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CA. Rajesh Mehta

Who is liable to deduct TDS u/s 194R ?Any person being Individual/HUF/Company/ Firm/LLP etc. providing any benefit or perquisite whether convertible into money or not, is liable w.e.f. 1-7-2022 to deduct TDS U/s 194R @ 10% on the value or aggregate value of such benefit or perquisite.Any individual or HUF whose turnover or gross receipts in business in the immediately preceding previous year was not more than Rs. 1 crore or in case of professional whose gross receipts in profession were not exceeding Rs. 50 Lakh will not be liable to deduct tax U/s 194R.
From whom to deduct TDS U/s 194R ?TDS U/s 194R is to be deducted from any resident on any benefit or perquisite arising in business or profession of such resident.
Whether any person providing any benefit or perquisite to an end user/ultimate consumer is liable to deduct TDS U/s 194R ?No, if such benefit or perquisite has not arisen in the business or profession of such end user. Say for example any consumer purchases one Refrigerator for personal purposes, from an electronic shop for Rs. 2.90 Lakh and also given one refrigerator worth of Rs.21000 free of cost to the said end user /consumer, or provided one Goa tour worth of Rs. 21000/- as free of cost to such end user then such benefit or perquisite is not liable to TDS U/s 194R, because such benefit or perquisite has not arisen in business or profession of such end user.
Was TDS deductible prior to amendment of Finance Act 2022, if any benefit in kind is provided?Prior to introduction of Sec. 194R there was no provision to deduct TDS on benefit provided in kind. Because all other TDS provisions states the words, “any sum payable”, “any sum of money”, “responsible for paying”, “responsible for paying any sum”, i.e. TDS provision applies in most of the cases if any sum is payable, any money is payable and not for kind.In a movie, “Billu Barber” produced by Shah Rukh Khan, there were special appearances of Heroines Kareena Kapoor, Priyanka Chopra and Deepika Padukone for songs, the Ld. AO during the course of assessment of Red Chiilies Entertainment observed that major item of gift amounting to Rs. 45 lakh was given to two actors for participating in some song sequences in the movie. Hence made disallowance U/s 40(a) (ia) for violation of 194J for not deducting TDS on providing gifts in kind. Subsequently in the appeal ITAT Mumbai in the said case of Red Chillies Entertainment P. Ltd. V. ACIT vide ITA No. 1577/Mum/2013 dt. 31-5-2016 AY 09-10 allowed in favour of the assessee stating that, “The expression “any sum” used in section 194J, whether should mean payment made in money terms or also in kind requires to be examined. It is the contention of the assessee that “any sum” as referred to in section 194J, would only relate to payment made in money term. It is observed, in case of Shri H.H. Sri Rama Verma v. CIT [1990] 187 ITR 308 (SC), the Hon’ble Supreme Court while referring to the expression “any sum paid” used in section 80G, held that “any sum” referred to in the provision would only mean cash amount of money”.
Therefore earlier any gifts in kind were not covered under TDS provisions therefore now Section 194R will attract, if any gifts in kind are given if other conditions of Section 194R are applicable.
If any manufacturing company sells its products to distributors and also provides free gifts to further pass on to end user/ consumer then is it liable to TDS U/s 194R ?Yes. Even if the distributor is acting like conduit in providing such benefit or perquisite to end user/consumer, but as per CBDT guideline vide circular No. 12/2022 dated 16-6-2022 issued in this regard it is not required to check whether benefit is taxable or not in the hands of recipient. Say for example a Car manufacturing company is selling 300 cars to distributor at a cost of Rs. 23 Lakh per car and also providing seat cover free of cost for each car (each seat cover having value of Rs. 22000), such seat cover are to be passed on free of cost to end user/ consumer, the said manufacturer is required to deduct TDS u/s 194R on aggregate value of such seat covers.However the said issue of circular seems not in accordance with act, because Section 4 states that TDS can be done only on income chargeable to tax.
Section 4(2) of the income tax act states that,

“(2) In respect of income chargeable under sub- section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act”.

Section 4(2) of the act as above states that the TDS is to be deducted on income chargeable U/s 4(1). Therefore any amount which is not an income in the hands of recipient, it may not be subject to TDS. But now until the circular 12/2022 is supplemented by suitable amendment, the TDS has to be done on this value deeming it as benefit.

If 3 cars would have been given free of cost on sale of 300 cars to the distributor then it will not be subjected to TDS U/s 194R because it is covered in the exact example given in Question No. 4 of the circular No. 12/2022.
In the above example whether the car distributor can claim value of these free seat covers as an allowable expenses, as and when passed on free of cost to the end users/consumers ?Yes. To claim it as an expenditure the said distributor will have to maintain a detailed working with proof that such seat covers have been distributed/given to the end users/ consumers and the distributor has not charged any money from any consumer for such free seat covers.
If a company gives New year diaries and calendar and pen set or gift items given to dealer for further distribution to retailers or end users etc. whether liable for TDS U/s 194R?Yes, it will be subject to TDS by the company because the company has given benefits in kind even if these are not to be retained by the distributor or retailer because finally to be given to end consumer, due to the fact that the circular 12/2022 has specified that the person providing is not required to check whether person receiving the gift etc. is, his income or not, will be subject to TDS, until any further clarification comes from CBDT.
Is it necessary that the person providing benefit or perquisite needs to check if the amount is taxable under clause (iv) of section 28 of the Act, before deducting tax under section 194R of the Act?In this regard circular No. 12/2022 states that, “No. The deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under clause (iv) of section 28 of the Act. The amount could be taxable under any other section like section 41(1) etc. Section 194R of the Act casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source @10%. There is no further requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.”As per the guideline the scope of TDS U/s 194R has also been extended to Section 41(1) etc.
However it seems from the memorandum explaining the provisions of the Finance Bill the intention was not so.

Which can be inferred from the fact that while presenting the budget,2022 Honorable Finance Minister in her budget speech stated that, “Rationalizing TDS Provisions:- It has been noticed that as a business promotion strategy, there is a tendency on businesses to pass on benefits to their agents. Such benefits are taxable in the hands of the agents. In order to track such transactions, I propose to provide for tax deduction by the person giving benefits, if the aggregate value of such benefits exceeds Rs. 20,000 during the financial year.”

Honorable FM has stated that benefits are passed on to agents and it is taxable in hands of agents, to track these TDS is provided. It means such benefits are not through banking channel nor through book entries nor through credit notes, therefore there may remain chances of not recording in books of agents, therefore TDS is being provided. Further here in the above para the word used is, “aggregate value of such benefit”, i.e. benefit is to be converted into value, if the scope was to cover cash benefits also then the word, “aggregate amount or aggregate value of such benefit”, would have been used here.

Further the same can be inferred from the memorandum to Finance Bill,2022:- “TDS on benefit or perquisite of a business or profession

As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite.

However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.
1. Accordingly, in order to widen and deepen the tax base, it is proposed to insert a new section 194R to the Act to provide that the person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from carrying out of a business or exercising of a profession by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite.For the purpose of this section, the expression ‘person responsible for providing’ has been proposed to mean a person providing such benefit or perquisite or in case of a company, the company itself including the principal officer thereof.
  1. Further, in a case where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing such benefit of perquisite shall, before releasing the benefit or perquisite, ensure that tax has been paid in respect of the benefit or perquisite.
  2. No tax is to be deducted if the value or aggregate value of the benefit or perquisite paid or likely to be paid to a resident does not exceed twenty thousand rupees during the financial year.
  3. Further, the provisions of the said section shall not apply to an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided.
2. This amendment will take effect from 1st July, 2022.[Clause 58].”In the first para above reference has been made for Section 28(iv) only, nothing else. From the above paras of the memorandum the words used are, “value or aggregate value”, “person providing such benefit or perquisite”, “person responsible for providing such benefit or perquisite”, etc. from the phrases it is clear that nowhere in above phrases the word or words, “amount or aggregate of amounts”, or “person responsible for paying”, or “person paying such benefit or perquisite” have been used.
  It seems that wrongly in the para 2.2 of the memorandum as above the word, “paid or likely to be paid” was used, because benefit or perquisite is not “paid”, it is “provided”, therefore it has been correctly removed in the Finance Bill and the Finance Act, under Second proviso to Sec. 194R(1).,
  
  Section 194R(1) : Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite:
  
  As per second proviso to Section 194R(1) of the act, “Provided further that the provisions of this section shall not apply in case of a resident where the value or aggregate of value of the benefit or perquisite provided or likely to be provided to such resident during the financial year does not exceed twenty thousand rupees:”
If any cash discount or sales discount is given to customer whether it is liable to TDS U/s 194R ?As per Q. 4 of guideline circular No. 12/2022,“Question 4: Whether sales discount, cash discount and rebates are benefit or perquisite? Answer: Sales discounts, cash discount or rebates allowed to customers from the listed retail price represent lesser realization of the sale price itself. To that extent purchase price of the customer is also reduced. Logically these are also benefits though related to sales/purchase. Since TDS under section 194R of the Act is applicable on all forms of benefit/ perquisite, tax is required to be deducted. However, it is seen that subjecting these to tax deduction would put seller to difficulty. To remove such difficulty it is clarified that no tax is required to be deducted under section 194R of the Act on sales discount, cash discount and rebates allowed to customers.”
In the said answer CBDT has further stated that, “There could be another situation, where a seller is selling its items from its stock in trade to a buyer. The seller offers two items free with purchase of 10 items. In substance, the seller is actually selling 12 items at a price of 10 items. Let us assume that the price of each item is Rs 12. In this case, the selling price for the seller would be Rs 120 for 12 items. For buyer, he has purchased 12 items at a price of 10. Just like seller, the purchase price for the buyer is Rs 120 for 12 items and he is expected to record so in his books. In such a situation, again there could be difficulty in applying section 194R provision. Hence, to remove difficulty it is clarified that on the above facts no tax is required to be deducted under section 194R of the Act.

It is clarified that situation is different when free samples are given and the above relaxation would not apply to a situation of free samples.

Similarly, this relaxation should not be extended to other benefits provided by the seller in connection with its sale.

To illustrate, the following are some of the examples of benefits/perquisites on which tax is required to be deducted under section 194R of the Act (the list is not exhaustive):
- When a person gives incentives (other than discount, rebate) in the form of cash or kind such as car, TV, computers, gold coin, mobile phone etc.
- When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets
- When a person provides free ticket for an event
- When a person gives medicine samples free to medical practitioners. The above examples are only illustrative. The relaxation provided from non-deduction of tax for sales discount and rebate is only on those items and should not be extended to others”.
From the above it can be inferred that any items given free out of the stock in trade alongwith item sold out of stock in trade, is not liable to TDS i.e. if any item has been in the nature of expenses and has been claimed as an expenditure in the profit and loss account by the person providing the benefit then it will

be liable for TDS because it is not treated as purchases and not sold i.e. given without tax invoice and not out of and alongwith stock in trade.
CBDT guideline Question 7: Whether reimbursement of out of pocket expense incurred by service provider in the course of rendering service is benefit/ perquisite? CBDT guideline Answer: Any expenditure which is the liability of a person carrying out business or profession, if met by the other person – “X”, is in effect benefit/perquisite provided by the second person-“X”, to the first person in the course of business/profession.If the invoice is not in the name of “X” and the payment is made by “X” directly or reimbursed, it is the benefit/perquisite provided by “X” to the consultant for which deduction is required to be made under section 194R of the Act.
As clarified by CBDT additional guideline vide circular No. 18/2022 dated 13-9-2022 in the case of “pure agent”, if the GST input credit is allowed to the recipient and it is not considered as supply of the pure agent, it is clarified that amount incurred by such “pure agent” for which he is reimbursed by the recipient would not be treated as benefit/perquisite for the purpose of section 194R of the Act.
CBDT circular Q. No. 8 :- If there is a dealer conference to educate the dealers about the products of the company – Is it benefit/ perquisite?CBDT guideline Answer: The expenditure pertaining to dealer/business conference would not be considered as benefit/perquisite for the purposes of section 194R of the Act in a case where dealer/business conference is held with the prime object to educate dealers/customers about any of the following or similar aspects: (i) new product being launched (ii) discussion as to how the product is better than others (iii) obtaining orders from dealers/customers (iv) teaching sales techniques to dealers/customers addressing queries of the dealers/customers reconciliation of accounts with dealers/ customers However, such conference must not be in the nature of incentives/benefits to select dealers/customers who have achieved particular targets.Further, in the following cases the expenditure would be considered as benefit or perquisite for the purposes of section 194 R of the Act:- (i) Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer business conference. (ii) Expenditure incurred for family members accompanying the person attending dealer business conference (iii) Expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such conference (excluding the day of conference and its just preceding day and its just following day)
When to deposit the TDS deducted U/s 194R ?Within 7 days from the end of the month in which the TDS deducted and within 30 days for any TDS done in the month of March. And furnish the said information in TDS statement to be filed quarterly in form 26Q.
Whether recipient can apply for lower rate U/s 197 ?No, lower rate application cannot be applied for 194R.
What is the threshold of 194R TDS liability ?If benefit or perquisite provided to a resident is not more than Rs. 20000 during the year then there is no need to deduct TDS U/s 194R.
Since when the liability to deduct TDS U/s 194R going to arise ?TDS U/s 194R is applicable w.e.f. 1-7-2022. If any benefit or perquisite during the year exceeds Rs. 20000/- then liability to TDS will arise.Any benefit or perquisite provided between 1-4-2022 to 30-6-2022 will be considered to determine the aggregate benefit during the year, however any benefit or perquisite before 1-7-2022 (between 1-4-2022 to 30-6-2022) will not be liable to TDS U/s 194R, i.e. will only be considered for determining threshold – aggregate of benefit or perquisite during the year.
If any benefit or perquisite provided in the form of money only i.e. in cash or cheque or by way of credit note or journal entry then whether is it liable to TDS ?Any benefit or perquisite if only in the form of money i.e. either by cash or cheque or by credit note or journal entry is not liable to TDS U/s 194R, because Section 28(iv) nowhere uses the word, “in the form of money” or “in cash” exclusively.Also Section 194R(1) states that, “any benefit or perquisite whether convertible into money or not”, it means U/s 194R only those benefit or perquisite are covered which is not in the form of money, but which has to be convertible in money or not capable to convert into money”, therefore any benefit or perquisite which is directly in money is excluded U/s 194R.
However circular has stated that any incentive in cash is also liable for TDS.

However there is one controversy here, that as per Section 28(iv) benefit or perquisite directly in the form of money i.e in cash or cheque or banking channel or Credit note is not liable to be covered U/s 28(iv), because it is directly and clearly in the form of money, then any

benefit in cash or cheque or RTGS should have been kept out of purview of 194R by the CBDT guideline, because cash/cheque/RTGS/journal entry/credit notes are already accounted for in the books of account. Therefore any benefit or perquisite in kind whether convertible into money or not, any cash benefit which is not through book entry can only to be treated as income U/s 28(iv).

Hon’ble Madras High Court in the case of Iskraemeco Regent Ltd. v. Commissioner of Income-tax-I [2011] 196 Taxman 103 (Mad.) held that the reserve and surplus is brought in financial terms having monetary value and not through any fixed assets. In fact, section 28(iv) has not application to any transactions which involves money.

Further, in the case of CIT v. Alchemic (P) Ltd. [1981] 130 ITR 168 (Guj), it has been held that under sec. 28(iv), the question of including the value of the benefit or perquisite would arise only if the benefit or the perquisite is not in cash or money.

Madras High Court in the case of Instalment Supply P. Ltd. v. Commissioner Of Income-Tax, on 14 May, 1984 in para 16. “In CIT v. Venkatraman [1978] 111 ITR 444, had occasion to consider a similar provision as contained in s. 2(6C) (iii) of the Indian I.T. Act, 1922, which defined income as including “the value of any benefit or perquisite, whether convertible into money or not obtained from the company”. It was held that “from this language it is clear that the benefit or perquisite” contemplated cannot be money itself. If it is money, the question of its value being taken into account or the benefit or perquisite being converted into money will not arise.”

In CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340, the Karnataka High Court was of the view that the expression “whether convertible into money or not”, occurring in s. 40(a)(v), is something apart from money such as something in kind, which may be convertible into money or not and that this expression would not be appropriate when one considers a payment in cash. It, therefore, held that payment of bonus to its employees in cash was not a perquisite and could not be disallowed under s. 40(a)(v).

In the case of Yoshio Kubo v. Commissioner Of Income Tax on 31 July, 2013 before Honorable Delhi High Court vide ITA No. 441/2003 which was held in favour of assessee, it was quoted in the judgment, “Counsel submit that the term “provided for” means to keep something ready, in order to perform or do it. Under Section 10(10CC) the monetary payment should be provided for the employee. It should be employee who is provided for by way of monetary payment within the meaning of Clause (2) of Section 17. In other words, payment of actual money to the employee (and not the equivalent of that, or the money’s worth) is what the legislature contemplated by provision of by way of monetary payment. If some benefit is directly or indirectly received by the assessee which has money’s worth, it is not a “monetary payment”.

Honorable Gujarat High Court in the case of Commissioner Of Income-Tax, … v. Alchemic Pvt. Ltd. on 19 August, 1980 (1981) 130 ITR 168 (Guj.) held that, “9. It is obvious that if what is received either by way of benefit or perquisite is money, there is no question of considering the value of such monetary benefit or perquisite under clause (iv) and including the value of such benefit or perquisite under the head “Profits and gains of business or profession.” It is only if the benefit or the perquisite is not cash or money but is non-monetary benefit or non-monetary perquisite that the question of including the value of such benefit or perquisite would ever arise. Under these circumstances, the Tribunal was right in rejecting the contention urged on behalf of the revenue that the amount of Rs. 15,964 should be brought to tax as value of any benefit or perquisite within the meaning of s.28(iv). The tribunal doubted whether the amount of Rs. 15,964 was any benefit – “It may or may not be a benefit”. Another question is whether the phrase “whether convertible into money or not” would normally mean something else than money. In our opinion, the conclusion of the Tribunal that s. 28(iv) would not apply when the amount received is cash or is considered in terms of money, is correct, and the provisions of s. 28(iv) can never be made applicable to the facts of the present case, where excise refund was received by the assessee.

10. The three contentions urged on behalf of the revenue were on the basis of s. 28(iv), s. 41(1) and on general commercial principles and on each of these three grounds we are of the opinion that the contentions urged on behalf of the revenue must be rejected. The conclusions of the Tribunal, both regarding s. 28(iv) and regarding the decision not to go into the question of s. 41(1), was correct and in accordance with law.

We, therefore, answer the question referred to us in the affirmative, that is, the favour of the assessee and against the revenue.”

In the case of N. K. Poddar v. ACIT vide TC(A) No. 812 of 2010 dated 23-11-2010 Honorable Madras High Court, held in favour of the assessee that waiver of loan by bank in one time settlement scheme in neither covered u/s 28(iv) nor u/s 41(1) of the act. In support of his contention, the learned senior counsel placed reliance upon the following judgments:-

COMMISSIONER OF INCOME TAX v. GANESA CHETTIAR (P.) [(1982) 133 ITR 103],

COMMISSIONER OF INCOME TAX v. A.V.M. LTD. [(1984) 146 ITR 355],

COMMISSIONER OF INCOME TAX v. ALCHEMIC PVT. LTD. [(1981) 130 ITR 168],

COMMISSIONER OF INCOME TAX v. MAFATLAL GANGABHAI AND CO. (P.) LTD. [(1996) 219 ITR 644], and

DEPUTY COMMISSIONER OF INCOME TAX (ASSESSMENT) v. GARDEN SILK MILLS

LTD. [(2010) 320 ITR 720] and submitted that Section 28(iv) has no application to a money transaction and therefore, the orders passed by the authorities cannot be sustained”.

