Query

Rate of Interest

The querist has claimed ITC. However, subsequently there is found to be mismatch between ITC claimed in GSTR 3B vis-à-vis GSTR 2A. The querist is ready to reverse ITC and pay difference. However, what will be the rate of interest, whether 18% u/s.50(1) or 24% u/s.50(3) of CGST Act?

Reply

To see correct position, it will be better to see where section 50(3) applies. If section 50(3) is not applicable then safely it can be said that it will attract interest u/s.50(1) i.e.@ 18%.

Section 50(1) to 50(3) of CGST Act reads as under:

“50. Interest on delayed payment of tax.—

1. Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council:

   [Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger.] 78

2. The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.

3. A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty four per cent., as may be notified by the Government on the recommendations of the Council.”

The interest under section 50(3) applies when there is undue or excess claim of ITC under section 42(10).

Section 42(10) reads as under:

“42. Matching, reversal and reclaim of input tax credit.—

(10) The amount reduced from the output tax liability in contravention of the provisions of sub-section (7) shall be added to the output tax liability of the recipient in his return for the month in which such contravention takes place and such recipient shall be liable to pay interest on the amount so added at the rate specified in sub-section (3) of section 50.”

As per this section when there is reduction from output liability in contravention of provision of section 42(7), then interest as per section 50(3) shall apply.

Therefore, reference is required to be made to section 42(7). The said section reads under:

“42. Matching, reversal and reclaim of input tax credit.—

(7) The recipient shall be eligible to reduce, from his output tax liability, the amount added under sub-section (5), if the supplier declares the details of the invoice or debit note in his valid return within the time specified in sub-section (9) of section 39.”

As per this section the person can reduce his output tax liability by the amount added under section 42(5), if the supplier declares the details of invoices or credit note in his valid return filed within time limits given in section 39(9). Therefore, it is necessary to find out what is being added as per section 42(5).

Section 42(5) & (3) reads as under:-

“42. Matching, reversal and reclaim of input tax credit.—

(5) The amount in respect of which any discrepancy is communicated under sub-section (3) and which is not rectified by the supplier in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the recipient, in such manner as may be prescribed, in his return for the month succeeding the month in which the discrepancy is communicated.”

Thus, as per this section if the mis-match conveyed to recipient is not cleared by supplier, it will be added in output liability of succeeding month. Mis- match is conveyed as per section 42(3), reproduced below:

“42. Matching, reversal and reclaim of input tax credit.—

(3) Where the input tax credit claimed by a recipient in respect of an inward supply is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns, the discrepancy shall be communicated to both such persons in such manner as may be prescribed.”

This section provides for communication of mismatch to both parties i.e. supplier and recipient who claims ITC.

From above inter connected provisions, the sequence can be arranged as under:-

The discrepancy of mis-match will be found out by revenue and conveyed to supplier/ recipient (Section 42(3)).

If discrepancy communicated is not rectified by supplier in concerned month in which discrepancy communicated , then the recipient should add such amount in its output liability (sec.42(5)).

The recipient can once again take credit and reduce his output tax liability, if supplier rectifies his mistake by valid return filed within time limit of section 39(9).(sec.42(7)). As per section 39(9) the supplier can declare details of previous year till due date of filing return of September of succeeding year or actual date of filing annual return whichever is earlier. Due to section 42(7) supplier gets longer time to rectify his position.

If person has taken above reduction as per section 42(7) and it transpires to be incorrect then again it will be added back in output tax liability in return of concerned month of contravention (sec. 42(10)) and it is here that interest on same will apply @ 24% u/s.50(3).

Therefore, there are two situations.

1. Where the output tax liability is added due to communication of mismatch. This will be the first occasion in chain and hence interest will be 18% u/s.50(1). This is also clear from section 42(8).

2. Second occasion occurs when, after first addition in output liability, the recipient reclaims credit and reduces its output tax liability on ground that supplier has rectified discrepancy by valid return as per section 39(9).

However, if such assumption turns out to be wrong then the output liability will again be added by such amount of discrepancy. At such time the interest rate will be @ 24% u/s.50(3).

In summery, it can be said that in normal circumstances, where the recipient discharges discrepancy amount at first occasion the rate will be @ 18% u/s.50(1).

It is only when there is reclaim of such amount and if such reclaim turns out to be wrong, then the rate of interest will be @ 24% u/s.50(3).

The querist can see position accordingly.

1. Going Concern

Facts : The applicant, is inter alia engaged in cable operation business. The applicant is a Multi-System Operator (‘MSO’) and purchases digital signals from broadcasters. These signals are transmitted through satellite to receiving stations owned by MSOs. MSOs further transmit these signals through cables to the Local Cable Operators (‘LCO’) who own their last-mile network to individual homes and customer premises. M/s. ACN Cable Private Limited is inter alia engaged in provision of similar services where it receives broadcasting signals and transmits them to individual customers through LCOs.

ACN has entered into a Business Transfer Agreement with the applicant. In terms of the Agreement, ACN has agreed to purchase entire cable operation business of seller. All rights, title and interest in and to the business, assets, subscribers/ customers, linked LCOs will get Transferred from applicant to ACN as a going concern except the liabilities which have presently arisen or will arise for the past business relationship/ earlier period and the employees.

The applicant has raised following question before the AAR : Whether SI.No.2 of the Notification No.12/2017 – Central Tax (Rate) dated June 28th, 2017 (‘Service Exemption Notification’) granting exemption to ‘Services by way of transfer of a going concern as a whole or an independent part thereof’ is applicable on the business transfer undertaken in the present instance?

Observations & Findings : On perusal of the facts, it is noticed that the applicant’s Business as MSO sought to be sold is in functioning state and the transaction by virtue of the Business Transfer Agreement contemplates the sale of business to the purchaser, except any of the employees or liabilities and the purchaser intends to continue the same business.

The term ‘going concern’ is defined nowhere in the CGST Act. Hence, the term is taken in its common parlance as used in trade. The running business, when sold in its entirety or a branch of the business, it is considered a going concern in lock, stock and barrel.

The concept of transferring a company as a ‘going concern’ was examined by the Delhi High Court in the land mark judgment of In re Indo Rama Textile Limited (2013) 4 Comp LJ 141 (Del). In this case the Delhi High Court held that a company is said to be transferred as a ‘going concern’ when the assets and liabilities being transferred constitute a business activity capable of being run independently for a foreseeable future. The Supreme Court in Allahabad Bank vs. ARC Holding AIR 2000 SC 3098 (Allahabad Bank case) held that if the company is sold off as a ‘going concern’, then along with the assets of the company, if there are any liabilities relevant to the business or under taking, the liabilities too are transferred.

In view of the judicial precedents as mentioned above it is evidently clear that the transaction of ‘transfer of business’ in the instant case does not fit in the definition of a ‘going concern’ in the context of exclusion of liabilities.

Hence, the entry at serial No.2 of the chapter 99 of the Notification No.12/2017-Central Tax (Rate) dated 28.06.2017 prescribing the rate of tax for ‘the services by way of transfer of a going concern as a whole or an independent part there of’, as “NIL” rated, is not applicable to the present case.

Ruling

Question: Whether SI.No.2 of the Notification No.12/2017 – Central Tax (Rate) dated June 28th, 2017 (‘Service Exemption Notification’) granting exemption to ‘Services by way of transfer of a going concern as a whole or an independent part thereof’ is applicable on the business transfer undertaken in the present instance?

Answer: Negative.

[2021 (8) TMI 523 – AAR, Andhra Pradesh – M/s SCV Sky Vision]

2. Taxable Supply

Facts : The Applicant is engaged in the business of pulses and dalls with a facility in its mill to convert pulses into dalls. The Andhra Pradesh state civil supplies corporation, limited, which is a State Government undertaking engaged in the business of supplying essential commodities to the Fair price shops for public distribution, has given a work order to the applicant. The applicant is appointed as miller cum transporter for conversion and supply of resultant red gram dall to allotted districts in 1 kg packets. The supply involves the following services:

1. Lifting of Red Gram from the Godowns of the recipient and transportation to the dall mill.

2. Conversion of Red gram into dall (milling)

3. Packing the Red gram dall in the specified manner.

The applicant receives consideration for the above services, besides incidental charges for un-milled Tur.

The applicant’s main contention is that whether the supply of red gram dall by receiving indigenous red gram under barter system attracts any tax under GST.

The applicant submitted that, in respect of the above transaction, whole red gram was purchased before hand and it was converted into dall and supplied in advance to the corporation. Subsequently after receipt of dall, Corporation has sent whole red gram to the applicant as per its convenience and availability.

The applicant has raised following questions raised before the authority:

1. Whether the supply of red gram dall receiving indigenous red gram under barter system attracts any tax under GST?

2. Whether the packing charges received by the applicant for packing 1 Kg. of red gram dall supplied to the said Corporation are taxable?

Observations & Findings : We examine whether the activity of milling of whole red gram to red gram dall by the millers is liable to GST or not. The clarification issued in this regard on the custom milling of paddy is applicable as well in the instant case. F.No.354/263/2017-TRU by the Government of India, Ministry of Finance, in its letter dated 20.11.2017 clarifies as follows;

“3. Milling of paddy is not an intermediate production process in relation to cultivation of plants. It is a process carried out after the process of cultivation is over and paddy has been harvested. Further, processing of paddy into rice is not usually carried out by cultivators but by rice millers. Milling of paddy into rice also changes its essential characteristics. Therefore, milling of paddy into rice cannot be considered as an intermediate production process in relation to cultivation of plants for food, fibre or other similar products or agricultural produce.

4. In view of the above, it is clarified that milling of paddy into rice is not eligible for exemption under S. No. 55 of Notification 12/2017-Central Tax (Rate) dated 28th June 2017 and corresponding notifications issued under IGST and UTGST Acts.

5. GST rate on services by way of job work in relation to all food and food products falling under Chapters 1 to 22 has been reduced from 18% to 5% vide notification No. 31/2017-CT(R) [notification No.11/2017-CT (Rate) dated 28.06.17. S.No.26 refers]. Therefore, it is hereby clarified that milling of paddy into rice on job work basis, is liable to GST at the rate of 5% on the processing charges (and not on the entire value of rice).”

Thus, the milling of Red gram fall under the Serial No.26 Heading 9988 (i) (f) of the Notification no.11/2017 Central Tax Rate dated 28.06.2017 and as amended from time to time and liable to tax @ 5%.

In the instant case, the custom milling is the principal supply, while the packing charges received by the applicant for packing of I Kg. of red gram dall supplied to the said Corporation constitutes ancillary supply. As seen from the agreement, it is a single contract of composite supply comprising of two or more taxable supplies like milling, transportation and packaging services. Out of which, milling is the principal supply and the rest of the supplies are liable to be taxed at the same rate of principal supply.

Ruling

Question: Whether the supply of red gram dall 2600 MTs by receiving 3823.529 MTs of red gram under barter system attracts any tax under GST?

Answer: The transaction cannot be considered as ‘barter’, but a ‘job work’ and attracts the tax rate of 5% under Serial No.26 Heading 9988 (i) (f) of the Notification No.11/2017 Central Tax Rate dated 28.06.2017 as amended from time to time.

Question: Whether the packing charges of ₹ 4.50 received by the applicant for packing 1Kg. of red gram dall supplied to the said Corporation are taxable?

Answer: Affirmative.

[2021 (8) TMI 524 – AAR, Andhra Pradesh – M/s Seetharamanjaneya Dal and Fried Gram Mill]

3. Exempted Supply

Facts : The applicant, is a manufacturer of product ‘Lassi’ will be named as ‘Laban’ and sold under Brand name of ‘Elan’.

The applicant has raised the followings Question on which Advance Ruling sought?

1. Whether product manufactured as ‘Lassi’ but named as ‘laban’ can be classified as Lassi under Description of Goods?

2. Is the goods taxable or exempted?

3. If exempted, HSN of the Product and rate of tax on product.

4. If taxable, HSN of product and rate of tax on product.

Observations & Findings : We note that Lassi is a fermented milk drink and its main ingredients are curd, water and spices. We have noted the manufacturing Process submitted by the applicant. On reading the contents of the subject goods displayed on the bottle of ‘laban’, we find following ingredients printed on the bottle: Pasteurized toned milk, spices, pudina, green chilli, ginger, salts, active culture, added nature identical flavour and stabilizer (INS440). Further, on the bottle of ‘laban’ we note that ‘‘Dairy based fermented Drink’ is printed. The product would fall under the HSN 0403.

Inferring from the manufacturing process submitted and the contents of the subject goods printed on its bottle, we hold subject goods are Lassi. We find goods ‘Lassi’ is described at Sr. No.26 of Notification No.2/2017-Central Tax (Rate) dated 28-6-17.

Ruling : The goods are classified as Lassi at HSN 040390 and is exempt from GST.

[2021 (8) TMI 784 – AAR, Gujarat – M/s Sampoorna Dairy and Agrotech LLP.]

4. Import of Service

Facts : The applicants are Non-vessel owner container carriers/ Operators (NVOCC) who are based in India but lease containers from suppliers outside the country and in turn use it in transportation of bulk chemicals.

The applicant entered into a lease purchase agreement from supplier located outside the Country. In terms of this agreement the applicant pays lease rentals every month and he is entitled for the purchase of the container during the period of lease or at the end of the lease period by paying the agreed rate. The applicant further contended that the said transfer of title occurred on a future date in pursuance of a pre-existing lease agreement and the supplier transfers title only after payment of full consideration as per terms of agreement. the applicant sought Advance Ruling on the following issues:-

Is GST liable to be paid on leasing of tank containers taken form a supplier i.e., lessor who is located outside India and the tank containers do not reach India? As it is finance lease, it is supply of goods and tank containers do not reach the Indian Territory.

The applicant submits that they have recognized the tank containers and assets in the books of account from the inception of the lease and there is certainty that the same would be purchased later. Therefore the applicant is of the opinion that this transaction is a transaction for supply of goods from the inception of the agreement in terms of SL.No.1(c) of Schedule II to Section 7.

Observations & Findings : A plain reading of the relevant terms of the contract clearly indicate the consensus ad idem or the meeting of minds between the parties to the contract that the agreement is prima facie for lease. There is no fixed lease term but the contract only mentions minimum lease period which may extend beyond such minimum period.

There is no binding obligation for purchase of the goods at the end of the lease term. The agreement does not confer any title upon the lessee but a mere option to purchase based on fulfilment of certain conditions.

Clearly the agreement does not fulfill the conditions mandated under Entry 1 (c) of Schedule II to the CGST Act i.e.,

1. The agreement should leave no scope for uncertainty regarding the transfer of property.

2. The agreement should not provide for an option to purchase the goods at the end of the lease period but shall make it an obligation on the part of contracting parties to necessarily transfer such property.

3. The agreement which shall not leave any option for return of the goods.

4. The terms in the copies of agreements submitted by the applicant it is amply clear that the leasee may or may not take final possession of the goods.

As per the statutes there is a binding obligation on the parties to the agreement to complete the sale i.e. Transfer of title as well as property whereas in the present case there is no such obligation but there is an option for the lessee to either purchase the goods or return them to the lessor. There is even a clause in the agreement as to the (condition and) place where the goods can be returned on termination of the lease.

Where there is such an option available to the lessee, the transaction does not fall under entry 1(c) of Schedule II to the CGST Act, 2017.

Ruling : The applicant is liable to pay IGST on importation of lease services into India in light of the above discussion.

[2021 (8) TMI 892 – AAR, Telangana – M/s Deccan Transco Leasing P Ltd.]

