Important Case Laws on Section 36(1)(iii) of the Income Tax Act

Section 36(1)(iii), interest deduction in Income Tax Act, income tax

This article explains how Speculative Business is Distinct Business, What is speculative transaction, What shall not deemed to be speculative transactions, What is Eligible Transaction for security derivative, Recognised stock exchange for Section 43(5), Recognised association for Section 43(5), What are the Eligible Transaction for Commodity derivative, Do Single transaction constitute speculative business, Treatment of Losses in Speculation business and other related Income Tax Provisions.
Article further explains Which one of these are Speculative Transaction- F&amp;O in Shares, F&amp;O in Commodities, Intraday Trading, Normal Trading in Shares / Delivery Base, Forward Contract in Currency, Arbitrage trading and Dabba Trading.
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Speculative Business is Distinct Business
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Explanation 2 to Section 28 of the Income-tax Act, 1961 (&ldquo;Act&rdquo;) provides &ndash; Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as &ldquo;speculation business&rdquo;) shall be deemed to be distinct and separate from any other business.
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Why Distinct Business?
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Explanation 2 to section 28 specifically provides that where an assessee carries on speculative business, that business of the assessee must be deemed as distinct and separate from any other business. This becomes necessary because section 73 provides that losses in speculation business unlike other business, cannot be set-off against the profits of any business other than a speculation business. Likewise, a loss in speculation business carried forward to a subsequent year can be set-off only against the profit and gains of any speculative business in the subsequent year. Profits and losses resulting from speculative transaction must, therefore, be treated as separate and distinct from other profits and gains of business and profession.
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What is&nbsp;speculative transaction
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&ldquo;speculative transaction&rdquo; means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Section 43(5)
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What shall not deemed to be speculative transactions
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As per&nbsp;Section 43(5):
&nbsp;
a. a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him
b. a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations
c. a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member
d. an&nbsp;eligible transaction&nbsp;in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) &ndash; [Security Derivative Transaction] carried out in a&nbsp;recognised stock exchange
e. an&nbsp;eligible transaction&nbsp;in respect of trading in commodity derivatives carried out in a&nbsp;recognised association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013)
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What is Eligible Transaction for security derivative
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&ldquo;eligible transaction&rdquo; means any transaction &ndash;
&nbsp;
a. Carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange;&nbsp;and
b. which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;
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Recognised stock exchange
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&ndash; NSE
&ndash; BSE
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What is Eligible Transaction for Commodity derivative
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&ldquo;eligible transaction&rdquo; means any transaction,&mdash;
&nbsp;a. carried out electronically on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the recognised association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a recognised association; and
b. which is supported by a time stamped contract note issued by such member or intermediary to every client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act;
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Recognised association
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&ndash; MCX Stock Exchange Ltd.
&ndash; United Stock Exchange of India Limited
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A single transaction cannot constitute speculative business
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The explanation 2 to Section 28 provides for the speculation business as separate and distinct business while Section 43(5) defines what is speculative transaction. From the reading of these two sections it is quite clear that unless the speculative transactions constitute business, the provisions of Section 73 cannot apply. Thus, unless the loss pertains to speculative business the provisions of section 73 cannot be applied. The use of the plural Speculative &lsquo;transactions&rsquo; in explanation 2 to Section 28 clearly shows that in order to constitute speculative business within the terms of the explanation, a single transaction would not be sufficient, unless there is a systematic or organised course of activity or conduct on the part of the assessee, a single transaction cannot constitute business. Further where a transaction is settled, otherwise than by actual delivery, the transaction would be a speculative transaction. But merely because it is a speculative transaction it will not by itself render it a speculative business for which there should be more than one speculative transactions carried out by the assessee as per explanation 2 to Section 28 of the Income Tax Act, 1961.
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Moreover, High court of Bombay in the case of Commissioner of Income tax vs. Kamani Tubes Ltd. 207 itr 0298, (1994) 75 Taxman 0055 followed the Supreme Court ruling in the case of Commissioner of Income tax vs. Shantilal P. Ltd. (1983) 144 itr 0057 and held that;
&ldquo;It is abundantly clear that failure to accept the goods in terms of the contract on the stipulated date amounts to a breach of contract and in such a case, the other party is entitled to receive compensation for loss or damage caused by such breach. In the case of a contract for the sale of goods, the measure of damages upon a breach by the buyer is the difference between the contract price and the market price at the date of the breach. Such payment cannot be termed as &ldquo;payment made on periodical or ultimate settlement of the contract for purchase and sale of the commodity otherwise than by actual delivery or transfer of the commodity&rdquo; contemplated by s. 43(5) of IT Act. That would happen only in cases falling under s. 63 of the Contract Act. This is a case of breach of contract and the payments made by the assessee are by way of damages caused thereby. It clearly falls in illustration (c) of s. 73. It is not a case of performance of the contract within the meaning of s. 63 of Contract Act. The payment by the assessee, therefore, cannot be termed as a &ldquo;speculative transaction&rdquo; within the meaning of s. 43(5). Even if in a given case, a particular transaction is held to be a speculative transaction within the meaning of s. 43(5) such a finding would not resolve the controversy regarding the applicability of Expln. 2 to s. 28 and s. 73 without a further finding that the assessee carried on business in such speculative transactions. It is only where the speculative transactions carried on by an assessee are of such a nature as to constitute business that Expln. 2 to s. 28 gets attracted and such business, which is referred to as &ldquo;speculative business&rdquo;, is deemed to be distinct and separate from other business and s. 73 becomes applicable to the set off and carry forward of loss from such business. There is a perceptible difference between &ldquo;speculative transaction&rdquo; and &ldquo;speculation business&rdquo;. An isolated transaction of settlement of a contract otherwise than by actual delivery of the goods might amount to &ldquo;speculative transaction&rdquo; within the meaning of s. 43(5) but in the absence of something more to show that the nature of the transactions was such as to constitute a business, it cannot be termed as &ldquo;speculation business&rdquo; which has been treated as distinct and separate from other business.
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Treatment of Losses in Speculation business
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Section 73 of the Act
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(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.
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(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and&mdash;
(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.
(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.
(4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed.
Explanation.&mdash;Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads &ldquo;Interest on securities&rdquo;, &ldquo;<a href="https://taxguru.in/income-tax/faqs-income-house-property.html">Income from house property</a>&ldquo;, &ldquo;Capital gains&rdquo; and &ldquo;Income from other sources&rdquo;, or a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.
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Conclusions;
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F&amp;O in Shares
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Not a speculative business if transaction of F&amp;O is eligible transaction, as discussed above and carried out in Recognised Stock Exchange
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F&amp;O in Commodities
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Not a speculative business if transaction of F&amp;O is eligible transaction, as discussed above and carried out in Recognised Association
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Intraday Trading
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As there is no delivery of shares, it will be always treated as speculative business irrespective of fact whether carried on recognised stock exchange or off market
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Normal Trading in Shares / Delivery Base
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Normal Business, either taxed under the head of Capital Gain or PGBP depends upon intention of holding and nature of business
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Forward Contract in Currency
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Not a speculative transaction If contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him
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Arbitrage trading
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Arbitrage trading involves simultaneously buying and selling the same asset across two different markets, profiting from the price difference. Hence, technically delivery is taken, therefore it is normal business and not a speculative transaction
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Dabba Trading
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Speculative transaction &ndash; However this kind of business is illegal and prohibited by SEBI
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[Article Originally published on Taxguru: https://taxguru.in/income-tax/speculative-business-speculative-transactions.html]

All about speculation business income and income tax on speculation business

speculation income, tax on intraday, tax on speculation business

The legislature changed the entire law on penalty by shifting the defaults of &lsquo;concealment or furnishing inaccurate particulars of income&rsquo; u/s 271(1)(c) of the Income tax Act, 1961 (Act)&nbsp; to new defaults of &lsquo;Underreporting or Misreporting of the Income&rsquo; u/s 270A of the Act for the assessment year beginning on or after 01/04/2017 i.e. for the AY 2017-18 &amp; Onwards.
&nbsp;
Recently, the scrutiny assessments for the AY 2017-18 has been completed and based on that the Author has focused on the practical issues related to the implementation of these new provisions. Further, the Author has also focused on the practical issues related to the provisions of the immunity u/s 270AA of the Act. In the article, the author has not dwelled into the detailed discussion of the provisions of the Section 270A of the Act.
<h2>1. Whether it is mandatory on part of the AO to state that under which limb the penalty for the misreporting of income has been initiated?</h2>
Section 270A (8) is non obstante provision which provides that where under-reported income is in consequence of any misreporting thereof by any person, then the penalty shall be equal to 200% of the amount of tax payable on under-reported. Section 270A(9) provides the list of cases of misreporting of the income, which are;
(a) misrepresentation or suppression of facts;
(b) failure to record investments in the books of account;
(c) claim of expenditure not substantiated by any evidence;
(d) recording of any false entry in the books of account;
(e) failure to record any receipt in books of account having a bearing on total income; and
(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.
The above list is exclusive one and if the case of the assessee is not falling in the above-stated cases, then the AO cannot impose the penalty on account of misreporting of the income.
In many assessment orders passed recently, it has been observed that the AO has not stated that under which limb the penalty in consequence of any misreporting of income has been initiated. As a part of principal of natural justice, it is mandatory on part of the AO to state that under such limb, the penalty in consequence of any misreporting of income has been initiated. Therefore, if the AO has not specified that under which limb the penalty in consequence of any misreporting of income has been initiated, then the assessee must raise this ground during the course of penalty proceedings as well as during the course of appellant proceedings and going ahead, we&rsquo;ll find many judgments of various forum on this count.
<h2>2. Whether the assessee can file an application for immunity application before the AO u/s 270AA(1) of the Act and simultaneously, can he also file the appeal?</h2>
Before going ahead, let me draw one hypothetical case of which order was passed u/s 143(3) by making various additions;
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Sr. No.
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Addition on account of
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Amount
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Penalty Imposed on account of
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1
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Disallowance of expenses u/s 14A of the Act
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XX
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Under Reporting of Income
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2
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<td width="274">
Unaccounted Sales
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XX
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Misreporting of Income
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Section 270AA(1) provides that the An assessee may make an application to the AO to grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, if he fulfils the following conditions, namely
(a) the tax and interest payable as per the order of assessment or reassessment under sub-section (3) of section 143 or section 147, as the case may be, has been paid within the period specified in such notice of demand; and
(b) no appeal&nbsp;against&nbsp;the order&nbsp;referred to in clause (a) has been filed
Further, Section 270AA(3) provides that the AO&nbsp;shall,&nbsp;subject to fulfilment of the conditions specified above and after the expiry of the period of filing the appeal as specified in 249(2)(b), grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC,&nbsp;where the proceedings for penalty under section 270A has not been initiated under the circumstances referred to in sub-section (9) of the said section 270A.
Therefore, in case&nbsp;if the penalty has been initiated on account of Under Reporting of Income, then the AO, upon fulfilment of above both conditions,&nbsp;shall grant an immunity from the penalty as well as from the prosecution.
Now, considering the above scenario, whether the assessee can simultaneously file an;
(a) application for granting an immunity u/s 270AA against the first addition i.e. addition made on account Disallowance of expenses u/s 14A of the Act? and
(b) appeal against the second addition i.e. Unaccounted Sales?
The second condition of the 270AA is clear &ndash; it provides that the &ldquo;no appeal&nbsp;against the order referred&nbsp;to in clause (a) has been filed&rdquo;. Therefore, the precondition for making an application u/s 270AA(1) provides that the assessee has&nbsp;not disputed the order as whole&nbsp;and has paid all taxes as per assessment order. The similar language is also found in the section 264 of the Act and it is settled position of law that the said section affirms full merger.
However, intention of the legislatures behind the introduction of new regime of the penalty is to create less litigation environment. This fact is apparent from the Budget Speech of the Hon&rsquo;ble Finance Minister and the relevant extract thereof is reproduced hereunder;
<ol start="166">
<li> Levy of heavy penalty for concealment of income has over the years resulted in large number of disputes despite a number of decisions of the Apex court on interpretation of statutory provisions and principles guiding imposition of penalty. At present the Income-tax Officer has discretion to levy penalty at the rate of 100% to 300% of tax sought to be evaded. I propose to modify the entire scheme of penalty by providing different categories of misdemeanor with graded penalty and thereby substantially reducing the discretionary power of the tax officers. The penalty rates will now be 50% of tax in case of underreporting of income and 200% of tax where there is misreporting of facts. Remission of penalty is also proposed in certain circumstances where taxes are paid and appeal is not filed.</li>
</ol>
In view of the above, even though the wordings of the preconditions to make an application for immunity are clear &ndash; which affirm full merger of the assessment order, however, we&rsquo;ll find various litigation on that issue. Hope, the department may also clear its position by issuing suitable circular in this regard.
<h2>3. Whether the late filing of the application for granting an immunity is permisible?</h2>
It might be possible that the assessee had paid full demand within time specified in the demand notice or the tax has been adjusted against the refund due and the assessee is also not wanting to agitate the matter before the appellant authorities but the assessee, forget to file the application for immunity u/s 270AA(1) of the Act in Form 68 within the time specified therein.
The section 270AA(2) specifically provides that the application referred to in sub-section (1)&nbsp;shall be made within one month from the end of the month in which the order referred to in clause (a) of sub-section (1) has been received&nbsp;and shall be made in such form and verified in such manner as may be prescribed. The legislature has used word shall, therefore, as per the provisions, the application must be filed within the specified time.
However, looking to the intention behind the introduction this new penalty regime, as discussed supra, we&rsquo;ll find numerous of case laws on this issue in future. Further, department might issue circular to clarify its position on this matter.
<h2>4. Whether the application for granting an immunity from the penalty and prosecution u/s 270AA of the Act in form 68 can filed in case if the penalty has been initiated on account of misreporting of the income?</h2>
In nutshell, the answer is yes and the same is explained as under;
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Provision
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Analysis
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Section 270AA(1) provides that &ldquo;An assessee may make an application to the Assessing Officer to grant immunity from&nbsp;imposition of penalty under section 270A&nbsp;and initiation of proceedings under section 276C or section 276CC, if he fulfils the following condition&hellip;&rdquo;
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Section 270AA(1) entitle the assessee to file an application before the AO to grant immunity from&nbsp;the imposition of penalty under section 270A.&nbsp;Consequently, this section provides that the application for immunity can be filed irrespective of fact that whether the penalty has been initiated on account of under-reporting of income or misreporting of income.
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Section 270AA(3) provides that The&nbsp;Assessing Officer shall, subject to fulfilment of the conditions specified in sub-section (1) and after the expiry of the period of filing the appeal as specified in clause (b) of sub-section (2) of section 249, grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, where the proceedings for&nbsp;penalty under section 270A has not been initiated under the circumstances referred to in sub-section (9) of the said section 270A.
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This provision snatches away the discretionary power of the AO and mandate that if the penalty has been initiated on account of under-reporting of income and the preconditions to make an immunity application has been fulfilled, it is mandatory on the part of the AO to grant an immunity.
However, the hidden language of this provisions is that in case, if the penalty has been initiated on account of under-reporting of income in consequence of misreporting, then the AO may his own discretion, grant an immunity.
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Section 270AA(4) provides that the Assessing Officer shall, within a period of one month from the end of the month in which the application under sub-section (1) is received, pass an order accepting or rejecting such application:
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This provision provides that the Order accepting or rejecting the application of the assessee shall be passed by the AO within the period of one month from the end of the month in which the application is received.
Therefore, the combined reading of subsection 1 and subsection 4 provides that that assessee can make an application under section 270AA for requesting to granting an immunity from penalty Initiated in consequence of misreporting of income. However, in such cases, the AO may his own discretion either may accept or reject the application.
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<h2>5. Whether the assessee can file an application u/s 273A of the Act before the Pr. CIT if the application of the assessee has been rejected by the AO u/s 270AA?</h2>
The answer is Yes. The assessee can still put an application before the Pr. CIT u/s 273A of the Act to reduce or waive penalty, etc. even if his application to grant immunity u/s 270AA(1) has been rejected by the AO. In fact, section 273A also contains the reference of section 270A.
<h2>6.&nbsp; In the case of misreporting of income, whether the AO have the powers to reduce penalty percentage under Section 270AA?</h2>
The answer is No. Section 270AA clearly provides that The AO shall, within a period of one month from the end of the month in which the application under sub-section (1) is received, pass an order
<ul>
<li>accepting or</li>
<li>rejecting such application</li>
</ul>
Entire section 270AA of the Act does not empower the AO to reduce the penalty in the case of misreporting of the Income. Therefore, the AO shall either accept an application or reject an application.
Conclusion
We, the taxpayers and tax professionals, must welcome this less litigation step of our Legislatures. Every new law requires time to get mature for smooth implementation and till that, it is our duty to draw the interpretation of these new provisions in accordance with their intention and purpose behind the introduction.

