In life, it is evidenced that an action is initiated with a particular purpose, but with the passage of time, the purpose changes or is lost. This is so often witnessed under the Income-tax Act, 1961 (‘Act’). A particular section is inserted with a particular object, but slowly the section gets amended and the purpose seems to fade away. One particular section which exemplifies this trend is section 206C of the Act dealing with ‘tax collected at source’ (‘TCS’).

The purpose of the present article is to revisit the history of TCS and to test the recent amendments based on the original purpose with which the provisions were introduced.

TCS – basic nature

Tax deducted at source means deduction of tax from the payment made to a recipient of income. The receipt by the recipient is in the nature of income and therefore, tax is deducted therefrom. Whereas TCS is a case, where tax is recovered from a person making payment; such payment is an expenditure for the payer, still tax is collected from such person, on the assumption that such payment is linked to some income which the person will earn against which the credit of tax can be taken.

History

Section 206C of the Act was introduced by Finance Act, 1988. This section was inserted as a corollary to section 44AC. Section 44AC, as then introduced, taxed a trader, obtaining in any sale by way of auction, tender or any other mode, conducted by any other person the following goods:

  1. Alcoholic liquor for human consumption

  2. Timber obtained under a forest lease

  3. Timber obtained by any mode other than under a forest lease

  4. Any other forest produce not being timber.

Such tax was levied on an adhoc basis in the year of purchase itself at a specified percentage of the purchase price. Further, section 206C required the seller of such goods to collect tax from the trader at the time of sale itself at specified rate, the credit of which was given to the trader in the same year.

Thus, circumventing the basic principles of taxation, section 44AC levied tax at the time of purchase of goods, without waiting for such goods to be sold and income to accrue and such tax was levied at an ad-hoc percentage of the purchase price. The Explanatory Memorandum to Finance Bill, 1988, gave the rationale behind such insertion. It was stated that there was difficulty in assessing income of persons who take contracts for sale of liquor, forest produce, etc. These people constitute a separate entity or a benami entity for getting the contract. Once the contract was entered, these entities became untraceable and the assessment of income in the year of sale of such goods was getting difficult thereby leading to large scale tax evasion. Further, section 206C was introduced to mere facilitate collection of taxes in advance.

Thus, TCS and income tax was going hand in hand – i.e. section 44AC taxed such income in the hands of the buyer in the year of entering into contract and in the same year, TCS was happening.

The constitutional validity of both the sections were upheld by the Apex Court in case of UOI v. A. Sanyasi Rao [219 ITR 330 (SC)]. The Court gave some important findings in this regard, which is germane to our discussion. Court held that in order to prevent evasion of tax legitimately due on such ‘income’, section 44AC and section 206C were enacted. Section 206C was only to facilitate the collection of tax on income which is bound to arise or accrue, at the very inception itself or at an anterior stage. The Court even drew analogy between the advance tax provision and section 206C of the Act.

Interesting it is to note that section 44AC of the Act was obliterated in 3 years’ time by Finance Act, 1992 on the ground of administrative difficulty, though section 206C continued in the Statute book.

Section 206C was expanded to include even sale of scrap (Finance Act, 2003) and sale of minerals (Finance Act, 2012). The explanatory memorandum to Finance Act, 2012 again spelt out the same logic that trading of minerals remained largely unregulated resulting in non-reporting or under-reporting for taxation purpose.

It can be gathered from the above discussion that

  1. TCS was linked to the income that was to accrue in future

  2. It was in the nature of collection of tax in advance

  3. Purpose being prevention of tax evasion.

One may also refer to Rule 37-I which provides for credit of TCS. As per the said Rule, credit for such tax is given for the assessment year in which the income is assessable to tax. Thus, it is beyond any realm of doubt that TCS is collected only where it is linked to any income.

Subsequent amendments

There were three subsequent amendments which expanded the scope of the TCS provisions. The same are discussed hereunder:

Vide Finance (No. 2) Act, 2004, TCS provision was made applicable to grant of lease, licence or right in respect of any parking lot or toll plaza or a mine or a quarry for use of such places for the purposes of business by inserting sub-section (1C). Explanatory Memorandum to the said Finance Act stated that such extension was for the purpose of widening of tax base.

It can be deduced that the purpose took a minor diversion. Earlier, the purpose was to prevent evasion of tax; the Apex Court had upheld that constitutional validity of TCS provisions only on the ground that the same is in the nature of collection of tax in advance in cases where the income was going untaxed. But, vide this amendment, the purpose of TCS was diverted to widening of tax base. Though, thankfully, the collection of tax was still related to income which was to accrue in future, as the TCS provision was to apply only where such places like parking lot etc. was for the purpose of business.

The second amendment was made by Finance Act, 2012 by inserting sub-section (1D). By this amendment, cash consideration received on sale of bullion or jewellery was subjected to TCS provisions. Again the Explanatory Memorandum, gave the same rationale i.e. widening of tax base. It also stated that the action was to reduce the quantum of cash transaction and for curbing the flow of unaccounted money in the trading system of bullion and jewellery.

Pertinent to note, the Explanatory Memorandum stated that “This would be irrespective of the fact whether buyer is a manufacturer, trader or purchase is for personal use. Further, the term buyer, was defined separately for the purpose of this sub-section to include all buyers.

Thus, even if one agrees that the purpose behind this insertion was to prevent tax evasion, how does one justify applying this provision to purchase of goods for personal use. If the purchase is for personal use, how does one justify linking of TCS to the income that may accrue or arise in future, which is fundamental principle based on which the validity of the provision is upheld.

If this was not enough, the Finance Act, 2016 expanded the scope of sub-section (1D), to included cash consideration received on sale of all types of goods or provision of all types of services where such consideration exceeded ₹ 2 lakhs. Again there was no exemption for purchase of goods for personal consumption and again same logic was provided by Explanatory Memorandum to Finance Bill 2016.

Vide same Finance Act, sub-section (1F) was introduced which required a seller of motor car to collect TCS on sale of motor case for a consideration more than ₹ 10 lakh. This insertion was to widen the base by bringing high value transactions within the tax net. Again, no exemption was provided for purchase of goods for personal consumption.

Interestingly, sub-section (1D) dealing with cash consideration on sale of goods etc. was removed from the statute book on insertion of section 269ST by Finance Act, 2017, which was the right way to deal with cash transactions.

Amendment by Finance Act, 2020

The onslaught of the Legislature is yet to be subdued. Vide Finance Act, 2020, the Legislature has covered the following transactions within the TCS net:

  1. Receipt of an amount, or an aggregate of amounts, of ₹7 lakh or more in a financial year by an authorised dealer for remittance out of India from a buyer under the Liberalised Remittance Scheme of RBI [Sub-section (1G)]

  2. Receipt of an amount from a buyer from a seller of an overseas tour program package [Sub-section (1G)]

  3. Receipt by a seller of any amount as consideration for sale of any goods of the value or aggregate of such value exceeding ₹ 50 lakh in any previous year.

The Memorandum in this regard is maintaining a stoic silence in as much as the only reason given behind this insertion is widening and deepening of tax base. Thus, the move for introducing TCS on these transactions is bereft of any reason.

In so far as the first case is concerned, there is absolutely no link between the tax collected and income which the remitter may earn. Say a person wants to transfer a sum of money from his account in India to his account outside India or where the person wants to transfer a sum of money to his son studying abroad. Such payment has no rational connection with the income of the remitter rather it’s an expense. Even where a person makes payment for overseas tour package which is likely to be a personal expenses, such payment is not likely to lead to any income. Infact the remittance may be out of the tax paid income of the person. Thus, in such case, imposing TCS is absurd and illogical.

Further, there are chances that the AO may deny credit of TCS, on the ground that no income linked to such TCS is offered to tax; as per Rule 37-I, TCS credit is given in the year in which the income is assessed to tax.

The third insertion may also lead to complication in the sense that, the goods may be purchased by a person for personal consumption or something which may not lead to income in future.

Thus, the principles based on which the section was original inserted and the constitutional validity has been upheld are not adhered to while expanding the section. This section was originally enacted for prevention of tax evasion, however then the section was used for widening of tax base and for curbing cash transaction. Further, the section was for advance collection of tax in respect of a transaction which had a link with some income or an income which would have arisen in future. However, subsequently, the section was amended to cover transaction having no nexus with income chargeable to tax. Though the purpose may be laudable, but the means to achieve such purpose are not correct or apt. The later amendments are a completely misfit and that there are other ways to deal with such issues. As a result, the later amendments, which are miles away from the main purpose behind enacting the TCS provisions and which are undoubtedly misfit here, are in my opinion, vulnerable and stand at the peril of being unconstitutional.

  1. Introduction :

The Finance Act, 2020 has introduced new penalty provision under section 271AAD to curb malpractices of issuing fake invoice. Section 271AAD shall apply with effect from 1st April, 2020.

  1. Object

The Explanatory Memorandum to the Finance Bill, 2020 has stated that in the recent past after the launch of Goods & Services Tax (GST), several cases of fraudulent claims of Input Tax Credit (ITC) have been caught by the GST authorities. It has been revealed in these cases that fake invoices are obtained by suppliers registered under GST to fraudulently claim ITC and reduce their GST liability. These invoices are found to be issued by racketeers who do not actually carry on any business or profession. They only issue invoices without actually supplying any goods or services. The GST shown to have been charged on such invoices is neither paid nor is intended to be paid. Such fraudulent arrangements deserve to be dealt with harsher provisions under the Act.

The penalty provision has been inserted to discourage taxpayers to manipulate their books and claim wrong input credit under GST.

  1. Penalty in what circumstances

The new provision has been inserted to provide for levy of penalty on a person, if it is found during any proceeding under the Act that in the books of account maintained by him there is a (i) false entry or (ii) any entry relevant for computation of total income of such person has been omitted to evade tax liability.

Thus the new section 271AAD has been inserted to penalise person maintaining books of account in case of a false entry or omission of an entry relevant for computing total income.

  1. Quantum of Penalty under section 271AAD

The penalty payable by such person shall be equal to the aggregate amount of false entries or omitted entry. It has also been provided that any other person, who causes in any manner a person to make or cause to make a false entry or omits or causes to omit any entry, shall also pay by way of penalty a sum which is equal to the aggregate amounts of such false entries or omitted entry.

  1. What will be considered “false entries” for the purpose of penalty under section 271AAD

What is false entry is explained vide explanation below the said section 271AAD. The false entries will include use or intention to use –

(a) forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or

(b) invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both; or

(c) invoice in respect of supply or receipt of goods or services or both to or from a person who do not exist.

Therefore false entries will include forged or falsified documents, false invoices, receipt of goods or services without actual supply or receipt of such goods or invoices using fake IDs.

Thus we may summarise that False entry include use or intention to use:

(i) forged documents or falsified documents (such as false or fake invoices)

(ii) invoice in respect of supply or receipt of goods or services or both without actual supply or receipt thereof

(iii) invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist

It may be noted that in case of false entry in books of account, it is immaterial whether it has impact on computation of income or not. If there is false entry in books of account, penalty shall be levied.

However in case of omission of entry in books of account, it must have impact on computation of income in order to attract penalty provision under section 271AAD.

  1. Penalty shall also be levied on any other person who causes any false entry etc.

In view of section 271AAD (2), the Penalty shall also be levied on any other person who causes the person required to maintain books of account to make or causes to make any false entry or omit or cause to omit any entry in books of account. For the purpose of this section such other person may cover an accountant or book keeper, consultant or advisors etc.

  1. Section 271AAD of the Income tax Act : Provisions

For ready reference the newly inserted section 271AAD reads as under :

Sub section (1) “Without prejudice to any other provisions of this Act, if during any proceeding under this Act, it is found that in the books of account maintained by any person there is—

(i) a false entry; or

(ii) an omission of any entry which is relevant for computation of total income of such person, to evade tax liability,

the Assessing Officer may direct that such person shall pay by way of penalty a sum equal to the aggregate amount of such false or omitted entry.”

Sub- section (2) of section 271AAD reads as under :

“Without prejudice to the provisions of sub-section (1), the Assessing Officer may direct that any other person, who causes the person referred to in sub-section (1) in any manner to make a false entry or omits or causes to omit any entry referred to in that sub-section, shall pay by way of penalty a sum equal to the aggregate amount of such false or omitted entry.”

  1. Important Points relating to section 271AAD

This section 271AAD begins with “without prejudice to any other provision…”, hence penalty under this section shall be in addition to any other penalty under the Income-tax Act.

  1. The penalty can be imposed if during any proceeding under this Act, it is found that in the books of account maintained by any person there is either a false entry; or an omission of any entry, to evade tax liability.

  2. Penalty how much :a sum equal to aggregate of amount of false entries or omitted entries

  3. Power to levy penalty is with Assessing Officer

  4. There must be books of account maintained by a person. That implies that in case of person who is not required to maintain books of account then in such case penalty may not be levied under section 271AAD. Further a question will arise whether this penalty can be levied in case of person who is required to maintain books of account but such person had not maintained books of account

  5. Penalty shall be levied on “any person”. The word used by legislature is any person and not any assessee.

  6. To levy penalty there must be either of following two conditions should be satisfied (i) false entry in books of account; or (ii) omission of any entry in books of account which is relevant for/ has impact on computation of total income, to evade tax liability.

  1. Definition of books of account under section 2(12A) of the Income tax Act

It is quite important to refer to the definition of Books of account which is provided in section 2(12A) of the Income tax Act.

“books or books of account” includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device.

  1. Onus to prove

To levy penalty, element of mens rea must be an essential ingredient. That means intention is paramount. It is important to note that false entry or omission of entry re the basic ingredients and onus to prove the same is on the Revenue/ department.

  1. Benefit of section 273B

As per section 273B, penalty shall not be imposed if assessee can prove that there was reasonable cause for the failure. However, section 271AAD is not included in section 273B.

  1. Penalty provisions under the GST Act

The Finance Bill 2020 vide Clause 124 has amended section 122 of the GST Act to make the mediator/ beneficiary liable with the same degree of penalty as a taxable person i.e. supplier or transporter etc. when the question of fake invoicing comes. Sub-section (1A) has been inserted in section 122 of the GST Act. It may be noted that the GST Act provides, vide its Section 122, provisions for levy of penalty for various offences, which are not covered in section 73 and 74 of the GST Act. The concerned person shall be liable to penalty of an amount specified in the said section 122.

Relevant provisions of said section 122 of the GST Act are mentioned here.

122 (1) Where a taxable person who––

(i) supplies any goods or services or both without issue of any invoice or issues an incorrect or false invoice with regard to any such supply;

(ii) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder;

(vii) takes or utilises input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder;

(ix) takes or distributes input tax credit in contravention of section 20, or the rules made thereunder;

(x) falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information or return with an intention to evade payment of tax due under this Act;

Such person shall be liable to pay a penalty of Rs. 10,000 or an amount equivalent to the tax evaded or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher.

Sec 122 (1A) : Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transaction is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on. [Inserted by the Finance Act, 2020 ]

Sec 122 (3) : Any person who aids or abets any of the offences specified in sub-section (1); shall be liable to a penalty which may extend to Rs. 25,000.

It is important to note that on going through the above provisions, it is evident that for any of the defaults mentioned above both the beneficiary as well as the wrongdoer will be liable for penalty for an amount equal to the tax evaded or Input Tax Credit availed.

On a conjoint reading of both the sections 271AAD of Income tax Act and section 122(1A) of the GST Act, we will find that there may be situations that can lead to imposition of penalty under both the sections for the assessee.

The provisions applicable in various circumstances vis a vis relevant sections of the Income Tax Act and GST Act are analysed here below.

Sl.

Circumstance

GST Act, 2017 Section 122(1A)

Income Tax Act Section 271AAD

1.

Supply of any goods or services or both without issue of an invoice

The person can be treated as beneficiary of a transaction covered under Clause (i) of Section 122(1) and thus liable for penalty equivalent to the amount of tax evaded under sec 122(1A) of GST Act

Supply without Invoice will lead to lower Turnover and hence lower income declaration by assessee resulting in omission of entry necessary for computation of total income. The Assessing Officer may levy penalty under sec 271AAD(1)(ii).

2.

Issue of Invoice, by the person or any other person without actual supply or receipt of such goods or services or both

The person can be treated as beneficiary of a transaction covered under Section 122(1) (ii) and thus liable for penalty equivalent to the amount of tax evaded under sec 122(1A) of GST Act

Under sec 271AAD(1)(i) the Assessing officer may classify the transaction as a False Entry and may direct such person to pay by way of penalty a sum equal to the aggregate amount of such false entry.

