30. S. 36(1)(iii) : Interest on borrowed capital – Enhancement of lease rental – Question of fact [Ss. 37(1), 260A]

High Court dismissed the appeal of revenue in respect of allowability of interest paid on intercorporate deposits and enhancement of lease rental by holding the same as questions of fact. On appeal by revenue the same was dismissed by holding that the questions decided by Tribunal and High Court were purely on facts. (From the Judgment of Bombay High Court in ITA No. 452 of 2000 dated 28-1-2013) (A.Y. 1998-99)

CIT v. Essar Projects Ltd (2014) 365 ITR 363 / 223 Taxman 344 (SC)

31. S. 37(1) : Business expenditure – Guarantee commission – Matter remanded to High Court [S. 260A]

High Court refused to admit the question on allowability of guarantee commission on the ground that same question for earlier year has not been admitted. On appeal Supreme Court remanded the matter to High Court for disposal on merits, following the earlier year (A.Y. 1998-99)

CIT v. Essar Projects Ltd. (2014) 365 ITR 363 / 223 Taxman 344 (SC)

32. S. 132 : Search and seizure – Reason to believe – High Court appointed an advocate Commissioner to take inventory of goods – No reason was given the search and seizure action was illegal – Order passed by High Court was set aside

Court observed that how the High Court appointed an advocate Commissioner to take inventory of Goods in respect of which restraint order was passed by Revenue. Court also observed that High Court had not even remotely tried to see the reasons. Reasons, needless to say, can be recorded on the file and the Court can scrutinise the file and find out whether the authority has appropriately recorded the reasons for forming of an opinion that there are reasons to believe to conduct search and seizure. As is evident the High Court has totally misdirected itself in quashing the search and seizure action on the basis of the principles on non-traverse. Order of High Court was set aside matter remanded to the High Court to decide in accordance with law.

UOI v. Agarwal Iron Industries (2014) 272 CTR 313/ 112 DTR 137/(2015) 370 ITR 180 (SC)

Editorial: Decision in Ravi Iron Industries v Director of Investigation (2003) 264 ITR 28 (All.)(HC) is set aside.

33. S. 254(1) : Appellate Tribunal – Orders – Dismissal for default – No power to dismiss the appeal for want of prosecution even if the appellant therein or its counsel has not appeared when the appeal was taken up for hearing. CESTAT has to decide the appeal on merits. [Income-tax (Appellate Tribunal) Rules, 1963, R. 24, Central Excise Act, 1944 S. 35C(1)]

Question of law which arises for consideration in the present case was whether the Customs Excise and Service-Tax Appellate Tribunal has the power to dismiss the appeal for want of prosecution or not. Court held that Central Excise, Act 1944 enjoins upon CESTAT to pass order on appeal confirming modifying or annulling the decision or order appealed against or may remand the matter. It does not give any power to CESTAT to dismiss the appeal for default or for want of prosecution in case the appellant is not present when the appeal is taken up for hearing. Therefore CESTAT could not have dismissed the appeal filed by the assessee for want of prosecution and it ought to have decided the appeal on merits even if the assessee or its counsel was not present when the appeal was taken up for hearing. Matter was setaside and was directed to be decided on merit.

Balaji Steel Re-Rolling Mills v. CIT (2014) 272 CTR 205 (SC)

Research Team

ALL EYES ARE SET ON
THE UNION BUDGET

My Beloved Members,

The exercise of framing Union Budget by Hon’ble FM, Mr. Arun Jaitley under the supervision of the Prime Minister Mr. Narendra Modi has already commenced. This being the first budget of both, the expectations of all quarters are running very high!

The Prime Minister already met on the eve of first meeting of “Niti Aayog” and sought views from experts to find ways to boost economy as Government has set its full-fledged machinery for the preparation of budget. The meeting was attended by Finance Minister, Arun Jaitley and experts such as Mukesh Butani, Nitin Desai, Partha Sarathi Shome, Rajiv Lall, Swaminathan Aiyer, Vijay Kelkar, V. Reddy, among others. In this connection, it may be recalled that the Government set-up the ‘National Institute for Transforming India (NITI)’ by replacing Soviet-era Planning Commission on January 1. The Government earlier said that the said meeting was called for “interaction on the subject of the State of Economy and for inviting suggestions on the forthcoming Union Budget.”

Following is a ‘Wish List’ submitted by investors, common man and trade and industry bodies as well as the outline feedback given by the Finance Minister:

Fiscal discipline : The Finance Minister is expected to stick to the fiscal consolidation path, with the deficit target for 2015-16 and 2016-17 at 3.6% and 3% of GDP, respectively.

Subsidy reforms : Investors hope the budget will follow-up on reforms for other subsidised fuels, trim spending on food and fertilizer subsidies.

Welfare reforms : The budget is expected to streamline flagship welfare schemes like the National Rural Employment Guarantee Act.

Capital Spending : Jaitley is expected to create fiscal space to spend as much as $ 50 billion next fiscal on new roads, new rail lines, ports and irrigation facilities.

Manufacturing : The budget is expected to give a big push to Modi’s ‘Make in India’ campaign, with tax breaks and other incentives for several sectors.

Goods and Services Tax : Its passage depends on whether the FM can honour his promise to compensate States for potential revenue losses. The budget is expected to detail the promised compensation package which may be incorporated in the Finance Bill.

GAAR : Investors are seeking a new timeline for the implementation of General Anti- Avoidance Rules, (GAAR), aimed at Companies and investors routing money through tax havens.

Banking reforms : FM is expected to offer a road map to improve the health of ailing public sector banks, which have been hobbled by non-performing assets and corporate governance issues.

Substantial increase in Section 80-C investments : RBI Governor has expressed deep concern over the domestic saving rate going down to 30% which was 36.9% in the F.Y. 2007-08. He has therefore himself recommended to the government to increase substantially 80C investment limit from the present one at Rs. 1.5 Lakh, since the earlier limit of Rs. 1 Lakh was stationary for number of years. As a result, the saving rate on a National level has greatly reduced which is required to be greatly enhanced right now.

Seeking tax sops : The telecom Dept. also wants the government to increase tax depreciation rate from 15% to 65% on batteries used by telecom infrastructure service company. Many recommendations in its earlier list, did not find their way in this behalf.

AG ADVISES CENTRE TO ACCEPT BOMBAY HIGH COURT RULING

Attorney General Mr. Mukul Rohatagi has advised the Govt. to accept the orders of the Courts and Tribunals that have decided in favour of a taxpayer. On consideration of this advice the Centre accepted the decision and Bombay High Court judgment will be accepted so as to ensure stability and predictability in tax matters are important for long-term investors such as Vodafone. Several multinationals such as Shell and Nokia have complained of getting an unfair deal. The Dutch Oil Major won a similar transfer pricing case in the Bombay High Court. Therefore, CBDT Chief as well as Rohatgi’s views prevailed in the matter and the Government accepted their views, thereby a kind of signal has been given, Namely, where the IT liability is clear and unambiguous, it shall only be charge. Where it is over stretched without legal authority, the Govt. will be fair. Thus, it is now clear that income tax laws will be quite fair to foreign companies doing business in India.

Coming back to the working of the Association, members are aware of the National Tax Conference scheduled to be held on 18th and 19th April, 2015 at Darjeeling, a lovely place famous for watching early sunrise at Tiger Hill. The program and other details have been printed in AIFTP Times for February 2015. I take this opportunity and appeal to our members to attend the same in large numbers. Additionally, I request our brothers to make all efforts to enrol new members on this occasion.With best wishes and regards,

J.D. Nankani
National President

 

APATHY OF THE JUDICIARY – NEEDS IMMEDIATE REDRESSAL

Judiciary is the foundation and backbone of the democracy. We the people of India while giving unto ourselves the sacred document, the Constitution entrusted its three wings : (i) Legislature the duty to make laws within the framework of the Constitution; (ii) Executive the duty to administer laws and to govern the country; and (iii) Judiciary to keep a watch, vigil and see that the freedom enshrined in the Constitution reach to every citizen and is not jeopardized or tinkered with or obstructed by the executive or any person in authority or otherwise. Function of the judiciary is to vouchsafe that any law enacted by the Parliament or State legislature is intra-vires the constitution and not ultra-vires, making the mockery of law and denying the freedom of life and liberty, with equality and dignity to the people. The third wing has been created in order to secure justice and in order to let reach every citizen the freedom, the peace, the prosperity spiritual and economic, so as to achieve the objectives contained in the preamble of the Constitution. All citizens of this largest democracy of the world are entitled to access to justice and seek justice expeditiously and cheapest at its doors. The judiciary is playing a vital role in keeping balance between the three wings. To sum up the Legislature make law, the Executives implement them; the Judiciary keep actions of Executives and Legislature within the parameters prescribed by the Constitution.

Judicial activism is resorted to only when other organs of the State become dyes-functional, and fail to perform the duties or discharge the obligations laid upon them by the Constitution and the laws or act contrary to them. Judicial activism cannot and need not be confined to any doctrinaire theory. The fundamental rights and directive principles enshrined in the Constitution cannot remain idle or merely ornamental; they should be a living reality and not only on paper. Constitutional functionaries have to do their duty faithfully, fearlessly and expeditiously.

Legislature is elected and there is no requirement of formal education for a legislature. Executive is appointed but the judiciary is selected from amongst man well versed in the knowledge and practice of law with integrity and accountability. The judiciary is expected to supplement and compliment the work of the other two wings. Legitimacy of judicial interpretation of the Laws is the recognition that it is the institution with an ability. The balance of power in the three organs has to be maintained in order to impart justice and to look at the common good of the citizens of India. The separate spheres of constitutional authority have to be necessary respected to harness the collective energy in society. By proper functioning of the democratic institutions within the framework of constitution, the depleting legitimacy of the democratic order can be arrested and it can be further protected and promoted by good governance, the object of the Constitution.

Our Constitution is a sacred and solemn document and it is soul, spirit and sound of the people of Bharat. However, in order to keep up with the aspirations of new generations and in public interest it has been amended, modified, altered, tinkered more than 100 times during the last 65 years. So much so that emergency was declared in 1975, writ jurisdiction was suspended, some of the Hon’ble judges of the Supreme Court were superseded. Judges keeping with the philosophy of the ruling party were elevated and all efforts were made to tame the judiciary. So much so that basic structure was tried to be disturbed against the wishes of the founding fathers. But Constitution is a permanent document framed by the people through their chosen and learned representatives for regulating their social and political life in free India. The Constitution has been accepted by the people to govern them for all times to come. The basic structure of the Constitution is unchangeable and only such amendments to the Constitution are allowed which do not affect its basic structure and rob it of its essential character. The Constitution was framed by its makers keeping in view the situations and conditions prevailing at the time of its making; but being a permanent document, it has been conceived in a manner so as to apply to situations and conditions which might arise in future. The Supreme Court in Keshvanand Bharati’s case, after struggle of war, had to hold that the basic structure cannot be tinkered with. We salute our stalwart Mr. N.A. Palkhivala, Senior Advocate for the resounding success. Thus over years tug of war commenced between the three wings and the Legislature and the Executive claim to be superior and not equal, different and not supplementary or complimentary to each other.

Law and Order is the State subject. Judiciary is appointed. Terms, tenure and conditions are decided by the other two wings and ultimately Hon’ble judges of the Supreme Court/High Courts are appointed on the warrant issued by the President of India. Much say was with the Prime Minister/Governors/Chief Ministers and not with the Chief Justice of India/High Courts. Many politico-motivated appointments were made, recommendations of the Chief Justices by passed. In public interest and in order to have independent judiciary the Apex Court in 1993 decided to adopt “Collegium System” with Chief Justice of India and 4 senior most judges of the Supreme Court, to finally approve on the recommendation of Chief Justice and two senior judges of the High Court. Last year proposal for an eminent Senior Advocate recommended by the Collegium for direct elevation in the Supreme Court, was turndown and substituted by another eminent Senior Advocate, causing unrest in the judiciary. System worked well, but it caused irritation with the Central/State Governments resulting in the amendment of procedure by the 99th Amendment Act and setting up of “National Judicial Appointment Commission” (NJAC).

Age of Superannuation : Presently age of superannuation is 60 for the judicial officers; 62 for the members of Tribunals and Hon’ble judges of the High Courts and Chief Justices; 65 for the President of Income Tax Appellate Tribunal, Hon’ble judges of the Supreme Court and Chief Justice of India. With awareness, health check-ups, improved treatment facilities, the average age of an Indian is on increase and is around 70 as against 60 when these ages for superannuation were fixed. A large number of healthy, experienced justices, judges, members are available but their services are not availed of, resulting in national waste. Demands were made from all corners to increase the age limit. The Parliament constituted a committee headed by Smt. Jayanti Natrajan as Chairperson for considering the increase in age limit of Judges of High Courts from 62 to 65. The Committee observed : “Taking into account the justifications given by the Secretary, Department of Justice, and the statement of objects and reasons appended to the bill, the Committee supports the proposal for increase in the retirement age of judges of the High Courts from sixty two years to sixty five years and to be par with the retirement age of the judges of the Supreme Court. The Committee also acknowledges that the Bill has been brought forth in pursuance of the recommendation made by the Committee in its earlier reports”. The Law Commission has also recommended for increase of age from 60 to 62 of the subordinate judiciary.

Though the Committee made the above recommendation on 7th December, 2010, till date no progress has been achieved in the matter. It is desirable that an appropriate decision be taken at the earliest. We are of the considered opinion that increase in age limit will help to reduce substantially the pendency of cases, with utilization of vast experience of the Hon’ble judges and members. We are further of the opinion that age of the Chief Justice of India and Chief Justices of High Courts be enhanced to 68. The age limit of judicial officers be enhanced to 62. It may be noted that in the United States there is no age of retirement for federal judges. They are tenured posts. If a federal judge feels that by reason of old age he cannot function, he will receive the last drawn salary as pension for the rest of his life and is permitted to work In the United Kingdom and Canada, Judges retire at the age of 75. In Australia Judges of Federal Court and Supreme Court retire at the age of 70. Similarly, in Japan Judges of High Court retire at the age of 65.

It may also be considered in the context that on retirement the Hon’ble judges cannot practice in the said High Court and a member of I.T.A.T. cannot appear before the I.T.A.T., causing waste of intellectual asset of the nation. It is equally desirable that no retired judge should be appointed in any Tribunal or Commission and should not be permitted to do consultation/arbitration, else to forego pension and other facilities provided after retirement. The Bombay High Court recently noticed that arbitration has become a ‘luxury corporate litigation’ with fat fees and in five star environment.

