With a view to implement Circular No. 21/2015 dated 10th December 2015 issued by the CBDT (which states that even pending appeals of the department with a monetary tax effect of Rs. 10,00,000 or less should be withdrawn/ not pressed), Hon’ble Justice (Retd) Dev Darshan Sud, President of the ITAT, has issued a notice dated 14.12.2015 requesting all representatives to furnish a list of departmental appeals where the tax effect does not exceed the monetary limit of Rs. 10 lakhs and which are covered by the said Circular. It is stated that all possible efforts should be made to furnish such information containing requisite details, viz., appeal number, date of filing, name of the assessee etc. in the office of the Assistant Registrar (Judicial) as expeditiously as possible, preferably by 18th December, 2015.

Date : 14th December, 2015

NOTICE

All representatives are requested to furnish a list of departmental appeals where the tax effect does not exceed the monetary limit of Rs. 10 lakhs and are covered by Circular No. 21/2015 dated 10th December, 2015 issued by CBDT. All possible efforts be made to furnish such information containing requisite details, viz., appeal number, date of filing, name of the assessee etc. in the office of the Assistant Registrar (Judicial) as expeditiously as possible, preferably by 18th December, 2015.

The aforesaid is being solicited as a measure to implement the Circular No. 21/2015 dated 10th December, 2015 issued by CBDT.

Sd/-
[Justice (Retd) Dev Darshan Sud]
President

14-12-2015

Figures of institution, Disposal and Pendency of Appeals as on 1-12-2015.

BENCH

Number of Sanctioned Benches

Numbers of Members

Institution for the month of Nov-2015

Disposal for the month of Nov-2015

Total Pendency (Including SMC Cases)

SMC Pendency

Mumbai

12

20

344

844

22781

134

Pune

2

4

132

113

4866

57

Nagpur

1

2

28

72

941

18

Raipur

1

1

28

1199

12

Panji

1

2

43

22

154

3

Delhi

9

17

478

482

20692

222

Agra

1

0

10

23

888

39

Bilaspur

Lucknow

2

2

48

60

685

9

Allahabad

1

2

28

56

1581

235

Jabalpur

1

4

0

847

70

Kolkatta

5

7

105

350

6787

210

Patna

1

1

0

823

31

Cuttack

1

1

35

57

1072

74

Guwahati

1

2

0

551

44

Ranchi (Jharkhand) Circuit Bench

1

25

67

318

23

Chennai

4

6

118

271

3438

85

Bangalore

3

4

128

173

4169

61

Cochin

1

2

44

64

661

0

Ahemdabad

4

7

296

225

13643

496

Indore

1

2

18

139

2159

149

Rajkot

1

69

53

2144

90

Hyderabad

2

4

97

157

2584

68

Vishakha Patnam

1

2

31

49

1825

32

Chandigarh

2

4

51

141

2055

46

Amritsar

1

2

78

39

1544

182

Jaipur

2

4

52

256

2302

419

Jodhpur

1

23

0

703

24

Total

63

95

2290

3741

101412

2833

Members 126

Vacancy 31126

1. ATTEMPT TO EVADE TAX

U/s. 51(7), penalty was levied for an attempt to evade tax. Vehicle loaded with M. S. Bar was detained, statement of driver recorded who stated that goods were loaded from the premises of A. B. Steel mills, but no such invoice was produced to authenticate the transaction. Appellant’s explanation on the other hand appears to be manipulated one as he did not produce any such invoice on 1-3-2007 or thereafter till the case remain pending with the detaining officer up to 9-3-2007. Detailed enquiry proved that the bill was not in existence and it was clearly an attempt to evade tax on the goods loaded. Therefore, penalty levied u/s. 51(7) was confirmed by the Tribunal.

Sahib Steel Industries v. State of Punjab (2015) 52 PHT 104 (PVT)

2. BRANCH TRANSFER OF GOODS COVERED BY SECTION 6A OF THE CST ACT

At the outset the PVAT Tribunal clarified the distinction of branch transfer and transfer of goods by way of consignment. Where branch transfer is the transfer to one’s own company having same constitution and whereas consignment transfer is transfer to the consignee agent, who sells goods of appellant in terms of the written agreement and deposits the tax. Thereafter, the Tribunal analysed the facts of the appellant’s case dealing in pharmaceutical products. Firm had two TIN Nos. one at Zirakpur and other at Jalandhar, both in the State of Punjab. For transferring goods at Jalandhar office, claim of stock transfer to branch at Jalandhar was denied. Dept. contended that on sale of goods at Jalandhar office, VAT was liable to be collected and paid. That was how, the question arose for the consideration of the Tribunal. The Tribunal on perusal of the record and hearing of arguments noticed that sufficient evidence was missing in the case. There was no evidence on the record that whether TIN No. was issued twice to the Company as per rules as well as the consent of the Govt., there was also nothing to show that both offices were working under the same constitution. The appellant had not placed on record, the account books in order to show that ITC had not been claimed twice. In the circumstances, the appeal was accepted but remitted back to the Assessing Officer with a direction to allow the appellant to lead evidence in his favour and thereafter decide the matter on merit.

Cachet Pharmaceuticals Pvt. Ltd., Zirakpur v. State of Punjab (2015) 52 PHT 407 (PVT)

3. COMMUNICATION OF ORDER

PVAT Act, Section 64 regarding communication of Order. There was a delay of 124 days in filing appeal seeking condonation of delay. Appellant was subjected to levy of penalty u/s .51(7)(c) for attempt to evade tax. On fact, it was noticed that the delay in filing the appeal against the Order pronounced in front of the Counsel of the appellant. Therefore, argument that no intimation of dismissal of appeal was granted was not sustainable on the ground that negligence caused by the appellant appears to be the result of carelessness and casual approach of the Counsel. Hence, the delay was not condoned and consequently the appeal was dismissed.

Connel Bros. Co. Pvt. Ltd. v. State of Punjab (2015) 52 PHT 374 (PVT)

4. CONDONATION OF DELAY

In the present case, after analysing facts and circumstances, the Appellate Tribunal came to the conclusion that the appellant was making misuse of process of law thereby seeking condonation of delay of four years in filing the appeals. Therefore, outright the Tribunal dismissed the appeal.

Satpal Surinder Kumar, Ludhiana v. State of Punjab (2015) 52 PHT 392 (PVT)

5. DECLARATION IN FORMS ‘C’ AND ‘F’

A. Because of technical defects in Forms ‘C’ and ‘F’, Tribunal allowed the appellant to produce the same before the Assessing Authority and remanded the case for its fresh assessment.

Aggarwal Agencies v. State of Punjab (2015) 52 PHT 420 (PVT)

B. Non-submission of ‘C’ forms, assessment was made charging higher rate of tax and reasonable opportunity of being heard was not given to the appellant. In the circumstances, the High Court held that the Order passed by the Assessing Authority was in violation of principle of natural justice and the assessment order was quashed and matter remitted back for fresh assessment on the point.

ABB India Ltd. v. Dy. C.C.T. Bengaluru 2015-16 (20) KCTJ 103 (KHC)

6. EXEMPTION TO NEW UNITS

Rate of CST reduced to 1% up to 31-3-2009 by Himachal State Govt. by Notification dt. 31-12-2004. Subsequently, Govt. decided to extend this period up to 31-3-2013 or till he Central Govt. reduced the rate of CST to 1% whichever was earlier. The Finance Dept. of the State Govt. approved this proposal, and the note prepared on 19-5-2009 in this regard was approved by Council of Ministers also. On that basis a notification was issued by Industries Dept. on 29-5-2009 to amend earlier Notification dt. 30-12-2004 issued in terms of Industrial Policy, 2004. However, the Excise and Taxation Dept. of the State Govt. issued Notification u/s. 8(5)(b) of CST Act, on 18-6-2009 and use the words “…..with immediate effect”. Due to use of these words, the benefit of reduced rate of 1% was not allowed to the appellant-assessee for the period 1-4-2009 to 17-6-2009. The matter was carried to Supreme Court which held that the State Govt. could not speak in two voices. Once the Cabinet took a policy decision to extend CST concessions up to 31-3-2013, and Notification dt. 29-5-2009 was issued by the Dept. of Industries, thereafter, the Excise and Taxation Dept. could not have taken a different stand. What was given by the right hand, could not be taken back by the left hand. The Govt. shall speak only in one voice. The State Govt. is bound by the policy decision taken by the Council of Ministers duly notified by the Dept. of Industries. Accordingly, the appeal was allowed.

Lloyd Electric & Engg. Ltd. v. State of Himachal Pradesh and Ors. (2015) 27 STJ 787 (SC)

7. HDFC BANK QUA HYPOTHECATED GOODS HELD AS A DEALER

U/s. 2(15) of the Tamil Nadu VAT Act, 2006, where a bank registered as a dealer and which holds hypothecated vehicles in its name, would be a dealer within the definition of the expression u/s. 2(15) of the Act, merely because the bank seizes and repossesses the hypothecated vehicles and brought it to sale through public action, was a dealer? Held, in the affirmative, by referring to the Apex Court Judgment in Federal Bank Ltd. v. State of Kerala (2007) 6 VST 736 (SC) and ICICI Bank Ltd. v. Prakash Kaur (2007) 2 SCC 711 (SC).

HDFC Bank Ltd., Chennai-4 v. State of Tamil Nadu (2015-16) 21 TNCTJ 143 (Mad.)

1. We had carried out works in the State of Andhra Pradesh for our client. The nature of work was to set up the project on turnkey basis. The contract was a lump sum contract but the values of the individual equipments have been specified.

The contract indicates that the prices are inclusive of customs duty (including countervailing duty, special duty, if any), procurement and other charges, excise duty, sales tax, vat, entry tax etc.,

Following clause appears in the contract:

“Owner will issue C forms to contractor, on all inter-State sales in India of materials for permanent incorporation in the works by the contractor to the owner to enable the contractor to avail concessional rate of sales tax.

2. The Company had furnished returns in the State of Andhra Pradesh since the work of supply and erection was executed for client. In the returns, the Company claimed non-liability under Section 6(2) of the Central Sales Tax Act, 1956 (hereinafter referred to as “the CST Act”) in respect of various equipments procured from vendors outside the State for fulfilment of the contract. To perform the contract, vendors were identified outside AP. The said vendors after manufacturing the different equipment against the orders placed by the Company dispatched the goods direct to the site. The consignment so moved from out of the State was accompanied by the vendor’s Commercial-cum-Excise Invoice and Packing slip-cum-Delivery Challan.

3. The Company staked its claim for exemption under Section 6(2) of the CST Act and the issue is now being adjudicated by the tax authorities in the State of Andhra Pradesh. The VAT authorities have issued show-cause notices for different periods and have indicated the sales u/s. 6(2) would be disallowed in view of the judgment of the A. P. High Court in the case of M.s/ Larsen & Toubro Ltd., in W.P. No. 22960 of 2007 dated 14-9-2013. In this background, the following questions are posed:

(a) Can the transaction in question take place under Section 6(2) of the Central Sales Tax Act in the execution of a works contract for any client?

(b) If the answer to question (a) is in the negative, whether the State of Andhra Pradesh can impose tax under the VAT Act/CST Act in respect of the goods sold to that client?

Opinion

4. At the outset kindly see the observations of the Andhra Pradesh High Court in the case of L & T reported in 132 STC 418.

“Held allowing the appeals, (i) that the entire project work had to be completed by the appellant which included installation of machinery and supervision up to certain point of time, that is to say, the contract was composite in nature. By merely supplying material to the contractee, the responsibility arising out of the agreement did not cease, the appellant had to install the machinery and watch the performance for a period of 15 months. Certain goods were manufactured by the appellant on the specification of the contractee at the factory near Bombay and the representative of the contractee inspected the goods and after being satisfied with the quality of goods clearance was given. 90 per cent of the value of goods was already received by the appellant from the contractee. The movement of goods was occasioned pursuant to the contract. The documents on record would go to show that these goods had reached the destination as per the terms of the contract. Central sales tax was paid to the State of Maharashtra under the scheme of the Act. Having regard to the fact that there were two facets of the contract, supply of goods and installation of machinery with the labour of the appellant, the contract was a divisible contract. The transaction was an inter-State transaction and not an intra-State transaction and the turnover arising on this transaction could not be brought under the net of the Andhra Pradesh Act.”

5. The legal position vis-à-vis, the taxing power to impose tax under the General Sales Tax law in legislation under Serial No. 54 of the State List has been declared by the Hon’ble Supreme Court. It is needless to quote extensively from 88 STC 204 (SC)(Gannon Dunkerley & Co., v. State of Rajasthan). The Constitution Bench held that, even a composite works contract involving deemed sale of goods in the State where the work is performed will be subject to the Constitutional bar and disabled from imposing sales tax on deemed sales taking place in the course of inter-State trade and commerce or in the course of import. The argument of the States that in a works contract, there can never be any sale in the course of inter-State trade or commerce or an outside sale was dealt and negatived vide Pages 222 to 225 of the report.

