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THE FINANCE ACT, 2020

19DECODING GST: ROLE OF A STATUTORY AUDITOR VIS-À-VIS GST

84DATA-DRIVEN INTERNAL AUDIT – II: PRACTICAL CASE STUDIES

14‘COLLABORATE TO CONSOLIDATE’ – A GROWTH MODEL FOR PROFESSIONAL SERVICES FIRMS

11C U R I O S I T Y T O C R E AT I V I T Y

3BOMBAY CHARTERED ACCOUNTANT JOURNAL SEPTEMBER 2020

TAXATION ARTICLE: The Finance Act, 2020 | 19

REPORT: ROLE OF THE PROFESSIONAL IN A CHANGING TAX LANDSCAPE | 36 Direct Taxes

GLIMPSES OF SUPREME COURT RULINGS | 57 CONTROVERSIES: TAXATION OF RECEIPT BY RETIRING PARTNER | 67 IN THE HIGH COURTS: PART A: REPORTED DECISIONS 42 (i) Business expenditure – Disallowance – Sections 14A and 36(1)(iii) of ITA, 1961 –

Interest on borrowed capital – Finding that investment from interest-free funds available with assessee – Presumption that advances made out of interest-free funds available with assessee – Deletion of addition made u/s 14A justified;

(ii) Unexplained expenditure – Section 69C of ITA, 1961 – Suspicion that certain purchases were bogus based on information from sales tax authority – Neither independent inquiry conducted by A.O. nor due opportunity given to assessee – Deletion of addition by appellate authorities justified; A.Y. 2010-11 : | 47

43 Business expenditure – Deduction u/s 42(1)(a) of ITA, 1961 – Exploration and extraction of oil – Conditions precedent for deduction – Expenditure should be infructuous or abortive exploration expenses, and area should be surrendered prior to commencement of commercial production – Meaning of expression ‘surrender’ – Does not always connote voluntary surrender – Assessee entering into production sharing contract with Government of India and requesting for extension at end of contract period – Government refusing extension – Assessee entitled to deduction u/s 42(1)(a); A.Y. 2008-09 : | 47

44 Capital gains – Exemption u/s 54 of ITA, 1961 – Sale of residential house and purchase or construction of new residential house within stipulated time – Construction of new residential house need not begin after sale of original house; A.Y. 2012-13 : | 48

45 Capital gains – Transfer of bonus shares – Bonus shares in respect of shares held as stock-in-trade – No presumption that bonus shares constituted stock-in-trade – Tribunal justified in treating bonus shares as investments; A.Ys. 2006-07 to 2009-10 : | 49

46 Deemed income – Section 41(1) of ITA, 1961 – Remission or cessation of trading liability – Condition precedent for application of section 41(1) – Deduction must have been claimed for the liability – Gains on repurchase of debenture bonds – Not assessable u/s 41(1); | 49

47 Fringe benefits tax – Charge of tax – Section 115WA of ITA, 1961 – Condition precedent – Relationship of employer and employee – Free samples distributed to doctors by pharmaceutical company – Not fringe benefit – Amount spent not liable to fringe benefits tax; A.Y. 2006-07 : | 50

48 Income – Accrual of income – Mercantile system of accounting – Business of distribution of electricity to consumers – Surcharge levied on delayed payment of bills – Assessee liable to tax on receipt of such surcharge; A.Y. 2005-06 : | 50

49 Offences and prosecution – Sections 271(1)(c), 276C(2), 278B(3) of ITA, 1961 and Section 391 of Cr.P.C., 1973 – Wilful default in payment of penalty for concealment of income – Conviction of managing director and executive director of assessee by judicial magistrate – Appeal – Evidence – Documents to prove there was no wilful default left out to be marked due to inefficiency and inadvertence – Interest of justice – Appellate court has power to allow documents to be let in as additional evidence; A.Y. 2012-13 : | 51

50 Settlement of cases – Sections 245C(1) and 245D(4) of ITA, 1961 – Powers and duties of Settlement Commission – Application for settlement – Duty of Commission either to reject or proceed with application filed by assessee – Settlement Commission relegating assessee to A.O. – Not proper; A.Ys. 2008-09 to 2014-15 : | 51

51 Settlement of cases – Chapter XIX-A of ITA, 1961 – Powers of settlement commission – Application for settlement of case – Settlement commission cannot consider merits of case at that stage; A.Ys. 2015-16 to 2018-19 : | 52

In this issue . . .Namaskaar | 5 Editorial ‘Taxpayer Services: Message, Meaning and Means – 1/n | 7

From the President | 8

Continuous No. 727 Price Rs. 100 (For Members only)

CONTENTSTHE BOMBAY CHARTERED ACCOUNTANT JOURNAL

VOL. 52-A I PART 6 I SEPTEMBER 2020

Printed and published by Raman Jokhakar on behalf of Bombay Chartered Accountants’ Society, 7, Jolly Bhavan No. 2, New Marine

Lines, Mumbai-400020. Phone : 61377600 E-mail : [email protected]

Printed at Spenta Multimedia Pvt Ltd, Plot 15, 16 & 21/1, Village Chikloli, Morivali, MIDC, Ambernath (West), Dist. Thane.

JOURNAL COMMITTEE

QUOTE OF THE MONTHThe aim of education is

the knowledge, not of facts, but of values.

WILLIAM INGE

EDITORIAL BOARD Chairman & Editor I Raman Jokhakar

ConvenersJagdish Punjabi I Vinayak PaiPublisher I Raman JokhakarMembers of Editorial Board

Anil Sathe, Anup Shah, Ashok Dhere, Gautam Nayak, Kishor Karia, Sanjeev Pandit,

Sunil Gabhawalla

Suhas Paranjpe I Abhay MehtaMembers

Abbas Jaorawala | Bhadresh Doshi | Chandrashekhar Vaze | Chetan Shah | Gaurav

Shah | Jagdish Shah | Kinjal M. Shah | Mihir Sheth | Nitin Shingala | Parth Desai |

Puloma Dalal | Rajaram Ajgaonkar | Riddhi Lalan | Ritu Punjabi | Rutvik Sanghvi |

Shreyas Shah | Sonalee Godbole | Tarunkumar Singhal | Zubin Billimoria.

4 BOMBAY CHARTERED ACCOUNTANT JOURNAL SEPTEMBER 2020

were not in nature of royalty, whether under the Act or Article 12 of DTAA; fees for management services (such as sales support, financial advisory and human resources assistance) and fees for referral services did not satisfy the requirement of ‘make available’ under Article 12 of DTAA | 44

17 Article12 of the India-Ireland DTAA – Consideration received by the assessee from supply / distribution of its copyrighted software products was not chargeable to tax in India as royalty under Article 12 of India-Ireland DTAA | 45

18 Article 11(3)(c) of the India-Mauritius DTAA – Interest income earned from India by a Mauritian company engaged in the banking business is exempt under Article 11(3)(c) of the India-Mauritius DTAA; in terms of Circular No 789, TRC issued by Mauritius tax authority is valid proof of residence as well as beneficial ownership | 46

ACCOUNTANCY AND AUDIT ARTICLE: Data-Driven Internal Audit – II: Practical Case

Studies | 14 Ind AS/IGAAP – Interpretation & Practical Application | 78 FROM PUBLISHED ACCOUNTS | 110 FINANCIAL REPORTING DOSSIER | 129

CORPORATE AND OTHER LAWS SECURITIES LAWS: Disgorgement of Ill-Gotten Gains – A US Supreme

Court Judgment and a SEBI Committee Report | 101 ALLIED LAWS | 103 LAWS AND BUSINESS: Coparcenary Right of a Daughter in Father’s

HUF: Final Twist in The Tale? | 106 CORPORATE LAW CORNER | 113 RIGHT TO INFORMATION (r2i) | 122

PRACTICE MANAGEMENT ARTICLE: ‘Collaborate to Consolidate’ – A Growth Model for

Professional Services Firms | 11

NEWS AND VIEWS LIGHT ELEMENTS | 10

REGULATORY REFERENCER | 126 MISCELLANEA | 134 TECH MANTRA | 139 REPRESENTATION | 141 WHO CONTROVERSY: LACK OF GLOBAL LEADERSHIP IN

CORONA CRISIS | 143 SOCIETY NEWS | 148

Disclaimer The views expressed in this journal are the personal views of the contributors and the BCA Society does not necessarily concur with the same. The opinions expressed herein should not be construed as legal or professional advice. Neither the BCA Society, the publisher, the editor nor contributors are responsible for any decisions taken by readers on the basis of these views.

Total No. of Pages : 156 including Covers

Your feedback may be sent to

IN THE HIGH COURTS: PART B: UNREPORTED DECISIONS 9 Reopening – Capital gains arising on conversion of the land into

stock-in-trade – Closing stock has to be valued at cost or market price whichever is lower – No reason to believe income had escaped assessment – Reopening bad in law: Sections 45(2) and 147 of the Act | 53

TRIBUNAL NEWS: PART A: REPORTED DECISIONS 20 Section 50B read with sections 2(19), 2(42C) and 50 – Windmills of an

assessee, engaged in the business of aqua culture, export of frozen shrimp, sale of hatchery seed and wind-power generation, along with all the assets and liabilities, constitute an ‘undertaking’ for the purpose of slump sale | 40

21 Sections 28, 36(1)(iii) – In a case where since the date of incorporation the assessee has carried on substantial business activities such as raising loans, purchase of land, which was reflected as stock-in-trade in the books of accounts, and entering into development agreement, the assessee can be said to have not only set up but also commenced the business. Consequently, interest on loan taken from bank for purchase of land which was held as stock-in-trade is allowable as a deduction | 40

22 Sections 2(47), 28(i), 45 – Gains arising on transfer of development rights held as a business asset are chargeable to tax as ‘business income’ – Only that part of the consideration which accrued, as per terms of the agreement, would be taxable in the year of receipt | 41

TRIBUNAL NEWS: PART B: UNREPORTED DECISIONS 12 Section 254: Non-consideration of decision of jurisdictional High Court,

though not cited before the Tribunal at the time of hearing of appeal, constitutes a mistake apparent on record | 42

13 Section 35(1)(ii): Deduction claimed by an assessee in respect of donation given by acting upon a valid registration / approval granted to an institution cannot be disallowed if at a later point of time such registration is cancelled with retrospective effect | 42

14 Section 28: Share of profits paid to co-developer based on oral understanding not disallowable as the recipient had offered it to tax and there was no revenue loss and the transaction was tax-neutral | 43

Indirect Taxes

DECODING GST: Role of a Statutory Auditor Vis-À-Vis GST | 84 RECENT DEVELOPMENTS IN GST | 91 RECENT DECISIONS PART A: Service Tax | 93 RECENT DECISIONS PART C: Goods and Services Tax | 94

International Taxation INTERNATIONAL TAXATION: Taxability of a Project Office or Branch

Office of a Foreign Enterprise in India | 114 TRIBUNAL NEWS : PART C 16 Article 12 of India-Singapore DTAA; Section 9 of the Act – Provision for

IT infrastructure management and mailbox / website hosting services

672 (2020) 52-A BCAJ


673 (2020) 52-A BCAJ

attitudes, feelings and motivations. Our subconscious mind instinctively responds to harshly spoken words, expressions and physical gestures. But if we can control such reactions, we will not only emerge sharper but also as better, happier and more contented individuals.

I believe that despite the real world’s annoyances and

to overlook a negative reaction, thus ensuring a higher state of mind. On the physical level it is a well-established fact that our mental attitude does impinge on health! It is surely much easier for those who have deeply instilled these factors in their subconscious / spiritual level.

It is only by following what is dharma for our body and for our mind that we can strengthen our immune system

a clean lifestyle, a supportive attitude and spiritual endeavours will certainly boost our immune system. Our scriptures say that Dharma, grounding, withdrawal from materialistic activities and practices of Japa and Daan are internal preventive means.

While modern medicine does provide quick relief, debates continue about the side-effects and probable long-term harms of the same. But alternate medicine and cure undoubtedly educate us on how to keep the environment and ourselves naturally clean.

The spiritual immune system and the physical immune system are deeply interrelated. It is hard to separate one from the other and I believe that best results are obtained by working on health at both levels. We cannot possibly

develop the strength to handle them.

Even as the battle against the existing pandemic is being fought primarily by our healthcare workers, we can do our bit by limiting our exposure to the virus by staying indoors, maintaining required social distancing and following basic hygiene protocols to improve both physical and social immunity levels.

How can I emerge stronger through this devastating pandemic and become a real winner in a new and changed world? This is a question that must have certainly agitated everyone’s mind in these last few months.

So much has been written and discussed about the current situation. The actions that you take now and in

attitude towards life. And while the impact of this crisis will vary across regions, it will be no exaggeration to say that this time around the burden of destiny is real.

What is emerging from the competing demands and chaotic conditions is the paramount importance of being positive and doing the right thing at the right time. After all, anxiety and fear adversely affect the physiological systems that protect individuals from infection.

Let’s begin with immunity, the most desired condition that everyone wishes for. In today’s technical world the primary role of immunity is to recognise viruses and to obliterate them. Many good measures have been discussed and prescribed for improving immunity. These include a healthy diet, ample sleep, optimum hydration, regular exercise, minimising stress, meditation, yoga and pranayama, avoiding smoking and alcohol, etc. The most favoured therapy in vogue is the use of immunity-boosting supplements and foods.

If and when one gets infected, timely treatment is of paramount importance. However, healing involves not

body's immunity system. The same principle applies to our spiritual healing, too.

The Bhagavad Gita says that we should not fan our likes and our dislikes. If such thoughts develop in our minds, we should simply ignore them. But this is easier said than done.

We do strive to have a spiritual immune system. In general, such a system refers to our reactions to thoughts,

NAMASKAARNARAYAN PASARI

Chartered Accountant

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674 (2020) 52-A BCAJ

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675 (2020) 52-A BCAJ

EDITORIALA taxpayer is that rare citizen who creates value, earns income and parts with a portion of it as tax for nation-building. Just as it is the ‘legal’ obligation to pay tax, there is a much ‘higher moral social’ obligation upon the government to ensure that the taxpayer is treated as a valued patron and ensure that his taxes give him a bang for his buck.

Faceless Assessment and the Taxpayer’s Charter (TC) is an awakening and realisation of the above understanding. This move is what a wise government and sincere taxpayer would want. PM Modi spoke candidly about making the tax system and assuring the honest taxpayer of

Over the last few years, calibrated sequential changes were undertaken – the black money act, DeMo, post-DeMo amnesty scheme (GKY), the Benami Act, reduction of rates for corporates and individuals, increasing the threshold for the Department to litigate, dispute resolution Vivad se Vishwas scheme, E-assessments, etc.

its rightful place from posters in hallways to the statute book. The directional change is worthy of appreciation for what otherwise to many of us was a no-brainer. However,

Here are some thoughts on how this process can be made real and robust.

We have serious consequence

taxpayers. For a law to be fair, we need equivalent

and ‘jehadism’ (all for lack of a vocabulary which needs to be evolved) on the Tax Department depending on the

TAXPAYER SERVICES: MESSAGE, MEANING AND MEANS – 1/n

intensity of their actions that eventually get turned down at subsequent levels of appeal.

monetarily and otherwise. An assessee should be compensated for the hassle that she has to go through.

Another example is of prosecution, which if proved excessive or overruled, the ITO must face the music for irresponsible behaviour that resulted in agony, cost and loss of reputation.

The taxpayer should be able to take grounds of calling the order ‘perverse’, ‘excessive’, or ‘illegal’ (all for lack of a vocabulary which needs to be evolved) and should be able to claim reverse penalty on the Department if he wins. Grounds such as

and that would give the taxpayer equal ‘power’ to call the bluff of the ITO.

Setting targets should be made illegal. The vocabulary, mentality and methods that follow a ‘target regime’ create bias against a fair, respectful and reasonable assessment. The TC is perhaps one of the best news of the year. The change deserves our support, encouragement and positivity. At the same time, as the title of this Editorial

.

Raman JokhakarEditor


676 (2020) 52-A BCAJ

Many things have happened all around us in the recent past. On 20th August, the BCAS along with the BCA Foundation hosted the Fifth Narayan Varma Memorial digital event jointly with other organisations. Everything happened virtually in the true spirit of ‘the show must go on’ and following the positive attitude of the Late In the panel discussion

psychologist and a Covid survivor CA professional who shared their thoughts and experiences. As per tradition, the BCA Foundation recognised the social contributions of its CA nominee Sanjay Hegde and felicitated him.

This year, the volunteers of the BCAS and the BCA Foundation could not visit Dharampur for the annual tree plantation programme. This initiative was started

now gone on to over 300 trees. We started with seven volunteers visiting the place and now it is over 40 with a

th August we arranged the tree plantation event via a digital meeting with the trustees of the Sarvodaya Parivar Trust with video presentations of the Dharampur site. We followed ‘Work from Home’ here, too, in an innovative manner with our ‘BCAS Green Warriors’. We felicitated the volunteers who planted trees in and around their localities and carried out tree plantation this year although they were working from home.

In the West, tech companies have surged past every other industry in this digital transformation regime

most famous equity benchmark, the Dow Jones Industrial Average of USA, replaced the world's biggest company of the last decade, viz., Exxon Mobile Corp., from the

steady challenges faced by commodity companies

economies, too.

‘Retire from your job, but never retire your mind.’ These are golden words. Retirement is a stage of life that could be a new beginning with new initiatives on the family front, the social front, or in one’s personal space which might have been missed during the days of one’s employment.

The person who plans his retirement years in advance –

prudent and wise.

th August, on the occasion of India's 74th

(MSD) bid adieu to international cricket and thus called

was, as we know him well, done in his normally cool, silent style, with very few words.

‘Looking at you as just a sportsperson would be an injustice. The correct way to assess your impact is as a phenomenon! Rising from humble beginnings in a small town, you burst onto the national scene, made a name for yourself and, most importantly, made India proud,’ – this is how the Hon. Prime Minister, Mr. Narendra Modi, wished the hero of the Word Cup. How aptly the person and the situation are portrayed in these few words. All Indians would always be proud of MSD and he would be an inspiration to the next generation. I wish and hope that post-retirement he would take up and initiate the setting up of a training academy to create more MSDs for Indian cricket.

Recently, the Reserve Bank of India (RBI) published its th June, 2020). On

a review of the report and certain comments therein, I, as an accounting professional, observed three key perspectives – accountants, auditors and economics / investment.

The accountant's perspectiveRBI’s lower income and higher provisions resulted in the transfer of lesser surplus to the government. It fell to Rs.

The auditor's perspective

FROM THE PRESIDENTMy Dear Members,


677 (2020) 52-A BCAJ

but progressive and innovative. The report narrates in detail the various measures initiated by RBI including progressive reductions in the Repo rate and the various windows to infuse additional liquidity to lead the economy onto the path of growth.

Come September and let it bring changes much awaited and longed for. May I close this page by requesting you to visit our site bcasonline.org for extremely relevant and innovative events in the month of September, 2020, such as M&A – Master Class, Brand Building by professional

BCAS Global social media handle for the events missed, if any.

Best Regards,

CA Suhas ParanjpePresident

though low-value online cybercrimes arising out of net transactions are a cause of worry, too.

Economic / investment perspectiveThe moratorium for loan repayments with the infusion of more than Rs. 3 lakh-crore guarantees by the Central Government has boosted the morale of the MSME sector where banks have started disbursing funds to help the sector recover from the adverse impact of the pandemic and migrant labour.

The sharp cut in corporate tax announced in September,

and build up cash and other current asset balances rather than a fresh CAPEX cycle. This resulted in a weakness in private investment demand and capital expenditure in the economy.

monetary policies cannot be traditional and book-bound


BCAJ

The profession was basically rendering a very specialised service to businessmen and many government / private organisations. Under the law then prevailing, it was mandatory for many organisations to avail their professional services.

The persons belonging to that profession were under the impression that the profession was important and indispensable. But the reality was that had it not been legally incumbent, nobody would have willingly gone for their services. The payment to those professionals was always considered as unproductive and was at the bottom of the list of priorities with the users of their services. It was common that the fees of these professionals were kept unpaid for up to three or even four years.

But all of a sudden, the ‘Governors’ of the profession, with a laudable objective to protect the profession, declared that if your fees are unpaid for two consecutive years by a client, you should discontinue your services to that client.

The ‘Governors’ said it would be unethical to render service to that client who owes you so much. There was a big hue and cry against this decision. But the ‘Governors’ said the client cannot escape because no other service provider can accept his work unless the previous person’s fees are paid.

So, the previous professional lost the work. He could not get any other work since all the clients had avoided payments to their respective professionals. The mandatory service could not be rendered by anybody to anybody!

All clients became defaulters under the laws concerned.

businesses were closed.

The government realised the gravity of the situation, so it brought an amnesty scheme. The mandatory compliance was waived. Clients found it more economical to pay the money under amnesty rather than paying fees to the professionals.

This is an article that ‘appeared’ in the daily ‘Futurology’ in the year 2050. The title of the article was ‘Extinct Profession’. It was to mark the Silver Jubilee of the death

‘Overlaw’ in an unknown ocean. The following are some excerpts from the said article:

There has always been a policy in the business that the big players get some work done by small players by offering them a seemingly lucrative business volume. Small players get excited, especially if they are new entrants in the business. Their costing is fully monitored by the big players. After a couple of years of a smooth relationship, the big start delaying the payments. The poor small ones don’t mind it initially. The big ones place larger orders with some small advances.

Again, they withhold the payments. They paint a rosy future before the small players. The poor fellows have no choice.

The small go to a banker and raise funds on the ‘merit’ that they have orders from large corporates. The bankers oblige. Their meters of interest and EMI start ticking. But the small ones cannot function smoothly.

Gradually, the small players see the death of their own businesses. The big ones are scratch-free. They have a hundred reasons for not paying – from ‘quality defects’ to ‘belated deliveries’.

continues forever… Government makes laws against

implementation.

Here is a story where an entire profession in the country had to be closed down 25 years ago. Had the profession survived, it would have celebrated its centenary year in the current year 2050. Continued on Page 90

LIGHT ELEMENTSChartered Accountant

EXTINCT PROFESSION


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‘COLLABORATE TO CONSOLIDATE’ – A GROWTH MODEL FOR PROFESSIONAL SERVICES FIRMS

In today’s times, when the market is seeking lower cost alternatives in every spend and the otherwise not-to-

is increasingly being questioned by CFOs and business owners, with ever-increasing need for specialist advice, the refrain is to come together with like-minded professionals.

prerequisite for professions to grow. It is a huge challenge

changed the rules of the game and advanced the time for these discussions. If you are not growing consistently, there is a case for a relook. If you haven’t thought through

so.

This article is an attempt to provide some ideas and

and work together for their common growth.

thought, analysis and a sustained positive outlook. The mindset of growth has to be foremost for any consolidation to be productive and value accretive. And to start this

good way to proceed.

(I) PREREQUISITES OF CONSOLIDATION

(i) MindsetIt is of paramount importance that the mindset to collaborate, consolidate and grow is clear and positive. Having a positive, open mindset means that one is willing

Consolidation doesn't only have to be by merger. One can consolidate mindsets, expertise, people, teams, functions,

accounts, administration and various other aspects which

and adaptable to change and growth.

(II) GETTING STARTEDIt is also not lost on any of us that coming together for a common client or referred client may be a good way to get started.

For example:When there is a referred client, where a professional refers some matter to another professional, although the other professional will be the primary service provider, the referring professional should contribute actively by providing the background knowledge on the basis of his / her experience and the relationship aspects of dealing

from the referring partner’s experience and expertise.

engaging, powerful, organised and delivered in a properly thought through manner, then you have the right prerequisites for a successful consolidation.

The thesis is that enthusiastic collaboration is a vital ingredient and a prerequisite for sustained, organised

will pursue the above with a lot of enthusiasm and momentum once a road-map is given and a framework is created.

(III) MODELS OF CONSOLIDATION

VAIBHAV MANEKChartered Accountant

Referral

Preferred Partner

Associate

Network

Merger


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(A) Referral modelThis is a simple, ‘start with’ model. ABC & Co has a client to whom it is providing audit and tax services. The client needs MIS services. Given that ABC & Co is an auditor, it

may no longer be independent. So, ABC contacts XYZ & Co and refers the client’s MIS work. XYZ delivers and invoices fees.

XYZ will in turn ensure that it will not pitch for any other services to the client. If the client comes for any other work, it will get referred back to ABC. This is an unwritten code that is based on trust.

If this is done well, trust develops and this lays the ground

ABC will not work with XYZ in the future. That itself is a good deterrent in this model.

The code of conduct and rules of professional engagement may prohibit payment of referral fees and this needs to be respected.

(B) Preferred partner modelThis is an extension of the referral model, where ABC and

with. If ever there is work coming to ABC which it cannot

Conversely, XYZ will refer work to ABC for any engagement where it needs help / support. In this model again, it is a very clear way of supporting each other in such a way

There could be exceptions where XYZ is not able to service a client of ABC, in which case ABC is obviously

common association and agree to abide by the principles and rules of working under a larger umbrella. The associate

need to change its constitution nor its key areas of work.

referral model and the preferred partner model with more formalised meetings, exchange of knowledge, use of resources, common marketing collaterals and a greater

speed of response and alignment.

years and has proved to be a very credible alternative

biggest difference is that members are free to continue their own brands and they have far more independence in what they choose to do or not to do, including the choice

and choice of sharing of information.

Effectively, there are no compulsions and there are no

territory and is free to conduct or practice any service area without any pre-approval or without worrying about a centrally administered bureaucratic process.

The main disadvantage of an associate model is that it

can choose not to fall in line citing whatever compulsions

(D) Network modelA network model is one of the best ways to grow

global network or a national or regional network, using a common brand, using common tools and having signed a

leadership, a common partner pool and, most importantly, a common identity.

Indeed, over a century it has been proven that the network model has the ability to grow the fastest and to become the largest amongst all prevalent models of collaborations

In a network, the biggest consideration is giving up one’s

the international brand or the national or regional brand

marketing collaterals and service delivery are under the

a foreign brand. In such cases, the network pushes for

rules.

common rules of engagement. Conduct of shared work, sharing of knowledge, territorial restrictions, respect for

wide dissemination of developments and a governance


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structure where partners align with the central leadership

Whilst there are several perceived disadvantages such as loss of one’s own brand, the associated loss of identity and integration into common practices which one may take some time to evolve, understand and add up to, the network model has stood the test of time. It has proven and validated the concept of ‘collaborate to grow manifold’ and critics have accepted the formal network models.

bank account. Effectively, one is ‘all in’. That means it is

There are no real silos, there are no individual mindsets, nor any individual practices.

belief that as long as one is contributing to his or her best abilities, the larger collective will grow. As a partner, I am

In a merger situation, the rules of the game are very different and may appear overwhelming to start with. One should get into a merger only after detailed due diligence and after a few years of working together with one of the

be made, there are positions to be gone away from and yet there's the harmony and beauty of the collective.

A partner may not need to be spending time on areas outside of his or her core focus. What it does is provide partners with adequate time to build, consolidate and grow. Focus on service areas, with administrative or functional work percolating down to the teams, is a positive outcome.

(IV) ROAD-MAP FOR CONSOLIDATION

Having looked at the various models of consolidation, it is now time to look at the execution road-map for consolidation:

USP is critical.

(ii) The objective of the collaboration should be very

working with the best minds, professional growth, sharing of knowledge, newer geographies, recognition of the changing market place and demands of the client? Clarity on the objective is very critical. Often, in the haste of coming together, the main objective is forgotten. That’s to be avoided at all costs.

particular area, the automatic next step will be to have

intensely and with the purpose of achieving a target of

with. These one or two partners have the responsibility of ensuring that the objectives of the collaboration are

(iv) One of the better ways to start is by working together on actual projects. That normally provides a

provides an easy and operational way to get to know the

baby steps is important.

(v) Once some early success is seen, the foremost assumption that all partners are aligned for collective growth will be tested. It will be hard for partners to sit

challenging. Keep moving forward to a point where trust is created and enhanced. Each model should be given adequate chance to work and succeed. At some point,

model.

have to be at it. It’s a constant effort. Take small steps but keep moving forward. It won’t get done overnight. But achieving small successes will pave the way for larger integration. If all cylinders are aligned, the practices will

model.

CONCLUSIONIt is no longer okay to continue the status quo. During

Perhaps, it is time to understand and introspect. It is time to move forward from working as disaggregated practices. It is time to work together. It is time to consolidate


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DATA-DRIVEN INTERNAL AUDIT – IIPRACTICAL CASE STUDIES

BACKGROUNDInternal auditors are effective in their delivery of professional services only by conducting value-added services. Important value drivers for management are:- cost savings / optimisation,- prevention or detection of frauds,- compliance with procedures and regulations.

These can only be achieved in today’s day and age by adoption of technology for all stages in the life-cycle of the internal audit. It may necessitate getting the data from multiple sources, analysing huge quanta of data,

of data in intelligent form to various stakeholders for action to be taken for improvement/s.

Let’s add the fact that we are moving to remote auditing, again a necessity in today’s circumstances and which would most probably become the new normal in times to come. Remote auditing is already being practised by many organisations where internal auditors carry out internal auditing for global, geographically-spread entities from their internal audit teams based out of India.

In our earlier article (Pages 11-13; BCAJ, August, 2020), we have discussed the necessity of adopting a data-driven

audit, basically explaining ‘why’. Now, we are offering the methodology to be adopted for making it happen, in other words, ‘how’ to do it.

Using what you know(1) DETERMINE WHETHER DATA ANALYTICS IS APPROPRIATE FOR THE AUDIT

judged from the audit objectives and the expected problems, as well as from the data volume, the number

should be given to the usefulness of additional analysis over what is currently provided by the system and whether any special factors apply, such as fraud detection

and investigation, Value for Money audits (in obtaining performance statistics) and special projects.

(2) CONSIDER AUDIT OBJECTIVES AND WHERE DATA ANALYTICS CAN BE USEDData Analytics can be used in different areas with different goals and objectives. Data Analytics is generally used to validate the accuracy and the integrity of data, to display data in different ways and to generate analysis that would otherwise not be available. It can also be helpful in identifying unusual or strange items, testing the validity of items by cross-checking them against other information, or re-performing calculations.

Although Data Analytics allows you to increase your coverage by investigating a large number of items

may still want to extract and analyse a portion of the database by using the sampling tasks within. You could examine a subset of the population (a sample), to predict

a particular event or attribute occurs in the population as a whole.

The quality of the data, your knowledge of the database and your experience will contribute to the success of Data Analytics processes. With time you will be able to increase or widen the scope of investigations (for example, conducting tests which cannot be done manually) to

that you never thought were feasible.

It is also not unusual that far more exceptional items

than other methods and that these may require follow-up time. However, the use of Data Analytics may replace other tests and save time overall. Clearly, the cost of using the Data Analytics Tool must be balanced against

Case Study 1 – General Ledger – What is our Audit Objective?

Chartered Accountants


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to the General Ledger is a common way of committing

appropriateness of journal entries recorded in the General Ledger.

The objectives may include testing for risk or unusual transactions such as:• Journals with no description,• Journals not balancing,• Journals containing keywords,• Journals posted by unauthorised users,• Journals posted just below approval limits,• Journals posted to suspense or contra accounts.

Case Study 2 – Accounts Receivable – What is our Audit Objective?Accounts Receivable is one of the largest assets of a

assurance that the amounts stated are accurate and reasonable.

The objectives may include:• Identify large and / or unusual credit notes raised in the review period,

year,• Isolate customers with balances over their credit limit,• Filter out related party transactions and balances,• Generate duplicates and gaps in the sales invoice numbers,• Match after-date collections to year-end open items / balances.

Preparing data for analysis(3) DETERMINE DATA REQUIRED AND ARRANGE DOWNLOAD WITH PREPARATIONData download is the most technical stage in the process, often requiring assistance and co-operation from Information Technology (IT). Before downloading or analysing the data, it is necessary to identify the required data. Data may be required from more than

the user understands the availability and the details of the databases. You may also have to examine the

relationships between databases and tables.

In determining what data is required, it may be easier

Therefore, it may be better to be selective, ignoring blank

needed. At the same time, key information should not be omitted.

Case Study 1 – General Ledger – Planning – What Data is Required?The Auditor needs to obtain a full General Ledger transactions history for the audit year after all the year-end (period-end) postings have been completed by the client. To carry out a completeness test on the General Ledger transactions, the ‘Final’ Closing Trial Balances at the current and previous year-ends are required. Where possible,

the export of the Trial Balance, this will give assurance over

from the Accounting Software or ERP system.

General ledger initial check for preparing the dataField Statistics can be used to verify the completeness and accuracy of data like incorrect totals, unusual trends, missing values and incorrect date periods in the General Ledger. This pre-check in the data preparation stage allows the Auditor a greater chance of identifying any issues that will cause invalid test results. Comparing difference in totals obtained from the client for the Transaction Totals in the General Ledger with the Field Statistics should be

Analytic tests.

Case Study 2 – Accounts Receivable – Planning – What Data is Required?The Auditor should requisition the ‘AR Customer-wise open items at the year-end’ data. This data provides more details than a simple list of balances because often an Auditor wants to test a sample of unpaid invoices rather than testing the whole customer balance. Further, the Auditor should obtain the ‘Accounts Receivable Transactions’ during the year to analyse customer receipts in the year, to test for likely recoverability. Apart from this, more detailed Data Analytics can be performed on the sales invoices and credit notes, as well as cut-off analysis.

Accounts receivable initial check for preparing the dataField Statistics can be used to verify the completeness and accuracy of data like incorrect totals, unusual trends, missing values and incorrect date periods in the Accounts Receivable (AR) ledger. This pre-check in the data


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Interpretation of Results – Any gaps in invoicing sequences require further investigation to ensure that revenue has been correctly allocated, as well as to check for improper revenue recognition which can be accomplished by manipulating income records, causing material misstatement.

Discovering patterns, outliers, trends using pre-built analytic intelligenceThe Discover task provides insights through patterns, duplicates, trends and outliers by mapping data to high-

Analytic Intelligence.

• Identify trends, patterns, segmental performance and outliers automatically.• Intuitive auto-generation of dashboards that can then be

(5) REVIEW AND HOUSEKEEPINGAs with any software application, all work done in Data Analytic Tools must be reviewed. Review procedures are often compliance-based, verifying that the documentation is complete and that reconciliations have been carried out.

preparation stage offers the Auditor a better chance of identifying any issues that could cause invalid test results. Comparing difference in totals obtained from the client for the AR Debit Credit Totals with the Field Statistics should

the Analytic tests.

Validating data(4) USE ANALYTIC TASKSCase Study 1 – General Ledger – Highlighting Key Words within Journal Entry Descriptions

– To isolate and extract any manual journal entries using key words or unusual journal descriptions. These can include, but not be limited to, ‘adjustment, cancel, missing, suspense’.

– Apply a search command on the manual

unusual descriptions by using a text search command.

Interpretation of Results – Records shown when using the above criteria would display records which have description narratives that include key terms such as ‘adjustment’, ‘cancel’, ‘suspense’ and ‘missing’, and may require further investigation.

When determining which manual journal entries to select for testing, and also what description should be tested,

misstated through a variety of fraudulent journal entries and adjustments, including:• Writing off liabilities to income,• Adjustments to reserves and allowances (understated or overstated),• False sales reversed after year-end and out-of-period

will need to tailor the said search to the type of manual journal entry that the Auditor is aiming to test.

Case Study 2 – Accounts Receivable – Detecting suppression of Sales

– To test for gaps in invoicing sequences which may indicate unrecorded sales and / or deleted invoices.

– Gap Detection is used to detect gaps in data. These could be gaps within purely numeric or alpha-numeric sequential reference numbers, or these could be gaps within a sequence of dates. Perform a Gap Detection


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The actual history logs from each analytical activity should also be reviewed.

Backup of all the project folders must be done meticulously and regularly.

Clear operating instructions with full details on how to

documented for each project and kept easily accessible for the Audit Teams who will take up the project in the ensuing review period. If necessary, logic diagrams with

appropriate explanatory comments should be placed

could pick up the project in the following year.

CONCLUSIONBy embedding data analytics in every stage of the audit process and mining the vast (and growing) repositories of data available (both internal and external), Auditors can deliver unprecedented real-time insight, as well as enhanced levels of assurance to management and audit committees.

Businesses are faced with unprecedented complexity, volatility and uncertainty. Key stakeholders can’t wait for Auditor’s analysis of historical data. They must be alerted to issues at once and be assured of repetitive monitoring of key risks. Data Analytics empowers Audit to deliver, as well as to serve the business more proactively in audit planning, scoping and risk assessments, and by monitoring key risk indicators closely and concurrently. Auditor’s use of data analytics in every phase of the audit can help management and the audit committee make the right decision at the right time.


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Income Tax Law, 7/e


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THE FINANCE ACT, 2020

1. BACKGROUND

st

February, 2020. The Finance Bill, 2020, presented along with the Budget with certain amendments suggested by the Finance Minister on the basis of discussions with the stakeholders, was passed by the Parliament without any discussion on 23rd March, 2020. It received the assent of the President on 27th March, 2020. The Finance Act, 2020 was passed by both the Houses of Parliament without any discussion in view of the recent lockdown due to the coronavirus pandemic which has affected India and the whole world.

relating to the Direct Taxes, can be summarised as under:(i) In line with the reduction in rates of Income-tax for certain domestic companies which forgo certain deductions and tax incentives introduced last year, the Finance Act, 2020 provides for revised slabs of Income-tax rates for Individuals and HUFs who do not claim certain deductions and tax incentives.(ii) Dividend Distribution Tax, hitherto payable by companies and Mutual Funds and consequent exemption on dividend received by shareholders and unitholders,

st April, 2020. Consequently, the exemption in respect of dividend receipt enjoyed by the shareholders and unitholders of Mutual Funds has been withdrawn.(iii) The compliance burden of Charitable Trusts and Institutions has been increased.(iv) The Finance Minister has recognised the need for

st April, 2020 to provide that CBDT shall adopt and declare the Taxpayer’s Charter. CBDT will issue guidelines for

the Tax Department.(v) One important measure announced by the Finance Minister this year relates to the Disputed Income-tax Settlement Scheme. ‘The Direct Tax Vivad Se Vishwas Bill, 2020’ was introduced by her and was passed by

th March, 2020. This Scheme has been

introduced with a view to reduce litigation. It is stated

various appellate authorities. The assessees can avail

getting waiver of penalty, interest and fee.

amendments made in the Income-tax Act by the Finance Act, 2020.

2. RATES OF TAXES

the case of a domestic company, the rate of tax is the

company having total turnover or gross receipts of less

requirement was with reference to total turnover or gross

2.2 The rates for Surcharge on tax applicable in A.Y. 2020-

st April, 2020 is now taxable in the hands of the shareholder. Earlier, the company was required to pay Dividend Distribution Tax (DDT) and the shareholder was not liable to pay any tax.

will be liable to tax in the hands of the shareholder. In order to provide relief in the rate of Surcharge to Individual, HUF, AOP, etc. having total income exceeding Rs. 2 crores, it

Income-tax on dividend income included in the total income.

and Surcharge shall continue as in the earlier year.

3. REDUCTION IN TAX RATES FOR INDIVIDUALS AND HUFs



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the company does not claim certain deductions and tax incentives. In respect of newly-formed manufacturing

st

incentives were not claimed.

has been inserted in the Income-tax Act with effect from

Individuals and HUFs if the assessee does not claim certain deductions and tax incentives. For claiming this concession in tax rates, the assessee will have to exercise the option in the prescribed manner. The reduced tax rates are as under:

Income (Rupees in lakhs) Existing rate Reduced rate (section

115BAC)1 2.50 L Nil Nil2 2.50 to 5.00 L 5% 5%3 5.00 to 7.50 L 20% 10%4 7.50 to 10.00 L 20% 15%5 10.00 to 12.50 L 30% 20%6 12.50 to 15.00 L 30% 25%7 Above 15.00 L 30% 30%

chargeable. It may be noted that there is no separate higher threshold for senior and very senior citizens in the above concessional tax rate scheme.

tax rates, the assessee will have to forgo the deductions

with special allowances granted to employees other than

th June, 2020.

Out of the above, some of the allowances as may be

cases, deduction for professional tax, etc., available to salaried employees, (viii) 24(b) – Interest on borrowing

depreciation, (x) 32AD – Investment in new plant and

Deposits in tea, coffee and rubber development account,

expenditure on Agricultural Extension Project, (xvi) 57(iia) – Standard deduction for Family Pension, (xvii) Chapter VIA – All deductions under Chapter VIA – excluding

dealing with deduction in respect of certain income of International Financial Services Centre.

(investment in PPF A/c, LIP payments or investments

forward loss from house property against income from other heads, (ixx) Section 32 – Depreciation u/s 32 [other

manner, (xx) No exemption or deduction for allowances or perquisites allowable under any other law can be claimed, (xxi) provisions of Alternate Minimum Tax and credit under

3.4 As stated above, the assessee will have to exercise the option in the prescribed manner where an Individual or HUF has no business income, this option can be

words, the option can be exercised every year in the prescribed manner.

3.5 If the Individual or HUF has income from business

once exercised shall apply to that year and all subsequent years. Such an assessee can withdraw the option at any time in a subsequent year and, thereafter, it will not be possible to exercise the option at any time so long as the said assessee has income from business or profession.

3.6 It may be noted that the above option for concession in tax rates will not be available to AOP, BOI, etc. The existing slab rates will continue to apply to them. Further,


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Alternative Minimum Tax and credit for such tax will not

3.7 Considering the above conditions, it is possible that very few assessees will exercise this option for lower tax rates. If deductions for PPF contribution, LIP, etc., u/s

this concession in tax rates to Individuals and HUFs will not be attractive.

4. TAXATION OF DIVIDENDSst March, 2020, domestic companies declaring

/ distributing dividend to shareholders were required to

Fund while distributing income on its units at varying

that the shareholder receiving dividend from a domestic company or a unitholder receiving income from an M.F. will not be required to pay any tax on such dividend income and income received from an M.F. in respect of

an assessee, other than a domestic company and Public

plus applicable Surcharge and Cess if the total dividend

4.2 Now, after about two decades, the system of levying st

domestic companies / M.F.s are now made inoperative.

st April, 2020.

4.3 In view of the above, any dividend declared by a domestic company or income distributed by an M.F.,

st April, 2020 will be taxable in the hands of the shareholder / unitholder at the rate applicable to the assessee. In the case of a non-resident assessee it will

which will include limit on tax rate for dividend income and tax credit in home country as provided in the applicable tax treaty.

4.4 Section 57 has been amended to provide that

expenditure by way of interest paid on monies borrowed for investment in shares and units of M.F.s will be allowed to be deducted from Dividend Income or Income from

Dividend Income or Income from units of M.F.s. No other deduction will be allowed from such income.

domestic company whose gross total income includes dividend from any other (i) domestic company, (ii) foreign company, or (iii) a business trust. The deduction under this section will be allowed to the extent of dividend distributed by such company on or before the due date. For this purpose ‘Due Date’ means the date one month

company, Rs. 50 lakhs from a foreign company and Rs. st

st

th

income from units of M.F.s.

4.6 In order to provide some relief to Individuals, HUFs, AOP, BOI, etc., a concession in the rate of Surcharge has been provided in respect of dividend income. In case of such assessees, the rate of Surcharge on income

It is now provided that if the income of such assessee exceeds Rs. 2 crores, the rate of Surcharge shall not

Dividend Income included in the total income. From the wording of this concession given to Dividend Income, it appears that this concession will not apply to the income from units of M.F.s received by the assessee.

4.7 Since the income from dividend on shares is now

shareholder will be deducted at source. In the case of a non-resident shareholder, the TDS will be at the rate

distributed to a resident unitholder. In the case of a non-


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not required to be deducted at source from interest paid by a quoted company to its debenture-holders if the said debentures are held in demat form. This concession is

shares or units of M.F.s held in demat form. Therefore, the provisions for TDS will apply in respect of shares or units of M.F.s held in demat form.

5. TAX DEDUCTION AND COLLECTION AT SOURCE

Sections 191 and 192: Both these sections are

sweat equity shares (ESOP) allotted to any employee by the employer as a perquisite. The value of ESOP is the fair market value on the date on which the option is exercised as reduced by the actual payment made by the employee. When the shares are subsequently sold, any gain on such sale is taxable as capital gain. The employer has to deduct tax at source on such perquisite at the time

In order to ease the burden of startups, the amendments in these two sections provide that a company which

assessment year, or (ii) from the date of sale of such ESOP shares by the employee, or (iii) from the date on

ceases to be an employee of the company, whichever is earlier. For this purpose, the tax rates in force in the

allotted or transferred are to be considered. By this amendment, the liability of the employee to pay tax on such perquisite and deduction of tax on the same is deferred as stated above. Consequential amendments

5.2 Sections 194, 194K and 194LBA:

st April, 2020. These sections now provide as under:

resident shareholder by a company exceeds Rs. 5,000 in

at source. In the case of a non-resident shareholder, the

distributed by an M.F. to a resident unitholder and such

M.F. In the case of a non-resident unitholder, the rate of

in respect of income distributed by a Business Trust to a resident unitholder, being dividend received or receivable from a Special Purpose Vehicle, the tax shall be deducted

5.3 Section 196C:income by way of interest or dividends in respect of Bonds or GDRs purchased by a non-resident in foreign

st April, 2020. Under

the dividend paid to the non-resident.

