March, 2012 · JUDICIAL ANALYSIS Advocate Tushar Hemani COMMERCIAL ASPECTS OF CIVIL..... CA. Sandesh Mundra FEMA UPDATE CA. Savan Godiawala FINANCIAL REPORTING STANDARDS CA. Manish

March, 2012

613AHMEDABAD CHARTERED ACCOUNTANTS JOURNAL

EDITORIAL

PRESIDENT'S MESSAGE

ARTICLE : PARK YOUR MONEY WISELYCA. Hardik Biharilal Shah

ARTICLE : REVISED SCHEDULE - VI . . .CA. Chirag M. Shah

FROM THE COURTSCA. C. R. Sharedalal & CA. J. C. Sharedalal

TRIBUNAL NEWSCA. Yogesh G. Shah

UNREPORTED JUDGMENTSCA. Sanjay R. Shah

CONTROVERSIESCA. Kaushik D. Shah

JUDICIAL ANALYSISAdvocate Tushar Hemani

COMMERCIAL ASPECTS OF CIVIL. . . . .CA. Sandesh Mundra

FEMA UPDATECA. Savan Godiawala

FINANCIAL REPORTING STANDARDSCA. Manish Iyer

INDIRECT TAXES CORNERCA. Bihari B. Shah

CST LAW UPDATECA. Priyam R. Shah

SERVICE TAX REVIEWCA. Ashwin H. Shah

FROM PUBLISHED ACCOUNTSCA. Pamil H. Shah

BITS & BYTESCA. B. M. Zinzuvadia

FROM THE GOVERNMENTCA. Chandrakant H. Pamnani & CA. Kunal A. Shah

HEALTH & FUNCA. Ganesh Nadar

ASSOCIATION NEWSCA. Kunal A. Shah & CA. Ashok C. Kataria

JOURNAL COMMITTEE

CA. Darshan A. ShahChairman (Editor)

CA. Parimal S. ShahConvener

CA. Chandrakant H. PamnaniPresident (Ex-Officio)

CA. Kunal A. ShahHon. Secretary (Ex-Officio)

CA. Ketul R. PatelExe. Committee Member

CA. Kaushik C. PatelExe. Committee Member

MEMBERS

CA. Bijal J. Gandhi

CA. Ganesh T. Nadar

CA. Hardik Vora

CA. N. K. Aswani

CA. Rajni M. Shah

CA. Sanjay R. Shah

CA. T. J. Adwani

AHMEDABADCHARTEREDACCOUNTANTSJOURNAL

Annexe to Insurance BuildingNear Income Tax,Ashram RoadAhmedabad - 380 014.Phone : 91 79 27544232Fax : 91 79 27545442E-mail : [email protected] : www.caa-ahm.org

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March, 2012


PUBLISHED BYShri Darshan A. Shah, on behalf of CharteredAccountants Association, Ahmedabad, Annexe toInsurance Building, Near Income Tax, Ashram Road,Ahmedabad - 380 014.Phone : 91 79 27544232 Fax : 91 79 27545442

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QUOTES FOR THE MONTH

March, 2012


EDITORIAL

¥… ¢ï çÝy² : à¢¢E¼¢ï²}¢ ÐéÚ¢‡¢¢ï J Ý¢²}¢ ãç‹¼ Ý ã‹²}¢¢Ýï à¢ÚèÚï JJ

In the month of March, 2012, the Ahmedabad CAfraternity lost CA C.F.Patel – respectfully called “PatelSaheb”. It was a severe stroke of destiny thoughimminent to happen yet was not easily acceptable.

This space is generally not spared for x¢é‡¢¢Ýé±¢Î – buteven at the cost of facing ire of readers, I tread to makeits reference.

C.F. Patel was a Chartered Accountant. Yes, but thenthere are many! No big deal! He was a successfulprofessional – widely accepted by his clients. Thereare many such, no big deal again! He was like anyother CA professional – living with his vanities,arrogance, bluntness! Then what made him moreacceptable by a large portion of the fraternity than

many of his equals, his „}¢Ã²SÜs?

He had certain unique qualities not very commonlyfound in co-professionals. The first and foremost isbest described by the following:

„éH|¢¢: ÐéL̄ ¢: Ú¢… ‹Ý „¼¼æ çÐí²±¢çÎÝ: J ¥çÐí²S² ™ Ð‰²S² ±Q¢™ Ÿ¢¢ï¼¢ ™ ÎéHü|¢: JJU

For the matter of common good, he had the guts tocall a spade a spade. He would put his point bluntlyand even crudely, if so needed, before authority of anylevel, before person of any stature. But the best partof it was he never kept grudge against the adversarywhen he met him again! He had led manyrepresentations before various authorities in mattersconcerning the interest and comforts of fellowprofessionals and tax payers. But he had never cravedfor a pat on his shoulder, public appreciation, invitationto chair the events – though all these happened withhim very naturally and casually. In essence, he was anatural leader. He had uncanny abilities of timemanagement - sparing time for achieving personalambitions vis-à-vis sparing time for the cause of theprofession. Yes! He was available all the time to alland putting aside his personal work was extending ahelping hand. At the CAA level, his contributions were

always felt – office bearers never felt inferior in seekinghis help, guidance and troubleshooting abilities. Thiswas great – he never made the seeker feel that onlyhe had the answer. Problem heard, solution found,period. No discussion about the same with anyoneelse. This quality really matters.

A true professional will not only be tight lipped abouthis client but also about whosoever approaches forany sensible guidance. Every institution, every group,every family needs persons with such qualities. Intimes to come, for CAA, we too will need such persons.We have to raise many issues, seek answers to manyquestions which may irritate the powerful andresourceful

* When there are 118 CCs and most of them do onlybaton bashing, why then 225 new CCs are added tothe force? What will they do and at what cost to theexchequer?

* What is the total NPA of each of the large industrialhouses with all the banks of the country?

There can be innumerable issues like these. Whensuch issues are raised, the decayed system is stirred,blood suckers are exposed. Today our judiciary hasstarted doing this (the results are before us).

But we need many more CFs to do this.

Patel Saheb was not an individual, he was like aninstitution and institution never dies.

² »Ýæ ±ïçœ¢ ã‹¼¢Úæ, ²Eñ‹Ý}¢ }¢‹²¼ï ã¼}¢ J©|¢¢ñ ¼¢ñ Ý ç±…¢Ýè¼¢ï, Ý¢²}¢ ãç‹¼ Ý ã‹²¼ï JJ

CA. DARSHAN SHAHEDITOR

CA. Darshan ShahPractising since 1985. He can be reached [email protected]

March, 2012


Dear Professional friends,

The month of March generally begins with thediscussion on Union Budget. This time the budgethowever got delayed and the professional brothers hadto wait till 16th March when the Finance Ministerpresented Union Budget 2012-13. Going through theproposals of Finance Bill various doubts are raisedover the intention of the Union Government. Theproposals like reversing the Supreme Court’s verdictin case of Vodafone, provisions of General AntiAvoidance rule (GAAR) and applicability of provisionsof transfer pricing to domestic transactions are fewsuch examples. The rationalisation in Service Tax byintroducing negative list of services is a welcome step.However, raising the base tax rate of 10% to 12% wouldincrease the revenue of the government by 20% acrossthe board, but the Aam Admi severly would beimpacted.

Once done away with return filing and thereafter thebank audits, activities at the Association also slowdown a bit but only to start afresh and it is the time thePresident lays down his office of this esteemedAssociation. I believe, by the time you read thismessage, Annual General Meeting would be round thecorner and it would be the time to elect new president.Over last so many years such change of guards andevery new leadership has brought new ideas, newactivities that have made Association scale newheights.

It is said that time flies away very fast. It appears sovery true as I look back at the day of last annual generalmeeting when I took charge as the president ofAssociation. The tenure as a president has indeed beena special occasion of my life. With a busy schedule ofvarious activities round the year, few programs havebeen very special viz. RRC at Jaipur, two programsunder auspices of Diamond Jubilee, re-launching ofAssociation’s website which is now fully active withlatest updates and K T Thakore memorial lecture on

PRESIDENT'S MESSAGE

CA. Chandrakant H. PamnaniHe can be reached [email protected]

RTI by Shri Narayan Verma.

My tenure as a president has been thoroughly enjoyedby me and I attribute all success to the members, pastpresidents and staff members of the Association fortheir support and co-operation. However the month ofMarch brought some difficult times when past presidentof the Association and executive committee memberShri C F Patel Saheb left all of us for heavenly abode.He was instrumental in various activities of theAssociation for last so many years and his demisehas been a personal loss to me. His dedication towardsthe profession and the Association in particular isunmatched. His attitude of selflessness and that ofgiving helping hand to everyone is an inspiration for allto learn and reminds me verse 1 of chapter VI ofBhagwad Gita where Lord Krishna has set a standardof living for all beings by defining a yogi and a sanyasiwith which I would rest.

Sri Bhagavaan Uvaacha:

Anaashritah karmaphalam kaaryam karma karoti yah;

Sa sannyaasi cha yogee cha na niragnirna chaakriyah.

The Blessed Lord said:

He who performs his bounden duty without dependingon the fruits of his actions— he is a true Sannyasi anda Yogi, not he who lights no fire and performs no duty.

CA C H PamnaniPresident

March, 2012


PARK YOUR MONEY WISELY

INTRODUCTION:

To earn money now-a-days, requires tremendousefficiency, labour and use of intelligence for everybody. After the same has been spent for necessities,the surplus money is more dear and nobody wouldlike to loose it.

The economical atmosphere is not static in the worldincluding India and therefore where to invest surplusmoney is required detailed study of various avenues .There are many avenues open for investing themoney. Some of them are as under.

[i] Investment in Mutual Funds[ii] Investment in Fixed Deposits[iii] Investment in Immovable Properties – Real Estate[iv] Investment in Shares and Securities[v] Investment in Gold, Silver and Precious metal.

Looking to the volatile condition of share market in theyear 2011, the investors have changed his options andthey have started to invest money in FDs, variousEquity Fund, Gold and Silver rather than in sharemarket. Therefore in this article, we have discussed -

[i] How to select Mutual Fund?

[ii] The detail discussion of various Mutual Funds

[iii] Taxation effect of Mutual Funds and

[iv] Investments opportunities for NRI investors.

[1] THE PERFORMANCE OF 2011 OF EQUITYAND DEBT MUTUAL FUNDS ARE AS UNDER.

Equities (1 year Return) Debt (1 year Return)

ICICI Prudential FMCG 17.00% Canara Rebeco 15.50%

Ing Global Real Estate 08.60% Tata Floater 12.80%

Birla SL International 05.30% Sahara ST Bond 14.00%

Equity Plan A Baroda Pioneer 12.50%

SBI Magnum FMCG 08.60% Peerless ST 12.90%

[2] HOW TO SELECT MUTUAL FUND?

How does one select a mutual fund? The Indian

mutual fund industry has come a long way, with

the assets under management (AUM) growing atan annualized rate of 20% between September

2006 and September 2009. It has moved from

offering traditional equity and debt schemes tospecialized products, such as funds of funds,

arbitrage funds, assets allocation funds and

exchange traded funds (ETF). All these make itdifficult for investors to select the scheme that suits

their needs. Let us look at some of the parameters

that should be considered while selecting funds.

Investment object ive & r isk pro f i le: The

investment goal of the fund must coincide withthat of the investor. The objectives can be defined

in terms of tax planning, regular income, high

returns, long term planning etc. Equity funds aremore tax efficient compared with debt funds, short

term debt funds aim at regular income, whereas

closed-ended equity funds aim at long term capitalappreciation.

The fund should be chosen according to theinvestor’s risk tolerance. The objective of high

returns is generally associated with high risk. The

Association of Mutual Funds in India (Amfi) definesthree types of risk tolerance levels; low risk of

cautious, moderate risk or cautiously aggressive,

and high risk or aggressive. Low risk investorsshould consider debt funds, which invest in

government securities or high rated debt papers,

Moderate risk investors should consider indexfunds, balanced funds and asset allocation funds.

High risk investors should look for equity funds

(diversified and specialized), off-shore funds andmid cap funds.

CA. Hardik Biharilal ShahThe author is practising since 2005. He canbe reached at [email protected]

March, 2012


Fund Performance & Management: Though thepast performance of a fund does not define itsfuture performance, it is important to consider howit has performed with respect to its benchmark orother similar funds. A fund should be comparedwith the same category of funds. So, theperformance of a mid-cap fund cannot becompared with that of a large cap fund as the formeris more volatile compared with the latter.

Past performance also helps in assessing thequality of fund management, the skills of the fundmanager and his team. The stock picking andmarket timing abilities of the manager can bejudged by comparing the fund performance withits benchmark. The funds that perform better thantheir benchmarks are considered out performers,whereas the funds that yield less than theirbenchmarks are under performers.

Fund Size: The size is important because a verylarge fund often faces difficulties in the optimumdeployment of its corpus, which, in turn, negativelyimpacts its performance. On the other hand,a verysmall sized fund is constrained with the problemsof high costs funds as it ideally balances theinvestment flexibility and costs.

Fund costs: These involve the operating costsof running a fund and include marketing and sellingexpenses, audit fees, custodian fees etc. Thesecosts can be gauged by looking at the fund’sexpense ratio, which is reported in its annualreport. The expense ratio should be compared withsimilar funds as those with high ratios significantlyimpact the long term investors due to the effect ofcompounding.

[3] DETAILED DISCUSSION OF VARIOUSMUTUAL FUNDS.

It’s important to understand that each mutual fundhas different risks and rewards. In general, thehigher the potential return, the higher the risk ofloss. Although some funds are less risky thanothers, all funds have some level of risk – it’s neverpossible to diversify away all risk. This is a factfor all investments.

Each fund has a predetermined investmentobjective that tailors the fund’s assets, regions of

investments and investment strategies. At thefundamental level, there are three varieties ofmutual funds.[1] Equity Funds (Stocks)[2] Fixed income Funds (Bonds)[3] Money Market Funds

All mutual funds are variations of these three assetclasses. For example, while equity funds thatinvest in fast-growing companies are known asgrowth funds, equity funds that invest only incompanies of the same sector or region are knownas specialty funds.

Let’s go over the many different flavors of funds.We’ll start with the safest and then work throughto the more risky.

Money Market Funds

The money market consists of short term debtinstruments, mostly Treasury Bills. This is a safeplace to park your money. You won’t get greatreturns but you won’t have to worry about losingyour principal. A typical return is twice the amountyou would earn in a regular checking/savingsaccount and a little less than the average certificateof deposit (CD).

Bond / Income Funds:

Income funds are named appropriately, theirpurpose is to provide current income on a steadybasis. When referring to mutual funds, the terms‘fixed income’, ‘bond’ and ‘income’ aresynonymous. These terms denote that investprimarily in government and corporate debt. Whilefund holdings may appreciate in value, the primaryobjective of these funds is to provide a steadycash flow to investors. As such, the audience forthese funds consists of conservative investors andretirees (Learn more in Income Funds 101).

Bond funds are likely to pay higher returns thancertificates of deposit and money marketinvestments, but bond funds aren’t without risk.Because there are many different types of bonds,bond funds can vary dramatically, depending onwhere they invest. For example, a fund specializingin high yield junk bonds is much more risky than afund that invests in government securities.Furthermore, nearly all bond funds are subject tointerest rate risk, which means that if rates go upthe value of the fund goes down.

Article : Park Your Money Wisely

March, 2012


Balanced Funds:

The objective of these funds is to provide a balancedmixture of safety. Income and capital appreciation.The strategy of balanced funds is to invest in acombination of fixed income and equities. A typicalbalanced fund might have a weighting of 60% equityand 40% fixed income equities. The weighting mightalso be restricted to a specified maximum orminimum for each asset class.

A similar type of fund is known as an assetallocation fund. Objectives are similar to those of abalanced fund but these kinds of funds typically donot have to hold a specified percentage of any assetclass. The portfolio manager is therefore givenfreedom to switch the ratio of asset classes as theeconomy moves through the business cycle

Equity Funds:

Funds that invest in stocks represent the largestcategory of mutual funds. Generally the investmentobjective of this class of funds is long term capitalgrowth with some income. There are, however,many different types of equity funds because thereare many different types of equities. A great wayto understand the universe of equity funds is touse a style box, an example of which is below.

Investment Style

Size Value Blend Growth

Large

Mid

Small

The idea is to classify funds based on both thesize of the companies invested in and theinvestment style of the manager. The term valuerefers to a style of investing that looks for highquality companies that are out of favor with the

market. These companies are characterized bylow P/E and price to book ratios and high dividendyields. The opposite of value is growth whichrefers to companies that have had (and areexpected to continue to have) strong growth inearnings, sales and cash flow. A compromisebetween value and growth is blend, which simplyrefers to companies that are neither value norgrowth stocks and are classified as beingsomewhere in the middle.

For example, a mutual fund that invests in largecap companies that are in strong financial shapebut have recently seen their share prices fall wouldbe placed in the upper left quadrant of the stylebox. (large and value). The opposite of this wouldbe a fund that invests in start up technologycompanies with excellent growth prospects. Sucha mutual fund would reside in the bottom rightquadrant (small and growth).

Global / International Funds:

An international fund (or foreign fund) invests onlyoutside your home country. Global funds investanywhere around the world, including your homecountry.

It’s tough to classify these funds as either riskieror safer than domestic investments. They do tendto be more volatile and have unique country and/or political risks. But, on the flip side, they can, aspart of a well balanced portfolio, actually reducerisk by increasing diversification. Although theworld’s economies are becoming more inter-related, it is likely that another economysomewhere is outperforming the economy of yourhome country.

Speciality Funds:

This classification of mutual funds is more of anall-encompassing category that consists of fundsthat have proved to be popular but don’tnecessarily belong to the categories we’vedescribed so far. This type of mutual fund forgoesbroad diversification to concentrate on a certainsegment of the economy.

Sector funds are targeted at specific sectors ofthe economy such as financial, technology, health


March, 2012


etc. Sector funds are extremely volatile. There isa greater possibility of big gains, but you have toaccept that your sector may tank.

Regional funds make it easier to focus on a specificarea of the world. This may mean focusing on aregion (say Latin America) or an individual country(for example, only Brazil). An advantage of thesefunds is that they make it easier to buy stock inforeign countries, which is otherwise difficult andexpensive. Just like for sector funds, you have toaccept the high risk of loss, which occurs if theregion goes into a bad recession.

Socially responsible funds (or ethical funds) investonly in companies that meet the criteria of certainguidelines of beliefs. Mostly socially responsiblefunds don’t invest in industries such as tobacco,alcoholic beverages, weapons or nuclear power.The idea is to get a competitive performance whilestill maintaining a healthy conscience.

Index Funds:

Gold ETFs are open-ended mutual fund schemesthat will invest the money collected from investorsin standard gold bullion (0.995 purity). Theinvestor’s holding will be denoted in units, whichwill be listed on a stock exchange.

These are passively managed funds and aredesigned to provide returns that would closelytrack the returns from physical gold in the spotmarket.

All investor can buy and redeem the units eitherdirectly from the mutual fund, subject to certainstipulations, or from the stock exchange.

Tax Treatment of Gold ETF:

The Gold ETF is classified under mutual fund andwill be taxed as per non equity mutual fund taxationrules. Investor investing in Gold ETF need not paywealth tax. Investor has to pay taxes afterredemption as per the tax laws application for nonequity mutual fund. But, when the Gold ETF isredeemed for physical gold the taxation rules willbe similar to that of physical gold.

Tax Rate for Mutual Fund Investors as per FinanceBill 2011 – As per the Table.


[4] FOR NRI INVESTORS

The rupee was quoting at Rs. 44.80 against USDollars seven months ago and has depreciatedabout 18% to-day. A falling rupee is not the bestnews for us, but definitely is for exporter and NRIinvestors who will receive more rupee funds onconversion. Looking to the current scenario, NRIshave some good investment options to part theirsurplus funds.

[1] Liquid Plus Funds:Combined benefit of attractive returns with fullrepatriability.

[2] Bond Funds:Benefit from any potential capital gain arisingout of any reduction in future interest rates

[3] NRE Deposits:Best option after the deregulation by RBI ShortTerm deposit rules are attractive.

[4] Medium Term Deposit (1 – 3 years)The choice depends on the kind of pricevolatility and whether the investor is seekinga guaranteed return or not.

[5] Fixed Maturity Plans:Attractive option for customers looking tolocking in at prevailing high rules.

[6] Long Term (3 years or more):Good options at the current rates.

On account of Indian Equity markets being theirvolatile worst, the year 2011 saw internationalschemes performing for better than the domesticones. However, based on their consistentperformance are Franklin India Bluechip, HDFCTop 200, IDFC Premier Equity (Midcap).

CONCLUSION:

We hope this article may be useful to young CharteredAccountants who desire not to practice in traditionalfields. Doors are opened for take entry in advising infinancial matters in corporate sectors.

Sources:[1] Economic Times (Wealth Series)[2] Website of various Mutual Fund.

March, 2012


REVISED SCHEDULE – VI (RS-VI) –SALIENT ISSUES

(1) BASICS :

What is role of RS-VI Vs. Accounting Standard(AS)

- RS-VI deals with Presentation andClassification of all financial items andtransactions

- Whereas AS deals with Recognition andMeasurement and some times also prescribesspecific disclosure.

- RS-VI was introduced by NotificationNo.447(E), dtd. 22.02.2011, subsequently itwas amended on 30.03.2011.

PRINCIPLE OF SUPREMACY OF “AS”

As per general instructions No.1, the provisionsof ‘AS’, Companies Act and other laws,regulations, shall over-ride requirements of RS-VI in case of conflict.

‘AS’ upto AS-29 are separately notified underCompanies (AS) Rules,2006 and as provided inSec.211(3A) to (3C), every Company has tocomply.

REVISED NEW INDIAN ‘AS’ ( “IND AS”) are alsoin offing and are awaiting notification from theGovernment.

(2) APPLICABILITY :

- RS-VI shall apply to reporting period startingfrom on or after 01.04.2011, accordingly firstyear of applicability shall be 2011 – 12.

- Early voluntary adoption is not permissiblesince Old Sch. VI is in existence.

- Corresponding previous figures are also to beas per RS-VI

- Applicable to all companies except bankingindustries, insurance, power generation etc.

- In case of Interim Reporting, if full financialstatements are prepared as per AS-25, RS-VIshall apply.

- However, if condensed financial statements areprepared than old Sch.VI shall prevail (As perDraft GN).

- Thus listed companies, publishing theirquarterly results as well as half yearly results& statements of Assets and Liabilities have toprepare as per Old ‘AS’, whereas Last QuarterResults & Annual Audited Accounts shall beas per RS-VI.

(3) MAJOR HIGH LIGHTS :

- Supremacy of “AS”

- No Schedules, but only notes to accounts.

Old Sch.VI has 4 Parts :

(a) Balance Sheet (Part I)

(b) Profit & Loss Account (Part II)

(c) Definition of “Reserves and Provisions” (part III).

(d) Balance Sheet Abstract (Part IV)

RS-VI has only two parts :

(1) Balance Sheet (Part –I)

(2) Statement of Profit & Loss Accounts (Part II).

- Profit & Loss Account as popularly known tous will now be renamed as “Statement of Profit& Loss”.

- As per instruction, No.6 of RS-VI , meaning andterms used in the RS-VI shall be as defined bythe notified “AS”.

- Only vertical Format is prescribed andpermitted.

- Horizontal format was permitted for BalanceSheet in Old Sch.VI.

CA. Chirag M. ShahThe author is practising since 1991. He canbe reached at [email protected]

March, 2012


Article : Revised Schedule - VI (RS-VI) - Salient Issues

- No Profit & Loss appropriation account to beprepared. Appropriation will have to be given inNotes to Accounts under the group “Reservesand Surplus”.

- Debit balance of Profit & Loss is to be reducedfrom Reserves & Surplus and if still thereremains loss the same shall not be shown ondebit side of Balance Sheet, but Reserves andSurplus Group shall be shown as “Negative”Figure.

- RS-VI prescribes Minimum disclosure.However, additional disclosure, if it facilitatesthe user of financial statement, the same ispermissible.

- Uniformity of Units measurements shallcompulsorily be adopted in the entire financialstatement, e.g. If figures in the Balance Sheetand Profit & Loss Accounts are given in“Crores” then in Notes to Accounts, it can notbe mentioned “in Lacs”.

(1) For Turnover Rounding up in Hundred,upto 100 Thousands, Lacs & MillionsCrores. is permitted.

(2) Turnover Rounding up in Lacs,exceeding Millions & Crores &100 Crores decimals is permitted.

The entire presentation of Balance Sheet is tobe judged from the angles of Current or Noncurrent assets and liabilities.

(4) MAJOR EXCLUSIONS :

- Disclosure of payment made / expensesincurred by managerial personnel,

- Computation of Managing Director’sremuneration U/S.349,

- Misc. Expenditure to the extent not Written Off.

- All quantitative information like Production,Purchase, Sales, Consumption in quantity :

- Details of Licensed and Installed capacity.

- Details of Purchase & sales of Investment.

- Details of Investment, deposits, loans andadvances to company under the samemanagement.

- Classification of Commission and brokerage

income.

[1] BALANCE SHEET :

Definition & Format :

i. Current Assets :

An Asset is classified as “Current” if it satisfiesany one of the following criteria :

(a) It is expected to be realized or intendedfor sale or consumption in No rm alOperating Cycle.

(b) Held preliminarily for the purpose ofTrading.

(c) Expected to be realized within 12 monthsafter reporting date.

(d) It is Cash or Cash Equivalent unless it isrestricted from being exchanged or usedto settle a liability for atleast 12 months afterreporting date i.e. it can be used to settleliabilities for atleast 12 months.

(e) In case of FD which is given as “margin”and has lock in period of two years, thesame shall not be classified as CashEquivalent.

- All assets other than above shall be “NonCurrent Assets”

- Normal Operating Cycle (NOC) is the timebetween acquisition of assets for processingand their realization into Cash or CashEquivalent.

- here NOC can not be precisely identified, it isassumed to be 12 months.

- NOC can be of more than 12 months like incase of Ship Manufacturing Industries,Wineries, etc. what about big Project,Infrastructure Companies ?

(ii) Current Liabilities :

A Liability shall be classified as “Current” when itsatisfies any one of the following criteria :

(a)It is expected to be settled in Normal OperatingCycle.

(b)It is primarily held for the purpose of Trading.

(c)It is due to be settled within 12 months afterReporting date.

March, 2012



(d)The Company does not have unconditional rightto defer settlement of Liabilities for atleast 12months after Reporting Date.

(e)All liabilities other than above shall be classifiedas Non Current Liabilities.

Long Term Liability like :

- Term Loan can become current liability if termsof the loan provides that “on Breach of conditionsthe same shall become Demand Loan”.

- The important aspect to be considered is duesto be settled or realized within 12 months afterthe reporting date.

- Whether Asset is Current or not, is to beidentified not from the date of their creation, butfrom the 12 months of the Balance Sheet date.

- There can be “Trade Payables or Receivables”for more than 12 months, but within the “NormalOperating Cycle”, then not to classify as “NonCurrent”

Whether Current or Non Current ?