Penalty under section 270A immunity u/s 270AA of Income Tax Act - Practical Issues

270A penalty, immunity u/s 270AA, income tax penalty waiver

On 15th November, 2021 the Government extended the due date of linking of UAN with AADHAAR to 01-Dec-2021.
The relevant cirulcar is as under:
<a title="UAN Circular" href="https://1drv.ms/b/s!ApU2N0J4rEzogcUSP3QSGfX6PFZS5A?e=SUMCii" target="_blank" rel="noopener">UAN Circular</a>

Due date for seeding of AADHAAR with UAN extended

PAN AADHAAR UAN linking, PAN Linking

On 11th October 2021, CBDT issued vide Notification No.119/2021/F. No. 225/76/2021-ITA.I exempting certain non-resident from furnishing of the Income Tax Return for the AY 2021-22 and onwards subject to fulfilment of certain conditions. The class of person and corresponding conditions are stated as under:
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Sr. No.
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Class of Person
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Conditions
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1
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(i)&nbsp; a&nbsp; non-resident,&nbsp; not&nbsp; being&nbsp; a company; or
(ii) a foreign company
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(i)&nbsp; &nbsp;The&nbsp; said&nbsp; class&nbsp; of&nbsp; persons&nbsp; does&nbsp; not&nbsp; earn&nbsp; any&nbsp; income&nbsp; in India,&nbsp; during the previous&nbsp; year,&nbsp; other&nbsp; than the income&nbsp; from investment&nbsp; in&nbsp; the&nbsp; specified&nbsp; fund referred&nbsp; to in sub-clause&nbsp; (i) of&nbsp; clause&nbsp; (c)&nbsp; of Explanation to&nbsp; clause&nbsp; (4D)&nbsp; of&nbsp; section&nbsp; 10&nbsp; of the said Act; and
&nbsp;
(ii)&nbsp; The&nbsp; provisions&nbsp; of&nbsp; section&nbsp; 139A&nbsp; of&nbsp; the&nbsp; said&nbsp; Act&nbsp; are&nbsp; not applicable&nbsp; to&nbsp; the&nbsp; said&nbsp; class&nbsp; of&nbsp; persons subject&nbsp; to&nbsp; fulfillment of&nbsp; the&nbsp; conditions&nbsp; mentioned&nbsp; in&nbsp; sub-rule &nbsp;(1)&nbsp; of&nbsp; rule&nbsp; 114AAB of&nbsp; the&nbsp; Income-tax&nbsp; Rules,&nbsp; 1962&nbsp; (hereinafter&nbsp; referred&nbsp; to&nbsp; as &ldquo;said rules‟)
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2
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a&nbsp;&nbsp;&nbsp; non-resident being&nbsp;&nbsp;&nbsp; an eligible foreign investor
</td>
<td width="270">
(i)&nbsp; The&nbsp; said&nbsp; class&nbsp; of&nbsp; persons,&nbsp; during&nbsp; the&nbsp; previous&nbsp; year,&nbsp; has made&nbsp; transaction &nbsp;only&nbsp; in&nbsp; capital&nbsp; asset&nbsp; referred&nbsp; to&nbsp; in&nbsp; clause (viiab)&nbsp; of&nbsp; section&nbsp; 47&nbsp; of&nbsp; the&nbsp; said&nbsp; Act,which&nbsp; are&nbsp; listed on&nbsp; a recognised&nbsp;&nbsp; stock&nbsp;&nbsp; exchange&nbsp;&nbsp; located&nbsp;&nbsp; in&nbsp;&nbsp; any&nbsp;&nbsp; International Financial Services Centre and the consideration on transfer of such capital asset is paid or payable in foreign currency;
&nbsp;
(ii)&nbsp; The said&nbsp; class&nbsp; of&nbsp; persons&nbsp; does&nbsp; not&nbsp; earn&nbsp; any&nbsp; income&nbsp; in India,&nbsp; during&nbsp; the&nbsp; previous&nbsp; year,&nbsp; other&nbsp; than&nbsp; the&nbsp; income&nbsp; from transfer of capital asset referred to in clause (viiab) of section 47 of the said Act; and
&nbsp;
(iii)&nbsp; &nbsp;The provisions&nbsp; of&nbsp; section&nbsp; 139A&nbsp; of the&nbsp; said&nbsp; Act are&nbsp; not applicable&nbsp; to&nbsp; the&nbsp; said&nbsp; class&nbsp; of&nbsp; persons&nbsp; subject&nbsp; to&nbsp; fulfillment of the conditions mentioned in sub-rule (2A) of rule 114AAB of the said rules
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&nbsp;
&nbsp;

CBDT conditionally exempts certain non-residents from furnishing ITR

CBDT Circular, Non Resident Return, Income Tax on Non Resident

In the recent judgement, the Hon'ble Guahati High Court set aside the Circular and directed the GST department to allow the Refund under inverted duty structure.&nbsp;
In the instant case, the assessee obtains its input supplies either from the manufacturer, or from some other authorized dealer and makes the output supplies to a Government Department or PSU or a Research and Educational Institute within the NE Region. The tax rate applicable in respect of a supply made to a Government Department, PSU or a Research and Educational Institutes within the NE Region is subjected to a partial exemption of the GST under Notification&nbsp;45/2017-GST (Rate) dated 14.11.2017 of the Government of India in the Ministry of Finance, Department of Revenue. The Notification 45/2017-Central Tax (Rate) dated 14.11.2017 is issued under Section 11(1) of the CGST Act of 2017 and provides that on the recommendation of the GST Council, the goods specified in column(3) of the table therein are exempted from the so much of the central tax leviable thereon under Section 9 of the Act as in excess of the amount calculated at the rate of 2.5% in respect of supplies to the institutions specified in the corresponding entry in column(2) of the said table.
Section 54(3)(ii) provides as under:
<blockquote>
54(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:
Provided that no refund of unutilised input tax credit shall be allowed in cases other than&mdash;
(i) zero-rated supplies made without payment of tax;
(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified50 by the Government on the recommendations of the Council:
</blockquote>
Then, the CBEC issued a circular vide Circular No.135/05/2020 - GST Dated the 31st March, 2020 which clarifies certain issues related to refunds and the relevant para, which is under the dispute is as under:
<blockquote>
3.2 It may be noted that refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act. It is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same.
The hon&rsquo;ble High Court carefully examined the provisions of the Section 11, Section 54, Section 168 and provisions of the applicable Notification No. 45/2017-GST (Rate) dated 14.11.2017 and concluded as under:
24. Accordingly, we are to conclude that in the instant case the input supplies and the output supplies made by the petitioner assessee are not governed either by a nil rate of tax nor it is governed by fully exempted rate of tax and, therefore, the refund provided under Section 54(3)(ii) would be applicable in respect of the difference between the rate of tax of input supplies and the rate of tax on output supplies. In other words, the provisions for refund of the unutilized input tax credit under Section 54(3)(ii) of the CGST Act of 2017 would be applicable in case of the petitioner assessee.
26. When we read the provisions of paragraph 3.2 of the circular No.135/05/2020-GST dated 31.03.2020 vis a vis, the provisions of Section 54(3)
27. The law in this respect is settled to the extent that whenever there is a conflict between the provisions of a statutory Act and that of a notification or circular issued by an administrative authority, the provisions of the statutory Act would prevail over such conflicting provisions of a notification or a circular of an administrative authority. The said principle of law is so well entrenched that we are not required to refer to any specific judgment on the said point of law and it is a well accepted principle of law. The further implication of such conflict between the provisions of a statutory Act and that of a notification or circular by an administrative authority has been interpreted by the Supreme Court in a plethora of decisions that the provisions of such notification or circular, which would be in conflict with the provisions of a statutory Act, would have to be ignored and not taken into consideration for the purpose of arriving at any such decision
33. Consequently, in view of the clear unambiguous provisions of Section 54(3) (ii) providing that a refund of the unutilized input tax credit would be available in the event the rate of tax on the input supplies is higher than the rate of tax on output supplies, we are of the view that the provisions of paragraph 3.2 of the circular No.135/05/2020-GST dated 31.03.2020 providing that even though different tax rate may be attracted at different point of time, but the refund of the accumulated unutilized tax credit will not be available under Section 54(3)(ii) of the CGST Act of 2017 in cases where the input and output supplies are same, would have to be ignored.
</blockquote>
Citation:
Case No. : WP(C)/3878/2021

High Court set aside GST circular and directed to allow the Refund under inverted duty structure

CBIC Circular read down, GST Refund, inverted duty refund

The Hon&rsquo;ble Supreme Court dismiss the petition filed by an NRI, whose stay in India was involuntary extended on account of Covid-induced lockdown and suspension of international air travel, challenging the Circular issued by the CBDT, alleging that it had placed him in the pernicious position of losing his &lsquo;non-resident status&rsquo; for the purpose of Income Tax Act, 1961.
The Court stated that there was a transport bubble system created for such passengers, which the petitioner could have availed. The Court Further noted that:
<blockquote>
&ldquo;We won&rsquo;t entertain such petition unless and until you show us that you are completely powerless and confined to the shores of this country, then only we will consider the matter from the stand point of Article 32 but if this is the situation, the transport bubble was created from July 1 onwards and yet you chose not to avail, that is the matter to go into individual cases,&rdquo;
</blockquote>
Author Remarks
It is noteworthy to state here that the CBDT on 3rd March 2021 has issued a circular (No. 2/2021) wherein the board has explained the legal position with respect to residential status considering the provisions of the Income Tax Act as well the provisions of the DTAAs.
The Board has firm view that there should be no case of double non taxation. However, if there is any case of double taxation, then the board will entertain the applications of such Individual. The Form / Application for that purpose has been prescribed in the Circular itself.

