ESIC Act is applicable in Maharashtra for Shops and Commercial Establishments where minimum 10 or
 more persons are working since last preceding 12 months.

Introduction

Employees’ State Insurance Corporation (“ESIC”) is a statutory corporate body set up under the ESI Act 1948, which is responsible for the administration of ESI Scheme in India. Social security and health insurance scheme which provides medical benefit, sickness benefit, maternity benefit, disablement benefit and various other benefits such as funeral expenses, free supply of physical aids etc. to the employees and their family.

Applicability of ESIC Act in Maharashtra from 01st October 2020:

• Notification No. ESIS 2015/C.R. 150/RAKAVI-2. Dated: 10th September 2020.

• From 1st October 2020 Provisions of Employees’ State Insurance Act, 1948, is extended to the classes of establishments in column (2) of the said notification.

i.e.

1) Shops,

2) Hotels,

3) Restaurants,

4) Road Motor Transport Establishments,

5) Cinema including preview theaters,

6) Newspaper establishments as defined in section 2 (d) of the Working Journalists (Condition of Service and Miscellaneous Provisions Act (45 of 1995)

• The Employees’ State Insurance Act, 1948, becomes applicable, In above Classes of Establishments in which 10 or more persons are employed, or were employed on any day of the preceding 12 months.

i.e 1st November, 2019 to 30 Sept 2020 in this period if strength of employees in any months is 10 more than 10 employees then this Act will apply to the establishment from 1st Oct, 2020.

• Earlier this limit was 20 or more coverable employees in Maharashtra.

Note: For manufacturing unit with power it was already applicable on 10 persons.

RULINGS OF ADVANCE RULING AUTHORITIES

1. Input Tax Credit

Facts : Applicant has engaged service providers to provide transportation facility to its employees, in non-air conditioned buses having seating capacity of more than 13 person. He recovers nominal amount from employees for usage of employee bus transportation facility in non-air conditioned bus.

The applicant, seeking an advance ruling in respect of the following questions.

1. Whether input tax credit (ITC) available to Applicant on GST charged by service provider on hiring of bus/motor vehicle having seating capacity of more than thirteen person for transportation of employees to & from workplace?

2. Whether GST is applicable on nominal amount recovered by Applicants from employees for usage of employee bus transportation facility in non-air conditioned bus?

3. If ITC is available as per question no. (1) Above, whether it will be restricted to the extent of cost borne by the Applicant (employer)?

Observations & Findings : In the subject case we find that the applicant is not providing transportation facility to its employees, in fact the applicant is a receiver of such services in the instant case. The applicant’s contentions that they are eligible for exemption from GST under SI. No. 15 (b) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 in respect of nominal amounts of recoveries made from their employees to wards bus transportation service, is not correct. The exemption under the said notification is available only when the supply is taxable in the first place. In the subject case, the transaction between the applicant & their employees, due to “Employer-Employee” relation as stated by the applicant in their submissions, is not a supply under GST Act.

Ruling : Input Tax Credit on GST charged by service provider on hiring of bus/motor vehicle having seating capacity of more than thirteen person for transportation of employees to & from workplace is available only the extent cost bone by the applicant w.e.f., 01-02-2019. Section 17(5)(b)(i) of the CGST Act, 2017 has been amended, w. e.f. 01.02.2019.

[2020 (9) TMI 352 – AAR, Maharashtra – Tata Motors Limited]

2. Tour Operator Service

Facts : The Applicant is engaged in business of providing tour services to the tourists identified by the Main Tour Operator. In transaction which the Applicant intents to undertake, the Applicant is going to provide some of the services i.e.., local transportation services along-with services like elephant ride, lunch/dinner, local sightseeing, guide services.

The applicant sought to know, whether the rate of 5% under heading 9985(i) is applicable on transaction which the Applicant intents to undertake wherein a single invoice is raised in respect of all the services i.e. local transportation services along-with services like sightseeing, tour guide, elephant ride etc., provided by the Applicant to The Main Tour Operator?

Observations & Findings : As per the definition of Tour Operator, in the Notification, the same will include the person who provides services in the nature of planning, scheduling, organizing, arranging tours (which may include arrangements for accommodation, sightseeing or other similar services) by any mode of transport. Further, the rate of 5% under the Rate Notification is subject to fulfillment of the conditions mentioned in the said Rate Notification.

Ruling : Since, the applicant is rendering only transportation with some ancillary services and not accommodation, as such does not satisfy the conditions as mentioned under Serial No. 23 (i) (Chapter heading 9985) of Notification No. 11/2017-Central Tax (rate) dated 28-6-2017 (as amended), therefore, rate of GST 5% is not applicable.

[[2020] 119 taxmann.com 121 (AAR- RAJASTHAN) – Crown Tours & Travels]

3. Services to entities providing functions prescribed under clause 243G and 243W of the Constitution of India.

Facts : The applicant is engaged in providing services in auditing, accounting, taxation etc. The applicant has been appointed for its professional service in respect of maintenance of Accounts and allied items of work in Segment III of M/s. Sardar Sarovar Narmada Nigam Ltd (SSNNL).

SSNNL, a company is engaged in the work of providing drinking water, generation of electricity and irrigation facility which is a function entrusted to a Panchayat under Article 243G and Municipalities under Article 243W of the Constitution.

The applicant sought the advance Ruling, whether, the professional service for maintenance of accounts and allied items of work provided to SSNNL by the applicant is a taxable service under Section 9 (1) of The CGST Act, 2017 or exempted vide Sr. No.3 of Not. No. 12/2017-CT (Rate) dated 28.06.2017.

Observations & Findings : They are not providing any technical services/any related services for constructing of Dam, Canal or any other irrigation network of the company; that Service of maintenance of Accounts provided by them is not related to main function of the Company like water providing activity and to prepare the structure of Dam, Canal and other irrigation network of the Company; they do not provide any services which are in relation to the functions prescribed in clause 243G and 243W of the Constitution of India; that Maintenance of Accounts service has no anywhere concern with functions prescribed under clause 243G and 243W of the Constitution of India.

Ruling : The professional service for maintenance of accounts and allied items of work provided to SSNNL by the applicant is a taxable service under Section 9 (1) of The CGST Act, 2017 and are not exempted in terms of Sr. No.3 of Notification No. 12/2017-CT (Rate) dated 28.06.2017, since, the services provided by the applicant to SSNNL is not in relation to work entrusted to a Panchayat under Article 243G of the Constitution; or Municipality under Article 243W of the Constitution.

[2020 (9) TMI 545 – AAR, Gujarat – Dhirubhai Shah & Co. LLP]

4. Valuation

Facts : The Applicant employs a fleet of around 30 helicopters (aircrafts) for providing Rental services with or without operator under the charter hire services entered into by the applicant with various customers, the applicant is responsible for operating and maintaining the aircrafts.

Providing of Aviation Turbine Fuel (ATF) required for flying the Aircrafts would be the responsibility of the Customers. However, at locations where the customer is unable to provide the fuel, in order to ensure continuity of flying, the contract requires the applicant to procure the fuel on behalf of the Customer and subsequently the cost of the fuel is reimbursed by Customer at actual (without charging any mark-up). The applicant, as per his opinion, undertakes the activity of procurement of fuel as a ‘pure agent’.

The applicant has sought advance ruling, “Whether in terms of the valuation provisions under GST legislation, amount recovered as reimbursement (at actual) by the applicant from the customer, for the fuel procured on behalf of the Customer is required to be included in the value of services provided by the Applicant?”

Observations & Findings : In terms of Section 15(1) of the CGST Act, 2017, ‘the value of supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole ‘consideration’ for the supply. In the instant case, where the applicant and the customer are unrelated parties, the price actually paid or payable for the supply of services includes the value of services i.e. “Rental services of aircraft including passenger aircrafts, freight aircraft and the like with or without operator” as well as the amount for the fuel filled in the aircraft by the applicant, which would be the sole consideration for the supply as per the said section.

Ruling : In terms of the valuation provisions under GST legislation, amount recovered as reimbursement (at actual) by the applicant from the customer, for the fuel procured on behalf of the Customer is required to be included in the value of services provided by the Applicant.

[[2020] 119 taxmann.com 268 (AAR – GUJARAT) – Global Vectra Helicorp Ltd.]

5. Valuation

Facts : The Applicant have proposed/ planned for engaging in the business of renting of commercial property on monthly rents and allied business. They intend to enter in to a contractual agreement of renting of immovable property with an Educational Institution in Bangalore. The Contract is on the basis of the reserved monthly rent of ` 1.50 lakhs or Annual Rent of ` 18.00 Lakhs and also refundable caution deposit of ` 500 Lakhs, which shall be returned without interest on the termination of the tenancy.

The applicant sought for advance ruling in respect of the following questions:

i. For the purpose of arriving at the value of rental income, whether the applicant can seek deduction of property taxes and other statutory levies.

ii. For the purposes of arriving at total income from rental, whether notional interest on the security deposit should be taken into consideration.

iii. Whether the applicant is entitled for exemption of tax under the general exemption of ` 20 lakhs.

Observations & Findings : As per Section 15(2) of CGST Act, 2017 any taxes, duties, cesses, fees and charges, levied under any law for the time being in force, shall include in the value of taxable supply. In the instant case the property tax is levied, under the Karnataka Municipalities Act 1964, by the BBMP in Bangalore. Further the only exclusions from the value of the taxable supply are the taxes, duties, cesses, fees and charges levied under the CGST Act 2017.

The security deposit is collected normally equivalent to 6 months or 12 months rent. Also it is a known fact that the higher the security deposit lower the monthly rent amount. In the instant case, an amount of ` 5 Crore is proposed to be collected as security deposit and a monthly rent of ` 1.5 Lacs. Hence, the notional interest on the security deposit shall be taken into consideration, for the purposes of arriving at total income from renting of Immovable Property.

Ruling : The applicant is entitled for exemption of tax under the general exemption of ` 20 lakhs, subject to the condition that their annual turnover, which includes monthly rent and notional interest, if it influences the value of supply, does not exceed the threshold limit. Property tax is not deductable from the value of taxable supply of “Renting of Immovable Property” service.

[2020 (9) TMI 784 – AAR, Karnataka – Midcon Polymers P Ltd.]

ORDERS OF APPELLATE ADVANCE RULING AUTHORITIES

1. Renting of Immovable Property

Facts : The appellant, along with four others have collectively leased out a multi-storied property to a Company engaged in providing hostel facilities. The property was constructed as Hostel building. The appellant sought advance ruling from AAR, Karnataka, on the following issues :

“1. Whether exemption prescribed under entry number 13 of notification no. 9/2017-integrated tax (rate) dated 28th June, 2017 can be sought and the lessors (here Ambrish Vasudeva and 4 others) need not charge GST while issuing the invoice for the lease service to M/s. DTwelve Spaces Pvt ltd.

2. Whether the lease service falls under the Exemption prescribed and can be described as “Services by way of renting of residential swelling for use as residence” as listed in the aforesaid Notification?”

The AAR vide its order dated 23rd March 2020 gave the following ruling :

1. The exemption prescribed under entry no. 13 of Notification No. 9/2017 – Integrated tax (Rate) dated 28th June 2017 cannot be sought and the lessors (as an entity) have to charge GST while issuing the invoice for the lease services to M/s DTwelve Spaces Pvt Ltd, provided they are registered under the GST Act.

2. The lease services does not fall under the exemption “Services by way of renting of residential dwelling for use as residence” as listed in entry 13 of Notification No. 9/2017 – Integrated tax (Rate) dated 28th June 2017.”

Observations & Findings : Can a hostel building be called as a residential dwelling? A common understanding of a hostel is that of an establishment which provides inexpensive accommodation to specific categories of persons such as students, workers, travellers.

The lease services does not fall under the exemption “Services by way of renting of residential dwelling for use as residence” as listed in entry 13 of Notification No. 9/2017 – Integrated tax (Rate) dated 28th June 2017.”

Order : Ruling of AAR, Karnataka in respect of levy of GST on Lease Service by way of renting of residential dwelling for use as residence by persons such as students, workers, travellers, as lease does not fall under exemption listed in the Notification No. 9/2017-Intergated Tax (Rate) dated 28-06-2017 is upheld.

[2020 (9) TMI 354 – Appellate AAR, Karnataka – Sri. Taghar Vasudeva Ambarish]

1. An assessee is declaring income lower than 6%/8% and his total income exceeds the maximum amount which is not chargeable to income-tax. Is he required to get his accounts audited by CA u/s 44AB or only section 44AA will be applicable?

In case of a Partnership firm after deducting Salary and interest to partners, the net profit is NIL. Is it required to get its accounts audited?

Ans. Section 44AD(5) provides that an eligible assessee to whom section 44AD(4) applies and whose total income exceeds the maximum amount not chargeable to tax, is required to maintain books of account and other documents specified in section 44AA(2) and get them audited and furnish a report of such audit under section 44AB. Similarly, clause (e) of section 44AB provides that every person carrying on business shall get his accounts of the previous year audited under that section before the specified date and furnished by the date the report of such audit, if section 44AD(4) is applicable and his income exceeds the maximum amount not chargeable to income tax for that year. Therefore, two conditions are required to be fulfilled if a tax audit is required under section 44AB – one, that section 44AD(4) should apply, and the income should exceed the basic exemption limit applicable to that person.

Section 44AD(4) provides that where an eligible assessee declares profit for any previous year in accordance with section 44AD and he declares profit for any of the five assessment years relevant to the previous year subsequent to such previous year, not in accordance with section 44AD(1) [i.e. not at 6%/8% of turnover], hey shall not be eligible to claim the benefit of section 44AD for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been so declared. In other words, once an assessee has declared profit at 6%/8% of turnover, and in any of the next five years, does not declare profits at, at least such a percentage of turnover, he cannot claim the benefit of section 44AD for the next five years. It is such an assessee who is required to get his accounts audited under section 44AB in those years in which he is not so eligible for section 44AD.

2. A partnership firm having two partners (husband and wife). One partner (Husband) expired. The firm has one old industrial gala in the balance sheet. Now what are the tax consequences in such a case?

Whether the firm can be continued with admitting sons of the deceased as per partnership deed, as partners from the date of death and firm will continue? Or the firm will be regarded as dissolved and tax have to be paid by firm on difference between fair market value of industrial gala and the written down value of such gala?

As discussed with the Registrar of Firms consultants, the Supreme court has given a verdict that where a firm has only two partners and one partner dies, the firm is compulsorily dissolved, even if there is a clause in the partnership deed of admission of legal heirs as partners.

Considering the above facts, what is the best possible solution?

Ans. As rightly pointed out, under the Partnership Act, 1932, the firm gets dissolved. Once the firm has been dissolved, subsequent admission of a partner (maybe the legal heirs of the deceased partner) would amount to constitution of a new firm, which would be separate and therefore assessed separately. The Supreme Court, in the case of Mohd. Laiquiddin v. Kamala Devi Mishra (deceased) by LRs, (2010) 2 SCC 407, held that on the death of a partner of a firm comprised of only two partners, the firm is dissolved automatically; this is notwithstanding any clause to the contrary in the partnership deed.

As regards the applicability of section 45(4) in such cases of dissolution, the Madras High Court in the case of CIT v. Vijayalakshmi Metal Industries 256 ITR 540, has held that where there was a dissolution of a firm by operation of law by reason of section 42(c) of the Partnership Act (i.e. on death of a partner), but this was not followed by the by distribution of capital assets on the dissolution of the firm, since no transfer had taken place, no capital gains could be said to arise under section 45(4). A similar view has been taken by the Madhya Pradesh High Court in the case of CIT v. Moped and Machines 281 ITR 52.

However, a slightly different view has been taken by the Andhra Pradesh High Court in the case of Rajlaxmi Trading Co 250 ITR 581, and by the Kerala High Court in the case of CIT v. Southern Tubes 306 ITR 216, on slightly different facts. In those cases, the firm was dissolved (voluntarily, and not by death of a partner) and all its assets were taken over by one partner. The court held that the assessing officer was justified in taking market value of assets as transferred for the purpose of determining capital gains tax under section 45(4).

Therefore, if a new firm is started with the legal heirs of the deceased partner immediately after the death of the partner, it can be argued that the provisions of section 45(4) do not apply, as there is no distribution of assets to the partners.

3. An appeal filed by the Tax Department is pending with ITAT on 31st January 2020. Is the assessee eligible to apply under Vivad se Vishwas Scheme? Now, If ITAT hearing is held in July and the appeal is decided against the assessee, is the assessee still eligible under the Vivad se Vishwas Scheme? Is there any condition that the appeal should also be pending on the date of application under the Vivad se Vishwas Scheme?

Ans. Under the Vivad se Vishwas Act, 2020, an appeal has to be pending before the appellate forum on the specified date, i.e. 31st January 2020, in order to be eligible to make an application under the Scheme. This has been clarified in the answer to question No. 1 in CBDT circular No. 7 of 2020 dated 22 April 2020.

There is no requirement under the Act that such appeal should also be pending on the date of application. Therefore, even if the tribunal has decided the matter subsequent to the specified date, the assessee can still make an application for settlement under the Vivad se Vishwas scheme.

In this case, since the appeal that is pending is an appeal filed by the Income Tax department, the amount payable under the scheme would be 50% of the disputed tax.

On 15.10.2020, the Hon’ble Bombay High Court heard the writ petition filed by the Confederation of GST Professionals and Industries for extension of due date of submitting GSTR 9 and 9C for 2018-19 to 31.12.2020 [WP (L) 4419 of 2020]. Dr. Ashok Saraf, Senior Advocate made a passionate plea on behalf of all tax professionals, telling the Court that Chartered Accountants and tax professionals have now become “Corona Worriers” in these drastic times, being forced to work day and night, battling against all odds to submit these two forms before the current due date of 31.10.2020. Bombay HC has noted the arguments of Dr. Saraf and observed that this is not adversarial litigation and that solution has to be worked out. Court has called for ASG to appear and tell the Court how the UOI intends to resolve these matters for benefit of all. The Goods and Service Tax Practitioners’ Association of Maharashtra ( GSTPAM) had also filed similar petition and they were represented by the Senior Advocate Shri R. V. Desai.

I am a lawyer practising solely in litigation for the past two decades at least. Perhaps I am not proper person to write about problems of tax professionals who are doing GSTR 9 and 9C filing work during coronavirus crisis. However, when even someone like me can understand that there is a grave urgency to extend the due dates for submitting the GSTR 9 and 9C by at least 3 months, and the Government purposely ignores the problems of the tax professionals, like an ostrich which has buried its head in the sand, such induced blindness of the Government requires outright condemnation from the entire tax fraternity, and not just polite representations.

Vide the Notification No.69 of 2020 – Central Tax dated 30.9.2020, the Central Government extended the due dates for extending the due date of submitting GSTR – 9 and 9C for FY 2018-19 to 31.10.2020, a paltry extension of one month. The Government will no doubt say that the deadline under the Statute was 31.12.2019 and therefore extension until 31.10.2020 is more than enough. But is this the truth?

Under Section 44 of the Central Goods and Services Tax Act, 2017 (hereinafter “CGST Act”) and Maharashtra Goods and Services Tax Act, 2017 (hereinafter “MGST Act”), an annual return has to be filed each year in the prescribed format by the 31st of December following the end of the financial year and the audit report or reconciliation statement has to be submitted along with it:

“44. Annual return.

(1) Every registered person, other than an Input Service Distributor, a person paying tax under section 51 or section 52, a casual taxable person and a non-resident taxable person, shall furnish an annual return for every financial year electronically in such form and manner as may be prescribed on or before the thirty-first day of December following the end of such financial year.

(2) Every registered person who is required to get his accounts audited in accordance with the provisions of sub-section (5) of section 35 shall furnish, electronically, the annual return under sub-section (1) along with a copy of the audited annual accounts and a reconciliation statement, reconciling the value of supplies declared in the return furnished for the financial year with the audited annual financial statement, and such other particulars as may be prescribed.

Explanation – For the purposes of this section, it is hereby declared that the annual return for the period from the 1st of July, 2017 to the 31st of March, 2018 shall be furnished on or before 30th June, 2019. ”

Section 35(5) of the CGST and MGST Act reads as follows:

“35. Accounts and other records. –

…

(5) Every registered person whose turnover during a financial year exceeds the prescribed limit shall get his accounts audited by a chartered accountant or a cost accountant and shall submit a copy of the audited annual accounts, the reconciliation statement under sub-section (2) of section 44 and such other documents in such form and manner as may be prescribed.

…”

Rule 80 of the Central Goods and Services Tax Rules, 2017 (hereinafter “CGST Rules”) and Maharashtra Goods and Services Tax Rules, 2017 (hereinafter “MGST Rules”) prescribe the following forms:

“80. Annual return.-

(1) Every registered person [other than those referred to in the proviso to sub-section (5) of section 35, other than an Input Service Distributor, a person paying tax under section 51 or section 52, a casual taxable person and a nonresident taxable person, shall furnish an annual return as specified under sub-section (1) of section 44 electronically in FORM GSTR-9 through the common portal either directly or through a Facilitation Centre notified by the Commissioner:

Provided that ….

(2) ….

(3) Every registered person whose aggregate turnover during a financial year exceeds two crore rupees shall get his accounts audited as specified under sub-section (5) of section 35 and he shall furnish a copy of audited annual accounts and a reconciliation statement, duly certified, in FORM GSTR-9C, electronically through the common portal either directly or through a Facilitation Centre notified by the Commissioner.

Provided that every registered person whose aggregate turnover during the financial year 2018-2019 exceeds five crore rupees shall get his accounts audited as specified under subsection (5) of section 35 and he shall furnish a copy of audited annual accounts and a reconciliation statement, duly certified, in FORM GSTR-9C for the financial year 2018- 2019, electronically through the common portal either directly or through a Facilitation Centre notified by the Commissioner.”

Thus, the prescribed form for this annual return is GSTR-9 and for the audit report/reconciliation statement is GSTR-9C. Though there is no specific due date for GSTR-9C per se, the same has to be submitted alongwith the annual return in GSTR-9 and thus the same deadline applies.

It will be seen that the GST Act provides for 9 months to complete the GSTR – 9 and 9C submission. The due date is 31st December following end of financial year. Parliament and the State Legislatures, in their wisdom have given this 9 months time-line, recognising that the work will take time.

