1. The latest judgment of the Bombay High Court in the case of E-Lands Apparels Ltd. v. The State of Maharashtra and Others, WP No. 1819 of 2019, judgment dated October 5, 2021 is an eye opener for the all the negligent assessees. The judgment has far-reaching effects. There are speculations in the profession about the ratio of this judgment. Therefore, this article.

2. The facts recorded by the Hon’ble High Court in this case are as follows. The petitioner company had taken over another company, namely, ‘Mudra Lifestyle Ltd.’, prior to 2011. The name of the erstwhile company was changed to ‘E-Land Apparel Ltd.’. The new management did not inform the assessing authority the change which had taken place. Section 18 of the MVAT Act, 2002 provides that any registered dealer liable to pay tax under the Act, who transfers by way of sale or otherwise disposes of his business or any part thereof, or effects or knows of any other change in the ownership of the business, and changes the name of his business, should, within the prescribed time, inform the prescribed authority accordingly. It was not done. An application in Form No. 501 for part refund was made on September 30, 2011. It was rejected on September 20, 2012 and was served on the Petitioner on September 26, 2012 by pasting. The roznama produced by the Respondents before the Court recorded that on August 29, 2012 a notice for assessment in Form No. 301 was issued. The roznama also recorded that the dealer (Petitioner) was not available at the place of business and was not responding for last two years and the case was closed for rejection. It was stated that many opportunities were given but the dealer was not available at the place of business and there was no response and hence the application for refund was rejected. The roznama dated March 25, 2014 recorded that the application made by the dealer for the year 2009-2010 was rejected on September 20, 2012 and served on September 26, 2012 by pasting.

3. The Petitioner had written letter to the Sales Tax Department on October 4, 2015, stating that no cognizance was taken by the Department on the refund application filed by them in the year 2011. The Petitioner thereafter applied on April 20, 2018 under Right to Information Act seeking status of the refund application. The Department replied on May 30, 2018 stating that no details were available with them. The Petitioner persisted with the remedy under Right to Information Act. Ultimately, a reply was received by the Petitioner on October 9, 2018 from the Department wherein it was mentioned that the application for refund was rejected. It was the Petitioners grievance that the copy of the rejection order was not provided. The Petitioner was therefore left with no other alternative but to approach the Court under Article 226 of the Constitution of India. It was contended that the cause of action survived and having regard to the explanation in the petition, the live link with the dispute had not snapped. The Petitioner submitted that after exhausting all the possible remedies they had approached the Court.

4. The Court observed that it did not find any substance in the contentions of the Petitioner that as the copy of the refund rejection order was not served the cause of action survived. The Court observed that there was a failure to take steps as per the requirement of the Act. It was therefore not possible to ignore or brush aside the stand of the Respondents that the order had been served by way of pasting as the assessee named in the application was not found at the place of business.

5. The Court observed that the right to seek the refund in the instant case crystalized on September 30, 2011 itself, viz. the date of transaction stated in Form 501. In the opinion of the Court by filing an application on April 20, 2018 under Right to Information Act the Petitioner attempted to resurrect the cause of action. The communication dated October 9, 2018 was merely a response indicating the status of the Petitioner’s claim having been rejected. The department merely supplied information as regards the decision already made. The claim made by the Petitioner was a stale/dead claim, and the representation thereto was belated representation. The issue of limitation or delay and laches as regards the claim should be considered with reference to the original cause of action which in the opinion of the Court arose on September 30, 2011 itself. The Court relied on the decision of the Hon’ble Supreme Court in the case of Union of India and Others v. M. K. Sarkar (2010) 2 SCC 59to come to this conclusion. The Court therefore held that the reply given by the Department on October 9, 2018 could not therefore be considered as furnishing a fresh cause of action for reviving a dead issue or a stale claim.

6. The Court further observed that the Petitioner woke up from its slumber on October 14, 2015. Though the right to claim refund was crystalized way back on September 30, 2011, the Petitioner chose not to enforce their rights with diligence and promptitude. This was a case where by passage of time the Petitioner had allowed the remedy of claiming refund to be lost. Mere making an application on October 14, 2015 and then trying to obtain information under the Right to Information Act since 2018 onwards would not revive a stale claim. The law is well settled that making of repeated representations does not have the effect of keeping the claim alive. The Petitioner had referred to the application dated October 14, 2015 and the application made under the under Right to Information Act from 2018 onwards to explain the delay in filing the Writ Petition. However, the explanation, in the opinion of the Court was unsatisfactory. Those repeated representations did not give a fresh cause of action to the Petitioner and mere making of representation could not justify a belated approach. It could not be said that Petitioner was perusing the Statutory remedies in respect of the refund claim. The Petitioner was not vigilant of its rights and therefore the Court stated that they did not feel that they should exercise their extraordinary Writ jurisdiction in the favor of the Petitioner.

7. The Court relied on another Supreme Court judgment in the case of Karnataka Power Corporation Ltd. and anr. v. K. Thangappan and anr. AIR 2006 SC 1581 and stated that the discretion had to be exercised judicially and reasonably. They also relied on another judgment of the apex court in the case of State of M. P. v. Nandalal AIR 1987 SC 251which said that the High Court in exercise of its discretion does not ordinarily assist the tardy and the indolent or the acquiescent and the lethargic.

8. The Court also considered the present matter from the point of view that the application for refund was in the nature of a money claim. The Court relied on the judgment of the Supreme Court in the case of The State of Madhya Pradesh and anr. v. Bhailal Bhai and others 1964 AIR 1006. The apex court in that case had observed that the maximum period fixed by the legislature as the time within which the relief by a suit in a civil court must be brought may ordinarily taken to be a reasonable standard by which delay in seeking remedy under Article 226 could be measured. The Court may consider the delay unreasonable even if it is less than the period of limitation prescribed for civil action for the remedy but where the delay is more than this period, it will almost always be proper for the Court to hold that it is unreasonable. Hon’ble Bombay High Court held that the present case was squarely covered by the Bhailal Bhai’s case and dismissed the Writ Petition.

9. This judgment of the Bombay High Court is now a booster shot for Department. The quasi-judicial authorities are bound to take advantage of this. One error on the part of the Petitioner, of failure to inform the Department of the changes effected in the status of the Petitioner, has invited so many observations of the Court which are now detrimental to all other similar cases involving delay. Each litigant has now to be careful. The explanation for the delay caused should be set up properly. Advisably it should be done after proper inspection of the Department’s records. Each day of delay, irrespective of whether it is for the refund or it is in filing appeal has to be explained properly.

In Part-I it was stated that the concept of joint venture, the facts, observations and decision of CESTAT in case of Mormugao Port Trust v/s Commissioner of Customs, Central Excise & Service Tax- Goa, dated 07/10/2016 will be described in detail in the next part.

Concept of Joint venture

A joint venture is a combination of two or more persons in a specific venture, where profit is jointly sought without any actual partnership or corporate designation. It is a common enterprise for profits with a joint control over strategic financial and operative decisions. The relation between the co-venturer and joint venture is akin to that of a partner in a partnership firm. The partner contributes into a common pool, resources required for running the joint enterprise. If the venture is successful, the returns that he gets from the same, is his profits and not a consideration, for any specific service rendered. Likewise a co-venturer does not render any service to the joint venture for a consideration.

Facts:

Mormugao Port Trust (Mormugao) was rendering Port Services from its own land and was registered with the service tax authorities. Mormugao leased out/rented out the said land to M/s. South West Port Ltd. (SWPL) for the purpose of carrying out the business of providing the service of loading and unloading of cargo to ocean going vessels. SWPL constructed a jetty on the said land for the aforesaid business. Mormugao received license fee and royalty from SWPL. Mormugao paid service tax on the license fee, but not on royalty. The Commissioner of Central Excise, issued the notice to Mormugao, proposing to levy service tax on royalty, under the head of Renting of Immoveable Property services. Mormugao replied to the Notice submitting that service tax cannot be levied, as there was no renting of land. The royalty earned by it was infact its share of revenue from services which were jointly rendered by Mormugao and SWPL. The principal-client relationship which is the basic tenet for applicability of service tax, was not existing between the Mormugao and SWPL. Being not satisfied with the aforesaid submissions, the order was passed to levy service tax. On appeal before CESTAT, Mormugao argued that the impugned order has been passed without appreciating the true nature of agreement existing between the Mormugao and SWPL. The assumption that Mormugao had leased the land and the water front was erroneous and contrary to facts. Infact the arrangement between the Mormugao and SWPL was one where both parties were jointly rendering port services for earning profits. Both the parties were jointly controlling the operations of the two cargo handling berths. The relation between the Mormugao and SWPL was not that of a service provider and service recipient but was that of a co-venturer in a joint venture.