3.

Taking or utilising input tax credit (ITC) without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of the relevant Act or the Rules made thereunder

The person can be treated as beneficiary of a transaction covered under sec 122(1)(vii) and hence liable u/s 122(1A) for penalty equivalent to the amount of input tax credit (ITC) availed

Under sec 271AAD(1)(i) the Assessing Officer may classify the transaction as a False Entry and may direct such person to pay by way of penalty a sum equal to the aggregate amount of such false entry

4.

Forging or falsifying of documents such as a false invoice or, in general, a false piece of documentary evidence

The person can be treated as beneficiary of a transaction covered under section 122(1)(i) and hence liable for penalty equivalent to the amount of tax evaded under sec 122(1A) of GST Act

Under sec 271AAD(1)(i) the Assessing Officer may classify the transaction as a false entry and may direct such person to pay by way of penalty a sum equal to the aggregate amount of such false entry

In addition to above instances, there can be many more situations where the assessee may get covered in both the sections. In both the sections the onus for default has been placed on the beneficiary as well as the initiator of the transaction.

  1. Penalty against other person(s)

Section 271AAD(2)of the Income Tax Act states that any person who causes the person referred to in sub-section (1) [hereafter referred to as “other person”] to make a false entry or omits or causes to omit any entry then such other person shall also be liable to pay penalty equal to aggregate amount of such false or omitted entry. Hence, provision has been made for imposing penalty on the assessee as well as any other person involved in making the false entry or causing omission of any entry in books of assessee.

Similarly, section 122(1A) of GST Act states that “Any person who retains the benefit of a transaction covered under clauses (i),(ii),(vii) or clause (ix) of sub-section(1) of Section 122 and at whose instance such transaction is conducted shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit (ITC) availed of or passed on.” Here also, the objective of this amendment is to penalise the beneficiary and the wrongdoer of the transactions specified in clause (i),(ii),(vii) or clause (ix) of section 122(1) liable for penalty.

  1. Prosecution provisions under sec. 132 of the GST Act

The Finance Act, 2020 vide its Clause 125 has also amended section 132 of the GST Act, which provides for Punishment for certain offences related to Fake Invoicing. The purpose is to extend punishment under this section to a person who causes to commit such offence and also to a person who retains benefit of such offences mentioned in section 132. It further makes the offence of availing ITC without lawful invoice a cognizable and non bailable offence.

Provisions of Section 132(1) of the GST Act as substituted by the Finance Act, 2020 are discussed below.

Sec 132(1) provides : Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences], namely:-

…..

  1. issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax;

  2. avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill; [as substituted by the Finance Act, 2020 ].

  3. evades tax or fraudulently obtains refund and where such offence is not covered under clauses (a) to (d); [as substituted by the Finance Act, 2020 ].

  4. falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information with an intention to evade payment of tax due under this Act;

  5. tampers with or destroys any material evidence or documents;

  6. attempts to commit, or abets the commission of any of the offences mentioned in clauses (a) to (k) of section 132 of the GST Act.

Such person shall be punishable as below in cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken :

  1. if the amount exceeds Rs. 5 Crore, with imprisonment for a term which may extend to 5 years and with fine;

  2. if the amount exceeds Rs.2 Crore but does not exceed Rs. 5 Crore, with imprisonment for a term which may extend to 3 years and with fine;

  3. if the amount exceeds Rs.1 Crore but does not exceed Rs. 2 Crore, with imprisonment for a term which may extend to one year and with fine.

  1. Imprisonment not less than 6 months and the Offence is cognizable and non-bailable under the GST Act

Section 132 of the GST Act also provides that the imprisonment referred to above shall, in the absence of special and adequate reasons to the contrary to be recorded in the judgment of the Court, be for a term not less than 6 months. Further notwithstanding anything contained in the Code of Criminal Procedure, 1973, the offences specified in clause (a)/(b)/(c) or (d) of sec. 132(1) of the GST Act, shall be cognizable and non-bailable.

  1. Scope of the term “tax” under the GST Act

It may be noted that for the purposes of prosecution under section 132 of the GST Act, the term “tax” shall include the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or refund wrongly taken under the provisions of this Act, the State Goods and Services Tax Act, the Integrated Goods and Services Tax Act or the Union Territory Goods and Services Tax Act and cess levied under the Goods and Services Tax (Compensation to States) Act.

  1. Conclusion

From the above discussion, we can make out that accounting and book keeping needs to be done by keeping above points in mind. Proper reconciliation of books for the purpose of Income tax as well as for the purpose of GST and the Returns filed (Income tax and GST Returns) is vital in order to avoid any inconvenience. Any negligence or error or mistake on the part of the assessee can expose him to imposition of penalties under the Income tax as well as GST. It is important to periodically check and make cross verification of vendors as well as customers/ clients.

Introduction

Equalization levy has been defined as follows in section 164 (d) of the Finance Act, 2016 [Finance Act, 2016, available at http://www.cbic.gov.in/resources/htdocs-cbec/fin-act2016.pdf ] as follows:

“Equalisation levy means the tax leviable on consideration received or receivable for any specified service under the provisions of this Chapter (Chapter VII, Finance Act, 2016)”

The Finance Act, 2016 incorporated the recommendations of the Akhilesh Ranjan Committee [Proposal for Equalization Levy on Specified Transactions, February 2016, Report of Committee on Taxation of E-commerce, https://incometaxindia.gov.in/News/Report-of-Committee-on-Taxation-of-e-Commerce-Feb-2016.pdf] (Hereinafter referred to as “Equalisation Levy Report, 2016”). It defined Equalisation Levy as follows ( Page 86):

“Equalization Levy is intended to be a tax imposed in accordance with the conclusions of the BEPS Report on Action 1 that has been endorsed by G-20 and OECD, on payments made for digital services to foreign beneficial owner, who enjoy an unfair advantage over their Indian competitors providing similar services by digital or more traditional means, with the objective for equalizing their tax burden with other businesses that are subjected to income-tax in India, without disturbing the existing tax treaties.”

This measure was introduced by the means of Finance Act, 2016 on the basis of the recommendations given in the Equalization levy report. On a general basis, any changes in taxation are introduced by the means of amendments to the Income Tax Act, 1961 (Hereinafter referred to as “IT Act”), Central Goods and Services Tax Act, 2017 (Hereinafter referred to as “CGST Act”), Integrated Goods and Services Tax Act, 2017 (Hereinafter referred to as “IGST Act”) or any other legislation or treaty for taxation. This route however was not followed for the introduction of the Equalization levy for the following reasons, as listed in the Equalization Levy report, 2016 (Page 86):

  • Equalisation levy was not introduced through tax treaties because of the divergent opinions of the nations on it. The lack of consensus amongst the nations to implement the levy would have it nearly impossible for the levy to be incorporated in the regulatory framework through the treaties.

  • It was not introduced through the Income Tax Act, 1961 because it is not a tax. It is a tax on a transaction. It is a levy imposed on the revenue generated through which escapes from domestic legislation and the treaties.

  • Due to its nature i.e. tax on transaction, it was through the Finance Act, 2016 on the lines of the service tax and securities transaction tax.

Equalization levy was introduced to counter the problem of the escapement of revenue generated through electronic services from the taxation. However, every e-commerce service is not covered within the ambit of equalization levy. The scope of equalization levy has been defined in the Finance Act, 2016. It is an exhaustive definition, in the sense, that it does not give scope for liberal and expansive interpretation of the scope of the levy. Only the services explicitly mentioned in the Act are covered within the ambit of equalization levy.

Since, the provisions leading to the introduction and implementation of equalization levy were introduced by the Finance Act, 2016 and not through amendments in any legislation for taxation, the amendments for equalization levy, in the Finance Act, 2020 were through the means of amendment to the Finance Act, 2016. However, in order to implement and support the equalization levy smoothly certain ancillary provisions were introduced by the means of amendments to various taxation legislations such as the Income Tax Act, 1961, Central Goods and Services Act, 2017, Integrated Goods and Services Tax Act, 2017 and Customs Act, . This article aims to elaborate upon the reforms introduced for the taxation of the digital economy in India by the means of all these legislations and hence, it is divided into the following parts, covering one legislation each i.e. Reforms and Amendments made through the Finance Act, 2016 and Finance Act, 2020 [i] Amendments to the Income Tax Act, 1961 [ii] Amendments to the CGST Act, 2017 and IGST Act, 2017 [iii], followed by the concluding remarks.

Finance Act, 2016 and Finance Act, 2020

For the reasons mentioned above, Equalisation levy was introduced through the Finance Act, 2016. Further reforms to the provisions were incorporated by the Finance Act, 2020, through amendment to the Finance Act, 2016. This section deals with the need for equalization levy [i] scope of equalization levy [ii] and the amendments made to the provisions of equalization levy through the Finance Act, 2020 [iii].

Need for the Introduction of Equalization levy

The multi-national enterprises and various individuals have been benefitting out of the loopholes in the DTAAs and the domestic tax legislations regarding the regulation of digital economy. The BEPS Action Plan 1 was devised to analyze the situation and come up with solutions for tacking the challenges posed by the digital economy. This Action Plan 1 was primarily relied upon by the committee set up by the Government for regulation of taxation of e-commerce in India, in its report, “Proposal on Equalisation Levy”. This committee opined that Equalization levy was required to be introduced for attaining the objective of providing greater “clarity, certainty and predictability” in terms of the taxation of the digital services and to reduce the cost of compliance. Despite the DTAAs, withholding tax and various other provisions under the IT Act, the measure of equalization levy was required to tax the income earned over services and transactions over digital platforms. It is important to understand that equalization levy is different from the provisions in the DTAAs and the domestic legislations for taxation in India and is required for taxation of digital transactions which escape the tax net. There are a few questions which are often raised regarding the veracity of equalization levy. It is important to understand the discussion regarding these aspects in the Equalization Levy Report, 2016, to get a clarity regarding the nature of the equalization levy:

  • Difference between Equalization levy and withholding tax:Withholding tax, under the IT Act, is considered to be an effective measure for tacking the problem of tax evasion. Thus, the introduction of Equalization levy with a similar objective under Finance Act, 2016 was questioned in terms of its purpose and efficiency. The Akhilesh Ranjan Committee observed in its report that withholding tax is different from Equalisation levy because of Withholding tax is a tax on income, while Equalisation levy is a tax on the consideration paid.

  • Scope of equalization levy:Equalisation levy was covered under chapter VII of the Finance Act, 2016. It was first implemented at the of 6% on the consideration for the services received/ receivable by a non-resident from a person being resident of India and carrying on business or profession [i] or a non-resident having a permanent establishment in India [ii] [Section 165, Finance Act, 2016]. Equalisation levy was implemented on consideration received/ receivable for specified service, i.e. online advertising, any provision for online advertising space or any other facility or service for online advertisement (and any other service specified by Central Government in this regard). Online has been accorded a wide and exhaustive definition by the Act i.e. it includes any facility or service or right or benefit or access that is obtained through the internet or any other form of digital or telecommunication network. [Sections 164 (i), 164 (f) Finance Act, 2016]

  • Exceptions to the collection of Levy: An exception from liability to pay Equalisation levy was carved out for following cases/ persons [Section 165 Finance Act, 2016]:

    • The non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment. The rationale of this exception can be understood to be that the non-residents having the liability of a permanent establishment should not be benefitted from this provision as the tax rates for permanent establishments are very high and not creating an exception for permanent establishments might benefit them with lower tax rate.

    • The aggregate amount of consideration for specified service received or receivable in a previous year by the non-resident from a person resident in India and carrying on business or profession, or from a non-resident having a permanent establishment in India, does not exceed one lakh rupees. This threshold was introduced in line with the proposals of the Equalisation Levy Report, 2016 i.e. the small payments by MSMEs or for personal purposes should not be adversely affected by the Equalisation Levy. [Explanatory notes to Finance Act, 2016: Circular No.- 3/2017, para 32, available at https://www.incometaxindia.gov.in/communications/circular/circular03_2017.pdf ].

    • If the payment for the specified service by the person resident in India, or the permanent establishment in India is not for the purposes of carrying out business or profession. This exception was carved out again in compliance with the recommendations of Equalisation Levy Report, 2016 i.e. the payments not made for business purposes should not be taxed by Equalisation Levy.

Despite the implementation of the Equalisation Levy, certain services were left out of its purview. With the implementation of the Equalisation levy the need for modification and improvement was felt. Thus, certain amendments were made to the Finance Act, 2016 and other provisions relating to Equalisation Levy for the purpose of solving the problems and challenges arising from its implementation.

Changes brought in the Provision of Equalization levy

Finance Act, 2020, [available at http://egazette.nic.in/WriteReadData/2020/218938.pdf] has made several amendments in the Finance Act, 2016. The provisions have been amended to incorporate changes for better administration:

  1. Scope: The services provided by the e-commerce operators have also brought within the ambit of the Equalization Levy. The following changes were incorporated:

  • The scope of the Chapter VII of the Finance Act, 2016 was modified to include the consideration received or receivable for the e-commerce supply or services made after April, 1, 2020.[Section 153, Finance Act, 2020]

  • E-commerce supply or services includes online sale of goods by e-commerce operator, online provision of services by e-commerce operator, sale of goods or provision of services through a platform operated by the e-commerce operator or any combination of these activities. [Section 164 (cb), Finance Act, 2020]

  • E-commerce operators have been defined as a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both [Section 164 (ca), Finance Act, 2020]

  • Equalization levy at the rate of 2% has been made applicable to the consideration received or receivable for the services provided by the e-commerce operators to a person resident in India, a person who buys goods, services or both using an Internet Protocol located in India or a non-resident if the non-resident is involved in sale of advertisement, targeted at customer who is resident in India or who has access to the advertisement through a internet protocol address located in India or is involved in sale of data, collected from a person resident in India or. Person who uses and internet protocol which is located in India [Section 165A, Finance Act, 2020].

  1. Exceptions to the Equalization levy:The e-commerce operator providing services or supplying goods will not be charged equalization levy, if it has a permanent establishment in India and such supply or services is related to the permanent establishment, if the service or supply is chargeable under section 165 of the Finance Act, 2016 or if the sales, turnover or gross revenue of the e-commerce operator is less than ₹ 2 crores during the previous year. [Section 165A, Finance Act, 2020].

  2. Compliance requirements:The equalization levy paid at the rate of 5% for all other specified services, except the services or supply from e-commerce operator, has to be given by the customers to the Central Government. While, in case of the supply and services of e-commerce operators, the equalization levy has to be deducted by the e-commerce operators themselves and has to be given to the Central Government. [Section 166, Finance Act, 2016; Section 166A, Finance Act, 2020]

In essence, Finance Act, 2020 has amended the Finance Act, 2020 to incorporate equalization levy provisions for taxing e-commerce operators.

Amendments in The Income Tax Act, 1961

The aspects of direct taxation are discussed in reference of the amendments to the Income Tax Act, 1961 by the Finance Act, 2020. The concept of Significant Economic presence was first introduced in the Income tax Act, 1961 by the means of an amendment through the Finance Act, 2018. Income Tax Act, 1961, CGST Act, 2017 and IGST Act, 2017 were amended by the Finance Act, 2020 to incorporate further reforms. This part is sub-divided in various sections which elaborate upon the amendments in reference to significant economic presence.

The concept of Significant Economic Presence was first introduced by the Finance Act, 2018 [Section 4, Finance Act, 2018, available at http://egazette.nic.in/writereaddata/2018/184302.pdf ]. It amended section 9 of the IT Act. Explanation 2A was inserted in section 9, to clarify that significant economic presence of a non-resident would constitute business connection. The Finance Act, 2020 amended the Finance Act, 2018 Significant Economic Presence. The explanation 2A inserted by Finance Act, 2018 was scraped and new explanations 2A and 3A was inserted in section 9 of the IT Act, which are as follows:

“Explanation 2A.—For the removal of doubts, it is hereby declared that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean—

(a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed:

Provided that the transactions or activities shall constitute significant economic presence in India, whether or not—

(i) the agreement for such transactions or activities is entered in India; or

(ii) the non-resident has a residence or place of business in India; or

(iii) the non-resident renders services in India:

Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.”

“Explanation 3A.––For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1, shall include income from––

(i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;

(ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and

(iii) sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.”;

(iv) after Explanation 3A as so inserted, the following proviso shall be inserted with effect from the 1st day of April, 2022, namely:––

“Provided that the provisions contained in this Explanation shall also apply to the income attributable to the transactions or activities referred to in Explanation 2A.”

