For Private Circulation Only • February 2015 • Vol 9 Issue 2
Society of Auditors
Chennai Inside this Issue... •
From the Edit Pad
2
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Letter to the new President of ICAI
4
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Budget 2015 – My take
5
•
New Black Money Law – I am not Impressed
6
•
Indirect Tax Snippets
8
•
Case Study on Sec. 54F of Income Tax Act
10
•
Recent Judicial Decisions Reported
13
•
Old Madras Road
15
FROM THE EDIT PAD I seek your apology for the significant delay in bringing out this issue, which is due to my personal bereavement. I thank the President of SOA who was empathetic with me and allowed me time. Actually, there are many issues that I need to write about and those who are under the mistaken belief that those who man our mother institution ICAI are a revered lot and should not be critiqued or made snide remarks about, may actually skip reading this editorial and start preparing to go to the free CPE seminars which come with free coffee / tea, free lunch, free pen & notepad, possibly a free gift packet and free nonsensical blabber from the council members. The first thing is about the election to the offices of the President and Vice President of ICAI that was held in February. For the first time perhaps, there was no automatic elevation from VP to President and the sitting VP had to bear the sting of competition from a few council colleagues and ‘sweat it out’ to become the President. There were open battle lines drawn before the ‘contest’ and the senior most sitting Council member actually ‘bared’ every dirty thing that has been happening in the council (including on Nagpur land scam, Ajmer Centre of Excellence, inaction against MAFs, not keeping even the council members informed of various things, zero governance process in ICAI, self-nomination in international bodies etc.) in a widely circulated e-mail and trust me, it was a bolt from the blue. Never before so many
P.S. Prabhakar things were open and out and so much of dirty linen was washed in public by a member of the Council in a single e-mail. The sitting VP, who, otherwise had a decent demeanor, knew that his one year dream of sitting in the President’s chair was likely to be shattered. He could have shed the dream and fought but instead he shed the decency and fought! In the process, it was widely rumoured that he had to oblige, accommodate, buy peace by offering various things including plum committee chairmanships, co-options to their friends and relatives etc. (Literally followed ‘coalition dharma’ to form his cabinet!) A mail was written to the President, pointing out these accusations and seeking his views but no reply was received. If this is the beginning, we can guess how transparent his regime will be. We can expect new lows, but believe me, this will not be the end. Thus the sitting VP became the President and therefore the ‘convention’ in this regard was ‘protected’ but look at the double standard of those who received the demanded favours. They were all in favour of such a convention and even voted for the sitting VP in the election to the President but eagerly sided with a bunch of power-gluttonous group in SIRC last year and successfully broke the convention of the Vice Chairman becoming the Chairman. These are the guys who demand importance, reverence, garlands and shawls at branches, (continued on next page)
AUDITOR
Editorial Board
A periodical from Society of Auditors, Chennai Society of Auditors “Platinum Chambers”, 33, TNHB Complex, 4, Luz Church Road, Mylapore, Chennai - 600 004. Phone : 044-2498 6979 E-mail : society.auditor@gmail.com editor@societyofauditors.in Website URL: www.societyofauditors.in
CA P S Prabhakar, Editor Adv B Ramana Kumar CA R Sivakumar, President, Ex-officio Member CA Karthik A Bhatt
(continued from previous page)
photographs all over in the magazines, stage space and what not. These are the guys who pontificate to general members on ethics. These are the guys who keep duping, cheating and misleading the budding members of the profession by their self aggrandizement-filled, despicable jokes-pregnant lectures in GMCS sessions and in convocations. These are the guys who ‘administer’ the administrators of the Institute and decide various things. These are the guys who will be attempting to make money in every matter – be it in printing or transportation or real estate dealings. These are the guys who mean ill to the profession. Unfortunately, these are the guys who will be voted by the gullible members who are lured by free lunches and free drinks. (In North India, free movie tickets and many other ‘freebies’ also). Should we blame them or the ordinary members who sell themselves and their conscience so cheap? On the election of office bearers to SIRC, nothing is even planned to be commented as I think it is even beneath the dignity of this magazine to do so. The ever active social media and whatsapp are agog with several happenings in the various branches of ICAI and a significant one is about a ‘real estate’ deal at Varanasi Branch of ICAI. It has been clearly alleged that an incident of misappropriation of funds has taken place to the tune of Rs. 40 lakhs and that enquiries have been conducted by ICAI way back in June, 2014. However, no action seems to have been taken by ICAI yet, giving an apprehension that the powers that be are actually trying to cover up the issue, at the behest of some. (Perhaps by ICAI’s standards, this has not passed the test of materiality!). In Surat also, some issue has erupted in the issue of title. We do not even know the details as to how many infrastructure projects undertaken during last 10 years, their present status, how much amounts are involved in projects not completed yet, reasons for non completion etc. The interesting thing that is to be noted is both were the constituencies from AUDITOR • February 2015
where our Prime Minister Sri Narendra Modi contested and won. May be this is why, he thought that this institution needs self cleaning first and as a motivation for the same, nominated for Swachh Bharath campaign! Talking of Prime Minister, the other thing that he has been harping is “Make in India”. Does he know that we don’t even make accounting standards in India? Does he know that ICAI has become a perennial slave to IASC and is more eager than IASC to bring IFRS in India, without realizing that the suitability of IFRS to Indian business conditions are not tested at at all? IFRS is the result of conspiracy of IASC plus MAFs and ICAI, which is functioning as if it is a wholly owned subsidiary of IASC, is merrily dancing to their tunes and has contributed majorly for the UPA Government’s passing a completely nonsensical Companies Act, which has copied many matters in accounting including IFRS. Is this the reason why the Oxford University’s research paper on the Socio Economic Impact of IFRS on India, which was funded by ICAI’s Accounting Research Foundation was NEVER put on public domain? Is this the reason why the reports of various committees like Kale Committee, Jayant Gokhale Committee and Uttam Prakash Agrawal Committee on the functioning of MAFs in India were NEVER made public by ICAI? Forget making in India of any accounting or auditing standard, most of which are shamelessly imported on a ‘cut copy paste’ mode. Has ICAI, the glorious institution of 60 plus years existence, the second largest accounting body of the world, produced one document or research paper of international standard ever, so far? I am writing this in absolute agony and also with some hope. We have cultivated many leaders to be selfish, power and publicity hungry and as those who would do anything to make name, fame and money. Those who mean well are far and few. But, all is not lost. As mentioned already, many members have started raising inconvenient questions. Even inside the Council. The numbers will swell. Acche Din will come. When is the question. 3
