Arbitrators have to give reasons for arbitral award even if arbitral proceedings are initiated under old Act

Where arbitrator's award was unsupported by any reason, same was to be set aside, even though arbitral proceedings were initiated under old Act, i.e., Arbitration Act, 1940

Facts:

a)A non-speaking arbitral award in favour of the appellant-company was set aside by the High Court on the ground that the arbitrator had not recorded his 'findings' as required under clause 70 of the General Conditions of Contract

b)The High Court held that the expression 'finding' appearing in clause 70 of the general conditions of contract implied something more than the mere recording of a conclusion by the arbitrator. Inasmuch as the arbitrator had failed to do so, the award announced by him was unsustainable.

c)The High Court, accordingly, set aside the award and remitted the matter back to the arbitrator for a fresh determination of the issues between the parties.

On appeal, the Supreme Court held as under:

1)The Arbitration and Conciliation Act, 1996 had repealed the Arbitration Act of 1940 and sought to achieve the twin objectives of obliging the arbitral Tribunal to give reasons for its arbitral award and reducing the supervisory role of courts in arbitration proceedings

2)There was a paradigm shift in legal position under new Act, i.e., 1996 Act, which prescribed a uniform requirement for arbitrators to give reasons for their arbitral award

3)Where arbitrator's award was unsupported by any reason, same was to be set aside, even though arbitral proceedings were initiated under old Act, i.e., Arbitration Act, 1940 - ANAND BROTHERS (P.) LTD. V. UNION OF INDIA [2015] 55 TAXMANN.COM 153 (SC)

ICSI plans to place ceiling of five Cos for which Secretarial audit report can be issued by practicing CS

The Council of the Institute of Company Secretaries of India has issued the draft guidelines for Issuing Compliance Certificate and Signing of Annual Return by practicing member to seek views and suggestions from the stakeholders. The Guidelines would come into force wef. April 1, 2015.

ICSI proposes ceiling on Issuing Secretarial Audit Report and Annual Return

As per draft guidelines, ICSI has proposed the ceiling on issuing a Secretarial Audit report by a practicing member to a maximum of 5 companies in a financial year and upper limit of Signing/certification of annual return by a practicing member has been fixed at 80 Companies in aggregate, in a financial year

Breach of specified ceiling to be deemed as professional misconduct

Practicing member who issues Secretarial Audit Report in respect of more than 5 Companies and/or Signs/Certifies Annual report of more that 80 companies in aggregate in a Financial Year, would be deemed to be guilty of professional misconduct Ceiling in case of a firm of Company Secretaries

In case of a firm of Company Secretaries, the ceiling of five companies in case of issuance of Secretarial Audit report and eighty companies in case of signing/certification of Annual Return would apply to each partner therein who is entitled to issue Secretarial Audit Report pursuant to Section 204 of the Companies Act, 2013 and/or sign/certify an Annual Return pursuant to Section 92 of the Companies Act, 2013.

Editor’s comment: The Guidelines have been issued in supersession of the Guidelines (‘old guidelines’) issued on 27th November, 2007 by council for Issuing Compliance Certificate and Signing of Annual Return. Earlier, as per the old guidelines the ceiling for issuing compliance certificate and signing of Annual Return was fixed at 80 companies in aggregate in a calendar year. Under new guidelines the ceiling on signing/certification of Annual return has been kept same as old guidelines however, the time limit criteria has been changed from ‘Calendar year’ to ‘Financial Year’

Depreciation available on asset even when it was transferred to stock-in-trade at nominal value

Assessee who used to convert the assets (incapable of any further use and having negligible market value) into stock-in-trade at nominal value would be entitled to claim depreciation on remaining book value of block of asset.

