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Direct Tax Laws 

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Vodafone story - Re-written 

contents 

VOLUME 24 • ISSUE 7 • AUGUST 1-15, 2012 

- A.J. MAJUMDAR 

Think twice before withdrawing appeal 

filed before ITAT 

- S. KRISHNAN 

CBDT needs to issue instructions to 

CIT(A) to decide stay of demands applications 

expeditiously 

- T.N. PANDEY 

Taxing the expenditure on litigation : 

Adding insult to injury? 

- PURUSHOTTAM ANAND 

Exclusive Owner v. Joint Owner - An 

analysis of the decision of the Madras 

High Court in the case of Dr. 

(Smt.) P.K. Vasanthi Rangarajan v. CIT 

[2012] 23 taxmann.com 299 

Retrospective amendments - Courts 

disagree 

- GOPAL NATHANI 

Write off of non-rural advances by 

banks not impaired by provision kept 

for rural advances 

Taxation of insurance business in 

India 

- AMIT KUMAR & NIKHIL MISHRA 

670 

674 

684 

Tax Implications for NGOs that Source 

Foreign Goods and Services 

- JAMES JOSEPH 

Experts’ Comments 

• Additional claim can be made otherwise 

than by filing a revised return - An analysis 

of Commissioner of Income-tax, Central-I 

v. Pruthvi Brokers & Shareholders (P.) 

Ltd. [2012] 23 taxmann.com 23 (Bom.) 

• Bifurcation of Lease Rental into Capital 

and Revenue Receipt - An analysis of 

Prakash Leasing Ltd. v. Deputy Commissioner 

of Income-tax [2012] 23 

taxmann.com 3 (Kar.) 

- D.C. AGRAWAL 

• Validity of availing twin benefits of sections 

54F and 54EC in respect of sale of 

one long-term capital asset - An analysis 

of Asstt. CIT v. Deepak S. Bheda [2012] 23 

taxmann.com 159 (Mum. - Trib.) 

- V.K. SUBRAMANI 

Landmark Rulings 

Company Law 

696 


Related Party Disclosures and legal 

provisions 

- KIRAN MUKADAM

Accounts & Audit 

701 

707 

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August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 3 iii

Contents 

iv August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 4

INTRODUCTION 

Vodafone story - 

1. One thought that dust had finally settled 

on the Vodafone International Holdings B.V. v. 

Union of India [2012] 204 Taxman 408/17 

taxmann.com 202 with the decision of the 

Supreme Court. But it was not to be. The 

Finance Ministry, Government of India, not 

being satisfied with the above decision, sought 

to have the last laugh in the matter by proposing 

declaratory amendments to the Income-tax Act 

with retrospective effect, in the Finance Bill, 

2012, so as to nullify the decision of the Apex 

Court. The proposed amendments to the Incometax 

Act were passed by the Parliament and 

have also become the law after receiving the 

assent of the President. However, the issue 

has not died down. The foreign investors as 

well the Indian industrial houses, who had 

adopted the same strategy like Hutchinson 

Inc. for making investments in new business 

ventures in India to avoid capital gains tax on 

disinvestment, are agitating against the 

amendment, particularly its retrospective effect, 

as they apprehend that their tax planning in 

the earlier years might have come within the 

departmental scanner. They are also not happy 

with the nullification of the decision of the 

highest Court of law and the amendments, 

which block the tax planning strategy for 

investments they have followed so far in different 

Re-written 

DIRECT TAX LAWS 

A.J. MAJUMDAR 

Member (Retd.), CBDT 

countries. The issue has now transcended from 

being merely a tax issue to a larger economic 

issue, like the country becoming an unattractive 

destination for foreign direct investment – a 

country where the decision of the highest Court 

of law is not followed, which is receiving 

attention in the highest quarters of the 

Government. The present article, however, only 

discusses on the legal aspects of the issue and 

not its economic and political ramifications. 

2. THE RECENT AMENDMENTS TO THE 

INCOME-TAX ACT 

2.1 These amendments are - 

(a) An Explanation has been added, for removal 

of doubt, in the definition of capital 

asset in section 2(14) to clarify that 

“property” includes and shall be deemed 

to have always included any rights in or 

in relation to an Indian company, including 

rights of management or control or 

any other rights whatsoever. 

(b) It has been clarified for removal of doubt 

by way of Explanation 2 to the definition 

of transfer in section 2(47) that “transfer” 

includes and shall be deemed to have 

always included disposing of or parting 

with an asset or any interest therein, 


625


626 

notwithstanding that such transfer of rights 

has been characterized as being effected 

or dependent upon or flowing from the 

transfer of a share or shares of a company 

registered or incorporated outside India. 

(c) Explanation 5 has been added for the removal 

of doubts to section 9(1)(i) to clarify 

that an asset or a capital asset being any 

share or interest in a company or in an 

entity registered or incorporated outside 

India shall be deemed to be and shall 

always be deemed to have been situated 

in India, if the share or interest derives, 

directly or indirectly, its value substantially 

from the assets located in India. 

(d) For the removal of doubts, it has been 

clarified that the obligation to comply with 

sub-section (1) of section 195 and to make 

deduction thereunder applies and shall 

be deemed to have always applied and 

extends to and shall be deemed to have 

always extended to all persons, resident 

or non-resident, whether or not the nonresident 

person has— (i) a residence or 

place of business or business connection 

in India; or (ii) any other presence in any 

manner whatsoever in India. 

(e) It has also been declared that notwithstanding 

anything contained in any judgment, 

etc., of any Court, Tribunal, etc., all 

notices sent or taxes levied, demanded, 

collected or recovered under the provisions 

of the Income-tax Act, 1961, in respect 

of income accruing or arising through or 

from the transfer of a capital asset situate 

in India in consequence of the transfer of 

a share or shares of a company registered 

or incorporated outside India, shall be 

deemed to have been validly made and 

the notice, levy, demand, collection or 

recovery of tax shall be valid and shall 

be deemed always to have been valid and 

shall not be called in question on the 

ground that the tax was not chargeable 

or any ground including that it is a tax 

on capital gains arising out of transactions 

which have taken place outside India, 


and, accordingly, any tax levied, demanded, 

assessed, imposed or deposited before the 

commencement of this Act and chargeable 

for a period prior to such commencement 

but not collected or recovered before 

such commencement, may be collected 

or recovered and appropriated in 

accordance with the provisions of the 

Income-tax Act, 1961 as amended by this 

Act, and the rules made thereunder and 

there shall be no liability or obligation to 

make any refund whatsoever. 

2.2 Amendments in nutshell - In nutshell, the 

amendments have sought to declare that the 

cases of tax planning by non-residents, like 

Hutch group or a resident group, which used 

subsidiaries incorporated abroad to acquire 

shares of Indian companies, to avoid capital 

gains tax on disinvestment, by transferring the 

shares of the subsidiary company abroad, which 

has the effect of indirectly transferring the 

shares of the Indian company held by the 

group, would always fall within the scope of 

section 9(1)(i) or section 2(47) as income accruing 

or deemed to accrue in India from transfer of 

a capital asset situate in India. It is also provided 

by way of a validation clause in the Finance 

Act that any decision of any Court, Tribunal, 

etc., (including the decision of the Supreme 

Court in Vodafone’s case (supra) which has held 

such indirect transfer as not falling within the 

scope of section 9(1)(i) and, hence, not taxable, 

will be disregarded. 

SUPREME COURT’S VIEWS/RULINGS ON 

NON-RESIDENT ENTERPRISE MAKING 

INDIRECT TRANSFER 

3. The declaratory amendments, in fact, represent 

the Revenue’s view of the transactions entered 

into by Hutchison Inc. and its associates with 

Vodafone and its associates, which was argued 

before the Supreme Court to contend that Hutchison 

Inc. had acquired the shares of the Indian company 

in an indirect manner through its wholly owned 

subsidiaries abroad and had sold the shares 

later on to Vodafone Plc. in a similar manner

and the capital gains on transfer of shares had 

to be deemed to have accrued in India. The 

Supreme Court in its decision accepted that “... 

if an actual controlling non-resident enterprise 

makes an indirect transfer through ‘abuse of 

organizational/legal form’ and without reasonable 

‘business purpose’ which results in tax avoidance, 

then the Revenue may disregard the form of the 

arrangement or the impugned action through 

use of non-resident holding company, recharacterize 

the equity transfer according to its 

economic substance and impose tax on the actual 

controlling non-resident enterprise. Whether a 

transaction is used principally as a colourable 

device for the distribution of earnings, profit 

and gains, is determined by a review of all the 

facts and circumstances surrounding the 

transaction.” (para 67). 

However, in the facts of the case the Supreme 

Court negated the contentions of the Department 

and held that “we may reiterate that the ‘look 

at’ principle enunciated in ‘Ramsay’ must look 

at a document or a transaction in the context 

to which it properly belongs. It is the task of 

the Court to ascertain the legal nature of the 

transaction by looking at the entire transaction 

and not adopting a dissecting approach…. Every 

strategic foreign direct investment coming to 

India, as an investment destination should be 

seen in a holistic manner. While doing so, 

Court should keep in mind the following factors: 

the concept of participation in investment, the 

duration of existence of the holding structure, 

the period of Indian operations, the timing of 

the exit …. The onus will be on the Revenue 

to identify the scheme and its dominant purpose. 

The corporate business purpose of a transaction 

is an evidence of the fact that the impugned 

transaction is not undertaken as a colourable 

or artificial device.” (para 68). 

COURTS HAVE MOSTLY FOLLOWED 

THE DICTUM LAID IN CASE OF DUKE 

OF WESTMINSTER 

4. The reasons adduced by the Supreme Court 

in support of its decision in Vodafone’s case 

(supra) are not very convincing, but the fact 

remains that if we consider all the decisions 

of the Indian Courts since 1940’s starting from 

the decision of Privy Council in the case of 

Bank of Chettinad Ltd. v. CIT [1940] 8 ITR 522 

up to the recent decision of the Supreme Court 

in Union of India v. Azadi Bachao Andolan [2003] 

132 Taxman 373, in almost all the cases the 

Courts have followed the dictum laid down 

by Lord Tomlin of House of Lords (UK) in the 

case of Duke of Westminster (supra) and have 

refused to frown upon tax avoidance practices. 

The principles laid down by House of Lords 

(UK) in Ramsay Ltd. v. IRC [1981] 1 ALL ER 

259 and other cases in 1980’s had no effect on 

Indian Judiciary. The only exceptions were the 

cases of CIT v. Sri. Meenakshi Mills Ltd. [1967] 

63 ITR 609 (SC) and Juggilal Kamlapat v. CIT 

[1969] 73 ITR 702, where the Supreme Court 

felt that it was necessary to lift corporate veil 

to look at the substance of the transactions so 

as to frustrate tax avoidance efforts. 

5. JUDICIAL INTERPRETATION OF 

STATUTORY PROVISIONS 

5.1 Two schools of thought - In judicial 

interpretation of statutory provisions, there 

are two distinct schools of thought. 

5.1.1 Classical literal School - The classical literal 

school holds a statute as the authentic enactment 

of the Will of the Legislature. The rule of 

construction of a statute is that one must not 

imply anything in the statute which is 

inconsistent with the words expressly used. 

If the language is clear and explicit, the Court 

must give effect to it, as the words of the 

Statute speak the intention of the Legislature. 

In doing so, the Court must bear in mind that 

its function is interpretation of existing law 

and not enactment of new law. The Court 

must not overrule the words of a statute; 

reform of the law must be left in the hands 

of the Parliament (Maxwell on interpretation 

of statutes, p. 1-2). Indian judicial history is 

replete with decisions which followed the above 

school of interpretation. 


627


5.1.2 Purposive School - With the proliferation 

of tax planning exercises, another school of 

construction of statutes developed, which is 

known as purposive school. An important rule 

of this school is Heydon’s mischief rule, which 

requires all the judges to always make such 

construction of statutes as shall suppress the 

mischief and advance the remedy, and to 

suppress subtle inventions and evasions for 

continuance of the mischief, and to add force 

and life to the cure and remedy according to 

the true intent of the makers of the Act. To 

carry out effectually the object of a statute, it 

must be so construed as to defeat all attempts 

to do, or avoid doing, in an indirect or circuitous 

manner that which it has prohibited or enjoined. 

This manner of construction has two aspects. 

One is that the Courts, mindful of the mischief 

rule, will not be astute to narrow the language 

of a Statute so as to allow persons within its 

purview to escape its net. The other is that 

the statute may be applied to the substance 

rather than the mere form of the transactions, 

thus, defeating any shifts and contrivances 

which parties may have devised in the hope 

of falling outside the Act. (Maxwell, p. 40, 

137). 

5.2 Prophetic remarks by some eminent jurists - 

Justice Chinnappa Reddy of the Supreme Court 

in the case of McDowell & Company Ltd. v. 

CTO [1985] 22 Taxman 11 had expressed himself 

rather strongly against tax avoidance in his 

separate judgment, drawing references to British 

decisions. He had finally observed “It is neither 

fair nor desirable to expect the Legislature to 

intervene and take care of every device and 

scheme to avoid taxation. It is up to the Court 

to take stock to determine the nature of the 

new and sophisticated legal devices to avoid 

tax and consider whether the situation created 

by the device could be related to the existing 

legislation with the aid of the emerging 

‘techniques of interpretation’ as was done in 

Ramsay, Burma Oil and Dawson to expose the 

devices for what they really are, and to refuse 

to give judicial benediction.” Justice Krishna 

Iyer made a somewhat prophetic remark by 

628 


way of obiter in the case of CIT v. T.N. Aravinda 

Reddy [1979] 2 Taxman 541 (SC) — “A passing 

reference to avoidance and evasion of tax was 

made at the bar, a dubious refinement of a 

dated legal culture sanctified, though, by judicial 

dicta. The Court is not the mint of virtue and 

one day in our welfare State geared to social 

justice, this clever concept of ‘avoidance’ against 

‘evasion’ may have to be exposed. Enough 

unto the day is the evil thereof.” 

6. AMENDMENTS HAVE RAISED A 

STORM 

6.1 Relevance of role of Apex Court - As 

mentioned earlier, the amendments have raised 

a storm among non-resident as well as resident 

investors. They feel that such far reaching 

amendments should not have been introduced 

with retrospective effect. It also raises a serious 

issue about relevance of the role of the Apex 

Court as a final arbiter of tax disputes. 

6.2 Principles of declaratory amendments - In 

this regard, it is necessary to refer to well 

established principles in the matter of declaratory 

amendments. Justice G.P. Singh in his book on 

principles of statutory interpretation (Sixth 

Edition, 1977) observes: “The presumption against 

retrospective operation is not applicable to 

declaratory statutes. As stated by Craies on 

statute law and approved by the Supreme 

Court in the case of Central Bank of India v. 

Their Workmen AIR 1960 SC 12 : “For modern 

purposes a declaratory Act may be defined as 

an Act to remove doubts existing as to the 

common law, or the meaning or effect of any 

statute. Such Acts are usually held to be 

retrospective. The usual reason for passing a 

declaratory Act is to set aside what Parliament 

deems to be to have been a judicial error, 

whether in the statement of common law or 

in the interpretation of statutes. Usually, if not 

invariably, such an Act contains a preamble, 

and also the word ‘declared’ as well as the 

word ‘enacted’ “. But the use of the words ‘it 

is declared’ is not conclusive that the Act is 

declaratory, for these words may at times be

used to introduce new rules of law, and the 

Act in the latter case will only be amending 

the law and will not necessarily be retrospective 

(Harding v. Queensland Stamp Commissioners 1898 

AC 769 PC). In determining, therefore, the 

nature of the Act, regard must be had to the 

substance rather than to the form. If a new 

Act is to ‘to explain’ an earlier Act, it would 

be without object unless construed retrospective. 

An explanatory Act is generally passed to supply 

an obvious omission or to clear doubts as to 

the meaning of the previous Act. It is wellsettled 

that if the statute is curative or merely 

declaratory of the previous law, retrospective 

operation is generally intended. The language 

‘shall be deemed always to have meant’ is 

declaratory, and is in plain terms retrospective. 

In the absence of clear words indicating that 

the amending Act is declaratory, it would not 

be so construed when the pre-amended provision 

was clear and unambiguous. An amending 

Act may be purely clarificatory to clear a meaning 

of a provision of the principal Act which was 

already implicit. A clarificatory amendment of 

this nature will have retrospective effect…..” 

(pp. 338-339). 

6.3 No amendment is pro-tanto constitutionally 

invalid due to retrospective effect - No 

amendment is pro-tanto constitutionally invalid 

merely because it is retrospective. The Federal 

Court had examined the norms of a 

constitutionally valid provision in the case of 

the Governor-General-in-Council v. The Raleigh 

Investment Company Ltd. [1944] 12 ITR 265 (FC) 

and cited with approval the observation of 

Justice Evatt in an Australian tax case – “The 

Constitution requires that it must be possible 

to predicate of every valid law that it is for 

the peace, order and good Government of the 

Dominion with respect to a granted subject, 

e.g., customs, taxation, external affairs. In such 

cases, the presence of non-territorial elements 

in the challenged law has to be considered 

upon a slightly different footing and those 

affirming its validity have to show not only 

that the Dominion has some real concern or 

interest in the matter, thing, or circumstance 

dealt with by the legislation, but that the concern 

or interest is of such a nature that the challenged 

law is truly one with respect to an enumerated 

subject-matter.” Further, constitutional validity 

of an enactment can also be challenged before 

a court of law, if the enactment infringes the 

fundamental rights of the citizens. 

6.4 Questions connected with constitutional 

validity of declaratory amendments - If the 

issue of constitutional validity of these declaratory 

amendments is challenged before Court of law, 

the following questions may arise – (i) whether 

the amendments are really declaratory of the 

existing law or a new addition to the existing 

law and, hence, should not have retrospective 

effect ? (ii) whether the capital gains or other 

income arising from the transactions described 

in the declaratory amendments have sufficient 

territorial nexus with India, so as to make the 

income taxable in India in conformity with 

constitutional principles, and, hence, whether 

the amendment is constitutionally invalid. 

6.5 Past amendments to Income-tax Act - In 

the past, there have been several examples of 

amendments to the Income-tax Act to clarify 

or remove deficiencies in the existing law, 

exposed by clever tax planning devices adopted 

by taxpayers to circumvent a particular taxing 

provision, but the reaction of the Revenue has 

never been as aggressive as of now. Inclusion 

of income arising to the wife and minor children 

from the assets transferred by an individual, 

in latter’s hands, is one of the earliest specific 

anti-avoidance provisions introduced in the 

Income-tax Act. It was introduced in the Incometax 

Act, 1922 as section 16(3) by the Amending 

Act of 1937 (counterpart of section 64 of Incometax 

Act, 1961). While as clause (a) of section 

16(3) dealt with inclusion of income arising 

from assets transferred directly or indirectly 

to the wife or a minor child by the individual, 

clause (b) dealt with inclusion of so much of 

the income of any person or association of 

persons as arises from assets transferred to the 

person or association by such individual for 

the benefit of his wife or a minor child or 


629


both. The first issue, which arose, was whether 

the word ‘individual’ in the provision meant 

only the male and not the female of the species, 

particularly because of use of the word ‘wife’ 

in juxtaposition ? Supreme Court held in 1950’s 

in the case CIT v. Sodra Devi [1957] 32 ITR 615 

that in section 16(3) the word ‘individual’ 

connotes only a male, thus, granting immunity 

to female taxpayers from the operation of the 

anti-avoidance provision. This must not have 

been a deliberate intention of the Legislature, 

but only inadvertent mistake in drafting. The 

Legislature did not react immediately. The 

mistake was corrected only in the Income-tax 

Act, 1961, with effect from 1-4-1962, by using 

the word ‘spouse’ in place of ‘wife’. 

An interesting issue regarding applicability of 

clause (b) of section 16(3) arose before the 

Supreme Court in 1952 in the case of CIT v. 

Manilal Dhanji [1962] 44 ITR 876. A taxpayer, 

to avoid application of the above provision, 

settled some assets in trust for the benefit of 

his minor child with the direction to the trustee 

that the income arising from the transferred 

assets should be accumulated by the trustee 

during the minor status of the child and paid 

to him in a lump sum after he attains majority. 

The taxpayer contended before the Court that 

section 16(3)(b) would not be applicable as the 

child did not have any right to receive any 

income from the transferred assets during his 

minor status. Revenue argued that the income 

from the transferred assets was held by the 

trustee when the child was minor for his benefit, 

which was paid to him on attaining maturity. 

Supreme Court held that a person could be 

taxed on the income from assets transferred 

for the benefit of his wife or minor child, 

provided that in the year of account she or 

he derived some benefit under the transfer, 

either income should be received or accrued 

or any beneficial interest in the income acquired 

in the relevant year of account, and, accordingly, 

the provision of section 16(3) will not be 

applicable. Legislature did not react in this 

case also. The omission was corrected only in 

the Income-tax Act, 1961 by qualifying the 

630 


word ‘transferred’ by the words ‘directly or 

indirectly’ and ‘benefit’ by the words ‘immediate 

or deferred’. 

Taking recourse to the provisions of the Hindu 

law, another tax planning exercise came into 

vogue. A taxpayer, to avoid the provisions of 

section 64 of I.T. Act, 1961, would not transfer 

directly or indirectly any asset to his spouse 

or minor children. Instead, he would throw 

his separate property into the common hotchpot 

of the Hindu undivided family consisting of 

himself, his wife and minor children to blend 

it with the H.U.F property. The property and 

its income would henceforth belong to the 

H.U.F. The H.U.F could thereafter undergo a 

partition of its property including the property 

thrown into the common hotchpot distributing 

it among the individual, his wife and minor 

children. As held by the Supreme Court in 

1965 in the cases of CIT v. Keshavlal Lallubhai 

Patel [1965] 55 ITR 637 and CIT v. M.K. Streman/ 

Manilal Virchand [1965] 56 ITR 62, neither the 

act of throwing separate property by an 

individual in the common stock of an H.U.F 

of which he is a coparcener nor the subsequent 

partition of H.U.F property amount to transfer 

of property nor the provisions of section 64 

apply to such transactions. Here again the 

Legislature did not react immediately, but 

introduced sub-section (2) of section 64 by the 

Amendment Act of 1970 with effect from 

1-4-1971 to neutralize such tax planning 

undertaken after 1-1-1970. 

6.6 Retrospective amendments to neutralize 

Judicial decisions - Since 1998, there have 

been a large number of retrospective amendments 

mainly to neutralize judicial decisions of the 

High Courts and below, the most notable of 

them being introduction of section 14A with 

retrospective effect from 1-4-1962, which sought 

to neutralize the decision of the Supreme Court 

in the case of CIT v. Indian Bank Ltd. [1965] 

56 ITR 77, rendered in 1965, to the effect that 

in computation of taxable business income, all 

expenses incurred for the purpose of business 

should be allowable as deduction including 

expenditure incurred in the course of business

for earning tax exempt income. However, 

subsequently, a proviso was introduced to 

prohibit reopening of completed assessments 

for the assessment years up to A.Y. 2000-01 

so as to omit retrospective operation of the 

provision. 

CONCLUDING REMARKS 

7. Apart from retrospective clarificatory 

amendments resulting from judicial decisions 

which are obviously against legislative intentions 

or suffer from a lacuna or are deficient in 

drafting of law, there are borderline cases where 

the provisions of the law are not clear and 

unambiguous or the law does not literally 

cover the planned transactions undertaken to 

circumvent the provisions. (perhaps Vodafone 

International Holdings B.V. case (supra) falls in 

this category. Legislature while drafting section 

9 of I.T. Act, 1961 which is modelled on section 

42 of the I.T. Act, 1922 might not have foreseen 

such an affront on the provision by the taxpayers). 

• DT - Secs. 2(14), 2(47), 9(1), 16(3), 64 & 195(1) 

�� 

lis A suit, actions, controversy, dispute 

fraus omnia vitiat Fraud vitiates everything 

seisin The possession of land or chattels by 

one having title thereto 

For a long time, the literal school of interpretation 

of statute was widely prevalent in India. The 

fact that the judges must give effect to the 

clear and unambiguous words of the Statute 

and should not look at the substance of the 

transaction was accepted by the taxpayers and 

Revenue alike. Justice Krishna Iyer and Justice 

Chinnappa Reddy and some other judges brought 

the concept of purposive interpretation of statute 

to India. The decisions of the House of Lords 

in W.T. Ramsay Ltd. (supra) and other cases in 

1980’s were discussed in the Indian decisions 

in ‘80’s and ‘90’s. But the issue died down 

with the decision of the Supreme Court in 

Azadi Bachao Andolan case (supra). But Revenue 

still yearns for judicial decisions on the lines 

of Ramsay or for the attitude of Justice Chinnappa 

Reddy and Justice Krishna Iyer towards tax 

avoidance. Most probably the above psyche of 

the Revenue provoked the retrospective, and 

not prospective, amendments to Income-tax 

Act. 

sine anno Without date 

sub poena Under a penalty 

••• 

ipse dixit Dogmatic statement resting on bare 

authority 


631


Think twice before 

withdrawing appeal 

filed before ITAT 

An analysis of the decision of the Bombay High Court in the case of CIT 

v. Jamnadas Virji Shares & Stock Brokers (P.) Ltd. [2012] 21 taxmann.com 

27 interpreting rule 27 of ITAT Rules, 1963 

INTRODUCTION 

1. Sometimes when the provisions of the Act 

and/or rules are analyzed and lucidly explained 

by the High Court, the assessee is able to 

understand the purpose of enactment of the 

relevant section or rule, as the case may be, 

and this should make the assessee wise enough 

to take remedial measures to safeguard his 

interest so that he is not caught unawares. The 

Bombay High Court in the case of CIT v. 