5.4 Section 196D: This section deals with TDS from income in respect of securities held by an FII. Amendment

st April, 2020 now provides that dividend paid to an FII or FPI will be subject to TDS at the

5.5 Section 194A: This section deals with TDS from interest income. This section is amended effective from

st April, 2020. At present, a co-operative society is not required to deduct tax at source on interest payment in the following cases:(i) Interest payment by a co-operative society (other than a Co-operative Bank) to its members.(ii) Interest payment by a co-operative society to any other co-operative society.(iii) Interest payment on deposits with a Primary Agricultural Credit Society or Primary Credit Society or a Co-operative Land Mortgage Bank.(iv) Interest payment on deposits (other than time deposits) with a co-operative society (other than societies mentioned in iii above) engaged in the business of banking.

st April, 2020, the above exemptions have been

deduct tax at source in all the above cases at the rates in


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(a) The total sales, gross receipts or turnover of the co-operative society exceeds Rs. 50 crores during the

(b) The amount of interest, or the aggregate of the

year, is more than Rs. 50,000 in case the payee is a senior citizen (aged 60 years or more) or more than Rs. 40,000 in other cases.

5.6 Section 194C: This section is amended effective from st

section to include manufacturing or supplying a product

by using material purchased from such customer. Now, this term ‘Work’ will also include material purchased from the associate of such customer. For this purpose, the

5.7 Section 194J: This section is amended effective from st April, 2020. The rate of TDS has been reduced to

services. The rate of TDS from professional fees will

Section 194LC: This section is amended effective st April, 2020. The eligibility of borrowing under

the loan agreement or by issue of long-term bonds for concessional rate of TDS under this section has now been extended from 30th June, 2020 to 30th June, 2023. Further,

interest on monies borrowed by an Indian company from a source outside India by issue of long-term Bonds or

st April, 2020 and 30th June, 2023, which are listed on a recognised stock exchange in any International Financial Services Centre.

in other cases).

Section 194LD: This section is amended effective st April, 2020. This amendment is made to cover

st th June, 2023

Rupee-Denominated Bonds of an Indian company or

st April, 2020 and 30th June, 2023 will also be covered under the provisions of this section. The rate for

Section 194N:st

respect of cash withdrawn by any account holder from

accounts in different branches of the bank, total cash withdrawals in all these accounts will be considered for this purpose. This TDS provision applied to all persons,

engaged in business or profession, as also to all persons maintaining bank accounts for personal purposes. Under this section there will be no TDS on cash withdrawn up

Now, the above section has been replaced by a new st July, 2020. This new

section provides as under:

st July, 2020, if the account holder in the

the three assessment years relevant to the three previous

(ii) The Central Government has been authorised to notify, in consultation with RBI, that in the case of any account holder the above provisions may not apply or tax may be

(iii) This section does not apply to cash withdrawals by

banking correspondent, white label ATM operators and

Government in consultation with RBI if such person

reduced rates or at Nil rate.(iv) This provision is made in order to discourage cash withdrawals from banks and promote digital economy.

assessee. If the amount of this TDS is not treated as


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income of the assessee, credit for tax deducted at source

read with Rule 37BA. If such credit is not given, this will be an additional tax burden on the assessee.

Section 194-O and 206AA:st April, 2020. Existing

section 206AA has been amended from the same date.

to E-commerce operators. The effect of this provision is as under:

(a) ‘E-commerce operator’ is a person who owns, operates or manages digital or electronic facility or platform for electronic commerce, and (b) ‘E-commerce participant’ is a person resident in India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce. For this purpose the services will include fees for professional services and fees for technical services.(ii) An E-commerce operator facilitating sale of goods or provision of services of an E-commerce participant, through its digital electronic facility or platform, is now

the payment of gross amount of sales or services or both to the E-commerce participant. Such TDS is to be deducted from the amount paid by the purchaser of goods or recipient of services directly to the E-commerce participant / E-commerce operator.(iii) No tax is required to be deducted if the payment is made to an E-commerce participant who is an Individual

than Rs. 5 lakhs and the E-commerce participant has furnished PAN or Aadhaar Card Number.(iv) Further, in the case of an E-commerce operator who is required to deduct tax at source as stated in (ii) above or in a case stated in (iii) above, there will be no obligation to deduct tax under any provisions of Chapter XVII-B in respect of the above transactions. However, this exemption will not apply to any amount received by an E-commerce operator for hosting advertisements or providing any other services which are not in connection with sale of goods or services.(v) If the E-commerce participant does not furnish PAN or Aadhaar Card Number, the rate for TDS u/s 206AA will

section 206AA.(vi) It is also provided that CBDT, with the approval of the Central Government, may issue guidelines for the

Section 206C: This section dealing with collection of st

October, 2020. Hitherto, this provision for TCS applied in

seller is required to collect tax from the buyer of certain

st October, 2020 extends the net of TCS u/s

(i) An authorised dealer, who is authorised by RBI to deal in foreign exchange or foreign security, receiving Rs.

remittance out of India under the Liberalised Remittance

the person remitting such amount. Thus, LRS remittance

this TCS. If the remitter does not provide PAN or Aadhaar

(ii) In the above case, if the remittance in excess of Rs. 7 lakhs is by a person who is remitting the foreign exchange

If the remitter does not furnish PAN or Aadhaar Card

(iii) The seller of an overseas tour programme package, who receives any amount from a buyer of such package,

noted that the TCS provision will apply in this case even if the amount is less than Rs. 7 lakhs. If the buyer does not provide PAN or Aadhaar Card Number, the rate for TCS

(iv) It may be noted that the above provisions for TCS do not apply in the following cases:

(a) An amount in respect of which the sum has been collected by the seller.(b) If the buyer is liable to deduct tax at source under the provisions of the Act. This will mean that for remittance for professional fees, commission, fees for technical services, etc. from which tax is to be deducted at source, this section will not apply.(c) If the remitter is the Central Government, State Government, an Embassy, High Commission, a Legation, a Commission, a Consulate, the Trade Representation of a Foreign State, a Local Authority or any person in respect of whom the Central Government has issued a

st October, 2020 provides that a seller of goods is liable to

from the buyer of goods, other than goods covered by


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apply only in respect of the consideration in excess of Rs.

If the buyer is liable to deduct tax at source from the seller on the goods purchased and made such deduction, this provision for TCS will not apply.

not apply in the following cases:

(a) If the buyer is the Central Government, State Government, an Embassy, a High Commission, Legation, Commission, Consulate, the Trade Representation of a Foreign State, a Local Authority, a person importing goods into India or any other person as the Central Government may notify.(b) If the seller is a person whose sales, turnover or gross

(vii) The CBDT, with the approval of the Central Government, may issue guidelines for removing any

provisions.

Obligation to Deduct Tax at Source: Hitherto, the obligation to comply with the provisions of sections

Individuals or HUFs whose total sales or gross receipts or turnover from business or profession exceeded the

st April, 2020, to provide that the above TDS provisions will apply to an individual or HUF whose total sales or gross receipts or turnover

case of business or Rs. 50 lakhs in the case of profession. Thus, every Individual or HUF carrying on business will have to comply with the above TDS provisions even if he is not liable to get his accounts audited u/s 44AB.

General:(i) From the above amendments it is evident that the net for TDS and TCS has now been widened and even transactions which do not result in income are now covered under these provisions. Individuals and HUFs carrying on business and not covered by Tax Audit u/s 44AB will now be covered by the TDS and TCS provision. In particular, persons remitting foreign exchange exceeding Rs. 7 lakhs under LRS of RBI will have to pay tax u/s 206C. This tax

will be considered as payment of tax by the remitter u/s 206C(4) and he can claim credit for such tax u/s 206C(4)

(ii) It may be noted that the Government has issued a th May, 2020 giving certain relief during

th May, 2020 st

of TDS / TCS from payments or receipts from residents. This concession is not in respect of TDS from salaries or TDS from non-residents and TDS / TCS under sections 260AA or 206CC.

6. EXEMPTIONS AND DEDUCTIONS This is a new clause providing for

exemption of income from dividend, interest or long-term capital gain arising from investment made in India by a

st st March, 2024. The investment may be in the form of a debt,

means a wholly-owned subsidiary of Abu Dhabi Investment Authority which complies with the various conditions of the Explanation given in the section. For claiming the above

for at least three years. Further, the investment should be in (a) a Business Trust, (b) an Infrastructure Company as

I or Category II Alternative Investment Fund regulated

companies as referred to in (a), (b) or (c) above.

If exemption under this section is granted in any year, the same shall be withdrawn in any subsequent year when

section in a subsequent year. It is also provided in the

implementation of this section, CBDT, with the approval of the Central Government, may issue guidelines for

6.2 st April, 2020. It provides for exemption in respect of any income of Indian Strategic Petroleum Reserves Ltd., as a result of arrangement for replenishment of crude oil stored in its storage facility in pursuance of directions of the Central Government.

6.3 This section was added by the


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an Individual from a Financial Institution for acquiring a residential house. One of the conditions in the section is that the loan should be sanctioned during the period

st st March, 2020. This period is now st

6.4 This section deals with certain

Till now, this deduction was allowed even if amounts

st June, 2020 and the above

6.5 This section deals with deduction in

be claimed for three consecutive assessment years out of seven years from the year of incorporation. By amendment of this section, the outer limit of seven years has been increased to ten years.

is provided that the total turnover of the business of the startup claiming deduction under this section should not exceed Rs. 25 crores. This limit is now increased to Rs.

6.6 This section deals with deduction

present, for claiming deduction under this section one of the conditions is that the housing project should be approved by the Competent Authority during the period

st st March, 2020. This period is st

6.7 Filing Tax Audit Report:

Audit Report u/s 44AB along with the return of income.

st April,

7. CHARITABLE TRUSTSAt present, a University, Educational Institution, Hospital or other Medical Institution claiming exemption u/s

from the designated authority (Principal Commissioner or a Commissioner of Income-tax). The procedure for this is

is operative until cancelled by the designated authority. For other Charitable Trusts the procedure for registration

continues until it is cancelled by the designated authority. The Charitable Trusts and other Institutions are entitled

This approval is valid until cancelled by the Designated

donor to the Charitable Trust or other Institutions can claim deduction in the computation of his income for the

of Trusts. These provisions are discussed below.

New procedure for registration:st October,

amended and a similar procedure, as stated in section

Trusts and other Institutions registered under sections

Therefore, all Trusts / Institutions claiming exemption

(ii) Existing Charitable Trusts, Educational Institutions, Hospitals, etc., will have to apply for fresh registration u/s

st December, 2020. The designated authority will grant

from the end of the month in which the application is made. Six months before the expiry of the above period of

to the designated authority for renewal of registration

has to be passed by the designated authority within six months from the end of the month when the application for renewal is made.

(iii) For new Charitable Trusts, Educational Institutions,


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Hospitals, etc., the following procedure is to be followed:(a) The application for registration in the prescribed form should be made to the designated authority at least one month prior to the commencement of the previous year relevant to the assessment year for which the registration is sought.(b) In such a case, the designated authority will grant provisional registration for a period of three assessment years. The order for provisional registration is to be passed by the designated authority within one month from the last date of the month in which the application for registration is made.(c) Where such provisional registration is granted for three years, the Trust / Institutions will have to apply for renewal of registration at least six months prior to expiry of the period of the provisional registration or within six months of commencement of its activities, whichever is earlier. In this case, the designated authority has to pass the order within six months from the end of the month in which the application is made. In such a case, renewal of

inoperative from the date on which the Trust is st October, 2020,

whichever is later. In such a case the Trust can apply for

months prior to the commencement of the assessment year for which the registration is sought. The designated authority will have to pass the order within six months from the end of the month in which the application is made.

conditions of registration, application should be made to the designated authority within 30 days from the date of

(vi) Where the application for registration, renewal of registration is made as stated above, the designated authority has power to call for such documents or information from the Trust / Institutions or make such inquiry in order to satisfy itself about (a) the genuineness of the Trust / Institutions, and (b) the compliance with requirements of any other applicable law for achieving the objects of the Trust or Institution. After satisfying himself,

years or reject the application for registration after giving a hearing to the trustees. If the application is rejected,

Tribunal within 60 days. The designated authority also has power to cancel the registration of any Trust or Institutions

st October, 2020 will be considered as applications made under the new

7.2. Corpus donation:(i) Hitherto, a corpus donation given by an Educational

to a similar institution claiming exemption under that section, was not considered as application of income

st April, 2020, a corpus donation given by such an Institution to a Charitable Trust registered u/s

a corpus donation given by a Charitable Trust to another

st

April, 2020, to provide that a corpus donation given by a

and to Educational Institutions or a Hospital registered u/s

st April, 2020, to provide that any corpus donation received by an Educational Institution or a Hospital claiming exemption under that section will not be considered as its income. At

this provision.

7.3. A proviso st October,

it is cancelled. Now, this provision is deleted and a new

as under:

it will have to make a fresh application in the prescribed

st December, 2020. In such a

has to pass the order within three months from the last date of the month in which the application is made.

have to be made at least six months before the date of


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to pass the order within six months from the last date of the month in which the application is made.

the commencement of the previous year relevant to the assessment year for which the approval is sought. In such a case, the designated authority will give provisional approval for three years. The designated authority has to pass the order within one month from the last date of the month in which the application is made.(iv) In a case where provisional approval is given, application for renewal will have to be made at least six months prior to the expiry of the period of provisional approval, or within six months of the commencement of the activities by the Trust / Institution, whichever is earlier. In this case the designated authority has to pass the order within six months from the last date of the month in which the application is made.

In cases of renewal of approval as stated in (ii) and (iv) above, the designated authority shall call for such documents or information or make such inquiries as he thinks necessary in order to satisfy himself that the activities of the Trust / Institution are genuine and that

can reject the application after giving a hearing to the

7.4. Clauses (viii) and (ix) st October, 2020 to

tax Authority particulars of all donors in the prescribed form within the prescribed time. The Trust / Institution has

donor about the donations received by it. The donor will

Trust / Institution will be liable to pay a fee of Rs. 200 per day for the period of delay under the new section 234G. This fee shall not exceed the amount in respect of which

sections are also amended. Provisions for levy of fee or penalty for failure to comply with these provisions will also apply to the donee company or association which received donations u/s 35. As stated earlier, the donor will not get deduction for donations as provided in section

donation.

CIT(A) or ITATl against the levy of fee u/s 234G.

7.5. Filing of Audit Report:st April, 2020 to provide that the

the return of income.

7.6 General: The existing provisions relating to Charitable Trusts and Institutions are complex. By the above amendments they are made more complex. The effect of these amendments will be that there will be no ease of doing charities. In particular, smaller

procedural requirements. The compliance burden for them will increase. If the Trusts are not able to comply

requirement of getting fresh registration for all Trusts and

process. Those dealing with Trust matters know how

from the Income-tax Department. In order to reduce the

relating to donations exceeding Rs. 50,000 received from a donor during the year. Trustees of the Charitable Trusts are rendering honorary service. To put such an onerous

the new provisions the donors will not get deduction for the donations made by them if the trustees of the Trust

to get donations as donors will have apprehension that


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Income-tax Department in time.

8. RESIDENTIAL STATUSThe provisions relating to residential status of an assessee are contained in section 6 of the Income-tax

section 6 so far as the residential status of an individual is concerned. In brief, these amendments are as under:

(i) An individual is resident in India in an accounting year

or (b) his stay in India is for 365 days or more in four years preceding that year and he is in India for a period of 60 days or more in the accounting year.(ii) At present, in the case of a citizen of India or a Person of Indian Origin who is outside India and comes on a visit to India in the accounting year, the threshold of 60 days

provided that in the case of a citizen of India or a Person of Indian Origin who is outside India having total income

will be considered as a resident in India.(iii) It may be noted that the existing provision applicable to a citizen of India who leaves India in any accounting year as a member of the crew of an Indian ship or for the purpose of employment outside India remains unchanged.

that if a citizen of India, having total income other than

for that year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criterion of similar nature.

‘Resident but not Ordinary Resident’ (‘R but not OR’). By amendment of this section, it is provided that the following persons shall also be considered as ‘R but not OR’.

(a) A citizen of India, or a Person of Indian Origin,

(b) A citizen of India, who is deemed to be a resident in India, as stated in (iv) above, will be considered as ‘R but not OR’.

India, except income derived from a business controlled in India or a profession set up in India.(vii) It may be noted that under the Income-tax Act, an ‘R and OR’ is liable to pay tax on his world income and a non-resident or an ‘R but not OR’ has to pay tax on income accruing, arising or received in India. Therefore, individuals who are citizens of India or Persons of Indian Origin will have to be careful about their stay in India and abroad and determine their residential status on the basis of this amended law.

9. SALARY INCOME(i) At present, the contribution by an employer (a) to the account of an employee in a recognised Provident

contribution in National Pension Scheme is fully taxable in the hands of an employee. However, deduction provided in

is no combined upper limit for the purpose of deduction of amount of contribution made by the employer.

contribution made by the employer to the account of the employee by way of PF, superannuation fund, NPS exceeding Rs. 7,50,000 in an accounting year will be taxable as perquisite in the hands of the employee. Further, any annual accretion by way of interest, dividend or any other amount of similar nature during the year to the balance at the credit of the fund or scheme, will be treated as perquisite to the extent it relates to the employer’s taxable contribution. The amount of such perquisite will be calculated in such manner as may be prescribed by the Rules.

10. BUSINESS INCOMESection 35:

Association, University, College or other Institution or

Bodies). The existing section provides that these Research Bodies have to obtain approval of the prescribed authority.

st October, 2020, to provide as under:(i) The approval granted to such Research Bodies on or

st October, 2020 shall stand withdrawn unless a fresh application for approval in the prescribed form is made to the prescribed authority within three months,

st


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22.

Central Government in respect of the Research Bodies st December, 2020 shall, at any one time, have

(iii) The amendment in the section also provides that the above Research Bodies shall be entitled to the deduction under the section only if the following conditions are

(a) They have to prepare such statement about donations for such period as may be prescribed and deliver these to

the amount of the donation in the prescribed form.(iv) It may be noted that if the statement in the prescribed

not given in time as stated above, the Research Body will

(v) The donor will not get deduction for the donation if

prescribed form is not issued by the Research Body.

Section 35AD:

expenditure on Land, Goodwill and Financial Assets)

35AD(4) provides that no deduction is allowable under

The section is now amended, effective from A.Y. 2020-

claim deduction under the section or not do so. If such option is exercised and the assessee has not claimed

Section 43CA: This section provides that if the consideration for transfer of land / building, which is held

valuation, the stamp duty valuation (SDV) will be deemed to be the consideration. This provision is now amended,

the SDV shall be deemed to be the consideration. Thus,

Section 72AA: At present, this section deals with carry-forward and set-off of accumulated losses and unabsorbed depreciation on amalgamation of Banks.

forward and set-off losses and unabsorbed losses which was given on amalgamation of Banks has been extended to the following entities.(a) Amalgamation of one or more Banks with another Bank under a scheme framed by the Central Government under the Banking Companies (Acquisition and Transfer

(b) Amalgamation of one or more Government companies with another Government company under a scheme sanctioned by the Central Government under the General

11. CAPITAL GAINS

cost of acquisition for capital assets which became the

Further, section 2(42A) provides for the period of holding of a capital asset by an assessee for being considered as a short-term capital asset. These two sections are

(a) In the event of downgrade in credit rating of debt and money market instruments in M.F. schemes, SEBI has permitted the Asset Management Companies an option to segregate the portfolio of such Schemes. In the event of such segregation, all existing investors are allotted equal number of units in the segregated portfolio held in the main portfolio. It is now provided that in determining the period of holding of such segregated portfolio, the period for which the original units in the main portfolio were held will be included.(b) Further, the cost of acquisition of such units in the segregated folio shall be the cost of acquisition of the units held by the assessee in the total portfolio in proportion to the NAV of the asset transferred to the segregated portfolio out of the NAV of the total portfolio before the date of segregation. The cost of acquisition of the original units in the main portfolio will be suitably reduced by the amount derived as cost of units in the segregated portfolio. These provisions are similar to those applicable for allocation of cost of shares on demerger of a company.

Section 50C provides that if the consideration for transfer of a capital asset

Duty Valuation (SDV), the SDV will be deemed to be the


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consideration. This provision is now amended, effective

will be deemed to be the consideration. Thus, further

On the same basis, section 56(2)(X) is also amended. Under this section if land / building is received by an assessee from a non-relative for a consideration which

SDV and consideration is treated as income from other sources. This section is also amended on the same line

such a transaction.

Section 55: At present, this section provides that if the capital asset became the property of the assessee

st

adopt the fair market value of the asset transferred as st

to provide that if the capital asset is land / building, the st

st

12. FILING OF RETURN OF INCOME At present, a person (including a

company) who is required to get his accounts audited th

September every year. By amendment of this section

st October of

or LLP which is required to get its accounts audited is covered by this provision. Now, any partner, including

st October of that year. It may be noted that

is extended up to 30th November, 2020 under CBDT th June, 2020.

Ordinance dated 31st March, 2020: By Taxation and Other Laws (Relaxation of certain Provisions) Ordinance

st st th June, 2020

th September, 2020.

lockdown from 25th March, 2020 onwards in the country.

Section 140: Under this section, at present the return of income has to be signed in the case of a company by a Managing Director or Director and in the case of an LLP by a Designated Partner or Partner. By amendment of this

that in such cases the return of income can be signed by such person as may be prescribed by the Rules.

13. TAX AUDIT REPORTSSection 44AB: By amendment of this section,

that in the case of a person carrying on business if the aggregate of all amounts received including for sales, turnover or gross receipts and the aggregate amount of all payments (including expenditure incurred) in cash during

Tax Audit u/s 44AB will be required only if the sales, turnover or gross receipts exceed Rs. 5 crores in that accounting year. It may be noted that this provision will

will apply. The above concession is not applicable in the case of a person carrying on profession where the limit with reference to gross receipts is Rs. 50 lakhs.

and payments applies with reference to all receipts from sales, turnover or gross receipts, receipts from debtors, receipts from capital account transactions, receipts of interest on loans and deposits, etc., and to all payments for expenses for business or other purposes, payments to creditors, payments of taxes, repayment of loans, payments for capital account transactions, payments relating to transactions other than business, etc. In other

payments are in cash.

st October, then the Tax Audit th September of that


700 (2020) 52-A BCAJ

year. In the case where Transfer Pricing Audit Report is

remains 30th November. In such cases, the Audit Report st October.

the Income-tax Act which require different types of audit

income. These sections relate to charitable trusts, transfer

these cases, the Tax Audit Report will be required to be

tax return of income.

the Finance Bill, 2020, it is stated that to enable pre-

from business or profession, it is required that the Tax Audit Report may be furnished by the said assessee at

of income. All the above sections are amended for this

14. APPEALSSection 250: At present, an appeal before the CIT(A)

assessee or his counsel has to attend before the CIT(A) and argue the matter. In order to reduce human interface

st April, 2020 to provide for a new E-appeal Scheme on lines similar to the E-assessment Scheme. This amendment is as under:(i) The Central Government is given power to notify an E-appeal Scheme for disposal of appeal so as to impart

(ii) Interface between CIT(A) and the appellant in the course of appellate proceedings will be eliminated to the extent technologically feasible.(iii) Utilisation of resources through economies of scale and functional specialisation will be optimised.(iv) An appellate system with dynamic jurisdiction in which an appeal shall be disposed of by one or more CIT(A)s will be introduced.

Further, the Central Government may direct for exception,

st March, 2022.

Section 254: Under this section, the ITAT has been given power to grant stay of disputed demand on an

is not required to impose any condition for deposit of any amount out of the disputed demand while granting such stay.

st April, 2020 to provide that the ITAT can pass a stay order subject to the condition that

tax, interest, fee, penalty, etc., or furnish security of equal amount of such disputed tax.

Further, ITAT can grant extension of stay only if the assessee has complied with the condition of depositing the amount of disputed tax or furnishing of security for the amount as stated above. The ITAT has to decide the appeal, where stay of demand is granted, within 365 days of granting of the stay. Thus, the stay of demand granted by the Tribunal cannot exceed 365 days.

15. PENALTIESSection 271AAD: This is a new section inserted in

the Act which will have far-reaching implications. This st April, 2020. It provides that

if, during any proceedings under the Act, either a false entry or an omission of an entry, which is relevant for computation of total income of such person is found in the books of accounts maintained by any person with a view

the aggregate amount of such entry or omission of entry. Since this is a penal provision, it is possible to take the view that this provision will apply to any false entry or omission of entry found in the books for the accounting

Explanation to the section. It includes use or intention to use:

or, in general, a false piece of documentary evidence, or(ii) Invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both, or(iii) Invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist.

Section 271K: This is a new section which comes st June, 2020. Under this section the A.O.


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or (ix).

Section 274: This section has been amended from st April, 2020 to provide for a scheme for conducting

penalty proceedings on lines similar to the E-assessment Scheme. By this amendment, the Central Government is authorised to notify a scheme for the purpose of imposing

and accountability. This scheme will provide for:(i) Elimination of interface between the A.O. and the assessee in the course of proceedings to the extent technologically feasible,(ii) Optimisation of utilisation of resources through economies of scale and functional specialisation,(iii) Introduction of mechanism of imposing penalty with dynamic jurisdiction in which penalty shall be imposed by one or more Income-tax authorities.

Further, the Central Government is also empowered to

the Act relating to jurisdiction and procedure for imposing penalty shall not apply or shall apply with such exceptions,

st March, 2022.

16. OTHER AMENDMENTSSection 115UA: This section deals with taxation

of income of unit holders of Business Trust. Section

provide that the distributed income in the nature of interest, dividends and rent shall be deemed to be income of the unit holder and shall be charged to tax. Consequential

deduction of tax at source on such distributed income.

Section 133A: At present, the power to survey u/s

Commissioner or Joint Director. This section is amended st April, 2020 and it is provided as under:

(i) Where the information is received from the authority to be prescribed by the Rules, the survey shall not be undertaken by Assistant Director, Deputy Director,

approval of the Joint Commissioner or Joint Director.(ii) In any other case, no survey can be conducted by the Joint Director, Joint Commissioner, Assistant Director,

without the approval of the Director or Commissioner of Income-tax.

Section 143:

st April, 2020 it is now provided that the E-Assessment Scheme shall also apply to ex parte

provisions of the Income-tax Act relating to assessment of total income or loss shall not apply or shall apply with

st March, 2020 to st March, 2022.

Section 144C: This section deals with the Dispute Resolution Panel (DRP). At present, the provision for sending draft assessment order by the A.O. to the assessee applied only if the A.O. proposed variation in the income or loss returned by the assessee. By amendment

st April, 2020 it is now provided that the A.O. will have to send the draft assessment order to the assessee even if the A.O. proposes to make any variation which is prejudicial to the interest of the assessee. Further, at present the provisions of this section apply in the case of (i) an assessee in whose case transfer pricing adjustments are proposed by an order passed by T.P.O.

st April, 2020, this section will also apply in cases of all non-residents.

Section 234G: This is a new section inserted in the st June, 2020. It provides for levy

sections. This fee is Rs. 200 per day during which the

amount in respect of which the above failure has occurred.

the due date. As stated earlier, these statements relate

noted that no appeal is provided against the levy of this

is for reasonable cause.

Section 203AA required the Income-tax authority to prepare and deliver to the assessee a statement in Form 26AS giving details of


702 (2020) 52-A BCAJ

TDS, TCS and taxes paid. This section is deleted from st

the Act from the said date. This new section provides that the prescribed Income-tax authority shall upload in the registered account of the assessee an Annual Information Statement in the prescribed form and within the prescribed time. This statement will include information about taxes paid, TDS, TCS, sale / purchase transactions of immovable properties, share transactions, etc., which are reported to the tax authorities under various provisions.

This section gives a list of persons who can appear before the Income-tax authorities and Appellate Authorities as authorised representatives. This

st April, 2020 to authorise CBDT to prescribe, by Rules, any other person who can appear as an authorised representative.

17. TAXPAYER’S CHARTERAt present there is no provision under the Income-tax Act providing for declaration of a Taxpayer’s Charter. A new

st April, 2020 which provides that CBDT shall adopt and declare a Taxpayer’s Charter and issue such orders, instructions, directions and guidelines to the Income-tax Authorities for administration of such Charter. This Charter may explain the Rights and Duties of taxpayers. Let us hope that the Income-tax Authorities respect the rights of taxpayers in the true spirit in which the Charter is to be issued by CBDT.

18. ‘VIVAD SE VISHWAS’ SCHEMEParliament passed ‘The Direct Tax Vivad Se Vishwas Act, 2020’ in March, 2020. Certain amendments are made in the Act by ‘The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020’ promulgated by the

st March, 2020. This Scheme has been introduced with a view to reduce litigation in Direct Tax cases pending before various appellate authorities. The

the disputed tax and getting waiver of penalty, interest

19. TO SUM UP(i) From the above analysis of the provisions of the Finance Act, 2020, the existing complex Income-tax Act has been made more complex. Many provisions are added in the Act which have increased the compliance burden of the taxpayers. The assessees and their tax advisers will have to be more vigilant to ensure compliance with these provisions and to meet the time limits provided for their compliance.

(ii) In last year’s Budget, rates of Income-tax for certain domestic companies were reduced on the condition that they forgo certain deductions and tax incentives. The scope of deductions to be forgone has been widened and such companies will not be able to claim deductions under

Co-operative Societies who will pay lower tax if they opt to forgo various deductions and tax incentives. Considering the list of deductions and incentives to be forgone, it is possible that very few assessees will exercise the option for lower rate of tax.

(iii) Dividend Distribution Tax, hitherto levied on companies for over two decades, has now been removed. Now, dividend on shares and income distribution on units of Mutual Funds will be taxed in the hands of the share / unit holders. This is one of the major steps taken in this Budget. This change will bring many persons within the tax net as the exemption enjoyed by them so far has been withdrawn.

(iv) By several amendments made in the provisions relating to exemption granted to Charitable Trusts, Educational Institutions and Hospitals, the compliance burden of such institutions will increase. These amendments made in the Income-tax Act are unfair. When the Government is propagating for ease of doing business and ease of living, it has made the life of Trustees

there will no ease of doing charities. In particular, these provisions will make the life of Trustees of small trusts

consuming. Further, any delay in compliance with these

Government wanted to keep track of the activities of such trusts, these provisions could have been made applicable to Trusts having net worth exceeding Rs. 5 crores or

every year.

(v) Several amendments are made in the provisions relating to Tax Deduction and Tax Collection at Source. Now, tax is required to be collected from persons remitting foreign exchange under the LRS Scheme. The scope of the provisions for TDS / TCS is now widened and, in some cases, tax will be collected at source even on items which do not constitute income of the deductee.


703 (2020) 52-A BCAJ

(vi) Amendments relating to residential status will bring some of the persons who could avoid tax by planning their visits to India every year under the tax net. Now, many

penalty for an alleged false entry or omission of any entry is a harsh provision. This will raise many issues of interpretation. This will create hardship to the assessees where arbitrary addition is made by the tax authorities and penalties are levied under this section. An incidental question arises whether this provision is retrospective or applies to accounting entries relating to transactions

st April, 2020.

(viii) One welcome feature of this year’s Budget is statutory recognition of a ‘Taxpayer’s Charter”. CBDT has to prescribe the Rules for this Charter which will declare the rights and duties of a taxpayer. Let us hope that CBDT provides a comprehensive document when this Chapter is announced and that the Income-tax Authorities respect the rights of taxpayers in the letter and spirit of this document.

(ix) Another welcome feature of this year’s Budget is the enactment of the Direct Tax Vivad Se Vishwas Act. The objective of this Act is to reduce Direct Tax litigation pending before the Appellate Authorities. Considering the liberal provisions of this Act, it is possible that many

settlement of many pending tax disputes.

(x) This year’s Finance Bill was introduced in both st February, 2020. The

various provisions of the Bill were not discussed in

Bill were moved by the Finance Minister on 23rd March, 2020 and the Bill with the amendments was passed by both Houses of the Parliament without any

and the entire world. Some of the harsh provisions in the Finance Act, 2020, as pointed out above, have not undergone legislative scrutiny. It is possible that these

days to come.

BCA Journal, Shri P.N. Shah has been authoring an article on the Finance Act for as long as I can remember. This year due to Covid-19 and non-availability of staff, we have received it much later than we would have liked. The article summarises key direct tax provisions [except co-

taxation of non-residents and provisions relating to DTAA and transfer pricing which we couldn’t carry due to space constraints] and serves as a summary analysis of the key


704 (2020) 52-A BCAJ

REPORT: ROLE OF THE PROFESSIONAL IN A CHANGING TAX LANDSCAPE

FUTURE OF TAX PRACTICE

Chartered Accountantth

Hitesh D. Gajaria, a respected member of the BCAS

the BCAS thJuly, 2020. We are publishing this summary just when the profession is at the threshold of change, a trending theme of 2020-21: Tradition, Transition and Transformation, adopted by the BCAS. A summary cannot convey the full import of his talk but we hope it will enable the professionals to get an eagle-eye view of the landscape of the tax profession, both near and far. We would recommend that you also watch the captivating talk on the BCAS YouTube channel.

appeals and litigating matters. From simple and straight-forward days, where the most common tax concerns were additions on account of lower GP Ratio, deductions u/s 37 and revenue expenditure vs. capital expenditure for the Income-tax and the lack of C-Forms in the Sales Tax Assessments, the tax profession today has morphed into a complex, multi-dimensional arena requiring unique and varied skills from the tax professionals.

In light of this background, the learned speaker sought to dwell upon the most gripping questions for the tax professionals today – What are the current global and local trends? What factors have caused the changes? And as a result, how is the tax world different today? Is tax planning still possible? What is the future of the tax profession? What can be done by a tax professional to stay relevant and on top of the changes?

THE CURRENT TRENDSGlobal• Increased reporting obligations in a number of tax jurisdictions.• Increased collaborations between tax authorities of

different jurisdictions and robust exchange of information mechanisms.

to concepts like transfer pricing, which India adopted only

• Increasing tendency to focus on ‘formula-based

• Strong anti-abuse rules to target treaty shopping and other abusive arrangements.• No consensus on tackling the tax challenge arising from digitisation of the global economy. Even if a consensus is reached, it may result in re-thinking of the way taxation of income is approached and highly sophisticated and complex rules which a tax professional will have to master.• Increased blurring of direct and indirect taxes, with a shift towards transaction type tax levies invading the domain of direct taxes.

Local• Protectionism and increased unilateral measures, triggered by the revival of nationalistic politics in various nations, developed as well as developing, and partially by the slow pace of multilateral reform in tax.• At the same time, countries still want to attract investments (both domestic and foreign) by way of

jurisdiction. While this may trigger another round of tax competition, there will be greater need for not only tax competition but also tax co-operation. Tax war is an

however, tax competition shall always sustain.• Proliferation of preferential regimes (e.g., patent box regimes).• Many countries have combated preferential regimes by way of disallowance provisions for foreign related party transactions.• Uncertainty over tariffs and potential trade wars has


705 (2020) 52-A BCAJ

ripened the entire area of customs and indirect taxes for rethinking and overhaul.• Unilateral measures to tax the digital sector have been introduced by many countries including India.• In many countries, including India, huge compliance burden has been embedded at the stage of business transactions taking place, leading to huge burden on businesses.• Closer home, an oncoming storm of tax assessments, audits, recoveries and tax enforcement measures is on the anvil because the government needs to start recovering

fund more social welfare programmes if the needs of the lowest strata of society have to be met.

WHAT FACTORS HAVE CAUSED THESE CHANGES?The changes in the tax trends began after the global

governments worldwide. Improving tax compliance and increasing tax enforcement were seen as better routes rather than increasing tax rates, leading to increased global political interest in tax issues and driving the agenda for tax reforms. There has been a greater public focus and media scrutiny on taxpayer behaviour (Apple, Starbucks, Amazon, Panama papers leak, etc.). While there has been an increased alignment of interests between nations

reforms have led to even more burdensome compliance

for unknown reforms in the tax world.

HOW IS THE TAX WORLD DIFFERENT TODAY?

THEN NOW• Tax liability depended on the strict letter of the law• Remedies to correct abuse lay with the legislature to amend the tax laws

• Tax ‘morality’ has gained

• Factors such as substance, purpose and the acceptability of the outcome are extremely relevant for both taxpayers and advisers

generally maintained• There has been a rise in publicising tax outcomes, naming and shaming of tax defaulters• Increasing data leaks have proved that the so-called tax havens have been mirages in some sense• Information asymmetries between countries have been largely plugged through exchange of information mechanisms

THEN NOW• Tax matters involved only the government and the taxpayer assisted by tax advisers

• List of stakeholders has expanded to include the media, NGOs and even consumers

• Compliance was a labour-intensive and assured source of regular work

• Compliance functions are being radically overhauled through use of technology tools

• Clear distinction between tax avoidance and tax evasion• Tax avoidance was thought to be a goal

• The term ‘tax avoidance’ is under a cloud• The new standard is ‘tax morality’

IS TAX PLANNING STILL POSSIBLE?The days of tax planning in the form of reduction of tax liability with little or no impact on economic circumstances

way of achieving legitimate business objectives are over. That type of tax planning which disregards commercial realities no longer exists but it has evolved. Tax planning, in the traditional sense, will no longer work in an era where international measures such as CFC, MLI and domestic measures such as General Anti-Avoidance Rules are in place. However, planning for real business transactions is still possible.

A professional, who is fully grounded in understanding and mastering the law and able to guide businesses about what is permissible and what is not, will sustain. However, any planning will now involve a much higher risk of scrutiny at assessment and judicial levels. Higher threshold for acceptability and higher risk of scrutiny of the transactions from a large number of stakeholders would be inevitable. There is heightened risk of such transactions being reported on the front pages of newspapers due to

measure himself by these standards. Extremely robust documentation and robust proof of commercial substance will be critical.

WHAT IS THE FUTURE OF THE TAX PROFESSION?The entire platform of tax services will rest on three main

may need to specialise their skillsets and garner focused experience:

• Technology has ruthlessly changed the landscape

perhaps, has been a big revelation!• It is the need of the hour to completely adapt and master technology to stay ahead.


706 (2020) 52-A BCAJ

• Competition would not only be limited to the tax professionals but also more disruptors, say non-

a fraction of the cost, will now enter the arena.

Learning (ML) must take over a number of repetitive tasks.• Technology has raised a question as to ‘Whether professionals, going forward, would even be engaged for compliance?’• Compliance would not be dead for a professional, but will need adaptability and agility.• Additional challenges of data safety, security and protection need to be addressed.• By embracing mass compliance and processing data in larger volumes, a tax professional can gain leverage from the data available which will open a whole new vista predicting tax outcomes to better serve clients.• While drafting and research has been taken over by AI, there are two ways to look at it – (i) threat to

(ii) opportunity for value addition due to increasing uncertainty.• Technology has merits but with the overload of the digital world there is also digital distraction. Tax professionals need to engage in deep work, detox periodically from technologies and opt for in-depth and consistent reading.

connecting theory to practice in how that impacts a client is now more valuable.• Technology cannot substitute experience and deep knowledge. Here lies the true value of a tax professional.• By using algorithms and data mining, the Department is in a position to point out anomalies. Tax professionals need to be better prepared to address such anomalies. To walk the path of technology, assistance from data scientists may be required.

• Global convergence of tax methodologies, the drive against base erosion with accompanying changes in domestic and international laws and the emergence of and seeping in of transaction tax type levies, gives rise to fresh challenges for a professional to overcome.• Today, with the convergence of accounting and tax principles, giving clear preference to the doctrine of substance over form and new and ever-changing corporate law, foreign exchange and SEBI regulations, we are in the middle of a perfect storm with attendant opportunities.• There is a perceived need for professionals who have experience in more than just one or two core areas and

also for those professionals who can collaboratively work together with other professionals in different disciplines to evolve solutions which overcome complex problems, while simultaneously not falling foul of any regulations.• A longer-term strategy to develop and nurture appropriate talent needs to be undertaken because, in this arena, too, sister professions are nibbling away at pieces of work that Chartered Accountants traditionally did.

• Complexities and uncertainties shall lead to an explosion of tax litigation.• The tax professional has only witnessed the

commence.

to do tax assessments more intelligently. The Income-tax Department, also, has sharply climbed up the learning curve. Even judges in Tribunals and Courts are keeping abreast with latest trends.

more revenue and that of businesses to conserve more revenue will result in a sharp increase in litigation.• At the same time, it needs to be understood that not all litigation is good. Hand-holding and guidance to clients would gain relevance to decide which litigation to pursue and which not to, having regard to the alternate forums of dispute resolution available under domestic laws as well as under international tax laws.• Government is also realising the futility of litigations and therefore a scheme like VSVS is an attempt to clear such backlogs.• The tax professional needs to be nuanced in how to assist clients to shape their litigation strategies. Jurisprudence is not static as more case laws are available online nationally and internationally.• Mandatory disclosure regulations in case of aggressive tax positions require a balance in audit, assurance and litigation.

These three pillars are not independent compartments. A strong professional may have competency either in all or in more than one of these.

capabilities and professional competency are available before pitching for such assignments. The Department is now equipped with algorithms to intelligently search all the reports and ferret out anomalies. Therefore, there is


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correctly or refrain from accepting – there is just no other option.

Tax risk in the corporate world: Barring a few exceptions, there is polarisation in the way the market is valuing companies having clear, transparent, ethical policies. Effective tax rate is not to be viewed in an absolute

based on a bench-marking analysis and tax policies and decided accordingly. The tone and culture of the corporate decides whether tax risk is a subject of discussion in the Board Room. Adverse tax consequences with attendant negative publicity is already tinged with social stigma, at least in the minds of independent directors whether the corporates believe in it or not. Therefore, tax risk is, increasingly, forming a part of the Board Room discussions.

HOW TO STAY RELEVANT?• Maximum advantage available with the younger professionals having agility, ability, keenness, inquisitiveness and willingness to change.

• Develop a willingness to adapt to changed circumstances.• Ability to manage tax risks without overpaying taxes.

expected and demanded today.• An analogy may be drawn from the letter ‘T’. The vertical line is the depth and core. Develop that depth, that core, own it, invest in it and nurture it. But do not forget the horizontal line which is the adjacent line. It is now, more than ever, important to read commercial news, develop good communication skills, understand cultural differences, learn personal etiquette, etc. Both lines need to be worked upon simultaneously.

• Develop cutting-edge technical skills and become comfortable with a fast-paced legal and regulatory environment.


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[117 taxmann.com 440 (Vish.)(Trib.)]ACIT vs. Devi Sea Foods Ltd.ITA No. 497/Vish./2019A.Y.: 2013-2014Date of order: 19th June, 2020

FACTSThe assessee sold three windmills, declared the gains arising on such sale as a slump sale and computed the long-term capital gains as per section 50B. The assessee

a separate business which was allowed by the A.O. from

A.O. denied the applicability of the provisions related to slump sale by stating that the windmills did not constitute an ‘undertaking’ and charged the income as short-term capital gains.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that each windmill is a unit of the undertaking

noted that though the assessee had shown windmills as part of the block of assets, depreciation claim could not

A.O. to compute long-term capital gains u/s 50B.

HELDThe Tribunal observed that the windmills were part of the

assessee’s business, for which the assessee was claiming

any adverse remarks in respect of deduction claimed u/s

maintained, the assessee had demonstrated separate ledger account belonging to the windmill operation, and income from such activity was independently ascertainable. Further, there is no requirement in the Act that all assets sold under slump sale should be together. The Tribunal held that the real test for considering any sale of an asset as non-slump sale would be any independent asset or liability not forming part of the business operations.

considered as an ‘undertaking’ and the provisions of slump sale would be applicable.

[117 taxmann.com 419 (Del.)(Trib.)]Jindal Realty (P) Ltd. vs. ACITITA No. 1408/Del/2011A.Y.: 2006-07Date of order: 22nd June, 2020

FACTSDuring the previous year relevant to the assessment year under consideration, the assessee, engaged in real estate business, borrowed monies from banks and utilised the same to purchase land for township projects and also for

IREPORTED DECISIONS

TRIBUNAL NEWS

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I PRACHI PAREKHChartered Accountants

DEVENDRA JAINAdvocate


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giving as advance to other associate parties for purchase of land by them. The interest on such monies borrowed

declaring a loss.

The A.O. disallowed the claim of deduction of interest on the ground that the assessee had not commenced any business activity and held the same to be pre-operative in nature.

Aggrieved, the assessee preferred an appeal to the

Still aggrieved, the assessee preferred an appeal to the Tribunal.

HELDThe Tribunal held that since the date of incorporation, the assessee carried on substantial business activities such

as stock-in-trade in the books of accounts and entering into development agreements. The Tribunal relied on the decision of the Delhi High Court in the case of CIT vs. Arcane Developers (P) Ltd. 368 ITR 627 (Del.) wherein it is held that in case of real estate business, the setting

taken by the respondent-assessee to look around and negotiate with parties.

Thus, the assessee had not only set up the business but also commenced the business in the previous year and therefore was eligible to claim deduction of interest

[117 taxmann.com 637 (Del.)(Trib.)]ITO vs. Abdul Kayum Ahmed Mohd. TamboliITA No. 1408/Del/2011A.Y.: 2006-07Date of order: 6th July, 2020

FACTS

The assessment of the assessee was re-opened because the consideration received for transfer of development rights was not offered for taxation. Since the assessee had handed over possession of the land and also transferred the development rights, the A.O. in the course of reassessment proceedings taxed the amount received by the assessee on transfer of development rights as business income. The assessee submitted that under the contract with the developer, he was to perform work on the basis of receipt of funds from the developer. Accordingly, the assessee had offered only a part of the receipts as income to the extent that receipts had accrued. The balance, according to him, were conditional receipts. The developer, in response to

by the assessee.

But the A.O. opined that the said accounting treatment was not in consonance with the mercantile system of accounting followed by the assessee. Besides, since the transfer had been completed, the consideration would be taxable in the year of receipt as business income.

Aggrieved, the assessee preferred an appeal to the CIT(A) and contended that the balance amount be considered as capital receipts. The CIT(A) adjudicated in the assessee’s favour and held that only the part of the amount accrued as per the agreement would be taxable in the year of receipt. He estimated an amount

receipt. The provisions pertaining to capital gains were also held to be inapplicable as the development rights were business assets.