Facts:

a)The assessee ('Xerox India Ltd.') was engaged in the business of trading in Xerographic equipments, Printers, Scanners, etc.

b)It leased out the equipments to the customers on an operating lease basis.These equipments were capitalised and depreciation thereon was claimed by assessee.

c)When equiptments were returned back to the assessee on the termination of the lease, it used to convert these into stock-in-trade at a nominal value of Rs.1.

d)The nominal value was reduced from the block of assets and depreciation was claimed by assessee on the remaining amount. The revenue disallowed the depreciation on the ground that instead of nominal value, actual value of asset had to be reduced from the block of assets as these assets were transferred to stock-in-trade.

e)On the other hand the assessee contended that whenever these assets were sold, the profit was offered for taxation and in case any of these assets was again leased out, then it was recapitalized in block of asset at the nominal value at which it was decapitalised.

The ITAT held in favour of assesse as under-

1)When the assets were recapitalized at the nominal value at which these were decapitalised then there was no effect on the taxability of the assessee.

2)Similarly, there was no harm to revenue whenever these used assets were sold after their conversion into stock-in-trade as surplus on the sale would be taxed.

3)Thus, assessee was entitled to depreciation on asset. - XEROX INDIA LTD. V. DEPUTY CIT (2015) 55 taxmann.com 29 (Delhi - Trib.)

Entertainment tax subsidy granted to cinema halls is capital receipt, rules Delhi High Court

Subsidy granted to owner of multiplex in the form of exemption frompayment of entertainment taxcollected from the public is a capital receipt.

Facts:

a)The assessee was engaged in the business of running of multiplex cinema halls and shopping malls.With a view to encourage setting-up of multiplex cinema halls and to promote the viewership therein, the State government launched a scheme whereby it offered subsidy to cinema industry. Subsidy was in the nature of exemption from payment of entertainment tax, which is collected from the public.

b)Assessee treated such subsidy as capital receipt.The Assessing Officer (‘AO’) treated such subsidy as revenue receipt on the ground thatsubsidy had been given to the assessee after commencement of its business and operationalization of the multiplex and, further, it was not linked to any of the fixed assets of the company.

c)On appeal, the appellate authorities set aside the order of AO.Aggrieved by the order of appellate authorities, AO filed the instant appeal before the High Court.

The High Court held in favour of assesse as under:

1)The UP Scheme under which the assessee claims exemption to the extent of entertainment tax subsidy, claiming it to be capital receipt, is clearly designed to promote the investors in the cinema industry encouraging establishment of new multiplexes. A subsidy of such nature cannot possibly be granted by the Government directly.

2)Entertainment tax is leviable on the admission tickets to cinema halls only after the facility becomes operational. Since the source of the subsidy was the public at large which was to be attracted as viewers to the cinema halls, the funds to support such an incentive could not be generated until and unless the cinema halls became functional.

3)The purpose of the scheme was to assist the entrepreneur in meeting the expenditure incurred on account of construction of the multiplex as also the actual cost incurred in arranging the requisite equipment installed therein. Therefore, it could not be treated as assistance for the purposes of trade.

4)It was unreasonable on the part of the AO to reject the claim of the assessee about the subsidy being capital receipt as subsidy by its very nature, was bound to come in the hands of the assessee after the cinema hall had become functional and definitely not before the commencement of production.

5)The fact that the subsidy granted was not linked to any particular fixed asset did not make any difference. Thus, the assessee was entitledto treat such subsidy on entertainment tax as capital receipt. - CIT V. BOUGAINVILLEA MULTIPLEX ENTERTAINMENT CENTRE (P.) LTD.[2015] 55 taxmann.com 26 (Delhi)

Department couldn't allege suppression against assessee while issuing subsequent notices on same issues

Where all relevant facts were in knowledge of authorities when first show-cause notice was issued, while issuing second and third show-cause notices on similar facts, department couldn't allege suppression of facts by assessee.

a)Department carried out inspection on 16-9-1996 and issued notices on 14-3-1997 and 20-4-1998 alleging clandestine removal of goods.

b)Later, department issued third notice dated 27-3-2001 invoking extended period alleging suppression of facts.

c)Assessee challenged third notice as time-barred, as all facts were within knowledge of department since 16-9-1996.

d)Department argued that if any suppression of material facts of fraud was detected, then extended period of limitation of five years was available to the department,therefore, the entire proceedings were legal and within the time-limit prescribed by the Act as the third notice was issued within 5 years from 16-9-1996.