(i) Non moving / obsolete Raw-material.

(ii) Unsold finished goods for more than 15months.

(iii) Preventive stores purchased for next 3 years.

(iv) Provision for Employees benefits like Gratuity,Leave Encashment etc.

(v) Breach of terms of Term Loan converting intoDemand loan.

(vi) Trade receivables and payables are requiredto be classified into “Current” and “NonCurrent” on above basis.

(vii) Bank Deposits maturing after 12 months,which is covered in the definition of Cash andCash Equivalent.

FORMAT OF BALANCE SHEET :

The new heads for presentation of Assets andLiabilities shall be

(i) Equities and Liabilities

(ii) Assets

In Old Sch.VI the word “Equity” was missing and only“Liability” was prescribed which gives misleadinginterpretation about Equity / Shareholder Funds.

Note Figures FiguresNo. as at as at end

end of ofcurrent previousreporting reportingperiod period.

(1) EQUITIES & LIABILITIES

Shareholders funds

(i) Share Capital

(ii) Reserves & Surplus

(iii) Money receivedagainst share warrants

(2) SHARE APPLICATIONMONEY PENDING ALLOTMENT

(3) NON CURRENT LIABILITIES:

(i) Long Term Borrowings

(ii) Deferred Tax Liabilities (Net)

(iii) Long Term Liabilities

(iv) Long Term Provisions.

(4) CURRENT LIABILITIES :

(i) Short term borrowings

(ii) Trade Payables.

(iii) Other current Liabilities

(iv) Short Term Provisions

T O T A LASSETS

(1) Non Current Assets :

(a) Fixed Assets :

(i) Tangible Assets

(ii) Intangible Assets

(iii) Capital Working progress

(iv) Intangible Assets under

(b) Non Current Investment

(c) Deferred Tax Assets (Net)

(d) Long Term Loans & advances

(e) Other Non Current Assets

(2) Current Assets :

(a) Current Investments

(b) Inventories

(c) Trade Receivables

(d) Cash & Cash Equivalents

(e) Short Term Loans & Advances

(f) Other Current Assets

T O T A L

(A) EQUITIES & LIABILITIES :

(a) Shareholders Funds

(A) Share Capital

Important requirements

(I) Names and number of shares of each personsholding more than 5% shares. – Whetherregistered or Legal (beneficial shareholders)?

March, 2012



(II) In respect of shares held by holding company,

- Whether the Auditor need to certify authority?Earlier Old Sch.VI, specifically mentioning theAuditor need not certify correction of hold“which is missing in RS-VI”.

(iii) Following information is to be given for next 5Years from the year of event.

(f) Issue of Shares by way of Bonus Shares.

(g) Shares bought back – Whether Redemptionof Preference Share is covered?

(h) Shares issued for consideration other thanCash.

(2) Whether Preferential Shares, is Capital or Liability:

As per Principle Laid down in “AS-31”, the samemay be considered as liability.

However, CASR,2006 has notified only upto “AS-29”

(B) Reserves and Surplus :

Bifurcation into

(i) Capital Reserves

(ii) Capital Redemption Reserve

(iii) Securities Premium

(iv) Debenture Redemption Reserves

(v) Revaluation Reserves

(vi) Other Reserves

(vii) Surplus in Profit & Loss Accounts &appropriation for the year.

As per Guidance Note on Audit of Capital &Reserves,

“Reserves” are portion of earning, receipts andother surplus of an enterprise (Whether Capital orRevenue) appropriated by the management forgeneral or specific purpose other than theprovision for depreciation or diminution in value ofassets or for a known liabilities.

- Thus revenue reserves are retained earnings

- Capital Reserves comprises

- Retained Capital Profits.

- Revaluation Reserves arising from revaluationof tangible fixed assets.

- Surplus from re-issue of forfeited shares etc.

Thus, Capital Reserves is not free from

distribution.

In amalgamation whether excess of Assets overLiabilities taken over is part of “Capital Reserves”?

Capital Redemption Reserves :

Normally CRR created for Redemption ofPreference Shares and Buy Back of Shares

- Can be utilised only for issue of Fully-PaidBonus Shares.

- For any other use, prior sanction of Court isrequired.

- Debit Balance of P & L to be adjusted againstall reserves and even it can not be set-off then“Negative” figure of R & S to be given.

(C) Share Application Money Pending Allotment :

- Only amount is to be shown upto IssuedCapital and to the extent of Not Refundable isto be shown under this head :

- Earlier Share Application Money was shownunder the head “Shareholders’ Fund”

- Share Application money to the extentrefundable shall be shown under the head“Other Current Liabilities”

- Details of Number of Shares,

Amount of premium.

Interest on Refundable money are to be shownboth in Reserves and Surplus.

(B) Non Current Liability :

(a) Long Term Borrowing :

- Classification into Secured and Unsecuredto be made.

- Nature of Security against each loan.

- Terms of Repayment to be disclosed.

- Period and amount of “continuing default”to be disclosed.

(b) Deferred Tax Liability :

Net Amount after adjusting Deferred TaxAssets if any (on the basis of principle of virtualcertainty) to be shown

(c) Other long Term Liability :

TRADE PAYABLES :

(due for settlement after 12 months – DeferredPayment basis)

March, 2012


(d) Other Long Term Liabilities :

Employees’ benefits.

(e) Long Term Provisions :

Provision for employees benefits like profitsharing benefits, deferred compensation,Long Services Leave, Sabbatical Leave, Longterm disability benefits etc.

[c] CURRENT LIABILITIES :

(a) Short Term Borrowings :

- Classification into “Secured and Unsecured”to be given.

- Demand Loan.

- Loans and Advances from related parties.

- Deposits maturing within 12 months fromBalance Sheet date.

For Example;

Deposit of Rs.1 Crore taken for 18 months on01.07.10, shall become current liability sincematuring on 31.12.2012, even though theperiod of deposit is more than 12 months

- Loans guaranteed by Directors and others tobe disclosed separately.

- Period and amount of default on repayment ofloan and interest as on Balance sheet date –to be disclosed.

(b) Trade Payables (Sundry Creditors)

NOC or 12 months from Balance Sheet Date.

Information of outstanding dues of Micro, Smalland medium industries as per MS MEDAct,2006 to be given to comply with the saidloan – over-riding nature of other laws.

(c) OTHER CURRENT LIABILITIES : Followingshall be part of Other current liabilities ;

(a) Current maturities of Long term debts,

(b) Interest accrued, but not due

(c) Interest accured and due

(d) Income received in advance.

(e) Unpaid dividends

(f) Investor’s Education & Protection Fund.

(g) Unpaid matured Deposit (debentures)along with accrued interest thereof

(D) SHORT TERM PROVISION :

Following shall be part of Short Term Provisions;

(a) Provision for employees’ benefit.

(b) Professional warranties

(c) Provision for other expenses.

(C) ASSETS :

(1) Non Current Assets :

(a) Fixed Assets :

(i) Tangible Assets

Own and Lease hold to be shown separatelyunder each Assets.

(ii) Intangible Assets now classified in broad 8heads

(iii) Work in progress of Tangible and Intangible –on face of Balance Sheet.

(iv) Revaluation / Devaluation to be shown for first5 years.

(b) Investment :

Definition of current Investment as per “AS13”

Investment is “Current Investment”, if it is readilyrealisable and intended to be held for not more than1 year from the date on which investment is made.

If any of the above condition is not fulfilled, then itis “Non Current”.

The definition of current investment as per RS-VIis different – due to Supremacy “AS13” to comply.

Classification in;

- Investment in property for earning, rentalincome is part of investment property.

- Investment in equity, preference shares,debentures, the names of subsidiaries,associates, Joint Ventures etc. shall be given.

- Investment in Partnership firm (Balance ofCapital Account), to be shown and CurrentBalance to be shown under the head “CurrentInvestment”.

- Investment in LLP is not specif icallymentioned.

- Classification of “Trade” & other investmentstill continue.


March, 2012


- Aggregate of quoted & MV thereof & unquotedas well as provision for diminution in value todisclose.

(c) Deferred Tax Assets (Net) :

The working of the same shall be as per “AS22”and the figure is to be Net of Deferred TaxLiabilities.

(d) Long Terms Loans & Advances :

Classification into

a. Capital Advance :

Advance for purchase of Capital Assets(Whether Capital Assets, are to be suppliedwithin 12 months, should be disclosed in thisGroup?

b. Security Deposit.

c. Loans and advances to related parties.

d. Other Loans and advances :

VAT, CENVAT credits, which is likely to beutilised after 12 months from the BalanceSheet Date.

e. Classification of Long Term Loans andAdvances on the basis of Security andrecoverability to be given.

For Bad and doubtful Loans and Advances –Allowance to be made.

(e) OTHER NON CURRENT ASSETS :

Long Term Trade receivables (Trade receivableson Deferred Credit terms).

(2) CURRENT ASSETS :

(a) Investments

Current Investment as per “AS13” samedisclosure requirement as per NCA.

(b) Inventories :

Goods in transit under each sub-head to begiven.

Mode and method of valuation, formula usedas per “AS2” – Inventories also to mention.

[c] TRADE RECEIVABLES (Sundry Debtors)

Bills Discounting:

Classification on the basis of Security &

Recoverability :

Classification into Outstanding for periodexceeding six months from the date they aredue for payment (6 months not to beconsidered from date of invoice) in respect ofsale of Rs.1 Crores, made on 01.08.11 oncredit of 90 days and outstanding as on31.03.12, the same shall not be classified asoutstanding for more than 6 months. (only 5months old).

Allowance for Bad and Doubtful to be made:

(3) CASH & CASH EQUIVALENT :

As per “AS3” Cash Equivalent is having very shortterm of less than 3 months and highly liquidated,readily convertible in Cash and insignificant riskof change in value

(1) Balance with Banks –

Separate disclosure for margin money,security deposit, guarantee, no need to givebalance with scheduled or non-scheduledbanks

(2) Cash on hand :

IOU, Temporary Advance or Stail Chequesare not Cash on Hand. (GN on Audit of Cash)

(3) Cheues / Drafts on hand only if received priorto 31st March.

(4) SHORT TERM LOANS & ADVANCES :

Classification on the basis of security andrecoverability.

Separate disclosure for related parties.

Loans for Bad and doubtful.

OTHER CURRENT ASSETS :

All inclusive heads.

CONTINGENT L IAB IL ITIES ANDCOMMITMENTS :

Contingent Liabilities :

(i) Claims against company notacknowledged as Debt.

(ii) Guarantees

Commitments :

Estimated amount of contract remaining to beexecuted on Capital Account.


March, 2012


Uncalled Liability of partly paid Shares/Investments.

PROPOSED DIVIDEND :

· RS-VI does not provide for recognition of proposeddividend in the Books on the lines of IND AS10.Only disclosure in the Note is to be made for theproposed dividend.

· However, AS4 specifically provides for adjustmentin respect of proposed dividend and hence tillimplementation IND AS, Company will have toprovide for proposed dividend.

[2] PROFIT AND LOSS ACCOUNT :

· Vertical Form only.

· Disclosure of exceptional and extra ordinaryitems on face of Balance Sheet.

· IND AS1, prohibits disclosure of extra ordinaryitems.

· Exceptional items are Item of Income andexpenses which are of such nature, size andIncidence that their separate disclosure canbetter explain financial performance e.g.;

- Disposal of items of Fixed Assets.

- Disposal of long term investments.

- Settlement of litigations etc.

- EXTRA ORDINARY ITEMS

· When nature of event or transaction issuch that it is distinct from ordinary activitylike Earth Quake, Attachment of property,credit on account of time barred liability ofcapital assets.

REVENUE :

- Sale of Products

- Sale of services

- Other Operating Income

· Excise duty to be shown as deductionfrom sale of products on the face ofBalance sheet.

VAT & SERVICE TAX

· Not to reduce as per “Guidance Note” onVAT and terms used in FS.- Revenueexcludes amount collected on behalf of3rd party.

DIFFERENCE BETWEEN OTHEROPERATING INCOME AND OTHER INCOME:

· Other Operating Income :

Revenue Generated from ancillary / Incidentalactivity to principle revenue generating activity.

E.g. Sale of DEPB,

Sale of Waste, Scraps.

· Other Income e.g.:

- Rental Income,

- Sales of Fixed Assets and Investments,

- Interest,

- Dividends, Forex Gains etc.

· Dividend from Subsidiary Company

- Old Sch.VI require to recognize dividenddeclared by subsidiary after the date ofbalance sheet for the period related toholding Company.

- RS-VI does not provide for suchrecognition. AS 9 provides recognition ofdividend if right to receive is establishedduring reporting period.

EXPENSES :

· Depreciation : Annual review of “useful life” andmethod of depreciation as prescribed in IND AS8.

· Items of Income & Expenditure, which exceeds1% of Revenue from operations Rs.1.00,000/-,which ever is higher to be shown separately.

· In case of Interest Income, no bifurcation ofInterest on Trade Investment and others as wellas TDS.

· In case of Raw Material Consumption, no need toshow separately Raw Material more than 10%cosumption.

· RS-VI, provides separate disclosure of RMConsumption in broader heads and if it is material.

· In Notes to Account, no quantity details ofconsumption. Only value disclosure is required.

· Separate disclosure provide from Discontinuingoperation.

· Changes in Inventories :Increase/decrease ofinventories to be shown on expense side, whereincrease is to be shown by negative figure.


March, 2012


DEPRECIATION ON GOODWILL :CIT V/S. HINDUSTAN COCO COLA

BEVERAGE (P) LTD.(2011) 331 ITR 192 (DELHI)

Issue :-

Whether depreciation can be allowed on goodwill ?

Held :

Assessing Officer allowed the claim of the assessee.CIT u/s 263 proposed to disallow the same. Tribunalallowed the claim. On appeal High Court held that :-

The Tribunal had treated it to be valuable commercialasset similar to other intangibles mentioned in thedefinition of the block of assets and, hence, eligible todepreciation. It had also been noted by the Tribunalthat these facts were stated by the assessee in theaudit report and the A.O. had examined the audit reportand also made queries and accepted the explanationoffered by the assessee. The acceptance of the claimof the assessee by the A.O. would come in thecompartment of taking a plausible view in as much asbasically intangible assets were identifiable nonmonetary assets that could not be seen or touched orphysical measures which were created through timeand/or effort and that were identifiable as a separateasset. They could be in the form of copy rights, patents,trade marks, goodwill, trade secrets, customer lists,marketing rights, franchises, etc, which either ariseon acquisition or were internally generated. Goodwillconveys a positive reputation built by a person/company/business concern over a period of time. TheTribunal was justified in holding that if two views werepossible and when the A.O. had accepted one viewwhich was a plausible one, it was not appropriate onthe part of the Commissioner to exercise his power u/s 263 solely on the ground that in the books it wasmentioned as goodwill and nothing else.

Also See :

B. Reveendran Pillai v/s. CIT (2011) 332 ITR 531(Ker)

78

CA. Jayesh C. SharedalalThe author is the past President of CAA,practising since 1981. He can be reached [email protected].

CA. C. R. SharedalalThe author is the past President of CAA,practising since 1953. He can be reached [email protected].

INTERPRETATION OF TAXING STATUTES– LITERAL CONSTRUCTION - PURPOSIVECONSTRUCTION - AIDS TOCONSTRUCTION.

GREAT EASTERN EXPORT V/S. CIT(2011) 332 ITR 14 (DELHI)

Issue :

How the taxing statutes are to be interpreted ?

Held :-

On interpretation of Sec. 80IA and 80IB of the I.T. Act1961, the Court has laid down the following principlesfor interpretation.

If the language of the statute is plain and capable ofone and only one meaning, the obvious meaning is tobe given to the said provision. Rules of interpretationare applied only if there are ambiguities when thepurpose of interpretation is to ascertain the intentionof law, i.e. mens legis. It is based on assertion byadopting a plain meaning of the statute in the absenceof any ambiguity.

A particular Section of an enactment the intention ofwhich is otherwise manifest, cannot be read by referringto other section. The Legislature adopts different waysin order to achieve its goal and there is no justificationfor insistence on identical language.

The notice and objects of accompanying reasons areonly an aid to construction. Such aids to construction

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From the Courts

are needed when a literal reading of the provision leadsto an ambiguous result or absurdity.

Purposive interpretation means to understand thepurpose with which a particular provision was enactedor inserted by Legislature.

SEC. 2 (22) (E) : DEEMED DIVIDEND :MEANING OF “SUBSTANTIAL PART OFBUSINESS” :

CIT V/S. PARLE PLASTICS LTD.

(2011) 332 ITR 63 (BOM)

Issue :

What is the meaning of “Substantial part of business”in Sec. 2 (22)(e) ?

Held :

High Court had an occasion to interpret the words“Substantial part of business” used in Sec. 2(22)(e).The same is explained in the following words :-

The expression used under clause (ii) of section2(22)(e) is “substantial part of business”. Theexpression “substantial Part” does not connote an ideaof being the “Major part” or the part that constitutesmajority of the whole. If the legislature intended that aparticular minimum percentage of the business of alending company should come from the business oflending, the Legislature could have specificallyprovided for that percentage while drafting clause (ii)of Sec. 2 (22)(e) of the Act. The Legislature haddeliberately used the word “substantial” instead ofusing the word “Major” and/or specifying anypercentage of the business or profit to be comingfrom the lending business of the lending company forthe purpose of clause (ii) of section 2(22)(e). Anybusiness of a company which the company does notregard a small, trivial or unconsequential as comparedto the whole of the business is substantial business.Various factors and circumstances would be requiredto be looked into while considering whether part of thebusiness of a company is its substantial business.Sometimes a portion which contributes a substantialpart of the turnover, though it contributes a relativelysmall portion of the profit, would be a substantial partof the business. Similarly a portion which is relativelysmall as compared to the total turnover, but generates

a large portion, say more than 50 percent, of the totalprofit of the company would also be a substantial partof the business. Percentage of turnover in relation tothe whole as also a percentage of the profit in relationto the whole and sometimes even percentage ofmanpower used for a particular part of the business inrelation to the total manpower or working force of thecompany would be required to be taken intoconsideration.

MEANING OF PLANT : SHUTTERING INCONSTRUCTION BUSINESS :

CIT V/S. VIJAYA ENTERPRISES

(2011) 332 ITR 235 (AP)

Issue :

Whether a single part of shuttering in constructionbusiness is a “plant” for the purpose of allowance @100% depreciation u/s 32 (1)(ii) ?

Held :

Depreciation at 100% was allowed to certainpurchases of plant of the prescribed value u/s 32 (1)(ii).On the Question as to every part of the shutteringmaterial is separate so as to avail benefit of 100%depreciation, High Court has held as under :

In determining whether an item constitutes “Plant” thecourts have applied the durability and/or functionaltests. If a thing itself is durable (in the sense it can beused and re-used as non interdependent, interconnected a non consumable thing) and has functionalutility in the trade or business of the assessee toadvance his business interest, such thing would be aplant. If it is durable but cannot effectively stand alonewithout functional integration with other similar ordissimilar components or units it would not qualify asa plant.

In the very nature of things, and as understood in theconstruction industry, a single metal or wooden poleor supporting material is never understood as formingshuttering material. The owner of the building underconstruction, the contractor /mason who understandsconstruction and/or a business man who arrange foror supplies shuttering material, is an integrated unitconsisting of more than a few metal or wooden poles,plants and other props used to support the cement

80

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construction stage of a building. Each item of shutteringmaterial cannot be treated as one whole shutteringmaterial forming one plant eligible for 100 percentdeprecation under the first proviso to section 32(1)(ii).

RECREATION CLUB: PRINCIPLE OFMUTUALITY AND INTEREST INCOME.

CIT V/S. DELHI GYMKHANA CLUB LTD.

(2011) 198 TAXMAN 207 (MAG).

Issue :-

Whether in the case of a mutual concern income frominterest from FDS dividend income is exempt ?

Held :-

Even if the income was earned by the society in theform of interest by keeping the funds in bank suchinterest would not be treated as an income liable to tax

High Court stated that the issue is covered by followingthree decisions:-

(1) D.I.T. v/s All India Oriental Bank of Commerce 130Taxman 575 (Delhi)

(2) C.I.T. v/s Talangong Co. Op. Group Housing Soc.Ltd. (2010) 195 Taxman 110 (Del)

(3) C.I.T. v/s Standing Conference of PublicEnterprises (2010) 186 Taxman 142 (Del)

WAIVER OF LOAN AND INCOME

LOGITRONICS (P) LTD. V/S. CIT

(2011) 197 TAXMAN 394 (DEL)

Issue :

When the waiver of loan can be treated as income forcharge under I.T. Act. 1961 ?

Held :

Under Section 4, the charging section, the charge ofincome tax is upon the “total income of the previousyear”. The term “income” is defined u/s 2(24). Ingeneral, all receipts of revenue nature, unlessspecifically exempted, are chargeable to tax. Loantaken is not normally a kind of receipt which will betreated as income. However when a part of that loanis waived off by the creditor, some benefit accrues tothe assessee. Question is what would be the character

of waiver of part of the loan in the hands of theassessee ? Waiver definitely gives some benefit tothe assessee. Whether it is to be treated as Capitalreceipt? If it is so, then only capital gains tax would bechargeable u/s 45 or else, whether remission of loanis no income at all ?

The answer to these Questions would depend uponthe purpose for which the said loan was taken. If theloan was taken for acquiring the capital asset, waiverthereof would not amount to any income exigible totax, but on the other hand, if the loan was taken fortrading purpose and was treated as such from thevery beginning in the books of account, the waiverthereof may result in the income, more so when it wastransferred to the profit and loss account.

SALE AS A GOING CONCERN : SEC. 41(2)NOT APPLICABLE

C.I.T. V/S. AGROSYNTH CHEMICALS

(2011) 198 TAXMAN 232 (KAR)

Issue :

Whether provisions of Sec. 41(2) can be applied whenthe sale is as a going concern ?

Held :

Under the agreement of sale the entire land measuring5 acres along with the factory buildings, plant andmachinery and the assets and liabilities were sold fora total consideration of Rs. 1.50 crores and thecompany, which had purchased it, had agreed to paythe consideration by allotting 15 lakhs equity sharesof Rs. 10 each in favour of the partners of theassessee. On going through the documents, itappeared that the agreement did not reflect the actualvalue of the land, building, plant and machinery. It alsodid not reflect the actual liability of the assessee

payable to different persons. It was a compositeagreement agreeing to sell the entire going concern ofthe factory, as it was. Therefore, following the decisionin the case of C.I.T. v/s. Electric Control Gear Mfg.Co,. (1997) – 227 ITR 278/93 Taxman 384 (SC),provisions of section 41(2) would not be applicable.

From the Courts

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DCIT VS. SANDVIK ASIA LTD 133 ITD 126(PUNE)

ASSESSMENT YEAR 1992-93, ORDER DATED:JUNE 02, 2011

BASIC FACTS

The taxpayer during the year under considerationreceived interest on refund of taxes and also paidinterest on the late payment of taxes. Taxpayerdeducted from such interest received, the interest paidand offered the differential income for tax. Taxpayercontended that there can only be a single accountbetween two parties i.e. taxpayer and the Income TaxDepartment. Hence applying the principle of nettingoff and the real income theory, the net amount shouldbe taxed. Assessing Officer [“AO”] rejected the claimof the taxpayer on the ground that interest paid on latepayment of tax is not business expenditureCommissioner of Income Tax (Appeals) accepted thecontention of the taxpayer and held that the net interestincome was chargeable to tax. Revenue authoritiespreferred an appeal before the Income Tax AppellateTribunal [ITAT].

ISSUE

Whether on the facts and in the circumstances ofthe case and in law, the assesse is entitled todeduction in respect of the amount of interestRs.137225/- paid to the Income Tax Departmentagainst the interest received on income tax refundswhile computing its income.

HELD

After considering the facts of the case, it was held thatinterest received on refunds of taxes is chargeable totax on gross basis without deducting any interest paidto the income tax department where such interestpayment is not inextricably linked with the interestreceived. Interest paid to income tax department cannotbe allowed as business deduction while computingbusiness income. The interest paid to the income tax

57CA. Yogesh G. ShahThe author is practising since 1986. He can bereached at [email protected]

department cannot be allowed as deduction from theinterest received on refunds, in absence of any nexusor relation between the two. The gross interest receivedon the refund of taxes was liable to be taxed withoutany deduction in relation of interest paid on the latepayment of taxes.

Note: Mumbai Tribunal in case of Bank of AmericaNT&SA (2011-TII-114-ITAT-MUM-INTL) has held thatonly net interest income received from income taxdepartment was chargeable to tax.

ACIT VS. MINPRO INDUSTRIES 143 TTJ 331(JODHPUR)

ASSESSMENT YEAR 2005-06, ORDER DATED:DECEMBER 09, 2011

BASIC FACTS

During the course of the assessment proceedings, AOfound that selling and distribution expenses amountingof Rs. 1,65,24,301 was debited to profit and lossaccount. AO asked for the details of the expenses.Assessee replied and stated that the expenses wereincurred on account of export clearing and forwarding(C&F) charges. AO asked for details regarding taxdeduction on these expenses and also asked to submitthe proof that the tax has been paid to the government.Assessee submitted the requisite details and statedthat clearing and forwarding agents raised two bills i.e.on for actual services provided by them and the otherfor reimbursement of expenses. Accordingly assesseededucted tax u/s 194C on payments made for receivingservices and did not deduct any tax on reimbursementof expenses. After considering this AO observed thattax should have been deducted on the gross amountand not only on the agency charges paid and in view

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of that, hedisallowed certain amount u/s 40(a)(ia).CIT(A) deleted the addition made by the AO. Aggrievedof the same, revenue went into appeal before the ITAT?

ISSUE

Whether tax is required to be deducted u/s 194Con reimbursement of expenses? Whether wheresea freight transport, CCI charges paid by theassessee to C&F agents who has already madepayment of these expenses on behal f of theassessee are out of provisions of section 194C &195? Whether such payments are to be governedby section 172 and Circular No. 723 dated 19th Sept.1995 would be applicable?

HELD

After considering the facts of the case, it was held thatcertain payments like sea freight transport, CCIcharges, Steamer freight charges, REPO containercharges would be covered by Circular No. 723 dated19th Sept 1995 and those payments will be out of thescope of Section 194C or 195 but the same will begoverned by provisions of Section 172. CIT(A) wasjustified in holding that the above payments made bythe assessee to the C&F agents who have alreadymade those payments on behalf of the assesse wouldnot be covered by provisions of Section 194C & 195consequently assesse was not liable to deduct tax atsource from such payments. The remaining amountsreimbursed by the assesse on account oftransportation charges & shipping bills and the agenthas deducted TDS on these amounts before makingpayment to the principal, assesse was not liable todeduct tax at source from such payments andconsequently same could not be disallowed byinvoking provisions of s. 40(a)(ia).

RAMESH R SHAH VS. ACIT 143 TTJ 166(MUM)

ASSESSMENT YEAR 2005-06, ORDER DATED:JULY 29, 2011

BASIC FACTS

Assessee filed its original return of income declaringRs. 94,09,046 as total income which was dulyprocessed u/s 143(1). Then the assessee filed arevised return of income claiming a loss of Rs.