LETTER TO THE NEW PRESIDENT OF ICAI Dear Mr President, Congratulations on behalf of Society of Auditors, Chennai and on behalf of AUDITOR magazine, on assuming the Presidentship of ICAI. Of course, it was not very pleasant to know that you had your moments of tension as like all of your predecessors, you were not elevated automatically from the VP position and had to undergo the rigamarole of elections. That, in any case, provided an opportunity for you to prove that you were still the preference of the majority in the council. That said, is it true, sir, that you had to accommodate certain council members - in a sort of quid pro quo - to ensure their support? Like promising and later on standing by such promises in the matter of committee chairmenship and co-options? Why, then, sir, the Board of Studies Chairmanship should have gone to Mr Murali for the record fifth time? What have been his stellar contributions in the field of education that he keeps getting this coveted committee, year on year? I was told that Mr Babu Abraham demanded CPE committee in lieu of his support to you and you obliged. Same case with Mr Sekar getting Capacity Building. Well, we can go on as to how certain CCMs are placed in 2 and 3 standing committees and how certain CCMs have been sidelined by you. I honestly expected you to be above all this but sir, it is indeed disappointing. In the matter of co-options also, your actions are perplexing. For the third year in a row, an infant member, who is the son of a veteran member has been co-opted, in spite of the fact that the record of attendance in the meetings, let alone the contribution, has been abysmal. So, it appears that you have also decided to be a copy book President - like many of your predecessors. Very sad. I wouldn't have ventured to write this to any one else but my estimations of you were rather high. Sir, you know very well that things are not what they used to be in our profession a few years ago. Lot of people have started noticing things and even begun to question things in public fora and social media. Gone are the days when council members were revered - today they are even ridiculed. Of course, when within the council, people can level and trade accusations, then why would not general members do the same? If you have any replies, I would be happy to present the same before the members through the monthly magazine AUDITOR. All the best for your tenure. Regards, P.S. PRABHAKAR Date: 21st Feb, 2015 Note: This was sent to the new President and we did not get any reply yet. This is just but one indication how things are happening at ICAI. If an organization like SOA gets this kind of treatment, for asking questions that are inconvenient to answer, then general members can imagine their plight! 4
AUDITOR • February 2015
Budget 2015 – My take Budget in India is used as a multi-purpose tool. It embodies the intent (or the lack of it), direction (which includes misdirection) and action (which includes inaction) of the government of the day. Budget 2015 created a huge expectation in contrast to the FM’s maiden one last year as, he had adequate time for this budget, which he didn’t have last year. Expectation that this budget would provide for the steps that will stimulate the economic growth, usher in measures which will enable ease of doing business in India. The salient features of the budget are the provision to create a social security cover for the poorest of poor. It is proposed provide accident cover of Rs. 2 lacs per year a paltry premium of Rs. 12 per year and a life cover of Rs. 2 lacs at a premium of Rs. 330 per year. A welcome step indeed. The next game changing idea is the Mudra bank which is stated to be a refinancing institution with a corpus of Rs. 20000 crores that will facilitate the ease of credit availability to the MSME sector. The NBFC’s which provided the last mile connectivity to finance to those who cannot access banking facilities or who are routinely ignored by the banking sector and with RBI pursuing an attitude of anti-nationalist towards NBFC’s, there was a near strangulation of the MSME which created more than half of the jobs in India. This sector was left to the mercies of money lenders. The avowed objective is excellent in intent but the budget did not spell how it would be implemented, nor I saw a provision for Rs 20000 crores in the budget document. (or did I miss the fine print). Be that as it may, for the moment it deserves a thumbs up! The third major initiative is the steps to monetize the gold. Though our nation is one of the largest consumer (western thinking)/importers of gold, we are unable to have any say on the prices of the gold. (Compare this with the tactics adopted by Walmart/Tesco/Amazon). The government should collect (though no estimate was indicated in the budget) at least 500 tonnes of gold to make a meaningful start to the scheme, which will act as a buffer stock and a strong financial lever to the government. In addition the keepers of idle gold will also earn interest on the gold deposit plus the promise to get back the quantity of gold deposited. In fact with the government not honouring the promises worldwide, Shri S Gurumurthy even suggested a constiAUDITOR • February 2015
CA. R.G. Rajan tutional amendment to bind the government to return the quantum of gold. Meckenna would be surely turning in his grave on the missed opportunity to make a few bucks on the gold stock. The fourth major initiative announced is the law to be enacted which will provide for stringent punishment for black money hoarders who loot(ed) the country. The proposed law will make black money hoarding a criminal offence punishable with a rigorous imprisonment of 10 years. With the Constitution of India providing for a prospective legislation in respect of a criminal offence, it will be interesting to see how this proposed law will deal with the past looters! The other positives of the budget include the increasing the domestic transfer pricing limit to 20 crores (they could have made it not applicable where it is tax neutral), clarification on taxation of REIT, abolition of DTC (as admitted by the FM most of the DTC proposed amendments are part of the income tax law now) etc. Now the negatives of the budget. The bureaucrats who live in their own charmed world and who are the most unaccountable class of employees in this part of the world, mostly ignore the intent of the government and in the guise of simplification they tweak the law into a complex beauty. Three examples in the budget which portray this phenomenon is the amendment to section 195, and the proposed 13 conditions to be fulfilled on the fund manager status. The Third one is the draconian amendment proposed is the Place of Effective Management (POEM) which will only lead to litigation. No better way to improve your index on the ease of doing business. A good 2 step forward and 5 step backwards approach. Service tax is hiked to 14% which will lead to all round inflation. With the comparison of actuals and budgeted figures for 14-15 on hand, there is a sure short chance of government missing the revenue target in 15-16 also, there by missing the fiscal deficit target also. So the budget season is coming to an end with the budget speech, followed by analysis meets one after the other and now it is time to focus on the world cup followed by IPL, Bihar election and then the next budget in 2016. Punarapi Jananam Punarapi Maranam…………….
