|Sr. No.||Name of Members||Profession||Zone|
|1||M/s. AKGVG & Associates||Corporate Member||North|
|2||P. Srinivasa Murthy||GSTP||South|
|4||P. Guru Karthik||GSTP||South|
|8||Aditya Rajaram Ajgaonkar||Adv.||West|
|9||Ritesh Kumar Shyam||CA.||South|
|10||Sanjay B. Tanna||Adv.||West|
|11||Subhash Chandra Keyal||Adv.||East|
|Sr. No.||Name of Members||Profession||Zone|
|1||A. Bhanoji Rao||Adv.||South|
|3||Keval D. Kanabar||GSTP||West|
|4||Shasank Sekhar Jalan||CA||East|
|6||Rohita Kumar Parida||Adv.||East|
|8||Pankaj Kumar Singh||Adv.||East|
|9||Akash Suman Pirgal||CA||South|
|11||Deepika Pardeep Goyal||Adv.||North|
|12||Sanjay Dnyaneshwar Nikam||CA||West|
|15||Raghuveer Singh Roonia||CA||Central|
RULINGS OF ADVANCE RULING AUTHORITIES
1. Joint Development Agreements :
Facts : The applicant, an un-registered person, had given irrevocable license to the Developer to execute and complete the project at its sole cost, expense and responsibility, develop the schedule property in accordance with the specifications set out there in and the responsibility to obtain conversion orders, construction plans and other permissions from the respective authorities by the Developer.
The applicant has sought advance ruling in respect of the following question.
Whether the total amounts received by the Owner towards the advances or sale consideration of the flats fallen to his share of 40% in terms of the Joint Development Agreement dated 19.05.2016 and the subsequent Area Sharing Agreement dated 03.01.2018, are not amenable for payment of GST, since Applicant has sold or agreed to sell or gifted, the fiats after obtaining Occupancy Certificate dated 26.08.2019 and that Applicant has not received any part of the sale consideration prior to the said date of occupancy certificate, thus falling under Entry No.5 of Schedule III of CGST Act read with Notification No.11/2017-Central Tax (Rate) dated 28.06.2017 and the corresponding provisions of SGST Act.
The developer is liable to pay tax (GST) on construction service (Construction of complex) intended for sale to a buyer, wholly or partly, at the rate of 18% in terms of the Notification (Central tax rate) No. 11/2017 Central Tax (Rate) dated 28.6.2017 as amended by Notification No. 04/2018 Central Tax (Rate) dated 25.01.2018. Further the valuation of said services is to be determined in terms of paragraph 2 of the Notification No. 11/2017 Central Tax (Rate) dated 28.6.2017, prior to 1.4.2019.
Observations & Findings : We observed on examination of the records that the applicant has entered into JDA, along with irrevocable general power of attorney, on 19.05.2016 with the Developer and Developer obtained necessary plan approval dated 21.02.2017, Commencement Certificate dated 16.06.2017 and the Completion/ Occupancy Certificate dated 26.08.2019, from the authority BBMP. The applicant has executed the sale deeds for sale of the said flats after the occupancy certificate dated 26.08.2019 and thus the transaction is not exigible to GST in terms of clause 5 to Schedule III of the CGST Act 2017, which specifies certain transactions to be treated neither as a supply of goods nor a supply of services. Further Schedule Il to the CGST Act 2017 specifies certain activities / transactions to be treated as supply of goods / services. Clause 5(b) of the said schedule stipulates that “Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly” shall be treated as supply of service except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation whichever is earlier.
Thus, if the applicant themselves or the developer on behalf of the applicant have sold the applicant’s share of units/flats prior to issuance of completion certificate, then the transactions amount to supply of “Works Contract Service” are liable to GST. The value of the aforesaid supply is to be ascertained from open market and would be equal to open market value as per rule 27 of the CGST/SGST rules 2017. Further it is also clarified vide Notification No. 4/2019 Central Tax (Rate) dated 29-03-2019 at paragraph (iii) 1B, which states that “Value of portion of residential or commercial apartments remaining un-booked on the date of issuance of completion certificate or first occupation, as the case may be, shall be deemed to be equal to the value of similar apartments charged by the promoter nearest to the date of issuance of completion certificate or first occupation, as the case may be.”
Ruling : The amounts received by the applicant, either by himself or through his agents, towards sale of their share of flats are not exigible to GST, if and only if the entire consideration related to such sale of flats is received after the issuance of Completion Certificate dated 26.08.2019, as the said activities are treated neither supply of goods nor supply of service in terms of schedule III of the CGST Act 2017 subject to Clause 5(b) of the Schedule-II of the CGST Act, 2017.
[2020 (11) TMI 718 – AAR, Karnataka – Sri. B.R. Sridhar]
2. Exempted Service :
Facts : The Applicant is providing conservancy service to the Military Establishments. The applicant seeks a ruling on whether the above supply is exempted in terms of Serial No. 3 or 3A of Notification No. 12/2017 – Central Tax (Rate) dated 28/06/2017.
Observations & Findings : In its Circular No. 51/25/2018-GST dated 31/07/2018 the Central Government clarifies that the service tax exemption at serial No. 25(a) of Notification No. 25/2012 dated 20/06/2012 (hereinafter the ST Notification) has been substantially, although not in the same form, continued under GST vide Sl No. 3 and 3A of the Exemption Notification. Serial No. 25(a) of the ST notification under the service tax exempts “services provided to the Government, a local authority or a governmental authority by way of water supply, public health, sanitation, conservancy, solid waste management or slum improvement and up-gradation.” The Circular further explains in relation to the specific issue of ambulance service to the government by a private service provider (PSP) that such service is a function of ‘public health’ entrusted to Municipalities under Art 243W of the Constitution, and, therefore, eligible for exemption under Sl No. 3 or 3A of the Exemption Notification.
Ruling : The applicant’s supply to Military Stations, is exempt from the payment of GST under Sl No. 3 of Notification No. 12/2017 – Central Tax (Rate) dated 28/06/2017.
[2020 (12) TMI 189 – AAR, West Bengal – Lokenath Builders]
ORDERS OF APPELLATE ADVANCE RULING AUTHORITIES
1. Online Information and Database Retrieval Services :
Facts : The Respondent Company having its registered office USA, has a business division in India engaged in the provision of computer-based test (alternatively referred to as ‘exams’) administration solutions to its clients (test sponsors) like educational institutes, professional licensing organizations, etc. and is registered with Bangalore West Commissionerate as a supplier of Online Information and Database Retrieval Services (OIDAR services).
In India, the Respondent Company has entered into contractual arrangements with independent third-party service providers including a subsidiary company of the Respondent to act as Authorized Test Centers to provide secure test center services to the Respondent Company for delivery of the tests including verification of candidates identity, invigilation etc.
In view of the above, the respondent company filed an application for Advance Ruling under Section 97 of the CGST Act, 2017 in respect of the following questions:
a) Whether the service provided for type 2 test (the specified service) classifies as ‘Online Information and Database Retrieval Services’?
b) If the type 2 test provided by the applicant does not qualify as ‘Online Information and Database Retrieval Services’, whether the applicant is liable to pay integrated tax on the supply of said services to non-taxable online recipients in India?
c) Whether the service provided for type 3 test (the specified service) classifies as ‘Online Information and Database Retrieval Services?
d) If the type 3 test provided by the applicant does not qualify as ‘Online Information and Database Retrieval Services’, whether the applicant is liable to pay integrated tax on the supply of said services to non-taxable online recipients in India?
The Authority for Advance ruling examined the case of the Respondent and vide ruling No. KAR/ADRG 37/2019 dated 22nd May 2020 = 2020 (6) TMI 182 – AAR, Karnataka, arrived at the conclusion that type 3 test does not qualify as OIDAR services. It was held that Sl. No. 10 of Notification No. 09/2017-IGST (R) dated 28.06.2017 exempts Services (not including OIDAR services) received from a provider of service located in a non-taxable territory by the Central Government, State Government, Union territory, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession. If the transaction itself is exempt, there is no liability on the recipient of service. Hence, there will not be any liability on the supplier located outside India and hence the entire transaction is exempted both in the hands of the supplier and also the recipient by virtue of Sl No. 10 of Notification No. 09/2017-IGST (R) dated 28.06.2017.
Nature of Type 3 Test is as under:
These tests contain a mixture of multiple-choice questions and analytical writing assessment section i.e. essay-based questions. For candidates from India, the test is taken at test centres in India at a computer workstation which is physically administered and supervised by an invigilator (proctor) as described in the type 2 test above. The candidates may create a profile, schedule the appointment and remit payment using a registration center (call center). The test is completed in parts viz. at the end of the exam, the test-taker is able to see the final score for multiple choice questions and an indicative score (which is not final) for essay-based questions marked by the computer-based algorithm. However, the essay-based questions are then sent to a human-evaluator in the USA for assessment and final scoring. In addition to this, the essay is scored by an automated essay scorer. In case the difference in score for a single essay question between the electronic computed based algorithms scoring vis-a-vis human scoring is more than I point, then the essay-based questions are again sent to an expert evaluator for assessment and scoring. Once the entire aforesaid scoring activity is completed, the test-taker is then e-mailed a URL to access their official score.
The jurisdictional CGST officer reviewed the impugned order passed by the Authority and being aggrieved by the ruling passed with regard to a particular test, filed this appeal.
Observations & Findings : We find from the information furnished by the Respondent that their activity is primarily to conduct computer-based tests for their clients. The type of computer-based test i.e whether the test is purely multiple-choice questions or a mix of multiple-choice and essay questions depends on the purpose of the test and what the test sponsor aims to measure in a test taker. We are concerned only with the Type-3 test which is a mix of multiple-choice questions and essay-based questions. It is the responsibility of the Respondent to provide the software to enable the candidates to take the online Type-3 test; appoint or establish test centers from where the candidates will take the online Type-3 test; provide for the candidate’s test registration validation at the test center; provide for online and offline proctoring during the test-taking process, provide software for scoring the tests and deliver the test results electronically to the candidate. From the above it is abundantly clear that the Type-3 test is conducted over the internet using a computer system. The process of the test registration, conduct of the test and communication of the result are automated and such a test will not be possible in the absence of information technology. Thus, three out of the four requirements of an OIDAR service are fulfilled. The bone of contention is with regard to the fourth ingredient which is that the service should have minimum human intervention. We find that the lower Authority has taken the view that the scoring by the human scorer for the essay-based responses in the Type-3 test renders the element of human intervention more than minimal thereby disqualifying it as an OIDAR service.
There is no dispute on the fact that there is an element of human intervention involved in the process of scoring the essay responses in the Type-3 test. What needs to be decided is whether the extent of human intervention is ‘minimum’ or not. Since there are no guidelines in Indian laws regarding the concept of minimum human intervention in electronically provided services, we refer to the European Commission VAT Committee Working Paper No 896 wherein the notion of ‘minimal human intervention’ was discussed in the context of determining whether or not a service can be said to fall within the definition of electronically supplied services. However, even in such cases there is no direct human interaction of individualistic nature between the evaluator and the candidate. The Respondent accepts the electronic request for a rescore of the essay and returns the result to the candidate electronically. The candidate who is the service receiver has received a fully digitally provided service. When the Type-3 computer-based test is viewed as a whole, the scoring done by the human scorer is to be regarded as being within the realm of minimum human intervention. As such the ingredient of ‘minimum human intervention’ required to classify the service as OIDAR is also satisfied. We therefore, disagree with the decision of the lower Authority that the Type-3 test is not an OIDAR service.
Order : We allow the appeal filed by the Principal Commissioner of Central Tax, Bangalore West Commissionerate and set aside the ruling given by the AAR with regard to the classification of the Type-3 test.
[2020 (11) TMI 956 – Appellate AAR, Karnataka – M/s NCS Pearson INC]
2. Services by Residential Welfare Associations :
Facts : The Appellant is a Co-operative Housing Society, provides certain services to the members of the Housing Society, as enumerated in the By-laws of the Society. For the purpose of obtaining the objectives of the Society, the Appellant raises fund by collecting contributions from the members of the Society on monthly basis, which are also called “charges” in terms of the Bye-laws. The Society charges include property taxes, water charges, common electricity charges contribution to repair and maintenance fund, contribution to the sinking fund, services charges, car parking charges, interest on the default charges, non-occupancy charges, insurance charges, lease charges, lease rent, non-stop agricultural tax, or any other charges.
The Appellant had filed an Advance Ruling application before the Maharashtra Advance Ruling Authority, seeking clarifications on the following issues:
(i) Whether the said activities carried out by the Appellant would amount to supply, and whether the same are liable to the GST.
(ii) Whether they are correctly discharging the GST liability, for which they provided the illustrative invoices raised on the members of the society.
The Maharashtra AAAR, vide their order GST-ARA-21/2019-20/B-34, dated 17.03.2020 = 2020 (7) TMI 200 – AAAR, Maharashtra, passed the ruling, wherein it was held that the activities carried out by the Appellant, as detailed herein above, would amount to supply in terms of Section 7(1)(a) of the CGST Act, 2017, and accordingly would attract GST, as provided under Section 9 of the CGST Act, 2017. For arriving at the aforesaid conclusion, they have referred to Section 2(17) and Section 2(31) of the CGST Act, 2017 to conclude that the said activities have been carried out by the Appellant for consideration in the course or furtherance of business, and hence the same would qualify as “Supply” in terms of Section 7(1)(a) of the CGST Act, 2017.
Aggrieved by the aforesaid Advance Ruling passed by the MAAR, the Appellant has filed the present appeal before this Appellate Authority for Advance Ruling.
Observations & Findings : The Appellant contention that a particular transaction, which cannot be considered as business under the Income Tax law, cannot be considered as business even under the GST law is not acceptable as the definition of the term ‘business’ provided under the CGST Act, 2017 is much wider than the definition of the term ‘business’ provided under the Income Tax Act, 1961. Therefore, any provision under the Income Tax Act,1961 is not compulsorily applicable even under the CGST Act, 2017.
We would also like to explore the intention of the legislature on this aspect as to whether the society charges are liable to GST or not. For this purpose, we would refer to the clause (c) of Sl. 77 of the Notification No. 12/2017-C.T. (Rate), dated 28.06.2017 as amended by the Notification No. 2/2018-C.T. (Rate), dated 25.01.2018, which stipulates that the service by an unincorporated body or a non-profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution up to an amount of seven thousand five hundred rupees per month per member for sourcing of goods or services from a third party for the common use of its members in a housing society or a residential complex is exempt from the levy of GST. Thus, it can clearly be inferred from the provisions of the aforesaid notification that any amount, exceeding seven thousand five hundred rupees per month per member, charged by the housing society from its members, for the supply of goods or services for the common use of its members, would be subject to GST provided that the aggregate turnover of such society in a financial year exceed twenty lakh rupees. It is noteworthy that the said exemption limit of seven thousand five hundred rupees would not include the statutory dues/taxes, such as property tax, water tax, electricity charges, collected by the society from its members on behalf of the statutory authorities.