1,82,27,039 as long term capital loss to be carriedforward. AO denied the claim of loss citing provisionsof section 139(1), 139(3) & 80. He also observed thatrevised return of loss should have been filed u/s 139(1)and as the loss was not claimed in the original return,the same cannot be allowed to be carried forward.Assessee went into appeal before the CIT(A). CIT(A)also upheld the contention of the AO. Aggrieved of thesame, assessee went into appeal before ITAT.

ISSUE

Whether where revised return has been filed toclaim long term capital loss to be carried forwardwas allowable in view of the fact that such losswas not claimed in the original return filed by theassessee?

HELD

ITAT observed that there was no dispute regardingthe time limit of original return as well as revised return.Assessee filed original return with positive income andalso the assessment order determines a positiveincome in view of the fact that loss incurred on sale ofshares was not eligible for set off against the saidincome. ITAT also observed that as per provisions ofSection 80, condition for filing revised return of loss isconfined to cases wherein original return has been filedwith a loss and not with a positive income. Section 80is a cap on the right of the assessee, when theassessee only has loss and no taxable income andhe does not file a return of income u/s 139(3). Section139(1) deals with situation where the assessee hastaxable income and sec. 139(3) deals with a situationwhen assessee has a loss and he desires the sameto be carried forward. So as per the language of Sec.139(3), assessee should have a loss at the time offiling the original return. In the present case, assesseefiled the original return as well as the revised returnwith positive income. As per provisions of sec. 139(5)in both the situations where the assesse has filed thereturn of positive as well as return of loss at the firstinstance as per time limit prescribed and subsequentlyfiles the revised return is treated as valid return. Asper Tribunal as the assesse had filed its original returndeclaring positive income, the subsequent revisedreturn is valid return also, the assesse is entitled to

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carry forward the claim of long term capital loss.

DDIT(EXEMPTION) VS. ADI SANKARATRUST 143 TTJ 234 (COCHIN)

ASSESSMENT YEAR 2005-2006, ORDER DATED:JUNE 16, 2011

BASIC FACTS

The assessee is a charitable trust registered u/s 12Aof the IT Act. It filed a return with Nil income, claimingdepreciation at Rs. 96.83 lakhs & Rs. 146.75 lakhs.The cost of the capital assets on which the depreciationwas claimed in past were claimed as application ofincome towards Trust’s object. The cost of assetshaving been allowed, its WDV was Nil, so there wasno amount available on which depreciation could beclaimed as it would also lead to double deduction. TheAO disallowed the depreciation claimed & allowed theapplication of income as claimed in past. The samewas deleted by the CIT(A). Thus revenue is in appealwith Hon’ble Tribunal with assessee filing cross-objection.

ISSUE

Whether assessee-trust can claim deduction ofdepreciation u/s 32(1) on a capital asset which isallowed in past as application of income towardsits objects u/s 11(1) of the Act?

HELD

There is no distinction between depreciation on capitalassets & deduction via application of the same as itwould be used to write off of the underlying capitalexpenditure. The claim that the two claims representdifferent deductions, under separate sections, servingdifferent objects thus not influencing one another, theconcept of taxable income f inds the two asrepresenting the same claim. The fundamental axiomis that no legislation would have intended a doublededuction in respect of the same business outgoing &the same cannot be conceived otherwise unless clearlyso expressed. It is to be presumed that intention is ofnon-double deduction unless in a particular caseprovision to contrary is expressed. The assessee’scontention is therefore not valid. The CIT(A) allowedclaim relying on the decision in case of CIT vs. Instituteof Banking where no claim of double deduction was

raised. Thus Revenue’s appeal is allowed & crossobjection of assessee is dismissed.

SRL RANBAXY LTD V. ACIT 143 TTJ 265(DEL)

ASSESSMENT YEAR 2006-07, ORDER DATED:DECEMBER 16, 2011

Basic Facts

Assessee is engaged in conducting various medicaldiagnostic tests. The assessee entered into non-exclusive agreements with domestic and internationalcollection centres whereby these centres collectsamples from patients/customers for laboratory testingservices and forward the same to the assessee, inturn the assessee extends its laboratory testingservices at a discounted price as compared to thestandard price list. The assessee company in the yearunder consideration filed its return of income declaringnil income after adjustment of brought forward loss ofRs. 8,18,11,190. The assessment was completedunder section 143(3) of the Income Tax Act determiningthe income at Rs. 25,32,44,857. While doing so, theAssessing Officer made a disallowance ofRs.16,80,66,667 in connection with discount offeredby the assessee company to the collection centresunder section 40(a)(ia) of the Act, on the basis thatthe assessee had not deducted tax thereon undersection 194H of the Act. Aggrieved by the same theassessee went for an appeal to the CIT(A). The CIT(A)partly allowed the assessee’s appeal and reduced thedisallowance to Rs. 11,78,24,03. However the learnedCIT(A) affirmed the disallowance in principle, holdingthat the relationship between the assessee and thecollection centres was that of principal and agent,attracting the provisions of section 194H of the Act.And finally the assessee company aggrieved by theorder of the CIT(A) went for an appeal to the ITAT.

Issue

Whether where discount offered by the assesseecompany to the col lection centres should betreated as commission for which tax should bededucted at source under section 194H?

Held

ITAT observed that the working of the assessee is

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March, 2012


that it signs agreements with the collection centres,on a non-exclusive basis. The collection centre isunder no obligation to always forward these samplesto the assessee company. It is evident from abovethat there is no principle-agent relationship existingbetween the assessee and the collection centres. ITATalso observed that disallowance under section 40(a)(ia)read with section 194H can only be made in respectof expenditure in the nature of commission paid/credited to the account of the recipient, or to any otheraccount. ITAT held that there is no principle-agentrelationship between the assessee and the collectioncentres and that being so, the provisions of Section194H of the Act have wrongly been invoked. The ITATalso held that the provisions of Section 194H of theAct could, even otherwise, not have been met, sinceno payment has been shown to have been made bythe assessee to the collection centres. Also thepayment made to the assessee by the collectioncentres was at the rates agreed to inter se betweenthem. In view of above, ITAT held that the learnedCIT(A) erred in confirming the disallowance madeunder section 40(a)(ia) of the Act for alleged failure ofTDS by the assessee under section 194H of the Act.

CHATTISGARH STATE ELECTRICITYBOARD V. ITO 143 TTJ 151 (MUM)

ASSESSMENT YEARS 2006-07 TO 2009-10,ORDER DATED 30TH NOVEMBER, 2011

Basic Facts

The assessee, Chattisgarh State ElectricityBoard(CSEB) is a public sector undertaking ownedby the Government of Chattisgarh and is engaged inthe business of distribution of electricity to consumerswith Chattisgarh. The activity of distributing electricityto end consumers is preceded by two steps-production of electricity, and its transmission from pointof production to the point of distribution which is doneby National Thermal Power Corporation Ltd.(NTPC)and Power Grid Corporation of India Ltd.(PGCIL).During the course of verification of TDS returns, theAssessing officer took a stand that the payments madeby the assessee to PGCIL, for the purpose oftransmitting power from NTPC’s delivery point toassessee’s facilities can be said to be payments in

the nature of rent for transmission facilities andaccordingly hit by the provisions of Section 194I of theAct. And assessee was accordingly treated as indefault in respect of the amounts which the assesseeought to have deducted at source u/s 194I of the Act.Aggrieved by the same, the assessee carried thematter to CIT(A) which took a similar stand. Theassessee not satisfied by the stand taken by theCIT(A) further went for an appeal to the ITAT.

Issue

Whether ‘Bulk Power Transmission Agreement’entered into by the assesse with PGCIL for thetransmission of power purchased by it from NTPCwould attract the provisions of section 194I?

Held

The ITAT observed that in a circumstance in whichany payment made for the use of an asset simply,whether with or without control and possession in itslegal sense, the payment made would be said to befor the use of the asset. However on the contrary, whenthe payment is made only for the purpose of a specificact, power transmission in this case, and even if theasset is used in the process of performing the act, thepayment made cannot be said to be for the use of theasset. Hence, payment made by the assesse, a stateelectricity board, to PGCIL for the transmission ofpower purchased by it from NTPC was made only forthe transmission of power and not for the usage oftransmission wires in itself. These wires are used fortransmission of power not only to the assesse but alsoto many other entities and, the assesse also does nothave any say in the manner in which such transmissionwires are controlled or used by PGCIL. Therefore,section 194I cannot be attracted and has no applicationin the present case.

Tribunal News

62

March, 2012


In this issue we are giving full text of two decisions ofAhmedabad Income Tax Appellate Tribunal. The firstone in the case of M/s Dharti Developers deals withthe issue whether when a partnership firm files itsreturn for the first time claiming to be assessed as firmand when only photocopy of the partnership deed isattached with return of income whether A.O. can ignorethe same and invoke provisions of section 185 toassess the firm as AOP even if subsequently duringthe course of assessment proceedings the firm filesduly certified copy of the partnership deed.

The Second decision in the case of Dr.YasheshDalaldeals with the exigibility of penalty u/s271(1)(c).When there was a search in the case of theassessee and he disclosed additional income, includedthe same in its return of income and departmentassessed the same more or less at the same figurefor which the return was filed u/s 153A whether therebeing no incriminating material found during the courseof search, whether penalty could be levied u/s271(1)(c) in case of income disclosed during search.

We hope the readers would find both the decisionshelpful.

IN THE INCOME TAX APPELLATETRIBUNAL :

‘B’ BENCH : AHMEDABAD

(Before Hon’ble Shri T.K. Sharma, J.M. &Hon’ble Shri A.K.Garodia, A.M.)

ITA No. 2672/Ahd./2009 : 2006-07

I.T.O., Ward-9(2), Ahmedabad … (Appellant)

-Vs-

M/s. Dharti Developers, Ahmedabad … (Respondent)

(PAN : AAEFD 6638G)

Appellant By :Shri Samir Tekriwal, Sr.D.R.

Respondent By :Shri R.B.Sheth, A.R.

Date of Hearing :24/10/2011

Date of Pronouncement :25/10/2011

CA. Sanjay R. ShahThe author is the past President of CAA,practising since 1981. He can be reached [email protected]

Order

Per Shri T.K. Sharma, Judicial Member :

This appeal filed by the Revenue is against the orderdated 22-07-2009 of the Learned Commissioner ofIncome Tax(Appeals)-XV, Ahmedabad deleting thedisallowance of Rs.12,69,506/- made by the AO, afterinvoking the provisions of section 185 of the I.T. Act,1961 for the assessment year 2006-2007.

2. Briefly stated, the facts are that the assessee filedthe return of income on 31.07.2006 showing totalloss of Rs.69,100/-. On verification of profit & lossa/c., the AO noticed that the assessee has debitedan amount of Rs.12,69,506/-, being interest paidto partners. The AO, in para 3 of the assessmentorder, observed that this return has been filed bythe assessee, as per the provisions of section184(2) of the I.T. Act, under which, the assesseewas required to enclose/file along with the returnof income, a certified copy of partnership deed.On perusal of return of income, the AO noticedthat the assessee failed to file the certified copy ofpartnership deed along with the return of income.The AO accordingly issued a show cause noticedated 04.11.2008 requiring the assessee to showcause as to why the provisions of section 185 ofthe I.T. Act, should not be invoked and interest ofRs. 12,69,506/- paid to partners should be deleted.In reply, the assessee, vide letter dated11.11.2008, submitted as under:

“We had with return of the income attached thepartnership deed. The deed is an instrument inwriting with individual share specified therein as

15

UNREPORTEDJUDGMENTS

March, 2012


Unreported Judgements

required u/s, 184(1). There may be technical lapseas far as Sec 184(2) is concerned, whichaccording to you the deed does not bear signatureof all the partners certifying the deed. Through anoversight such lapses ma have crept in. The spiritof law is that the assessing officer must be satisfiedbefore finalizing the assessment that theinstrument of partnership is genuine with theendorsement of the partners named therein. Anybonafide mistake is always pardonable in eyes oflaw.”

2.1 After considering the aforesaid submission, theAO, in the assessment order, observed that thesame is not acceptable for the reason that as perexplanation to subsection (2) of section 184, it ismandatory for the assessee to get the copy ofinstrument of partnership deed certified in writingby all the partners not being minors. Since theassessee has only filed a xerox copy ofpartnership deed along with return of income, theassessee has not complied the mandatoryprovisions of section 184(2) of the I.T. Act, 1961.Therefore, the provision of section 185 is clearlyattracted. The AO also stated that this is not atechnical lapse but a clear violation of provision ofsection 184(2) of the I.T. Act, 1961. The AOaccordingly disallowed the interest paid to thepartners amounting to Rs.12,69,506/-.

3. On appeal, before the ld. CIT(A), the assesseecontended that it was a technical lapse whichoccurred due to oversight. It was also stated thatduly certified copy of partnership deed was filedbefore the AO before the assessment wascomplied. The reliance was also placed on thedecision of the ITAT, Delhi Bench in the case ofIshar Dass Sahni & Sons –vs- DCIT reported in68 TTJ 125 (Delhi) wherein the Tribunal held asunder:

“The provision about the certified copy of theinstrument accompanying the return on income isdirectory in nature and its substantial complianceby filing uncertified Photostat copy of instrumentof partnership along with return of income and byproducing certified copy at the time of assessment,would be enough.”

3.1 After considering the above submission, in theimpugned order, the ld. CIT(A) held that theassessee has corrected the procedural lapsebefore the assessment was finalised and ITAT,Delhi Bench (supra), cited by the assessee’scounsel, supports the case of the assessee. Heaccordingly directed the AO to delete the additionof disallowance of interest paid to the partnersamounting to Rs.12,69,506/-. Aggrieved with theorder of the ld. CIT(A), the Revenue is in appealbefore the Tribunal.

4. At the time of hearing before us, Shri SamirTekriwal, Sr.D.R. appeared on behalf of theRevenue and relying on the decision of the Hon’bleHigh Court of Kerala in the case of Bhaskar & Co.–vs- CIT reported in [2010] 187 Taxman 163 (Ker.),pointed out that production of certified copy ofinstrument of partnership deed is mandatory forclaiming assessment in the status of a firm for anyassessment year commencing from 1993-94onwards, irrespective of whether such anassessee was assessed as a registered firm upto 1993-94. He accordingly contended that this isthe solitary judgement available on this issue.Therefore, disallowance of Rs. 12,69,506/- beinginterest paid to partners be restored.

5. On the other hand, Shri R.B.Sheth, A.R., appearingon behalf of the Assessee, vehemently supportedthe order of ld. CIT(A). The Counsel of theassessee pointed out that accounted certificateunder section 80HHC is also required to be filedat the time of filing the return of income. TheHon’ble Gujarat High Court, in the case of VXLIndia Ltd. –vs- ITO reported in 219 CTR 242/207Taxation 553, held that to obtain report of theaccountant is a condition precedent and it ismandatory in nature, non-furnishing such reportat the time of filing the return income but at asubsequent stage and before assessment iscompleted, the assessee’s claim of deduction u/s.80HHC cannot be disallowed. The Counsel ofthe assessee also relied on the followingobservations of judgement of Hon’ble High Courtof Kerala in the case of Bhaskar & Co. (supra),which is relied on by the ld. D.R., that “Hon’ble

March, 2012



High Court had in the concluding paragraph notedthat “Therefore we direct the A.O. to verify fromthe record and find out whether the assessee hasproduced certified copy of the deed of partnershipwhen the assessment was taken up and if so grantthe status as a firm… ”

5.1 Further reliance was placed, by the ld. Counselfor the assessee, on the following judgements:

i) Hon’ble Calcutta High Court, in case ofRaibahdur Bueshwarlal Motilal Malwasie Trust(195 ITR 825) and Hon’ble Bombay High Courtin the case of Shivanand Electronics (209 ITR63) had held that having regard to the natureof the provision and their object the directiongiven in section 184(2) of the Act, falls in thearea of procedure and hence directory innature.

ii) State of Tamilnadu V/S kodaikenal MotorUnion P. Ltd. (AIR 1986 SC 1973) Looking tothe purpose of statute the court should notalways stick to literal meaning.

iii) State of UP V/S Baburam Upadhyay (AIR1961 SC 751)

Though the word ‘“shall” is prima-faciesuggest mandatory requirement but looking tothe object of the statute court may consider i.directory in nature

iv) Raza Buland Sugar Co. Ltd V/S MunicipalBoard Rampur (AIR 1965 SC 895) Havingregard to the purpose and intention of thelegislature, serious general inconvenience orinjustice to persons resulting from reading ofthe provision one way or other regardingnature is mandatory or directory beconsidered sympathetically.

6. After hearing both the sides, we have carefullygone through the orders of the authorities below.It is pertinent to note that in the case before us,the assessee has enclosed the photo copy of thepartnership deed along with return of income.However, through inadvertence, he failed to get itcertified by all the partners. This alone indicatesthat the assessee has made substantial

compliance of provisions contained in section 184of the I.T. Act. Before the assessment, theassessee has removed the defect by filing thecertified copy of the partnership deed. In thesefacts, we are of the view that the ld. CIT(A) is legallyand factually correct in directing the AO to treatthe assessee firm as registered, following thedecision of the ITAT, Delhi Bench in the case ofIshar Dass Sahni & Sons –vs- DCIT (supra), we,therefore, incline to uphold the order of the ld.CIT(A). Resultantly, the appeal of the Revenue isdismissed.

7. In the result, the appeal filed by the Revenue isdismissed.

This Order pronounced in the Open Court on 25/10/2011.

Sd/- Sd/-(A.K.Garodia) (T.K. Sharma)

Accountant Member Judicial Member

IN THE INCOME TAX APPELLATETRIBUNAL “ A ”BENCH, AHMEDABAD

(BEFORE SHRI G.C.GUPTA VICE PRESIDENT &SHRI ANIL CHATURVEDI A.M.)

I.T.A. No. 2275/AHD/2009

(Assessment Year: 2004 - 05)

Assistant Commissioner Vs. Dr. Yashesh Dalal,of Income Tax, Shrushtil HospitalCentral Circle-2, Nr. Akota Garden,Aayakar Bhavan, Baroda.Nr. RaceCourse Circle,Baroda.(Appellant) (Respondent)

PAN: ACRPP 4051F

Appellant by : Shri Rahulkumar, Sr. D.R.Respondent by : Shri Mukund Bakshi.

ORDER

Date of hearing : 13-3-2012Date of Pronouncement : 30-3-2012

PER: SHRI ANIL CHATURVEDI,ACCOUNTANT MEMBER.

16

March, 2012



This appeal is filed by the Revenue against the orderof CIT (A)IV, Baroda dated 22-1-2009 for theAssessment Year 2004-05. In appeal Revenue hasraised following grounds:-

1. The Ld. CIT (A) has erred in law and in factsin deleting the penalty of Rs.3,80,785/-.

2. The CIT (A) has erred in law and in facts indeleting the penalty without appreciating thatthe Explanation 5 to section 271(1) isapplicable to the assessment year in whichthe search was carried and return was notfiled.”

2. The brief facts of the case is that the assessee isa practicing Doctor running a hospital at Akota,Baroda. A search u/s. 132 of the Act wasconducted on 24-11-2005 at his place. In thecourse of search, the assessee made a disclosureof an additional income of Rs.1 crore in thestatement recorded u/s. 132(4) on 24-11-2005. Theassessee further stated that as per hisunderstanding, about 60% i.e. about Rs.60 lacswas the net undisclosed income of F.Y. 2005-06and remaining 40% i.e.Rs.40 lacs was for A.Y.2004-05. The assessee filed returns in responseto notice u/s.153A on 1-5-2006 declaring totalincome of Rs.23,52,480/- as against total incomeof Rs.11,99,600/- declared u/s.139(1). He alsopaid the taxes. During the course of assessmentproceedings the assessee filed an affidavit dated27-112007, wherein he stated as under:-

I have disclosed following amount:

Financial Nature of disclosure. AmountYear disclosed

in Rs.

1999-2000 Other income. 68,700

2003-04 Professional income 11,50,000(including on money givento JRH Developers, Brd.(Rs.900.000)

2004-05 Professional income 20,00,000[including NSC of Rs.50,000]

2005-06 Professional Income 60,00,000[including Gold Barpurchased therefrom]

Total. 98,18,700

I further declare that during my testimony insearch proceedings, I have made an error inestimating year-wise distribution of my total;undisclosed income as Rs.40/-lacs in the financialyear 2004-05 and Rs.60/- lacs in the financial year2005-06 due to pressure, tense frame of mind andbased only on a rough estimated and limitedunderstanding. On detailed study of my paperswhile filing revised returns in terms of provisionsof section153A(a), the actual year wise distributionof undisclosed income earned from, professionalpractice is as per chart mentioned above and havepaid the appropriate tax on the same along withstatutory interest… .”

3. The order u/s. 153A was passed on 27-12-2007and the income was assessed at Rs.23,52,480/-.As the income declared in the return u/s. 153Awas higher by Rs.11,52,880/- as compared to theincome declared in the return u/s. 139(1) , the A.O.concluded it to be an effort on the part of theassessee of concealing of income and accordinglypenalty proceedings were initiated against theassessee.

4. In the penalty proceedings before the A.O., theassessee contended that its case was coveredby the immunity provided in Explanation-5 to Sec.271(1)(c) as the assessee had declaredundisclosed income in the statement recorded u/s. 132(4) during the course of search and taxesalong with interest were paid thereon in the returnfiled u/s. 153A and accordingly requested to A.O.to drop the penalty proceedings. The A.O. did notagree with the contention of the assessee.According to the A.O., the assessee came forwardto disclose income only because of the searchaction taken by the Revenue Department.According to A.O. as the assessee had failed todischarge his onus within the meaning ofExplanation 1 to Section 271(1)(c) penalty ofRs.3,80,785/- (being 100% of tax sought to beevaded ) was levied.

5. Aggrieved by the order of A.O., the assesseepreferred appeal before the CIT (A). CIT (A)deleted the penalty vie order dated 22-12009holding as under:-

March, 2012


“2.2. The additional income offered by assesseeu/s.153A after the search having been acceptedin its entirety without detailed discussion of theseized documents. An assessee’s statutoryobligation u/s.139(1) is to give correct andcomplete information with the return of incomecompiled with, then there is no contravention whichcan attract penalty. In other words, the assesseeconcealed the income comes to an end when thecorresponding amount was offered for taxationwhen all the necessary particulars are declaredby the assessee in the return of income filed u/s.153A. In a case where all the necessary particularsare declared by the assessee in the return ofincome, it cannot be said that the assessee hasconcealed his income or furnished inaccurateparticulars of income in respect of the undisclosedincome. The Assessing Officer has not dischargedthe burden to prove the concealment of income,which was levied purely on the basis of voluntarysurrender made by the assessee in good faith.Therefore, the assessee had made disclosureafter the search cannot be treated as concealment.It cannot be said to be the amount of tax sought tobe evaded because the undisclosed income wasdeclared during the course of search only. Further,the disclosure made by Dr. YasheshVinodchandra Dalal u/s.132(4) of the Act and istherefore, entitled to the immunity to levy of penaltyunder Explanation-5 attached to section 271(1)(c)since taxes along with interest were paid on thedisclosure made by the assessee. Keeping in viewthe above facts and circumstances of the caseas well as the cases relied upon by Ld. Counsel(supra), the penalty imposed u/s. 271(1) (c) ishereby deleted. Hence, the appeal is allowed.

6. Aggrieved by the order of CIT (A), the Revenue isin appeal before us.

7. The Ld. DR contended that the CIT (A) has erredin deleting the penalty. The Ld. DR argued thatthe assessee’s case is not covered byExplanation (1) to section 271(1)(c) butExplanation (5) to section 271(1)(c) is applicable.According to him the assessee is not entitled toimmunity by Explanation 5 because benefit of

Explanation 5 is confined to the return for the yearin respect of which the previous year is to end oreven though ended, the time for filing the return u/s. 139(1) is yet to expire. He relied on the decisionof ACIT vs. Kirit Dahyabhai Patel (2009) 121 ITD159. The head note reads as under:-

“Benefit of Explanation 5 is confined to the returnfor the year in respect of which the previous yearis yet to end or even though ended, the time forfiling the return under s. 139(1) is yet to expire..”

8. He also relied on the decision of Ajit B. Zota (2010)40 SOT 543 (Mum.) wherein it was held as under:-

“When compared to the original return already filedand the return filed in response to notice under S.153A, assessee had offered an additional incomeof Rs.40,000/- as speculation profit, withoutdisturbing the capital gains working – Explanation1 to S. 271(1)(c) cannot be invoked as there is nobona fide explanation given why this income wasnot disclosed at the time of filing original return –No immunity is available to the assessee whenadditional income was disclosed in the return underS. 153A – Penalty upheld.”

9. The Ld. AR on the other hand argued that theassessee’s case falls under Explanation 1 and notExplanation 5. The contention of the Ld. AR is thatthe disclosure of additional income of Rs.1 crorewas based on the disclosure made by theassessee during the course of search and notbased on any incriminating material found duringthe search. It is not the case of detection ofundisclosed income during the search. Furtherduring the course of assessment, the assessee,suo-moto, offered the income by means of anaffidavit. In the assessment framed u/s. 153Ar.w.s. 143(3) the income has been assessed atRs.23,52,480/- being the income declared and assuch there is no change in the income that hasbeen assessed. The Ld. AR further stated that thedisclosure was done voluntarily and not based onany incriminating material found during search, nopenalty u/s. 271(1)(c) should be levied. He reliedon various decisions apart from followingdecisions for the proposition that no penalty be


March, 2012


levied.

(1) Addl. CIT vs. Prem Chand Garg 119 ITD 97(Del)(TM) (2) DCIT vs. Sushma Devi Agarwal &Ors. ITA No.876/Kol/2008 dated 23-6-2011. (3)Bhairav Lal Verma vs. UOI (1998) 230 ITR 855(All) (FB). 10. We have heard the parties, perusedthe material on record and case laws cited by boththe parties.

11. It is an undisputed fact that the assessee haddeclared total income of Rs.23,52,480/- in returnu/s. 153A and the taxes thereon were paid by theassessee. The income that was declared was notbased on any incriminating material seized duringthe course of search. The disclosure was donevoluntarily and the income was also assessed onthe basis of return filed by the assessee. 12. Inthe case of Bhairav Lal Verma vs. UOI (supra)the Hon’ble High Court has held that it cannot beheld as a principle of law that the disclosure ofincome made after the search/raid cannot bevoluntary. It is a question which has to be decidedby the Department in each case on the basis ofthe material on record. 13. It is an undisputed factthat the assessment was made by the A.O. onthe basis of admission of the assessee and noton basis of any material found during the courseof search. Further the additional income offeredby the assessee u/s. 153A after the search hasbeen accepted in its entirety without detailed

discussion of the seized documents. In a casewhere all the necessary particulars are declaredby the assessee in the Return of income, it cannotbe said that the assessee has concealed hisincome or furnished inaccurate particulars ofincome in respect of the undisclosed income.Therefore, the case under consideration is not thecase that the assessee has furnished inaccurateparticulars or concealed any particulars of incomein the return filed u/s. 153A of the Act. TheAssessing Officer has not discharged the burdento prove the concealment of income, which waslevied purely on the basis of voluntary surrendermade by the assessee. Therefore, the assesseemade disclosure after search cannot be treatedas concealment. When there is no finding ofconcealment in respect of return filed by theassessee in response to notice u/s. 153A, we findthat penalty u/s. 271(1)(c) cannot be levied. Wetherefore, cancel the penalty of Rs.3,80,785/-levied u/s. 271(1)(c).