HIGH COURTS

MADRAS HIGH COURT

NATIONAL ASPHALT PRODUCTS AND CONSTRUCTION CO.

v.

STATE OF TAMIL NADU

[M.S. Ramesh, J]

W.P. NO. 11574 OF 2006 AND WPMP No.13190 of 2006

Date of Decision: September 2, 2020

Penalty—Non payment of entry tax—No payment of entry tax on import of heavy road vehicles as per prevailing law—Later levy of entry tax upheld by Apex court on such imports—Penalty imposed—writ filed—Bonafides observed on part of petitioner in paying entry tax on demand—Therefore, penalty not justified

The petitioner had imported heavy road laying vehicles and had not paid the entry tax in view of the prevailing law that time. Subsequently, the levy of entry tax on imported vehicles was upheld by the Supreme Court in the case of State of Kerala and others vs FR. William Fernandez and others. A notice has been issued proposing to levy penalty as per Sec.15 of the Entry Tax Act, 1990. Hence, a writ is filed in this regard. It is held that there is no fault with the petitioner not paying entry tax at that time. When the enforcement wing insisted for payment, the petitioner immediately paid the entry tax on the same day itself. Where there are bonafides on part of the importer in referring from paying the tax, the penalty is not justified. The petition is allowed.

PUNJAB AND HARYANA HIGH COURT

UFV INDIA GLOBAL EDUCATION

v.

UNION OF INDIA

[RAKESH KUMAR JAIN & ASHOK KUMAR VERMA, JJ]

CWP NO.11961 OF 2020 (O&M)

Date of Decision: September 9, 2020

Attachment of bank account under CGST Act—Scope of section 83—Proceedings under section 67 over—held effect of s 83 ended after proceedings u/s 67 of the Act were over—pendency of the relevant sections is sine non quo—account ordered to be released

The officers of the DGGSTI had visited the premises of the petitioner taking access of all required documents. The bank account was provisionally attached U/s 83 of CGST Act, 2017. The petitioners had filed objections to it after which the Bank account was partly released for payments under Amenity Scheme. A writ is filed contending that the order of the provisional attachment has been passed U/s 83 of the Act on account of launching of proceedings u/s 67 of the Act and it is argued that proceedings U/Sec.67 were over and now proceedings either U/s 63 or Sec/74 were initiated, therefore, the attachment order u/s 83 has become redundant. It is held that effect of Sec.83 of the Act comes to an end as soon as the proceedings pending under the above mentioned sections are over because pendency of the proceedings is the sine qua non and if the Commissioner was of the opinion that it is necessary to do in the interest of government revenue it can passed an order in writing to attach any bank account if the proceedings are over. Therefore, the order passed by the respondent is patently illegal. The bank account of the petitioner is ordered to be released.

GUJARAT HIGH COURT

JSK SONS

v.

STATE OF GUJARAT

[J.B. PARDIWALA &
BHARGAV D. KARIA, JJ]

R/SPECIAL CIVIL APPLICATION NO.3109 OF 2020

Date of Decision: March 5, 2020

Provisional attachment of bank account—fictitious bills issued—enforcement wing report submitted against the petitioner—petitioner ignorant about such fictitious transactions made from its own firm—Section 83 rightly invoked—reasonable apprehension by department about failure to pay tax dues by petitioner—No interference required by court

It is the case of the petitioners that the bank accounts have been provisionally attached under Sec.83 of GST Act by the respondents without forming an opinion necessary to pass such order. The court has observed that the petitioner has issued a large number of e-way bills within a very short period without actual movement of goods. The report submitted by the Enforcement Department makes it further clear about the issue of bogus documents. Also the petitioner has shown ignorance with regard to the transactions reported to be fictitious made from the firm of which it itself is the owner.

Prima facie there is a reasonable apprehension that the petitioner may default in ultimate collection of demand likely to be raised. As the petitioners are indulging in bogus billing, causing loss to revenue, the impugned order is passed for protecting the government revenue as the petitioner has failed to produce on record to show its capacity to pay the tax dues which may be levied. It cannot be said that the respondent has no reason to form an opinion as required U/s 83 of the Act.

No interference is required to be made by the court.

MADHYA PRADESH HIGH COURT

AGRAWAL OIL MILL

v.

STATE OF M.P.

[SHEEL NAGU AND RAJEEV KUMAR SHRIVASTAVA, JJ.]

W.P. 12679 OF 2020, W.P. 12690/2020 AND W.P. 12687/2020

Date of Decision: September 15, 2020

Natural Justice—Scope of section 67 of CGST Act –Documents seized on search—sufficient opportunity granted to produce remaining documents—Non production implies purposeful withholding of documents—prayer by petitioner to grant copies of seized documents declined on account of apprehension that it may lead to interpolation for depressing tax liability by petitioner—authority within its jurisdictional purview in the given case to refuse for supply of copies—Discretion u/s 67 reasonably exercised—no interference called out

A writ is filed by the petitioner contending that the copies of the seized documents were denied to it after the search and seizure process conducted by the officers in its premises. On the other hand the authority contents that the petitioner was asked to produce certain documents which were not supplied contending that the same were maintained in the computer. The authority has recorded that the intention on part of the petitioner in seeking copies of the seized documents is to cause interpolation in the account books maintained in his computer and therefore, discretion U/s 67 of the CGST Act was exercised denying the prayer for grant of copies. It is held that the opinion is founded upon reasonable apprehension that the supply of copies can adversely affect the investigation; therefore, the discretion U/s 67 of the Act appears to be judicially exercised. It cannot be said that the authority has travelled beyond its jurisdiction purviews.

CHHATTISGARH HIGH COURT

NSPR PLR JOINT VENTURE

v.

COMMISSIONER OF CHHATTISGARH STATE TAX (GST)

[GOUTAM BHADURI, J]

WPT No. 130 of 2021

Date of Decision: August 27, 2021

Predeposit—appeal—dismissal of for failure of predeposit of 10% as required under S 107 of CGST Act—observed that entire tax liability stood deducted from cash ledger already—Therefore, appeal filed alongwith application of condonation for delay could be heard on merits without going into technicality—Its not that that no amount is deposited—department directed to hear on merits

In this case a summary tax liability was served against which an appeal was preferred. The appeal was rejected for failure of predeposit of 10% as required under section 107 of CGST ACT. The Hon’ble court has observed that if the entire amount of tax liability has been deducted and the appeal was pending along with an application for condonation of delay, then the appellate authority can always adjudicate the facts whether there was sufficient cause to condone the delay and may further extend the period of filing for a period of one month as per section 107 (4) of the central goods and services tax act, 2017. The dismissal of the appeal only on the ground that 10% amount has not been deposited cannot be too technically viewed and always the petitioner can go for adjudication on merits. It is not a case that no amount is deposited till date. The respondents are directed to decide the appeal in accordance to the observation made herein before.

BOMBAY HIGH COURT

KASTURBA HEALTH SOCIETY

v.

UNION OF INDIA, THE STATE OF MAHARASHTRA, THE CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS, THE ASSISTANT COMMISSIONER, GOODS & SERVICE TAX DIVISION, HINGNA, NAGPUR

[SUNIL B. SHUKRE & ANIL S. KILOR, JJ]

WRIT PETITION NO. 1745 OF 2020

Date of Decision: August 30, 2021

Advance Ruling—whether petitioner exempted from tax being occupied in imparting education—respondent contends that its not a charitable institution but only an identity engaged in running MGIMS —Held that the contention of petitioner society that to the extent it imparts education through its Special Purpose Vehicle MGIMS it is termed as an education al institution is not considered—matter remanded back for fresh consideration in light of aims and objectives of the society

The petitioner is a charitable institution engaged in imparting education. It contends that it is exempted from registration and therefore exempted from payment of service tax. The Ruling authorities had held that the MGIMS is run by petitioner society and is an entity that imparts education and cannot be termed as an educational institution. The reason given by both these authorities is that the petitioner-society is not an ‘educational institution’ because the activity of imparting education is carried on not by the petitioner-society in actual terms, but by its Special Purpose Vehicle-MGIMS.

The contention that, to the extent the petitioner-society imparts education through its Special Purpose Vehicle-MGIMS, the society would also be eligible to be termed as ‘educational institution’ and therefore, entitled for seeking exemption, is the submission of the society. This contention of the petitioner has neither been considered nor has it been answered specifically by these authorities. The authorities ought to have considered this contention independently of the activity of MGIMS and in the light of the manner in which the aims and objects of the society is fulfilled by the petitioner-society. The question posed by the petitioner-society in respect of which Advance Ruling was solicited, must be answered specifically by these Authorities. The matter is remanded back for fresh consideration and appropriate decision.

TRIPURA HIGH COURT

NE EQUIPMENT SOLUTIONS PVT. LTD

v.

TRIPURA HIGH COURT

[AKIL KURESHI, C.J AND ARINDHAM LODH, J.]

WRIT PETITION NO. 577/2020-21

Date of Decision: August 24, 2021

Evasion of tax—goods under transport—e way expired on account of unintentional and unforeseen delay—IGST liability stood paid—petition disposed of

The petitioner, a company is engaged in business of dealing in construction machinery, had transported an excavator from Silchar to its head office at Agarthala under an e-way bill. The IGST was collected from the purchaser and declared in sale invoices. When the transport vehicle reached check post, the transport department of Tripura detained the vehicle stating that the excavator has no registration in the State which was violative of Section 192 A of Motor Vehicles Act. However, the petitioner paid fine and the vehicle was released. The vehicle was now intercepted by GST authority and detained on the ground that the e-way bill generated had lost its validity .A writ is filed in this regard and it is contended that the validity of e-way bill was lost on account of unexpected and unforseen delay in crossing the check post since the transport department had stopped the vehicle for non-registration. This process took more than 24 hours. The Hon’ble Court has held that the tax authorities must make a clear distinction between deliberate tax evasion and technical defects with no intention to evade tax. When the IGST liability has been fully discharged and there is no intention of part of the petitioner to evade the tax machinery should be released. The petition is disposed of.

BOMBAY HIGH COURT

REAL TRADE

v.

UNION OF INDIA & OTHERS

[DIPANKAR DATTA, C.J & M.S KARNIK J.]

WRIT PETITION NO. 4733 OF 2021

Date of Decision: September 7, 2021

Provisional attachment u/s 83 of CGST Act—No attachment can be continued if no proceedings under Section 62, 63,64,67 and 74 are pending- writ allowed

A writ is filed contending that provisional attachment of property under Section 83 of CGST Act cannot be continued as there are no proceedings under Sections 62, 6, 64, 67, 73 and 74 pending. The Hon’ble Court has held that the present case is squarely covered by the decision given in a case of M/s S.S OFFSHORE Pvt. Ltd.. Therefore, the order of provisional attachment stands set aside with a direction to de-freeze the bank account of the petitioner. Writ is allowed.

ALLAHABAD HIGH COURT

SRI. SANJAY GARG

v.

UNION OF INDIA AND OTHERS

[VIVEK AGARWAL, J]

APPLICATION U/S 482 NO.13923 OF 2021

Date of Decision: August 13, 2021

Section 132—complaint filed against invoking of—whether congnizable by the officer in the given case—Held, the officer in the said case is the Additional director General who is vested with the powers of commissioner thus requiring no interference by the Court—contention that since assessment yet to be completed and section 132 could not be invoked is unacceptable as the assessment is available on record- application dismissed

An application under Section 482 has been filed for quashing the order whereby of cognizance of complaint under Section 132 of CGST Act has been filed summoning the applicant. It is contended that the sanction has been issued by an incompetent authority. Secondly that the assessment is yet to be completed so invoking provision of Section 132 cannot be done. The Hon’ble Court has held that the authority concerned had issued summons in response to which the applicant had appeared, answered queries and signed the statement though the applicants had retracted his statement after about 3 months. Also, there is an assessment as available on record showing the amount of fraudulent ITC availed and utilized .Therefore, the argument that there has been no assessment and prosecution has been launched without any assessment is not made out. Secondly, the Additional Director General has been vested with the powers of the Commissioner hence it does not require any interference in the order of cognizance or the order of summoning. The application fails and is dismissed.

MADRAS HIGH COURT

M.MURTAZA MUSTAN ANJARWALA

v.

THE SUPERINTENDENT OF GST

[P. VELMURUGAN, J]

CRIMINAL PETITION NO.6129 OF 2021

Date of Decision: March 29, 2021

Bail –offence u/s 132 of CGST —whether there is violation of CPC—petitioner called for enquiry- arrest memo issued the same day- remanded to judicial custody the following day—arrest is made only after enquiry and after statement is taken by petitioner based on which material is available against him- no violation of CPC—No bail is granted

The petitioner was arrested under Section 132 of CGST Act. The respondent police issued summons under Section 70 of CGST Act calling him for inquiry and on the same day by issuing an arrest memo after the inquiry he was arrested and then remanded to judicial custody the following day. The petitioner contests that the civil procedures has not been followed and no opportunity has been granted to it. The Hon’ble Court has held that sufficient opportunity has been given and during inquiry he made a statement voluntarily and based on that statement there is sufficient material against the petitioner. Therefore, after inquiry is completed when was arrested hence there is no by violation of CPC. Therefore, Court is not inclined to grant bail to the petitioner.

MADRAS HIGH COURT

SM CIVIL LABOUR CONTRACTOR

v.

THE ASSISTANT COMMISSIONER

[M. SUNDAR, J]

WRIT NO. 17601 OF 2021

Date of Decision: August 31, 2021

Show cause notice—erroneous—date of public holiday fixed for hearing by mistake—no opportunity consequently granted for personal hearing—Direction to respondent to re issue show cause notice after eliminating the error

The registration of the writ petitioner was cancelled and no opportunity of being heard was granted it being the date of public holiday. Admittedly an error has been committed in the show cause notice, so the Court directs for reissuance of the show cause notice after eliminating the error. The impugned order is thus set aside on the ground that show cause notice has been issued inadvertently by fixing personal hearing on public holiday on account of Gandhi Jayanti. A petition disposed of.

JHARKHAND HIGH COURT

DIRECTORATE GENERAL OF GST INTELLIGENCE

v.

PANKAJ AGGARWAL

[CHANDER SHEKHAR, J]

CASE NO. 665 OF 2019

Date of Decision: July 9, 2021

Contempt of order of summons—earlier petition was disposed of holding that the petitioner being summoned shall not be arrested by the officer on first day—however, after issuance of a dozen summons the petitioner neither appeared nor submitted documents—contempt filed by officer with a contention that directorate is reluctant to proceed in view of bar of arrest granted by Hon’ble court earlier—Held the respondent misread the order passed—one acting against law cannot claim its protection—avoiding appearance purposely entitles the officer to take coercive action

In 2019 a batch of petitions was disposed of holding that the petitioner shall appear before the Senior Intelligence Officer who had issued summons and they shall not be arrested on the first day when they appear. However, as contended by the Officer the petitioners did not appear and have neither submitted documents nor any other evidence on account of which the present contempt case is being filed. It is further contended that the directorate is reluctant to proceed against the individuals as the Court had held in the earlier order that the individuals shall not be arrested by the officer. The Hon’ble Court has held that the directorate has misread and misconstrued the observations in the order passed earlier it is well-settled in law that anyone intentionally acting against law is not entitled for any protection in law. It is certainly not the import of Section 69, Section 70 of the Act that an individual avoiding appearance before the authority without excuse can claim that even if it appears after dozen summons of the authority, the latter cannot take coercive action against him.