Supreme Court dismisses the petition challenging CBDT Circular by the NRI who stuck in India due to Covid-19

Supreme Court Case, NRI Taxation, Non Resident Taxation, NRI Status

Mumbai ITAT held that an assessee shall be entitled to claim deduction of any interest payable on capital borrowed by him for acquiring, constructing, repairing, renewing or reconstructing a property for claiming deduction of interest under section 24(b) and there is neither any precondition nor any eligibility criteria prescribed that assessee should have taken possession of property so purchased or acquired by him.
Section 24 provides as under:
<blockquote>
24. Income chargeable under the head &ldquo;Income from house property&rdquo; shall be computed after making the following deductions, namely: - (a). ..................................................................................................................... (b). Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:
</blockquote>
Considering the above provision, the Tribunal held that
<blockquote>
Although, as per the plain literal interpretation of Sec. 24(b) of the Act there is no bar on an assessee to claim deduction of interest payable on a loan taken for purchasing a residential property, though, the possession of the same might not have been vested with him, however, even otherwise the logic given by the CIT(A) for declining the aforesaid claim of deduction of the assessee clearly militates against the mandate of Sec. 22 to 24 of the Act. Accordingly, as in the case before us the assessee had admittedly paid interest of Rs. 2,69,842.12 on the capital that was borrowed by him for acquiring the property in question, which was duly evidenced on the basis of the certificate that was filed in the course of the assessment proceedings, therefore, we are unable to concur with the lower authorities who had declined his aforesaid claim for deduction of interest under Sec. 24(b) of the Act. We, thus, not finding favor with the view taken by the CIT(A) therein set-aside his order and direct the A.O to allow the assessee‟s claim for deduction of Rs. 2 lac under Sec. 24(b) of the Act.
</blockquote>
Citation: ITA No.4831/MUM/2019

Possession is not precondition to claim interest deduction under section 24(b)

interest on housing loan, interest deduction on home loan, tax saving 

On 6th September 2021, CBDT has notified another exclusion to case where Assessment Order not to be passed under faceless assessment regime.
The Board has notified that Assessment Orders in cases where pendency couldn&rsquo;t be created on ITBA because of technical reasons or cases not having a PAN shall not be passed by the National Faceless Assessment Centre under section 144B.
Earlier, the CBDT vide instructions dated 13th August 2020 has excluded following cases from the Faceless assessment:
<ol style="list-style-type: lower-roman;">
<li>Assessment orders in cases assigned to Central Charges. </li>
<li>Assessment orders in cases assigned to International Tax Charges.</li>
<li>(New Category) Assessment Orders in cases where pendency could not be created on ITBA because of technical reasons or cases not having a PAN, as the case may be.&nbsp;</li>
</ol>
&nbsp;
Ref: CBDT office order no. F No. 187/3/2020-ITA-I dated 6th Sep. 2021.

List of cases to be excluded from the Faceless Assessment

faceless assessment, income tax, e assessment, faceless appeals

The Rule-59(6) has been inserted vide Notification No. 1/2021 dated 1st January 2021, and this rule provides for restriction in filing of GSTR-1 in cases where GSTR-3B for the previous two monthly tax-periods is not filed by monthly filers or GSTR-3B for the previous quarterly tax period is not filed by quarterly filers.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Now, GSTN has issued an update to inform taxpayers that this rule will be implemented on GST Portal with effect from 1st September, 2021.
The system will check whether taxpayers have done filing of GSTR-3B as per Rule 59(6) before allowing taxpayers to file GSTR-1. This check will operate on clicking the SUBMIT button of GSTR-1 and the system will give an error message if the condition of Rule-59(6) is not met.
Cosequently, taxpayer would not be able to transfer the credit as he could not file the GSTR-1/IFF.

Implementation of Rule 59(2) on GST portal and consequences

Rule 59(2) of GST, non filing of GSTR 3B

In this case, the 11 bank accounts of the taxpayer was provisionally attached by the GST Department.
company had filed its objections&nbsp;qua&nbsp;the order of attachment, which were rejected on 18-2-2021. It is in this backdrop that the petitioner-company has approached this Court for interim directions for lifting the provisional attachment so that the subject bank accounts could become operable and the petitioner-company is not only able to pay the salaries and other statutory dues concerning its employees but is also able to pay the amounts claimed by the respondents.
It was not in dispute that the respondents have not carried out an assessment, as yet and also it was not in dispute that the petitioner-company has not made a self-assessment of the tax dues, if any, payable by it.
Considering the all relevant facts of the case, the Hon&rsquo;ble High Court directs as under:
<blockquote>
5. We also make it clear that Rs. 2.00 crores which the petitioner-company, for the moment, has been permitted to collect from the 11 bank accounts will be only used to pay the salaries of the employees whose details have been given in the affidavit of Mr. Singh.
</blockquote>
Citation: W.P.(C) NO. 2435 OF 2021, CM NO. 7083 OF 2021 Delhi High Court

High Court permits the Taxpayer to collect 2 crores from provisionally attached bank accounts to pay salaries of employees

bank account attachment, GST department attached bank account

The Income Tax Appellant Tribunal finds Assessee's reasons behind filing of TRC before CIT(A) instead of Assessing Officer is justifiable
In this case, the Assessee-Individual, a non-resident, in his return of income for AY 2014-15 sought to avail special rates of tax on income from fixed deposits and bank deposits under the India-USA DTAA
Assessee's claim was denied by the AO as the Assessee failed to furnish TRC and information in Form No. 10F under Rule 21AB during the course of assessment proceedings
Assessee's furnished TRC&nbsp;and Form No. 10F as additional evidence before CIT(A) who also rejected Assessee's claim due to delay in furnishing&nbsp;TRC&nbsp;and Form No.10F by holding that Rule 21AB casts an obligation&nbsp;on the assessee to&nbsp;maintain and furnish the documents, therefore, the said information ought to have been available with the Assessee at the time of filing of the return of income itself and was required to furnish&nbsp;TRC and Form No.10F and thus, held that the Assessee failed to comply with the mandate of Section 90(4)/(5).
The Hon'ble ITAT Directs the Assessing Officer to determine the taxability on interest income as per the special rate of tax under the India-USA DTAA.
Rule 21AB(2A) provides as under:
<blockquote>
<div>(2A) The assessee shall keep and maintain such documents as are necessary to substantiate the information provided under sub-rule (1) and an income-tax authority may require the assessee to provide the said documents in relation to a claim by the said assessee of any relief under an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A, as the case may be.]</div>
</blockquote>
<div>The Tribunal considered the facts of the case at length and held as under:</div>
<div>
<blockquote>
After perusing the aforesaid facts, we are of the considered view that there were justifiable reasons for the assessee in not filing the TRC in the course of the assessment proceedings. But then, we cannot also remain oblivious of the fact that the A.O had declined to apply the special rate of tax as per the DTAA, for the reason, that the assessee had failed to substantiate that the interest income in question was offered by him for tax in his return of income filed in U.S.A. As observed by us hereinabove, the very basis of rejection of the assessee‟s claim for applying of special rate of tax as per the India-USA DTAA by the A.O is absolutely misconceived and in fact misplaced. As stated by the ld. A.R, and rightly so, the assessee was not seeking credit of taxes paid on his income abroad, but was seeking taxing of his interest income as per the special rates on the basis of the India-USA DTAA. Considering the fact that the assessee had filed the TRC with the A.O though after the conclusion of the assessment, coupled with the reasons that had led to delay in obtaining of the same alongwith the Form 10F, we are unable to persuade ourselves to the summarily rejection or in fact discarding of the same by the CIT(A). We, thus, in the backdrop of our aforesaid deliberations, are of the considered view, that as the assessee had filed the TRC and Form 10F, therefore, there was no justification in declining the applying of the special rate of tax qua the interest income on fixed deposits &amp; bank interest...
</blockquote>
Accordingly, the Tribunal allowed the appeal of the assessee and finds Assessee's reasons behind filing of TRC before CIT(A) instead of Assessing Officer is justifiable.
</div>

Delay in furnishing TRC justifiable. ITAT Allows benefit of India-USA DTAA

TRC, non availability of TRC, India US DTAA

Whether the GST Authority can direct the Taxpayer to reverse the ITC before determination of liability u/s 74 of the GST Act?
The Hon'ble Telangana High Court carefully gone through with provisions of the section 74 and observed that:
<blockquote>
19. In our opinion, sub-Section (5) of Section 74 of the Act gives a choice to the tax payer to make any payment, if he is so chooses, but it does not confer any power on the respondents to make a demand as if there has been a determination of liability of the Assessee and demand tax along with interest and penalty.
</blockquote>
&nbsp;The High Court Further observed and concluded that:
<blockquote>
21. Also no advisory jurisdiction is conferred on the respondents to issue any 'advises' of the nature issued to the petitioner by 3rd respondent on 22-1-2021 asking him to pay Rs. 1,17,35,822/- .
22. In our opinion, no tax demand can be issued or raised when investigation is still in progress. The respondents cannot be allowed to put the cart before the horse and collect any tax, interest or penalty before they determine, in an enquiry, after putting the petitioner/assessee of notice, and we are of the opinion that their action is wholly arbitrary and without jurisdiction.
23. Accordingly, the Writ Petition is allowed; the respondents are restrained from coercing the petitioner to make any payment without issuing notice under section 74(1) of the Act and following the procedure therein; and they are directed to refund Rs. 35,00,000/-already paid by petitioner with interest @ 7% p.a from the date of payment till date of refund within four (04) weeks from the date of receipt of a copy of this order.
</blockquote>
Read the Complete judgement as under:
&nbsp;
HIGH COURT OF TELANGANA
Deem Distributors (P.) Ltd. v. Union of India
M.S. RAMACHANDRA RAO AND T. VINOD KUMAR, JJ.
I.A. NO.2 OF 2021 AND WRIT PETITION NO.7063 OF 2021
AUGUST &nbsp;3, 2021&nbsp;
ORDER
The Background facts
M.S. Ramachandra Rao, J. -&nbsp;The petitioner is a partnership firm and is registered under the Telangana GST Act, 2017, CGST Act, 2017 and IGST Act, 2017 and is involved in the business of dealing in goods and services relating to Ferrous waste and scrap, re-melting scrap ingots of iron or steel, flat rolled products of iron or non-alloy steel of a width of 600 mm or hot rolled, not clad, plated or coated etc.
<ol start="2">
<li>In the instant case, the 4th respondent issued a letter dt.25-4-2019 to the petitioner saying that the petitioner had availed input tax credit on the basis of invoices issued by certain suppliers/firms. It is stated in the said letter that the investigations conducted by the departmental officials reveal that the said suppliers/firms are fictitious and are issuing fake invoices with an intent to pass on input tax credit, and it appears that the said credit was availed by the petitioner in a fraudulent manner without receiving any material, and the petitioner was requested to reverse the input tax credit of Rs. 1,52,35,820/- availed on such invoices immediately.</li>
<li>The 3rd respondent sent an intimation of tax ascertained as being payable on 22-1-2021 saying that petitioner is liable to pay Rs. 1,17,35,822/- for the period February, 2018 to March, 2018 and he was being advised to pay it, failing which a show cause would be issued under sub-Section (1) of Section 74 of the Act.</li>
<li>No doubt summons have been issued to the Director of the petitioner firm under section 70 of the Act to give evidence/depose statement and to produce certain purchase orders and to appear on 24-12-2020 and 25-1-2021vide&nbsp;summons dt.22-12-2020 and 22-1-2020 respectively but admittedly investigation against the petitioner is not complete and no notice under Sub-section (1) of Sec.74 of the Act has been issued to it.</li>
</ol>
&nbsp;
Contentions of Counsel for petitioner
<ol start="5">
<li>The petitioner is assailing the conduct of respondents in directing it to remit the amount availed as input tax credit at the stage of summons itself without following due procedure under section 74 of the CGST Act, 2017 (for short 'the Act').</li>
<li>Petitioner contends that to buy peace with the respondent and to avoid coercion, petitioner had paid Rs. 10.00 lakhs on 30-4-2019 and Rs. 25.00 lakhs on 13-9-2019 and the respondents are not entitled to make such a demand.</li>
<li>According to the Counsel for the petitioner, liability cannot be determined by respondents before conducting enquiry when even the investigation is incomplete; any advise or demand by the respondents 3 and 4 can at best be a provisional one; and when no enquiry has been initiated, petitioner cannot be compelled coercively to pay amounts to the respondents and this violates Art.14 and 300-A of the Constitution of India.</li>
</ol>
&nbsp;
I.A.No.1 of 2021 in W.P.No.7063 of 2021
<ol start="8">
<li>On 23-3-2021, in I.A.No.1 of 2021 in W.P.No.7063 of 2021, this Court initially granted interim stay of all further proceedings pursuant to the demand dt.25-4-2019 issued by 4th respondent and also the summons issued to the petitioner, and the said order was also extended on 6-4-2021 and 19-7-2021.</li>
</ol>
&nbsp;
I.A.No.2 of 2021
<ol start="9">
<li>I.A.No.2 of 2021 is filed to vacate the said order.</li>
</ol>
&nbsp;
The stand of the respondents
<ol start="10">
<li>In the counter-affidavit filed on behalf of respondents, it is admitted in para-7 that investigation proceedings are still going on against the petitioner and have not been concluded.</li>
<li>In para-8 of the counter-affidavit, reference is made to the intelligence information obtained from the Assistant Commissioner, Balasore Division, and it is contended that the intelligence passed on by them is very much actionable and on that basis, summons had been issued on 9-9-2019 and statement was recorded on 13-9-2019 from the Director of the petitioner firm.</li>
<li>Though certain allegations are leveled against petitioner in para-10 to 13 of the counter affidavit, they require to be put to the petitioner by way of a notice under section 74 of the Act for the petitioner to respond.</li>
<li>It is admitted in para-15 of the counter-affidavit that no notice for tax demand has been served or raised under section 74 of the Act as the investigation is still in progress and had not reached finality. It is contended that pending investigation, petitioner was advised, before issue of show cause notice, based on the intelligence received from the other Commissionerates to pay the amount of tax along with applicable interest and penalty under section 74(5) of the Act.</li>
<li>In para-18 of the counter-affidavit, it is specifically stated that since investigation is under progress, no notice for a tax demand has been made or raised under section 74 of the Act.</li>
</ol>
The consideration by the Court
<ol start="15">
<li>Section 74 of the Act deals with determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any wilful-misstatement or suppression of facts. It states:</li>
</ol>
"74.&nbsp;Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any wilful-misstatement or suppression of facts:&mdash; (1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to tax specified in the notice.
(2) The proper officer shall issue the notice under sub-section (1) at least 6 months prior to the time limit specified in sub-Section (10) for issuance of order.
(3) Where a notice has been issued for any period under sub-Section (1), the proper Officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for such periods other than those covered under sub-Section (1), on the person chargeable with tax.
(4) The service of statement under sub-Section (3) shall be deemed to be service of notice under sub-Section (1) of Section 73, subject to the condition that the grounds relied upon in the said statement, except the ground or fraud, or any wilful-misstatement or suppression of facts to evade tax, for periods other than those covered under sub-Section (1) or the same as are mentioned in earlier notice.
(5) The persons chargeable tax may, before service of notice under sub-Section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to 15 per cent of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper office and inform the proper officer in writing of such payment.
(6) The proper officer, on receipt of such information, shall not serve any notice under sub-Section (1), in respect of the tax so paid or any penalty payable under the provisions of this Act or the Rules made thereunder.
(7) Where the proper officer is of the opinion that the amount paid under sub-Section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-Section (1) in respect of such amount which falls short of the amount actually payable.
(8) Where any person chargeable tax under sub-Section (1) pays the said tax along with interest payable under section 50 and a penalty equivalent to 25 per cent of such tax within 30 days of issue of the notice, all proceedings in respect of the said notice shall be deemed to be concluded.
(9) The proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest and penalty due from such person and issue an order.
(10) The proper office shall issue the order under section 9 within a period of five years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilized relates to or within 5 years from the date of erroneous refund.
(11) Where any person served with an order issued under sub-Section (9) pays the tax along with interest payable thereon under section 50 and a penalty equivalent to 50 per cent of such tax within 30 days of communication of the order, all proceedings in respect of the said notice shall be deemed to be concluded. &hellip;."
<ol start="16">
<li>A reading of the above provision indicates that a notice in sub-Section (1) of Section 74 of the Act may be issued by the proper officer if he is of the opinion that the input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful-misstatement or suppression of facts, to the person who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.</li>
</ol>
Sub-Section (5) of Section 74 of the Act, however, enables the person chargeable with tax to, before service of notice under sub-Section (1) of Section 74, pay the tax along with interest payable under section 50 and a penalty of 15% of such tax on the basis of his own ascertainment of such tax or the tax ascertained by the proper officer and inform the proper officer in writing of such payment.
Sub-Section (9) of Section 74 of the Act enables the proper officer to determine the amount of tax, interest and penalty due from such person and issue an order, if the contents of the notice are disputed.
<ol start="17">
<li>The tenor of the counter affidavit filed by respondents suggests that a conclusion appears to have been drawn on the basis of the incomplete investigation already done that petitioner had availed input tax credit and raised invoices by certain fictitious suppliers without actual receipt of goods.</li>
<li>We do not see how, without there being a determination of liability of the petitioner in any enquiry conducted under the Act, a demand for reversal of input tax credit or payment of tax with interest for penalty, can be raised by respondents.</li>
<li>In our opinion, sub-Section (5) of Section 74 of the Act gives a choice to the tax payer to make any payment, if he is so chooses, but it does not confer any power on the respondents to make a demand as if there has been a determination of liability of the Assessee and demand tax along with interest and penalty.</li>
<li>Before ascertainment of liability, the 4th respondent could not have issued the letter dt.25-4-2019 to the petitioner asking him immediately reverse the input tax credit of Rs. 1,52,35,820/- allegedly availed.</li>
<li>Also no advisory jurisdiction is conferred on the respondents to issue any 'advises' of the nature issued to the petitioner by 3rd respondent on 22-1-2021 asking him to pay Rs. 1,17,35,822/- .</li>
<li>In our opinion, no tax demand can be issued or raised when investigation is still in progress. The respondents cannot be allowed to put the cart before the horse and collect any tax, interest or penalty before they determine, in an enquiry, after putting the petitioner/assessee of notice, and we are of the opinion that their action is wholly arbitrary and without jurisdiction.</li>
<li>Accordingly, the Writ Petition is allowed; the respondents are restrained from coercing the petitioner to make any payment without issuing notice under section 74(1) of the Act and following the procedure therein; and they are directed to refund Rs. 35,00,000/-already paid by petitioner with interest @ 7% p.a from the date of payment till date of refund within four (04) weeks from the date of receipt of a copy of this order.</li>
<li>It is however made clear that respondents can proceed with the investigation as well as enquiry under the provisions of the Act against the petitioner and act strictly in accordance with the Act.</li>
<li>I.A.No.2 of 2021 is dismissed. No costs.</li>
<li>Consequently, miscellaneous petitions, pending if any, shall stand closed.</li>
</ol>

