8 things you would like to know about Swachh Bharat Cess

1. What is Swachh Bharat Cess?

The Hon’ble Finance Minister in his Budget speech 2015-16 had proposed levy of Swachh Bharat Cess. Such Cess was proposed for financing and promoting initiatives towards Swachh Bharat.

Swachh Bharat is not only a programme of hygiene and cleanliness but, at a deeper level, a programme for preventive health care, and building awareness.

Now "Swachh Bharat Cess” is effective from November 15, 2015, at the rate of 0.5% on all taxable services. Thus, rate of service tax will increase from 14% to 14.5%. Now we will have to shell out a bit more service-tax so that our country can become cleaner.

2. Whether Swachh Bharat Cess will be levied on services which are in negative list or are wholly exempt from service-tax?

Swachh Bharat Cess will be levied on all services expect those services which are in the Negative list or are wholly exempt from service-tax.

3. What should be the value of taxable services for computation of Swachh Bharat Cess?

The taxable value for the levy of Swachh Bharat Cess would be the same on which service-tax is levied.

As per Notification No. 23/2015 Swachh Bharat Cess of 0.5% would be levied on the abated value of taxable services.

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Foreign tax credit should be given on tax liability computed under MAT provisions

The issue that was disputed in the instant case was as under:

“Whether relief under section 90 of Income-tax Act(‘the Act’) in respect of tax paid in a foreign country would be available while computing tax liability under as per provisions of MAT ?.”

The Tribunal held in favour of assessee as under:

1)   The Mumbai Tribunal in case of ACIT v. L&T Ltd. (in ITA No.4499/Mum/2008/ dated 22-04-2009) had held that once taxable income was determined either under the normal provisions of the Act or as per Sec 115JB, subsequent portion relating to rebate and set-off would be governed by the normal provision of the Act.

2)   There is no provision in the Act, debarring granting of credit for tax paid abroad in case income is computed under section 115JB. Thus, assessee could not be denied set off of tax relief under section 90 against the tax liability determined under section 115JB. - Dy.CIT v. Subex Technology Ltd. [2015] 63 taxmann.com 124 (Bangalore - Trib.). 

No VAT on free supply of medicines; HC declares Sec. 15(5) of Bihar VAT Act as unconstitutional

CST & VAT: Bihar VAT - Patna High Court declares section 15(5) of Bihar Vat Act (which provides for levy of tax on basis of MRP) as unconstitutional.

Facts

a)   Assessee was engaged in business of manufacture and sale of medicines. It paid sales tax after claiming exemption in respect of medicines supplied free of cost to its dealers. The revenue, however, was of the view that such quantity of medicines supplied free of cost would be subject to tax in view of provisions of Section 15(5)(b) of Bihar VAT Act, 2005 (‘the Act’).

b)   Under the Scheme of the Act every dealer registered under the Act would be liable to pay tax on the sale and purchase made by him. Section 15(5) is in nature of exception to the general scheme of taxation and provides an option to certain class of registered dealers to pay in lieu of the tax payable by them, tax at the rate specified in Section 14, on the maximum retail price of such goods.

c)   The assessee objected to such levy on the ground such transaction would not amount to sale as there being no valuable consideration for supply of such extra quantity of medicines. Aggrieved-assessee filed the instant writ to challenge the validity of provisions of Section 15(5) of the Act and the Notification No. S.O. 47 dated 05.04.2006.

The High Court held in favour of assessee as under:

1) The Supreme Court in case of State of Rajasthan v. Rajasthan Chemist Association [2007] 2007 taxmann.com 1766 (SC) held that notification to the extent it intends to levy tax on first point sale with reference to price which could be charged in respect of a subsequent sale which has not come into existence at the time liability of tax arises and is determined ex hypothesis is unsustainable on that basis.

2)  In view of aforesaid, the State legislature not being competent to provide for levy of tax on the first point of sale on the basis of MRP or any other notional value, there could be no question of the legislature providing for the same even by way of exercise of option by the dealer concerned.

3)   Thus, in light of aforesaid discussion sub-section (5) of Section 15 of the Act was to be declared as ultra vires. - Mapra Laboratories (P.) Ltd. v. Commercial Tax Officer - [2015] 63 taxmann.com 91 (Patna)

High Court rejects Sec. 292C presumption for treating seized docs as true/correct; disallows exp.

Section 292C provides that where any document is found in possession or control of any person in the course of search, then it may be presumed that the contents of such documents are true and correct. However, in the instant case, the documents (in respect of alleged expenditure) found during the course of the search did not indicate the name of payee and payer. Therefore, even if the presumption of Section 292C is to be applied and the documents are accepted as true, it would not lead to the conclusion that payments have been made so as to claim the expenditure.