Observation & Judgment:

Hon’ble CESTAT observed that the issue to be decided by us is whether the amount received by Mormugao from SWPL, under the nomenclature of royalty, was a consideration for the renting/leasing of the land and the waterfront and accordingly liable to tax under the head of Renting of Immoveable Property services. After going through the licence agreement dated 11-4-1999 between the two parties, we find that the Commissioner was wrong in holding that Mormugao had merely leased out the land and water area to SWPL, and had done nothing else besides that. The agreement shows that besides leasing out the land and water area to SWPL for which a specific consideration by way of licence fees is charged by Mormugao (this licence fee is not subject matter of dispute in this appeal), Mormugao had also granted a permission to SWPL to conduct port operations. This permission was necessary for SWPL, as the right to exploit the water front by operating a port at Mormugao waterfront was by law, vesting only with Mormugao. Therefore, besides leasing out the land and the water area to SWPL, the other facility/right given to SWPL, is the right to conduct port operations at Mormugao waterfront. As per the licence agreement, licence fee is the consideration agreed for the specific activity of leasing/renting of land and water area. Royalty on the other hand is the reward that Mormugao earns as his share of revenue from a joint port business enterprise run by the two parties in lieu of the various facilities, rights and resources contributed by Mormugao for the joint business. The main contribution of Mormugao, for which it is entitled for Royalty is the grant of permission/licence to carry on business on the water front at Mormugao. This exclusive right to exploit the water front which was available only to Mormugao as per law, was relinquished by Mormugao in favour of the joint venture. In addition to the above contribution, Mormugao was also obliged to do many more things for the smooth running of the port operations. These obligations are such as, providing information about licence premises to SWPL, approval of the provision and maintenance of all general port infrastructure, pilotage and towage on a non-discriminatory basis, overseeing dock-side safety, monitoring air pollution and water pollution at its own cost, compliance of environmental measures, supplying of power and water during construction, assistance for firefighting, obtaining/assisting in obtaining other sanctions and donations, scheduling entry, berthing and sailing of vessels, maintenance, dredging, removal of racks, debris of liquid spillage etc. The arrangement between Mormugao and SWPL is the public-private partnership. In our view this arrangement in the nature of the joint venture where two parties have got together to carry out a specific economic venture on a revenue sharing model. Such PPP arrangement are common nowadays not only in the port sector but also in various other sectors such as road construction, airport construction, oil and gas exploration where the Government has exclusive privilege of conducting businesses. In all such models, the public entity brings in the resource, over which, it has the exclusive right, whether land, water front or the right to exploit the said land and water front, and the private entities brings in the required resources either capital, or technical expertise necessary for commercial exploitation of the resource belonging to the Government. These PPP arrangements are described sometimes as collaboration, joint venture, consortium, joint undertaking, but regardless of their name or the legal form in which these are conducted. These are arrangements in the nature of partnership with each co-venturer contributing in some resource for the furtherance of the joint business activity. Sometimes, the contracting parties, may conduct such joint venture in the name of a separate legal entity, while at times, such a joint venture is carried out under the individual names of the parties. Such informal arrangements are called by different names either as a consortium, collaboration, joint undertaking, etc. Regardless of the legal form or name that is given to such a Joint Venture, the same are arrangements in the nature of partnership but without the liabilities being joint and several.

The meaning of the term joint venture was interpreted by the Supreme Court in the case of Faqir Chand Gulati v. Uppal Agencies Pvt. Ltd. – (S.C.) wherein the Apex Court quoted with approval the following extract from the American jurisprudence Second Edition Volume 46 defines Joint Venture to mean that a joint venture is frequently defined as an association of two or more persons formed to carry out a single business enterprise for profit. More specifically, it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects, skill, and knowledge, without creating a partnership, a corporation or other business entity, pursuant to an agreement that there shall be a community of interest among the parties as to the purpose of the undertaking, and that each joint venture must stand in the relation of principal, as well as agent, as to each of the other coventurers within the general scope of the enterprise. Joint ventures are, in general, governed by the same rules as partnerships. The relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership that their rights, duties, and liabilities are generally tested by rules which are closely analogous to and substantially the same, if not exactly the same as those which govern partnerships. Since the legal consequences of a joint venture are equivalent to those of a partnership, the courts freely apply partnership law to joint ventures when appropriate. In fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very little law being found applicable to one that does not apply to the other. Thus, the liability for torts of parties to a joint venture agreement is governed by the law applicable to partnerships. A joint venture is to be distinguished from a relationship of independent contractor, the latter being one who, exercising an independent employment, contracts to do work according to his own methods and without being subject to the control of his employer except as to the result of the work, while a joint venture is a special combination of two or more persons where, in some specific venture, a profit is jointly sought without any actual partnership or corporate designation.

An analysis of this judgment shows that in order to constitute a joint venture, the arrangement amongst the parties should be a contractual one, the objective should be to undertake a common enterprise for profit. Joint control over strategic financial and operative decisions was held to be the key feature of a joint venture. The other obvious feature of a joint venture would be that the parties participate in such a venture not as independent contractors but as entrepreneurs desirous to earn profits, the extent whereof may be contingent upon the success of the venture, rather than any fixed fees or consideration for any specific services.

The question that arises for consideration is whether the activity undertaken by a co-venture (partner) for the furtherance of the joint venture (partnership) can be said to be a service rendered by such co-venturer (partner) to the Joint Venture (Partnership). In our view, the answer to this question has to be in the negative inasmuch as whatever the partner does for the furtherance of the business of the partnership, he does so only for advancing his own interest as he has a stake in the success of the venture. There is neither an intention to render a service to the other partners nor is there any consideration fixed as a quid pro quo for any particular service of a partner. All the resources and contribution of a partner enter into a common pool of resource required for running the joint enterprise and if such an enterprise is successful the partners become entitled to profits as a reward for the risks taken by them for investing their resources in the venture. A contractor-contractee or the principal-client relationship which is an essential element of any taxable service is absent in the relationship amongst the partners/co-venturers or between the co-venturers and joint venture. In such an arrangement of joint venture/partnership, the element of consideration i.e. the quid pro quo for services, which is a necessary ingredient of any taxable service is absent.

In our view, in order to render a transaction liable for service tax, the nexus between the consideration agreed and the service activity to be undertaken should be direct and clear. Unless it can be established that a specific amount has been agreed upon as a quid pro quo for undertaking any particular activity by a partner, it cannot be assumed that there was a consideration agreed upon for any specific activity so as to constitute a service.

In Cricket Club of India v. Commissioner of Service Tax, reported in it was held that mere money flow from one person to another cannot be considered as a consideration for a service. The relevant observations of the Tribunal in this regard are extracted below:

Consideration is, undoubtedly, an essential ingredient of all economic transactions and it is certainly consideration that forms the basis for computation of service tax. However, existence of consideration cannot be presumed in every money flow. The factual matrix of the existence of a monetary flow combined with convergence of two entities for such flow cannot be moulded by tax authorities into a taxable event without identifying the specific activity that links the provider to the recipient.

Unless the existence of provision of a service can be established, the question of taxing an attendant monetary transaction will not arise. Contributions for the discharge of liabilities or for meeting common expenses of a group of persons aggregating for identified common objectives will not meet the criteria of taxation under Finance Act, 1994 in the absence of identifiable service that benefits an identified individual or individuals who make the contribution in return for the benefit so derived.

Neither can monetary contribution of the individuals that is not attributable to an identifiable activity be deemed to be a consideration that is liable to be taxed merely because a club or association is the recipient of that contribution.

To the extent that any of these collections are directly attributable to an identified activity, such fees or charges will conform to the charging section for taxability and, to the extent that they are not so attributable, provision of a taxable service cannot be imagined or presumed. Recovery of service tax should hang on that very nail. Each category of fee or charge, therefore, needs to be examined severally to determine whether the payments are indeed recompense for a service before ascertaining whether that identified service is taxable.

We are accordingly of the view that activities undertaken by a partner/co-venturer for the mutual benefit of the partnership/joint venture cannot be regarded as a service rendered by one person to another for consideration and therefore cannot be taxed.

We may mention here that there are situations where a co-venturer or a partner may render a taxable service to the joint venture or the firm. This may happen if, for instance, the partner in individual capacity enters into a separate contract with the joint venture/partnership for providing a specific service in lieu of a separate specific consideration. Such consideration for specific services provided under an independent contract between a co-venturer/partner and joint venture/partnership can be taxable, as such contracts are executed by the partners not in their capacity of the partners but as independent contractors and such a relationship is governed by a separate contract independent of the partnership/joint venture agreement. To illustrate, a partner in a partnership firm may enter into a separate lease agreement with the firm for renting out his private property to the Partnership firm for a monthly rent. In this situation, the partner will be liable to pay service tax on the renting service rendered by him to the firm. On the other hand, if the partner chooses to grant the firm a right to use his office premises and regards this as his contribution to the hotch-potch of the partnership firm, the reward by way of profits which such partner may earn upon the success of the partnership venture will not be taxable as the profit earned by the partner in such circumstances is not a consideration for the service of renting out the property to the partnership firm. By placing the office at the disposal of the firm to conduct its business the partner agrees to receive only a share of profit which is contingent upon the firm earning profits in the first place. If the venture fails and the firm does not earn any profit, the partner may not receive anything in return for the contribution made by him. On the other hand, if the firms venture is successful, the partner may earn profit which may be much more than the normal rent that he would have earned by simply leasing out the office to the firm for a fixed rent. The profits which the partner will earn in such circumstances is a reward due to an entrepreneur for the risk that he takes and cannot be regarded as a consideration for the renting of the office to the firm.