High Court held in favour of assessee as under:

1)Show-cause notices were issued with regard to part of transactions for different periods, but on basis of same inspection made on 16-9-1996. Once earlier show-cause notices were issued with regard to same inspection, then department could not claim having discovered suppression, fraud, etc., subsequently, as everything was within its knowledge since 16-9-1996. Hence, extended period of five years was not available to department.

2)The High Court took note of the judgment of Supreme Court in Nizam Sugar Factory v. Collector of Central Excise 2006 (197) ELT 465 in which it was held that where all relevant facts were not in the knowledge of the authorities when the first show-cause notice was issued, while issuing second and third show-cause notices to the assessee on similar facts,it could not be taken as suppression of facts on the part of the assessee as the facts were already within the knowledge of the authorities – Commissioner of Central Excise & Customs v. Rivaa Textiles Inds. Ltd.(2015) 54 taxmann.com 239 (Gujarat).

Unabsorbed research exp. claimed as revenue exp. can’t be carried forward if hit by Sec. 79

If assessee did not capitalize scientific research expenditure and claimed it as revenue expenditure, any unabsorbed portion of such research exp. would be in nature of business loss and not in nature of unabsorbed depreciation - Therefore, it would be subject to restriction imposed under Section 79 in case of closely held company

Issue for consideration:

a)In view of Section 79 of the Act, where a change in shareholding (i.e., 51%) has taken place in a previous year in the case of a company (being closely held company), no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year.

b)In the instant case, an issue arose whether unabsorbed scientific research expenditure would also be subject to same treatment as that of carry forward of losses in Section 79

c)Assessee’s contention was that the unabsorbed scientific research expenditure had to be treated at par with unabsorbed depreciation based on the principles laid down in the case of Mahyco Vegetable Seeds Ltd. [2010] 123 ITD 40 ( Mum.)

Tribunal held as under:

1)In the case of Mahyco Vegetable Seeds Ltd(Supra), the expenditure in question was unabsorbed capital expenditure incurred on scientific research claimed as deduction under section 35. Therefore, the unabsorbed capital expenditure on scientific research had the same effect as unabsorbed depreciation;

2)Therefore, for applying the above cited decision, it was necessary that the scientific research expenditure should have been capitalized before claiming deduction under section 35;

3)If assessee treated scientific research expenditure as revenue expenditure and claimed deduction thereof, it would give rise to business losses and couldn't be deemed as similar to unabsorbed depreciation.

4)Therefore, in such case there would be a business loss and the provisions of section 79 would be applicable- DEPUTY CIT V. TEJAS NETWORKS LTD.[2015] 55 taxmann.com 55 (Bangalore - Trib.)

No insurance claim for damages as vehicle owner didn't apply for registration on expiry of temporary registration

Where an accident had taken place, petitioner as owner of vehicle would not be entitled to claim compensation for damages in respect of vehicle when, admittedly, vehicle was being driven on date of accident without any valid registration

Facts:

a) The Petitioner-complainant purchased a vehicle and got it insured with respondent-company, The vehicle was temporarily registered for one month's period.

b) The petitioner did not apply for permanent registration. Meanwhile, an accident took place in which vehicle got damaged. Consequently, the appellant filed a consumer complaint before the District Forum.

c) The District Forum allowed the complaint and directed the respondent-company to indemnify the complainant to the extent of 75% of the insured amount. Aggrieved by the decision of the District Forum, respondent-company as well as the appellant-complainant approached State Commission.

d) Petitioner's claim for insurance was rejected by the Sate Commission as well as by National Commission on ground that at the time of accident, the vehicle was being driven without registration, which was prohibited under section 39 of the Motor Vehicles Act, 1988, and was also an offence under section 192 of the said Act

On appeal, the Supreme Court held as under:

1) Using a vehicle on public road without any registration is not only an offence punishable under section 192 but also a fundamental breach of terms and conditions of policy contract

2) Nothing had been brought on record by petitioner to show that before or after period of temporary registration had expired, petitioner, either applied for permanent registration or made any application for extension of period.