Whether the GST Authority can direct the Taxpayer to reverse the ITC before determination of liability u/s 74 of the GST Act?

GST Reversal, Show cause u/s 74, gst assessment, gst audit

<center>
Petitioner / Applicant: FR TRADE LINKS
Respondent: THE STATE TAX OFFICER AND OTHERS
Court: Kerala High Court
Date: Aug 5, 2021
Order No.: WP(C) NO. 28917 OF 2020
</center><center>ORDER</center>
Heard both sides.
2. The petitioner, a registered person, by this petition, is challenging the orders at Exts.P8 and P12 cancelling his certificate of registration under the CGST/SGST Act and rejection of his application for revocation of cancellation of registration certificate.
3. Learned counsel appearing for the petitioner drew my attention to the order of cancelllation of registration and submitted that respondents have invoked provisions under Sub Section (2) of Section 29 of the CGST/SGST Act, 2017 for cancellation of registration of the petitioner. However, the reasons stated in the impugned order at Ext.P8 are not in consonance with the powers conferred by the respondents for cancellation of registration. It is further submitted by the learned counsel appearing for the petitioner that the order for rejection of application for revocation of cancellation also suffers from non-application of mind and it is an unreasoned order, without mentioning any reason for rejection of application for revocation of cancellation. Learned counsel appearing for the petitioner submitted that the petitioner has honestly given all necessary particulars in the application for registration of (Ext.P17) and no case is made out by the respondents that the registration has been obtained by the petitioner by means of fraud, willful misstatement or suppression of facts.
4. Learned counsel appearing for the petitioner, by placing his reliance on judgment of this Court in the matter of&nbsp;P.Y. Mustaffa, Kanakonam Traders, Erattupetta V. Additional Sales Tax Officer, Pala &amp; Another [(2002) 10 KTR 192]&nbsp;submitted that the matter of registration is merely regulatory in nature and no overbearing importance can be given to minor lapses in such matter.
5. Learned Government Pleader opposed the petition by placing reliance on the counter affidavit. She submitted that several inspections were conducted by the respondents at the principal place of business of the petitioner. It is submitted that during inspection, it was found that no business was conducted at the place of principal business centre. The building was not having any building number or shutter and no books of accounts were placed at that place of principal business. The door was fully opened and some water tanks were kept. The building was found to be having no change in structure during second inspection. In second inspection, it was found that some stock was kept at the new premises near the house of the petitioner, but that place was not added in the GST registration and therefore, it was suspected to be a bogus. The business in the name and style of 'F.R Trade Links' was not found functioning in the given address and therefore, the impugned action was taken. Learned Government Pleader tried to place reliance on some other aspects which are unfortunately not mentioned as a reason for cancellation of registration of the petitioner and therefore, it is not necessary to elaborate the same while incorporating the argument of the learned Government Pleader.
6. I have considered the submissions so advanced and also perused the materials placed before me.
7. The impugned order of cancellation of registration of the petitioner is dated 02.11.2020 and is at Ext.P8. Perusal of that order shows that registration is cancelled by invoking provision of Sub Section (2) of Section 29 of the CGST Act, 2017. It is worthwhile to reproduce provisions of Sub Section (2) of Section 29 of the CGST Act, which reads thus:-
&ldquo;29. Cancellation or suspension of registration:
(1) xxxxxxxxxxx
(2) The proper officer may cancel the registration of a person from such date, including any retrospective date, as he may deem fit, where, -
(a) a registered person has contravened such provisions of the Act or the rules made thereunder as may be prescribed; or
(b) a person paying tax under Section 10 has not furnished returns for three consecutive tax periods; or
(c) any registered person, other than a person specified in clause (b), has not furnished returns for a continuous period of six months; or
(d) any person who has taken voluntary registration under Sub-Section (3) of Section 25 has not commenced business within six months from the date of registration; or
(e) registration has been obtained by means of fraud, willful misstatement or suppression of facts;
Provided that the proper officer shall not cancel the registration without giving the person an opportunity of being heard.
Provided further that during pendency of the proceedings relating to cancellation of registration, the proper officer may suspend the registration for such period and in such manner as may be prescribed.&rdquo;
It is seen from the foregoing provision of law that the proper officer can cancel registration of a person for the reasons stated in Sub Section (2) of Section 29 of the CGST Act. It is not the case of the respondents that the petitioner had contravened any of the provisions of the Act or Rules made thereunder, inasmuch as, no such allegation is levelled against the petitioner either in the show case notice (Ext.P5) nor such accusation is made against him in the impugned order at Ext.P8. My attention is not drawn to contravention of any provision of the Act or Rules framed thereunder by the learned Government Pleader. Similarly, there are no allegations either in the show cause notice or in the impugned order that the petitioner has failed to furnish returns for three consecutive tax periods or that he failed to file returns for a continuous period of six months. It is not averred either in the show cause notice or in the impugned order at Ext.P8 that the petitioner has taken voluntary registration under Sub Section (3) of Section 25, but has not commenced the business within six months from the date of such registration. Now the only provision which remains and empowers the respondent to cancel the registration is indulgence in fraud, willful misstatement or suppression of facts. Unfortunately, this is also not the case sought to be made out by the proper officer in the show cause notice at Ext.P5 or the impugned order at Ext.P8.
8. For better understanding of the matter, let us put on record the relevant portion of the show cause notice making out and conveying the case of the department to the petitioner for soliciting his reply. The relevant portion of the show cause notice (Ext.P5) reads thus:-
&ldquo;Whereas on the basis of information which has come to my notice, it appears that your registration is liable to be cancelled for the following reasons:
1. As per the intelligence squad report your business place is situated in the first floor of the three storied building which is partially completed with structure only and no building number affixed by the local authority.
You are hereby directed to furnish a reply to the notice within seven working days from the date of service of this notice.&rdquo;
It is thus clear that the allegation levelled against the petitioner by the respondent department is to the effect that business place is situated in a building which is partially completed with structure only and no building number is affixed by the local authority.
9. Now let us put on record the reason mentioned in the order for cancellation of registration dated 29.09.2020 (Ext.P8), which reads thus:-
&ldquo;1. As per the new registration case verification report submitted by the inspector of this office dated 14/10/2020 and also the report of ASTO, Squad2, Intelligence wing, Kottayam at Pala dated 11.08.2020, it is observed that F R TRADE LINKS, 6/580-E, THEKKEMURANJOOR BUILDING, ERATTUPETTA &ndash; VAGAMON ROAD, ERATTUPETTA, Kottayam, Kerala, 686 121 with GSTIN 32CMEPR0466B1ZG is not functioning in the address given in the registration application at the time of registration. They also reported that, the business place is situated in the first floor of the three storied building which is partially completed with structures only. Said business place is an open space in pillars, having no partition walls or shutter. No building number is seen affixed by the local authority and no stock in the business premises. There is only a banner with phone number &amp; GSTIN in the wall of three storied building. In the circumstances your contention against the SCN issued on 29/09/2020 is not acceptable. Hence the registration is canceled U/s.29(2) of the CGST/SGST Act 2017.&rdquo;
10. It is thus clear that in consonance with the allegation levelled in the show cause notice, the impugned order is passed for the reason that the business place is situated in a building which is partially completed with structures only and no building number is affixed by the local authority. Even otherwise, the respondent department cannot go beyond the show cause notice issued by it to the petitioner, requiring the petitioner to defend the case against him as conveyed to him in the show cause notice. Thus, this Court will have to examine whether the reasons stated in the show cause notice, which is reproduced in the foregoing paragraph, can be construed as reason for cancellation of registration as per provisions of Sub Section (2) of Section 29 of the CGST Act, 2017. The answer to this question is found to be in negative, because Sub section (2) of Section 29 does not envisage the contingency of situation of place of business in a partially completed building having no building number affixed on it by the local authority. Such is not the reason as contemplated by Sub section (2) of Section 29, authorising the proper person to cancel the registration of a person in exercise of the powers conferred by the relevant provision of the statute. Consequently, the impugned order at Ext.P8 cannot stand in the scrutiny of law. Consequently, the order of rejection of application for revocation of cancellation is also illegal and cannot stand in the scrutiny of law.
11. At this juncture, it is apposite to take note of Rule 25 of the CGST/SGST Rules. According to the provision of this Rule, where the proper officer is satisfied that the physical verification of the place of business of a person is required due to failure of Aadhaar authentication or due to not opting for Aadhaar authentication before grant of registration, or due to any other reason after the grant of registration, the proper officer may get verification of the place of business, in the presence of the said person, done. Thereafter, the verification report along with the other documents, including photographs, are required to be uploaded in FORM GST REG 30 on the common portal within a period of fifteen working days following the date of such verification.
12. In the case in hand, the State Tax Officer, Pala is the proper officer for assessment and he is a competent officer to invoke provisions of Rule 25. The State Tax Officer, Pala is also the registering authority of the petitioner. This officer has issued a notice to cancel the registration of the petitioner in FORM GST REG 17, based on the report of the intelligence officer. It is clear that the State Tax Officer, Pala has himself did not conduct any enquiry as contemplated in Rule 25. He proceeded further to cancel registration, despite the fact that the petitioner was aggrieved by the report of the intelligence officer as seen from the reply tendered by the petitioner. The proper officer, as such, ought not to have proceeded ahead with cancellation of the registration on the basis of report of the intelligence officer. The proper officer ought to have independently assessed the situation, particularly, when the petitioner had produced the receipt of the building tax from the local authority (Ext.P3) to prove the authenticity of his stand. This seems to have been not done by the proper officer. Without considering this document at Ext.P3, the registering authority had cancelled the registration. The application for revocation of cancellation of registration is also rejected by the respondent without proper enquiry in the matter.
In the result, the writ petition is allowed. The impugned orders at Exts.P8 and P12 are quashed and set aside. Consequently, the respondents are directed to restore the registration of the petitioner.

Cancellation of GST Registration on report of intelligence without making any independent enquiry by the officer is invalid: High Court

gst registration cancellation, gst cancelled, suo moto cancellation

Hon'ble Madhrai Bench of the Madras High Court set aside the assessment order passed u/s 153A of the Income Tax Act, 1961. The issue, inter-alia, include non compliance of mandatory requirements of Section 65B of Indian Evidence Act, 1872 in respect of electronic records.
 
