1. Maintenance Repair Contracts

Facts : The applicant is the local branch of a Russian business entity by the same name, which entered into a Maintenance and Repair Contract with Bharat Coking Coal Ltd (BCCL) with respect to the machinery and equipment it had supplied. The applicant wants to know whether the Maintenance and Repair Contract makes the supplier liable to pay GST. More specifically, the applicant wants to know whether the recipient is not liable to pay tax on reverse charge basis in terms of Notification No. 10/2017 – Integrated Tax (Rate) dated
28-6-2017.

Observations & Findings : The Maintenance and Repair Contract is between the Maintenance and Repair Contract Holder and BCCL. Although clause 9 of the Maintenance and Repair Contract, dealing with ‘Taxes & Duties’, distinguishes between a foreign Maintenance and Repair Contract Holder and a domestic Maintenance and Repair Contract Holder, nowhere else in the Maintenance and Repair Contract two such entities exist separately. The contract speaks of the rights, duties, and obligations of the Maintenance and Repair Contract Holder only without any distinction between a foreign Maintenance and Repair Contract Holder and a domestic Maintenance and Repair Contract Holder. The distinction, therefore, is relevant only in the context of any statutory provision requiring the Maintenance and Repair Contract Holder to be located in India.

The Maintenance and Repair Contract Holder, therefore, supplies the service at the sites from fixed establishments as defined under section 2 (7) of the IGST Act. The location of the supplier should, therefore, be in India in terms of section 2 (15) of the IGST Act. Supply of the Maintenance and Repair Contract Holder to BCCL is not, therefore import of service within the meaning of section 2(11) of the IGST Act. The Maintenance and Repair Contract Holder should be treated as a supplier located in India triggering clause 9.2.2 of the Maintenance and Repair Contract, and made liable to pay GST, the place of supply being determined in terms of section 12(2)(a) of the IGST Act. The applicant, being the registered branch of the Foreign Company, should be treated as the domestic Maintenance and Repair Contract Holder in terms of clause 9.2.2 of the Maintenance and Repair Contract and be liable to pay tax accordingly.

Ruling : Supply of service to BCCL in terms of the Maintenance and Repair Contract is not import of service. The recipient is not, therefore, liable to pay GST on reverse charge basis in terms of Notification No. 10/2017 – Integrated Tax (Rate) dated 28-6-2017. The applicant, being the domestic Maintenance and Repair Contract Holder, is liable to pay tax as applicable in terms of clause 9.2.2 of the Maintenance and Repair Contract.

[2020] 117 taxmann.com 418 (AAR-WEST BENGAL) – IZ-Kartex named after P.G. Korobkov Ltd.]

  1. Input Tax Credit on Lifts

Facts : The applicant established a Company with an object to undertake construction of Hotel. The Company started construction of Hotel and completed a major part of its work. This applicant sought advance ruling for input credit on Lift used in hotel. The contention of the applicant is that Input credit on Purchase of Lift would be available to Hotel as it has been used in the course or for the furtherance of business.

Observations & Findings : The applicant mentions that the said Lift is being capitalized in the books of the company and depreciation as per the provisions of Income Tax Act, 1961 is charged on the cost of lift less eligible credit of GST. Hence no depreciation is being applied on the GST portion credit of which is eligible in accordance with the provisions of section 16 of CGST Act 2017 without controverting the provisions of section 16(3) of CGST Act 2017. It is therefore pleaded that the lift in question be termed as “Plant & Machinery” and hence out of purview of blocked credit in terms of Section 17(5)(d) in as much as ‘Plant & Machinery’ has been excluded from the definition of immovable property.

The lift becomes part of the building and is not a separate thing per se. A lift does not have an identity when removed from the Building. Therefore, the lift cannot be said to be separate from a Building. Also, it has to be borne in mind that a lift is not an item that is purchased and sold. It is a customized mechanism for transportation, designed to suit a specific building. Upon piece by piece installation, it becomes an integral part of the building.

In the explanation relating to Plant and Machinery, beneath sub-section (6) of Section 17, while providing the meaning of the term plant and machinery, it has been clearly stated that Buildings and Civil Structures shall not be covered under the term Plant.

Ruling : We hold that the input tax credit of tax paid on Lifts procured and installed in hotel building shall not be available to the applicant as the same is blocked in terms of Section 17(5)(d) of the CGST Act 2017, become an integral part of the building.

[2020 (7) TMI 476 – AAR, Madhya Pradesh – Jabalpur Hotels P Ltd.]

  1. Goods Transport Agency Service – RCM

Facts : The applicant, M/s. Uttarakhand Forest Development Corporation, is registered with the GSTN seeking advance ruling on the following questions in terms of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017:

  1. Whether a person, unregistered with GST, providing road transport services by his own truck as GTA for RCM under GST;

  2. Will issuance of E-way bill, Form 2.1 & 3.3 by or to road transporter who is unregistered with GST, providing road transport services by his own truck, be treated as consignment note for GST-RCM purposes;

  3. Whether a person, unregistered with GST providing road transport services by hiring trucks from third party, to applicant, will be treated as GTA for RCM under GST;

  4. Will issuance of E-way bill, Form 2.1 & 3.3 by or to road transporter who is unregistered with GST providing road transport services by hiring trucks from third party be treated as consignment note for GST-RCM purposes.

Observations & Findings : The applicant is sole agency for removal and sale of forest produce from the entire forest area in Uttarakhand. The applicant after felling trees gets timber transported to its sale depots. For this purpose the applicant hire truck transporter from open market accordingly as per availability of vehicles and get transported to its sales depot from road head. Due to unique nature of goods, the applicant itself fills Form 2.1 for transportation of goods which is called “Ravana”. Form 2.1 is printed format of applicant to transport timber from one place to another. The said form carries details of material, vehicle no., name of driver & signature & other details

We find that a list of goods on which GST is payable under section 9(3) of the Act is given in the Notification No. 4/2017-Central Tax (Rate) dated 28.06.2017 and the category of services on which tax is payable is enumerated in the Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017. On perusal of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017, we find that the services rendered by the ‘Goods Transport Agency” in short (GTA) falls under ‘Reverse Charge Mechanism’ (in short RCM). Further we find that services provided by “GTA” in respect of transport of goods by road is a taxable event. As per Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, “goods transport agency” means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called.

We hold that Form 2.1 may be treated as consignment note, thus the condition of GTA is fulfilled and thus the services procured from unregistered person for transportation of goods full under the definition of GTA and the applicant is liable to pay GST on the same under ROM.

Ruling : 1. Services received from the unregistered transporters ‘by the applicant falls under the definition of “GTA’ services in terms of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 and the same are covered under ‘RCM’ in terms of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017.

  1. Form 2.1 issued by the applicant can be considered as a consignment note.

[2020 (6) TMI 520 – AAR, Uttarakhand – Uttarakhand Forest Development Corporation]

  1. Renting of immovable property

Facts : The applicant is having Petrol bunk and engaged in supply of petroleum oils and lubricants in Andhra Pradesh. Further, the applicant is the absolute and sole owner of a building located in Telangana. The applicant has entered into a lease agreement dt: 31-7-2019 with D-Twelve Spaces Private Limited is inter alia engaged in the business of running, managing and operating the day to day affairs of residential premises and sub-lease of such residential premises to individuals (including students) for the purpose of long stay accommodation. As per the terms of the Lease agreement, in consideration of grant of lease to use and possess the aforesaid property, the lessee is required to pay to the applicant a monthly rent of ₹ 7,20,000 and all operational costs such as electricity, telecom and water charges as per the actual meter reading or based on the invoice or the bill issued by the relevant authorities.

The applicant seeks advance ruling on whether it is eligible for the exemption from payment of GST on the monthly rent received on lease of residential building at Telangana to D-Twelve Spaces Private Limited, as per SI.No.13 of the Notification No. 9/2017 Dt:28-6-2017.

Observations & Findings : Though the applicant claims that it has rented out residential dwelling for use as residence, it appears that the premise is a non-residential property. Considering the number of rooms and amenities provided in it, boarding and hospitality services extended to the inmates and all the clauses of the agreements, it appears that the building was constructed for the purpose of running a lodge house. It is clear that the lessee is engaged in commercial activity of renting of rooms in the dwelling and providing boarding and hospitality services to the inmates.

Therefore, it is clear that the lessor has rented out dwelling for commercial activity, and supply of such services, in the facts and circumstances of the case, are classifiable as “Rental or leasing services involving own or leased non-residential property” under Service Code (Tariff) 997212. It is taxable in the hands of the lessor and is liable for IGST at the rate of 18 percent.

Ruling : The classification of service provided by the applicant, is covered under SAC 997212 and hence under entry number 16 of Notification No.8/2017 (Integrated Tax)(Rate), Dt:28-6-2017, liable to IGST @ 18%. The entry No.13 of Notification No.9/2017 (Integrated Tax) (Rate) Dated 28-6-2017 – “services by way of renting of residential dwelling for use as residence” is not applicable to the present case on hand.

[2020 (7) TMI 390 – AAR, Andhra Pradesh – Lakshmi Tulasi Quality Fuels]

  1. Aggregate Turnover

Facts : The applicant has submitted that, he is an individual having not engaged in any business. His receipts are only from savings, personal loans and advances and deposits, which are reflected in the Income Tax Returns.

  1. The applicant has further submitted that his estimated receipts for the F.Y. 2018-19 is likely to be totally ₹ 20,12,000, which includes,(i) Rent receipts: ₹ 9,84,000, (ii) Bank interest: ₹ 3,000, (iii) Interest on PPF deposit:
    ₹ 2,76,000 and (iv) Interest on Personal Loans and Advances: ₹ 7,49,000.

  2. The applicant further submitted that their interpretation of law is that if interest is received on loans and advances, deposits and savings Bank account by an individual person, who is not engaged in any such business and who is not a money lender, then such Interest Receipts is not a Supply and does not attracts GST, as the same is neither “In the course of Business” nor “In the furtherance of Business”.

  3. The applicant further submitted that he relies on the definition of “Scope of Supply” given under Section 7 of the CGST Act, 2017, which clearly states that the receipts should be “In the course or furtherance of Business”.

  4. The applicant further submitted that the receipts from personal loans and advances, deposits and Bank Interest are not covered under “Business” as per the definition of “Business” given under Section 2(17) of the CGST Act, 2017.

  5. In view of the above, the applicant further submitted that for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for obtaining registration under GST law, such interest receipts are not required to be aggregated.

  6. In light of the above backdrops, the applicant is seeking an advance ruling in respect of the following questions:-

    1. Whether Interest received in form of PPF would be considered for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for registration under GST Law?

    2. Whether Interest received on Personal Loans and Advanced to family/friends would be considered for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for registration under GST Law?

    3. Whether Interest received on Saving Bank Account would be considered for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for registration under GST Law?

Observations & Findings : “Aggregate Turnover” is relevant to a person to determine the threshold limit to obtain registration under the Act (supply of Services) or (goods and services both): ₹ 20 Lakh ( ₹ 10 Lakh in case of supplies effected from special category states).

The different kinds of supplies covered under the “aggregate turnover” are:-

(i) Taxable Supplies;

(ii) Supplies that have a NIL rate of tax;

(iii) Supplies that are wholly exempted from SGST, UTGST, IGST or Cess; and

(iv) Supplies that are not taxable under the Act (alcoholic liquor for human consumption and articles listed in section 9(2) and in Schedule III);

(v) Export of goods or services or both, including zero-rated supplies.

It is revealed that the applicant is an individual with an annual turnover of more than ₹ 20 Lakh. Since this income is interest-related, the turnover is exempt from GST. However, the Applicant also supplies services of “Renting of immovable property” along with activity of providing services by way of extending deposits, loans or advances where the consideration is represented by way of interest. His turnover from the rent income is ₹ 9.84 Lakh and we know that this transaction (“Renting of immovable property”) is chargeable to GST. However, his taxable turnover is only ₹ 9.84 Lakh. Going by the definition of “aggregate turnover”, the Applicant is required to consider the value of both the taxable supply i.e. “Renting of immovable property” and exempted supply of service provided by way of extending deposits, loans or advances for which they earned interest income, to arrive at “Aggregate Turnover” to determine the threshold limit for the purpose of obtaining registration under the GST Act.

Ruling : The Interest received in form of PPF should be considered for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for registration under GST Law. Interest received on Personal Loans and Advanced to family/friends should be considered for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for registration under GST Law. Interest received on Saving Bank Account should be considered for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for registration under GST Law.

[2020 (6) TMI 449 – AAR, Gujarat – Shree Sawai Manoharlal Rathi]

SUPREME COURT OF INDIA

The Commercial Tax Officer & Anr

v.

Mohan Brewaries And Distrilleries Limited

[A.M. Khanwilkar & Dinesh Maheshwari, JJ]

Civil Appeal No. 7164 of 2013

Date of Decision: June 29, 2020

Purchase tax – Applicability of section 7-A of Tamil Nadu VAT Act – Empty bottles bought under bought note used in the course of business of manufacturing and sale of Beer/IMFL – Applicability of purchase tax on empty bottles challenged – Held : Even if bottles are not consumed or used “in” or “for” manufacturing, said bottles are ‘used otherwise’ and the activity is thus covered under sub-clause (iv) of clause (a) of Section 7(1) – Clauses (1) to (5) and (6)(a) of section 7-A are cumulatively satisfied to attract purchase tax on the purchase turnover.

Circulars – High Court quashing demand extending the benefit of circulars clarifying that no purchase tax is leviable – Held the circulars were not in conformity with the statutory provisions of law – No benefit of circulars to be given.

Cash discount – Taxability of – Held cash discount offered by assessee not exigible to tax

The question came up before the Hon’ble supreme Court to determine Whether purchase tax u/s 7-A is leviable on the purchase turnover of empty bottles purchased by the assessee in the course of business of manufacture and sale of Beer and IMFL – Held – Applying the relevant tests concerning the expressions ‘consumes’, ‘uses’ and ‘in the manufacture’ to the present case, it is clear that the bottles are neither consumed at all nor been used ‘in the manufacture’ of Beer/IMFL. Hence, elements (i) and (ii) pertaining to clause (a) of subsection (1) of Section 7-A of the Act do not exist in this case. However, the bottles have been ‘used otherwise’ and thus the activity of assessee in relation to the bottles in question is clearly covered by element (iv) of clause (a) of subsection (1) of section 7-A of the Act. The elements (1) to (5) and (6)(a) for applicability of section 7-A are cumulatively satisfied to attract purchase tax on the purchase turnover.

The benefit of clarification dated 9/11/1989 and 27/12/2000 given to assessee by the Hon’ble High court is contested by the revenue and it is held by Supreme court that this benefit could not have been given since the said circulars were not in conformity with the statutory provision and its interpretation y the courts.

Regarding the taxability of cash discount offered by assessee, the Order of High court has been upheld thereby giving partial relief to the assessee in appeal before it.

HIGH COURTS

RAJASTHAN HIGH COURT

Uma Shankar Aggarwal

v.

Union of India

[Pankaj Bhandari, J]

S.B. Criminal Misc Bail Application No 3092/2020

Date of Decision; June 5, 2020

Bail – Fraudulent claim of Input tax Credit – Case registered for claim of ITC to the tune of 11.6 Crore without there being any transaction – Bail application rejected as claim of ITC without any transaction affects economy of country – Section 132 of CGST Act.

The petitioner has filed an application for bail u/s 439 of Cr.P.C. against the registration of case for alleged offence u/s 132 of CGST Act, 2017. Allegedly, the petitioner has claimed ITC to the tune of ₹ 11.6 Crores without there being any transaction. The petitioner has already been in custody for five months. The authority has contended that the vehicles in which the products have been stated to be sent to the petitioner are scooty, motorcycle etc which clearly shows that fake bill entries were manipulated to claim ITC.

The Hon’ble Court has rejected the bail application there being claim of ITC without any transaction which affects the economy of the country.

BOMBAY HIGH COURT

Eureka Fabricators Pvt Ltd

v.

Union of India

[K.K. Tated & Milind N. Jadhav, JJ]

W.P. No. 3510 of 2019

Date of Decision: June 30, 2020

Central Excise Duty – Quantum of – SVLDRS 3 filed declaring tax dues by petitioner– Estimated amount enhanced by respondent– Writ filed- Held not appropriate to determine the quantum of liability towards central excise duty by court since petitioner’s contention is about being unheard – Petitioner to deposit the balance amount demanded following which the authorities would hear it on its estimated liability – writ disposed of.

The Sabka Vishwas Form No. SVLDRS-3 filed by petitioner with respect to the central excise duty payable was rejected and a writ is thus filed in this regard against the enhanced quantum specified by the authorities under the scheme.

A demand was raised on account of alleged clearing of goods without paying central excise duty which was deposited by the petitioner. An appeal was filed before Commissioner alongwith payments of ₹ 50 lacs, ₹ 5,17,877 and ₹ 18,00,000/- towards central excise duty to show its bonafides. The appeal was rejected confirming the payment of central excise duty as decided earlier.

In 2019, the petitioner filed online application in Form No SVLDRS 1 declaring its tax dues under the scheme after deduction of the amount already paid as ₹ 9,95,606/- The respondent quantified the estimated amount to be ₹ 55 lacs approx in Form SVLDRS-3 on 18/11/2019. The petitioner filed a writ in this regard.

The Hon’ble Courts have held that it isn’t appropriate for them to confirm the quantification of balance estimated at ₹ 55 lacs approx when the petitioner contends that the respondent has failed to consider its case in light of the interpretation and application of the provisions and has not heard the petitioner before confirming the balance final demand.

The petitioner shall deposit the sum as quantified by the respondent within one week following which the petitioner shall be heard on the estimation of the liability under SLVDRS 3 and its excise duty payable is determined. If the liability is less, the excess amount shall be refunded within a period of two weeks. The writ is disposed of.

GUJARAT HIGH COURT

Mahavir Enterprise

v.

Assistant Commissioner of State Tax

[Vikram Nath, CJ & J.B. Pardiwala, J.]

Special Civil Application No. 7613 of 2020

Date of Decision: June 22, 2020

Writ – Show Cause Notice – Validity of Rule 142(1)(a) of CGST Rules, 2017- show cause notice issued – Rule challenged on grounds of being beyond provisions of the Act – contended to be framed under excessive delegation of powers – Held interference at the show cause notice is beyond scope of judicial review in the instant case as interference of courts is limited to certain defined parameters which the said case does not fulfill – Validity of the Rule is upheld as it is nowhere repugnant to the provisions of the Act – Central Government is empowered to make rules under section 164 of the Act, 2017 – Rule 142(1)(a) is intra vires – writ dismissed.

A writ is filed before the Hon’ble High Court challenging the show cause notice issued to the petitioner and also praying to declare Rule 142(1)(a) of CGST Rules as being ultra vires. There is a challenge to the said rule on the ground that the same travels beyond the provisions of the Act and is a result of excessive delegation of powers. It is contended petitioner that the said notice is invalid as Sec. 122 of the Act does not contemplate issue of any show cause notice, Rule 142 travels beyond the provisions of the Act.

Considering the scope of judicial review it is held that ordinarily the courts should not interfere with the show cause notice. But the High Court can interfere under Article 226 of the Constitution against a show cause notice where the same is issued in exercise of the power which is absent; the facts do not lead to commission of any offence; the show cause notice is without jurisdiction; its suffers from incurable infirmity; against the settled judicial decision.

A rule under delegated legislation can be held as ultra vires if it is (i) beyond the scope of ruling making power of the delegate conferred under the Act or (ii) that it is in conflict with any enactment in the Act. Under Section 164 of the Act the Central Govt. has the power to make rules for the purposes of the Act.

Therefore, Rule 142(1)(a) of the Rules 2017 is no manner conflicting with any provision of the Act. Therefore, challenge to the validity of Rule 142(1)(a) fails.

With respect to scope of judicial review of the said notice also, challenge to the validity of the said rule fails.

The writ application is rejected.

HIGH COURT OF GUJARAT

Remankhan Belin

v.

State of Gujrat

[R.M. Chhaya, J]

Special civil Application no. 7307 of 2020

Date of decision: June 8, 2020

Opportunity of hearing – Impugned Order challenged being passed in absence of petitioner – Absence attributed to safety reasons on account of corona pandemic- Impugned order set aside – Direction given to hear afresh-

The petitioner has challenged the order dated 14/5/2020 passed u/s 130 of GST Act in Form MOV-11 on the ground that no opportunity of actual hearing was given to it and the order was passed in its absence. The petitioner remained absent due to pandemic corona virus covid 19 and preferred to stay safe.

Hence, the impugned order is quashed and a fresh order shall be passed on merits by the authorities after giving an opportunity of hearing to the petitioner.

HIGH COURT OF KERELA

Pazhayidom Food Ventures Pvt Ltd

v.

Superintendent Commercial Taxes, Kerela

[Amit Rawal, J]

WP No. 5665 of 2020

Date of decision : June 8, 2020

Registration – Cancellation of – Notice for cancelling registration issued without proper format as required under Rule 22(1) of GST Rules, 2017 – Impugned notice and consequent orders of cancellation quashed as being without jurisdiction –

As the return was not filed, the Registration was cancelled after serving a show cause notice to the petitioner. The petitioner has approached the Hon’ble High court in this regard. The petitioner has contended that the notice in question lacks the date, month and year of appearance.

The Court has held that the impugned notice is not in order due to want of date, month and year as it ought to have been as per the actual format i.e. GST REG – 17 contained in Rule 22(1). On this account the Court has invoked its extraordinary jurisdiction as the order under challenge is without jurisdiction. The notice lacks compliance of audi alteram partem. Hence, the notice and consequent order of cancellation are quashed. The 2nd respondent is directed to comply with the observation derived from the Form GST REG 17.

