Legislation UpdatesRules & Regulations

The Central Board of Direct Taxes notified the Income Tax (31st Amendment) Rules, 2021 which seeks to further amend Income Tax Rules, 1962. Key changes brought by the amendment are as follows:

 

  • The 31st Amendment Rules, 2021 has introduced new Rules 11UE and 11UF, after Rule UD for provisions relating to ‘Indirect transfer prior to 28.05.2012 of assets situated in India’ along with Form 1 or 2 or 3.
  • Rule 11UE – Specified conditions under Explanation to fifth and sixth proviso to Explanation 5 to clause (i) of sub-section (1) of section 9 which states that the declarant shall furnish an undertaking in Form No. 1 and shall append the undertakings from all the interested parties in Part M of the Annexure to the undertaking in Form No. 1 and furnish all the attachments required to be furnished under any clause or Part thereof.
  • Rule 11UFManner of furnishing undertaking which states that the undertaking in Form No. 1 under sub-rule (1) of rule 11UE shall be submitted by the declarant to the jurisdictional Principal Commissioner or Commissioner within 45 days from the date of commencement of the Income-tax (31st Amendment) Rules, 2021.

After the undertaking in Form No. 1 under sub-rule (1) of rule 11UE is furnished by the declarant, the jurisdictional Principal Commissioner or Commissioner shall, within a period of 15 days from the date of receipt of the said undertaking, grant a certificate in Form No. 2 accepting such undertaking; or pass an order rejecting such undertaking, where the undertaking in Form No. 1 is incorrect or incomplete or any part thereof or any of the attachments or evidences or the indemnity bonds provided therein or any of the authorisations, as referred to in sub-rule (3) of rule 11UE is incorrect or incomplete or not furnished, after giving an opportunity of being heard to the declarant.

  • The Amendment provides revised Form No. 1 for filing undertaking declaring that specified orders have been passed or made in respect of income accruing or arising through or from the transfer of an asset or a capital asset situated in India in consequence of the transfer of a share or interest in a company or entity registered or incorporated outside India made before the May 28, 2012.


*Tanvi Singh, Editorial Assistant has reported this brief.

Experts CornerTarun Jain (Tax Practitioner)


Introduction


It was under the shadow of a war that India introduced two major fiscal legislations; the Income Tax Act, 1961 and the Customs Act, 1962, paving way for tax policy of independent India. Both legislations have witnessed umpteen amendments to accommodate the shifting priorities of the incumbent Governments and are now well past their sell-by date. In respect of customs, no fundamental alteration is required as the law is mostly aligned to the international framework[1] which ensures that it stays abreast with the changing times. However, the framework of the income tax law – notwithstanding the tide of significant policy changes and amendments to reverse the judicial pronouncements – continues to wheel the Indian economy like a patchy retreated tyre.

 

Earnest attempts to bring about holistic changes have not yielded fruit despite the Direct Taxes Code of 2009,[2] the Direct Taxes Code Bill, 2010,[3] followed with a 2013 Bill,[4] all of which lapsed. Thereafter, another fresh attempt in recent past by an Expert Committee in 2019[5] seems to have met the same fate. This is so despite the fact that substantial changes have been made in the income tax policy and law. To enumerate certain landmark changes, the 2016 black money legislation[6]; 15% corporate tax rate for new manufacturing entities announced in 2019;[7] India’s digital services tax i.e. the 2020 Equalisation Levy;[8] Taxpayers’ Charter;[9] scheme for faceless assessments, appeals, penalties;[10] the new scheme for reopening of assessments unveiled in 2021;[11] etc. are some of the path-defining measures. However, their fullest potential cannot be realised given the limitations inherited under the old framework. It is not a surprise, therefore, that the Supreme Court recently implored the Parliament, particularly the draftsmen, to frame simpler tax laws which do not scuttle the taxpayers’ ability to carry out their affairs.

 


Recent decision of Supreme Court


September 9 decision of the Supreme Court in South Indian Bank[12] is a quintessential illustration on why the founding premise of the tax law needs to be revisited. The decision has been rendered in the context of Section 14-A of the Income Tax Act which disallows claim for expenses which are incurred for earning tax free income.[13] This single provision, which was inserted in 2001, has seen more than its fair share of litigation. Notwithstanding the correctness of the underlying premise,[14] stretched interpretation of the law and an indiscriminate and patchy implementation has resulted into multiple and tiresome controversies. In its two decades of existence, it has engaged the Supreme Court more than 25 times and cluttered the dockets of the tax tribunals and High Courts.

 

This part of law illustrates that an over-empowered tax administration results into ad hoc stances. It is routinely invoked by tax officers who insist that a proportional disallowance to the ratio of average investments to average assets is mandatory.[15] The application of this provision and the accompanying subordinate legislation[16] warrants a closer look at the minutest of facts of a business enterprise during the assessment stage, which have to be subsequently revaluated at multiple appellate levels in the tax litigation system. In most cases, the disallowance is pressed upon to require businesses to justify whether the expenditure is not just directly related to exempt income but also to rule out its indirect linkage.[17]

The practice of ad hoc disallowance may appear to be trivial but it indicates a discomforting scenario. It not only obliges business to incur more compliance costs, but also disproportionately influences business choices, making them perennially sceptical of Tax Department’s outlook, and perpetuates a penny wise pound foolish quandary.

 

The Supreme Court decision, echoing Adam Smith’s canon of certainty in tax law, seeks to impress upon the Government that “it is the responsibility of the regime to design a tax system for which a subject can budget and plan”. The Supreme Court has unhesitatingly implored upon the Government to ensure a fair balance of taxpayers’ entitlements such that “unnecessary litigation can be avoided without compromising on generation of revenue”. The observations of the Court, therefore, could not have come at a more appropriate instance. The Government must, however, go beyond. It must reinstitute the tax system such that it scuttles the tax officials’ urge to assume the role of the corporate managers and review their decisions from a tax expediency perspective. In other words, the Department should not be permitted to put itself in the shoes of the taxpayer to assess how a prudent businessman should operate.[18]

 


Aspirational cravings


The ambitious outlines of the Government, to make India a 5 trillion dollar economy[19] and an economic powerhouse, cannot be achieved with an outdated tax system. The recent withdrawal of 2012 retrospective amendment[20] reveals that the Government is not shy of undertaking bold course correction measures. Having undone all legacy issues, it is time for reforming the administration and functioning of officials. All bets now rest on the faceless assessment scheme, which has had a rough start, given the clutch of writs issued by some High Courts on denial of natural justice and quashing of notices for fallacious reopening of past cases by application of old archaic provisions despite simplification brought into the statute.[21] One cannot over-emphasise the urgency for a new tax system which synergises (and not digests) the aspirations and energies of this reinventing nation, a tax system which facilitates business activity and does not scare away business or drive out investments with humongous compliances and energy sapping inspector-like approach of tax officers.

 

The Government of India must attempt a GST-like[22] rewriting of entire direct tax landscape which should be based on deep stakeholder consultations such that the progressive advancement of tax system is not replete with thorny issues. The basis premise of the law must be simple; business should focus on doing business without managing tax consequences and Tax Department should collect tax without sitting in judgment over how business should do business. The correct tax lawmaking process, which is usually centred around budget day, is too secretive and gives overwhelming powers to the tax bureaucracy and requires businesses to immediate react to the changes because, many of which are overnight. India can do well to take inspiration from advanced countries wherein lawmaking is a continuous process of stakeholder discussion and duly factors economic metrices and impact analysis before deploying the tax measure. Such system avoids a trial and error approach and obviates the need for frequent course correction measures which become inevitable when the measure has not been thought through. In short, the tax law must reduce avenues for friction.


† Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.

[1]The Indian Customs policy and law is aligned to India’s participation and multilateral agreements inter alia under the aegis of (a) World Trade Organisation; (b) World Customs Organisation; and (c) Harmonised Commodity Description and Coding System (or Harmonised System).

[2] This was draft for public consultation. Available  HERE.

[3] Introduced in the Lok Sabha on 28-8-2010. Available HERE.

[4] Available at HERE.

[5] The Task Force on Direct Tax Code submitted its Report to FM Nirmala Sitharaman on 19-8-2019. For details, see HERE.

[6]The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

[7] For details, see, corporate tax rates slashed to 22% for domestic companies and 15% for new domestic manufacturing companies and other fiscal reliefs, (PIB 20-9-2019), available  HERE.

[8]Vide Chapter VI (Part VI) of the Finance Act, 2020 (amending provisions of Finance Act, 2016).

[9]Unveiled in year 2020. For details, see HERE.

[10]For details, see <HERE>.

[11]In terms of Ss. 40-45 of Finance Act, 2021 (amending Ss. 147-151 of Income Tax Act, 1961).

[12]South Indian Bank Ltd. v. CIT, 2021 SCC OnLine SC 692.

[13]“14-A. Expenditure incurred in relation to income not includible in total income.— (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.”

[14]In a detailed decision in Maxopp Investment Ltd. v. CIT, (2018) 15 SCC 523, the Supreme Court upheld the underlying premise of S. 14-A.

[15]For illustration, see CIT v. Jagson International Ltd., 2018 SCC OnLine Del 12874 opining that the mandatory conditionalities under the Income Tax Rules need to be satisfied before S. 14-A disallowance can be triggered and rejecting the stand of the tax authorities of automatically applying the provision.

[16]I.e. R. 8-D, Income Tax Rules, 1962.

[17]For illustration, see CIT v. Sociedade De Fomento Industrial (P) Ltd., 2020 SCC OnLine Bom 1896 : (2020) 429 ITR 207.

[18]For illustration, see recent decision of the Supreme Court in Shiv Raj Gupta v. CIT, 2020 SCC OnLine SC 589 where the “doctrine of commercial expediency” has been affirmed. In this case the Supreme Court inter alia observed that “a catena of judgments has held that commercial expediency has to be adjudged from the point of view of the assessee and that the Income Tax Department cannot enter into the thicket of reasonableness of amounts paid by the assessee”.