HELDIt was evident from the terms of the joint venture agreement that only part income accrued to the assessee on execution of the project agreement. The balance consideration was a conditional receipt and was to accrue only in the event of the assessee performing certain obligations under the agreement. Since the development rights constituted the business assets of the assessee, the provisions of capital gains would not

the decision of the CIT(A) and held that only part of the receipts as estimated accrued to the assessee were taxable.

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IUNREPORTED DECISIONSI


Tata Power Company vs. ACIT (Mumbai)Shamim Yahya (A.M.) and Saktijit Dey (J.M.)M.A. No. 596/Mum/2019 arising out of ITA No. 3036/Mum/2009A.Y.: 2003-04Date of order: 22nd May, 2020Counsel for Assessee / Revenue: Nitesh Joshi / Micheal Jerald

FACTS

challenged the decision of the CIT(A) in deleting the surplus on buyback on Euro Notes issued by the assessee earlier. It was the claim of the assessee that since Euro Notes were issued by the assessee for capital expenditure, the income derived as a surplus on buyback of Euro Notes would be capital receipt and hence not taxable. Although, the A.O. treated it as the income of the assessee, the CIT(A), relying upon the decision of the Tribunal in the assessee’s own case for the assessment

the addition.

Before the Tribunal, the assessee, apart from relying upon the decision of the Tribunal in its own case, also relied upon the decision of the Hon'ble Supreme Court in CIT vs. Mahindra & Mahindra Ltd. [(2018) 302 CTR 201 (SC)]on buyback of Euro Notes cannot be treated as income chargeable to tax as Euro Notes were raised for incurring capital expenditure. The Tribunal restored the issue to the A.O. for fresh adjudication after applying the ratio laid down in Mahindra & Mahindra Ltd. (Supra).

In the course of hearing of the Miscellaneous Application, it was submitted that after taking note of the decisions of the Supreme Court in Mahindra & Mahindra Ltd. (Supra) and in CIT vs. T.V. Sundaram Iyengar & Sons [(1996) 222 ITR 344 (SC)], the Jurisdictional High Court has reiterated the view expressed by the Supreme Court

in Mahindra & Mahindra Ltd. (Supra) and consequently the issue stands settled in favour of the assessee. Therefore, there is no need for restoring the issue to the A.O.

HELDThe Tribunal observed that the Jurisdictional High Court in Reliance Industries Ltd. (ITA No. 993 of 2016, dated 15th January, 2019), after taking note of the decisions of the Supreme Court in Mahindra & Mahindra Ltd. (Supra) and T.V. Sundaram Iyengar & Sons (Supra) has upheld the decision of the Tribunal in holding that the gain derived from buyback of foreign currency bonds issued by the assessee cannot be treated as revenue receipt.

The Tribunal held that though it may be a fact that the aforesaid decision was not cited before the Tribunal at the time of hearing of appeal, however, as held by the Supreme Court in Saurashtra Kutch Stock Exchange Ltd. [(2008) 305 ITR 227 (SC)], non-consideration of a decision of the Supreme Court or the Jurisdictional High Court, even rendered post disposal of appeal, would constitute a mistake apparent on the face of record. It held that since the aforesaid decision of the Hon'ble Jurisdictional High Court will have a crucial bearing on the disputed issue, non-consideration of the said decision certainly constitutes a mistake apparent on the face of record as envisaged u/s 254(2) of the Act.

st

passed in ITA No. 3036/Mum/2009 and restored the appeal to its original position.

Span Realtors vs. ITO (Mumbai)G. Manjunatha (A.M.) and Ravish Sood (J.M.)ITA No. 6399/Mum/2019A.Y.: 2014-15Date of order: 9th June, 2020Counsel for Assessee / Revenue: Rashmikant Modi and Ketki Rajeshirke / V. Vinod Kumar

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FACTS

based institution, viz. ‘School of Human Genetics and Population Health’ (SHG&PH) and claimed deduction

The A.O. called upon the assessee to substantiate the claim of such deduction. The assessee submitted all the evidences which were required to substantiate the claim of deduction.

However, the A.O. was not persuaded to subscribe to the genuineness of the aforesaid claim of deduction by the assessee. He observed that a survey operation conducted

th

SHG&PH had revealed that the said research institution had indulged in providing accommodation entries of bogus donations to the donors through a network of brokers. The A.O. gathered that the secretary had admitted in her statement that was recorded in the course of survey

in lieu of commission, was providing accommodation entries of bogus donations through a network of market brokers. Besides, the accountant of SHG&PH, in the course of survey proceedings, was found to be in possession of a number of messages from brokers regarding bogus donations and bogus billings. He also observed that as per the information shared by DDIT (Inv.), Kolkata, the

Commission, Kolkata Bench, wherein it had admitted that in consideration of service charge they had indulged in providing accommodation entries of bogus donations.

Moreover, the Ministry of Finance videth

th


Still aggrieved, the assessee preferred an appeal to the Tribunal.

HELDThe Tribunal observed that as on the date of giving of donation, SHG&PH was having a valid approval granted under the Act. Having regard to the language of the

view that it can safely be gathered that a subsequent withdrawal of such approval cannot form a reason to deny the deduction claimed by the donor. By way of analogy, the Tribunal observed that the Supreme Court in the case of CIT vs. Chotatingrai Tea [(2003) 126 Taxman 399 (SC)] while dealing with section 35CCA of the Act, had concluded that a retrospective withdrawal of an approval granted by a prescribed authority would not invalidate the assessee’s claim of deduction. The Tribunal also observed that on a similar footing the Bombay High Court has in the case of National Leather Cloth Mfg. Co. vs. Indian Council of Agricultural Research [(2000) 100 Taxman 511 (Bom.)] observed that such retrospective cancellation of registration will have no effect upon the deduction claimed by the donor since such donation was given acting upon the registration when it was valid and operative.

The Tribunal held that if the assessee acting upon a valid registration / approval granted to an institution had donated the amount for which deduction is claimed, such deduction cannot be disallowed if at a later point of time such registration is cancelled with retrospective effect. It also observed that the co-ordinate Mumbai bench of the Tribunal in Pooja Hardware Pvt. Ltd. vs. ACIT [ITA No. 3712/Mum/2016 dated 28th October, 2019] has, after relying on the earlier orders of the co-ordinate benches of the Tribunal on the issue pertaining to the

of a donation given to SHG&PH by the assessee, vacated the disallowance of the assessee’s claim for deduction

issue is squarely covered by the orders of the co-ordinate

reason to take a different view. Following the same, the Tribunal set aside the order of the CIT(A) and vacated the disallowance of the assessee’s claim for deduction

HP Associates vs. ITO (Mumbai)Vikas Awasthy (J.M.) and G. Manjunatha (A.M.)ITA No. 5929/Mum/2018A.Y.: 2011-12Date of order: 12th June, 2020Counsel for Assessee / Revenue: Haridas Bhatt / R. Kavitha

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FACTS

Co. The disallowance was made on the ground that there

equal ratio.


Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that the assessee had jointly developed a project with Lakshmi Construction Co. for which there was a joint development agreement. Though there was no formal written agreement between

there was, however, an oral understanding between

has not resulted in any loss of revenue as the recipient has offered the same to tax and paid taxes thereon.

HELDThe Tribunal observed that the contention on behalf of the assessee that there was no revenue loss has been substantiated by placing on record the income-tax return of M/s Lakshmi Construction Co. It also noted that both

Therefore, the transaction is tax-neutral and no loss is caused to the Government exchequer. The Tribunal

ITRIBUNAL & AAR INTERNATIONAL TAX DECISIONSI


[2020] 118 taxmann.com 2 (Mumbai-Trib.)Edenred (P) Ltd. vs. DDITITA Nos. 1718/Mum/2014; 254/Mum/2015A.Ys.: 2010-11 to 2012-13Date of order: 20th July, 2020

FACTSThe assessee was a Singapore tax resident company. It entered into certain agreements with its group companies in India for rendering the following services:

Infrastructure Data Centre (IDC) services

Management services Referral services

• Administration and supervision of central infrastructure• Mailbox hosting services• Website hosting services

• Sales support activities• Legal services• Financial advisory services• Human resource assistance

• Support services1 to serve clients in India that were referred by assessee

the assessee contended that income received from the aforesaid agreements was not taxable in India. The A.O. as well as the DRP rejected this contention of the assessee. The following is a summary of the conclusions of the A.O. and of the DRP:

Services Draft A.O. order Draft DRP direction

Final assessment

orderIDC charges Taxable as royalty under Act and DTAA

Management services

Taxable as FTS under Act and DTAA

Referral fees Taxable as royalty under Act and DTAA

Taxable as royalty and FTS under Act and DTAA

Being aggrieved, the assessee appealed to the Tribunal.

HELD

• Facts pertaining to IDC agreement are as follows:• The assessee had an infrastructure data centre and not an information centre in Singapore.• The Indian group companies did not access or use

16

1 Decision does not describe nature of services in detail


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17permit such use / access to group companies of the assessee nor had the assessee provided any system which enabled group companies such use / access.

IDC did not have any capability in respect of information analytics, data management.• The assessee provided IDC service using its own

companies received standard IDC services without use

Indian companies only received output generated by the assessee using bandwidth and network but not the use of underlying infrastructure.• Consideration paid by group companies was for

Besides, the assessee had not developed any embedded / secret software which was used by group companies.

• Having regard to the case law relied upon by the assessee and the Tax Department, since the assessee had merely provided IDC services, such as administration and supervision of central infrastructure, mailbox hosting services and website hosting services, income from IDC services was not in the nature of ‘royalty’, whether under the Act or under the DTAA.

• The assessee had provided management services to support Indian group companies in carrying on their

the business model, policies and best practices uniformly followed by companies of the assessee group.• Services did not ‘make available’ any technical knowledge, skill, know-how or processes to Indian group companies.• Hence, consideration received by the assessee for management services was not in the nature of ‘fees for technical services’ under the DTAA.

Referral Fees• The fees received by the assessee in consideration for referral services did not ‘make available’ any technical knowledge, skill, know-how or processes to Indian group companies because there was no transmission of the technical knowledge, experience, skill, etc. by the assessee to the group company or its clients.• Hence, the consideration received by the assessee for referral services was not in the nature of ‘fees for technical services’, whether under the Act or under the DTAA.

[2020] 117 taxmann.com 983 (Delhi – Trib.)Mentor Graphics Ireland Ltd. vs. ACITITA No. 3966/Del/2017A.Y.: 2014-15Date of order: 9th July, 2020

FACTSThe assessee, an Ireland resident company, received consideration for sale of software and provision of support services. According to the assessee, it had received consideration for sale of copyrighted product and not

of the India-Ireland DTAA, such consideration was not chargeable to tax in India. However, it offered income from support services to tax.

Relying upon the Karnataka High Court decisions in the case of Samsung Electronics Company Ltd2 and Synopsis International Old Ltd.3, the A.O. and the DRP held that the consideration received by the assessee for supply / distribution of copyrighted software products was for grant of 'right to use' of

‘royalty’.

Being aggrieved, the assessee appealed before the Tribunal.

HELD• In earlier years, on an identical issue in the assessee’s case4, the Tribunal had ruled in favour of the assessee.

• Further, in DIT vs. Infrasoft Ltd.5 , the jurisdictional High Court had held that receipt from sale of software by the

the India-Ireland DTAA.

• Accordingly, income from sale of software was not in

DTAA and was not taxable in India.

2 345 ITR 494 (Kar)3 212 Taxman 454 (Kar)4 ITA No. 6693/Del/2016 relating to Assessment Year 2013-145 [2013] 220 Taxman 273 (Del.)


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[2020] 117 taxmann.com 750 (Mumbai-Trib.)DCIT vs. HSBC Bank (Mauritius) Ltd.ITA No: 1320/ Mum/2019A.Y.: 2015-16Date of order: 8th July, 2020

FACTSThe assessee, a resident of Mauritius, carried on banking business as a licensed bank in Mauritius. The assessee

the India-Mauritius DTAA exempts interest income from

carrying on banking business in Mauritius. The assessee had received interest income from securities and loans to Indian tax residents. According to the

hence, interest earned by it was not chargeable to tax in

Residency (TRC) issued by Mauritius tax authorities and 6.

The A.O., however, did not grant exemption on the ground that the banking activities carried out by the assessee in Mauritius were minuscule and were only for namesake

of dividends and capital gains under the India-Mauritius DTAA and did not apply in case of interest. Accordingly,

On appeal, relying upon the orders of the Tribunal in favour of the assessee in earlier years7, the CIT(A) concluded in favour of the assessee.

before the Tribunal where it contended that the earlier years’ orders did not deal with the Tax Department’s

the interest and was a conduit company.

HELD• The following observations from the orders of earlier years in the case of the assessee are relevant:

Residency is issued by the Mauritius tax authority,

ownership for application of the India-Mauritius DTAA.

issued by the Mauritius tax authority, the assessee is

• Accordingly, interest earned by the assessee is exempt

Note: The decision is in the context of the India-Mauritius DTAA prior to its amendment with effect from 1st April,

‘Interest arising in a Contracting State shall be exempt

owned by any bank resident of the other Contracting State carrying on banking business. However, this exemption shall apply only if such interest arises from debt-claims existing on or before 31st March, 2017.’

7 A.Y. 2009-10 (ITA No. 1086/Mum/2018), A.Y. 2010-11 (ITA No. 1087/Mum/2018) and A.Y. 2011-12 (ITA No. 1708/Mum/2016)

8 A.Y. 2014-15 (ITA No. 1319/Mum/2019)

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— (From CRPF Twitter handle)


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IN THE HIGH COURTS

Advocate

Principal CIT vs. Shapoorji Pallonji and Co. Ltd.[2020] 423 ITR 220 (Bom.)Date of order: 4th March, 2020A.Y.: 2010-11

according to information received from the Sales Tax Department, Government of Maharashtra, those two sellers had not actually sold any material to the assessee. Accordingly, he issued a show cause notice in response to which the assessee furnished copies of the bills and entries made in its books of accounts in respect of such purchases. However, the A.O. in his order made addition

The Commissioner (Appeals) deleted the disallowances. The Tribunal upheld the decision of the Commissioner (Appeals). According to the Tribunal, the A.O. had merely relied upon the information received from the Sales Tax Department but had not carried out any independent

failed to show that the purchased materials were bogus, whereas the assessee produced materials to show the genuineness of the purchases and held that there was no

made by the assessee.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

‘i) On the facts as found by the Commissioner (Appeals)

if there were funds available with the assessee, both interest-free and overdraft or loans, the investments were out of the interest-free funds generated or available with

the order of the Commissioner (Appeals) deleting the

the interest-free funds available with the assessee were far in excess of the advance given. The principle of

pleaded by the Department.

by the Tribunal was that the assessee had not utilised interest-bearing borrowed funds for making interest-free advances but had its own interest-free fund far in excess of interest-free advance. No question of law in respect of the deletion of the disallowance made by the A.O. u/s

suspicion based on the information received from another authority, the A.O. ought not to have made the additions without carrying out independent inquiry and without affording due opportunity to the assessee to controvert the statements made by the sellers before the other authority.’

Principal CIT vs. Hindustan Oil Exploration Co. Ltd.[2020] 423 ITR 465 (Bom.)Date of order: 25th March, 2019A.Y.: 2008-09

42

IREPORTED DECISIONS

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expenses, and area should be surrendered prior

The assessee was engaged in the business of exploration and extraction of mineral oil. It entered into a production-

th

to the contract, a licence was issued to a consortium of three companies, which included the assessee, to carry out the exploration initially for a period of three years and the entire exploration was to be completed within a period of seven years in three phases. At the end of the period, extension was denied by the Government of India. In its Nil

th

A.O. was of the opinion that it had not surrendered the right to carry on oil exploration since the assessee was interested in extension of time which was denied by the Government of India and disallowed the claim.

The Commissioner (Appeals) allowed the appeal. The

relinquishment and termination of agreement were two th March,

2007 the assessee was informed that its contract stood relinquished. The Tribunal held that the assessee was covered by the deduction provision contained in section 42, that such expenditure was not amortised or was not being allowed partially year after year and it had to be


‘i) As long as the commercial production had not begun and the expenditure was abortive or infructuous exploration expenditure, the deduction would be allowed.

not always connote the meaning of voluntary surrender. The surrender could also take place under compulsion. The assessee had no choice but to surrender the oil blocks because the Government of India had refused to extend the validity period of the contract. Admittedly, commercial production of oil had not commenced. The act of the assessee to hand over the oil blocks before the commencement of commercial production was covered within the expression “any area surrendered prior to the beginning of commercial production by the assessee”.

ii) The provisions of section 42 recognised the risks of the business of exploration which activity was capital-intensive and high in risk of the entire expenditure not yielding any fruitful result and provided for special deduction. The purpose of the enactment would be destroyed if

the elements vital were that the expenditure should be infructuous or abortive exploration expenses and that the area should be surrendered prior to the beginning of commercial production by the assessee. As long as

question would be recognised as a deduction. The term “surrender” had to be appreciated in the light of these essential requirements of the deduction clause. It was not the contention of the Department that the expenditure was infructuous or abortive exploration expenditure.

and its order holding the assessee eligible for deduction thereunder were not erroneous.’

Principal CIT vs. Akshay Sobti[2020] 423 ITR 321 (Del.)Date of order: 19th December, 2019A.Y.: 2012-13

u/s 54 in respect of capital gains from the sale of residential house. The A.O. disallowed the deduction u/s 54 on the ground that the assessee had entered into an agreement

th February, 2006 and the date of the agreement was to be treated as the date of acquisition, which fell beyond the one year period provided u/s 54 and was also

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prior to the date of transfer.

The Commissioner (Appeals) held that the assessee had

in instalments and the builder was to construct the

the Commissioner (Appeals) considered the agreement to be a case of construction of new residential house

construction has been completed within three years of the sale of the original asset, the assessee was entitled to relief u/s 54. The Tribunal upheld the decision of the Commissioner (Appeals).

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

assessee to purchase a residential house property either one year before or within two years after the date of transfer of a long-term capital asset, or construct a residential house. It is not stipulated or indicated in the section that the construction must begin after the date of sale of the original or old asset.

Principal CIT vs. Ashok Apparels (P.) Ltd.[2020] 423 ITR 412 (Bom.)Date of order: 8th April, 2019A.Ys.: 2006-07 to 2009-10

In the appeal by the Revenue against the order of the Tribunal, the following question was raised before the Bombay High Court.

‘Whether on the facts and in the circumstances of the case

in treating the bonus shares as investments with a cost of acquisition of Rs. Nil for the year under consideration, ignoring the fact that the original shares, for which bonus shares were allotted, were present in the trading stock itself for the year under consideration, thus the bonus shares allotted against the same were also required to be

treated as a part of trading stock itself?’

The Bombay High Court upheld the decision of the Tribunal and held as under:

‘i) In CIT vs. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC) the Supreme Court observed that bonus shares would normally be deemed to be distributed by the company as capital and the shareholder receives the shares as capital. The bonus shares are accretions to the shares in respect of which they are issued, but on that account those shares do not become stock-in-trade of the business of the shareholder. A trader may acquire a commodity in which he is dealing for his own purposes and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of

to be gathered from the evidence of conduct and dealings by the acquirer with the commodity.

ii) The A.O. had merely proceeded on the basis that the origin of the bonus shares being the shares held by the assessee by way of stock-in-trade, necessarily the bonus shares would also partake of the same character. The

the case in treating the bonus shares as investments.’

CIT vs. Reliance Industries Ltd.[2020] 423 ITR 236 (Bom.)Date of order: 15th January, 2019

The assessee had issued foreign currency bonds in the

According to the assessee, on account of the attack on th September,

of debentures and bonds started selling them which, in turn, brought down the market price of such bonds and debentures which were traded in the market at less than the face value. The assessee, therefore, purchased such bonds and debentures from the market and extinguished

45 46


BCAJ

them. In the process of buyback, the assessee gained

addition accordingly.

The Commissioner (Appeals) deleted the addition. The

(Appeals).


sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment year in respect of loss, expenditure or trading liability incurred. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, the assessee is liable

ii) It was not the case of the Revenue that in the process of issuing the bonds the assessee had claimed deduction of any trading liability in any year. Any extinguishment of such liability would not give rise to applicability of sub-

Principal CIT vs. Aristo Pharmaceuticals P. Ltd.[2020] 423 ITR 295 (Bom.)Date of order: 23rd January, 2020A.Y.: 2006-07

the Revenue before the Bombay High Court:

‘i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in setting aside the action of the A.O. without appreciating the fact that

ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in ignoring

the fact that the Tribunal has explained considering the case of Eskayef vs. CIT [2000] 245 ITR 116 (SC), of the Supreme Court that free medical samples distributed to doctors is in the nature of sales promotion and, similarly, any expenditure on free samples of other products distributed to trade or consumers would be liable to fringe

The Bombay High Court held as under:

tax it is essential that there must be a relationship of

provided or deemed to be provided by the employer to his employees. The relationship of employer and employee is the sine qua nonprovided by the employer to the employees in the course of such relationship.

ii) The assessee was a pharmaceutical company. Since there was no employer-employee relationship between the assessee on the one hand and the doctors on the other hand to whom the free samples were provided, the expenditure incurred for them could not be construed as

Principal CIT vs. Dakshin Haryana Bijli Vitran Nigam Ltd.[2020] 423 ITR 402 (P&H)Date of order: 29th November, 2018A.Y.: 2005-06

The assessee distributed electricity. For the A.Y. 2005-06

proceedings for reassessment were initiated on the ground that the assessee had charged surcharge on delayed payment of bill and this was charged as part of the single bill along with the electricity charges. The assessee did not account for the surcharge as part of its income on

made an addition on account of the surcharge levied but not realised since the assessee followed the mercantile system of accounting.

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BCAJ

The Commissioner (Appeals) deleted the addition following

On appeal by the Revenue, the Punjab and Haryana High Court upheld the decision of the Tribunal and held as under:

‘i) As and when the assessee received payment of surcharge, it would be obliged to pay tax on such amount.

by the appellate authorities which warranted interference.

ii) No question of law arose.’

Gangothri Textiles Ltd. vs. ACIT[2020] 423 ITR 382 (Mad.)Date of order: 20th November, 2019A.Y.: 2012-13

there was no wilful default left out to be marked due

The assessee company was a textile manufacturer. It was represented by its managing director and executive director. The Assistant Commissioner of Income-tax

against the petitioners for offences u/s 276C(2) read

that the trial court had failed to take into consideration the necessity and requirement for marking the documents adduced by way of additional evidence. The Madras High Court allowed the revision petition and held as under:

‘i) Where documents of evidence are left out to be marked due to carelessness and ignorance, they can be allowed to be marked for elucidation of truth, in the interests of

of the Code is to empower the appellate court to see that

justice is done between the prosecutor and the prosecuted in the interests of justice.

court opined that additional evidence was necessary, it shall record its reasons and take such evidence itself. The petitioners had been charged u/s 276C(2) read with

the penalty and having deliberately failed to admit the capital gains that arose from the sale transactions done

of presentation of the appeal. The documents sought to be marked as additional evidence were not new documents

the Department in respect of the earlier assessment years, copies of which were also available with the Department. By marking these documents, the nature or course of the case would not be altered. The documents had not

or inadvertence of the person who had conducted the case. Where documents were left out to be marked due to carelessness and ignorance, they could be allowed to be marked for elucidation of truth, in the interest of justice, by

iii) The petitioners should be allowed to let in additional evidence subject to the provisions of Chapter XXIII of the Code in the presence of the complainant and his counsel.’

Samdariya Builders Pvt. Ltd. vs. IT Settlement Commission[2020] 423 ITR 203 (MP)Date of order: 7th May, 2019A.Ys.: 2008-09 to 2014-15

The assessee was a part of a group of companies. Search

and business premises of the group, including those of the assessee and some brokers. No incriminating material was found against the assessee during the operations, but nine loose sheets of paper, purportedly relating to the

50

49


720 (2020) 52-A BCAJ

assessee, were seized from a broker. In compliance with

returns of income. During the assessment proceedings,

Settlement Commission for settlement and the application

Settlement Commission u/s 245D(2C). Thereafter, the

by his order u/s 245D(4) relegated the assessee to the A.O. Hence, the A.O. issued a notice to the assessee to

order. The Madhya Pradesh High Court allowed the writ petition and held as under:

‘i) The Settlement Commission’s power of settlement has to be exercised in accordance with the provisions of

it cannot make any order with a term of settlement which

Act, such as in the quantum and payment of tax and the interest. The object of the Legislature in introducing

protracted proceedings before the authorities or in courts are avoided by resorting to settlement of cases.

ii) The Settlement Commission could have either rejected the application or allowed it to be proceeded with further. If the Settlement Commission was of the opinion that the matter required further inquiry, it could have directed the Principal Commissioner or the Commissioner to inquire and submit the report to the Commission to take a decision. The Commission could not get around the application for settlement. When a duty was cast on the Commission, it is expected that the Commission would perform the duty in the manner laid down in the Act, especially when no further remedy is provided in the Act against the order of the Settlement Commission. The order of the Settlement Commission relegating the assessee to the A.O. was to be set aside.’

Hitachi Power Europe GMBH vs. IT Settlement Commission[2020] 423 ITR 472 (Mad.)Date of order: 17th February, 2020A.Ys.: 2015-16 to 2018-19

had invited bids under international competitive bidding for the supply and installation of eleven 660-megawatt

successfully submitted by B, a company incorporated in India and engaged in providing turnkey solutions for coal-based thermal power plants. B sub-contracted a portion of the scope of work under three contracts to its joint venture company, which in turn sub-contracted a portion thereof to the assessee. One of the contentions raised by the assessee on the merits was that the scope of work under each of the contracts was separate and distinct in all respects including the delineation of the work itself, the modes of execution of the contract and the payments therefor.

For this reason, the assessee took the stand that the income from offshore supplies would not be liable to tax

onshore supply and services only. While assessment proceedings were pending, the assessee applied for settlement of the case. The Settlement Commission held that the contract was composite and indivisible and hence the applicant, i. e., the assessee, had failed to make a full and true disclosure of income.

On a writ petition against the order, the Madras High Court held as under:

‘i) The scheme of Chapter XIX-A of the Income-tax

that arise from an assessment in the case of an assessee that has approached the Commission. The question of full and true disclosure and the discharge

be seen only in the context of the issues offered for settlement and the remittances of additional tax thereupon. Issues decided by the Commission and the liability arising therefrom will be payable only at the stage

u/s 245D(4) of the Act.

ii) The assessee had just applied for settlement of the case. The Commission, however, in considering the

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BCAJ

“validity” or otherwise of the application, proceeded to delve into the merits of the matter even at that stage. The order of the Settlement Commission was beyond the

Advocate

IUNREPORTED DECISIONS

M/s. J.S. & M.F. Builders vs. A.K. Chauhan and others[Writ Petition No. 788 of 2001A.Ys.: 1992-93, 1993-94, 1994-95 and 1995-96Date of order: 12th June, 2020(Bombay High Court)

The petitioner had challenged the legality and validity of the four impugned notices, all dated 25th February,

chargeable to tax for the said assessment years had escaped assessment.

st October,

builders and developers.

th November,

and the petitioner whereby and whereunder Mr. Dasani agreed to sell, and the petitioner agreed to purchase, a property situated at Borivali admeasuring

consisted of seven structures and two garages. The property was mortgaged and all the tenements were let out. The aggregate consideration for the purchase was

was incurred by way of stamp duty and registration charges. The said property was purchased subject to all

the balance sheets of the petitioner drawn up thereafter

the petitioner entered into various agreements with the tenants to get the property vacated. In the process, they

In the balance sheet as on 30th

st

petitioner converted a portion of the property into stock-in-trade and continued to retain that part of the property

st October,

of the property that was converted into stock-in-trade was

The petitioner thereafter demolished the vacant structures and commenced construction of a

st

accompanying the computation of income it was clearly mentioned that the conversion of a part of the Borivali property was made into stock-in-trade and the liability to

were sold. During the previous year relevant to the A.Y.

gains' was arrived at by determining the difference between the market value of the land converted into

st

9

scope of section 245D(2C) having been passed on the merits of the issue raised and set aside the same. This writ petition is allowed.’


722 (2020) 52-A BCAJ

pro-rata basis. Accordingly, having

return of income, a computation of income as well as an audit report in terms of section 44AB of the Act were

of the Act assessing the petitioner at the income of

of business or profession' as well as under the head

previous year. The return was accompanied by the tax

balance sheet. The A.O. completed the assessment

gains' was declared in terms of section 45(2) of the Act.

was issued on 30th

declaring income under both heads, i.e., 'income from business' and 'capital gains'. The income of the petitioner was computed in a similar manner as in the earlier years

loss account and balance sheet furnished along with the return. In the course of the assessment proceedings, the

th March, 2000 four notices, all dated 25th

The reasons recorded for each of the assessment years were identical save and except the assessment details and

of re-assessment proceedings. Firstly, the petitioner was

st

static in the subsequent years. In other words, the closing stock of the land should have been valued at the market price as on the date of closing of accounts for the year

concerned. This resulted in undervaluation of closing stock

Secondly, even though the petitioner might have

ownership of the land continued to remain with the petitioner. The whole of the land under the ownership of the petitioner constituted its stock-in-trade and it should have been valued at the market price as on the date of closing of accounts for the year concerned. Thus, the assessee had suppressed the market price of the closing

Thirdly, for the purpose of computing the 'capital gains' in terms of section 45(2) of the Act, the petitioner was

the petitioner ought to have taken only a fraction of the

cost. Lastly, in terms of section 45(2), the 'capital gains' arising on conversion of the land into stock-in trade ought to have been assessed only in the year in which the land was sold or otherwise transferred. As the land was not conveyed to the co-operative society, the petitioner was

during each of the previous years relevant to the four A.Y.s under consideration.

The petitioner submitted that it had fully complied with the requirement of section 45(2) of the Act and the capital gains arising on the conversion of the land into stock-in-trade was offered and rightly assessed to tax in the

the land. This methodology adopted by the petitioner is in accordance with law. It was also submitted that it is not

of the closing stock. In this connection, reliance was placed on a decision of the Supreme Court in Chainrup Sampatram vs. CIT, 24 ITR 481.

The Petitioner also referred to a decision of this Court in CIT vs. Piroja C. Patel, 242 ITR 582 to contend that the expenditure incurred for having the land vacated would certainly amount to cost of improvement which is an allowable expenditure.

The case of the Revenue was that the A.O. after recording the sequence of events from acquiring the property vide


723 (2020) 52-A BCAJ

the deed of conveyance dated 23rd

the assessee had converted part of the property into stock-st

On the date of conversion into stock-in-trade, the value

st March,

to the total constructed area. However, the assessee valued the closing stock at market price prevailing as on

st

should have been valued at the market price on the close of each accounting year. This resulted in undervaluation

Secondly, land as an asset is separate and distinct from the building. The building was shown as a work in progress

still under the ownership of the assessee. Ownership of land was not transferred. As the land continued under the ownership of the assessee, its value could not be reduced

under ownership of the assessee constituted its stock-in-trade and it should have been valued at the market price as on the date of closing of the accounts for the year under consideration. Therefore, the A.O. alleged that the assessee had suppressed the market price of the closing

The third ground given was regarding computation of 'capital gains' furnished with the return of income.

st

st

the assessee made deduction of the cost incurred for the entire land whereas only a fraction of the said land was converted into stock-in-trade where construction was done.

The A.O. worked out that the cost of the converted piece

tenanted property from the cost of the property, i.e.,

The last ground given by the A.O. was regarding offering of long-term capital gain by the assessee. He noted that for the purpose of computation of long-term capital gain, the assessee estimated the fair market value of the land

st

st October,

that the method of computation of cost was not clear in view of the fact that the whole of the land with tenanted structures was purchased for Rs. 3,00,000. The A.O. further noted the methodology adopted by the assessee for computation of long-term capital gain. According to him, the assessee had worked out the difference between the fair market value of the land converted to stock and the cost and thereafter divided it by the total

the assessee as capital gains per sq. ft. The assessee

sold with such quotient and claimed it to be the 'capital gains' for the year under consideration. By adopting such a computation, the assessee was claiming sale of land in

bore to the total permissible FSI area. But this calculation was not accepted by the A.O. primarily on the ground that

did not amount to selling of proportionate quantity of land.

The Court held that u/s 45(2) of the Act, 'capital gains' for land should be considered in the year when land was sold or otherwise transferred by the assessee. Though

with the assessee. 'Capital gains' would be chargeable to tax only in the year when the land was sold or transferred

The Court accepted the contention of the petitioner that the A.O. proceeded on the erroneous presumption that stock-in-trade had to be valued at the present market value. In Chainrup Sampatram (Supra), the Supreme Court had held that it would be wrong to assume that the valuation of the closing stock at market rate has for its object the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there had been actual sales in the course of

the year's trading. While anticipated loss is taken into


724 (2020) 52-A BCAJ

value of the closing stock is not brought into the account

before its actual realisation. This is the theory underlying the rule that the closing stock has to be valued at cost or market price whichever is lower and it is now generally accepted as an established rule of commercial practice and accountancy. In such circumstances, taking the view

in conformity with the ordinary principles of commercial accounting unless such principles have been superseded

held that it would be a misconception to think that any

With regard to the third ground, i.e., computation of 'capital gains', the Court held that the cost incurred included not only the sale price of the land, i.e., Rs. 3,00,000, but also the expenditure incurred by way of stamp duty and

in getting the entire property vacated. The contention of

Thus, for computing the income under the head 'capital gains', the full value of consideration received as a result of transfer of the capital asset shall be deducted by the expenditure incurred in connection with such transfer, cost of acquisition of the asset and the cost incurred in improvement of the asset. The expression 'the full value of the consideration' would mean the fair market value of the asset on the date of such conversion. The meaning of the expressions 'cost of improvement' and 'cost of

the Act, respectively.

The expression 'capital asset' occurring in sub-section

2. 'Capital asset' means property of any kind held by an assessee whether or not connected with his business or profession as well as any securities held by a foreign institutional investor, but does not include any stock-in-trade, consumable stores or raw materials, personal effects, etc.

includes sale, exchange or relinquishment of the asset or the extinguishment of any rights therein, or compulsory acquisition of the asset, or in case of conversion of the asset by the owner into stock-in-trade of the business

carried on by him, such conversion or any transaction involving the allowing of possession of any immovable property to be taken or retained in part performance of a contract, or any transaction whether by way of becoming a member of or acquiring shares in a co-operative society, etc. which has the effect of transferring or enabling the enjoyment of any immovable property.

In the case of Miss Piroja C. Patel (Supra), the court held that on eviction of the hutment dwellers from the land in question, the value of the land increases and therefore the expenditure incurred for having the land vacated would certainly amount to cost of improvement.

Thus, the cost incurred on stamp duty, etc., together with the cost incurred in carrying out eviction of the hutment dwellers would certainly add to the value of the asset and thus amount to cost of improvement which is an allowable deduction from the full value of consideration received as a result of the transfer of the capital asset for computing the income under the head 'capital gains'.

Insofar as the fourth ground is concerned, the A.O. has taken the view that long-term capital gains arising out of sale or transfer of land would be assessed to tax only in the year in which the land is sold or otherwise transferred by the assessee. Opining that land

held that ownership of land continued to remain with

he was of the view that 'capital gains' would be chargeable to tax only in the year when the land is sold or otherwise transferred to the co-operative society

According to the A.O., the assessee had erred in offering to tax 'capital gains' in the year when the individual

assessed to tax only when the land was transferred to

If the assessee had offered to tax as 'capital gains' in the assessment years under consideration that which should have been offered to tax in the subsequent years, it is beyond comprehension as to how a belief can be formed that income chargeable to tax for the assessment year under consideration had escaped assessment. That

certainly acquired a right or interest in the proportionate share of the land but its realisation is deferred till the

Continued on Page 66


725 (2020) 52-A BCAJ

tripartite operating agreement (the ‘tripartite agreement’) with YRIPL and its franchisees, wherein the assessee

of gross sales for the proper conduct of the AMP activities

franchisees.

its return stating the income to be Nil under the pretext of the mutual character of the company. The same was not accepted by the A.O. who observed that the assessee company along with the franchisees was

YRMPL. However, as per the tripartite agreement submitted by YRMPL, YRIPL had the sole absolute discretion to pay to YRMPL any amount as it may deem appropriate and that YRIPL had no obligation to pay any amount if it chooses not to do so. YRIPL was under no legal obligation to pay any amount of contribution as per

The A.O. determined the total income at Rs. 44,44,002, being the excess of income over expenditure for A.Y.

The imposition of liability by the A.O. was upheld by the CIT(A) on the ground of taint of commerciality in the activities undertaken by the assessee company.

the essential ingredients of the doctrine of mutuality were found to be missing. The Tribunal inter alia found that apart from others, contributions were also received from M/s Pepsi Foods Ltd. and YRIPL. Pepsi Foods Ltd.

some contribution was also received from YRIPL who was not under any obligation to pay. Thus, the essential requirement, that the contributors to the common fund are

of the contribution, was missing. Through the common

YRIPL. Accordingly, the principles of mutuality could not be applied.

GLIMPSES OF SUPREME COURT RULINGS

Yum! Restaurants (Marketing) Private Limited vs. Commissioner of Income Tax, DelhiDate of order: 24th April, 2020

raison d’être behind the refund

of the same in the subsequent assessment year is

The appellant company Yum! Restaurants (Marketing) Private Limited (‘YRMPL’ or ‘assessee company’ or ‘assessee’) was incorporated by Yum! Restaurants (India) Pvt. Ltd. (‘YRIPL’), formerly known as Tricon Restaurants India Pvt. Ltd., as its fully-owned subsidiary for undertaking the activities relating to advertising, marketing and promotion (‘AMP activities’) for and on behalf of YRIPL and its franchisees after having obtained approval from the Secretariat for Industrial Assistance (‘SIA’) for the purpose of economisation of the cost of advertising and promotion of the franchisees as per their needs. The approval was granted subject to certain conditions as regards the functioning of the assessee

on the principles of mutuality.

In furtherance of the approval, the assessee entered into a

14

KISHOR KARIA Chartered Accountant

Advocate


726 (2020) 52-A BCAJ

The consistent line of opinion recorded by the aforementioned three forums was further approved in appeal by the High Court.

According to the Supreme Court, the following questions of law arose in the present case:(i) Whether the assessee company would qualify as a mutual concern in the eyes of law, thereby exempting subject transactions from tax liability?(ii) Whether the excess of income over expenditure in the hands of the assessee company is not taxable?

The assessee had contended before the Supreme Court that the sole objective of the assessee company was

to the mutual concern. It was further contended that the assessee company levied no charge on the franchisees for carrying out the operations. While assailing the observations made in the impugned judgment, holding

of the concern, the assessee company had urged that YRIPL was the parent company of the assessee and

sales as increased sales would translate into increased royalties. A similar argument had been advanced as regards Pepsi Foods Ltd. It was stated that under a marketing agreement the franchisees were bound to serve Pepsi drinks at their outlets and, thus, an increase in the sales at KFC and Pizza Hut outlets as a result of AMP activities would lead to a corresponding increase in the sales of Pepsi. It was pointed out that Pepsi was also advertised by the franchisees in their advertising and promotional material, along with Pizza Hut and KFC.

As regards the doctrine of mutuality, it was urged by the assessee company that the doctrine merely requires

and it does not contemplate that each member should

to the same extent. Reliance had been placed by the appellant upon reported decisions to draw a parallel between the functioning of the assessee company and clubs to support the presence of mutuality.

The Revenue / respondent had countered the submissions made by the assessee company by submitting that the moment a non-member joins the common pool of funds

commerciality begins and mutuality ceases to exist in the eyes of law. It had been submitted that the assessee company operated in contravention of the SIA approval as contributions were received from Pepsi, despite it not being a member of the brand fund. It was urged that once

was lost, mutuality stands wiped out.

The Supreme Court held that it was undisputed that Pepsi Foods Ltd. was a contributor to the common pool of funds. However, it did not enjoy any right of participation in the surplus or any right to receive back the surplus which was a mandatory ingredient to sustain the principle of mutuality.

The assessee company was realising money both from the members as well as non-members in the course of the same activity carried on by it. The Supreme Court noted that in Royal Western India Turf Club Ltd., AIR 1954 SC 85 it has categorically held such operations to be antithetical to mutuality. Besides, the dictum in Bankipur

was apposite.

According to the Supreme Court, the contention of the assessee company that Pepsi Foods Ltd., in fact,

exclusive contracts with the franchisees was tenuous, as the very basis of mutuality was missing. Even if any

Ltd., the same could not be said to be in lieu of it being a member of the purported mutual concern and, therefore,

mutuality. The surplus of a mutual operation was meant to be utilised by the members of the mutual concern as members enjoy a proximate connection with the mutual operation. Non-members, including Pepsi Foods Ltd., stood on a different footing and had no proximate connection with the affairs of the mutual concern. The exclusive contract between the franchisees and Pepsi Foods Ltd. stood on an independent footing and YRIPL as well as the assessee company were not responsible

limb of the three-pronged test stood severed.

The Supreme Court held that the receipt of money from an outside entity without affording it the right to have a

of common identity, but also contravened the other two conditions for the existence of mutuality, i.e., impossibility

the assessee company was laid down in the SIA approval


727 (2020) 52-A BCAJ

wherein the twin conditions of mutuality and non-sine qua non for the

functioning of the assessee company. The contributions made by Pepsi Foods Ltd. tainted the operations of the assessee company with commerciality and concomitantly contravened the prerequisites of mutuality and non-

The Court further held that YRIPL and the franchisees stand on two substantially different footings. For, the

for the conduct of AMP activities, whereas YRIPL is under no such obligation in utter violation of the terms of the SIA approval. Moreover, even upon request for the grant of funds by the assessee company, YRIPL is not bound to accede to the request and enjoys a ‘sole and absolute’ discretion to decide against such request. An arrangement wherein one member is subjected to the absolute discretion of another, in such a manner that the

reaped by all, is the antithesis to the mutual character in the eyes of law.

According to the Supreme Court, the contention advanced by the appellant that it is not mandatory for every member of the mutual concern to contribute to the common pool failed to advance the case of the appellant. The Court held

obligation and presence of overriding discretion. In the present case, YRIPL enjoyed the latter to the detriment of the franchisees of the purported undertaking, both in matters of contribution and of management. In a mutual concern, it is no doubt true that an obligation to pay may or may not be there, but in the same breath it is equally true that an overriding discretion of one member over others cannot be sustained in order to preserve the real essence of mutuality wherein members contribute for the

The Court observed that the settled legal position is that in order to qualify as a mutual concern, the contributors to the common fund either acquire a right to participate in the surplus or an entitlement to get back the remaining proportion of their respective contributions. Contrary to

franchisees did not enjoy any ‘entitlement’ or ‘right’ on the surplus remaining after the operations were carried out for a given assessment year. As per the aforesaid clause the assessee company may refund the surplus subject to the approval of its Board of Directors. It implied that the franchisees / contributors could not claim a refund of

their remaining amount as a matter of right. According to the Supreme Court, the raison d’être behind the refund of surplus to the contributors or mandatory utilisation of the same in the subsequent assessment year is to reduce their burden of contribution in the next year proportionate to the surplus remaining from the previous year. Thus, the

even if any surplus is remaining in a given assessment year, it would not reduce the liability of the franchisees

funds were surplus in the previous year. The only entity

YRIPL, i.e., the parent company. This was antithetical to the test of mutuality.

It was observed that the dispensation predicated in the tripartite agreement may result in a situation where YRIPL would not contribute even a single paisa to the common

out of the purported mutual operations, created from the

of inputs supplied by others. According to the Supreme Court, the doctrine of mutuality, in principle, entails that

directly or indirectly. One of the tests of mutuality requires that the purported mutual operations must be marked by

The Supreme Court further observed that the exemption granted to a mutual concern is premised on the assumption that the concern is being run for the mutual

the members ought to be directed accordingly. Contrary to this fundamental tenet, the tripartite agreement relieves

spending the amounts received by way of contributions

assessee company does not hold such amount under any implied trust for the franchisees.

According to the Supreme Court, the assessee company had acted in contravention of the terms of approval.

The appellant had urged before the Supreme Court that

upon YRIPL as it did not operate any restaurant directly and, thus, the actual volume of sales could not be determined. According to the Court this argument was not


BCAJ

from the franchisees on the sales. If the franchisees could

in the present case, there was no reason as to why the same obligation ought not to apply to YRIPL.

The Court further noted that the text of the tripartite agreement pointed towards the true intent of the formation of the assessee company as a step-down subsidiary. It was established to manage the retail restaurant business, the advertising, media and promotion at the regional and national level of KFC, Pizza Hut and other brands currently owned or to be acquired in future. In its true form, it was not contemplated as a non-business concern because operations integral to the functioning of a business were entrusted to it.

The Supreme Court held that the doctrine of mutuality bestows a special status to qualify for exemption from tax

and to prove the existence of mutuality, the question of extending exemption from tax liability to the appellant, that, too at the cost of the public exchequer, did not arise.

The assessee company had relied upon reported decisions before the Supreme Court to establish a parallel between the operations carried out by it and clubs. According to the Supreme Court, all the members of the club not only have a common identity in the concern but also stand on an equal footing in terms of their rights and liabilities towards the club or the mutual undertaking. Such clubs are a means of social intercourse and are not formed for the facilitation of any commercial activity. On the contrary, the purported mutual concern in the present case undertook a commercial venture wherein contributions were accepted both from the members as well as from non-members. Moreover, one member was vested with a myriad set of powers to control the functioning and interests of other members (franchisees), even to their detriment. Such assimilation could not be termed as a case of ordinary social intercourse devoid of commerciality.