Order : We do not find any reason to interfere with the ruling passed by the AAR in light of the above stated reasons. Accordingly, it is held that activities carried out by the Appellant would amount to supply in terms of Section 7(1)(a) of the CGST Act, 2017, and the same would be liable for GST subject to the condition that the monthly subscription / contribution charged by the society from its members is more than ₹ 7500/- per month per member and the annual aggregate turnover of the society by way of supplying of services and goods is also ₹ 20 lakhs or more.
[2020 (11) TMI 489 – Appellate AAR, Maharashtra – M/s Apsara Co-Op Housing Society Ltd.]
3. Import of Service :
Facts : The appellant, Russian Federation, entered into a Maintenance and Repair Contract with Bharat Coking Coal Ltd., Dhanbad (BCCL) for maintenance of 4 nos. of Electric Rope Shovel, supplied by the appellant. As the agreement, a foreign entity shall be entirely responsible for all taxes, duties, license fees and such other levies imposed outside BCCL’s country. The foreign supplier shall also be responsible for all taxes & duties in BCCL’s country legally applicable during execution of the contract. The appellant raised invoices against BCCL inclusive of tax. BCCL required them to revise the invoices by reducing the tax element paid by BCCL under reverse charge mechanism. According to the appellant, as per Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017, the recipient of service, i.e. BCCL is liable to pay the IGST on the services imported by them from the appellant under reverse charge mechanism.
The appellant company sought advance ruling to specify the person who is liable to pay tax in the aforesaid circumstances and whether it is legally justified by BCCL to deduct GST from payments made to the foreign company. The AAR in its Ruling No. 04/WBAAR/2020-21 dated 29.06.2020 = 2020 (7) TMI 140 – AUTHORITY FOR ADVANCE RULING, WEST BENGAL, has held that supply of service to BCCL in terms of the agreement / contract is not import of service. The recipient is not, therefore, liable to pay GST on reverse charge basis in terms of Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017. The applicant, being the domestic entity is liable to pay tax as applicable in terms of the contract.
Aggrieved by the Ruling, the Appellant has filed the instant Appeal against the above Advance Ruling with the prayer to set aside the impugned Advance Ruling passed by the AAR.
Observations & Findings : In the Advance Ruling, it is seen that the AAR has not considered / discussed the various other terms of the agreement which says, inter alia, that the entire control of the activities would rest with the foreign entity, which had entered into an agreement with BCCL. The AAR has observed that the service is ensured from the appellant’s domestic entity for seventeen years of the contract. However, it has not taken into consideration the fact that the appellant is providing service to BCCL since 2015, whereas the domestic entity has come into existence in 2018 only.
The AAR has found that the MARC holder ensures supervision of equipment, supply of spares and consumable and overheads for 5000 annual working hours for seventeen years, indicating sufficient degree of permanence to the human and technical resources employed at the sites and thus the domestic entity of the appellant is a ‘fixed establishment’ as defined under Section 2(7) of the IGST Act, 2017. Let us have a look at the definition of ‘fixed establishment’ as referred above :
“fixed establishment means a place (other than the registered place of business) which is characterised by a sufficient degree of performance and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs.”
In the above definition, it is clear that the registered place of business cannot be termed a fixed establishment. Here, the domestic entity IZ-KARTEX is registered with GST authorities and hence, going by the definition, it cannot be termed a fixed establishment. In that sense, the decision of the WBAAR does not hold good in legal terms.
The appellant, on the other hand, has claimed that their activity is import of service and the tax is payable by BCCL. The AAR has not made any observation on this aspect, while holding that the appellant’s domestic entity is the supplier of the service. Import of service, as defined under Section 2(11) of the IGST Act, 2017, contains supply of service containing of the following three elements:
i. The supplier of service should be located outside India
ii. The recipient of service should be located in India
iii. The service should be provided in India.
Order : We modify the order of Advance Ruling to the extent that the supply of service by the appellant to BCCL qualifies as import of service as defined under Section 2(11) of the IGST Act, 2017 and GST is payable on such import of service by BCCL under reverse charge mechanism in terms of Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017.
[2020 (11) TMI 528 – Appellate, AAR, West Bengal – M/s IZ Kartex]
SUPREME COURT OF INDIA
Paramvir Singh Saini
Baljit Singh & Others
[R. F. Nariman, K.M. Joseph & Aniruddha Bose, JJ]
SLP (CRIMINAL) NO.: 3543 of 2020
Date of Decision: December 2, 2020
Installation of Videography/ CCTV cameras during investigation—Apex court passed orders dated 3/4//2018 for installation of COB for implementing use of videography during investigation—no real action taken at state level and central level—hence vide this order, the Honble Court has directed for implementation of the same within a period of 6 weeks.
The Apex Court had earlier directed the Ministry of Home affairs to set up COB (Central Oversight Body) to implement for use of videography in the crime scene during investigation vide order dated 3/4/2018(SLP No 2302). Since nothing was done in pursuance to this, the Apex court has given further orders to be complied within a period of 6 weeks in letter and in spirit with a firm plan.
Hence, the Oversight committees should be constituted at state (SLOC) and district levels(DLOC).The duties of both have been enlisted by the Court. The finance has to be looked in to be the Finance departments of the respective states/ UTs. Working, maintainance, recording is to be looked after by the SHO of the Police station.
The state and UT governments shall ensure that CCTV cameras are placed in every police station at all points, lockups, corridors, reception, verandah etc. They must have night vision and audio and video footage. Data shall be preserved for 18 months mandatorily.
In case of serious injury or death in custody, the complainant may reach out to Human right commissions as well as Human rights courts which would be set up u/s 30 of the Protection of Human Rights Act. The said court or commission shall then summon the CCTV camera for further probe. The obligations on part of Union of India have also been enlisted in detail in similar manner.
SUPREME COURT OF INDIA
State of Jharkhand
Brahmputra Metallics Ltd.
[Dr. Dhananjaya Y. Chandrachud, J]
Civil Appeal No 3860 of 2020
Date of Decision : December 1, 2020
Doctrine of legitimate expectation—industrial policy of 2012 envisaged issue of notification within one month to grant deduction to units setting up captive power plant for 5 years—notification issued 3 years later prospectively—petitioner deprived of benefit of three years as envisaged by policy—writ accepted on grounds of promissory estoppel—appeal before supreme court by department—doctrine of legitimate expectation envisages fairness in dealings by state—wider scope than promissory estoppel— representation of state induced legitimate expectation in instant case—no reason given by state for delay in issue of notification—trust of state violated—respondent permitted to deduction—appeal disposed of
Where the state had notified an industrial policy 2012 envisaging that notifications would be issued by the department within 1 month granting exemption to industrial units setting up captive power plants from payment of 50% duty on electricity for a period of five years starting from the next financial year from the date of production; the state government issued such exemption notification three years later( Jan 2015) with a prospective effect. Hence, a writ was filed on the ground that the industrial unit would be entitled to benefit for a much lesser period. The Hon’ble High court decided in favour of the assessee on the grounds of promissory estoppel. The state has thus appealed before the Supreme Court.
It is held that the representation made by the state gave rise to ‘legitimate expectation’ on their behalf regarding deduction in electricity duty for the next five years. However, due to delay in issue of notification and that too with prospective effect, trust in state is violated. There is no justification given by state on the delay, therefore action of state is arbitrary ad violative of A-14.
Though the High court agreed to grant relief on a different footing, the concept of legal expectation has a wider scope and is founded on fairness in government dealings. Hence the respondent (industrial units) is entitled to relief for the financial years following the commencement of production.
SUPREME COURT OF INDIA
Skill Lotto Solutions Pvt Ltd
Union of India & Ors
[Ashok Bhushan, J]
W.P. No. 961 of 2018
Date of Decision: December 3, 2020
Lottery Tickets—Whether taxable—whether rightly included in the definition of ‘goods’ u/s 2 of CGST Act—these are actionable claims included in the definition of goods and it is in conformity with the provisions of the Constitution of India( A 366 and A 246A); the rationale behind inclusion of lottery, betting and gambling in the actionable claim and excluding others is not questionable as taxing these three has been done with the aim of regulating the practices for the welfare of the state; transaction value is calculated for determining the taxable supply for levy of GST, hence excluding prize money from face value is not permissible as per S 15 of the Act
A writ is filed challenging the levy of tax on lottery tickets which is a consequence of inclusion of them under the definition of goods under S. 2(52) of CGST Act, 2017.
Whether writ petition is maintainable in the instant case: held yes, since violation of Article 14 is alleged the writ is maintainable under A- 32. Moreover the Apex court has earlier entertained writs on same subject of lottery in other cases where in the petitioners had challenged the ban on sale of lottery tickets and questioned levy of sale tax by state on their sale.
What is the legal meaning of goods and whether actionable claim is included in terms of S. 2(52) of CGST Act, 2017? The definition of goods as given in the section above is in conformity and not contrary to the Articles of Constitution of India. A 366 clause 12 contains an inclusive definition thereby intending to not give any restrictive meaning to it and the definition given in section 2 of CGST Act is not in conflict with it. Article 246A was inserted by parliament with respect to goods and service tax which begins with a non obstante clause. Therefore, the definition does not violate any constitutional provisions of law.
This Court has held in the case of sunrise Associates that lottery tickets are actionable claims and the observation cannot be said to be obiter dicta.
Whether exclusion of lottery, betting and gambling from item no 6 of schedule III of CGST Act, 2017 is hostile discrimination and violative of A -14 of Constitution of India? Held No, these concepts have been there even before Independence and the Act of 2017 defines goods to include actionable claims and includes only these three for levy of GST, it can’t be said there is no rationale for including these three. Hence, no violation of the above mentioned Articles is observed.
Whether prize money be excluded while determining face value of tickets for levying GST? Since the value of taxable supply is calculated by calculating the transaction value in terms of S. 15 of the Act, it is not possible to exclude the prize money for determination of face value for purpose of levy of GST
The petition is dismissed.
TELANGANA HIGH COURT
MANTHAN EDUCATIONAL SOLUTIONS PRIVATE LIMITED
ASSISTANT COMMISSIONER OF STATE TAX
[M.S.RAMACHANDRA RAO & CHALLA KODANDA RAM, JJ]
Date of Decision: November 12, 2020
Natural justice—assessing authority is a quasi judicial body bound to assign reasons—rejecting the objections by petitioner to levy of tax by terming it as’ not satisfactory’ not justified—failure to assign reasons amounts to violation of natural justice
The petitioner is a dealer engaged in Food, House-keeping services, Transportation services, Security services to schools. A show-cause notice was issued proposing to levy VAT -on four items, viz., (i) Transportation services; (ii) House-Keeping services; (iii) Infra Lease services; and (iv) Mess charges.
The impugned Assessment Order was passed dropping demand of VAT on House-keeping and Transportation charges, but rejected plea of the petitioner with regard to such levy on the consideration received towards Infra Lease and Mess charges at the rate of 14.5% by simply observing that ‘explanation given by the petitioner is not satisfactory’.
A writ is thus filed.
It is held that the respondent, being a quasi-judicial authority, is bound to assign reasons in support of its decision, and cannot simply reject the objections of petitioner to the levy proposed by him on these two items by merely saying that the explanation of petitioner is not ‘satisfactory’.
The respondent is obligated to supply reasons for his conclusion and failure to do so amounts to violation of principles of natural justice.
MADHYA PRADESH HIGH COURT
SHRI SHYAM BABA EDIBLE OILS
THE CHIEF COMMISSIONER AND ANOTHER
[SHEEL NAGU & RAJEEV KUMAR SHRIVASTAVA JJ.]
Dated of Decision: November 19, 2020
Show cause notice—mode of communication—impugned show cause notice sent through e mail—writ filed for no communication being made—Held Rule 142 of CGST Rules prescribes a particular mode of communication i.e. through website of revenue—principle becomes stringent when statutorily prescribed—show cause notice quashed with liberty to department to proceed as per law
The grievance of petitioner is that the show cause notice sent for raising a demand was never communicated to it. However, the department has alleged that it was sent by e mail and no response was received in respect of the notice sent.
A bare perusal of Rule 142 of CGST Rules reveals that the only mode prescribed for communicating the show-cause notice/order is by way of uploading the same on website of the revenue. It is trite principle of law that when a particular procedure is prescribed to perform a particular act then all other procedures/modes except the one prescribed are excluded. This principle becomes all the more stringent when statutorily prescribed as is the case herein. Therefore, the impugned notice is quashed.
DELHI HIGH COURT
SENIOR INTELLIGENCE OFFICER, DIRECTORATE GENERAL OF GST INTELLIGENCE & ORS.
[MANMOHAN & SANJEEV NARULA, JJ]
W.P.(C.) No. 8975/2020
Dated of Decision: November 18, 2020
Appearance through video conferencing—summon issued u/s 70—writ filed seeking permission to appear through video conferencing for the reason of ill health and rising Covid 19 situation—writ dismissed as no serious ailment observed—recording of statement at this stage significant for entire investigation process—balance of convenience cannot be tilted in favour of petitioner merely because travelling from Bengaluru to New Delhi would expose him to risk of Covid 19
The company BYJUS based in Bengaluru is allegedly supplying printed copies etc for online teaching and evading tax on account of misdeclaring them under the exempted category. An investigation u/s 67 was carried out to ascertain the claim of petitioner. It was summoned u/s 70 but due to ill health and covid 19 situation it sought appearance through video conferencing which was denied.Hence a writ is filed seeking permission for appearance through video conferencing.
The certificates given by the doctors only indicate that the Petitioner is undergoing treatment of hypertension and diabetes which is not a serious ailment. The past record indicates that the petitioner avoided recording of its statement during inspection. The evidence being recorded at this stage would impact the entire investigation of tax evasion. The questioning during investigation has to be on the basis of evaluation and examination of documents. During the process of interrogation, the investigating agency may come across certain relevant facts and discoveries which are germane and crucial for concluding the investigation. The concept of balance of convenience, therefore, cannot be tilted in favour of the Petitioner to be allowed to appear through video conferencing, merely because travelling from Bengaluru to New Delhi would be a risk factor for the Petitioner of contracting COVID-19. This mere apprehension of contracting COVID-19 does not persuade us to grant the relief sought for by the present Petitioner.
KERALA HIGH COURT
THE SUPERINTENDENT CENTRAL TAX AND CENTRAL EXCISE
[A.K. JAYASANKARAN NAMBIAR, JJ]
WP 20071 of 2020
Date of Decision: November 10, 2020
Cancellation of registration—Application applied for on account of transfer of business- Reason mistakenly mentioned as closure of business by applicant – No change permitted to be made after receipt of order—writ filed- Held mistake occurred apparently while making application—Respondent cannot plead helplessness – directed to pass fresh order accordingly
Mistakenly, the petitioner filed an application for cancellation of registration by mentioning the reason as ‘closure of business’ instead of ‘transfer of business.’ The petitioner contacted the respondent but it was told that change wasn’t possible as the system was already fed with the information.