Delay in Justice: Since independence, there have been long delay in disposals and cost of litigation, with uncertainties, have substantially increased. So much so that matters prolong for long years causing unrest and distrust in justice delivery system. Faith of the people in the judiciary is shaking. It is noticed that more than three crore matters at different levels are pending. Some of the matters are pending for over 30-50 years. Distressed litigants commence due proceedings but finality is achieved by their grand sons, with great agony for the family. Some litigants have committed suicide. The prime reason for the backlog and for such precarious condition is absence of adequate strength of Hon’ble Judges and judicial officers apart from large number of vacancies. It is noticed that around 40% of the sanctioned strength is vacant. A citizen cannot appreciate when the outer date is known. It is highly desirable to increase the strength. During the UPA Government in 2008, recommendation was for additional appointment of 1,500 judges of the High Court and double the number in subordinate judiciary, but remained in paper. It is equally necessary that procedure for appointment/elevation commences before 6-9 months from the anticipated vacancy and final oath is administered within 15 days from the date of vacancy. By filling up the vacancies, 40% of the backlog would be wiped of. Hon’ble Justice H. L. Dattu, Chief Justice of India in the conference, in last week of December, 2014, desired that every case should be disposed of finally within 3 to 5 years against normal 10 years taking presently. It is well said “Justice delayed is justice denied” and equally it is rightly said “judgment hurried is justice buried”. Non enforcement or delayed enforcement would be disastrous to democracy. It would make the people violent and to adopt unethical means or muscular power, dangerous to democracy. Law Commission in July, 2014 reported to Mody Government for speedy steps to clear backlog. It deserves to be done on war speed.

Code of Compulsory Cost: Over years it is apparent that a fairly large number of litigants tell a lie, do not believe in truth, mutilate facts and drag litigation from Court to Court, to higher Court and the highest. Appellant/Respondents move frivolous infructuous applications/petitions to prolong the proceedings, to harass the other side and litigation goes on from generation to generation. Adjournments are asked and granted without sufficient cause, mere on mention. The Hon’ble Supreme Court in the case of Sahara Group observed “Ways and means need to be evolved, to deter litigants from their compulsive obsession, towards senseless and ill-considered claims. One needs to keep in mind, that in the process of litigation, there is an innocent sufferer on the other side, of every irresponsible and senseless claim. He suffers long drawn anxious periods of nervousness and restlessness, whilst the litigation is pending, without any fault on his part. He pays for the litigation, from out of his savings (or out of his borrowings), worrying that the other side may trick him into defeat, for no fault of his. He spends invaluable time briefing counsel and preparing them for his claim. Time which he should have spent at work, or with his family, is lost, for no fault of his. Should a litigant not be compensated for, what he has lost, for no fault?” This abuse of the judicial process is not limited to any particular class of litigants. The State and its agencies litigate endlessly up to the highest Court, just because of the lack of responsibility, to take decisions. So much so, that we have started to entertain the impression, that all administrative and executive decision making, are being left to Courts, just for that reason. In private litigation as well, the concerned litigant would continue to approach the higher Court, despite the fact that he had lost in every Court hitherto before.

Hon’ble Mr. Justice Jagdish Singh Khehar added “A conscious effort on the part of the legislature in this behalf, would serve several purposes. It would, besides everything else, reduce frivolous litigation. When the litigating party understands, that it would have to compensate the party which succeeds, unnecessary litigation will be substantially reduced. At the end of the day, Court time lost is a direct loss to the nation. It is about time, that the legislature should evolve ways and means to curtail this unmindful activity. We are sure, that an eventual determination, one way or the other, would be in the best interest of this country, as also, its countrymen”. We suggest that a code of compulsory cost be formulated to award exemplary costs to the winner and to check frivolous litigation with waste of precious time of the Courts and all concerned.

Supreme Court and Elevation: Article 130 of our Constitution reads: “The Supreme Court shall sit in Delhi or in such other place or places, as the Chief Justice of India, may with the approval of the President, from time to time, appoint”. To make available justice at the door and at low cost to the litigants, the Parliament Committee relying on the said Article had asked the Union Government to persuade the Supreme Court to set up its benches in three distant regions. Hon’ble Dr. Manmohan Singh, then Leader of Opposition in Rajya Sabha in his letter dated 22-10-2002 has also endorsed the view in favour of establishment of Benches of Supreme Court. Many Senior Advocates, Former Attorney Generals of India and Associations and very recently All India Bar Association through its President, Dr. A. C. Agarwala have suggested for the circuit benches of the Supreme Court at Mumbai, Chennai and Kolkata. The Federation have also made similar representation.

It has been noticed that presently there are three Hon’ble Judges from Maharashtra (110 million population), only two from U.P. (200 million population), one Judge each from Bihar (100 million population), West Bengal (90 million population), Gujarat (60 million population), North Eastern States (45 million population) and there is no judge from Rajasthan (60 million population). It may be mentioned that one time there were two Hon’ble Judges from Rajasthan apart from two Chief Justices of High Courts, whereas presently there is none in the Apex Court as well as a Chief Justice. It is highly desirable that proper representation is given to the Hon’ble Judges of 24 High Courts in the Supreme Court.

Chief Justice: There was a practice to elevate Senior Judge as Chief Justice in the own High Court. It was predominantly with an intention and object that senior judge having been in the State for more than 10-12 years is well acquainted with the functioning of lawyers and judicial officers. Hence, the elevations would be better and faster. However, later a convention has been developed whereby senior most judge of the High Court is transferred to other High Court few months before the retirement of Chief Justice of that High Court and with hope for being elevated as Chief Justice. But it has been observed that the Chief Justices of the High Courts coming from other States do not make just and proper administrative decisions as they are usually unaware of the local and social affairs of the Bar, and the ability and reputation of the local lawyers. Thus, they have to be totally reliant on the local judges of the particular High Court or the lower staff coming in touch with them. It is desirable to revert back to the old system.

Elevations: 99th amendment has been made in the Constitution and the appointment of the Hon’ble Judges is being entrusted to National Judicial Appointment Commission. Both bills were passed by voice votes in Parliament and in spite of number of adverse observations by all concerned. Six member commission led by CJI will now appoint judges to the Supreme Court and the 24 High Courts. Besides CJI, the Commission will have as members to other senior most judges of the Supreme Court. The Law Minister and two eminent persons appointed by a panel comprising the Prime Minister, Chief Justice of India and the leader of the opposition in the Lok Sabha. Till date the two eminent persons could not be selected and rules and procedure could not be framed and may be further delayed with the CJI reportedly showing his reluctance on “ethical grounds” till a petition challenging the NJAC is settled by the Supreme Court and is sub judice.

A public interest litigation has been filed in the Supreme Court in the month of January, 2015 by a lawyer, Bishwajit Bhattacharya. The petitioner says “The two bills (now Acts) make frontal attack on the independence of the judiciary and on the doctrine of separation of power, both basic features of India’s Constitution. Such violence done to the basic structure of India’s Constitution is reminiscent of the dark days of Emergency”. So the fate of NJAC for the time being is in doll drum, meaning thereby no elevations would be done by the Commission and one does not know as to whether the old existing collegium system would continue in the meanwhile. Thus, it is evident that unless and until a final decision is taken by the Government, there may not be further elevations and vacancies may increase causing unrest and piling of pendecy.

Confirmations: Additional judges are appointed. Acting Chief Justices are notified. Officiating President of Income Tax Appellate Tribunal has been appointed though Shri Vimal Gandhi, Past President retired on 3-6-2010 but the officiating President has not been confirmed. Similarly, a vacant post of Senior Vice President and Vice Presidents of ITAT have not yet been filled up. More than seven Acting Chief Justices are awaiting oath as Chief Justice. Some of the additional judges await confirmation till last day i.e. end of tenure of two years. It shows legislature and executive have no time for judiciary. It causes unrest and insecurity in the functioning of the incumbents. When the elevations are made of man of integrity, knowledge and on seniority, one fails to appreciate the latches, delay, in action or slow action on behalf of all concerned. Representation to the Hon’ble Law Minister have been made by the Federation but no expeditious action is evident. Present Law Minister is an eminent Senior Advocate of repute of the Supreme Court and must realize the agony caused on account of giving less priority to the judicial functioning.

Uncle Judges: In 1994 there was a practice to transfer newly elevated judge immediately or after few months of elevation to other High Court. The basic objective therefore, was to avoid gossips on account of personal prejudices, nearness or favour while in profession. With transfer at national level, the object of integration use to be achieved. Suspicion as to “uncle judges” when the children, parents, close relatives, kith or kin of the elevated judge practice in the same High Court is diminished. Representations have been made by the Bar Council of India, State Bar Councils and other Bar Associations but one is transferred only when there are serious allegations in the parent High Court. Instead it is advisable to make it a convention as was existing in 1994 and few years thereafter.

N. M. RANKA
Member, Editorial Board

1. Adjustment of tax paid in wrong head

Clerk of petitioner, paid CST in the head of State Sales Tax. Central tax authorities (of course of State) levied interest and penalty for short payment of CST. Hon’ble Calcutta HC held that adjustment was to be made only when taxes paid in excess or short paid were credited into a known account or fund and could be easily adjusted. Of course, this ratio would not apply in case of inter-departmental adjustment or completely different types of taxes. The revenue on the other hand contended that this kind of adjustment was not possible. According to it, it may be true that the CST and ST were directly credited into the Consolidate Fund of the State. Nevertheless, CST was an item under List-1 Entry 92-A of the Seventh Schedule to the Constitution over which Parliament had exclusive power to legislate and sales tax falls under List-II Entry-54 over which the State Legislature had exclusive power. This proposition was based on the Mysore HC judgment reported in 20 STC 20 which was not applied in the present facts of the case.

2. A subsequent Circular No. 9 of 2006 dt. 19th October 2006 issued by the Central Govt. took care of the exact situation as obtained in the present case. Relevant paragraph of the said circular read as under:

“Thus a tax payable under the West Bengal Value Added Tax 2003 can be given credit under the same act although the challans has been used under the West Bengal Sales Tax Act, 1994 or under the CST Act, 1956. Similarly a tax meant for deposit under the CST Act, 1956 may be given credit under the same Act although challans used for such deposit is either under the West Bengal Value Added Tax Act, 2003 or The West Bengal Sales Tax Act, 1994. Likewise a tax required to be deposited under the West Bengal Sales Tax Act, 1994 may be given credit under the same act, although the challans for the purpose has been used inadvertently under the West Bengal Value Added Tax Act, 2003 or the CST Act, 1956.”

Accordingly, the revenues pedantic and very technical approach was rejected and writ petition was allowed.

Hindustan Unilever Ltd. v. Dy. Commr. CT (2015) 50 PHT 150 (Cal)

2. Clarification issued by the Commissioner of the Commercial Taxes, Karnataka

Sl. No. Clarification No. and data Commodity Brief text of clarification
1 CLR.CR-82 / 2014-15 dt. 23-1-2015
“Nutralite” “Nutralite” is liable to tax as unscheduled goods @12.5% from 1-4-2005 to 31-3-2010, at 13.5% from 1-4-2010 to 31-3-2011, at 14% from 1-4-2011 to 31-07-2012 and at 14.5% from 1-8-2012 and onwards
2 CLR.CR-131 / 2014-15 dt. 2-2-2015
Bamboo and Cane including bamboo splints and sticks whether green or dry
These items are liable to tax at 5.5% from 1-8-2012 as per Sl. No. 8 of Third Schedule to the KVAT Act, 2003.
3 CLR.CR.-117 / 2013-14 dt. 4-5-2014
Davanam Oil, Ginger Oil etc. These oils together with Palmrosa oil and Patchouli oil are liable to tax at 14.5 % from 1-8-2012 as unscheduled goods u/s 4(1)(b)(iii) of the KVAT Act, 2003.
4 CLR.CR.-114 / 2014-15 dt. 17-1-2015
Paint brushes and other hardware accessories
Paint brushes and other hardware accessories such as hand paint brushes made in Dupont Tynex Filamnet putty mixers, putty knife, hand gloves and face mask etc. liable to tax at 14.5% from 1-8-2012 as unscheduled goods.
5 CLR.CR.88 / 2014-15 dt. 23-12-2014
Scrapped Buses The same are liable to tax at 5.5% w.e.f. 1-8-2012 as “all kinds of scraps and waste materials” vide Sl. No. 3 in the Table to the Notification No. FD-82 / CSL / 10(III) dt. 31-3-2010 r/w No. FD-143 / CSL / 12(I) dt. 31-7-2012.
6 CLR.CR-127 / 2013-14 dt. 5-1-2015
Orthopedic appliances “Back Braces, Fracture Bracing, Braces for Knee, Elbow and Ankle” are liable to tax at 5.5% w.e.f. 1-8-2012 under Entry 60 of the Third Schedule of the KVAT Act, 2003.
7 CLR.CR-81 / 2014-15 dt. 30-1-2015
Tamarind Juice Concentrate Tamarind in all forms have to be treated as one and the same, and, hence, the benefit of reduced rate of tax on “Tamarind” has to be extended to Tamarind juice concentrate, which is nothing but tamarind in usable form. Under Notification No. IV No. FD-63 / CSL-2009 dt. 30-3-2009 liable to tax at 2% w.e.f. 1-4-2009 and onwards.
8 CLR.CR-102 / 2014-15 dt. 14-1-2015
Money Counting Machine It is liable to tax at 14.5% from 1-8-2012 as unscheduled goods u/s 4(1)(b)(iii) of the KVAT Act, 2003.
9 CLR.CR-64 / 2014-15 dt. 30-12-2014
Packing cases, boxes, crates, drums and similar packing cases of plywood
The same are liable to tax at 5.5% from 1-8-2012 as industrial inputs and packing materials under Sl. No. 5(1) of the Third Schedule to the KVAT Act, 2003.

3. Facts – Negative facts – Burden of Proof

In the present case, fact of ‘sale’ by a dealer not recorded as purchase by the appellant. Books of accounts not found at the time of survey. Assessing authority issued show-cause notice and rejected clarification given by the appellant and imposed tax. Tribunal on appeal after consideration of the case law cited by the appellant held that the burden of proof as contained in Section 16 of the Act 2008 has been proved by the appellant-dealer. The bonafide dealer is not responsible to prove negative facts. Accordingly, the Tribunal held that the First Appeal Order does not deserve to be supported and therefore it is set-aside and the appeal is allowed.

Maa Mahamaya Alloys Pvt. Ltd. v. C.C.T 2015 NTN (Vol. 57) Tribunal 80

4. Karnataka Sales Tax Act, 1957 – Entry 25 of Schedule-VI

In the present case, constitutional validity of Entry 25 of Schedule-VI to the Karnataka Sales Tax Act, 1957, pertaining to “Processing and supplying of Photographs, photo prints and photo negatives” was the subject-matter of the appeal. It was the third endeavour to resurrect the said entry, when on the first two occasions, the steps taken by the State were declared as impermissible. Even this time the HC has dumped the amendment as unconstitutional. However, the reasons advanced by the HC in all three rounds were different. While travelling through the historical facts which led to the issue at hand, we shall clear the whole controversy involved inasmuch as in respect of works contract levy of tax power of State Legislature is derived under Article 366 clause 29-A r/w Entry No. 54 list II of the Constitution and by virtue of Clause 29A of Article 366, the State legislature is now empowered to segregate the goods part of the works contract and imposed sales tax thereon. It may be noted that Entry 54, List II of the Constitution of India, empowers the State Legislature to enact a law taxing sale of goods. Sales tax, being a subject-matter into the State list, the State Legislature has the competency to legislate over the subject. In view of this legal position, the Apex Court comprising of three Judges undertook the journey of its own 15 cases and set-aside the HC judgment by observing that the HC has not dealt with the matter in its correct perspective and even not dealt with various facets of the issue and allowed the appeal of the State holding that Entry 25 of Schedule-VI of the Act is constitutionally valid. For detailed legal analysis, readers are advised to go through the entire text of the long judgment.