3) Thus, the petitioner would not be entitled to claim compensation for damages in respect of vehicle when, admittedly, vehicle was being driven on date of accident without any valid registration - NARINDER SINGH V. NEW INDIA ASSURANCE CO. LTD. (2015) 54 TAXMANN.COM 414 (SC)

ROC can allow e-filing of DIR-12 by one of the resigned directors who was an authorized signatory

MCA has received several representations with regard to difficulties faced by stakeholders in filing Form DIR-12. The difficulty arises due to the deactivation of Digital signature certificate (DSC) following en masse resignation of all the directors of a company before appointment of new directors in their places. As a result, Form DIR-12 (Particulars of appointment of directors and the key managerial personnel and the changes among them) couldn’t be filed by few companies due to lack of an authorized signatory Director.

Thus, MCA has provided much needed relief to such stakeholders by authorizing the ROCs to allow any one of the resigned directors who was an authorized signatory Director to e-file Form DIR-12 along with additional fees subject to compliance of other provisions of the Companies Act, 2013.

Editor’s Comments: MCA has temporarily allowed e-filing of such form by one of the resigned directors till an alternate mechanism is put in place in MCA 21 system. It is a welcome step in the direction of promoting ease of doing business by removing the obstacles faced by the stakeholders in ordinary course of business. – [GENERAL CIRCULAR NO.3/2015 [F.NO.MCA21/272/2014 Dated, 04-03-2015]

Assessee not entitled to interest on refund of excess self-assessment tax paid by it, rules Delhi HC

Refund of excess self-assessment paid by assessee was not eligible for interest as the provisions of Section 244A would not apply thereto.

The issue that arose for consideration of the High Court is as under:

“Whether the Tribunal was rightin holding that the assessee would be entitled to interest under Section 244A in respect of excess self-assessment tax paid by it?”

The High Court held in favour of revenue as under:

1)Clause (a) of Section 244A(1) provides that where refund of any amount becomes due to the assessee, he shallbe entitled to receive simple interest thereonwhere the refund is out of any tax paid under section 115WJ or collected at source under section 206C or paid by way of advance tax or treated as paid under section 199.

2)The provisions contained in Sections115WJ or 199 or 206C or Section 207 have no connection with the liability to pay self-assessment tax. Therefore, clause (a) of sub-section (1) of Section 244A would not apply to refund arising out of excess self-assessment tax paid by assessee.

3)Clause (b) of Section 244A(1) was also not applicable in the instant case asit provides that the amount paid by the assessee (from which refund was to be made) must have been deposited pursuant to demand notice issued by the assessing authority.

4)There cannot be a general rule that whenever a refund of income tax is to be paid, the Revenue must necessarily pay interest on the refunded amount.

5)If the excess amount was paid due to erroneous assessment by the Revenue, the reimbursement would be accompanied by payment of interest at the statutorily prescribed rate.Conversely, if the assessee was to be blamed for the miscalculation, the Revenue does not owe any interest even if the excess payment of tax was liable to be refunded.

6)There being no allegation that such excess deposit was pursuant to demand by the Revenue, the claim for interest on excess payment voluntarily made could not be sustained.Therefore, theorder of ITAT directing the AO to pay interest to the assessee on the refunded amount was to be set aside. - CIT vs Engineers India Ltd. - [2015] 55 taxmann.com 1

Section 6 should clarify meaning of 'Going abroad for the purpose of employment'

As per section 6(1)(c) of the Income-tax Act, 1961 ('the Act')an individual is said to be resident in India in any previous year, if he was in India for a period or periods amounting in all to 365 days or more in four years immediately preceding that year and is in India for a period or periods amounting in all to sixty days or more in that year.

However, in view of the Explanation (a) to section 6(1)(c), an Individual leaving India, for the purposes of employment during the previous year, shall be treated as resident in India only if he is in India for 182 days or more during the previous year.

In other words, restriction of short stay of 60 days or more is not applicable to an Individual, leaving India for the purposes of employment during the previous year.