5
New Black Money Law – I am not Impressed One of the first legal principles is that the any law ought to be prospective in its application; not retrospective. This legal position has been accepted by the Indian Constitution which provides certain safeguards to an Indian citizen [including corporations] accused of any offence. In this connection it guarantees protection to a citizen under the chapter on “fundamental rights” against such retrospective operation of any criminal law. Specifically, Article 20(1) provides that “No person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence.” Thus it is apparent that no person shall be convicted by a court of law except for a violation of a “law in force.” That simply means that when a law is enacted later it cannot, thanks to the constitutional bar, hold any citizen of India liable for any act done prior to that law being legislated. Such laws are regarded as inequitable, abhorrent to the notions of justice and hence expressly prohibited by the Constitution. Put pithily if any act is not an offence as at the date of its commission under a law in force, a citizen of India cannot be tried under a law enacted subsequently. This is the Constitutional position. A retrospective black money law? It may be noted that the Hon’ble FM has proposed a “new law” on black money in his Budget speech [Para 103]. The law provides for imprisonment of ten years in case of tax evasion, penalty at the rate of 300 percent of the tax evaded shall be levied for such concealment of income [and consequential assets] and there is express prohibition of approaching the settlement commission. The FM also proposes to amend the Prevention of Money Laundering Act [PMLA] and Foreign Exchange Management Act [FEMA] to ensure that appropriate punitive actions against those holding illicit wealth abroad. But the “new law” on black money may take well over six months to get legislated even if this is introduced in the current session of the Parliament as promised by FM in his Budget 6
CA M R Venkatesh
speech. That implies that possibly only by yearend the “new law” may well be in statue books. So the question arises - whether the “new law” is applicable prospectively i.e. from the date in which it is notified or whether it is retrospective? The answer to this question lies in the plain reading of Article 20(1) of the Constitution which bars a criminal law from being retrospectively legislated as explained above. Thus the “new law” can at best be prospective not retrospective. Consequently, only those who after the “new law” is notified in the official gazette do not pay income-tax, generate black money, stash it abroad through some illegal means and create illicit assets out of such money would come under the ambit of this “new law,” not otherwise. Any other interpretation of the “new law” on black money would render it unconstitutional. But what about those who already have illicit wealth or assets abroad? Does it mean that there is no law in place in India to tackle such wealth as on date? If so, what is Income-tax law supposed to be? Isn’t it supposed to tackle black money within India and abroad? Pertinently, is a new law required to tackle the menace of black money? Subtly, is the FM hinting that he is unable to proceed against those who have already stashed wealth abroad under the extant legal system? If so, is it a fault of the law or a question of its enforcement? What about Income-tax Act, 1961? The answer to all these questions lies in Income-tax Act, 1961. Readers may be aware that the IT Act is a comprehensive law relating to income and by extension is competent to deal with illicit wealth, both in India and abroad. The IT law precisely anticipating generation of black money and creation of assets from such black money empowers the assessing officer to add to the income of assessee, investments, for which the assessee offers no clear explanation about source of income. These are technically called “Unexplained investments” and dealt with under S 69 of the IT Act. Likewise where an assessee fails to offer explanations for source for money, bullion or jewellery S 69A empowers the assessing officer to add to the income of the assessee (continued on page 7)
AUDITOR • February 2015
(continued from page 6)
the money or value of bullion or jewellery to the income of the assessee. Similarly S 69B deals with amount of investment not fully disclosed in the books, S 69C deals with unexplained expenditure and S 69D deals with amount borrowed or repaid on Hundi. In effect these five sections are potent and comprehensive enough to deal with any illicit wealth stashed both in Indian and abroad including expenditure for which the assessee offers no explanation for its source. Further, the IT authorities have power regarding discovery, production of evidence, search, survey and even seizure. Interestingly the IT Act was amended in 2012 to allow the authorities to reopen assessment up to sixteen years in relation to any asset located outside India while it is merely six years in case of assets located within India. Over and above this, the authorities can levy interest for belated payment of taxes, charge penalties [Chapter XXI] and in extreme cases also prosecute wilful defaulters [Chapter XXII]. It is pertinent to note that the penalty can be levied under the IT Act upto 300 percent. Thus on any information received from any source within India or outside India the IT Authorities can forthwith open assessments of sixteen prior years, re-assess such persons and recover tax, levy interest, penalty and also prosecute such delinquent assessee. In short the existing IT Act is precisely aimed at tackling the issue of Black Money – both within India and abroad. By promising to legislate a new law the FM seeks to create an impression that he is legislatively handicapped in going after such buccaneers. Frankly, I am unimpressed with this argument. Pertinently the “new law” mirrors exactly the provision of the existing IT Law except for the fact that it is limited to being prospective in its operation under the provisions of our Constitution. If so, what is new about it? Why have a new law? I am unable to find the rationale. Crucially, the Hon’ble FM claims to have procured any useful information from other Tax Haven countries including Switzerland. If so, has he set in motion the due process under IT Act? In such a scenario why another law? On the other hand if he cannot use such information in the absence of a law, why send his officers on a wild goose chase abroad? But what about our politicians who have stashed their illicit wealth AUDITOR • February 2015