PUNJAB AND HARYANA HIGH COURT

Mitha Ram

v.

State of Punjab and Haryana

[Girish Agnihotri, J]

CRM-M-42451-2019

Date of Decision: June 1st, 2020

Bail – show cause notice served u/s 74 of Punjab GST Act, 2017 – Bail granted on account of expected long duration of trial and situation of Covid 19-

The petitioner has filed a petition praying for grant of regular bail u/s 132 of Punjab Goods and Services Act, 2017. The petitioner has contended that it has been falsely implicated in the case and that out of 29 witnesses; only 1 has been examined till date. The present situation of Covid 19 and long duration of trial being expected, detention of petitioner in jail is dangerous to his life.

Considering the long duration of trial expected and situation of Covid 19, the petitioner is granted regular bail subject to his furnishing of security and bail bonds.

KERELA HIGH COURT

Goods and Services Tax Network

v.

Leo Distributors

[K. Vinod Chandran & T.R. Ravi, JJ]

WA No. 511 of 2020

Date of decision : June 4, 2020

TRAN 1 – Mistake by assessee in filing of returns – department ordered to facilitate uploading of – Appeal filed against the order as error occurred at hands of assessee not department – Held to be a transitional problem – Mistake occurred with no ulterior motive but due to inadvertence prompted by inexperience – Appeal rejected

In this case, an appeal is filed by the department against the order directing the authorities to facilitate filing of GST TRAN 1 forms electronically by making arrangements or accept manual filing of returns. It is contended that the assessee (respondent here) could not upload the prescribed form for reason that details were filled in the wrong column. Hence the main argument is that the error occurred at the hands of the assessee and not the department.

It is noticed that there are a rising number of teething problems in the initial stages of a new regime and the assessees too are not well versed in the ways and means provided in the new enactment and those prescribed by rules: both substantive and procedural aspects. The transition from old regime to the new one poses unprecedented problems in successful migration either due to failure of system or inexperience of assessee. The return is rejected due to the mistake in column which is not with an ulterior motive but for reason of inadvertence prompted by inexperience. The appeal is thus rejected and the impugned order is also upheld.

GUJRAT HIGH COURT

Om Sai Traders

v.

The State Tax Officer

[CJ Vikramnath & JB Pardiwala, J]

R/Special Civil Application No.7395 of 2020

Date of Decision: June 15, 2020

Show cause notice u/s 130 of GST Act, 2017 – Quashing of – Refusal by court to interfere with the notice – Authority to adjudicate as per law – Likeliness of goods being damaged in monsoon, goods ordered to be released on furnishing of bank guarantee and payment of tax and penalty – writ disposed of –

The Petitioner engaged in the trading of Tobacco had purchased goods to be delivered at its premises from Kalol. The vehicle was only little away from destination when it broke down and the goods were shifted to another vehicle. The vehicle was intercepted before reaching and the goods were seized for discrepancy in E-Way bill. A writ is filed praying for quashing of the notice.

The court has held that it should not interfere with the impugned show cause notice. The authority should be permitted to adjudicate the same as per law. However considering that the onset of Monsoon may damage the goods, the goods are ordered to be released on furnishing of bank guarantee and the amount determined as tax and penalty. The writ is disposed of.

PUNJAB AND HARYANA HIGH COURT

Haryana Petro Oils

v.

Union of India & Ors.

[Jaswant Singh & Sant Parkash, JJ]

CWP No.8361 of 2020

Date of Decision June 9, 2020

TRAN-1 – Vires of Rule 117(1A) of HGST Rules – Technical glitch in uploading TRAN 1 Form – Writ filed – Repeated Extensions observed to be given where technical glitch existed – Rule held to be intra vires as repeated extensions to claim credit vindicate the claim of petitioner that if he is denied the claim to file TRAN-1 would render it ultravires Article 300A of the Constitution of India – Petitioner permitted to upload GST Form till 30th June, 2020.

The petitioner failed to upload TRAN-1 by last date i.e. 31.12.2017 due to technical glitch on GST portal for claiming CENVAT Credit as per the erstwhile Act. A writ is filed challenging vires of rule 117(1A) of HGST Rule 2017 and seeking direction to respondent to permit it to electronically upload the said form.

It isn’t appropriate to declare the said Rule as invalid as the petitioner is entitled to claim CENVAT credit accrued under the Central Excise Act. The court observed that the respondents have repeatedly extended the date to file TRAN-1 where there was a technical glitch. Such repeated extensions vindicate claim of petitioner that denial of unutilized credit who are unable to furnish evidence of attempt to upload TRAN-1 would amount to violation of Article 14 and Article 300A of Constitution of India.

The petitioner is permitted to upload TRAN-1 on or before 30.6.2020 failing which it would be at liberty to avail ITC in GSTR-3B after satisfaction of the authorities

MADRAS HIGH COURT

Visteon Automotive Systems Pvt. Ltd.

v.

Deputy Commissioner (CT)-IV (FAC)

[C. SARAVANAN, J]

W.P. No. 32655 of 2015

Date of Decision: January 13, 2020

Input Tax Credit – Tax charged @ 12.5% on capital goods by dealer instead of 4% – Petitioner ordered to reverse excess ITC @8.5% – Held Petitioner entitled to claim ITC on strength of invoice on tax paid by registered dealer (seller) – Even if tax was paid in excess by dealer to liquidate excess ITC, thereby passing it on to petitioner, claim of petitioner justified

The petitioner had purchased ‘capital goods’ on which VAT @12.5% was charged by the dealer. The petitioner availed the tax paid. The respondent contended that the ‘capital goods’ were liable to VAT only @4% and hence the petitioner was required to reverse credit availed equivalent to 8.5% VAT.

The Court held that Input tax credit can be availed on the strength of the invoice on the tax paid by the registered dealer who sells such capital goods.

Even if the registered dealer deliberately paid tax in excess and passed on the incident of such tax to the petitioner with a view to liquidate excess ITC accumulated, the petitioner cannot be denied of the ITC of tax paid and reflected in invoice. In such a case the department can recover the tax passed on in excess from the registered dealer who sold such goods to the petitioner.

There is no reason why credit availed by the petitioner should be disallowed, when the intention of legislature is to reduce the cascading effect of the tax. Therefore, the impugned order passed by the respondent is quashed.

MADHYA PRADESH HIGH COURT

Subhash Joshi

v.

Director General of GST Intelligence and (ORS)

[Prakash Shrivastava & Vandana Kasrekar, JJ.]

W.P. No. 9184 OF 2020

Date of Decision: July 3,.2020

Search and seizure – Presence of Advocate during Enquiry – premises sealed – apprehension about fairness in the process of search and seizure and manner of confession to be taken, writ filed for direction for presence of advocate during the process – No case for interference made out – No provision to support the request – writ dismissed.

A notice for sealing the factory premises of petitioner was issued. Being apprehensive about the manner in which search and seizure would be conducted and his statement be taken, the petitioner seeks a direction for carrying out the search in presence of an Advocate as to his mind the respondents want to carry out search by keeping their own pocket witnesses.

The respondents have assured the Court that the provisions of Sub-section 4 of Section 100 of Cr.PC and Sub-section 10 of Section 67 of CGST Act, 2017 will be duly complied with. Hence, no direction is required. Also the petitioner has failed to point out any statutory provisions or legal right to buttress its contention for presence of Advocate. No case for interference is made out. Petition is dismissed.

DELHI HIGH COURT

SKH Sheet Metals Components

v.

Union of India & Ors.

[Manmohan & Sanjeev Narula, JJ]

W.P. 13151/2019

Date of Decision: June 16, 2020

TRAN 1 – Human error/ Non technical error in filing – TRAN 1 filed well within time- Clerical error by petitioner-Partial credit displayed on GST Portal – Case rejected by ITGRC without giving reasons – writ filed – Held vested right not to be taken away on mere clerical mistake – Proviso of Rule 117 of CGST Act silent as to which class of cases it applies to – Considering time limit given in Rule 117 (1A) as mandatory is arbitrary – Rule 117 silent about any consequence in case of non compliance, therefore directory in nature – GST council extended relief to taxpayers against both technical and non technical difficulties – TRAN 1 stood filed within time and revision thereof would relate to the date of filing – Language of Section 140 of CGST Act, 2017 envisages the intention to save the accrued right – Writ allowed with a direction to respondents to accept revised return electronically or manually.

The petitioner asserts its entitlement to transitional credit under GST Laws by filing of form GST TRAN-1. However, only a small portion of the available credit was reflected on the GST Portal .The petitioner filed a revised declaration on. But the short amount was still shown as blocked Credit. The Hon’ble Bombay High Court directed it to file a representation before the Jurisdictional Commissioner in terms of 32nd GST Council Meeting. The said Council had resolved that ITGRC would consider cases relating to technical glitches as well as involving human errors. However, the case of the petitioner was rejected by ITGRC without giving any reasons for rejection. The petitioner thus filed a writ before this Hon’ble Court invoking Article 226 of the Constitution of India.

Held—It is clear that it was for the clerical mistake on part of the petitioner that there has been short transitioning of the credit which vested in his favour under the VAT regime. Since GST Law is a major tax reform, human errors in filing statutory forms cannot be ruled out.

The petitioner’s case has been rejected on the ground of being, ‘non technical’ human error and the benefit of Rule 117(1A) has not been given. It is observed that the Rule suffered from vagueness and concept of ‘Technical difficulty on common portal’ and its applicability has not been adequately defined anywhere. Therefore, the application of this rule cannot be predicted as to which class of cases is would apply. The GST Council in its 32nd meeting has mandated to include those cases where tax payers have suffered due to system failure whether technical or otherwise. Therefore, there is blurring thin line between technical and non-technical difficulty faced by tax payers due to which the courts finds the restrictive applicability of Rule 117(1A) as arbitrary.

For cases covered under Sec.140 (1) of the CGST Act, the ITC under the existing laws is a vested right. The language of Sec.140 of the Act manifests the intention behind the provision is to save the accrued and vested ITC under the existing law. This vested right is protected under Article 300A of the Constitution of India and cannot be taken.

The purpose of time lines prescribed is just to hasten the migration of taxes from erstwhile regime to the new GST laws. The time limit given by Section 117 of the CGST Act is purely procedural. It cannot be deciphered that there is any intend to deny extension of time to deserving cases where delay in filing was on account of human error.

Rule 117 of the CGST Rules doesn’t indicate any consequence for non compliance of the condition given. Since the consequences are not indicated the provision is seem as directory.

Lastly, TRAN-1 was filed within the stipulated period and revision thereof to correct an error will relate back to the said date of filing. There is no reason to hold that the revision of the said return is time barred and to be treated as fresh return.

The petitioner has made countless complaints and representations and the respondents have consistently denying it and opportunity to revise the return without disclosing the reasons for arriving at this decision. The petitioner is permitted to revise TRAN-1 Form on or before 30th June, 2020 and transition the entire ITC subject to verification. The respondents are directed to open the on line portal to enable the petitioner to file revised declaration TRAN-1 electronically or accept the same manually.

KARNATAKA HIGH COURT

Sri Hanumanthappa Pathrera Lakshmana

v.

State

[K. Natarajan, J]

Criminal Petition No. 2419 of 2020

Date of Decision: June 11, 2020

Anticipatory bail – Preliminary investigation completed – Fake ITC taken by petitioner – Summon issued u/s 70 of 2017 Act for appearance – Anticipatory granted as no prejudice would be caused to respondent by doing so – Petition u/s 438 of CrPC is maintainable for an offence u/s 132 of the CGST Act – No statutory bar for invoking power u/s 438 of CrPC-

An anticipatory bail is sought by petitioner against an alleged offence punishable u/s 132 of CGST Act. Summons u/s 70 of CGST Act, 2017 are issued for him to appear before the officer. The respondent contends that an anticipatory bail is not maintainable and only a writ can be filed in this regard.

Held:

As per Section 69(1) of CGST Act, if the Commissioner feels there is a reason to believe that a person has committed an offence u/s 132 of the Act, he may order arrest of such person. In such an eventuality a petition u/s 438 of CrPC is maintainable for offence committed under the CGST Act and there is no statutory bar for invoking power u/s 438 of CrpC for the offence committed under CGST Act.

Also, on merits of the case, it is observed that the preliminary investigation is complete and they found that fake ITC taken by the petitioner is said to be taken by creating fake invoices. Hence the petitioner suspects that on appearing before officer, he might be taken to judicial custody. There is no bar in CGST Act for granting anticipatory bail and no prejudice would be cause to respondent by granting him anticipatory bail. Therefore, anticipatory bail is granted subject to furnishing of surety and executing a personal bond.

DELHI HIGH COURT

Zones Corporate Solutions Pvt. Ltd.

v.

Commissioner of Central Goods & Services Tax Delhi East & Anr.

[Manmohan & Sanjeev Narula, JJ]

W.P.(C) No 3620/2020

Date of Decision: July 10, 2020

Refund – GST Appeal filed by petitioner was accepted before Commissioner – Refund not given – Delay attributed to impossibility in filing appeal by respondents against the said order due to non working of GST Tribunal – Held respondents to refund the amount as petitioner cannot be asked to wait endlessly.

There was an indication on part of the respondents for not disbursing the refund amount as the GST Appellate Tribunal weren’t working. The court has observed that the petitioner has succeeded in appeal before Commissioner vide order dated 23rd July, 2019. The petitioner cannot be asked to wait endlessly for the respondents to challenge the order dated 23rd July, 2019. Consequently, the present writ petition is disposed of with a direction to the respondents to refund the amount as directed by the within four weeks. During this period, it shall be open to the respondents to file appropriate proceedings in accordance with law. All rights and contentions of the parties including objection, if any, to the maintainability of such proceedings are left open.

  1. In taxation law, no liability to pay tax arises unless and until an assessment is framed. Parliament has followed same principle in GST laws. The scheme has been so framed that the determination of tax liability is done in a proper manner affording proper opportunity of hearing to the assesse.

  2. If the person is an unregistered person, the authority can proceed to assess the tax liability of such taxable person to the best of his judgement for the relevant tax periods and issue an assessment order. However, such an assessment order can’t be passed without giving a person concerned a proper opportunity of being heard.

  3. Every registered person, if he does not file returns as per applicable periodicity or, annual return or final return, section 46 mandatorily requires the Notice to be issued for furnishing such returns. If, even after such notice the returns are not filed, the authority may proceed to assess under section 62 the tax liability of the said person to the best of his judgement taking into account all the relevant material which is available or which he has gathered and issue an assessment order.

  4. Section 61 makes it compulsory for the authorities to inform the registered person, who has filed the returns, any discrepancy found in any of the returns so filed and seek an explanation from him. If the explanation is not offered within 30 days or the explanation so offered is not found satisfactory or having accepted the discrepancy the corrective steps are not taken by the said registered person then the authorities can initiate action such as audit by the tax authorities, special audit, inspection, search and seizure. The authorities can also proceed to determine the tax not paid or short paid.

  5. If audit of such a registered person is undertaken by the tax authorities, then on conclusion, the authorities have to mandatorily inform, within 30 days, to that registered person their findings. The said person is also to be informed his rights and obligations and the reasons for such findings. The action for determination of tax liability under section 73 or 74 can be initiated only after the detection of tax liability, as a result of the audit, is informed to such person.

  6. If the special audit is conducted under section 66 by the nominated Chartered Accountant or Cost Accountant, then the registered person is required to be given an opportunity of hearing in respect of any material gathered on the basis of special audit which is proposed to be used in any proceeding against him under the GST Act and Rules.

  7. If the authorities have reason to believe that a taxable person has suppressed any transaction or, the goods supplied have escaped the payment of tax or, the person has evaded or is attempting to evade the payment of any tax, then the powers of inspection, search and seizure can be used and the authority may, for reasons to be recorded in writing, seize the accounts, registers or documents of such person produced before him. However, he should grant receipt for the same, and can retain the same for so long as may be necessary in connection with any proceedings under the GST of the rules made thereunder for prosecution.

  8. Under section 73, the authorities can determine the tax not paid or short paid or erroneously refunded or input tax credit wrongfully availed or utilised for any reason other than fraud or any wilful misstatement or suppression of facts. After noticing such a default, the authority has to issue a Notice. The person chargeable to tax, if is not willing to accept the default and pay the tax with interest, can make the representation. The authority after considering the representation has to pass the order.

  9. If the non-payment of tax or the short payment of tax or the erroneous refund thereof or the availment of wrong input tax credit or utilisation thereof is by reason of fraud or any wilful misstatement or suppression of facts then the determination of tax arising on account of such default shall be under section 74 of the GST Act. Even under this provision the authority has to consider the representation of the person charged with the default, if the same is not acceptable to him, and pass the order.

  10. Section 75 lays down general provisions relating to determination of tax. Sub-section (4) thereof says that an opportunity of hearing should be granted where a request is received in writing from the person chargeable with tax or penalty, or where any adverse decision is contemplated against such person.

  11. Sub-section (5) thereof says that on sufficient cause being shown maximum three adjournments can be granted for hearing.

  12. Sub-section 7 of Section 75 is more important. It says that the amount of tax, interest and penalty demanded in the order shall not be in excess of the amount specified in the notice and no demand shall be confirmed on the grounds other than the grounds specified in the notice.

  13. Section 78 is equally important It says, any amount payable by a taxable person in pursuance of an order passed under the Act should be paid by such person within a period of 3 months from the date of service of such order, failing which recovery proceedings would be initiated. In other words, the Parliament has granted 3 months’ time to the person against whom the order is passed to challenge such order before the higher forum if the same is not acceptable to him..

  14. Thus, in every provision of the GST Act the rules of natural Justice have been incorporated. However, while administering these laws those principles are not being followed. The authorities always endeavour to extract the revenue flouting all such principles. The coercive measures of recovery are adopted. This is more particularly so when surprise visits are paid under Section 67.

  15. The authorities invariably by force obtain a confession form the assessee at the time of such visit and use it in further proceedings. The Supreme Court has always condemned this practise of obtaining confession by force and has warned that it requires close scrutiny and independent corroboration and should not be accepted unless it is proved that it is made voluntarily. See Mohate Sham Mohd. Ismile v. Special Director, Enforcement Directorate, 2007 (220) ELT 3 (SC).Further the confession should be in writing and not verbal and the copy thereof should be given to the assessee. See Ambalal v. Union of India, 1983 (13) ELT 1321. If the confession is not voluntary, it should be at the earliest possible time should be retracted. The burden of proving that the confession is voluntary is always on the revenue. See Vinod Solanki v. Union of India and Others, 2009 (233) ELT 157.

  16. After obtaining such confession under duress the next coercive action is always to make provisional attachment under section 83 of the Act. Such Section 83 can be brought into operation only if the Commissioner is of the opinion that for the purpose of protecting the interest of the government revenue, it is necessary so to do, he may, by order in writing attach provisionally any property belonging to a taxable person. Thus, the power of provisional attachment is to be exercised only after passing speaking order of the satisfaction of the Commissioner about the loss of revenue in future if the property is not provisionally attached. The Courts have vacated such orders where they have found that either the orders are not speaking or the reasons given are not adequate.

  17. In Goenka & Associates Educational Trust, 2008 (9) STR 228 (BH)the petitioner was contesting their liability about the registration and consequent liability under the Service Tax as the Tour Operator. The Court was prima facie convinced about their contention and passed order protecting them from any coercive recovery till adjudication.

  18. In Keyur Shah v. Union of India, 2014 (306) ELT 603 (BH)a communication was sent to Co-operative Housing Society attaching the property of the assessee and insisting for NOC form the Department before transfer of the property. The Court quashed the communication since no adequate reasons were stated therein.

  19. In ICICI Bank v. Union of India, 2015 (38) STR 907 (BH)the petitioner had filed the return declaring that they were not liable to Service Tax. However, they paid the tax under protest upon receiving the communication from the Department. After receiving such tax under protest, the Department sent another communication for interest. They were also threatened of drastic action like attachment of property sealing bank account etc. The Court expressed displeasure with such threatening and held that the if the stand taken by the petitioner was not acceptable to the revenue then they should have determined (assessed) the liability on the basis of the return filed.

  20. Cavim Properties Pvt. Ltd. v. Union of India, 2016 (44) STR 217( BH). In this case the Court set aside the attachment of property including bank account directing the adjudication be done and reasoned order be passed.

  21. M. P. Enterprises v. Union of India, 2018 (19) GSTL 493 (BH).In this case the Garnishi Notices attaching the bank accounts were vacated Notices issued to third parties were also quashed.

  22. However, where the assessee has revised his returns pursuant to pressure by Revenue officers, he must immediately file a refund application and simultaneously retract any statement or confession which is given. It may so happen in some cases that the limitation period for claiming refund is over. In such cases, one can move the High Court in writ jurisdiction. However, it is always advisable that where the limitation for refund is over, the taxpayer should not revise the return without proper legal advice.

  23. Another trend which is seen nowadays is to levy interest on self-assessed tax shown in return without giving any opportunity of being heard. This is also clearly wrong. Interest may be an automatic liability, but it cannot be said that there can be no error of law or fact in the working of the interest. As such, the assessee must be heard before finalising the levy of interest even on self-assessed tax.