Therefore in view of above judgments CBDT guideline is not in accordance with judicial precedents. Until any further clarification through any circular present guideline is to be followed.
If any benefit in kind is provided and tax invoice is raised for it, not for the full amount or not of the fair value but for Rupee one only, say for example a dealer who deals in FMCG goods and on purchase of certain minimum quantity the buyer dealer has been given a refrigerator of Rs. 30000/- but in the tax invoice the amount charged for the refrigerator is shown of Rupee one only for the refrigerator then how and why the value is to be determined ?Section 194R(1) of the act states that, “(1) Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite”.From the above it is clear that the section provides that TDS is to be deducted @ 10% of the value or aggregate of value of such benefit or perquisite.
As per Q. 5 of the circular 12/2022, “Question 5. How is the valuation of benefit/perquisite required to be carried out? Answer: The valuation would be based on fair market value of the benefit or perquisite except in following cases:- (i) The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In that case the purchase price shall be the value for such benefit/perquisite. (ii) The benefit/perquisite provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite. It is further clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R of the Act”.
Whether provisions of Sec. 206AB will be applicable to TDS U/s 194R ?As per Section 206AB, “(1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be deducted at source under the provisions of Chapter XVIIB, other than section 192, 192A, 194B, 194BB, [194-IA, 194-IB, 194LBC, 194M or 194N] on any sum or income or amount paid, or payable or credited, by a person to a specified person, the tax shall be deducted at the higher of the following rates, namely”.From the above provisions of Sec. 206AB it is clear that higher TDS is to be deducted under section 206AB on any sum or income or amount paid, or payable or credited, by a person to a specified person.
Since any sum or amount or income is not being paid nor payable nor credited U/s 28(iv) nor covered under 194R, therefore nothing is liable U/s 206AB, if cash amount is going to be covered under section 194R in view of CBDT guideline, then only it can be treated to be covered under section 28(iv) and 194R, which will only be liable to be covered under 206AB.

Since benefit or perquisite is only “provided”, not “paid or payable nor credited” hence it is not covered under section 206AB.

Other TDS provisions uses the word, “person responsible for paying any sum or any income”, whereas section 194R states the word, “providing benefit or perquisite”, therefore it is clear that in case of non-monetary transaction but convertible into money, Section 206AB will not be applicable to 194R because CBDT guideline is also silent on this issue.
Whether provisions of Section 40(a)(ia) of the act are applicable if benefit or perquisite provider has failed to deduct or deposit TDS U/s 194R ?No, because Section 40(a)(ia) of the act states that, “thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub- section (1) of section 139”Since under section 28(iv) and 194R word “sum payable” is nowhere used, the words used are only “benefit or perquisite provided”, therefore no disallowance can be there U/s 40(a)(ia), in case of default in deducting TDS or in case of default in depositing TDS after due date specified U/s 139(1) of the act. Other consequences of TDS default in case of delay deposit may have to face.
If any benefit is in the form of money/cash/any sum of money, then in that case if TDS is not deducted then it will attract disallowance U/s. 40(a)(ia) of the act.
As per CBDT circular 12/2022:- “Question 3. Is there any requirement to deduct tax under section 194R of the Act, when the benefit or perquisite is in the form of capital asset?CBDT Answer: As has been stated in response to question no 1, there is no requirement to check whether the perquisite or benefit is taxable in the hands of the recipient and the section under which it is taxable.Further, courts have held many benefits or perquisites to be taxable even though one can argue that they are in the nature of capital asset. The following judgments illustrate this point:
- Assessee entered into an agreement with ‘1’ for purchase of a plot of land and certain amount was paid as earnest money. However, possession of land was not given to assessee and seller entered into another agreement with a third party to develop the said plot. Assessee filed suit in which a consent decree was passed and in pursuance of same certain amount as paid to assessee. On appeal it was held that such sum received in pursuance of consent decree was liable to tax as business income under section 28(iv). Ramesh Babulal Shah v CIT (2015) 53 taxmann.com 277 (Bom)
- The amount representing principal loan waived by bank under one time settlement scheme would constitute income falling under section 28(iv) relating to value of any benefit or perquisite, arising from business or exercise of profession. CIT v Ramaniyam Homes (P) Ltd (2016) 68 taxmann.com 289 (Mad)
- Value of rent free accommodation, furniture and fixtures given to director was held as taxable under section 28(iv). CIT v Subrata Roy (2016) 385ITR 547 (All) • Where a car was given to an assessee by his disciple, who had been benefited from his preaching, the value of car was held to be taxable in the hands of the assessee being a receipt from the exercise of the vocation carried on by him. CIT (Addl) v Ram Kripal Tripathi (1980) 125 ITR 408 (All)
- The assessee was a director of a company. In terms of an agreement with the promoters, shares were allotted to the director. On these facts, it was held that the shares received by the director were benefit or perquisite received from a company by the director and it was a benefit assessable to tax. D. M. Neterwala v CIT (1986) 122 ITR 880 (Born)
- Value of gift of land was held as a receipt by the assessee in carrying on of his vocation and was
held as taxable. Amarendra Nath Chakraborty v CIT (1971) 79 ITR 342 (Cal) Thus, it can be seen that the asset given as benefit or perquisite may be capital asset in general sense of the term like car, land etc but in the hands of the recipient it is benefit or perquisite and has accordingly been held to be taxable.

In any case, as stated earlier, the deductor is not required to check if the benefit or perquisite is taxable in the hands of recipient. Thus, the deductor is required to deduct tax under section 194 R of the Act in all cases where benefit or perquisite (of whatever nature) is provided.”

In the above answer CBDT has failed to have a look that the judgment of CIT v. Ramaniyam Homes (P) Ltd (2016) 68 taxmann.com 289 (Mad) has already been reversed by Honorable Supreme Court vide [2018] 404 ITR 1 (SC) dated 24-4-2018 alongwith case of Mahindra & Mahindra, and in the case of Ramesh Babulal Shah the assessee had received sum of money therefore no capital asset was received by that assessee and that assessee had received money due to consent decree against and during the course of trading of land, except these two case laws in all other case laws cited above the assessees had received benefit in kind, any capital asset received is also in kind, therefore it can be inferred that any benefit in kind is only liable to TDS and not the monetary benefit. But as per the CBDT guideline monetary benefit/ cash/any sum of money is also covered U/s 194R of the act.
How to deduct TDS if benefit is in kind only, whether and when to receive/collect TDS amount from beneficiary, if beneficiary has deposited tax how provider will report in 26Q ?First proviso to section 194R(1) of the act states, “Provided that in a case where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing suchbenefit or perquisite shall, before releasing the benefitor perquisite, ensure that tax required to be deductedhas been paid in respect of the benefit or perquisite”.The interpretation of above proviso can be, that the person providing benefit or perquisite will collect deductible amount from the person who has been provided benefit or perquisite, then benefit provider will deposit the TDS, before releasing benefit or perquisite.
In case of benefit in kind provider shall ensure that recipient has deposited tax. Such recipient would pay tax in the form of advance tax. The tax deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the recipient confirming that the tax required to be deducted on the benefit/ perquisite has been deposited. This would be then required to be reported in TDS return statement along with challan number. This year Form 26Q has included provisions for reporting such transactions.

As per section 2(24)(vd) any benefit or perquisite covered U/s 28(iv) is included in income.
Since this is non-financial transaction whether it will be entered in books of person who has been provided benefit ?Even if this is non-financial transaction, it is advisable to enter value of benefit or perquisite to be entered in books as business income U/s 28(iv), rather than directly offering as income under the computation of income. It is advisable that the said entry need not be passed through party ledger but directly taken to income ledger.
44AD/44ADA beneficiary will have to include this benefit or perquisite in his turnover or gross receipts ?No, Section 44AD states that 6% or 8% percentage income is to be computed on total turnover or gross receipts and Sec. 44ADA states that 50% income is to be computed on total gross receipts. Benefit or perquisite is not a receipt nor turnover. As per Section 28(iv) or 41(1) this is income, but cannot be assumed to be part of turnover or gross receipts, therefore it can be advised not to include the benefit or perquisite in turnover or gross receipt for the purpose of Section 44AD/44ADA.
If any resident who has been provided benefit or perquisite does not offer income in the return of income due to the reason that he assumes that it is not taxable in his hands then how such resident will be able to claim credit of TDS thereon in his return ?As per Sec. 199 of the act TDS credit can be claimed by the person in the year in which such income is offered in the return of income and in the hands of person who has offered such income.It is advisable that to follow Section 199 of the act the value or aggregate value of benefit or perquisite is first offered in profit and loss account/relevant ledger account/return of income as income and then any expenditure or outgoing in that respect is claimed as an expense in profit and loss account/ledger account/return of income.
In case of 44AD/44ADA there is no need to separately add this amount as income or expenses, because this will be covered in deemed income and deemed expenses, if any.
Whether CBDT has power to issue guideline to remove difficulty ?As per Section 194R(2) & (3) :- “(2) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.(3) Every guideline issued by the Board under sub- section (2) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person providing any such benefit or perquisite”.
Who is the, “person responsible for paying” or who will be the person responsible in case of any default U/s 194R ?Section 194R has nowhere used the word, “person responsible for paying”, therefore Section 204 of the act has no application to Section 194R, therefore Section 194R itself has specified, “person responsible for providing”.As per Explanation to Section 194R —”For the purposes of this section, the expression “person responsible for providing” means the person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer thereof.”
Whether proviso can expand the scope of Main section ?A proviso cannot expand the scope of Section, when the main content itself does not depict anything, that cannot be construed to be there by a proviso appended to the main section.“Section 194R. (1) Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite:”
From the reading of above sub-section (1) it can be inferred that the section has nowhere used the word, “any sum payable”, or “any money”, or “any amount”, which clearly reflect that the amount or money or any sum was intended to be kept out of purview of TDS under this section, but proviso has expanded the scope of section by inserting the phrase, “wholly in kind or partly in cash and partly in kind”, which can be inferred from the following proviso :-

“Provided that in a case where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite:”

From reading of above proviso it depicts and reflects that the sub-section 1 comprises payments wholly in cash, and the proviso talks about payments in kind or partly in cash and partly in kind, whereas the fact is that the sub- section 1 which is the main section itself does nowhere comprise the words, “any sum of money or any amount”, then how the proviso can be said to expand the scope of sub-section.

Further the CBDT guideline has also expanded the scope of section, whereas the sub-section 2 empowers to issued guidelines only to remove the difficulty and not to expand the scope of section. Therefore the proviso and CBDT guideline needs to be further looked into to align with law and intention of the law and nothing authorised beyond the law.
How to reflect transactions covered under 194R in the TDS statement 26Q ?

In form 26Q these transactions shall be reflected as follows :-

In the form 26Q format there is a column at S.No. 424 which requires the information, “Reason for non-deduction / lower deduction/ Higher Deduction/ Threshold/ Transporter etc. (See notes 1 to 16)”, If any benefit or perquisite provided is not more than Rs. 20000/- during the year then as per Note No. 6 to format of 26Q mention “Write “Y” if no deduction is on account of payment below threshold limit specified in the Income-tax Act, 1961”, this is same as applicable to other TDS sections. If benefit has been provided in kind and recipient has paid advance tax then it has to be reflected as advance tax paid by recipient in form 26Q as per First Proviso to sub-section (1) of section 194R – “Benefits or perquisites of business or profession where such benefit is provided in kind or where part in cash is not sufficient to meet tax liability and tax required to be deducted is paid before such benefit is released” showing the code 94R-P, details of Advance tax deposited, BSR code, date of deposit, Challan serial No. will have to be mentioned in 26Q.

Conclusion

The discussion on 194R is very wide and vast and unending, however in nutshell it is advisable to follow the provisions of the act and guideline until any further amendments or suitable CBDT guidelines. The discussion made above in the form of questions and answers is very limited and indicative only and to be followed as per prevalent law.

(Source : Article published in Souvenir released at National Convention 2022 held at Jaipur on 17th & 18th December, 2022)

Upendra Bhatt, Advocate

PreambleSection 271AAD was included in Chapter XXI which starts with section 270 and ends with section 275.
Section 271AAD was inserted by the Finance Act 2020 wef 01/04/2020. As explained in the memorandum by the Honorable Finance Minister that several cases were found of fraudulent ITC claimed which were caught by the GST authorities. The suppliers obtained fake invoices from the fake dealers who obtained GST number but who do not actually carry on business or profession. The invoices were issued without supply of goods or services. Such racketeers actually who do not carry any business or profession. They issue invoices without supply of goods or services. In the invoices GST was charged which was neither paid nor intended to be paid. Nowadays it is noticed that GST number or PAN obtained in the name of servant or a person having no source of income. If assessment was made on such person there was no chance of recovery of tax.

To deal with such activity, A penal provision is introduced to penalise a person who passes false entries. Any other person who causes in any manner to make a false entry or omits such entry shall also be liable to penalty. Penalty in both the cases will be equal to the amount of invoice.

In some cases, it is noticed that either accountants or even tax practitioners entered into such unhealthy practice. It is advised to the dealers, accountants, professional friends or mediators not to enter in to such activity which will harm them

as almost all the information is received from different agencies by the Government.
SECTION 271AAD PENALTY FOR FALSE ENTRY, ETC., IN BOOKS OF ACCOUNT
1. Without prejudice to any other provisions ofthis Act, if during any proceeding under this Act, it is found that in the books of account maintained by any person there is—
  1. a false entry ; or
  2. an omission of any entry which is relevant for computation of total income of such person, to evade tax liability, the Assessing Officer may direct that such person shall pay by way of penalty a sum equal to the aggregate amount of such false or omitted entry.
2. Without prejudice to the provisions of sub- section (1), the Assessing Officer may direct that any other person, who causes the person referred to in sub-section (1) in any manner to make a false entry or omits or causes to omit any entry referred to in that sub-section, shall pay by way of penalty a sum equal to the aggregate amount of such false or omitted entry.2.1 Explanation For the purposes of this section, “false entry” includes use or intention to use—
  1. forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence ; or
  2. invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both ; or
  3. invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist.
Extract of Notes on Clauses annexed to Finance Act, 2020 – Clause 98Clause 98 of the Bill seeks to insert a new section
271AAD in the Income-tax Act relating to penalty for false or omission of entry in books of account. It is proposed to insert a new section 271AAD, under which penalty shall be levied on a person who is required to maintain books of account, if it is found that the books contain a false entry or that any entry has been omitted which is relevant for the computation of his total income. Such person shall be liable to pay by way of penalty a sum equal to the aggregate amount of such false and omitted entries. Penalty shall also be levied on any other person who causes the person required to maintain books of account to make or causes to make any false entry or omit or cause to omit any entry in books of account. The false entries shall include use or intention to use forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods; or invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist.

This amendment will take effect from 1st April, 2020.
Extract of Memorandum to Finance Act, 2020 – Section 271AADPenalty for fake invoice. In the recent past after the launch of Goods & Services Tax (GST), several cases of fraudulent input tax credit (ITC) claim have been caught by the GST authorities. In these cases, fake invoices are obtained by suppliers registered under GST to fraudulently claim ITC and reduce their GST liability. These invoices are found to be issued by racketeers who do not actually carry on any business or profession. They only issue invoices without actually supplying any goods or services. The GST shown to have been charged on such invoices is neither paid nor is intended to be paid. Such fraudulent arrangements deserve to be dealt with harsher provisions under the Act. Therefore, it is proposed to introduce a new provision in the Act to provide for a levy of penalty on a person, if it is found during any proceeding under the Act that in the books of accounts maintained by him there is a (i) false entry or (ii) any entry relevant for computation of total income of such person has been omitted to evade tax liability. The penalty payable by such person shall be equal to the aggregate amount of false entries or omitted entry. It is also propose to provide that any other person, who causes in any manner a person to make or cause to make a false entry or omits or causes to omit any entry, shall also pay by way of penalty a sum which is equal to the aggregate amounts of such false entries or omitted entry. The false entries is proposed to include use or intention to use – (a) forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or (b) invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both; or (c) invoice in respect of supply or receipt of goods or services or both to or from a person who do not exist. This amendment will take effect from 1st April, 2020.
Meaning of certain words used in this section
1. Prejudice : causing harm
2. Books of accounts Section 2(12A) :“books or books of account” includes ledgers, day-books, cash books, account- books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro magnetic data storage device.
3. False : Artificial not genuine
4. Falsified : To present falsely or to misrepresent
5. Omission :To fail or neglect to do something
6. Entry :Item written in diary list and account book
7. Forged : Copy of something in order to deceive people
8. Invoice :List of goods sold with the price charged especially send as a bill
9. Document :To prove or support something with document
10. Cause to omit : To inspire for not disclosing income
11. Turnover :Amount of business done by a company within a certain period of time
Issues arises out of this section are replied in question answer form
1. 1. From which date / assessment year this section will be applicable?
    1. 1. This section will be applicable from 01/04/20 means from FY 2020- 21.Thus, it will be applied for AY 2021-22 and onwards. In the notes and clauses in the Finance Bill 2020 wherever it was necessary, the assessment year is mentioned, while in this section the assessment year is not mentioned but in clause 98 it is mentioned that this section will be effective from 01/04/20. Thus, if the offence is committed after 01/04/20 this section will be applicable and it cannot be applicable for AY 2020-21.
  2. This section starts with the wording, “without prejudice to any other provisions of this act….” What is the meaning of this?
    1. 1. The meaning of this word is, it overrides the other provisions of this act.So, this is an independent section. Thus, if penalty proceedings under any other section is initiated or the income is taxed either at normal rate or special rate, still the provision of this section will be applicable because the intention of the legislature is clear to penalise persons who are involved in receiving and issuing fake or bogus invoices.Thus, even if the amount of bogus entry is considered for addition in the returned income, still this penalty will be leviable. Even if there is penalty leviable under any other section, still penalty under this section will be leviable.
        Assessee cannot take plea that as he is liable to pay tax or penalty under any other provision, no penalty is leviable under this section because the intention of the legislature is to curb use of bogus or fake invoices.
  3. What is the meaning of, “during the proceedings under this act”?
    1. 1. During the proceedings under this act means it may be assessment proceedings, reassessment proceedings, appellate proceedings etc.When there is assessment or reassessment proceedings, penalty proceedings will be initiated by the assessing officer because it will be satisfaction of the assessing officer. When in the appellate proceedings it is noticed by CIT(A) regarding breach of this section, notice of penalty should be issued by the CIT(A) and penalty will be also levied by CIT(A).
        
        It was held in the case of CIT v. Shadiram Balmukund reported in 84 ITR 183 Allahabad that the income tax officer has no jurisdiction to impose penalty when addition is made in the assessed income by appellate authority or CIT. Thus, penalty order of the assessing officer was quashed.
        
        Similar issue arose in the case of CIT v. Manjunath Cotton and Ginning Factory reported in 359 ITR 565 Karnataka and 263 CTR 153 Karnataka.In this case addition on account of undisclosed investment was deleted by CIT(A) but addition was made on the ground of under valuation of stock. Thus, penalty proceedings should be initiated by CIT(A). As the penalty order was passed by assessing officer, the same was cancelled on the ground that the notice was not in accordance with law as the subject matter of penal proceedings was the order of appellate authority and the order was passed by the assessing officer, order of penalty was cancelled.
        A question arises if the proceedings in the case of the assessee is not pending, still whether the AO can initiate penal proceedings under this Act?
        