The threshold for SEP has not been notified by the Government yet. The transactions of the e-commerce operators which trigger the equalization levy, also lead to generation of income under this explanation. However, in order to avoid taxation of the non-resident e-commerce operators, an exception has been created under the Income Tax Act, 1961. Any income arising from any specified service, chargeable to equalization levy is not included in computing the total income, for the purpose of Income Tax Act, 1961. [Section 10 (50), Income Tax Act, 1961] The report of OECD regarding taxation of Digital Economy is likely to be released by December, 2020 and thus, the threshold will be set after considering the OECD report.

Challenges in Implementation of Equalisation Levy

These amendments for the taxation of the digital economy, though well-intended, have led to certain challenges in implementation of the same. They are:

  • Constitutional Validity of Equalisation levy: Constitutional validity of Equalization levy is in question because of the mode of legislation of the equalization levy and the power of the conflict in the subject matter of the states and Centre. Article 265 of the Constitution of India states that:

[The Constitution of India, available at: http://legislative.gov.in/sites/default/files/COI-updated.pdf]

“No tax can be imposed except with the authority of law.”

There are three lists under Schedule VII of the Constitution of India i.e. Union List, State List and Concurrent List. The Central government can legislate upon the subjects in the Union list, the State Government can legislate on the subjects in the state list and both Central and state government can legislate on the subjects of the concurrent list, but in case of contradiction, the law legislated by the Central Government will prevail. Equalization levy is being questioned on two fronts i.e. the incorporation through Finance Act, rather than Income Tax Act and the potential encroachment of the powers of the State government by the central government. The first issue has been dealt with in the earlier section. Entry 97 of List I covers “any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists”. Thus, the fact that “Equalization levy” or “tax on advertising” is not mentioned in the List II or List II can be the basis for the Centre to legislate on this subject matter. But, the Entry 55 of List II covers “Taxes on advertisements other than advertisements published in newspapers and advertisements broadcast by the radio or television”. [The Indian Equalisation Levy: Inelegant but not Unexpected, Shreya Rao, NLS Business Law Review, 2016, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2850608 ]

In order to resolve this deadlock, it is pertinent to understand the purpose of equalization levy. The primary purpose of equalization levy is to tax transactions on online mode. This includes multiple transactions, such as supply of goods, provision of services, advertising, marketing, promotional services and payment for reserving space on online medium for advertising. “Advertisement (other than through newspaper, radio or television)” is not the essence of the targeted transactions. It happens to be one of the subject matters on which the Centre legislated ancillary. It cannot be challenged on the basis of the pith and substance doctrine as the pith and substance of the area of legislation is within the powers of the Central government and the incidental encroachment upon the subject matter of the state cannot be a ground for declaring the legislation unconstitutional.

  • Potential challenge under National Treatment on Internal taxation and Regulation under GATT: The exclusion of domestic e-commerce operators from the definition can trigger the problem of national treatment i.e. if a tax is implemented only on foreign e-commerce operators. It can be argued that the services provided by domestic e-commerce operators are taxed separately from the services provided by the foreign e-commerce operators. This principle is applicable exclusively in case of the imports and thus, if any products are supplied by the e-commerce operator (non-resident) to Indian residents, are taxed by equalization levy and same products supplied by domestic e-commerce operator are not subject to it, the national treatment principle under GATT can be violated and this action can be challenged at WTO. In order to avoid this, India will have to incorporate the provision, creating an exception in all its Double Taxation Avoidance Agreements. Alternatively, if significant economic presence and equalization levy are proposed and accepted by the nations in the next negotiation on BEPS Action Plan 1, it can be a possible safeguard for India. [Article III, General Agreement on Tariffs and Trade, 1947, available at https://www.wto.org/english/docs_e/legal_e/gatt47.pdf ]

  • Treaty Override: Since, Equalisation levy is not accepted to be a part of the Double Taxation Avoidance agreements or the Multilateral Instrument, it is difficult to implement it against various nations. The nations are unlikely to agree to equalization levy or even if they do, it might be a long and tedious process. Hence, it is safe to say that it can be implemented against various nations only if it is a part of the domestic law. Thus, the potential solution was to implement it through domestic law, it is accepted by all the nations and becomes a part of the DTAAs and the international law. An exception can be created to the DTAAs, only if the domestic tax is a tax on income. Thus, India’s approach to not to include the equalization levy as ‘income tax’ but ‘transaction tax’ can be perceived as a potential means of treaty override. [Equalisation Levy- A Case of Treaty Override? Part II, Mr. Rahul K Mitra (Partner KPMG), May 9, 2016, available at https://www.taxsutra.com/experts/column?sid=607]

  • Applicability of Equalisation Levy in certain cases: Clarification is required in terms of applicability of equalization levy in certain cases as the law is silent on that. For example, the applicability of equalization levy is unclear if the total transaction amount satisfies the threshold, but the discounted sale price is below the threshold value or when the products supplied by the non-resident e-commerce operator are returned by the customer and the equalization levy is already paid, the provision for rebate of the equalization levy is absent from the legislation. Thus, clarificatory provisions should be released by the CBDT in this regard. [New Burden on Foreign E-Commerce Companies: The Problem of two Hows, Payaswini Upadhyay, March, 31 2020, available at: https://www.bloombergquint.com/law-and-policy/new-tax-burden-on-foreign-e-commerce-companies-the-problem-of-two-hows ]

Conclusion

In conclusion, it can be said that equalization levy was a much required step for preventing the tax evasion by non-resident e-commerce operators, but the mechanism adopted for the incorporation of this provision has led to potential problems. However, the entire scenario can drastically change on the basis of the OECD report on taxation of the digital economy, which is slated to be released in December, 2020. However, before the implementation of this levy the unique situation created by COVID-19 has to be considered. In light of the pandemic, majority of the work has been shifted online and various services are being provided online now. The implementation of the extra 2% levy might be deterrent the to the required services provided online and harm the economy and people further. Thus, the implementation of the Equalisation levy on e-commerce operators should be deterred till this extraordinary problem is resolved.

Section 115BBE and demonetisation: Penal taxation impeding settling of disputes?

Introduction of section 115BBE and amendments

  1. Section 115BBE of the Income-tax Act, 1961 (the “Act”) contains special provisions for taxation of cash credits, unexplained money, investments etc. It was introduced w.e.f. Financial Year 2012-13 onwards. Prior to introduction of this section, such incomes were subject to tax as per the tax rate applicable to the assessee and in case of individuals, HUF, etc., no tax was levied up to the basic exemption limit.

  2. As per the Memorandum explaining the provisions of Finance Bill, 2012, the section sought to curb the practice of laundering of unaccounted money by taking advantage of the basic exemption limit. Hence, in sub-section (1) of section 115BBE, it was provided that unexplained credits, money, investment, expenditure, etc., which would be deemed as income under sections 68, 69, 69A, 69B, 69C or 69D (the “Deemed Unexplained Incomes”), would be taxed at a flat rate of 30% (plus surcharge and cess as applicable).

  3. Sub-section (2) of this section provided that no expenditure or allowance shall be allowed to be deducted from such incomes, thereby eliminating the possibility of assessees claiming deductions so as to reduce their taxable unexplained incomes. However, what the Government failed to consider was to prohibit set off of losses against the Deemed Unexplained Incomes.

  4. In order to tighten the provisions of section 115BBE, Finance Act, 2016 amended sub-section (2) further w.e.f 1st April 2017 (i.e. from Financial Year 2016-17) to provide that no set off of loss would be permitted against the Deemed Unexplained Incomes. Though this amendment was in line with the object of introducing section 115BBE i.e. to tax full unexplained incomes at the maximum marginal rate, certain overzealous revenue officers started denying set off of losses for assessment years even prior to this amendment took effect. In one such case before the Kerala High Court pertaining to Assessment Year 2013-14 where the Principal Commissioner, in exercise of powers under section 263 of the Act, revised the assessment order on the ground that set off of brought forward loss against income under section 68 of the Act was incorrect, the High Court held that amendment brought in section 115BBE(2) by Finance Act, 2016 whereby set off of losses against income under section 68 was denied, would be effective from 1st April 2017, and therefore, for Assessment Year 2013-14, there was no bar with respect to allowing set off of carried forward unabsorbed depreciation on fixed assets against such income under section 681. A similar view was taken by the Jaipur2and Chandigarh3benches of the Income Tax Appellate Tribunal.

  5. Considering the inconsistent approach being adopted by Assessing Officers regarding set off of losses against the Deemed Unexplained Incomes, the Central Board of Direct Taxes (the “CBDT”), in its Circular No. 11/ 2019 dated 19th June 2019, acknowledged that the “pre-amended provision of section 115BBE of the Act did not convey the intention that losses shall not be allowed to be set-off against income referred to in section 115BBE of the Act and hence, the amendment was made vide the Finance Act, 2016”. However, since this amendment was specifically inserted w.e.f 1st April 2017, the CBDT clarified that an assessee would be entitled to claim set off of loss against incomes referred to in section 115BBE till Assessment Year 2016-17. Thus, a controversy which could have been averted with slightly more assiduousness at the time of drafting and introducing section 115BBE into the Act was put to rest, albeit after loss of precious judicial time.

Demonetisation and further amendment of section 115BBE

  1. The most prominent amendment in section 115BBE came later in the year 2016 in the aftermath of the demonetisation of high denomination currency notes (“HDNs”) w.e.f. 9th November 2016. After announcement of demonetisation of HDNs, sections of the media reported that unscrupulous persons were employing dubious ways of converting their black money into white. Apart from illegally getting HDNs exchanged with valid currency notes for a commission, assessees found out that they could even deposit HDNs in their bank accounts, offer the amount represented by HDNs as income, pay tax @ 30% and enjoy the balance 70%! Even if an assessee could not substantiate the source of income for the cash deposit, the fact that he had paid tax at the applicable rate on the same was sufficient to resist any further tax-scrutiny in respect of the same.

  2. Acknowledging that the existing provisions of the Act could possibly be used for concealing black money, the Government amended the Act by introducing the Taxation Laws (Second Amendment) Bill, 2016. The Bill was purportedly introduced “to plug these loopholes as early as possible so as to prevent misuse of the provisions”4. With a view to visit defaulting assessees to tax at a higher rate and stringent penalty provision, section 115BBE was amended to provide that the Deemed Unexplained Incomes, whether suo motu reflected by the assessee in his return of income or determined by the Assessing Officer during assessment, would be subject to tax at the rate of 60% and surcharge of 25% thereon & applicable cess. By the Taxation Laws (Second Amendment) Bill, 2016, section 271AAC was also introduced as per which penalty for additions made by the Assessing Officer towards the Deemed Unexplained Incomes would be leviable at the rate of 10% of the tax payable under section 115BBE.

  3. After the above amendment, section 115BBE(1) of the Act read as under:

“115BBE. Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D.

(1) Where the total income of an assessee,—

(a) includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or

(b) determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a),

the income-tax payable shall be the aggregate of—

(i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent.; and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).”

  1. What this amendment has done is that even if an assessee suo motu reflects any income under sections 68, 69, 69A, 69B, 69C or 69D in his return of income, he would still be liable to pay tax at the rate of 60% on the amount and 25% surcharge. This was done to negate the ingenious advice that the assessees were receiving to deposit their otherwise unsubstantiated HDNs in bank accounts, offer the same as income even under sections 68/ 69/ 69A/ 69B/ 69C/ 69D, pay tax @ 30% and enjoy the balance. After the amendment, a sum motu reflection in assessee’s return of income as above would result in an outflow of 77.25% (including tax, surcharge and cess) whereas any income determined by the Assessing Officer under sections 68, 69, 69A, 69B, 69C or 69D would be visited with an aggregate outflow into Government coffers at the rate of 83.25% (including tax, surcharge & cess and penalty under section 271AAC).

  2. However, quite afar from the stated objective of plugging loopholes to prevent misuse of existing provisions in the aftermath of demonetisation of HDNs, the amendment in fact had no correlation with demonetisation or additions made as a result of unsubstantiated cash deposits in the form of HDNs.

  3. What this amendment did under the garb of plugging loopholes was only increase the tax rate for certain types of incomes/ additions; it had no correlation with the purported misuse of the provisions of the Act which the amendment sought to address. This amendment by the Taxation Laws (Second Amendment) Act, 2016 was made applicable from 1st April 2017 i.e. Financial Year 2016-17 onwards. In other words, the higher tax rate is applicable even for pre-demonetisation period from 1st April 2016 to 8th November 2016. It would cover additions which have no correlation with unsubstantiated deposits of HDNs. It covers in its sweep all additions that an Assessing Officer may make upon rejecting the explanation offered by an assessee regarding the source and genuineness of a credit in the books, loans, identities of donors/ lenders/ payers, unexplained expenditure/ investments, amounts borrowed or repaid on hundi. The amendment, in other words, is retroactive.

Rule that assessment be in accordance with law existing on first day of financial year given a go-by

  1. It is quite settled that the Act, as it stands amended on the first day of April of any financial year applies to the assessments of that year and any amendments which come into force after that date do not apply to the assessment for that year. The Supreme Court, in the case of Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262 (SC), observed as under:

“Now, it is well-settled that the Income-tax Act, as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into, force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force.”

  1. However, the Taxation Laws (Second Amendment) Act, 2016 which received Presidential assent on 15th December 2016 has altered the tax rate for the Deemed Unexplained Incomes from 1st April 2016 onwards. Though the power of the legislature to amend the provisions of a taxing statute retrospectively or to give effect to provisions retroactively cannot be doubted, this can be said to be in violation of the principle enunciated by the Supreme Court in Karimtharuvi Tea Estate Ltd.(supra). The validity of this amendment to section 115BBE by the Taxation Laws (Second Amendment) Act, 2016 has been challenged before the Rajasthan High Court5. By order dated 6th March 2020, the High Court has issued notice to the Ministry of Finance and as an interim measure directed that no coercive steps shall be taken against the petitioner towards recovery. The Writ Petition is pending for hearing.

Experience with assessments dealing with deposit of HDNs and invocation of section 115BBE

  1. 31st December 2019 was the last date for completion of scrutiny assessments for Financial Year 2016-17 i.e. the financial year in which HDNs were demonetised and contained a demonetisation window6for deposit of HDNs in bank accounts. The ITR forms prescribed by the CBDT required assessees to furnish details of cash deposited by assessees in each of their bank accounts in the demonetisation window. On 31st January 2017, the Income Tax Department launched Operation Clean Moneywith e-verification of large cash deposits made in the demonetisation window as one of its tasks in the initial phases. In the first batch, the Income Tax Department identified 18 lakh persons in whose cases, cash transactions did not appear to be in line with the tax payer’s profile7.

  2. In order to aid Assessing Officers in carrying out verification of deposit of HDNs by assessees and evaluating the explanations furnished by assessees in this regard, the CBDT issued a verification checklist8and instructions9. For the use by the Assessing Officers, the CBDT even issued Standard Operating Procedures10. It also issued an internal guidance note11and enabled a tab called “Cash Transactions 2016” in the e-filing account of assessees to facilitate faceless responses to tax queries pertaining to cash deposits during the demonetisation window. All these steps were taken so that Assessing Officers could complete assessments with issues arising from deposit of HDNs in a fair and objective manner. However, the experience of assessees undergoing such assessments has been far from satisfactory.

  3. Scrutiny assessments for the Financial Year 2016-17 were concluded by 31st December 2019. It has been the experience of tax professionals that during these scrutiny assessments, Assessing Officers have obtained details of cash deposited in the pre-demonetisation period, in earlier financial years during the period corresponding to the demonetisation window, details of cash sales, cash deposits and withdrawals during different periods etc. strictly in line with the letter of the Verification checklist dated 9th August 2019. However, it has been the common grievance of tax professionals and assessees that in many cases, explanations and evidence furnished by assessees to substantiate deposit of HDNs in their bank accounts were rejected and/ or not considered and additions were made. In some cases, additions were made without granting an opportunity of personal hearing to the assessee. In some cases, the explanation of the assessees that the amount represented by cash deposits being already reflected in the return of income as sales and offered to tax was not only rejected but no corresponding downward adjustment to sales was made despite adding the same amount as income under section 68, leading not only to double taxation but taxation at the absurd rate of 105%12by taking recourse to section 115BBE.