Thus, it is clear that before taxing any transaction of sale, whether involved in works contract or otherwise, the State has to avoid taxing a transaction taking place in the course of inter-State trade and commerce as well as a sale taking place outside the State. Gannon Drunkenly itself, vide Page 229, held that “ legislative power of the State to impose tax on such transfers under Entry 54 of the State List will have to be exercised, keeping in view the provisions contained in Sections 3,4 and 5 of the Central Sales Tax Act “.

6. Since one of the issues raised for the opinion is the permissibility of a sale and purchase of the goods independent of the incorporation of the goods in the works (e.g. sale under Section 6(2) of the CST Act), the same is discussed here. Sale is a consensual transaction. In a sale, property passes when intended to pass. There can be little doubt that in a sale effected in the legal sense, the property could pass when intended to pass, i.e. at the time and place of choice of the parties. See Section 19 of the Sale of Goods Act, 1930. It will be a misconception to believe that in a works contract, property should only pass by accretion and only when the materials are incorporated in the works and never earlier. This aspect has been dealt by the Constitution Bench in 73 STC 370 (Builders Association of India v. Union of India). Vide Pages 400-401, the Hon’ble Supreme Court observed, “ordinarily, unless there is a contract to the contrary in the case of a works contract, property in the goods used in the construction of a building, passes to the owner of the land on which the building is constructed, when the goods or materials used are incorporated in the building.” See the following observations of the Apex Court in the case of Larsen & Toubro Ltd., v. State of Karnataka, 65 VST 1 (On page 42) “Ordinarily, in the case of works contract the property in the goods used in the construction of the building passes to the owner of the land on which the building is constructed when the goods and materials used are incorporated in the building. But there may be contract to the contrary or a statute may provide otherwise. Therefore, it cannot be said to be an absolute proposition in law that the ownership of the goods must pass by way of accretion or exertion to the owner of the immovable property to which they are affixed or upon which the building is built”. Thus, as between a contractor and an employer, there can be a stipulation to pass title or risk even prior to the incorporation in the work.

In view of the above, it may not be improper to accept a portion or arrangement by which parties agree for sale of the goods against delivery of goods at site, or against documents at the time of delivery to the common carrier for transportation to the site. Therefore, even in a composite contract, a special clause or term may provide for property passing before incorporation in the work.

7. I find that as and when the materials are dispatched by the vendors, the goods being accompanied by document of title in favour of the customer and invoice-cum-delivery challan, the carriers are authorised to effect delivery of the documents themselves with goods taken into their account by appropriate entry in their inward register. Customer does not wait for completion of the work by the querist for either taking the goods into their records or for taking the benefit or credit of the duty paid on the goods received at site for availment of CENVAT credit. It is already seen that the goods are dispatched for direct transmission to site and the documents accompany the goods. The sequence of events considered that customer/employer have consented to issue “C” Forms, because of the inter-State movement of materials, though subsequently employed in the contract. As already seen, “sale” is a consensual transaction and as defined under Section 2(g) of the CST Act, sale involves transfer of property for money consideration.

8. Having regard to the authority of the Supreme Court, it is difficult to assert that there can never be a sale of the goods prior to incorporation in the work. A sale can take place, if agreed to between the parties even prior to incorporation. In the case on hand, goods have been required to be consigned favouring employer as consignee, the consignment note is handed over to the carrier for transmission and presentation to the employer who, receives the consignment and takes them into their books. These facts point out that the goods having been bought and sold (transferring property) during transit of the goods. The goods have been dispatched as directed by employer under Clauses of Special Conditions of Contract. The position is made clear in 84 STC 317 (Guj.) (State of Gujarat v. Haridas Mulji Thakker), later followed and applied by the Division Bench of the Madras High Court in 2010(35) VST 262 (State of Tamil Nadu v. Hydels Engineers (P) Limited)… Haridas Mulji (84 STC 317 (Guj.) observed as under vide Page 322:

“When the Transport receipt /railway receipts were taken out by the supplier at Bombay in the name of the purchaser, the property in goods stood transferred in favour of the purchaser. This second sale took place during the movement of the goods from one State to another. Therefore, as far as second sale is concerned, provisions of Section 3(b) of the Central Sales Tax Act, 1956 are attracted.”

9. The Andhra Pradesh Value Added Tax Act, 2005, by Section 5, excludes sale or purchase taking place in the course of inter-State trade or commerce or outside the State requiring application of the principles in Section 3 and 4 of the CST Act. In the case on hand, there has been movement of the goods from one State to the other. The goods have been sold and dispatched by vendors outside the State complying with the instructions issued by customer with regards to the making out of the documents including consignment note. Orders have been placed by the Company on out-of-the State vendors to execute the contract of customer in AP. Accordingly, goods were moved from one State to the other solely for the purpose of delivery to customer/employer and for employment in the contract. The sale and the movement from State to State are integral. This is a case of cause and effect. It is already seen that the transmission of the goods from one State to other and the sale during the movement of goods (prior to the termination) has been accompanied by the presentation of the consignment note bringing the transaction within Section 6(2) of the CST Act. It is also seen that even if the goods were meant to be employed in the execution of contract, there is no antithesis if parties provide for passing of property in the goods prior to incorporation of the goods in the work. Parties can agree for such a position. Therefore, it may be incorrect to assert that there can never be a sale under Section 6(2) of the CST Act of the goods involved in the execution of a work contract.

10. Assuming that in the case on hand, there was no sale falling under Section 6(2) of the CST Act, the further question is whether the sale is taxable in the State of Andhra Pradesh. Answer is provided by Section 5 of the AP Value Added Tax Act, which expressly excludes sales outside the State, applying Section 4 of the CST Act. Section 4 reads as under:

“4. When is a sale or purchase of goods said to take place outside a State –

(1) Subject to the provisions contained in Section 3, when a sale or purchase of goods is determined in accordance with sub-Section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States.

(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State –

(a) In the case of specific or ascertained goods, at the time the contract of sale is made; and

(b) In the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation”

In the case on hand, the goods were neither specific nor ascertained at the time of the contract between employer and the querist. They were future goods to be later found and dispatched. But at the time when the goods were later appropriated by the vendors as per the contract with the querist, the goods were outside the State. The matter calls for application of Section 4(2)(b) of the CST Act. “Appropriation” is the act of setting apart of the goods, as the goods to which the contract of sale attaches. Thus, when the vendors were required to take out the lorry receipt indicating employer as “Consignee” and simultaneously prepared delivery challans-cum-packing slip, the goods were set apart for customer. The goods were at that point of time outside the State of AP. There was further delivery of the goods to the common carrier who by reason of the consignee being CUSTOMER/CONTRACTEE, transported the goods as agent of CUSTOMER/EMPLOYER. This aspect is stressed in the judgment in Haridas Mulji Thakkar, which vide page 321, referred Supreme Court judgment in Bayyana Bhimayya & Sukhdevi Rathi v. Government of A.P. 12 STC 147, to state:

“When the Bombay supplier transported the goods to Surat and Ahmedabad and took out receipts in the name of the purchaser/purchasers at Surat and Ahmadabad, there was constructive delivery in favour of the opponent-assessees. At the same time, there was constructive delivery of the same goods in favour of the purchasers. However, the second delivery by the Bombay supplier could not be as principal to principal. While effecting second delivery, it has to be inferred in the facts of the case that the Bombay supplier acted as agent of opponent-assessee. Such inference has been drawn by the Tribunal and in our opinion rightly. The moment the goods are transported and the transport receipt or the railway receipts are taken in the name of the purchasers at Ahmedabad and Surat, the property in the goods stood transferred in favour of the purchasers”.

11. There was an unconditional appropriation of the goods in favour of EMPLOYER/CONTRACTEE when consignment notes were taken under the instructions of the querist in favour of CONTRACTEE. There was direct transmission to the consignee. This brings in the principle set out in Section 23 of the Sales of Goods Act, 1930. The cumulative circumstances indicate that the first appropriation of goods in favour of CONTRACTEE was outside the State and not in the State of AP. It should be kept in mind that Section 4 of the CST Act does not require an appropriation, which is accompanied by transfer of property. Section 4 sets out the principle as to the situs irrespective of the time and place of passing of property. Section 4 looks to the place of the first appropriation. In this, view, it appears that in such a situation, it may be inappropriate to invoke the provisions of the AP VALUE ADDED TAX ACT, 2005.

12. Equally, the State of AP may be incompetent to invoke the provisions of CST Act to impose any tax. The answer is provided by Section 9 of the CST Act. A sale occasioning the movement is taxable in the movement State. Sale during the movement of the goods alone are entrusted for levy and collection to the State of delivery. i.e. by the proviso to Section 9(1), which is the State from which the registered dealer obtained or as the case may be, could have obtained the form prescribed for the purpose of sub-section (iv) of Section 8 in connection with the purchase of such goods. In the case on hand, the State of Andhra Pradesh can impose central sales tax only if that State concedes to the position that the sale in question was during the movement of the goods and only if the Company had not complied with Section 6(2) of the CST Act. In other words, the State of Andhra Pradesh comes into picture only if the sale of the Company is during the movement of the goods effected by transfer of document and only if the conditions of Section 6(2) are not complied. In the case on hand, the conditions of Section 6(2) were complied by the production of the certificate in Form – E1 and the declaration in Form “C”. If the certificates and Forms had not been produced, then the State of AP can rely upon the proviso to Section 9(1) and impose central sales tax, provided the sale is during the movement of goods. If the State takes the position that the sale itself does not fall under Section 6(2) of the CST Act, nevertheless the State may be non-jurisdictional State either to impose Central Sales tax or AP VAT.

It may be noted that in 2009 (19) VST 239 (A & G Projects and Technologies Ltd., vs. State of Karnataka), the claim of the assessee in the State of Karnataka, though negatived under Section 6(2) of the CST Act, was nevertheless held not attracted tax in the State of Karnataka at all.

However, there is another approach to the sales u/s. 6 (2) qua inter-State works contract. The Parliament always intended to encourage inter-State sale and therefore exempted the second sale in the course of such trade. See the Objects and Reasons appended to the Act No. 31 of 1958 which introduced sub-section (2) in Section 6 of the CST Act, 1956. The definition of sale u/s. 2(g) was amended on 11.05.2002 by Finance Act No. 20 of 2002 so as to include therein the then non sale transactions like works contract. Section 6(2) contemplates the sale by Transfer of Documents of Title to the goods. If the word “sale” used in Section 6(2) is read in the defined way then the second sale under that section is impossible (as has been held in the L&T judgment by A.P. High Court vide their judgment dated 14-9-2015) since under the works contract transfer of property is always on incorporation. However, considering the legislative intention, the term sale used in that sub-section need not be interpreted in a defined manner but should be understood with reference to context. Section 2 of the CST Act, 1956 which is the definition section commences with the words, ‘Unless the context requires-‘ indicating that the words defined thereunder should be read in the defined manner only if the context permits. I am therefore of the considered view that in impugned case the sale u/s. 6(2) should be allowed. Kindly see the following judgments:

M/s. Vanguard Fire and General Insurance Co. Ltd., Madras v. M/s. Fraser and Ross, (AIR 1960 SC 971).

“ ………….. The main basis of this contention is the definition of the word “insurer” in S.2(9) of the Act. It is pointed out that definition begins with the words “insurer means” and is therefore exhaustive. It may be accepted that generally the word “Insurer” has been defined for the purposes of the Act to mean a person or body corporate etc., which is actually carrying on the business of insurance, i.e., the business of effecting contracts of insurance of whatever kind they might be. But S.2 begins with the words “In this Act, unless there is anything repugnant in the subject or context” and then come the various definition clauses of which (9) is one. It is well-settled that all statutory definitions or abbreviations must be read subject to the qualification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive in as much as the word defined is said to mean a certain thing, it is possible for the word to leave a somewhat different meaning in different sections of the Act depending upon the subject or the context. That is why all definitions in statutes generally begin with the qualifying words similar to the words used in the present case, namely, unless there is anything repugnant in the subject or context. Therefore in finding out the meaning of the word “Insurer” in various sections of the Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context to which the word has been used and that will be giving effect to the opening sentence in the definition section namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances. Therefore, though ordinarily the word “Insurer” as used in the Act would mean a person or body corporate actually carrying on the business of insurance, it may be that in certain sections the word may have carrying on the business of insurance, it may be that in certain sections the word may have a somewhat different meaning”.