Jamnadas Virji Shares & Stock Brokers (P.) Ltd. 

[2012] 21 taxmann.com 27, after analyzing rule 

27 of the Income-tax (Appellate Tribunal) Rules, 

1963 (the ITAT Rules, 1963) has held that once 

an appeal before the Tribunal was withdrawn 

by assessee, in revenue’s appeal, assessee could 

support order of Commissioner of Income-tax 

(Appeals) only to that extent to which 

Commissioner of Income-tax (Appeals) allowed 

assessee’s claim and could not assail the order 

of Commissioner of Income-tax (Appeals) on 

grounds decided against it. The author, in this 

632 


CA S. KRISHNAN 

article, has analyzed this decision of the Bombay 

High Court as also quite a good number of 

decisions to arrive at the conclusions. 

FACTS OF THE CASE AND DECISION OF 

AUTHORITIES INCLUDING TRIBUNAL 

2. The assessee had made a claim towards 

bad debts to the tune of ` 28.69 lakhs under 

section 36(2) of the Income-tax Act (the Act). 

The Assessing Officer disallowed the entire 

claim. The Commissioner of Income-tax 

(Appeals), on first appeal, granted relief to the 

extent of ` 13.73 lakhs under section 36(2) of 

the Act while confirming the disallowance made 

by the Assessing Officer to the extent of ` 

14.96 lakhs. Both, the revenue and the assessee, 

filed appeals before the Tribunal. The appeal 

filed by the assessee was, however, barred by 

limitation, as there was a delay of 551 days 

on the part of the assessee in preferring the 

appeal before the Tribunal. During the course

of the hearing before the Tribunal the assessee 

withdrew its appeal, but sought to press in 

aid the provisions of rule 27 of the ITAT Rules, 

1963 to contend that the Commissioner of Incometax 

(Appeals) had erred in partly confirming 

the disallowance. The Tribunal vide its order 

dated 9 th September, 2011, while dismissing 

the appeal of the assessee with regard to 

admission of the appeal which was filed with 

a delay of 551 days as no sufficient cause was 

shown in filing the appeal belatedly, held that 

in the absence of relevant details being brought 

on record by the parties and in the interests 

of justice it was appropriate to remand the 

entire matter pertaining to the disallowance of 

` 28.69 lakhs to the Assessing Officer. 

Accordingly, the order passed by the Assessing 

Officer on this account was set aside in its 

entirety by the Tribunal and the Assessing 

Officer was directed to decide the matter afresh 

in view of the decision of the Mumbai Special 

Bench in Dy. CIT v. Shreyas S. Morakhia [2010] 

40 SOT 432. 

The Revenue filed an appeal before the High 

Court. 

ARGUMENTS PUT FORTH BY BOTH 

SIDES BEFORE THE HIGH COURT 

3. The Revenue contended that as per rule 27 

of the ITAT Rules, 1963 the assessee, as the 

respondent to the appeal filed by the Revenue, 

would be permitted to support the order passed 

by the Commissioner of Income-tax (Appeals) 

only on any of the grounds decided in favour 

of the assessee and not support order on the 

point(s) by taking recourse to the provisions 

of rule 27 of the ITAT Rules, 1963 where the 

assessee had withdrawn its appeal. 

It was submitted on behalf of the assessee 

that as the appeal was barred by limitation 

the assessee was advised to withdraw the 

appeal so that provisions of rule 27 of the 

ITAT Rules, 1963 could be pressed in aid 

and, accordingly, the assessee withdrew the 

appeal. 

DECISION OF THE HIGH COURT AND ITS 

BASIS 

4. The High Court, in the instant case, extracted 

the relevant rule 27 of the ITAT Rules, 1963 

which reads as under:- 

“27. Respondent may support order on grounds 

decided against him:- The respondent, though 

he may not have appealed, may support 

the order appealed against on any of the 

grounds decided against him.” 

The High Court then referred to its earlier 

decision in the case of B.R. Bamasi v. CIT 

[1972] 83 ITR 223 (Bom.) wherein the Division 

Bench after noting an earlier judgment in CIT 

v. Hazarimal Nagji & Co. [1962] 46 ITR 1168 

(Bom.) for the proposition that a respondent 

in an appeal is undoubtedly entitled to support 

the decree which is in his favour on any grounds 

which are available to him, even though the 

decision of the lower court in his favour may 

not have raised those grounds and observed 

that the powers of the Appellate Tribunal are 

similar to those of an Appellate Court under 

Order XLI rule 22 of the Code of Civil Procedure, 

1908. 

The High Court made the following observations 

at para 12 of its order- 

“Once the appeal was withdrawn, it was 

only open to the assessee to support the 

order of the Commissioner (Appeals) on 

any of the grounds decided in its favour. 

Hence, while the assessee would support 

the order that would mean that the assessee 

would be entitled to urge that the deletion 

of the disallowance to the extent of 

` 13.73 lakhs by the Commissioner (Appeals) 

was correct and proper, the assessee would 

not be entitled to avail of the benefit of 

the provisions of rule 27 in regard to that 

part of the order of the Commissioner 

(Appeals) which, upon consideration of 

the evidence, confirmed the disallowance 

of ` 14.96 lakhs made by the Assessing 

Officer.” 


633


The High Court ultimately held that the Tribunal 

had erred in setting aside the order of the 

Commissioner of Income-tax (Appeals) in its 

entirety and by restoring the proceedings to 

the Assessing Officer in regard to the 

disallowance to the extent of ` 28.69 lakhs and 

confirmed order of the Tribunal only to the 

extent to which it restored the proceedings to 

the Assessing Officer as regards the amount 

of ` 13.73 lakhs 

The High Court, however, observed that the 

assessee, if so advised, could take necessary 

steps for restoration of the appeal before the 

Tribunal which was dismissed earlier for nonprosecution 

by the assessee. The High Court 

also observed that it would be open to the 

Tribunal to deal with such application, when 

made by the assessee for restoration of appeal, 

in accordance with law. 

5. OTHER IMPORTANT DECISIONS 

5.1 The Kerala High Court in the case of CIT 

v. Commonwealth Trust (India) Ltd. [1996] 

221 ITR 474/87 Taxman 393 in which it was 

observed that - The law of procedure has to 

be approached, understood and appreciated 

as a helpmate in the course of the process of 

administration of justice and never as a situation 

of obstruction or obstacle in regard thereto. 

The High Court, therefore, held that “even 

though limitation is not specifically set up as 

a defence, a barred proceeding has to be 

dismissed. Rule 27 of the ITAT Rules, 1963, 

enacts that the respondent (in this case the 

assessee) may support the order, though he 

may not have appealed, on any of the grounds 

decided against him.” 

5.2 The Supreme Court in the case of 

Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 

232 - Held that Rule 12 (dealing with rejection 

of memorandum of appeal) and Rule 27 of the 

Appellate Tribunal Rules, 1946, (the ITAT 

Rules,1946) are not exhaustive of the powers 

of the Tribunal. They are merely procedural 

in character and do not, in any way, circumscribe 

or control the power of the Tribunal under 

634 


section 33(4) of the Indian Income-tax Act, 

1922.It is to be noted that the earlier rule 27 

of the Appellate Tribunal Rules, 1946 was on 

the same lines as the rule 27 of Income-tax 

(Appellate Tribunal) Rules, 1963. It is further 

to be noted that provisions of section 33(4) of 

the 1922 Act were akin to section 253 of the 

Act. 

5.3 The Madras High Court in the case of CIT 

v. Sundram & Co. (P.) Ltd. [1964] 52 ITR 763 

- It was held that “Rule 27 of the ITAT Rules, 

1946, confers a right on the respondent in an 

appeal to the Appellate Tribunal to support 

the order of the Appellate Assistant 

Commissioner, on any of the grounds decided 

against him, even though he may not have 

himself preferred an appeal to the Tribunal. 

Being a right conferred on the respondent, the 

Tribunal has no right in its discretion to deprive 

him of the benefit of this rule.” 

5.4 The Madras High Court in the case of 

M.R.M. Periannan Chettiar v. CIT [1960] 39 

ITR 159 - Held that “Rule 27 recognizes the 

principle that the Appellate Tribunal would 

have authority only to decide the question 

decided by the Appellate Assistant Commissioner 

against the appellant, and makes a special 

provision, enabling the respondent alone to 

support the order on a ground decided against 

him.” The Madras High Court also opined 

that the existence of an appeal which related 

only to a distinct matter in controversy did 

not entitle the Tribunal to take up and decide 

the appeal in favour of the appellant on the 

basis of a ground not in controversy by taking 

recourse to any of the ITAT Rules,1946. 

5.5 The ITAT Chandigarh Bench in the case of 

Asstt. CIT v. Balbir Chand Maini [2007] 111 

TTJ 160 - Held that where issue relating to 

validity of reopening was decided against 

assessee, in light of rule 27 of the ITAT Rules,1963, 

assessee was entitled to contest issue in an 

appeal filed by Revenue. 

5.6 Durgeshwari Investments (P.) Ltd. v. ITO 

[2005] 146 Taxman 56 (Mum.)(Mag.) - The facts 

of the case which arose in Durgeshwari Investments

(P.) Ltd.’s (supra) before the ITAT Mumbai 

Bench were that the Commissioner of Incometax 

(Appeals) dismissed the appeal of the assessee 

on merits without noticing that the assessee 

had not paid the admitted tax as required 

under section 249(4) of the Act and in the 

appeal filed by the assessee, the Revenue 

pleaded before the Tribunal that, though the 

Commissioner of Income-tax (Appeals) dismissed 

the appeal on merits, yet he should have done 

the same on the ground of admission of appeal 

as well. The Tribunal, on these facts, held that 

as the order of the Commissioner of Incometax 

(Appeals) was only being supported by 

the respondent-Revenue they were entitled to 

do that as per rule 27 of the ITAT Rules, 1963. 

The Tribunal observed at para 8 of its order 

as under:- 

“The objection taken by the Revenue does 

not, strictly speaking, constitute a ground 

of appeal or the ground of cross-objection, 

but it is only an argument in support of 

the conclusions arrived at by the CIT(A) 

which is permissible by the scheme of 

proceedings before the Tribunal.” 

The Tribunal in this case distinguished the 

decision of the Madhya Pradesh High Court 

in the case of Kamal Kishore & Co. v. CIT [1998] 

232 ITR 668, wherein it was held that in the 

absence of a specific ground and specific objection 

regarding an issue, the Tribunal had no powers 

to decide that issue, by pointing out that the 

issue before the Tribunal, in this case, was 

different. 

5.7 The ITAT Delhi Bench in the case of Dy. 

CIT v. Lakshmi Precision Screws Ltd. [2001] 

71 TTJ 333 - Held that when the Revenue is 

in appeal before the Tribunal and the view 

taken by the Commissioner of Income-tax 

(Appeals) is upheld by the Tribunal, the assessee 

cannot claim any relief over and above what 

has already been allowed by the first appellate 

authority, unless he is a cross-objector or in 

cross-appeal before the Tribunal. The Tribunal 

also held that “In case, one has to consider 

the assessee’s request with reference to rule 

27 of the ITAT Rules,1963, then the Tribunal 

can only confirm the view taken by the first 

appellate authority and here also no further 

relief can be allowed.” The Delhi Bench of 

ITAT in an earlier case in IAC v. Avis International 

(P.) Ltd. [1990] 33 ITD 217 had echoed similar 

views. 

5.8 The Kerala High Court in the case of 

Travancore Chemical & Mfg. Co. Ltd. v. CIT 

[1997] 226 ITR 429/ 92 Taxman 440 - Held if 

the assessee, as a respondent before the Tribunal, 

did not file cross-objections or supported the 

order of the Appellate Assistant Commissioner 

under rule 22 or rule 27 of the ITAT Rules, 

1963, then his contention agitating the matter 

on a reference (now appeal) could not be 

entertained by the High Court, as the same 

was not raised at the appropriate occasion. 

5.9 The Kerala High Court in CIT v. BPL Systems 

& Projects Ltd. [1997] 227 ITR 779 - In this 

case as against the disallowance of deduction 

made under section 37(1) of the Act in respect 

of the acquisition of designs and drawings for 

the manufacture of power line carrying 

communication equipment, the assessee filed 

an appeal before the first appellate authority 

who confirmed the disallowance made under 

section 37(1) of the Act but allowed the deduction 

in full under section 35 of the Act. The assessee 

did not file an appeal before the Tribunal, as 

it was not required because there was no financial 

loss, yet it supported the order of the first 

appellate authority by invoking rule 27 of the 

ITAT Rules, 1963. The Tribunal held that the 

expenditure in acquiring designs and drawings 

for improving the efficiency or profit earning 

apparatus would be revenue expenditure and 

would not be a case of payment for an enduring 

advantage. The issue which was raised before 

the High Court was “Whether the assessee is 

entitled to invoke rule 27 of the ITAT Rules, 

1963, and the Tribunal is empowered to consider 

the contention of the assessee under the rule?” 

The High Court answered in the affirmative. 


635


5.10 The ITAT Bench in the case of IAC v. 

Panipat Co-operative Sugar Mills Ltd. [1983] 

3 ITD 734 (Chd.) - Case that out of four items 

of additions made to the income of the assessee, 

penalty for concealment under section 271(1)(c) 

of the Act was levied at assessment stage. 

The Commissioner of Income-tax (Appeals) 

deleted the penalty imposed on three items 

but sustained the penalty imposed on the 

fourth item. In the second appeal by the revenue 

contesting the deletions, the assessee, on the 

strength of rule 27 of the ITAT Rules, 1963, 

raised before the Tribunal for the first time 

that a different finding was warranted qua 

the penalty sustained. 

The Tribunal held as follows- 

636 

“The right granted to the respondent under 

rule 27 of the ITAT Rules, 1963 is limited. 

All that the respondent can do is to support 

the order of the appellate authority as a 

respondent, who has neither come in appeal 

nor in cross-objection. He cannot ask for 

a finding different from that of the first 

appellate authority on the basis of rearguing 

the grounds rejected by the first 

appellate authority. The contentions raised 

by the assessee against the levy of penalty 

were, therefore, not sustainable.” 

5.11 The Delhi High Court in CIT v. Edward 

Keventer (Successors) (P.) Ltd. [1980] 123 ITR 

200 - Case was that the Assessing Officer had 

treated certain share transactions as sham and 

collusive and, therefore, disallowed the losses 

claimed and, consequently, disallowed the interest 

admitted by the assessee relating to these 

transactions. The first appellate authority treated 

these transactions as genuine but considered 

the prices to be inflated. He, therefore, computed 

a profit and as a logical corollary, allowed the 

interest substantially (except to the extent of 

inflation found by him). The assessee filed an 

appeal before the Tribunal and urged that the 

profit computed by the first appellate authority 

was wrong and prayed for its deletion. In 

other words the first appellate authority had 

given two findings, one against the assessee 


and the other against the department. The 

Tribunal deleted the profit estimated by the 

first appellate authority and so the Revenue, 

invoking rule 27 of the ITAT Rules, 1946 argued 

that when the Tribunal had deleted the addition 

made by the first appellate authority the assessee 

would not be entitled to the benefit of any 

deduction by way of interest on loans said to 

have been obtained for purchasing the shares. 

The Tribunal, however, did not accede to the 

contention of the Revenue. It was pointed out 

by the Tribunal that all that a respondent in 

an appeal could do was to support the decree 

on any of the grounds decided against him in 

the lower court, but that the respondent could 

not make out a case for a decree for the same 

amount by attacking the decree in respect on 

a right decided against him. Referring to certain 

decisions under order 41, rule 22 of the Code 

of Civil Procedure, 1908 the Tribunal rejected 

the arguments on behalf of the revenue and 

declined to maintain the addition to the extent 

of the relief granted by the first appellate 

authority in assessee’s favour, in the interest 

account. The High Court, on reference, held 

that “It could not have assailed the latter in 

appeal without attacking the findings on the 

first also. To say, in such circumstances, that 

the department could not seek to uphold the 

order of the first appellate authority on this 

subject-matter would virtually amount to denial 

of natural justice to it which is not the object 

of the relevant statutory provisions. Moreover, 

even if the department’s grounds ultimately 

succeed on merits, the assessee would not be 

adversely affected and could not be in a worse 

position than if it had preferred no appeal at 

all.” 

The High Court, ultimately, held that the Tribunal 

should have entertained the ground adduced 

by the Revenue being an inter-connected one 

and then should have disposed of the appeal 

in the light of its decision thereon. 

5.12 The Allahabad High Court in the case of 

Kanpur Industrial Works v. CIT [1966] 59 ITR 

407 - The decision in the case succinctly explains 

the rights of the assessee to invoke rule 27 of

the ITAT Rules, 1946, vis-à-vis the order passed 

by the first appellate authority, in the following 

words- 

“When the department files an appeal for 

an increase in the assessed income, the 

subject-matter of the appeal is the increase 

claimed by the department and the assessee 

can urge any ground of defence, even 

though it might have been rejected by the 

Appellate Assistant Commissioner, for 

showing that there should be no increase. 

That the assessee is not liable to be assessed 

at all is a ground for showing that there 

should be no further assessment and the 

department’s appeal can, therefore, be 

resisted on this ground. There is no 

incongruity in maintaining the assessment 

order passed on the assessee and refusing 

to increase it on the ground that he was 

not liable to be assessed at all. 

But if the Tribunal accepts the ground of 

defence that the assessee was not liable 

to be assessed at all, it can only refuse 

to increase the assessed income as only 

that will be “an order on the appeal” by 

the department. Any other order such as 

annulling the assessment would be outside 

the scope of the appeal: 

Held, on the facts, that on a proper 

interpretation of the statement of the case 

• DT - Secs. 36(2) & 37(1)/Rule 27 

and the question framed what the assessee 

desired to argue before the Tribunal was 

that the assessment order itself should be 

quashed because the receipts were not 

profits at all, and this was rightly disallowed 

by the Tribunal.” 

CONCLUSION 

6. In the light of the detailed discussion, it 

becomes clear that pros and cons have to be 

weighed before an appeal filed by an assessee 

[on some point(s)] before the ITAT is withdrawn 

by him as the assessee would be left with no 

remedy on account of the fact that in the event 

of such withdrawal of appeal he would be 

divested of powers/rights to invoke rule 27 

of the ITAT Rules, 1963 on the same point(s), 

in case of need. It is always advisable to go 

through the facts of each case minutely before 

applying decided case laws to the issue(s) in 

hand. It is also imperative to go through the 

circulars issued by the Central Board of Direct 

Taxes from time-to-time to understand the 

purpose of introduction/amendment to a section 

or a rule. It is also necessary to understand 

from a decision rendered by a judicial authority 

as to what points have been decided by the 

authority and which points were not before it 

for adjudication? 


••• 

637


638 

CBDT needs to issue instructions to 

CIT(A) to decide stay of demands 

applications expeditiously 

The author, in this well researched 

article, has raised the issue of stay 

of income-tax demands by the CIT(A) 

during the course of pendency of appeals 

before them. Number of High Courts have 

held that the CIT(A) have such powers but 

for unknown reasons (or may be on account 

of some secret instructions from the 

CBDT) no CIT(A) is exercising this power. 

Two High Courts have even issued directions 

to the CBDT for issuing instructions/ 

guidelines in this direction, but for some 

unknown reasons, the CBDT is shying away 

from doing so. 

The author, in this article, has examined 

the issue of stay of demands during the 

pendency of appeals before the CIT(A) from 

various angles and has clearly demonstrated 

that the CIT(A) have powers to do so. This 

exhaustive article on the subject can be of 

great assistance for the taxpayers to press 

their claims in this regard before the various 

IT authorities. 

INTRODUCTION 


T.N. PANDEY 

Ex-Chairman, CBDT 

1. Article 265 of the Constitution of India 

mandates that no tax shall be collected except 

with the authority of law. Yet, there are umpteen 

instances, year after year, where high-pitched 

assessments are made with high additions by 

the Assessing Officers (AOs), many of which 

get knocked down in appeals. But the AOs 

start action for collection of demands raised, 

in a number of cases even by curtailing the 

mandatory period of 30 days allowable for 

payment under the Income-tax Act, 1961 (Act) 

and even where demands have been secured 

by attachment and other legal processes. This 

tantamounts to underserved hardship to the 

assessee. Coercive action is taken/threatened 

for the collection of demand in cases where 

the assessments made are, prima facie, on high 

incomes unlikely to be sustained in appeals.

Two recent instances of such practices have 

been provided in this article. 

2. COURT DECISIONS 

2.1 Case of Firoz Tin Factory v. Asstt. CIT 

2.1.1 Entire demand directed to be paid within 7 

days only - In Firoz Tin Factory v. Asstt. CIT 

[W.P. No. 765 of 2012, dated 26-3-2012], a 

demand of ` 36,56,61,776 was raised and the 

assessee was directed to pay the entire demand 

within a period of 7 days (curtailing the 

prescribed period of 30 days for payment of 

demand, without mentioning any cogent reasons 

for doing so). On such action of the AO, the 

High Court has observed: “there was absolutely 

no justification for the AO making an order of 

demand within a period of one week from the date 

of the assessment order”. Such observations are 

indicative of the unreasonable steps resorted 

to for the realization of even unmerited demands. 

2.1.2 Provisional attachment under section 281B 

taken - In this case action by way of provisional 

attachment under section 281B has already 

been taken, attaching the amount invested by 

the assessee in mutual funds, which was almost 

equal to the demand raised. 

2.1.3 The Bombay High Court orders no coercive 

steps to be taken - Even on these facts the 

assessees’ request for stay of demand till the 

disposal of appeal by the CIT(A) was rejected. 

Hence, the assessee had to file a writ petition 

before the Bombay High Court for relief. The 

HC passed an order that no coercive steps 

shall be taken against the petitioner for the 

recovery of the demand pending the disposal 

of the appeal before the CIT(A) and also for 

a further period of eight weeks after the disposal 

of appeal by the CIT(A). Such an order could 

as well have been passed by the departmental 

authorities instead of making the assessee to 

move the High Court and make the Court to 

spend time on such issues which otherwise 

could have been used for some more important 

cases. 

2.2 Second case of City & Industrial Development 

Corpn. of Maharashtra Ltd. v. Asstt. CIT [2012] 

343 ITR 102 (Bom.) 

2.2.1 The High Court had to intervene and grant 

stay of demand - In this case also, stay of demand 

during the pendency of the appeal before the 

CIT(A) was not granted by the administrative 

authorities even when taxes due to revenue were 

secure and the HC had to issue direction to the 

appellate authority (CIT[A]) to expedite the disposal 

of appeal and for the intervening period, the 

Court granted stay for the recovery of demand. 

3. ISSUE FOR CONSIDERATION 

3.1 Why the Departmental authorities are 

unhelpful? - The foregoing discussion raises 

the issue as to why the Departmental authorities 

should be rigid/conservative/unhelpful to the 

taxpayers in the matter of grant of stay of 

demand in cases where the taxpayers dispute 

the extra demand raised by the AO as unjustified. 

The legal position in this regard for stay upto 

the 1st appeal stage has been clearly spelled 

in section 220(6) of the Act which reads as 

under: 

“Section 220(6): Where an assessee has 

presented an appeal under section 246, 

the Assessing Officer may, in his discretion 

and subject to such conditions as he may 

think fit to impose in the circumstances 

of the case, treat the assessee as not being 

in default in respect of the amount in 

dispute in the appeal, even though the 

time for payment has expired, as long as 

such appeal remains undisposed of”. 

3.2 Why requests for stay of demands are 

summarily rejected? - Regretfully, the officers 

of the IT Department on the administration 

and appeal side generally neglect this wholesome 

provision meant for relief to taxpayers. Requests 

for stay of demands are either summarily rejected 

or even neglected and such applications remain 

pending for a long-time and the coercive actions 

prescribed under the Act are pressed against 

the taxpayers! 


639


4. GENERAL PRACTICES FOLLOWED IN 

DEALING WITH THE APPLICATIONS FOR 

STAY OF DEMAND 

4.1 Such requests are generally rejected without 

hearing the assessee - Such requests are generally 

rejected without hearing the assessee. The legal 

view is that as the exercise of discretion by 

the AO under section 220(6) is quasi-judicial 

function and he has to exercise his power 

fairly and reasonably and not arbitrarily or 

capriciously, the AO should give reasons for 

dismissing an application made by an assessee 

in his discretion and should also hear the 

assessee – Seth Gopaldas Paliwal v. WTO [1983] 

139 ITR 900(MP). Moreover, the order should 

be a speaking order – Teletube Electronics Ltd. 

v. CIT [1998] 96 Taxman 278 (Delhi); Chesebrough 

Pond’s Inv. v. A.A.C. (C.T.) [1973] 32 STC 464 

(Mad.). 

4.2 Such applications are also rejected on the 

ground of assessee’s sound financial position - 

Such applications are also rejected on the ground 

that the assessee’s financial position is sound 

against legal views. Normally, once the officer 

is satisfied that an appeal has been filed (and 

the grounds are not frivolous), he has to treat 

the assessee as not in default to the extent of 

the portion of tax disputed in the appeal. Though 

section 220(6) does not indicate in what cases 

denial of discretion shall be justified, yet the 

fact that the assessee is financially sound and 

is in a position to pay is not in itself a ground 

for refusing to exercise the discretion in granting 

the stay – R.P. David v. Ag. ITO [1972] 86 ITR 

699 (Mad.). 