Though as of now we are concerned with the due date for 2018-19, I want to highlight the chaos that GSTR 9 and 9C for 2017-18 was delayed due to until Feb 2020 due to fault of Government itself:

(i) The due date for the annual return of the year 2017-18 was thus 30.6.2019 by statute. However, the same was extended multiple times till February 2020 due to various factors:

(ii) In the 38th GST Council Meeting, the date was extended from 31.12.2019 to 31.1.2020 due to the following reasons recorded in Table Agenda 4/5 of the Minutes:

“Table Agenda (4/5)

• Notification No.56/2019 dated 14.11.2019 issued to simplify filing of Annual return (FORM GSTR-9) and Reconciliation Statement (FOR GSTR-9C) for FY 2017-18 and FY 2018-19.

• Certain changes required in the offline utility of FORM GSTR-9C.

• It has been informed that the offline utility for filing of FORM GSTR-9C not yet deployed (till 16.12.2019).

• Taxpayers are expressing concern that they will get very little time for compliance.

Proposal – Due date for filing the FORM GSTR-9 and FORM GSTR-9C may be extended from 31.12.2019 to 31.01.2020.”

The minutes record the approval of this agenda:

“Agenda Item 15: Any other agenda item with the permission of the Chairperson

…

4. Extension of due date for filing of FORM GSTR-9/9C for 2017-18

35.3. Principal Commissioner, GST Policy Wing, CBIC stated that notification No.56/2019 dated 14.11.2019 was issued to simplify filing of Annual Return (FORM GSTR-9) and Reconciliation Statement (FORM GSTR 9C) for FY 2017-18 and FY 2018-19. Certain changes were required in the offline utility for filing of FORM GSTR-9C had not been deployed yet (till 16.12.2019). Taxpayers were expressing concern that they would get very little time for compliance. Accordingly, it was proposed to extend the due date for filing the FORM GSTR-9 and FORM GSTR-9C for FY 2017-18 from 31.12.2019 to 31.1.2020.

…

37. For Agenda Item 15, the Council approved the following:

…

ii…

(a)…

(b)…

(c)…

(d) To extend the due date for filing of FORM GSTR-9/9C for FY 2017-18 ton 31.1.2020.

(e) …”

(iii) The due date for submitting the GSTR-9/9C for 2017-18 was thereafter extended in staggered manner in February, 2020, the last of which dates was 7th February 2020. However, due to technical issues on the portal and the inability of the system to cope with the load of filings, the Hon’ble High Court of Rajasthan passed an interim order injuncting the Union of India from charging any late fees till 12th February, 2020 and accepting the GSTR 9/9CX till that date [Tax Bar Association v. Union of India – 2020 (33) GSTL 615 (Raj)] When this order was appealed to the Hon’ble Supreme Court, and on the statement of the Ld. Solicitor General of India that the late fees were being reduced to Rs.200 per day, the Hon’ble Supreme Court was pleased to stay the portion of the order of the Hon’ble High Court of Rajasthan to the extent extending the date to 12th February, 2020 and the Hon’ble Apex Court specifically directed that late fees collected by the Union of India will be subject to the final outcome of the petition in the High Court of Rajasthan [Supreme Court Order dated 10.2.2020 in SLP (C) No.3839 of 2020]. A similar order criticizing the lack of adequate facilities to file the GSTR-9 and 9C for the year 2017-18 was issued by the High Court of Delhi [Sales Tax Bar Association v. Union of India – Order dated 23.1.2020 in WP (C) 10284/2018].

For the year 2018-19, the GSTR 9 and 9C due date as per the statute was 31.12.2019. However, the same was extended till 30.6.2020 in view of the fact that the Forms GSTR-9 and 9C for the year 2018-19 were not available till 29.2.2020 for filing. The following extract from the 39th GST Council meeting held on 14.3.2020 explains the reasons for the extension:

“Agenda Item 5A(vi) : Filing of GSTR-9 (Annual Return) and GSTR-9C (Reconciliation Statement)

(1/3)

• A lot of negative feedback was received regarding filing of annual return and reconciliation statement for FY 2017-18. Most of the feedback is on non-working of the IT portal.

….

(2/3)

….

(3/3)

…

• As the utility has not been made available till 29.2.2020 and even those taxpayers to whom the utility has been made available, many of the fields such as Table 8A are blank or not visible, the law committee recommended that the date of filing of these forms for 2018-19 may be extended to 30.6.2020.

…

Accordingly, these recommendations are placed before GST Council.”

The minutes further record:

“14. For Agenda Item 5A, the Council approved:-

…

(vi) to give relief to taxpayers having threshold of less than Rs.5 crores from filing GSTR-9C for FY 2018-19, to extend the due date for filing of annual return in FORM GSTR-9 and the reconciliation statement in FORM GSTR-9C for FY 2018-19 from 31st March, 2020 to 30th June, 2020 and that ….”

Clearly therefore the utility for filing the GSTR-9 and 9C was made available in midst of the lockdown. However, no filing of GSTR-9 or 9C could be done even before 30th June 2020 due to the reason to the lockdown.

In the State of Maharashtra, there was a complete lockdown from 15.3.2020 to 31.5.2020. The Unlock Phases began only from 1.6.2020. Here it is pertinent to note that even though the Ministry of Home Affairs guidelines by Central Government for unlocking did not contain many restrictions, these guidelines presented only broad framework and decision on exact restrictions were left to States. Accordingly, the State of Maharashtra allowed only 10% of office staff, or 10 people whichever is higher, in private offices in metro cities and many other towns to attend. Kindly note that even if the CA firm thus had 50 Chartered Accountants and 100 support staff, he could only call maximum 10 people to office. The situation at client side was worse. A corporate with 500 staff, was also subjected to same restriction. Such a corporate could not only call 10 people from accounting division. It had to apportion the 10 people facility amongst many divisions.

Till August end, these staff restrictions were there. Only from 2nd September, 2020 was the staff restriction relaxed to allow 30% of the staff strength to attend office. During the same period as the unlock phases began, entire staff was busy in complying with the following due dates:

Extensions announced during COVID Period for tax payers having aggregate turnover more than Rs. 5 Crore in preceding Financial Year. [i.e. to whom GST Audit and GSTR-9 for FY 2018-19 is applicable.] –

Extensions announced during COVID Period for tax payers having aggregate turnover up-to 5 Crore in preceding Financial Year. [ i.e. to whom GST Audit for FY 2018-19 is not applicable but Annual Return GSTR-9 is applicable if their turnover is exceeding Rs.2 Crores.] –

GSTR-1 details uploading:

Therefore, there has been heavy workload since June, 2020 on tax professionals to comply with all the returns and other deadlines while working at much lesser strength than normal.

Despite many associations representing to the Government, the due date for submitting GSTR-9 and 9C for 2018-19, the due date was extended only to 31.10.2020. Can it be said that sufficient time is granted in view of above-detailed chronology of events?

Now, the statute requires the Form GSTR-9 and 9C to be filed by 31st December from the end of the financial year, that is within 9 months from the end of the financial year to which the forms relate. The GSTR- 9 and 9C facility for the year 2018-19 was not made available at least till 29.2.2020 according to the admission of the GST Council itself. Counting from that date, the 9 months period for filing GSTR-9 and 9C should ordinarily end on 30.11.2020. The periods of March, 2020 to May, 2020 are liable to be further completely excluded, on the basis of principles of the limitation act, since there was a total lockdown during which compliance with the statute was impossible. Thus, another 3 months are liable to be added after 30.11.2020 in order to cover this exclusion of lockdown period and the deadline for submitting GSTR-9 and 9C therefore cannot be over before end of February, 2021.

Furthermore, even today, there are heavy restrictions on public transport and on staff strength which can attend office. Businesses in India do not operate in a totally paperless online environment and the enormous data which is required for completing audit and compilation of the annual return cannot be scanned and sent to the tax professional’s offices. Firstly, the volume of data and technical restrictions in the offices of taxpayers cannot support scanning and uploading such huge amounts of data. Secondly, there are issues of confidentiality which hamper the amount of data which can be shared over the internet.

The staff of the tax professionals have to work from home and they do not have adequate technical resources and tools to carry out the work of auditing and compiling the GSTR-9 and 9C data. Mere internet connection and availability of laptops will not suffice. The complex accounting and auditing software required for the job cannot be sent to each and every employee’s house. All tax professionals are subject to rigorous penalties if the audit is not properly carried out. Chartered Accountants can loose their certificate of practice if due diligence is not followed. Thus, physical presence in office is required and the entire work cannot be carried out from home.

Undue haste in completing the compilation of GSTR-9 and 9C will in fact hurt the Government itself in as much wrong data sent to the Government will result in revenue shortfall. It is submitted that the Forms GSTR-9 and 9C are used by the Government to ensure that a private audit can point out defaults and discrepancies to the taxpayers resulting in increased voluntary compliance. However, if the audit itself is not completed properly, the Government’s own interest will be harmed. On the other hand, extension of time till 31.12.2020 will not lead to any revenue loss at all.

The Government has extended the due date for completing scrutiny and assessment etc. under the Central Excise Act, Customs Act and the Finance Act, 1994 till 31.12.2020 [See Section 6 of the Taxation and Other Laws (Relaxation and amendment of Certain Provisions) Act, 2020 and the notification issued thereunder]. There is qualitatively no difference between a scrutiny or an assessment and an audit. All aspects have to be verified by the Chartered Accountant or the Cost and Management Accountant and various discrepancies have to be pointed out in order to ensure that revenue is not lost to the Government. As such, it is discriminatory on part of the Government to give themselves time upto 31.12.2020, whereas the Chartered Accountants and Cost and Management Accountants are given time only till 31.10.2020.

Such extremely short time period is also directly in teeth of the statute as well as Article 21 of the Constitution of India. Firstly, as aforesaid, time will not run out at all till 30.11.2020 since the 9 months of period has to be counted from when the GSTR 9 and 9C are made available for FY 2018-19. Furthermore, time has to be excluded for the lockdown period on the basis of the normal principles of the limitation act. However, apart from this, there is clear violation of Article 21 in as much the health of Chartered Accountants, Cost and Management Accountants, their staff as well as taxpayers and their staff is being put at significant risk.

The panic which is being created by giving such a short extension till 31.10.2020 will result in staff having to attend office in violation of lockdown guidelines as well as they being made to travel in public transport for long hours to attend office everyday. Tax professionals will have to run from pillar to post to arrange for paper records to be brought into their office. The short time-line will result in compromises being made in sanitization and other guidelines in the race to finish the work of GSTR 9 and 9C before 31.10.2020. Furthermore, staff belonging to age-group of 50 and above, cannot be deputed at audit places due to risk of COVID infection. Scarcity of resources has also affected the work to a large extent.

We hope the wise counsel will prevail and proper decision will be taken before the next date of hearing in the Court.

JAI HIND!

Background

The GST law under Integrated Goods and Services Tax Act, 2017 (IGST Act) has defined the term ‘intermediary’ in its clause 2(13) as “‘intermediary’ means a broker, an agent or any other person by whatever name called, who arranges or facilitates the supply of goods or services or both or securities between two or more persons but does not include a person who supplies such goods or services or both or securities on his own account”. This definition is not new to service suppliers as almost identically the term was defined under the legacy legislation of service tax with effect from July 01, 2012, the date from which the negative list based taxation was introduced in the service tax law in the Finance Act, 1994. Yet, a significant amount of controversy is generated recently on account of different interpretations applied to the term in the context of a variety of services in rulings provided by different State Authorities for Advance Ruling and consequent litigation initiated against various service suppliers whose services were regarded as ‘exports’ under the erstwhile service tax legislation as they were not held as those provided by an intermediary and thus refund of input tax credit was granted almost consistently in many cases under service tax law. It is relevant to mention here that both under service tax law and GST law, the place of supply for an intermediary service is determined as location of the supplier of service. Hence, when a person is held as intermediary or his services as intermediary services, even when such services are provided to a person outside India, they are determined as provided or supplied in India and hence not considered as exported. Resultantly, not only their claim of refund of input tax credit is questioned but considering the services liable for tax, demand for GST against such service suppliers could be made. In the scenario, it is imperative and interesting to decipher the said term by studying and discussing the term under GST.

Analysis of the definition of ‘Intermediary’

As stated above, the definition of ‘intermediary’ under the service tax law was almost identical. It is reproduced below for easy reference as a few significant tribunal decisions under service tax law are referred here:

The definition of ‘Intermediary’ under service tax law was contained in the Place of Provision of Service Tax Rules, 2012 (POP Rules) because as per Rule 9 of these rules, the place of provision for the intermediary service among a couple of others was fictionally determined to be the place of location of the service provider. The definition in Rule 2(f) of the POP Rules read as “Intermediary means a broker, an agent or any other person by whatever name called, who arranges or facilitates a provision of service (hereinafter called the main service) or *a supply of goods between two or more persons, but does not include a person who provides the main service or supplies the goods on his own account”. (*The words added in the substituted definition with effect from 01/10/2014). Perusal of the definition indicates that except replacing the words “main service by such goods or services or both”, the definition under the GST law has not undergone any substantial change. Also, along with goods and services, ‘securities’ are added as the definition of goods under section 2(52) of Central Goods and Services Act 2017 (CGST Act) excludes securities. Precisely for this reason, the rulings of AAR under GST in some cases have not only referred to the clarification provided in Education Guide issued by the Government at the time of introduction of the negative list based taxation under the service tax law but have also relied upon a few of such decisions.

It can be observed that simply worded short definition reproduced above also contains a specific exclusion clause as follows:

“ …But does not include a person who supplies such goods or services or both or securities on his own account.” (emphasis supplied)

At this point, it must be noted that like service tax law, section 13 of IGST Act also continues with the deeming fiction to determine the place of supply of service where either location of supplier or location of recipient is outside India. Hence the definition is most relevant for all cross border transactions of services, as once a service is determined as one supplied by an intermediary, per sub-rule (8) of the said section 13, the place of supply is determined as location of the supplier of service and hence though the person from India is supplying service to a party outside India, the service cannot be considered as export of service for the purpose of section 2(6) of IGST Rules as one of the key requirements to consider a service as “export of service” is that the place of its supply is outside India.

The main part of the definition indicates that when a person arranges or facilitates supply of goods or services between two or more persons, then only he is held as an intermediary service supplier. This means that when a person is instrumental in causing a supply between a supplier to the receiver/s, either at the instance of the supplier or the receiver, he has acted as an intermediary whether for supply of goods or services or securities. Let us therefore, refer to the meaning of the key words ‘arrange’ and ‘supply’ as provided in dictionaries and examine in the context of supply of goods and services.

‘Arranges’ or ‘arrange’ as per dictionaries means, “to plan, prepare for or organize something” (Cambridge English Dictionary).

“to make plans for something to happen for example by agreeing to time and place” (Macmillan Dictionary).

“to set in a rank or row, to put in order, to settle or work out … to come to an agreement…. to make plan…” (Chambers Dictionary).

Facilitation as per Black’s Law Dictionary means the act or an instance of aiding or helping.

Facilitate: – “to make easy or easier” (Chambers Dictionary)

– “make something possible or easier” (Cambridge /English Dictionary)

– “to help people deal with a process or reach an agreement or solution without getting directly involved in the process, discussion etc. yourself” (Cambridge Business English /dictionary).

The meaning of the above words appearing inter alia in the above cited dictionaries in substance indicates that an intermediary is a person who acts in between two or more persons who merely arranges a supply of goods or services between two persons by making it easy or make/help plan the supply between the two persons but without getting involved in the supply made by the supplier to the receiver.

Thus it appears clear that the legislation has meant to treat those persons as intermediaries who merely aide or facilitate supplies to happen by arranging meetings or negotiation etc. but those who do not actually supply goods or any service or in other words execute supply of goods, service or securities. As a corollary thereto, when a person has himself supplied goods, service or securities, he does not act as an intermediary for the purpose of the definition and therefore he does not satisfy the basic definition of being a broker, agent or any other person having arranged or facilitated supply between two persons or more as he has himself supplied the goods, service or both or securities and not merely arranged or facilitated the supply thereof. The words, any other person certainly would mean that a person whether called or referred to as a broker or an agent or not, but if acted in the capacity as a mere facilitator or a middleman, he is an intermediary.

A classic example of intermediary service in relation to supply of goods is commission agents or indenting agents who are not involved in supply of goods themselves but arrange or facilitate or help supply to take place by soliciting the other party/parties through introduction, negotiations etc. Service in relation to supply of goods is less difficult to perceive, though some amount of litigation under service tax law did occurr as regards determining whether an activity was one of trading where the goods were purchased and sold on one’s own account and so was apparent even from the examination of books of account. However the same was looked upon by the department as one resulting from the service of an intermediary and margin earned on sale was regarded as ‘commission’ received and therefore held liable for service tax. However, the controversy mainly focussed around some of the services provided by service providers located in India to the recipients located outside India which were often the group companies. This is because a large number of marketing arms or back office processing or business process outsourcing outfits are set up by multinational groups on account of availability of cheaper human resource. While providing these services, often the service provider is required to deal with customers of clients. Hence, prima facie the presence of three parties would be found in many cases. Such transactions were looked upon by the revenue as “intermediary services” and hence leading to litigation.

Exclusion clause

This necessitates us to focus on the specific exclusion in the definition viz., but does not include a person who supplies such goods or services or both or securities on his own account.

The exclusionary expression clearly starts with the preposition BUT which means that even though a person arranges or facilitates a supply between two or more parties, yet in specific and abundant terms provides that a person supplying such goods, services or securities on his own account is not to be considered an intermediary as essentially he does not act in such a capacity and hence excluded from the definition. That brings us to analyse as to what constitutes “acting on one’s own account”.

Simplicitor example of an intermediary in relation to supply of goods is a person who buys goods on his own account and sells the same which is known as trader engaged in a trading activity is not acting as an intermediary though he may be interacting with purchaser and a seller. Similarly, when a stock broker buys securities himself on his account and not for any of his clients and would sell the said securities from his own account, it would be part of his own trading activity in shares or securities or it could be his own investment activity and he does not play the role of an intermediary for such transactions. Since goods and securities are tangible, it is easier to perceive and fathom the nature of transactions. However, it may require some more efforts or a challenge to examine the nature of service in relation to service transactions and determine whether a specific transaction is one provided as intermediary or a service provided on one’s own account though interaction with or dealing with the customers of the client may be involved while performing the functions assigned by the recipient of the service. This appears particularly challenging for the revenue office it seems!

Examples of services of intermediary

On examination, it is not difficult to perceive certain services supplied as an intermediary in relation to services besides services of commission agents and stock brokers or security brokers. A rail or an air travel agent books tickets for transportation by rail or air respectively but transportation service by rail or air is provided by a rail company or an airline. Thus, an agent booking travel tickets acts merely to connect the supplier and receiver of transportation service. Also a steamer agent booking a cargo space for a customer does not transport goods himself but brings the exporter or importer and the shipping line to cause supply of ocean transportation service. An estate broker brings the purchaser and seller of the immovable property against each other thus facilitates or arranges the meetings and negotiations with an ultimate goal to culminate his efforts into sale or supply of immovable property from one to the other hand. Even when an estate agent is approached for providing a property on leave and licence or acquiring one on license basis, he merely arranges or facilitates such supply for licensing the property and thus he wears the hat of an intermediary and does not supply the licensing/ leasing / renting service on his own account. Thus an intermediary acts as a link between the purchaser and supplier of goods, services or securities and thus causes or facilitates and thus helps the process of supply predominantly, though the said process may involve some incidental services, like a commission agent may follow up payments for supply or a travel agent besides booking a ticket may also help obtaining a seat allocation or modification of the schedule etc. However, their presence or existence is meant only to facilitate the supply of goods or service between two persons or more and their acting as a link or a bridge between two or more persons in itself is an intermediary service. Such intermediaries may receive consideration for facilitation from one of the parties or at times even both, supplier and the receiver of his service.

Services on one’s own account

Let us now examine the activity of tour operators. Sometimes tour operators act as intermediary in some transactions and in others, they may have ‘tour’ products on their own account. For example, when a tour operator plans a tour abroad for a customer and books a hotel room or sells a product such as Euro rail pass wherein if he earns only commission or brokerage for selling booking for the hotel or selling / marketing the Euro rail pass for the company issuing such passes would be treated as intermediary for the above definition. However it is often experienced that in many cases, tour operators also act as travel agents and supply a bouquet of services including incidental services like providing vehicle at various destinations, entry tickets for monuments etc. and sometimes some products and/or hotel rooms are booked on their own account viz. buying at an agreed or negotiated price and enjoying the freedom of recovering margin thereon as per demand. In such cases, a tour operator does not act as an intermediary as he has acted on his own account. Similarly, an advertising agency when acts as an intermediary, it facilitates or arranges a readymade matter of advertisement to be printed in print media or broadcast on an electronic media for which commission or a fee is paid. However when it prepares an advertisement by doing a creative work of producing an advertisement, it acts on its own account. Under the legacy law of service tax, the Education Guide dated 20/06/2012 at para 5.9.6, an example of freight forwarder is cited to explain what it means by acting on one’s own account as the fraternity of freight forwarders and multimodal transport operators (MTO) act on principal to principal basis by buying cargo space at one rate of freight and selling with own margin to a shipper where risk and responsibility of a shipping line is assumed by the freight forwarder. Thus, they act on their own account and therefore, they are not covered as ‘intermediary’ by the definition under examination.

The above discussion however relates only to a few examples of services in simple or solo format. In reality, the transactions are often of composite nature or structured as complex service contracts containing a bouquet of services. Hence perusal of the contracts or terms of reference is imperative before determining whether a service is covered by the definition intermediary or otherwise and therefore determination would depend on facts and structuring of each contract independently. In view thereof, the interpretation has to be done only after examining all the relevant factors while perusing a contract and other relevant documents in the background of the parameters discussed above.

