As we all know, in recent years there has been introduction of new enactments and also there has been reinforcement of old enactments to deal with economic offences done by the offenders for cleaning up and streamlining economy of our country. It was indeed a global milestone in terms of advancement in enactment of the legislations especially when certain laws like new Benami Law and Black Money Law were implemented and PMLA, 2002 (an Anti- Money Laundering Law) was strengthened. India can now claim on the global platform to be a pioneer in introduction of such laws.

However, the irony is that because of improper implementation on the part of enforcement/ executing agencies and because of certain provisions of these laws being very stringent or vaguely drafted, it happens at times that a third person (i.e. a person who may not be directly connected with the commission of an economic offence) may unfortunately be held ‘liable’ as an offender merely for the reason that he has done any dealing/transaction with a person who is accused of commission of an offence under any of the laws dealing with economic offences such as the Prevention of the Money Laundering Act, 2002, the Prohibition of Benami Property Transaction Act, 1988 (amended Benami Law), the Banning of Unregulated Deposits Schemes Act, 2019, Narcotic Drugs and Psychotropic substances Act, 1985, Foreign Exchange and Management Act or the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and so forth and so on.

Just to give a striking and live example, suppose an entity say M/s D Ltd. had borrowed a large sum of loan from a bank and after some time said D Ltd. unfortunately became defaulter in repayment of its liability(loan) to the bank. The bank filed a complaint with the CBI alleging that the loan was availed by the Company by fraudulent means and using forged documents and funds were not utilised as per terms of the loan agreement and that there was siphoning of funds by the management of the company whereby funds borrowed from the bank were diverted for the personal benefit of the key managerial personnel of the company. In pursuance of the same, proceedings were initiated after some time under sections 3 & 4 read with section 45 of the Prevention of the Money Laundering Act, 2002 against the said company on the ground that the amount of loan was obtained by way of cheating, fraud or forgery done by the company with the banker (which is a scheduled offence under the Prevention of the Money Laundering Act, 2002). Under these circumstances, the amount of loan taken by the company from its bank may be treated as ‘Proceeds of Crime’ in the hands of the said defaulter company under section 2(1)(u) of the Prevention of the Money Laundering Act, 2002 by the Directorate of Enforcement.

Under aforesaid facts and circumstances, if any other person say Mr. A had bought a property from said M/s D Ltd and the said property was acquired by M/s D Ltd utilising the aforesaid loan amount OR in an another case, if any amount of the aforesaid loan amount has been paid by the said M/s D Ltd to another company say M/s C Ltd. in pursuance to any transaction, then the said property as well as the recipient (M/s C Ltd here) may also be roped into the proceedings launched by the Enforcement Directorate under sections 3, 4, 5, 17, 18 and 50 of the Prevention of the Money Laundering Act, 2002 and their assets maybe attached being alleged proceeds of crime and they (Mr A and M/s C Ltd) may also be held accountable as a person in possession of proceeds of the crime and party to the offence of the money laundering under section 3 of the Prevention of the Money Laundering Act, 2002 unless they are able to demonstrate and establish the bona fides of their transactions with the said defaulter company as per satisfaction of the Enforcement Directorate or the appellate authorities, as the case maybe.

Thus, implications upon the persons who have done any financial transactions with M/s D Ltd. would also be quite serious. Thus, in view of the current scenario as is prevailing in the country at the moment for enforcement of the laws dealing with economic offences, it is essential to know and understand the stringent provisions pertaining to penalties, fines and prosecutions etc. prescribed in these laws for not only the main accused persons but also the other persons who might be implicated for being directly or indirectly connected through the transactions done with the main accused person.

I. The Prevention of the Money Laundering Act, 2002 (Anti- money laundering law)

In 1989, the Financial Action Task Force (FATF)

was established at a summit of seven major industrial nations in Paris, to examine the problem of money laundering which was considered to be posing a serious threat not only to financial system of the countries but also to their integrity and sovereignty. In pursuance to the recommendations made by the FATF, numerous measures were taken by the various countries to combat the menace of money laundering. India also took some measures as soon as an urgent need was felt for enactment of a comprehensive legislation for preventing money laundering and connected activities, attachment and confiscation of proceeds of crime and setting up agencies and mechanisms for coordinating measures for combating money laundering.

That is how, going further in this direction, Prevention of the Money Laundering Act, 2002 was promulgated in pursuance to the Political Declaration adopted by the Special Session of the United Nations General Assembly held on 8th to 10th June, 1998 which called upon the Member States to adopt national money laundering legislation and programme.

The main object of the legislation (i.e. PMLA) is to prohibit the proceeds of crime and to prosecute, punish and penalise the persons involved in the offence of the money laundering.

Authorities/Enforcement Agencies

i) The Directorate of Enforcement (commonly known as ‘ED’)

The original powers and duties under the Prevention of the Money Laundering Act, 2002 to enforce the law have been granted to the Directorate of Enforcement (popularly known as ‘Enforcement Directorate’) which has its office in few major cities of the country.

The Enforcement Directorate has been granted various powers to enforce the law such as-

  1. Attachment of properties involved in money laundering under section 5 of the Prevention of the Money Laundering Act, 2002
  2. Power of survey, search and seizure under sections 16, 17 and 18 of the Prevention of the Money Laundering Act, 2002
  3. Power of arrest under section 19 of the Prevention of the Money Laundering Act, 2002
  4. Power of retention of property and records seized or frozen during survey or search under sections 20 and 21 of the Prevention of the Money Laundering Act, 2002
  5. Powers of summons, production of documents equivalent to the powers as are vested in the civil court under the Code of Civil Procedure, 1908 as prescribed under section 50 of the Prevention of the Money Laundering Act, 2002

ii) The Adjudicating Authority

The Adjudicating Authority is located at New Delhi (having pan-India jurisdiction) and it decides on the sustainability of actions taken by the Enforcement Directorate with regards to the attachment of property or retention of records/ properties which are alleged by t h e Enforcement Directorate to be involved in the money-laundering.

iii) The Appellate Tribunal

The orders passed by the Adjudicating Authority are appealable to the Appellate Tribunal located at New Delhi (having pan-India jurisdiction). Section 25 of the Prevention of the Money Laundering Act, 2002 provides that “The Appellate Tribunal constituted under sub-section (1) of section 12 of the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 (13 of 1976) shall be the Appellate Tribunal for hearing appeals against the orders of the Adjudicating Authority and the other authorities under this Act.”

iv) Special Courts

The trial for the prosecution of the accused(s) for the offence of money laundering punishable under section 4 of the Prevention of the Money Laundering Act, 2002 is done before the Special Court which is usually Court of Sessions of the District which is designated as Special Court by the Central Government as per Section 43 of the Prevention of the Money Laundering Act, 2002.

It has also been prescribed under section 43 that while trying an offence of money laundering under the Prevention of the Money Laundering Act, 2002, a Special Court shall also try a scheduled offence with which the accused is charged under Code of Criminal Procedure, 1973.

Objective, Scope and Operation of the Prevention of the Money Laundering Act, 2002

As stated above the main objective of the legislation is to prohibit the proceeds of crime and punish and penalise the offenders. Section 3 of the Prevention of the Money Laundering Act, 2002 defines the Offence of Money Laundering as “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.”

The Proceeds of Crime has been defined under section 2(1) (u) as “any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country [or abroad.”

It may be noted from the above discussion that the offence of money laundering shall necessarily involve following three stages:

  1. Commission of a Scheduled Offence,
  2. Generation of Proceeds of Crime &
  3. Projecting /claiming the Proceeds of Crime as untainted property.

For the commission of offence of money laundering, it is essential that all of the three acts should have been conjunctively done by the accused. If, even any one of them is missing, thought it may be held that the accused has committed a scheduled offence but that alone would not ipso facto be enough to hold that offence of money laundering under the Prevention of the Money Laundering Act, 2002 has been done by the said accused.

(Scheduled Offence here means any of the offences described under Part A, B, C of the Schedule to the Prevention of the Money Laundering Act, 2002 such as offences under the Indian Penal Code, 1860, the Narcotic Drugs And Psychotropic Substances Act, 1985, the Wild Life (Protection) Act, 1972, the Prevention Of Corruption Act, 1988, the Securities And Exchange Board of India Act, 1992, the Copyright Act, 1957, the Trade Marks Act, 1999, the Information Technology Act, 2000 etc.

Thus from the above, it is evident that the offence under PMLA does not have its independent standing or existence. The offence under the Prevention of the Money Laundering Act, 2002 is piggy backing on a scheduled offence. In case there is no scheduled offence or no proceeds have been generated from the commission of such scheduled offence, then no offence of money laundering can be said to have been committed.

Though an amendment has been made by adding an ‘explanation’ in section 3 and also in section 44 of PMLA by the Finance Act, 2019

w.e.f. 1-08-2019, however, in my considered view the fundamental concept of offence of money laundering remains unaltered, and I am of strong belief that the courts would read and explain the law of PMLA including its recent amendments in that spirit only.

Punishment/Penalties under the Prevention of the Money Laundering Act, 2002

i) Section 4 provides for punishment for money laundering and states that “Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine :

Provided that where the proceeds of crime involved in money laundering relate to any offence specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the words “which may extend to seven years”, the words “which may extend to ten years” had been substituted.”

As stated earlier, the trial for prosecution of an accused shall be done at the Special Courts along with the trial for the prosecution of scheduled offence in terms of relevant provisions of Code of Criminal Procedure, 1973.

ii) Attachment of a Property

As per Section 5 of PMLA, 2002, in case an authorised officer of the Enforcement Directorate has reasons to believe that any person is in possession of the Proceeds of Crime which are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings related to confiscation of such Proceeds of Crime, then he may make provisional attachment of such property till the decision of the Special Court is rendered as per the provisions of the PMLA. The provisional attachment made by the Directorate of Enforcement is subject to its confirmation by the Adjudicating Authority and the Appellate Tribunal (under PMLA).

iii) Confiscation by the Special Court

Section 8 of the PMLA inter alia provides that

(5) Where on conclusion of a trial of an offence under this Act, the Special Court finds that the offence of money-laundering has been committed, it shall order that such property involved in the money-laundering or which has been used for commission of the offence of money-laundering shall stand confiscated to the Central Government.

(6)Where on conclusion of a trial under this Act, the Special Court finds that the offence of money- laundering has not taken place or the property is not involved in money-laundering, it shall order release of such property to the person entitled to receive

iv) Imposition of Fine

As per Section 13 of the Prevention of the Money Laundering Act, 2002 the Director of the Enforcement has been authorised to ensure that information stipulated under the law is provided by a ‘Reporting Entity’ or by its Director or an employee, or through any other mode, if he finds that some person has failed to comply with obligations cast upon them under the Prevention of the Money Laundering Act, 2002, the Director may either suo-motu, or through an application made by any reporting entity, may impose fine as well.

As per section 2(1)(wa) ‘reporting entity’ means “a banking company, financial institution, intermediary or a person carrying on a designated business or profession.”

The obligations upon the reporting entities has been provided under sections 11 to 15 of the PMLA which talks about maintenance and provision of various records by these entities to the government authorities as has been prescribed.

v) Punishment for false information or failure to give information, etc.

Section 63 of the Act provides that“(1) Any person wilfully and maliciously giving false information and so causing an arrest or a search to be made under this Act shall on conviction be liable for imprisonment for a term which may extend to two years or with fine which may extend to fifty thousand rupees or both.

(2) If any person,-

  1. being legally bound to state the truth of any matter relating to an offence under section 3, refuses to answer any question put to him by an authority in the exercise of its powers under this Act; or
  2. refuses to sign any statement made by him in the course of any proceedings under this Act, which an authority may legally require to sign; or
  3. to whom a summon is issued under section 50 either to attend to give evidence or produce books of account or other documents at a certain place and time, omits to attend or produce books of account or documents at the place or time,

he shall pay, by way of penalty, a sum which shall not be less than five hundred rupees but which may extend to ten thousand rupees for each such default or failure.

Controversies Arising Due To Difference in the ‘Law as per Books’ and ‘Law as per Practice’:

Though the objective of the law (of PMLA) is emphatic and clear, but due to improper implementation coupled with some vagueness left in the drafting of the law which is further aggravated by lack of evolution of the law due to absence of clear judgments coming from the higher judiciary, many controversies have arisen which has led to enormous litigation in the entire country, which indeed could have been avoided.

Firstly, there is a huge controversy on the understanding of precise definition of ‘Proceeds of Crime’. The contention of the Enforcement Directorate in this regard is that it covers not only the assets which are involved in the offence of money laundering but also other assets, especially if the assets involved in money laundering are not available. On the other hand, the persons adversely affected by this law would strongly contend that under the law only those properties are covered under ‘Proceeds of Crime’ which are derived or obtained out of the proceeds generated from the commission of the scheduled offence and also any other asset whose origin can be traced back to the proceeds derived or obtained from commission of a scheduled offence. But, it would in no circumstance, include any asset / property whose origin cannot be traced back to the proceeds generated from the commission of the scheduled offence.

The above controversy has led to enormous litigation causing avoidable hardship to various persons who are facing actions under the PMLA as a result of attachment / confiscation of their records and properties which are wholly unconnected with generation of proceeds from the commission of scheduled offence. Few persons are also facing hardship and harassment on account of their involvement in prosecution before the Special Court along with the main accused.

To my mind, the law in this regard become candid clear if we study the bare provisions of the law along with scheme of the Act (of PMLA) and thus unnecessary controversies on these issues could have been avoided. The whole objective of the Prevention of the Money Laundering Act, 2002 is to prohibit the proceeds of crime and to punish the offender. The objective is not to recover any dues or taxes form the accused, as if there was any loss to the exchequer, as would also be clear from the holistic reading of the law.

It is worth noting that Section 8(6) provides that “Where on conclusion of a trial under this Act, the Special Court finds that the offence of money- laundering has not taken place or the property is not involved in money-laundering, it shall order release of such property to the person entitled to receive it.”

Thus when the law itself provides that even in a situation where the offence of money laundering is found to have taken place, but if it is found by the court that the property attached by the ED is not involved in money laundering, such property attached by the ED, shall be released.

Thus, under these circumstances and clear position of statute, there is no rationale to attach those properties, even at first instance, which are apparently not involved in money laundering.

It would be relevant to mention here that Hon’ble Punjab and Haryana High Court had well clarified the controversy through its detailed and well-reasoned judgment passed in the case of Mrs. Seema Garg and Others vide order dated 6th March, 2020 and clearly held that only that property can be attached as part of proceeds of crime which has been derived from value’ or ‘value thereof’ basis. The said judgment has also been affirmed by Hon’ble Supreme Court by dismissing the SLP filed by the ED.

It is expected that the Government would bring out some clarifications via notification or suitable amendment in law OR there would be a clear judgment from the Hon’ble Supreme Court to put the unnecessary controversy to rest saving many people from avoidable hardships.

i) Burden of Proof

It is generally perceived that the law contained in PMLA envisages reverse burden of proof viz. the burden is upon the accused to prove that he is innocent. This perception seems to have developed because of the peculiar drafting of Section 24 of the Act in this manner which provides that:

“In any proceeding relating to proceeds of crime under this Act,-

  1. in the case of a person charged with the offence of money-laundering under section 3, the Authority or Court shall, unless the contrary is proved, presume that such proceeds of crime are involved in money-laundering; and
  2. in the case of any other person the Authority or Court, may presume that such proceeds of crime are involved in money-laundering.”

A careful perusal of this provision would reveal that only that part of burden has been shifted wherein the ‘proceeds of crime’ are presumed to be involved in money laundering. However, as discussed above, three stages are involved to reach the stage of money laundering, as narrated hereunder for convenience:

  1. Commission of a Scheduled Offence,
  2. Generation of Proceeds of Crime &
  3. Projecting/claiming the ‘Proceeds of Crime’ as untainted property.

It may be noted from the perusal of Section 24, supra that the ‘burden’ which has been shifted is only about the stage placed at number three only, i.e. projecting the proceeds as ‘untainted’.

WHEREAS the burden to prove the foundational allegation that the scheduled offence has been committed and certain amount of proceeds have been generated therefrom has not been shifted. It goes without saying that the fundamental principle of criminal jurisprudence derived from the Constitution of India and followed by the courts all over the country since ages is that a that person is innocent unless proved guilty and that the burden to prove that a person is guilty upon the person who is alleging it so.

Thus, in my considered opinion, the burden to prove that there is no commission of offence under stages one and two, has not been shifted upon the accused, and thus it still rests on the shoulder of the enforcement authorities / prosecution.

The root cause of the litigations under this law is solely due to lack of clarity in the aforesaid provisions and few other similar provisions of law wherein urgent intervention of our Government or the Courts is needed as soon as possible.

II. The Prohibition of Benami Property Transactions Act, 1988 (newly Amended Benami Law)w.e.f. 1.11.2016:

The Benami transactions were earlier allowed in our country during pre and post- independence period. Ready reference can be made to erstwhile sections 81, 82 and 94 of the Indian Trust Act, 1882 and also to erstwhile section 281A of the Income Tax Act, 1961. All of these sections were repealed in 1988 when the Benami law was introduced for the first time in the country which was then called as The Benami Transactions (Prohibition) Act, 1988 which came into effect repealed sections would reveal that doing the benami transactions was expressly allowed by the then governments through these provisions and few other similar provisions in other Acts.

Though original Act was promulgated in 1988 but it remained in an inactive mode for want of establishment of enforcement agencies. However, in the year 2016 the original law was overhauled and radical amendments were made to enforce the new introduced law with altogether new dimensions.

The new law on benami transaction/property is now proving to be quite stringent and harsh in various situations.

New definition of a benami transaction/ property has now been provided under section 2(9) of the Prohibition of Benami Property Transactions Act, 1988 in a sweeping and widest possible manner.

As we all understand, the main objective of the law contained in PBPT Act is to remove the layer of masking created in the transactions or any kind of impersonation in the title of ownership of the property / assets. It aims to check tax evasion or avoidance of payment of various other statutory dues such as stamp duty etc. and more importantly, it also aims to prevent the people from violating various other laws by prohibiting them from doing the transactions in the name of other persons which could not have been done in their own names such as:

  1. Land reforms legislations adopted by States of our country post-independence to redistribute holding of the land amongst the citizens of the country in an even and equitable manner,
  2. Corporate laws especially Securities and Exchange Board of India Act, 1992 to maintain legal sanctity of corporate structures,
  3. Law prohibiting non-residents to acquire agricultural and other lands in India, transactions done to avoid Insolvency and Banking Code,
  4. Local laws of the states to prohibit the non-residents of the state to acquire and old land in the State etc.

And so forth and so on.