It is held that the respondent cannot plead helplessness in a matter where mistake occurred apparently while filing an application and the petitioner had immediately approached the department after receipt of such order. A fresh order should be issued mentioning the reason of cancellation as transfer.
ANDHRA PRADESH HIGH COURT
THE DEPUTY ASSISTANT COMMISSIONER ST 1
[U. DURGA PRASAD RAO & SMT KONGARA VIJAYA LAKSHMI, JJ]
Writ Petition No.7078 of 2020
Date of Decision: October 22, 2020
Confiscation of goods—shifting of business premises—goods in transit seized—penalty imposed—Held confiscation proceedings can be simultaneously taken up u/s 129 and S 130 of the GST Act—however, firm opinion of intention to evade tax by dealer before invoking S 130 must be there- personal hearing must be granted before—mere non production of records at the moment does not falsify records produced later—reasoned order must be passed—branding the explanation tendered as an afterthought without reason is not a legally justified order
The silver ornaments being taken while shifting of business premises were seized for being not covered by documents. Penalty, tax and interest were imposed in lieu of confiscation. A writ is filed in this regard.
It is held that the respondent is legally authorised to issue the impugned proceedings in view of Section 68(3) of the CGST Act which confers power on “the Proper Officer” to intercept any conveyance and require the person in-charge to produce the documents prescribed.
The confiscation proceedings can be taken up by the authorities after exhausting the measures under Section 129(6) and also simultaneously along with Section 129 and there is no bar. However, since the phrase “with an intent to evade the payment of tax” is employed in S. 130 of the Act, the authority must form a firm opinion before invoking it.
Confiscation u/s130 will denude the citizen of his right over his property. Therefore, the authority must afford a personal hearing to the owner in terms of Section 130(4) of CGST Act, and also adduce cogent reasons for discarding the explanation offered by him. Mere non-production of the records at the inception, will not automatically falsify the records produced later. Mere branding the explanation as afterthought without reasoning will not make the order legally justified.
The reason is the live nerve of an order which are not given in the order. Therefore, the impugned order does not stand to legal scrutiny and liable to be set aside.
MADRAS HIGH COURT
TMT. A. BHUVANESWARI W/O LATE N.P. ASOGAN
THE ASSISTANT COMMISSIONER
[ABDUL QUDDHOSE, JJ]
W.P.(MD)Nos.11861 and 11862 of 2013
Date of Decision: November 23, 2020
Registration—Legal heirs of deceased—Legal heirs not to apply for fresh registration after death of deceased dealer -– registration can be amended w.e.f. the date of death of deceased u/s 26 of the Act
The petitioner has challenged the order cancelling the registration of the petitioner. The said registration was applied for by the wife, as legal heir of her deceased husband who was a dealer but it was denied asking for applying fresh registration. The department contends that the registration should be applied for u/s 38 of the VAT Act.
The Hon’ble court has observed that when it is an admitted fact that the petitioner is a legal heir of the deceased dealer, legal heirs are deemed to be dealers on the death of it. Section 38(4) deals with succession by a third party to the business of the registered dealer, who has died, whereas the case on hand involves succession by legal heirs of the deceased dealer, for which S 26 of the Tamil Nadu Value Added Tax Act, 2006 gets attracted and not S. 38(4).
The amendment shall take effect retrospectively, from the date of death of the dealer
TELANGANA HIGH COURT
THE DEPUTY STATE TAX OFFICER AND ORS.
[M.S. RAMACHANDRA RAO & T. AMARNATH GOUD, JJ.]
Writ Petition No. 2563 of 2020
Date of Decision: November 11, 2020
Confiscation of goods—mismatch of goods in movement and documents tendered—writ filed—Held in view of circulars dt. 13.4.2018 and 14.9.2018 of the Central Board of Indirect Taxes and Customs, such detention is in violation of Rule 68 of the Rules especially when all documents were tendered at the time of checking—explanation of petitioner regarding the existence of vehicle at the said destination cannot be said to be untrue- No material on record to show any local sale being attempted to evade tax—detention for being at wrong destination without anything more is not permissible.
The goods in transit were being sent from Tamil Nadu to Secunderabad when they were detained at Jeedimetla for the reason of ‘mismatch between the goods in movement and the documents tendered’ i.e., that the goods were checked at IDA Jeedimetla.
It is explained that that the material from vendor at TN is purchased by various dealers at Hyderabad; the vehicles come to Hyderabad in groups through Outer Ring Road and all the trucks assemble at IDA Jeedimetla; and from that place, the vendor, directs them to their destinations. The vehicle of petitioner was detained at Jeedimetla when the driver was waiting for the vendor’s direction.
On filing of writ, the Court has held that the petitioner cannot be asked to avail the remedy of appeal u/s 107 of the Act in the absence of any formally order being passed by the respondent. It is not mentioned which document is defective. The explanation tendered cannot be said to be unbelievable. It is not permissible to detain a vehicle or levy penalty on the sole ground that the vehicle is found at a wrong destination without anything more. There is no material on record to show that any attempt was made by petitioner to sell the goods in local market at IDA Jeedimetla to evade tax.
The detention of the vehicle in spite of the documents being presented is in violation of Rule 68 of the Rules and the Circulars dt. 13.4.2018 and 14.9.2018 of the Central Board of Indirect Taxes and Customs.
Department cannot plead estoppel. Therefore, writ is allowed and the respondent is directed to refund the amount of petitioner.
KARNATAKA HIGH COURT
BNA TECHNOLOGY CONSULTING PVT. LTD.
THE STATE OF KARNATAKA COMMERCIAL TAX DEPARTMENT BANGALORE-01.
[ALOK ARADHE & H.T.NARENDRA PRASAD, JJ]
S.T.R.P. NO.458 OF 2015
Date of Decision: November 23, 2020
Error apparent on face of record—tax on goods sold during course of import—tax charged inadvertently on goods sold while they were being imported—assessment order passed forfeiting such tax amount—Revisional order passed setting aside the assessment order—appeal dismissed by Tribunal—Held by High court that tax cannot be levied u/s 5 (2) of CST Act on sale of goods during course of import – Though the assessing officer referred to S 39 of the Act, but exercised powers u/s 69 which deals with rectification of mistake—merely wrong mentioning of sections cannot invalidate the assessment order when otherwise valid—Impugned orders of revision and tribunal quashed
The petitioner, during the course of import , inadvertently charged tax on sale of goods made to ISTRAC which is in contravention of the provisions of law. The assessing authority passed an order forfeiting the amount of said tax against which was set aside by Revisional authority and upheld by Tribunal on grounds that there is no illegality in the order passed on revision.
The Hon’ble court has held that the assessing officer has referred to Section 39(1) of the Act, however, in substance, the Assessing Officer has exercised the powers under Section 69(1) of the Act, which deals with rectification of the mistake. Since, tax cannot be levied, u/s 5(2) of CST Act, on the sale of goods during the course of import, it was an error apparent on the face of the record. The Assessing Officer in purported exercise of powers under Section 69(1) of the Act has rightly rectified the same. Merely because the Assessing Officer has referred to Section 39(1) of the Act, the same would not invalidate the order passed by it. The order passed by the Tribunal and Revisional Authority are thus quashed.
KERALA HIGH COURT
GLOW GROW HEALTH AND BEAUTY (P) LTD
THE STATE OF KERALA, STATE TAX OFFICER, STATE TAX OFFICER (INTELLIGENCE)
[A.K.JAYASANKARAN NAMBIAR, J]
WP (C). No. 26533 OF 2020 (N)
Date of Decision: December 1, 2020
Assessment order—best judgment done—No payment effected by petitioner—Assessment order passed subsequently after proceeding u/s 74 of GST Act—writ filed impugning the assessment orders – Petitioner relegated to avail the statutory remedy of appeal before the first Appellate Authority
For the years 2018 and 2019 best judgment assessment orders were passed due of non filing of returns. No payment has been done after completion of the orders. Hence the department proceeded u/s 74 and completed by passing assessment orders. A writ is filed apprehending that the department would now proceed for recovery.
It is held that the challenge to the said assessment orders cannot be sustained. The petitioners are relegated to avail the statutory remedy of filing an appeal before the first appellate authority.
ALLAHABAD HIGH COURT
RANCHI CARRYING CORPORATION
STATE OF U.P. AND 2 OTHERS
[Pankaj Bhatia, J.]
Writ Tax No.: 655 of 2020
Date of Decision: December 7, 2020
Principles of natural justice—improper service of notice u/s 169 of GST Act—service of notice on driver and later by affixing it on the vehicle in question—grounds taken by petitioner in first appeal not considered as no reply was given to the notices sent—writ filed- held notices ought to be sent as per the provisions of law- petitioner thus deprived of opportunity of hearing – violation of natural justice observed in the instant case
The petitioner has contended that the service of notice u/s 169 wasn’t done in the manner prescribed.
It is held that service as on the driver or a fixation of the copy of the order on the truck in question is none of the methods prescribed under Section 169 GST Act and thus it is clear that the orders were never served and the proceedings were held ex-parte. Whenever a manner is prescribed, the thing should be done in that manner alone.
The grounds taken during filing of appeal were not considered contending that no reply given for the notices sent and so the grounds taken were an afterthought. Thus, a failure of natural justice has been occasioned to the petitioner.
RAJASTHAN HIGH COURT
ADITYA GUPTA S/O SHRI ARJUN GUPTA
UNION OF INDIA
[MRS. SABINA, J]
S.B. Criminal Miscellaneous 5th Bail Application No. 11595/2020
Date of Decision: December 4, 2020
Bail—offence u/s 132 of GST Act, 2017—case listed for pre charge evidence before trial court—fifteen out of forty five witnesses examined— no chances of trial ending soon—though charges are serious but petitioner already been in custody for about two years- Bail granted with conditions—
The respondents have contended that the accused had committed fraud to the tune of ₹ 22 Cr. by creating fictitious firms and had claimed tax input credit.
It is observed that the petitioner is in custody for the last more than two years and maximum punishment to be imposed on the accused, if convicted, is five years. Now the case is listed before the trial court for recording of pre-charge evidence and the trial may not be concluded at an early date.
The appellants are entitled to the grant of bail with certain conditions.
ALLAHABAD HIGH COURT
ADDITIONAL COMMISSIONER CENTRAL GOODS AND SERVICES TAX (APPEALS) AND 2 OTHERS
[PANKAJ BHATIA, J.]
Writ Tax No. – 626 of 2020
Date of Decision: November 24, 2020
Registration—revocation of—cancellation on account of alleged failure to file returns for six consecutive months—application for revoking filed—denial of as no verification could possibly be done—writ filed—held that no verification done by department to verify correctness of assertions of petitioner shows lack of legally trained minds—show cause notice vague and short of pointing any fault of assessee—unacceptable—order rejecting application for revocation is arbitrary—revocation permitted
The registration was cancelled on the ground of failure to file returns for six continuous months. An application for revocation was filed explaining that the returns were complete and there weren’t any pending dues. The application for revocation was rejected without verifying the portal and the order was affirmed in appeal.
It is held by the Hon’ble High court that the show cause notice issued is unacceptable as it does not record any shortcoming on the part of the assessee and doesn’t explain what was required. The said show cause notice clearly highlights that serious quasi-adjudicatory functionaries are being discharged by persons who do not have a legally trained mind and are entrusted in discharging functions affecting huge revenues. The order rejecting the application of the petitioner is wholly arbitrary and there appears no effort to verify the correctness of the assertions made by the petitioner.
Considering the department’s stand that the petitioner has fulfilled all its obligation within time, the registration is revoked with costs on department.
ALLAHABAD HIGH COURT
KONE ELEVATOR INDIA PRIVATE LTD.
COMMISSIONER OF COMMERCIAL TAX U.P. LUCKNOW
[PANKAJ BHATIA, J]
Sales/Trade Tax Revision Defective No. 33 of 2020
Date of Decision: November 26, 2020
Stay of recovery— Enhanced turnover—Tribunal directed for stay of recovery to the extent of 90% of tax demanded despite recording that prima facie case is made out and it would cause undue financial hardship—revision filed—Held by High court that order of Tribunal is arbitrary as it directed deposit of 10% despite recording prima facie case was made out—Appeal to be heard on merits by first appellate authority—revision answered in favour of assessee.
In the instant case, an appeal was filed before Tribunal against the order of DETC wherein stay of demand raised was granted upto 65% of the tax. However, on appeal, the Tribunal recorded that at that stage prima facie case was made out and direction for deposit of the entire amount would cause undue financial hardship to the appellant. Despite recording this, it proceeded to stay only 90% of the tax. The rest 10% was deposited by the petitioner.
On Revision, the Hon’ble High Court has held that it is well settled that the phrase ‘prima facie case’ would include even an arguable case. Under what circumstances the Tribunal directed for deposit of 10% of the amount even after having recorded that a prima facie case was made out and the deposit would cause financial hardship to the revisionist in not understandable. The order is wholly arbitrary, illegal and contrary to the law laid down in catena of judgements in the case of ITC v. Commissioner Appeals (MANU/UP/0515/2003:2005 (184) E.L.T. 347).
The question is decided in favour of the assessee. The first Appellate Court shall hear the appeal on merits.
ALLAHABAD HIGH COURT
MONDELEZ INDIA FOODS PVT LTD
COMMISSIONER OF CENTRAL TAX
[PANKAJ BHATIA, J]
S.T Revision No 85 of 2020
Date of Decision: December 2, 2020
Stay application—‘prima facie case’—whether Tribunal can refuse stay on deposit to be made ignoring prima facie case?—After the appellate authority had granted stay to the extent of 50% of tax to be deposited, appeal filed before Tribunal—Dismissal of giving no further relief while recording that Tribunal couldn’t consider the ‘prima face case’ at this stage as it would affect the final adjudication—Revision filed—Held by High court that Tribunal is bound to consider prima facie case when a stay application is in question—being contrary to law, the order of Tribunal is set aside and only 10% of deposit is required to be made
After an interim stay in respect of deposit to be made as a condition for stay was passed by the Hon’ble High court, the matter was remanded by the Appellate authority to the assessing authority. The assessing authority again rejected the account books. On appeal, the stay of 50% was granted of the amount assessed. The Tribunal dismissed the appeal rejecting the demand of further stay of more than 50% and recorded that it could not go into question of prima facie case at this stage as it would affect the merits of the case. Hence, a review application is filed.
It is held that while deciding the grant of stay application, the Tribunal is bound to consider ‘prima facie’ case as pleaded and the financial hardship. It can’t refuse to consider them solely because any finding recorded at this stage would affect the final outcome. Being contrary to law, the order of Tribunal is set aside and the revisionist is directed to deposit 10% of the demand assessed.
