Tuesday, July 25, 2017

Sec. 68 couldn't be applied for sundry creditors arising out of purchase expenses: Patna ITAT


a) Assessee-partnership firm had shown sundry creditors arising out of purchase expenses in its return but failed to establish genuineness of such sundry creditors.

b) Assessing Officer (AO) disallowed provision for such creditors and added it to total income of assessee under section 68.

c) CIT (Appeals) confirmed the order of AO. The aggrieved-assessee filed the instant appeal before the Tribunal.

The ITAT held in favour of assessee as under:

1) The provisions of section 68 are applied to the cash credit which has not been explained by assessee. In the instant case sundry creditors arose out of the purchases as claimed by assessee which had been duly accepted by the authorities.

2) AO had invoked section 68 to tax the sundry creditors whereas the assessee was claiming that the aforesaid amount represented the trade creditors and, therefore, it couldn’t be applied.

3) Admittedly, the creditors were found by the AO and the onus lay on assessee to justify that these were sundry creditors. In order to justify the impugned trade creditors, the assessee had to produce copies of PAN, ledger copies, bills / invoices details of payments, income tax return, mode of payments, etc.

4) In the instant case, assessee had summarily failed to observe the directions issued by the AO. Therefore, issue was restored to AO for fresh adjudication as per law. - [2017] 83 taxmann.com 187 (Patna - Trib.)

Compensation paid to clients due to negligence of employees was allowable as business exp.


a) Assessee was engaged in Marketing of Financial products of various companies as distributor. He claimed Rs.1.54 lakh as expenses in its profit and loss account on account of compensation paid to clients for loses occurred due to negligence of on the part of its employees.

b) Assessing officer (AO) held that assessee had not been able to prove as to how the loss was payable by it as the losses were suffered by the clients and, therefore, assessee was not entitled to claim such losses its profit and loss account.

c) CIT (Appeals) also upheld order of AO. Aggrieved-assessee field the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1) Assessee had claimed that the losses which had occurred to its clients due to negligence of employees as the employees of assessee could not square off the positions taken by clients in NIFTY index of National Stock Exchange.

2) Amount paid to these clients was necessarily an exp. which was allowable under section 37 as section 37 clearly states that any expenditure not in the nature of capital expenditure or personal expense laid out or expenditure wholly and exclusively incurred for the purposes of business or profession shall be allowed.

3) Moreover Circular no. 35-DCXLVII-20 of 1965 dated 24-11-1965, clearly states that losses arising due to negligence of employees has to be allowed as expense if loss took place in normal course of business

4) In the instant case, the losses were necessarily incurred in the normal course of business of assessee and therefore, the expenditure was allowable. - [2017] 83 taxmann.com 230 (Amritsar - Trib.)

Ind AS: Exposure Draft of revised lease standard Ind AS 116 issued

Exposure Draft on revised lease standard Ind AS 116 has been issued by the Institute of Chartered Accountants of India (ICAI). Ind AS 116 will replace the existing lease standard Ind AS 17. Last year, International Accounting Standards Board (IASB) revised the lease standard and issued new IFRS 16, Leases.

Ind AS 116, Leases sets out the provisions for the recognition, measurement, presentation and disclosures of leases. There are differences between Ind AS 116 and Ind AS 17. The major differences are as follows:

1. Under Ind AS 116, a part of the contract can also be treated as lease if the same conveys the right to use an asset for a period of time for certain consideration.

2. The principles of Ind AS 116 with regards to accounting of lease by the lessee is substantially different from that of Ind AS 17. However, requirements of Ind AS 116 with regard to lessor is substantially similar to Ind AS 17

3. Recognition of leases having lease term less than 12 months or value of underlying asset of the lease is low, by lessee is not mandatory under Ind AS 116. In such cases, lessee have to recognise the lease rentals as expense on a systematic basis considering pattern of benefits from the asset.

4. Ind AS 116 provides for a single accounting model for lessee. Classification of lease as either finance or operating lease by the lessee is not required under Ind AS 116. Initially, lessee should recognise right-of-use assets at cost similarly to other non-financial assets, like property, plant & equipment, intangible assets etc. and lease liabilities at the present value of all future payments.