Facts:

a)  During the course of search, the search party came across with documents pertaining to alleged expenditure incurred by assessee.

b)  The assessee wants to claim deduction under Section 37(1) on basis of such seized documents. Assessee was of the view it was not required to prove that it had actually incurred alleged expenditure as any document found during search presumed to be true and correct as per Section 292C.

c)  Assessing Officer (AO) disallowed such expenditure on ground that complete evidence in support of payment was not provided.

d)  The third member bench of Tibunal affirmed the order of AO. Aggrieved by the order of Tribunal, assessee filed the instant appeal before the High Court.

The High Court held in favour of revenue as under-

1)  Section 292C provides that where any document is found in possession or control of any person in the course of search, then it may be presumed that the contents of such documents are true and correct.

2)  The words 'may presume' as provided in Section 292C are in the nature of discretionary presumption. Therefore, invocation of such presumption is at discretion of the revenue authorities.

3)  An expenditure could be claimed under section 37(1) only when it has in fact been incurred and that too wholly and exclusively for the purposes of business.

4)  In the instant case, the documents found during the course of the search were inchoate. Document did not indicate the name of payee and payer. Therefore, even if the presumption is to be applied and the documents are accepted as true, it would not lead to the conclusion that payments have been made so as to claim the expenditure. Hence, AO was right in disallowing the expenditure- Harish Textile Engrs. Ltd. v. DCIT [2015] 63 taxmann.com 66 (Bombay)

Bankruptcy Law panel recommends unified insolvency code for Cos, LLPs, firms and individuals

The Finance Ministry has put up the Insolvency and Bankruptcy Bill, 2015 (‘the draft bill’) on its website for public comments till November 19 2015, after which the bill will be placed before Parliament in the winter session for approval. The draft bill contains provisions to speed up the process of revival of financially distressed companies and limited liability entities. The draft legislation is based on the report of a high-level panel headed by former law secretary T.K. Viswanathan.

The Draft Bill aims to consolidate the existing laws relating to insolvency of companies, limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals which are presently scattered in a number of legislations, into a single legislation.

Major recommendations of Bankruptcy panel:

1.Fast track insolvency resolution: The draft Bill provides for a fast track insolvency resolution process for certain categories of entities wherein the insolvency resolution process has to be completed within a period of 90 days from the trigger date

2.Formation of Insolvency Regulator: It proposes creation of an insolvency regulator and setting a time limit of 180 days (which can be 90 days in special cases) to deal with insolvency resolution cases.

3. Insolvency Professionals: The draft Bill proposes to regulate insolvency professionals and insolvency professional agencies. Under Regulator’s oversight, these agencies will develop professional standards, codes of ethics and exercise a disciplinary role over errant members leading to the development of a competitive industry for insolvency professionals

4.  Insolvency Information Utilities: The draft Bill proposes for information utilities which would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database is also proposed to be set up with the goal of providing information on insolvency status of individuals

5.   Bankruptcy and Insolvency Processes for Companies and Limited Liability Entities: The draft Bill prescribes a swift process and timeline of 180 days for dealing with applications for insolvency resolution. This can be extended for 90 days by the Adjudicating Authority only in exceptional cases. If 75 % of the creditors approve the plan, the insolvency resolution process can kick off. If not, the adjudicating authority can order liquidation of the company.

6.   Bankruptcy and Insolvency Processes for Individuals and Unlimited Liability Partnerships: The draft Bill also proposes an insolvency regime for individuals and unlimited liability partnerships. As a precursor to a bankruptcy process, there can be two processes that are followed. In the fresh-start process, individuals with annual gross income of less than Rs.60,000 and aggregate asset value of less than Rs.20,000 shall be eligible to make a fresh start through a specified process. In the insolvency resolution process, creditors and the debtor will engage in negotiations to arrive at an agreeable repayment plan, supervised by a resolution professional.

IASB issues exposure draft on Application of Materiality

International Accounting Standards Board (IASB) has issued exposure draft providing guidance on application of materiality while preparing financial statements as per International Financial Reporting Standards (IFRS).It will help management of company to apply the concept of materiality in preparation and presentation of both annual and interim financial statements of the company. The draft specifies the factors that should be considered at the time of determination of materiality of an information, guidance on presentation and disclosure of material information. It also includes some practical examples to clarify the guidance.

As per the Conceptual Framework for Financial Reporting, an information is said to be material when non-disclosure or omission of the information could influence the decision about the entity taken by users of financial statements on the basis of financial statement. As per the exposure draft on application of concept of materiality, materiality of an information is a matter of judgement. The management of an enterprise make assessment of an information to check whether the information is material or not. While making assessment of materiality management should take into consideration requirements of primary users of financial statements and types of decisions they are taking, nature and size of the information etc. The assessment of materiality should be done on both on individual basis and on collective basis.

