1. Reversal of Input Tax Credit

A In a writ petition before the Madras HC, the court was concerned in respect of reversal of input tax credit on the ground that the selling dealer has not filed monthly returns. The reversal was done u/s 19. The question was whether the Order of the Assessing Officer reversing ITC was in violation of principles of natural justice. The liability had to be fastened on the selling dealer and not on the writ-dealer which had shown proof of payment of tax on purchases made from the selling dealer. In the circumstances, High Court held in the affirmative and the matter was remitted back to the AO for fresh consideration.

Sri Andal Co. v. A.C.C.T. 2015-16 (21) P 67 TNCTJ (Mad.)

B. In this case too, the Madras HC was concerned of the reversal of input tax credit u/s 19 and the ground was that the Registration Certificate of the selling dealers were cancelled with retrospective effect could not be a ground to deny the benefit of input tax credit to the petitioner and others.

M/s Bhairav Trading Co. And Ors. v. A.C.C.T. 2015-16 (21) P 73 TNCTJ (Mad.)

2. Tax Exemption on Sale of Solar PV Panels And Solar Inverters

Under Notification No. FD-71 CSL 2015 dated 1-8-2015, the Karnataka Govt. exempted with immediate effect, the tax payable by a dealer under the KVAT Act, 2003 on the sale of the goods viz. (1) Solar PV Panels and (2) Solar Inverters.

2015-16 (20) KCTJ P.P 170-171

3. Whether the Authority is Bound to take into Consideration of Belated Production of Statutory Declaration Forms ?

The Karnataka HC was concerned in writ petitions about the construction of section 9(2) r/w Rule 12(7) of the CST Act, 1956 about the powers of the authorities to assess, reassess, collect and enforce payment of any tax. In this case, Assessing Authority levied higher rate of tax on the turnover for which the statutory forms were not produced in time but produced belatedly. The question was whether the authority was bound to take into consideration of belated production of statutory forms and give the benefit of reduction of tax. High Court held in the affirmative, by referring to four cases i.e. (2005) 142 STC 01 (Guj.), (2001) 121 STC 273, (1970) 78 ITR 26 and (AIR 1996 SC 142)

M/s Weir Bdk Valves v. A.C.C.T. And Ors. 2015-16 (20) KCTJ (Kar.)

4. Appeal to The Appellate Authority barred by limitation – Whether delay can be condoned ?

The Karnataka High Court was concerned with the legal provision that u/s. 62(3) of the KVAT Act, 2003 where the Act expressly provided for filing of an appeal within 30 days and empowered the Appellate Authority to condone the delay up to 180 days and the appeal was filed beyond 210 days was indeed beyond the period prescribed for filing of the appeal. Further, section 5 of the Limitation Act, which provided for condonation of delay was not attracted in view of the specific provision under the Act. Hence, the writ petition was dismissed.

BMS Mines And Metals Pvt. Ltd. v. Jt. C.C.T., Bengaluru 2015-16 (20) P 78 KCTJ (KHC)

5. Luxury Tax – Tax liability

In a resort hotel amount collected by way of entry ticket charges to access park and beach, video / camera permit charges from non-residents at the hotel, was a “luxury” as defined u/s 2(ee) ? The HC held that it would fall within the term “luxury” provided in a hotel as defined in section 2(f). It was therefore liable to luxury tax at the appropriate rate under the Kerala Tax Luxuries Act, 1976.

N.C. Gardens & Beach Resort v. State of Kerala And Ors. (2015) 23 KTR 429 (Ker)

6. Compounding of Tax liability option

In this case, the petitioner was a dealer in cooked food who had, in earlier years opted for payment of tax at compounded rates, and did not exercise such an option for the year 2012-13. When an offence was made out by the Dept. with regard to suppression of turnover during the year in question viz. 2012-13, the petitioner chose to get the offence compounded u/s. 74 of the KVAT Act, on payment of compounding fee of ` 4,00,000 over and in addition to the tax amount. The tax amount was quantified at ` 14,43,885 applying the tax rate at 5%. According to the dealer, the rate of tax that has to be applied ought to be 0.5% and not regular rate of 5%. Petitioner-dealer relied on the circular of the Commissioner that in the case of cooked food dealers, who had opted for compounding facility, even in respect of suppressed turnover, the tax need to be paid only at 0.5%. It was therefore the case of the petitioner that, even in his case, looking to the Commissioner’s circular, the tax liability pursuant to the compounding of the offence, should be computed by adopting the rate of tax at 0.5%. However, the writ court held that the scheme of payment of compounded rate was one that was available, as an option to a dealer who chose to pay tax on that basis, in lieu of the regular method of paying tax u/s 6. Inasmuch as, the petitioner had not opted for payment of tax at the compounded rates during the year 2012-13, the *
circular of the Commissioner, could not have any application to the case of the petitioner. Resultantly, the writ petition against the demand notice failed and dismissed.

* In this case, it is seen from the judgment that the Apex Court’s judgment in Commissioner of ST, U.P. v. Indra Industries (2001) 122 STC 100 (SC).

George Mathew v. State of Kerala And Ors. (2015) 23 KTR 444 (Ker.)

7. Deduction of Discount from The Sale Price

In this case, dealer allowed discount subsequent to the sale through ‘credit notes’. Exact quantification of discount was not worked out at the time of sale, as a result dealer paid tax in excess to the extent of discount amount. The assessing authority duly verified the payment of discount and finalised the assessment for the year 1999-2000. However, Addl. Commissioner u/s 21(2) of the U.P. Trade Tax Act, 1948 directed reassessment and recovery of the tax refunded on the discount amount. The petitioner challenged this action by filing writ petition in the HC. While deciding the writ petition, the HC came to the conclusion that there was no application of mind and non-recording of reasons in the Order of reassessment made by the Dy. Commissioner. As a result, the writ petition was allowed setting aside the demand of ` 29,04,735 as a result of reassessment order.

Ceat Ltd. v. State of U.P. And Ors. (2015) 23 KTR 451 (All)

8. Refund in Respect of two tax deposits made

Here in this case, the question was appropriation of payments made during pendency of provision assessment. Entire demand set-aside in provisional assessment, but upheld in the revision proceedings. Meantime, “Amnesty Scheme” was declared by the Govt. and the tax liability settled under the scheme. In the circumstances, writ was filed praying that amounts of pre-deposit be adjusted towards “Principal Tax Liability” under the Amnesty Scheme and liability to be adjusted accordingly. High Court held it was not proper that pre-deposits to be appropriated first as per section 55C of the Act. In the circumstances, the petitioner filed S.L.P. in the SC. The HC held that S.L.P. is not a continuation of revisional proceedings u/s. 55C of the Act and the appellant-assessee would have no right and it cannot be considered in the scope of writ petition. Accordingly, the writ petition was rejected.

A.C.C., Special Circle, Kannur And Ors. v. ACC Ltd. (2015) 23 KTR 397 (Ker.)

9. Amnesty – Settlement of tax arrears

In the case of the applicant, settlement of arrears found to be incorrect, which was prejudicial to the interest of revenue. Hence, Dy. Commr. invoked suo motu powers of revision and he corrected the amnesty order. This was challenged in the revision petition. The HC held that the authority to correct an order passed by any officer subordinate to the Dy. Commr. except Appellate Authority, was well within the power of Dy. Commr. to interfere and prevent prejudice being caused to the revenue, as per section 23(B) and 35 of the Kerala GST Act, 1963. Accordingly, the revision petition was rejected.

United Distilleries v. State of Kerala (2015) 23 KTR 415 (Ker.)

10. Denial of input tax credit

In this case, the dealer was denied input tax credit as the selling dealer did not deposit the tax collected by him. Therefore, the question in appeal before the HC was whether purchasing dealer was again liable to pay the tax? The HC held in the negative on the ground that the sale was complete by transfer of goods on the payment of the price of goods. The movement of goods in case of transfer of goods which was taxable under the VAT Act was not essential but the sale invoice and the tax payment as well as passing of consideration could constitute the sale of such goods. The claim of ITC on the purchases could not be denied on the ground that the selling dealers did not deposit the tax charged from the purchasing dealer unless fraud, collusion and connivance with the Registered dealers selling the goods was established. The rules did not provide that there must be some movement of goods or if there was no movement of goods, then, input tax credit was not admissible. So long as VAT invoice shall contain the particulars of goods sold as per Rule 54(4), ITC could not be denied and, thus, the appeal was decided in favour of the appellant.

Malwa Rice Company, Sangrur v. State of Punjab (2015) 52 PHT 105 (PVT)


In AIFTP Journal Vol. 18 Part 6 at Sl. No. 10 in the case citation, namely, Saral Wirecraft Pvt. Ltd., please read STJ Vol. 54 Part V P 634 instead of P 652 (Guj.) inadvertently mentioned.


We have a godown in Navi Mumbai Municipal Corporation area wherein we store goods which are thereafter dispatched to JNPT for the purpose of using the same in our operations in the Territorial Waters or in the Exclusive Economic Zone. We do some processing on such goods but the goods remain the same even after the processing. The goods remain in such godown for two to three days. We were of the view that CESS or LBT is not payable on such transactions and therefore we did not obtain registration under the respective enactments though such storage is for last several years. Now, the Corporation officials are insisting for registration.Kindly inform us the correct legal position.


Our views are expressed qua the provisions of Local Body Tax (LBT) but the same apply mutatis mutandis to the provisions of Cess.

The Maharashtra Municipal Corporations Act (MMC Act) is relatable to Entry 52 of List-II (State List) of the 7th Schedule to the Constitution and the said entry runs as follows :–

“taxes on the entry of goods into a local area for consumption, use or sale therein.”

Clause (31A) of section 2 of the Act defines LBT and it is stated as follows :

“Local Body Tax” means a tax on the entry of goods into the limits of the City, for consumption, use or sale therein, levied in accordance with the provisions of Chapter XIB, but does not include cess as defined in clause (6A) and Octroi as defined in clause (42).

Clause (aaa) of sub-section (2) of section 127 of the Act is quoted below :–

127. Taxes to be imposed under this Act

(1) For the purposes of this Act, the Corporation shall impose the following taxes, namely,

(a) …………….

(b) …………….

(2) In addition to the taxes specified in sub-section (1) the Corporation may for the purpose of this Act and subject to the provisions thereof impose any of the following taxes, namely,–

(a) ………………….

(aa) …………………..

(aaa) Local Body Tax on the entry of the goods into the limits of the City for consumption, use or sale therein, in lieu of octroi or cess, if so directed by the State Government by Notification in the Official Gazzettee.


Section 152P of the MMC Act states that the Corporations to which the provisions of clause (aaa) of sub-section (2) of section 127 apply, may, for the purposes of that Act, levy and collect Local Body Tax on the entry of goods specified by the State Government by Notification in the Official Gazzette, into the limits of the City, for use or consumption or sale therein, at the rates specified on the Notification.