The counsel of petitioner contend that, when the entire assessment has been framed only on the basis of the so-called electronic record which are said to be copies of Excel Sheet, Excel work note book etc., non compliance of Section 65B of the Indian Evidence Act renders the document inadmissible in the eye of law as held by the Supreme Court in the judgment reported in Anvar P. V. vs. P.K.Basheer and others reported in (2014) 10 SCC 473.
 
Following the above judgement, the HC directed as under:
 
<blockquote class="wp-block-quote">
c)the respondent should strictly comply with Section 65-B of the Indian Evidence Act if the respondent wants to use the electronic document by way of secondary evidence;
</blockquote>
 
Citation:
 
W.P(MD)Nos.11261, 11271, 11272, 11273 and 11765 of 2021 BEFORE THE MADURAI BENCH OF MADRAS HIGH COURT

HC set aside assessment framed on the basis of electronic record in violation of requirements of Section 65B of Indian Evidence Act, 1872

65B of evidence act, income tax search, electronic evidence, 65B

Government has decided to provide income-tax exemption to ex-gratia payment received by family members of a person- - From the employer of such person (or) - From other person on the death of the person on account of COVID-19 during FY 2019-20 and subsequent years. Exemption is as under: &bull; Received from Employer - No limit &bull; Received from any other person - Rs. 10 Lakhs (in aggregate from all persons)
 
Author's Note: The death of the person should be on account of COVID-19. So, all the treatment related papers, hospital bills, medicine prescriptions etc. should be preserved in order prove cause of death. However, this depends upon what provisions are to be proposed in the Act.
 
Necessary legislative amendments for the above decisions shall be proposed in due course of time.
 
Source: PIB dated 25-06-2021

Government announces tax exemption for expenditure on COVID-19 treatment and ex-gratia received on death due to COVID-19.

COVID19 relief in income tax, tax exemption for COVID-19 expenditure, 

Due to technical issues, several valid returns (upto assessment year 2017-18) were not processed within the time limit stipulated under section 143(1) of the Income tax Act, 1961. This led to denial of legitimated income tax refund of the taxpayers.
 
Therefore, To mitigate genuine hardship being faced by the taxpayers on this issue, the CBDT, by virtue of its powers under section 119 of the Act, relaxed the time-frame u/s 143(1) and directs that all validly filed returns upto AY 2017-18 with refund claims which could not be processed u/s 143(1) can be processed now with the prior approval of Principal CCIT / CCIT Concerned. The intimation to such processing can be sent to assessee concern by 30th September 2021.
 
For more details, please refer <a href="https://1drv.ms/b/s!ApU2N0J4rEzogasG7_CzrAudHsAr1A?e=ubplo0" target="_blank" rel="noreferrer noopener">CBDT circular dated 5th July 2021.</a>

CBDT extended time for processing income tax refunds for the AY 2017-18 and earlier years

procession of return, ITR intimation u/s 143(1), income tax demand 

<h2>Mandatory to file Annual Return in Form FC-4 and time limit to file Form FC-4 return</h2>
 
Rule 17(1) of Foreign Contribution (Regulation) Rules, 2011 mandates that every person who receives foreign contribution under the Act, shall submit a signed or digitally signed report in electronic form in Form FC-4 with scanned copies of income and expenditure statement, receipt and payment account and balance sheet for every financial year beginning on the 1st day of April within nine months of the closure of the financial year.
 
Therefore, the Form FC-4 are required to be filed on or before 31st December for the previous financial year.
 
For the FY 2019-20, the original due date for filing of FC-4 was 31st December 2020 (as per rule 17(1)). However, the same was extended to 30th June 2021 through vide <a href="https://fcraonline.nic.in/home/PDF_Doc/fc_notice_24112020.pdf" target="_blank" rel="noreferrer noopener">Public Notice dated 23rd November, 2020</a>.
 
Rule 17(8) also mandate that NIL report shall be furnished even if Foreign Contribution was received during a financial year.
 
<h2>Documents to be submitted with Annual Return in Form FC-4</h2>
 
<ol>
<li>Certificate from the Chartered Accountant (not required if no Foreign Contribution received or utilised during the financial year)</li>
<li>Audited Accounts includes Balance Sheet, income &amp; expenditure account and receipt &amp; payment account (not required if no Foreign Contribution received or utilised during the financial year)</li>
<li>Declaration by chief functionary (Chairperson/President/Secretary/CEO/MD) - this declaration is part of Form FC-4</li>
<li>Copy of statement of account from the bank - where exclusive foreign contribution account is maintained by the person, duly certified by an officer of such bank.
<h2>Late Filing Fees / Penalty of Form FC-4</h2>
 
<a href="https://fcraonline.nic.in/home/PDF_Doc/doc%206-7.pdf" target="_blank" rel="noreferrer noopener">Notification SO 2133(E)</a> dated 16-June-2016 provide the amount of penalty as under.
 
<figure class="wp-block-table">
<table>
<tbody>
<tr>
<th>S.N</th>
<th>Offence</th>
<th>Amount of Penalty</th>
<th>Officer competent for compounding</th>
</tr>
<tr>
<td>1</td>
<td>Non-furnishing of return up to three months after the 31st December every year.</td>
<td>Penalty of 2% of the amount of foreign contribution received during the financial year or Rs. 10,000, Whichever is less.</td>
<td>The Director or the Deputy Secretary in Charge of the Foreign Contribution (Regulation) Act Wing of Foreign Division in the Ministry of Home Affairs.</td>
</tr>
<tr>
<td>2</td>
<td>Non-furnishing of return after three months up to six months after the 31 December every year.</td>
<td>Penalty of 3% of the amount of foreign contribution received during the financial year or Rs. 50,000, Whichever is less.</td>
<td>The Director or the Deputy Secretary in Charge of the Foreign Contribution (Regulation) Act Wing of Foreign Division in the Ministry of Home Affairs</td>
</tr>
<tr>
<td>3</td>
<td>Non-furnishing of return after six months up to one year after the 31 st December every year</td>
<td>Penalty of 4% of the amount of foreign contribution received during the financial year or Rs. 2 Lakh, Whichever is less.</td>
<td>The Director or the Deputy Secretary in Charge of the Foreign Contribution (Regulation) Act Wing of Foreign Division in the Ministry of Home Affairs.</td>
</tr>
<tr>
<td>4</td>
<td>Non-furnishing of return after one year up to two years after the 31 December every year</td>
<td>Penalty of 5% of the amount of foreign contribution received during the financial year or Rs. 5 Lakh, Whichever is less.</td>
<td>The Director or the Deputy Secretary in Charge of the Foreign Contribution (Regulation) Act Wing of Foreign Division in the Ministry of Home Affairs.</td>
</tr>
<tr>
<td>5</td>
<td>Non-furnishing of return after two years up to three years after the 31st December every year.</td>
<td>Penalty of 10% of the amount of foreign contribution received during the financial year or Rs. 10 Lakh, Whichever is less.</td>
<td>The Director or the Deputy Secretary in Charge of the Foreign Contribution (Regulation) Act Wing of Foreign Division in the Ministry of Home Affairs.</td>
</tr>
</tbody>
</table>

<h2>Connect With Us</h2>
 
Have any query? Connect with us at harchandanica@gmail.com or Mobile Number +91 9909880111

</figure>
</li>
</ol>

All about FCRA Annual Return in Form FC-4

FCRA, Annual Return, FC-4 due date, late filing of FC-4 penalty

Merely suspecting on borrowing capacity cannot be ground for addition u/s 68

section 68 addition, addition based on suspicious, income tax survey 

Mumbai ITAT in its very short judgement but made very important observations and held that section 195, is a vicarious liability and its survival entirely depends on survival of the primary tax liability of income, embedded in the related payments, in the hands of the recipient. Once that primary liability stands quashed, as in this case, the very foundation of tax withholding demands under section 195 ceases to hold good in law.
 
In this case the counsel of the assessee pointed out that the very taxability of payments, in respect of which impugned tax withholding demands are raised, have been negated in the hands of the recipient, i.e. Braitrim UK Ltd., by a coordinate bench. A copy of the related order dated 21st August 2019 (in Braitrim UK Ltd. vs. DCIT; ITA Nos. 1750 to 1753/Mum/2015).
 
The full judgment is reproduced as under:
 
Judgment / Order
 
Pramod Kumar, Vice President And Ravish Sood, Member (J)
 
For the Appellant : Vasanti Patel
 
For the Respondents : S.S. Iyangar
 
ORDER
 
Pramod Kumar, Vice President
 
1. By way of these appeals, the assessee appellant has challenged corrections of consolidated order dated 30th January 2014 in the matter of tax withholding demands under section 201 r.w.s. 195 of the Income Tax Act 1961, for the assessment years 2005-06 to 2012-13
 
2. When these appeals came up for hearing, learned counsel for the assessee pointed out that the very taxability of payments, in respect of which impugned tax withholding demands are raised, have been negated in the hands of the recipient, i.e. Braitrim UK Ltd., by a coordinate bench. A copy of the related order dated 21st August 2019 (in Braitrim UK Ltd. vs. DCIT; ITA Nos. 1750 to 1753/Mum/2015) was also placed before us. In this order, the coordinate bench has, inter alia, observed as follows:-
 
13. We have carefully considered the rival submissions and perused the material on record. We find that the assessee is required to give a rebate/discount to the retailers based on the volume/units of sales to garment suppliers achieved by the Braitrim group. Subsequently, the proportionate share of rebate/discount is recovered by the assessee from its group companies, including BIPL, based on the relative sales of those group companies to the respective retailers. The assessee has, accordingly entered into a reimbursement agreement with BIPL, whereby BIPL has acknowledged its obligation to reimburse its proportionate share of the discount/rebate to the assessee based on sale volumes/units achieved by it. As per the Cost Reimbursement Agreement (CRA), such reimbursements are depicted as 'Administration charges' by BIPL in its books of account.
 
14. We find it relevant to refer to the following clauses of the Cost Reimbursement Agreement (CRA) in order to appreciate the nature and characterisation of the amount of reimbursements:-
 
i) that the title to the agreement is described as 'Cost Reimbursement Agreement';
 
ii) that the preamble to the agreement mentions the fact of payment of administration charges by the Assessee to the customer companies in respect of goods supplied by worldwide entities of Braitrim group including BIPL and the purpose of the agreement is to recover such charges by the assessee from BIPL;
 
iii) that Article 3 requires BIPL to compensate the assessee towards the proportionate administration charges in respect of goods supplied to the customer companies/suppliers;
 
iv) that Article 4 prescribes the method of computation of the proportionate share of the administration charges to be borne by BIPL determined as proportion of its sale to customer companies to the total worldwide sales of the Braitrim group; and,
 
v) that Article 5 stipulates that the payments made under the agreement represent reimbursement of administration charges borne by the assessee.
 
15. Therefore, so far as the understanding of the parties to the CRA is concerned, the same has been understood to be in the nature of reimbursement of the rebate/discount passed on by the assessee to the retailers. Factually speaking, it has also been established that there is no mark-up retained by the assessee while recovering from BIPL the rebate/discount given to the retailers. It is also clear that BIPL has also made sales to other independent parties for which no discount/rebate or administrative charges are payable to the assessee company. The aforesaid undisputed features of the arrangement clearly bring out that the transaction in question cannot be construed to be 'royalty' as understood by the income-tax authorities. This becomes even more pertinent once the nature of such payments by BIPL to the assessee has been admitted as such in the assessment of BIPL for assessment year 2007-08
 
16. Pertinently, the assessee stated that the transaction for reimbursement of administrative charges by BIPL to the assessee was subject to transfer pricing proceedings during the assessment year 2007-08, wherein the TPO questioned the commercial expediency of the transaction of payment for administration charges and determined the arm's length price as 'Nil', which was effectuated accordingly by Assessing Officer in the draft assessment order.
 
17. Before the DRP, BIPL raised objections against the draft assessment order, which was based on the order of the Transfer Pricing Officer. The DRP held as under:-
 
"The DRP has carefully considered the order of the TPO, submissions of the taxpayer and objections of the taxpayer. The main issue here is that the assessee has paid to its AEs an amount of ₹ 1,87,30,339 slating that these charges are paid as administration charges. However, as accepted by the taxpayer, these expenses are nothing but reimbursement of expenses incurred by the AE for the discounts to be passed on to the retailers by Braitrim UK. After considering the arguments of the assessee it can be inferred that Braitrim UK negotiates globally with various garment retailers to use the hangers manufactured by Braitrim group companies all over the world. As part of these arrangements/agreements Braitrim UK agreed to pass on the discount at the rate 1% of sale of hangers by Braitrim group of companies to the retailers. As rightly stated by the assessee because of this arrangement the taxpayer is getting business without much effort on advertisement and marketing as evidenced by no expenses on marketing or advertisement debited in the profit and loss account for the FY 2006-07. The Braitrim group companies supply the hangers to the garment manufacturers, which in turn supply to the ultimate retailers in the form of pre-hanged clothes. The assessee also supplied hangers to garment manufacturers within and outside India. Based on the sale of these hangers by the assessee Braitrim UK has to pay to the retailers at the rate of 1% on these sales made by the taxpayer to retailers through garment manufacturers. Before the DRP, the taxpayer also produced invoices raised by third party retailers against Braitrim UK to show that the said discount @ 1% on sale of hangers by the Indian entity was passed on to the retailers.....In view of the above discussion, we are satisfied that the discount given by the AE, Braitrim UK to the retailers is helping the tax payer to get the business without much marketing effort, for which the taxpayer is reimbursing the AE at the rate of 1% of sale of hangers in India, which was ultimately passed on to the retailers by the AE."
 
However, the DRP revised the arm's length price as computed by the TPO on account of the timing difference between the recognition of administration charges/rebate in the books of account of BIPL, vis-&agrave;-vis the amount recognized by the assessee in its accounts; and, accordingly, the assessment was finalised. When BIPL filed appeal before the Tribunal, the Tribunal, while accepting the payments to be reimbursements, restored the issue to the file of the DRP for examination of the reconciliation of invoices raised by the assessee and the invoices recorded by BIPL. The TPO, in response to the remand report called for by the DRP, as directed by this Tribunal, had accepted the contentions of BIPL and found the same to be in order.
 