State of Karnataka etc. v. M/s Pro Lab And Ors. etc. 2014-15 (19) KCTJ 275 and 2015 NTN (Vol. 57)-102

5. Limitation

The revision application filed by the Commissioner was delayed by 175 days and prayer was made to condone it. No reasons were cited in the affidavit for the period in between 90 days of serving the order except for stating that there was a shortage of employees in the office and there was no permanent State Representative. The HC following the judgment of the Apex Court in the case of Postmaster General v. Living Media India Ltd. 2012 (3) SCC 563 held that the work of no Dept. can be left unattended only for the reason that there was a shortage of employees or that the officer was not posted in a particular post. Therefore, the delay in filing the revision went totally unexplained. Accordingly, the revision application praying of condonation of delay was rejected and revision too was dismissed as barred by time.

Commissioner, CT, U.P., Lucknow 2015 NTN (Vol. 57) – 47 (All)

6. lis When Commences – Right to appeal when arises

Accrual of right of appeal is the date of initiation of proceedings and not the decision itself. Right of appeal is a vested right and accrues to the litigant as and from the date lis commences. Such right is actually exercised when the adverse judgment is pronounced. Lis can be said to have arisen as soon as proceedings start and when the authority called the assessee for evidence. The lis cannot be said to have started merely on the filing of the return. The lis cannot be said to have arisen on issuance of mere notice because (i) the assessee could not accept the notice and there could be no objection from his side; (ii) the assessee would not have appeared to contest the assessment; (iii) the critical relevant date of the initiation of the proceedings and the decision itself. Therefore, following the Apex Court judgments the Tribunal held the intention of the Apex Court to make such observations was that lis is to be determined from the date when objection has been made by the party to the litigation.

2. In the present case decided by the Punjab Value Added Tax Tribunal in the context of Section 62(5) of the PVT Act, 2005 which referred to the payment of 25% of the tax, penalty and interest. Earlier, it was taken that the appeal could be entertained on the payment of 25% of tax, penalty and interest. But it never referred, if the appellant was also to make the payment of 25% of the “additional demand.” Consequently, the present amendment to the section was brought on the statute book as a clarificatory provision so as to include 25% additional demand of tax, penalty and interest. It is in the context of the section, the above legal position was explained by the Tribunal and the case was decided in favour of the revenue.

Indian Sucrose Ltd. v. State of Punjab (2015) 50 PHT 141 (Pvt.)

7. Notification and its effective date

Allahabad HC held that it was a settled position in law that the taxing statute was generally prospective in nature and if it has to be made retrospectively, it has to be specifically provided. The facts of the case related to the A.Y. 1997-98 (Central). Assessee dealt in manufacture and sale of electronic goods and was granted Eligibility Certificate (EC) under the provision of Section 4A of the U.P. Trade Tax Act, 1948. The first sale was made on 5-5-1997 under Notification No. 781 dt. 31-3-1995 issued u/s 8 of the CST Act, which entitled the assessee to exemption / rebate on the tax for the first 10 years of the production / sale. However, exemption or rebate in the rate of tax on any transaction of sale shall not exceed 5% of the sale price and it shall be as percentage of the rate of tax normally applicable under the U.P. Act. The Notification dt. 31-3-1995 was amended by another notification dt. 5-5-1997 thereby substituting the words “under the U.P. Act” by the words “under the Act”. Tribunal by its order impugned refused the benefit of exemption / reduction in tax to the assessee for the relevant year 1997-98 on the ground that the use of the word “U.P. Act” in Column 4 of Annexure-I to the Notification dt. 31-3-1995 appeared to be a clerical mistake and that in view of the subsequent amendment made by the Notification dt. 5-5-1997 the said mistake stood rectified which would be operative from 1-4-1995 itself. The HC held that the amendment to the Notification dt. 31-3-1995 brought about by means of the Notification dt. 5-5-1997 shall be effective from 5-5-1997 and would not apply retrospectively w.e.f. 1-4-1995 as held by the Tribunal. Accordingly, the revision was allowed.

Super Cassette Industries Ltd. v. Commissioner of Trade Tax, Lucknow 2015 NTN (Vol. 57) – 48 (All)

8. Opportunity of hearing and notice

In the present case, two points were for the consideration of the Punjab Value Added Tax Tribunal, viz. (i) Opportunity of hearing and (ii) Notice for imposition of penalty. As per section 61 of the PVT Act, 2005, opportunity of hearing is to be given before imposition of penalty. The penalty was imposed on 8-8-2012 and notice was issued on 29-8-2012. Thus, it was no notice in the eye of law after levying the penalty first. As regards reversal of input credit on transfer of stocks to branches, the assessee had not reversed ITC completely as per the provisions of section 19(3) of the Act. The Assessing Officer without giving proper notice, reversed the same and levied penalty on the assessee. The Tribunal held: as regards ITC on the capital goods, the AO did not give his opinion as to at what rate ITC was admissible upon the capital goods. Order passed thus completely lacks application of mind. Consequently, penalty was also set-aside and the AO was directed to decide the case afresh on both the above issues. Accordingly, the appeal was decided.

Hawkins Cookers Ltd. v. State of Punjab (2015) 50 PHT 189 (Pvt).

9. Refund of excess amount of tax paid

In writ petition filed before the Allahabad HC, the main grievance of the petitioner was that refund of the excess amount of tax of pre deposit amounted to ` 16.6 crore paid under protest in compliance of interim order of the Supreme Court and be application for rectification of mistake apparent on record has been rejected. The HC on examination of the case allowed the writ petition by holding that not passing an order of refund when the amount is found due to be refundable would amount to be judicial misconduct. The rectification application filed was rejected mechanically without application of mind, the same order too was set-aside. All in all, the refund was required to be granted by allowing writ petition within a period of 6 weeks from the date of production of a certified copy of the Order.

Sony India Pvt. Ltd. v. State of U.P. & 2 Ors. 2015 NTN (Vol. 57) -125 (All)

10. Sale its Ingredients

In order to constitute ‘sale’ three ingredients must be present i.e. (i) mutual consent between the parties competent to contract, (ii) transfer of property in goods and (iii) transfer of ownership along with valuable consideration. In the present case, goods were supplied as free of cost returned back after fitment. Questioned goods “Child parts” supplied as free cost to the appellant. Appellant contended that excise duty was leviable on the assessable value i.e. the value of ‘manufactured goods’ whereas sales tax was charged on the taxable value of goods against consideration. The appellant sent back such ‘Child parts’ by fixing it in automobile plastic component supplied back. No tax charged on the value of child parts. The Assessing Authority (AO) imposed tax on supply of such child parts by treating it as sale. First Appellate Authority remanded the matter back to the AO. Aggrieved with the remand order, the dealer filed the present appeal. The Tribunal in appeal placed reliance on the judgment in the case of Devidas Gopal Krishna And Ors; Commissioner of sales tax, U.P. v. Satya Industrial Corporation (1994) UPTC 1149 and observation of the Supreme Court in the case of M/s Moriroku UT India Pvt. Ltd. v. State of U.P. (2008) 15 VST 559 (SC) and held that no valuable consideration was received on supply of questioned goods “Child parts” received as “free of cost” from the buyer for fitments in the manufactured goods supplied by the appellant again to the buyer. No transfer in property in questioned goods passed from buyer to the appellant. Ownership remained with the buyer company which provided “free of cost” supply of question goods to the appellant. Insurance of such question goods was made at the end of the buyer company supplying it as free of cost to the appellant. Hence, on facts, tax deleted as imposed by the AO on supply of “child parts” by treating it as “sale”. Accordingly, appeal allowed.

Mori Roku Ut Pvt. Ltd. v. C.C.T. 2015 NTN (Vol. 57) – Tribunal-52

11. Time barred assessment

In this case, Respondent intentionally withheld legitimate purchase tax due to be deposited as per the admitted turnover in the returns. There was delay in framing the assessment on the part of the Dept. Amount withheld whether can be recovered by enacting new law / provision after the expiry of period of limitation as prescribed in the law itself. The HC followed State of Punjab And Ors. v. Patiala Co-Op. Sugar Mills Ltd. and held in the negative.

State of Punjab & Ors. v. Fazilka Co-Op. Sugar Mills Ltd. (2015) 50 PHT 128 (P&H)

12. Whether “Surgical Cotton” commercially different and distinct product ?

In the present case, the fact was production of surgical cotton from raw cotton by process of transformation whether amounts to manufacture, was held in the affirmative and whether “Surgical Cotton” was commercially different and distinct product was held in the affirmative, in the context of Schedule Entry “Cotton including absorbent cotton wool 1.P” and whether liable to exemption of tax under Notification u/s 2(27) of the Rajasthan Sales Tax Act, 1994, also held in the affirmative.

Mamata Surgical Cotton Industries v. AC (Anti Evasion), Rajasthan (2015) 65 S.T.A. 122 (SC)

13. Words and Phrases – “Tax Due”

Section 23(5) of the Delhi Sales Tax Act deals with the situation where a dealer fails to furnish returns in respect of any period by the prescribed date. In such eventuality, the Commissioner is mandated to, after giving the dealer a reasonable opportunity of being heard, make a best judgment assessment. Consequently after due notice and opportunity to the dealer a best judgment assessment was made on 26-3-1985 by the Assessing Authority whereby the petitioner was directed to pay a sum of ` 52,39,763 under the said act and by a separate order of the same date, the petitioner was required to pay a sum of Rs. 5,92,469 under the CST Act, 1956. However, in neither case was any interest levied by the assessing authority u/s. 27(1) of the said Act. The writ petition was directed against the order dt. 13-2-1994 passed by the Sales Tax Appellate Tribunal. The point in issue related to the chargeability of interest u/s. 27(1) where the petitioner did not file any return in respect of the year 1980-81. The petitioner had also not deposited any tax during the currency of that year. Provisions of section 23(5) were invoked and best judgment assessment framed where under petitioner was directed to pay a sum of ` 52,39,763 under the Delhi Sales Tax Act, and a sum of ` 5,92,469 under the CST Act, 1956.

2. The expression “tax due” as appearing in section 27(1) of the Delhi Sales Tax Act to be read in relation to the provisions of section 21(3) thereof. Section 21(3) of the said act has clear reference to the furnishing of a return. Moreover, it has reference to the full amount of tax due from a dealer under the act “according to such return”. In other words, the tax which is set to be due u/s. 27(1) of the said act must be the tax which is due “according to the return”. If no return is filed then there could be no “tax due” within the meaning of section 27(1) of the act r/w section 21(3) thereof. The tax which is ultimately assessed is the tax which becomes due on assessment and if this tax so assessed is not paid even after the demand is raised then the dealer would be deemed to be in default and would be liable to pay interest u/s 27(2) of the said act. But till such tax is assessed no interest can be levied on such a dealer, who has not filed a return u/s 27(1) of the said act.

3. In view of the above legal position, it is evident that the impugned order dt. 13-2-1994 is not in accordance with the Constitution Bench judgments of the Supreme Court i.e. J.K. Synthetics Ltd. v. CTO (1994) 4 PHT 450 (SC), Maruti Wire Industries Pvt. Ltd. v. STO (2001) 17 PHT 414 (SC) (FB) and State of Rajasthan v. Ghasilal AIR 1965 SC 1454.

Pure drinks (New Delhi) Ltd. v. The Members Sales Tax Tribunal (2015) 50 PHT 169 (Del)

D. H. Joshi,
Advocate

Change in shareholding patten requires Bank’s approval

In reference to SARFAESI Act, 2002, every Securitisation Company / Reconstruction Company (SC / RC) is required to obtain prior approval of the Reserve Bank for any substantial change in its management. The expression “substantial change in management” means the change in the management by way of transfer of shares or amalgamation or transfer of the business of the company. Hence, one of the terms and conditions stipulated to the SC/RCs, while granting them the Certificate of Registration, states that prior approval of Reserve Bank will have to be taken by the SC/RCs for any change in their shareholding pattern.

Further all SC/RC companies may require RBI approval for changes in the shareholding pattern related to : (a) any transfer of shares by which the transferee becomes a sponsor (b) any transfer of shares by which the transferor ceases to be a sponsor and (c) an aggregate transfer of ten per cent or more of the total paid-up share capital of the SC/RC by a sponsor during the period of five years commencing from the date of certificate of registration..

Circular No. RBI/2014-2015/476 DNBR(PD)CC.No. 01/SCRC / 26.03.001 / 2014-2015 dtd. 24-2-2015.

NBFCs Raising Money by Private Placement of Non Convertible Debentures (NCDs)

NBFCs for resource planning should cover the planning horizon and the periodicity of private placement and the policy is to be approved by the Board. The following issues shall be governed: :

i. Minimum subscription per investor shall be ` 20,000 (Rupees Twenty thousand);

ii. Issuance of private placement of NCDs shall be in two separate categories;

(a) Maximum subscription of less than ` 1 crore and

(b) A minimum subscription of ` 1 crore and above per investor;

iii. Limit of 200 subscribers for every financial year, for issuance of NCDs with a maximum subscription of less than ` 1 crore, shall be fully secured;

iv. No limit on the number of subscribers in respect of issuances with a minimum subscription of ` 1 crore and above; the option to create security in favour of subscribers will be with the issuers. The unsecured debentures shall not be treated as public deposits as defined in NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 1998.

v. An NBFC (excluding Core Investment Companies) shall issue debentures only for deployment of funds on its own balance sheet and not to facilitate resource requests of group entities / parent company / associates.

vi. An NBFC shall not extend loans against the security of its own debentures (issued either by way of private placement or public issue).

All tax exempt bonds offered by NBFCs are exempted from the applicability of the circular. All NCDs of maturity up to one year as per the guidelines on Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010, dated June 23, 2010, by Internal Debt Management Department, RBI shall be applicable.

Circular No. RBI/2014-15/475 DNBR (PD) CC No. 021/03.10.001/2014-15 dated 20-2-2015

Sections 10(4) & 11(1) of the FEMA: Risk Management and Inter Bank Dealings: Foreign Currency (FCY) – INR Swaps

All eligible residents can enter into FCY-INR swaps to hedge exchange rate and/or interest rate risk exposure arising out of long-term foreign currency borrowing or to transform long-term INR borrowing into foreign currency liability, subject to guidelines. Further, swap transactions, once cancelled, shall not be rebooked or reentered. Also to permit greater flexibility to the residents borrowing in foreign currency where the underlying is still surviving, the client, on cancellation of the swap contract, may be permitted to re-enter into a fresh FCY-INR swap to hedge the underlying but only after the expiry of the tenor of the original swap contract that had been cancelled.