The Government has accordingly issued Notification.

In view of the above legal provisions, LBT can be levied when goods are brought into the LBT area for consumption, use or sale – mere physical entry of the goods into the LBT area would not attract the levy of LBT. Mere physical entry of goods into the LBT limits would not attract levy of LBT unless goods are brought in for use or consumption or sale. Use and consumption would involve conversion of the commodity into a different commercial commodity by subjecting it to some processing. The entry must be for the purpose of consumption, use or sale within the local area. Further, the word “therein” is significant and indicates unambiguously that the consumption, use or sale must take place in the local area and not outside.

The taxable event is the entry of goods into a local area for use ‘therein’. The fundamental ingredient of the taxable event is that the goods will ‘repose’ in the local area for ‘an indefinite period’ and ‘finally and permanently rest within the municipal limits’ and amount to ‘a mixing up of the goods with the mass of property in the local area’.

Words are not to be viewed in isolation and their meaning ascertained only according to dictionaries. The word must be viewed in the light of its setting in the sentence in Entry 52, List II.

We have considered the sentences in Entry 52, List II and in sections 127 and 152P. It seems to us clear beyond doubt that the legislature has been invested with the power to tax entry of goods into a local area for consumption, use or sale therein. The purpose of allowing the State Legislature to impose LBT is to allow taxation of goods that enter into a local area for either consumption, use or sale within the local area. The purpose is not to allow taxation of entry of any goods which enter temporarily into and then exit the local area. If the consumption and sale have to take place within the local area, the ‘use’ must equally take place within the local area.

Blacks Law Dictionary, 8th Edition, gives the meaning of the word “use” as follows:- “The application or employment of something; esp., a long-continued possession and employment of a thing for the purpose for which it is adapted, as distinguished from a possession and employment that is merely temporary or occasional the neighbours complained to the city about the owner’s use of the building as a dance club.” The word “use” thus means the employment of a thing for the purpose for which it is made or adapted.

If the article is imported within the city limits not for use therein but temporarily as in transit, it must be necessarily inferred that the article has not entered for use within the municipal limits. It is settled law that octroi is not leviable if goods are not brought into the octroi area for the purpose of use in the area but for export and, in fact, exported by the importer. In
Burmah-Shell Oil Storage and Distributing Co. of India Ltd. Belgaum vs. Belgaum Borough Municipality, Belgaum [AIR 1963 SC 906], the Supreme Court observed that it is a peculiar requirement to octroi that the goods must not only have entered the area but must be “for the purpose of consumption, use or sale therein. The Supreme Court observed in para 20 as follows:- “……Added to the word “consumption” is the word “use” also. There may be certain commodities which though put to use are not ‘used up’ in the process. A motor-car brought into an area for use is not used up in the same sense as food-stuffs. The two expressions use and consumption together therefore, connote the bringing in of goods and animals not with a view to taking them out again but with a view to their retention either for use without using them up or for consumption in a manner which destroys, wastes, or uses them up. ………”

In the said decision it was not a case of import for the purpose of use, the Supreme Court concluded as follows:— “…..The company was, however, not liable to octroi in respect of goods which it brought into the local area and which were re-exported……”

The Supreme Court in Acqueous Victuals Pvt. Ltd. vs. State of U.P. And ors. [(1998) 5 SCC 474] where the Supreme Court considered the earlier decision on the subject and observed that the word “consumption” is added to the word “use” and in either case the entry within the municipal limits must be with a view to their retention.

The court further observed that, “15. In view of the aforesaid decision, it becomes obvious that the word “retention” is held to be a synonym with the word “repose”, meaning thereby the article concerned must finally rest within the municipal limits. In the light of the aforesaid judgment of the Constitution Bench of this Court, therefore, it is obvious that before a municipality can impose octroi duty on any commodity, it has to be shown that the commodity concerned was brought within the municipal limits for consumption, that is, for being totally used up so that it ceases to exist within the municipal limits themselves or it was to be used for an indefinite period within the municipal limits so that it ultimately rests within the municipal limits and does not go out subsequently, or the commodity concerned must be shown to have been brought within the municipal limits for the purpose of sale within the said limits.

We are therefore of the view that that considering the facts informed by you, you are not liable to pay LBT in Navi Mumbai Municipal Corporation area. However, you have not informed the nature of processing. Please ensure that the processing done by you does not convert the original goods into different commercial commodity.


Amendment to LBT Provisions w.e.f.1-8-2015

The Government of Maharashtra has amended Rule 3(1) & Rule 17(1) (b) of the Maharashtra Municipal Corporations (Local Body Tax) Rules, 2010, vide Notification No. LBT. 2015/CR-47/UD -32 dated 1-8-2015 as under :

1) In Rule 3 of the Maharashtra Muncipal Corporations (Local Body Tax) Rules, 2010 (hereinafter referred to as “ the Principal Rules) in sub-rule (1) the following shall be added, namely:—

“Provided that for any period starting on or after 1st April 2015, the dealer whose turnover of sales or turnover of purchases, during any year, is not less than 50 Cr. shall be liable for registration.”

2) In Rule 17 of the Principal Rules in sub-rule (1), for clause (b), the following sub-clause shall be substituted, namely:-

“neither the turnover of sales nor the turnover of purchases of a registered dealer, during the year prior to the year starting on 1st April, 2015 has exceeded
Rs. 50 Cr. then, the Certificate of Registration of such dealers shall be deemed to have been cancelled with effect from 1st August 2015.”

In view of the aforesaid amendment in the provisions of LBT law, we request you to kindly examine the issue and let us have your valued opinion in respect of the following queries:

1. As per the amended provisions of LBT law, what is the basis to determine turnover during the year, whether it will be on the basis of the turnover for each Municipal Corporation or total turnover of all Municipal Corporations in Maharashtra State?

2. Presently, my client is discharging LBT liability for 23 Municipal Corporations in State of Maharashtra. In the previous financial Year 2014-2015, out of the 23 Municipal Corporations only 4 Municipal Corporations turnover exceeded
Rs. 50 Crores. Considering the above amendments, whether LBT liability is now to be discharged only for those 4 Municipal Corporations?

3. As per the aforesaid Notification, the amendment is effective from 1st April, 2015. In such case the LBT paid by my client in the remaining 19 Municipal Corporations can be claimed as Refund for the period from April 2015 to July 2015?


1. Section 127(aaa) of the Maharashtra Municipal Corporations Act (MMC Act) read with Section 152P of that Act authorises the Corporation to impose Local Body Tax on the entry of the goods into the limits of the city for consumption, use or sale therein if so directed by the State Government by Notification in the Official Gazette.

2. Section 152T of the said MMC Act authorises the Government of Maharashtra to prescribe the Rules for the purposes of the Act. Accordingly, the Government of Maharashtra has notified the Rules vide Notification number LBT-0209/CR-65/09/UD-34 dated 25-3-2010. Rule 3 of the said Rules prescribes the limits of turnover for registration and Rule 17 provides for cancellation of the registration certificate granted under Rule 3 in the circumstances prescribed under the said Rule 17.

3. Rule 3 creates a liability for registration for two categories of dealers. The first one is the importer and second one is the dealer other than the importer. The word “importer” has been defined under clause (28A) of section 2 of the MMC Act to mean a person who brings or causes to be brought any goods into the limits of the City from any place outside the area of the City for use, consumption or sale therein. Sub-clause (a) of rule 3(1) prescribe the limit of such import at
Rs.. 5,000/-. In other words, if the value of the goods brought into the City of that particular Corporation is not less than
Rs. 5,000/- then that dealer is liable for registration under that Corporation, of course if the further conditions of that Rule 3(1)(a) are also complied with. The other category of dealers, who are other than importers. For them clause (b) has been prescribed under Rule 3(1). This clause speaks about the turnover of purchase or sales other than import and has accordingly prescribed the limits.

4. Now the question is, whether the term “turnover of purchases” or “turnover of sales” mentioned in these clauses (a) & (b) apply to those particular Corporations or whether they apply to the entire State. These terms have not been defined under the Rules but have been defined under the main MMC Act. The term ‘Corporation’ has also been defined under clause (10) of section 2 of the MMC Act and means the Municipal Corporation constituted or deemed to have been constituted in larger area known as a City.

5. The ‘turnover of purchases’ and ‘turnover of sales’ have been defined under clauses (70A) and (70B), respectively, of that Section 2 of the MMC Act and mean the aggregate amount of purchase price paid or payable in respect of purchase of goods and sale price received or receivable in respect of sale of goods.

6. If these definitions of “turnover of purchases”, “turnover of sales”, “Importer” and “Corporation” under the Parent Act are carefully examined along with the scheme of Act, then it should be clear that these limits of turnover are meant to apply to particular Corporation. Those limits cannot be interpreted to mean the aggregate turnover of purchases or sales within the entire State of Maharashtra. If that be so, then clause (a) of Rule 3(1) which prescribes the limit for importer would become redundant. The dealer would be liable for registration in all the Corporations in this State on the basis of clause (b) of rule 3(1), if the interpretation of aggregate turnover in the State of Maharashtra is to hold good. For example, the dealer whose purchase turnover of Schedule A goods is of
Rs. 5,500/- and turnover of all the purchases are more than Rs. 1,50,000/- in Navi Mumbai Municipal Corporation Area shall become liable in all Municipal Corporation Areas in the State of Maharashtra even if he does not have any transaction in any other corporation area. It is illogical.

7. You have informed that only in four Municipal Corporations your turnover has exceeded
Rs. 50 Crores in the previous financial year. In our view, you are liable to pay LBT only in those four Municipal Corporations and not in other 19 Municipal Corporations.

8. However, the view expressed by us is not free from doubt. It is especially so, because the Government of Maharashtra is in great financial crises due to the possible postponement of the GST. The speeches made by the Minister on the floor of House at the time of introduction of Bill qua LBT are not admissible for the construction of the statute. The bureaucracy may in future interpret the same to mean the aggregate turnover in the State of Maharashtra. Therefore, we advise you to immediately apply to the Commissioner of all respective Municipal Corporations under Rule 31 of the LBT rules for determination of the correct position in law. The said Rule 31authorises the Commissioner to statutorily determine, on application, whether Local Body Tax is payable qua particular transaction.

9. Section 152R of the MMC Act is to be read with section 152B. Subsection (3) of section 152B states that every dealer who has become so liable for payment of (CESS) LBT shall continue to be so liable until his registration is duly cancelled. The second proviso to rule 17(b) states that the cancellation of certificate of registration on an application of the dealer or otherwise shall not affect the liability of the dealer to pay the local body tax, including any penalty, interest and sum forfeited due for any period prior to the date of cancellation of the certificate of registration. The clause (b) of rule 17(1) which has been substituted by Notification No. LBT.2015/CR-47/UD-32 dated 1-8-2015 states that the certificate of registration of such dealers (whose turnover is below
Rs. 50 Crores in the previous year) should be deemed to have been cancelled with effect from 1-8-2015. Therefore, in our view your liability to pay LBT continued till 31st July, 2015.