18. From the aforesaid, it follows that for the assessment year 2007-08 there is a concurrent acceptance of the claim of BIPL that the payments are in the nature of reimbursement by all the authorities, viz. the TPO, the DRP and the Tribunal. Therefore, in the face of such concurrent acceptance of the nature of payment as being a mere reimbursement, it is untenable for the Revenue to contend in the captioned cases that the nature of the amount is otherwise. Therefore, what follows is that the expenses have been incurred by the assessee on behalf of BIPL and the same were merely reimbursed to the assessee. Ostensibly, the contractual responsibility of the rebates to be paid to retailers lies with the assessee. However, since the sales are made by BIPL, the commercial prudence postulates that BIPL bears the ultimate responsibility of such rebates in respect of India sales, and thus the payment of such reimbursements. Admittedly, the liability is definite and crystallised in the books of BIPL, and it merely represents normal discount. Thus, we are inclined to uphold the grievance of the assessee that the payments qualify as a pure reimbursement of expenses and accordingly, not taxable in India. The reimbursements received by the assessee are in respect of specific and actual expenses incurred by the assessee and do not involve any mark-up and the assessee has furnished sufficient evidence to demonstrate the incurrence of expenses. There is thus no good reason to make any addition to income in respect of these reimbursements of expenses. The action of the Assessing Officer, as the learned counsel rightly contends, is on pure surmises and conjectures.
 
19. Here, we would also like to refer to the judgment in the case of AP Moller (supra). Facts of that case were that the assessee was a foreign company engaged in shipping business and was a tax resident of Denmark; that it had agents working for it, who booked cargo and acted as clearing agents for the assessee; and, that in order to help all its agents across the globe, the assessee had set up and maintained a global telecommunication facility called Maersk net system which was a vertically integrated communication system. The agents would pay for the system on pro rata basis. According to the assessee, it was merely a system of cost sharing and the payments received by the assessee from its agents in India were in the nature of reimbursement of expenses. The Assessing Officer, however, did not accept this contention and held that the amount paid by these three agents to the assessee were FTS rendered by the assessee and held them taxable in India under Article 13(4) of the Double Taxation Avoidance Agreement (DTAA) between India and Denmark and brought them to tax at 20% u/s. 115A of the Act. The CIT(A) dismissed the assessee's appeal, but the Tribunal allowed its further appeal. The Hon'ble High Court dismissed the Department's appeal holding that the Tribunal had rightly observed that the Maersknet-communication-system was an automated software based communication system which did not require the assessee to render any technical services; that it was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business; and, that it was part of the shipping business and could not be captured under any other provisions except under the DTAA. The Hon'ble Supreme Court, dismissing the appeal held as under:-
 
"....... the facts that the assessee had its information technology system, that the assessee had appointed agents in various countries for booking of cargo and servicing customers in those countries, preparing documentation, etc., through these agents, that for the sake of convenience of all these agents, a centralised system was maintained to avoid unnecessary cost, that the system comprised booking and communication software, hardware and a data communications network and was, thus, an integral part of the international shipping business of the assessee and ran on a combination of mainframe and non-mainframe servers located in Denmark, that the expenditure incurred for running this business was shared by all the agents and that the systems enabled the agents to co-ordinate cargos and ports of call for its fleet were findings of fact. Once these were accepted, by no stretch of imagination, could the payments made by the agents be treated as fees for technical services. The payments were in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. Neither the Assessing Officer nor the Commissioner (Appeals) had stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Once the character of the payment was in the nature of reimbursement of the expenses, it could not be income chargeable to tax. Moreover, freight income generated by the assessee in the assessment years in question was accepted as not chargeable to tax as it arose from the operation of ships in international waters in terms of article 9 of the DTAA. Once that was accepted and it was also found that the Maersk net system was an integral part of the shipping business which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, and the business could not be conducted without it, it could not be treated as any technical services provided to the agents."
 
20. Quite clearly, payments by way of reimbursement of expenses incurred on behalf of the payer cannot be construed as income chargeable to tax in the hands of the payee, a proposition which is approved by the Hon'ble Bombay High Court in the case of Siemens Aktiengesellschaft (supra). In view of the above discussion, we direct the Assessing Officer not to treat any part of reimbursement of expenses received by the assessee as income of the assessee. The assessee gets the relief accordingly on Ground No. 2 of the aforesaid appeal.
 
3. It is thus submitted that once the primary liability of the recipient has come to an end, vicarious liability of the payer cannot survive. We are urged to quash the impugned demands for this short reason alone.
 
4. Learned Departmental Representative does not dispute the facts stated by the learned counsel, but relies on the orders of the authorities below nevertheless.
 
5. The plea of the learned counsel is indeed well taken. A tax withholding liability, particularly under section 195, is a vicarious liability and its survival entirely depends on survival of the primary tax liability of income, embedded in the related payments, in the hands of the recipient. Once that primary liability stands quashed, as in this case, the very foundation of tax withholding demands under section 195 ceases to hold good in law. We, therefore, quash the impugned demands under section 201(1) r.w.s. 195 as well. The assessee gets the relief accordingly.
 
6. As we part with the matter, we make it clear that the present appeals are disposed of for short reasons discussed above. All other issues raised by the assessee have become infructuous, and are, therefore, dismissed as such.
 
7. In the result, all the appeals are allowed in the terms indicated above. Pronounced in the open court today on the 21st May, 2021.

Once the primary liability of the recipient has come to an end, vicarious liability of the payer cannot survive

section 195 tds, tax on non resident, tds on non resident NRI Taxation

<h2>Facts of the Case</h2>
 
The assessee company is engaged in the business of manufacturing machine tools, textile machines, air conditioning and refrigeration work, casting and job work for air conditioning and humidification, air control equipment and trading in engineering. The original return of income was filed by the assessee on 26/09/2013 and revised return was filed on 14/05/2014 declaring loss of Rs.4,65,01,710/- under the normal provisions of the Act and book profit of Rs.61,77,000/- u/s.115JB of the Act.
 
The assessee company owned a constructed building on a plot of land in the city of Coimbatore. The said land along with the super structure was acquired by the company vide sale deed dated 15.04.1967. During the Financial Year 2012-13 relevant to Asst Year 2013-14, the assessee company proposed to sell the said land along with its super structure and therefore entered into negotiations with various parties. During the negotiations, the company became aware of the fact that post acquisition of the land and the constructed building, the Development Control Regulations Rules (DCR) in the city of Coimbatore had undergone a change. Consequently, the company engaged the services of Dadbhawala Architects, Engineers and Valuers Pvt. Ltd., to examine the amendments in the DCR and furnish a report giving the fair market value of the land, the constructed building and the additional FSI, if any.
 
In the meanwhile, the negotiations for sale of the immovable property in Coimbatore, culminated in an understanding on 15.09.2012 when the prospective purchasers visited the premises of the company. A letter of understanding was executed on the said date by the purchasers. The purchasers agreed on a total consideration of Rs.11,14,00,000/-. Further, the said consideration based on discussions and negotiations was broken up as Rs.5,72,84,600/- for the land, Rs.64,90,400/- for the constructed building and Rs.4,76,25,000/- for the additional FSI. The valuers also submitted three reports giving the fair market value of the land constructed building and the additional FSI on 21.09.2012. As per the report submitted by the valuers, the company had obtained an additional benefit of 0.8 by way of additional FSI. The valuers arrived at a fair market value of Rs. 5,01,79,800/- in respect of additional FSI of 0.8 whereas, the company had arrived at a negotiated price with prospective purchasers‟ for the additional FSI of Rs.4,76,25,000/-.
 
While filing the return of income, the company excluded the sum of Rs.4,76,25,000/- received towards additional FSI from its total income computed under normal provisions of the Act, treating the same as a capital receipt. However, while computing its book profit u/s.115JB of the Act, the said sum of Rs.4,76,25,000/- was included in the book profit.
 
<h2>During the assessment proceeding</h2>
 
The AO observed that FSI attached to the land is neither separable from the said land nor could be treated independently;
 
The availability of increase in FSI is merely a value addition to the land provided by the Government; that any buyer, while purchasing the land will also take over the FSI and that the purchase price is determined by the benefits attached to the land 
 
He further observed that the assessee has neither maintained the land with it and transferred the FSI to a third party nor has transferred the land and FSI to different people.
 
He also observed that FSI is fastened to the land and is not separable there from, except in circumstances where only the FSI is permitted to be sold out by maintaining the title of land with the owner.
 
Accordingly, the AO brought the amount of Rs.4,76,25,000/- shown under the head "transfer of FSI" to tax under the head long term capital gain.
 
<h2>Before the CIT(A)</h2>
 
The ld. CIT(A) observed that assessee had sold the land, super structure situated in the said land and the FSI in lock, stock and barrel to only one purchaser for a total consideration of Rs.11,14,00,000/-. However, taking the help of the valuer, the same was broken into three parts and thereafter, sale consideration to the extent of Rs.4,76,25,000/- has been attributed on account of sale of additional FSI by the assessee.
 
The said additional FSI has not been sold separately as TDR and there has been no separate document for the same.
 
The inseparable FSI had been sold in one single deal by the assessee to the same party.
 
CIT(A) Distinguished the reliance placed on the decision of the Hon'ble Jurisdictional High Court in 370 ITR 325 supra by stating that in that case, the TDR was sold separately by the society after completion of construction as per the available FSI.
 
CIT(A) also observed that in that case, the land and building earlier in possession of the assessee continued to remain with it and even after the transfer of the right or additional FSI, the position did not undergo any change. Whereas, in the instant case, the land and building have been transferred together with additional FSI within a single deal to a single purchaser. 
 
With these observations, the ld. CIT(A) upheld the action of the ld. AO.
 
<h2>Before the ITAT</h2>
 
The Tribunal Observed that &ldquo;the bifurcation of the total sale consideration into land, building and additional FSI is not in dispute. What is in dispute before us is only whether the said sum of Rs.4,76,25,000/- received by the assessee on sale of additional FSI could be treated as a capital receipt and thereby making it nonexigible to tax both under normal provisions as well as in the computation of book profits u/s.115JB of the Act&rdquo;
 
In the instant case, we find that the Development Control Regulations in the city of Coimbatore had undergone a change which had admittedly conferred a benefit or by virtue of which the assessee got vested with additional benefit of 0.8 by way of additional FSI.
 
Hence, the issue now boils down to the fact that when there is no cost incurred by the assessee for obtaining any additional benefit of 0.8 by way of additional FSI, then, whether any sum received by the assessee pursuant to a sale of such additional FSI could be brought to tax under the head &ldquo;income from capital gains&rdquo;. We hold that assessee could not have pre-empted any change in the Development Control Regulation Rules in the city of Coimbatore at the time of purchase or before the sale.
 
Admittedly no cost was incurred by the assessee for getting such benefit by way of additional FSI. Hence, it could be safely concluded that the additional benefit derived by the assessee by way of getting vested with additional FSI on the land and building owned by the assessee is only a wind fall gain by operation of law, and which had not costed the assessee any money.
 
The tribunal followed the judgment of Jurisdictional High Court in the case of Commissioner of Income Tax vs. Kailash Jyoti No.2 CHS Ltd., in Income Tax Appeal No.1607 of 2013 and held that the sum received by the assessee in the sum of Rs.4,76,25,000/- on sale of additional FSI, is not exigible for long term capital gains.
 
The tribunal also held that the sum of Rs.4,76,25,000/- being a capital receipt from its inception, is to be excluded while computing book profits u/s.115JB of the Act and also on the ground that it does not form part of operational working results of the company by relying assessee&rsquo;s own case in ITA No.5428/Mum/2015 for A.Y.2011- 12.
 
<h2>Citation</h2>
 
ITA No.6228/Mum/2017, Dated 21/05/2021

Neither capital gain tax nor MAT on sum received towards Additional FSI

MAT, additional fsi, tax on capital gain additional fsi

<h2>Facts of the Case</h2>
 
The A.O. noticed that during the year under consideration, the assessee society had deposited a sum of Rs. 83,95,000/- in its bank account maintained with Axis bank Ltd., Sikar. The assessee society has not filed its return of income for the year under consideration. Notice U/s 148 of the Act was issued to the assessee.
 
In compliance of the notices issued, the assessee filed its return of income on 28/09/2017 declaring NIL income.
 
Assessing Officer completed the assessment after due consideration and examination of allthe issues specifically related to the corpus donation and he was satisfied with the evidences andsubmissions of the assessee as well as the manner in which it was shown in the accounts of theassessee. He mentioned his satisfaction in the office note attached with the assessment order, which isthe part of the assessment order. The copy of the certified copy of office note is attached herewith forready reference at Page No. 12 of Paper book. The relevant portion of the office note is reproducedhere under-
 
<blockquote class="wp-block-quote">
"(ii) Issue of Corpus donation has been examined carefully and satisfying with evidence produced by the assessee during the course of hearing, no adverse inference has beendrawn on this issue."
</blockquote>
 
<h2>Findings of the CIT(E)</h2>
 
The ld. CIT(E) in his order has observed that the assessee has no details of donors and whenever this detail is sought, it comes up with a story to avoid it.
 
The ld. CIT(E) further observed that in the order sheet, the A.O. has noted that corpus donations have been examined, he has not made any of requisite inquiries regarding identity and address of the claimed donors, particularly when all these donations were received in cash, therefore, the ld. CIT(A) has held that the order passed by the A.O. is deemed to be erroneous in so far as it is prejudicial to the interest of revenue within the meaning of Explanation 2(a) r.w. Section 263 of the Act.
 
Against the order of the ld. CIT(E), the assessee is in further appeal before the ITAT..
 
