The outbreak of COVID-19 has resulted a surge in the demand for relevant medical supplies and prevention material/services, such as sanitizers, disinfectants, PPE kits, protective masks, protective spectacles, rubbing alcohol, gloves, infrared thermometers, ventilators, fumigation services etc. Goods and Services Tax (hereinafter referred to as ‘GST’) on masks, sanitizers, gloves, PPE kits and some other key COVID-19 medical supplies may fall either under the 5% or 12% or 18% GST slabs due to some valid controversies about their classification based on their contents and usage in accordance to the accepted principles of classification of goods and services. The present pandemic has also led to a trail of amendments, relief measures and other changes directed at regulating the foreign trade and associated matters. The analysis of such measures and changes in brief as well as some controversies shall provide the reader an insight on the possible widespread effects needing reconsideration of earlier understanding.

1. TRADE FACILITATION CUSTOMS LAW

The following are the major amendments which have been introduced in effect to the outbreak of COVID-19 intending at regulating & providing relief to the business keeping into consideration the requirement of the current situation.

  1. PROCEDURE FOR EXPORT OF PPE MEDICAL COVERALLS NOTIFIED

Trade Notice No. 17/2020-21 dated 29.06.20201 issued by the Directorate General of Foreign Trade (hereinafter referred to as ‘DGFT’) restricts the export of PPE medical coveralls for COVID-19 (hereinafter referred to as ‘the Product’) and fixes the export quota of 50 lakh Product Units per month. It notifies the online application procedure through DGFT’s ECOM system for Export authorizations and criteria for export of the aforementioned commodity. This is as follows:

  • Export of only 50 lakh units of the Product shall be allowed monthly.

  • Exporters to apply online through DGFT’s ECOM system for Export authorizations

  • Only applications for export of the Product filed from 1st to 3rd day of each month to be considered for monthly quota.

  • Approvals/allocations to be done by 10th of every month in accordance with Handbook of Procedures.

  • Validity of Export License will be for 3 months only.

Further, the requirements/eligibility criteria for issuance of Export license for exporting the products along with documents to be submitted along with online application have been laid as follows:

  • The applicant shall be a manufacturer of the Product.

  • Applicant is to submit copy of Testing/ Accreditation of the Product issued to him from laboratories notified/recognized by the Ministry of Textiles.

  • Applicant to either submit copy of importing country’s PPEs medical coveralls Standards Certificate obtained by it or copy of Bureau of Indian Standards Certificate obtained by it, if importing country does not insist in a Standard Certificate.

  • Applicant to submit a Chartered Engineer’s certificate certifying that fabrics used in the Product were manufactured in India.

  • Copy of Applicant firm’s IEC.

  • Only one application per IEC will be considered during a month

  • Copy of Purchase Order/Invoice

  • All documents to be duly self-attested by

authorized person of the firm.

  1. DUTY EXEMPTIONS

The Department has exempted the levy of customs duty and health cess on medical equipment to combat COVID-19 pandemic by virtue of Notification No. 20/2020-Cus dated April 9, 2020 upto 30.09.2020.2 The following goods are covered by the exemption notification:

S.

No.

HSN

DESCRIPTION OF GOODS

1.

9018 or 9019

Artificial respiration or other therapeutic respiration apparatus (Ventilators)

2.

63 or any Chapter

Face masks and surgical masks

3.

62 or any Chapter

Personal protection equipment (PPE)

4.

30, 38 or any chapter

COVID-19 testing kits

5.

Any chapter

Inputs for the manufacture of above items

The importer however should follow the procedure set out in the Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017

  1. OTHER EXEMPTIONS

The DGFT in another relief measure by way of Trade Notice No. 62/2012-2020 dated 06.04.20203 directed that where imports taking place under a Free Trade Agreement, have claimed preferential treatment but original hard copy of Certificate of Origin on account of disruptions caused by COVID-19 pandemic cannot be produced or only a digitally signed copy or unsigned copy of the certificate may be accessed and cleared provisionally.

The final assessment may however be done subsequently on submission of the original certificate by the importer. Also, the revenue may be secured through undertaking and appropriate security.

2. CONTROVERSIAL ISSUES AS PER HSN Code vis-à-vis GST RATE ON SOME ITEMS OF EXTENSIVE USE AGAINST COVID-19

GOODS AND SERVICES TAX LAW

  1. ISSUES RELATED TO CLASSIFICATION

The pandemic has led to introduction of new products and services in the market. Additional facilities for manufacture of such products have also been resorted to by several ventures as their new business lines. After detailed research and analysis of Harmonized System Nomenclature (hereinafter referred to as ‘HSN’) as updated till 2017 by World Customs Organization, we have prepared and enclosed the table providing various important products, their description, HSN Code, relevant rate notification and its item number as well as the GST tax rate in accordance to the prescribed Schedule under the GST law. The possible notifications and relevant entries have been incorporated with our brief comments for easier understanding and brief analysis of the most appropriate applicable classification and GST rate on the specifically described product. The difference of opinion regarding the categorization of some items has emerged due to very complicated structure of the classification entry which is really difficult to comprehend. The issues of classification have already started surfacing as being raised by the investigating agencies of the GST Departments.

There have been contrasting views regarding the classification of N95 Mask whether would be suitable under Heading 9018 or 9020 of the Harmonized System of Nomenclature.

  1. Masks used for medical purposes and for other than medical purposes

In India, masks can be broadly divided into 4 types, on the basis of their physical features. These are:

  1. Masks with detachable filters or with a mechanical part;

  2. Masks without a detachable filter or a mechanical part;

  3. Masks made of cellulose paper or felt or non woven fabric; and

  4. Textile masks including designer masks which have now formed a part of the suit sets.

Further, the World Health Organisation in its 2016 Guidelines on Personal Protective Equipment (hereinafter referred as ‘PPE’) recommended technical specifications for surgical mask.4 Guidance Flyer issued by WHO recommends Advanced masks (Surgical masks for single use only & N95 masks) for health workers or those in contact with COVID 19 patients or COVID patients themselves5. While, homemade masks of cloth have been recommended for people not suffering from medical conditions or having breathing difficulties. Guidelines prescribing the use of PPE in different settings have also been issued by the Ministry of Health and Family Welfare.6

There has however, emerged another category of face masks with replaceable filters. The following columns (I) and (II) state the competing entries for classification of the aforementioned Mask:

 

I

II

HSN

9018

9020

Rate

12%

12%

Text

Instruments and Appliances used in Medical, Surgical, Dental or Veterinary Sciences, Including Scientigraphic Apparatus, Other Electromedical Apparatus and Sight -Testing Instruments

Other breathing appliances and gas masks, Excluding Protective Masks having neither Mechanical Parts nor Replaceable Filters

Our View:

Heading 9020 constitutes of two major categories of ‘Other Breathing Appliances’ and ‘Gas Masks’ but at the same time excludes the protective masks which do not have mechanical parts or replaceable filters. Hence a protective mask of the category having replaceable filters shall be classified within the Heading 9020 and shall attract a GST rate of 12%.

The second part of the heading containing exclusion of protective masks having neither mechanical parts nor replaceable filters creates a complexity and needs a clearer consideration of the facts of each case in order to classify a mask under the heading 9020 or 9018.

Further, the third category of ‘textile mask’ is classifiable under Heading 6307.90 depending upon the ‘sale value’ of the mask as a textile article. A textile mask with a sale value below ₹ 1000/- piece shall attract a rate of 5%. On the other hand, a textile mask with a sale value exceeding ₹ 1000/- piece shall attract a rate of 12%.

  1. Face Shields majorly used for medical purposes

A constituent of the ‘Personal Protective Equipment’ is a plastic face shield with headgear providing good visibility to both the wearer and the patient with an adjustable band attached firmly around the head. It aims to protect the facial area from exposure to airborne particles containing virus that may be expelled by another person.

The following are the competing entries:

 

I

II

HSN

9018

3926.90

Rate

12%

18%

Text

Instruments and Appliances used in Medical, Surgical, Dental or Veterinary Sciences, Including Scientigraphic Apparatus, Other Electromedical Apparatus and Sight -Testing Instruments

Other articles of plastics and articles of other materials of headings 3901 to 3914 [other than bangles of plastic, plastic beads and feeding bottles]

Our View:

Face Shields as have been described above, are being majorly used for ‘medical’ purposes and the same shall qualify as an ‘instrument and appliance’ classifiable under Heading 9018, sub-heading ‘Other’ with HSN 9018 99 with applicable rate of 12%.

The possible contrary view has emerged based on the two rulings rendered by the United States CROSS Rulings7 where under both the rulings, it has been held that such face shields brought into U.S. shall have a classification under Heading 3926.90 attracting a rate of 18% holding that they “would be considered articles of plastic, and as they are not more specifically provided for elsewhere.” The said view makes the impugned product susceptible to challenge and leviable to a higher rate.

The latter entry is however expansive and according to the general rules of interpretation, a specific entry over a general entry shall prevail. The entry for classification of a specially designed item based on its specific use is a better categorization being a nearer entry.

  1. Mechanical Sprayer including battery/ power operated used in fumigation

A battery/power operated mechanical sprayer usually works when user slides the locking button to the unlocked position, which enables the trigger button. When the user presses the trigger button, the motor is activated, which bring the water, water-based sanitizers or disinfectants up the suction hose via the pump to the spray chamber.

 

I

II

III

HSN

8424

8424.89

84131910

Rate

12%

18%

5%

Text

Sprinklers; drip irrigation system including laterals; mechanical sprayers

Mechanical appliances (whether or not hand-operated) for projecting, dispersing or spraying liquids or powders; fire extinguishers, whether or not charged; spray guns and similar appliances; steam or sand blasting machines and similar jet projecting machines

[other than sprinklers; drip irrigation systems including laterals; mechanical sprayer; Nozzles for drip irrigation equipment or nozzles for sprinklers]

Pumps for Liquids, whether or not fitted with a measuring device, Liquid Elevators

— Other

— Hand Pumps

Our View:

The article ‘battery/power operated mechanical sprayer’ clearly falls within the Heading of ‘Mechanical Sprayers’ under 8424 subjecting the same to a rate of 12%. A specific entry reading ‘mechanical sprayers’ has been listed thereunder.

However, a contrary view might be taken claiming a classification under the heading 8424.89 attracting a higher rate of 18% under the heading ‘Mechanical Appliances’. A careful consideration of the physical characteristics of the impugned product is required as to whether the product shall constitute a ‘sprayer’ or ‘gun’ or ‘appliance’.

A pump or a liquid elevator on the other hand shall be classifiable under Heading 8413.19.10 attracting a rate of 5%. Similarly, gun sprayer has been specifically stated under Heading 8424.89.

  1. Hand Sanitizers

Most controversial item concerning the classification issue is ‘sanitizer’. The specification as per WHO note on Handrub Formulations mentions the ingredients: Ethanol, Isopropyl Alcohol, Hydrogen Peroxide and Glycerol. The majority of the formulation contains either Ethanol or Isopropyl Alcohol.8

The Director General of Goods and Services Tax vide its (internal) communication dated June 16, 2020 relating to evasion of GST in respect to Alcohol based – Hand Sanitizers (as used in ‘WCO Classification’) has stated that some manufacturers of the product are classifying product under wrong tariff heading 3004 attracting a rate of 12% while the product shall attract a rate of 18% under Heading 3808.

The most competitive entries under which a sanitizers or disinfectants could fall are as follows:

 

I

II

III

IV

V

HSN

3004

3401

3402

3808

3824

Rate

12%

18%

28%

18%

18%

Text

Medicaments for therapeutic or prophylactic uses, put up in measured doses or in forms or packings for retail sale, including Ayurvedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail sale

Soap, Organic surface-active products and preparations for washing the skin, in the form of liquid or cream and put up for retail sale, whether or not containing soap

Organic surface- active agents (other than soap); surface-active preparations, washing preparations (including auxiliary washing preparations) and cleaning preparations, whether or not containing soap, other than those of heading 3401

Insecticides, rodenticides, fungicides, herbicides, antisprouting products and plant-growth regulators, disinfectants and similar product

Prepared binders for foundry moulds or cores; chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products), not elsewhere specified or included

Notes to HSN Code Chapter 34

Note 2 of Chapter Note while defining ‘soap’ for 3401 states that Products containing abrasive powders remain classified in heading 3401 only if in the form of bars, cakes or moulded pieces or shapes. In other forms they are to be classified in heading 3405 as “scouring powders and similar preparations”.

Note 3 defining ‘organic surface-active agents” are products which when mixed with water at a concentration of 0.5% at 20oC and left to stand for one hour at the same temperature: give a transparent or translucent liquid or stable emulsion without separation of insoluble matter; and reduce the surface tension of water 4.5 X 10-2 N/m (45 dyne/Cm) or less.

Our View:

  1. Heading 3004

    The Heading 3004 primarily deals with ‘Medicaments’ and states its properties thereafter. The present commodity does not largely fulfill the basic criteria as has been set by the heading 3004, probably the classification adopted by some of the manufacturers needs serious reconsideration.

    The HSN classification 3004 could only be attracted for sanitizer because of its characteristic being “prophylactic” which means measures designed to prevent the occurrence of an adverse event, a disease or its dissemination. For the purpose of the correct classification of the product, many other accepted principles of classification needs to be examined in depth.

  2. Heading 3824

    The classification HSN 3824 is a general category for chemical products which do not fall in any other classification.

    A view has been taken by the US CROSS Rulings in NY N3110379 where it has been held that the sanitizer made of Alcohol from Rum Distillated 70 % v/v, to be used in antimicrobial applications such as hand sanitizing and also containing distilled water, hydrogen peroxide, glycerin and isopropyl myristate shall be classified under Heading 3824 i.e. “Prepared binders for foundry molds or cores; chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products), not elsewhere specified or included: Other: Other: Other: Other: Other: Other.”

    A similar view has been taken by NY N30436510

    wherein the product constituted of a liquid

    sanitizer comprising of the active ingredient, ethyl alcohol (62% of the total product), the remainder of the hand sanitizer comprising of water, isopropyl alcohol, glycerin, fragrance, propylene glycol, and aloe barbadensis leaf juice.

    If we go by the view as supported by US CROSS Rulings NY N311037 and NY N304365 wherein a similar issue relating to classification of hand sanitizer was raised before the authority then unfortunately the appropriate Heading for classification of hand Sanitizers is 3824 attracting a rate of 18%.

    However, the analysis of the same is to be made taking into consideration the chemical constitution, intended use and by applying other relevant tests for determination of appropriate classification of the product. The products falling under same family is an important consideration for attracting the particular classification, by this criteria the questioned product must fall in 3808 covering “Insecticides, rodenticides, fungicides, herbicides, antisprouting products and plant- growth regulators, disinfectants and similar product”.

  3. Heading 3402

    Heading 3402 concerns “Organic surface- active agents (other than soap); surface-active preparations, washing preparations (including auxiliary washing preparations) and cleaning preparations, whether or not containing soap, other than those of heading 3401.”

    If the product sanitizer could be characterized as per its contents as an organic substance then such sanitizer may fall in 3402, but in accordance to the principle of use of the product, the nearest entry is 3808 which could appropriately be used for deciding the applicable rate of tax under GST being a consumption based tax collection system.

    The appropriate Heading for classification of hand Sanitizers is 3808 attracting GST rate of 18%. Hand sanitizers fall under the category: ‘Insecticides, rodenticides, fungicides, herbicides, antisprouting products and plant-growth regulators, disinfectants’ and shall qualify as ‘similar product’ as per the same family of consumable products as well as for the reason that they possess similar properties to the genus of products covered in the category.

  4. Disinfectant

Disinfectants with constitutions of alcohol, benzalkonium chloride solution or peroxyacids, or other disinfectants are common in use in present times.

Our View:

‘Disinfectant’ is specifically mentioned under Chapter Heading 3808 attracting a rate of 18%, so there is not much to debate on its classification for the present purposes.

The classification of the good is dependent upon the chemical properties of the product. The rules of classification have relied on chemical composition and reactions and hence, a reference to chemical composition is also a prerequisite to the classification of the product.

  1. Protective Garments generally known as the Personal Protective Equipment (PPE) WCO Classification provides for the following Headings which may be perused for classification of the said product:

    1. 3926.20: Protective unisex garments made of plastic sheeting, textile reinforced plastics or textile backed plastics

    2. 4015.90: Protective unisex garments made of rubber sheeting…

    3. 4818.50: Paper or cellulose garments

    4. Other Sub headings of Chapter 62, which can be discussed as follows:

 

I

II

III

HSN C

6210.10

6210.50

6210.50

Rate

5% or 12%

5% or 12%

5% or 12%

Text

Protective garments for surgical/medical use made up of felt or nonwovens whether or not impregnated, coated, covered or laminated (fabrics of heading 56.02 or 56.03).This includes spun- bonded garments.

Other protective garments of textiles and rubberised textile fabrics or woven fabrics that are impregnated, coated, covered or laminated (fabrics of headings 59.03, 59.06 or

59.07).

Unisex protective garments made of rubberized textile fabrics

Our View:

While a distinction on the basis of the broad heads may be done depending on the properties of the protective garment, the most closely related heading under Chapter 62 is the Heading 6210.10 i.e. Protective garments for surgical/medical use made up of felt or nonwovens whether or not impregnated, coated, covered or laminated (fabrics of heading 56.02 or 56.03).This includes spun- bonded garments.

As per Wikipedia, Felt has been defined as “Felt is a non-woven textile. It is made by compressing and matting fibres together until they connect to form a sturdy fabric. Felt has a long history and is the oldest form of cloth known. Felt has been used in many cultures as a material for clothing, footwear, rugs and even tents.”

The reason for the above conclusion is that in major cases, the use of the commodity is ‘surgical’ or ‘medical’ and that the material used for making the protective garment is made of ‘felt or nonwovens whether or not impregnated, coated, covered or laminated’.

PPE made from plastic sheeting other than felts impregnated, coated, covered or laminated with plastics or embedded in plastics will be classifiable under the Heading 3926.20 with an applicable rate of 18%.

  1. Gloves including surgical rubber gloves and others

Gloves, full fingered are being commonly used for prevention from the spread of the disease. They are made by using varied materials ranging from plastic, rubber, textile, etc. A differentiation on the basis of material used to manufacture the product and the purpose of manufacturing them has been made.

The following are the competing Headings for undertaking the process of classification of the product:

 

I

II

III

IV

V

HSN

3926.20

4015.11

4015.19

6116.10

6216

Rate

18%

12%

18%

5% or 12%

5% or 12%

Text

Other articles of plastics and articles of other materials of headings 3901

to 3914 [other than bangles of plastic, plastic beads and feeding bottles]

Surgical rubber gloves or medical examination rubber gloves

Articles of apparel and clothing accessories (including gloves, mittens and mitts), for all purposes, of vulcanised rubber other than hard rubber [other than Surgical gloves]

Knitted or crocheted gloves which have been impregnated or covered with plastics or rubber

Textile Gloves that are not knitted or crocheted

Our View:

An intricate analysis of the properties of the material used to manufacture the product and those specified in the description of the product is required to ascertain the correct classification of the product. The intended use of the product in light of the destination based tax collection system read with the principles used in the classification process are needed to be relied upon.

The most commonly used type: Rubber gloves shall be classifiable as ‘Surgical rubber gloves’ attracting a lower rate of 12% or shall constitute an ‘article of apparel and clothing accessories’ attracting a rate of 18% shall depends upon the very facts of each case.

  1. UV Disinfectant Boxes

UV Disinfectant boxes and similar appliances usually contain a component emitting ultraviolet (UV) rays/light to disinfect documents, medical instruments, articles, etc. and are in common use in work places and hospitals to sanitize the inputs.

Our View:

The most closely related Heading to the impugned product is Heading 8543.70.99 i.e. “Electrical machines and apparatus, having individual functions, not specified or included elsewhere in this Chapter.” The present Entry is of a residuary and general nature attracting a rate of 18% under the rate notification.

It is hence iterated herein that UV disinfectant process is also commonly used in medical establishments for disinfecting of medical instruments, etc. but UV Disinfectant boxes does not find any specific mention in Chapter 90 which contains Medical or Surgical Instruments and Apparatus.

  1. AVAILABILITY OF INPUT TAX CREDIT

    1. Handwash, sanitizer, masks etc. provided to the employees by the employer

In the series of inadvertent event of spreading of corona virus turning into pandemic, the Prime Minister under Sections 6 and 10 of the Disaster Management Act, 2005 declared the pandemic as a ‘national disaster’, followed by the national lockdown as per Order dated 24.03.2020 under the Act. The Ministry of Home Affairs thereafter issued guidelines11 which have been updated from time to time to prescribe National Directives for COVID-19 Management. These include special directions for Work Places, which are as follows:

  1. Provision for thermal scanning, handwash, sanitizer will be made available at all entry and exit points and common areas

  2. Frequent sanitisation of entire office, common facilities and all points which come into human contact.

  3. Wearing of face cover is compulsory in all work places and adequate provision of the same should be made

  4. Employees showing any symptoms of COVID 19 should be immediately sent for checkup in nearby medical hospitals/ clinics.

  5. Arrangement for transport facilities to be ensured with social distancing wherever public/private transport is not feasible

  6. Intensive communication and training on good hygiene practices shall be taken up

Standard Operating Procedures12 for offices, factories, workplaces and establishments has been prescribed to be as follows:

  1. All workplaces to have adequate measures for temperature screening and provide sanitizers at convenient places

  2. All organisations to sanitise their workplaces between shifts.

  3. All areas in the premises to be disinfected

  4. For workers coming- from outside, special transportation facility to be arranged without any dependency on public transport

  5. Medical insurance for workers to be made mandatory

Hence, in light of the above laws, the ‘work places’ are required to fulfill the above mentioned conditions. A failure to comply with any of the above shall on the other hand attract penal measures as imposed by State laws. Hence, a compliance of the above provisions is necessary for carrying on the business i.e. such activities by virtue of the above laws is in course or furtherance of business. Moreover, to instil confidence in the employee’s to work together at workplace all these products are necessary otherwise the work cannot be possible adhering the social distancing norm to fight COVID-19.

Section 16 of the Central Goods and Services Tax Act, 2017, prescribes the eligibility for taking credit. Section 17(5) however specifies a list of supplies in respect of which such credit shall not be available. The list blocks credit in respect of the following:

  1. Under clause (b), Food and beverages

  2. Under clause (b), life insurance and health insurance.

  3. Under clause (h), goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

In addition to the above, the following cases shall also be referred in order to determine the correct position in relation to the availability of credit on the supplies on which such credit on input has been blocked.

  • In Re: Caltech Polymers Pvt. Ltd. 2018 (10) TMI 1313 –AAR Kerala

The present application was filed with the issue of whether the food expenses for canteen services recovered from the employee without any profit margin would be liable to GST. The Appellate Authority held that the activity would constitute a ‘supply’ and would
constitute a taxable service. It was observed before the Advance Ruling
Authority that there is an involvement of ‘consideration’ as has been defined under Section 2(31) of the CGST Act, 2017 and that such provision of food shall fall within the meaning of ‘business’ as has been defined under Section 2(17)(b) of the CGST Act, 2017.

  • CCE v. Brakes India Ltd. 2018 (11) TMI 1748

The issue before the Madras High Court was whether an activity carries out in compliance of statutory requirement under a particular Act alone would make the said activity/ service as input service under Rule 2(l) of the CENVAT Credit Rules, 2004 especially when such service/activity has no nexus in or integral connection to the manufacture of final product. It was held that when the employer spends money to maintain factory premises in an eco-friendly manner based upon the directives issued by the Statutory Authorities, the tax paid on such services would form part of the costs of the final product, that the same would fall within the ambit of ‘input services’ and that the assessee is entitled to claim the benefit.

  • CCE v. Stanzen Toyotetsu India (P.) Ltd. 2011 (4) TMI 201

It was held that credit on Outdoor catering services, transportation charges, rent-a- cab scheme and Group Health Insurance shall be available. It was held that it is clear from the definition any service used by the manufacturer whether directly or indirectly in or in relation to the manufacture of final products constitutes input service. If the credit is availed by the manufacturer, then the said service should have been utilized by the manufacturer directly or indirectly in or in relation to the manufacture of final products or used in relation to activities relating to business – merely because these services are not expressly mentioned in the definition of input service it cannot be said that they do not constitute input service and the assessee is not entitled to the benefit of CENVAT credit.