14. In the result, appeal of the Revenue is dismissed.

Order pronounced in Open Court on 30 -3 - 2012.

Sd/- Sd/-(G.C.GUPTA) (ANIL CHATURVEDI)

VICE PRESIDENT ACCOUNTANT MEMBER


The nature has been unkind,

Hence you left us before the time,

But leaving the legacy behind

Help all, always to bear in min.

The light of each day be reminiscent,

You continue to guide even from heaven.Late CA. C. F. Patel Saheb26-01-1936 / 21-03-2012

HOMAGE

March, 2012


Whether unabsorbed depreciation of earlier years canbe set off against Income from Other Sources ofcurrent year?

Issue:

ABC Ltd. had unabsorbed depreciation of earlier yearsof Rs. 15,00,00,000 (15 Crores) and in A.Y. 2011-12had an income of Rs. 7,00,00,000 (7 Crores) as Incomefrom Other Sources. The company intends to set offthe unabsorbed depreciation against the income fromIFOS.

Proposition:

Courts have always bifurcated accumulated businesslosses and unabsorbed depreciation. Such a view hasbeen taken in the interpretation of sections 78 and 79barring carry forward of loss in the event of change ofownership, but finding that unabsorbed depreciationwould continue to be available notwithstanding suchchange.

Section 32(2):

Section 32(2) provides for carry forward of unabsorbeddepreciation. The provisions in effect of the aforesaidsection are as under:

· Since the unabsorbed depreciation now falls partof the current year’s depreciation, it can be set offagainst any other head of income.

· The unabsorbed depreciation can be carriedforward for indefinite number of previous years.

· Set off will be allowed even if the same business towhich it relates is no longer in existence in the yearin which the set off takes place.

Section 72:

Under this section, the assessee has the right to carryforward the loss in cases where such loss cannot beset off due to the absence of inadequacy of incomeunder any other head in the same year. The loss socarried forward can be set of against the profits ofsubsequent previous years. Subject to certain

CA. Kaushik D. ShahThe author is the past President of CAA,practising since 1976. He can be reached [email protected].

conditions:

· The loss should have been incurred in business,profession and vocation.

· The loss should not be in the nature of a loss in thebusiness of speculation.

· The loss may be carried forward and set off againstthe income from business or profession though notnecessarily against the profits and gains of the samebusiness or profession in which the loss wasoccurred. But a loss carried forward cannot, underany circumstances, be set off against the incomefrom any head other than “Profits and Gains ofBusiness or Profession”.

· The loss can be carried forward and set off onlyagainst the profits of the assessee who incurredthe loss. That is, only the person who has incurredthe loss is entitled to carry forward or set off thesame. Consequently, the successor of the businesscannot carry forward or set off the losses of hispredecessor except in case of succession byinheritance.

· A business loss can be carried forward for amaximum period of 8 assessment yearsimmediately succeeding the assessment year inwhich the loss was incurred.

A period prior to Assessment year 1997-98:

Up to assessment year 1996-97, unabsorbeddepreciation was considered as the depreciationallowance of the succeeding year(s) and, thus, hadan indefinite life for set-off against any head of income.

- A period between Assessment year 1997-98 and

March, 2012


Controversies

2001-02:

From assessment year 1997-98 to 2001-02(‘intervening period’), the law was amended andunabsorbed depreciation of a particular year waspermitted to be carried forward for a period of eightyears only, for a set-off against profits and gains ofbusiness or profession.

The law existing prior to the intervening period wasreinstated with effect from assessment year 2002-03.

- From Assessment year 2002-03 and onwards:

A further development took place in law with effectfrom the aforesaid assessment year which can beanalysed as under:

· The position of right to carried forward withoutrestriction is also available in respect of depreciationearned but unabsorbed for and from assessmentyear 2002-03.

· Depreciation earned for A.Y. 1997-98 to 2001-02would suffer from restriction in respect of set offagainst income other than business in respect ofinter seset off among these years.

· Since status quo ante is restored from A.Y. 2002-03, even the restriction for depreciation earnedbetween A.Y. 1997-98 and 2001-02 should betreated as inapplicable, so as to be available for setoff without any restriction from A.Y. 2002-03, sincethere is no provision restricting the right of carriedforward depreciation relating to some years and notfor others.

It is proposed that in view of the amendment insection 32(2) with effect from A.Y. 2002-03, theunabsorbed depreciation can be set off against theincome from other sources of the current year sincethe prohibition for such a set off is only in section72 and not in section 32(2).

View in favour of the Proposition:

The Board vide Circular (F.No. 13/8/69-IT (A-III) dated24th June, 1969) clarified that the provisions for set offof carried forward loss and unabsorbed depreciationare not identical and it was held in case of CIT v.Haryana Hotels Ltd. [2005] 276 ITR 521 (P&H)that

unabsorbed depreciation can be carried forward evenif the return is not filed within the time permitted undersection 139(3).

Even in one of the leading case of Virmani IndustriesPvt. Ltd. [1995] 216 ITR 607 (SC)it was held that theunabsorbed depreciation would certainly be availablefor set off notwithstanding the fact that the businesswas dead as dodo. In case the business isdiscontinued, it will be treated as current depreciationand relying upon the earlier decision in CIT V. JaipuriaChina Clay Mines P. Ltd. [1966] 59 ITR 555(SC)which specifically upheld the Madras view in EastAsiatic Co. (India) P. Ltd. v. CIT [1986] 161 ITR 135(Mad.), where the right to set off carried forwarddepreciation against income from other sources andcapital gains was conceded though the business hadceased. This decision of Madras High Court was againcited by Kerala High Court which dismissed the sameon the ground that reference of section 72 for thepurpose of unabsorbed depreciat ion wasmisconceived, since the only relevant section for setoff of carried forward depreciation is under section32(2).

Circular No. 762, dated February 18, 1998 [1998]230 ITR (St.) 12, explaining the amendments by theFinance (No. 2) Act, 1996, has also confirmed theassurance by pointing out that the unabsorbeddepreciation allowance up to A.Y. 1996-97 will beadded to the allowance of 1997-98 and that thelimitation of 8 years shall start only from A.Y. 1997-98.

The claim of depreciation by taxpayers and its denialby the tax authorities has been the subject matter ofappeal quite frequently. The change of law on this facetof taxation has also contributed to multip leinterpretation and different decisions, distinguishing onefrom the other.

On one hand where various High Courts favouredassessee regarding set off of unabsorbed depreciationagainst various heads of income, the Madras HighCourt in case of CIT v. Fabriquip P. Ltd. [2003] 260ITR 207 (Guj.) decided that the set off will be availableeven where the assessee ceases to carry on thebusiness in respect of which depreciation was earned.There was such a condition for carry forward and set

March, 2012


off of losses and not for depreciation. There was littledifficulty in concluding that there was no bar for theassessee to avail the benefit of unabsorbeddepreciation, though the business itself had beendiscontinued, against his other current income. It alsofound that there is a decision to this effect as aprecedent in CIT v Deepak Textile Industries Ltd.[1987] 168 ITR 773 (Guj.).

After the further development of law from A.Y. 2002-03, many decisions on the issue were conflicting. Therewas also an additional point of dispute that even if therestriction is inferred to be continued, it will still have tobe found, whether it has to be first set off againstbusiness income or other income. As section 32(2) isitself a deeming provision, it cannot be extendedbeyond the purpose for which it was intended. Theprovision itself does not state whether the carriedforward depreciation should be set off only againstbusiness income or otherwise. As per one of thedecision laid down by Supreme Court in CIT v. MotherIndia Refrigeration Industries Pvt. Ltd., carriedforward depreciation has the character of currentdepreciation.

- View against the Proposition:

The issue in this controversy is whetherunabsorbed depreciation can be set off in currentyear against Income from Other Sources. Theunabsorbed depreciation is a part of business lossand business loss can be set off only againstbusiness income. The unabsorbed depreciation isalso covered by chapter IVD of I.T. Act, 1961. Theincome tax return also provides year wise broughtforward depreciation for set off purpose and it issubmitted that if unabsorbed depreciation is to betreated as part of current year’s depreciation thenthere is no need for having separate column in ITRfor set off. However, even if it is concluded that suchset off is available, the same cannot be availed offin respect of unabsorbed depreciation for A.Y.97-98 to 01-02. The reliance can be placed on decisionof Supreme Court in case of Reliance Jute andIndustries Ltd. v/s CIT 120 ITR 921 where theLordships of Supreme Court held that that it is acardinal principle of tax laws that the law to beapplied is then in force in the assessment year

unless otherwise provided expressly or by anecessary implication. There is no question ofassessee having any vested right under the law asit stood before the amendment. A right claim byassessee under law in force in a particularassessment year is ordinarily applicable only inrelation to the law pertaining to that year.

It is submitted that theunabsorbed depreciation isnot available for set off against any income otherthan Business Income. However, if a view is takenthat such set off is available than also there is nodoubt that in respect of unabsorbed depreciationfor the period A.Y. 1997-98 to A.Y. 2001-02 cannotbe set off against Income from Other Sources. Infuture, since unabsorbed depreciation for theprohibited years will remain prohibited in future yearsas well and hence, unabsorbed depreciation for theperiod 1997-98 to 2001-02 can be set off onlyagainst business income.

- Summation:

The law regarding set off of unabsorbeddepreciation can be summarized as under:

· Unabsorbed depreciation as standing on 1-4-1996 can be carried forward set off without anyrestriction under the law as to the period ofeligibility or the sources against which it can beadjusted as covered by the decision of theSupreme Court in Virmani Industries Pvt. Ltd.’scase (supra).

· The position of right to carried forward withoutrestriction is also available in respect ofdepreciation earned but unabsorbed for and fromassessment year 2002-03.

· Depreciation earned for A.Y. 1997-98 to 2001-02 would suffer from restriction in respect of setoff against income other than business in respectof inter seset off among these years.

· Since status quo ante is restored from A.Y.2002-03, even the restriction for depreciationearned between A.Y. 1997-98 and 2001-02should be treated as inapplicable, so as to beavailable for set off without any restriction fromA.Y. 2002-03, since there is no provision

Controversies

March, 2012


restricting the right of carried forwarddepreciation relating to some years and not forothers.

Let me also now refer to the decision of SpecialBench of ITAT in case of DCIT v. TimesGuaranty Ltd. [2010] 4 ITR (ITAT) 210 (Mum).In this case, the special bench decided thatunabsorbed depreciation for assessment years1997-98 to 1999-2000 cannot be set off againstIncome from Other Sources for A.Y. 2003-04. Itis very surprising that the honorable SpecialBench of ITAT decided the issue against theproposition in spite of the clear language ofsection 32(2). There is no provision restrictingthe right of carrying forward depreciation relatingto some years and not for others. Number ofdecisions before honorable Special Bench wasrelied upon by the parties. The decision ofspecialbench relies mostly on the decision relating todepreciation in the years where it was restrictedwithout considering the fact that the provisionsregarding set off of unabsorbed depreciation isrestored without pressing any limitation as to therestriction brought during the entire period. It issubmitted that the legal fiction under section 32(2)before restoration cannot be treated as extendedafter restoration. Carried forward depreciationhas the character of current depreciation asdecided by Supreme Court in CIT v. Mother

India Refrigeration Industries Pvt. Ltd. 155ITR 711. Having considered this decision ofSupreme Court, argued on behalf of assesseesurprisingly the special bench came to a differentconclusion. The special bench held that thedepreciation for the period for which there wasrestriction cannot be treated as currentdepreciation as current depreciation for A.Y.2003-04 (year under appeal).

Let me also refer to the decision of SupremeCourt in case of Shah Shadiq & Sons [1987]166 ITR 102. After considering its earlier decisionin Reliance Jute 120 ITR 921 (SC), it was heldthat once assessee has acquired the right tocarry forward and set off a loss, it is an accruedright and vested right. Thus, the amended lawunder section 32(2) from A.Y. 2002-03 is veryclear and following conclusion emerges:

The unabsorbed depreciation is available for setoff against any income from A.Y. 2002-03 evenin respect of unabsorbed depreciation for A.Y.1997-98 to A.Y. 2001-02, there is no prohibitionfor set off in future against any income, sincethere is no such prohibition from A.Y. 2002-03.

Controversies

Heartiest Congratulation to CA.

Aniket S. Talati for being elected as

Secretary of Ahmedabad branch of

WIRC of ICAI For the Year 2012

CONGRATULATIONS

Heartiest Congratulation to CA.

Jainik N. Vakil for being elected as

Chairman of Ahmedabad branch of

WIRC of ICAI For the Year 2012

March, 2012


Some recent decisions under S.40(a)(ia) of the Act.

· COMMISSIONER OF INCOME TAX, KOL-XI,KOL V. VIRGIN CREATIONS (Kolkata HighCourt)

ITAT No. 302 of 2011GA 3200/2011

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The Court: We have heard Mr. Nizamuddin and gonethrough the impugned judgment and order. We havealso examined the point formulated for which thepresent appeal is sought to be admitted. It is arguedby Mr. Nizamuddin that this court needs to takedecision as to whether section 40(A)(ia) is havingretrospective operation or not.

The learned Tribunal on fact found that the assesseehad deducted tax at source from the paid chargesbetween the period April 1, 2005 and April 28, 2006and the same were paid by the assessee in Julyand August 2006, i.e. well before the due date offiling of the return of income for the year underconsideration. This factual position was undisputed.

Moreover, the Supreme Court, as has beenrecorded by the learned Tribunal, in the case of AlliedMotors Pvt. Ltd. and also in the case of AlomExtrusions Ltd., has already decided that theaforesaid provision has retrospective application.Again, in the case reported in 82 ITR 570, theSupreme Court held that the provision, which hasinserted the remedy to make the provisionworkable, requires to be treated with retrospectiveoperation so that reasonable deduction can be givento the section as well.

In view of the authoritative pronouncement of theSupreme Court, this court cannot decide otherwise.

Hence we dismiss the appeal without any order asto costs.

· Meri lyn Shipping & Transports v. ACIT[2012] 20 taxmann.com 244 (Visakhapatnam- Trib.)(SB)

Advocate Tushar HemaniThe author is practising advocate. He can bereached at [email protected]

D. Manmohan, Vice-President (MZ) - I have gonethrough the orders passed by the learnedAccountant Member, Shri S.V. Mehrotra as well asthe learned Judicial Member, ShriMahavir Singh. Iam not able to persuade myself to agree with theview taken by Shri S.V. Mehrotra, AccountantMember. I have gone through the detailed reasonsgiven by ShriMahavir Singh while coming to theconclusion that the word ‘payable’ used in section40(a)(ia) of the Income Tax Act, 1961 has to begiven its natural meaning and, going by strictinterpretation, I am of the firm view that section40(a)(ia) of the Act is applicable only to expenditurewhich is payable as on 31st March of every yearand cannot be invoked to disallow the amountswhich have already been paid during the previousyear, without deducting tax at source. I thereforeagree with the view taken by ShriMahavir Singh,JM and answer the question accordingly. Thematter may now be placed before the DivisionBench for passing appropriate orders, in the abovelisted cases, in the light of the majority view of theMembers consisting of the Special Bench.

Mahavir Singh, Judicial Member - I have gonethrough proposed order of Ld A.M., BrotherShriS.V.Mehrotra and could not persuade myself tothe conclusion arrived at by my Brother. So, I amwriting my own order on the basis of arguments ofboth the sides and material placed before us. Asregards to arguments narrated by Ld BrotherShriMehrotra, I have no difference because he hasbeautifully narrated every argument of both the sides.

March, 2012


Judicial Analysis

First, I have perused the question referred to theSpecial Bench by Hon’ble President, which is asunder:

“Whether Sec. 40(a) (ia) of the Income Tax Act canbe invoked only to disallow expenditure of the naturereferred to therein which is shown as “payable” ason the date of the balance sheet or it can be invokedalso to disallow such expenditure which becomepayable at any time during the relevant previousyear and was actually paid within the previousyear?”

2. Section 40(a)(ia) of the Act was introduced in theIncome-tax Act, 1961 by the Finance Act, 2004w.e.f. 1st April, 2005 with a view to augment therevenue through the mechanism of tax deductionat source. This provision was brought on statute todisallow the claim of even genuine and admissibleexpenses of the assessee under the head “Incomefrom Business & Profession” in case the assesseedoes not deduct TDS on such expenses. Thedefault in deduction of TDS would result indisallowance of expenditure on which such TDSwas deductible. Let us see the provision as broughtout in the Act, which is as under:

xxx…

From the above comparison between the proposedand enacted provision, I find that the Legislaturehas replaced the word “amounts credited or paid”with the word “payable” in the final enactment. Asargued by ld. Counsel for assessee as well as forthe Interveners, a question arises as to why theLegislature dropped the words “credited” and “paid”under section 40(a)(ia) as proposed in the FinanceBill, 2004. The ld. Counsel argued that the word“paid” was not incorporated because Legislatureknew it that if amount is already paid, TDS cannotbe deducted. According to ld. Counsel, as per Rule30 of Income Tax Rules, 1962 (hereinafter referredto as ‘the Rules’), which, inter alia, deals with timeand mode of payment of Tax deducted at source,he pointed that Rule 30 of the Rules prior to itssubstitution by the Income-tax (Sixth Amendment)Rules, 2010 with retrospective effect from 1st April,2010 allowed two months period of time fordepositing of TDS, if the amount is deducted with

reference to this Rule. According to the ld. Counsel,the words “paid” and “payable” have differentconnotations and accordingly, different time periodshave been prescribed for depositing of TDS.According to ld. Counsel, the provision of section43 deals with definition of certain terms relating toincome from profits and gains of business orprofession and pointed out that sub-section (2)defines the term “paid” as under:

“(2) “paid” means actually paid or incurred accordingto the method of accounting upon the basis of whichthe profits or gains are computed under the head“profits and gains of business or profession “.

According to ld. Counsel, though the word “paid”has been defined but the word “payable” has notbeen defined in the Act and he referred to thedictionary meaning of the word “payable”. ld.Counsel, Shri S. Subramanian in the case of MerilynShipping & Transports, Visakhapatnam has filedwritten submission and at page 6, para 2.2 has giventhe term “payable” as per the dictionary meaningwhich is as under:

“2.2. The word’ payable’ as per dictionary meaningis (a) that must be paid, (b) able to be paid.

(a) Oxford dictionary defines the terms ‘payable’and ‘paid’ as under:-Payable (pay-a-ble- adjective[predict.]

1. (of money) required to be paid; due :

2. able to be paid:

Noun (payables)

Debts owed by a business’ liabilities.

Paid: Past and past principal of PAY.

(b) According to Black’s Law Dictionary (SeventhEdition) at p. 1150-, the term ‘payable’ is defined asa sum of money that is to be paid. Another meaningto the term ‘payable’ is given as under :-

“An amount may be payable without being due.Debts are commonly payable long before they falldue “.

(c) According to West’s Legal Thesaurus/Dictionary Paid : means pay. To discharge a debt.

Payable : means justly or legally due (payable

March, 2012


immediately}. Uncollected (outstandingdebts).Unpaid, undischarged, unsatisfied, unsettled,mature, owed, ripe, collectable, in arrears,redeemable. “

xxx…

The literal rule of interpretation really means thatthere should be no interpretation. In other words,we should read the statute as it is, without distortingor twisting its language.

We may mention here that the literal rule ofinterpretation is not only followed by Judges andlawyers, but it is also followed by the lay man in hisordinary life. To give an illustration, if a person says“this is a pencil”, then he means that it is a pencil;and it is not that when he says that the object is apencil, he means that it is a horse, donkey or anelephant. In other words, the literal rule ofinterpretation simply means that we mean what wesay and we say what we mean. If we do not followthe literal rule of interpretation, social life will becomeimpossible, and we will not understand each other.If we say that a certain object is a book, then wemean it is a book. If we say it is a book, but wemean it is a horse, table or an elephant, then we willnot be able to communicate with each other. Lifewill become impossible. Hence, the meaning of theliteral rule of interpretation is simply that we meanwhat we say and we say what we mean. “

The provision of section 40(a)(ia) of the Act clearlyuses the term “payable” and not “paid”. Hence, ifthe literal construction of this word is taken, thenno word can be substituted in place of the said word“payable” nor can any new word be supplied in theprovision. The language of the provision has thrownopen two terms “paid” and “payable” for judicialinterpretation. We have gone through the meaningof terms “payable” and “paid” as defined in variousjudicial dictionaries and the definitions arereproduced above in para 3 of this order.

5. In respect to this, Revenue argued that theinterpretation of the word “payable”, if restricted topayable, will throw up an anomalous situation. Asper ld CIT DR, if the disallowance under section40(a)(ia) of the Act is restricted to amounts payable

then it in the subsequent year such provision isactually paid off without deducting TDS or depositingthe same the revenue would lose its right to disallowsuch expenses. According to ld CIT- DR, this wouldrender the provision of section 40(a)(ia) of the Actotiose and its avowed objective of augmentingrevenue through the compliance of TDS provisionwould fall flat. Another argument taken by ld CIT-DR was that section 40(a)(ia) of the Act would failwhere assessee is maintaining books of accounton cash system and according to ld CIT-DR, thisis because there would be no amount claimed asexpenses from outstanding or from payable amount.For this, ld CIT-DR referred that the provision ofsection 43B of the Act will be of no consequence.

6. No doubt the dispute before us is whether the term“payable” in section 40(a)(ia) of the Act refers to entirepayment on which the TDS was required to be madein terms of various provisions referred to in thissection contained in Chapter XVII-B or it refers onlyto amount payable with reference to those sections,which, as per the assessee, remain outstanding ason 31st March of every year. The contention that aparticular amount is covered under Chapter XVII-Band therefore TDS was required to be made fromthat amount but the amount has also been paidwithout TDS, therefore, disallowance to this extentshould not be made under section 40(a)(ia) of theAct. The provision of section 40(a)(ia) of the Act wasintroduced in order to ensure compliance of TDS butassigned the term “payable” in the provision ofsection 40(a)(ia) of the Act. On a comparisonbetween the proposed and enacted provision, theonly conclusion, which can be reached, is thatLegislature consistently replaced the words “amountcredited” or “paid” with the word “payable” in the finalenactment and such change was not done withoutany purpose. It is a basic presumption that anenactment was brought in by the Legislature is well-thought of and properly worded in order to givemeaning to its intent by changing the words from“credited” or “paid” to “payable”. The legislative intenthas been made clear that only the outstanding amountor the provision for expense liable for TDS is soughtto be disallowed in the event there is a default of TDS.This proposition is also explained by Hon’ble

Judicial Analysis

March, 2012


Supreme Court in the case of CIT v. Kelvinator ofIndia Ltd. [2010] 320 ITR 561, wherein it is held ‘Ourview gets support from the changes made to section147 of the Act, as quoted hereinabove. Under theDirect Tax Laws (Amendment) Act, 1987, Parliamentnot only deleted the words “reason to believe” butalso inserted the word “opinion”. However, on receiptof representations from the companies againstomission of the words “reason to believe”, Parliamentreintroduced the said expression and deleted theword “opinion “ on the ground that it would vestarbitrary powers in the AO.’ And further Hon’bleSupreme Court quoted the relevant portion of circularNo.549 dated October 31, 1989 [1990] 182 ITR (St.)1, 29), which reads as under:

xxx…

10. Section 40(a)(ia) of the Act, creates a legal fictionby virtue of which even the genuine and admissibleexpenses claimed by an assessee under the head“Income from Business and Profession” if theassessee does not deduct TDS on such expensesare disallowed. Section 40(a)(ia) of the Act has beenenacted for the purposes of augment of tax throughthe mechanism of TDS and was in furtherance tothe said objective. This is a deeming provision. Howto interpret the deeming provision or what is themeaning of word “deem”. As verb transitive, theword “deem” means to treat something as if (i) it isreally something else, or (ii) it has qualities that itdoes not have. ‘Deem’ is a useful word when it isnecessary to establish a legal fiction eitherpositively by ‘deeming’ something to be somethingit is not or negatively by ‘deeming’ something not tobe something which it is. Legal fiction is anassumption that something is true even though itmay be untrue. Such an assumption is especiallymade in judicially reasoning to alter how a legal ruleoperates. When the law creates a legal fiction suchfiction should be carried to its logical end. Thereshould be no hesitation in giving full effect to it. Theproposition that legal fiction must be carried to itslogical conclusion does not, however, mean that itshould be carried to an illogical length. By catenaof decisions, three rules are fairly well settled forinterpreting a provision creating a legal fiction. They

are as under:

(i) The Court is to ascertain the purpose for whichthe fiction has been created, and afterascertaining this, the Court is to assume allthose facts and consequences, which areincidental or inevitable corollaries to giving effectto the fiction.

(ii) The legal fiction cannot be interpreted in amanner that extends the effect of fiction beyondthe purpose for which it is created or beyondthe language of the section by which it iscreated. Neither can one allow himself to be socarried away by a legal fiction so as to ignorethe words of the very section which creates itor its context or setting in the statute whichcontains that section nor can one loose sightof the purpose for which the fiction is created.

(iii) Outside the bounds of the legal fiction thedifference between the reality and the fictionmay still persist in the provisions of the sameAct which creates the fiction and the differencemay be ascertained by reference to the subjectand context of those provisions.