4.3 Stay applications are disposed of without 

passing a speaking order - Stay applications 

are, many a times, disposed of without passing 

a speaking order and such orders even get 

approved by the higher authorities. In one 

case, relating to stay of demand, the AO passed 

an order on a detailed application by the taxpayer 

as to why demand should be stayed till the 

disposal of appeal as under: 

640 

“Stay of demand is not automatic as a 

result of filing of first appeal before CIT(A). 

In view of above, your request for keeping 

the demand in abeyance till the disposal 

of the appeal by the CIT(A) is rejected 

and you are directed to pay the entire 

demands within 10 days of the receipt of 

this letter. Non-compliance will lead to 

actions as per provisions of IT Act without 

any further reference”. 

CIT’s order: 

When the taxpayer appealed to the CIT against 

the AO’s decision, the CIT passed a still short 

and cryptic order to the following effect 

communicated to the taxpayer by an officer 

in his office- 

“I am directed to inform you that your 

request for stay of demand for the above 

mentioned two years has not been acceded 

to by the CIT…. You are, therefore, 

requested to make necessary correspondence 

with the AO in the matter of payment 

of the outstanding demand immediately.” 

4.4 Often cryptic orders are passed by Assessing 

Officers and Commissioners - In cases, related 

to stay of demand, often cryptic orders are 

passed by the AOs and Commissioners without 

assigning any reasons, just saying ‘refused’/ 

‘rejected’, etc., without stating as to why the 

prayer mentioned in the assessee’s application, 

giving varied reasons for staying demand, are 

not acceptable. 

WHY CIT(A) ARE NOT STAYING 

DEMANDS? 


5. The foregoing discussion candidly shows 

that authorities functioning on the administrative 

side are most reluctant to favourably consider 

applications for stay of demand during the 

pendency of appeals, ignoring the legal 

requirements of section 220(6) [supra]. Even if 

these are taken up, the orders on the same are 

not passed judiciously. There could be some 

grounds for the AOs/CIT(A) on the administration 

side not to accept such requests because 

of their concern/enthusiasm for meeting the 

budget targets fixed for them by the CBDT,

ut CIT(A) are not bothered by any such 

considerations. They are perceived as independent 

functionaries under the Act, having no 

orders, instructions or directions under the 

Act so as to interfere with their discretion in 

the exercise of their appellate functions (section 

119(2)(b) of the IT Act). However, even CIT(A) 

for reasons which are totally unclear have not 

been taking any decisions on applications for 

stay of demands in cases where appeals are 

pending before them, despite the fact that the 

Courts have categorically ruled in a number 

of cases holding that CIT(A) can exercise such 

powers when the appeals are pending before 

them. Some cases where such decisions have 

been taken are as follows: 

(i) Prem Prakash Tripathi v. CIT [1994] 75 

Taxman 107(All.) 

(ii) V.N. Purushothaman v. Agrl. ITO [1984] 

149 ITR 120 (Ker.) 

(iii) Debasish Moulik v. Dy. CIT [1998] 231 ITR 

737 (Cal.) 

(iv) Keshav Cashew Co. v. Dy. CIT [1994] 210 

ITR 1014 (Ker.) 

(v) Bongaigaon Refinery & Petrochemicals Ltd. 

v. CIT [1994] 239 ITR 871 (Gau.) 

(vi) Tin Mfg. Co. of India v. CIT [1995] 78 

Taxman 249 (All.) 

(vii) Punjab Kashmir Finance (P.) Ltd. v. ITAT 

[1999] 104 Taxman 584 (Punj. & Har.). 

HOW THE COURTS VIEW SUCH CASES? 

6. Not only the Courts in the above mentioned 

decisions have held that the CsIT have full 

powers to give stay, in some of the decisions, 

the Courts have even directed the CBDT to 

clarify to the CIT(A) about their powers. Some 

such cases are as follows: 

6.1 The Allahabad High Court’s view - The 

Allahabad HC in Smita Agrawal (Ind.) v. CIT 

[2009] 184 Taxman 59, observed as follows:— 

“We, therefore, direct the CBDT, New 

Delhi to look into this aspect of the matter 

and, if necessary, to issue a circular to 

all the appellate authorities directing them 

to dispose of stay applications expeditiously 

and so long the stay application is not 

disposed of, the assessing officer must be 

slow or reluctant in initiating recovery 

process. Let a copy of this order be supplied 

to the Chairman, CBDT, New Delhi for 

information and necessary action”. 

6.2 The Rajasthan High Court’s view - The 

Rajasthan High Court in the case of Maheshwari 

Agro Industries v. Union of India [2012] 206 

Taxman 375/17 taxmann.com 68 has in para 

56 of the Order said as follows: 

“…this Court, respectfully following the 

Division Bench observations of Delhi High 

Court in the case of Valvoline Cummins 

Ltd. (supra), would again urge the Central 

Board of Direct Taxes to issue appropriate 

guidelines for grant of stay in the spirit 

of Instruction No. 95, dt. 21-8-1969 to all 

the subordinate authorities and to clarify 

for uniform application all over the country 

at department level that first appellate 

authority shall have power to entertain 

and decide stay application during 

pendency of appeal before it upon relevant 

consideration of stay against recovery of 

disputed demand of tax”. 

AN EYE-OPENER FOR IT DEPARTMENT 

ON INERTIA OF ITS OFFICERS 

7. The following observation of the Allahabad 

HC in Smita Agrawal (Ind.)’s case (supra) should 

be eye-opener for the IT Department which 

encourages increase in load of the Courts because 

of the inertia of its officers to deal with such 

requests: 

“Before parting we may observe herein 

that off late, we have experienced a flood 

of such writ petitions, where the petitioner 

having filed appeal along with the stay 

application before the authority concerned 

have waited for some time but the appellate 

authority has failed to pass any order 


641


642 

whatsoever on the stay application and 

in the meantime the assessing authority 

had proceeded to make recovery which 

causes in filing of a number of writ petitions 

before this Court. This can be avoided by 

the authorities concerned showing more 

concern to their duties and by disposing 

of such stay applications expeditiously 

and in any case within a reasonable time. 

For inaction of the authorities, this Court 

is being flooded with avoidable litigation 

which is causing more harm to public at 

large who is awaiting for dispensation of 

justice within a reasonable time from the 

highest Constitutional court in the State. 

This Court is already burdened with lakhs 

of cases awaiting their turn for disposal. 

The constraint in which this court is 

functioning is being added by this inaction 

of the authorities and is causing delay in 

disposal of huge number of cases. We do 

not propose to make this order an occasion 

to illustrate the various reasons for delay 

but we will be failing in our duty if we 

refrain from showing our concern to such 

callousness on the part of the revenue 

authorities in sitting tight over the stay 

application compelling the assessee to turn 

to the High Court by filing writ petition 

simply to get an order for expeditious 

disposal of the application for interim 

order. If they have some justification for 

not deciding the stay application for some 

time, it would be in the fitness of things 

that in such case, the assessing authority, 

if it has received the information that the 

assessee has approached the appellate 

authority by filing appeal along with the 

stay application which is pending, must 

await the recovery till the decision is 

taken by the appellate authority on such 

stay application. We, therefore, direct the 

CBDT, New Delhi to look into this aspect 

of the matter and, if necessary, to issue 

a circular to all the appellate authorities 

directing them to dispose of stay 

applications expeditiously and so long 

the stay application is not disposed of, 


the assessing officer must be slow or 

reluctant in initiating recovery process. 

Let a copy of this order be supplied to 

the Chairman, CBDT, New Delhi for 

information and necessary action.” 

CBDT’S INSTRUCTION NO. 96, DATED 

21-8-1969 REGARDING STAY OF 

DEMANDS DURING PENDENCY OF 

APPEALS 

8. The CBDT has issued following instruction, 

with the approval of the then Dy. PM and 

Finance Minister regarding stay of demands 

during pendency of appeals. This is the first 

important instruction [or one may say the Master 

Circular] concerning stay of demands. In this 

instruction, the policy regarding stay of demands 

has been stated in unambiguous terms. The 

instructions are as follows: 

“The demand has to be stayed till the 

decision of the first appeal. Such assurance 

was given by the then Deputy Prime 

Minister and Finance Minister to the 

Informal Consultative Committee of 

Parliament and therefore has to be followed 

in the matter of grant of request for stay 

– the decision of the FM, conveyed through 

a Circular, being binding on the field 

officers. For ready reference, the above 

mentioned circular is reproduced below: 

1. One of the points that came up for 

consideration in the 8th meeting of 

the Informal Consultative Committee 

was that income-tax assessments 

were arbitrarily pitched at high figures 

and that the collection of disputed 

demands as a result thereof 

was also not stayed inspite of the 

specific provision in the matter in 

section 220(6). 

2. The then Deputy Prime Minister had 

observed as under: 

“….where the income determined 

on assessment was substantially 

higher than the returned income,

say, twice the latter amount or 

more the collection of the tax 

in dispute should be held in 

abeyance till the decision on the 

appeals, provided there were 

no lapse on the part of the 

assessee”. 

3. The Board desires that the above observations 

may be brought to the 

notice of all the ITOs working under 

you and the powers of stay of recovery 

in such cases upto the stage of 

first appeal may be exercised by the 

IAC/CIT. 

The above circular is, prima facie, also in 

consonance with the letters and spirit of 

provisions contained in sub-section(6) of 

section 220 of the IT Act” 

The Department is now dithery on these 

instructions. 

WHETHER INSTRUCTION NO. 96 IS 

SUPERSEDED? 

9. The CBDT’s stand is that Instruction No. 

96, issued with the approval of the then Dy. 

PM & FM stands superseded and is no longer 

an authority to claim stay of demands during 

the pendency of appeals before the CIT(A). 

9.1 Supersession of instruction No. 96 cannot 

be presumed - This view of the CBDT is not 

correct. The CBDT claims that Instruction No. 

96 stands superseded by Instruction No. 1914. 

However, there is no specific approval taken 

for supersession of Instruction No. 96 except 

that the Instruction No. 1914 generally states 

that it is in supersession of all earlier 

Instructions. An assurance given by the FM 

during the 8th meeting of Informal Consultative 

Committee of the Parliament cannot be 

superseded in such a general or one may say 

in a casual way without even making a mention 

of it in taking FM’s approval. The approval 

of the FM that Instruction No. 96 stands 

superseded cannot be implied/presumed by 

Instruction No. 1914. 

9.2 Judicial view on Instruction No. 96 - Judicial 

view regarding Instruction No. 96 (supra) is 

that it is still valid and is not superseded. In 

Valvoline Cummins Ltd. v. Dy. CIT [2008] 171 

Taxman 241 (Delhi) – a decision pronounced 

on 20th May, 2008 – the Court’s observations 

were as under: 

“A perusal of paragraph 2 of the aforesaid 

extract would show that where the income 

determined is substantially higher than 

the returned income, that is, twice the 

latter amount or more, then the collection 

of tax in dispute should be held in abeyance 

till the decision on the appeal is taken. 

In this case, as we have noted above, the 

assessment is almost 8 times the returned 

income. Clearly, the above extract from 

Instruction No. 96, dated 21-8-1969 would 

be applicable to the facts of the case”. 

Thus the Court has not agreed with the view 

that Instruction No. 96 is superseded. 

9.3 Court cases where Instruction No. 96 has 

been followed - 

9.3.1 Case of Delhi High Court - The Delhi High 

Court’s decision in the case of Taneja Developers 

& Infrastructure Ltd. v. Asstt. CIT [2010] 324 

ITR 247, also indicates that Instruction No. 96 

is not superseded, though the Counsel for the 

IT Department raised plea regarding the 

supersession of this Instruction which has not 

been accepted by the Court. 

9.3.2 Case of Rajasthan High Court - The Rajasthan 

HC in the case of Maheshwari Agro Industries’ 

case (supra) vide order dated 15-12-2011 has 

granted stay in high-pitched assessments on 

the basis of Instruction No. 96 saying “the 

assessing authorities will also decide application 

under section 220(6) of the Act in accordance with 

Instruction No. 96, dated 21-8-1969 and observations 

made hereinbefore”. Actually in this decision, 

the Court directed all CIT(A) to entertain such 

applications and decide the same on merits. 

The observations were as follows: 

“It is directed that all the first appellate 

authorities in the cases of other appellant 


643


644 

assessees within the State of Rajasthan 

also, would entertain stay applications 

filed before them during the pendency of 

appeals and would decide the same on 

their own merits in future also. The 

assessing authorities will also decide 

applications under section 220(6) of the 

Act in accordance with Instruction No. 

96, dated 21-8-1969 and observations made 

hereinbefore”. 

10. THE CONCLUDING COMMENTS 

10.1 CBDT should issue fresh instructions to 

CIT(A) on stay of demands - CIT(A), for 

administrative purposes, are under the control 

of the CBDT. The CBDT decides their jurisdiction, 

quota of work, leave, posting, transfer, etc., 

even issues instructions to them to dispose of 

high demand appeals, promptly on priority 

basis. Hence, there could be no objection in 

issuing instructions to CIT(A) regarding disposal 

of application of assessees for stay of demands 

during the pendency of appeals. In CIT v. Lala 

Rajeshwar Prasad [1956] 29 ITR 792 (Punj. & 

Har.), it has been observed that an order passed 

by the AO granting extension of time for payment 

of tax or instalments or stay of payment till 

a particular date is an administrative or executive 

order – not a judicial or quasi-judicial order. 

The same view can apply in disposal of 

applications for stay of demands by the CIT(A). 

• DT - Secs. 119(2), 220(6) & 281B. 


10.2 During pendency of appeals no coercive 

action should be taken against taxpayers - 

The CBDT, instead of ignoring the directions 

of two High Courts and in realization of the 

hardships faced by the taxpayers, when the 

AOs press for payment of demands which are 

highly disputed and attach their properties, 

bank accounts, etc., should issue guidelines/ 

instructions to the CIT(A) to pass orders for 

the applications received for the stay of demands 

expeditiously preferably within one month of 

the receipt thereof. During the pendency of 

such applications with the CIT(A), no coercive 

action should be taken by the AOs against the 

taxpayers. The applications to the CIT(A) should 

lie only in cases where the AO rejects it or 

gives only partial relief. 

10.3 Not following Court’s instructions would 

tantamount to discrimination against taxpayers - 

It looks incongruous that the CBDT is trusting 

its junior officers/AOs for stay of demand 

orders, but not its senior officers like the 

Commissioner of Income-tax (Appeals). This 

incongruity needs to end immediately, more 

so when High Courts have clarified the legal 

position and two of them have issued directions 

to the CBDT for issue of instructions/guidelines. 

Rajasthan HC even directed the CIT(A) to 

entertain such applications. Not doing so would 

mean contempt of Court. Doing so, would 

tantamount to discrimination against millions 

of taxpayers in other States. 

•••

Taxing the Expenditure 

on Litigation: Adding 

insult to injury? 

INTRODUCTION 

1. Business as a source of income yields profits 

only at the cost of certain ‘expenditures’. Profits 

and losses are like high and low tides in the 

sea or the ups and downs in the life line 

(health) of any business. The genius of the 

economic machine is in its ability to convert 

all indulgences into some benefit. 

The provisions of section 28(i), read with section 

29 of the Income-tax Act provide for 

determination of “profits and gains of any 

business or profession” carried on by the assessee 

in accordance with the provisions contained 


PURUSHOTTAM ANAND 

“When we can drain the Ocean into mill-ponds, and bottle up the Force of Gravity, 

to be sold by retail, in gas jars; then may we hope to comprehend the infinitudes 

of Profit and Loss; and rule over this too, as over a patent engine, by checks, 

and valves, and balances.” 

Thomas Carlyle1 in sections 30 to 43D. Section 37(1) is a specific 

provision where deduction is provided for any 

expenditure “laid out or expended wholly and 

exclusively for the purpose of the business or 

profession.” 

Further, the Explanation to section 37(1) declares 

that any expenditure incurred by an assessee 

for any purpose which is an offence or which 

is prohibited by law shall not be deemed to 

have been incurred for the purpose of business 

or profession and no deduction or allowance 

shall be made in respect of such an expenditure. 

Therefore, an expenditure cannot be allowed 


645


as deduction under section 37(1), if the same 

is against the law and prohibited by law or 

where expenditure incurred by an assessee is 

not wholly and exclusively for the business 

purpose of the assessee. 

Now the question arises to what extent and 

under what circumstances can the expenditure 

incurred in a criminal proceeding or other 

litigation related to any business be allowed 

as deduction under section 37(1)? This article 

attempts to outline and consolidate the principles 

to be kept in mind for deciding as to whether 

certain expenditure on litigation can be allowed 

as deduction under the scheme of the Act? 

EXPENDITURE WHEN DEDUCTIBLE? 

2. Profits and gains of business expenditure, 

in the commercial sense, whether specifically 

provided for or not, may also be deducted 

under section 37(1) itself. 2 An amount would 

be deductible under section 37(1) only where 

it is an expenditure connected with or arising 

out of trade or is a commercial loss. 3 To be 

deductible, a business expense must be both 

ordinary and necessary, though need not be 

indispensible to be considered necessary. 

Legitimacy or necessity for expenditure cannot 

be probed into. 4 

To be an allowable expenditure under section 

37(1), the money paid out or away must be: 

(a) paid out wholly and exclusively for the 

purpose of the business or profession; and 

further, (b) must not be: (i) capital expenditure; 

(ii) personal expense; or (iii) an allowance of 

the character described in sections 30 to 36 

and section 80VV. 5 Apart from these prequalifications, 

the expenditure should not be 

caught by the mischief of the Explanation to 


EXPENDITURE INCURRED ON 

DEFENDING EMPLOYEES IN CRIMINAL 

PROCEEDINGS 

3. In J.N. Singh & Co. (P) Ltd. v. CIT 6 , it has 

been held that the expenditure incurred to 

646 


defend assessee’s employee against criminal 

prosecution with regard to a transaction carried 

out in the ordinary course of business will be 

business expenditure and allowable as deduction. 

In J.B. Advani & Co. Ltd. v. CIT 7 and Excess 

Profits Tax, the assessee was a trading Private 

Ltd. Company in which Director had a controlling 

interest. The assessee’s director and manager 

were prosecuted for offences under the Hoarding 

and Profiteering Prevention Ordinance and 

Defence of India Rules. The expenses incurred 

in “successfully defending” them were held to 

have been incurred wholly and exclusively for 

the purpose of assessee’s business and were 

allowable deductions under section 10(2)(xv) 

of the Indian Income-tax Act, 1922. 

In CIT v. National Rayon Corpn. Ltd. 8 it has 

been held that where the assessee is an individual 

or a firm and incurs expenditure in defending 

the assessee-owner or a partner, it incurs the 

expenditure not wholly and exclusively for its 

business. The company protects its business 

interests and goodwill in such situations and 

the expenditure could be said to be wholly 

and exclusively incurred for the purposes of 

its business. 

In I.C.B. Ltd. v. ITO [2005] 93 ITD 418 (Mum.) 

the expenditure was incurred to defend the 

employees from criminal proceeding. It was 

held that the criminal act, did not seem to be 

for the purpose of ‘carrying on assessee’s 

business, nor did the same seem to be incidental 

thereto. Incurring of expenditure for defending 

an employee from criminal proceeding/ 

prosecution for activities which are violative 

of or in contravention of the provisions of law 

tantamounts to incurring of expenditure for a 

purpose which is an offence or which is 

prohibited by law. Under Explanation to section 

37(1), the same shall be deemed to have not 

been incurred for the purpose of business or 

profession and, in turn, no deduction in respect 

of such an expenditure will be allowable. Relying 

on Haji Aziz & Abdul Shakoor Bros. v. CIT 

[1961] 41 ITR 350 (SC) decision, the expenditure 

was not allowed as deduction.

PENALTY CHARGES FOR BREACH OF 

LAW CANNOT BE CLAIMED AS AN 

EXPENDITURE IN TRADE 

4. In Haji Aziz & Abdul Shakoor Bros. 9 , the 

Supreme Court observed as follows (para 24): 

“An expenditure is not deductible unless 

it is a commercial loss in trade and a 

penalty imposed for breach of the law 

during the course of trade cannot be 

described as such. If a sum is paid by an 

assessee conducting his business, because 

in conducting it he has acted in a manner 

which has rendered him liable to penalty 

for an infraction of the law, it cannot be 

claimed as a deductible expense, as it 

cannot be called a commercial loss incurred 

in carrying on his business, infraction of 

the law is not a normal incident of business.” 

EXPENSES INCURRED IN TRANSAC- 

TIONS VIOLATING PROVISIONS OF FERA 

NOT DEDUCTIBLE 

5. It may also be relevant to consider the judgment 

of the Hon’ble Supreme Court in the case of 

Maddi Venkataraman & Co. (P.) Ltd. v. CIT 10 it 

has been observed therein that one can carry 

on his trade without violating the law and 

section 37 of the Income-tax Act, 1961, presumes 

that the trade will be carried on lawfully. The 

expenses incurred in transactions carried out 

in violation of provisions of the FERA are not 

deductible. The Court also observed that it would 

be against public policy to allow benefit of 

deduction under one statute, of any expenditure 

incurred in violation of provisions of another 

statute or any penalty imposed under another 

statute. It is also to be borne in mind that 

evasion of law cannot be a trade pursuit. 

PAYMENTS MADE OPPOSED TO PUBLIC 

POLICY ADMISSIBLE IN A FEW CASES 

ONLY 

6. However, payments made opposed to public 

policy may also be admissible in a few cases 

where it is established as a custom which 

could be recognized and the assessee had to 

comply with it as part of business. In First, 

ITO v. French Dyes & Chemicals (I) (P.) Ltd. 11 , 

it has been held that there are two aspects of 

the question. If it was absolutely necessary in 

that field of business to make payments to 

some employees, whether the documents of 

payments were maintained or not, the custom 

could be recognized. 

NO DISTINCTION NEED TO BE MADE 

BETWEEN CIVIL AND CRIMINAL 

LITIGATION EXPENSES 

7. Section 37(1) does not make any distinction 

between civil litigation and criminal litigation. 

All that has to be seen is whether the legal 

expenses were incurred by the assessee in his 

character as a trader ? In other words, whether 

the transaction in respect of which proceedings 

are taken arose out of and was incidental to 

the assessee’s business ? - CIT v. Dhanrajgirji 

Raja Narasingirji [1973] 91 ITR 544 (SC). 

EXPENDITURE ON DEFENDING AUDITOR 

IN DISCIPLINARY PROCEEDINGS 

8. When such proceedings were initiated by 

shareholders/union in CIT v. Deccan Sugar & 

Abkhari Co. Ltd. [1976] 104 ITR 458 (Mad.), it 

was held that such expenses incurred by assesseecompany 

were not allowable as decision of 

such proceedings, one way or other, would 

not have affected assessee’s business. Per contra, 

expenditure borne by assessee-company to defend 

a suit by employees’ union against auditors 

appointed by assessee, for certain irregularities 

in accounts of employees’ provident fund, was 

declared as an allowable expenditure in CIT 

v. Ananda Bazar Patrika (P.) Ltd.. 12 

LEGAL EXPENSES INCURRED ON 

DEFENDING A CLAIM FOR PAYMENT OF 

HIGHER COMPENSATION FOR LAND 

ACQUIRED BY ASSESSEE ARE NOT 

DEDUCTIBLE 


647


9. Legal expenses incurred by an assessee for 

defending a claim for higher compensation in 

respect of lands acquired by the assessee must 

be treated as capital expenditures, since the 

compensation payable in regard to the acquisition 

of the land was clearly capital expenditure. 

DEDUCTIBILITY OF EXPENSES UNDER 

SECTION 10(2)(xv) 

10. In CIT v. H. Hirjee 13 , the assessee was 

carrying on business as a selling agent of a 

company and was prosecuted under section 

13 of Hoarding and Profiteering Ordinance on 

a charge of selling goods at prices higher than 

were reasonable in contravention of the legal 

provisions. The prosecution ended in acquittal 

and the assessee claimed deduction of expenses 

spent on defending the case from the business 

profits under section 10(2)(xv) of the Indian 

Income-tax Act, 1922. The Hon’ble Supreme 

Court held that in the circumstances of the 

case the sum spent on defending the criminal 

proceeding was not an expenditure laid out 

or expended wholly and exclusively for the 

purpose of the business and it was not an 

allowable deduction under section 10(2)(xv). 

648 

The deductibility of such an expense under 

section 10(2)(xv) must depend on the nature 

and purpose of the legal proceedings in relation 

to the business whose profits are under 

computation and ‘cannot be affected by the 

final outcome of that proceeding’ (emphasis 

supplied). 

CONCLUSION 

11. The nature, causes and characteristics of 

a Court or arbitration proceeding escapes all 

attempts at concrete categorization. These 

litigations are driven by an array of apparent 

as well as ulterior motives which aggravate 

the uncertainty around the issue as to whether 

such expense was ‘exclusively’ for the business 

purposes. Further, the fact as to whether the 

assessee is the victim or the accused/defendant 

in a litigation should also be given due 

consideration while allowing these expenditures 

as deductions. Thus, in this increasingly complex 

business environment, availability of these 

deductions must be scrutinized keeping in mind 

the broad functioning of a particular industry 

and on case-to-case basis. 