5. Subsequently, lessee should measure the right-of-use assets either at cost or other specified models like revaluation model. The amount of interest paid on lease liability should be recognised as finance cost.

6. Under Ind AS 116, lessee shall depreciate the right-of-use asset in accordance with Ind AS 16, Property, Plant and Equipment.

Apart from this the Draft also provides principles with regard to transition from Ind AS17 to Ind AS 116. Ind AS 116 will be applicable from April 1, 2019. 

Thursday, July 20, 2017

No TDS on GST paid or payable on services when GST is separately shown in invoice: CBDT

CBDT had issued Circular No.1/2014 wherein it was clarified that TDS had to be deducted on the amount paid/payable without including service tax component. In other words, no TDS would be deducted on service tax component when amount of service tax is shown separately in the invoice.

After implementation of GST across the country with effect from July 1, 2017, CBDT has received various references for treatment of GST component on services. Now the CBDT has clarified (vide Circular 23/2017) that if as per terms of the agreement of the payee and payer ‘GST on services’ component has been indicated seperately in the invoice, then no tax would be deducted on GST component. GST will include CGST, SGST, IGST, UTGST.

Legal consultants working on contractual basis can't be enrolled as Advocates: Gujarat HC

When contract between petitioner law graduate with a company was in nature of full time employment, such employment of petitioner was violative of requirement of rule 49 of Advocacy Act; Bar Councils had rightly refused to grant her enrolment and certificate to practice law

Facts of the case:

i. Petitioner was in her last year of L.L.B. course. During her academic period, Campus placement were started and she was selected in campus interview of Gujarat Industrial Development Corporation as Legal Consultant on contract basis. After that, she had applied for Certificate of practice.

ii. Bar council had put her enrollment form for Certificate of Practice on hold by saying that she was violating the rule of 49 of the Bar Council of India as she is rendering his full time service to the Gujarat Industrial Development Corporation.

iii. Further, she contended that contractual arrangement of her service with the Gujarat Industrial Development Corporation could not be viewed as employment and remuneration of Rs. 25,000/- per month paid to her was not by way of salary, as such, there was no employee-employer relationship between them.

iv. Single Judge of High Court has granted interim relief to the respondent and directed the Bar Council of Gujarat to grant her a temporary enrolment number.

v. Aggrieved by the directions of Single Judge of High Court, Bar council of Gujarat preferred appeal against the directions of Single Judge. The Gujarat High Court held as under:

a) In view of the conditions of service contract of the Gujarat Industrial Development Corporation, it was observed that she was in the office from 11.00 a.m. to 5.00 p.m. which are standard hours of work, prima facie it has to be considered as full-time employment. 

b) Further, there is no provision for grant of temporary certificate by the Bar Council for practicing as an advocate under the Advocates Act, 1961 and the rules framed there under.

c) She could not entitled to practice as advocate so long as she continues such employment - [2017] 83 taxmann.com 129 (Gujarat)

Dept. can’t deny PAN correction in TDS return for more than 4 characters: HC


a) CPC-TDS has provided an online facility to correct invalid PAN mentioned in TDS return. The online system of department is programmed to permit correction only in case four digits/characters of PAN are to be changed and no more.

b) In the instant case, entire PAN number of the recipient of the payment was wrongly fed by the assessee-company and the on-line system of the department didn’t permit to carry out changes in PAN in excess of four digits/characters.

c) Assessee challenged the action of the revenue in not permitting it to correct the error in mentioning the PAN before the High Court.

The High Court in favour of assessee as under:

1) Once the department recognizes the possibility of errors and also makes provisions for making corrections, it would be wholly illogical to limit such corrections on arithmetical working out of only two alphabets or two numeric of PAN characters.

2) Error in feeding an entry or a number may have multiple origins from typographical error of Data Entry Operation to mechanical failures or through pure oversight referring to one column of PAN instead of another while filling up and uploading the statement.