Circular No. RBI/2014-15/469A.P. (DIR Series) Circular No. 78 dated 13-2-2015

Ss.10(4) & 11(1) FEMA, 1999 : Foreign Direct Investment in Pharmaceuticals sector – Clarification

FDI policy for pharmaceutical sector has been reviewed and it has now been decided with immediate effect that there would be a special carve out for medical devices which was earlier given the same treatment as pharmaceutical sector. FDI up to 100% is permitted under the automatic route in for manufacturing of medical devises and is applicable to Greenfield Projects (100% Automatic) and Brownfield Projects (100% Government). This circular has also defined the definition of Medical Devices.

Circular RBI/2014-15/441 A.P. (DIR Series) Circular No. 70 dated 2-2-2015.

S. 10(4) & 11(1): FEMA Act, 1999 Foreign investment in India by Foreign Portfolio Investors

All future investment in Government securities by registered Foreign Portfolio Investors (FPIs) shall be required to be made in Government bonds with a minimum residual maturity of three years. Accordingly, all future investments by an FPI within the limit for investment in corporate bonds shall be required to be made in corporate bonds with a minimum residual maturity of three years. Further, all future investments against the limits vacated when the current investment runs off either through sale or redemption, shall be required to be made in corporate bonds with a minimum residual maturity of three years. FPIs shall not be allowed to make any further investment in liquid and money market mutual fund schemes. There is no lock-in period and FPIs shall be free to sell the securities (including those that are presently held with less than three years residual maturity) to domestic investors.

Circular RBI/2014-15/448 A.P.(DIR Series) Circular No. 71 dated 3-2-2015

S. 6(3) and S. 47(2) Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) (Amendment) Regulations, 2015

RBI permission necessary to acquire or transfer of immovable property in India not exceeding five years except for lease by citizens of certain countries like Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau or Hong Kong.

Notification No. FEMA. 335/2015-RB dated 4-2-2015

Ss. 10(4) & 11(1) FEMA, 1999 Foreign investment in India by Foreign Portfolio Investors

FPIs shall be permitted to invest in Government securities, the coupons received on their existing investments in Government securities. These investments shall be kept outside the applicable limit (currently USD 30 billion) for investments by FPIs in government securities. AD Category – I banks shall ensure reporting of such investments as may be prescribed from time to time.

RBI/2014-15/453 A.P. (DIR Series) Circular No. 72 dtd. 5-2-2015

Ss. 10(4) & 11(1) FEMA, 1999 Foreign investment in India by Foreign Portfolio Investors

The Reserve Bank has issued a clarification about the applicability of investment by FPI :

Any fresh investments shall be permitted in any type of debt instrument in India with a minimum residual maturity of three years. Accordingly, FPIs shall not be allowed to make any further investment in CPs.

FPIs shall not be allowed to make any further investments in debt instruments having minimum initial/residual maturity of three years with optionality clause exercisable within three years.

FPIs shall be permitted to invest in amortised debt instruments provided the duration of the instrument is three years and above.

Further any clarification above shall not be in conformity with the provisions of the A.P. (DIR Series) Circular No. 71 dated February 3, 2015.

RBI/2014-15/460 A. P. (DIR Series) Circular No.73 dated 6-2-2015

Ss.10 (4) & S.11(1) FEMA Act, 1999 – Import of goods into India

The RBI liberalise and simplify the procedure to dispense the requirement of submitting request in Form A-1 to the AD Category–I Banks for making payments towards imports into India as they need to obtain all the requisite details from the importers and satisfy itself about the bona fides of the transactions before effecting the remittance by persons, firms and companies for making payments, exceeding USD 5,000 or its equivalent towards imports into India.

RBI/2014-15/467 A. P. (DIR Series) Circular No. 76 12-2-2105.

Sujeet Karkala,
Advocate

Definition – Authorised Officer

A definition inserted defining various under Section 2 of the FEMA 1999 a new sub clause (cc) been inserted defining “Authorised Officer” means an officer of the Directorate of Enforcement authorised by Central Government u/s. 37A. Under previous Act no such officer was defined but the new provisions makes an insertion enplaning the scope of authorised person.

S. 6 Capital Account Transactions

Sub-section (2) sub-cl (a) has been replaced with a new clause (a), under previous clause “any class or classes of capital account transaction which are permissible” now this “any class or classes of capital account transaction involves debt instrument, which are permissible.” As per the new insertion “debt instrument” has been inserted.

A new sub-clause (c) has been inserted after sub clause (b) of sub-section (2) of Sec. (6) stating “any conditions which may be placed on such transaction“. This clause explains any conditions can be placed on capital account transactions for any person who may sell or draw foreign exchange to or from authorised person.

An amendment has been made to the proviso after sub-section (2) sub-cl (b) by inserting “Central Government” as earlier proviso only includes Reserve Bank of India in not imposing any restrictions on drawal of foreign exchange for payments due on account of amortisation of loans or for depreciation of direct investments in the ordinary course of business which now also includes Central Government.

A new clause (2A) has been inserted which states

The Central Government may in consultation with the Reserve Bank of India, prescribe –

(a) Any class or classes of capital account transactions, not involving debt instrument, which are permissible ;

(b) The limit to which foreign exchange shall be admissible for such transactions; and

(c) Any conditions which may be placed on such transactions.

Section 6 sub-section (3) has been omitted which explains the list of regulations prohibit, restricts or regulate by RBI.

A new sub section (7) has been inserted which defines “debt instrument” which means any instruments as may be determined by the Central Government in consultation with the RBI.

Under Section 18, the word adjudicating Authorities” has been replaced by “Competent Authority”.

A new section 37A deals with Special Provisions relating to assets held outside India in contravention to Section, has been inserted for all the assets being hold outside in India in contravention to Section 4 of the Act after Section 37 of the Foreign Exchange Act, 1999 which states that

1) Authrorise Officer who has reason to believe that any property situated outside India contravene section 4 of the Act may by writing, order, seize value equivalent of foreign exchange in India of the immovable property but such seizure cannot be made in a case where the aggregate value of such foreign exchange, foreign security or any immovable property, situated outside India, is less than the value.

2) The order of seizure to be placed before the Competent Authority, appointed by the Central Government not below the rank of Joint Secretary to the Government of India within thirty days from the date of such seizure.

3) The Competent Authority within one hundred and eighty days from the date of seizure after giving an opportunity to be head shall dispose of the petition.

An explanation is inserted explaining the computing of one hundred eighty days, the period of stay granted by court shall be excluded and a further period of at least thirty days shall be granted from the date of communication of vacation of such stay order.’

S.46.Power to make Rules for Central Government by notification to carry out the provisions of the act.

A new sub clause (aa) has been inserted under sub section 2 which also covers debt instrument covered by sub section 7 of section 6.

Also a sub clause (ab) been inserted that includes the the permissible classes of capital account transactions in accordance with sub-section (2A) of section 6 and the limits of admissibility of foreign exchange, and the prohibition, restriction or regulation of such transactions

Also after sub clause (g) a new sub clause (gg) has been inserted which states the aggregate value of foreign exchange referred to in sub-section (1) of section 37A;’’.

S. 47. deals Power to make regulation by Reserve Bank of India to carry out the provisions of the Act as well as the rules under this sub section 2 sub clause (a) has been replaced by including debt instruments as the permissible classes of capital account transactions under sub- section (7) of Section (6) the limits of admissibility of foreign exchange for such transactions, and the prohibition, restriction or regulation of such capital account transactions under section 6

A new sub clause (ga) has been inserted after sub clause (g), which includes export, import or holding of currency or currency notes.

Under Section 47 a new sub section (3) has been inserted which includes ll regulations made by the Reserve Bank before the date on which the provisions of this section are notified under section 6 and section 47 of this Act on capital account transactions, the regulation making power in respect of which now vests with the Central Government, shall continue to be valid, until amended or rescinded by the Central Government.

Prevention of Money Laundering Act, 2002

Under section 2 Sub section (1) sub cl (u) which has been extended by including the value of property within India in case of property situated outside India, define “Proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of such property or where such property is taken or held outside the country, then the property equivalent in value held within country.

Clause (y) defined schedule Offence , in sub-clause (ii), for the words “thirty lakh rupees”, the words “one crore rupees” been substituted.

S.5 Attachment of Property involved in Money-laundering, in sub-section (1), in the second proviso, for the word, brackets and letter “clause (b)”, the words “first proviso” shall be substituted.

S. 8 :Adjudication

sub-section (3), in clause (b), for the words “Adjudicating Authority”, the words “Special Court” shall be substituted;

a new sub section (8) has been inserted which stated that Where a property confiscated to the Central Government under sub-section (5) which deals with attachment of property involved in Money Laundering, the Special Court may direct the Central Government to restore such confiscated property or part thereof of a claimant with a legitimate interest in the property, who may have suffered a quantifiable loss as a result of the offence of money laundering:

Provided that the Special Court shall not consider such claim unless it is satisfied that the claimant has acted in good faith and has suffered the loss despite having taken all reasonable precautions and is not involved in the offence of money laundering.

S.20: Retention of Property:

sub-section (5), for the words “the Court or the Adjudicating Authority, as the case may be”, the words “Special Court” shall be substituted;

Sub section 6 instead of the word “Court”, the words “Special Court” shall be substituted; further the clause amended that the Directors or any officers authroised by him n thus behalf has reason may withhold the release of any such property instead of the words “ninety days from the date of”, the words “receipt of” shall be inserted.

S. 21 : Retention of Records:

sub-section (5), deals with after passing of an order of confiscation “under sub-section (5) or sub-section (7) of section 8” has been replaced with “or release under sub-section (5) or subsection (6) or sub-section (7) of section 8 or section 58B or sub-section (2A) of section 60” shall be substituted;

Sub-section (6), –– (a) for the words, brackets, figures and letters “under sub-section (6) of section 8 or by the Adjudicating Authority under section 58B or sub-section (2A) of section 60”, the words, brackets and figures “Adjudicating Authority under sub-section (5) of section 21” shall be substituted;

S.60 Attachment, seizure and confiscation, etc of property in contracting state or India in sub-section (2A), for the words “Adjudicating Authority”, the words “Special Court” shall be substituted.

Sujeet S. Karkala,
Advocate

In this article, an attempt has been made to analyse the some of the key proposals related to Customs Laws.

1. Rationalisation of Penalty Provisions:

• Proper Officer under Customs Department may serve SCN for recovery of duties not levied/ short levied for reasons other than that of collusion, wilful mis-statement or suppression of facts, within one year from relevant date1. In case the assessee pays duty with interest, SCN shall not be served.

Now, one proviso is proposed to be inserted to Section 28 (2) of the Customs Act, 1962 for non-imposition of penalty provided full duty along with interest is paid within 30 days from the date of receipt of SCN. Further, it is proposed that in such a case, the proceedings would be deemed to be concluded.

• Further, in cases of short payment/non-payment due to collusion, wilful mis-statement or suppression of facts by the importer or exporter or agents or employees thereof and SCN is already issued, the noticee may pay accepted duty in full or part with interest and penalty @ 25% of the duty amount within 30 days from the date of receipt of SCN2. In such a case, the proceedings are deemed to be concluded for the accepted duty amount.

Now, in the above cases, it is proposed to reduce penalty of 25% of duty amount to 15% of duty amount.

• In view of proposed amendment to penalty provisions, transitional provisions are proposed to be introduced. Accordingly, in cases where SCN is issued but Adjudication Order is not passed before enactment of Finance Bill, 2015, the proceedings would be deemed to be concluded if duty, interest and penalty @ 25% or 15% of duty amount respectively is paid in full within 30 days from the date of enactment of Finance Bill, 2015.

2. Amendment to penalties for improper importation or export of dutiable goods

• If any person deals with goods in a manner that the goods become liable for confiscation or any person acquires possession of or is in any way involved in dealing with goods such as handling, depositing, harbouring, keeping, concealing, selling or purchasing which that person knows or has reason to believe, are liable to confiscation, then such a person is liable for specified penalties3.

• Currently, in case of dutiable goods other than prohibited goods, penalty, not exceeding 100% of the duty sought to be evaded on such goods or
Rs. 5,000/-, whichever is higher, shall be imposed. Now, it is proposed to amend the upper cap for such penalties from 100% to 10% i.e. penalties are proposed to be levied maximum upto 10% of the duty sought to be evaded or
Rs. 5,000/-, whichever is higher.

• Further, it is proposed that if duty alongwith interest on such improper import has been deposited within 30 days from the date of the communication of adjudication order, penalty shall be reduced to 25% of the penalty (i.e. effectively 2.50% of duty sought to be evaded).

• Similarly, in case of improper exports of goods i.e. if any person deals with dutiable goods other than prohibited goods in a manner which would render the goods liable for confiscation, presently, penalty is levied not exceeding 100% of the duty sought to be evaded on such goods or
Rs. 5,000/-, whichever is higher.

• Now, penalty criteria is proposed to be amended as penalty not exceeding 10% of duty sought to be evaded or
Rs. 5,000/-, whichever is higher.

• Yet again, it is proposed that if duty alongwith interest on such improper export has been deposited within 30 days from the date of the communication of adjudication order, penalty shall be reduced to 25%. Of the penalty (i.e. effectively 2.50% of duty sought to be evaded).

3. Amendment to provisions for Settlement Commission:

• Hitherto, Settlement Commission is given power to reopen completed proceedings if the same are connected with the case pending with Settlement Commission with the concurrence of the applicant and pass orders accordingly. The Settlement Commission is not allowed to reopen the case after expiry of 5 years from the date of application made to Settlement Commission.

• Now, the power given to reopen the cases to Settlement Commission is proposed to be withdrawn.

All the above amendments would be effective from the date of enactment of Finance Bill, 2015.

4. Facility of advance rulings extended to resident firms

• Presently, following persons may apply for advance ruling:

• A non-resident setting up a joint venture in India in collaboration with a non-resident or a resident;

• A resident setting up a joint venture in India in collaboration with a non-resident;

• A wholly owned subsidiary Indian company, of which the holding company is a foreign company, which proposes to undertake any business activity in India;

• A joint venture in India;

• A resident in case of imports from Singapore;

• A resident public sector company;

• A resident proposing to import goods under Chapter heading 9801 of the First Schedule to the Customs Tariff Act, 1975;

• A resident public limited company;

• A resident private limited company.

• Now, with effect from 1st March, 2015, even a resident firm has the facility to apply for advance rulings4. The term “firm” means Partnership Firm and includes Specified Limited Liability Partnership (LLP), Sole Proprietorship and One Person Company.

• With the aforesaid amendment, almost all business entities will be eligible to apply for the Advance Rulings.

CA. Prerana (Payal) Shah

In this article an attempt has been made to analyse the key provisions amended/proposed to be amended related to Central Excise Act and rules made thereunder:

1. Effective Rate of Duty

Standard ad valorem rate of duty of excise is being increased from 12% to 12.5% for most of the items. Similarly, duty of excise is increased from 12% to 12.5% for goods covered by the Medicinal and Toilet Preparations Act, 1955. However, the Education cesses of 3% applicable on the duty amount are being exempted. Therefore, the effective rate of duty for most of the items would be 12.5% in stead of 12.36%.

There is no increase in the concessional rates of duties of 2% or 6%.