(Emphasis *supplied)

The principle emerging from the aforestated observations of the Supreme Court has subsequently been followed by the Gujarat High Court in the case of M/s. Union Medical Agency v. The State of Gujarat (31 STC 396) in which the term ‘Registered Dealer’ in the context of a dealer registered under the Central Act and liable to pay tax under Section 4 of the Bombay Act, (as was then applicable to Gujarat State) had fallen for interpretation. Under Section 8(ii) of the Bombay Act, a deduction from the taxable turnover was admissible in respect of ‘the resale of goods purchased by the assessee on or after the appointed day from a Registered Dealer’. In other words, the resales were allowable only if the corresponding purchases were effected from a Registered Dealer.

The term ‘Registered Dealer’ was defined in Section 2(25) of the Bombay Act as to mean ‘a dealer registered under Section 22 of the Bombay Act’. The question posed before the Gujarat High Court in a reference under Section 61 of the Bombay Act was as regards whether a dealer liable to pay tax under Section 4 of the Bombay Act but not registered under Section 22 of the Bombay Act could be considered as a ‘Registered Dealer’ and whether the sales of goods purchased from such a dealer would qualify for the deduction of ‘Resale’ under Section 8(ii) of the Bombay Act, even though such a dealer is not a ‘Registered Dealer’ strictly as per the defined meaning of that term in Section 2(25) of the Bombay Act. Having regard to the context, collocation and the object of the expression ‘Registered Dealer’ in Section 8(ii) and having regard to the policy of the Bombay Act, the High Court held that the said expression would also include a dealer who is not registered under Section 22 of the Bombay Act but who is registered under the Central Act and on whom special liability to pay tax has been imposed under Section 4 of the Bombay Act. In view thereof, the sales of goods purchased from such a dealer would qualify for the deduction as a ‘Resale’ under Section 8(ii). While holding this view, the High Court drew support from the above-mentioned Supreme Court judgment and observed that –

“It is thus clear that though ordinarily the meaning to be given to an expression found in a provision of a statute is one that is given in the definition clause, there may be cases in which that meaning may have to be departed from having regard to the context, collocation and the object of the statute and it may become necessary to interpret the word differently so as to give effect to the enacting provisions of the Act”.

(Emphasis *supplied)

Same principle has been followed in another judgment of the Gujarat High Court in the case of the State of Gujarat v. Wood Polymer Ltd. (50 STC 229). As in the present case, in that case also, the term ‘sale’ under the Bombay Act and that too in the context of set-off provision fell for interpretation and the question there was as regards whether that expression should be given a meaning wider than the defined meaning, having regard to the context, collocation and the object of the set-off rule. From that point of view, the said case is more or less a direct Authority on the issue presently disputed. In that case, the assessee was a certified manufacturer who had established a new industry and therefore he was entitled to set-off of the tax paid by him on his purchases of raw materials, processing materials, machinery etc., provided they were used in manufacture of goods for sale. Thus a ‘sale’ of the manufactured goods was a condition for admissibility of the set-off of the tax paid on the purchases of inputs. The term ‘Sale’ was defined in Section 2(28) to mean a sale of goods made within the State for cash or deferred payment or other valuable consideration’ (Emphasis*supplied). In the said Section 2(28), the term ‘sale’ within the State’ was explained to include a sale determined to be inside the State in accordance with the principles formulated in Section 4(2) of the Central Act. Obviously, an inter-State stock-transfer of manufactured goods is not a sale as per the aforesaid defined meaning of the term ‘sale’. The assessee M/s. Wood Polymer Ltd. had sales-depots in various other States, where he transferred his manufactured goods and sold them in those respective States. Holding that the assessee had not ‘sold’ the manufactured goods to the extent of the inter-State stock-transfers, the Departmental Authorities disallowed the set-off proportionately. This disallowance having been confirmed in the First Appeal was further contested before the Tribunal. It was argued before the Tribunal that having regard to the object of the set-off scheme and the legislative intent of granting concessional incentives to the new industries, the term ‘sale’ in the set-off rule should not have been construed as per the defined meaning, but it should be interpreted to mean as ‘sale’ in its generic sense. The Tribunal traced the legislative history of the set-off scheme, considered the entire context of the Scheme and accepted the assessee’s contention that the term ‘sale’ in the set-off rule should not be restricted only to ‘a sale within the State.’ The Tribunal thus gave a wider meaning to the term ‘sale’ in the set-off rule and thus held the assessee as entitled to the set-off even in the context of the inter-State stock transfer of the manufactured goods. At the instance of the department, the matter was referred to the High Court for its decision under Section 61. Before the High Court, it was inter alia argued on behalf of the Revenue that the term ‘sale’ in the set-off rule cannot be construed de hors its legislative dictionary which defines it to mean ‘a sale of goods made within the State’ and that the Tribunal committed a substantial error of law in upholding the Assessee’s set-off claim in disregard to the said dictionary meaning by trying to spell out the repugnancy by travelling outside the particular set-off provision. The High Court however rejected this argument by drawing support from the aforesaid Supreme Court judgment in the case of M/s. Vanguard Fire and General Insurance Co. Ltd (supra), as also another Apex Court Judgment in the case of M/s. Dhandhania Kedia and Co. v. Commissioner of Income Tax, (1959) 35 ITR 400: AIR 1959 SC 219. The High Court observed that the Court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances. So observing, the High Court went through in depth the entire taxation Scheme embodied in the Bombay Act as also the basic object of the set-off provision, and held the assessee as legally entitled to set-off in the context of inter-State stock-transfers of his manufactured goods, by making the following observations –

“We are therefore of the opinion that there is sufficient justification and warrant for departing from the dictionary meaning of the term ‘sale’ and that having regard to the object, purpose, structure and tenor of the rule, it is not necessary that in order to earn set-off, the sale of the manufactured goods by a certified manufacturer should be within the State only. The Tribunal was therefore justified in reaching the conclusion that the assessee was entitled to set-off the whole amount of tax paid on the purchases of raw materials.”

(Emphasis * supplied)

In support of the proposition that the definition in a section of a statute should not be always subject to a wooden interpretation, but sometimes it ought to be liberally understood in accordance with the context in which the defined word appears, you may kindly see few other judicial pronouncements. In the Madras High Court case of M/s. Indian Express (Madurai) Ltd. (29STC 88) and in the Supreme Court case of M/s. Printers (Mysore) Ltd (1994) 93 STC 95, newspapers were held to be ‘Goods” for the purposes of Sections 7 and 8 of the Central Act, even though Newspapers have been specifically excluded from the definition of ‘Goods’ in Section 2(d) of the Central Act. It was held that the exclusion of ‘Newspapers’ from the scope of the expression ‘Goods’ in the definition clause was actuated by the object of exempting the sale of newspapers from the levy of Central Sales Tax. That would however not mean that the newspapers have ceased to be ‘Goods’ for the purposes of Sections 7 and 8 of the Central Act and therefore a purchase of newsprint for the purpose of use in the manufacture of newspapers would be permissible to be made at a concessional tax-rate against a declaration in Form C. Thus considering the object of the amendment whereby newspapers were excluded from ‘Goods’, the expression was given a wider meaning and was not confined to the defined meaning. While doing so, the Madras High Court observed that –

“No doubt, it is fundamental that the definition clause in a statute is by itself a small dictionary of its own in which it endeavours to define certain words and terms, sometimes arbitrarily. But, invariably it takes the precaution of using a non obstante clause such as unless there is anything repugnant in the subject or context” in the beginning of the section. Thus, if in the course of the statute some words are used in different parts thereof, then it would not be improper to interpret those words differently if the context so requires.”

(Emphasis* supplied)

13. I submit my answers to the questions raised as under :

(i) I do not subscribed to the views expressed by the A.P. High Court in the case of L&T vide their lordships judgment dated 14-9-2015.

(ii) There can be a sale and purchase during the movement of the goods even in the execution of a works contract if parties to the contract so provide or agree.

(iii) The querist is found to have effected transfer of property even prior to incorporation of the goods in the contract when instructions were issued to the vendors to take out goods consignment note favouring contractee as consignee, and when the goods were so consigned and document handed over to contractee to be received and goods accounted by contractee in their books and when contractee availed CENVAT credit.

(iv) Situs of the sale, in any view, is outside the State of AP, since the goods were appropriated to the contract outside the State in terms of Section 4(2)(b) of the CST Act.

Vinayak Patkar
Advocate

Eligibility to issue C form

Q. Whether C form can be issued for the purchase of DEPB during 2009-10, 2010-11 and 2011-12 when the same are not resold and utilised for the import of raw materials used in manufacturing of goods for sale.

Facts: During the above years DEPB was taxable goods taxed @ 4% under entry 39 of Schedule C appended to MVAT Act, 2002.

There are several Companies who had purchased DEPB in market in those years and issued C form and paid 2% CST and did not resell the DEPB, but utilised the same for the import of goods viz.raw materials, which have been used by them in the manufacture of other goods and manufactured goods are sold and VAT on the same is paid. Most of the assessments are over accepting the transactions.

Now the investigation wing has issued notice in Form 215 alleging that there is misuse of C form and according to them DEPB is not directly used in manufacture and to that extent there is misuse of C form and proposal is to levy penalty u/s. 10(d) of the CST Act, 1956.

Apart from the submissions made by the Companies submitting that the DEPB is goods and the same is forming a part of purchase price paid for the import of raw materials and hence there is no contravention.

Besides this we relied on very old judgments of Apex Court viz. J. K. Spg. & Weaving Mills Ltd. reported in (1965)- of STC P-563 (SC) and also submitted a copy of recent Delhi High Court judgments (copy of the same submitted).

The learned Counsel is requested to opine “whether our contention raised are in order and what are chances in Appeal”.

Reply

The issue involved is required to be seen in the light of provisions of CST Act, 1956. As per section 8(3), C form can be used for various purposes as mentioned in the said section. Section 8(3) is reproduced below for ready reference.

“8. Rates of tax on sales in the course of inter-State trade or commerce.

(3) The goods referred to in clause (b) of sub-section (1) –

(a) Omitted

(b) Are goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for resale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing of goods for sale or [1] [in telecommunications network or] in mining or in generation or distribution of electricity or any other form of power.

(c) Are containers or other materials specified in the certificate of registration of the registered dealer purchasing the goods, being containers or materials intended for being used for the packing of goods for sale;

(d) Are containers or other materials used for the packing of any goods or classes of goods specified in the certificate of registration referred to in clause (b) or for the packing of any containers or other materials specified in the certificate of registration referred to in clause (c)….”

It can be seen that the C form can be issued for various purposes mentioned above like use in manufacturing of goods for sale, resale, packing or generation of electricity and mining etc.

In the given facts, your purchases against C form of DEPB can be eligible if it can be satisfied that they are used in manufacturing of goods for sale.

DEPB is separate commodity. It is used for clearing of imported goods. The said item can be said to be consumed in clearing of such import. Clearing of imported goods cannot be considered as manufacturing by itself. It is true that the raw materials so cleared are used for manufacturing of goods for sale. However, this is subsequent event, post consumption of DEPB. Therefore it will be difficult to sustain that it is used in manufacturing.

You have referred to judgment in case of J. K. Spg. & Weaving Mills Ltd. reported in (1965) – of STC P-563 (SC). The said judgment speaks about eligibility of using C form, if the purchases to be made are integrally connected with the manufacturing process. Since, DEPB are not directly in manufacturing process, it will be difficult to maintain that they are integrally connected with the manufacturing process.

You have cited judgment in case of Jagriti Plastics Ltd. v. Commissioner of Trade & Taxes (2015) 62 Taxamann.com 62 (Delhi). In this case the facts are different. The issue was regarding ITC under Local VAT Act. Short facts narrated in the article attached with the query are reproduced below to understand the facts and legal position.

“3.3) As per the provisions of Sec. 9 of the DVAT Act, input tax credit is available in respect of the turnover of purchases occurring during the tax period where the purchase arises in the course of his activities as a dealer and the goods are to be used by him directly or indirectly for the purpose of making the sales liable to tax. Thus only condition for claiming input tax credit is whether the goods purchased are “used” by the dealer directly or indirectly for making the sale. Hon. High Court held that there could be no doubt that the price of the goods imported has an element of customs duty paid on such goods. The component of customs duty is reduced to the extent of the usage by the appellant of the DEPB scrips. The reduced customs duty is embedded in the resale price of the imported goods. Thus, the use of the DEPB scrips is for the purpose of the appellant selling the imported goods. ‘Usage’ in this context has to be seen as the use that affects the price of the goods although it may not be used tangible in the goods themselves. There is no warrant to limit the understanding of the word ‘use’ to an actual direct tangible or physical use in the imported goods. Thus words ‘used’ cannot be construed to mean only actual use. If any goods like DEPB have an impact on price of finished product, it is also regarded as ‘use’ for the purpose of claiming input tax credit.”

It can be seen that even indirect use was also eligible for ITC and it appears that based on said provision the issue is resolved by Hon. Delhi High Court in favour of dealer. However, this analogy may not apply under CST Act, in light of above restricted eligibility as per Section 8(3) of CST Act.