3) It is not necessary nor possible for us to envisage different situations under which such errors could crop up and it need not necessarily be confined to limited figures on the letters of the PAN being incorrect. 4) Therefore, decision of department in not permitting the petitioner to correct PAN of the deductee in the statement of tax deducted at source was impermissible. [2017] 83 taxmann.com 205 (Gujarat)

Delhi HC provides temporary relief to advocates for noncompliance with GST

There is no clarity on whether all legal services (not restricted to representational services) provided by legal practitioners and firms would be governed by the reverse charge mechanism. If all legal services are to be governed by the reverse charge mechanism, then there would be no requirement for legal practitioners and law firms to compulsorily get registered under the GST Acts.

No coercive action be taken against any lawyer or law firms for non-compliance with any legal requirement under the GST Acts till a clarification is issued by the Central Government and the GNCTD. - [2017] 83 taxmann.com 202 (Delhi)

Ind AS 12: Create deferred tax asset on goodwill even if eliminated while consolidating financials


A company, say X Ltd. has two subsidiaries, say Y Ltd. and Z Ltd. Ind AS is applicable on X Ltd. from April 1, 2017. In April, 2016 both subsidiaries got amalgamated and consequently goodwill has been recognised in the books of amalgamated subsidiary. This goodwill is an allowable deduction to the amalgamated entity under Income tax laws. X Ltd. decided to apply Ind AS 103, Business Combinations prospectively.

At the time of consolidation as per Ind AS, X Ltd. has eliminated the goodwill as consolidation adjustments. But, tax base of assets in the consolidated financial statements (CFS) has increased because of eliminated tax deductible goodwill.

Whether X Ltd. should recognise deferred tax asset in CFS on goodwill as the same is deductible under tax laws, even if the goodwill has been eliminated from the CFS?


Tax base of an asset is defines under para 5 of Ind AS 12, Income Taxes as the amount that will be deductible while determining taxable profits.

According to para 9 of Ind AS 12, some assets and liabilities have tax base even if they are not recognised in the books. For example, preliminary expenses, which are allowed as deduction over the years under Income tax laws but while determining accounting profit these are recognised as expense in the year of their incurrence. In such case, in the second year, tax base of preliminary expenses is the amount deductible over the future years even if there is no corresponding entry in the financial statements.

Further, para 24 of Ind AS 12 states that deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available in future years against which the deductible temporary differences can be utilised. But where deductible temporary differences arises on initial recognition of an asset or liability in a business combination or on recognition of a transaction that affectsneither accounting profit nor taxable profit, no deferred tax asset should be recognised. 

From the above paras, X Ltd. should recognise deferred tax asset on the tax base of the eliminated goodwill by crediting consolidated profit or loss to the extent that it is probable that taxable profit will be available in future years against which tax base of the goodwill can be deducted.

- Issue 3 of Ind AS Transition Facilitation Group Clarification Bulletin 10

Sum paid to AAI to operate executive lounge at IGI Airport treated as rent under Sec. 194-I

Facts :

a) Assessee entered into a Licence Agreement (LA) with Airport Authority of India (AAI) in terms of which the premises at the first floor of the IGI Airport was given on license basis to the assessee for the purpose of operating an executive lounge.

b) Assessee was paying monthly royalty and licence fee for space allotted for operating the Lounge Premises.

The issue before the High Court was "Whether amount paid to AAI for use of lounge premises would be deemed as rent within the meaning of Section 194-I?"

The High Court held in favour of revenue as under :

1) Assessee relied on a certificate issued by the AAI wherein it was clarified that the royalty charged was not for the use of building but only for the right to operate the lounge and accordingly it couldn’t be regarded as rent.

2) Assessee was permitted to operate an executive lounge. The payment made to AAI although in two parts, was for operating an executive lounge. Non-payment of even one component, as either of royalty or of the fee for the space, would entail the assessee losing the right to operate the executive lounge.

3) The payment for the use of space was inseparable from the payment of royalty. The question of being able to operate the lounge without the actual use of the space simply did not arise.