KERALA HIGH COURT
M.M. ABDUL HAMEED AND SONS
THE ASST. STATE TAX OFFICER, THE STATE TAX OFFICER, THE DEPUTY COMMISSIONER (INT) STATE GST DEPARTMENT
[A.K.JAYASANKARAN NAMBIAR, J]
WP (C).No.26891 OF 2020(J)
Date of Decision: December 3, 2020
Detention of goods- goods in transit—invoice short of date—shipping bill and e-way bill bearing different dates—part B no updated with relevant RR no- Detention held to be justified by Hon’ble High Court
The detention notice was served on the grounds that the invoice that accompanied the goods did not contain any date, while the shipping date was shown as 15.11.2020, the date shown in the e-way bill was 25.11.2020. It was also noticed that Part-B of the e-way bill was not updated with the relevant railway RR number. On writ being filed, the Hon’ble High court has observed that the detention is justified.
ALLAHABAD HIGH COURT
R.J. EXIM AND ANOTHER
THE PRINCIPAL COMMISSIONER CENTRAL GOODS AND SERVICE TAX AND 3 OTHERS
[SURYA PRAKASH KESARWANI & DR. YOGENDRA KUMAR SRIVASTAVA JJ]
Writ Tax No.: 608 of 2020
Date of Decision: November 24, 2020
Provisional attachment of goods—petitioners contends that as only show cause notice under S.70 of the CGST Act, 2017 has been issued, the attachment u/s 83 of CGST Act cannot be made—HELD that the impugned Provisional attachment order issued for the purpose of protecting interest of the revenue— petitioners given an opportunity to file an objection under sub-Rule 5 of Rule 159 of the Rules against the said order—admittedly, no objections filed thereof—Therefore, the impugned orders cannot be said to suffer from any manifest error of law.
The provisional order attaching goods u/s 83 was challenged on the ground that it was against the provisions of law since only a show cause notice u/s 70 was served and the petitioner. Admittedly no objections were filed by petitioner. The Hon’ble court has observed that since the opportunity was given to file objections, the said order cannot be said to be bad in law.
1.1 Loyalty program managing entities (‘Reward Manger’, for brevity) manage and operate reward points for its partner/s / organizations with whom the agreements are entered. In this business model of providing rewards, managing reward points and redemption of reward points, Reward Manager enters into agreement with various organizations for issuance and managing of reward points of the customers of the entities / organizations. Generally, the following activities are involved in this scheme of arrangement
a. On purchase of products of ‘partners’ (partners means Companies associated with Reward Manager for managing their loyalty / reward points) by the customers, the customers get rewards / payment points. The rewards points can be redeemed by customers, while making future purchases of products of ”partners”. Reward Manager maintains reward points earned by the customers on behalf of the partners.
b. Upon customers getting rewarded for the reward / loyalty points, the partner/s transfers amount equivalent to the reward points earned as per the agreement between the partner/s and the Reward Manager. Say for instance in pursuance to the reward points management, “partner” transfers amount equivalent to ₹ 0.35 per reward point, as issuance charges to the Reward Manager.
c. On redemption of points by the customer on any purchase, Reward Manager transfers the amount equivalent of reward point used by the customer and the outlet gives reduction to the customer to the extent of points redeemed.
d. The reward points earned by customers generally have a validity period say 24 months. In case the reward points are not redeemed by the customers within the validity period, the customers cannot redeem the reward points after the validity period. Where reward points expire, the Reward Manager is entitled to retain the amount initially transferred by the partner to the extent of points expired.
1.2 Generally, Reward Manager have the following streams of revenue
a. Fee / service charges from partners for managing the reward points.
b. Amount earned on account of expiry of reward points.
1.3 Under the erstwhile service tax provisions, the taxability on amount earned by the Reward Manager upon expiry of reward points has been in dispute. In this article an attempt is made to analyse the implication of tax on loyalty points / reward points under the Central Goods and Services Tax Act, 2017 (for brevity, “CGST Act”).
2. Central Goods and Services Tax Act, 2017
A. Legislative background
2.1 Section 2(52) of the CGST Act defines goods to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
2.2 Section 7(2) of the CGST Act provides that activities or transactions specified in Schedule III shall be treated neither as supply of goods nor a supply of services. Amongst other transactions / activities listed in Schedule III of the CGST Act, ‘Actionable claims, other than lottery, betting and gambling’ is listed as neither supply of goods nor a supply of services.
2.3 Section 2(1) of the CGST Act provides that actionable claim shall have the same meaning as assigned to it in section 3 of the Transfer of Property Act, 1882 (4 of 1882).
2.4 Actionable claim is defined in Section 3 of the Transfer of Property Act, 1882 as under
“actionable claim means a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent”
2.5 In the case of Sunrise Associates (2006) 145 STC 576 (SC) the Honorable Supreme Court gave reference to the case of Sarada Mills (1972) 2 SCC 877, 880 to state what constitutes an actionable claim. In case of Sarda Mills, the Honorable Supreme Court explained an actionable claim as follows
“Section 130 of the Transfer of Property Act however speaks of transfer of actionable claim. Actionable claims under the Indian law include claims recognised by the Court either as to, unsecured debts or as to beneficial interests in moveable property not in possession. A debt is an obligation to pay a liquidated or certain sum of money. A beneficial interest in moveable property will include a right to recover insurance money or a partner’s right to sue for an account of a dissolved partnership or a decretal debt or a right to recover the insurance money or the right to claim the benefit of a contract not coupled with any liability (emphasis supplied)”.
In the Sunrise Associates case, the Honorable Supreme Court held that sale of lottery ticket also amounts to the transfer of an actionable claim. It is mere piece of paper. Its value lies in the fact that it represents a chance or a right to a conditional benefit of winning a prize of a greater value than the consideration paid for the transfer of that chance. It is nothing more than a token or evidence of this right. Right to participate in a lottery is an actionable claim and that sale of lottery tickets is not goods and not liable to sales tax.
2.6 In a recent judgement of Skill Lotto Solutions Pvt. Ltd. Writ Petition (Civil) No. 961 of 2018 December 03, 2020 the Honorable Supreme Court held the following
“The Constitution Bench judgment of this Court in Sunrise Associates has laid down that lottery is an actionable claim as proposition of law. The observation cannot be said to be obiter dicta.
The inclusion of actionable claim in definition “goods” as given in Section 2(52) of Central Goods and Services Tax Act, 2017 is not contrary to the legal meaning of goods and is neither illegal nor unconstitutional”
B. Tax implications
2.7 Service charges for managing reward points: Reward Manager generally charges a fee separately for managing the reward points of the partner/s and the said fee is liable to tax as a service under GST law.
2.8 Reward points:
2.8.1 Reward points also confer the member the right to claim the benefit of reward points without any liability. Therefore, based on the judgment of Sunrise Associates, paper writer’s view is that loyalty points can also be considered as actionable claims. Thus, issuance of reward points to the customers by the partners would not tantamount to supply since actionable claim (other than lottery, betting and gambling) is neither supply of goods nor a supply of services in terms of Schedule III of the CGST Act, 2017. In the case of Loyalty Solutions and Research Private Limited Advance Ruling No. HAR/HAAR/R/2017/18/4 dated 11.04.2018, the Honorable AAR Haryana has mentioned that reward points earned by the end customers for purchase of products of “partners” to loyalty programme are indeed “actionable claim”.
2.8.2 The tax implication on expiry of reward points has been a contentious issue under the erstwhile service tax provisions and continues even under the GST law. Reward points earned by the customers on purchase of products of partners which expire after the validity period can no longer be used by the customers and the customer loses right over the reward points upon its expiry. The paper writer’s view is that reward points even after expiry of reward points it does not lose its characteristic as actionable claim since reward points are ‘conditional’ which would fall within Section 3 of the Transfer of Property Act, 1882 and as such would not be liable to tax under GST law as the same would be covered in Schedule III of the CGST Act, 2017. However, just because reward points upon expiry results in revenue in the hands of the Reward Manager, it does not partake the colour of supply in the paper writer’s view.
To take the discussions further, say if a gift voucher (where supply of goods or services is not identifiable at time of issuance of voucher) lapses and on account of lapsing of such gift voucher, the amount attributable to the expired voucher results in revenue, can it be said that the expired voucher is a supply under GST law. The paper writer’s view is that expiry of gift voucher (where supply of goods or services is not identifiable at time of issuance of voucher) resulting into revenue for the issuer of voucher does not tantamount to supply. Similarly, expiry of reward points in the paper writer’s view also does not tantamount to supply under GST law.
2.8.3 In the case of Loyalty Solutions and Research Private Limited Advance Ruling No. HAR/HAAR/R/2017/18/4 dated 11.04.2018, the Honorable AAR Haryana has held as under in respect of forfeiture of points
‘The value of points forfeited of the applicant on which money has been paid by the issuer of points on account of failure of the end customers to redeem the payback points within their validity period is to be treated as “supply” of services and consequently be chargeable to GST under the CGST, HGST or IGST Act as the case may be’
The said Ruling has been upheld Honorable AAAR Haryana.
2.8.4 The issue of taxation of forfeiture of reward points is contentious and we will have to keep a watch how the GST law will evolve on this matter.
2.9 Redemption of points by the customer:
The customers can redeem the reward points earned for purchase of products / or receive services. Upon redemption of points, the vendor sells the goods / provides the service as the case maybe. To discuss the tax implication in the hands of the vendor on redemption of points an illustration is provided below
A customer purchasing a product from a vendor costs ₹ 1,000/- excluding GST for our discussion. The customer has reward points accumulated worth ₹ 250/-; the customer can pay by redeeming points worth ₹ 250/- and pay balance amount of ₹ 750/- by cash to purchase the product of ₹1,000/. The question arises whether the vendor selling the product should levy GST on ₹ 1,000/- or ₹ 750/-. The vendor in the illustration is required to pay GST on ₹ 1,000/-. The consideration of ₹ 250/- for the points redeemed by the customer would be paid to the vendor by the Reward Manager. Though the consideration of ₹ 250/- is not paid by the customer, GST would be payable on ₹ 1,000/-, since in terms of Section 2 (31) (a) of the CGST Act, 2017 the consideration for supply of goods or services or both includes payment made by the recipient or by any other person.
An attempt has been made in this article to make a reader understand the issue involved in the loyalty program under the GST law. This article is written with a view to incite the thoughts of a reader who could have different views of interpretation. Disparity in views, would only result in better understanding of the underlying principles of law and lead to a healthy debate or discussion. The views written in this article is as on 11.12.2020
1. Article 366 of the Constitution of India or any other article of the Constitution does not contain the definition of either ‘Supply’ or ‘Works Contract’. However, by virtue of the powers granted by Article 246-A, the Parliament and the State Legislatures, both, have defined ‘Supply’ and ‘Works Contract’ in their respective enactments.
2. We should first understand the development of the concepts of ‘Sale’ and ‘Works Contract’ under the erstwhile repealed laws of Sales Tax and VAT, if we wish to properly understand the concept of Works Contract under the GST Law.
3. The concept of Works Contract was first explained by the Five Judges Bench of the Supreme Court of India in the case of The State of Madras v. The Gannon Dunkerley & Company (Madras) Limited (1958) 9 STC 353. In that case the Court had to deal with an amendment introduced in the Madras General Sales Tax Act (Madras IX of 1939) by the Amendment Act No. XXV of 1947. The Amending Act amended the definition of ‘Goods’ under Section 2(c) of the Act to include therein the material used in the construction, fitting out, improvement or repair of the immovable/ movable property. The definition of Sale under Section 2(h) was also enlarged so as to include the transfer of property in goods involved in the execution of ‘Works Contract.’ A new Clause No. 2 (i) was inserted and it defined the ‘Works Contract’ to mean any agreement for carrying out for cash, deferred payment or other valuable consideration the construction, fitting out, improvement or repair of any building, road, bridge or other immovable property or the fitting out, improvement or repair of any movable property.
4. The assessing officer in view of this amendment levied tax on the material used by the assessee in the building construction. The assessee challenged the amendments so introduced as ultra vires the constitutional mandate. It was their contention that Entry 48 in list II of the Seventh Schedule of the Government of India Act, 1935 which read as ‘Taxes on the Sale of Goods’ should be interpreted as it meant in the Sale of Goods Act, 1930. The Court considered the concept of Sale as the same had developed under the general law and held that the expression ‘Sale of Goods’ in Entry 48 is a nomen juris, it’s essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement in a building contract which is, one and indivisible and that is it’s norm, there is no sale of goods and it is not within the competence of the Provincial Legislature under Entry 48 to impose tax on the supply of materials used in such a contract treating it as a sale.
5. This judgment related to the works contract in immovable property. Thereafter, the concept of works contract qua the movable property was explained in many judgments of the apex court, the main being The State of Andhra Pradesh v. The Guntur Tobacco Limited (1965) 16 STC 240. The concept was explained in the following words:
‘The fact that in the execution of a contract for work some materials are used and property in the goods so used passes to the other party, the contractor undertaking to do the work will not necessarily be deemed on that account to sell the materials. A contract for work in the execution of which goods are used may take one of the three forms. The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for the price; it may be a contract for work in which the use of materials is accessory or incidental to the execution of work or it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances: if it is of the first, it is a composite contract for work and sale of goods; where it is of the second category, it is a contract for execution of work not involving sale of goods. —– The question in each case is one about the true agreement between the parties and the terms of the agreement must be deduced from a review of all the attendant circumstances. But one fundamental fact has to be borne in mind that from the mere passing of title to goods either as integral part of or independent of goods it cannot be inferred that the goods were agreed to be sold, and the price was liable to sales tax.’ (Underling supplied).
6. Thus, the Courts thereafter, till Forty Sixth amendment to the Constitution of India, evolved the tests known as ‘dominant nature test’ or ‘degree of intention’ or ‘overwhelming component test’ or ‘degree of labor and service test’ to find out the true agreement between the parties.
7. However, after the introduction of Clause (29A) in Article 366 which is the definition clause in the Constitution of India the above referred tests have become inapplicable. See Larsen & Toubro Limited v. The State of Karnataka (2014) 1 SCC 708. Every composite contract became divisible by the operation of law. See Kone Elevator (India)(P) Ltd; v. State of Tamil Nadu (2014) 7 SCC 1. Entire position has been summarized by the Supreme Court in the case of State of Karnataka v. Pro Lab (2015) 8 SCC 557 in the following words:
‘20. To sum up, it follows from the reading of the aforesaid judgement in Larsen and Toubro case that after insertion of clause (29 – A) in article 366, the works contract which was indivisible one by legal fiction, altered into a contract, which is permitted to be bifurcated into two: one for sale of goods and the other for services, thereby making goods component of the contract exigible to sales tax. Further, while going into this exercise of divisibility, dominant intention behind such a contract, namely, whether it was for ‘sale of goods’ or for services, is rendered otiose or immaterial. It follows, as a sequitur, that by virtue of clause (29 – A) of Article 366, the State Legislature is now empowered to segregate the goods part of the works contract and impose sales tax thereupon. It may be noted that Schedule VII List II Entry 54 to the Constitution of India empowers the State Legislature to enact a law taxing sale of goods. Sales Tax, being subject matter of the State List, the State Legislature has the competency to legislate over the subject.’