The Commissioner has tried to support his conclusion to levy tax on Royalty by citing Mormugao’s own action of paying service tax on Royalty after April, 2012 when the negative list regime of taxation was introduced. Since there is no estoppels in law, we find this aspect to be totally irrelevant for deciding Mormugao’s liability for the past period. In any case, we find that under the negative list regime the most significant change having a bearing on the issue in hand is the insertion of explanation (iii) in the definition of service in Section 65B(44). The said explanation (iii) reads as under:

Explanation 3. – For the purposes of this Chapter, -(a)an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; (b)an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. In our view all that the explanation stipulates is that an unincorporated association or a body of persons and members thereof, shall be treated as distinct persons. This explanation in our view does not have the effect of rendering the activities undertaken by the partner/co-venturer, which are actually for his own benefit, as being a service rendered by it to the partnership (joint venture). What the partner/co-venturer does is for his own benefit cannot ipso facto be considered as a service rendered to the partnership (joint venture). The mere fact that the partnership (joint venture) may also benefit from the same is irrelevant as there is no contract of service agreed upon or performed by the partner (co-venturer) to the partnership (joint venture). Additionally, there is no consideration agreed upon or provided. In the absence of there being a quid pro quo the essential requirement of the definition of service is not met with.

The learned AR for the Revenue disputed the contention with regard to the enterprise being a joint venture and Mormugao being a joint venture partner on the ground that the agreement between the two entities in Clause 15.3 states that the duties, obligation and liabilities of the parties under the agreement are intended to be several and not joint or collective and that nothing contained in the agreement shall be construed to create an association, trust, partnership, agency or a joint venture amongst the parties. It has also been contended that there being no sharing of losses provided for, enterprise could not be called a joint enterprise.

In our view none of the two reasons urged by the learned Counsel for the Revenue would lead us to a conclusion that the arrangement between the two was not that of a Joint venture. The true nature of parties relationship has to be decided keeping in view the totality of the agreement by reading the agreement as a whole and not by reading one clause in isolation. If the agreement is read as a whole, it clearly comes out that Mormugao and SWPL were jointly undertaking a common enterprise, the revenue of which was shared between the two. Insofar as the other argument of the revenue that non-sharing of losses militates against the principle of partnership being canvassed by the Mormugao is concerned, firstly the broad principle of partnership of law applies to a transaction between co-venturer and joint venture and not the entire Partnership Act per se. Secondly, even under the Partnership Act there is no stipulation that the partners must necessarily share losses. Infact the Honble Bombay High Court in the case of Raghunandan Nanu Kothare v. Hormasji Bezonji Bamji (1927) 29 BOMLR 207 have categorically held that it is not essential to constitute a partnership that a partner should share the losses. In any case in a joint venture of the present type where jointly controlled operations are being undertaken and one of the venturer brings in the land and the water front and the right to exploit such water front as his contribution while the other venturer brings in money to create infrastructure on the same as his capital, each of the partners is responsible/liable for loss of his capital in case the venture is not successful. Had the Mormugao chosen to give right in the land and the water front by way of auctioning the same, they could have gained substantial fixed amount, irrespective of revenue loss to the person who takes the right under auction. If the venture goes into loss the co-venturer who invested money will loose his money, at the same time the Mormugao will also not get anything being the consideration of the Mormugao is a share in the earning of the joint venture, that way the Mormugao is the looser of intrinsic auction value. Therefore, as per the present arrangement of joint venture, though there is clause that the Mormugao will not share the revenue loss of the business of the joint venture but in fact, they are otherwise the looser of the deemed auction amount, in case of auction which the Mormugao could have opted instead of joint business venture. Therefore, in the present set of arrangement also, it is not correct to say that the Mormugao is not sharing the loss.

We are accordingly of the view that there is no service that has been rendered by Mormugao, much less the taxable service of renting of immoveable property. The money flow to the Mormugao from SWPL, under the nomenclature of Royalty, is not a consideration for rendition of any services but infact represents the Mormugao’s share of revenue arising out of the Joint Venture being carried on by Mormugao and SWPL. Consequently, the appeal is allowed.

Summing up

The GST Act being new, many tax payers and professionals are not ready to take the risk. As a result, there is a rising tendency of the tax payers to assume (i) as something is received, it must be against a supply and (ii) as something is supplied, it must be for a consideration. As the aforesaid judgment is helpful to do away the aforesaid assumptions, I have reproduced, almost the entire judgment. I am of the firm view that any enactment cannot evolve, unless every illegal provision is challenged by someone; may be, after payment of tax under protest. I am the supporter of automation systems for the purpose of filing returns etc. but any illegal provision in the law should not be allowed to be settled automatically, by inaction of the taxpayers.

BUY BACK

Buy Back of Shares means the purchase by the Company of its own shares. Buy Back of equity shares is an imperative mode of capital restructuring. It is a corporate financial strategy which involves capital restructuring and is prevalent globally with the underlying objectives of increasing Earnings Per Share (EPS), averting hostile takeovers, improving returns to the stakeholders and realigning the capital structure. Buy Back is an alternative way of Reduction of Capital.

Companies Act

Section 68 of the Company’s Act deals with the instance of buy back of its own shares by a company. The most important points to be considered under the Companies’ Act is that the buy back by a company can be made out of :

its free reserves;

the securities premium account; or

the proceeds of the issue of any shares or other specified securities:

No buy-back of any kind of shares or other specified securities can be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

The buy-back should be twenty-five per cent or less of the aggregate of paid-up capital and free reserves of the company. But in case of Equity Shares, the same shall be taken as 25% of paid up equity capital only. Debt equity ratio should be 2:1.

All the shares or other specified securities for buy-back are fully paid-up;

The buy-back in respect of unlisted shares or other specified securities is in accordance with the Share Capital and Debentures Rules, 2014.

No offer of buy-back can be made within a period of one year from the date of the closure of the preceding offer of buy-back.

Income Tax Act

The Companies’ Act as such does not prescribe the rate at which the buy back has to be done. In this context, the provisions of Section 115QA of the Income Tax Act would be relevant, which reads as under:

“115QA. Tax on distributed income to shareholders.- (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.

Provided that the provisions of this sub-section shall not apply to such buy-back of shares (being the shares listed on a recognised stock exchange), in respect of which public announcement has been made before 5th day of July, 2019 in accordance with the provisions of the Securities and Exchange Board of India (Buy-back of Securities). Regulations, 2018 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) as amended from time to time.

Explanation.-For the purposes of this section,-

(i) “buy-back” means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies;

(ii) “distributed income” means the consideration paid by the company on buy- back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed .

(2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on the distributed income under sub-section (1) shall be payable by such company.

(3) The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in sub-section (1).

(4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid.

(5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon.”

The government introduced the concept of buyback tax under Sec 115QA vide the Finance Act 2013, wherein tax at the rate of 20 per cent is to be levied on the amount of income distributed by unlisted companies. It is pertinent to note that this tax was earlier applicable to income distribution by unlisted companies and not listed companies. The government was of the view that a similar practice should be adopted for listed companies given that there was also a tax arbitrage and, hence, the buyback tax has now been extended to listed companies as well. This provision was made effective in respect of buyback undertaken from July 5, 2019., by deleting the phrase ‘not being shares listed in a recognized stock exchange’.

Rationale of the provision

The rationale for the introduction of the provision was that unlisted companies resorted to buyback of shares in order to avoid dividend distribution tax. As the buyback was charged as capital gains in the hands of the shareholder and dividend distribution tax was charged to the company. Therefore the amendment was introduced as an anti- tax avoidance measure. The said amendment was intended to bring at par both the methods of income distribution that is dividend payout and buyback of shares. In fact, companies will now show a greater preference for the dividend payout as the buyback rules may prove to be more expensive. However there have been concerns that the shares of listed companies being tradeable pass through many hands. Every time a shareholder sells his shares, he will incur short term or long term capital gains on the differential price. Now when the company buys back the shares, it again incurs tax on the differential price (Market Price – Issue Price). Therefore there is a possibility of double taxation. The same occurrence is less likely in the case of Unlisted Companies.

The company that has surplus funds and no viable investment opportunity to invest in will look to distribute the surplus. While dividend payout and buyback both result in payouts, buyback warrants a smaller shareholding and higher Earnings Per Share also compact ownership.

However, it is to be noted that w.e.f., Assessment Year 2021-22, a domestic company isn’t required to pay dividend distribution tax on any amount declared, distributed or paid by such company by way of dividend. Dividend received from domestic company is taxable in hands of shareholders.

How to compute cost of acquisition

Rule 40BB prescribes the determination of Cost of acquisition to be deducted for computation of Income Tax Liability under Sec. 115QA. The said Rule covers various scenarios of buy back, however in normal scenario to calculate Income Tax of Buy Back of Shares, Amount received by the company is to be deducted from the Buy- Back price. This is because, the intention of Income tax Act is to tax income distributed by the Company. Hence, if a Company buy backs its shares from secondary market, the Income component in the Buy Back price = Buy Back price – Issue price of shares.

Taxability in the hands of shareholders

Section 10(34A) prescribes the taxability in the hands of shareholders.

10(34A) any income arising to an assessee, being a shareholder, on account of buy back of shares by the company as referred to in section 115QA]

Earlier, the declared dividend was chargeable as Dividend Distribution Tax (DDT) to the company and not the shareholder. Whereas the amount distributed as buy-back of shares was chargeable to the shareholder and not the company. The rationale for the introduction of Sec 115 QA was that companies would resort to buyback of shares in order to avoid dividend distribution tax.

As per Section 115QA, read with Section 10(34A), incidence of tax on buy back of shares by the company arises at the company level and thereafter no tax is required to be paid by the shareholder. Thus, shareholder need not calculate any income under the head Capital Gains, in accordance with Section 46A, read with 48, of the ITA. By Finance Act, 2020, DDT on dividends was abolished and the company is no longer liable to pay tax on dividends. Instead, dividends would be taxable in the hands of the shareholder (as per applicable slab rates). From the shareholder’s perspective, this means that income from buybacks is now more tax efficient compared to income from dividend.