The exposure draft states that apart from assessment of materiality, the management of an entity should also use its judgement in deciding way of disclosure and presentation of a material information on the financial statement. Material information should be disclosed in the financial statement in such a way that disclosure of the same would not defeat the objective of financial statement. Any immaterial information should not be disclosed, unless non-disclosure of the same reduce level of understandability of any material information. Further, material information can be aggregated or disaggregated at the time of presentationin financial statement. The management should decide about aggregation or disaggregation of material information and the draft provides guidance to the management thereon. The information can be presented either on face of primary financial statements or in the notes to primary financial statements. An information representing a bulk of other information can be presented on face of primary financial statements, otherwise in the notes.

The disclosure requirements specified in different IFRS are minimum disclosure requirements. Apart from IFRS requirement management can disclose other information if the information is judged as material. At each reporting date, management of an entity should review earlier disclosures.

As pet the draft, if management identified any material misstatements before the issuance of financial statements, the management should amend the financial statement.

Stakeholders can submit their comments on IASB website by 26 Feb 2016.

HC sets aside penalty on ‘Flipkart’ for effecting sales without registering under Kerala VAT Act

CST & VAT: Kerala VAT- ‘Flipkart’ is merely facilitating sales, purchase and delivery of goods, it can’t be considered as dealer of goods under Kerala VAT Act.

Facts

a)   ‘Flipkart’ (assessee), being an online service provider facilitating sales or purchases, was registered under service tax law. Notice was issued to ‘Flipkart’ under Kerala VAT Act (KVAT) for neither registering as a dealer nor filing returns. Accordingly, penalty was levied on it for such default.

b)   Flipkart’ argued that it was only a service provider which was not engaged in business of sale or purchase of goods. It merely facilitated transactions of sale or purchase through its online portal and made arrangements for the delivery of goods. Therefore, the provisions of KVAT Act were not applicable to it.

The High Court held as under:

1)  The tenor of notice gave ample implication that the department had made up its mind to impose penalty on assessee without any supported reasons. It did not consider the contentions of assessee that the said transactions were inter-State sales. These sales transactions were effected by sellers who were registered on online portal of ‘Flipkart’ and all sales were inter-State sales on which tax had been paid by seller under the CST Act.

2)  The contention of department that the online portal could be seen as an intangible shop was legally flawed because it is well settled that the situs of a sale is wholly irrelevant to a determination of the issue of whether a sale is inter-State sale or not

3)  The department had imposed penalty on ‘Flipkart’ due to non-filing of returns and due to its failure to maintain true and correct accounts. However, there was no indication in notice as to why the ‘Flipkart’ was to be considered as a dealer and why said transaction was to be treated as local sales against inter-State sales.

4)   The department has proceeded against the assessee without first having ascertained whether these transactions would come under the coverage of Act. The matter must be first referred to the concerned Assessing Officers before invoking penal provisions since no tax can be levied except by authority of law – Flipkart Internet (P.) Ltd. vs. State of Kerala [2015] 62 taxmann.com 387 

Land acquired under an agreement not to be held as compulsory acquisition under Sec. 194LA

The question of compulsory acquisition will arise only where the compensation cannot be determined by agreement. In other words when the compensation is based on an agreement between State Government and owner of the land, no more can we say that it is a compulsory acquisition.

The disputed issue is as under:

Whether acquisition of land under an agreement by Karnataka Industrial Area Development Board (a state Government Undertaking) with landowners under the Karnataka Industrial Areas Development Act, 1966 (‘KIA Act’) would be deemed as compulsory acquisition within the meaning of Sec.194LA?”

Held:

1)    Section 194LA applies only when there is a compulsory acquisition under law. Under compulsory acquisition, the seller has no option but to sell the land. He cannot even negotiate the price as same is fixed by statute itself.

2)    In the instant case, the land owners and a State Government Undertaking (i.e., assessee) entered into an agreement whereby they mutually agreed for the amount of compensation which was fixed in accordance with Section 29(2) of the KIA Act.

3)    The question of compulsory acquisition will arise only where the compensation cannot be determined by agreement. In other words when the compensation is based on an agreement between State Government and owner of the land, no more can we say that it is a compulsory acquisition.

4)    In the instant case, compensation was based on an agreement between State Government and owner of the land, and, therefore, it could not be said to be a case of compulsory acquisition. Thus, once the acquisition is not considered as compulsory, Sec.194LA of the IT Act will not be applicable.