        According to my view the AO can initiate penal proceedings under this Act because in the case of an individual assessee who is involved in issuing fake invoices who does not have taxable income and who does not file return, still penalty under this section can be levied because this section is a separate section and introduced in the statute book with the intention to punish entry providers which is explained in detail in the memorandum of this section.
  4. What is the meaning of books of accounts maintained?
    1. 1. Definition of books of accounts is given in section 2(12A). It ordinarily means a collection of sheets of paper or other material, blank, written or printed, fastened or bound together so as to form a material whole, loose sheets or scrapes of paper cannot be termed as “book” as it can be easily detached and replaced (reference from the judgement Sunilkumar Sharma v. DCIT 448 ITR 485 Karnataka).
  5. What is meaning of any person?
    1. 1. Word person is defined in section 2(31) which includes
        
        an Individual
        
        a Hindu Undivided Family
        
        a Company
        
        a Firm
        
        an Association of Person
        
        a Local Authority etc.
  6. What is the meaning of false entry?
    1. 1. This section is included in the statute book with regard to false entry. Explanation regarding false entry is also given in this section. Kindly see sr.no.2 of this article.
  7. What is an omission of entry?
    1. 1. As per this section, omission of entry has direct nexus with computation of total income with the intention to evade tax liability.
  8. Who can levy penalty?
    1. 1. As per this section, either the assessing officer or CIT(A) may direct to pay penalty.
  9. What is the quantum of penalty?
    1. 1. Amount of penalty shall be a sum equal to the aggregate amount of such false or omitted entry.
  10. Any other person is also responsible to pay penalty as per the provision of this section?
    1. 1. Yes, as per section 271AAD(2) any other person who causes the person referred in section(1) in any manner to make a false entry or omits any entry shall also be liable to penalty a sum equal to the aggregate amount for false or omitted entry.This section was introduced even for the person other than the assessee to levy penalty for issuing fake invoice. Thus accountant, tax practitioner etc. being an abettor is also liable to pay penalty under this section.
        A question will arise regarding jurisdiction to levy penalty. For example, if the entry provider is situated at Calcutta and the assessee is situated in Bombay, assessing officer of Calcutta will issue notice for penalty under this section if he is satisfied on the basis of the information received from assessing officer of Bombay that a person from Calcutta was involved in providing fake entry and will levy penalty if satisfied.
  11. When the penalty is deleted in appeal, what will happen as far penalty in the case of other person is concern?
    1. 1. According to my view if penalty is cancelled in the case of the assessee, penalty in the case of other person cannot survive because the basis on which the penalty notice was issued on assessee is deleted consequentially the penalty in the case of another person shall be deleted.
  12. Like old section 271(1)(c) penalty was leviable either for concealment of income or furnishing inaccurate particulars of income, similarly as per section 270A penalty is leviable for under reporting of income or misreporting of income, whether similar provision is there in section 271AAD?
    1. 1. Yes, in the notice under this section, charge should be specific. Whether the notice was issued for false entry or on account of an omission of any entry. If the charge is not specific, penalty cannot survive as held by Honorable Supreme Court and various High Courts dealing with penalty leviable u/s.271(1)(c).
  13. During any proceeding under this act, if it is noticed by AO or CIT(A) that assessee is liable for false entry relating to previous year whether he can issue notice for the year for which the proceedings are before him?
    1. 1. No, for the year for which the proceedings are going on he cannot issue notice u/s.271AAD. For levy of penalty for previous year, proceedings for reassessment may be initiated within the time prescribed as per amended section 148A applicable wef 01/04/2022.
  14. As per this section, “during any proceedings under this act from the books of account it is noticed that there is false entry or omission of any entry”, what will happen when the books of accounts are not maintained by the assessee and assessee has shown the income u/s.44AD etc.?
    1. 1. This is a penal provision and it is to be strictly interpreted. When the books of account are not maintained, no penalty under this section is leviable. If the assessee is liable to maintain books of account as per section 44AA of the act, separate proceedings may be initiated for not maintaining books of account but penalty under this section cannot be levied looking to the wording of this section.While filing return on presumptive basis certain details like cash on hand, sundry debtors, sundry creditors, stock in trade is required to be disclosed while uploading the return but it cannot be presumed that the books of account are maintained because the details are maintained for the purpose of collecting the amount from the debtors or payment to creditors. The details are maintained because in the subsequent year if the assessee is liable to compulsory audit, the balance sheet can be drawn.
  15. When false invoices issued consisting of GST and other charges including the cost of material, on which amount penalty shall be levied? On the amount of material supplied or on the amount of entire invoices?
    1. 1. Word invoice means, “List of goods sold with the price charged especially send as a bill”. Thus, the amount of other charges cannot be segregated. Thus penalty will be leviable on the amount of invoice.In the case of CHOWRINGHEE SALES BUREAU P. LTD. v. COMMISSIONER OF INCOME-TAX, WEST BENGAL-I reported in 110 ITR 385 Calcutta, the issue was in relation to trading receipt. When the sales tax realised was credited in separate account, it was held in this case that sales tax collected was part of trading receipts. Similarly amount of invoice will be including of GST etc.
  16. An entry operator who issued fake invoices but does not file return as the income was below the taxable limit and who does not maintain books of accounts, whether the penalty will be leviable on such entry operator?
    1. 1. Yes, Penalty will be leviable on such person because in this section the word written is any other person. Thus, it has nothing to do with the income of any other person.
  17. When the assessee received fake invoices and some of the invoices are shown as goods return, whether the penalty will be levied on entire amount of invoices or only on the invoices other than goods returned?
    1. 1. As per intention of the legislature to bring this section fake invoices were issued including GST but though the GST was collected but not paid for such transactions. When the goods are returned, no question of penalty arises. As per this section the omission of entry should relate to computation of total income to evade tax liability. By showing goods returned, there will not be any effect on computation of total income and it cannot be termed as omission of an entry.
  18. What is the distinction between false entry and omission of entry?
    1. 1. Meaning of false entry is, “artificial not genuine invoice”. Thus, in case of false invoice penalty shall be leviable because it has nothing to do with the income of the assessee.Omission of entry means, “to fail or neglect to do something” and as per this section and the intention of omission should be to evade tax liability. Thus, when it is proved that the intention was not to evade any tax but it was a purely omission, penalty is not leviable.
  19. When invoice for bogus salary or commission is entered in the books by the assessee, whether penalty will be leviable?
    1. 1. Yes, penalty will be leviable because as per explanation of false entry in (b), there is mention of receipt of goods or services without supply of goods or services. Thus, when the services are not received and simply false entry is passed in the books of accounts. There may be other view in favour of the assessee.
  20. There is provision in this section to levy penalty when the invoice is issued in the name of person who does not exist. How the assessee can know whether the bill issued by any person is alive or not?
    1. 1. To levy penalty under this provision, the assessing officer has to prove that the invoice issued was in the name of non- existing person. For the assessee it will become difficult to ascertain, whether the person was alive or not when the bill was issued because he is a buyer. In genuine cases also if the bill is issued in the name of the person who is not live, the assessee may be requires to face legal proceedings.
  21. In case of entry provider for fake invoice, how he will be assessed for income tax purpose and whether penalty will be levied in relation to income assessed or invoices issued?
    1. 1. As per income tax act income is to be assessed on the basis of concept of real income. As per section 5 of the Income Tax Act which deals with scope of total income, income tax is payable on the real income either it is accrued, receive or receivable. Thus, the racketeers who issued fake invoices will be liable to pay tax on the amount of real income earned but as per this section penalty on such person will be to the tune of fake invoices issued.The intention to bring this section in the statute book was with the intention that fake invoices were issued in the names of persons who were paid token amount but fake invoices of crores of rupees were generated and issued in the name of such poor people. To warn such people, this provision is introduced. Still it will be a difficult task for the Government to catch hold of the real culprits.
  22. How the burden will be discharged by the AO / CIT(A) to prove that the invoice is fake?
    1. 1. The burden is always on the department to prove that the invoice is fake or bogus. For this purpose, cogent evidences will be required to be gathered by the I T Authorities. If the notice at the address shown or summons is issued which is not served or there is report of I T Inspector that the party is not available will not serve the purpose unless something more is gathered by the assessing officer.It is very well known that any confession during survey has no evidential value because that statement is not recorded on oath. Thus, when the penalty is to be levied, cogent and acceptable evidences are required to be gathered before penalty is levied. This will be applicable even in case of levy of penalty on any other person or deceased person.
  23. Penalty is not leviable as per section 273B? If the assessee proves that there was a reasonable cause for the said default. Whether this benefit will be available in case of penalty leviable under this section?
1. 1. No, if the sections mentioned in this section 273B are looked into, after section 271AA, there is mention of section 271B. Thus, section 271AAD is intentionally not included in this section to deal harshly with such entities.
Conclusion

This is the recent section and there are many grey areas which were not considered while introducing this section. Certain clarifications are also required to avoid future litigation. The view expressed by me in this paper is my personal view and there may be other possible view.

Hope that this paper may be useful to my professional friends.

I am thankful to Shri Pankaj Ghia President of All India Federation of Tax Practitioners for giving me this opportunity to write a paper on the burning issue which may invite litigation.

(Source : Article published in Souvenir released at National Convention 2022 held at Jaipur on 17th & 18th December, 2022)

CA Anilkumar Shah

Part -A

Now let us discuss the landmark judgment in the case of

New Noble Educational Society v. CCIT, [2022] 143 taxmann.com 276 (SC), judgment dt. 19-10-2022.

1. Facts in brief and background

The case is of an Educational institution seeking approval u/s 10(23C)(vi) of the Act which is rejected for two reasons that-

the trust was not created solely for the purpose of education; and
it is not registered under the local act The Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act,

The facts given in the Hon. H.C. judgment are important and are as under-

The assessee trust/society contended before Hon. High Court that-

10(23C)(vi) places emphasis on receipts and, since the amounts are received by the petitioner-societies on behalf of the educational institution, it is only the objects of the educational institution which should be taken into consideration, and not that of the society;
approval, under s. 10(23C)(vi), is sought only for the educational institution, and not for the society/ educational agency;
that 10(23C)(vi) of the Act makes a distinction between the educational institution and the society/educational agency running it;
the society, which runs the educational institution, is entitled to pursue objects other than those relating exclusively for educational purposes;
at the stage of grant of approval, under s. 10(23C)(vi), only the objects of the society are required to be examined, and not the manner of application of funds by it;
the words “solely” in s. 10(23C)(vi) is redundant;
and the other objects of the petitioners are also ancillary to “education”.

The assessee trust/society applied for approval only for one of its institutions and not the entire society. There was surplus of this educational institution. The objects of the trust/society as a whole included objects other than education, which are contended as ancillary to education. The assessee contended that the approval is sought only for the educational institution and not for other institutions and also not for the entire trust/society.

The revenue contended that-

it is immaterial whether the society pursues all its objects as enumerated in its trust deed;
even if an object is not pursued in real terms in a particular year, the society can pursue it in any other year as it has the mandate under the objects mentioned in its trust deed;
such objects of a trust fall foul of the conditions specified in 10(23C)(vi);
exemption is granted to a society and not to any limb of a society engaged in a particular activity;
it is, therefore, necessary that all the aims and objects mentioned in the trust deed are exclusively for education, and not for any other purpose;
the clauses in the trust deed should not be ambiguous allowing the society a wide scope to indulge in any other activity which are strictly not for promotion of education;
in its Instruction No. 1112 dt. 29th Oct., 1977, the Central Board of Direct Taxes had explicitly prohibited spending of “surplus” of an educational institution for non-educational purposes;
violation thereof implied that the society did not exist solely for educational purposes;
even if no amount is spent for non- educational purposes, the society would not be entitled for exemption under the Act if its existence is not solely for educational purposes;
the surplus, which societies seeking approval make, should again be ploughed back for educational purposes, and not utilized for any other object; and
diversion of funds to achieve objects, which are not solely for educational purposes, would disentitle the society from being granted

as the assessee had objects other than education, in its trust, which are not pursued at present, but it is always possible that the funds and/ or surplus of educational institution may be utilised for those objects in future. Hence, the trust/society did not exist solely for educational purpose.

2. The objects causing rejection

In W. P. No. 12374 of 2010 the objects of the petitioner-society include

“to maintain unity among members of the society”,

“to organize sports, games and cultural activities”, and

“to solve problems of the members on social grounds”.

In W. P. No. 21248 of 2010 the objects of the petitioner society include

“providing employment among educated people”.

In W. P. No. 21251 of 2010 the objects of the petitioner-society include

“promotion of the economic and educational needs of Christians in particular and others in general”.

In W. P. No. 21257 of 2010 the objects of the applicant society include

“to strive for the upliftment of socially, economically and educationally weaker sections of the society in general and of the Christian community in particular”, and

“to meet all the above aims and objectives for the Christian minority community”.

In W. P. No. 21266 of 2010 the objects of the petitioner-society include

“to establish associate organizations, such as orphanages, hostels for needy students,

home for the aged and disabled, hospitals for the poor etc.”

The above objects were treated as not educational. However, Hon. HC has held following objects as educational –

35. Publication of journals, magazines, or other media for diffusion of useful knowledge for promotion of education is incidental and ancillary to the primary object of the society e., to run an educational institution. It is the applicant’s case that publication of journals and magazines is to provide knowledge to students and the teaching staff. Inasmuch as the petitioner is an educational institution, the mere fact that the object of publication of journals and magazines for promotion of education is not restricted, in so many words, only for the benefit of students and teaching staff is of no significance. It is not even the case of the prescribed authority that publication of these journals and magazines was for anyone else. The prescribed authority was, therefore, not justified in rejecting the application on this ground.

36.The objects of the petitioner-society included “to conduct seminars, symposiums, workshops and invite experts from India and abroad to improve the quality of education and to support students to elevate themselves to international standards”. This object was held not to be “solely educational” in nature.

…………

37. The aforesaid object, which the prescribed authority held not to be for the purposes of education, is incidental and ancillary to the primary object of carrying on educational activities by the educational The Chief Commissioner was, therefore, not justified in rejecting the petitioner’s application on this ground.

Under these circumstances the Hon. High Court delivered its judgment stating that-

16. We, accordingly, hold that in cases where approval, under s. 10(23C)(vi) of the

Act, is initially sought, the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and as being eligible for approval, under s. 10(23C)(vi) of the Act.

In addition, an application in the prescribed proforma should be submitted to the prescribed authority within the time stipulated and the specified documents should be enclosed thereto.

However, in cases where an application is submitted, seeking renewal of the exemption granted earlier, the prescribed authority shall, in addition to the conditions aforementioned, also examine whether the income of the applicant-society has been applied solely for the purposes of education in terms of s. 10(23C)(vi) of the Act, the provisos thereunder, the Income-tax Rules, and the documents enclosed to the application submitted in Form 56D.

26. We, accordingly, hold that the certificate signed by the Commissioner of Endowments, as the appropriate authority under s. 43 of the A. P. Act No. 30 of 1987, is but one of the factors, and not conclusive proof, of an assessee under the Income-tax Act being a charitable institution existing solely for the purposes of education. Even in case the assessee produces a certificate of registration under s. 43 of A.P. Act No. 30 of 1987, the Chief Commissioner has to independently examine the objects of the applicant-society, their application seeking approval under s. 10(23C)(vi), and the prescribed documents enclosed thereto, and satisfy himself, in the light of the provisions of s. 10(23C)(vi), the provisos thereto, r.2CA and Form 56D, that the existence of the educational institution is solely for the purposes of education and not for the purpose of profit and, only if he is so satisfied, to grant approval. Registration under s. 43 of the A. P. Act 30 of 1987 is not a condition precedent for seeking approval under s. 10(23C)(vi) of the Act. The Chief Commissioner can, however, prescribe registration under A. P. Act 30 of 1987 as a condition subject to which approval is granted under s. 10(23C)(vi) of the Act. Questions Nos. 2, 3 and 4 are answered accordingly.

Please see – New Noble Educational Society & Ors. vs. CCIT, (2011) 334 ITR 303 (AP): (2011) 242 CTR (AP) 266: (2011) 201 TAXMAN 33 (AP).

3. Questions before Hon. Supreme Court

Questions before Hon. Supreme Court

Whether the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and being eligible for approval, under 10(23C)(vi) of the Act?
Whether registrations under the state laws was required to be checked and required in the process of approval u/s 10(23C) (vi)?

4. Decision by Hon. Supreme Court

Hon. Court framed the questions as follows-

34. The issues which require resolution in these cases are –

firstly, the correct meaning of the term solely in Section 10 (23C) (vi) which exempts income of university or other educational institution existing solely for educational purposes.

Secondly, the proper manner in considering any gains, surpluses or profits, when such receipts accrue to an educational institution, i.e., their treatment for the purposes of assessment, and

thirdly, in addition to the claim of a given institution to exemption on the ground that it actually exists to impart education, in law, whether the concerned

tax authorities require satisfaction of any other conditions, such as registration of charitable institutions, under local or state laws.

72. What then is incidental business activity inrelation to education? Imparting education throughschools, colleges and other such institutions wouldbe per se charity. Apart from that there could beactivities incidental to providing One example is of text books. This court in a previous ruling in Assam State Text Book Production & Publication Corpn. Ltd. v. Commissioner of Income Tax ((2009) 17 SCC 391) has held that dealing intext books is part of a larger educational activity. The Court was concerned with State established institutions that published and sold text books. It was held that if an institution facilitated learning of its pupils by sourcing and providing text books, such activity would be incidental to education. Similarly, if a school or other educational institution ran itsown buses and provided bus facilities to transportchildren, that too would be an activity incidentalto education. There can be similar instances suchas providing summer camps for pupil specialeducational courses, such as relating to computersetc., which may benefit its pupils in their pursuit oflearning.

73. However, where institutions provide theirpremises or infrastructure to other entities, trusts, societies , for the purposes of conducting workshops, seminars or even educational courses (which the concerned trust is not actually imparting) and outsiders are permitted to enrol in such seminars, workshops, courses etc., then the income derived from such activity cannot be characterised as part of education or incidental to the imparting education. Such income can properly fall under the other heads of income.

74. In R.R.M. Educational Society’s appeal before this court, the charitable status of the appellant within Section 10(23C) was denied inter alia on the ground that the institution was not merely imparting education but also was running hostels. It is clarified that providing hostel facilities to pupils would be an activity incidental to imparting education. It is unclear from the record whether R.R.M. Educational Society was providing hostel facility only to its students or to others as well. If the institution provided hostel and allied facilities (such as catering etc.) only to its students, that activity would clearly be incidental to the objective of imparting education.

76. The conclusions of this court are summarized as follows:

It is held that the requirement of the charitable institution, society or trust , to solely engage itself in education or educational activities, and not engage in any activity of profit, means that such institutions cannothave objects which are unrelated to education. In other words, all objects of the society, trust etc., must relate to imparting education or be in relation to educational activities.
Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval under Section 10(23C) of the IT At the same time, where surplus accrues in a given year or setof years per se, it is not a bar, provided suchsurplus is generated in the course of providingeducation or educational activities.
The seventh proviso to Section 10(23C), aswell as Section 11(4A) refer to profits whichmay be incidentally generated or earned by the charitable institution. In the present case, the same is applicable only to those institutions which impart education or are engaged in activities connected to education.
The reference to business and profits inthe seventh proviso to Section 10(23C) andSection 11(4A) merely means that the profitsof business which is incidental to educationalactivity as explained in the earlier part ofthe judgment e., relating to education suchas sale of text books, providing school busfacilities, hostel facilities, etc.
The reasoning and conclusions in American Hotel (supra) and Queen’s Education Society (supra) so far as they pertain to the interpretation of expression “solely” are hereby disapproved. The judgments are accordingly overruled to that extent.
While considering applications for approval under Section 10(23C), the Commissioner or the concerned authority as the case may be under the second proviso is not bound to examine only the objects of the institution. To ascertain the genuineness of the institution and the manner of its functioning, the Commissioner or other authority is free to call for the audited accounts or other such documents for recording satisfaction where the society, trust or institution genuinely seeks to achieve the objects which it professes. The observations made in American Hotel (supra) suggest that the Commissioner could not the records and that the examination of such accounts would be at the stage of assessment. Whilst that reasoning undoubtedly applies to newly set up charities, trusts the proviso under Section 10(23C) is not confined to newly set up trusts it also applies to existing ones. The Commissioner or other authority is not in any manner constrained from examining accounts and other related documents to see the pattern of income and expenditure.
It is held that wherever registration of trustor charities is obligatory under state or locallaws, the concerned trust, society, otherinstitution seeking approval under Section10(23C)shouldcomplywith provisionsof such state laws.This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society etc. This reasoning is reinforced by the recent insertion of another proviso of Section 10(23C) with effect from 01.04.2021.

5. Effects on existing trusts/ societies/institutions/educational institutions

The trust/societies etc. having any other activity in its object clause, which is not educational activity or incidental to education or educational activity, shall have to amend their object clauses to make them solely for education by removing such clauses in the light of this judgment.

Upon changes in the object clauses, the approvals u/s 10(23C)(vi) and/or registrations u/s 12A will have to be sought again by updating the changes.

Henceforth, any amount spent on such non educational activities shall not be allowed as expenditure on the object and in counting the 85% amount for the purpose of exemption u/s 11, 12 and 10(23C)(vi).

6. Education

It may be noted that the term “Education” is not examined by Hon. Apex Court in the present case.

However, the case of Lok Shikshana Trust is referred in the discussion which defined education. The relevant para from the present case are as follows-

32. Education ennobles the mind and refines the sensibilities of every human It aims to train individuals to make the right choices. Its primary purpose is to liberate human beings from the thrall of habits and preconceived attitudes14. It should be used to promote humanity and universal brotherhood. By removing the darkness of ignorance, education helps us discern between right and wrong. There is scarcely any generation that has not extolled the virtues of education, and sought to increase knowledge.

33. The subject of education is vast, even Yet, it is not the broad meaning of the expression which is involved in this case. As was held in T.M.A Pai Foundation (supra), education in the narrower meaning of the term as scholastic structured learning is what is meant in Article 21-A, Articles 29-

30 and Articles 45-46 of the Constitution. As to what is education in the context of the IT Act, was explained in Loka Shikshana Trust v. Commissioner of Income Tax [1975, 101 ITR 234 (SC)] in the following terms:

“5. The sense in which the word “education” has been used in section 2(15) is the instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word “education” has not been used in that wide and extended sense, according to which every acquisition of further knowledge constitutes education. According to this wide and extended sense, travelling is education, because as a result of travelling you acquire fresh knowledge. Likewise, if you read newspapers and magazines, see pictures, visit art galleries, museums and zoos, you thereby add to your knowledge. All this in a way is education in the great school of life. But that is not the sense in which the word “education” is used in clause (15) of section

2. What education connotes in that clauseis the process of training and developingthe knowledge, skill, mind and character ofstudents by formal schooling.”