II. Interpretational issue:

Unfortunately, the term leaving India for the purposes of employment is subjective and prone to multiple interpretations, as can be seen from the recent litigations on the subject matter.

In the ever-changing process of globalization, the number of individuals seeking employment abroad has increased, we also have a fast increasing class of entrepreneurs'/ artists/ sportsmen etc. who work/perform abroad while keeping their base/roots in India. Accordingly, all these aspiring Indians travel frequently outside India and are facing difficulties before the I-T authorities while deciding their residential status, which is very crucial for deciding tax implications of their global income.

III. Representative judicial views:

For the purpose of Explanation (a) the individual need not be an unemployed person who leaves India for employment outside India. The fact that person was already an employee at the time of leaving India was neither material not relevant [British Gas India P. Ltd. In re, [2006] 155 Taxman 326 (AAR – New Delhi)

Going abroad for purpose of employment (assessee, a world known professional golfer, pursued vocation of sportsman) also means going abroad to take up employment or any avocation which takes in self-employment like business or profession[ACIT vs. Jyotinder Singh Randhawa [2014] 46 taxmann.com 10 (Delhi)]

For the purpose of determining the residential status in India under Sec. 6, going abroad for purposes of 'employment' includes self-employment to determine residential status under I-T Act. It is not necessary to establish employer-employee relationship to prove travelling abroad [K. Sambasiva Rao v. ITO, [2014] 42 taxmann.com 115 (Hyd. - Trib.)]

While deciding as above, CBDT circular No. 346 Dated 30-06-1982 was referred to wherein the words "employed or engaged in other avocations outside India" are used to explain the term 'leaving India for the purposes of employment'.

Further, on the aspect of whether an individual needs to be stationed abroad on permanent/semi-permanent basis for availing of the benefit of the relevant provision (benefit of 182 day test), the ITAT, Hyd. (supra) prevented revenue from applying new tests of domicile/permanent home under section 6(1) of the Act. As noted by the Tribunal, the only relevant test for determining residential status of individuals in India is their physical presence in India for the stipulated number of days and visit and stay abroad should not be for other purposes other than business (business VISA) such as a tourist or for medical treatment or for studies, etc..

However, contrary to above, Hon'ble ITAT, Mumbai in the case of ITO vs. K. Y. Patel 33 ITD 714, held that the meaning of the term 'leaving' should not only be physical one but also with the intention of staying abroad on a permanent or semi-permanent basis. It is only a temporary or permanent posting outside India which could fall in the purview of such a phrase and any stay abroad in connection with one's employment in India could not be treated as equivalent of employment outside India.

IV. Legislative intent behind the explanation (a) to section 6(1)(c):

Firstly, the amendment by way of explanation (a) to section 6(1)(c) was made by the Finance Act, 1982with a view to avoid hardship in the case of Indian citizens who are employed or engaged in other avocations outside India. [CBDT Circular No. 346 dated 30.06.1982] The words "employed or engaged in other avocations outside India "used by CBDT in circular No. 346 (supra) clearly indicate that the test of residence envisaged in Clause (a) of Explanation to Section 6(1) was not limited only to Indian citizens going out on contract of service as salaried employees but also to Indian citizens who go out of India and are engaged in other avocations i.e.,other than as salaried employees.

V. Logical interpretation:

In view of the clarification by CBDT and majority judicial views on the interpretation of the term leaving for the purposes of employment,the reasonable and logical conclusion is employment includes self-employment. The only relevant test for determining residential status of individuals in India is their physical presence in India for the stipulated number of days andvisit and stay abroad should not be for other purposes other than employment/ business.

VI. Expectations from the budget:

To put the controversy at rest and to avoid the futile litigation, a clarificatory amendment below the explanation (a) in the following manner is welcome:

"For the removal doubts, it is hereby declared that, employment outside India shall include self employment of such nature as may be prescribed"

It should be left to CBDT to precisely define the nature and extent of self-employment which is eligible for Explanation (a) to section 6(1)(c) having regard to the nature of business/profession of various class of assessees' such as entrepreneurs'/artists/sportsmen etc. and after due consideration of various judicial principles as above.