  4. In one Writ Petition before the Madras High Court13involving a challenge to an assessment order making additions in respect of cash deposited by the assessee in the demonetisation window, the High Court while setting aside an assessment order observed as under:

    1. “The Government of India has introduced E-Governance for conduct of assessment proceedings electronically. It is a laudable steps taken by the Income-tax Department to pave way for an objective assessment without human interaction. At the same time, such proceedings can lead to erroneous assessment if officers are not able to understand the transactions and statement of accounts of an assessee without a personal hearing. The respondent should have to be therefore at least called for an explanation in writing before proceeding to conclude that the amount collected by the petitioner was unusual.

    2. In my view, the petitioner has prima facie demonstrated that the assessment proceeding has resulted in distorted conclusion on facts that amount collected by the petitioner during the period was huge and remained unexplained by the petitioner and therefore same was liable to be treated as unaccounted money in the hands of the petitioner under section 69A of the Income-tax Act, 1961. Therefore, the impugned order making the petitioner liable to tax at the maximum marginal rate of tax by invoking Section 115BBE of the Income-tax Act, 1961 placing reliance on the decision of the Honourable Supreme Court in Smt. Shrilekha Banerjee v. CIT, 1964 AIR SC 697 appears to be misplaced.

    3. Since the assessment proceedings no longer involve human interaction and is based on records alone, the assessment proceeding should have commenced much earlier so that before passing assessment order, the respondent assessing officer could have come to a definite conclusion on facts after fully understanding the nature of business of the petitioner. It appears that the return of income was filed by the petitioner on 02-11-2017. However, the assessment proceeding commenced much later towards the end of the period prescribed under section 153 of the Income-tax Act, 1961. In my view, assessment proceeding under the changed scenario would require proper determination of facts by proper exchange and flow of correspondence between the petitioner and the respondent Assessing Officer.”

  5. The months of January and February of 2020 have seen a spate of appeals being filed before the Commissioner (Appeals) against assessment orders making additions in respect of cash deposited in bank accounts in the demonetisation window. Furthermore, since the higher rate of 60% tax prescribed in section 115BBE and 25% surcharge thereon does not differentiate between additions made on account of unsubstantiated deposit of HDNs in bank accounts or the other Deemed Unexplained Incomes, or between cash deposits in the demonetisation window or prior thereto, all additions under sections 68, 69, 69A, 69B, 69C or 69D made by Assessing Officers in scrutiny assessments for Financial Year 2016-17 have been subject to this penal taxation. Obviously, the appellate authorities under the Act cannot go into the question of whether the amendment by the Taxation Laws (Second Amendment) Act, 2016 increasing the rate of tax and surcharge even for the pre-demonetisation part of FY 2016-17 is valid or not. Therefore, the appellate authorities, upon coming to the conclusion that on merits an addition under sections 68, 69, 69A, 69B, 69C or 69D for the pre-demonetisation part of FY 2016-17 is justified, they are very likely to uphold the invocation of section 115BBE also. An assessee aggrieved by the invocation of section 115BBE of the Act to Deemed Unexplained Incomes for the pre-demonetisation part of FY 2016-17 may have to challenge the amendment before the High Court similar to the challenge before the Rajasthan High Court in the case of Deepak Maratha v. UoI, through the Ministry of Finance & Anr
    (supra).

Vivad se Vishwas scheme and Section 115BBE

  1. Encouraged by the success of the indirect tax dispute resolution scheme which saw settling of over 1,89,000 indirect tax cases14, the Union Budget for the fiscal year 2020-21 contained an announcement of a similar scheme for direct tax disputes’ resolution/ settlement. Touted as “No dispute but Trust” scheme, the statute was named the Direct Tax Vivad se Vishwas Act, 2020 (the “VsV Act”) under which inter aliaincome-tax disputes pending as on 31st January 2020 were eligible to be settled. The Government is desperate to see the tax disputes being settled and revenue locked in disputes be released so much so that the CBDT has even informed its officers that their performance in respect of VsV Act would be an important factor in determining their future postings15.

  2. By and large, most scrutiny assessment orders pertaining to Financial Year 2016-17 involving additions towards the Deemed Unexplained Incomes and levying penal tax under section 115BBE of the Act would be eligible under the VsV Act. However, the question is whether assessees would or should opt for the same. With tax disputes being usually contested at the cost of a fraction of the tax involved in the dispute and even lesser effort on part of the taxpayer, time, energy and resources likely to be saved by the taxpayer are unlikely to persuade him to settle his disputes. The success of dispute resolution schemes depends on:

    1. What are the chances of assessees’ success before the appellate authorities; and,

    2. What they would receive in real terms by settling the dispute.

  3. A person is unlikely to settle a tax dispute if he feels that he has a good chance of succeeding before the appellate authorities or that the benefit accruing to him by settling is far less than the benefit he would derive if he were to take a chance and prosecute his appeal. On the other hand, if the assessee feels that the chances of his success are less, he may want to settle the dispute to negate penalty and/ or criminal prosecution.

  4. As per India‘s Annual Economic Survey – 201816, out of the total number of direct tax cases pending by the quarter ending March 2017, litigation initiated by the Income-tax Department at the ITAT and the Supreme Court was 88% while that before the High Courts was 83%. This unambiguously means that statistically the odds of an assessee succeeding in a tax appeal are very high.

  5. In the context of additions towards Deemed Unexplained Incomes for Financial Year 2016-17, an assessee whose explanations and evidence were unreasonably rejected or not considered at all by the Assessing Officer are likely to take a chance at least before the fact finding appellate authorities. Despite pressure from tax officers in this regard17, such assessees may want to pursue their appellate remedies rather than settle the dispute under the VsV Act. Thus, even overzealousness of Assessing Officers in making additions in a premeditated manner may become a roadblock in settling tax disputes under the VsV Act.

  6. One more stumbling block on the road to settling such disputes for Financial Year 2016-17 is that the tax payable by the assessee would be at the rate of 77.25%. In order to settle the dispute under the VsV Act, the assesse would have to pay this amount, being the “disputed tax” as per section 2(1)(j) r/w section 3 of the VsV Act. An assessee may not find the differential of a mere 22.75% sufficient to settle the dispute. It is important to note that the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 for indirect tax disputes resolution provided for payment of 40-70% of the disputed demands which is one of the key differences between the two schemes.

  7. In a given case where indiscriminate invocation of section 115BBE has resulted in double taxation and imposing tax at the rate of 105% (as set out in para 16 above), assessees would be well-advised to not opt for settling the dispute under the VsV Act as it is very likely that the appellate authorities might correct such errors of the Assessing Officer and assessees would get a chance to even contest the additions on merits. This would be a classic example of Government’s failure to reign in accountability on part of the Assessing Officers impeding its own efforts to tackle proliferation in tax litigation.

  8. In a case where an assessment order for Financial Year 2016-17 involves other additions apart from those inviting section 115BBE, an assessee may be constrained to prosecute his challenge to the assessment order as it is not possible for an assessee to avail the VsV Act for certain additions and prosecute the appeal for other additions in the same assessment order18. Thus, even one addition which the assessee may consider as unreasonable and unwarranted may result in him wanting to contest the matter rather than settle it.

  9. Obviously, each case would have to be seen on its own merits before deciding on whether it would be prudent to opt for the VsV Act. However, due to the above reasons, it is unlikely that too many assessment orders involving taxation under section 115BBE especially the ones which suffer from non-application of mind on part of the Assessing Officers or violation of principles of natural justice would be settled by assessees under the VsV Act.

Epilogue

  1. Much of the problem of lakhs of crores of rupees19being locked up in tax disputes lies in the high-pitched assessments that Assessing Officers are used to making with impunity. As famous American lawyer Clarence Darrow humourously said “the trouble with law is lawyers”, in the Indian tax context, it is often said that the real trouble with tax law is tax administration. Unless the tendency of making short-sighted amendments, later amending them to “convey the intention” of the earlier amendments and of making amendments having no nexus with the purpose of amendment as we have seen in the case of section 115BBE of the Act is stopped, it is unlikely that the trend in tax disputes will see an overall decline.

  2. The CBDT may issue directives to its officers to bring all pending disputes under the VsV Act and even link their future postings with their performance in respect of VsV Act, but without addressing the real issues that plague the implementation of progressive schemes such as the VsV Act, rather than earning the vishwasof taxpayers, this will only lead to virodh(dissension)20 from the officers themselves.

  1. Vijaya Hospitality and Resorts Ltd. v. CIT [2020] 419 ITR 322 (Ker.).

  2. ACIT v. Sanjay Bairathi Gems Ltd. [2017] 166 ITD 445 (Jp.).

  3. Famina Knit Fabs v. ACIT [2019] 176 ITD 246 (Chd.).

  4. Para 2 of the Statement of Objects and Reasons of the Taxation Laws (Second Amendment) Bill, 2016.

  5. Deepak Maratha v. UoI, through the Ministry of Finance & Anr,Civil Writ Petition No. 3625/ 2020 – Before the Jodhpur Bench of the Rajasthan High Court.

  6. The period between 9th November 2016 to 30th December 2016 (both days inclusive) when holders of HDNs were permitted to deposit their HDNs in their bank accounts.

  7. Source: Press Release dated 31st January 2017 –
    https://pib.gov.in/newsite/PrintRelease.aspx?relid=157815.

  8. Verification Checklist dated 9th August 2019 (F.No.225/145/2019-ITA-II) – Though marked “Strictly for departmental use”, it is freely available on the web.

  9. Instruction No. 3/ 2017 dated 21st February 2017 and Instruction No. 4/ 2017 dated 3rd March 2017.

  10. SOP issued vide F. No. 225/363/2017/ITA-II dated 15th November 2018 and 3rd March 2019.

  11. Internal Guidance Note issued vide F. No. 225/145/2019/ITA-II dated 13th June 2019.

  12. 30% tax on offering the amount as sales + 75% tax and surcharge by invoking section 115BBE (excluding cess and penalty).

  13. Salem Sree Ramvilas Chit Company (P) Ltd. v. DCIT [2020] 114 taxmann.com 492 (Mad.).

  14. Source: Para 126 of the Budget Speech for fiscal year 2020-21.

  15. Office Memorandum dated 13th February 2020.

  16. Chapter 09 “Ease of Doing Business Next Frontier: Timely Justice” – Para 9.24.

  17. It has been reported in the media that assessees have started to feel the pressure from tax officials to withdraw cases and settle the disputes through the scheme – Refer: https://smartinvestor.business-standard.com/market/story-628371-storydet-Vivad_se_Vishwas_scheme_100_target_or_poor_appraisal_taxmen_told.htm#.Xo62gogzZPY.

  18. FAQ Nos. 11 r/w 14 of CBDT clarification dated 4th March 2020 on the provisions of the VsV Act.

  19. As on the 30th November, 2019, the amount of disputed direct tax arrears is Rs. 9.32 lakh crores – Source: Statement of Objects and Reasons of the Direct Tax Vivad se Vishwas Bill, 2020.

  20. Read Vivad se Vishwas scheme: I-T officials up in arms over CBDT diktat at https://www.business-standard.com/article/economy-policy/vivad-se-vishwas-scheme-i-t-officials-up-in-arms-over-cbdt-diktat-120030500041_1.html.

 

Reopening beyond 4 year-finding in subsequent year’s assessment can be used as tangible material for reopening-Department cannot amend or change the notice or reasons-notice or the assessee should not be prejudiced or be taken by surprise-Assessee needs to disclose only primary facts-Non disclosure of other facts which may be termed as secondary facts is not necessary-Reopening can be initiated under the first proviso to section 147 of the Act only if the revenue can show that the assessee had failed to disclose fully and truly all material facts necessary for its assessment.

New Delhi Television Ltd. v. Dy. CIT Civil Appeal No. 1008 of 2020; dated 3rd April, 2020 Supreme Court (AY: 2008-09) www.itatonline.org

In mids of the covid 19 lockdown the Hon Supreme court rendered yet another landmark judgement under Income tax Act. The Supreme court once again reiterate the important legal principles in context to reopening of assessment beyond the period 4 years. The decision also deals with basic principles related to issuance of notice, recording of reasons and opportunity of hearing. Though the decision needs to be read in context of the facts of the case, however the decision will go a long way in understanding the legal-principles in relation to reopening of assessment.

FACTS:

The appellant New Delhi Television Limited is an Indian company engaged in running television channels of various kinds. It has various foreign subsidiaries however for present case we are concerned mainly with the subsidiary based in the United Kingdom (UK) named NDTV Network Plc., U.K. (NNPLC’).

The reassessment proceeding deals with the issue of step-up coupon bonds amounting to US$ 100 million, therefore certain facts revolving around these bonds needs to be known.

These bonds were issued in July, 2007 through the Bank of New York for a period of 5 years. The case of the assessee is that NNPLC issued stepup coupon bonds of US$ 100 million which were arranged by Jeffries International and the funds were received by NNPLC through Bank of NewYork. The assessee had agreed to furnish corporate guarantee for this transaction. These bonds were subscribed to by various entities. These bonds were to be redeemed at a premium of 7.5% after the expiry of the period of 5 years. However, these bonds were redeemed in advance at a discounted price of US $74.2 million in November, 2009.

The ROI for AY: 2008-09 was filed on 29.09.2008 declaring a loss. In the original assessment proceeding the assessing officer held that NNPLC had virtually no financial worth, it had no business of the name and therefore it could not be believed that it could have issued convertible bonds of US$ 100 million, unless the repayment along with interest was secured. This was secured only because of the assessee agreeing to furnish guarantee in this regard. Though the assessee had never actually issued such guarantee, the assessing officer was of the view that the subsidiary of the assessee could not have raised such a huge amount without having this assurance from the assessee. The transaction was of such a nature that the assessee should be required to maintain an arm’s length from its subsidiary, meaning that it should be treated like a guarantee issued by any corporate guarantor in favour of some other corporate entity. The assessing officer did not doubt the validity of the transaction but imposed guarantee fee @ rate of 4.68% by treating it as a business transaction and added Rs. 18.72 crores to the income of the assessee, vide order dated 03.08.2012.

Reopening of Assessment:

On 31/3/2015 (beyond 4 years from end of relevant Assessment years) the department issued notice u/s. 148 of the Act on the ground that net income chargeable to tax for the AY: 2008-09 had escaped assessment. On 4/8/2015 reasons were supplied. The main reason given was that in the following assessment year i.e. AY: 2009­10, the assessing officer had proposed a substantial addition of ₹ 642 crores to the account of the assessee on account of monies raised by the assessee through its subsidiaries NDTV BV, The Netherlands, and others.

The assessee for AY 2009-10 had raised its objection before the Dispute Resolution Panel (DRP) which came to the conclusion that all these transactions with the subsidiary companies in Netherland were sham and bogus transactions and that these transactions were done with a view to get the undisclosed income, for which tax had not been paid, back to India by this circuitous round tripping.

For issuing the reassessment notice the assessing officer relied upon the order of the DRP holding that there is reason to believe that funds received by NNPLC were actually the funds of the assessee. Therefore, the assessing officer was of the opinion that there

were reasons to believe that the funds received by NNPLC were the funds of the assessee under a sham transaction and that the amount of Rs.405.09 crores introduced into the books of NNPLC during the AY : 2008­09 through the transaction involving the step­up coupon convertible bonds pertains to the assessee.

Objections Raised by Assessee:

The assessee filed its objection to the notice and reasons given, and claimed that

  1. There had been no failure on the part of the assesse to disclose fully and truly material facts necessary to make an assessment;

  2. that the proceedings had been initiated on a mere change of opinion and there was no reason to believe that the transaction of step­up bonds was a legal and valid transaction.

  3. In addition, it was claimed that the assessing officer had no valid reasons to believe that the income of the assesse had escaped assessment.

  4. According to the assessee the assessment officer had accepted the genuineness of the transaction by levying guarantee fees and adding it back to the income of the assessee.

  5. In the alternative, it was submitted that the notice had been issued beyond the period of limitation of 4 years. According to the assessee it had not withheld any material facts and therefore, limitation of 6 years as applicable to the first proviso to Section 147 would not apply.

Rejection of Objection :

The claim of the assessee was disposed of by the assessing officer vide order dated 23.11.2015 wherein the assessing officer held that there was non­disclosure of material facts by the assessee and the notice would be within limitation since NNPLC was a foreign entity and admittedly a subsidiary of the assessee and the income was being derived through a foreign entity. Hence, the case of the assessee would fall within the 2nd proviso of Sec. 147 of the Act and the extended period of 16 years would be applicable. The objections were accordingly rejected.

The assessee’s writ petition was dismissed by the High Court on 10.08.2017. Against the said order the assessee filed the present Appeal before Supreme Court.