[19] For details, see Vision of a USD 5 Trillion Indian Economy, (PIB 11-10-2018), available HERE.

[20]Vide Taxation Laws (Amendment) Act, 2021 (Act 34 of 2021), assented by the President on 13-8-2021.

[21]For illustration, see Pooja Singla Builders and Engineers (P) Ltd. v. National Faceless Assessment Centre, 2021 SCC OnLine Del 4294, holding that even if principles of natural justice have been complied with, still the proceedings cannot be sustained if an order was passed without issuing a show-cause notice which is a mandatory statutory condition.

[22]See generally, Tarun Jain, One Year of “Goods and Services Tax” in India, available at HERE.

Legislation UpdatesRules & Regulations

The Central Board of Direct Taxes has notified the Income-tax (30th Amendment) Rules, 2021 vide notification dated 24th September, 2021.

  • The amendment has amended Rule 10D of the Income Tax Act and further extended the applicability of provisions under Rule 10D for assessment years 2020-21 and 2021-22. They shall be deemed to have come into force from the April 1, 2021.
  • Rule 10D of Income tax Rules states that where an eligible assessee has entered into an eligible international transaction and the option exercised by the said assessee is valid, the transfer price declared by the assessee in respect of such transaction shall be accepted by the income tax authorities, if it is in accordance with the circumstances provided in the rule.

 


*Tanvi Singh, Editorial Assistant has reported this brief.

Legislation UpdatesNotifications

On September 17, 2021, the Central Government extends timelines under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.

They are listed below:

(A) where the specified Act is the Incometax Act, 1961 and

(a) the completion of any action relates to passing of any order for imposition of penalty under Chapter XXI of the Incometax  Act,

(i) the 30th day of March, 2022 shall be the end date of the period during which the timelimit specified in, or prescribed or notified under, the Incometax Act falls for the completion of such action; and

(ii) the 31st day of March, 2022 shall be the end date to which the timelimit for completion of such action shall stand extended;

(b) the compliance of any action relates to intimation of Aadhaar number to the prescribed authority under subsection (2) of section 139AA of the Incometax Act, the timelimit for such the compliance of such action shall stand extended to the 31st day of March, 2022.

(B) where the specified Act is the Prohibition of Benami Property Transaction Act, 1988, (45 of 1988) and the completion of any action, relates to issue of notice under subsection (1) or passing of any order under subsection (3) of section 26 of the Benami Act,

(i) the 30th day of June, 2021 shall be the end date of the period during which the timelimit specified in or prescribed or notified under the Benami Act falls, for the completion of such action; and

(ii) the 31st day of March, 2022 shall be the end date to which the timelimit for completion of such action shall stand extended.

Legislation UpdatesRules & Regulations

On September 13, 2021, the Central Board of Direct Taxes notifies Income-tax (29th Amendment) Rules, 2021 to amend Income-tax Rules, 1962. The Amendment inserts a provision prescribing income- tax authority under second proviso to clause (i) of sub-section (1) of section 142.

 

The Rule provides:

12F. Prescribed income- tax authority under second proviso to clause (i) of sub-section (1) of section 142.- The prescribed income-tax authority under second proviso to clause (i) of sub-section (1) of section 142 shall be an income-tax authority not below the rank of Income-tax Officer who has been authorised by the Central Board of Direct Taxes to act as such authority for the purposes of that clause.

Legislation UpdatesRules & Regulations

The Ministry of Finance has issued the Income tax (28th Amendment) Rules, 2021 on September 10, 2021, to further amend the Income-tax Rules, 1962. The Income-tax (28th Amendment) Rules, 2021 shall come into force from April 1, 2021 and shall be applicable for the assessment year 2022-23 and subsequent assessment years.

The Amendment has inserted a new clause 4 under Rule 11UAC which prescribes the class of person for the purpose of clause (xi) of the proviso to clause (x) of sub-section (2) of section 56. Section 56(2)(x) prescribes the tax on sum or property received without consideration.

As per new Rule 11UAC(4), the provisions of section 56(2)(x) shall not apply to any movable property, being equity shares, of the public sector company, received by a person from the Central Government or any State Government under strategic disinvestment.


*Tanvi Singh, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: In an important ruling on taxation law, the bench of Sanjay Kishan Kaul and Hrishikesh Roy*, JJ has held that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments.

Issue

Whether Section 14A of the Income Tax Act, 1961, enables the Department to make disallowance on expenditure incurred for earning tax free income in cases where assessees like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income?

What does Section 14A state?

In Section 14, the various incomes are classified under Salaries, Income from house property, Profit & Gains of business or profession, Capital Gains & Income from other sources.

The Section 14A relates to expenditure incurred in relation to income which are not includable in Total Income and which are exempted from tax. No taxes are therefore levied on such exempted income. The Section 14A had been incorporated in the Income Tax Act to ensure that expenditure incurred in generating such tax exempted income is not allowed as a deduction while calculating total income for the concerned assessee.

Legislative history

Section 14A was introduced to the Income Tax Act by the Finance Act, 2001 with retrospective effect from 01.04.1962, in aftermath of judgment in the case of Rajasthan State Warehousing Corporation Vs. CIT, (2000) 3 SCC 126. The said Section provided for disallowance of expenditure incurred by the assessee in relation to income, which does not form part of their total income.

“As such if the assessee incurs any expenditure for earning tax free income such as interest paid for funds borrowed, for investment in any business which earns tax free income, the assessee is disentitled to deduction of such interest or other expenditure.”

Although the provision was introduced retrospectively from 01.04.1962, the retrospective effect was neutralized by a proviso later introduced by the Finance Act, 2002 with effect from 11.05.2001 whereunder, re-assessment, rectification of assessment was prohibited for any assessment year, up-to the assessment year 2000-2001, when the proviso was introduced, without making any disallowance under Section 14A. The earlier assessments were therefore permitted to attain finality. As such the disallowance under Section 14A was intended to cover pending assessments and for the assessment years commencing from 2001-2002.

Facts

  • In the case at hand, the Court was concerned with disallowances made under Section 14A for assessment years commencing from 2001-2002 onwards or for pending assessments.
  • The assessees are scheduled banks and in course of their banking business, they also engage in the business of investments in bonds, securities and shares which earn the assessees, interests from such securities and bonds as also dividend income on investments in shares of companies and from units of UTI etc. which are tax free.
  • None of the assessee banks amongst the appellants, maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee.
  • In absence of separate accounts for investment which earned tax free income, the Assessing Officer made proportionate disallowance of interest attributable to the funds invested to earn tax free income by referring to the average cost of deposit for the relevant year.
  • The CIT (A) had concurred with the view taken by the Assessing Officer.
  • The ITAT in Assessee’s appeal against CIT(A) considered the absence of separate identifiable funds utilized by assessee for making investments in tax free bonds and shares but found that assessee bank is having indivisible business and considering their nature of business, the investments made in tax free bonds and in shares would therefore be in nature of stock in trade. The ITAT then noticed that assessee bank is having surplus funds and reserves from which investments can be made. Accordingly, it accepted the assessee’s case that investments were not made out of interest or cost bearing funds alone and held that disallowance under Section 14A is not warranted, in absence of clear identity of funds.
  • The decision of the ITAT was reversed by the High Court.

Analysis

The Supreme Court took note of the fact that the CIT(A) and the High Court had based their decision on the fact that the assessee had not kept their interest free funds in separate account and as such had purchased the bonds/shares from mixed account. This is how a proportionate amount of the interest paid on the borrowings/deposits, was considered to have been incurred to earn the tax-free income on bonds/shares and such proportionate amount was disallowed applying Section 14A of the Act.

It, however, explained that

“In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure.”

The Court, hence, held that if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax- free securities then in such cases, disallowance under Section 14A cannot be made.

[South Indian Bank v. CIT,  2021 SCC OnLine SC 692, decided on 09.09.2021]


*Judgment by: Justice Hrishikesh Roy

Know Thy Judge | Justice Hrishikesh Roy

Appearances before the Court by:

For Appellants: Senior Advocates S. Ganesh, S.K. Bagaria, Jehangir Mistri and Joseph Markose,

For Respondent/Revenue: ASG Vikramjit Banerjee and Senior Advocate Arijit Prasad

Legislation UpdatesStatutes/Bills/Ordinances

The Ministry of Finance has passed the Taxation Laws (Amendment) Act, 2021 on August 13, 2021. The Act amends the Income Tax Act, 1961 and the Finance Act, 2012.

Key amendments under the Act are:

Levy of Tax on income earned from the sale of shares outside India: 

Under the Income Tax Act, 1961 the non-residents are required to pay tax on the income accruing through or arising from any business connection, property, asset, or source of income situated in India. The Finance Act, 2012 amended the Income Tax Act, 1961 and clarified that if a company is registered or incorporated outside India, its shares will be deemed to be or have always been situated in India if they derive their value substantially from the assets located in India.  As a result, the persons who sold such shares of foreign companies before the enactment of the Finance Act, 2012, also became liable to pay tax on the income earned from such sale. The Taxation Laws (Amendment) Act, 2021, omits this tax liability if following conditions are met:

  1. An appeal or petition filed in this regard must be withdrawn or the person must submit an undertaking to withdraw it
  2. The notices or claims under such proceedings must be withdrawn or the person must submit an undertaking to withdraw them
  3. The person should submit an undertaking to waive the right to seek or pursue any remedy or claim in this regard, which may otherwise be available under any law in force or any bilateral agreement.

The Act prescribes that if all the above conditions are fulfilled by the concerned person, then all the assessment or reassessment orders issued with respect to such tax liability will be deemed to have never been issued. Also, if a person becomes eligible for refund after fulfilling these conditions, the amount will be refunded to him, without any interest.


*Tanvi Singh, Editorial Assistant has reported this brief.

Op EdsOP. ED.