(i) Authorities/Enforcement Agencies

The original powers of enforcement is enjoyed by the Benami Prohibition Unit (BPU) which is set up by the Central Board of Direct Taxes and is carved out from the existing cadres of the officers of the Investigation Wing of the Income Tax Department. So far, around 26 BPUs have been set up in the country. Each of said BPUs comprises of an Initiating Officer (who is of the rank of Assistant Commissioner or a Deputy Commissioner) and Approving Authority (who is of the rank of Additional Commissioner or a Joint Commissioner) as action taking officers.

The original action of inquiry/investigation and determination of transaction/property being benami is done by the Initiating Officer after the approval of Approving Authority as per section 19 to and 23 and section 24 read with various other provisions of the Prohibition of Benami Property Transactions Act, 1988.

After the Initiating Officer is sure of his decision based on his investigation and inquiry, he continues his order of provisional attachment till the passing the order by the Adjudicating Authority.

(ii) Adjudicating Authority

The Adjudicating Authority (of PMLA) located at New Delhi was earlier given the charge with Pan-India jurisdiction. However now the charge has been given to the Competent Authority dealing with matters under SAFEMA and NDPS etc. It decides whether the action of the Initiating Officer with regard to the attachment of the properties (which are alleged by the Initiating Officer to be benami) is maintainable or not. If yes, the Provisional Attachment Order passed u/s 24(4) of the Act is confirmed by the said authority. If not, the said order and the reference sent u/s 24(5) of the Act is rejected by the said Authority.

(iii) The Appellate Tribunal

The orders passed by the Adjudicating Authority are appealable to the Appellate Tribunal located at New Delhi (with pan-India jurisdiction). Section 30 of the Prohibition of Benami Property Transactions Act, 1988 provides that “The Central Government shall, by notification, establish an Appellate Tribunal to hear appeals against the orders of [any Authority] under this Act.”

Further section 71 provides that for the time being the Appellate Tribunal set up under section 25 of the PMLA, 2002 shall discharge the functions under PBPT Act also till independent Tribunal is set up under section 30 of PBPT Act.

Thus, the Appellate Tribunal (of PMLA and SAFEMA) is also having jurisdiction to decide appeals against the orders passed by the Adjudicating Authority under Benami Law. However, the said Tribunal is having no coram since last more than two years and thus all the appeals being filed are lying pending for fixation of hearing since long.

But, unfortunately, the BPUs have starting launching prosecution u/s 53 and 54 of the PBPT Act, merely on passing of confirmation order by the Adjudicating Authority even while the Tribunal is not functional and thus judicious application of mind has not yet taken place on the order passed by the Initiating Officer.

(iv) Administrator

Section 2(2) of the Act an administrator is “an Income-tax Officer as defined in clause (25) of section 2 of the Income-tax Act, 1961.

An administrator is in charge of two crucial acts as stated below:

  1. To take possession of property under section 29 of the Prohibition of Benami Property Transactions Act, 1988 according to which, Where an order of confiscation in respect of a property under sub-section (1) of section 27, has been made, the Administrator shall proceed to take the possession of the
  2. Management of properties confiscated under section 28 of the Prohibition of Benami Property Transactions Act, 1988, wherein the Administrator shall have the power to receive and manage the property, in relation to which an order of confiscation under subsection (1) of section 27 has been made.
  3. The Administrator is also empowered to take such measures, as the Central Government may direct, to dispose of the property which is vested in the Central Government under sub-section (3) of section 27, in such manner and subject to such conditions as may be prescribed.

(v) Special Courts

The Central Government has issued notification to set up a Special Court under Section 50 of the PBPT Act for trial of an offence which shall be punishable under this Act by designating Court of Session as Special Court.

It is also provided that while trying an offence under this Act, a Special Court shall also try an accused of an offence under the Code of Criminal Procedure, 1973 other than an offence punishable under the Prohibition of Benami Property Transactions Act, 1988.

It has been provided that the Special Courts shall conduct every trial expeditiously and conclude the trial within six months from the date of filing of the complaint by the Authorised Officer.

Few Startling Facts About Benami Law There are few peculiar features of this new piece of legislation which make it uniquely stinging and harsh, such as:

  • Retrospective Operation: It attempts to cover old transactions done even prior to 1.11.2016 (date of notification of new law). The issue currently is pending for an order before Hon’ble Supreme Court.
  • No Future Time Limit: No future time limit has been prescribed in the statute for taking action under the new law for transaction being done Thus, it is essential for a buyer to ensure that property being purchased by him is NOT a benami property, else any time in future he may be faced with the action under this law leading to the attachment of the property purchased, if found to be benami.
  • Any Property Covered: It covers not only immovable properties like land & building but also movable andother assets g. shares, FDRS, bank accounts etc.
  • Any Class: It may hit not only rich but financially poor also, as it has no threshold limit. It is affecting not only urban people but rural also, as it extends to whole of India.
  • Any Profile: Provisions of this Act are brought out for setting right not only errant politicians, but also officers in the public service, businessmen, self- employment, employees of PSUs as well as private sectors, Agriculturist, Artists and everyone else who may own or possess wealth in the form of properties which are not found to be registered in their names.
  • Any Structure: It is roping in corporate (listed or unlisted) as well as non- corporate entities and individuals as
  • Any Intention: Whether there was malafide intention of the offender or not, if Benami transaction has been one, then property transferred/held as benami may be acquired/confiscated under this law.
  • Any Motive: Intention or motive may be relevant for prosecution u/s 53, but not for acquisition/confiscation of the
  • Inadequate Protection for Bona fide Purchasers: Though protection has been provided to the purchasers of bona fide properties, but it is neither absolute nor is free from ifs and buts. Further, the provisions contained in Section 27(2) in this regard are vague and needs urgent clarification/ suitable amendments.
  • Makes no distinction between black money and tax paid money: Any property held benami shall be treated as Benami Property under the law and all consequences of its confiscation and prosecution of offenders shall follow irrespective of fact whether BLACK MONEY was used or tax paid money was used to acquire such property.
  • No U-Turn allowed: Once benami transactions is done and benami property is acquired, its re-transfer is not allowed under the law. Thus, its correction or reversal is NOT envisaged under the old or new law. There is no scope under the law for relief by way of any confession or surrender or settlement or compounding etc. Thus, legal consequences of entering into the benami transaction are imminent viz. confiscation of benami property and prosecution of the offender.
  • Multiplier Effect: Provisions of the Benami Law are in addition to provisions contained in any other These are not designed to be mutually exclusive. Thus, in any given situation all six principal laws dealing with economic offences viz. Income Tax Law, PMLA, Companies Act, FEMA, Black Money Act as well as Benami Law can be invoked simultaneously if violation has taken place or offence has been committed in the respective laws.
  • No compensation for any damage: There is no provision under the law for payment of any compensation to the person whose property is confiscated under the PBPT Act, 1988. Similarly no damage can be claimed for vacation of any wrongful attachment done under this law.

Punishment/Penalties/Fines

i) Attachment

a) Provisional Attachment by the InitiatingOfficer

In case it is found by the Initiating Officer that a particular transaction or property is held Benami, then he may make its Provisional Attachment under section 24(3) of the Prohibition of Benami Property Transactions Act, 1988 after giving adequate notice under section 24(1) of the Prohibition of Benami Property Transactions Act, 1988 upto a period of 90 days from the last day of the month in which the notice under sub-section (1) is issued.

Though the law provides condition precedent for making of Provisional Attachment that when the Initiating Officer is of the opinion that the person in possession of the property held benami may alienate the property during the period specified in the notice, he may, with the previous approval ofthe Approving Authority, by order in writing, attach provisionally the property.

However, it is seen that mostly the Provisional Attachments have been done in many cases all over the country without bringing any material on record to form an opinion with respect to the fulfilment of the aforesaid condition precedent. Thus, such a harsh and invasive power which was meant to be used sparingly in specific cases only is being used routinely and thus causing avoidable hardship to many innocent owners.

Further the law provides an inbuilt protection to bona fide purchasers and owners of property. However no such care is observed to have been taken to avoid any inconvenience or damage to bona fide purchasers of alleged Benami property.

The aforesaid Provisional Attachment can be continued by the Initiating Officer under section 2(4) of the Prohibition of Benami Property Transactions Act, 1988 if at conclusion of the 90 days’ long proceedings it is found by him that the property attached is a benami property. The said attachment then continues till the date of passing of order by the Adjudicating Authority.

b) Adjudication of Provisional Attachment by Adjudicating Authority:

As per section 24(5) of the Act, once the Provisional Attachment Order (PAO) is passed by the Initiating Officer U/s 24(4), he has to prepare a Statement of the Case (also called as ‘Reference) and refer it to the Adjudicating Authority within 15 days from the date of passing of the aforesaid PAO.

After the Reference is received by the Adjudicating Authority Under section 24(5), it issues a notice to alleged benamidar and alleged beneficial owners to furnish such documents, particulars or evidence as is considered necessary on a date specified by the Authority. As per section 26(3), the Adjudicating Authority must pass its order within a period of one year from the end of the month in which the reference under sub-section (5) of section 24 was received.

The Adjudicating Authority decides whether the Provisional Attachment Order so passed by the Initiating Officer under section 24(4) is confirmed or rejected, thereby deciding a property or transaction to be benami or not to be benami.

c) Decision of the Appellate Tribunal, New Delhi on the order of the Adjudicating Authority.

An Appeal is filed before the Appellate Tribunal within a period of 45 days, wherein either of the aggrieved party can come to challenge the order passed by the Adjudicating Authority. The role of Appellate Tribunal is to ponder, adjudicate and decide over the order passed by the Adjudicating Authority either by confirming it or denying it.

ii) Prosecution and imposition of fine Section 3(2) provides that “Whoever enters into any benami transaction shall be punishable with imprisonment for a term which may extend to three years or with fine or with both” and sub-section (3) provides that “Whoever enters into any benami transaction on and after the date of commencement of the Benami Transactions (Prohibition) Amendment Act, 2016, shall, notwithstanding anything contained in subsection (2), be punishable in accordance with the provisions contained in Chapter VII”

Thus from the above it is clear that transactions done on or after 1st November, 2016 are punishable as per Section 53 and Section 54 of the Prohibition of Benami Property Transactions Act, 1988.

a) Punishment and Fine for doing Benami Transaction

Section 53 provides that in following three circumstances in which a person shall be guilty of the offence of benami transaction i.e. if the benami transaction has been done to:

  1. defeat the provisions of any law or
  2. avoid payment of statutory dues or
  3. avoid payment to

It further provides that following person shall be guilty of an offence of Benami transaction:

  1. the beneficial owner,
  2. benamidar and
  3. any other person who abets or induces any person to enter into the Benami transaction, shall be guilty of the offence of Benami transaction.

It also provides that a person found guilty of offence of Benami transaction shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years.

It also provides that a person found guilty shall also be liable to fine which may extend to twenty-five per cent of the fair market value of the property.

b) Punishment and Fine for false information

Section 54 provides that “Any person who is required to furnish information under this Act knowingly gives false information to any authority or furnishes any false document in any proceeding under this Act, shall be punishable with rigorous imprisonment for a term which shall not be less than six months but which may extend to five years and shall also be liable to fine which may extend to ten per cent of the fair market value of the property.”

c) Penalty for failure to comply with notices or furnish information

Section 54A is a recent addition in the PBPT Act, 1988 via the Budget of 2019. It says that

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“(1) Any person who fails to,–

  1. comply with summons issued undersub-section (1) of section 19; or
  2. furnish information as required under section 21,

shall be liable to pay penalty of twenty-five thousandrupees for each such failure.

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From the above discussion, it may be noted that the consequences of doing Benami transaction are very harsh and quite disproportionate beyond any reasonable limits. The quantum of fine may be well beyond the financial capacities of the persons who may be held guilty for the offence of benami transaction. The provisions regarding punishment of other persons who allegedly abets or induces any person to involve in benami transaction or who gives false information/document to any authority under the Prohibition of Benami Property Transactions Act, 1988 are quite harsh and may tend to hit unfairly to even those who may be connected to the main accused person in professional or personal capacity.

Controversy arising under the Prohibition of Benami Property Transactions Act, 1988 Though, undoubtedly our country really needed such a crisp and expedient law to deal with the menace of accumulation of wealth in hidden or pseudo names and to merge the parallel economy with the main economy, however due to lack of clarity in drafting and/or unguided implementation/enforcement of law, the Prohibition of Benami Property Transactions Act, 1988 has become like an unguided missile, causing huge collateral damage (which may not be visible immediately) as would be evident from the following:

  1. It would be witnessed from the practical experience that impromptu attachment of the properties has led to chaos and fear in society and business community.
  2. Retrospectivity: As discussed above, the benami transactions were legally allowed till 1988 since ancient times. Therefore retrospective operation of this law is like a bolt from the blue and proving to be very harsh. Though, it may be quite shocking to know, but the truth is that not only for past transactions, but no future time limits has been provided even for the current transactions. It is piercing the fundamental principle followed in the Constitution of India viz. Sanctity of Finality of Litigation. The sword of litigation is kept hanging on the heads of the citizens of the country, under this law.
  3. The law gives no clear cut protection to bona fide purchasers and the PBPT Act is acting as an unguided missile for want of clarity in law with regards to the bona fide purchaser as its provisions are hitting them unfairly and causing avoidable
  4. There is an Urgent Need for Adequate Training and appropriate guidance to the Benami Law Officers who are in the charge of enforcement of the law, as limited knowledge and self-perceived perceptions on their part is causing huge chaos and ordeals to innocent owners of the property.
  5. There is an urgent need for adequate training and appropriate guidance to the Benami Law Officers who are in the charge of enforcement of the law, as limited knowledge and self-perceived perceptions on their part is causing huge chaos and ordeals to innocent owners of the property.
  6. The concept of Burden of Proof is yet again a hot topic for controversy as though it is well settled legal position that the burden rests on the shoulders of the Initiating Officer to prove that what he alleges is true, but recently the Initiating Officers have been trying to shift this burden completely on the noticee(s) thereby being misadventures and harsh in enforcing the provisions of law.
  7. The Appellate Tribunal situated at New Delhi is a combined Tribunal under the Prevention of Money laundering Act, 2002, the Smugglers and Foreign Exchange Manipulators Act, 1976 and the Prohibition of Benami Property Transactions Act, At present it is not having any coram, because of vacancies arising on the retirements have not been filled up, which is leading and creating huge back log of cases to be decided.

Thus, if the intent of our Government is to implement the law in most fair manner, then the least it must do is:

  1. Bring out suitable amendments/ clarifications wherever vagueness or gaps are left in the hasty making of the Statute.
  2. Train the implementation agencies and enforcement officers and instil appropriate guidance for fair implementation.
  3. Set up immediately adequate infrastructure and robust mechanism for the remedial measures by way of fair process of adjudications and appeal.
  4. Ensure checks and balances for avoidance of misuse of law by setting up appropriate

In case the Government is not able to take all requisite steps as discussed above due to the reasons of ‘non-priority’ or other constraints etc., then in my considered opinion, it should postpone the unplanned implementation of this law till then to avoid huge collateral damage, as has also been opined recently by Hon’ble Supreme Court.

(Source: This article is published in souvenir of National Tax Conference which was held on 6th & 7th August, 2022 at New Delhi)

I was selected as Income-tax Officer Class-1 on the basis of IAS etc examination held in 1958. After five months of combined foundational training of all services at Mussoorie, we, the probationers, who had opted for Indian Revenue Service (Income-tax), were sent for 18 months training in income tax and allied laws. Fortunately, out of 16 probationers, I and three others completed the prescribed written tests in the very first attempt and within six months of our training, we were sent for practical training. Shri R.D. Shah, who later retired as Chairman of the Central Board of Direct Taxes (CBDT), was our Training In-charge in the rank of Inspecting Assistant Commissioner of Income-tax – a highly committed officer but a meticulous follower of rules and regulations.

Post training, the Board’s policy was not to post the officers in their home State much less in their home town. The then Chairman, CBDT, came to the training college to give a valedictory address and thereafter, met the probationers and enquired about their problems. I stood up and told him that contrary to the policy, I would like to get the posting in my home town at New Delhi. The reason was that without the State posting, I shall not be able to get a Punjabi bride to look after my old parents. There was laughter all around. Despite strong opposition including from our Training In-charge, I stood my ground and gave several other reasons for the first positing to be in one’s home town.

Ultimately, the Board relaxed the policy of not giving the first posting after training in the home town and I was posted at New Delhi. It has now become a general policy of posting the officers, after training, in their home towns and if that is not possible, to post them at least in their home States.

Another interesting feature in my carrier has been my posting as the Chief Commissioner of Income-tax -1, Calcutta. The Income-tax Department had a plot of land for constructing residential flats but the same, over the years, had been encroached. I tried to remove the encroachers but there was lot of resistance reaching violence. I met Shri Jyoti Basu, the then Chief Minister of West Bengal, requesting him to get the encroachers removed. He gave me a counter offer about a new colony that was being developed by the State Government near the Calcutta airport and he could offer me as much land as was needed. This was not acceptable to me and I insisted that the Department’s land should be removed from the encroachers. Ultimately, he agreed. The encroachers were removed but, in the bargain, the Income-tax Department also got a large piece of land near the airport where a very commodious Guest House was set up for the initial and temporary stay of out-stationed officers who were posted to Kolkata. In this way, the Department got double benefit largely because of my persistence for the vacation of the encroachers from the that land.

Another reminiscence is of an incident when I was the Vice-Chairman of the Income-tax Settlement Commission at New Delhi. The Chairman, Central Board of Direct Taxes, with the concurrence of the Revenue Secretary, transferred me from Mumbai to New Delhi on the condition that I shall dispose off the oldest pending case of a foreign company which was lying unresolved for more than 10 years, firstly before the Assessing Officer and later before the Settlement Commission. After studying the case papers running into about 10,000 pages, I discovered it to be a very simple case of applying a reasonable net profit ratio to the receipts because they all were from the Government Departments and their correctness could not be questioned. As was my habit, I would start negotiations by proposing an unreasonable rate of profit so that in the negotiations, a reasonable rate can be arrived at and case settled on a win-win basis. The matter was settled to the mutual satisfaction of the foreign company and the Department and the additional tax, which was quite significant material, was paid within a month of the demand having been raised by the Commission.

It has been my experience that a vast majority of taxpayers do not mind paying a little more tax than what is due if it is based on an agreed assessment and the problem of ascertaining their tax liability is settled for good.

(Source: This article is published in souvenir of National Tax Conference which was held on 6th & 7th August, 2022 at New Delhi)

“Faith is of no evil in absence of strength. Faith and strength, both are essential to accomplish any great work.”