HELD :

  1. The court repeatedly observed that it will not go in to the merits of the allegations made by the department against the assessee. At this stage court will only decide whether the revenue has sufficient reasons to believe that undisclosed income of the assessee has escaped assessment and therefore there are grounds to issue notice.

  2. Whether the facts which came to the knowledge of the assessing officer after the assessment proceedings for the relevant year were completed, could be taken into consideration for coming to the conclusion that there were reasons to believe that income had escaped assessment .

    On behalf of the assessee it has been urged that once the transaction of step­up coupon bonds has been accepted to be correct, then the revenue cannot re­open the same and doubt the genuineness of the transaction based on the subsequent order of the DRP for the assessment year 2009­10. According to the assessee there is an attempt on behalf of the revenue to deliberately mixup the transactions relating to the Netherlands subsidiary with the U.K. subsidiary.

    According to the revenue Tax Evasion Petitions were filed by the minority shareholders of the assessee company on various dates, which complaints describe in detail the communication between the assessee and the subsidiaries and also allegedly showed evidence of round tripping of the assessee’s undisclosed income through a layer of subsidiaries which led to the issuance of the notice in question.

    The Hon. court relied on the decisions in case of Claggett Brachi Co. Ltd., London v. CIT, (1989) 177 ITR 409 (SC), 1989 Supp(2) SCC 182; M/s. Phool Chand Bajrang Lal and Another v. ITO and Another (1993) 203 ITR 456 (SC); (1993) 4 SCC 77 and Ess Kay Engineering Co.(P) Ltd. v. CIT, (2001) 247 ITR 818 (SC); (2001) 10 SCC 189, for the proposition that subsequent facts which come to the knowledge of the assessing officer can be taken into account to decide whether the assessment proceedings should be re­opened or not. Information which comes to the notice of the assessing officer during proceedings for subsequent assessment years can definitely form tangible material to invoke powers vested with the assessing officer u/s. 147 of the Act.

    Therefore the court disagreed with the submission of the assessee and observed that since the revenue discovered fresh tangible material subsequent to the assessment order of 03.08.2012, it cannot be said that the assessing officer did not have reasons to believe that income had escaped assessment. At the stage of issuance of notice, the assessing officer is to only form a prima facie view. Thus the court held that the material disclosed in assessment proceedings for subsequent years was sufficient to form such a view and that there were reasons to believe that income had escaped assessment in this case.

  3. Coming to the second question as to whether there was failure on the part of the assessee to make a full and true disclosure of all the relevant facts.

    The case of the assessee was that it had disclosed all facts which were required to be disclosed. The revenue has placed reliance on certain complaints made by the minority shareholders and it is alleged that those complaints reveal that the assessee was indulging in round tripping of its funds.

    According to the revenue the material disclosed in these complaints clearly shows that the assessee is guilty of creating a network of shell companies with a view to transfer its un­taxed income in India to entities abroad and then bring it back to India thereby avoiding taxation.

    The court refused to go into the above aspect of the matter because these complaints have not seen light of the day either before the High Court or before Supreme Court. The case of the revenue is that the assessee did not disclose the amount subscribed by each of the entities and furthermore the management structure of these companies.

    The court observed that even before the assessment order was passed on 03.08.2012, the assessing officer was aware of the entities which had subscribed to the convertible bonds. The court observed that it was apparent from the records of the case that the revenue was aware of the entities which subscribed to the convertible bonds.

    The fact that stepup coupon bonds for US$ 100 millionwere issued by NNPLC was disclosed; who were the entities which subscribed to the bonds was disclosed; and the fact that the bonds were discounted at a lower rate was also disclosed before the assessment was finalised. This transaction was accepted by the assessing officer and it was clearly held that the assessee was only liable to receive a guarantee fees on the same which was added to its income. The court held that it cannot be said that the assessee had withheld any material information from the revenue.

    The court further observed that the revenue can take the benefit of the extended period of limitation of 6 years for initiating proceedings under the first proviso section 147 of the Act only if the revenue can show that the assessee had failed to disclose fully and truly all material facts necessary for its assessment. According to the court the assessee, had disclosed all the facts it was bound to disclose. If the revenue wanted to investigate the matter further at that stage it could have easily directed the assessee to furnish more facts.

  4. Whether the assessee had disclosed all the primary facts necessary for assessment of its case to the assessing officer ?

    On the argument of the revenue that the assessee to avoid detection of the actual source of funds of its subsidiaries did not disclose the details of the subsidiaries in its final accounts, balance sheets, and profit and loss account for the relevant period as was mandatory under the provisions of the Indian Companies Act, 1956. The court observed that it was not disputed that the assessee had obtained an exemption from the competent authority under the Companies Act, 1956 from providing such details in its final accounts, balance sheets, etc. As such it cannot be said that the assessee was bound to disclose this to the Assessing Officer. The Assessing Officer before finalising the assessment of 03.08.2012 had never asked the assessee to furnish the details.

    The revenue also came up with the plea that certain documents were not supplied but according to court all these documents cannot be said to be documents which the assesse was bound to disclose at the time of assessment. The court noted the fact that there was material on record to show that the assessee had not only disclosed the names of all the bond holders but also their addresses; number of bonds along with the total consideration received. This forms part of the assessment orders dated 03.08.2012 in the case of M/s. NDTV Labs Ltd. and M/s. NDTV Lifestyle Ltd which were passed by the same officer who had passed the assessment order in the case of the assessee on the same date itself. Therefore the entire material was available with the revenue. The court held that, all relevant facts were duly within the knowledge of the assessing officer. Therefore, there was full and true disclosure of all material facts necessary for its assessment by the assessee.

    The court held that the assessee had disclosed all primary facts before the assessing officer and it was not required to give any further assistance to the assessing officer by disclosure of other facts. It was for the assessing officer at this stage to decide what inference should be drawn from the facts of the case.

    The Hon. court relied on the decision in case of Calcutta Discount Co. Ltd. v. ITO, Companies District I, Calcutta and Anr. (1961) 41 ITR 191 (SC); AIR 1961 SC 372, wherein it was held that non disclosure of other facts which may be termed as secondary facts is not necessary.

    The court therefore held that the assessee disclosed all the primary facts necessary for assessment of its case to the assessing officer.

    The Court also noted the fact that revenue in its counter­ affidavit before the High Court had stated that it was not relying upon the non­disclosure of facts by the assessee, therefore before Supreme court the revenue had taken a contrary stand and therefore could not have been permitted to orally urge the same. Even otherwise court held that the assessee had fully and truly disclosed all material facts necessary for its assessment and, therefore, the revenue cannot take benefit of the extended period of limitation of 6 years.

  5. The next arguments urged before the Court by the revenue was that in terms of second proviso to section 147 of the Act r.w.s 149(1)(c) of the Act, the limitation period would be 16 years since the assessee has derived income from a foreign entity. The second proviso and explanation 2(d) reads as follows:

    Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year:

    xxx xxx xxx

    Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :—

        xxx xxx xxx

        (d) where a person is found to have any asset(including financial interest in any entity) located out side India.

        xxx xxx xxx

    The assessee contented that no income was derived from the foreign entity and a loan cannot be termed to be an asset or an income and it is submitted that the notice cannot be said to have been issued under the second proviso.

    The court noted that the notice dated 31.03.2015 is conspicuously silent with regard to the second proviso. It does not rely upon the second proviso and basically relies on the provision of Section 148 of the Act. The reasons communicated to the assessee on 04.08.2015 mention‘ reason to believe’ and non disclosure of material facts by the assessee. There is no case set up in relation to the second proviso either in the notice or even in the reasons supplied on 04.08.2015 with regard to the notice. It was only while rejecting the objections of the assessee that reference has been made to the second proviso in the order of disposal of objections dated 23.11.2015.

    The High Court relied upon the judgment in Mohinder Singh Gill & Anr. vs. The Chief Election Commissioner, New Delhi & Ors. (1978) 2 SCR 272 / AIR 1978 SC 851 and came to the conclusion that the revenue cannot rely upon the second proviso because the notice was silent in this regard. However, the High Court held that the assessee was guilty of non disclosure of material facts and upheld the reopening.

    The Supreme court observed that it had already held that the assessee was not guilty of non disclosure of material facts and the revenue has not challenged the judgment of the High Court in so far as the findings against it is concerned. However the court permitted the revenue to defend the petition even on a ground which may have been decided against it by the High Court.

    On behalf of the revenue it was urged that mere non naming of the second proviso in the notice does not help the assessee.

    The court held that, the noticee or the assessee should not be prejudiced or be taken by surprise. The uncontroverted fact is that in the notice dated 31.03.2015 there is no mention of any foreign entity. There is only mention of the Section 148. Even after the assessee specifically asked for reasons, the revenue only relied upon facts to show that there was reason to believe that income has escaped assessment and this escapement was due to the nondisclosure of material facts. There is nothing in the reasons to indicate that the revenue was intending to apply the extended period of 16 years. It is only after the assessee filed its reply to the reasons given, that in the order of rejection for the first time reference was made to the second proviso by the revenue.

    According to the court this was not a fair or proper procedure. The assessee must be put to notice of all the provisions on which the revenue relies upon.

    The notice and reasons given thereafter do not conform to the principles of natural justice and the assessee did not get a proper and adequate opportunity to reply to the allegations which was being relied upon by the revenue. If the revenue is to rely upon the second proviso and wanted to urge that the limitation of 16 years would apply, then in the notice or at least in the reasons in support of the notice, the assessee should have been put to notice that the revenue relies upon the second proviso. The assessee could not be taken by surprise at the stage of rejection of its objections or at the stage of proceedings before the High Court that the notice is to be treated as a notice invoking provisions of the second proviso of Section 147 of the Act.

The Hon. Court allowed the appeal of the assessee by holding that the notice issued to the assessee shows sufficient reasons to believe on the part of the assessing officer to reopen the assessment but since the revenue has failed to show nondisclosure of facts the notice having been issued after a period of 4 years is required to be quashed.

As obiter the Hon court also stated that they have not expressed any opinion on whether on facts of this case the revenue could take benefit of the second proviso to S 147 read with S 149(1)(c).or not. Therefore, the revenue may issue fresh notice taking benefit of the second proviso if otherwise permissible under law.

Issue left open :

Thus a major issue in context to applicability of second proviso to sec 147 of the Act i.e. asset or financial interest in foreign country, is left open. As per second proviso to section 147 of the Act. inserted by the Finance Act 2012 w.e.f. 1.7.2012, provides that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India chargeable to tax has escaped assessment in any assessment year. According to the second proviso the condition of first proviso to sec 147 will not be required to be fulfilled i.e disclosure of fully and truly all material facts. Thus if a notice u/s. 147/148 is issued relying on the second proviso, the dept need not satisfy the requirement of first proviso, i.e even if an assessee has disclosed fully and truly all material facts for assessment, the Dept can reopen the assessment.

However one should note that if at the time when the order which was subject matter of appeal or revision was passed, the time-limit for issuance of notice u/s. 148 had already expired, prior to insertion of second proviso then the time limit of extended period of 16 years will not apply.

The law of limitation is intended to give certainty and finality to legal proceedings and to avoid exposure to risk of litigation to litigant for indefinite period on future unforeseen events. Proceedings, which have attained finality under existing law due to bar of limitation cannot be held to be open for revival unless the amended provision is clearly given retrospective operation so as to allow upsetting of proceedings, which had already been concluded and attained finality. The amendment to subsection (1) of section 150 is not expressed to be retrospective and, therefore, has to be held as only prospective. The amendment made to sub-section (1) of section 150 which intends to lift embargo of period of limitation under section 149 to enable authorities to reopen assessments not only on the basis of orders passed in proceedings under the Act but also on order of a Court in any proceedings under any law, has to be applied prospectively on or after 1.4.1989 when the said amendment was introduced to sub-section (1). The provision in sub-section (1), therefore, can have only prospective operation to assessments, which have not become final due to expiry of period of limitation prescribed for assessment under section 149.

Summary of ratios laid down by the Supreme Court.

  1. In a challenge to reopening proceeding the court should not go in to the merits of the allegations made by the dept against the assessee (in present case Tax Evasion Petitions filed by minority shareholders). At this stage court will only decide whether the revenue has sufficient reasons to believe that undisclosed income of the assessee has escaped assessment and whether there are grounds to issue notice.

  2. At the stage of issuance of notice, the assessing officer is to only form a prima facie view.

  3. The material disclosed in assessment proceedings for subsequent years are sufficient to form a view that there were reasons to believe that income had escaped assessment in a case.

  4. Information which comes to the notice of the assessing officer during proceedings for subsequent assessment years can definitely form tangible material to invoke powers vested with the assessing officer u/s. 147 of the Act.

  5. Revenue can take the benefit of the extended period of limitation of 6 years for initiating proceedings under the first proviso section 147 of the Act only if the revenue can show that the assessee had failed to disclose fully and truly all material facts necessary for its assessment.

  6. Mere change of opinion of the assessing officer is not a sufficient to meet the standard of ‘reason to believe’.

  7. The requirement of law is that the assessee must disclosed all primary facts before the assessing officer and it was not required to give any further assistance to the assessing officer by disclosure of other facts.

  8. It was for the assessing officer to decide what inference should be drawn from the primary facts disclosed. Non disclosure of other facts which may be termed as secondary facts is not necessary.

  9. The revenue cannot be permitted to take a contrary stand and therefore could not be permitted to orally urge the same before the court.

  10. The assessee must be put to notice of all the provisions on which the revenue relies upon. The assessee could not be taken by surprise at the stage of rejection of its objections or at the stage of proceedings before the Court that the notice is to be treated as a notice invoking a particular provision of the Act.

  11. The notice and reasons given should confirm to the principles of natural justice and the assessee must get a proper and adequate opportunity to reply to the allegations which was being relied upon by the revenue. The court held that, the noticee or the assessee should not be prejudiced or be taken by surprise.

  12. There is no bar in issuing second reopening notice if notice satisfy the other condition.

Conclusion :

By virtue of Article 141 of the Constitution of India, the judgments pronounced by the Supreme Court have the force of law and are binding on all the Courts in India.

Thus in the ongoing reassessment proceedings and upcoming one’s, the ratio of the above decision will be helpful. However the ratio of the above decision has to be read in context of the fact before it as held in CIT vs. Sun Engineering Works (p.) Ltd. (1992) 198 ITR 297 (SC). One needs to note the above key legal principles while dealing with reassessment proceedings and raise appropriate contentions while filing reply/objections to the reasons recorded for reopening of assessment. It is settled position in law now that department cannot improve the reasons recorded and the courts shall not rely on any new explanation from department either in form of affidavit or orally submitted in court nor from the order rejecting the assessee’s objection. Further one should note that there is no bar in law in issuance of second notice u/s. 147 /148 of the Act subject to other conditions are satisfied.

One can also make reference to the detail article on reopening:

http://www.itatonline.org/articles_new/a-comprehensive-guide-to-the-law-of-reopening-of-assessments-under-sections-147-to-153-of-the-income-tax-act-1961/#link

http://itatonline.org/articles_new/guide-to-the-law-of-reopening-of-assessments-updated-sept-2018/#dlcenter

Thank you

“The problem with experts is that they do not know what they do not know.”

— Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

COVID-19 Corona Virus pandemic, the Black Swan event! The whole world has been swept by the Corona Virus. The extraordinary situation has arisen. The sudden closure of small and large economies across the globe is an unprecedented event. Virtually the whole world is under lockdown. The restrictions on mobility, fall in income and absence any kind of activity will result into contraction of demand. The rate of unemployment, in most of the developed countries, is spiked at decades high. We are going to witness the worst recession post Great Depression. One after another, Governments of developed nations are coming up with massive stimulus packages to keep the economy on track. They are even differing tax payments by their citizens without any additional burden of interest to leave liquidity in their hands. For policy makers, now priority is revival of the economy rather than controlling inflation and managing deficits.

Indian policy makers are no exception to the above. Government of India has taken conscious call of placing the life over livelihood by taking early on decision of nationwide lockdown. During the virulent times, the Government’s priority has been public health over the economy. The whole of India is under the lockdown for 40+ days. This has given rise to various socio-economic problems. At this juncture the world economies are contracting and International Agencies have reduced India’s GDP projection to less than half in the span of two months.