Our View:

Considering the unique and challenging circumstances to protect human beings from the virus by introduction of the new law to fight the COVID pandemic, the business are entitled to undertake certain compulsory activities which were not prevalent before the COVID scenario. The circumstances however have found a mention in the previous excise regime wherein the credit was available in cases an activity which was compulsory to be undertaken by a law. The same has been asserted by the Appellate Authority for Advance Rulings under the New GST regime as well. So, the direct expenses for such fight to protect the business interests including all stakeholders are legitimate expenses in furtherance of business and thus the ITC would be eligible on all such inward supplies, as mandated by the law.

  1. CSR Expenditure

    • The Mumbai Bench of CESTAT in the case of Essel Propack v. Commissioner [2018-TIOL-3257-CESTAT-Mumbai] held that Corporate Social Responsibility (hereinafter referred to as CSR) is not in the nature of charity and is directly connected with the principal manufacturing activity of the company which is largely dependent on smooth supply of raw materials. The Bench held that contribution towards Social Responsibility is a mandatory requirement for public sector undertakings and has also been made obligatory for the private sector. CENVAT credit was allowed to the appellant for the reason that the production and sustainability of the company would be at stake if such activity is not treated as ‘business’ activity.

    • The Kerala Authority for Advance Rulings in an application filed by Polycab Wires Pvt. Ltd. 2019-VIL-100- AAR, the applicant had distributed electrical goods to people affected by the flood in Kerala in discharge of the applicant’s CSR obligations. It was hence adjudicated that the goods were distributed on free basis without collecting any money. Such distribution shall amount to ‘disposal by way of gift’ and no ITC shall be available as per Section 17(5)(h).

In a similar context to that of the mandatory CSR activities by law, while the erstwhile regime provides for credit, the AAR denies the same by invoking the specific provision of Section 17(5) concerning blocked credit.

The tussle on whether an obligation imposed by introduction of a law to the effect amounts to a supply in the course or furtherance of business is yet to reach the Courts. It points at the blatant denial of the right available to the taxpayer to avail ITC.

3. CONCLUDING REMARKS

The present circumstances of pandemic are once a lifetime challenge, so the situation needs to be tackled with exceptional thinking and innovative actions. The issues of classification or categorization of products and services needs to be re-invented considering the distinctive facts and circumstances. The GST law needs to be uniquely interpreted considering the crucial need to protect the human race both from the ill-effects of deteriorating health and economy.

CLASSIFICATION OF GOODS & SERVICES USED MAJORLY IN COVID ERA

Compiled & Presented by Mukul Gupta – Senior Partner & Counsel, Prateek Gupta – Partner & Counsel and Akshi Narula – Associate Lawyer At Sharnam Legal

S.

No.

NOTIFICATION NUMBER

HSN/ SAC NO.

Entry

DESCRIPTION OF GOODS/ SERVICES

RATE OF TAX

GST Schedule- Rate

1

PERSONAL PROTECTIVE EQUIPMENT (PPE) KIT

Protective garments for surgical/medical use made up of felt or nonwovens whether or not impregnated, coated, covered or laminated (fabrics of heading 56.02-felt, whether or not impregnated, coated, covered or laminated as well as 56.03-non-wovens, whether or not impregnated, coated, covered or laminated). This includes spun-bonded garments. As per Wikipedia, Felt has been defined “Felt is a non woven textile. It is made by compressing and matting fibres together until they connect to form a sturdy fabric. Felt has a long history and is the oldest form of cloth known. Felt has been used in many cultures as a material for clothing, footwear, rugs and even tents.”

1.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

 

6210.10

223

Articles of apparel and clothing accessories, not knitted or crocheted, of sale value not exceeding Rs. 1000 per piece

5%

Schedule I – 2.5%

1.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

170

Articles of apparel and clothing accessories, not knitted or crocheted, of sale value exceeding ₹ 1000 per piece

12%

Schedule II – 6%

2

OTHER PROTECTIVE GARMENTS OF TEXTILES AND RUBBERISED TEXTILE FABRICS OR WOVEN FABRICS THAT ARE IMPREGNATED, COATED, COVERED OR LAMINATED (FABRICS OF HEADINGS 59.03, 59.06 or 59.07).

Example: a unisex full body woven suit impregnated with plastics would be classified under 6210.50 – Other

women’s or girls’ garments”

2.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017 dated 28th June, 2017

 

6210.20

6210.30

6210.40

6210.50

223

Articles of apparel and clothing accessories, not knitted or crocheted, of sale value not exceeding Rs. 1000 per piece

5%

Schedule I – 2.5%

2.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

170

Articles of apparel and clothing accessories, not knitted or crocheted, of sale value exceeding Rs. 1000 per piece

12%

Schedule II – 6%

3

PROTECTIVE GARMENTS MADE FROM PLASTIC SHEETING OTHER THAN FELTS IMPREGNATED, COATED, COVERED OR LAMINATED WITH PLASTICS OR EMBEDDED IN PLASTICS

3.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3926.20

111

Other articles of plastics and articles of other materials of headings 3901 to 3914 [other than bangles of plastic, plastic beads and feeding bottles]

18%

Schedule III – 9%

4

N95 MASKS:

Available in variety of categories/models with or without detachable filters or mechanical parts as per the

requirement of the situation under which the mask should be scientifically used.

4.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

9018.00

218

Instruments And Appliances Used In Medical, Surgical, Dental Or Veterinary Sciences , Including Scientigraphic Apparatus, Other Electromedical Apparatus And Sight -Testing Instruments

12%

Schedule II – 6%

4.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

9020.00

220

Other Breathing Appliances And Gas Masks , Excluding Protective Masks Having Neither Mechanical Parts Nor Replaceable Filters

12%

Schedule II – 6%

5

TEXTILE MASKS INCLUDING DESIGNER MASKS :

Textile face masks,without a replaceable filter or mechanical parts, including surgical masks and disposable face-masks made of non-woven textiles.

5.1

Notification No.1/2017- Central Tax (Rate) Substituted vide

Notification No. 14/2019-Central Tax (Rate) dated 30-09-2019 w.e.f. 01-

10-2019

 

6307.90

224

Other made up textile articles, sets, of sale value not exceeding Rs. 1000 per piece

5%

Schedule I – 2.5%

5.2

Notification No.1/2017- Central Tax (Rate) Substituted vide Notification No. 41/2017 dated 14-11-2017, w.e.f. 15-

11-2017

171

Other made up textile articles, sets of sale value exceeding Rs. 1000 per piece [ other than Worn clothing and other worn articles; rags]

12%

Schedule II – 6%

6

CELLULOSE/PAPER MASKS

6.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

4818.50

153

Toilet paper and similar paper, cellulose wadding or webs of cellulose fibres, of a kind used for household or sanitary purposes, in rolls of a width not exceeding 36 cm, or cut to size or shape; handkerchiefs, cleansing tissues, towels, table cloths, serviettes, napkins for babies, tampons, bed sheets and similar household, sanitary or hospital articles, articles of apparel and clothing accessories, or paper pulp, paper, cellulose wadding or webs of cellulose fibres

18%

Schedule III – 9%

7

PLASTIC FACE SHIELD (covering more than the eye area)

7.1

Notification No.1/2017- Central Tax (Rate) vide Notification No. 41/2017 dated 14-11-2017, w.e.f. 15- 11-2017 Rate of tax reduced from 28% to 18%

3926.20

111

Other articles of plastics and articles of other materials of headings 3901 to 3914 [other than bangles of plastic, plastic beads and feeding bottles]

18%

Schedule III – 9%

8

PROTECTIVE SPECTACLES

8.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

9004.90

178

Spectacles, corrective [other than goggles for correcting vision]

12%

Schedule II – 6%

9

MEDICAL VENTILATORS (artificial respiration apparatus)

Provides mechanical ventilation by moving breathable air into and out of the lungs.

9.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

9019.20

219

Mechano-therapy appliances; massage apparatus; psychological aptitude-testing apparatus; ozone therapy, oxygen therapy, aerosol therapy, artificial respiration or other therapeutic respiration apparatus

12%

Schedule II – 6%

10

SOAP, PAPER SOAP

10.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3401.00

61

Soap; organic surface-active products and preparations for use as soap, in the form of bars, cakes, moulded pieces or shapes, whether or not containing soap; organic surface active products and preparations for washing the skin, in the form of liquid or cream and put up for retail sale, whether or not containing soap; paper, wadding, felt and nonwovens, impregnated, coated or covered with soap or detergent

18%

Schedule III – 9%

11

HAND SANITIZER

11.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3808.00

87

Insecticides, rodenticides, fungicides, herbicides, anti- sprouting products and plant- growth regulators, disinfectants and similar products [other than bio-pesticides mentioned against S. No. 78A of schedule -II]

18%

Schedule III – 9%

12

TRIGGER SPRAYER used for Fumigation/sterlisation of the surface and area.

12.1

Notification No.1/2017- Central Tax (Rate) Substituted vide Notification No. 06/2018 dated 25.01.2018

8424.89

325

Mechanical appliances (whether or not hand-operated) for projecting, dispersing or spraying liquids or powders; fire extinguishers, whether or not charged; spray guns and similar appliances; steam or sand blasting machines and similar jet projecting machines [other than sprinklers; drip irrigation systems including laterals; mechanical sprayer; Nozzles for drip irrigation equipment or nozzles for sprinklers]

18%

Schedule III – 9%

13

PUMP DISPENSER used for Fumigation/sterlisation of the surface and area.

13.1

Notification No.1/2017- Central Tax (Rate) Substituted vide Notification No. 06/2018 dated 25.01.2018

8424.89

325

Mechanical appliances (whether or not hand-operated) for projecting, dispersing or spraying liquids or powders; fire extinguishers, whether or not charged; spray guns and similar appliances; steam or sand blasting machines and similar jet projecting machines [other than sprinklers; drip irrigation systems including laterals; mechanical sprayer; Nozzles for drip irrigation equipment or nozzles for sprinklers]

18%

Schedule III – 9%

14

MECHANICAL SPRAYER

including battery/power operated and those used in fumigation/sterlisation of the surface and area.

14.1

Inserted vide Notification No. 6/2018 Dated 25-01- 2018

8424.00

195B

Mechanical Sprayer

12%

Schedule II – 6%

15

STEAM SANITIZER: Medical, surgical or laboratory sterlizers, function by steam or boiling water

15.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017 substituted vide Notification No. 41/2017 Dated 14-11-2017

8419.20

320

Machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, ovens and other equipment of heading 8514), for the treatment of materials by a process involving a change of temperature such as heating, cooking, roasting, distilling, rectifying, sterilising, pasteurising, steaming, drying, evaporating, vaporising, condensing or cooling, other than machinery or plant of a kind used for domestic purposes; instantaneous or storage water heaters,non-electric other than Solar water heater and system

18%

Schedule III – 9%

16

OTHER DISINFECTANT PREPARATIONS

put up in forms or packings for retail sale such as rubs and wipes impregnated with alcohol or other disinfectants

16.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3808.94

87

Insecticides, rodenticides, fungicides, herbicides, anti- sprouting products and plant- growth regulators, disinfectants and similar products [other than bio-pesticides mentioned against S. No. 78A of schedule -II]

18%

Schedule III – 9%

17

HYDROGEN PEROXIDE in bulk, Bulk H202 whether or not with solidified with urea

17.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

2847.00

58

Medicinal grade hydrogen peroxide

12%

Schedule II – 6%

18

HYDROGEN PEROXIDE presented as a medicament H2O2 put up for internal or external use as a medicine, including as an antiseptic for the skin. Only covered here if in measured doses or in forms or packings for retail sale (including directly to hospitals) for such use

18.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3004.90

63

Medicaments (excluding goods of heading 30.02, 30.05 or 30.06) consisting of mixed or unmixed products for therapeutic or prophylactic uses, put up in measured doses (including those in the form of transdermal administration systems) or in forms or packings for retail sale, including Ayurvaedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail saleadministration systems) or in forms or packings for retail sale, including Ayurvaedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail sale

12%

Schedule II – 6%

19

HYDROGEN PEROXIDE put up in disinfectant preparations for cleaning surfaces H2o2 put up as cleaning solutions for surfaces or apparatus.

19.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3808.94

87

Insecticides, rodenticides, fungicides, herbicides, anti- sprouting products and plant- growth regulators, disinfectants and similar products [other than bio-pesticides mentioned against S. No. 78A of schedule -II]

18%

Schedule III – 9%

20

OTHER CHEMICAL DISINFECTANTS put up in forms of packings for retail sale as disinfectants or as disinfectant preparations, containing alcohol, benzalkonium chloride solution or peroxyacids, or other disinfectants

20.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3808.94

87

Insecticides, rodenticides, fungicides, herbicides, anti- sprouting products and plant- growth regulators, disinfectants and similar products [other than bio-pesticides mentioned against S. No. 78A of schedule -II]

18%

Schedule III – 9%

21

PLASTIC GLOVES

21.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3926.20

111

Other articles of plastics and articles of other materials of headings 3901 to 3914 [other than bangles of plastic, plastic beads and feeding bottles]

18%

Schedule III – 9%

22

SURGICAL RUBBER GLOVES

22.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

4015.11

85

Surgical rubber gloves or medical examination rubber gloves

12%

Schedule II – 6%

23

OTHER THAN SURGICAL RUBBER GLOVES

23.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

4015.19

85

Articles of apparel and clothing accessories (including gloves, mittens and mitts), for all purposes, of vulcanised rubber other than hard rubber [other than Surgical gloves]

18%

Schedule III – 9%

24

KNITTED OR CROCHETED GLOVES WHICH HAVE BEEN IMPREGNATED OR COVERED WITH PLASTICS OR RUBBER

24.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6116.10

222

Article of apparel and clothing accessories or cap/topi, knitted or crocheted, of sale value not exceeding Rs 1000 per piece

5%

Schedule I – 2.5%

24.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6116.10

169

Articles of apparel and clothing accessories, knitted or crocheted, of sale value exceeding Rs. 1000 per piece

12%

Schedule II – 6%

25

TEXTILE GLOVES THAT ARE NOT KNITTED OR CROCHETED

25.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6216.00

222

Article of apparel and clothing accessories or cap/topi, knitted or crocheted, of sale value not exceeding Rs 1000 per piece

5%

Schedule I – 2.5%

25.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6216.00

169

Articles of apparel and clothing accessories, knitted or crocheted, of sale value exceeding Rs. 1000 per piece

12%

Schedule II – 6%

26

DISPOSABLE HEAD NET

26.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6505.00

171B

Other headgear, knitted or crocheted, or made up from lace, felt or other textile fabric, in the piece (but not in strips), whether or not lined or trimmed; hair-nets of any material, whether or not lined or trimmed

18%

Schedule III – 9%

27

SHOE COVERS

27.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

6307.90

224

Other made up textile articles, sets, of sale value not exceeding Rs. 1000 per piece

5%

Schedule I – 2.5%

27.2

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

 

171

Other made up textile articles, sets of sale value exceeding Rs. 1000 per piece [ other than Worn clothing and other worn articles; rags]

12%

Schedule II – 6%

28

UV DISINFECTANT BOXES

28.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

8543.70.

99

394

Electrical machines and apparatus, having individual functions, not specified or included elsewhere in this Chapter

18%

Schedule III – 9%

 

Comment: UV disinfectant process is also used in medical establishments for disinfecting of medical instruments, etc. but UV Disinfectant boxes does not find any specific mention in Chapter 90 which contains medical or surgical instruments and apparatus.

29

TEST KITS/Instruments and Apparatus used in Diagnostic Test – Diagnostic reagents based on polymerase chain reaction (PCR) nucleic acid test.

29.1

Notification No.1/2017- Central Tax (Rate) dated 28th June, 2017

3822.00

80

All diagnostic kits and reagents

12%

Schedule II – 6%

30

SWAB & VIRAL TRANSPORT MEDIUM SET

30.1

Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017

3006.10

65

Pharmaceutical goods specified in Note 4 to this Chapter [i.e. Sterile surgical catgut, similar sterile suture materials (including sterile absorbable surgical or dental yarns) and sterile tissue adhesives for surgical wound closure; sterile laminaria and sterile laminaria tents; sterile absorbable surgical or dental haemostatics; sterile surgical or denatal adhesion barriers, whether or not absorbable; Waste pharmaceuticals] [other than contraceptives]

12%

Schedule II – 6%

31

FUMIGATION SERVICES

31.1

Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017

9983.00

21

(ii) Other professional, technical and business services other than (i) and (ia) above and serial number 38 below.

18%

Schedule III – 9%

Comment: The physical/chemical features, use of the product/service i.e. the actual facts and circumstances of the case shall be the ultimate determinants of the correct classification of the product. The appropriate classification of a product/service might differ from the list provided.

 

  1. http://dgft.gov.in/sites/default/files/TradeNotice17_0.pdf
  2. https://cbic.gov.in/resources//htdocs-cbec/customs/cs-act/notifications/notfns-2020/cs-tarr2020/cs20-2020.pdf.
  3. https://www.cbic.gov.in/resources//htdocs-cbec/customs/cs-circulars/cs-circulars-2020/Circular-No-18-2020.pdf
  4. https://apps.who.int/iris/bitstream/handle/10665/251426/9789241549721-eng.pdf?sequence=1&ua=1
  5. https://www.who.int/docs/default-source/searo/bangladesh/2019-ncov/home-made-maskiv.pdf?sfvrsn=a5f05f58_8
  6. https://www.mohfw.gov.in/pdf/GuidelinesonrationaluseofPersonalProtectiveEquipment.pdf
  7. Number N311621 concerning classification of face shields imported from the United Kingdom dated May 13, 2020 and Number G89437 concerning classification of face shields imported from South Korea dated April 11, 2001.
  8. https://www.who.int/publications/i/item/guide-to-local-production-who-recommended-handrub-formulations
  9. Concerning the tariff classification of Hand Sanitizer from Netherlands dated April 7, 2020.
  10. Concerning the tariff classification of Hand Sanitizer from China dated May 21, 2019.
  11. https://www.mha.gov.in/sites/default/files/MHAOrderextension_1752020_0.pdf; https://mha.gov.in/sites/ default/files/MHA%20Order%20Dt.%201.5.2020%20to%20extend%20Lockdown%20period%20for%202%20weeks%20 w.e.f.%204.5.2020%20with%20new%20guidelines.pdf
  12. https://www.mha.gov.in/sites/default/files/MHA%20order%20dt%2015.04.2020%2C%20with%20Revised%20Consolidated%20Guidelines_compressed%20%283%29.pdf

With profound regret to lack of a better alternative to Simon Beaufoy of the 2017 classic between Bobby Riggs and Billie Jean King for titular adaptation, in the current context, it impresses on the impost vigilant mind that the revenues of jurisdictions at large are now engaged in what can be effectively termed as a prelude to of no less than the Star Wars classic “The Empire Strikes Back”.

From the middle 1990’s academics (a particular mention to Prof Arvid Aage Skaar and his classic “Permanent Establishment: Erosion of a Tax Treaty Principle” ) and forward thinking practitioners alike had been propagating the advent of the e-commerce juggernaut and in particular the impact of the same on its capacity to hit ability of source countries to tax transactions within their jurisdictions.

The essential paradigm that followed was that companies based physically in a totally different legal and residential jurisdiction could bypass the taxation system of source countries and still provide goods and services in those countries. The common critical question arising out of such flow of business was to “how bring such cross border transactions within the ambit of taxes?”.

The Westminster Principle (Inland Revenue Commissioners v. Duke of Westminster, http://www.bailii.org/uk/cases/ UKHL/1935/4.html) elicited by Lord Tomlin of the High Court of Justice in England, notwithstanding, it was clear that there was an attempt to bring a systemic change in the way commerce was being and was to be conducted globally.

From the processes arising, about the “fin de siècle” jurisdictions started reconfiguration of the base framework of the OECD:OCDE and after much deliberation, subsequent to the OECD:OCDE conference in Turku in 1997, came up with the Ottawa Taxation Framework 1998, which emphasised more particularly on the application of traditional income tax laws and guiding principles to tax cross border ecommerce transactions as well as traditional transactions.

2008, brought to fore events that would cause a seismic cataclysm to the propositions in the Ottawa Taxation Framework 1998. Sovereigns ran huge fiscal deficits trying to shore up their respective economies. Governments lost revenue steadily owing to contagion caused by the financial sector seeping into traditional business and individual incomes alike, with witness of a gradual but exponential increase in e-commerce activity picking up. Despite substantial co-ordinated efforts by the G20 and OECD:OCDE nations it became clear by 2013 that there had to be a paradigm shift in the ways tax policies were designed. The problem was more exacerbated by the fact that the existing framework was not only woefully inadequate to address the aggressive tax planning of digital and semi digital MNE but also fell short at addressing concerns of source countries to which goods and services were supplied via digital platforms. It follows that the most glamourous of the lot, the FAANG (Facebook, Amazon, Apple, Netflix, Google) were found to be the forerunners in matters of aggressive tax planning. Your attention is invited to the following video of Public Accounts Committee Hearing (12/11/2012) on Taxation of Multinational Corporations, witnesses: Matt Brittin (CEO, Google UK), Troy Alstead (Global CFO, Starbucks), Andrew Cecil (Director Public Policy, Amazon) (http://www.parliamentlive.tv/main/ player.aspx?meetingId=11764) p a r t i c u l a r l y intriguing as well as raising some important issues camouflaged within the parameters of morality. Chairperson British MP Margaret Hodge very clearly outlines “We are not accusing you of being illegal, we are accusing you of being immoral.” It could be gauged therefore that it was only a matter of time before “morality” was translated into “legality”.

At this point the author would invite a reading of Millar, Historical View of the English Government (1789) bk. ii, chap. 7, and of the North Caorlina Law Review Vol 23 Number 3, of a perspective of circumstances in which morality translates effectively into legality. (https:// scholarship.law.unc.edu/cgi/viewcontent.cg i?article=1651&context=nclr&hx0 03E;). The underlying intentions being very clear, and as famously attributed to Denis Healey, former UK Chancellor of the Exchequer who once said “The difference between tax avoidance and tax evasion is the thickness of a prison wall.”, the dimensions of the wall getting blurry with MNE tax avoidance schemes.

Authors Riley Carpenter and Shaun Parsons (Wilson, Amy & Carpenter, Riley & Parsons, Shaun. (2016) in The effect of electronic commerce on the erosion of tax bases – Developing appropriate taxation laws in South Africa) have argued that there needs to be an overhaul of taxing systems around the globe in order to meet the taxation challenges in particular caused by the ecosystem around and parallel to the FAANG, and while not radically different the structure of the South African Taxation system needs to be in sync with proposed legislation in counterparts.

For the Indian scenario, India has advocated the its own strategy to counter the reduction of the resulting tax base on account of digitalisation by incorporating changes in the Finance Act 2018. In the G20 meeting at Osaka in June 2019, India advocated that its approach (equalisation levy and proposed Tax Collected at Source) be adopted by the OECD:OCDE as a possible resolution of the digitisation quagmire (https://pib.gov.in/PressReleasePage.aspx?PRID=1573765).

Ukraine has as of June 2020 amended its tax laws via the Tax Bill 1210 to bring into alignment with the BEPS project and has introduced CFC aspects into its domestic legislation.

Events such as outlined above have led to a knock-on effect by sovereign governments to act in order to protect their own interests in revenue by means of either significant economic presence tests, withholding taxes, transaction taxes (e.g., equalization levies and digital services taxes), and minimum taxes (e.g., diverted profits taxes) (Walter Hellerstein, Jurisdiction to Tax Income and Consumption in the New Economy: A Theoretical and Comparative Perspective, Georgia Law Review (2003)). Imperatively, sovereigns now under significant financial and political pressure are finding it a compulsion under nationalism to go it alone and adopt means to protect their revenue. (Desperate times, desperate measures)

Discussing a few of the measures becomes imperative

  1. Economic Presence Tests: Significant economic presence tests either qualitative or quantitative offer as of the date of publication a good view of taxation of revenue on source. Academics like Arvid Aage Skaar, Luc Hinnekens, etc argue in favour of the economic presence tests. Stimulatingly, in 2013 there was an attempt by the French authorities to tax revenue attributed to social media platforms even though none of them had any presence in any territorial jurisdiction governed by France(https://convention-s. fr/wp-content/uploads/2014/06/ Taxation_Digital_Economy_Jan2013_ France.pdf). In a characteristically amusing case in the Tax Tribunals in India it was held that social media profiles of employees could be a trigger for determination of a permanent establishment (GE Energy Parts v. Addl Director of Income Tax). In a way it might be argued there is a general trend towards dilution/modification of the permanent establishment principle (Article 5 of the OECD/UN Model convention). Whether MLI alone would be sufficient to dilute the said, is a fact that would unravel in the coming times. There are some other Quantitative Economic Presence tests being proposed like GAAR and SAAR rules being automatically applicable on above a certain threshold.