GUJARAT HIGH COURT

MAHAVIR ENTERPRISES

v.

STATE OF GUJARAT

[J.B. PARDIWALA AND VAIBHAVI D. NANAVATI, JJ]

R/SPECIAL CIVIL APPLICATION NO.9286 OF 2020

Date of Decision: September 2, 2021

Provisional attachment—Order in DRC-07 passed—provisional attachment thereafter u/s 83 is set aside being without jurisdiction as provisional attachment cannot be done after passing of DRC-07

The respondent had passed an order in Form GST-DRC 07 in March 2020 after which an order of provisional attachment under Section 83 of the Act has been passed. A writ is filed seeking quashing of the order of provisional attachment. The Hon’ble Court has held that once order in Form DRC 07 has been passed the order of provisional attachment cannot be passed. The said order is held to be passed without jurisdiction and is thus set aside.

Where a landlord sells the land to a developer, there is no role for him in a real estate project. GST on the sale of land is not payable by virtue of Para 5 of Schedule III appended to Central and State GST Act, which provides that a transaction of sale of land shall be treated neither as a supply of goods nor a supply of services.

The case is different, where the landlord does not want to sale land but want to develop the said land, jointly with a developer by entering into Joint Development Agreement (JDA) on revenue sharing basis or area sharing basis or something in cash plus mixture of revenue & area sharing. JDA can be for:

1. construction on vacant land;

2. development of land into plots or apartment.

3. demolition of existing building and constructing new building on the same land, or

4. converting existing building or a part thereof into apartments,

JDA is required to be drafted carefully, by taking into account, not only the liability to pay GST but, Capital Gain Tax, Stamp Duty, documents required for registration of the project under RERA and most important is, transfer of title of apartment or plot, to Buyers/Society.

JDA is nothing but a partnership by whatever name it is called or treated under the Income Tax Act, GST Act, etc. The Land and Development rights is a capital used by the landlord to carry out the business of development, jointly with a developer. The capital of a developer is his experience, skill, labour, goods and money he invests, for the said project. I am of the view that, in JDA, development rights by the landlord and construction services by the developer cannot be treated as supplied to each other and to and by JDA, as a third entity/party and the levy of GST on the said development rights and construction services invested in JDA as capital, is illegal.

Under the GST Act, tax is being levied erroneously on the development rights in land and on goods/services respectively contributed as a capital by the co-venturer landlord and developer. For the purpose of levying tax on their capital contribution for JDA, with effect from April 2019, following amendments have been carried out to Entry 3 of the Notification No.11/2017-CT vide Notification No.3/2019-Central Tax (Rate) dated 29/03/2019.

1. It is defined that Developer-promoter is a promoter who constructs or converts a building into apartments or develops a plot for sale. [Refer Entry 3(i) to 3(id), clause (i) of the Explanation to 4th Proviso in condition column]

2. It is defined that Landowner-promoter is a promoter who transfers the land or development rights or FSI to a developer-promoter, for construction of apartments and receives constructed apartments against such transferred rights and sells such apartments to his buyers independently. [Refer Entry 3(i) to 3(id), clause (ii) of the Explanation to 4th Proviso in condition column]

3. It is provided that the developer-promoter shall pay tax on supply of construction of apartments to the landowner-promoter. [Refer Entry 3(i) to 3(id), clause (i) of 4th Proviso, in condition column]

4. Where a registered person transfers development right or FSI (including additional FSI) to a promoter against consideration, wholly or partly, in the form of construction of apartments, the value of construction service in respect of such apartments shall be deemed to be equal to total amount charged for similar apartments in the project from the independent buyers, other than the person transferring the developing right or FSI (including additional FSI), nearest to the date on which development right or FSI (including additional FSI) is transferred to the promoter, less the value of transfer of land, if any, as prescribed in paragraph 2. [Refer Para 2A of Notification No.11/2017-CT, as amended by Notification No.3/2019-Central Tax (Rate) dated 29/03/2019]

While making the aforesaid provisions, the provisions under RERA are not taken into account. As the JDA is a joint venture, under RERA, the responsibility on the landlord and developer is joint. Section 2(zk) of RERA defines the term ‘promoter’. It does not define or explain, the term ‘developer-promoter’ or ‘landowner-promoter’. The sum and substance of the definition of a promoter is that a promoter means a person who constructs or causes to be constructed an apartment for the purpose of selling and therefore the persons covered by clause (v) of the aforesaid Section are also promoter, if they acts as a builder, colonizer, contractor, developer, estate developer, or by any other name or claims to be acting as the holder of power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale. As per explanation to Section 2(zk) of RERA, where a person who constructs/develops apartment or plot etc. for sale and the person who sells the same are different persons, both of them shall be deemed to be the promoters and shall be jointly liable as such for the functions and responsibilities specified under this Act or the rules and regulations made thereunder.

While amending the Entry 3, the existence of Joint Venture in the form of JDA is also not taken into account. In case of JDA, the Landlord, by a separate irrevocable Power of Attorney, allows the developer, to use the development rights, for carrying out the said project. As such there is no transfer of development rights by the landlord to a developer. Had it been so transferred, there was no need of power of attorney, for authorizing the developer to use the development rights. The land and all the rights attached thereto, remains with the landlord, till conveyance deed is executed in favor of buyer/society. As the said rights are not being transferred to a developer, the landlord (not the developer) executes ‘Conveyance Deed’ in favor of buyer of apartment or plot or society. The developer merely signs the conveyance deed on behalf of the landlord as well as in his capacity as a developer, as a confirming party.

When it is clear that in JDA, neither the land nor development rights are transferred to a developer, it is a legal error on the part of author of Notification No.3/2019-Central Tax (Rate) dated 29/03/2019 to insert Para 2A to Notification No.11/2017-CT providing that the value of construction service provided to landlord shall be equal to total amount charged, less the value of transfer of land as prescribed in para 2. Under the circumstance, following questions are important.

Whether allowing to use the development rights in a joint venture vide JDA is a sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made, by a landlord? In other words, whether allowing the use of development rights is a ‘supply’ withing the meaning of Section 7 of the Central and State GST Act?

In my view, allowing the use of development rights is different than permanent transfer or transfer for some period. For all kinds of supply covered by Section 7, transfer of goods or services to other person, permanently or for some period, is obligatory. As there is no transfer of developments rights to a developer, it is not a ‘supply’ within the meaning of Section 7.

Similarly, another question is, whether, a developer is liable to pay output tax in case of allotment of flats/apartments or plots to landlord, of his share in JDA?

In my view, when the Real Estate Project is carried out by JDA, the allotment of under construction apartments or under developed plots by the developer to the landlord, as landlord’s share, cannot be treated as supply by the developer or by JDA within the meaning of Section 7 of the Central and State GST Act and hence no GST thereon can be levied. In other words, in case of JDA, there cannot be two sales of under construction apartment or plot; first one by developer to landlord and second one from landlord to outside buyer. There can be only one sale by JDA to outside party. When a developer sells, landlord shall be a confirming party and when landlord sells, developer shall be a confirming party.

GST Registration: According to me, ultimate purpose behind JDA is to sale, all or some of the apartments or plots to outsiders. The liability to pay GST on the sale of under construction apartments or plots to outside buyers is joint. Hence the landlord and developer should obtain single GST registration on the basis of Joint Development Agreement, as AOP i.e. as ‘Association’ or ‘Body of Individuals’ whether incorporated or not. If the landlord wishes to take separate registration, he may obtain the same and file the returns and pay the output tax pertaining to sale of under construction flats/plots of his share. In the alternative i.e. where the landlord do not wish to take separate registration, the output tax on such sale, shall be paid by a developer, and a sale proceeds thereof, if received by the developer, shall be paid to the landlord by deducting the GST payable thereon or the landlord shall collect the sale proceeds from the buyer. Though such sale is shown by the developer in his returns, it should not be shown as sale in his Profit & Loss Account. The sale proceeds received from the buyers and paid to landlord should be respectively credited and debited to separate ledger account, which at the end will show zero balance.

The opinion expressed in this article gets support from the order in case of Mormugao Port Trust vs. Commissioner of Customs, Central Excise & Service Tax, Goa dated 07/10/2016. [2016 SCC online CESTAT 5095, 2017 ELT TRI BOM 4869, 2017 ELT TRI BOM 04869] The facts involved in the aforesaid case, the concept of joint venture and the observations and decision of CESTAT will be described in detail in the next part.

Summing up: The opinion expressed by me in this article may be pressed or relied upon by the landlord or a developer only where the tax on transactions between the two is not paid and the show cause notice is received for the said levy. Otherwise, the Association of Builders should represent before the GST Council to amend the Entry 3, to do away the levy of GST on the so-called supply between the landlord and developer in case of JDA.

Introduction

The concept of GST on Government Services under the Service Tax era as well as GST regime has been under the cloud of confusion and much debated. Payments made to Government can be broadly classified into fees and taxes. Reverse charge on Government Services puts an additional burden on the business community to keep track of such payments, bifurcate such payments into fees or taxes, take a prudent call and if required pay tax on reverse charge and thereafter avail input tax credits if eligible. The biggest stumbling block in this whole process is the proper classification of payment into fees or taxes. In this paper, an attempt has been made to decode the taxation issues of so-called ‘Government Services’.

Taxability of Government Services in Service Tax Regime

Scope of taxability of Government Services has been enlarged significantly w.e.f. 1st April 2016. Accordingly, from the said date all the services provided by the Government or Local Authority to a business entity, except services that are specifically exempted or are covered by any entry of negative list were made liable to service tax. Further, recipient was made liable to pay 100% of applicable service tax on a reverse charge basis.

Taxability of Government Services in GST regime

CGST Act defines ‘reverse charge’ under section 2(98), as to mean, the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both…..Section 9(3) of the CGST Act and Section 5(3) of the IGST Act empowers the Central Government to notify supplies subject to reverse charge. Exercising powers under aforesaid sections Notification No. 13/2017-CT(R) dated and Notification No. 10/2017-IT(R) both dated 28.06.2017 (hereinafter ‘RCM Notifications’) have been issued to notify various services on which the recipient is liable to pay applicable GST on reverse charge basis.

Entry No. 5

Entry No. 5 of said Notification fasten RCM liability on Government services received by the business entity. Said entry can be explained in detail as under:

Particulars	Description
Category of Supply of Services under Reverse charge	Services supplied by the Central Government (CG), State Government (SG), Union territory (UT) or Local Authority (LA) to a business entity
Supplier of Services	CG,SG,UT or LA
Recipient of Services	Any business entity located in the taxable territory
Services excluded from the operation of reverse charge	Following services even though provided by the aforesaid supplier of services to a business entity shall not be subject to reverse charge (1) renting of immovable property, and (2) services specified below- services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;  transport of goods or passengers

Entry No. 5A

Further w.e.f. 25th January 2018, Entry No. 5A has been added in the aforesaid RCM Notifications. As per Entry No. 5A, services supplied by the CG,SG,UT or LA by way of renting of immovable property to a person registered under GST is covered under reverse charge. Before moving ahead, it would be apt to highlight that Entry No. 5A expands the scope of reverse charge mechanism in as much as earlier (till 24th January 2018) such supply was under forward charge¹.

Before assimilation of the detailed GST implications on Governments services, let us first understand the meaning of various relevant terms used in aforesaid reverse charge entries.

Meaning of Business Entity

The term ‘business entity’ has not been defined in the above RCM Notifications. However, reference can be made to clause 2(n) of Notification No. 12/2017- CT(R) dated 28.06.2017, which defines a business entity means any person carrying out business.

Meaning of Government

Section 2(53) of the CGST ACT, respective State/UT GST Act defines the term ‘Government’. It simply means the Central Government, State Government or Union Territory as the case may be. Term ‘Central Government’, ‘State Government’ or ‘Union Territory’ have not been defined in the GST law, hence we would need to look at the definition of these terms, as are available in General Clauses Act, 1977.

A conjoint reading of Section 3(8) of General Clauses Act, Article 53 and 77 of Constitution of India it can be inferred that Central Government means the President and the officers subordinate to him while exercising the executive powers of the Union vested in the President and in the name of the President. Applying same analogy and as supported by a reading of Section 3(60) of General Clauses Act r.w. Article 154 and 166 of the Constitution, State Government means the Governor or the officers subordinate to him who exercise the executive powers of the State vested in the Governor and in the name of the Governor

Meaning of Local Authority

Definition of the term ‘local authority’ as defined in section 2(69) of the CGST Act is verbatim reproduced as under:

“Local Authority” means––

(a) a “Panchayat” as defined in clause (d) of Article 243 of the Constitution;

(b) a “Municipality” as defined in clause (e) of Article 243P of the Constitution;

(c) a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund;

(d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006;

(e) a Regional Council or a District Council constituted under the Sixth Schedule to the Constitution;

(f) a Development Board constituted under article 371 of the Constitution; or

(g) a Regional Council constituted under article 371A of the Constitution;

It is to be highlighted that the scope of clause(c) above is very wide. Many State and Central boards though may not fall within the definition of Central/State government but depending upon facts and circumstances may be covered under clause(c) above. Further to understand the correct meaning of various constituents of local authority one may have to refer to various clauses/articles of the constitution and other legislation as referred to in the above definition. It is worth mentioning that Public Sector Undertaking (PSU), Autonomous bodies etc are not covered within the ambit of Local Authority.

Meaning of Taxable Territory

On a combined reading of Section 2(109) of the CGST Act and Section 1(2) of the CGST Act, taxable territory refers to the whole of India.

To understand the taxability of Government Services it is imperative for us to discuss whether so-called Government Services fall within the meaning of ‘supply’ in GST? This question also assumes significance as Section 9(3)/5(3) of the CGST/IGST Act empowers the Government to specify only categories of supply for reverse charge levy. Therefore, unless the existence of supply is demonstrated there cannot be a reverse charge levy.

Wider Scope of the term supply

In terms of Section 7(1)(a) of the CGST Act following points merit consideration to determine whether an activity or transaction can be characterised as supply:

• Supply should be made for a consideration

• Supply should be made by a person

• Supply should be made in the course or furtherance of business

• Only a few instances of supply are narrated in Section 7(1)(a) of the CGST Act. Therefore scope of supply is much wider than generally perceived.

It is to be noted that the definition of ‘Person’ u/s. 2(84) of the CGST Act includes a Central Government, State Government and Local Authority.

Government Services – whether fits into the realm of Business?

The prime issue to decide is whether the so-called government services are covered within the definition of Business? Reference is invited to relevant extract of Section 2(17) of the CGST Act. Said section defines ‘business’ to include:

(a) ….

(b) …

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

Clause (i) above makes very interesting reading. Even activity or transactions undertaken by Central or State Government or any Local Authority in which they are engaged as public authorities are considered as business.

Final question that arises is whether there is a consideration? To answer this vexatious issue, one needs to delve deep into the domain of sovereign functions in subsequent paragraphs.

Sovereign Functions – Meaning

In laymen’s language, sovereign functions are those functions that can only be discharged by the state and not by a private person. Term sovereign functions are not defined. Even Apex court over the years could not conclusively explain the contours of the term ‘Sovereign Functions’. Five-Judge Constitution Bench of the Supreme Court In State Of Up. Versus Jai Bir Singh [(2005) 5 SCC 1] observed as under:

“The concept of sovereignty in a constitutional democracy is different from the traditional concept of sovereignty which is confined to ‘law and order’, ‘defence’, ‘law making’ and ‘justice dispensation’. In a democracy governed by the Constitution, the sovereignty vests in the people and the State is obliged to discharge its constitutional obligations contained in the Directive Principles of the State Policy in Part -IV of the Constitution of India. From that point of view, wherever the government undertakes public welfare activities in the discharge of its constitutional obligations, as provided in part-IV of the Constitution, such activities should be treated as activities in the discharge of sovereign functions falling outside the purview of ‘industry’…….”