8. We have seen hereinabove how the concept of Works Contract got developed in the erstwhile Sales Tax/ VAT laws. Let us now see to what extent the same applies to the GST laws.
9. The definition of Works Contract under Section 2 (119) of the GST laws is substantially the same as it existed in the amended Madras General Sales Tax Act (and later on imported in the Central Sales Tax Act, 1956) which was considered by the Supreme Court of India in the case of Gannon Dunkerley & Company cited supra. However, while construing this definition two riders have to be born in mind :
• Firstly, it operates in the narrow field in the sense that it is restricted to immovable property. Clause (119) of Section 2 defines “works contract’ to mean a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair , maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract. Thus, the definition covers only the contracts pertaining to immovable property. For example, it applies to the repairs of building but does not apply to the repairs of Motor Car.
• Secondly, Clause (29A) of Article 366 of the Constitution of India has no application to the GST laws.
10. In Gannon Dunkerley, the State had derived the power to levy tax form Entry 48 in list II of Seventh Schedule to the Government of India Act,1985 which read as ‘Taxes on sale of goods’. Therefore, the Court held that those words sale of goods should be interpreted to mean sale of movables. As aforesaid, under the GST laws the power to enact laws is not derived under Entry No. 54 of list II of Schedule VII of the Constitution of India. It is derived from Article 246 A. Therefore, the observations of the Court qua sale of goods would not apply.
11. The Court in that case had observed that there can’t be an agreement for one kind of property and sale as regards another. These observations of the Court regarding the transfer of property in very goods will also not apply since the definition of Works Contract under the GST laws incorporates therein the transfer of property in goods whether in the form of goods or in some other form.
12. The Sale of Goods Act, 1930 does not apply to the goods supplied (in any form) under the Works Contract. However, the Indian Contract Act, 1872 does apply to such supply. There can be two different contracts for supply of goods and services, respectively. These two contracts can also be embodied in one document. There can be two separate obligations. For example, there can be an obligation for supply of Equipment or Machinery and in the same document there can be an obligation for commissioning of such Equipment or Machinery. However, if there exist cross fall breach clauses or the clauses such as handing over such Equipment or Machinery after successful commissioning, then the contracts even if those are separate, may turn out to be one turkey contract. In short, whether the contract is the Works Contract or not would depend how the contract is drafted.
13. For the application of the definition of Works Contract, it is necessary that the contracts enumerated therein should relate to immovable property. If the contract is otherwise or if the same results in movables, then it may be a composite supply but not the works contract. The Supreme Court of India in the case of Commissioner of Central Excise, Ahmedabad Vs. Solid and Engineering Works, (2010) 5 SCC 122 has explained in detail the law relating to Immovable property. In that case the asphalt drum/ hot mix plants were claimed to be immovable property. The observations of the Court in that case as regards immovable property are reproduced below for the benefit of the readers:
‘Para 21- the expression ‘movable property’ has been defined in Section 3 (36) of the General Clauses Act, 1897 as under:
“3. (36) ‘movable property’, shall mean property of every description, except immovable property.”
From the above it is manifest that the answer to the question whether the plants in question are movable property, would depend upon whether the same are immovable property. That is because anything that is not immovable property is by this very definition extracted above movable in nature.
Para 22-Section 3 of the Transfer of Property Act, 1882 does not spell out an exhaustive definition of the expression immovable property. It simply provides that unless there is something repugnant in the subject or context, immovable property under the Transfer of Property Act, 1882 does not include standing timber, growing crops or grass. Section 3 (26) of the General Clauses Act, 1897 similarly, does not provide an exhaustive definition of the said expression.
It reads :
“3. (26) immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth;”
Para 24-Section 3 (26) of the General Clauses Act includes within the definition of the term” immovable property” things attached to the earth or permanently fastened to anything attached to the earth. The term attached to the earth has not been defined in the General Clauses Act, 1897. Section 3 of the Transfer of Property Act, however gives the following meaning to the expression “attached to the earth”
(a) rooted in the earth, as in the case of trees and shrubs;
(b) imbedded in the earth, as in the case of walls or building; or
(c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached.
Para 25-it is evident from the above that the expression ‘attached to the earth’ has three distinct dimensions.… Attachment of the plant in question with the help of nuts and bolts to a foundation not more than one and half feet deep intended to provide stability to the working of the plant and preventing vibration/wobble free operation does not qualify for being described as attached to the earth under any one of the three clauses extracted above. That is because attachment of the plant to the foundation is not comparable or synonymous to trees and shrubs rooted in the earth. It is also not synonymous to imbedding in the earth of the plant as in the case of walls and buildings, for the obvious reason that a building imbedded in the earth is permanent and cannot be detached without demolition. Imbedding of a wall in the earth is also in no way comparable to attachment of a plant to a foundation meant only to provide stability to the plant especially because the attachment is not permanent and what is attached can easily be detached from the foundation. So also the attachment of the plant to the foundation at which it rests does not fall in the third category, for an attachment to fall in that category it must be for permanent beneficial enjoyment of that to which the plant is attached. It is nobody’s case that the attachment of the plant to the foundation is made for permanent beneficial enjoyment of either the foundation or the land in which the same is embedded.’
14. Further, the transfer of property should be involved in the execution of works contract. The author is of the view that if the transfer of property in goods is after the completion of works contract of immovable property then the definition of works contract is not applicable.
15. Section 9 is the charging Section. It empowers the levy and collection of tax on goods or services or both. The parliament was aware of the difficulties it would face in determining the nature of composite supply qua immovable property and prescribing the rates applicable thereto. Therefore, conveniently the same has been classified as Service in Schedule II.
16. The concept of works contracts qua movables which was enunciated by the apex court in Guntur Tobacco cited supra has been attempted to be given a go by in the GST laws. The works contract relating to movables would now either fall under the ‘Composite Supply’ or fall outside it.
17. However, definition of Composite Supply may not cover the work contracts in the following circumstances:
• Supplies of goods and services may not have been rendered by the single taxable person. For example, the goods are supplied by the Delhi Branch, however, the services relating thereto are supplied by the Gurgaon Branch;
• The bunch of goods and/or services are offered but those are unnaturally bundled. The Advance Ruling Authorities have interpreted the meaning of the term ‘naturally bundled’ to mean dependent on each other. The author is of the view that such restrictive meaning can’t be given to this term. It should be interpreted relevant to the facts of each case;
• The goods and services so offered may not be supplied in conjunction with each other. Conjunction means in combination. An act of con joining;
• All the different kinds of supplies in such Composite Supply may be equal and there may not be a Principal Supply.
18. I am aware that the discussion made hereinabove regarding the concept of works contract in GST laws is not exhaustive. It is a vast subject. The law is still developing. I have intentionally not discussed any particular Advance Ruling. Those Rulings are based on the facts involved in those cases and the law as is understood by the bureaucrats.
The Hon’ble Gujarat High Court under Rule 89(5) of the Central Goods and Services Tax Rules allowed the refund of unutilized Input Credit (ITC) on input services. Assessees having accumulated credit due to input services can now be accumulated, whereas the Hon’ble Madras High Court has taken a contrary view holding that Rule 89(5) is intra vires the Central Goods and Services Tax Act, 2017, consequently refund has been held to be allowable only to the extent of Input Credit (ITC) on input out of total unutilized Input Tax Credit.
It is important to understand the reasons based on which Hon’ble Madras High Court has not described to the views of Hon’ble Gujarat High Court especially when this issue is already under challenge before various other High Courts.
Findings of above tow High Courts – Gujarat and Madras High Court
A. Reasoning of Hon’ble Gujarat High Court
(i) Section 54(3) allows refund of “any unutilized input tax credit”. The term “Input tax credit” is defined in Section 2(63) of the said Act to mean the credit of input tax. The phrase “input tax” is defined in Section 2(62) of the said Act to mean the tax charged on any supply of goods or services or both made to any registered person.
(ii) Both “input” and “input service” are part of “input tax” and “input tax credit”.
(iii) Thus, as per Section 54(3) “any” unutilized Input Tax Credit (ITC) (which includes inputs and input services) could be claimed as refund. Rule 89(5) cannot restrict such refund to only inputs.
(iv) Explanation (a) to Rule 89(5) which defines the terms “Net NTC” is ultra vires. Section 54(3) to the extent it restricts refund only on inputs.
B. Reasoning of Hon’ble Madras High Court:
(i) Though Section 54(3) allows refund of “any unutilized input tax credit”, the clause (ii) of proviso to Section 54(3) uses the words “accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies. If the proviso is interpreted merely to be a condition to claim refund of entire unutilized Input Tax Credit, the words “accumulated on account of” would become redundant.
(ii) The proviso, in addition to prescribing a condition also performs the function of limiting the quantum of refund.
(iii) Rule 89(5) as amended is within the rule making power under Section 164 and in line with Section 54(3).
(iv) The unamended rule 89(5), wherein refund of both input and input services available exceeded the scope of Section 54(3).
(v) The decision of the Hon’ble Gujarat High Court did not consider the scope, function the impact of proviso to Section 54(3).
Further findings of Madras High Court
Hon’ble Madras High Court has laid down the general principles governing claim of refund by way of the following findings:
(i) Refund claim other than a claim for excessive taxes paid inadvertently on account of the erroneous interpretation of applicable law or the declaration of a provision as unconstitution is in the nature of a benefit or concession.
(ii) Right of refund is purely statutory and cannot be availed of except strictly in accordance with the prescribed conditions.
(iii) The Parliament has wide latitude for classification. Thus, the non-conferment of the right of refund to the unutilized input tax credit from the procurement of input services cannot be said to be violative of Article 14 of the Constitution of India.
Issue still open for examination:
It is important to note that input tax credit is fungible and there is no correlation between the availment and utilization of input tax credit. In such a scenario, the question arises as to whether it is possible to determine the amount of credit which has accumulated on account of rate of tax on inputs being higher than rate of tax on output supplies. Once the amount of Input Tax Credit gets credited to the Electronic Credit Ledger, it loses its identity as being out of inputs and inputs services and forms part of a large pool. Therefore, it may not be possible to compute the amount of unutilized input tax credit attributable to the inverted duty inputs. Thus, this aspect of proviso is still open for examination.
Lingering question still an open issue:
Two contrary decisions of two different Hon’ble High Courts, the most question therefore arises whether the assessee stands. Assessees in Gujarat would be bound to follow the decision of jurisdictional High Court. Similarly, assessee in Tamil Nadu would be bound to follow the decision of jurisdictional High Court of Tamilnadu.
The Hon’ble Bombay High Court of Bombay in the case of Thana Electricity Supply Ltd.  206 ITR 727 (Bom) has held that the decision of a High Court is not a binding precedent for another High Court or Tribunals outside its territorial jurisdiction. At the best such a decision may have persuasive value. Further, the larger bench of a Tribunal in case of Atma Steels (P) Ltd. vs. CCE 1984 (17) ELT 331 (Trib.) (LB) has decided that the Tribunal has the judicial freedom to consider the conflicting decisions of two different High Courts and adopt the one considered more appropriate to the facts of a given case.
High Court decisions are not binding on Tribunals in a different territorial jurisdiction:
The decisions of Hon’ble High Court of Gujarat are not binding on Tribunals and authorities in other territorial jurisdictions. They may after considering those decisions take an appropriate independent view on this issue.
When two decisions are contradictory, one may argue that the decision more favoruable be considered as the lighter burden prevails on the assessee.
In view of the two contrasting decisions, the issue shall attain finality only after the matter is decided by the Hon’ble Supreme Court, i.e., the Apex Court. This will take very long time till such time issue will remain lingering and the taxpayers would suffer. Government should come out with clarification so that the taxpayers are bound to follow and will put an end to litigation.
Virtual Currency (VC) or Crypto currency is an innovative concept which works as a medium of exchange for purchasing goods and services online. The working of cryptocurrency uses cryptography. For each cryptocurrency, a Distributed Ledger Technology (DLT) is used for keeping the database of all the transactions. This database is publicly used for storing information regarding financial transactions made through cryptocurrency. Technically, this list or the records are known as blocks which are connected with the help of cryptography and the same is known as Blockchain.
Blockchain is a system of recording information of transactions while ensuring Security, Transparency and Decentralization. This digital ledger of transaction is duplicated and distributed across the entire network of computer system on the blockchain.
WHERE DOES VIRTUAL CURRENCY COME FROM ?
Mining is an activity where an individual (called the “miner”) uses his computer prowess to crack computationally difficult puzzles. The process of cracking such puzzles which are integral to the blockchain technology, help in maintaining them. As a reward for this, the miner gets new bitcoins which is nothing but creation of a bitcoin or mining.
PURCHASING THEM FROM A CRYPTO EXCHANGE AGAINST REAL CURRENCY
Everyone cannot be a Crypto miner. Hence, you can consider buying same from crypto exchanges and store them in an online wallet in digital form. Unicorn, Bitxoxo, Zebpay, Coinbase etc., are some of the bitcoin exchanges presently in India. Such bitcoins would be purchased in consideration for real currency. It would be interesting to note that currently, the value of 1 bitcoin is approximately about INR 3,61,610.
RECEIVING VC IN CONSIDERATION OF SELLING GOODS AND SERVICES
Though this may not be a common phenomenon in India currently, there are few savvy businessmen who accept bitcoins (instead of real currency) on sale of goods or services, they deal in.
JOURNEY OF VIRTUAL CURRENCY IN INDIA – A BRIEF HISTORY
Year : 2012
Cryptocurrency made its subtle entry in India in the year 2012 when small scale Bitcoin transactions had already started taking place across the country.
Year : 2013
In the year, 2013 Bitcoin began gaining some popularity within the country. The vintage era pizza shop known as Kolonial (Worli, Mumbai) became the first restaurant service in India to accept payments in Bitcoin. Gradually, after 2013, the rise in use of this parallel currency began.
Finally, when demonetization took place in the year 2016, more investments in cryptocurrencies started so as to lower the uncertainties. People started buying large orders of Bitcoin and other cryptocurrencies, which they would sell at a later date. The other well-known types of cryptocurrency are Ether (ETH), Ripple (XRP) and Litecoin (LTC). Transactions pertaining to online shopping and investment in shares, started seeing the use of crypto currency in this year.