Significance of examining services in International scenario

As it is known, the services of intermediary or of any other nature are liable for GST at the standard rate of 18% when supplied in India. However, the issue arises when they are supplied by a person in India to a person outside India or vice versa. As mentioned above, section 13 of IGST Act contains provisions to determine place of supply of a service where either location of supplier or that of a receiver is outside India and sub-rule 8(b) provides that the place of supply of intermediary services shall be the location of the supplier of services. Therefore when a service supplied by a person in India to a person abroad is determined to be in the nature of intermediary service it attracts GST as the place of its supply is determined as territory of India even if the service is supplied to a person in a country abroad. Conversely, when a person from outside India is a supplier of a service and if it is interpreted as not in the nature of intermediary service, then only the tax liability under Reverse Charge Mechanism (RCM) arises. This is because the place of supply for intermediary services supplied by a person outside India to a person in India would be determined as the location of the service supplier. Hence, the liability of GST under RCM would not be attracted for the receiver of such a service. To illustrate, we consider here an example of globally known model of a Business Process Outsourcing (BPO) service such as voice based call centres established to serve foreign entity/entities. A corporate providing call centre services from India to an entity/entities abroad establish an Information Technology enabled network in India and employs a substantially huge work force working as operators, supervisors etc. besides a significantly large administration team. The operators after being trained attend to calls of clients’ customers. Their terms of reference are provided by their corporate client/s located in a foreign country. They neither arrange nor facilitate a service of their client to their customers but execute or perform customer support services themselves. The services are supplied on behalf of their client however through their own resources of the call centre establishment in India and/or even elsewhere. In this case, the service is supplied with one’s own resource in terms of detailed instructions and requirements of their client/s and therefore on one’s own account. IT enabled establishment does not arrange or facilitate supply of service from their client to their customers or subscribers or various others but supplied and performed with their own resources would mean supplying services on their own account. Thus, it gets covered by the specifically excluded part of the definition of intermediary service under service tax law as well as under GST law. The Education Guide referred above at its para 5.9.6 has cited the example of call centres and clarified that these services will not be categorized as intermediaries. It may be noted here that simply because the call centre deals with or attends to customer base of their client, they do not become ‘intermediary’ between their client and client’s customers as they have neither any contract with the customers of their client nor do the customers know them or recognize them as an intermediary between them and the supplier of service. They do not act as a link between their client and client’s customers but provide services to their client through their specific establishment or specific requirement alone. The supply of their service to their client itself comprises of customer care service of their client to the customers. Thus interaction with such third parties do not place them in the shoes of an intermediary acting as a link as they provide service on their own account.

Some judicial pronouncements under service tax law

In case of GST Gurgaon vs. Orange Business Solutions Pvt. Ltd. 2019 (22) GSTL 523 (Tri.-Chandigarh) it was held that when the activity is of routine back office process outsourcing which was a completely instruction or guideline based activity and when the revenue’s contention was not backed by any evidence to the contrary, the activity was not carried out as an intermediary. Earlier than this, In Re: GoDaddy India Web services Pvt. Ltd. 2016 (46) STR 806 (AAR) wherein the applicant company situated in India proposed to provide support services in an integrated manner to assist the foreign company develop its brand in India and serve customers in India. Their functions included marketing and promotional activity, oversee third party customer care centres, providing payment processing services etc. In consideration thereof, they would receive consideration on cost plus mark-up basis. The Hon. AAR at para 10 of the judgment inter alia observed “In the present case, applicant is providing main service i.e. “business support services” to WWD US and on his own account. Therefore applicant is not an ‘intermediary’ and the services provided by him is not intermediary service”. In a case before Tribunal viz. Lubrizol Advanced Material India Pvt. Ltd. vs. CCE Belapur 2019 (22) GSTL 355 (Tri.-Mum) also it was observed that when an Indian company provided service to the foreign entity on principal-to-principal basis and the service fee charged was not connected with the supply of goods but was based on cost plus mark up and thus cannot be correlated with the supply made to customer in India, the Appellant is not acting as a bridge between the overseas group entities and supplies made to their customers in India. Hence it was held that appellant did not provide intermediary service. Similar decision was given by the Tribunal in Chevron Phillips Chemicals India Pvt. Ltd. vs. Commissioner of CGST & Central Excise 2020-TIOL-178-CESTAT-Mum wherein also the facts were that though the appellant was appointed by its overseas company which itself provided marketing services to its clients, the appellant had to promote and market goods of clients of the overseas company but was neither involved in price fixation nor in negotiation for the goods sold in India and therefore held as falling outside the definition of intermediary. In another case by a co-ordinate bench of Chandigarh Tribunal viz. Evalueserve.com (P) Ltd. vs. CST Gurgaon (2019) 106 taxmann.com 74 (Chandigarh CESTAT) also, as the facts go, the Indian company provided services to customers of foreign client, as per requirements of the client and details of various deliverables in close co-ordination with the client’s team. The Indian company also had to prepare report based on its business research including financial services, market research and intellectual property activities. Placing reliance inter alia on the AAR decision in the case of GoDaddy (supra), it was categorically observed that the appellant did not facilitate or arrange services provided by their client to the third party but provided services on their own account to their client by providing services to customers of their clients and they did not have direct nexus with their customers. Thus the activity undertaken by them does not qualify as intermediary service.

A few select Rulings of AAR under GST law:

• In Fulcrum Info services LLP In Re (2019) 110 taxmann.com 236 (AAR Karnataka) An Indian LLP proposed to supply back-end support services to a foreign entity, Juniper Inc. by performing outsourced processes which inter alia included export compliance, orders screening, shipment screening, import compliance, give email responses to customers among other helpdesk support services and perform a few administrative tasks as assigned vide detailed scope of work contained in the agreement. The applicant was found to be providing the services on their own account though observed by the Authority that the applicant provided service in relation to services provided by their client Juniper Inc., there was no interaction of the applicant with any third person directly or indirectly and the applicant performed the entrusted work as noted by the Authority and thus the service was categorized as support service under 9985 specifically under SAC 998599. It was held that the applicant was not involved as intermediary.

• In another case McAfee Software India (P) Ltd. (2019) 110 taxmann.com 236 (AAR Karnataka), the applicant proposed to provide marketing support service to its Singapore holding company under a master service agreement. The scope of work mainly included market research and forecasts, gathering data on target market, etc. and could be in short considered as identifying potential opportunities. However, the applicant was not authorized to conclude contracts and also not involved in negotiation with customers. The applicant was to be paid on cost plus mark-up basis. As per Applicant’s contention, they provided management services in relation to marketing and their relationship being on principal-to-principal basis, they were claimed by applicants to be in the nature of support services. Further reliance was placed on the decision of GoDaddy’s case (supra) and Evalueserve (supra) among others. The Advance Ruling Authority in this case however found that the applicant though was not a broker or an agent, the expression “any other person” covered it and the principle of “ejusdem generis” did not apply to the words “any other person” and observed that the services of Applicant as per agreement indicated support and facilitate selling, marketing and distribution of company’s products. Therefore they clearly acted as intermediary. Further, according to the Authority, the exclusion clause does not cover their services as they are not to supply goods or services on their own account but the supply of the goods is made by the parent company. Also the word ‘such’ relates to supply of goods or services which is facilitated by the applicant and not the services provided by him. It was also observed that the payment on cost plus mark-up basis did not have bearing on the nature of supply and it was not a qualification to be satisfied for the definition of intermediary. Lastly, reliance on decisions under service tax law also was held as not applicable as it required verification in the light of GST law. It is not known whether any appeal is filed against the ruling. However, the ruling indicates that prima facie similar or even identical facts require detailed examination of the contract between the parties wherefrom the relationship and the nature of the supply requires determination as to what constitutes supply of service on one’s own account to finally conclude as to whether a service can be considered as one provided by an intermediary or not.

• Considering the above ruling in the case of McAfee Software (supra) it is interesting to examine AAR Ruling in the case of In Re: Asahi Kasei India Pvt. Ltd. 2019 (21) GSTL 243 (AAR GST), Maharashtra. In this case also, the Applicant provides service of sales promotion and marketing support to its group companies in Japan. The scope broadly includes market analysis and support. Asahi Kasei group in getting new business, providing marketing and administration support, networking and supporting sales activity of Asahi Kasei Group whereunder two separate agreements with two different group companies were referred to. Briefly stated on examining the first agreement, the authority found that relationship between the parties is that of independent contractors and the agreement does not create relationship of a principal and an agent. In this case, it is noted categorically that the Applicant has no authority to conclude or negotiate any contracts or secure orders or maintain stock of goods. The Applicant would provide service on their own account and therefore Applicant would not arrange and facilitate supply of service between two or more persons. In this broad background, the ruling was provided that the entire set of services had two distinct categories – one to be in the nature of research including corporate research and development etc. to fall under service code Tariff 998599 and the other group in the nature of Information on market, market surveys of products, their markets and to provide assistance in business activities etc. would fall under Service Code Tariff 99837. However, when the matter was referred to the appellate authority by the department reported at 2019 (28) GSTL 172 (App, AAR GST), it was in a nutshell observed that there was a mixed supply of services and accordingly the first part was modified from SAC 998599 to SAC 9981 & SAC 9183 whereas the second part categorized under SAC 9983 to be intermediary service (under SAC 9962) as it was observed that the services such as liasioning with potential customers, collecting product development plans, reporting this information to their parent company etc. amounted to facilitation and arranging between two or more persons and the goods were supplied by the parent company and not by the company in India. Therefore all ingredients required for an intermediary were held as fulfilled. As for the second agreement referred to the Authority of Advance Ruling under marketing services Agreement also containing services such as conducting market survey, providing information of Indian market to the recipient of service, liasioning with customers & potential customers, providing feedback to service recipient, monitoring regulatory developments and incidental services thereto, the Authority found the case commonly covered by the decision in GoDaddy and that market research was the principal supply. Therefore it was ruled to be covered under Group 99837 as market research services. The said composite supply however was looked upon by the Appellate AAR as mixed supply as against composite supply as held by AAR as it was found that independent services were provided under research & development services having SAC 9981 and other professional, technical and business services bearing SAC 9983 and under the heading miscellaneous services bearing SAC 9997 as they were held as not naturally bundled.

• The said Appellate Authority of Maharashtra also examined a ruling provided by AAR in the case of Sabre Travel Network India Pvt. Ltd. 2019 (27) GSTL 754 (AAAR-GST) and decided against them though the entire set of services listed under marketing support services pursuant to a marketing agreement are provided to advance the business of a foreign company Sabre Asia Pacific Pvt. Ltd. (APAL) in India in an integrated manner and not acting as a mere representative or agent to solicit business of Sabre APAL nor does it negotiate the term for subscription of Sabre APAL’s software. Their job is to make their brand visible and popularise it on the lines of the facts in the case of GoDaddy (supra). Thus appellant is not acting as a link or a bridge between Sabre APAL and their subscribers but they provide the service of providing market access to the CDS software on their own account through the establishment of their marketing network in India and thus popularise Sabre brand. However, the Appellate Authority advancing the ruling given by AAR held that the principal service of the appellant is intermediary service to identify potential subscriber and all other activities performed viz. advertising, promotional activities, sponsorship trade shows etc. were ancillary to the principal service of intermediary services.

• Similar set of litigation was involved in the case of Vserve Global Pvt. Ltd. 2018 (19) GSTL 173 (AAR-GST) and 2019 (26) GSTL 127 (App.AAR-GST) wherein the facts involved were on a much stronger footing as the services of applicant / appellant started after sale, thus consisting of back office administration and accounting services,_ payroll processing, payment follow-up with customers, pre-shipment inspection and incidental follow up processes. However, the decision in the case of GoDaddy (supra) was distinguished by merely stating that the facts are different. Eventually, it was observed by the Appellate Authority as “they are invariably facilitating the supply of goods between their client and its suppliers/buyers”. Further, they are “arranging or facilitating the supply of goods”. The supply of goods is invariably between their client and its buyers. Lastly, Appellants do not supply goods in question on their own account. On reading the ruling, the question arise is, whether the service supplier is supplying service on his own account or goods? Goods would certainly be supplied by his client only! It can only be stated that the Authority is authorized to pronounce decision on his own account!

END NOTE

Conclusion drawn and reasoning provided in the above select cases leads us to learn or unlearn and examine as to what constitutes supplying goods or service on one’s own account after examining primarily whether a person arranges or facilitates a service or goods or discharges various executory functions”. Also a question arises is whether the mere fact that a supplier of service has to deal with or interact with the customers of the client, the company becomes an intermediary? In case of service supplier dealing with supplier of services or supplier of goods, most often three parties are present. Simply because there are three parties involved in an arrangement, is the service necessarily to be interpreted as one supplied by an intermediary? Does such an interpretation amount to mockery of law in the writer’s view or something else? Nevertheless, it certainly is capable of causing irreversible hardship mainly to ‘settled’ cases of exports under service tax regime as a host of refund claims filed by many assessees are being questioned on the ground of being an intermediary.

Though the ruling of Authority for Advance Ruling is binding only in respect of applicant, due consideration is required to be granted to the fact that Authority of Advance Ruling under service tax was ruled under the chair of a retired Supreme Court judge. In this context it is relevant to note what was held by Hon. Supreme Court in Columbia Sports Wear Co. vs. Director of Income Tax 2012 (283) ELT 321 (SC) wherein inter alia Hon. Supreme Court held that “it does not mean that a principle of law laid down in the case will not be followed in future.” The services of executory nature performed by outsourced entities are different and far more detailed in terms of instructions and guidelines outlined by the receiver and would assume a much larger canvas than that played by the person acting as a link or a bridge between the supplier and the receiver. To perceive a person supplying service on his own account is generally possible in cases where scope of work is defined well providing precise details of the tasks to be performed and which is way different from a person merely arranging or facilitating a supply of goods, services or securities between two or more persons though at times there is a thin line of difference between an intermediary arranging supply of goods or services from a person supplying services by performing multiple tasks in relation to marketing of goods or service products and hence such situations would remain litigious.

A. INTRODUCTION

1. Business restructuring and reorganisation have seen increasing frequency over the last several years. Businessmen, business-houses and investors have been cherry picking viable businesses as well as start-ups offering long-term potential. Surprisingly though, while the entire world economy is reeling under the COVID-19 pandemic, a lot of businesses have been storming the mergers and acquisitions space during these unprecedented times.

2. As organizations seek to sustain earnings or even continue to increase earnings through managing costs, as global competition continues to intensify, investors and businesses are demanding higher revenues from their top-line products as a way to further increase shareholder value. Therefore, reasons vary from business downturn, achieving economies of scale, establishing marketing leadership, ring fencing against predators, diversification and expansion, etc. or even exiting from non-core businesses or activities.

3. These objectives are sought to be achieved through business restructuring or reorganization. This may involve complex restructuring such as amalgamation, mergers or demergers as well as hive off or transfer of business or dilution of shareholding through sale of shares.

B. HISTORICAL BACKGROUND UNDER INDIRECT TAX LAWS

4. Transfer of business, amalgamation, mergers or demergers have also raised debates and disputes regarding taxation thereof. This was particularly so under the provisions of the earlier State sales tax and value added tax (VAT) laws across India.

5. The fundamental dispute which arose under the sales tax laws was, whether transfer of business as a going concern was liable to tax. It was argued that, in transactions of transfer of business, be it by a business transfer agreement or a scheme of amalgamation, merger or demerger, the assets of a business entity stand transferred to the transferee, that is, the purchaser of the business, the amalgamated, merged or the resultant entity. Therefore, sales tax was demanded on the assets which stood transferred under such arrangements. The matter was settled when Courts held that in such arrangements, there is no contract for sale of goods, and also that business is not ‘goods’.

6. Once it was held that business is not goods, questions arose whether a transaction under a Business Transfer Agreement or also under a Scheme of Amalgamation, Merger or Demerger actually resulted in transfer of a ‘Business’ as a ‘Going Concern’. This was dependent on the facts of each case and it was came to be concluded that, typically transfer of business as a going concern requires transfer of business in its entirety, as a whole including all assets, liabilities, rights, obligations, contracts, employees, etc. The transfer should be such that it enables the purchaser or the transferee to carry on or continue the business without interruption immediately upon the transfer. Exclusion of certain assets or few liabilities should not militate against there being a transfer of business. Moreover, it was concluded that transfer of business would also include transfer of an independent part of the business, such as a business division or a distinct line of business, one of the many factories, independent support units, etc.

7. Therefore, it was held that transfer of business would not attract liability for payment of sales tax or VAT. Courts further held that, in any event, such a transfer is normally not ‘in the course of business’ which was a pre-requisite for making a person liable to pay sales tax or VAT. Therefore, transfer of business could not be taxed under the State sales tax or VAT laws.

8. Several States provided that transfer of business would not be a transaction liable to sales tax or VAT. This settled the proposition regarding taxability of transfer of business under the State sales tax or VAT laws. On the other hand, an exemption was also granted under the provisions of the service tax law, under Chapter V of the Finance Act, 1994. Vide entry 37 in Mega Notification No. 25/2012-ST dated 20 June 2012, ‘Services by way of transfer of a going concern, as a whole or an independent part thereof’ was exempted from payment service tax.

9. One of the other areas of dispute was regarding the price or the consideration paid for the transfer of business. Generally, the consideration is paid in the form of cash or issuance of shares in the business of the transferee. In accordance with the practice and requirements under the Income Tax Act, 1961, specifically under section 50B thereof, in relation to slump sale, it was generally accepted that transfer of business should be for a lump sum consideration. It was then argued that in cases where values were assigned to the various assets and liabilities of the business in order to determine the consideration payable for the transfer of the business, the transfer no longer qualifies as a slump sale or transfer of business and should be treated as an itemized or piecemeal sale of assets of the business. Authorities governing the State sales tax or VAT laws also adopted this argument and the provisions of the agreement and intention of the parties were not considered to be a factor having a bearing on the issue.

10. While these were the aspects being debated under the sales tax and VAT laws, fresh controversy arose in cases of amalgamations, mergers and demergers from an anterior date. The question was regarding the treatment of inter-se transaction between the amalgamating companies or between various divisions of the demerging company between the appointed date and the effective date. In the case of amalgamations from an anterior date, claims for refund were filed for taxes paid on inter-se transactions between the entities between appointed date and the effective date. Courts were pleased to grant the refunds on the ground that, amalgamation from an anterior date converted transactions of sales into inter-unit transfers or stock transfers which did not invite levy of sales tax or VAT.

11. To overcome the requirement to grant refunds, some States amended their sales tax and VAT laws to provide that in the case of amalgamations, , the entities shall be deemed to be distinct entities upto the order of the High Court or the date on which the order was filed with the Registrar of Companies in accordance with the requirements of the Companies Act. This mitigated the requirement to refund taxes paid on inter-se transactions between the amalgamating companies.

12. However, while States sought to mitigate their liability for granting refunds, no provision was made in respect of demergers from an anterior date, where potentially, inter-unit transfer or stock transfer would stand converted into sales in view of the demerger or hive off. This resulted in a fresh controversy and demands for taxes in the case of demergers.

13. Refer Annexure for decisions of Courts enunciating the principles and conclusions on the matters discussed above.

14. With the above background, it will be desirable to examine whether the Goods and Service Tax Law (GST law) addresses the controversies which had arisen in the erstwhile indirect tax regime. The concepts and principles in relation to ‘business’ or ‘going concern’ have not been discussed herein, as the focus is on the liability, if any, under the GST law. For the sake of brevity, the different kinds of arrangements, namely, transfer of business under a business transfer agreement (BTA), amalgamations, mergers and demergers have been referred to as ‘transfer of business’ though each are distinct and have their own nuances.

C. GST IMPLICATIONS ON TRANSFER OF BUSINESS

15. GST is levied on supply of goods or services or both. The scope of ‘supply’ is provided in section 7 of the Central Goods and Service Tax Act, 2017 (CGST Act). Section 7(1)(a) states that supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Therefore, the pre-requisites of a transaction of ‘supply’ are;

(a) existence of ‘goods’ or ‘services’ or ‘both’, which is subject matter of the supply;

(b) supply in the nature of or similar to sale, transfer, barter, exchange, licence, lease, etc.

(c) between two persons;

(d) for a consideration;

(e) in the course or furtherance of business of the person making such transfer.

16. Therefore, it needs to be examined whether transfer of business satisfies all the criteria specified under section 7(1)(a) of the CGST Act.

17. As discussed above, in the case of transfer of business, there is an agreement to transfer a business as a whole, which is a conglomerate. There is no contract or bargain between the parties to transfer the individual assets, liabilities, entitlements, obligations, employees, etc. Business, as a conglomerate, by itself is not goods as already held by the Courts under the erstwhile sales tax laws. This conclusion will apply with equal force under the GST law also. However, the definition of ‘services’ under the GST laws will be relevant. Under section 2(102), ‘services’ are defined as ‘anything other than goods’.

18. Once it is concluded that business is not goods, by virtue of the definition under the GST law, transfer of business would be treated as supply of services. Having treated transfer of business as a service, it must still be recognized that there is no supply of the individual components of the business that is the assets, liabilities, etc. Therefore, there would be a transfer of the business as a whole, for which the consideration would be the price paid or issuance of shares.

19. However at this juncture, it is pertinent to refer to an important criteria in the scope of supply, i.e., such supply should be in the course or furtherance of business. The decision of the Courts should support the contention that transfer of a business is not in the course or furtherance of business and therefore it does not fall under the main clause of meaning of the term ‘supply’ under section 7(1)(a) of the CGST Act. It may be noted that ‘business’ is defined under section 2(17) of the CGST Act and includes supply of goods or services in connection with commencement or closure of business. However, it is contended that, in the case of transfer of business as a going concern, the business is not closed but is transferred. Moreover, the transfer of the business is not in connection with closure of business but the business itself is transferred (supplied). Therefore, arguably transfer of business should not be subject to the levy of GST. However, this will have to be tested before the Courts.

20. Considering the potential for debate, a specific exemption has been provided vide Entry No.2 of Notification No. 12/2017-Central Tax (Rate) dated 28 June, 2017, which exempts ‘Services by way of transfer of a going concern, as a whole or an independent part thereof’. Therefore, transfer of business would, in any event not be liable to GST. As is evident, the exemption applies not only to transfer of business as a whole but also to an independent part thereof. The phrase ‘going concern’ signifies that a business for transfer should be in a conglomerate comprising of all elements of the business which are required to continue operation of the business independently by the transferee without any interruption. This would, therefore, include all assets, tangible or intangible, contracts, customers, resources and stocks (raw materials, semi-finished goods and finished goods), employees as well as liabilities and obligations including sales contracts, orders, etc.

D. ENTRIES OF SCHEDULES I AND II OF THE CGST ACT

21. The next question that arises is regarding the applicability of entries mentioned in Schedules I and II of the CGST Act which provide for tax on transfer of business assets.

22. Entry 1 of Schedule I specifies that ‘Permanent transfer or disposal of business assets where Input Tax Credit has been availed on such assets’ shall be treated as a supply even when made without consideration. Therefore, a doubt could arise whether there could be a liability for payment of GST on assets which are transferred as part of transfer of business.