STOP PRESS : The Government of Maharashtra has accepted this legal position and has now issued.

Branch Transfer vis-à-vis inter State sales

Query: A company has standard production which is transferred to branches as per projections made by the sales team. The sales team projects the sales based on market movements. The sales tax department in contemplating that such projection means sales and hence it amounts to inter State sales from the State of movement. Whether the Stand of the department is justified?

Reply: Inter-states sales can take place, if there is movement due to any pre-committed sales. The burden to prove the inter-state sales is on department. Only having sales projections for dispatch purpose cannot amount to sending the goods as per any pre-committed sales. It is possible that while making the projections, the sales team might have considered demand of prospective buyers. However, that is not the criteria for determining sales. At the most, such is a cause for transfer of goods for sale but not a movement due to sale.

From the goods actually transferred, the ascertainment for delivery to particular buyer will be made at the branches and hence it will be sale in such State in light of section 4 of the CST Act, 1956. In my opinion, the department is not justified in contemplating interstate sales under above circumstances.

Certain judgments can also be referred to as under;

Central Distillery & Breweries Ltd. vs. Commissioner of Trade Tax, U.P., Lucknow (115 STC 296)

“The petitioner was a manufacturer of liquor having a distillery at Meerut in the State of Uttar Pradesh, with its Head Office at Delhi. Its tender to the Delhi Administration for supply of rum for the years 1984-85 to 1986-87, for sale at Government run retail vends in Delhi was accepted and agreements for the three years were executed. Under the agreement the petitioner was granted a licence to supply rum to the retail vends in Delhi. The orders for the actual purchase and sale were to be placed subsequently by the Collector at fortnightly intervals and the licensee was required to keep a buffer stock of at least two truck loads at warehouse within the territory of Delhi. Clause 18 of the agreement required the dealer to have licensed premises within the State of Delhi for which purpose it could be allowed the use of a bonded warehouse established by the Government on payment of the specified rent and furnishing of a security deposit. Clause 16 specifically stated that by virtue of this agreement, the Government did not guarantee purchase of any specified quantity of rum during the year or during any portion of it and the licensee shall not be entitled to any compensation or relief on the ground that the sufficient orders were not placed. The Sales Tax Department took the view that the goods in question were taken to Delhi from the State of U.P. to be supplied to the Delhi Administration in pursuance of the agreements, referred to above, and, therefore, the goods moved to Delhi in pursuance of the said agreements, which occasioned the movement of goods from U.P. to Delhi and, therefore, the transactions amounted to inter-State sales within the meaning of section 3(a) of the Central Sales Tax Act, 1956. This was confirmed by the Tribunal. On revision petitions: Held, that the intention of the parties was to bring about intra-State sales at Delhi from the warehouse of the dealer that it was required to establish within the territory of Delhi
where the dealer was required to maintain a buffer stock of at least two trucks without any guarantee that any purchase would be actually made by the Delhi Administration. As and when the Delhi Administration made the purchase, the dealer who was to be a L1-A licensee would supply the goods and replenish the stocks. Therefore, as indicated by the agreement, the movement of the goods to Delhi was not in pursuance of any transaction of sale but in pursuance of the licence under
which the dealer was to maintain a warehouse with a minimum stock within the territory of Delhi. The agreement by itself did not bring about any sale or purchase and, therefore, the transport of goods from the distillery in U.P. to the warehouse in Delhi could not be treated as a movement of goods occasioned by any sale or purchase. There was no evidence to show that the supply of rum to the Delhi Administration in the three years resulted in any inter-State sales taxable in State in U.P.”

State of Andhra Pradesh vs. Coromandel Paints & Chemicals Ltd.(98 STC 82)

“The Shipping Corporation of India called for tenders for the supply of paints suitable for marine ships. The respondent submitted its tender, which was accepted. The terms of the acceptance of the tender, were, inter alia, that during the period of contract the respondent should supply paints to vessels owned, managed and chartered vessels against the orders placed by the officers/agents of the Shipping Corporation of India at the rates and on the terms mentioned in the Schedule. On the basis of the tender agreement the sales tax assessing authority held that there had been inter-State sales of goods and, rejecting the claim that the movement of goods was by way of stock transfers covered by Form F, brought the goods to tax under the Central Sales Tax Act, 1956. The Tribunal held in favour of the respondent. On revision petitions:

Held, dismissing the petitions, that where the terms of the agreement enjoin supply of goods against an order already placed, it amounts to a contract if the goods are specified but they are to be delivered at a future date as and when specified. But, where neither the quantity nor the goods have been specified and the supply has to be made at a stated period of the required quantity, it cannot be said that there was a sale or even an agreement to sell, it is merely a standing offer. In the instant case, the terms of the letter of acceptance of the tender contemplated that the respondent would keep paints of the varieties, which were the subject-matter of tender, ready at their sub-offices or branches and that they were bound to supply as and when the order was placed by the Shipping Corporation with the respondent; this would only be a standing offer but not a “sale” or an “agreement to sell”. Neither was there an agreement to sell containing a stipulation regarding movement of goods from one State to another, nor did the goods in fact move from one State to another in pursuance of the contract. Acceptance of the tender of the respondent to meet the requirements of the orders that would be placed from time to time resulted in a standing offer by the respondent pursuant to which arrangements were made for the sale of paints to the Shipping Corporation. There was no obligation on the Shipping Corporation to accept the goods which had been moved to the branches; nor could there be any complaint for not taking of the goods after the goods had arrived at the branches; here the process of sale commenced only after an order was placed by the Shipping Corporation with the respective branches which delivered the goods and effected sales. There were therefore no inter-State sales taxable under the Central Sales Tax Act.”

Balabhagas Hulaschand vs. State of Orissa ((37 STC 207)(SC)

The Hon’ble Supreme Court along with example explained as under;

“Case No. II-A, who is a dealer in State-X, agrees to sell goods to B but he books the goods from State X to State Y in his own name and his agent in State Y receives the goods on behalf of A. Thereafter the goods are delivered to B in State Y and if B accepts them a sale takes place. It will be seen that in this case the movement of goods is neither in pursuance of the agreement to sell nor is the movement occasioned by the sale. The seller himself takes the goods to State Y and sells the goods there. This is, therefore, purely an internal sale which takes place in State Y and falls beyond the purview of section 3(a) of the Central Sales Tax Act not being an inter-state sale.”

Indian Duplicators Ltd. vs. State of Tamil Nadu (57 STC 263)(Mad.)

The gist of said judgment is as under:

“The assessee, a manufacturer and dealer in duplicators, its accessories and duplicating ink, etc., in Madras with branches outside, dispatched goods to its Hyderabad branch and the branch supplied the goods to local buyer against orders placed by the buyers with the branch office at Hyderabad. There was no contract for supply of goods by the Madras office to the Andhra Pradesh buyer. The bills were raised and collected in the name of the branch at Hyderabad and sales tax was also paid according to the rates prevailing in Andhra Pradesh. But the goods had the mark of the Andhra Pradesh buyer’s name on them. The assessee claimed exclusion of such turnover on the ground that it represented stock transfer from Madras to the Hyderabad branch. The assessing authority held that the goods in question were moved from Madras specifically for the purpose of satisfying the requirements of the buyer in Andhra Pradesh, and that the sales were inter-State sales falling under section 3(a) of the Central Sales Tax Act. 1956. The Appellate Assistant Commissioner held the transaction as representing stock transfer. The Board of Revenue, by its suo- moto powers, set aside the order of the Appellate Assistant Commissioner on the ground that there was a close nexus between the order placed by the buyer in Andhra Pradesh, with the branch of the assessee at Hyderabad and the movement of goods for Madras to Hyderabad, and therefore, the turnover was to be regarded as representing inter-State sales falling under section 3(a) of the Central Act. On appeal to the High Court:

Madras High Court held that on the facts and circumstances of the case, that though there was a movement of goods from Madras to Hyderabad, such movement was of goods manufactured in the ordinary or general course of business of the assessee and for being sold as and when the manufacturers received orders for purchase at its branch office at Hyderabad. There was no establishment of any direct link or nexus between the assessee and the movement of goods for supply to the Andhra Pradesh buyer, especially when the goods dispatched by the assessee were manufactured by it in the ordinary course of its business. The mere fact that the mark of the Andhra Pradesh buyer’s name was found on the goods would not necessarily lead to the conclusion that there was a completed transaction of sale by the assessee in Madras by the appropriation of the goods towards any contract. Therefore, the transaction was not to be regarded as representing inter-Sate sales effected by the assessee.”

Steel Authority of India Ltd. vs. State of Orissa and others (30 VST 334)(CSTAA)

The small gist of judgment is as under:

“The appellant, an undertaking of the Government of India, had a steel plant in Rourkela from where different items of iron and steel were manufactured and dispatched to its various branches located all over the country.

The Time Bound Scheme was evolved by the Central Government under the Iron and Steel Control Order, 1956, to estimate the demands for different kinds of steel products from different areas and to advise a suitable production programme to the steel plants. Demands from eligible customers for a quarter were registered making suitable allotments and offering and delivering the products at the specified price through branches.

The branch sales office, after compiling the demands under the TBS scheme and other schemes prepared the forecast and sent it to the Central Production Planning Department through its regional office. The Central Production Planning Department and the regional office finalised the branch-wise dispatch programme and sent it to the plants. The plants, on manufacturing the goods, dispatched them to the different branch sales offices. On receipt of the material mostly by rail the branch sales offices sent communications to the customers to deposit the sale price and take delivery of the goods. Acting on that the customers made full payment and lifted the goods from the wagon or stockyards on the basis of delivery order, challan and invoice issued by the branch sales offices. Claiming that the dispatches from Rourkela were in the nature of stock transfers and on that footing paying local sales tax to the respective States, the appellant filed F forms under section 6A of the Central Sales Tax Act, 1956, read with rule 12(5) of the Central Sales Tax (Registration and Turnover) Rules, 1957, for most of the stock transfers and claimed exclusion of the value of stock transfers from the turnover under the Central Sales Tax Act, 1956. The assessing authority disallowed the claim for exclusion and treated the transactions under the Scheme as inter-State sales and levied tax under section 3(a) of the Central Sales Tax Act, 1956, at four per cents, in the absence of C forms. The Assistant Commissioner confirmed the assessments but granted relief in regard to the quantum of turnover based on actual sales figures. The Tribunal confirmed the assessments granting some incidental reliefs. On appeal to the Appellate Authority:

Held, remanding the matter to the Tribunal for fresh disposal, that the Tribunal had not referred to documents to show the modus operandi of the transactions negating the case of the assessing authority that there was an inextricable link between the contract of sale and the movement of goods pursuant thereto. The goods were not tailor-made but they were of standard make and the production programme was based on assessment of market demand in general rather than to cater to the requirements of particular customers. The mere fact that the objective of the Scheme was stated to be to give commitment to the customers regarding supply materials against firm orders did not lead to the necessary inference that the offer and acceptance resulting in an agreement of sale would have come into effect before the goods were dispatched from the steel plant. It was wrong to characterise the scheme itself as spelling out an agreement of sale. A general statement of the objective did not control the operative clauses of the scheme and the actual modalities of the transactions.”