Applicability of section 56(2)(x) on buy back of shares

The shares received by the company pursuant to buyback for cancellation has no value and in our view cannot be regarded as less than fair market value. In this regard reading of a the supreme Court judgement in the case of CTO vs State Bank of India (Civil Appeal No. 1798 of 2005) would be beneficial, wherein the issue was replenishment of certain Exim Scrips by the State Bank of India from the original purchaser. The view of the Apex Court was that the SBI is not getting any property in such replenishment. The observation of the Apex Court reads as under:

“34. Be it noted that the initial issue or grant of scrips is not treated as transfer of title or ownership in the goods. Therefore, as a natural corollary, it must follow when the RBI acquires and seeks the return of replenishment licences or Exim scrips with the intention to cancel and destroy them, the replenishment licences or Exim scrips would not be treated as marketable commodity purchased by the grantor. Further, the SBI is an agent of the RBI, the principal. The Exim scrips or replenishment licences were not “goods” which were purchased by them. The intent and purpose was not to purchase the replenishment licences because the scheme was to extinguish the right granted by issue of replenishment licences. The “ownership” in the goods was never transferred or assigned to the SBI.”

From the above, in our understanding, by buying back the shares, the company is not acquiring any ‘property’. The provisions of section 56(2)(x) starts with the terminology ‘where a person receives……. Any property’. In our understanding buy back does not result in company receiving any property. Shares are never “received” by company since they may as one option be deemed to be cancelled without company receiving them. Property is not in existence post the transfer. Section 56(2)(x) is therefore, in our opinion, not applicable.

However, ITAT Bangalore Bench in the case of Fidelity Business Services India (P.) Ltd. [2017] 164 ITD 270 (Bang) held that payment in the name of buy back of shares made by the assessee, to its related party, in excess of FMV of the share of the assessee company would fall in the ambit of Section 2(22)(e), i.e. Deemed Dividend. ITAT in the said case held that in case the buy back price is not based on the real valuation and it is artificially inflated by the parties then it is certainly a device for transfer of the reserves and surplus to the holding company by avoiding the payment of tax and therefore it will be treated as a colorable device. This decision of ITAT, Bangalore Bench, has been subsequently affirmed by the Karnataka High Court [[2018] 257 Taxman 266 (Karnataka)]

Conclusion

It is clear that in the wake of section 115QA tax implications arise in the hands of company, be it a private company or a public company, no tax in the hands of shareholder is exigible. However, since now dividend being not taxable in the hands of distributing company but being taxable in the hands of shareholders, it is to be seen how the companies prefer to distribute surplus.

(Source : Article published in Souvenir released at National Tax Conference held at Katra on 2nd & 3rd October, 2021)

Transfer Pricing (“TP”) provisions were introduced in the Indian Income Tax Act with effect from 1 April 2002. During the initial years of TP provisions, there were many interpretational and implementational issues. As with any other direct tax dispute resolution in India, TP dispute resolution involves a lengthy process. Since multi-national business enterprises undertake similar international transactions across years, an unresolved issue can create uncertainty over the different years. In terms of the amount of adjustment, this can be quite substantial. The below article discusses the TP dispute resolution journey in India and highlights specific key issues that have dominated the past two decades of TP legislation.

In the initial years of TP litigation, the emphasis was more on the comparability analysis, use of most appropriate method, which tested party to use etc. Over the years disputes have progressed to advanced issues such as intangible transactions, attribution of profits to Permanent Establishment, re-characterization of the entity, use of Profit Split Method, etc.

TP Rulings on the initial issues

One of the first landmark TP ruling was by a 5 member special bench of the Income-tax Appellate Tribunal (“ITAT”) in the case of Aztec Software & Technology Services Ltd. v. Asstt. CIT [TS-4-ITAT-2007(Bang)-TP]. It laid down how TP regulations should be applied, such as benchmarking methods, selection of comparable companies, implementing provisions in cases of complex transactions involving intangibles, etc.

In the case of Coca-Cola India Inc v ACIT [TS-2-HC-2008(P&H)-TP] Punjab & Haryana High Court upheld the constitutional validity of Chapter X. Also, it held that the legislature was competent to make the relevant provisions applicable to non-resident without there being any evidence showing transfer of profits out of India or tax evasion motive. High Court rejected the Petitioner’s argument that TP provisions do not apply to parties subject to jurisdiction of Indian taxing authorities, without establishing a tax evasion motive.

Comparability analysis is one of the most litigated areas in transfer pricing dispute resolution. It mainly relates to selection of comparable; internal vs external comparable; use of single year vs multiple year data; selection of Indian vs foreign tested party and aggregation vs segregation of transactions. Though judicial precedents have settled specific issues, some issues are still pending before High Courts and Supreme Court to achieve finality. Some others have been put to rest due to the changes in the legislation. Such as the Tax authorities and the ITATs were largely against the use of the multiple-year data. This controversy was put to rest with the amendment made by the Legislature in Income Tax Act in 2014, wherein the government allowed use of 35th and 65th percentile range as well as multiple year data.

Similarly, it has been accepted that the tested party should be the least complex entity out of the related parties to the transaction. Madras HC has confirmed this view in the case of Virtusa Consulting Services Private Limited [TS-45-HC-2021(MAD)-TP]. TP legislation provides for use of the Most Appropriate Method (“MAM”) to determine the arm’s length price (“ALP”) of international transaction. In many cases, this has also been subject to litigation.

TP Rulings on more complex issues

Capital receipts: In the case of Shell India Markets Pvt Ltd [369 ITR 516] and Vodafone India Services Pvt Ltd. (Vodafone IV)[368 ITR 1], it was settled that capital receipt transactions will not be subject to transfer pricing provisions. These cases dealt with the applicability of TP to fresh issue of equity shares at a premium. Therefore, they do not fall within the ambit of “income” within section 2(24) of the Act.

Corporate Guarantee Commission is another most commonly litigated issues. It is contended that provision of corporate guarantee does not constitute an ‘international transaction’ and thus there is no requirement to charge any fee from the overseas entity. An explanation was added to the definition of the term “international transaction” under section 92B by the Finance Act, 2012, with retrospective effect from 1 April 2002. This explanation aimed to include the provision of guarantees within its scope. However,even after retrospective amendment the ITATs have held that issuing corporate guarantee without any effect on profits, income, losses, or on taxpayer assets should not be considered an “international transaction” {Bharti Airtel Ltd 43 Taxman.com 150 and MicroInk Ltd v. ACIT [63 Taxman.com 353]}. The appeal filed by Revenue authorities against these Tribunal orders are pending before the High Court. Though various rulings rely on the case of Everest Kanto Cylinders Ltd [TS-714-ITAT-2012(Mum)-TP] and Glenmark Pharmaceuticals [TS-1268-SC-2018-TP] and consider a rate of 0.5% of Corporate Guarantee Commission as being adequate.

Advertisement, Marketing and Promotional (“AMP”)Amongst many other controversial issues, the adjustment on account of AMP expenditure is one of the most litigated issues and it even involves high stakes. The Tax authorities have consistently held that excess AMP expenditure leads to brand building for the foreign associated enterprises (“AEs”), and hence Indian taxpayers should be compensated for such brand-building services. There were two landmark rulings from Delhi High Court on this issue. In Maruti Suzuki India Ltd. v. ACIT [TS-395-ITAT-2015(DEL)-TP] it was confirmed that AMP is not an international transaction. In the case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [TS-543-HC-2016(DEL)-TP] the High Court rejected the application of the bright-line test and affirmed that AMP is not a separate international transaction and can be compensated on an aggregate basis as part of the distribution activities. The issue of AMP is pending before the Supreme court and the hearing is scheduled in September end.

Substantial question of law: In a landmark ruling in the case of Principal. CIT v. Softbrands India (P.) Ltd [TS-475-HC-2018 (KAR)-TP], the Karnataka HC held that under section 260A, appeals to the HC can be preferred only on ‘substantial question of law’ and not on questions of fact unless it is established that the ITAT order was perverse. As a result, many issues were considered as “questions of fact” and “not questions of law”. However, if the findings by the Tribunal were perverse, then the HC can set aside such results.

Re-characterization: Another issue faced under TP has been relating to re-characterization. In the case of EKL Appliances Limited, the Delhi HC has held that situations, where re-characterization could be considered, are exceptional and should not be a routine permissible practice by the revenue. On the significance of the OECD Guidelines that deal with re-characterization, the HC noted as follows:

“17. The significance of the aforesaid guidelines lies in the fact that they recognize that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured bythe associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterization of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured.”

Central Board of Direct Taxes (“CBDT”) issued a Circular No.06/2013 by way of which it gave certain conditions for the classification of contract research and development centres in India. This was before the actual Development, Enhancement, maintenance, protection, and exploitation (“DEMPE”) analysis guidelines were outlined by the OECD BEPS action plan 8-10. The main principle that emerged is about defining the parties’ actual conduct and looking at the substance of the transaction rather than the form.

Mutual Agreement Procedure and Advance Pricing Agreement

Mutual agreement procedure (“MAP”) is a mechanism through which two or more countries tax administrations consult each other to resolve disputes regarding the application of double tax treaties. It is also used to eliminate double taxation that could arise from a transfer pricing adjustment. This procedure is described and authorised by Article 25 of the OECD Model Tax Convention. On 7 August 2020, India’s CBDT issued detailed guidance on the regulations and processes that the Indian government intends to follow when implementing the MAP. India’s endeavour is to resolve MAP cases within an average timeframe of 24 months in conformity with the minimum standards recommended in the BEPS Action 14 final report. The biggest advantage of MAP is that it is a consultative process. It has become an increasingly important tool for taxpayers and tax authorities alike in addressing double taxation, as it allows for competent authorities to consult with each other on the application of double taxation treaties.