5)    The matter was remanded back to AO for verification whether in all the cases payment was made under agreement only. Once it was found that the acquisition resulted through an agreement, it would not be considered as compulsory acquisition- Karnataka Industrial Area Development Board v. ITO [2015] 62 taxmann.com 393 (Bangalore - Trib.)

Set-off of losses allowed despite change in shareholding if control over Co. remains unchanged

Facts

a)  Assessee-company (‘APSL’) was wholly owned subsidiary of AMCO Batteries Limited (‘ABL’).

b)  ABL transferred 45% and 49% of its shareholding to its subsidiary company (‘APIL’) and Tractors and Farm Equipments Limited (‘TAFE’), respectively.

c)  Consequently, ABL retained only 6% shares and 45% of shares held by its subsidiary, APIL. The remaining 49% shares were with TAFE.

d)  As shareholding of the ABL in APSL reduced to 6% in the relevant assessment year, meaning thereby, it was left with less than 51% shares. Thus, AO did not allow APSL to carry forward and set-off the business losses of that year as per section 79 of the Income-tax Act (‘Act’).

e)  On appeal, CIT(A) confirmed the order of AO. However, on further appeal, the Tribunal sets aside the order of AO.

f)  Aggrieved by the order of Tribunal, revenue filed the instant appeal before the High Court.

The High Court held in favour of assessee as under-

1)  Section 79 provides that where there is a change in shareholding of a Company, no losses (incurred in any year prior to the previous year) shall be carried forward and set-off against the income of the previous year, unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.

2)  The expression ''not less than 51% of voting power..."used in Section 79 indicates that only voting power is relevant and not the shareholding pattern.

3)  In the instant case, despite the transfer of shares, the holding-company (ABL) still holds effective control over the assessee-company (ABSL) as it holds 51% of shareholding along with its subsidiary (APIL).

4)  Section 79 was introduced to prevent misuse of carry forward of losses by the new owner. But, in the instant case, effective control over the assessee-company (APSL) remained unchanged even after the change in shareholding. Therefore, losses could be carry forward and set-off- CIT v. AMCO Power Systems Ltd. [2015] 62 taxmann.com 350 (Karnataka)

Excess money refunded on cancellation of booking of flats couldn't be held as interest for purpose of sec. 194A TDS

Builder could not be held liable to deduct tax on excess amount refunded to purchasers on cancellation of booking of apartments as such excess payment could not be qualify as interest as defined under section 2(28A)

Facts

a)  Assessee-Builder entered into construction agreements with various customers.

b)  After entering into the agreements and making certain payments, some purchasers opted out of the agreement and, accordingly, assessee entered into fresh agreements with new buyers at prices that were higher than what was agreed with the old purchasers.

c)  Out of the receipts from the new buyers, the assessee refunded to the old purchasers the amount paid by them and a portion of the excess amount received from the new buyers.

d)  The Assessing Officer (AO) held that the excess amount so paid by the assessee to old purchasers had to be treated as interest paid on deposit and, hence, liable for TDS under section 194A and that having failed to do so, assessee was an assessee-in-default and, accordingly, assessment was completed under section201.

e)  The order of AO was set aside by the first appellate authority. However, the said order was reversed by the Tribunal.

f)  Aggrieved by the order of the tribunal, assessee filed the instant appeal before the High Court.

The High Court held in favour of assessee as under-

1)  Section 2(28A) which defines ‘interest’ can be attracted only in cases where there is debtor-creditor relationship and payments are made in discharge of a pre-existing obligation.

2)  The amount refunded to the purchasers represented the consideration the purchasers paid towards the undivided shares in the property agreed to be purchased and also the cost of construction of the apartment, which work was entrusted to the assessee-builder.

3)  Such a relationship between assessee and purchasers could not spell out a debtor-creditor relationship nor was the payment made by the assessee to the purchaser in discharge of any pre-existing obligation to be termed as interest as defined in section 2(28A).

4)  Further, there was no finding in the assessment order or in the order of the Tribunal that the amount paid by the purchasers, which was refunded, was accounted for as deposit or advance received from them or that there was any debtor-creditor relationship between the parties, obliging the assessee to pay the amount to the purchasers.

5)  There was also no case for the revenue that the excess amount paid by the assessee was based on any agreement between them or that it was quantified at rates that were already agreed between the parties.

6)  In such circumstances, the payments made would not qualify to be interest as defined in section 2(28A) of the Act and the assessee did not have the obligation to deduct tax at source as provided under section 194A nor could they be proceeded against under section 201A, treating them as assessee-in-default- Beacon Projects (P.) Ltd. v. CIT [2015] 62 taxmann.com 177 (Kerala)