<h2>Grounds of the Assessee</h2>
 
<blockquote class="wp-block-quote">
the order of CIT(E) is illegal and against the law because the Ld. Assessing officer has examined and considered the matter involved in this order. 
the donation so received was received for a specific purpose and use, hence it was Corpus Donation. The corpus donation cannot be treated as part of Income and Expenditure account.
the order of the CIT(E) is otherwise unjustified because the assessee submitted the sufficient and proper explanation during the course of assessment proceedings and accepted by the Ld. Assessing officer
</blockquote>
 
<h2>ITAT held</h2>
 
The tribunal held that assessment order under consideration does not fall in any of the limb mentioned in the explanation 2 of the Section 263(2) of the Act, therefore the assessment is proper and cannot be said as erroneous and prejudicial to the interest of the revenue.
 
The assessee replied the queries raised by the assessing officer during the course of assessment _proceedings. After examination of the records and submissions found him satisfied and complete the assessment. Therefore, it could not be said the assessing officer has not examined the issue raised in the show cause notice under consideration. It is also reveals from the certified copies of the order sheet that the issue which is limited issue related to the cash deposited into bank, in spite of that he went beyond mandate and examined the entire issues, which is also without getting permission of the Commissioner. Hence it cannot be said that the assessment was without any enquiry or investigation.
 
The issue was already examined, discussed and considered by the then Assessing officer and issue of show cause notice by the CIT(E) on the very same issue is amounts to change of opinion
 
The ld AR of the assessee apart from the other grounds as discussed by us in detail, has also submitted before us that the notice issued by the ld. CIT(E) was on the basis of proposal of subsequent ITO, therefore, this act does not provide such powers to the ITO U/s 263 of the Act. The ld AR also submitted that as per provisions of Section 263 of the Act, the Pr.CIT/CIT may call for and examine the proceedings under this Act if he considers that any order passed therein by the A.O. is erroneous in so far as it is prejudicial to the interest of the revenue but in the present case, the proposal was sent by the subsequent A.O. to the CIT(E) on the basis of which a show cause notice was issued which is against the provisions of the Act. However, on this proposition, our view is not in favour of the ld AR as we convinced with the arguments of the ld. CIT-DR who had submitted that there is no prohibition U/s 263 of the Act for the Commissioner to act on the basis of proposal by the A.O. if other conditions under the said Section are satisfied. In this regard, the ld. CIT-DR has relied on the decision in the case of Apollo Tyres Ltd. Vs ACIT (1998) 65 ITD 263 (Delhi) and Stewarts and Lloyds of India Ltd. Vs CIT (2016) 67 taxmann.com 41, therefore, we reject this contention raised by the assessee.
 
<h2>Conclusion</h2>
 
The Tribunal allowed the appeal of the assessee and quash the revisionary proceedings u/s 263 initiated by issuing impugned show cause notice.
 
<h2>Citation</h2>
 
Swami Keshwanand Sikshan Sansthan Versus C.I.T. (Exemption) , Jaipur (Rajasthan) ITA No. 273/JP/2020 (Assessment Year: 2010-11) Dated 18 January 2021

No revision u/s 263 on Change of Opinion even though proposal was sent by the subsequent AO to the CIT

<h2>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Introduction</h2>
 
<ol type="1">
<li>This article provides the complete insight of the Acquisition and transfer of immovable property in India by-</li>
<li>Non-Resident Indian (NRI),</li>
<li>Overseas Citizen of India Card Holders (OCI) and</li>
</ol>
 
as per the provisions of the Foreign Exchange Management Act, 1999 (FEMA) and rules / regulations made thereunder.
 
<ol type="1">
<li>The acquisition and transfer of immovable property in India by PROI (Person Resident of India) and by some other specified persons (such as Long Term Visa (LTV) Holders, Foreign Embassies or Diplomats or Consulate Generals etc.) is not discussed in this article and the same will be discussed in upcoming article. Further, the conceptual clarity and difference between NRI, OCI, PROI, PRI, Citizen etc. is separate topic. This requires in depth understanding, therefore, the same will be discussed in separate article. The link of upcoming relevant articles will be shared in comment section for ease of reference.</li>
</ol>
 
<h2>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Historical Background</h2>
 
<ul>
<li>[Before the enactment of FEMA] As we know, before the enactment of FEMA, there was Foreign Exchange Regulation Act, 1973 (Repealed by FEMA) and section 31(1) of said Act provided that &ldquo;No person who is not a citizen of India and no company (other than a banking company) which is not incorporated under any law in force in India shall, except with the previous general or special permission of the Reserve Bank, acquire or hold or transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise an immovable property situate in India.&rdquo;</li>
<li>[After the enactment of FEMA] The FEMA classifies each foreign transaction in two categories viz: Current Account Transaction and Capital Account Transaction. The Current account transactions are generally permitted unless prohibited and capital account transactions are generally prohibited unless specifically permitted. The Central Government has an exclusive jurisdiction to regulate current account transactions and Reserve Bank of India (RBI) had exclusive jurisdiction to regulate capital account transactions. Accordingly, as per the provisions of section 6(3)(i) (now omitted), the RBI had exclusive jurisdiction to prohibit, restrict or regulate the acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India</li>
<li>[Amendment by Finance Act 2015 in FEMA] Later on,the Finance Act, 2015 amended the section 6 of the FEMA and classifies the capital account transactions in two categories: viz capital account transactions, involving debt instruments and capital account transactions, not involving debt instruments. Further, it has been provided that the term &ldquo;debt instruments&rdquo; shall mean, such instruments as may be determined by the Central Government in consultation with the Reserve Bank.</li>
<li>[Current Position] As discussed above, by the Finance Act 2015, the capital account transactions were further classified in two categories: viz capital account transactions, involving debt instruments and capital account transactions, not involving debt instruments. The power to regulate the capital account transactions, involving debt instruments is with the RBI and the power to regulate the capital account transactions, not involving debt instruments is with Central Government.</li>
<li>Summary of Above Discussion: The above discussion is summarized as under:</li>
</ul>
 
<figure class="wp-block-image size-large"><img class="wp-image-362" src="https://harchandanica.files.wordpress.com/2021/06/fema-1.png?w=625" alt="" /></figure>
 
<h2>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Important Terms</h2>
 
<ul>
<li>[Immovable Property]The term Immovable Property neither has been defined in the FEMA nor in rules / regulations. Therefore, the meaning of same can be borrowed from the General Clause Act, 1897. Section 3(26) of the said Act provides that &ldquo;immovable property&rdquo; shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth;Apart from the above, the Transfer of Property Act, 1882, Registration Act, 1908 and Real Estate (Regulation and Development) Act, 2016 also contain the definition of immovable property. However, in substance, all these enacts highlight similar view while defining &ldquo;immovable property&rdquo;.</li>
</ul>
 
<ul>
<li>[Acquire]The term acquire is not defined in the Rules or Act. Generally, it means &ldquo;to gain possession or control of; to get or obtain.&rdquo;</li>
</ul>
 
<ul>
<li>[Transfer]Transfer is Defined in FEMA. Section 2(ze) define [&ldquo;transfer&rdquo; includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.]</li>
</ul>
 
<h2>4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; FEMA Provisions &amp; Relevant Rules</h2>
 
<ul>
<li>Section 6(2A) and 46(2)(ab) empower the Central Government to notify or make rules with respect to the permissible classes of capital account transactions (not involving debt instrument), the limits of admissibility of foreign exchange, and the prohibition, restriction or regulation of such transactions.</li>
</ul>
 
<ul>
<li>Therefore, in Oct. 2019, the Central Government notifies <a>Foreign Exchange Management (Non-debt Instruments) Rules, 2019</a> by suppressing the previous regulations made by RBI viz: Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018.</li>
</ul>
 
<ul>
<li>Chapter IX of Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (&ldquo;Rules&rdquo;) contain the provisions regarding acquisition and transfer of immovable property in India.</li>
</ul>
 
<h2>5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; General (Rules applicable in all cases)</h2>
 
<ul>
<li>[All transactions should be done only through banking channel in India and subject to payment of applicable tax]
<ul>
<li>Any transaction involving acquisition or transfer of immovable property shall be undertaken through banking channels in India and subject to payment of applicable taxes and other duties or levies in India (e.g. Stamp Duty, Registration Fees, Applicable Income Tax etc.)</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Prior approval of RBI required by citizens of certain countries]
<ul>
<li>Prior permission of the RBI required to acquire or transfer of immovable property in India (other than lease not exceeding five years) by the person who is citizen or legal person (company, LLP, Firm, Trust etc.) of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau or Democratic People&rsquo;s Republic of Korea (DPRK).</li>
<li>Please note that this rule links the condition of prior approval of the RBI with the citizenship (including legal person incorporated in those countries), therefore, even if such citizens become Person Resident in India by virtue of provisions of Section 2(v), then still, they must obtain the prior approval of the RBI.</li>
<li>Now suppose, there are two persons being husband and wife and any of them is citizen of above country and another is citizen of India and both desires to purchase the property in joint name, then, in the opinion of author, still prior approval of RBI is must.</li>
<li>However, this prohibition is not applicable to OCI card holder (i.e. a person who is holding OCI card and is citizen of any of above mentioned country)</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Prior approval of RBI is must in case of any deviation or non fulfilment of any condition]
<ul>
<li>Any transaction, which is not specified in Chapter IX of Rules or in case of any deviation or non fulfilment of any conditions, requires prior approval of RBI before the execution of such transaction.</li>
</ul>
<ul>
<li>In case if person fails to obtain prior approval, wherever required, and execute the transaction, then this may attract the adjudication or person have to file compounding application for compounding of offence before the RBI.</li>
</ul>
</li>
</ul>
 
<h2>6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Rules for NRI and OCI</h2>
 
<ul>
<li>[Acquisition other than gift or inheritance]
<ul>
<li>NRI and OCI can acquire any immovable property other than an agricultural land or farm house or plantation property</li>
</ul>
<ul>
<li>Permitted mode of payment: (i) funds received in India through banking channels by way of inward remittance from any place outside India or (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act, rules or regulations framed thereunder (such as NRE / FCNR / NRO account). However, property acquired by utilizing funds of NRO account cannot be repatriate outside India (see para 7 of this article).</li>
</ul>
<ul>
<li>Prohibited mode of payment: payment made through traveller&rsquo;s cheque or by foreign currency notes or by any other mode other than those specifically permitted.</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Acquisition by way of gift]
<ul>
<li>NRI and OCI can acquire any immovable property in India (other than agricultural land or farm house or plantation property) by way of gift from a person who is either person resident in India or NRI or OCI.</li>
</ul>
<ul>
<li>Further, such donor (who is giving gift of immovable property) should be relative of such NRI / OCI with the meaning of section 2(77) of the Companies Act, 2013.</li>
</ul>
<ul>
<li>Section 2(77) of Companies Act, 2013 define relative as under;</li>
</ul>
</li>
</ul>
 
<blockquote class="wp-block-quote">
(77) "relative", with reference to any person, means any one who is related to another, if&mdash;
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed (following relations are prescribed)
(1) Father (includes step-father)
(2) Mother (includes the step-mother)
(3) Son (includes step son)
(4) Son&rsquo;s wife.
(5) Daughter.
(6) Daughter&rsquo;s husband.
(7) Brother (includes step brother)
(8) Sister (includes the step-sister)
</blockquote>
 
<ul>
<li>[Acquisition by way of inheritance]
<ul>
<li>Sub-section (5) of section 6 of FEMA provides that</li>
<li>A person resident outside India</li>
<li>may hold, own, transfer or invest</li>
<li>in Indian currency, security or any immovable property situated in India</li>
<li>if such currency, security or property was acquired, held or owned by such person</li>
<li>when he was resident in India or inherited from a person who was resident in India.</li>
</ul>
</li>
<li>Section 6(5) of FEMA allows the PROI to hold any immovable property situated in India property if such property was acquired by such person when he was resident in India or inherited from a person who was resident in India. However, this section does not allow to acquire new property by PROI out of fund accumulated during the period when he was resident or funds received in inheritance and this can be appreciated from the reading of the part of the provision (may hold, own, transfer or invest) which does not contain acquire.</li>
<li>NRI and OCI can acquire any property (including agricultural land or farm house or plantation property) by way of inheritance from a person resident outside India who has</li>
</ul>
 
(a.) acquired such immovable property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these rules; or
 
(b.) from a person resident in India.
 
<ul>
<li>[Transfer of any property by NRI and OCI]
<ul>
<li>NRI and OCI can transfer any property (including agricultural land or farm house or plantation property) to a person resident in India.</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Joint acquisition by the spouse of a NRI / OCI]
<ul>
<li>PROI, not being an NRI / OCI, who is a spouse of an NRI or OCI may acquire ONE immovable property (other than agricultural land or farm house or plantation property), jointly with his or her NRI or OCI spouse subject to following conditions:</li>
<li>Consideration for transfer, shall be made out of (i) funds received in India through banking channels by way of inward remittance from any place outside India; or (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act and the regulations made by the RBI</li>
<li>No payment for any transfer of immovable property shall be made either by traveller&rsquo;s cheque or by foreign currency notes or by any other mode other than those specifically permitted as above</li>
<li>The marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the acquisition of such property</li>
<li>Such non-resident spouse is not otherwise prohibited from such acquisition (e.g. suppose if the Spouse is Citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau or Democratic People&rsquo;s Republic of Korea (DPRK), then prior approval of RBI is mandatory)</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Summary]
<ul>
<li>The above discussion is summarized as under:</li>
</ul>
</li>
</ul>
 
<figure class="wp-block-image size-large"><img class="wp-image-363" src="https://harchandanica.files.wordpress.com/2021/06/fema-2.png?w=626" alt="" /></figure>
 
<ul>
<li>Repatriation of sale proceed
<ul>
<li>[Repatriation by person referred in Section 6(5)] PROI or his successor (who acquired immovable property when he was resident in India or inherited from a person who was resident in India) shall not, except with the general or specific permission of the RBI, repatriate outside India the sale proceeds of any immovable property referred to in that sub-section.</li>
</ul>
<ul>
<li>[Repatriation by NRI / OCI] Subject to fulfilment of following conditions NRI / OCI may repatriate the sale proceed outside:</li>
<li>Sale proceed does not relates to agricultural land or farm house or plantation property in India</li>
<li>Such immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition or the provisions of these rules</li>
<li>In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties</li>
<li>The amount for acquisition of the immovable property was paid in foreign exchange received through banking channels or out of funds held in Foreign Currency Non-Resident Account or out of funds held in Non-Resident External Account. (it is apparent that, while acquiring, if funds were utilized from NRO account, then such proceed cannot be repatriate outside India. If funds were utilized partially from the NRO and partially from NRE account? In such case, in the opinion of the author, the prior permission of RBI is must.)</li>
</ul>
</li>
</ul>
 
<ul>
<li>Disclaimer</li>
</ul>
 
The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor the publisher or its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
 
<ul>
<li>About Author</li>
</ul>
 
The author, Manish Harchandani (founder of Harchandani &amp; Associates, Chartered Accountants) is practicing Chartered Accountant and he can be reached at <a href="mailto:harchandanimanish@gmail.com">harchandanimanish@gmail.com</a> and at M. +91 9909880111

Acquisition and transfer of immovable property in India by NRI and OCI

On 1st April 2021, the Ministry of Finance notifies India Iran Comprehensive DTAA. The same can access by clicking following link-
<a href="https://www.linkedin.com/posts/mnharchandani_india-iran-dtaa-activity-6783812126868869120-sNMq">https://www.linkedin.com/posts/mnharchandani_india-iran-dtaa-activity-6783812126868869120-sNMq</a>
Earlier, there was Limited DTAA between India and Iran.