Further, to deal with the rise in transfer pricing litigation, reforms such as the Advance Pricing Agreements (APA) was introduced in 2012. To start with APAs were applicable for a period of five years starting from the previous year in which it was applied. Subsequently, with the introduction of the rollback provision by the Finance Act 2014, the APA also became applicable to four years preceding the first previous year for which APA is applied. To operationalize the APA scheme, notification no. 36/2012 [F. No. 133/5/2012-SO(TPL)]/SO 2005 (E), dated 30 August, 2012 was notified and the APA Scheme [Rules 10F to 10T] were inserted in the Income-tax Rules. Thus, the Indian APA programme, though it commenced from 1 July, 2012, actually became functional and operational from 30 August 2012 with the notification of the rules. The rules lay down the detailed procedures for filing of pre-filing consultation; payments of fees; filing of APA application; processing of APA application; withdrawal of APA application; terms and conditions of APA; filing of Annual Compliance Report; Compliance Audit; revision, cancellation and renewal of APA; etc.

Safe Harbour Rules

Safe harbour rules list down specific rates/circumstances in which the tax authority shall accept the transfer price declared by the taxpayer to be at an arm’s length. Safe harbour rules were introduced by the Finance (No. 2) Act, 2009 and later rationalised in 2017. The taxpayers have always envisaged the safe harbour rates to be higher than those reflective of the industry trends or that which may be available through an APA route, and accordingly, they have not been the first preference as a measure of dispute prevention for multinationals.

Concluding remarks

During the initial years of the TP dispute resolution, only the traditional dispute resolution measures were available to the taxpayers. Traditional dispute resolution includes transfer pricing audit, appeals and redressal options before the courts. They often are long drawn and consume substantial time before any matter reaches finality. Therefore, alternate dispute prevention and resolution programmes like MAP, APA, and safe harbour rules, which are additional mechanisms for dispute resolution and prevention between taxpayers and tax authorities have gained popularity globally over the last decade.

Further, there are issues such as repeated litigation on identical grounds and remand orders that place companies in litigation cycles. Even the DRP mechanism could not be as successful as was the intent while introducing the same. Since often grounds for litigation are similar across years specially in transfer pricing, block transfer pricing assessment for multiple years in one cycle may be a good strategy for transfer pricing cases. Various nations across the world follow the approach of multiple year audits in one cycle. It reduces the uncertainty, cost, time and increases efficiencies in the audit process.

Another challenge being faced is the actual implementation of the APA programme. The CBDT needs to provide better infrastructure, resources and expertise to achieve the full potential of the APA programme. While India has come a long way in the TP dispute resolution; there are still many milestones to be achieved.

(Source : Article published in Souvenir released at National Tax Conference held at Katra on 2nd & 3rd October, 2021)

A confessional statement admitting extra income during search, may be retracted. However, one should be cautious on following points to make the retraction successful.

1. The Retraction must be made without delay:Kantilal C. Shah v. ACIT [2011] 133 ITD 57 (Ahd) held that retraction of statement made u/s 132(4) will not be permissible if it has been made after a lapse of considerable time and not done immediately. In this case, after a lapse of around 9 months through an Affidavit, and the said retraction was submitted before the AO with a covering letter after 50 days of its retraction. According to department’s pleadings the said delay thus demonstrated that the assessee was not confident about filing of the retraction. There must be some convincing and effective evidence in the hands of the assessee through which he could demonstrate that the said statement was factually incorrect. Further there should also be some strong evidence to demonstrate that the earlier statement recorded was under coercion. In the present case, it was held that the retraction is general in nature and lacking any supportive evidence, rather assessee took several months to retract the initial statement, which by itself created a serious doubt.

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

3. Evidences to corroborate reasons for retraction:

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

   2. In  CIT v. Rameshchandra R. Patel [2004] 89 ITD 203 (Ahd.) (TM)it was held that the assessee had a right to retract but that has to be based on evidence brought on record to the contrary and there must be justifiable reason and material for accepting retractioni.e., cogent and sufficient material have to be placed on record for acceptance of retraction. All that has to be done by the assessee if he is to retract the statement which was recorded in the presence of witnesses unless there is evidence of pressure or coercion. Further corroboration of retracted statement is necessary where the assessee established at the earliest possible opportunity by leading reliable evidence and proving thereby the erroneous or incorrect nature of the facts admitted or confessed and also where evidence available on record is inconsistent with the confessional statement.

4. Intimation of retraction to higher authorities: In Principal CIT v. Roshan Lai Sancheti [2019] 306 CTR (Raj) 140, the Court held that “Statement recorded under sec. 132(4) and later confirmed in statement recorded under sec. 131, cannot be discarded simply by observing that the assessee has retracted the same because such retraction ought to have been generally made within reasonable time or by filing complaint to superior authorities or otherwise brought to notice of the higher officials by filing duly sworn affidavit or statement supported by convincing evidence.Duration of time when such retraction is made assumes significance and in the present case retraction has been made by the assessee after 237 days.

5. Statements made involuntarily i.e. obtained under coercion, threat, duress, undue influence etc.:In Deepchand & Co v. ACIT [1995] 51 TTJ (Bom.) 421, the ITAT, Mumbai held that there is no supporting evidence to confirm the additions except the statements of two partners recorded at the time of search. It would not be out of context to mention that the statements recorded by the search party for 2 days cannot be considered to be free, fearless and voluntary. There is a considerable substance in the assessee’s contention that the statements were recorded under pressure and force. The Tribunal had held that retraction should be allowed if it is based on proper principles and evidence. In the ordinary course, no assessee would say that he had much concealed unaccounted money as mentioned in the statements herein. Putting in the mouth of the assessee that so much amount was unaccounted and concealed would itself indicate that the admission was forcible and not voluntary.

6. Retraction after obtaining copy of Statement on ground of mistaken belief either of fact or law:

   1. In Jyotichand Bhaichand Saraf & Sons (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle 11(1) (ITAT Pune) [2012] 139 ITD 10 (Pune),
      during search action, statement of the Director of assessee was recorded on 6th November 2001. The assessee was given copies of the statement recorded under section 132(4) on 20th May 2002.On receipt of copy of the statement, assessee realized that there was a mistake in the declaration of income. The assessee submitted a letter clarifying the mistake on 21st June 2002 to the Assessing Officer and retracted the statement made under mistake of fact. The assessment was accordingly made but was set aside by the CIT under sec. 263 stating that the same was prejudicial to the interest of the revenue and was made by A.O. without application of mind. On appeal, ITAT held that the department has not brought on record any corroborative evidence so as to establish undisclosed income having been invested in agricultural land. Statement of the assessee cannot be sole basis without any cogent and corroborative evidence. The mistake in the statement is immediately clarified on the receipt of the statement by the appellant. Moreover, no material/evidence was found during the course of search action indicating on-money payment or any undisclosed investment in land. The statement was given under mistaken belief of law that the suppressed sale is unaccounted/undisclosed income instead of correct legal position that the gross profit arising from unaccounted sale is the undisclosed income. Statement of Director indicate that he was not mentally composed at relevant point of time.

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

   3. Hotel Kiran v. Asstt. CIT [2002] 82 ITD 453 (Pune)– Admission by a person is a good piece of evidence though not conclusive. The Legislature in its wisdom has provided that such a statement under sec. 132(4) may be usedas evidence in any proceedings under the Act. However, there are exceptions to such admission where the assessee can retract from such statement/admission. The first exception exists where such statement is made involuntarily, i.e., obtained under coercion, threat, duress, undue influence, etc. But the burden lies on the person making such allegation to prove that the statement was obtained by the aforesaid means. The second exception is where statement has been given under some mistaken belief either of fact or of law. If he can show that the statement has been made on mistaken belief of facts, and the facts on the basis of which admission was made were incorrect.

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

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

   1. Affidavit– A retraction should be made on an affidavit along with supporting evidences, if any;

   2. Affidavit of witnesses– Additional affidavit of the witnesses present during search may also be filed. Such statement holds good value and may aid the assessee in getting relief.

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

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

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

   6. Earlier the better– Any retraction should be done at the earliest without any delay. A retraction made immediately may strengthen the case of the assessee whereas a belated retraction will in most cases would be seen as an afterthought.

9. Some decisions where Retraction of Statement was held VALID:

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

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

   3. In CIT Central-III v. Lavanya Land Pvt. Ltd. and Others [2017] 397 ITR 246 (Bom.), the Hon’ble Bombay High Court dismissed an appeal filed by the revenue against the order of the ITAT, Mumbai had set aside the additions made by the revenue based on the statement made by person during search which was later retracted by him. In this case, a search was conducted at the premises of one of handlers of the assessee company and his statement was recorded which showed an admission that a large sum of money was received by him to purchase lands in the name of the assessee company. The statement was retracted by him after a period of two and a half months. On appeal, the ITAT Mumbai set aside the addition made. Adverting to the fact that the concerned person has retracted his statement, the Tribunal arrived at the conclusion that merely on the strength of the alleged admission in the statement, the additions could not be made as the essential ingredients of Section 69C of the IT Act enabling the additions were not satisfied. This was not a case of ‘no explanation’. Rather, the Tribunal concluded that the allegations made by the authorities are not supported by actual cash passing hands.Bombay High Court, held while dismissing the appeal of the revenue: “It is not possible for us to reappraise and re-appreciate the factual findings. The finding that Section 153C was not attracted and its invocation was bad in law is not based just on an interpretation of Section 153C but after holding that the ingredients of the same were not satisfied in the present case. That is an exercise carried out by the Tribunal as a last fact finding authority. Therefore, the finding is a mixed one. There is no substantial question of law arising from such an order and which alternatively considers the merits of the case as well.”