Reference can also be made to the earlier judgments under BST era. Under BST Act, purchase tax was attracted on DEPB and dealers tired to claim set-off on the same under Rule 42I as used in manufacturing. Tribunal has negatived the said contention saying that DEPB cannot be considered as used in manufacturing. Readily reference can be made to the judgment in case of Impex Diamonds (S.A.1361 of 1998 dated 18-11-2000).

Therefore, there appears to be remote possibility to contend that the DEPB used for import of goods is used in manufacturing.

However, the issue is about levy of penalty. In our opinion, this is not a case for penalty. Penalty can be attracted, if there is conscious disregard of the legal position. Here two views are possible. Also the claim was under bona fide belief and cannot be said with mala fide intention. The assessing authority has also allowed such use, shows that there was acceptance of view about eligibility to issue C form. Therefore, no penalty can be attracted on the facts. There are number of judgments which support the above view like Hindustan Steel Ltd. (25 STC 211)(SC). About nature of penalty in fiscal laws, Hon’ble Supreme Court has observed as under:

“Under the Act penalty may be imposed for failure to register as a dealer: section 9(1) r/w section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to the act in the manner prescribed by the statute. Those in charge of the affairs of the company in failing to register the company as a dealer acted in the honest and genuine belief that the company was not a dealer. Granting that they erred, no case for imposing penalty was made out.”

Therefore, in light of ratio laid down by Hon. Supreme Court, the penalty cannot be attracted.

C. B. Thakar
Advocate

TDS

Query No. 1 (u/s. 195)

On sale of ancestral property by NRI at what rate TDS to be deducted by the purchaser?

Answer

The purchaser has to deduct tax if NRI’s income is chargeable under the Act. The Supreme Court in G.E. India Technology Centre P. Ltd. v. CIT [327 ITR 456 (SC) has held that:

“The most important expression in section 195(1) of the Income-tax Act, 1961, dealing with deduction of tax at source consists of the word “chargeable under the provisions of the Act.” A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act. Section 195 contemplates not merely amounts, the whole of which are pure income payments, which have an element of income embedded or incorporated in them. The obligation to deduct tax at source is, however, limited to appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. It is for this reason that the CBDT has clarified in Circular No. 728 dated October 31, 1995 that the tax deductor can take into consideration the effect of the DTAA in respect of payments of royalties and technical fees while deducting tax at source.”

Be that as it may, if income of non-resident is chargeable in India, the purchaser has to deduct the tax @ 20% being rate in force, as per section 112 of the Act.

Income tax

Query No. 2 (exemption u/s. 54)

‘A’ has two residential house (let out) in Mumbai and one residential house (self occupation) in Chennai. Now ‘A’ wants to purchase one residential house in Chennai, out of sale proceeds of one houses in Mumbai out of two residential houses. Whether ‘A’ will get section 54 exemption or not?

Answer

It is not clear from the fact, whether the ‘A’ wants to dispose of the Chennai’s residential house and one house of Bombay and then buy one house in Chennai? If yes, ‘A’ is entitled to get the benefit of section 54.

If not then, ‘A’ is not entitle to get benefit even under section 54F, as on the date of purchase of new asset, he owns more than one residential house, irrespective of whether self-occupied or rented.

Query No. 3

Assessee falls under the definition of “eligible assessee” as provided in Explanation (a) to section 44AD. His turnover is not exceeding one crore rupees (taking into consideration positive & negative figures). Assessee maintains regular books of account. Assessee has incurred speculation loss of
Rs. 5,00,000/- on share trading, which he wants to carry forward and assessee has incurred business loss of
Rs. 3,00,000/- in an eligible transaction in respect of trading in derivatives as provided in section 43(5)(d) & (e), which he wants to set-off against income from other sources. In this connection assessee has the following question,

(i) Will speculation business & business carried out in eligible transaction in respect of trading in derivatives as provided in section 43(5)(d) & (e) be treated as “eligible business” as provided in Explanation (b) to section 44AD.

(ii) If yes, will it be necessary to carry out Audit u/s. 44AD to carry forward speculation loss & set-off business loss in the case of above facts?

Answer

As per Explanation 2 of section 28 of the Act, the speculative business is distinct from any other business. So speculation business is a separate business from eligible transaction as defined in Explanation 2 to section 43(5).

Further, from the fact, it is clear that an assessee is “eligible assessee” and therefore if he is carrying on “eligible business” as defined in Explanation (b) to the section 44AD and his turnover is less than rupees one crore then he can claim benefit of section 44AD.

If he does not show the profit of 8% of the gross turnover or receipt then he is required to keep books of account and get them audited if he has income chargeable to tax.

In this case, a loss from speculation business, can be carried forward for four years and can set-off only against profits of speculation business.

In case of loss, though assessee may maintain the books of account, he need not get them audited, as income is not chargeable to tax. However, if he wants to claim carry forward of loss, he has to file the return of income before the due date as mentioned in section 139(1) r. w. s. 80 of the Act.

Query No. 4 (Interest on deposit of EPF Trust)

The Bank is paying 8% interest on the deposit of EPF Trust and they are deducting tax from this amount. Kindly inform whether any exemption is allowed?

Answer

Interest earned by Employees Provident Fund is not liable to tax under section 10(25) of the Act, if it is recognized provident fund. Therefore, whatever TDS made by the bank, EPF trust has to claim refund.

Query No. 5

Whether company secretaries are entitled to appear before ITAT? If yes under which provision / rule /case laws?

Answer

Sub-section (2) of section 288 of the Income tax Act defines “authorised representative” which includes “any person who has passed accountancy examination recognised in this behalf by the Board”.

Rule 50 of the Income-tax Rules, 1962 recognises the accounting examination, which inter alia, includes final examination of the Institute of Company Secretaries of India, New Delhi” for the purpose of section 288(2)(v) of the Act. Therefore, company secretaries are entitled to appear before ITAT.

Note: Please send your queries relating to Direct, Indirect & International taxation, Accounting & Auditing Standards and Company Law, FEMA etc. to AIFTP, having interest to the Members.

CA. H.N. Motiwalla

I. ISSSUE OF DEPRECIATION

1. The claim of the Department is that the Charitable Trust (hereinafter referred as assessee) is claiming double deduction which is in violation of the law laid down by the Supreme Court in the case of Escorts Ltd. v. union of India 199 ITR 43 (SC). The department is also relying upon the decision in the case of JK Synthetics Ltd. v. UOI 1992 65 Taxmann 420 (SC) where the Supreme Court has laid down the law regarding the non-admissibility of double deduction. Needless to say that the ruling of the Apex Court would prevail over the judgment pronounced by the High Court.

2. Reliance by the Department on the two judgment of the Supreme Court in the case of Escorts Ltd. and JK Synthetics (supra) is that the law lays down that in no circumstances the benefit of double deduction can be claimed and allowed.

3. It is entirely incorrect to deny the claim of depreciation to the assessee. This is based on the facts that there are various judgment that supports the assessee’s view directly on the subject while the decision of the Supreme Court are not directly on the issue but are by virtue of inference and analogy on the issue of double deduction and therefore the Supreme Court judgments would not apply. In fact, the following judgments would support the stand that depreciation would be allowed. These judgments being:

(i) CIT v. Seth Manilal Ranchhoddas Vishram Bhawan Trust [1992] 198 ITR 598 (Guj.);

(ii) CIT v. Institute of Banking Personnel Selection (IBPS) (2003) 131 Taxmann 386 (Bom.);

(iii) CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad.);

(iv) CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Kar.); and

(v) CIT v. Raipur Pallottine Society [1989] 180 ITR 579 (MP).

4. The judgment of the Supreme Court in the case of Escorts Ltd. v. Union of India 199 ITR 43, in my opinion has no application to the situation where depreciation as claimed by a charitable institution in determining the percentage of fund applied for purpose of charitable objects and the question concerning depreciation. In this connection, attention is invited to the judgment of CIT v. Tiny Tots Educational Society (2011) 330 ITR (P&H).

5. Courts have repeatedly held that in ascertaining the income of a trust or charitable institution liable to be either applied or accumulated, depreciation on capital assets in use would have to be charged. However, this law was sought to be treated as superseded by the decision in Escorts’ Ltd. v. Union of India 199 ITR 43 (SC) overlooking the vital fact that the decision in Escorts’ case was rendered in the context of section 35(1) (iv), which barred depreciation for an equipment acquired for research, the cost of which had been allowed as a deduction.

6. In the case of charities, the amount of expenditure incurred for acquiring capital assets is not deducted from his income, so that depreciation could not have been denied even otherwise.

7. In CIT v. Market Committee, Pipli (2011) 330 ITR 16 (P&H) have pointed out this distinction with the facts of Escorts Ltd.’s case and upheld the order of the Tribunal allowing depreciation. This was followed in CIT v. Tiny Tots Educational Society 330 ITR 21 (P&H).

8. Based on the above, I am of the view that the claim of depreciation is justified on law as well as on facts.

9. CASE LAWS IN SUPPORT OF THE PROPOSITION THAT DEPRECIATION TO BE ALLOWED TO THE TRUST

9.1. BOMBAY HIGH COURT

9.1.1 CIT v. Institute of Banking (2003) 264 ITR 110 (Bom.):

The Tribunal was right in law in directing the Assessing Officer to allow depreciation on the assets, the cost of which had been fully allowed as application of income under section 11 in the past years.

Income of the Trust is required to be computed under section 11 on commercial principle after providing for allowance for normal depreciation and deduction thereof from the gross income of the Trust.

9.1.2. DIT Exemption v. Framjee Cawasjee Institute (1993) 109 CTR 463 (Bom.):

In the case, the facts were as follows: The assessee was the trust. It derived its income from depreciation assets. The assessee took into account depreciation on those assets in computing the income of the trust. The Income-tax officers held that depreciation could not be taken into account because, full capital expenditure had been allowed in the year of acquisition of the assets. The assessee went in appeal before the Appellate Assistant Commissioner. The appeal was rejected. The Tribunal, however, took the view that when the Income Tax Officer stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as “application of Income” of the trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal has been confirmed by the Bombay High Court Institute of Banking case. Hence, question No. 2 is covered by the decision of the Bombay High Court in the above judgment. Consequently, question No. 2 is answered in the affirmative i.e. in favour of the assessee and against the Department.

9.2 CALCUTTA HIGH COURT

9.2.1 CIT vs. Public welfare Trust (1999) 240 ITR 513 (Cal.):

While Computing Income of Charitable Trust, income is to be arrived at in commercial manner and, therefore, depreciation claimed in accounts by assessee-trust was an outgoing for purpose of determination of income in terms of section 11(1) of the Act. In the Computation of Income of the Trust, Depreciation is deductible.

9.2.2 CIT v. Birla Janahit Trust (1994) 208 ITR 372 (Cal.):

Computation of Income for purpose of section 11. Expenditure on salary and miscellaneous expenditure for carrying out the purpose of the trust must be considered as application for Charitable Purposes. Central Board of Direct Taxes Circular dated 19th May, 1968.

9.3 GUJARAT HIGH COURT

CIT v. Seth Manual Ranchhoddas Vishram Bhavan Trust (1992) 198 ITR 598 (Guj.):

Allowance of Depreciation in Computing Income of a Charitable Trust. Mode of Computation of Income. Income to be computed in normal commercial manner.

9.4 KERALA HIGH COURT

9.4.1 CIT v. Society of Sisters of St. Anne (1984) 146 ITR 28 (Ker.)

Depreciation on its assets is to be allowed to a Charitable Trust. It is not right to contend that depreciation being a notional expenditure cannot be allowed to be the expenditure account of the Trust.

9.4.2 CIT v. St. George Forana Church (1988) 170 ITR 62 (Ker.)

The assessee trust spent certain amount for the construction of additional to its buildings which had been let out and income by way of rent from those building was used for religious purposes. Held that the word ‘applied’ occurring in section 11 is wider in import than the word ‘Expenditure’. The word ‘Expenditure’ means ‘Disbursement’. ‘Expend’ means ‘to pay out or distribute; to spend’. Considering these two words, the word ‘applied’ is of wider import. The money or amount will not to go out irretrievably, when it is ‘applied’ to a purpose. Hence, the said expenditure was as application of income by the assessee for religious or charitable purposes.

9.5 MADRAS HIGH COURT

CIT v. Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135 ITR 485 (Mad.):

Income from properties held under trust would have to be arrived at in normal commercial manner without classification under various heads set out in section 14 and 25% thereof will have to be ascertained. If the assessee has accumulated more than 25%, the consequences in section 11 will have to follow.