Sensing the tax and regulatory issues, the Finance Minister has announced relief measures by way of press release dated
24-03-2020. Post issue of press release all India lockdown was ordered. On 31st March 2020, the Government of India promulgated the Ordinance “The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020”. The Ordinance acknowledges the fact that it has been promulgated in the wake breakout of pandemic COVID-19 across many countries of the world including India, which is causing loss of life and livelihoods of people. Hence, it has become imperative to relax certain provisions, including the extension of the time limit, in the taxation and other laws. Government has been swift in announcing measures. But certain decisions of the establishment expose their myopic vision. I am reminded of the lines from Nassim Nicholas Taleb’s book The Black Swan: The Impact of the Highly Improbable, “Why do we, scientists or non-scientists, hotshots or regular Joes, tend to see the pennies instead of the dollars? Why do we keep focusing on the minutiae, not the possible significant large events, in spite of the obvious evidence of their huge influence?” Besides Ordinance various circulars/notification relaxing the provisions has also been issued.

In this article I would be covering direct tax relaxation and relaxation under Companies Act.

PART A – Direct Taxes

Before I move to the provision of Ordinance, I would deal with 2 decisions of the Supreme Court relevant to the subject.

  1. Allahabad High Court in case of Darpan Sahu v. State Of U.P. & Others1 has on account of pandemic disease of Corona Virus (COVID-19), had held that “All the recovery proceedings at the end of the district administration, financial institutions and other administrative bodies/authorities/agencies and otherwise at the end of the instrumentalities of the State shall be deferred for two weeks i.e. till 6.4.2020.” It has also granted a stay on auction, eviction demolition etc. Similar decision was given by the Kerala High Court in case of P. D. Sunny2.

    Against above mentioned both the decisions, the Central Government has moved before the Supreme Court3. Before Supreme Court, it took a stand, that the Government of India is fully conscious of the prevailing situation and would itself evolve a proper mechanism to assuage concerns and hardships of everyone. Considering the stand taken by the Government of India, the Supreme Court has granted stay against both rulings on 20/03/2020.

  2. Supreme Court considering situation arising out of the challenge faced by the country on account of COVID-19 Virus and resultant difficulties that may be faced by litigants across the country in filing their petitions/applications/suits/appeals/all other proceedings has suo moto in ReCognizance for Extension of Limitation4has extended the period of limitation on 3/03/2020. It held that the period of limitation in all such proceedings, irrespective of the limitation prescribed under the general law or Special Laws whether condonable or not shall stand extended w.e.f. 15th March 2020 till further order/s to be passed by the Supreme Court in present proceedings. Said order was passed by the Supreme Court under Article 142 read with Article 141 of the Constitution of India and it declared that this order is a binding order within the meaning of Article 141 on all Courts/Tribunals and authorities.

    The Hon’ble Supreme Court in the above mentioned order at para 1 has referred to “petitions/applications/suits/appeals/all other proceedings”. Thus Supreme Court covered not only “petitions/applications/suits/appeals” but also “all other proceedings”. Further, under para 3 it stated that its order is binding on “Courts/Tribunals and authorities”. Thus Supreme Court Order is not only binding to the “Courts/Tribunals” but also on “authorities”. The authorities may also include tax officers.

    Article 142(1) empowers the Supreme Court to pass such decree or make such order as is necessary for doing complete justice in any cause. Further, any decree so passed or order so made shall be enforceable throughout India until Legislature acts upon the same5. The power under Article 142 has been granted to Supreme Court to issue necessary directions to fill the vacuum till such time the legislature steps in to cover the gap or the executive discharges its role6.

    An order which Supreme Court can make to do complete justice between the parties, must not only be consistent with the fundamental rights guaranteed by the Constitution, but it cannot even be inconsistent with the substantive provisions of the relevant statutory laws7. Indeed, these constitutional powers cannot, in any way, be controlled by any statutory provisions but at the same time these powers are not meant to be exercised when their exercise may come directly in conflict with what has been expressly provided for in a statute dealing expressly with the subject8.

    On promulgation of the Ordinance suo motto Supreme Court Order may seize to apply in some cases. Supreme Court Order provided relief w.e.f. from 15.03.2020 but ordinance has provided relief only in respect from the period commencing from 20.03.2020. Hence relief may be available for the period between 15.03.2020 and 20.03.2020 as per the Supreme Court Order. Further, in case extra-ordinary situation persists beyond the 29-06-2020 and no further necessary relief provided above ruling would not only help the taxpayers but also the tax officers.

The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020

The Ordinance generally relaxes or extend due dates in respect of anytime limit has been specified in, or prescribed or notified under, the specified Act for the completion or compliance of action which falls during the period between 20 March 2020 and 29 June 2020 to 30 June 2020 or in case such other date after the 29 June 2020 the Central Government has authorised to relax compliance by such date as may be notified, specify in this behalf. The Specified Act means

(i) the Wealth-tax Act, 1957;

(ii) the Income-tax Act, 1961;

(iii) the Prohibition of Benami Property Transactions Act, 1988;

(iv) Chapter VII of the Finance (No. 2) Act, 2004;

(v) Chapter VII of the Finance Act, 2013;

(vi) the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015;

(vii) Chapter VIII of the Finance Act, 2016; or

(viii) the Direct Tax Vivad se Vishwas Act, 2020

Broadly relaxation in dates are enumerated under:

Particulars

Current due date

Extended due date

Remarks

Filing of Belated / Revised Return of Income for FY 2018-19

31/03/2020

30/06/2020

Due date extended for filing belated returns u/s 139(4) as well as revised return u/s 139(5) for FY 2018-2019

Payment of Advance Tax, Self-Assessment Tax, Regular Tax for payments due between 20/03/2020 to 29/06/2020

31/03/2020

30/06/2020

Taxes paid after the original due date but on or before revised due date shall be subject to interest (e.g. u/s 234B) at the rate of 0.75% for the month or part thereof instead of 1%*. No penalty shall be levied or prosecution shall be sanction for such delay in payment.

Payment of TDS for the month of:

 

30/06/2020

TDS paid after the original due date but on or before revised due date shall be subject to interest at the reduced rate of 0.75% for the month or part thereof instead of 1.5%*. No penalty shall be levied or prosecution shall be sanctioned for such delay in payment.

i) March 2020

(i) 30/04/2020

ii) April 2020

(ii) 07/05/2020

Filing of 15G/H for FY 2020-2021

07/04/2020

30/06/2020

If valid Forms 15G/H were submitted for FY 2019-2020, then the validity period of such forms is extended up to 30/06/2020

For the quarter ended 31st March 2020, filing of:

 

30/06/2020

 

(i) TDS Returns in Form 24Q/26Q

i) 31/05/2020

(ii) TCS Statement u/s 206C r.w.r. 31AA

ii) 15/05/2020

Filing of TDS Returns in Form 26QB/QC/QD for the months of:

 

30/06/2020

 

i) February 2020

i) 30/03/3030

ii) March 2020

ii) 30/04/2020

iii) April 2020

iii) 30/05/2020

For the quarter ended 31st March 2020, issue of:

 

30/06/2020

 

(i) TDS Certificates in Form 16 in respect of tax deducted from salary for FY 2019-20 / in respect of tax deducted other than salary in Form 16A

(i) 15/06/2020

(ii) Issue of TCS certificate u/s 206C r.w.r. 37D

(ii) 30/05/2020

   

Issue of TDS certificate in Form 16B/16C/16D in respect of payments made for the transfer of immovable property u/s 194-IA, Payment of rent by individual/HUF u/s 194-IB, Payment of other sums by individual/HUF u/s 194M for the month of:

 

30/06/2020

 

i) March 2020

i) 15/05/2020

ii) April 2020

ii) 14/06/2020

Furnishing of Form 24G u/s 206C r.w.r. 37CA & u/s 192(1A) r.w.r. 20 by an office of the Government for the month of

 

30/06/2020

 

i) March 2020

i) 30/04/2020

ii) April 2020

ii) 15/05/2020

iii) May 2020

iii) 15/06/2020

Due date to send the intimation for processing of statement of TDS u/s 200A/ TCS u/s 206CB filed during the FY 2018-19

31/03/2020

30/06/2020

 

Payments under Chapter VI-A under heading B (Section 80C to Section 80GGC), i.e. various Tax Saving Instruments u/s. 80C, medical insurance u/s. 80D, donations u/s. 80G

31/03/2020

30/06/2020

One will have to ensure that the same deduction is not claimed twice for FY 2019- 20 as well as for FY 2020-21.

However, the taxpayer has the option either to claim in FY 2019-20 or FY 2020-21

Investments / payments construction purchase u/s. 54 to 54GB for claiming Long Term Capital Gains Exemption for the FY 2019-20

Due dates fall between 20.03.2020 and 29.06.2020

30/06/2020

In case due date falls after 29.06.2020 Central Government is authorised to notify such other date for completion or compliance

Linking of PAN with Aadhar Number u/s 139AA

31/03/2020

30/06/2020

However, no corresponding amendment has been made to section 139AA r.w.r. 114AAA non Aadhar linked PAN would be treated as invalid, current due date remains 31.03.2020.

Application of new PAN on triggering of specified events or holding positions like being director etc. of a specified person referred in rule 114(3)(v)

31/05/2020

30/06/2020

 

Commencement of manufacturing/ production or providing any services by SEZ units for claiming deduction u/s.10AA

31/03/2020

30/06/2020

Letter of approval issued under the provisions of the Special Economic Zones Act 2005 should have been issued on or before 31/03/2020.

Seems no relaxation has been provided where the later of approval could not be issued before 31/3/2020 due to lockdown.

Availing Vivad se Vishwas Scheme without paying 10% additional liability

31/03/2020

30/06/2020

Post 30/06/2020 taxpayer can avail the settlement of the dispute on payment of a specified rate of disputed tax along with an additional 10%

Completion of any proceeding or passing of any order or issuance of any notice, intimation, notification, sanction or approval, by any authority, commissioner or tribunal

Any date falling within the specified period between 20.03.2020 and 29.06.2020

30/06/2020

This would cover various cases e.g.

(i) Issuing an intimation u/s 143(1) after processing of return of income, in respect of the return is filed:

a) During FY 2018-19 under section 139;

b) During FY 2018-19 in response to a notice issued under section 142(1)

(ii) Time-limit to issue a reassessment notice u/s 149 for the:

     

a) Income escaped is less than Rs. 1 lakh for AY 2015-16

b) Income escaped is more than Rs. 1 lakh for AY 2013-14

c) Income escaped is related to any foreign asset (including financial interest) for AY 2003-04

d) To a person who has been treated as an agent of a non-resident under section 163 for AY 2013-14

Filing of any reply or application or furnishing of any report, document, return, statement or such other record

falling within the specified period between 20.03.2020 and 29.06.2020

30/06/2020

The time limit for submission to be made under scrutiny assessment proceedings, revision application, rectification application etc. gets extended

Filing of appeals against any assessment / appellate order under Income Tax Act 1961 before the CIT(A)/ITAT

Within 30/60 days of receipt of order

30/06/2020

 

Furnishing of Statement of Financial Transactions (SFT) for the Financial Year 2019-20

31/05/2020

30/06/2020

 

* Period of delay means the period between the due date and the actual date of payment. Reduced interest rate is applicable only for payments made up to 30th June 2020. Original rates shall apply for any made payments made after 1st July 2020 even for the tax period, payments of which are due between 20th March 2020 and 29th June 2020. In other words, a lower rate of interest would not be applicable in case of delay in payment has occurred before March 20, 2020 and after June 30, 2020.

The due date for payment of TDS for payments made or provided during March 2020 falls on 30 April 2020 and during this period there is extended lockdown. Considering the instruction of lockdown by the Government of India and also that State Government, taxpayers would face practical difficulties to pay tax as on 30 April 2020 and failure to pay the tax they would be liable to pay interest. E.g. TDS in respect of contract payment is paid on 4th May 2020 i.e. estimated date of release for lockdown. In the instant case, there is a delay of 4 days and that to on account of lockdown. The assessee would be subject to paying interest for 3 months. Is this justified? Lex not cogit ad impossibila which means that law does not compel a man to do that which he cannot possibly perform. However mandatory the provision may be, where it is impossible of compliance that would be a sufficient excuse for non-compliance, particularly when it is a question of the time factor9. The other similarly recognized legal maxims are “Impotentia Excusat Legim” and “neon tenatur ad impossibilia.” Where the law creates a duty or charge and the party is disabled to perform it, without any default in him and has no remedy over it, there the law will in general excuse him. The maxim of law impotentia excusat legam is intimately connected with another maxim of law lex non cogit ad impossibilia. Therefore, when it appears that the performance of the formalities prescribed by a statute has been rendered impossible by circumstances over which the persons interested had no control, like the act of God, the circumstances will be taken as a valid excuse. Where the act of God prevents the compliance of the words of a statute, the statutory provision is not denuded of its mandatory character because of supervening impossibility caused by the act of God10. Where parties are prevented from doing a thing in a particular day, not by any act of their own, but by the act of the Government or other they are entitled to do it at the first subsequent opportunity, then taxpayer should not be subject to any penal provision11.

Issue of certificates for lower/Nil TDS deduction/collection (TCS) u/s. 195, 197 and 206C(9) Considering the hardship caused to the taxpayers and constraints faced by the tax officer CBDT has extended benefit of earlier issued NIL/lower deduction certificates and has issued instructions u/s 119(1)12

Particulars

Current due date

Extended due date

Remarks

For applications already filed for FY 2019-2020 but not disposed of till 31/03/2020

 

30/06/2020 or disposal date, whichever is earlier

The applicant has to intimate the concerned Assessing Officer (AO) vide an email along with the documents and evidence of applying. AO has to dispose of the applications by 27/04/2020 and communicate the issuance/rejection vide email to the applicant.∑

For applications already filed for FY 2020-2021 but not disposed till 31/03/2020 and assessee is having lower/Nil deduction certificate for FY 2019-20

 

The validity of a certificate issued for FY 2019-20 shall extend till 30/06/2020 or disposal date, whichever is earlier3

 

For those who could not apply for lower /Nil deduction of TDS/TCS for FY 2020-2021 and assessee is having lower/Nil deduction certificate for FY 2019-20

 

The validity of a certificate issued for FY 2019-20 shall extend till 30/06/2020

Subject to the condition that application to be filed at the earliest as soon as normalcy is restored or 30/06/2020, whichever is earlier

For those who could not apply for lower /Nil deduction of TDS/TCS for FY 2020-2021 and assessee is not having lower/Nil deduction certificate for FY 2019-20

 

The modified procedure introduced: Assessee shall apply to vide an email addressed to the concerned Assessing Officer (AO). The email shall contain filled Form 13, projected financials of FY 2020-2021, provisional financials of FY 2019-2020, financials and ITR of FY 2018-2019, Form 26 AS for FY 2018-19 & 2019-2020. The AO shall issue the certificate on or before 30/06/2020 and communicate the same vide email to the applicant.

On payment to Non-Residents incl. Foreign Companies, having PE in India and not having lower deduction certificates for FY 2019-20

 

Tax to be deducted @ 10% including surcharge and cess on payments made till 30/06/2020 for FY 2020-2021 or disposal date, whichever is earlier

∑ The certificate issued shall be applicable for the amounts credited/debited after the date of making application u/s. 195, 197 and 206C(9) during the FY 2019-2020 but is unpaid/not received till the date of issuance by the AO.

∞ (i) For certificates valid for a particular period during FY 2019-20, the same shall also be valid for a further period from 01/04/2020 to 30/06/2020. For example, if the certificate for lower/Nil TDS was issued for the period 01/10/2019 to 15/12/2019 for the FY 2019-2020, then the same shall also be valid for the period from 01/04/2020 to 30/06/2020 for the FY 2020-2021.

(ii) The threshold limit/transaction limit mentioned in the certificate issued for FY 2019-2020 will be taken fresh for the period from 01/04/2020 to 30/06/2020 for FY 2020-2021and the amount shall be same as assigned for the certificate for FY 2019-2020.

(iii) In case the taxpayer had a certificate for the lower deduction for FY 2019-2020 and application has been made for FY 2020-2021 for a new TAN different from that for which the certificate issued in FY 2019-2020 or where the rates mentioned in the lower/Nil TDS certificate issued for FY 2019-2020 are higher and the taxpayer wants a revision/reduction in the rates, the relaxation provided shall not be applicable and the taxpayer shall have to apply afresh as per the procedure mentioned in the order.

Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund

Considering pandemic a new fund has come up with Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES FUND). This fund has been inserted in section 10(23C)(i) and 80G(2)(a)(iiia) along with Prime Minister’s National Relief Fund and thus the person contributing under the said fund would be eligible for 100% deduction of the contribution made. Further various employees of the government and other organizations have contributed their part of salary to PM Cares Fund through their employer. The contribution is not made directly by such employees. In cases where donation is made to the Fund by an employee through his/her employer, the Fund will not issue a separate certificate to every such employee in respect of the donation so made, as the contributions made to the Fund are in the form of a consolidated payment. The CBDT has clarified13 that the deduction in respect of such donations will be admissible u/s 80G of the Act based on the Form 16/Certificate issued by the Drawing and Disbursing Officer (DDO)/Employer in this regard. Various organization/institutions are also approaching to various people for gathering donation for PM CARES Fund. Issue may arise with respect to deduction u/s 80G for the person who contribute to such institution and who in turn would contribute to PM CARES Fund. In the records of PM CARES Funds individual names may not be available and Fund would not issue receipt in the name of such individual persons.

Further the contribution to PM CARES FUND & State Disaster Management Authorities to tackle COVID-19 qualifies as Corporate Social Responsibility expenditure. Hence such contribution will not be allowed as deduction while computing taxable income. It was also clarified that the contribution to ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ not be admissible as CSR expenditure. Hence any contribution to ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ may be eligible as deduction while computing taxable income.

Cash System of Accounting

Assessee following cash system of accounting can claim a deduction of expenses which has been actually paid during the year and only such income would be taxed during the year which has been actually received. Many of the assessees are following cash system of accounting, especially professionals. Due to the lockdown, planned expenditure could not have been paid by the close of the financial year. The ordinance has not provided any new relief to the assessees who are following cash system of accounting. Expenditure paid post 31/03/2020 cannot be claimed as deduction during FY 2019-20, while following cash system of accounting.

The issue may arise whether any sums as referred u/s 43B paid after 31/03/2020 but before the due date of filing return of income can be claimed as deduction under section 43B by an assessee following cash basis of accounting? The provision of section 43B is overriding and applies to sums specified therein irrespective of the method of accounting followed by the assessee. In respect of payment of tax as referred u/s section 43B(a), Explanation 2 states that “any sum payable” means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. Explanation 2 and proviso 1 under Section 43B conferred a privilege on the assessee irrespective of the method of accounting followed by him. The privilege thus available under these provisions can as well come to the rescue of the assessee even though he maintains his accounts on a cash basis. In the case of ITO v. B V Reddy 44 ITD 682 (Hyd), it was held that when assessee following cash system of accounting and paid sales tax outside the accounting year but before the due date of filing of return of Income, deduction of such taxes can be claimed by the taxpayer.

During the virulent times’, the clamour for tax relief measures is getting louder and louder. Government measure should provide a stage for economic recovery. The regulator should work with foresight. In the end, I would like to close with the “our world is dominated by the extreme, the unknown, and the very improbable (improbable according to our current knowledge)—and all the while we spend our time engaged in small talk, focusing on the known, and the repeated. This”― Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable.

Part B

Relaxation relating to Companies Act due to COVID 19

Companies Affirmation of Readiness towards COVID-19

With the breakout of COVID-19 Ministry of Corporate Affairs have come up with an Advisory on Prevention measures to contain the spread of COVID- 19. To generate greater awareness and confidence on the state of readiness, the Ministry of Corporate Affair has deployed obnoxious form Companies Affirmation of Readiness towards COVID-19 Form. This form was to be filed by an authorised signatory (Director/ Partner) of Companies and LLP’s. Further, Companies and LLP’s were requested to report compliance using the web service w.e.f 23rd March till 30th March. Compliance was required to be made during the lockdown period. Subsequently, it was clarified that as such no penalty or enforcement-related action is applicable. The web service Company Affirmation of Readiness towards COVID-19 has been discontinued w.e.f. 14th April 2020.

Companies Fresh Start Scheme

General Circular No. 11/2020 dt. 24/03/2020 issued stating that no additional fees shall be charged for late filing during a moratorium period from 01st April to 30th September 2020, in respect of any document, return, statement etc., required to be filed in the MCA-21 Registry, irrespective of its due date. COVID-19 has provided the opportunity for the Companies /LLP to file old pending document and have a fresh start. Subsequently on 30/03/2020 MCA unveiled the scheme Companies Fresh Start Scheme 2020 (CFSS) Circular No. 12/2020.

CFSS applies to the Defaulting Company which has made a default in filing of any of the documents, statement, returns, etc. e.g.

  • Annual statutory documents (AOC-4 & MGT- 7)

  • Return of allotment (PAS-3)

  • Filing of resolution /agreements (MGT-14)

  • Appointment of Auditor (ADT-1)

  • Declaration of commencement of business (INC-20A)

  • Active Company (INC 22A)

on the MCA-21 registry on due time. It shall commenced from April 01, 2020 and end on September 30, 2020. During this period Defaulting Company is permitted to file all belated documents which were due for filing without any additional fees. Filing of various forms under MCA is event base. CFSS does not extends due date for filing such forms. It merely allows to submit form without payment of additional fees.

The scheme shall not be applicable in the following cases:

  • Action for striking-off has already been initiated by the Designated Authority;

  • Application (STK-2) for strike off of Company with ROC has been filed by the companies;

  • Companies which have amalgamated as per the provision of law;

  • Companies which has applied u/s 455 for obtaining dormant status;

  • Vanishing Companies;

  • Where an increase in authorized capital is involved (Form SH-7) and all charge related documents (CHG-1, CHG-4, CHG-8 and CHG-9);

Immunity from prosecution:

After filing of the pending forms (making default good) and where forms are taken on record or approved by an appropriate authority, defaulting company within 6 months is required to file Form CFSS 2020. Based on the filing of Form CFSS 2020 designated authority shall grant immunity from prosecution.

However in case the Defaulting Company or its officer in default has filed any appeal against any notice issued or complaint filed or any order passed by Court or by an adjudicating authority, an application in Form CFSS 2020 can be filed only after submission of proof for withdrawal of such appeal.

No application for immunity can be filed –

  • where any appeal is pending before the court of law

  • in case of management disputes of the company pending before any court of law or tribunal;

  • in case any court has ordered conviction in any matter or an order imposing penalty has been passed by an adjudicating authority under the Act and no appeal has been preferred against such order

Immunity will be provided to defaulting companies only concerning the belated filings by waiving off additional fees. However where proceedings involving the interest of any shareholder or its director, or key managerial person or any other person belonging to the company than immunity shall not be provided e.g. as per Section 42(8) of Companies Act 2013 every company is required to file PAS-3 – Return of allotment within a specified period. Section 42(4) also provides that utilization of money raised through private placement shall not be made unless the return of allotment is filed. Immunity under CFSS will only be related to delay the filing of return of allotment and not concerning the utilization of money raised through private placement before the filing of return.

Temporary halt on the prosecution

In the matters where penalties were imposed by an adjudicating officer due to delayed filing, and no appeal has been made before the Regional Director then

(i) If the due date for filing the appeal falls between March 01 and May 31, 2020, an additional 120 days shall be allowed for filing the appeal, and

(ii) During this additional period, no prosecution shall be initiated against the company or its officers, insofar as it relates to delay in filing.

Hence during this the Company can avail benefit of CFSS for delayed filing.

Scheme for Inactive Company

While applying under this CFSS the option has been provided to the companies to apply for Dormant Status or Strike off by paying fees which is applicable on respective Forms.

DIN Holders- DIR 3 KYC Form/ ACTIVE non-compliant [General Circular No. 11 dated 24th March, 2020 & General Circular No.12 dated 30th March 2020]

Issue of disqualification of directors due to non-filing of DIR3 KYC cannot be resolved by filing form under CFSS. DIN holders of DINs marked as ‘Deactivated’ due to non-filing of DIR-3KYC/DIR-3 KYC-Web and those Companies whose compliance status has been marked as “ACTIVE non-compliant” due to non-filing of Active Company Tagging Identities and Verification(ACTIVE) eform, can file respective forms without any filing fee of INR 5000/INR 10000 respectively latest by 30/09/2020

LLP Settlement Scheme 2020 [General Circular No. 6/2020 dated 04th March,2020 notified LLP Settlement Scheme 2020, General Circular No. 13/2020 dated 30th March, 2020 Modification in LLP Settlement Scheme]

Inline that of CFSS, LLP Settlement Scheme 2020 has been revised. Under the revised scheme, LLPs are allowed to file all documents which are due for filling up to 31st August 2020 by 30 September 2020. Initially, the scheme was applicable in respect of a few forms viz.

  • Form-3: Information with regard to limited liability partnership agreement and changes, if any, made therein;

  • Form-4: Notice of appointment, cessation, change in name/ address/designation of a designated partner or partner. and consent to become a partner/designated partner;

  • Form-8: Statement of Account & Solvency;

  • Form-11: Annual Return of Limited Liability Partnership.

Now it has been extended to all documents or forms which are required to be filed by the LLP as per the provisions of the LLP Act and Rules made thereunder. Accordingly, some of the other forms as mentioned under would also be covered:

  • Form-5: Notice for Change of Name.

  • Form-12: Form for intimating other address for service of documents.

  • Form-15: Notice for change of place of registered office.

  • Form-22: Notice of intimation of Order of Court/ Tribunal/CLB/ Central Government to the Registrar

  • Form-23: Application for direction to Limited Liability Partnership (LLP) to change its name to the Registrar.

  • Form-29: Notice of (A) alteration in the certificate of incorporation or registration; (B) alteration in names and addresses of any of the persons authorized to accept service on behalf of a foreign limited liability partnership (FLLP) (C) alteration in the principal place of business in India of FLLP (D) cessation to have a place of business in India

VARIOUS OTHER RELAXATIONS

Various other relaxations are announced by the Ministry of Companies Affairs by General Circular No. 11/2020 dt. 24/03/2020

  1. Interval between 2 board meetings: As per the provisions of Companies Act, the interval between two board meetings cannot exceed 120 days. The time limit has been relaxed by providing an additional 60 days till next two quarters i.e., till 30th September 2020. Hence now during the prescribed period gap between two board meetings can be up to 180 days.

  2. CARO 2020: New Companies (Auditor’s Report) Order, 2020 was issued and it was made applicable from the financial year 2019-20. Now Companies (Auditor’s Report) Order, 2020 would be applicable from the financial year 2020-2021 instead of from 2019-2020.

  3. Meeting of Independent Directors: As per Schedule 4 to the Companies Act, 2013, Independent Directors (ID) are required to hold at least one meeting without the attendance of non-independent directors and members of management. For the year 2019-20, if the IDs of a company have not been able to hold even one meeting, the same shall not be viewed as a violation.

  4. Deposit reserve: The requirement to create a Deposit reserve of 20% of deposits maturing during the financial year 2020-21 before 30th April 2020 is allowed to be complied with till 30th June 2020.

  5. Specified Investments: The requirement to invest 15% of debentures maturing during a particular year in specified instruments before 30th April 2020, may be done before 30th June 2020.

  6. Commencement of Business: Newly incorporated companies are required to file a declaration for Commencement of Business within 6 months of incorporation. An additional time of 6 more months has been allowed to file a declaration.

  7. Resident Director: As per the provisions of section 149 every company shall have at least one director who stays in India for a total period of not less than 182 days during the financial year. Non-compliance of minimum residency in India for at least 182 days by at least one director of every company, shall not be treated as a violation.

Corporate Social Responsibility

The funds spent on measures to combat the COVID-19 outbreak will be counted towards Corporate Social Responsibility (CSR). Accordingly, it was then clarified that corporate donations to PM-CARES will qualify as CSR expenditure. But it was also clarified that the contribution to “Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ is not included in Schedule VII of the Companies Act, 2013 and therefore any contribution to such funds shall not be admissible as CSR expenditure. However, the contributions made to State Disaster Management Authorities to tackle COVID-19 will qualify as CSR expenditure.

Further, it was also clarified that payment of salary and wages to the employees and workers (including contract labour/ temporary/ casual/ daily wage workers) of the organization during the lockdown period will not be considered as expenditure eligible for CSR. But in case any ex-gratia payment made over and above the disbursement of wages to temporary/casual workers/daily wage workers, specifically to fight COVID-19, will be considered as CSR expenditure. This is subject to an explicit assertion by the board of the company and certified by the statutory auditor.

Board Meetings

To overcome the outbreak of the coronavirus the requirement of holding Board meetings with the physical presence of directors under section 173 (2) r.w.r. rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 for approval of the annual financial statements, Board’s report, approval of prospectus, audit committee meeting for consideration of financial statements, approval of amalgamation merger demerger, acquisition and takeover was relaxed. Such meetings can be held through video conferencing or other audiovisual means until 30 June 2020.

General Meeting

Vide General Circular No. 14/2020 dt. 08/04/2020 clarification on the passing of an ordinary and special resolution by the companies on account of the threat posed by COVID 19. The Act does not contain any specific provision for allowing conduct of members meetings through video conferencing (VC) or other audiovisual means (OAVM). Considering the current situation where the holding off of an extraordinary general meeting (EOGM) of the company is considered unavoidable, the additional procedure has been laid for holding such meeting on or before 30.06.2020 via VC or OAVM.

Two separate procedures have been provided for the companies which are required to provide the facility of e-voting under the Act or any other company which has opted for such facility and for the companies which are not required to provide such facilities. EOGM to be held using a combination of VC and e-Voting/simplified voting through registered emails to enable companies to conduct their EOGMs. As the meetings will be conducted over VC/OAVM, the facility for the appointment of proxies has been dispensed with, while representatives of bodies corporate will continue to get appointed for participation in such meetings. All resolutions passed through this framework will be required to be filed with the RoC within 60 days, so that such resolutions may be viewed publicly. Such meeting requires the attendance of at least one independent director (where a company is required to appoint one) and auditor or his authorised representative who is qualified to be the auditor and maintenance of recorded transcripts of the EGM and, in case of a public company, such transcripts to be uploaded on the company website (if any).

Vide General Circular No. 17/2020 dt. 13/04/2020 further relaxation has been provided for the issue of notice for convening General Meeting. It provides that notice of EGMs to be held through VC/OAVM (and for passing shareholder resolutions through postal ballot/ e-voting) may now be given to shareholders only through email addresses of the shareholders registered with the company or with the depository participant/ depository. Other safeguards have also been included in the Circular to ensure transparency, accountability and protection of interests of investors.

Ministry of Companies has provided relief on identified issues. However various practical issues may arise. E.g. Companies following December as financial year ending are required to hold their Annual General Meeting (AGM) by 30 June 2020. Possibility of holding AGM by that date may not be possible under current scenario. Act also provides gap been 2 AGMS. There is no relaxation in holding AGM. Companies may be required to file application for extensions in holding AGM.

Conclusion

All the amendments have been made on the conjecture that life will return to a normal in a couple of months. However, the writing on the wall is get ready for a long haul. Normalcy, in near future is a mirage. Microbe has become more deadly than an atom bomb. Suddenly, we slept in one world and woke up in another. Old normal like handshake, hugs, physically meeting people are no longer normal. Social distancing and virtual meetings, virtual education classes have swept the wave. We have being paying huge premium for physical meeting in form of time and costs than virtual meeting using technology, for physical education classes and training than that for virtual classes. Let’s see what’s in store for tomorrow!

The author acknowledges with thanks the assistance and support offered by CA Prity Dharod and CS Prachi Shah for this article.

  1. Writ – C No. – 7014 of 2020 order dt. 18.3.2020

  2. Writ Petition (Civil) No. 8231 of 2020 order dt. 19.03.2020

  3. Special Leave Petition (Civil) Diary No(s). 10669/2020 Order dt. 20.03.2020

  4. Suo Motu Writ Petition (Civil) No(s).3/2020 order dt. 23.03.2020

  5. Article 142. Enforcement of decrees and orders of Supreme Court and orders as to discovery, etc.-

    (1) The Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it, and any decree so passed or order so made shall be enforceable throughout the territory of India in such manner as may be prescribed by or under any law made by Parliament and, until provision in that behalf is so made, in such manner as the President may by order prescribe.

  6. Vineet Narain v. Union of India, (1998) 1 SCC 226, para 51

  7. Prem Chand v. Excise Commr., U.P. AIR 1963 SC 996 at p. 1002, para 12

  8. Supreme Court Bar Assn. v. Union of India, (1998) 4 SCC 409, SCC p. 432, para 48

  9. State Of Rajasthan & Anr vs. Shamsher Singh 1985 AIR 1082 SC

  10. Board of Control for Cricket India vs. Netaji Cricket Club & Ors Appeal (Civil)237-239 of 2005 SC Order dt. 10/01/2005; The Inter College vs The State Of U.P. Order Dt. 6.01.2006

  11. Reliance van be placed on Sambasiva Chari vs. Ramaswami Reddi (1898) 8 MLJ 265 (Madras)

  12. F. No. 275/25/2020-IT(B) dt. 31/03/2020

  13. F. No. 178/7/2020-ITA-I dt 9/04/2020

As the topic suggests, an ideal Court is one where there is convergence of what the Bench expects from the Bar and what the Bar expects from the Bench; there is harmonization of expectations.