   4. Retraction of statements recorded at odd hours:The admissibility of retraction of statements which were given in an exhausted state and at odd hours was allowed by Gujarat High Court in Kailashben Manharlcil Choksi v. CIT [2010] 320 ITR 411 (Guj,). It was held that a statement which has been recorded u/s 132(4) at odd hours is not a voluntary statement if it is subsequently retracted. The Court observed that the main grievance of the A.O. was that the statement was not retracted immediately and it was done after two months. It was an afterthought and made under legal advise. High Court held : Merely on the basis of admission the assessee could not have been subjected to such additions unless and until, some corroborative evidence is found in support of such admission. The Court also held that the statement recorded at such odd hours cannot be considered to be a voluntary statement, if it is subsequently retracted and necessary evidence is led contrary to such admission.

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

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

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

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

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

   10. Other cases in which Retraction was accepted:These are CIT v. Uttamchand Jain [2009] 182 Taxman 343 (Bom) / [2010] 320 ITR 554 (Bombay); CIT v. Rakesh Ramani [2018] 94 taxmann.com 461 (Bom.)/ [2018] 256 Taxman 299 (Bom.) / 168 DTR 356 (Bom.)(HC); Surinder Pal Verma v. Asstt. CIT [2004] 89 ITD 129 (Chd.) (TM); Asstt. CIT v. Anoop Kumar [2005] 147 Taxman 26 (Asr.) (Mag.); Gyan Chand Jain v. ITO [2001] 73 TTJ (Jodh.) 859– Part Relief allowed.

1. Introduction: The Finance Act, 2021 has proposed that foreign company shall not be liable to pay MAT on its dividend income if the same is chargeable to tax at a rate lower than MAT rate. After the amendment, the dividend income is chargeable to tax in the hands of the shareholders.

2. At present the taxation of dividend has been shifted from a domestic company to a shareholder. A foreign company shall be liable to pay tax in India on the dividend income, both under normal provisions as well as under the provisions of MAT. Sub-section (7) of Section 115JB, if the company is located in the International Financial Services Center (IFSC) and deriving income solely in convertible foreign exchange, MAT is levied at the rate of 9%.

   Explanation – defines International Finance Services Centre

   1. It shall have the same meaning as assigned to it in Section 2(9) of the Special Economic Zones Act, 2005.

   2. “Unit” means a unit established in an International Financial Centre.

   3. “Convertible foreign exchange” – It means a foreign exchange which is for the time being treated by Reserve Bank of India as convertible foreign exchange for the purposes of Foreign Exchange Management Act, 1999 and the rules made thereunder.

      However, where the dividend is received in respect of GDRs (Global Depository Receipts) of an Indian Company or PSU (Public Sector Undertaking) referred to in Section 115AC or in respect of units of mutual funds purchased in foreign currency referred to in Section 115AB, (it shall have the meaning as in the Foreign Exchange Management Act, 1999). The same shall be chargeable to tax at the rate of 10% as per Section 115AC(1)(ii). However, if the foreign company is a resident of a country with which India has DTAA, the provisions of DTAA shall come into play. However, DTAA provide a beneficial tax rate on dividend income ranging from 5% to 15%. The dividend income of a foreign company may be chargeable to tax in India at a rate lower than the MAT rate applicable as it is unreasonable for a foreign company to pay MAT on such income.

3. Amendment in clauses (iid) and clause and clause (fb) of Explanation 1 to Section 115JB, certain income and expenses claimed in respect thereof shall be reduced or added back while computing the book profit of a foreign company if the same is debited or credited in the statement of profit and loss respectively. This adjustment is required to be made if the relevant income is taxable at a rate lower than the rate of MAT. The existing provisions included capital gains arising on transactions in securities and the interest, dividend, royalty or fees for technical services (FTS) chargeable to tax at the rate or rates specified in Chapter XII.

The Dividend Distribution Tax (DDT) has been abolished and the dividend income is now taxable in the hands of the shareholder with effect from assessment year 2021-2022.

Minimum Alternate Tax (MAT)

Minimum Alternate Tax (MAT) was introduced by the Finance (No. 2) Act, 1996 with effect from assessment year 1996-1997 to facilitate the taxation of zero tax companies. These companies were paying no tax or marginal tax by undue advantage of various tax concessions or incentives inspite of having high profits. Thus, to avoid the malpractices, the concept of MAT was introduced so that the companies were required to pay a certain percentage of their book profit as minimum alternate tax even if they were not required to pay or liable to pay lower tax as per the normal provisions. At present, the MAT is levied under Section 115JB at the rate of 15%, with effect from 1st April, 2020 of book profit. The “Book Profit” is computed certain adjustments to the profits as show in the profit and loss of the company. They are prescribed under explanation I to Section 115JB. For the purpose of MAT, the profit and loss shall be required to be prepared by the company in accordance with the provisions of Schedule III to the Companies Act, 2013. This is not applicable to companies engaged in the business of insurance, banking and generation or supply of electricity.

Section 115JB does not differentiate between domestic company and a foreign company for payment of MAT. However, the foreign companies not governed by the Companies Act, 2013 unless it has a place of business in India. Various counts have held that MAT provisions can apply in case of a foreign company only when it has a place of business in India. Explanation 4 of Section 115JB inserted by Finance Act, 2016 was made applicable retrospectively form assessment year 2001-02. The Explanation provides that the provisions of MAT shall not apply to a foreign company, if

1. It is a resident of the country with which India has DTAA and does not have a Permanent establishment in India; or

2. It is a resident of those countries with which India does not have DTAA and not required to get registered in India under any law relating to companies.

However, the foreign companies are not required to take registration in India under the Companies Act, 2013 unless they have place business in India. As per DTAA, a PE is constituted when an enterprises carries on business in a country through a fixed place of business in India.

A PE is constituted when an enterprise carries on business in a country, through a fixed place of business constituted therein. This is as per DTAA requirement.

Thus, when a foreign company is required to take registration under the Companies Act, 2013 only when it has a place of business in India. Once a foreign company has a place of business in India or PE, it may be required to prepare a financial statement of its Indian business operations in accordance with Schedule III as per Section 381 of the Companies Act, 2013 read with rule 4 of the Companies (Registration of foreign companies) Rules, 2014. Thus, such companies in order to compute book profit, the profit shown in the profit and loss account statement prepared for Indian Business Operations shall be taken into consideration as prescribed under Explanation 1 to Section 115JB.

MAT on Dividend Income of the Foreign Company:

As per Finance Act, 2021, dividend income of a foreign company shall not form part of the book profit. Consequently, MAT will not be levied provided the following conditions are satisfied.

1. Dividend income is chargeable to tax at the rate specified under Chapter XII, and

2. The tax rate on such income as per the provisions of the Act is less than the rate of MAT.

It is therefore, necessary to first determination when the dividend of a foreign company is chargeable to tax at the rates specified in Chapter XII. Once, this is determined, the next step is to determine the tax rate on such income as per the provisions of the Income-tax Act or provisions of DTAA, whichever is most beneficial.

Taxability of certain income under Chapter XII of the Income-tax Act

Chapter XII of the Income-tax Act provides for the special tax rates in respect of certain income. Tax rates for dividend income of a foreign company are specified in Section 115A, Section 115AB, Section 115AC and Section 115AD of Chapter XII of the Cat.

They are as follows:

Section	Income covered	Tax rate
115AB	Dividend income from units of Mutual Funds purchased in foreign covered by the overseas financial organization	10%
115AC	Dividend on GDR of an Indian Company or Public Sector company (PSU) purchased in foreign company	10%
115AD	Dividend income from Securities	20%
115A	Dividend income in any other case	20%

Thus dividend income of a foreign company shall, in any case, be chargeable at the special rates provided under Chapter XII.

Tax on dividend income as per DTAA’s

Where the dividend income is chargeable to tax under Section 115AB or Section 115AC, the benefit of amendment shall be available as the tax rate is lower than the rate of MAT. If the dividend is taxable under Section 115AD or Section 115A, if shall be excluded from the book profits only if the rate as per DTAA on such dividend income is upto 15%. As per most of the DTAA’s that India has signed with the foreign countries, the dividend income is taxable in the source country in the hands of the beneficial owner at the rate ranging from 5% to 15% of the gross amount of income of dividends. Thus, the dividend income may be excluded from the computation of book profit in almost all situations.

Tax on Dividend if foreign company has PE in India

1. If a foreign company does not have a PE in India, it is not chargeable to MAT;

2. Where a foreign company has a PE in India, the DTAA empowers the taxing country to the source country and accordingly, income is taxable as per domestic law of that country;

3. As per Section 9, income arising from business connection in India, which is deemed to accrue or arise in India, which may be taxable under the head business or profession.