1. Scottish Historian and Essayist, leading figure in the Victorian era. 1795-1881. 

2. Addl. CIT v. Rustam Jehangir Vakil Mills Ltd. [1976] 103 ITR 298 (Guj.). 

3. CIT v. Mihir Textiles Ltd. [1976] 104 ITR 167 (Guj.). 

4. Hemraj Nebhomal Sons v. CIT [2005] 278 ITR 345/146 Taxman 345 (MP). 

5. CIT v. Indian Molasses Co. (P.) Ltd. [1970] 78 ITR 474 (SC), J.K. Cotton Mfrs. Ltd. v. CIT [1975] 101 ITR 221 (SC). 

6. [1966] 60 ITR 732 (Punj. & Har.). 

7. [1950] 18 ITR 557 (Bom.). 

8. [1985] 155 ITR 413/[1984] 19 Taxman 485 (Bom.). 

9. (supra). Hereinafter referred as Haji Aziz & Abdul Shakoor Bros. case (supra). 

10. [1998] 229 ITR 534/96 Taxman 643 (SC). 

11. [1984] 10 ITD 240 (Bom.)(SB) 

12. [1990] 184 ITR 542/[1989] 47 Taxman 436 (Cal.). 

13. [1953] 23 ITR 427 (SC). 

• DT - Sec. 37(1) 


•••

Exclusive Owner 

v. 

Joint Owner 


An analysis of the decision of the 

Madras High Court in the case of Dr. 

(Smt.) P.K. Vasanthi Rangarajan v. CIT 

[2012] 23 taxmann.com 299 

INTRODUCTION 

1. Though favourable decisions are rendered by judicial authorities 

such as ITAT and High Courts to the delight and advantage of 

assessees, yet some times it becomes a risky proposition to follow 

such precedents when decisions have been rendered in ignorance 

of reported decisions of the Supreme Court in respect of vital 

issues; one such instance being a recent decision rendered by the 

Madras High Court in the case of Dr. (Smt.) P.K. Vasanthi Rangarajan 

v. CIT [2012] 23 taxmann.com 299. The Madras High Court, has 

held that if a residential property is jointly owned by two persons 

that would not preclude the person (as an assessee) from claiming 

exemption under section 54F of the Income-tax Act (the Act), as 

the assessee would not be hit by the proviso to section 54F of the 

Act - being not the exclusive owner of the residential property. 

The author has analyzed the definition of co-ownership/jointownership 

in the light of judicial pronouncements of the Supreme 

Court and definitions of “owner” and “ownership” as found in 

Black’s Law Dictionary (6th Edition) and concludes that the observation 

of the Madras High Court in the case of Dr. (Smt.) P.K. Vasanthi 

Rangarajan (supra) with regard to exclusive owner is too wide and, 

hence, the decision of the Madras High Court appears to be wrong 

requiring reconsideration by a Full Bench. 


649


ANALYSIS OF THE DECISION OF THE 

MADRAS HIGH COURT IN DR. (SMT.) 

P.K. VASANTHI RANGARAJAN’S CASE 

(SUPRA) 

2. The assessee was a joint owner, along with 

her husband of an immovable property A. The 

property consisted of a clinic in the ground 

floor and a residential portion on the first 

floor. The assessment year concerned was 2000- 

01. The assessee had been declaring 50% of 

the share in the property as owned by her in 

the wealth-tax assessment since 1989-90. The 

assessee had entered into a joint development 

agreement with a builder/promoter for 

construction of eight flats/apartments in the 

property B owned by her during the financial 

year 1998-99 and parted with possession of 

the property during the previous year, pertaining 

to the assessment year 2000-01. As per the 

terms of the agreement the builder/promoter 

would construct all the eight flats at its cost 

and would allot four flats to the assessee by 

retaining the other four flats for its business 

purposes. Though initially the assessee argued 

that the transfer of property took place during 

the previous year pertaining to the assessment 

year 2001-02 on account of handing over of 

(completed) flats only in June 2000, the issue 

was confirmed by the Tribunal that the correct 

assessment year in which transfer took place 

by way of handing over of property to the 

builder/promoter was 2000-01 and not 2001- 

02 as contended by the assessee. The dispute 

with regard to the year in which assessment 

had to be made did not travel further, as the 

decision rendered by the Tribunal attained 

finality on this issue. 

The assessee claimed benefit of exemption under 

section 54F of the Income-tax Act, as she had 

invested in purchase of a residential property 

within the stipulated limit as set out in section 

54F of the Act. The Assessing Officer rejected 

the contention of the assessee as the then proviso 

to section 54F disentitled the assessee from 

claiming the benefit for investing the capital 

gains in yet another house property. It is to 

650 


be noted that the assessee was a joint-owner 

of a residential property at that time. The 

disallowance made by the Assessing Officer 

stood confirmed till the Tribunal’s stage. The 

assessee filed an appeal in the High Court. 

The High Court agreed with the contention 

raised on behalf of the assessee that “when the 

individual assessee owns a residential house 

along with somebody else under a joint 

ownership or as a co-owner therein, the 

ownership in a status other than that of 

individual/HUF would not result in denial of 

exemption”. 

The High Court after assimilating facts made 

the following observations at para 13 of its 

order- 

“The facts thus reveal that as joint owners 

of the property, the assessee and her 

husband had shown 50% share with 

reference to the clinic and the residential 

portion in their respective returns. Thus, 

it is clear that as on the date of the 

transfer, the assessee did not own a 

residential house in her name only, the 

income from which was chargeable under 

the head “income from house property”, 

to bring into operation, the proviso to 

section 54F. The rejection of the claim for 

exemption would arise if only the property 

stands in the name of the assessee, namely, 

individual or HUF. Given the fact that 

the assessee had not owned the property 

in her name only to the exclusion of anybody 

else including the husband, but in joint 

name with her husband, we agree with 

the submission of the learned senior counsel 

appearing for the assessee herein that 

unless and until there are materials to 

show that the assessee is the exclusive 

owner of the residential property, the 

harshness of the proviso cannot be applied 

to the facts herein. Apart from that, 50% 

ownership is with reference to the clinic 

situated in the ground floor. As such, the 

entire property is not an exclusive 

residential property. Hence, we are inclined

to agree with the assessee’s contention 

that the joint ownership of the property 

would not stand in the way of claiming 

exemption under section 54F”. 

The High Court distinguished: (a) the decision 

of the Delhi High Court in the case of Vipin 

Malik (HUF) v. CIT [2009] 183 Taxman 296 

wherein it was held that in order to claim 

exemption under section 54F of the Act the 

residential house, which is purchased or 

constructed, has to be in the name of the same 

assessee whose agricultural land was sold, and 

(b) the decision of the Bombay High Court in 

the case of Prakash v. ITO [2008] 173 Taxman 

311 wherein it was held that when the purchase 

of a new property is made in the name of 

adopted son by an assessee, even if made with 

a clear intention to transfer the property to his 

adopted son, the assessee would not be entitled 

to exemption. 

The High Court went on to hold as under in 

para 16 of its order- 

“As far as the present case is concerned, 

the purchase of the property was by the 

individual in her own name and the 

property held by her as on the date of 

transfer, stood in the joint names of the 

assessee and her husband. A reading of 

section 54F clearly points out that the 

holding of the residential house as on the 

date of transfer has relevance to the status 

of the assessee as an individual or HUF. 

On the admitted fact that the assessee 

herein, as an individual, does not own 

any property in the status of an individual 

as on the date of transfer, we have no 

hesitation in accepting the case of the 

assessee, thereby allowing the appeal” 

With regard to other issue of allowing exemption 

on investment made in four flats by the assessee, 

the High Court had no difficulty in accepting 

such contention of the assessee, as it placed 

its reliance on the decision of the Karnataka 

High Court in the case of CIT v. Smt. K.G. 

Rukminiamma [2011] 196 Taxman 87/[2010] 8 

taxmann.com 121 wherein it was held that 

‘four residential flats constituted “a residential 

house” for the purpose of exemption under 

section 54 of the Act’. 

WHY THIS DECISION IS A SHAKY ONE? 

3. The Madras High Court in this case seems 

to have overlooked the fact that it is required 

that “the assessee had to be the owner of the 

property in her name only to the exclusion of 

anybody else including the husband” in order 

to attract the disentitlement as stated in proviso 

to section 54F of the Act, by not considering 

the three principles that have emerged from 

the decision of the Supreme Court in the case 

of Kochkunju Nair v. Koshy Alexander [1999] 3 

SCC 482 so far as co-owners are concerned. 

The following are those three principles- 

1. right to possession 

2. right to enjoy 

3. right to dispose 

The Supreme Court observed that all the three 

essentials are satisfied even in the case of coowners. 

It has also been observed that all coowners 

would have equal rights and coordinate 

interest in the property, though their shares 

may be either fixed or indeterminate. It has 

been held that every co-owner has a right to 

enjoyment and possession equal to that of 

the other co-owner or co-owners. It has also 

been held that each co-owner has, in theory, 

in every infinitesimal portion of the subjectmatter 

and each has a right, irrespective of the 

quantity of his interest, to be in possession of 

every part and parcel of the property, jointly 

with others. 

So, the observations - that unless and until 

there are materials to show that the assessee 

is the exclusive owner of the residential 

property, the harshness of the proviso cannot 

be applied to the facts herein – made by the 

High Court appear to be too wide in the light 

of the decision of the Supreme Court in the 


651


case of Kochkunju Nair (supra) and in the light 

of definitions of “owner” and “ownership” as 

found in Black’s Law Dictionary (6th Edition) 

Black’s Law Dictionary (6th Edition) defines 

“owner” as under:- 

652 

“The person in whom is vested the 

ownership, dominion, or title of property; 

proprietor; he who has dominion of a 

thing, real or personal, corporeal or 

incorporeal, which he has a right to enjoy 

and do with as he pleases, even to spoil 

or destroy it, as far as the law permits, 

unless he be prevented by some agreement 

or covenant, which restrains his right.” 

Black’s Law Dictionary (6th Edition) defines 

“ownership” as under:- 

The term “ownership” has been defined to 

mean, inter alia, as “Collection of rights to use 

and enjoy property, including right to transmit 

to others…..The right of one or more persons 

to possess or use a thing to the exclusion of 

others. The right by which a thing belongs to 

some one in particular to the exclusion of all 

other persons. The exclusive right of possession, 

enjoyment, and disposal; involving as an essential 

attribute the right to control, handle, and dispose” 

Moreover, the following principles with regard 

to rights in the case of “ownership” emerge 

from the decision of the Supreme Court in the 

case of Swadesh Ranjan Sinha v. Haradeb Banerjee 

[1991] 4 SCC 572. 

(a) The term “ownership” which denotes the 

relationship between a person and an object 

forming the subject-matter of his ownership 

consists of a complex of rights, all 

of which are rights in rem, being good 

against the entire world and not merely 

against specific persons. 

(b) There are various rights or incidents of 

ownership such as right to possess, use 

• DT - Secs. 45 & 54F 

and enjoy the thing owned and a right 

to destroy or alienate, though it need not 

necessarily be present in every case. 

(c) Such a right may be indeterminate in 

duration and residuary in character. 

(d) A person has a right to possess the thing, 

which he owns, even when he is not in 

possession, but retains only a reversionary 

interest, i.e., a right to repossess the 

thing on the termination of a certain period 

or on the happening of certain event. 

CONCLUSION 


4. In the light of the above discussion and the 

specific attribute of “ownership” found in the 

Black’s Law Dictionary (6th Edition) as the 

right of one or more persons to possess or 

use a thing to the exclusion of others, the 

conclusion of the High Court to the effect “on 

the admitted fact that the assessee herein, as 

an individual, does not own any property in 

the status of an individual as on the date of 

transfer, we have no hesitation in accepting 

the case of the assessee, thereby allowing the 

appeal” runs counter to the definition and one 

of the attributes of the term “ownership” (as 

seen earlier) and, therefore, it is submitted, 

with respect, that the decision of the Madras 

High Court in the case of Dr. (Smt) P.K.Vasanthi 

Rangarajan (supra), appears to be wrong and 

requires re-consideration by a Full Bench. 

Moreover, it can never be the intention of the 

Legislature to exempt the assessees from the 

rigours of proviso to section 54F of the Act 

in respect of co-ownership of residential 

properties under the pretext that they(the coowners) 

are not the exclusive owners of such 

residential properties. 

•••

Retrospective 

Amendments - 

Courts Disagree 

INTRODUCTION 

1. This article highlights an interesting ruling 

from the Gujarat High Court in case of Avani 

Exports v. CIT [2012] 23 taxmann.com 62, on 

the constitutional validity of series of retrospective 

amendments to section 80HHC/28 vis-a-vis 

DEPB/DERC receipts w.r.e.f. 1-4-1998. As per 

the amendment made in 2005 certain preconditions 

were imposed for allowance of benefit 

under section 80HHC vis-a-vis DEPB/DERC 

receipts. The amendment provided as under: 

Profits on sale of Duty Entitlement Pass Book 

Scheme (DEPB) credits or Duty Free 

Replenishment Certificate (DFRC) will be treated 

at par with duty drawback for the purposes 

of proportionate increase of profits derived 

from exports computed under clause (a) or 

clause (b) or clause (c) of sub-section (3) of 

section 80HHC in the case of,— 

(i) an exporter having export turnover not 

exceeding ` 10 crores; 

(ii) in the case of an exporter having export 

turnover exceeding ` 10 crores, if— 


GOPAL NATHANI 

CA 

(a) he had an option to choose either 

duty drawback or duty entitlement 

pass book scheme; and 

(b) the rate of drawback credit attributable 

to the customs duty was higher 

than the rate of credit allowable under 

duty entitlement pass book scheme. 

or 

(c) he had an option to choose either 

duty drawback or duty free replenishment 

certificate; and 

(d) the rate of drawback credit attributable 

to the customs duty was higher 

than the rate of credit allowable under 

duty free replenishment certificate. 

HIGH COURT QUASHES RETROSPECTIVE 

EFFECT OF AMENDMENT 

2. The Government somehow accepted the 

harshness and issued a Circular stating that 

no penalty and interest shall be imposed on 

such old demands and further, if levied these 

will be refunded/reversed. In a further tragedy 


653


it allowed leniency in the payment of demands 

in such years over a period of five years. This 

was when the amendment would have actually 

benefited 60,000 out of the 65,000 exporters. 

So much of leniency was practically extended 

to the exporters numbering only 5,000. 

The first facet of the objection to such an 

amendment has been that the High Court 

answered in the affirmative and quashed 

retrospective effect to bring uniformity in the 

grant of benefits to one and all exporters in 

the previous period to the year 2005. So the 

amendment can take effect only from prospective 

date, i.e., from 1.4.2006. 

Interestingly the Court then went into the manner 

in which such retrospective amendment was 

made, as it noticed that the need for amendment 

was felt after a decision by the Delhi Tribunal 

in P & G Enterprises (P.) Ltd. v. Dy. CIT [2005] 

93 ITD 138. Therein both the Assessing Officer 

and the Commissioner of Income-tax (Appeals) 

held that DEPB receipts would fall under clause 

28(iv) and not under section 28(iiia). Hence, 

first DEPB amount was excluded as any other 

receipt of similar nature from the profits of 

the business as per Explanation (baa) and later 

on proportionate benefit under the first proviso 

to sub-section (3) of section 80HHC was denied 

by the AO/CIT(A) as it covered only items 

falling under clauses (iiia), (iiib) and (iiic) of 

section 28. The assessee claimed that no exclusion 

is provided for clause (iv) of section 28. 

TRIBUNAL’S RULING 

3. The Tribunal in the next course held that 

had the Legislature intended to exclude 90 per 

cent of sum referred to in section 28(iv), it 

could easily include the same alongside clauses 

(iiia), (iiib) and (iiic) of section 28. Thus, deliberate 

omission to include clause (iv) of section 28 

alongside clauses (iiia), (iiib) and (iiic) in the 

Explanation (baa) clearly suggested that the 

Legislature never intended to exclude 90% of 

DEPB sums. Sh. K C Singhal (JM) then in the 

Bench held that 90% of DEPB receipts assessable 

under section 28(iv) could not be excluded 

654 


from the profits of business computed under 

the head “Profits and gains of business or 

profession” for the purpose of computing profits 

of business under clause (baa) of the Explanation 

to section 80HHC(4B). 

GOVERNMENT INTRODUCES SERIES OF 

AMENDMENTS TO SECTION 80HHC AND 

SECTION 28 

4. It is at this point of time that the Government 

introduced series of amendments to section 

80HHC and section 28 to have separate clauses 

for DEPB/DERC and their treatment for section 

80HHC benefit. This was done to get over the 

interpretation given by the Delhi Bench of the 

Tribunal (supra) and to make an entry for exclusion 

of DEPB as well from the exclusion clause (baa) 

of the Explanation to section 80HHC(4B). 

OBJECT OF AMENDMENTS TO SECTION 

80HHC AS PER GOVERNMENT 

5. The object of the amendment to section 

80HHC, as it appeared from the statements of 

the Finance Minister while moving the bill, 

was to get rid of the alleged wrong decision 

of the Tribunal interpreting the then provision 

of the Statute in a way which was beneficial 

to the assessees, which according to the Finance 

Minister, was never the intention of the 

Legislature. To corner this position the High 

Court pointed in the following words: 

“If such be the position, the Revenue has 

definitely right to challenge the decision 

of the Tribunal as a wrong one before the 

higher forum; but on a plea of delay in 

disposal of appeal if filed, without 

challenging the decision of the Tribunal 

before High Court or Supreme Court, the 

Revenue cannot curtail such benefits by 

proposing amendment, incorporating a new 

provision in the Statute from an anterior 

date. According to the existing law enacted 

by the Parliament itself, wrong orders passed 

by a Tribunal should be challenged by the 

aggrieved party before the appropriate High

Court and if such party is still aggrieved 

by the order of the High Court, he should 

move the Supreme Court.” 

COURT POINTS OUT THE DISCONNECT 

6. In their further note on the rationale of 

such an amendment vis-a-vis the performance 

of the role of executive the Court pointed out 

the disconnect in the following words: 

“25. In the case before us, it is not one 

where the executive has failed to carry out 

the object of the Parliament necessitating 

exercise of control by retrospective amendment 

what the executive ought to have achieved. 

In the present case, according to the Finance 

Minister presenting the Bill, a valid piece 

of legislation has been wrongly interpreted 

by the Tribunal. We have already pointed 

out that according to the existing law, if a 

valid piece of legislation is wrongly interpreted 

by the Tribunal, the aggrieved party should 

move higher judicial forum for correct 

interpretation. As pointed by the Apex Court 

in the case of Pritvi Cotton Mills Ltd. (supra), 

the Legislature does not possess or exercise 

power to reverse the decision in exercise of 

judicial power. Thus, we are of the view 

that the principles laid down in the case of 

R. C. Tobacco (P.) Ltd. (supra) have no application 

to the facts of the present case. The impugned 

amendment granting benefit restricting it to 

a class of assessees whose turnover is less 

than ` 10 crore is permissible prospectively 

but the way it has been enacted, it takes 

away an enjoyed right of a class of citizen 

who availed of the benefit by complying 

with the requirements of the then provisions 

of law.” 

THE GUJARAT HIGH COURT POINTS OUT 

GREAT DISSATISFACTION AT HURRY 

SHOWN BY GOVERNMENT 

7. Pointing out great dissatisfaction in the manner 

and at the hurry shown by the Government 

• DT - Secs. 9, 28 & 80HHC 

the Gujarat High Court held that the impugned 

amendment was violative for its retrospective 

operation in order to overcome the decision 

of the Tribunal, and at the same time, for 

depriving the benefit earlier granted to a class 

of the assessee’s whose assessments were still 

pending, although such benefit would be 

available to the assessee’s whose assessments 

had already been concluded. Further to this, 

it held that in this type of substantive amendment, 

retrospective operation can be given only if it 

is for the benefit of the assessee but not in a 

case where it affects even a fewer sections of 

the assessees. 


8. It proves a point that the law of the land 

should be equal for everyone – be it a small 

one or a big one and, therefore, there is little 

that the Government can now do to defend 

its position even before the Supreme Court. 

The High Court has now quashed the impugned 

amendment only to the extent that the operation 

of the said section can be given effect from 

the date of amendment and not in respect of 

earlier assessment years of the assessee’s whose 

export turnover was above ` 10 crore. It would 

be wise if the Government does not challenge 

this decision in the Supreme Court and perhaps 

it is time that the Government should learn 

a lesson from this decision and roll back all 

those amendments that it had incorporated in 

the Income-tax Act, 1961 by the Finance Act 

of 2012, which is again a show of retrospective 

amendments that are introduced on account 

of certain interpretations given by the benches 

of Tribunals and High Courts in favour of the 

assessee’s especially vis-a-vis section 9 

amendments. Also it is a matter of rejoicing 

for non-residents as well as resident taxpayers 

as they can benefit from this decision and 

challenge the retrograde laws in the Courts of 

law, notwithstanding the position taken by 

the Government henceforth. 


••• 

655


Write off of non-rural advances by 

banks not impaired by provision 

kept for rural advances 

INTRODUCTION 

1. Some of the provisions of the income-tax 

law are so fascinating that what one interprets 

on plain reading of the provision at some 

point of time undergoes a change due to effluxion 

of time. This is not a change of opinion or 

understanding but a change due to proper 

look through and more so at the High Court 

level where this kind of dynamic interpretation 

leads to fascinating study of judgments. 

The Apex Court in Catholic Syrian Bank Ltd. 

v. CIT [2012] 18 taxmann.com 282/206 Taxman 

182 made a path breaking interpretation of the 

application of section 36(1)(vii) vis-a-vis section 

36(1)(viia) of the Act. This decision is not only 

taxpayer friendly but also gives wider coverage 

of the statute by looking into the circular issued 

by the CBDT and the purposive interpretation 

of the statutory provision. 

This write up discusses the Apex Court’s decision 

which reversed the decision of the Kerala High 

Court and how the High Court interpreted the 

law to deviate from its own precedent available 

in South Indian Bank Ltd. v. CIT [2003] 130 

Taxman 749. 

LEGAL PROVISIONS 

2. Legal provisions discussed in the Apex Court’s 

decision relate to write off of bad debt contained 

656 


in section 36(1)(vii), read with Explanation to 

section 36(1)(viia) meant for deduction in respect 

of provision for bad and doubtful debts for 

scheduled banks and the conditional rider 

contained in section 36(2) for bad debt write 

off envisaged in section 36(1)(vii). 

Section 36(1)(vii) meant for bad debt deduction 

says that any debt or a part thereof which is 

written off as irrecoverable in the accounts of 

the assessee is eligible for deduction. The proviso 

to the section says that where the assessee is 

a bank, etc., the amount of deduction shall be 

limited to the amount by which such debt or 

part thereof exceeds the credit balance maintained 

in the provision for bad and doubtful debts. 

The Explanation to the section says that any 

debt written off as irrecoverable would not 

include any provision for bad and doubtful 

debts made in the accounts of the assessee. 

Section 36(1)(viia) is meant for deduction 

towards provision for bad and doubtful debts 

for scheduled banks and the quantum of 

deduction is with reference to 7.5% of the total 

income computed before any deduction under 

Chapter VI-A and an amount not exceeding 

10% of the aggregate average advances made 

by the rural branches of such banks. 

Section 36(2) imposes the conditions which 

are to be satisfied when a debt is written off 

and deduction is claimed under section 36(1)(vii)

of the Act. It will not apply to deduction 

towards provision made for bad and doubtful 

debts applicable to banks under section 36(1)(viia). 

CATHOLIC SYRIAN BANK’S CASE 

3. The assessee a scheduled bank filed its return 

of income for the assessment year 2002-03 

declaring total income of ` 61.16 lakhs. 

Subsequently, during the course of scrutiny 

assessment, it was found that the assessee had 

made claim of ` 1265.96 lakhs towards bad 

debts written off which was in addition to 

provision created for bad and doubtful debts 

under section 36(1)(viia) of the Act. The Assessing 

Officer held that when the assessee had 

maintained provision for bad and doubtful 

debts of ` 1501.30 lakhs, the bad debts written 

off could not be allowed in view of the proviso 

to section 36(1)(vii). 

The Commissioner (Appeals) applied the 

precedent in the case of South Indian Bank Ltd. 

(supra) and held that since the debts written 

off pertained to urban branches and did not 

relate to provision made for advances of rural 

branches under section 36(1)(viia), the claim of 

deduction was allowable. 

The appellate Tribunal also considered the 

arguments of the assessee and decided the case 

in assessee’s favour. When the matter reached 

the Court, the Full Bench vide its order dated 

16-12-2009 set aside the precedent view of the 

Division Bench in South Indian Bank Ltd.’s case 

(supra) and held that the banks are entitled to 

claim deduction in respect of provision for bad 

and doubtful debts in terms of clause (viia) but 

with regard to bad debts write off the eligibility 

for deduction is satisfied only when it exceeds 

the provision created and allowed as deduction 

under clause (viia). It held that the distinction 

drawn in South Indian Bank’s case between 

bad debts written off in respect of advances 

made by rural branches and bad debts pertaining 

to advances made by other branches of the 

bank does not exist and was not visualized 

under proviso to section 36(1)(vii). 