In Union of India v. Assn. of Unified Telecom Service Providers of India[1] (AGR case), when the telecom service providers (TSPs) knocked the doors of the Supreme Court, the Supreme Court whilst acting as an executive court overlooked the economic impact of its decision and forced the TSPs to suffer an unconscionable bargain at the hands of the executive. Though the judiciary had the opportunity to remedy the wrongs of the State in this case, it is respectfully submitted that the judiciary failed to do so. The Court not only forced the TSPs to suffer in the unconscionable bargain but also modified the payment plan to the further detriment of the TSPs than what was proposed by the Union of India.

In this article, the author seeks to present a critique of the Supreme Court’s decision in AGR case[2] through author’s own analogy of the adjusted gross revenue (AGR) with income tax.

The case

In the erstwhile licence regime, the TSPs were forced to pay a fixed licence fee based on irrationally exorbitant bids; however, the New Telecom Policy of 1999[3] (NTP) introduced a revenue sharing regime, whereby the TSPs were to pay a fixed percentage of their AGR to the Department of Telecommunications, Government of India (DoT) along with an entry fee.[4] The NTP of 1999 was introduced by the Government of India in order to provide some relief to the TSPs. This fixed percentage was initially fixed at 15% and was subsequently reduced to 8%. In order to arrive at the licence fee payable by the TSP, the AGR as per the licence agreement would include revenue generated by licensees from both licensed and unlicensed activities (i.e. revenue from activities for which the telecom licence is not required, for instance, leasing out infrastructure, returns earned on investments).

As per Section 4(1)[5] of the Telegraph Act, 1885, the Union of India owns the exclusive privilege of establishing, maintaining and working telegraphs and may grant a licence to any person to establish, maintain or work a telegraph. In order to expand telecom services, private enterprises were invited to participate in the telecom sector. It is against this backdrop that the TSPs were granted licences to operate in the telecom sector.

The terms and conditions contained in the licence agreement under the NTP defines AGR in Cl. 19.1 read with Cl. 3.2 in Part II[6] thereof, in an inclusive manner and covers within its ambit revenue from licensed as well as non-licensed activities. For instance, it covers revenue on account of sale proceeds of handsets, interest, dividend, revenue from sharing infrastructure and any other miscellaneous revenue. Such a wide definition of revenue for computation of licence fees is unwarranted. When the NTP was introduced, the TSPs reasonably expected to pay a percentage on the revenue generated from licensed activities i.e. activities for which the licence is obtained.

In AGR case[7], the Supreme Court on 24-10-2019 ordered the TSPs to pay the AGR levies along with interest and penalty based on its interpretation of definition of AGR as per DoT within a period of three months. The Union of India after taking into consideration various factors including the adverse impact on the economy submitted before the Supreme Court a payment plan wherein the AGR dues would be recovered over a period of twenty years, and to that end, filed a miscellaneous application seeking extension of time to the TSPs for making the payment.

By its order of 1-9-2020 in Union of India v. Assn. of Unified Telecom Service Providers of India[8] (order in miscellaneous application), the Supreme Court of India without much deliberation granted a period of ten years (i.e. half of the period sought by Union of India) to the TSPs to clear their AGR dues.[9] When the payee (in this case the Government) proposed twenty years for recovery of the dues, there is no reason why a constitutional court must intervene to reduce it to ten years. The Supreme Court overstepped its duty to interpret the law and instead acted like an executive court.[10]

AGR alike income tax

TSPs pay corporate tax at around 30% on their total income (comprising of the gross revenue after allowing various deductions) in the form of income tax to the Government of India and in addition are liable to pay licence fee at 8% to the DoT on the very same revenue generated. Income tax is levied on their total income after allowing various deductions and exemptions from the gross total income, whereas, the licence fee is a levy on their AGR without exemptions and negligible deductions. Thus, these TSPs are liable to pay levy twice on the same income.

In the author’s opinion, the wide definition of AGR seems to have been inspired by the widest definition of income under the Income Tax Act, 1961[11]. It resembles an attempt to include nearly every possible revenue within its ambit, just like the definition of income endeavours to do. The TSPs raised an objection to the definition of AGR as it included income/revenue even from the non-operational activities for computation of licence fees. The irrationality of the wide scope of definition is comprehensible by any man of commercial wisdom.

In the author’s view, on the pretext of licence fee, a form of tax is levied on the income earned by TSPs. Though this tax is levied at a lower rate compared to the corporate tax rate, however, it is levied on a much wider base because unlike the computation of taxable income,[12] while computing AGR, there are negligible deductions and no exemptions available.

AGR — From the standpoint of the Supreme Court

The TSPs inter alia contended before the Supreme Court that the definition of AGR must be understood as per Accounting Standard 9[13] and that revenue from non-licensed activities must not be a part of AGR.

The Supreme Court examined various heads of revenue mentioned in the definition of AGR and came to the conclusion that the definition must be interpreted in its literal sense to include them while computing the AGR. Astonishingly, the TSPs are expected to pay licence fees even on various discounts given to the users. Gains from foreign exchange rate fluctuations are also to be included within AGR for computation of licence fees. The wide definition also includes late fees. It may be contended that the objective behind including late fees within the definition of AGR is that it is also revenue received by the TSPs. However, late fees for delayed payments by the users which have been waived by the TSPs for goodwill, are also included in the computation of AGR. Thus, amount which is not received by the TSPs has also been included in the computation of AGR. It is humbly submitted that these inclusions are unreasonable and prima facie arbitrary.

The Court’s reasoning is based on the premise that there has been a paradigm shift in the telecom policy which is extremely beneficial to TSPs. The TSPs having taken the advantage under the beneficial policy are bound by the terms of the licence agreement, and thus the definition of AGR should be interpreted without any reference to any Accounting Standards which in author’s opinion is sans commercial wisdom. The Supreme Court overlooked the well-settled legal principles of interpretation of commercial contracts and Lord Diplock’s observations in Antaios Compania Navieras SA v. Salen Rederierna, “… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense”.[14]

Unconscionable bargain

A simple analogy of the Supreme Court’s interpretation is that of a tenant occupying a flat in the building being asked to pay a percentage of her total income and expenses as rent for the flat. There is no rational connection between the two.

The TSPs are embroiled in an unconscionable bargain due to the widely worded definition of “AGR” in the licence agreement. Expecting the TSPs to pay a percentage of their gross revenue for a licence to operate telecom services is unreasonable. The terms and conditions of the licence must have nexus to the licensed activities.[15]

Although the Supreme Court observed that the Central Government has the exclusive privilege to carry on telecommunication activities and must get the best price for parting from it, it further noted that the State is a trustee of natural resources and is obliged to hold it for the benefit of its citizens. In effect the Supreme Court observed that the State is a trustee of the natural resources and is duty-bound to hold it for the benefit of the citizens. It remains to be seen which principle of trusteeship would allow the trustee State to make whopping profits for performing its duties. It must be understood, that the objective of introducing the NTP was to create an environment which enables continued attraction of investment in the sector and facilitates the creation of communication infrastructure by leveraging technological development,[16] not revenue generation.

The State has imposed a partnership on the TSPs. The DoT has demanded a certain percentage of the revenue that these TSPs generate from operational and non-operational income. This makes one wonder, why should the TSPs pay a percentage even on their passive income to use a licence to generate operational income?

Economic impact of judicial decisions

In Vodafone International Holdings BV v. Union of India[17] (Vodafone case), the Supreme Court was dealing with a case wherein the Tax Department had made demands worth nearly Rs 12,000 crores from Vodafone International as capital gains tax under the Income Tax Act, 1961. The Supreme Court rightly interpreted the law as it stood on the date of the transaction and arrived at the conclusion that Vodafone International was not liable to pay the demand of nearly Rs 12,000 crores. The judgment was met with appreciation from the investor community around the world. It instilled confidence in the Indian justice system for domestic and foreign investors. It paved the way for believing that even though the executive arm of the State may want to unreasonably extract taxes from the corporates, the judicial arm will undo the wrongs and deliver justice. Nevertheless, this appreciation was short spanned, because the Finance Act of 2012[18] overturned the effect of the judgment and reassured the masses that Indian authorities would not leave any stone unturned for extracting maximum taxes from corporations. However, this episode left an indelible impression in the minds of the investor masses about the Supreme Court.

Per contra, in the present case, the Union of India by the miscellaneous application brought to the notice of the Supreme Court the plausible adverse impact on the telecom sector if sufficient time was not granted to the TSPs to clear the AGR dues. The Union of India took notice of the ramifications of the Supreme Court’s order arising out of its own interpretation of the AGR definition, it accordingly submitted a plan for recovery of the AGR dues. However, the Supreme Court reduced the time period by half without substantiating it with any reason whatsoever. It is respectfully submitted that when the revenue collector (in this case the DoT) had sought a time-frame of twenty years for collection of the AGR dues, the Supreme Court, by reducing the period to ten years has performed an act of judicial encroachment. A reasoned order is one of the most fundamental principles of law, it is humbly submitted that in AGR case[19] the Supreme Court has failed to adhere to the same.

In 2017, in Shivashakti Sugars Ltd. v. Shree Renuka Sugar Ltd.[20] the Supreme Court was dealing with a case wherein the High Court had ordered the closure of a sugar factory for violating the minimum distance requirement. The Supreme Court while quashing the order of closure succinctly highlighted the interplay between economics and law and the need to keep economic considerations in mind while pronouncing judicial decisions. It observed that “… the Court needs to avoid that particular outcome which has a potential to create an adverse effect on employment, growth of infrastructure or economy or the revenue of the State. It is in this context that economic analysis of the impact of the decision becomes imperative.”[21] This judgment is considered as a paradigm case for law and economics in the judicial sphere for considering the economic impact of judicial decisions.

However, while delivering the judgment in AGR case[22], the Supreme Court seems to have ignored the aforesaid observation in its holistic form and seems to have considered only the last factor stated therein, namely, “adverse effect on revenue of the State”.