  1. Intellectual property rights are legal rights for governing the use of creation of human mind. The recognition and protection of these rights is of recent origin. Patents, Designs and Trade Marks are considered as Industrial Property. As per international convention for the protection of industrial (Paris Convention) of property has as its object, patents, utility models, industrial designs, trademarks, service marks, trade names, indications of source or appellations or origin and the repression of unfair competition when copyrights, geographical indicator, layout designs and confidential information were included to industrial property, they all become intellectual property.

  2. Forms of Intellectual Property Rights are as under:

(a) Patents

(b) Copyright

(c) Trademarks

(d) Industrial Designs

(e) Trade Secrets etc.

(f) Brand Name

(a) Patents:

The process of bringing it into commercial production and is tied up as secret (know-how). Know-how is really capable of protection against those who stick to make use of it without consent as distinct from those who will pay for a license to obtain it. This is a right granted to resist invasion of privacy. It protects the rights relating to films, music, literature and other creative works as well as the source code of computer programme.

(b) Copyright and Related Rights

The subject-matter of copyright is the literary, dramatic, and musical or artistic work, a cinematograph, film and sound recording. Literary work includes computer programmes, tables and complications including computer database. The object of this right is not the material thing produced, but the form impressed upon it by the maker. The picture in the abstract sense of the artistic form made visible by that paint and canvas belongs to him who made it.

(c) Trademark

A registered owner of a trade mark or goods retains its right to protect any reputation acquired by use, by means of passing action.

Actual goodwill in trade remains the fundamental to be protected and registration is concerned merely as a heightened forms of protection.

The registration must be pre-requisite to protection of anything that they define as a trade or service mark.

This right is granted to protect the symbol of the organization representing its logo or brand, it can be in the form of a figure, slogan etc.

(d) Industrial Designs

It means only the feature of shape, configuration, pattern, ornament or composition of lines or colours applied to any article whether in two dimensional or three dimensional or both forms, by any industrial process or means whether manual, mechanical or chemical separate or combined, which in the finished article appeal to and are judged solely by the eye, but does not include any mode or principle or construction and does not include any trademark.

(e) Trade Secrets

This is granted to protect right relating to formula practice process design, pattern, instrument, commercial method or compilation of information, not generally known or reasonably ascertained by others.

(f) Brand Name

Vide “Taxation services”

An Education Guide issued in 2012 under the Erstwhile Service Tax Regime, the Government has certified that the phrase “intellectual property rights” in normal trade parlance inter alia includes trade mark. Therefore, the brand name registered as trade mark can be covered as intellectual property rights.

  1. Intellectual Property Rights

Transfer of Intellectual Property Rights (IPR) – Supply of goods or services:

Under the GST Law, it has been specified for both permanent and temporary transfer of intellectual property rights and done away with the issue relating to classification and rate.

  1. Transfer of IPR is a supply of goods or service

Classification of supply as goods or service is still a debatable issue under the GST regime, due to different provisions contained as to the time of supply, place of supply, Reverse Charge Mechanism, rates, exports etc.

Therefore, it is necessary to determine the exact nature of intellectual property right transactions. GST law defines goods and services.

GST law defines goods under clause 2(52) which means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of land which are agreed to be severed before supply or under a contract of supply. In short, it means every kind of movable property.

It means movable property of every description except immovable property. Therefore, the intellectual property rights can be treated as “goods”, since it is not immovable in nature, goods covers both tangible and intangible property. Therefore, it can be transferred by way of sale or licensing that is either permanent disposal or temporary disposal. Permanent transfer of IPR is a supply of goods.

As per section 2(102) of CGST Act, 2017 “services” means “anything other than goods, money and securities.”

Section 7 read with Schedule II, Entry no. 5(1)(c) has clarified that the temporary transfer or permitting the use or enjoyment of any intellectual property rights shall be treated as supply of service.

  1. Notification No. 8 of 2017

Central (Rate) Notification No. 8 of 2017, Serial No. 17 dated 28th June, 2017 under GST under the heading 9973, temporary or permanent transfer or permitting the use or enjoyment of intellectual property (IP rights) in respect of goods other than information technology software is a service. By issuing the said notification, they have created a confusion that they have used the word “permanent transfer” and considered as a service.

Notification cannot override the provisions of law and its rules. The law clearly spells out that unless there is a permanent transfer of IPR rights which will be treated as a goods and not services. It is a temporary transfer or permitting the use or enjoyment of intellectual property rights, in respect to goods other than with or without information technology, is a service.

Thus, the intention is when there is a temporary transfer or transfer is for a limited period, then it is a service.

Supreme Court in the case of Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors. in a Writ Petition No. 183 of 2003 decided on 2nd March, 2006, where the Hon’ble Supreme Court has held that in order to constitute a transaction or the transfer of right to use the goods, the transaction must have the following attributes.

(a) There must be goods available for delivery. There must be consensus ad idem as to the identity of the goods

(b) The Transferor should have a legal right to use the goods. Consequently, all legal consequences of such use including any terms or license required, therefore should be available to the Transferee.

(c) For the period during which the Transferee has such legal right, it has to be the exclusion of the Transferor. This is necessary concomitant of the plain language of the constitute. Namely, (a) “transfer of the right to use and not merely a license to use the goods”.

(d) Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same right to others.

The above mentioned are the conditions for right to use the goods, then it would fall under the temporary or permitting the use or enjoyment of intellectual property rights in respect of goods other than information technology.

  1. Scheme of classification of services

The scheme of classification of service provides that the rate shall be restricted for licensing of service only and thus not applicable when there is a sale of IPR. The same rate has been made applicable for permanent transfer of IPR through notification determining the rate of goods.

The principle regarding the permanent transfer or temporary transfer shall continue to be governed by the agreement of particular transaction and the settled the Rule by the Supreme Court in the case of BSNL v. Union of India 152 Taxmann.135

A question, therefore, arises that how a permanent transfer of intellectual property right is governed by GST rate provided for services. This has created confusion and unwanted debate. This creates a perplex situation as to permanent transfer of Intellectual Property Rights is governed by the GST rate provided for services.

Further to clarify the said confusion GST council in its 23rd meeting held on 10th Nov 2017 issued a press release stating:

“In order to obviate dispute and litigation, it is proposed that irrespective of whether permanent transfer of Intellectual Property is a supply of goods or service.-

(i) permanent transfer of Intellectual Property other than Information Technology software attracts GST at the rate of 12%; and

(ii) permanent transfer of Intellectual Property in respect of Information Technology software attracts GST at the rate of 18%.”

  1. Situs of Sale

GST law provides different set-off rules for determining the place of supply of goods and place of supply of services.

Temporary IPR is governed by the place of supply of services. Temporary transfer of Intellectual Property Rights shall be governed by the provisions of Section 13 determining the place of supply of services which stipulates that the situs lies at the location of the recipient of service.

The place of supply for permanent transfer of IPR is debatable issue as the place of supply is dependent upon the movement of goods. Further, as per Section 10(1)(c) of the IGST Act, where the supply does not involve movement of goods, whether by the supplier or the recipient, the place of supply shall be the location of such goods at the time of the delivery to the recipient. Hence, it is difficult to say where the situs of place of supply lies and analysis has to be done on the facts of each case, nature of IPR and agreement between the parties.

Also, when the parent company has registered the IPR outside India and the IPR is used by the Indian entities, will it result into a supply, it becomes more complicated as every transactions between related persons and deemed distinct persons in the course of business, even without consideration brought under the ambit of GST, refer Entry 2 of Schedule I. Thus, it has widen the scope. Further, question arises whether there is any movement of permanent transfer of Intellectual property rights, what are the criteria to determine the commencement and termination of movement due to its intangible nature. All these issues remain unsettled.

  1. Taxability when either supplier or recipient is outside India

  2. Permanent transfer:

  3. a) In case of permanent transfer from a supplier located outside India to recipient located in India:

Section 7(2) specifies that supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce. Hence, it is an interstate Supply of goods.

Also, Section 5 deals with levy and collection of tax. Sub-section (v) of Section 5 provides that there shall be levied a tax called Integrated Goods & Service Tax (IGST) on all inter-state supplies of goods or services or both.

The provision to sub-section (1) of Section (5) provides that Integrated Tax on goods imported into India shall be levied and collected in accordance with the Provisions of the Customs Tariff Act, 1975. On the value as determined under the said Act, at the point when duties of customs are the levied on the said goods in accordance with a provision of Section 12 of Customs Act, 1962.

  1. b) In case of permanent transfer form a supplier located in India to recipient located outside India:

The place of supply of goods,––

(a) imported into India shall be the location of the importer;

(b) exported from India shall be the location outside India.

Hence, in this case it amounts to export of Goods and hence provision related to exports of service will apply.

  1. Temporary transfer

  2. a) In case of temporary transfer form a supplier located outside India to recipient located in India:

Section 7(4) of the IGST Act, 2017 states that Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.

Further, sub-section (3) of Section 5 provides that the Government may specify categories of supply of goods / services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and the provisions of IGST Act shall apply to such recipient as if he is the person who is liable to pay tax in relation to the supply of such goods or services or both.

The Government has issued a Notification specifying categories of supply of goods or services or both liable to pay tax on reverse charges basis vide Notification No. 10/2017 – Integrated Tax (Rate) dated 28th June, 2017:

As per serial No. 1, any service supplied by any person who is located in a non-taxable territory to any person, located in India other than non-taxable online recipient. Hence, it amounts to import of services and applicable GST is payable under RCM.

Further, as per Schedule I Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business is to be treated as supply even if made without consideration.

  1. b) In case of temporary transfer form a supplier located in India to recipient located outside India:

Section 7(5) of the IGST Act, 2017 states that Supply of services when the supplier is located in India and the place of supply is outside India shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.

As per Section 13 (2), the place of supply of services shall be the location of the recipient of services. Hence, in this case as the recipient is outside India it amounts to export of Services and provision related to exports of service will apply.

  1. Taxability of Intellectual Property Right as supply of services

Hon. Supreme Court in the case of Vikas Sales Corporation v. Commercial Taxes AIR 1996 SC 2082, Yasha Overseas v. CIT (2008) has considered that in respect of REP Licenses and Exim Scrips are goods and the same would be chargeable to sales tax. Based on the above decision of Supreme Court alternatively view can be taken that permanent transfer of Intellectual Property Right is goods and should be taxed under the Goods Rate Notification. It is relevant to note that no specific HSN is mentioned against the entry relating to permanent transfer of Intellectual Property Right (IP) in respect of goods in goods rate Notification. Therefore, the doubt arises as to under which HSN, the permanent transfer of IP Rights has been made by the Govt. Till date there is no amendment to service rate notification to delete permanent transfer of IPR has been made by the Govt. From the aforesaid situation, can it be gathered that the taxpayer has option to choose the rate notification which gives greater relief to the taxpayer. It is well settled law that when the policy offer various alternatives, it is the assessee’s option to choose the one which gives him the maximum benefit. Refer: Share Medical Care v. UOI 2007 (209) ELT 321 (SC).

H C L Limited v. CC New Delhi (2001) 130 ELT 405 (S C) 405

  1. Domestic supply – Import of Goods or Services

In a situation where brand name is treated as goods and the seller is located outside India, the first and foremost question arises whether it will be treated as import of brand name as import of goods? The import of goods means bringing goods into territory of India from a place outside India. In this case, there is no physical movement of goods into India. Hence, there is no import of goods. There are various judgments wherein it has been held that situs of Trade Mark is the situs of the owner. Refer: Mahyco Monsanto Biotech (India) P Ltd. v. UOI 2016 (95) VST 499 (Bom). Lal Products v. Intelligence Officer v. Commercial Taxes 2018-VIL-565 Ker. On the basis of above decisions, doubt still persists as to whether the situs of brand name is the situs of owner hence there is an import of such Brand Name into India from a place outside India. However, the Maharashtra Sales Tax Tribunal in case of Merck KGAA, Germany v. State of Maharashtra (2016-VIL-13-TRB). Hon. Tribunal has held that situs of intangible goods would be the location where the property is registered or where rights to property can be enforced. In my view, there is no clarity on the situs of brand name for determining the import of goods. It can neither be derived from the provisions of GST law nor from judicial decisions. It is, therefore, uncertain as to whether the situs of brand name can be said to be located outside India, i.e., Location of supplier or the location where the trade name is registered.

Further, treating the sale of brand name as import of goods may involve the following up of the procedure to be followed by filing Bill of Entry and paying custom duty as the goods are not in physical form. In such a case, proviso to section 5(1) and section 2(10) of IGST Act may not apply. Next question arises as to whether the sale of brand name by foreign seller to the recipient in India can be treated as import of service under GST Law? A question may arise even if one treats the sale of brand name as an import of service, in such a situation can the foreign seller be made liable to discharge GST in India on the plea that situs of trade mark is the place of registration i.e., India.

Conclusion

In view of above complexity Government should remove genuine difficulty faced by bonafide taxpayers and issue clarification or amend the GST law to settle the ambiguity to avoid costliest litigations.

In the present Article, I am raising a very interesting issue about the place of supply of goods as envisaged under Section 10(1)(a) of IGST Act. Practically, in all situation, wherever the movement of goods is terminating at a place (in other State), that place was said to be place of supply of goods except where unregistered buyer come to the place of sellor and takes a delivery of goods, then it was said to be intra-state supply i.e. supply taking place at the door steps of sellor.

*Advocate Past Central Council Member, the ICSI

pkmi[email protected]

The provisions of Section 10(1)(a), of IGST Act, 2017, is reproduced below for ready reference:-

Section 10(1)(a): The place of supply of goods, other than supply of goods imported into or exported from India, shall be as under:-

(a): Where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of such goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient;

2: The above provision says that the place of supply of goods shall be the place where movement of goods terminate. Thus one leads to inquisitive query – whether the movement terminate and in whose hands i.e. (a) supplier (b) buyer or (c) third person.

3: The idea behind Section 10(1)(a) was to levy GST at the place where the goods are delivered or shipped and not the where the movement terminates. The word “delivery” is to be analyzed in terms of Sales of Goods Act, 1930 as “delivered” and the word “delivery” has not been defined in CGST Act. As per Section 2(2) of Sales of Goods Act, delivery mean “voluntary transfer of possession from one person to another”. In my view, it cannot be argued that the “delivery” has to be interpreted in any other manner except as defined in Section 2(2) of Sales of Goods Act.

4: In order to decide as to whether movement continued upto a place of buyer, it would also be necessary to understand as to when ownership in the goods passes and for that purpose, we have to understand the provisions of Section 19 Sales of Goods Act, which, as is relevant for our purpose, reproduced below:-

Section 19(1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred

5: At this stage, Section 39 of Sales of Goods Act may also kindly be seen, which is, as is relevant, reproduced below:-

Section 39(1): Where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer, or delivery of the goods to a wharfinger for safe custody, is prima-facie deemed to be a delivery of the goods to buyer.

6: Hence, by virtue by Section 39(1), delivery of goods to the buyer is prima facie shall be deemed to be delivery of goods to buyer at the factory gate when the agreed terms and conditions, inter-alia, stipulate that the goods were Ex-Works, payment terms were through LC/DD/Advance payment and pursuant to which, the goods were delivered to the transporter who is either designated by the buyer or otherwise, it shall be deemed that the goods had been delivered to the buyer.

7: It would be pertinent to see provision of Section 26 of Sales of Goods Act, which provides as under:-

Unless otherwise agreed, the goods remain at the seller’s risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made or not:

Provided that, where delivery has been delayed through the fault of either buyer or sellor, the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault;

7.1: The perusal of Section 26 of Sales of Goods Act makes it clear that when the ownership in the goods stand transferred, risks passes to the buyer irrespective of the fact whether delivery has been made or not to the buyer.

8: The Division Bench of Patna High Court in the case of Coke Oven Construction Company (Private) Ltd. v. State of Bihar: MANU/BH/0210/1958, has observed that in relation to ascertained goods, when the parties intended to transfer the title:-

Under Section 23(2) of the Sale of Goods Act, there is a presumption that title passes as soon as the goods are delivered to the carrier, but this presumption is subject to the express term embodied in the actual contract between the parties. This is made clear by Section 19 of the Sale of Goods Act, which is to the following effect:

19 (1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.

(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.

(3) Unless a different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.

9: The Hon’ble Supreme Court in CCE v. Ispat Industries Ltd. MANU/SC/1151/2015 has observed as under:-

As has been seen in the present case all prices were “ex-works”, like the facts in Escorts JCB’s case. Goods were cleared from the factory on payment of the appropriate sales tax by the Assessee itself, thereby indicating that it had sold the goods manufactured by it at the factory gate. Sales were made against Letters of Credit and bank discounting facilities, sometimes in advance. Invoices were prepared only at the factory directly in the name of the customer in which the name of the Insurance Company as well as the number of the transit Insurance Policy were mentioned. Above all, excise invoices were prepared at the time of the goods leaving the factory in the name and address of the customers of the Respondent. When the goods were handed over to the transporter, the Respondent had no right to the disposal of the goods nor did it reserve such rights inasmuch as title had already passed to its customer.

10: Hence, it is a complete sale where-under the ownership, title and possession of the goods had passed on to the buyer at the Ex-Works of the Sellor. In my humble view, the issue of movement of goods completely eclipses and vanishes the moment the goods had been delivered either to the buyer or to the designated carrier at the works of the Sellor or at the godown of sellor. The same is also evident from the following judgment of the Hon’ble Supreme Court.

11: The Hon’ble Supreme Court in CCE v. EMCO Ltd. MANU/SC/0824/2015, has observed as under:-

It was found as a fact that the goods were cleared at the factory gate. On these facts, this Court held that insurance charges, or for that matter, transport charges would not be included even if the Assessee had arranged for the transit insurance. The Court found that the terms and conditions of sale clearly stipulated that it was ex-works at the factory gate of the Assessee. The payment was to be made before discharge of the goods from the factory premises. In the opinion of the Court, the machinery which was handed over to the career/transporter on receiving the payment was as good as delivery to the buyer in terms of Section 39 of the Sale of Goods Act and, therefore, possession of the sold goods was handed over to the buyer at the factory gate. In this manner, the transaction was full and complete and nothing remained to be done after the goods left the factory premises.

12: The Four Member Bench of Hon’ble Supreme Court in the case of Duni Chand Rataria v. Bhuwalka Brothers Ltd.: MANU/SC/0038/1954 has interpreted that delivery to mean and include “constructive delivery” as well and, therefore, observed as under:-

Such an eventuality could never have been contemplated by the Government and the only reasonable interpretation of the expression “actual delivery of possession” can be that actual delivery as contrasted with mere dealings in differences was within the intendment of the Ordinance and such actual delivery of possession included within its scope symbolical as well as constructive delivery of possession.

13: The Rajasthan High Court in Shambhu Dutt Shastri v. State of Rajasthan: MANU/RH/0397/1985 has observed as under:-

Section 2(2) of the Sales of Goods Act defines “delivery to mean voluntary transfers of possession from one person to another. The essence of the delivery is voluntary transfer of possession from one person to another.

14: In view of the above, in cases where the goods are sold (i) at Ex-Works or Ex-Godown, (ii) Payments were received in advance (iii) mutual agreement that risk passes when goods delivered to either buyer representative or carrier or transporter (iv) transporter is agent of buyer, then, in my view, it cannot be said movement of goods continued to, till the premises of the buyer.

15: Another line of thinking is emanating from the judgment of the Hon’ble Kerala High Court and, therefore, it is interesting to note the observation of the Division Bench of Kerala High Court in Kun Motor Co (P) Ltd v. STO MANU/KE/3579/2018 (Date 6.12.2018) wherein in para 15 of this judgment, it makes a very interesting reading:

15: But, when a person residing in one State goes to another State and purchase the goods for his own use, the supply with respect to the transaction terminates on the individual taking possession of the goods in that other State. The movement of the goods, after such sale is terminated and delivery is effected, whether it be inside the state or to outside that state, would be the prerogative of the purchaser, who owns the goods, in whom the property in such goods vests and such movement would not be that occasioned by the sale transaction or the supply thereon.

16: However, High Court, in the aforesaid case, was dealing the issue of generation of E Way Bill and hence observed that transaction which terminates with the supply within a state is an intra-state supply. Nonetheless it would be held to obiter dictum and not a ratio decidendi and could not be, in my respectful submission, a binding precedent. Even otherwise, in my humble view, the above ratio, in no way, support the view so taken by one segment.

17: It is also relevant to mention that AAA Karnataka in the case of Deputy Conservator of Forest (71 GSTR 429 (Kar) (Advance Ruling No. KAR ADRG 20/2019 dt.26.8.2019, wherein Forest Department, Karnataka disposes off by E–auction Timber of various sizes and specification from their Depot located in the State of Karnataka. It is further was stipulated that point of sale is Depot and the destination of sale is also Depot and resultantly 9% + 9% CGST and SGST was made applicable. It was argued by the Department when the buyer pays full amount, he is free to transport the timber to any place within or outside Karnataka. On the contrary, the contention of the buyer is that since the material purchased is being taken to and consumed outside the State of Karnataka, they should be paying 18% IGST. Notwithstanding the fact that the buyer is registered outside State of Karnataka, AAA, Karnataka, has held that the depot (delivery having been given at Karnataka itself) delivery, consequently, the transaction is intra-state transaction.

18: However, there is another ruling of AAA Telengana TSAAR Order No.03/2020 dated 2.3.2020 wherein the applicant is manufacturer of cement in the State of Telengana. They make Ex-factory sale from their plant. – A question has arisen what which tax should be charged? However, the AAA Telegana, relying upon the language of Section 10(1)(a), while observing that buyer is taking the goods himself to his place outside the State of Telengana, hence the movement terminate in another state and, therefore, IGST shall be payable. However, the AAA did not deal with the issue of buyer having taken over the delivery and only thereafter, good having been taken outside the State of Telengana.