(This amendment is effective from 1-3-2015)

2. Penalties

a. Presently, if duty has not been paid due to reasons like fraud/collusion/wilful misstatement/suppression of facts or contravention of any provisions with an intention to avoid duty, then penalty equal to the amount of duty involved is leviable. However, if details regarding such transactions are available then penalty would reduce by fifty per cent vide Section Also, if duty liability along with applicable interest has been paid, before issuance of show cause notice (SCN), the penalty shall get reduced to maximum up to 25% of the duty.

b. However, as per the proposed amendment, the availability of transaction in records will have no bearing on reduction of penalty. Moreover, in cases, where there is no involvement of factors like fraud, etc.; the penalty not exceeding 10% will be leviable. In such bona fide cases, if the duty along with interest, before issuance of SCN or within 30 days of SCN, no penalty would be leviable. In such cases, if the duty along with interest has been paid within 30 days of commnunication of the order, the penalty will get reduced to 2.5% of the duty amount.

c. Moreover, as per the proposed amendments, if the duty is wilfully evaded, the penalties shall be payable as under:

i. If the duty along with interest and reduced penalty is paid within 30 days of SCN, the penalty shall be 15% of the duty

ii. If the duty, interest and reduced penalty is paid within 30 days of the order, the penalty shall be 25% of the duty

iii. In other cases, 100% of the duty amount

The below table summarises the proposed changes pertaining to the penalty in cases involving mens rea and other cases:

Particulars

Proposed Penalty under Section 11AC (Bona fide cases)

Proposed Penalty under Section 11AC (Mala fide cases)

Cases covered

Cases other than

• Fraud

• Collusion

• Wilful mis-statement

• Suppression of facts

• Contravention of provisions of the Act with intent to evade Excise Duty

Cases of

• Fraud

• Collusion

• Wilful mis-statement

• Suppression of facts

• Contravention of provisions of the Act with intent to evade Excise Duty

Non-levy/Non-payment/Short-levy/Short-payment/Erroneous refund of Excise Duty

Penalty not exceeding 10% of amount of duty or
Rs. 5,000/- whichever is higher

Penalty equal to 100% of Excise Duty

50% reduction in penalty where details relating to transactions are available in specified records only for the period from 8th April, 2011 to the date of enactment of Finance Bill.

3. Excise Duty with interest paid within 30 days from the date of service of SCN

No penalty

Reduced penalty of 15% of Excise Duty provided such reduced penalty is also paid within 30 days from the date of service of SCN

Excise Duty with interest and reduced penalty as per these Sections is paid within 30 days from the date of receipt of Adjudication Order

25% of the penalty imposed

25% of Excise Duty

If Commissioner (Appeals), Appellate Tribunal or Court modifies Excise duty liability, penalty to be modified accordingly. Benefit of reduced penalties is proposed to be made available provided Excise duty, interest and reduced penalty is paid within 30 days from the date of receipt of the Order modifying Excise Duty liability.

The penalty under sections 37(4) and 37(5) have been increased from
Rs. 2,000 to Rs. 5,000.

The above changes shall be effective from the date of enactment of the Finance Bill, 2015 (The Bill).

Moreover, general penalty prescribed under rule 25 of Central Excise Rules, 2004 (CER) has been increased from
Rs. 2,000 to Rs. 5,000 w.e.f. 1-3-2015

3. Recovery of duties:

a. Presently, relevant date for the purposes of calculating time limit for recovery of duties is the date of filing return. However, the cases where return is filed belatedly are not covered. Now, it has been proposed that date of filing of return would be the relevant date irrespective whether the return was filed on time or belatedly. Moreover, in respect of interest not paid on duties, the relevant date is proposed to be the date of payment of duty.

b. Self-assessed duty liability as per return which has not been discharged by the assessee can be recovered without issuance of show cause notice as per the proposed introduction of a new sub-section (16).

The above amendments to come into effect from the date of enactment of the Bill.

4. Registration

a. Compulsory online registration: Application for registration or de-registration is made compulsory through online procedure at website www.aces.gov.in

b. Compulsory PAN based Registration

i. Applicants other than Government Departments intending for registering themselves under Central Excise shall compulsorily have their Permanent Account Number (PAN) failing which No Registration Certificate shall be issued.

ii. Existing temporary registrants other than Government Department shall apply for PAN based registration within 3 months failing which their temporary registration shall stand cancelled. Extension for time limit of 3 months can be provided by the jurisdictional authority for one month on the basis of reasons specified by the applicant. If the assessee makes application beyond 1 month then an opportunity of being heard shall be provided thereafter the jurisdictional authority shall pass an appropriate order.

c. Compulsory Details Required

i. Applicant shall mandatorily provide its mobile number and e-mail id in the application form for communication with the department. Also, existing registrants who have not provided its communication details shall submit amended application within 3 months

ii. Requirement of Business Transaction Numbers: Business Transaction Numbers obtained from other Governments or agencies are to be filled in the application form if they are already issued or the certificate should be amended after procuring such numbers. Certain examples of Business Transaction Numbers are provided such as Customs Registration No (BIN No.), Import Export Code (IEC) Number, State Sales Tax /(VAT) Number, Central Sales Tax Number, Company Index Number (CIN), Service Tax Registration Number. Existing registrants are required to amend its application accordingly within 3 months

d. Registration Certificate within 2 days: It has been provided that post verification of documents and premise the Registration Certificate shall be issued by the DC/AC within 2 days instead of 7 days of receipt of duly completed online application form.

e. Online Registration Certificate: Registration Certificate which is issued online shall be an adequate proof of registration. Applicants are now not required to take signature of issuing authority on the said Registration Certificate.

f. Submission of Documents: The applicant shall tender self attested copies of the following documents at the time of verification of the premises:

i. Plan of the factory premises;

ii. Copy of the PAN Card of the proprietor or the legal entity registered;

iii. Photograph and Proof of the identity of the applicant;

iv. Documents to establish possession of the premises to be registered;

v. Bank account details;

vi. Memorandum or Articles of Association and List of Directors; and

vii. Authorisation by the Board of Directors or Partners or Proprietor for filing the application by a third party.

g. Physical Verification

The authorised officer has been made responsible to verify the premises physically within 7 days from the date of receipt of application through online. If any error is found by the concerned authority or certain clarifications are required, the applicant shall rectify the same within 15 days from the date of intimation failing which registration shall stand cancelled. Also, the assessee would be given an opportunity to present his case against the cancellation and if the reasons provided are reasonable, the officer shall not cancel the registration.

If during physical verification it is found that the premise is non-existent, the registration shall stand cancelled. The applicant would also be provided an opportunity of being heard.

h. Change in Constitution

Change in the Constitution shall be intimated to the Jurisdictional Officer within 30 days by way of amendment in the registration details. Any change in the Constitution leading to change in PAN shall require a fresh Registration Certificate

i. Deregistration within 30 days

Earlier, if a registered person ceases to carry on the business he/she may de-register himself by physically submitting a declaration along with the Registration Certificate. However, now only filing of such application will suffice. If there are no dues pending against the person, the application for deregistration shall be approved within 30 days from the date of filing online declaration which shall be accordingly communicated to the assessee.

j. Cancellation of Registration

Earlier revocation/suspension of Registration could be done only if the holder of such certificate or any person in his employment, is found to have committed breach of any of the provisions of the Act or the rules made thereunder or has been convicted of an offence under section 161, read with section 109 or with section 116 of the Indian Penal Code (45 of 1860). However, now the Registration of an assessee may get cancelled due to the following reasons:

i. Where on verification, the premises proposed to be registered is found to be non-existent;

ii. Where the assessee does not respond to request for rectification of error noticed during the verification of the premises within fifteen days of intimation;

iii. Where there is substantial misdeclaration in the application form; and

iv. Where the factory has closed and there are no dues pending against the assessee.

The assessee shall also be provided a reasonable opportunity of being heard against the proposed cancellation by the AC/DC.

The above amendments shall come into effect from 1st March, 2015.

(Notification 7/2015-CE (NT) dated 1st March, 2015 w.e.f. 1st March, 2015)

5. Records can be maintained in electronic form

Rule 10 of the Central Excise Rules, 2002 provides for maintenance of daily stock account by every assessee having description of goods manufactured, opening balance, quantity produced or manufactured, inventory of goods, quantity removed, assessable value, the amount of duty payable and particulars regarding amount of duty actually paid. Also, first page and the last page of each such account book shall be duly authenticated by the producer or the manufacturer or his authorised agent. Now, assessees can maintain records in the electronic form provided that every page of the record shall be authenticated by a means of digital signature.

CBEC shall also specify conditions, safeguards and procedures to be followed by the assessee who wishes to preserve digitally signed records through notification.

The above changes will come into effect from 1-3-2015

6. Invoice can be signed digitally

With effect from 1-3-2015, Sub-rule (8) has been inserted under Rule 11 which lays down that invoice issued by a manufacturer under Rule 11 can be authenticated by means of a digital signature. However, if the duplicate invoice meant for transporter is digitally signed, then the hard copy of the duplicate invoice should be self-attested by the manufacturer. Also, the Board may, by notification, specify the conditions, safeguards and procedure to be followed by an assessee using digitally signed invoice.

7. Late filing Fees

If an assessee fails to submit any return or Annual Financial Information Statement or Annual Installed Capacity Statement referred to in Rule 12 within the prescribed time then penalty of
Rs. 100 per day subject to a maximum of Rs. 20,000 for the period of delay in submission of each such return or statement shall be levied.

Similar late fees has also been prescribed for the delay in filing returns required to be filed by 100% EOUs under Rule 17(3).

The above changes are in effect from 1-3-2015.

8. Power to impose restriction extended to registered importers

Rule 12CCC of Central Excise Rules, 2002 empowers the Central Government to specify the restrictions if there is evasion of duty or to prevent evasion of duty. However, the rule provided that such measures could be imposed for manufacturer, first stage and second stage dealer or an exporter. Now, such restrictions can also be provided by the Central Government for registered importer, with effect from 1-3-2015.

9. Applicability of Rules to the Importer

a. Rule 22 specifying the details to be furnished and audit of assessee are now been made applicable to importer who issues an invoice on which CENVAT credit can be taken also.

b. Rule 25 of Cenvat Credit Rules, 2002 which prescribes the reasons whereby goods can be confiscated and penalty can be levied. It has been amended to include importers in its gamut.

c. Importers who are issuing invoices need to prepare invoices as per Rule 11 of Central Excise Rules, 2002.

(Notification 8/2015-CE (NT) dated 1st March, 2015 w.e.f. 1st March, 2015)

10. Submission of Undetaking in lieu of Bond

Central Excise (Removal of Goods at Concessional Rates of Duty for Manufacture of Excisable Goods) Rules, 2001 allows Manufacturer to receive goods for specified use at concessional rate of duty. Earlier, to avail the exemption a general bond with surety or security was to be submitted. Now, submission of letter of undertaking is also allowed in case of specified Manufacturers.

(Notification 9/2015-CE(NT) dated 1st March, 2015 w.e.f. 1st March, 2015)

11. Settlement Commission

The case which is remanded back to the adjudicating authority for fresh adjudication, by a Court/Appellate authority/any authority, the same shall not be eligible for Settlement.

The above amendment will be effective post enactment of the Bill.

12. Advance Ruling

Section 23A of Central Excise Act, 1944 provides for the meaning of an applicant for the purpose of filing advance ruling application. The term “applicant” means a non-resident or resident, Indian or foreign company setting up joint venture in India.

Now resident firms shall also be eligible to apply for the advance ruling, as the term ‘applicant’ has been amended to include ‘resident firms’. Firms would include LLPs and sole proprietorship firms also.

Whether a firm is ‘resident’ or otherwise shall get determined in accordance with Income tax provisions.

(Notification 11/2015-CE (NT) dated 1st March, 2015 w.e.f 1st March, 2015)

13. CENVAT Credit

Following amendments would be effective from 1st March, 2015:

a. Time limit for availment CENVAT Credit on inputs and input services has been increased from 6 months to 1 year1 from the date of issuance of Cenvatable document.

b. Now, CENVAT Credit on inputs and capital goods is available to a job worker if goods are directly sent to job worker on the direction of manufacturer or service provider2.

c. The benefit of availment of CENVAT Credit on inputs as such or after being partially processed by a job worker is extended to include all subsequent job workers in a chain.

d. The benefit of availment of CENVAT Credit on capital goods is available provided capital goods are sent “as such” to the job worker. The time lag allowed for to and fro of capital goods is increased to 2 years as against 180 days for non-reversal of CENVAT Credit.

e. Henceforth, inputs and capital goods may be received at any place by manufacturer.

f. In case of export of goods or services, refund of CENVAT Credit is available subject to conditions vide Rule 5 of CENVAT Credit Rules, 2004. Now, the said Rule is amended to include the meaning of Export Goods as under:

“’export goods’ means any goods which are to be taken out of India to a place outside India.”3

g. Till now, definition of exempted goods4 and final products5 included only “excisable goods”. Therefore, CENVAT Credit was not allowed on inputs or input services used in or in relation to manufacture of exempted excisable goods6. However, now for the limited purpose of Rule 6 of CENVAT Credit Rules, exempted goods would include even non-excisable goods i.e. to say CENVAT Credit shall not be taken on input or input services used for manufacture of non-excisable goods7.

h. Rule 12AAA of CENVAT Credit Rules, 2004 relating to restrictions to prevent misuse of provisions of Cenvat Credit is made applicable to importers as well.

i. Till now, CENVAT Credit was recovered provided CENVAT Credit is availed as well as utilised wrongly8. However, now SCN may be issued for recovery of CENVAT Credit availed wrongly though not utilised.

j. All credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to be in the following order:

i. Opening balance first

ii. Admissible credits second

iii. Inadmissible credits last

Following amendment to be effective from 1st April, 2015:

In case of Partial RCM, CENVAT Credit is available on input services only when value of input services as well as Service tax is paid. Now, CENVAT Credit, in respect of Service tax payable by service recipient, is available on payment of Service tax and the same is delinked with payment for services made to service provider9.

(Notification 6/2015-CE (NT) dated 1st March, 2015)

CA Jayesh P. Gogri

The Finance Minister’s indirect tax proposals this time are introduced with a view to prepare the economy for the smooth transition to the new levy of GST in April 2016. A brief analysis of service tax proposals may be given hereunder:

1. Goods and Services Tax (‘GST’)

The Finance Minister has reaffirmed and shown his commitment to introduce India’s most awaited tax reform, the GST, effective 1st April, 2016. The Constitutional Amendment Bill has already been introduced in the Parliament to this effect.

In fact, on the indirect taxes front, proposals are largely directed towards GST implementation like simplification of Excise duty and Service tax rates by removing Education Cess and Secondary & Higher Secondary Education Cess as well as increase in rate of Service tax to 14% and also visible thrust on e-compliances in line with GST expectations etc.

2. Rate of Service Tax

With the overall objective of preparing the economy for a smooth transition to GST, it is proposed to tax services at the increased rate of 14%. The enhanced rate shall not be subject to Education Cess. In indirect taxes, the FM has done away with the levy of education cess, which has been subsumed into the enhanced rate of 14%.

Thus, the Effective service tax rate is increased from the existing rate of 12.36% to 14%.