The Court held that in respect of bad debt 

write off by banks it is eligible for deduction 

only to the extent it exceeds the provision 

created and allowed as a deduction under 

section 36(1)(viia) of the Act. 

POINTS OF CONTENTION 

4. The Apex Court had to decide the appeal 

of the assessee. The following two questions 

were to be resolved: 

(i) Whether the Full Bench of the High Court 

had grossly erred in reversing the Division 

Bench’s decision in order to deny the 

deduction in respect of bad debts written 

off in the books with respect to which 

provision was made under clause (viia) of 

the Act? 

(ii) Whether the Full Bench was correct in 

reversing the findings of the earlier Division 

Bench that if the bad debt written 

off relates to debt other than for which 

the provision is made under clause (viia), 

such debts will squarely fall within the 

main part of clause (vii) which is entitled 

to deduction and in respect of part of the 

debt which relates to provision made under 

clause (viia), the proviso will operate to 

limit the deduction to the extent of the 

difference between the debt written off 

and credit balance in the provision for 

bad and doubtful debts made under clause 

(viia)? 

The above questions could be simplified as 

under: 

Whether the proviso to section 36(1)(vii) limits 

the deduction in respect of bad debts written 

off only when it exceeds the provision made 

under section 36(1)(viia)? 

Whether bad debts relating to non-rural branches, 

when written off would be governed by section 

36(1)(vii), which is independent of the provision 

maintained in respect of rural advances of the 

bank governed by section 36(1)(viia)? 


657


Whether banks have to maintain identity of 

the bad debts written off in case of rural branches 

and other branches and adjust the write off 

relating to rural advances in the provision 

account maintained as per section 36(1)(viia) 

and the write offs relating to non-rural branches 

being eligible for deduction separately under 

section 36(1)(vii), read with section 36(2)? 

DECISION OF THE COURT 

5. The Apex Court held that sections 36(1)(vii) 

and 36(1)(viia) are separate items of deduction. 

They are independent provisions and cannot 

be intermingled or read into each other. It is 

a well-settled canon of interpretation of fiscal 

statutes that they need to be construed strictly 

and on their plain reading. 

Section 36(viia) was introduced by the Finance 

Act, 1979 w.e.f. 1-4-1980 and the scope of the 

provision was explained by the CBDT vide its 

Circular No. 258, dated 14-6-1979 in which it 

was explained that the provisions were 

introduced to promote rural banking and assist 

the scheduled commercial banks in making 

adequate provision out of their current profits 

in order to provide for risks in respect of rural 

advances. 

Clause 13.3 of the Circular states that the 

deduction on account of provision for doubtful 

debts, is distinct and independent of section 

36(1)(vii) relating to allowance of deduction 

for bad debts. The scheduled commercial banks 

would continue to get the benefit of writing 

off of irrecoverable debts as per section 36(1)(vii) 

in addition to the benefit of deduction of the 

provision for bad and doubtful debts under 

section 36(1)(viia). 

The Court observed that it is inclined to give 

an interpretation which would serve the 

legislative object and intent, rather than 

subverting the same. It held that the language 

of section 36(1)(vii) is unambiguous and does 

not provide for dual interpretation. However, 

this benefit of bad debts write off is subject 

to satisfaction of conditions contained in section 

658 


36(2). The proviso to section 36(1)(vii) does 

not control the application of the section, 

since the proviso could apply only when the 

case of the assessee is covered by section 

36(1)(viia) (applicable for scheduled banking 

companies). 

The Apex Court held that in respect of nonrural 

advances, section 36(1)(viia) relating to 

maintenance of provision will not apply. So, 

any debt written off as irrecoverable is deductible 

under section 36(1)(vii) and such claim is not 

controlled by section 36(1)(viia). 

With regard to rural advances, the assessees’, 

i.e., banks are obliged to maintain a provision. 

Bad debts written off in respect of rural advances 

have to be adjusted against the provision 

maintained by the assessee. Only where the 

bad debts written off exceed the provision 

maintained, such excess is deductible and is 

covered by the proviso to section 36(1)(vii). 

The proviso to section 36(1)(vii) protects the 

interests of the Revenue. For rural advances, 

which are covered by clause (viia) there would 

be no double deduction. The proviso limits 

the deduction towards bad debt write off by 

allowing the claim only when the write off 

relating to rural advances exceeds the provision 

maintained. 

The Apex Court also observed that the Full 

Bench of the Kerala High Court ignored a 

significant expression appearing in both the 

proviso to section 36(1)(vii) and section 36(2)(v), 

i.e., ‘assessee to which clause (viia) of subsection 

(1) applies’. Thus, where the claim 

does not fall under section 36(1)(viia) (i.e., 

provision for bad and doubtful debts), section 

36(1)(vii) will not apply. 

Chief Justice of the Apex Court in his separate 

concurrent view held that where the bad debt 

write off in respect of rural advances exceeds 

the provision, such excess alone is deductible 

and this situation is taken care of by the proviso 

to clause (vii). He observed that the proviso 

indicates that it is limited in its application to 

bad debts arising out of rural advances of a

ank. It follows that if the amount of bad debt 

actually written off relates to urban advances, 

such claim is not affected, controlled or limited 

in any way by the proviso to clause (vii). 

CONCLUSION 

6. The decision of the Apex Court provides 

finality and would be binding in nature. In 

simple terms, bad debts written off relating to 

urban advances are eligible for deduction as 

per section 36(1)(vii), read with section 36(2). 

It is not controlled by section 36(1)(viia). 

In respect of rural advances for which the 

banks are expected to maintain a provision 

towards bad and doubtful debts, any bad debt 

written off will be adjusted only in the provision 

account. Only when the bad debt write off 

claim exceeds the provision maintained by the 

assessee such an excess is deductible and it 

is mandatory as per the proviso to section 

36(1)(vii). 

The decision provides a conceptual clarity and 

would set at rest the controversy surrounding 

these two sub-sections. The proviso contained 

in section 36(1)(vii) if it was incorporated in 

section 36(1)(viia) the confusion or controversy 

might have been avoided. Similarly, the 

Explanation to section 36(1)(viia) saying that 

the deduction is in addition to section 36(1)(vii) 

would have eliminated any controversy 

whatsoever on this issue. 

• DT - Secs. 36(1)(vii), 36(1)(viia), 36(2) 

••• 


659


INTRODUCTION 

660 

TAXATION 

OF INSURANCE 

BUSINESS IN INDIA 

AMIT KUMAR NIKHIL MISHRA 

1. Historically, the insurance industry has been 

one of the foremost benefactors of any economy 

and its people. The insurance industry plays 

a pivotal role in economies by absorbing 

economic, personal as well as political tremors, 

thereby justifying its presence as one of the 

pioneering industries for the good of economy. 

The Prime Minister of India has been sagacious 

in his remarks that the insurance sector would 

be the next field of investment other than 

private equity which would bring enormous 

foreign investments into India and take us out 

of the present economic slowdown. 

This suggests the importance of not only the 

significance of insurance business in driving 

investment into our economy but it also perhaps 

connotes the revenue that can be generated 

from taxing this booming industry. 


However, technically speaking, the insurance 

industry has left many jurists of taxation puzzled 

as to the method of taxation to be applied to 

such industries. This is because the true profits 

of the insurance business cannot be fairly arrived 

at by following the ordinary methods of 

accounting 1 , as there is no recognized business 

method of ascertaining the profits derived from 

the insurance businesses. 2 

However, with the passage of time, the Courts 

and the Legislature have made significant efforts 

in trying to rationalize, codify and clarify the 

modes, methods, procedures as well as the 

rates of taxation on the insurance businesses 

while keeping in mind the privileged position 

it has in the economy and adapting to the 

needs of the insurance businesses so as to 

ensure complete public welfare arising from 

the participation of these businesses in the 

economy.

This article aims to study various aspects related 

to the taxation of the insurance businesses in 

India under the Income-tax Act, 1961. 

The authors have proceeded in the following 

manner for the purpose of this study. 

Firstly, the authors have tried to give a brief 

description of the working of Insurance 

Businesses. 

Secondly, the authors aim to present the difficulties 

in taxation of insurance businesses and seek 

to clarify, through legal provisions and settled 

case laws, the need of a different mode of 

taxation of the insurance businesses. 

Thirdly, the authors have presented the form 

in which the insurance businesses are required 

to submit their financial statements to the 

concerned authorities in consonance with the 

provisions of the Insurance Act, 1938 and various 

IRDA regulations. 

Fourthly, the authors have tried to analyze the 

mode of taxation of the insurance businesses 

according to the provisions of the Income-tax 

Act, 1961, read with the Insurance Act, 1938 

and various other Finance Acts and IRDA 

regulations. 

Fifthly, the paper seeks to study the provisions 

of the Direct Tax Code, 2010. 

INSURANCE BUSINESS AND THE 

PRINCIPLES ON WHICH THIS BUSINESS 

WORKS 

2. In the present era, when life is full of risks 

and uncertainty, insurance has its own 

importance. Today it is not limited to individuals 

or families, rather it embraces the entire country 

in a way that no industry can ignore it. It is 

the backbone of every industry, irrespective of 

field in which it operates. Big industrial units 

having huge investment needs to get risk covered 

so that in case of a misfortune, the industry 

may not come to a standstill. No one in the 

modern world can afford to be without an 

insurance cover. 

Insurance, or as it is sometimes called, assurance, 

is a contract by which one party, for a 

consideration, which is usually paid in money 

either in lump sum or at different times during 

the continuance of the risk, promises to make 

certain payment of money upon the destruction 

or injury to something in which the other 

party has an interest. In fire insurance and in 

marine insurance the thing insured is property; 

in life or accident insurance it is the life or 

health of the person. 3 In this manner insurance 

covers every type of risk and now insurance 

business has turned up into a trillion dollar 

business. 

Insurance business works on certain general 

principles. All principles enshrined under section 

10 of the Indian Contract Act, 1872 for a lawful 

contract apply to insurance contracts. However, 

there are certain other principles which apply 

to Insurance business. Those principles are as 

follows: 

(a) Indemnity: Every contract of insurance, 

except life insurance, is a contract of 

indemnity and no more than an indemnity. 

The insurer 4 undertakes, within the 

limit of obligation, to compensate the insured 

for his actual loss, and no more. 5 

(b) Duty of disclosure, uberrima fides (utmost 

good faith): Every contract of insurance 

is a contract of utmost good faith 

(uberrima fides). The insured should not 

only make any misrepresentation but should 

also disclose all facts affecting the risk 

insured against. Insurance is a contract of 

good faith where both parties have to 

abide by the terms and conditions of the 

policy. 6 

COMPUTATION OF INCOME TAX ON 

INSURANCE BUSINESSES UNDER THE 

INCOME-TAX ACT, 1961 

3. The Insurance Companies 7 and Co-operative 

Societies providing insurance have been provided 

with a special status under the Income-tax Act 

in relation to both, the procedure as well as 


661


the rate of taxes levied on the insurance 

businesses. 

It is important to note that the insurance 

businesses are exempted from the application 

of section 199 8 and sections 28 to 43B 9 . The 

mode and rates of computation of income-tax 

on insurance businesses are governed by the 

provisions of section 44, read with the First 

Schedule of the Income-tax Act, 1961 and section 

115B. This interpretation has been settled in 

a plethora of judgments. 10 

It was laid down in the case of CIT v. BB & 

Railway Co-op. Mutual Death Benefit Society Ltd. 11 

that an insurance company, instead of making 

its return of income under the various heads 

laid down under section 14 is required to 

submit only one figure of income, arrived at 

in accordance with the rules laid down in the 

First Schedule. This is because First Schedule 

does not provide for computation of income 

under different heads. 

In GIC v. CIT 12 , the Supreme Court held that 

section 44, read with First Schedule, lays down 

a synthetic mode of computing the profits and 

gains of the insurance business, for the purposes 

of the income-tax. It also held that the figures 

of accounts drawn by the assessee must be 

drawn up in accordance with the provisions 

of the First Schedule and must also satisfy the 

requirements of the Insurance Act. Further, 

the Court held that the reports so drawn are 

binding on the Assessing Officer and he has 

no general power to correct the errors in the 

accounts of the insurance business and undo 

the entries made therein. 

It is also pertinent to note that the profits of 

life insurance business are to be taxed at rates 

specifically provided under section 115B, inserted 

by the Finance Act, 1976. 

FURNISHING OF ACCOUNTS 

4. The insurance businesses are required to 

produce financial statements in accordance with 

the provisions of the Insurance Act, 1938, read 

with the Insurance Regulatory and Development 

662 


Authority (Preparation of Financial Statements 

and Auditor’s Report of Insurance Companies) 

Regulations, 2002. 13 

Financial reports and balance sheets of the 

insurance businesses must be prepared in 

accordance with the provisions enlisted under 

sections 10 to 13 of the Insurance Act, 1938. 

It is obligation upon every insurer dealing 

with any kind of insurance business to have 

a separate account of all receipts and payments 

in respect of each class of insurance business. 14 

In case of life insurance business by any insurance 

company the business of life insurance shall 

be carried on with the help of separate fund 

known as life insurance fund. They are not 

permitted to carry on any other business other 

than life insurance until and unless the assets 

of life insurance fund of the insurer are adequate 

to meet all liabilities of life insurance. 15 

Every insurer carrying on any kind of insurance 

business is under an obligation to prepare balance 

sheet, profit and loss account, a separate account 

of receipts and payments and revenue accounts 

after expiration of each financial year as per 

provisions mentioned under the Insurance 

Regulatory and Development Authority Act, 

1999. 16 They shall also keep separate accounts 

relating to funds of shareholders and policyholders. 

17 Every balance sheet, profit and loss 

account, revenue account and profit and loss 

appropriation account of every insurer must be 

audited annually by a practicing auditor. 18 It is 

obligatory upon every insurer carrying on the 

business of life insurance to cause an actuarial 

valuation of its assets and liabilities and financial 

condition of the life insurance business once in 

a year as per provisions mentioned in the Insurance 

Regulatory and Development Authority (Actuarial 

Report and Abstract) Regulation, 2000. The audited 

accounts and reports carried on by actuary as 

per the IRDA (Actuarial Report and Abstract) 

Regulation, 2000 as well as financial statements 

of every insurance companies or insurers is to 

be submitted to the Insurance Regulatory and 

Development Authority within six months of 

the period specified by every insurance company 

or insurer. 19

The true profits of the insurance business cannot 

be fairly arrived at by following the ordinary 

methods of accounting. 20 This is because there 

is no recognized business method of ascertaining 

the profits derived from the life insurance 

businesses. 21 The profits and liabilities calculated 

must be ascertained on the basis of actuarial 

valuations and calculations. 22 

In this manner the accounts of the insurance 

business are furnished to the authorities and 

it helps in the taxation of their business as per 

the provisions mentioned in the Income-tax 

Act, 1961. 

LIFE INSURANCE BUSINESS 

5. Rule 7(1)(iv) provides that the definition of 

‘Life Insurance Business’ in section 2(11) 23 of 

the Insurance Act, 1938 applies under the First 

Schedule. 

It has been settled in a leading judgment that 

where the business consists of granting terminable 

pensions 24 or annuities 25 dependent on human 

life in favour of the subscribers or their nominees, 

the business must be assessed in accordance 

with rule 2 of the First Schedule. 

Further, for life insurance businesses, a special 

rate of tax has been prescribed by sec. 115B 

of the Income-tax Act. 

5.1 Method of calculating the profits of the 

life insurance business - For the purpose of 

assessment, the income of a life insurance business 

is synthetically calculated in consonance with 

the provisions of the First Schedule of the 

Income-tax Act, 1961. 

5.1.1 RULE 1 - Rule 1 26 of the First Schedule 

states that the profits of life insurance business 

must be computed separately from the profits 

of ‘any other businesses.’ This means that if 

a person is also carrying out businesses other 

than the life insurance business, the income 

that is to be computed for computation of tax 

must be separately done so as to enable the 

profits from the life insurance business to be 

separately determined from the profits which 

arise from other businesses being carried on 

by the person. 

A good example of the aforesaid situation is 

the profits of a ’Composite Insurance Company 27 ’ 

which has to be split up for income-tax purposes 

into life insurance business and other insurance 

business. 28 

Further, if a life insurer also carries on any 

other business other than insurance, the income 

of the life insurance business alone is to be 

computed under this Schedule, while the income 

from other businesses shall be separately 

computed under sections 28 to 43A. 29 Moreover, 

it has also been held by the Allahabad High 

Court that where certain activities of an insurance 

company have been financed from the funds 

of the miscellaneous insurance branch and partly 

from the funds of the life insurance branch, 

the profits accruing from such an activity must 

be distributed proportionately between the two 

branches for the computation of the profits of 

those branches separately. 30 

It has also been observed by the Courts that 

income from investments will be considered 

as profits and gains of life insurance business. 31 

5.1.1.1 SET OFF AND CARRY FORWARD OF LOSS IN 

CASE OF LIFE INSURANCE BUSINESS - Even though 

there is a mandate for separate computation 

of profits for life insurance businesses and 

other businesses, yet there is no restriction on 

setting off any loss incurred in life insurance 

business against the profits of non-life insurance 

businesses or other businesses carried on by 

the assessee in the same year. A vice versa 

application of this statement is also applicable. 

This is because of the operation of section 70 

which clarifies that it is only the net result of 

the profits and losses of various businesses 

which is assessable to tax. 32 

Loss incurred in the life insurance business 

can be carried forward and set off against the 

profits made in a subsequent year from the 

same business, where the life insurance and 

non-life insurance businesses are departments 

of one and the same business carried on by 


663


the assessee. 33 Now even if the life and nonlife 

insurance businesses are separate and do 

not constitute separate departments of the same 

business, still the aforesaid provision can be 

effected. 34 

Under this rule the annual average of the 

surplus disclosed by the actuarial valuation 35 

made for the last inter-valuation period 36 pending 

before the commencement of the assessment 

year is to be taken as the basis of computation 

subject to certain adjustments. 37 It is not open 

to the department to make an addition to the 

surplus other than the adjustments specifically 

provided for in the Schedule, even if an item 

of the income escapes tax as a result of not 

being taken into account in making the actuarial 

valuation. 

The provision also stipulates that in case of 

any carry forward of losses or surplus, an 

adjustment for the surplus or deficit of an 

earlier inter-valuation period must be made to 

the surplus disclosed by actuarial valuation 

before the assessable annual average is 

calculated. 38 

5.1.2 RULE 2 39 - This rule stipulates that a 

surplus or deficit disclosed by the valuation 

for the relevant inter-valuation period includes 

the surplus or deficit of an earlier inter-valuation 

period. The same should be fragmented and 

the surplus or deficit from any previous intervaluation 

period must be excluded. 40 

For instance, if the actuarial valuation depicts 

a surplus of ` 24 lakhs which includes ` 4 

lakhs as surplus of the previous inter-valuation 

period which has been carried forward, the 

surplus to be actually taken into consideration 

shall be ` 20 lakhs arrived at after ignoring 

` 4 lakhs of the surplus carried forward from 

the previous inter-valuation period. 

For clarification, it was observed in LIC (supra) 

that when the assessee had taken over the 

assets and liabilities of the existing insurers, 

the refund received by the assessee in respect 

of excess tax paid by the predecessor companies 

must be deemed to be included in the previous 

664 


inter-valuation period, rather than being included 

in the relevant inter-valuation period. 41 

It is pertinent to note that only the notional 

figure arrived at according to the valuation under 

rule 2 is to be taken as the basis of assessment 

and not the actual income of the relevant year, 

which might be more or less than the annual 

average of the last inter-valuation period 42 . 

5.1.3 RULE 4 43 - This rule specifies that when 

an assessment has been made under rule 2 on 

the basis of the annual average of surplus 

disclosed by actuarial valuation for an intervaluation 

period exceeding 12 months, no credit 

should be given in accordance with section 

199 for the tax deducted at source in the previous 

year, but credit should be given for annual 

average of tax deducted at source during such 

inter-valuation period. 44 

It has been clarified that this rule applies only 

to tax deducted at source and not when the 

tax is directly paid on assessment. 45 

METHOD OF CALCULATING THE PROFITS 

OF THE NON-LIFE INSURANCE 

BUSINESS 

6. Rule 5 46 of the First Schedule prescribes the 

method of calculating the income of a Non- 

Life Insurance Business for the purpose of tax 

assessment. 

It stipulates that the profits of non-life insurance 

businesses shall be taken to be the profits 

revealed by the annual accounts required to 

be furnished under the Insurance Act, 1938. 47 

It is pertinent to note that the figures in the 

accounts of the assessee drawn in accordance 

with the provisions of the First Schedule and 

satisfying the requirements of the Insurance 

Act are binding on the Assessing Officer. He 

has no general power to correct errors in accounts 

of the insurance business and undo any entry 

made therein. 48 

However, in terms of rule 5(a), if the profit 

has been arrived at after deducting any

expenditure or allowance which is not admissible 

under sections 30 to 43B of the Income-tax 

Act, 1961, then such expenditure or allowance 

shall be added back to the profits disclosed 

by the annual accounts in order to arrive at 

the assessable profit. 

However, the Assessing Officer has no jurisdiction 

to add back any expenditure or allowance on 

the ground that it was deducted contrary to the 

provisions of the Insurance Act, 1938. 49 

It is also important to note that in case the 

amount is not expenditure or an allowance, 

the question of making an adjustment for it 

under rule 5(a) shall not arise at all! 50 

METHOD OF CALCULATING INDIAN 

PROFITS OF NON-RESIDENT INSURANCE 

BUSINESSES 

7. Rule 6 51 of the First Schedule provides an 

extremely synthetic mode of calculating the 

profits of the non-resident insurance businesses. 

It stipulates that in the absence of ‘more reliable 

data,’ the profits of the Indian branches of the 

non-resident insurance businesses shall be taken 

to be the proportion of the world income 

corresponding to the proportion which the Indian 

premium income bears to the total premium 

income. 52 Also, for calculating the world income 

of a non-resident insurance business, the 

assessable income shall be calculated in the 

manner stipulated by the First Schedule for 

computation of profits of an insurance business 

carried out in India. 53 

The Privy Council has made some sagacious 

observations in the construction of this rule in 

CIT v. Great Eastern Life Assurance Co. Ltd. 54 

and have since been regarded as the leading 

case on the construction of this rule. 55 

SERVICE TAX TO BE CHARGED ON 

INSURANCE BUSINESS 

8. The insurance businesses, because of their 

nature of being service providing businesses, 

are liable to be charged with Service Tax as 

well. The method, procedure, deductions and 

rates of levying service tax on Life Insurance 

Businesses 56 and General Insurance Businesses 57 

are governed by separate notifications of the 

Ministry of Finance, Government of India. 

MINIMUM ALTERNATE TAX APPLICABLE 

TO THE INSURANCE COMPANIES 

9. The Insurance Businesses are required to 

furnish their financial statements according to 

the provisions of the Insurance Act, 1938 and 

IRDA Regulations and are exempt from 

furnishing such statements under section 210 

of the Companies Act, 1956. 

Therefore, the insurance businesses come under 

the purview of section 115JB of the Incometax 

Act, 1961. This provision provides the 

minimum amount of tax applicable on insurance 

businesses according to their book profits. This 

minimum amount of tax has been termed as 

Minimum Alternate Tax and the rate of such 

tax applicable to the insurance businesses has 

been thoroughly prescribed under section 115JB. 

DIRECT TAX CODE, 2010 ON TAXATION 

OF INSURANCE BUSINESS 

10. Direct Tax Code Bill, 2010 has dealt with 

taxation of insurance business 58 in expressed 

terms and has proposed to bring about significant 

change in taxation of insurance business in 

India. Section 32 of the Bill has proposed to 

charge profits and gains from insurance business 

under the head ‘Computation of income from 

the businesses’. It provides that ‘income from 

the businesses shall be presumed as the profits 

from the business and the profits gained by 

insurance companies shall be charged under 

provisions mentioned in Eighth Schedule of 

the Bill. 59 

10.1 Computation of profits of life insurance 

business - The profits of the business of life 

insurance shall be the profits determined in 

shareholders’ accounts in accordance with the 


665


Insurance Act, 1938. The profits of the insurance 

business while computing shall be increased 

by the aggregate of the accruals of the receipts 

calculated as per the provisions mentioned 

under section 33(2) of the draft Bill to the 

extent that such profits are not referred to in 

any other heads of profits and the amount of 

expenditure referred to under section 35(4) 

and the exceptions of finance charges referred 

to under section 36(2) of the draft Bill shall 

be considered as the deductions while computing 

profits of the insurance business. 60 While 

computing the profits, deductions mentioned 

under section 35(2)(xxx) which talks about 

contribution to any fund related to their 

employees shall also be taken into consideration. 61 

10.2 Computation of profits of non-life insurance 

business - The profits of the insurance business 

other than life insurance business shall be the 

profits disclosed in the annual accounts, the 

copies of which are deposited with the Controller 

of Insurance as per the provisions of the Insurance 

Act, 1938. 62 The increase in the profits and 

deductions made in the profits are same as 

calculated in the life insurance business. 63 

The profits of the branches in India of a person 

not resident in India and carrying on any 

business of insurance, may, in the absence of 

more reliable data, be deemed to be that 

proportion of the world income of such person 

which corresponds to the proportion which 

his premium income derived from India bears 

to his total premium income. 64 

The profit from the business of insurance shall 

be aggregated with unabsorbed preceding year’s 

loss from the business of insurance, if any, 

and the net result of such aggregation shall 

be the current profit from the business of 

insurance for the financial year. 65 The current 

profit from the business of insurance shall be 

treated as nil, if the net result of aggregation 

in profit is negative and the absolute value of 

the net result of the aggregation shall be the 

amount of unabsorbed current loss of the business 

of insurance for the financial year. 