– Sardar Vallabhbhai Patel

1. GENERAL BACKGROUND

  1. The report is to be given by an Accountant in Form 3CEB as prescribed under Rule 10E. With effect from 1.04.2013, the rule requires electronic filing of the report.
  2. Section 2(31) defines a “person” in an inclusive manner. The definition is wide enough to include non-residents including foreign companies. Accordingly, if a foreign company has taxable international transactions with its Associated Enterprise (AE) in India, it is required to comply with the transfer pricing regulations and furnish an Accountant’s Report.
  3. Section 92E requires that every person who has entered into an “international transaction” or “specified domestic transaction” during a previous year shall obtain a report from an accountant and furnish such report in the prescribed form and in the prescribed manner on or before the specified date.
  4. Transfer pricing law applies to both domestic and international transactions. For domestic transactions the law will apply only if the specified domestic transactions fall above a threshold in terms of the transaction value.
  5. Transfer Pricing law in India was introduced through insertion of Section(s) 92A to 92F to Income-tax Act, 1961 and Rule(s) 10A to 10E of the Income Tax Rules The purpose is to ensure that the transaction between ‘related’ parties is at a price that would be comparable if the transaction was occurring between unrelated parties.
  6. Section 92F(i) imports the definition of an “Accountant” from Explanation to Section 288(2) which means a Chartered Accountant who holds a valid certificate of practice, subject to certain exclusions prescribed under the Section 92E therefore does not require that only statutory auditor appointed under the applicable law can perform the examination.
  7. Rule 10E provides that the requisite report under Section 92E shall be in Form No. 3CEB. The particulars required to be furnished under Section 92E are prescribed in Annexure to Form No. 3CEB.
  8. With effect from A.Y. 2020-21, section 92F defines “specified date” as the date which is one month prior to the due date for furnishing the return of income under Section 139(1) for the relevant assessment year. The due date for filing of return of income under for f.y. 2021-22 (AY 2022- 23) under Section 139 for the assesses whose accounts are required to be audited under any law is 31st October, 2022. Therefore, they will be required to furnish report under Section 92E are prescribed in Annexure to Form No. 3CEB by an Accountant before 30th September, 2022.

References to sections and rules in this article, unless otherwise specified, are reference to sections under the Income-tax Act, 1961 and rules under Income-tax Rules, 1962.

2. SCOPE OF EXAMINATION OF AN ACCOUNTANT’S REPORT UNDER SECTION 92E

  1. The accountant is not responsible to ensure that the Method used by the taxpayer to determine the Arm’s Length Price ‘ALP’ is the Most Appropriate Method, but he is required to ensure that the method stated to have been used to determine the ALP has actually been selected and applied by the assesse for such determination as provided under section 92C.
  2. In many a cases, non-residents are taxable in India in respect of income earned from sources within India, even though they may not have any physical presence (business connection or permanent establishment) in India and therefore statutorily they are not required to maintain regular books of accounts in India. Unless exempted under the provisions of section 115A(5) from filing a return of income in India, they are required to obtain an accountant’s report in Form 3CEB (Also known as ‘Mirror Form No. 3CEB’). In such cases, accountant can place reliance on invoices, agreements, Form 26AS and other documents available with the non-resident taxpayer and accounts, Form No. 3CEB and other information provided by the resident assessee with whom non-resident has entered into international transaction(s) in examination of Mirror Form No. 3CEB.
  3. If any document is not maintained, the accountant should suitably qualify or make appropriate disclosure in his report, depending upon the importance and the materiality aspect of the document. Qualification in the report should be comprehensive and self-explanatory and in accordance with “SA 700 – Forming an Opinion and Reporting on Financial Statements” issued by the Institute of Chartered Accountants of India ‘ICAI’.
  4. Examination under Section 92E is not an audit. Therefore, it does not require expression of an opinion on the “true and fair view” of the financial statements but it is a restricted examination of accounts and records of the tax payer relating to the International Transaction or the Specified Domestic Transaction entered into by the tax payer.
  5. The accountant should obtain from the tax payer a complete list of accounts and records (financial and non-financial) along with the supporting documents, if any, maintained by the taxpayer pertaining to international transactions and /or specified domestic transactions and obtain suitable representation confirming the completeness of the accounts and records pertaining to the relevant transactions.
  6. The accountant should take an appropriate Management Representation Letter (MRL) from the assessee in respect of all oral representations given to him. However, it may be noted that mere reliance on MRL in respect of the matters that may be directly verified by the accountant will not be in compliance with the Generally Accepted Auditing Standards.
  7. While it is the responsibility of the taxpayer to prepare and provide complete details, the accountant should use his professional skills and expertise to examine the same based on the documents, information and evidences provided to him by the assesse and apply reasonable tests to ensure that no item is omitted in the information furnished by the taxpayer and that the information furnished by the assesse is complete and correct.
  8. Where the certifying accountant is not the statutory auditor of the assessee, he should disclose his reliance on the work performed by the statutory auditor and ensure that reasonable checks/tests are applied to the transactions to satisfy himself about the authenticity and the correctness of the ultimate information.
  9. In order that the accountant is in a position to explain any question which may arise later on, it is necessary that he should keep detailed notes on the documents and other evidences on which he has relied upon while conducting his examination along with the detailed working papers. Such working papers, amongst others, should include his notes on the followings:-
    1. list of registers, documents and other records examined;
    2. the extent of checking and the basis ofsuch examination and by whom;
    3. information and explanations provided during the course of examination and by whom;
    4. decision on various points taken and the basis;
    5. the judicial pronouncements relied upon while issuing the If there is a conflict in judicial opinion, the view which he has followed and the reasons;
    6. certificates issued by the client;
    7. The assets owned and risks undertaken by each entity of the group in relation to the functions performed
    8. representation letter issued by the management;
    9. reconciliation between the figures to be reported under section 92E and the figures reported in the general purpose financial statements;
    10. Annexure to Form No.3CEB duly filled in and authenticated by the client and provided along with management representation letter.
  10. SA 230 –“Audit Documentation” provides that the documentation should serve as a sufficient and appropriate record of the basis for the accountant’s report. The documentation should be prepared on a contemporaneous real time basis and the accountant should document all the matters important in providing evidence that the examination was planned and performed in accordance with the applicable legal and regulatory requirements.
  11. Understanding taxpayer’s business operations is an essential part of transfer pricing examination, especially when assessee seeks guidance and professional assistance for preparation/ maintenance of the contemporaneous documentation. This will include an understanding of the followings:-
    1. The taxpayer’s operations;
    2. Industry in which the taxpayer operates;
    3. Key value drivers in the business;
    4. The operations of the taxpayer’s affiliates (domestic and foreign);
    5. The relationships between the taxpayer and its affiliates (domestic and foreign);
    6. The role each entity plays in carrying out the activities and performing the business functions of the controlled group;
    7. The scope, volume and nature of the controlled functions; and
    8. How much control and direction that taxpayer receives from headquarter of the group.
  12. The accountant should consider the law that is applicable for the relevant year even though the format of Form 3CEB may not have been amended to bring it in conformity with the amended law.

3. FORMAT OF THE ACCOUNTANT’S REPORT

3.1 The report from an accountant under Rule 10E is to be furnished in Form No 3CEB. The Form No. 3CEB is divided into three parts as follows:-

  1. Examination of the accounts and records: The first paragraph is a declaration by an accountant about his examination of the accounts and records of the taxpayer to review the international transaction(s) and/ or the specified domestic transaction(s) entered into by the assesse during the relevant previous year.
  2. Expression of an Opinion about maintenance of proper information and documentation: The second paragraph requires the accountant to express an opinion as to whether the tax payer has maintained proper information and the documents prescribed under the law in respect of the international transactions and/ or the specified domestic transactions entered into by him.
  3. Certification of ‘true and correct’ nature of the particulars furnished in the Annexure: Third paragraph is an expression of opinion by the accountant as to whether the particulars required to be furnished under Section 92E are furnished in the Annexures to Form 3CEB and whether the particulars furnished are true and correct.

Annexures to Form No.3CEB referred to in paragraph 3 of the report contains twenty five clauses. The accountant has to report whether the particulars furnished are true and correct.

4. CONCLUSION

The scope of an accountants report envisaged under section 92E does not require an accountant to express his opinion on the “true and fair view” of the financial statements of the assesse enterprise.

The section 92E requires an accountant to express an opinion whether “proper information and documents as are prescribed” have been kept by the assessee in respect of the international transactions and/or the specified domestic transaction entered into by him and whether the particulars required to be furnished under Section 92E are furnished in the Annexures to Form No. 3CEB and whether the particulars furnished are true and correct.

The contents of the report prescribed under section 92E and the Annexure are of no less importance. The accountant will have to use his professional skill and expertise and apply such tests as the circumstances of the case may require, considering the contents of the report. In order that the accountant may be in a position to explain any question which may arise later on, it is necessary that he should keep detailed notes about the evidence on which he has relied upon while conducting the examination and also maintain all his working papers.

The accountant should obtain from the assessee a letter of appointment for conducting the examination as mentioned in section 92E. It is advisable that such an appointment letter should be signed by the person competent to sign/verify the return of income in terms of the provisions of section 140 or by any person who has been authorized by the company to make such an appointment. The accountant should get the statement of particulars, as required in the annexure to the report, authenticated by the assessee before he proceeds to verify the same. The accountant is required to submit his report to the person appointing him viz. the assessee.

ICAI has issued “GUIDANCE NOTE ON REPORT ON INTERNATIONAL TRANSACTIONS UNDER SECTION 92E OF THE INCOME-TAX ACT, 1961” (“GN”).

It is advisable to refer the guidance note for the through and detailed guidance.

Introduction

The legislature, from time to time has introduced various anti abuse provisions in order to avoid tax evasion and revenue leakage. Section 56(2)(x) of the Act is one of the special deeming provisions which is introduced to avoid laundering of unaccounted income. The Finance Act, 2017 has widen the scope of section 56 by inserting the section 56(2)(x) of the Act. The Hon’ble Finance Minister in his budget for the Finance Bill, 2017 proposed to introduce a section 56(2)(x) of the Act to bring any money, immovable property or specified movable property valued more than fifty thousand under a tax regime if it is received by any person without consideration or with an inadequate consideration.

Before insertion of section 56(2)(x) the Act, the Income Tax Act, 1961 provided for certain special deeming provisions to tax such transactions entered by the assessee for the value which is less than the stamp duty value/ market value. The said special provisions were introduced mainly to avoid tax evasion and money laundering. The Finance Act, 2002 inserted section 50C of the Act which provides that with effect from 01.04.2003, the transfer of capital asset being land or building or both for a consideration, which is less than the Stamp duty value of such capital assets is taxable under the deeming provisions of section 50C of the Tax. As a result, the stamp duty value of such immovable property is deemed to be the full value of consideration for the purpose of computation of Capital Gains under section 48 in the hands of transferor.

While interpreting the said provisions, various courts have held that the same cannot be attracted to the transactions where an agreement is not registered and the stamp duty value is not determined by the stamp valuation authority. To overcome such situation and to prevent the leakage of revenue, an amendment was proposed vide Finance Act, 2009 to include the transactions in the purview of this section where the amount of stamp duty value is yet to be assessed which was applicable from 1st October, 2009 and shall accordingly apply in relation to transactions undertaken on or after such date. Since, the said provision was not applicable to the assets held as a stock in trade, the Finance Act, 2013 introduced another special provision of section 43CA of the Act to determine the full value of consideration for transfer of an assets other than capital assets for computing business income in the hands of a transferor. The said provisions are mainly attracted in the hands of builders/developers who sold the property held as a stock in trade for the consideration less than the stamp duty value. Thus, the builders and developers are also liable to pay additional tax as per the provisions of section 43CA of the Act the Act if the stamp duty valuation of the property is higher than the consideration received / accrued on the transfer of such immovable property.

Sections 50C and 43CA of the Act are applicable in the case of transferor of an asset and the same do not have any implications in the hands of transferee. Thus, to give similar effect in the case of transferee and to maintain parity under the statute, the legislature introduced section 56(2)(vii) of the Act vide Finance Act 2009 through which any sum of money or any property which is received without consideration or for inadequate consideration exceeding fifty thousand by an Individual or HUF after 1st October, 2009 but before 1st April, 2017 was chargeable to tax under the head “Income from other sources” subject to certain exceptions. Further, the scope of the said section was expanded by introduction of section 56(2)(viia) of the Act through the Finance Act, 2010 with effect from 1st June, 2010. As per section 56(2)(via), any receipt of certain shares by a firm or a Private Limited company is chargeable to income-tax under the head Income from Other Sources if such receipt is in excess of fifty thousand or it is received without consideration or for an inadequate consideration.

Subsequently, the Finance Act, 2012 introduced another section 56(2)(viib) which is applicable in the case of a private limited company. As per this section, if a company received any consideration for issue of shares exceeds the face value of such shares, then, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be taxed under the head Income from Other Sources.

The aforesaid anti-abuse provisions were applicable only in the case of individual or HUF and firm or company in certain cases. Thus, the receipt of sum of money or property without consideration or for inadequate consideration did not attract these anti-abuse provisions in cases of other assessees. Therefore, in order to prevent such practice, a new clause (x) in sub- section (2) of section 56 has been introduced to tax the such receipts in the hands of the recipient under the head “Income from other sources”. The provisions of section 56(2)(x) of the Act came into operation with effect from 1st April, 2017 as per which any money or a property exceeding the value of fifty thousand rupees received by any person on or after 1st April, 2017 shall be chargeable to tax as “Income from Other Sources”.

Further, certain exceptions are also provided to this section by keeping the receipts by certain trusts or institutions and receipt by way of certain transfers not regarded as transfer under section 47 of the Act out of the purview of tax regime. Consequential amendment has also been proposed in section 49 of the Act to determine the cost of acquisition.

Further, in the background of COVID-19 Pandemic, certain relaxation provisions were introduced in Finance Act, 2022 giving retrospective effect from 1st April, 2020. These provisions shall apply from the Assessment Year 2020-21. As per these provisions, the tax benefit has been provided to the assesses on the amount received for medical treatment and on account of death due to COVID-19 Pandemic. The Finance Ministry has released a press statement dated 25.06.2021 to announce that income-tax shall not be charged on the amount received by a taxpayer for medical treatment from employer or from any person for treatment of COVID-19 during FY 2019- 20 and subsequent years. Further, in order to provide relief to the family members of such taxpayer, exemption shall be provided to ex- gratia payment received by the family members of a person from the employer of such person or from other person on the death of the person on account of COVID-19 during FY 2019-20 and subsequent years. Also, it was stated that the exemption shall be allowed without any limit for the amount received from the employer and limited to Rs.10 lakh in aggregate for the amount received from any other persons. This is a good step taken by the government to provide the relief to the assessees for the difficulties faced during Covid-19 Pandemic.

Scope of section 56(2)(x) of the Act:

The provisions of section 56(2)(x) of the Act are anti-abuse provisions which are mainly brought into statute to avoid money laundering. This section applies to all the assesses who receive any sum of money or movable/ immovable property value of which in excess of fifty thousand without consideration or for inadequate consideration. The scope of section 56(2)(x) of the Act is briefly discussed as under:

  1. If any person receives a sum of money without consideration or for inadequate consideration which is valued in excess of fifty thousand then, such sum shall be treated as “Income from Other Sources”.
  2. If any person receives any immovable property
    1. without consideration and the stamp duty of which exceeds fifty thousand then, the value of stamp duty of such property shall be treated as “Income from Other Sources”.
    2. For a consideration less than stamp duty value of the property then, the difference between stamp duty value and consideration shall be treated as “Income from Other Sources” if such amount is more than fifty thousand or the amount equal to ten percent of consideration, whichever is higher. Vide Finance Act, 2021, this difference has been enhanced from five percent to ten percent in case of such property and up to twenty percent in a case where the property is being a residential unit.
    3. The valuation of stamp duty can be done in accordance with the provision of section 50C of the Act and the assessee can challenge the same as per such section. This provision can be attracted especially in case of a buyer who purchased a property for a consideration less than stamp duty value.
    4. The cost of acquisition of the property shall be determined as per section 49(4) of the Act.
  3. If any person receives any movable property
    1. Without consideration and fair market value of which exceeds fifty thousand then, the entire fair market value of such property is treated as “Income from Other Source”.
    2. For a consideration less than fair market value and the difference between fair market value and the consideration is more than fifty thousand then, the aggregate fair market value as exceeds such consideration shall be treated as “Income from Other Sources”.
    3. The fair market value of the property shall be determined in accordance with the method under rule 11U & 11UA of the Income Tax Rules, 1962
  4. Section 56(2)(x) of the Act excludes any sum of money or any property from taxability if it is received –
    • From any relative; or
    • On the occasion of marriage; or
    • Under a will or by way of
    • inheritance; or
    • in contemplation of death of the payer or donor, as the case may be; or
    • From any local authority as defined in the Explanation to clause (20) of section 10; or
    • From any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or
    • From or by any trust or institution registered under section 12A or section 12AA or section 12AB; or
    • By any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or
    • By way of transaction not regarded as transfer under clause (i) or clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) or clause (viiac) or clause (viiad) or clause (viiae) or clause (viiaf) of section 47; or
    • By way of transaction not regarded as transfer under clause (i) or clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) or clause (viiac) or clause (viiad) or clause (viiae) or clause (viiaf) of section 47; or
    • From an individual by a trust created or established solely for the benefit of relative of the individual;
    • From such class of persons and subject to such conditions, as may be prescribed.
  5. The Finance Act, 2022 has inserted further exceptions for application of section 56(2)(x) of the Act to give relaxation to the assessee on account of COVID-19 Pandemic which provides that if any sum of money or property received –
    • by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family, for any illness related to COVID-19 subject to such conditions, as the Central Government may, by notification in the Official Gazette, specify in this behalf;
    • by a member of the family of a deceased person—
      • from the employer of the deceased person; or
      • from any other person or persons to the extent that such sum or aggregate of such sums does not exceed ten lakh rupees,
      • where the cause of death of such person is illness related to COVID-19 and the payment is received within twelve months from the date of death of such person; and subject to such other conditions, as the Central Government may, by notification in the Official Gazette, specify in this
    • For this provision, the meaning of Family in relation to an individual shall have the same meaning as provided under Explanation 1 to clause (5) of section 10 of the Act.
  6. The Finance Act, 2022 has introduced a new proviso which provides that any amount of money or a property is received by any person referred to in sub- section (3) of section 13 of the Act then, the same shall not be covered under the exception provided in section 56(2)(x) of the Act. This proviso shall be applicable with effect from 1st April, 2023.
  7. For the purpose of section 56(2)(x) of the Act, the expressions “assessable”, “fair market value”, “jewellery”, “relative” and “stamp duty value” shall have the same meanings as provided in Explanation to clause (vii) of section 56(2) of the Act. Further, the expression “property” shall have the same meaning as provided in clause (d) of the Explanation to clause (vii) of section 56(2) of the Act and the same shall include virtual digital asset.