The change in rate of Service Tax would be effective from a date to be notified after the enactment of the Finance Bill, 2015. Till such time the levy of existing rate of Service Tax of 12.36% including ‘Education cess’ and ‘Secondary & Higher Education cess’ shall be continued to be levied.

With the objective of financing and promoting Swachh Bharat initiatives, Swachh Bharat Cess is likely to be imposed on all or any of the taxable services as may be notified at the rate of 2% of the value of taxable services.

This Cess shall be levied from a date to be notified by the Central Government in this regard, most probably this cess shall be levied on some high-end services which can support the Swachh Bharat Abhiyan of the Prime Minister.

3. Widening of tax base

a. Negative List pruned

The list of services in the Negative List is proposed to be reduced by bringing the following services within the ambit of taxation of services. The object behind it has been to widen the Service tax base and to include more services into the service tax net:

• Service provided by way of access to amusement facility providing fun or recreation by means of rides, gaming devices or bowling alleys in amusement parks, amusement arcades, water parks, theme parks or such other places.

• Service provided by way of admission to entertainment events of concerts, non-recognised sporting events, pageants, music concerts, award functions, if the amount charged is more than ` 500/- for right to admission to such an event;

• Services by way of contract manufacturing or job work production of alcoholic liquor for human consumption for a consideration;

• All services provided by the Government or local authorities to business entities.

These proposed changes shall come into effect from a date to be notified by the Central Government after the enactment of the Finance Bill, 2015.

b. Withdrawal of Exemptions

The following exemptions are proposed to be withdrawn by appropriate amendments in the Mega Exemption Notification No. 25/2012-ST, dated 20th June, 2012 effective 1st April 2015:

• Services provided to Government by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:

o A civil structure meant for use other than for commerce, industry, etc.

o A structure meant predominantly for use as an educational, clinical, or an art or cultural establishment.

o A residential complex predominantly meant for self-use or the use of their employees.

• Services by way of construction, erection, commissioning, or installation of original works pertaining to airports and ports;

• Services provided by performing artists in folk or classical art forms of music, dance and theatre for an amount greater than ` One lakh per performance;

• Services by way of transportation of foodstuff except milk, salt and food grain (including flour, pulses and rice);

• Services provided by mutual fund agents, distributors to mutual fund/asset management companies and marketing agents of lottery tickets;

• Services by way of making telephone calls from a public telephone (i.e. departmentally run, guaranteed public telephone and free telephone at airports and hospitals).

4. New Exemptions

The Finance Minister has proposed to provide the following new exemptions:

o Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail packing, labelling of fruits and vegetables;

o Service provided by a Common Effluent Treatment Plant operator for treatment of effluent;

o Life Insurance service provided by way of Varishtha Pension Bima Yojna (senior citizen);

o Service provided by way of exhibition of movie by the exhibitor (theatre owner) to the distributor or association of persons (consisting of such exhibitor as one of its members);

o Ambulance services provided by way of transportation of patient;

o Service provided by way of admission to a museum, zoo, national park, wild life sanctuary, and a tiger reserve;

o Exemption on GTA services provided to exporter for transportation of goods from Goods transport services for transport of organic manure by vessel, rail or road container freight station/inland container depot/from place of removal to land customs station.

All the above new exemptions shall come into effect from the 1st April, 2015.

5. Amendments in Valuation related aspects

a. The definition of the term ‘consideration’ amended to include

(i) Any reimbursable expenditure/cost incurred and charged by the service provider in the course of providing taxable services, except in prescribed conditions.

(ii) Any amount retained (viz. in addition to fee/commission) or discount received by lottery distributor or selling agent (i.e. difference between face value of lottery and procurement price of ticket).

The above amendments would be effective from enactment of the Finance Bill, 2015.

b. Inclusion of reimbursable expenses in the value of taxable services?

To overcome the decision of the Hon’ble Delhi High Court in Intercontinental Consultants, the definition of ‘consideration’ in Explanation to Section 67 has been suitably amended.

Delhi High Court in the case of Intercontinental Consultants & Technocrats (P) Ltd vs Union of India [2012] 28 Taxmann.com 213 (Delhi) has considered whether out of pocket expenses or reimbursable expenses incurred by the service provider in the course of providing the taxable services has to be included in the value of taxable services. The petitioner filed a writ petition before the High Court for quashing the show cause notice issued by the Service Tax Department for recovery of Service Tax on amount received as reimbursement of expenses such as hotel accommodation, travelling etc. under Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006.

Delhi High Court decided in favour of the Assessee, but the Department is in appeal before the Supreme Court against the decision of the High Court which is pending for disposal.

Thus, after the amendment in the definition of ‘consideration’ in Explanation to Section 67 there is no doubt that any expenditure incurred by the service provider for providing any taxable services has to be included in the value of taxable services unless specifically excluded and Service Tax would be chargeable on the total value including the reimbursable expenses incurred by the service providers.

However, the inclusion of reimbursable expenses for the period prior to this amendment is yet to be decided by the Hon’ble Supreme Court.

6. Introduction of Definitions

“Government”

Hitherto, the term “Government” has not been defined in the Act or the Notification. This has given rise to interpretational issues. To address such issues, definition of the term “Government” is now being incorporated in the Act to mean Central Government, State Government, Union Territory and its departments. But it would not include entities whose accounts are not required to be kept under Article 150 of the Constitution.

‘Service’

Definition of the term ‘service’ amended to include services provided by chit fund foreman for conducting a chit and distributor/selling agent of lottery for organising/conducting a lottery.

7. Rationalisation of Abatements

Service tax on transportation of goods and passengers

Effective 1st April 2015, uniform abatement of 70% is prescribed for transport by rail, road and vessel with a condition of non-availment of CENVAT credit on inputs, capital goods and input services. As a result, these services would be taxable at 30% of the service value.

In works contract valuation provisions, effective from 1st October 2014, there will be two slabs for computing taxable value of 40% and 70% instead of the existing three slabs of 40%, 60% and 70%.

Service tax on air transport of passengers

Effective 1st April 2015, service tax is payable on 60% (instead of 40 per cent) of service value in case of air transport services of passenger in other than economy class.

Service tax on chit fund service

Effective from 1st April 2015, Abatement is being withdrawn from chit fund service. Consequently, Service Tax shall be paid by the chit fund foremen at full consideration received by way of fee, commission or any such amount. They would be entitled to take CENVAT Credit.

8. Modification in Penal Provisions

(a) Section 76

Penal provisions in cases not involving fraud/collusion/or wilful misstatement or suppression of facts or contravention of any provision of the Act or rules with the intent to evade payment of service tax, have been proposed to be rationalised as under:

o Maximum penalty reduced from 50% to 10% of the Service tax amount in such cases;

o No penalty is to be paid if service tax and interest is paid within 30 days of issuance of notice under section 73(1);

o Reduced penalty equal to 25% of the penalty imposed, if the service tax, interest and reduced penalty is paid within 30 days of such order;

o If the service tax amount gets reduced in any appellate proceeding, then penalty amount shall also stand modified accordingly, and benefit of reduced penalty (25% of penalty imposed) shall be admissible if service tax, interest and reduced penalty is paid within 30 days of such appellate order.

(b) Section 78

Penal provisions in cases involving fraud/ collusion/or willful misstatement or suppression of facts or contravention of any provision of the Act or rules with the intent to evade payment of service tax, have been proposed to be rationalised as under:

o Penalty shall be 100% of service tax amount involved in such cases;

o Penalty equal to 15% of the service tax amount is to be paid if service tax, interest and reduced penalty is paid within 30 days of service of notice in this regard;

o Reduced penalty equal to 25% of the penalty imposed, if the service tax, interest and reduced penalty is paid within 30 days of such order;

o If the service tax amount gets reduced in any appellate proceeding, then penalty amount shall also stand modified accordingly, and benefit of reduced penalty (25% of penalty imposed) shall be admissible if service tax, interest and reduced penalty is paid within 30 days of such appellate order.

The existing benefit of reduced penalty in following specified situations stands withdrawn:

o 50% of the Service tax amount where true/complete details of transactions are available.

o 25% of the Service tax amount where value of taxable service does not exceed ` 60 lakhs and payment is made within 90 days from the date of communication of the order.

(c) Section 80

The existing provision for waiver of penalty in cases where assessee proves the reasonable cause for failure to pay service tax stands withdrawn (effective from enactment of the Finance Bill, 2015).

9. Section 78B – Transitionary provision

A new section 78B is being inserted to prescribe, by way of a transition provision, that,-

o Amended provisions of sections 76 and 78 shall apply to cases where either no notice is served, or notice is served under sub-section (1) of section 73 or proviso thereto but no order has been issued under sub-section (2) of section 73, before the date of enactment of the Finance Bill, 2015; and

o In respect of cases covered by sub-section (4A) of section 73, if no notice is served, or notice is served under sub-section (1) of section 73 or proviso thereto but no order has been issued under sub-section (2) of section 73, before the date of enactment of the Finance Bill, 2015, penalty shall not exceed 50% of the service tax amount.

10. Rebate Claims

Appeal against the order of Commissioner (Appeals) in matters relating to rebate of Service tax shall be filed with Central Government and not Tribunal, this shall be effective from enactment of the Finance Bill, 2015.

11. Rationalisation of Service Tax Rules, 1994

o In case of aggregator model, foreign aggregator of service can appoint a person representing the aggregator or any other person in India for the purposes of payment of service tax (effective 1st March 2015).

o Provisions for issuing digitally signed invoices have been added along with the option for maintaining the records in electronic form and their authentication by means of digital signatures.

12. Reverse Charge Mechanism

o Manpower supply and security services when provided by an individual, HUF, or partnership firm to a body corporate are being brought to full reverse charge. Currently, these are taxed under partial reverse charge mechanism.

o Services provided by mutual fund agents, mutual fund distributors and agents of lottery distributor are being brought under reverse charge consequent to withdrawal of the exemption on such services.

Accordingly, Service Tax in respect of mutual fund agents and mutual fund distributors services shall be paid by assets management company or, as the case may be, by the mutual fund receiving such services. In respect of sub-agents of lottery, Service Tax shall be paid by the distributor or selling agent of lottery.

These amendments would be effective 1st April, 2015.

13. CENVAT Credit

In case of partial reverse charge, the CENVAT credit can be availed by the service recipient as under:

o With respect to service tax to be paid by the service recipient, credit can be claimed on depositing the same with the Government Treasury.

o With respect to service tax charged by the service provider, credit can be claimed immediately on receipt of invoice. However, credit to be reversed if payment not made within a period of three months which can be re-availed on making payment.

These amendments would be effective 1st April 2015.

Further, the time limit for availment of CENVAT credit on input services is increased from six months to one year from the date of issuance of any of the specified documents.

14. Others

o Effective 1st March 2015 the scope of advance ruling is extended to cover all resident firms such as one person company, sole proprietor, partnership firm, etc.

o Effective from the date of enactment of Finance Bill, 2015 the recourse to settlement shall not be available in cases where proceedings are referred back in any manner to the adjudicating authority for fresh adjudication.

Mukul Gupta,
Naveen Garg,
Advocate

I. Amendment of section 271

Concealment Penalty leviable in cases covered by sections 115Jb and 115Jc

1. Introduction

1.1 Section 271(1)(c) of the income-tax Act provides for levy of penalty for concealment of income or furnishing inaccurate particulars of income. Clause (iii) to sub-section (1) of section 271 provides for imposition of penalty of an amount which shall not be less than the amount of tax sought to be evaded but which shall not exceed three times the amount of tax sought to be evaded by reason of the concealment of particulars of income or the furnishing of inaccurate particulars of such income.

1.2 Explanation 4 to section 271(1) defines the expression ‘amount of tax sought to be evaded’ for the purpose of section 271(1)(c)(iii). As per this Explanation, as amended by Finance Act 2002 w.e.f 1-4-2003, in the following situations it shall be deemed that amount of tax has been evaded:

(i) In any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income;

(ii) In any case to which Explanation 3 applies, means the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under section 148;

(iii) In any other case, where difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished.

1.3 As per section 115JB(1), where in the case of a company, the tax payable on the total income as computed under the Act in respect of any previous year relevant to the assessment year commencing on or after 1-4-2012 is less than 18.5 per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 18.5 per cent. This is known as Minimum Alternate Tax (MAT).

Thus, it can be said that in case of a company tax payable shall be higher of the following –

(i) 18.5 per cent of the book profit;

(ii) Tax on total income computed as per normal provisions of the Income-tax Act.

1.4 In the case of companies at the time of assessment tax on income under normal provisions and as per MAT provisions is computed and compared. If the amount of tax payable under the MAT provisions comes higher, then the same is levied on the company. However, there may be some additions to normal income. In such a case, a question arises as to whether concealment penalty under section 271(1)(c) can be levied for the additions so made.

1.5 In the following decisions it has been held that penalty u/s. 271(1)(c) cannot be levied on additions/disallowances made under the general provisions if tax is ultimately payable on Book Profits:

i. CIT v. Nalwa Sons Investments Ltd. (2010) 327 ITR 543(DEL)(HC). The SLP against the above decision was dismissed by the Apex Court in CIT v. M/s Nalwa Sons Investment Ltd on 4-5-2012 Special Leave to Appeal (Civil) No(s). 18564/2011.

ii. Unisons Hotels Ltd. vs. DCIT (2013) 40 taxmann.com 237 (Del.)(HC).

iii. CIT s. Aleo Manali Hydro Power Ltd. (2013) 29 taxman 90 (ALL)(HC)(Mag.)

iv. CIT v. Artemis Biotech Ltd. ITA No. 230/M/2004 dtd. 30-4-2007 (Bom)(HC)

v. ACIT v. Atcom Technologies Ltd. ITA No. 2578/MUM/2008 dtd. 3-8-2012 (Mum)(Trib.)

vi. M/s. Ruchi strips & Alloys ltd v. DCIT ITA No. 6940/M/2008 DTD 21/1/2011 (MUM)(TRIB.)

vii. BSEL Infrastructure Realty Ltd. v. ACIT (2012) 137 ITD 61(Mum)

1.6 Thus all the courts were unanimous in its decision on the said issue. To overcome these overwhelming judicial precedents, the Finance Bill, 2015 proposes to substitute Explanation 4 to section 271(1)(c) so as to provide that penalty will be levied on additions made under general provisions if they constitute concealment or inaccurate particulars even if the tax is ultimately paid on the Book Profits.

2. Scheme of the proposed amendment

Clause 68 of the Bill seeks to amend section 271 of the Income-tax Act relating to failure to furnish returns, comply with notices, concealment of income, etc. by substituting existing Explanation 4 by new Explanation 4 to provide that the amount of tax sought to be evaded shall be determined in accordance with the following formula–

(A – B) + (C – D) where

A = amount of tax on the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC;

B = amount of tax that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished;

C = amount of tax on the total income assessed as per the provisions contained in section 115JB or section 115JC;

D = amount of tax that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished:

The first proviso provides that where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished on any issue is considered both under general provisions and under the provisions contained in section 115JB or section 115JC, such amount shall not be reduced from total income assessed while determining the amount under item D.