The Supreme Court was of the view that once it had conclusively determined that the assessee company had not operated as a mutual concern, there was no question of extending exemption from tax liability.

To support an alternative claim for exemption, the assessee company took a plea in the written submissions that it was acting under a trust for the contributors and was under an overriding obligation to spend the amounts received

for advertising, marketing and promotional activities. It urged that once the incoming amount is earmarked for an obligation, it does not become ‘income’ in the hands of the assessee as no occasion for the application of such income arises.

The Supreme Court left the question of diversion by overriding title open as the same was neither framed nor agitated in the appeal memo before the High Court or before it (except a brief mention in the written submissions), coupled with the fact that neither the Tribunal nor the High Court had dealt with that plea and

pending before the Tribunal.

Date of order: 24th April, 2020

Supreme Court deleted the addition of amount of

The appellant / assessee was served with a notice u/s

order was passed on 30th November, 2000. The A.O., while relying on the balance sheet and the books of accounts, inter alia took note of the credits amounting to Rs. 2,26,000.

Act and added the same in the declared income of the assessee (the 'second addition'). According to the A.O., the

were not correct and any correct proof / evidence had not been produced by the assessee with respect to the income

15


BCAJ

of the creditors and source of income. He also made other additions to the returned income.

Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), Jodhpur. The appeal was partly allowed vide th January, 2003. However, as regards the trading account and credits in question, the CIT(A) upheld the assessment order.

The assessee then preferred a further appeal to the ITAT. Having noted the issues and objections raised by the Department and the assessee, the ITAT partly allowed the appeal vide order dated 4th November, 2004. However, the order relating to the second addition regarding the credits of Rs. 2,26,000 came to be upheld.

27th April, 2006 on the following substantial question of law:

‘Whether claim to purchase of goods by the assessee

credit, by placing burden upon the assessee to explain that the purchase price does not represent his income from the disclosed sources?’

The High Court dismissed the appeal vide impugned st

devoid of merits. The High Court opined that the amount shown to be standing to the credit of the persons which had been added to the income of the assessee, was clearly a bogus entry in the sense that it was only purportedly

persons, purportedly on account of the assessee having purchased goods on credit from them, while since no goods were purchased, the amount did represent income of the assessee from undisclosed sources which the assessee had only brought on record (books of accounts), by showing to be the amount belonging to the purported sellers and as the liability of the assessee. That being the position, the contention about impermissibility of making

having been made in trading account, rejecting the books

had not been accepted on the ground that the assessee had not maintained day-to-day stock registers, nor had he produced or maintained other necessary vouchers, but then, if those books of accounts did disclose certain other assets which were wrongly shown to be liabilities, and

for acquisition of which the assessee did not show the source, it could not be said that the A.O. was not entitled to use the books of accounts for this purpose.

The assessee in the civil appeal before the Supreme Court reiterated the argument that the A.O., having made

assessment’, had invoked powers under sub-section (3)

books are rejected. In that case, the same books could not be relied upon to impose subsequent additions as had

the Supreme Court for permission to bring on record subsequent events. By this application, the assessee placed on record an order passed by the CIT(A) dated

th

th November, 2006 qua the assessee for

passed the said order as a consequence of the conclusion reached in the assessment order which had by then

vide order dated 27th

April, 2006 – to the effect that the stated purchases by the assessee from unregistered dealers were bogus entries

were initiated by the ITO. That order was set aside by

the assessee, vide th

of income or furnished inaccurate particulars of income for the assessment year concerned. As a consequence of this decision of the appellate authority, even the criminal proceedings initiated against the assessee were dropped / terminated and the assessee stood acquitted

vide judgment and order dated 6th

the Court of Additional Chief City Magistrate (Economic Offence), Jodhpur City in proceedings No. 262/2005.

The Supreme Court noted that during the course of

under Rule 46A vide th

vide this th st December,

additional evidences. Along with the application under

showing purchases from unregistered dealers to the tune


730 (2020) 52-A BCAJ

stamp for receipt of payment by the unregistered dealers and copy of ration card / Voter ID Card to show the identity of the unregistered dealers. The A.O. recorded

report dated 22nd

th th

identity cards and all of them had admitted that they had sold marble on credit basis to Basir Ahmed Sisodiya, the

after two or three years. However, he observed that none of them had produced any evidence in support of their statement since all were petty, unregistered dealers of marble and doing small business and therefore no books of accounts were maintained. Some of them had stated that they were maintaining small dairies at the relevant period of time but they could not preserve the old dairies. Some of them had stated that they had put their signature on the vouchers on the date of the transactions.

The Supreme Court further noted that the CIT(A) had observed that in respect of the addition of Rs. 2,26,000 there had been no denial of purchase of marble slabs

st

Without purchases of marble, there could not have been sale and disclosure of closing stock in the trading account which suggested that the appellant must have purchased marble slabs from unregistered dealers. The CIT(A) had found that the explanation given by the appellant in respect of purchases from unregistered dealers and their

producing these before the A.O. in the course of remand

in respect of the identity of the unregistered dealers and claims made for the sale of marble slabs to the appellant

and conclusions recorded by the A.O. and which were commended to the appellate authority as well as the High Court, it must follow that the assessee despite being given

genuineness of his claim in respect of purchase of marble from unregistered dealers to the extent of Rs. 2,26,000. As a result, the said transactions were assumed as bogus entries (standing to the credit of named dealers who were non-existent creditors of the assessee).

According to the Supreme Court, the assessee, however, in penalty proceedings had offered explanation and

the unregistered dealers concerned and establish their credentials and that explanation having been accepted by the CIT(A) who concluded that the materials on record would clearly suggest that the unregistered dealers concerned had sold marble slabs on credit to the assessee, as claimed.

The Supreme Court was therefore of the view that the factual basis on which the A.O. formed his opinion in the assessment order dated 30th November, 2000 (for

unregistered dealers concerned in penalty proceedings. That evidence fully supported the claim of the assessee. The appellate authority vide th January,

concealment of income or furnishing of any inaccurate particulars of income by the appellant / assessee for the

must necessarily follow that the addition of the amount of

The Supreme Court, therefore, allowed the appeal.

Union of India (UOI) and Ors. vs. U.A.E. Exchange CentreDate of order: 24th April, 2020

to the extent attributable to the PE of the assessee

non obstante

17


BCAJ

The respondent, a limited company incorporated in the United Arab Emirates (UAE) was engaged in offering, among other things, remittance services for transferring amounts from UAE to various places in

pursuant to which approval was granted by the Reserve Bank of India (the RBI) vide letter dated 24th September,

New Delhi, Mumbai and Jalandhar. The activities carried

stated to be in conformity with the terms and conditions prescribed by the RBI in its letter dated 24th September,

were met exclusively out of funds received from the UAE

undertook no activity of trading, commercial or industrial, as the case may be. The respondent had no immovable property in India otherwise than by way of lease for

for services rendered in India. It was claimed that no income accrued or arose or was deemed to have accrued or arisen, directly or indirectly, through or from any source

According to the respondent, the remittance services were offered by it to non-resident Indians (NRIs) in the UAE. The contract pursuant to which the funds were handed over by the NRI to the respondent in the UAE was entered into between the respondent and the NRI remitter in the UAE. The funds were collected from the

collecting the funds from the NRI remitter, the respondent made an electronic remittance of the funds on behalf of its customer in one of two ways:

(ii) On the request of the NRI remitter, the respondent sent

according to the respondent no income had accrued or was deemed to have accrued to it in India, both under

between the Government of the Republic of India and the Government of the UAE, which is known as the Double Taxation Avoidance Agreement (‘DTAA’). This agreement (DTAA) had been entered into between the two sovereign

for the purpose of avoidance of double taxation and

vide th November,

respondent and were accepted by the Department without any demur.

However, as some doubt was entertained, the respondent

Advance Rulings (Income Tax), New Delhi, which was

Authority on the following question:

‘Whether any income is accrued / deemed to be accrued in India from the activities carried out by the Company in India?’

The Authority vide its ruling dated 26th May, 2004 answered

deemed to accrue in India from the activity carried out by

the Authority opined that in view of the deeming provision

Act, the respondent-assessee would be liable to pay tax

through a ‘permanent establishment’ (PE) situated in

in India, but only that proportion that was attributable to

in India which attended to the complaints of the clients in cases where remittances were sent directly to banks in India from the UAE. In addition, in cases where the

downloaded the information from the internet, printed

and sent them through couriers to various places in India.


732 (2020) 52-A BCAJ

Without the latter activity, the transaction of remittance of the amounts in terms of the contract with the NRIs would not be complete. The commission which the applicant received for remitting the amount covered not only the business activities carried on in the UAE but also the

India by cheques / drafts through courier which was being

There was, therefore, a real relation between the business carried on by the applicant for which it received commission in the UAE and the activities of the liaison

preparation of cheques / drafts and sending the same to

indirectly to the earning of income by the applicant by way of commission. There was also continuity between the business of the applicant in the UAE and the activities

followed that income had deemed to have accrued / arisen to the applicant in the UAE from 'business connection' in India.

The Authority further held that insofar as the amount was remitted telegraphically by transferring directly from the UAE through bank channels to various places in India

to play except attending to the complaints, if any, in India regarding the remittances in cases of fraud etc., it could be said to be auxiliary in character. However, downloading the data, preparing cheques for remitting the amount and

was an important part of the main work itself because

desired by the NRIs, performance of the contract would

of the UAE establishment. It, therefore, followed that the

this mode of remittance were a 'permanent establishment' within the meaning of the expression in the DTAA.

Following the impugned ruling of the Authority, dated 26th May, 2004, the Department issued four notices of

th

addressed to the respondent and pertaining to A.Y.s

The respondent approached the Delhi High Court by way inter alia for quashing of

the ruling of the Authority dated 26th May, 2004, quashing of the stated notices and for a direction to the appellants not to tax the respondent in India because no income had

accrued to it or was deemed to have accrued to it in India

The High Court was of the opinion that the Authority

Act instead of applying the provisions in Articles 5 and 7 of the DTAA for ascertaining the respondent's liability to tax. Further, the nature of activities carried on by the

of a preparatory and auxiliary character, were clearly excluded by virtue of the deeming provision. The High Court distinguished the decisions relied upon by the Authority in Anglo-French Textile Co. Ltd., by agents, M/s. Best & Company Ltd., Madras vs. Commissioner of Income Tax, Madras AIR 1953 SC 105 and R.D. Aggarwal & Company (Supra). The ratio in these decisions, according to the High Court, was that the non-resident entity could be taxed only if there was a business connection between the business carried on by a non-

the taxable territory which contributes directly or indirectly

The High Court then concluded that the activity carried

not in any manner contribute directly or indirectly to the

and every aspect of the transaction was concluded in the

in India was only supportive of the transaction carried on in the UAE. The High Court also took note of Explanation

the fact that in order to have a business connection in respect of a business activity carried on by a non-resident through a person situated in India, it should involve more than what is supportive or subsidiary to the main function referred to in clauses (a) to (c). The High Court eventually quashed the impugned ruling of the Authority and also

Act, since the notices were based on the ruling which was being set aside. The High Court, however, gave liberty to the appellants to proceed against the respondent on any other ground as may be permissible in law.

Petition before the Supreme Court.

According to the Supreme Court, the core issue that was required to be answered in the appeal was whether the stated activities of the respondent-assessee would qualify


733 (2020) 52-A BCAJ

the expression ‘of preparatory or auxiliary character’?

The Supreme Court observed that having regard to the nature of the activities carried on by the respondent-assessee, as held by the Authority, it would appear that the respondent was engaged in ‘business’ and had ‘business connections’ for which, by virtue of the deeming provision and the sweep of sections 2(24), 4 and 5 read with section

Anglo-French Textile Co. Ltd. (Supra) and R.D. Aggarwal & Company (Supra), it would be a case of income deemed to accrue or arise in India to the respondent. However, in the present case, the matter in issue would have to be answered on the basis of the stipulations in the DTAA

the Supreme Court proceeded on the basis that the

through which its business was being wholly or partly carried on. That, however, would not be conclusive until

a PE situated in India so as to attract Article 7 dealing

extent attributable to the PE of the respondent in India. For that, one has to revert back to Article 5 which deals

enterprise is wholly or partly carried on is regarded as a PE. The term ‘Permanent Establishment (PE)’ would

Article 5. According to the Supreme Court, it was not in dispute that the place from where the activities were

and would, therefore, be covered by the term PE in Article 5(2). However, Article 5(3) of the DTAA opens with a non obstante clause and also contains a deeming provision. It predicates that notwithstanding the preceding provisions

2 of Article 5, it would still not be a PE if any of the clauses in Article 5(3) are applicable. For that, the functional test regarding the activity in question would be essential. The High Court had opined that the respondent was carrying

of a preparatory or auxiliary character.

The Supreme Court, after noting the meaning of the

discerning the meaning of the expressions ‘business

‘preparatory’ and ‘auxiliary’, concluded that since the

India were of preparatory or auxiliary character, the same would fall within the excepted category under Article 5(3)(e) of the DTAA. As a result, it could not be regarded as a PE within the sweep of Article 7 of the DTAA.

According to the Supreme Court, while answering the question as to whether the activity in question could be termed as other than that ‘of preparatory or auxiliary character’, it was to be noted that the RBI had given

th

of the stated permission it was evident that the RBI had

at Cochin, initially for a period of three years, to enable the respondent to (i) respond quickly and economically to inquiries from correspondent banks with regard to

centre receiving computer (via modem) advices of mail transfer T.T. stop payments messages, payment details, etc., originating from the respondent's several branches in the UAE and transmitting to its Indian correspondent

following up with the Indian correspondent banks. These were the limited activities which the respondent had been permitted to carry on within India. This permission did not allow the respondent-assessee to enter into a contract with anyone in India but only to provide service of delivery of cheques / drafts drawn on the banks in India.

The permitted activities were required to be carried out by

3 of the permission, which included not to render any consultancy or any other service, directly or indirectly, with or without any consideration and further that the

from or to any person in India without prior permission of

in India would not undertake any other activity of trading, commercial or industrial, nor shall it enter into any business contracts in its own name without prior permission of the

even charge commission / fee or receive any remuneration or income in respect of the activities undertaken by it in

it could be safely concluded, as opined by the High Court,


734 (2020) 52-A BCAJ

respondent in India were circumscribed by the permission given by the RBI and were in the nature of preparatory

Court was unexceptionable.

The Supreme Court concluded that the respondent was not carrying on any business activity in India as such, but only dispensing with the remittances by downloading information from the main server of the respondent in the UAE and printing cheques / drafts drawn on the banks in India as per the instructions given by the NRI remitters in the UAE. The transaction(s) had been completed with the remitters in the UAE, and no charges towards fee

India in that regard. To put it differently, no income as

was only carrying on activity of a preparatory or auxiliary character).

The concomitant was that no tax could be levied or

in respect of the primary business activities consummated by the respondent in the UAE. The activities carried on by

demonstrated that the respondent must steer away from engaging in any primary business activity and in establishing any business connection as such. It could carry on activities of preparatory or auxiliary nature only.

The Supreme Court dismissed the appeal with no order as to costs.

formation of the co-operative society by the owners of the

operative society.

The Court also referred to various other decisions, namely, Prashant S. Joshi [324 ITR 154 (Bom)], Additional CIT vs. Mohanbhai Pamabhai, 165 ITR 166 (SC), Sunil Siddharthbhai vs. CIT, 156 ITR 509 (SC) and Addanki Narayanappa vs. Bhaskara Krishnappa, AIR 1966 SC 1300, wherein the Court held that what is envisaged on the retirement of a partner is merely his right to realise his interest and to receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership by virtue of his status as a partner and in terms of the partnership agreement. Therefore, what the partner gets upon dissolution of the partnership or upon retirement from the partnership is the realisation of a pre-existing right or interest. The Court held that there was nothing strange in the law that a right or interest should exist in praesenti but its realisation

or exercise should be postponed. Applying the above

the purchaser certainly acquires a right or interest in the proportionate share of the land but its realisation is deferred till formation of the co-operative society by the

operative society.

Thus, on an overall consideration of the entire matter,

the A.O. to form a belief that any income of the assessee chargeable to tax for the A.Y.s under consideration had escaped assessment within the meaning of section

led to formation of any belief that income had escaped assessment within the meaning of the aforesaid provision.

Therefore, in the facts and circumstances of the case,

25th February, 2000 were set aside and quashed.

IN THE HIGH COURTS Continued from Page 56

Civil rights used to be about treating everyone the same. But today some people are so used to special treatment that equal treatment is

considered to be discrimination. — Thomas Sowell


735 (2020) 52-A BCAJ

CONTROVERSIES

TAXATION OF RECEIPT BY RETIRING PARTNER

PRADIP KAPASI I I BHADRESH DOSHIChartered Accountants

ISSUE FOR CONSIDERATION

the outgoing partner may be paid an amount which is in excess of his capital, current account and loan balances

often determined on the basis of an informal valuation of

Taxation of such receipts by a partner on retirement from

subject matter of disputes for several decades. As far

case of Malabar Fisheries Co. vs. CIT 120 ITR 49, held

of rights in partnership assets and was thus not a

the Supreme Court, in a short decision in Addl. CIT vs. Mohanbhai Pamabhai 165 ITR 166

CIT vs. Mohanbhai Pamabhai 91 ITR 393. In that case, the Gujarat High Court had held that when a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on footing of notional sale of partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in partnership to the continuing partners. Therefore, charge of capital gains tax would not apply on such retirement.

45(4) and simultaneous deletion of section 47(ii). Section 47(ii) earlier provided that distribution of assets on

Section 45(4) now provides as under:

asset by way of distribution of capital assets on the

year in which the said transfer takes place and, for the

on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.’

of its assets on dissolution or otherwise. However, even subsequent to these amendments, the taxability of the excess amounts received by the partner on retirement

of dispute before the Tribunals and the High Courts. While the Pune, Hyderabad, Mumbai and Bangalore benches have taken the view that such excess amounts are chargeable to tax as capital gains in the hands of the partner, the Mumbai, Chennai, Bangalore and Hyderabad benches have taken the view that such amounts are not taxable in the hands of the retiring partner. Further, while the Bombay, Andhra Pradesh and Madras High Courts have taken the view that such amount is not taxable in the hands of the partner, the Delhi High Court has taken the view that it is taxable in the hands of the partner as capital gains.

THE HEMLATA S. SHETTY CASEThe issue came up before the Mumbai bench of the Tribunal in the case of Hemlata S. Shetty vs. ACIT [ITA Nos. 1514/Mum/2010 and 6513/Mum/2011 dated 1st December, 2015].

In this case, relating to A.Y. 2006-07, the assessee was

acquired a plot of land in September, 2005 for Rs. 6.50


736 (2020) 52-A BCAJ

crores. At that time, the original capital contributions of the partners was Rs. 3.20 crores, the partners being the assessee’s husband (Sudhakar M. Shetty) and another person. The assessee became a partner in the

th September, 2005, contributing a capital of Rs. 52.50 lakhs. On 26th September, 2005 three

Most of the tenants occupying the land were vacated by paying them compensation, and the Ministry of Tourism’s

the plot of land.

On 27th March, 2006 the assessee and her husband

on revaluation was credited to the partners’ capital accounts. The assessee and her husband each received

balances.

The A.O. noted that the revaluation of land resulted in a

share therein of the assessee and her husband at Rs.

that the excess amount received on retirement from the

gains as there was a transfer within the meaning of section 2(47) on retirement of the partner.

order of the A.O.

Before the Tribunal, on behalf of the assessee, reliance was placed on a decision of the Bombay High Court in the case of Prashant S. Joshi vs. ITO 324 ITR 154, where the Bombay High Court had quashed the reassessment proceedings initiated to tax such excess amount received

the ground that the amount was a capital receipt not chargeable to tax and the reopening of the case was not maintainable.

It was argued on behalf of the Department that the Tribunal had decided the issue against the assessee in the case of the assessee’s husband, Sudhakar M. Shetty vs. ACIT 130 ITD 197 th

Tribunal had referred to the observations of the Bombay High Court in the case of CIT vs. Tribhuvandas G. Patel

115 ITR 95, where the Court had held that there were two modes of retirement of a partner from a partnership

might, instead of assigning his interest, take the amount

and acknowledge that he had no more claim on his co-partners. In that case, the Bombay High Court held that where, instead of quantifying his share by taking accounts on the footing of a notional sale, the parties agreed to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to transfer within the meaning of section 2(47). This view was followed by the Bombay High Court in subsequent decisions in the cases of CIT vs. H.R. Aslot 115 ITR 255 and N.A.Mody vs. CIT 162 ITR 420, and the Delhi High Court in the case of Bishan Lal Kanodia vs. CIT 257 ITR 449.

In the case of Sudhakar Shetty (Supra), the Tribunal observed that in deciding the case of Prashant S. Joshi (Supra), the Bombay High Court had not considered its earlier decisions in the cases of N.A. Mody (Supra) and H.R. Aslot (Supra) and the said decision was rendered by the Court in the context of the validity of the notice u/s

ratio of the decision in that case did not apply to the facts of the case before it in the Sudhakar Shetty case.

On behalf of the assessee, Hemlata Shetty, it was pointed out to the Tribunal that, after the Tribunal’s decision in Sudhakar Shetty’s case, the Department had reopened

that the Department had realised the mistake that it could not have assessed the partners on account of receipt on retirement u/s 45(4). It was therefore pointed out that due to subsequent developments, the facts and circumstances had changed from those prevalent when the Tribunal had decided the case of Sudhakar Shetty.

It was further argued on behalf of the assessee that after the judgment in the Sudhakar Shetty th

by the Mumbai bench of the Tribunal in the case of R.F. Nangrani HUF vs. DCIT [ITA No. 6124/Mum/2012] on

th Sudhakar Shetty’s case was also referred to. The issue in that case was similar to the issue in the case of Hemlata Shetty.


737 (2020) 52-A BCAJ

In R.F. Nangrani HUF ’s case, the Tribunal had followed the decision of the Supreme Court in the case of CIT vs. R. Lingamallu Rajkumar 247 ITR 801, where it had held that the amount received on retirement by a partner was not liable to capital gains tax, and the Tribunal in that case had also considered the decision of the Hyderabad bench in ACIT vs. N. Prasad 153 ITD 257, which had taken a similar view. It was argued on behalf of the assessee

a bench of equal strength, the later judgment should be followed, especially when the earlier judgment was referred to while deciding the matter in the later judgment.

The Tribunal noted that in the case of CIT vs. Riyaz A. Shaikh 221 Taxman 118, the Bombay High Court referred to the fact that the Tribunal in that case had followed the Bombay High Court decision in Prashant S. Joshi’s case, while noting that Tribuvandas G. Patel’s case, which had been followed in N.A. Mody’s case, had been reversed by the Supreme Court. The Bombay High Court further noted in Riyaz Shaikh’s case that Prashant Joshi’s case had also noted this fact of reversal, and that it had followed the decision of the Supreme Court in R. Lingamallu Rajkumar’s case 247 ITR 801.

The Tribunal therefore followed the decision of the jurisdictional High Court in Riyaz Shaikh’s case and held that the amount received by the assessee on retirement

‘Capital Gains’.

This decision of the Tribunal in Hemlata Shetty’s case has been approved by the Bombay High Court in Principal CIT vs. Hemlata S. Shetty 262 Taxman 324. R.F. Nangrani HUF’s Tribunal decision has also been approved by the Bombay High Court in Principal CIT vs. R.F. Nangrani HUF 93 taxmann.com 302. A similar view has also been taken by the Andhra Pradesh High Court in the case of CIT vs. P.H. Patel 171 ITR 128, though this related to

(ii) of section 47. Further, in the case of CIT vs. Legal Representative of N. Paliniappa Goundar (Decd.) 143 ITR 343, the Madras High Court also accepted the Gujarat High Court’s view in the case of Mohanbhai Pamabhai (Supra) and disagreed with the view of the Bombay High Court in the case of Tribhuvandas G. Patel (Supra), holding that excess amount received by a partner on retirement was not taxable.

A similar view has also been taken by the Mumbai bench of the Tribunal in the case of James P. D’Silva vs. DCIT

175 ITD 533, following the Bombay High Court decisions in Prashant S. Joshi and Riyaz A. Shaikh’s cases and by the Bangalore bench in the case of Prabhuraj B. Appa, 6 SOT 419 and by the Chennai bench in the case of P. Sivakumar (HUF), 63 SOT 91.

SAVITRI KADUR’S CASEThe issue again came up before the Bangalore bench of the Tribunal recently in the case of Savitri Kadur vs. DCIT 177 ITD 259.

In this case, the assessee and another person had st April, 2004. Yet

another person was admitted as a partner with effect from st April, 2007, and simultaneously the assessee retired

st April,

lakhs was credited to her account. The land and building

lakhs in the surplus on revaluation was credited to her

credited to her account which, after deducting drawings,

her retirement. The assessee was paid a sum of Rs. 3.40 crores on her retirement. The assessee had invested an amount of Rs. 50 lakhs in capital gains bonds.

The difference of Rs. 62 lakhs between Rs. 3.40 crores

A.O. in her hands. According to the A.O., such amount was nothing but a payment for her giving up her right in

u/s 2(47) on her retirement, which was therefore liable to capital gains tax.

The Commissioner (Appeals) upheld the order of the A.O., placing reliance on the decision of the Bombay High Court in the case of CIT vs. A.N. Naik Associates 265 ITR 346, where the High Court had held that there was a charge to capital gains tax u/s 45(4) when the assets of the partnership were distributed even on retirement of a partner, and the scope of section 45(4) was not restricted

On appeal, the Tribunal observed that it was necessary to appreciate how the act of the formation, introduction, retirement and dissolution of partnership was used by

by converting an asset held individually into an asset of


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the partners by effecting dissolution or retirement. In that direction, the Tribunal analysed the background and tax implications behind conversion of individual assets into assets of partnership, distribution of assets on dissolution,

a partner retired and the retiring partner was allotted a

a partner retired and the retiring partner was paid a consideration for relinquishing all his rights and interests

manner:(a) on the basis of amount lying in his / her capital account, or(b) on the basis of amount lying in his / her capital account plus amount over and above the sum lying in his / her capital account, or(c) a lump sum consideration with no reference to the amount lying in his / her capital account.

The Tribunal thereafter held that the case of the appellant, on the basis of the facts before it, was a situation falling under (b) above, meaning that the assessee on her

amount lying in her capital account plus an amount over and above the sum lying in her capital account.

The Tribunal observed that:(i) there was no dispute that there could not be any incidence of tax in situation (a) above on account of the Supreme Court decision in the case of Additional CIT vs. Mohanbhai Pamabhai (Supra)(ii) so far as situations (b) and (c) were concerned, they had been the subject matter of consideration in several

with a resultant enhancement of the capital accounts of the partners was not relevant.

The Tribunal further observed that:

and its assets would be property and, therefore, a capital

(2) the question was whether it could be said that there was a transfer of capital asset by the retiring partner in

(3) the share or interest of a partner in the partnership and its assets would be property and, therefore, a capital

next question was whether it could be said that there was a transfer of capital asset by the retiring partner in favour

(4) the question whether there would be incidence of tax on capital gains on retirement of a partner from the

retirement was effected. Therefore, taxability in such a situation would depend on several factors like the intention, as was evidenced by the various clauses of the instrument evincing retirement or dissolution, the manner in which the accounts had been settled and whether the same included any amount in excess of the share of the partner on the revaluation of assets and other relevant factors which would throw light on the entire scheme of

(5) for the purposes of computation, what was to be seen was the credit in the capital account of the partner alone.

The Tribunal, referring to the observations of the Bombay High Court in the case of Tribhuvandas G. Patel (Supra), held that the terms of the deed of retirement had to be seen as to whether they constituted a release of

where on retirement an account was taken and the partner was paid the amount standing to the credit of his capital account, there would be no transfer and no tax

sum consideration for transferring or releasing his interest in the partnership’s assets to the continuing partners, there would be a transfer, liable to tax. The Tribunal noted that the Supreme Court, in appeal in that case, had held that there was no incidence of tax on capital gains on the transaction only because of the provisions of section 47(ii), which exempted the distribution of capital assets on dissolution, even though the facts in the case in appeal before the Supreme Court were concerning the case of a retiring partner giving up his rights over the properties

The Tribunal referred to the cases of the Pune bench in the case of Shevantibhai C. Mehta 4 SOT 94 and the Mumbai bench of the Tribunal in the case of Sudhakar M. Shetty (Supra) and held that the facts in the case before it were almost identical to the facts in the case of Sudhakar M. Shetty.

It distinguished the other cases cited before it on behalf


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of the assessee on the grounds that some of those cases related to a period prior to the amendment of the

where the issue involved was whether the reassessment proceedings were valid, or were cases involving the

the retiring partner was paid a share in the goodwill of the

applicable to the facts of the assessee’s case.

the excess paid to the retiring partner over and above the sum standing to the credit of her capital account as capital

gains by treating the amount lying to the credit of the partner’s account, including the amount credited towards goodwill in the partner’s capital account, as a cost and allowing the deduction thereof. It also held the gains to be long-term capital gains and allowed exemption u/s 54EC to the extent of investment in capital gains bonds.

A similar view has been taken by the other benches of the Tribunal in the cases of Shevantibhai C. Mehta (Supra), Sudhakar M. Shetty (Supra) and Smt. Girija Reddy vs. ITO 52 SOT 113 (Hyd)(URO). The Delhi High Court also,

Bishan Lal Kanodia vs. CIT 257 ITR 449, followed the decision of the Bombay High Court in Tribhuvandas G. Patel (Supra) to hold that the receipt on retirement was liable to capital gains tax.

OBSERVATIONSTo understand the root of the controversy, one would have to go back to the decision of the Gujarat High Court in the case of CIT vs. Mohanbhai Pamabhai 91 ITR 393,

165 ITR 166, holding that there was no transfer of capital assets by a partner on his retirement. In that case, on retirement, the assessee received a certain amount in respect of his share in the partnership which was worked out by taking the proportionate value of a share in the partnership assets, after deduction of liabilities and prior charges, including an amount representing his proportionate share in the value of the goodwill. It was this proportionate share in the goodwill which was sought to be taxed as capital gains by the authorities.

In that case, the Gujarat High Court held that:(i) what the retiring partner was entitled to get was not merely a share in the partnership assets, he has also to bear his share of the debts and liabilities, and it was only

his share in the net partnership assets, after satisfying the debts and liabilities, that he was entitled to get on

(ii) Since it was only in the surplus that the retiring partner was entitled to claim a share, it was not possible to predicate that a particular amount was received by the retiring partner in respect of his share in a particular partnership asset, or that a particular amount represented a consideration received by the retiring partner for extinguishment of his interest in a particular partnership

transfer of interest of the assessee in the goodwill or any

(iv) no consideration received or accrued as a result of

and(v) no part of the amount received by the assessee was assessable to capital gains tax u/s 45.

The Gujarat High Court relied on its earlier decision in the case of CIT vs. R.M. Amin 82 ITR 194, for the proposition that where transfer consisted in extinguishment of a right in a capital asset, unless there was an element of consideration for such extinguishment, the transfer would not be liable to capital gains tax.

It may be noted that in Mohanbhai Pamabhai, the document pursuant to which retirement was effected stated that the amount had been decided as payable to the retiring partners in lieu of all their rights, interest and

gave up their right, title and interest in the partnership

to the capital accounts of the partners, and therefore it

Tribunal. The Bangalore bench of the Tribunal therefore

cases where only balance standing to credit of the capital

are not transfers as was held by the Supreme Court in Mohanbhai Pamabhai. In other words, the facts of the Mohanbhai Pamabhai

appreciating that the facts in the case before the Supreme Court were akin to situation (b), the decision could have been different.

The Supreme Court approved the Gujarat High Court decision on the footing that there was no transfer within the meaning of section 2(47) on retirement of a partner


740 (2020) 52-A BCAJ

Court held that such cases of retirement, where a partner was paid a sum over and above the balance due as per the books of accounts, was not chargeable to capital gains tax. Interestingly, in deciding the case the Supreme Court, while holding that the receipts in question were not taxable, did not distinguish between different modes of retirement, as some of the Tribunals and High Courts have sought to do, for taxing some and exempting others.

The Tribhuvandas G. Patel case (Supra) was one where the retiring partner was paid his share in the goodwill of

Commentary of Lindley on Partnership, the Bombay High Court observed as under:

‘Further, under section 32, which occurs in Chapter V, retirement of a partner may take any form as may be agreed upon between the partners and can occur in

retirement of a partner his share in the net partnership assets after deduction of liabilities and prior charges may be determined on taking accounts on the footing of notional sale of partnership assets and be paid to him, but the determination and payment of his share may not invariably be done in that manner and it is quite conceivable that, without taking accounts on the footing of notional sale, by mutual agreement, a retiring partner may receive an agreed lump sum for going out as and by way of consideration for transferring or releasing or assigning or relinquishing his interest in the partnership assets to the continuing partners and if the retirement takes this form and the deed in that behalf is executed,

"transfer" involved in the transaction. In our view, it will depend upon the manner in which the retirement takes place. What usually happens when a partner retires from

law, which occurs in , 13th edition, at page 474:

"24. Assignment of share, etc., by retiring partner.—When a partner retires or dies, and he or his executors are paid what is due in respect of his share, it is customary for him or them formally to assign and release his interest in the partnership, and for the continuing or surviving partners to take upon themselves the payment of the outstanding

his estate from all such debts, and it is useful for the

At page 475, under the sub-heading "stamp on assignment by outgoing partner", the following statement of law occurs:

"An assignment by a partner of his share and interest in

as a sale of property within the meaning of the Stamp Acts; and consequently the deed of assignment, or the agreement for the assignment, requires an ad valorem stamp. But if the retiring partner, instead of assigning his

a receipt for the money, and acknowledges that he has no more claims on his co-partners, they will practically obtain all they want; but such a transaction, even if carried out by deed, could hardly be held to amount to a sale; and no ad valorem stamp, it is apprehended, would be payable."

A couple of things emerge clearly from the aforesaid

out and while receiving what is due to him in respect of his share, may assign his interest by a deed or he may, instead of assigning his interest, take the amount due

and acknowledge that he has no more claim on his co-partners. The former type of transactions will be regarded as sale or release or assignment of his interest by a deed attracting stamp duty, while the latter type of transaction would not. In other words, it is clear, the retirement of a partner can take either of two forms, and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer

Based on the language of the Deed of Retirement, the Bombay High Court took the view that since there was an assignment by the outgoing partner of his share in

there was a transfer and the gains made on such transfer were exigible to tax.


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In the context of taxation, the Bombay High Court observed:

‘It may be stated that the Gujarat decision in Mohanbhai is the only decision

directly on the point at issue before us but the question is whether the position of a retiring partner could be equated with that of a partner upon the general dissolution for

by the Supreme Court in , was not for capital gains tax purposes

but for considering the question whether the instrument executed on such occasion between the partners inter se required registration and could be admitted in evidence for want of registration. For capital gains tax purposes

the purview of section 45 while the case of a retirement

the question arises whether the retirement of a partner stands on the same footing as that upon a dissolution of

from each are entirely different. In the case of retirement

Indian Partnership Act the two concepts are separately dealt with.’

This distinction between the dissolution and the retirement, made by the High Court for taxing the receipt was overruled by the Supreme Court by holding that the two are the same for the purposes of section 47(ii) of the Act.

that there was a transfer and later that the receipt of consideration on transfer was not exempt from tax u/s 47(ii) of the Act. The Supreme Court, however, overruled the Bombay High Court decision, holding that retirement was also covered by dissolution referred to in section 47(ii), and that such retirement would therefore not be chargeable to capital gains. It may also be noted that the Bombay High Court’s decision was rendered prior to the Supreme Court decision in the case of Mohanbhai Pamabhai (Supra).

Surprisingly, the Delhi High Court, while deciding the case

of Bishanlal Kanodia (Supra), relied upon the decision of the Bombay High Court in Tribuhuvandas G. Patel (Supra), overlooking the implications of the decisions of the Supreme Court in the cases of Mohanbhai Pamabhai and Tribhuvandas G. Patel wherein the ratio of the decision of the Bombay High Court was rendered inapplicable. The Delhi High Court sought to distinguish between dissolution and retirement, even though the Supreme Court had held that the term ‘dissolution’ for the purpose of section 47(ii) included retirement up to A.Y.

Further, though the decision of the Madras High Court in the case of the Legal Representatives of N. Paliniappa Goundar (Supra) was relied upon by the assessee in the case of Savitri Kadur (Supra), it was not considered by the Bangalore bench of the Tribunal. The Madras High

the decisions of the Gujarat High Court in the case of Mohanbhai Pamabhai and of the Bombay High Court in the case of Tribhuvandas G. Patel, which had not yet been decided by the Supreme Court. While disagreeing with the view of the Bombay High Court, the Madras High Court observed as under:

With respect, we cannot see why a retirement of a partner

of attributes according to the mode of settlement of the retiring partner's accounts in the partnership. In our view, whether the retiring partner receives a lump sum consideration or whether the amount is paid to him after a general taking of accounts and after ascertainment of his share in the net assets of the partnership as on the date of retirement, the result, in terms of the legal character of the payment as well as the consequences thereof, is precisely the same. For, as observed by the Gujarat High Court in Mohanbhai's case when a partner retires from

in the partnership, what he receives is his own share in the partnership, and it is that which is worked out and realised. Whatever he receives cannot be regarded as representing some kind of consideration received by him as a result of transfer of assignment or extinguishment or relinquishment of his share in favour of the other partners.

We hold that even in a case where some kind of a lump sum is received by the retiring partner, it must be regarded as referable only to the share of the retiring partner. This


742 (2020) 52-A BCAJ

being so, no relinquishment at all is involved. What he receives is what he has already put in by way of his share capital or by way of his exertions as a partner. In a true sense, therefore, whether it is a dissolution or a retirement, and whether in the latter case the retirement is on the basis of a general taking of accounts or on the basis of an ad hoc payment to the retiring partner, what the partner obtains is nothing more and nothing less than his own share in the partnership. A transaction of

or a mutual relinquishment. In the very case dealt by the Bombay High Court, the particular amount paid by the remaining partners in favour of the retiring partner was only a payment in consideration of which there was a mutual release, a release by the retiring partner in favour of the remaining partners and a release by the remaining partners in favour of the retiring partner. The idea of mutual release is appropriate to a partnership, because

release the retired partner from all future obligations

Gujarat High Court as based on a correct view of the law and the legal relations which result on the retirement of a partner from the partnership. With respect, we do not subscribe to the distinction sought to be drawn by the learned Judges of the Bombay High Court between an ad hoc payment to a retiring partner and a payment to him after ascertaining his net share in the partnership.

The Andhra Pradesh High Court in the case of CIT vs. L. Raghu Kumar 141 ITR 674, also had an occasion

the retiring partner received an amount in excess of the balance lying to the credit of his capital account and

considered the decisions of the Bombay High Court in the case of Tribhuvandas G. Patel (Supra) and CIT vs. H.R. Aslot 115 ITR 255, where the Bombay High Court had held that whether there was a transfer or not would depend upon the terms of the retirement deed – whether there is an assignment by the outgoing partner in favour of the continuing partners, or whether the retiring partner merely receives an amount for which he acknowledges receipt.

The Andhra Pradesh High Court observed as under:

‘It is no doubt true as submitted by the learned counsel for the revenue that the Bombay High Court did not accept

the principle in the Mohanbhai case, that there is no distinction between a case of a retirement of the partner

never be a transfer of a capital asset in the case of a retirement of a partner as there is no relinquishment of a capital asset or extinguishment of rights therein. With great respect, we are unable to agree with the view of the Bombay High Court. The rights of a partner are governed by the provisions of the Partnership Act. Otherwise by a mere description, the nature of the transaction can be altered. Further, the Gujarat High Court in Mohanbhai's

followed the decision of the Supreme Court in Narayanappa (Supra) which laid down the proposition of law unequivocally.’

This decision of the Andhra Pradesh High Court has been CIT vs. R. Lingmallu

Raghukumar 247 ITR 801. Therefore, effectively, the Supreme Court has approved of the approach taken by the Andhra Pradesh High Court, to the effect that there can never be a transfer of a capital asset in the case of retirement of a partner as there is no relinquishment of a capital asset or extinguishment of rights therein, and that the nature of the transaction cannot be altered by a mere description, but is governed by the provisions of the Partnership Act. It is only logical that a transfer cannot arise merely because a retiring partner is paid an amount in excess of his capital, or because the retirement deed wording is different.

This fact of law laid down by the Supreme Court and the overruling of the law laid down by the Bombay High Court, has been recognised by the Bombay High Court in its later decision in the case of Prashant S. Joshi (Supra), clearly and succinctly, where the Bombay High Court observed:

‘The Gujarat High Court held that there is, in such a situation, no transfer of interest in the assets of the

a partner retires from a partnership, what the partner receives is his share in the partnership which is worked out by taking accounts and this does not amount to a consideration for the transfer of his interest to the continuing partners. The rationale for this is explained as

Mohanbhai Pamabhai

"...What the retiring partner is entitled to get is not merely a share in the partnership assets; he has also to bear his share of the debts and liabilities and it is only his share in


743 (2020) 52-A BCAJ

the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement. The debts and liabilities have to be deducted from the value of the partnership assets and it is only in the surplus that the retiring partner is entitled to claim a share. It is, therefore, not possible to predicate that a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a particular amount represents consideration received by the retiring partner for extinguishment of his interest in a particular asset."

14. The appeal against the judgment of the Gujarat High Court was dismissed by a Bench of three learned Judges of the Supreme Court in

. The Supreme Court relied upon its judgment in

. The Supreme Court reiterated the same principle by relying upon the judgment in Addanki

1300. The Supreme Court held that what is envisaged on the retirement of a partner is merely his right to realise his interest and to receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership by virtue of his status as a partner and in terms of the partnership agreement. Consequently, what the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest.

The Supreme Court held that there was nothing strange in the law that a right or interest should exist in praesenti but its realisation or exercise should be postponed. The Supreme Court inter alia cited with approval the judgment of the Gujarat High Court in Mohanbhai Pamabhai's

and held that there is no transfer upon the retirement of a partner upon the distribution of his share

, the Supreme Court Mohanbhai

Pamabhai that when a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts, there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners.

15. At this stage, it may be noted that in ,

which was decided by a Division Bench of this Court, under a deed of partnership, the assessee retired from

inter alia paid an amount of

Rs. 4,77,941 as his share in the remaining assets of the

transaction would have to be regarded as amounting to

as the assessee had assigned, released and relinquished his share in the partnership and its assets in favour of the continuing partners. This part of the judgment was reversed in appeal by the Supreme Court in

Following the judgment of the Supreme Court in Sunil , the Supreme Court held

that even when a partner retires and some amount is paid to him towards his share in the assets, it should be treated

question was answered in favour of the assessee and

at the material time provided that nothing contained in

st

transfer of a capital asset by way of distribution of capital

previous year in which the said transfer takes place.

The fair market value of the assets on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the

Ex facie sub-

is a transfer of a capital asset by way of a distribution of

Evidently, on the admitted position before the Court, there is no transfer of a capital asset by way of a distribution of

in the facts of this case. What is to be noted is that even

The Bombay High Court in Prashant Joshi’s case (Supra) also considered the fact that section 45(4) was brought in simultaneously with the deletion of section


744 (2020) 52-A BCAJ

a situation of transfer of a capital asset on distribution of

that too only in a situation where there was a distribution

which situation would include retirement of a partner as held by the Bombay High Court in the case of CIT vs. A.N. Naik Associates 265 ITR 346. This understanding of the law has clearly been brought out by the Bombay High Court in Hemlata Shetty’s case (Supra), where the Bombay High Court has observed that amount received

is not subject to tax in the retiring partners’ hands in view of section 45(4), and the liability, if any, for tax is on the

Had the intention been to also tax a partner on his retirement on the excess amount received over and above

would have been made to cover such a situation involving the receipt of capital asset by a partner on distribution by

The Bombay High Court’s decision in the case of Riyaz A. Shaikh (Supra) is a decision rendered in the context of A.Y. 2002-03, i.e., post-amendment. It was not a case

an appeal from the decision of the Tribunal. The Court in that case has considered all the relevant decisions – the Bombay High Court’s decisions in the cases of Prashant S. Joshi, N.A. Mody and Tribhuvandas G. Patel, besides the Supreme Court decisions in the cases of Tribhuvandas G. Patel and R. Lingamallu Rajkumar – while arriving at the view that the amounts received on retirement by a partner are not liable to capital gains tax.

Similarly, Hemlata Shetty’s case pertained to the post-

amendment period and the Court therein has considered the earlier decisions of the Bombay High Court in the Prashant S. Joshi and Riyaz A. Sheikh cases and has also considered the impact of section 45(4). It is indeed

5th

the same case have not been considered by the Bangalore bench of the Tribunal in Savitri Kadur’s case, decided on 3rd

Sudhakar M. Shetty (Supra), where the matter was still pending before the Bombay High Court, rather than a decision of the Bombay High Court in his wife’s case on identical facts (retirement from the same partnership

where the matter had already been decided on 5th March,

have been different if the development had been in its knowledge.

One may note that the Legislature, realising that the receipt in question was not taxable under the present

the partner under the proposed Direct Tax Code which has yet to see the light of the day.

The better view of the matter therefore is that retirement

capital gains tax, irrespective of the mode of retirement of the partner, as rightly held by the Bombay High Court in various decisions, and the Mumbai bench of the Tribunal in the cases of Hemlata Shetty and James P. D’Silva (Supra). It is rather unfortunate that this issue has been continuing to torture assessees for the last so many decades, even after several Supreme Court judgments.

Supreme Court.