4) Thus, sum paid to the AAI under the LA fell within the definition of 'rent' under section 194-I. - [2017] 83 taxmann.com 167 (Delhi)

Dept. can levy fee under Sec. 234E even without regulatory provision Sec. 200A for computing fee: HC

Fact of the case :

a) Assessee filed the petition challenging the demand of fee in terms of section 234E raised by Assessing Officer (AO) under section 200A. He argued that section 200A didn’t authorize the AO to make adjustment of the fee to be levied under section 234E. 

b) The provision introduced with effect from 01.03.2016 wasn’t retrospective and therefore, for the period between 01.07.2012 i.e. when section 234E was introduced in the Act and 01.06.2015 when proper mechanism was provided under section 200A of the Act for collection of fee, the department could not have charged such fee. 

The High Court held in favour of revenue as under :

1) Section 200A is a machinery provision providing mechanism for processing a statement of deduction of tax at source and for making adjustments, which are, arithmetical or prima facie in nature.

2) With effect from 1-6-2015, this provision specifically provides for computing the fee payable under section 234E. On the other hand, section 234E is a charging provision creating a charge for levying fee for certain defaults in filing the statements.

3) Under no circumstances a machinery provision can override or overrule a charging provision. Section 200A does not create any charge in any manner. It only provides a mechanism for processing a statement for tax deduction and the method in which the same would be done.

4) Even in absence of section 200A with introduction of section 234E, it was always open for the revenue to demand and collect the fee for late filing of the statements. Section 200A would merely regulate the manner in which the computation of such fee would be made and demand raised.

5) Thus, the view that without a regulatory provision being found for section 200A for computation of fee, the fee prescribed under section 234E couldn’t be levied was unacceptable. - [2017] 83 taxmann.com 137 (Gujarat)

Wednesday, July 12, 2017

Paid or Payable – Does it really matter?

Section 40(a)(ia) was inserted by the Finance Act, 2004 w.e.f April 1,2005 with an intent to expand the compliance of TDS provisions. It seeks to disallow 30% of the sum payable to resident on which TDS was deductible, but not deducted or deducted but not paid to credit of Govt. within due date.

The much disputed issue was whether provisions of Section 40(a)(ia) would be limited to expenditure subject to TDS which remains payable as on 31st March of the previous year or it would include expenditure which was payable at any point of time during previous year.

Now finally the Apex Court settled this controversy. It was held by the court that it is a statutory obligation of a person making payment to the resident payee to deduct tax as per TDS Chapter. Further provisions of TDS suggests that TDS needs to be deducted at the time of credit of such sum to the account of the payee or at the time of payment whichever is earlier. Therefore, it is clear that the tax had to be deducted in both possibilities, such as, when the amount is credited to the payee account or when the payment is actually made.

Ind AS 109: Include processing fees for undisbursed loan as well while calculating effective interest rate


A company, say B Ltd. is a first-time adopter of Ind AS from FY 2017-18. In April, 2015 it had taken a 10 year term loan. The processing of loan required upfront payment of loan processing fees which was duly paid. As per the terms of loan, it would be disbursed in 5 equal installments from April 2015. As on transition date, i.e. April 1, 2016 B Ltd. has recognised the term loan at fair value by calculating net present value of disbursed loan by using effective interest rate method. Effective interest rate was calculated after adjusting processing fees related to disbursed loan amount.

What should be the treatment of processing fees related to undisbursed loan amount?


Ind AS 109, Financial Instruments, defines effective interest rate as the rate that exactly discounts estimated future cash flows or contractual cash flows through expected life/contractual term of the financial instrument to the gross carrying amount or amortised cost of the financial instrument. While calculating the effective interest rate of a financial instrument, estimated/contractual cash flows should be adjusted with the fees paid or received between parties to the contract that are integral part of the effective interest rate except in cases where the financial instrument is measured at fair value through profit or loss (FVTPL). As per para B5.4.2 of Ind AS 109, such fees includes transaction costs or processing fees.

Accordingly, in the present case, assuming that balance loan amount will be disbursed in future years, total processing fees whether related to disbursed or undisbursed loan amount, should be included in calculation of effective interest rate as on transition date, i.e. April 1, 2016.


- Issue 2 of Ind AS Transition Facilitation Group Clarification Bulletin 10
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SC turns down Sahara’s request for extension of time for enchasing cheque amount of Rs, 552.21 crore

The Apex Court has denied prayer of Sahara Chief, Subrata Roy for extension of time period for payment of balance amount of Rs. 552.21 crore. Earlier, Mr. Roy had deposited two cheques worth Rs. 2000 crore and promised to honour balance payment by July 15, 2017.