23. The answer should be in the negative for obvious reasons. Schedule I of the CGST Act is specified under clause (c) of sub-section (1) of Section 7 of the CGST Act. In terms of the said clause (c) of section 7(1), activities specified in Schedule I would be liable to tax even in the absence of a consideration. However, as discussed above, transfer of business is a service which takes place for a consideration and therefore, already covered under sub-section (1)(a) of Section 7, although exempt from payment of tax.

24. The transfer of business once covered under section 7(1)(a) of the CGST Act cannot now be considered as supply under section 7(1)(c) read with Schedule I. Therefore, Entry 1 of Schedule I of the CGST Act will have no application in the case of transfer of business.

25. Further, Schedule II of the CGST Act provides the classification of supplies as that of ‘supply of goods’ or ‘supply of services’. The said Schedule II is specified under section 7(1A) of the CGST Act and assists in classification of transactions which otherwise qualify as supply under section 7(1) of the CGST Act. The following clauses in Para 4 of Schedule II refer to transfer of assets –

4. Transfer of business assets,-

(a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person;

(b) …….;

(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless,-

(i) the business is transferred as a going concern to another person; or

(ii) the business is carried on by a personal representative who is deemed to be a taxable person.

26. Clause (a) of Para 4 refers to transfer or disposal of assets such that no longer forms part of the assets of the business. In such a case, the transfer or disposal of the assets shall be treated as supply of goods. From a careful reading, it will be evident that the entry envisages transfer or disposal of some of the business assets and continuity or use of the other remaining ones as part of or in the course of business. Therefore, this clause envisages and contemplates continuity of the business. Accordingly, transfer of business which results in transfer or disposal of all of the assets of business and discontinuation thereof by the transferor is not envisaged under this clause. Therefore, clause (a) of Para 4 of Schedule II has no application in such case. This will also be evident from the fact that clause (c) of Para 4 covers transfer or discontinuation of business.

27. Clause (c) of Para 4 considers transfer or transmission of business. However, the said entry does not apply when the business is transferred to another person as a going concern.

28. Therefore, entries of Schedules I and II of the CGST Act will have no application in the case of transfer of business.

E. GST IMPLICATION IN CASE OF ITEMIZED / PIECEMEAL SALE

29. What would be the implications if it is eventually held that, the arrangement between two parties does not constitute transfer of business or transfer of business as a going concern?

30. As discussed above, business is an amalgam or conglomerate of various assets and liabilities comprised therein. The claim for exemption may be sought to be denied on the ground that the business being transferred is not a ‘going concern’ and, therefore, does not qualify for exemption under Entry 2 of Notification No. 12/2017-Central Tax (Rate) dated 28 June, 2017. Alternatively, it could be claimed that arrangement between the parties does not constitute a transfer of business as a whole.

31. If a transaction is sought to be brought to tax on the ground that the business is not a going concern, the fact remains that it is a business and what is transferred is an amalgam or conglomeration of the various elements thereof. As discussed above, the argument in such event could be that such a supply of a business is not ‘in the course or furtherance of business’ and therefore, cannot be brought to tax. However, if it is eventually held that taxes are payable thereon, the transaction being supply of services, will be taxed at the residual rate of 18 percent under Entry 35 of the Notification No.11/2017-Central Tax (Rate) dated 28 June, 2017.

32. The other situation could be that there is no sale of business, as a whole or an independent part. That is, the transaction is nothing but an itemised or piecemeal sale or transfer of the assets of the business. Therefore, GST shall be payable in case of such itemized or piecemeal sale at the rate applicable to the respective goods or services. It must be borne in mind that the assets of the business may be tangible as well as intangible assets, rights, may include actionable claims as well as cash and balances of receivables, which will be neither goods nor services.

33. Itemised or piecemeal sale will, therefore, be subject to GST as any other supply including requirements of Section 18(6) of the CGST Act read with Rule 44(6) of the Central Goods and Service Tax Rules, 2017 (CGST Rules) as well as entries of Schedule II shall apply.

F. COMPLIANCES AND OTHER OBLIGATIONS UNDER THE GST LAW

34. Certain procedural aspects which every registered person would be required to comply in the case of transfer of business may be examined, It should be borne in mind that these compliances will have to be undertaken separately in each of the States where the transferor conducts or is engaged in business.

35. APPLICATION FOR REGISTRATION AND CANCELLATION OF EXISTING REGISTRATION UNDER GST

35.1. Section 29(1) of the CGST Act provides that when the business is transferred for any reason or amalgamated or demerged, etc. the certificate of registration shall be cancelled. For this purpose, an application for cancellation will be required to be filed in accordance with the provisions of Rule 20 of the CGST Rules within 30 days of the occurrence of the event, warrantying the cancellation. This provisions covers transfer of business under a business transfer agreement as well as amalgamation, merger or demerger under an order of the Court or Tribunal.

35.2. Transfer of Business under a Business Transfer Agreement

(i) Section 22(3) of the CGST Act provides where a business carried on by a registered person is transferred as a going concern, the transferee will be required to obtain registration from the date of such transfer. This provision covers transactions of transfer of business under a business transfer agreement only and not amalgamation, mergers or demergers under an order of the Court or Tribunal.

(ii) The implication of this provision read with section 29(1) will be that the effective date of cancellation of registration of the transferor and the grant of registration of the transferee will be the same date, ensuring continuity of the registration in respect of the business. The transferee will, therefore, be entitled to continue the business with immediate effect without any interruption or pause therein.

(iii) Similarly, section 85(2) provides that the transferee of the business shall be liable to pay tax on the supply of goods or services made from the date of effect of the transfer and shall, if already registered, apply for amendment to the certificate of registration.

35.3. Amalgamation, Merger or Demerger

(i) Section 22(4) of the CGST Act provides that in the case of transfer pursuant to sanction of a scheme or an arrangement for amalgamation or demerger of two or more companies pursuant to an order of a High Court or Tribunal, the transferee shall be liable to be registered and obtain a fresh registration, with effect from the date on which the Registrar of Companies issues a certificate of incorporation giving effect to such order of the High Court or Tribunal.

(ii) On the other hand, Section 87(2) of the CGST Act provides that in the case of amalgamation or merger pursuant to the order of the Court or Tribunal where the merger has to take effect from an anterior date (called the ‘appointed date’), the two companies shall be deemed to be distinct companies from the appointed date upto the date of the order of the Court or Tribunal and the Certificate of Registration of the said companies shall be cancelled with effect from the date of the order of the Court or Tribunal.

(iii) The above provisions highlight the dichotomy. In terms of section 87(2) and 29(1), the certificate of registration of the transferor is required to be cancelled with effect from the date of order of the Court or Tribunal whereas the transferee, amalgamated, demerged or the resultant company is entitled to obtain registration only with effect from the date when the Registrar of Companies issues the certificate of incorporation giving effect of such order of the High Court or Tribunal. Therefore, there could be a time lag between the cancellation of registration of the amalgamating or demerging company and the new registration of the amalgamated, demerged or the resultant company.

36. JOINT AND SEVERAL LIABILITY IN THE CASE OF TRANSFER OF BUSINESS UNDER A BUSINESS TRANSFER AGREEMENT

36.1. Section 85(1) of the CGST Act provides that in case of transfer of business, the liability of the transferor and the transferee shall be jointly and severally liable for any demand of tax, interest and penalty upto the date of transfer. Therefore, the transferee of the business shall become liable of the tax dues in respect of transactions prior to the date of the transfer.

36.2. As stated above, section 85(2) provides that the transferee will be liable to pay tax on the supply of goods or services from the date of transfer. Therefore, it should be clear that the creation of the joint and several liability under section 85(1) is for the purpose of recovery of demands only. All the proceedings, including audits, enquiries, assessments, appeals, etc. will be required to be undertaken in the name of the transferor. Recovery of the demands of tax, interest and penalty from the transferee can be made only when it is not possible to recover the demands from the transferor.

36.3. It may be noted that the provisions of section 85 will be applicable only in the case of transfer of business under a business transfer agreement and not in the case of amalgamation, merger or demerger under an order of the Court or Tribunal.

37. BALANCE OF UNUTILISED INPUT TAX CREDIT OF THE TRANFEROR

37.1. It is pertinent to bear in mind that the transfer of business, which is considered as ‘supply of services’ and is specifically exempted under Entry No.2 of Notification No. 12/2017-Central Tax (Rate) dated 28 June, 2017 or not liable to tax as not being in the course of business, will also be required to be considered for the purposes of reversal of common input tax credit in accordance with Section 17 (2) of the CGST Act read with Rule 42 of the CGST Rules. Moreover, supply of any goods or services used directly or exclusively for effecting such transfer shall not be available by way of input tax credit. Accordingly, the transferor of the business will be required to reverse the input tax credit in respect of the supplies attributable for effecting the transfer of the business.

37.2. Further, under section 18(3) of the CGST Act, the transferor of business shall be allowed to transfer balance of unutilized input tax credit lying in its electronic credit ledger to the transferee of business. However, such transfer of input tax credit is subject to the condition that the liabilities of the business are also transferred along with the business.

37.3. Also, Rule 41(1) of the CGST Rules prescribes that the transferor of the business is required to furnish complete details of sale, amalgamation, merger, demerger, etc., along with a request for transfer of unutilized input tax credit to the transferee. The details and request are required to be furnished in Form ITC-02 and submitted electronically on the common portal, that is, the GST portal.

37.4. Proviso to Rule 41(1) states that in case of demerger, input tax credit shall be transferred to the resulting company in the ratio of the value of assets of the new units as specified in the scheme of demerger. Explanation to the said sub-rule states that ‘value of assets’ means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.

37.5. In this context, the question arises regarding the phrase ‘value of assets’. While the proviso to Rule 41(1) specifies that the value of the assets will have to be as per the scheme of demerger, the Explanation refers to ‘value of assets’ of the entire business. A rational comparison will have to be on like basis, that is, for the purpose of the determination of the ratio for input tax credit to be transferred to the transferee, the basis of value of the assets will have to be identical. Therefore, where the value of the assets in the Scheme of Demerger is at book-value, the ratio will have to be determined on the basis of book values of all assets only.

37.6. The other issue to be borne in mind is that locations of a business entity having separate registrations are treated as ‘distinct persons’ under section 25(4) and (5) of the CGST Act and under Explanation to section 8 of the Integrated Goods and Services Tax Act, 2017. Therefore, the transfer of business will take place at all the locations where the transferor has been conducting its business. Accordingly, the transfer of the balance of unutilised input tax credit will require filing of separate details in Form ITC-02 in each of the State where the business exists.

37.7. Moreover, from reading of Section 18(3), 25(4) and (5) of the CGST Act and Rule 41 of CGST Rules, it would be seen that the rule refers to the business of a registered person and not the business of the Company. Therefore, in the case of demerger, the computation of the amount input tax credit eligible for transfer will have to be undertaken and determined separately for each State. Therefore, the value of assets forming part of the demerged business as well as the value of the assets of the entire business will have to be considered separately for every registration.

37.8. Rule 41(3) of the CGST Rules provides that the transferor shall also submit a copy of a certificate issued by a practicing Chartered Account or Cost Accountant certifying that the sale, merger, demerger, amalgamation, or transfer of business has been done with a specific provision for transfer of liabilities.

37.9. Upon filing of the application in Form ITC-02 by the transferor, the transferee of the business is required to accept the details so furnished by the transferor on the common portal and, upon such acceptance, the unutilized credit specified in FORM GST ITC-02 shall be credited to his electronic credit ledger of the transferee.

37.10. Moreover it is important to note that section 18(3) states that the registered person shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger. Rule 41(1) of CGST Rules provides for furnishing of details of the transfer of business in Form ITC-02 with a request for transfer of the balance of unutilised input tax credit. Therefore, even in case there is no un-utilized balance lying in electronic credit ledger, the transferor company is required to furnish the details of the transfer of business by filing Form ITC-02. Moreover, use of the words ‘shall be allowed’ in section 18(3) indicates that the transfer of the unutilised balance is optional and the transferor may retain the unutilised balance of input tax credit for future utilisation.

37.11. It is also important to note that, these provisions only pertain to transfer of unutilized balance of input tax credit. These provisions are not applicable to unutilized balance lying in electronic cash ledger or for transfer of any other amounts.

38. INTER-SE TRANSACTIONS BETWEEN AMALGAMATING COMPANIES DURING THE INTERVENING PERIOD

38.1. Many times, amalgamation or merger of Companies may take effect from a retrospective date (called the ‘appointed date’). Therefore, the amalgamating companies will continue to be distinct legal entities upto the date of order of the High Court or Tribunal and, in fact, upto the filing of the order with the Registrar of Companies for giving effect to the order.

38.2. In the interim, there may be transactions of supplies of goods or services between the amalgamating companies during this period, that is, ‘inter-se’ transactions during the ‘intervening period’. ‘Intervening Period’ refers to the period between the appointed date (i.e., date from which business of the transferor vests with the transferee) and the effective date (i.e. when the Court order is submitted to the Registrar of Companies, in cases involving transfer of business through a Court scheme).

38.3. In such cases of an amalgamation or merger with retrospective effect, two companies would be considered as a single entity from the appointed date and thus, any supplies of goods and services between the appointed date and effective date would be considered as transaction with oneself. Under the GST Laws, transactions with oneself shall not be liable to GST as there will be no supply.

38.4. However practically, until the Court order is received and submitted to the Registrar of Companies, both the Companies would treat themselves as distinct legal entities and charge and pay tax on the inter-se transactions.

38.5. The question which has arisen was about the treatment of the inter-se transactions during the intervening period. Should the transactions be unwound and reclassified as inter-unit transactions, which may or may not be liable to tax? Should the taxes paid, if any, be refundable? Should the input tax credits be reversed? Similar issues and questions had also arisen under the sales tax and VAT regimes.

38.6. There are two schools of thought on this issue. According to the first school of thought, amalgamation or merger from a retrospective date results in nullifying all inter-se transactions and converting all transactions as supplies to self. Therefore, any taxes paid (which were otherwise not payable on inter-unit or intra-entity transactions) should be reversed and should be claimed by way of refund. This amounts to unwinding of the transactions, amending the returns filed (where permitted) and claiming the refund of the excess taxes. A corollary would be that input tax credits claimed will also be required to be reversed.

38.7. According to the other interpretation, amalgamation or merger from a retrospective effect has no implications on transactions during the intervening period, be it with third parties or inter-se between the amalgamating companies. Such an amalgamation only requires that the results of the amalgamating company during the intervening period be recognised, recorded and accounted as part of the results of the amalgamated or merged entity. However, the individual transactions do not become the transactions of the amalgamated or merged entity. This is supported by the fact that in such cases, the amalgamating companies do not record the individual transactions which take place during the intervening period in the books of account of the amalgamated or merged entity. Further, documentation of the transactions which take place during the intervening period are not amended and reissued. For example, the invoices raised on third party customers are not revised or reissued in the name of the amalgamated or merged entity, similarly despatch documents, e-waybills, etc. are not amended or reissued, the claim of input tax credit originally availed during the intervening period is not reversed by the amalgamating company and re-availed by the amalgamated company and so on. Only the assets, liabilities and results of the business are recorded in the books of account of the amalgamated or merged entity.

38.8. The above treatment is in accordance with the earlier Accounting Standard 14 which required accounting of amalgamations under the Pooling of Interest Method, that is, at the existing carrying amounts of the transferor or the Purchase Method, that is, by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. Similarly, the balance of the Profit and Loss Account appearing in the financial statements of the transferor is aggregated with the corresponding balance appearing in the financial statements of the transferee company or transferred to the General Reserve. Under Ind AS 103, the accounting is basis the Acquisition Method, where the acquirer measures identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. Therefore, it is argued that the amalgamation or merger from a retrospective date will have not implications on inter-se transactions during the intervening period.

38.9. Some of the States, recognising potential claims for refunds and the decision of Courts, incorporated provisions under their respective State Sales Tax laws and VAT laws to provide that in the case of amalgamation or merger from a retrospective date, the companies will be deemed to be distinct entities upto the date of the order of the High Court or Tribunal or upto the date of filing of the order with the Registrar of Companies. It was further provided that all inter-se transactions will be liable to tax.

38.10. Similar provision has also been made under Section 87 of the CGST Act to provide that in such cases, the companies will be deemed to be distinct companies upto the date of the order of the Court or Tribunal and all inter-se transactions will be included in the turnover of supplies and tax paid thereon.

39. INTER-UNIT OR INTRA-ENTITY ACTIVITIES DURING THE INTERVENING PERIOD IN THE CASE OF DEMERGER

39.1. It is pertinent to note that section 87 of the CGST Act is applicable only in the case of amalgamation or merger of companies. Demerger has not been specifically provided thereunder. Therefore, the question is about the treatment in the case of demerger of companies. In such cases, will demerger from a retrospective date have the effect of converting inter-unit transfers or intra-entity activities into supplies requiring payment of GST? Will there be liability on account of deemed supplies between the entity and the demerged company by invoking clause 2 of Schedule I? Will there be liability for payment of interest on account of a creation of retrospective liability? What will be the fate of input tax credit otherwise available to a recipient?

39.2. The answer will be determined basis one of the two schools of thought discussed above, which will eventually hold the field. The omission of ‘demerger’ in section 87 of the CGST Act is evidently by design and not an oversight. The GST authorities will certainly invoke the provisions of section 87 to raise demands on inter-se activities in the case of demergers with retrospective effect. An important criteria before a demand for payment of GST can be raised will be the existence of ‘consideration’, though this will not be applicable in the case of deemed supplies between related persons or distinct persons. The DDQ Order of the Maharashtra Sales Tax department in the case of UltraTech Cemco Ltd. may be referred.

39.3. Therefore, the argument that amalgamation or merger from a retrospective date cannot unwind or reclassify any inter-se transactions during the intervening period should also apply with equal force to demergers with a retrospective effect. Such demerger cannot be said to create or give rise to inter-se supplies, when there were none.

39.4. This interpretation should find support and, therefore, recognition, from provisions of section 22(4), which provides that the transferee shall be liable to be registered and obtain a fresh registration, with effect from the date on which the Registrar of Companies issues a certificate of incorporation giving effect to such order of the High Court or Tribunal. Therefore, in any case, inter-unit or intra-entity activities undertaken by or emanating from the demerged business is not liable. The question, and therefore, the debate will raise in the case of inter-unit and intra-entity activities undertaken by the on-going business units of the demerging entity,

40. FILING OF FINAL RETURN IN FORM GSTR-10, ANNUAL RETURN (GSTR 9) AND RECONCILIATION STATEMENT (GSTR 9C)

40.1. In view of section 45 of the CGST Act, the transferor of business whose registration is cancelled after the transfer will be required to furnish a final return within 3 months from the date of cancellation or date of order of cancellation, whichever is later. Under Rule 81 of the CGST Rules, the Final return is required to be furnished electronically in Form GSTR -10 through the Common Portal.

40.2. Similarly, the transferor of the business as well as the transferee will be required to comply with the requirements of Section 44(1) of the CGST Act which requires every registered person to furnish an annual return for every financial year in Form GSTR 9 on or before 31st December following the financial year to which such annual return pertains. Also section 35(5) requires registered persons to get their accounts audited and submit an audited Reconciliation Statement when the turnover exceeds the prescribed limit.

40.3. Therefore, for the period when the registrations of the transferor and the transferee were effective, and depending upon the turnover of the respective entities, there will be requirement to file the Annual Return in Form GST 9 and the audited Reconciliation Statement in Form GSTR 9C by the transferor as well as by the transferee of the business.

G. OPEN AREAS REQUIRING ATTENTION

41. There are various areas which will require attention of the transferee post transfer of business. Some require guidance, clarification or appropriate amendments to the GST law.

42. Reversal of ITC in case of non-payment to the supplier of goods / services within 180 days

42.1. Second proviso to Section 16 (2) of the CGST Act read with Rule 37 of the CGST Rules requires that where the recipient of goods or services fails to pay the amount towards the value of supply along with tax payable thereon to the supplier within 180 days from the date of invoice, the recipient of supply shall be required to reverse the Input Tax Credit along with interest thereon.

42.2. Further, the Third proviso to Section 16(2) of the CGST Act read with Rule 37(4) also provides that, the recipient shall be entitled to avail of the credit of input tax once the amount towards the value of supply of goods or services along with tax payable thereon is paid to the supplier.

42.3. Therefore, the following situations may arise:

(i) Requirement of reversal of input tax credit claimed, after the transfer of business;

(ii) Eligibility to re-claim the input tax credit already reversed prior to the transfer of business.

42.4. In the above situations, the reversal or re-claim of the input tax credit should be required to be undertaken by the transferee of the business. While, this would be undisputed in the case of amalgamation, merger or demerger by an order of the Court of Tribunal, disputes may arise in the case of transfer of business under a business transfer agreement. Section 85 of the CGST Act creates joint and several liability of the transferor and transferee in respect of demands of tax, interest and penalty in respect of periods prior to the date of transfer. However, there is no specific provision creating any other obligations against or granting any rights in favour of the transferee in respect of periods prior to the date of transfer. However, such obligations and rights should be recognised as part of the principle of ‘going concern’ where the transferee steps into the shoes of the transferor and continues the business. Therefore, the obligations and rights of the transferor of the business arising after the date of transfer should also fall upon and be available to the transferee.

42.5. Therefore, in the above situations, the transferee of the business:

(i) Should be required to reverse the input tax credit claimed prior to the date of transfer, where the time limit of 180 days under Second proviso to Section 16(2) expires after the transfer;

(ii) Should be entitled to claim the re-claim the input tax credit under Third Proviso to Section 16(2) read with Rule 37(4) as and when the payment for the goods or services is made to the supplier.

43. Invoices appearing in the GSTR 2A of the Transferor Company after filing of Form ITC-02

43.1. Under Rule 36(4) of the CGST Rules, every registered person is entitled to avail ITC only to the extent of invoices appearing in its GSTR 2A. The Rule also further allows the registered person to avail Input tax credit in respect of the invoices not appearing in the GSTR 2A upto 10 percent of the eligible ITC appearing in the GSTR 2A.

43.2. GSTR-2A is a dynamic report available from the common portal and is, therefore, subject to change. The transferor of the business may be faced with the following situations:

(i) Invoices in respect of which input tax credit was not availed by the transferor in view of the restrictions under Rule 36(4);

(ii) Invoices reported or amended by suppliers after the date of filing of details in Form ITC-02 which appears in the GSTR-2A of the transferor after the date of transfer and cancellation of registration.