It means that legal fiction cannot be extended anyfurther and has to be limited to the area for which it iscreated. Hon’ble Andhra Pradesh High Court in thecase of Addl. CIT v.Durgamma P. [1987] 167 ITR776 held that it is not possible to extend the fictionbeyond the field legitimately intended by the statute.The Hon’ble court was dealing with the provisions ofsec. 171(1) of the IT Act in the context of which it washeld that joint family shall be deemed to continue forthe limited purpose of assessing cases of joint familieswhich have been hitherto assessed as such. It is notpossible to extend that fiction to other cases. Similarview was taken by the Hon’ble Kerla High Court inCIT v. Kar Valves Ltd. [1987] 168 ITR 416 wherein itis held that legal fiction is limited to the purpose forwhich they are created and could not be extendedbeyond that legitimate frame, Hon’ble Kerala HighCourt was dealing with the case where assesseesought to take advantage of sec. 41(2) of the Act bysubmitting that if liabilities are not liquidated andoutstanding are not collected, then business could bedeemed to continue. Hon’ble Allahabad High Court in

Judicial Analysis

March, 2012


the case of Controller of Estate Duty v. KrishnaKumar Devi [1988] 173 ITR 561 held that ininterpreting the legal fiction the court should ascertainthe purpose for which it was created and after doingso assume all facts which are logical to give effect tothe fiction. Further, Hon’ble Supreme Court in CITv Mother India Refrigeration Pvt. Ltd. [1985] 155ITR 711 held that legal fictions are created only forsome definite purpose and they must be limited to thatpurpose and should not be extended beyond thatlegitimate field. In CIT v. Bharani Pictures [1981] 129ITR 244 (Mad.) it is held that legal fictions are for adefinite purpose and are limited to the purpose forwhich they are created and should not be extendedbeyond its legitimate field. The statutory fictionintroduced in one enactment cannot be incorporatedin another enactment. The point that legal fiction cannotbe extended to a new field was highlighted by Hon’bleMadras High Court in CIT v Rajam T.S [1988] 125ITR 207 wherein it is held that section 41(2) of the Actcreates a legal fiction under which the balancingcharge is treated as business income chargeable totax but when this amount is distributed to shareholdersthen it would not become deemed dividend and it wouldbe only a capital receipt and not distribution ofaccumulated profits. Thus, a legal fiction was invokedin the hands of the assessee company and was notextended in the hands of the shareholders. In thepresent case, section 40(a)(ia) of the Act creates alegal fiction for the amounts outstanding or remainspayable i.e. at the end of every year as on 31st Marchand it cannot be extended for taxing the amountsalready paid. In fact, section 201 of the Act itself takecare of tax to be collected in the hands of the payeeand other TDS provisions under Chapter XVIIB of theAct. No further legal fiction from elsewhere in thestatute can be borrowed to extend the field of section40(a)(ia) of the Act. This fiction cannot be extendedany farther and, therefore, cannot be invoked byAssessing Officer to disallow the genuine andreasonable expenditure on the amounts ofexpenditure already paid.

xxx…

12.In view of the above judicial pronouncements ofHon’ble Supreme Court and Hon’ble High Courts,materials placed before us, arguments made by both

the sides and in view of the provisions of section40(a)(ia) of the Act, on comparison between theproposed and enacted provision, the only conclusionwhich I can reach is that the Legislature consciouslyreplaced the words “amounts credited or paid” withthe word “payable” in the final enactment. By changingthe words from “credited” or “paid” to “payable”, thelegislative intent has been made clear that onlyoutstanding amounts or the provisions for expensesliable for TDS under Chapter XVII-B of the Act issought to be disallowed in the event there is a defaultin following the obligations casted upon the assesseeunder Chapter XVII-B of the Act. I agree with thearguments made by ld. Counsel for the assesseeand other Counsels for the Interveners that whileinterpreting the word “payable” in this provision, theword of a statute must be understood in its natural,ordinary or popular sense and construed accordingto its grammatical meaning. According to me, suchconstruction would not lead to absurdity becausethere is nothing in this context or in the object of thisstatute to suggest to the contrary. It is a cardinalprinciple of interpretation that the words of a statutemust be prima facie given their ordinary meaning,when the words of the statute are clear, plain andunambiguous then the courts are bound to give effectto that meaning. The literal rule of interpretation reallymeans that there should be no interpretation of thestatute, rather in other words, we should read thestatute as it is without doing any violence to thelanguage. In the present dispute before us, the word“payable” used in section 40(a)(ia) of the Act is to beassigned strict interpretation, in view of the object ofLegislation, which is intended from the replacementof the words in the proposed and enacted provisionfrom the words “amount credited or paid” to “payable”.Hence, in my view, my answer to the questionreferred by Hon’ble President to the Special Benchis as under:

The provisions of section 40(a)(ia) of the Act areapplicable only to the amounts of expenditure whichare payable as on the date 31st March of everyyear and it cannot be invoked to disallow which hadbeen actually paid during the previous year, withoutdeduction of TDS.

Judicial Analysis

March, 2012


March, 2012


IMPACT OF BUDGET 2012 PROVISIONS ON THECONSTRUCTION SECTOR

Budget is a tool of government which drives it past thejourney of economic growth as well as economicmisery. Each year the government brings in severalnew provisions changing the set tax laws and therebyimpacting evryone either positively or negatively.

The Finance Minster has projected the economy togrow by 7.6 percent for the FY 2012-13 and the Budgetproposal emphasizes on five focus areas to achievethe desired growth namely:

· Focus on domestic demand growth recovery

· Create conditions for rapid revival of high growth inprivate investment

· Address supply bottlenecks in agriculture, energyand transport sectors

· Intervene decisively to address the problems ofmalnutrition

· Address the problem of black money and corruptionin public life

The Real Estate & Construction sector is an importantcomponent of the Service Sector which is evident fromthe figures of 2010-11 as below :-

Contribution of Real estate sector in GDP - 10.6percent

Contribution of Construction sector in GDP - 8.2percent

Let us look at Budget 2012 from the impact that itseeks to have on the Real Estate and constructionsector as and when it gets passed:-

1. Macroeconomic Impact

2. Service Tax Specific Proposals

2.1. Changes in Rates

2.2. Precautions to be taken by Service Receiverunder the Reverse Charge Mechanism

CA. Sandesh MundraThe author is practising since 2004. He can bereached at [email protected]

Commercial Aspects ofCivil Construction

2.3. Changes in Rules

2.4. Old wine (with some remixes) in the Newbottle - “Service”

2.5. Exemptions under the new regime – PostBudget

2.6. Exemptions under the current regime soughtto be withdrawn

2.7. Amendments in o ld L aw i n favour o fass essees (Inc l ud in g Ret ros pec t i veAmendments)

3. Impact of Other Taxes

1. Macroeconomic Impact

Following are the important budget proposals:

· Efforts are continued to arrive at broad basedconsensus for allowing FDI upto to 51 percentin multi-brand retail. This would positivelyimpact new construction of huge malls in thecountry.

· During Twelfth Plan period, investment ininfrastructure is planned to go up to INR50,000 billion with half of this, expected fromprivate sector which will increaseopportunities for the construction companies.

· Much needed “fiscal” impetus to affordablehousing by allowing External CommercialBorrowings (ECB) and reducing taxwithholding from interest on such ECBs fromexisting 20 percent to 5 percent for 3 years.This shall ensure availability of capital fordevelopers and Better capital availability willhelp in timely project execution, which willresult in higher volumes.

March, 2012


Commercial Aspects of Civil Construction

· The extension of the 1% interest subventionscheme for affordable housing continues foranother year, benefitting buyers in the marketfor houses worth upto Rs 25 lakhs.

· More sectors added as eligible sectors forViability Gap Funding under the scheme“Support to PPP in infrastructure”.

· Tax free bonds of ‘60,000 crore to be allowedfor financing infrastructure projects in 2012-13.

· IIFCL has put in place a structure for creditenhancement and take-out finance for easingaccess of credit to infrastructure projects.

· The Rural Housing Fund has been enhancedto Rs 40 billion from Rs. 30 billion to supportaffordable housing projects.

· Enhancement of investment linked incentivefor affordable housing to 150 percent of capexfrom current 100 percent.

· The doubling of allocation in infrastructuredebt fund through allocation to NHDP, IIFCL,NHB and SIDBI coupled with full exemptionfrom basic customs duty for equipment forroad and highways construction are likely toboost infrastructure and construction sectors.First Infrastructure Debt Fund with an initialsize of ‘8,000 crore launched recently.

· Further, measures like credit guarantee anddirect transfer of subsidy is likely to changethe growth environment.

· One year extension of sun-set clause on taxincentives for infrastructure projects underSection 80 IA of Income Tax Act, 1961 is alsoa welcome step.”

However like any child even we have someunfulfilled wishes from the budget

· Increase in excise duty on Cement and Steelcould have been avoided

· No Infrastructure status for Real Estate

· Removal of levy of multiple taxes on the sameproperty transaction

· Ease in interest rates for domesticbusinesses

· No increase in the limit on tax deductionavailable on home loans interest from currentRs 1.5 lakhs.

2. Service Tax Specific Proposals

Budget 2012 has, brought a paradigm shiftin the manner in which we view service tax.How? Lets see! An attempt is made to coveronly those provisions which have a materialimpact on the construction sector.

2.1. Changes in Rates

The rate of service tax is being restored to thestatutory rate of 12% - same as goods. This isdone by rescinding Notification No. 8/2009-STwhich had reduced the rate to 10%. This iseffective from April 1, 2012.

2.2. Precautions to be taken by Service Receiverunder the Reverse Charge Mechanism

A shift in taxing approach from ‘selective’ to‘comprehensive’, has been announced by Mr.Finance Minister. To effectively implement thesechanges, certain amendments in various areashave been made. This is very much like the TDSprovisions as applicable under the Income TaxAct. So few select categories of services, wherea lot of indiscipline was observed by governmenthave been brought under the reverse chargemechanism.Currently, there are sevenheads (Rule 2(1)(d) of Service Tax Rules,1994) under which tax is collected on reversecharge mechanism i.e. a service receiver isrequired to pay service tax and not the serviceprovider. Notification No. 15/2012 dated 17/03/2012 has proposed to some more service headsunder reverse charge mechanism whilecontinuing earlier service heads. Below are someof the services which are normally availeddirectly by the construction sector or the clientswho issue works contracts. If one observes theabove list closely most of the services are alsocovered in TDS provisions under Direct Tax law.Now the said services are also covered under

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reverse charge mechanism in Indirect Tax lawand service receiver will have addedresponsibility of depositing TDS plus ServiceTax of Service providers. This will seriously hitthe funds of service receivers. Hence propercare needs to be exercised in all such cases

Nature of Service Liability of Liability

Service of

Provider ServiceReceiver

Renting or hiring anymotor vehicle designedto carry passenger(for Non-abated value) 60% 40%

Supply of manpowerfor any service 25% 75%

Works contract service byan individual/HUF/proprietary firm/partnershipfirm/association of persons(whether registered or not)to company or bodycorporate located in thetaxable territory.

In works contract service50% service tax will be paidby the contractor and 50%by the contractee. In workscontract service there aretwo schemes one iscomposite scheme andother is paying on actuallabour and services.

The question is in asingle works contract if thecontractee and contractorchoose different schemesfor payment of service taxthen how the ratio of 50%will be determined, will thecontract be divided in twoparts or any other criteriawill be adopted? Some

more clarifications arerequired in this regard fromCBEC.

Also what if the serviceprovider does not chargeany service tax in hisinvoice as he is unregisteredalthough he is required tounder the turnover criteria. 50% 50%

Availing Legal Services ofan Individual Advocate 0% 100%

Services received from aperson residing in the non-taxable jurisdiction (That isplace outside India andJammu and Kashmir whereservice tax is not applicable) 0% 100%

Goods Transport Agency 0% 100%

Government Support Services(Infrastructure , Marketing,Logistics) – There is lack ofclarity as to what constitutesthe government supportservices in the practical life.And normally reverse chargemechanism are built in forunorganized sectors.No sense in giving governmentthe benefit of this mechanism. 0% 100%

Therefore, if you are availing any of the aforesaidservices then now (from the enactment ofFinance Bill 2012) you will also be required topay Service tax to Central Government andcomply with registration and returns filingrequirements.

Certain other impact in terms of reverse chargein case of import of services are redefined in thedraft Place of Provision of Services Rules, 2012which also needs to be examined based on thereview of transactions of the company.

It is clarified that liability of the two persons is forrespective amounts and is not influenced bycompliance or the lack of it by the other side.

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Service provider is allowed Cenvat credit of taxpaid by him on inputs and input services. Therespective portions have been attempted suchthat the credits available will be well below theamount required to be paid by such persons. Inextreme situations the small service provider isalso being allowed the refund of unutilized Cenvatcredit if any, available with him. Suitable changeswill be made in Cenvat Credit Rules, to this effect.

2.3. Changes in Rules

2.3.1.Valuation Rules

Negative list will require movement away fromservice-specific provisions. As such, theabatements under Notification 1/2006-ST andcomposition rate under the Works Contract(composition scheme for payment of service tax)Rules, 2007 will need some reformulations. Anew valuation rule is being introduced tosubstitute the Works Contract (CompositionScheme for Payment of Service Tax) Rules,2007. The value of the Works Contract isproposed to be redefined, as follows:

a. As at present, first determination will bethe value of service being the totalamount charged for the contract reducedby the value of property transferred ingoods for State VAT purpose;

b. If value of goods is not intimated to StateVAT, the assessees can still calculatethe actual value of goods and the samewill be relevant to deduce the value ofthe service involved in the works contract;

c. If the value is not so deduced as perabove, and not merely as an option, thevalue shall be specified percentage ofthe total value as follows:

a. for original works: 40% of the totalamount;

b. other contracts: 60% of the totalamount;

c. for contracts involving construction ofcomplex or building for sale whereany part of the consideration is

received before the completion of thebuilding: 25% of the total amount

Thus mode of payment under thecomposition scheme is not available as asimple option. It can only be exercised if thefirst two options can-not be used to computethe value. If say a contractor is working inmultiple states and having multiple contractsin a single state as well, then one needs tosee and check the mode of payment of VATunder each contract to take a decision asregards the chargeability of service tax.

Notes for consideration:-

Original works will include all new constructionsand all types of additions and alterations toabandoned or damaged structures to make themworkable.

The total amount will be gross amount plus thevalue of any material supplied under the samecontract or any other contract.

The input tax credit on goods forming part of theproperty on which VAT is payable shall not beavailable as they are not used in the provision ofservice, which is totally independent of thedeemed sale. However taxes paid on capitalgoods and input services will be available for setoff.

2.3.2.Point of Taxation Rules, 2011

a. The time period for issuance of invoiceis being increased to 30 days ordinarilyand 45 days for banks and financialinstitutions (to reconcile with thebusiness practice of issuing monthlystatement). These changes are beingprovided in Rule 4A of Service TaxRules and the time period so defined isbeing incorporated in POT Rules.

b. The benefit available to individuals andfirms to determine POT on the basis ofdate of payment for eight specifiedservices is being extended to all servicesin a slightly modified form. The facilitywill be now available to individuals and

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partnership firms (including limitedliability partnership) up to a turnover ofRs 50 lakh in a financial year providedthe taxable turnover did not exceed thislimit in the previous financial year. Forcomputing the above limits, the turnoverof the whole entity is required to besummed up and not any singleregistration.

2.3.3.Service Tax Rules, 1994:

a. A common simplified registration formatfor Central Excise and Service Tax isbeing placed for public comments,together with further liberalization inregistration requirements, particularlycentralized registrations.

b. Likewise a new simplified one pagecommon return with Central Excise: tobe called Excise & Service Tax Return(EST for short) is being introduced.

c. It is also being proposed that the cyclesfor the payment of service tax and filingof return should coincide. To this end theservice tax return filing and tax paymentrequirement is proposed to be revisedas follows:

a. Assessees who paid tax of Rs 25 lakhor more in previous year and newassessees other than individuals andfirms: Monthly

b. Others: Quarterly

At present only Individuals or Firms areallowed to pay the taxes on quarterly basis.Now this relaxation has been given to everysmall assessee

2.3.4.Cenvat Credit Rules, 2004

All the amendments are effective from 1-4-2012, except otherwise specified.

a. Following services are excluded fromdefinition of ‘input service’ only so far asthey relate to a motor vehicle, which isnot a capital goods – (a) Renting of a cab

(b) Supply of tangible goods. However,these services will be eligible as ‘inputservices’ if used for provision of taxableservices for which Cenvat credit of motorvehicle is available as capital goods [rule2(l) clause (B) amended w.e.f. 1-4-2012].

b. Following services are excluded fromdefinition of ‘input service’, except whenused by (a) a manufacturer of a motorvehicle in respect of a motor vehiclemanufactured by him or (b) provided bygeneral insurance company [as specifiedin section 65(105) of the Finance Act], inrespect of a motor vehicle insured orreinsured by him - (a) General InsuranceServices (b) Motor vehicle related service(earlier termed as Authorised ServiceStation service) [rule 2(l) clause (BA)inserted w.e.f. 1-4-2012].

c. The ‘amount’ payable under rule 6(3) [whereassessee is manufacturer of excisable aswell as exempt goods or provider of taxableas well as exempt services] has beenincreased from 5% to 6% w.e.f. 1-4-2012.Rarely any contractor would have exercisedthis option. So it does not make much impact.

d. Interest is not payable on wrongly takenCenvat credit if it was not utilised [Rule 14amended] (All those who have paid interestwould be cursing themselves)

e. Inputs or capital goods need not be broughtin the premises of service provider.(Thisprovision will only fuel disputes relating topast and should have ideally come asretrospective amendment or a clarification)

f. Input Service Provider to distribute credit onfollowing basis - (a) Credit of service taxattributable to wholly exempted goods orexempted services shall not be distributed(b) In case of service tax attributable to aparticular unit - directly to that unit (c) In caseof common input services - on basis ofturnover of each unit [Rule 7 of CenvatCredit Rules overhauled] - This is relevant

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where a contractor is doing all threecategories of construction like exempt,taxable and non-taxable.

g. Cenvat Credit Reversal not required ifexempted taxable service provided toSEZ - retrospective amendment w.e.f.16-6-2005 [clause 144 of Finance Bill,2012]]. (Thos who have already paidand reversed in the past may try and takecare during the course of service taxaudits as far as possible)

2.3.5.Place of Provision Rules

Taxation of export of services and import ofservice is being replaced by “place of provisionof service” and the draft rules are placed fordiscussion.

One of the examples given in the budgetdocument to explain these rules is in relation toan architect as below :-

An architect based in Mumbai provides hisservice to an Indian Hotel Chain (which hasbusiness establishment in New Delhi) for its newlyacquired property in Dubai. If Rule 5 (Propertyrule) were to be applied, the place of provisionwould be the location of the property i.e Dubai(outside the taxable territory). With this result, theservice would not be taxable in India. Whereas,by application of Rule 8, since both the providerand the receiver are located in taxable territory,the place of provision would be the location of theservice receiver i.e New Delhi. Place of provisionbeing in the taxable territory, the service tax wouldbe taxable in India. By application of Rule 14, thelater of the Rules i.e Rule 8 would be applied todetermine the place of provision.

2.4. Old wine (with some remixes) in the New bottle- “Service”

You are no longer required to pose the question- “which taxable service is being provided?”

Service has been defined as any activity donefor consideration. So now every service that wedo is taxable unless the same falls in the negativelist or under the exemption notification. So now

specific descriptions like “Industrial andCommercial Construction”, “Erection andCommissioning”, “Consulting Engineer”, havebeen done away with. So the question that arisesis what would happen to the Principles ofclassification which exist in the current scenario

Although the negative list approach largelyremoves the need for descriptions of services,but for the construction sector such descriptionscontinue to exist to identify whether the specificservice falls under following lists or not –

· In the negative list (Non-taxable services)

· In the declared list (Deemed taxableservices)

· In the exemption notifications. (Exemptedservices)

· In the Place of Provision of Service Rules,2012

· In few other rules and notifications.

Concept of Declared Services:-

There are two principles laid down which arecontained in clauses (1) and (2) of section 66Fof the Act.

In the definition of ‘service’ contained in clause(44) of section 65B of the Act it has been statedthat service includes a declared service. Thephrase ‘declared service’ is also defined in thesaid section as an activity carried out by aperson for another for consideration andspecified in section 66E of the Act. Most of theseservices are presently also being taxed but onlyto ensure that these are not avoided with areasoning that they are also subjected to statetaxes , they have been categorized under theheading of Declared services. This is also witha view to remove any ambiguity for the purposeof uniform application of law all over the country.

The following activities directly related or ancillaryto construction have been specified in section66E as declared services:-

a. Renting of immovable property;

b. Construction of a complex, building, civil


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structure or a part thereof, including acomplex or building intended for sale toa buyer, wholly or partly, except wherethe entire consideration is received afterissuance of certificate of completion bya competent authority;

This service is already taxable as part ofconstruction of residential complex serviceunder clause (zzzh) of sub-section 105 ofsection 65 of the Act and as part of servicein relation to commercial or industrialconstruction under clause (zzq) of sub-section 105 of section 65 of the Act. Thisentry covers the services provided bybuilders or developers where buildingcomplexes, civil structure or part thereof areoffered for sale but the payment for suchbuilding or complex or part thereof isreceived before the issuance of completioncertificate by a competent authority. Furtherthere are various types of arrangementsunder which builders or developers sellbuildings, flats, office space etc. to buyerswhere entire consideration is received beforecompletion certificate is issued includingtripartite model, redevelopment model,investment model, reconversion model,BOT projects and joint developmentagreement model.

A detailed circular has been issued by theBoard dealing with such arrangements in thecontext of existing taxable service of samedescription vide Circular no 151/2/2012 STdated 10/2/12 issued from F.No. 332/13/2011TRU. The said circular may be referred tofor guidance on this point.

Further as regards Completion Certificates- Earlier under the Circular No. 1/2011(CE&ST PuneIII TF) dated 15/02/2011,the competent authority includes architects,chartered engineers, licensed surveyorbesides any Government Authority. Now theposition is that in case if the GovernmentAuthorities are required to issue “CompletionCertificate” under the state lawsthen they are

the only ‘Competent Authority’. Only in caseof no such requirement under the State Law,the only the above specified persons arecompetent to issue ‘Completion Certificate’.

c. Transfer of goods by way of hir ing,leasing, licensing or any such mannerwithout transfer of right to use suchgoods;

This will create some controversy. Theprovisions as exist currently mention that inall such cases where VAT has been paid,no service tax shall be levied. However nowthe taxability is purely based on how youinterpret “Transfer of right to use”. So theremay be a scenario where both the authorities(VAT and Service Tax) argue the case intheir favour when assessee takes aparticular stand. This might result in doubletaxation on the same value. Thisinterpretation of “Right to use” is also marredby conflicting court judgements.

All such issues are only expected to beresolved once GST is in place.

d. Service portion in execution of a workscontract

A new definition for the “Work Contract” hasbeen introduced through Sec 65B (54) andis as follows:

1. Definition - Works contract has beendefined in section 65B of the Act as acontract wherein transfer of property ingoods involved in the execution of suchcontract is leviable to tax as sale of goodsand such contract is for the purpose ofcarrying out construction, erection,commissioning, installation, completion,fit ting out, improvement, repair,renovation, alteration of any building orstructure on land or for carrying out anyother similar activity or a part thereof inrelation to any building or structure onland.

2. Significance of the word ‘only’ in the


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exclusion clause in the definition of‘service’ - The word ‘only’ signifies thetransactions which involve only transferof title in goods or immovable propertynot included as service. A transactionwhich in addition to a transfer of title ingoods or immovable property involvesan element of another activity carried outor to be carried out by the persontransferring the title would not beexcluded from the definition of service.

3. Question that arises is whether allcomposite transactions which in additionto a transfer of title in goods involve anelement of provision of service beconsidered as a ‘service’ and taxableunder Service Tax as such? - Themanner of treatment of such compositetransactions for the purpose of taxation,i.e. are they to be treated as sale of goodsor provision of service, has been laid downby the Honorable Supreme Court in thecase of Bharat Sanchar Nigam Limitedvs Union of India [2006(2)STR161(SC)].The relevant paras 42 and 43 of the saidjudgment are reproduced below -

“42.Of all the different kinds of compositetransactions the drafters of the 46thAmendment chose three specificsituations, a works contract, a hirepurchase contract and a catering contractto bring within the fiction of a deemed sale.Of these three, the first and third involvea kind of service and sale at the sametime. Apart from these two cases wheresplitting of the service and supply hasbeen Constitutionally permitted in Clauses(b) and (g) of Clause 29A of Art. 366, thereis no other service which has beenpermitted to be so split. For example theclauses of Art. 366(29A) do not coverhospital services. Therefore, if during thetreatment of a patient in a hospital, he orshe is given a pill, can the sales taxauthorities tax the transaction as a sale?

Doctors, lawyers and other professionalsrender service in the course of which canit be said that there is a sale of goodswhen a doctor writes out and hands overa prescription or a lawyer drafts adocument and delivers it to his/her client?Strictly speaking with the payment offees, consideration does pass from thepatient or client to the doctor or lawyer forthe documents in both cases.

43. The reason why these services do notinvolve a sale for the purposes of Entry54 of List II is, as we see it, for reasonsultimately attributable to the principlesenunciated in Gannon Dunkerley’s case,namely, if there is an instrument ofcontract which may be composite in formin any case other than the exceptions inArticle 366(29-A), unless the transactionin truth represents two distinct andseparate contracts and is discernible assuch, then the State would not have thepower to separate the agreement to sellfrom the agreement to render service,and impose tax on the sale. The testtherefore for composite contracts otherthan those mentioned in Article 366 (29A)continues to be - did the parties have inmind or intend separate rights arising outof the sale of goods. If there was no suchintention there is no sale even if thecontract could be disintegrated. The testfor deciding whether a contract falls intoone category or the other is to as whatis the substance of the contract. We will,for the want of a better phrase, call thisthe dominant nature test.”

The following principles emerge from thesaid judgment for ascertaining thetaxability of composite transactions-

· Except in cases of works contracts orcatering contracts [exact words in article366(29A) being – ‘service wherein goods,being food or any other article of humanconsumption or any drink (whether or not


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intoxicating) is supplied in any manner aspart of the service’] compositetransactions cannot be split into contractsof sale and contracts of service.

· The test whether a transaction is a‘composite transaction’ is that did theparties intend or have in mind thatseparate rights arise out of theconstituent contract of sale and contractof service. If no then such transaction isa composite transaction even if thecontracts could be disintegrated.

· The nature of a composite transaction,except in case of two exceptions carvedout by the Constitution, would bedetermined by the element whichdetermines the ‘dominant nature’ of thetransaction.

Ø If the dominant nature of such atransaction is sale of goods orimmovable property then suchtransaction would be treated as such.

Ø If the dominant nature of such atransaction is provision of a service thensuch transaction would be treated as aservice and taxed as such even if thetransaction involves an element of saleof goods.

· In case of works contracts and ‘servicewherein goods, being food or any otherarticle of human consumption or any drink(whether or not intoxicating) is suppliedin any manner as part of the service’ the‘dominant nature test’ does not apply andservice portion is taxable as a ‘service’This has also been declared as a serviceunder section 66E of the Act.

· If the transaction represents two distinctand separate contracts and isdiscernible as such then contract ofservice in such transaction would besegregated and chargeable to servicetax if other elements of taxability are

present. This would apply even if a singleinvoice is issued.

The principles explained above would,mutatis mutandis, apply to compositetransactions involving an element oftransfer of title in immovable property.

4. Notification 12/2003-ST is proposed fordeletion - By way of this notification, ServiceTax was exempted on so much of the valueof all taxable services as was equal to thevalue of goods and materials sold by theservice provider to the service recipientsubject to condition that there isdocumentary proof of such value of goodsand materials. Under the negative listscheme, transactions that involve transferof title in goods are excluded. Therefore ifgoods are being sold by a service providerunder a distinct and a separate contract thensale of such goods is excluded from thedefinition of service. If it is a ‘compositecontract’ and dominant nature of the contractis that of provision of service then value ofgoods cannot be excluded and if thedominant nature is sale of goods then thecontract is not taxable as service. In viewof the same the notification 12/2003-SThas been proposed to be deleted.