The litigants represented by the Bar as well as the Bench are equal stakeholders in our judicial system; where there is no conflict of expectations inter se, there would be a just result in a free, fair and conducive environment. The following observations of the Apex Court aptly outline the relationship between the Bar and the Bench:

“……………… while the judges hold the reigns, the two opposite counsel are the wheels of the chariot. While the direction of the movement is controlled by the judge holding the reigns, the movement itself is facilitated by the wheels without which the chariot of justice may not move and may even collapse…………”

[D. P. Chadha vs. Triyugi Narain Mishra (2001) 2 SCC 221]

I am called upon to speak today on the “Role of the Authorized Representative”. Before the Tribunal, the taxpayer and the Revenue are represented by their respective A/Rs. It will be my endeavour to dwell on the attributes, qualities and conduct of the A/R which would help contribute to an ideal Court atmosphere.

The A/R have the duty to his client, duty to his opponent, duty to the Court, duty to the society at large and duty to himself. Insofar as his client is concerned, the A/R owes a fiduciary duty to his clients. It is incumbent upon the A/R to advice / defend the interest of his clients; at the same time the litigant has to be impartially and dispassionately advised by the A/R about the pros and cons of the litigation and the best course of action. The litigant reposes faith and trust in his A/R and shares with him privileged and confidential information. The A/R is expected to keep such information confidential and not divulge the same. Furthermore, the A/R must ensure that there is no breach of faith and trust reposed by the litigant in him.

Insofar as presenting the case of his client, the A/R is expected to conscientiously prepare the matter and present the same before the Court to the best of his ability. He is expected to put forth his best efforts to persuade the Court.

While being mindful of his duties and obligations, the A/R is also required to be aware of the limitations vested upon him in the exercise of his authority as a representative for his client.

The A/R, as explained by the Hon’ble Supreme Court in State of Uttar Pradesh vs. U.P. State Law Officers Association : [1994] 2 SCC 204 is not an agent of its client but is dignified and responsible spokesman. He demeans himself if he acts merely as a mouthpiece of his client. In other words, the A/R is expected to exercise diligence to present to the Court the correct facts and the legal position; he must not, under any circumstance, compromise his independence.

The relationship between the A/R and his client can be summed up in the following observations of the Apex Court may be extremely important:

“…………………The advocate represents the client before the court and conducts proceedings on behalf of the client. He is the only link between the court and the client. Therefore his responsibility is onerous. …………………”

[Himalayan Coop. Group Housing Society vs. Balwan Singh (2015) 7 SCC 373]

Then, there is a sense of duty owed by the A/R to his opponent. He has to be fair and not take advantage of the ignorance of the other side with respect to facts of the case or the position in law. The A/R is required to give space / time to the opponent to present his defence, without interruption. He is expected to be patient while his opponent is on his legs and not intimidate / browbeat the opponent.

The A/R, as a responsible officer of the Court has an overall obligation of assisting the Court in a just and proper manner for the administration of justice. The A/R is expected to marshal the facts of his case, be abreast of latest developments in law and place the same before the Court in a non-partisan manner in order to enable the Court to reach a just result. It is expected that the A/R would not suppress and / or distort facts and would fairly bring to the notice of the Court the position of law, even if, it is against the interest of his client. The A/R must not attempt to confuse or mislead the Court.

The Apex Court made the following illuminating observations in this respect:

“This obligation of a counsel flows from the confidence reposed by the court in the counsel appearing for any of the two sides. A counsel, being an officer of the Court, shall apprise the judge with the correct position of law whether for or against either party.”

[D.P. Chadha vs. Triyugi Narain Mishra: [2001] 2 SCC 221]

It is the duty of the A/R to place his point of view on behalf of his client in a lucid, coherent manner, bringing into focus the issue in dispute so as to avoid wasting the precious judicial time of the Court. It is expected that the A/R would have the grace to accept that the position of law is against his client and not waste unnecessary time of the Court in trying to defend an indefensible case.

Last but not the least – the A/R has above all duty to himself.

In Re: Vinay Chandra Mishra (supra); reiterated in Mohit Chaudhary, Advocate, in Re [2017] 16 SCC 78; also Ajay Kumar Pandey, In Re [1998] 7 SCC 248, the Apex Court observed that “a lawyer had to be a gentleman first. His most valuable asset is the respect and goodwill he enjoys among his colleagues and in the Court.”

To earn the respect and goodwill, it is necessary that the A/R –

– Is Humble

– Is Courteous to the Court and his opponent,

– Exercises restraint and responsible attitude towards the Court,

– Maintains dignity, order and decorum in the Court,

– Is dignified in his dealings with the Court, his fellow lawyers and the litigant,

– Has an unblemished character, credibility and integrity,

– Is fearless and independent,

– Avoid over-zealousness and misguided enthusiasm,

– Is not over attached to his case and the result,

– Is never knowingly a party to any deception, design or fraud.

To conclude, I would state that the A/R plays a vital role in the justice delivery system and is under an overall obligation to uphold the rule of law so as to ensure that the public justice system is able to function to its full potential. As a responsible officer of the Court, his satisfaction and contentment should flow from a job well done, to the best of his ability.

[Source : 79th Foundation day Celebration & All India Members’ Conference on 25th January, 2020 at Hotel The Ashok, New Delhi.]

Covid-19 Pandemic

Today is the 30th day of the complete lockdown announced by our Prime Minister. I am sure, our members are strictly observing the lockdown not only for your own benefit but also for the sake of your near and dear ones. The expected result may take some more time. Nonetheless, as it is rightly said “Jan hai to Jahan hai”. Therefore, my sincere request to all of you my dear friends and the seniors is to strictly observe the guidelines, prohibitions and restrictions. While taking care of your own health you should also maintain the hygienic conditions vociferously advocated by all the health care workers.

The lockdown presently may be up to 3rd May, it may open partially for some of the areas, however, what is required is maintaining physical distance, wearing masks etc. for at least next six months to a year from now. Those interested can visit our website and hear the excellent lecture given on ‘Myths of Covid-19 and how to stay safe’ by Dr. Pratit Sandhani, MD, a leading doctor and a visiting faculty at four renowned hospitals in Mumbai.

After 3rd May when we reopen the office, if permitted by the State authority, even partially, it is advisable that the meeting of the client is avoided for a month or so. My earnest request ‘stay safe and follow the Government advisory’.

Donate generously through AIFTP

AIFTP has always been in forefront in making the contribution at the times of calamity through the Prime Minister Fund. In the message given in the AIFTP Times, I have requested each and every member to contribute at least ₹ 1000/-. We have robust membership of 8500 members and if each one of you contribute we can collect sizeable fund and contribute to the PM Care Fund. Please do not worry about 100% deduction, even if you pay through us, we would be submitting your name, PAN number and address to PM Cares Fund, who would be issuing the receipt individually. I am aware, that each one of you have contributed in some or other form for the Covid-19 fund through various associations. Our East Zone members are doing the noble work of providing food to the needy persons. I am aware, many of our members doing similar activities, and I am proud of all of them. Nonetheless, it is with this reason I wish to reach out to each and every member to donate generously through AIFTP. If you have donated through other organizations, we are requesting you to pay only ₹ 1000/- to put your mark in the AIFTP kitty. Friends those who have not paid so far, kindly hurry up and visit our website www.aiftponline.org. A pop-up would guide you to the donation form and you can fill up the form and you can pay either through credit card or through any other mode of e-payment. I am sure, each one of you would assist me in reaching my goal. Kindly do it at the earliest as we wish to submit the same by 30th April 2020 or latest by the time when partial opening happens.

The new opportunity – Virtual Meeting

Every challenge carries a seed of opportunity. The sudden lockdown has given all of us an opportunity to be part of numerous virtual meetings / webinars organized by almost all the Associations. I was personably little backward about the new technology and virtual meeting. The Central zone’s leading advocate Shri Pankaj Ghiya organized three trial meetings and taking the thread there from, all the zones of AIFTP, jointly or independently, have started hosting webinars. I am happy to share that the Central zone is leading in the attendance front of the webinar, they have reached up to 1000 participants in one of the webinar of which I would give details little later. The highest attendance in the Webinar arranged by South Zone is more than 900 and in West zone so far is 768. I am fully aware, that it is not only the number that counts but the quality of the program and the speaker is also being maintained. Leading personalities in the concerned field are being invited. I must also thank all the past presidents who have been supporting the cause of education and encouraging respective zones. We are producing in the later part of this publication the list of webinars held so far and webinars to be held which are planned today. I am also happy to inform you that we are providing in our website You-tube link for each and every webinar held by us so far. For every day program, kindly visit our AIFTP website for the meeting id and password. Let me also inform you that we are taking due care while using the zoom app as per Government advisory.

At present, we have designed a plan of meetings up to 4th May 2020. We will look into the scenario thereafter and continue with virtual webinar on Saturday morning. The reason is, for further two or three months it is going to be impossible and unworkable and also not desirable to hold any conference and seminars where physical presence is required. Let us hope and pray the situation improves fast.

The e-publication era of AIFTP

The lockdown has given us an opportunity to take a step forward for e-publication. Shri Vipul Joshi from Mumbai has dictated the entire e-book which is a thorough and detailed analysis of ‘Vivad se Vishwas’ (VSV) scheme. Hon’ble Shri Justice S C Dharmadikari took pains to go through the contents in the lock down and gave a wonderful message for the e publication. We thank the two past presidents – Sr. Advocate from Delhi, Madam Premlata Bansal and Sr. Advocate from Jabalpur Shri Ganesh Purohit who have vetted the e-book right since its nascent stage. A team of panel headed by our Past President and also Sr. Advocate of Bombay High Court, Dr. K. Shivaram has graciously consented to head the panel of experts who would be answering the queries raised by the members after going through the e-book. All the three past presidents have written forward for e publication

The author and his team have agreed to update the book as and when the clarification / information on any other issue or further FAQ are received from the Department. It is for this reason that presently the e-book is only viewable format. On visiting our website, you would be guided to a form of e-publication, on filling up the form you would be provided the password to have access to the e-publication. This password can be used ‘n’ number of times by the members from the same instrument, laptop or mobile. If you wish to see the book on another instrument, for example on i-pad, you would get a fresh password. The book is dedicated to the health workers, front-liners and the police authorities who have been on their legs throughout the entire lockdown period to safeguard us at the cost their own health. Friends, kindly visit the website, read the e-publication which runs into about 300 pages. Raise your query, if any, by writing an email to [email protected] and take the benefit of answer by the experts in the field.

The second cover page of this journal contains the details about the e-publication and its release at the hands of the President of ITAT.

ITAT commences e-Court.

ITAT made history by conducting open court hearing on internet. As the physical office of the ITAT is not functioning due to lockdown, one of the stay petition was heard through video conferencing. The salient point of this hearing was that for the first time the hearing had taken place from the home offices of the members, lawyers were arguing from their home offices and DR arguing from his home office, the AR and Registry staff were present in their home offices. It was an open court proceeding open to everyone on the website. The meeting was conducted through web-based video conferencing platform. The appellant’s advocates plea was heard and stay was granted by a detailed order dated 24 April 2020 in the case of Pandhes Infracall Pvt. Ltd. vs. ACIT (ITAT Mumbai).

The GST issues requiring urgent action by the Government

The Federation has been making regular representation to the Finance Ministry and GST authorities on various difficulties faced by the members and the trade at large. Although some of the suggestions made by us are accepted by the Finance Ministry, there are number of issues which remain unattended.

The Government has taken steps and announced relief to assist the taxpayers who are unable to comply with the statutory deadline due to complete lockdown on account of Covid-19 pandemic. CBIC has issued certain clarifications extending the date for filing the refund application as also extending the time limit for filing LUT for 2020-21 up to 30th June 2020. Certain hardships are still being faced on account of technical glitches. For example, there is no remedy for cancellation of contract on account of force majeure especially to get refund of tax paid on advance receipt. It has to be clarified that excess advance paid can be claimed through RFD-1.

Due date for furnishing any document, report or return etc. falling between 20th March 2020 to 30th June 2020 is extended up to 30th June 2020 in a phase-wise manner. Vide Notification 31/2020 dated 03-04-2020 full interest is waived for the taxpayers having turnover of less than ₹ 5 crores. Unfortunately, the dealers having more than ₹ 5 crores turnover would face the levy of interest at 9% if the return is not filed within 15 days of the due date. This appears to be discriminatory provision as the lockdown has affected equally large and small sectors – both are closed due to lockdown, both have to pay salary to the workers, staff and also incur additional expenses when they are partially open. For example, the places like Mumbai and Delhi may continue to remain under complete lockdown up to 15th May or further depending on the situation then prevailing. Therefore, in my opinion, it is absolutely unfair to levy the burden of interest on the taxpayer having turnover more than ₹ 5 crores. For a person having turnover of more than ₹ 5 crores, for example, for a trader, the net earnings would be around less then 1% of turnover. With the business being closed for over a month, each and every businessman is equally affected. We request that the limit of ₹ 5 crores be removed by taking a sympathetic view under special circumstances.

The exporters are facing a different type of hardship. The time limit for filing the LUT is extended for 2020-21 and not for 2018-19 and 2019-20. This should be considered immediately as a policy of the Central Government has always been to support the exporters.

The persons starting new business or requiring fresh registration for any reason, whatsoever, are not given any extension if the liability to apply for registration accrue in the lockdown period. A dealer starting new business is in a vulnerable position, it is not possible for him to upload the form without the help of Tax Consultant. He may not have required document to upload available with him at his home and therefore such new registration application’s time limit be also extended considering exceptional circumstances.

For the person doing continuous supply of services, during lockdown period, they may not be able to raise the invoice for services like lease, rentals, AMC, works contract, etc. If the hardship is faced by one dealer, it is faced by all the dealers across the country and the yardstick for extension should be same for all.

Difficulties on Direct Tax Front

The Hon’ble Prime Minister has given the time limit for VSV application up to 30th June 2020. The majority of pendency of appeals are at Metropolitan citifies’ appellate authorities, Tribunals and High Courts. Unfortunately, the lockdown may not be lifted in the Metropolitan cities for another 3 to 4 weeks. That would leave hardly any time for the dealers to contact the Consultant to understand the benefit of VSV as also to weigh the probability of contesting their matters in appeal vis-à-vis the benefit of applying for VSV. Moreover, financial hardship of the Assessee on account of lockdown cannot be overlooked. This is going to be very difficult for the Assessee, whether small or big, to arrange for fund to pay for VSV. Considering all these aspects it would be prudent on the part of the Government to extend the time of furnishing VSV application up to 30th September 2020, if the Government desires the scheme to be successful in terms of monitory return to the Government.

With best wishes,

25-04-2020

Nikita R. Badheka
National President, AIFTP

Dawn of A New Era: E-Hearing Before The Tribunal

Necessity is the mother of all invention, as the proverb goes, on April 24, 2020, the Mumbai Bench of the Hon’ble Income tax Appellate Tribunal (‘ITAT’) presided by Hon’ble Justice P. P. Bhat, President and Hon’ble Mr. Pramod Kumar, Vice President, conducted a hearing via video conferencing, the first of its kind.

The assessee had filed a stay application via email and sought urgent hearing on their petition, so that no coercive measures are taken by the department for recovery of demand. Considering it to be a fit issue, the ITAT granted a stay on merits and fixed the matter for a suitable date.

The Organisation for Economic Co-operation and Development (‘OECD’) on March 16, 2020 outlined a range of emergency tax measures that governments could adopt to curb an economic fallout, inter alia was to suspend the recovery of taxes and enhancement of services & communication.

Although, most of the measures were adopted by the Finance Ministry vide Taxation and other Laws (Relaxation of Certain Provisions) Ordinance, 2020 dated March 24, 2020, no measures were adopted with respect to suspending the recovery of taxes or to enhance services & communication.

The ITAT has really stepped up to safeguard the interest of the tax payer. They have not only stayed the recovery proceedings in such difficult time but also challenged the traditional communication process. This will set an example for people who are under the wrong impression that tax terrorism is prevalent in our Country.

This has pioneering act has certainly changed the future of Tribunal. It is urged that the ITAT, Rules 1963 are suitably amended to ensure proper Legislative sanction, so that this can set a tone for future proceedings of the Tribunal.

A thought for debate.

Dr. K Shivaram
Chairman, Editorial Board