43.3. As stated above, the rights of the transferee of business should be recognised in the case of ‘going concern’. However, considering the mandate of the Rule 36(4), the claim for input tax credit by the transferee will require that the transactions pertaining to periods upto the date of transfer of the business are carried over to the GSTR-2A of the transferee so as to enable the transferee to avail the same and comply with the provisions of the GST law.

43.4. At present, the GST Portal does not recognise the rights of the transferee and does not enable carry over or re-routing of the transactions relating to the business transferred to the registration of the transferee. Therefore, claim of such input tax credit will prove to be a challenge and will result in disputes and litigation.

44. Adjustment of tax paid on Advances received by the Transferor in respect of which services are not supplied upto the date of transfer of the business

44.1. On the date of transfer or the date of order of the Court or Tribunal, the transferor may have unadjusted advances for supply of services to be made, on which tax is already discharged by the transferor.

44.2. The following situations may arise in such cases:

(i) The services are rendered by the transferee after the transfer of the business;

(ii) The orders are cancelled and the transferee is required to refund the advances.

44.3. Therefore, in both the above situations, as discussed above, the transferee of the business should be entitled to adjust the taxes paid by the transferor on the advances received. However, there is no facility to report or record such instances on the common portal. Suitable facility will have to be provided for reporting such advances as part of Form ITC-02 so that the same may be adjusted by the transferee of the business with suitable reconciliation.

45. Issue of a Credit Notes or Debit Notes by the Transferee for Supplies made by the Transferor

45.1. After the effective date of transfer, all the on-going contracts including contractual rights and obligations pertaining to the transferor is transferred to the transferee.

45.2. Thus, there may be a possibility that, the transferee may be required to issue Credit Notes or raise Debit Notes towards the supplies of goods or services for which an invoice was already issued by the transferor before the transfer of business.

45.3. So far, the common portal did not permit the registered person to report any Credit Notes or Debit Notes without mentioning the details of the corresponding Tax Invoices to which such Credit Notes or Debit Notes relate. Therefore, since the Tax Invoices were reported by the transferor, the GST portal did not enable the transferee to report the Credit Notes or Debit Notes issued after the date of transfer.

45.4. This issue has been resolved recently by the common portal by de-linking the Credit Notes and Debit Notes from the original Tax Invoices. Therefore, to this extent, this issue has now been resolved, albeit from a prospective date.

46. Amendments to transactions reported in GSTR-1 after cancellation of registration

46.1. Transactions reported in the returns in Form GSTR-1 are eligible for amendment in the subsequent returns. However, in cases where the registration of the transferor or the amalgamating entity, no returns are required to be filed for subsequent periods.

46.2. There is no provision under the GST law or on the common portal to amend transactions reported in the preceding financial periods although no returns are require to be filed. Suitable facility will have to be provided for making amending the transactions reported in the returns relating to the period prior to the transfer of business, so that the input tax credit of the recipient of the goods or services is protected.

47. Proceedings relating to the Transferor of the business

47.1. In the case of transfer of business under a Business Transfer Agreement, the transferor and the transferee continue to exist as separate persons even after the transfer of the business. Therefore, all proceedings under the GST law in respect of the periods prior to the transfer will be taken up against the transferor of business. The CGST Act already creates a joint and several liability of the transferor and the transferee in respect of demands of tax, interest and penalty for the periods upto the date of transfer. Therefore, all proceedings, namely, audits, assessments, show cause notices, adjudication, appeals, etc. will be taken up against and in the name of the transferor. The transferee of the business will be called upon to discharge the demand of tax, interest or penalty only in the event that the transferor fails to do so.

47.2. However, the implications are different in the case of transfer under a scheme of amalgamation, merger or demerger. The scheme of amalgamation, merger or demerger usually provides that all claims, suits, liabilities of whatever nature pending in the name of the transferor company shall be continued in the name of the transferee company and the transferee company will be responsible for the same. Moreover, in the case of amalgamation or merger, the transferor ceases to exist.

47.3. Therefore, in the case of amalgamation, merger or demerger by an order of the Court or Tribunal, all proceedings in respect of periods prior to the date of amalgamation, merger or demerger will have to be instituted against and in the name of the transferee, that is, the amalgamated, merged or resultant company.

47.4. This has been held by Courts including the Supreme Court in various cases under the provisions Income Tax Act, 1961 and initiation and continuation of assessment proceedings against a non-existent entity has been held to be unsustainable.

47.5. While the GST law does not make any specific provision or prescribe procedures for transfer of proceedings in the case of amalgamation, mergers or demergers, suitable facility will have to be provided for transfer of pending and on-going proceedings as part of Form ITC-02.

H. CONCLUSION

GST laws cover all business and all kinds of business transactions. Transfer of business, whether under business transfer agreements or amalgamation, mergers or demergers are the order of the day and will continue to be the preferred mode of reorganising or restructuring businesses, with a view to sustain the competitive edge in these trying times.

Although the GST laws have made some provisions in relation to transfer of business, there are various areas of debates, potential disputes and the resultant litigation. These issues need to be examined and addressed by the GST Council to ensure that such business reorganisation or restructuring continue to enable the businesses to achieve the desired benefits and do not suffer the burden of GST.

ANNEXURE – PRINCIPLES LAID DOWN BY COURTS

(The case laws are for reference only. Their application to transfer of business under the GST regime should be evaluated with the facts of every case)

1. Sri Ram Sahai v. Commissioner of Sales Tax [1963 14 STC 275 All HC]

‘Business’ is not a movable property and therefore is not covered within the meaning of ‘goods’. Sale proceeds from such sale of business is not to be included in turnover and no tax is payable thereon.

2. Monsanto Chemicals of India (P.) Ltd. v. State of Tamil Nadu [1982 51 STC 278 Mad HC]

It was held that, a person may carry on several lines of business and each line of the business would be a unit of business by itself. If there was a sale of that unit of the business as a whole, no tax is payable on such sale proceeds Alternatively, there was no sale in the course of business as closure of a line of business could not be incidental or ancillary to its carrying on of the business.

3. Deputy Commissioner (C.T.), Coimbatore v. Behanan Thomas [1977 39 STC 325 Mad HC]

Sale of an independent unit or branch by itself is also a sale of a business as a going concern. Such sales proceeds cannot be regarded as proceeds received from sale of goods and can neither be said to be transaction in connection with or incidental or ancillary to such trade or commerce, adventure or concern. Accordingly, such sales proceeds are not exigible to tax.

4. The Deputy Commissioner (C.T.), Coimbatore Division, Coimbatore -2 v. Cheran Transport Corporation Limited [1985 59 STC 95 Mad HC]

Sale proceeds received on transfer of workshop unit to another company will not form part of the taxable turnover and the assesee would not be liable to pay tax on the amount representing the value of articles transferred to another company as a result of the closing down of the workshop.

5. The Deputy Commissioner of Sales Tax (Law) v. Dat Pathe [1985 59 STC 374 Ker HC]

It was held that sale of such 3 out of 4 businesses though carried on under a common certificate of registration and sole proprietorship of the assesse amounts to separate businesses. Sale of each of such business is not liable to tax.

6. State of Tamil Nadu v. Jeewanlal (1929) Ltd. [1993 89 STC 515 Mad HC]

Sale of a unit which is a separate and an independent unit and where no part of the business pertaining to such unit is retained or carried on by the assesse shall not be liable to tax.

7. M/s. Paradise Food Court v. state of Telangana [Writ Petition No. 2167 of 2017 on 18-04-2017]

When a business in transferred in entirety as a going concern, with all the rights and liabilities, (i) there is no sale of any taxable goods and (ii) that even if there is a deemed sale of goods, as understood in common parlance, it does not take place in the course of trade or business. No business can be transferred in the course of trade or business, unless a person is in the very business of buying and selling business houses. Therefore, unless a sale takes place in the course of trade or business, it is not covered by the Act.

Further, it was held that to treat the transfer of business as a sale of goods merely on the ground that all the assets of business are individually mentioned in the Schedule together with their value, is completely contrary to the Statutory prescription.

8. Coromandal Fertilisers Limited v. State of A.P. [1999 112 STC 1 AP HC]

Disposal of entire business as a slump sale is not covered in the course of business even if it involves transfer of certain movables hence it is not covered by the definition of “goods”. It further held, that the transfer of property in goods as an integral part of the agreement to sell is not “in the course of business” for the obvious reason that the seller wants to put an end to its entire business. An activity directed towards the end or termination of business is not a transaction “in the course of business”.

9. Zacharia v. State of Kerala [1977 39 STC 221 Ker HC]

Where liabilities are not transferred but agreed to be settled before the sale of business, it does not mean that business is not sold as a whole. So long as there is nothing to suggest any part of assets were retained by the seller, it cannot be suggested that business was not transferred as a whole.

10. CIT v. Artex Manufacturing Co., [227 ITR 260 (SC)]

Possibility of identification of price attributable to individual items (plant, machinery and dead stock) which are sold as part of slump sale, may not entitle a transaction to be qualified as slump sale. However, in case of slump sale which includes land/building where separate value is assigned to it under the relevant stamp duty legislation, the slump sale will not be adversely affected.

11. Triune Projects Pvt. Ltd v. DCIT [TS-6237-HC-2016(DELHI)]

It was held that, the fact that certain assets of the “undertaking” are left out of the sale transaction because it would cause inconvenience for the purchaser does not mean that the transaction is not a “slump sale”. To expect a purchaser to buy and pay value for defunct or superfluous assets would be against common and commercial sense.

12. Castrol India Ltd. v. State of Tamil Nadu [1999 114 STC 468 Mad HC]

The Court held that, the amalgamation took place from an anterior date and from that date, the transferor company continued only for the benefit of the transferee company. When it had no separate entity (since that anterior date) transfer of goods by the assesse dealer in favour of the transferor company could not be regarded as the sale which could attract Central Sales Tax.

13. Mohan Breweries & Distilleries Limited v. Commercial Tax Officer, Porur Assessment Circle, Madras [1996 103 STC 424 TNTSP]

The Tamil Nadu Taxation Special Tribunal held that, since the order of the Board for Industrial and Financial Reconstruction passed an amalgamation order giving effect from an anterior date, the request of petitioner to adjust the taxes paid by the transferor company on the inter se transactions during the intervening period (i.e. from the appointed date till the date of the order) against the sum payable by the petitioner towards tax and surcharge were in order.

14. Marshall Sons & Co. v. ITO [1997 2 SCC 302]

The Supreme Court held that, in case of an amalgamation from an anterior date, an assessment can be made in the name of the transferee Company taking into account the income of both the transferor and transferee companies.

15. Principal Commissioner of Income Tax v. Maruti Suzuki India Ltd [Order dated 25.07.2019 in Civil Appeal No. 5409 of 2019]

In the present case, despite the fact that the assessing officer was informed of the amalgamating company having ceased to exist as a result of the approved scheme of amalgamation, the jurisdictional notice was issued only in its name. Thus, it was held that, initiating such assessment proceedings in the name of a non-existent company was unsustainable and against the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation.

16. C.I.T., New Delhi v. M/s. Spice Enfotainment Ltd. (Order dated 02.11.2017 in Civil Appeal No. 285 of 2014)

The Supreme Court affirmed the decision of the Hon’ble Delhi High Court in Spice Entertainment v. Commissioner of Service Tax [(2012) 280 ELT 43] which held that, the framing of assessment against a non-existing entity/person goes to the root of the matter which is not a procedural irregularity but a jurisdictional defect as there cannot be any assessment against a “dead person”.

On account of COVID-19 there was complete lockdown w.e.f. 25.03.2020 and all the offices etc. could not work. Therefore, an Ordinance dated 31.03.2020 called “The Taxation and Other Laws (Relaxation of Certain Provision) Ordinance, 2020” was promulgated providing that any action or compliance, due date for which was falling between 20.03.2020 to 29.06.2020, shall be extended to 30.06.2020 or any other date as may be further extended by the Central Government by way of notification. Thereafter, a notification dated 24.06.2020 was issued by the government further extending time limit for certain compliances under the Income Tax Act. A notification dated 29.07.2020 was also issued subsequently by the Central Government further extending time limit for filing return of income for A.Y. 2019-20. In order to validate the Ordinance and above refereed notifications, a Bill called “The Taxation and Other Laws (Relaxation of Certain Provision) Bill, 2020” was introduced in the Parliament. The aforesaid Bill was duly passed by the Parliament and on receiving assent of the President of India on 29.09.2020 it became the Act. Thereafter, notification dated 30.09.2020 has also been issued by the Government further extending time limit for filing return of income of A.Y.2019-20.

As per above referred Ordinance / notifications and the validation Act, as a general rule all the due dates, which are falling during the period 20.03.2020 to 31.12.2020, have been extended to 31.03.2021. In respect of certain compliances extended due date, however, has been restricted to a date prior to 31.03.2021 as has been specifically provided in Validation Act. Now, the extended due dates for respective compliances under various provisions of IT Act are as under: –

Suggestion for CBDT

The Government (CBDT) has been quite considerate in taking cognizance of the position arising out of Covid-19. Necessary notifications have been issued well before time extending the time lines for compliances. Same have provided great relief to assesses and tax practitioners. There are however, following issues which need further attention of CBDT and necessary action in respect thereof: –

1. As per extended dates all audit reports, including tax audit report, are required to be filed by 31.10.2020 and returns of income are to be filed by 30.11.2020. Till now Covid position has not improved satisfactorily. Offices of assesses and of Chartered Accountants are not working regularly and to their full capacity. Therefore, it is not possible to prepare, finalise and file tax audit and other audit reports before 31.12.2020. Hence, it is necessary and desirable that due date for filing all audit report should be extended by 3 months i.e. till 31.01.2021. It may also be stated in this regard that vide Circular No.28/2020 dated 17.08.2020 Ministry of Corporate Affairs has clarified that concerned Registrar of Companies will grant extension upto 3 months i.e. upto 31.12.2020 for holding annual general meetings for approval of accounts for the year ended 31.03.2020. In case accounts are approved by 31.12.2020 it is not possible to file Tax Audit Report by 31.10.2020. Hence, extension upto 31.01.2021 is justified.

2. Due date for filing return of income in the cases of all the assesses should be extended to 31.03.2021.

3. Due date for completing the assessment by the department for A.Y.2019-20 at present, as per the law is 31.03.2021. There is no extension till date in this regard. Due date for issuing notices u/s 143(2) of the Act stands extended up to 31.03.2021 in respect of returns filed by 31.03.2020 and up to 30.09.2021 in respect of returns being filed during the current financial year. Therefore, due date for passing the assessment order needs to be extended till 31.03.2022.

4. As per Vivad se Vishwas Scheme Designated Authority can issue the certificate determining the amount payable within 15 days from receipt of declaration filed by the assessee. As per Validation Act all due dates for compliance by the Authorities falling between 20.03.2020 to 31.12.2020 stands extended to 31.12.2020. Accordingly, Designated Authority can issue certificate in respect of all the applications received up to 16.12.2020 till 31.12.2020. In case certificate is issued by the DA on 31.12.2020, the assessee will not be able to make payment of amount without additional amount before 31.12.2020. Hence, date for making payment by the assessee without additional amount needs to be extended by 15.01.2021, allowing the assessee time of 15 days from receipt of the certificate issued by the Commissioner. Date till when the Scheme will remain in force also needs to be notified. It should be specified till when the assessee can file the declaration. Last date till when the payment can be made under the scheme should also be specified.

1. Cases on search authorisation/ Issue of authorisation held invalid

1.1 In H.L. Sibal v. CIT [1975] 101 ITR 112 (P&H), it was held that power under section 132(1) has to be exercised in an honest manner and search warrants cannot be indiscriminately issued purely as matter of policy. The Commissioner has to record his reasons before issuing search warrant and where there was no information with Commissioner on basis of which he could form requisite belief under section 132(1)(a), (b) or (c) to issue search warrant in respect of search of premises of assessee, warrant issued for conducting aforesaid search and proceedings pending against assessee under section 132(5) were to be quashed. The High Court also observed at page 138 of the ITR, as follows: “The applicability of Section 165, Criminal Procedure Code, to the searches made under Section 132(1) gives an indication that this Section is intended to apply in limited circumstances to persons of a particular bent of mind, who are either not expected to cooperate with the authorities for the production of the relevant books or who are In possession of undisclosed money, bullion and jewellery, etc. Take for instance, a particular assessed who has utilised his undisclosed income in constructing a spacious building His premises cannot be subjected to a search under this Section on this score alone. A search would be authorised only if information is given to the CIT that such a person Is keeping money, bullion, jewellery, etc., in this building or elsewhere. Further, if an assessee has been regularly producing his books of account before the assessing authorities who have been accepting these books as having been maintained in proper course of business, it would be somewhat unjustified use of power on the part of the CIT to issue a search warrant for the production of these books of account unless of course there is information to the effect that he has been keeping some secret account books also. He has to arrive at a decision in the background of the mental make up of an individual or individuals jointly interested in a transaction or a venture. A blanket condemnation of persons of diverse activities unconnected with each other on the odd chance that if their premises are searched some incriminating material might be found is wholly outside the scope of Section 165, Criminal Procedure Code. This power has to be exercised in an honest manner and search warrants cannot be indiscriminately issued purely as a matter of policy.”

1.2 In Dr. Nand Lal Tahiliani v. CIT [1988] 39 Taxman 127 (Allahabad)/[1988] 170 ITR 592 (Allahabad), the Allahabad High Court held that the condition precedent for an action under Section 132 was possession of the Information mentioned in the said Section. If either of the conditions was missing or not adhered to then the authority was precluded from invoking the provisions of Section 132. In order that averment “of information must be in a good faith and not a mere pretence, it was necessary that information in consequence of which it was formed must be valid and linked with the ingredients mentioned in this Section. There must be a rational connection between the information or material and the belief about undisclosed income. While quashing the authorisation which had been issued, the Court referred to the note of satisfaction which had been recorded and observed that the reputation of roaring practice or rumour of charging high rate of fee could not be regarded as tangible material on the basis of which an opinion could be formed as contemplated by Section 132 of the Act. The satisfaction of the authorities under Section 132 may be subjective but it must be arrived at objectively and on material which is available.

1.3 In Balwant Singh and others v. R.D. Shah, Director of Inspection, [1969] 71 ITR 550 (Del.), the Division Bench held that the High Court could not test the adequacy of the grounds leading to the satisfaction which was recorded under Section 132 of the Act. It was, however, observed that the Director of Inspection or the Commissioner ought not to lightly or arbitrarily invade the privacy of a subject. If the grounds on which the belief is founded are non-existent or are irrelevant or are such on which no reasonable person can come to that belief, the exercise of the power would be bad, but short of that, the Court cannot interfere with the belief bona fide arrived at by the Director of Inspection. It is, however, for the Court to examine whether the reasons for the belief have a rational connection or relevant bearing to the formation of the belief. It was further observed, that search authorisation could not be issued merely with a view to making a roving or fishing enquiry, but could be issued only when their existed a good ground for believing that further proceedings may have to be taken.

1.4 In Moti Lal v. Preventive Intelligence Office, 80 ITR 418 (All.), the Division Bench of the Allahabad High Court observed while interpreting the provisions of Section 132, in the language of Justice R.S. Pathak, as follows : “In my opinion the power conferred under Section 132(1) is contemplated in relation to those cases where the precise, location of the article or thing is not known to the Income Tax Department and, therefore, a search must be made for it, and where it will not be ordinarily yielded over by the person having possession of it and, therefore, it is necessary to seize it……I am unable to accept the contention on behalf of the Income Tax Department that Section 132(3) will Include a case where the location of the article or thing is known and where ordinarily the person holding the custody of it will readily deliver it up to Income Tax Department, such article or thing. I think, it requires neither search nor seizure.” The said decision was approved by the Supreme Court in the case of CIT v. Tarsem Kumar, 161 ITR 595 (SC).

1.5 In Jignesh Farshubhai Kakkad v. DIT (Inv) [2003] 132 Taxman 350 (Gujarat)/[2003] 264 ITR 87 (Gujarat), during the course of search in case of members of ‘A’ Group under section 132, the premises of one ‘P’ had been searched by the respondent- authorities and certain sum was found which according to ‘P’ belonged to his firm ‘J’ of which he was a partner after disassociating himself from the ‘A’ Group. The High Court held that from the perusal of the satisfaction note submitted by the respondent No. 2 and the satisfaction recorded by the respondent No. 1, it was clear that there was no justifiable reason for having search under the provisions of section 132 at the residence of the petitioners. The condition precedent referred to in section 132 had not been satisfied. No justifiable reason had been recorded for having search either by respondent No. 2 or by respondent No. 1 regarding his satisfaction. Simply because certain sum was found at the residence of ‘P’ and simply because ‘P’ was one of the partners of ‘J’, there was no justifiable reason to issue authorization by respondent No. 1 in favour of respondent No. 2 for having search at the residence of the petitioners. The condition precedent for having search under the provisions of section 132 did not exist. [Para 11] It was held that in the circumstances, the said satisfaction was arrived at in a mechanical manner and without any application of mind. The impugned orders of issuing athorization were quashed and set aside.

2. Recording of Statement under Section 132(4) and Presumption under sec. 292C

Section 132 (4) of Income Tax Act deals with recording of statements on oath. The same reads as under:

The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Income-tax Act.

Explanation : For the removal of doubts it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Income tax Act.

Recording of statements of the assessee and/ or other persons connected with the search, found in place of search and whom the authorized officer deems fit for recording a statement, is a common practice during such proceedings. It may be noted that the statement is recorded not for questioning simpliciter. and is taken on oath, its sanctity is quite high in the eyes of law and therefore, cannot be allowed to be retracted easily.

The words ‘may be used in evidence in any proceedings’ appearing in section 132(4) are of great significance. The judicial views with regard to use of a Statement recorded under section 132(4) and circumstances in which such person can retract the Statement as also necessity for revenue to corroborate the admission, are analysed hereinafter.

Presumption under Section 292C : Section 292C has been inserted by the Finance Act, 2007 with retrospective effect from 1-10-1975 allowing presumption as to assets, books of account, etc. found during search under section 132 and requisition under section 132A.

Later on by the Finance Act, 2008 the ambit of section 292C has been enlarged by including presumption in case of survey proceedings under section 133A with retrospective effect from 1-6-2002.