Biggest issue which remains to be discussedupon is the dominant intention theory itselfwhich has been subject to various conflictingjudgements. So if the VAT authorities do notaccept the same, then the assessee has togear himself up to fight till the highest authority.The implications are explained by way of asmall example as below :-

M/s ABc is enagaged in doing AMC for thefactory machines. During the course ofAMC, certain parts of machines are alsorequired to be replaced if damaged. Howeverat the start of the contract the chances arethat such replacement would be rare. Insuch a contract the dominant intention is toprovide the maintenance services. Hence if


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M/s ABC pays service tax on full value andif the VAT authorities do not agree to thecontention and require the assessee to payVAT on whatever material was incidentallytransferred in the course of maintenance,then it shall be a case of double taxation quathe value of goods involved.

5. Relevant FAQ’s as mentioned in the budgetmemorandum

5.1. Would labour contracts in relation to abuilding or structure treated as a workscontract?

No. Labour Contracts do not fall in thedefinition of works contract. It is necessarythat there should be transfer of property ingoods involved in the execution of suchcontract which is leviable to tax as sale ofgoods. Pure labour contracts are thereforenot works contracts and would be leviableto service tax like any other service and onfull value.

5.2. Would contracts for tailoring of clothes ordevelopment of photographs also be treatedas works contracts as these are also forcarrying out a particular work?

No. The phrase used is ‘works contract’ andnot work contract. ‘Works’ has a defined andaccepted legal meaning. As per Black’s Lawdictionary ‘works’ means ‘buildings orstructures on land’. Moreover works contracthas been defined in the Act as contract forcarrying our specif ied activity, likeconstruction, erection, commissioning,installation, completion, f itting out,improvement, repair, renovation, alterationetc., or a part thereof in relation to anybuilding or structure on land. Thereforecontracts which do not pertain to building orstructures on land would be out of the ambitof works contracts.

5.3. Would contracts for construction of a pipeline or conduit be covered under workscontract?

Yes. As pipeline or conduits are structureson land contracts for construction of suchstructure would be covered under workscontract.

5.4. Would contracts for erection commissioningor installation of plant, machinery, equipmentor structures, whether prefabricated orotherwise be treated as a works contract?

Such contracts would be treated as workscontracts if –

· Transfer of property in goods is involved insuch a contract; and

· The machinery equipment structures areattached or embedded to earth after erectioncommissioning or installation.

5.5. What is the scope of ‘building or structureon land’?

Buildings and structures on land means notonly buildings or structures attached to earthbut also things permanently fastened to abuilding or structure attached to earth.

5.6. Would contracts for painting of a building,repair of a building, renovation of a building,wall tiling, flooring be covered under ‘workscontract’?

Yes, if such contracts involve provision ofmaterials as well.

5.7. What is the way to segregate service portionin execution of a works contract from thetotal contract?

A simplified manner for determining the valueof service portion of a works contract fromthe total works contract is given in Rule 2Aof the Service Tax (Determination of Value)Rules, 2006 ( which will be amended partiallyfor the negative list). In brief the value of theservice portion is the gross amount chargedfor the works contract less the value oftransfer of property in goods involved in theexecution of the said works contract.

Gross amount includes


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Labour charges for execution of the works

Amount paid to a sub-contractor for labourand services

Charges for planning, designing andarchitect’s fees

Charges for obtaining on hire or otherwise,machinery and tools used for the executionof the works contract

Cost of consumables such as water,electricity, fuel, used in the execution of theworks contract

Cost of establishment of the contractorrelatable to supply of labour and servicesand other similar expenses relatable tosupply of labour and services

Profit earned by the service providerrelatable to supply of labour and services

Gross amount does not include

Value of transfer of property in goodsinvolved in the execution of the said workscontract.

Value Added Tax (VAT) or sales tax, as thecase may be, paid, if any, on transfer ofproperty in goods involved in the executionof the said works contract

Note:

Where Value Added Tax has been paid onthe actual value of transfer of property ingoods involved in the execution of the workscontract, then such value adopted for thepurposes of payment of Value Added Tax,shall be taken as the value of transfer ofproperty in goods involved in the executionof the said works contract.

The issue that arises is, if the declarationgive by the dealer is not accepted by theVAT department in the course ofassessment proceedings and deparmentasks the dealer to pay VAT on a higher value,will he be allowed to claim refund of excessservice tax paid on the contract. So again

solution probably lies in GST.

5.8. Is there any simplified scheme fordetermining the value of service portion in aworks contract?

Yes. The scheme will be contained in therevised Rule 2A of the Service Tax(Determination of Value) Rules, 2006. Asper this scheme the value of the serviceportion, where value has not beendetermined in the manner as explained at5.8.7 above, shall be determined in themanner as below -

Where works contract Value of the serviceis for… portion shall be…

(i) execution of 40% of the totaloriginal works amount charged for

the works contract

(ii) execution of 25% of the totaloriginal works and amount charged forthe gross amount the works contractcharged includesthe value of land

(iii) works contracts, 60% of the totalother than contracts amount charged forfor execution of the works contractoriginal works,including contractsfor completion andfinishing servicessuch as glazing,plastering, floor andwall tiling,installation ofelectrical fittings.

5.9. How is the value of goods or services suppliedfree of cost be determined to arrive at the totalamount charged for a works contract?

If the value of goods and services supplied freeof cost for use in or in relation to execution of aworks contract is not ascertainable, the sameshall be determined on the basis of the fairmarket value of the goods or services that haveclose resemblance to goods made available.

5.10. What are ‘’original works’?

Original works’ means :


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· all new constructions;

· all types of additions and alterations toabandoned or damaged structures on land thatare required to make them workable;

5.11. Is duty paid on any goods, property in which istransferred (whether as goods or in some otherform) in the execution of works contract,available as Cenvat credit?

No. Such Cenvat credit is not available,irrespective of the fact that the value of serviceportion in execution of the works contract isdetermined in the specified manner, since suchgoods are not inputs for the service provided.However, the goods not forming part of suchtransfer will be eligible for input tax credit subjectto the provisions of the Cenvat Credit Rules,2004 including the provisions relating to reversalof credits contained in rule 6 of the said rules.

5.12. Are various corporations formed under CentralActs or State Acts or various governmentcompanies registered under the Companies Act,1956 or autonomous institutions set up by aspecial Acts covered under the definition of‘Government’?

No. In terms of the definition of ‘Government’ ascontained in the General Clause Act, 1857 andas per the settled position of law suchcorporations or authorities or companies are notincluded in the definition of ‘Government’.Services provided by such entities would,therefore, not be entitled to the negative list entryrelating to the ‘Government’. It would also notinclude regulatory bodies.

5.13. Is access to national highways or state highwaysalso covered in the entry under Negative List?

Yes, National highways or state highways arealso roads and hence covered in this entry

5.14. Are collection charges or service charges paidto any toll collecting agency also covered?

No. The negative list entry only covers accessto a road or a bridge on payment of toll charges.Services of toll collection on behalf of an agency

authorized to levy toll are in the nature of servicesused for providing the negative list services. Asper the principle laid down in sub section (1) ofsection 66F of the Act the reference to a serviceby nature or description in the Act will not includereference to a service used for providing suchservice.

5.15. If charges are collected by a developer or ahousing society for distribution of electricitywithin a residential complex then are suchservices covered under this entry?

No. The developer or the housing society wouldbe covered under this entry only if it is entrustedwith such function by the Central or a Stategovernment or if it is, for such distribution, adistribution licensee licensed under theElectricity Act, 2003.

5.16. If the services provided by way installation ofgensets or similar equipment by privatecontractors for distribution of electricity coveredby this entry?

No. the entry does not cover services providedby private contractors. Moreover the servicesprovided are not by way of transmission ordistribution of electricity.

2.5. Exemptions

Various exemptions have been given to theconstruction sector under the budget provisions.These have been given either by way of inclusionin the negative list or under exemptionnotification. These are as below :-

2.5.1.Under Negative List of Services

Service by way of access to a road or a bridgeon payment of toll charges. Except theseservices of construction of roads, where therevenue is generated by way of toll collection,no other service has been specified under theNegative List. So idea is that in the times to comewe can see various other exemptions whichhave currently been given under the MegaNoticiation, being removed making the activitieschargeable to service tax.


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2.5.2.Exemptions related to the construction sectorproposed under Mega Notification

2.5.2.1. Services provided to the Government or localauthority by way of erection, construction,maintenance, repair, alteration, renovation orrestoration of:–

(a) a civil structure or any other original worksmeant predominantly for a non-industrial ornon-commercial use;

(b) a historical monument, archaeological siteor remains of national importance,archaeological excavation, or antiquityspecified under Ancient Monuments andArchaeological Sites and Remains Act,1958 (24 of 1958);

(c) a structure meant predominantly for use as(i) an educational, (ii) a clinical, or (iii) an artor cultural establishment;

(d) canal, dam or other irrigation works;

(e) pipeline, conduit or plant for (i) drinking watersupply (ii) water treatment (iii)seweragetreatment or disposal; or

(f) a residential complex predominantly meantfor self-use or the use of their employeesor other persons specified in the Explanation1 to clause 44 of section 65 B of the saidFinance Act;

2.5.2.2. Services provided by way of erection,construction, maintenance, repair,alteration, renovation or restoration of:-

(a) road, bridge, tunnel, or terminal for roadtransportation for use by general public;

(b) building owned by an entity registered undersection 12 AA of the Income tax Act,1961(43 of 1961) and meant predominantlyfor religious use by general public;

(c) pollution control or effluent treatment plant,except located as a part of a factory; or

(d) electric crematorium;

2.5.2.3. Services by way of erection or constructionof original works pertaining to:-

(a) airport, port or railways;

(b) single residential unit otherwise as a part ofa residential complex;

(c) low- cost houses up to a carpet area of 60square metres per house in a housingproject approved by competent authorityempowered under the ‘Scheme ofAffordable Housing in Partnership’ framedby the Ministry of Housing and UrbanPoverty Alleviation, Government of India;

(d) post- harvest storage infrastructure foragricultural produce including a coldstorages for such purposes; or

(e) mechanised food grain handling system,machinery or equipment for unitsprocessing agricultural produce as food stuffexcluding alcoholic beverages

“original works” means –

(a) all new constructions;or

(b) all types of additions and alterations toabandoned or damaged structures on landthat are required to make them workable,

“residential complex” means any complexcomprising of a building or buildings, havingmore than one single residential unit,

“single residential unit” means anindependent residential unit with specificfacilities for living, cooking and sanitaryrequirements,

2.5.3.Other exemptions for the Construction Sector

2.5.3.1. Small scale exemption - For a serviceprovider for the taxable services ofaggregate value not exceeding ten lakhrupees in a financial year subject to certainconditions.

2.5.3.2. Taxable services, received by a unitlocated in a Special Economic Zone orDeveloper of SEZ for the authorizedoperations.

2.6. Exemptions under the current regime sought tobe withdrawn


March, 2012


Sr. Pre – Budget Post - Budget (Expected if the Finance Bill isNo. passed as proposed)

Negative Impact on existing exemptions

1 Site formation and clearance services were All these services henceforth, except when providedexempt under Notification 17/2005 on service to or by Government or local authority shall becomeprovided in the course of con struction of roads, taxable under service tax regulations.airports, railways, transport terminals, bridges,tunnels, dams, ports and other ports.

2 Services in relation to Construction of Roads not Construction of private road for factory, residentialliable to tax. complex and other private premises is taxable now.

3 Under Airport services exemption was available All services provided in the airport which are not forto all works contract services performed within or in relation to the original erection or constructionairport premises. of such airport will henceforth be taxable.

4 Construction of Residential Complex services Under the new regulations, construction ofprovided for “personal use” is presently exempt residential complex services for personal use shallfrom Service Tax as exempted in the definition of be taxable other than for government or local‘residential complex’. authority for its personal use and for MPs, MLAs,

constitutional authorities etc.

5 Services in relation to construction of less than It appears that even construction of less than 1212 Residential units are specifically exempt from residential units will also get covered under theTax as per the definition of ‘residential complex’. service tax ambit. Regarding exemption for single

residential unit otherwise as a part of a residentialcomplex, no clarity is presently available, asconstruction of residential unit for self use alsoseems to becoming taxable.

6 Under works contract provisions construction Henceforth, construction for or by any non-in respect of Dam is generally exempt. government entity / person of any Dam or canalConstruction of Canal is exempt except for the irrespective of its end use would be a taxable event.ones primarily used in the commerce or industry. This may likely to impact industrial townships and

large plants where canals are required to transportfresh water, liquids or sewage to and from the factory/ township premises.

7 Notification No. 11/2011 & 10/2011 provides for All works which are non-original in nature performedexemption of works contract specific services within the airport or port shall henceforth becomeprovided within the port & all services in airport. taxable.

8 Presently Works contract ser vices receiver The new regulations would have a major implicationwas not required to pay service tax under the on business entities which engage contract servicesreverse charge mechanism from individuals, firms, HUF etc as now such

business entities would also be liable for service taxcompliance. Earlier, as the responsibility for servicetax was on the service provider, these businessentities were engaging multiple entities (who were in


March, 2012


many cases individually below the taxable limit) andwere not legally required to pay service tax.Henceforth, even with this approach, the saidbusiness entities (who are normally large) would beliable to pay service tax on 50 % of the said amountspaid for such works contracts. This may possiblyincrease the effective cost for such Works Contractservices to such business enti ties.

9 Construction of Non commercial Buildings If the construction of such structures if for personsHospitals and Educational Institutes for any one other than for the government or local authority, thenwhether government or private was exempt from service tax shall be levied irrespective of the end useservice tax of the structure

Positive Impact

10 Services by way of erection or construction of These have now been given the exemption under thisoriginal works pertaining to post- harvest storage Budget. infrastructure for agricultural produce including acold storages for such purposes; or mechanisedfood grain handling system, machinery orequipment for units processing agriculturalproduce as food stuff excluding alcoholicbeverages were taxable

11 Repair and Maintenance of Roads and These have been now been given exemption bothgovernment buildings were always subject to retrospectively in the old regime as well as post 2012disputes budget regime

2.7. Amendments in old Law in favour of assessees(Including Retrospective Amendments)

2.7.1. Rule 6(6A) of the Cenvat Credit rules,introduced last year vide Notification 3/2011-CE (NT), dated 01/03/2011, is being given effectfrom February 10, 2006. This will neutralize theinvestigations or demands for reversal ofcredits in respect of services provided to SEZsfor the past.

2.7.2. Repair of roads has been exempted fromservice tax by Notification 24/2009-ST dated27th July, 2009. By section 97, exemptionrelating to roads is extended for the earlierperiod commencing from June 16, 2005;

2.7.3. Service tax exemption has also been grantedwith retrospective effect on management,maintenance or repair service in relation to non-commercial Government buildings from 16th

June, 2005 till the coming into force of thenegative list when such repair will be exemptedby the new mega notification.

2.7.4. Penalty waiver for renting of immovableproperty service:

Recently, Delhi High Court while examining theissue of constitutionality of service tax onrenting of immovable property service in thematter of Home Solutions Retail Vs UOIobserved that ‘on the question of penalty dueto non-payment of tax, it is open to theGovernment to examine whether any waiveror exemption can be granted’ [para 73].Subsequently, in the matter of Retailers Assn.of India Vs Union of India, Honorable apexcourt, had ruled on October 14, 2011, thatlitigants should pay 50% of the arrears withinsix months in three equated installments. For


March, 2012


the balance, solvent surety should be furnishedto the satisfaction of the jurisdictionalcommissioner. It is thus proposed that penaltymay be waived for those taxpayers who paythe service tax due on the renting of immovableproperty service (as on the sixth day of March,2012), in full along with interest within sixmonths. Section 80A is being introduced for thispurpose. Those who fail to avail the benefit willbe treated as if this section did not exist.

3. Impact of other tax proposals

Direct Taxes:-

3.1. Introduction of Alternate Minimum Tax willadversely impact the non-corporate developersdeveloping SEZs

3.2. Tax Deduction at Source (TDS) at 1 percent ofconsideration for transfer of immovable propertyis being proposed. This is aimed at curbingcirculation of unaccountable money in thesector

3.3. Further, GAAR has been proposed to beintroduced on similar lines as outlined in theproposed Direct Taxes Code, towardscountering aggressive tax avoidance

3.4. The limit for tax-free bonds in the infrastructuresector has been doubled to Rs 600 billion for2012-13 vis-à-vis 2011-12. These measureswill ease financing constraints faced by certaininfrastructure segments and improve theinvestment scenario for construction sector.

3.5. The restriction on Venture Capital Funds (VCC)to invest only in nine specified sectors isremoved and consequently, investment in realestate sector is eligible for pass through taxtreatment for VCFs/VCCs

3.6. Removal of cascading effect of DividendDistribution Tax(‘DDT’) in multi layer corporatestructure – if dividend distributed by a subsidiarycompany has been subject to DDT, there willbe no further DDT in the hands of holdingcompany while further distributing the saiddividend in the same year

3.7. Provisions of Alternate minimum tax extendedto all persons other than companies claimingprofit linked deductions

3.8. Transfer Pricing Regulations have beenproposed to apply to certain domestictransactions as well. This would provideobjectivity in determination of income fromdomestic related party transactions anddetermination of reasonableness of expenditurebetween related domestic parties.

Other Indirect Taxes

3.9. Full exemption from basic customs duty, CVDand SAD is being extended to equipmentimported for road construction projectsawarded by Metropolitan DevelopmentAuthorities.

3.10. Full exemption from basic customs duty andCVD at present available to tunnel boringmachines for hydel and road projects is beingextended to all infrastructure projects. Theexemption shall also be available for partsrequired for assembly of such machines.

3.11. Overall, the Budget provides the much neededimpetus to the Affordable Housing segment toachieve the Government’s vision of “Housingfor All” and this will have a positive impact onthe sector. Further, the enhancement of thespending on the infrastructure sector willgenerate opportunities for the constructionsector. However, the enhanced levy ofservices tax and levy of multiple taxes on thesame transaction will hamper the desiredgrowth.

This we have tried to cover various provisions of theBudget impacting the Construction Sector. Pleasespare us if you do not agree to the interpretation insome if cases. The concept of Negative List is stillvery new and is expected to take some time to settledown.


March, 2012


Import of Gold on Loan Basis – Tenor of Loan andOpening of Stand–By Letter of Credit

Ref.: A. P. (DIR Series) Circular No. 83 datedFebruary 27, 2012

Attention is invited to the A.P.(DIR Series) Circular No.34 dated February 18, 2005, in terms of which themaximum tenor of gold loan was notified as 240 daysconsisting of 60 days for manufacture and exports+180 days for fixing the price and repayment of goldloan as per the Foreign Trade Policy 2004-2009 of theGovernment of India and that the tenor of the StandbyLetter of Credit (SBLC), for import of gold on loan basis,where ever required, should be in line with the aforesaidtenor of gold loan.

2. Attention is also invited to para 4A 23.2 and para4A 23.3 of the Hand Book of Procedures (HBP)Vol. I of the Foreign Trade Policy (FTP) 2009-14which states that, “the export has to be completedwithin a maximum period of 90 days from the dateof release of gold on loan basis “, and that, “ theexporter shall have flexibility to fix the price andrepay gold loan within 180 days from date ofexport”. Accordingly, the maximum tenor of goldloan becomes 270 days at present (i.e. 90 daysfor manufacture and export + 180 days for fixingthe price and repayment) as per FTP 2009-14.

3. AD Category-I Banks may, accordingly, note tocomply that (i) the maximum period of gold loanshall be as per the Foreign Trade Policy 2009-14or as notified by the Government of India from timeto time, in this regard and (ii) the tenor of SBLC,for import of gold on loan basis, where everrequired, should also be in line with the tenor ofgold loan.

4. All the other terms and conditions of the A.P. (DIRSeries) circular No. 34 dated February 18, 2005shall remain changed.

Ex ternal Commerc ial Bor rowings (ECB) forIn f ras t ruc ture fac i l i t i es w i th i n Nat ion alManufacturing Investment Zone (NMIZ)

CA. Savan GodiawalaThe author is practising since 1992. He canbe reached at [email protected]

Ref.: A. P. (DIR Series) Circular No. 85 datedFebruary 29, 2012

Attention is invited to the Foreign ExchangeManagement (Borrowing or Lending in ForeignExchange) Regulations, 2000, notified vide NotificationNo. FEMA 3/2000-RB dated May 3, 2000, as amendedfrom time to time and A.P. (DIR Series) Circular No. 5dated August 1, 2005, as amended from time to time.

2. As per the extant guidelines, availing of ECB ispermissible for the infrastructure sector, which isdefined to include (i) power, (ii) telecommunication,(iii) railways, (iv) road including bridges, (v) seaport and airport, (vi) industrial parks, (vii) urbaninfrastructure (water supply, sanitation andsewage projects), (viii) mining, refining andexploration and (ix) cold storage or cold roomfacility, including for farm level pre-cooling, forpreservation or storage of agricultural and alliedproduce, marine products and meat. Developersof SEZ were also allowed to provide suchinfrastructure facilities within the SEZ.

3. Keeping in view the infrastructural needs of theproposed National Manufacturing InvestmentZones (NMIZs), it has now been decided to allowdevelopers of NMIZ also to avail of ECB underthe “approval route” for providing infrastructurefacilities within the NMIZ, as indicated above.

4. The modifications to the ECB policy will come intoforce with immediate effect. All other aspects ofthe ECB policy, such as, recognised lender,average maturity, all-in-cost, prepayment,refinancing of existing ECB and reportingarrangements shall remain unchanged.

March, 2012


FEMA Update

Clarification – Establishment of Branch Offices(BO) / Liaison Offices (LO) in India by ForeignEntities – Delegation of Powers

Ref.: A. P. (DIR Series) Circular No. 88 dated March1, 2012

Attention is invited to the A.P. (DIR Series) CircularNo.24 dated December 30, 2009 in terms of whichpowers have been delegated to the AD Category-I bankregarding submission of Annual Activity Certificate byBO / LOs, extension of the validity period of LOs andclosure of BO / LOs of foreign entities in India.

2. In the A.P. (DIR Series) Circular mentioned above,powers as regards the transfer of assets of LO /BO to others have not been delegated. It is,therefore, clarified that transfer of assets of Liaison/ Branch Office to subsidiaries or other LO / BO orany other entity is permitted only with the specificapproval of the Central Office of the ForeignExchange Department, Reserve Bank of India.

3. All the other instructions of A.P. (DIR Series)Circular No.24 dated December 30, 2009 shallremain unchanged.

Foreign Institutional Investor (FII) investment in ‘tobe listed’ debt securities


Attention is invited to the Regulation 5(4) and Schedule5 of Notification No. FEMA 20/2000-RB dated May 3,2000, viz., Foreign Exchange Management (Transferor issue of Security by a Person Resident outsideIndia) Regulations, 2000, as amended from time to time,in terms of which the Securities and Exchange Boardof India (SEBI) registered FIIs are allowed to investonly in listed non-convertible debentures (NCDs) /bonds issued by an Indian company.

2. SEBI has, vide their circular CIR/IMD/FIIC/18/2010 dated November 26, 2010, issuedinstructions on the revised allocation of investmentlimits to FIIs. In terms of paragraph 8 of the circular,SEBI has allowed FIIs to invest in ‘to be listed’debt securities. Accordingly, it has been decidedthat SEBI registered FIIs/sub-accounts of FIIs cannow invest in primary issues of Non-Convertible

Debentures (NCDs)/ bonds only if listing of suchbonds / NCDs is committed to be done within 15days of such investment. In case the NCDs/bonds issued to the SEBI registered FIIs / sub-accounts of FIIs are not listed within 15 days ofissuance to the SEBI registered FIIs / sub-accounts of FIIs, for any reason, then the FII/sub-account of FII shall immediately dispose of thesebonds/NCDs either by way of sale to a third partyor to the issuer and the terms of offer to FIIs / sub-accounts should contain a clause that the issuerof such debt securities shall immediately redeem/ buyback the said securities from the FIIs/sub-accounts of FIIs in such an eventuality.

3. Necessary amendments to the Foreign ExchangeManagement (Transfer or Issue of Security by aPerson Resident Outside India) Regulations, 2000notified vide Notification No. FEMA 20/2000-RBdated May 3, 2000 will be issued separately.

Clarification – Liberalised Remittance Scheme forResident Individuals


Attention is invited to the A. P. (DIR Series) CircularNo. 64 dated February 4, 2004, as amended form timeto time, A. P. (DIR Series) Circular No. 24 datedDecember 20, 2006, A.P. (DIR Series) Circular No. 9dated September 26, 2007, A.P. (DIR Series) CircularNo. 51 dated May 8, 2007 and A.P. (DIR Series)Circular No. 32 dated October 10, 2011 on theLiberalised Remittance Scheme for ResidentIndividuals (the Scheme).

2. In this regard, it is clarified that:

i. The facility is available to all residentindividuals including minors. In case of remitterbeing a minor, the LRS declaration form shouldbe countersigned by the minor’s naturalguardian. Accordingly, the modified LRSapplication cum declaration form is enclosed;

ii. Remittances under the facility can beconsolidated in respect of family memberssubject to individual family memberscomplying with the terms and conditions of thescheme; and

March, 2012


iii. Remittances under the scheme can be usedfor purchasing objects of art subject to theprovisions of other applicable laws such asthe extant Foreign Trade Policy of theGovernment of India.

3. All other terms and conditions mentioned in theafore-mentioned Circulars shall remain unchanged.

Opening of Diamond Dollar Accounts (DDAs) –Change in periodicity of the reporting


Attention is invited to para 4 of A.P. (DIR Series)Circular No. 51 dated February 13, 2009 in terms ofwhich AD Category - I banks are required to submit amonthly report to the Reserve Bank of India, givingdetails of the name and address of the firm / companyin whose name the Diamond Dollar Account is opened,along with the date of opening / closing the DiamondDollar Account, by the 10th of the following month towhich it relates.

2. With a view to further rationalizing the reportingmechanism, it has now been decided that ADCategory-I banks should submit quarterly reportsinstead of monthly reports to the Chief GeneralManager-in-Charge, Foreign ExchangeDepartment, Reserve Bank of India, TradeDivision, Amar Building, Mumbai – 400 001, givingdetails of the name and address of the firm /company in whose name the Diamond DollarAccount is opened, along with the date of opening/ closing the Diamond Dollar Account with effectfrom the quarter ended March 2012, by the 10th ofthe month following the quarter to which it relates.

3. The other terms and conditions mentioned in theA.P. (DIR Series) Circular No. 51 dated February13, 2009 and A.P. (DIR Series) Circular No.13dated October 29, 2009 shall remain unchanged.

Investment in Indian Venture Capital Undertakingsand /or domestic Venture Capital Funds by SEBIregistered Foreign Venture Capital Investors


Attention is invited to Schedule 6 to the Foreign

FEMA Update

Exchange Management (Transfer or Issue of Securityby a Person Resident outside India) Regulations, 2000notified vide Notification No. FEMA 20 / 2000 -RB datedMay 3, 2000 as amended from time to time, in terms ofwhich, a SEBI registered Foreign Venture CapitalInvestor (FVCI) may invest in equity, equity linkedinstruments, debt, debt instruments, debentures of anIndian Venture capital Undertaking (IVCU) or of aVenture Capital Funds (VCF) through Initial PublicOffer or Private Placement or in units of schemes /funds set up by a VCF, subject to such terms andconditions mentioned therein.