Certain important issues for consideration –

⮚ Whether the provisions of section 56(2)(x) of the Act are attracted to the issuance of bonus shares

The similar issue had come up before the Mumbai ITAT in the case of Sudhir Menon HUF vs. ACIT [2014] 148 ITD 260 (Mumbai-Tribunal) wherein the Hon’ble ITAT has held that when the additional shares of a company are allotted on pro rata basis to the shareholders including assessee based on their existing shareholding, then, there is no scope for any property being received on said allotment of shares and, consequently, the provisions of section 56(2)(vii)(c) can not apply to difference in book value and face value of additional shares. It is important to note that provisions of section 56(2)(vii) and 56(2)(x) of the Act are coterminous. Therefore, there is no question of applicability of section 56(2)(x) of the Act to the issuance of bonus shares when the provisions of section 56(2)(vii) of the Act are not attracted for the same as held by the Mumbai ITAT in this case. The ITAT discussed the legislative intent to introduce section 56(2)(vii) of the Act and held that the provisions of section 56(2)(vii) (c) of the Act would not attract to the genuine transactions of issuance of the shares to the existing shareholders.

The Hon’ble Delhi ITAT in the case of DCIT vs. Smt. Mamta Bhandari [ITA 5681/Del/2016] has uphold the above ratio laid down by the Mumbai ITAT

Further, the above proposition has been confirmed by the Hon’ble Mumbai ITAT in the case of ITO vs. Rajeev Ratanlal Tulshyan [2022] 193 ITD 860 (Mumbai – Trib.)

⮚ The amendment introduced to section 56(2)(x)(b)(B) of the Act through the Finance Act, 2020 with effect from 01.04.2021 excluded the transaction out of the purview of section 56(2)(x) of the Act if the difference between the stamp duty value and actual consideration of the property is not more than 10% of the total consideration. Whether this amendment should be applied prospectively or retrospectively –

The identical amendment has been introduced vide Finance Act, 2018 by inserting third proviso to sub-section (1) of section 50C of the Act which provides that from assessment year 2019-20 this section will not apply if the stamp duty valuation does not exceed 5% of the consideration received or accruing as a result of the transfer of capital asset. Subsequently Finance Act 2020 increased the limit to 10%. The question arose before the Hon’ble Mumbai ITAT in the case of Maria Fernandes Cheryl vs. ITO ITA No. 4850/Mum/2019 order dated 5.01.2021 that whether the said proviso applies prospectively or retrospectively. The Hon’ble ITAT held that since the said proviso is beneficial to the assessee, the same should be applied retrospectively. The relevant observation of the ITAT is as under:

“Once legislature very graciously accepts, by introducing the legal amendments in question, that there were lacunas in the provisions of Section 50C in the sense that even in the cases of genuine variations between the stated consideration and the stamp duty valuation, anti-avoidance provisions under section 50C could be pressed into service, and thus remedied the law, there is no escape from holding that these amendments are effective with effect from the date on which the related provision, i.e., Section 50C, itself was introduced. These amendments are thus held to be retrospective in effect. In our considered view, therefore, the provisions of the third proviso to Section 50C(1), as they stand now, must be held to be effective with effect from 1st April 2003. We order accordingly.”

The similar issue has also been dealt by Mumbai ITAT in the case of Joseph Mudaliar vs. CIT [2021] 191 ITD 719 (Mumbai – Trib.)[14-09-2021]

wherein it has been held that section 50C and section 56(2)(vii)(b)(ii) are identical provisions. The only difference is section 50C is applicable to the seller of an immovable property, whereas, the later provision is applicable to the buyer of the property. Therefore, a benefit given to a seller of the property in respect of marginal variation cannot be denied to the buyer of the property, since, they stand on the same footing. There cannot be two different fair market value in respect of the very same property, i.e. one at the hands of the seller and the other at the hands of the buyer. Thus, if the difference in valuation between the value determined by the stamp duty authority and the declared sale consideration is less than 10%, no addition can be made under section 56(2)(vii)(b)(ii) of the Act in view of the third proviso to section 50C and 56(2)(x) of the Act. The ITAT further, held that amendment made in section 50C(1) by inserting third proviso by Finance Act, 2018, with effect from 01.04.2019 is curative in nature and thus, the same would apply retrospectively.

Considering the same analogy, the amendment proposed in section 56(2)(x) of the Act vide Finance Act, 2020 to section 56(2)(x)(b)(B) shall have retrospective effect from 1st April, 2017.

⮚ Whether section 56(2)(x) of the Act isattracted to buy back of shares-

The Hon’ble Mumbai ITAT has decided this issue in the case of Vora Financial Services (P.) Ltd. vs. ACIT [ITA 532/Mum/2018]/[2018] 171 ITD646 (Mumbai) wherein it has been held that the

provisions of section 56(2)(via) of the Act should be attracted where the receipt of shares become property in the hands of recipient and the shares shall become property of the recipient only if it is “shares of any other company”. In the present case, the assessee has purchased its own shares under buyback scheme and the same has been extinguished by reducing the capital. Hence, the tests of “becoming property” and also “shares of any other company” fail in this case. Therefore, the tax authorities are not justified in invoking the provisions of sec. 56(2)(viia) for buyback of own shares. To arrive at this conclusion, the ITAT referred to the memorandum explaining the provisions of Finance Bill, 2010 wherein the object behind the insertion of section 56(2)(vii) of the Act is provided as under:

“The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income under the garb of gifts, particularly after abolition of the Gift Tax Act. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. It is, therefore, proposed to amend the definition of property so as to provide that section 56(2)(vii) will have application to the “property” which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.”

It is important to note that even the intention for introduction of section 56(2)(x) of the Act is to avoid tax evasion and money laundering. Therefore, the genuine transaction entered by the assessee cannot be taxed under the said section. Considering the ratio laid down by Mumbai ITAT in the case of Vora Financial Services (P.) Ltd. (supra), the provisions of section 56(2)(x) of the Act should not be attracted to the buy-back of the shares.

⮚ In a case where Mr A entered into an agreement on 31.03.2017 to purchase the immovable property from Mr.B for total consideration of Rs. 1cr and the registration of the same was done on subsequent date, whether the provision inserted in section 56(2)(x)(b)(B) through the Finance Act, 2018 with effect from 01.04.2019 imposing the taxes on difference between stamp duty value and consideration would be applied to the present transaction which is entered in the A.Y. 2017-18

The Hon’ble Mumbai ITAT in the case of Rajib Rathindra Saha vs. ITO [ITA 7352/Mum/2019], [2022] 139 taxmann.com 211 (Mumbai – Trib.) / [2022] 95 ITR(T) 216 (Mumbai – Trib.) [21-02- 2022], has considered this issue in light of the provisions of section 56(2)(vii)(b)(ii) as amended by Finance Act, 2013 came into operation with effect from 01.04.2014. In this case, the assessee had purchased a flat on 16.04.2010 for total consideration of Rs.68,45,550/- for which earnest money was paid on 31.03.2013. The stamp duty for execution of the agreement was paid by the assessee on 18-3-2013 and the agreement was registered on 02.04.2014 and on the date of registration, the stamp duty value of the property was Rs. 87,02,007/. The AO, during the assessment proceedings for the A.Y. 2014-15, held that as the agreement was executed in the year under appeal, the provisions of section 56(2)(vii)(b)(ii) of the Act as amended by the Finance Act 2013 with effect from 01.04.2014 would be applicable.

Thus, the AO made the addition of the difference between the consideration paid by the assessee and stamp duty value i.e. Rs.18,53,457/-. The issue travelled before the ITAT. Before ITAT, the assessee contended that since the assessee had paid stamp duty on 18.03.2013 and had executed the agreement on 31.03.2013 i.e. in the period relevant to the Assessment Year 2013-14. Therefore, the amended provisions of section 56(2)(vii)(b)(ii) of the Act would not apply. Merely for the reason that the agreement was registered on 02.04.2014 i.e. during the year under consideration, the amended provisions would not get attracted. The ITAT observed that the sub-clause (b) to section 56(2)(vii) was amended by the Finance Act, 2013 w.e.f. 01.04.2014 i.e. from Assessment Year 2014-15. As per the amended provisions, where an individual or HUF receives in any previous year any immovable property for a consideration which is less than stamp duty value of such property, the AO can made addition of the difference between the stamp duty value and the consideration paid.

Prior to amendment by the Finance Act, 2013 there was no such provision under section 56(2)(vii)(b) of the Act to make addition in respect of consideration less than the stamp duty value. The scope of section 56(2)(vii) has been enlarged after amendment w.e.f. 01.04.2014. Since, in the present case, the agreement was executed on 31.03.2013 i.e. in the A.Y. 2013-14, the provisions of section 56(2) (vii)(b) of the Act as applicable to the A.Y. 2013- 14 would apply. The registration of agreement on the subsequent date would not alter the situation. The registration of agreement is a compliance of a legal requirement under the Registration Act, 1908. Thus, in the facts of case, the authorities below erred in invoking the provisions of section 56(2)(vii)(b)(ii) of the Act as amended by the Finance Act, 2013.

Now, in the given case, an agreement was entered on 31.03.2017 i.e. in the A.Y. 2017-18. As per the provision inserted in section 56(2)(x)(b) (B) of the Act through the Finance Act, 2018, if the consideration of immovable property is less than the stamp duty value then, the difference of the same shall be chargeable to tax under section 56(2)(x) of the Act.

The said amendment is applicable with effect from 01.04.2019 i.e. from the A.Y. 2019-20. If the ratio of the above decision of Mumbai ITAT is applied to this situation, then, it is to be concluded that as the agreement for purchase of immovable property is entered in the A.Y. 2017-18, the provisions applicable for such year has to be applied to this transaction and the amendment made with effect from 01.04.2019 i.e. from A.Y. 2019-20 will not have any impact on the same.

Conclusion:

Section 56(2)(x) of the Act is a special deeming provision which can be attracted only in respect of those transactions which resulted into the tax evasion and rolling of unaccounted income. The legislature never intended to tax the transactions under section 56(2)(x) of the Act which entered in the normal course of business or trade, the profits of which are taxable under specific head of income. Thus, the provisions of section 56(2)(x) will not have any application to the genuine transactions which fall under the legal parameters of the said section.

The term “Trust” is defined as “an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner” (Section 3 of the Indian Trust Act 1882).

A trust can be a private trust or a public trust. The current article is addressing taxation and compliance of Public Charitable or Religious trust.

The NGO / Trust operate for the benefit and upliftment of the people of the area in which they operate. They play a substantial role with the government in the development of the oppressed class. They are partners of the government in the economic development of the country.

The concept of “Dan” in Hindus or “Zakat” in Muslims is a way of life. It is a belief that the portion of one’s income should be donated for those who are less privileged. Thus in order to see that the funds which are set aside as donation year on year are utilized properly trusts/NGO’s are formed.

The operation of trusts/NGO has become difficult due to the need for increased compliance. There are huge number of amendments to the provisions governing trusts/ NGO’s. It was therefore felt that a comprehensive note be prepared to understand the law governing trusts/NGO’s. Lot of tax professionals avoid trust work due to the trusts incapability to pay market rate of professional fees, however the same has changed and the trusts today are ready to pay professional fees for the complex compliances thrust on them by the government whom they are helping.

Formation of trusts and their Registration.

A public trust can be formed by two or more

persons and is governed by the Bombay Public Trust Act in state of Gujarat and Maharashtra and by the provisions of section 92 of the Code of Civil Procedure, 1908. The NGO’s are also formed as section 8 companies under the Companies Act 2013 or a society under the State Co-operative Society Acts. However, formation of society would require seven members to form a society(Maharashtra).

A trust needs to be formed by a settlor with the first trustees through a trust deed. A trust/ NGO has to be registered before it can start operations. The registration process would differ based on the Act under which the trust is seeking registration (Bombay Public Trust Act/ Companies Act as a section 8 company or under the Co-operative Society Act of the state).

Taxation of Trusts under the Income Tax Act

The Income Tax Act 1961 provides for special

provisions to tax trusts operating for charitable and religious purposes. The intention initially seemed to be to monitor the trusts/NGO operation and give exemption if they are doing charitable or religious work. The sections of income tax which govern the trust taxation are as under

SECTION EXPLANATION
Section 2(15) Definition of Charitable purpose
Section 11 Exemption from taxation of income applied for charitable and religious purpose subject to conditions
Section 10(23C) Exemption for certain Charitable or religious trusts subject to registration and conditions similar to section 11 above.
Section 12, 12A, 12AA, 12AB Registration of Trusts/ NGO’s under the Income Tax Act to claim benefit under section 11
Section 13 Section 11 not to apply in certain cases
Section 80G(5) Deduction from Income for Donor at 50% of the eligible amount of the income donated.
Section 115BBC Anonymous Donation to be taxed in certain cases
Section 115TD Tax on accumulated Income(assets) on cancellation of registration
Section 115TE Interest for nonpayment of tax under section 115TD.

*Besides above section 164 talks about charge of tax on trust income

Charitable Purpose-2(15)

Section 11 to 13 of the Income Tax Act 1961 is a code in itself. Section 11(1) provides ”any income, profits and gains derived from property held under trust wholly for religious and charitable purposes shall not be included in the total income”. The exemption is allowable subject to certain conditions. Thus the definition of Charitable purpose is important as only income from property held for charitable purpose is exempt.

“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:”

The definition has a proviso which was introduced from 1-4-2009 and further amended from 1-4- 2016, the proviso puts restriction on the activity of “the advancement of any other object of general public utility” by restricting the activity in the nature of trade, commerce or business for a cess or a fee or any other consideration unless the activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility and the total receipts from such activity is less than 20% of the total receipts.

It is stated that the intention was to prevent trade association and chamber of commerce from claiming exemption as charitable institutions. It was to reverse the decision of Supreme Court in the FICCI case.

The supreme court while considering the proviso in the case of India Trade Promotion Organization vs Director General of Income Tax 250 Taxman 97 held that “in deciding whether an activity is in the nature of trade, commerce or business as used in the first proviso to section 2(15) it has to be examined whether there is an element of profit making. Expression, Charitable purpose cannot be construed literally and in absolute terms. Correct interpretation of the said proviso would be that it carves out an exception and that exception is limited to activities in nature of trade, commerce or business. Thus if dominant and prime objective of the institution is profit making and activities are directly in nature of trade, commerce or business or indirectly in rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its objects to be a charitable purpose.”

One should also look at Circular No. 21/2016 dated 27-5-2016 where CBDT clarifies that temporary excess of receipts beyond the specified cut off in the year may not necessarily result in cancellation of registration. It is to be noted a literal interpretation of the proviso would lead to an unintentional result where old age homes run by a charitable trust would loose exemption under section 11 and therefore a purposive interpretation as laid down in India Trade Promotion Organization vs Director General of Income Tax has to be done.

Education-Issue and controversies.

There is also a dispute as to what constitutes “education”. The term should refer only to structured education courses approved by a university or an education board or would include in its fold the generic meaning of education starting from birth to death of a person. Sole Trustee Lokshikhshan Trust vs. CIT 101 ITR 234 the Supreme Court has taken a narrow meaning of the term education. However in the later decisions in the case of CIT vs. Thyaga Brahma Gana Sabha 52 Taxman 395 the Madras HC has taken a view that the raising the artistic taste of the country by public performances of dramas, musical programs etc. would be educational purpose. However if the trust is formed for earning profits through educational institutes on commercial lines then the deduction needs to be denied (Dawn Educational Charitable Trust 233 Taxman 204 where it was running a posh school for the elite on commercial lines) however I am of the view that the said decision needs reconsideration as otherwise all IB schools running as a trust all over India would get their exemptions revoked, one should look at the privy council decision in case of Trustees of the Tribune Trust 7 ITR 415 where it was held that the concept of providing free or concessional rate is not required for general public utility only object of private gain should be absent. Yoga classes on regular basis is held to be education activity under DIT vs. Patanjali Yogpeeth (NYAS) 87 taxmann.com 54 (DEL). Also one should read the case of Director of Income tax vs. Bharat Diamond Bourse (2013) 126 Taxman 365(SC) in which case majority of the objects were charitable and some ancillary objects were not charitable.

Registration under section 12A or 12AB. The provisions for registration of trust under the Income Tax Act has seen a see saw. It initially required renewal every few years and then in 2009 all trusts having valid registrations were told that the same was perpetual and no more renewal was required. The Finance Act 2021, reintroduced the need for all trusts to register themselves under section 12A within a period of three months. However this time was extended regularly due to covid-19 pandemic and the deadline expired on 31st March 2022. Thus all trusts which were registered earlier and who have not taken registration under the new online system, their registrations are cancelled and the consequences under section 115TD would follow.

The online registration process was a simple process where the trust was required to file a form with details attached in PDF form listed below:

  1. The registration under the state charity commissioner office/ Companies Act/ State Co- operative Society act.
  2. Trust
  3. The Old 12A registration
  4. Details of Trustees giving address, PAN NO and other details.
  5. The last three years accounts and audit report with schedules.
  6. The 80G certificate and FCRA certificate if

The registration was granted either for a provisional period of three years or for a regular registration for a period of five years under section 12AB. The entire process was online without any human intervention and the department has issued certificates in almost all cases where application was made. The said certificates have been issued with specific conditions for registration and one should read the same as the registration is subject to these conditions.

One should note that the department has started sending messages to trusts who have been issued provisional registrations for three years to file form 10AB which was to be filed within six months of the commencement of activity by a new trust or within six months of the provisional registration coming to an end whichever is earlier. The difficulty arises as in certain cases where the existing trusts who had registration in earlier section are also given provisional registration which were to be issued to new trusts. The CBDT has issued circular No. 11 of 2022 dated 3rd June 2022 rectifying this mistake unilaterally and making all such registrations regular registration and also removing all conditions of registration which were not as per the provisions of the Income Tax Act “Null” by this circular.

Cancellation of registration.

The earlier power of cancellation of registration under section 12A was provided under sub clauses (3) and (4) of section 12AA. However from A.Y. 2022-23 the power to cancel registration are provided under section are provided under sub clause (4) section 12AB. The said sub clause provides for Principal Commissioner to call for information and then cancel the registration in the following cases.

  1. The Principal Commissioner has noticed occurrence of one or more specified violations* during the previous year.
  2. The Principal Commissioner has received a reference from the Assessing officer under the second proviso to sub section (3) if section 143 for any previous year.
  3. The case has been selected in accordance with risk management strategy, formulated by the Board from time to time for any previous year.

The Principal Commissioner after calling for information and giving an opportunity to the trust to explain, may either cancel the registration or refuse to cancel the registration and send the copy of the order to the Assessing officer of such trust or institution.