The dividend income attributable to PE shall be taxable under other sources at the rate specified in Chapter XII. In such a situation, the benefit of Article of the DTAA pertaining to taxability of dividend shall not be available as it excludes a dividend income. In short, the concessional rate of 5% to 15% as specified in DTAA shall not be available and such dividend shall be taxable under Section 115AD or Section 115A, it will not be excluded from the book profit because ultimate rate of tax would be 20%.

The question arises when dividend income is attributable to PE

A shareholding will be deemed to be connected with PE, if the economic ownership of the holding is allocated to that PE under the principles of attribution of profits permanent establishments. This is based on the principle that PE is treated as a private enterprise. The attribution of economic ownership of assets will have consequences for both attribution of capital and interest bearing debt and the attribution of profit to the PE.

For example – If company has a branch in India and such branch is treated as PE. The said branch invests out of profits earned in the shares of another Indian Joint Stock Company. Further, the employees of the branch evaluate from time to time investments made by the branch. In such a case, the holding of investment may effectively considered as connected to that PE and result of the same, the dividend income may be attributable to PE in India.

Background

The taxation of charitable trusts/non-profit organisations has become an area of extensive litigation in the last three decades. Up to assessment year 1970-71, the law was fairly liberal for charitable trusts and the entire income of a charitable trust was unconditionally exempt. From assessment year 1971-72, the exemption was only to the extent of application but even at that time the voluntary contributions to charitable trusts continued to be exempt without fetter. However, in the definition of income voluntary contributions by one charitable trust to another were to be included. There was a gradual tightening of the exemption provisions under the Income Tax Act 1961, hereinafter referred to as “The Act”. In the year 1973 a procedure for registration of trusts was brought on the statute.

The principal reason for granting a tax exemption to charitable and religious institutions is that the exemption enables such entities to preserve their resources, which are then available for charitable purposes. It is well accepted that non-profit non-government organisations spend their resources far more efficiently than the government itself. The activities of such institutions augment the efforts of the state in its pursuit of welfare activities. This results in public participation in these areas.

However, the use of this tax exemption for collateral purposes by some entities/persons has resulted in a trust deficit of the authorities in charitable entities. This has led to the legislating authorities making amendments which have made life difficult for genuine institutions while the unscrupulous continue to exploit the loopholes of law with impunity. This article attempts to discuss some of these changes in the direct tax law. I have tried to refrain from referring to judicial pronouncements to the extent possible and restricted myself to an analysis od the provisions and their impact.

Definition of Charitable purpose

The exemption is available to entities which exist for charitable purposes. This is defined in an inclusive manner in section 2(15) with the proviso carving out an exception. For ease of reference the said section and the proviso are reproduced hereunder

(15) “charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless—

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

The proviso was first introduced in Finance Act 2008 with effect from 01.04.2009 and has undergone a number of amendments thereafter. The proviso excludes the advancement of any other object of general public utility from being a charitable purpose if the conditions in the proviso stand attracted. At the time introduction of the Finance bill 2008 the honourable Finance Minister introducing the provision stated on the floor of the house.

“Charitable purpose includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt as they should be. However, some entities carrying on a regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purpose would also fall under charitable purpose. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organisations will not in any way be affected.”

While this was undoubtedly the intent, its interpretation has caused innumerable problems.

Some of the issues that the proviso has created are

1. while the proviso does not apply to the objects contained in the first limb and applies only to any other object of general public utility what is the position if the entity has a mixed object for example education as well as any other object of general public utility?

2. If the business is carried on in pursuance of the charitable objects of the entity on an examination of which registration under section 12A has been granted will the exemption be vitiated?

3. the second clause of the proviso provides for a monetary threshold limit. Does this mean that whether the objects of the entity constitute a charitable purpose or not has to be tested in each year?

4. If in one year the aggregate receipts of the entity from the business is below the threshold while it is breached in the subsequent year what is the tax treatment in respect of application made out of income accumulated in the earlier year?

5. In understanding the term charitable purpose does one look at the dominant purpose or is a single activity in the nature of business sufficient to vitiate the claim for exemption?

6. The provisions of section 11(4A) have not been omitted nor has their application been circumscribed 12 years after the proviso was inserted. In such a situation what is the exact import of the said provision after the insertion of the proviso?

The attraction of the proviso results in a complete denial of the exemption in terms of section 13(8). It appears that the extent of the infringement and the penal consequence do not at all correspond with each other. It needs to be pointed out that the proviso to section 2(15), is to be applied only at the stage of assessment and not at the stage of granting registration under section 12A/12AA. Despite the law being clear and emphasised as such by the CBDT circular no 21/2016 dated 27th May 2016, the authorities continue to refer to the same for denying registration.

As a consequence of this proviso there has been rampant denial of registration as well as exemption in assessments to absolutely genuine trusts resulting in untold hardship. These institutions have had to litigate matters right up to the High Court. At the time of writing this article, these issues have reached the doorstep of the Supreme Court and it is hoped that the Supreme Court will clarify the position and read it down so that its true intent is achieved.

Restriction on manner of computing application of income

As of now the general category of trusts {other than those whose sole object is education or medical relief and therefore enjoy exemption under section 10(23C)}, are entitled and exemption under section 11 if they are registered under section 12A. Such an exemption is to the extent of application of income.

Income which is not applied in the relevant previous year but accumulated or set apart cannot be donated or contributed to another charitable trust. Such contribution is not treated as application {Explanation to section 11(2) with effect from A.Y.2003-04}

Any income of a charitable entity received during the previous year or in respect of which an option of spending it in the subsequent year is exercised, cannot be donated /contributed to the corpus of another charitable trust as such a contribution is not treated as application of income {explanation 2 to section 11(1) with effect from A.Y. 2018-19}

The object of restrictions appears to be to ensure that the income is spent by the charitable institution itself. While an ultimate utilisation of the monies donated to trust for charitable purposes should certainly be a requirement, such restrictive clauses stifle the operation of trusts. While the avowed objective of the government is creating an environment of “ease of carrying on business”, one wonders why such stepmotherly treatment has been given to charitable entities.

Corpus donations

A corpus donation is in fact a capital receipt and not income. Such donations were artificially included in the definition of income but exempted under section 11(1)(d). While a corpus donation has not been specifically defined in the Act, it is a voluntary contribution made with a specific direction that it shall form part of the corpus of the trust or institution. A further restriction has been inserted with effect from assessment year 2022-23, inasmuch as such a contribution has to be now invested or deposited in one of the forms or modes specified in section 11(5), maintained specifically for such corpus. Ordinarily the inclusion of such a capital receipt in the definition of income is tax neutral as long as the entity enjoys the exemption and complies with the conditions However an accidental crossing of the threshold prescribed in the proviso could have catastrophic effect. This can be illustrated by the following example.

Let us assume that a charitable trust is engaged in the promotion of cleanliness and hygiene. It receives a contribution towards its corpus of rupees 1 crore with the direction that the interest thereon should be utilised to promote hygienic habits in the rural areas. The institution also holds a seminar which is attended by various experts in the country to discuss the manner in which these objects can be promoted. The institution receives an aggregate fee of 30 lakhs from the delegates. The conduct of this seminar is treated as a business by the authorities and since the receipt of 30 lakhs crosses 20% of the aggregate receipts the exemption under section 11 is denied. As a consequence, the exemption would be denied even to 1 crore of corpus donation. This will result in the trust suffering huge tax as well as not being able to comply with the philanthropic objects of the donor. It can of course be urged that this is inherently a capital receipt, and the operation of section 56 is specifically excluded, but this will involve avoidable litigation.

Denial of exemption on technical infractions of the law

Section 12A(1)(b)-failure to furnish the audit report by the specified date. The ingredients of the provision are

1. total income of the trust is computed without considering the exemption under section 11 exceeds the maximum amount not chargeable to tax

2. it is required to carry out an audit of its accounts and a report is to be issued in the prescribed form duly signed and verified by an accountant and

3. the report is to be furnished electronically before the specified date.

A failure to comply with, the provision would result in a denial of the exemption. While it is undoubtedly true that entities desiring to claim a concession must comply with the law it is an avowed principle that the penal consequence must correspond with the degree and character of the infringement. The return of income of such an entity is required to be furnished on or before 31st October of the assessment year. {This date has been extended this year}. As a corollary the audit report will have to be furnished electronically on or before 30th September of the assessment year. A marginal delay can result in the denial of the exemption. It would have been appropriate to prescribe a monetary penalty possibly a heavy one as well to ensure discipline but denying exemption is an excessive penal consequence

Section 12A(1)(ba) denial if return is not filed by the due date

Prior to A.Y. 2018-19, the delay in filing a return of income by a charitable trust would attract a small penalty. With effect from A.Y. 2018-19 it would result in complete denial of exemption. No power to condone delay is available with any authority except by way of an order by the CBDT under section 119(2)(b).

Registration Travails

Prior to 01-04-1973, a trust desirous of enjoying exemption under section 11 did not require any registration provided it satisfied the conditions of the section itself.

Registration was introduced from 01-04-1973, and a charitable trust was required to get itself registered by making an application before the 1st day of July 1973 or before the expiry of a period of one year from the date of creation of the trust. The Commissioner was empowered to condone the delay which was caused for sufficient reasons. The power of condonation was deleted with effect from 1st day of June 2007.

Prior to 01-04-1997 there was no statutorily defined procedure for registration of a trust. This was introduced from that date and mandated an examination of-

1. genuineness of activities of the trust or institution; and

2. the compliance osf such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects.