9.6 MADHYA PRADESH HIGH COURT

In respect of the assets owned, a charitable trust is entitled to depreciation allowance CIT v. Raipur Pallottine Society (1989) 180 ITR 579 (MP)

Depreciation is the exhaustion of the effective life of a fixed asset owing to “use” or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure incurred in acquiring the asset over its effective lifetime and the amount of provision made in respect of an accounting period is intended to represent the proportion of such expenditure which has expired during that period. If depreciation is not allowed as a necessary deduction in computing the income of a charitable trust, then there would be no way to preserve the corpus of the trust. A charitable trust is, therefore, entitled to depreciation in respect of the assets owned by it.

CIT v. Society of the Sisters of St. Anne (1984J 146 ITR 28 (Kar.) followed.

9.7 Recent Tribunal’s judgment of Chennai Tribunal also confirms with the same principle having distinguished Escort’s case. In Shri Rengalatchumi Education Trust v. ITO (OSD) Exemptions (2012) 137 ITD 318 (Chennai), assessee was entitled to depreciation on capital assets even if the cost of acquisition of such assets was earlier allowed as application of income while computing income u/section 11. Facts: Assessee trust claimed depreciation while computing its income for the respective assessment year. The AO held that as the cost of addition to assets was claimed by the assessee as application of income for the respective assessment years, assessee could not further claim depreciation on the very same assets and hence disallowed the claim of depreciation.

Held: For the purpose of determining the income of trust eligible for exemption u/section 11, income should be construed strictly in commercial sense (i.e. normal accounting principles), without reference to the heads of income specified in section 14. The income to be considered is the book income and not the total income as defined in section 2(45). The concept of commercial income necessarily envisages deduction of depreciation on the assets of the trust. This position is as confirmed by the CBDT vide its circular No. 5-P (LXX-6), dated 19-5-1968. Normal accounting principles clearly provide for deducting depreciation to arrive at income. Income so arrived at (after deducting depreciation) is to be applied for charitable purpose. Capital expense is applicable of income so determined. Hence, there is no double deduction or double claimed of the same amount as application.

Thus, depreciation is to be deducted to arrive at income and it is not application of income.

Note:

(i) Supreme Court decision in case of Escorts Ltd. v. Union of India (1993) 199 ITR 43 was distinguished;

(ii) Readers may refer two decision of Hon’ble Bombay High Court viz.:

• DIT (Exemption) v. Framjee Cawasjee Institute (1993) 109 CTR 463;

and

• CIT v. Institute of Banking Personnel Selection (IBPS) (2003) 264 ITR 110.

10. Since the Department is relying upon Escort’s judgment, in my opinion, the said judgment has no application and my analysis of depreciation in Escorts’ judgment is made hereunder:

(i) Since the income of a charitable institution should be computed under ordinary Principles of commercial accounting, depreciation has to be allowed for depreciable assets held by a charitable institution to arrive at the income of 85%, which is required to be applied for charitable purposes. But where an acquisition of an asset is treated as income which has been applied for the objects of the trust or institution, it was inferred that such application gets the income correspondingly reduced, so that in respect of such assets, there can be no further deduction by way of depreciation in view that any such deduction would amount to double deduction. This was understood to be the view taken by the Supreme Court in Escorts Ltd. v. Union of India {1993} 199 ITR 43 (SC), so that was followed by the Kerala High Court in Lissie Medical Institutions v. CIT {2012} 348 ITR 344 (Ker). There is considerable confusion on the subject.

(ii) Accordingly to the Guidance Note issued by the Institute of Chartered Accountants of India in Audit of Public Charitable Institution under the IT Act, even where the whole capital expenditure has been treated as application of income towards charitable or religious purposes for exemption u/section 11, the trust or institution can claim depreciation in respect of the assets used by it for its purposes on the basis of normal commercial principles following Circular No. 5-P (LXX-6) of 1968 dated 19th June 1968 issued by the Central Board of Direct Taxes. But in a publication by the institute of Chartered Accountants of India on debatable issues (page 121), it was opined that three could be an inference of double deduction in following the cost as well as depreciation purportedly with reference to the decision of the Supreme Court in Escorts’ case (supra). The Guidance note issued by the Institute of Chartered Accountants of India has correctly understood that depreciation can be claimed on all assets applied for charitable purposes.

(iii) This view cannot be subject matter of any debate on the basis of Escorts Ltd v. Union of India {1993} 199 ITR 43 (SC)’s case, which relates to a case of full deduction of the cost of asset used for research since capital expenditure on scientific research is deductible in recognition of income, so that depreciation was inadmissible. The doubt overlooks the difference between computation of income and utilisation of such income.

(iv) This distinction has been pointed out in CIT v. Manav Mangal Society {2010} 328 ITR 421 (P&H) at 423 as under:

“The amount spent on construction of school building at Panchkula is a capital expenditure but for the purpose of Section 11 it is an outgoing which is application of the income of the appellant for charitable purpose. The appellant shall also be entitled to claim depreciation on the school building.”

(v) Special Leave Petition (“SLP”) filed by the Income Tax Department against this case has also since been dismissed by the Supreme Court (see Income Tax Reports {2010} 328 ITR (St.) 9). The decision in Manav Mangal Society’s case was cited before the High Court but it was dismissed by the High Court along with other citations in a sweeping statement that “we do not find in any of these decisions this aspect is considered and discussed by any of the High Court’s”, while in Manav Mangal’s case, this was the sole issue, which was discussed.

11. When capital expenditure has been treated as application of income, whether depreciation can be deducted in respect of those assets? In other words, while computing taxable income whether both depreciation and capital expenditure be deducted?

Ans: Yes, as already discussed above on the issue of depreciation and the various explanations.

II CARRY FORWARD OF DEFICIT

12. Another issue is concerning deficit arising on a/c of excess of expenditure over the revenue. When the expenditure incurred is more than the revenue generated, which are credited to income and expenditure account, the deficit occurs. The issue that arises is what is the source of excessive expenditure over the revenue generated. The view of the department is that the funds can come from three sources either by expenditure from corpus, accumulation or loans raised. The Department’s contention is that in such circumstances, the issue is which such deficit and expenditure due to which deficit has occurred can be termed as applicable of income for availing of expenditure. In this connection, the Department is relying upon the decision of Escorts and JK Synthetics (supra) on the ground that deficit cannot be allowed since no double deduction can be allowed, unless it is specifically sanctioned by the statute.

In my opinion, the stand regarding carry forward of deficit is misplaced and the Charitable Trust (hereinafter referred as assessee) is entitled to carry forward of the deficit.

In this connection, my analysis of deficit is as under :

In this connection, reliance is placed on (i) 279 ITR 659 (Del.); (ii) 185 CTR 492 (Bom.); (iii) 60CTR (Raj.) 40; and (iv) 211 ITR 293 (Guj.) that the excess expenditure in earlier years can be adjusted against the income of subsequent years.

The amount incurred out of corpus is an amount applied for the objects of the trust and, therefore, the said amount is claimed as deduction u/section 11(1)(a) of the IT Act. The IT Act allowed a trust/ institution to carry forward losses and claim set off against the future income. These are based on benevolent provisions of the Act and such debits to corpus accounts are only account presentations. Reliance is placed on the decision of the Kerala High Court in case of George Forma Church 170 ITR 62 where the word “apply” occurring in section (11)(1)(a) is of wider import than the word “expenditure”, where the “expenditure” means “disbursements”. Hence, the said expenditure was application of income of the assessee for the objects of the trust.

The amounts spent on acquisition of capital assets of a trust are exempt as held in the case of Devine Mission 279 ITR 659 (Del). Reliance is also placed on the decision of Institute of Banking Personnel 185 CTR 492 (Bom.) for the proposition that carry forward of deficit of earlier years and set off against subsequent years is allowable. Also the decision of the Rajasthan High Court in the case of Maharana of Mewar Charitable Foundation 60 CTR 40 (Raj.) lends support to the proposition that there is nothing in the language of section 11(1)(a) which lends support to the contention that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent years. Result of such income for meeting expenditure of earlier years will amount to such income being applied for charitable or religious purpose. Reference is also made to the decision of the Gujarat High Court in Shri Plot Swetamber Murti Pujak Jain Mandal 211 ITR 293 that excess expenditure in earlier years can be adjusted against the income of the subsequent years. In the light of the above judgments, the carry forward of deficits would be allowed.

III The Charitable Trust (hereinafter referred as assessee) is writing the following note in the statement of total income

“If for whatever reason, the deficit turns out to be surplus and if that surplus figure, after setting off the brought forward deficits to earlier years, if any, is taxable than the taxable portion of it should be deemed to have been applied under clause (2) of the explanation section 11(1). That this return may be treated as if we are exercising the option under clause (2) of the explanation of section (1)”.

Whether such a note will be sufficient for deemed application for surplus arising on assessment ?

Ans.: Yes. The note filed by the Charitable Trust (hereinafter referred as assessee) in my opinion is absolutely correct :

“1. Deemed application under explanation 2 to section 11(1):

The Explanation 2 to section 11(1) refers to two circumstances under which the income applied to charitable or religious purpose in India may fall short of eighty-five per cent of income derived during the relevant year from property held under trust, or as the case may be, held under trust in part and still it will be deemed to have been applied., Firstly in case the whole or any part of income has not been received during that year, then so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following; the year of accrual as does not exceed the said amount, may be deemed to have been applied provided the option and conditions stated below are availed of and satisfied. Secondly, where the shortfall from 85 per cent application is for any other reason, then so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, would be deemed to have been applied for the purposes of exemption provided the option provided for is availed of and conditions met.

2. Effect of exercise of option available under explanation 2:

On exercise of option in writing by the person in receipt of income in the first circumstance may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes during the previous year in which the income is received or during the previous year immediately following, as the case may be.

Similarly on exercise of option in writing by the person in receipt of income in the second circumstance mentioned above, so much of the income applied to such purpose in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount to be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes during the previous year immediately following the previous year in which the income was derived.

3. According to Trustees of Tulsidas Gopalji Charitable & Chaleshwar Temple Trust v. Cit (1994) 207 ITR 368 (Bom), if a return is filed within the time specified in section 139(4) and the option contemplated by Explanation 2 to section 11(10) is exercised in writing along with such return, the requirements of that Explanation would stand satisfied.

4. The assessee charitable trust accumulated more than 25 per cent of its income. The option for accumulation was exercised by furnishing a statement along with the return. The Assessing Officer held that the assessee had not filled Form No. 10 giving notice for accumulation; the entire amount was therefore, taxable. Commissioner (Appeals) and Tribunal allowed the assessee’s appeal holding that the disputed income would be deemed to be applied for charitable purpose. It was held by the High Court that mere mentioning in the total income statement that the amount had been set apart to be utilised for charitable purpose in subsequent year amounts to exercising option under Explanation 2(i) or (ii) to Section 11(1)(a) and such amount set apart for application under section 11(1)(a). Further, when an assessee claims exemption under section 11(1), no notice of accumulation need be give and a statement along with the return would serve the purpose. Thus, section 11(2) does not operate to whittle down or to cut across exemption provisions contained in section 11(1)(a) so far as such accumulated income of the previous year is concerned. – Vide CIT v. G. R. Govindarajulu & Sons Charities (2005) 1 (I) ITCL 378 (Mad. – HC): (2005) 271 ITR 145 (Mad.): (2005) 144 Taxmann 300 (Mad.).”

In this connection, attention of the querist is invited to the recent decision of CIT v. Moti Ram Gopal Chand Charitable Trust (2014) 360 ITR 598 (All.). In this case, the issue was accumulation of income and the information to be furnished to the AO in prescribed form within the prescribed time. The Court held that it was a matter of form and not of substance and information furnished in form of a letter with full details as required in Form 10 for setting apart and carried forward of unspent amount for spending in the next year would be full compliance of section 11 and the assessee would be entitled to the exemption u/section 11.

In CIT v. Nagpur Hotels Owners’ Association 247 ITR 201 (SC), it was held that notice of accumulation must be given to the AO u/section 11 before the assessment is concluded. That the AO must have information at the time of completion of the assessment. That in the absence of any such information, it is not possible for the AO to give assessee the benefits of such exclusion and once the assessment is completed it would be futile to find fault with the assessing authority for having included such income in the assessable income of the assessee. Thus it is reasonable to presume that intimation required u/section 11 has to be furnished before the assessing authority completes the concerned the assessment.

In CIT v. Moti Ram Gopalchand Charitable Trust, the Allahabad High Court held that even if application u/section 11(2) is not filed with the return, but information is given during the process of assessment and before the completion of assessment, then in such circumstances, the assessee has given notice u/section 11(2)(a) read with Rule 17 of the Rules of 1962 for accumulation of income. In my opinion, the assessee has already given the note which forms part of the total income, and therefore there is full compliance and the recent judgment of the Allahabad High Court squarely supports the note as sufficient for deemed application of surplus arising on assessment.