2. It has now been decided, to allow FVCIs to investin the eligible securities (equity, equity linkedinstruments, debt, debt instruments, debenturesof an IVCU or VCF, units of schemes / funds setup by a VCF) by way of private arrangement /purchase from a third party also, subject to termsand conditions as stipulated in Schedule 6 ofNotification No. FEMA 20 / 2000 -RB dated May3, 2000 as amended from time to time. It is alsobeing clarified that SEBI registered FVCIs wouldalso be allowed to invest in securities on arecognized stock exchange subject to theprovisions of the SEBI (FVCI) Regulations, 2000,as amended from time to time, as well as the termsand conditions stipulated therein.

3. Necessary amendments to Foreign ExchangeManagement (Transfer or Issue of Security by aPerson Resident outside India) Regulations, 2000(Notification No. FEMA 20/2000-RB dated May 3,2000) are being notified separately.

Clarification – Prior intimation to the Reserve Bankof Ind i a fo r rai s ing the aggregate ForeignInstitutional Investors / Non-Resident Indian limitsfor investments under the Portfolio InvestmentScheme


Attention is invited to the provisions of Schedules 2and 3 to the Notification No. FEMA 20/2000-RB datedMay 3, 2000, viz., Foreign Exchange Management(Transfer or issue of Security by a Person Residentoutside India) Regulations, 2000, as amended from

March, 2012


time to time, in terms of which registered ForeignInstitutional Investors (FII) and Non-Resident Indians(NRI) are allowed to purchase/sale shares andconvertible debentures of an Indian company (throughregistered brokers) on recognized stock exchangesin India subject to, inter-alia, aggregate investment limitof 24 per cent and 10 per cent, respectively, of thepaid up equity capital or value of each series ofconvertible debentures of the Indian company.

2. It is hereby clarified that the Indian companyraising the aggregate FII investment limit of 24 percent to the sectoral cap/ statutory limit, asapplicable to the respective Indian company orraising the aggregate NRI investment limit of 10per cent to 24 per cent, should necessarily intimatethe same to the Reserve Bank of India,immediately, as hitherto, along with a Certificatefrom the Company Secretary stating that all therelevant provisions of the extant Foreign ExchangeManagement Act, 1999 regulations and theForeign Direct Policy, as amended from time totime, have been complied with.

3. It may also be noted that the Reserve Bank ofIndia monitors the ceilings on FII/ NRI/ PIOinvestments in Indian companies on a daily basis.For effective monitoring of foreign investmentceiling limits, the Reserve Bank has fixed cut-offpoints that are two percentage points lower thanthe actual ceilings. Once the aggregate netpurchases of equity shares of the company byFIIs/NRIs/PIOs reaches the cut-off point of 2 percent below the overall limit, the Reserve Bankcautions all the designated bank branches not topurchase any more equity shares of the respectivecompany on behalf of any FIIs/ NRIs/ PIOs withoutprior approval of the Reserve Bank. The linkoffices are then required to intimate the ReserveBank about the total number and value of equityshares/ convertible debentures of the companyproposed to be bought on behalf of their FIIs /NRIs/PIOs clients. On receipt of such proposals, theReserve Bank gives clearances on a first-come-first served basis till such investments incompanies reaches the respective limits (such as,10 / 24 / 30 / 40/ 49 per cent limit or the sectoral

FEMA Update

caps/statutory ceilings), as applicable. Onreaching the aggregate ceiling limit, the ReserveBank advises all designated bank branches tostop purchases on behalf of their FIIs/ NRIs/ PIOsclients. The Reserve Bank also informs thegeneral public about the ‘caution’ and the ‘stoppurchase’ in these companies through a pressrelease and an updated list regarding the same isplaced on the RBI website (www.rbi.org.in).

For eign Exc hang e Management (Depos i t )Regulat ions, 2000 – Credi t to Non Resident(External) Rupee Accounts


Attention is invited to Regulation 5(6) of ForeignExchange Management (Borrowing or Lending inForeign Exchange) Regulations, 2000 notified videNotification No. FEMA 3/2000-RB dated May 3, 2000,as amended from time to time, in terms of which, anindividual resident in India may borrow a sum notexceeding USD 250,000/- or its equivalent from her /his close relatives outside India, subject to theconditions mentioned therein.

2. The Reserve Bank has received representationsthat the repayment of such loans may be allowedto be credited to the Non Resident (External) Rupee(NRE) Accounts. On review, it has been decidedthat AD Category-I banks may allow repayment ofsuch loans to NRE / Foreign Currency Non-Resident (Bank) [FCNR(B)] account of the lenderconcerned subject to the condition that the loan tothe resident individual was extended by way ofinward remittance in foreign exchange throughnormal banking channels or by debit to the NRE /FCNR(B) account of the lender and the lender iseligible to open NRE / FCNR(B) account withinmeaning of the Foreign Exchange Management(Deposit) Regulations, 2000 notified videNotification No. FEMA 5/2000-RB dated May 3,2000, as amended from time to time. Such creditshall be treated as an eligible credit to the NRE /FCNR(B) account in terms of Para 3(j) of Schedule-1 read with Para 5 of Scheule-2 of Notification No.FEMA 5/2000-RB, ibid.

March, 2012


CA. Manish IyerThe author is practising since 2003. He can bereached at [email protected]

Introduction:

In previous column, we discussed on Guidance Noteon Recognition of Revenue by Real EstateDevelopers. This column dwells on further aspects ofthe Guidance Note on Recognition of Revenue by RealEstate Developers.

IFRS, IAS, SIC and IFRIC are the copyright of IFRSFoundation. The column includes references andextracts of the IFRS as issued by IASB. The IPSASBissues International Public Sector AccountingStandards (IPSAS).

Application of Percentage of Completion Method

Para 5 of the Guidance Note dwells upon applicationof Percentage of Completion Method. It requiresapplication of the Percentage of Completion Methodwhen the economic substance is similar to constructioncontracts. The following have been listed by theGuidance Note as some of the indicators of the contractbeing a construction contract:

1. The duration of such projects is beyond 12 monthsand the project commencement date and projectcompletion date fall into different accountingperiods

2. Most features of the project are common toconstruction contracts, viz. land development,structural engineering, architectural design,construction etc.

3. While individual units of the project are contractedto be delivered to different buyers these areinterdependent upon or interrelated to completionof a number of common activities and / or provisionof common amenities.

4. The construction or development activities form asignificant proportion of the project activity.

Here, it would be worthwhile to note how AS 7 defines“Construction Contract”. A construction contract is acontract specifically negotiated for the construction ofan asset or a combination of assets that are closely

interrelated in terms of their design, technology,function or their ultimate purpose or use. On readingthe indicators specified in the Guidance Note and thedefinition in AS 7, one would conclude that the indicatorsspecified in the Guidance Note go beyond the definitionof construction contract. The first indicator with regardto duration of the contract may not hold true in all thecases. The construction of a tenement might be overwithin 3 months with today’s technologicaldevelopments. Also, the guidance note has deliberatelynot emphasized on the phrase “Specifically negotiatedcontract”. All contracts have at least two parties andevery contract is finalized after negotiation. Thus thequestion arises on the need to have the phrase“Specifically negotiated contract” in the definition ofconstruction contract. Thus the main characteristicsof a construction contract as per AS 7 are:

1. Construction of an asset or assets

2. The contract is specifically negotiated

The word “specifically” indicates that the negotiationis not a general one but limited to the contractingparties. As per IFRIC 15, a contract can be said to bespecifically negotiated if the customer is able to specifythe major structural elements of the design of the realestate before construction begins and / or specify majorstructural changes once construction is in progress.An agreement for the construction of real estate inwhich buyers have only limited ability to influence thedesign of the real estate, eg to select a design from arange of options specified by the entity, or to specifyonly minor variations to the basic design, is anagreement for the sale of goods. Thus, InternationalFinancial Reporting Standards make it clear why thedefinition of construction contract contains the phrase

March, 2012


Financial Reporting Standards

“specifically negotiated”. The guidance note hasignored the concept of “specific negotiation” that is thepole star to differentiate any contract from constructioncontract. It is extremely difficult to understand the extentof compliance with the Guidance Note in view of thisconflict with AS 7. If the provisions of the guidancenote are to prevail, the definition of “ConstructionContract” in AS 7 would require to be amended toremove the phrase “specifically negotiated”.

Also, there are many cases where the customeracquires and supplies construction materials. In thatcase, whether the contract is a construction contract?As per the Guidance Note, such contract would be aconstruction contract whereas as per IFRIC 15, thecontract would be a contract for rendering of services.The guidance notes states that the percentage ofcompletion method is applied when the outcome of areal estate project can be estimated reliably. In author’sview, there was no requirement to specify this in theguidance note as the same is amply clear in AS 7.The Guidance Note attempts to override and duplicatesthe provisions of AS 7 instead of complementing it.

The guidance note makes a rebuttable presumptionthat the outcome of a real estate project can beestimated reliably. It is difficult to comprehend the basisfor making such a presumption. Internationally,standards contain a section on Basis for Conclusions.The Institute of Chartered Accountants of India shouldstart minuting and printing the Basis for Conclusionsfor the various issues discussed which also bringsout the other alternatives discussed and why thosewere not accepted. The guidance note states thatrevenue should be recognized under the percentageof completion method only when the following eventsare completed:

1. All critical approvals necessary forcommencement of the project have beenobtained. These include, wherever applicable:

a. Environmental and other clearances

b. Approval of plans and designs etc.

c. Title to land or other rights to development /construction

d. Change in land use

2. The stage of completion of the project reaches areasonable level of development. From this pointonwards, the guidance note starts imposing rules.The guidance note states that a reasonable levelof development is not achieved if the expenditureincurred on construction and development costsis less than 25% of the construction anddevelopment costs defined as project costs. Thedefinition of project, project costs and projectrevenue were discussed in the previous column.This limit of 25% is in line with the proposed TaxAccounting Standard on Construction Contract tobe issued by CBDT. Controversies are surfacingon when should a contract be accounted asconstruction contract or as a sale contract or as aservice contract. Rather than explaining thisdistinction, the guidance note has emphasized onhow to apply percentage of completion method.Moreover, rules promote structuring which is nota good practice from corporate governanceperspective.

3. At least 25% of the saleable area is secured bycontracts or agreements with buyers. It is not clearwhy the word “agreements” has been used. Doesit mean that agreements which are not contractsas per the Indian Contract Act 1872 will sufficesuch as contract without consideration? Thoughit is difficult to comprehend the use of the word“agreements”, in authors’ opinion, in such casesthe presumption that the outcome of the projectcan be estimated reliably will be rebutted. Also,why the guidance note has mentioned non-financial measures such as saleable area as arule for application of percentage of completionmethod requires explanation.

4. At least 10% of the total revenue as per theagreements for sale or any other legallyenforceable documents are realized at thereporting date in respect of each of the contractsand it is reasonable to expect that the parties tosuch contracts will comply with the payment termsdefined in the contract. Here again, howrealisability can be a condition precedent toapplication of percentage of completion method

Contd. on page no. 676

March, 2012


CA. Bihari B. ShahThe author is the past President of CAA,practising since 1970. He can be reached [email protected].

[I] IMPORTANT NOTIFICATIONS/CIRCULARS:

[A] BUDGET PROPOSALS UNDER GVAT ACT:

The Hon’ble Finance Minister presented his budgetin the State Assembly on 25th Feb. 2012 and madein the tax reduction in certain items as well ascertain essential items are made Tax Free. Thedetails are as under.

No. Particulars Present ProposedRate Rate

1 Hardware (includes items 15% 5%are required to build ahouse of various metalssuch as steel, copper,brass, aluminium etc,)

2 Battery Operated Bike 15% 5%(Two Wheelers)

3 Medical Implants 5% 0%(For Heart Disease)

4 Blood Bags 5% 0%

5 Helmet 15% 5%

6 Mangalori Nalia 5% 0%

7 Toys (Except Electronic 5% 0%& Battery operated)

8 Agar Batti 5% 0%

9 Pooja Items (such as 15% 0%Pavitra, Harr, Kalagi, Mugat,Divo, AGAR BATTI STAND,PRASAD BHOG ETC)

10 Loban and Googal 5% 0%

11 Thread used to fly kites (Firki) 5% 0%

12 Dalia, Chikki & Revdi 5% 0%

13 Yogurt, Butter, Cheese and 0% 5%Paneer (New Entry)

14 Sabudhana 15% 0%

15 Boria, Buckle, Ribbon, Sari 15% 0%Pin, Broach, Kajal for woman

16 Sanitary Napkins and diapers 15% 5%

17 Glass Bead 5% 0%

18 Tools meant for tailor and 15% 5%barber (except shaving blade)

Thus the relief in tax calculated above is Rs. 200

crores. These new rates are effected from 1st April2012.

[B] BENEFICIAL CIRCUL AR DECLARING ASCHEME FOR WAIVER OF SALES TAX,PENALTY AND INTEREST:

The Commissioner of Commercial Taxes has

issued a Public Circular No. 133 dated 2.4.2012in respect of Settlement Scheme for the relief given

to pending dues in assessments and higher level

for giving the rebate in tax, interest and penalty.The gist of the circular is as under.

SETTLEMENT SCHEME

No. Particulars Relief to be granted

1 In the cases wherein the amount of tax Rs. 20,000/- Plus Interest and Penalty thereon.

(except interest and penalty) has not beenpaid up to 31.3.2012 up to Rs. 20000/-.

2 In the cases wherein assessment/ If the assessee pays total tax in that case the totalre-assessment. Revision pending up to interest and penalty will be waived (remitted)

31.3.2012 and the dues are not paid by the

assessee

March, 2012


Indirect Taxes Corner

3 In the cases wherein orders are pending of If the assessee pays total dues of tax and withdrawsthe assessment at the level of appeal and the appeal, then the interest and penalty will be waived.above.

4 If the assessee has paid any amount against The amount paid by the assessee will be adjustedthe tax, interest and penalty before the against the amount of tax dues and if the balanceoperation of this Settlement Scheme amount is paid by the assessee in that case penalty

and interest will be waived.

Conditions:

[1] Period of Settlement Scheme is from 1.4.2012 to30.9.2012.

[2] This scheme is applicable only to pending duesup to F. Y. 2005-2006.

[3] This scheme is also applicable to pending duesunder CST Act, Entry Tax and SugarcanePurchase Tax.

[4] This scheme is also not applicable to the caseswhose dues are Rs. 1.00 Crore and above exceptinterest and penalty.

[5] The assessee will not claim for any refund underthis scheme.

[6] This scheme will not be applicable to the cases ofinvestigation.

[7] Those assessees who want to take the benefit ofthis scheme, shall have to apply to the OfficerIncharge of the Ward in Form No. A within the timeperiod of this scheme.

[8] Those assesses who would like to take the benefitof this scheme shall have to withdraw theapplication made to Appellate Authority and otherAuthorities.

[II] IMPORTANT JUDGMENT:

An important Tribunal Judgment in respect ofreassessment was delivered in the year 2006,which is reproduced to the benefit of the membersbecause the assessment is reopened under theSales Tax Act beyond the limitation period of 5years and therefore this judgment is useful for thepending appeals.

In case of Voltamp Transformers P. Ltd. v/s.The State of Gujarat.

The appellant above named has filed this secondappeal under section 65 of the Gujarat Sales Tax

Act, 1969, for short the Act, in order to challengean order in first appeal dated 25.04.1994 passedby the learned Asst. Commissioner of Sales Tax,Appeal – 7, Circle – 4 at Vadodara, partlydismissing the same and thereby partly confirmingan order of re-assessment under section 44 dated30.04.1992 passed by learned Sales Tax Officer-5 (Enforcement) at Vadodara, re-assessing theappellant for the purpose of sales tax undedrsection 44 of the said act and raising a demand ofRs. 1,85,722/-.

The first appeal was heard as the appellant hadmade payment of full amount.

The second appeal was admitted and it has beenplaced for regular hearing. I have accordinglyheard the learned Sales Tax Practitioner for theappellant and the learned Government Agent forthe respondent. It may be incidentally noted thatthe appeal was partly argued by the learnedGovernment Agent for the respondent also.

It is not much in dispute that the assessmentrelates to the period 1983-84. The appellant hassubmitted that the re-assessment under section44 had to be completed within five years i.e. before30th June 1989. The learned Government Agenthas submitted that since the matter relates toconcealed sales, the time limit should be of eightyears and therefore the limitation would expire on30.06.1992. That in the instant case the orderunder section 44 has been passed within eightyears and therefore the order is within the limitationaccording to the argument of the learnedGovernment Agent.

On the other hand, the learned Sales TaxPractitioner has argued that since the order hasnot been passed within five years, the order isbared by limitation.

March, 2012


On going through the records it appears that allthe sales have been reflected in the books ofaccounts. However, in respect of certain sales theappellant could not produce forms ‘C’ at the re-assessment stage and therefore the said saleshave been treated to be concealed sales.

It is not clear as to whether or not form ‘C’ wereactually available at the initial assessment stage.However the said ‘C’ forms were definitely notavailable at the reassessment stage.Nevertheless the sales were actually posted inthe books of accounts and the entries in the booksof accounts revealed the said sales. Thereforemerely because the appellant did not or could notproduce ‘C’ forms at the second assessmentstage, it cannot be said that the sales wereconcealed sales.

It has also been submitted that certain forms werenot accepted at the assessment stage. Even onthis issue, sales were noted in the books ofaccounts and there is no dispute about the same.Once the sales are noted in the books of accountsand the books of accounts show the said entriesof sales then even such sales cannot be treatedto be concealed sales.

There is no other incident of sales not reflected inthe books of accounts of the appellant. It is notthe case of the state that the appellant had enteredinto certain sales with certain parties and entrieswere not posted in the books of accounts in respectto those sales. In other words, there is no saleincident which took place but did not find place inthe books of accounts. All the sales made by theappellant during the year under assessment havebeen reflected in the books of accounts of theappellant. In that view of the matter it cannot besaid that the appellant had certain concealed salesduring the year of assessment.

When there is no case of concealed sales, theprovision contained in section 44-b will apply andtherefore the provision contained in section 44-awill not apply.

Once it is found that the case will be governed bysection 44-b of the said act, then in that case, the

period of limitation would be five years and not eightyears. Once it is found that the present case isnot a case of concealed sales and therefore it wouldnot be governed by section 44-a of the said actand that it would be governed by section 44-b ofthe said act, then it goes without saying that thecase would be governed by limitation of five years,

Considering the period of five years, for the periodfrom 1.7.1983 to 30.6.1984, the limitation wouldexpire on completion of five years from 30.6.1984.Therefore it would expire on 30.6.1989, In theinstant case notice has been issued on 24.7.1991and the orders have been passed on 30.4.1992.Therefore the notice was issued after limitation andthe order of re-assessment under section44 hasalso been passed after the expiry of limitation.

As the orders have been passed after expiry ofprescribed period of limitation of five years then inthat event the issue of notice and consequent orderof re-assessment under section 44 are illegal.

The above argument of the appellant is fairlysupported by a judgment of this Tribunal dated12.4.2005 referred in second appeal No. 160 of1999 in the case of M/s. BhupendrakumarManharlal & Company v/s. State of Gujarat. Similarview was also taken in an earlier judgment dated3.7.2001 by this Tribunal in second appeal No. 351of 2001 in the case of M/s. Kamal SalesCorporation v/s. State of Gujarat.

The Tribunal follows the principles laid down inabove two citations and hold that the re-assessment in the present case is barred by lawof limitation and therefore the second assessmenti.e. reassessment under section 44 is not inaccordance with law and deserves to be set aside.This second appeal is therefore required to beallowed and orders in appeal are required to beset aside.

Order: This second appeal is allowed and theorders under appeal are set aside.

Indirect Taxes Corner

March, 2012


March, 2012


CA. Priyam R. ShahThe author is practising since 1998. He can bereached at [email protected]

CST LAW UPDATE

Sales made by duty free Shop is local sales or Sale inthe course of imports

20. In the case of HOTEL ASHOKA (INDIANTOUR. DEV. COR. LTD.) V. ASSISTANTCOMMISSIONER OF COMMERCIAL TAXES ANDANOTHER [2012] 48 VST 443 (SC)

Background of the case

The appellant, a registered dealer under the KarnatakaValue Added Tax Act, 2003 and the Central Sales TaxAct, 1956, was managed by the Indian TourismDevelopment Corporation Limited having its duty freeshops at all major international airports in India. At theduty free shops, the dealer sold several articlesincluding liquor to foreigners and Indians, who weregoing abroad or coming to India by air. The AssistantCommissioner of Commercial Taxes, rejecting thecontention of the dealer that the sales made by it in theduty free shops was a sale in the course of importunder section 5(2) of the Central Sales Tax Act as thegoods were sold directly to the passenger and eventhe delivery of goods at the duty free shops was madebefore importing the goods or before the goods hadcrossed the custom frontiers of India, levied tax onthe goods sold by the dealer in the duty free shops.

When a transaction takes place outside the customsfrontiers of India, the transaction would be said to havetaken place outside India. Though the transaction mighttake place within India, technically, looking to theprovisions of section 2(11) of the Customs Act andarticle 286 of the Constitution, the transaction wouldbe said to have taken place outside India. In otherwords, it cannot be said that the goods are importedinto the territory of India till the goods or the documentsof title to the goods are brought into India.

Simply because the sales have not been effected bytransfer of documents of title to the goods and the salesare effected by giving physical possession of thegoods to the customers, it would not mean that thesales are not sales in the course of import under section5(2) of the Central Sales Tax Act, 1956 and therefore

taxable under the State Act. Transfer of documents oftitle to the good is one of the methods whereby deliveryof the goods is affected. Delivery may be physical also.

Held, (i) that the goods which had been brought fromforeign countries by the appellant had been kept inbonded warehouses and they were transferred to dutyfree shops situated at airport as and when the stockof goods lying at the duty free shops was exhausted.The dealer had executed the bonds and the goods,which had been brought from foreign countries, hadbeen kept in the bonded warehouse by the dealer.When the goods were kept in the bonded warehouses,it could not be said that the goods had crossed thecustoms frontiers. The goods were not clear from thecustoms till they were brought in India by crossing thecustom frontiers. When the goods were lying in thebonded warehouses, they were deemed to have beenkept outside the custom frontiers of the country andthe dealer was selling the goods from the duty freeshop owned by it at airport before the goods hadcrossed the custom frontiers. Therefore the goods soldat duty free shops, own by the dealer, would be saidto have been sold before the goods crossed thecustoms frontiers of India, as it was not in the disputethat the duty free shop of dealers situated at airportswere beyond the custom frontiers of India, i.e. theywere not within the customs frontiers of India.Therefore in view of provision of article 286 of theConstitution, the state had no right to tax any suchtransaction which took place at the duty free shopsowned by the dealer which were not within the customsfrontiers of India.

Discount through credit notes subsequent to sale-Eligible for deduction or not

March, 2012


21. In the case of IFB INDUSTRIES LTS. V. STATEOF KERALA AND INDIA CEMENTS LTD. V.ASSISTANT COMMISSIONER AND OTHERS[2012] 49 VST 1 (SC)

Background of the case

The definition of “Turnover” under section 2(xxvii) ofthe Kerala General Sales Tax Act, 1963 recognizesdiscounts other than cash discount and provides thatthose other discounts too like the cash discount shallnot be included in the turnover. Rule 9(a) of the KeralaGeneral Sales Tax Rules, 1963, does not speak ofinvoices but stipulates that the discount must be shownin the accounts. Under the rule the exemption isallowable subject to two conditions: first, the discountis given in accordance with the regular practice in thetrade and secondly, the accounts should show thatthe purchaser has paid only the sum originally chargedless the discount. There is nothing in rule 9(a) to read

CST Law Update

it in the restrictive manner to mean that a discount inorder to qualify for deduction under its provision mustbe shown in the invoice itself.

On an appeal against the Division Bench of the KeralaHigh Court holding that unless the discount was shownin the invoices itself, it would not qualify for deductionin determination of “turnover” as defined under section2(xxvii) of the Kerala General Sales Tax Act, 1963and further that any discount that was given by meansof credit note issued subsequent to the sale of thearticle was in reality an incentive and not trade discounteligible for deduction under rule 9(a) of the KeralaGeneral Sales Tax Rules, 1963 :

HELD accordingly, allowing the appeal, that the claimfor deduction of the amounts of trade discount couldnot be disallowed solely on the ground that the discountamounts were not shown in the sales invoices.

Contd. from page no. 591 FEMA UPDATE

requires explanation. In authors’ view, if therevenue is not realizable, the financial asset shouldbe impaired. By not recognizing the revenuebecause of uncertainty in realisability, theguidance note is increasing off-balance sheetitems which is again not a good practice. One ofthe reasons for the acceptability of IFRS worldwideis that it reduces off balance sheet itemssignificantly and efforts are on to ensure that allexposures are taken care of in the financialstatements.

Para 5.2 gives conditions when the outcome ofreal estate project can be estimated reliably. Itstates if any of the following conditions are notsatisfied, outcome of the real estate project cannotbe measured reliably:

1. Total project revenues can be estimatedreliably

2. It is probable that the economic benefitsassociated with the project will flow to theenterprise

3. The project costs to complete the project andthe stage of project completion at the reporting

date can be measured reliably

4. The project costs attributable to the project canbe clearly identified and measured reliably sothat actual project costs incurred can becompared with prior estimates.

The rebuttable presumption and the conditions inpara 5.2 and para 5.3 as stated above introducecompletely new perspective of the application ofpercentage of completion method as promulgatedby AS 7. A question also arises, why the 25% and10% rules have been specified only for contractsinvolving real estate projects and not toconstruction of any other assets to which AS 7would apply. In author’s view, the guidance noteneeds a comprehensive relook with a focus ondistinguishing the sale contracts, service contractsand construction contracts. In view of theconflicting positions in guidance note and AS 7, itis difficult to understand the authoritative status ofthe guidance note. Even to members of the Instituteof Chartered Accountants of India, the guidancenote will have no authority as it cannot overridethe law.

March, 2012


CA. Ashwin H. ShahThe author is the past President of CAA,practising since 1975. He can be reached [email protected]

In this issue, judgement on clearing & forwardingagent service, commercial or industrialconstruction service, cenvat credit on capitalgoods and reverse charge mechanism arereproduced for the benefit of Members.

1) [2012] 17 taxmann.com 63 (New Delh i -CESTAT) CESTAT, NEW DELHI BENCH -Kamal Auto Finance Ltd. v. Commissioner ofService Tax, Jaipur*

Facts:

The assessee was appointed as a consignmentagent of the principal, ‘B’ to sell spare partsmanufactured by latter in market. For aboveactivity, service tax demand was confirmed on theassessee under category of ‘Clearing andforwarding agent’s service’.

- Whether all above facts showed that assesseewas acting as independent businessman and wasselling products of principal and was not acting asclearing and forwarding agent ?

Held:

The activities of C&F agent to the contrary arealtogether different. A clearing and forwardingagent receives the goods from the factory of theprincipal, warehouse the same, receives thedispatched orders from the principal, arrangesdispatch of the goods as per the directions of theprincipal and maintains the records of receipt anddispatch of the goods and stocks available atwarehouse, prepares invoices on behalf of theprincipal.