Thus, education i.e., imparting formal scholastic learning, is what the provides for under the head “charitable” purpose in Sec.2(15).

It may kindly be noted that the Lok Shikshana Trust case pertains to AY 1962-63. The trust was engaged in the business of printing and publication of newspaper and journals and making profits, and claimed exemption u/s 11 of the 1961 Act. The trust’s object clause amongst other was –

“2. The object of the Trust shall be to educate the people of India in general and of Karnatak in particular by

establishing, conducting and helping directly or indirectly institutions calculated to educate the people by spread of knowledge on all matters of general interest and welfare:
founding and running reading rooms and libraries and keeping and conducting printing houses and publishing or aiding the publication of books, booklets, leaf lets, pamphlets, magazines etc., in Kannada and other languages, all these activities being started, conducted and carried on with the object of educating the people…….

Based on the object clauses, the trust claimed that its purpose was charitable u/s 2(15) and claimed exemption u/s 11.

It was in this background that the Hon. Supreme Court made the observations in para 5 and quoted by the Hon. SC as stated above in the present judgment under discussion.

Hon. Supreme Court has opened the present judgment under discussion, with the following lines-

1. It has been said that education is the key that unlocks the golden door to freedom. (quoted from Ravindranath Tagore’s Gitanjali). In Avinash Mehrotra v Union of India ((2009) 6 SCC 398), this court underlined the object and value of education in the following words:

9. Education today remains liberation – a tool for the betterment of our civil institutions, the protection of our civil liberties, and the path to an informed and questioning citizenry. Then as now, we recognize education’s “transcendental importance” in the lives of individuals and in the very survival of our Constitution and Republic.”

In the opening paragraph itself the Hon. Apex court has recognised the wide definition and meaning of education and the objective precisely in one word i.e. liberation.

But in the judgment relied only on the 1962 judgment. Much water has flown under the bridge since 1962.

The system of communication which is an essential part of learning process has undergone tremendous changes. The invent of computers, in fact, is referred to as the “third wave” by the famous writer Alwyn Toffler.

With due respect to Hon. Supreme Court, I am in doubt about whether, for the purpose of the definition of “education” as stated in Lok Shikshana trust still holds good?

What would happen to various institutions working in various fields to impart education to its members without holding a formal classroom?

Let us ask the question about the Tax Consultants’ Associations working across the nation, nay, across the globe. Do these institutions not impart education through journals, seminars, symposiums and various residential and non-residential courses?

In Marathi there is a saying that

केल्याने देशाटन, पंडित मैत्री, सभेत संचार, शास्त्रग्रंथविलोकत मनुजा येतसे चातुर्य फार..

Meaning – by travelling, friendship of intellectuals, talk as a speaker before a gathering and by reading analytical books earns one the intellect. I agree that, this meaning is too wide but it is in our culture to train ourselves from whatever we come across. This is the reason that they say education is an ongoing process.

There are numerous institutions working to train people on field. e.g. Agricultural, farming, horticulture, vermiculture, permaculture etc. etc. and the like. Are these activities not education? What would happen to them?

Wikipedia gives the definition of Education as under-

Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty. Various researchers emphasize the role of critical thinking in order to distinguish education from indoctrination. Some theorists require that education results in an improvement of the student while others prefer a value-neutral definition of the term. In a slightly different sense, education may also refer, not to the process, but to the product of this process: the mental states and dispositions possessed by educated people. Education originated as the transmission of cultural heritage from one generation to the next. Today, educational goals increasingly encompass new ideas such as the liberation of learners, skills needed for modern society, empathy, and complex vocational skills.

Types of education are commonly divided into formal, non-formal, and informal education. Formal education takes place in education and training institutions, is usually structured by curricular aims and objectives, and learning is typically guided by a teacher. In most regions, formal education is compulsory up to a certain age and commonly divided into educational stages such as kindergarten, primary school and secondary school. Non-formal education occurs as addition or alternative to formal education. It may be structured according to educational arrangements, but in a more flexible manner, and usually takes place in community-based, workplace-based or civil society-based settings. Lastly, informal education occurs in daily life, in the family, any experience that has a formative effect on the way one thinks, feels, or acts may be considered educational, whether unintentional or intentional. In practice there is a continuum from the highly formalized to the highly informalized, and informal learning can occur in all three settings. For instance, home-schooling can be classified as non-formal or informal, depending upon the structure.

Public libraries are now acknowledged to be an indispensable part of community life as promoters of literacy, providers of a wide range of reading for all ages, and centres for community information services. Yet, although the practice of opening libraries to the public has been known from ancient times, it was not without considerable opposition that the idea became accepted, in the 19th century, that a library’s provision was a legitimate charge on public funds. It required legislation to enable local authorities to devote funds to this cause.

Public libraries now provide well-stocked reference libraries and wide-ranging loan services based on systems of branch libraries. They are further supplemented by traveling libraries, which serve outlying districts.

In Maharashtra the public libraries are governed under the Education Dept. of State Govt.

After giving a thorough thought to the narrow definition ruled by Hon. Supreme Court, under the Income Tax Act, 1961, do we not need to redefine the word Education?

7. Comparison between 10(23C) and Section 11

For the sake of convenience, the four provisions are reproduced as under-

Section 10(23C)

(iiiab) any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government;

(iiiad) any university or other educational institution existing solely for educational purposes and not for the purposes of profit if the aggregate annual receipts of the person from such university or universities or educational institution or educational institutions do not exceed five crore rupees;

(vi) any university or other educational institution existing solely for educational

purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority.

Section 11

(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.

Hon. Supreme Court has referred to clause (4A) of Section 11 and has observed that,

71. This reasoning equally applies especially in Section 11(4A) which speaks of profits incidental which specifies that exemption in relation to income or trust of an institution which are profits or means of business cannot be exempted unless the business is incidental, trust or as the case may be institution and separate books of accounts are maintained by such trusts or institution in respect of such business. Thus, the underlying objective of seventh proviso to Section 10(23C) and of Section 11(4A) are identical. These have to be read in the light of the main provision which spells out the conditions for exemption under Section 10(23C) – the same conditions would apply equally to the other sub-clauses of Section 10(23C) that deal with education, medical institution, hospitals etc.

In my personal view, the parameters for exemption u/s 11 are not affected by this judgment as far as the educational institutions are concerned. As per section 11(4A) the business, if any, is carried out then it must be incidental to education.

However, it is advisable for all the educational trust/societies to revisit their object clauses and

realign the same with the principles enunciated by this judgment.

If the educational trust/society etc. is carrying out any activity which cannot be called educational or incidental to education, will have to hive off that part either to other trust/society or form a new trust/society and carry out the same separately under the new entity.

Otherwise the existing trust is certainly going to face the music in the years to come.

8. What needs to be done?

The spears of education always keep To define the term too narrowly to only cover the scholastic academic education, other fields which have developed beyond the scholastic education will suffer very harshly and the effects are disastrous.
What is meaning of the term “solely” is defined and interpreted narrowly as against the same was defined widely with the parameter of “predominant object”. For the educational trusts/societies/ institutions, the predominant object test which was hitherto ruled the scenario is overruled now and the objects have to be aligned with education only.
No parent would ever permit the pupil to be admitted to an institution with an inadequate To maintain a high standard of service, the educational trusts/societies will have to maintain their infrastructure and continuously upgrade it to keep in tune with the time.
As the word “solely” is very narrowly defined by Hon. Supreme Court to cover only the scholastic academic education, the basic clauses (iiiab), (iiiad) and (vi) of Section 10(23C), these provisions certainly need to be revisited and redefined to make it wide enough to cover the entire spectrum of education under the same, if India wishes to improve its educational sector infrastructure.
At present the provisions focus on monitoring the One of the suggestion is to monitor the spending instead of creating an artificial and highly debatable and subjective limits or cap on the receipts.

Drafting of the Object clause – Draftsmen try to make it all inclusive as the amendment of the same poses a long and tedious procedure under the state and central laws in addition to those under the Income Tax Act, which makes it compulsory to get it approved from the proper authorities for exemptions u/s 11, 12 and 10(23C). This will have to change drastically.

9. Stanford University’s tax system

I am not an expert in international taxation. But for this subject searched the taxation of Stanford University as I have visited this University personally and have some contacts.

The income of the University is exempt. The definition of exemption gives an interesting insight to the other income which is not exempt.

The words used are “unrelated business” to make the income taxable.

It is defined as under-

For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:

It is a trade or business,
It is regularly carried on, and
It is not substantially related to furthering the exempt purpose of the organization.

There are, however, a number of modifications, exclusions, and exceptions to the general definition of unrelated business income.

It means if the activity is substantially related to the exempt purpose the same is also exempt. This is quite wide and sufficient to cover the allied, but not necessarily incidental, activities of any educational trust/society.

This is too similar to the predominant object theory which prevailed hitherto.

This is just a sample and is given with only primary look into the taxation of that university. An in-depth comparative study of other countries would certainly throw more light on the issue. We as a country can be guided in the light of the same.

Is it not possible for our country to incorporate the wordings or the like to stop the menace of using the word “solely”?

10. Conclusion

The judgment has disastrous effects.

To usher India’s educational sector especially in its infrastructure, with the advancement of technology and tremendous changes since the “third wave”, is it not possible to align the definitions in section 2(15) and exemption sections to make the scope of Education enough wide and clear to avoid any confusion and avoid the costs of litigation?

Part –B

Now let us discuss the landmark judgment in the case of

ACIT (Exemptions) v. Ahmedabad Urban Development Authority, (2022) 115 CCH 0156 ISCC, (2022) 449 ITR 0389 (SC), [2022] 143 taxmann.com 278 (SC), dt. 19-10-2022.

It is a big judgment in every respect. The case covers a wide spectrum of assessees and as many as thirteen senior counsels argued for various parties to the case. The judgment delivered runs into 150 pages and is styled like a book with proper page wise Index to subjects.

The Advancement of any other object of general public utility (GPU) category is always treated different from the per se purposes of medical relief, education, relief to poor, to which are added preservation of environment, preservation of monuments or places or objects of artistic or historic interest, and yoga, states the Court.

“Advancement of any other object of general public utility” (GPU) is the subject of interpretation of this case, says Hon. Supreme Court.

The cases mainly relate to assessment years subsequent to amendment in S. 2(15) and the primary question before the Supreme Court was the correct interpretation of the proviso to Section 2(15), which defines ‘Charitable purpose’.

Hon. Supreme Court has clarified that an assessee advancing GPU cannot engage itself in any trade, commerce, or business or provide service in relation thereto for any consideration. In the course of achieving the object of GPU, the concerned organisation can carry on trade, commerce, or business or provide services in relation thereto for consideration, provided that:

The activities of trade, commerce, or business are connected to the achievement of its objects of GPU; and
The receipt from such business or commercial activity or service in relation thereto does not exceed the quantified limit of 20% of total receipts of the previous year.

Charging an amount towards consideration for such an activity (advancing GPU), which is on a cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto.

Only when the consideration is significantly above the cost incurred by the assessee, it would fall within the mischief of “cess, or fee, or any

other consideration” towards “trade, commerce or business”.

Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities should be conducted in the course of achieving the GPU object, and the income, profit, or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15) has not been breached.

The assessing authorities must on a yearly basis, scrutinize the record to discern whether the nature of the assessee’s activities amount to “trade, commerce or business” based on its receipts and income (i.e., whether the amounts charged are on cost-basis, or significantly higher). If it is found that they are in the nature of “trade, commerce or business”, then it must be examined whether the quantified limit (as amended from time to time) in proviso to Section 2(15), has been breached, thus disentitling them to exemption.

Hon. Court has also observed that the Central Govt. would have to decide on a case to case basis whether and to what extent exemption can be awarded to bodies that are notified under S.10(46).

1. On the issue of binding nature of Circulars

Hon. Court first went through and analysed the history of the sections right from the Act of 1922 which did not define charitable purpose, till the 1961 Act and amendments under the same.

On the issue of binding nature of circulars, it ultimately quoted excerpts from Ratan Melting and Wire Industries case:

6. Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions They are not binding upon the court It is for the Court to declare what the particular provision of statute says and it is not for the Executive Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law.”

And concluded that

123. In the opinion of this court, the views expressed in Keshavji Ravji [(1990) 183 ITR 0001], Indian Oil Corporation [(2004) 267 ITR 272], and Ratan Melting and Wire Industries, [(2008) 220 CTR 0098], (though the last decision does not cite Navnit Lal Jhaveri), reflect the correct position, i.e. that circulars are binding upon departmental authorities, if they advance a proposition within the framework of the statutory provision. However, if they are contrary to the plain words of a statute, they are not binding Furthermore, they cannot bind the courts, which have to independently interpret the statute, in their own terms. At best, in such a task, they may be considered as departmental understanding on the subject and have limited persuasive value. At the highest, they are binding on tax administrators and authorities, if they accord with and are not at odds with the statute; at the worst, if they cut down the plain meaning of a statute, or fly on the face of their express terms, they are to be ignored.

2. Interpretation of Section 2(15)

The court analysed the provisions since its insertion and its journey till amendments by F. Act 2015.

The Hon. Apex Court has thoroughly analysed the term “unless the context otherwise requires”, “in the nature of”, “business”, “in relation to” occurring in S. 2(15) and its provisos and the changes in the section, and how the judicial thinking has shaped it.

It has analysed the term “any other object of general public utility” and the sentence “not being charitable purpose “if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.”

It states that:

138. Parliamentary endeavour, was to alter the regime applicable to taxation of GPU category charities, under the IT Act. The absolute bar imposed on GPU charities from carrying on activities in the nature of trade, commerceor business, or of rendering any service inrelation to any trade, commerce or business,for a cess or fee or any other consideration, evidences this intent. The original Section 2(15) did not allude to trade, commerce or business, or any service in relation to such activities. It only enjoined the GPU charities from involving themselves from carrying on of any activity for profit (which was interpreted in Surat Art Silk). This substantial change brought about by the amendments of 2008-2012 and 2015 is the prohibition from engaging in any kind of activity in thenature of business, commerce, or trade or any rendering any service in relation thereto, and earning income by the way of cess, fee or consideration. In the opinion of this court, the express deletion of the reference to ‘activity for profit’ on the one hand, and the enactment of an expanded list of what cannot be done by GPU charities if they are to retain their characteristic as charities, is an emphatic manner in which Parliament wished to express itself.

It, after taking note of the arguments in brief by the parties on the ground of the term business and analysing it, the Court concluded that:

142. What then is the true meaning of the expressions “fee, cess or consideration”? The careful analysis of the amended proviso to Section 2(15), reveal that the prohibition applies in a four-fold manner-

The bar to engaging in trade, commerce or business,
The bar to providing any service in relation to trade, commerce or business,
Wherein “for a fee, cess or any other consideration” is the controlling phrase for both (a) and (b) (which are collectively referred to as “prohibited activities” for brevity)
irrespective of the application of the income derived from such ‘prohibited activities’.

After analysing terms “cess”,“fee”and“consideration”, the Hon. Court has summarised the interpretation of S.2(15) as under:

152. Section 2(15) – in the wake of its several amendments between 2008 and 2015 – can be juxtaposed with the interpretation of the un-amended Section 2(15) by this Court. In Surat Art Silk [(1980) 121 ITR 0001] the principle enunciated was that so long as the predominant object of GPU category charity is charitable, its engagement in a non-charitable object resulting in profits that are incidental, is The court also declared that profits and gains from such activities which were non-charitable had to be deployed or “fed” back to achieve the dominant charitable object.

153. The paradigm change achieved by Section 2(15) after its amendment in 2008 and as it stands today, is that firstly a GPU charity cannot engage in any activity in the nature of trade, commerce, business or any service in relation to such activities for any consideration (including a statutory fee etc.). This is emphasized in the negative language employed by the main part of Section 2(15). Therefore, the idea of a predominant object among several other objects, is discarded. The prohibition is relieved to a limited extent, by the proviso which carves out the condition by which otherwise prohibited activities can be engaged in by GPU charities. The conditions are:

That such activities in the nature of trade, commerce, business or service (in relation to trade, commerce or business for consideration) should be in the course of “actual carrying on” of the GPU object, and
The quantum of receipts from such activities should be exceed 20% of the total receipts
Both parts of the proviso: (i) and (ii) (to Section 2 (15)) have to be read conjunctively-given the conscious use of “or” connecting the two of This means that if a charitable trust carries on any activity in the nature of business, trade or commerce, in the actual course of fulfilling its objectives, the income from such business, should not exceed the limit defined in sub- clause (ii) to the proviso.

3. Hon. Supreme Court divided it into five groups as under:

Authorities, Corporations or bodies established by statutes,
Statutory Regulators
Trade Promotion bodies
Sports Associations; and
Private Trusts

and has summarised the judgment for each of them in separate paragraphs. However, the underlying principle for all of them stated is that:

Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto.

It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business”.

4. What is nominal or mark-up limit?

Hon. Court has although emphatically mentioned about the nominal or mark-up limit over the cost, but has not defined or clarified what it is. This is left to the legislature to define it and insert in the law, else the revenue is certain to create and make the lacunae a big chaos. An officer working in the field is not likely to have a judgment of what is markedly excess and what is nominal. Without any guiding factor, every officer will have his own judgment, leading the entire situation to sheer chaos.

Best examples are stay applications and Reassessment cases. Although Hon. Supreme Court itself has laid down the principle that it will be open to the authorities, on the facts of individual case, to grant deposit orders of a lesser amount that 20 per cent, pending appeal. [Principal CIT v. LG Electronics India (P) Ltd. (2018) 303 CTR (SC)]. But, practically the authorities do not even wish to read the judgments quoted and given with the stay applications.

Similar is the scenario in reassessment cases. There are cases where Hon. High Court has stayed further proceedings u/s 148A, still the officers have taken further steps in the matter conveniently ignoring, the Hon. High Court’s stay orders, for reasons best known to them.

5. Hon. Supreme Court’s duty

What Hon. Supreme Court has done is, interpreted the law passed by the legislature, as it stands in the statute books.

While reading these judgments, I am reminded of the words of Hon. First Chief Justice Harilal J. Kania, on the occasion of opening of the Supreme Court of free India on 28th January, 1950:

It is not the function of the court to supervise or correct the laws passed by the legislature as an overriding authority. It is its function and duty to point out, when examining the acts of individuals or of the executive authority purporting to be done under some act of the legislature, the lacunae or the loopholes only with the object that, if so desired, the legislative authority may put matters right.

Through various judgements discussed in the series, Hon. Supreme Court has pointed out the lacunae and the loopholes of the law relating to charitable trusts and institutions. Now it is the legislature to put the matters right through corrective amendments to make the functions smooth and to set right the path of growth in the right direction and perspective of the entire charitable sector.

The judgments discussed underline the need as never before, for the law makers, to take utmost care while drafting the law and check all the possible effects of the same before passing and putting it on the statute books.

Let us hope the amendments on a positive side in the coming budget and Finance Bill.

Friends,

The year 2023 is an year of hope, optimism, joy, affection, innovation, artificial intelligence and looking to futuristic trends in life. After almost two year of Covid related issues we are hopeful that 2023 would be a year which would be free of diseases and will bring new buoyancy in the economy.

The New team has taken charge from 1st January, 2023 and we had our first program at Hotel Lalit at New Delhi on 6th January, 2023 which was organized by AIFTP North Zone and West Zone together with Maharashtra Tax Practitioner Association and Sales Tax Bar Association, New Delhi. There was gathering of almost 400 Tax Professionals from throughout India. Credit goes to Mr. Narendra Sonawane of MTPA and Mr. Sripad Bedarkar of MTPA. The special credit goes to Mr. O.P. Shukla, Chairman, North Zone for his efforts and getting registration of around 300+ Members. Sh. Ashvin Acharya, Chairman, West Zone also deserves appreciation for the efforts and Coordinating for the program. My thanks to my dear friend Mr. Sanjay Sharma, President, Sales Tax Bar Association. New Delhi for all the support and encouragement.

The next program for month of January is being organized by AIFTP East Zone on 20th – 22nd of January at Kolkata with WBNUJS. It is a National Evaluative Conference on GST @ 5 which will be discussing impact of GST on Central – State physical and the structural and working of GST Law. Office bearer meeting is also called at Kolkata on 20th January, 2023.

We are working to celebrate 26th January i.e. the Republic Day and also planning to organized some programmes in South.

The National Tax Conference and the NEC will be held on Puri on 3rd – 5th February, 2023. The Conference will be organized on a large scale and Speakers from all over India are the star attraction of the NTC. My request to all Members to participate in large number in the Puri NTC & NEC. Special efforts are being done by the AIFTP Eastern Zone Chairman Mr. Bibekanand Mohanti and the National Vice President, Eastern Zone Mr. Vivek Agarwal for the Conference. Mr. Pradosh Patnaik, Joint Secretary, AIFTP, Eastern Zone if Coordinative for the success of the NTC.