abroad? Well, over and above the tax, interest, penalties and possible prosecution available under the provisions of the Income-Tax Act as explained above, a public servant is also punishable under the provision of clause (e) of subsection (1) of Section 13 of Prevention of Corruption Act [PCA] for possessing assets disproportionate to his known source of income. Naturally, if the Central Government is in the know of details of any politician having asset abroad which is disproportionate to his known source of income appropriate actions can be initiated under the PCA. But the billion dollar question remains – in how many cases has the NDA government proceeded against those who posses illicit wealth under the IT Act? In how many cases has it proceeded against our politicians for possessing assets disproportionate to their known source of income under the PCA? The answer to this question in my considered opinion settles the debate. Remember, you can legislate at best a new law, not administrative will or intention. It may be interesting to note that while in opposition politicians accuse others of indulging in corrupt practices, when they get elected, especially on the corruption plank, they seem to do precious little against those very people whom they accused of being corrupt. The NDA government seems to be suffering from this inaction syndrome like many of its predecessors when it comes to fighting corrupt and corruption. Old or new law – let us not forget Government requires hard evidences to fix tax cheats in a court of law. And this till date has flown from foreign countries [as the HSBC Bank and Liechtenstein Bank case demonstrate] in driblets and by divine providence; not due to any concerted efforts of our Government. Instead of a new law Government requires a dedicated team of people – comprising of men of integrity – and understanding of both national and international laws to go after such illicit wealth stashed abroad. The SIT constituted under the directions of the Hon’ble SC unfortunately is still a non-starter. It is time to look beyond SIT. But surely a “new law” is definitely not the solution. M R Venkatesh is a Chartered Accountant. Comments can be sent to mrv@mrv.net.in
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Indirect Tax Snippets SERVICE TAX Cenvat credit on specified services allowed by Tribunal as they are commercially required Revenue denied Cenvat credit on renting of furniture, housekeeping services, annual maintenance contract and food coupons provided to the staff, which were taken by the taxpayer who is 100 percent Export oriented Unit engaged in providing IT enabled services (period relates to pre April 2011). The Tribunal allowed the Cenvat credit on the ground that such expenses are commercially required to be incurred with a view to facilitate carrying on the business as a service provider, and thus, would confirm to the expression ‘activities relating to business' as contained in the definition clause of ‘input service’. C Cubed Solutions Private Limited vs CCE [2014TIOL-2643-CESTAT-BANG] Supreme Court stays the decision of the Delhi High Court order quashing audit by service tax authorities. The Delhi High Court in the case of Travelite (India) had quashed Rule 5A(2) of the Service Tax Rules, 1994 (“ST Rules”), which prescribed for the conducting of audit by an officer authorized by the Commissioner for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue on the ground that the said rule was ultravires the governing statutes and the same did not have any substantial legal backing. The SC has stayed the aforementioned decision of the Delhi HC. UOI and others vs Travelite (India) (Appeal No. 34872/2014) (SC) Service tax not applicable on value of materials involved in the repair of vehicles when separate invoices have been raised for the material. Revenue Authority demanded service tax in respect of materials supplied while carrying out the repair of the vehicle since the predominant nature of work of the taxpayer was servicing of vehicles. Relying on the Central Board of Excise & Customs (“CBEC”) Circular no 96/17/2007 dated August 23, 2007, the Tribunal rejected the claims of the Revenue and held that since the 8
CA Debasis Nayak taxpayer had raised separate invoices for the value of goods on which VAT had already been paid by the taxpayer, there was no obligation to pay service tax on the same amount. Safeway Motors vs CCE (Order No. A/1684/14/ CSTB/C-I) (CESTAT, Mumbai) Service tax paid on Installation / erection undertaken at customer’s premises allowable as credit to manufacturer. The taxpayer manufactured and cleared machines and parts thereof to customers on payment of duty and undertook the responsibility of installing the same at the customer’s premises. Revenue contended that the taxpayer was not entitled to the CENVAT credit on the installation and erection charges as these were incurred beyond the place of removal and were not included in the assessable value. The Tribunal allowed the Cenvat credit since erection and installation was an essential activity for the machine to function and the said activity was part of the taxpayer’s business. Hercules Hoists Ltd vs CCE (Order No. A/1477/14/SMB/C-IV) (CESTAT, Mumbai) If no service is provided after receipt of advance, the advance has to be considered as a ‘deposit’ and limitation provisions do not apply for claim of refund The taxpayer entered into works contract and received mobilization advance on which service tax was duly paid. The contract was terminated and the advance paid was recovered for services not provided. Consequent refund claim filed by the taxpayer was rejected on the grounds of limitation. The Tribunal held that the amounts paid by the taxpayer cannot be termed as payment of duty but has to be considered as a 'deposit' to which limitation provisions prescribed under Section 11B of Central Excise Act, 1944 will not be applicable. Thus, the refund claim of the taxpayer was allowed. CCE&ST vs Madhvi Procon Pvt Ltd (Order No.A/11993/2014) (CESTAT, Ahmedabad)
(continued on page 9)
AUDITOR • February 2015
(continued from page 6)
