject to certain conditions, includes he advancement of any other object of general public utility.

The Hon’ble Madras High Court in the case of ACIT v. Madras Jewellers & Diamond Merchants Association [1981] 129 ITR 214 (Mad)(HC) held that where the Assessee association was established for protecting, safeguarding, guiding and furthering interest and welfare of merchants dealing in diamonds, bullion, jewellery, etc., and to create and encourage friendly feeling and unity amongst merchants, the Assessee claimed exemption in respect of income received from survey charges, weighment charges and charges for arbitration; since activities carried on by assessee were for benefit of general public and those were not conducted with a view to make profits assessee was therefore entitled to exemption under section 11 of the Act.

The Hon’ble Bombay High Court in the case of DIT(E) v. Bharat Diamond Bourse [2000] 245 ITR 437 (Bom)(HC) where it was a matter of fact that as a result of setting up of assessee bourse there was substantial increase in diamond exports leading to increased earning of foreign exchange for the country, its predominant activity was to be held to be promotion of trade which was object of general public utility and, therefore, charitable within meaning of section 2(15) of the Act and since it restricted application of its income to its objects only, it was entitled to exemption under section 11 of the Act. However,

the Hon’ble Supreme Court in the case of DIT(E) v. Bharat Diamond Bourse (2003) 259 ITR 280 (SC) held that the Assessee whose principal object was to facilitate diamond trade so that maximum revenue could be earned by way of foreign exchange by the trade and also to make diamond trade more competitive at international level, was an institute established for charitable purpose. Amount lent to without interest will lose the benefit of exemption

The Hon’ble Bombay High Court in the case of DIT v. Bombay Bullion Association Dharamno Kanto Trust [2002] 254 ITR 708 (Bom)(HC)

where Assessee-trust was earning income from weighing activities, popularly known as Dharam Kanta for benefit of public in general; business activities of trust were carried on with assistance of employees under supervision of Committee of Management appointed by Board of directors, who acted for and on behalf of beneficiaries, namely, general public or public at large; it could be said that business activities carried on in manner provided in trust deed were being carried on by beneficiaries of trust, being public, and, thus, there was sufficient and substantial compliance of provision of sub-section (4A)(b) of section 11 of the Act and such assessee-trust was entitled to exemption under section 11(4A) of the Act.

The Hon’ble Income-tax Appellate Tribunal

– Surat Bench in the case of ACIT v. Gujarat Hira Bourse [2021] 130 355 (Surat- Trib.) Where assessee trust was established with objective to develop world class gems and jewellery park to provide common facilities required to promote exports of diamonds from India and it was not carrying out any trade, commerce or business and only dealt with its members to attain its objects of general public utility, it would not be hit by first proviso to section 2(15) of the Act, hence, benefit of section 11 of the Act could not have been denied.

The Hon’ble Income-tax Appellate Tribunal – Mumbai Bench in the case of Bharat Diamond Bourse v. DIT(E) [2017] 83 134 (Mumbai) where there was no change in activities of assessee diamond bourse established for promoting diamond export, its registration could not be cancelled on ground that its business receipts exceeded monetary limit specified in proviso to section 2(15) of the Act; conditions specified under section 12AA(3) of the Act was to be fulfilled.

3.2. Special Economic Zones & Export Oriented Unites

In February 2021, India’s gold and diamond export contributed to 14 percent of total merchandise export. Further, the Government has also considered gems and jewellery sector as a focus area for export promotion. A lot of the manufacturing and other ancillary activities pertaining to gems and jewellery are set up in free trade zones.

Firstly, It is pertinent to note that Section 10 AA of the Act was inserted by the Special Economic Zones Act, 2005, with effect from February 10, 2006. Further, Section 51(1) of The Special Economic Zones Act, 2005 (SEZ Act) gives an overriding provision over other laws.

The rule of generalia specialibus non derogant, it is a well settled position in law. i.e. the provisions of a general statute must yield to those of a special one. The same has been upheld by the Hon’ble Supreme Court in the case of Union of India v. India Fisheries (P.) Ltd. [1965] 57 ITR 331 (SC) wherein it was held that If there is an apparent conflict between two independent provisions of law, the special provision must prevail.

The Hon’ble Income-tax Appellate Tribunal – Mumbai Bench in the case of Gitanjali Exports Corpn. Ltd. v. ACIT ITA Nos. 6947 & 6948 of 2011, dated May 8, 2013 (Mumbai-Trib) where the assessee was allowed deduction under Section 10AA of the Act on “Trading activities” as same is covered by definition of “Services” in the SEZ Act.

Similarly, the Hon’ble Income-tax Appellate

Tribunal – Jaipur Bench in the case of DCIT v. Goenka Diamond & Jewellers Ltd [2012] 19 91 (Jaipur) where the assessee-firm was engaged in the business of trading and manufacturing of precious and semi-precious stones, diamond and studded gold jewellery. It claimed deduction under section 10AA of the Act in respect of profits from the Surat unit. It was held that deduction under section 10AA of the Act is available in respect of trading in nature of re-export of imported goods.

The Hon’ble High Court of Delhi in the case of CIT v. Jayshree Gems & Jewellery [2014] 49 43 (Delhi) held that Process of jewellery making through job work amounts to manufacturing for purpose of section 10A of the Act.