3. CBDT Instruction dated March 23, 2003: In the light of the statements recorded followed by retractions on the ground of coercion and threat in the course of search and survey operations, the Board issued the Instructions F.No. 286/2/2003 – IT (Inv.) dated March 23, 2003 stating as follows

“Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess undisclosed income during the course of the search and seizure and survey operation. Such confession, if not based on credible evidence, are retracted by the concerned assessees while filing return of income. In these circumstances, confession during the search and seizure and survey operation do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income-tax department. Similarly, while recording statement during the course of search and seizure operation, no attempt should be made to obtain confession as to the undisclosed income.”

4. Admissions

Admissions as in Evidence Act: Statements recorded during Search and under various provisions of the Income-tax Act, are vital tool in the hands of the income-tax authorities in their quest to establish certain factual and legal positions. Written Statements are used as evidence in various proceedings under the Income tax Act.

The word “Statement” is neither defined in the Income-tax Act and, hence, it assumes its dictionary meaning of ‘something that is stated’. Section 17 of the Indian Evidence Act, 1872 defines admission as an oral or documentary Statement which suggests any inference as to any fact in issue or relevant fact.

Admissions are Statements by a party of the existence of a fact which is relevant to an issue in dispute. It may be noted that the Statement may be either admission or denial of a fact.

An Admission is a Statement, oral or documentary, which suggests an inference as to any fact in issue or relevant fact and which is made by a party or by a person concerned with him in any of the ways as described under sections 18 to 23 of the Indian Evidence Act, 1872.

5. Admissions are not conclusive proof

Admission, though sometimes strong evidence, are, however, not conclusive proof of the facts admitted. But what a party himself admits to be true, may reasonably be presumed to be so, unless it is satisfactorily explained or successfully withdrawn. So long as they do not operate as estoppel, persons making admissions are at liberty to contradict them or to show that they are untrue or mistaken or made under a misapprehension. Thus, the effect of an admission is to shift the burden of proof to the party making the admission.

Admissions play a very important role in the income-tax proceedings, as they generally bind the maker. In the absence of any denial or explanation therefor, an admission is almost conclusive regarding the facts contained therein.

They generally dispense with the requirement of adducing further evidence or proof to support a fact. Though section 31 of the Indian Evidence Act, 1872 states that admissions are not conclusive proof of the matters admitted, yet admissions in the absence of rebuttal may conclude an issue.

Under the Income-tax Act also admissions bind the maker if these are not properly rebutted or retracted. Some important judgments of the Supreme Court explain the concepts and relevance of admission and rebuttal or retraction of admitted facts, are discussed hereinafter.

As per section 31 of the Indian Evidence Act, admissions are not conclusive proof of the matters admitted, but they may operate as estoppel under the provisions of the law as contained.

6. Retraction of Statement

A statement given on oath under section 132(4) may be retracted depending on the facts and circumstances of the case. When a person intends to retract his or her statement, the same should be done without undue delay and by giving cogent reasons for doing so along with other evidences to corroborate the reasons given for retraction.

It is settled law that a statement which is recorded under coercion or threat may be retracted and even statements which were given under mistaken facts or mistaken position of law, may be retracted, as soon as possible, giving cogent reasons explaining the mistake. Even if an admission is made in a statement, the same cannot be held to be conclusive in every case especially when the assessee or any other person whose statement has been recorded under section 132(4) seeks to retract it and shows some genuine concrete reason.

However, retraction of statements made, is viewed adversely by the Income Tax Department, in most cases. Article 20(3) of the Constitution says that no person accused of any offence shall be compelled to be a witness against himself. This is based upon a legal maxim which means that no man is bound to accuse himself.

7. Decisions where Retraction of Statement was held VALID

7.1 Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 (SC) : Their Lordships while observing that admission is an extremely important piece of evidence, held that, it cannot be said to be conclusive and the maker can show that it was incorrect. [Also refer S. Arjun Singh v. CWT [1989] 175 ITR 91/[1988] 41 Taxman 272 (Delhi)].

7.2 In Commissioner of Income Tax, Central-III v. Lavanya Land Pvt. Ltd. and Others [2017] 397 ITR 246 (Bom.), the Hon’ble Bombay High Court dismissed an appeal filed by the revenue against the order of the ITAT, Mumbai and upheld the order of the ITAT in which it had set aside the additions made by the revenue based on the statement made by person who was searched but which was later retracted by him. In this case, a search was conducted at the premises of one of handlers of the assessee company and his statement was recorded which showed an admission that a large sum of money was received by him to purchase lands in the name of the assessee company. The said statement was retracted by him after a period of two and a half months. However, the department proceeded to issue a notice to the assessee under section 153C of the Act on the basis of the statement of the person searched and without taking into account the retraction, an addition was made under section 69. The CIT(A) upheld the addition made. On appeal, the ITAT Mumbai set aside the addition made. Adverting to the fact that the concerned person (Dilip Dherai) has retracted his statement, the Tribunal arrived at the conclusion that merely on the strength of the alleged admission in the statement, the additions could not be made as the essential ingredients of Section 69C of the IT Act enabling the additions were not satisfied. This was not a case of ‘no explanation’. Rather, the Tribunal concluded that the allegations made by the authorities are not supported by actual cash passing hands. Against the order of the ITAT, the revenue filed an appeal to the Hon’ble Bombay High Court, which held while dismissing the appeal of the revenue, in para 22 of its Order, as under:

“It is not possible for us to reappraise and re-appreciate the factual findings. The finding that Section 153C was not attracted and its invocation was bad in law is not based just on an interpretation of Section I53C but after holding that the ingredients of the same were not satisfied in the present case. That is an exercise carried out by the Tribunal as a last fact finding authority. Therefore, the finding is a mixed one. There is no substantial question of law arising from such an order and which alternatively considers the merits of the case as well.”

7.3 Retraction of statements recorded at odd hours: The admissibility of retraction of statements which were given in an exhausted state and at odd hours was allowed by the Hon’ble Gujarat High Court in Kailashben Manharlcil Choksi v CIT [2010] 320 ITR 411 (Guj,). It was held that a statement which has been recorded u/s 132(4) at odd hours is not a voluntary statement if it is subsequently retracted. The Hon’ble High Court observed that the main grievance of the A.O. was that the statement was not retracted immediately and it was done after two months. It was an afterthought and made under legal advise. However, if such retraction is to be viewed in light of the evidence furnished along with the affidavit, it would immediately be clear that the assessee has given proper explanation for all the items under which disclosure was sought to be obtained from the assessee. The High Court held that the explanation seems to be more convincing, has not been considered by the authorities below and additions were made and/or confirmed merely on the basis of statement recorded under Section 132(4) of the Act. Despite the fact that the said statement was later on retracted no evidence has been led by the Revenue authority. Merely on the basis of admission the assessee could not have been subjected to such additions unless and until, some corroborative evidence is found in support of such admission. The High Court also held that the statement recorded at such odd hours cannot be considered to be a voluntary statement, if it is subsequently retracted and necessary evidence is led contrary to such admission.

7.4 Principal CIT, Central III v. Krutika Land (P.) Ltd. [2019] 103 taxmann.com 9 (SC): During search certain incriminating documents were found in possession of one DD, managing and handling land acquisition on behalf of assessee-company and his statement was recorded. He stated that there were amounts disbursed for purchase of lands and a certain amount of cash had also been received by him to purchase lands. However, later he had retracted his statement. A.O. issued notice under section 153C and initiated proceedings against assessee and made additions under section 69C. High Court held that since seized documents did not belong to assessee but were seized from residential premises of one Mr. DD who had later retracted his statement, no action under section 153C could be undertaken in case of assessee. It further held that since entire decision was based on seized documents and there was no material to conclusively show that huge amounts revealed from seized documents were actually transferred from one side to another, additions under section 69C were not sustainable. SLP of Revenue was dismissed.

7.5 Satinder Kumar (HUF) v. CIT [1977] 106 ITR 64 (HP): It was held that it is true that an admission made by an assessee constitutes a relevant piece of evidence but if the assessee contends that in making the admission he had proceeded on a mistaken understanding or on misconception of facts or on untrue facts such an admission cannot be relied upon without first considering the aforesaid contention.

7.6 Asstt. CIT v. Jorawar Singh M. Rathod [2005] 148 Taxman 35 (Ahd. – Trib.) (Mag.) : In this case, the assessee stated in retraction that during recording of statement he was under constant threat of penalty and prosecution and was confused about various questions asked by the search party about documents, papers, etc., of other persons found from his premises. He declared the sum under pressure which was evident from the fact that no such corroborative evidence, asset or valuables were found in form of immovable or movable properties from his residence in support of the amount of disclosure which was later on retracted but not accepted by the department. The Tribunal observed: “…It is true that simple denial cannot be considered as a denial in the eyes of law but at the same time it is also to be seen (that) the material and valuables and other assets are found at the time of search. The evidence ought to have been collected by the revenue during the search in support of the disclosure statement.

7.7 S.R. Koshti v. CIT [2005] 193 CTR (Guj.) 518: If an assessee under a mistake, misconception or on not being properly instructed, is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected. The decision in CIT v. Durga Prasad More [1973] CTR (SC) 500, was followed i.e., test of human probabilities. The High Court said “We do not find any material on record on which basis it can be said that the disclosure of the assessee of Rs. 16 lakhs is in accordance with law or in spirit of section 132(4)…”. (p. 872)

7.8 Surinder Pal Verma v. Asstt. CIT [2004] 89 ITD 129 (Chd.) (TM)- The Chandigarh Bench of the Tribunal took a realistic view of the facts and circumstances in which disclosure is generally made in search and seizure proceedings. It was observed: “It is well known fact that the confessional statements made during the search are often vulnerable on the ground that the person giving such statements remain under great mental strain and stress. They also do not have the availability of relevant details, documents and books of account at the time of giving such statements in the absence of which precise information relating to the mode of utilization of such income and the year of such investment cannot be correctly furnished. The assessees are, therefore, entitled to modify/clarify the statements after verifying the necessary details from the relevant records at later point of time.” (p. 24)

7.9 Asstt. CIT v. Rameshchandra R. Patel [2004] 89 ITD 203 (Ahd.) (TM) – It was accepted that the assessee had a right to retract but that has to be based on evidence brought on record to the contrary and there must be justifiable reason and material accepting retraction i.e., cogent and sufficient material have to be placed on record for acceptance or retraction. All that has to be done by the assessee if he is to retract the statement which was recorded in the presence of witnesses unless there is evidence of pressure or coercion. The facts of each case have to be considered to reach the conclusion whether retraction was possible or not as there can be no universal rule. Further corroboration of retracted statement is necessary where the assessee established at the earliest possible opportunity by leading reliable evidence and proving thereby the erroneous or incorrect nature of the facts admitted or confessed and also where the evidence available on record is inconsistent with the confessional statement.

7.10 Asstt. CIT v. Anoop Kumar [2005] 147 Taxman 26 (Asr.) (Mag.): The A.O. worked out the income on the basis of seized material which was less than the income declared in statement under section 132(4). The assessment was, however, made on the income confessed in the statement. The Tribunal observed: “…It is also a fact that total income so computed by the Assessing Officer falls below the income disclosed under section 132(4). It is not the case of the department that the difference in the income assessed and income disclosed under section 132(4) represents some other concealed income. Therefore, it is clear that there is no material available with the department to justify the addition so far as the difference between the income computed by the Assessing Officer and income disclosed under section 132(4). In other words, the so-called disclosure under section 132(4) is bald and has no legs to stand and in such a case retraction is justified… (p. 292)

7.11 Avadh Kishore Das v. Ram Gopal AIR 1979 SC 861: The Supreme Court held that evidentiary admissions are not conclusive proof of the facts admitted and may be explained or shown to be wrong, but they do raise an estoppel and shift the burden of proof on to the person making them. The Supreme Court further held that unless shown or explained to be wrong, they are an efficacious proof of the facts admitted.

7.12 Gyan Chand Jain v. ITO [2001] 73 TTJ (Jodh.) 859 – Held that, it is not the position of law that no addition can be made on the basis of an admission at all, but the position of law is that the person making an admission is not always bound by it and sometimes can get out of its binding purview if that person can explain concisely with supportive evidence/material or otherwise that the admission made by him earlier is not correct or contains a wrong statement or that the true state of affairs is different from that represented therein and so, the same should not be acted upon for fastening tax liability which should rather be fixed on the basis of correct/true facts, as ascertained from material on record. Unless it is explained as stated above, the admission does retain its binding nature for the person who makes the admission and the same may, if considered reasonable in view of other facts on record and following the principles of preponderance of probability, form the basis of fastening liability. The ITAT allowed part relief to assessee.

7.13 Hotel Kiran v. Asstt. CIT [2002] 82 ITD 453 (Pune) – It is settled law that admission by a person is a good piece of evidence though not conclusive and the same can be used against the person who makes it. The reason behind this is, a person making a statement stops the opposite party from making further investigation. This principle is also embedded in the provisions of the Evidence Act. But the statement recorded under section 132(4) is on a different footing. The Legislature in its wisdom has provided that such a statement may be used as evidence in any proceedings under the Act. However, there are exceptions to such admission where the assessee can retract from such statement/admission. The first exception exists where such statement is made involuntarily, i.e., obtained under coercion, threat, duress, undue influence, etc. But the burden lies on the person making such allegation to prove that the statement was obtained by the aforesaid means. The second exception is where the statement has been given under some mistaken belief either of fact or of law. If he can show that the statement has been made on mistaken belief of facts, than the facts on the basis of which admission was made were incorrect.

7.14 CIT (LTU) v. Reliance Industries Ltd. [2019] 102 taxmann.com 372 (Bombay)/[2019] 261 Taxman 358 (Bombay)/[2020] 421 ITR 686 (Bombay) [SLP granted in [2020] 114 taxmann.com 320 (SC)], the Appellate Authorities allowed payments made to ‘S’, a consultant holding that there was sufficient evidence justifying payments made to ‘S’ and Assessing Officer other than relying upon statement of ‘S’ recorded in search had no independent material to make disallowance. The CIT (Appeal) and Tribunal concurrently held that ‘S’ retracted his statement within a short time by filing an affidavit. Subsequently his further statement was recorded in which he also reiterated the stand taken in affidavit. The High Court slammed AO for making disallowance of payment merely relying on statement of payer recorded during search, which said that ‘S’ had not rendered any service to assessee so as to receive such payments. The allowance of payments made to ‘S’, a consultant, was allowed as business expenditure. The assessee had set up a captive power generating unit and provided electricity to its another unit. It claimed deduction u/s 80-IA in respect of the profits arising out of such activity. It contended before the Assessing Officer that the valuation of electricity provided to the another unit should be at the rate at which the electricity distribution companies were allowed to supply electricity to the consumers. The issue at hand had been examined by the Bombay High Court on earlier occasion in Income Tax Appeal No. 2180 of 2011 and the view taken by the Tribunal in similar circumstances was upheld. A similar issue came up for consideration before the Chhattisgarh High Court in the case of CIT v. Godawari Power & Ispat Ltd. [2014] 42 taxmann.com 551/223 Taxman 234 (Chhattisgarh), in which the Court had upheld the claim of the assessee. The Gujarat High Court in the case of Pr.CIT v. Gujarat Alkalies & Chemicals Ltd. [2017] 395 ITR 247/88 taxmann.com 722 (Gujarat) also had occasion to examine such an issue and allowed the expenditure.

7.15 In CIT v. Uttamchand Jain [2009] 182 Taxman 343 (Bom) / [2010] 320 ITR 554 (Bombay), the Assessee, a dealer in diamonds, had declared certain diamond jewellery under Voluntary Disclosure of Income Scheme, 1997 – Said declaration was accepted by department and a certificate was issued to assessee – In his return of income for relevant assessment year, assessee claimed to have sold said jewellery to one T on 20-1-1999. Return was processed u/s 143(1)(a), but later, on basis of statement of T recorded during course of survey conducted upon him wherein he had stated that he was not actually doing business of diamonds and transactions reflected in his books of account were merely accommodation entries. The A.O. reopened assessment and made addition of entire sale amount as undisclosed income of assessee. The Tribunal, relying upon retracted statement made by T, deleted impugned addition. Since existence of diamond jewellery with assessee prior to sale was evidenced by VDIS, 1997 certificate and on sale of said jewellery assessee had received consideration which was duly accounted for, mere fact that jewellery sold by assessee was not found with purchaser ‘T’ could not be a ground to hold that transaction was bogus and consideration received by assessee was his undisclosed income. The Court held that retraction statement of Mr. Trivedi is corroborated by the pay-in-slips/cash deposits in the bank account of Mr. Trivedi and the non-availability of the jewellery claimed to have been sold by the assessee to Mr. Trivedi, is a reasonable and possible view. Therefore, the High Court upheld the decision of the Tribunal in deleting impugned addition.

7.16 In CIT v. Rakesh Ramani [2018] 94 taxmann.com 461 (Bom.)/ [2018] 256 Taxman 299 (Bom.) / 168 DTR 356 (Bom.)(HC), in course of block assessment, assessee brought on record various documents to establish that jewellery seized from him actually belonged to his employer, impugned addition made in respect thereof merely on ground that assessee in course of statement made u/s 132, had admitted that said jewellery belonged to him, could not be sustained. It was also held that there is no requirement in law that evidence in support of its case must be produced by assessee only at time when seizure has been made and not during assessment proceedings. Besides, the entire basis of the revenue’s case is the statement made on the date of the seizure. The voluminous evidence filed by the respondent during the course of the assessment proceedings has been completely ignored on the ground that the same was not produced when the seizure was made. The High Court held that there is no requirement in law that evidence in support of its case must be produced by assessee only at the time when the seizure has been made and not during the assessment proceedings. The basis of the decision was the evidence led by the respondent during the assessment proceedings which established that the jewellery belonged to his employer ‘P’ Jewellers. Therefore, the Bombay High Court held that the view taken by the two Authorities namely the Commissioner (Appeals) as well as the Tribunal is a possible view on the facts as existing. Therefore, the Court held that the question of law does not arise to any substantial question of law and the appeal of the Revenue was dismissed.

8. Retraction partly accepted

In Pranav Construction Co v. ACIT (1998) 61 TTJ 145 (Mum) (Trib) (dt 12 -11-1997), the AO was of the view that whereas in the statement recorded under s. 132(4) the partner of the assessee-firm had disclosed an income of Rs. 70 lakhs, in the return there has been retraction of the said statement inasmuch as the assessee had declared only Rs. 10,53,680 on account of undisclosed income. The assessee had retracted from the statement in respect of two issues, the first being the undisclosed receipts, which were reduced from Rs. 70 lakhs to Rs. 52,68,400 and the second being the claim of expenses amounting to Rs. 42,14,720. The assessee explained that “The aforesaid statement was recorded by the ADIT at 2.30 A.M. in the early morning, though it was mentioned at 11.45 P.M. The assessee pleaded that he was totally tired and was under tremendous pressure and not in a proper state of mind to understand the implications as to what is stated in the said statement. He stated before the ADI during search that the aforesaid amount of Rs. 80 lakhs is the gross receipts, but as a builder, the assessee are required to incur lot of expenditure, which is unaccounted for. The A.O. felt that it cannot be postulated that the assessee had effected the payments out of the moneys received by it earlier in respect of the flats, offices and shops and recorded in the books. With regard to the admission, the learned D.R. had argued that there is no scope for allowing any expenditure because the statement of the assessees partner u/s 132(4) relates to disclosure of income, which means net income. The Tribunal observed “We are of the view that the admission cannot be read as an Act of Parliament and that it has to be read in the context fairly and reasonably. We have already adverted to this aspect. The burden can be discharged either by direct evidence or if such evidence is not available the assessee can always point out to circumstantial evidence supporting the claim. In the present case in respect of the payment of Rs. 9 lakhs there is direct evidence and in respect of the payment of protection money to the extent of Rs. 20 lakhs to Shellar and Padmakar Choudhary, there is circumstantial evidence, to which we have already referred. The further deduction of Rs. 1 lakh which we have allowed is also based only on the circumstantial evidence such as newspaper cuttings, reports, etc.” The Tribunal considered total on-money receipts @ Rs. 100 per sq. ft. for 73,371 sq. ft. 73,37,100 and allowed deduction for payments as protection money, for vacating hawkers, tapories, etc. Rs.30 Lacs and Pooja expenses of Rs.14,720 and thus the addition was reduced to Rs. 43,22,380.

9. Leakage to media will jeopardise investigation, such tendency should be curbed

In Rajendran Chingaravlelu (Mr) v. R. K. Mishra, Addl. CIT [2010] 186 Taxman 305 (SC)/[2010] 320 ITR 1 (SC), When a bona fide passenger is carrying an unusually large sum, and his claims regarding source and legitimacy have to be verified, some delay and inconvenience is inevitable and, in such a situation, rights of passenger will have to yield to public interest. Intelligence officers are entitled to satisfy themselves not only that money is from a legitimate source, but also that such a large amount is being carried for a legitimate purpose and, therefore, even if carrier is not guilty of any offence in carrying money, verification or seized amount may be warranted to ensure that money is not intended for commission of a crime or an offence. There is a growing tendency among investigating officers (either police or other departments) to inform the media, even before the completion of investigation, that they have caught a criminal or an offender. Such crude attempts to claim credit for imaginary investigational breakthroughs should be curbed. Premature disclosures or ‘leakage’ to the media in a pending investigation will not only jeopardise and impede further investigation, but many a time, allow the real culprit to escape from law.