VAT / CST No VAT on resale of used motor vehicle by a dealer, subject to fulfilment of conditions The taxpayer was a registered dealer under the Delhi Value Added Tax Act, 2004 (“DVAT Act”), engaged in manufacturing / trading in commodities other than motor vehicles. Input Tax Credit (“ITC”) was not availed by the taxpayer on the purchase of motor vehicles procured for his business purposes. Subsequently on sale of the used motor vehicle, the taxpayer did not pay VAT on the same. The Delhi HC held that sale of the used motor vehicle is a part of the business turnover given the broad definition of the term ‘business’ under the DVAT Act. However, the sale price was exempt from tax by virtue of section 6(3) of the DVAT Act which provides for exemption on sale of used capital goods on which ITC has not been claimed and which have been ‘used exclusively for making non-taxed sales under the DVAT Act’. Anand Decors and Others v Commissioner of Trade & Taxes, Delhi [ST Appl No. 37/2014) (HCDelhi][ Source :Taxsutra.com] ‘Primers of all kinds” taxable at of five percent under Tamil Nadu Value Added Tax Act, 2006 (“TNVAT Act”) Primers of all kinds sold either by manufacturers or traders are taxable under the entry no 67(ad)(iv) i.e..’primers of all kinds’’ of Part B of t h e F i r s t S c h e d u l e t o t h e T N VAT A c t . Accordingly, the impugned goods shall be taxable at the rate of five percent irrespective of whether the same is sold as industrial input or otherwise. Advance Ruing and Clarification of Asian Paints Ltd [ACAAR No 124/2015 dated February 9, 2015] Clarification for the rate of tax for motors ‘Electric Motor’ taxable at fourteen and half percent vide entry 27 of Part-C of First Schedule to TNVAT Act. However, is such goods are sold to a manufacturing unit within the State of Tamil Nadu for use as ‘capital goods’ in manufacturing process, it is liable to tax at five percent as ‘capital goods’ under section 2(11) of the TNVAT Act. Further, if such goods are sold to manufactures of power operated machinery for use in the manufacture, it is liable to tax at five AUDITOR • February 2015
percent under entry no 67 of Part-B of First Schedule to the TNVAT Act as an ‘industrial input’ Advance Ruing and Clarification of Modern Machine Tools Co [ACCAR No 51/2014-15 dated January 27, 2015] Use of trademark liable to sales tax The question fell before the Hon’ble High Court was whether the agreement entered into by Tata Sons with Tata companies called the ‘TATA B r a n d E q u i t y a n d B u s i n e s s Pr o m o t i o n Agreement’ (“Brand Agreement”) is liable to be taxed under Transfer of Right to use any goods for any Purpose Act, 1985 (“Act of 1985”). The Brand Agreement was to develop, promote and enhance the brand equity in the word TATA as well as to legally protect the same. HC after careful analysis of the statutory provisions and basis the decision of CST v Duke and Sons Pvt Ltd opined that there can be a transfer of the right to use these goods and it need not be exclusive and unconditional even though the transferor may simultaneously use it during the period of an agreement to transfer the right to use it. Accordingly, sales tax is leviable on the Brand Agreement under the Act of 1985 Tata Sons Limited and Another vs State of Maharashtra and Another[2015-TIOL-345-HCMUM-CT] States power to levy tax on inter-state sales and import under Turnkey project The issue for consideration before the Calcutta HC was whether the supplies by import and by way of inter-state sale under turnkey package required for installation of main plant package, is liable to tax under West Bengal Value Added Tax Act, 2003 in the Project State or not. HC after examining the series of judgments in the context of forty-sixth amendment to the Constitution of India whereby the definition of ‘sale’ got expanded to include tax on sale of goods involved in the execution of works contract noted that State cannot impose sales tax on the goods procured inter-state sale or in the course of import, provided the same is used in commissioning of the project on turnkey basis in the same form without changing its character through a manufacturing process. Reliance Infrastructure Ltd &Anr vs Deputy Commissioner, Sales Tax &Anr [2015-VIL-50-CAL]
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Case Study on Sec. 54F of Income Tax Act This case study is based on modified versions of real life situations and does not pertain to any specific assessee. The study is intended to draw some clarity on the possible claims by assessees and refusals by the Department and the possibilities of situations which can be clarified by the CBDT to avoid extensive litigation and costs of compliance and inconvenience to assesses.
funds (5 lacs), 30 lacs of bank loan, released periodically. v)
Case on Capital Gains- Exemption u/s 54 F Facts of the Case: i)
X, an individual, owns land in Bangalore since 1991. This is proposed to be sold in January 2015 for Rs. 40 lacs.
ii)
X already has a house property in Mysore consisting of land and ground floor. This has been let out as a residence and income is being offered as property income for the past 10 assessment years.
iii) X has constructed in 2013-14, a full-fledged Ist floor above the ground floor in Mysore. The first floor consits of a three bed room unit with self- contained kitchen, toilets, bathrooms and verandahs, fully fit for occupancy for own use or to be let out as residential premises.The House Warming function was performed in December 2014. Some interior work is incomplete. iv) The construction was funded out of some own
CA. Mythili Chandrashekhar
Mrs. X owns a house property in Chennai, purchased out of a bank loan when she was employed. This property consists of ground and first floors. The loan has been repaid. The ground floor is let out (one part for commercial use and the other for residential use). Mrs and Mr. X stay on the first floor, u s e d a s r e s i d e n t i a l p r o p e r t y. T h i s w a s purchased by Mrs. X and repaid entirely out of her income. The income from this house property is being assessed in the hands of Mrs. X right from the beginning. However, the document has been registered in the names of Mrs and Mr X jointly. Mr X has no beneficial ownership in the property.
X proposes to claim exemption under section 54 F in the financial year 2014-15, assessment year 2015-16. Is it valid? It is to be noted that Section 54 F has been amended with effect from the 1st day of April, 2015, to substitute the words the words "constructed, one residential house in India" in place of "constructed, a residential house.” Issues in this case: X has to offer the Ist floor of the house (just constructed) as the newly constructed residential house.
Arguments against the assessee
Arguments in favour of the assessee
1)
X does not own the Bangalore house under “beneficial ownership”. It was earned by his wife and is being assessed as her income. In the context of capital gains, chargeability itself is based on “beneficial ownership”.