666 

In this manner the total profit of the insurance 

business shall be calculated as per the different 

provisions of the Direct Tax Code Bill in 

consonance with the Insurance Act, 1938. 

CONCLUSION 


11. It is evident from the present study that 

there is a need to tax the insurance businesses 

differently from other businesses. The same 

has been convincingly clarified by the Courts 

in various judgments while identifying the 

difficulties that might arise if the insurance 

businesses are taxed in the same model of 

taxing as the other businesses. 

However, inspite of these clarifications and 

reconciliations by both, the Courts as well as 

the Legislatures, the difficulties in ascertaining 

a stable model for taxing insurance businesses 

still persist. 

There are great difficulties in applying rule 2. 

This is because the term ‘annual average’ referred 

to in rule 2 has been left redundant, since 

actuarial valuation is carried out on yearly 

basis by insurance companies. Moreover, the 

term ‘Actuarial valuation’ is not defined in the 

Income-tax Act. Further, only policyholders’ 

account is considered if prescribed Form is 

adopted as basis for taxation. 

Also, the computational provision, i.e., the rule 

2 of the First Schedule is capable of different 

interpretations. 

Further, the tax provisions have not kept pace 

with major regulatory changes brought about 

by IRDA, since there has been no amendment 

since 1976 to provide for uniform methodology 

for computation of profits from life insurance 

business. 

Moreover, the Central Government had in 2000 

formed a Committee under the Chairmanship 

of Justice V.U. Eradi to suggest necessary 

alterations in the present Income-tax Act, 1961 

in relation to the taxation of the Insurance 

Businesses. However, despite some significant 

alterations suggested by the Committee’s report,

the same have not yet been adopted by the 

Government in the present taxation scheme. 

The expert Committee headed by Justice VU 

Eradi on taxation of life insurance sector has 

designed a two-tier tax structure, one for the 

policyholders and the other for the shareholders 

against the existing uniform base of taxation 

of both, policyholders and shareholders. 

The Committee set-up by the Ministry of Finance 

has recommended a concessional tax rate of 

5 per cent to 7 per cent on the life insurance 

policyholders fund. The shareholders fund of 

the life insurance companies will be taxed at 

the prevailing corporate tax rate of 35 per 

cent. 

As per the proposed norms, two separate tax 

structures will be applicable for computing 

the taxes after bifurcating the entire fund of 

a company into shareholder’s fund and 

policyholder’s fund. 

The Eradi Committee was set-up with the 

objective of forming concrete guidelines for 

computing the taxes on the total income of the 

insurance companies. The Committee had further 

proposed that the present method of actuarial 

valuation should continue to be the basis of 

taxation, nevertheless some members of the 

Committee were understood to have 

recommended that income-expenditure method 

should be the basis. The concessional rate 

prescribed by the Committee aimed at 

safeguarding the interest of the policyholders 

who generally belong to the lower middle 

income group. 

The Committee’s recommendations would now 

necessitate the insurance companies to prepare 

two different profit and loss accounts, based 

on two different tax rates - for policyholders 

and shareholders of the company. 

Furthermore, it is also pertinent to note that 

the aforementioned recommendations have been 

largely ignored in the proposed Direct Tax 

Code, 2010 as well. 

However, one can only pray that necessary 

recommendations are adopted by the Legislature 

and the government and the significant alterations 

are brought about in the persisting laws in 

order to streamline and stabilize the taxation 

scheme on the insurance businesses. This will 

ensure that the insurance businesses play a 

major role in economic and human welfare by 

not only providing investments into the economy 

but also by contributing to the revenue 

significantly by means of taxes paid. 

1. Himalaya Assurance Co. Ltd., In re [1939] 7 ITR 402 (PC). 

2. Ibid. 

3. George J. Couch, Couch on Insurance, § 1.2, at 4-5 (2nd Ed. 1984). 

4. Insurance Act, 1938, Section 2(9). 

5. Dr. Avtar Singh, Law of Insurance, Eastern Book Company, Lucknow, p. 14, (7th Ed., 2010). 

6. New India Insurance Company Ltd. v. Kiran Singh [2004] 10 SCC 649. 

7. Insurance Act, 1938, section 2(8). 

8. Income-tax Act, 1961, section 199. 

9. Ibid, section 43B. 

10. LIC v. CIT [1996] 85 Taxman 313 (SC); CIT v Hero Cycles (P.) Ltd. [1997] 94 Taxman 271 (SC), General Insurance 

Corpn. of India v. CIT [1999] 106 Taxman 389 (SC), CIT v. Oriental Insurance, 260 ITR 91, Bombay Mutual Life 

Assurance Society Ltd. v. CIT [1951] 20 ITR 189 (Bom.), CIT v. New India Assurance Co. Ltd. [1969] 71 ITR 761 

(Bom.), Addl. CIT v. Jupiter General Insurance Co. Ltd. [1984] 18 Taxman 152 (Bom.) & CIT v. National Insurance 

Co. Ltd. [1995] 81 Taxman 449 (Cal.). 

11. CIT v. B.B. & C.I. Railway Co-operative Mutual Death Benefit Society for Indian Staff Ltd. [1949] 17 ITR 509 (Bom.). 


••• 

667


12. General Insurance Corpn. of India’s case (supra). 

13. Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditor’s Report 

of Insurance Companies) Regulations, 2002, section 3. 

14. Insurance Act, 1938, section 10. 

15. Ibid 


17. Ibid, section 11(1A). 



20. Himalaya Assurance Co. Ltd. (supra). 

21. Ibid. 

22. CIT v. General Eastern Life Insurnace Co. Ltd. [1949] 17 ITR 173 (PC); Scottish Union v. Smiles 2 TC 551. 

23. Income-tax Act, 1961, section 2(11). 

24. Black’s Law Dictionary, 9th Ed.,P. 1277, A fixed sum paid regularly to a person (or to the person’s beneficiaries), 

esp. by an employer as a retirement benefit. 

25. Black’s Law Dictionary, 9th Ed., P. 105, an obligation to pay a stated sum, usu. Monthly or annually, to a 

stated recipient. 

26. Income-tax Act, 1961, First Schedule, Rule 1. 

27. A composite insurance company is an insurance company which provides multi-faceted insurance services like 

life insurance, marine insurance, fire insurance etc. under the name of a single company. 

28. Kanga Palkhiwala & Vyas, The Law and Practice of Income-tax, p. 2600, Lexis NexisButterworthsWadhwa, 

Nagpur, 10th Ed., 2010. 

29. Swadeshi Bima Co. Ltd. v. CIT [1954] 26 ITR 530 (All.). 

30. Ibid. 

31. General Family Pension Fund v. CIT [1946] 14 ITR 488 (Cal.); Liverpool & London & Globe Insurance Corpn. v. Bennett, 

2 KB 577 (HL). For further information, please refer to Circular No. 22[R Dis No. 51(14) II-47], dated 23 September, 

1947. 

32. Supra Note 28. 

33. CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 (SC); Zenith Assurance Co. Ltd. v. CIT [1954] 26 ITR 256 (Bom.). 

Refer section 24(2) of the 1922 Income-tax Act. 

34. Section 72(1)(i) 

35. An actuarial valuation is a type of appraisal which requires making economic and demographic assumptions 

in order to estimate future liabilities. The assumptions are typically based on a mix of statistical studies and 

experienced judgment. Since assumptions are often derived from long-term data, unusual short-term conditions 

or unanticipated trends can occasionally cause problems. http://www.investopedia.com/terms/a/actuarialvaluation.asp, 

as accessed on 22nd July, 2012. 

36. Insurance Act, 1938, Fourth Schedule, Regulation 3(5). 

37. See further, Andhra Insurance Co. Ltd. v. CIT [1937] 5 ITR 697 (Mad.); Calcutta Insurance Ltd. v. CIT [1952] 21 

ITR 404 (Cal.) per Chakraarti J.; LIC v. CIT [1978]115 ITR 45 (Bom.); LIC v. CIT [1979] 119 ITR 900 (Bom.). 

38. Supra note 28, p. 2608. 


40. Calcutta Insurance Ltd. (supra) 

41. LIC (supra). 

42. B.B. & C.I. Railway Co-operative Mutual Death Benefit Society for India Staff Ltd. (supra); Salem Provident Fund Society 

Ltd. v. CIT [1961] 42 ITR 547 (Mad.) 


44. Ibid, this rule has superseded the decisions North British & Mercantile Insurance Co., In re [1937] 5 ITR 349 (Cal.) 

and Phoenix Assurance Co., In re [1937] 5 ITR 397 (Cal.), which held decisions contrary to the existing rule 4. 

45. Calcutta Insurance Ltd. (supra). 

46. Income-tax Act, 1961, First Schedule, rule 5. 

47. New Asiatic Insurance Co. Ltd. v. CIT [1973] 90 ITR 243 (Delhi); CIT v. United India Fire & General Insurance 

Co. Ltd. [1982] 11 Taxman 217 (Mad.); Oriental Fire & General Insurance Co. Ltd. v. CIT [1983] 13 Taxman 68 

(Bom.). 

668 

August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 48

48. General Insurance Corpn. of India (supra). 

49. CIT v. Devkaran Nanjee Insurance Co. Ltd. [1977] 110 ITR 815 (Bom.). 

50. General Insurance Corpn. of India (supra); CIT v. New India Assurance Co. Ltd. [1969] 71 ITR 761 (Bom.); South 

India Insurance Co. Ltd. v. CIT [1977] 106 ITR 969 (Bom.); CIT v. New India Assurance Co. Ltd. [1979] 1 Taxman 

544 (Bom.). 


52. CIT v. Lakshmi Insurance Co. Ltd. [1941] 9 ITR 516 (Rangoon); Motor Union Insurance Co. Ltd. v. CIT [1945] 13 

ITR 272 (Bom.). 

53. Supra note 28, p. 2610. 

54. Great Eastern Life Insurance Co. Ltd. (supra). 

55. Supra Note 28, p. 2610. 

56. Notification No. 8/2002-S.T., dated 1 August, 2002, Gazette of India. 

57. Notification No. 1/94-S.T., dated 28 June 1994, Gazette of India. 

58. The term insurance business has been defined under Paragraph 13 (b) of the 8th Schedule of Direct Tax Code 

Bill, 2010. It describes Insurance Business as business of life insurance and any other insurance business other 

than life insurance business. 

59. Direct Tax Code Bill, 2010, Paragraph 32(2). 

60. Ibid, Eighth Schedule, Paragraph 2. 

61. Ibid. 

62. Direct Tax Code Bill, 2010, Eights Schedule, Paragraph 3. 

63. Ibid, Paragraph 4. 



• DT - Secs. 14, 44, 115B & 115JB 


669


670 

Tax Implications for NGOs 

that Source Foreign Goods 

CA JAMES JOSEPH 

INTRODUCTION 

1. Recently, the Hon’ble Delhi High Court 

delivered an interesting judgment in the case 

of DIT(Exemption) v. National Association of Software 

& Services Companies [2012] 21 taxmann.com 

213, which could have certain long-term 

implications on tax interpretations for NGOs. 

In this case, the High Court took a view that 

expenditure incurred outside India by a charitable 

trust/institution for a charitable purpose in 

India does not conform to the condition provided 

under section 11(1)(a) of the Income-tax Act, 

1961 (hereinafter referred to as the “Act”). 

This section provides that in the case of a 

charitable trust/Institution registered under 

section 12A of the Act, the income shall not 

be included in the total income of the previous 

year to the extent to which such income is 

applied to charitable purposes in India. 

The relevant part of the section reads as follows: 

“11. (1). Subject to the provisions of sections 

60 to 63, the following income shall not be 

included in the total income of the previous 

year of the person in receipt of income- 

(a) Income derived from property held 

under Trust wholly for charitable or 

and Services 

religious purposes, to the extent to 

which such income is applied to such 

purpose in India............ 

(b) to (d) ********” 

FACTS OF THE CASE 


2. The assessee was a Trust registered under 

section 12A of the Act. As per the annual 

report published by the Trust, the assessee 

was the industry association for the IT-BPO 

sector in India. Being a not-for-profit organisation 

funded by the industry, its objective was to 

build a growth-led, sustainable, technology and 

business services sector in the country. 

In respect of AY 1998-99, it filed a tax return 

declaring ‘nil’ income. When the return was 

taken up by the Assessing Officer for scrutiny 

under section 143(2) of the Act, he noticed 

that expenditure incurred on events/activities 

held at Hanover, Germany amounting to 

` 38.30 lakhs was claimed as application of 

income in terms of section 11(1)(a) of the Act. 

The Assessing Officer concluded the assessment 

holding that expenditure incurred in Germany 

was not an application of income, since it was 

incurred outside India and, therefore, the surplus

of income as declared by the assessee was 

liable for further enhancement to that extent. 

DECISIONS OF THE APPELLATE FORUMS 

3. While as the learned CIT(A) upheld the 

view of the Assessing Officer, the Hon’ble 

Delhi Tribunal reversed the order of the lower 

authorities. 

The Tribunal focused on the words “is applied 

to such purposes in India” used in section 

11(1)(a) of the Act. The Tribunal was of the 

view that the Legislature had put the words 

“to such purposes” between “is applied” and 

“in India” to mean that the application need 

not be in India but needs only to result in, 

and should be for the purposes of a charitable 

activity in India. 

The Tribunal further went on to state that the 

expenditure incurred by the assessee in Germany 

was for the purpose of attaining charitable 

objects in India. Hence, the assessee rightly 

claimed the expenditure as application of income 

in terms of section 11(1)(a) of the Act. 

To conclude its decision, the Tribunal also relied 

upon the decision of the Hon’ble Mumbai Tribunal 

in the case of Gem & Jewellery Export Promotion 

Council v. Sixth, ITO [1999] 68 ITD 95 and 

distinguished the ratio laid down by the Hon’ble 

High Court of Andhra Pradesh in the case of 

Trustees of H.E.H The Nizam’s Pilgrimage Money 

Trust v. CIT [1988] 36 Taxman 154. 

DECISION OF THE HIGH COURT 

4. The Revenue challenged the decision of the 

Tribunal before the Delhi High Court on the 

same grounds that were raised before the 

appellate forums. 

The High Court reversed the decision of the 

Tribunal stating that such an expenditure could 

not be considered as an application of income 

in India as same had been incurred in Germany. 

Once again before the High Court, the contentious 

issue between the Revenue and the assessee 

boiled down to the meaning of the words “is 

applied to such purposes in India” appearing 

in section 11(1)(a) of the Act. 

The High Court discussed the meaning of these 

words in the light of the mandate for which 

it had been enacted. The Court compared section 

11 of the Act with that of section 4(3)(i) of the 

erstwhile Indian Income-tax Act, 1922. The 

Court observed that the object of these two 

Sections in their respective Acts are same and, 

therefore, the ratio laid down by the Hon’ble 

Supreme Court in the case of H.E.H. Nizam’s 

Religious Endowment Trust v. CIT [1966] 59 ITR 

582 in the context of section 4(3)(i) of the 

Indian Income-tax Act, 1922 was equally 

applicable to section 11(1)(a) of the Act. The 

High Court observed that the Supreme Court 

in the case of H.E.H. Nizam’s Religious Endowment 

Trust (supra) laid out that “application of income 

of the Trust to such religious or charitable 

purpose as relate to anything done within taxable 

territories” only qualifies for exemption under 

the old Act. 

Since the basic object of both, the old Act and 

new Act was same, the High Court held that 

the ratio laid out in the Supreme Court’s decision 

was equally applicable to the present case 

also. The High Court observed that as the 

assessee had incurred the expenditure in 

Germany, and, as such, this expenditure was 

not related to anything done within the taxable 

territories of India, it could not be considered 

as application of income for charitable purposes 

in India. 

The High Court did not find any merit in the 

argument of the assessee that the words “as 

relate to anything done within the taxable 

territories” mean that the charitable purposes 

must be executed within the taxable territories 

and that it was immaterial where the income 

was actually applied. The assessee contended 

that the words “is applied to such purpose in 

India” used in section 11(1)(a) of the Act also 

conveyed the same meaning. However, the 

High Court could not conceive of a situation 

under which the charitable purposes are executed 


671


within the taxable territories but the income 

of the Trust is applied elsewhere in the 

implementation of such purposes. 

The contention of the assessee, that the Supreme 

Court’s decision relied on by the High Court 

was not applicable to the present case, also 

did not find favour of the Court. The assessee’s 

argument was that in the case of H.E.H. Nizam’s 

Religious Endowment Trust (supra), the trustees 

had discretion to apply the income outside 

India and such application should have approval 

from CBR (present CBDT) which was not 

obtained by the Trust at that point of time. 

In the light of that particular situation the 

Supreme Court had held that the income did 

not qualify for exemption. The assessee also 

argued that the Supreme Court did not deal 

with the contentious issue debated in the present 

case, viz., with respect to the meaning of words 

“to such religious or charitable purposes as 

relate to anything done within the taxable 

territories” occurring in section 4(3)(i) of the 

old Act. 

The High Court also interpreted the natural 

grammatical meaning of the words “to the 

extent to which such income is applied to such 

purposes in India” appearing in section 11(1) 

(a) of the Act. The High Court observed that 

the word “applied” is a verb in the past tense 

used in a transitive form followed by words 

“such purposes” and “India” qualified with 

two prepositions “to” and “in”. This being the 

case, the words should be read as applicable 

to charitable purposes and also applied in 

India to such purposes. 

The assessee’s contention, that “in India” qualifies 

only the phrase “such purposes” so that only 

the purposes are geographically confined to 

India, was not acceptable to the High Court. 

The Court observed that if such meaning is 

assigned to the words, it would place a strain 

on the natural or grammatical interpretation 

of the words, “to the extent to which such 

income is applied to such purposes in India”. 

For this purpose the Court relied on a few 

rules of interpretation laid down in the cases 

672 

of Jugal Kishore Saraf v. Rao Cotton Co. Ltd. AIR 

1955 SC 376; Kanai Lal Sur v. Paramnidhi Sadhukhan 

AIR 1957 SC 907 and Union of India v. Rajiv 

Kumar [2003] 6 SCC 516. 

AN ANALYSIS OF HIGH COURT’S 

DECISION 


5. A close “look through” in the case discussed 

would reveal that the High Court had assigned 

a meaning “spent” for the word “applied” 

used in Section 11(1)(a) of the Act. However, 

“applied” need not necessarily imply “spent”, 

(CIT v. Trustees of H.E.H. The Nizam’s Charitable 

Trust [1981] 7 Taxman 178 (AP)). 

The Compact Oxford Thesaurus Dictionary 

meaning of the word is “bring into operation 

or use”. As per Webster Dictionary “applied” 

means “to put to practical use”; “engaged in 

for a utilization or contributory purpose”; 

“employed in the decoration, design or execution 

of useful object”. 

Therefore, “applied” is wider in import than 

the word “spent” or “to payout or distribute” 

or “expenditure”. 

In a charity, situs of beneficiary and benefits 

are predominant than situs of payment made 

for the procurement of such benefits for the 

beneficiary. When a charitable trust/institution 

was making payment outside India for acquiring 

a benefit for the beneficiaries in India, it was 

applying the money paid for charitable purposes 

in India. 

CONSEQUENCES OF HIGH COURT’S 

DECISION 

6. In India there are a large number of NGOs 

engaged in various charitable activities. The 

income of such NGOs (subject to registration 

under section 12A of the Act) is exempted 

under sections 11, 11A and 12 of the Act. If 

the meaning assigned to the word “applied” 

in the section is “spent”, it would be interesting 

to ponder over the consequences of the above 

decision for NGOs.

NGOs undertake many kinds of charitable 

activities. The benefits may be in cash or in 

kind. If the benefits are in kind, it would be 

in the nature of supply of material or services 

for which the NGOs have to make payment 

to a third party who supplies the materials or 

provides the services. 

Let us look into the anomalies brought about 

by the decision of the High Court. Suppose 

a poor patient is in urgent requirement of 

certain lifesaving medicines which are available 

only abroad or are available at a significantly 

higher cost in India. If the NGO was to spend 

the money abroad for importing the medicine, 

such an expenditure would not be application 

of income according to the case decided. But 

if it was imported through an agency in India 

such an expenditure would be an application 

of income for charitable purpose. 

Let us look into another example. Take the 

case of a poor patient being sent abroad for 

special medical treatment. While the amount 

spent in India, say for, onward journey ticket 

booked in India, is considered as permissible 

application, the amounts spent abroad for 

treatment and homeward journey, if paid outside 

India, would be considered as non-application 

of income for charitable purposes. 

ANALYSIS OF DECISION UNDER DIRECT 

TAX CODE, 2010 

7. The above anomaly would possibly be 

removed in the proposed Direct Code, 2010. 

Section 92 of the DTC provides the manner 

of computation of total income of a non-profit 

organisation. As per the said Section, the total 

income of any non-profit organisation in relation 

to any charitable activity, during the financial 

year, shall be the gross receipts as reduced by 

the amount of outgoings, as computed in 

accordance with the cash system of accounting. 

Section 94 of the DTC describes permissible 

types of “outgoings” of a non-profit organisation. 

• DT - Secs. 11(1)(a), 11A, 12 & 12A 

Clause (b) of the said Section states that “the 

amount paid for any expenditure, incurred for 

the purpose of carrying out any charitable 

activity” shall be one of the “outgoings”. 

Clause (b) of section 103 of the DTC defines 

charitable activity with a preamble,- 

“charitable activity” means the following activities 

carried out in India, namely:— 

(i) to (iii) *******, etc., 

Therefore, a combined reading of all these 

sections would make it possible for an NPO 

to incur expenditure outside India, if the 

expenditure is in relation to charitable activities 

carried out in India. 

CONCLUSION 

8. The decision of the High Court in the above 

case has placed the NGOs in a peculiar situation. 

It is the considered opinion of the author that 

in light of this judgment, NGOs would not be 

able to tap foreign supplies and services that 

would be required for beneficiaries in India, 

if they have to make payments directly to the 

foreign suppliers or service providers. At the 

same time, it would become permissible 

transaction if the NGOs engage an Indian agent 

for provision of such supplies and services 

and pay the amount to them in India. In both 

the cases the beneficiaries are in India and the 

benefits also accrue in India, but in the former 

instance, the payment for supplies or services 

passes directly to a foreign party and in the 

latter case the payment is routed through an 

Indian agent. 

It is pertinent to note that the High Court, 

while concluding its order, noted such an 

anomaly but was of the opinion that such an 

anomaly could not be removed by the Courts 

by interpreting the words used in the Section 

contrary to what the words convey in the 

plain meaning of the words used in the Act. 


••• 

673

674 

DECISIONS 

Additional claim can be made otherwise 

than by filing a revised return 

An analysis of Commissioner of Income-tax, Central-I v. 

Pruthvi Brokers & Shareholders (P.) Ltd. [2012] 23 

taxmann.com 23 (Bom.) 

(i) Additional claim of deduction or exemption 

can be made by the assessee otherwise 

than by filing a revised return. 

(ii) Such additional claim can be made by the 

assessee before appellate authorities. 

(iii) The appellate authorities have jurisdiction 

and, therefore, discretion to entertain 

a new claim. 

FACTS 

D.C. AGRAWAL 

Advocate 

(Former CIT & Accountant Member of ITAT) 

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The assessee was apparently a share broker. 

For the A.Y. 2004-05 it claimed to have made 

payments of ` 40,00,000, ` 10,00,000 and another 

` 10,00,000 to SEBI as payments of fee. In the 

return of income it made a claim of deduction 

under section 43B of ` 20,00,000 only. The Ld. 

A.O. disallowed this claim as payment of 

` 10,00,000 each was made on 16th July, 2004 

and 29th April, 2004, i.e., during the financial 

year 2004-05, relevant to the assessment year 

2005-06. The assessee then made a claim of 

deduction under section 43B in respect of sum 

of ` 40,00,000 which was paid on 9-5-2003 but 

pertained to F.Y. 2001-02. It was submitted 

before the A.O. that incorrect claim was made 

through inadvertence. Since no revised return 

was filed, the A.O. rejected the claim of additional 

sum of ` 40,00,000 on the ground that it was 

not claimed in the return of income. The claim 

was repeated before Ld. CIT(A) and before 

the Tribunal which was allowed by both the 

authorities. The Department filed an appeal 

before the Hon’ble High Court which decided 

the issues arising from the appeals as above. 

COMMENTS 


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The rationale of permitting to raise additional 

claim or additional ground before the appellate 

authorities is that an assessee should be assessed 

on correct income for the correct A.Y. and in 

the hands of the right person. The Hon’ble 

Apex Court in ITO v. Ch. Atchaiah [1996] 84 

Taxman 630 emphasized on the assessment in 

the hands of right person. In Jute Corporation 

of India Ltd. v. CIT [1990] 53 Taxman 85 (SC) 

referred by the Hon’ble Bombay High Court

in the above judgment observed that the appellate 

authority has all the powers which the original 

authority has in deciding the question before 

it subject to the restrictions and limitations 

prescribed by statutory provisions. The powers 

of the CIT(A) are co-terminus with the powers 

of the A.O. while deciding any issue before 

him. He can call for additional evidence, can 

do the enquiries or direct the A.O. to carry 

out requisite enquiries through remand. 