Tushar Doctor and Zankhana Pranjal Mehta

Very often we ignore some small but pertinent legal issues where remedy is available under the statute. However, the assessee ultimately suffers. Such a case is discussed hereunder for appreciation of the facts. Although the matter is very small but it will certainly throw light on the facts that how Income Tax Department is collecting revenue by misinterpreting the provisions of law.

The facts of the case runs like this:

The Income Tax Officer of Bhubaneswar, Odisha assessed the assessee-firm M/s, Oberoi Enterprises on a total income of
Rs. 16,72,300/- for the Assessment Year-1998-99. The firm preferred first appeal against the aforesaid order and got substantial relief i.e. the total income was reduced by a sum of
Rs. 14,23,133/-. Hence ultimately the total income of the assessee was determined at
Rs. 2,49,170/-. Being aggrieved with the said order passed by the learned CIT(A), the assessee-firm filed Second Appeal before the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack vide ITA No.338/CTK/2001 having deposited a sum of
Rs. 2,492/- towards appeal filing fee as per provisions of Section 253 of I.T. Act, 1961. The appellant here calculated appeal fee @1% of the modified assessed income i.e.
Rs. 2,49,170/-. But the Registry of Hon’ble ITAT demanded fee of Rs. 10,000/- on the original assessed income of
Rs. 16,72,300/- as per provisions of Section-253(6)(c) of the said Act. A notice was issued to rectify the defect otherwise the appeal would be rejected.

The assessee-firm filed a Writ Application before the Hon’ble High Court of Orissa bearing OJC No. 4902 of 2002 challenging the legality of the notice of the ITAT.

The matter was finally heard and disposed of on 29-10-2015 with the following observation of the Hon’ble Court:

“The issue in the present case needs for determining only to refer Section 253(6) (a)(b)(c) of the Income-tax Act, 1961 which is as follows:

S.253. Appeals to the Appellate Tribunal

(6) An appeal to the Appellate Tribunal shall be in the prescribed form and shall be verified in the prescribed manner and shall, in the case of an appeal of the assessment proceedings relating thereto, be accompanied by a fee of –

(a) Where the total income of the assessee as computed by the Assessing Officer, in the case to which the appeal relates, is one hundred thousand rupees or less, five hundred rupees.

(b) Where the total income of the assessee, computed as aforesaid, in the case to which the appeal relates is more than one hundred thousand rupees but not more than two hundred thousand rupees, one thousand five hundred rupees,

(c) Where the total income of the assessee, computed as aforesaid, in the case to which the appeal relates is more than two hundred thousand rupees, one per cent of the assessed income, subject to a maximum of ten thousand rupees,

(d) xx xx xx”.

It is clear from the aforesaid provision of the Income-tax Act, 1961 that this provision applies to the appeal through the Appellate Tribunal which obviously means that the assessee has by then exhausted the First Appellate remedy before approaching the Appellate Tribunal. Consequently, the total income of the assessee as mentioned under Section 253(6)(c) of the Act has already been determined in the First Appeal. As the basis for computing the amount of fee payable for approaching, the Appellate Tribunal determined in the First Appeal in the present case as
Rs. 2,49,170/- and the petitioner have deposited the fee amounting to
Rs. 2,492/- i.e. 1% of the determined income amount which satisfies the requirement of deposit of fees. Consequently, we find no jurisdiction in the demand raised under Annexure-4 series dated 6th September, 2001.

Accordingly, while quashing the order dated 6th September, 2001 under Annexure-4 series, we further direct the Registry to place the matter before the Tribunal for consideration of the Second Appeal on its own merits. Further, we find that the matter has been substantially delayed pending before this Court and accordingly, this Court hopes and trusts that the Tribunal would condone the delay suitably and dispose of the matter on its own merit expeditiously.

The writ application is allowed in terms of the above directions”.

Similarly CBDT Circular No. 14(XI-35) of 1955 dated: 11-4-1955 says:-

“Officers of the department must not take advantage of the ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for, it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessees on whom it is imposed by law, officers should-

(a) Draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

(b) Freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.”

Here not only in the above cited case but also in each and every case, Registry of ITAT is compelling the appellants to deposit appeal filing fee @1% of the original assessed income or
Rs. 10,000/- whichever is less as per the provisions of Section-253(6)(c) where the assessed income has exceeded
Rs. 2,00,000/-. No one has interpreted the matter in this regard. However, M/s. Oberoi Enterprisers of Bhubaneswar took the matter to the notice of the Hon’ble High Court of Orissa for proper interpretation of the Statute and ultimately the appellant succeeded.

Everyone must be aware of the fact that recently CBDT has come up with a new idea to simplify the provisions of Income-ax Act, 1961 and Rules and formed a Committee as per Press release dated 27-10-2015 which is reproduced hereunder:

“Government of India

Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

PRESS RELEASE

New Delhi, 27th October, 2015

Subject: SETTING UP OF COMMITTEE WITH A VIEW TO SIMPLIFY THE PROVISIONS OF THE INCOME TAX ACT, 1961

With a view to simplify the provisions of the Income-tax Act, 1961, a Committee has been constituted with the following composition:

(i) Justice R. V. Easwar, (Retd.), former Judge, Delhi High Court and former President, ITAT – Chairman

(ii) Shri V. K. Bhasin, former Law Secretary – Member

(iii) Shri Vinod Jain, Chartered Accountant – Member

(iv) Shri Rajiv Memani, Consultant – Member

(v) Shri Ravi Gupta, Sr. Advocate – Member

(vi) Shri Mukesh Patel, Chartered Accountant – Member

(vii) Shri Ajay Bahl, Consultant – Member

(viii) Shri Pradip P. Shah, Investment Advisor – Member

(ix) Shri Arvind Modi, IRS (IT:81009) – Member

(x) Dr. Vinay Kumar Singh, IRS (IT:95006) – Member

2. The Terms of Reference (ToR) of the Committee shall be as follows:

i) To study and identify the provisions/phrases in the Act which are leading to litigation due to different interpretations;

ii) To study and identify the provisions which are impacting the ease of doing business;

iii) To study and identify the areas and provisions of the Act for simplification in the light of the existing jurisprudence;

iv) To suggest alternatives and modifications to the existing provisions and areas so identified to bring about predictability and certainty in tax laws without substantial impact on the tax base and revenue collection and;

3. The Committee shall set its own procedures for regulating its work. The Committee can also work in Sub-Groups and the draft prepared by the Sub-Groups can then be approved by the whole Committee. The Committee will put its draft recommendations in the public domain. After stakeholder consultations, the Committee will formalise its recommendations. The Committee can give its recommendations in batches. The first batch containing as many recommendations as possible shall be submitted by 31st January, 2016.

4. The Term of the Committee shall be for a period of one year from the date of its constitution.

(Shefali Shah)

Pr. Commissioner of Income Tax (OSD)

Official Spokesperson, CBDT”

Thus it is suggested that AIFTP should take the initiative in bringing those anomalies in the Income-tax Act & Rules to the notice of the above committee for suitable amendment, which the assessees or their representatives are facing in their day-to-day practice.

Natabar Panda
Advocate

“We contend that for a nation trying to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”

So said Winston Churchill, on the question as to whether more and more taxes should be levied to bring in more revenue to the Government for spending on welfare projects. In India, Churchill’s views would find more sympathisers with the taxman in perpetual pursuit for more tax revenue under the pretence that the ‘welfare state’ needs it. The experience of the past has been disastrous, as taxes have often soared to confiscatory levels and cesses and surcharges get added with regular frequency. Business and industry has been reduced to a mere cash cow to finance social policies which make no economic sense. The situation in indirect taxes is worsening as the time goes by, with more than one Government trying tax everything under the sun – simultaneously.

In this backdrop, three Governments have tried to replace the overflowing basket of indirect taxes with a single Goods and Services Tax. The Constitution Amendment Bill required for changing the current scenario is now pending in the Upper House of Parliament. The 122nd Constitution Amendment Bill was passed by the Lok Sabha in December, 2014. The current Government wants the GST Constitution Amendment Bill to be passed before the Budget Session and the new regime to kick in from 1st April, 2016.

The Goods and Services Tax has worked spectacularly in other countries which have adopted that model of taxation. The Indian model also sounds good in theory. But whether or not it works as well in India is a matter of how it is implemented and whether the Government is willing to keep the tax rate reasonable. With this caveat, let us proceed to examine the proposed Constitutional framework for the levy of GST.

The Present Scenario

As of now, the taxation of goods and services is divided between the States and the Union. At present, the State Governments have authority to tax the sale or purchase of goods which take place within the State. The Union Government has the authority to tax manufacture of goods and inter-State sale or purchase of goods as well as authority to levy sales tax on all sales within the Union Territories. The Union Government can also levy Customs duties on import or export of goods. The Union Government also levies a tax on services under the residuary power of legislation.

What is a Goods and Services Tax

The Goods and Services Tax is in essence a Value Added Tax. The classic definition and the simplest description of the design of VAT is contained in Para 1.2 of the OECD International VAT/GST Guidelines (November 2015):

“The overarching features of a VAT are to impose a broad-based tax on consumption, which is understood to mean final consumption by households. In principle only private individuals, as distinguished from businesses, engage in the consumption at which a VAT is targeted. In practice, however, many VAT systems impose VAT burden not only on consumption by private individuals, but also on various entities that are involved in non-business activities.”

The Indian GST is also envisaged as a destination-based consumption tax based on the VAT-model of the European Union and the GST models in Australia and New Zealand. The proposal for both the States and the Central Government to tax supplies simultaneously is inspired from the Canadian model. Under the Indian GST model also, both the Central Government and the State Governments will tax supply of goods as well as services within the State. The former will be called the Central GST (CGST) and the latter will be called the State GST (SGST). Inter-State supply of goods and services will be taxed exclusively by the Union and will be called “Integrated GST” (IGST). Taxation of Import and Export of goods and services has been deliberately kept outside the field of State taxation.

The Goods and Services Tax is expected to reduce the cascading effect of multiple taxes which tax each and every aspect of the economic activity without providing for any harmonised set-off mechanism. It is expected to reduce considerably the tussle between the Union and State Governments for maximising their own revenue and the overlapping demands on the same economic activity by both the Union and the State Governments.

The Goods and Services Tax seeks to resolve this conflict of jurisdictions by giving both the Central and State Governments uniform access to tax all supplies of goods and services and provide for set-off machinery to target only the value addition as much as possible. Apart from this, the widening tax base is expected to lead to lesser obstacles in the credit chain which will ultimately reduce the cascading effect of taxes.

Before commencing a deeper study of the Bill, it is necessary to look at some of the definitions which will be relevant to for the purposes of the levy of GST:

“Goods and Services Tax” is sought to be defined by way of a new Article 366(12A) as “any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption”.

“Goods” has already been defined in Article 366(12) as “including all materials, commodities and articles”. We hope that there would be no need to refer to the definition of “goods” in the Sale of Goods Act, 1930 while interpreting the GST legislation since the GST laws are not concerned merely with sale of goods.

“Services” is sought to be defined in Article 366(26A) to mean “anything other than goods”.

Supply

Now, the cornerstone of the levy of Goods and Services Tax is a “supply of goods and services”. Unfortunately, the Constitution Amendment Bill does not define a “supply”. It has been left to Parliament and the State Governments to define “supply” in any which way they choose. This is somewhat similar to the position in the European Union wherein the term “supply” has not been defined in the EU Sixth VAT Directive and has been left to the member-nations to define for themselves.

However, the EU Sixth VAT Directive uses the term “supply for consideration”1 and the EU Sixth VAT Directive itself lays down specific exceptions for treating a transaction without consideration as a “deemed supply”. It is not open to the member-nations of the European Union to make a law in conflict with the provisions of the EU Sixth VAT Directive. In essence the EU Sixth VAT Directive is in nature of a Constitutional document.

Our Constitution Amendment Bill not only avoids defining a “supply”, but also chooses not to use the term “supply for consideration” which is used in the EU Sixth VAT Directive. The authors submit that the term “supply for consideration” would have put Constitutional brakes on the attempts of Parliament or State Legislatures to define “supply” in wider sense and keep on expanding the list of deemed supplies” (supplies which are taxable even if there is no consideration) and thus bring everything from sunshine to moonlight to tax. After all, we do have a history and an addictive tendency to introduce deeming fictions and explanations wherever possible and that too with retrospective effect. It is more probable than not that the number of “deemed supplies” in India will go on increasing with each passing year as the Union and State Governments scramble for more and more revenue. Since each State and Parliament is independent to define the definition of “supply” in its own law, the consequences of the same would lead to a lot of problems in future.

Will Parliament’s GST Law override State’s GST law?

Before we discuss the actual Constitutional provisions relating to GST, it is important to consider what will happen if Parliament’s GST law conflicts with a State GST law. What happens if a State GST law is repugnant to a Central GST law? Would the State GST law be void to the extent it conflicts with the Central GST law? Can the State legislature make changes in its own GST law which are not contemplated in the Central GST law at all?