19: The Hon’ble SC in the case of DCM Ltd v. CST 2009(2)TMI 444 SC, while dealing with the issue of intra-state sale or inter state sale, has held as under:-

Once it is found that the purchasing dealers were obliged under the contract(s) to take the chemicals to their respective territories outside Delhi, once it is found that the purchasing dealers were obliged to sell the chemicals in their respective assigned territories, once it is found that the said purchasing dealers were obliged to enter into separate contract(s) with the assessee, once it is found that each of the purchasing dealers were required to sell the chemicals in their assigned territories at the price fixed by the assessee and once it is found that each of the purchasing dealers was obliged to submit monthly reports to the assessee then in that event the mode in which each of the purchasing dealers could sell their goods either by way of stock transfer or inter-State sale or local sale becomes irrelevant.

20: In my view, because of the following peculiar facts, the judgment of DCM Limited is distinguishable.

Under the contract(s), each purchasing dealer(s) was assigned an exclusive territory. Each dealer(s) was obliged to take the chemicals to his respective territory outside Delhi where they were to be sold. Despite the fact that the delivery of the goods was taken in Delhi, the purchasing dealer(s) had to move the goods to the respective assigned territories outside Delhi and it was the essential condition of the contract itself that the chemicals would move out of Delhi and would be sold in the assigned territories allotted to each of the respective purchasing dealers. The covenant in the contract obliged each of the purchasing dealers to move the goods to the territories outside Delhi.

21: The Constitution Bench of Hon’ble Supreme Court in the case of State of AP v. NTPC Ltd MANU/SC/0356/2002 has observed as under:-

  1. It is well settled by a catena of decisions of this Court that a sale in the course of inter-State trade has three essential ingredients:

(i) there must be a contract of sale, incorporating a stipulation, express or implied, regarding inter-State movement of goods;

(ii) the goods must actually move from one State to another, pursuant to such contract of sale; the sale being the proximate cause of movement; and

(iii) such movement of goods must be from one State to another State where the sale concludes. It follows as a necessary corollary of these principles that a movement of goods which takes place independently of a contract of sale would not fall within the meaning of inter-State sale. In other words, if there is no contract of sale preceding the movement of goods, obviously the movement cannot be attributed to the contract of sale. Similarly, if the transaction of sale stands completed within the State and the movement of goods takes place thereafter, it would obviously be independently of the contract of sale and necessarily by or on behalf of the purchaser alone and, therefore, the transaction would not be having an inter-State element.

22: From the above, it is apparent that the movement as envisaged under Section 10 CGST will terminate whenever there is a actual or constructive delivery in accordance with general law. There cannot be any doubt that post delivery movement is absolutely irrelevant in as much as once the constructive delivery or actual delivery has been taken by the buyer or his agent, then when and where, the goods were delivered is, in my considered view, is wholly irrelevant.

23: The underlying principle under Section 10(1)(a) is that if the goods involve movement, whether by any of the person, the place of supply would obviously be the place where movement of goods terminates for delivery to recipient. In case, where there is a constructive delivery by delivery challan, like supplier transferring or alienating the title and ownership in goods kept in his godown by making sale and issues delivery challan and the challan is accepted by the buyer – though the goods remain in the godown of supplier but delivery is complete and calls for payment of CGST and SGST.

24: In my humble view, in case where transactions are in the nature of FOR delivery transaction or ownership in the goods passes at the buyer place or where sellor undertake to deliver the goods to buyers’ place and title passes thereat, then, in that event, Section 10(1)(a) would get attracted and call for payment of IGST.

Recently, there are some advance rulings issued under GST whereby an opinion was formed that Interest income of pure personal nature is ‘supply’ under GST. The AAR Gujarat in case of Shree Sawai Manoharlal Rathi [Advance Ruling No. GUJ/GAAR/R/2020/10, Dated: 19th May, 2020] has held that Interest received from PPF, Interest received from Personal loans and advances to family members and Interest Income from Saving Bank account would be considered for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for registration under the GST Law. This ruling has again created a confusion, chaos & debate.

Facts of the case

In the above case, applicant was an individual having not engaged in any business. His income includes, (i) Rent receipts: ₹ 9,84,000/-, (ii) Bank interest: ₹ 3,000/-, (iii) Interest on PPF deposit: ₹ 2,76,000/- and (iv) Interest on Personal Loans and Advances: ₹ 7,49,000/-. Thus the aggregate total income was estimated to ₹ 20,12,000/-. So a question was raised whether the said income of interest would form part of aggregate income for calculating threshold limit of ₹ 20.00 Lakh for registration under GST law?

Provisions of Law

Section 2(6) of the Central Goods & Services Tax Act, 2017 defines the term “aggregate turnover” as under:-

“aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.”

“Exempt supply” is defined under Section 2(47) of the CGST Act, 2017 as –

“Exempt Supply” means supply of any goods or services or both which attracts nil rated of tax or which may be wholly exempt under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes Non-Taxable supply.

“Nil rated supply” is nowhere defined in GST Law.

The basic difference between nil rated and exempt supply is that the tariff is higher than 0% in case of exempt supply. But there is no tax payable due to exemption notification. Whereas in case of NIL rated supply, the tariff is at NIL rate so there is no tax without the exemption notification.

Section 7 of the Central GST Act, 2017 prescribes scope of the term “Supply” which includes sale, transfer, exchange, barter, license, rental, lease and disposal. If a person undertakes either of these transactions during the course or furtherance of business for consideration, it will be covered under the meaning of Supply under GST.

Entry 27(a) of the Notification No. 12/2017- Central Tax (Rate) and Entry 28(a) of the Notification No. 9/2017 – Integrated Tax (Rate) dated: 28.06.2017 relates to the exemption of services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest. Therefore, such services are exempted from payment of GST and the individual is not required to discharge GST on the activity of providing services by way of extending deposits, loans or advances where the consideration is represented by way of interest.

Submission of Applicant

The applicant submitted that the “Scope of Supply” given under Section 7 of the CGST Act, 2017 clearly states that the receipts should be “In the course or furtherance of Business”. The receipts from personal loans and advances, deposits and Bank Interest are not covered under “Business” as per the definition of “Business” given under Section 2(17) of the CGST Act, 2017. So in view of the same, the applicant was of the opinion that for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for obtaining registration under GST law, such interest receipts are not required to be aggregated.

Finding and decision of AAR

Going by the definition of “aggregate turnover”, the Applicant is required to consider the value of both the taxable supply i.e. “Renting of immovable property” and exempted supply of service provided by way of extending deposits, loans or advances for which they earned interest income, to arrive at “Aggregate Turnover” to determine the threshold limit for the purpose of obtaining registration under the GST Act. The aggregate receipts of the applicant in the instant case are ₹ 20.12 Lakhs i.e. exceeding the threshold for registration. So he will liable to pay GST on the taxable turnover of rental income of ₹ 9.84 Lakhs and balance amount of interest income ₹ 10.28 Lakhs will be considered as exempt income not liable to GST.

Author’s View

The above decision of the AAR in view of author appears to be incorrect and needs to be reviewed. Though it will applicable only to the party who sought it but still author feels that somewhere it is demonstrating opinion of revenue authorities to such transactions. If this ruling is presumed to be correct then it will have far reaching impact on various individuals and HUFs who are not engaged in any business rather earning only interest and rental income. Most of the retired persons and senior citizens will be badly affected by such mindset of revenue authorities and need to run for GST registration and compliances. The issues with this ruling are:

  1. Object of earning Interest Income not examined

PPF Interest

The Public Provident Fund (PPF) is a savings-cum-tax-saving instrument in India, introduced by the National Savings Institute of the Ministry of Finance in 1968. The aim of the scheme is to mobilize small savings by offering an investment with reasonable returns combined with income tax benefits. So it is clear that the earning of interest from PPF can never be in the course or furtherance of business.

Saving Bank Account Interest

The primary objective of opening any Saving Bank account with Bank is to promote habit of saving. There are two types of saving bank accounts are in vogue in our Country viz: Basic Saving Bank deposit Account and Normal Saving Bank Account. Both the accounts are meant for saving and earning interest income thereon. However, based on the transactions limits etc. certain restrictions and charges are levied by Bank in each such account. These saving accounts are regulated by the RBI under the Banking Regulation Act, 1949. On the contrary current bank account is opened to run business etc. Thus the objects of opening a saving Bank account are also clear and it is not for running or supporting business.

Interest on Personal Loans

Further interest income from Personal Loans and Advanced to family/friends (irrespective of related party or not) can also never be called as ‘money lending’ or in the course of such business. It would be worthwhile to refer that for doing money lending business etc. one needs a specific license or approval or permission from RBI or other regulator. But in the instant advance ruling there is nothing on record to prove the same. Also, the applicant was not accepting loan from third parties at a lesser rate and then granting loans to friends & relatives at a higher rate to do any business. So in absence of any such activities how can one imagine that it is in the course or furtherance of business?

  1. Incorrect application /interpretation of legal provisions

The major problem in this ruling appears to the author is that it has failed to take into consideration the full facts of the case and the provisions of the u/s 7 of the CGST Act, 2017. In the instant case earning of interest income is considered as ‘Service’ by the Ld. Authority and relying on the exemption notification they arrived at a conclusion that interest would form part of ‘aggregate turnover’ being exempted service. But they never attempted to appraise the fact that any income included in aggregate turnover need to be amounts to Supply first in terms of Section 7(1)(a) of CGST Act, 2017. Also, the applicant was never into any business. So without any business or in furtherance of business how can there be a supply u/s 7?

If we read section 7 then it comes to light that scope of Supply is very vast and any transaction to be called as ‘Supply’ must satisfy the test laid down under said section. Further section 7(1) (a) states that supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. So it implies that the supply must be done for consideration and supply has to be in the course or furtherance of business. So these twin conditions must be satisfied for any transaction to be called as ‘supply’. Further wherever the legislature intended to treat a transaction as ‘Supply’ without satisfying the conditions of ‘consideration’ & ‘furtherance of business’ the law has been drafted accordingly. Reference can be made to section 7(1) (b), section 7(1) (c), Sch-I & II to the said section. But in the instant case though the applicant is rendering services by way of extending deposits, loans or advances where the consideration is represented by way of interest. But the same was purely personal in nature and without in the course or furtherance of any business. So the basic test laid down u/s 7 is not satisfied and thus taxable event never occurred. Further exemption notification is applicable only to such transactions which are otherwise taxable Supply under section 7 of the Act. So exemption notification cannot exempt a transaction which per se is not a supply. Though Govt. has got powers u/s 7 to notify any transactions as ‘Goods’, ‘Services’ or ‘neither goods nor services’. Thus above notifications in view of author are referring only such services which are in the course or furtherance of business of extending deposits, loans or advances but however to provide relief, it was exempted from tax. But unfortunately the authority has merely relied upon such exemption notifications without considering the undisputed fact that applicant were never into any business.

  1. Burden of Proof on revenue to prove receipts are in course of Business

It is settled law that when one forms an opinion on a particular subject matter then the burden of proof establishing the same lies on him only. In the instant case the AAR presumed that the Interest Income is in the course or furtherance of business then the burden lies on them only to prove the same. The tax payer has got a very strong ground to prove that the same are not so but this is not the case with revenue. So the author feels that at higher forum the question of burden of proof shall also arise and AAR has to establish the same.

  1. Income Tax Provisions & Reporting in ITR not examined

Section 28(i) and section 56 of the Income Tax Act has got two separate and independent provisions for taxation of Interest Income as Income from Business & profession and Income from other sources respectively. It is worthwhile to discuss some of the key pronouncements under the Income Tax law to examine the nature of interest income earned by an assessee.

Interest earned on short-term investment of funds borrowed for setting-up of factory during construction of factory before commencement of business has to be assessed as income from other sources. [Tuticorin Alkali Chemicals & Fertilizers Ltd. v. Commissioner of Income-tax [1997] 93 Taxman 502 (SC)]

Interest Income on Bank deposits out of surplus funds earned by the assessee engaged in the manufacture and export of garments is not to be considered as ‘Business Income’ rather ‘Income from other sources’ only and consequently, deductions under sections 80HHC and 80-IA claimed were also disallowed thereon. [Royal Stitches (P.) Ltd. v. Chief Commissioner of Income-tax, Chennai-II [2009] 184 Taxman 27 (Madras)]

Assessee made term deposit for purpose of availing of credit facility, deposit so made by assessee would be deemed to be a deposit made for purpose of business and eligible for deduction under section 80HHC. It was found that condition, as found in bank’s letter, made it absolutely necessary for assessee to make a term deposit for purpose of availing of credit facility. So it was very much connected and necessary for the business. Hence deduction u/s 80HHC rightly claimed. [Premier Enterprises v. Deputy Commissioner of Income-tax [2015] 59 taxmann.com 137 (Madras)]

The main object of assessee-golf club was to provide golf facilities to its members for promotion of sport and there was no element of assessee club being in nature of trade, commerce or business, then interest earned from banks or financial institutions on investment of surplus funds was exempted from tax. [Commissioner of Income Tax (Exemptions) v. Bombay Presidency Gold Club Ltd [2019] 106 taxmann.com 58 (Bombay)]

Assessee engaged in business of sale and purchase of mutual funds and money lending business. It earned interest income from parties and after adjusting brought forward business losses there against, declared nil income. The assessing Officer held that interest income was assessable under head of ‘Income from other sources’ and, therefore, brought forward business loss could not be allowed to be adjusted from said ‘interest income’. The Hon’ble Court confirmed the views of Tribunal and CIT (A) which treated interest income from money lending business as business income and allowed benefit of set-off of brought forward business.[Commissioner of Income-tax-I, Ludhiana v. Eastman Industries, Ludhiana [2010] 8 taxmann.com 215 (Punjab & Haryana)]

In case of Commissioner of Income-tax v. Bongaigaon Refinery & Petrochemical Ltd. [2001] 114 TAXMAN 311 (GAU.) the Hon’ble Gauhati High Court following the Apex Court ruling in case of Tuticorin Alkali held that items of income from interest and house property, derived by assessee during formation period of main business, would be taxable as income from other sources.

A perusal of the above rulings makes it clear that for the purpose of taxation of Interest Income under the head ‘Business & Profession’ it has to be seen whether such interest earned was in the or during the course of doing business. If it is so then the same is very much a business income else it should be Income from other sources. It is not necessary that each and every interest earned by an assessee engaged in business is a business income. It depends on facts and circumstances of each case. As a corollary, to be taxable under the head ‘Income from other sources’ it is not necessary that assessee should not be engaged in business. Hence the purpose and object of investment are important consideration for the same.

Apart from above legal provisions one can draw an inference from the Income Tax Return (ITR) where an assessee is reporting interest income as ‘Business income’ or ‘Income from other sources’. Generally, people invest money in PPF and deposit in saving bank account out of some savings etc. and interest from which is reported as income from other sources only. So on this footing also if the views of the authority are accepted then it will be a situation where same transaction will be classified differently under Income tax law and differently under the GST law which in the opinion of author will again create a mess.

  1. Conclusion

The author feels that the above ruling is certainly a perverse one. If we read the inclusive definition of business u/s 2(17), it covers all the activities as business irrespective of volume, frequency, recurrence etc. But still Investment activities out of one’s saving for earning interest would never fall under this definition. Nor it will be in the furtherance of business. So this ruling will face judicial scrutiny and the applicant has a good case to win. The author came across one more AAR of Karnataka in case of M/s Anil Kumar Agarwal [AAR no: KAR ADRG30/2020 dated: 04.05.2020] wherein the similar views were expressed without examining whether such services are in the course or furtherance of business. So let’s wait for suitable clarification from Govt. and hope at last good sense will prevail.

Disclaimer: The above expressed views are purely the personal views of the author. The possibility of other views on the subject matter cannot be ruled out. So the readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The author is not responsible in anyway.

The author is a practicing Chartered Accountant at Guwahati and can be reached at: [email protected]

  1. BACKGROUND

The significant Goods and Services Tax law (GST) was brought into place and effectuated on 1st July 2017 after adoption on 8th August 2016 of the 101st Constitutional Amendment Act, 2016. This week marking the 3rd anniversary of the law, warrants a mention of the historic midnight session addressed by Hon’ble President Pranab Mukherjee, Prime Minister Narendra Modi and Finance Minister Arun Jaitley in the Central Hall of Parliament on 30th June 2017, where the game-changing economic reform was formally announced.

Hon’ble President Sri Pranab Mukherjee stated, ‘GST is the result of a broad consensus arrived at between the Centre and the States and is a tribute to the maturity and wisdom of India’s democracy”

The Hon’ble Prime Minister in his own flair nicknamed GST as “Good and Simple Tax”. The following are some noteworthy assertions made by him in his midnight address:

  • The new law shall ensure ‘one nation, one tax’ which shall be executed in a standard manner in all the states. The same was expected to put an end to much of the earlier compliance headache for businesses from the erstwhile multiple Indirect Taxation collection system.

  • It shall be a revolutionary taxation system for the digital India. It is not merely ease of doing business but would demonstrate the way of doing business.

  • It shall be an example of Co-operative Federalism which shall facilitate inclusive growth of the nation. States shall now get equal opportunities of development where both Centre and State are playing equal role in its operations.

  • It would lead to immense savings of time and cost. Specifically, that the new law would eliminate delays at State border crossings caused by existence of different State taxation policies.

  • The law would cater to the cascading erstwhile indirect tax regime by introduction of a simpler, more transparent modern tax administration which would help curb corruption (including the low-level corruption of pre-GST era) and reward honesty.

In addition to the above, the primary objectives of this new consumption based indirect tax system instead of erstwhile multiple taxes on Manufacturing by Centre and Sale by States known as GST has sought to achieve uniform GST procedures and seamless Input Tax Credit (ITC); increase Tax to GDP ratio and revenue surplus; reducing economic distortions; transparency in taxation system; increase in employment opportunities; development of a unified national market to boost Foreign Investment and ‘Make in India’; increase the product competitiveness in the international market; improving the overall investment climate in the country which will uniformly benefit development of states.

  1. NOTABLE ACHIEVEMENTS

The new law has its own share of achievements. It has considerably stopped the cascade of taxes upon taxes, has reduced compliances in contrast to the erstwhile indirect tax regime, and has an effectively functioning GST Council which meets regularly to discuss important challenges faced by the law. Further, the new law brought up the Central uniform E-Way Bill across the country, the rainmaker policy of availability of seamless credit has been beneficial for a number of industries while leading to the emergence of another set of concerns stated hereinafter. The new law has further led to a substantial decline in the number of cases of tax evasion.

While appreciating the milestones which have been achieved by the GST law, a look back at the eventful years of the introduction of the reform, demonstrate a swelling number of confusions and litigations in the recent past. A surge in the legal, technical and procedural faults has been observed. These need to be reviewed for their immediate solutions.

  1. CHALLENGES

The implementation of the new law as per its design has been made substantially reliant on the efficient digital platform-GSTN which is regrettably susceptible to technical glitches. It is the single largest problem which needs to be strengthened and streamlined. Too much concentration & centralization of power in the hands of few bureaucrats has kept the extensive reform away from the people of the country. GST failed to touch the areas requiring transformation and corrections in Indian economy. GST has not lived up to its potential due to continuous technical hiccups, faulty implementation and initial un-preparedness, repeated experiments in the framing of GST Law; lack of consistency and sustainability had adversely affected the business and industry. India lost a big opportunity to happily feel GST as a beneficial reform. The challenges faced by the law today can further be discussed as follows:

  1. GST Law is not well drafted, it is cut and paste of erstwhile three main Indirect Tax Laws which make it a combination without clarity, simplicity, transparency and intelligence of its own. During this three year’s period, GST has seen in the year 2017, 256 Notifications, 29 Circulars, 12 Orders and 1 Removal of Difficulty Order (ROD) while in the year 2018, 192 Notifications, 56 Circulars, 4 Orders and 4 ROD as well as in the year 2019, 174 Notifications, 50 Circulars, 2 Orders, 13 ROD and 11 Corrigendum were issued. In the current year of 2020, we have already seen 73 Notifications, 11 Circulars, 1 order and 1 ROD. In total 695 Notifications, 146 Circulars, 19 Orders, 19 ROD and 11 Corrigendum were issue in addition to numerous Notifications and Amendments in the GST Law which comprised of three Acts & their corresponding Rules i.e. CGST, SGST and IGST. Further, the taxpayer needs to understand and implement the law after considering the interpretation and observations made in more than 1000 Judgments rendered by various High Courts creating more chaos than bringing clarity.

  2. Whether the businessman can keep track of such large number of Notifications, Circulars, Clarifications, ROD, etc. while performing his other business duties. Can it still be called a ‘Simple’ Law? Even a Tax Professional having requisite educational qualification, knowledge and experience is worried every moment that whether what he is advising the client or implementing the Law while filing of Return or performing any usual compliance is correct in-accordance to the Law. The genuine and vigilant Businessman including their Tax Advisors are just spending un-productive time in keeping track of extended dates, waving of Late fees or fines and interest rather than focusing on real issues facing GST and its long-term success.

  3. The difficulty increases when the Law is driven absolutely through the complex Notifications issued everyday by the Government and complicated Circulars by Central Board of Indirect Taxes and Customs.