Therefore, there cannot be any restrictions or 

limitations on his powers to entertain new 

claim or new ground. He has to be only satisfied 

that the ground or claim raised before him 

was bona fide and it could not be raised earlier 

for good reasons. 

The power of the first appellate authority is 

derived from the statute wherein section 251 

empowers him to confirm, reduce, enhance or 

annul the assessment and to pass such orders 

in the appeal as he thinks fit. The Explanation 

to section 251 empowers him to “consider and 

decide any matter arising out of the proceedings in 

which the order appealed against was passed 

notwithstanding that such matter was not raised 

before him by the appellant.” A new claim of 

deduction or exemption would affect the taxable 

income and, accordingly, tax liability of the 

assessee which is the core matter in the 

proceedings before the A.O. and, therefore, even 

if a matter is not raised before him CIT(A), he 

can consider and decide any issue arising out 

of the assessment proceedings. Even though 

Hon’ble M.P. High Court in CIT v. Nirbheram 

Deluram [1981] 5 Taxman 84 was of the view 

that the proceedings before the A.O. are limited 

to the matters expressly or impliedly raised by 

the assessee and by the A.O. and so considered 

by him, meaning thereby that new issues not 

raised by the assessee or by the A.O. will not 

be part of the proceedings before the A.O., but 

this view was reversed by the Hon’ble Apex 

Court in CIT v. Nirbheram Deluram [1997] 91 

Taxman 181 by following the decision in Jute 

Corporation of India Ltd. (supra) wherein the 

Apex Court reiterated that the first appellate 

authority has wide powers “co-terminus with 

that of the Income-tax Officer”, so that, “he can 

do what the Income-tax Officer can do and can 

also direct him to do what he failed to do”. 

Such vast powers are conceded to the first 

appellate authority for the reason that the 

Department has no right of appeal against the 

assessment order and, in the course of scrutiny 

of appeal filed by the assessee, the appellate 

authority can see whether, in the interests of 

the Revenue, the tax has to be enhanced? The 

only limitation which seems to be placed on 

the powers of the first appellate authority is 

that he cannot travel beyond the record to find 

out new source of income. If he is able to 

identify new source of income from the record 

of the A.O. or his own record of appeal, it 

would be within his jurisdiction to consider 

new source of income. After considering the 

decisions in Nirbheram Deluram (supra); CIT v. 

Kanpur Coal Syndicate [1964] 53 ITR 225 (SC); 

CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 

891 (SC) and CIT v. Raj Bahadur Hardutroy Motilal 

Chamaria [1967] 66 ITR 443 (SC) the Hon’ble 

Delhi High Court in CIT v. Union Tyres [1999] 

107 Taxman 447 laid down the principle that : 

“The first appellate authority is invested 

with very wide powers under section 

251(1)(a) of the Act and once an assessment 

order is brought before the authority, his 

competence is not restricted to examining 

only those aspects of the assessment about 

which the assessee makes a grievance 

and ranges over the whole assessment to 

correct the Assessing Officer not only with 

regard to a matter raised by the assessee 

in appeal but also with regard to any 

other matter which has been considered 

by the Assessing Officer and determined 

in the course of assessment. However, 

there is a solitary but significant limitation 

to the power of revision, viz., that it is 

not open to the Appellate Assistant 

Commissioner to introduce in the 

assessment a new source of income and 

the assessment has to be confined to those 

items of income which were the subjectmatter 

of original assessment”. 


675


If the powers of Ld. CIT(A) can extend to 

enhancement of income by identifying new sources 

of income or incorrect deductions or allowances, 

then it would be equally applicable to justified 

claims of deductions and exemptions if available 

to the assessee in accordance with law. Therefore, 

there is not only an existence of jurisdiction in 

CIT(A) for entertaining new claim, but also a 

clear discretion vested in him to admit the 

claim, get it verified, give opportunity to the 

A.O. and decide it according to law. 

Even though in an earlier decision of the Apex 

Court in Addl. CIT v. Gurjargravures (P.) Ltd. 

[1978] 111 ITR 1 it was held that a claim not 

made before the A.O. could not be made even 

before the first appellate authority but there 

was a rider in that decision. It was observed 

that if there was no material on record in support 

of the claim, the claim could not be made for 

the first time before the appellate authority. 

This decision was apparently per incurium as 

attention of the Court was not drawn to the 

principles laid down by the Apex Court in CIT 

v. Kanpur Coal Syndicate [1964] 53 ITR 225 wherein 

it was held that the powers of AAC are plenary 

in disposing of an appeal and scope of his 

power is co-terminus with that of the ITO and, 

therefore, he can do what the Income-tax officer 

can do and can also direct him to do what he 

has failed to do. When this principle is applied, 

the AAC/CIT(A) can entertain new claims 

investigate them and decide whether they should 

be allowed or not? Therefore, the judgment of 

the Apex Court in Gurjargravures (P.) Ltd. (supra) 

was distinguished by several High Courts in 

subsequent decisions. After distinguishing the 

judgment in Gurjargravures (P.) Ltd. case (supra), 

the Hon’ble Punjab and Haryana High Court 

in Atlas Cycle Industries Ltd. v. CIT [1981] 5 

Taxman 310 went to observe that “the powers 

of the Tribunal in appeal to allow additional 

plea and, consequently, for additional evidence 

being taken, has been given to do substantial 

justice between the parties. The Tribunal has 

to allow or disallow the additional plea and 

additional evidence after applying its judicial 

mind”. 

676 


There was a slight reversal of the view in CIT 

v. Stepwell Industries Ltd. [1997] 94 Taxman 

280 (SC) wherein Apex Court held that claim 

not made before the first appellate authority 

could not be allowed by Tribunal. But, the 

subsequent decision in National Thermal Power 

Corpn. Ltd. (NTPC) v. CIT [1998] 229 ITR 383 

(SC), settled the law on the subject whereby 

new grounds could be raised before the Tribunal 

if no investigations into the facts were required. 

It may also be noted that the judgment in 

Stepwell Industries Ltd. (supra) was also apparently 

per incurium as attention of the Hon’ble Apex 

Court was not drawn to its own judgment in 

Jute Corporation of India Ltd. (supra) wherein it 

was held that view taken about power of the 

first appellate authority in Gurjargravures (P.) 

Ltd. case (supra) does not lay down a correct law. 

However, as compared to CIT(A) there is a 

slight difference in the powers conferred on 

the ITAT. Whereas CIT(A) can entertain new 

claim, investigate the correctness of the claim, 

give opportunity to the A.O. and decide whether 

claim has to be admitted or rejected, the Tribunal 

on the other hand can entertain a new ground 

only when all the facts relating thereto are on 

the record. No investigation into the facts can 

be directed by the Tribunal before or after 

admitting new ground. The Tribunal is 

empowered to pass such order on the appeal 

as it thinks fit, which obviously does not include 

an order enhancing the tax liability of the 

assessee in the absence of an appeal by the 

Department. The subject-matter of appeal before 

the Tribunal cannot be anything different from 

the subject-matter before the Appellate Assistant 

Commissioner and necessarily it should be 

something which arises out of the determination 

made by the Appellate Assistant Commissioner. 

This is because : (i) Statutory provisions do 

not exist to enable Tribunal to enhance an 

assessment, or to pick up a new source of 

income not considered by the A.O./CIT(A), 

(ii) Scope of powers of Tribunal is confined 

to the grounds raised by the assessee or the 

Department, (iii) These grounds must arise 

from the order of CIT(A), (iv) Raising of new

ground not raised earlier in appeal memo is 

governed by rule 11 of the ITAT Rules. This 

rule must be read subservient to the provision 

in the Act providing for the right of appeal. 

Therefore, additional ground that could be 

permitted to be raised under rule 11 is the one 

that should relate to the subject-matter of the 

appeal which, in turn, is linked to the subjectmatter 

of the order passed by the first appellate 

authority. Further, it is always desired in taxing 

statutes that there should be finality to subjectmatter 

of appeal. The assessments need not be 

thrown to contest throughout the stages of 

appeal, revision and reference. Thus, the issues 

which are not raised before A.O. or CIT(A) are 

presumed to have become final and, therefore, 

cannot be raised before Tribunal. However, an 

exception has been carved out from this principle. 

A question of law can be raised before the 

Tribunal for the first time. Hon’ble Apex Court 

in National Thermal Power Corpn. Ltd. (supra) 

upheld the jurisdiction of the Tribunal to examine 

a question of law which arose from the facts 

as found by Income-tax Authorities and having 

a bearing on the tax liability of the assessee. 

Hon’ble Apex Court observed as follows: 

“Under section 254 of the Income-tax Act, 

the Appellate Tribunal may, after giving 

both the parties to the appeal an opportunity 

of being heard, pass such orders thereon 

as it thinks fit. The power of the Tribunal 

in dealing with appeals is thus expressed 

in the widest possible terms. The purpose 

of the assessment proceedings before the 

taxing authorities is to assess correctly 

the tax liability of an assessee in accordance 

with law. If, for example, as a result of 

a judicial decision given while the appeal 

is pending before the Tribunal, it is found 

that a non-taxable item is taxed or a 

permissible deduction is denied, we do 

not see any reason why the assessee should 

be prevented from raising that question 

before the Tribunal for the first time, so 

long as the relevant facts are on record 

in respect of that item. We do not see any 

reason to restrict the power of the Tribunal 

under section 254 only to decide the grounds 

which arise from the order of the 

Commissioner of Income-tax (Appeals). 

Both, the assessee as well as the Department, 

have a right to file an appeal/cross-objections 

before the Tribunal. We fail to see why 

the Tribunal should be prevented from 

considering questions of law arising in 

assessment proceedings, although not raised 

earlier. The view that the Tribunal is confined 

only to issues arising out of the appeal 

before the Commissioner of Income-tax 

(Appeals) takes too narrow a view of the 

powers of the Appellate Tribunal.” 

Therefore, issues relating to facts can be raised 

before CIT(A) but within the parameters of 

record and proceedings before A.O., whereas 

for the first time only legal issues can be 

raised before the Tribunal. 

CONCLUSION 

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Since the power of first appellate authority is 

co-terminus with that of the A.O., he can entertain 

a new claim not raised before the A.O. On the 

other hand, the power of the Tribunal is 

comparatively restricted to decide new grounds 

only when all the facts relating to those grounds 

are available on the record. On the other hand, 

Tribunal is not vested with such power as 

given to the CIT(A) by the Explanation to section 

251. It is only vested with the power to pass 

such orders on the appeal as it thinks fit. 

Therefore, it can consider the new grounds 

which are legal in nature and do not require 

investigation of facts. From this point of view 

a new claim not made before the A.O. could 

be made before the CIT(A) or even before the 

Tribunal, if all the facts relating to the claim 

are already on the record. 

• DT - Secs. 139(5), 251 & 254-EC-CIT v. Pruthvi Brokers & Shareholders (P.) Ltd. [2012] 23 taxmann.com 23 (Bom.) 


••• 

677


678 

DECISIONS 

Bifurcation of Lease Rental into Capital and 

Revenue Receipt 

An analysis of Prakash Leasing Ltd. v. Deputy Commissioner 

of Income-tax [2012] 23 taxmann.com 3 (Kar.) 

(i) Lease rentals relating to finance lease consist 

of two components, i.e., capital receipt 

and financing charges. 

(ii) Only financing charges represent real income 

and are accordingly chargeable to tax. 

(iii) The amount received towards capital 

recovery constitutes the capital receipt and 

is adjusted against cost of the asset. 

(iv) The lease equalization charge is the result 

of such an adjustment, which the assessee 

makes whenever the amount put aside 

towards capital recovery is not equivalent 

to the depreciation claimed by the 

assessee. 

(v) While determining accrual of liability or 

income, the Accounting Standards prescribed 

by the ICAI would have to be 

followed and applied if they are not 

inconsistent with any provision of law. 

FACTS 

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The assessee was a non-banking financial 

company. For the assessment year 1998-99 the 

assessee had claimed a deduction of ` 4,35,89,486. 

under the head 'lease equalization account.' 

Under the profit and loss account for the said 

year the assessee had reduced the aforesaid 

amount representing the lease equalization account 

from the lease rental of ` 11,84,21,434 on the 

basis of Accounting Standard (AS) 19 issued by 

the ICAI. The Assessing Officer disallowed the 

said claim on the ground that the same was 

neither a liability nor an allowance nor an 

expenditure. He further observed that : (i) it 

was just a matching entry for the purpose of 

tallying the accounts with regard to the assets 

leased out, (ii) this claim was made for the first 

time during the year, (iii) depreciation was 

provided in the books, (iv) lease income was 

recognized. This order was confirmed by ld. 

CIT(A) and the Tribunal on the ground that it 

was an appropriation of profit and, therefore, 

could not be allowed as a deduction. 

The Hon'ble High Court admitted and allowed 

the appeal of the assessee by holding as above. 

COMMENTS 


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This judgment recognizes the importance of 

Accounting Standards (AS in short) issued by 

ICAI. The scheme of the Companies Act, 1956, 

also indicates that Accounting Standards are 

mandatory. They have to be followed by the 

auditors. They have to be followed by the 

companies, as they provide discipline, 

harmonization of concepts and of accounting 

principles. The prudential norms issued by 

the Reserve Bank of India also hold that 

Accounting Standards prescribed by the Institute 

of Chartered Accountants of India would apply 

to non-banking financial companies. Even section 

211(3C) of the Companies Act specifies that 

till such time when the Central Government 

prescribes the Accounting Standards, the 

Accounting Standards issued by the ICAI shall 

be deemed to be the Accounting Standards.

As per section 145 of the IT Act business 

income is required to be computed in accordance 

with the cash or mercantile system of accounting. 

Sub-section (2) thereof authorizes the Central 

Government to notify in the Official Gazette 

from time-to-time Accounting Standards to be 

followed by any class of assessees or in respect 

of any class of income. Sub-section (3A) requires 

that the profit and loss account and balancesheet 

should be prepared according to Accounting 

Standards. Sub-section (3C) defines “Accounting 

Standards”. A combined effect of these provisions 

of the Act and the Companies Act, 1956 is that 

the assessees, which are companies showing 

income under the head “Business or profession”, 

have to follow the Accounting Standards 

prescribed. The Government of India has notified 

Accounting Standards in exercise of its powers 

under section 145(2) of the Act. (RE: CIT v. 

Dinesh Kumar Goel [2011] 197 Taxman 375 (Delhi)). 

The Accounting Standards are intended to be 

in conformity with the law, but if conflict 

arises due to subsequent amendment, in law, 

then the provision of law will prevail. But if 

there is no conflict, AS is to be followed and 

applied for recognizing revenue and liabilities. 

Prior to issue of Accounting Standards by ICAI 

guidance notes on accounting of leases were 

issued for the first time in 1988 which were 

revised in 1995. About the importance of guidance 

notes issued by the ICAI, Hon'ble Delhi High 

Court in CIT v. Virtual Soft Systems Ltd. [2012] 

205 Taxman 257/18 taxmann.com 119 observed 

that “the guidance notes reflect the best practices 

adopted by accountants the world over” and 

further, that “as long as there was a disclosure 

of the change in the accounting policy in the 

accounts which had a backing of a professional 

body such as ICAI, it could not be discarded 

by the A.O.” 

In this context, it would be appropriate to 

refer to para 11 of “Guidance Notes on 

Accounting for Leases as revised in 1995”. It 

says in respect of lessors as follows: 

“It is appropriate that against the lease 

rental, a matching lease annual charge is 

made to the profit and loss account. This 

annual lease charge should represent 

recovery of the net investment/fair value 

of the leased asset over the lease term. 

The said charge should be calculated by 

deducting the finance income for the period 

(as per para 12 below) from the lease 

rental for that period. This annual lease 

charge would comprise: (i) minimum 

statutory depreciation, (e.g., as per the 

Companies Act, 1956) and (ii) lease 

equalization charge, where the annual lease 

charge is more than the minimum statutory 

depreciation. However, where annual lease 

charge is less than minimum statutory 

depreciation, a lease equalization credit 

would arise. In this regard the following 

accounting entries/disclosures should be 

made:— 

(a) A separate Lease Equalization Account 

should be opened with a corresponding 

debit or credit to Lease 

Adjustment Account, as the case may 

be. 

(b) Lease Equalization Account should 

be transferred every year to the Profit 

and Loss Account and disclosed separately 

as a deduction from/addition 

to gross value of lease rentals shown 

under the head “Gross Income”. 

(c) Statutory depreciation should be 

shown separately in the profit and 

loss account. Accumulated statutory 

depreciation should be deducted from 

the original cost of the leased asset 

in the balance sheet of the lessor to 

arrive at the net book value. 

(d) Balance standing in Lease Adjustment 

Account should be adjusted in 

the net book value of the leased assets. 

The amount of adjustment in respect 

of each class of fixed assets may be 

shown either in the main balance 

sheet or in the Fixed Assets Schedule 

as a separate column in the section 

related to leased assets. 


679


680 

(e) The aggregate amount included under 

Lease Adjustment Account on account 

of lease equalization credits should 

be disclosed separately. 

The method of income measurement 

suggested in this paragraph, is in 

consonance with the inherent nature of 

a finance lease.” 

Thus, the “guidance notes” effective till AS 19 

was issued, made it obligatory on the part of 

the companies to debit to the lease rentals, 

annual lease charge comprising of minimum 

statutory depreciation and lease equalization 

charge, where the annual lease charge is more 

than the minimum statutory depreciation. 

On 1-4-2001 Accounting Standard AS 19 about 

accounting of leases was for the first time 

published by the ICAI and was made effective 

in respect of leases commencing on or after 

that date. AS 19 provides accounting of “Leases”, 

appropriate accounting policies and disclosure 

in relation to finance leases and operating leases. 

Para 26 thereof provides that lessor should 

recognize asset given under finance lease in 

its balance sheet as receivable at an amount 

equal to the net investment in the lease. As 

per para 27 thereof the lease payment receivable 

is treated by the lessor as repayment of principal, 

i.e., net investment in the lease and finance 

income to reimburse and reward the lessor for 

its investment and services. As per para 28 

finance income is recognized on the basis of 

a constant periodic rate of return on the net 

investment of the lessor outstanding in respect 

of the lease. 

Hon'ble High Court noticed that there is no 

conflict between AS 19 and any provision of 

the IT Act. Further, the Government has not 

notified any Accounting Standards in respect 

of lease, even though it has notified other 

Accounting Standards as required under section 

145(2). Therefore, the Hon'ble High Court in 

the impugned judgment took the view that 

recognition of revenue out of lease rentals will 

be governed by AS 19 by apportionment of 


lease rentals into capital recovery and finance 

charges. There is a rationale in such an 

apportionment. Depreciation claimed according 

to the IT Act or according to the Companies 

Act may not always be equal to actual reduction 

in value of the asset with passage of time and 

due to wear and tear. The market value (residuary 

value) of the leased asset at the end of the 

lease period may not be equal to the written 

down value (WDV). The difference between 

the residuary value (Say RV) of the leased 

asset and its written down value is adjusted 

yearly by an amount called the “lease equalization 

charges”. It can be positive, meaning thereby 

that RV is more than WDV. It will result into 

a profit chargeable to tax. From the same logic 

if RV is less than the WDV, then the lease 

equalization charge will be negative and will 

be a charge on the profit. Thus, “lease 

equalization charges” are yearly adjustment 

entries to act as supplement to, or recovery 

from, statutory depreciation claimed and debited 

to P/L account and signify full recovery of 

value of asset reduced during the lease period. 

This can be claimed in the profit and loss 

account. 

The concept of apportionment of receipt into 

capital and revenue can also be understood 

from EMIs received by a finance company on 

grant of a housing loan or a car loan. EMIs 

consist of return of principal and interest and 

entire loan along with interest is paid back at 

the end of the term of the loan. What is taxed 

in the hands of the lender is not the entire EMI 

received by the lender but only the interest 

part of it. The other part is the recovery of 

capital advanced as a loan. 

Theoretically the concept of real income is 

applicable when there is technical or legal 

right to receive an income but really no income 

is received due to factors beyond the control 

of the assessee. In State Bank of Travancore v. 

CIT [1986] 24 Taxman 337 (SC) question of 

interest on sticky loans accrued to the assessee 

was involved: In Godhra Electricity Co. Ltd. v. 

CIT [1997] 91 Taxman 351 (SC) issue regarding

enhanced rates shown as receipts in accounts 

but not realised due to litigation and subsequent 

takeover of undertaking by Government was 

involved: In CIT v. Bokaro Steel Ltd. [1999] 102 

Taxman 94 (SC) entry was initially made as 

interest but was reversed the very next year 

because original agreement ceased to be operative 

ab initio. In FGP Ltd. v. CIT [2009] 177 Taxman 

147 (Bom.) amount was due to the assessee in 

terms of royalty agreement but dispute arose 

between the parties and arbitration proceedings 

were initiated. It was held that no real income 

accrued to the assessee. In the present case, 

the amount referable to capital recovery was 

not of the character of the income but a capital 

receipt. For real income theory, the disputed 

amount must carry the character of income. 

The concept of real income had been enlarged 

in the present case by the Hon'ble High Court 

so as to include therein all those amounts 

whose character as capital receipt was also in 

dispute. Since lease rentals initially carry 

character of income and a portion thereof is 

characterized as capital recovery by Accounting 

Standards and Guidance Notes relating to finance 

lease, it has been considered proper by the 

Hon'ble Court to distinguish and separate it 

by applying real income theory and, therefore, 

to hold that this part of lease rentals is not 

real income and, hence, not chargeable to tax. 

CONCLUSION 

Wherever the Central Government has notified 

Accounting Standards, they would be followed 

by any class of assessees or in respect of any 

class of income; the correctness of completeness 

of the accounts of the assessee would be examined 

by the A.O. as to whether such notified 

Accounting Standards are followed by the 

assessee or not? Wherever and in respect of 

any class of income or in respect of any other 

assessees the Central Government has not notified 

such Accounting Standards, then Accounting 

Standards issued by the ICAI will have to be 

followed in respect of such class of income or 

by such class of assessees which are covered 

by such Accounting Standards issued by the 

ICAI and not covered by notified Accounting 

Standards. 

Accordingly, wherever the assessee follows 

the Accounting Standards relating to finance 

lease issued by the ICAI, and no defect is 

found by the A.O. in the correctness or 

completeness of the account, his books of account 

cannot be rejected and profit and loss as 

determined on the basis of such Accounting 

Standards will have to be accepted as per subsection 

(1) of section 145. 

• DT - Sec. 4 - EC - Prakash Leasing Ltd. v. Dy. CIT [2012] 23 taxmann.com 3 (Kar.). 

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••• 

681

682 

DECISION 

Validity of availing twin benefits of sections 

54F and 54EC in respect of sale of one 

long-term capital asset 

An analysis of Asstt. CIT v. Deepak S. Bheda [2012] 23 

taxmann.com 159 (Mum. - Trib.) 

The appellate Tribunal in Asstt. CIT v. Deepak 

S. Bheda [2012] 23 taxmann.com 159 (Mum.) 

has held that on transfer of a long-term capital 

asset (not being a residential building) the 

assessee can avail of twin benefits of tax 

exemptions, viz., under section 54F for the 

investment in a residential house and by making 

deposit in the bonds specified under section 

54EC. It held that there is no embargo, in law, 

to restrict the benefit of exemption, limiting 

it to any one particular section. Another passing 

reference made in this decision by the Tribunal 

related to specification of its jurisdiction by 

stating that it could not enhance the income 

than what was assessed originally by the 

Assessing Officer. 

COMMENTS 

CA V.K. SUBRAMANI 

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The assessee in this case sold his ancestral 

property for ` 340 lakhs. The entire amount 

was taken as long-term capital gain, since the 

cost of acquisition of the ancestral property 

was taken as ‘nil’. The assessee reinvested 


` 260 lakhs for purchase of a residential house 

property and deposited ` 50 lakhs in capital 

gain bonds of the Rural Electrification 

Corporation Ltd. The assessee claimed the benefit 

of exemption under sections 54F and 54EC 

which the Assessing Officer rejected. In the 

assessment the exemption was granted only 

under section 54F and the benefit of section 

54EC was denied in toto. 

Even in respect of the benefit under section 

54F, the Assessing Officer held that the assessee 

had acquired four flats out of which only one 

flat was eligible for the exemption. The 

Commissioner (Appeals) held that section 54EC 

provides for tax exemption even when part of 

the capital gain is invested in specified longterm 

asset, i.e., notified bonds. With regard to 

exemption under section 54F, he allowed the 

exemption as claimed by the assessee, since 

the flats were contiguous to one another and 

operated as a single dwelling house. 

The Tribunal held that where more than one 

dwelling units are acquired, which are adjacent 

to one another and are converted into one 

house for the purpose of residence by having

a common passage, common kitchen, etc., it 

would be a case of reinvestment in one residential 

house and, hence, eligible for exemption for 

all the flats. Accordingly, it upheld the claim 

of the assessee and allowed exemption under 

section 54F and held that the benefit of section 

54EC is no way limited by the Statute and, 

hence, was also allowable to the assessee. 

In ITO v. Ms. Sushila M. Jhaveri [2007] 107 ITD 

327 (Mum.) (SB) the Tribunal held that if the 

assessee has acquired more than one residential 

house, the benefit of exemption under section 

54 or section 54F is limited to one residential 

house only. Where the residential units are 

independently located the benefit of exemption 

cannot be extended to all the residential units 

and would be limited to one residential unit 

at the choice of the assessee. 