    The OECD:OCDE came up with a report titled OECD:OCDE/G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising from Digitalisation – Interim Report 2018 (https://www.oecd.org/ctp/ tax-challenges-arising-from-digitalisation- interim-report- 9789264293083-en.htm), in which it has taken into account the significant dilution proposed by sovereign jurisdictions of Article 5 of the OECD:OCDE model convention (The PE principle) (Similar to the UN model convention) . In particular mention has been made in pages of the significant modification of the PE principle with respect to Israel (Significant Economic Presence), Slovak Republic(fixed place of business or digital platforms) and India(Significant Economic Presence).

    Effectiveness of the afore is again subject to private international law interpretations. The US-Canada tax treaty automates the application of a services PE with the 183 days rule. (However, see Tech Mahindra vs Commissioner of Taxation 20 ITLR 70(Australia) and Satyam Computer Services Ltd vs Commisioner of Taxation 21 ITLR 274 (Australia) and some conflict in Mistubishi Corporation India Pvt Ltd vs Deputy Commissioner of Income Tax Circle 6(1), New Delhi ITA 5042/DEL/11(India))

    The author is of the opinion that Quantitative Significant Economic Presence tests might be a possible solution to the quagmire considering that private international law has generally been in favour of “there is no equity about tax”.

  2. Withholding Taxes: Yariv Brauner and Andres Baez in their research paper argue in favour of a globally standardized withholding tax rate of 10% on all transactions impacted by base erosion movements in favour of source jurisdictions. The alternatives to nexus based and election are left open, in opposition to the IBFD position of nexus based solution being superior to the withholding tax regimen. (https://www.ibfd.org/sites/ibfd.org/ files/content/WithholdingTaxesintheSer viceofBEPSAction1-whitepaper.pdf ). For the uninitiated reader a reading (Richard Doernberg, Electronic Commerce and International Tax Sharing, 16 TAX NOTES INT’L 1013) is also recommended on Doernberg’s arguments on imposition of withholding taxes on electronic commerce resulting transactions. Some countries have actually incorporated a broadened definition of their parameters of SAAS, (Software As A Service), sharing of music and content (http://www.ifa-luxembourg.lu/download/237/withholding-tax-in-the-era-of-beps-civs-and- digital- economy-presentation-report-30112017. pdf ) for example Greece and Malaysia. Withholding taxation on Collective Investment Vehicles(CIV) is again a controversial topic and Luxembourg wherein most of these vehicles are situated has implemented withholding tax treaties with many counterparts. The problem is exacerbated further by the fact that some of the CIV’s are treated as fiscally transparent entities in Luxembourg and not so in other jurisdictions.

  3. Transaction Taxes: Although we are not anymore living in the era of infamy of the “bit” tax, transactional taxes have become very important especially in jurisdictions where FAANG and “clone” business models have significant presence. And in thus current Covid -19, scenario the impact of FAANG on supply chain has been undoubtedly universal. France and Hungary take the pole as far as imposition of transaction taxes are concerned, for example in France the turnover tax governs the delivery of online content in accordance with its proposal to tax online content. In Hungary the online delivery of advertisements is taxes according to its targeted demographic. India and Italy have very recently introduced their own versions of the equalisation levy for bring under the tax fold transactions by MNE who do not have a permanent establishment (with a baseline threshold). The author although admits it would be interesting to see how the economics of operation work out in cases of UBER and “clones”. The United Kingdom has the Digital Services Tax which came into operation on 1st of April 2020.

  4. Threshold Taxes: Jurisdictions over the world are attempting to make models similar to the GILTI (Global Intangible Low Taxed Income) and the Tax Cuts and Jobs Act in the United States for Outbound Foreign Investment and other versions of diverted profits taxes for Inbound Foreign Investment. Australia has imposed the Multinational Anti Avoidance Law; India has very recently imposed a TCS on outbound ODI transactions. CFC rules in many jurisdictions have been made to identify the ultimate beneficiary and hence tax passive foreign income on the ultimate beneficiary. The case of the GILTI and the TCJA in the United States deserve a mention since FAANG are situated in the United States and its brings into its fold the CFC regime and applies corporate tax on the excess of shareholders CFC income over and above the returned Income.

  5. Measures for countering “gig economy”: A recent paradigm is now witnessed whereby focus of jurisdictions is now targeted at “gig” operations rather than the long term employment market. In fact, countries are slowly opening up to the “gig” labour market in which there is a demand based employment rather than long term contractual obligations of employment of labour. OECD:OCDE has of very recent in the month of July 2020 come up with model rules with respect to the “gig” economy (https://www.oecd. org/ctp/exchange-of-tax-information/ model- rules-for-reporting-by-platform- operators-with-respect-to-sellers-in- the- sharing-and-gig-economy.pdf). For instance, the Baltic states(Lithuania, Latvia, Estonia) have been at the forefront of pushing for the nomadic gig economy for expats, and the Nordic countries are evaluating a similar proposition. How and where does the PE and the value addition principle for taxation apply in such a case.? In such cases its relatively easy for a person to have a nomadic jurisdiction less approach, while in particular cases the person still might be liable depending on his nationality. India for its part has as of this year introduced a hybrid residence- nationality based taxation system wherein a “stateless” person would be taxed as an Indian citizen and would be liable for taxes in India(Finance Bill 2020, Insertion of Section 6(1A) into the Income Tax Act 1961.). The United States has a citizenship based approach to taxing worldwide income of Citizens (Cook v. Tait, 265 U.S. 47 (1924)) and doesn’t apply the residence notion IRC 1. Norway applies the quantitative test method for determination of residence status.

Undoubtedly the afore five considerations of taxes denigrate basic principles of both Capital Import Neutrality and Capital Export Neutrality (on which most jurisdictions are supposed to be based), and are rather tending towards National Neutrality as a matter of International Tax Policy. As a consequence, it seems that the market for cross border trade and transactions would be leading to a blurring of tax treatments and also distorting an already set paradigm of income classification. Tax planning would engage in a far more complicated scenario and countries would be vying for their “fair” share of revenue and MNE’s would have to re-align their tax strategies including that of Hybrid Mismatches. This could also potentially lead to a scenario where tax offsets are relegated to such a level that this in itself leads to a trade barrier (see discussion on gig economy supra) to sharing of resources. International double taxation avoidance is the result of almost a century of hard work and negotiations since the days of 1920’s compromise, and any disruption would likely have a spiralling effect, which could be totally unwarranted.

Governments developing their own taxation frameworks and presenting them on an international arena unilaterally would lead to an unfair playing field at the cost of MNE’s

who are providing benefits of economies of scale while not engaging in aggressive tax planning. The paradigm to make a jurisdiction more lucrative by providing for tax benefits is overtaken by attempts to garner a bigger chunk of the pie. An indirect implication of this entire scenario is the additional burden of statutory compliance put on firms both MNE’s and alike.

Another challenge posed despite the stated objectives of the OECD:OCDE 2015 BEPS report, is that the current system of taxation is geared towards taxation of value addition and not as at source. So will it involve a complete overhaul? Also pertinently, even in the current system where there is a limited “gig” economy, there is no homogenous definition of value addition.

The Indian construct is defined u/s 9 of the Income Tax Act 1961 and has to be read in conjunction with Bilateral treaties more particularly with reference to Articles 5 & 7 in the general form and also reference to BEPS article 7 with particular emphasis on artificial avoidance of PE status. Courts in India have generally leaned towards interpretation of Articles on the Bilateral framework. Guiding principles being provided by the Vienna Convention on the Law of Treaties subsequent to the landmark in Ram Jethmalani v. Union Of India (Writ Petition (Civil) No. 176 Of 2009). It might be noted that India although has not ratified the convention, adjudicative law in India has nonetheless used the guiding principles therefrom. Courts have also on occasion had the instance to go beyond the define treaty and the Act to render adjudicative law. (ABB FZ, LLC v. Deputy Commissioner of Income Tax I.T (TP)

http://www.kluwertaxblog.com/wp-content/ uploads/sites/59/2017/08/Bangalore-Tribunal- Ruling.pdf).

Private International Law assumes significance as countries might be prone to adopt a particular manner of interpretation of principles of international taxation to suit their own needs and hence might create a no win scenario for the business as such (see ABB FZ LLC supra). The apparent conflicts in the Dell Products cases, wherein in one jurisdiction since Dell Products Norway was accorded not a PE since did not have authority to bind the principle and in the other case it was deemed a PE on totally different grounds. (See Spain vs. Dell, June 2016, Supreme Court, Case No. 1475/2016 and Dell Products v. Staten v/Skatt ost, Case HR- 2011-02245-A, See also France vs Zimmer Ltd CE 31/03/2020 304715)

Academics like Cockfield (Reforming the Permanent Establishment Principle through a Quantitative Economic Presence Test, 38 CAN. BUS. L. J. 400 (2003)) argue in favour of Quantitative Economic Presence Permanent Establishment test for MNE’s on a worldwide basis, so that the hitherto sacrosanct principles of Capital Export and Capital Import Neutrality be kept sacrosanct. Although there are some arguments in favour of Qualitative tests (See South Dakota vs Wayfair Inc 138 S.Ct. 2080 (2018) which overturned the ruling in Quill Corp. v. North Dakota (1992), See also Direct Marketing Ass’n v. Brohl particularly the commentary by Justice Kennedy) , by and large the administration of such a test could lead to a administrative nightmare and overhauling the established frameworks under the Convention on Mutual Administrative Assistance in Tax Matters.

There has to be made a fine distinction between MNE’s operating on a bigger scale who are actually able to hurt revenue jurisdictions materially and MNE’s operating on a much smaller scale who don’t have a material impact on revenue. Primarily owing to the fact that significant exercise on the latter might not be in favour of smaller business and start-ups who would anyway be constrained by resources for application. And secondarily conducting such a costly exercise might not provide a favourable cost benefit exercise for Revenue.

An incremental change in fiscal as well as international tax policy of the comity of nations is possibly the only way forward in the interest of business as well as growth of revenue of jurisdictions. The way forward from value addition to source would pave the way to reducing harmful tax conflict and also juridical double taxation, which would be undoubtedly harmful to business in the short run and revenue in the long run as competition intensifies all around the globe. The OECD/ UN model double taxation convention and the BEPS 2.0 framework particularly that on Pillar 1 (Although the United State posed some objections on Pillar 1 especially with reference to GILTI and TCJA) although have a consensus of almost 129 countries (excepting notably the United States), the way forward into multilateralism and nationalism in taxes at least is challenging and fraught with interesting negotiations and trade deals.

Simplified Analysis of the Supreme Court ruling on Basic Wages for Provident Fund Computation.

The Honorable Supreme Court of India have passed a Judgment on 28th February, 2019 in case of Regional Provident Fund Commissioner (II), West Bengal v. Vivekananda Vidyamandir & Others. [Civil Appeal No 6221 of 2011]. A bench of Justice Shri Arun Mishra and Justice Shri Naveen Sinha ruled that employers cannot segregate ‘special allowance’ from basic wages for purpose of PF deductions.

It’s a judgment on the definition of ‘basic wages’ for the purposes of calculating Provident Fund contributions. This is a very important judgment as it impacts on cost to companies (Employers) and take home salary of employees.

1. PF contribution is payable on all amounts paid to employees, except on certain amounts. PF is payable on Dearness Allowance.

2. PF is not payable on House Rent Allowance (HRA).

3. PF is not payable on any allowance which is variable and not universal in nature like Overtime, Statutory Bonus, Commission, Incentive, Leave Encashment, etc.

To Conclude, PF is payable on Gross Salary, reduced by HRA and any variable allowance.

Certain other points to be considered:

  • There is no effective date specified by the PF Department for application of rulings in the Judgment.

  • This Ruling has not touched upon the impact of those contributing PF on amounts exceeding ₹ 15,000/- per month which is the statutory wage 
    limit.

  • This Ruling impacts companies employing foreign nationals qualifying to be International Workers (i.e. other than Indian passport holders) where the statutory wage ceiling of ₹ 15,000/- per month does not apply.

  • Currently, there is no clarity on whether this will have any retrospective effect on companies contributing PF on amounts lesser than ₹ 15,000/- per month.

Some Examples for the Calculation of Salary after the SC Judgment:

Case Calculation PF Computation
Example No.: 1

In case when Gross Salary is less than ₹ 15,000/- Per Month.

Basic + DA 12000
Special Allowance other than DA 1500
HRA 600
Overtime 400
Gross 14500
PF is now payable on Gross Salary minus OT, HRA, Statutory Bonus and other variable allowances.

Old PF Contribution – 
12,000 X 12% = 1440/-

New PF Contribution – 12000+1500=13500, 
13500 X 12% =1620/-

Example No.: 2

In case when Gross Salary is more than ₹ 15,000/- Per Month, but Basic is less than ₹ 15,000 per month (Example 1).

Basic + DA 13000
Special Allowance other than DA 1800
HRA 4000
Overtime 400
Gross 19200
PF is now payable on Gross Salary minus OT, HRA, Statutory Bonus and other variable allowances.

Old PF Contribution – 
13,000 X 12% = 1560/-

New PF Contribution – 13000+1800=14800, 
14800 X 12% =1776/-

Example No.: 3

In case when Gross Salary is more than ₹ 15,000/- Per Month, but Basic is less than ₹ 15,000 per month (Example 2, Where Statutory Wage limit becomes applicable).

Basic + DA 14000
Special Allowance other than DA 1900
HRA 5000
Overtime 800
Gross 21700
PF is now payable on Gross Salary minus OT, HRA, Statutory Bonus and other variable allowances.

Old PF Contribution – 
14,000 X 12% = 1680/-

New PF Contribution – 14000+1900=15900, 
15900 X 12% =1908/- ( PF Ceiling Cap can be kept upto 
15000 X 12% = 1800/-)

Example No.:4

In case when Gross Salary is more than ₹ 15,000/- Per Month, and Basic is also more than ₹15,000 per month, and Management Currently Contributes PF on restricted / Statutory wages Ceiling.

Basic + DA 20000
Special Allowance other than DA 3000
HRA 6000
Overtime 1200
Gross 30200

 

Old PF Contribution – 
15,000 X 12% = 1800/-New PF Contribution – 
15,000 X 12% = 1800/-

(NO CHANGE)

(PF Ceiling Cap 
15000 X 12% = 1800/-)

Example No.:5

In case when Gross Salary is more than ₹15,000/- Per Month, and Basic is also more than ₹ 15,000 per month, and Management Contributes PF on actual Basic.

Basic + DA 25000
Special Allowance other than DA 5000
HRA 10000
Overtime 4000
Gross 44000

 

Old PF Contribution – 
25,000 X 12% = 3000/-New PF Contribution – 
25,000 X 12% = 3000/-

(NO CHANGE)

Since SC Judgment

has not touched upon the impact of those contributing PF on amounts exceeding ₹15,000 per month which is the statutory wage limit.

Query 1

Nature of GST to be levied

The supplier is registered in Maharashtra. The supplier has commercial vacant office at Tamil Nadu. Supplier is not registered in Tamil Nadu nor carrying on any other activity in Tamil Nadu. The supplier has entered into agreement for renting of commercial place of Tamil Nadu. Supplier will receive rent for which GST is payable. Supplier is of the opinion that, he is liable to pay IGST in Maharashtra. Which is the correct tax payable?

Reply: The transaction referred is about renting of office i.e. immovable property. Schedule II to CGST Act specifies the transactions which are to be considered for supply of service and for supply of goods.

Entry 5 in Schedule II provides as under:-

SCHEDULE II

[See section 7]

ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES

5. Supply of services

The following shall be treated as supply of services, namely:—

(a) renting of immovable property;”

Therefore, the given transaction is for supply of services. Under GST, the taxability under particular Act i.e. whether IGST or CGST / SGST depends upon two factors. Therefore, two factors, i.e. location of supplier of service and place of supply of service are two aspects which are first to be decided. If the location of supplier of service as well as place of supply of service is in same State, then the supply transaction will be intra state and the liability will be under CGST/SGST. However, if the location of supplier is in one State and place of supply falls in other State, then it will be inter-state supply and IGST will apply.

For deciding above factors, reference is to be made to the relevant legal provisions.

Section 2(15) of the IGST Act defines location of supplier of service, which is reproduced below:-

(15) “location of the supplier of services” means,––

(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;

(b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and

(d) in absence of such places, the location of the usual place of residence of the supplier;”

The ‘place of supply’ for services is defined in section 12 of IGST Act. The said section is reproduced below to the extent required:-

12. (1) The provisions of this section shall apply to determine the place of supply of services where the location of supplier of services and the location of the recipient of services is in India.

(2) The place of supply of services, except the services specified in sub-sections (3) to (14),––

(a) made to a registered person shall be the location of such person;

(b) made to any person other than a registered person shall be,––

(i) the location of the recipient where the address on record exists; and

(ii) the location of the supplier of services in other cases.

(3) The place of supply of services,––

(a) directly in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out or co-ordination of construction work; or

(b) by way of lodging accommodation by a hotel, inn, guest house, home stay, club or campsite, by whatever name called, and including a house boat or any other vessel; or

(c) by way of accommodation in any immovable property for organizing any marriage or reception or matters related thereto, official, social, cultural, religious or business function including services provided in relation to such function at such property; or

(d) any services ancillary to the services referred to in clauses (a), (b) and (c),

shall be the location at which the immovable property or boat or vessel, as the case may be, is located or intended to be located:

Provided that if the location of the immovable property or boat or vessel is located or intended to be located outside India, the place of supply shall be the location of the recipient.

Explanation.– Where the immovable property or boat or vessel is located in more than one State or Union territory, the supply of services shall be treated as made in each of the respective States or Union territories, in proportion to the value for services separately collected or determined in terms of the contract or agreement entered into in this regard or, in the absence of such contract or agreement, on such other basis as may be prescribed.”

It can be seen that in relation to immovable property the place of supply is the place where the immovable property is situated as per section 12(3)(a).

Further, the location of supplier of service is the place where the place of supplier is registered.

In the given case, it is fact that the querist is registered in Maharashtra. The immovable property is situated in Tamil Nadu. It is also fact that querist has no any other activity in Tamil Nadu and it is also not registered in Tamil Nadu. Therefore, location of supplier is in Maharashtra and place of supply is in Tamil Nadu.

Since location of supplier and place of supply are in different states, the transaction becomes interstate supply as per section 7. This position is clear from the reading of section 7(3) of IGST Act, which reads as under:-

(3) Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in––

(a) two different States;

(b) two different Union territories; or

(c) a State and a Union territory, shall be treated as a supply of services in the course of inter-State trade or commerce.”

Renting is service relating to immovable property. Therefore, applying above provisions of inter-state supply of service, the tax should be paid under IGST in Maharashtra.

Even if property is located in Tamil Nadu still, since as per the definitions, supply of service is from other state, the liability will be under IGST.

In our opinion, the view of the querist is correct.

In B. K. Educational Services v. Parag Gupta Associates [AIR 2018 SC 5601], the Hon’ble Supreme Court has made an obiter comment in the closing paragraphs of the judgment, to the effect that Section 5 of the Limitation Act applies to an application filed under Section 7 and 9 of the Insolvency and Bankruptcy Code, 2016 for commencing insolvency resolution process against any debtor. That comment has created immense uncertainty in the law, for the obiter comment runs counter to the spirit of the entire judgment and creates an unusual situation where a creditor is barred from filing a suit for recovery of debt after 3 years, but can still pray for condonation of delay under the insolvency code and put the debtor in insolvency without through an extremely summary procedure.

An obiter dicta of the Supreme Court binds all lower Courts and tribunals under Article 141 of the Constitution, except the Supreme Court itself [Oriental Insurance Co. Ltd. v. Meena Variyal (2007) 5 SCC 428]. Unlike the general rule that only the ratio is binding and not the obiter dicta which applies to High Courts and lower courts, the effect of Article 141 is such that every “declaration of law”, whether ratio or obiter, when it comes from the Supreme Court, it becomes binding throughout the entire country. The only exception to this rule is that there must be a direct pronouncement of the Supreme Court in some other case conflicting with the obiter, and then and only then, will the obiter be obliterated.

In the article, I propose to examine the obiter in B. K. Educational holding that Section 5 of the Limitation Act applies to Section 7 and 9 of the Insolvency Code, particularly in respect of earlier pronouncements of the Supreme Court which hold otherwise.

B. K. Educational Services

Under Section 3 of the Limitation Act, no suit or application can be filed unless the same is done within the limitation provided under the said Act. The period for recovery of a debt is three years. The question which was put before the Supreme Court in B. K. Educational was whether the insertion of Section 238A in June 2018 which made the Limitation Act applicable to the proceedings under the Insolvency Code before the NCLT, was applicable from the inception of the Code or only from June, 2018.

Sections 7(1) and 9(1) of the Code read as follows:

“7. (1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.

Explanation.— For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.”

9. (1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.”

Section 238A reads as follows:

“238A. The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.”

Prior to the Supreme Court judgment, the National Company Law Appellate Tribunal had taken the view that since no limitation is prescribed for filing an application under Sections 7 and 9 of the Insolvency Code, the Limitation Act is not made applicable to the Insolvency code before Section 238A and the Insolvency code is a self-contained enactment, and therefore effectively an application for initiating insolvency under Section 7 and 9 of the Code can be filed even for debts which were time-barred long ago, at least prior to the enactment of Section 238A.

The Apex Court reversed and held that any amendment or any law affecting limitation is only a procedural amendment and will affect all existing debts which are alive and subsisting at the time of the amendment or the new law. To that extent, the amendments or new laws touching on limitation are always retrospective in nature. However, when a debt is already barred by the general law of limitation, such a debt cannot be revived by an amendment or a new law without express language by Parliament showing that the intention was that the new limitation or extended limitation must apply to debts which are already time-barred as on the date of the new law or amendment. Thus, any debt which was already time-barred as on the date on which the Insolvency Code was brought into force could not be revived or resurrected by way of the Insolvency code.

With respect to those debts which were not time-barred as on date of inception of the Code in 2016, it was held that though Section 238A was not on the books at that time, the general principle that amendments touching on limitation will apply to all existing rights and obligations retrospectively. Furthermore, since Section 433 of the Companies Act, 2013 applies to the proceedings under the Insolvency Code through Section 5(1) of the Insolvency Code. Section 433 of the Companies Act, 2013 itself provided that the Limitation Act applies to the proceedings before the NCLT and this was taken by the Supreme Court as indication that the intention was to apply the limitation act even before the insertion of Section 238A.

Condonation of delay

The application of the Limitation Act to proceedings under the Insolvency Code has created a new controversy altogether. While Section 3 of the limitation act bars the institution of a suit or application after the limitation period, the same is subject to exceptions under Sections 4 to 24. The limitation period for recovering amounts due on a debt is 3 years. Section 5 of the Limitation Act provides for condonation of delay, but Section 5 applies only to “applications” and “appeals” and not to suit proceedings. Therefore, it is not possible to condone any delay in filing suit proceedings

However, Sections 7 and 9 of the Insolvency Code use the word “application” and hence the Supreme Court has held in B. K. Educational that a condonation application can be filed even after 3 years from the date of the default.

Is B. K. Educational per incuriam?

In State of Kerala v V. R. Kalliyanikutty (1993) 3 SCC 657, the Supreme Court was confronted with provisions of the Kerala Revenue Recovery Act, 1968 which allowed speedy recovery of “amounts due” as covered by the Act. The Supreme Court held that after the lapse of period specified in the Limitation Act, the amounts cannot be said to be “due” any more. Any other interpretation, the Court has held, would lead to a situation where a creditor uses the Act meant for “speedy” recovery after failing for 3 years in instituting civil proceedings and failing to prove his debt according to civil procedure in a civil court and directly use the draconian summary proceedings for recovery under the Kerala Revenue Recovery Act, 1968. This, the Court held, would deprive the debtor of his defense of time-bar and his rights under the normal civil procedure and would offend Article 14. In words of Sujata Manohar J:

“5. Explaining analogous provisions of the U.P. Public Moneys (Recovery of Dues) Act, 1965, this Court in Director of Industries, U.P. v. Deep Chand Agarwal [(1980) 2 SCC 332 : AIR 1980 SC 801] held that the said Act is passed with the object of providing a speedier remedy to the State Government to realise the loans advanced by it or by the Uttar Pradesh Financial Corporation. Explaining the need for speedy recovery, it says that the State Government while advancing loans does not act as an ordinary banker with a view to earning interest. Ordinarily it advances loans in order to assist the people financially in establishing an industry in the State or for the development of agriculture, animal husbandry or for such other purposes which would advance the economic well-being of the people. Moneys so advanced have to be recovered expeditiously so that fresh advances may be made for the same purpose. It is with the object of avoiding the usual delay involved in the disposal of suits in civil courts and providing for an expeditious remedy that the U.P. Act had been enacted. It was on this ground that this Court upheld the classification of loans which are covered by the said U.P. Act in a separate category. It held that this is a valid classification and the provisions of the Act are not violative of Article 14.