While hearing the plea of the TSPs disputing the calculation of the AGR dues, the Supreme Court observed that there can be no going back on AGR dues and held that the calculation of the DoT is to be treated as final, adding that there is no scope for any reassessment or recalculation of the said dues.[23] Notwithstanding the analogy between the AGR dues and income tax, even the taxation laws allow the assessees to challenge the demand orders and dispute the calculation of the tax dues. Assessees are heard before the tax demand is finally adjudicated. However, the resistance and the obdurate stand taken by the Supreme Court for not hearing the parties on the disputes for calculation of the AGR dues is in the author’s humble opinion incomprehensible and blatantly in denial of their right to be heard on the issue of computation.

As discussed above, in 2012, when the Supreme Court delivered the judgment in Vodafone case[24], the Government proactively introduced in the Finance Act, 2012 amendments to the Income Tax Act, 1961 to nullify the effect of the Court’s ruling. This was done to enable collection of revenue from Vodafone International. However, when the judgment in AGR case[25] was delivered in late 2019 enabling the Government to collect revenue, the Union of India took cognizance of the economic impact and brought before the Court the huge repercussions of its order and proposed to grant the TSPs some relief by providing them twenty years to make the payment of the AGR dues. However, in this case, the Supreme Court diluted the State’s attempt to ease the situation and granted a half-hearted “relief” to the TSPs.

Conclusion

Although it may be contended that the DoT has a right to maximise its revenue from the collection of licence fees, the manner in which the DoT may levy, demand and collect the licence fees must be reasonable and equitable. The most apt quote to draw guidance from for the aforesaid in context of taxes is,

“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”[26]

Besides the DoT’s role, the indulgence shown by Supreme Court in the matter, as regards the determination of method of calculation of the AGR and also, as regards the determination of the timeline for the clearing of the AGR dues has left legal minds pondering over the rationale of the Supreme Court behind the same. The Supreme Court interpreted the definition of AGR not only without considering its economic impact but also without taking into account the lack of equitable considerations. Further, the Supreme Court frustrated the Union of India’s attempt to give some relief to the TSPs from the burden which it itself had inflicted and offered to aid the State to quickly recover its dues, so to say by aggressively gathering revenue. The foregoing culminates in one conclusion, that is, the process of transformation of the constitutional court into an executive court[27] has progressed over the years.


Advocate and Licentiate Company Secretary.

[1] 2019 SCC OnLine SC 1887.

[2] 2019 SCC OnLine SC 1887.

[3] New Telecom Policy, 1999. <http://www.scconline.com/DocumentLink/nyJLbz00>.

[4]License Agreement for Unified License, Cl. 18 <https://dot.gov.in/sites/default/files/Unified%20Licence_0.pdf> accessed on 14-6-2021.

[5] Telegraph Act, 1885. <http://www.scconline.com/DocumentLink/zjzpZh69>.

[6]License Agreement for Unified License, Cl. 18. <https://dot.gov.in/sites/default/files/Unified%20Licence_0.pdf> accessed on 14-6-2021.

[7] 2019 SCC OnLine SC 1887.

[8] (2020) 9 SCC 748 : 2020 SCC OnLine SC 703.

[9] The arrears accumulated for a period spanning over twenty years.

[10] See Gautam Bhatia, The Fear of Executive Courts (The Hindu, 14-12-2018). <https://www.thehindu.com/opinion/lead/the-fear-of-executive courts/article25735185.ece#:~:text=By%20an%20executive%20court%2C%20I%20mean%20a%20court,compunctions%20in%20navigating%20only%20according%20to%20that%20compass> accessed on 27-11-2020.

[11] Income Tax Act, 1961. <http://www.scconline.com/DocumentLink/7VAV83wS>.

[12] Taxable income under the Income Tax Act, 1961 allows various deductions of expenses and expenses.

[13] As prescribed by the Institute of Chartered Accountants of India.

[14] 1985 AC 191 : (1984) 3 WLR 592 : (1984) 3 All ER 229.

[15] Bharati Hexacom Ltd. v. Union of India, 2017 SCC OnLine Tri 125.

[16] New Telecom Policy, 1999, para 3. <http://www.scconline.com/DocumentLink/nyJLbz00>

[17] (2012) 6 SCC 613.

[18] Finance Act of 2012. <http://www.scconline.com/DocumentLink/83JFSs1j>.

[19] (2020) 9 SCC 748 : 2020 SCC OnLine SC 703.

[20] (2017) 7 SCC 729 : 2017 SCC OnLine SC 602.

[21] (2017) 7 SCC 729 : 2017 SCC OnLine SC 602, para 44.

[22] (2020) 9 SCC 748 : 2020 SCC OnLine SC 703.

[23] (2020) 9 SCC 748 : 2020 SCC OnLine SC 703, para 38.2.

[24] (2012) 6 SCC 613.

[25] 2019 SCC OnLine SC 1887.

[26]Jean-Baptiste Colbert, Louis XIV’s Finance Minister famously declared this quote which meant that, “the largest possible amount of revenue with the smallest possible amount of economic and political damage.”

[27] See Gautam Bhatia, The Fear of Executive Courts (The Hindu, 14-12-2018). https://www.thehindu.com/opinion/lead/the-fear-of-executive courts/article25735185.ece#:~:text=By%20an%20executive%20court%2C%20I%20mean%20a%20court,compunctions%20in%20navigating%20only%20according%20to%20that%20compass> accessed on 27-11-2020.

Legislation UpdatesRules & Regulations

On September 06, 2021, the Central Board of Direct Taxes makes the Income-tax (26th Amendment) Rules, 2021 further to amend Income-tax Rules, 1962.

 

The Amendment Act inserts new provision In the Income-tax Rules, 1962, after rule 14B:

 

14C. Prescribed manner of authentication of an electronic record under electronic verification code under sub-clause (b) of clause (i) of sub-section (7) of section 144B.- For the purposes of sub-clause (b) of clause (i) of sub-section (7) of section 144B, where an assessee or any other person submits an electronic record by logging into his registered account in designated portal of the Income-tax Department, it shall be deemed that the electronic record has been authenticated under electronic verification code.

Explanation.- For the purposes of this rule, ―designated portal shall have the same meaning as assigned to it in in clause (i) of the Explanation below to section 144B‘.

Case BriefsSupreme Court

Supreme Court: The division bench of RF Nariman* and BR Gavai, JJ has explained the object and scope of Explanation 3C of the Section 43B of the Income Tax Act, 1961 and has held that Explanation 3C is clarificatory as it explains Section 43B(d) as it originally stood and does not purport to add a new condition retrospectively.

Section 43B. Certain deductions to be only on actual payment – Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

xxx xxx xxx

(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

xxx xxx xxx

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

xxx xxx xxx

Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid.

Why was Section 43B inserted?

Section 43B was originally inserted by the Finance Act, 1983 w.e.f. 1st April, 1984 after taking note of the fact that in several cases taxpayers were not discharging their statutory liability such as in respect of excise duty, employer’s contribution to provident fund, Employees State Insurance Scheme, etc., for long periods of time, extending sometimes to several years.

To curb this practice, the Finance Act inserted a new section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee.

Why was Explanation 3C inserted?

The Finance Act, 2006 inserted Explanation 3C w.e.f. 1st April, 1989 after it was brought to the Board’s notice that certain assessees were claiming deduction under section 43B on account of conversion of interest payable on an existing loan into a fresh loan on the ground that such conversion was a constructive discharge of interest liability and, therefore, amounted to actual payment. Claim of deduction against conversion of interest into a fresh loan is a case of misuse of the provisions of section 43B.

A new Explanation 3C was, therefore, inserted to clarify that if any sum payable by the assessee as interest on any loan or borrowing, referred to in clause (d) of section 43B, is converted into a loan or borrowing, the interest so converted, shall not be deemed to be actual payment.

Object of Section 43B and Explanation 3C

The object of Section 43B, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the nonobstante clause contained in the beginning of the provision, coupled with the deduction being allowed irrespective of the previous years in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by it.

“In short, a mercantile system of accounting cannot be looked at when a deduction is claimed under this Section, making it clear that incurring of liability cannot allow for a deduction, but only “actual payment”, as contrasted with incurring of a liability, can allow for a deduction.”

Explanation 3C, which was introduced for the “removal of doubts”, only made it clear that interest that remained unpaid and has been converted into a loan or borrowing shall not be deemed to have been actually paid.

“… at the heart of the introduction of Explanation 3C is misuse of the provisions of Section 43B by not actually paying interest, but converting such interest into a fresh loan.”

Hence,

  • Since Explanation 3C was added in 2006 with the object of plugging a loophole – i.e. misusing Section 43B by not actually paying interest but converting interest into a fresh loan, bona fide transactions of actual payments are not meant to be affected.
  • A retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood.
  • Any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per Cape Brandy Syndicate v. Inland Revenue Commissioner [1921 (1) KB 64] as followed in Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613.

[MM Aqua Technologies Ltd. v. Commissioner of Income Tax, 2021 SCC OnLine SC 575, decided on 11.08.2021]


*Judgment by: Justice RF Nariman

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Delhi: Dealing with the validity of the order passed under section 143(3), which was passed by an officer who did not have the Jurisdiction on the case of the Assessee and whether, the second Statutory notice issued under section 143(2) by the jurisdiction Assessing Officer, is also barred by limitation. The tribunal has reiterated that the notice under section 143(2) can be issued within a period of six months from the end of the financial year in which the return was filed. Further, on the point of jurisdiction relating to the issuance of notice also makes the notice under Section 143(2) void-ab-initio

The return of income for Assessment Year 2015-16 was e-filed by the Assessee on 2/9/2015 declaring a total income of Rs. 8,76,900/-. The case was selected for complete scrutiny under CASS. The Assessing Officer after considering the submissions and the relevant documents passed the final assessment order u/s 143 (3) of the Income Tax Act on 1st May, 2017, and accepted the declared income by the Assessee.