*The section provides for the specified violation in the explanation to the section

  1. Where any income of the fund or institution or trust or any university or other educational institution or any hospital or other medical institution has been applied other than for the objects for which it is established; or
  2. the fund or institution or trust or any university or other educational institution or any hospital or other medical institution has income from profits and gains of business, which is not incidental to the attainment of its objectives or separate books of account are not maintained by it in respect of the business which is incidental to the attainment of its objectives; or
  3. Any activity of the fund or institution or trust or any university or other educational institution or any hospital or other medical institution—
    1. is not genuine; or
    2. is not being carried out in accordance with all or any of the conditions subject to which it was notified or approved; or
  4. the fund or institution or trust or any university or other educational institution

or any hospital or other medical institution has not complied with the requirement of any other law for the time being in force, and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.

The Principal Commissioner is required to pass an order either cancelling the registration or an order refusing to cancel registration within six months from the end of the quarter in which the first notice is issued.

Income of the trust and its taxability.

Income for a trust has to be determined in the normal commercial sense for claiming exemption under section 11. Income arising from the property held by the trust for charitable or religious purpose is the income of the trust. It will include the interest, rent, capital gain on sale of property, voluntary contributions or other receipts from incidental business activity. Income would also include voluntary contributions received by the trust. [Section 2(24) (ilia)].

The different types of incomes are to be considered as per the method of accounting followed by the trust. However, if the income has not accrued and due the same cannot be included even if the entries are passed in the books of accounts. The mere book entries cannot make the income taxable. (CIT vs. Chamanlal Mangaldas Girdhardas Parekh Ltd 39 ITR 8, CIT vs. India Discount Co. Ltd 75 ITR 191, CIT vs. Toshoku Ltd 125 ITR 525) It is also to be noted that the classification of income under section 14 in to various heads of income is also not applicable to the trust affirmed by CIT vs. Rao Bahadur Calavala cunnan Chetty Charities 135 ITR 485.

The trust receive subscriptions, entry fees or life membership fees in certain cases, these would also be treated as income from property held by the trust. (CIT vs. Cotton Textiles Export Promotion Council 67 ITR 539, CIT vs. Divine Light Mission279 ITR 639, CIT vs. WIAA Club Limited 136 ITR569). Similarly, government grants received with specific conditions like payment of salary or other specific uses are also treated as voluntary contribution and to be included in income (Gem and Jewellery Export Promotion Council 143 ITR 579). We will deal with the allow ability of the 15% under section 11(1) (a) on the said grants separately when we deal with the application of funds.

Corpus Donations.

The voluntary contributions included in income would also include contributions received with specific direction that they shall form part of corpus. The said corpus donations(contribution with specific instructions) are to be excluded from the income of the trust under section 11(1)

(d) subject to the conditions that the same are invested or deposited in one of the modes listed in section 11(5) (this condition is included from the Finance Act 2021 and is applicable from A Y 2022-23). The provisions are applicable from 1-4-2022(A Y 2022-23) and would not apply to old corpus donations taken and used over the years. We will deal with the application of the corpus donations in the following paras as the use of corpus donation is not regarded as application of income.

Anonymous Donations.

Section 115BBC was introduced from A Y 2007-08 The term Anonymous donation is stated to be any voluntary contribution under section 2(24)(iia) “where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed”.

The said section provides that the trusts or NGO’s registered under section 11 or under section 10(23C) [sub clauses (iiiad), (iiiae), (iv), (v), (vi), (via)] receives anonymous donations higher of 5% of the total donations or Rs 1,00,000/-, would be taxed at 30%.

The said provisions do not apply to trust which have been established wholly for religious purposes or for both charitable and religious purposes.

Gain from transfer of Capital Asset.

The transfer of a capital asset by a trust is covered by section 11(1A). The section provides that if the trust transfers a capital asset held for charitable and religious purpose and the whole or part of the net consideration is used for the used for acquisition of new capital asset, then the capital gains are deemed to have been applied for Charitable and religious purpose.

The term capital asset is not defined under section 11(1A) and as per the Calcutta High Court in the case of CIT vs East India Charitable Trust 206 ITR 152 the definition of capital asset under section 2(14) can be used to ascertain what is a capital asset.

There is no time limit for investment of the net consideration of capital asset, however it should be done by the end of the financial year. One should look at the judgment of Trustees of Dr. Sheth Charitable Trust vs. Seventh ITO 2 ITD 649 in this case the capital asset was sold at the fag end of the year and the investment in new asset was made in the following year after six months, the tribunal held that the benefit of section 11(1A) could not be taken as the trust had not availed the option of accumulation under section 11(2),

It is also not important that the capital asset should be held by the trust for a specific period. It is possible that the asset is sold and a new asset is bought and the said new asset is sold and a third asset is bought still the gain will be deemed to be invested. However if the asset is not available and the new asset is also sold then the gain cannot be said to be reinvested. Dalmia Charitable Trust vs. ITO 27 Taxman 46 (Mag)

Restriction on Investment of Trust funds.

Section 11(5) provides for investment instruments

in which a trust can invest. The said section was introduced from Finance Act 1983. In section 11(2) discussed below and also corpus donations under 11(1) (d) are to be invested in securities listed in section 11(5). The intention is to not allow the use of trust funds to be invested in any high risk instrument. The section provides clauses (i) to (xi) where various instruments are listed and clause (xii) provides for any other form or mode which may be prescribed, Rule 17C provides other list of instruments in which investments can be made.

The section 13(1) (d) provides for forfeiture of exemption under section 11 and 12 if the investment are not made as provided under section 11(5). The said withdrawal of exemption will lead to the taxation of such income at maximum marginal rate. However, would it lead to the withdrawal of exemption for the entire income or would it be restricted to the income from such investment not under section

11(5). It is to be noted that all the high courts have held in favor of trust/ NGO and held that the tax would be levied only on the income from assets which are not held in the manner specified under section 11(5) and the other income would continue to enjoy the benefit. [DCIT vs. Sheth Mafatlal Gaganbhai Foundation trust 249 ITR 533(BOM), CIT vs. Fr. Muller Charitable Institutions 363 ITR 230(KER), CIT vs. Santokha Durlabhi Trust Fund 406 ITR 457 (RAJ), also CBDT issued Circular No. 387 dated 6th July 1984 accepting that only part which is earned by violation of section 11(5) will be taxed at maximum marginal rate]

New Compliance from 1-4-2022 for voluntary contributions received.

The section 80G (5) along with section 35(1A)

has been amended and all trust/NGO’s have to now file a form 10BD annually providing details of donations received by them from A Y 22-23. The said form is in the same lines as the TDS return filed by assesse and on filling of the said form the trust/NGO will be able to download the form10BE which he can issue to a donor. The said form requires details of the donor to be uploaded. The list of details to be uploaded are as under

  • Name of the Donor
  • Address of the Donor
  • Nature of Donation
  • Mode of Receipt
  • Amount of Donation
  • Section code under which donation was received
  • PAN NO / Aadhar / Tax Identification Number of donor

This process of uploading details will remove any bogus claim as all deduction claim under section 80G will be cross tallied by the statements filed by the trust/NGO.

The said form 10BD is an annual statement and the same was to be filled for the first time for March 2022. The due date for the filling of the said form was 31st May 2022. The PAN details are a must to file the form. The details filed late would have to pay a fees of Rs 200 per day(Section 234G). The fees is also payable if you amend the form to add a donor detail which you have missed in the first filling. This is a deviation from the Section 234E where the TDS return amendment after filling the return on time would not entail late fees. This does not seem to be the intention of the section but the system in the present levies this late fee on trust. This online filling for charitable trusts would lead to a situation where if there is any discrepancy in the amount of donation received and the amount filed in the form 10BD would be held to be anonymous donation and taxed at 30%.

Application of Income.

Section 11 provides that a trust or a NGO should apply its income for the objects of the trust/ NGO to claim exemption. It provides that the trust/NGO should spend 85% of its income for Charitable and Religious objects as per the trust deed or the Formation document like the memorandum or the bye laws. (Section 11(1) (a). The emphasis is on the application of income and it includes both revenue and capital expenses. The entire capital expenses can be claimed as application of income. The term application in common parlance would mean amount spent. However, the term under section 11(1)(a) has a wider meaning as held in the following cases CIT vs. George Forane Church 170 ITR 62, and CIT vs. Radhaswami Satsang Sabha 25 ITR 472. The Allahabad High Court in the Radhaswami Satsang Sabha had held that the amount irrevocably earmarked and allocated for future spending is also application of income.

However the law has been changed from A Y 2022-23, explanation 4 has been added to section

11(1) which provides that the amount spend from corpus donation would not be allowed as application of income, similarly the amount spend from loan taken is also not allowed as application of income. However the amount which is there after deposited for replenishing of the corpus donations or repayment of loan amount will be allowed as application of income. The law has been further amended from A Y 2023-24 by Finance Act 2022 by providing that the application of amount has to be actually spent and the mere book entries based on accounting system followed by the trust/NGO will not be allowed as application of income. (Explanation added after section 11(7).

The explanation to section 11(1) provides that the donation given by one trust to the other trust as corpus donation will not be allowed as application of income. Similarly application of funds in violation of 40A(3)[payment above Rs 10000 in cash] or 40(a)(i)/40(a)(ia) [Payment without deducting TDS as per law] is not held to be application of income.

The trust/NGO is restricted from taking depreciation on the assets where the entire amount is taken as deduction as application of income under section 11(1) (a). (Section 11(6) from A Y 2015-16. However if the trust chooses to claim the depreciation instead of the whole amount of the asset the same can be opted by the trust. However, the system I designed in such a manner that the 143(1) processing auto adds the depreciation and one would then have to struggle to get the intimation rectified.

The trust /NGO which is registered under section 12AA or 12AB is restricted from taking exemption under section 10 of income earned by it and for which deduction is taken under section 11. Prior to this amendment in A Y 2015-16 there were trusts who were taking exemption under section 10 for dividend income earned by it and thus were avoiding spending money from the trust. Many trusts surrendered their registration after the introduction of the said provisions.

Taxes Paid and Refund of Income Tax One of the common question which is raised is the tax paid by trust is it an application of income. The answer is yes, similarly is the refund of income tax refund received is it an Income. There are conflicting decisions on this issue and the reconciliation of the same is that if the tax paid is taken as application then the refund is to be taken as income, if it is not taken as application then the refund would also not be taken as income.

Option to apply the amount in the following year-Deemed application of funds.(Deemed Application of income) The trust may not be able to apply its income towards the objects due the fact that the amount is not received by it. (Interest accrued but not received, or rent accrued but not received from tenant due to Covid 19 pandemic)

The trust in such a case has an option to not take the amount as application and spend it as an when received by it or in the following year. [Explanation 2 to section 11(1)] There need not be any reason for not using the amount in the current year, so it is possible that the amount is received but the trust is not able to use it. The trust has an option to use it in the following year. If the non use of the amount is due to trust not receiving the amount, then the trust will have to take it as income in the year in which it is actually received, for example a cumulative fixed deposit of five years where the amount is to be received only in the fifth year in this case the trust will be able to use the fund in the fifth year when the money is received.

However the trust is required to file form 9A online before the due date of filling return in order to claim exemption from application of the above amount. Non filling of the above form would lead to the income being taxed as there is no application of income.

Condonation of delay in filling forms. The CBDT has issued a Circular No. 7/2018 dated 20-12-2018 for A Y 16-17 and Circular No. 19 of 2020 dated 3rd November 2020 for A Y 17-18 and A Y 18-19 for the condonation of delay in filling the above form 9A, 10, 10B and form 10BB as the same was made online and the trust may not be aware of the process. One can apply for the condonation of the delay in filling form to the Director of exemption (Income Tax) if in Mumbai or the Principal Commissioner (PCIT) having jurisdiction on the trust. However the notification of 2020 only allowed PCIT to condone delay upto 365 days, however recently by circular no. 15, 16 & 17 dated 19th July 2022, the PCIT has been allowed to condone delay upto three years for A Y 18-19 onwards. The trust who have not filed the forms and the delay is more than three years may apply to the CBDT under section 119(2)(a) for condonation. The CBDT should have allowed the PCIT to delay any delay by the trust without giving a cap on the period of delay, as the non filling of forms is a venial fault and it cannot be anyone’s case to punish the trust for this venial default. The PCIT always have the discretion to reject a malafide or fraudulent delay in filling forms.

Deemed Application by Accumulation for Project.

The trust/NGO can accumulate amounts for a

project or for particular activity of the trust for a period of five years and the said accumulation will be deemed to be an application of the income.

The trust/NGO is required to complete the project or activity from the accumulation in the five years available.

The project for which accumulation is to be made needs to be specific and can be more than one project, however there are contrary views on the singular or plural objects. Kolkata HC in CIT vs. Trustees of Singhania Charitable Trust 199 ITR 819 (against) it has held that there can be only a singular object. However the Del HC has consistently held that the objects could be plural. (CIT vs. Hotel and Restaurant Association 261 ITR 190, DIT(exemp) vs. Eternal Science of Man’s Society 290 ITR 535, Mamta Health Institute for Mothers and Children 293 ITR 380.

However accumulation by simply stating “for the objects of the trust” is held to be inappropriate and the deemed application of the accumulation is not allowed. (DIT vs. Mitsui and Co. Environmental Trust 303 ITR 111)

Conditions for claiming the Deemed Application

  • The said amount is to be kept invested in any of the modes specified under section 11(5).
  • The trust/NGO has to also file form 10 online to the assessing officer before the due date of filling return of income under section 139(1).

The object for which the accumulation has been done may be changed by an application to the Assessing officer if due to any reason the object for which it is set aside cannot be achieved. (Sub section 3A of section 11)

The amount accumulated will become income of the trust/NGO if the

  1. Income is applied for purposes other than the Charitable or religious objects.
  2. Amount ceases to be invested in any of the modes specified under section 11(5).
  3. Not utilized for the purpose for which it is accumulated with in the five years. (Income of the sixth year)
  4. Credited or paid to any other trust registered u/s 12AA or having exemption under 10(23C).

The said provision has been amended and from A Y 2023-24, prior to A Y 23-24 the trust would be liable to be taxed on the accumulation in the sixth year after completion of five years, however the amount not spend will be the income of the fifth year itself after the amendment.

Restriction on use of funds for specifiedpersonsn-(S.13)

Section 13(1) sub clause (a) and (b) denies benefit of section 11 and 12 to income used for the benefit of Private Religious purposes (Ghulam Mohidin Trust v CIT 248 ITR 587(J & K) or for the benefit of any particular religious community or caste. Gujarat High Court in CIT vs. Girdharram Hariram Bhagat 154 ITR 10 has discussed the distinction between public and private endowments or trusts.

“A religious endowment may be either public or private. A public religious endowment necessarily implies that it is a dedication of property for the use or benefit of the public, while on the other hand a private religious endowment is a dedication of property for worship of the family GOD in which public is not interested.” In Rajkot Vishw Shrimali Jain Samaj v ITO 292 ITR (AT) 222 (Rajkot) it was held that the benefit need not be to the entire public and may be available to a specified section of the public

Application of funds for Specified Persons

It further under sub clause (c) blocks any benefit of the trust property or income from such property being used for the benefit of the specified persons* or its relatives as defined in sub section (3) of section 13 read with explanation 1 and 3.

Person includes “another trust” (Champa Charitable trust) vs. CIT 214 ITR 764(BOM). This restriction is intended to ensure that, despite the ostensibly charitable objects of a trust or institution, its income is not diverted away to benefit persons who are closely connected with the creation, establishment and conduct of the trust and or institution.

In DIT vs. Bharat Daimond Bourse 259 ITR 280(SC) the institution established for charitable purposes advanced Rs 70 Lakhs to one of its office bearer (honorary secretary) without interest or with any security or without any agreement. Since the borrower belonged to the prohibited category within the meaning of section 13(3)(a) and 13(3) (cc) the income of the institution will be deemed to have been applied for the benefit of the prohibited category of person and consequently the benefit of section 11 was lost to the institution.

The benefit to specified persons should not arise directly or indirectly and the violation of the said clause would lead to the cancellation of benefit to the entire income of the trust except in the cases covered under sub section 4 and 5. (Welfare and Awakening in Rural Environment vs. DCIT 263 ITR13) However, the Delhi High Court rightly held

that only the dividend income would be liable to tax where the shares were held by the prohibited category mentioned in S. 13(3). (CIT vs. Narinder Mohan Foundation 311 ITR 425)

Investments in violation of 11(5)

The sub clause (d) of section 13(1) denies benefit of section 11 to income generated from investments made in any instrument not specified under section 11(5). The intention is to restrict investment in other than specified instruments. There is exemption and time period provided for those holding such investment from prior to 30th November 1983 when section 11(5) was introduced. This concession was extended till 31st March 1993. Further, there is an exception provided for such assets which are part of corpus of the trust or institution as on the 1st day of June 1973.

The violation of section 13(1) (c) being benefit directly or indirectly to specified persons the entire exemption under section 11 will be denied, however if there is a violation of 13(1)

(d) by investing in instruments other than those specified under section 11(5) then only the income from such investment would be taxed and the entire income would not entire trust income.

*The specified person in section 13(3) are listed below

  • The author of the trust or the founder of the institution;
  • Any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees;
  • Where such author, founder or person is a Hindu undivided family, a member of the family;

(cc) any trustee of the trust or manager (by whatever name called) of the institution;

  • Any relative of any such author, founder, person, member, trustee or manager as aforesaid;
  • any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and

(d) has a substantial interest.

The explanation 1 defines the term relatives of the specified persons and explanation 3 provides that person shall be deemed to have substantial interest in the concern if he hold more than 20% of the voting rights or is entitled to 20% of the profit sharing ratio. However the above does not include the employees of the specified persons (Tata trust 203 ITR 764). It also does not include the manager of the specified persons (CIT vs. Rai Bahadur 252 ITR 84).

Deemed Violation

The sub section (2) of section 13 provides for a list of transactions which are deemed to have been used for the benefit of persons under section 13(3) if they are not entered on the principals of arms length. The list from to (h) is illustrative and not exhaustive. The nature of transaction and the facts in each case would have to be considered before one concludes that there is a violation of 13(3) [Shree Poongalia Jain Swetamber Mandir vs. CIT 168 ITR 516(RAJ)].

Onus: – Although the burden to prove exemption is on the assesse the burden to prove exclusion from exemption is on the revenue.