His first cheque worth Rs. 1500.40 crore has been cleared and his second cheque will be honoured by July 15, 2017. He wanted more time to pay his balance amount and requested Apex Court for extension of time for realization of his second cheque. However, the Apex Court denied to entertain his prayer for extension of time and warned him that if the cheque is dishonoured, then appropriate action will be taken - [2017] 83 taxmann.com 94 (SC)

CGST Act-Electronic Commerce Operator and Builder

Electronic Commerce Operator

Section 52 contemplates that notwithstanding anything to the contrary contained in this Act [CGST], every electronic commerce operator not being an agent shall collect an amount calculated at such rate not exceeding 1% as may be notified by the Government on the recommendations of the Council of the net value of the taxable supplies made by it through it by other suppliers where the consideration with respect to such supplies is to be collected by the operator. Thus electronic commerce operator is a classic example of bending the collection machinery to garner revenue from the earliest possible source saving time and cost.

Section 52(7) affirms that every supplier who has supplied the goods or services or both through the operator shall claim credit in his electronic cash ledger of the amount collected and reflected in the statement of the operator furnished under sub-section (4) in such manner as may be prescribed. Sub-section (8) of Section 52 stipulates that that details of outward supplies furnished by every operator do not match with the corresponding details furnished by the supplier under Section 37, the discrepancy shall be communicated to both persons in such manner and within such time as may be prescribed. Sub-section (10) read with sub-section (11) of Section 52 says that if the value of outward supplies reported by operator exceed the same furnished by supplier then unless rectified either by the operator or supplier the same shall be added to the output tax liability of supplier for the month succeeding the one in which discrepancy was communicated which the supplier shall pay with interest.

GST Issues on Construction of flats by builders

Taxability (indirect taxes) of flats constructed by builders and the like had a chequered history of litigation. Chiefly, the bone of contention was whether sale of immovable property when it is under construction involves any service element. Constitutional competency of enacting sections exacting service tax on construction of flats was challenged largely unsuccessfully and ultimately, it was accepted by all concerned that service tax is imposable on part of consideration constituting sale of flats except where they are transferred after obtaining completion certificate from competent authorities. 

Govt. notifies another set of CGST rules

Earlier, Govt. had notified various CGST rules, 2017 viz., Composition levy, Registration, valuation, Input tax credit, Invoice, Returns, Payment, Refund and Transitional rules, etc. Recently, Govt. has notified three CGST rules through N/N- 15/2017, related to:

Inspection, Search & Seizure

Demands & Recovery

Offences & Penalties

Govt. specifies procedure of intimating Aadhaar No. to Income-tax dept.

Section 139AA(2) of the Income-tax Act provides that every person who has been allotted PAN as on the 1st day of July, 2017, and who is eligible to obtain Aadhaar, shall intimate his Aadhaar on or before a date to be notified by the Central Government (CG). Now, CBDT has specified the procedure for intimating the Aadhaar number to income tax department and quoting the same in PAN application. Taxpayers can opt for any of the following mode for intimation of Aadhaar number:-

1) SMS mode: Taxpayers can send an SMS in the following predefined format to 567678 or 56161. UIDPAN 12 digit Aadhaar 10 digit PAN

2) On-line mode: Taxpayer can intimate Aadhaar number by visiting and filing required information’s through link provided on the website of either of PAN Service provider, i.e.,www.tin-nsdl.com or www.utiitsl.com.

3) Designated PAN Service center: Aadhaar number can be intimated by visiting designated PAN service center of PAN service provider NSDL eGov or UTIITSL.

4) E-filing portal: Taxpayer can intimated Aadhaar no. by visiting e-filing website of income-tax department i.e. www.incometaxindiaefiling.gov.in.

CBDT has also specified procedure for quoting Aadhaar number in PAN application form in compliance with section 139AA. Person seeking for PAN shall attach copy of Aadhaar letter or card along with PAN application form. In case Aadhaar has not been allotted to the person, he need to attach copy of such enrolment ID receipt along with the PAN application form.