The beauty of doing nothing is that you can do it perfectly. Only when you do something is it almost impossible to do it without mistakes. Therefore people who are contributing nothing to society, except their constant criticisms, can feel both

intellectually and morally superior. — Thomas Sowell


745 (2020) 52-A BCAJ


746 (2020) 52-A BCAJ

Ind AS/IGAAP – INTERPRETATION & PRACTICAL APPLICATION

DEFINITION OF A BUSINESS (AMENDMENTS TO Ind AS 103)

vide th July, 2020) and continues

to be intended to assist entities to determine whether a transaction should be accounted for as ‘a business combination’ or as ‘an asset acquisition’.

The accounting for the acquisition of an asset and for the acquisition of a business are very different, hence

applicable to business combinations for which the

st April, 2020 and to asset acquisitions that occur on or after the beginning of that period. In a nutshell, the amendments have made the following broad changes:

is made narrow.(ii) clarify the minimum features that the acquired set of activities and assets must have in order to be considered a business.(iii) the evaluation of whether market participants are able to replace missing inputs or processes and continue to produce outputs is removed.

assessment of whether an acquired set of activities and assets is not a business has been introduced.

a business as follows:

‘An integrated set of activities and assets that is capable of being

conducted and managed for the purpose of providing a return in the form of dividends, lower

directly to investors or other owners, members or participants’

‘An integrated set of activities and assets that is capable of

being conducted and managed for the purpose of providing

goods or services to customers, generating investment income (such as dividends or interest)

or generating other income from ordinary activities’

and services to customers, removes the emphasis from providing a return to shareholders as well as to ‘lower

acquisitions are made with the motive of lowering costs but may not involve acquiring a substantive process.

Under the revised standard, the following steps are required to determine whether the acquired set of activities and assets is a business:

Step 1 Consider whether to apply the concentration test

Does the entity want to apply the concentration test?

If yes go to Step 2, if no go to Step 4Step 2 Consider what assets have

been acquired asset or a group of similar

acquired?If yes go to Step 3, if no go to Step 4

Step 3 Consider how the fair value of gross assets acquired is

concentrated

Is substantially all of the fair value of the gross assets

acquired concentrated in a

assets?If yes, the concentration test has passed, transaction is not a business,

if no go to step 4Step 4 Consider whether the

acquired set of activities and assets has outputs

Does the acquired set of activities and assets have

outputs?Go to step 5

Step 5 Consider if the acquired process is substantive

• If there are no outputs, in what circumstances is the

acquired process considered substantive?

• If there are outputs, in what circumstances is the

acquired process considered substantive?

If acquired process is substantive, transaction is a business; if acquired process is not substantive, transaction is an asset acquisition



747 (2020) 52-A BCAJ

OPTIONAL CONCENTRATION TESTThe optional concentration test allows the acquirer to carry out a simple evaluation to determine whether the acquired set of activities and assets is not a business. The optional concentration test is not an accounting policy

not for another. If the test passes, then the acquired set of activities and assets is not a business and no further evaluation is required. If the test fails or the entity chooses not to apply the test, then the entity needs to assess whether or not the acquired set of assets and activities

assessment.

The amended standard does not prohibit an entity from carrying out the detailed assessment if the entity has carried out the concentration test and concluded that the acquired set of activities and assets is not a business. The standard-setter decided that such a prohibition was unnecessary, because if an entity intended to disregard the outcome of the concentration test, it could have elected not to apply it.

In theory, the concentration test might sometimes identify a transaction as an asset acquisition when the detailed assessment would identify it as a business combination. That outcome would be a false positive. The standard-setter designed the concentration test to minimise the

statements of useful information. The concentration test might not identify an asset acquisition that would

would be a false negative. An entity is required to carry out the detailed assessment in such a case and is expected to reach the same conclusion as if it had not applied the concentration test. Thus, a false negative has no accounting consequences.

of assets that would be recognised and measured as

This will include assets that are attached or cannot be

cost or loss of value of either asset. Examples of single

lists, trademarks, outsourcing contracts, plant and machinery, intangible asset (for example, a coal mine), etc. Land and buildings cannot be removed from each

either of them, unless the building is inconsequential or

Assets are grouped when they have a similar nature and have similar risk characteristics (i.e., the risks associated with managing and creating outputs from the assets). The following are examples of groupings which are not considered to be similar assets:(a) a tangible asset and an intangible asset.

example, equipment and building (unless the equipment is embedded in the building and cannot be removed

the building or the equipment).(c) tangible assets that are recognised under different

‘Property, Plant and Equipment’).

investments, etc.).(f) different classes of intangibles (e.g. brand, mineral rights, etc.)(g) assets belonging to the same class but have

different types of mines.

In applying the concentration test, one test is to evaluate whether substantially all of the fair value of the gross

The fair value of the gross assets acquired shall include any consideration transferred (plus the fair value of any NCI and the fair value of any previously held interest) in

The fair value of the gross assets acquired may normally be determined as the total obtained by adding the fair value of the consideration transferred (plus the fair value of any NCI and the fair value of any previously held interest) to the fair value of the liabilities assumed (other than deferred tax liabilities), and then excluding cash and cash equivalents, deferred tax assets and goodwill resulting from the effects of deferred tax liabilities.

The standard-setter concluded that whether a set of activities and assets includes a substantive process does

the concentration test is based on the gross assets acquired, not on net assets. Thus, the existence of debt


BCAJ

or other liabilities does not alter the conclusion on whether an acquisition is a business combination. In addition, the gross assets considered in the concentration test exclude cash and cash equivalents acquired, deferred tax assets, and goodwill resulting from the effects of deferred tax liabilities. These exclusions were made because cash acquired, and the tax base of the assets and liabilities acquired, are independent of whether the acquired set of activities and assets includes a substantive process.

interest in Ox for INR 270. Ox’s assets and liabilities on the acquisition date are the following:

• a building with a fair value of INR 720

420

• deferred tax liabilities of INR 240 arising from temporary differences associated with the building and the intangible asset.

Ze determines that at the acquisition date the fair value of Ox is INR 600, that the fair value of the NCI in Ox is

Analysis

When performing the optional concentration test, Ze needs to determine the fair value of the gross assets acquired. Ze determines that the fair value of the gross

- the consideration paid (INR 270), plus the fair value of

- the fair value of the liabilities assumed (other than

Alternatively, the fair value of the gross assets acquired

• the excess (INR 60) of:

- the sum (INR 600) of the consideration transferred (INR

MINIMUM REQUIREMENTS TO QUALIFY AS BUSINESSWhat are the minimum requirements to meet the

Elements of a business

Explanation Examples

Inputs An economic resource that creates outputs or has the ability to contribute to the creation of outputs when one or more processes are applied to it

• tangible assets• right-of-use assets• intangible assets• intellectual property• employees• ability to obtain necessary material or rights

Processes A system, standard, protocol, convention or rule that when applied to an input or inputs, creates outputs or has the ability to contribute to the creation of outputs. These processes typically are documented, but the intellectual capacity of an organised workforce having the necessary skills and experience following rules and conventions may provide the necessary processes that are capable of being applied to inputs to create outputs. (Accounting, billing, payroll and other administrative systems typically are not processes used to create outputs.)

• strategic management processes• operational processes• resource management processes

Outputs The result of inputs and processes applied to those inputs that provide goods or services to customers, generate investment income (such as dividends or interest) or generate other income from ordinary activities

• revenue


BCAJ

To qualify as a business, the acquired set of activities and assets must have inputs and substantive processes that together enable the entity to contribute to the creation of

not necessary for an integrated set of assets and activities to qualify as a business. A business need not include all of the inputs or processes that the seller used in operating that business. However, to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together enable the entity to contribute to the creation of outputs.

According to the standard-setters, the reference in the

provided directly to investors did not help to distinguish between an asset and a business. For example, many asset acquisitions may be made with the motive of lowering costs but may not involve acquiring a substantive process. Therefore, this wording was excluded from the

determining whether an acquired set of activities and assets is a business. This means that it is irrelevant whether the seller operated the set as a business or whether the acquirer intends to operate the set as a business. An assessment made from a market participant’s perspective and driven by facts that indicate the current state and condition of what has been acquired (rather than the acquirer’s intentions) helps to prevent similar transactions being accounted for differently. Moreover, bringing more subjective elements into the determination would most likely have increased diversity in practice.

When is an acquired process considered to be substantive?The amended Standard requires entities to assess whether the acquired process is substantive. The evaluation of whether an acquired process is substantive depends on whether the acquired set of activities and assets has outputs or not. For example, an early-stage entity may not have any outputs / revenue, and is therefore subjected to a different analysis of whether the acquired process along with the acquisition of the development stage entity is substantive or not. Moreover, if an acquired set of activities and assets was generating revenue at the acquisition date, it is considered to have outputs at that date, even if subsequently it will no longer generate revenue from external customers, for example because it will be integrated by the acquirer.

For activities and assets that do not have outputs at the acquisition date, the acquired process is substantive only if:(i) it is critical to the ability to develop or convert an

(ii) the inputs acquired include both an organised workforce that has the necessary skills, knowledge, or experience to perform that process (or group of processes) and other inputs that the organised workforce could develop or convert into outputs. Those other inputs could include:

(a) intellectual property that could be used to develop

(b) other economic resources that could be

(c) rights to obtain access to necessary materials or rights that enable the creation of future outputs.

Examples of the inputs include technology, in-process research and development projects, real estate and mineral interests.

As can be seen from the above discussion, for an acquired set of activities and assets to be considered a business, if the set has no outputs, the set should include not only a substantive process but also both an organised workforce and other inputs that the acquired organised workforce could develop or convert into outputs. Entities will need to evaluate the nature of those inputs to assess whether that process is substantive.

For activities and assets that have outputs at the acquisition date, the acquired process is substantive if, when applied to an acquired input or inputs:

and the inputs acquired include an organised workforce with the necessary skills, knowledge, or experience to

delay in the ability to continue producing outputs.

The following additional points support the above:(A) an acquired contract is an input and not a substantive process. Nevertheless, an acquired contract, for example, a contract for outsourced property management or outsourced asset management, may give access to an organised workforce. An entity shall assess whether an organised workforce accessed through such a contract performs a substantive process that the entity controls, and thus has acquired. Factors to be considered in making


750 (2020) 52-A BCAJ

that assessment include the duration of the contract and its renewal terms.

workforce may indicate that the acquired organised workforce performs a process that is critical to the ability to create outputs.(C) a process (or group of processes) is not critical if, for example, it is ancillary or minor within the context of all the processes required to create outputs.

As can be seen from the above discussions, more persuasive evidence is required in determining whether an acquired process is substantive, when there are no outputs, because the existence of outputs already provides some evidence that the acquired set of activities and assets is a business. The presence of an organised workforce (although itself an input) is an indicator of a substantive process. This is because the ‘intellectual capacity’ of an organised workforce having the necessary skills and experience following rules and conventions may provide the necessary processes (even if not documented) that are capable of being applied to inputs to create outputs.

The standard-setter concluded that although an organised workforce is an input to a business, it is not in itself a business. To conclude otherwise would mean that hiring a skilled employee without acquiring any other inputs could be considered to be acquiring a business. The standard-setter decided that such an

business.

business need not include all of the inputs or processes that the seller used in operating that business, ‘if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own inputs and processes’. The standard-setter, however, decided to base the assessment on what has been acquired in its current state and condition, rather than on whether market participants are capable of replacing any missing elements, for example, by integrating the acquired activities and assets. Therefore, the reference to such integration was

on whether acquired inputs and acquired substantive

to create outputs.

Illustrative examples

Example –Acquisition of real estate

with in-place lease contracts for each of them. The fair value of the consideration paid is equal to the aggregate fair

family home includes the land, building and lease-hold improvements. Each home is of a different carpet size and

and the class of customers (e.g., tenants) are similar. The risks in relation to the homes acquired and leasing them out are largely similar. No employees, other assets, processes or other activities are received in this transaction.

test

Analysis

Ze elects to apply the optional concentration test set and concludes that:

• each single-family home is considered a single

• the building and lease-hold improvements are attached to the land and cannot be removed without incurring

• the building and the associated leases are considered

a business combination.

homes, are similar in nature and the risks associated

different. This is consistent with the fact that the types

different.

Ze concludes that the acquired set of activities and assets is not a business because substantially all of the fair value of the gross assets acquired is concentrated in a group of


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Assume the same base case, except that Ze also

The additional set of activities and assets acquired includes the land, buildings, leases and contracts for outsourced cleaning, security and maintenance. However, no employees, other assets, other processes or other activities are transferred. The aggregate fair

homes. The processes performed through the contracts for outsourced cleaning and security are minor within the context of all the processes required to create outputs.

Analysis

Ze elects to apply the optional concentration test and

associated with operating the assets, obtaining tenants

consistent with the fact that the two classes of customers

proceeds to evaluate whether the acquisition is a business in the normal way.

The set of activities and assets has outputs because it generates revenue through the in-place leases. Ze needs to evaluate if there is an acquired process that is substantive. For activities and assets that have outputs at the acquisition date, the acquired process is substantive if, when applied to an acquired input or inputs:• it is critical to the ability to continue producing outputs, and the inputs acquired include an organised workforce with the necessary skills, knowledge, or experience to

delay in the ability to continue producing outputs.

Ze concludes that the above criterion is not met because:

• the only processes acquired (processes performed by the outsourced cleaning, security and maintenance personnel) are ancillary or minor and, therefore, are not critical to the ability to continue producing outputs.

to continue producing outputs.

• the processes are not unique or scarce and can be

ability to continue producing outputs.

Consequently, Ze concludes that the acquired set of activities and assets is not a business. Rather, it is an asset acquisition.

Consider the same facts as in Scenario 2, except that the acquired set of activities and assets also includes the employees responsible for leasing, tenant management, and managing and supervising all operational processes.

Analysis

Ze elects not to apply the optional concentration test and proceeds to evaluate whether there is a business in the normal way. The acquired set of activities and assets has outputs because it generates revenue through the in-place leases. Consequently, Ze carries out the same analysis as in Scenario 2.

The acquired set includes an organised workforce with the necessary skills, knowledge or experience to perform processes (i.e. leasing, tenant management, and managing and supervising the operational processes) that are substantive because they are critical to the ability to continue producing outputs when applied to the acquired inputs (i.e. the land, buildings and in-place leases). Additionally, those substantive processes and

create output. Therefore, Ze concludes that the acquired set of activities and assets is a business.

In the author’s view, these amendments may result in more acquisitions being accounted for as asset

Further, the accounting for disposal transactions Consolidated

Financial Statements will be applicable in case of the recognition of proceeds from the sale of a business, while

Revenue from Contracts with Customers will be applied for the recognition of proceeds from the sale of an asset.


752 (2020) 52-A BCAJ

INTRODUCTIONA statutory audit is conducted to elicit an opinion as to

a true and fair view in conformity with the generally accepted accounting principles / laid down guidelines.

regulations varies considerably. SA 250, Consideration of Laws & Regulations in an audit of Financial Statements, provides guidance to the auditors on how to identify

cannot be expected to detect non-compliance with all laws and regulations.

GST, as a transactional indirect tax law, can have

and therefore appropriate compliance with the GST law is one of the important validations that a statutory auditor has to perform before he can conclude about the true and fair

impossible journey for the statutory auditor to come to an assertive judgement on the extent of compliance or non-compliance.

This article highlights some examples whereby the interplay between the statutory audit process and the GST domain can be better appreciated.

DIFFERING OBJECTIVES & FOCUSAs stated earlier, the objective of statutory audit is to

To that extent, the core focus of a statutory audit (and

accounting policies, the disclosure whereof is governed

However, when it comes to GST, this is a transaction-driven tax law and therefore the core focus changes to individual transactions, whether such transactions constitute supply, whether the levy provisions are attracted and whether there is a tax prescribed for the same.

GOING CONCERNOne of the fundamental accounting assumptions is ‘going

as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the need of liquidation or of curtailing materially the scale of its operations.

however, the same is inherent in the overall scheme except to the extent that a person obtains a registration as a casual taxpayer – which indicates the intention of the taxpayer to do business only for a limited time frame. Can the absence of a normal registration and only casual taxpayer registration prompt the statutory auditor to question this fundamental accounting assumption as a going concern? It may be relevant to bear in mind that

statements pertain to the entire world.

In actual experience, entities end up with substantial accumulation of input tax credit (ITC) under some GST registrations. Considering another principle of conservatism, at times, statutory auditors question the possibility of realisation of the accumulated ITC balance and insist on writing it off on the grounds of non-recoverability or reversal of such credits.

ROLE OF A STATUTORY AUDITOR VIS-À-VIS GST

I RISHABH SINGHVI I Chartered Accountants

DECODING GST


753 (2020) 52-A BCAJ

of GST.

In view of the time of supply provisions under GST,

in the accounting and statutory audit space have very limited relevance in the context of GST. Having said

point for obtaining prima facie comfort on the completeness of the GST compliances. This typically results in the preparation of a reconciliation statement which attempts to bridge the gaps between the turnover as

turnovers reported in multiple GST registrations obtained by the enterprise.

While it may be correct as well as prudent to undertake the reconciliation referred to above, at times the inability

each reconciliation adjustment results in wrong demands being raised which have to be agitated before the judicial forums.

Interestingly, many notional entries / adjustments are insisted upon by the statutory auditors at a global level

of multi-locational enterprises, it may become challenging for the taxpayer to allocate the values of such notional entries / adjustments to the respective GST registrations. In such cases, whether it would be appropriate for the

PRUDENCE

accounting policies suitable to the disclosure of the over-arching objective of presentation of a true and fair view of

important consideration for the selection of an accounting

recognised only when realised, though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of the available information.

CONSISTENCY

are consistent from one period to another. However, when it comes to GST, it being a transaction-driven tax, each transaction can have different tax implications based on the ‘form’ of the said transaction. As explained a little later, GST concentrates on the ‘form’ of the transaction rather than the ‘substance’. Further, the GST law at various

taken by the taxpayer. For example, Entry 2 of Schedule

locational enterprise to raise a notional cross-charge invoice on its branches located in other states. The proviso

mechanism for such cross-charge as per its convenience

valuation mechanism. In the backdrop of the said legal

different valuation principles for cross-charge to different branches? Can the statutory auditor object to such a position on the grounds of violation of the fundamental accounting assumption of consistency? In the view of the authors, the notional cross-charge does not represent an accounting policy and hence the principle of consistency may not be relevant in such a scenario.

ACCRUAL

that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the

However, the liability towards GST is triggered when the provisions of time of supply are attracted. In general, the time of supply provisions get triggered at the earliest point of invoicing, completion of service / removal of goods or the receipt of advance and therefore the accounting concept of accrual has no relevance to the GST liability. However, in case of import of services from an associated enterprise, the time of supply (and consequential GST liability under reverse charge mechanism) is triggered at the time of booking the provision in the books of accounts itself. This presents a substantial challenge in case of multinational corporations where the royalty payable to the foreign parent itself is determined based

In view of the requirement to provide for such royalties in the books of accounts at the year-end even though the quantum of royalties itself is determined after the year-end, such organisations end up in delay in the discharge


754 (2020) 52-A BCAJ

A common example of the prudence principle at play is that of valuation of inventories at cost or market value, whichever is lower. However, when it comes to GST,

multiple GST registrations of the same legal entity should be carried out at market value. While the proviso to Rule

recipient branch is not eligible for full ITC, the said Rule is in stark contrast to the time-tested accounting principle of prudence. Is the ERP of the enterprise geared up to duly comply with the GST law (by valuing such branch transfers above cost) as well as the accounting principles (by once again creating a provision for such notionally

has valued such inventory movements at cost and the

GST auditors, can the statutory auditor qualify his report to observe this non-compliance, especially considering that accounting wisdom would suggest exactly what the taxpayer has done?

Even in normal scenarios where slow-moving inventory is valued below cost, the issue which needs to be examined is whether such valuation below cost would trigger the

of ITC if the goods on which ITC is claimed are written off. A possible view could be taken that there is a difference between ‘write-off’ of goods and reduction in the value of the goods on account of an accounting policy.

Similarly, when the statutory auditor insists that a refund shown as receivable in the balance sheet be written off as being unlikely of recovery due to some dispute with the Department, it can prejudice the claim of refund since the judiciary may interpret non-appearance of the asset in the balance sheet as a case of unjust enrichment. This is one more area of interplay where the statutory auditor will need to exercise caution rather than pre-judge the situation.

SUBSTANCE OVER FORMAnother consideration in the selection of an appropriate accounting policy is the choice of substance over the form of a transaction. It is such consideration which requires that leases be accounted in a particular manner. In stark contrast to the accounting / auditing preference of substance over form, the tax laws typically concentrate on the form rather than the substance. However, the

upon the accounting treatment.

An interesting issue arose in the case of an airport operator

construction cost be treated as revenue expenditure and then be taken to the Balance Sheet as an intangible asset to be amortised over the life of the concession. Section

the same is incurred for own account and is capitalised in the books of accounts. The airport operator relied on a series of Supreme Court judgments under the earlier excise / service tax / income tax laws and also a High Court judgment under the GST law to claim the ITC. However, the statutory auditor was of the view that the ITC is not available. The airport operator backed up his position with an opinion from a Senior Counsel from the Supreme Court. However, the statutory auditor was not convinced. Perhaps, the auditor skipped three important aspects while framing his view:

Audit Evidence, which deals with this issue, provides that the auditor should determine if the evidence

can be done by:* Evaluating the competence, capabilities and objectivity of that expert,* Obtaining an understanding of the work of that expert,* Evaluating the appropriateness of the expert’s work as audit evidence for the relevant assertion.(2) The difference between the concepts of amortisation of an intangible asset and depreciation on tangible assets.

accounting that the construction is not on account of the airport operator but is on account of the Government. Having taken that position and implemented the same, whether the statutory auditor can bounce back to the form of the transaction and disregard the conduct in accounting?

MATERIALITYThe selection of accounting policy is also based on the consideration of materiality. In fact, the entire accounting and auditing process considers materiality and

or inaction. As compared to accounting and auditing,

materiality, much less an objective benchmark of what constitutes material items. Having said that, one may need to bear in mind that GST law is nascent and there

rulings.


755 (2020) 52-A BCAJ

supply and the consequential levy of CGST+SGST

provide for guiding principles to determine such place of supply. However, there could be scope of interpretation in some cases. The taxpayer could have discharged IGST, which in the opinion of the statutory auditor would merit CGST+SGST, or vice versa. What would be the role of the statutory auditor in such cases?

The Legislature itself has predicted that there could be such interpretation issues and therefore has provided

the IGST Act that in such cases the wrong tax should be refunded to the taxpayer and the correct tax should be collected. It is further provided that no interest should be charged in such cases. Since the tax has been fully

many judicial precedents suggest that there should be no penalty in such cases. In the backdrop of the above provisions, is there a possibility of a material impact on

statutory auditor?

ROLE OF THE STATUTORY AUDITOR VIS-À-VIS GST COMPLIANCESThe above discussion on the differing objectives of the GST law and the statutory audit process based on the

between the two domains. It is important for the statutory auditor to clearly recognise the differences and the points of interplay while taking any position on GST. At the same time, in view of SA 250 and the fact that non-compliances in GST law could have not only a material

fundamental assumption of going concern, the statutory auditor may not be in a position to take the management representations at face value. How does the statutory auditor strike that delicate balance?

One important aspect which needs to be noted before moving on is the basic understanding regarding audit, and that is, ‘An auditor is a watch-dog and not a bloodhound’, meaning the auditor is bound to give a reasonable assurance on the subject matter being audited and not

an absolute assurance. Based on the various activities undertaken during the audit, the auditor arrives at a reasonable assurance relating to whether or not the

or not there is any material misstatement? An auditor

from giving an opinion.

audit procedures which help him to validate compliance with other laws and also help him to identify instances of non-compliance with other laws and regulations that

One of the processes laid down in the SA is to obtain

the entity is complaint with such laws and regulations.

However, mere representation from the management

representation. He should understand the process designed by the company to comply with GST compliances and various checks and controls employed by the company and how the process is actually implemented in reality. This should include a review of multiple aspects

transactions,

made through such statements.

OPERATIONAL REVIEW THROUGH A WALKTHROUGH OF SAMPLE TRANSACTIONS

Understanding of businessAs part of the general audit procedure, the statutory auditor is expected to have reasonable knowledge about the business of the enterprise. When it comes to GST, a slightly more detailed knowledge of the business (more

enterprise) may be required. The tax rates, exemptions, reverse charge applicability, etc. to a substantial extent

services.

It may be useful for the statutory auditor to obtain the list

the tax rates applied on them. On a random basis, it may also be appropriate to review the process of creation of masters in the ERP / Invoicing Software to ensure that


756 (2020) 52-A BCAJ

the conduct of the enterprise. Depending on the time at the disposal of the auditor and the materiality, the auditor may also like to examine independently the correctness

in the public domain. However, in cases where there are

statutory auditor to rely on an expert opinion obtained by the auditee in this regard. In case there is no active litigation on this issue and generally the industry also accepts the tax rate adopted by the enterprise, the statutory auditor could be said to have reasonably performed his duty. The dividing line between the role of a statutory auditor and an

but fairly blurred in practice and the auditor should use his value judgement in ensuring that he does not transgress this line.

In case of services, it may also be important to understand

the supplier’. This may be especially important in multi-locational entities like banks and insurance companies. It may not be feasible for the auditor to actually examine each transaction to ensure full compliance. Besides, the law in this regard is fairly ambiguous. Therefore, a general understanding of the process may be obtained and validated with a few sample transactions. At this point, the interplay of contractual obligations vis-à-vis the service performance locations may have to be examined closely and accordingly the principles of cross-charge of services instituted by the enterprise may be revalidated.

Understanding the Procurement to Pay (P2P) CycleIn view of the requirement for matching of vendor credits, correct implementation of the P2P Cycle and appropriate vendor due diligence are very critical. It may be useful for the statutory auditor to review the processes of vendor master creation and validation of the GST registration obtained by the vendor. On a regular basis, the GRN closure process could be reviewed to verify that the ITC claim is not unnecessarily delayed. The auto-populated credit statement in Form GSTR2A available on the GST Portal can be an important audit tool to verify cases of delayed booking of invoices in the system. At the same time, it may be useful for the statutory auditor to bear

of the auditee and therefore if third parties have

Similarly, in view of the suspension of the Government-

controlled matching process proposed at the time of the

not imply non-compliance on the part of the assessee and

While reviewing the P2P Process, it may also be important to examine the extent of automation in relation

and the applicability of RCM. At this point, it may be important to examine the process and system instituted

transactions and question the positions already taken by the assessee and duly supported by adequate prima facie reasoning or expert opinions.

While on the P2P Process, it may also be appropriate to have a review of the inventory cycle to examine situations of shortage, free supplies, write-offs, destructions, etc., and to revalidate that appropriate ITC has been reversed in such scenarios. The auditor may bear in mind a possible

get triggered only in case of inventory items which are

In certain cases, liquidated damages, discounts, incentives, etc., are recovered from the vendors. Such

‘other income’ and, therefore, it is natural for a statutory auditor to inquire about the applicability of GST on such ‘other incomes’. However, in case the taxpayer wishes to rely on the decision of the Mumbai High Court in the case of Bai Mamubai vs. Suchitra and contend that there is no underlying supply by the taxpayer to the vendor, in the

auditors to take such management representation on record rather than impose their interpretation on the taxpayer.

Understanding the Ordering to Cash (O2C) CycleIn many organisations, the O2C Cycle may not comprise of merely one ERP / IT system but may be an integration of multiple invoicing, delivery and performance modules. In such a scenario, it may be important for a statutory

important for the statutory auditor to have knowledge

tax invoices. On a random basis, the review of a few tax invoices to ensure appropriate GST compliance may be


757 (2020) 52-A BCAJ

in order. In view of the speedy and unorganised phase-wise customisation of GST in many organisations and the limited support offered by ERP software, this integration of the revenue and the tax GLs becomes very critical in ensuring correct GST compliance. This aspect becomes even more important in complex service establishments like banks or airlines where revenue is generated from multiple sources and may not be immediately accompanied by a system-generated invoice.

It may be especially important for the statutory auditor to verify the checks and controls within the organisation to ensure that manual or draft invoices are not issued from outside the system. In many cases, such manual / draft invoices are later regularised in the ERP but this results in substantial reconciliation issues since the enterprise would upload the ERP invoice whereas the customer will upload the manual / draft invoice.

Understanding the Financial and Cost Control (FICO) ModulesThe Financial System (FI) Module would take care of most of the residuary activities within the organisation and therefore becomes a crucial module for review. Depending upon the extent of automation and control, it

manual entries. However, if such controls do not exist it may be appropriate for the auditor to scrutinise the tax GLs in detail to identify such manual entries and make sure that such manual entries are correctly recorded. A reconciliation of the tax GLs with the electronic ledgers maintained on the GST Portal may also provide some indications of non-compliance.

Understanding Generic GST CompliancesHaving obtained an overall understanding of the business processes and systems controls, it may then be relevant for the statutory auditor to venture into a review of the GST processes undertaken by the enterprise. Some indicative steps could be as under:

Having understood the nature of business of the enterprise, it may be useful for the auditor to cross-check whether it has obtained all the required registrations. Section 22 of the GST Act requires every assessee to obtain a registration in each of the states from where it makes a taxable supply. In view of the provisions of Entry 2 of Schedule I, certain branch transfers are deemed to be taxable supplies. Considering the interplay of these

two provisions, the auditor may like to examine whether or not all branches are registered under GST. If they are not registered, the reason for such non-registration may also be examined.

How does one determine whether any place requires a registration or not? Can there be an imputation of place of business in cases where employees work from home

establishment’ under the GST law requires a physical

to render a service, it may be in order for the statutory auditor to restrict his inquiries only to the branches which are physically owned / leased by the enterprise rather than impute the possibility of a place of business and insist on additional registrations.

This is an important part from the GST perspective. GST, as stated above, is a transaction-based tax, i.e., it applies on almost all transactions undertaken by a company. Therefore, automation in the process becomes important. This automation can be from different perspectives such as:* Booking of all incomes and expenses at correct locations resulting in booking of GST liabilities and credits also at the correct locations,* Booking GST amounts in books.

manually entered in systems? Especially in the context of sales invoicing where companies issue invoices in a different environment which is then sourced into the accounting system?(2) How are various factors determined, such as HSN, rate of tax, place of supply, etc.? What is the level of manual intervention involved and determining the scope of errors?

need for manual intervention?(4) What is the basis to determine eligibility of ITC and when is it done?(5) What is the basis to determine liability to pay tax under reverse charge?(6) What method is applied for complying with provisions of Rule 36(4) – matching of credits?(7) Whether proper accounting entries are passed in the books of accounts relating to liabilities and credits?

correctly compared with the corresponding GST Rate? Whether the amounts match with the tax collection as per liability GLs?


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supplies liable to reverse charge and at the correct rate? Whether monthly reconciliation with expenses booked in corresponding GLs is prepared?

is reconciled with the corresponding balance on the GST Portal? In case there are differences, are the same reconciled?

the forum before which the dispute is pending and the

This would cover disputed dues other than the above and would also include dues which have been demanded by the tax authorities but not accounted for in the books of the company. For example, the company has treated a particular transaction as not liable to tax for reasons such as exports, exempted, etc., or a claim of ITC is disputed by the tax authorities. Such instances would not be reported as liability in the books of accounts and therefore

to identify such instances.

Under GST, there is a facility to maintain all assessment proceedings, such as issuance of notices, orders, etc., online on the GST Portal.

In case notice has been issued, identifying the status of the said notice as to whether the same is relating to a recovery proceeding or procedural aspect. Generally, a mere notice for recovery should not require reporting under CARO. However, if the notice has been adjudicated and an order issued with respect to the same

would require reporting under this tab.

process and there are instances when the notices, orders, etc., are issued manually. In such cases it would

therefore for the same he can check the litigation tracker, if any, maintained by the company and do the above exercise, or rely on the management representation to this extent.

CONCLUSIONAs stated earlier, a statutory auditor may need to adopt a three-pronged approach towards ensuring adequate GST compliance. While doing so, he should attempt to

benchmarks can be established except by analysing the probable consequences. However, what may be important is to prioritise the aspects of systems and processes and controls and validate the business processes through review of sample transactions rather than step

interpretations adopted by the enterprise.

We have discussed in this article the conceptual framework and aspects relating to the operational review. In the next article, we shall cover in detail some aspects

[This article has received substantial inputs from Editor Raman Jokhakar whose contribution the authors would like to acknowledge.]

The ‘Governors’ of the profession kept on introducing newer and newer rules and regulations thrust by other countries. That was done under the garb of ‘Ethics’.

The professionals started spending more time on learning and more money on books and study courses. Since most of the clients’ work was discontinued, they had a lot of idle time.

This continued for a few years and in the year 2025 the government realised that the mandatory compliance was not required at all. The so-called specialised services

rendered by the profession became redundant. Everybody realised that it had made no difference whatsoever to anyone even in the absence of those services.

longer relevant and all the laws were changed accordingly.

That was the end of the profession.

The students as well as the existing professionals heaved a big sigh of relief that there was no longer any need to study too many laws and regulations!

LIGHT ELEMENTS Continued from Page 10


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RECENT DEVELOPMENTS IN GST

NOTIFICATIONS

th July, 2020 and

st August, 2020.

30th July, 2020, Government has made amendments in

st October, 2020 to those dealers whose aggregate turnover was more than Rs. 500 crores during the previous year.

30th July, 2020, Government has amended the earlier st

prescribed that issue of e-invoice is applicable to only those dealers whose turnover was more than Rs. 500 crores during the previous year. It is further provided that the said provisions of e-invoicing are not applicable to a Special Economic Zone unit.

ADVANCE RULINGS

th

The issue involved availability of ITC on various items pertaining to amusement parks. The applicant proposes to construct a water-park containing various items like water slides, kids’ play-slides, wave pool, etc. For the said purpose it has to use various components and services which are liable to GST. The following questions were posed before the AAR:

(a) Whether they are eligible to take credit on Input Tax paid on purchase of water slides? Water slides are made of strong PVC.(b) Water slides are installed on a steel and civil structure.

Will credit of tax paid on input goods and services used in construction of this support structure be available or not?(c) Whether or not Input Tax will be available on goods and services used for area development and preparation of land on which water slides are to be erected?(d) Whether the applicant will be eligible to take credit of Input Goods and Services used for construction of swimming pool / wave pool as water slides directly run into the pools?

The issues were basically in light of the provisions of

on inward supplies used in construction of immovable property is blocked. However, as per the Explanation

properties if they are Plant & Machinery. The Explanation has included foundation and structural support in the category of Plant & Machinery.

The learned AAR noted that although the Explanation seeks to allow ITC on foundation and structural support

ITC on building or any other civil structures. Analysing the position, the AAR further observed that there seems to be an apparent contradiction, but actually there is no such contradiction. If the foundation and structural

it will be part of Plant & Machinery. Other construction will fall in building or any other civil structures on which ITC is not allowed.

In this context, the AAR also referred to the meaning of foundation in various dictionaries. Thereafter, he referred to the main issue about the nature of items (slides, etc.) involved and whether such items can be covered under the category of Plant & Machinery. He also referred to various judicial pronouncements on the meaning of ‘plant’. Though many judgments were cited, the AAR made extensive reference to the judgment of the Supreme Court in the case of


Advocate


760 (2020) 52-A BCAJ

In this judgment the Supreme Court referred to various foreign judgments also and observed that when the meaning of ‘plant’

understanding. It further observed that the meaning

movable, live or dead, used by businessmen for carrying

an apparatus which is used for mechanical operations or processes, or is employed in mechanical industrial business. Citing such wide meanings, the AAR ruled in respect of each item as under:

(i) ITC in respect of Input Tax paid on purchase of water slides is eligible as it is part of Plant & Machinery.(ii) In respect of the steel and civil structure on which the water slides are installed, ITC is eligible as they are foundation and support structures which are used to fasten plant and / or machinery to the earth and hence they are Plant & Machinery.(iii) Similarly, foundation in respect of wave pool machines is also held eligible to ITC as Plant & Machinery. However, the machine room which is a civil structure is not eligible as it is neither foundation nor civil structure for machinery.(iv) As for Input Tax on goods and services used for area development and preparation of land on which water slides are to be erected, the AAR held that ITC is not eligible as they become part of land on which ITC is not allowed.(v) Input Tax Credit (ITC) on goods and services used for construction of swimming pools / wave pools was held ineligible as they are not support structure or foundation of the plant. They are held as independent items per se.(vi) The ITC in respect of goods and services used for the provision of facilities like transformer, sewage treatment

ineligible as they are not Plant & Machinery but part of building or civil structure.

th

The issue was about availability of ITC on the lift installed in the upcoming hotel building.

The applicant intends to construct a hotel building with

The inward supplies for the lift will include its parts, components and installation services. The question was

CGST Act which blocks credit in respect of goods and services received by taxable person for construction of an immovable property (other than Plant & Machinery) on his own account, including when such goods or services or both are used in the course or furtherance of business. It was the contention of the applicant that the lift is in the hotel and is necessary for the successful running of the same. Therefore, the inward supplies are in the course of business. It was further argued that even

the ITC is eligible in respect of Plant & Machinery. It was contended that a lift is machinery and hence it does not

The applicant cited the meaning of the words Plant & Machinery, which include apparatus, equipment and

support, that are used for making outward supply of goods or services. Citing a reference from Oxford, it was sought to explain that the equipment required to operate

given in legal dictionaries like Law Lexicon was cited in

etc. necessary to carry on any trade. The applicant also cited the judgments given in relation to CENVAT Credit. It was further contended that as per Indian Accounting Standards the lift installations are recorded in the books of accounts under a separate head and not under the head ‘building’.

The AAR made reference to the provisions of ITC in the CGST Act and agreed with the contention of the applicant that the lift is used for business. However, he further observed that the intent of the Legislature is clear in that it intends to restrict ITC on any goods or services which are used in the construction of an immovable property, even when such goods or services are used in the course of business.

In respect of the nature of the lift, the AAR observed that the lift comprises of components or parts like lift car, motors, ropes and rails, etc., and each of them has its own identity prior to installation and they are assembled / installed to create the working mechanism called a lift. It further observed that the installation of these components / parts with immense skill is rendition of service and without installation in the building there is no lift. They are

Therefore, they are not goods by themselves.Continued on Page 100


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RECENT DECISIONS–INDIRECT TAXES

I JAYESH GOGRI I Chartered Accountants

ISERVICE TAX

I. HIGH COURT

[2020-TIOL-1285-HC-AHM-ST]M/s. Linde Engineering India Pvt. Ltd. vs. Union of IndiaDate of order: 16th January, 2020

FACTS

The petitioner is engaged in providing services in India and outside India. Service is provided to their holding company located outside India. A show cause notice was issued alleging that the services provided to the holding company being merely an establishment of a distinct person, cannot be considered as export of service and

therefore Rule 6(3) of the CENVAT Credit Rules, 2004 is applicable and hence a demand is raised for reversal of credit.

HELD

The Court noted that the demand is raised on mere misinterpretation of the provisions of the law. The petitioner and its parent company can by no stretch of the imagination be considered as the same entity. The petitioner is an establishment in India which is a

is the other company in the non-taxable territory, cannot be considered as establishment so as to treat them as distinct persons for the purpose of rendering services. Thus, services provided to its holding company are considered as export of service as per Rule 6A of the

II. TRIBUNAL

[2020-TIOL-1178-CESTAT-ALL]M/s Encardio-Rite Electronics Pvt. Ltd. vs. Commissioner of Appeals, Central Excise and Service TaxDate of order: 25th November, 2019

FACTS

The appellants are sub-contractors engaged in laying of tracks for the Indian Railways and work associated with the construction of dams. The entire activity is performed in the state of Jammu and Kashmir. The Revenue argues that since both the sub-contractor and the main contractor are located in the taxable territory in view of Rule 6 of the Taxation of Services (Provided from Outside and Received in India) Rules 2006 as

leviable.

HELD

The Tribunal primarily noted that the services were provided and consumed in the state of Jammu and Kashmir. It was held that the provisions of the rule cannot override provisions of the sections provided in the Act. Section 64 clearly lays down that provisions of

service tax are not applicable in the state of Jammu and Kashmir. Accordingly, since the service is consumed in a non-taxable territory, the demand of service tax is not sustainable.

25 26


762 (2020) 52-A BCAJ

27 28[2020-TIOL-1167-CESTAT-CHD]State Bank of India vs. Commissioner (Appeals) of CGST, LudhianaDate of order: 27th February, 2019

FACTSThe appellant is a banking company providing banking

contractor and discharged service tax under reverse charge on works contract service. However, while making the payment the same was made under the category

required to pay service tax under reverse charge, they

that they have failed to show that the payment was made under works contract service.

HELDThe Tribunal noted that whatever service tax was payable by the appellant has been paid under banking and

issued by the chartered accountant showing that the

than the works contract service. The Tribunal accordingly held that the refund claim cannot be rejected on technical grounds and the appeal was allowed.

[2020-TIOL-1166-CESTAT-CHD]M/s Hitachi Metals India Pvt. Ltd. vs. Commissioner of Central Excise and Service TaxDate of order: 3rd April, 2019

when tax is not required to be paid

FACTSThe appellant entered into an agreement with a foreign company for promotion of products in India by way of

from, inquiries relating to business, co-operate with and represent companies in its promotional efforts, etc. Due to confusion and lack of clarity, the appellant paid service

for the services provided to their foreign-based service recipient for the payment received against the services

HELDThe Tribunal relying on the decision in the case of National Institute of Public Finance and Policy vs. Commissioner of Service Tax [2018-TIOL-1746-HC-DEL-ST] held that since the appellant was not liable to pay

IGOODS AND SERVICES TAX (GST)

I JAYESH GOGRI I Chartered Accountants

I. HIGH COURT

[(2020)-TIOL-1273-HC-AHM-GST]VKC Footsteps India Pvt. Ltd vs. Union of IndiaDate of order: 24th July, 2020

ultra vires to

FACTSThe petitioner is engaged in the business of manufacture

the majority of the inputs and input services procured

utilisation of credit for payment of GST on outward supply, there is an accumulation of unutilised credit in the electronic credit ledger. The respondents are allowing refund of accumulated credit of tax paid on inputs such as synthetic leather, PU polyol, etc., but refund of accumulated credit of tax paid on procurement of ‘input services’ such as job work service, goods transport agency service, etc., is being denied. The petitioners have, therefore, challenged the validity of

extent that it denies refund of input tax credit (ITC) relatable to input services.

39


763 (2020) 52-A BCAJ

HELD

particularly the Explanation (a) thereof, provides that Net

the relevant period other than the ‘input tax credit’ availed for which refund is claimed under sub-rule (4A) or (4B), or both. Therefore, ‘input tax credit’ on ‘input services’ is not eligible for calculation of the amount of refund by

which entitles any registered person to claim refund of ‘any’ unutilised ITC. Section 7 of the Act provides that ‘scope of supply’ includes all forms of supply of goods or services, therefore, for the purpose of calculation of refund of accumulated ‘input tax credit’ of ‘input services’ and ‘capital goods’ arising on account of inverted duty structure is not included in ‘inputs’ which is explained by

st

wherein it is stated that the intent of law is not to allow refund of tax paid on ‘input services’ as part of unutilised ‘input tax credit’.

The Court in this reference noted the decision of the Delhi High Court in the case of Intercontinental Consultants & Technocrats P. Ltd., 2012-TIOL-966-HC-DEL-ST which holds that the rule which goes beyond the statute is ultra vires and thus liable to be struck down. From the conjoint reading of the provisions of the Act and the Rules, it appears that by prescribing the formula in sub-rule 5

of tax paid on ‘input services’ as part of the refund of unutilised ITC is contrary to the provisions of sub-section 3 of section 54 of the Act which provides for claim of refund of ‘any unutilised input tax credit’. The word ‘input

section 2(62) as the central tax, state tax, integrated tax or union territory tax charged on any supply of goods or services, or both made to a registered person, whereas

other than capital goods and ‘input service’ as per section 2(60) means any service used or intended to be used by a supplier. Thus ‘input’ and ‘input service’ are both part of the ‘input tax’ and ‘input tax credit’.

Therefore, as per the provisions of sub-section 3 of

that registered person may claim refund of ‘any unutilised

such claim of the refund cannot be restricted only to ‘input’ excluding the ‘input services’ from the purview of ‘input tax

of ‘unutilised input tax’ paid on ‘input services’ as part of the ‘input tax credit’ accumulated on account of inverted duty structure is ultra vires the provisions of section 54(3) of the Act. Net ITC should mean ‘input tax credit’ availed

The respondents are directed to allow the claim of the refund made by the petitioners considering the unutilised ITC of ‘input services’ as part of the ‘net input tax credit’ for the purpose of calculation of the refund of the claim as

section 3 of section 54 of the Act.

[(2020) 7 TMI 611 (Delhi High Court)]Jian International vs. Commissioner of DGSTW.P.(C) 4205/2020Date of order: 22nd July, 2020

limit

FACTSThe petitioner’s refund application was not processed

seeking a direction to grant refund along with interest. It was stated that the refund application would be presumed to be complete in all respects in accordance with the rules

memo as certain documents had not been uploaded with the refund application.

HELDThe Court held that the respondent had lost the right to

belated stage and directed it to pay refund along with interest within two weeks. The Court was of the view

timeline would delay the petitioner’s right to seek refund and also impair the right to claim interest from the date of

[(2020) 7 TMI 24 (Gujarat High Court)]Mahavir Enterprise vs. ACSTSpecial Civil Application No. 7613 of 2020Date of order: 22nd June, 2020

40

41


764 (2020) 52-A BCAJ

FACTSA show cause notice was issued to the applicant u/s

physical movement of goods. The applicant submitted

summary notice needs to be issued electronically along

beyond the provisions of the Act, and being in excessive delegation, stands ultra vires. According to the applicant, section 74 contemplates show cause notice for the purpose of determination of the tax liability.