Thus, the legal position is required to be decided in light of above judgments, as well as other judgments on the issue. Further, it is also settled that each transaction is required to be examined.

Under above legal and factual position, there cannot be inter-state sales on the facts given in the query.

Income from Other Sources

Query No. 1: [Taxability of Single Premium Money Back Policy]

Mr. X has purchased single premium money back plan of LIC called New Bima Bachat Policy. Sum assured is
Rs. 7,00,000/-. He has paid a single premium of Rs. 5,59,843/-. He will be getting
Rs. 1,05,000/- as survival bonus after every three years from LIC during the span of 15 years and thereafter the sum assured with Bonus on maturity.

The survival bonus and sum assured with bonus, receivable during the lifetime of Mr. X, is taxable in his hands as there is no exemption available as per the provisions of section 10(10D) of the Income-tax Act. There will be TDS also on this amount. Mr. X has not claimed deduction under section 80C on this premium paid, which in any case would have been
Rs. 70,000/- only.

In this connection, the following questions arise:

1. Is there any specific provision under the Income-tax Act by which this amount is taxed under the head “Income from other sources”?

2. Is it possible to show the income under head Capital Gain?

3. Is there any provision to claim the investment made in the policy as cost against the survival benefits?

4. If yes then how the same is to be claimed i.e. can one claim the cost by dividing it against the survival benefit receivable after every three years and then pay tax on entire amount received on maturity.

5. If the investment made is not allowed to be deducted from the survival amount receivable, will it not be unconstitutional as this will amount to taxing gross receipt and not income.


From the facts, it is clear that Mr. X has taken money back insurance policy called as New Bima Bachat Policy. As per the terms of the said policy, it is a single premium payment policy, where sum assured will be paid back to the policy holder in the form of survival benefit periodically. First survival benefit will be given to the policy holder on completion of three years of the policy and thereafter completing every three years. At the end of the term, policyholder on maturity will receive a sum assured minus survival benefits paid plus bonus. If he dies within the term of policy, death benefit will be paid to his nominee i.e. sum assured plus bonus.

As stated correctly, Mr. X is only entitled to claim deduction at
Rs. 70,000/- as per section 80C(3A) read with section 80C(2), though he has paid premium of
Rs. 5,59,843/-. However, as stated he has not claimed any deduction under section 80C.

The amount receivable on maturity of the said policy would not be entitled to the benefit of section 10(10D) of the Act, amounting to
Rs. 1,75,000/- plus bonus (i.e. sum assured Rs. 7,00,000/- less survival benefits paid in five installments of
Rs. 1,05,000/-. i.e. Rs. 5,25,000/-).

So, the survival benefits received would be nothing but return of capital as it is money back policy, hence, the same is not liable to tax when it is received. But on maturity bonus amount would be taxable in the hands of Mr. X under section 56 of the Act as it cannot be taxed under any other head.

In view of the above, the queries raised in serial nos. 2 to 4 do not require any elaboration.

Further, there is nothing unconstitutional, as survival benefit is nothing but return of investment and on maturity bonus would be taxable as the same is not exempt under section 10(10D) of the Act.

As regards TDS deducted on each payment of survival benefit can be claimed as a refund.


Query No. 2: S. 45(4): [Taxability of Distribution of assets during continuation of firm and on dissolution]

A firm having three partners and doing construction work.

In the said firm, there are tippers and JCB machines standing in balance sheet for business purpose.

Out of three partners, one partner wants tipper and another partner wants JCB machinery for his individual business purpose.

Can it be transferred by debiting their capital account and crediting machinery account during the continuation of partnership business without attracting capital gains tax.

What will be position, if the said transaction is effected on dissolution of firm?

Further, if the firm is decided to be dissolved on April 1, 2016 and the said transaction is made then as to whether the entry is to be passed on March 31, 2016 or April 1, 2016 and in that circumstances as to which date will be treated for taxation purpose i.e. March 31, 2016 or April 01, 2016 and in which year liability to pay income tax, if any, will arise?


If plant and machinery are withdrawn by the partners at book value during the continuance of partnership firm, then, the same can be debited to partners account and credited to plant and machinery account in such case there is no question of any liability of capital gains. [see Malabar Fisheries Co. (120 ITR 49) (SC)]

However, if partners withdraw at the time of dissolution of firm then as per section 45(4) of the Act, the liability in the hands of firm would arise on the basis of fair market value of the assets withdrawn on the ground that it amounts to distribution.

The dictionary meaning of the expression “distribution” is “to give each a share, to give several persons”. The expression ‘distribution’ connotes something actual and not notional. It can be physical, it can also be constructive. One may distribute amounts between different shareholders either by crediting the amount due to each one of them in their respective accounts due to him.
[see Punjab Distilling Industries Ltd. v. CIT (57 ITR) (SC)].

The Madras High Court in CIT vs. Vijayalakshmi Metal Industries [256 ITR 540] has held that the relevant date for ascertaining the year in which the tax is to be levied is the year in which the transfer takes place. That year may or may not be the year in which the dissolution of the firm takes place. Until such time such capital asset is transferred by way of distribution of the assets on the dissolution of the firm no occasion arises for brining to tax any capital gain on a transfer which has not taken place. The section itself gives no room for doubt as the year in which the capital gains to be brought to tax is “the previous year in which the said transfer takes place.”

Thus the year in which transfer takes place would create liability for taxation.

Income from Other Sources

Query No. 3: [S. 56(2) Gifts from Nana / Nani]

Gift given by Nana or Nani (i.e. mother side of assessee) is taxable or not? Whether Nana / Nani is covered under the definition of ‘Relative’? Whether lineal ascendant / descendant is also covered by mother side of assessee?


As per Explanation to section 56(2)(vii) “relative“ means in case of an individual:

(A) Spouse of the individual

(B) Brother or sister of the individual

(C) Brother or sister of the spouse of the individual

(D) Brother or sister of either of the parents of the individuals.

(E) Any lineal ascendant or descendant of the individual

(F) Any lineal ascendant or descendant of the spouse of the individual

(G) Spouse of the person referred to in items (B) to (F)

The term “lineal descendants” include all descendants and is not restricted to male descendants. [see Jagnnath vs. Kunja Behari (AIR 1929 PC 162)]. So lineal ascendant would include an ascent or in direct line of ascent of a child which includes Nana / Nani (i.e. parents of mother).

Capital Gains

Query No. 4: [Right in the flat, converted into flat]

An individual booked a flat in a building in April 2012, allotted flat no. A-1. Building is completed in March 2015 and possession given. The flat is resold in May 2016 whether it will be long term capital gain or short term capital gains


It is a long term capital gain as per Punjab and Haryana High Court in Mrs. Madhu Kaul vs. CIT [363 ITR 54]. In that case, the assessee was allotted a flat on June 7, 1986 conveyed on June 30, 1986. The assessee paid the first installment on July 4, 1986. The flat was later identified and delivery of possession was given on November 30, 1988. The assessee sold the flat on July 5, 1989. The assessee’s claim for treating
Rs. 2,38,609/- received from sale of a flat as long term capital gain was rejected treating it as short term capital gains. This was confirmed by the Commissioner (Appeals). The Tribunal held that as a specific flat was allotted to the assessee, on November 30, 1988,the allotment letter or payment of the first installment did not entitle the assessee to claim that the gains were long term capital gains.

However on appeal, the High Court held that the flat was allotted to the assessee on June 7, 1986, by a letter conveyed to the assessee on June 30, 1986. The assessee paid the first installment on July 4, 1986 thereby conferring a right upon the assessee to hold a flat, which was later identified and possession was delivered on a later date. The mere fact that possession was delivered later did not detract from the fact that the allottee was conferred a right to hold the property on issuance of an allotment letter. The payment of the balance installments, identification of a particular flat and delivery of possession were consequential acts, that related back to and arose from the right conferred by the allotment letter,

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.

Recently in the case of Larsen & Toubro and others1, the Apex Court had occasion to examine that whether imposition of service tax on composite works contract was valid under various sub-clauses of S. 65(105) as existed prior to 1-7-2012. The Hon’ble Delhi High Court in G. D. Builder’s Case2 had held that service tax was leviable on service portion of a composite contract involving material and services even if the rules were not framed for computation of tax. In Larsen and Toubro’s case the ratio of G. D. Builder’s case was challenged and the Hon’ble Supreme Court in para 34 of the judgment referring to Mahim Patram Pvt. Ltd vs. UOI3 held that, “the Delhi High Court judgment unfortunately misread the aforesaid judgment of this Court to arrive at the conclusion that it was an authority for the proportion that a tax is leviable even if no rules are framed for assessment of such tax, which is wholly incorrect”. The conclusion reached by the Delhi High Court was held as wholly incorrect.

The core issue before the Hon’ble Supreme Court was that whether five taxable services, namely, ‘Consulting Engineer Service’ (sub-cl. g), ‘Erection Commission and Installation Service’ (sub-cl. zzh), ‘Technical Testing and Analysis Service’ (sub-cl. zzd), ‘Commercial or Industrial Construction Service’ (sub-cl. zzq) and ‘Construction or Complex Service’ (sub-cl. zzzh) were whether capable of imposing the charge on a composite contract, particularly when S. 67 target only value of taxable service i.e. “the gross amount charged by the service provider by such service provided by him”. The charging S. 66 seeks to levy charge of service tax on services defined in various sub–clauses of S. 65(105). The operating portion of S. 65(105) describe “taxable service” as “service provided or to be provided…………”. The combined reading of S. 65(105), S. 66 and S. 67 would unequivocally show that what is referred to in the law (Ch. V of Finance Act, 1994) is the taxability of the service contract simpliciter and not a composite works contract. In none of the relevant clauses, there was any provision to remove the property in goods transferred in the execution of works contract. In G. D. Builder’s case the Delhi High Court rejected the contention on the assessee holding that the provisions of the clauses (zzd), (zzq) and (zzzh) were applicable only to the service contracts and not to the composite works contract and the question of bifurcation of service element did not arise at all. The judgment of Delhi High Court in the impugned case is effectively overruled.