The Hon’ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd [2011]

330 ITR 175 (Bom)(HC) [Affirmed by the Hon’ble Supreme Court in the case of CIT v. HCL Technologies Ltd. [2018] 93 33 (SC)] where it was held that for purpose of application of formula prescribed by section 10A(4) of the Act, export turnover in numerator must have same meaning as export turnover which is a constituent element of total turnover in denominator. Since in computing export turnover Legislature has made a specific exclusion of freight and insurance charges, these two items would have to be excluded from total turnover also for purpose of computing exemption under section 10A of the Act.

The Hon’ble High Court of Madras in the case of PCIT v. Jewels Magnum [2020] 120 taxmann. com 316 (Mad)(HC) held that A medallion is also classifiable as a pendant; therefore, assessee could not be denied exemption under section 10AA of the Act on ground that it had violated approval granted by Development Commissioner, Special Economic Zone for manufacturing gold pendants by saying that product manufactured by assessee was described as medallion

The Hon’ble Income-tax Appellate Tribunal

-Mumbai Bench in the case of Inter Classic Jewellery (I) (P.) v. ITO [2008] 114 TTJ 402

(Mumbai) where during relevant assessment year, assessee in addition to manufacture of jewellery undertook manufacturing activities for others on job-work basis and received service charges. The Revenue authorities excluded service charges from export turnover holding that said income earned by assessee could not be held to be income from manufacturing activity and, therefore, exemption under section 10A of the Act was not available to said income of assessee. It was held that since there was no difference between activities relating to export business carried on by assessee and process carried on by it for manufacturing jewellery for others under job-work contracts, authorities below were not justified in denying exemption to assessee under section 10A of the Act in respect of service charges.

3.3 Bogus Purchases & Unexplained Income Bogus purchases are illegal means by which, tax payers inflate their expenses, thereby reducing taxable The Central Board of Direct taxes vide Instruction No. 2 of 2008, dated August 22, 2008 has directed all the AOs to accept profit of 6 percent in diamond business.

The Hon’ble Income-tax Appellate Tribunal – Mumbai Bench in the case of DCIT v. Lucent Diamond [2021] 128 262 (Mumbai

– Trib.) held that where the assessee failed to produce any of suppliers to confirm transactions of purchases shown by it, however, at same time, assessee was in possession of purchase invoices and ledger confirmation as well as PAN of suppliers was also placed on record and payment to suppliers was made through banking channels, Commissioner (Appeals) was justified in restricting addition at rate of 6 per cent on account of bogus purchases.

The Hon’ble Income-tax Appellate Tribunal –

Delhi Bench in the case of ACIT v. PC Jewellers Ltd. [2022] 137 71 (Delhi – Trib.) where assessee purchased diamonds through commission agent from various parties and Assessing Officer made addition on purchases, as income of assessee on account of inflation of purchase price of diamonds on purchases from accommodation entry providers, Commissioner (Appeals) having considered quantitative details, stock and payment made by assessee with regard to these purchases and retraction letter of alleged entry operator with regard to accommodation of purchase bills having been filed, Commissioner (Appeals) rightly held that disallowance made by Assessing Officer was not valid.

The Hon’ble High Court of Gujarat in the case of Sajani Jewels v. DCIT [2016] 71 90 (Gujarat) where source of expenditure was very much available since in reasons recorded itself, Assessing Officer pointed out that purchases were made by making cheque payments, section 69C of the Act had no applicability.

The Hon’ble ITAT Ahmedabad Tribunal in the case of Chokshi Hiralal Maganlal v. DCIT [2011] 9 300 (Ahmedabad – ITAT) where during a survey under section 133A, excess stock of gold and silver ornaments was found. Assessee filed its return wherein excess stock found during survey was included in inventory of closing stock. Assessing Officer opined that said disclosure was not consistent with provisions of sections 69, 69A, 69B & 69C of the Act. Taking above view, Assessing Officer separately added amount of excess stock under section 69B of the Act after reducing same from total income disclosed by assessee. It was held that since excess stock found during survey was not separately and clearly identifiable but was part of mixed lots of stock found at premises which included declared stock as per books also, provisions of section 69B of the Act could not be made applicable and therefore, investment in excess stock had to be treated as business income.

3.4. Certain Deductions

The following are instances of certain deduction or expenses which have been a subject matter of litigation:

Hon’ble Income-tax Appellate Tribunal –

Mumbai Bench in the case of Ramesh D. Murpana v. ACIT [2016] 71 218 (Mumbai) where the Assessee was engaged in business of dealing in gold and diamond jewellery, He borrowed certain amount for advancing security deposit for taking a shop on leave and license basis on monthly license fee for setting a jewellery outlet as an expansion of existing business and claimed interest on such loan as deduction. It was held that interest on borrowing was incurred for purpose of business and was an allowable revenue expenditure.

Hon’ble Income-tax Appellate Tribunal

-Mumbai Bench in the case of DCIT Tribhovandas Bhimji Zaveri [2008] 23 SOT 57 (Mumbai) (URO) where the Assessee-firm claimed deduction of foreign travel expenses incurred on its employees for business of firm, The Assessing Officer disallowed assessee’s claim mainly on ground that assessee-firm was not engaged in export of jewellery and it was a business leader, thus, there was no requirement for such foreign travel. The Ld. Commissioner (Appeals), however, allowed assessee’s claim – The Tribunal held that, even though assessee was a business leader in this line, yet same position could not be maintained unless assessee was aware of latest technologies and designs for jewellery manufacturing, therefore, expenditure incurred on foreign travel in said connection was rightly allowed as business expenditure.