There have been some apprehensions surrounding the use of cryptocurrencies ever since the Bitcoin crash in 2017. The crash in 2017 happened when the government sent out a warning against the use of the same and ruled out the possibility of fraud termed as ‘Ponzi schemes’. The government still holds the same viewpoint and may continue until and unless the crypto market gets regulated. There is another reason as well for the crypto crash in 2017. Because of the impact of China’s warning against investing in cryptocurrencies, the crypto market was hit badly. The People’s Bank of China went against the investment in virtual currencies and alerted its people against the negative impacts like money laundering, suspicion of market manipulation and so on. This condition improved by the end of the year due to certain reasons like Japan declaring Bitcoin as a legal currency in April 2017. Furthermore, the U.S regulator, CFTC (Commodities Futures Trading Commission) gave nod to cryptocurrency trading.
Year: 2018 to 2020
01. In the year 2018, In the budget speech of 2018-19, the Hon’ble Finance Minister announced that the government does not consider cryptocurrencies as legal tender. He stated as follows
“112. Distributed ledger system or the blockchain technology allows the organisation of any chain of records or transactions without the need for intermediaries. The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system. The Government will explore use of blockchain technology proactively for ushering in digital economy.”
Consequently, The RBI banned crypto transactions after a string of frauds post demonetization were uncovered.
02. Since the first Bitcoin ATM came into being after the RBI’s ban on cryptocurrencies, the one installed in Bengaluru was immediately seized.
03. Subsequent to the ban, The Hon’ble Supreme Court of India in the case of Internet and Mobile Association of India vs. Reserve Bank of India in its Order dated 04.03.2020 struck down RBI’s curve on Cryptocurrency trade in India. This verdict gives a thumbs up to the Crypto exchanges as well as Crypto as an asset class, as indirectly they have not been found violating any other law of the land. So except for RBI Ruling it in a way tells us that everything else was legit and it upholds the right of the investors who have invested in Cryptos. The win in the court prompted an almost 450 percent surge in trading according to TechSci Research, reviving concerns as more Indians risked savings amid job losses and economic slowdown worsened by Covid Pandemic. Bitcoin marketplace Paxful reported 883 percent growth between January to May 2020 from around $ 2.2 million to $ 22.1 million. WazirX, a Mumbai based crypto exchanger grew 400% in March, 2020 and 270% in April, 2020 on month-on-month basis, according to TechSci Research.
INDIAN RULES AND REGULATIONS ABOUT VIRTUAL CURRENCY
The rules and regulations for cryptocurrencies are not established yet, and this lack of the regulatory setup deprives the investors of the safety from several kinds of risks, which includes Potential losses for the retail investors, owing to Volatility of crypto trade and misuse of technology, leading to funding of harmful or dangerous organizations indulging in terrorism, trafficking, etc.
This unregulated cryptocurrency market is unlike the financial institutions and the markets, where as of now third-party audits, financial reporting & disclosure and regulations of crypto trade is not possible.
Since the Supreme Court has lifted the ban on the use of cryptocurrencies, it is essential that the use of these currencies comes under the ambit of a regulatory framework. According to the Bloomberg report dated 20th March, 2020, India is already planning to regulate the cryptocurrencies.
THE FUTURE OF CRYPTOCURRENCY IN INDIA
With the Supreme Court’s order recently about lifting the ban imposed, there seems to be a bright future for the crypto market. This ruling supports the trading of cryptocurrencies like Bitcoin and Ethereum. Still, the full-fledged use of the crypto trading may take some time as RBI’s formal notification is awaited.
According to The New Indian Express, looking at the data with regard to the value of Bitcoin in the past one year, it rose from ₹ 2.7 lakh in March 2019 to ₹ 8.46 lakh in July 2019. But, in December 2019, it again fell to ₹ 4.69 lakh. Coming to the judgement of the Supreme Court recently, of lifting the ban RBI had imposed, the value of Bitcoin went up to ₹ 6.74 lakh in March 2020.
THE FUTURE LOOKS BRIGHT NOW
All the Digital currency or Financial Technology firms are working towards reviving their plans of expanding businesses in India due to the return of crypto. According to the Economic Times, Singapore-based crypto firm ZPX will consider ramping up operations. Nischal Shetty, the co-founder of the crypto exchange WazirX, added that investment in Indian markets will begin this year.
HOW ARE CRYPTO CURRENCIES TAXED IN INDIA?
The concept of Crypto Currency being quite new to the Indian market, apparently the government has not yet brought taxability of Crypto into the statute books. At the same time, the levy of tax on such Crypto cannot be ruled out because the Income Tax Act, 1961 has always sought to tax income received irrespective of the form in which it is received.
Therefore, the possibility of tax on Crypto can be looked at under the following situations:
1. When Crypto is generated through Mining
2. When Crypto held as an investment is subsequently sold.
3. When Crypto held as stock in trade is subsequently sold.
4. When Crypto is received as a consideration against sale of goods or services.
SCENARIO 1: MINING
Crypto Generated by mining are treated as self-generated capital assets. Subsequently sale of such crypto would, in the ordinary course, give rise to capital gains. However, one may note that the cost of acquisition of a crypto currency cannot be determined as it is a self-generated asset. Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets.
Therefore, the capital gains computation mechanism fails following the Supreme Court decision in the case of B.C. Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of bitcoins. This position would hold till such time the government thinks of coming up with an amendment to Section 55 of the Act.
Due to the above, currently, The Income Tax Authorities strive hard to Tax Crypto currency under the head – Income from Other Sources. Source of Acquisition of such Cryptos Need to be explained by the assessee in crystal clear manner to avoid adverse inference and action by the department.
There is another school of thought which seeks to tax the Crypto at the point of generation itself i.e. at the point when the crypto was mined at the Fair Market Value at that point in time. But the biggest challenge in such a scenario is tracking of the Mining Event. Hence urgent requirement in modification of law is required to envisage such situations and track and monitor them for taxation purpose.
SCENARIO 2: CRYPTO INVESTMENT BEING TRANSFERRED IN EXCHANGE FOR REAL CURRENCY
If cryptos being capital assets, have been held as an investment and are transferred in exchange for real currency, the appreciation in value would give rise to a long term capital gain or a short term capital gain depending on the period of holding of the bitcoin. Further, long term gains would be taxed at a flat rate of 20% while short term gains would be taxed at the individual slab rate. The cost of acquisition for arriving at long term capital gains will be determined after giving the benefit of indexation. Again, Department has in certain cases Tried to tax Such Transactions under the head Income from Other Sources and Denied the Benefit of Indexation as well as lower tax rate which would have been available if the said Investment were treated as a Long term capital Assets. Even in this case, Source of Acquisition of such Crypto Needs to be explained by the assessee in crystal clear manner to avoid adverse inference by the department.
SCENARIO 3: STOCK-IN-TRADE CRYPTOS BEING TRANSFERRED IN EXCHANGE FOR REAL CURRENCY
The income arising out of cryptos trading activity would give rise to income from business and accordingly, the profits arising out of such business would be subject to tax as per the individual slab rates. An alternate view also arises that If Cryptos are traded as a commodity deriving its value based on future Demand and Supply they should be taxed as speculation Income.
SCENARIO 4: CRYPTOS AS CONSIDERATION ON SALE OF GOODS AND SERVICES
Cryptos being received as consideration in such a scenario shall be treated on par with receipt of money. It would constitute income in the hands of the recipient. Further, since the recipient received this income out of a business or profession, he would be taxed, normally, under the head profits or gains from business or profession at the fair Market value of Such Crypto.
As regards the disclosure requirement of Cryptos in the income tax return forms, there continues to be a lack of clarity.
In my opinion, Virtual Currency (VC) / Cryptos will fast become part of the new normal with digitization of the market catching up fast in India. The Regulatory authorities should move quickly to lay down the groundwork for a clear Law on Taxation of Such Virtual Currency and guidelines Regulating transactions of such VCs and monitoring said Transactions. The Law Should clearly envisage each situation and seek to tax it in a Justl and reasonable manner. Furthermore, The government through the RBI should come up with its own currency as an alternative to other VCs in the market to enable a smooth transactions and build trust in the stakeholders.
The application of assets seized during the course of search and seizure action is governed by the provisions of Section 132B of the Income Tax Act’1961.
Before digging deeper into the matter, let us go through the provisions of Section 132B in the statute as on date which are reproduced herein under with relevant amendment notes:-
“Application of seized or requisitioned assets.
132B. (1) The assets seized under section 132 or requisitioned under section 132A may be dealt with in the following manner, namely:—
(i) the amount of any existing liability under this Act, the Wealth-tax Act, 1957 (27 of 1957), the Expenditure-tax Act, 1987 (35 of 1987), the Gift-tax Act, 1958 (18 of 1958) and the Interest-tax Act, 1974 (45 of 1974), and the amount of the liability determined on completion of the assessment 1[under section 153A and the assessment of the year relevant to the previous year in which search is initiated or requisition is made, or the amount of liability determined on completion of the assessment under Chapter XIV-B for the block period, as the case may be] (including any penalty levied or interest payable in connection with such assessment) and in respect of which such person is in default or is 2[deemed to be in default, or the amount of liability arising on an application made before the Settlement Commission under sub-section (1) of section 245C, may be recovered out of such assets] :
3[Provided that where the person concerned makes an application to the Assessing Officer within thirty days from the end of the month in which the asset was seized, for release of asset and the nature and source of acquisition of any such asset is explained] to the satisfaction of the Assessing Officer, the amount of any existing liability referred to in this clause may be recovered out of such asset and the remaining portion, if any, of the asset may be released, with the prior approval of the 4[Principal Chief Commissioner or] Chief Commissioner or 4[Principal Commissioner or] Commissioner, to the person from whose custody the assets were seized:
Provided further that such asset or any portion thereof as is referred to in the first proviso shall be released within a period of one hundred and twenty days from the date on which the last of the authorisations for search under section 132 or for requisition under section 132A , as the case may be, was executed;
(ii) if the assets consist solely of money, or partly of money and partly of other assets, the Assessing Officer may apply such money in the discharge of the liabilities referred to in clause (i) and the assessee shall be discharged of such liability to the extent of the money so applied;
(iii) the assets other than money may also be applied for the discharge of any such liability referred to in clause (i) as remains undischarged and for this purpose such assets shall be deemed to be under distraint as if such distraint was effected by the Assessing Officer or, as the case may be, the Tax Recovery Officer under authorisation from the 4[Principal Chief Commissioner or] Chief Commissioner or 4[Principal Commissioner or] Commissioner under sub-section (5) of section 226 and the Assessing Officer or, as the case may be, the Tax Recovery Officer may recover the amount of such liabilities by the sale of such assets and such sale shall be effected in the manner laid down in the Third Schedule.
(2) Nothing contained in sub-section (1) shall preclude the recovery of the amount of liabilities aforesaid by any other mode laid down in this Act.
(3) Any assets or proceeds thereof which remain after the liabilities referred to in clause (i) of sub-section (1) are discharged shall be forthwith made over or paid to the persons from whose custody the assets were seized.
(4) (a) The Central Government shall pay simple interest at the rate of 5[one-half per cent for every month or part of a month] on the amount by which the aggregate amount of money6 seized under section 132 or requisitioned under section 132A, as reduced by the amount of money6, if any, released under the first proviso to clause (i) of sub-section (1), and of the proceeds, if any, of the assets sold towards the discharge of the existing liability referred to in clause (i) of sub-section (1), exceeds the aggregate of the amount required to meet the liabilities referred to in clause (i) of sub-section (1) of this section.
(b) Such interest shall run from the date immediately following the expiry of the period of one hundred and twenty days from the date on which the last of the authorisations for search under section 132 or requisition under section 132A was executed to the date of completion of the assessment 7[under section 153A or] under Chapter XIV-B.
8[Explanation 1].—In this section,—
(i) “block period” shall have the meaning assigned to it in clause (a) of section 158B;
(ii) “execution of an authorisation for search or requisition” shall have the same meaning as assigned to it in Explanation 2 to section 158BE.]
9[Explanation 2.—For the removal of doubts, it is hereby declared that the “existing liability” does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII.]”
1. Substituted for “under Chapter XIV-B for the block period” by the Finance Act, 2003, w.e.f. 1-6-2003.
2. Substituted for “deemed to be in default, may be recovered out of such assets” by the Finance Act, 2015, w.e.f. 1-6-2015.
3. Substituted for “Provided that where the nature and source of acquisition of any such asset is explained” by the Finance Act, 2003, w.e.f. 1-6-2003.
4. Inserted by the Finance (No. 2) Act, 2014, w.r.e.f. 1-6-2013.
5. Substituted for “six per cent per annum” by the Finance Act, 2007, w.e.f. 1-4-2008. Earlier word “six” was substituted for “eight” by the Taxation Laws (Amendment) Act, 2003, w.e.f. 8-9-2003.
6. For the meaning of the term “money”, see Taxmann’s Direct Taxes Manual, Vol. 3.
7. Inserted by the Finance Act, 2003, w.e.f. 1-6-2003.
8. Explanation renumbered as Explanation 1 by the Finance Act, 2013, w.e.f. 1-6-2013.
9. Inserted by the Finance Act, 2013, w.e.f. 1-6-2013.
Therefore, Section 132B of the Income Tax Act 1961, provides for adjustment of seized assets/requisitioned assets against the amount of any existing liability under the Income Tax Act, 1961, the Wealth-tax Act, 1957, the Expenditure-tax Act, 1987, the Gift-tax Act, 1958 and the Interest-tax Act, 1974, and the amount of the liability determined on completion of the assessment under section 153A of the Act and the assessment of the year relevant to the previous year in which search is initiated or requisition is made, or the amount of liability determined on completion of the assessment under Chapter XIV- B for the block period, as the case may be (including any penalty levied or interest payable in connection with such assessment) and in respect of which such person is in default or is deemed to be in default, or the amount of liability arising on an application made before the Settlement Commission under sub-section (1) of section 245C of the Act.
It is interesting to note that Finance Act, 2013, w.e.f. 1-6-2013 inserted Explanation 2 which states that for the removal of doubts, it is hereby declared that the “existing liability” does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII. This insertion was intentionally brought in by the legislature to nullify the impact of various judgments wherein it was predominantly held that seized assets can be adjusted against the advance tax liability of the assessee which is also an existing liability. However, the Finance Act, 2013, w.e.f. 1-6-2013 has clearly put in place an embargo against such adjustment of seized asset against the advance tax liability of the assessee being advance tax payable not included as an existing liability.