  4. RULE OF LAW in GST is absolutely missing in the country, which is a serious question in a seasoned democracy like India. The Government have been regularly collecting around ₹1 Lakh Crore every month as GST revenue, but no Judicial Forum has yet been put in place for the genuine taxpayer for resolving their grievances. Every time they have to knock the doors of the High Court or Supreme Court which is practically not possible for small or medium dealers. Lack of judicial forum like Tribunal and Appellate Authorities as prescribed and provided by the Parliament in the GST Law has placed the taxpayers in the precarious situation since he cannot take any legal action to safe guard his interest. Probably, GST Council which itself is one of the finest examples of Cooperative Federalism, has not realized the essential requirement of proper judicial forum. Probably, bureaucracy responsible for implementing GST Law wants no or minimum interference so that their arbitrary actions and pro-revenue approach could continue even at the detriment of the country wide business. Imagine the plight of the repressed taxpayers in a democracy for last three years, the Government could not establish and start the ‘GST Tribunal’ neither the ‘Central Advance Ruling Authority’ while the local AARs manned with junior officers deficient in legal acumen are creating havoc with their revenue biased interpretations of law in most cases.

  5. Even as the time-gap arrangement of filing the 1st Appeal, the procedure is too much complicated, tedious and time consuming. As per the present instructions in the various States after uploading/filling of appeal online, hard copy must be submitted before the 1st Appellate Authority. What is the benefit of filling appeal online? Certified Copy of the questioned Order is separately needed to be filed manually.

  6. GST was expected to integrate the entire value chain starting from raw materials to finished products, this one advantage itself should have been a huge economic benefit for India, but GST grossly failed due to numerous arbitrary riders placed in the law. Thus, the aim of removal of cascading effect in the economy could not be achieved to the desired level nor the business could become globally competitive neither the prices of the finished products consumed by the citizens could come down due to the restrictions on Input Tax Credit adjustment seamlessly through-out the supply chain.

  7. A new problem has unfortunately erupted and faced by taxpayer. Suppose during the movement of goods from Gujarat to Punjab if goods are verified & seized by Mobile Squad Authority in Rajasthan, all legally required solutions like filing of clarifications, written reply etc. even filling of Appeal against the Tax & Penalty Order have to be completed before the proper Authority in Rajasthan i.e. at the remote place of seizure itself which is entirely new State or a unknown place for a normal consignor of Gujarat or consignee of Punjab. Such tedious procedure forces the harassed consignor or consignee to succumb before the arbitrary, illegal and un-justified huge demand of security deposit in Rajasthan. This is leading to corruption rather than removing the corruption, as envisaged earlier by the Government before implementation of GST. The present bureaucracy is absolutely sitting upon this very sensitive issue and no solution is being found out by GST Council inspite of repeated representation by Trade, Industry and Professional Bodies.

  8. Classification of Goods for applying the tax rate has many complications. In respect to same commodities Custom officer depends on their own Custom Classifications based on old thinking resulting in different views than GST Officer as per HSN Code. The custom duty calculated and paid at ICEGATE i.e. web portal of customs and GSTN i.e. web portal of GST both managed by Central Government have different interpretations and applications creating huge uncertainty for the import business. To develop and maintain transparent price structure by a business which is importing the goods as well as manufacturing the goods of similar brand in the country is a big issue due to this variance in thinking of the two Central Departments. Even after three years of implementation, the Government has utterly failed to integrate the windows of two Central Departments under Central Board of Indirect Taxes & Customs. Blocking of fund due to lack of integration as well as riders placed in process of refund/adjustment has further aggravated the financial problems of the export or import business.

  9. The rationalization of GST rates has also been taken by the Government in a big way, the number of entries in 28 percent GST Tax slab has been reduced from the earlier 228 items to only 37 items as well as some 500 items have seen rate tweaks over a period of 3 years which is certainly a good start, but still, we have at least seven GST slabs. This defeats the principle of simplicity and also introduces inverted tax structure. The classifications tend to be arbitrary, which means that slab allotment is susceptible to political patronage and undesirable lobbying.

  10. In the recent time of COVID-19, the businesses have come across an intricate controversy about the applicable HSN code and accordingly the GST Tax rate on face mask, sanitizer, medical consumables & tools and other such items of essential requirements for fighting the pandemic. Similar such issues are erupting time and again to complicate the business in various fields.

  11. The problem of fake registration under GST could not be tackled by the Government inspite of the availability of large number of State as well as Central Officers. Rather this laxity is increasing both the evasion and corruption to the great disadvantage of genuine business inducing tax distortions.

  12. Due to in-efficient digital infra-structure the pre-requisite of matching of GSTR-1 (Outward Supply) and GSTR-2 (Automatic up-dation of Inward Supply) could not be put in place which is detrimental to the very ethos of GST; defeating the advantage of ‘Self-Policing’ feature. Now, with an aim to cover-up the failure, the Government is giving some limited benefits to the registered dealers knowingly that such leniency is certainly susceptible to misuse by un-scrupulous registered dealers as well as independently detrimental to genuine business which is conducting all its transactions after recording in the books of accounts and payment of due taxes.

  13. The policy of ‘minimum personal contact’ with the representative of tax payer or ‘face to face verification’ is being largely defeated by the old mentality of field officers of the Central and State Departments as they are directly contacting the representative of assessee again and again on the mobile telephones as declared with the details of the registered dealers. Repeated visits are enforced by the departmental officers on one pretext or the other, until the taxpayer succumb to the pressure of corruption.

  14. The Goods and Services Tax has many anomalies in its present form, inputs are taxed at higher rates than final products, this phenomenon known as ‘Inverted Duty Structure’ resulting in blockage of fund which has become a very common and general problem of several Industries & Trade. It is tough to get even the top-most bureaucracy understand the real issue for its solution, further every time the industrial or trade body cannot approach High Court for obvious reason as their action of adopting judicial route being characterized as against the Government.

  15. One of the important aims of GST was to allow seamless credit of tax paid at the earlier stage from the Outward Liability to remove cascading effect, but large number of direct and indirect restrictions has been imposed on allowing ITC. This is creating interruption which is against the spirit of homogeneous integration of value chain. Government with all its might, un-reasonably blocked the transitional Input Tax Credit available as on 1st July 2017 for the erstwhile taxes (VAT, Central Excise or Service Tax etc) paid in repealed laws merged with GST; why so?

  16. The GST was expected to raise efficiency in business with the aim to lower the final prices of supply of goods and services, a goal it has largely failed to achieve, this could be a popular advantage to the citizens after implementation of GST. Anti-Profiteering provisions of GST Law have not been rationally used to ensure passing on differential benefit by the business to the ultimate consumer in the larger interest of economy of the country.

  17. GSTN Official Web Portal of the Government has failed in data management and analysis for accurate policy planning of targeted growth; sectoral data is not available for the economic activity so the business as well as Trade & Industry bodies are unable to get the precise data to make a long term planning in their business area.

  18. Even after 3 years of implementation of GST Law the Central & State Departmental Officers are still untrained to analyze the transaction data and immediately detect loss of revenue by un-scrupulous registered dealers. The training provided by the Government has not yet equipped/skilled the Officers and staff to the desired level as is needed for correct implementation of GST, expecting guidance to the small taxpayers is a farfetched dream.

  19. Most important of all, range of technical glitches need to be fixed. The software systems in use are too complex for individuals and modest businesses, and input credits are hard to get. Moreover, the GST Authority’s at the District or Zone level or even at the State level has no power at all to resolve any of the grievances which are increasing troubles of the taxpayers. The resolution of the dispute even with the satisfaction and consent of the Jurisdictional Authority at the local level is not permitted at all, the tax-payer cannot rectify any genuine mistake happened during filing of any of the complicated forms regularly required to be submitted online.

  1. CONCLUSION

Recently, the Government on 24th June, 2020, by Notification extended the operation of power to issue ‘Removal of Difficulties Orders’ by a further period of two years, beyond 1st July 2020 which proves beyond doubt that the GST Council itself admits that GST has not yet been stabilized even-after passing of three years, as this time period was envisaged when GST was adopted by Indian Parliament.

The extensive impediments which have been faced by the law have not gone unnoticed by the eyes of various Courts of India. The bench of Madras High Court constituting of Dr. J. Anita Sumanth in the case of M/s. Samrajyaa and Co. v. Deputy Commr of GST & CE in paragraph 5 mentions that “the era of GST is in a nascent stage and both the Department as well as assessees are still learning the ropes …it is common knowledge that assessees pan India are facing difficulties in accessing the system and uploading Forms to seek transition of credit…” Further, the Delhi HC in the case of Sales Tax Bar Association (Regd.) v. Union of India recognized the technical issues faced by the portal and provided further instructions on improving the efficacy and reach of the portal. Also, in the recent Delhi High Court decision of the Brand Equity Treaties, it was observed in paragraph 15 that “realizing that Respondent’s network and system, and the change, had posed multifarious problems that require a reasonable approach. …This is palpably evident from the sheer number of cases being presented before us, in relation to such technical difficulties and inadequacies. The benchmark, in our view, is that the online system brought into force by the GSTN Ltd. should be able to perform all functions and should have all flexibilities/ options, which were available in the pre-GST regime. The problems on the GSTN cannot be wished away and have to be resolved in the right earnest. This requires sensitivity on the part of the Government which has, unfortunately, not been exhibited in adequate measure.”

Hence, keeping the above extensive list of issues in mind as have been experienced by the businesses & industries in the implementation phases, it would not be wrong to admit that 3 years is a sufficient time for new GST regime to stabilize, but unfortunately India is still struggling with this new law and now onwards will be losing the precious time to firmly stand as a global economic power. A legislative reform coupled with a robust technical reorganization with minimal glitches, which shapes the basic machinery for immaculate implementation of the GST law is required on the present date.

  1. Introduction

1.1. Impact of Covid-19 pandemic may affect a number of Assessees and their businesses. A large number of Assessees may not be able to repay their loan or interest or both. Most of the Assessees may approach the banks or other financial institutions for waiver of loans and interest. What will be the consequence of waiver of loan and the interest thereon, from the tax angle, though seemingly settled by the recent judgement of the Apex Court in the case of Mahindra & Mahindra, various rulings of other high courts by following or referring to another decision of Supreme Court in the case of TVS Sundaram Iyengar makes it a debatable issue. Recently, however, the Honourable Bombay High Court, in a land mark judgement, in Essar Shipping Ltd v. CIT (Bom) (HC) www.itatonline.org dt. 5/March/2020, held that waiver of loan cannot be assessed as benefit or perquisite. Considering the importance of the subject I am revising my earlier article on the subject “The law on taxability of loan waiver“ (Posted on May 2018) www.itatonline.org for the benefit of readers.

1.2. Tax is essentially levied on the income actually earned by any ‘person’ defined u/s. 2(31) of the Income tax Act, 1961. The legislature, in it’s wisdom, felt that in order to bring to tax certain benefits which are otherwise not covered under the scheme of taxation there is a need to introduce certain deeming provisions. Let me take readers through two such provisions which were considered by various forums and decided in favour of assessees by holding that such remission would not lead to taxation in the hands of the beneficiary, but interpreted logically from a different angle in subsequent decisions of various high courts.

1.3. Provisions of s.28(iv) deal with taxability of any benefit or perquisite received by an Assessee in the course of business whereas provisions of s.41(1) refers to any amount treated as profit of an Assessee, subject to conditions being fulfilled, and aims at imposing tax on an amount which is not in the form of money and which also arises in the course of business. The purpose of both the sections, in the opinion of the Revenue, was to bring to tax any benefit arising to an assessee in the event of remission or otherwise by the other party and it has to be brought to tax either u/s 28 or u/s 41 whereas from the perspective of an assessee the transaction, at the initial stage, was of capital nature and upon remission, due to specific circumstances, it would not change its character to be roped in u/s 28 or 41 and there is, even otherwise, no benefit in cash to the assessee to treat such an event as a taxable event. The dissension between the Assessees and the tax department with respect to whether any benefit arises to the Assessee in case of waiver of loan, and if the postulate that a benefit arises is agreed to, whether such a benefit should be taxable in the hands of the Assessee, apart from the year of taxability, has been examined in a periscopic view by different courts. The Supreme Court, in the cases of Mahindra & Mahindra (2018) 404 ITR 1 (SC) and CIT v. Compaq Electric Ltd (2019) 261 Taxman 71 (SC), have held that s.28(iv) and s.41(1) are not applicable in the case of waiver of loans and hence no tax can be levied in such situations.

1.4. Recently the Bombay High Court, in the case of Essar Shipping Limited v. CIT ITA (IT) NO.201 OF 2002 (Bom.) (HC) www.itatonline.org, dealt with the issue of loan granted by Government of Karnataka and its subsequent waiver. The Supreme Court decision in the case of Mahindra & Mahindra(supra) has been followed.

Brief analysis of Essar Shipping case:

The Tribunal, in the above case had taken a view that writing off of the loan was inseparably connected with the business of the Assessee and therefore this benefit had arisen out of the business of the Assessee. Amount written off was nothing but an incentive for the business of the Assessee. It was held that the benefit was received by the Assessee in the form of writing off of the liability to the extent of the loan. Therefore, it could not be said that the Assessee received cash benefit u/s 28(iv).

The Bombay High Court followed the decision in Mahindra & Mahindra (supra) wherein a loan of ₹ 2.52 cores was given by the Karnataka Government to the Assessee which was subsequently waived. Therefore, such amount was construed to be cash benefit in the hands of the Assessee, falling outside the ambit of s.28(iv).

  1. Taxability of waiver of loans: Judicial analysis

In the case of British Mexican Petroleum Co. [1932] 16 Tax Case 570, the House of Lords had rejected the contention of the Revenue that waiver of loan is taxable in the year of waiver, by observing as under;

“I cannot see how the extent to which a debt is forgiven can become a credit item in the trading account for the period within which the concession is made.”

It is important to bear in mind that the issue of taxability of such benefit came up for consideration before Bombay high court also – see Mohsin Rehman Penkar v. CIT [1948] 16 ITR 183 (Bom.), Orient Corpn. v. CIT [1950] 18 ITR 28 (Bom),- and presumably to identify some specific nature of remmissions which needs to be taxed, which are otherwise not taxable under 1922 Act, in the light of the above judgements, sections 28(iv) and 41(1) came to be enacted.

In the case of CIT v. Phool Chand Jiwan Ram [1981] 131 ITR 37 (Delhi), it was held that unless the amounts have been allowed as deduction in earlier years they cannot be treated as trading liability.

Thereafter, there have been several cases, both for and against this concept of taxability of waiver of loan. When the position of taxability came up before the Bombay High Court in the year 2002 in the case of Mahindra & Mahindra Ltd. v. CIT (2003), 261 ITR 501 (Bom) (HC), it held that when no deduction was claimed by the assessee in earlier years and the utilisation of loan went into acquiring capital assets, s.28(iv) or s.41(1) cannot be made applicable. Emphasis was also made on non-claiming of deduction u/s 36(1)(iii) of the interest component which shows that irrespective of whether the loan has been utilised for acquiring capital goods or otherwise, as long as no deduction was claimed, s.28(iv) or 41(1) would not be applicable. However in the case of Solid Containers Ltd v. DCIT (2009) 308 ITR 417 (Bom) (HC), the Hon’ble court deviated from the earlier decision and held that application of the funds would decide the nature of treatment to be given to the remission of liabilities. The court held that if the loans were utilised for trading purposes, remission of such liabilities would be in the nature of income, whereas if the loans were utilised for capital purposes, remission of loan could not be treated as income. Court further observed that a receipt, which is capital in nature in the earlier year, by efflux of time, can change its character as revenue receipt.

The Hon’ble Madras High Court, in the case of Iskraemeco Regent Ltd. v. CIT (2011) 331 ITR 317 (Mad) (HC) held that remission of liability does not give rise to liability to tax under the Act and reference was made to the decision of the Bombay High Court in Mahindra & Mahindra Ltd. v. CIT (2003) 261 ITR 501 (Bom) (HC) and Solid Containers Ltd. v. DCIT (2009) 308 ITR 417. The court has also considered the decision of the Hon’ble Supreme Court in the case of CIT v. T. V. Sundaram Iyengar & Sons Ltd. (1996), 222 ITR 344 (SC) and held that waiver of loan could not be treated as income under s. 28(iv) of the Act.

However, in a later judgement, the Hon’ble Madras High Court (in the case of CIT v. Ramaniyam Homes (P.) Ltd. [2016] 384 ITR 530 (Madras)), after considering Iskraemeco Regent Ltd. (supra), Solid Containers (supra) and Mahindra & Mahindra (supra), differed from the views taken in the aforementioned judgments and held that waiver of loan was a benefit in the hands of Assessee and not ‘receipt of money’. The relevant observation is reproduced here;

“the waiver of a portion of the loan would certainly tantamount to the value of a benefit. This benefit may not arise from “the business” of the assessee. But, it certainly arises from “business”. The absence of the prefix “the” to the word “business” makes a world of difference.”

Further the distinction sought to be made between the waiver of a portion of the loan taken for the purpose of acquiring capital assets on the one hand and the waiver of a portion of the loan taken for the purpose of trading activities on the other hand, has also been dealt with in the judgment and after considering all the aforementioned judgments, decided in favour of the revenue i.e. waiver of loan is taxable in the hands of the Assessee.

However, the controversy was put to rest to a certain extent by the Supreme Court in the case of Mahindra and Mahindra Ltd. [2018] 404 ITR 1 (SC) where it had interpreted that the provisions of section 28(iv) and 41(1) are not applicable in the event of waiver of loan. Though the Madras high court did not follow the line of reasoning adopted by Honble Bombay high court, having regard to the fact that the decision of the Bombay high court in the case of Mahindra & Mahindra was approved by Apex court (supra), the view taken by Madras High Court in the case of Ramaniyam can be said to be no longer relevant. The Bombay High Court as well as the benches of Tribunal have followed the Apex Court’s decision in several judgments in varying circumstances.

  1. Taxability of benefit, if any, arising out of waiver of loan, falls for consideration, in the opinion of the Revenue, either u/s 28(iv) or s.41(1)and hence section wise analysis is made hereunder;

3.1. Taxability u/s 28(iv) :

The relevant portion of the section is reproduced here:

‘28. The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”,—

(i)…

(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession …’

This sub-section speaks of two components i.e., (i). the benefit or perquisite may or may not be convertible into money and hence it has to be other than money and, (ii). It should arise from business or exercise of a profession.

With respect to taxability u/s 28(iv), the courts have been clear about the fact that the benefit arising to the assessee should be anything but cash.

In the case of CIT v. Alchemic (P) Ltd [1981] 130 ITR 168 (Guj.) (HC), court observed that taxability u/s 28(iv) would arise only if the benefit or perquisite is not in cash/ money.

In the case of Ravinder Singh v. CIT [1994] 205 ITR 353 (Del.) (HC), it held that, “s.28(iv) can be invoked only where the benefit or perquisite is other than cash. If what was received either by way of benefit or perquisite was money, there would be no question of considering the value of such monetary benefit or perquisite under clause (iv) of s.28”.

The Apex court, in the case of Mahindra & Mahindra (supra), has held that “ ‘waiver of loan’ by the creditor results in the debtor having extra cash in his hand. It is receipt in the hands of the debtor/assessee.”

And once, ‘waiver of loan’ is treated as ‘cash receipt’, it would automatically fall outside the purview of s.28(iv).In other words the expression “benefit or perquisite” does not cover loans in which event, upon waiver of such loan, s.28(iv) is not attracted even if the loan is connected to business or profession.

Similar view was expressed in the following judgements;

  1. PCIT v. SICOM Ltd. [2020] 116 taxmann.com 410 (Bombay) (HC)

  2. PCIT v. Vibhadeep Investment & Trading Ltd. ITA No. 843 of 2017 dt. 11/09/2019, A.Y. 2008-09 (Bom.)(HC)

  3. CIT v. Santogen Silk Mills Ltd. [2015] 231 Taxman 525 (Bombay) (HC)

  4. Iskraemeco Regent Ltd. v. CIT [2011] 331 ITR 317 (Madras) (HC)

  5. PCIT v. M/s. Colour Roof (India) Ltd. ITA 896 of 2017, dt. 25.9.2019, www.itatonline.org

Another aspect which may have to be considered is the ‘Purpose’ for which the loan had been taken. Even though Mahindra & Mahindra (supra) has not considered this aspect of the nature for which the loan has been taken, emphasis on the same has been made by several High Courts and the Supreme Court in the case of Sunderam Iyengar (1996) 222 ITR 344 (SC).

When a loan is taken for purchase of capital assets, majority of the decisions concluded that section 28 comes into play only when receipt or subsequent benefit is of revenue character and it cannot be invoked when loan was taken for capital investment and not for it’s day to day business; upon remission also it does not change it’s character.

3.2. Taxability u/s 41(1) :

The relevant portion of the section is reproduced here:

‘41. [(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,—

(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not…..;’

S.41(1) may be divided into the following parts:

(i) An allowance or deduction should have been claimed in any earlier year preceding the year of remission;

(ii) Such allowance or deduction should relate to any expenditure or loss;

(iii) The liability generated from the expenditure or loss should be in the nature of a ‘Trading Liability’ and;

(iv) In any later year, the trading liability in respect of such expenditure is waived off.

The Supreme Court in CCIT v. Kesaria Tea Co. [2002] 254 ITR 434 (SC) held that the following points are to be kept in view:

“1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee;

2) Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred;

3) In that situation the value of benefit accruing to the assessee is deemed to be the profits or gains of business which otherwise would not be his income; and

4) Such value of benefit is made chargeable to income-tax as the income of the previous year wherein such benefit was obtained.”