The Principal Commissioner of Income Tax (CIT) issued a notice under Section 263(1) on 16/08/2017. The Principal CIT vide order dated 7/11/2017 set aside the original assessment order and directed the Assessing Officer to pass the assessment order afresh.

Being aggrieved by the order u/s 263 of the Income Tax Act, 1961 passed by the Principal CIT, the Assessee preferred an Appeal before the Income Tax Appellate Tribunal (hereinafter referred as to “Tribunal”).

Whereby, the tribunal was pleased to held that the notice under section 143(2) can be issued within a period of six months from the end of the financial year in which the return was filed. Further, on the point of jurisdiction relating to the issuance of notice also makes the notice under Section 143(2) void-ab-initio.

“The tribunal was pleased to held that the notice under Section 143(2) can be issued after an income tax return has been filed but within a period of six months from the end of the financial year in which the return was filed. Thus, the first notice under Section 143(2) was issued on 01.08.2016 which by the non-jurisdictional Assessing Officer and jurisdictional Assessing Officer issued the notice on 10.03.2017 which is beyond the limitation period as per the statutory provisions of the Act. Thus, the notice is time-barred and hence, the assessment itself becomes void-ab-initio.

the proper jurisdiction of the Assessing Officer in the present case is that of DCIT, Circle 25(2) as the assessment for A.Y. 2014-15 has proceeded before the said Assessing Officer in Assessee’s case. There was no change of jurisdiction sought by the Revenue as per Section 124 read with Section 120 of the Income Tax Act, 1961. Thus, on the point of jurisdiction relating to the issuance of notice also makes the notice under Section 143(2) void-ab-initio.”

[Nirmal Gupta v. Pr. CIT-9,  2021 SCC OnLine ITAT 345, decided on 22.06.2021]


† Advocate, Supreme Court of India and Delhi High Court  

Case BriefsSupreme Court

Supreme Court: Interpreting the true scope of Section 80-IA(5) of the Income Tax Act, 1961, the bench of L. Nageswara Rao* and Vineet Saran, JJ has held that the scope of sub-section (5) of Section 80- IA of the Act is limited to determination of quantum of deduction under sub-section (1) of Section 80-IA of the Act by treating ‘eligible business’ as the ‘only source of income’.

Provision in question

Sub-section (1) and sub-section (5) of Section 80-IA which are relevant for these Appeals are as under:

“80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.— (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent. of the profits and gains derived from such business for ten consecutive assessment years.

* * * *

(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of subsection (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

The essential ingredients of Section 80-IA (1) of the Act are:

  1. a) the ‘gross total income’ of an assessee should include profits and gains;
  2. b) those profits and gains are derived by an undertaking or an enterprise from a business referred to in subsection (4);
  3. c) the assessee is entitled for deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years; and
  4. d) in computing the ‘total income’ of the Assessee, such deduction shall be allowed.

The import of Section 80-IA is that the ‘total income’ of an assessee is computed by taking into account the allowable deduction of the profits and gains derived from the ‘eligible business’.

Background

In the case at hand, the ‘gross total income’ of the Assessee for the assessment year 2002-03 was less than the quantum of deduction determined under Section 80-IA of the Act. The Assessee contended that income from all other heads including ‘income from other sources’, in addition to ‘business income’, have to be taken into account for the purpose of allowing the deductions available to the Assessee, subject to the ceiling of ‘gross total income’. The Appellate Authority was of the view that there is no limitation on deduction admissible under Section 80-IA of the Act to income under the head ‘business’ only.

The Court was hearing a case where the Revenue had argued that sub-section (5) of Section 80-IA refers to computation of quantum of deduction being limited from ‘eligible business’ by taking it as the only source of income.

“… the language of sub-section (5) makes it clear that deduction contemplated in sub-section (1) is only with respect to the income from ‘eligible business’ which indicates that there is a cap in sub-section (1) that the deduction cannot exceed the ‘business income’.”

On the other hand, the Assessee had argued that sub-section (5) pertains only to determination of the quantum of deduction under sub-section (1) by treating the ‘eligible business’ as the only source of income.

The claim of the Assessee was that in computing its ‘total income’, deductions available to it have to be set-off against the ‘gross total income’, while the Revenue contends that it is only the ‘business income’ which has to be taken into account for the purpose of setting-off the deductions under Sections 80-IA and 80-IB of the Act

Analysis and conclusion

In Synco Industries Ltd. v. Assessing Officer, Income Tax, Mumbai, (2008) 4 SCC 22, the Supreme Court was concerned with Section 80-I of the Act. Section 80-I(6), which is in pari materia to Section 80-IA(5), is as follows:

“ 80-I(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under subsection (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

It was held in Synco Industries that

  • for the purpose of calculating the deduction under Section 80-I, loss sustained in other divisions or units cannot be taken into account as sub-section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income.
  • Section 80-I(6) of the Act dealt with actual computation of deduction whereas Section 80-I(1) of the Act dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee.

In CIT (Central), Madras v. Canara Workshops (P) Ltd., Kodialball, Mangalore, (1986) 3 SCC 538, the question that arose for consideration before this Court related to computation of the profits for the purpose of deduction under Section 80-E, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E of the Act, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels.

The Court was, however, not in agreement with the submissions made by the Revenue. It was, hence, held that the profits and gains by an industry entitled to benefit under Section 80-E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.

Referring to the aforesaid authorities, the Court held that

“… Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’.”

[CIT v. Reliance Energy Ltd., 2021 SCC OnLine SC 349, decided on 28.04.2021]


Judgment by: Justice L. Nageswara Rao 

Know Thy Judge| Justice L. Nageswara Rao

For Revenue: Senior Advocate Arijit Prasad

For Assessee: Senior Advocate Ajay Vohra

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Bangalore: Dealing with the issue of whether the CIT(A) was justified in confirming the addition of amount representing 15% of the sale proceeds deducted by the Monitory committee from e-auction sale of mineral stock belonging to the Assessee and which was contributed to SPV, as per the direction given by the Supreme Court,  the ITAT held that the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the Assessee, but at the same time it is allowable as deduction u/s 37(1) of the Income Tax Act, 1961.

Over rampant mining in the state Karnataka the Supreme Court in the case of Samaj Parivartana Samudaya v. State of Karnataka, (2019) 17 SCC 753 imposed a complete ban on mining in the district of Bellary. Further, after application and request the mining work was resumed after categorizing the mines in three segments ‘A’, ‘B’ and ‘C’, depending on various types of violations by Lessee and financial obligation were created on account of damages and loss caused to the forest and environment by contravention of laws

The Assessee was a partnership firm and is engaged in the business of extraction of iron ore by taking lease of lands from Government. The mines owned by the Assessee herein have been categorised as “B” category mines. Hence 15% of sale, proceeds have been deducted by Monitoring Committee during the years under consideration.

The Assessee had reduced the above-said amounts from the gross sale proceeds and accordingly declared only net sale proceeds as its income in both the years. Assessment proceedings were initiated whereby the AO held that: –

  1. Entire sale proceeds as per E-auction bit sheets/invoices has to be assessed to tax as trading receipts. Hence it constitutes income in the hands of the Assessee.
  2. The amount retained by CEC/MC, as per directions of the Supreme Court on behalf of the Assessee, which is given to the Special Purpose Vehicle (SPV) is on account of damages and loss caused to the forest and environment by contravention of laws. The said amount cannot be allowed as deduction out of sale proceeds even after the accrual of such liability which is being compensation and penal in nature for contravention of laws. The amount so retained for adjusting penalty and other liabilities is nothing but the appropriation of the profit of the Assesse
  3. SPV established for Social-economic development of the mining area is nothing but relating to Corporate Social responsibility only. Hence it is not allowable u/s 37(1), as it was not incurred by the Assessee wholly and exclusively for the purpose of business. It was retained to meet the penal and other liabilities for contravention of law and therefore, the said amount cannot be allowed as deduction in view of the specific Explanation to section 37(1) of the Act.

The CIT(A) confirmed the view taken by the AO. Being aggrieved by the said order, the Assessee preferred an Appeal before the ITAT, whereby ITAT held that:

“It cannot be said that these amounts are penal in nature. The Assessee could not have resumed the mining operations. Therefore, these expenses are incidental to carrying on the business and hence allowable u/s 37(1) of the Act.”

“In view of the foregoing discussions and also following the decision rendered by the co-ordinate benches, we hold that the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the Assessee, but at the same time it is allowable as deduction u/s 37(1) of the Act. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue in both the years under consideration and direct the AO to delete the impugned addition in both the years.”

Thus the Appeal preferred by the Assessee was allowed and the ITAT was pleased to hold the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the Assessee, but at the same time it is allowable as deduction u/s 37(1) of the Act.

 [M/s. M. Hanumantha Rao Vs. A.C.I.T I.T.A. No. 3298 % 3299/Bang/2018. Decided on 25.02.2021].


† Advocate, Supreme Court of India and Delhi High Court 

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman*, Hemant Gupta and BR Gavai, JJ has held that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India.

Background

The Court was hearing an appeal arising from the judgment of the High Court of Karnataka dated 15.10.2011 reported as CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494, wherein it was held that the amounts paid by the concerned persons resident in India to non-resident, foreign software suppliers, amounted to royalty and as this was so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961, thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source [TDS] under section 195 of the Income Tax Act.

The Court grouped the appeals before it into four categories:

i) The first category dealt with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer

ii) The second category of cases dealt with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users.

iii) The third category dealt with cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users.

iv) The fourth category dealt with cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users

Scheme of Income Tax Act vis-à-vis applicability of Double Taxation Avoidance Agreements (DTAA)

The scheme of the Income Tax Act, in relation to the questions before the Court, is that for income to be taxed under the Income Tax Act, residence in India, as defined by section 6, is necessary in most cases.