Hon’ble Income-tax Appellate Tribunal – Mumbai Bench in the case of Brightest Circle Jewellery (P.) Ltd. v. ACIT [2012] 24 130 (Mumbai) where owner of brand of diamond licensed it to another company which in turn sub-licensed it to assessee and assessee sold diamond under said brand name, payments made by assessee to intermediary towards

sales promotion expenses would be revenue expenditure.

Hon’ble Income-tax Appellate Tribunal – Mumbai Bench in the case of Fine Jewellery (India) Ltd. v. ACIT [2013] 30 323 (Mumbai – Trib.) [affirmed by the Hon’ble Bombay High Court in the case of CIT v. Fine Jewellery (India) Ltd. [2015] 55 514 (Bom)(HC)] held that Expenditure incurred by assessee, a jeweller, on creation of brand was rightly allowed as deferred revenue expenditure.

3.5. Transfer Pricing

It is known that there is a practical difficulty in furnishing segment wise Profit & loss account of AE segment and non-AE segment in the diamond industry.

If Ld. TPO was not satisfied with benchmarking of assessee under TNMM, nothing prevents them from rejecting assessees’s benchmarking and determining arm’s length price of transaction with AEs independently by applying any one of prescribed methods. However, if the Ld. TPO has accepted benchmarking of assessee under TNMM, imposition of penalty under section 271G of the Act is to be deleted.

Further, Hon’ble Income-tax Appellate Tribunal

-Mumbai Bench in the case of Dty CIT Decent Dia Jewels (P.) Ltd. [2020] 117 taxmann. com 358 (Mumbai – Trib.) where TPO accepted benchmarking of assessee under TNMM to be at ALP, imposition of penalty under section 271G for non-furnishing of segmental profitability of AE and non-AE transactions was to be deleted.

Further, Hon’ble Income-tax Appellate Tribunal

-Mumbai Bench in the case of CIT v. Leo Schachter Diamonds India (P.) Ltd. [2020] 116 994 (Mumbai – Trib.) where the Assessee submitted that it was not practical to identify and bifurcate stock, cost and revenue between AE and non-AE segment, TPO opined that the non-furnishing of such information thwarted department from examination of correctness of ALP and concluded that since assessee failed to maintain documentation as required under clauses (g) and (h) of Rule 10D(1) read with section 92D(3) of the Act and penalty was to be imposed under section 271G of the Act. It was held that where no TP adjustments was made in case of assessee- company, penalty under section 271G of the Act could not be levied.

Further, Hon’ble Income-tax Appellate Tribunal

-Mumbai Bench in the case of ACIT D. Navinchandra Exports (P.) Ltd. [2017] 87 taxmann. com 306 (Mumbai – Trib.) wherein it was held that where TPO directed assessee-diamond merchant to furnish segmental profitability for AE transactions and non-AE transactions, since practical difficulty in furnishing segment wise Profit & loss account of AE segment and non-AE segment was expressed by diamond industry, penalty under section 271G was not called for.

Further, Hon’ble Income-tax Appellate Tribunal

-Mumbai Bench in the case of CIT v. K. Girdharilal International Ltd [2019] 111 taxmann. com 322 (Mumbai – Trib.) where it was held that where assessee made substantial compliance with requirements of filing all major information called for by TPO and, accordingly, ALP was accepted by TPO, penalty under section 271G of the Act was rightly deleted by Commissioner (Appeals).

Further, Hon’ble Income-tax Appellate Tribunal

-Mumbai Bench in the case of CIT v. Asian Star Company Ltd [2020] 116 448 (Mumbai – Trib.) where it was held that the department had accepted the method adopted by assessee to benchmark its international transaction in past and even during year under consideration no adjustment was made under section 92C of the Act in respect of international transactions with its AE. The Ld. TPO erred in levying penalty under section 271G of the Act for not furnishing segmental profitability of AE transactions and non-AE transactions.

Further, Hon’ble Income-tax Appellate Tribunal

-Mumbai Bench in the case of CIT v.

Ankit Gems (P.) Ltd [2019] 106 243 (Mumbai – Trib.) where TPO had accepted benchmarking done by assessee under TNMM and no variation/adjustment was made by him to arm’s length price, imposition of penalty under section 271G of the Act would be unsustainable.

The practical difficulty in furnishing segment wise Profit & loss account of AE segment and non-AE segment was expressed by diamond industry and the same has been observed by the jurisdictional Tribunal in the case of D. Navinchandra Exports (P.) Ltd. (Supra).

Hon’ble Income-tax Appellate Tribunal –

Mumbai Bench in the case of ACIT v. Dilipkumar v. Lakhi [IT Appeal No. 2142 (M) of 2017, dated 2-8-2018] where it was held that that the assessee may not have effected absolute compliance to the directions of the TPO and furnished all the requisite details as were called for by him on account of practical difficulties as had been deliberated by us at length hereinabove, but however, in the backdrop of our aforesaid observations, we are of the considered view that the failure to the said extent on the part of the assessee to comply with the direct ions of the TPO can safely be held to be backed by a reasonable cause, which thus would bring the case of the assessee with the sweep of section 273B of the Act.

The above decision of the jurisdictional Tribunal was followed by jurisdictional Tribunal in the case of Dy. CIT v. Firestone International (P.) Ltd. [IT Appeal No. 5304 (Mum.) of 2016, dated 1-12- 2018] and Dy. CIT v. Interjewel (P.) Ltd. [IT Appeal No. 5628 (M) of 2016, dated 1-11-2018]

3.6. Chapter VI-A Deductions

Chapter VI-A allows certain deductions in respect of certain incomes on the gross total income of an assessee. Some of these deductions are to incentivise or boost certain segment of an industry based on its activities, location et cetera.