The Karnataka High Court in the case of CIT v. Compaq Electric Ltd [2012] 249 CTR 214 (Karn.) (HC) [SLP by department dismissed – [2019] 261 Taxman 71 (SC)], held that for the application of s. 41(1), the condition precedent is that there should be an allowance or deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax u/s 41 and not otherwise.

The Apex court, in the case of Mahindra & Mahindra (supra), observed that if loan is obtained for the purpose of purchasing machinery i.e. capital assets and loan was an independent transaction, such liability was not a trading liability and hence, would not come under the purview of s.41(1). Further, emphasis was also made on the fact that the interest amount was not claimed as deduction u/s 36(1)(iii).

Similar view was taken in the following cases:

  1. PCIT v. SICOM Ltd. [2020] 116 taxmann.com 410 (Bombay) (HC)

  2. CIT v. V. S. Dempo & Co. Ltd [2015] 233 Taxman 417 (Bombay) (HC)

  3. CIT v. Xylon Holdings (P.) Ltd. [2012] 211 Taxman 108 (Bombay)(Mag.)

  4. CIT v. Gujarat State Fertilizers & Chemicals Ltd. [2013] 217 Taxman 343 (Gujarat)

  5. CIT v. Dholgiri Industries (P) Ltd. [2014] 266 CTR 111 (Madhya Pradesh) (HC)

  6. PCIT v. M/s. Colour Roof (India) Ltd. ITA 896 of 2017, dt. 25.9.2019, www.itatonline.org

  1. A question could arise as to what is a ‘trading liability’?

Trading Liability in general terms can be understood as an obligation of a person (Debtor) to pay another person (Creditor) for goods purchased or value received from that other person in the course of business. A genuine Trading Liability incurred in the course of business or Profession is a permissible expenditure under the Income-tax Act.

The expression “trading liability” has not been defined in the Income-tax Act but a liability created for purchase of stock-in-trade on credit or a current trading transaction or a liability, which is awaiting adjustment by way of supply of goods or services, or a trade debt is certainly a trading liability which is quite different from a mere loan on capital account. This difference is generally overlooked by the A.Os. As per the accounting parlance and legal parlance a “trading liability” would mean the following –

a) Liability created for purchase of stock-in-trade on credit or a trade debt;

b) A liability, which is awaiting adjustment by way of supply of goods or services;

c) Borrowings for working capital

d) Sales tax collected in the course of business;

e) Receipt of compensation for loss of stock-in-trade;

f) Recoupment of debt / loss allowed as bad debts u/s 41(4) / business loss;

g) Remission / cessation of liability in respect of a trading transaction;

h) Remission in respect of unclaimed wages or bonus claimed in the return of income;

i) Unclaimed insurance premium;

j) Unclaimed excise duty liability, sales tax or purchase tax liability;

k) Refund of excise duty and sales tax;

l) Refund of electricity charges as grant / concession in power rates

m) Sums obtained as rebates;

n) Write back of excess provision;

o) Amounts earlier allowed as bad debts and later realised;

p) Unclaimed deposits received from customers in the course of trading operations credited to profit and loss account;

q) Monies kept for disbursement to meet business expenses;

r) Amounts received in the course of carrying on trading; etc

  1. Trading liability-waiver of loan, when not taxable

In the following cases trading liability, upon waiver, was held to be not taxable:

5.1. In the case of Mohsin Rehman Penkar v. CIT [1948] 16 ITR 183 (Bom.) (HC), it was held that “once the Income-tax department accepts the mercantile system of accounts keeping and taxes an assessee on the accrual and not on the payment basis the department is not concerned as to how the liability incurred by the assessee is in fact discharged. He may discharge that liability by actual payment or he may discharge it by getting a remission from his creditor. But that is a question entirely for the debtor to determine. It is impossible to see how a mere remission which leads to the discharge of the liability of the debtor can ever become income for the purposes of taxation.”

Further, Honourable Justice Chagla, CJ of Bombay High Court, referred to the decision of the decision in the case of British Mexican Petroleum Co. [1932] 16 Tax Case 570 in great detail which is reproduced herein;

“There the appellant company entered into a contract with an oil producing company for the purchase of petroleum for a minimum period of twenty years. The appellant company came into difficulties and the accounts of the company’s business were made up for the year ended 30th of June, 1921, and for eighteen months i.e upto 31st of December, 1922. On the 30th of June, 1921, the amount which the appellant company owed to the oil producing company was £1,073,281 and on the 31st of December, 1922, £1,270,232. The appellant company paid to the oil producing company £ 325,000 and was released by the oil producing company from its liability to pay the balance, viz., £945,232. The amount so released was carried direct to the appellant company’s balance sheet and was shown as a separate item under the head “Reserve” on the 31st of December, 1922.

The contention of the Crown was that the amount released should be brought into account in computing the appellant company’s profits for the purposes of income-tax either in the account for eighteen months up to the 31st of December, 1922, or alternatively for the year ending on 30th of June, 1921, that account being reopened for that purpose. Both those contentions were rejected by the Court.

The House of Lords took the view that the account having been once settled as on 30th of June, 1921, and the liability of the appellant company fixed, that could not be re-opened merely because a creditor had remitted a part of the debt. With regard to the other contention that the remission should be looked upon as a trading receipt Lord Thankerton at p. 592 stated as follows:—

“I am unable to see how a release from a liability, which liability has been finally dealt with in the preceding account, can form a trading receipt in the account for the year in which it is granted.”

Lord Macmillan at p. 593 is equally emphatic as to what he thought about it. This is what the learned Law Lord says :—

“I say so for the short and simple reason that the appellant company did not, in those eighteen months, either receive payment of that sum or acquire any right to receive payment of it. I cannot see how the extent to which a debt is forgiven can become a credit item in the trading account for the period within which the concession is made.”

5.2. In the case of CIT v. Dholgiri Industries (P) Ltd. [2014] 266 CTR 111 (MP.) (HC), it was held that where principal amount of loan being never claimed by assessee as its expenditure, its waiver would not amount to income of assessee.

  1. Cases where cessation of trading liability was held to be taxable

6.1. In the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344 (SC), the court observed that the moneys had arisen out of ordinary trading transactions. The assessee had received certain deposits from customers in the course of carrying on his business, which were originally treated as capital receipts. Since these credit balances, standing in favour of assessee’s customers, were not claimed by the customers, the assessee transferred such amounts to its profit and loss account. The assessee did not include such amounts in its total income.

The Court held that although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee’s own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation.

Here we see the concept of ‘changing of character of receipt by efflux of time’ and the action of the assessee of crediting it to profit & loss account which shows that the assessee treats it as revenue.

6.2. In the case of Solid Containers Ltd. v. DCIT [2009] 308 ITR 417 (Bom.) (HC), after considering the Bombay High Court decision of Mahindra and Mahindra Ltd. v. CIT [2003] 261 ITR 501 (Bom.)(HC), the Hon’ble High Court observed that in the case of Mahindra & Mahindra purchase consideration related to capital assets; the toolings were in the nature of dies and the assessee was a manufacturer of heavy vehicles & the import was that of plant and machinery in which event waiver was held to be not a business activity. However the facts in the case of Solid Containers are entirely different inasmuch as it was a loan taken for trading activity and ultimately upon waiver, the amount was retained in business by the assessee, due to which the amount of deposit liability, which was waived off, was treated as income in the hands of the Assessee.

6.3. The Bombay High Court in the case of Protos Engineer Co. (P.) Ltd. v. CIT [1995] 211 ITR 919 (Bom.) (HC) held that cessation of a trading liability is not receipt of money, but receipt in kind u/s 28(iv) and hence taxable. In the above case, there were trade advances i.e. amount received in advance for purchase of goods and such advances were never claimed by the customers. The Court held such receipt of money as trade receipts in the course of business. The second point to be decided was whether such receipts, which were not received during the year under consideration, but were received at an earlier date, could not be treated as receipt of cash in the year under consideration. The court held that such benefit was a receipt of benefit in kind and hence covered u/s 28(iv).

[Note : Considered by Essar Shipping Limited v. CIT ITA (IT) NO.201 OF 2002 (Bom.) (HC) and held that this judgment no longer holds the field.]

  1. Law laid down by Mahindra and Mahindra Ltd. [2018] 404 ITR 1 (SC)

7.1. The Bombay high court in the case of Mahindra and Mahindra (supra) (HC) mentions that waiver of loan, where loan is taken for a capital asset, would not constitute a capital receipt at the time of waiver of such loan and hence not taxable in the hands of the assessee. The Bombay high court in the case of Solid Containers(Supra) states that the loan was taken for trading activity and ultimately, upon waiver the amount was retained in business by the assessee and hence the case of Mahindra & Mahindra (HC) (Supra) would not be applicable and the waiver of trading liability in question would be taxable in the hands of the assessee.

7.2. The Supreme Court approved the view of the Bombay High court in the case of Mahindra and Mahindra Ltd [2018] 404 ITR 1 (SC) by observing that s.41(1) would not be applicable since firstly there should be an allowance or deduction claimed by the assessee in any assessment year in respect of loss, expenditure or trading liability incurred by the assessee. The objective behind this Section is simple, i.e. it is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability.

  1. Facts of Mahindra & Mahindra Case

An agreement was entered into by the assessee with the seller company to purchase dies, welding equipment and die models. However, for the procurement of the said equipment, a loan was taken from the seller at the rate of 6% interest repayable after 10 years in instalments. Later on, the seller company was taken over by another company, who had then waived the loan taken by the assessee. The Apex Court held that neither of the sections i.e. 41(1) and 28(iv) would be applicable due to the following reasons:

  • Section 28(iv) requires that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. In this regard Hon’ble Court observed as under:

    “It is a well-settled principle that creditor or his successor may exercise their “Right of Waiver” unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. The waiver may be a partly waiver i.e., waiver of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts. Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It is receipt in the hands of the debtor/assessee”

    The section clearly mentions that such benefit can be in any form, which can also be convertible into money. However, it should not be money. The Apex court has now clarified that ‘waiver of loan’ should be treated as ‘receipt of money’ and hence such receipt of money would fall outside the purview of s.28(iv) and accordingly cannot be taxable.

  • Section 41(1) requires that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, any benefit arises due to the cessation of such trading liability, shall be chargeable to income-tax as the income of that previous year. It has observed as under;

    “It is evident that it is sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the IT Act.”

    The Apex Court has held that for ‘waiver of loan’ to be considered for taxability through the lens of S.41(1), the first and foremost condition is the claim of the amount of loan received, as an expenditure or loss or trading liability i.e. it has passed through the Profit and Loss account(previously not accounted in taxable profits).

The second condition to be fulfilled was for the loan to be a trading liability. The Court held as under;

“It is important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years. Here, we deem it proper to mention that there is difference between ‘trading liability’ and ‘other liability’. Section 41 (1) of the IT Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to cessation of liability other than trading liability.”

The Apex Court thus concluded that waiver of loan would not come within the purview of s.41(1).

A particular reference may be made to the case of CIT v. Sun Engineering Works (1992) 198 ITR 297 (SC) where the Supreme Court held:

“It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this court. The Judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions before the court. A decision of this court takes colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasoning.”

In a nutshell the Apex Court, in the case of Mahindra & Mahindra, considered the gamut of cases relevant under sections 28(iv) & 41(1) as well as the facts and ratio laid down in all the leading decisions on this aspect and hence the issue is no longer res integra. In the case of Sun Engineering (supra) the court rightly observed that a view taken by any court by picking one word from a piece of legislation (known as cherry picking), divorced from it’s context, need not be followed. Entire judgment and the facts of each case would have to be read and understood to come to a conclusion as to whether any of the decisions, holding a view contrary to the apex court’s decision, are applicable in the given facts and not based on cherry picking method, as against a well-reasoned judgment in the case of Mahindra (supra).

  1. Treatment of waiver of loan in case of deduction being claimed u/s 36(1)(iii)

Whether in a case where a deduction would have been claimed of the interest amount u/s 36(1)(iii), would the entire amount of principal also get taxed?

One of the methods to determine the purpose of the loan to be revenue is to check how the interest payment has been treated in the books of the Assessee.

An immediate question which should now come to the minds of the professionals is what would be the quantum of such principal which would get taxed? Would it be to the extent of the proportion of interest claimed u/s 36(1)(iii) or to that of the principal amount or whether it would be the entire principal amount along with interest component?

The Court in the case of Solid Containers(supra) has tried to infuse the concept of ‘trading and non-trading purpose’. It mentions that, once it is established that the loan was taken in the course of business or for utilising it for trading activities, the nature of the loan changes from a capital receipt to a revenue receipt.

If we have a glance at s.36(1)(iii), it states that “the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:”, such an amount would be allowed as a deduction under this section.

Hence, from the above, an inference can be drawn that, once deduction is claimed, it could be deemed to be used for the purposes of business, due to which the loan amount could be treated as borrowed for trading activity, which was upheld by the Court in the case of Solid Containers which states that in such an event(as mentioned above), such waiver of loan becomes taxable.

Once the purpose of the loan is taken towards capital, the proportion of claim of deduction may not be looked into since the entire amount waived would fall outside the purview of the aforementioned provisions.

The Apex Court in the case of Mahindra & Mahindra(supra) laid emphasis on the fact the no deduction u/s 36(1)(iii) has been claimed by the assessee.

In a situation where such a deduction is claimed, the author is of the view that only to the extent of the deduction claimed would be taxable in the hands of the Assessee, in light of the Mahindra judgment.

  1. Situation where Loan is taken for one purpose but utilised for another purpose

In a situation where the loan is obtained for capital purposes but utilised for trading purposes or vice versa, the concept of substance over form may be considered i.e. the ultimate utilisation of the fund should be considered for the purposes of taxability under the Income-tax Act and not the form in which the loan was procured.

  1. Interplay between s.41(1), s.28(iv) and s.56(2)(x)

Since the Hon’ble Courts have held that waiver of loan is nothing but ‘receipt of cash’ in the year when the loan gets waived, whether the newly introduced provisions of s.56(2)(x) applicable?

s.56(2)(x) of the Act states as under :

‘where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

(a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum; ……….’

Under s.56(2)(x), the provision mandates the ‘receipt of money’ in any previous year. Now, because of the law laid down by the Apex court, the understanding of ‘receipt of money’ would incorporate in it, even ‘waiver of loan’. The event of loan being waived off, would now be treated as the year in which the money is received.

But, s.56(2)(x) clearly states that such receipt of money should be without any consideration. The next question which would arise is, whether there is any consideration involved in receiving the benefit of loan waiver?

Two situations may arise here i.e.

(a) When the creditor or the giver of the loan chooses to forgo or forsake his/her right to receive the loan back.

(b) In a case where the Assessee is not in a position to pay back the loan or becomes bankrupt and thereby requests the other party to forsake his right to receive.

  1. The first scenario is similar to the case of Mahindra & Mahindra (supra) where the reason for waiver of loan was given as a measure of compensation for certain losses including goodwill, the benefit of association, and also for sudden change to another company. However, the interest had been undisputedly paid i.e. there was no waiver of interest in the case of Mahindra & Mahindra.

    Since the section mandates consideration, even though it may not be adequate, can it be now said that the consideration for the waiver of loan has already been received by the other party either in the form of continued interest (as in the case of Mahindra) or in the form of receiving part of the amount at an earlier date or in any other indirect form in the course of business?

    A similar point has been considered by the Chandigarh Tribunal in the case of Jai Pal Gaba v. ITO [2019] 178 ITD 357 (Chandigarh – Trib.) in respect of waiver of loan and its taxability u/s 56(2)(vi) where it held that there is adequate consideration involved. The following observation was made;

    “the terms and conditions were settled and as per the terms and conditions, in the event of the loanee paying an amount of 140 lacs immediately, out of which 125 lacs to be deposited in third party account, which would be acceptable on the approval of the one-time settlement and execution of ‘compromise agreement’ at the cost of the loanee, the remaining of the loan was agreed to be waived/sacrificed by the bank. It was not a simple case of waiver without consideration, rather, the consideration of the waiver was the condition of depositing immediately the remaining part of the loan i.e. 140 lacs and performance of certain other formalities as per the agreement. It is not just a case where the bank has simply waived or remitted the loan amount, rather the bank to secure payment of 140 lacs, which otherwise the bank was feeling difficult to recover, was the consideration for settlement of the loan account. Hence, the amount received by the assessee as waiver or remission of loan amount cannot be said to be without consideration. Hence, in our view, the provisions of section 56(2)(vi) are not applicable to the case in hand.”

    Even in the case of Mahindra & Mahindra it was observed that the loan was waived because of certain losses including goodwill, the benefit of association, and also for sudden change another company as a shareholder. Hence there is adequate consideration involved in this case as well.

    Whether consideration other than in the form of money can be considered as consideration for the purposes of s.56(2)(x).

    However, we may not be able to apply such a theory to every act of waiver of loan. The reasons for waiver may have to be looked into. But more often than not, we may be able to see some strong reason behind any person to forsake a right to receive.

  2. Dealing with the second scenario i.e. in a case where the Assessee is not in a position to pay back the loan or becomes bankrupt and thereby requests the other party to forsake his right to receive. Revenue may raise an issue that apparently there is no consideration or it is inadequate, but in business or real life scenario nobody is expected to waste good money after bad and keep fighting the litigation with a near certain conclusion that even the litigation expenditure adds to the existing loss and in such an event it can be argued that purchasing mental peace and averting further expenditure is a consideration.

In fact, such a scenario is likely to raise in the current covid-19 pandemic where many business may run into losses and they may not be able to repay the banks either due to bankruptcy or some other reason.

Before we come to a superficial conclusion that in such cases waiver of loans has to be taxed, let us look at the motive behind implementation of these provisions.

The Finance bill 2017 [2017] 391 ITR 40 (st.) introduced the provision of s. 56(2)(x) to expand the scope of the provisions of the said section to all categories of assessees so that the assets received without or inadequate consideration may be brought to tax. The Memorandum explaining the Finance bill stated as under:

“In order to prevent the practice of receiving the sum of money or the property without consideration or for inadequate consideration, it is proposed to insert a new clause (x) in sub-section (2) of section 56 so as to provide that receipt of the sum of money or the property by any person without consideration or for inadequate consideration in excess of
50,000 shall be chargeable to tax in the hands of the recipient under the head “Income from other sources”.

The provision of s.56(2)(x) has borrowed most of its content from its erstwhile s.56(2)(vii) & (viia) which were inserted in the years 2009 & 2010 respectively. Since the provision of s.56(2)(x) was intended to merely expand the scope of the provision, not may changes have been made.

In the Memorandum explaining Finance Bill 2010 [2010] 321 ITR 110(st.), under the heading ‘Taxation of certain transactions without consideration or for inadequate consideration’ it has been mentioned that, “These are anti-abuse provisions which are currently applicable only if an individual or an HUF is the recipient”.

Since the Memorandum explaining the Finance bill 2010 shows that these are ‘anti-abusive provisions’, genuine transactions will go out of the sweep of these provisions.

The intention of the legislature in inserting those provisions was to bring to book those Assessees who have made a real profit, which can be gleaned from the Memorandum to the Finance Act 2010 wherein it was mentioned that it was mainly incorporated as an ‘Anti-abuse’ measure, and hence the situation as explained above, may not come within the purview of s.56(2)(x).

  1. Other Issues

12.1. Depreciation and its effect

What happens when the loan is utilised for purchase of plant and machinery, etc? Whether the benefit of depreciation already claimed would have any effect?

A loan received having been utilised for the purpose of infusing capital into the business in the form of purchasing plant/machinery, the subsequent waiver of loan would not convert such loan into a revenue item so as to fall for taxation either u/s 28(iv) or u/s 41(1).

S.41(1) states that no claim of deduction or loss should have been made in earlier years. It essentially refers to claim of deduction of the loan repayment or interest repayment whereas depreciation is not a repayment and its essentially a mere charge to the profit and loss account since the value of the asset gets depleted on the basis of the user. Therefore, in my humble opinion, it may not fall within the ken of section of 41(1) of the Act, so as to call for taxation of the amount waived. There are catena of decisions explaining the nature of depreciation and even in a case of estimate of income by rejecting the book results, courts have taken a view that depreciation being a statutory deduction, it has to be independently considered.

However, there is a contrary decision of the ITAT Hyd bench in the case of Binjrajka Steel Tubes Ltd. v. ACIT [2011] 130 ITD 46 (Hyd.), though it can be distinguished on the ground that in the event of waiver of loan, the value of the asset gets reduced proportionately in which event there is no double tax benefit to the assessee and in the event of sale of such asset, the profit or loss if any would be determined on the basis of the net asset value.

In the case of Binjrajka Steel Tubes Ltd. v. ACIT [2011] 130 ITD 46 (Hyd.), the court observed as under:

“However, assessee-company had obtained the benefit of depreciation in the earlier years even on this amount of 2 crores. Hence, when it was written off later, the assessee obviously was not entitled for the depreciation benefit which was granted earlier. It is an undisputed fact that the assessee-company had claimed the depreciation on the entire amount of 6 crores from the year of acquisition of the asset and it was already allowed by the Department. Now that we have held hereinabove that 2 crores liability written off by the TATA SSL on the supplies of plant and machinery is not liable to be taxed as deemed income under section 41 of the Act, depreciation allowed on that amount earlier has to be withdrawn and added back in this year, as otherwise, the assessee-company will get double benefit which is not justified. In this view of the matter, considering the totality of facts and the circumstances of the case, we hold that the depreciation claimed by the assessee on 2 crores in the earlier years, which the assessee-firm is not entitled, need to be brought back to tax under section 28(iv) of the Act, as the value of benefit arising from business of the firm. After reducing the said amount of depreciation granted earlier from the amount of 2 crores, balance amount is to be reduced from the closing written down value of the block of assets. Hence, we direct the Assessing Officer to bring back to tax, the amount of depreciation granted to the assessee in the earlier years on the alleged amount of 2 crores under section 28(iv) of the Act and re-determine the closing written down value of the block of assets in the year under consideration, as discussed above.”