X owns more than one residential house property chargeable as “income from house property”. The section does not say “beneficial ownership” or otherwise
Remedy: Before transfer of the land, have a release deed made by X, relinquishing his interest in the Bangalore property. Will this be construed as a transaction primarily to evade tax? No. There never existed a beneficial ownership for X. He is only emphasizing the fact and making the position clear in order to avoid a lawful claim being disallowed. Suppose that X had been using the rental income of the Bangalore property in the past. Then is it tax evasion? No. It is tax planning, a precaution to be able to use the benefit of Section 54 F. !2) a) The section says “construction should be within 3 years after the transfer of the original asset”. completed after the transfer of the land, X will be
Construction should be completed within 3 years after the date of transfer. Commencement of construction is not relevant. If the balance work is eligible.
Ref: Case Law: CIT vs. J.R.SubramanyaBhat, 9/6/1986 – Karnataka High Court. “Original asset” sold on Feb 9th, 1977; New asset – construction began in 1976 and was completed in March 1977. Substantial construction was over in 1976. However, held that the requirements of the section “construction within specified period of transfer” was satisfied. (continued on page 11)
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AUDITOR • February 2015
(continued from page 10)
CIT v. Bharti Mishra (2014) 265 CTR (Del) 374 b)
X has taken a bank loan showing different stages of completion. Since the amount for the final phase is released, construction is deemed to be over, having spent the qualifying portion of the cost as the last phase. Hence construction is “completed” before the date of transfer.
In practice, cost over-runs are usual. Release of final phase of loan does not mean that no further amounts can be spent by X for construction.
Precaution: X should pay by cheque amounts for completion of his interior work. c)
Finishing interiors is only improvement. Construction is complete when it is fit to be occupied. Even in a brand new flat handed over to the buyer, there are always more jobs done. These are only improvements and cannot be said to be incurred for completion of construction.
When the cost of the new asset is taken for later computations of capital gains, all costs up to occupying the house and finishing initial modification is considered as capital costs, which qualify as “costs”, for computing capital gains after indexation.
d)
Construction almost complete, qualifies for exemption u/s 54 F – CIT v SambandamUdaykumar 345 ITR 389 (Kar)- Window shutters, electrical work, etc were completed beyond the 3 year permitted period. But benefit was allowed on the grounds that the unit was livable and therefore qualified for 54 F exemption as completed construction. On the same grounds, it can be argued that the construction was completed before the transfer of the land. Therefore exemption u/s 54 F can be denied.
We need not go into a case law for this case, since the provisions of the section are complied with. We are stating that construction is completed within the period stipulated from the date of transfer, since some capitalised costs were incurred after the date of transfer of the original asset. In the cited case, the further works done after 3 years would certainly be capitalized, but they were not required for the exemption amount. Hence, an extended application of the case law is not required in the instant case.
Precaution/ Remedy: Make sure that at least one or two lacs are spent on the interiors after the date of transfer. Supporting bills is a must. Get the Corporation tax assessment made after the date of transfer (let at least 2 months lapse). Do not occupy the house until the transfer of original asset is made. d)
Construction of additional floor is mere extension of the existing building and therefore no benefit u/s 54 F. – Asst. CIT v. T.N. Gopal (IT Appeal No. 231 of 2008, decided on 25-5-09) and also CIT v. Pradeep Kumar (2006) 153 Taxman 138 (Mad)
Other Issues: Amount invested out of borrowed funds eligible for exemption: The section does not envisage the application of the consideration for funding the new property, since purchase is explicitly allowed one year before. In support of this contention, we have: J.V.Krishna Rao v DCIT (2012) 54 SOT 44 (Hyd); Bombay Housing Corporation v ACIT (2002) 81 ITD 545 (Mum). Should X deposit the proceeds in the Capital Gains Account Scheme? If X sells before March 2015 and shows completion before July 31st, he need not route it through Capital gains Account Scheme. If X sells after 31/3/2015, i.e. during FY 2015-16, he AUDITOR • February 2015
The ground floor unit is self-contained and rentable as an independent unit. Proof- income shown as house property. Also, the current Ist floor is also self-contained, comprising a hall, kitchen and three bed rooms. This is an equivalent of an apartment. Therefore exemption cannot be denied. The premises can be let out as two independent units though they have the same door number and address. They are in fact two residential houses and financed by two separate housing loans at different points of time.
has time until July 31st 2016 to show the completion. But he has to be careful to finish the construction after the transfer. How much would be the exemption? Let the amount of bank loan plus all amounts for construction spent by X out of his other than bank loan plus cost of finishing plus all amounts spent up to the point the house is occupied for usual living (i.e. after all interiors) plus all bank interest paid up to the point of occupation be denoted by “a” If the net consideration “c” of the land is < a, then, the entire “c” is exempt. If “c” > “a”, then, (c/a ) x capital gains is exempt. Point for clarification: X can purchase after two years from the date of transfer or construct after 3 years from the date of 11
(continued from page 10)
Other Effects of the Section (not pertaining to X)
construction. If he claimed exemption by purchase, even then, he can construct only after 3 years of transfer. Then, will the date of commencement be a hindrance or can he only ensure the completion of the next house after three years to avoid the disallowance? He can enter into an agreement to purchase and ensure that he gets the next property to be purchased, considering the effect of the amended provisions of Section 53 A of the Transfer of Property Act,i.e. by not attracting the definition of transfer on the new purchase until the lapse of the two years from the date of the original transfer.
i) An assessee cannot own more than one residential house on date of transfer, which means he gets the benefit of 54 F if he has two houses, one new and another old. Whereas, an assessee who has no house on the date of transfer of (say, land), but buys one property for exemption, he cannot buy another. i.e. he can have only one property for the next two years. There is discrimination. The section would have been just if it was worded that he will not purchase or construct, subject to his holding (by purchase/construction) not more than two properties including the new asset. Then, the difference between one who had a property already and one who did not already have a residential house would not exist. They would have been treated on par.