8. Looking to the object of Section 71 we have to examine whether time-barred claims of the State Financial Corporation and the banks can be recovered under it. Is the object only speed of recovery or is it also enlargement of the right to recover? The respondent-institutions rely on the words “amount due” in Section 71 as encompassing time-barred claims also. Now, what is meant by the words “amounts due” used in Section 71 of the Kerala Revenue Recovery Act as also in the notifications issued under Section 71? Do these words refer to the amounts repayable under the terms of the loan agreements executed between the debtor and the creditor irrespective of whether the claim of the creditor has become time-barred or not? Or do these words refer only to those claims of the creditor which are legally recoverable? An amount “due” normally refers to an amount which the creditor has a right to recover. Wharton in Law Lexicon defines “due” as anything owing; that which one contracts to pay to another. In Black’s Law Dictionary, 6th Edn., at p. 499 the following comment appears against the word “due”:

“The word ‘due’ always imports a fixed and settled obligation or liability; but with reference to the time for its payment there is considerable ambiguity in the use of the term, the precise signification being determined in each case from the context. It may mean that the debt or claim in question is now (presently or immediately) matured and enforceable, or that it matured at sometime in the past and yet remains unsatisfied, or that it is fixed and certain but the day appointed for its payment has not yet arrived. But commonly and in the absence of any qualifying expressions, the word ‘due’ is restricted to the first of these meanings, the second being expressed by the term ‘overdue’ and the third by the word ‘payable’.”

There is no reference in these definitions to a time-barred debt. In every case the exact meaning of the word “due” will depend upon the context in which that word appears.

9. In the case of Hansraj Gupta v. Dehra Dun-Mussoorie Electric Tramway Co. Ltd. [AIR 1933 PC 63 : 60 IA 13] the Przivy Council was required to interpret the words “money due” under Section 186 of the Companies Act, 1913. Section 186 dealt with the recovery of any money due to the company from a contributory. Interpreting the words “money due”, the Privy Council said that the phrase would only refer to those claims which were not time-barred. It noted that the section is concerned only with moneys due from a contributory. A debtor who is not a contributory is not affected by it. Moneys due from him can be recovered only by a suit in the company’s name. Secondly, the section creates a special procedure for obtaining payment of moneys. It is not a section which purports to create a foundation upon which to base a claim for payment. It creates no new rights. Thirdly, the power of the court to order payment under that section is discretionary. It may refuse to act under that section, leaving the liquidator to sue in the name of the company. Therefore, the respondent under the procedure of Section 186 cannot be deprived of some defence or answer open to him in a suit for the same moneys.

10. The same reasoning would apply in the present case also. The Kerala Revenue Recovery Act does not create any new right. It merely provides a process for speedy recovery of moneys due. Therefore, instead of filing a suit, (or an application or petition under any special Act), obtaining a decree and executing it, the bank or the financial institution can now recover the claim under the Kerala Revenue Recovery Act. Since this Act does not create any new right, the person claiming recovery cannot claim recovery of amounts which are not legally recoverable nor can a defence of limitation available to a debtor in a suit or other legal proceeding be taken away under the provisions of the Kerala Revenue Recovery Act.”

The judgment in V. R. Kalliyanikutty is by a bench of 3 learned judges, whereas B. K. Educational is a judgment by 2 judges. If the obiter of B. K. Educational is taken to be binding law, it will directly contradict V. K. Kalliyanikutty. A creditor who has waited for 3 years and not filed a suit and proved his debt according to the normal civil process, will suddenly get up one day and file a condonation application. The debtor will have no chance to defend himself according to the normal legal process and must answer the claim in extremely summary procedure adopted by the NCLT under Insolvency code. This would lead to a clear-cut infraction of Article 14 rights of the debtor.

It is true that condonation may or may not be granted. However, the debtor is placed at the mercy of the Court in cases of condonation. Furthermore, the law under Section 5 of the Limitation Act is that an applicant need not explain why he did not act within the allowed time, he must only explain what happened after the due date had elapsed [Shrimant Jadhavrao Anandrao Pawar v. Dilip Balvantrao (2002) 9 SCC 593]. As such, a creditor will not have to explain why he did nothing for 3 years, but only explain what he did after 3 years. This is a complete negation of the Article 14 rights of the debtor. The consequences under Insolvency Code are much more disastrous than the ones under the Kerala Act. The bar under the Insolvency Code must therefore be higher.

Can this conundrum be resolved?

The obiter in B. K. Educational allowing condonation applications to be filed in case of applications under Section 7 and 9 of the Insolvency Code is therefore directly contrary to V. K. Kalliyanikutty. In due time, the Supreme Court must clarify the law once and for all. However, till then, the Courts must take up the mantle and interpret the condonation provision in a strict manner. For starters, the creditor must be asked to satisfy the Court what prevented him from filing a suit in 3 years. The NCLT has thankfully been strict towards those creditors who were negligent or who were not genuinely prevented from filing a suit. As long as the NCLT is alert about not letting creditors abuse the condonation process, the constitutional and fundamental rights of the debtors would be protected. Any liberal interpretation of the condonation provision in this context would lead to unconstitutional results.

NCLAT creating further chaos after B. K. Educational

While the uncertainty over condonation provision persists, the NCLAT has held in A. J. Agrochem v. Duncans Industries [Judgment dated 20.6.2019 in Company Appeal (AT) (Insolvency) No. 710 of 2018], that since the Insolvency code came in December 2016, the limitation period for filing petitions should run upto December 2019 for all debts. Obviously, this judgment flies in the face of B. K. Educational which says that 3 years should be counted from the date of default. However, till the Supreme Court sets aside this judgment, debtors have another fire to fight and another frontier to defend.

 

The word arrest usually comes within the realm of criminal jurisdiction. That being said, there has been a increasing amount of legislative backing which countries are now giving to civil arrests, especially in the field of taxation.

It must be clarified, that civil prosecution under tax laws is neither new nor an isolated occurrence. Direct tax laws, like Income tax have several provisions, wherein the assessee can be prosecuted. Comparative study between powers of arrests under various tax laws would be an extremely interesting case study for a different article.

Under the Goods and Services Tax laws, power to arrest is found in Section 69. Before going into the discussion about the sweeping powers granted to any Commissioner to order ‘arrest’ of any person against whom he has ‘reasons to believe’ that he has committed an offence, which is non bailable and cognizable, it would be prudent to dwell into the history of why the indirect tax laws are enacted to be increasingly stringent bordering on draconian.

Compared to the true predecessor of GST, the State Vat Laws, as per section 74 of the Maharashtra Value Added Tax Act, the maximum punishment is one year, extendable up to 2 years. Therefore all prosecutable offences were bailable and non cognisable. Importantly, the MVAT officer did not have powers to ‘make’(order) the arrest. Therefore the actual power of prosecution lay with the Police.

If the sections dealing with imprisonment were to be read in isolation, upon reading the sweeping powers of arrests under the GST regime they come across in stark contrast to the almost mellow provisions of the MVAT Act. Therefore one can be forgiven if they presume that both laws deal with totally different scenarios. Previous Excise laws did have prosecution powers as well, but it is best to keep the reference to the VAT laws, since the taxable events under VAT and GST are closest and so are the breaches, offences, etc.

This tectonic change in the prosecution powers under the GST laws is a growing trend or if I may dare say indicative of the general annoyance and derision towards tax evasion by the Revenue. Such an attitude is usually a popular move amongst the unaffected public in general, who tend to have equal annoyance and derision towards tax evaders or so called ‘tax thieves’.

The above statements are not India specific, but is prevalent internationally. Validation from the same comes from the OECD guidelines ‘Fighting Tax Crime: The Ten Global Principles’ of 2017 (OECD (2017), Fighting Tax Crime: The Ten Global Principles, OECD Publishing, Paris. http://www.oecd.org/tax/crime/fighting-tax-crime-the-ten-global-principles.htm). Most democracies are members of OECD or in the case of India member of several committees within OECD including taxation.

The first principle enshrined is ‘Ensure tax crimes are criminalised

Item No. 5 and 6 state the following:

5. The precise way of criminalising violations of tax law will vary from one jurisdiction to another. Each jurisdiction has a different legal system, which reflects and interacts with the particular culture, policy and legislative environment.

6. Whatever the particular details of the legal framework are,it will be most effective if:

  • The law clearly defines the tax offences that are criminalised;

  • A criminal sanction applies if the offence is proven;

  • More serious offences are punishable by more serious criminal sanctions; and

  • Criminal sanctions are applied in practice.

The above principles indicate, that countries are no more just content at tax recovery, more and more emphasis is now being given to criminal sanctions.

Discussions of Various Provisions under GST Laws and judgments

Section 69 : Power to Arrest

69. (1) Where the Commissioner has reasons to believe that a person has committed any offence specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is punishable under clause (i) or (ii) of sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central tax to arrest such person.

(2) Where a person is arrested under sub-section (1) for an offence specified under subsection (5) of section 132, the officer authorised to arrest the person shall inform such person of the grounds of arrest and produce him before a Magistrate within twenty-four hours.

(3) Subject to the provisions of the Code of Criminal Procedure, 1973,––

(a) where a person is arrested under sub-section (1) for any offence specified under sub-section (4) of section 132, he shall be admitted to bail or in default of bail, forwarded to the custody of the Magistrate;

(b) in the case of a non-cognizable and bailable offence, the Deputy Commissioner or the Assistant Commissioner shall, for the purpose of releasing an arrested person on bail or otherwise, have the same powers and be subject to the same provisions as an officer-in-charge of a police station.

From the above section it is clear that, the Commissioner has power to authorise an arrest if he has ‘reason to believe’ that any person has committed an offence which are enumerated in Section 132. Thus it is clear, that a Commissioner of a commercial tax regime can now act in the role of a ‘de facto’ Police Officer.

Section 132 gives out a list of all offences and the also lists out severity of the same.

List of offences as per Section 132 are not reproduced here for the sake of brevity.

Offences can be classified into 3 major categories:

1. Tax evasion

2. Wrong/ fraudulent availing of Input tax credit

3. Wrong/ fraudulent obtaining of Refund

All other offences are associated with above three categories. The punishment for offences in Section 132 (a),(b), (c ), (d) where the quantum involved is more than 5 crore is cognisable and non bailable. All other offences with lesser quantum are non cognisable and bailable.

Section 2 (c) of the Criminal Procedure Code, 1973 defines Cognizable offences.

Cognizable offence/case means a case in which, a police officer may arrest without warrant, as per the First Schedule of the Criminal Procedure Code, 1973 or under any other law for the time being in force.

Cognizable offenses are usually offenses which are serious in nature.

A non-cognizable offence has been defined in Section 2(l) of Criminal Procedure Code 1973. Non-cognizable offence means an offence for which, and ₹non-cognizable case’ (NC) means a case in which, a police officer without any warrant has no authority to arrest.

Whether an offence is cognisable or non cognisable usually always depends on the severity and quantum of tax impact involved.

It is almost a daily news item nowadays where GST authorities cause arrests of several persons in a group companies . These are mainly for the fraudulent availing of ITC. What it effectively means is that ITC is transferred amongst group of several companies with barely any value addition. This modus operandi is adopted to avail Input tax credit and enhance the turnover without there being an actual presence of goods and subsequent transfer of property in goods. Merits of whether there is a loss of revenue and several other aspects including Section 16, which specifically allows ‘constructive delivery’ require deep analysis in appropriate forums.

Judgments

In the light of the above background, let us examine in brief the judicial pronouncements in the short span of time since GST has been implemented.

1. P. V. Ramana Reddy and ANRs v. State of Telangana (WP 4764 of 2019), Telangana High Court, confirmed by the Supreme Court on 27-05-19)

This is the only detailed judgment on the powers of arrest under the GST regime. This case similar to almost all cases all over India where parties have been arrested for fraud and wrongly availing Input Tax Credit. The main contention was a prayer to the Court to grant Interim protection in form of Anticipatory Bails.

The major arguments were based on the applicability of Section 41 and 41A of Criminal Procedure Code, 1973 (‘CrPC’).

As per this section mandates the police officer to issue a notice on the alleged offender in certain cases, where he is accused of committing a cognizable offence, but an arrest is not required. There is an additional protection under the Act wherein it bars the arrest of persons against whom a notice under the section is issued, so long as such person complies with the directions under the notice.

That being said the section also allows an arrest if the Police officer has recorded compelling reasons in writing.

It was contended by the petitioners that, when the arrest was authorised under Section 69 of the CGST Act, that drawing parallel to Section 41 and 41A of the CrPC, for the Officer to arrest there must be compelling reasons and the same must be recorded in writing.

The revenue contest this line of reasoning by stating that, arrests are made as per Section 69(1) and that is an independent power granted by the statute to the Commissioner. In fact, it was contest that CrPC is referenced only in 69(3) where the phrase ‘subject to the provisions of the CrPC’. Since this sub section deals with Bail provisions and producing the arrested party before the Magistrate as per the guidelines of the CrPC.

The Hon’ble High Court in its judgment discussed the interplay of Section 69 and 132 along with the extent of applicability of CrPC. Following broad observations were made:

a. 69(1) is applicable only to offences specified in Section 132(a) to (d). Therefore power of Commissioner can only be exercised when the Commissioner has reasons to believe that a cognisable and non bailable offence has been committed.

b. Incongruity between 69(1) and 132(4) and (5), since the power to order arrest is only for cognizable and non bailable offences, the applicability on 132(4) for non cognisable offences is unclear.

c. Whether CGST is a complete code in itself and thereby CrPC need not be referenced at all? 69(1) make a clear distinction between powers to arrest in case of non bailable offences, but is not clear on the powers of the commissioner to order an arrest for non cognisable offences under 132(4).

d. Difference in the language between CrPC (Section 41, 41A) and CGST Section 69. “Reasons are to recorded” is very different from the term used in CGST i.e. ‘Reasons to believe’. Since term used is reason to believe, it will suffice if the reasons are entered into a file and not disclosed.

The Court had also dismissed the contention that, no prosecution can be initiated without determination or assessment by stating that Section 132 has no co relation to assessment and the same is independent of any assessment.

Though the Court gave a finding that protection under Section 41 and 41-A CrPC may be available, in view of special circumstances and the alleged severity of the breach, No relief was granted.

2. Jayachandran Alloys (P.) Ltd. v. Superintendent of GST & Central Excise WRIT PETITION NO. 5501 OF 2019 Dated:- 04-04-19(Madras High Court)

Interestingly in this case, the Hon’ble High Court has observed that, with regards offences as per Section 132 of the Act as extracted earlier, imposes a punishment upon the Assessee that ‘commits’ an offence.

The use of words ‘commits’ clearly indicates that act of committal of the offence is to be established first before punishment is imposed. Thus, ‘determination’ of the excess credit by way of the procedure set out in Section 73 or 74, as the case may be is a pre-requisite for the recovery thereof. As the recovery is to be made subject to ‘determination’ in an assessment, punishment for the offence alleged cannot be imposed prior to such assessment.

3. Union of India v. Sapna Jain (2019), Special Leave to Appeal (Crl.) Nos. 4322-4324/2019, (Supreme Court).

Though status quo was maintained as regards the accussed Petitioner as per the High Court, but the Supreme Court appreciated that a larger bench of 3 Members is required to be constituted to settle the issue of Powers of Arrest under the GST Regime.

Conclusion

Apart from the above mentioned judgments, several cases are at different stages in their filing. Though the order of P. V. Ramana raises several interesting points. Anticipatory bail is essentially a specie of CrPC and IPC. The Departmental view that Special provisions supercedes general provisions, will have to be tested in the light of the several judgments which are for and against as regards extent of applicability of CrPC on other civil/tax laws. The CGST Law purports to grant extra ordinary discretionary power on the Commissioner, which although had deterrent value, but experience of the tax payers is that it will lead to abuse of discretionary powers and rampant misuse.

One expects the Supreme Court to find a balance between strict reasonable criminalisation of tax offences and discretionary and arbitrary threats of prosecution.

Threat of arrests ought to act as a deterrence for commissioning of any tax crime. That being said, stricter punishments have not had a direct co relation with reduced crime or our case compliance. As the old story of Pick pocketing during the public execution of pick pockets guides us, such sweeping arbitrary powers in the hands of Commissioners who are part of an eco system which considers all tax payers are evaders, will have disastrous consequences on the confidence of the businesses and have an effect which is counter productive to the supposed goal of ensuring tax compliance.

A family settlement is not a species of transfer like partition nor it is a commercial contract. Family settlement have received judicial recognition and are enforceable in the Court of law.

A family arrangement is an arrangement between members of the same family intended to be generally and reasonably for the benefit of the family by avoiding litigation or to maintain its reputation. It may involve even settlement of bona fide disputes ether present or future which may not involve legal claims. So, firstly, it must be an agreement among the members of Hindu Family to settle some matters of dispute or otherwise. Secondly, the object must be to compromise either doubtful claims or disputed claims or to preserve the peace in the family or to maintain its reputation by avoiding litigation. Thirdly, the agreement has consideration of expectation that such agreement or settlement will result in establishing or ensuring amity or goodwill amongst the members of the family.

Briefly, the ingredients of a family arrangement can be summarized as follows:

(i) Arrangement is based on assumption that there is an antecedent in the parties to the arrangement.

(ii) The agreement acknowledged what that title is.

(iii) Each party relinquished some claims in favour of others.

(iv) There is a recognition by some of the rights in favour of others.

(v) The object is to avoid and settle disputes.

(vi) The dispute may be existing or likely to arise in future.

(vii) The arrangement should be bona fide and the terms reasonable.

(viii) If there is no dispute, present or future there can be no family arrangement. Thus, a family arrangement when it is bona fide entered into and for the benefit of the family will be generally enforced by the Court of Law.

a) Potti Lakshmi Perumallu v. Potti Krishna Venamma AIR 1965 SC 825

and in such cases the rule of evidence such as estoppel election etc. will be applied.

b) P. G. Hariharan v. Padarul AIR 1994 Ker. 36

c) P. N. Wan Kudre v. C. S. Wankude AIR 2001 Bom 129

A family arrangement generally would not require registration, but if the titled vested in one person is transferred to another in an immoveable property it would require registration.

d) Shambhu Prashad Singh v. Phool Kumari AIR 1971 SC 337

e) Digamber Patil v. Devram Girdhar Patil AIR 1995 SC 1728

Where the family settlement was made orally and subsequently a Memorandum of Family Settlement was signed recording settlement it was held that it did not require registration. The word “Family” is to be understood in a broad sense and parties to family arrangement may not necessarily belong to the same family. If the dispute is one between near relations then the settlement of such dispute can be treated as “Family Arrangement”.

Krishna Biharilal v. Gulabchand AIR 1971 SC 1041

1. Taxation Implication

It will not attract any income-tax as the arrangement is among the members of the family.

Section 56(2) of Income-tax is applicable for transfer of assets between persons with inadequate consideration or without consideration. However, the said section 56(2) does not apply to “Family Arrangement”.

Hon’ble Supreme Court in Ramcharandas v. Girjanan Devi AIR 1966 323 held as under:

(i) To put an end to dispute amongst the members of the family is not a transfer. It is also not a creation of interest.

(ii) In family settlement each party takes a share in the property by virtue of an independent title which is in fact admitted by other parties.

(iii) Each Party need not have a legal claim to be share in the property.

(iv) It is necessary to show that the parties are related to each other in some way and a possible claim on property or possible claim on some other ground.

(v) Apex Court in Kale v. Dy. Director of Consolidation AIR 1976 SC 807

It laid down two important aspects of family arrangement, they are:

It must be bona fide one to resolve the family dispute and rival claims by fair and equitable division or allotment of properties amongst various members of the family. Settlement must be fair and voluntary free of coercion or fraud.

2. Halsbury’s Laws of England:

It defines family arrangement as under:

“A family arrangement is an agreement between the members of the same family, intended to be generally and reasonably for the benefit of the family, either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour.”

3. To constitute a valid family arrangement:

(i) The transaction should be one which is for the benefit of the family generally.

(ii) The consideration for arrangement may be the preservation of family, property, preservation of peace and honour of the family or the avoidance of litigation.

(iii) It is not essential that there should be a doubtful claim, or disputed right to be compromised. If there is one, the settlement may be upheld if it is founded on a reciprocal give and take and there is a mutuality between the parties, in the one surrendering his right and in the other forbearing to sue. In such cases, the Court will not too nicely scrutinize the adequacy of the consideration moving from one party to the other.

(iv) In any case, if such an arrangement has been acted upon, the courts will give effect to it on the ground of estoppel or limitation and the like.

(v) A family arrangement may also be upheld if the consideration moves form a third party.

(vi) If it appears to the Court that if one party has taken undue advantage of the helpness of the other and there is no sacrifice of any right or interest, the agreement is unilateral and devoid of consideration.

(vii) The consent of the parties should be freely given to the arrangement end gross inadequacy of consideration may be determining factor in judging whether the consent was freely given.

(viii) If the agreement involves or implies injury to the person or property of one of the parties, the courts retain inherent power to prevent injustice being done.

Surendra Sahu Gountia v. Chamra Sahu Gountia [1953] Cut. 591 AIR 1954 (Orissa) 80

4. Binding effect and the essentials of a Family Settlement:

The Supreme Court in Kale v. Dy. Director of Consolidation [1976] 3 SCC 119;

has laid down the following propositions in the matter of binding effect and essentials of a Family Settlement.

(i) the family settlement must be bona fide one so as to resolve family disputes and rival claims by a fair and equitable division or allotment of properties between various members of the family.

(ii) the said settlement must be voluntary and should not be induced by fraud, coercion or undue influence.

(iii) the family arrangement may be even oral in which case no registration is 
necessary.

(iv) It is well settled that registration would be necessary only if the terms of the family arrangement is reduced in writing. Hence, also a distinction be made between a document containing the terms and recitals of family arrangement made under the document and a mere Memorandum prepared after the family arrangement had already been made either for the purpose of the record or for the information of the Court for making necessary mutation. In such a case, the memorandum itself does not create or extinguish any rights in immoveable properties and, therefore, does not fall within the mischief of Section 17(1)(b) of the Registration Act, 1908 and is, therefore, not compulsorily registerable.

(v) The members who may be parties to the family arrangement must have some antecedents, title, claim or interest or even a possible claim in the property which is acknowledged by the parties to the settlement. Even if one of the parties to the settlement has no title but under the arrangement, the other party relinquishes all its claim or titles in favour of such a person and acknowledges him to be the sale owner, then the antecedent title must be assumed and the family arrangement will be upheld and the Courts will find no difficulty in giving assent to the same.

(vi) Even bona fide disputes, present or possible, which may not involve legal claims are settled by a bona fide family arrangement which is fair and equitable, the family arrangement is final.

5. No transfer in case of family arrangement:

It is well settled that there is no transfer in case of family arrangement. Consequently, where there is a rearrangement of shareholding as between family members to avoid possible litigation and to ensure effective control of different companies, there is no transfer within the meaning of section 2(47) of the Income-tax Act, so as to attract capital gains. Kay Arr Enterprises v. Jt. Commissioner of Income-tax 279 ITR (AT) 163 (Chennai)CIT v. R. Ponnmmal, Madras [1987] 164 ITR 706 (Mad.).

Though a company in which family members are interested may not be a party to the family arrangement.

6. Family Arrangement and decided cases:

(i) The transaction of a family settlement entered into by the parties bona fide for the purpose of putting an end to the dispute among family members does not amount to transfer . CTI v. R. Ponnammal 164 ITR 706 (Mad.).

(ii) Where a person owning site puts up a structure thereon and effects a partition between himself, wife and son by way of family arrangement on the ground that his wife and son had loaned amounts for construction of the property. No, it is not a family arrangement unless it could be shown that the wife and son had claimed that they had contributed was for interest in the property and net loan or gift giving rise to a dispute as between them, family arrangement cannot be valid. Banarasi Lal Aggarwalv. CGT 230 ITR 114 (P & H)

(iii) If a person who can act on his behalf as a guardian either under personal law applicable to minor or signed by person appointed by the Court on his behalf, the family arrangement could be valid. But where the arrangement is between father and minor son and is colourable and therefore, not genuine, it may not be treated as family arrangement. K. Venugopal v. CIT 248 ITR 251 (Mad.).