In between of the programmes the budget talk on virtual platform is being organized on 1st & 2nd Feb., 2023 by all Zones. Details of the Budget talks will be circulated shortly.

We are working on connecting the Members of AIFTP to the global world. Accordingly we had decided to launch “AIFTP Global Connect”. It will be a search facility on the website of the AIFTP wherein any person can search the presence of AIFTP Member in any city and can connect with him for the professional work etc. Initially we are making it available to all AIFTP Members and shortly the Members who will verify their data and correct the same on the website of the AIFTP will be given priority and will be said to be the AIFTP verified.

I convey my thanks and gratitude to all the Members for electing me as the National President for the year 2023. It will be my endeavour to work for the tax fraternity and to spread the knowledge and to follow the motto of Ethics, Education and Excellence.

On behalf of AIFTP I convey my best wishes for the happy and prosperous New year, 2023 and a very happy Republic Day.

Regards,

Pankaj Ghiya

National President, 2023

Dear Friends,

Wish you all a very happy, prosperous and eventful year 2023. The Hon’ble Supreme Court, on 2nd January, 2023, upheld the validity of the notification dated 8th, November, 2016, through which the currency notes of Rs. 500/- and Rs.1000/- were scraped. As per court the said notification cannot be termed to be unreasonable and struck down on the ground of decision – making process. However, Hon’ble Justice Nagarathna, differed with the majority judgement on the point of the Central Government’s powers under section 26(2) of the RBI, Act. As per the Hon’ble Justice Nagarathana the Parliament should have discussed the law on demonetization, the process should not have been done through a Gazette notification. Parliament cannot be left aloof on an issue of such critical importance for the country. The Apex Court was the view that “There has to be great restraint in matters of economic policy. Court cannot supplant wisdom of executive with its wisdom. “The Apex Court held that demonetization has a reasonable nexus with the objectives i.e. eradicating black marketing, terror fending, etc. sought to be achieved. It is not relevant whether the objective was achieved or not.

I have a very interesting quote of Mildred Aldrich, who in an American Journalist, lived during 1853 to 1928, passed away in France, once said “There is a law which decrees that two objects may not occupy the same place at the same time-result: two people can not see things from the same point of view, and the slightest

difference in angle changes the thing seen” This statement is correct, especially in the contest of divergence views of courts on the same issue.

In this issue of the Journal eminent professionals have contributed articles on important and relevant issues for we professionals. I am grateful to all the esteemed professionals for sparing their valuable time for the Journal.

K. Gopal,

Editor

Sr. No.	Name of Members	Profession	Zone
1	Kumar Kundan	Adv.	East
2	Punit Kesarwani	Adv.	North
3	Sanjay Kumar Murarka	CA.	East
4	Anjali Rathi	CA.	East
5	Anil Agrawal	Adv.	Central
6	Aarti Jain	CA.	Central
7	Aditya Sharma	GSTP	South
8	Amit Kumar Upadhyay	Adv.	North
9	Rajat Agrawal	CA.	East
10	Hemant Kumar Sahu	Adv.	East
11	Bhavik Bhatia	CA.	Central
12	Lokeshs Singh	Adv.	East
13	Sitaram Agrawal	Adv.	North
14	Kancharla Satish	Adv.	South
15	Rajendra Kumar Tripathi	Adv.	North
16	Atul Kumar Gupta	Adv.	Central
17	Vikas Mittal	CA.	North
18	Hemchand Kumawat	Adv.	Central
19	H. V. Vasanth Kumar	CA.	South
20	Kishor C. Gupta	Adv.	West
21	Anil Kumar Agrawal	CA.	East
22	S. Mahboob Basha	GSTP	South
23	Mahesh Kumar Dudeja	Adv.	North
24	Yashasvi Bansal	Adv.	Central
25	Rohit Sharma	CA.	North
26	Rajesh Kumar Khurana	Adv.	North
27	Adarsh Gupta	CA.	East
28	Tarun Modi	CA.	Central
29	Chetan Agarwal	CA.	North
30	Indra Pal Pandey	Adv.	North
31	Vasu Goyal	Adv.	North
32	Abhinay Singh	CA.	East
33	Revathi Babu	Adv.	South
34	R. Ramachandran	CA.	South
35	Manish Kanth	Adv.	North
36	Bakkiya Narayanan	GSTP	South
37	Ruchita Dhoot	CA.	Central
38	Divesh Chawla	Adv.	West
39	Pramod Kumar Bhatia	CA.	Central
40	Somnath Ghosh	CA.	East
41	Sudhanshu Dwivedi	Cost Accountant	North
42	Manish Binani	CA.	West
43	Vidyadhar S. Apte	Adv.	West
44	Narendra Kumar Sharma	Adv.	North
45	Utkarsh Singhal	Adv.	North
46	Rounak Kothari	Adv.	Central
47	Prem Singh	Adv.	Central
48	Vijay Kumar Gupta	CA.	North
49	Rupak Kapoor	Adv.	North
50	Gulab C. Gupta	Adv.	North
51	Ravindra Tripathi	Adv.	North
52	Pranjal Shukla	Adv.	North
53	Manju Agarwal	Adv.	East

Ankita Prakash & Manish Rastogi

INTRODUCTION

The Indirect Tax regime existing in India underwent a landmark reform with the introduction of Goods & Services Tax (“GST”) w.e.f. 01.07.2017. GST is recognised internationally as a destination-based consumption tax. One of the main reasons behind implementation of GST in India was to replace multiple indirect taxes levied at different points of the value chain with one single tax on ‘supply’ of goods and services and to provide seamless flow of taxes paid on inputs in order to prevent cascading effect of taxes. Consequently, introduction of GST replaced several indirect taxes which were being levied and collected by the Union and the States viz., Sales Tax, Excise Duty, Entry Tax, Service Tax etc.

It is relevant that the First ‘Discussion Paper on Goods and Services Tax in India’ was released by the Empowered Committee of State Finance Ministers wherein, it was emphasized that seamless flow of input tax credit is a key mechanism to avoid cascading effect of taxes. Further, the Seventy-Third Report of the Standing Committee on Finance on the Constitution (115th Amendment) Bill, 2011 also emphasized that a consistent and essential objective of the introduction of GST is to eliminate cascading effect of taxes and tax only the portion of value addition in the supply chain.

The statement of objects and reasons of the Central Goods and Service Tax Bill, 2017 proposed that “the proposed legislation will simplify and harmonise the indirect tax regime in the country. It is expected to reduce cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of goods and services tax that would incentivise tax compliance by taxpayers. The proposed goods and services tax will broaden the tax base, and result in better tax compliance due to a robust information technology infrastructure.¹” Thus, it was clarified that the Bill aimed to broad base the Input Tax Credit (“ITC”) by making it available in respect of taxes paid on any supply of goods or services or both used or intended to be used “in the course or furtherance of business”.

LEGAL FRAMEWORK AND AMENDMENTS:

Value added tax regimes have existed in India

in the past in different forms both as part of the Central as well as State taxation and have had similar features as the present GST. Both statutory as well as judicial precedents of the past would, therefore, have a bearing in interpreting the GST statutes.

Position prior to 09.10.2019

The scheme of ITC in the GST regime is provided under Chapter V of the Central Goods and Services Tax Act, 2017 (“CGST Act”). However, it is subject to certain conditions which are prescribed under Section 16 of the CGST Act which needs to be complied by a registered person to become eligible for ITC. One of the conditions is that the GST charged in respect of such supply has been actually paid to the Government by a supplier. The said Section reads as follows: –

“INPUT TAX CREDIT²

Eligibility and conditions for taking input tax credit.

16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––
1. he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
2. he has received the goods or services or both.
  
  Explanation.-For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––
  1. where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
  2. where the services are provided by the supplier to any person on the direction of and on account of such registered person.
3. subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
4. he has furnished the return under section 39:
  
  Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
  
  Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:
  
  Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.
Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.
A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or 4[****] debit note pertains or furnishing of the relevant annual return, whichever is earlier.

Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub- section (1) of said section for the month of March, 2019.”

A perusal of the above discloses that Section 16 of the CGST Act entitles every registered person to take ‘credit of input tax charged on any supply’ of goods or services or both to him which are ‘used or intended to be used in the course or furtherance of business’ and the amount of ITC claimed shall be credited to the electronic credit ledger of such person. However, the claim is to be made in the manner specified in Section 49 of the CGST Act and is subject to conditions and restrictions as may be prescribed. It is relevant for the present purpose that Section 16 (2) mandates, inter alia, that no ITC can be claimed by a registered person unless: –
1. The recipient is in possession of a tax invoice, debit note or any other prescribed tax paying document issued by the supplier;
2. The recipient has received the goods or services or both;
3. Subject to the provisions of Section 41 or Section 43A, the tax charged by the supplier in respect of the supply has been ‘actually paid’ to the Government. In other words, the amount claimed as ITC by the recipient should have been deposited by the supplier with the exchequer in accordance with law; and
4. The recipient has furnished a return under Section 39 of the said Act.
Therefore, in terms of aforementioned Section 16, the two essential substantive conditions which enable the eligibility of the recipient to avail ITC are that the recipient should be in possession of tax invoice/debit note or any other tax paying document issued by the supplier and he should have received the goods or services. Section 16 (2) (c) of the CGST Act further provides that no ITC can be claimed by a registered person unless tax charged by a supplier in respect of the supply has been actually paid to the Government by the supplier.

Further, as per the second proviso to Section 16 (2), the recipient is required to reverse the ITC availed along with interest thereon in case of non-payment of the value and tax to the supplier within 180 days from the date of issue of invoice. Thus, it is significant to note that even as per the said proviso, the statutory mandate is that if payment is made by the recipient to the supplier within 180 days, ITC can be availed by the recipient.

Section 155 of the CGST Act further imposes burden of proof to establish eligibility to avail ITC on the person claiming the ITC. Therefore, where recipient is claiming ITC, the statutory burden is on the recipient who will be required to establish the satisfaction of all the statutory conditions specified above.

Section 37 of the CGST Act provides that every registered person should furnish details of outward supplies effected during the tax period on or before 10th of the succeeding month and such details such details shall be communicated to the recipient in a prescribed manner. Further, as per Rule 59 of the Central Goods And Service Tax Rules, 2017 (“CGST Rules”), these details are required to be furnished in Form GSTR-1 and once filed, these details will be auto-populated for the recipient in Form GSTR-2A on his GST web portal.

Section 38 of the CGST Act provides that every registered person should either verify, validate, modify or delete, if required, the details relating to outward supplies or credit or debit notes communicated under Section 37 (1) of the CGST Act through GSTR-1 by the supplier of taxable goods and services. It is also pertinent that the recipient can also include the details of inward taxable supplies received by him to claim ITC where the said details have not been declared by the supplier for any reason. Further, Rule 60 of the CGST Rules provides that the registered person should report details for inward supplies in Form GSTR-2 including for invoices and debit notes not reflecting in Form GSTR-2A. However, it is relevant to state at this stage that the GSTR- 2 utility has not been implemented till date on account of GSTN limitations and therefore, no compliance is warranted for the same.

Section 39 of the CGST Act provides that every registered person shall furnish monthly return of inward supplies and outward supplies, input tax credit availed, tax payable and tax paid in prescribed manner. As per Rule 61 of the CGST Rules, every registered person is required to furnish return in Form GSTR-3 on monthly basis as required under Section 39. However, it is pertinent that the Form GSTR-3 utility has not been implemented till date because of GSTN limitation and therefore, Form GSTR-3B has been prescribed as an alternate measure to operationalize the payment of taxes, which tax- payers are required to file on monthly basis.

Section 41 of the CGST Act provides for claim of ITC and provisional acceptance thereof. a registered person, on self-assessment, can take eligible ITC on a provisional basis subject to conditions and restrictions as may be prescribed.

Further, such provisional ITC can be utilized only for payment of self-assessed output tax as per return furnished by the registered person. Thus, the aforesaid Section merely enables a provisional claim of ITC and its finalization after matching the details of inward supplies (purchases) furnished by the recipients with the details of outward supplies (sales) furnished by the suppliers.

Section 42 of the CGST Act relates to the matching, reversal and re-claim of ITC. It provides that the details of every inward supplies furnished by a registered person (recipient) shall be matched with the corresponding details of outward supply furnished by the corresponding registered person (supplier) and in this regard detailed procedure for compliance with the provision have been prescribed in the CGST Rules.

Thereafter, on 01.09.2017, the CBEC Circular No. 07/07/2017-GST was issued in respect of System based reconciliation of information to be furnished in FORM GSTR-1 and FORM GSTR-2 with FORM GSTR-3B. The re-

conciliation procedure set out in the Circular No. 07/07/2017-GST dated 01.09.2017 was kept in abeyance vide C.B.E. & C. Circular No. 26/26/2017-GST, dated 29.12.2017. Thus, it can be seen from the above that the matching mechanism including Form GSTR-2, Form GSTR-1A and Form GSTR 3 set out under the Act and Rules framed thereunder as explained in the Circular No. 07/07/2017-GST dated 01.09.2017 could not be operationalized because of technical limitations and due to this reason, the matching of ITC in the system itself was not enabled. Accordingly, only Form GSTR-1 and Form GSTR-3B were being furnished and considering the minutes of 39th GST Council Meeting held on 14.03.2020, it appears that the existing system of furnishing Form GSTR-1 and Form GSTR-3B continued till September, 2020. Thus, the statutory framework which provided for a system-based reconciliation of the invoices issued and reported by the vendors in their

returns with the ITC claimed by the recipients based on these invoices was not enabled during the period up to September, 2020.

There was thus no fool proof mechanism available with the recipient who had already paid the GST to its vendor to categorically determine whether the vendor had reported all its invoices in its returns or had correctly paid the GST, which it had already collected from the recipient to the GST department.

By way of Section 183 dated 29.08.2018, a new provision Section 43A was introduced in the CGST Act which provides the procedure for furnishing return and availing ITC. Section 43A (4) specifically provides for the procedure to be followed to avail ITC for unreported transactions on the GSTN portal. Further, Section 43A (6) empowers to make recipient of goods and services jointly and severally liable for payment of ITC claimed for unreported transactions by the suppliers. The procedure to recover such ITC is to be prescribed in accordance with sub-section (7) of this Section. Further, Section 43A (4) enables restricting the ITC available to the recipients on the basis of details furnished by the suppliers. In other words, it seeks to put a limitation on the ITC that can be availed by the recipients solely on the basis of details furnished by the suppliers. It is important to note that vide Notification No. 2/2019-C.T. dated 29.01.2019, various Sections of the Central Goods and Service Tax (Amendment) Act, 2018 were operationalized from 01.02.2019. However, Section 18 by virtue of which Section 43A was inserted has not been operationalized/notified till date.

It appears that on account of certain issues regarding purported wrongful availment of ITC, the GST Council in its 37th Meeting held on 20.09.2019, decided to impose certain restrictions on availment of ITC by the recipients. In exercise of power conferred under Section 164 of the CGST Act, the CGST Rules including Rule 36 were notified which provided for documentary requirements and conditions for claiming ITC. Rule 36 (1) and Rule 36 (2) provides for the list of eligible documents and particulars to be mentioned in these documents subject to which ITC can be claimed.

Position w.e.f 09.10.2019

Rule 36 (4) vide Para 3 of the Notification No. 49/2019-CT dated 09.10.2019 was introduced without implementing/notifying the enabling Section 43A of the CGST Act, in exercise of power under Section 164 of the CGST Act imposing a restriction on the ITC that can be availed by a tax-payer. Therefore, with the insertion of sub clause (4), Rule 36 has imposed a restriction that a taxpayer can avail ITC pertaining to outward supplies not declared by his supplier in Form GSTR-1 only up-to the extent of 20% of the eligible ITC available in respect of invoices declared by his supplier in Form GSTR-1. The limitation of 20% has been further reduced to 10% of the eligible ITC available in respect of invoices or debit notes reflected in Form GSTR-2A w.e.f. 01.01.2020 vide Notification No. 75/2019-CT dated 26.12.2019. Further, recently by Notification No. 94/2020 dated 22.12.2020, w.e.f. 01.01.2021, the limitation of 10% has further been reduced to 5%. Therefore, with the insertion of Rule 36 (4), the eligibility of the recipients to claim ITC has been made dependent on the timely filing of GSTR-1 by the suppliers. As per Circular No. 123/42/2019-GST dated 11.11.2019 it was clarified that the restriction under Rule 36 (4) is to be applied by the taxpayers on a self- assessment basis. However, the restrictions under Rule 36 (4) are only applicable on invoices on which ITC is availed after 09.10.2019 and is not applicable to invoices on which ITC was availed prior to 09.10.2019. Thereafter, another clarification was issued vide Circular No. 142/12/2020-GST, dated 09.10.2020, wherein application of Rule 36 (4) for the months of February, 2020 to August, 2020 was explained inter alia Rule 36 (4) is being implemented February, 2020 onwards and ITC is being restricted to 110% (105% w.e.f. 01.01.2021) of the cumulative value of the eligible ITC available in respect of invoices or debit notes, the details of which have been furnished by the supplier in Form GSTR-1. It also transpires that the Rule is sought to be implemented even though Section 43A of the CGST Act containing the substantive provision for such restriction has not been notified.

At this juncture, it is imperative to point out that Rule 36 (4) was introduced only from 09.10.2019 and thus, cannot be applied for the period July, 2017 to September, 2019 and even if the said Rule has been made effective from October, 2019, it cannot be applied to past period and will only be operative prospectively. On a combined reading of the aforesaid provisions of Section 43A and Rule 36 (4), it is evident that prior to 09.10.2019, there was no provision under the CGST Act or CGST Rules which restricted the registered person from claiming ITC even for the transactions not reflecting in GSTR-2A.

This amendment appears to be contradictory to the clarification provided by the Press Release dated 18.10.2018 wherein, it was categorically accepted that entitlement of ITC was not dependent on reconciliation of Form GSTR-2A and actual claim made in GSTR-3B.

Position introduced by the Finance Act, 2021

The Finance Act, 2021 was enacted on 28.03.2021

for the Financial Year 2021-2022 and vide Section 109 of the said Act, clause (aa) has been inserted after clause (a) of Section 16 (2) of the CGST Act i.e., “(aa) the details of the invoice or debit note

referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;” A reading of the above clause (aa) inserted in Section 16 (2) discloses that ITC will not be available to the recipient if the supplier fails to furnish the required details in its statement of outward supplies and if the said details are not communicated to the recipient in the specified manner.

Accordingly, availment of legitimate ITC by a recipient has been made dependent on furnishing of required details by a supplier despite possessing tax-invoice and paying applicable GST charged on the same to the supplier. Section 16(2) (aa) has been made effective w.e.f. 01.01.2022.

ANALYSIS

Section 16 (2) (c) is contrary to the objective behind the introduction of the GST regime and is ex-facie unconstitutional

It appears that Section 16 (2)(c) imposes an unreasonable and onerous condition where the said provision gives an unequal treatment to bona fide recipients of goods and services and thereby violating Article 14 of the Constitution of India. By way of Section 16 (2) (c), burden of ensuring actual payment of tax by the supplier of inputs and input services to the Government has been placed on the recipient and by denying the bona fide recipients the credit of the input taxes paid to registered suppliers, Section 16(2)

(c) of the CGST Act violates Article 14 of the Constitution of India where the principles of Article 14 requires that the Section 16 (2) (c) ought to have adequately protected bonafide purchasers and their substantive rights of claiming ITC.

In our view, Section 16 (2) (c) imposes a disproportionate burden on those recipients who have availed the ITC in accordance with the provisions of Section 16 by making the entire payment towards the inputs/input services within the time frame prescribed under Section

16. The said provisions have the effect that a bona fide recipient who has already made the entire payment to the supplier of inputs/input services will be denied with the ITC merely because of the supplier not having ‘actually paid’ the tax collected from the recipient to the Government. Therefore, ensuring such actual payment by the supplier is an onerous burden on the recipient.

The Hon’ble Supreme Court 4has held that bona fide taxpayers stand on a different footing as compared to willful defaulters and these two unequal categories cannot be equated and by denying credit to the recipient, in case of default on the part of the supplier in payment of tax collected from the recipient, treats a bona fide recipient and mala fide recipient in a similar manner which is completely illegal and unconstitutional. As per Section 16(2)(c) although the bona fide recipient and mala fide recipient represent two different classes, the formers stands to lose out on credit despite being diligent and otherwise, compliant with the provisions of the CGST Act and the Rules. Whereas a guilty recipient in collusion with a guilty supplier enters into a tacit agreement or understanding or arrangement to falsely claim ITC and cause loss of revenue to the Government, an innocent recipient pays his taxes and adheres to all the requirement of the laws yet is penalized in the form of loss of ITC and resultantly, suffer higher tax costs. Thus, the same treatment afforded to both categories of recipients does not have any reasonable basis and results in hostile discrimination against the bonafide recipients.