Effect of Disallowance of benefits u/s 54 F: If the conditions of Section 54 F are violated,the capital gains exempted earlier will be charged to tax as long term capital gains in the previous year of the expiry of three years from the date of transfer. This would mean that interest on the capital gains that escaped assessment three years earlier will not be charged, since this extra time is given. For example, where an assessee buys a plot of land for construction of the residential house soon after the transfer of the original asset and applies the entire consideration on the land, he merely has to spend on the minimum construction required for a house property to be eligible for 54 F exemption. If he had done this investment in the land before he filed the return on July 31st, he would not go through the capital gains account scheme. Subsequently if he fails to construct, his violation should be charged only three years later as capital gains, but in practice, the IT Dept can take a view that 54 F was never applicable and charge the entire gains in the year of the earlier year, levy interest and penalty. CBDT needs to issue a clarification in this regard, with suitable precautions to disallow only purchase of land without a building. In the present environment where metro and other projects by the Govt or failed cases of proposed townships are prevalent, genuine assessees who invest in the land with sincere intentions of construction are not able to get out of their predicaments due to blockage of money in the land. They are engaged i n f i g h t i n g f o r t h e r e t u r n o f t h e m o n e y. Irrespective of this fact, they have to pay interest and penalty on violation of section 54 F. In many cases, flat promoters cheat or do not complete construction as per schedule. In such cases, merely for the sake of a valid exemption, more money cannot be put into a cash stressed builder’s hands just to show application of the conditions of construction before three years. CBDT should come up with suitable remediesfor such horrifying cases. In many cases, the lack of a clear view is the seed to corruption.
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ii) Extending the above case, suppose that Mrs. X dies before the transfer, X will not be eligible to get the exemption u/s 54 F. If Mrs. X dies after the transfer, he will be eligible since he did not purchase or construct within the stipulated period. iii) If Mrs. X was in the process of constructing her house and she died after the transfer and X finishes the construction, the benefit u/s 54 F will not be available, since he constructs. In the context of working women in this generation and the age of the working/retiring population, these kinds of applications will soon arise. CBDT could come out with a clarification before giving rise to a lot of disputes, claims and unnecessary expenses for the assessee.
SOA mentioned in Swabhodhini’s (School for special children) newsletter
AUDITOR • February 2015
Recent Judicial Decisions Reported
P.M. Veeramani, FCA
Statute: Income Tax Act – Sec.2(24), 92 – Issue of shares at premium Decision in favour of : Assessee Title: Vodafone India Services Private Ltd vs UOI Citation: 110 DTR 1 Bench: Bombay HC Neither the capital receipts received by the assesse on issue of equity shares to its holding company , a nonresident entity, nor the alleged short fall between the so-called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of expression as defined under the Act. Issue of shares at a premium by assesse to its non-resident holding company does not give rise to any income from an international transaction and hence chapter X is not applicable. Statute: Income Tax Act – Sec.2(31) - Individual vs AOP Title: CIT vs Govindbhai Mamaiya Citation: 367 ITR 498 SC
Decision in favour of: Assessee Bench: Supreme Court of India
Property acquired by the Government came to the assesses (co-hiers) on inheritance from their father i.e. by operation of law. Interest on compensation is not on account of any business venture but the result of acquisition. This was not a case of where any association of persons was formed by volition of the parties for the purpose of generation of income. This basic test to determine the status of AOP was absent and hence the three sons were to be taxed as individuals. Statute: Income Tax Act – Sec.6 – Artist & Sportsmen – residential status Title: ACIT vs Jyotinder Singh Randhawa Citation: 64 SOT 323
Decision in favour of: Assessee Bench: ITAT Delhi
Going abroad for the purpose of employment also means going for any allocation which takes in self employment like business or profession. Assessee, being a professional golfer, is a self employed professional and requirement for being treated as resident of India is his tay of 182 days in India in previous year as per explanation (a) to section 6(1)(c). Statute: Income Tax Act – Sec.32(1)(iia) – Additional depreciation Title: Apollo Tyres Ltd vs ACIT Citation: 64 SOT 203
Decision in favour of: Assessee Bench: ITAT Cochin
In terms of section 32(1)(iia) there is no restriction on assesse to carry forward additional depreciation and thus where only 50% is allowed in the year of purchase of machinery as it was put to use for less than 180 days during the said year, the balance 50% can be claimed in the subsequent year. Statute: Income Tax Act – Sec.37 – Brand Building Title: Fine Jewellery India Ltd vs ACIT Citation: 110 DTR Trib 1
Decision in favour of : Assessee Bench: ITAT Mumbai
Expenditure on product display, visual display in stores, product launch, exhibition and professional expenses as part of the brand building exercise through sustained advertisement campaign was incurred for the purposes of business and there being no basis to hold that the impugned expenditure has resulted in acquisition of a capital asset or a profit making apparatus, same is allowable as revenue expenditure. Statute: Income Tax Act – Sec.37 – Abandoned project Title: Idea Cellular Ltd vs ACIT Citation: 47 taxmann.com 341
Decision in favour of: Assessee Bench: ITAT Mumbai
Assessee company incurred expenses for putting up cellular sites / towers for enabling its business but this could not be completed as those projects were abandoned. Since expenditure was incurred for project which could not be accomplished , but it was intended to facilitate business activity to be carried out more conveniently and profitably, said expenditure is revenue. Statute: Income Tax Act – Sec.40(a)(ia) – Freight paid to Indian agents Title: Poddar Sons Ex.L Private Ltd vs CIT Citation: 108 DTR 188
Decision in favour of: Assessee Bench: Calcutta HC
Payment made to agents of German carrier towards air freight not being chargeable to tax in India in view of art.8 of DTAA between India and Germany, did not require deduction of TDS under section 194C and hence could not be disallowed. Statute: Income Tax Act – Sec.40(a)(ia) – 2012 Amendment is retrospective Title: Rajeev Kumar Agarwal vs ACIT Citation: 109 DTR Trib 33
Decision in favour of: Assessee Bench: ITAT Agra
Section cannot be seen as intended to be a penal provision to punish the lapses on non-deduction of TDS from payments for expenditure particularly when the recipient has taken into account the income embedded in and therefore, insertion of section proviso to section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1.4.2005 i.e. date from which 40(a)(ia) was inserted. Statute: Income Tax Act – Sec.40A(3) – Cheque -crossed vs A/C payee Title: Rajmoti Industries vs ACIT Citation: 367 ITR 392
Decision in favour of: Revenue Bench: Gujarat HC
Amendment with effect from 13.7.2006. It cannot be said that there is no distinction between a crossed cheque and account payee cheque. For the purposes of the section, there is a clear distinction which exists and must be recognized and implemented as required in the plain language used therein.