(iv) A Court may decree specific performance to give effect to family arrangement, if such arrangement has been made in good faith to resolve bona fide disputes, present or possible legal effect may be given to such arrangement by a court degree. Family arrangement is legally enforceable. Gulam Abas v. Haz Air 1973 SC 554.

(v) A mistake as regards rights of the parties, on the basis of which compromise is made in a family arrangement, the validity of the same is not lost. Cashim v. Carlo AIR 1938 PC 103.

The same principle was followed to uphold the validity of a family arrangement in a gift tax case CGT v. Pappathi Anni 127 ITR 655 (Mad.).

(vi) Family arrangement is a settlement which does not involve any transfer. It cannot, therefore, give rise to liability for capital gains. This law was repeated in CIT v. R. Nagaraja Rao 352 ITR 565 (Karn.). They followed the decision in Ziauddin Ahmed v. CIT 102 ITR 253 (gau). Refer. also CIT v. Ashwani Chopra 352 ITR 620 (P& H).

7. Other Important Cases on family arrangement.

i. Transfer of shares was for equalization of wealth of the family members which had monetary connotation, the same cannot be said to be voluntary (ACIT v. Bilakhia Holdings (P.) Ltd.)(Ahmedabad Trib.)

Family arrangement was to equalize the holdings between the respective families of three brothers. Therefore, it cannot be said that consideration for transfer of shares cannot be measured in terms of money or monies worth. The equalization of wealth has only monetary connotation. To avoid disputes cannot be said to be without monetary consideration as it is common knowledge that family disputes ruin the family financially. The family disputes are being settled in monetary terms by resorting to arbitration and in case such settlements is not done, matter travels to the court and the family suffers heavily not only mentally but also financially. There is a proverb according to which it is said that a person who wins a case actually looses it as by the time matter is settled in his favour he is already a ruined person. Thus, it cannot be said that the consideration for transfer of shares was not for monetary consideration.

Further the transfer was in pursuance of family arrangement, the same was not voluntary as the family arrangement was enforceable and binding on the parties. The argument made on behalf of the assessee that since the family arrangement was voluntary the subsequent action of the parties to the arrangement was also be considered voluntary. But it was held that the argument advanced by assessee devoid of any merit because if this argument of the assessee is accepted then what was the need of signing enforceable binding family agreement in the first place.

ii. Family arrangement among the assessees does not amount to any transfer and hence, not exigible to capital gains tax (CIT v. Kay Arr Enterprises)(Madras high Court).

There was a transfer of shares in the assessee-firm which consisted of partners, who were family members. in that, certain new shares were acquired in exchange of old shares, as also some consideration was paid in cash. According to the assessees, the transfer was consequent to a family arrangement. But the Assessing Officer, after analyzing the facts of the case and the legal aspects on the same, concluded that there was indeed a transfer involved and, thus, subjected the transaction to capital gains tax. The Tribunal held that the re-arrangement of share holdings in the company to avoid possible litigation among family members was a prudent arrangement necessary to control the company effectively by the major shareholders to produce better prospects and active supervision as otherwise there would be continuous friction and there would be no peace among the members of the family and held that such family arrangement could not be held as transfer which was exigible to capital gains tax.

The Madras High Court held that the law on the point involved is well settled by the decisions of the Apex Court in Maturi Pullaiah v. Maturi Narasimham AIR 1966 SC 1836, and in Kale v. Dy. Director of Consolidation AIR 1976 SC 807. In view of the settled proposition of law, the Tribunal was justified in arriving at the conclusion that the family arrangement among the assessees did not amount to any transfer and, hence, was not exigible to capital gains tax. Accordingly, no substantial question of law arose.

iii. Word ‘transfer’ does not include partition or family settlement (CIT v. R. Nagaraja Rao) ( Karnataka HC)

Family members of assessee were holding apart from personal properties, family properties and shares in different business concerns. Disputes arose between assessee and other family members . Thereupon a family arrangement was made between assessee and other family members, whereby assessee had resigned from a partnership firm and transferred his share of profit and loss in said firm to a family member for a consideration of ₹ 35,000 being capital balance of firm.

The Karnataka High Court held that the word ‘transfer’ does not include partition or family settlement as defined under the Act. It is well settled that a partition is not a transfer. What is recorded in a family settlement is nothing but a partition. Every member has an anterior title to the property which is the subject matter of a transaction, that is, partition or a family arrangement. So there is adjustment of shares, crystallization of the respective rights in the family properties and, therefore it cannot be construed as a transfer in the eye of law. Consequently, the Tribunal on a proper consideration of the entire material on record has categorically held that the transaction in question is a family arrangement. When there is no transfer, there is no capital gain and, therefore, there is no liability of the assessee to pay capital gain tax. Therefore, the appeal filed by the revenue was dismissed.

iv. Amount of compensation paid to the assessee to settle inequalities in Partition Capital would not attract capital gain tax. (CIT v. Ashwin Chopra)(Punjab and Haryana HC)

Assessee (Group A) had received compensation from Group B at the time of partition of properties of group of ‘H’ Ltd and that the said amount had been kept in fixed deposit receipts as per the orders passed by the High Court as well as by the Supreme Court. The Assessing Officer considered the family settlement and found that 8.56 per cent of ₹ 24 crore of compensation was the share of the assessee and, consequently, levied long term capital gain on the said amount.

The High Court held that the payment of ₹ 24 crore to Group A is to equalize the inequalities in partition of the assets of ‘H’ Ltd. The amount so paid is immovable property. If such amount is to be treated as income liable to tax, the inequalities would set in as the share of the recipient will diminish to the extent of tax. Since the amount paid during the course of partition is to settle the inequalities in partition, it is deemed to be immovable property. Such amount is not an income liable to tax. Thus, the amount of owelty i.e. compensation deposited by Group B, is to equalize the partition represents immovable property and will not attract capital gain.

Background

Tax audit under the section 44AB Income-tax Act 1961 has been introduced with an effect of the Assessment year 1985-86. The Tax audit report is issued in form either 3CA or 3CB along with the questionnaire in Form 3CD. Form 3CD has been revised/updated from time to time and it was last updated on 20-8-2018. The objective of introduction of Tax Audit as stated in the Memorandum explaining the provisions of the Finance Bill, 1984 “Compulsory audit is intended to ensure proper maintenance of books of account and other records, in order to reflect the true income of the taxpayer and to facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities. This would also save time of the AO considerably in carrying out the verification.” The virus of the section 44AB was challenged and the Hon’ble Supreme Court in T. D. Venkata Rao v. UOI [1999] 237 ITR 315 has held that Chartered Accountants, by reason of their raining have special aptitude in the matter of audit. It is reasonable that they, who form a class by themselves, should be required to audit the accounts of business and profession.

As such tax audit is a very vast topic and it may be practically difficult to capture in an article. In view of this I trying to cover a few aspects.

Applicability of Tax Audit

Any person carrying business or profession and having a turnover or gross receipts exceeding ₹ 1 Crore (assessee engaged in business); ₹ 2 Crore (assessee engaged in business and opted for presumptive taxation) or ₹ 50 lacs (assessee engaged in the profession) is required to get its accounts audited u/s 44AB. Tax audit is applicable to all assessees irrespective of the fact whether such assessee is resident or non-resident. Tax audit is also required to be carried irrespective of the fact that income is exempt from tax by reason of a specific exemption/deduction provided under the Act. However if an agriculturist who does not have any income under the head “profits and gains of business or profession” chargeable to tax under the Act and who is not required to file any return under the Act, need not get his accounts audited for the purposes of section 44AB even though his total sales of agricultural products exceeds the specified limits.

Regulatory Responsibilities on Chartered Accountants

Tax Audit is carried by Chartered Accountant and they are bound by the Institute of Chartered Accountants Regulations (ICAI) viz.

  • Restriction of a number of Tax Audit: ICAI has prescribed a maximum 60 tax audits that can be carried by a Chartered Accountant. However, in the case of the firm, this limit is reckoned per partner e.g. Chartered Accountants firm with 3 partners can undertake a maximum of 180 audits. But such case a partner can sign more than 60 tax audit reports. However part-time practising partner of a firm shall not be taken into account for the purpose of reckoning the tax audit assignment of the firm. The ICAI has issued show-cause notice Chartered Accountants when C & A G in its report has given finding that some Chartered Accountants have issued tax audit report in excess of prescribed limits. While determining the limit of 60 tax audits, tax audit of the head office and branch or audit of more than one branch of same concern is considered as one tax audit assignment. A further audit carried under Companies Act, Trust Act, 44AD, 44ADA etc. are also not to be considered.

  • Code of Ethics: Auditor is required to comply with the code of ethics of ICAI e.g. communication with the previous auditor, internal auditor cannot act as tax auditor, cannot accept the appointment of auditor of a concern or where given any guarantee or provided security in connection with the indebtedness to any third person to the concern, for limits fixed in the statute and in other case for amounts exceeding ₹ 10,000/-, not accept the appointment as auditor of an entity in case the undisputed audit fee of another Chartered Accountants for carrying out the audit etc.

  • Compliance of Auditing Standards: Various Auditing Standards as issued by the ICAI or other applicable authorities are required to be complied with. To name a few important as

    • SA 210 – Agreeing to the terms of Audit Engagement

    • SA 230 – Audit Documentation

    • SA 610 – Relying on work of Internal Auditors

    • SA 315– Identifying and assessing the risk of material misstatement through understanding the entity and its environment

    • SA 330 – Auditors’ Responses to Assessed Risks

    • SA 505 – External Confirmations

    • SA 520 – Analytical Procedures

    Non-compliance of the auditing standards will invite disciplinary action against the tax Auditor. Chartered Accountant ‘M’ had obtained the External confirmations of 14 Banks out of 18 Banks. The Appellate Authority1 has observed that no suitable reply was given as to how the Auditor assessed the Risk of Material Misstatement in the Financial Statements. The procedure is clearly laid down in Standard on Auditing (SA 315) “Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment”. It also observed that the Standard on Auditing (SA 330) “The Auditor’s Responses to Assessed Risks” provides that after assessment of the Risk, the auditor is required to consider whether external confirmation procedures are to be performed as substantive audit procedures.

    The Appellate Authority also opined that the fact that the account statement of ‘K’ Bank was not properly authenticated increased the risk and the Appellant was required to use his expertise about how to mitigate the same, including obtaining External Confirmations. The detailed procedure of obtaining and examining such external confirmations are prescribed in Standard on Auditing (SA-505) “External Confirmations” which was followed for 14 banks out of 18 but not for others including the ‘K’ which turned out to be fabricated. Accordingly, it was held that the Chartered Accountant did not exercise due diligence expected from him as per Auditing Standards and also did not obtain sufficient information for the expression of opinion on the Financial Statements of the Company.

  • Minimum audit fees: Minimum audit fees in respect of audit has been withdrawn by the Council at its meeting held on 7th & 8th June 2011. However, ICAI has issued Minimum Recommended Scale of Fees for the Professional Assignments done by the Chartered Accountants. The fee has been recommended separately for Class A i.e. ₹ 40,000 and above and Class B Cities i.e. ₹ 30,000 and above.

  • Maintenance of Register of Audit: Auditor is required to maintain a register of the audit reports signed by him. In case of need arises ICAI can call for such register to verify its particulars

Statutory Auditor and Tax Auditor different in case of a Company

In case appointed tax auditor has not carried statutory audit of the auditee company, tax auditor is not required to carry the whole audit again. According to the SA 600 Using the work of Another

Auditor such Tax Auditor can rely on the work of the Statutory auditor. In case need arises he can issue a questionnaire to the statutory auditor for his reporting requirement. However such tax auditor is required to apply appropriate audit procedures for reporting in Form No. 3CD.

Format of Financial Statements

In the case of the corporate entity, Financial Statements are prepared in the format as prescribed by the Companies Act. However, the issue may arise in case of non-corporate entity or entities set up under other laws but the format for financial statements is not prescribed e.g. LLP. While issuing a report in Form No. 3CB/3CD auditor has to ensure that the financial statements are prepared in such manner that adequate information which is necessary to convey a true and fair view of the state of affairs of the assessee is given in the financial statement. Maintenance of books of accounts and preparation of financial statement is the responsibility of the assessee. Guidance note on tax audit recommends a separate format for preparation of profit and loss account and balance sheet for manufacturing and trading concern. It also states that assessee engaged in the profession and other service activities can use the format prescribed for a trading entity with appropriate modification. The format also requires to provide comparative figures for the previous year. The assessee has given the option either to follow vertical or horizontal format.

The opinion of Tax Auditor not binding on Assessee

The opinion expressed by the tax auditor is not binding upon the assessee. Assessee may take a different view while preparing his return of income from that what has taken by the Tax Auditor especially when he has issued qualified report or makes certain adverse required disclosures. Now tax audit report is uploaded by tax auditor on the e-filing portal and asseesse is required to accept it. The issue may arise whether still, assessee can take different view once he has accepted the tax audit report? In my view, assessee can still take different view since the acceptance of the tax audit report on e-filing portal is merely procedural compliance to confirm that he has authorised Auditor to issue a report and also to file a return of income. Common example can be that of late payment of employees’ contribution to Provident Funds.

Clause 20b of Form No. 3CD requires the details of contribution received from employees for various funds as referred to in Section 36(1)(va) wherein the following information needs to be furnished:—

  • Nature of fund

  • Sum received from employees

  • Due date of payment

  • Actual amount paid, i.e, employees share of contribution

  • Actual date of payment to the concerned authorities.

In case the actual date of payment of employees contribution is after the due date of payment under respective law like ESI, PF, etc., and if assessee in return of income has not made suo motu disallowance, CPC issues notice proposing adjustment to disallow the payments made post due date under the provisions of section 36(1)(va). In such as cases assessee needs to state his viewpoint and support the same on the basis of any judicial pronouncement viz. CIT v. Aimil Ltd. [2010] 321 ITR 508 (Delhi); CIT v. Kichha Sugar Co. Ltd. [2013] 35 taxmann.com 54 (Uttarakhand); CIT v. Ghatge Patil Transports Ltd. [2015] 53 taxmann.com 141 (Bombay). In the series of these decisions it was held that employees’ contribution towards provident fund and ESI would qualify for deduction even if paid after the due date prescribed under the Provident Fund Act/ESI Act but before the due date of filing of return and Section 43B covers both employee’s & employer’s share of contribution.

Disciplinary action for the incorrect discloser

Incorrect and incomplete disclosure in the Form No. 3CD may disciplinary action against the tax auditor. Under Clause 34 an Auditor is required to report instances where tax was deductible by the auditee but not deducted by him. In the instant case, it was observed that auditor has completely ignored the new reporting requirements imposed by the CBDT. Appellate Authority under these circumstances has held that the Auditor did not exercise due diligence in carrying out his professional duties, which is expected from him and was guilty under the Clause (7) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949 and upheld the same.2

Amendment to Form No. 3CD

Amendment and introduction of the various section in the Act have necessitated the amendment in Tax Audit Form No. 3CD. The last amendment was made vide Notification No. GSR 666(E) dated 20-7-2018 wherein various clauses were added and few of the existing clauses were modified. The revised Tax Audit Form No. 3CB was made effective from 20-8-2019. Various representations were made to the Central Board of Direct Taxes (CBDT) that the implementation of reporting requirements under the proposed Clause 30C (pertaining to General Anti-Avoidance Rules (GAAR)) and proposed Clause 44 (pertaining to Goods and Services Tax (GST) compliance) of the Form No. 3CD may be deleted or deferred. The CBDT vide Circular No. 6/2018 dated 17th August 2018, has kept in abeyance the reporting under the proposed Clause 30C and proposed Clause 44 till 31st March 2019. Subsequently, this was further extended till 31st March 2020.

Reporting with respect to income taxed as other sources income

Tax auditor is required to provide its opinion on certain deemed income which may be taxed under income from other sources. The trigger for a tax audit is having specified turnover. But the objective of tax audit is to determine the correct income of the assessee on the basis of books of account. Hence Form No. 3CD has prescribed particulars to be provided which are taxable under other heads of Income.

a. Clause 29A – Amount Chargeable under section 56(2)(ix) – Whether any amount is to be included as income chargeable under the head ‘income from other sources’ as referred to in clause (ix) of sub-section (2) of section 56? (Yes/No) If yes, please furnish the specified details:

This is a newly introduced clause pertaining to section 56(2)(ix). Said section is effective from AY 2015-16. It provides any sum of money received as an advance or otherwise in the course of negotiations for the transfer of a capital asset if such sum is forfeited and the negotiations do not result in the transfer of such capital asset shall be considered as income. Provisions of said section are applicable only if such sums are not deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition as per the section 51. Further, if advance received in relation to stock-in-trade is forfeited, the same would not be reported under this clause as it is taxable u/s. 28(i) and hence would be reported under clause 16(a) only if not credited to profit and loss account. There is no responsibility of the auditor to report any such forfeited amount if it is in respect of a personal capital asset, where neither the asset, the advance nor the forfeiture is recorded in the books of account relating to the business or profession.

The Supreme Court, in the case of Bankura Municipality v. Lalji Raja and Sons AIR 1953 SC 248, 250 has observed: “According to the dictionary meaning of the word ‘forfeiture’, the loss or the deprivation of goods has got to be in consequence of a crime, offence or breach of engagement or has to be by way of penalty of the transgression or a punishment for an offence Unless the loss or deprivation of the goods is by way of a penalty or punishment for a crime, offence or breach of engagement, it would not come within the definition of forfeiture.” A forfeiture has to be either in terms of the right to forfeit such advance under the contractual terms of the agreement, or as agreed upon with the prospective purchaser. It has to have the sanction of law or the contract. It has to be a positive action on the part of the assessee. Mere write back of amounts would not tantamount to forfeiture. Merely issue of notice for forfeiture or when such forfeiture is contested is not required to be reported.

The tax auditor should, therefore, obtain a certificate from the assessee regarding all such advances received towards the transfer of capital assets which have forfeited during the year and same need to be corroborated applying the audit procedures.

b. Clause 29B – Income chargeable under section 56(2)(x): Whether any amount is to be included as income chargeable under the head ‘income from other sources’ as referred to in clause (x) of sub-section (2) of section 56? (Yes/No) If yes, please furnish the specified details i.e. Nature of income and Amount (in )

Deemed gifts are made taxable u/s. 56(2)(x) and said section is effective from AY 2017-18. Amount taxable under the said section is determined by valuation rules specified in rules 11U and 11UA. The tax auditor shall obtain a certificate from assessee regarding receipt of amount/property covered by section 56(2)(x) during the year and scrutinise the books of account of business/profession to see whether any receipt of amount/property covered by section 56(2)(x) is credited therein. For the correct and appropriate amount to be reported, tax auditor may ask the assessee to obtain a report from the registered valuer.

c. Clause 36A: Whether the assessee has received any amount in the nature of dividend as referred to in sub-clause (e) of clause (22) of section 2? (Yes/No); If yes, please furnish the specified details.

Taxability of sums received u/s. 2(22)(e) is subject to fulfilment of provision specified therein. The auditor is required to understand the terms loans and advances, accumulated profits, concern, substantial interest etc. Reporting under this clause may be complicated. Hence Auditor needs to obtain various clarification in order to comply with requirements. Obtain an appropriate certificate from auditee:

i. containing a list of closely held companies in which he is the beneficial owner of shares carrying not less than 10% of the voting power and list of concerns in which he has a substantial interest.

ii. particulars of any loans or advances received by any concern in which he has substantial interest from any closely held company in which he is the beneficial owner of shares carrying not less than 10% voting power.

However, the auditor is required to apply appropriate audit procedures to verify the same. These certificates are important since the same could not be verified books of accounts. Auditor may include appropriate remarks for inability to independently verify certain information and he has relied on the certificates obtained from the assessee e.g. any payment by the closely held company made on behalf of or for the individual benefit of the assessee is concerned; the beneficial shareholder is not the registered shareholder and the closely held company has given loan or advance to the beneficial shareholder or to a concern etc.

For the purpose of this clause certain loans and advances shall not be included as dividend:

i. Any advance or loan or trade advance made to a shareholder in the ordinary course of its business. Circular No. 19/2017 dated 12-6-2017

ii. Any advance or loan made to a shareholder or the concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company. The term ‘substantial part’ has not been defined. However, in some case, it has been held that where 20% or more funds have been deployed in the business of lending money the test of the substantial part will be satisfied – refer CIT v. Parle Plastics Ltd. 332 ITR 63 (Bom.), CIT v. Shree Balaji Glass Manufacturing (P.) Ltd. 386 ITR128 (Cal.)

Accumulated profits are required to be determined in accordance with the provisions of Explanation 1, Explanation 2 and Explanation 2A below section 2 (22) and also in light of judicial pronouncements. The accumulated profits are to be computed up to the date of payment. If at any time earlier any amount has been taxed under any of the clauses of section 2(22), the accumulated profits will have to be reduced by the amount so taxed.

Now TDS is also applicable on deemed dividend payment. The auditor may also verify 26AS to determine the sums paid chargeable as deemed dividend.

Verify Form 26AS of the assessee to know if the closely held company has deducted tax at source from any payment made by it to the assessee or the concern under section 194.

Disclosure with respect to specified transactions to tackle tax evasion

1. Clauses 31(ba), (bb), (bc) and (bd) has been introduced considering the provisions of section 269ST

Section 269ST was introduced with effect from AY 2017-18. It provides that no person shall receive sum of ₹ 2 lakh or more

a) in aggregate from a person in a day; or

b) in respect of a single transaction; or

c) in respect of transactions relating to one event or occasion from a person

otherwise than by an account payee cheque or an account payee demand draft or by use of electronic clearing system through a bank account. Contravention of section 269ST attracts penalty under section 271DA.

The new sub-clauses 31(ba), (bb), (bc) and (bd) deal with reporting of transactions of receipts and payments in excess of the specified limit made otherwise than by the modes specified therein

ICAI Implementation Guide provides that considering the provisions of the section, particulars of the payments made to the government need not be included under sub-clauses (bc) and (bd) and a suitable note may be given to the effect that details of payments made to Government have not been included in the particulars. Reporting of the sums are required irrespective of the fact where it revenue receipt or capital receipt since Section 269ST does not distinguish between receipt on capital account and revenue account.

Sub-clauses 31(ba), (bb), (bc) and (bd) require particulars to be furnished of receipts or payments, as the case may be, in an amount exceeding the limits specified in section 269ST, in aggregate from a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion from a person. Thus, particulars are required to be given if receipts or payments, even though individually are lower than ₹ 2 lakh but in aggregate amount to ₹ 2 lakh or more if such receipts or payments are to or from one person in a day (whether related to a single transaction or otherwise) or relate to a single transaction (even if the receipts or the payments, as the case may be, are on different dates and individual receipts or payments are less than ₹ 2 lakh) or are in respect of more than one transaction but relate to a single event or occasion (even if the receipts or the payments, as the case may be, are on different dates and individual receipts or payments are less than ₹ 2 lakh).

The Auditor is required to exercise care and caution while arriving at the particulars of receipts or payments pertaining to a single transaction or relating to a single event or occasion. Link all receipts or payments, as the case may be, otherwise than by the modes specified in this section received/made in respect of a single transaction and verify if the aggregate amount exceeds the limits specified in section 269ST.

The tax auditor will have to exercise judgement in deciding whether received/payments though pertaining to more than one transaction, pertain to a single event or occasion. For example, for a function organised by a person, assessee contractor may have been given catering contract as well as a contract for flower decoration. In such a case, while the transactions may be different the occasion or event would be the same and provisions of section 269ST will be attracted if the receipts exceeding the limits specified under section 269ST are by mode other than those specified in the section.

The certain transaction may be set off without making payment and receiving money. E.g. transaction of purchase and sales. If the amount of such set-off exceeds ₹ 2 lakh, the tax auditor may give an appropriate note to the effect that such set-off not being a receipt or payment has not been included in the particulars given and the relevant sub-clause.

Where the receipts or the payments, as the case may be, pertaining to a single transaction or transactions relating to one event or occasion, such receipts/payments may be grouped together while reporting. The tax auditor may also keep in his record date of the receipts and date of the payments reported under sub-clauses 31(bb) and 31(bd), although not required to be reported under the said sub-clauses.

Where payment is made by cheque or demand draft there will be practical difficulties in verifying whether the relevant receipt or payment is by account payee cheque or account payee draft. In such cases, the tax auditor should verify the transactions with reference to such evidence which may be available. In the absence of satisfactory evidence, the tax auditor, in his report may make comment as suggested below while reporting under sub-clauses 31(bb) and 31(bd): “It is not possible for me/us to verify whether the receipts/payments have been accepted/made otherwise than by an account payee cheque or an account payee bank draft, as necessary evidence is not in the position of the assessee”.