It is pertinent to note that the issue of sovereign functions is pending with the nine-judge bench of Apex court and the final verdict is still awaited.

Having understood the litigation around sovereign functions let us now evaluate whether performance of sovereign functions can be equated with a rendering of supply?

Sovereign Functions – Whether tantamount to service/supply?

There is a catena of judgements wherein it was held that sovereign functions performed in terms of the powers granted/obligations cast in the constitution of India are not subject to Service Tax². In a recent judgement, Hon’ble Bangalore CESTAT in Karnataka Industrial Areas Development Board v. Commr of Central Tax, Bangalore north[2020-TIOL-860-CESTAT-BANG] held that appellant is a statutory body performing statutory functions and exercising statutory powers as per Karnataka Industrial Areas Development Act and is not liable to pay Service Tax. Bombay High Court in the case of CCE, Nashik v. Maharashtra Industrial Development Corporation [TIOL-2629-HC-MUM-ST] held that no service tax could be demanded on the charges collected by MIDC in terms of the Maharashtra Industrial Development Act, 1961 towards the maintenance of the industrial areas, as the same is in the nature of statutory functions performed in terms of the statute.

Aforesaid rulings put an interesting pauser with respect to the existence or otherwise of consideration/quid pro quo in relation to sovereign functions. While the above judgments may bring in a wave of relief for the taxpayers, the likelihood of further litigation with respect to the impugned issue cannot be ruled out and the issue is yet to attain finality.

Flip Flop by CBIC on the taxability of Sovereign Function

It is equally important to note that the vide Circular No. 96/7/2007-Service Tax, dated 23rd August 2007 CBIC has earlier clarified as under:

“Activities assigned to and performed by the sovereign/public authorities under the provisions of any law are statutory duties. The fee or amount collected as per the provisions of the relevant statute for performing such functions is in the nature of a compulsory levy and are deposited into the Government account.

Such activities are purely in public interest and are undertaken as mandatory and statutory functions. These are not to be treated as services provided for consideration. Therefore, such activities assigned to and performed by a sovereign/public authority under the provisions of any law, do not constitute taxable services. Any amount/fee collected in such cases are not to be treated as consideration for the purpose of levy of service tax.

However, if a sovereign / public authority provides a service, which is not in the nature of statutory activity and the same is undertaken for consideration (not a statutory fee), then in such cases, service tax would be leviable as long as the activity undertaken falls within the scope of taxable service as defined.”

It was a welcome clarification from CBIC affirming the widely prevalent view of statutory/sovereign functions is outside the purview of taxability. Surprisingly it seems that vide Circular No. 192/02/2016-Service Tax, dated April 13 2016, CBIC has changed its stand while clarifying as under:

“It is clarified that any activity undertaken by Government or a local authority against a consideration constitutes a service and the amount charged for performing such activities is liable to Service Tax. It is immaterial whether such activities are undertaken as a statutory or mandatory requirement under the law and irrespective of whether the amount charged for such service is laid down in a statute or not. As long as the payment is made (or fee charged) for getting a service in return (i.e., as a quid pro quo for the service received), it has to be regarded as a consideration for that service and taxable irrespective of by what name such payment is called. It is also clarified that Service Tax is leviable on any payment, in lieu of any permission or license granted by the Government or local authority.”

Further, it has been clarified that Circular No. 96/7/2007-Service Tax (supra) is no longer applicable. In the humble opinion of author of this article position taken by CBIC in 2016 circular (supra) deserves a re-look. In the humble opinion of author of this article views expressed by CBIC may not stand the scrutiny of the MIDC and Karnataka Industrial Areas Development Board judgments (discussed in preceding para).

Escape route of Section 7(2)

It is highlighted that Section 7(2) overrides Section 7(1) of the CGST Act. Accordingly, activities or transactions undertaken by the Central Government, State Government or any Local Authority in which they are engaged as public authorities do not amount to supply if covered under schedule III of the Act or notified by the Government on the recommendations of the Council. It is interesting to note that vide Notification No. 25/2019-Central Tax (Rate) dated 30th September 2019, services by way of grant of alcoholic liquor licence, against consideration in the form of licence fee or application fee or by whatever name called is notified U/s 7(2) of the CGST Act. Accordingly, so-called government services of granting liquor license are outside the scope of term supply and therefore fees paid for such license is not subject to either forward or reverse charge.

It is highlighted that in Builders Association of Navi Mumbai v. Union of India 2018 (4) TMI 461, Hon’ble Mumbai High Court observed that CIDCO is a town planning authority. Further, Court remarked that it is entirely for the legislature, therefore, to exercise the powers conferred by sub-section (2) of Section 7 of the CGST Act and issue the requisite notification. Absent that notification, merely going by the status of the CIDCO, we cannot hold that the lease premium charged by CIDCO would not attract or invite the liability to pay tax in terms of the CGST Act.

A combined reading of the definition of business (supra), Section 7(1) and 7(2) of the CGST Act and judicial pronouncements manifest a view that all activities or transactions undertaken by the Central Government, State Government or any Local Authority (even if they are acting as public authority) is leviable to GST and very few escape routes are available in the form of Schedule III or specific Notification u/s 7(2) or specific Exemptions u/s 11 of the CGST Act.

Exemption to Government Services

To soften rigours of Reverse Charge levy on Government Services, Notification No. 12/2017-CT(R) Notification No. 8/2017-IT(R) both dated 28.06.2017 (hereinafter, ‘Exemption Notifications’) have exempted various services provided by CG,SG,UT or LA. Needless to say, since such supplies are exempted there can’t be either forward or reverse charge levy on such supplies. Few Important exemption entries relating to Government Services are explained hereunder:

Attention is invited to Entry No.6 of Exemption Notifications. Said entry grants exemption to services by the CG,SG,UT or LA excluding the following services:

1. services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than the Central Government, State Government, Union territory;

2. services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

3. transport of goods or passengers; or

4. any service, other than services covered under entries (a) to (c) above, provided to business entities.

Services mentioned in clauses a,b and c are excluded from the exemptions and therefore it implies that they are taxable. A fine reading of clause (d) above suggests that said clause denies exemption to any services other than those in clauses (a) to (c) if provided to a business entity.

Moving further, Entry No. 7 of the Exemption Notifications exempts services provided by the CG,SG,UT or LA to a business entity with an aggregate turnover of up to ₹ 20 lakhs (₹ 10 lakhs in case of a special category state) in the preceding financial year. Therefore, even business entities having aggregate turnover up to ₹ 20/10 lakhs in the preceding financial year is not subject to reverse charge levy on Government Services. Entry no. 8 of the Exemption Notifications exempts all services supplied inter se Governments.

Entry No. 9 of the Exemption Notifications provides an exemption where the consideration against the services provided by CG,SG,UT or LA does not exceed ₹ 5,000/-. It is worth mention that in case of continuous supply of services limit of ₹ 5000/- is applicable on a yearly basis.

Entry No. 47 of the Exemption Notifications provides an exemption for Services provided by the CG,SG,UT or LA by way of

1. registration required under any law for the time being in force

2. testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, including fire license, required under any law for the time being in force.

Basis above exemption entry, it is safe to conclude that vehicle registration fees paid for registration of vehicles are exempt from the levy. Similar analogy can also be drawn for various registration fees paid e.g. ROC filing fees paid for incorporation of a company etc.

Entry No. 61 of the Exemption Notifications exempts services provided by way of issuance of passport, visa, driving licence, birth certificate or death certificate. Entry No. 62 of the Exemption Notifications provides an exemption for fines or liquidated damages payable to CG,SG,UT or LA for tolerating non-performance of a contract entered into with such Authority.

Exemption Notifications contains many other exemption entries pertaining to Government Services, however after going through the most relevant entries let us move further to discuss other intricate issues.

Governmental Authority, Government Entity and RCM implications

Notification no. 11/2017-CT (R) and Notification no. 12/2017- CT(R) both dated 28th June 2017 have specifically defined these terms and reproduced hereunder for quick reference:

“Governmental Authority” means an authority or a board or any other body, – (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government, with 90 per cent or more participation by way of equity or control, to carry out any function entrusted to a Municipality under Article 243 W of the Constitution or to a Panchayat under Article 243 G of the Constitution.

“Government Entity” means an authority or a board or any other body including a society, trust, corporation, (i) set up by an Act of Parliament or State Legislature; or (ii) established by any Government, with 90 per cent or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”

At this juncture, it would be important to notice that Government authorities and Government entities are eligible for concessional rates of tax/exemptions. For this limited purpose aforesaid notifications carry the explicit definition of these 2 terms. However, services rendered by Government authority and Government entities would not be covered by Entry no. 5 and 5A of RCM Notifications, unless such entities and authorities fall within the meaning of CG,SG, UT or LA.

After going through the gamut of taxability of government services stage is now set to discuss the taxability of various payments made to Governments.

Applicability of levy on taxes, duties, cess, fines and penalty

As discussed earlier condition of supply should be satisfied first to levy GST on taxes, duties and cesses. CBIC vide its Circular No. 192/02/2016-Service Tax, dated April 13, 2016, has aptly clarified that taxes, cesses or duties levied are not consideration for any particular service as such and hence not leviable to tax.

It is further clarified by CBIC that fines and penalties chargeable by Government or a local authority imposed for violation of a statute, bye-laws, rules or regulations are also not leviable to Service Tax.

Applicability of levy on Fees paid to Government

It is a settled position that there is no element of ‘quid pro quo’ in cases of taxes, but fee is collected for a special service rendered. Hence taxes should not be subject to levy, but fees can be. The biggest problem is how to determine, whether a particular levy is a tax or a fee? Following landmark judicial pronouncements can be referred for guidance in this matter:

In Sri Krishna Das v. Town Area Committee, Chirgaon [(1990) 3 SCC 645], the Apex Court has succinctly discussed the difference between a ‘fee’ and a ‘tax’ by observing, as under:

“A fee is paid for performing a function. A fee is not ordinarily considered to be a tax. If the fee is merely to compensate an authority for services performed or as compensation for the services rendered, it can hardly be called a tax. However, if the object of the fee is to provide general revenue of the authority rather than to compensate it, and the amount of the fee has no relation to the value of the services, the fee will amount to a tax.”

Supreme Court in Calcutta Municipal Corporation and Others v. M/s Shrey Mercantile Pvt Ltd & Others 2005 AIR SC 1879 held as under:

“According to “Words & Phrases”, Permanent Edition, Vol. 41 Page 230, a charge or fee, if levied for the purpose of raising revenue under the taxing power is a “tax”. Similarly, imposition of fees for the primary purpose of “regulation and control” may be classified as fees as it is in the exercise of “police power”, but if revenue is the primary purpose and regulation is merely incidental, then the imposition is a “tax”. A tax is an enforced contribution expected pursuant to a legislative authority for purpose of raising revenue to be used for public or governmental purposes and not as payment for a special privilege or service rendered by a public officer, in which case it is a “fee”. Generally speaking “taxes” are burdens of a pecuniary nature imposed for defraying the cost of governmental functions, whereas charges are “fees” where they are imposed upon a person to defray the cost of particular services rendered to his account.”

In the case of P. Kannadsan, etc. v. State of Tamil Nadu & Other etc. J.T. 1996 (7) S.C. 16, it has been observed that:

“Even in the matter of fees, it is not necessary that element of quid pro quo should be established in each and every case, for it is well settled that fees can be both regulatory and compensatory and that in the case of regulatory fees, the element of quid pro quo is totally irrelevant.”

Above pronouncements makes it amply clear that there is quite an overlap between fees and taxes. Many instances can be cited where fees may partake character of taxes. A common example could be ROC fees or shop and establishment fees. In the humble view of author of this article, such payment may not be subjected to GST.

Taxability of Liquor License fees

GST Council in its 26th meeting has recommended that GST shall not be levied on license fee and application fee, “by whatever name called”, payable for alcoholic liquor for human consumption. Subsequently, Notification No. 25/2019-CT (R) (supra) was issued u/s 7(2) of the CGST Act for providing an exemption for liquor license fees.

Taxability of other License fees

CBIC Circular No. 121/40/2019-GST dated 11.10.2019 has surprisingly clarified that special dispensation/exemption applies only to supply of services by way of grant of liquor license and such exemption has no applicability or precedence value in relation to grant of other licenses and privileges for a fee in other situations, where GST is payable. In the opinion of author of this article in absence of intelligible differentia between exemption for liquor license fees and other license fees, it is open for taxpayers to argue violation of Article 14 of the Constitution of India.

Taxability of Toll Tax / Marg Sudharan Shulk

Question of taxability of toll tax came up for ruling in the case of Forest Department [2018 (14) G.S.T.L. 159 (A.A.R. – GST)]. Advance Ruling Authority observed that the stated purpose of said ‘marg sudharan shulk’ is for maintenance of forest road. Further, it was pointed out that services by way of access to a road or a bridge on payment of toll charges are included in the list of exempted services. It was accordingly held that no GST is leviable on marg sudharan shulk/toll tax.

Taxability of Abhivahan Shulk (Charges on Forest Produce/Transit fees)

Appellate Authority for advance ruling, Uttarakhand in Divisional Forest Officer 2018 (18) G.S.T.L. 566 (App. A.A.R. – GST) affirmed findings of advance ruling authority and observed that a vehicle entering a forest area will have to pay the Abhivahan Shulk only if it comes out of forest with forest produce. Further in lieu of such fees, the forest department is providing the service of maintaining and regulating the forest produce and ensuring the continuous availability of the forest produce and its safe transit Finally, it was held that such fees are taxable and therefore recipient shall discharge liability @ 18% on RCM basis.

Taxability of fees paid to Pollution Control Board

Many business entities are statutorily required to pay fees for monitoring pollution levels and protecting the environment to state pollution control board. Such board may fall within the definition of local authorities by virtue of Section 2(69)(c) of the CGST Act. Uttarakhand Advance Ruling Authority had occasion to deal with taxability of such fees in Purewal Stone Crusher [2018 (18) G.S.T.L. 641 (A.A.R. – GST)]. Authority observed that such fees are exempted by virtue of Entry no. 4 of Exemption Notifications.

Taxability of Khanij sampada sulk or Royalty or Mining Fees

Authority for Advance ruling in Purewal Stone Crusher (supra) held that said fee relates to consideration for transportation/release of Natural Sand & Grit and other similar River Bed Material. Further in absence of specific exemption entry authority held that such services are taxable @ 18% on Reverse charge basis. Similar advance rulings were delivered in many other cases. In the opinion of author of this article, this issue is not simple as it appears to be. multiple writ petitions have been filed across High Courts challenging the levy on Royalty/Mining Fees on various grounds. An important issue for consideration whether royalty is a tax is pending before 9 judge bench in the case of Mineral Area Development Authority v. Steel Authority of India and Ors[(2011) 4 SCC 450]. It would be interesting to observe the apex court verdict on constitutional issues raised in the said matter. Further Apex court in Udaipur Chambers Of Commerce And Industry v. Union Of India has also granted interim stay on recovery of service tax on grant of Mining Lease/ Royalty.