The Hon’ble Supreme Court in the case of CIT v. Gem India Mfg. Co. [2001] 249 ITR 307 (SC) held that cutting and polishing of diamonds does not amount to manufacture or production of goods for purpose of section 80-I of the Act.

The Hon’ble High Court of Jammu & Kashmir in the case of PCIT v. Lakesh Handa [2017] 399 ITR 305 (J&K)(HC) where it was held that conversion of standard 24 carat gold into 22 carat gold jewellery or ornaments amounted to manufacture or production for purpose of deduction under section 80-IB of the Act.

The Hon’ble Supreme Court in the case of Heaven Diamonds (P.) Ltd. v. CIT v. CIT (2014) Civil Appeal No.9936 of 2011 dated November 18, 2011. (SC) where The assessee is engaged in the business of cutting and polishing rough diamonds. The Ld. AO disallowed the deduction under section 80IB of the Act following the judgment in CIT v. Gem India Mfg. Co. Ltd. 249 ITR 307 (SC). The appeal was dismissed by CIT(A), Tribunal and High Court. Aggrieved by the order of High Court the assessee filed SLP before the Supreme Court. Allowing the Civil Appeal the Court observed the Tribunal ought to have examined the process undertaken by the assessee, and High Court ought to have set aside the matter. The Apex Court directed the matter to the Tribunal to consider whether the process undertaken by the assessee constituted ‘manufacture”. Order of High Court and Tribunal set aside and matter remitted to the Tribunal for de novo assessment.

The Hon’ble Income-tax Appellate Tribunal – Mumbai Bench in the case of Flawless Diamond (India) Ltd. v. ACIT [2014] 45 67 (Mumbai) where it was held that Cutting and polishing of diamond amounts to manufacturing or production of article or thing and, therefore, an assessee, engaged in said activity, is entitled to claim deduction under section 80-IC of the Act.

3.7. Treatment of Wastage

The Hon’ble Income-tax Appellate Tribunal

-Hyderabad Bench in the case of DCIT Sanghi Jewellers (P.) Ltd. [2013] 40 taxmann. com 152 (Hyderabad – Trib.) held that Loss of gold and silver due to wastage in process of manufacturing jewellery at 5 per cent to be considered as reasonable and same to be allowed.

The Hon’ble Income-tax Appellate Tribunal

-Delhi Bench in the case of Bridal Jewellery Manufacturing v. ITO [2017] 82 taxmann. com 232 (Delhi – Trib.) Where assessee-firm was engaged in manufacturing and export of gold jewellery in SEZ and gold in question found during survey operation was out of wastage in manufacturing process, value of said gold was to be treated as income of assessee but eligible for deduction under section 10A of the Act.

3.8. Survey, Search & Seizure cases

It is not uncommon to hear about survey & search cases happening in the Gem & jewellery Industry. In a survey case, a measure of stock is taken and the books are examined. In a search & seizure case, documents and asseets can be seized. It is to be noted that stock in trade cannot be seized by the Department. The Finance Act, 2003 (2003) 261 ITR (St) 62 inserted a proviso to section 132(1)(iii) of the Act stating that that bullion, jewellery or other valuable article or thing, being stock-in-trade of the business, found as a result of such search shall not be seized but the authorised officer shall make a note or inventory of such stock-in-trade of the business.

The Hon’ble Supreme Court in the case of DGIT v. Diamond star Exports Ltd. (2006) 156 Taxman 299/(2007) 293 ITR 438 (SC) where In the course of search gold, diamond, jewellery and other ornaments were seized. In writ proceedings the High court quashing the proceedings initiated under block assessment and directing the

department to return items seized with interest on value of items seized. Supreme Court in appeal by Department not deciding on whether interest was payable. Department directed to pay cost in lieu thereof.

The Hon’ble Bombay High Court in the case of New Lakshmi Jewellers v. PCIT [2021] 124 taxmann. com 356 (Bom)(HC) where assessee, engaged in business of trading in gold jewellery, gave gold to a job worker for making jewellery which was seized from custody of said job worker as he failed to produce relevant documents, since appeal filed by said job worker against said seizure of gold was pending before Commissioner (Appeals), impugned writ petition filed by assessee claiming to be an owner of such gold could not be accepted.

The Hon’ble Income-tax Appellate Tribunal – Kolkata Bench in the case of Subhas Brothers Jewellers (P.) Ltd. [2014] 51 422 (Kolkata – Trib.) where during course of survey operations, certain shortages pertaining to cash in hand, gold ornaments, diamond items and silver items was noticed, it was held that merely because shortages had been noticed as compared to books, it could not be said that any undisclosed investment/money was made by assessee. Further held that shortage in gold, silver and diamond ornaments could at best be treated as undisclosed sales and not undisclosed investment.

The Hon’ble High Court of Karnataka in the case of CIT v. B. Sudheer Baliga [2015] 53 524 (Kar)(HC) where the assessee was in the business of jewellery. A, survey was conducted at the business premises of the assessee. In the course of the survey, they found excess stock of gold and silver. On the very same day, after obtaining a search warrant, what was found as excess stock and jewellery in the business premises was seized. Thereafter,

proceedings were initiated under section 158BC of the Act for block assessment and block assessment order came to be passed. It was held that where certain unaccounted stock was noticed in survey commenced prior to search, could not be subject matter of block assessment proceedings.