HELD

power on the Central Government to frame the rules. Under the said section, the Central Government has the power to make rules generally to carry out all or any of

of the Act.

[(2020) 8 TMI 11 (Gujarat High Court)]Material Recycling Association of India vs. UOI13238 of 2018Date of order: 24th July, 2020

FACTSThe petitioner was an association of the recycling industry engaged in manufacture of metals and casting, etc. for various upstream industries in India. It acted as an agent for scrap and recycling companies based outside India, engaged in providing business promotion and marketing services for principals located outside India. The members also facilitated sale of recycled scrap goods for their foreign principals in India and other countries. They received commission upon receipt of sale proceeds in convertible foreign exchange. They raised invoices upon their foreign clients for such commission received by them. Thus, according to them, the transactions entered into were export of service from India. The constitutional

HELDThe Court, after analysing the statutory provisions of place of supply, intermediary and export of service, held that

ultra vires and unconstitutional. The basic logic or inception of section

the place of supply was in order to levy CGST and SGST and such intermediary service, therefore, would be out of the purview of the IGST. There was no distinction between the intermediary services provided by a person in India or outside India. The said service would not qualify as export of service only because the invoice was raised on the person outside India and foreign exchange was received. A similar situation was present in the service tax regime and as such the situation continued in the GST regime also.

[(2020) 118 taxmann.com 53 (Kerala)]State of Kerala vs. Metso Minerals India (P) Ltd.Date of order: 19th June, 2020

would not have authority to tax the same and it

FACTSThe assessee entered into a contract with an entity for delivery and erection of a three-stage Nordwheeler plant. The materials for the plant were sourced from Singapore and Calcutta (i.e., from outside Kerala), which were brought into the state in a knocked-down condition and erected at the site of the client. The Department held that the transfer of goods having occurred at the time of the accretion of the goods in the works, is a works contract to be taxable within the state of Kerala. Such transfer has occurred within the state on the accretion of the goods in the works and it was found to be taxable within the state

works contract.

HELDThe Hon’ble High Court noted that the goods were all sourced from outside the state and suffered tax on interstate movement, where the purchases were made

42

43


765 (2020) 52-A BCAJ

Singapore, the movement after it was cleared from the port is exempted from tax. It, therefore, held that the works contract executed by the assessee is an interstate works contract and the state of Kerala cannot levy a tax on the transfer of goods in the form of goods or in any other form by accretion of such goods in the works, merely for the reason that the plant was erected within the state. The Court relied upon the decision in the case of Siemens Ltd. vs. State of Kerala and another [(2001) 122 STC 1] in which the Court, referring to the authoritative pronouncements of the Hon'ble Supreme Court, read down the provision in the Kerala General Sales Tax Act,

other form involved in the execution of a works contract taking place within the state taxable. If the goods are within the state at the time of such transfer, irrespective of the place where the agreement was executed or the contract being prior or subsequent to such transfer, the Court in that case held that the situs of the goods just prior to its accretion in the works, has absolutely no relevance in deciding the taxability when the goods used in the works contract were sourced from outside the state or imported into the country.

[(2020) 118 taxmann.com 59 (ECJ)]Vodafone Portugal – Comunicações Pessoais SA vs. Autoridade Tributária e Aduaneira

c)

FACTSVodafone (the assessee) concludes with its customers services contracts, some of which include special promotions subject to conditions that tie those customers in for a predetermined minimum period (the tie-in period). Under those terms and conditions, customers commit to maintaining a contractual relationship with Vodafone and to using the goods and services supplied by that

from advantageous commercial conditions, usually

44

related to the price payable for the contracted services. The tie-in period may vary according to those services and its purpose is to enable them to recover some of the investment on equipment and infrastructure and on other costs, such as the costs related to service activation and

customers to comply with the tie-in period for reasons attributable to themselves results in them paying the amounts provided for in the contracts. Those amounts seek to deter such customers from failing to comply with the tie-in period. The issue involved before the Court was whether the charges collected for early termination of the contract would be regarded as consideration for service so as to attract VAT when the operator no longer supplies services to the customer.

HELDA supply of services is carried out ‘for consideration’ only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance and the remuneration received by the provider of the service constituting the

to the recipient. That is the case if there is a direct link between the service supplied and the consideration received. It was noted that in this case the amounts at

formula, in compliance with the conditions laid down under national law according to which those amounts cannot exceed the costs incurred by the service provider in the context of the operation of those services (e.g. investment linked to its global infrastructure networks, equipment and installations), the acquisition of customers (commercial and marketing campaigns and the payment of commission to associated undertakings), the activation

of discounts or free services and costs necessary to the installation and purchase of equipment, etc., and it must

in the contract concluded with that provider.

of the costs associated with the supply of the services which that operator has provided to those customers and which the latter committed to reimbursing in the event of such a termination. The Court, therefore, held that those amounts must be considered to represent part of the cost of the service which the provider committed to supplying to its customers, that part having been reabsorbed within the monthly instalments, where the tie-


766 (2020) 52-A BCAJ

in period is completed and recovered separately where the tie-in period is not complied with by those customers. Therefore, from the perspective of economic reality, which constitutes a fundamental criterion for the application of the common system of VAT, the amount due upon the early termination of the contract seeks to guarantee the operator a minimum contractual remuneration for the service provided. The Court, therefore, held that when an operator determines the price for its service and monthly instalments having regard to the costs of that service and the minimum contractual commitment period, the amount payable in the event of early termination must be considered an integral part of the price which the

contractual obligations and liable to VAT.

II. AUTHORITY FOR ADVANCE RULING

[2020-TIOL-210-AAR-GST]M/s Navneeth Kumar TallaDate of order: 29th June, 2020

FACTSThe applicant is engaged in supplying food and beverages at the canteen of his customers. The applicant himself does not get paid by the consumers for the food and beverages. The recipients of the services are hospitals who enter into a contract with the applicant. The charges are accordingly received from the hospitals. The question before the Authority is whether food supplied to hospitals is liable to GST and, if yes, what is the rate of tax.

HELDThe Authority noted that exemption is allowed only on supply of food by a clinical establishment to the in-patients, being a part of health care services. The exemption is not available when such supply is made by a person other than a clinical establishment. Therefore, GST is payable on supply of the services by the applicant to hospitals and no exemption is provided in respect of the same. Supply of food to hospitals by the applicant depends on

the time period (during which it is supplied) and will be

st th July,

from 27th

and services used in supplying the service has not been taken.

[2020-TIOL-209-AAR-GST]Prasa Infocom and Power Solutions Pvt. Ltd.Date of order: 18th March, 2020

FACTSM/s Cray Inc. has entered into a contract with Indian Institute of Tropical Meteorology for supply of high performance computing solutions (including its maintenance) and preparation and maintenance of a data centre. M/s Cray has sub-contracted the portion related to preparation of the data centre (including its maintenance) to the applicant vide a contract. The applicant is engaged in the business of providing data centre construction and contracting services, which includes civil and mechanical work, supply and installation of other ancillary equipment necessary in a civil structure, namely, UPS and batteries,

systems, etc. The activities are undertaken to set up the data centre as a whole which cannot be shifted to another

at any other site. The question before the Authority is

HELDThe Authority noted that from the contract it is seen that the costing of goods and services are shown separately

total cost of the project is pertaining to supply of goods. These goods are sold to the client by the applicant and they receive separate payment for such goods sold. Without these goods, the services cannot be supplied and, therefore, the goods and services are supplied as a combination and in conjunction with and in the course of their business where the principal supply is supply of goods. There is a composite supply in the instant

45

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767 (2020) 52-A BCAJ

case but there is no building, construction, fabrication,

or commissioning of any ‘immovable property’ wherein transfer of property in goods is involved in the execution

involved in the subject case.

The data centre appears to be a space / room where the equipment / machinery / various other apparatuses are installed. The value of civil construction shown is

On perusal of the copy of the agreement / document submitted it reveals that the value of goods / equipment

a works contract. Further, from the list of goods and services, it is seen that some items are in the nature of machine / instruments / equipment and are all replaceable and hence cannot be said to be ‘immovable' in nature.

contract.

[(2020) 7 TMI 140 (AAR, West Bengal)]IZ Kartex 04/WBAAR/2020-21Date of order: 29th June, 2020

FACTSThe applicant was a local branch of a foreign business entity. They were involved in supply of maintenance and repair service to Indian customers for machinery and equipment supplied by the foreign entity. They submitted that the foreign entity provides the maintenance and

contract to customers in India and they were providing the said service on behalf of the foreign entity. The Indian customers were importing the service from the foreign entity and thus should be liable for tax under reverse charge.

HELD

important to train the employees of the Indian customers for which it may have to depute staff at the premises of the Indian customer. It is also important to ensure that timely delivery of spares, etc., was being made at the premises of

the Indian customers. The applicant, being the registered

establishment as per section 2(7) of the Integrated Goods

supplier was in India. Hence, the transaction is not an import of service but a supply of service by the applicant and accordingly tax is payable under forward charge.

[(2020) 7 TMI 353 (AAR, Rajasthan)]Hazari Bagh Builders Pvt. Ltd.RAJ/AAR/2020-21/05Date of order: 30th June, 2020

FACTSA lease agreement was entered into between the applicant company, i.e., the lessee, and the Rail Land

The applicant had paid a certain amount after the bid was

As per the agreement, the contract would stand terminated on breach of conditions and the bid security paid by the company would stand forfeited and the amount otherwise paid was fully refundable. The applicant stated that the amount which was paid without even executing the agreement could not be construed to be a premium paid for such lease agreement. The amount so paid was only

such amount shall not be chargeable under GST as it was in the form of security and not advance or lease premium.

th

th

paid was exempted under GST.

HELDThe Authority rejected the applicant’s contention on the ground that every agreement is de novo in itself and conditions may vary from each other, except the conceptual facts and principles. It stated that security of the contract was ensured when the letter of acceptance was signed. It was also observed that the RLDA being the statutory authority of the Government of India is providing services by way of renting of immovable property to a registered person and renting of immovable property includes leasing. Thus, the applicant was liable to pay GST under reverse charge mechanism. The Authority

47

48


BCAJ

was available only on industrial plots provided by the

st

plot over which residential structure was to be built and st

the transaction is a taxable supply liable to GST.

The AAR came to the conclusion that the lift becomes part of the building and is not a separate building per se. The lift has no identity when removed from the building. It cannot be sold or purchased. It is a customised mechanism for

by piece, it becomes an integral part of the building.

Regarding the contention of the applicant that it is Plant & Machinery, the AAR observed that building and civil

of Plant & Machinery even in the Explanation below

it gets excluded and therefore comes within the scope

reference to the AR given by AAR Karnataka in the case of Tarun Realtors Private Limited vide order dated 30th September, 2019. The AAR observed that though such other ARs have no value as precedents, there is a lot of persuasive value. In the above case of Tarun Realtors also, the ITC is held ineligible on the lift.

In view of the above position, the AAR in the present case held that ITC is not eligible in respect of installation of lift.

th

It was the contention of the applicant that it is medicament

analysing the above HSNs, the AAR observed that hand sanitizer is of the category of alcohol-based products

(D) Permanent Establishment

th

The facts in this case were rather peculiar. The applicant is the local branch of a Russian business entity by the same name (referred to as foreign company) which has entered into a maintenance and repair contract (MARC) with Bharat Coking Coal Limited (BCCL) with respect to the machinery and equipment that it had supplied. The local branch which had applied for the AR, was trying to argue that the supply of services is by a foreign company and therefore it is

IGST Act. It was further argued that it is the recipient, that is, BCCL, which should discharge liabilities under RCM.

The AAR referred to the terms of the MARC and found

date of commissioning of the equipment. The applicant

system experts at the site for maintenance and repair of equipment and to train the BCCL personnel. The applicant is paid at an agreed rate for supervision, supply of spares and consumables, etc.

Looking into all this, the AAR observed that the applicant maintains suitable structures in terms of human and technical resources at the sites of BCCL. It ensures supervision of the equipment, supply of

of permanence to the human and technical resources employed at the sites. Accordingly, the AAR held that the

the IGST Act and therefore the location of the supplier is

there is no import of services but these are supplies by the applicant located in India. Accordingly, it is liable to GST in India.

RECENT DEVELOPMENTS IN GST Continued from Page 92

My definition of wisdom is knowing the long-term consequences of your actions. — Naval Ravikant


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SECURITIES LAWS

DISGORGEMENT OF ILL-GOTTEN GAINS – A US SUPREME COURT JUDGMENT

AND A SEBI COMMITTEE REPORT

BACKGROUNDOne of the important enforcement tools that SEBI has against wrong-doers in capital markets is disgorging their ill-gotten gains. This means taking away by SEBI those gains that such persons have made from their wrong-doings. For example, an insider may trade based on unpublished price-sensitive information and make

and Education Fund. There can be numerous other similar cases of ill-gotten gains such as through price manipulation, excessive remuneration, fraudulent schemes of issue of securities, etc.

Disgorgement is not a punitive action and thus is limited to the gains made. Penalty and other actions may be over and above such disgorgement. The idea of disgorgement is that a wrong-doer should not retain the

While this power is expressly available to SEBI under law (thanks to a curiously worded ‘Explanation’ to section

and lack of clarity. Recently, however, there have been

a judgment of the Supreme Court of the USA (in Charles C. Liu et al vs. SEC, Supreme Court dated 22nd June 2020, No. 18-501 – referred to here as Liu), and the second is the report of the high-level committee under the Chairmanship of Justice A.R. Dave (Retired Judge,

th June, 2020 (‘the Report’).

The US judgment in Liu has highlighted three

the Securities and Exchange Commission (SEC) in the context of the prevailing law. The Report, on the other

hand, makes recommendations for amendments in these areas, although to some extent different from what the US judgment in Liu has held. These developments need discussion because disgorgement happening at present in India (and even in the US) is often ad hoc, arbitrary and even unfair.

For example, the Securities Appellate Tribunal in Karvy Stock Broking Ltd. vs. SEBI [(2008) 84 SCL 208] pointed out the arbitrary manner in which disgorgement was ordered by the Securities and Exchange Board of India. Persons who rendered services, and thus were part of the alleged scam, were required to disgorge the entire illegal gains. Similar orders of disgorgement were, however, not made against others in the same matter who had made the major gains.

There are no legal or judicial guidelines regarding the manner of disgorgement except some generic remarks in SEBI orders or SAT decisions. Some of the issues raised in Liu and the Report can be strongly raised before SEBI and appellate authorities in the hope that they would be ruled on, thus creating clarity and precedents. In some or all areas, the law itself could be amended, thus creating a strong, transparent and comprehensive base that SEBI and parties can rely on.

PRESENT PROVISIONS RELATING TO DISGORGEMENT IN INDIA UNDER THE SEBI ACT, 1992SEBI has ordered disgorgement of ill-gotten gains in numerous cases over the years. While disgorgement is accepted as an inherent power based on equity, the

almost a belated after-thought. It is in the form of an



770 (2020) 52-A BCAJ

any transaction or activity in contravention of the Act or Regulations made thereunder. Such ‘wrongful gain made or loss averted’ can be disgorged. No further guidance or details are given in the provision or in any Rules / Regulations / Circulars.

Thus, while power has been granted in the law, many aspects remain unclear and thus result in arbitrary actions in many cases that have now been highlighted, particularly through the US judgment and the Report.

every person who has contravened the law be made to

by another wrong-doer in the same wrong but who cannot or does not pay the amount? In short, should the liability be joint and several? If yes, are all wrong-doers to be subject to such joint and several liability, or only

be so subject?

Should the gross gains earned by a wrong-doer be fully disgorged or only his net gains that have gone into his pocket? In other words, should any deductions be allowed for expenses, taxes, etc. incurred while earning

Should any account be taken of losses incurred by the victims or should the disgorgement be only of the gains made?

be paid to those who incurred the losses, or can SEBI / Government keep them? Can an employer disgorge

Securities Laws?

THE DECISION OF THE US SUPREME COURT IN LIU

married couple formulated a scheme to defraud foreign nationals, inviting them to invest in certain commercial enterprises. This, it was promised, would enable them to obtain permanent residence in the USA. It turned out that this was allegedly a scam and only a small part of such amounts raised (about $27 million) were invested for such purposes. A substantial portion of the rest was diverted to personal accounts. Such acts were found to be in violation of the relevant laws and SEC ordered disgorgement.

SEC, for the purpose of disgorgement, applied a provision that enabled grant of ‘equitable relief that may

The core question before the Court was whether

equitable relief.

The Court upheld the right of SEC to disgorge the ill-gotten gains. However, three conditions were placed: First, joint and several liability cannot be placed on all the guilty persons, except in cases where the parties are partners in the wrong-doing. Second, the condition that it

ordinary course, if the disgorged proceeds are used to compensate the loss caused to investors, the condition

condition would have to be demonstrated. Third, it was

without giving appropriate deductions. While monies that go into the pocket of the wrong-doer cannot be allowed as deductions, fair deductions on legitimate expenses related to the activity that was in violation of law could be allowed.

Indian Securities Laws do have parallels with those in the USA and thus judicial developments there are considered by SEBI and Courts here. The judgment is not only on certain general legal principles but also lays down issues that have relevance even in the Indian context. However,

some respects and hence it cannot be directly applied to India in all aspects. For example, there is no condition

disgorged should be credited to the IPEF fund, the uses of which have been prescribed in the regulations. Thus, the decision in Liu, while raising interesting questions, would have to be applied after considering the niceties

REPORT OF JUSTICE A.R. DAVE COMMITTEEThe Report is fairly detailed and covers suggestions for reforms in certain major areas. In one of the sections, where suggestions have been given relating

of disgorgement has been discussed in some detail. Notably, the Report was released before the decision in Liu was rendered. Nevertheless, the issues that came up in Liu have also been discussed to an extent.



BCAJ

ALLIED LAWS

Hindu Succession Act, 1956, section 6 – Hindu Succession (Amendment) Act, 2005 – Equal right of a daughter in HUF – Devolution of interest in coparcenary property – Confers status of coparcener on daughters, even if born prior to the amendment, with effect from 9th September, 2005 – And it is not necessary that the father should be living as on 9th September, 2005 – Amendment is retrospective

Date of order: 11th

FACTSSeveral appeals on the issue of retrospective effect

before the Supreme Court. In one of the cases, Vineeta

brothers, viz., Rakesh Sharma and Satyendra Sharma, and her mother (respondents). The father, Dev Dutt Sharma, had three sons, one daughter and a wife.

th

st

claimed that being the daughter she was entitled to th share in the property of her father. The case of the

respondents was that after her marriage she ceased to be a member of the joint family. The High Court disposed of the appeal as the amendments of 2005 did

th

HELDThe Supreme Court held that the provisions contained in

confer the status of coparcener on the daughter born before or after the amendment, in the same manner as a son, with the same rights and liabilities. Since the right in coparcenary is by birth, it is not necessary that the father

th September, 2005 (the date of the amendment).

Indian Evidence Act, 1872, section 65B –

65B(4) – Not necessary that original document itself is produced

th July, 2020

FACTS

respondents before the Bombay High Court challenging the election of the present appellant, Arjun Panditrao Khotkar, to the Maharashtra State Legislative Assembly

revolved around the four sets of nomination papers

respondents that each set of nomination papers suffered from defects of a substantial nature and, therefore, all four sets of nomination papers having been

Election Commission, the election of the appellant be declared void. In particular, the respondents contended

by the RC after the stipulated time of 3.00 p.m. on 27th

have been rejected.

The respondents sought to rely upon the video camera arrangements that were made both inside and outside

respondents, the nomination papers were only offered at 3.53 p.m. (i.e. beyond 3.00 p.m.), as a result of which it

complaint making this objection was submitted by Kailash th

reject the nomination forms that had been improperly accepted. This request was rejected by the RO on the

2526

Senior Advocate

I Advocates


772 (2020) 52-A BCAJ

same day, stating that the nomination forms had, in

th

record of the election of the constituency, including

made that the electronic record needs to be produced

held that the CDs that were produced by the Election Commission could not be treated as an original record and would, therefore, have to be proved by means of secondary evidence. It was also found that

the Evidence Act was furnished by any of the election

HELD

unnecessary if the original document itself is produced. This can be done by the owner of a laptop computer, computer tablet or even a mobile phone, by stepping into the witness box and proving that the device concerned,

and / or operated by him.

Foreign Exchange Regulation Act (FERA), 1973, sections 8, 51, 68 -- Liability for offence -- Role played in company affairs -- Not designation or status

th July, 2020

FACTSModi Xerox Ltd. (MXL) was a company registered under

th June, st

made by the company through its banker Standard Chartered Bank. The Reserve Bank of India issued a letter stating that despite reminders issued by the authorised dealer, MXL had not submitted the Exchange Control copy of the customs bills of Entry / Postal Wrappers as evidence of import of goods into India. The

supplying invoices as well as purchase orders. MXL on th

MXL amalgamated and merged into Xerox Modicorp th January,

th was issued by the Deputy Director, Enforcement Directorate to MXL and its directors, including the appellant. The notice required to show cause in writing as to why adjudication proceedings as contemplated

The Directorate of Enforcement decided to hold

nd October, 2003 for personal hearing. th October, 2003 was sent to MXL and its

directors.

In reply the appellant stated that he is a practising advocate of the Supreme Court and was only a part-time, non-executive director of MXL and he was never in the employment of the company nor had any executive role in its functions. It was further stated that the appellant was never in charge of, nor ever responsible for, the conduct of the business of the company. The Deputy Director, Enforcement Directorate, after hearing the appellant and other directors of the company, passed an order dated

st

The appellant approached the Appellate Tribunal for foreign exchange but his appeal was dismissed on 26th

appellant in the Delhi High Court but by the impugned th

appeal of the appellant.

HELDThe Supreme Court held that for proceeding against a director of a company for contravention of provisions of

be that at the time the offence was committed, the director was in charge of and was responsible to the company for the conduct of its business. The liability to be proceeded

role one plays in the affairs of the company and not on mere designation or status.

Editor’s Note:

27


773 (2020) 52-A BCAJ

Constitution of India, Articles 226, 300A – High Courts bound to issue Writ of Mandamus – For enforcement of public duties – Right to property is a fundamental right and human right

th

FACTSThe Thorat family was the owner of a plot at Bhamburda

st

the northern part of the plot jointly to Swami Dilip Kumar Roy, one of the most eminent disciples of Sri Aurobindo, and Indira Devi, daughter-disciple of Swami Dilip Kumar Roy. Swami Dilip Kumar Roy had moved to Pune to propagate the philosophy of Sri Aurobindo and established the Hare Krishna Mandir with his daughter disciple, Indira Devi, on the land purchased from Krishnabai Gopal Rao Thorat.

According to the appellants, the Pune Municipal Corporation, by an order dated 20th

Plot No. 473 which was originally numbered Survey

four plots. On 20th

directed issuance of separate property cards in view of a proposed Development Scheme under the Regional and Town Planning Act which included Final Plot No. 473, and an Arbitrator was appointed. The Arbitrator made

th

and ownership of the plots were to be as per entries in

28the property register. The appellant contended that the

th June, th th

that the internal road had never been acquired by the Pune Municipal Corporation. The Town and Planning Department also admitted that the Pune Municipal Corporation had wrongly been shown to be the owner of the said road.

The Urban Development Department rejected the proposal of the appellant and held that the Pune Municipal Corporation is the owner of the land. The Hon’ble High Court dismissed the Writ Petition challenging the said order and refused to issue a Writ of Mandamus.

HELDThe Supreme Court held that the right to property may not be a fundamental right any longer, but it is still a Constitutional right under Article 300A and a human right. In view of the mandate of Article 300A of the Constitution of India, no person is to be deprived of his property save by the authority of law. The High Courts, exercising their jurisdiction under Article 226 of the Constitution, not only have the power to issue a Writ of Mandamus or in the nature of Mandamus, but they are duty-bound to exercise such power where the Government or a public authority has failed to exercise or has wrongly exercised discretion conferred upon it by a statute, or a rule, or a policy decision of the Government, or has exercised such discretion mala

or on irrelevant consideration. The High Court is not deprived of its jurisdiction to entertain a petition under Article 226 merely because in considering the petitioner's right to relief questions of fact may fall to be determined. Exercise of the jurisdiction is discretionary, but the discretion must be exercised on sound judicial principles.

We must never ever give up, or give in or throw in the towel. We must continue to press on! And be prepared to do what we can to help educate people, to motivate

people, to inspire people to stay engaged, to stay involved and to not lose their sense of hope. We must continue to say we’re one people. We’re one family. We all live in the same house. Not just an American house but the world house. As Dr. King said

over and over again, 'We must learn to live together as brothers and sisters. If not, we will perish as fools.

— John Lewis, 8th June, 2020, New York Interview (civil rights giant, 17-term Congressman, an ally of MLK. He passed away in July, 2020)


774 (2020) 52-A BCAJ

LAWS AND BUSINESS

COPARCENARY RIGHT OF A DAUGHTER IN FATHER’S HUF: FINAL TWIST IN THE TALE?


INTRODUCTIONThe Hindu Succession (Amendment) Act, 2005 (‘2005

th September, 2005, was a path-breaking Act which placed Hindu daughters on an equal footing with Hindu sons in their father’s Hindu Undivided Family by amending the age-old

ushered in great reforms it also left several unanswered questions and ambiguities. Key amongst them was to which class of daughters did the 2005 Amendment Act apply? The Supreme Court by two important decisions had answered some of these questions and helped clear a great deal of confusion. However, just when one thought that things had been settled, a larger bench of the Apex Court has turned the decision on its head and come out with a more liberal interpretation of the law. Let us analyse the Amendment and the old and the new decisions to understand the situation in greater detail.

THE 2005 AMENDMENT ACTFirst, let us understand the Amendment to put the issue in perspective. The Hindu Succession (Amendment) Act,

applies to all cases of intestate succession by Hindus. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, a Christian, a Parsi or a Jew. Any person who becomes a Hindu by conversion is also covered by the Act. The Act overrides all Hindu

entitled to such property and the order or preference among them. The Act also deals with some important aspects pertaining to an HUF.

By the 2005 Amendment Act, Parliament amended section

th September, 2005.

revamped. The relevant portion of the amended section 6 is as follows:

and from the commencement of the Hindu Succession

family governed by the Mitakshara law, the daughter of a

same manner as the son;

she would have had if she had been a son;

coparcenary property as that of a son, and any reference to a Hindu Mitakshara coparcener shall be deemed to include a reference to a daughter of a coparcener:Provided that nothing contained in this sub-section shall affect or invalidate any disposition or alienation including any partition or testamentary disposition of property which had taken place before the 20th day of December, 2004.’

Thus, the amended section provides that a daughter of a coparcener shall become by birth a coparcener in her own right in the same manner as the son and, further, she shall have the same rights in the coparcenary property as she would have had if she had been a son. It also provides that she shall be subject to the same liabilities in respect of the coparcenary property as a son. Accordingly, the amendment equated all daughters with sons and they would now become coparceners in their father’s HUF by virtue of being born in that family. She has all rights and obligations in respect of the coparcenary property, including testamentary disposition. Not only would she become a coparcener in her father’s HUF, but she could also make a will for the same.

One issue which remained unresolved was whether the application of the amended section 6 was prospective or retrospective?

Act, 2005, stated that it came into force from the date


775 (2020) 52-A BCAJ

th September, 2005. Thus, the amended section 6 was operative from that date. However, did this mean that the amended section applied to:(a) daughters born after that date,(b) daughters married after that date, or(c) all daughters, married or unmarried, but living as on that date?

There was no clarity under the Act on this point.

PROSPECTIVE APPLICATION UPHELDThe Supreme Court, albeitthat the 2005 Amendment Act did not seek to reopen vesting of a right where succession has already taken place. According to the Supreme Court, ‘the operation of the Statute is no doubt prospective in nature… the 2005 Act is not retrospective, its application is prospective” – G. Sekar vs. Geetha (2009) 6 SCC 99.

The Supreme Court has held in Sheela Devi vs. Lal Chand, (2007) 1 MLJ 797 (SC) that if the succession was opened prior to the Hindu Succession (Amendment) Act, 2005, the provisions of the 2005 Amendment Act would have no application.

FATHER-DAUGHTER COMBINATION IS A MUSTFinally, the matter was settled by a two-Judge Bench of the Apex Court in its decision in the case of Prakash vs. Phulavati, (2016) 2 SCC 36. The Supreme Court examined the issue in detail and held that the amendment was prospective and not retrospective. It further held that the rights under the Hindu Succession Act Amendment were applicable to living daughters of living coparceners

th September, 2005 irrespective of when such daughters were born. It further held that any disposition or alienation including a partition of the HUF which may have taken place before 20th December, 2004 (the cut-off date provided under the 2005 Amendment Act) as per law applicable prior to the said date, would remain unaffected. Thus, as per the above Supreme

required was that the daughter should be alive and her father should also be alive on the date of the amendment,

th September, 2005. Once this condition was met, it was immaterial whether the daughter was married

immaterial when the daughter was born.

DAUGHTER BORN BEFORE THE ACTIn Danamma @ Suman Surpur & Anr. vs. Amar &

Ors., (2018) 3 SCC 343, another two-Judge Bench of the Supreme Court took off from the Prakash case (Supra) and agreed with it. It held that the Amendment used the words ‘in the same manner as the son’. It was therefore apparent that both the sons and the daughters of a coparcener had been conferred the right of becoming coparceners by birth. It was the very factum of birth in a coparcenary that created the coparcenary, therefore the sons and daughters of a coparcener became coparceners by virtue of birth. The net effect of the amendment according to the Court was that it applied to living daughters of living

th September, 2005. It did not matter whether the daughters were married or unmarried. It did not matter when the daughters were born. They might be

th

THREE-JUDGE VERDICT LAYS DOWN A NEW LAWA three-Judge Bench of the Supreme Court in the case of Vineeta Sharma vs. Rakesh Sharma, CA 32601 /2018, Order dated 11th August, 2020 considered a bunch of SLPs before it on the issue of the 2005 Amendment Act. The Court by a very detailed verdict considered the entire genesis of the HUF Law. It held that in the Mitakshara School of Hindu law (applicable to most parts of India), in a coparcenary there is unobstructed heritage, i.e., right is created by birth. When right is created by birth it is called unobstructed heritage. At the same time, the birthright is acquired in the property of the father, grandfather, or great grandfather. In case a coparcener dies without leaving a son, right is acquired not by birth, but by virtue of there being no male issue and is called obstructed heritage. It is called obstructed because the accrual of right to it is obstructed by the owner's existence. It is only on his death that obstructed heritage takes place. It held that property inherited by a Hindu from his father, father's father, or father's grandfather (but not from his maternal grandfather) is unobstructed heritage as regards his own male issues, i.e., his son, grandson, and great-grandson. His male issues acquire an interest in it from the moment of their birth. Their right to it arises from the mere fact of their birth in the family, and they become coparceners with their paternal ancestor in such property immediately on their birth, and in such cases ancestral property is unobstructed heritage.

Further, any property, the right to which accrues not by birth but on the death of the last owner without leaving a male issue, is called obstructed heritage. It is called obstructed because the accrual of right to it is obstructed


776 (2020) 52-A BCAJ

by the existence of the owner. Consequently, property which devolves on parents, brothers, nephews, uncles, etc. upon the death of the last owner is obstructed heritage. These relations do not have a vested interest

time on the death of the owner. Until then, they have a mere spes successionis, or a bare chance of succession to the property, contingent upon their surviving the owner. Accordingly, the Apex Court held that unobstructed heritage took place by birth and obstructed heritage took place after the death of the owner.

The Apex Court laid down a very vital principle that coparcenary right, under section 6 (including after Amendment), is given by birth which is called unobstructed heritage. It is not a case of obstructed heritage depending upon the owner's death. Thus, the Supreme Court concluded that a coparcener’s father need not be alive on 9th September, 2005, i.e., the date of the Amendment.

The Court observed that the Amendment was a gender bender inasmuch as it sought to achieve removing ‘gender discrimination to a daughter who always remains a loving daughter’. It further held that though the rights

th September, 2005, the provisions were of a retroactive application, i.e., they

the Mitakshara coparcenary law should be deemed to include a reference to a daughter as a coparcener. Under the amended section 6, since the right was given by birth, i.e., an antecedent event, the provisions concerning claiming rights operated on and from the date of the Amendment Act. Thus, it is not at all necessary that the father of the daughter should be living as on the date of the Amendment, as she has not been conferred the rights of a coparcener by obstructed heritage. The effect of the amendment is that a daughter is made coparcener with effect from the date of the amendment and she can claim partition also, which is a necessary concomitant of the

governed by Mitakshara Law. The coparcenary must th September, 2005 to enable the daughter of a

coparcener to enjoy rights conferred on her. As the right is by birth and not by dint of inheritance, it is irrelevant whether a coparcener whose daughter is conferred with the rights is alive or not. Conferral is not based on the death of a father or other coparcener.

The Court also held that the daughter should be living th September, 2005. In the substituted section 6,

the expression 'daughter of a living coparcener' has not been used. One corollary to this explanation would mean that if the daughter has died before this date, then her children cannot become coparceners in their maternal grandfather’s HUF. However, if she dies on or after this date, then her children can become coparceners in their maternal grandfather’s HUF.

The Court explained one of the implications of becoming a coparcener was that a daughter has now become entitled

th September, 2005, which was a vital change brought about by the statute. Accordingly, the Supreme Court in Vineeta Sharma vs. Rakesh Sharma, CA 32601/2018, Order dated 11th August, 2020 expressly overturned its earlier verdict in Prakash vs. Phulavati, (2016) 2 SCC 36 and those portions of Danamma @ Suman Surpur & Anr. vs. Amar & Ors., (2018) 3 SCC 343 which approved of the decision in Prakash vs. Phulavati.

EXCEPTION TO THE RULESection 6(5) of the Act provides that the Amendment will not apply to an HUF whose partition has been effected before 20th December, 2004. For this purpose, the partition should be by way of a registered partition deed / a partition brought out by a Court Decree. In the Amendment Bill even oral partitions, supported by documentary evidence,

stage since the intention was to avoid any sham or bogus transactions in order to defeat the rights of coparcener conferred upon daughters by the 2005 Amendment Act.

It was argued before the Court that the requirement of a registered deed was only directory and not mandatory. But the Court negated this argument. It held that the intent of the provisions was not to jeopardise the interest of the daughter but to take care of sham or frivolous transactions set up in defence unjustly to deprive the daughter of her right as coparcener. In view of the clear provisions of section 6(5), the intent of the Legislature was clear and a plea of oral partition was not to be readily accepted. However, in exceptional cases where the plea of oral partition was supported by public documents and partition

effected by a decree of a court, it may be accepted. A plea of partition based on oral evidence alone could not be accepted and had to be rejected outright.

CONCLUSIONThe conclusion arrived at by the Supreme Court in Vineeta Sharma’s case (Supra) undoubtedly appears


777 (2020) 52-A BCAJ

to be correct as compared to the earlier decisions on

made restrictive and the same has now been set right. However, consider the turmoil and the legal complications which this decision would now create. Several disputes in HUFs were created by the 2005 Amendment and those

Prakash vs. Phulavati (Supra)this decision was rendered. Now comes a decision which overrules the settled law. One can expect a great deal of litigation on this issue now that the restrictive parameters set down have been removed. In respect of cases pending before different High Courts and subordinate courts, the Supreme Court in Vineeta Sharma’s case (Supra) has held that daughters cannot be deprived of their equal right and hence it requested that all the pending matters be decided, as far as possible, within six months. However, what happens to cases where matters are settled? Would

they be reignited again?

One wonders how Parliament can enact such a path-breaking enactment and not pay heed to a simple matter of its date of applicability. Could this issue not have been envisaged at the drafting stage? This is a classic case of a very advantageous and laudable Amendment suffering from inadequate drafting! Is it not strange that while the language of some of our pre-Independence Acts

Indian Succession Act 1925, etc.) have stood strong for over a century, some of our recent statutes have suffered on the drafting front. Ultimately, matters have to travel to the Supreme Court leading to a lot of wastage of time and money. One can only hope that this issue of the coparcenary right of a daughter in her father’s HUF is settled once and for all. Or are there going to be some more twists in this tale?

The Report notes the language of the Explanation and its possible interpretations. A literal view could be that a wrong-doer could be held liable to disgorge only the gains that have gone into his pocket and he would not be made to pay what other wrong-doers gained. However, the Report opines that the better view is that the gains made by all wrong-doers can be recovered from each person. The Committee, however, suggests that the

provide for joint and several liability of all persons who indulged in such wrong-doing.

It also opines that disgorgement should be of net gains and not of gross gains. It suggests detailed guidance on what deductions should be allowed from the gains, so that only the net gains are disgorged. Interestingly, income-tax is allowed as a deduction where it has been incurred on gains from certain insider trading but not, say, where

The Report also notes that SEBI has no powers of compensating investors by helping them recover their losses from the wrong-doers. For recovering their losses, the victims have to approach civil courts. It also notes that it is the gains made that can be disgorged

and not the losses caused to others. Such losses can, however, be taken into account for levy of penalty.

the law. It has been released for public comments after which SEBI may implement it by amending the law.

CONCLUSIONWrong-doings in securities laws usually have a motive of

motive is frustrated and wrong-doers lose their incentive. That, coupled with penalty and other enforcement and even prosecution, should help curb the ills in our securities markets.

The law relating to disgorgement, however, continues to remain vague and opaque, leading to arbitrary actions. The absence of guidelines also leads to inconsistent actions. Appellate authorities also face the same problem of absence of a base in law in terms of clear provisions.

Even the decision in Liu is general in nature though broad guidelines are given. Fortunately, we have the detailed and scholarly report of Justice Dave and one hopes that it is quickly implemented after due consideration.

SECURITIES LAWS Continued from Page 102

If you disrupt yourself, you will be able to manage and even thrive through disruption. — Whitney Johnson, Executive Coach and Author


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FROM PUBLISHED ACCOUNTS

DISCLAIMER OF CONCLUSION REPORT

COFFEE DAY ENTERPRISES LTD. (CONSOLIDATED)

ended 30th th

COMPILER’S NOTEPost the issue of this report, the then statutory auditors tendered their resignation to the company citing commercial considerations. The subsequent auditors

technical reasons. For the quarter ended 30th September, 2019, the next auditors appointed have issued a similar ‘Disclaimer of Conclusion’ report.

BASIS FOR DISCLAIMER OF CONCLUSION

subsidiaries and 2 joint ventures (together constituting

report is dated 2nd

much earlier than the date of this report.

a disclaimer of conclusion on the underlying unaudited inter alia: possible impact of

of transactions and recoverability of balances of

balances, recoverability of receivables.

In our Group Review Instructions, circulated in accordance

the Listing Regulations read with SA 600, ‘Using the Work of Another Auditor’, we raised a number of queries and sought further information and explanations from the above subsidiary auditors including: impact of ongoing


consideration of subsequent events up to the date of

results due to inter alia: possible impact of the ongoing

concern assumption.

Based on the above, we have not been able to obtain

conclusion other than a disclaimer for the Group as a whole.

(b) In a letter dated 27th

V.G. Siddhartha, the Promoter and then Chairman and Managing Director of the Parent Company, which has come to light, it was inter alia stated that the Management and auditors were unaware of all his transactions.

consequently, the Board of Directors have initiated an investigation into the circumstances leading to the statements made in the letter and to scrutinise the books of accounts of the Company and its subsidiaries. As of the date of this report, the investigation is not yet concluded and, thus, the Parent Company is unable to conclude if there are any adjustments / disclosures required to be made to the Statement.

Pending outcome of the ongoing investigation, we are unable to comment on the completeness, existence, accuracy and appropriateness of the transactions and


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disclosures of the current quarter and earlier periods, including regulatory non-compliances, if any, and any other consequential impact to the Statement.

Regulations, other applicable laws and the Indian Accounting Standard), transactions with such parties and the resulting balances have not been made available

appropriate evidence to demonstrate business rationale, propriety, compliance with the requirements of the relevant laws and regulations for these transactions and the recoverability of the balances with these parties has not been made available.

Accordingly, we are unable to comment on the completeness, existence, accuracy, business rationale, propriety of transactions with related parties, compliance with applicable laws and regulations, recoverability of these balances and the consequential impact, if any, on the Statement.

(d) In case of certain subsidiaries, we have not received

with debt covenants or details of defaults in repayment of borrowings and consequent actions, if any, taken by bankers / lenders as provided in the relevant loan

Accordingly, we are unable to comment on the completeness, existence and accuracy of the borrowings on account of consequential adjustments that might arise due to non-compliance with debt covenants.

evidences for the listing of transactions and recoverability of balances of ‘advances net of trade payables’ (including related parties) amounting to Rs.

in case of certain other subsidiaries, the reconciliations /

been received. Further, an assessment of recoverability

been provided.

Accordingly, we are unable to comment on the completeness, existence and recoverability of such ‘advances net of trade payables’, receivable and other

payable balances.

(f) In case of certain subsidiaries, we have not received

assets for the quarter ended 30th

leasehold improvements, capital work-in-progress and

Additionally, at a consolidated level, for goodwill

of the Statement).

The above impairment assessments are as required by Ind AS 36, ‘Impairment of Assets’, particularly consequent to developments during the period, including the pending investigation as discussed in this report.

Accordingly, we are unable to comment on whether any adjustments on account of impairment are required with

appropriate evidence is not available to support a subsidiary’s compliance with section 45-IA of the Reserve

seeking exemption from registering themselves as Non-Banking Financial Company (NBFC). As at the date of this review report, a response from RBI is awaited.

Accordingly, we are unable to comment on the compliance with the aforesaid regulations and consequential impact, if any, on the Statement.

(h) The Parent Company has also received a notice from the Registrar of Companies, Karnataka, calling for information in connection with a proposed enquiry

Parent Company is in the process of responding to such enquiry. Pending the outcome of the enquiry and related proceedings, we are unable to comment on the impact of the same on the Statement.

transferred a part of its business to its step-down subsidiary whose parent subsequently became a joint

for such transfer and compliance of the same with the requirements of the Indian Accounting Standards have not been provided.


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Accordingly, we are unable to comment on whether the transaction complies with the requirements of Indian Accounting Standards and consequential impact on the Statement, if any.

down subsidiaries and 2 joint ventures, reviewed by another auditor, the relevant review report on consolidated

the date of this report. In the case of this group as well

regarding subsequent events as required by Ind AS

provided, and therefore relevant procedures could not be performed.

Accordingly, we are unable to comment on the adjustments, if any, arising from such events in the case of these subsidiaries which may have occurred in the time period between 30th

report.

Company and certain subsidiaries have adopted section

its tax expense for the quarter ended 30th

tax Act, came into force on 20th

cannot be applied for measurement of the tax expense for the quarter ended 30th

expense is not in compliance with applicable standards. Additionally, matters listed in the paragraphs above may have a consequential effect on the Company’s current and deferred tax expense / (credit) for the current period / earlier periods as well as corresponding balances as at the reporting date.

Accordingly, we are unable to comment on the

completeness and accuracy of current and deferred tax expense / (credit) for the current period / earlier periods as well as the corresponding balances as at the reporting date.

(l) In case of the Parent Company and certain subsidiaries, the review reports contain a disclaimer of conclusion

other subsidiaries contain a paragraph stating that there was material uncertainty relating to going concern assumption. However, the management has prepared

basis as detailed in Note 22. On a consideration of the overall position and in view of the matters stated in the paragraphs above, we are unable to comment on whether the going concern basis for preparation of the Statement is appropriate.

DISCLAIMER OF CONCLUSIONBecause of the substantive and pervasive nature of the matters described in paragraph 6, ‘Basis for disclaimer of conclusion’, above for which we have

evidence resulting in limitation on work, and in respect of which the possible adjustments have not been determined, and based on the consideration of the review

below, we are unable to state whether the accompanying Statement has been prepared in accordance with the recognition and measurement principles laid down in the relevant Indian Accounting Standards and other accounting principles generally accepted in India, or that the Statement discloses the information required to be disclosed in terms of Regulation 33 of the Listing Regulations, including the manner in which it is to be disclosed, or that it contains any material misstatement. Thus, we do not express a conclusion on the accompanying

The task is not to see what has never been seen before, but to think what has never been thought before about what you see every day.

— Erwin Schrödinger (1887 - 1961)


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CORPORATE LAW CORNER

It was submitted by the corporate debtor that the validity of the franchise agreement and entries in the balance sheet were all a subject matter of dispute before the High Court. The High Court vide th July,

fact which will have to be proved on trial. The corporate debtor thus submitted that the subject issue as regards the payment of the unsecured loan and the default was in itself an issue before the High Court.

HELDThe Tribunal heard both the parties at length. It examined

Rule 4 of IBBI (Application to Adjudicating Authority) Rules,

amount disbursed as per the loan / debt, the tenure of the loan / debt, interest payable and conditions of repayment.

Relying on the decision in the matter of Prayag Polytech Pvt. Ltd. vs. Sivalik Enterprises Pvt. Ltd. IB-312/(ND)/2019, it was observed that in order to invoke provisions of section 7 of the Code and for initiation of CIRP against the corporate debtor, the following conditions were

in payment of interest or in payment of principal, or both, on part of the corporate debtor. All the above conditions

contract’ it was not possible to ascertain the actual amount

franchise agreement which did not state the consideration for time value of money being granted to the corporate debtor. Assuming there was a disbursal, the default had

it is repayable. In any case, the entire agreement was in dispute before the High Court.