10. Decisions where Retraction of Statement was NOT ACCEPTED

10.1 Ms. Priyanka Chopra v. Deputy CIT, Central Circle-1(3), Mumbai* [2018] 89 taxmann.com 287 (Mumbai – Trib.) : A search was carried out in case of assessee in course of which various incriminating documents were seized. In said proceedings, assessee as well as her mother admitted certain undisclosed investment towards purchase of assets. Subsequently, assessee’s mother retracted her statement. A.O. however, added amount admitted to assessee’s taxable income. It was noted that it was only with reference to search and seizure material that assessee’s mother had given a specific amount to various heads wherein undisclosed income had been utilized. Furthermore, so-called retraction was by mother of assessee and there was no retraction whatsoever by assessee. Impugned addition was based upon incriminating material found or searched and, thus, same was confirmed. [Para 8]

10.2 Bannalal Jat Constructions (P.) Ltd. v. Assistant Commissioner of Income-tax [2019] 106 taxmann.com 128 (SC): A search was carried out at business premises of assessee-company – In course of search proceedings, statement of director of assessee-company was recorded under section 132(4) admitting certain undisclosed income. In course of assessment, A.O. made addition to assessee’s income on basis of statement given by its director. Subsequently, director of assessee-company retracted said statement. Tribunal, however, finding that statement had been recorded in presence of independent witness, confirmed addition made by Assessing Officer. High Court also opined that mere fact that director of assessee-company retracted statement at later point of time, could not make said statement unacceptable. It was further opined that burden lay on assessee to show that admission made by director in his statement was wrong and such retraction had to be supported by a strong evidence showing that earlier statement was recorded under duress and coercion. High Court finding that assessee failed to discharge said burden, confirmed order passed by Tribunal. – Whether, on facts, SLP filed against decision of High Court was to be dismissed – [Para 2]

10.3 Thiru S. Shyam Kumar v. Assistant CIT, Central Circle-III(3), Chennai* [2018] 99 taxmann.com 39 (Madras): A search was conducted in business premises of assessee wherein certain loose slips were recovered, which showed several entries pertaining to cash and cheque transactions in respect of purchase of a property. Assessee accepted in his statement that slip represented on-money payment made for purchase of property in question. Later on, assessee retracted from his statement and claimed that loose slips were only dumb slips – Tribunal however, rejected claim of assessee and confirmed addition under sec. 69. Since notings in loose slips were clear, retraction made by assessee after period of two years was rightly rejected as an afterthought. [Paras 8 and 11]

10.4 Narayan Bhagwantrao Gosavi, Balajiwale v. Gopal Vinayak Gosavi AIR 1960 SC 100: The Hon’ble Supreme Court held that an admission is the best evidence that an opposite party can rely upon and, though not conclusive, yet could be decisive of the matter unless successfully withdrawn or proved erroneous.

10.5 Fakir Mohmed Haji Hasan v. CIT [2002] 120 Taxman 11/[2001] 247 ITR 290 (Guj), Gujarat High Court upheld the department’s action of treating the amount as deemed income.

10.6 Manharlal Kasturchand Chokshi v. Asstt. CIT [1997] 61 ITD 55 (Ahd.) – Proof of threat or coercion is necessary for valid retraction. The allegation that the assessee was tortured and harassed by the search team and was forced to make an admission is not enough.

10.7 Param Anand Builders (P.) Ltd. v. ITO [1996] 59 ITD 29 (ITAT- Mum), It was held by ITAT, Mumbai that allegations of torture and harassment were unacceptable when independent witnesses were present at the time of search. Mere filing of a letter retracting the statement was not held to be rebuttal of the presumption that what is admitted is true. The Tribunal’s observations were also based on the fact that the ‘Panchas’ had not brought any harassment to the notice of the higher authorities.

10.8 Video Master v. Joint CIT [2002] 83 ITD 102 (Mum) ITAT, Mumbai dealt with a case where aseessee retracted statement made claiming it to have been made under duress and coercion. During search, D, who was partner of assessee-firm, made voluntary disclosure of Rs. 3 crores comprising earnings from two films and income on account of discrepancy in books of account. The retraction made by ‘D’ later on, after a gap of one month of recording statement, was immaterial as it could not be said that D’s statement under section 132(4) was recorded under duress. It was held that since statement recorded in present case under section 132(4) was fully supported with documents seized during course of search, additions made by Assessing Officer of Rs. 1.83 crores treating same as undisclosed income of assessee from share of profits from two films was justified.

10.9 Hotel Kiran v ACIT [2002] 82 ITD 453 (Pune), Addition of Rs. 4.5 lakhs was made by Assessing Officer on account of ‘on-money’ alleged to have been paid by assessee-firm for purchase of flat and plot for partner. During search partner of assessee itself had admitted that amount was paid before agreement out of suppressed profits of firm. It could be said that there was a direct nexus between payment of ‘on-money’ and suppressed profits of assessee-firm. Since source of payment of Rs. 4 lakhs was suppressed profits of assessee-firm, assessee was entitled to set off this amount against suppressed business profits of firm relating to year concerned to the extent addition was ultimately sustained because a person cannot be taxed twice over same income. Where statement under section 132(4) was voluntarily made and there was no coercion or threat whatsoever and contents of statement were clear and unambiguous, same would be binding on assessee even if it was subsequently retracted.

10.10 The Bombay High Court in the case of T. Lakhamshi Ladha & Co. v CIT [2016] 386 ITR 245 (Bom), held that in case there is a statement by a senior partner of an assessee firm, statement cannot be retracted by another partner of that firm in absence of any allegation of pressure and coercion by the department and there being no evidence to prove that original statement was incorrect.

10.11 In Dhunjibhoy Stud & Agricultural Farm v DCIT, [2002] 82 ITD 18 (Pune), ITAT, Pune Bench held that where a retraction of a statement was made on an affidavit after a lapse of three years, the same should not be considered and the admissions made earlier were held to be admissible evidences.

10.12 In Manmohansingh Vig v Deputy Commissioner of Income Tax, Circle 1(1), [2006] 6 SOT 18 (Mum), the ITAT while coming to a conclusion as to the admissibility of a retraction made on an affidavit by the assessee, laid out certain reasoning for not admitting the same. The conclusions drawn by the Tribunal would be useful for us and gives us an insight to ascertain as to what the Courts have regard to, while dealing with retractions and how a retraction should be framed. The relevant extract is given hereunder:

a) What was retracted subsequently was only a denial. No material evidence was furnished so as to discharge onus cast on the assessee by virtue of statement recorded under sections 132(4) and 131(1A),

b) Presumption raised under section 132(4A) is not rebutted by the assessee by submitting cogent evidence. Hence, the statement given under sections 132(4) and 131 (1A) hold their evidentiary value.

c) No material has been submitted to show that any pressure or coercion was exercised while recording the statements under sections 132(4) and 131(1A). No complaint was filed immediately after search or recording of statement under section 131 (1A) to show that there was any pressure or coercion. Statement under section 132(4) was recorded before witnesses. Hence, there is a presumption that there was no pressure/coercion unless proved.

d) Disclosure was enhanced during statement under section 131(1A) as compared to the statement given under section 132(4). Hence, the theory of pressure or coercion applied during recording of statement under section 132(4) is not acceptable.

e) The assessee is silent for about 11 months. No letter/correspondence was sent immediately after recording of statement under section 132(4). Hence, theory of pressure or coercion is only an afterthought.

f) Disclosure of several items were based on documents found in the search. These documents were explained under sections 132(4) and 131(1A). Hence, there is a strong reason to believe that statement under sections 132(4)/l31(1A) reveal correct state of affairs and retraction has to be ignored.

The ITAT held that the retraction or rather denial is not established by any material/evidence and hence the same cannot be substituted for admission made by the assessee under sections 132(4) and 131(1A) and supported by documentary evidence found in the search. Hence, the additions made were confirmed.

10.13 In Asst. CIT v Expresso Investments [2006] 8 SOT 287 (Mum) the retraction made was held to be incomplete and the contents thereof were inconclusive. In the said case neither did the content of the retraction show any coercion or duress exerted and neither did it have any conclusive and corroborative evidences by witness in the affidavit of retraction submitted by the assessee. The ITAT referred to the celebrated book titled ‘Administrative Law’ by Sir William Wade (eighth edition by Wade and Forsyth – Oxford University Press), in which the legal position has been explained at p. 242 as under :

“The basic principle of estoppel is that a person who by some statement or representation of fact causes another to act to his detriment in reliance on the truth of it is not allowed to deny it later, even though it is wrong. Justice here prevails over truth. Estoppel is often described as a rule of evidence, but more correctly it is a principle of law. As a principle of common law it applies only to representations about past or present facts”.

The ITAT also held that discretion is vested with assessing officer, to use statement under section 132(4) as evidence. However it is not incumbent on him to make addition solely on the basis of such statement. Even otherwise, in our opinion, mere admission, without any corroboration, is not enough for making addition. In the statement under section 132(4), the assessee merely stated that some of the cash creditors may not be genuine. It is on the basis of such doubt that addition was made. In these circumstances of cash creditors, the assessing officer should not come in the way of assessee. In the present case, assessing officer merely got restricted himself to the statement under section 132(4). He had chosen to make enquiries regarding genuineness of the cash creditors by asking the assessee to prove the genuineness of such cash credits. Having done so, he could not make addition on the basis of statement under section 132(4) alone. Rather, he should have dealt with each credit with reference to the materials on the record. Accordingly, the order of Commissioner (Appeals) was set aside and matter was restored to the file of assessing officer for fresh adjudication after giving reasonable opportunity of being heard.

10.14 Sidhharth Shankar Roy v. Commissioner of Customs, Mumbai 2013 (291) ELT 244 (Tri.) (Mumbai) (Order dated 30-8-2011), it was held that retraction of a confessional statement should be addressed to the same officer to whom the confessional statement was given u/s 108 of the Customs Act. In this case, the retraction was made before the Judicial Magistrate and not before the concerned officer of Customs (AIU). Moreover, though the officer of Customs who was alleged to have beaten/manhandled the appellants challenged their retractions before the ACMM, he was not cross-examined by any of the appellants. The Tribunal found that the appellants have not been able to establish that the said statements were extorted from them by the officers of AIU by threat, coercion, force or assault. The submissions made by them before the Judicial Magistrate and those made before this Tribunal in this regard are inconsistent and incoherent. The Medical Reports relied on by the appellants also do not support their allegation that they were assaulted by any officer of Customs. The medical reports, on the other hand, refer to assault by the police. The Tribunal held that the Commissioner rightly rejected the retractions.

10.15 In Hiralal Maganlal & Co. v DCIT [2005] 96 ITD 113 (Mum) the assessee took a complete turn around and alleged that the statements of the aforesaid persons were forcibly recorded and that the seized sheets were mere estimates of goods to be purchased. The ITAT held that the somersault taken by the assessee several months after search was, as held by the Assessing Officer, was an afterthought and the events following thereafter were simply a device to frustrate the efforts of the Department to sniff off the unaccounted income of the assessee which it had unambiguously and voluntarily declared and offered for taxation at the time of search. The ITAT also laid down some useful principles as under in para 35:

a) Statements in the nature of declarations covered by the provisions of section 115 of the Evidence Act, are binding on the declarant. They can neither he retracted nor do they require any corroboration. Such declarations can form the sole basis for assessment. The declaration made by partner in the assessee-firm through his statement recorded under section 132(4) falls squarely within the ambit of section 115 of the Evidence Act and hence the same was neither open to retraction nor required any further corroboration. The assessing officer could, therefore, base the impugned addition on the said declaration.

b) Statements which are not in the nature of declarations under section 115 of the Evidence Act are also binding and can form the sole basis for assessment if they are not effectively retracted. Effective retraction is possible in two situations. First situation is where it is not voluntarily made. A statement, however, cannot he said to be involuntarily made merely because it is subsequently sought to be retracted. It is also to be remembered that the law of evidence presumes regularity and correctness of the official actions unless proved otherwise and hence the said principle will also govern the statement recorded by a public official. The provisions of section 132(4) also create rebuttable presumption in favour of the statements recorded there under and authorize their use in evidence in any proceeding under the Income Tax Act. The burden is, therefore, squarely on the person who alleges that the statement was not made voluntarily to prove that it was involuntarily made or made under coercion or undue influence or that it was made under mistaken belief or was obtained by fraud or misrepresentation. Mere allegation will not suffice. Second situation is where the person seeking to retract proves, by leading cogent and reliable evidence, the erroneous or incorrect nature of the facts stated or confessed at the earliest possible opportunity. In the case before us, it has been held above that the assessee has squarely failed to satisfactorily discharge the burden that the confessional statement made by partner under section 132(4) was involuntarily made or made under coercion or undue influence or was made under mistaken belief or obtained by fraud or misrepresentation. Rather, the evidence available on record shows that it was voluntarily made by Shri Sanghvi with due care and caution and after necessary consultations with all concerned. Besides, there has been inordinate delay, which has not been substantiated, on the part of the assessee to retract from the confessional statement. Retraction is also not supported by any independent or reliable evidence to prove the incorrect nature of the facts confessed in the statement. The confessional statement of the partner is also corroborated by other evidence. For these reasons also, the assessing officer, was therefore, in our view, justified in basing the impugned addition on the basis of confessional statement made at the time of search.

c) A confessional statement, which is not in the nature of declaration under section 115 of the Evidence Act, continues to have evidentiary value even after its retraction. However, such retracted confession/statement needs corroboration if it has been successfully retracted.

11. Relevant Points in case a Statement is RETRACTED

8.1 The Retraction must be made without delay: Kantilal C. Shah v ACIT [2011] 133 ITD 57 (Ahd) held that retraction of statement made u/s 132(4) will not be permissible if the retraction has been made after a lapse of ample time and not done immediately. In this case, a search was conducted on 12/12/1995 and on that very day a statement u/s. 132(4) of the Act was recorded, however, after a lapse of around nine and a half months, i.e., 01/10/1996 a retraction was made through an Affidavit. The said retraction was not immediately submitted before the AO but it was submitted through a covering letter dated 19/11/1996. This was pointed out by Id. D.R. that the retraction in the form of an Affidavit dated 1/10/1996 was kept with the assessee for one and a half months and on 19/11/1996 it was submitted before the AO. According to his pleadings the said delay thus demonstrated that the assessee was not confident about filing of the retraction. There must be some convincing and effective evidence in the hands of the assessee through which he could demonstrate that the said statement was factually incorrect. An assessee is under strict obligation to demonstrate that the statement recorded earlier was incorrect, therefore, on the basis of those specific evidences later on retracted. Further there should also be some strong evidence to demonstrate that the earlier statement recorded was under coercion. In the present case, the retraction is general in nature and lacking any supportive evidence. Rather assessee took several months to retract the initial statement, which by itself created a serious doubt.

8.2 In Council of Institute of Chartered Accountants of India v Mukesh R. Shah,[2004] 134 Taxman 265 (Guj) the Hon’ble Gujarat High Court, held that it goes without saying that a retraction made after a considerable length of time, would not have the same efficacy in law as a retraction made at the earliest point of time from the day of admission. A belated retraction would fall in the category of afterthought instead of being retraction…. “

8.3 Evidences to corroborate reasons for retraction

Sudharshan P. Amin v. Asst. CIT [2013] 35 taxmann.com 370 (Gujarat)/[2013] 217 Taxaman 37 (Guj.): In search, assessee had disclosed a sum as undeclared income – Assessee again admitted same in his confessional statement. However, during assessment proceedings, assessee retracted from his statement. Assessee’s CA who was present at time of confessional statements did not suggest any undue pressure or allurement by department. Further, assessee had not offered any explanation as to why he repeated confessional statement even after search. It was held that retraction made by assessee could not be accepted and addition should be made to his income as undeclared investment. When retracting a statement made on oath under section 132(4), it should always be supported by effective evidence which shows that the statement which was earlier recorded was incorrect on facts or was taken under inter alia coercion and intimidation. Merely mentioning that the statement was recorded using undue influence, threat or coercion, or that there was a mistake of facts or law. may not be enough. What has to be seen is how clearly the same is spelt out and what evidence, has been attached to demonstrate the same.

8.4 Intimation of retraction to higher authorities

In Principal CIT v Roshan Lai Sancheti [2019] 306 CTR (Raj) 140, the Rajasthan High Court held in para 19 that “Statement recorded under sec. 132(4) and later confirmed in statement recorded under sec. 131, cannot be discarded simply by observing that the assessee has retracted the same because such retraction ought to have been generally made within reasonable time or by filing complaint to superior authorities or otherwise brought to notice of the higher officials by filing duly sworn affidavit or statement supported by convincing evidence. Such a statement when recorded at two stages cannot be discarded summarily in cryptic manner by observing that the assessee in a belatedly filed affidavit has retracted from his statement. Such retraction is required to be made as soon as possible or immediately after the statement of the assessee was recorded. Duration of time when such retraction is made assumes significance and in the present case retraction has been made by the assessee after almost eight months to be precise, 237 days.

8.5 Statements made involuntarily i.e. obtained under coercion, threat, duress, undue influence etc.

In Deepchand & Co v ACIT [1995] 51 TTJ (Bom.) 421, the ITAT, Mumbai held that there is no supporting evidence to confirm the additions except the statements of two partners recorded at the time of search. It would not be out of context to mention here that the statements recorded by the search party during the search of more than two days and two nights cannot be considered to be free, fearless and voluntary. There is a considerable substance in the assessee’s contention that the statements were recorded under pressure and force. The Tribunal had held that retraction should be allowed if it is based on proper principles and evidence. In the ordinary course no assessee would say that he had much concealed unaccounted money as mentioned in the statements herein. At the most what was expected to say was that certain income from the business was not disclosed, but putting in the mouth of the assessee that so much amount was unaccounted and concealed would itself indicate that the admission was forcible and not voluntary.

8.6 Retraction after obtaining copy of Statement on ground of mistaken belief either of fact or law

a) In Jyotichand Bhaichand Saraf & Sons (P.) Ltd. v Deputy Commissioner of Income-tax, Circle 11(1) (ITAT Pune) [2012] 139 ITD 10 (Pune), a search and seizure action was taken under section 132. During the course of search action, statement of the Director of the assessee was recorded under section 132(4) on 6th November 2001. The assessee was given copies of the statement recorded under section 132(4) of the I.T. Act, 1961 on 20,h May 2002. On receipt of the copy of the statement the assessee realized that there was a mistake in the declaration of income. The assessee submitted a letter clarifying the mistake on 21st June 2002 to the Assessing Officer and retracted the statement made under mistake of fact. The assessment order was accordingly issued and was set aside by the CIT under sec. 263 stating that the same was prejudicial to the interest of the revenue and was made by the assessing officer without application of mind. On appeal, the Ld. ITAT held that the department has not brought on record any corroborative evidence so as to establish undisclosed income having been invested in agricultural land. Statement of the assessee cannot he sole basis without any cogent and corroborative evidence. This is the reason that the mistake in the statement is immediately clarified on the receipt of the statement by the appellant as stated above. Moreover, no material/evidence was found during the course of search action indicating on-money payment or any undisclosed investment in agricultural land at Malad. The assessee has clarified the mistake in the statement immediately on receipt of the statement. Thus the statement has been retracted on realization of the mistake. The statement was given under mistaken belief of law that the suppressed sale is unaccounted/undisclosed income instead of correct legal position that the gross profit arising from unaccounted sale is the undisclosed income. It is a settled position that admission made by the assessee u/s 132(4) is an important piece of evidence but the same is not conclusive. It is open to the assessee who made the admission to show that it is incorrect and the same is given under mistaken belief of fact or law. Statement of Director indicate that he was not mentally composed at relevant point of time. There is nothing on record to suggest that said undisclosed income declared on behalf of assessee has nexus with undisclosed investment in the said agricultural land.

b) Amritsar ITAT Bench in Asstt. CIT v Janak Raj Chciuhan [2006] 102 TTJ 316 (Asr.), observed that admission made at the time of search action is an important piece of evidence, but the same is not conclusive. It is open to the assessee who made the admission to show that it is incorrect and same was made under mistaken belief of law and fact.

8.7 Principles of Natural Justice

ITAT, Jodhpur Bench in Maheshwari Industries v Asstt. CIT [2005] 148 Taxman 74 (Jodh) (Mag.) has held that additions should be considered on merits rather than on the basis of the fact that the amount was surrendered by the assessee. It is settled legal position that unless the. provision of statute warrant or there is a necessary implication on reading of section that the principles of natural justice are excluded, the provision of section should be construed in manner incorporating principles of natural justice and quasi-judicial bodies should generally read in the provision relevant section a requirement of giving a reasonable opportunity of being heard before an order is made which will have adverse civil consequences for parties effected.

12. Mode and Manner of Retraction

Retraction of a statement later on, which was made during the search operation is not an easy way to escape the tax implications and requires corroborative evidence and documents to support the retraction and show the circumstances as to why the person is retracting his statement made earlier. The person has to go through minute scrutiny by the tax authorities and the courts later on at different stages if the need be. The following aspects should be kept in mind:

a) Affidavit – A retraction should be made on an affidavit along with supporting evidences, if any,

b) Affidavit of witnesses – Additional affidavit of the witnesses present during search or seizure may also be filed. The statement of the witnesses present holds good value and may aid the assessee in getting relief.

c) Elaborate – It must clearly lay down the facts of the case and detail the evidences showing inter alia use of force, coercion, intimidation or any mistake of fact/law, whatever may be the case.

d) Highlight Error – In case of a mistake of fact or law, it must clearly lay down as to what statement was recorded, what mistake took place in making such a statement, the reason for the same and the actual correct position. Evidences in support of the correct facts must also be attached.

e) Inform Senior Officers – In addition to the A.O., Authorised Officer {who conducted the Search), a retraction which is made on affidavit or otherwise should also be communicated to higher authorities.

f) Earlier the better – Any retraction should be done at the earliest without any delay. A retraction made immediately may strengthen the case of the assessee whereas a belated retraction will in most cases will have no value and would be seen as an afterthought.

13. Burden of Proof lies on the assessee

10.1 In case the assessee wishes to retract the statement earlier made whether voluntarily or involuntarily, the burden to prove that the said statement was derived by exerting force or intimidation or was given due to mistake of fact or law, lies upon the assessee. Merely an onus to disprove the already existing and supposedly incorrect statement does not lie, but an entirely new burden arises on filing of an affidavit and that burden has to be shifted by the assessee at the earliest.

This position was enunciated in CIT v. O. Abdul Razak [2013] 350 ITR 71 (Ker), wherein the Hon’ble Kerala High Court made the following observations in para 9, on the statement recorded under section 132(4) of the Act and its retraction by the assessee:

Section 132 of the Income-tax Act deals with search and seizure and sub-section (4) of section 132 empowers the authorised officer during the course of the search and seizure to examine on oath any person who is found to be in possession or control of any books of account, documents, money or valuable articles or things, etc., and record a statement made by such person which can be used in evidence in any proceedings under the Income-tax Act. The Explanation appended to clause (4) also makes it clear that such examination can be in respect of any matters relevant for the purpose of any investigation and need not be confined to matters pertaining to the material found as a result of the search. A plain reading of section 132(4) would clearly show that what was intended by empowering an officer conducting the search to take a statement on oath was to record evidence as contemplated in any adjudication especially since section 131 confers on all officers empowered therein with the same powers as vested in a court under the Code of Criminal Procedure, 1973, for the purpose of the Income-tax Act.