In the instant case, it was found that the assessee,in fact, raises its own requisition to the principaland manages the goods/premises on it’s own andsells the goods to the customers as if it is the ownerof the goods. The above facts are clear from theinvoices being raised by the assessee in it’s ownname. Even otherwise, the clauses of theagreement very clearly show that the assesseeis doing the business with ‘B’ and not acting as

C&F agent. For the above reasons, it was heldthat demand against the assessee by treating itas C&F agent is not justified and same isaccordingly, set aside.

Consequently, the penalty imposed upon it is alsoset aside and the appeal is allowed.

2) [2012] 19 axmann.com 81 (New Delh i -CESTAT) CESTAT, NEW DELHI BENCH ACECalderys Ltd v . Commiss ioner of CentralExcise, Bhopal

Facts :

Assessee was owner of brand names offirebricks and other refractory products. It hadengaged other manufacturers to manufacturesaid products using its brand name. It soldgoods against orders procured by it andtransferred part of sales proceeds collected byit to manufacturers as price of their productsand retain remaining with it.

- Whether service tax could be demandedagainst assessee on amount retained by it, underhead ‘Franchise service’ ? Whether therefore, pre-deposit requirement was to be waived?

Held:

Prima facie, in the disputed type of transaction, themanufacturers have no rights to represent theassessee. There are far too many cases wherethe brand name owners get goods manufacturedby job-workers with their brand name, purchase thegoods from the job-workers and sell the goods tothe consumers at a higher price. No service tax isbeing paid or demanded in such cases. There was


March, 2012


March, 2012


CA. Pamil H. ShahThe author is practising since 1995. He can bereached at [email protected]

AS 15 Benefits to Employees

JAIPRAKASH POWER VENTURES L IMITEDANNUAL REPORT 2010-11

Schedule Q Significant Accounting policies

(i) Employees Benefits

Employees Benefits are provided in the books asper AS-15 (revised) in the following manner:

(a) Provident Fund and Pension contribution as apercentage of salary/wages as per provisions ofEmployees Provident Fund and miscellaneousprovisions Act, 1952.

(b) Gratuity and Leave Encashment is definedbenefits obligation. The liability is provided for onthe basis on Projected Units Credit Methodadopted in the actuarial valuation made at the endof each financial year.

ADANI POWER LIMITED ANNUAL REPORT 2010-11

Schedule -18 (A) Significant Accounting Policies

15. Employees Benefits

(i) Gratuity:

The Company has an obligation towards gratuity,a defined benefit retirement plan covering eligibleemployees through Group Gratuity Scheme of lifeInsurance Corporation of India. The Companyaccounts for the liability for the Gratuity benefitspayable in future based on an independentactuarial valuation carried out using Projected UnitCredit Method considering discounting raterelevant to Government Securities at the BalanceSheet Date.

(ii) Provident Fund:

Retirement Benefits in the form of Provident Fundand Family Pension Fund, which are definedbenefit contribution scheme, are charged to theProject Development Expenditure Account till the

commencement of commercial production or to theprofit and loss account for the period, in which thecontribution to the respective funds accrue.

(iii) Leave Encashment:

Provision for Leave Encashment is determined andaccrued on the basis of actuarial valuation.

PETRONET LNG LIMITED ANNUAL REPORT2010-11

Schedule -18 Significant Accounting Policies

9. Employees Benefits

(a) Provision for gratuity and leave encashment ismade on the basis of actuarial valuation at the endof the year. Actuarial gains or losses arerecognized to the profit and loss account.

(b) Contribution made to Provident Fund andSuperannuation is accounted for on accrual basis.

GOKALDAS EXPORTS LTD - ANNUAL REPORT2010-11

Schedule XV- NOTES TO ACCOUNTS

L. Retirement and other Employees Benefits

Defined Contribution Plan:

Contribution to provident fund are made at pre-determined rates and charged to the profit and lossaccount. The Company’s liability is limited to theextent of contribution made.

Defined Benefit Plans:

Gratuity liability is accrued in the books based onthe actuarial valuation on projected unit creditmethod as at Balance Sheet date. Actuarial gains

March, 2012


From Published Accounts

or losses are immediately taken to the profit andloss account and are not differed.

Other Employees Benefits:

Compensated absences are provided for, on thebasis of an actuarial valuation on projected unitcredit method at the end of each financial year.Actuarial gains or losses are immediately takento the profit and loss account and are not deferred.

TECPRO SYSTEMS LIMITED -2010-2011

Schedule 14: Significant Accounting Policies andNotes to the Consolidated Accounts

2. Significant Accounting Policies

(m) Employee benefits

1. All employee benefits payable/available withintwelve months of rendering the service areclassified as short-term employee benefits.Benefits such as salaries, wages and bonus etc.are recognized in the profit and loss account inthe period in which the employee renders therelated service.

2. Provident fund is a defined contribution scheme.Contributions payable to the provident fund arecharged to the profit and loss account.

3. Superannuation fund is a defined contributionscheme. The company contributes to schemesadministered by the Life Insurance Corporation ofIndia (‘LIC’) to discharge its superannuationliabilities. The company’s contribution paid/payableunder the scheme is recognized as an expensein the profit and loss account during the period inwhich the employee renders the related service.

4. Gratuity costs are defined benefits plans. Thepresents value of obligations under such definedbenefit plan is determined based on actuarialvaluation carried out by an independent actuaryusing the projected unit credit method, whichrecognizes each period of services as giving riseto additional Unit of employee benefit entitlementand measure each unit separately to build up thefinal obligation.

The obligation is measured at the present value ofestimated future cash flows. The discount rates

used for determining the present value of obligationunder defined benefit plans, is based on the marketyields on Government securities as at the balancesheet date, having maturity period approximatingto the terms of related obligations.

Annual contributions are made to the employee’sgratuity fund, established with the LIC based onan actuarial valuation carried out by the LIC as at31 March each year.

The fair value of plan assets is reduced from thegross obligation under the defined plans, torecognize the obligation on net basis. Actuarialgains and losses are recognized immediately inthe profit and loss account. Gains or losses onthe curtailment or settlement of any defined benefitplan are recognized when the curtailment orsettlement occurs.

5. Benefits under the company’s leave encashmentscheme constitute other long term employeebenefits. The obligation in respect of leaveencashment is provided on the basis on actuarialvaluation carried out by an independent actuaryusing the projected unit credit method, whichrecognizes each period of service as giving riseto additional unit of employee benefit entitlementand measure each unit separately to built up thefinal obligation.

The obligation is measured at the present value ofestimated future cash flows. The discount ratesused for determining the present values ofobligation under defined benefit plans, is based onthe market yield on Government securities as atthe balance sheet date, having maturity periodsapproximating to the terms of related obligations.

Annual contribution are made to the employee’sleave encashment fund, established with the LICbased on an actuarial valuation carried out by theLIC as at 31 March each year. The fair value ofplan assets is reduced from the gross obligation,to recognize the obligation on net basis. Actuarialgains and losses are recognized immediately inthe profit and loss account.

March, 2012


CA. B. M. ZinzuvadiaThe author is practising since 2001. He canbe reached at [email protected]

Information System Audit

Understanding nature of controls in an InformationSystem

The purpose of information system audit is to ensurethat Information system operates effectively andreliably. Evaluating effectiveness or reliability of asystem is evaluating the effectiveness and reliabilityof the controls set in that system.

Control refers to a system or a set procedure designedto achieve a definite purpose. A procedure set forissue of purchase order is a control to ensure that thepurchases made by the managers are as per the setprocedures. A password for login is a control to restrictentry in a system by unauthorized persons.

In purchase policy, a policy document itself is not acontrol. It is a system which ensure that

1. Policy is known to all.

2. Policy is followed

3. Actions are taken where ever there is a deviation.

Therefore a purchase policy with abovementioned setup is a control.

On the same line, a password itself is not a control.The system which ensures that the correct passwordwas used makes a password a control. If your bank’sinternet banking application is not robust enough toensure that a genuine user has entered the system,your all efforts to keep your password secret has nomeaning.

A password or a purchase policy documents is acomponent of control. They work with othercomponents and the degree of their synchronizationwith each other is effectiveness of the control.

Reliability of a control depends on the quality of eachof the consonants. A weak password or a poorlydefined purchase policy may not give a reliable supportlevel even if they are not misused.

Controls are designed to achieve a definite purpose.In other words, controls canalize the processes and itdirects the process towards a set goal. Normally nocontrol comes into action until there is a deviation. Sayfor example, a wrong date is entered, or a wrongpassword is entered. Basically, a control comes intoplay when system moves into an unacceptable state.

For academic purpose, controls are divided in to threebasic categories.

1. Preventive Controls

2. Detective Controls

3. Corrective Controls

Preventive controls are those controls which remainsactive even while the system is in its acceptable move.Say for example, a remark, on screen, that the“CAPLOK is on”, when you select a password inputbox, is a preventive control. It remains active and takessteps to ensure that a deviation does not take place.Instructions givens in Income Tax Return arepreventive controls to ensure that the ITR are filled upproperly by the tax payers. However, if the instructionsare not clear or the tax payer is not competent tounderstand the instruction, the control will not work.Thus, instructions are one of the components of thecontrol. The entire set of control will work effectivelyonly if the components work in synchronization witheach others.

Detective control may or may not remain active whileexecution of the work. It depends on significance ofthe work being executed. A banking application mayhave a batch processing system to find out those

March, 2012


accounts were minimum balance is not maintained.Computer software may process the data in batch ona periodical basis for verification of its correctness.However, checking of authenticity of password andlogin ID has to be online.

The purpose of detective control is to identify anunacceptable item/movement in the system. AnInternal audit is a detective control.

A corrective control enforces correction of the action.Majority of data validity tools attached to a data inputforms are of a corrective control nature. They enforceto enter a correct value.

The classification of controls into preventive, detectiveand corrective is purely academic. In practicalsituation, a control may have all three characters to

Bits & Bytes

gather. Say for example, a system that block user IDafter certain failed attempt to login. It is a preventivecontrol in a sense that it prevents trial and errorpassword recovery attack. It is a detective control ina sense that, it identifies the login attempt as fakeattempt and it is also a corrective control because onceit identifies, it take action and block the ID.

The overall purpose of setting of control is to preventloss due to misuse of the information system. Thepreventive, corrective and detective controls work togather to make the system reliable and effective.

Auditors’ (information system auditor) task is todetermine that the controls are in place and they are ineffect during the period under audit.

Contd. from page no. 591 SERVICE TAX REVIEW

no ingredient in the disputed transaction which primafacie calls for a different approach in the instant.One difference is that the excise duty is being paidon the value at which goods are sold by theassessee to the customers. In fact, this factor is infavour of the case made out by the assessee.

So on an overall appreciation of facts and law,there is prima facie, strong case in favour of theassessee. So, the requirement of pre-deposit iswaived for admission of the appeal.

3) [2012] 277 ELT 353 (Tribunal large bench),Bharat Petroleum Corporation Ltd v. CCE

Fact:

The capital goods were lying in the factorypremises pending installation. The question of lawreferred to the Larger Bench was, whether anassessee is eligible to avail the credit of balance50% of the credit in respect of capital goods in thesubsequent financial year without installing thesame. The issue thus involved related tointerpretation of provisions of Rule 4(2)(b) of CCRas to whether the situation of goods would beregarded as possession of capital goods and usefor the manufacture of final products in suchsubsequent years.

Held:

It was held that the condition under the relevant

rule for taking 50% credit in subsequent financialyear when capital goods are lying in the factoryfor installation and under the process of erectionhas to be interpreted as capital goods inpossession and use for manufacture andaccordingly the Division Bench was directed todecide the appeal on merits.

4) [ 2011] TIOL 748 HC, Karnataka,Commissioner of Service Tax v. ArvindFashions LtdFacts:

The assessee had paid service tax as a receiverof intellectual property service using Cenvat Crediton advertisements, manpower recruitment, repairsand maintenance, construction services, etc. Therevenue filed appeal against the Tribunal’s order

-Whether the service receiver can take the creditwhich is to his credit while paying the service tax?

Held:

It was held that though the person is a servicerecipient, he is treated as service provider.Therefore to discharge his liability, he is entitled touse the Cenvat credit available with him. Tribunalwas held justified in holding so. The revenue’sappeal for penalty was also dismissed assubstantial question of law was decided in favourof assessee.

March, 2012


CA. Chandrakant H. PamnaniThe author is the President of CAA. He canbe reached at [email protected]

CA. Kunal A. ShahThe author is the Hon. Secretary of CAA. Hecan be reached at [email protected]

(A) INCOME TAX

1) CBDT notifies the following New Income TaxReturn forms for AY 2012-13:-

a) ITR-1(Sahaj) à For Individuals having

salary, pension, one house property and

other sources income ;

b) ITR-2 à For Individuals and HUF not

having income from business orprofession;

c) ITR-3 à For Individuals/HUFs being

partners in firms and not carrying out

business or profession under anyproprietorship;

d) ITR-4S (Sugam) àPresumptive BusinessIncome tax Return;

e) ITR-4 à For individuals and HUFs havingincome from a proprietory business or

profession.

2) Amendment in rate of depreciation on wind

mills

CBDT restricts the rate of depreciation to 15%

on wind mills installed after 31-3-2012.

(For full text refer Notification no-15 , dated

30-03-2012)

3) Change in the provisions for filing of return ofincome

An individual or HUF must file the return ofincome electronically for the previous year

2011-12 and subsequent assessment years

if his/its total income exceeds Rs. 10 lakhs.

A resident Individual or a resident HUF must

file the return of income electronically for theprevious year 2011-12 and subsequent

assessment years, if he/it has :

a) assets (including financial interest in any

entity) located outside India; or

b) signing authority in any account located

outside India.

The prescribed ITR Form SAHAJ - ITR 1 and

Form SUGAM – ITR 4S cannot be used by aresident Individual to file his return of income,

if he has:

a) assets (including financial interest in any

entity) located outside India; or

b) signing authority in any account located

outside India.

4) Issuance of TDS certificates in form 16A

All deductors shall issue TDS certificate in

Form No. 16A generated through TIN central

system in respect of all sums deducted on orafter the 01-04-2012 and shall authenticate

such TDS certificate either by using digital

signature or by manual signature.

( For full text refer Circular no-1, dated 09-04-2012)

5) Application for New PAN in new form 49A (incase of Indian Citizens) and form 49AA (in


March, 2012


March, 2012


HEALTH

Compiled from various sources from internet.

WARTS

Warts are small, usually painless growths on the skincaused by a virus called human papillomavirus (HPV).Most, but not all, are generally harmless. Theappearance of warts can differ based on the type ofwart and where it is located on the body. Most wartsare well defined, with skin thickening.

Warts are common in children. Most cases occurbetween ages 12-16 years. Up to 30% of wartsdisappear by themselves within 6 months. Most willdisappear without any treatment within 3 years.

Warts can be disfiguring and embarrassing.Sometimes they itch or hurt (particularly on the feet).Some warts spread through sex. The typical wart is araised round or oval growth on the skin with a roughsurface. The spot may be lighter, darker, or black(rare) colored compared to other skin. Some wartshave smooth or flat surfaces. Some warts cause pain,others do not.

Different types of warts include:

Common warts usually appear on the hands, but canappear anywhere. They usually do not cause painunless they are repeated rubbed against.

Flat warts are generally found on the face andforehead. They are common in children, less commonin teens, and rare in adults.

Genital warts are usually found on the genitals, in thepubic area, and in the area between the thighs, butthey can also appear inside the vagina and anal canal.

Plantar warts are found on the soles of the feet. Theycan be very painful. Many of them on the foot maycause difficulty walking or running.

Subungual and periungual warts appear under andaround the fingernails or toenails.

Treatment

CA. Ganesh NadarPractising since 1996. He can be reached [email protected]

Do NOT attempt to remove a wart yourself by burning,cutting, tearing, picking, or any other method.

Over-the-counter medications are available to removewarts. Do NOT use over-the-counter wart medicationson your face or genitals. Warts on the face or genitalsneed to be treated by your doctor.

Above all, wart treatments require patience. How wellwart treatments work is another matter. Warts canappear and disappear without an identifiable cause andmay disappear on their own without treatment. Somewarts sprout offshoots near the main wart, and othersdon’t. Some hurt, and others are painless. Certainwarts, even of the same type, respond to treatment,while others (even on the same person at the sametime) don’t. All treatment methods often require manysessions over weeks, months, or longer to succeed.

A practical approach to the treatment of warts:

1. If you can ignore your warts, do so. Eventually,they’ll go away (although eventually can mean along time — even months or years).

2. If you have an easy case (a single wart on theface or one or a few on the hands), see a doctorfor a quick freeze or electrical zap. This method issimple, almost painless, and non-scarring.

Home Remedies

a. Peel off banana. Tie the peel around the wart withthe inner side facing the infected skin. Practicethis with fresh peels after every 12 hours. This isan effective home remedy for wart.

b. Extract oil from cashew nut shell, apply on wart

March, 2012


Health And Fun

and bandage it. This checks wart growth.

c. Rubbing potato slice on warts dislodges them.

d. Application of tea tree oil on warts helps to removethem.

e. Rub chalk on warts to remove them.

f. Soak an onion slice in vinegar and keep overnight.In the morning, place the slice on warts and fixwith an adhesive tape. This is a good wart cure.

g. Application of camphor oil on warts several timesdaily removes them

h. Place a crushed clove of garlic on wart and sticka tape to hold it in place. This is a useful wartremedy.

i. Immerse the warty skin in warm water for 15-20minutes. Then dab the area with a cotton ballsoaked in apple cider vinegar. After sometimewash off with plain water and pat the skin dry.

j. Apply grapefruit juice on warts thrice daily andcover the area with a clean bandage. Thisremoves warts.

k. Grind flaxseeds, mix with flaxseed oil and addsome raw honey. Apply this poultice on warts daily.This will give you a wart free skin.

l. Application of fresh pineapple slices on wartsseveral times daily solves the problem.

m. Massaging warty skin with castor oil many timesa day helps to remove them.

n. Apply the juice extracted from fig stems on warts.This cures warts.

FUN

Top 22 things an Indian does after returning to Indiafrom US

22. Use Nope for No and Yep for Yes.

21. Tries to use credit card in road side hotel.

20. Drinks and carries mineral water and alwaysspeaks of health conscious.

19. Sprays deo such so that he doesn’t need to takebath.

18. Sneezes and says ‘Excuse me’.

17. Says “Hey” instead of “Hi”.

Says “Yogurt” instead says “Curds”

Says “Cab” instead of “Taxi”.

Says “Candy” instead of “Chocolate”.

Says “Cookie” instead of “Biscuit”.

Says “Free Way” instead of “Highway”

Says “got to go” instead of “Have to go”

Says “Oh” instead of “Zero”, (for 704, says SevenOh Four Instead of Seven Zero Four)

16. Doesn’t forget to crib about air pollution.Keepscribbing every time he steps out.

15. Says all the distances in Miles (Not in Kilo Meters),and counts in Millions. (Not in Lakhs)

14. Tries to figure all the prices in Dollars as far aspossible (but deep down the heart multiplies by43 times).

13. Tries to see the % of fat on the cover of a milkpocket

12. When need to say Z (zed), never says Z (Zed),repeats “Zee” several times, if the other personunable to get, then says X, Y Zee(but never saysZed)

11. Writes date as MM/DD/YYYY, on watchingtraditional DD/MM/YYYY, says “Oh! BritishStyle!!!!”

10. Makes fun of Indian Standard Time and IndianRoad Conditions.

9. Even after 2 months, complaints about “Jet Lag”.

8. Avoids eating more chilli (hot) stuff.

7. Tries to drink “Diet Coke”, instead of Normal Coke.

6. Tries to complain about any thing in India as if heis experiencing it for the first time.

5. Pronounces “schedule” as “skejule”, and “module”as “mojule”.

4. Looks suspiciously towards Hotel/Dhaba food.Few more important

March, 2012


Health And Fun

3. From the luggage bag, does not remove thestickers of Airways by which he travelled back toIndia, even after 4 months of arrival.

2. Takes the cabin luggage bag to short visits in India,tries to roll the bag on Indian Roads.

1. Tries to begin conversation with “In US ....” or“When I was in US...”

Blunders of the World

Wealth without work

Pleasure without conscience

Knowledge without character

Commerce without morality

Science without humanity

Worship without sacrifice

Politics without principle

Where are you right now????????

A mother and a baby camel were lazing around, andsuddenly the baby camel asked....

Baby: Mother, mother, may I ask you some questions?

Mother: Sure! Why son, is there something botheringyou?

Baby: Why do camels have humps?

Mother: Well son, we are desert animals, we need thehumps to store water and we are known to survivewithout water.

Baby: Okay, then why are our legs long and our feetrounded?

Mother: Son, obviously they are meant for walking inthe desert, You know with these legs I can movearound the desert better than anyone does! Said themother proudly.

Baby: Okay, then why are our eyelashes long?Sometimes it bothers my sight.

Mother: My son, those long thick eyelashes are yourprotective cover. They help to protect your eyes fromthe desert sand and wind. Said mother camel with eyesrimming with pride....

Baby: I see. So the hump is to store water when we

are in the desert, the legs are for walking through thedesert and these eyelashes protect my eyes from thedesert...Then what the hell are we doing here in theZzzoooooo!

MORAL OF THE STORY IS:

“Skills, knowledge, abilities and experiences are onlyuseful if you are at the right place” (Where are youright now????????)

Amazing usage of only one wish!

A Indian guy having no child, no money, no home, ablind mother, prays to God.

God happy with his prays, grants him a wish but itsonly one wish!

Indian thinks about his wish and says “I want my motherto see my wife putting Diamond bangles on my Child’shands in our new mansion!”.

Indian way of doing Business

Three contractors are bidding to fix a broken fence atthe White House in Washington D.C. One fromBangladesh , another from India and the third, fromChina.

They go with a White House office to examine thefence.

The Bangladesh contractor takes out a tape measureand does some measuring, then works some figureswith a pencil. “Well”, he says, “I figure the job will runabout $900. ($400 for materials, $400 for my team and$100 profit for me)”.

The Chinese contractor also does some measuringand figuring, then says, “I can do this job for $700.($300 for materials, $300 for my team and $100 profitfor me)”.

The Indian contractor doesn’t measure or figure, butleans over to the White House official and whispers,“$2,700.”

The official, outraged says, “You didn’t even measurelike the other guys! How did you come up with such ahigh figure?”

The Indian contractor whispers back, “$1000 for me,$1000 for you, and we hire the guy from China to fix

March, 2012


the fence.”

“Done!” replies the government official.

MURPHY’S ADDITIONAL LAWS

1) Whenever I find the key to success, someonechanges the lock.

2) To Err is human, to forgive is not a COMPANYpolicy.

3) My road to success is always under construction.

4) Alcohol does not solve any problems, but if youthink again, neither does Milk.

5) It’s funny but In order to get a Loan, you first needto prove that you don’t need it.

6) All the desirable things in life are either illegal,expensive or fattening or married to someone else.

7) Since Light travels faster than Sound, peopleappear brighter before you hear them speak.

8) Everyone has a scheme of getting rich? Whichnever works until you cheat.

Health And Fun

Contd. from page no. 591 FROM THE GOVERNMENT

9) If at first you don’t succeed?. Destroy all evidencethat you ever tried.

10) He who has the gold, makes the golden rules andthose who don’t have gold follow them.

11) Once you have bought something, you will findthe same item being sold somewhere else at acheaper rate.

12) When in a queue, the other line always movesfaster and the person in front of you will alwayshave the most complex of transactions.

13) If you have paper, you don’t have a pen! If youhave a pen, you don’t have paper! if you have both,no one calls.

14) You will pick up maximum wrong numbers whenon roaming.

15) The door bell or your mobile will always ring whenyou are in the bathroom.

16) Irrespective of the direction of the wind, the smokefrom the cigarette will always flow towards the non-smoker.

case of foreign citizens) will be done w.e.f. 08/

04/2012.

(B) SERVICE TAX

1) Clarification on Point of Taxation Rules

regarding Airline Ticketing :-

It is clarified that point of taxation shall be the

date of receipt of payment or date of issuanceof invoice, whichever is earlier. Thus the

service tax shall be charged @10% in case

ticket is issued before 1st April,2012 when thepayment is received before 1st April,2012.

(For full text refer circular no 155, dated 9th

April, 2012)

2) Clarification on Point of Taxation Rulesfor specified eight services:-

It is clarified that Provisions have been

amended from 1/4/2012 both in the point of

taxation rules,2011 and service tax rules 1994

that all individuals and partnership firms,irrespective of the description of service,

whose turnover of taxable services is 50 lacs

rupees or less in the previous financial year ,the payment of tax shall be allowed to be

deferred till the receipt of payment upto a value

of Rs 50 lacs of taxable services.

It is clarified in respect of the specified eight

services that the point of taxation shall be thedate of payment received in respect of

invoices issued on or before 31st march,2012

where the payment has not received before1/4/2012.

(For full text refer circular no 154, dated 28th

March,2012)

March, 2012


(A) FORTHCOMING PROGRAMMES

Details of forthcoming programme are as under:-

Date/Day Time Programmes Speaker Venue

05/05/2012 4.30 PM 24th AGM of Shantinath Hall,Saturday Mutual Benefit Scheme (MBS) ICAI Bhawan,

5.00 PM 61st AGM of 123, Sardar Patel Colony,onwards CA Association,Ahmedabad Naranpura, Ahmedabad

(B) IN RETROPECT

Date/Day Time Programmes Speaker Venue

20/03/2012 5.30 PM Technical Aspects of the Saurabh N. Soparkar Town Hall, Ellis bridge,Tuesday Finance Bill,2012 (Senior Advocate) Ahmedabad

21/03/2012 4.00 PM Technical Aspects of the CA. S.S. Gupta (Mumbai) Town Hall, Ellis bridge,Wednesday Finance Bill,2012 on Ahmedabad

Service Tax and Central Excise

26/03/2012 5.30 PM to Right To Information – CA Narayan Varma, Shantinath Hall,Monday 7.30 PM As a tool to combat corruption Mumbai ICAI Bhawan,

123, Sardar Patel Colony,Naranpura, Ahmedabad.

27/03/2012 6.00 PM Condolence Meeting on Shantinath Hall,Tuesday Sad Demise of ICAI Bhawan,

CA C.F. Patel Saheb 123, Sardar Patel Colony,Naranpura, Ahmedabad.

CA. Kunal A. ShahHon. Secretary

CA. Ashok C. KatariaHon. Secretary

GENERAL REMINDER

The members are requested to intimate changes in their email ID & mobile phone number at the Association’s office, which willhelp the office bearers to remind you about the programmes through email and SMS.

Members who have not yet paid their contribution under the Mutual Benefit Scheme are kindly requested to pay the same at theearliest.

March, 2012


Documents

March, 2012 · JUDICIAL ANALYSIS Advocate Tushar Hemani COMMERCIAL ASPECTS OF CIVIL..... CA. Sandesh Mundra FEMA UPDATE CA. Savan Godiawala FINANCIAL REPORTING STANDARDS CA. Manish