The Hon’ble Supreme Court found the findings of the Delhi High Court is misplaced that the term, ‘gross amount charged’ in S. 67 signifies the gross amount charged for the service portion and not the whole amount of the works contract as several deductions have to be made to arrive at the service portion from the indivisible works contract amount. The Court further observed that even in case of completion and finishing of service, the exemption for material portion was not allowed at all which means that the service tax was required to be paid on the entire portion including the material portion in the case of that service.

The argument of the revenue that the exemption notification4 providing for exemption of certain percentage of the contract value gave the enough sanctity to the levy was found illogical and irrelevant, thus, “whichever judgments which are in appeal before us and have referred to and dealt with such notifications will have to be disregarded. Since, the levy itself of service tax has been found to be non-existence, no question of any exemption would arise”. Therefore on the basis of the exemption notification, levy of service tax cannot be justified as valid as the ‘Erection, Commission and Installation Service’, ‘Commercial or Industrial Construction Service’ and ‘Construction or Complex Service’ as under the relevant provisions the levy of service tax is non-existence on composite works contract. The exemptions were only in respect of material portion, whereas the exemption u/s. 93 could be granted from the value of taxable service and not for material portion which was not a service at all. It is well settled that a notification cannot expand or enlarge the charging section. Further, the subsequent legislation, viz. the insertion of clause (zzzza) showed that the earlier legislation would not cover the composite works contract and the impugned exemption notification was ultra vires to the Act.

A view is expressed that from 1-6-2007 the levy of service tax is valid even under clauses (g), (zzd), (zzh), (zzq) & (zzzh). Such a view fails to appreciate that the judgment of the Hon’ble Supreme Court is that those clauses never gave power to the Government to tax other than the service element. Thus, the said judgment would hold good even after 1-6-2007 so far as the levy of service tax on composite works contract under those clauses is concerned. The power to levy service tax on service portion involved in composite works contract was assumed by the Government only from 1-6-2007 when the Parliament inserted sub-clause (zzzza) of clause (105) of S. 65 of the Finance Act, 1994 by the amendment made by the Finance Act, 2007 and provisions were made under the rules to compute value of taxable service under composite contract or to pay tax under composition scheme rules.

The fallout of the judgment

1. No service tax can be levied on composite works contract under sub-clauses (g), (zzd), (zzh), (zzq) & (zzzh) of S. 65(105), i.e. ‘Consulting Engineer Service’, ‘Technical Testing & Analysis Service’, ‘Erection, Commission and Installation Service’, ‘Commercial or Industrial Construction Service’ and ‘Construction or Complex Service’ at all, as these services refers only to pure service contracts.

2. S. 67 referring to valuation of service is applicable to pure services only and the exemption notifications with respect to material portion are of no consequence.

3. Service tax on construction of building where provision of material (transfer of property in goods) is also a part of the contract under sub-clauses (zzq) & (zzzh) is wholly outside the purview of the Finance Act, 1994. Thus, service tax on under-constructed sale of flats or units of immovable properties is also outside the purview of the law, being nothing but a specie of composite works contract as held by the Apex Court in K. Raheja Development Corporation’s5 case. With this judgment, all pending disputes of levy of service tax on under-constructed flats under sub clause (zzq) & (zzzh) of S. 65(105) may be resolved in assessee’s favour.

4. No service tax can be levied on completion and finishing contracts under sub-clauses (zzq) & (zzzh).

5. Free supply of material may not be covered under service tax as the exemption notification itself is invalid. The issue of leviability of service tax on free supply of material is pending in Supreme Court and it may be guided by this judgment.

6. The judgment can also have the repercussion on the Declared Service clause (b) of S. 66E from 1-7-2012, however, the same needs to be tested.

7. A question may arise of ability of claim of refund by the assessee who has paid service tax under the impugned clauses as existed prior to 1-7-2012. However, the refund depends on the factors like ‘unjust enrichment’ i.e. recovery of taxes from the buyers and the controversy as regards to time barring in refund claim which is not discussed here. However, in principle it is clear that under Article 265 of the Constitution of India no tax can be levied or collected expect with the authority of the law and this case may be regarded as perfect example of such unauthorised levy.

(Source: Article published in souvenir of National Tax Conference held at Varanasi on 10 & 11 October 2015)

Under the provisions of Income Tax Act 1961, when an assessment is made and demand is raised against the assessee, the assessee usually prefers first appeal before the CIT(A) and files application for stay of the demand in dispute before the AO within thirty days from the date of receipt of the assessment order.

But under the Indirect Tax Laws, the assessee being aggrieved with the order of assessment prefers Appeal before the First Appellate Authority along with an application for stay of the demand in dispute. The latter seems to be very much reasonable. Because, the authority, who would dispose of the first appeal would certainly apply his mind while disposing of the stay application filed before him.

Since the year 1961 the Income Tax Law came in to existence, it was never thought of that the AO who had passed the order of assessment would never act in a fair manner to grant stay on the demand in dispute. It is also not expected in common paralance that the AO, who has raised demand would grant stay on the demand to the assessee. Because if the AO will grant stay of the demand in dispute, he will mean that he is challenging his own order.

Section 220(6) of the Act provides that where an assessee has presented an appeal under section 246 or section 246A the Assessing Officer may, in his discretion and subject to such conditions as he may think fit to impose in the circumstances of the case, treat the assessee as not being in default in respect of the amount in dispute in the appeal, even though the time for payment has expired, as long as such appeal remains un-disposed.

Besides that the First Appellate Authority i.e. the CIT(A) was not given with the power under the statute to hear and dispose of the stay application during the pendency of appeal. A few Hon’ble High Court(s) have taken view that the CIT(A) has inherent, implied and ancillary power to hear and dispose of the stay application although it is not expressly mentioned in the Statute. Some of citations are reproduced hereunder:-

(a) ITO v. M.K. Mohammed Kunhi (1969) 71-ITR-815(SC).

(b) V. N. Purushothaman v. Agricultural ITO (1984) 149-ITR-120 (Kerala).

(c) Prem Prakash Tripathi v. CIT (1994) 208-ITR-461 (All.).

(d) Debashis Moulik v. CIT (1998) 231-ITR-737 (Cal.).

(e) Smita Agarwal v. CIT (2010) 321-ITR-491 (All.),

(f) Jagdish N.Hinduja v. CIT (2011) 59-DTR-333 (Karn.).

(g) UTI Mutual Fund v. ITO (2012) 345-ITR-71 (Bom.),

(h) Maheswari Agro Industries v. Union of India (2012) 346-ITR-375 (Raj.),

In the above judgment [ITO v. M.K. Mohammed Kunhi (1969) 71-ITR-815 (SC)], the Hon’ble Supreme Court of India has discussed about the power of the CIT(A) to grant stay as under.:—

In our opinion, the Appellate Tribunal must be held to have the power to grant stay as incidental or ancillary to its appellate jurisdiction. This is particularly so when section 220(6) deals expressly with a situation when an appeal is pending before the Appellate Assistant Commissioner, but the Act is silent in that behalf, when an appeal is pending before the Appellate Tribunal. It could well be said that when section 254 confers appellate jurisdiction, it impliedly grants the power of doing all such acts, or employing such means, as are essentially necessary to its execution and that the statutory power carries with it the duty in proper cases to make such orders for staying proceeding as will prevent the appeal if successful from being rendered nugatory.”

Similarly, in the judgment [Maheswari Agro Industries v. Union of India (2012) 346-ITR-375(Raj.)], cited supra the Hon’ble Rajasthan High Court has held the same as under:—

“In view of aforesaid legal position culled out from different judgments and there being no contrary view available before this Court cited from the side of Revenue or otherwise, this Court is inclined to hold that First Appellate Authority, namely, Dy. CIT(A) or CIT(A) have inherent, implied and ancillary powers to grant stay against the recovery of disputed demand of tax while seized of the appeal filed before them in accordance with s. 246 or 246A of the Act. There is yet another reason for holding so, and such inherent powers have to be inferred even in the absence of any specific statutory provision conferring the power to grant stay upon such authorities under the Act.”

Although the legal position is very much clear but the CIT(A) is quite reluctant to exercise this power. On the other hand, they are not exercising this power at all. Such is the attitude on the part of CIT(A) to stay the demand during the pendency of an appeal. But the Parliament of India has not considered this aspect till this date and amended the law to that effect.

Against the stay order of the AO the assessee has to approach the Joint/Additional Commissioner and against the order of JCIT/Addl. CIT’s order, the CIT. These are all administrative orders. Being aggrieved with the stay order of the CIT the assessee may prefer Writ Application before the Hon’ble High Court.

In a number of cases where high pitch assessment is done by the AO and stay application is not considered by him, the assessee suffers a lot due to coercive measures taken by AO for realisation of the demand in dispute by way of attachment of bank accounts for recovery of the demand.

Further, it is generally understood that instructions of CBDT are binding on the AO. CBDT’s clarification on Instructions on Stay of Demand issued vide Letter [F. No. 404/10/2009-ITCC], dated 1-12-2009 is discussed below for better appreciation of the facts.

Many queries have been received by the Board regarding the applicability of Instruction number 95 dated 21-8-1969 vis-à-vis Instruction number 1914 dated 2-12-1993. Many assessees are taking the plea that Instruction No. 1914 does not supersede Instruction No. 95 dated 21-8-1969.

1. Instruction No. 95 dated 22-8-1969 was an assurance given by the then Deputy Prime Minister during the 8th Meeting of the Informal Consultative Committee held on 13th May, 1969. The observations made by the Deputy Prime Minister were as under:-

“Where the income determined on assessment was substantially higher than the returned income, say twice the latter amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeal provided there were no lapses on the part of the assessee.”

The above observations were circulated to the field officers by the Board as Instruction number 95 dated- 21-8-1969.

2. The matter has been considered by the Board and the decision of the Board has been approved by the Finance Minister. It is hereby clarified that subsequent to Instruction No. 95 following Instructions/clarifications on the stay of demand were issued till 15th October, 1980:-

(i) Clarification to Instruction number 95 was issued on 14-9-1970 stating that it relates to disputed demands only.

(ii) Instruction number 635 was issued on 12-11-1973 stating that stay should be granted only in those cases where demands are attributable to substantial points of dispute.

(iii) Clarification to Instruction number 95 dated 13-7-1976 held that the Instruction becomes operative only in cases where there are no lapses on the part of the assessee.

(iv) Instruction number 1067 dated 21-6-1977 held that the ITO can pass the necessary orders u/s. 220 (6) in all cases except cases under section 144A or 144B where the approval of IAC is required.

(v) Instruction number 1158 dated 27th March. 1978 held that in suitable cases the assessee may be allowed to furnish security.

(vi) Instruction number 1282 dated 4th October 1979 held that requests should be made to CIT(A) and ITAT for early disposal of appeals and constant watch should be kept on progress of appeals.