2. Clause 42. (a) Whether the assessee is required to furnish statement in Form No. 61 or Form No. 61A or Form No. 61B? (Yes/No) (b) If yes, furnish specified details:

a. Form No. 61 – Under section 139A(5)(c) every person is required to quote his Permanent Account Number (PAN) in all documents pertaining to prescribed transactions entered into by him. Relevant rules are 114B, 114C and 114D. Rule 114B prescribes transactions where quoting of PAN is mandatory. The second proviso to Rule 114B provides that any person who does not have PAN and who enters into a prescribed transaction shall make a declaration in Form No. 60. Rule 114D contains a provision regarding the filing of Form No. 61. Form No. 61 is to be filed by certain persons who have received any declaration in Form No. 60.

The tax auditor should verify whether the assessee has entered into any transaction where the other party was required to quote PAN. He should verify whether the assessee has obtained a declaration in Form No. 60 where the other party has not furnished his PAN. Wherever the assessee has received declarations in Form No. 60, the auditor should verify if the assessee has filed Form No. 61 including therein all the necessary particulars.

b. Form No. 61A: Under section 285BA an assessee and certain other specified/prescribed persons are required to furnish a statement in respect of specified financial transactions. The statement in respect of specified financial transactions is to be furnished to the Director of Income-tax (Intelligence and Criminal Investigation) or Joint the Director of Income-tax (Intelligence and Criminal Investigation) in Form No. 61A. The relevant rule is Rule 114E. Rule 114E provides that statement of financial transactions required to be furnished under section 285BA shall be furnished in Form No. 61A. The statement is to be furnished in respect of the financial year on or before 31st May of the immediately following financial year. The Rule 114E(3) provides for aggregation of amounts for arriving at the threshold limit for reporting, except in couple of cases.

The tax auditor should ascertain whether the assessee is required to report any transactions under section 285BA read with Rule 114E. It may be noted that specified transactions include the issue of bonds, issue of shares buyback of shares by a listed company. These transactions may not happen every year and hence special attention should be given in the year when a company assessee issues any security or a listed company undertakes buyback of shares. Specified transactions include receipt of cash payment exceeding ₹ 2 lakh for sale by any person (who is liable for audit under section 44AB) of goods and services of any nature other than those specified at serial numbers 1 to 10 in the Table in sub-rule (2). The tax auditor should verify whether the assessee has received more than ₹ 2 lakh in cash in the financial year for sale of goods and services, without applying the rule of aggregation

c. Form No. 61B: USA, in 2010, enacted a law known as “Foreign Account Tax Compliance Act” (FATCA) with the objective of checking tax evasion. The USA entered into Inter-Governmental Agreement (IGA) with various countries including India. The G20 and OECD countries together have developed a Common Reporting Standard (CRS) on Automatic Exchange of Information (AEOI). With a view to implementing the IGA and the CRS on AEOI, by Notification No. 62 of 2015 [F. No. 142/21/2015 TPL] dated 7 August 2015 rules 114F to 114H and Form 61B were inserted requiring maintenance and reporting information about ₹Reportable Accounts’ by ₹Reporting Financial Institutions’.

The tax auditor should verify that the above information is appropriately maintained and reported in Form No. 61B. He should verify that all reportable accounts are reported. In case any reportable account has been omitted or there is any error or omission in Form 61B, the same may be reported under clause 42 of the Form No. 3CD.

Conclusion

It is an onerous duty of the Tax Auditor to report in the Form No. 3CA/3CB/3CD. The tax auditor will have to take a considered view while reporting. If reliance has been placed by him on any judicial decision or he is unable to verify certain transaction considering various evident and apply the audit procedures, a reference of the same should be given by him as observations in clause (3) of Form No. 3CA or clause (5) of Form 3CB, as the case may be.

 

1. Mahavir Jain v. Disciplinary Committee, Institute of Chartered Accountants of India (ICAI) Appeal No. 09/ICAI/2018 [The Appellate Authority (Constituted under the Chartered Accountants Act, 1949)] Order Dt. 5/10/18

2. Ishaq Esmail Lakkadghat v. ITO 11(3)-1 Mumbai Appeal No. 10/ICAI/2018 [The Appellate Authority (Constituted under the Chartered Accountants Act, 1949)] Order Dt. 27/08/2018 (5 member bench)

The proposal of the government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by the Parliament are submitted to the Parliament through Finance Bill, which is a key document of Union Budget Papers.

In this year 2019, we firstly had an interim budget and then a final budget. The interim budget was presented by the then Finance Minister Mr. Piyush Goel on 1st February, 2019 and the provisions of Finance Bill, 2019 contained therein became an Act on 21st February, 2019. In this interim budget, few amendments were made in the Income Tax Act, 1961 and the same is now part of Income Tax Act, 1961 (hereinafter referred to as “the Act”).

After winning the election with clear majority, the new Finance Minister Madam Sitaraman presented Finance (No. 2) Bill, 2019 on 5th July, 2019 (hereinafter referred to as “FB No. 2”) before the Parliament. The FB No. 2 contained various proposals for amending the Act, to continue to provide momentum to the buoyancy in direct taxes through deepening and widening of the tax base, promoting less cash economy, reducing the corporate tax rate for small enterprises, strengthening anti-abuse measures, providing tax incentives, removing difficulties of taxpayers and enhancing the effectiveness of the tax administration. Certain Amendments have been made to FB No. 2 by way of insertion of new proposals, removing existing one and making changes in some of it, before it was presented before the Lok Sabha for debate discussion and passing. The Lok Sabha passed FB No. 2 with Amendments on 18th July, 2019. It received assent of Hon’ble President on 1st August, 2019. The Amended proposals as enacted are now part of the Act.

In this article, we are dealing with some of the major Amendments made to FB No. 2 in the income tax arena before it was passed by the Lok Sabha. The amendments made is other than areas such as Prohibition of Benami Property Transaction Act, 1988, and Prevention of Money Laundering Act, 2002 are not covered in this article.

1. Deemed accrual of gift made to a person outside India [Section 9]:

As per section 5 of the Act, non-residents are taxable in India in respect of income that accrues or arises in India or is received in India or is deemed to accrue or arise in India or is deemed to be received in India. Section 9 of the Act relates to Income deemed to accrue or arise in India. Under the existing provisions of the Act, a gift of money or property is taxed in the hands of donee, except for certain exemptions provided in clause (x) of sub-section (2) of section 56 of the Act. When an amount is received as a gift (gift of money or property) by a non-resident outside India from an Indian Resident, it does not fall within a scope of taxable income u/s. 5 of the Act (as it is neither received in India nor accrues / arises or deemed to accrue / arise in India).

To bring such gifts made by residents to persons outside India within tax net, it was proposed in FB No. 2 that income of the nature referred to in section 2(24)(xviia) of the Act, arising from any sum of money paid, or any property situated in India transferred, on or after 5th July, 2019, by a resident in India to person outside India, shall be deemed to accrue or arise in India. Section 2(24) of the Act defines “income” and as per clause (xviia) the income includes – any sum of money or value of property referred to in clause (x) of sub-section (2) of section 56.

The section 56(2)(x) refers to receipt by a person from any other person:

  • a sum of money (without consideration) and

  • property (immoveable or moveable – without consideration and/or for inadequate consideration).

An amendment was made in this proposal of FB No. 2 by substituting new clause (viii) in section 9(1) of the Act, details of which are as under:

Proposal as per FB No. 2 Amendment to Proposal of FB No. 2, which is passed by Lok Sabha
It is proposed to insert following clause in sub-section (1) of section 9:

“(viii) income of the nature referred to in sub-clause (xviia) of clause (24) of section 2 of the Act, arising from any sum of money paid, or any property situated in India transferred, on or after the 5th day of July, 2019 by a person resident in India to a person outside India.”.

Income arising outside India, being any sum of money referred to in sub-clause (xviia) of clause (24) of section 2, paid on or after the 5th day of July, 2019 by a person resident in India to a non-resident, not being a company, or to a foreign company.

Income arising from transfer of property situated in India is now removed from the ambit of this proposal of FB No 2 leaving the amendment only in respect of sum of money paid without consideration. Further, the phrase “person outside India” is replaced with “non-resident, not being a company or a foreign company”. The scope of taxability under section 9(1)(viii) of the Act is restricted to sum of money (without consideration) received by a non resident from a resident.

However, income of the nature referred to in sub-clause (xviia) of clause (24) of section 2 of the Act, arising from any property situated in India transferred, by a person resident in India to a non resident is still not out of the scope of taxation.

The Existing Section 9(1)(i) of the Act provides that all income accruing or arising whether directly or indirectly, from any property in India and/or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India.

Section 2(24) of the Act includes transfer of a property as per section 56(2)(x) of the Act.

For Section 56(2)(x) of the Act, the term “Property” is defined u/s 56(2)(vii) of the Act and it includes specified nine items (including immovable property).

Reading all the three sections together viz., section 2(24) (xviia), 9 (1)(i) and 56(2)(x) of the Act, it is stated that –

  • transfer of nine specified “properties” in India (as per section 56(2)(vii));

  • from a resident to non resident;

  • without consideration and / or without adequate consideration (as per section 56(2)(x));

  • to a non-exempt person (as per section 56(2)(x));

  • is an income (as per section 2(24)(xviia));

  • which is deemed to have accrued or arisen in India as per section 9(1)(i);

and, therefore taxable in India.

Thus, the proposal in FB No. 2 and Amendment thereto does not change the taxability of income arising from any property situated in India and/or through the transfer of a capital asset situate in India.

However, the existing provision for exempting gifts as provided in proviso to section 56(2)(x) of the Act will continue to apply for such gifts. Thus, a gift of sum of money from resident father to a non-resident son/daughter will continue to be non-taxable but a gift of sum of money outside India from a resident to a non-resident friend will now be covered under taxable income in India of the non-resident friend.

This amendment is effective from 1st April, 2020 and will accordingly apply in relation to assessment year 2020-21 and subsequent assessment years.

2. Exemption to Category III AIF on transfer of capital asset [Section 10(4D), 47(viiab)]:

Under the existing provisions of the section 47 of the Act, any transfer of a capital asset, being bonds or Global Depository Receipts or rupee denominated bond of an Indian company or derivative, made by a non-resident through a recognized stock exchange located in any International Financial Services Centre (IFSC) and where the consideration for such transaction is paid or payable in foreign currency shall not be regarded as transfer.

With a view to provide tax-neutral transfer of certain securities by Category III Alternative Investment Fund (AIF) in IFSC, it was proposed to amend the said section so as to provide that any transfer of a capital asset, specified in the said clause by such AIF, of which all the unit holders are non-resident, are not regarded as transfer subject to fulfilment of specified conditions.

It was also proposed to widen the types of securities listed in said clause by empowering the Central Government to notify other securities for the purposes of this clause.

The Amendment to FB No. 2 shifted the exemption of gains on transfer of such assets by inserting new clause 10(4D) in the Act and removing the changes proposed by FB No. 2. This amendment provides an exemption u/s 10(4D) of the Act for any income earned by Category III AIFs on transfer of specified securities on a recognised stock exchange in an IFSC where the consideration is in convertible foreign exchange to the extent the income relates to units held by NRs. Thus, the transfer of capital asset by Category III AIFs shall now be treated as transfer for the purposes of capital gain, but the income of such AIF arising out of such transfer shall be exempt from tax u/s 10(4D) of the Act.

This amendment is effective from 1st April, 2020 and will accordingly apply in relation to assessment year 2020-21 and subsequent assessment years.

3. Compliance of Other laws before granting exemption under Section 10(23C):

Section 12AA of the Act prescribes for manner of granting registration in case of trust or institution for the purpose of availing exemption in respect of its income under section 11 of the Act, subject to conditions contained under sections 11, 12, 12AA and 13 of the Act. Section 12AA of the Act also provides for manner of cancellation of said registration.

The earlier provision of section 12AA of the Act did not require the Principal CIT or CIT to satisfy himself about the compliance of trust or institution to requirements of any other law.

To ensure that the trust or institution do not deviate from their objects, Finance (No 2) Act, 2019 amended section 12AA of the Act, to provide that:

(i) at the time of granting the registration to a trust or institution, the Principal Commissioner or the Commissioner shall, inter alia, also satisfy himself about the compliance of the trust or institution to requirements of any other law which is material for the purpose of achieving its objects;

(ii) where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A of the Act and subsequently it is noticed that the trust or institution has violated requirements of any other law which was material for the purpose of achieving its objects, and the order, direction or decree, by whatever name called, holding that such violation has occurred, has either not been disputed or has attained finality, the Principal Commissioner or Commissioner may, by an order in writing, cancel the registration of such trust or institution after affording a reasonable opportunity of being heard.

By Amendment to FB No. 2, the additional condition inserted in Section 12AA of the Act in relation to grant and cancellation of registration is incorporated in section 10(23C) of the Act also.

Accordingly, provisos to clause (iv), (v), (vi), (via) of section 10(23C) of the Act allowing exemption to fund, trust, institutions, university, other educational university, hospital and any medical institution are amended.

This amendment now clarifies that the exemption would be available only where the prescribed authority is satisfied that the other laws are also complied with. Additionally, the exemption may be withdrawn where such conditions are not fulfilled.

These amendments are effective from 1st September, 2019.

4. Start ups – Angel Tax chargeable for non compliance of Notification [Section 56 (2) (viib) and 270A]:

The word “Start-Ups” and “Angel Tax” are talk of the town today. Everyday newspapers have something or other to talk about “start-ups” and “Angel tax”.

The existing provisions of the said section 56(2)(viib) of the Act, provide that where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be charged to tax.

However, the Central Government is empowered to notify that the provisions of this section shall not be applicable to consideration received by a notified company.

The DPIIT had issued a Notification No. 127(E), dated 19th February, 2019, allowing the exemption from angel tax under section 56(2)(viib) of the Act and to allow the deductions under section 80-IAC of the Act to the start ups. The exemption under this notification is allowed if start up fulfils the prescribed conditions, which includes-

(a) Company does not invest in specified assets such as share and securities,

(b) Purchase of motor vehicle of value of more than ₹ 10 lakhs, etc.

With a view to ensure compliance to the conditions specified in the notification, it was proposed in FB No. 2 to provide that in case of failure to comply with the conditions, the consideration received for issue of shares which exceeds the face value of such shares shall be deemed to be the income of the company chargeable to income-tax for the previous year in which the failure to comply with any of the said conditions has taken place.

The objective of this sub-section (viib) of section 56(2) of the Act was to tax the excess premium over the fair market value of shares. While making the proposal it was stated that in case any of the condition of the notification is violated, the amount in excess of face value will be taxable. What is taxable is the amount in excess of FMV and not in excess of face value.

This has now been corrected by Amending the FB No. 2 and also penalty has now been prescribed for violation.

Proposal as per FB No. 2 Amendment to Proposal of FB No. 2, which is passed by Lok Sabha
After the proviso, the following proviso shall be inserted, namely:—

“Provided further that where the provisions of this clause have

“Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in
not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the face value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place.”; the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has underreported the said income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year.

Thus, it is now provided that –

If a company after fulfilling the conditions of DPIIT’s notification fails to comply with any of the conditions mentioned therein, then the difference between the issue price of the shares and fair market value of such shares shall be deemed as income of the company of the previous year in which such failure takes place. Hence, the Angel tax shall be levied on the difference between the issue price of shares and the Fair Market Value of shares and not the Face Value of shares.

Further, it is now provided that when the exemption is withdrawn, it shall be deemed that the company has misreported the said income and, consequently, a penalty of an amount equal to 200% of tax payable on the underreported income (i.e., difference between issue price and fair market value of shares) shall be levied as per section 270A of the Act.

These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

5. Exemption from Dividend Tax to Mutual Funds located in IFSC [Section 115 R]:

The existing provisions of section 115R of the Act provide that any amount of income distributed by the specified company or a Mutual Fund to its unit holders shall be chargeable to tax and such specified company or Mutual Fund shall be liable to pay additional income-tax on such distributed income.

In order to incentivize relocation of Mutual Fund in IFSC, it was proposed to amend the said section so as to provide that no additional income-tax shall be chargeable in respect of any amount of income distributed, on or after the 1st day of September, 2019, by a Specified Mutual Fund and the term Specified Mutual Fund was defined.

The following amendment has been made to FB No. 2

Proposal as per FB No. 2 Amendment to Proposal of FB No. 2, which is passed by Lok Sabha
After the second proviso, before the Explanation, the following proviso shall be inserted, namely:—

“Provided also that no additional income-tax

After the second proviso, before the Explanation, the following proviso shall be inserted, namely:—

“Provided also that no additional income-tax

shall be chargeable in respect of any amount of income distributed on or after the 1st day of September, 2019 by a specified Mutual Fund, out of its income derived from transactions made on a recognised stock exchange located in any International Financial Services Centre:”; shall be chargeable in respect of any amount of income distributed on or after the 1st day of September, 2019 by a specified Mutual Fund, out of its income derived from transactions made on a recognised stock exchange located in any ‘International Financial Services Centre and where the consideration for such transaction is paid or payable in convertible foreign exchange.”

Thus, the Specified MF will now be entitled to exemption from payment of additional income-tax on distribution of income, when it complies with following conditions –

i) income is distributed out of income derived from the transactions made on recognised stock exchange located in IFSC.

ii) the consideration for such transaction should be paid / payable in convertible foreign exchange.

iii) all units of Mutual Funds are held by non-residents.

This amendment will take effect, from 1st September, 2019.

6. TDS on payment by individual / HUF on Commission or Brokerage [Section 194M]:

Earlier, there was no requirement for an individual or HUF to deduct tax at source on payments made to a resident contractor or professional when it is for personal use, or if the individual or HUF is not subjected to audit for his business or profession.

The FB No. 2 proposed to insert a new section 194M in the Act making it obligatory for such individual or HUF to deduct tax at source at the rate of five per cent if the annual payment made to a contractor or professional exceeds ₹ 50 lakhs.

It was also proposed that a person deducting tax under this section shall be able to deposit TDS on the basis of the Permanent Account Number (PAN) only and also eligible to file an application u/s 197 of the Act for issue of certificate for nil or lower rate of TDS.

The Amendment to FB No. 2 has extended the scope of section 194M of the Act to levy TDS on commission (not being insurance commission referred to in section 194 D) and brokerage.

The threshold of ₹ 50 lakhs continues to apply.

Thus, now an individual or HUF who will utilize the services of a resident –

  • Contractor; or

  • Professional; or

  • Agent;

for –

  • personal use; or

  • for business or profession not subject to tax audit,

will be liable to deduct and pay TDS at the rate of 5%, if the threshold exceeds ₹ 50 lakhs.

This amendment will take effect from 1st September, 2019.

7. TDS on cash withdrawal from banks [Section 194N and section 198]:

In order to discourage large amount of cash withdrawal from bank accounts, it was proposed in FB No. 2 to provide for tax deduction at source at the rate of 2% on cash withdrawal by a person in excess of ₹ 1 crore in a year from his bank account.

Some business models, where large cash withdrawal is a necessity, are proposed to be exempted.

It is also proposed that the Central Government may notify the persons to whom these provisions shall not be applicable in consultation with the Reserve Bank of India.

Implementation of proposal raised certain practical issues, such as –

i) Whether this limit of ₹ 1cr is per account or cumulative for all accounts operated by a person,

ii) Tax is deductible from an income, so whether amount withdrawn from bank is to be treated as income of the Tax payer (section 198 of the Act).

These issues has been addressed by the Amendment to FB No. 2, as under –

Proposal as per FB No. 2 Amendment to Proposal of FB No. 2, which is passed by Lok Sabha
Every person, being,–– Every person, being,––
(i) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act); (i) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);
(ii) a co-operative society engaged in carrying on the business of banking; or (ii) a co-operative society engaged in carrying on the business of banking; or
(iii) a post office,

who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year, to any person (herein referred to as the recipient) from an account maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent. of sum exceeding one crore rupees, as income-tax:

(iii) a post office,

who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year, to any person (herein referred to as the recipient) from an account from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent. of sum exceeding one crore rupees, as income-tax:

Further following proviso is inserted with effect from 1st September, 2019 in section 198 of the Act.

“Provided further that the sum deducted in accordance with the provisions of section 194N for the purpose of computing the income of an assessee, shall not be deemed to be income received.”

The literal interpretation of this amendment as proposed in the FB No. 2 was that the threshold of ₹ 1 crore was to be calculated account wise (i.e., for each account maintained by an assessee) with a Payer as referred above. Now through the Amendment to FB No. 2, it is clarified that the threshold of ₹ 1 crore is to be calculated for all the accounts maintained by an assessee with a Payer as referred above (i.e. threshold of ₹ 1 crore is to be calculated payerwise).

Trust the above interpretation is held to be correct and the interpretation is not stretched to cover cash withdrawals from all the accounts maintained with all the Payers cumulatively, to consider the threshold of ₹ 1 crore.

This is not a levy of tax, it is just a TDS, for which an assessee will get credit in his/her/its Return. So basically it is a cash flow issue. However, no corresponding amendment has been made in Section 199 of the Act which gives the assessee, a right to claim the credit for tax deducted at source. Thus, there is an ambiguity regarding the same. It is expected that the same will be corrected by way of Notification.

The practical issues which the assessees are going to face are that during the course of assessment proceedings, the assessee will have to reconcile such cash withdrawn from the accounts with its books of account and going forward may have to produce its cash book to show utilization of every penny of cash withdrawn.

The amendment is effective from 1st September, 2019.

As stated in the beginning, the FB No. 2 along with Amendment to FB No. 2 is enacted on 1st August, 2019 and now it is part of the Income Tax Act, 1961 and accordingly respective amendments are effective from the date specified therein.

Also, there was one proposal in FB No. 2 (now enacted) which has been point of discussion from day one, i.e. high rate of surcharge on super rich. No Amendment has been made in FB No. 2 in respect of the same. Earlier, the view was that the Government will not reconsider the same presently and will deal with it as and when issues are faced. However, the issue is being reconsidered for FPIs and some relaxation by way of notification is expected soon.

As per newspaper report, the draft of Direct Tax Code (DTC) is ready and it should be presented and available in public domain for understanding, debating and representation soon. Let’s hope for the Best.

 

Introduction

S.14A was introduced to overcome the judgement of Supreme Court in Rajasthan State Warehousing Corporation v. CIT (2000) 242 ITR 450 (SC) wherein it was held that in case of an indivisible business, some income wherefrom is taxable while some exempt, entire expenditure would be permissible deduction and the principle of apportionment would apply only for an indivisible business. Finance Act, 2001 w.e.f. 01-04-1962 introduced the provision. Constitutional validity of the provision is upheld by the Bombay High Court in Goderj & Boyce Mfg Co Ltd v. CIT (2010) 328 ITR 81 (Bom) (HC) observing that Ruled 8D is applicable w.e.f. AY. 2008-09 and subsequent year and same is affirmed in Godrej & Boyce Manufacturing Co. Ltd v. DCIT (2017) 394 ITR 449(SC). Provision of S.14A read with Rule 8D has led to increase in litigation tremendously in the last one decade. To guide the professionals, we have made an attempt to prepare an issue wise list of case laws which may be useful for tax practitioners in their day to day practice.

Finance Bill 2001 (2001) 248 ITR 35 (St.) (45)

Finance Bill 2001 – Notes on clauses (2001) 248 ITR 116 (St.)

Finance Bill 2001 – Memo – Explaining Provision (2001) 248 ITR 195 (St.)

Finance Act, 2001 (Assent) (2001) 249 ITR 37 (St.)(47)

Circular No. 14 of 2001 – Explanatory Notes on provisions relating to direct taxes (2001) 252 ITR 65 (St) (86)

Rule 8D Working Circular NO. 5 / 2014  [F. NO. 225 / 182 / 2013-ITA.II], dt. 11-2-2014 (2014) 361 ITR 94 (St)

S.14A : Expenditure incurred in relation to income not includible in total income. [R.8D]

1. Recording of satisfaction :

1.1. Recording of satisfaction: When suo motu disallowances are shown by the assessee, without recording the satisfaction as to why the working shown by the assessee is not acceptable, disallowances cannot be made.

  • Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 / 164 DTR 1 /254 Taxman 325 (SC)

  • PCIT v. State Bank of Patiala (2018) 402 ITR 640 / 164 DTR 1 / 254 Taxman 325(SC)

    Editorial: Maxopp Investment Ltd v CIT (2012) 347 ITR 272 (Delhi) (HC) is affirmed. Decision of special Bench in ITO v. Daga Capital Management (2009) 312 ITR (AT) 1 (Mum.) (SB) is referred. Decision of SB is admitted vide order dt. 20.08.2018, is pending before Bombay High Court for final hearing ITA No. 989 of 2009.