Under section 5(2) of the Income Tax Act, the total income of a person who is a non-resident, includes all income from whatever source derived, which accrues or arises or is deemed to accrue or arise to such person in India during such year. This, however, is subject to the provisions of the Income Tax Act. Certain income is deemed to arise or accrue in India, under section 9 of the Income Tax Act, notwithstanding the fact that such income may accrue or arise to a non-resident outside India. One such income is income by way of royalty, which, under section 9(1)(vi) of the Income Tax Act, means the transfer of all or any rights, including the granting of a licence, in respect of any copyright in a literary work.

That such transaction may be governed by a DTAA is then recognized by section 5(2) read with section 90 of the Income Tax Act, making it clear that the Central Government may enter into any such agreement with the government of another country so as to grant relief in respect of income tax chargeable under the Income Tax Act or under any corresponding law in force in that foreign country, or for the avoidance of double taxation of income under the Income Tax Act and under the corresponding law in force in that country.

“What is of importance is that once a DTAA applies, the provisions of the Income Tax Act can only apply to the extent that they are more beneficial to the assessee and not otherwise.”

Further, by explanation 4 to section 90 of the Income Tax Act, it has been clarified by the Parliament that where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at. It is only where there is no such definition that the definition in the Income Tax Act can then be applied.

The machinery provision contained in section 195 of the Income Tax Act is inextricably linked with the charging provision contained in section 9 read with section 4 of the Income Tax Act, as a result of which, a person resident in India, responsible for paying a sum of money, “chargeable under the provisions of [the] Act”, to a non-resident, shall at the time of credit of such amount to the account of the payee in any mode, deduct tax at source at the rate in force which, under section 2(37A)(iii) of the Income Tax Act, is the rate in force prescribed by the DTAA. Importantly, such deduction is only to be made if the non-resident is liable to pay tax under the charging provision contained in section 9 read with section 4 of the Income Tax Act, read with the DTAA.

When is making of copies or adaptation of a computer programme not copyright infringement?

The making of copies or adaptation of a computer programme in order to utilise the said computer programme for the purpose for which it was supplied, or to make up back-up copies as a temporary protection against loss, destruction or damage so as to be able to utilise the computer programme for the purpose for which it was supplied, does not constitute an act of infringement of copyright 54 under section 52(1)(aa) of the Copyright Act. What is referred to in section 52(1)(aa) of the Copyright Act would not amount to reproduction so as to amount to an infringement of copyright.

Section 52(1)(ad) is independent of section 52(1)(aa) of the Copyright Act, and states that the making of copies of a computer programme from a personally legally obtained copy for non-commercial personal use would not amount to an infringement of copyright. However, it is not possible to deduce from this that if personally legally obtained copies of a computer programme are to be exploited for commercial use, it would necessarily amount to an infringement of copyright.

“Section 52(1)(ad) of the Copyright Act cannot be read to negate the effect of section 52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in section 52(1)(aa) of the Copyright Act.”

Definition of Royalty in the DTAAs vis-à-vis the Income Tax Act

Under Article 12 of the India-Singapore DTAA, the term “royalties” uses the expression “means”, thereby making it exhaustive and it refers to payments of any kind that are received as a consideration for the use of or the right to use any copyright in a literary work.

As opposed to this, the definition contained in explanation 2 to section 9(1)(vi) of the Income Tax Act, is wider in at least three respects:

i. It speaks of “consideration”, but also includes a lump-sum consideration which would not amount to income of the recipient chargeable under the head “capital gains”;

ii. When it speaks of the transfer of “all or any rights”, it expressly includes the granting of a licence in respect thereof; and

iii. It states that such transfer must be “in respect of” any copyright of any literary work.

However, even where such transfer is “in respect of” copyright, the transfer of all or any rights in relation to copyright is a sine qua non under explanation 2 to section 9(1)(vi) of the Income Tax Act. In short, there must be transfer by way of licence or otherwise, of all or any of the rights mentioned in section 14(b) read with section 14(a) of the Copyright Act.

The transfer of “all or any rights (including the granting of a licence) in respect of any copyright”, in the context of computer software, is referable to sections 14(a), 14(b) and 30 of the Copyright Act. The expression “in respect of” is equivalent to “in” or “attributable to”.

“Thus, explanation 2(v) to section 9(1)(vi) of the Income Tax Act, when it speaks of “all of any rights…in respect of copyright” is certainly more expansive than the DTAA provision, which speaks of the “use of, or the right to use” any copyright.”

However, when it comes to the expression “use of, or the right to use”, the same position would obtain under explanation 2(v) of section 9(1)(vi) of the Income Tax Act, inasmuch as, there must, under the licence granted or sale made, be a transfer of any of the rights contained in sections 14(a) or 14(b) of the Copyright Act, for explanation 2(v) to apply. To this extent, there will be no difference in the position between the definition of “royalties” in the DTAAs and the definition of “royalty” in explanation 2(v) of section 9(1)(vi) of the Income Tax Act.

Conclusion

The Court held that the “person” mentioned in section 195 of the Income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of “royalty” inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute.

“… persons are not obligated to do the impossible, i.e., to apply a provision of a statute when it was not actually and factually on the statute book.”

Hence, the distribution of copyrighted computer software, would not constitute the grant of an interest in copyright under section 14(b)(ii) of the Copyright Act, thus necessitating the deduction of tax at source under section 195 of the Income Tax Act.

The Court highlighted that the effect of section 90(2) of the Income Tax Act, read with explanation 4 thereof, is to treat the DTAA provisions as the law that must be followed by Indian courts, notwithstanding what may be contained in the Income Tax Act to the contrary, unless more beneficial to the assessee. Hence, it was held that,

“Given the definition of royalties contained in Article 12 of the DTAAs, there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.”

[Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax, 2021 SCC OnLine SC 159, decided on 02.03.2021]


*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For appellants: Senior Advocates Arvind Datar, Percy Pardiwala, S. Ganesh, Ajay Vohra, Preetesh Kapur and Advocates Sachit Jolly, Kunal Verma

For Revenue: Additional Solicitor General Balbir Singh

Experts CornerTarun Jain (Tax Practitioner)

  1. Introduction

Tax minimisation pursuits are as old as tax itself. While there is no fundamental right to be immune from taxation,[1] there is nonetheless judicial recognition that “every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be”.[2] The Indian judiciary has witnessed tumultuous swings on the scope of taxpayers’ abilities to adjust their affairs. On the one hand are the sui generis observations of Justice Chinnappa Reddy in McDowell[3] inter alia highlighting that “no one can now get away with a tax avoidance project with a mere statement that there is nothing illegal about it” versus the other decisions of the Supreme Court, such as Azadi Bachao Andolan,[4] Walfort Share,[5] Vodafone International,[6] etc., which continue to vindicate tax planning.

In the year 2012 and in the context of income tax law, the Parliament intervened by inserting statutory provisions to address tax avoidance disputes and thereby adding legislative certainty as regards their respective rights of the taxpayers vis-à-vis the tax officer’s ability to revisit transactions. It is not for the first time that anti-avoidance rules have been inserted in the tax law. In fact tax laws are replete with provisions which repel specific class of prohibited transactions.[7] The difference between these provisions vis-à-vis the 2012 change, which introduced General Anti-Avoidance Rules (or GAAR), is that GAAR are potentially limitless in their scope and extend to all transactions.

  1. Legislative history

The introduction of GAAR in the law was originally proposed in the Direct Taxes Code Bill, 2009, which was followed by Direct Taxes Code Bill, 2010, but did not fructify. Thereafter the GAAR provisions were enacted in the Income Tax Act, 1961 (Act) in terms of the amendments carried out by Finance Act, 2012. Seeking to accommodate the representations from various quarters, the Government of India appointed an Expert Committee under the chairmanship of Dr Parthasarathi Shome which made extensive recommendations on GAAR.[8] Taking note of these recommendations, the relevant provisions of the Act were amended and also supplemented by detailed rules and administrative clarifications. The application of the GAAR law was also revised and amended law came into force from 1-4-2017.[9]

  1. Scope of GAAR – Impermissible avoidance arrangement

For the GAAR law to apply, it is necessary that an “impermissible avoidance arrangement” (IAA) exists.[10] The expression IAA has been defined in the Act[11] and the relevant provision states as under:

  1. Impermissible avoidance arrangement.— (1) An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—

 (a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;

 (b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

 (c) lacks commercial substance or is deemed to lack commercial substance under Section 97, in whole or in part; or

 (d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

As can be seen from the above, IAA is defined very widely to cover not just the transactions which are not at arm’s length but even those which are considered as resulting in misuse of the Act (either directly or indirectly), lacking commercial substance or lacking bona fide purpose. The same provision further provides that even where the “main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit”, it shall be presumed that the entire arrangement has the main purpose of obtaining a tax benefit; the burden is upon the taxpayer concerned to rebut such presumption.[12]

As if such detailed scope of IAA was not enough, there are other provisions in the Act which supplement (rather enlarge) the scope of IAA. The Act defines the scope of arrangements which are deemed to lack commercial substance,[13] meaning and scope of “round tripping” (which is one of the situations which is deemed to lack commercial substance),[14] besides delineating when does a person become an “accommodating party” for the purpose of IAA,[15] factors considered irrelevant to determine commercial substance in a transaction,[16] etc. In addition, another provision contains a near-exhaustive set of definitions specific to the GAAR chapter under the Act.[17]

  1. Consequences of application of GAAR

Once a transaction is covered within the scope of IAA, then wide-ranging consequences can follow.[18] It is stipulated that where an IAA exists, “then the consequences, in relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in such manner as is deemed appropriate, in the circumstances of the case”. The Act itself stipulates the likely consequences in such scenarios, which include disregarding, combining or recharacterizing any step or the whole IAA; disregarding any accommodating party or treating any accommodating party and any other party as one and the same person; reallocating amongst the parties to the arrangement accruals, receipts, expenditures, etc., repositioning the place of residence of any party to the arrangement or the situs of an asset or transaction; lifting of corporate veil, etc. The Act further provides that, to this end, “(i) any equity may be treated as debt or vice versa; (ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or (iii) any expenditure, deduction, relief or rebate may be recharacterized.”[19] The Act, in addition, provides consequences in respect of the connected persons and accommodating parties.[20] In short, once a transaction is declared as an IAA, the underlying tax benefit would be brought to tax irrespective of the legal form of the transaction or the position of the parties.