(continued on page 11)
AUDITOR • February 2015
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Statute: Income Tax Act – Sec.54F – A Residential house – plural Title: CIT vs V.R.Karpagam Citation: 109 DTR 504
Decision in favour of: Assessee Bench: Madras HC
Prior to amendment of section 54F by Finance Act (No.2) 2014, the words “a residential house” include multiple flats / residential units; assesse getting 43.75% of built up area in lieu of land which translated into five flats after development, exemption was allowable in respect of all the five flats. Statute: Income Tax Act – Sec.80 AC – Mandatory from 1.4.2006 Title: CIT vs Shelcon Properties Pvt Ltd Citation: 110 DTR 37
Decision in favour of: Revenue Bench: Calcutta HC
Requirement of 80AC is mandatoryand therefore, benefit of section 80IB(10) can be availed by the assesse only if it has filed the return on or before the prescribed date and not otherwise. Statute: Income Tax Act – Sec.115 JB – Profit on sale of Agricultural land Title: ACIT vs Nilgiri Tea Estate Ltd Citation: 47 taxmann.com 329
Decision in favour of: Assessee Bench: ITAT Cochin
Profit from sale of agricultural land which is not a capital asset cannot be included for the purposes of computing book profit under section 115JB. Statute: Income Tax Act – Sec.147 – No change of opinion when facts are new Title: DCIT vs Tivoli Investment and Trading Co Pvt Ltd Citation: 150 ITD 659
Decision in favour of: Revenue Bench: ITAT Mumbai
When new facts comes into picture and there is a change in the factual matrix of the case consequent thereto, it cannot be said to be review or change of opinion, which may lead to a view either in agreement or in modification of that formed earlier. Statute: Income Tax Act – Sec.147 – Change of Opinion on reappraisal of facts Title: Maharasthra Airport Development LTd vs DCIT Citation: 150 ITD 709
Decision in favour of: Assessee Bench: ITAT Mumbai
When there are no fresh or tangible material which worked out as a livewire to AO to form an opinion or create a reason to believe that there was concealment of income , it is essentially a product of ‘perusal of assessment records” which amounts to change of opinion. Statute: Income Tax Act – Sec.226(3) – Debt to Stock Exchange Title: The Stock Exchange Mumbai vs V S Kandalgaokar & others Citation: 109 DTR 225
Decision in favour of: NA Bench: Supreme Court of India
Lien possessed by Bombay Stock Exchange under Rule 43 makes it a secured creditor and therefore, irrespective of the fact whether the said lien is a statutory lien or a lien arising out of agreement , the claim of stock exchange against the defaulter member has priority over income tax or other government dues. Statute: Income Tax Act – Sec.263 – Only if AO order is unsustainable in law Title: CIT vs LIC Housing Finance Ltd Citation: 110 DTR 78
Decision in favour of: Assessee Bench: Bombay HC
Merely because AO adopts one of the two views possible and that has resulted in loss of revenue it cannot be treated as erroneous order prejuidical to the interest of the Revenue unless the view taken by AO is unsustainable in law. Statute: Income Tax Act – Sec.271B – Commodity transaction Title: Om Stock & Commodities Ltd vs DCIT Citation: 150 ITD 645
Decision in favour of: Assessee Bench: ITAT Mumbai
Value of sale transactions of commodity through MCX without delivery cannot be considered as turnover for the purpose of section 44AB and therefore, failure on part of assesse to get its accounts audited would not lead to levy of penalty.
BB NAIDU STUDY CIRCLE MEETING – MARCH 2015 Topic
: Bank Audits (Branch Audit emphasis) – Recent Developments
Speaker
: CA. Naganathan Senior Partner, Price Patt & Co.
Date & Time
: Friday, the 20th March 2015 (6.00 p.m.)
(High Tea: 5.40 p.m.)
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AUDITOR • February 2015
Old Madras Road
CA Karthik A. Bhatt
N.V. Shanmugam and Co:
Wrenn, Bennett and Co:
This well known snuff manufacturing business of Old Madras was setup in 1904 by Nagoor Velayudham Shanmugam. Specialising in white snuff, a finer variety than the black powder, Shanmugam attracted a dedicated set of clientele with his door to door marketing. After Shanmugamâ&#x20AC;&#x2122;s demise, his sons Palani Vale Nadar and Muruga Vale Nadar continued the business. It was a flourishing one, with sales constantly on the rise. The business had a huge network of agents and distributors to whom they distributed specialised calendars printed in Germany as gifts every year.
Founded in 1889 on Mount Road as a departmental store selling everything except liquor and food, it expanded its scope of activities to include other divisions such as tailoring. Its best known division was however furniture. At the Coronation Durbar in Delhi in 1911, this establishment was given the task of furnishing the camps of the various dignitaries such as the Governor of Madras and the Lt.Governor of Burma. It also ran a service station for cars in the 1930s. The business had branches in Ooty and Bangalore.
AUDITOR â&#x20AC;˘ January 2015
The business changed hands in 1938 and was bought for around 200 pounds by the family that currently runs it. A search in the ROC records reveals that it was incorporated as a company in April 1938. Its premises too shifted to General Patters Road, from where it functions even today as an auction house.
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