  • Godrej & Boyce Manufacturing Co Ltd v. DCIT (2017) 394 ITR 449 /247 Taxman 361 / 151 DTR 89 / 295 CTR 121 (SC)

  • PCIT v. Bajaj Finance Ltd (2019) 178 DTR 219 / 309 CTR 28(Bom) (HC), www.itatonline.org

  • PCIT v. Vedanta Ltd. (2019) 261 Taxman 179 (Delhi) (HC)

  • PCIT v. Reliance Capital Asset Management Ltd (2017) 251 Taxman 68 / (2018) 400 ITR 217 (Bom) (HC)

    Editorial: SLP of revenue is dismissed, PCIT v. Reliance Capital Asset Management Ltd. (2018) 259 Taxman 83(SC)

  • H. T. Media Limited v. PCIT (2017) 399 ITR 576 / 156 DTR 250 / (2018) 300 CTR 34 (Delhi) (HC)

  • Punjab Tractors Ltd. v. CIT (2017) 393 ITR 223 / 246 Taxman 31 / 293 CTR 50 / 147 DTR 307 (P&H) (HC)

  • PCIT v. U. K. Paints (India) P. Ltd. (2017) 392 ITR 552 / 244 Taxman 309 / 153 DTR 201(Delhi) (HC)

  • CIT v. Kapsons Associates (2016) 381 ITR 204 (P&H) (HC)

  • CIT v. I. P. Support Services India (P) Ltd. (2015) 378 ITR 240 (Delhi) (HC)

  • CIT v. Om Prakash Khaitan (2015) 376 ITR 390 / 234 Taxman 813 / (2016) 138 DTR 197 /(2016) 288 CTR 378 (Delhi) (HC)

  • CIT v. Abhishek Industries Ltd. (2016) 380 ITR 652 / (2015) 231 Taxman 85 (P&H) (HC)

    Editorial: Granted special leave to the department (SLP (C) No. 28216 dated 28-9-2015) CIT v. Abhishek Industries Ltd. (2015) 378 ITR 34 (St) / 235 Taxman 510 (SC))

  • CIT v. Taikisha Engineering India Ltd. (2015) 370 ITR 338 /229 Taxman 143 / 275 CTR 316 / 114 DTR 316 (Delhi) (HC)

  • CIT v. Hero Management Service Ltd. (2014) 360 ITR 68 /220 Taxman 107 (Mag.) (Delhi.) (HC)

  • CIT v. REI Agro Ltd. (Cal.) (HC), www.itatonline.org

  • Unitech Ltd. v. DCIT (2019) 176 ITD 266 (Delhi) (Trib.)

  • ACIT v. Karnataka Bank Ltd.(2018) 63 ITR 433 (Bang.) (Trib.)

  • M. Junction Services Ltd. v. (2018) 65 ITR 40 (SN) (Kol) (Trib.)

  • Editorial : Followed, Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC) need not maintain separate books of account .

  • IMC Ltd. v. Dy. CIT (2018) 191 TTJ 73 (Kol.) (Trib.)

  • DCIT v. Vantage Advertising P. LTD. (2018) 61 ITR 564 (Kol) (Trib.)

1.2. Recording of satisfaction – Mere assertion that section is applicable and that no expenditure had been incurred, was not acceptable without saying anything further, is not sufficient.

  • CIT v. U.P. Electronics Corporation Ltd.(2017) 397 ITR 113 (All) (HC)

  • Pradeep Khanna v. ACIT (Delhi) (HC), www.itatonline.org

  • Fereshte Sethna (Ms) v. ACIT(2017) 162 ITD 412 (Mum.) (Trib.)

1.3. Recording of satisfaction – Proximate cause between expenditure and exempt income is condition precedent for disallowance of expenditure. A proximate cause shall mean that the amount disallowed has a relationship with the exempt income.

  • CIT v. Walfort Share and Stock Brokers P. Ltd. (2010) 326 ITR 1 / 233 CTR 42 / 41 DTR 233 / 192 Taxman 211 (SC) Wallfort Shares & Stock Brokers Ltd. v. ITO (2005) 3 SOT 879 /96 ITD 1 / 96 TTJ 673 (SB) (Mum.) (Trib.)

Editorial: Affirmed in CIT v. Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR 233 / 326 ITR 1 / 192Taxman 211 / 233 CTR 42 / (2010) 8 SCC 137 (SC)

CIT v. Walfort Share & Stock Brokers (P) Ltd. (2009) 310 ITR 421 (Bom) (HC)

1.4. Recording of satisfaction-The AO need not pay lip service and formally record dissatisfaction. It is sufficient if the order shows due application of mind to all aspects.

  • Indiabulls Financial Service Ltd. v. DCIT (2016) 395 ITR 242 (Delhi) (HC)

    Editorial: SLP of assessee is accepted; Indiabulls Financial Services Ltd. v. Dy CIT (2017) 247 Taxman 311 (SC)

  • Not expressly recording dissatisfaction does not render assessing officer’s reasons for disallowance invalid.

    Indiabulls Financial Services Ltd. v. Dy. CIT (2017) 395 ITR 242 (Delhi) (HC)

1.5. Recording of satisfaction by Appellate Authority – Satisfaction to be recorded by the Assessing Officer, it cannot be substituted by recorded satisfaction of Commissioner of Income tax (Appeals)

Arnav Gruh Ltd.v. DCIT (2018) 168 ITD 518(Mum.) (Trib.)

1.6 CIT (A) gave opportunity to the assessee and assessee has not demonstrated any mistake in the calculation hence disallowance was held to be justified.

GEBR Pfeiffer (I) (P.) Ltd. v. Addl. CIT (2014) 64 SOT 172 (URO) (Delhi) (Trib.)

1.7. Recording of satisfaction – Appellate Tribunal- Recording of satisfaction is mandatory, once this mandatory aspect was itself not fulfilled, the question of remanding the matter to the Commissioner (Appeals) and to call for a remand report from the Assessing Officer for the purposes of rectifying this jurisdictional defect would not arise.

Eicher Motors Ltd v. CIT (2017) 398 ITR 51 / 250 Taxman 532 (Delhi) (HC)

2. No exempt income – In the absence of any exempt income no disallowances can be made.

  • PCIT v. Oil Industries Development Board (2019) 262 Taxman 102 (SC), www.itatonline.org

    Editorial: PCIT v. Oil Industries Development Board (2019) 103 taxmann.com 325 (Delhi) (HC) is affirmed. (ITA No. 187 / 2018 dt.16-02-2018)

  • PCIT v. Caraf Builders and Constructions Pvt. Ltd.(2019)414 ITR 122 / 261 Taxman 47(Delhi) (HC)

  • PCIT v. McDonald’s India (P.) Ltd.[2019] 101 taxmann.com 86 (Del) (HC)

    Editorial: Referred Maxopp Investment Ltd v. CIT (2018) 402 ITR 640 (SC))

  • PCIT v. Vardhman Chemtech (P.) Ltd. (2019) 261 Taxman 233 / 179 DTR 35 (P&H) (HC)

  • CIT v. DLF Home Developers Ltd. (2019) 411 ITR 378 (Delhi) (HC)

  • CIT v. Goldman Sachs Services P. Ltd.(2018) 409 ITR 268 (Karn) (HC)

  • PCIT v. Ballapur Industries Ltd (ITA No. 51 of 2016, dt.13.10.2016) (Bom.) (HC), www.itatonline.org

  • PCIT v. IL & FS Energy Development Company Ltd. (2017) 399 ITR 483 / 250 Taxman 174 / 297 CTR 452 / 156 DTR 89(Delhi) (HC)

    Editorial. CBDT circular cannot override the provision.

  • CIT v. Chettinad Logistics (P.) Ltd. (2017) 248 Taxman 55 (Mad.) (HC)

    Editorial: SLP of revenue is dismissed; CIT v. Chettinad Logistics (P.) Ltd (2018) 257 Taxman 2 (SC)

  • Redington (India) Ltd v. Addl. CIT (2017) 392 ITR 633 / 77 taxman.com 257 (Mad.) (HC)

  • Cheminvest Ltd. v. CIT (2015) 378 ITR 33 /234 Taxman 761 / 126 DTR 289 / 281 CTR 447 (Delhi) (HC)

  • CIT v. Shivam Motors (P) Ltd. (2015) 230 Taxman 63 / 272 CTR 277 (All.) (HC)

  • CIT v. Corrtech Energy (P) Ltd. (2015) 372 ITR 97 / (2014) 272 CTR 262 / 223 Taxman 130 (Guj) (HC)

  • CIT v. Holcim India P. Ltd. (2014) 111 DTR 158 / 272 CTR 282 (Delhi) (HC)

  • CIT v. Lakhani Marketing Inc.(2014) 226 Taxman 45 (Mag.) / 272 CTR 265 /111 DTR 149 (P&H) (HC)

  • CIT v. Shivam Motors (P.) Ltd. (2014) 111 DTR 153 /272 CTR 277 / (2015) 230 Taxman 63 (All.) (HC)

  • ACIT v. Orissa Manganese & Minerals Ltd. (2019) 69 ITR 1((SN) (Kol.) (Trib.)

  • ACIT v. Sodexo Food Solutions India P. Ltd. (2019) 69 ITR 119 (Mum) ( Trib)

  • Jayneerinfrapower & Multiventures (P.) Ltd. v. DCIT (2019) 176 ITD 15 (Mum) (Trib.)

  • ACIT v. Janak Global Resources (P.) Ltd.(2019) 175 ITD 365 (Chd.)(Trib.)

  • DCIT v. Piramal Realty (P.) Ltd. (2019) 174 ITD 633 / 198 TTJ 999 / 176 DTR 242 (Mum) (Trib.)

  • DCIT v. Mc Fills Enterprise (P.) Ltd. (2019) 174 ITD 667 (Ahd) (Trib.)

  • ACITv. Gini & Jony Ltd. (2018) 172 ITD 472 /67 ITR 45 (SN) (2019) 197 TTJ 322 / 178 DTR 114 (Mum.) (Trib.)

  • ACIT v. Dish TV India Ltd. (2018) 194 TTJ 897 / 169 DTR 253(Mum.) (Trib.)

  • HLL Lifecare Limited v. ACIT (2018) 191 TTJ 1 (UO) /66 ITR 361 (Cochin) (Trib.)

  • Moonrock Hospitality P. Ltd. v. DCIT (2018) 61 ITR667 (Delhi) (Trib.)

  • ACIT v. Progressive Constructions Ltd (2018) 161 DTR 289 /63 ITR 516 / 191 TTJ 549 (SB) (Hyd) (Trib.)

  • ACIT v. Claridges Hotels Pvt. Ltd. (2018) 61 ITR135 (Delhi) (Trib.)

  • Cheminvest Ltd v. ITO (2009) 27 DTR 82 /124 TTJ 577 / 121 TTD 318 (SB) (Delhi) (Trib.)

    Editorial: Order of Tribunal is reversed by High Court in Chemivest Ltd v. CIT (2015) 378 ITR 13 (Delhi) (HC)

3. Disallowance u/s.14A cannot exceed exempt income.

  • PCIT v. Caraf Builders & Constructions (P.) Ltd. (2019) 261 Taxman 47 (Delhi) (HC)

  • PCIT v. State Bank of Patiala (2018) 99 taxmann.com 285 /259 Taxman 315 (P& H) (HC)

    Editorial: SLP of revenue is dismissed, PCIT v. State Bank of Patiala (2018) 259 Taxman 314 (SC)

  • Pragathi Krishna Gramin Bank. v. JCIT (2018) 256 Taxman 349 (Karn) (HC)

  • PCIT v. Empire Package Pvt. Ltd. (2016) 136 DTR 342 /286 CTR 457 (P&H) (HC)

  • Welspun India Ltd. v. Dy. CIT (2019) 69 ITR 617 (Mum) (Trib.)

  • Magic Share Traders Ltd. DCIT (2019) 174 ITD 230 (Ahd.) (Trib.)

  • Gold Seal Engineering Products P. Ltd. v. ACIT (2018) 66 ITR 37 (SN) (Mum.) (Trib.)

  • ACIT v. Satish Kumar Agarwal. (2018) 172 ITD 143 (Jaipur) (Trib.)

  • Future Corporate Resources Ltd. v. DCIT (2017) 167 ITD 33 (Mum)(Trib.)

4. Disallowance u/s. 14A cannot exceed exempt income – Alternative claim was raised before the Court was that disallowance cannot be in excess of total exempt income. As the alternative claim was not raised before the Tribunal the High Court declined to entertain the claim. Only issue of jurisdiction can be raised.

  • Ashish Estate & Properties (P.) Ltd. & CIT (2018) 257 Taxman 585 (Bom.) (HC)

5. Interest free funds – No disallowances can be made when there are sufficient interest free funds to make investment.

  • PCIT v. Premier Finance & Trading Co. Ltd.(2019)262 Taxman 341 (Bom) (HC)

  • CIT v. Gujarat State Fertilizers And Chemicals Ltd. (2018) 409 ITR 378 (Guj) (HC)

  • CIT v. Shreno Ltd. (2018) 409 ITR 401 / (2019)261 Taxman 239 (Guj) (HC)

    Editorial: Referred Maxopp Investment Ltd. v. CIT (2018) 402 ITR640 (SC)

  • CIT v. NHPC Ltd (2018) 408 ITR237 / 304 CTR 612 / 167 DTR 33 (P& H) (HC)

  • CIT v. Maruti Udyog Ltd. (2018) 407 ITR 159 (Delhi) (HC)

  • PCIT v. Rasoi Ltd. (2018) 407 ITR 126 (Cal) (HC)

  • CIT v. Deepak Vegpro (P) Ltd. (2018) 406 ITR 496 / 161 DTR 170 / 300 CTR 98 (Raj) (HC)

  • PCIT v. Nirma Credit & Capital (P.) Ltd (2017) 85 taxman. com 72 / (2018) 300 CTR 286 / 161 DTR 333 (Guj) (HC)

  • PCIT v. Sintex Industries Ltd. (2017) 248 Taxman 449 (Guj.) (HC)

    Editorial: SLP of revenue is dismissed PCIT v. Sintex Industries Ltd. (2018) 255 Taxman 171 (SC)

  • PCIT v. UTI Bank Ltd. (2017) 398 ITR 514 (Guj.) (HC)

  • PCIT v. Adani Enterprises Ltd. (2016) 241 Taxman 542 / (2017) 152 DTR 102 (Guj.) (HC)

  • CIT v. Nicholas Piramal (India) Ltd. (2016) 239 Taxman 470 (Bom.) (HC)

  • CIT v. Gujarat Industrial Development Corporation Ltd. (2013) 218 Taxman 142 (Guj.) (HC)

  • CIT v. UTI Bank Ltd. (2013) 215 Taxman 8 (Mag.) (Guj.) (HC)

  • CIT v. Microlabs Ltd. (2016) 383 ITR 490 (Karn.) (HC)

    Editorial: Order of Tribunal in Dy. CIT v. Microlabs Ltd. (2015) 39 ITR 585 (Bang.) (Trib), is confirmed

  • HDFC Bank Ltd. v. DCIT (2016) 383 ITR 529 /132 DTR 89 / 284 CTR 414 (Bom.) (HC)

    Editorial: Order of Tribunal in HDFC Bank v. Dy CIT (2015) 155 ITD 765 / 173 TTJ 810 / 130 DTR 21 (Mum.) (Trib.) is set aside.

  • CIT v. Karnataka State Industrial & Infrastructure Development Corpn. Ltd. (2016) 237 Taxman 240 /143 DTR 67 (Karn.) (HC)

  • CIT v. SBI DHFL Ltd. (2015) 376 ITR 296 /63 taxmann.com 345 (Bom.) (HC)

  • Addl. CIT v. Dhampur Sugar Mills (P) Ltd. (2015) 370 ITR 194 / 273 CTR 90 / 229 Taxman 271 (All.) (HC)

  • CIT v. Gujarat Narmada Valley Fertilizers Co. Ltd. (2014) 221 Taxman 479 (Guj) (HC)

  • CIT v. HDFC Bank Ltd. (2014) 366 ITR 505 /107 DTR 140 / 226 Taxman 132 (Mag.) / (2016) 284 CTR 409 (Bom) (HC)

  • CIT v. Torrent Power Ltd. (2014) 363 ITR 474 /222 Taxman 367 / 272 CTR 270 / 108 DTR 418 (Guj) (HC)

  • CIT v. Hitachi Home & Life Solutions (I.) Ltd. (2014) 221 Taxman 109 (Guj.) (HC)

  • DIT v. BNP Paribas SA (2013) 214 Taxman 548 (Bom.) (HC)

  • CIT v. Gujarat Power Corporation Ltd. (2013) 352 ITR 583 (Guj.) (HC)

  • DCIT v. Godawari Power & Ispat Ltd. (2018) 68 ITR 19 (SN) (Raipur)(Trib.)

Editorial: considering the huge investments, 2% of the dividend income should be disallowed towards administrative expenses.

6. Interest free funds – Decrease in interest free funds cannot be presumed that funds borrowed on interest were invested to earn exempt income. If even after the decrease the assessee has interest free funds sufficient to make the investment in assets yielding the exempt income, the presumption that it was such funds that were utilized for the said investment remains.

  • CIT v. Max India Ltd. (2017) 398 ITR 209 /295 CTR 448 / 151 DTR 220 (P&H) (HC)

  • DCIT (OSD) v. Voltamp Transformers Ltd. (2017) 59 ITR 101 (SN) (Ahd) (Trib)

  • Hi-Tech Engineers v. ITO (2017) 164 ITD 94 / 155 DTR 334 /188 TTJ 453 (Mum.) (Trib.)

  • DCIT v. Bombay Oxygen Corporation Ltd. (2017) 167 ITD 224 (Mum) (Trib.)

7. Interest free funds – Mixed funds – Interest expenditure relatable to investment in tax free funds was to be computed under provisions of Rule 8D(2) (ii).

  • Avon Cycles Ltd. v. CIT (2015) 228 Taxman 368 (Mag.) (P&H) (HC)

Editorial: SLP is granted, Avon Cycles Ltd. v. CIT (2015) 231 Taxman 226 (SC)

8. Interest free funds – Interest on borrowed funds that had been subject – matter of disallowance under section 36(1) (iii), could not be considered again for purpose of disallowance under section 14A.

  • ITO v. Snowtex Investment Ltd. (2015) 174 TTJ 875 /(2016) 129 DTR 203 (Kol.) (Trib.)

9. Interest free funds – Merger – Major part of shares were acquired by merger – it could not be said that assessee would have used loan fund – No disallowance of interest could be made.

  • CIT v. Cellice Developers (P.) Ltd. (2015) 231 Taxman 255 (Cal.) (HC)

10. Interest earned on NOSTRO account is taxable, hence no disallowance of interest expenditure u/s 14A.

  • DIT v. Credit Agricole Indo Suez (2015) 377 ITR 102 / 280 CTR 491 / 126 DTR 156 (Bom.) (HC)

11. Netting of interest – Benefit of netting to be allowed.

  • Dy. CIT v. UMIL Share & Stock Broking Services Ltd. (2018) 171 ITD 713 / 170 DTR 441 / 196 TTJ 91 (Kol.) (Trib.)

  • ITO v. Karnavati Petrochmem Pvt. Ltd. (Ahd.) (Trib.) www.itatonline.org.

    Investment which not yielded income cannot be considered – Investment which yielded income only be considered for computing the disallowance.

  • Welspun India Ltd. v. Dy. CIT (2019) 69 ITR 617 (Mum) (Trib.)

  • PTC India Ltd. v. DCIT (2019) 69 ITR 37(SN.) (Delhi) (Trib.)

  • ACIT v. Paras Buildtech (India) (P.) Ltd. (2018)62 ITR 284 (Delhi) (Trib.)

  • ACIT v. Vireet Investment Pvt. Ltd. (2017) 165 ITD 27 / 58 ITR 313 / 154 DTR 241 / 188 TTJ 1 (SB) (Delhi) (Trib.)

  • Dy.CIT v. Diamond Co. Ltd. (2017) 162 ITD 131 (Kol.) (Trib.)

  • Yashoda Health Care Services P. Ltd. v. DCIT (2017) 54 ITR 26 (Hyd.) (Trib.)

  • Electrosteel Castings Ltd. v. DCIT (2017) 53 ITR 5 (Kol.) (Trib.)

12. Stock in trade – Dividend received incidentally – Dominant intention not to be considered – Expenditure incurred for earning business profits will have to be apportioned and allowed as a deduction – Expenditure attributable to exempt dividend income will have to be appointed to be disallowed under section 14A.

  • Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 /164 DTR 1 / 254 Taxman 325(SC)

  • PCIT v. State Bank of Patiala (2018) 402 ITR 640 / 164 DTR 1 / 254 Taxman 325(SC)

Editorial: Maxopp Investment Ltd v CIT (2012) 347 ITR 272 (Delhi) (HC) is affirmed.

Decision of special Bench in ITO v. Daga Capital Management (2009) 312 ITR (AT) 1 (Mum.) (SB) is referred

13. Stock in trade or investment is irrelevant, disallowance was held to be justified.

  • Voltech Engineers (P.) Ltd. v. DCIT 163 ITD 469 (Chennai) (Trib.)

  • ITO v. Daga Capital Management (P) Ltd. (2008) 119 TTJ 289 /117 ITD 169 / 26 SOT 603 / 15 DTR 68 (SB) (Mum.) (Trib.)

    Editorial: Decision of SB is pending before Bombay High Court for final hearing ITA No. 989 of 2009.

  • D. H. Securities Pvt. Ltd. v. DCIT (2014) 146 ITD 1 / 99 DTR 298 / 160 TTJ 393 / 31 ITR 381 (TM) (Mum.) (Trib.)

14. Stock in trade – No disallowances can be made.

  • CIT v. GKK Capital Markets (P) Ltd. (2017) 392 ITR 196 /246 Taxman 52 / 293 CTR 323 / 147 DTR 330(Cal.) (HC)

  • PCIT v. State Bank of Patiala (2017) 391 ITR 218 / 245 Taxman 273 / 293 CTR 35 /147 DTR 290 (P&H) (HC)

  • CIT v. India Advantage Securities Ltd. (2016) 380 ITR 471 (Bom.) (HC)

    Editorial: Refer Dy. CIT v. India Advantages Securities Ltd. (Mum) (Trib.) itatonline.org

  • CCI Ltd. v. JCIT (2012) 206 Taxman 563 / 71 DTR 141 / 250 CTR 291 (Karn.) (HC)

  • Nice Bombay Transport (P.) Ltd. v. ACIT (OSD) (2019) 175 ITD 684 (Delhi) (Trib.) www.itatonline.org

    Editorial: Applying the ratio in Maxopp Investment Ltd v. CIT (2018) 402 ITR 640 (SC) the Tribunal held that no disallowances can be made in respect of dividend received from stock in trade.

  • Rajasthan State Industrial Development & Investment Corporation Ltd v. DCIT (2018) 195 TTJ 35 (Jaipur) (Trib.)

    Editorial: Own funds more than the investment no disallowances can be made.

  • UCO Bank v. Dy. CIT (2016) 49 ITR 34 (Kol.) (Trib.)

  • Fiduciary Shares & Stock (P.) Ltd. v. ACIT (2016) 159 ITD 554 /181 TTJ 750 (Mum.) (Trib.)

  • Paresh Pritamlal Mehta v. ITO (Pune) (Trib.); www.itatonline.org

  • Yes Bank Ltd. v. ACIT (2016) 46 ITR 317 (Mum.) (Trib.)

  • Dy. CIT v. Baljit Securities Private Limited (Kol.) (Trib.); www.itatonline.org

15. Securities held as stock in trade has to be considered for computing disallowance, however, the disallowance has to be computed by taking into consideration only those shares which have yielded dividend income in the year under consideration.

  • Kalyani Barter (P) Ltd. v. ITO (2017) 163 ITD 571 / 154 DTR 73 /187 TTJ 352 (Kol.) (Trib.)

  • Dy. CIT v. Teenlok Advisory Services (P.) Ltd. (2016) 159 ITD 991 (Kol.) (Trib.)

16. Strategic investments – Strategic investments or investments made for controlling interests with its group / associated companies is also to be considered for disallowance

  • Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 / 164 DTR 1 /254 Taxman 325 (SC)

  • PCIT v. State Bank of Patiala (2018) 402 ITR 640 / 164 DTR 1 / 254 Taxman 325 (SC)

  • Welspun India Ltd. v. Dy. CIT(2019)69 ITR 617 (Mum) (Trib.)