The Hon’ble High Court of Gujarat in the case of Jitendra Mansukhlal Adesara v. ACIT [2021] 126 150 (Guj.)(HC) where during search conducted upon two persons at airport, parcel of gold of certain quantity was seized and documents in form of parcel and courier receipts recovered from them were pertained or related to assessee who was engaged in business of gold ornament, impugned notice under section 153C of the Act issued against assessee was justified

The Hon’ble High Court of Madras in the case of Lalithaa Jewellery Mart (P.) Ltd. v. DDIT [2020] 115 369 (Mad)(HC) where assessee, a gold jewellery manufacturer, from Chennai, was travelling to Kolkata and gold was seized from his custody at Kolkata airport on tip off from officer at Chennai, since seized gold should be sent for further investigation to Assessing Officer at Chennai, impugned seizure was to be quashed and Assessing Officer Kolkata was not justified in treating said gold as undisclosed investment of assessee in terms of section 69A of the Act.

4. Dénouement

Given the luxurious and expensive nature of stock, the Gem & Jewellery Industry have always been vulnerable to Income-tax assessments. Further, cash transactions & off-the- book transactions are also seen in this industry. A robust accounting & book keeping mechanism can help these industries justify themselves during assessments, surveys, search & seizures.

The term ‘goodwill’ is not specifically defined in the Income Tax Act (the Act). Goodwill is typically generated during business restructuring transactions like merger, demerger, slump sale, etc. where many companies end up buying other companies (mostly internal entities) at a value that is higher than the book value. The differential amount is recorded in books of account as ‘goodwill’, as prescribed in Accounting Standards. Goodwill is basically the advantage made available to the buyer on such transactions that gives rise to commercial benefits like honesty, trade name, customer value, etc.

Goodwill generally includes other intangibles. However, under restructuring transactions, it is recommended to separately recognize specific intangibles like brand name, trademark, customer base, etc. Only the remaining amount should be considered as goodwill.

The Hon’ble Supreme Court, in the landmark Judgement of Smifs Securities, considered goodwill as a capital asset eligible for depreciation. It provided support in claiming depreciation on goodwill generated on transactions like Amalgamation, Demerger, Slump sale, etc. After the Apex Court decision, there have been many judgements on this aspect – most of them have been in favour of the assessee. Recently, the Hon’ble Supreme Court maintained this legal position in the case of Zydus Wellness Ltd.

After laps of almost 8-9 years the Ministry of Finance amended the Act to exclude Goodwill from Block of Assets.

The Act refers to multiple intangible assets like know how, patent, copyright, trademark, license, and includes wider terms like other business or commercial rights of similar nature. The reference to intangible assets is now amended to specifically exclude goodwill.


The Finance Act, 2022 has inserted an Explanation after the proviso to Section 50 to clarify that the reduction of the amount of goodwill of a business or profession from the block of an asset in accordance with Section 43(6)(c)(ii)(B) shall be deemed to be a transfer. Earlier, the Finance Act, 2021 had not amended Section 50 for computation of deemed capital gains in a case the amount of goodwill is reduced from the block of intangible assets. Though, Rule 8AC(3) squarely covers this situation and computes the deemed capital gains.

To fill this gap, the Finance Act, 2022 has brought a consequential amendment under section 50 to provide that a reduction of the amount of goodwill of a business or profession, from the block of asset shall be deemed to be a transfer.

This amendment is applicable with retrospective effect from Assessment Year 2021-22.

The Amendment as per section 15 of Finance Act, 2022 is as follows:

Amendment of section 50

In section 50 of the Income-tax Act, after the proviso, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2021, namely:—

“Explanation.—For the purposes of this section, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance with sub-item (B) of item(ii) of sub-clause (c) of clause (6) of section 43 shall be deemed to be transfer.”.

The Memorandum explaining the proposed amendment is as follows:

Reduction of Goodwill from block of assets to be considered as ‘transfer’

From the assessment year 2021-2022, goodwill of a business or profession is not considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation. In case where goodwill is purchased by an assessee, the purchase price of the goodwill will continue to be considered as cost of acquisition for the purpose of computation of capital gains under section 48 of the Act subject to the condition that in case depreciation was obtained by the assessee in relation to such goodwill prior to the assessment year 2021-22, then the depreciation so obtained by the assessee shall be reduced from the amount of the purchase price of the goodwill.

When the amendment was carried out through the Finance Act 2021, consequential amendment was carried out in section 50 of the Act by insertion of a proviso to clause(2) of that section. A further consequential amendment required is being proposed now.

Accordingly, it is proposed to clarify that for the purposes of section 50 of the Act, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance with sub item (B) of item (ii) of sub-clause (c) of clause (6) of section 43, shall be deemed to be transfer.

Since the amendment to the effect that goodwill of a business or profession is not a depreciable asset has been made applicable from assessment year 2021-2022 the above amendment will take effect retrospectively from 1st April 2021 and will accordingly apply in relation to the assessment year 2021- 22 and subsequent assessment years.

The Notes on clauses also gave insight of the legislative intent behind the present amendment

Clause 15 seeks to amend section 50 of the Income-tax Act relating to special provision for computation of capital gains in case of depreciable assets.

The said section provides for certain modification in the applicability of the provisions of sections 48 and 49 for computation of capital gains in case of depreciable assets where the capital asset is an asset forming part of a block of asset in respect of which depreciation has been allowed under this Act.