However, the Bangalore bench in the case of Akzo Nobel Coatings India (P.) Ltd. v. DCIT [2012] 139 ITD 612 (Bangalore) observed that allowing depreciation from year to year on a capital asset would not change the character of loan and unless remission falls within the specific letter of law i.e. u/s 41(1) mere double benefit, if any, should not be the criterion for invoking the provisions of s.41(1). The relevant portion of the paragraph has been reproduced as under:

“….there is a lacuna in the law and it is for the legislature to provide appropriate safeguards in this regard. It is true that the Assessee on the one hand gets the waiver of monies payable on purchase of machinery and claims such receipt as not taxable because it is capital receipt. On the other hand the Assessee claims depreciation on the value of the machinery for which it did not incur any cost. Thus the Assessees stand to benefit both ways. As per the law as it prevails as on date, we are of the view that the revenue is without any remedy. The only way that the revenue can remedy the situation is that it has to reopen the assessment for the year in which the asset was acquired and fall back on the provisions of Sec. 43(1) of the Act which says that actual cost means the actual cost of the assets to the assessee. Even this can be done only when after the waiver of the loan which was used to acquire machinery. By that time if the assessments for that AY gets barred by time, the revenue is without any remedy. Even the provisions of Sec. 155 do not provide for any remedy to the revenue in this regard.”

In the light of the conflicting interpretations on this issue, it can safely be contended that a view in favour of the Assessee be taken in the light of the principle laid down by the Apex Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC). The Hyderabad bench decision is based on several independent assumptions which were probably not even conceived by the legislators while enacting the provisions of s.28(iv) or 41(1). Law evolves and becomes stronger when all the facets of the issue are properly put forth in a given case and the author wishes to borrow the words of Lord Denning, “A judge must not alter the material of which it is woven but he can and should iron out the creases”. If it can be shown that in the event of reducing the amount waived from the capital asset, there would be reduction in the future depreciation and eventually, in the long run, there is no double benefit, it can always be pleaded that neither s.28(iv) nor s.41(1) can be roped in.

However, when there are two views possible, the law is settled that a view which is in favour of the Assessee has to be adopted. This principle has also been propounded in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) which states that the rule of beneficial construction of the provisions shall be of eminence. And when there are multiple or conflicting decisions of co-ordinate benches, then that judgment which appears to state the law more elaborately and accurately must be followed [Amar Singh Yadav And Anr. v. Shanti Devi And Ors. AIR 1987 Pat 191 – Para 24]. In fact, a few courts have also held that the later decision should be followed i.e. the decision delivered later in time.

12.2. MAT provisions

A question may arise as to how waiver of other liabilities/trading liabilities be treated under MAT provisions. When a Loan is waived, it may be recorded as an extraordinary item in the books of the Assessee i.e. as a capital receipt. Further, if such loan had been utilised for the purpose of acquiring equipment of capital nature, then, as per the interpretation of the Courts, as discussed till now, waiver of loan would become a capital receipt. Since only the ‘working results’ are required to be considered for the purpose of computing the book profit under the provisions of section 115JB, waiver of loan may not be imported under the framework of MAT provisions.

The purpose and legislative intent behind introduction of provisions of section 115J/115JA/115JB was to take care of the phenomenon of prosperous zero tax companies which had continued but were paying no income tax even though they had profits and were declaring dividends. It was, therefore, sought that minimum corporate tax should be paid by these prosperous companies and accordingly, MAT was introduced. It was never the intention of the legislature that any receipts which is not taxable per se within the income tax provision or not reckoned as part of net profit as per the profit & loss account as per Companies Act can be brought to tax as a book profit.

The Hon’ble Supreme Court in the case of Indo Rama Synthetics (I) Ltd. v. CIT (2011) 330 ITR 363 (SC) held that object of the MAT provision is to bring out the ‘real profits’ of the companies and the main thrust is to find out the working result of the company. And for the purpose of achieving the real working result of a company, capital receipt has to be excluded. This proposition has also been considered by the Bangalore tribunal in the case if JSW Steel mentioned below.

In the case of M/s. JSW Steel Limited v. ACIT ITA No.923/Bang/2009, A.Y. 2004-05, the Tribunal observed as under:

“if an assessee company is in receipt of a ‘capital receipt’ which is not chargeable to tax at all, that is, it does not fall within any of the charging section or can be classified under any heads of income under the Income Tax Act, then same cannot be treated as part of net profit as per Profit & Loss account or reckoned as ‘working result’ of the company of the relevant previous year and consequently, cannot be held to be taxable as ‘book profit’ under MAT in terms of section 115JB. Accordingly, our conclusion remains the same that, the capital surplus on account of waiver of dues is neither taxable nor can be included in computation of book profit u/s 115JB.”

In summary, the law as it stands today, vis-à-vis the provisions of s.28(iv) and 41(1), needs to be cautiously approached, depending on the facts of each case and certainly not in a case where amount of loan initially received was on capital account, apart from other factors considered by the Apex Court in the case of Mahindra & Mahindra (supra).

  1. Practical Guidance

In cases where waiver of loan/remission of liability, the Assessee may keep the following in mind:

  1. Check whether the principal amount and interest amount are seperately given effect to in the books of the Assessee.

  2. Find out the treatment given by the bank in its books of accounts w.r.t. the loan.

  3. In case the Assessee is unable to procure such information from the Bank, a letter may be written stating the treatment given by the Assessee.

  4. Once the principal amount and interest amount is determined, check the purpose for which the loan has been utilised.

  5. Check whether any amount has been claimed as deduction, either principal amount or the interest amount.

  6. Accordingly the taxability can be determined w.r.t. the waiver of the liability, in light of the judgments mentioned in the article above.

In the era of bilateral Double Taxation Avoidance Agreements, it seems that the rule espoused in the landmark case of Govt. of India v. Taylor is more or less a persona non grata.

About 3 decades before I was born, the House of Lords in London had an occasion to review the Revenue Rule as enunciated by Dicey and Morris in their landmark “Conflict of Laws” (probably the gold standard when it comes to Private International Law), crowning a landmark judgement more widely known as the “Govt of India v. Taylor”. The Revenue rule is also of referred to Rule 3 in Dicey and Morris.

To put things in perspective, Delhi Electric Supply and Traction Co Ltd was an English company established in 1906 for the purpose providing electric supply and operation of tramway in India under license from the Municipality of Delhi. In March 1947, the company sold off all its business to the Government of India. In April 1947, the Indian Government passed Indian Income Tax and Excess Profits Tax (Amendment) Act 1947. The company underwent voluntary liquidation in England in January 1949, Samuel Taylor and John Lovering (who posthumously was replaced by William Hume) serving as liquidators of the company. Subsequently the Commissioner of Income Tax at New Delhi served a demand on account of revenue and capital gains in October 1951.

The Indian Government took the claims to the English territories. The claim after being rejected at the Chancery and Appeals, the Government of India took the case to the House of Lords. Viscount Simonds had this to say about the claim:

“My Lords, I will admit that I was greatly surprised to hear it suggested that the courts of this country would and should entertain a suit by a foreign state to recover a tax. For at any time since I have had any acquaintance with the law, I should have said as Rowlatt J. said in The King of the Hellenes v. Brostron”: “It is perfectly elementary that a foreign government cannot come here – nor will the courts of other countries allow our Government to go there – and sue a person found in that jurisdiction for taxes levied and which he is declared to be liable to in the country to which he belongs.”

Needless to say the claim of the Indian Revenue was rejected, unanimously by a five-member panel.

On observation three pertinent points are there for consideration

  1. The concept of independent sovereignty: National independent sovereignty precludes the assertion of sovereign authority of a foreign state within the territorial jurisdiction of the sovereign state. Revenue by extension is assertion of sovereign authority.

  2. Scrutiny of foreign state law: Any observations on foreign state laws by a sovereign state might not be in the best books of the foreign state.

  3. Administrative costs: Even out of courtesy it would be a remarkable feat if the sovereign state would allow its resources to be used for the purpose, all if by comity, just for the sake of collection of Revenue of the foreign state.

In some circles it is suggested that this case remains good law as of even today.

Reference may also be made to Relfo Ltd (in liquidation) v. Bhimji Velji Jadva Varsani [2008] SGHC 105 in case of unjust enrichment the respondent being a director of the petitioner company was accorded relief on the grounds of non-enforceability of revenue claims in a foreign jurisdiction. Also Oroville Reman & Reload Inc v. R 19 ITLR 259 is an interesting read.

Attempts have been made to distinguish between information gathering and revenue enforcement in that it has been held authoritatively that gathering of information does not tantamount to gathering of revenue and thus and therefore the law enunciated in Govt. of India v. Taylor doesn’t hold good as far as requisition of information is concerned for many common law jurisdictions. Jimenez v. HMRC being an authority in this subject. (http://www.bailii.org/ew/cases/EWCA/Civ/2019/51.html). Furthermore Article 26 of the OECD Model Convention of Income and Capital deals with information exchange in an international context.

However, with the recent changes in revenue concepts and administration, particularly the OECD Model Convention of Income and Capital more so with articles 26 and 27 and also the Convention on Mutual Administrative Assistance in Tax Matters, it does appear that the effect of the revenue rule becomes significantly diluted in contracting states applying the articles of the convention in spirit and face.

The case of article 27 of the OECD Model Convention of Income and Capital is a bit curious. Not only does it attempt to override well established legal precedent of the Revenue Rule, it also attempts to provide a mechanism for the same. Furthermore, the Convention on Mutual Administrative Assistance in Tax Matters has incorporated mechanisms in contracting states for recovery of taxes due in applicant states in any of the member states having regards to specific terms and conditions specified in Article 14 and 15 of the convention. However, it is to be noted that a time period of 15 years applies in case of any such request.

And while not a member of the OECD, India has for its part echoed its reservations on the OECD Model Convention of Income and Capital (https://home.kpmg/content/dam/kpmg/in/pdf/2017/12/KPMG-Flash-News-Indias-reservations-update-to-the-OECD-Model-Tax-Convention-and-Commentary-2.pdf), echoing its protection of self-preservation of revenue. As far as the Convention on Mutual Administrative Assistance in Tax Matters is concerned India has signed the Convention on Mutual Administrative Assistance in Tax Matters in 2012.

The position of the Revenue Rule as from above has significantly changed in guidance provided from the British case of Ben Nevis (Holdings) Ltd & Anor v. Revenue and Customs Commissioners [2013] BTC 485 and the South African Supreme Court in the case of Krok v. CSARS (20230/2014, 20232/2014) [2015] ZASCA 107; 2015 (6) SA 317 (SCA); [2015] 4 All SA 131 (SCA), wherein both the cases after a due consideration to articles 27 and 25 of the OECD model convention and the Vienna Convention on The Law of Treaties concluded that the Revenue rule in Dicey and Morris and resulting cases thereon would not be applicable between territorial jurisdictions who have incorporated specific terminology abrogating the effect of the Revenue Rule in their respective treaties, and if required, further guidance can be sought from Convention on Mutual Administrative Assistance in Tax Matters.

Very interesting to note is that article 27 of the Vienna Convention on The Law of Treaties applies and unless the language of the treaty specifically provides for retrospective application, the same cannot be taken advantage of. Courts have often cited this rule even in non- member states of the Vienna Convention.

More notably in the Ambatielos case (Preliminary Objections) ICJ Rep. (1952) 40, and Mavrommatis Palestine Concessions (1924) PCIJ Ser. A, No. 2 case it has been held that in case of treaty between two states everything boils down to the intention of the parties and any application to retrospective effect is to be determined from the language of the treaty and not otherwise. This state of law is generally held to be true even in case of states not parties to the Vienna Convention. It might be noted that although India has till now not ratified the Vienna Convention, courts have used the guiding principles for interpretation., AWAS Ireland v. Directorate General of Civil Aviation W.P.(C) 671/2005, Delhi High Court, Ram Jethmalani & Ors v. Union Of India & Ors ((2011) 8 SCC 1). In the case of Gramophone Company Of India Ltd v. Birendra Bahadur Pandey & Ors 1984 AIR 667, 1984 SCR (2) 664 the Apex Court has unambiguously held “There can be no question that nations must march with the international community and the municipal law must respect rules of international law even as nations respect international opinion. The comity of nations requires that rules of international law may be accommodated in the municipal law even without express legislative sanction provided they do not run into conflict with Acts of Parliament.”

With progressing adjudicative and prescriptive legislation within international juridical domains effectively moving towards greater co-operation between states as evidenced by the movements of and within the OECD and The Convention on Mutual Administrative Assistance in Tax Matters, and the rapid proliferation of information exchange provisions and application thereof, it seems that there is little space in the modern paradigm for such a restrictive covenant.

I Introduction

1) Re-development process is usually undertaken by a co-operative housing society when the Society building becomes old. The new building also gives the advantages of parking spaces and common amenities which may not exist in the old building. As the Society does not have the wherewithal & funds to undertake re-development, same is undertaken by appointing a Developer.

2) Recently there have been multiple changes in law in Maharashtra and particularly Mumbai with a view to provide impetus for redevelopment of Co-operative Housing Societies.

3) Under Section 79(A) of the Maharashtra Co-operative Societies Act, 1960, [‘MCS Act”] the Govt of Maharashtra has issued revised directions being Govt Resolution No SaGruYO 2018/Pra.Kra.85/14-S, dated 4th July, 2019 which prescribe procedure regarding making re-development of the Co-operative Housing Society. Said directions supersede the earlier directions SaGruYO 2007/Pra.Kra.554/14-S dated 3rd January, 2009. The revised directions aim to provide more transparency in the redevelopment process and bring about uniformity in Agreements with the developers with a view to instill confidence in the members towards the re-development process. The most important change made in the revised directions of 2019 is that it has reduced the consent required for redevelopment to 51%. This will expedite redevelopment process. Further, w.e.f 9th March, 2019, a separate Chapter XIII-B comprising Sections 154B to S.154B-31 has been inserted in the Maharashtra Co-operative Societies Act, 1960 to cater to the specific requirements of co-op housing societies. Under said chapter, a housing society is defined and redevelopment is specifically provided as object of a Housing society. Further the Chapter also applies to Developers and deals with dispute resolution between Society, Members, Developers, Architects and Project management Consultants involved with the re-development.

4) As far as the new Development Control and Promotion Regulations for Greater Mumbai, 2034 (DCPR,2034) are concerned it has increased the Permissible FSI in the Island City of Mumbai. It further allows loading of TDR in the Island city which was not permitted under the Development Control Regulations of 1991. Further, a specific regulation being Regulation 33(7)(B) provides utilizing Additional FSI to certain extent without payment of premium. Further the Fungible compensatory area on the existing authorized Built-up area shall be without charging premium. Thus, the new DCPR, 2034 will boost redevelopment of Co-operative Housing societies.

5) The various changes as pointed out above will also have impact on the taxation of Co-operative Housing societies and it’s members on account of re-development. The relevant provisions of MCS Act and DCPR having impact on taxation are covered at relevant places in this Article.

6) Typically in case of a Co-operative Housing Society, a tri-partite Development Agreement is entered into between the Society as Owner, Developer and the Members of the Society usually as a confirming party and the development rights or right to construct by loading of TDR is transferred to the developer. Usually in Mumbai, the Society continues as owner of Land and building. However, it is also possible that by virtue of the Development Agreement, Land and Building may be transferred to the Developer. The Development Agreement contains various terms and conditions of re-development. It contains provisions for the area of new flat to be allotted to the Members, temporary alternate accommodation to be provided to the members, the corpus fund to be provided to the member/society and the area available with the developer for Sale in the new building. The Society gives the Developer a general Power of Attorney to apply for various permissions and to permit him to enter the premises for demolition of old building and construction of new building. The Developer enters into a Permanent Alternate Accommodation Agreement (PAAA) with individual members with respect to new flat to be allotted to the member in the re-developed Building. Such Development Agreement is registered. The Developer obtains various permissions to commence the construction by demolition. Usually upon obtaining the permissions, the members vacate their old premises. The Developer hands-over the new flats upon completion of redevelopment. The new flat owners who purchase flats from the developer’s share are given membership in the Society. The various issues of taxation arising in above process of re-development of co-operative housing society are discussed hereinafter.

II WHETHER SALE OF DEVELOPMENT RIGHTS ARE TAXABLE.

  1. DEVELOPMENT RIGHTS ARE CAPITAL ASSETS.

A1) Development rights are rights by virtue of which the development potential of the Land can be exploited by making construction. The development potential of the land is determined by various Local Authorities by fixing the Floor Space Index (FSI). The construction can be made to the extent of such FSI. In Mumbai, one of the means by which additional construction over and above the existing FSI can be made is by Loading of Transferrable Development Rights.(TDR) in accordance with Law. It is the exploitation of this additional FSI which makes a re-development project through the agency of Developer viable.

A2) In Land Breez Co. Operative Hosing Society Ltd. v. ITO [2013] 55 SOT 103 (Mum)(Trib) it is held that “Thus, such a right is definitely a “Capital Asset” held by the assessee and assignment of such a right in favour of the developer amounts to transfer of capital asset. In our conclusion, transfer of TDRs amounts to transfer of a “Capital Asset”. In Maheshwar Prakash-2 Co-op. Hsg. Society Ltd v. ITO [2009] 121 TTJ 641 (Mum)(Trib) [Confirmed by Bombay high court in INCOME TAX APPEAL NO.2346 OF 2009 dtd 24/4/2015] it was held that “In view of this legal position, it is held that the right to construct the additional storeys on account of increase in FSI by virtue of Regulation No. 14 of the Appendix VII to DCR, 1991 was a capital asset held by the assessee. Therefore, assignment of such right in favour of the developers amounted to transfer of capital asset.”

A3) Hence, Development rights constitute a capital asset.

  1. ISSUE OF YEAR OF TRANSFER.

B1) The year of transfer in case of Joint development Agreements has been a matter of great dispute. When pursuant to a Development Agreement, Assessee mainly receives share in the constructed area and if such share is taxed in the year of execution of Development Agreement then Assessee has to pay huge taxes on the share in constructed area even though the constructed area is to be received in future.

B2) The Supreme Court in Alapati Venkataramiah v. CIT (1963) 57 ITR 185(SC) held that transfer means effective conveyance and handing over of possession or receiving consideration was not sufficient. There was wide spread evasion of stamp duty and Income tax in India as Vendor would receive the consideration and handover the possession to Buyer but not execute a conveyance. To plug this mischief Sec. 2(47)(v) was inserted w.e.f 1/4/1988 whereby transfer included any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882.

B3) In Shrimant Shamrao Suryavanshi v. Pralhad Bhairoba Suryavanshi [2002] 3 SCC 676(SC) it is stated as follows in the context of Section 53A :

“16. But there are certain conditions which are required to be fulfilled if a transferee wants to defend or protect his possession under Section 53-A of the Act. The necessary conditions are:

  1. there must be a contract to transfer for consideration of any immovable property;

  2. the contract must be in writing, signed by the transferor, or by someone on his behalf;

  3. the writing must be in such words from which the terms necessary to construe the transfer can be ascertained;

  4. the transferee must in part-performance of the contract take possession of the property, or of any part thereof;

  5. the transferee must have done some act in furtherance of the contract; and

  6. the transferee must have performed or be willing to perform his part of the contract.”

B4) From the year 2001, it is also important that to constitute part-performance within the meaning of S.53A, the Agreement/Contract must be registered.

B5) The Bombay High Court in Chheda Housing Development Corpn., a Partnership firm v. Bibijan Shaikh, Farid & Ors. (2007) (3) MHLJ 402 (Bom.), while dealing with specific performance of Agreement for use of TDR, held that FSI/TDR are benefit arising from the land consequently must be held as immovable property. Thus, S. 2(47)(v) will apply irrespective whether a Development Agreement is only transferring development rights or transferring land or building along-with development rights.

B6) In the case of Development Agreements, date of transfer has to be decided in the context of Section 2(47)(v). Perhaps the first decision on this point was of the Bombay High Court in Chaturbhuj Dwarkadas Kapadia v. CIT- [2003] 260 ITR 491 (Bom). In this case it was held that the year of taxation was the year in which Development agreement was executed and not the year in which possession was handed over to the Developer. However, in CIT v. Geetadevi Pasari- [2009] 17 DTR 280 (Bom.) it was held that the year of transfer was the year in which possession was handed over to the Developer after receiving entire consideration. It may be noted that in both the cases consideration for transfer of development rights was only cash and no share in constructed area was to be given to the owner. In CIT v. DR. T.K. Dayalu- [2011] 14 taxmann.com 120 (Karn) consideration to be received by owner on parting with development rights was both i.e. cash component and share in the constructed area. Assessee contended that year of transfer was the year in which it received the constructed area. AO contended that year of transfer was year of execution of development agreement. The Court held that the year of transfer was the year in which actual possession was handed over to the developer. Thus, though year of transfer was not the year of execution of development agreement but the year of handing over possession, Assessee would face hardship of paying taxes on his share in constructed area even without receiving the same. Hence, hereafter, the Assessee’s mainly focused on what would constitute possession for attracting S.53A of TOPA and whether terms of Development agreement constitute said possession. In CIT v. Sadia Shaikh [Tax Appeal No. 11 of 2013 dtd 30/1/2014](Bom)(HC) it was held that there was no transfer as possession was not given as per S.53A i.e entire control was over property was with owner and Licence and Occupation certificate was in the name of Owner.