(vii) Instruction number 1362 was issued on 15-10-1980 in supersession of all the earlier Instructions. It was an Instruction covering the issue in detail and in para 4 of the same there was a clear reference to the proposition laid down in Instruction number 95 which is as follows:- In exercising this discretion, the Income-tax Officer should take into account factors such as: whether the points in dispute relate to facts; whether they arise from different interpretations of law; whether the additions have been made as a result of detailed investigation; whether the additions are based on materials gathered through enquiry/survey/search and seizure operations; whether the disputed addition to income has been assessed elsewhere by way of protective assessment and the tax thereon has been paid by such person etc. The magnitude of addition to income returned cannot be the sole determinant in this regard. Each disputed addition will need to be considered to arrive at the quantum of tax that may need to be stayed.

3. It is clear that the substance of the assurance as laid down in Instruction number 95 dated 21-8-1969 was submerged in the Instruction number 1362 dated 15-10-1980 which was issued in supersession of all earlier Instructions on the subject. Instruction No. 1914 dated 2-12-1993 was issued subsequently in super-session of all the earlier Instructions on the subject and the said Instruction also covers unreasonably high pitched assessment order and genuine hardship cases.

4. It is therefore clarified that there is no separate existence of the Instruction No. 95 dated 21-8-1969. Instruction No. 95 and all subsequent Instructions on the issue ceased to exist from the date Instruction No. 1362 came into operation. In turn Instruction No. 1362 and all subsequent Instructions on the issue also ceased to exist the day Instruction No. 1914 came into operation i.e. 2-12-1993.The Instruction No. 1914 holds the field currently and a copy of Instruction No. 1914 is enclosed for reference.

Similarly, Instructions for Recovery of Outstanding Tax Demands have been issued by CBDT vide No. 1914 F. No. 404/72/93 ITCC dated 2-12-1993.

1. The Board has felt the need for a comprehensive instruction on the subject of recovery of tax demand in order to streamline recovery procedures. This instruction is accordingly being issued in supersession of all earlier instructions on the subject and reiterates the existing Circulars on the subject.

2. The Board is of the view that, as a matter of principle, every demand should be recovered as soon as it becomes due. Demand may be kept in abeyance for valid reasons only in accordance with the guidelines given below:

A. Responsibility

i. It shall be the responsibility of the Assessing Officer and the TRO to collect every demand that has been raised, except the following:

(a) Demand which has not fallen due;

(b) Demand which has been stayed by a Court or ITAT or Settlement Commission;

(c) Demand for which a proper proposal for write-off has been submitted;

(d) Demand stayed in accordance with paras B & C below.

ii. Where demand in respect of which a recovery certificate has been issued or a statement has been drawn, the primary responsibility for the collection of tax shall rest with the TRO.

iii. It would be the responsibility of the supervisory authorities to ensure that the Assessing Officers and the TROs take all such measures as are necessary to collect the demand. It must be understood that mere issue of a show cause notice with no follow-up is not to be regarded as adequate effort to recover taxes.

B. Stay Petitions

i. Stay petitions filed with the Assessing Officers must be disposed of within two weeks of the filing of petition by the tax- payer. The assessee must be intimated of the decision without delay.

ii. Where stay petitions are made to the authorities higher than the Assessing Officer (DC/CIT/CC), it is the responsibility of the higher authorities to dispose of the petitions without any delay, and in any event within two weeks of the receipt of the petition. Such a decision should be communicated to the assessee and the Assessing Officer immediately.

iii. The decision in the matter of stay of demand should normally be taken by Assessing Officer/ TRO and his immediate superior. A higher superior authority should interfere with the decision of the AO/TRO only in exceptional circumstances; e.g., where the assessment order appears to be unreasonably high-pitched or where genuine hardship is likely to be caused to the assessee. The higher authorities should discourage the assessee from filing review petitions before them as a matter of routine or in a frivolous manner to gain time for withholding payment of taxes.

C. Guidelines for staying demand

i. A demand will be stayed only if there are valid reasons for doing so. Mere filing an appeal against the assessment order will not be a sufficient reason to stay the recovery of demand. A few illustrative situations where stay could be granted are: It is clarified that in these situations also, stay may be granted only in respect of the amount attributable to such disputed points. Further, where it is subsequently found that the assessee has not co-operated in the early disposal of appeal or where a subsequent pronouncement by a higher appellate authority or court alters the above situation, the stay order may be reviewed and modified. The above illustrations are, of course, not exhaustive.

ii. In granting stay, the Assessing Officer may impose such conditions as he may think fit. Thus he may-

a. Require the assessee to offer suitable security to safeguard the interest of revenues,

b. Require the assessee to pay towards the disputed taxes a reasonable amount in lump sum or in installments,

c. Require an undertaking from the assessee that he will co-operate in the early disposal of appeal failing which the stay order will be cancelled.

d. Reserve the right to review the order passed after expiry of a reasonable period, say up to 6 months, or if the assessee has not co-operated in the early disposal of appeal, or where a subsequent pronouncement by a higher appellate authority or court alters the above situations;

e. Reserve a right to adjust refunds arising, if any, against the demand.

iii. Payment by installments may be liberally allowed so as to collect the entire demand within a reasonable period not exceeding 18 months.

iv. Since the phrase “stay of demand” does not occur in section 220(6) of the Income-tax Act, the Assessing Officer should always use in any order passed under section 220(6) [or under section 220(3) or section 220(7)], the expression that occurs in the section viz., that he agrees to treat the assessee as not being default in respect of the amount specified, subject to such conditions as he deems fit to impose.

v. While considering an application under section 220(6), the Assessing Officer should consider all relevant factors having a bearing on the demand raised and communicate his decision in the form of a speaking order.

D. Miscellaneous

i. Even where recovery of demand has been stayed, the Assessing Officer will continue to review the situation to ensure that the conditions imposed are fulfilled by the assessee failing which the stay order would need to be withdrawn.

ii. Where the assessee seeks stay of demand from the Tribunal, it should be strongly opposed. If the assessee presses his application, the CIT should direct the departmental representative to request that the appeal be posted within a month so that Tribunal’s order on the appeal can be known within two months.

iii. Appeal effects will have to be given within 2 weeks from the receipt of the appellate order. Similarly, rectification application should be decided within 2 weeks of the receipt thereof. Instances where there is undue delay in giving effect to appellate orders, or in deciding rectification applications, should be dealt with very strictly by the CCITs/CITs.

3. The Board desires that appropriate action is taken in the matter of recovery in accordance with the above procedure. The Assessing Officer or the TRO, as the case may be, and his immediate Superior Officer shall be held responsible for ensuring compliance with these instructions.

4. This procedure would apply mutatis mutandis to demands created under other Direct Taxes enactments also.

It is also observed by the Hon’ble High Court(s) that when the assessed income of the assessee is twice the returned figure, the demand raised in the assessment is stayed in full till disposal of appeal. A few case laws are cited hereunder for better appreciation of the facts:—

(a) KEC International Ltd. vs. B. R. Balakrishnan & Others (2001) 251-ITR-158 (Bom.),

(b) RPG Enterprises Ltd. vs. DCIT (2001) 251-ITR-(AT) 20 (Mum.),

(c) Cocacola (P) Ltd. vs. CIT (2006) 285-ITR-419 (Bom.),

(d) Mahindra and Mahindra Ltd. vs. AO (2007) 295-ITR-42 (Bom.),

(e) Taneja Developers and Infrastructure Ltd. vs. ACIT (2010) 324-ITR-247 (Del.),

(f) Soul vs. DCIT (2010) 323-ITR-305 (Del.),

(g) UTI Mutual Fund vs. ITO (2012) 345-ITR-71 (Bom.),

But Hon’ble Kerala High Court in the judgment dated:-26/02/1996 in the case of Pradip Ratan Shi-Vrs.-CIT reported in 221-ITR-502(Kerala) held as under:—

“A reading of sub-section 6 of 220 will show that the discretion to be exercised under the said sub-section can only be exercised by the Assessing Officer and not by the Commissioner. As the order was passed by the Commissioner of Income Tax is without jurisdiction the order has to be set-aside and accordingly it is set-aside.”

It is thus understood from the above judgment that the CIT has no jurisdiction under the statute to grant stay on the demand in dispute. It is the AO, who has got only power as per provisions of section 220(6) of the Act to grant stay of the demand. It is not out of place to mention here that referring the judgment of the Hon’ble Kerala High Court some of the CIT(s) are not taking up stay application for hearing or rejecting the same being not maintainable before them.

It is thus pointed out here that merely writing an article in a souvenir or journal would not solve the purpose. Further, an assessee’s representation to the Government of India may not help in bring an amendment to the present law, which is beinging followed for years together. It is only All India Federation of Tax Practitioners, which may represent the FINMIN/CBDT to make an amendment in the Income Tax Law incorporating a clear provision so as grant of stay by the CIT(A) is concerned and modify the earlier instructions with a new one. It is not known whether the Direct Tax Code would come in to force and the same shall contain provisions as discussed above. However, the above aspect needs attention and every effort should be made to bring the above little change in the statute.

(Source: Article published in souvenir of National Tax Conference held at Varanasi on 10 & 11 October 2015)

The issue when rental income is chargeable under the head “Income from house property” and when under the head “Profits and Gains of business” has been an issue of controversy and repeatedly the matter has gone before the Courts for consideration. Recently, the Hon’ble Supreme Court in the case of
Chennai Properties and Investment Ltd. v. Commissioner of Income Tax, (2015) 373 ITR 673 (SC) and also High Court of Calcutta in the case of Shyam Burlap Co. Ltd. v. Commissioner of Income Tax in ITA No. 163/2005 decided on 4-9-2015 have held that income in case of companies where Memorandum of Association provides for carrying on the business of letting out is in the nature of business income and chargeable accordingly and not under the head “Income from house property”. An attempt is being made in this Article to analyze the effect on above decisions on the controversy in regard to the matter.

The leading decision in regard to the matter has been of the Hon’ble Supreme Court in the case of
East India Housing and Land Development Trust Ltd. v. Commissioner of Income Tax (1961) 42 ITR 49 (SC). In the facts of above case the company was incorporated with the object of developing a market on the land purchased for this purpose. Accordingly, shops and stalls were constructed on the land purchased. Certain shops were let out to different tenants and rental income was received by the assessee company. The issue accordingly, arises whether the income was chargeable to tax under the head “Income from house property” or same was chargeable as business income as was claimed by the assessee. The Hon’ble Supreme Court primarily proceeded on the basis that there is separate head of income provided in the Income-tax Act for taxability of income from house property and, therefore, the income is chargeable under the above head. It was observed that distinct heads specified in section 6 including the sources are mutually exclusive and income derived from different sources following under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within specified head set out in sections, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head. In this regard reference had been made to decision of Hon’ble Supreme Court in the case of
United Commercial Bank Ltd. v. Commissioner of Income Tax (1957) 32 ITR 688, wherein the Hon’ble Supreme Court had taken a view after exhaustive review of the authorities that under the Scheme of Income-tax Act, 1922, the heads of income, Profit and Gains enumerated in difference clauses of section are mutually exclusive. Each specific head covering items of income arising from a particular source. Accordingly, notwithstanding that the market was constructed pursuant to object of the company, rental income received from the shops held to be assessable under the head “Income from other sources” and not as business income.