Proviso to the said section provides that in a case where goodwill of a business or profession forms part of a block of assets for the assessment year beginning of the 1st day of April, 2020 and depreciation thereon has been obtained by the assessee under the Income tax Act, the written down value of that block of asset and short term capital gain if any, shall be determined in such manner as may be provided by rules.

It is proposed to amend section 50 to insert an Explanation to clarify that for the purposes of the said section 50, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance with sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43 shall be deemed to be transfer.

This amendment will take effect retrospectively from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021- 2022 and subsequent assessment years.

From the combined reading of the above explanations, it is seen that the amendment is curative in nature.

Earlier, vide Finance Act, 2021 the CBDT had done away with depreciation allowance on goodwill, and hence, amendments were made to various sections of the Act with effect from Assessment Year 2021-22:

  • Change in the definition of ‘block of asset’ so as to remove ‘goodwill from business or profession’.
  • Clause (ii) to section 32(1) was amended to provide that ‘goodwill of a business or profession’ shall not be eligible for Further, an amendment was made to Explanation to Section 32(1), which defines the expression ‘asset’. It was provided that ‘goodwill of a business or profession’ shall not be treated as an ‘intangible asset’ for Section 32(1).
  • The Finance Act had amended provision of section 55 by inserting a proviso to Section 55(2)(a). The actual cost of goodwill shall be computed after reducing the depreciation claimed by the assessee up to the Assessment Year 2020-21 from the amount of purchase price of such The amount remaining after such reduction shall be treated as the actual cost of goodwill for computation of capital gain from transfer of goodwill on or after 01-04-2020.
  • Clause (c) of Section 43(6) was amended to provide that the WDV of the block of intangible assets shall be reduced by the actual cost of goodwill falling within such block of assets. Before the reduction of the actual cost of goodwill from the block, it shall be first reduced by the amount of depreciation:
    1. Actually allowed to the assessee for such goodwill before the Assessment Year 1988-89, and
    2. That would have been allowable to the assessee from the Assessment Year 1988-89 as if the goodwill was the only asset in the relevant block of
  • Section 50 of the Act contains provisions for computation of capital gain in case of transfer of depreciable assets. The Finance Act, 2021 inserted a new proviso to section 50(2). It provided that the CBDT may prescribe a manner to determine the WDV of the block of asset and short- term capital gain if goodwill is forming part of that block and depreciation has been claimed thereon. Thus, if a block of intangible asset contains goodwill and it ceases to exist, the capital gain on such block shall be calculated in the manner prescribed by the Board. The CBDT has accordingly notified Rule 8AC prescribing manner for computation of capital gain on such block. However, this proviso is applicable only if a block of intangible assets contains goodwill and ceases to

The effective changes can be summerised as under:

  • Goodwill of a business or profession is not considered as a depreciable asset, and no depreciation is allowable on it under any situation;
  • In a case where goodwill is purchased, the purchase price of the goodwill will be considered as the cost of acquisition for computing capital gains;
  • If depreciation was obtained on goodwill before assessment year 2021-22, the depreciation so obtained shall be reduced from the amount of the purchase price of the goodwill. The CBDT has notified Rule 8AC to compute short-term capital gains and written down value under Section 50 where depreciation on goodwill has been


The Finance Ministry has made various changes in the Act related to depreciation on Goodwill, which has created tumultuous wave in the industry. Changes have been made in various provisions, including the definition of the term ‘block of assets’ to specifically exclude ‘goodwill’, which has, in turn effected nullifying various decisions of the Apex Court wherein it had been held that ‘acquired Goodwill’ is a depreciable asset. The Ministry is of the view that Goodwill is not a depreciable asset and may even see appreciation. The Memorandum explaining the Finance Bill (as reproduced above) states that in general, Goodwill is not a depreciable asset and Goodwill may see appreciation or in the alternative no depreciation to its value, and therefore, there may not be a justification for allowing depreciation on goodwill. Hence, the amendment to disallow the depreciation claim on Goodwill acquired as a result of business acquisitions or reorganizations. Accordingly, going forward, businesses will have to remove Goodwill from the block of asset. The same would be chargeable to Capital Gain tax when sold in future.

Surprisingly the Ministry has taken more than nine years to notify that Goodwill is not a depreciable asset and amended the law, the only positivity could be considered that it has not taxed the presumed appreciation in Goodwill till now, which could be major relief to the assessee.

Though it’s observed throughout the years it’s a practice to overturn the decisions of the Hon’ble Supreme Court, by bringing in the parliamentary veto, the above amendment comes as a surprise. These changes may have a significant negative impact not only on proposed mergers and restructuring transactions, but also on past transactions.

If Goodwill is considered to be not an appreciable asset then it, not necessarily, has to be a non-depreciable asset. The value of Goodwill may change depending on many factors like, performance, customer satisfaction, financial stability or even due to technological changes. An example could be taken of Nokia which used to make best cell phones in past, but it had to shut down as the technology advanced & they could not keep up with the change in technology.

This amendment will have a far-reaching negative impact on business acquisitions and restructuring transactions. It could be enthralling to observe that how sellers and buyers negotiates and agree on valuations in coming years.