Denial of ITC to a recipient of goods and services would tantamount to treating both the “guilty recipients” and the “innocent recipients” at par whereas they constitute two different classes. A “guilty recipient” entering into a tacit agreement or understanding or arrangement in collusion with the “guilty supplier” to falsely claim ITC and cause loss of revenue cannot be treated at par with a bona fide recipient.

One can understand the denial of ITC in those cases where the recipient dealer has not acted with caution or without obtaining the documents prescribed under the provisions of Act for availing credit. However, denying the ITC to a recipient who has acted in a bona fide manner and has taken reasonable steps for verifying the credentials of suppliers and received the inputs/input services under competent invoices is clearly violative of Article 14 of the Constitution of India. However, in those cases where the vendors from whom the inputs and input services are received are paid the entire amounts as per the tax invoices which includes both the value of the inputs/ input services as well as the tax and in such circumstances, denying the ITC solely by relying on Section 16 (2) (c) is completely unwarranted and any such interpretation would render the said section as unconstitutional.

It is relevant that even under the erstwhile law, it has been held in various judgments by the Hon’ble Courts that in cases where the purchasing dealer establishes the genuineness of the invoices issued by the selling dealer, ITC cannot be denied5. Even while the said decisions were rendered in the context of the Karnataka VAT Act, 2003, principle that bona fide recipients cannot be subjected to onerous and unwarranted liabilities for the fault of the vendors, will still be applicable to GST regime.

Significantly, Hon’ble Delhi High Court has held that such a provision which fails to make a distinction with regard to purchasing dealers who have bona fide transacted with the selling dealer by taking all precautions, is vulnerable to invalidation on the touchstone of Article 14 of the Constitution of India and had accordingly, struck down the said provisions6. The said judgment of the High Court has since been upheld by the Supreme Court by way of Order dated 10.01.20187. It is imperative to point out that Section 16 (2) (c) is also similar to the provisions of the Delhi Value Added Tax Act which were dealt with by the Hon’ble Delhi High Court and fails to distinguish between case where the recipient has acted bona fide and has made the payment of tax to the supplier and the supplier has failed to make the payment to the Government and other cases where there is a collusion between the defaulting supplier and the recipient. Clubbing both these categories together amounts to clubbing two unequals together and is not a reasonable classification.

Similar provisions under the Haryana Value Added Tax Act, 2003 were under challenge8 and it was held by the Hon’ble Punjab & Haryana High Court that “In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender. However, law nowhere envisages to impose any penalty either directly or vicariously where a person is not connected with any such event or an act. Law cannot envisage an almost impossible eventuality. The onus upon the assessee gets discharged on production of Form VAT C-4 which is required to be genuine and not thereafter to substantiate its truthfulness by running from pillar to post to collect the material for its authenticity. In the absence of any malafide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier thereto, no liability can be imposed on the principle of vicarious liability. Law cannot put such onerous responsibility on the assessee otherwise, it would be difficult to hold the law to be valid on the touchstone of Articles 14 and 19 of the Constitution of India. The rule of interpretation requires that such meaning should be assigned to the provision which would make the provision of the Act effective and advance the purpose of the Act. This should be done wherever possible without doing any violence to the language of the provision. A statute has to be read in such a manner so as to do justice to the parties. If it is held that the person who does not deposit or is required to deposit the tax would be put in an advantageous position and whereas the person who has paid the tax would be worse, the interpretation would give result to an absurdity. Such a construction has to be avoided”

Thus, Section 8(3) of the Haryana Value Added Tax Act, 2003 was read down and it was held that no liability could be fastened on the purchasing dealer on account of any non- payment by the selling dealer except in cases of fraud, collusion etc. The Hon’ble Court read down the provision in order to carve out a distinction between genuine cases as opposed to cases of fraud, collusion etc. Accordingly, it is submitted that Section 16 (2) (c) fails the principle of reasonableness in order to carve out distinction between bona fide recipients and mala fide recipients.

Identical view was taken by the Hon’ble Jharkhand High Court9 wherein it was held that no punitive steps could be taken where the recipient had discharged its VAT liability by paying the supplier and timely filing its return claiming the applicable ITC. It was further held that the fault on the part of the supplier could not be held against the recipient especially when there was no mechanism available with the recipient to compel the supplier to furnish its return within the stipulated time frame and deposit tax from the recipient with the government.

The cases of forgery and collusion stand on a different footing and a taxpayer/dealer cannot be expected to establish what is beyond his control10. Section 16 (2) (c) treats bona fide and mala fide recipients with the same yardstick and further, requires the recipients to ensure payment of tax by the supplier which is beyond the control of the recipient and almost impossible to comply with. Section 16(2)(c) of the CGST Act creates a further classification between (1) a bona fide recipient whose supplier pays the tax to the Government and (2) a bona fide recipient whose supplier, despite such bona fide recipient exercising due caution, defaults in making payment of tax. Thus, in such a case, where there are two recipients both of whom have paid the tax to their respective suppliers on the strength of valid GST invoices, yet one stands to lose out on ITC while the other is allowed to claim the same. Thus, Section 16 (2) (c) creates invidious discrimination between similarly situated assesses which is completely contrary to the principle that equal protection under Article 14 means right to equal treatment in similar circumstances, both in privileges conferred and liabilities conferred and therefore, if the two persons or two sets of persons are similarly situated/placed, they have to be treated equally11.

The Hon’ble Madras High Court12 has quashed Orders demanding entire liability from recipients in similar cases where consideration along with applicable GST had been duly paid by the recipients to the suppliers through banking channels. Thus, it is clear that coercive action should not be taken against bona-fide recipients who have duly paid the invoice amount along with the GST charged therein.

Although the constitutional validity of the Impugned Section 16 (2) (c) was not in question in the said case, the said Section is liable to be read down in view of the well settled legal position which has been reiterated by the Hon’ble Madras High Court.

The test of manifest arbitrariness can be applied to in respect of delegated legislations as well as parliamentary legislations and further, any legislation which is excessive, disproportionate, irrational, capricious and without adequate determining principles is liable to be struck down as being manifestly arbitrary and contrary to Article 14 of the Constitution of India. Section 16(2)(c) imposes onerous condition on the recipients but fails to lay any guidelines to comply with the same. While the mandate of the said Section is to ensure that the tax collected is deposited by the supplier with the Government, it fails to provide any procedure or methodology for the recipient to ensure the same. Therefore, prescription of onerous condition on the recipient and complete absence of determining principles renders Section 16(2)(c) of the CGST as manifestly arbitrary and violative of Article 14 of the Constitution of India.

The Hon’ble Supreme Court13 has laid down legal principles to be applied for striking down taxation statutes which suffer from the vice of manifest arbitrariness. In Author’s view the restriction contained under Section 16(2)(c) is manifestly arbitrary as it is impossible for a recipient to ensure that its suppliers comply with the provisions of the statute. Although as per the condition laid down under Section 16(2)(c), a recipient is not entitled to avail ITC if the tax has not been paid to the Government by the supplier, yet the mechanism stipulated is beyond its control and is an unnecessary hardship for the recipients. Further, the matching provisions have undisputedly not been implemented due to GSTN limitations. In view of the same, Section 16(2)(c) of the CGST Act fails to meet the requirement of reasonableness contained under Articles 14 and 19(1)(g) of the Constitution of India.

It is a settled cannon of interpretation, namely “lex non cogit ad impossibilia”, meaning that the law does not compel a man to do that which he cannot possibly perform meaning thereby that ‘where the law creates a duty or charge, and the party is disabled to perform it without any default in him, and has no remedy over, there the law will in general excuse him; and though impossibility of performance is in general no excuse for not performing an obligation which a party has expressly undertaken by contract, yet when the obligation is one implied by law, impossibility of performance is a good excuse14. Further, “Under certain circumstances compliance with the provisions of statutes which prescribed how something is to be done will be excused. Thus, in accordance with the maxim of Law, Lex non cogit ad impossibilia, if it appears that the performance of the formalities prescribed by a statute has been rendered impossible by circumstances over which the persons interested had no control, like the act of God or the King’s enemies, these circumstances will be taken as a valid excuse.15” The GST law requires that the Supplier shall upload its outward suppliers in GSTR-1 and the same shall be reflected in GSTR-2A of the recipient. Furthermore, in case the Supplier does not submit the sales data, the recipient is provided with an option under the GST law to upload the purchase data and then Supplier was required to take action on the same. Thus, the above procedure designed and crafted under the law is a two-way process which ensures that purchaser has complete visibility on the tax payable by the supplier on supply effected to him. However, due to

incomplete implementation of various forms prescribed under the CGST Act, the Government realized fallacy in their claim and changed the procedure to their advantage for collection of taxes without giving a single thought, as to how a taxpayer will meet his compliance obligations and will come to know the fact as to whether his suppliers have really paid the taxes or not. Section 16(2)(c) of the CGST Act provides for a condition wherein the recipient is not entitled to avail ITC if the tax has not been paid to the Government by the supplier. It is the responsibility of Government to develop and implement a machinery for collection of taxes and take action against erring non tax-payers in cases of default, and such responsibility cannot be shifted on the recipient by way of Section 16(2)(c) of the Act, so as to make the recipient liable for enforcing payment of taxes by the supplier. However, the provisions of CGST Act do not equip or empower the recipient for ensuring payment of taxes by the suppliers. In the absence of any machinery provision, it is impossible to prevent the loss of credit on account of default on the part of its supplier in payment of tax.

Once a recipient has paid the entire invoice value along with the tax charged on the said invoices to the vendors, it cannot be subjected to further onerous and irrational obligations in the form of Section 16(2)(c) to further ensure actual payment to the Government. It is relevant to point out in this regard that as originally contemplated, the provisions of Section 16(2)(c) were subjected to Section 43A, which provided for the procedure for furnishing of returns and availment of ITC. Thus, as originally enacted, Section 16(2)(c) provided safeguards for the recipient to check whether the supplier has actually paid tax or not. However, the said provisions were not brought into force and despite the absence of any mechanism, Section 16(2)(c) alone was brought into effect. The absence of mechanism to verify payment of tax by the supplier, makes it practically impossible for the recipient to even cross-check compliance. In these circumstances, initiation of actions against bona fide recipient is completely unwarranted, onerous and manifestly arbitrary. The legislative intent has not been given full effect and instead, based on incomplete mechanism, illegal actions are being initiated.

Section 16 (2) (c) is also violative of Article 19 (1) (g) and Article 300A of the Constitution of India

As evident from the above, Section 16(2)(c) of the CGST Act casts an impossible burden on the recipient of the supply to either ensure payment of tax by the suppliers or stand to lose out on ITC in case the supplier defaults. In fact, Section 16(2)(c) indirectly requires a recipient to assume the role of a parallel collection agency. Despite being diligent and transacting with registered suppliers against the strength of valid invoices, recipient will have to incur loss of ITC for the defaults of others, thereby increasing the tax cost of running business.

It is a settled principles of law that credit which stood accrued to a tax-payer is a vested right and is protected under Article 300A of the Constitution of India and cannot be taken away without authority of law where Article 300A provides that no person shall be deprived of property saved by authority of law and further, while right to the property is no longer a fundamental right but it is still a constitutional right16.

Under the scheme of Section 16, it is evident that the ITC can only be availed of the tax paid

by the recipient to the supplier. Further, the charging provisions require that the supplier of goods and services will be liable to discharge the tax liability and also take registration under section 22 of the CGST Act. Thus, in the mechanism provided under the CGST Act, the tax liability and statutory obligations to pay the tax casts on the supplier of goods. Further, the specific provisions of Chapter XVI of the CGST Act also empowers to recover tax, impose penalty etc. from the person liable to pay the tax. Thus, sufficient machinery has been provided under the CGST Act for the Department to ensure payment. In such circumstances, by relying on the impugned Section 16(2)(c) cannot bypass the entire statutory machinery for recovery, etc. and demand the same amounts from the recipient who has already borne the burden of tax on the inputs and input services received from such suppliers. Even though under the CGST Act, the supplier has been made responsible for collection and payment of tax since the levy of GST is on the supplier, Section 16(2)(c) practically shifts the responsibility on to the recipient, to ensure that the tax payments have been made by the supplier to the Government in order to make recipient avail ITC, which is certainly against the scheme of the CGST Act besides being onerous, impractical and impossible of compliance.

GST Department has been vested with all the powers to initiate recovery proceedings against the erring suppliers and therefore, depriving the bona fide recipients of the credit of input taxes paid by them on account of any failure on the part of the suppliers falls foul of Article 19

(1) (g) and Article 300A of the Constitution of India. Under the various provisions of CGST Act particularly in Chapter XV, the Department has been vested with the powers to not only recover tax but also to issue notices, impose penalties and collect interest in case of default in payment of taxes. Furthermore, the CGST Act under Section 132 provides for punishment, which are in the nature of imprisonment and fine, for offences where tax was collected but not paid to the Government under certain circumstances Further, the officers have been given the power under Section 69(1) of the CGST Act to arrest a person committing offence under Section 132 of the CGST Act. Therefore, there are adequate machinery provisions under the GST Act empowering the department to initiate appropriate proceedings against the registered dealers/suppliers defaulting in payment of taxes and therefore, there are no cogent reasons to deprive the bona fide recipients of the credit of input taxes paid by them in the face of such machinery provisions. On the other hand, it would be unreasonable to expect from the recipients who do not possess any power to compel the defaulting suppliers to make the payment of taxes under the CGST Act. On the contrary, upon the culmination of recovery proceedings against the erring suppliers, there is no mechanism that has been prescribed under the CGST Act to remit the reversed ITC back to the recipient is grossly unjust and arbitrary.

Section 16 (2) (c) can lead to double recovery from the recipients apart from arbitrary levy of interest under Section 50 of the CGST Act

Despite payment of applicable tax to the supplier against a valid tax-invoice, a recipient will be required to reverse the ITC claimed along with interest under Section 50 of the CGST Act in the event its supplier is unable to deposit the tax due by filing its GSTR-3B. Thus, merely on account of a non-payment by the supplier, the recipient will fail to satisfy the mandate of ‘tax charged in respect of such supply has been actually paid to the Government’ prescribed under Section 16 (2) (c) and resultantly, the

recipient will be obligated to reverse the ITC claimed along with interest under Section 50 of the CGST Act. This would lead to a situation where a recipient will be liable to pay GST twice on the supplies procured viz., once to the supplier and subsequently, to the Government by making appropriate reversal along with the interest due. Therefore, in absence of any redressal available under Impugned Section 16 (2) (c) of the CGST Act, a recipient of goods or services or both will get taxed twice for no fault on his part merely on account of any non- payment of tax by its supplier. Therefore, due to the provision contained under Section 16 (2) (c), levy of interest on the recipient under

Section 50 of the CGST Act despite payment of applicable tax by the recipient to the supplier merely on account of any default on the part of the supplier appears to be arbitrary and bad in law. Where the obligation of the recipient can only be limited to payment of applicable tax to the supplier, interest cannot be imposed on the recipient merely on account of any non-payment or delayed payment of tax to the Government by the supplier.

Section 16 (2) (c) is contrary to the Scheme of availment and utilization of ITC under the GST Regime

Section 16 (2)(c) imposing an unreasonable and arbitrary onus on the recipients runs contrary to the scheme of the CGST Act and the Rules wherein, on satisfaction of the substantive eligibility conditions, the recipient is entitled to the ITC and such ITC is not merely in the nature of a concession but instead, is a substantive right under the CGST Act. A perusal of Section 16 discloses that registered person becomes eligible for availing ITC on fulfilment of conditions and restrictions provided in the said section which, inter alia, requires:

Possession of tax invoice or any other tax paying document, and
Receipt of goods or services or both.

Further, in terms of the second proviso to Section 16, if the payment is not made within 180 days, they ITC is added back to the output liability of the registered person. The intention of the legislature of providing seamless credit mechanism has completely been defeated on account of lack of reasonable classification between bona fide and non bona fide recipient in the impugned Section 16(2)(c). In this regard, it is relevant to note that:-
1. The reason behind the introduction of the GST laws, which subsumed multiple levies, by way of replacement of the multiple indirect taxation levies such as state VAT, Central Excise, Service Tax, Central Sales Tax, Entry Tax etc., was to reduce the complexities that existed in the indirect taxation regime and to reduce the tax costs incurred by the businesses as the cross credit of such levies was not available. Thus, the GST law was introduced to remove the blockage of credit of duty paid on supplies to minimize the cascading effect of the taxes;
2. The aforesaid objective resounded in numerous reports and papers issued by the Government prior to the introduction of the GST. In the ‘First Discussion Paper on Goods and Services Tax in India’ issued by the Empowered Committee of the State Finance Ministers on 10.11.2009, wherein at Para 3.3 (iii), it was echoed that subsummation of taxes should result in free flow of tax credit in intra and inter- state levels;
3. The ‘seamless flow of credit’ was clearly stated to be in the ‘Statement of object and reason’ of CGST Act, relevant except of which has been reproduced hereinabove. Accordingly, the provisions dealing with ITC were provided under Section 16 (1) of the CGST Act;
4. Unlike erstwhile regime, ITC was therefore, not a concession which
  
  was extended to the taxpayers but a substantive right forming the core of the GST legislation and Section 16(1) entitled every registered person to take credit of the input taxes ‘charged’ on any supply to him;
5. As per the scheme of the GST law, the supplier is made liable for payment of GST to the credit of the Government under Section 9(1) read with Section 2(107) and Section 22 of the CGST Act. It is very clear from the said provisions that the liability to pay tax has been cast upon the supplier irrespective of whether the price of the goods and services has been paid to the supplier or not.

Thus, Section 16 (2) (c) appears to impose a manifestly arbitrary condition of ensuring actual payment of tax to the Government by the vendors/input service providers and denying the ITC on this sole basis, defeats the very purpose of the object with which the CGST Act and the provisions of Section 16 were brought in force. The entire purpose of the CGST Act and Section 16 gets defeated on account of the erroneous, irrational and manifestly arbitrary conditions of ensuring ‘actual payment’ on the recipient of inputs/input services.

Rule 36 (4) introduced w.e.f. 09.10.2019 is ultra vires the CGST Act and ex- facie unconstitutional

It seems that in absence of any substantive

provision in the CGST Act enabling restriction on ITC, Rule 36 (4) introduced w.e..f. 09.10.2019 restricts the ITC of the recipients in cases where details of invoices or debit notes have not been furnished by the suppliers under Section 37 (1) of the CGST Act in Form GSTR-1. Thus, purely by way of a delegated legislation, ITC which is otherwise enabled under the CGST Act, has been sought to be restricted merely on account of a mismatch between Form GSTR-3B and Form-GSTR2A. Rule 36 (4) of the CGST Rules is

in the nature of delegated legislation which has been enacted in exercise of the powers conferred under Section 164 of the CGST Act. It is a well- settled principle in law that a subordinate / delegated legislation can be challenged on (1) any ground on which a plenary legislation can be questioned; (2) the ground that it does not conform to the statute or is inconsistent with the statute under which it is made; and (3) the ground that it manifestly arbitrary and unjust.

Thus, instead of enforcing the already existing provisions in place, Rule 36(4) seeks to penalise the recipients for any default by the suppliers which is excessive, unreasonable and also does not serve the object behind its purported introduction viz., possibility of fraud, adverse impact on the revenue and encouragement to suppliers to file FORM GSTR-1. It appears that Rule 36(4) also goes against the very spirit of ensuring seamless availability of ITC to the recipient.

One of the major legislative intents behind introduction of GST was to reduce multiplicity of taxes and ensuring that a seamless flow of credit is available to the recipients to remove cascading of taxes to reduce cost. However, by imposing restriction on ITC that can be availed by the recipients, Rule 36 (4) goes against the very spirit of ensuring seamless availability of ITC to the recipient inasmuch as blocking of ITC would lead to increase in cost of doing business and would ultimately lead to inflation due to cascading of taxes.

CONCLUSION

In the light of the aforesaid discussion, it can be fairly concluded that Section 16 (2)(c) of the CGST Act imposes an unreasonable and onerous condition and provides an unequal treatment to bona fide recipients of goods and services. In Author’s view, any such condition which

imposes onerous condition on the recipients but fails to lay down any guidelines to comply with the same is completely illegal, arbitrary and falls foul of the constitutional mandate.

ITC is a vested right and the same cannot be taken away without the authority of law and the burden to pay tax cannot be shifted upon the recipient who has already paid the value of goods and services as well as the tax amount to the supplier.