Taxability of Spectrum Fees

It can be argued that the allocation of Radio Frequency Spectrum to telecom companies for its proper utilization is a sovereign function and thus should not be subject to GST, But it is not so simple. CBIC in its 2016 circular (supra) has clarified that service tax is payable on license fees and spectrum user charges. Even for argument sake levy of GST is accepted on such fees and charges then by virtue of Section 15(2) of the CGST Act, GST shall also be payable on delayed payment interest for delayed payment of such fees and charges.

Taxability of fees paid for change of land use

Services in the nature of change of land use, building approval, utility services provided by Government, or a local authority are listed in the Twelfth Schedule to the Constitution and have been entrusted to Municipalities under Article 243W of the Constitution. Entry No. 4 of Exemption Notifications specifically exempts said services from GST levy.

Parting Note

In the backdrop of the above legal provisions, it is critical for a business entity to periodically undertake detailed scrutiny of various payments made to governments to cull out transactions subject to reverse charge. Further issues of taxability of government services are highly debatable and would be settled only before Higher forums after long litigation. In the opinion of author of this article, taxpayers need to take an informed call on the taxability issue of government services considering their risk appetite. A pro-active approach would be more beneficial to avoid departmental enquiries and consequential demands/harassments otherwise, situations would be more of a professionals paradise.

 

1. For the sake of convenience Services referred in Entry in 5 and 5A of RCM Notifications are referred to as ‘Government Services’ in this paper.

2. It is to be highlighted that GST provisions of reverse charge of Government Services are similar to provisions existed in erstwhile Service Tax law.

The Supreme Court of India in their Lordships’ Judgment dated September 3, 2021 in the case of The Assistant Commissioner of State Tax and Others v. M/s Commercial Steel Limited, Civil Appeal No 5121 of 2021 has reversed the judgment of the Telengana High Court granting relief in Writ Petition filed in the Court though alternate remedy was available. The High Court in the exercise of its writ jurisdiction under Article 226 of the Constitution set aside the action of the Revenue in collecting an amount from the Petitioner towards tax and penalty under the Central Goods and Services Tax Act 2017 (CGST) and State Goods and Services Tax Act (SGST) and directed a refund together with interest at the rate of 6% per annum from 13 December 2019. A further direction had been issued to the State of Telangana to consider initiating disciplinary proceedings against the Assistant Commissioner. Costs of ₹ 25,000 had been imposed on the Asstt. Commissioner, who was the first respondent before the High Court.

The respondent before the Supreme Court was a proprietary concern engaged in the business of iron and steel and was registered under the Central Goods and Services Tax Act 2017 and had been allotted a GST code. The respondent purchased certain goods from a dealer, JSW Steel Limited, Vidyanagar, Karnataka, under a tax invoice dated 11 December 2019. The consignment of goods was being carried in a truck bearing registration No KA 35 C 0141. While it was proceeding from the State of Karnataka, it was intercepted on 12 December 2019 at 5.30 pm at Jeedimetala. The tax invoice indicated that the goods were earmarked for delivery at Balanagar, Telangana. The case of the appellants was that Balanagar is situated between the State of Karnataka and Jeedimetala and that no reasonable person would cross Balanagar and then turn around to go back to the place of destination.

The High Court entertained the writ petition and ordered the refund of the amount collected towards tax and penalty together with interest. The High Court had observed that a mere possibility of a local sale would not clothe the officials to take such an action and there was no material to indicate that an attempt was made by the respondent to deliver the goods at a different place and to sell them in the local market evading CGST and SGST. The High Court had also come to the conclusion that since the vehicle was being driven from Karnataka by the local driver from that State, “it is perfectly possible for the driver to lose his way on account of being unfamiliar with the roads” in Hyderabad and bypass Balanagar to proceed to Jeedimetala.

The Supreme Court held that the respondent had a statutory remedy under section 107. Instead of availing of the remedy, the respondent instituted a petition under Article 226. The existence of an alternate remedy is not an absolute bar to the maintainability of a writ petition under Article 226 of the Constitution. But a writ petition can be entertained in exceptional circumstances where there is:

1. a breach of fundamental rights;

2. a violation of the principles of natural justice;

3. an excess of jurisdiction; or

4. a challenge to the vires of the statute or delegated legislation.

The Court said in the present case, none of the above exceptions was established. There was, in fact, no violation of the principles of natural justice since a notice was served on the person in charge of the conveyance. In this backdrop, it was not appropriate for the High Court to entertain a writ petition. The assessment of facts would have to be carried out by the appellate authority. The Court further said that as a matter of fact, the High Court had while doing this exercise proceeded on the basis of surmises. Thus, the Supreme Court reversed the decision of the High Court and relegated the case to the alternate remedy.

After the publication of this judgment, there is an uproar all over India. The tax payers have apprehension that the bureaucracy will take disadvantage of this judgment of Hon’ble Supreme Court. The author wishes to inform them, that this judgment is more on facts. Court is not saying that an alternate remedy is the only remedy, but the Court is saying that on the facts of impugned case it is not falling in the parameters enumerated in the judgment. It is quite possible that the Court has noticed some facts (not recorded in the judgment) which compelled them to relegate the case to alternate remedy. In several cases the Court has upheld the judgments entertaining Writ Petitions. Kindly see the observations of the Constitution Benches of the Supreme Court recorded in the judgment of that Court in the case of Whirlpool Corporation v. Registrar of Trade Marks, Mumbai and Others (1998) 8 Supreme Court Cases 1.

“14. The power to issue prerogative writs under Article 226 of the Constitution is plenary in nature and is not limited by any other provision of the Constitution. This power can be exercised by the High Court not only for issuing writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari for the enforcement of any of the Fundamental Rights contained in Part III of the Constitution but also for “any other purpose”.

15. Under Article 226 of the Constitution, the High Court, having regard to the facts of the case, has a discretion to entertain or not to entertain a writ petition. But the High Court has imposed upon itself certain restrictions one of which is that if an effective and efficacious remedy is available, the High Court would not normally exercise its jurisdiction. But the alternative remedy has been consistently held by this Court not to operate as a bar in at least three contingencies, namely, where the writ petition has been filed for the enforcement of any of the Fundamental Rights or where there has been a violation of the principle of natural justice or where the order or proceedings are wholly without jurisdiction or the vires of an Act is challenged. There is a plethora of case-law on this point but to cut down this circle of forensic whirlpool, we would rely on some old decisions of the evolutionary era of the constitutional law as they still hold the field.

16. Rashid Ahmed v. Municipal Board, Kairana [AIR 1950 SC 163 : 1950 SCR 566] laid down that existence of an adequate legal remedy was a factor to be taken into consideration in the matter of granting writs. This was followed by another Rashid case, namely, K.S. Rashid & Son v. Income Tax Investigation Commission [AIR 1954 SC 207 : (1954) 25 ITR 167] which reiterated the above proposition and held that where alternative remedy existed, it would be a sound exercise of discretion to refuse to interfere in a petition under Article 226. This proposition was, however, qualified by the significant words, “unless there are good grounds therefor”, which indicated that alternative remedy would not operate as an absolute bar and that writ petition under Article 226 could still be entertained in exceptional circumstances.

17. A specific and clear rule was laid down in State of U.P. v. Mohd. Nooh [AIR 1958 SC 86 : 1958 SCR 595] as under:

    “But this rule requiring the exhaustion of statutory remedies before the writ will be granted is a rule of policy, convenience and discretion rather than a rule of law and instances are numerous where a writ of certiorari has been issued in spite of the fact that the aggrieved party had other adequate legal remedies.”

18. This proposition was considered by a Constitution Bench of this Court in A.V. Venkateswaran, Collector of Customs v. Ramchand Sobhraj Wadhwani [AIR 1961 SC 1506 : (1962) 1 SCR 753] and was affirmed and followed in the following words:

    “The passages in the judgments of this Court we have extracted would indicate (1) that the two exceptions which the learned Solicitor General formulated to the normal rule as to the effect of the existence of an adequate alternative remedy were by no means exhaustive, and (2) that even beyond them a discretion vested in the High Court to have entertained the petition and granted the petitioner relief notwithstanding the existence of an alternative remedy. We need only add that the broad lines of the general principles on which the Court should act having been clearly laid down, their application to the facts of each particular case must necessarily be dependent on a variety of individual facts which must govern the proper exercise of the discretion of the Court, and that in a matter which is thus pre-eminently one of discretion, it is not possible or even if it were, it would not be desirable to lay down inflexible rules which should be applied with rigidity in every case which comes up before the Court.”

19. Another Constitution Bench decision in Calcutta Discount Co. Ltd. v. ITO, Companies Distt. I [AIR 1961 SC 372 : (1961) 41 ITR 191] laid down:

    “Though the writ of prohibition or certiorari will not issue against an executive authority, the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts will issue appropriate orders or directions to prevent such consequences. Writ of certiorari and prohibition can issue against the Income Tax Officer acting without jurisdiction under Section 34, Income Tax Act.”

20. Much water has since flown under the bridge, but there has been no corrosive effect on these decisions which, though old, continue to hold the field with the result that law as to the jurisdiction of the High Court in entertaining a writ petition under Article 226 of the Constitution, in spite of the alternative statutory remedies, is not affected, specially in a case where the authority against whom the writ is filed is shown to have had no jurisdiction or had purported to usurp jurisdiction without any legal foundation.”

Thus, where an action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings or unnecessary harassment, the High Courts can issue appropriate orders or directions to prevent such consequences.

1. Introduction

   Though more girls are educated now a days, the reality seems that girls are married off early and bear children long before they should. There is also the possibility of a marriage not working out for varied reasons, leaving the girl or young woman in extreme distress because often she is not financially independent. People would also like to know the treatment in Income Tax with regard to amount received as maintenance or Alimony in case of Separation/ Divorce matters.

2. Right to claim alimony

   The most important right under divorce and matrimonial laws is the right to claim and receive alimony (maintenance). Generally speaking alimony means an allowance or amount which a court orders the husband to pay to the wife for her sustenance. The Courts have ruled that an abandoned wife and children will be entitled to ‘maintenance’ from the date she applies for it in a court of law.

3. “Reasonable needs” of a wife and dependent children

   In the case of Rajnesh v. Neha & Anr. the Supreme Court Bench of Hon’ble Justices Indu Malhotra and R. Subhash Reddy, in decision dated 4th Nov. 2020 outlined specifics guidelines in alimony cases, including “reasonable needs” of a wife and dependent children, her educational qualification etc., and whether she has an independent source of income. The Court laid down that while women can make a claim for alimony under different laws, including the Protection of Women from Domestic Violence Act, 2005 and Section 125 of the CrPC, or under the Hindu Marriage Act, 1955, it would be inequitable to direct the husband to pay maintenance under each of the proceedings, urging civil and family courts to take note of previous settlements.

   Section 22 of Hindu Adoptions & Maintenance Act, 1956 (“HAMA”) provides for maintenance of dependants. Section 23 provides that while awarding maintenance, the Court in determining the amount of maintenance, to be awarded to a wife, children or aged or infirm parents, shall consider: (a) the position and status of the parties; (b) the reasonable wants of the claimant; (c) if the claimant is living separately, whether the claimant is justified in doing so; (d) the value of the claimant’s property and any income derived from such property, or from the claimant’s own earning or from any other source; (e) the number of persons entitled to maintenance.

4. Concept of permanent alimony and maintenance

   The grounds on which a Hindu woman can seek divorce and alimony may not be the same for every community. Similarly, the law on alimony and maintenance also varies from personal law to personal law. For example, under the Hindu Marriage Act, 1955, both the husband and wife are legally entitled to claim permanent alimony and maintenance. However, if the couple marries under the Special Marriage Act, 1954, only the wife is entitled to claim permanent alimony and maintenance.

5. Divorce by mutual consent

   When a couple gets divorced by mutual consent, alimony/maintenance could be paid by either the husband to the wife or by the wife to the husband subject to the mutual understanding between the couple. The court passes the decree of divorce on terms agreed between the couple. The decree binds the couple and is capable of being enforced by the court.

6. Where the matter is contested

   In such cases, court intervenes and decides the issue of alimony/maintenance on the merits of case. Courts have powers to grant alimony to the wife even where the husband is granted a decree. Assessment of the amount of permanent alimony is entirely the court’s discretion.

7. If the wife remarries

   If the wife remarries, the husband is absolved of his responsibility and can petition the court for orders to stop the alimony. Similarly, if there is a change in circumstances, that is, the husband is unable to maintain the wife due to a financial crisis or any other adverse situation and the wife is financially independent earning a decent salary, then the husband may petition to the court to address the changed circumstances. The court may, taking into account the facts, evidences and circumstances prevailing at that point of time, modify, vary or rescind the order.

8. Lump-sum alimony

   The discretion to award lump-sum alimony or a periodical amount vests with the court. If the spouse paying alimony/maintenance earns more income after the award for permanent alimony/maintenance has been passed in the case then the wife receiving alimony/maintenance may make a petition addressing the court about the increase in the husband’s income but she will have to prove her inability to maintain herself with the alimony already awarded by the court. The court may take into account facts, evidences and circumstances prevailing at that point of time increase the alimony payable. However, just because his income goes up does not necessarily mean she will get more alimony.

9. Taxability of Alimony and Maintenance

   1. Whether the alimony and maintenance payments received from a spouse are taxable: A question generally arises as to whether, as a result of a divorce, the alimony and maintenance payments received from a spouse are taxable. The Income Tax Act does not contain specific provisions relating to Alimony, therefore analogous
      provisions along with relevant case laws must be studied. In case of a divorce,
      the relationship between the husband and the wife ceases to exist and they will
      no longer be spouses. In India, the law of the land places an obligation on the
      husband to maintain his wife which arises out of the status of a marriage. Right
      to maintenance forms a part of the personal law. Under the Code of Criminal
      Procedure, 1973, right of maintenance extends not only to the wife and dependent
      children, but also to indigent parents and divorced wives. Therefore, in a
      divorce the wife relinquishes her personal right of claiming monthly maintenance
      as provided under law. This relinquishment will be consideration of the wife for
      the receipt of alimony/maintenance and hence will not be a gift for inadequate
      consideration. In CIT v. Shaw Wallace and Co, the Privy Council held
      that the object of the Indian Act is to tax ‘income’. And ‘Income’
      connotes a periodical monetary return coming in with some sort of regularity or
      expected regularity, from definite sources.The source is not
      necessarily one which is expected to be continuously productive, but it must be
      one whose object is the production of a definite return, excluding anything in
      the nature of a mere windfall. Thus income has been likened pictorially to the
      fruit of a tree, of the crop of field. In the landmark case of Princess
      Maheshwari Devi of Pratapgarh v. CIT (1983) 33 CTR Bom 117,the Appellant
      was married to Maharaja of Kotah and had later obtained a decree of nullity of
      the marriage from a Court of Law. She had claimed monthly alimony and gross sum
      as permanent alimony and the same was directed by the court.

   2. Monthly alimony payments will be treated as income in the hands of
      the recipient:Bombay High Court held that Alimony is an
      extension of the husband’s obligation under Hindu Law to maintain his wife.The
      Hon’ble Bombay High Court further stated that to constitute a revenue receipt, a
      source for the receipts must be established and it is established in the form of
      the decree. Therefore, the monthly alimony being a regular and
      periodical return from a definite source, being the decree, must be held to be
      income within the meaning of the said term in the said Act. The person
      paying the alimony, there is no provision under the tax laws enabling him to
      claim a deduction towards such payment from his income.