The answer to all these questions is ‘yes’. There is nothing in the Constitution Amendment Bill which expressly makes State GST law subject to Central GST law. The principle that a State law is subject to Central law is only applicable to subjects which are part of Concurrent list (see Article 254). If a law is properly made under an entry under the State List and it conflicts with a law properly made under an entry in the Union List, the two laws will operate independently and the State law is not void due to repugnancy with Union law. But if the State law as well as the Union law is made under an entry in the Concurrent List, the repugnancy will cause the State law to be void to the extent of the repugnancy.

However, the GST Constitution Amendment Bill does not place the subject of GST under the concurrent list. Indeed, the GST is not sought to be placed in any of the three legislative lists.

The power to levy GST is to be embodied through a completely separate provision, that is Article 246A. Hence, the principles of Article 254 with respect to inconsistency between Union and State laws qua Concurrent list subjects would be rendered completely irrelevant. Indeed, the opening words of the new Article 246A make this very clear by specifically saying “Notwithstanding anything contained in Articles 246 and 254..”2.

Structure of the GST regime

The GST is to be levied by both the Central Government and the State Governments. According to Article 246A(1), Parliament as well as the State Legislature can make laws with respect to goods and services tax. Article 246A(1) is the enabling provision for levying the GST, but it does not itself speak of exactly which legislature will tax which transaction. That task is fulfilled by Articles 269A and 286.

According to Article 269A, only the Government of India can levy a tax on the inter-State trade and commerce and a tax on supplies of goods or services in the course of import of goods and services into India.

On the other hand, Article 286 expressly bans the State Legislatures from imposing a tax on:

(1) Supply outside the State

(2) Supply in the course of import

(3) Supply in the course of export

Thus, the State legislature can only tax a supply within the State. It cannot tax an inter-State supply or a supply in the course of import or export.

Articles 269A(2) and 286(2) give Parliament the exclusive authority to decide, by law:

(1) When a supply is in the course of inter-State trade or commerce

(2) When a supply is in the course of import

(3) When a supply is in the course of export

(4) When a supply is outside the State

These provisions are similar to the provisions governing sales tax law. Before the Constitution was enacted, there was no similar provision in the Government of India Act, 1935 and the Provincial Governments used to invoke the “nexus theory” to tax any transaction of sale even though the sale was completely outside the State on basis of various nexuses like place of storage, place of delivery, place of entering into contract, place of invoicing etc. The Constitution-makers realised that the trade and industry were getting badly affected due to multiple taxation of one transaction and hence the power of State legislatures to levy sales tax was restricted on the principle that only one State can tax a sale. The same principles are now being, fortunately, extended to GST. In absence of these restrictions, the nexus theory would have resurrected to the peril of trade and industry.

Therefore, by way of summarisation, the following can be said to be the division of taxing power between the Union and the States:

(1) Both Parliament and State Legislature can tax a supply within a State

(2) Only Parliament can tax an inter-State supply of goods and services

(3) Only Parliament can tax a supply in the course of import

Which taxes will be subsumed completely in the Goods and Services Tax?

The 122nd Constitution Amendment Bill seeks to subsume most of the levies of indirect taxes. This is sought to be done by deleting or modifying the taxation entries in the three legislative lists. The following entries are sought to be deleted:

Union List

(1) Entry 92: Taxes on sale or purchase of newspapers and on advertisements published therein

(2) Entry 92C : Taxes on services (though the Constitution Amendment inserting this entry was never notified. Service tax continues to be levied under the residuary power of legislation vested in Parliament)

State List

(3) Entry 52: Taxes on the entry of goods into a local area for consumption, use or sale therein

(4) Entry 55: Taxes on advertisements other than advertisements published in the newspapers and advertisements broadcast by radio or television.

Which taxes will be subsumed partially?

Some taxes have been subsumed partially, that is the scope of the entries has been narrowed down. The following taxes will be levied in a modified form:

Union List:

(1) Entry 84: The power to levy excise duties on manufacture of goods has been drastically narrowed down to levy a duty of excise on manufacture of only 6 types of goods:

i. Petroleum crude

ii. High speed diesel

iii. Motor spirit (commonly known as petrol)

iv. Natural gas

v. Avitation turbine fuel

vi. Tobacco and tobacco products

No Central Excise Duty under Entry 84 can be levied on any other product.

State List

(2) Entry 54: Entry 54 deals with the power to levy tax on sale or purchase of goods except newspapers. The scope of Entry 54 is also sought to be reduced and it will only cover these goods:

i. Petroleum crude

ii. High speed diesel

iii. Motor Spirit (commonly known as petrol)

iv. Natural gas

v. Aviation turbine fuel

vi. Alcoholic liquor for human consumption.

However, Entry 54 will not cover sales in the course of inter-State trade or commerce or a sale in the course of international trade or commerce

It is pertinent to note that reference to “tax on purchase” has been deleted completely. It is submitted that the Entry 48 of the Government of India Act, 1948 also did not expressly refer to “tax on purchase”, but only spoke of “tax on sale of goods”. However, the Supreme Court interpreted the term “tax on sale of goods” in a wide manner and held that it includes a tax on purchase of goods in V. M Syed Mohammed and Co. [1954 AIR 314 SC]. Whether the same principle is extendable in the present case where the term “tax on purchase” is deliberately omitted is a matter of fresh controversy.

(3) Entry 62: Hitherto, the State Government had the authority to levy taxes on luxuries, including taxes on entertainments, amusements, betting and gambling. In so far as the authority to levy tax on betting and gambling is concerned, the same has been completely deleted from the Entry 62 and the taxes on betting and gambling will be subsumed in the GST. Taxes on entertainments and amusements will continue to be authorised by the Entry 62, but only to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council.

Which taxes will be retained in unmodified form: The following taxes will be retained in unmodified form:

Union List:

(1) Entry 82: Taxes on income other than agricultural income

(2) Entry 83: Duties of Customs including export duties

(3) Entry 85: Corporation Tax

(4) Entry 86: Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies; taxes on the capital of companies

(5) Entry 87: Estate Duty in respect of property other than agricultural land

(6) Entry 88: Duties in respect of succession to property other than agricultural land

(7) Entry 89: Terminal taxes on goods or passengers, carried by railway, sea or air, taxes on railway fares and freights

(8) Entry 90: Taxes on stamp duties on transactions in stock exchanges and future markets

(9) Entry 92A: Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce

(10) Entry 92B: Taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce.

State List:

(11) Entry 46: Taxes on agricultural income

(12) Entry 47: Duties in respect of succession to agricultural land

(13) Entry 48: Estate Duty in respect of agricultural land

(14) Entry 49: Taxes on lands and buildings

(15) Entry 50: Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development

(16) Entry 51: Duties of excise on alcoholic on the following goods manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:

a. Alcoholic liquors for human consumption

b. Opium, Indian hemp and other narcotic drugs and narcotics,

but not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragrabh (b)

(17) Entry 53: Taxes on the consumption or sale of electricity

(18) Entry 56: Taxes on goods and passengers carried by road or on inland waterways

(19) Entry 57: Taxes on vehicles, whether mechanically propelled or not, suitable for use on roads, including tramcars subject to the provisions of entry 35 of List III.

(20) Entry 58: Taxes on animals and boats

(21) Entry 60: Taxes on professions, trades, callings, and employment

(22) Entry 61: Capitation taxes

What happens to the Central Sales Tax and Consignment tax provisions under the GST regime

As can be seen from the list of taxation entries which have not been deleted, the legislative entries relating to Central Sales Tax and Consignment Tax (Entries 92A and 92B of the Union List).

However, an amendment is being made to the Article 269 which provided that the Central sales tax and the consignment tax (when consignment is in inter-State trade or commerce) which has the effect of making sure that the inter-State supplies which are covered Article 269A (IGST) are out of the scope of CST and consignment tax. The exact effect of this amendment is unclear, particularly what tax can be levied under the Central Sales Tax Act as long as Article 269A covers the entire scope of inter-supplies (supply will include a sale or purchase in course of inter-state trade and commerce).

Article 366(29A) continues to be a part of the Constitution even post-GST

The 122nd Constitution Amendment Bill does not delete Article 366(29A). Article 366(29A) was introduced into the Constitution to overcome the decisions of the Courts which held certain types of transactions are not “sales” within the meaning of Sale of Goods Act, 1930 and hence beyond the taxing power of the States. Six categories of deemed sales were introduced –

(1) Transfer of right to use goods

(2) Works contract

(3) Sale by an association to its members

(4) Supply of food in a restaurant etc.

(5) Hire Purchase

(6) Transfer otherwise than in pursuance of a contract of sale but for consideration

Article 366(29A) may be relevant for whatever remains of the Central Sales Tax

As far as relevance of Article 366(29A) is concerned qua the State sales tax Acts, the readers will recall that the power to levy sales tax is now restricted to the following goods:

i. Petroleum crude

ii. High speed diesel

iii. Motor Spirit (commonly known as petrol)

iv. Natural gas

v. Aviation turbine fuel

vi. Alcoholic liquor for human consumption

The authors submit that it is not clear what purpose is going to be served by retention of the Article 366(29A). It is not conceivable that there should be a transfer of right to use petroleum crude or anything which can only be consumed and not “used”. Similarly, there is no possibility of works contract qua these 6 types of goods. Hire-purchase is also not possible on the same reasoning that there is no possibility of hiring a consumable product, it can only be consumed. However, the “transfer otherwise than by way of contract but for consideration” can be invoked in respect of all six categories of goods.

It may be that the Article 366(29A) would be useful for taxing a supply of these 6 goods by association to members or for taxing supply of alcoholic liquor in restaurant, but overall the entire exercise seems to be misguided and haphazard. Only time will tell what role the Article 366(29A) will play in a limited sales tax regime.

What is the Goods and Services Tax Council

The Goods and Services Tax Council is a special body which is being created by the 122nd Constitution Amendment Bill. It is to be tasked with the following functions:

(a) The GST Council will recommend when the date from which the goods and services tax will be levied on:

i. Petroleum crude

ii. High speed diesel

iii. Motor Spirit (commonly known as petrol)

iv. Natural gas

v. Aviation turbine fuel

The Explanation to Article 246A(2) says that Parliament and the State Legislatures will get authority to enact laws to impose the goods and services tax qua the above-mentioned 6 goods from the date of the recommendation. The GST laws will not be automatically extended on such recommendation, an amendment or a separate law has to be passed by the legislature concerned to bring these 6 goods to tax under GST.

Readers should, however, note that these 6 goods are the same goods which are being retained under the Sales tax regime (see Entry 54 State List as amended by 122nd Constitution Amendment Bill). Now, there is no provision in the 122nd Constitution Amendment Bill which says that the States will have to mandatorily stop levying sales tax and the Union will have to compulsorily stop levying Central Excise from the date that the GST Council recommends that GST should be levied on these 6 categories of goods or from the date on which Parliament and the State Legislatures bring these 6 goods to tax under their GST laws.

(b) The GST Council shall make recommenda-tions to the Union and States on:

a. The taxes, cesses and surcharges levied by the Union, the States and local bodies which may be subsumed in the goods and services tax;

b. The goods and services that may be subjected to, or exempted from goods and services tax

c. Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of supply

d. The threshold limit of turnover below which goods and services may be exempted from goods and services tax

e. Rates including floor rates with bands of goods and services tax

f. Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster

g. Special provisions with respect to the States of Arunachal Pradesh, Assam, Jammu & Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, Uttarakhand

h. Any other matter relating to goods and services tax as the Council may decide

Needless to say, all these powers are in nature of advisory powers, they do not bind any legislature.

The composition of the GST Council and other details can be found in the proposed Article 279A.

Amendments relating to the GST Constitutional provisions

The GST Constitution Amendment Bill seeks to amend the Proviso to Article 368(2) in order to make provision for a future Constitutional amendment relating to Article 279 (i.e. provisions relating to Goods and Services Tax Council).

The Constitution can be amended only if both Houses of Parliament pass the amendment with 2/3rds majority of those present and voting in each house (50% of members have to attend such sessions) as per the Article 368(2). However, the Proviso to Article 368(2) restricts the powers of amendment in cases specified in that proviso and in such cases, at least half of the State Legislatures have to ratify the such amendment by passing resolutions in their assemblies.

The Article 279A providing for Goods and Services Tax Council has been placed under the Proviso to Article 368(2) by the GST Constitution Amendment Bill. The Article 246A (which empowers Parliament and the State Legislatures to levy GST) will automatically fall within the auspices of the Proviso to Article 368(2) since it is placed within Chapter I of Part XI.

However, the Article 286 which places restrictions on the power of State Legislatures to levy the tax (i.e. No law of State can impose a tax on supply outside the State, supply in the course of import or export or in the course of inter-State trade or commerce) does not come within the scope of the Proviso to Article 368(2). It is submitted that even the original Article 286 outside the scope of the Proviso to Article 368(2). Hence, whatever be the possibility of abuse of that Article, the same has not happened till now.