After above referred decision of Hon’ble Supreme Court in the case of East India Housing and Land Development Trust Ltd. (supra) the issue came up repeatedly before the Hon’ble Supreme Court and various High Courts. In large number of cases following the above decision of Hon’ble Supreme Court view had been taken that income is chargeable under the head “Income from house property”. In certain cases, however, a view was taken on the basis of facts of cases that income is chargeable as business income. In the case of
Karanpura Development Co. Ltd. v. Commissioner of Income Tax (1961) 44 ITR 362 (SC). The facts before the Supreme Court have been that income had been received pursuant to leasing of coal mining rights. The assessee company was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. The assessee had shown the income as business income. The Hon’ble Supreme Court observing that the object and the manner of its activities and the nature of its dealings with its properties have to be considered and accordingly had held the income to be in the nature of business income for the purpose of above case and not as income from house property.

The issue had again come up for consideration before the Hon’ble Supreme Court in the case of
Sultan Brothers (P) Ltd. v. Commissioner of Income Tax, (1964) 51 ITR 353 (S.C.). In the facts of above case, the Appellant had let out building fully equipped and furnished for a term of six years for running a hotel and for other ancillary purpose. The Hon’ble Supreme Court observed that whether a particular letting is business has to be decided in the circumstances of each case. Further, it was observed that “each case has to be looked at from a businessman’s point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner”. It was also observed that merely an entry in the object clause showing a particular object would not be determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case viz. whether the particular business is letting or not. Accordingly, in the facts of above case the Hon’ble Supreme Court held the income to be in the nature of business income.

In the case of S.G. Mercantile Corporation P. Ltd. v. Commissioner of Income (1972) 83 ITR 700 (SC) again the Hon’ble Supreme Court considered the issue in the circumstances where the assessee company was having its object of developing the market and had let out shops, stalls and ground spaces. The assessee company had taken the market place on lease and thereafter sub-leases were made. In this circumstances the question for consideration was whether the income was chargeable under the head “Business income” or under the head “Income from other sources”. The Hon’ble Supreme Court held that income in the facts of the case was assessable as business income and not under the head “Income from other sources”.

Reference in this regard can also be made to the decision of Hon’ble Supreme Court in the case of
Shambhu Investment P. Ltd. v. Commissioner of Income Tax (2003) 263 ITR 143 (SC). In the facts of above case the assessee company was owning a immovable property. It had occupied a portion of the property. Rest of the property was let out to be used as table space by the occupants with furniture and fixtures and lights and air conditioners. The assessee also provided services like watch and ward staff, electricity, water and other common amenities. The monthly rent was being charged was inclusive of above facilities. The Calcutta High Court held that income from property was assessable in the hands of assessee as income from house property.
(2001) 249 ITR 7 (Cal.). On appeal to the Supreme Court, the Hon’ble Supreme Court dismissed the appeal holding that there was no reason to interfere with the conclusion arrived at by the High Court.

In regard to the issue, as mentioned above, there have been large numbers of decisions of different Courts including of Hon’ble Supreme Court in regard to the matter. Reference of above decisions has been made herein only with a view to indicate that there has been consistently an issue in regard to the matter and the Hon’ble Supreme Court and High Courts have taken view considering facts and circumstances of each of the case and if we strictly go through the facts of each case and the holding of Hon’ble Court, it is very difficult to make out what has been the consistent line of thinking and why decision in a particular case has been taken in one way or another.

The Hon’ble Supreme Court has considered the issue recently in the case of Chennai Properties and Investment Ltd. (supra). In the facts of this case the assessee company was having its main object in the Memorandum of Association to acquire the properties in the city of Madras (now Chennai) and to let out those properties. The rental income from such properties was shown as income from business in the return of income filed by the assessee. The Department considered the same as income chargeable under the head “Income from house property”. The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee holding it to be income from business. The Income Tax Appellate Tribunal also affirmed the order of Commissioner of Income Tax (Appeals). In appeal filed by the Department before the High Court of Chennai the Hon’ble High Court held that income was chargeable under the head “Income from house property”. The Madras High Court basically rested its decision on the judgment of Hon’ble Supreme Court in the case of East India Housing Land Development Trust Ltd. (supra). Against the decision of High Court the assessee filed appeal before the Hon’ble Supreme Court. The Hon’ble Supreme Court analyzed decisions of Supreme Court in the cases of East India Housing and Land Development Trust Ltd. and also in the case of Sultan Brothers (P) Ltd. (supra) and Karanpura Development Co. Ltd. (supra). In the facts of the case the Hon’ble Supreme Court also observed that the entire income of the assessee was through letting out of two properties, namely, “Chennai house” and “Firhavin Estate” and there was no other income of the assessee. Further, the Hon’ble Supreme Court observed that main object of the company was to acquire and hold properties and to let out those properties. After taking specific note of the decision of Constitutional Bench of Hon’ble Supreme Court in the case of Sultan Brothers (P) Ltd. (supra) in which case it was observed by the Hon’ble Court that each case has to be looked at from businessman’s point of view, held that in the facts of the case income was chargeable as business income.

The issue had also recently come up for consideration before the High Court of Calcutta in the case of Burlap Co. Ltd. v. Commissioner of Income Tax (supra) decided on 4-9-2015. In the facts of above case the assessee company was in earlier years has been showing the income under the head “Income from house property” and same was being accepted as such by the Department. During the year under consideration the assessee company paid compensation to two of its tenants for vacating the property and intention of the company was to earn higher rental income by letting the property to new tenants. In these circumstances the assessee company claimed that its rental income was in the nature of business income and compensation paid by it was also deductible as business expenditure. The Department in these circumstances had taken a view that since the assessee company itself has been showing the income in earlier years as income from house property, it could not change its stand in this year and cannot claim the income as business income. The Commissioner allowed the claim of the assessee company after examining the Memorandum of Association and noting the fact that 85% of its income was by way of rent. The Tribunal, however, held that income was chargeable under the head “Income from house property”. Accordingly, the assessee filed appeal before the Calcutta High Court. Before the Calcutta High Court amongst other decisions, decision of Hon’ble Supreme Court in the case of Chennai Properties and Investment Ltd. (supra) has also been cited by counsel on behalf of the assessee. There is, however, no specific discussion in the Judgement in regard to aforesaid decision of the Supreme Court. The Hon’ble High Court, however, proceed in the matter taking cognizance of the object clause in the Memorandum permitting the assessee to carry on business in letting out of properties. Further, it has been noted that 85% of income of the appellant was by way of deriving rent and lease rentals. Accordingly, it has been held by High Court that income from rent constituted the business income of the assessee.

It can be observed on the basis of various decisions of the Courts in the past that in the case of East India Housing and Land Development Trust Ltd. the Hon’ble Supreme Court had proceeded on the basis that since there is a separate head of income for taxability of income from house property, the income should be assessed under the above head. Thereafter in various decisions following the aforesaid view of the Hon’ble Supreme Court it was held that rental is chargeable under the head “income from house property”. In the case of
Commissioner of Income Tax v. Ansal Housing Finance & Leasing Co. Ltd. & Ors. (2013) 354 ITR 180 (Del.)
the Hon’ble High Court had gone to the extent of holding that in respect of unsold flats owned by the assessee in the business of developing and selling the properties, which are held as stock-in-trade, taxability is to be determined under the head “Income from house property” on the basis of Annul Letting Value regardless whether actual income is received or not. The Hon’ble Court had not accepted the contention of the assessee company that since it was engaged in the business of building activity and flats held were part of its inventory of stock-in-trade and there was no actual letting out. Therefore, deemed income, which is the basis for assessment under the Annual Letting Value method should not be applied. The Hon’ble Court expressed its view that “This Court is of the opinion that arguments, though attractive, cannot be accepted. As repeatedly held in East India, Sultan and Karanpura, the levy of income-tax in the case of one holding house property is premised not an whether the assessee carries on business, as landlord, but on the ownership. The incidence of charge is because of the fact of ownership.

It can be said in the conclusion that broadly there has been thinking of the Courts that since property is held as a owner and rental income is being received as a result of ownership of the property the same is chargeable under the head “Income from house property”, notwithstanding it may be stock-in-trade of the business or the rental income is received as part of its business activities. Whereas the Courts from time to time have also been taking the view that income from properties is in the nature of business income. In the case of Chennai Properties and Investment Ltd. (supra) and thereafter Calcutta High Court in the case of Shyam Burlap Co. Ltd. has held that where rental income is being received as a result of carrying on the business of letting out, income would be in the nature of business income notwithstanding that there is separate head of income in the Income-tax Act, namely, income from house property. It is, therefore, submitted that the rental income where it is in the nature of business income keeping in view the activities of an assessee, should be considered as business income and not as income from house property. Similarly in case of developers no income should be assessed on the basis of notional annual value on the ground of ownership as the flats etc. are held by the builders/developers as stock-in-trade and not for the purpose of letting out and same are held only for the reason that they have not been able to sell the same. A distinction should be drawn whether the property is held as business asset or an investment. The basis and the criteria adopted in determining the nature of income earned in respect of shareholding, whether capital gain or business income, should equally be applicable for determining the nature of rental income for the purpose of taxability.

In this regard reference can also be made to the decisions where the issue had arisen in the context of dividend income, which is chargeable under the head “Income from other sources”. The Courts have taken a view that notwithstanding that it is taxable under the head “Income from other sources”, its nature is business income when dividend is received on shares held as stock-in-trade. In this regard reference can be made to the decisions of Supreme Court in the cases of
United Commercial Bank Ltd. v. Commissioner of Income Tax (`957) 32 ITR 688 (SC) and Western State Trading Co. Pvt. Ltd. v. Commissioner of Income Tax (1971) 80 ITR 21 (SC) and the dividend income has been allowed to be set off against brought forward loss arising in share deals. To the same effect have been number of other cases also.