  • DCIT v. The Saraswat Co-operative Bank Limited (Mum.) (Trib); www.itatonline.org

  • Everplus Securities & Finance Ltd. v. Dy. CIT (2006) 102 TTJ 120 /101 ITD 151 (Delhi) (Trib.)

17. Object of assessee in making investment to gain holding controlling stake in group concerns and not for earning income – Provisions of section 14A cannot be invoked.

  • Dy. CIT v. Selvel Advertising P. Ltd. (2015) 37 ITR 611 (Kol.) (Trib.)

  • Interglobe Enterprises Ltd. v. Dy. CIT (2014) 40 CCH 22 (Delhi) (Trib.); www.itatonline.org

  • Garware Wall Ropes Ltd v. ACIT (2014) 65 SOT 86 (Mum.) (Trib.)

18. Investments in subsidiaries to be excluded while computing disallowance.

  • CIT v. Oriental Structural Engineers Pvt. Ltd. (2013) 35 taxmann.com210 /216 Taxman 92 (Mag.) (Delhi) (HC)

  • EIH Associated Hotels Ltd. v. Dy. CIT (Chennai) (Trib.) www.itatonline.org

  • JM Financial Ltd. v. ACIT (Mum.) (Trib.); www.itatonline.org.

19. Since Dividend from foreign subsidiaries are taxable in India, disallowance cannot be made

  • CIT v. Suzlon Energy Ltd. (2013) 215 Taxman 272 / 93 DTR 50 (Guj.) (HC)

    Editorial: Tribunal order in Suzlon Energy Ltd v. Dy. CIT 20 ITR 391(Ahd.) (Trib) is affirmed.

20. Investment in shares of foreign company – No disallowance can be made

  • ITO v. Strides Arcolab Ltd. (2012) 138 ITD 323 /(2013) 153 TTJ 181 / 85 DTR 128 (Mum.) (Trib.)

21. Short term gain – Since assessee is paying capital gains tax on short term investments, the provisions of Rule 8D will not apply on them.

  • Sundaram Asset Management Co. Ltd v. DCIT (2013) 145 ITD 17 (Chennai) (Trib.)

22. Administrative expenditure – Assessing Officer cannot attribute administrative expenses for earning tax free income in excess of total administrative expenditure.

  • PCIT v. Adani Agro (P) Ltd. (2018) 253 Taxman 507 (Guj.) (HC)

23. Estimation of expenditure – PSU bonds of NTPC – No specific relation of expenses to exempt income in orders of lower authorities – Disallowance was restricted to 1 percent of exempt income.

  • DCIT v. Growmore Leasing & Investment Ltd. (2018) 168 ITD 1 (Mum.) (Trib.)

24. Investment – Real dividend income alone is exempt and not Notional dividend – Difference between value of actual investment and value as on balance sheet is not dividend income – Hence S. 14A could not be invoked.

  • Apollo Sugar Clinics Ltd. v. DCIT (2019) 176 ITD 724 (Hyd.) (Trib.)

  • Mutual funds – Fixed terms debt scheme – Interest on over draft cannot be disallowed

Assessee having invested in the fixed maturity plans of various mutual funds which are basically fixed terms debt scheme, the same are not tax free investments and therefore the interest on the overdraft account could not be disallowed under the provisions of S. 14A of the Act.

Allen Career Institute v. JCIT (2017) 190 TTJ 823 / (2018) 161 DTR 25 (Jaipur.) (Trib.)

25. Disallowances shown in the return – Once Tribunal concluded that order passed in case of Reliance Utilities was binding on it then Tribunal could not fall back on alternative disallowance computed by assessee. Matter remanded to Tribunal for disposal a fresh.

  • Darashaw & Company (P.) Ltd. v. DCIT(2017) 251 Taxman 394 (Bom) (HC)

26. If disallowance falls below the amount of disallowance computed under section 14A offered by assessee in return of income, revenue cannot charge tax on income which never was income of assessee chargeable to tax. Assessed income can be less than the returned income.

  • Sajjan India Ltd v. ADIT (2018) 89 taxmann.com 21 (Mum) (Trib.)

27. Higher disallowance agreed before Assessing Officer during course of assessment. Assessee could not be bound by such offer. Restriction of disallowance was held to be justified.

  • CIT v. Everest Kento Cylinders Ltd. (2015) 378 ITR 57 /119 DTR 394 / 232 Taxman 307 / 277 CTR 511 (Bom.) (HC)

28. Disallowance only to extent of expenditure incurred by assessee in relation to tax exempt income – No reason for disallowance of sum voluntarily disallowed. Exempt income lower than disallowance.

  • Joint Investments P. Ltd. v. CIT (2015) 372 ITR 694 /233 Taxman 117 / 275 CTR 471 / 116 DTR 289 (Delhi) (HC)

Editorial: Order in Joint Investment P. Ltd. v. Asst. CIT [2014] 33 ITR 373 (Delhi) (Trib.) is set aside.

29. Disallowance cannot exceed the expenditure claimed.

  • ACIT v. Iqbal M. Chagala (2014) 34 ITR 636 / (2015) 67 SOT 123 (URO) (Mum.) (Trib.)

30. No expenditure incurred for earning exempt income, disallowances cannot be made.

  • CIT v. Max India Ltd. (No. 2) (2016) 388 ITR 81 / 75 taxmann.com 268 (P&H) (HC)

  • Pradeep Khanna v. ACIT (Delhi) (HC), www.itatonline.org

  • CIT v. Deepak Mittal (2013) 219 Taxman 314 / (2014) 361 ITR 131 (P&H) (HC)

  • CIT v. Amrit Sagar Mittal (2013) 219 Taxman 314 / (2014) 361 ITR 131 (P&H) (HC)

  • CIT v. Glenmark Pharmaceutical Ltd. (2013) 351 ITR 359 / 85 DTR 169 (Bom.) (HC)

  • CIT v. Reliance Industries Ltd. (2011) 339 ITR 632 (Bom.) (High Court)

  • CIT v. Hero Cycles Ltd. (2009) 31 DTR 301 / 233 CTR 74 / 323 ITR 518 / 189 Taxman 50 (P&H) (High Court)

31. Expenditure not connected with exempt income – Disallowance cannot be made

  • CIT v. Oriental Structural Engineers (P.) Ltd. (2013) 216 Taxman 92 (Mag) (Delhi) (HC)

32. Depreciation – The expression “expenditure” does not include allowances such as depreciation allowance. Accordingly, depreciation cannot be the subject matter of disallowance under section 14A (ratio of Nectar Beverages P. Ltd. v. Dy. CIT (2009) 314 ITR 314 (SC)followed);

Similarly, it was further held that the deduction under section 80D is not expenditure for earning tax-free income but is a permissible deduction from gross total income under Chapter VIA.

  • Hoshang D. Nanavati v. ACIT ITA No. 3567 / Mum / 07 dated 18-3-2011 (Mum.) (Trib.) Source: www.itatonline.org

33. Diminishing value of securities cannot be considered as expenditure for the purpose of disallowance.

  • ACIT v AF-taab Investment Company Ltd.(Mum) (Trib.) www.itatonline.org

34. Interest income from debentures is taxable hence such investments could not be considered for the purposes of disallowance of expenses towards exempt income.

  • Carpricon Reality Ltd. v. DCIT (2017) 165 ITD 249 / 156 DTR 219 / 188 TTJ 685 (Mum)(Trib.)

35. Interest expenditure attributable to a taxable business cannot be disallowed.

  • ACIT v. Dhampur Sugar Mill Pvt. Ltd. (2015) 370 ITR 194 /273 CTR 90 / 229 Taxman 271 / 111 DTR 350 (All.) (HC)

36. Share application money cannot be included while working average value of investment for the purpose of Rule 8D.

  • ITO v. LGW Ltd. (2016) 130 DTR 201 (Kol.) (Trib.) www.itatonline.org

37. Growth Mutual funds – Growth mutual funds does not yield any dividend / exempt income, therefore, the provisions of section 14A would not apply on the investment in Growth mutual funds. Disallowance for administrative expenses cannot exceed allocable expenditure debited to P&L account.

  • Manugraph India Ltd. v. DCIT (Mum.) (Trib.); www.itatonline.org

38. Interest on partner’s capital is not an expenditure amenable to S.14A and hence no disallowance can be made

  • Quality Industries v. JCIT (2016)161 ITD 217 / (2017) 183 TTJ 350/ /145 DTR 215(Pune) (Trib.)

39. Firm – Partner – Interest – Disallowance cannot be made if there is no tax-free income for the relevant year.

  • CIT v. Delite Enterprises (Bom.) (HC) www.itatonline.org

40. Income from firm – No disallowance can be made.

  • Hitesh D. Gajaria v. ACIT, ITA No. 993 / Mum / 2007, Bench – H, A.Y. 2003-04, dt. 14-11-2008 (2008) BCAJ p. 519, Vol. 40-B, Part 4, January 2009. (Mum.) (Trib.)

41. Interest paid to partners on capital contribution is not a statutory allowance under section 40(b) but is an expenditure under section 36(1) (iii) and, hence, liable for disallowance under section 14A.

  • ACIT v. Pahilajrai Jaikishin (2016) 157 ITD 1187 /179 TTJ 148 (Mum.) (Trib.)

42. Disallowance applies to partner’s share of profits – Depreciation is not “expenditure” & cannot be disallowed under section 14A

  • Vishnu Anant Mahajan v. ACIT (2012) 137 ITD 189 /16 ITR 621 / 72 DTR 217 / 147 TTJ 142 (SB) (Ahd.) (Trib.)

43. Share income from firm from which no interest was charged on advances made – Disallowance is justified.

  • CIT v. Popular Vehicles & Services Ltd. (2010) 325 ITR 523 /33 DTR 140 / 228 CTR 346 / 189 Taxman 14 (Ker.) (High Court)

44. Assessee is not to claim expenditure, including interest on borrowed amount invested in firm as capital, against income earned from a firm as share of profit in capacity of a partner of firm, since such income is exempt under section 10(2A)

  • Sudhir Dattaram Patil v. Dy. CIT (2005) 2 SOT 678 (Mum.) (Trib.)

45. Book profit – Disallowance has to be applied while computing book profits under clause (f) of Explanation to s.115JA. [S.115JA]

  • CIT v. Goetze (India) Ltd. (2014) 361 ITR 505 /97 DTR 169 (Delhi) (HC)

  • CIT v. Federal Mogul Goetage (India) Ltd. (2014)361 ITR 505 /97 DTR 169 (Delhi) (HC)

46. Book profit – The computation under clause (f) of Explanation 1 to section 115JB (2) is to be made without resorting to the computation as contemplated u / s 14A read with Rule 8D of the Income tax Rules 1962

  • ACIT v. Vireet Investment Pvt. Ltd. (2017) 165 ITD 27 /154 DTR 241 / 188 TTJ 1 (SB) (Delhi) (Trib.)

47. No disallowance under section 14A could be made against income which are entitled to deduction under section 80P(2) (d)

  • CIT v. Kribhco (2012) 349 ITR 618 /75 DTR 265 / 209 Taxman 252 / 252 CTR 374 (Delhi) (HC)

    Editorial:- Order of tribunal in ACIT v. Kribhco (2010) 6 ITR 686 (Delhi) (Trib.) is affirmed. SLP of revenue is dismissed (2013) 214 Taxman 24 (SC) (Mag.)

48. S. 14A is applicable to income claimed as deduction under S. 80P(2)(d) as well.

  • Punjab State Co-operative Milk Producers Federation Ltd. v. CIT (2016) 238 Taxman 207 (P&H) (HC)

49. Appellate authorities finding ten per cent of income earned could be apportioned towards expenses for earning dividend – Finding not perverse.

  • CIT v. India Advantage Securities Ltd. (2016) 380 ITR 471 (Bom.) (HC)

50. Directly credited by way of bank transfer – Disallowance of 2% of gross total income was not justified

  • Canara Bank v. ACIT (2014) 265 CTR 385 / (2015) 228 Taxman 212 / 99 DTR 36 (Karn.) (HC)

    Since incurring of certain administrative expenses cannot be ruled out – 2 per cent of exempt income was directed to be disallowed.

  • Super Auto Forge (P.) Ltd. v. ACIT (2016) 156 ITD 467 (Chennai) (Trib.)

51. The question of allocation of interest could arise only in a situation in which at least a part of borrowed funds are used in investments resulting in tax exempt income -Restricted to 0.5% of average value of investments resulting in tax exempt income.

  • UFO Movies India Ltd. v. ACIT (2016) 175 TTJ 633 /131 DTR 81 (Delhi) (Trib.)

52. Bifurcation of expenses –Proportionate disallowance is permissible

  • CIT v. Sintex Industries Ltd. (2013) 215 Taxman 148 (Mag.) (Guj.) (HC)

53. Non-maintenance of separate accounts – Disallowance of proportionate expenditure relating to tax-free income justified

  • Catholic Syrian Bank Ltd. v. ACIT (2012) 349 ITR 569 /251 CTR 40 / 74 DTR 19 (Ker.) (HC)

54. Arbitrary rejection-Explanation cannot be rejected arbitrarily

  • PCIT v. Hero Corporate Service Ltd. (2019) 103 taxmann.com 199 / 262 Taxman 30 (Delhi) (HC)

    Editorial: SLP of revenue is dismissed, PCIT v. Hero Corporate Service Ltd. (2019) 262 Taxman 29 / 103 taxmann.com 200(SC)

  • Inducto Steel Ltd. v. ACIT (2017) 165 ITD 405 /190 TTJ 582 / (2018) 161 DTR 136(Mum)(Trib.)

55. Investment in foreign subsidiary – Provisions of S.14A would not be applicable.

  • DCIT v. Helios and Matheson Information Technology Ltd. (2016) 46 ITR 172 (Chennai) (Trib.)

56. Provisions cannot extend to investments made in shares of foreign companies

  • ITO v. Strides Arcolab Ltd. (2012) 138 TD 323 / (2013) 85 DTR 128 (Mum.) (Trib.)

  • Suzlon Energy Ltd. v. Dy. CIT (2012) 20 ITR 391 /57 SOT 54 (URO) (Ahd.) (Trib.)

    Editorial: Affirmed by High Court in CIT v. Suzlon Energy Ltd (2013) 215 Taxman 272 / 93 DTR 50 (Guj.) (HC)

57. Investments to incorporate special purpose vehicles for road projects – Investments not for earning dividend income – Expenses and interest not to be disallowed.

  • L & T Infrastructure Development Projects Ltd. v. ITO (2015) 37 ITR 10 (Chennai) (Trib.)

    Editorial: Now this case law may be read in consonance with Maxopp where the dominant purpose if no more relevant.

58. Income exempt under section 50 of SIDBI Act, 1989, provisions of section 14A cannot be applied since it does not provide that such income of the SIDBI Bank will not be a part of the total income but only exempts from payment of income tax.

  • CIT v. Small Industries Development Bank of India (2012) 211 Taxman 341 / (2013) 85 DTR 436 (Bom.) (HC)

59. Key man insurance policy are taxable under section 28(vi) hence expenditure incurred relating to same cannot be disallowed under section 14A

  • Dy. CIT v. Noble Enclave & Towers (P) Ltd. (2012) 50 SOT 5 (Kol.) (Trib.)

60. Premium – Insurance policy – Income from Keyman Insurance Policy not having been included in the total income by dividend of section 10(10D) expenditure incurred by way of premium on this policy cannot be allowed as deduction in view of prohibition in section 14A.

  • Agarwal Packaging (P) Ltd. v. CIT (2007) 108 TTJ 787 /112 ITD 240 (Pune) (Trib.)

61. Shipping business -When income is computed as per provisions of Chapter XII – G disallowance under section 14A cannot be made [S. 115VP]

  • Varun Shipping Company Ltd. v. Addl. CIT (2012) 134 ITD 339 /66 DTR 390 / 144 TTJ 286 / 17 ITR 587 (Mum.) (Trib.)

62. Insurance business – S.14A is not applicable in the case of insurance business, which is governed by specific provisions of section 44.

  • Bajaj Alliance General insurance Co. Ltd. v. Addl. CIT (2010) 38 DTR 282 /130 TTJ 398 (Pune) (Trib.)

  • Oriental Insurance Co. Ltd. v. ACIT (2010) 38 DTR 273 /130 TTJ 388 (Delhi) (Trib.)

63. Double taxation avoidance agreement.

Dividend income earned from investment made in Oman is chargeable to tax in India under head ‘Income from other sources’ and would form part of total income; rebate of taxes had to be allowed from total taxes in terms of section 90(2), read with article 25 of Indo-Oman DTAA, and, consequently, provisions of S. 14A were not applicable to dividend received.

  • ACIT v. Indian Farmers Fertiliser Cooperative Ltd. (2018)171 ITD 504 (Delhi) (Trib.)

64. Revision-Disallowance has to be made even if the assessee has not earned any tax free income on the investment. Revision is held to be valid.

  • Lally Motors India (P) Ltd v. PCIT (2018) 170 ITD 370 / 93 taxmann. com 39 / 171 DTR 106 /195 TTJ 728 / 64 ITR 45 (SN) (Asr.) (Trib.) www.itatonline.org

Editorial : The aforementioned case law is to be read in lines with the judgment of PCIT v. Caraf Builders and Constructions Pvt. Ltd. and PCIT v. McDonald’s India (P.) Ltd.

65. Remand – In remand, disallowance under section 14A cannot exceed disallowance 
made in the original assessment order.

  • CIT v. Machino Plastic Ltd. (2012) 348 ITR 523 (Delhi) (HC)

66. Appellate Tribunal – Power – Applicability of provision of section 14A for the first time before Tribunal cannot be raised when the disallowance was made u/s 36(1) (iii) of the Act.

  • ACIT v. Delite Enterprises (P) Ltd. (2011) 135 TTJ 663 / 50 DTR 193 / 128 ITD 146 (Mum.) (Trib.)

67. Reassessment – Disallowance u/s 14A is held to be not valid

  • CIT v. P. G. Foils Ltd (2013) 356 ITR 594 (Guj.) (HC)

  • Reckitt Benckiser HealthCare India Ltd v. ACIT (2013) 216 Taxman 209 (Guj) (HC)

68. Concealment penalty – Disallowance u/s. 14A -Levy of penalty is held to be not valid.

  • CIT v Liquid Investment and Trading CO (ITA No. 240 / 2009 / dt.05-10-2010 (Delhi) (HC)

  • Skill Infrastructure v ACIT (2012) 139 ITD 25 / (2013) 157 TTJ 565 (Mum) (Trib.)

  • Sunash Investment Co Ltd v ACIT (2007) 14 SOT 80 / 106 TTJ 855 (Mum) (Trib.)

69. Applicable from AY 2008 -09 onwards – Provision is applicable only from the AY 2007 – 08 onwards; Rule 8D is prospective in nature.

  • CIT v. Essar Teleholdings Ltd (2018) 401 ITR 445 /162 DTR 225 / 300 CTR 561 / 253 Taxman 321 (SC)

    Editorial: CIT v. Firestone International P. LTD. (2015) 378 TR 558 (Bom.) (HC) and CIT v. Essar Teleholdings Ltd (Bom.) (HC) is affirmed.

  • Dhanalakshmi Bank Ltd. v. CIT (2019) 410 ITR 280 / 261 Taxman 521 / 177 DTR 48 / 308 CTR 484(Ker) (HC)

  • CIT v. Jammu Central Co-Op. Bank Ltd. (2018) 407 ITR 362 (J&K) (HC)

  • CIT v. Himatsingka Seide Ltd. (2016) 388 ITR 463 /240 Taxman 753 (Karn.) (HC)

  • Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT (2010) 328 ITR 81 /43 DTR 177 / 234 CTR 1 / 194 Taxman 203 (Bom.) / (2010) Vol. 112 (7) Bom. L.R. 3421 /(2011) 224 Taxation 330 (High Court)

  • Dy. CIT v. Philips Carbon Black Ltd. (2012) 146 TTJ 175 /70 DTR 267 (TM) (Kol.) (Trib.)

Articles :

  • S.14A: Essential Prerequisite For Invoking Section 14A: Satisfaction of AO- dt. 16. March 2019, Ashish Chadha CA.www.itatonline.org

  • S. 14A: Exempt Income Versus Expenses For Exempt Income- dt.19 April, 2018- Jyoti Gupta CA. www.itatonline.org

  • S.14A:An Analysis Of The Supreme Court’s Judgement In Maxopp Investment 402 ITR 640 On S. 14A / Rule 8D- 18 Oct.2018, Vipul B. Joshi, Adv. www.iatonline.org

  • S.14A: Supreme Court’s ruling in case of Maxopp Could have taxpayers shell out additional income-tax by Yogesh G. Shah (2018) 255 Taxman 11 (Mag.) (Article)

  • S.14A: Application of S.14A to investment companies: when unjustified? by S. Ganesh and R. S. Janani (2018) 253 Taxman 23 (Mag.)

  • S.14A: Rightly conceived but erroneous interpretations are proliferating litigation by T. N. Pandey (2018) 253Taxman 1 (Mag.)

  • S.14A: Section 14A & Rule 8D: Analysis Of Recent Important Judgements – dt. 31 May 2018- Ketan Ved CA. www.itatonline.org

  • S. 14A : Recording of reasons – Whether an empty formality under section 14A of the Income – tax Act, 1961 by Asim Choudhury (2017) 390 ITR 9 (Journal)

  • S. 14A : Special Bench Puts An End To The Controversy Of Applicability Of S. 14A Adjustment To Profit u / s 115JB by Jyoti Gupta, CA, www.itatonline.org

  • S. 14A : Exempt Income v. Expenses For Exempt Income by Jyoti Gupta, CA www.itatonline .org

  • S.14A : Scope Of Disallowance Explained by Dev Kumar Kothari, CA, www.itatonline.org

  • S.14A : No disallowance under section 14A, where the assessee has got no income from a composite and indivisible business, by S. K. Tyagi (2016) 384 ITR 1(Journal)

  • S.14A : Expenditure under Section 14A not disallowed if no exempt income received during the year by Vineet Sawheny (2016) 237 Taxman 1 (Mag.) (Articles)

  • S.14A :Tax exemption – A Boon turning in to Curse by Minu Agarwal (2015) 279 CTR 1 (Articles)

  • S.14A : Whether disallowance can be made by invoking provisions of section 14Aof the Act, even in those cases where no income has been earned by an assessee, which has been earned by assessee, which has been claimed as exempt during the financial year. By Kaushik D. Shah (2015) ACAJ – August – P. 297

  • S.14A : Disallowance under section 14A, in the light of the case of Deepak Mittal by S. K. Tyagi (2014) 361 ITR 1(Journal)

  • S.14A : Section 14A–Whether contemplates notional expenditure also by Mini Agarwal (2014) 266 CTR (Articles) 17

  • S.14A : Disallowance u / s. 14A cannot be added back to the “book profits” while computing MAT u/s. 115JB–Judicial analysis by Tushar Hemani (2014) ACAJ–September–P. 356

  • S.14A : Expenditure incurred for earning exempt income: Guide to law on section 14A by Dr. K. Shivaram Sr. Advocate and Rahul R. Sarda (2014) The Chamber’s Journal (2014) October–P. 61

  • S.14A: Disallowance under section 14A by S. K. Tyagi (2013) 358 ITR (Journal) 30

  • S.14A: Controversies-Section 14A, and its applicability to cases of stock in trade by Pradip Kapashi, Gautam Nayak (2013) BCAJ –March- P. 33

  • S.14A: Business expenditure-Applicability of section 14A to income covered by deductions under chapter VI-A by R. Raghunathan (2013) 255 CTR (Articles) 30.

  • S. 14A: Section 14A and Rule 8D by Sameer G. Dalal (2013) The Chamber’s Journal –June 31

  • S. 14A : Business expenditure – Delhi High Court’s Elucidation of section 14A of the Income-tax Act, 1961 By T. N. Pandey (2012) 246 CTR 57 (Articles)

  • S. 14A : Section 14A lack application vis-à-vis trade strategic Investments – Rule 8D must carry exceptions to be workable By Gopal Natahni (2012) 341 ITR 11 (Journal)

  • S. 14A : Business expenditure – Ready for dissection By Minu Agarwal (2012) 251 CTR 17 (Articles)

  • S. 14A : Assessing Officer cannot alter disallowance made under section 14A by the assessee unless there is some error in computation By V. K. Subramani (2012) 208 Taxman 266 (Mag.)

  • S. 14A : Business expenditure – Section 14A – Facing conceptual dilemma By Minu Agarwal (2012) 253 CTR 49 (Articles)