   3. Lump-sum receipt of alimony: With regard to the lump-sum
      receipt of alimonythe Hon’ble Bombay High decided as follows: “the
      point of view of taxability the decree must be regarded as a transaction in
      which the right of the assessee to get maintenance from her ex-husband was
      recognized and given effect to. That right was undoubtedly a capital
      asset.Lump sum payment cannot be looked upon as a commutation of any
      future monthly or annual payments because there was no pre-existing right in the
      assessee to obtain any monthly payment. Therefore, it is clear that a lump-sum
      receipt in the form of Alimony will not be taxable in the hands of the
      recipient. Whereas, monthly alimony payments will be treated as income
      in the hands of the recipient. The same ratio was upheld in the case of ACIT
      v. Meenakshi Khanna (2013) TIOL 880 ITAT DEL) wherein the agreement for
      custody, separation and divorce was entered into on 01.12.1989 with the divorce
      finally taking place on 20.04.1990. The Tribunal held this one-time
      payment, though delayed, as a lumpsum payment relating to the divorce agreement,
      is not taxable in the hands of the recipient (wife). Some other case
      Laws-

      1. Shrimati Roma Sengupta v. CIT (Cal)– Lump sum alimony is a
         capital receipt and therefore not taxable.

      2. ACIT v. Meenakshi Khanna (ITAT Delhi)– Lump sum amount received
         from ex-husband as alimony is not taxable

      3. Prema G. Sanghvi v. ITO (ITAT Mumbai) – Receipt of alimony from
         ex-husband is nothing but Gift and is exempt.

   4. Where there is NO divorce:It may be noted that where there
      is NO divorce; and an asset is transferred by one spouse to another, for
      inadequate consideration, the same shall be a gift exempt from taxation under section 56(2) of the Income Tax Act. Any income from the same will be ‘clubbed’ (i.e. included) in the hands of the transferring spouse as if the asset had not been transferred at all.

Section 115BBC(3)

The expression “anonymous donation” has been defined as follows:

1. It is a voluntary contribution referred to in Section 2(24)(iia);

2. The person receiving such contribution does not maintain a record of:

   1. the identity indicating the name and address of the person making such
      contribution, and

   2. such other records as may be prescribed.

3. Special Rate of Tax in case of Anonymous Donations received by a Trust
   [Section 115BBC(1)]

   “Anonymous Donation” would be taxed at the rate of 30%.
   However, from assessment year 2010-11, anonymous donations are taxable only to
   the extent such donation exceeds ₹ 100,000/- or 5% of total donations received
   by the trust, whichever is higher.

Institutions liable to pay tax on Anonymous Donations

(Section 115 BBC(1))

Any income received by way of anonymous donations by the following entities
shall be included in the total income and taxed at the rate of 30%.

1. Any trust or institution referred to in Section 11;

2. Any university or other educational institution referred to in Section
   10(23C)(iiiad) and (vi), that is, its annual receipt is less than or more
   than `1 crore;

3. Any hospital or other institution referred to in Section 10(23C)(iiiae) and
   (via), i.e. its annual receipts is less than or more than `1 crore;

4. Any fund or institution referred to in Section 10(23C)||(iv), and

5. Any Trust or institution referred to in Section 10(23C)(v)

   1. any trust or institution created or established wholly for religious
      purposes;

   2. any trust or institution crated or established wholly for religious and
      charitable purposes other than any anonymous donation made with specific
      direction that such donation is for any university or other educational
      institution or any hospital or other medical institution run by such trust or
      institution.

CBDT Explanatory Circular No. 5 / 2010 dated 3rd June, 2019

CBDT has issued an explanatory Circular No. 5/2010 dated 3rd June, 2010 on
Section 115BBC.

“Tax relief on anonymous donations in certain cases – under the provisions of
Section 115BBC, wholly religious entities are outside the purview of taxation of
anonymous donations. Partly religious and partly charitable entities had also
been exempted from the taxation of anonymous donations, except where the
anonymous donation is made to an educational or medical institution run by such
entity in which case such donations were taxed at the rate of 30%. In the case
of wholly charitable entities, all anonymous donations are taxed at the rate of
30%.

It was observed that in the case of some such institutions, there are
practical difficulties to maintain complete records of donation received. In
order to mitigate the compliance burden, the above section was amended and some
relief was provided to such organizations by exempting a part of the anonymous
donations from being taxed. The amendment has resulted in the following scheme.
Anonymous donations received by wholly religious institutions shall remain
exempt from tax.

In the case of partly religious and partly charitable institutions, anonymous
donations directed towards a medical or educational institution run by such
entities shall be taxable only to the extent such donations exceed 5% of total
donations received by such trust or institution or a sum of ₹ 1 lakh whichever
is more. Other donations to partly religious and partly charitable institutions
shall remain exempt from taxation.

In the case of wholly charitable institutions, anonymous donations shall be
taxable only to the extent such donations exceed 5% of total donations received
by such trust or institution or a sum of ₹ 1 lakh, whichever is more.

It has been clarified in the above Circular, that donations to partly
religious and partly charitable institutions shall remain exempt from taxation
except anonymous donations directed towards a medical or educational institution
run by such entities.

Meaning of Anonymous Donation

Section 115BBC(3) provides that for the purposes of this section “anonymous
donation” means any voluntary contribution referred to in Section 2(24)(iiia)
where a person receiving such contribution does not maintain a record of the
identity indicating the name and address of the person making such contribution
and such other particulars as may be prescribed.

Hans Raj Samarak Society v. Asst. DIT [2011] 16 Taxmann.com
103/133 ITD 530 (Delhi Tribunal)

In this case, it was held that the assessee was not required to maintain
anything more than the name and address of the donor as prescribed in Section
11BBC(3). It clarifies the limitation of the power of AO to call for information
or additional evidence in case of anonymous donation. Section 115 BBC(3)
provides that the Receiver has an obligation to maintain the identity indicating
the name and address of the Donor and such other particulars as may be
prescribed. It is to be noted that no other particulars has been prescribed
under this provision or elsewhere in the Act or rules.

Shri Girraj Educational and Welfare Society v. ITO [2013] 56 SOT
428 (Agra Tribunal) [2012] 27 Taxmann.com 89 – It was held that in
view of failure of assessee society to maintain proper records indicating name
and address of donors, voluntary contributions received were brought to tax as
anonymous donations within meaning of Section 115BBC.

M/s. Ramadesh Memorial Charitable Trust, Jaipur ITA No.
1023/JP/2016 dated 7th February, 2000

It was held that where proper name and address were not available and
donation were of identical amount of ₹ 5,000/-, the Assessing Officer was
justified in taxing it as anonymous donation.

Taxability of exempted portion of Anonymous Donation

There is an amendment in the Finance (No. 2) Act, 2014 with regard to the
computation of tax liability in case of Anonymous Donations. It was proposed
that while computing the tax liability of the total income, instead of excluding
entire amount of anonymous donation only the amount in excess of 5% of the total
income or ₹ 1 lakh whichever are higher should be deducted. This removes the
anomaly, as the anonymous donation upto ₹ 1 lakh or 5% whichever is higher is
not subjected to tax. The exempted portion shall form part of income subject to
application under Section 11 of the Income-tax Act, 1961.

Whether anonymous donations (taxable portion) are subject to
conditions as to application and accumulation

A new sub-section (7) has been added to Section 13 which provides that
nothing contained in Section 11 or 12 shall operate to exclude anonymous
donations from total income. In short, exemptions available under Section 11 are
not available to taxable portion of anonymous donations and they are to be taxed
as per the provisions of Section 115BBC. Therefore, taxable anonymous donations
shall not be subject to 85% application for charitable purposes. However,
exempted portion of anonymous donations shall be subject to 85% application for
charitable purposes.

Whether anonymous donations would be taxed again in violation under
Section 13

A plain reading of Section 13(1) implies that anonymous donations have been
excluded from the purview of sections 11 and 12. Any violation under Section 13
results in a forfeiture of the exemptions available under Section 11 and 12 of
the Income Tax Act. Thus, double taxation of anonymous is out of question since
it does not enjoy any exemption under Section 11 or 12. Hon’ble Supreme Court
has on several occasions that income cannot be taxed twice. Refer: Laxmipat
Singhania v. CIT 72 ITR 291 (SC), Jain Brothes v. Vol 77 ITR 107 (SC).

Unexplained payments out of unaccounted donations

Where the assessee explained that it made certain unexplained payments out of
unaccounted donations, such an explanation could be accepted in penalty
proceedings and, thus, penalty order proposed under Section 271(1)(c) was set
aside. In this case, the Assessing Officer made addition in respect of
unaccounted donations received and unexplained payments made to different
parties. Assessing Officer initiated penalty proceedings under Section
271(1)(c), Assessee’s explanation was that unexplained payments were made out of
amount received as donations not recorded in the books of account. Assessing
Officer rejected the assessee’s explanation and passed a penalty order. It was
held that in view of the fact that undisclosed donations were utilized either
for giving advances to builders or used for personal use of trustees or their
relatives, there was no such infirmity in an explanation of assessee being
accepted at the stage of penalty proceedings whether may have been the stand of
revenue authorities at the stage of penalty proceedings whatever may have been
the stand of revenue authorities at the stage of assessment.

Refer ITO exemptions, ward 11(1), Mumbai v. Lawrence Education
Society [2012] 51 SOT 68 (Mumbai Tribunal)

Capacity of the Donor

The Assessing Officer suspects the capacity of the creditor or donor. It is
therefore pertinent to refer principles laid down by the Hon’ble Supreme Court
in case of CIT v. Daulat Ram Rawat Mull 87 ITR 349 (SC) that the
assessee is not required to prove the source of source. The fact that the lender
was not been able to give satisfactory explanation regarding the source of the
fund lent by him would not be decisive, even of the matter as to whether the
lender was the owner of that sum, even though that the explanation furnished by
him regarding the source of money is found to be not correct. The fact that the
explanation regarding the source of money furnished by the lender whose money is
lying deposited has been found to be false, it would be remote and forfeited
conclusion to hold that money belongs to the assessee and that he would in such
a case, have any direct nexus between the facts and the conclusion found
therefrom.

Anonymous donation is different from unaccounted donation

Anonymous donation is different from unaccounted donation. In case of
anonymous donations, the donations are on record but donors are not traceable.
However, the unaccounted donations may attract the provisions of Section
13(1)(c).

Vidhyavardhini v. Asst. CIT, Thane [2012] 20 Taxmnn.com 81
(Mumbai)

It was held that since the Trust is an artificial juridical person and has to
act through Trustees or anybody authorized by Trustees, acts of trustees or
person so authorized have to be considered as acts on behalf of the Trust.
Therefore, considering material on record and entire surrounding circumstances,
it was held that unaccounted donations, collected by Secretary were on
instructions of trustees on behalf of Trust and had been assessed as income of
the assessee Trust. It was further held that having regard to fact that
donations were not accounted in books of assessee trust and used by the trustees
and Secretary who were persons specified in Section 13(3), provisions of Section
13(1)(c) were applicable and exemption under Section 11 would not be available.

Anonymous donation in case of Foreign Donation can attract Money
Laundering Act

Prevention of Money Laundering Act (PMLA) 2002, all religious organizations
have been included within the purview of Prevention of Money Laundering Act,
2002 (PMLA). For this reason, it may not be possible to take large donations,
because under PMLA Act, it is necessary to provide for the details of the donor,
particularly in case of foreign receipts. Therefore, religious organizations
though are not covered under Section 115BBC will also be covered under the
Prevention of Money Laundering Act.

Anonymous donation and provisions of Section 68, 69 and 69A to 69C

The provisions of Sections 68 to 69D as to unexplained cash credits, money
investment expenditure etc. are subjected to income tax. Before the insertion of
provisions relating to anonymous donation, there was always a debate / arguments
whether sections 68 to 69D applies to an organization subject to Section 10
(23C) or Section 11. However, after the insertion of section 115BBC all the
controversies have been settled as Income-tax Act provided a separate mechanism
to deal with such situations. In short, with effect from 1st April, 2007 any
undisclosed income or credits in the books of account which otherwise would have
been taxable under Section 68 will fall within the purview of Section 115 BBC.

The provisions of Sections 68 and 69 and can be invoked only when the
assessee does not treat a particular receipt as income. However, in case of
charitable organization, anonymous donations shown as income of the Trust, it
would be possible on the part of Assessing Officer to invoke the provisions of
68 to 69D of the Income-tax Act. Hon’ble Delhi High Court in DIT (Exemption)
v. Keshav Social and Charitable Foundation 278 ITR 152 (Delhi) held that
anonymity of the donors cannot lead to the inference that unaccounted money has
been introduced. Section 68 had no application to the facts of the case because
the assessee had disclosed the donations as a part of its income. Thus, there
was full disclosure of its income and its application by the assessee. The
provision of the Act is very clear about treating anonymous donations as valid
income available for charitable purposes.

Assessing Offices cannot declare the donations as anonymous or bogus
by examining few donors

In case of CIT v. Geetanjali Education Society 114 Taxman 440 (Rajasthan),
Hon’ble Rajasthan High Court held the Assessing Officer cannot declare the
donations as anonymous or bogus, as some of them were not examined nor those who
were examined had been allowed to be cross-examined.

Therefore, any donation given in favour of Education Society could not have
been held to be bogus donation given in favour of the Society could not have
been held to be bogus without examining the donors and subjecting them to cross
examination.

Burden of Proof is entirely on the assessee

In case of Madhavi Raksha Sankalp Nirmal Niketan 165 ITO 627 (Mumbai
Tribunal) that onus as well as burden of proof is entirely on the assessee
to provide to the Assessing Officer as to the compliance of Section 115BBC and
as to genuineness of the said donation and if the assessee failed to do so, the
entire transaction will be hit by provisions of Section 115BBC.

Hon’ble ITAT, Mumbai Bench in case of Madhavi Raksha Sankalp Nirmal
Niketan v. Dy. CIT [2017] 83 Taxmann.com 316 (Mumbai Tribunal) held that
burden of proof is entirely on the assessee to provide to the Assessing Officer
all details to his satisfaction as to compliance of Section 115BBC and the
genuineness of the said donations failing which entire transactions will be hit
by provisions of Section 115BBC.

Conclusion

Finance Act, 2006 had brought in some radical changes with regard to
anonymous donations received by charitable organizations. Section 115 BBC was
introduced with effect from 1st April, 2007 whereby anonymous donations are
taxable at the rate of 30% without any deduction or set off under any other
head. This amendment has caused harassment to many genuine voluntary
organizations who received anonymous donations through donation boxes and
various sources. However, Finance Act, 2009 brought some relief to the taxation
of anonymous donations by providing some relief to such organizations atleast
amount of anonymous upto 5% of the total income of ₹ 1 lakh whichever is higher
was exempted from taxation.

I. ASSESSMENT UNDER SEC.143 (1)

GENERAL

• No tax can be levied or collected without Authority of law- Article 265 of Constitution of India.

• Circular: No. 14(XL-35) of 1955, dated 11-4-1955 [Extracted from Chokshi Metal Refinery v. CIT [1977] 107 ITR 63 (Guj.)] also long back instructed and directed the department and said-

  Department not to take benefit of assessee’s ignorance.

• The Honourable Supreme Court from time and again had commented and suggested the Tax Authority to be humane and justified while applying the Provisions of law. Refer the following Judgments-

  Pannalal Binjraj v. Union of India [1957] 31 ITR 565 (SC).

Provisions should be applied in a humane and considerate manner – A human and considerate administration of the relevant provisions of the Income-tax Act would go a long way in allaying the apprehensions of the assessee and if that is done in all the true spirit, no assessee will be in a position to charge the revenue with administering the provisions of the Act with ‘an evil eye and an unequal hand’

CIT v. Simon Carves Ltd. [1976] 105 ITR 212 (SC).