(Source: Article published in souvenir of National Tax Conference held at Varanasi on 10 & 11 October 2015)

My Beloved Members,


With great pride, I must say that the above Conference organised by All India Federation of Tax Practitioners (AIFTP), (North Zone), and Income Tax Bar Association, Varanasi, at Hotel Clarks, Varanasi, on 10th and 11th October, 2015, for in-depth deliberations on tax laws was a unique success in as much as, it was inaugurated by the Chief Guest Hon’ble Justice Mr. R. K. Agarwal, Judge, Supreme Court of India and the Guest of Honour Hon’ble Mr. K. V. Chaudhary, Central Vigilance Commissioner, Government of India. Hon’ble Chief Guest at the inaugural address stressed the importance of taxes as the nation is governed/administered and developed on taxes only. At the same time, he stated that the structure and implementation of taxes is quite complex apart from its high incidence, and requires to be simplified for the benefit of the taxpayer, as was emphasised by great author and thinker ‘Chanakya’ in his ‘Arthashastra’, which advice is valid even today and we must follow it. Guest of Honour Mr. K. V. Chaudhary, Central Vigilance Commissioner, Government of India, informed the distinguished gathering, that huge unquantified black money is going out of the country in respect of which Government of India has no accounts. Therefore, according to him, it is necessary to make the law to arrest such outflow of huge money out of the economy of the country. In this respect, he made categorical statement that the citizens of this country who have stacked black money in various other countries must be proceeded with as per law, and monitored strictly by financial cyber crime agency of the nation.

The Conference Chairman Mr. Bharat Ji Agarwal, Sr. Advocate and Past President of the AIFTP also addressed the distinguished gathering on the importance of such conferences wherein continued study of tax laws and updating the knowledge takes place, which is of vital importance for the Bar, Bench as well as the Administration, who also takes part in such ‘Manthan’ and enrich themselves of the current developments that takes place in the field of direct and indirect taxes, which affects the fabric of the society as a whole.

In recognition of Mr. Bharat Ji Agarwal’s contribution in the development of direct and indirect tax laws of the country as well as shouldering the responsibilities as Chairman/President of the various Bar Associations, the Conference awarded him the citation of ‘Lifetime Achievement Award’ which was presented to him by Mr. P. C. Joshi, Advocate and Past President of the AIFTP.

Thereafter, technical sessions of direct and indirect taxes took place in which eminent faculties / authorities on the subjects deliberated extensively on the assigned subjects.

The unique feature of the Conference was panel discussion, appropriately titled, ‘Mann Ki Baat’ with the Senior officials of the IT, ST, VAT, Company Law, Depts. and the Industries Leaders, who exchanged freely and frankly their difficulties in resolving the grievances of the Trade and Industry, in mutual interests. This session of ‘Mann Ki Baat’ proved quite fruitful and at the end of the session, everybody participating in the session wore a very smiling face and reiterating that in future such sessions should be held regularly to resolve the difficulties of both i.e., the administration and taxpayers.

As usual the last session was of ‘Brain Trust’ in which Trustees answered queries received from the delegates to their satisfaction.

All in all, after undergoing hectic sessions of the Conference, the delegates visited the Temple of “Lord Kashi Vishwanath” for prayers and offered Ganga Pooja and Aarti, and then the delegates departed the venue of the Conference with great satisfaction.

Last but not the least, the leaders of AIFTP (NZ) and Income Tax Bar Association, Varanasi, deserves great appreciation for their hard work put in organising the above Conference.


Earlier, Empowered Committee of State Finance Ministers’ Panel, released a draft report of ‘The Jt. Committee on businesses and processes for GST’ April 2015 on GST payment process. Thereafter, the said Committee released a draft report on Registration in July 2015 and the 3rd draft report on Refund process August 2015 for the deliberations of the public at large. Now, as per TOI (Times Business) report dated 14-10-2015, the GST Panel suggested black-listing defaulting dealers. It also suggested compliance rating of dealers, which obviously will hurt, buyers who will be denied input tax credit. This approach of the GST Panel is quite disturbing and putting a curtain of gloom on the entire exercise of expediting GST coming to India soon. As per suggestions, there are number of pain bearing points few of them are as under: –

  • A system of GST compliance rating could result in blacklisting of defaulting dealers. However, it is the buyer who will be denied input tax credit.

  • There is no centralised registration for Central GST and integrated GST.

  • Exporters will no longer be able to obtain non-duty paid inputs and will have to claim input credit / rebate at a later stage.

  • A partial refund will not be made upfront and automatically when a claim is filed; the entire refund will be made after due processing at one go, within the set time period.

  • Considering the above red-tape practices adopted at the initial stage of promoting GST, it is highly impossible to go for it. So, the trade and industry together with tax practitioners in general should be on alert whether they should advocate the GST still knowing that it will cause great hardships of no end to them.


The CBDT is always late when it comes to resolving the dues of income tax payers. The recent CBDT Notification No. 78/2015 dated 12-10-2015 is a testimony of its working. U/s 80DDB r/w amended Rule 11DD dated 12-10-2015, it had relaxed the condition of obtaining the certificate for claim of expenditure u/s. 80DDB in respect of specified ailments from a specialist doctors working in a Government hospital. Under the amended rule, it will not be mandatory to obtain a certificate from a specialist doctor working in a Govt. hospital but a certificate from a specialist treating the patient will suffice for the purpose of claiming deduction u/s. 80DDB r/w. Rule 11DD.


The Government has speeded up for tax refunds with some taxpayers getting them within a week of filing returns. But it appears that those who got it may be blessed by the Govt. Those who received reacted “Historic! I-T refund in less than a month of filing!” Jai Ho! tweeted Bhaskar Bhattacharya. Others such as Chartered Accountant Kamlesh Vikamsey and Krish tweeted accordingly (TOI dated. 24-8-2015). But we common persons will not receive refunds so fast. Thus, it appears that CPC is following pick and choose method for releasing refunds, one wonders! May we therefore appeal to CBDT to look into the matter?

With best wishes and regards,

J.D. Nankani
National President

National Judicial Appointments Commission (NJAC) Act struck down by the Apex Court as unconstitutional – Independence of judiciary in manner of appointment of judges – Suggestions for improvement of present collegium system are invited from the Bar at the next hearing on November 3, 2015

In a landmark judgment, the Supreme Court has declared the National Judicial Appointments Commission (NJAC) unconstitutional. The collegium system where judges appoint judges, will continue, as according to the Supreme Court the NJAC Act interfered with the independence of judiciary.

One of the objects of the All India Federation of Tax Practitioners (the “Federation”) being “to strive and work for independence of Honourable Courts”, we at AIFTP welcome the Supreme Court judgment. The senior members of the Tax Bar were always of the opinion that the present system of the appointment of judges should be continued albeit with increased transparency.

The Tax Bar has witnessed how the Executive in the past has tried to interfere with the justice delivery system of the Income-tax Appellate Tribunal. It is only due to a Public Interest Litigation filed by the ITAT Bar Association, Mumbai, and with the strong support of the then President of the ITAT, Honourable Shri T. V. Rajagopala Rao, could the independence of the ITAT be saved by the higher Judiciary. It may be noted that the then Law Secretary was held guilty of contempt for interfering with the judicial functioning of the ITAT. [ITAT v. V. K. Agarwal (1999) 235 ITR 175(SC), Ajay Gandhi v. B. Singh (2004) 265 ITR 451 (SC)]. This scenario of developments must be kept in mind while welcoming the above Apex Court judgment.

One can only imagine if the Apex Court would not have interfered, then what could have been the fate of the Mother Tribunal of our country and the taxpayers. One would also appreciate that the then Honourable Prime Minster of India, Shri Atal Bihari Vajapyee, on 16-1-2004, on the occasion of the release of commemorative postage stamp in memory of late Shri N. A. Palkhivala at Mumbai, had stoutly deprecated the Emergency thus: “In those dark days, the battle for democracy was fought by many people in many different ways. Many of us in politics under the leadership of Jaiprakash Narayan fought it in prisons. But I have no doubt that one of the finest battles was fought in the Court rooms and that fighter was Nani Palkhivala”.

Judges could deliver verdicts such as that in Kesavanand Bharti’s case [AIR 1973 SC 1461] only because of their fierce independence. One would also appreciate that in taxation matters, the Government is always a party. If any High Court Judge decides a high-stake matter in favour of the assessee, the Government may brand him as a pro-assessee Judge thereby jeopardising his chances of being elevated to the Apex Court, if the NJAC was to continue. We are of the firm opinion that the Honourable Apex Court has rightly done its lawful duty by striking down the Act as unconstitutional. Having said that, we are also of the opinion that there is a lot of scope for improvement in the current process of selection of judges and we at AIFTP level shall contribute our mite in the process.

Therefore, while the Supreme Court has upheld the collegium system, it has also perhaps realised certain inherent flaws in its functioning which is why on November 3, 2015, the Supreme Court will consider suggestions for improvement of the present collegium system. One of the most vociferous criticisms of the collegium system is the lack of obvious transparency with which it functions. The Federation feels that integrity and merit are unequivocally the two most essential factors that should be considered in the appointment of Judges of the Supreme Court and High Courts. Therefore, the Federation in the interest of the nation suggests as under:

1. Steps must be taken to introduce transparency and wider consultations with Bar Associations and senior members of the Bar whose integrity is beyond reasonable doubt;

2. There could be three categories of selections:

(i) After looking at the performance of advocates in courts and after enquiring into their credentials, advocates may be selected by the collegium, and thereafter, he or she may be requested to forward an application in appropriate form.

(ii) Applications maybe invited by the Registry of High Courts from advocates who are eligible to be appointed as Judges.

(iii) Selection of Judges from the lower courts / judicial authorities such as the Income-tax Appellate Tribunal, CESTAT as well as Sales Tax Tribunals across the country may be considered.

3. Eligibility criteria may be prescribed, such as:

(i) Cases involving important issues argued by the applicant;

(ii) Details of income to be declared for last five years by practising lawyers;

(iii) Recommendations of at least three Senior Advocates or Advocates having more than 30 years of practice in that High Court may also be considered;

(iv) Importantly, contribution to the development of the profession made by the lawyer may be given additional weightage in the selection process.

4. After scrutinising the applications, the names of shortlisted candidates may be circulated in the full court of the respective High Court or at least amongst its senior Judges and thereafter, the names of approved candidates be forwarded to the Supreme Court collegium.

5. In the era of specialisation, persons who are well conversant with certain specialised areas of law such as taxation, PIL, RTI, IPR etc. deserve to be appointed. In the Income–tax Appellate Tribunal, for instance, certain Judicial Members deserve to be appointed as High Court Judges. As per the transfer procedure, a professional appearing before the Income-tax Appellate Tribunal is not posted as a Member in the same State where he was practicing. Therefore, the collegium of the High Court concerned may not have the mechanism to judge the credentials of the prospective candidates from the Income–tax Appellate Tribunal. Thus, the collegium of the High Court may, in consultation with the Income-Tax Appellate Tribunal, devise an appropriate internal mechanism for obtaining feedback about the proposed candidates. This will help attract deserving candidates of the Income–tax Appellate Tribunal to the High Court.

6. As regards appointment and elevation to the Apex Court, the present system of collegium should be continued with greater transparency and accountability, only on merits

The above are some suggestions given in a limited time to improve the collegium system. Members are requested to send in their views to at
[email protected]

Dr. K. Shivaram