  1. Procedural dynamics

The aforesaid survey of statutory provisions relating to GAAR unfailingly manifests its wide scope and consequences. In order to ensure against its indiscriminate application and arrest potential of abuse, the Act provides for framing of “guidelines” and stipulation of “conditions” which may be prescribed and the GAAR provisions “shall be applied in accordance” with such guidelines and conditions.[21] These guidelines are prescribed in Part DA of the Income Tax Rules, 1962 (Rules).

The very first provision in the Rules stipulates carve-outs i.e. situations where GAAR provisions shall not apply.[22] There are four different situations identified in this provision. First is a monetary threshold in terms of which GAAR would not apply to an IAA where the tax benefit does not exceed INR 3 crores. This is presumably to give relief to small transactions. Second is a class exclusion whereby GAAR does not apply to foreign institutional investors (i.e. FIIs) who do not claim tax treaty benefits and satisfy other stipulated conditions. Third is also a class exclusion whereby non-resident investors of a FII are excluded. The rationale for these exclusions was discussed in detail in the Expert Committee Report, which is evidently to protect foreign investors and grant legal certainty to them. Fourth is a provision colloquially referred as grandfathering provision whereby income arising out of investment transfer made prior to 1-4-2017 (i.e. before application of GAAR) is excluded from the scope of GAAR. This is to ensure against the retrospective application of GAAR law. The other provisions in the Rules provide for the show-cause notice mechanism to be issued by the assessing officer (AO) to the taxpayer concerned before application of GAAR,[23] time-limits for various actions to be undertaken under the GAAR provisions, etc. In addition, certain administrative clarifications[24] have been issued by the Income Tax Department which explain its perspective on the interpretation and application of GAAR provisions.

This takes us back to the Act which prescribes a detailed procedure for applying GAAR.[25] It is stipulated that in a situation where the AO considers that the transaction may be an IAA, he is required to a make a reference to the Principal Commissioner of Income Tax, who, if he agrees, shall issue a notice to the taxpayer concerned and issue necessary directions after hearing the response. In the event the explanation of the taxpayer is not found satisfactory, then a reference has to be made to an approval panel which would, after hearing both the taxpayer and the tax officer, pass directions determining whether a case for IAA is made out. The approval panel would comprise of three members; the chairperson being a serving or former High Court Judge, one senior Indian Revenue Service member and one member who “shall be an academic or scholar having special knowledge of matters, such as direct taxes, business accounts and international trade practices”. The completion of proceedings relating to IAA shall be in terms of the directions of the approval panel, which must be issued within six months of reference being made to it.

  1. Conclusion

A review of the procedural dynamics reveals that multiple stages of hearing and application of mind by different classes of authorities, including those representing the judiciary and external experts, are envisaged in the GAAR application process. This is possibly directed towards driving away subjectivity before the GAAR consequences are applied, in line with the recommendations of the Expert Committee and also emulating international best practices. On a larger level, however, the introduction of GAAR in the tax law reveals the legislative non-tolerance towards tax avoidance manoeuvers. Looked from another perspective, the constant tussle between the taxpayer and the tax officer is sought to be injuncted by the legislature with GAAR, by prescribing the substantive parameters on which the conduct of the taxpayer shall be assessed and the procedure which shall preserve the sanctity of adjudication and instil fairness in this exercise. It is noteworthy that despite the extensive litigation generally observed in tax laws, not a single case has been reported where GAAR law has been applied even though the law already being in force for a few years now. This indicates that the introduction of GAAR in the income tax law has brought about both a perceptual and implementation change insofar tax avoidance is concerned.

†Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.

[1]State of W.B. v. Subodh Gopal Bose, AIR 1954 SC 92, para 20, vide Patanjali Sastri C.J.

[2]IRC v. Duke of Westminster, 1936 AC 1.

[3]McDowell and Co. Ltd. v. CTO, (1985) 3 SCC 230 : (1985) 154 ITR 148.

[4]Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 : (2003) 263 ITR 706.

[5]CIT v. Walfort Share and Stock Brokers (P) Ltd., (2010) 8 SCC 137 : (2010) 326 ITR 1.

[6]Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 : (2012) 341 ITR 1.

[7]For illustration, see Ch. X, Income Tax Act, 1961.

[8] Expert Committee Report available HERE .

[9]S. 95(2) of the Income Tax Act, 1961 states “[t]his Chapter shall apply in respect of any assessment year beginning on or after the 1st day of April, 2018”.

[10]S. 95(1), Income Tax Act, 1961.

[11] S. 96(1), Income Tax Act, 1961.

[12] S. 96(2), Income Tax Act, 1961.

[13] S. 97(1), Income Tax Act, 1961.

[14] S. 97(2), Income Tax Act, 1961.

[15] S. 97(3), Income Tax Act, 1961.

[16] S. 97(4), Income Tax Act, 1961. It is noteworthy that “the fact of payment of taxes, directly or indirectly, under the arrangement”, “period or time for which the arrangement exists”, etc. are specifically provided as immaterial for the purpose of the commercial substance analysis.

[17] S. 102, Income Tax Act, 1961. For illustration, this provision defines expressions such as arrangement, asset, benefit, connected person, fund, party, relative, tax benefit, etc.

[18] S. 98, Income Tax Act, 1961, titled “consequences of impermissible avoidance arrangement”.

[19] S. 98(2), Income Tax Act, 1961.

[20] S. 99, Income Tax Act, 1961.

[21] S. 101, Income Tax Act, 1961.

[22] R. 10-U, Income Tax Rules, 1962.

[23] R. 10-UB, Income Tax Rules, 1962.

[24]For illustration, see Circular No. 7 of 2017 dated 27-1-2017, available HERE .

[25] S. 144-BA, Income Tax Act, 1961.

Case BriefsTribunals/Commissions/Regulatory Bodies

Income-tax Appellate Tribunal, New Delhi: Dealing with the issue of enhancement by CIT(A) which was never therein the reasons recorded for reopening the assessment. The ITAT was pleased to hold that the CIT(A) exceeded his jurisdiction in making the enhancement on an issue which was never there in the reasons recorded for reopening the assessment.

The Assessee is a resident of Meerut and has been filing his return from the same address before the ITO, Ghaziabad. On the basis of an AIR information ITO, Ghaziabad initiated reassessment proceedings. The information suggested that Assessee has purchased property. All the notices and intimations were issued to the address which was mentioned in the transfer deed of the property. Since all the notices were served at this address, where the Assessee was not residing he could not respond to the notices and the assessment was framed ex parte u/s 144/147 of the Act.

Being aggrieved by the order passed by the Assessing Officer, the Assessee preferred an appeal before the CIT(A). CIT(A) was pleased to delete the addition made by the AO as no such property was purchased by the Assessee. However, the CIT (A) was of the opinion that the Assessee has in fact sold some property in the year under consideration and, accordingly, issued a notice of enhancement.

Being Aggrieved by the enhancement the Assessee preferred an Appeal before the ITAT on a limited issue that CIT(A) had no power to enhance the assessment on an altogether different issue which was never there in the reasons recorded for reopening the assessment.

The ITAT was pleased to hold that the CIT(A) exceeded his jurisdiction in making the enhancement on an issue which was never there in the reasons recorded for reopening the assessment.

“However, the CIT(A) exceeded his jurisdiction in making the enhancement on an issue which was never there in the reasons recorded for reopening the assessment.

We are of the considered view that the enhancement done by the CIT(A) is bad in law and the reassessment notice issued by the AO, Ghaziabad is also bad in law. We, accordingly, set aside the assessment and quash the same. Since the foundation has been removed the order of the first appellate authority becomes non est”

Hence, the appeal was allowed. [Harendra Singh v. ITO, I.T.A No.1318/Del/2018, decided on 27-11-2020]


Akshat Malpani, Advocate, Supreme Court of India and Delhi High Court

Hot Off The PressNews

Taking another step towards e-governance and encouraging participation of citizen as stakeholders in curbing tax evasion, the Central Board of Direct Taxes has launched an automated dedicated e-portal on the e-filing website of the Department to receive and process complaints of tax evasion, foreign undisclosed assets as well as complaints regarding Benami properties.

The public can now file a Tax Evasion Petition through a link on the e-filing website of the Department https://www.incometaxindiaefiling.gov.in/ under the head “File complaint of tax evasion/undisclosed foreign asset/ Benami property”. The facility allows for filing of complaints by persons who are existing PAN/Aadhaar holders as well as for persons having no PAN /Aadhaar. After an OTP based validation process (mobile and/or email), the complainant can file complaints in respect of violations of the Income-tax Act, 1961, Black Money (Undisclosed Foreign Assets and Income) Imposition of Tax Act, 1961 and Prevention of Benami Transactions Act (as amended) in three separate forms designed for the purpose.

Upon the successful filing of the complaint, the Department will allot a unique number to each complaint and the complainant would be able to view the status of the complaint on the Department’s website. This e-portal is yet another initiative of the Income Tax Department to bring about enhanced ease of interaction with the Department, while strengthening its resolve towards e-governance.