Authorities must act in a fair and not partisan manner – The taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due from the assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighed against the assessee. It is impossible to subscribe to the view that unless those authorities exercise the power in a manner most beneficial to the revenue and consequently most adverse to the assessee, they should be deemed to have exercised it in a proper and judicious manner.

• Despite the aforesaid instructions and also suggestions from apex Courts, the Department do function in a very arbitrarily manner and the Assessee is taxed for the receipt which legitimately is not an income for him.

• The processing and issue of intimation has been made mandatory from AY 2017-18 (Proviso to Sec. 143(1D))

Therefore, We are now getting the Assessment/intimation order under sec.143(1)(a) but having the adjustments even for the income/expenses not authorized under the provision.

We for ready reference reproduce Sec.143(1)(a) as under :

143. [(1) where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:—

     1. the total income or loss shall be computed after making the following adjustments, namely:—

        1. any arithmetical error in the return;

        2. an incorrect claim, if such incorrect claim is apparent from any information in the return;

        3. disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;

        4. disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;

        5. disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-IE, if the return is furnished beyond the due date specified under sub-section (1) of section 139; or

        6. addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:

Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:

Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made:]

[Provided also that no adjustment shall be made under sub- clause (vi) in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018;]

The Central board of direct taxes has from time and again issuing the instructions and also circular as direction and procedure to be followed for making the adjustments while processing the Return. Such Instructions and circular are as under-

• INSTRUCTION NO.9/2017 [F.NO.225/333/2017-ITA.II], DATED 11-10-2017

• INSTRUCTION NO.10/2017 [F.NO.225/333/2017-ITA.II], DATED 15-11-2017

• CIRCULAR NO.1/2018 [F.NO.225/333/2017-ITA.II], Dated 10-1-2018 (143(1)(a)(vi))

From the reading of Sec.143(1)(a) of the Act, only adjustments of the nature as specified can be adjusted while processing the Return of Income and that too only after informing of the intention to Assessee.

o Adjustments which are subject to interpretation and debatable can not be made

1. ACIT v. Haryana Telecom Pvt Ltd, 14 taxmann.com 122 (Delhi HC)

It is beyond any doubt that when a deduction is claimed in the return of income and it is somewhat controversial, it cannot be treated to be prima facie disallowable. If the claim is made by the assessee is treated not to be free from debate and argument, it is bound to be regarded as debatable issue, which is not enable to prima facie adjustment within the meaning of section 143(1)(a) of the Act. Thus, where the issue involved is debatable, an intimation under section 143(1)(a) disallowing the claim based on such debatable issue on the ground that it is prima facie inadmissible, cannot be sustained

2. CIT v. Mekins Agro Products Limited (2015)( 55 Taxmann.com 216 (Andhra Predesh and Telangana High Court)

By its very nature, a claim under section 80HHC of the Act is surrounded by several uncertainties and debatable questions of fact and law. Before the Assessing Officer disallowed a part of the claim made under that provision, he ought to have issued notice under sub-section (2) of section 143 of the Act. It is not even asserted by the Revenue that the disallowance of part of the claim was on the basis of settled principles of law and there was nothing debatable about it. There cannot be any hard and fast rule as to when a particular aspect can be treated as debatable and when not. Much would depend upon the nature of claim and the adjudications that have taken place on the subject. (Para 10).

3. Modern Fibotex India Ltd. v. Dy. CIT [1995] 126 CTR (Cal.) 69 : [1995] 212 ITR 496 (Cal.),

The jurisdiction of the AO under s. 143(1)(a) to make an adjustment and to issue an intimation is, in my view, limited not only to the obvious but also to that which is deducible from the return as filed, without doubt or debate. This is clear form the language of the section and is supported by the authority as well as the circulars issued by the CBDT in this connection.

The said decision of the learned Single Judge was also affirmed by the Hon’ble Division Bench of this High Court in APO No. 383 of 1995 decided on 23rd Nov., 2000 and the said decision of the learned Single Judge also approved by the Hon’ble Supreme Court in CIT v. Hindustan Electro Graphites Ltd. [2000] 160 CTR (SC) 8 : [2000] 243 ITR 48 (SC)

4. Khatau Junkar Ltd. v . K.S. Pathania, Dy. CIT [1992] 102 CTR (Bom.) 194 : [1992] 196 ITR 55 (Bom.)

This is because the scope of the powers to make prima facie adjustments under s. 143(1)(a) is somewhat coterminous with the power to rectify a mistake apparent from the record under s. 154 In its literal sense, ‘prima facie’ means on the fact of it. Hence, on the face of the return and the documents and accounts accompanying it, the deduction claimed must be inadmissible. Only then can it be disallowed under the proviso to s. 143(1)(a). If any further enquiry is necessary, or if the ITO feels that further proof is required in connection with the claim for deduction, he will have to issue a notice under sub-s. (2) of s.143.’

o Instances of Debatable Issues

Employees Contribution to PF and ESI

Relevant clauses and provisions are clause 20(b) of the Form 3CD, Sec. 2(24) (x), Sec.36 (1) (va) and Sec.43B.

Sec.43B- Certain deductions to be only on actual payment

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(a)………………………………….. or

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, [or]

(c)………………………………..

……………………………………..

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.

Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Courts Interpretation :

Regarding the Word “Contribution” in Sec.43B

1. The Honorable Karnataka High Court in the case of ESSAE TERAOKA (P) LTD v. DCIT 366 ITR 408 (KAR)has analyzed the entire PF ACT and PFscheme in this regard and held that-

   From bare perusal of sub-para (1) of paragraph 30, it is clear that the word ‘contribution’ is used not only to mean contribution of the employer but also contribution to be made on behalf of the member employed by the employer directly. [Para 19]

   Paragraph 38 of the PF scheme provides for Mode of payment of contributions. As provided in sub-para (1), the employer shall, before paying the member, his wages, deduct his contribution from his wages and deposit the same together with his own contribution and other charges as stipulated therein with the provident fund or the fund under the ESI Act within fifteen days of the closure of every month pay. It is clear that the word ‘contribution’ used in clause (b) of section 43B means the contribution of the employer and the employee. That being so, if the contribution is made on or before the due date for furnishing the return of income under sub-section (1) of section 139 is made, the employer is entitled for deduction. [Para 20]

2. Patna High Court in Bihar State Warehousing Corporation Ltd v. CIT 386 ITR 410 (PAT)has also taken the same view that the word contribution in 43B(a) would include both employer and employee contribution. It was held-

   The issue as to whether a distinction can be made between the employees’ contribution and employer’s contribution with regard to applicability of section 43B was raised before the Bombay High Court in CIT v. Ghatge Patil Transports Ltd. [2014] 368 ITR 749/228 Taxman 340/53 taxmann.com 141 (Bom.) and before the Punjab and Haryana High Court in CIT v. Hemla Embroidery Mills (P.) Ltd. [2014] 366 ITR 167/217 Taxman 207/37 taxmann.com 160 (Punj. & Har.) and both the High Courts have answered the same by holding that both the employees and employer’s contributions are covered by the amendment
   to section 43B after considering Alom Extrusion Ltd.’s case (supra). [Para 15]

   Although technical reading of section 43B and the provisions of
   sub-section (2) of section 24(x), read with section 36(1)(va) create
   the impression that the employees’ contribution would continue to be treated
   differently under a different head of deduction, as the head of deduction is
   separate under section 43B and section 36 but on a broader reading of the
   amendments made to section 43B repeatedly and going by the intention of the
   Parliament there appears to be sufficient justification for taking the view that
   the employees’ and the employer’s contribution ought to be treated in the same
   manner. In Alom Extrusion Ltd.’s case (supra) the Supreme Court has not made any
   distinction between the two as similar problem of implementation would arise in
   both the cases, although specific issue was not raised therein; but both the Bombay High Court and the Punjab and Haryana High Court in the above referred to cases, after considering Alom Extrusion Ltd.’s case (supra), have answered the question treating the two contributions on the same footing. [Para 16]

3. Punjab & Haryana High Court in Commissioner of Income-Tax v. Hemla Embroidery Mills (P.) Ltd.held that Section 43B shall apply to both ‘contributions’ i.e. employers’ and employees’.

   Overriding effect-

   The Honorable Mumbai ITAT in case of ATE Pvt. Limited v. ACIT, Mumbai, Bench G reported on 84TTJ 186 has dealt with this aspect and held that Sec.43B has an overriding effect over other provisions of the Act, 1961.

   Courts considered due date under Sec. 139(1) and allowed deduction-

   Since the Assessee Company has paid/deposited the liability before the due date of filing of Return, the same cannot be disallowed. The Assessee places its reliance on the judgments of the various High Court where the deposit of PF and ESI if paid within due date of filing of Return under sec.139 (1) of the Act was allowed.-

4. The Jurisdictional Delhi High Court in case of CIT v. AIMIL LTD. (2010) 188 Taxmann 265 (DHC)held-

   Section 2(24) enumerates different components of income. It, inter alia, stipulates that income includes any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948, or any other fund for the welfare of such employees. It is clear from the above that as soon as employees’ contribution towards provident fund or ESI is received by the assessee-employer by way of deduction or otherwise from the salary/wages of the employees, it will be treated as ‘income’ at the hands of the assessee. It clearly follows therefrom that if the assessee does not deposit this contribution with provident fund/ESI authorities, it will be taxed as income in the hands of the assessee. However, on making deposit with the concerned authorities, the assessee becomes entitled to deduction under the provisions of section 36(1)(va ). Section 43B(b), however, stipulates that such deduction would be permissible only on actual payment. This is the scheme of the Act for making an assessee entitled to get deduction from income insofar as employees’ contribution is concerned. [Para 11]

   If the employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as in the ESI Act. Therefore, the Act permits the employer to make the deposit with some delay, subject to the aforesaid consequences. Insofar as the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down by the Supreme Court in CIT v. Vinay Cement Ltd. [2007] 213 CTR (SC) 268. [Para 17]

5. CIT v. SPL Industries Ltd, 9 taxmann.com 195 (Delhi)-2011

   Upon perusal of the aforesaid, we are of the considered opinion that the decisions rendered in P.M. Electronics Ltd.’s case (supra) and AIMIL Ltd.’s case (supra) have correctly laid down the law and there is no justification or reason to differ with the same. In the result, we do not perceive any merit in this appeal and accordingly the same stands dismissed.

   Followed in other cases-

   • ACIT v. Ranbaxy Laboratories Ltd, 20 taxmann.com 334 (Delhi)

   • ACIT v. Dixon Technologies (I) (P.) Ltd32 taxmann.com 218 (Delhi-Trib.)

   • All saints School v. Income Tax Officer (Exemption), Ward, Ghaziabad (2019) 105 taxmann.com 149 ( Delhi-ITAT).

   • Unitech Ltd. v. DCIT, 112 taxmann.com 162 (Delhi-Trib.)

   • Universal Precision Screws v. ACIT, 69 taxmann.com 368 (Delhi-Trib.)

   – CIT v. State Bank of Bikaner and Jaipur (2014) 43 Taxmann.com 411(Rajasthan) 06-01-2014

   Where PF and/or EPF, CPF, GPF, etc., was paid after due date under respective Acts but before filing of return of income under section 139(1), same could not be disallowed under section 43B or under section 36(1)(va).

   – Pr. CIT v. Rajasthan State Beverages Corporation Ltd. (2017) 84 taxmann. com 173-August 2, 2016

   So far as the question relating to privilege fees amounting to ₹ 26.00 Crores in the instant year as well as the deduction of claim of ₹ 17,80,765/- on account of Provident Fund (PF) and ESI is concerned, this Court has extensively considered the aforesaid two questions in assessee’s own case vide judgment and order dt.26.05.2016 referred to (supra) and has held that the privilege fees being a revenue expenditure, is required to be allowed as a revenue expenditure. This court in the aforesaid case has also allowed the claim of the assessee, in so far as payment of PF & ESI etc. is concerned, on the finding of fact that the amounts in question were deposited on or before the due date of furnishing of the return of income and taking in consideration judgment of this Court in CIT v. State Bank of Bikaner & Jaipur [2014] 363 ITR 70/43 taxmann.com 411/225 Taxman 6 (Mag.) (Raj.) and CIT v. Jaipur Vidhut Vitaran Nigam Ltd. [2014] 363 ITR 307/49 taxmann.com 540/[2015] 228 Taxman 214 (Mag.) (Raj.) and accordingly both the questions are covered by the aforesaid judgment and against the revenue.

   SLP filed by the Department with SC was also dismissed in this case.

   – Commissioner of Income -Tax v. Kichha Sugar Co. Ltd. [2013] 35 taxmann.com 54 (Uttarakhand) May 20, 2013

   The due date referred to in section 36(1)(va) must be read in conjunction with section 43B(b) and a reading of the same would make it amply clear that the due date as mentioned in section 36(1)(va), is the due date as mentioned in section 43B(b) i.e., payment/contribution made to the Provident Fund Authority any time before filing the return for the year in which the liability to pay accrued along with evidence to establish payment thereof. The Assessing Officer proceeded on the basis that ‘due date’, as mentioned in section 36(1)(va) is the due date fixed by the Provident Fund Authority, whereas in the matter of culling out the meaning of the word ‘due date’, as mentioned in the said section, the Assessing Officer was required to take note of section 43B(b) and by not taking note of the provisions contained therein committed gross error, which having been rectified by the Appellate Authority and confirmed by the Tribunal, there is no scope of interference. [Para 4]

   – Commissioner of Income-Tax (Central), Pune v. Ghatge Patil Transports Ltd. [2015] 53 taxmann.com 141 (Bombay)

   In this manner, the amendment provided by Finance Act, 2003 put on par the benefit of deductions of tax, duty, cess and fee on the one hand with contributions to various Employees’ Welfare Funds on the other. All this came up for consideration before the Supreme Court in the case of Alom Extrusions Ltd. (supra). The Tribunal in the case at hand relied upon the said judgment. There is no reason to fault the order passed by the Tribunal. The decision of the Supreme Court in Alom Extrusions Ltd. (supra) applies to employees’ contribution as well as employer’s contribution.[Para 15]

   Thus, both employees’ and employer’s contributions are covered under the amendment to section 43B and the Alom Extrusions Ltd. judgment (supra). Hence the Tribunal was right in holding that payments thereof are subject to benefits of section 43B. Both the appeals are decided in favour of the assessee and against the revenue and are disposed of accordingly[Para 16]

   The following Honorable High Courts also have taken the same view as above on the question of allowability of Employees Contribution to PF and ESI under sec.43B of the Act.

6. Sagun Foundry Pvt. Limited v. CIT, Kanpur (2017)78 taxmann.com 47 (Allahabad), Dec.21. 2016

7. Spectrum Consultants India Pvt. Limited v. CIT, Banglore-III(2013) 34 Taxmann.com 20 (Karnataka HC)

8. CIT, Circle-1, Kolkata v. Vijay Shree Ltd. Sep.06, 2011 (2014) 43 Taxmann.com 396 (Kol)

9. CIT, Shamla v. Nipso Poly Fabriks Limited(2013) 30 taxmann.com 90(HP High Court)

10. CIT-1, Chennai v. Rambal (P) Limited (2018) 96 taxmann.com 170( Madras HC)

Thus Majority of the Honorable High Court has accepted that late Payments of PF and ESI but before the due date under sec.139(1) shall be allowable and has not considered any difference between Employers Contribution and the Employees Contribution.