It is the duty of the revenue to prove beyond doubt with necessary materials and documents that a particular trust cannot avail the exemption under section 11 and falls under the ambit of S. 13 (CIT vs. Kamala Town Trust 279 ITR 89)

Taxation of Net Assets on Cancellation of Registration (S.115TD)

The said section was introduced from Finance Act 2016 from 1st June 2016. It is intended to tax the accreted income at maximum marginal rate if the trust has

  • Converted into any form which is not eligible for grant of registration 98[under section 12AA or section 12AB];
  • merged with any entity other than an entity which is a trust or institution having objects similar to it and registered 98[under section 12AA or section 12AB] ; or
  • failed to transfer upon dissolution all its assets to any other trust or institution registered 98[under section 12AA or section 12AB] or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub- clause (via) of clause (23C) of section 10, within a period of twelve months from the end of the month in which the dissolution takes place,

The accreted income is to be calculated at the market value of assets less the liabilities of the trust related to the assets which are available, the liabilities with regard to the assets already disposed are to be ignored.

The section would not come in to operation if the trust has filed an appeal against the rejection of the registration or has applied for the registration after the amendments to the objects. The application of the section seems to be to cases where there was malafide intention to form trust which were charitable and then to convert the said trusts in to non-charitable and enabling the trustees to enjoy the benefits of the assets which are not taxed.

The above section though introduced in 2016 there has been no amendment in the definition of income under section 2(24)-Income to include taxation of such accreted income. This is important as there is serious doubt as to whether the definition of income in the normal course would include such accreted income. The provision needs to be tested in the court of law with regard to the power to tax accreted income.

Choosing between S. 10(23C) and S. 11 The provisions of Section 10(23C) have been amended to bring the provisions of the said section in line with provisions of section 11. The need to take registration and also regular renewals, utilization of funds, to keep the funds invested in specified securities under 11(5) and restrictions for corpus donations utilization are all similar. However one has to choose between section 10(23C) and exemption under section 11, each trust will have to take in to account advantages and disadvantages before choosing one under which it wants registration. It is felt that the requirements and restrictions are more onerous under section 10(23C) but one has to look at the facts of each case before deciding.

Latest Development

The Finance Act 2022 had amended the section 11 to provide that books of accounts will be maintained by the trust. There was also power taken to notify the books of accounts to be maintained by the trust. The CBDT has notified the books of accounts to be maintained by the trust vide notification G.S.R. 622 dated 10th August 2022. The said notification gives a detailed list of both books and statements and records to be kept by the trust for 10 years. The said notification has made the job of trust doing charities further difficult as there is no threshold limits and small trusts will also have to maintain the entire records as stated in the notification.

The CAG has recently tabled a report on the NGO and trusts before the parliament for returns filed with income tax from A Y 2014-15 to 2017-18. The CAG has brought the attention of parliament towards the various violations by IT department and also by the trusts and the advantages taken by the NGO/ trust which according to them were to not to be granted.

There is a list of suggestions made by CAG which are likely to be brought in to the act by the next budget knowing the Government’s policy of zero tolerance for tax leakages. The report makes interesting reading. What is surprising is that the violation reported by the CAG is for a handful of cases and still there is a recommendation for amendment of the law. In one case of violation or misuse of 15% concession in spending of income received was misused by four trusts in Maharashtra. They donated funds from one trust to another and the 15% benefit was taken by all the four trusts who got the money from the previous trust. This was an aberration of the normal Nobel activity carried out by trust in general and still there is a recommendation to amend the law to not allow donation from one trust to another. The GAAR enacted under the Income tax Act 1961 (Section 96 to Laws cannot be made for exceptions. However over the years this basic principal of law making is missed by the governments. Some of the suggestion are to amend the Form ITR 7, Form 10B and other such suggestions which would lead to more compliance and running of a trust a compliance nightmare.

Conclusion

The compliance for charitable and religious trusts have increased over the years. Besides the compliance under the Income Tax Act, the trust needs to do compliance under the Bombay Public Trust Act / Companies Act/ Society Act. The audit and filling under those laws have also increased. The trust would be further burdened with the FCRA (Foreign Contribution Regulation Act) if it wants to receive donations or contributions from out of India. The process of doing charitable activity is not charitable anymore and the trustees and founders run the risk of being penalized and imprisoned for any error which they may make in the process of work. They should be a determined lot or crazy lot to take on such a daunting task and I on my part salute there efforts to do good work in spite of the hurdles and road blocks which keep increasing from time to time. They are really the “Sevaks” or “Heros” who need to be applauded and recognized by all.

In the digitally aided fast paced world of today intangibles have become a very important part of tax planning of Multi National Enterprises (MNE’s). Specifically, research and scientific activities have become a very important of tax base planning at a group level for multinational enterprises. Whether we look at Alphabet, or Meta or Apple or Amazon or Sandoz or Pfizer the ilk. A very important stream of shareholder ’s residual money is from the effective tax rate that is finally applicable to shareholders. Intangibles are invariably the result long periods of research and development, whether it be IP or marketing intangibles or any other, it is a well-known fact that MNE’s today of any significant size are putting in lot of capital in Research and Development.

Although the term “Research and Development”(R&D) has not been specifically defined under the Domestic Tax Laws, yet all entities in India are entitled to deduction for research and development expenses. A definition of the term Research and Development has not been incorporated into the Income Tax Act per se but Scientific Expenditure as defined u/s 43(4) of the Income Tax Act 1961 “Scientific Research’ means any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries;” (Deputy Commissioner of Income-tax (Asstt.) vs Mastek Ltd. (Gujarat High Court) Tax Appeal No. 242, 243 AND 263 OF 2000), which is more or less analogous with what a definition of R& D could be.

In the domain of International Taxation, it is generally the MNE’s who engage in research and development activities and they generally represent significant elements of cost, which are invariably in the domain of section 92C viz under and arm’s length price.

Explanation(i)(d) to section 92B provides that scientific research would be covered under the ambit of international transactions.

Section 92C inter alia provides for allocation of profits between associated enterprises on the basis of six approved methods

  1. comparable uncontrolled price method;
  2. resale price method;
  3. cost plus method;
  4. profit split method;
  5. transactional net margin method;
  6. such other method as may be prescribed by the Board.

For the sixth portion Rule 10(AB) prescribes as follows “10AB. For the purposes of clause (f) of sub- section (1) of section 92C, the other method for determination of the arm’s length price in relation to an international transaction 91[or a specified domestic transaction] shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.]”

However, it is interesting to note that neither the rule nor the section provides for any preference to any method or any guidance on how and which criteria to use for an appropriate selection for transfer pricing. Furthermore, there was no clarity on what was the position of the state in matter of risk allocation as such.

The CBDT on its part came out with a circular number 06/2013 [F NO. 500/139/2012], DATED

29-6- 2013 for the purpose. It clarified Inter alia amongst others that

“The Research and Development Centres set up by foreign companies can be classified into three broad categories based on functions, assets and risk assumed by the centre established in India. These are:

  1. Centres which are entrepreneurial in nature;
  2. Centres which are based on cost-sharingarrangements; and
  1. Centres which undertake contract research and development.

While the three categories are not water-tight compartments, it is possible to distinguish them based on functions, assets and risk. It will be obvious that in the first case the Development Centre performs significantly important functions and assumes substantial risks. In the third case, it will be obvious that the functions, assets and risk are minimal. The second case falls between the first and the third cases.”

In particular the circular clearly outlines that there is some leeway between all the three types and in particular the second type will have characteristics of both the first and second types. In the same circular the CBDT has noted the preference of the assessee to perform TP using the Transactional Net Margin Method (TNMM) as opposed to other more simpler traditional methods by classification of the R&D provider as a contract R&D provider with an insignificant risk. The CBDT then delves forward to provide for a guidance on how the same should be tackled in particular with reference to for identification of the Development Centre as a contract R&D service provider with insignificant risk.

The steps are outlined as below

  1. The Foreign principal assumes most of the risks associated with the research and development and uses the Indian associated enterprise as a toll manufacturer, and the employees or associated companies of the Foreign Principal also remunerate the employees or the associate enterprise to carry out the tasks entrusted by the Foreign Principal.
  2. The foreign principal or its associated enterprise(s) provides funds/capital and other economically significant assets including intangibles for research or product The personnel and other resources are also remunerated by the foreign Principal or is Associated Enterprises for the work done at the Contract R&D centre.
  3. The Foreign principal exercises direct control and supervision over the R&D center, not only contractually but functionally too.
  4. The contract R&D centre doesn’t take over any significant economic risk both contractually and functionally.
  5. The Foreign Principal of the R&D centre isn’t located in a tax haven or a low tax
  6. The R&D center doesn’t have any control over the final product and is contractually obligated to pass on the final product and any incidental benefits to the Foreign

It is only if all the criteria above are met that the R&D centre would be considered a low risk entity. The assessing officer shall be free to allocate the TP method considering all the facts and circumstances of the case.

Thus the regime of R&D as a contract toll manufacturer is well defined as per Indian Tax Laws.

GAAR regime will apply in case of R&D centres as well, so anti abuse rules would take an important part in determination of profits to be allocated to R&D centres.

Although, establishing R&D Centers by the way of PE is not illegal, they are generally not established as a PE just owing to the fact that it creates complications in the structure and tax compliance. Furthermore, it is highly likely that the Department of Scientific and Industrial Research would accord any recognition to it, and thus by extension no incentives might be provided to it. Therefore, it would make sense to incorporate and entity for R&D centres.

Super deductions u/s 35 are generally not available to PE’s , it might be made available for in case if some contribution is made to an approved scientific research association being an Indian Entity. Such a super-deduction would generally not be available to the PE if the contribution is made to a non-resident.

In India, certain R&D incentives are available to products manufactured through use of IP owned or leased by Indian owned companies. Thus, accordingly any transfer of an IP to a low tax jurisdiction or a tax haven would lead to a denial of benfits. Further, transfer pricing regulations apply in the case of transfer of IP or the right to use IP between associated enterprises. There are no specific statutory anti- avoidance rules with respect to such transfer. Indian law has introduced GAAR applicable from 1 April 2015.

It might be also noted that India does not have any “patent-box” regimes existing.

Thus in the case of MNE’s in the Indian context it appears that Taxation for Research and Development centers is more about transfer pricing and proper allocation of method rather than other factors.

In case of Intra group facilities the OECD Transfer Pricing Guidelines accept the same as in para 7.41 “Research is similarly an example of an activity that may involve intra-group services. The terms of the activity can be set out in a detailed contract with the party commissioning the service, commonly known as contract research. The activity can involve highly skilled personnel and vary considerably both in its nature and in its importance to the success of the group. The actual arrangements can take a variety of forms from the undertaking of detailed programmes laid down by the principal party, extending to agreements where the research company has discretion to work within broadly defined categories. In the latter instance, the additional functions of identifying commercially valuable areas and assessing the risk of unsuccessful research can be a critical factor in the performance of the group as a while. It is therefore crucial to undertake a detailed functional analysis and to obtain a clear understanding of the precise nature of the research, and of how the activities are being carried out by the company, prior to consideration of the appropriate transfer pricing methodology. The consideration of options realistically available to the party commissioning the research may also prove useful in selecting the most appropriate transfer pricing method.”

Courts in India have on various occasions stepped in to determine what an arms length could be in matters of allocation of research and development costs, either intra group or intra company and that comparables in such cases should be strict. Some of which are enumerated below:

  1. DCIT [2022] 137 taxmann.com 246 (Bangalore – Trib.)[29-03-2022]
  2. Where selected company performed research and development activities, said company was not functionally comparable to assessee, manufacturer Continental Automotive Components India (P.)
  3. Where under Parent Subsidiary Agreement, assessee subsidiary Microsoft- India acted as a R&D service provider and parent Microsoft-USA supplied related intangibles and ownership right on outcome of research, vested with Microsoft-USA, assessee was a contract R&D service provider to Microsoft-USA – Microsoft India (R&D) (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle-16(2), New Delhi – [2018] 97 taxmann.com 360 (Delhi – Trib.)[14-09-2018]
  4. Where a company, engaged in carrying out research and development activities, had created large intangibles and earned revenue from different verticals, same was to be excluded from list of comparables to assessee-company, a captive service provider – Huawei Technologies India (P.) Ltd. v. ACIT ([2021] 133 taxmann.com 486 (Bangalore – Trib.)[22-07-2021])
  5. A)Where comparable company was engaged in product engineering, acquisition and development, consultancy and solutions and also undertook significant research and development operations, approved by government, it would not be comparable to assessee company engaged in provision of software development services. b) Where comparable company engaged in diverse range of activities, owned high brand value and had also incurred significant expenses in foreign currency, it would not be comparable to assessee company engaged in provision of software development services – Finastra Software Solutions (India) (P.) Ltd. v. ACIT – [2022] 135 com 308 (Bangalore – Trib.)[21-12-2021]
  6. A company engaged in pharmaceutical industry, having own intangibles, could be compared with assessee, rendering contract research and development service – Deputy Commissioner of Income tax, Circle-1(1) v. Akzo Noble Car Refinishes India (P.) Ltd ([2018] 90 taxmann.com 15 (Delhi – Trib.)[08-01-2018])
  7. Where assessee was providing software research and development services to its AEs, a company engaged in diversified activities of software development, consultancy, engineering services, web development and hosting, was incomparable to assessee b) Where assessee was providing software research and development services to its AEs, a company engaged in business of software products was incomparable to assessee c) Where assessee had two divisions viz, software R&D division and marketing support division, TPO was justified in apportioning unallocated cost between both segments of assessee while making segmental analysis of both divisions – Trident Microsystems India (P.) Ltd – [2019] 111 com 100 (Bangalore – Trib.)[26-07-2019]
  8. A company in business of clinical trial services is comparable to a company providing contract manufacture, contract research and development of drugs to its Associated Enterprises b) Where both comparables as well as assessee are situated in India, no adjustment of ALP on account of locational advantage is called for – PCIT vs. Watson Pharma (P.) Ltd. ([2018] 95 taxmann.com 281 (Bombay)/[2018]257 Taxman 65 (Bombay)[20-06-2018])
  9. SLP dismissed against High Court ruling that where services rendered by assessee were specialized and required specific skill based analysis and research that was beyond rudimentary nature of services rendered by a BPO, it was to be held services provided by assessee constituted functions of a KPO MC Kinsey Knowledge Centre India (P.) Ltd. v. Principal Commissioner of Income-tax, Delhi-6 [2019]102 taxmann.com 439 (SC)/[2019] 261Taxman 451 (SC)[04-02-2019]

Abstract

The Article aims at providing a detailed guide for advocates, chartered accountants, tax practitioners, tax officials and Taxpayers for addressing the notices issued under the new regime of reassessment proceedings which was introduced vide Finance Act, 2021 (2021) 432 ITR (St) 52 and certain provisions were amended retrospectively vide Finance Act 2022 with effect from April 01, 2021. The Article provides a 20-point checklist to be considered while addressing statutory notices under the reassessment regime to ensure that the reassessment proceedings are as per law. Violation of these checks could be challenged by filing a Writ Petition before the Hon’ble jurisdictional High Court. The Article considers important judicial pronouncements from the erstwhile reassessment regime, that shall, in principle, hold good in the new reassessment regime as well.

Table of Contents

Abstract

  1. Introduction
  2. Distinction between Old regime & New regime
  3. Validity of Notices
    • Notices issued between April 01, 2021 to June 30, 2021
    • Status of Assessees who didn’t file a Writ Petition
    • Impact of the decision of the Hon’ble Supreme Court
    • Notices issued on or after July 01, 2021
  1. Procedure for Reassessment
    • Notice received under section 148A of the Act
    • Order under section 148A(d) of the Act
    • Notice received under section 148 of the Act
    • Notice under section 143(2) read with section 147 of the Act
    • Draft Order under section 147 read with section 143(3) read with section 144B (xvi) of the Act
    • Order passed under section 147 read with section 143(3) of the Act.
  2. Dénouement

1. Introduction

The Finance Act, 2021 (2021) 432 ITR (St) 52 proposed to change the regime of reassessment by introducing section 148A of the Income-tax Act, 1961 (Act) with effect from April 01, 2021.

However, on account of the Nationwide Pandemic, The Taxation and Other Laws (Relaxation of Certain Provisions) Act, 2020 (2020) 428 ITR (St) 29, extended the last date for issuance of Notice under section 148 of the Act, i.e., the erstwhile reassessment regime.

The last date was extended from time to time; the CBDT on account of the second wave and disruption of normalcy, the vide Notification No. 20 of 2021 dated March 31, 2021, (2021) 432 ITR (St) 141 inter alia, extended the period of limitation for issuance of Notice under section 148 of the Act to June 30, 2021.

Therefore, the Notices issued after June 30, 2021 have to undisputedly follow the procedure laid down vide the Finance Act, 2021.

It is pertinent to note that several Writ Petitions are filed where the Ld. Asseessing Officers have not followed the due process of law while issuing the notices, failure to follow the principle of natural justice, proper obtaining sanction from wrong authority et cetera. Last year amassed a lot of litigation before various High Courts only on account of reassessment proceedings. An attempt has been made in this article to explain the new provision so that it may benefit the taxpayers as well as the tax administration.

2. Distinction between Old regime & New regime

In the new reassessment regime, the decision

of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO 259 ITR 19 (SC) appears to be included in the statute. In the erstwhile regime, where the assessee had to ask for a copy of the “recorded reasons” and file objections against the same which were disposed of by a speaking order. The same has been included in the statute as section 148A of the Act.

Further, the concept of “recorded reasons”, is substituted with information. The period of 4 & 6 years has been changed to 3 & 10 years with different pecuniary limits and other conditions. Et cetera.

There have been several amendments in section

148 to section 151A of the Act, including introduction of new sections like section 135A, 148B and section 151A of the Act. This Article is restricted to the procedural aspects of reassessment.

The new provisions pertaining to the procedure will be dealt with in detail in the later part of the Article

3. Validity of Notices
3.1. Notices issued between April 01, 2021 toJune 30, 2021

The issue of validity of Notices issued between April 01, 2021 and June 30, 2021 has been a subject matter of major litigation in the past year. More than 5000 Writ Petitions were filed across the country challenging the constitutional validity of the Notice issued under the section 148 of the Act.

The Hon’ble Chhattisgarh High Court in the case of Palak Khatuja v. UOI [2021] 438 ITR 622 (Chh)(HC) held that the Notices were valid and were covered by the Doctrine of Conditional Legislation.

Subsequently, the Hon’ble Allahabad High Court in the case of Ashok Kumar Agarwal & Ors v. UOI (2021) 439 ITR 1 (All)(HC) held the Notices to be invalid observing, inter alia, that a delegated legislation can never overreach any Act of the principal legislature.

Subsequently, the Hon’ble Delhi High Court in the case of Mon Mohan Kohli v. ACIT & Anr [2022] 441 ITR 207 (Del)(HC) Explanations A(a)(ii)/A(b) to the Notifications dated 31st March, 2021 and 27th April, 2021 which extended the period of issuance of Notices beyond March 31, 2021 are declared to be ultra vires the TOLA and are therefore the Notices issued under section 148 of the Act on or after April 01, 2021 are bad in law, and null and void. The revenue is permitted to take further steps as per law.