Ministry of Finance

[Press Release dt. 12-01-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Mumbai (ITAT): Dealing with the issue on nature, scope, and explanation Section 263 (2)(a) to the effect that an order is deemed to be erroneous and prejudicial to the interests of the revenue or not. Further, what a prudent, judicious and responsible Assessing is to do in the court of Assessment Proceeding, whether an income is exempt under section 10(34) or not. The tribunal was pleased to conclude that, the true test for finding out whether Explanation 2(a) has been rightly invoked or not is, not simply existence of the view, but an objective finding that the Assessing Officer has not conducted, inquiries and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and a responsible public servant that the Assessing Officer is expected to be. Further, the investments in questions were held as the corpus, and, as such, the provisions of Section 13 (1)(d) were not attracted

The Assessee before us is a public charitable trust, set up in the year 1932, registered under the Bombay Trusts Act, 1950. The Assessee trust is also registered as a charitable institution under Section 12A of the Income Tax Act, 1961. The Assessee trust had filed its return of income, and its assessment, under section 143(3) of the Act, was completed determining ‘Nil’ taxable income. Subsequently, however, learned Commissioner of Income Tax (Exemptions) [hereinafter referred to as ‘the Commissioner’] issued a show-cause notice requiring the Assessee to show cause as to why this order not be subjected to revision under Section 263 of the Act. A subsequent show cause notice was also issued whereby the commissioner framed the issues on lack of inquiry by the Assessing Officer, the inadequacy of inquiry of the Assessing Officer, or taking up the pertinent line of inquiry but not following it to its logical conclusion by the Assessing Officer. Whereby the Commissioner was pleased to conclude that: –

  1. The investments in shares are covered by an exception provided in proviso (i) & (ia) to section 13(1)(d) and unless it is covered by exceptions, it results into denial of exemptions. Therefore, the AO has failed to make basic but necessary verification on this issue.
  2. It is the failure of Assessing Officer to make due verification on the basis of which jurisdiction under Section 263 can be invoked.
  3. Despite the material being available on records, which could lead to prima facie opinion that the trustees are having control over the affairs of Tata Sons Ltd., the Assessing Officer has failed to take the issue to any logical conclusion. Hence, the show-cause notice issued under Section 263 of I.T Act was reasonable and justified.
  4. In reference to Section 10, the Assessing Officer ought to have asked the assessee to demonstrate that the entire income of the Trust was applied or being applied for the purpose of the Trust. Not conducting due verification amounts to the order being erroneous and prejudicial to the interest of revenue. Similarly, adopting the pertinent line of inquiry but not taking it to the logical end also renders the order erroneous and prejudicial to the interest of revenue.
  5. Therefore order u/s 143(3) dated 30.12.2016 for the assessment year 2014-15 is erroneous in so far as it is prejudicial to the interests of the revenue. The Assessing Officer shall make a denovo assessment after proper examination of various issues.

Being Aggrieved by the stand of the Commissioner the Assessee preferred an Appeal before the Income Tax Appellate Tribunal, Mumbai whereby the tribunal was pleased to conclude that

  1. The true test for finding out whether Explanation 2(a) has been rightly invoked or not is, not simply existence of the view, but an objective finding that the Assessing Officer has not conducted, inquiries and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant that the Assessing Officer is expected to be.
  2. Whether an income is exempt under Sections 10(34) or under 11, it does not prejudice the interests of the revenue in any way. Accordingly, even if the order can be said to be ‘erroneous’ for any reason, it cannot be said to be ‘prejudicial to the interests of the revenue’, and, therefore, section 263 could not have been invoked on this point either. Further, the investments in questions were held as the corpus, and, as such, the provisions of Section 13 (1)(d) were not attracted.
  3. What essentially follows is that it’s not the declaration of an investment being a corpus investment but the fact of its being treated as capital and rather than using the investment for the purposes of the trust, using the income from investment for the purposes of the trust, which is determinative of its being in the nature of corpus investment. How the trust is treating the investment, i.e., in the capital field or not, is thus truly determinative of the investment being part of the corpus. Viewed thus, the mere fact of these investments being held as capital for at least more than four decades as conclusively established by the material before the Assessing Officer, and only income from these investments being applied for the purposes of the trust clearly establishes the fact of these investments being part of the corpus of the trust.
  4. A prima facie view of the Assessing Officer cannot be reason enough to decline the assessee certain tax treatment which has been given to the assessee all along for decades, but it can surely be reason enough to leave a window for appropriate action being taken against the assessee, if so warranted- and that is exactly what the Assessing Officer has done. The stand of the Assessing Officer is, in our humble understanding, quite apt and bonafide. It cannot be faulted.

The ITAT was pleased to set aside the order and judgment passed by the Commissioner “Learned Commissioner was clearly in error in invoking powers under section 263 on the ground that the Assessing Officer failed to examine the investments of the trust complying with the provisions of Section 11(5) and Section 13(1)(d) of the Act. We disapprove his action.” Further, the learned Commissioner was not justified in subjecting the assessment order to revision proceedings on the ground that the Assessing Officer did not examine the matter regarding assessee’s control over Tata Sons Ltd, and whether, by virtue of such alleged control, any of the specified persons under section 13(3) received any benefits, and whether the investments made by the assessee trust were in violation of Section 13(2)(h). Subsequently, ITAT held that  “we are unable to see any reasons for holding the suspicion that some of the interest income may be from sources that are not qualified for exemption under section 11, and, for that reason, the verification about sources of interest income is required to be done extensively. Once all these details were on record, and there is not even a suggestion that any part of interest income is not qualified for exemption under section 11, we are unable to uphold the stand of the learned Commissioner that the subject assessment order was erroneous and prejudicial to the interest of the revenue for want of verifications of interest income sources.”

[Sir Ratan Tata Trust v. Deputy Commr. of Income Tax, ITA No. 3737/Mum/2019, decided on 28-12-2020]


Akshat Malpani, Advocate, Supreme Court of India and Delhi High Court

Hot Off The PressNewsTaxation

In view of the challenges faced by taxpayers in meeting the statutory and regulatory compliances due to the outbreak of COVID-19, the Government brought the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 (‘the Ordinance’) on 31st March, 2020 which, inter alia, extended various time limits. The Ordinance has since been replaced by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act.

The Government issued a Notification on 24th June, 2020 under the Ordinance which, inter alia, extended the due date for all Income Tax Returns for the FY 2019-20 (AY 2020-21) to 30th November, 2020. Hence, the returns of income which were required to be filed by 31st July, 2020 and 31st October, 2020 were required to be filed by 30th November, 2020. Consequently, the date for furnishing various audit reports including tax audit report under the Income-tax Act, 1961 (the Act) was also extended to 31st October, 2020.

In order to provide more time to taxpayers for furnishing of Income Tax Returns, the due date was further extended vide notification No 88/2020/F. No. 370142/35/2020-TPL dated 29th October, 2020:

(A) The due date for furnishing of Income Tax Returns for the taxpayers (including their partners) who are required to get their accounts audited [for whom the due date (i.e. before the said extension) as per the Act was 31st October, 2020] was extended to 31st January, 2021.

(B) The due date for furnishing of Income Tax Returns for the taxpayers who are required to furnish report in respect of international/specified domestic transactions [for whom the due date (i.e. before the said extension) as per the Act was 30th November, 2020] was extended to 31st January, 2021.

(C) The due date for furnishing of Income Tax Returns for the other taxpayers [for whom the due date (i.e. before the said extension) as per the Act was 31st July, 2020] was extended to 31st December, 2020.

(D) Consequently, the date for furnishing of various audit reports under the Act including tax audit report and report in respect of international/specified domestic transaction was also extended to 31st December, 2020.

Considering the problems being faced by the taxpayers, it has been decided to provide further time to the taxpayers for furnishing of Income Tax Returns, tax audit reports and declaration under Vivad Se Vishwas Scheme. Further, in order to provide more time to taxpayers to comply under various ongoing proceedings, the dates of completion of proceedings under various Direct Taxes &Benami Acts have also been extended. These extensions are as under:

a.            The due date for furnishing of Income Tax Returns for the Assessment Year 2020-21 for the taxpayers (including their partners) who are required to get their accounts audited and companies [for whom the due date, as per the provisions of section 139(1) of the Income-tax Act,1961, was 31st October, 2020 and which was extended to 30th November, 2020 and then to 31st January, 2021] has been further extended to 15th February, 2021.

b.            The due date for furnishing of Income Tax Returns for the Assessment Year 2020-21 for the taxpayers who are required to furnish report in respect of international/specified domestic transactions [for whom the due date, as per the provisions of section 139(1) of the Income-tax Act,1961, was 30th November, 2020 and which was extended to 31st January, 2021] has been further extended to 15th February, 2021.

c.             The due date for furnishing of Income Tax Returns for the Assessment Year 2020-21 for the other taxpayers [for whom the due date, as per the provisions of section 139(1) of the Income-tax Act, 1961, was 31st July, 2020 and which was extended to 30th November, 2020 and then to 31st December, 2020] has been further extended to 10th January, 2021.

d.            The date for furnishing of various audit reports under the Act including tax audit report and report in respect of international/specified domestic transaction for the Assessment Year 2020-21 has been further extended to 15th January, 2021.

e.            The last date for making a declaration under Vivad Se Vishwas Scheme has been extended to 31st January, 2021 from 31st December, 2020.

f.             The date for passing of orders under Vivad Se Vishwas Scheme, which are required to be passed by 30th January, 2021 has been extended to 31st January, 2021.

g.            The date for passing of order or issuance of notice by the authorities under the Direct Taxes & Benami Acts which are required to be passed/ issued/ made by 30th March, 2021 has also been extended to 31st March, 2021.

Further, in order to provide relief for the third time to small and middle class taxpayers in the matter of payment of self-assessment tax, the due date for payment of self-assessment tax date is hereby again being extended. Accordingly, the due date for payment of self-assessment tax for taxpayers whose self-assessment tax liability is up to Rs. 1 lakh has been extended to 15th February, 2021 for the taxpayers mentioned in para 4(a) and para 4(b) and to 10th January, 2021 for the taxpayers mentioned in para 4(c).

The Government has also extended the due date of furnishing of annual return under section 44 of the Central Goods and Services Tax Act, 2017 for the financial year 2019-20 from 31st December, 2020 to 28th February, 2021.

The necessary notifications in this regard shall be issued in due course.


Ministry of Finance

[Press Release dt. 30-12-2020]