The effect of the above judgements appears to have been nullified by the Finance Act, 2021 wherein Explanation (5) to sec. 43B and Explanation to Sec.36(1)(va) were introduced.

Courts against the Assessee

CIT v. Gujarat State Road Transport Corporation, 41 taxmann.com 100 (Gujarat)

Where assessee did not deposit employees’ contribution to employees’ account in relevant fund before due date prescribed in Explanation to section 36(1)(va), no deduction would be admissible even though he deposits same before due date under section 43B

CIT v. Merchem Ltd, 61 taxmann.com 119 (Kerala)

In case of employee’s contribution, an assessee is entitled to get deduction of amount as provided under section 36(1)(va) only if amount so received from employee is credited in specified account within due date as provided under relevant statute.

Same court taking contrary view of its earlier decision- may be per incuriam order

1. Bharat Hotels Limited reported on 410 ITR 417has some what taken the different view and allowed the deduction only in terms of Sec.36(1)(va) of the Act. The aforesaid order very respectfully be said to be an order where the Court has itself not considered the orders passed in earlier Years of the bench of the same strength. The Order may very respectfully be said to be per incuriam as the Court while disposing of the Same issue is duty bound to have reference and to consider the Judgements passed earlier by the Bench of the same strength and composition. The Honorable Apex courts in the following cases have talked of the said judicial discipline.

2. State of Bihar v. Kalika Kuer alias Kalika Singh & others, (2003) 5 SCC 448

   “A decision is given per incuriam when the court has acted in ignorance of a previous decision of its own or of a court of coordinate jurisdiction which covered the case before it, in which case it must decide which case to follow; or when it has acted in ignorance of House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force.”

3. Siddharam Satlingappa Mhetre v. State of Maharashtra and Others, [AIR 2011 SC 312 : ( 2011) 1 SCC 694]

   “The analysis of English and Indian Law clearly leads to the irresistible conclusion that not only the judgment of a larger strength is binding on a judgment of smaller strength but the judgment of a co-equal strength is also binding on a Bench of Judges of co-equal strength…….In case there is no judgment of a Constitution Bench or larger Bench of binding nature and if the court doubts the correctness of the judgments by two or three judges, then the proper course would be to request Hon’ble the Chief Justice to refer the matter to a larger Bench of appropriate strength.”

Where two Views are possible

Even in a case where there are different views regarding the interpretation of a particular provision of the Act, the view favorable to the Assessee has to be applied. The Honorable Supreme Court in case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (S.C.) wherein it was held that when the language of a taxing provision is ambiguous or capable of more meanings than one, then the court has to adopt that interpretation which favours the assessse.

[Also see CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236 (SC), CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 (SC), CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518 (SC), CED v. R. Kanakasabai [1973] 89 ITR 251 (SC) and Sun Export Corpn. v. Collector of Customs [1997] 6 SCC 564.].

Thus while processing the return of Income, the Department tries to exceed its power by making adjustment which are prima facie not covered in Sec. 143(1)(a) of the Act. The Solution for the Assessee than available to the Assessee is to file Appeal with CIT(A) and get the relief.

SEC. 144 ASSESSMENT – BEST JUDGMENT ASSESSMENT

Similarly, the Assessing officer also feel pride in making the high pitched Assessment under Sec.144 of the Act and make the additions against the sprit and discipline of Sec.144 of the Act. The Courts have time and again given guidelines as to what considerations to be taken care while passing the ex parte Assessment order.

Sec. 144 of the Act, for better understanding is reproduced hereunder:

144. [(1)] If any person—

1. fails to make the return required [under sub-section (1) of section 139] and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or

2. fails to comply with all the terms of a notice issued under sub-section (1) of section 142 [or fails to comply with a direction issued under sub-section (2A) of that section], or

3. having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143,

the [Assessing] Officer, after [shall, after giving the assessee an opportunity of being heard, make the assessment] taking into account all relevant material which the [Assessing] Officer has gathered, of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment :

[Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment :

Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.]

[(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year.]

Honourable Courts on Assessment under Sec.144 of the Act.

1. SCOPE OF BEST JUDGEMENT ASSESSMENT- WHETHER AUTOMATICALLY SHALL APPLY WHERE ANY OF THE ABOVE THREE CONDITION EXISTS

   Aspect dealt in case of Mubarak Trading Co. v. CIT [2008] 174 Taxman 339 (Ker).

   Failure of any of the conditions mentioned in clauses (a) to (c) of section 144(1) need not always lead to best judgment assessment under section 144.

   For example, if an assessee fails to file return in time, but he produces entire books of account against the notice issued by the Assessing Officer, still assessment can be completed based on the book results and such assessment is certainly not a best judgment assessment under section 144. A best judgment assessment arises only when the Assessing Officer determines income based on materials gathered by him and not when assessment is made based on books of account submitted by the assessee.

   A best judgment assessment can arise even in case of income escaping assessment under section 147 because section 148 makes it clear that a return filed against notice issued under section 148 should be proceeded with as if it is a return under section 139. This means that in a proceeding initiated under section 147, the Assessing Officer can make a best judgment assessment if the books of account produced by the assessee are unacceptable. Even though word ‘or’ is used in clauses (a) to (c) of section 144, yet a best judgment assessment is called for only when there is cumulative failure of all conditions including failure to furnish his details of income and to prove same through his accounts and documents.

2. WHETHER POWER TO MAKE BEST JUDGEMENT ASSESSMENT IS ARBITRARY

   Matter dealt in case of State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC).

   The mere fact that the material placed by the assessee before the assessing officer is unreliable does not empower the officer to make an arbitrary order. The power to make a best judgment assessment is not an arbitrary power.

   Kachwala Gems v. Joint Commissioner of income Tax, jaipur (2007) 158 taxmann.com 71 (SC)

   It is well-settled that in a best judgment assessment, there is always a certain degree of guess work. No doubt, the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment, and should not act totally arbitrarily, but there is necessarily some amount of guess work involved in a best judgment assessment, and it is the assessee himself who is to blame as he did not submit proper accounts.

3. ASSESSING OFFICER SHOULD BE GUIDED BY RULES OF JUSTICE, EQUITY, FAIR AND GOOD CONSCIENCE

   CIT v. Ranicherra Tea Co. Ltd. [1994] 207 ITR 979 (Cal.)

   In making a best judgment assessment, the Assessing Officer does not possess absolute arbitrary authority to assess any figure he likes. Although he is not bound by strict judicial principles, he should be guided by rules of justice, equity and good conscience.

   Dhakeshwari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC)

   …….., although ITO is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends; because it is equally clear that in making the assessment under section 23(3) he is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all and there must be something more than bare suspicion to support the assessment under section 23(3). The rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. CIT [1944] 12 393. In the instant case, the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the assessee to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result was that the assessee had not had a fair hearing.

   The estimate of the gross rate of profit on sales, both by the ITO and the Tribunal, was based on surmises, suspicions and conjectures. The Tribunal took from the representative of the department a statement of gross profit rates of other cotton mills but did not show that statement to the assessee did not give him an opportunity to show that statement had no relevancy whatsoever to the case of the mill in question. It was not known whether the mills which had disclosed these rates were similarly situated and circumstanced. Not only did the Tribunal not show the information given by the representative of the department to the assessee, but it refused even to look at books and papers which assessee’s representative produced before the Accountant Member in his chamber. The assessment in this case and in the connected appeal, was above the figure of ` 55 lakhs and it was just and proper when dealing with a matter of this magnitude not to employ unnecessary haste and show impatience, particularly when it was known to the department that the books of the assessee were in the custody of the Sub-Divisional Officer. Thus both the ITO and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It was thus a fit case for the exercise of power under Article 136.

4. SPECIFIC FINDING REGARDING NON COMPLIANCE OF NOTICES IS NECESSARY

   Where there was no finding by the ITO that there had been any non-compliance with any of the notices mentioned in sub-clauses (a), (b) and (c) of section 144, the order of best judgment assessment should be struck down, even if there was valid service of notice under section 131 and there had been non-compliance with the terms of such notice – Mohini Debi Malpani v. ITO [1970] 77 ITR 674 (Cal.).

5. PROPER OPPORTUNITY MUST BE GIVEN TO ASSESSEE –

   The assessee will have to be given an opportunity of being heard and a right to question the correctness or the relevancy of the materials on the basis of which the ITO proposes to make the best judgment assessment-Dhanalakshmi Pictures v. CIT [1983] 144 ITR 452 (Mad.); T.C.N. Menon v. ITO [1974] 96 ITR 148 (Ker.).

   While making a best judgment assessment on the basis of comparable cases, the assessee must be apprised of those cases and given an opportunity to have his say in the matter – K. Baliah v. CIT [1965] 56 ITR 182 (Mys.).

   It is not open to Assessing Officer to make best judgment assessment under section 144, otherwise than, on basis of all relevant materials which he had gathered after giving an opportunity of hearing to assessee –Triyogi Narayan Singh v. CIT, Kolkata (2015) 60 Taxmann.com 351(Calcutta)
   Also refer First proviso to Sec.144- Proper show cause notice

6. ESTIMATION OF INCOME MUST BE HONEST AND FAIR

   Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC).

   Kachwala Gems v. Jt. CIT [2007] 158 Taxman 71 (SC).

   The authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such an estimate, the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case.

   State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC).

   Though there is an element of guesswork in a ‘best judgment assessment’, it should not be a wild one, but should have a reasonable nexus to the available material and the circumstances of each case. Though the section provides for a summary method because of the default of the assessee, it does not enable the assessing authority to function capriciously without regard to the available material.

   Commissioner of Income Tax v. Bhagat Steel and Forging P. Ltd. [2014] 52 taxmann.com 28 (Delhi)

   The best judgment assessment order under section 144 recorded that notices under section 143(2) were issued and served by affixture. Thereafter, questionnaire was issued alongwith notice under section 142(1), but no compliance was made. Another notice was sent at the address of the assessee-company, but there was no response. Addition of ₹ 90, lakhs was made on account of fresh investments as details with regard to the same were not available. The Assessing Officer noticed that there was increase in liabilities but he did not make any adjustment or addition on the said account. The loss return of ₹ 3.67 lakhs was thus subject to addition of ₹ 90 lakhs and the net income was assessed at ₹ 86.32 lakhs.

   On appeal, the Commissioner (Appeals) referred to the documents placed on record and the contention of the assessee that investment of ₹ 90 lakhs in the two sister concerns; could be easily explained. He observed that the payments were made by way of cheque or by bank transfer. The assessee had established sources in the form of secured loan from Bank, unsecured loan and advance for sale of land from unrelated and a third party. Accordingly, the addition was deleted on merits holding that the investment stands explained.

   On second appeal, the Tribunal indicted that the Departmental Representative had proceeded and argued on the basis that the Commissioner (Appeals) had annulled the assessment, which was factually incorrect. As noticed, the Commissioner (Appeals) examined merits and deleted the addition on merits.

7. FALL IN GROSS PROFIT RATIO CAN NOT BE SOLE GROUND FOR REJECTION OF BOOKS OF ACCOUNTS AND MAKING BEST JUDGEMENT ASSESSMENT

   Pr. CIT v. IBILT Technologies Ltd. (2018) 98 Taxmann.com 255 (DHC)

   If there is fall in the gross profit ratio, reasons and grounds given by the respondent/assessee have to be examined objectively, fairly and in a non-partisan manner. Past results could be a good reason to conduct detailed verification, albeit would not be the only ground and reason to make addition by rejecting the books of account. Good and cogent reason why the financial results should be rejected has to be given. Books of account cannot be rejected as the respondent- assessee has suffered losses, where as in the immediate earlier year, profit was made. Fall in gross profit ratio could be due to various reasons, and cannot be the sole and only ground to reject the book results in entirety and frame best judgment assessment [see CIT v. Poonam Rani [2010] 326 ITR 223/192 Taxman 167 (Delhi), Action Electricals v. Dy. CIT [2003] 132 Taxman 640/[2002] 258 ITR 188 (Delhi)]. The reasoning given in the assessment order to compute income on hypothetical basis by applying gross profit ratio of 4% is completely fallacious, wrong and is contrary to well-settled law, as expounded vide judgments reported as CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC), Dhakeshwari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC) and Raghubar Mandal Harihar Mandal v. State of Bihar AIR 1957 SC 810.

8. REFUSAL BY CHARTERED ACCOUNTANT UNDER SECTION 142(2A) CANNOT LEAD TO BEST JUDGMENT ASSESSMENT

   Swadeshi Polytex Ltd. v. ITO [1983] 144 ITR 171 (SC).

   If, for a frivolous reason, the chartered accountant declines to undertake the audit of a company’s accounts under a direction issued under section 142(2A), obviously the company could not be held responsible. There is neither default nor failure to comply with the direction issued under section 142(2A) on the part of the company so as to attract a best judgment assessment by invoking section 144(b)

Conclusion

Thus the Assessee of course against the arbitrariness of the Tax department, has to its disposal the security from the Judiciary and the arbitrary additions made are set aside. Still there must be some sort of accountability as to save the Assessee from the trouble of unjust additions being made by the department.

Thanks

Dear Federation Family,

Covid-19 vaccination is in full swing in the Country. I hope all of you and your family members got vaccinated. The cases of Covid have substantially reduced in the Country. Keeping this in mind, we have organised physical two days National Tax Conference on 2nd & 3rd October, 2021 at Katra, Jammu. We have also decided to physically celebrate 45th Foundation Day on 11th November, 2021 at Pune alongwith two days National Tax Conference on 12th & 13th November, 2021. I request all the members to join in large numbers for both the programmes. In my earlier communication, I have informed that we are organising the National Tax Moot Court Competition in the memory of Padma Vibhusan Late Dr. N. A. Palkhivala, Senior Advocate, in association with Maharashtra National Law University, Mumbai and The Goods and Services Tax Practitioners’ Association of Maharashtra, Mumbai. We have invited all the law colleges of India to take participation in the Moot Court. Please note the said Moot Court will be organised on virtual mode.

Please note that Zonal Election for the term 2022 & 2023 are already scheduled and Notices of all the 5 zones are printed in our AIFTP Times for the month of September, 2021 and also are uploaded on our website i.e.
www.aiftponline.org.

Central Board of Direct Taxes (CBDT) has further extended due dates for filing of Income Tax Returns and various report of audit for the Assessment Year 2021-22. I am sure this will give relief to the members for performing their duties. We are thankful to Finance Ministry to extend the dates well in advance on consideration of difficulties reported by the tax payers and other stakeholders in filing of Income Tax Returns and various reports of audit and glitches in the tax portal.

The Institute of Chartered Accountants of India has further provided appropriate time limit of generating UDIN of 60 days instead of 15 days.

I am happy to inform that Hon’ble Mr. Justice Rajesh Bindal has been elevated as Chief Justice of Allahabad High Court. It is proud moment for AIFTP as he is our esteemed member and closely associated with all of us. Our heartiest congratulations and all the very best for his new assignment.

I am also happy to inform that our Member Mr. Kamlesh Rathod has been appointed as Accountant Member of Income-tax Appellate Tribunal. Our heartiest congratulations and we wish him all the best.

GST Council in its meeting held on 17th September, 2021 extended concessions to specified drugs used in COVID 19 treatment till December 30, 2021 which is a very positive move in the current scenario.

I request all of you to stay safe with social distance, frequent sanitizing and wearing mask always and further follow rules and regulations announced by the Government time to time.

Place: Eluru 
Dated: 18-9-2021

M. Srinivasa Rao
National President, AIFTP