In Author’s view, restriction upon right to claim ITC as provided under Section 16(2)(c) fails on the touchstone of Article 14, 19 as well as Article 300 of the Constitution of India. As far as the author can understand, furnishing of outward details in FORM GSTR-1 by the corresponding suppliers and the facility to view the same in FORM GSTR-2A by the recipient is in the nature of taxpayer facilitation and cannot bear any impact upon the ability of a recipient to avail ITC on self-assessment basis in consonance with the provisions of section 16 of the Act. Further, any procedural requirement cannot deny the substantive right to claim ITC which is otherwise available to a recipient. Furthermore, it is impossible for a recipient to verify that a supplier has paid tax or not. In fact, when it is sufficiently established that the recipient has paid tax and the default is on the part of the supplier, the liability for the same cannot be fastened on the recipient at all.

Thus, it can be concluded that the restrictive condition provided under Section 16 (2)(c) is completely arbitrary, illegal and stands unconstitutional in view of the forgoing discussion.

(Source: Third Prize winner of Padma Vibhushan Nani A. Palkhivala Memorial National Research Paper Competition 2022)

Central Goods and Service Tax Bill, 2017
Goods And Services Tax Act, 2017 (Act 12 of 2017)
Central Goods and Service Tax (Amendment) Act, 2018 (31 of 2018)
Shree Bhagwati Steel Rolling Mills v. CCE, 2016 (3) SCC 643
Onyx Designs v. ACC (Audit, Bangalore), 2019-VIL-285-KAR; State of Karnataka v. Rajesh Jain, 2016-VIL-701-KAR; Mukand Ltd. v. State of Karnataka, 2018-VIL-82-KAR
On Quest Merchandising India Pvt. Ltd. v. UOI, 2017-TIOL-2251-HC-DEL-VAT
CTE v. Arise India Ltd., 2018-TIOL-SC-VAT
Gheru Lal Bal Chand v. State of Haryana, [2013] 29 Taxmann.com 484 (P&H),
M/s Tarapore & Co. v. State of Jharkhand, 2020-TIOL-93-HC-JHARKHAND-VAT
Chunni Lal Parshadi Lal v. Commissioner of Sales Tax, UP, (1986) 2 (SCC) 501
UOI & Ors. v. N.S. Rathnam & Sons, (2015) 10 SCC 681
M/S. D.Y. Beathel Enterprises v. The State Tax Officer, 2021 (3) TMI 1020
Shayara Bano v. UOI & Ors., (2017) 9 SCC 1, Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, DCIT v. Pepsi Foods Ltd., 2021 SCC Online SC 283
Broom’s Legal Maxims, 10th ed. (1939) pp. 162-163
Craies on Statute Law (6th ed, p. 268)
SKH Sheet Metal Component v. UOI, 2020 (38) G.S.T.L. 592 (Del.), Siddharth Enterprises v. Nodal Officer, 2019 (29) GSTL 664

(Guj.), CCE, Pune v. DaiIchi Karkaria Ltd., 1999 (112) ELT 353 (SC), Eicher Motors Ltd. v. UOI, 1999 (106) ELT 3

Priyanshi Desai, Advocate

Introduction

The objective behind interpreting laws is to clarify the ambiguous words and their meaning according to the intention of the legislation.

There are certain principles of interpretation which are exercised by the Courts for interpretation of statutes.

In this Article, a detailed discussion will be on the “Principle of Ejusdem Generis”, which is one of the principles of interpretation.

Meaning and definition of “Ejusdem Generis” “Ejusdem generis” is a Latin term and the meaning of it is “of the same kind and nature”.

Practical Application of Rule of Ejusdem Generis

The Rule of Ejusdem Generis comes into picture whenever any legal provision comprises of general words which follows words of specific class or category and is to be applied to interpret the general words.

For instance, Explanation (baa) to Section 80HHC(3) of Income-tax Act, 1961 defines “profits of business” for the purpose of availing profit-linked deduction in respect of export business from gross total income under the aforesaid section.

This Explanation emphasizes that certain receipts of income should be excluded from the profits of business. One of such exclusion enshrined in Explanation (baa) is receipts by way of “brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits”.

So here general word is “charges” which is following specific words i.e. “brokerage, commission, interest, rent”. Now, how should the word “charges” be interpreted. The word “charges” is to be interpreted by applying the Rule of Ejusdem Generis.

In-depth analysis and practical applicability of the rule is discussed as follows:

What does Rule of Ejusdem Generis envisage?

The Rule of Ejusdem Generis provides that when a list of specific words are being followed by the general words in a section, sub-section, proviso or a clause of a statute then the general words are interpreted in a way so as to restrict them to include the items or things which will be of same type as those of the specific words.

Applicability of Rule of Ejusdem Generis

The Rule of Ejusdem Generis would apply as a canon for interpretation of statutes only if following conditions are satisfied cumulatively:

Condition No.1: The provision must consist of specific words and general words

And

Condition No.2: The specific words should be followed by general words

And

Condition No.3: The specific words should constitute a distinct genus/class/category

And

Condition No.4: There must be an intention of the statute to restrict the meaning of the general words to the genus/class of the specific words it follows.

If all these conditions are satisfied cumulatively then the meaning of the general words will be restricted to same class/category of the specific words.

Example

Let us understand this rule with an example.

For instance, a provision of a particular legislation makes a reference to words like “car, trucks, tractors, bikes and other motor-powered vehicles”. So here specific words are “car, trucks, tractors and bikes” which are constituting a distinct genus or class of land transport vehicles and general words are “other motor-powered vehicles”.

Therefore, the conditions for applying the Rule of Ejusdem Generis are fulfilled.

So, by applying this rule, the meaning of “other motor-powered vehicles” will be restricted to the same class or category of land transport vehicles constituted by the specific words i.e. car, trucks, tractors and bikes.

In other words, “other-motor-powered vehicles” will not include any air plane or ship because the specific words preceding the aforesaid general words are constituting distinct class of land transport vehicles.

CIT v. Divya Jewellers (P.) Ltd. [2014] 368 ITR 671 (Allahabad High Court)

Allahabad High Court has defined the Rule of Ejusdem Generis in the case of CIT v. Divya Jewellers (P.) Ltd. The High Court have envisaged that:

“Ejusdem generis rule is the rule of generic words following more specific ones. The rule is that when general words follow specific words of the same nature, the general words must be confined to the things of the same kind as those specified. The specified words must form a distinct genus or category. The rule reflects an attempt to reconcile incompatibility between specific and general words.” [Para No.13]

Specific words must constitute distinct genus/class

In order to invoke the application of this rule there must exist a distinct genus, class or category of the specific words.

In the recent case of B. Rudragouda v. ACIT [IT Appeal Nos. 314 & 315 of 2020] dated 15.04.2021,

Bangalore Bench of ITAT held that

“Ejusdem Generis rule being one of the rules of interpretation, only serves, like all such rules, as an aid to discover the legislative intent; it is neither final nor conclusive and is attracted only when the specific words enumerated, constitute a class, which is not exhausted and are followed by general words and when there is no manifestation of intent to give broader meaning to the general words.” [Para No. 16]

Intention of the statute to restrict the meaning of the general words

Another condition to be fulfilled for applying the Rule of Ejusdem Generis is that there must be an intention of the statute to restrict the meaning of the general words to the genus/class of the specific words it follows.

This intention can be found out when the statute deliberately uses the words of specific class/ category which are followed by the general words. And if the Court will go in contrary to that intention and gives wider meaning to the general words then the purpose of the legislation will be defeated.

In the case of Lilawati Bai v. Bombay State, the Supreme Court observed that

“Where the context and the object and mischief of enactment do not require restricted meaning to be attached to words of general import, the Court must give those words their plain and ordinary meaning.”

CIT v. Divya Jewellers (P.) Ltd. [2014] 368 ITR 671 (Allahabad High Court)

Facts of the case

Assessee was manufacturer and exporter of gold jewellery and was also manufacturing jewellery Rule of Ejusdem Generis from the perspective of interpretation of Income-tax Laws for others on job work basis. Assessee claimed profit-linked deduction in respect of export business under section 80HHC of the Income-tax Act, 1961. The formula for computing profit- linked deduction is derived in Section 80HHC(3) which is as follows:

Export Profit (Profit Linked Deduction) =

Profits of business * Export Turnover

____________________________________________

Total Turnover

The assessee included job work charges in the profits of the business which is the numerator of the above formula.

Legal Provisions Involved

Explanation (baa) to section 80HHC(3) defines “profits of business” and emphasizes that certain receipts of income should be excluded from the profits of business. Explanation (baa) is reproduced as follows:

“Explanation. – For the purpose of this section,— . . .

(baa) ‘profits of the business’ means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by—

ninety per cent. of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and
the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India ;”

Assessing Officer’s action

The Department by invoking clause (1) of Explanation (baa) excluded job work charges from the profits of business on the context that receipts by way of charges are required to be specifically excluded from the profits of business for the purpose of computation of profit-linked deduction.

Findings and Observations of the High Court

It was found that receipt by way of job work charges were integral part of core business activity.
The High Court observed that the word “charges” used in sub-clause (1) of Explanation (baa) is found in the company of expressions like “brokerage”, “commission”, “interest”, “rent”.
By applying the rule of ejusdem generis, it was concluded that in sub-clause (1) of clause (baa), the word “charges” are preceded by the words of specific nature, such as brokerage, commission, interest, rent, etc. These specific words formed a distinct genus or category inasmuch as all those items relate to receipts earned by an assessee from non-core business activity. In such circumstances, the meaning of the word “charges” should be restricted to the distinct category formed by the specific words i.e. brokerage, commission, interest, rent, etc. If so, the word “charges’ should be confined to those charges which do not form integral part of the core business activity of the assessee.
In the present case, the job work charges included by the assessee in the profit of business for the purpose of computing profit-linked deduction were forming an integral part of its principal business.

Decision
Therefore, it was held that the job work charges received by the assessee-company for the job works undertaken as in the nature understood in this case could not be held as similar to the word “charges” provided in sub-clause (1) of clause (baa) of the Explanation given under section 80HHC.
Accordingly, it was held that job work charges would form part of operational income and had to be included in profits of business for computation of deduction under section 80HHC.

(Source : Article published in Souvenir released at National Tax Conference held at Dwarka on 2nd & 3rd October, 2022)

CA R.V. Shah

Preliminary:

Title of Chapter XX-C comprises of 16 sections, Section 269U to Section 269 UP. The title of Chapter XX-C is indicative of the nature of power and proceedings. The nature of power is penal and the proceedings are quasi criminal. The satisfaction of the component authority is exclusively a subjective satisfaction based on objective facts. Sections 269U to 269V were inserted by Finance Act, 1986 with effect from 1st October, 1986 vide Notification No. SO480(E), dated 7th August, 1988, i.e., assessment year 1986-87.

Section 269UA contains various definitions such as:

Apparent consideration
Appropriate authority
Immoveable Property
Person interested, and
Transfer

Agreement for transfer means an agreement for the transfer of any immovable property, whether registered under Registration Act, 1908 or not?
Apparent consideration:

In relation to any immovable property in respect of which an agreement for transfer is made for immovable property means:

If it is to be transferred by of sale, the consideration for such transfer as specified in the agreement of transfer would be an apparent consideration.
The ordinary meaning of the word “sale” is a transaction entered into voluntarily between two persons known as buyer and the seller by which the buyer acquires the property of the Seller for an agreed consideration known as price – Calcutta Electric Supply Corporation Ltd. 19 ITR 406 (Cal.). The term “Sale” means the transfer of property for a price CIT v. Devas Cine Corporation 68 ITR 240 (SC). Thus, the money consideration is an essential ingredients of a transaction of sale. Hon’ble Supreme Court in Jagdish Sugar Mills Ltd. v. CIT 161 ITR 209 (SC) has held that the sale would include an auction sale.
If the immovable property is to be transferred by way of exchange:
1. In a case where the consideration for transfer consists exchange of one property for another, the price that such property would ordinarily fetch on sale in the open market on the date on which the agreement for transfer is made and such sum.

The meaning of the word “Exchange” necessarily presupposes existence of two different properties owned by different persons. As a result, the ownership of one property is transferred to the owner of the other property and vice versa CIT v. Rasiklal Maneklal (HUF) 95 ITR 656 (Bom.)

The immoveable property is to be transferred by way of lease:

In a case where the consideration for the transfer consists of premium only, the amount of premium as specified in the agreement for transfer would be an apparent consideration.
In a case where the consideration for the transfer consists of rent only, the aggregate of moneys, if any, payable by way of rent and the amounts for the service of things forming part of or constituting the rent as specified in the agreement for transfer would constitute apparent consideration.
In a case where the consideration for transfer consists of premium, the moneys (if any) payable by way of rent and the amount for the service or things forming part of or constituting the rent, as specified in the instrument of transfer would constitute apparent consideration.

A lease is a division of bundle of rights. The full “bundle of rights” inherent in property with freehold tenure may further be divided by a lease or leases so as to create two or more interest in the property like lessor’s interest, lessee’s interest, sub-lessee’s interest etc.

Discounted value of consideration: Where the whole or any part of the consideration for such transfer is payable on any date or dates falling after the date of such agreement for transfer, the value of the consideration payable after such date shall be deemed to be “discounted value” of such consideration, as on the date of

such agreement for transfer, determined by adopting such rate of interest, i.e., 8% per annum vide Rule 48I.

Section 269UA(2): Any immoveable property in respect of which an agreement for transfer is made of immovable property means:

Where the consideration for transfer consists of a sum of money only, then such sum (i.e., case of sale);
Where the consideration for the transfer consists of a thing or things only, the price that such thing or things would ordinarily fetch on sale in the open market on the date on which the agreement for transfer is made, and such sum (i.e., case of exchange);
Where the consideration for the transfer consists of a thing or things and a sum of money, the aggregate of the price that such thing or things would ordinarily fetch on sale in the open market on the date on which agreement for transfer is made and such sum (i.e., in case of lease).
Where the whole or any part of the consideration for such transfer is payable on any date or dates falling after the date of such agreement for transfer, the value of the consideration payable after such date shall be deemed to be the “discounted value” of such consideration, as on the date of such agreement for transfer determined by adopting discounted rate of 8% under rule 48-I.
“Immoveable Property”: The term “immoveable property” has been defined in sub-section (2)(d) of Section 269UA. It means (i) any land or any building or a part of the building and includes, where any land or any building or part of the building is to be transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also. (ii) Any right in or with respect to any land or any building or part of the building (whether or not including any machinery, plant, furniture, fittings or other things therein) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building.

The definition of immoveable property is exhaustive.

It means (i) any land or building or any part of a building to be transferred together with any machinery, plant, furniture, fittings or other things. (ii) Any right in respect of or with respect to land, building or part of the building which has been constructed or which is to be constructed or by becoming a member of or acquiring shares in a cooperative societies or association of persons or by way of any agreement or any arrangement of whatsoever nature.

“Person Interested”: Section 269UA(2)(e) defines the term persons interested in relation to any immoveable property and includes all persons claiming or entitled to claim and an interest in the consideration payable on account of the vesting of the property in the Central Government.

“Transfer”: (i) Transfer in relation to immovable property is by way of sale or exchange or lease for a term of not less than twelve years; and (ii) includes allowing the possession of such property to be taken or retained in part performance of a contract referred to in Section 53A of the Transfer of Property Act, 1882. (iii) Transfer in relation to immovable property

means doing of anything by way of admitting a member, or of by way of transfer of shares in a co-operative society or company or other association of persons by way of agreement or arrangement or in any other manner which has the effect of transferring or enabling the enjoyment of such property.

Nature of powers:

The nature of power is penal and proceedings are quasi criminal. CIT v. Vimlaben Bhagwandas Patel & CIT v. Kamlaben Kanjibhai Patel [1979] 1 Taxmann 183 (Guj.). The satisfaction of the competent authority is absolutely a subjective satisfaction based on objective facts. Conditions precedent required is to be satisfied before the Competent Authority can exercise his satisfaction of initiating proceedings. For initiation of proceedings, two conditions have to be satisfied by the Competent Authority. Appropriate notice has to be published in the gazette must be observed and the principles of natural justice has to be observed by the Competent Authority in the course of inquiry for acquisition. Competent Authority in the context of acquisition proceedings under Chapter XXC has to follow the best method of valuation to arrive at fair market value. It is desirable that Competent Authority must resort to checks and counter checks by applying two or all the methods, namely, opinion of experts, principles of natural justice, price paid within a reasonable time in bonafide transactions of purchase of land acquired or of adjacent lands and number of years purchase of actual or immediately prospective profits of land acquired.

Restriction on transfer of immovable property:

There cannot be any transfer of immovable property in such area and value exceeding five lakh rupees provided in Rule 48K of the Income-tax rule, 1962 shall be effected except after an agreement for transfer is entered into between persons who intends transferring the immovable property atleast four months (prior to 1-6-1993, it was three months) before the intended date of transfer. The agreement shall be reduced to writing in the form of a statement by each of the parties to such transfer or by any of the parties to such transfer acting on behalf of himself and on behalf of the other parties.

The agreement shall be recorded in writing in the form a statement by each of the parties to such transfer or by any of the parties to such transfer.

Section 269UC(3) provides that every statement shall contain the following:

It shall be in the prescribed form 37-I under Rule 48 Lacs.
It shall set forth such particulars as may be prescribed; and
It shall be verified in the prescribed manner.

The said statement shall be furnished to the appropriate authority in such manner and within such time as may be prescribed by each of the parties to such transactions acting on behalf of the other parties.

Section 269UC(4) provides that above referred statement furnished to the appropriate authority is found to be defective, then the said authority shall intimate the defect to the parties concerned and give them the opportunity to rectify the defect within a period of fifteen days (15) from the date of intimation or within such further period the appropriate authority on an application made may extend further period as may be allowed and the defect is not rectified within the period fifteen days (15) or the further period so allowed, then such statement shall be deemed never to have been furnished.

Purchase of Immoveable Property by Central Government:

Section 269UD provides that the appropriate

authority may make an order for the purchase by the Central Government of such immovable property at an amount equal to the amount of apparent consideration.

It further provides that no such order shall be made in respect of any immovable property after the expiration of two months from the end of the month in which the statement in respect of such property is received by the appropriate authority under Section 269UC.

Second Proviso to Section 269UD provides that statement referred in Section 269UC is received on or after 1st June, 1993, no order shall be made for purchase of such immovable property after expiration of three months.

Section 269UD(1A) provides that the appropriate authority shall give a reasonable opportunity of being heard to the transferor, the person in occupation of the property, the transferee and to every other person in occupation of the immovable property and every other person whom the appropriate knows to be interested in the purpose.

Vesting of Property in the Central Government:

Section 269UE provides that where an order is made under Section 269UD(1), by the appropriate authority under Section 269UA(d) (i), such property shall on the date of such order, vest in the Central Government in terms of the agreement for transfer.

It further provides that where the appropriate authority, after giving reasonable opportunity of being heard to the Transferor, transferee or other interested persons in the said property, is of the opinion that any encumberance on the property, or the leasehold interest specified in the above agreement for transfer with a view to defeat the provisions of Chapter XX-C the appropriate authority may declare by an order that such encumbrance or leasehold interest is void and thereupon the said property shall vest in the Central Government.

Section 269UE(7) provides that where any rights in any immovable property, being rights in or with respect to, any land or building or a part of the building which has been constructed or which is to be constructed have been vested in the Central Government shall have the effect as if the reference to immovable property therein with reference to such land or building or part thereof as the case may be.

Payment of consideration for purchase of immoveable property by the Central Government:

Where an order for purchase of any immovable property is made, the Central Government shall pay by way of consideration for such purchase an amount equal to the amount of such apparent consideration.

Payment or deposit of consideration: Section 269UG provides that the amount of consideration shall be tendered to the person or persons entitled thereto, within a period of one month from the end of the month in which the immoveable property vests in the Central Government under Section 269UE.

Immunity to Transferor against claims of Transferee for transfer:

Section 269UM provides that when order for the purchase of immovable property by the Central Government is made no claim by the Transferee shall lie against the Transferor by reason of such transfer being not in accordance with the agreement for the transfer of immovable property entered into between the Transferor and the Transferee.

Order of an appropriate authority to be final and conclusive:

Section 269UN provides that any order made under Section 269UD or 269UF shall be final and conclusive and shall not be called in question in any proceedings under the Act or under any other law for the time being in force.

Chapter XX-C shall not apply to certain transfers:

Section 269UO provides that at this Chapter shall not apply to or in relation to any immovable property where the Agreement for such transfer is made to his relative on account of natural love and affection.