I Chartered Accountants

10P. Suresh vs. Super Foodis Pvt. Ltd.IBA/541/2019 - NCLT ChennaiDate of order: 20th December, 2019

FACTSMr. P (‘Financial Creditor’) entered into a franchise agreement with S Co (‘Corporate Debtor’) to run a vegetarian restaurant for a period of three years from

th th

stipulated the use of brand name, quality standards for

corporate debtor was changed and it was alleged that the

that they will discharge the loan liability, if any, due from the corporate debtor and subsequently the new management

st

st

With regard to the provisions of the franchise

th the franchise agreement and sought for removal of the sign board and surrender of all articles bearing the

the said notice the corporate debtor continued to use

infringement of registered trademark which was pending before the High Court of Madras.

debtor which is also a subject matter of dispute in the case referred to above. Continued on Page 125


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for the project.

establishment described as such by the company.

As per Schedule I read with Regulation 4(b) of the FEM

person resident outside India is permitted to carry out the following activities:(i) Export / import of goods.(ii) Rendering professional or consultancy services.(iii) Carrying out research work in which the parent company is engaged.

between Indian companies and parent or overseas group company.(v) Representing the parent company in India and acting as buying / selling agent in India.(vi) Rendering services in Information Technology and development of software in India.(vii) Rendering technical support to the products supplied by parent / group companies.(viii) Representing a foreign airline / shipping company.

activity as the parent company. There is a difference between the PO / BO and LO, both in terms of their models and, more importantly, their permitted activities. As per the FEMA 22(R), an LO is permitted to carry out very limited activities and can only act as a communication

whereas a PO / BO is permitted to carry out commercial

Regulations.

Thus, under FEMA 22(R) a PO is allowed to play a larger role as compared to an LO in India. Further, the scope of permitted activities of a BO provided in Schedule I of

In our last article published in the August, 2020 issue of the BCAJ, we discussed various aspects relating to

recent decision of the Supreme Court in the case of the U.A.E. Exchange Centre.

been important modes of doing business in India for many foreign entities.Issues have arisen for quite some time as to under what circumstances a PO / BO has to be considered as a

India and then be subjected to tax here.In this article, we discuss various aspects relating to taxability of a PO / BO in India, including the recent decision of the Supreme Court in the case of Samsung Heavy Industries Ltd.

BACKGROUNDThe determination of tax liability of a foreign enterprise has been a contentious subject in the Indian tax regime for a very long time. And whether a foreign enterprise has a PE in India has been a highly debatable issue, though it is very fact-intensive. The ITAT and the courts have been taking different views based on the facts of each case.

represent the interests of the foreign company executing

at the site of a project but does not include a Liaison

provided it has secured from an Indian company a contract to execute a project in India, and (i) the project

or (ii) the project is funded by a bilateral or multilateral

entity in India awarding the contract has been granted

INTERNATIONAL TAXATIONChartered Accountants

TAXABILITY OF A PROJECT OFFICE OR BRANCH OFFICE OF A FOREIGN ENTERPRISE IN INDIA


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FEMA 22(R) is much larger than the scope of permitted activities of an LO provided in Schedule II of FEMA 22(R).

In National Petroleum Construction Company vs. DIT (IT) [2016] 66 taxmann.com 16 (Delhi), the Delhi High

Foreign Exchange Management (Establishment in India of

2000, held that ‘It is apparent from the plain reading of

act as a channel of communication between the principal place of business and the entities in India and cannot undertake any commercial trading or industrial activity,

activity other than the "activity relating and incidental to execution of the project". undertake all activities that relate to the execution of the project and its function is not limited only to act as a channel of communication.’

WHETHER A PO / BO CONSTITUTES A PE IN INDIA?As mentioned above, as per the prevailing FEMA regulations a PO / BO can carry out activities which may not be limited to acting as a communication channel between the parent company and Indian companies.

An issue that arises for consideration is whether just because the scope of the permitted activities of a PO / BO is much wider as compared to an LO under FEMA 22(R), would that be an important consideration in determining the existence of a PE of a foreign enterprise in India?

Due to the difference in scope of activities to be carried

a times take a stand that the PO / BO is a PE of a foreign enterprise as they are permitted to carry out commercial activities as compared to an LO. This perception leads to the conclusion of a PO / BO being a PE in India.

In order to decide whether a PO / BO constitutes a PE in the source state, the actual activities carried out by them in India need to be minutely analysed irrespective of the fact whether such activities were carried out in violation of FEMA regulations and RBI approval.

RELEVANT PROVISIONS OF THE INCOME-TAX ACT, 1961 (the ITA) and the (DTAAs) relating to PEs

establishment’, referred to in clause (iii), place of business through which the business of the enterprise is wholly or partly carried on.’

and business of the enterprise is wholly or partly carried on.

in an inclusive manner. It has two limbs, i.e. (a) it has to

place the business of the enterprise is wholly or partly carried on.

OECD Model Conventions

Convention was updated ten times. The last such

number of changes resulting from the OECD / G20

(Neutralising the Effects of Hybrid Mismatch Arrangements), 6 (Preventing the Granting of Treaty

), (Preventing

Status) Making Dispute Resolution Mechanisms More Effective), produced as part of that project.

‘‘permanent establishment’’ meansbusiness the business of an enterprise is wholly or partly carried on.

that the term ‘permanent establishment’ includes,

(c)an oil or gas well, a quarry or any other place of extraction of natural resources.


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The updated Article 5(4) provides that the term PE shall

(a) the use of facilities solely for the purpose of

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of

the purpose of

for the purpose of

for provided that

(f)

paragraph 4 as under:

business that is used or maintained by an enterprise if the carries on at the same place or at another place in the same Contracting State, and(A) that place or other place establishment for the enterprise or the closely related enterprise , or(B) the

on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, is not of a preparatory or

, provided that the business activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places,

’

It is important to note that the UN Model Convention

the avoidance of PE status which is on the same lines

above, except that in Articles 5(4)(a) and 5(4)(b) of the

to the fact that the UN MC does not consider activity of ‘delivery’ of goods as of preparatory or auxiliary character.

Determination of existence of PE in cases of non-carrying on of ‘business’ or ‘core business’ of the assessee

be observed that it contains two limbs and to fall within

business’ in India but if the second limb ‘the business of an enterprise is wholly or partly carried

to be in existence.

The Tribunal and courts have, based on the facts of each case, often held that if the actual activities of a PO / BO did not tantamount to carrying on the business of an

be said to have come into existence.

Recently, the Supreme Court in the case of DIT vs. Samsung Heavy Industries Limited (SHIL) [2020] 117 taxmann.com 870 (SC) after in-depth analysis of the

the ‘core business’ of the assessee was wholly or partly carried on. Relying on a number of judicial precedents of the Supreme Court in the cases of CIT vs. Hyundai Heavy Industries Co. Ltd., [2007] 7 SCC 422; DIT (IT) vs. Morgan Stanley & Co. Inc., [2007] 7 SCC 1; Ishikawajima-Harima Heavy Industries Ltd. vs. DIT, [2007] 3 SCC 481; and ADIT vs. E-Funds IT Solution Inc. [2018] 13 SCC 294, the Court in paragraphs 23 and

‘23. A reading of the aforesaid judgments makes it

establishments under double taxation avoidance treaties, the condition precedent for applicability of Article 5(1) of the double taxation treaty and the ascertainment of a "permanent establishment" is that it should be an establishment "through which the business of an enterprise" is wholly or partly carried on. Further, the

only where the said enterprise carries on its core business through a permanent establishment. What is equally clear is that


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of a preparatory or auxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under Article 5.

may be taxed in the other State as is attributable to that permanent establishment.

28. Though it was pointed out to the ITAT that there

activity of the assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the

as the Mumbai

business through which the core business of the assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project

within Article 5(4)(e) of the DTAA, inasmuch as the

This being the case, it is not necessary to go into any of the other questions that have been argued before us.’

Supreme Court mentioned and summarised the aforesaid aspect in the decision in the case of Morgan Stanley & Co. Inc. (Supra) as under:

‘17. Some of the judgments of this Court have dealt with similar double taxation avoidance treaty provisions and therefore need to be mentioned at this juncture. In Morgan Stanley & Co. Inc. (Supra), the Double Taxation

United States of America was construed. …..Tackling

establishment existed on the facts of that case under Article 5 of the India-US treaty - which is similar to Article 5 of the present DTAA - this Court held:

"10. In our view, the second requirement of Article 5(1)

We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of the above Agreement / application that MSAS in India would be

enabled services such as data processing support centre and technical services, as also reconciliation of accounts.

In order to decide whether a PE stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view we are in agreement with the ruling of AAR that in the present case Article 5(1) is not applicable as the said MSAS would be performing in India only

5(1) is not attracted.”

14. There is one more aspect which needs to be

Under Article 5(3)(e) activities which are preparatory or auxiliary in character which are carried out at

non obstante clause. It

are preparatory or auxiliary in character. In the present case we are of the view that the abovementioned

MSAS in India falls under Article 5(3)(e) of the DTAA. Therefore, in our view in the present case MSAS would

The Supreme Court further mentioned about the decision in the case of E-Funds IT Solution Inc. (Supra) as follows:

‘22. Dealing with “support services” rendered by an Indian Company to American Companies, it was held that the outsourcing of such services to India would not amount to

the aforesaid treaty, as follows:

"22. This report would show that no part of the main business and revenue-earning activity of the two

business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give

therefore, correct on this score."’


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it is particularly important to determine what constitutes the ‘Business’, ‘Core Business’ or the ‘Main business’, as referred to by the Supreme Court, of the assessee foreign enterprise. This determination is going to be purely based on the facts and hence an in-depth functional and factual analysis of the activities being actually performed by the PO / BO would be required to be carried out in each case.

any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

‘business’ includes the performance of professional services and of other activities of an independent character.

From an overall analysis of the decisions, it appears that if the activities of the PO / BO are purely in the nature

the assessee foreign enterprise in turn to render services to their clients abroad or performing mere coordination and executing delivery of documents, etc., then the same would not be considered as the core or main business of the assessee, and accordingly a PO / BO performing such

It is not quite clear as to whether to constitute Core or Main business of the assessee foreign enterprise there has to be revenue-earning activity in India, i.e., having customers or clients in India to whom goods are sold or for whom services are rendered, invoiced and revenue generated in India, is necessary for the same to be

be taxable in India.

RELIANCE OF RELEVANT DOCUMENTS

an in-depth fact-based exercise, the ITAT and the courts have to rely on various relevant documents.

It has been observed that in the application to the Reserve Bank of India (RBI) for obtaining approval of PO / BO, the relevant Board resolution of the foreign enterprise to open a PO / BO, the approval given by the RBI, the accounts maintained by the PO / BO in India, etc., are very relevant for arriving at the determination of the existence of a PE in India.

The ITAT in SHIL vs. ADIT IT [2011] 13 taxmann.com

14 (Delhi), largely relied upon (a) SHIL’s application to

PO. In respect of the Board Resolution, the ITAT focused

order observed as follows:

‘71. There is a force in the contention of Learned DR that the words "That the Company hereby open one project

Vasai East Development Project for Oil and Natural Gas

company in its resolution of Board of Directors meeting dated 3-4-2006 makes it amply clear that

execution of the impugned project. In the absence of any restriction put by the assessee in the application moved by it to the RBI, in the resolutions passed by the assessee company for the opening of the project

carry out wholly or partly the impugned contract in India within the meaning of Article 5.1 of DTAA. These documents make it clear that all the activities to be carried out in respect of impugned contract will be routed through

All these gave a prima facie impression that the PO was opened for coordination and execution of the entire project and was thus involved in the core business activity of SHIL in India.

However, the Supreme Court delved deeper and looked at various other factors which the ITAT had ignored or

on the second paragraph of the Board Resolution which

executing delivery of certain documents, and not for the entire project, the fact that the accounts of the PO showed no expenditure incurred in relation to execution of the contract and that the only two people employed in the PO

India-Korea DTAA.

The above indicates that the determination of the existence

a deep factual and functional analysis and the same cannot be determined on mere prima facie satisfaction.


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Even in the case of Union of India vs. U.A.E. Exchange Centre [2020] 116 taxmann.com 379 (SC) dealing with

the Supreme Court mentioned that ‘keeping in mind the

by the RBI, it could be safely concluded, as opined by the High Court, that the activities in question of the liaison

the permission given by the RBI and are in the nature of

by the High Court is unexceptionable.’

In Hitachi High Technologies Singapore Pte Ltd. vs. DCIT [2020] 113 taxmann.com 327 (Delhi-Trib.) the ITAT held that whether the assessee violated the conditions of RBI or FEMA is not relevant in determining the LO as a PE under the I.T. Act.

It appears that there is an increasing reliance by the ITAT and courts, inter alia, on the application and related documents and the approval of the RBI in considering whether an LO / PO / BO can constitute a

INITIAL ONUS REGARDING EXISTENCE OF A FIXED PLACE PE IN INDIAAn important question arises as to whether the onus is on

The ITAT in the SHIL case (Supra) held that the initial onus was on the assessee and not the Revenue. However, the reiterated the fact that the initial onus lies on the Indian Revenue, and not the assessee, to prove that there is a PE of the foreign enterprise in India before moving further to determine the Indian tax liability of that enterprise.

Court stated that

establishment is again in the teeth of our judgment in

The Supreme Court in E-Funds IT Solution Inc. (Supra) stated that the burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE, is initially on the Revenue. The Court observed as follows:

‘16. The Income-tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation

business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs

of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents can be brought within any of the sub-clauses of Article 5.’

In view of above referred two Supreme Court decisions, it can be said that the initial onus is on the Revenue and not on the assessee.

PREPARATORY OR AUXILIARY ACTIVITIES TESTAs mentioned above, Article 5(4) of the OECD MC provides

provided the activities of a PE, or in case of a combination of activities the overall activities, are of a preparatory

. In this connection, the readers may refer to extracts of the OECD Commentary in this regard discussed in paragraph 4 of the article published in the BCAJ of August, 2020 in respect of Taxability of the

Further, in the context of activities of an ‘auxiliary’ character, in National Petroleum Construction Company vs. DIT (IT) (Supra) the Delhi High Court in

‘28.“auxiliary” to mean as "aiding or supporting, subsidiary". The word “auxiliary” owes its origin to the Latin word

supplementary or additional help and support". In the

would necessarily mean carrying on activities, other


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than the main business functions, that aid and support the Assessee. In the context of the contracts in question, where the main business is fabrication and installation of platforms, acting as a communication channel would clearly qualify as an activity of auxiliary character – an activity which aids and supports the Assessee in carrying on its main business.’

Avoidance of Permanent Establishment Status

in Article 5(4) of the OECD Model Tax Convention were

were generally considered to be of a preparatory or auxiliary nature.

Since the introduction of these exceptions, however, there have been dramatic changes in the way that business is conducted. Many such challenges of a digitalised economy are outlined in detail in the Report

Addressing the Tax Challenges of the Digital Economy. Depending on the circumstances, activities previously considered to be merely preparatory or auxiliary in nature may nowadays correspond to core

from core activities performed in a country can be taxed in

each of the exceptions included therein is restricted to activities that are otherwise of a ‘preparatory or auxiliary’ character.

BEPS concerns related to Article 5(4) also arose from what is typically referred to as the ‘fragmentation of activities’. Given the ease with which multinational enterprises may alter their structures to obtain tax advantages, it was important to clarify that it is not possible to avoid PE status by fragmenting a cohesive operating business into several small operations in order to argue that each part is merely engaged in preparatory or auxiliary activities

avoidance of Permanent Establishment status

st April, 2020 and it will affect many Indian DTAAs post MLI because, wherever applicable, MLI will impact the covered tax

activities which are preparatory or auxiliary in nature, and provides two options, i.e. 'Option A' and 'Option B'.

India has opted for 'Option A', which continues with the existing list of exempted activities from (a) to (e) in Article 5(4), but has added one more sub-clause (f) which states

any combination of activities mentioned in sub-paragraphs (a) to (e) is covered in the exempt activities, provided all the activities mentioned in sub-clauses (a) to (e) or a combination of these activities must be preparatory or

a standalone basis as well as a combination of activities should qualify as preparatory or auxiliary activity test.

INDIAN JUDICIAL PRECEDENTS

place PE in India, there are mixed judicial precedents, primarily based on the facts of each case. In addition to various Supreme Court cases mentioned and discussed above, there are many other judicial precedents in this regard.

BO CasesIn a few cases, based on the peculiar facts of each case, the Tribunals and courts have held that a BO does not

reference can be made to the following case: Whirlpool India Holdings Ltd. vs. DDIT IT [2011] 10 taxmann.com 31 (Delhi).

However, in the following case it has been held that a Hitachi High

Technologies Singapore Pte Ltd. vs. DCIT [2020] 113 taxmann.com 327 (Delhi-Trib.).

In the case of Wellinx Inc. vs. ADIT IT [2013] 35 taxmann.com 420 (Hyderabad-Trib.), where it was contended by the assessee that the income of the BO is not taxable in India, the ITAT held that services performed by a branch

services rendered would be taxable under article 7(3) of the India-USA DTAA.

PO CasesSimilarly, in the case of POs, based on the factual matrix the following cases have been decided in favour of assessees as well as the Revenue:

In favour of the assessees:Sumitomo Corporation vs. DCIT [2014] 43 taxmann.com 2 (Delhi-Trib.);


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National Petroleum Construction Company vs. DIT (IT) [2016] 66 taxmann.com 16 (Delhi);

DDIT (IT) [2017] 78 taxmann.com 101 (Kolkata-Trib.).

In favour of the Revenue:Voith Paper GmbH vs. DDIT [2020] 116 taxmann.com 127 (Delhi-Trib.);Orpak Systems Ltd. vs. ADIT (IT) [2017] 85 taxmann.com 235 (Mumbai-Trib.).

KEY POINTS OF JUDGMENT OF THE SUPREME COURT IN SHILThe Supreme Court in this case has clearly established that facts are important in deciding about the existence of

more or less remain constant. It is imperative that one must minutely look into the facts and actual activities to

The key points of this judgment can be summarised as under:

place PE, the entire set of documentation including the relevant Board resolutions, application to RBI and approval of the RBI, should be read minutely and understood in their entirety.• The detailed factual and functional analysis of the

actual activities and role of PO / BO in India is crucial in determining a PE. It would be necessary to determine whether the PO / BO carries on business / core business or the main business of the foreign enterprise in India.• The nature of expenses debited in the accounts of the PO / BO throws light and cannot be brushed aside on the ground that the accounts are entirely in the hands of the assessee. They do have relevance in determining the issue in totality.• It reiterates that the initial onus is on the Revenue to

Even post-MLI, the Supreme Court ruling in SHIL’s case

CONCLUSION

a PO / BO has been a subject matter of debate before the ITAT and courts for long. The ruling of the Supreme Court in SHIL’s case endorses the settled principles on

emerges only when ‘core business’ activities are carried on in India. The Court brings forth more clarity on the

do business in India and bring much needed certainty in this regard.


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RIGHT TO INFORMATION (r2i)

IDECISIONS OF SUPREME COURT

1

Case name: Chief Information Commissioner vs. High Court

of Gujarat and another Citation: Civil Appeal No(s). 1966-1967 of 2020 [Arising out

of SLP(C) No. 5840 of 2015]Court: The Supreme Court of IndiaBench: Justice R. BanumathiDecided on: 4th March, 2020Relevant Act/ Sections:

Gujarat High Court Rules, 1993 – Rule 149 - 154Right to Information Act, 2005 – Sections 2(f), 2(h), 2(i), 2(j), 4(2), 6(2), 8(1), 19, 22, 28Articles 124, 145, 216, 225 of Indian Constitution

Brief facts and procedural historyAn RTI application dated 5th

information pertaining to certain civil applications made

informed that for obtaining required copies one should make an application personally or through one’s advocate

Being aggrieved, the RTI applicant preferred an appeal before the Appellate Authority-Registrar Administration. The appeal was dismissed on the ground that for obtaining

Information Commissioner. The respondent reiterated the position on the High Court Rules but was ordered to provide the information within 20 days.

Challenging the order of the Chief Information

the High Court by the respondent. The learned Single Judge, while admitting the petition, passed an interim order directing the respondent to provide the information sought within four weeks.

Being aggrieved by the interim order, the High Court preferred Letters Patent Appeal before the Division Bench. This Bench set aside the order of the Chief Information Commissioner by observing that when a copy is demanded by any person, the same has to be in accordance with the Rules of the High Court on the subject.

The Chief Information Commissioner, aggrieved by the order of the Division Bench, preferred an appeal to the Hon’ble Supreme Court of India.

Issues before the Court

stipulating that for providing a copy of documents to third

inconsistency with the provisions of the RTI Act?

When there are two types of machinery to provide

Rules and another under the RTI Act – in the absence of any inconsistency in the High Court Rules, whether the provisions of the RTI Act can be resorted to for obtaining


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litigants / parties to the proceedings are entitled to receive the copies of documents / orders / judgments, etc. The third parties who are not parties in any of the proceedings, shall not be given the copies of judgments and other documents without the order of the Assistant Registrar.

applications requesting for copies of documents / judgments made by third parties shall be accompanied

required. Therefore, the access to the information or

/ court proceedings are not denied to the third parties but a procedure needs to be followed by the applicant. Hence, the Rules framed by the Gujarat High Court are in consonance with the provisions of the RTI Act. There is no inconsistency between the provisions of the RTI Act and the Rules framed by the High Court in exercise of the object of the RTI Act which itself recognises the powers under Article 225 of the Constitution of India.

(ii) There is a need to protect the institutional interest and

Court Rules is not cumbersome and is very simple. The information held by the High Court on the judicial side is the ‘personal information’ of the litigants like title cases and family court matters, etc. Under the guise of seeking information under the RTI Act, the process of the Court is not to be abused and information not to be misused.

(iii) If any information can be accessed through the mechanism provided under another statute, then the provisions of the RTI Act cannot be resorted to as there is absence of the very basis for invoking the provisions of the RTI Act, namely, lack of transparency. In other words, the provisions of the RTI Act are not to be resorted to if the same are not actuated to achieve transparency.

(iv) The non-obstante clause of the RTI Act does not mean an implied repeal of the High Court Rules and Orders framed under Article 225 of the Constitution of India, but only has an overriding effect in case of inconsistency. A special enactment or rule cannot be held to be overridden by a later general enactment simply because the latter opens up with a non-obstante clause, unless there is clear inconsistency between the two legislations.

IRIGHT TO INFORMATION

PM CARES Fund – The ‘gorilla’ in the roomBy now we are aware that the Appellate Authority of the

Minister's Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) is not a public authority under the Right to Information Act, 2005 (RTI Act). Moreover, the funds from the trust will not be transferred to the National Disaster Response Fund (NDRF) and the fund will not be audited by the Comptroller and Auditor-General of India, as ruled by the Supreme Court of India. Yet, there are many questions raised and striving for answers.

To start with, the Prime Minister of India is the Chairman of the Prime Minister National Relief Fund

(PMNRF) as well as the PM CARES Fund, constituted to already have the trappings of a public trust, the NDRF established thereunder, occupying the arena to deal with disaster situations, then what was the need to constitute the new PM-CARES Fund?

Given the federal ideologies of our Constitution, in case of predicaments like these the amounts collected should be deposited in the PMNRF and from there transferred to

the state governments for meeting the challenges of the pandemic and saving people’s lives.

A sum of Rs. 6,500 crores was collected by the PM CARES Fund in just one week and Rs. 3,076.62 crores in four days from the registration of the trust. This was donated by renowned philanthropists of our country, well-known tycoons and others. Mr. Mukesh Ambani donated Rs. 500 crores and many others like Mr. Aamir Khan, Mr. Shah Rukh Khan and many more celebrities came forward and donated to the fund.

The PM CARES Fund was integrated as a ‘public charitable

of public health crisis or other distress circumstances, like

affected by it’ and ‘to perform any other activity not varying

CARES2 provides the following details:

(a) The PM is the Chairman and the Minister of Home Affairs, Minister of Finance and the Minister of Defence are its trustees and the PM would


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nominate three eminent persons to the Board.

the least allowable amount of support, with no budgetary outlay.

(c) Foreign individuals and organisations can contribute to a separate account exempt from the application of the

(d) Contributions made can be apportioned towards the mandatory

provided that the contribution is made before 30th June, 20203

sources of the PSUs are not accepted.

(e) The Fund is administered on an honorary basis by a Joint Secretary (Administration) in the PMO as Secretary to the Fund who is assisted on an honorary basis by

provides such administrative and secretarial support to the trustees for the management and administration of the Trust as may be required by them.

(f) The Fund is as

(g) The PM CARES Fund has been allotted a Permanent Account Number .

(h) The Fund is audited by an independent auditor. The trustees of the Fund, during the second meeting held on 23rd April, 2020 decided to appoint M/s SARC & Associates, Chartered Accountants, New Delhi as the auditors of the PM CARES Fund for three years.

(i) There of the PM CARES Fund However, audit will be conducted at the end of the

Keeping in mind the larger picture of transparency, the PM CARES Fund should come under the purview of the Right to Information Act, 2005. Likewise, technical reasons like the fund being set up by the government by using government machinery to promote it and usage of gov.in as domain name, providing tax reliefs, etc. needs to be considered. There are multiple pleas in the High Courts and the Supreme Court of India requesting to bring the PM CARES Fund under the purview of the RTI Act, 2005 and also asking to transfer the funds from the Trust to the NDRF, which have been dismissed by the respective courts.

IINFORMATION ON AND AROUND

Memorial not made by MMRDA but a trust

activist, Mr. Anil Galgali, the Mumbai Metropolitan Region Development Authority (MMRDA), the nodal agency for the construction of the memorial of the late Balasaheb Thackeray which will be built at Shivaji Park in Dadar, mentioned the procedure of selection of the architect. The Thackeray Memorial had issued a tender notice directing MMRDA to appoint a distinguished architect. But the

th May, 2020 wherein architects and project advisers were selected. MMRDA being the nodal agency for the project and also because of the taxpayer’s money being involved, should have appointed the consultant and the architect. But in this case a private trust did it all without inviting any tender.4

The functioning of the State Information Commissions

was observed in a study conducted by the Commonwealth Human Rights Initiative (CHRI). The study was carried

by phone and emails and by following their websites.

was working, but during the second survey (in May)

were conducting hearings. According to its third rapid telephonic survey, the organisation found the SICs that had started attending to litigants in June had stopped by July.5

the last four years owed by loan defaultersThe Bank of Maharashtra, a public sector bank, has ‘technically written off’ an astounding Rs.


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7,400 crores unsettled by loan defaulters in the last four years. The bank has said that it would recover the amount at a later stage and that it has not been waived permanently. The recovery rate of such defaults is low and it takes a huge amount of time. According to information provided by the bank,

crores6.

1 Chief Information Commissioner vs. High Court of Gujarat and another available at https://main.sci.gov.in/supremecourt/2015/4228/4228_2015_5_1501_21164_Judgement_04-Mar-2020.pdf visited on 18.08.2020

2 https://www.pmindia.gov.in/en/about-pm-cares-fund/3 http://egazette.nic.in/WriteReadData/2020/218979.pdf4 https://www.timesnownews.com/mumbai/article/who-appointed-architect-for-

balasaheb-thackeray-memorial-mmrda-or-trust/6386975 https://www.hindustantimes.com/india-news/only-44-state-information-commis-

sions-conduct-hearings-chri-survey/story-tMT6otWRcVxyeC0nM7jCNN.html6 https://indianexpress.com/article/cities/mumbai/bank-of-maharashtra-writes-off-

rs-7000-cr-owed-by-loan-defaulters-6557765/

Thus, the Tribunal held that default could not be ascertained in the absence of a requisite document and the application was dismissed.

Tony Joseph vs. Union of India[2020] 117 taxmann.com 948 (Kerala)Date of order: 10th July, 2020

appropriate orders

FACTS

in time. Accordingly, their DIN and DSC have been

The directors submitted that they do not intend to continue with the company. However, it was urged that they seek

to enable a 'strike off' of the company. They therefore sought to upload form STK-2 to enable 'strike off' of the company from the Registrar of Companies.

HELDIt was noticed by the Court that the directors have not produced any request made by them before the ROC in this behalf. In case the directors approach ROC seeking an activation of the DIN and DSC for the purpose of uploading form STK-2, the ROC shall take up the application and pass appropriate orders in accordance with the law on the same within a period of two weeks from its receipt.

11

CORPORATE LAW CORNER Continued from Page 113

We live in a country where:Driving without a license = fine of Rs. 2000,

Not having a PUC = fine of Rs. 1000, Not wearing a mask outside = fine of Rs. 1000,

Insulting the Supreme Court = fine Rs. 1 — social media post on the recent decision by the SC


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REGULATORY REFERENCER

DIRECT TAX

issued under clause (v) of the proviso

Finance Act, 2020 shall be deemed to be issued under the fourth provisoFinance Act, 2020. [Circular No. 14/2020 dated 20th July, 2020.]

2.

being Form 27EQ. th July, 2020.]

th

investment fund to its unit holders as well as in Form 64C and 64D. th July, 2020.]

st July, 2020 have to pay self-assessment tax by

st July, 2020. will not be charged if senior citizens pay part of the tax payable for A.Y. 2020-

st July, 2020 and balance tax payable does not

st July, 2020 will be deemed to be advance tax paid for the purpose of levy of interest u/s 234. th July, 2020.]

5. Introduction of th August,

2020.]

COMPANY LAW

st In case of listed companies which comply with the relevant circulars

issued by SEBI, inability to dispatch the relevant notice to shareholders through registered post or speed post or courier would not be viewed as violation of section 62(2)

to 31st Other requirements provided in th May, 2020

remain unchanged. rd August, 2020.]

st

ended on 31st and who cannot hold their AGM by 30th September, 2020 [even with relaxations granted vide Circular No. 20/2020 dated 5th May, 2020 to

th September, 2020 to seek extension of time (for a maximum period of three months) for holding the same. The Registrar of Companies has been advised to consider the applications made by companies liberally.

th August, 2020.]

Under its research initiatives, it has launched a series on Companies Act Checklists Chapter-wise. Till date Checklists on Chapter II, Chapter VI and Chapter X are launched and the same are available on the link https://www.icsi.edu/ccgrt/research-initiatives-2/

SEBI has

form are allowed to tender shares in open offers, buy-backs through tender offer route and exit offers in case of voluntary or compulsory delisting and the restriction

not apply. [Circular SEBI/HO/CFD/CMD1/CIR/P/2020/144 dated 31st July, 2020.]

I I VINAYAK PAI I Chartered Accountants


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31st SEBI has permitted listed entities

st July, 2020 under the

st December, 2020. Earlier, SEBI had permitted the same until 30th June, 2020 vide its circular

th April, 2020. [Circular SEBI/HO/CFD/CMD1/CIR/P/2020/145 dated 31st July, 2020.]

Now, every listed company which has public

Securities Contracts (Regulation) (Second Amendment)

a period of three years from the date of

st July, 2020.]

experience in

the Trustees and directly report to them. [Circular SEBI/ HO/IMD/DF4/CIR/P/2020/0000000151 dated 10th August, 2020.]

ACCOUNTS AND AUDIT

Amended standards / topics:

to identify concentration of Fair Value, Elements of a Business, and Assessing whether an acquired process is substantive; Uncertainty arising from interest rate benchmark reform;

accounting requirements; Covid-19-related rent concession for lessees;and 34: Materiality; and (vi) Ind AS 37: Restructuring.

th July, 2020.]

(B) Implementation of Ind AS by NBFCs and ARCs Unrealised gain / loss on a derivative transaction

undertaken for hedging may be offset against the unrealised loss / gain recognised in capital (either

through P&L or OCI) on the corresponding underlying hedged instrument for the purposes of computation of regulatory capital and regulatory ratios. No. RBI/2020-21/15 dated 24th July, 2020.]

ended 30th th August to th September, 2020. [SEBI Circular No. SEBI/HO/CFD/

CMD1/CIR/P/2020/140 dated 29th July, 2020.]

ICAI’s Guidance highlighting key areas of focus in the current environment when undertaking a

[ICAI’s Auditing Guidance dated 7th August, 2020.]

FEMA

(i) FEMA was earlier regulated and administered by RBI including with respect to capital account transactions

th October,

for non-debt capital account transactions including those covered for FDI under the Non-Debt Instruments (NDI) Rules. Each change in these rules or introduction of

Ministry of Finance. This created delays. Further, Master Directions issued by RBI became inoperative. Now, the powers have again been shifted back from the Central Government to the RBI, though partly. RBI has now been empowered to:(a) Administer the NDI Rules and, while administering them, it may interpret and issue such directions, circulars,

(b) Permit investment into India by a person resident

under the NDI Rules to receive investment without the requirement of a consultation with the Central Government as was needed previously.

for the Civil Aviation sector under Schedule I to the NDI Rules have been amended. The position in the NDI Rules has now been brought in line with the changes made in the FDI policy as amended by Press Note 2 of 2020 dated


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th March, 2020. The important changes are:

automatic route is now removed. Only NRIs are allowed

allowed in M/s Air India Limited.(c) Foreign airlines are at present allowed to invest in Indian companies operating scheduled and non-

that this limit will subsume FDI and FII / FPI investment.

where necessary.th July, 2020 – F.

No. 01/05/EM/2019.]

ICAI MATERIAL

Rebooting

MSMEs in the Covid-19 Era – Checklist that focuses on factors requiring special attention by MSME managements to guide their initiative to face the ongoing tough times. [25th July, 2020.]

ICAI’s FAQ Publication on the One-Time Settlement Scheme issued by SEBI on 27th July, 2020. [30th July, 2020.]

Publication that collates various relaxations provided by MCA and SEBI. [10th August, 2020.]

Revised edition based on the law as amended by the Finance Act, 2020. [20th August, 2020.]

The reading of all good books is like a conversation with the finest minds of past centuries.

— Descartes


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key recent updates in the

accounting topic, viz., the functional currency approach; Impairment of Trade

Receivablesreporting practice – Viability Reportingextract from a regulator’s speech from the past.

1. KEY RECENT UPDATES

On 26th May, 2020, the Public Company Accounting Oversight Board (PCAOB) issued a document, Audits Involving Crypto Assets – Information for Auditors and Audit Committees, based on its observation that crypto assets have recently begun to be recorded and

material in certain instances. The document highlights

level) for addressing certain responsibilities under PCAOB standards for auditors of issuers transacting in, or holding, crypto assets. It also suggests related questions that Audit Committees may consider asking their auditors.

Estimatesth May, 2020, the International Auditing and

Assurance Standards Board (IAASB) released ISA 540 (R) Implementation: Illustrative Examples for Auditing Simple and Complex Accounting Estimates, a non-authoritative pronouncement that provides examples of (i) provision on inventory impairment, and (ii) provision on PPE impairment designed to illustrate how an auditor could address certain requirements of the ISA for auditing simple and complex accounting estimates.

th June, 2020, the UK Financial Reporting Council (FRC) released a report titled Covid-19 – Going Concern, Risk and Viability acknowledging that many parts of the annual report may be impacted by the pandemic. The report highlights the impact on three key areas of disclosure, viz., (i) going concern, (ii) risk reporting, and

(iii) the viability statement. It considers each of these areas and highlights some of the key considerations for reporting entities and also provides examples of current disclosure practices.

IASB: Business Combinations under Common Control

th June, 2020, the International Accounting Standards Board (IASB) issued an update – Combinations of Businesses Under Common Control – One Size Does Not Fit Allin IFRS by improving the reporting on

(companies / businesses that are ultimately controlled by the same party before and after the combination). The update discusses the preliminary views reached by the Board that include: the acquisition method of accounting should be used for some combinations of businesses under common control and a book-value method should be used for all other such combinations. A discussion paper is expected later this year.

And on 2ndJuly, 2020, the IAASB released a Staff Audit Practice Alert – Review Engagements on Interim Financial Information in the Current Evolving Environment Due to Covid-19. It highlights key areas of focus in the current environment when undertaking

Review of Interim Financial Information Performed by the Independent Auditor of the Entity.

2. RESEARCH: FUNCTIONAL CURRENCY APPROACH

The functional currency approach to accounting for foreign currency transactions and preparation of

the Indian context. Functional currency is ‘the currency of the primary economic environment in which an entity operates’ which is normally the one in which it primarily generates and expends cash.


FINANCIAL REPORTING DOSSIER


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the of the individual consolidated entities as measured in their functional currencies. The FASB opined that the process of translating the functional currency to the reporting currency, if the two are different, for the purposes of preparing consolidated

and relationships that were environment of the foreign operations.

Foreign Currency Matterseconomic factors to be considered individually and collectively in determining the functional currency: cash

and intra-entity transactions and arrangements indicators.

IFRSThe Effects of Changes in Foreign Exchange

Rates currency’ concept (the currency used in presenting

2 elaborated two related notions, viz., the ‘measurement

statements are measured), and the ‘presentation

presented).

the currency in which transactions were denominated rather than on the underlying economy determining the pricing of transactions. Some stakeholders were of the view that it permitted entities to choose one of several currencies or an inappropriate currency as its functional currency.

st January, 2005) and replaced the notion of ‘reporting currency’ with ‘functional currency’ and ‘presentation currency’. It

currency of the primary economic environment in which an entity operates, and the ‘presentation currency’ as the currency in which

In the determination of the functional currency, the primary indicators to be considered are: (a) the currency that

country whose competitive forces and regulations mainly

An entity (under Ind AS) is required to determine its functional currency and for each of its foreign operations. Such assessment, a process involving judgement, is

of certain events / transactions (e.g. acquisition of a subsidiary). Changes to the underlying operating environment could trigger the process of evaluating if there is any change to the functional currency.

The accounting approach requires foreign currency transactions to be measured in an entity’s functional

are required to be translated into the functional currency of the parent as a precursor to on-boarding them to the

In the following sections, an attempt is made to address the following questions: Is the functional currency

What have been the related historical developments and the approaches adopted by global standard setters? What are the principles that underpin them? What is the current position under prominent GAAPs?

USGAAPThe Financial Accounting Standards Board (FASB) issued SFAS 52, Foreign Currency Translation

and introduced the concept of ‘functional currency’ providing guidance for its determination with certain underlying principles that included:

(a) when an entity’s operations are relatively self-

, and(b) the

although in certain instances

SFAS 52 was designed to provide information generally compatible with the expected

1 SFAS 8, Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements (issued 1975) introduced the concept of a reporting currency. Prior USGAAP pronouncements had dealt only with the accounting topic of ‘translation of foreign currency statements’ and not with ‘foreign currency’

2 SIC-19, Reporting Currency - Measurement and Presentation of Financial Statements under IAS 21 and IAS 29 (issued in 2000)


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determine its selling prices, and (c) the currency that

(not linked to the primary economic environment but that provide additional supporting evidence) to consider are:

are generated, and (ii) the currency in which operating receipts are usually retained.

When the above indicators provide mixed results with no functional currency being obvious, then the management is required to apply its judgement. The guiding in such determination is that such judgement should

of the

ASThe Effects of Changes in Foreign Exchange

Ratesthe functional currency approach. The standard does not specify the currency in which an entity presents its

normally uses the currency of its country of domicile. It may be noted that the reporting currency is rule-based under the Companies Act.

extracted below.

(Business carried on as if it were an extension of the reporting entity’s operations).A change in the exchange rate between the reporting currency and the currency in the country of foreign operation has an almost immediate effect on the reporting

the change in the exchange rate affects the individual monetary items held by the foreign operation rather than the reporting enterprise’s net investment in that operation

(Business carried

When there is a change in the exchange rate between the reporting currency and the local currency, there is little or no direct effect on the present and future

foreign operation or the reporting enterprise. The change in the exchange rate affects the reporting enterprise’s net investment in the non-integral foreign operation rather than the individual monetary and non-monetary

items held by the non-integral foreign operation (AS

Snapshot of Position under Prominent GAAPsA snapshot of the position under prominent GAAPs is provided in Table A.

Table AAccounting framework

Foreign currency approach

Standard

USGAAP Functional Currency ASC 830, Foreign Currency Matters

IFRS Functional Currency IAS 21, The Effects of Changes in Foreign Exchange Rates

Ind AS Functional Currency Ind AS 21, The Effects of Changes in Foreign Exchange Rates

AS Reporting Currency AS 11, The Effects of Changes in Foreign Exchange Rates

IFRS for SMEs

Functional Currency Section 30 – Foreign Currency Translation

US FRF for SMEs3

Reporting Currency Chapter 31, Foreign Currency Translation

Case Study

Deswell Industries (US listed entity) changed their functional currency and accordingly required it to provide a comprehensive analysis regarding the appropriateness of the change. Extracts from the Company’s response4 (correspondence available in the public domain) is provided below:

Through our subsidiaries, we conduct business in two principal operating segments: plastic injection moulding and electronic products assembling and metallic parts manufacturing. Two Macao subsidiaries function as our sales arms, marketing products to, contracting with, and ultimately selling to, our end customers located throughout the world, principally original equipment manufacturers, or OEMs, and contract manufacturers to which OEMs outsource manufacturing. Our Macao sales subsidiaries subcontract all manufacturing activities to our subsidiaries in the PRC.

3 AICPA’s - Financial Reporting Framework (FRF) for SMEs, a special purpose

USGAAP4 -

name1.htm


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Catalyst for change in functional currency to US$: In

customers in US$. Such increase, which we considered a material change from our historical experience, was the stimulus that caused us to assess whether our then use of HK$ and RMB as our functional currencies remained appropriate.

Criteria used in assessment: In making our assessment, we reviewed the salient economic factors set forth in SFAS 52.

Conclusion to change our functional currency: Having reviewed the above economic factors individually and collectively, and giving what our management believes is the appropriate weight to, among other things, the increases in, and predominance of, US$ denominated sales, our reliance on US$ sales generated by our Macao sales subsidiaries to fund the PRC operations and the transfers of excess funds as dividend payments to the ultimate parent; and albeitpercentage of total costs and expenses in RMB for the PRC operations, our management concluded that the currency of the primary economic environment in which we operate is the US$ and that the US$ is the most appropriate to use as our functional currency.

In ConclusionThe functional currency approach originated in USGAAP

the EU’s adoption of IFRS, and made its entry in India

The functional currency approach lays emphasis on the underlying economic environment and not on the home currency. Management judgement is involved in the process of determination. Since there is no free choice, the leeway with management to decide the measurement

gains / losses in P&L is removed.

The underlying principles are the same under both USGAAP and IFRS, albeit the determining indicators differ. Ind AS is aligned with IFRS in this accounting area. The IFRS for SMEs framework follows the functional currency approach.

The reporting currency concept prevails under the AS

not based on underlying economics. It may be noted that the AS framework is mandatory for applicable companies in India while the USFRF for SMEs is non-mandatory.

At present, global standard setters do not have any stated plans to modify / improve the functional currency approach. While the underlying principle is robust, more guidance on applying management judgement cannot be ruled out in the future considering the complexity, diversity, digitisation of cross-border operations and structuring strategies of global corporates.

3. GLOBAL ANNUAL REPORT EXTRACTS: ‘VIABILITY STATEMENT’

The (applicable to companies with a premium listing) published by the FRC requires the inclusion of a Viability Statement in the Annual Report

in addition to the and is

below):

31. Taking account of the company’s current position and principal risks, the board should explain in the annual report how it has assessed the prospects of the company, over what period it has done so and why it considers that period to be appropriate. The board should state whether it has a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment,

necessary.

Company: st March, 2020 Revenues – US$ 5.2 Billion)

In conducting our viability assessment, we have focused on a three-year timeline because we believe our three-

basis of reviewing the outlook for our business beyond

Although all principal risks have the potential to affect future performance, only certain scenarios are considered likely to have the potential to threaten our overall viability

of these ‘severe but plausible’ scenarios and considered


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them alongside our projected maximum cash capacity over a three-year cash period.

The most likely scenarios tested included:* The loss or inappropriate use of data or systems, leading to serious reputational and brand damage, legal penalties and class action litigation.

developments in one or more of our major countries of

currency weakness or restriction. For this we assessed the possible range of outcomes, beyond our base case, due to the Covid-19 pandemic.* New legislation or changes in regulatory enforcement, changing how we operate our business.

Our viability scenario assumptions incorporate a

rebound and a slow recovery over a two-to-three-year period in order to adequately assess viability.

Viability StatementBased on their assessment of prospects and viability,

that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period ending 31st March, 2023. Looking further forward, the directors have considered

beyond the three-year horizon that would threaten the over a ten-year

perioduncertainty surrounding Covid-19, the near-term effects of which have been considered in the analysis, they are not aware of any.

4. COMPLIANCE: IMPAIRMENT OF TRADE RECEIVABLES

The provisioning for, and disclosure requirements for impairment losses on trade receivables is governed (under

Financial Instruments Financial Instruments: Disclosures.

Ind AS advocates an expected credit loss (ECL) approach and an entity applies section 5.5, Impairment of Ind

component. With respect to trade receivables that contain

an accounting policy choice, to account for impairment

disclosure requirements w.r.t. ECL on trade receivables are summarised in Table B.