Subsequently, the Hon’ble Rajasthan High Court – Jodhpur Bench in the case of Bpip Infra Private Limited and Ors v. ACIT and Ors [2021] 133 taxmann.com 48 (Raj)(HC) followed the decision of the Hon’ble Allahabad High Court in the case of Ashok Kumar Agarwal (Supra) Pursuant thereto, the Hon’ble Calcutta High Court in the case of Manoj Jain v. UOI [2022] 134 taxmann.com 173 (Cal)(HC) held that the impugned notices under Section 148 of the Income Tax Act are quashed with liberty to the Assessing Officers concerned to initiate fresh re- assessment proceedings in accordance with the relevant provisions of the Act as amended by Finance Act, 2021 and after making compliance of the formalities as required by the law.

Thereafter, the Hon’ble High Court of Rajasthan – Jaipur Bench in the case of Sudesh Taneja v. ITO [2022] 135 taxmann.com 5 (Raj)(HC) (Raj) (HC) held that the subordinate legislation could not have travelled beyond the powers vested in the Government of India by the parent Act and quashed all the impugned Notices.

Similarly, the Hon’ble Bombay High Court in the case Tata Communications Transformation Services

v. ACIT [2022] 137 taxmann.com 2 (Bom) (HC) and High Court of Madras (Division Bench) in Vellore Institute of Technology v. CBDT and Anr. [2022] 135 taxmann.com 285 (Mad)(HC) followed the above- mentioned decisions and held the issue in favour of the assessee.

The Revenue filed a Special Leave Petition before the Hon’ble Supreme Court against the order of the Hon’ble Allahabad High Court in the case of UOI v. Ashish Agarwal [2022] 138 taxmann.com 64 (SC) where in it was held that Reassessment notice if issued on or after April 01, 2021 under unamended section 148 of the Act, needs to be set aside; however, same being a bona fide mistake, notice should not be set aside, rather deemed to have been issued under substituted section 148A of the Act.

The following guidelines were laid down by the Court:

  1. The respective impugned section 148 notices issued to the respective assessees shall be deemed to have been issued under section 148A of the Act as substituted by the Finance Act, 2021 and treated to be show-cause notices in terms of section 148A(b) the Act. The respective assessing officers shall within thirty days from today provide to the assessees the information and material relied upon by the Revenue so that the assessees can reply to the notices within two weeks thereafter;
  2. The requirement of conducting any enquiry with the prior approval of the specified authority under section 148A(a) the Act be dispensed with as a one-time measure vis-à-vis those notices which have been issued under section 148 the Act of the unamended Act from 1-4-2021 till date, including those which have been quashed by the High Courts;
  3. The assessing officers shall thereafter pass an order in terms of section 148A(d) the Act after following the due procedure as required under section 148A(b) the Act in respect of each of the concerned assessees;
  4. All the defences which may be available to the assessee under section 149 the Act and/or which may be available under the Finance Act, 2021 and in law and whatever rights are available to the Assessing Officer under the Finance Act, 2021 are kept open and/or shall continue to be available and;
  5. The present order shall substitute/modify respective judgments and orders passed by the respective High Courts quashing the similar notices issued under unamended section 148 the Act of the Act irrespective of whether they have been assailed before this Court or not.

Further, The Hon’ble Bombay High Court in the case of Sai Cylinders Private Limited v. ACIT WP No. 3555 of 2021 dated May 05, 2022 while giving effect to the decision of the Hon’ble Supreme Court’s order in the case of Ashish Agarwal (Supra) held that wherever assessment order has been passed those orders will stand quashed and set aside.

3.1.1. Status of Assessees who didn’t file a WritPetition

All Assessee’s including the ones that did not file a Writ Petition will be covered by the decision of the Hon’ble Supreme Court by virtue of Article 142 of the Constitution of India.

3.1.2. Impact of the decision of the Hon’ble Supreme Court

The decision of the Hon’ble Supreme Court has opened a Pandora’s box of interpretations and potential litigation.

The Income-tax Gazetted Officer’s Association vide letter dated May 06, 2022 and May 11, 2022 raised several concerns and issues before the CBDT regarding the interpretation of the decision of the Hon’ble Supreme Court.

The CBDT vide Instruction No. 1 of 2022 dated May 11, 2022 has inter alia held that, that AY 2013-14, 2014-15 & 2015-16 will be reopened under the new law where the income escaping assessment is exceeding Rs. 50 lakhs. Further held that AY 16-17 and AY 17-18 will be considered as cases falling within 3 years from the end of the AY.

This has raised a lot of concerns amongst the Tax payers and Tax practitioners. The CBDT has not implemented the first proviso to section 149 of the Act while interpreting the decision of the Hon’ble Supreme Court. There is a possibility of a second round of litigation challenging the validity of CBDT Instruction No 1 of 2022.

Reliance is placed on the decision of the Hon’ble Allahabad High Court in the case of Ajay Bhandari v. UOI [2022] 139 taxmann.com 541 (Allahabad) where for assessment years 2013-14 to 2015-16, income of assessee escaping assessment to tax was less than Rs. 50,00,000/- and notice had not been issued within limitation under unamended provisions of section 149 of the Act, proceedings under amended provision of sections 148A and 149 of the Act as substituted by Finance Act, 2021, could not be initiated

3.2 Notices issued on or after July 01, 2022 There is no dispute regarding the Notices issued on or after July Reassessment Notices issued on or after July 01, 2022 have to be as per the new Law i.e., Notice under section 148A of the Act have to be issued.

4. Procedure for Reassessment

The Procedure for Reassessment has been divided into 5 important correspondences with the Department. They are as under:

4.1. Notice received under section 148A of the Act

Upon receipt of Notice under section 148A of the Act, the following points must be checked

Check 01: The Notice is pertaining to Assessment Year (AY) 2015-16 and subsequent years.

Albeit, vide Finance Act, 2021, the Department can reassess up to a period of 10 AYs, by virtue of amendment to section 149 of the Act, it will apply to AYs 2015-16 and onwards.

Therefore, reopening of any AY prior to AY 2015- 16 would be time barred and bad in law.

Reference is drawn to the decision of the Hon’ble Delhi High Court in the case of Nestle India Ltd.

v. DCIT [2016] 384 ITR 334 (Delhi) (HC) where reopening beyond the period six years was held to be invalid and barred by limitation.

This logic will continue to hold good.

Check 02: Whether the concerned AY is within3 years, or beyond 3 years but within 10 years.

As per section 149 of the Act, No Notice shall be issued beyond 3 years unless, Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax is represented:

  • in form of an asset,
  • expenditure in respect of a transaction or in relation to an event or occasion; or
  • an entry or entries in the books of account,

which has escaped assessment amounts to or likely to amount to fifty lakh rupees or more.

Further, as per explanation to section 149(1), “asset” shall include immovable property, being land or building or both, shares and securities, loans and advances, deposits in bank account.

Further, where the income chargeable to tax represented in the form of an asset or expenditure has escaped assessment and the investment in such asset or expenditure in relation to such event or occasion has been made or incurred, in more than one previous year relevant to the assessment years notice under section 148 shall be issued for every such assessment year.

Check 03: The Notice is issued with the prior approval of the specified authority means the specified authority referred to in section 151 of the Act.

Assessment Years Sanctioning Authority
3 or less

than 3

years

Principal Commissioner or Principal Director or Commissioner or Director
More than 3 years Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General

Sanction by an unauthorized authority would render the approval as bad in law. Further, there is no provision which states that the powers of a lower authority can be exercised by a higher authority.

The Hon’ble Bombay High Court in the case of DSJ Communication Ltd. v. DCIT [2014] 41 taxmann.com 151 (Bom)(HC) held that Notice issued under section 148 after obtaining approval of Commissioner would be of no consequence as said approval is contrary to provisions of section 151 of the Act.

Check 04: Sanction should be obtained prior to issuance of Notice.

The Ld. Assessing Officer has to bring on record documents to demonstrate that he had obtained a sanction from the appropriate authority before issuance of Notice under section 148/148A of the Act. If the Assessing Officer issues the notice for reopening the assessment before obtaining the sanction, the reopening proceeding is void ab initio.

The Hon’ble Bombay High Court in the case of CIT v. Smt. Suman Waman Chaudhary [2010] 321 ITR 495 (Bom) (HC) held that where Tribunal had recorded a finding of fact that ITO had recorded reasons on December 06, 1989, and on same date notice was issued and contention of assessee that approval of Deputy Commissioner was not obtained by ITO before issuance of notice had not been controverted by Departmental representative, in view of section 151(2) of the Act, the notice was without jurisdiction.

Check 05: Providing an opportunity of hearing to the assessee being not less than seven days and but not exceeding thirty days from the date on which such notice is issued.

There are instances where less than 7 days have been given to the assessee to respond to the Notice issued under section 148A of the Act. This results in violation of the procedure laid down by law.

Violation of Principles of Natural Justice is not a curable defect in appeal. The Hon’ble Supreme Court in the case of Tin Box Co. v. CIT (2001) 249 ITR 216 (SC) had observed that the Court held that the failure to observe the principles of natural justice cannot be made good in appeal. Lack of opportunity before the Assessing officer cannot be rectified by the appellate authority by giving such opportunity.

4.2. Order passed under section 148A(d) of the Act

The Ld. Assessing Officer on the basis of material available on record including reply of the assessee, pass an order, with the prior approval of specified authority, within one month from the end of the month in which the reply of the assessee.

Check 06: The Assessing Officer to pass a detailed order considering the reply of the Assessee.

It is a well settled law that the Ld. Assessing Officer is required to pass a speaking Order disposing of the objections and where the order is without elucidating and dealing with the contentions and issues raised in the objection.

The Hon’ble Bombay High Court in the case of Ankita A. Choksey v. ITO (2019) 411 ITR 207 (Bom)(HC) observed that, Order on disposal of objections must deal with the objection. The mere fact that the return is processed under section 143(1) of the Act does not give the Ld. AO a carte blanche to issue a reopening notice. The Reassessment notice was quashed.

The Hon’ble Bombay High Court in the case of Hitech Corporation Ltd v. ACIT WP(L) No 6861 of 2022 dated March 09, 2022 (Bom)(HC) held that the order of disposal of objections runs into 21 pages and referring 68 case laws without referring the issue under consideration the Ld. Assessing Officer has only wasted his time in writing unsustainable orders on objections. The order disposing of objections was quashed.

Further, The Hon’ble Bombay High Court in the case of Zuari Foods and farms Pvt. Ltd. v. ACIT (2018) 408 ITR 279 (Bom)(HC) wherein observed that even for reopening the assessment with in four years there are certain jurisdictional requirements that must exist before the power of reassessment is exercised. Strictures passed against the Ld. Assessing Officer for making comments which are highly objectionable and bordering on contempt and for being oblivious to law.

Check 07: The Order passed under section 148A

  • of the Act should contain sanction of the

specified authority.

Refer to Check 03.

Check 08: The Order passed under section 148A

  • of the Act should be passed within one

Where the order under section 148A(d) of the Act is passed after a period of one month, the same would be considered time barred and bad in law.

It is pertinent to note that, the Hon’ble Allahabad High Court in the case of CIT v. Munnalal Shrikishan [1987] 167 ITR 415 (All)(HC) wherein it was held that the term “month” does not mean consisting of 30 days. It would mean one calendar month.

Check 09: Whether the information recorded was with the Assessee during the original assessment and does it suggest that income has escaped assessment.

It is a settled position in law that no authority has the power to review its own order. Therefore, the concept of “Change of Opinion” should continue to hold good in the new reassessment regime as well.

Therefore, where the initial assessment was done under section 143(3) of the Act, and a question on the said “information” was put to the Assessee, the Assessee responded to the same, irrespective of the fact that the observations of the Ld. Assessing Officer pertaining to the issue is contained in the Order under section 143(3) of the Act or not; Reassessment on the same issue would amount to “change of opinion” i.e., a review of its own order.

The Hon’ble Supreme Court in the case of Lily Thomas v. UOI & Ors. (2000) 6 SCC 224 observed that the dictionary meaning of the word “review” is “the act of looking; offer something again with a view to correction or improvement. It cannot be denied that the review is the creation of a statute. The power of review is not an inherent power. It must be conferred by law either specifically or by necessary implication.

The Scheme of Income-tax Act, 1961 has not expressly conferred upon the Ld. Assessing Officer a power of review. It can only rectify apparent mistakes by way or rectification under section 154 of the Act.

Therefore, where a Ld. Assessing Officer on perusal of the documents and explanations submitted by the Assessee during assessment, concluded that the same is not taxable, and cannot change its view without any tangible information or material.

Further, the information should suggest that income has escaped assessment.

The Hon’ble Bombay High Court in the case of Nirmal Bang Securities Pvt Ltd v. ACIT WP. No. 671 of 2022 dated February 08, 2022 (Bom) (HC) observed that reasons recorded not indicated anywhere or any stretch of imagination the income has escaped assessment. There was non- application of mind by the sanctioning authority. Court further observed that the Ld. Assessing Officers could record better reasons for reopening and the Authority granting the approval will also apply their mind sincerely before granting approval. Re assessment proceeding was quashed.

Similarly, the Hon’ble Bombay High Court in the case of Sharvah Multitrade Company (P.) Ltd.

v. ITO [2022] 134 taxmann.com 134 (Bom)(HC)

where AO issued a reopening notice against assessee company, namely, SMCPL on ground that assessee had received accommodation entries from several bogus entities managed and controlled by company SMCPL, in view of fact that name of company which alleged to have provided accommodation entries to assessee and name of assessee company was found to be same, thus, there was a complete non-application of mind by AO as a company could not provide an accommodation entries to itself, impugned reopening notice issued against assessee was to be set aside. Further, CBDT was directed to frame a scheme to train the Ld. Assessing Officer on how to apply mind while recording reasons.

Check 10: Section 148A of the Act is not applicable for certain cases.

No Notice under section 148A of the Act is required for search cases, search connected matters, cases where information has been obtained pursuant to a search and cases where information has been received under section 135A of the Act.

However, in search matters (assessment under erstwhile 153A of the Act) search connected matters (assessment under erstwhile 153C of the Act) and cases where information has been obtained pursuant to search (assessment under 147 of the Act), the Ld. Assessing Officer has to obtain prior approval of the sanctioning authority. Refer to Check 03.

The litigative issue of whether assessment is to be done under section 153C of the Act or under section 147 of the Act, in cases where information has been found pursuant to a search action was settled by the Hon’ble Madras High Court in the case of Karti P. Chidambaram v. PDIT [2021] 436 ITR 340 (Mad)(HC) wherein it was held that where pursuant to receipt of information from AO of searched person regarding receipts of cash payments by assessee pertaining to sale of land, proceedings under section 147 of the Act were initiated against assessee and thereafter, when seized documents were received, jurisdictional Assessing Officer on recording of satisfaction initiated proceedings under section 153C of the Act, in such case pending proceedings under section 147 of the Act would stood abated and there were no procedural irregularity to establish legal malice with reference to actions initiated by Assessing Officer.

In the new reassessment regime, this issue will not arise, as there is no separate assessment regime for search & search related cases for search actions taken on or after April 01, 2021. They would be covered under the new reassessment regime.

Check 11: Survey cases will be deemed information, but a Notice under section 148A of the Act has to be issued.

As per Check 10, Section 148A of the Act will not attract certain cases. However, as per Explanation 2 to section 148 of the Act, in certain cases including survey cases under section 133A of the Act, the Ld. Assessing Officer would be deemed to have information which suggests that income has escaped assessment.

Therefore, in survey cases, section 148A of the Act is attracted and the Ld. Assessing Officer shall issue a Notice under the said Act.

4.3. Notice received under section 148 of the Act

Pursuant to the Order under section 148A(d) of the Act, the Ld. Assessing Officer shall serve the assessee with a Notice under section 148 of the Act asking the assessee to file their return of Income.

Note: Penalty – As per section 270A(2)(c) of the Act, a person shall be considered to have under- reported his income, if the income reassessed is greater than the income assessed or reassessed immediately before such reassessment.

Therefore, disclosing of income in the return in compliance with section 148 of the Act may not protect the assesee from penalty proceedings.

Check 12: Issuance of Notice under section 148 of the Act along with a copy of the Order under section 148A(d) of the Act.

As per amended section 148 of the Act, the Ld. Assessing Officer has to serve a Notice under section 148 of the Act along with a copy of the order passed under section 148A (d) of the Act.

Check 13: Sanction to be obtained before issuance of Notice under section 148 of the Act.

The Notice issued under section 148 of the Act should mention that the same has been issued after obtaining the requisite sanctions. Refer to Check 03.

However, no such approval shall be required where the Ld. Assessing Officer has passed an order under section 148A(d) of the Act stating that it is a fit case to issue a Notice under section 148 of the Act.

Check 14: What is meant by “information which is flagged in accordance with the risk management strategy formulated by the Board”. (The word ‘flagged’ has been omitted vide Finance Act, 2022)

Note: As per CBDT Instruction dated December 10, 2021 bearing no F.N0. 225/135/2021/ITA- II, the Assessing Officers shall identify the following categories of information pertaining to Assessment Year 2015-16 and Assessment Year 2018-19:

  1. Information from any other Government Agency/Law Enforcement Agency
  2. Information arising out of Internal Audit objection, which requires action under section 148 of the Act
  3. Information received from any Income-tax Authority including the assessing officer himself or herself
  4. Information arising out of search or survey action
  5. Information arising out of FT&TR references
  6. Information arising out of any order of court, appellate order, order of NCLT and/ or order under section 263/264 of the Act, having impact on income in the assessee’s case or in the case of any other assessee
  7. Cases involving addition in any assessment year on a recurring issue of law or fact:
    1. Exceeding 25 lakhs in eight metro charges at Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata, Mumbai and Pune while at other charges, quantum of addition should exceed Rs. 10 lakhs;
    2. Exceeding Rs. 10 crores in transfer pricing cases. and where such an addition:
      1. has become final as no further appeal has been filed against the assessment order; or
      2. has been confirmed at any stage of appellate process in favor of revenue and assessee has not filed further appeal; or
      3. has been confirmed at the 1st stage of appeal in favor of revenue or subsequently; even if further appeal of assessee is pending, against such order.

Check 15: What else suggests that information is with the Ld. Assessing Officer:

ii. An audit objection stating that the assessment is not in accordance with the

Note: The Hon’ble Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC) that the opinion of the Internal Audit party of the Income Tax Department on a point of law cannot be regarded as information within the meaning of section 147(b) of the Act. In view of the decision of the Supreme court now the audit objection as well as the note of the Ministry of Law cannot be regarded as information for the purpose of reopening.