Ministry of Finance notifies India Iran DTAA

iran india dtaa, dtaa with iran, India Iran DTAA

UN RELEASED THIRD EDITION (2021) PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES.
 
This third edition of the United Nations Practical Manual on Transfer Pricing for Developing Countries (the Manual) is intended to draw upon the experience of the first edition (2013) and the second edition (2017) including feedback on the latter version, but it is also intended to reflect developments in the area of transfer pricing analysis and administration since that time.
 
An important purpose of this Manual is to contribute to a common understanding of how the arm&rsquo;s length principle is to be applied in order to avoid double taxation and prevent or resolve transfer pricing disputes, as highlighted in paragraph 4 of the Commentary on Article 9 of the UN Model Convention.
 
Click below to download pdf file of United Nations (UN) Practical Manual on Transfer Pricing for Developing Countries 2021-
<div class="wp-block-file"><a href="https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2021-04/TP_2021_final_web%20%281%29.pdf">https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2021-04/TP_2021_final_web%20%281%29.pdf</a></div>
<div class="wp-block-file">&nbsp;</div>

United Nations (UN) released Practical Manual on Transfer Pricing for Developing Countries 2021

Hon'ble Madras HC in its recent decision upheld the findings of Tribunal and observe that the only expenditure, which was proved to be incurred in relation to earning of tax free income, could be disallowed and such provision could not be extended to disallow the expenditure, which was assumed to have been incurred for earning tax free income.
 
The AO found that the assessee had invested in SBI Magnum Insta Cash Fund to the tune of Rs.7.25 Crores and secured loans, which were outstanding as on 31.3.2011. The Assessing Officer also found that the assessee incurred finance cost, out of which, a sum of Rs. 12.93 Crores was towards interest on term loan and working capital facilities, that the assessee company made investments in mutual funds, out of which, there was a POSSIBILITY OF EARNING DIVIDEND INCOME. Accordingly, a notice was issued to show cause as to why the disallowance should not be made under Section 14A of the Act.
 
The assessee sent a reply stating that they had not incurred any expenditure for making such investment and that in the absence of any expenditure incurred, the question of disallowance did not arise. However, AO rejected the stand taken by the assessee and made disallowance u/s 14A.
 
The assessee preferred an appeal before the CIT(A) who allowed the appeal by order dated 16.6.2016. The CIT(A) accepted the stand taken by the assessee that the investments were in growth funds and not dividend funds and therefore, did not constitute tax free income. In this regard, the CIT(A) referred to the decision of the Delhi High Court in the case of Cheminvest Ltd. Vs. CIT [reported in (2015) 378 ITR 33] as well as the decision of the Chennai Tribunal in the case of ACIT Vs. M.Baskaran [ITA.No.1717/Mds/2013 dated 31.7.2014] and accordingly set aside the finding rendered by the Assessing Officer. The Tribunal took note of the decision of this Court in the case of Redington India Ltd. Vs. CIT [reported in (2017) 77 Taxmann.com 257] and dismissed the appeal filed by the Revenue.
 
The Hon'ble Madras HC held that "we find that the Tribunal rightly understood the scope of the transaction done by the assessee. The consistent case of the assessee was that they invested a sum of Rs.7.25 crores in SBI Magnum Insta Cash Fund, that the amount was invested on 30.3.2011, that they had not incurred any expenditure in making such investment and that at the year end, the assessee did not earn tax free income from such investments. In terms of Section 14A of the Act, the only expenditure, which was proved to be incurred in relation to earning of tax free income, could be disallowed and such provision could not be extended to disallow the expenditure, which was assumed to have been incurred for earning tax free income."
 
Hon'ble HC also observed that "to apply the provisions of Section 14A of the Act, the Assessing Officer should have recorded a finding as to how SubSection (1) of Section 14A of the Act would stand attracted. In the absence of any such finding, the disallowance made was not justifiable. In fact, the Assessing Officer straightaway proceeded to the second limb of Section 14(2) of the Act, which is impermissible. The Tribunal rightly took note of the decision in the case of Redington India Ltd., wherein it was held that the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 cannot be made applicable in vacuum i.e in the absence of exempt income. Therefore, we find that the Tribunal was right in deciding the issue against the Revenue and in favour of the assessee."
 
Citation: Tax Case Appeal No.26 of 2018, Madras HC.

Investment in Growth Fund does not attract 14A disallowance

Mutual fund taxation, growth fund, 14A deduction, income tax

The Finance Act, 2020 inserted new provisions related to the TCS on sale, TCS on liberalised remittance scheme and TCS on overseas tour program package, which are going to be applicable for 1st October, 2020.
 
Please <a href="https://www.linkedin.com/posts/mnharchandani_tcs-on-sale-lrs-and-foreign-travel-analysis-activity-6717006959926665216-EAGg" target="_blank" rel="noreferrer noopener">click here</a> to access the analysis on TCS on Sale, LRS and Foreign Travel in presentation mode.

TCS on Sale, LRS and Foreign Travel - Analysis

tcs on sales purchase, tds on sales purchase tcs on LRS

The Hon'ble Supreme Court in it's recent decision in the case of DIT vs. Samsung Heavy Industries (Civil Appeal No. 12183 of 2016) dismissed the appeal of the department and held that project office of the assessee is not permanent establishment within the meaning of the Article 5 of India-Korea DTAA. Although, it is settled position of law that the Project Office is PE (subject to threshold of numbers of days as per relevant DTAA), however, looking the facts of the case, the Hon'ble Supreme Court held that the Project Office in the question is not a PE withing the meaning of the Article 5(1) of DTAA rather it would fall within Article 5(4)(e) of the DTAA. Lets the discuss the facts of the case and findings of the each authority.
 
The critical fact of the case are that the ONGC awarded a &ldquo;turnkey&rdquo; contract to a consortium comprising of the Assessee, i.e. Samsung Heavy Industries Co. Ltd. (a Company incorporated in South Korea), and Larsen &amp; Toubro Limited, being a contract for carrying out the &ldquo;Work&rdquo;, inter alia, of surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of entire facilities covered under the &lsquo;Vasai East Development Project&rsquo;
 
The Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as &ldquo;a communication channel&rdquo; between the Assessee and ONGC in respect of the Project. Accordingly for the AY 2007-08 the assessee filed nil return and claimed the losses.
 
During the assessment proceedings, the AO concluded that "the Project in question is a single indivisible &ldquo;turnkey&rdquo; project, whereby ONGC was to take over a project that is completed only in India. Resultantly, profits arising from the successful commissioning of the Project would also arise only in India."
 
The DRP also concluded that "the Assessing Officer has given a specific finding that the assessee had a project office in India, when it was given the contract. The assessee has not contested the existence of the Project office in India but it has only contested that the project was used merely for preparatory and auxiliary activities. This submission of the assessee does not hold merit because if it wanted to perform only preparatory and auxiliary activities then it could have opened a liaison office. The opening of a project office clearly shows that the assessee was doing something more than what would have been done through liaison office. In any case nature and purport of activities undertaken in India determine the existence of PE. Considering the nature of activities undertaken in India it is clear that PE existed in the case of assessee."
 
During the hearing before the ITAT, the Ld. DR bought on record the resolution of Board of Directors meeting dated 3rd April, 2006. The opening para of said resolution provides that "the company hereby open one project office in Mumbai, India for coordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation (&ldquo;ONGC&rdquo;), India". Based on such resolution, the Ld. DR concluded that these documents make it clear that all the activities to be carried out in respect of impugned contract will be routed through the project office only. However, it is noteworthy to state here that the Ld. DR only reproduce the first para of the Board Resolution, the second para of said resolution provides that "That the Company hereby does make and constitute Mr. Sangsoon Park Yard General Manager of the Company, as the Company&rsquo;s true and lawful representative with full power and authority for the purpose of establishing a project office and coordinating and executing delivery of documents in connection with construction of offshore platform modification of existing facilities for ONGC above."
 
On other hand, the assessee before the ITAT argued that the Project Office was only an auxiliary office, and did not involve itself in any core activity of business, as accounts that were produced would show that there was no expenditure which related to execution of the project. The Hon'ble Tribunal disposed off that argument of the assessee by stating that "the way the terms of the contract are described and the way the work on contract has to proceed clearly describe that in all the activities of contract there will be the role of Mumbai project office as the same has to work as a channel between assessee company and ONGC. If PE of the assessee exists within the meaning of Article 5.1 and 5.2 and assessee claims that despite there being PE in terms of clause 5.1 and 5.2, it falls under exclusionary Article 5.4 then onus is on assessee to prove that activities of its PE are in the nature of preparatory or auxiliary in nature. No material has been brought on record by the assessee to prove the said fact. The arguments put forward in this respect are only by inference such as the accounts maintained by the assessee in India through which it is the argument of the ld. Counsel of the assessee that it does not contain any expenditure relating to execution of the contract. But such argument is not acceptable as the maintenance of account is in the hands of assessee and mere the mode of maintaining the accounts alone cannot determine the character of PE as the role of PE only will be relevant to determine what kind of activities it has carried on." However, the ITAT found that there was a lack of material to ascertain as to what extent activities of the business were carried on by the Assessee through the Mumbai Project Office, and therefore it was considered just and proper to set aside the attribution of 25% of gross revenue earned outside India &ndash; which was attributed as income earned from the Mumbai project office &ndash; the matter being sent back to the Assessing Officer to ascertain profits attributable to the Mumbai project office after examining the necessary facts.
 
Surprisingly, the Hon'ble High Court pronounced its decision on entire different footing. The core grievance of the assessee was regarding considering the PO as PE by the lower authorities looking to the peculiar facts and circumstances of the case. However, the High Court re-framed the question of law as "can it be said that the Agreement permitted the India Taxing Authority to arbitrarily fix a part of the revenue to the permanent establishment of the appellant in India?&rdquo;
 
Accordingly, the Hon'ble High Court held - "that being the situation we allow the appeal, set aside the judgment and order under appeal as well as the assessment order insofar as the same relates to imposition of tax liability on the 25% of the receipt upon the appellant in the circumstances mentioned above, and observe that the questions of law formulated by us, while admitting the appeal, have not, in fact, arisen on the facts and circumstances of the case, but the real question was, whether the tax liability could be fastened without establishing that the same is attributable to the tax identity or permanent establishment of the enterprise situate in India and the same, we think, is answered in the negative and in favour of the appellant."
 
However, the Supreme Court while pronouncing its decision, gone into details and considered the findings of the all lower authorities. The critical findings of the Hon'ble Supreme Court are with regards to documents filed by the assessee before the RBI and which was heavily relied by the ITAT also. The Hon'ble quote the Board Resolution of the assessee company and held that "A reading of the Board Resolution would show that the Project Office was established to coordinate and execute &ldquo;delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC&rdquo;. Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside."
 
The Hon'ble Supreme Court further observe that "Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core 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 meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of 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 Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC."
 
Therefore, it is rightly to conclude here that for the purpose of applying the DTAA, the legal form is not much relevant where the facts says something different. In this case, even the office of the assessee was registered as Project Office with the RBI, however, the Supreme Court went on the facts, considered the actual activities carried out by such office, considered the purpose of such office and concluded that the Project Office in question is not a PE rather it would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC.
 
(views are personal, for more details, it is advisable to go through with the order of the SC)

Project Office is not PE; SC affirm substance over legal form

project office, LO PO BO FEMA, Permanent Establishment Income tax

Get the insight of important judicial precedent on Section 36(1)(iii) by clicking on the following link-
 
<h2><a href="https://public.tableau.com/shared/BMY3C6KS7?:display_count=y&amp;:origin=viz_share_link&amp;:showVizHome=no" target="_blank" rel="noreferrer noopener">Tableau Public (Link)</a></h2>
 
Just hover over the chart area, you will get the citation and head note of the case law.
 
Author, Manish Harchandani, CA

Insight of important judicial precedent on Section 36(1)(iii).

judgments on section 36(1)(iii) interest deduction, tax benefit 

A formal Memorandum of Understanding (MoU) was signed today between the CBDT) and the SEBI for data exchange. This will facilitate the sharing of data and information between SEBI and CBDT on an automatic and regular basis. The information will also be shared on request and&nbsp;suo moto&nbsp;basis for the purpose of carrying out their functions under various laws. The formal press release is as under:
https://www.sebi.gov.in/media/press-releases/jul-2020/sebi-signs-mou-with-cbdt_47030.html

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