Subsequently, pursuant to the above embargo, a new thread of litigation started so far as to whether the insertion is prospective or retrospective. Predominant view of the court was that the insertion is only prospective is nature. This opinion of the courts was also conceded by the department in view of CBDT circular 20 of 2017 dated 20-06-2017. The same is reproduced herein under:-
“SECTION 132B OF THE INCOME-TAX ACT, 1961 – SEARCH AND SEIZURE – RETAINED ASSETS, APPLICATION OF – CBDT’S CLARIFICATION ON APPLICABILITY OF EXPLANATION 2 TO SECTION 132B OF SAID ACT WITH REGARD TO ADJUSTMENT OF SEIZED/REQUISITIONED CASH AGAINST ADVANCE TAX LIABILITY
CIRCULAR NO.20/2017 [F.NO.279/MISC./140/2015/ITJ], DATED 12-6-2017
Section 132B of the Income-tax Act, 1961, provides for adjustment of seized assets/requisitioned assets against the amount of any existing liability under the Income-tax Act, 1961, (the Act), the Wealth-tax Act, 1957, the Expenditure-tax Act, 1987, the Gift-tax Act, 1958 and the Interest-tax Act, 1974, and the amount of the liability determined on completion of the assessment under section 153A of the Act and the assessment of the year relevant to the previous year in which search is initiated or requisition is made, or the amount of liability determined on completion of the assessment under Chapter XIV-B for the block period, as the case may be (including any penalty levied or interest payable in connection with such assessment) and in respect of which such person is in default or is deemed to be in default, or the amount of liability arising on an application made before the Settlement Commission under sub-section (1) of section 245C of the Act.
2. Dispute arose between the Department and the assessees with regard to adjustment of such seized /requisitioned cash against advance tax liability etc. Several Courts held that on an application made by the assessee, the seized money is to be adjusted against the advance tax liability of the assessee. Subsequently, Explanation 2 to Section 132B of the Act was inserted by the Finance Act, 2013 w.e.f. 01-06-2013, clarifying that “existing liability” does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII of the Act. However, the dispute continued on the issue as to whether the amendment was clarificatory in nature having retrospective applicability or it has only prospective applicability.
3. Several Courts have held that the insertion of Explanation 2 to section 132B of the Act, is prospective in nature and not applicable to cases prior to 01.06.2013. The SLPs filed by the Department against the judgment of the Hon’ble Punjab and Haryana High Court in the case of Cosmos Builders and Promoters Ltd.1. and the Hon’ble Allahabad High Court in the case of Sunil Chandra Gupta2, have been dismissed. Subsequently, the CBDT has also accepted the judgment of the Hon’ble Punjab & Haryana High Court in the case of Spaze Towers Pvt. Ltd.3 dated 17.11.2016, wherein it was held that the Explanation 2 to Section 132B of the Act is prospective in nature.
4. Accordingly, it has now been settled that insertion of Explanation 2 to Section 132B of the Act shall have a prospective application and so, appeals may not be filed by the Department on this issue for the cases prior to 01.06.2013 and those already filed may be withdrawn/ not pressed upon.
5. The above may be brought to the notice of all concerned.
1. Order dated 14-7-2015 in ITA No. 425 of 2014 (P & H)
2. Order dated 11-3-2013 in ITA No. 182 of 2014 (All.)
3. ITA No. 40 of 2015 ”
The issue of application of seized assets towards advance tax liability of the assessee has reached a level of finality after the insertion of Explanation 2 by Finance Act, 2013, w.e.f. 1-6-2013 which clearly states that seized assets cannot be adjusted against the advance tax liability as existing liability not to include advance tax payable by the assessee. Further CBDT circular 20 of 2017 dated 20-06-2017 conceded to the judicial view that the insertion is only prospective is nature.
Issue under consideration
Having said so, another important question arises as to what is the position of self assessment tax payable by the assessee.
Let us understand this issue by the help of an illustration. Let us assume that one Mr. X was searched on February’2019. During the course of search, undisclosed cash of ₹ 10 crores was found which he admitted u/s 132(4) of the act as his undisclosed income for the year of search i.e. F.Y. 2018-19 and specified and substantiated the manner of earning such income of ₹ 10 crores as prescribed u/s 271AAB of the act. The cash of ₹ 10 crores was seized by the department during the course of search. Mr. X has not yet filed the return of income for F.Y. 2018-19 u/s 139 till the date of search as the Financial Year 2018-19 has not as yet concluded as on the date of search and therefore is a specified previous year in view of explanation (b) to Section 271AAB of the act.
Now, the question arises, as to whether Mr. X can seek for an adjustment/application of cash seized towards the self assessment tax payable on the additional admitted undisclosed income of ₹ 10 crores in F.Y. 2018-19.
Analysis, Judicial Precedents and Conclusion
One rigid view can be that self assessment tax and advance tax operate on similar line and serve the single purpose of tax payment. Since advance tax payable is excluded from existing liability, similar should be the position of self assessment tax payable. In support of this view, one can also argue that unless and until a liability is determined by a order, a liability doesn’t assumes the character of “existing liability”.
However, in my considered view, denial of application of seized assets towards the self assessment tax liability of the assessee may be draconian to an assessee and may render the application of search and seizure scheme totally ineffective.
Let us consider the example again as mentioned above. If Mr. X is denied to adjust the seized asset towards the self assessment tax liability on additional admitted undisclosed income, let us understand what will happen.
1. The tax on such additional disclosure of ₹ 10 crores will be worked out in assessment for F.Y. 2018-19 with additional interest u/s 234B and 234C as Mr. X was denied the adjustment of assets seized towards the self assessment tax. In such a scenario a higher liability will arise in case of Mr. X owing to excessive interest.
2. The assessee may be liable to pay enhanced penalty u/s 271AAB of the act as the assessing officer shall make out a case that the assessee has not tax on or before the specified date as specified u/s 271AAB of the act.
In some cases, there might a possibility that the assessee is left out with no liquidity after the seizure of undisclosed cash. In such cases, whether it would not amount to injustice to an assessee so as to force such an assessee to arrange additional funds, over and above, for payment of taxes particularly when cash seized is already lying with the department.
Having said so, in my considered opinion, the Explanation 2 inserted w.e.f. 01-06-2013, makes it clear that the terms ‘existing liability’ does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII. But self assessment tax liability has not been excluded for the term existing liability and moreover self assessment tax is covered Chapter XIV. Hence it can be safely concluded that what is precluded in the statute is adjustment of seized cash towards advance tax liability only and not self assessment tax.
Even otherwise, provisions regarding payment of self assessment tax are contained in Chapter XIV u/s 140A while the provisions regarding payment of advance tax are contained in Part C of Chapter XVII. It is pertinent to mention here is that the requirement of payment of advance tax is before the end of a financial year on an estimated income relating to that year. On the other hand the self assessment tax is paid after the end of the financial year at the time of filing of return of income for on the basis of actual tax liability determined after taking into account the taxes already paid by the assessee. Therefore, self assessment tax is different in nature as compared to advance tax.
It is also important to mention here is that in a search case particularly when an assessee admits certain undisclosed income u/s 132(4) which have also been substantiated with equivalent seizure of assets and other supporting corroborative evidences and such statement u/s 132(4) has never been retracted, he is roped in with the tax liability on such additional income disclosed though it is only the payment which has to effected or reflected later on while filing the return of income. Therefore, under such circumstances, the self assessment tax payable by an assessee should definitely be treated as a liability existing and therefore should be admissible to be adjusted from the seized asset.
This view also gathers support from the judgement of Hon’ble ITAT, Kolkata delivered in case of ACIT v. Narendra N. Thacker  82 taxmann.com 64 (Kolkata – Trib.) wherein it was held that the action of the assessee in seeking to adjust the seized cash with self assessment tax payable along with the return of income is in order and in accordance with section 132B as admittedly self assessment tax payable becomes ‘existing liability’ on the part of the assessee to settle.
Pursuant to the search, a notice under section 153A was issued on the assessee and in response to the same, the assessee filed his return of income for the assessment year 2006-07 declaring certain taxable income. During the course of search, cash to the extent of ₹ 20,00,000 was found from a locker with the Canara Bank belonging to the assessee and the same was seized by the department. The assessment was completed under section 153A determining taxable income raising a demand. Originally the Assessing Officer gave credit for seized cash towards self assessment tax which was later rectified under section 154 by the Assessing Officer by revoking the credit for seized cash as according to the Assessing Officer, there was no existing liability, and consequentially charged interest under sections 234B and 234C.
Held that the subsequent action of the Assessing Officer in revoking the credit given for seized cash towards existing tax liability under proceedings under section 154 is illegal. The provisions of section 132B makes it clear that the terms ‘existing liability’ does not include advance tax payable in accordance with the provisions of Part C of Chapter XVII. But this amendment was brought in the statute by the Finance Act, 2013 with effect from 1-6-2013 only. Hence, it can be safely concluded that what is precluded in the statute is adjustment of seized cash towards advance tax liability only and not self assessment tax or regular tax and that too only with effect from 1-6-2013. The action of the assessee in seeking to adjust the seized cash with self assessment tax payable along with the return of income is in order and in accordance with section 132B as admittedly self assessment tax payable becomes ‘existing liability’ on the part of the assessee to settle.
On the similar lines, Hon’ble ITAT, Delhi in case of Sh. Sajjan Singh v. ACIT, New Delhi on 18 January, 2018 in ITA No. 6640/Del/2016 held that what is precluded in the statute is adjustment of seized cash towards advance tax liability only and not self assessment tax.
During the course of a Search and Seizure action, it is seen in practice that incriminating material in the form of documents, diaries and other evidences are found which sometime reflects undisclosed income of an assessee only for a particular limited period of time and not for all the assessment years to be covered u/s 153A of the Income Tax Act’1961. However, it is seen that the during the course of search assessments, the finding of such undisclosed for a particular period is extrapolated to the entire block period of assessments as envisaged u/s 153A of the Income Tax Act’1961.
To illustrate, let us assume that during the search and seizure action on an assessee into manufacturing activity, certain seized document suggest that there were undisclosed scrap sales for 2 months only. The vital question here is as to whether the Assessing Officer while framing assessments u/s 153A r.w.s. 143(3) for 7 years, can extrapolate the findings of undisclosed income which relate to only 2 months, to entire 7 years.
On a similar note, in the case of search or survey on real estate developers, there may be cases when evidences are found regarding receipt of unaccounted cash or ‘on money’ from the customers. Such evidences may be found relating to certain units out of total project or from some of the customers. Whether in such cases, can the Assessing Officer extrapolate receipt of ‘on money’ to the entire project with respect to all the customers on the pretext that in case ‘on money’ is being received in certain cases, it reflects that the actual market price is higher and therefore the presumption is that ‘on money’ has been received from all the customers.
First of all let us understand what an “extrapolation” is.
The Extrapolation technique is the method of backward and forward projection of income while assessing the income of whole of the assessment years covered u/s 153A of the Income Tax Act’1961 on the basis of the income found to have been earned by the assessee for a short period. Under this technique, if the assessee is found to have earned the income found as a result of search based on certain evidence for a period of, say, 10 days, the assessee can be said to have earned the same income for the whole of the year or may be for all the years covered under assessment.
Having said so, it is pertinent to mention at the outset that it is a matter of settled legal principle that the doctrine of res judicata does not apply to tax laws so far as under the Income Tax Act each year is an independent year and the assessment is to be made for each year independently based upon the evidences available for that particular year.
However it is seen in practice that the department invariably relies on the extrapolation technique during the course of the search assessments and thereby makes arbitrary additions in the years relating to which no incrimination material has been unearthed on the pretext of some incriminating material pertaining only to a limited period/year.
To support its stand, the department heavily relies on the decision of the Supreme Court in the case of CST v. H.M. Esufali H.M. Abdulali  90 ITR 271 to justify the income estimated by it. In the above case, which pertains to sales tax law, the dealer had disputed the determination of turnover arrived at by the STO. On the basis of incriminating documents found at the premises of the dealer during the course of survey, while arriving at the best judgment assessment and estimating the assessee’s turnover, the STO observed that there were dealings outside the assessee’s books of account amounting to ₹ 31,171.28 during the period of 19 days. The fact of suppressed sale was established and the STO estimated the assessee’s turnover for the whole of the year on that basis. The assessee conceded that those bills belonged to him and the entries therein related to his dealings. The Supreme Court observed that it was proved and admitted that the assessee was dealing outside the accounts during the period of 19 days and that his dealings outside the books during that period stood at the value of ₹ 31,171.28 and that from this, it was open to the STO to infer that the appellant was dealing outside his books of account. The Supreme Court upheld the estimate of turnover made by the STO for the whole year. However, while upholding the estimate, the Supreme Court had made a qualification to the effect that the estimate should not be arbitrary and should have a nexus with the facts which had been discovered. It was stated that the basis adopted should be relevant to the estimate made. It was also stated by the Court that the assessing authority, while making a best judgment assessment, no doubt, should arrive at its conclusion on a rational basis without any bias and should not be vindictive or capricious. The prime issue before the Supreme Court while deciding the matter was whether estimate made in the best judgment assessment based on proper facts and material could be challenged just because of the fact that a precise estimate has not been made. Where it is purely a question of making estimate, it has been held by Supreme Court, that the estimate of the Assessing Officer should not be disturbed, provided it is fair and bona fide.
The Hon’ble Punjab and Haryana High Court in case of Tara Singh v. ITO  81 taxmann.com 293 (Punjab & Haryana) held that the assessing officer in a best judgment assessment can resort to a bona fide estimate based on a rational basis.
The Hon’ble Mumbai ITAT in case of ACIT v. Giriraj Developers 82 taxmann.com 54 (Mumbai – Trib.)
During the course of survey upon the assessee-firm one document was found with regard to sale of a shop involving cash component. The assessee had sold 5 shops during the year and on the basis of document impounded during the course of survey it was held by the Assessing Officer that during the year under consideration the assessee had also received cash on sale of said shops and brought to tax the same as undisclosed income of the assessee.
The law clearly stipulated and put the burden upon the shoulders of the assessee to show that other shops did not have a cash component at all or the sales consideration of the remaining shops having identical location and other contribution was equivalent to their agreement value only. Nothing had been brought during the course of assessment proceedings in this regard by the assessee. The Assessing Officer also failed in bringing any further information or evidence on record in this regard. In the circumstances, the issue was restored back to the file of the Assessing Officer to give the assessee an opportunity to bring requisite evidences to show that market value of those shops were equivalent to the amount on which transactions had been done.
Having laid down the above judgments, it is pertinent to mention here is that the courts have predominantly held against the adoption of extrapolation technique primarily because the judgment of the apex court in case of CST v. H.M. Esufali H.M. Abdulali  90 ITR 271 was rendered in respect to a best judgment assessment and not in respect of assessment other than best judgement assessment. However in search assessments, the additions to the income of the assessee have to be based by the material unearthed during the course of search only. Having said so, in cases where the evidence so unearthed during the course of search and investigation suggests conclusively that any extrapolation is justified, of course there can be no bar against such an extrapolation.