It is pertinent to note that ‘retrospective amendment’ takes effect from a date in the past. Though the current amendment has not been made applicable retrospectively, it has severely affected entities having acquired Goodwill in recent past years. It’s nearly ten years since the legal position related to depreciation on Goodwill was settled after the judgment of the Apex Court in the year 2012. Thereafter, many mergers, demergers, business acquisitions, restructuring has taken place. The sudden change in the law, after such a lapse, would probably result in higher tax outflow on account of disallowance of depreciation on Goodwill, which would naturally increase the cost to the business. Where the Goodwill is part of the block of assets consisting of other intangible assets, which if disposed-off, then there is also a possibility that depreciation already claimed in preceding years may now result in Short- Term Capital Gain adding insult to injury. The impact will be two edged sword as there could be additional tax burden & it would also impact the valuation of the Business or the going concern status of an entity depending on the size of business acquisitions or reorganizations and Goodwill acquired.

Going Forward, Goodwill will not be taxed under S. 50, but will be taxed under S. 45, in case of any transfer.

In case of block of assets consisting of Goodwill, the quantum of Goodwill within the block of intangible assets could be unascertained and the CBDT guidelines should address this aspect.

It is well known international practice of allowing Depreciation on Purchased Goodwill for taxation purpose. The intent of such allowance is that the assessee had incurred a cost for the purpose of his business, and hence, should be given the benefit of depreciation or amortization over a period of time. Incidentally, the memorandum to Finance Bill of 2021 states as:

“However, in some other cases (like that of acquisition of goodwill by purchase) there could be valid claim of depreciation on goodwill in accordance with the decision of Hon’ble Supreme Court holding goodwill of a business or profession as a depreciable asset.”

Even in spite of this After this, the Memorandum also has a contradictory explanation that the need of allowing depreciation on goodwill is not as justified as that allowable on other intangible assets or tangible assets, as Goodwill in general, is not a depreciable asset and may see appreciation or otherwise depending upon how a business runs. I would believe that depreciation on Purchased Goodwill should be allowable, irrespective of the way Business runs. This is because such a claim by the acquiror can’t be the basis for the way business goes on subsequently, but as there is a cost which has been incurred to acquire that business, which as per settled principles, should qualify for a claim of deduction.

It is a need of time, that the Finance Ministry recognizes this and gives further clarifications for better business environment and avoid controversies. Without which, the Business Acquisitions will become more expensive, and that’s not welcome for our economy, which has an ambitious growth agenda where mergers and acquisitions is one of the commonly-followed strategy by organizations to pursue business growth.

To conclude with, in future, any retroactive amendment to levy taxes (like the one discussed above) would only bring additional tax burden on the assessee, which in turn would impact ‘Ease of doing business’ (a pledge taken by our Government). Especially when global economy is staring at recession & Slow down & our economy and businesses are trying to expand with M&A.

As per the Current Scenario:

  • Acquirors will need to rework their advance tax computations and pay additional taxes with interest where they had, in earlier years, had claimed depreciation on Goodwill acquired through M&A Transactions closed during the previous year; and
  • For open transactions, the entities will need to renegotiate the transaction that were planned to be closed assuming availability of depreciation on

It is desired that the Ministry of Finance should pay due attention to this aspect while making further enactments.

Dear professional Colleagues, Greetings!

I write to you amidst the festival season and after finishing the busy professional assignments on account of Tax Audit and Income Tax Return deadlines.

The Festival Season has started and we have celebrated Navratri, Dusshera and are ready to welcome Diwali with new Zeal and enthusiasm in year 2022 after Pandemic.

After a Long time, we had a Physical Annual General Meeting on 24th September, 2022 at Radio Club, Mumbai.

I would like to congratulate the Western Zone team Led by Mr. Santosh Gupta, National Vice President and Mr. Mitish Modi, Chairman, with special Support of Dr. Axat Vyas, Member, NEC & Mr. Samir Jani Member, NEC, Mr. Bhavik Dolakia, Chairman Conference, Mr. Jayesh Kanani, Convenor Conference for successfully conducting a Fabulous National Tax Conference and NEC at Dwarka where not a Single Member of Federation is available and all the Team of Jamnagar AIFTIPIANS did it wholeheartedly filled with Hospitality, Grace with a smile on face. Blessings of Lord Shri Krishna was pouring in on all the delegates in the Conference wherein we had a tremendous response with over 330 delegates. The Conference was a breathing refresher after the busy audit season in September and the Technical Sessions were par excellence followed by Garba Night arranged at Conference Venue.

In the series, yet another Successful One Day Conference PARIVARTAN was organized at Hotel Park in Ludhiana by A.I.F.T.P. (Northern Zone) on 15-10-22 under the Guidance of Northern Zone Chairman Shri H. L. Madan. Special thanks to Mr. Sandeep Goyal, Mr. Varinder Sharma and all Team of Ludhiana.

Friends, ‘Change is one of the biggest challenges for tax professionals’. It takes careful planning to ensure the time spent keeping up with technical changes does not detract from time spent advising clients. Relentless changes have made the work of tax professional very challenging and demanding. In the modern era, the tax profession faces a new set of challenges. If we work together and focus on what the future needs to look like and how we are going to achieve it, there shall be smooth road to success. ‘The pace of change is really quite staggering. But the new technologies open up all sorts of new ways of working, which should lead to greater process efficiencies’.