Additional 1% tax

As a political compromise with the manufacturing States which will lose out on revenue, the GST Constitution Amendment Bill seeks to empower Parliament to levy a 1% tax on supply of goods in the course of inter-State trade or commerce (which will be assigned to the manufacturing States). The levy is to be operational for 2 years or such other period as the GST Council determines. The Originating State is to levy this additional tax just like under the Central Sales Tax Act.

It is also pertinent to note that the levy of additional tax is on “supply of goods”. Hence, services are not covered. The word “sale” has not been used, hence the additional tax can be levied on all transactions which do not qualify as a “sale” under the Sale of Goods Act, 1930 as well as a “deemed sale” under Article 366(29A).

Miscellaneous

Article 246A opens with the words “Notwithstanding anything contained in Articles 246 and 254”. We have already discussed above the significance of giving a non-obstante reference to Article 254. The non-obstante reference to Article 246 is necessary due to the fact that the Article 246 speaks of the three legislative lists. Since the GST is not placed in any of the three legislative lists, it is necessary that Article 246 be overridden to avoid confusion.

Similarly, since the authority to levy GST comes from Article 246A and is not part of the legislative lists, the provisions of the Constitution which say that any matter which does not form part of the three lists will come within Parliament’s residuary power of legislation have to be amended to avoid conflict with the Article 246A (since GST is also a matter not enumerated in the three lists and cannot be allowed to pass into the exclusive residuary lawmaking powers of Parliament. Hence, Article 248 will suffer amendment).

There are some provisions in the Constitution which allow Parliament to legislate in case of national interest and emergency. These powers are enshrined in Articles 249 and 250. The same are proposed to be amended to bring Article 246A within the purview of these extraordinary lawmaking powers.

Certain duties like stamp duties and duties of excise on medicinal and toilet preparations are levied by the Government of India but collected and appropriated by the States under Article 268. Since the Union Government will not have the exclusive authority to levy an excise duty on medicinal and toilet preparations under the Entry 84 as proposed to be amended, the reference to “medicinal and toilet preparations” in Article 268 is sought to be deleted.

Article 268A deals with service tax levied by the Union and collected and appropriated by the Union and States. Since service tax is to be subsumed in the GST, the Article 268A is proposed to be deleted.

The amendments in Articles 270 and 271 is consequent to the changes in the revenue-sharing between the Union and the States after the GST comes into being.

Paragraph 8 of the Sixth Schedule to the Constitution has been amended to give the Autonomous Regional/District Councils of the North East to levy “taxes on entertainment and amusements.”

Vinayak Patkar and Ishaan Patkar
Advocates

Introduction

The editor-in-chief of All India Federation of Tax Practitioners in its journal for the month of March, 2015, much appreciates the Finance Bill, 2015 but, while concluding its pleasant comments, inter-alia, states as under:

“Amendments to the fiscal laws each year is a regular feature. But, the Federation is of the opinion that whatever may be the law, unless the provision of accountability is introduced in the Act, honest taxpayers will have to suffer at the sweet mercy of few adventurous tax officials, and, therefore, it is essential for the law makers as well as the federation to focus the attention on this vital issue till such time the success is achieved in this behalf.

Recently, an assessee brought to our notice that the returned income was loss of
Rs. 2 crores, and the Assessing Officer, for reasons best known to him converted the loss into profit and assessed at
Rs. 4 crores by treating entire cost of purchase of machinery as income, sister concern’s sales added as the income of the assessee.

One has to imagine the harassment meted out to the assessee by such unlawful actions of the Assessing Officer. This is mainly because albeit the entire addition is deleted by higher authorities, no question will be asked of the Assessing Officer concerned for making such illegal additions. So both escape from the scrutiny on the ground that they being public servants their actions are honestly done. Therefore, it is high time, all concerned with this deeply-rooted malady, must ponder over it and seek remedy in the matter. One will find a number of High Court judgments warning tax officials to follow the due process of law while rejecting stay applications, notwithstanding that the Apex Court as well as High Courts have prescribed guidelines on this issue. Sadly, some tax officials do not show any respect to the judgments of the higher Courts and nothing happens to them. In such a disgusting scenario, we earnestly appeal to the Government to take drastic steps to bring accountability in tax administration and advise tax officials to follow the culture of tax service.”

2. The above said suggestions of the All India Federation of Tax Practitioners are fully justified for the reasons given hereunder :

I. Accountability in Tax Admini-stration

(i) In addition to the reasons given in the introduction portion, reproduced above, two cases namely of M/s. P. S. Agencies1 and M/s. Gurcharan Singh & Sons recently came up before the Hon’ble Appellate Tribunal, VAT, Delhi, wherein the refund claims of the dealers were rejected, inter alia, observing that the cases had been examined by the department and on their advice the refunds had been rejected. A judgment of the Hon’ble Delhi High Court in the case of M/s. Sita Juneja & Associates2 was brought to the notice of the Hon’ble Tribunal, wherein it was held, relying on a judgment of the Hon’ble Supreme Court in the case of Orient Paper Mills Ltd. v. Union of India3 wherein it was held

“That a quasi-judicial power cannot be controlled by the directions issued by the Board. No authority, however high placed can control the decision of a judicial or a quasi-judicial authority that is the essence of our judicial system.”

The Hon’ble Tribunal was also apprised of the observations of the Hon’ble Supreme Court in Mahadayal Premchandra v. Commercial Tax Officer, Calcutta4 and Another which are as under:-

“That is the essence of our judicial system. There is no provision in the Act empowering the Board to issue directions to the assessing authorities or the appellate authority in the matter of deciding disputes between the persons who are called upon to pay duty and the department. It is true that the assessing authorities as well as the appellate authorities are judges in their own cause, yet when they are called upon to decide disputes arising under the Act they must act independently and impartially. They cannot be said to act independently if their judgment is controlled by the directions given by others. Then it is a misnomer to call their order as their judgments, they would essentially be the judgments of the authority that gave the directions and which authority had given those judgments without hearing the aggrieved party.”

In view of the above judgments the impugned orders passed by the authorities below were set-aside and appeals filed were accepted.

This shows how some of the honest tax payers are dragged to litigation – may be up to Appellate Tribunal stage. In this context the following observations of the Hon’ble Rajasthan High Court in Chiranji Lal Tak v. UOI5 are quite apposite: –

“Litigation is not a luxury and/or amusement of entertainment. It is not pleasure or pleasant to come to the Courts. Only when the Union or a State or its officers make it unavoidable, the litigants come up before the Court for redressal of their grievances or for enforcement of their legal or fundamental rights. The litigation is heavily costly…………”

(ii) The above apart, the Hon’ble Punjab & Haryana High Court has observed in its judgment in the case of Leader Engineering Works v. Commissioner of Income Tax, Amritsar II6, that Taxation Laws are technical. This implies that there should be a cadre of taxation officers of the department so that they do not commit mistakes of the type as mentioned above.

(iii) It may be recalled that when sales tax was introduced in the National Capital of Delhi w.e.f. 1-11-1951, there were examination Rules in force in the integrated taxation department which consisted of sales tax, entertainment tax, excise and registration which yield revenue to the Government. For appointment as Sales Tax Officer and Assistant Sales Tax Officer, an official had to qualify the departmental examination by higher standard and for appointment to the post of Sales Tax Inspector the requirement of qualifying the examination by lower standard was a must. The last departmental examination took place in the year 1967 and it can be said that during those days the Sales tax department was one of the most efficient departments under the Delhi Government.

(iv) Another advantage of the examination system was that junior officials who were aspirant for higher posts, could get a chance of promotion in the department much sooner than otherwise it would be possible. To take an example, the author of this article joined the department as a steno-typist in June 1952; promoted as a Stenographer through a test, then got his cadre changed as a Senior Clerk. In May 1960, took the departmental examination as a senior clerk and stood first in papers (i), (ii), (iv) & (vi) and in the aggregate. The then venerable Commissioner, Sales Tax, Shri V.R. Bapat IRS, the only Commissioner so far who served the Department for full five years from 1-6-1959 to 31-5-1964 issued him a demi official letter no. 1044/CST dated 15-7-1960 conveying his heartiest congratulations for securing the highest marks. This facilitated the path of progress and proved as an incentive to others. It was because of his qualifying the examination by higher standard that the author reached the status of Assistant Legal Advisor in the year 1975 and then Sales Tax Officer in February 1978; nay, on the request of a semi-Government department, proceeded on deputation as a Deputy Divisional Manager (law) and, retired as a Joint Divisional Manager from that semi Government of India department. It can be said that all this was possible only because of qualifying the departmental examination.

(v) Attention in this connection is invited to a judgment of the Hon’ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. and Anr. v. Union of India and Another7 wherein it is observed that “the contents of legal concepts do not remain static. Courts must move with the times”. This aspect emphasizes all the more that officials employed to administer a fiscal statute should have experience, so that, they do not make mistakes of the type as made in the cases of M/s. P.S. Agencies and M/s. Gurcharan Singh & Sons, mentioned above.

(vi) Attention in this connection is further invited to the principle laid down by the Hon’ble Supreme Court in its judgment in Parashuram Pottery Works Co. Ltd. v. Income Tax Officer, Circle-I, Ward A, Rajkot8 which reads as under:

“It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realising that price should familiarise themselves with the relevant provisions and become well-versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce, repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activities.”

2. Culture of tax

The principles decided in the following judgments amply justify the need for culture of tax :-

Sr. No.

Court

Principle decided by the judgment

1.

Supreme Court9

“A humane and considerate administration of the relevant provisions of the Income-tax Act would go a long way in allaying the apprehensions of the assessees and if that is done in the true spirit, no assessee will be in a position to charge the revenue with administering the provisions of the Act with ‘an evil eye’ and unequal hand”

2.

Supreme Court10

“The taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due from an assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighted against the assessee.”

3.

Supreme Court11

“Tax planning within framework of law is legitimate.”

4.

Punjab & Haryana High Court12

“It is a legitimate attempt on the part of the assessee to save money by following a legal method. If on account of a lacuna in the law or otherwise the assessee is able to avoid payment of tax within the letter of law, it cannot be said the action is void because it is intended to save payment of tax. So long as the law exists in its present form, the taxpayer is entitled to take its advantage. We find no ground to accept the contention that merely because the gift was made with the purpose of saving payment of wealth tax, it needs to be ignored.”

5.

Orissa High Court13

“It has to be borne in mind that an assessee may be bad enough, but there is no reason why the assessing authorities must be worse and must not conform to the requirements of law in making a best judgment assessment. Observance of the rule of law is of vital importance and is compulsory not only for those who are to obey the law, but also for those who are to enforce the same.”

6.

Allahabad High Court14

“Law does not take notice of trifles.”

7.

Supreme Court15

“The order of the higher judicial authority should be followed by the sub-ordinate authority.”

8.

Delhi High Court16

“The need for consistency of approach and uniformity in the exercise of judicial discretion respecting similar causes and the desirability to eliminate occasions for grievances of discriminatory treatment require that all similar matter should receive similar treatment.”

9.

Gujarat High Court17

“Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rest with the assessees on whom it is imposed by law.”

10.

Supreme Court18

“It is well settled that no man should suffer because of the fault of the Court or delay in the procedure. Broom has stated the maxim actus curiae neminem gravabit – an act of Court shall prejudice no man.”

 


1. 52 DSTC page J-64

2. 38 DSTC pages 60-74

3. (1978) 2 ELT (J-345)

4. AIR 1958 SC 667

5. (2001) 252 ITR 333-335 (Rajasthan)

6. (1980) 124 ITR 44 (P.& H.)

7. (2003) 145 STC 91 (para 44)

8. (1977) 106 ITR 1-10 (last para)

9. Pannalal Binjraj v. UOI (1957) 31 ITR 565-597

10. CIT West Bengal I v. Simon Carves Ltd. (1976) 105 ITR 212

11. Union of India & Ors. v. Playworld Electronics Pvt.Ltd. & Anr. (1990) 184 ITR 308

12. CGT v. Satya Nand Munjal (2002) 256 ITR 516-528

13. Larsen & Toubro Ltd. v. State of Orissa (1998) 111 STC 75-77 para 6

14. Dhigra Mechanical Works (1972) 29 STC 238 (1971) UPTC 821

15. Union of India v. Kamalakshi Finance Corp.Ltd. AIR 1992 SC 711

16. Deeksha Suri v. I.T.A.T. (Delhi) (1998) 232 ITR 395-396

17. Choksi Metal Refinery v. C.I.T. (1977) 107 ITR 63-71

18. Atma Ram Mittal v. Ishwar Singh Punia (1988) 4 SCC 284

H. L. Taneja
Advocate