The second proviso further provides that where the provisions contained in section 115JB or section115JC are not applicable, the item (C – D) in the formula shall be ignored.

It is further proposed to provide that where in any case the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, the amount of tax sought to be evaded shall be determined in accordance with the formula contained in clause (a) with the modification that the amount to be determined for item (A – B) in that formula shall be the amount of tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income.

It is also proposed to provide that where in any case to which Explanation 3 applies, the amount of tax sought to be evaded shall be the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under section 148. These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to assessment year 2016-17 and subsequent years.

3. Reason/Purpose of Amendment

3.1 As per the Memorandum explaining the provisions of the Finance Bill, the amendment is carried out for following reasons:

i) Problems have arisen in the computation of amount of tax sought to be evaded where the concealment of income or furnishing inaccurate particulars of income occurs in the computation of income under provisions of section 115JB or 115JC of the Act and also under the provisions other than the provisions of section 115JB or 115JC of the Act.

ii) Further, as pointed out courts have held that penalty under section clause (c) of sub-section (1) of section 271 cannot be levied in cases where the concealment of income occurs under the income computed under general provisions and the tax is paid under the provisions of section 115JB or 115JC of the Act.

iii) Tax paid under the provisions of section 115JB or 115JC over and above the tax liability arising under general provisions is available as credit for set off against future tax liability. Understatement of income and the tax liability thereon under general provisions results in larger amount of such credit becoming available to the assessee for set off in future years. Therefore, where concealment of income, as computed under the general provisions, has taken place, penalty under clause (c) of sub-section (1) of section 271 should be leviable even if the tax liability of the assessee for the year has been determined under provisions of section 115JB or 115JC of the Act.

4. Critical analysis of the Amendment

Ambiguity in the second proviso.

4.1 The second proviso provides that where the provisions contained in section 115JB or sections 115JC are not applicable, the item (C-D) in the formula shall be ignored. The language of this proviso is unclear and ambiguous as it lead to two distinct interpretations as under:

(i) Whether the non-applicability is attached to the status of the assessee thereby the proviso implying that the item (C-D) is to be ignored in case of non-corporate assessee such as individuals, firms etc. or;

(ii) Whether the non-applicability means that where assessee being a company is liable to pay tax under general provisions and not on book profits, then the item (C-D) is to be ignored.

4.2 The implication of the first interpretation is that in the case of a corporate assessee even if the tax is paid under general provisions , penalty u/s. 271(1)(c ) would be levied on adjustments made to book profits by the Assessing Officer i.e penalty u/s. 271(1)(c ) would be levied on both, adjustments made under general provisions as well as adjustments made to book profits even when tax is payable under general provisions.

4.3 The implication of the second interpretation is that in the case of corporate assessee where tax is payable under the general provisions, then no penalty u/s. 271(1)(c) would be levied on adjustments made to book profits by the Assessing Officer.

4.4 It appears that the second interpretation is the correct interpretation as the object and purpose of the amendment is to levy penalty u/s. 271(1)(c) on additions made under general provisions when tax is ultimately payable on book-profits and not vice versa. However, this issue may not be free from controversy and it is important that the same is clarified in the Act or by means of a circular.

The amendment is prospective or retrospective?

4.5 Another issue which may arise consequent to this amendment is whether the said amendment is clarificatory/declaratory and thus would have retrospective effect or the amendment is prospective in nature as the same is applicable from 1-4-2016. Some of the arguments that can be raised in support of retrospectivity are as under:

4.5.1 Every statutory provision for imposition of penalty has two distinct components:—

(i) That which lays down the conditions for imposition of penalty.

(ii) That which provides for computation of the quantum of penalty.

Section 271(1)(c) and clause (iii) relate to the conditions for imposition of penalty, whereas, on the other hand, Explanation 4 to section 271(1)(c) relates to the computation of the quantum of penalty.

4.5.2 Though retrospectivity is not to be presumed and rather there is presumption against retrospectivity, according to Craies (Statute Law, 7th Edn.), it is open for the Legislature to enact laws having retrospective operation. This can be achieved by express enactment or by necessary implication from the language employed. If it is a necessary implication from the language employed that the legislature intended a particular section to have a retrospective operation, the courts will give it such an operation. In the absence of a retrospective operation having been expressly given, the Courts may be called upon to construe the provisions and answer the question whether the Legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant : (i) general scope and purview of the statute; (ii) the remedy sought to be applied; (iii) the former state of the law; and (iv) what it was the Legislature contemplated.

The present amendment clarifies that the same is remedial in so much so that none of the Courts appreciated the vital aspect that as tax paid under the provisions of section 115JB or 115JC over and above the tax liability arising under general provisions is available as credit for set off against future tax liability, understatement of income and the tax liability thereon under general provisions results in larger amount of such credit becoming available to the assessee for set off in future years. Hence, the amendment is to be given a retrospective effect as it is clarificatory and not substantive.

4.5.3 The Apex Court in the case of CIT v Gold Coin Health Food P. Ltd. (2008) 304 ITR 308(SC) clinches the issue of retrospectivity in the present case. The Apex Court in CIT v. Prithipal Singh and Co. (2001) 249 ITR 670 (SC) had held that where there is no taxable income or tax assessed for payment then penalty u/s. 271(1)(c) is not leviable. This decision resulted in the amendment of Explanation 4 by Finance Act 2002 w.e.f. 1-4-2003 so as to provide that penalty would be leviable even when the returned loss is reduced or converted into profit. The Apex Court in the case of Virtual Soft Systems Ltd. v. CIT (2007) 289 ITR 83 (SC) held that the amendment to Explanation 4 by Finance Act, 2002 was prospective and not retrospective. However this decision came to be overruled by the larger bench of the Apex Court in the decision of CIT v Gold Coin (supra) wherein it was held that the amendment is clarificatory. The present amendment is on similar lines and would thus be retrospective.

4.6 Some of the arguments that can be raised against retrospectivity are as under:

4.6.1 There is nothing in the Finance Bill to indicate that the amendment is clarificatory. In fact the Finance Bill unequivocally states that the effective date of the amendment is 1-4-2016.

4.6.2 The existing provisions of Explanation 4 were clear and unambiguous and hence there cannot be any case of obvious omission. In fact all the courts were unanimous in holding that on interpretation of Explanation 4 and sub-section (iii) of section 271(1)(c) penalty on additions made under general provisions is not applicable if tax is payable on book profits.

4.6.3 The Apex Court in the case of CIT v. Gold Coin Health Food P. Ltd. (supra) while deciding the issue of retrospectivity in the context of amendment brought by Finance Act 2002 considered CBDT Circular No 204 dtd. 24-7-1976 reported in (1977) 110 ITR (St) (21, 48) and recommendations of the Wanchoo Committee which stated that penalty was leviable in case of loss also and said circular was holding the field prior to the amendment brought about by the Finance Act, 2002 and thus the amendment was held to be clarificatory. The present amendment does not reiterate the position of law as declared by any statutory circular etc. issued prior to the amendment. Also the Notes on Clauses of the Finance Bill, 2002 stated that the amendment to Explanation 4 was clarificatory. Whereas the Notes on Clauses relating to the present amendment doesn’t state so.

4.6.4 The Delhi High Court in CIT v. Nalwa Sons Investments Ltd. (supra) has considered the effect of the decision of the Apex Court in CIT v. Gold Coin (supra) and held that the situation dealt with by the Apex Court was different. The relevant observation is as under:

“The income of the assessee was thus assessed under section 115JB and not under the normal provisions. It is in this context that we have to see and examine the application of Explanation 4.

Judgment in the case of Gold Coin Health Food (P.) Ltd. (supra), obviously, does not deal with such a situation. What is held by the Supreme Court in that case is that even if in the Income-tax return filed by the assessee losses are shown, penalty can still be imposed in a case where on setting off the concealed income against any loss incurred by the assessee under other head of income or brought forward from earlier years, the total income is reduced to a figure lower than the concealed income or even a minus figure. The court was of the opinion that ‘the tax sought to be evaded’ will mean the tax chargeable not as if it were the total income. Once, we apply this rationale to Explanation 4 given by the Supreme Court, in the present case, it will be difficult to sustain the penalty proceedings. Reason is simple. No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it is the deemed income assessed under section 115JB of the Act which has become the basis of assessment as it was higher of the two. Tax is thus, paid on the income assessed under section 115JB of the Act. Hence, when the computation was made under section 115JB of the Act, the aforesaid concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all.”

The above decision of the Delhi High Court has been affirmed by the larger bench of the Apex Court, Apex Court in CIT v. Nalwa Sons (2012) 12 Taxmann.com 184 (SC).

5. Conclusion

The amendment will affect lot of cases pending at the appellate stages where the issue of penalty on additions made under general provisions in case of tax payable on book profits is involved if the amendment is held to be retrospective. The Finance Minister in his speech stated that he desired to give sufficient time to enable taxpayers to arrange their affairs in tune with the amendments and therefore the incumbent establishment would not resort to restrospective amendment. It is therefore expected that there should be specific clarification to avoid controversies. Also, the possible ambiguity in the second proviso may be taken care of in the Act or may be clarified by the CBDT.

II. Amendment of section 271D and section 271E

Penalty for failure to comply with the provisions of sections 269SS and 269T

1. Introduction

1.1 Sections 271D/271E of the Income-tax Act, 1961 as it stands today levy penalty for accepting/repaying loan or deposit, except otherwise than, by an account payee cheque or account payee bank draft, or through electronic transfer through a bank account.

1.2 The incumbent establishment in furtherance of its initiative to curb generation of black money, has proposed to amend the said sections so as to provide that penalty shall be levied for accepting/paying from/to any person any sum of money, whether as advance or otherwise, in relation to transfer of an immovable property (whether or not such transfer takes place) except otherwise than by way of specified modes.

2. Existing provision

2.1 The existing provision contained in section 271D of the Income-tax Act provides that if a person accepts any loan or deposit in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so accepted.

2.2 Thus, section 269SS prohibited acceptance of (i) loan or (ii) deposit otherwise than by a mode prescribed therein and violation of section 269SS entailed a penalty u/s. 271D.

2.3 The existing provision contained in section 271E of the Income tax Act provides that if a person repays any loan or deposit referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so repaid.

2.4 Thus section 269T prohibited acceptance of (i) loan or (ii) deposit otherwise than by a mode prescribed therein and violation of section 269T entailed a penalty u/s 271E.

3. Proposed Amendment

3.1 Clause 69 of the Bill seeks to amend section 271D to provide that if a person accepts any loan or deposit or specified sum referred to in section 269SS in contravention of the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so accepted. Similarly, clause 70 of the Bill seeks to amend section 271E to provide that if a person repays any loan or deposit or specified advance referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified advance so repaid.

3.2 Thus clause 69 and clause 70 of the Bill makes not only acceptance/repayment of loan or deposit in contravention of sections 269SS/269T subject to penalty but also acceptance/repayment of specified sum/specified advance in contravention of section 269SS/section 269T subject to penalty.

3.3 This amendment is made as a consequence of substitution of existing section 269SS and section 269T by clause 68 and clause 69 of the Finance Bill respectively. The said clauses effectively prohibit even acceptance/repayment of a specified sum/specified advance otherwise than by an account payee cheque or account payee bank draft or online transfer through a bank account. The term specified sum is defined in Explanation (iv) to section 269SS as any sum of money receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place. Similarly the term specified advance is defined in Explanation (iv) to section 269T as any sum of money in the nature of advance, by whatever name called, in relation to transfer of an immovable property, whether or not the transfer takes place.’.

4. Reason/Purpose for bringing the amendment

4.1 The Finance Minister during his budget speech stated that while finalising tax proposals he has adopted certain broad themes. The first and foremost pillar of his tax proposal theme was “ Measures to curb black Money”. It is no secret that black money eats into the vitals of our economy and society. It is equally true that the problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully. In our country transactions in real estate generates lots of black money. In the direction of curbing generation and utilisation of black money in real estate transactions, the Finance Bill proposed to amend the provisions of sections 269SS and 269T of the Income-tax Act so as to prohibit acceptance or re-payment of advance in cash of ` 20,000 or more for any transaction in immovable property. Consequently the Finance Bill also proposed to provide a penalty of an equal amount in case of contravention of such provisions.

4.2 Also, there are judicial precedents wherein it has been held that advance given against property could not be treated as loan or deposit covered within the purview of section 269SS and therefore, no penalty under section 271D is leviable. Hence, it was necessary to widen the scope of provisions of section 269SS and section 269T to include transactions relating to immovable property.

4.3 The provisions of section 271D and section 271E are covered by section 273B which provides immunity from penalty in case of a reasonable cause. In Commissioner of Income Tax v. Raj Kumar Sharma (2007) 294 ITR 131 (Raj), Narotam Singh Mann v. Income Tax Officer (2004) 90 TTJ (Asr.) 683, Assistant Commissioner of Income Tax v. Vinman Finance & Leasing Ltd. (2008) 115 ITD 115, Harpal Singh v. Assessing Officer (2008) 12 DTR (Jd)(Trib.) 529, Narayan Ram Chhaba v. Income Tax Officer & Anr. (2005) 96 ITD 163 (Jd)(TM) penalty has been deleted u/ss. 271D/271E r.w. section 273B.

5. Effective date

According to the Finance bill the amendment will take effect from 1st June, 2015.

III. Insertion of new section 271FAB

Penalty for failure to furnish statement or information or document by eligible investment fund

1. Introduction

1.1 In the case of offshore funds, under the existing provisions, the presence of a fund manager in India may create sufficient nexus of the offshore fund with India and may constitute a business connection in India even though the fund manager may be an independent person. Therefore, apart from taxation of income received by the fund manager as fees for fund management activity, income of off-shore fund from investments made in countries outside India may also get taxed in India due to such fund management activity undertaken in, and from, India constituting a business connection. Obviously such a tax regime would be detrimental or at least create roadblocks in the efforts of the present establishment to infuse more and more foreign investments in India for the growth of India.

1.2 Further, there are a large number of fund managers who are of Indian origin and are managing the investment of offshore funds in various countries. These persons are not locating in India due to the above tax consequence.

1.3 In order to facilitate location of fund managers of offshore funds in India a specific tax friendly regime has been proposed by virtue of introduction of new section 9A by clause 6 of the Finance Bill in the Act in line with international best practices with the objective that, subject to fulfilment of certain conditions by the fund and the fund manager-

(i) The tax liability in respect of income arising to the fund from investment in India would be neutral to the fact as to whether the investment is made directly by the fund or through engagement of fund manager located in India; and

(ii) That income of the fund from the investments outside India would not be taxable in India solely on the basis that the fund management activity in respect of such investments have been undertaken through a fund manager located in India.

1.4 Section 9A requires that every eligible investment fund shall, in respect of its activities in a financial year, furnish within ninety days from the end of the financial year, a statement in the prescribed form to the prescribed income-tax authority containing information relating to the fulfilment of the above conditions or any information or document which may be prescribed.

1.5 In case of non furnishing of the prescribed information or document or statement as required under section 9A, a penalty of ` 5 lakh shall be leviable on the fund by virtue of section 271FAB.