This view may not hold good because of the specific amendment.

iii. Any information received under an agreement referred to in section 90 or section 90A of the Act.

iv. Any information made available to the Assessing Officer under the scheme notified under section 135A of the Act i.e., Faceless collection of information.

v. Any information which requires action in consequence of the order of a Tribunal or aCourt.

4.4. Notice under section 143(2) read with section 147 of the Act

Check 16: The Notice under section 143(2) of the Act cannot be issued prior to issuance of Notice under section 148 of the Act.

Issuance of Notice under section 143(2) of the Act before issuance of Notice under section 148 or before passing of Order under section 148A(d) would demonstrate the prejudice of the Ld. Assessing Officer to proceed with reassessment. This will render the reassessment procedure as bad in law. This has been held in the case of Asian Paints Ltd. v. DCIT [2008] 296 ITR 90 (Bom) (HC).

NOTE: It is pertinent to note that, on receipt of Notice under section 148 of the Act, if the assessee is of the opinion that there is a blatant & prima facie violation of Checks 1 to 16 the same has to be challenged by filing a Writ Petition before the Hon’ble High Court.

This is akin to the erstwhile procedure, where upon disposal of objections, the assessee had the liberty to file Writ Petition, similarly in the new regime, a Writ Petition can be filed on issuance of Notice under section 148 of the Act along with an order under section 148A(d) of the Act.

4.5. Draft Order under section 147 read with section 143(3) read with section 144B (xvi) of the Act

Check 17: Non-issuance of Draft Assessment Order under section 144B of the Act will render the assessment proceedings bad in Law. The final Order might be either set aside or held as non-est.

The Hon’ble Delhi High Court in the case of RMSI (P.) Ltd. v. National Faceless Assessment Centre [2022] 440 ITR 245 (Delhi)(HC) & The Hon’ble Bombay High Court in the case of Parull Isharani v. ACIT WP No. 2187 of 2021 (Bom)(HC) held that where in faceless assessment, NFAC passed a final assessment order in case of assessee, without issuing a Show Cause Notice and a draft assessment order which was mandated under section 144B(1)(xvi)(b) of the Act, assessment order not made in accordance with procedure laid down in section 144B of the Act would be non-est.

Check 18: Sufficient time must be given to the assessee to respond to a Draft Assessment Order.

Request for time i.e., Adjournment applications are to be considered before passing the final Order.

A short period of 1 to 2 days would be held to be in violation of Principles of Natural Justice i.e., Audi Alteram Partem.

The Hon’ble Madras High Court in the case of Swapna Manuel v. ACIT [2021] 133 taxmann.com 312 (Mad)(HC) held that here reasonable time was not given to assessee to respond to show cause notice, it tantamount to infraction of principle of natural justice and, therefore, matter was to be remanded back to Assessing Officer for de novo assessment from show cause notice stage.

The Hon’ble High Court of Himachal Pradesh in the case of Preethi Himachal & Co v. UOI [2022] 135 taxmann.com 265 (HP)(HC) where reasons given by assessee in his application seeking further time to file reply to notice containing draft assessment order were not considered by Assessing Authority before passing impugned assessment order, order was be to set aside to be passed afresh.

4.6. Order passed under section 147 read with section 143(3) of the Act.

Check 19: All submissions to be considered and a personal hearing to be granted (if sought for) while passing the Order.

Non-consideration of submission or not granting an assessee a personal hearing in spite of requesting for the same would amount to violation of principles of Natural Justice.

The Hon’ble Bombay High Court in the case of Piramal Enterprises Ltd. v. ACIT [2021] 129 taxmann.com 18 (Bom) (HC) held that where during assessment proceedings show-cause notice had been issued to assessee, to which assessee had responded to from time-to-time, requesting for personal hearing, however, personal hearing had not been provided as incorporated in section 144B of the Act, thus, assessment not made in accordance with procedure laid down under section 144B of the Act being non est was to be set aside.

Check 20: If additions are not made on the “information” which suggests that income has escaped assessment albeit additions/ disallowances are made on some other ground.

Where no addition is made on the “information” with the Ld. Assessing Officer, but the Ld. Assessing Officer proceeds to assesss and make addition/ disallowances on other grounds, the same would render the reassessment invalid.

The Hon’ble Bombay High Court in the case of CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236 (Bom)(HC) held that if after issuing a notice under section 148 of the Act, the Ld. Assessing Officer accepts contention of assessee and holds that income, for which he had initially formed a reason to believe that it had escaped assessment, has, as a matter of fact, not escaped assessment, it is not open to him to independently assess some other income; if he intends to do so, a fresh notice under section 148 of the Act would be necessary, legality of which would be tested in event of a challenge by assessee.

5. Dénouement
When to file a Writ:

Where there is any lapse or violation in Checks 1 – 16, the same can be challenged by filing a Writ Petition on receipt of the Notice under section 148 of the Act along with an Order under section 148A(d) of the Act.

Where there is any violation or lapse in Checks 17-20, the same may be challenged by filing a Writ Petition on receipt of the Order under section 147 read with section 143(3) read with section 144B (xvi) of the Act.

Further, the Hon’ble Bombay High Court in the case of Tata Capital Financial Services Limited v. ACIT WP NO. 546 OF 2022 dated February 15, 2022 (Bom.)(HC) inter alia directed the revenue to adhere to certain guidelines to be followed for reassessment proceedings (erstwhile reassessment regime), they are:

  1. While communicating the reasons for re-opening the assessment, a copy of the standard form/request sent by the Assessing Officer for obtaining approval of the Superior Officer should itself be provided to the assessee. This would contain comment or endorsement of the Superior Officer with his name, designation and date. The Assessing Officer shall not merely state the reasons in the letter addressed to the assessee.
  2. If the reasons make reference to any other document or a letter or a report, such document or letter or report should be enclosed to the reasons. Such a portion as it does not bear reference to the assessee concerned could be redacted.
  3. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion.
  4. A personal hearing shall be given and minimum seven working days advance notice of such personal hearing shall be
  5. If the Assessing Officer is going to rely on any judgment/order of any Tribunal or Court reference/ citation of these judgments/orders shall be provided along with notice for personal hearing so that

the assessee will be able to deal with/ distinguish these judgments/ orders.

Further stated that a copy of the Order to be placed before the CBDT to issue guidelines to all its officers based on these directions with clear instructions that they shall be strictly followed.

The guidelines are still awaited from the CBDT.

Earlier, the Hon’ble Gujarat High Court in the case of Sahkari Khand Udyog Mandal Ltd v. ACIT [2015] 370 ITR 107 (Guj)(HC) had issued

guidelines for reassessment and instructed the Chief Commissioner of Income Tax and Cadre Controlling Authority of the Gujarat State, shall issue a circular to all the Assessing Officers for scrupulously carrying out the directions contained in this judgment.

Similarly, The Hon’ble Bombay High Court in the case of CIT v. TCL India Holdings (P.) Ltd. [2016] 71 taxmann.com 216 (Bom)(HC) observed that the Revenue on affidavit stated that their website would take steps to maintain consistency in appeals and would upload cases in the “legal corner” of their website. However, this has not been done until date.

It is desired that the CBDT provides detailed guidelines for the Ld. Assessing Officers for conducting reassessment under the new reassessment regime.

From an Assessee’s standpoint, they are also under an obligation to prepare robust submission at the first stage i.e., before the National Faceless Assessment Centre/Assessing Officer, which will help assessees in their case before the High Court (in case of a Writ Petition) or in appellate proceedings, certain points to be kept in mind while preparing the submissions are:

  1. The Assessee should file their return (under protest) in response to Notice under section 148 of the Act rather than asking the Ld. Assessing Officer to consider the earlier return for compliance under Notice issued under section 148 of the Act. Non filing of return in spite of receipt of Notice under section 148 of the Act may attract prosecution proceedings under section 276CC of the Act.
  1. Notices should be promptly replied to, within the time stipulated in the Notice.
  2. The submissions should discuss the issue on the facts, merit and the non- applicability of the cases relied on by the Ld. Assessing Officer.
  3. The submissions should be brief and to the There are instances where upon response to a draft assessment order the Ld. Assessing Order has accepted the return filed by the asssessee or dropped certain proposed additions. Therefore, the quality the submissions should not be compromised upon.
  4. Where the issue is covered by the decision of the Hon’ble Supreme Court or the Hon’ble Jurisdictional High Court, the same must be mentioned. The Assessee should only cite relevant case law and refrain from citing several case laws where the facts do not The Hon’ble Supreme Court in the case of CIT v. Sun Engineering Works (P.) Ltd [1992] 198 ITR 297 (SC) held that it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by the Court. Therefore, citing several cases which do not have relevance or does not fit as per the factual matrix will not help the assessee.
  5. If the assessee is approaching the Hon’ble High Court by filing a Writ Petition, the assessee should come with clean hands. The Hon’ble Delhi High Court in the case of OPG Metals & Finsec v. CIT[2014] 41 taxmann.com 21 (Delhi)(HC) observed that where the requirement of full and true disclosure was not satisfied as assessee had not specifically pointed out at time of first reassessment that there were other transactions between amalgamated companies and entry operator, assessee did not come with clean hands and, therefore, second reassessment was justified.
  1. The assessee’s must note that a Writ Petition before the Hon’ble High Court is different from an appeal before the Hon’ble High One cannot file the writ in routine manner when an alternative remedy is available. The Hon’ble Supreme Court in the case of Radha Krishan Industries v. State of Himachal Pradesh 2021 SCC Online SC 834 held that though a High Court can entertain a petition under Article 226 of the Constitution, it must not do so when the aggrieved person has an effective alternate remedy available in law. However, certain exceptions to this “rule of alternate remedy” include where, the statutory authority has not acted in accordance with the provisions of the law or acted in defiance of the fundamental principles of judicial procedure; or has resorted to invoke provisions, which are repealed; or where an order has been passed in violation of the principles of natural justice.

The New Reassessment regime if implemented properly can reduce Litigation and smoothen the reassessment proceedings. It is important that, both, the Tax Officers and Taxpayers including their consultants are well versed with the law and procedure. In light of several judicial pronouncements, it is hoped that the CBDT issues some guidelines or provides training to its Assessing Officers for the reassessment proceedings.

Dear Friends,

Celebrating Azadi ka Amrit Mahotsav on this 76th Independence Day which gave as freedom & we are able to breath the fresh air and put our feet on a Land which is Independent from Foreign Rulers.

After Years of struggle of our freedom fighters, our Motherhood could get freedom. Be it the nonviolence movement of Mahatma Gandhi or the Leadership of Punjab Kesari Lala Lajpat Rai: be it revolutionary Bhagat Singh or the Swadeshi movement of Bal Gangadhar Tilak, the entire country is indebted to all the freedom fighters for the sacrifices they have made, as we got freedom & are living in a Nation of freedom .we owe certain duties towards our country as Sardar Vallabhbhai Patel rightly said” Every citizen of India must remember that he is an Indian and he has every right in this county but with certain duties”

Our duty as Tax fraternity is to Guide, Advice & Work in accordance with Law & I can say with pride & satisfaction that Federation has been doing its duty to its best since its inception by serving members by importing values, Education towards the society at large but we have to March Further in this Direction that is serving the country through working towards upholding the rule of Law which is possible through our contribution towards Independent Judiciary & Rights of personal liberty of citizens of the country.

On this occasion, I feel it a very blissful blessing to journeying with all of you and it’s a wonderful experience in life. Comparatively our Federation has been indisputably doing well on all fronts as far as the aspect of achieving excellence in knowledge, ethics & principles which is of course possible only because of the coherence and co-operation amongst members. We require equipping ourselves in all respects in which direction we shall activate all our zones to undertake study circle meetings / webinars at all places especially to enable the Members of Federation to enrich their professional knowhow & legal acumen which is need of each professional at all times. I also invite the new members to subscribe for the journal as the journal gives them opportunity to keep themselves updated on Direct and Indirect Taxes as also to read the articles of the members from all over India. This would obviously widen the horizon and the views of the tax consultants of different parts of the country can be appreciated and applied by a member.

Meanwhile, the Federation continues to hold free Webinars in the interest of the members to achieve our moto of spreading knowledge and education.

I must congratulate the Central Zone, Chairman Shri Anil Mathur and his team, Vice President Shri Vinay Jolly and ever enthusiastic Deputy President Shri Pankaj Ghiya to have maximum webinars with maximum participation. They have completed the certificate course of GST. The Northern Zone, Western Zone are equally doing the webinars.

The next programme of AIFTP is the International Study Tour which is going to Dubai under the Leadership of Sanjay Kumarji, Prayagraj & Santosh Gupta, Nagpur having a Theme of Emerging Professional Opportunities in Dubai having contingent of 160 delegates. Thereafter, we have NTC and NEC at Dwarka which is being organized by Western Zone at Dwarka City of Lord Krishna on 1st and 2nd October, 2022. I request all the members to join for a unique experience as for the first time the Conference shall take place at Dwarka. The subjects in the conference are also of prime importance for day-to-day practice of Direct and Indirect Tax. The 25th National Convention is at Jaipur from 16th to 18th December, 2022. Details have already been circulated. Please send your registration.

Dear Members, kindly continue to attend all our programs to enrich your knowledge. Let me appreciate that the inputs and the queries raised by the participants also help in enhancing and enriching the deliveries by the faculties. In my opinion, active participation by the delegates is the most important aspect for success of any programme.

I wish you all a very happy Janmashtami and Ganesh Chaturthi.

Yours faithfully,

D. K. Gandhi

National President, A.I.F.T.P.

Dear Friends,

Wish you all the Best on the Occasion of Azadi ka Amrit Mahotsav. As we celebrate 76th Independence Day we enter into the ‘Amrit Kal’ as mentioned by our Hon’ble Prime Minister.

The immortal words of Justice M.P. Thakkar in State of Gujrat v. Mohanlal Jitmalji Porwal & Ors. (1987) 2 SCC 364 while dealing with the issue of prosecutions for economic offenses:-

“The entire Community is aggrieved if the economic offenders who ruin the economy of the State are not brought to books. A murder may be committed in the heat of moment upon passions being aroused. An economic offence is committed with cool calculation and deliberate design with an eye on personal profit regardless of the consequence to the Community. A disregard for the interest of the Community can be manifested only at the cost of forfeiting the trust and faith of the Community in the system to administer justice in an even handed manner without fear of criticism from the quarters which view white collar crimes with a permissive eye unmindful of the damage done to the National Economy and National Interest”.

Economic offenses now are said to be a class unto themselves. Therefore, we see a large number of special acts being enacted for the purposes of punitive action which works as a deterrent also. One such law that has been in under attack in public discourse as well as in the Courts of Law is the Prevention of the Money Laundering Act, 2002 (PMLA). Being an Act that has been called both draconian as well as essential, the law has been not only in the news due to it’s alleged invocation against various high profile personalities, but also due to the Judgement of the Supreme Court in Vijay Madanlal Choudhary & Ors. v. UOI that has upheld various contentious as well as important aspects of the 2002 law which had been challenged as arbitrary and unconstitutional. In a detailed judgement spanning well over 500 pages, the Supreme Court has dealt with all the issues, Section wise and in detail before pronouncing authoritative findings upon the constitutional challenges raised.

Needless to say, erudite authors shall enlighten the readers with respect to various aspects of the judgement in the coming days while the lawyers will argue these matters threadbare before the High Courts. Even though the ambit of the Judgement is extremely wise as it covers some of the important aspects of almost the entire act, the Judgement shall perhaps be most cited during bail applications under the PMLA, having perhaps revived the infamous ‘twin conditions’ for grant of bail under the Act (a prima facie satisfaction from the Judge deciding the bail application that not only is the accused ‘not guilty’ of such an offense but also that the accused is not likely to commit any offense while on bail) that had been struck down in Nikesh Tarachand Shah v. UOI & Onr. (2018) 11 SCC 1.

A perusal of the Judgement shows that the Supreme Court has time and again relied upon the concepts of ‘reasonable nexus with purpose and object of the Act’ which is, as re-iterated time and again in the Judgement, not only to punish but also to prevent the evil of money laundering. The purposive interpretation test seems to alluded to time and again and more often than not in the backdrop of the PMLA, married off harmoniously with general rule of ‘literal interpretation’. The Court seems to have been very conscious of the fact, and rightly so, that the PMLA is a special act, enacted for a special purpose and also in line with the international commitments of our country. The financial action task force (FATF) recommendations are considered as well as international Anti-money laundering (AML) framework.

Though the judgement of the Court has received much flack from some quarters, the Supreme Court has not merely glossed over the issues. The safeguards in the Sections that may be considered arbitrary are recognised and discussed and a positive findings as to their adequacy have been arrived at. Though different people may have different opinions as to their adequacy, their existence cannot be denied. This is specially relevant for those challenges that had been made on the ground of manifest arbitrariness.

The observations of the Apex Court are very important and will have far eaching consequences with respect to a First Information Report (FIR), the officers of the Directorate who have not been held to be ‘police officers’ and the process envisaged by Section 50 of the Act has been held to be an ‘inquiry’ rather than an investigation and the statements recorded by the Authorities under the Act have been held to be not hit by the Right against being a witness against oneself (Article 20(3) as well as Article 21 of the Constitution of India. These observations are but the tip of the iceberg as the ‘conclusion’ to the Judgement itself summarises 21 broad points that have been decided by the Court. The Judgement has gone into the definition of Money Laundering and discussions recorded in the Judgement shall no doubt be relied upon and interpreted in Courts across the Country in the coming years.

More crucially, the Judgement shows that the ‘ghost’ of State of Gujrat v. Mohanlal Jitmalji Porwal & Ors. is far from exorcised and shows that even 25 years later, the Courts are reaffirming their commitment to grant Legislations that seeks to control and eradicate the evil of economic offenses a wide leeway to enable them to fulfil their intended objective.

In this issue of the Journal esteemed professionals have written articles on very important issues relevant for our date to day practice. I am grateful to all the authors who have contributed to this issue. I am thankful to my colleague Mr. Aditya Ajgoankar for helping me in the editorial work.

K. Gopal,

Editor

Sr. No. Name of Members Profession Zone
1 Parth Doshi CA. West
2 Sauvagya Ranjan Jena Adv. East
3 Sarath Chandran A. CA. South
4 Tanveer Khan Adv. West
5 Nazia Khan CS. North
6 Nikhil G. Gramle CA. West
7 Tanuj Gupta Adv. North
8 Brajabandhu Bihari Adv. East
9 Ashish Dinesh Dhapke GSTP West
10 Prince Kathuria Cost Acco. East
11 Ditikrushna Pradhan Adv. East
12 Surbhi Goyal Adv. North
13 Sudarsan Sahoo Adv. East
14 Ravi Agarwal CA. East
15 Shyam Khodecha Adv. West