B7) In Bhatia Nagar Premises, Co-operative Society Ltd. v. ITO [2013] 37 taxmann.com 9 (Mum)(Trib)/[2013] 59 SOT 134 (Mum)(URO)(Trib) the issue arose in the case of Co-operative Housing Society whether there was transfer within S.2(47)(v) of Additional FSI pursuant to Development Agreement in the year of execution & registration of Development agreement ie. AY 2009-2010. It was held that as no permissions were obtained and old building was not demolished, there was no transfer within the meaning of S.2(47)(v). The relevant portion is as under :

“………………….The assessee in this case has not transferred the land and the building. The assessee has only transferred its entitlement to additional FSI to the developer for reconstruction of building. The developer is required to demolish and reconstruct the old building with an additional 28% carpet area and hand over the same to the existing members. The transfer is only of additional FSI available to assessee in respect to the existing land for the purpose of construction of additional buildings which would be owned by the developer. Therefore, the real issue is whether assessee has transferred its rights in the additional FSI during the year.

  1. The clause (j) of DRA clearly provided that the developer was authorized to demolish and reconstruct the old building and simultaneously he was authorized to develop the remaining property consuming the principal FSI of the plot and by buying and utilizing additional TDR as per DC regulations. Therefore, assessee could transfer the additional FSI only on demolition of old building which has not taken place even till now.The developer has not been able to obtain even the IOD and CC in respect of the reconstruction of the old building as was required to be done under the DRA. The old building has not been demolished till date and the members continue to occupy their flats in the old buildings. In such a situation it could not be said that the assessee had transferred its rights over the FSI to the developer in assessment year 2009-10.”

The above decision of the tribunal was confirmed by the Bombay High court as reported in [2017] 246 Taxman 387 (Bom)(HC).

B8) In CIT v. Balbir Singh Maini – (2017) 398 ITR 531 (SC) the assessee was a member of the Punjabi Cooperative Housing Building Society Ltd. The society entered into Joint Development Agreement (JDA) for development of 21.2 acres of land with the Developers. The consideration was fixed as cash and share in constructed area to be given to the individual members. The Supreme Court held that S.2(47)(v) was not applicable as the JDA was not registered. The Supreme Court also analyzed the alternate argument of transfer u/s 2(47)(vi). S.2(47)(vi) provides that transfer includes any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. The Supreme Court held as under :

“The object of Section 2(47)(vi) appears to be to bring within the tax net a de facto transfer of any immovable property. The expression “enabling the enjoyment of” takes color from the earlier expression “transferring”, so that it is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof. The idea is to bring within the tax net, transactions, where, though title may not be transferred in law, there is, in substance, a transfer of title in fact.

A reading of the JDA in the present case would show that the owner continues to be the owner throughout the agreement, and has at no stage purported to transfer rights akin to ownership to the developer. At the highest, possession alone is given under the agreement, and that too for a specific purpose -the purpose being to develop the property, as envisaged by all the parties. We are, therefore, of the view that this clause will also not rope in the present transaction.”

It was also held that the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessees by the developers and therefore, the assessees have not acquired any right to receive income under the JDA as permissions were not obtained and the JDA fell through.

B9) Thus, above judicial precedents show a transition in determination of year of transfer from the date of execution of development agreement to the year of possession to the year of obtaining permissions and consequent demolition. The year of taxability is also held in some cases to be the year in which share in constructed area is received. Also, for determining year of transfer, subsequent events such as not obtaining approvals, cancellation of agreement have to be taken into consideration. In short, year of transfer would largely depend on the terms and conditions of the Development agreement.

B10) As far as redevelopment of Co-operative Housing societies in Maharashtra is concerned, it would be useful to refer to some guidelines provided under revised directions issued u/s 79A of MCS Act being Govt Resolution No SaGruYO 2018/Pra.Kra.85/14-S, dated 4th July, 2019 which prescribe procedure regarding making re-development of the Co-operative Housing Society. Some of the guidelines which may be useful in determining the year of transfer are as under :

1) The Development Agreement with the Society and the Permanent Alternate Accommodation with the members shall be registered.

2) The Developer shall make available Alternative residential facility.

3) The tenement members shall vacate the tenements only after the Developer has obtained all legal approvals from the redevelopment.

4) Redevelopment project has to be completed within 2 years/3 years from date of first completion certificate.

If one reads above guidelines in light of Section 2(47)(v) & 2(47)(vi), it can be fairly concluded that year of transfer should be the year where tenement is vacated after Developer has obtained all legal permissions and made arrangements of Alternate accommodation for the member of the society. Such an interpretation will be more acceptable to both the Department and the Assessee.

  1. FAILURE OF COMPUTATION MACHINERY.

C1) This issue is typical to the city of Mumbai and other cities having pari-materia provisions. The Development Control regulations, 1991 introduced the concept of loading of TDR to make further construction on Plots of Land where entire Basic FSI is exhausted. So the developer would purchase TDR generated in accordance with DCR, 1991 and load the same on the Plot of Land of the Society to make additional construction. The Courts took the view that where pursuant to Development Agreement, right to construct by loading TDR is transferred to a Developer by a Society formed before 1991, there will be no capital gains tax liability as the Additional FSI had it’s origin in DCR, 1991 for which there was no cost of acquisition paid or ascertainable u/s 55 and thus the computation machinery failed resulting in no capital gains Tax as held by the Supreme Court in CIT v. B.C.Srinivasa Setty [1981] 128 ITR 294 (SC). This legal principle has been laid down in following decisions ;

  • New Shailaja Co-operative Housing Society Ltd. v. ITO [2009] 121 TTJ 62 (Mum)(Trib)

  • Maheshwar Prakash-2 Co-op. Hsg. Society Ltd v. ITO [2009] 121 TTJ 641 (Mum)(Trib) [Confirmed by Bombay high court in INCOME TAX APPEAL NO.2346 OF 2009 dtd 24/4/2015]

  • Land Breez Co. Operative Hosing Society Ltd. v. ITO [2013] 55 SOT 103 (Mum)(Trib)

  • Bhatia Nagar Premises, Co-operative Society Ltd. v ITO [2013] 37 taxmann.com 9 (Mum)(Trib)/[2013] 59 SOT 134 (Mum)(URO)(Trib) confirmed by Bombay High court in [2017] 246 Taxman 387 (Bom)(HC).

  • CIT v Sambhaji Nagar Co-op. Hsg. Society Ltd [2015] 370 ITR 325 (Bom)(HC)

In Ishverlal Manmohandas Kanakia v. ACIT ITA No. : 3053/Mum/2010 AY 06-07 (Trib)(Mum) it was held that there was no capital gains tax even when there was transfer of Basic FSI and Additional FSI. It was held as under :

“In that view of the matter we are of the view that the receipts on assignment of FSI including originating from the plot of land and/or married to it and right to load consume and use FSI credit by way of TDR which was the subject matter of transfer by the Assessee was a capital asset in respect of which the cost of improvement could not be ascertained and therefore the receipts of consideration for transfer of the said rights cannot be brought to tax as the said receipts will be capital receipts and not capital gain. The authorities below erred in law and on facts in holding to the contrary.”

C2) It will be relevant to examine the Legal position in light of FSI provisions under the DCPR, 2034 which are now in vogue in the city of Mumbai. As per Regulation 30 of DCPR, 2034 Basic FSI is 1.33 for Island City and 1 for the Suburbs. However, permissible FSI for Island City is minimum 1.33 and maximum 3 and for Suburb is minimum 1 and maximum 2.5 depending upon the width of the road. To exhaust the FSI over and above the Basic FSI upto Permissible FSI, certain percentage of Additional FSI on payment of Premium to MCGM (50% of Ready Reckoner rate) and Admissible TDR has to be utilized. For Example, in Island City where width of road is above 27m, Basic FSI will be 1, Addln FSI by payment of premium is 0.84, Admissible TDR is 0.83 taking the permissible FSI to 3 (1+0.84+0.83). Further Fungible Compensatory Area (commonly known as Fungible FSI) can be built up-to certain extent over and above the Permissible FSI by making payment to MCGM. DCR 33(7)(B) provides certain extent of Additional FSI and Fungible FSI in case of re-development of Co-operative Housing societies which are more than 30 years old without payment of premium.

C3) Thus, as far as loading of particular percentage of TDR is concerned, said is the creature of DCPR, 2034 and hence giving right to load TDR will not be taxable. Similarly utilizing additional FSI and fungible FSI by making payment of premium would also be not taxable as both have their origin in DCPR, 2034. Payment of premium to obtain additional FSI and Fungible FSI is same as making payment for purchasing TDR and hence as far as owner of Plot is concerned it will not make any difference.

C4) However, another view may be possible with respect to additional FSI and fungible FSI obtained by payment of premium. TDR generation is by operation of Law under various circumstances as provided under DCR,1991 and also DCPR, 2034. Whereas generation of Additional FSI and Fungible FSI is simply by making payment of premium. Infact in Maheshwar Prakash-2 Co-op. Hsg. Society Ltd v. ITO [2009] 121 TTJ 641 (Mum)(Trib) it was held as under:

“The above discussion shows that two separate and distinct rights arose as per DCR, 1991 i.e., TDR and the right to construct additional floor. The former has inbuilt cost while the later one arose without any cost. Regulation 14 makes it clear that FSI of receiving plot shall be allowed to be excluded in the prescribed manner. Such right was made available automatically without paying anything either to BMC or to the Government.”

C5) Hence, it appears that some dispute with respect to validity of the argument of failure of computation machinery on utilization of additional FSI and fungible FSI may take place.

  1. APPLICABILITY OF S.50C

D1) In Chiranjeevlal Khanna v. ITO (2011) 132 ITD 474 (Mum.)(Trib.) it was argued by the assessee who was the owner of land and building and had entered into development agreement that S. 50C is not applicable to transfer of rights in land and building. The Hon’ble Tribunal on perusal of the Development agreement came to the conclusion that what was really transferred by virtue of the development agreement was not merely rights in land and building but the land and building itself and hence, S. 50C was applicable.

D2) In Voltas Ltd v. ITO [2016] 161 ITD 199 (Mum)(Trib) it was held that S.50C was not applicable to transfer of development rights i.e. rights in land or building as by virtue of development agreement land or building was not transferred.

D3) In cases where transfer of development rights is not exigible to tax as pointed out above, then the question of Applicability of S.50C does not arise.

  1. TAXABLE IN WHOSE HANDS.

E1) We are mainly concerned with two types of Co-operative Housing Societies ie “Tenant ownership housing society” and “Tenant co-partnership housing societies”. In respect of “tenant ownership housing society” commonly known as “Plot owners Society”, the land is held by Society as a lessee/owner and the members are the owners of the Building on such plot of Land. In such cases there won’t be much dispute about taxability in case of Development Agreements as it can be clearly concluded that whatever is received by the Member say new constructed area is accrued to the member only as he is owner of the building. Thus, whatever is received by the society may be taxed in the hands of the Society and whatever is received by the member of the Society will be taxed in the hands of the Member. In-fact in CIT v. Balbir Singh Maini (Supra), where the Society appears to be a Plot owners type society, the new area and cash component received by the member was sought to be taxed in the hands of the member of the society.

E2) In respect of “Tenant co-partnership housing societies”, which are of the nature of “Flat Owners Societies“ in which the flats are acquired by the members from the builder on ownership basis and thereafter Society is formed, and land & building is conveyed to the society and the member has what is known as occupation rights. Majority of the Societies in Mumbai are of this type. An issue arises whether new area and compensation received directly by the member can be taxed in the hands of the Society as it is the owner of Land and Building. If it is taxed in the hands of the Society then such Society is not eligible for Exemption u/s 54 & 54F. In-fact in Bhatia Nagar Premises, Co-operative Society Ltd. v. ITO [2013] 37 taxmann.com 9 (Mum)(Trib)/[2013] 59 SOT 134 (Mum)(URO)(Trib), the AO sought to tax the new premises, rent for alternate accommodation and other compensation to be paid to the member in the hands of the Society. Though this issue was raised same was not decided as it was held that transfer was not chargeable to tax.

E3) As per CBDT Circular : No. 9 [F. No. 8/2/69-IT(A-I)], dated 25-3-1969 it is stated that in case of “Tenant co-partnership co-operative housing societies” that the legal ownership in the flats can be said to vest in the individual members themselves and not in the co-operative society and hence, for all purposes (including attachment and recovery of tax, etc.) the individual members should be regarded as the legal owners of the property in question.” Further under Maharashtra Stamp Act as on the conveyance in favour of the housing societies, stamp duty paid by the purchasers of flats on ownership agreements is deducted from the stamp duty payable on the market value of the property transferred in favour of the society as per proviso to Article 25 of schedule 1 of Bombay Stamp Act. Thus, even in case of Flat owners Society it can be said that consideration received/paid to a member of a society will accrue in the hands of the Member.

E4) In Raj Ratan Palace Co-operative Housing Society Ltd v. DCIT (2011) 46 SOT 217 (Mum)(URO) out of total consideration of ₹ 3,02,16,828, ₹ 2,51,000/- was paid to the Society and balance was received by members. The AO sought to tax the amounts received by the members in the hands of the Society. The tribunal deleting the addition held that :

“It was also seen that the some of the individual members had offered the receipts from the developer to tax and the same had also been brought to tax in the hands of the individual members. In this scenario, the addition made in the hands of the assessee society was without any basis. Consequently the addition made in the hands of the society was to be deleted.”

In appeal against the above order of ITAT, the Hon’ble Bombay High Court in CIT v. Raj Ratan Palace Co­operative Housing Society ITA No 2292 of 2011 dated 27-2-2013 while confirming order of ITAT dealt with following question was raised by the department-

“Whether on the facts and in the circumstances of the case and in law, the Tribunal is right in holding that amount received cannot be taxed in the hands of assessee society because society continues to be owner of the land as no change in ownership of land has taken place without appreciation the fact that the assessee has received compensation of ₹ 3,02,16,828/-for granting the developer the right to develop the property which is clearly taxable as per provisions of Section 2(24) read with Section 2(47) and 2(14) of the Income Tax Act?”

The Hon’ble Court decided the issue as under :

“2. The Revenue seeks to tax the society in respect of the amount received on transfer of TDR. The Tribunal in the impugned order recorded a finding of fact that the amount which was received on the transfer of TDR was received by members of Respondent Society. The members of the Society had offered the amounts received by them to tax in their individual returns. In fact, copies of orders of the Tribunal in respect of individual members who received amount from the developers and offered to tax was also placed before the Tribunal.”

SLP against the above decision of the High court was dismissed. [CIT v. Raj Ratan Palace Co-operative Housing society ltd (2014) 362 ITR 1(SC)(St)]

E5) In MIG-Co-operative Housing Society Group-II Limited v. ITO ITA No 896&1099/M/16 dated 17/2/2017(Mum)(Trib) development agreement was entered into between the Society and the Developer whereby Corpus Fund was paid to the Society and the members were entitled to new Flat in the Re-developed building as well as cash compensation. The Society had offered to tax the amounts received by it and the members offered to tax the consideration received by it. The AO sought to tax value of new flat as well as cash compensation in the hands of the society on the ground that society was the owner of land and building. The Hon’ble ITAT deleting the additions made in the hands of the Society held as under

“We find that facts of the case before us are almost similar to the facts of Raj Ratan Palace CHG (supra). As stated earlier,the developer had made payments to the Society as well as to the members and they had offered the amounts received by them, for taxation. In our opinion, once the members had shown the income received by them in their hands there can not be any justification for taxing the same in the hands of society. No double taxation and no double deduction is one of the well recognised and fundamental principles of taxation. In our opinion, signing of agreement by the members or society cannot be base for taxing of income. As per the scheme of the Act, income received by any person or income accrued to him has to be taxed. In the case under consideration, income was received by the members and they had offered the same for taxation.”

E6) Thus, where the Development agreement clearly identifies consideration which is to be paid to the Society and that which is paid to the members and the developer directly pays the consideration to the members than the consideration received by the member cannot be taxed in the hands of the Society.

III ADDITIONAL AREA RECEIVED BY THE MEMBER. – ELIGIBILITY TO EXEMPTION U/S 54.

In the case of redevelopment, the new flat to be acquired will be treated as construction for the purpose of the Section 54. Thus, if the new flat is acquired by the owner within a period of 3 years from the date of transfer of the original flat then the capital gain arising from the sale of the original flat can be claimed to be exempted u/s. 54 of the Income Tax Act subject to fulfillment of conditions u/s 54.. In case of delayed possession or breach of conditions u/s 54 etc, the jurisprudence with respect to S.54 will have to be seen.

IV CORPUS FUND RECEIVED BY THE SOCIETY AND DEDUCTION U/S 80P.

1) Societies charge Corpus Fund to enable it to meet the increase in maintenance charges post re-development. Issue arises whether said receipt is a capital receipt or is chargeable to tax under the head capital gains or is chargeable to tax as income from other sources.

2) In MIG-Co-operative Housing Society Group-II Limited v. ITO ITA No 896&1099/M/16 dated 17/2/2017(Mum)(Trib) it was held that Corpus Fund received by the Society shall be taxable as under the head Capital Gains and not Income from other Sources. As regards interest income on corpus funds kept with Banks it was held that Assessee can claim deduction u/s 80P.

3) Thus where there is no exigibility to tax under the head Capital gains on transfer of development rights, then amounts received as corpus funds will also not be taxable.

V RENT RECEIVED BY THE MEMBER FOR TEMPORARY ACCOMMODATION.

1) The developer is required to pay rent for alternate accommodation after the old building is demolished. If such rent is considered as part of consideration exigible to tax under the head capital gains then Assessee can claim exemption u/s 54. If same is taxable under the head income from other sources then it is seen that the AO does not allow deduction of rent paid on the ground that it amounts to application of income and same cannot be allowed u/s 57. However, to the extent rent is paid it is nothing but reimbursement and does not have the character of income.

2) In Jitendra Kumar Soneja v. ITO [2016] 161 ITD 269 (Mum)(Trib) it was held that the rent received was utilized for paying rent and hence, it cannot be said to be income of Assessee. In Jatinder Kumar Madan v. ITO [2012] 51 SOT 583 (Mum)(Trib) it was held that rent was taxable as Income from other sources and not Capital Gains. However, the rent paid will be allowed as deduction. In P Madhusudan v. ACIT [2019] 419 ITR 194 (Mad)(HC) where rent was directly paid by the developer and assessee was provided rent free accommodation, it was held that same cannot be assessed as capital gains in the hands of the assessee.

3) It can be concluded that whether rent can be taxed as Capital gains or Income from other sources may depend on the wordings of the Agreement. In case of reimbursement there will be no income chargeable to tax.

VI COMPENSATION RECEIVED BY MEMBER OF SOCIETY OVER AND ABOVE RENT REFERRED TO AS HARDSHIP ALLOWANCE /CORPUS FUND ETC.

1) In case of re-development, many times the members are paid compensation for hardship/inconvenience caused to them on account of various reasons such as more no of members in the new building, sharing of amenities with more members, issues during shifting etc. Hence, many times developers pay compensation to members for such hardship/inconvenience.

2) In Kushal K Bangia v. ITO [2012] 50 SOT 1 (Mumbai)/[2012] 145 TTJ 37 (Mumbai)(UO) Development Agreement was entered into between Developer & Society and PAAA with individual member. The Additional Area , rent for alternate accommodation and cash compensation paid to members was Taxed in the hands of member. With respect to the cash compensation, it was held that same was a Capital receipt not liable to tax. It was held as under :

“This clearly implies, as is the settled legal position in our understanding, that a capital receipt in principle is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of revenue receipt or is brought within the ambit of income by way of a specific provision in the Act. No matter how wide be the scope of income u/s.2(24) it cannot obliterate the distinction between capital receipt and revenue receipt. It is not even the case of the Assessing Officer that the compensation received by the assessee is in the revenue field, and rightly so because the residential flat owned by the assessee in society building is certainly a capital asset in the hands of the assessee and compensation is referable to the same.”

3) In Jitendra Kumar Soneja v. ITO [2016] 161 ITD 269 (Mumbai) Assessing Officer made addition of ₹ 30,55,800/-, consisting of a sum of ₹ 22 lacs as corpus fund received by assessee during financial year 2006-07 and rental of ₹ 8,55,800/- appearing as credited to his bank account. It was stated that corpus fund was paid to member on account of hardship caused due to re-development. The ITAT held that same was not taxable as it is a capital receipt. However, the ITAT also held that said capital receipt will be adjusted against the cost of acquisition. In Kishore D Patel v. ITO ITA No 3796/M/2014 dated 17/2/2017(Mum)(Trib) inconvenience compensation paid by developer for constructing additional floors was held to be capital receipt.

VII. CONCLUSION

The article covers several issues which directly arise due to the process of re-development. There can be multiple issues which may arise in the fact of each case such as non-eligibility u/s 54, or transfer of new flat by a members before completion of construction etc. Each such case will have to be decided in light of terms of the Agreements, year of transfer and relevant provisions of the Income Tax Act. Recently, lot of Co-operative Societies are considering self-redevelopment wherein the contractor is appointed for carrying out the Construction and the Society keeps the additional Flats which it can sell. Tax implications in case of such self-redevelopment will be different than re-development carried out through developers.