Prior to 01-04-1973, there was no registration requirement but when it was introduced, the discretion vested with the Commissioner as regards the tests that he would apply. From 1997 the scope of enquiry was defined, and it created numerous controversies. The requirements of clause (b) created hardships as different Commissioners interpreted the law as per their own understanding.

Thankfully the registration once granted was permanent unless the charitable entity undertook a modification of its objects. This required of fresh registration which was mandated by 12A (1) (ab) (From A.Y. 2018-19). In certain circumstances the registration granted could be cancelled. The condition is contained in section 12AA (3), which is a finding subsequent to the registration of the trust, that the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust.

The registration which was hitherto permanent is now required to be obtained once again by all charitable trusts seeking to make a claim under section 11. Those trusts that are recognised/approved under section 10(23C) would also be required to obtain a fresh recognition / approval.

The circumstances/conditions in which such an application is required to be made are contained in section 12A(1)(ac).

As of now these applications have to be preferred before 31st March 2022. The registration process is defined in section 12AB.

The categories of trusts requiring registration are

1. Those already registered under section 12A/12AA

2. Where the trust is registered under section 12AB and the registration is due to expire (at least 6 months prior to the date of expiry)

3. Where the trust is provisionally registered under section 12AB at least 6 months prior to the expiry of provisional registration

4. Where registration of the trust has become inoperative in terms of section 11(7) at least 6 months prior to the commencement of the assessment year from which the said registration is sought to be made operative.

5. Where the trust has undertaken a modification of objects within a period of 30 days from the date of such modification

6. In any other case at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought

The objective of requiring such a large number of trusts to register again is really not understood. While an identification of trusts in order to ensure that they adhere to regulatory discipline is welcome this could possibly be achieved with a different modality.

The proposal as envisaged today could create a huge number of problems and one solitary illustration would suffice to explain the impact.

Take a case where an educational institution is enjoying an exemption under section 10(23C)(iiiab). The said exemption requires the said institution to be wholly or substantially financed by the government. It however does not require any separate recognition.

From assessment year 2015-16 Rule 2BBB provides that the institution shall be treated as wholly and substantially financed by government only if the government grants are 50% or more of its receipts.

The uncertainty of the time frame in which such grants will be received from the government are well known. Therefore, such an institution would know of its qualification for the claim of exemption only at the close of the financial year or thereabouts. However, if it then desires to claim an exemption under section 11 it will fall under the residuary clause mentioned above. That requires a registration one month prior to the commencement of the previous year.

In the scenario just described an educational institution for no fault of its own will be denied exemption and will be subjected to tax. These situations ought to have been contemplated and provided for.

Draconian Chapter XII EB

This chapter is one of the most uncharitable amendments in regard to charitable trusts. The chapter provides for taxation of “accredited” income of a trust registered under section 12AA /12AB in case any of the following events occur.

1. The trust is converted to any form which is not eligible for grant of registration.

2. It is merged with any entity other than an entity which is a trust or institution having objects similar to it and registered under section 12AA/12AB.

3. It fails to transfer upon dissolution its assets to any other trust or institution of charitable nature within a period of 12 months from the end of the month in which dissolution takes place.

The term conversion of a trust includes

1. The registration granted to it is cancelled.

2. It has adopted or undertaken modification of its objects which do not conform to the conditions of registration.

The manner in which registration of trusts have been cancelled in the recent past, is well known. If any of these eventualities occur the charitable trust will be liable to tax on its accredited income which is virtually its net worth. The rationale of such a chapter is not understood. Fortunately, since its introduction, this provision has rarely been invoked.

Conclusion

The above will indicate that the law on charitable trusts has travelled a long way. Commencing from the decade of the 70s where the law was a liberal, discretion was vested with the quasi-judicial authorities and was exercised in a humane manner, we have come to a scenario where every charitable institution or trust is viewed with suspicion. This has resulted in an extremely rigid interpretation of the law and an unduly heavy onus being cast on the institutions claiming exemption. One hopes that the lawmakers appreciate the ratio of the decision of the apex court in Commissioner of Customs Mumbai v. Dilip Kumar 9SCC FB(1) where the court ruled that at the threshold stage at which the exemption was being tested one had to be strict but once the hurdle was crossed one had to be liberal to ensure that the purpose of the grant of exemption was achieved.

Since the Covid 19 lockdown it was not possible to meet the members personally since March 2020. Last month we had organized physical NTC at Katra, followed by NEC meeting. The NTC was organized by the North Zone under the leadership of dynamic Chairman Dr. Naveen Ratan guided by S/Shri D. K. Gandhi, Dy President, O. P. Shukla, Vice President (NZ ), Arvind Mishra, Jt. Secretary (NZ) and Sanjaykumar. I thank all of them for wonderful NTC. It was really a pleasure to see our members including Past Presidents and members of NEC in person.

We were fortunate to have a very good darshan and blessings from Vaishnodevi Mataji. All was well arranged.

Hon’ble Mr. Justice Vineet Saran, Judge SC gave inaugural speech and Hon’ble Mr. Justice Pradeep Mithal, Chief Justice of Jammu & Kashmir and Ladakh, High Court graced the conference as Guest of Honour. I thank both Hon’ble Judges to accept our invitation and for their motivational speech at NTC.

Slowly and steadily, we are coming out of pandemic covid 19 and the fear of third wave is reduced. Thanks to massive vaccination. I hope and pray the almighty GOD to keep all of us safe and let the world progress and recover from the pandemic.

The Padma Vibhushan Late Dr. Nani Palkhivala, Sr. Advocate, Memorial National Tax Virtual Moot Court and Research Paper Competition organized by the Western Zone is scheduled from 17th to 21st November 2021. I appeal the members to contribute by way of voluntary donation for this noble cause.

Our next NTC is at Pune from 11th to 12th November 2021 followed by NEC Meeting as well as 45th Foundation celebration hosted by the Western Zone. We have decided to felicitate on the day of celebration of 45th Foundation, at Pune, our National Past Presidents, Vice Presidents, Treasurers, Jt. Secretary and Zonal Chairmen for their sincere and dedicated contributions to the cause of the federation due to which the federation is recognized as one of the strongest voluntary National Association of Tax Professionals. I express my sincere thanks to Shri Kishor Vanjara to take the responsibility as Chairman of the 45th Foundation Celebration Committee along with Shri Vinayak Patkar as convenor. I appeal all our members to enroll in large numbers to make the function a grand success.

In the last NEC meeting at Katra, it was decided to hold AGM on 20th November 2021 on virtual platform for which link shall be sent by mail and the Ordinary General Body Meeting to elect NEC for the term 2022 and 2023 physically on 24th December 2021 at Lucknow followed by the 24th National Convention from 25th to 26th December 2021. I am sure the members will attend the convention in large numbers and will make it a grand success.

Dr. Ashok Saraf, Past President, is the Chief Election Officer and under his able guidance the election of Zones have taken place with the help of election officers smoothly. I congratulate all the elected members of the Zonal Committee for unanimous election in a cordial manner. I express my sincere thanks to all the election officers and the respective team of Zones for conducting election of Zonal Committee in a peaceful manner. I am sure likewise the election of the NEC for the term 2022 and 2023 shall be in a cordial and peaceful manner.

I wish all the members Happy Diwali and Prosperous, Healthy and Wealthy New Year.

Looking to meet you all at Pune in person.

Jai Hind

Place: Eluru 
Dated: 19-10-2021

M. Srinivasa Rao
National President, AIFTP

Dear Friends,

Due to certain unforeseen circumstances we are not able to bringing out the “Tax Companion” as per the schedule. My sincere apologies for the same. However, with the help of our esteemed professional colleagues we are compiling certain very important articles on some of the very important topics. Our origination has successfully conducted NTC at Katra. We have even witnessed that two major festivals Ganpati Festival and Durga Puja has been celebrated without causing any major spike in the number of COVID-19 cases. Let’s put in all possible efforts from our side to make the vaccination drive a success and keep adhering to the COVID-19 appropriate behavior. The first as well as second wave of COVID-19 has hurt the economic activity in general and has specifically effected our fraternity severely. It is heartening to note that seniors in our association have risen to the occasion to support junior professionals who have faced the brunt.

Democracy and Discipline

Unfortunately, chaotic scenes seem to have become endemic to India and this necessitates one to address the question as to the role of discipline in a vibrant Democracy and Also examine whether chaos is an essential indicator of Democracy. Also pertinent is the question whether protests that undermine the authority of democratic institutions be allowed to continue perpetually! Can a country like India allow protests to be an alternative to credible mechanisms of alternative conflict resolution? Should a government respond to protests by yielding to the protestors thereby giving it credibility and make it a precedent? In a large and diverse country like India, it is imperative for many diverse and in fact opposite interests to exist in the same space… while it is the responsibility of the government of the day to work towards accommodating all shades of interests co existing in a given space, it is the responsibility of the stakeholders to put pressure on the government through established means of conflict resolution and not adopt ways that undermine the authority of democratic institutions after all, the sanction for the authority of state lies in the Constitution that has been given mandate to, by “We, the people.”

Discipline is the subtext for a democracy to function and chaos that has the potential to sow the seeds of anarchy is the pest that needs to be plucked from the root. The question in my opinion is not whether or not a democratic institutions have the right to put an end to violence and chaos; the only question that needs to be addressed now is the means that can be adopted to stem acts that have the potential to weaken democratic institutions.

I thank all the contributors to this issue of AIFTP Journal for sparing their valuable time. I wish you all, in advance, happy and great Diwali festivity

K. Gopal,
Editor