CA Anilkumar Shah

The need of the Charitable Trusts carrying out various activities of public charitable purposes do not need any elaboration, especially in the country of culture of giving is known for more than 5000 years.

The rising economic disparity in the society necessitates the need as never before. The need is further aggravated by the inability of the Govt. to input the resources in the basic infrastructure in the fields like 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. That is the reason these objects are inserted in the definition of Charitable Purpose as defined in Sec.2(15) of the Income Tax Act, 1961 (the Act).

The country is still struggling to build infrastructure and basic amenities in the fields especially of education and medical facilities.

The provisions regarding exemptions to charitable trusts have undergone many changes especially during the last decade.

Since 2015 the provisions in the Act have undergone major changes and amendments. The misuse of the exemption provisions by some errant trusts have made the Govt. to make the changes in the Act. But, more than that the revenue has been haunting the trusts to tax its receipts and curb the exemptions day by day.

In majority of the cases lack of understanding of the exemption provisions has raised many

avoidable litigations and in the process, the settled positions are unsettled even by Hon. Apex Court changing its own interpretations.

Three recent judgments of far reaching nature, two of Hon. the Supreme Court and one by Hon. Madras High court, which I wish to draw attentions of the readers to: –

ACIT (Exemptions) v. Ahmedabad Urban Development Authority, [2022] 143 taxmann.com 278 (SC), dt. 19-10-2022.
New Noble Educational Society v. CCIT, [2022] 143 taxmann.com 276 (SC), dt. 19-10-2022.
CIT v. M/s. MAC Public Charitable Trust & others (T.C.A. No. 303, 309 & 310 of 2021; T.C.A. No. 62 & 63 of 2022), dt. 31-10-2022.

All the three judgments require a separate article each to discuss the issues and far reaching impacts of each of them.

We will discuss them in a series of articles starting from this article.

Let us first take up the case of –

CIT v. MAC Public Charitable Trust & others, [2022] 144 taxmann.com 54 (Madras)

Facts in brief

It may kindly be noted that the facts in this case played a vital role and hence have to be understood properly.

Brief facts of the lead case were as under-

The assessee, Sri Venkateswara Educational and Health Trust registered as Charitable Trust under Section 12A (a) of the Act and filed the return of income with ‘nil’ income for the AY 2011-12.

On verification of ITR and other details during scrutiny, it unfolded that Rs.9,90,50,000/- was received by the Assessee as corpus donation from M/s. MAC Charities, M/s. MAC Public Charitable Trust and M/s. Spic Educational Foundation etc. This amount was received by the Assessee as donations from number of persons. To verify the same, elaborate exercise was undertaken by the Assessing Officer (AO) by issuing summons to various persons and their sworn statements were recorded.

The enquiry revealed that the said amount was paid to M/s. United Educational Foundation, in lieu of procuring seats in Sri Venkateswara College of Engineering which is a unit of the Assessee.

Further analysis concluded that there was a nexus between M/s. United Educational Foundation, M/s. MAC Charities, M/s. MAC Public Charitable Trust and Sri Venkateswara College of Engineering.

The AO also concluded that the Assessee utilised M/s. United Educational Foundation, M/s. MAC Charities, M/s.MAC Public Charitable Trust as a tool for transfer of capitation fees received from the students and thereby virtually sold education for a price.

Such practice of receiving donation and/or capitation fee as a condition precedent for admitting a student is opposed to the provisions of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992.

The enquiry also unfolded that the Assessee demanded and insisted the parents of the

students, who wish to get admission for their children, to pay capitation fee to the other trust in the name of their relatives or friends of the parents, but not in their name. The parents also, in the interest of admitting their children in the said College, were forced to pay capitation fee in the name of their relatives or friends.

According to the AO, the analysis of the fund transactions confirms that the Assessee made to appear that the contributors voluntarily paid the capitation fee, which was channelised through other trusts.

The donations received in the other trusts as Corpus donation and also paid as Corpus donations to the college trust.

Thus, the Assessee had purposefully and intentionally channelised the capitation fee in the name of donations back to themselves, thereby exempting the receipt of amount at both ends and confirmed the same through sworn statements from some of the parents and donors.

The AO also noticed that as per the Trust Deed dated 01.08.1984, the founder of the Trust was Mr. L.V. Ramaiah, but on examination of the supplementary deed dated 13.06.1995, it was executed by Dr. A.C. Muthiah. An amendment deed dated 17.12.2011 was also perused which indicated that it was executed by Mr. M.H. Avadhani. Therefore, the Assessee was called upon to submit evidence for change in trustees and to explain, whether it was intimated to the Director of Income Tax (Exemptions), but the Assessee failed to respond to the same.

The assessment for all the trusts were completed on the same lines. The exemption u/s 11 was denied and donations were treated as income and tax levied for the years AY 2011-12, 2013-14 and 2014-15 for all the trusts.

Appeal before Hon. CIT(A)
The assessee trusts filed appeal and the Hon. CIT(A) allowed the appeals with the following conclusions-
1. There is no prohibition in law for a charitable institution to receive donation from another charitable institution.
2. There is also no prohibition in law for a charitable institution to give donation to another charitable donation
3. The donation given by the Assessee trust is application of income and hence exempt u/s.11 of the Act.
4. The donation received and given by the Assessee trust are voluntary in nature.
5. The Assessee trust is not connected with receipt of donation/capitation fee by any trust from anyone.
6. The Assessee trust is not connected with the admission of students to any Engineering College.
7. In result, the appeal of the appellant trust is fully allowed.

(Note: It may be noted that now the donation to other trusts is not allowed as application of income in the hands of the donating trust.)

Appeal before Hon. ITAT

Aggrieved by the orders so passed by the Appellate Authority dated 01.08.2014 relating to the AY 2011-12, the Revenue preferred the appeals before the Income Tax Appellate Tribunal. It was contended on behalf of the Revenue before the Tribunal that the funds were mostly diverted to their connected/related charitable Trusts in order to secure admission for the relatives/wards of the donors in the educational institution run by M/s. Sri Venkateswara Educational & Health Trust. The Revenue placed reliance on the sworn statements recorded from various persons.

The Tribunal, by a common order dated 12.04.2017, rejected the contentions so made on

the side of the Revenue by observing that the statements recorded from the donors revealed that they made the donations voluntarily.

Further observations of the Hon. ITAT were as under-
- The AO did not examine the source of investment made by the donors. While so, it could be inferred that the AO might have coerced the individual donors and obtained the statements as the donors have changed their stand before the AO.
- None of the donors or the parents/ students studying in the educational institutions did make any complaint to any of the authorities complaining the so-called extortion of money in the form of donation for securing admission in the educational institutions run by M/s. Sri Venkateswara Educational & Health Trust.
- There is no bar for the Assessee Trusts to receive and/or accept voluntary donations from the donors or from the relatives/ parents of the students studying in the educational institutions connected with the charitable trusts.
- There may be quit-pro-quo arrangement for receipt of donation, but unless it is established by cogent evidence drastic decision cannot be arrived at by withdrawing the benefit of Section 11 of the Act to all the charitable trusts which will jeopardize the functioning and the very existence of the charitable educational institutions.
- The trusts have issued valid receipts for the donations received and had maintained the names, address of the donors as per the provisions of the Act.
- There is no finding with respect to any violation of Section 13 of the Act, because the donations received by the respective charitable trusts are spent according to the objects of the trusts.
  
  In effect, the Tribunal opined that the AO had not brought out credible materials to show that the Assessee Trusts had received donations as a condition precedent for allotment of seats to the student in M/s. Sri Venkateswara College of Engineering. Accordingly, the Tribunal dismissed the appeals preferred by the Revenue.
Appeal before Hon. High Court

of Madras The reported order of Hon. High Court runs in 124 pages and the issues involved are discussed in depth.

There were total 20 cases decided together, and as the issues involved in all these appeals were common, they were taken up for hearing together and were disposed of by this common judgment.

Submissions by the Revenue
In appeal before Hon. High Court the learned Senior Standing Counsel appearing for the revenue submitted following issues:
- The respondents /Assessees are part of a group trust. The modus operandi is that students of the educational institution of Trust – A are asked to give donations to Trust – C. Thereafter, Trust – C transfers the donation amount received to Trust – B and from Trust – B to Trust – A. Such is the arrangement within the group trusts and they have common trustees. In order to prove the modus operandi resorted to by the Assessee-Trust, the Assessing Officer recorded statements from 1500 persons out of which around 50 percent of those who have given statement, conceded that the donation was a quid pro quo transaction for admission. However, certain parents retracted their statements, which was mainly relied on by the Appellate Authority as well as the Tribunal to set aside the orders of assessment. Stating so, the learned
  
  Senior Standing Counsel submitted that the channelisation of the donations in such a way cannot be treated as voluntary donations.
- Assessees’ admittance of re-donation by one trust to the other Trust, amply fortifies the stand of the Revenue that the transaction is not genuine.
- The capitation fee received was for allotment of seats by the Trust and hence, it cannot be said to be a voluntary contribution/donation to the trust.
- That apart, the fact that no action has been initiated by the State cannot be a reason to allow the exemption under the provisions of the Act or absolve the liability of the assessees, that too after the device to route the capitation fee was discovered. Further, it is also settled law that illegality cannot be perpetuated.
- As per the provisions of the Act, the Assessing Officer is a statutory authority who can independently make his own decision upon scrutiny of the records and pass orders for disallowing the income. Hence, the Assessing Officer need not depend upon the State Government authorities to initiate action under the Tamil Nadu Educational Institutions (Prohibition and Capitation Fee) Act 1992.
- When the contributions cannot be treated as voluntary, the further question of their application to charitable purposes or otherwise, need not be gone into, meaning thereby that the assesses are not entitled to the benefits of Sections 11 and 12 of the Act.
Submissions by the assessee
The learned senior counsel for the assessee trusts submitted that –
- The object of the trust is to run educational institutions and other activities; and is to support other institutions by donating the donated money.
- There was no quid pro quo as contended by the learned counsel for the department. The trustees in the trusts do not get benefitted in any way at all. Thus, section 13 is not attracted in this case. Continuing further, the learned senior counsel submitted that the respondents / trusts have registration under sections 12A as well as 80G of the Act and hence, the power to divert funds under section 12 exists.
- The application of the donated money is towards the object of the trust, more particularly, charitable purposes only. Therefore, the same becomes relevant in view of section 13(1)(c) r/w section 13(3).
- No opportunity for cross examination of the witnesses was provided to the respondents / assessees.

Judgment by Hon. High Court

The judgment has discussed in depth the
following important issues –
1. Education – meaning
2. Education – Rights and duties under the Constitution
3. Exemption provisions u/s 10(23C), 11, 12 and Sec.13
4. Education- not a trade, business or commerce
5. Provisions of Tamil Nadu Educational Institutions (Prohibition Collection of Capitation Fee) Act, 1992
6. Menace of Capitation fee and its illegality
7. Retraction of the sworn statement recorded and the issues in rejecting the same.
8. Lifting of Corporate veil for Trusts
9. Meaning of Voluntary Contributions.
Conclusions of the Hon. High Court-
- In view of our findings that the amounts
  collected by the assessees are capitation fee in quid pro quo for allotment of seat in deviation of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992 and the same are neither a voluntary contribution nor to be treated as applied for charitable purpose, the orders of the Appellate Authority as well as the Tribunal, which are impugned in these appeals, are absolutely perverse in nature and therefore, they are set aside. Accordingly, all the substantial questions of law are answered in favour of the Revenue and against the Assessees. – Para 68.
- Our country, though has developed considerably, after independence and made several strides marching forward in different fields including in education, we are yet to reach the stage we aspired to, as a nation with specific reference to education.
- The States are unable to comply with the directions enshrined in the Constitution to thrive for education for all, which would encompass within it the access to all sections of the society by providing equal opportunity.
- Parents are reluctant to make their ward attend Public Schools unlike in other countries.
- As per the report of the All India Survey on Higher Education for the year 2019- 20, by the Ministry of Education, Higher Secondary Department, 78.6% of colleges are privately managed. In the Union Budget for the year 2022-2023, a sum of Rs.1,04,277 crores has been allocated for school education, literacy and higher education.
- Despite the fact that there are State laws making it penal to collect capitation fee and the repeated dictum of various Courts
  
  including the Apex Court, the menace of capitation fee could not be curtailed, forget eradication.
- Education is a means to achieve equality. It not only instils confidence in the mind of the student, but also is a tool to eradicate exploitation. It offers employment opportunity, besides helping in churning oneself into a better person.
- The development of a country is to be weighed in terms of the educated. Privatization of education aids in collection of Capitation Fee.
- We hope that the Central and State government will thrive to ensure that all those who deserve, but are unable to get admission in educational institutions for want of funds, are accommodated to pursue education and take appropriate steps to eradicate the collection of capitation fee by creating policies and awareness and for that purpose, on the lines of the web-portal under the aegis of the Supreme Court, a web-portal of a similar nature must be set-up, wherein any information about the private colleges charging capitation fees can be furnished by the students or their parents or anyone having first-hand information in this regard.
- The web-portal has to be maintained and regulated by the National Informatics Centre (NIC) and the Information Technology and Digital Services Department, Government of Tamil Nadu; and the State Government is directed to publish the details about the web-portal in the English as well as vernacular newspapers at the time of admission.
- In addition, a pamphlet should be compulsorily given to the students and their parents at the time of counselling informing them about the availability of the web-portal stated above. – Para 69
Hon. High Court ordered the Dept. as under-

In view of the fact that the present appeals filed by the Revenue are allowed, it is natural that –
1. The Assessing Authority shall proceed further on the basis of the orders of assessment of tax, which are the subject matter of these appeals.
2. The Assessing Authority shall also proceed further for cancellation of registration certificate issued to the Assessees/trusts under Section 12A of the Act thereby not to treat the respondents as charitable institutions any longer.
3. The Assessing Officer shall also proceed to reopen the previous assessments, if permissible by law, based on tangible materials relating to collection of capitation fee, since it is illegal and is punishable.
Regarding lifting of corporate veil in case of trusts –
1. There is no bar to apply the doctrine of lifting of corporate veil in the case of trusts.
2. What is to be seen, is the existence of the systemised mechanism to collect the capitation fee as donation through other entities.
3. The principles laid down in various decided cases while expounding the concept of lifting the corporate veil, especially in cases relating to tax evasion, and in cases where public interest and policy are sought to be defeated by fraud, are squarely applicable to the present appeals where while the Assessee Trusts are controlled by common trustees and are in indeed sister Trusts, this Court may be constrained to lift the veil to see the real beneficiaries and the object of the donations by relatives/friends of parents as quid pro quo for admissions into the Assessee educational institutions as well s the other Assessees who are not educational institutions.
4. On lifting the veil, it is clear as daylight that the modus operandi adopted by the Assessee Institutions and Trusts are with the twin objectives of circumventing/ violating the provisions of the Capitation Fee Act of Tamil Nadu as well as evading tax while seeking tax exemption under the corporate veil of being different and distinct entities receiving funds from each other for purely charitable purposes.
5. Suffice it to say, nothing can be farther from the naked truth that cannot hide itself sufficiently behind the fig leaf of the legal cover sought to be taken by the Assessees under the guise of being charitable trusts and seeking exemption thereof.
It may be seen that the menace of Capitation fee like in the Medical and Engineering colleges can never be justified and have to be removed. The scenario of admissions in medical and engineering colleges is going to change upon taking all the steps as per the directions of the Hon. High Court.
But, at the same time, it must be noted that apart from best efforts of the Central as well as State Governments, the infrastructure for the education which is a fundamental right of every citizen, is very poor and have to still go a long way. That is the reason that the private educational institutions are allowed to work in the field. Otherwise there is no reason why should they be permitted to operate in the education field at all. The menace of capitation fee cannot be justified on any ground. But, at the same time the environment to build good education infrastructure is not conducive especially when it comes to land, building and costly equipments and heavy running expenses. On one hand the Act provides exemptions for incomes of the charitable trusts, but at the same

time puts the restrictions in such a way that the exemptions practically cannot be availed. The surplus is many times confronted by tax officials as taxable and unwarranted litigation is raised. The courts are full of such cases. Any tax digest will generate huge number of cases where the surplus was treated as profit and taxed. The tax officials, raising unwarranted issues and demands especially in the trust cases apart from settled principles, are never punished nor even asked any questions. The revenue including its audit dept. seem at least apparently to be biased against the trusts, for the reasons best known to them.
The amount received by the trusts in this case is expended on the objects of the trust and this fact is nowhere denied by any authority at any level including the Hon. High Court. This underlines the need of huge funds required to meet the expenses of carrying the educational activity only. Who will give a thought to this? The nature of the current generation as well as the parents is to look for the posh and good infrastructure of the educational institution. If the laws do not permit to collect fees properly, where from will the money come to build the same?
The exemption u/s 10(23C)(iiiad) the limit as correctly interpreted by various Hon. Courts was receipt of Rs.1 crore to be calculated institution-wise and not per trust as such. The limit was set as long as 1998. Did not that need to be increased commensurate with the inflation? Instead the law is amended to make it for the entire trust at Rs.5 crores only. By this attitude India cannot have any Nalanda again in this country nor any Oxford, Stanford, or Cambridge or the like. The present brain drain will never reduce, if the attitude is not changed. Just for comparison the

The salary was increased to Rs.500 in 1964, Rs.750 in 1983, Rs. 1,000 in 1985, Rs. 1,500 in
1988, Rs. 4,000 in 1998, Rs. 12,000 in 2001 and to
Rs. 16,000 in 2006.
The daily allowance was increased to Rs.31 in 1964, Rs.51 in 1969, Rs.75 in 1983, Rs.150 in 1988, Rs.200 in 1993 (subject to the members signing the Attendance Register), Rs.400 in 1998, Rs.500 in 2001 and to Rs. 1,000 in 2006.

A comparative chart of 1998 and latest salaries shows that it is increased from Rs.4000 to Rs.1,00,000, a whopping 2500% increase since 1998.

What parameters are followed in deciding various exemption limits is known only to the concerned bureaucrats and the members of the house.

An interesting provision from Section 8A of The Salary, Allowances and Pension of Members of Parliament Act, 1954, which reads as under-

(1A) The pension and additional pension to every person shall be increased after every five years commencing from 1st April, 2023 on the basis of Cost Inflation Index provided under clause (v) of Explanation to section 48 of the Income-tax Act, 1961.]

[Inserted by Act 13 of 2018 (The Finance Act, 2018) – effective from 01-04-2018.]

Is the same not required to be inserted in exemption limits including the basic amount not chargeable to tax?
I am finding it irresistible to quote an interview with an American whom I met in New Jersey USA in June 2014. I asked what are the careers brilliant students wish to pursue in USA? His answer was: every brilliant student wishes to become a Professor, a Teacher or a Police! What this indicates? Can we dare to imagine or compare this answer in our country?

The judgment has referred the allocation of Rs. 1,04,277 crores Budget 2022 for school education, literacy and higher education. But if we look into the details of this figure the picture is not very encouraging.

Expenditure Profile 2022-2023, February 2022 was tabled by Ministry of Finance Budget Division. The above figure appears under Sr. No.5 Expenditure of Ministries and Departments in Part I at pages 6-18 and the details of the same in following pages.

The details reveal that major portion is going to be on salaries. It may be noted that the pay-scales have risen to meet the 7th pay commission norms. Thus, the major portion of the budgeted allocation is on the salaries and the infrastructure development is allocated a meagre amount.

The details appear as under –

Details of Expenditure allocation		Rs. Crores
25. Department of School Education and Literacy		63,449.37
1. Central Sector Schemes/Projects	358.26
2. Centrally Sponsored Schemes	50,694.11
3. Establishment Expenditure of the Centre	38.00
4. Other Central Sector Expenditure	12,359.00
26. Department of Higher Education		40,828.35
1. Central Sector Schemes/Projects	5,412.01
2. Centrally Sponsored Schemes	2,042.95
3. Establishment Expenditure of the Centre	273.38
4. Other Central Sector Expenditure	33,100.00
Total Budget allocation		1,04,277.72

One can keep the track of the actual expenditure details of the budgeted figures which I am sure will reveal interesting scenario.

Hon. High court itself has observed that 78.6% colleges are privately managed. Why this situation? Certainly the education sector is yet to achieve the expected level of infrastructure by the Govt. The exemption norms under the Income Tax Act, 1961 have to be re-visited and requires a holistic view to be taken by all the concerned authorities.

We will look into the two important judgments of Hon. Supreme Court in the next two articles.

Category Archives: Uncategorized

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Taxation of Trusts: Recent Judgments-2

President’s Communique

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Rule of Ejusdem Generis from the perspective of interpretation of Income-tax Laws

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Taxation of Trusts: Recent Judgments-1