In case of Dr. R.M.L. Mehrotra v. Asstt. CIT  68 ITD 288 (All.), the Tribunal also distinguished the decision of the Supreme Court relied on by the department in H.M. Esufali H.M. Abdulali’s case (supra) on the ground that the said case before the Supreme Court pertained best judgment assessment under sales tax law. The Supreme Court held that it was not possible for the officer to find out precisely the turnover suppressed and he could only embark on estimating the suppressed turnover on the basis of the material before him, in which some guess work was inevitable. The Tribunal observed that in contradistinction to the decision relied upon by department, the present case was in respect of search and seizure. Further, no additional evidence was found in respect of the suppressed income. No assets, despite the extreme step of search which amounted to a serious invasion on the rights of the subjects and which was perhaps the last weapon in the arsenal of the department, were found, which could be attributed to any such patently hypothetical receipts. Thus, it can be said that the decision of the Supreme Court in the case of H.M. Esufali H.M. Abdulali (supra) cannot be applied to block assessment, more particularly to justify application of the ‘extrapolation technique’ discussed above.
In the aforesaid case, the assessee with other members of his family and certain other doctors was running a pathology clinic. They were subjected to search where certain assets, account books and other documents were found and seized. During the course of search a notebook was also found which contained details of receipts from patients for a period of approximately two months. The aforesaid receipts were classified by the assessee in three groups, i.e., (i) advance received in full, (ii) part payment received in advance and balance received later and (iii) part payment received in advance and balance not received. In the last category, part payments aggregating to ₹ 85,820 were received while payments aggregating to ₹ 72,915 were never received, as patients did not turn up to collect the report. The Assessing Officer took the percentage of suppression of receipts, (which amounted to ₹ 1,65,405) to the total accounted receipts at 19 per cent and applying the same to the total receipts, worked out the suppressed income at ₹ 6,16,004 for the whole year. Before the Tribunal, the assessee objected to such multiplication formula applied by the Assessing Officer. The Tribunal upheld the view of the assessee and observed that department was not correct in adopting and applying the multiplication formulae.
It was observed by the Tribunal that as regards the multiplication formula, in first place, it was a search case in which a search party is supposed and expected to find out all the incriminating documents, and materials as also undisclosed assets. A search assessment much less a block assessment, therefore, stands on different footing than a normal assessment or an assessment based on the best judgment of the Assessing Officer. In the instant case, the assessee was searched and during this search no other diary or other record comparable to the notebook was found out by the search party for the remaining period which normally would have been, had it been maintained. It was further observed that though such records pertaining to the remaining period could have been destroyed by the assessee, if the assessee had actually made a fortune of similar receipts in respect of the remaining part of the year, they must be reflected by certain movable or immovable assets found during the course of search. In the present case, no such assets were ever found by the department which could be attributed to any of such hypothetical receipts. The Tribunal held that under these circumstances though estimation could be made, such estimation should not be vague and illogical which leads to absurdity. It was held that the department was not correct in applying the multiplication formula adopted by the Assessing Officer.
J. Gopal Rao v. State of Orissa  88 STC 488 (Ori.) – The Orissa High Court also had an occasion to deal with an issue relating to backward projection of materials under the Sales Tax Act. In this case, the assessee was carrying on business in grocery articles. In this case, the liability of the petitioner was determined by estimating daily sales at ₹ 75, ₹ 80 and ₹ 100 for the assessment years 1978-79, 1979-80 and 1980-81, respectively. The petitioner objected to the said liability and approached the Orissa High Court. The Court observed that the department did not have any evidence/materials except the admission of the petitioner that daily sales ranged from ₹ 100 to ₹ 125 in February, 1982. It was observed that for making presumption for the assessment years 1978-79 to 1980-81, some material is required. It cannot be stated by way of generalisation that the result of survey in one year can be treated as the basis of assessment in another year. If the Assessing Officer wants to do so, some material has to be brought on record to justify just projection. Mere presumption cannot be made the basis for any assessment. What is relevant is the nature of evidence/material discovered. If the materials discovered relate to any particular assessment year, those cannot be utilised for making assessment of other years unless the relevance to other years is established by the officer. This view was taken by the concerned Court in the decisions of Allahabad High Court in Babu Ram Vishnoi v. CST  29 STC 392 and Hukam Chand Mahendra Kumar v. CST  29 STC 394 and relied upon in the present case.
In CIT v. Dr. M.K.E. Memon  248 ITR 310/ 112 Taxman 96 (Bom.) – The assessee was a doctor by profession having main source of income by way of medical examination fees. A search and seizure action under section 132 of the Act was conducted in 1996 wherein the department found the registration books reflecting the information of fees received from patients. It was noticed that the fees recorded in the registration books exceeded the fees reflected in the cash book. The assessee made a disclosure of certain amount on account of undisclosed income from profession. The Assessing Officer estimated the undisclosed income of the assessee by applying the post-1993 weighted average rate of income for the period between 1983 and 1993. The case of the assessee before the Tribunal was that during the earlier period of his practice, the work relating to medical screening of candidates was less as compared to the post-1993 period. To justify the addition made by the Assessing Officer, the department heavily relied upon the decision of the Supreme Court in the case of H.M. Esufali H.M. Abdulali (supra). The Bombay High Court in this regard observed that the said judgment of the Supreme Court must be seen in the context of the facts of each case. It was pointed out that the assessee was a professional. It was highly improbable that the rate of fees charged by a professional in 1983 would remain static for the entire block of ten years. The assessee further pointed out that during the Gulf war, the number of persons who went to the Gulf countries stood substantially reduced. Further, it was observed that under section 158BB, read with section 158BC of the Act, what is assessed is the undisclosed income of the block period and not the total income or loss of the previous year. Therefore, the scope of regular assessment is quite different from the scope of assessment under Chapter XIV-B. The Bombay High Court explained the difference between the regular assessment and block assessment for the reason that the said distinction is not kept in mind by the Assessing Officer in a large number of cases. It was further held that the scope of regular assessment is to ensure that the assessee has not understated the income or has not computed excessive loss or not underpaid the tax in any manner whereas what is assessed under Chapter XIV-B is only the undisclosed income for the block period and not the income or loss of the previous year which is only done in the normal regular assessment. Thus, the above decision of the Bombay High Court clearly brings out the difference between regular assessment and block assessment with greater emphasis on the scope of determination of income by the Assessing Officer in both the assessments. It is necessary to note that the special leave petition filed by department before the Supreme Court has also been dismissed. Thus, the ratio of the decision in the above case rendered by the jurisdictional High Court would certainly set at rest the anomaly as regards the scope of estimation of income by the Assessing Officer in the block assessment.
The Bombay High Court also had an opportunity to deal with a similar issue in CIT v. C.J. Shah & Co.  246 ITR 671/ 117 Taxman 577. In the said case also the High Court observed that in matters of estimation, some amount of latitude may be required to be shown to the Assessing Officer, particularly when relevant documents are not forthcoming. However, it does not mean that the Assessing Officer can arrive at any figure without any basis by adopting an arbitrary method of calculation.
In Dr. S. Surendranath Reddy v. Asstt. CIT  72 ITD 205 (Hyd.) – A similar issue was dealt with also by the Hyderabad Bench of the Tribunal in the above case. While dealing with this issue, the Tribunal observed that for the purpose of income-tax assessment, the unit of the assessment is one year covered by the previous year relevant to assessment year. It is specific and independent unit of assessment for the purpose of income-tax. This principle of unit of assessment year is not diluted in block assessment also. In case of block assessments, the unit of computation is the larger period of previous years covered by the corresponding assessment years falling within the block period. The undisclosed income computed unit wise, on the basis of evidence collected as a result of search for each unit, is aggregated up to a period of ten years, for the purpose of block assessment. Thus, as per the Tribunal’s view, the additional feature of block assessment is only the facility of aggregation of income of block period, but the basic unit of assessment remains unchanged. Accordingly, it was held by the Tribunal that the undisclosed income has to be invariably determined with reference to each previous year included in the block period on the basis of matching evidence collected as a result of search for that particular year. When there is no material at all in relation to a particular previous year falling within the block period, no undisclosed income could be determined for that year in light of the matching principle. Hence, any addition made by the Assessing Officer in earlier years without any specific materials showing undisclosed income for that particular year, must be deleted.
In Samrat Beer Bar v. Asstt. CIT  75 ITD 19/251 ITR (AT) 1 (Pune) (TM) – During the course of search action at the premises of the assessee-firm, a diary was found and it contained certain entries of sale of liquor for the period from September 28, 1988 to August 25, 1989. On the basis of the said entries in the diary, the Assessing Officer concluded that the assessee would have continued the same pattern of suppressing sales even for the broken period for respective financial years. He, therefore, worked out his suppression of sales for all the years under the block period. In appeal, there was a difference of opinion between the Judicial Member and the Accountant Member on the issue as to whether under Chapter XIV-B, the Assessing Officer is empowered to estimate the suppression of sales for a larger period. On a reference made to the Third Member, it was held that no evidence had been found in the course of search showing suppression of sales in respect of any period other than September 28, 1988 to August 25, 1989. There was also no other indication to suggest that the seized diary was not exhaustive of unaccounted transactions relating to sale of liquor. The Bench also referred to the decision of the Gujarat High Court in the case of N.R. Paper & Board Ltd. v. Dy. CIT  234 ITR 733/ 101 Taxman 525 wherein it was held that the evidence found and the material available should be the basis for computing the undisclosed income. It was observed by the Bench that to hold that even without any evidence or material the Assessing Officer would be empowered to estimate the income was fraught with dangerous consequences. The Assessing Officer cannot presume that there must be some other material or evidence which has not been found during the search and the assessee must have derived the undisclosed income therefrom. As already discussed above, it has been observed by the Tribunal in the above decision that in the very scheme of a block assessment, any guess work or estimate is excluded from the reckoning, if there is evidence in the seized material itself, to show that the seized material is not the complete record of unaccounted transactions or where there are indications to show that the assessee had certain other record of unaccounted transactions which was not unearthed. In the case before the Tribunal, there was no indication anywhere in the seized record to show that even in respect of other periods, the assessee was maintaining such a diary which, for some reasons or the other was not found during the course of search. Hence, the addition made by the Assessing Officer was not sustainable.
It was held by Hon’ble High Court of Bombay in the case of CIT v. C. J. Shah & Co. (246 ITR 671) that estimation of undisclosed profit made by AO for the entire block period on the basis of seized loose papers which i ndicated undisclosed sales for three months was not justified.
In the case of Dolphin Builders Pvt. Ltd (356 ITR 420), Hon’ble High Court of Madhya Pradesh held that making addition merely on the basis of seized documents without cogent evidence that excess amount mentioned in seized document was actually passed on to the assessee was not sustainable where books of account of assessee were duly audited.
In the case of D. N. Kamani HUF (70 ITD 77) Hon’ble ITAT Patna Bench held that documents regarding receipt of on-money by assesses having been found in respect of sale of flats to one party, addition could not be made in respect of all the parties to whom assessee sold flats merely on the basis of presumption.
In the case of Fort Projects Pvt. Ltd (63 DTR 145) Hon’ble ITAT Kolkata Bench held that AO was not justified in extrapolating few notings in a seized diary to balance flats in three projects given that no incriminating evidence pertaining thereto was found in the course of search.
On the similar note, the Hon’ble ITAT Jaipur Bench in case of ACIT v. M.M. Sales Agencies (2006) 153 Taxman 13 held that the income cannot be estimated for the period for which no information is available on the basis of the seized record.
A similar issue was also dealt with by the Pune Bench of the Tribunal in Hotel Vrindavan v. Asstt. CIT  67 TTJ (Pune) 139 wherein it was held that the undisclosed income under Chapter XIV-B cannot be based on the presumption that if the assessee suppressed sales and expenses in later years, he must have done so in the earlier years also.
Similarly, the Hon’ble ITAT Ahmedabad Bench in case of DCIT v. Royal Marwar Tobacco Product Pvt. Ltd (2009) 29 SOT 53 held that the Assessing Officer was not justified in making estimated additions for earlier assessment years based on the documents seized for A.Y. 2004-05.
The High Court of Delhi in case of Commissioner of Income-tax, Delhi v. H.C. Chandna (P.) Ltd.  163 TAXMAN 654 (DELHI) upheld the finding of the tribunal that no income can be estimated on the basis of the evidences found for a particular period.
Similarly the Delhi High Court in case of CIT v. Anand Kumar Deepak Kumar  294 ITR 497 (Delhi) held as under:-
“7. The Commissioner as well as the Tribunal found that in fact there was no discrepancy noted in the books of account in the post search period. The assumption of the Assessing Officer may have perhaps been valid if the Assessing Officer had found some discrepancy in the books of account or if the search had been conducted after the accounting year and the books of account had brought out some discrepancies. But in the present case, the books of account were examined by the Assessing Officer in the middle of the accounting year. Merely because there were some discrepancies in the pre-search period, it cannot lead to any presumption that the discrepancies would have continued in the post-search period particularly when there was factually no evidence at all as found by both the authorities below to support such a view.”
On the similar lines recently the Hon’ble ITAT Ahmedabad in case of Savaliya Developers Pvt. Ltd v. DCIT in ITA No. 401/Ahd/2014 & 3188/Ahd/2015 vide order 30.06.2019 held as under in context to extrapolation:-
“Besides, estimated cash receipts on-money of sale of all flats merely on the basis of statement of two purchasers without any tangible corroboration clearly falls in the realm of conjunctures and surmises. It is obvious that driven by misplaced suspicion, the AO has presumed the presence of on-money in respect of each of the residential flat sold. The action of the AO is a mere ipse dixit which is not objectively justifiable by some inculpatory evidence. It is only elementary to say that estimation of unaccounted money cannot be made only on the basis of contemplation. The order of the AO in making additions of ₹ 3.28 Crores is thus clearly arbitrary and unsustainable in law. It is well settled that the Revenue authorities cannot base its findings on suspicions, conjunctures or surmises nor should it act on no evidence at all or on vague considerations partly on evidence and partly on suspicion, conjunctures or surmises. The Revenue could not demonstrate any material except unsupported statements of two persons. Such unverified statements without an y proof towards its assertions are not a good evidence and do not raise any estoppel against the assessee. Therefore, the addition made by the AO is in the realm of speculation without any basis whatsoever. Hence, we decline to interfere with the order of the CIT(A) in so far as appeal of the Revenue is concerned.”
Therefore, in view of the aforementioned discussion and judicial precedents mentioned above, in my considered opinion, the application of the extrapolation technique shall depend on facts and circumstances of each case and there can be no universal law on this issue. For instance there may be cases where a seized document unearthed the undisclosed income on a subject matter for a limited period only but thereafter accepted voluntarily in totality for several years by the assessee in his statement recorded u/s 132(4) of the Income Tax Act’1961 which have never been retracted. Such a case definitely warrants application of extrapolation technique. To the contrary, in a case where mere seized document highlights undisclosed income for a limited period, application of extrapolation technique shall not be warranted for the entire assessment period as envisaged u/s 153A of the Income Tax Act’1961.