2. Proposed Amendment

Clause 71 seeks to insert a new section 271FAB of the Income-tax Act relating to penalty for failure to furnish statement or information or document by an eligible investment fund. It is proposed to provide that if any eligible investment fund which is required to furnish a statement or any information and document under sub-section (5) of section 9A fails to furnish such statement or information and the document within the time prescribed under that sub-section, the income-tax authority prescribed under the said sub-section may direct that such fund shall pay, by way of penalty, a sum equal to five hundred thousand rupees.

3. Reason/Purpose for introduction of section 271FAB

3.1 The second pillar of taxation proposals theme of the Finance Minister this year is job creation through revival of growth and investment and promotion of domestic manufacturing and ‘Make in India’. In this direction it is proposed to undertake a series of steps to attract capital, both domestic and foreign.

3.2 The present taxation structure has an inbuilt incentive for fund managers to operate from offshore locations. The managers taking care of off-shore fund houses were forced to manage their investment activity from outside India due to the fear of adverse tax consequences in respect of income of such fund houses. To encourage such offshore fund managers to relocate to India, this finance bill proposes to modify the Permanent Establishment (PE) norms to the effect that mere presence of a fund manager in India would not constitute PE of the offshore funds resulting in adverse tax consequences.

3.3 Thus a new section 9A has been proposed whereby the income of the fund houses may not be taxable subject to the fulfilment of conditions mentioned therein.

3.4 Sub-section (5) of Section 9A casts a liability on such eligible fund houses to furnish statement, information or documents, as required, within a period of 90 days from the end of the financial year. These statements, information and documents would be relating to compliance of various terms and conditions contained in section 9A.

3.5 As section 9A effectively makes an exception to the rule, it is very important that the conditions contained therein are strictly adhered to and no wrongful advantage is taken. Thus, in order to ensure that the eligible fund house complies with reporting requirements as specified in sub-section (5) of section 9A, section 271FAB is proposed to be inserted to provide for penalty of ` 5 lakhs in case of non-compliance.

3.6 Further section 273B is proposed to be amended to include the reference of the proposed new section 271FAB relating to penalty for failure to furnish information or document by eligible investment fund.

4. Effective date of Amendment

This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

IV. Insertion of new section 271-I

Penalty for failure to furnish information or furnishing inaccurate information under section 195

1. Introduction

The Finance Act 2008, had inserted sub-section (6) to section 195 which required any person referred to in sub-section (1) of section 195, responsible for making cross-border payments which are chargeable to tax to furnish information relating to such payment in Form Nos. 15CA and 15CB read with Rule 37BB. However, no penalty was provided for non-furnishing of information.

2. Proposed Amendment

Clause 73 of the Bill seeks to insert a new section 271-I in the Income-tax Act relating to penalty for failure to furnish information or for furnishing inaccurate information under section 195. It is proposed to insert a new section 271-I so as to provide that if a person, who is required to furnish information under sub-section (6) of section 195, fails to furnish such information; or furnishes inaccurate information, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one lakh rupees.

3. Reason/Purpose of Amendment

3.1 The person responsible for making cross-border payment was required to furnish information as envisaged in Form 15CA and 15CB while making such payments, as per section 195(6) of the Act.

3.2 The mechanism of obtaining information in respect of remittances fulfils twin objectives of ensuring deduction of tax at appropriate rate from taxable remittances as well as identifying the remittances on which the tax was deductible but the payer has failed to deduct the tax. Therefore, obtaining of information only in respect of remittances which the remitter declared as taxable defeats one of the main principles of obtaining information for foreign remittances i.e. to identify the taxable remittances on which tax was deductible but was not deducted.

3.3 In view of this, the said sub-section (6) of Section195 is proposed to be substituted by clause 48 of the Finance Bill with effect from the 1st day of June, 2015 to provide that the person responsible for paying any sum, whether chargeable to tax or not, to a non-resident, not being a company, or to a foreign company, shall be required to furnish the information of the prescribed sum in such form and manner as may be prescribed.

3.4 Further, currently there is no provision for levying of penalty for non-submission/inaccurate submission of the prescribed information in respect of remittance to non-resident.

3.5 Hence, for ensuring submission of accurate information in respect of remittance to non-resident, section 271-I is inserted in the Act to provide that in case of non-furnishing of information or furnishing of incorrect information under sub-section (6) of section 195 of the Act, a penalty of one lakh rupees shall be levied.

3.6 However, the provisions of section 273B of the Act are suitably amended to provide that no penalty shall be imposable under this new provision if it is proved that there was reasonable cause for non-furnishing or incorrect furnishing of information under sub-section (6) of section 195 of the Act.

4. Cause of concern

The amendment to section 195(6) which requires disclosure of payments to non-residents even if the same may not be chargeable to tax is likely to have wide ramifications. It may be in the interest of the revenue but will cause undue hardship to the citizens. It raises several questions such as whether payment to non-residents for hotel booking on web-sites, payment to non-resident when on tour abroad etc. would require disclosures as most citizens would not be aware of such provisions and compliance would be cumbersome. Also, it is not clear whether new rules will be notified or existing rules will continue. It is important that the rules provide sufficient exemptions from disclosures. Penalty provision for non-compliance of section 195(6) when the payment to non-resident is not chargeable to tax require to be postponed till information of such new provision is properly disseminated to the public at large. Also, where certificate is obtained from an accountant it makes no sense to penalise an honest taxpaying citizen for incorrect furnishing of information. Of course provisions of Section 273B may come to the rescue of the taxpayer but why at the first place a citizen should go through the penalty proceedings when he is not at fault.The Hon Supreme Court in MotilalPadampat Mills Ltd. v. State of Uttar Pradesh reported in (1979) 118 ITR 326(SC) observed as follows “It must be remembered that there is no presumption that every person knows the law. It is often said that everyone is presumed to know the law, but that is not a correct statement: there is no such maxim known to the law”. Hence ignorance of law may be shown as a reasonable cause. Useful reference may also be made to the Full-Bench decision of Delhi Tribunal in Kaushal Diwan v. ITO (1983) 3 ITD 342 (Del.)(TM)(Trib.)

5. Effective date of Amendment

This amendment will take effect from 1st June, 2015.

V. Amendment of section 272A

Penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections, etc.

1. Introduction

The provisions of section 272A of the Act provide for penalty for non-compliance with various procedural requirement under the Income-tax Act. The Government deductors/collectors i.e. Drawing and Disbursing Officer (DDO)are allowed to make payment of tax deducted/collected by them through book entry under the existing mechanism. The DDO, thereafter, intimates such amount to the concerned officer who credits the amount to the credit of Central Government through book entry. The concerned officers were required to furnish detail of payment made through book entry in the prescribed Form 24G. However, the compliance was not effectively done by the concerned officers resulting into delay in furnishing of the TDS/TCS statement by the DDO. In order to improve the reporting of payment of TDS/TCS made through book entry and to make existing mechanism enforceable, sections 200 and 206C of the Act is proposed to be amended by Finance Bill, 2015 to ensure timely furnishing of information by the concerned officer. Further, to ensure compliance of this proposed obligation of filing statement, section 272A of the Act is proposed to be amended by Finance Bill, 2015 so as to provide for a penalty of ` 100 for each day of default during which the default continues subject to the limit of the amount deductible or collectible in respect of which the statement is to be furnished.

2. Proposed Amendment

Clause 74 of the Bill seeks to amend section 272A of the Income-tax Act relating to penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections, etc. The proposed amendment seeks to insert a new clause (m) in sub-section (2) of section 272A to provide that if any person fails to deliver or cause to be delivered a statement within the time as may be prescribed under sub-section (2A) of section 200 or sub-section (3A) of section 206C, then, such person shall pay, by way of penalty, a sum of one hundred rupees for every day of such default. It is also proposed to amend first proviso to sub-section (2) of the said section so as to provide that the amount of penalty for failure to file statements under sub-section (2A) of section 200 or under sub-section (3A) of section 206C shall not exceed the amount of tax deductible or tax collectible, as the case may be.

3. Reason/Purpose for Amendment

3.1 Under the existing scheme of payment of TDS and TCS, Government deductors / collectors are allowed to make payment of tax deducted/collected by them without production of challan i.e., through book entry. For payment of tax deducted/collected through book entry, the Drawing and Disbursing Officer (DDO) intimates the TDS/TCS amount to the Pay and Accounts Officer or the Treasury Officer or the Cheque Drawing and Disbursing Officer (PAO/TO/CDDO) who credits the TDS/TCS amount to the credit of Central Government through book entry. For generating credit for TDS/TCS paid through book entry by the Government deductors, Rule 30 and Rule 37CA of the Income-tax Rules, 1962 provide that the PAO/TO/CDDO shall file the detail of payment of TDS/TCS made through book entry in the prescribed Form 24G.

3.2 There was no specific section in the Act to enforce timely filing of the same by the concerned officer. Delay in furnishing of the Form 24G resulted into delay in furnishing of the TDS/TCS statement by the DDO. In order to improve the reporting of payment of TDS/TCS made through book entry and to make existing mechanism enforceable, sections 200 and 206C of the Act is proposed to be amended by clause 50 and clause 53 respectively of the Finance Bill to ensure timely furnishing of information by the concerned officer by providing that where the tax deducted [including paid under section 192(1A)] / collected has been paid without the production of a challan, the PAO/ TO/CDDO or any other person by whatever name called who is responsible for crediting such sum to the credit of the Central Government, shall furnish within the prescribed time a prescribed statement for the prescribed period to the prescribed income-tax authority or the person authorised by such authority by verifying the same in the prescribed manner and setting forth prescribed particulars.

3.3 To ensure compliance of this proposed obligation of filing statement, it is proposed to amend the provisions of section 272A of the Act so as to provide for a penalty of ` 100/- for each day of default during which the default continues subject to the limit of the amount deductible or collectible in respect of which the statement is to be furnished.

3.4 The penalty u/s. 272A is subject to the protection of reasonable cause u/s. 273B. In Commissioner of Income Tax v. Gordhanbhai Jethabhai (1994) 205 ITR 279 (Guj.), Superintending Engineer v. Income Tax Officer (1996) 54 TTJ (Jp) 608 , Royal Metal Printers (P.) Ltd. v. Additional Commissioner of Income-Tax, (Tds) Range 3, Mumbai [2010] 37 Sot 139 (Mum.), Harsiddh Construction (P) Ltd. v. Deputy Commissioner of Income Tax (2001) 70 TTJ (Ahd.) 266 & Sudershan Auto & General Finance v. Commissioner of Income- tax (1998) 60 ITD 177 (Del.) penalty u/s. 272A(2) has been deleted on account of reasonable cause.

4. Effective date of Amendment

The amendment will take effect from 1st June, 2015

VI. Insertion of new sectionS 285A and 271GA

Furnishing of information or documents by an Indian concern in certain cases and penalty for failure to furnish such information or documents

1. Introduction

The Finance Bill, 2015 has proposed a new section 285A casting a responsibility on the Indian entity, through or in, which the Indian assets are held by the foreign company or the entity whose value is substantially derived by the Indian assets. The Indian entity is obligated to furnish information relating to the transaction having the effect of directly or indirectly modifying the ownership structure or control of the Indian entity, or documents as required. Section 271GA is proposed to be inserted to provide for penalty to the tune of 2% of the value of transaction or INR 5,00,000, as the case may be, in the event of failure to furnish such information or document by the Indian entity.

2. Proposed Amendments

2.1 Clause 76 of the Bill seeks to insert a new section 285A relating to furnishing of information by an Indian concern in certain cases. It is proposed to provide that where any share or interest in a company or entity registered or incorporated outside India derives, directly or indirectly, its value substantially from the assets located in India as referred to in the Explanation 5 to clause (i) of sub-section (1) of section 9, and such company or, as the case may be, entity holds such assets in India through or in an Indian concern, then, any such Indian concern shall, for the purposes of determination of income accruing or arising in India, under the clause (i) of sub-section (1) of section 9, furnish within the prescribed period to the prescribed income-tax authority the relevant information or document, in such manner and form as is prescribed in this behalf.

2.2 Consequently clause 72 of the Bill seeks to insert a new section 271GA relating to penalty for failure to furnish information or document under section 285A. It is proposed to provide that if any Indian concern which is required to furnish any information or document under the proposed section 285A, fails to do so, the Income-tax authority as may be prescribed in the said section 285A, may direct that such Indian concern shall pay, by way of penalty,– (i) a sum equal to two per cent. of the value of the transaction, in respect of which such failure has taken place, if such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern; (ii) a sum of five hundred thousand rupees in any other case.

3. Reason for the Amendment

3.1 The Bombay High Court in Vodafone International Holdings B.V. v. Union of India (2010) 329 ITR 126 (Bom.) had dismissed the writ petition of Vodafone and the Court rejected the argument of Vodafone that what was transferred was only shares of an Cayman Island Company i.e., foreign company and therefore, the argument that no capital gains will arise on sale of shares in foreign company was rejected.

3.2 Vodafone filed an appeal to the Supreme Court and Supreme Court in Vodafone International Holdings B. V. v Union of India (2012) 341 ITR 1 (SC) reversed the Bombay High Court decision. Supreme Court held that Assessing Officer in India had no jurisdiction to tax the transaction which took place outside India and what was transferred was the shares of a foreign company and not Indian Business.

3.3 The Finance Act, 2012 made retrospectively amendment in the definition of Transfer under section 2(47); Capital asset under section 2(14) and deemed accrual of income under Section 9 in order to affirm the judgment of Bombay High Court in the case of Vodafone and to nullify the Supreme Court judgment in the said case.

3.4 Under section 9, vide Finance Act, 2012 , Explanation 5 to section 9(1)(i) was inserted with retrospective effect from April 1, 1962. The said Explanation 5 read as under: “Explanation 5. For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.”

3.5 The present Finance bill provides a mechanism to determine “value substantially from assets in India”. These changes would require the Indian concern to furnish information or documents relating thereto.

3.6 Thus new section 285A is introduced to provide for furnishing of information or documents by the said Indian concern and new section 271GA is introduced to provide for penalty for failure to furnish information as required by Section 285A.

3.7 Further section 273B is proposed to be amended to include the reference of the proposed new section 271GA.

3.8 In the context of old section 285A penalty was deleted on the ground of ignorance of law. The Full Bench of the Tribunal in Kaushal Diwan v. ITO [1983] 3 ITD 432 (Delhi)(TM) had come to grips with a matter in which the assessee had pleaded ‘ignorance of law as excuse’ for his failure to furnish information under section 285A of the Income-tax Act on the prescribed proforma and a penalty under the provisions of section 285A(2) was imposed upon him on the failure to comply with the said provision. Per Shri P.V.B. Rao, Vice President …”It is trite law to mention that merely because there is a provision for levy of fine, fine must be imposed … The plea that the assessee was not aware of the legal requirements cannot be brushed aside and he be made liable to a fine on the ground that ignorance of law is no excuse. The old theory that ignorance of law is no excuse does not hold good in view of the complexity of laws in modern days. It is impossible for anyone let alone well informed people to know all the technicalities of law … .”

4. Effective Date of Amendment

These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent years.

Rahul K. Hakani,
Advocate