It was further observed in para 11, that

“Admission as has been often held is the best evidence on a point in issue and though not conclusive is decisive of the matter unless successfully withdrawn or proved erroneous. Any retraction of a clear admission made has to be on the ground of it being either erroneous or factually incorrect or one made under threat or coercion…”

And finally adverting to the issue of burden of proof in case of retraction, the Hon’ble court held in para 13, as under:

In the instant case, on the clear admission of the assessee corroborated by the documents, the burden on the Department ceases to exist. On the retraction being filed by the assessee, there is a burden cast on the assessee to prove the detraction or rather disprove the admissions made. It is not a shifting of the onus but a new burden cast on the assessee to disprove the earlier admissions having evidentiary value. As noticed earlier, retraction made by the assessee can only be considered as a self-serving after thought and no reliance can he placed on the same to disbelieve the clear admissions made in the statement recorded under section 132(4). Deletion of the additions vis-a- vis the property transactions on the reasoning that the Department cannot do so on the basis of the admission made under section 132(4) and on the premise that the Department ought to have proved retraction to be untrue cannot be countenanced in view of the specific words employed in section 132(4).

10.2 In CIT, Bikaner v Ravi Mathur [2017] (1) WLC (Raj.) 387, the Hon’ble Rajasthan High Court held that the burden to prove the retracted statement lies on the assessee. The High Court held that the statements recorded under Section 132(4) have great evidentiary value and it cannot be discarded as in the instant case by the Tribunal in a summary or in a cryptic manner. Statements recorded under Section 132(4) cannot be discarded by simply observing that the assessee retracted the statements. One has to come to a definite finding as to the manner in which retraction takes place. On perusal of the facts noticed hereinbefore, we have noticed that while the statements were recorded at the time of search on 9.11.1995 and onwards but retraction, is almost after an year and that too when the assessment proceedings were being taken up in November 1996.

We may observe that retraction should be made as soon as possible and immediately after such a statement has been recorded, either by filing a complaint to the higher officials or otherwise brought to the notice of the higher officials, either by way of a duly sworn affidavit or statements supported by convincing evidence through which an assessee could demonstrate that the statements initially recorded were under pressure/coercion and factually incorrect. In our view, retraction after a sufficient long gap or point of time, as in the instant case, looses its significance and is an afterthought. Once statements have been recorded on oath, duly signed, it has a great evidentiary value and it is normally presumed that whatever stated at the time of recording of statements under Section 132(4), are true and correct and brings out the correct picture, as by that time the assessee is uninfluenced by external agencies. Thus, whenever an assessee pleads that the statements have been obtained forcefully or by coercion or undue influence without material/contrary to the material, then it should be supported by strong evidence which we have observed hereinbefore. Once a statement is recorded under Section 132(4), such a statement can be used as a strong evidence against the assessee in assessing the income, the burden lies on the assessee to establish that the admission made in the statements are incorrect/wrong and that burden has to be discharged by an assessee at the earliest point of time

10.3 In S.C. Gupta v CIT [2001] 248 ITR 782 (All), the Allahabad High Court held that a statement made voluntarily by the assessee could form the basis of assessment. The mere fact that the assessee retracted the statement could not make the statement unacceptable. The burden lay on the assessee to establish that the admission made in the statement at the time of survey was wrong and in fact there was no additional income. This burden does not even seem to have been attempted to be discharged.

14. Case laws about head of income under which disclosed income to be considered

14.1 Dev Raj Hi-Tech Machines Ltd. v. Dy. CIT [2017] 83 taxmann.com 15 (ITAT- Amritsar): The ITAT, Amritsar held that where additional income surrendered by assessee-company in search proceedings was declared as business income and same was accepted by Assessing Officer after considering reply of assessee, revision proceedings initiated under section 263 by Commissioner on basis that such income should be taxed as deemed income under section 69A was not sustainable. The ITAT also held that the wordings of surrender letter are very important as it can save the assessee from the clutches of section 115BBE. It must be clearly stated whether the income is business income or any unexplained income or investment.

14.2 Abdul Qayume v. CIT [1990] 184 ITR 404/ 50 Taxman 171 (All.) : The Allahabad High Court opined that an admission or an acquiescence cannot be the foundation for an assessment where the income was returned under an erroneous impression or misconception of law. It is always open to an assessee to demonstrate and satisfy the authority concerned that a particular income was not taxable in his hands and that it was returned under an erroneous impression of law. The principle can be applied in a case where the disclosure made under section 132(4) did not match with the material collected in search and seizure operation. In this case, during the course of survey under section 133A the assessee surrendered an additional income over and above the normal income for the year under consideration. In return of income, the assessee declared such surrendered income as business income. And it was held that from the surrender letter it was apparent that the assessee had made surrender as additional income over and above the normal profits of the concern and since the income has been declared as business income, the same has to be assessed under the head business income and not as deemed income under the provisions of section 69A.

14.3 Kim Pharma (P.) Ltd. v. CIT [2013] 35 taxmann.com 456/216 Taxman 153 (Punj. & Har.) where the court came to the conclusion that the amount surrendered during survey was not reflected in books of account and no source from where it was derived was declared by assessee, it was assessable as deemed income of assessee under section 69A and not business income. The court further observed that the opening words of s. 14 ‘save as otherwise provided by this Act’ clearly leave scope for ‘deemed income’ of the nature covered under the scheme of ss. 69, 69A, 69B and 69C being treated separately, because such deemed income is not income from salary, house property, profits and gains of business or profession, or capital gains, nor is it income from ‘other sources’ because the provisions of ss. 69, 69A, 69B and 69C treat unexplained investments, unexplained money, bullion etc. and unexplained expenditure as deemed income where the nature and source of investment, acquisition or expenditure, as the case may be, have not been explained or not satisfactorily explained. Therefore, in these cases, the source not being known, such deemed income will not fall even under the head ‘Income from other sources’.

14.4 In Fakir Mohme Haji Hasan’s case CIT [2002] 120 Taxman 11/[2001] 247 ITR 290 (Guj) it was held that value of gold in question was liable to be included in assessee’s income as deemed income under sec. 69A as source of investment or its acquisition was not explained.

14.5 Tax under sec. 115BBE: Earlier the assessee was not concerned whether the department is treating it as deemed income or business income as the income was taxable maximum at the rate of thirty percent. But after amendment in section 115BBE from assessment year 2017-18 this matter has become very important and if the department treats surrendered income as deemed income it will be subject to tax at the rate of 60 percent plus 25 per cent surcharge and education cess.

15. Deductions permitted from undisclosed income declared by assessee

15.1 Sheth Developers [2012] 25 taxmann.com 173 (Bombay)/[2012] 210 Taxman 208 (Bombay)(Mag.), the Bombay High Court held that Builders receiving undisclosed income in course of its business, is entitled to benefit of deduction under section 80-IB(10). The plea of revenue that in view of section 69A benefit of deduction u/s 80-IB(10) would not be available to assessee was not well founded.

15.2 ACIT v. Mahalaxmi Infraprojects Ltd (2018) 63 ITR 671 (Pune) (Trib), In case of Survey in an Industrial undertaking, additional income was offered as non genuine purchases. Tribunal held that additional income had been assessed in hands of assessee from same nature of business. Hence assessee was eligible to claim deduction u/s 80IA(4) of the Act. Followed Sheth Developers 25 taxmann.com 173 (Bom)(HC).

16. No Power of confinement or arrest

In L.R. Gupta And Ors. v. Union Of India And Ors. [1992]194 ITR 32 (Delhi), the Counsel for assessee submitted that the ingredients of Section 132(1) were not satisfied in the present case and the authorisation which was issued was liable to be quashed. It was further contended by the learned Counsel that the respondents were also in error in passing orders under Section 132(3) in respect of the jewellery. The Court agreed that the respondents had no jurisdiction to prevent the assessee from attending to his work in Court. However his statement could be recorded. The Court held that, in the present case, no reasonable person could have come to the conclusion that the ingredients contained in Clause (a), (b) or (e) of Section 132 were attracted, therefore, the Court issued writ of mandamus quashing the impugned authorisation and also the further action which had been taken by the Income Tax Department pursuant to the said authorisation including the seizure of all documents, cash and jewellery. The department was directed to return the said documents, cash and jewellery, seized by them, to the petitioners within two weeks from the date of Order.

17. Officers posted in Directorates of Investigation (Investigation Wing) and Commissionerates of TDS, only and exclusively shall act as Income-tax Authority for the purposes of power of survey under section 133A and the survey action has to be resorted to only as a last resort

The CBDT has issued an Order in F No. 187/3/2020-ITA-I, Dated 13th August, 2020, which states that with the launch of the Faceless Assessment Scheme, 2019, the Income-tax Department is moving towards minimal interface with the taxpayers, aiming at significant improvement in delivery of services and greater transparency in the working of the department. The survey action u/s 133A of the Act being an intrusive action, it is expected that the same should be carried out with utmost responsibility and accountability. In furtherance of the above, the Central Board of Direct Taxes, in exercise of powers under section 119 of the Income-tax Act, 1961 hereby directs that the officers posted in Directorates of Investigation (Investigation Wing) and Commissionerates of TDS, only and exclusively shall act as “Income-tax Authority” for the purposes of power of survey under section 133A of the Income-tax Act. Further the competent authority for approval of such survey action u/s 133A of the Act shall henceforth be DGIT (Inv) for investigation wing and Pr.CCIT/CCIT (TDS) for TDS charges, as the case may be. This order shall come into force with effect from the 13th August, 2020.

The CBDT has issued another Order on 18th September, 2020 for partial modification to the order F. No. 187/3/2020-ITA-I, dated 13th August, 2020 prescribing the “Income-tax Authority” for the purpose of exercise of power of survey u/s 133A of the Act, the CBDT has directed that:-

i) the verification surveys by the International Taxation charges will henceforth be conducted by them with the approval of the CCsIT (International Taxation) concerned and where there is no CCIT (International Taxation), with the approval of CCIT (International Taxation).

ii) the verification surveys by the TDS charges will henceforth be conducted by them with the approval of CCsIT (TDS) and where there is no CCIT(TDS), with the approval of Pr. CCsIT.

iii) any survey action u/s 133A of the Act by the Central charges will be conducted after the approval of CCIT(Central)/DGIT(Investigation) and in collaboration with the investigation wing.

The Order on 18th September, 2020 also states that before approving any survey action, Pr. CCsIT/ Pr. DGsIT/CCsIT/DGsIT must ensure that all the other possibilities are exhausted and the survey action has to be resorted to only as a last resort.

18. Whether survey be converted into search

In Vinod Goel (Advocate) v. UOI [2001] 118 Taxman 690 (P&H)/[2001] 252 ITR 29 (P&H), it was held that on basis of documents collected during search and seizure of premises of RKAK and RKC, authorities felt satisfied that petitioner had nexus with some property dealing and resultantly a survey was conducted at petitioner’s premises. Again, on basis of incriminating documents collected during survey, survey was converted into search and seizure for which Addl. Director gave authorisation. In view of fact that documents recovered during previous search established nexus between business of RKAK and RKC with petitioners, search and seizure carried out at premises of petitioner should be held to be in continuation of previous search. When sufficient number of incriminating documents were recovered during survey of petitioner’s premises and concerned officer recorded in warrant his satisfaction that required documents would not be produced in case of summons issued under section 131, on ground of mere presence of some defects in warrant, it could not be said that conversion of survey into search and seizure was illegal.

19. Sealing of business premises

In Shyam Jewellers v. CCIT [1992] 196 ITR 243 (Allahabad), it was held that business premises of assessee cannot be sealed off either under section 133A or section 132. When there was no information before Chief Commissioner at time of passing authorization order that assessee was in possession of undisclosed money, bullion, jewellery or other valuable article, such a vague and general order could not be treated as an authorization order in law and no proceedings on basis of such an order could have taken place. It was held that initiation of search proceedings and passing of assessment order under section 132(5) were invalid and liable to be quashed.

20. Recording of Telephone conversation/ Statements

20.1 In S. Pratap Singh v. The State of Punjab AIR 1964 AIR 72 (SC), 1964 SCR (4) 733, it was held that rendering of the tape recorded conversation can be legal evidence by way of corroborating the statements of a person who deposes that the other speaker and he carried on that conversation or even of the statement of a person who may depose that he overheard the conversation between the two persons and what they actually stated had been tape recorded. How much weight to be given to such evidence will depend on the other factors which may be established in a particular case.

20.2 Other cases on Tape recorded conversation/ statement

a) Yusufali Esmail Nagree v. The State of Maharashtra 1968 AIR 147 (SC)

b) Ram Singh v. Col Ram Singh AIR 1986 SC 3

c) Rama Reddy v. V.V. Giri AIR 1971 SC 1162

d) R.M. Malkani v. State of Maharashtra AIR 1973 SC 157

e) Z.B. Bukhari v. B.R. Mehra AIR 1975 SC 1788 -Tape recorded speeches are documents as defined in section 3 of the Evidence Act.

21. Conclusion

An admission in statement under section 132(4) is vital and the department may make addition in income based on such statement unless successfully retracted. However, in order it to be effective, the retraction should be made properly and at the earliest possible opportunity and establishing the situation as to how the facts stated in statement mistaken on facts or in law and if necessary to prove that the statement was recorded with coercion and pressure.

(Narayan Jain is author of the famous books “How to Handle Income Tax Problems” and “Income Tax Pleading & Practice”. He has served AIFTP as General Secretary and as Vice President. Email : [email protected])

The Proposition that no man can make a profit out of himself as recognized by House of Lords (1889) is now well accepted. The principle of mutuality has been tasted at different judicial levels and as of now enough guidelines are available as to its application and tax treatment.

Although a mutual association (Ma) is not defined in income tax law, however it may be defined as a tool for a section /group of members where the members themselves are the contributors and participants and where it is stipulated that in case of dissolution, the funds available would be distributed amongst themselves. Where the clause as to distribution of surplus to members upon dissolution is absent, such association would entail dual character of Ma as well as a charitable form. The Ma may be in the form of a society, co-operative society, trade/merchant associations, chambers, resident’s welfare society, employees association etc and they can also function as a charitable company u/s 8 of The Cos Act, 2013.

It is a well settled law that where the contributors and participants (Beneficiaries) are the same, the principle of mutuality survives and hence income like membership fees, Subscription fees, entrance fees, charges for welfare funds etc qualify for exemption on principle of mutuality, provided that the same are spent/ applied for the benefit of such members only. Even the room rents, rent of premises in the property of association taken from members would not vitiate mutuality. Similarly mutuality condition is not vitiated if a club has different classes of membership- their rights, enjoyments, subscriptions- may be different but in no way it affects mutuality. Even the existing members may go out and new members come in. However where the receipts of fees/charges from members sounds of a taint of commerciality, tax liability may arise such as collection of transfer fees for transfer of flats was held to be taxable in the case of ITO v. Jai Hind Co-operative Housing Society Limited.*1

In the case CIT v. Bankipur Club Limited it was held that overcharging for refreshments and beverages from members cannot be considered as tainting of commerciality. The fact that there is some diversion to non-members where some of the rooms were let out to non-members not necessarily vitiate the principle of mutuality as long as there is substantial compliance with the principle.

A persisting contraversory in the mind of tax professionals is whether the income of mutual association from interest on bank deposits is covered by mutuality principle or not?

In view of the writer of this article, this controversy had been settled long back by the Apex Court while delivering the judgments in the cases of CIT v. BANKIPUR CLUB LIMITED*2, CHELMSFORD CLUB*3 AND CAWNPORE CLUB*4 JUDGEMENTS.

In case of BANKIPUR CLUB (1997, AND 2004) the SC quoting with approval the head note and summarizing the decision of the full bench of Patna High Court(in the case of Ranchi Club Ltd), held that the rent of rooms from non-members as well as interest from bank deposit qualify for mutual principle. Similarly while dealing with the case of Chelmsford Club (2000),the SC overruled the decision of CIT v. Wheelers Club Ltd*5 (taxing on misc. income). Here it would be pertinent to mention that the Wheelers case was earlier dissented by Madras High Court also in the case of Presidency Club(1981)*6.

The Dept. generally insists, amongst others on the judgment of Gujarat High Court in the case of Sports Club of Gujarat*7 for taxing income such as bank interest, charges from non-members etc. but the thin line of distinction needs to be well understood. In fact in this case, the Court discussed the language of the objectives mentioned in the memorandum & articles of the Club which had authorized and allowed large discretion to its management to invest surplus not only in bank deposits but also shares, real estate or any other form or shape ,which sounded a taint of commerciality in the sense that when the income derived from such investments over a period of time is added to the surplus and when such surplus is distributed to the members, a component of income so distributed would be a plough back not from their own fees but also from out of income generated through transactions entered into with taint of commerciality, hence not qualified for mutuality principle. However the High Court further observed that all such income if tainted with commerciality, then only may be disqualified from mutuality otherwise not. From the above, it can be inferred that misc. income of a club like interest from bank deposits, income from third parties being guests of members or even the incidental income from charges of Mela, commission on purchases, certification fees, or fees charged for conducting seminars/conferences with participation of non-members also against a fee, rent of rooms/premises from guests of members or the members should also be eligible for exemption on principle of mutuality. Only commercial activities transacted with any outsiders or for that matter even with members would attract tax liability.

Incidentally the decision of Madras Gymkhana club v. CIT*8 had gone against the ‘a’, however with due regards, it was passed without considering the apex court ruling passed in the case of Ranchi club Ltd. The High Court in this case was influenced by the fact that the club had abnormal funds which could not be treated as necessary for running the club and therefore such interest income was not considered to be covered by the mutuality principle. High Court in this case made an incidental reference to the judgment of Gujarat High court in Sports Club of Gujarat*7,where interest income was taxable only because the management had large discretion in the matter of investment like in shares, real estate etc. However the conception would be clear in the minds of the tax professionals when the rider put by the HC in the judgement is read with utmost care. The rider is—

“therefore what is relevant is to see as to how the funds generated by way of contribution, donation etc from the members as well as the outsiders are expended and utilized for the objects of providing various recreational and other facilities to the members and then alone it can be held that the principle of identity between the contributors and the participants is fulfilled which is the basic requirement in the concept of mutuality.”

From the above discussion, it may be inferred that where there is no taint of commerciality in transactions held with members as well as non-members or outsiders and the mutual association functions well within its authorized field, then income earned from surplus funds or all other misc. income earned are exempt applying the mutuality principle. In such cases, even section 28(iii) won’t apply.

Likewise emphasis may be laid down in favour of Ma, that a bank where the deposits are placed, is neither a contributor nor a participant but mere a custodian or constructive trustee for the association/members and in no way it is a transaction with any outsider/non-member, hence mutuality is not lost.

The recent judgment of Delhi High Court in CIT v. Delhi Gymkhana Club*9 which can be considered to be the last word in favour of the Ma. The HC while passing this judgment referred to number of earlier judgments latest amongst them was – CIT v. Standing conference of public Enterprises(SCOPE)*10.

A feeling prevails that there is a set back after the decision in Bangalore Club*11 as regards the transactions with non-members and even income from bank deposits being taxable. However the facts are not so. The observation of the SC in this case was prompted by the theory that there could be trading transactions with both members and non-members as in this case the club had deposited its funds with some banks who were corporate members of the club and also with some other banks who were not corporate members of the club and while filing return of income, voluntarily offered interest income from bank deposits held with non-corporate members(banks) and in the given facts and circumstances of the case, the principle of mutuality was dealt in by SC verdicting that entire interest income would be taxed for taint of commerciality.

However The writer of this article is of the opinion that the case of Bangalore club should be seen as dealt within the given situation and cannot be straightly applied to other cases because such an inference would go against the law well settled in CIT v. Bankipur Club as well as CIT v. Cawnpore Club where it is clearly laid down that interest income from bank deposits and rent income from premises of the club do not vitiate the mutuality principle.

Similarly it should be clear to our minds that income which is not liable to be taxed on mutuality principle, can not be brought to tax by treating a mutual association as AOP (ITO v. Sarvodaya mutual benefits trust)*12

MUTUAL ASSOCIATION CAN ALSO BE A CHARITABLE INSTITUTION

It is well appreciated that any mutual organization generally, do have an element of altruism(spirit of charity), since the benefit availed by a member is not always commensurate with his contribution ,he may enjoy less or more as compared with others members. It was for this reason that even when there is no return on the contribution made by a member, as happens to be the case where association is formed with the purpose of general public utility as well; mutuality is not lost. Such association may also be entiltled to tax concessions as a charitable institution as was found in Addl.CIT v. Surat silk cloth manufacturer’s Association*13. In such cases ,income from entrance fees, subscription and donations etc. from members may be governed by the principle of mutuality and Any other income governed by the exemption for charitable institution. It is likely that both concessions , whether on mutuality principle or as a charitable institution, may be available. However it would be imperative for such MI to take registration u/s 12AA. It would be noteworthy that every receipt like advertisement receipts for souvenirs and journals which is not open for sale shall not be commercial income attracting proviso to section 2(15). In PHD Chamber of commerce & industry v. DIT(exem.)*14, it was held that any activity in the nature of rendering assistance to trade should not be considered as business.

The doctrine of mutuality, as the law so far developed, may be understood in the way that the surplus funds so invested in bank deposits and the interest earned on such deposits have resulted out of the transactions held amongst the members then also income would be exempt applying the mutuality principle and if generated from non-members then taxable. It may be advised that a Ma may account for separately the income earned out of the transactions with members and non-members. However the writer of this article is of the opinion that all income of a Ma would be exempt if there is no taint of commerciality regardless of separate accounting.

Surprisingly there is no section in Income Tax Act which straightly allows Ma to claim exemption. A new clause in section 10 can be inserted in line with section 10(23AAA) and 10(23C) for Ma. In the absence of the same, it becomes very difficult to choose the correct return Form and appropriate columns to claim exemption. This flaw needs to be looked into by the law makers.

Case laws referred in this article-

1. (2009)318 ITR (AT) 407 MUM.

2. (1981)129 ITR 787(PAT.),(1997)226 ITR 97(SC)

3. (2000) 243 ITR 89(SC)

4. (1984) 146 ITR 181(ALL.)

5. (1963) 49 ITR 52(ALL.

6. (1981) 127 ITR 264(MAD)

7. (1988) 171 ITR 504 (GUJ.)

8. (2010)328 ITR 348 (MAD)

9. (2011) 339 ITR 525 (DEL.)

10. (2009) 319 ITR 179(DEL.)

11. (2013) 350 ITR 509(SC)

12. (2013) 22 ITR (TRIBUNAL) 277 CHENNAI

13. (1980) 121 ITR1 (SC)

14. (2013)357 ITR 296(Del.)