Friends, it gives me immense pleasure to inform you all that THIS YEAR we have decided to have Foundation Day Fortnight Celebrations in November from 11th to 26th November, 2022, wherein all the Zones would be involved in conducting various programmers in their respective zones to commemorate the 46th Foundation Year Celebrations. In the series of Foundation Day Celebrations, One Day Conferences at Chandigarh, Kutak, Ranchi, Indore, Coimbatore and other program at Nagpur, Ruxol Bihar are going to take place and during this Fortnight of FOUNDATION DAY CELEBRATIONS, hoisting of flag of Federation shall take place. Zone Chairman and Vice Presidents HAVE BEEN ENTRUSTED to organize the Programs accordingly. Northern Zone shall be celebrating the Foundation Day in evening of 11th November in Hybrid Mode at 6 P.M. from CHANDIGARH followed by One Day Conference at Judicial Academy Chandigarh wherein Chief Justice of Allahabad High Court, Hon’ble Mr. Justice Shri Rajesh Bindal shall be Chief Guest on 12th Day of November, 2022. Eastern Zone shall be celebrating Foundation Day at Ranchi (Jharkhand) and Central Zone at Indore on 12th Day of November, 2022. Another Program is going to be organized by Northern Zone of the All India Federation of Tax Practitioners in association with the support of Income Tax Bar Association at VARANASI FOLLOWED by Many other programs in Southern Zone and in other Zones.

Immediately thereafter, the 25th National Convention is going to be held on 16th, 17th and 18th December, 2022 in Jaipur. A large number of delegates are going to participate in the event. We are looking forward to have you all in Jaipur and as such, appeal to you to register for the same in large numbers.

We invite suggestions from members for any improvement or betterment in the working of the Federation.

Thanking you,

With Best wishes for Happy Diwali and Prosperous New Year.

D. K. Gandhi

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

Dear Friends,

Wish you all a very Happy Deepavali. I pray to the almighty that this festival of lights fills lives of each one of us with brightness and optimism. Very soon the Finance Ministry will start pre-budget consultations. All the professional bodies, including AIFTP, is going to make their representations for improving the tax administration and seek mitigation of hardships faced by assesses who are burdened with unwarranted litigations. What has come to light in recent times is huge additions have been made invoking provisions of section 56(2)(x)(b)of the Income tax Act, 1961 (the Act). The sub-clause (B) provides that if the stamp duty valuation is more than the purchase consideration then the difference between the value adopted for determining the stamp duty paid or payable is treated as income in the hands of the purchaser in the year of purchase. This provision adversely effects the purchaser. It is important to note that the same amount is taxed in the hands of the seller as he is covered by the provisions of section 50C or section 43CA of the Act depending on under which head the income is assessable in the hands of the seller. The provisions section 56(2)(x)(b)of the Act came into operation from 1st April, 2017. There are many instances where the registration of the sale deed has taken place after 1st April, 2017. But the terms and conditions, especially the consideration, was agreed upon between the purchaser and seller much earlier. The first and second proviso protect the assesse from these harsh provisions of section 56(2)(x)(b)(B) of the Act. However, it is seen that protection provided under the proviso is not being extended to the assesse at assessment stage. The litigation causes hardship to the assesses, especially, when they are individuals. We should represent to the Government to drop these draconian provisions as Revenue’s interests are sufficiently protect by section 43CA and section 50C of the Act.

There is one more issue which needs to be considered for representation. The Hon’ble Supreme Court by its order dated 12th October, 2022 in the case Checkmate Services Pvt. Ltd vs. CIT in C.A. No. 2383 of 2016 has up held the Hon’ble Gujarat High Court’s order which was in favour of the Revenue. The issue before the Apex Court was whether deletion of second proviso to section 43B grants relief not only to the employer’s contribution deductible under section 36(1)(iv) of the Act but to employer’s contribution to EPF, ESIC, etc. also which is allowed as deduction under section 36(1)(va) of the Act. The Apex Court has deliberated upon several case laws and the statutory provisions. It has highlighted the scope of operation of section 3691)(iv) and section 36(1)(va) of the Act. According to the Hon’ble Supreme Court as far as the amounts covered under section 36(1)(va) of the Act are concerned the employer assesse is a trustee of the amounts collected from his employees. Thus, the obligation caste on him to comply with statutory time limits under the EPF,ESIC etc. is much heavier and he should discharged diligently. He cannot be given any lee way as it is given in the case of employer’s contribution covered under section 36(1)(iv) of the act. The Apex Court has even rejected the pleas based equity and hardship relying on the following observation in the case of Ajmera Housing Corporation vs. CIT(2010(8)SCC739.

“27. IT is trite law that a taxing statute is to be construed strictly. In a taxing Act one has to look merely at what is said in the relevant provision. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. There is no room for any intendment. There is no equity about be implied. There is no room for any intendment. There is no equity aout a tax. (See.: Cape Brandy Syndicate vs. Inland Revenue Commissioners (1921) 1 KB 64 and Federation of A.P. Chambers of Commerce and industry and Ors. v. State of A.P. and Ors. (2000) 6SCC 550. In interpreting a taxing statute, the Court must look squarely at the words of the statute and interpret them. Considerations of hardship, injustice and equity are entirely out of place in interpreting a taxing statute. (Also See: Commissioner of Sales Tax, Uttar Pradesh v. The Modi Sugar Mills Ltd. 1961(2) SCR 189)”

The amendments brought through Finance Act, 2021 also do not allow any deductions of employee’s contribution to EPF, ESI, etc. if the same is not paid to the exchequer with in the time limits provided under the respective statutes. The provisions are very stringent. The assesse losses the claim of deduction in case of a default due to genuine and reasonable cause. Effective representation has to be made before the Government to consider the hardship faced by assesses who are stuck in exceptional circumstances.

In this issued the AIFTP Journal esteemed professionals have shared their thoughts on issues which are relevant and important. I thank them for sparing their valuable time for the Journal. Once again Happy Celebrations for the festival of lights.

K. Gopal,