Table B: Accounting and disclosure requirements (ECL on trade receivables)

Ind AS Reference

Accounting requirements

Ind AS 9.5.5.15

• An entity is always required to measure ECL at lifetime ECL for trade receivables that do not contain a

component (or when practical expedient applied as per Ind AS 115.63)

Practical expedients available:• An entity can use practical expedients in measuring ECL as long as they are consistent with principles laid down by Ind AS 9.5.5.17.• An example of a practical expedient is the ‘ECL Provision Matrix’ that uses historical loss experience as the base starting point. The

provision rates depending on the age buckets of trade receivables that are past due• Appropriate groupings need to be used if historical loss experience is different for different customer segments (e.g., geographical region, product type, customer rating, type of customer, etc.)(9.B5.5.35)

9.5.5.17 • The measurement of ECL requires the

viz. (a) unbiased and probability-weighted amounts, (b) time value of money, and (c) reasonable and supportable information about past events, present conditions and forecasts of future economic conditions

Disclosure requirements

Ind AS 7.35F

Disclosures of credit risk management practices:• Explanation of credit risk management practices and how they relate to recognition and measurement of ECL

• How the assets were grouped if ECL is measured on a collective basis• Entity’s write-off policy

7.35G • Explanation of basis of inputs, assumptions and estimation techniques used to measure ECL• Explanation of how forward-looking information has been incorporated in determining ECL• Changes, if any, in estimation techniques or

reasons for change7.35H • Statement reconciling from the opening balance to

closing balance of the loss allowance, in a tabular format

7. 35L • Disclosure of contractual amount outstanding that has been written off during the reporting period and is still subject to enforcement activity

7.35M & 7.35N

• Credit risk exposure data to enable users to assess the entity’s credit risk exposure and understand its

credit risk concentration. This information may be based on a provision matrix

7.29 • Disclosure of fair value not required when carrying amount approximates fair value (e.g. short-term trade receivables)



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MISCELLANEAI


I. Technology

The long journey into holographic transportation

Who can forget Princess Leia's hologram asking for Obi-Wan Kenobi's help in the movie Star Wars? That was perhaps the best-known hologram of the many used in the Star Wars franchise movies, but the power and promise of holographic technology have been depicted in

Star Trek: Voyager was a hologram and holographic characters and ships are featured in several episodes in the Star Trek: The Next Generation series.

Holographic transportation is ‘an extension of mixed reality, a new use case if you will,’ Rob Enderle, principal analyst at the Enderle Group, told TechNewsWorld. ‘It's more a variant on telepresence.’

Aexa Aerospace, which provides custom software and hologram development for mixed and virtual reality devices for aerospace, medical and other industries, is one of several companies working on holographic transportation. The company demonstrated a holographic interaction between CEO Fernando De La Peña Llaca,

Ream's hologram was imported into De La Peña Llaca's

asked. The two also played Tic-Tac-Toe. Ream won. However, an attempt to shake hands failed.

Aexa Aerospace has demonstrated the prototype to a potential client in a United States government department,

and that ‘could be working at the client's facility before the end of 2020.’

Microsoft researchers coined the name ‘holoportation’ for

holographic transportation. The company trademarked

offering anything that augmented reality, virtual reality, mixed reality and cross reality doesn't,’ Michael Hoffman, a founding partner at Object Theory, told TechNewsWorld. Hoffman was a principal lead on the Microsoft HoloLens team.

th

days, or close its business

US President Donald Trump issued a new executive order extending the timeline for ByteDance, the parent company of TikTok, to sell its US business or wrap up its American operations. According to the earlier executive order, ByteDance was given a 45-day deadline that was to end on 20th September, 2020. With the new executive order, ByteDance has got slight relief

th November to work out a sale deal.

th August, Trump wrote, ‘There is credible evidence that leads me to believe that ByteDance... might take action that threatens to impair the national security of the United States.’ The US government has highlighted the issue that TikTok may share data and information about Americans with the Chinese government. The company has denied that it has ever done so.

Earlier, TikTok was banned by the Indian government, citing national security and user privacy concerns. The latest US order also requires ByteDance to destroy all TikTok data from American users and destroy any data from TikTok’s predecessor app Musical.ly, which was

must report to the Committee on Foreign Investment in the United States once all the data has been erased. TikTok, the short video creating and sharing platform,

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New work order: Notebook sales hit an all-time high, courtesy work-from-home amid Covid

The lockdown and work from home (WFH) saw demand for notebooks hit an all-time high, with even companies placing large-scale orders for employees to ensure business continuity. Notebook sales saw a whopping

As per analysts, Q2FY2020 has had some bright moments for the domestic PC market as decline in desktops and workstations was to an extent arrested by the huge demand for laptops. Traditionally, January-March sees an increase in demand, but due to Covid the pent up demand shifted to Q2. Besides, WFH further perked up the market for notebooks.

According to IDC, most IT services, global enterprises and consulting companies placed large orders for notebook PCs. This led to an all-time high of enterprise notebook

Q2FY2020. Small and medium businesses (SMBs) also increased their procurement of notebooks with relatively

‘Demand for notebooks exceeded expectations with most of the vendors exiting the quarter with minimum inventory.

the quarter, companies executed most of the large orders in Q2. Besides, many companies shifted their employees

to alter their procurement strategy in the long term with a

for many organisations,’ said IDC India market analyst (PC devices) Bharath Shenoy.

With most of India under lockdown, IT companies such as TCS, HCL, Infosys and Wipro have all announced arrangements for employees to work from home for the foreseeable future. The pandemic forced most IT companies

in favour of adopting new hybrid working arrangements to ensure business continuity during the lockdown.

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II. Sports News

M.S. Dhoni announces retirement from international cricket

M.S. Dhoni, the former Captain of the Indian cricket

team, has announced his retirement from international

storied career of one of the country’s greatest limited-overs cricketers. Dhoni retires as India’s most successful captain in limited-over internationals, having won three ICC trophies – the 2007 T20 World Cup, the 50-over

– the only Captain to do so.

Instagram, its caption reading: ‘Thanks – Thanks a lot for

me as Retired.’

The announcement means that Dhoni’s last India game

his 350th ODI, in which he scored 50 off 72 balls before being run-out by a bullet throw from Martin Guptill in the

well.

list of India’s all-time run-scorers in ODIs behind Sachin Tendulkar, Virat Kohli, Sourav Ganguly and Rahul Dravid.

dismissals.

Dhoni’s future was a hot topic of speculation since his sabbatical from cricket following India’s World Cup exit. Ever since the defeat to New Zealand, Dhoni did not play any form of cricket in the last one year, hinting he might have played his last in India colours. Dhoni, however, would be turning up in the IPL where he will captain the

th season, to be played in the UAE.

th

III. World News

Citi wired $900 million in ‘clerical error’, they won't hand cash back

Even for Citigroup Inc., it was big money. Loan operations

on behalf of Revlon Inc., to lenders of the troubled cosmetics giant controlled by billionaire Ron Perelman.

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It was a mistake for the ages – a ‘clerical error,’ as Citigroup told lenders – that's now plunged the bank into a battle between the Perelman empire and a corps of sharp-edged investment funds that have become its impatient creditors.

several hedge funds who claim Revlon was in default on the loan were showing no signs that they'll be giving Citigroup its money back.

The wayward transfer of nearly a billion dollars appears to be one of the biggest screw-ups on Wall Street in

The question everyone is asking: how could this happen? A spokeswoman for Citi declined to comment. A representative for Revlon said in an emailed statement that Revlon itself didn't pay down the loan, or any portion of it.

‘It's a billion-dollar clerical error,’ said Michael Stanton, a former restructuring and bankruptcy adviser. ‘This is probably knocking around some very big rooms at Citibank.’

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Pakistan’s blasphemy law a weapon of revenge used against minorities

Radical Islamists of Pakistan found a new ‘hero’ recently. His name is Khalid Khan, who shot dead Tahir Naseem, an American citizen accused of blasphemy, in a Peshawar

th July.

Even though Khalid Khan surrendered before the police, thousands rallied in his support and his photos were shared widely on social media. Before he was taken to the court, he was welcomed with hugs and kisses.

declared himself Islam’s prophet.

The killing has ignited a debate on the dangerous blasphemy law and Pakistani society’s mindset in

that ‘derogatory’ remarks on the Prophet Muhammad, insulting any religion, disturbing a religious assembly and trespassing on burial grounds can cause lifetime imprisonment or sentence to death.

Till now, no blasphemy convict has been executed by Pakistan but allegations of blasphemy are enough to cause riots and killing of accused by vigilante groups. According to Al Jazeera, 77 people have been killed since

data released by the National Commission for Justice

Christians and 30 Hindus have been accused under the

of the general population of Pakistan, but they account for

It isn’t that a politician has never tried to change these laws or bring reforms. But those who did faced the wrath

Punjab Governor Salman Taseer was killed by his own guard after he defended a Christian woman, Asia Bibi,

Rights groups and critics say Pakistan’s blasphemy laws are often used against religious minorities. Often the laws are used as a weapon of revenge. Therefore, there’s an urgent need to replace these laws.

It is important that murderers like Khalid Khan be given maximum punishment by the judiciary to set an example that the guilty will not be spared. If Pakistan wants to prove itself as a haven for religious freedom, then it must ban these regressive laws.

It’s also imperative that global powers raise this issue on international platforms to create pressure on the internal politics of the country. A proposal to put sanctions or interrogation at international level may force them to think on this again. Progressive countries of the world should give refuge to the acquitted.

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IV. Spiritual

Is being a Hindu acceptable but having faith in Hindutva ‘dangerous’? Quite the contrary

Is being a Hindu acceptable while faith in Hindutva is not? Is it even dangerous? Many Hindus seem wary to be associated with Hindutva in spite of the fact that Hindutva simply means Hindu-ness or being Hindu. They tend to accept the view which mainstream media has peddled for long: ‘Hindutva is intolerant and stands for the communal

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agenda of an extreme right Hindu party that wants to force uniform Hinduism on this vast country which is fully against the true Hindu ethos.’

‘Hindutva is indicative more of the way of life of the Indian people… Considering Hindutva as hostile, inimical, or intolerant of other faiths, or as communal, proceeds from an improper appreciation of its true meaning.’

From personal experience, I also came to the conclusion that Hindutva is not communal and dangerous.

For many years I lived in ‘spiritual India’ without having any idea how important the terms ‘secular’ and ‘communal’ were. The people I met valued India’s great Vedic heritage. They gave me tips, which texts to read, which Sants to meet, which mantras to learn, etc., and I wrote about it for German magazines. I thought that all Indians are proud of their ancestors, who had stunningly deep insights into what is true and who left a huge legacy of precious texts unparalleled in the world.

However, when I settled in a ‘normal’ environment away from ashrams and connected with the English-speaking middle class, I was shocked that several of my new friends with Hindu names were ridiculing Hinduism without knowing anything about it. They had not even read the Bhagavad Gita but claimed that Hinduism was the most depraved of all religions and responsible for the ills India is facing. The caste system and the Manusmriti were quoted as proof.

My new acquaintances had expected me to join them in denouncing ‘violent’ Hinduism which I could not do as I knew too much, not only from reading but also from doing sadhana. They declared that I had read the wrong books and asked me to read the right books, which would give me the ‘correct’ understanding. They obviously didn’t doubt that their own view was correct.

My neighbour, a self-declared communist, introduced me occasionally to his friends as ‘the local RSS pracharak’. It was half in jest, but more than half intended to be demeaning. My reaction at that time: ‘If RSS is in tune with my views, then it must be good.’

Standing up for Hindu Dharma indicted me as belonging to the ‘Hindutva brigade’ that is shunned by political correctness. My fault was that I said that Hindu Dharma is the best option for any society.

Of course, my stand is not communal or dangerous. Hindu Dharma is indeed not only inclusive but also most

to gain strength. And yes, politicians, too, need to base their lives on Hindu Dharma serving society. Propagating blind belief has no place in politics, but following Dharma is in the interest of all.

Humanity needs to win over the madness that ‘the Supreme Being’ loves only those human beings who believe in a certain book and condemns all others to

Even some staunch ‘secular’ Indians occasionally declare themselves as Hindus. It’s a good sign, but they usually get something wrong: They believe that being Hindu means that everything goes – believe in a god or not, be vegetarian or not, go to temples or not. It even seems to imply: be truthful or not. They portray Hindu Dharma as having no fundamentals.

Being Hindu means to know and value the profound insights of the Rishis and follow their recommendations in one’s life. These insights may not be obvious to the senses, like the claim that everything, including nature, is permeated by the one consciousness (Brahman), but it

the earth goes around the sun, but it can be proven. Being a Hindu does not require blind belief.

Being Hindu also means having the welfare of all at heart including animals and nature, because each part is intimately connected with the Whole.

Being Hindu means following one’s conscience and using one’s intelligence well. It means diving into oneself, trying to connect with one’s Essence. It means trusting one’s own Self, Atman, and doing the right thing at the right time.

Being Hindu means being wise – not deluded or gullible or foolish. This wisdom about the truth of this universe and about how to live life in the best possible way was discovered and preserved in India. Yet its tenets are universal and valid for all humanity.

Isn’t it time for our interconnected world to realise this and

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V. Markets

Tencent loses nearly $34 billion since the PUBG Mobile ban in India — its second-largest valuation dip this year

Chinese technology company Tencent loses $34 billion in two days since Indian mobile app ban took away the largest set of users from its iconic game, PlayerUnknown's Battlegrounds (PUBG)Tencent

• The company behind the Chinese app PlayerUnknown’s Battlegrounds (PUBG) Mobile, Tencent, is trading in the red for a second straight day after the Indian government banned the battle royale game.

• Its market value has plummeted by nearly $34 billion over the last two days with Tencent's share price falling

• The company said that they will engage with the Indian authorities to ensure the continued availability of their apps in India.

The Chinese technology mammoth Tencent has lost

over the last two days after news of its signature battle royale game PlayerUnknown’s Battlegrounds (PUBG) Mobile being banned by the Indian government. This is the second biggest dip in Tencent’s valuation since Bloomberg reported that the company lost $66 billion last month when the US President Donald Trump banned WeChat.

in $700 million into India’s most valuable Internet at

cab-hailing service Ola. Already leading in China, the

technology behemoth was looking at India’s market to provide the growth it needed to keep up valuations.

One year down the line, after a soft launch in China, it released PUBG to the rest of the world. Come 2020, gamers in India account for nearly a quarter of its downloads – ahead of even China, according to data by Sensor Tower.

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VI. Psychology

Kids today are lacking these psychological nutrients

When it comes to the rules and restrictions placed on children, author and Stanford Graduate School of Business lecturer Nir Eyal argues that they have a lot in common with another restricted population in society: prisoners. These restrictions have contributed to a generation that overuses and is distracted by technology.

Self-determination theory, a popular theory of human motivation, says that we all need three things for psychological well-being: competence, autonomy, and relatedness. When we are denied these psychological nutrients, the needs displacement hypothesis says that we look for them elsewhere. For kids today, that means more video games and screen time.

In order to raise kids, Eyal says we must

standardised tests as indicators of competency, and provide them with ample free time so that they can be properly socialised in the real world and not look to

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You could try to pound your head against the wall and think of original ideas or you can cheat by reading them in books.

— @patrickc

In life, loss is inevitable. Everyone knows this, yet in the core of most people it remains deeply denied – ‘This should not happen to me.’ It is for this reason that loss

is the most difficult challenge one has to face as a human being — Dayananda Saraswati

29

30


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In this month’s edition we look at some apps which are useful to us professionally.

McKINSEY INSIGHTS

The app offers business insights and analysis on the biggest issues facing senior executives today – from leadership and corporate strategy to the future of work and AI's impact on business and society. In

addition, explore new articles on digitisation, marketing and analytics across industries such as consumer goods,

daily, McKinsey consultants and contributing experts look at the latest in climate change, diversity and inclusion in the workplace, organisational restructuring, bringing data to bear on business strategy and more. Content includes articles from McKinsey Quarterly, reports from the McKinsey Global Institute, podcasts and videos.

This app allows you to view recent and most popular

personalise your app experience.

The best part is that all content is free. Go ahead, get insights into your business and professional world today!

co/3l2fylN

LINKEDIN – SLIDESHARE

is the world’s largest community for sharing presentations and professional content, with 60 million unique visitors a

million uploads. It is much more than just slides. Find

infographics, videos, how-to guides, data and analytics reports, industry research, thought-leadership articles, Q&As, DIY instructions, visual guides and more. You can follow companies and organisations like Dell, Ogilvy, the

expertise on SlideShare.

Students can use SlideShare for academic research, professionals can deepen their industry knowledge and everyone can explore interesting topics to learn something new.

on your phone or Android tablet. And now you can even clip the best content on SlideShare and organise your research into Clipboards, all in one place.

co/2Z3fjet

LAYOUT FROM INSTAGRAM: COLLAGE

This is a simple app which allows you to stitch up to nine images together and load them onto Instagram. Instagram allows you to add only one image at a time. However, sometimes you may wish to combine multiple

picture. This app lets you do just that.

It also helps you tweak many parameters for each photo, including the size, border width or zoom. You are the editor, so feel free to

experiment and get creative – tell a story, show off an

regular photos to convey a mood or theme.

TECH MANTRA


SOME USEFUL APPS


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The app also has three handy buttons at the bottom

can be further enhanced by using Instagram’s native

Android: http://bit.ly/2L5glDI iOS: https://apple.co/2L5ljAl

TICKTICK

is a simple and effective to-do list and task manager app which helps you make schedules, manage time, remind about deadlines and organise life at work, home and everywhere else. It is very easy to get started with its intuitive design and personalised features. Add tasks and reminders in mere seconds and then focus on important work. The app syncs across devices, so you are always up to date.

You can add your tasks by voice input or by typing. With Smart Date Parsing, the date info you enter into

task reminder with an alarm. You can set multiple

any deadline.

You can even get easy access to your tasks and notes by adding a checklist widget to your home screen. That is pretty neat.

5. FROM THE PAST – ‘THE PROFESSION WILL GET THE STANDARDS IT DESERVES’Extracts from a speech by (former Chairman, IASB) to the Empire Club of Canada, Toronto in related to standards are reproduced below:

A principle followed by an example can defeat the “tell me where it says I can’t do this mentality”. If the example is a rule

it. For example, if the rule is that, if A, B and C happens, the

so that it involved events B, C and D and would then claim that the transaction was not covered by the standard.

A principle-based standard relies on judgements. Disclosure of the choices made and the rationale for these choices would be essential. If in doubt about how to deal with a particular issue, preparers and auditors should relate back to the core principles.

Of course, the viability of a principles-based system depends largely on its implementation by preparers and auditors. Ultimately, the profession will get the standards it deserves.’

FINANCIAL REPORTING DOSSIER Continued from Page 133

INSTAPAPER

Instapaper is the simplest way to save and store articles

anytime, anywhere, perfectly formatted. It provides a mobile and tablet-optimised text view that makes reading Internet content a clean and

subways, on elevators, or on Wi-Fi-only devices away from Internet connections. It saves most web pages as text-only, stripping away the full-sized layout to optimise for tablet and phone screens with adjustable fonts, text sizes, line spacing and margins.

for easy access. You can download up to 500 articles on your phone or tablet and store unlimited articles on the Instapaper website. Dictionary and Wikipedia lookups, tilt

without leaving the app are all available, just like in Kindle.

A great app to consume content at your own time and space.Android: http://bit.ly/2FxujtG iOS: https://apple.co/2FAjrv5

I hope you will be able to use these apps effectively to become more productive in your professional life.


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are still increasing exponentially, the level of activity in the

day functioning for running the business. Consequently,

to run the business.

4. It would be relevant to mention here that though large companies and their auditors with their elaborate ERP

statements through Work from Home infrastructures, the mid-segment and small segment companies due to severe infrastructural handicaps have been struggling

of these companies are audited by small and medium sized Chartered Accountant auditors by making physical

small and medium sized companies whether for running the business or for making necessary compliances under various laws cannot be overemphasized.

caused a lot of consternation in the management of such small and medium sized companies as it would now require them to seek extension of time for holding AGM by making necessary compliances in these already trying times.

our request for blanket extension of due date for

year) by at least three months from 30th September, 2020 to 31st

Smt. Nirmala Sitharaman,Hon’ble Minister of Finance & Minister of Corporate Affairs,

Madam,

th August, 2020 whereby the Ministry of Corporate Affairs has, after considering the

seek extension of time in holding AGM with the concerned

aforesaid GC also mentions procedural relaxations

the AGM through video conferencing (VC) or other audio-visual means (OAVM).

2. Whereas the procedural relaxations granted vide

long way in mitigating hardships for conducting AGM, however, at present, the companies are struggling even

then be required to be audited by the statutory auditors of the company for laying before the AGM.

3. Your goodself is aware that due to nation-wide lockdown in the months of March, April and May, 2020 and the staggered process of unlocking from June, 2020

as well as of their Chartered Accountant auditors have

REPRESENTATION


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Respectfully Submitted,Thanking youYours sincerely,

Suhas Paranjpe President,

Chandrashekara Shetty President,

Rasesh Shah President,

Cc to: The Secretary, Ministry of Corporate Affairs, Government of India, Shastri Bhawan, Dr. Rajendra

Anshul Agarwal President,

Ketan Mistry President,

Ahmedabad

You will be the same person in five years as you are today, except for the people you meet and the books you read.

— John Wooden


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Let us look at the attitude that the international health body has displayed. Look at the statements of some of its members, such as Prof. Dieder Houssin, who is also a member of the Review Committee, International Health Regulations. On 23rd January he said, ‘Now is not

These comments were made on the exact day when the lockdown commenced in the city of Wuhan where it all started. It is perhaps because of the sluggishness and negligence of such massive proportions that we face a time where there is little hope for those who have to choose between food on the table and contracting the deadly virus. The world today is paying the cost for the blunders committed by the WHO. Its leadership has proved to be ineffective and is likely to adversely affect the lives of billions who now confront a prolonged tragedy worsened by an economic slowdown of gigantic proportions.

Through this paper I attempt to draw the reader’s attention to the shortcomings of and the blunders committed by the WHO which have led us to where we are today.

BACK IN TIMEThe SARS epidemic of 2002-03 had let loose fear, concern and death in a similar manner. Even then, China was slow to acknowledge the epidemic domestically and failed to inform the global community about its possible spread.

During the SARS epidemic, WHO was quick to recommend travel restrictions and criticise China for delaying the submission of vital information that would have limited its global spread. Even after eradication of SARS, WHO warned that the world would not remain free from other novel forms of the coronavirus. The then Director-General of WHO, Dr Gro Harlem Brundtland, implored the international community to investigate possible animal reservoirs that could be a source for

INTRODUCTION

The World Health Organization (WHO) was established on 7th

of creating a better, healthier future for people all over the world. It was assigned the role of providing leadership on matters critical to health, shaping the research agenda and stimulating the generation, translation and dissemination of valuable knowledge. However, when D-Day beckoned, the WHO failed and it failed gloriously. Just when the world was looking up to this multinational body, it failed with repercussions that will perhaps only get worse in the course of time.

As of today, the number of coronavirus cases stands

technical advancements, life-changing inventions and

such a situation that things are worsening day after day, every day. There is perhaps nothing better to showcase the gruesomeness of our reality. This is the question uppermost in the minds of everyone, whether a daily wage labourer in a small village in Uttar Pradesh, or a migrant worker desperately trying to go back home from Mumbai to Bihar. The world today asks the same question and does so in bewilderment when a prestigious and well-funded global watchdog for health, the WHO, appears to

WHO CONTROVERSY: LACK OF GLOBAL LEADERSHIP IN CORONA CRISIS


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Mistake 2: Denied human-to-human transmissionThe WHO denied evidence of human-to-human

th January, 2020 which has now become a famous tweet by the WHO.

Timeline of EventsNovember 17th 2019

China informs WHO Covid-19

Meanwhile Taiwan warns WHO of Covid-19 human-to-human transmission

WHO denies evidence of human-to-human transmission

WHO denied considering Covid-19 as public health emergency

WHO Director-General visits China

WHO Director-General denied any measures that interfere with international travel and trade

Dr. Lee Wenliang whistleblower of Covid-19 died

declared Covid-19 as a pandemic

December 31st 2019

January 14th 2020

January 23rd 2020

January 28th 2020

February 3rd 2020

February 7th 2020

March 11th 2020

future outbreaks and better study the movement of the virus to humans.

likely environment for the virus to incubate and jump from animals to humans. The mutable nature of the virus, coupled with China’s rapid urbanisation, proximity to exotic animals and refusal to tackle illegal wildlife trade and commerce, were together termed a ‘time bomb’ by a research paper in 2007.

JUMP TO PRESENTHere is a list of mistakes that the WHO committed. Had these been avoided, it could have changed the history of the world as we know it today.

st

th January, 2020. Surprisingly, when a pneumonia-like virus was detected

sluggishly. Dr. Tedros Adhanom, Director-General of WHO, applauded China’s ‘commitment to transparency’ in the early days of the epidemic in January.

WHO refused to acknowledge the human-to-human transmission of the virus despite several cases already showing transmission. WHO also castigated countries

and from China or issued travel advisories.

informationOne country that got their advice was Taiwan, which also warned the WHO that it suspected the virus was spreading through human-to-human transmission. Taiwan, which

per capita among countries impacted by the virus, was prevented from joining the WHO as a member country

independence. A newspaper headline of 3rd April, 2020, said famously,

In late March, WHO Epidemiologist Bruce Aylward declined to answer a Hong Kong reporter's question about Taiwan, or even acknowledge its existence.

As Taiwan was distributing facemasks to its citizens, the WHO was advising the rest of the world that they were


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doing so unnecessarily while initially the CDC and the

pointed out as to how mounting evidence that masks can help slow the spread of respiratory diseases by

population, and what the WHO maintained was virtually non-existent despite mounting evidence to the contrary in mid-February.

A CNN Health news article said,

st December, there are expert estimates that the virus had spread to humans as far back as October.

Even after being told, the WHO showed no urgency to send an investigative team, careful not to displease the Chinese government. A joint WHO-Chinese team went to Wuhan only in mid-February and wrote a report with decidedly Chinese characteristics misleading the entire world of the then situation.

A South China Morning Post article said, ‘Coronavirus:

Mistake 5: Misled the world

pandemic, spreading rapidly around the world. But not only did Dr. Tedros Adhanom and his team fail to declare a public health emergency, they also urged the international community to not spread fear and stigma by imposing travel restrictions.

The global health body even criticised early travel restrictions by the US as being excessive and unnecessary.

th March.

Following the WHO’s advice, the European Centre for Disease Prevention and Control (ECDC) suggested that the probability of the virus infecting the EU was low, likely delaying more robust border controls by European states.

As the virus continued spreading across Europe and reached America, WHO recommended that the travel industry maintain the status quo. Dr. Tedros said on 3rd February:

Indeed, the WHO’s response to Ebola was similarly

manoeuvring between the Soviet-led Communist bloc and the US.

as November but the Chinese government silenced the whistleblowers and downplayed the threat. Dr. Lee Wenliang is one of those whistleblowers who died as a hero trying to sound the alarm of coronavirus weeks before he contracted the illness himself and died. The CNN news

th February was:

During such testing times, the WHO only continued to please the authoritarian government of China. It praised China for releasing the virus's genome while neglecting to

China also did not report human-to-human transmission until late January, even though Chinese doctors suspected


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the same at least a month earlier. WHO scientists weren't allowed into Wuhan until three weeks after the outbreak

continued to glorify the all-powerful regime by saying,

There is nothing hidden about China’s efforts at undermining international organisations. Its growing clout in international organisations is creating new fault lines in global politics and the WHO has been an early victim.

MoU with China to advance health priorities under the Belt and Road Initiative.

of its early failings but has also employed an overt global disinformation campaign, trying to pinpoint the source of the outbreak as the US or Europe.

It is an irony of our times that the world’s most potent authoritarian state (China) heads over a quarter of all specialised agencies in the UN, ostensibly the centrepiece of the international liberal order.

Dr. Tedros said on 5th February that ‘China took

Dr. Tedros’ inaction stands in stark contrast to the WHO’s actions during the 2003 SARS outbreak in China.

The then WHO Director-General, Dr. Gro Harlem Brundtland, who had been the Prime Minister of Norway

advisory in 55 years which recommended against travel to and from the disease epicentre in southern China. Dr. Brundtland also criticised China for endangering global health by attempting to cover up the outbreak through its usual playbook of arresting whistleblowers and censoring the media. It is said that Dr. Tedros is not from a political background, hence he is unable to face China bluntly and blame it for the coronavirus.

WHO has required voluntary budgetary contributions to meet its broad mandate. In recent years, it has grown more

This dependence on voluntary contributions leaves WHO

or organisations. China’s WHO contributions have grown

CONCLUSIONIt is an open secret among international diplomats and public health experts that WHO is , riddled as it is with politics and bureaucracy. Given its previous failures and the warning that was SARS, its leadership has no excuse for reacting in such a sluggish and indifferent manner.

A global pandemic does not occur every time a novel infectious pathogen emerges. It does when there is an absence of accurate information about the pathogen and a failure of basic public services – in this case, the failure to regulate food and marketplaces to prevent the transmission of pathogens and the failure to shut down transportation and control movement once it spreads. When authorities regulate public health, share information about a pathogen and co-operate to control its movement, diseases are contained and pandemics are unlikely to occur.

The collateral price that the world has paid for this lesson is perhaps too exorbitant. Hopefully, we will take a leaf

Dr. Tedros, an Ethiopian politician, was also seen as

General’s election. The ex-Health Minister of Ethiopia has favoured China in innumerable ways which may be due to China having made a lot of investments in Ethiopia under the One Belt One Road initiative and because Ethiopia does not want to anger the red dragon. Dr. Tedros could also be favouring China because of these reasons. In late

th January he met with President Xi Jinping in Beijing. Following the meeting, he commended China for ‘setting a new standard for outbreak control’ and praised the country’s top leadership for its ‘openness to sharing information’ with the WHO and other countries.


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from this book and have better, more accountable and robust structures in place for such pathogens that threaten all life on our planet.

* The above article was chosen as the best article from over 50 entries submitted at ‘Tarang 2020’, the 13th Jal Erach CA Students’ Annual Day organised by the BCAS. One of the features of this year’s event was ‘Writopedia’.

INDIAN FIRM MADE THE WORLD’S FIRST CRUELTY FREE SOAP; GOT RABINDRANATH THAKUR TO MODEL FOR IT

opposite and distributed pamphlets in Gujarati that explained the process of making soaps from vegetable oils. Did it establish trust and appealed a larger audience? You bet.

Rabindranath Thakur sits in his quintessential calm position in a photo, hands obediently placed on his laps as he stares into the abyss. Next to his portrait is a quote that reads, “I know of no foreign soaps better than Godrej’s and I will make a point of using it.”

Yes, as hard as it may seem to believe, the Nobel Laureate had agreed to endorse a toilet soap in the early 1920s. Not

No. 1’ soap.

movement, and the leaders made their political statements by requesting people to cripple the economy of colonisers

Ardeshir Godrej, a businessman by profession and patriot at heart, is the man behind starting this humble swadeshi brand in 1897. His younger brother Pirojsha also joined the business and together they came to be known as the Godrej Brothers.

Fast forward to 2020, a 122-year-old consumer-goods giant, the Godrej Group controls $4.7 billion revenue. It

India including springless lock, Prima typewriter, ballot box and refrigerators.

(Better India, August 7, 2020)


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MEETING ON ‘EQUALISATION LEVY 2.0’

The International Taxation Committee conducted a virtual meeting on Amendments’ on 27th July, 2020. The meeting was led by Group Leader Bhaumik Goda who explained the amendments in the Finance Act, 2020 in relation to the Equalisation Levy ( ).

The new business models were facing a set of new tax challenges in terms of nexus, characterisation and valuation of data and user contribution. Thus, there was a continuous need to hone the working knowledge of taxation. It was in view of this that the group discussion at the ITF Study Circle was organised and led by Bhaumik

In the course of the meeting, he dealt with and discussed

E-commerce supply or services, exemption and charge of EL. Case studies pertaining to different industries were also brought up and discussed to explain various features and the impact of EL. Participants said that they had received several critical insights at the meeting.

ACCOUNTING SOFTWARE EXPLAINED

The Technology Initiatives Committee of the BCAS

st August. The meeting was led by Punit Mehta and

Punit Mehtafor MIS purposes. He also demonstrated the process of extracting the data with the use of specialised tools. Certain add-on features of Tally for auto bank reconciliation, copy of masters from one Tally account to another, auto generation of similar entries through templates and so on were also explained.

Abhay Gadiya described the process of using the data extracted from Tally for analysing and visualising in Power BI. The practical case studies were very helpful in

understanding the various graphics and charts that can be created using Power BI. Both speakers replied in detail to the queries raised by the attendees.

The live session was attended by more than 700 participants on Zoom and YouTube. They appreciated the efforts put in by the speakers.

24TH ‘ITF CONFERENCE 2020’ HELD ONLINE

This year’s International Tax and Finance Conference was conducted online from 6th th August (with extended

th th August) with a record attendance of 363 members from around 23 locations all over India and abroad. The Conference was top-lined by experts

with great clarity. The four-day Conference was marked by seven technical sessions that included two group discussion papers, one presentation, one expert chat and three panel discussions.

There were a total of 23 faculty members, including

about 30 contributors for case studies and the background material. It clocked around 30 hours of solid study during the Conference.

Participants were divided into six groups for group discussion on two papers written by

and Six breakaway rooms were created on the Zoom platform and participants were seamlessly divided into different groups upon their entry.

in-depth discussion of the case studies from the papers. Both the paper writers had a virtual tour of each group to see the discussion by the participants.

President Suhas Paranjpe gave his opening remarks and explained some major BCAS activities and its new initiatives. International Taxation Committee Chairman

welcomed the participants and set the tone with his introductory remarks.

SOCIETY NEWSI SAMIR KAPADIA

Hon. Jt. Secretaries


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The Conference was inaugurated with a keynote address by of the Delhi High Court who spoke about the role of the taxpayer and the tax authorities in today’s scenario.

Following the group discussion on the issue, in his presentation spread over two sessions

totalling six hours on ‘Practical application of the MLI in relation to PE’, highlighted the issues in the interpretation of MLI and its application on Permanent Establishment and the nuances of the interplay of the MLI and synthesised

Kishor Karia chaired both the sessions and gave his valuable inputs on the subject.

FEMA has become increasingly complex and there are a host of issues which one needs to analyse when dealing with any transaction that attracts it. A panel consisting of

, former Executive Director of the RBI, along with Hitesh Gajaria and and moderated by Past President , shared its

through case studies. These studies covered practical issues which would be of relevance in today’s scenario such as implications of a returning OCI to India, the recent circular by the Government to allow FDI from China only under the approval route, downstream investments, agricultural income, ECB and write-off of import payable against export receivable, and so on.

Gautam Doshi spoke on ‘Structuring of Outbound Transactions (tax and non-tax aspects)’. He covered, in a succinct manner, the various tax and other regulatory issues arising in setting up an SPV abroad as well as externalisation of the family holding through a foreign trust. Past President Gautam Nayak chaired the session and also provided his insights on the subject.

Taxation of the digitised economy is a hot topic with the

highly-digitised businesses, even as a host of countries including India have undertaken unilateral measures in this respect. , board member of the Tax Executive Institute in Singapore, in his presentation covered various measures undertaken by different jurisdictions and also shared his thoughts on some of the alternative approaches available.

, in his presentation, covered the potential trade war on account of various measures adopted by the countries and the role of the US in the

same. He also gave his views on the shortcomings of

OECD and currently being discussed by various countries. This was followed by a panel discussion featuring Butani (advocate) and Shefali Goradia and chaired by

(advocate). The panel deliberated on the issue at length and provided its views on various facets in the Indian approach to taxing the digitised

economic presence and the extended source rule. gave his valuable inputs and

comments on several issues.

The group discussion on the paper written by Geeta Jani on ‘Case studies on impact of MLI on select tax treaties with special emphasis on taxation of dividends’ took place

th August. In her presentation, which followed the group discussion, she brought out the various nuances in the application of the GAAR, LOB and PPT provisions in respect of dividend payments as well as the interplay of the MFN clause with the PPT provisions. Her presentation was based on case studies for easy understanding in an online format. The session was chaired by who also offered his views on the issue.

Mutual Agreement Procedure (MAP) has gained

and , IRS, in an expert chat took the participants through the MAP provisions and also shared their views on the practical aspects of the MAP procedure, how to apply for the same and India’s position in relation to the use of MAP as an effective tool for dispute resolution.

The last technical session was a panel discussion on ‘Case Studies on International Taxation’. The panel consisted of , Vice-President of the ITAT, , IRS, and Vohra, senior advocate. It was chaired by Pranav Satya. It was quite a unique discussion in that the panellists discussed issues from different possible perspectives. The issues discussed covered a range of topics of relevance in today’s world – application of tax treaty to DDT, royalty / FTS vs. EL, EL on E-commerce

to indirect transfer, foreign tax credit and hybrid entities. The panel was gracious enough to take part in another session

th August which also lasted two and a half hours.

In addition, there were two non-technical programmes


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for the participants – a musical programme by Nishant Gadhok and a Hasya Kavi Sammelan by Dube and

While the personal touch and the camaraderie amongst the participants during physical Conferences were certainly missed, the participants were compensated by the experts’ views shared at the virtual Conference.

of the BCAS and the International Taxation Committee in its true sense and meaning, where delegates participated from their respective residences!

Mahesh Nayak was the chief coordinator and was ably assisted by Abbas Jaorawala as joint coordinator. The other members of the team were

and

The Conference received an encouraging response and feedback from the participants.

The event was sponsored by in memory of his brother, the Late . The Students’ Forum comprised of a group of 25 dedicated and enthusiastic students. The event was truly an event ‘OF CA STUDENTS, FOR CA STUDENTS AND BY CA STUDENTS’. It imparted necessary life skills such as public speaking, management and marketing skills, and even technical skills.

BCAS President Suhas Paranjpe and HRD Committee Chairman Govind Goyal gave their inaugural speeches which were motivating and lauded the students for participating in the event which commenced with a prayer song to ensure a positive beginning.

Antakshari competition, styled ‘Suron ke Maharathi’ (or ‘Zoomtakshri’) were ‘Deewane’ and ‘Parwane’. They took over everyone’s screens and hearts. The Antakshari held true to this year’s theme of ‘Bollywood Retro’ and the quick-thinking and accuracy of the participants during the game that has been played by every Indian household was both a surprise and a delight.

The next event was the quiz ‘inQUIZitive – Eureka

elimination rounds). The quiz was hosted by student Parth Patani. Everyone got a ‘KBC feel’ as the participants answered question after question at astonishing speed, managing to keep everyone hooked on to the screen.

The end of the brainstorming quiz session led to the

following topics:

3. Doing things we don't enjoy is discipline.

The viewers could feel the energy of each of the speakers bursting forth from the comfort of their homes. The insight and perspective that each person offered was

their thoughts was captivating.

And then it was time to announce the winners of the research paper contest for ‘Writopedia’. The topics offered were:

The 13th

was held online on Zoom Cloud Meetings th August,

by the BCAS Students’ Forum under the auspices of the Human Resource Development Committee.

Taking experiments but the long days and longer nights of adaptation and innovation, technical checks and video call meetings brought together over 650 students from across the country to prove once again that CA students think about a lot more than just tax and audit. The student coordinators Drishti Bajaj and took the lead in the organisation.

The participants for ‘Talk Hawk’ and the ‘Talent Show’ sent their audition entries as pre-recorded videos and later performed live. Two new events were introduced this year – a ‘Quiz’ and a ‘Research Paper’ competition. Apart from these, also featured an Antakshari competition, a talent show and an elocution competition, resulting in a lifetime of learnings and memories. The theme for this year was ‘Bollywood Retro’.


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Corona Crisis2. How the Goals of Feminists have Changed over the Decade3. Can Encounters be used to Bypass the Indian Judicial System4. Untapped Potential of North-Eastern States of India.

The judges shared their thoughts on how they were surprised to go through several well-written papers. They also described the building blocks of a well-written research paper and how it was different from an essay.

Last, but not the least, it was time for ‘CAs Got Talent’ wherein three persons each from the categories singing, dancing and other performing arts helped make the evening entertaining, leaving the participants asking for

received for various presentations, such as mono-acting, yoga, rapping, etc., bringing out the hidden talent of CA

let alone deciding the winners.

The winners were then announced, each representing

Prize Name of Student

Name of Firm City

1st Prize Winner Vedant Satya CA student Lucknow

2nd Prize Winner

Priya D’Costa Vishwanathan Subramanian

Mumbai


Name of Firm City

1st Prize Winner Tanmay Modi K.C. Mehta and Co

Vadodara

2nd Prize Winner

Vanishree Srinivasan

Singhvi Oturkar Kelkar

Thane


Name of Firm City

1st Prize (Singing Category)

Vanishree Srinivasan

Singhvi Oturkar Kelkar

Thane

1st Prize (Others Category)

Prakhar Gupta D.K. Surana & Associates

Indore


Name of Firm City

1st Prize (Dancing Category)

Sanjana Subramanian

- Mumbai


Name of Firm City

Winning Team

Best Individual Performer

Jagat Dave Dipen Mehta & Co.

Mumbai

Nisarg Shah - Mumbai

Bidisha Banerjee

- Kolkata

Jagat Dave Dipen Mehta & Co.

Mumbai


Name of Firm City

Winning Team

Best Individual Performer

Kalpak Masalia CA student Pune

Mangesh Pai CA student Mumbai

Akash Sagar - Lucknow

Hearty Congratulations to all the winners and their

The judges for the various competitions were as follows:

Competition Level 1 Elimination Rounds

Final Round

Writopedia Nikunj Shah Raman Jokhakar

Talk Hawk Apurva Wani Mukesh Trivedi

Rajesh Muni Mihir Sheth

Narayan Pasari Mayur Nayak Mudit Yadav

Antakshari Yogesh Arya (Judge), Nidhi Shah (Judge) Vijay Bhatt (Host), Meena Shah (Host), Tej Bhatt (Host)

Talent Show Hrudyesh Pankhania, Tanvi Parekh

Rishikesh Joshi Devansh Doshi Parita Shah

Mihir Sheth Aditya Phadke

, a member of the technical team that held the event together, proposed the vote of thanks to Managing Committee and HRD Committee members, the coordinators of the Annual Day, the BCAS staff, the creative, social media and technical teams, the vibrant team of student volunteers and all the students for


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participating in big numbers.

With another successful held, this time in a new format, it was an unprecedented experience for the students who put up a great show in these challenging times.

watched the event live on YouTube and was overwhelmed with the performances. BCAS is honoured to receive the following letter of appreciation from him:

emotions. Taking responsibility for our feelings and healthy expression is preferable since suppression of feelings causes diseases.

Participants then shared the feelings that they had experienced in the past four months of the pandemic

had been a tough period for each one of them. Light was

understand why they are there, listen to the message that they have for us and allow them to guide us to the best course of action – thus enabling us to regain our mental equilibrium and tapping into the inner strength of resilience to bounce back.

Being mindful of the present moment and living in the here and now, reframing events and looking at things from a different perspective enables us to regulate our feelings. Nurturing ourselves and taking support from our near and dear ones and embracing change are some of the ways in which we can build our resilience, according to D’Mello

JOINT WEBINAR WITH IACCJust slash the regime of 767 establishment approvals to fuel India's post-Covid recovery through FDI, several experts urged at the online webinar organised by the IACC in association with the BCAS th August on the topic . The economic slowdown due to the global pandemic has made other countries think about China and its future strategy towards global trade and commerce. For this, IACC brought together many industry experts having rich experience in cross-border investments.

The eminent experts were Nishith Desai, Founder Sunil Kaul,

Managing Director and Head, Southeast Director Asia, Hoonar Janu, Co-Head, Americas Region,

and Deepak Nambiar, Partners at Kamlesh Vikamsey, Senior Partner, Khimji

, Principal, US-India Corridor, Withum. and Deepak Nambiar moderated the discussion.

said that India needed to develop the art of visualisation to uproot investments from China to India. The most critical challenge was environmental policies. Similarly, India should become a heaven to attract foreign

‘TUNE INTO YOUR EMOTIONS’th August

with a session on ‘Tune into your Emotions and Bounce back with Resilience’ presented by , an experienced counsellor, behavioural trainer and energy healer.

The session covered the basics of Emotional Intelligence. The icebreaker, when participants were asked to share what they were feeling at the moment, helped to bring home how we may confuse our thoughts and feelings. Tuning into one’s emotions is to be able to identify and be aware of one’s feelings. Self-awareness can then lead to other awareness and social awareness. Self-awareness is necessary for self-management and, together with social awareness, leads the way for effective relationship management.

The session allowed exploration of how we express our


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trends had been seen in investment – investment in manufacturing and infrastructure had taken some beating. Looking at services, there had been a huge

pharma, healthcare, medical devices, agrotech, IoT,

up. The Government had opened the insurance sector

said that India would be competing with other South-East Asian countries for this chunk of business such as Vietnam which was very welcoming to foreign companies. There was also the case of regulatory controls and taxation policies. India had to simplify its tax systems and provide ease and predictability in the tax and regulatory structures.

But standing in the way (of inviting investment into the nation) was the lack of single-window clearance for investors, said Naushad Panjwani, BCAS Past President and also the Regional President of the IACC, West India Council. He narrated how foreign businesses who sought to develop roots in India had to face a committee of secretaries from 35 Central Ministries or Departments, apart from an overall regime of 767 pre-operational licenses. Adding to this was the multitude of inspections, approvals and renewals after the commencement of operations.

said the second piece in this puzzle was

international transactions. The challenge in India was implementing and interpreting its plethora of good laws.

Several developments were taking place right now, offering better opportunities for India. American businesses that were looking for better opportunities, provided a chance for all, thanks to the large market here.

Ms Hoonar Janu said American ventures had spiked by four times in pursuit of defence partnerships and three times for healthcare. That underlined the larger, strategic relationship, all thanks to the economic strength of India.

The webinar was well moderated by and Deepak Nambiar. The vote of thanks was proposed by BCAS President Suhas Paranjpe.

‘CASE STUDIES ON GAAR’

The International Taxation Committee conducted a virtual meeting on ‘Case Studies on GAAR’ on 24th August. The discussions were led by Group Leader who explained the far-reaching practical impact of GAAR through relevant case studies.

The concept of GAAR is predominantly based on the concept of ‘substance over form.’ The Group Leaders

applications. They discussed the key points to be kept in mind before concluding whether transactions were GAAR-tainted. The speakers dealt with various case studies to explain the conceptual aspects of GAAR.

It was an interactive meeting and the participants said

insights provided during the same.

Great amount of scientific research is there to show that health is better because transcendental meditation deals with consciousness,

and consciousness is the basic value of all the physical expressions. The entire creation is the expression of consciousness.

— Maharishi Mahesh Yogi


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