CONCLUSION 

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The Tribunal was emphatic to hold that the 

benefit of exemption or denial of the same 

must be in accordance with what is mandated 

in law. When section 54EC mandates deposit 

of long-term capital gain either in whole or 

in part, the benefit has to be conferred in the 

absence of any other condition limiting or 

restricting the same. 

The plea of the Revenue, that the entire benefit 

of section 54F was to be denied, was something 

more than what the Assessing Officer had 

resorted to in the assessment. The Tribunal 

opined that it could not enhance the assessment 

than what was made by the Assessing Officer. 

Readers may note that this power of enhancing 

the income more than what is originally assessed, 

however, is vested in the CIT(Appeals). 

The above said analogy of availing twin benefits 

by combination of investments falling under 

different legal provisions could be thought of 

by combining section 54 with section 54EC 

also when a residential house is transferred 

and yet another residential house is acquired 

or constructed along with deposit in capital 

gains bonds. Transfer of depreciable assets 

held for more than 36 months with block ceasing 

to exist and reinvestment in a residential house 

covered by section 54F along with bonds specified 

in section 54EC, could also be contemplated. 

• DT - Secs. 54EC, 54F-EC - Asstt. CIT v. Deepak S. Bheda [2012] 23 taxmann.com 159 (Mum. - Trib.). 


••• 

683

LANDMARK RULINGS 

684 

LANDMARK RULINGS 

An Overview of Latest Judgments on 


Scot-free passage for closed PE, 

unabsorbed losses can be set-off against 

profits of rekindled PE - Singapore Tribunal 

In AYN Corporation v. Comptroller of Income 

Tax [2012] 23 taxmann.com 223 (ITBR - 

Singapore), the appellant, a Japanese company, 

was carrying on its business in Singapore through 

a branch. Due to losses, the appellant closed 

its branch and informed Registrar of Companies 

at Singapore. Later on, it opened a new branch 

and claimed set-off of unabsorbed losses of 

closed branch against profits of new branch. 

The Comptroller objected to the same on the 

ground that with closure of the branch, the 

right to tax the income of branch in Singapore 

also ceased and, therefore, losses of closed 

branch can’t be set-off against profits of new 

branch. Comptroller also contended that branch 

was a PE of appellant and it should be treated 

as separate entity in view of article 7 of Singapore- 

Japan DTAA. 

The tax review board held in favour of assessee - 

It held as follows: 

(a) Section 368 of the Singapore Companies 

Act allows a foreign company to set-up 

its branch in Singapore to carry on its 

business; 

(b) Therefore, branch is said to be an extension 

of HO and has no separate legal 

entity; 


(c) The PE is a mere fiction necessary for 

purpose of determining profits under article 

7; and 

(d) Article 7 is not concerned with how the 

profits of PE should be dealt with, such 

as allowing losses, etc. 

Therefore, it was held that unabsorbed losses 

of closed branch could be set off against profits 

of new branch. 

ITAT allows ESOP expenses, Ranbaxy’s 

case differentiated on grounds of 

‘expenditure’ and ‘notional loss’ 

In Addl. CIT v. Spray Engineering Devices 

Ltd. [2012] 23 taxmann.com 267 (Chandigarh 

- Trib.), the assessee-company passed a resolution 

to issue equity shares free of cost to its employees 

as Sweat equity. Shares were to be issued with 

lock in period of five years; however, no allotment 

of such shares was done till the end of relevant 

year. The fair value of the shares was debited 

to employee benefits (P & L account) with 

corresponding credit to shares outstanding 

account which was reflected in the balance 

sheet. AO denied the allowance for same 

contending that it was just a contingent liability. 

The Tribunal held in favour of assessee - The 

Tribunal held that fair value of sweat equity 

issued free of cost by special resolution was 

allowed to be deducted under section 37(1). 

}

The Tribunal concluded the decision on the 

following grounds: 

(a) Admittedly, no allotment was done, but 

still, the assessee had specified the number 

of shares to be allotted; 

(b) Pending the allotment, because few formalities 

were to be completed, didn’t merit 

the disallowance of said expenditure as 

contingent liability; 

(c) Merely because there was a lock-in-period 

of five years under which if any 

employee left before the expiry of five 

years, the shares so allotted to him would 

vest with the assessee company, didn’t 

make the liability as contingent; and 

(d) The case of Ranbaxy Laboratories Ltd. v. 

ACIT [2010] 39 SOT 17 (Delhi) is to be 

differed as in that case the issue was 

allowance of notional value of shares which 

is at variance with the facts of this case. 

Therefore, the claim of assessee stood allowed. 

ESOP expenses to be allowed if recognised 

in compliance of SEBI norms 

In CIT v. PVP Ventures Ltd. [2012] 23 

taxmann.com 286 (Madras), assessee had debited 

a sum of ` 66.82 lakhs in respect of Employees 

Staff Option Plan. The shares were allotted by 

the assessee in compliance of SEBI regulations, 

which mandate that the difference between 

the market prices of shares and the price at 

which the option is exercised by the employees 

is to be debited to the Profit and Loss Account 

as expenditure. During assessment proceedings, 

AO allowed the ESOP expenses. However, during 

proceeding under section 263, CIT disallowed 

the same on the ground that the accounting 

treatment prescribed by SEBI, nowhere suggests 

that it was revenue expenditure, to be debited 

to the profit and loss account, as it was only 

a notional and contingent expenditure. 

On appeal, the Tribunal held that it was not 

a case of contingent liability. The expenditure 

} 

in this behalf was an ascertained liability, thus 

the expenditure incurred being on lines of the 

SEBI guidelines, was correctly claimed by the 

assessee. 

The High Court held in favour of assessee - 

It was held that the Tribunal was right in 

holding that expenditure in this behalf was an 

ascertained liability. Therefore, the High Court 

upheld the order of Tribunal and allowed 

deduction in respect of difference between market 

prices of shares and the price at which the 

option was exercised. 

Belated return can’t nix section 54F 

exemption if investment is made within 

specified time limit 

In R.K.P. Elayarajan v. Dy. CIT [2012] 23 

taxmann.com 206 (Chennai - Trib.), the assessee 

derived long-term capital gains on sale of shares. 

It filed its return of income on 9-1-2009 claiming 

deduction under section 54F in respect of 

acquisition of a residential flat. AO denied the 

deduction under section 54F on the ground 

that due date for filing of return of income 

in case of assessee was 31-7-2008 and the sale 

deed for transfer of residential property was 

executed on 19-9-2008, which was after the 

due date for filing of return. On appeal, CIT(A) 

allowed the deduction in respect of amount 

paid at the time of entering into agreement 

‘which was before the due date of filing of 

return’ and upheld the disallowance for balance 

amount. 

The Tribunal held in favour of assessee - It 

was held that deduction under section 54F 

should be allowed to assessee on following 

grounds: 

(a) Amount was utilized by assessee for 

purchase of new residential flat before 

date of filing of return; 

(b) Merely because investment is made after 

due date of filing of return as specified 

under section 139(1), section 54F exemption 

cannot be denied; and 


} 

685


(c) Further, return is filed within due date 

as specified under section 139(4). 

686 

If loss not claimed in original return, it 

can’t be claimed through revised return 

either 

In Karnataka Forest Development Corp. Ltd. 

v. CIT [2012] 23 taxmann.com 314 (Bang. - 

Trib.), the assessee filed its return of income 

declaring certain income. Thereafter, a revised 

return was filed under section 139(5) declaring 

losses. During the assessment proceedings, the 

AO observed that the revised return filed by 

the assessee under section 139(5) was not valid. 

He, accordingly, computed the taxable income 

of the assessee. Assessee filed an appeal before 

the CIT(A) challenging the non-consideration 

of the revised return. The CIT(A) held that the 

revised return was return which should have 

been filed within the time specified under 

section 139(3) and, therefore, the loss return 

filed beyond the time-limit prescribed under 

section 139(3) was null and void. 

The Tribunal held in favour of revenue - It was 

held that from a literal reading of section 

139(3), it is seen that where any person claims 

a loss for any previous year and also claims 

that the loss or any part thereof should be 

carried forward, then the return has to be 

furnished within the time allowed under subsection 

(1) of section 139. In the instant case, 

the original return filed by the assessee was 

under section 139(1), but there was no claim 

of loss or loss to be carried forward. Therefore, 

it cannot be treated as a return under section 

139(3). Having filed the original return of income 

under section 139(1), the assessee cannot later 

on file the revised return of income claiming 

the loss on the ground that it was discovered 

subsequently as the losses for previous years 

must be available with assessee at the time of 

filing of return under section 139(1). Therefore, 

the argument of CIT(A) that when the assessee 


} 

was claiming the loss for the relevant assessment 

year and preceeding years relevant to AY, 

then the assessee was required to file the return 

under section 139(3), was to be accepted. 

Therefore, the revised return filed under section 

139(5) could not be accepted and had to be 

treated as null and void. 

No HRA exemption to employee on ‘rent 

reimbursed’ to employer for rent-free 

accommodation 

In Dy. CIT v. Kuldeep D. Kaura [2012] 23 

taxmann.com 225 (Ahmedabad - Trib.), assesseeemployee 

was living in a house provided as 

rent free accommodation by his employer. This 

house was taken on lease by his employer. 

Subsequently, employee reimbursed the rent 

of accommodation to the employer and he 

also received HRA for such reimbursement. 

Accordingly, the value of rent free 

accommodation came out to be ‘nil’ under 

section 17(2) as assessee was reimbursing full 

amount of rent to the employer. However, 

simultaneously, the assessee also claimed 

exemption under section 10(13A) for house 

rent allowance received in respect of rent 

reimbursed to employer. AO opined that 

exemption for HRA would amount to double 

benefit since assessee had claimed ‘nil’ value 

of rent free accommodation. CIT(A) allowed 

assessee’s appeal. 


held that assessee was getting double benefits, 

i.e., free use of accommodation provided by 

the employer which was taken by the employer 

on lease and in addition to this the assessee 

was also getting HRA. However, against these 

two benefits, assessee was making payment of 

rent in respect of one property. Hence, as 

assessee was getting double benefit, one had 

to be taxed in any case because only one payment 

was being made by the assessee on account 

of rent. Therefore, as the perquisite value of 

}

ent free accommodation was not being added 

in the income of the assessee due to 

reimbursement of rent to employer, the same 

reimbursement could not be treated as payment 

of rent to the employer for the purpose of 

working out exemption for HRA under section 

10(13A) of the Income-tax Act, 1961. 

Capital gains from sale of ‘multiple houses’ 

can be invested in new house for section 

54 deduction 

In Dy. CIT v. Ranjit Vithaldas [2012] 23 

taxmann.com 226 (Mumbai - Trib.), the Tribunal 

took up the issue as to whether capital gain 

from sale of ‘multiple houses’ can be invested 

in new house to claim section 54 deduction. 

In this regard, the Tribunal held as follows: 

(a) There is an inbuilt restriction that capital 

gains exemption under section 54 is available 

only in respect of investment in one 

house; 

(b) However, this provision does not restrict 

the exemption if capital gain arising from 

sale of more than one house property is 

invested to purchase or to construct a 

new house; 

(c) Therefore, even if assessee sells more than 

one house in a year and capital gains 

arising on sale of multiple houses are reinvested 

in a new residential house; the 

exemption under section 54 cannot be 

denied, subject to fulfilment of other 

conditions; and 

Further, even if two flats are sold in different 

years and capital gains from both flats are 

invested in one residential house, exemption 

under section 54 will be available in respect 

of capital gain accrued from sale of each flat 

provided the time-limit for construction or 

purchase of new house is satisfied in case of 

each flat sold. 

} 

} 

Section 54F exemption to be denied 

only if multiple houses are under ‘exclusive 

ownership’ of assessee 

In Dr. (Smt.) P. K. Vasanthi Rangarajan v. 

CIT [2012] 23 taxmann.com 299 (Madras), the 

assessee, owned a property along with her 

husband which is used as a clinic at the ground 

floor and for the purpose of residence at the 

first floor. The assessee entered into a 

development agreement for the joint development 

of 8 apartments in another property owned by 

the assessee. The development agreement 

provided for retaining undivided share of 50% 

by the assessee and the remaining in favour 

of the developer. In addition, the developer 

had to construct on the land entrusted to them, 

a new building consisting residential apartments 

and give the assessee 4 residential apartments 

and ` 10 lakhs in exchange for the undivided 

share of land in favour of developer. The 

undivided share was sold by assessee. The AO 

rejected the claim of the assessee with regard 

to exemption under section 54F on the ground 

that if more than one residential house was 

owned by the assessee on the date of transfer, 

exemption under section 54F was not allowable. 

On appeal, CIT(A) upheld the order of AO. 

On further appeal, the Tribunal also rejected 

the claim of the assessee under section 54F 

stating that although the assessee was the owner 

of 50% and not 100% of the property, the 

conditions of section 54F were not fully satisfied. 


It was held that second proviso disentitled the 

exemption contained in the parent provision 

only when the assessee had the exclusive 

ownership of a residential house as on the date 

of transfer of the asset which was not there in 

the case of assessee as she owned only 50% 

share in the property. Therefore, on an analysis 

of section 54F and its proviso it can be concluded 

that exemption can be denied where the assessee 

owns a residential house as an exclusive owner 

and not in the case of a joint ownership. Therefore, 

deduction was allowed to the assessee. 


} 

687


688 

‘Share issue expenses’ though not 

deductible from business income, yet 

can be claimed from ‘capital gains’ 

In Usharani Raghunathan v. CIT [2012] 23 

taxmann.com 123 (Chennai - Trib.), the assessee 

was a director-shareholder in a company. During 

the relevant previous year, the company brought 

IPO including shares held by the assessee. The 

IPO expenses, as incurred in the course of 

IPO, were apportioned by the company to the 

assessee on pro rata basis. The assessee claimed 

such expenses as deduction under section 48(1) 

while computing capital gains from sale of his 

shares. The AO disallowed deduction on the 

ground that entire IPO expenses were liable 

to be borne by the company only. 

The Tribunal held in favour of assessee - The 

Tribunal thoroughly analyzed the provisions 

of section 53 of Transfer of Property Act, 1882 

and held in favour of revenue. The relevant 

extracts of the judgment are as follows: 

(a) There is no dispute that the expenditure 

claimed by the assessee was for effecting 

the sale of his shares; 

(b) Assessees had an opportunity to sell his 

holdings in one block through the IPO, 

therefore, the extra expenditure incurred 

by assessee was sustainable; 

(c) This convenience received by the assessees 

if weighed against the extra expenditure 

incurred for IPO, it would get more or 

less balanced; and 

(d) Assessee also produced prospectus of IPO 

which clearly showed that assessee was 

obliged to meet pro-rated share of IPO 

expenses. 

Therefore, in view of the above facts, the expense 

shared by assessee should be allowed to be 

deducted while computing capital gains on 

sale of shares. 


} 

Charitable objects and application of 

income, both should be in India for 

section 11 exemption 

In India Brand Equity Foundation v. Asstt. 

CIT [2012] 23 taxmann.com 323 (Delhi - Trib.), 

the assessee-trust was formed to promote Indian 

brand overseas. During the year, the assessee 

received a sum of ` 3 crores for participation 

in Hannover Fair in Germany, which was 

partially incurred. AO disallowed the amount 

spent by invoking the provisions of section 11. 

On appeal, the assessee contended that the 

grant was received for specific purpose and 

hence, it should not be taxed by treating it as 

application outside India. Further, it was 

submitted that section 11 only requires that 

the charitable purposes should be confined to 

India, however, the application of income and 

the execution of such purposes can be outside 

India. 


held that the charitable purpose as well as 

application of income should be confined to 

India only. Therefore, the plea of assessee was 

rejected and order of AO was upheld. 

Virtual ownership vests in lessee in longterm 

lease; lease premium amortization 

not deductible 

In Krishak Bharati Cooperative v. DCIT [2012] 

23 taxmann.com 265 (Delhi), assessee entered 

into an agreement with the lessor to take a 

land on lease for a period of 90 years, in 

consideration of lease premium of ` 2.53 crore. 

The rights of the assessee under lease agreement 

were as under: 

(a) Assessee was entitled to construct a office 

complex on the land; 

(b) Without permission of lessor, assessee can’t 

transfer the land before erection of building; 

}

(c) Lease rental shall be paid at the rate of 

2.5% of the premium, which could be 

enhanced after 12 years of lease. 

In respect of premium paid, the assessee had 

been claiming it as revenue expenditure on 

pro rata basis over the life of lease since last 

15 years. The AO disallowed the same in the 

relevant year contending that the lease had 

enduring benefits over 90 years, thus, it had 

to be treated as capital expenditure. CIT(A) 

and ITAT upheld the order of AO. 

The High Court held in favour of revenue - 

The order of disallowance was upheld on the 

basis of following grounds: 

(a) Lease Premium is not an advance rent 

as held by the Supreme Court in CIT v. 

Madras Auto Service P. Ltd. [1998] 99 Taxman 

575; 

(b) Lease premium was paid by lessee to 

secure possession of the land, which was 

the pre-condition as well as the one-time 

consideration; 

(c) The lease was for 90 years which substantially 

and virtually created ownership right 

in favour of lessee; 

(d) The restrictions were consistent with the 

nature of asset created, i.e., leasehold right. 

Hence, amortization of lease premium could 

not be allowed. Further, the High Court held 

that blind adherence to the rule of consistency 

would lead to anomalous results. Also there 

can’t be wide application of the rule of consistency 

as the HC in its earlier ruling in a different 

case has held that the rule of consistency can’t 

be of inflexible application. 

Authorities can’t re-examine objects of 

a trust with a view to cancel its registration 

In Bombay Presidency Golf Club Ltd. v. DIT 

[2012] 23 taxmann.com 319 (Mum. - Trib.), 

assessee was a club and all activities of assessee 

were towards promotion of game of golf and 

} 

other ancillary activities carried were only 

incidental to said game only. The AO sent a 

proposal to the DIT(E) for cancellation of 

registration of assessee on the ground that the 

assessee had been carrying on activities in the 

nature of trade, commerce, business, etc. 

Therefore, it was hit by the first proviso to 

section 2(15) as amended by the Finance Act, 

2008, with effect from 1-4-2009. He, therefore, 

cancelled the registration of the assessee under 

section 12AA(3). It held that the assessee could 

not be held to be carrying out activities of 

charitable purposes and the assessee was directly 

hit by the first proviso to section 2(15), where 

there is a deeming provision that such an 

activity is not for charitable purposes. 


held that registration of assessee couldn’t be 

cancelled due to the following facts: 

(a) The activities of club were restricted amongst 

its members and all the activities were 

towards its objects and other ancillary 

activities were only incidental to said game 

only; 

(b) There was no evidence and material on 

record to show that activities of assessee 

were done on any business principle or 

assessee had been pursuing its business 

activities with reasonable continuity; 

(c) Expenditure of assessee was far more than 

receipts; and 

(d) Further be more, nowhere it had been 

brought on record that activities of assessee 

were not governed by principle of 

mutuality or it had been dealing with 

non-members. 

Amount received by trustee-cumbeneficiary 

on dissolution of trust is not 

‘gift’ to be taxed under section 56 

In Ashok C. Pratap v. Addl. CIT [2012] 23 

taxmann.com 347 (Mum. - Trib.), the trustees 

were the parents and the beneficiaries were 


} 

689


their two daughters. Subsequently, the parents 

were added as additional beneficiaries, when 

the original beneficiaries relinquished their rights. 

The said trust was dissolved and the assets 

were equally distributed among the parents. 

The AO made addition of amount received by 

parents to their total income. On appeal, CIT(A) 

held that the amount received by parents would 

be taxable as gift under section 56(2)(v), on 

following grounds: 

(a) Neither there was specific transfer nor 

gift by both the daughters to their parents; 

(b) As the sum was received without consideration 

and the said trust did not fall 

within the ambit of the word “Relative”. 


was held that undisputedly, the assessee had 

received the amount on dissolution of trust in 

the capacity of beneficiaries. Therefore, the 

amount received by the parents could not be 

termed as amount received by the beneficiaries 

“without consideration”. Therefore, addition 

made by AO was deleted and assessee’s claim 

had been allowed. 

690 

Statement by Tribunal in open Court 

doesn’t constitute an order, not rectifiable 

under section 254 

In Hari Om Soni v. ITO [2012] 23 taxmann.com 

349 (Agra - Trib.), the assessee filed miscellaneous 

application seeking rectification of the order 

passed by the Tribunal. Assessee contended 

that there was a mistake in the order of Tribunal 

as the Tribunal announced in the open Court 

that the issue stood settled in favour of the 

assessee. 


held that raising and discussing queries during 

course of hearing for exploration of correct 

facts of case does not constitute an order under 

section 254(1). The order of Tribunal is said 

to be in accordance with section 254(1) only 

when order bears signature of both Members 


} 

and is communicated to parties. Therefore, 

mere pronouncement during course of hearing 

in open Court does not amount to order under 

section 254(1) and same is not rectifiable under 


Service provided for support to 

representative office in India, not exempted 

under India-Poland DTAA 

In Dy. CIT v. Mohan Balakrishnan 

Pookulanagara [2012] 21 taxmann.com 115 

(Ahmedabad - Trib.), the assessee was employed 

by a Polish company. As per terms of 

employment, assessee was a ‘service provider’ 

and he was to support establishment of 

company’s representative office at Bangalore. 

The assessee claimed that salary received from 

non-resident company in Poland was exempt 

from tax on the basis of Indo-Poland DTAA. 

The AO opined that the certificate issued by 

the Polish company referred the assessee as 

a ‘service provider’, which showed that assessee 

was not a part of top level management and, 

therefore, the conditions specified in Article 

17(2) of the Indo-Poland DTAA were not fulfilled. 

Accordingly, the AO rejected the assessee’s 

claim. On appeal, the CIT(A) allowed the 

assessee’s claim. 


held that the function to support an establishment 

and preparing organization can at best be termed 

as a management function but cannot be equated 

with ‘Top Level Managerial Position’. Business 

dictionary defines top management as ‘The 

highest ranking executives (with titles such as 

Chairman/Chairperson, CEO, Managing Director, 

President, Executive Directors, Executive vice- 

Presidents, etc.) responsible for entire enterprise. 

Top management translates the policy 

(formulated by the Board of Directors) into 

goals, objectives and strategies and ‘projects 

a shared vision of future’. It makes decisions 

that affect everyone in the organization and 

is held entirely responsible for the successes 

and failures of the enterprise. Viewed in light 

}

of the above definition, the assessee could not 

be considered to be in top level managerial 

position. The assessee had been functioning 

from India and, therefore, the income was 

deemed to accrue and arise in India. In view 

of the aforesaid facts, the order of the CIT(A) 

was set aside and that of the AO was upheld. 

Therefore, the salary received from non-resident 

company in Poland was taxed. 

Consultancy service isn’t supply of 

‘technical or commercial knowledge’; can’t 

be termed as ‘royalty’ 

In KPMG India (P.) Ltd. v. Dy. CIT [2012] 

23 taxmann.com 224 (Mumbai - Trib.), the 

assessee engaged KPMG Dallas and KPMG 

Canada for rendering some consultancy service 

and made payment towards professional fees 

and reimbursement of expenses. The AO was 

of the opinion that these payments were in the 

nature of royalties under section 9(1)(vi) and 

the relevant article dealing with royalties under 

the respective ‘DTAAs’. AO disallowed the 

same under section 40(a)(i) for non-deduction 

of tax at source under section 195. 


was held that where payments to non-residents 

were purely for professional services or 

consultancy services, they could not be categorized 

as royalties under article 12. Therefore, no liability 

to deduct tax at source arose and, consequently, 

section 40(a)(i) was not applicable. 

Brought forward business loss to be 

set-off with a commercial profit, even if 

it is taxable under any other head 

In Lavish Apartment (P.) Ltd. v. Asstt. CIT 

[2012] 23 taxmann.com 414 (Delhi), the assesseecompany 

was carrying on the business of sale 

and purchase of properties and also earning 

rental and other income. During the year, the 

assessee set off the brought forward business 

loss against income earned from letting out of 

} 

} 

property, car and computer hire charges and 

commission income. The AO contended that 

section 72(1) permitted adjustment of brought 

forward business loss only against profits 

assessed under the head “business”. Hence, 

he disallowed the set off, as the rental income 

and hire charges/commission were chargeable 

to tax under head “income from house property” 

and “income from other sources” respectively. 

The CIT(A) allowed assessee’s appeal. The ITAT 

held in favour of revenue. 


It held that assessee was entitled to set off the 

brought forward business loss from the business 

profits taxable under any head of Income. The 

High Court gave the following findings: 

(a) Section 72(1) merely makes reference to 

“the profits and gains of any business or 

profession carried on by him” for the 

purpose of set off; 

(b) The condition that the computation of the 

business income should be under the head 

“profits and gains of business or profession” 

is conspicuously absent; 

(c) The income against which the loss is claimed 

to be set-off should represent business income 

judged by the application of commercial 

principles, and not on an application of 

the provisions of the Act; and 

(d) The rental income, hire charges from car 

and computer and the commission income 

all represent the profits and gains of business 

carried on by the assessee. 

Therefore, the brought forward business loss 

can be set off against these items of income. 

In absence of relevant notification, land 

within 8 kms. of municipal limits deemed 

to be an ‘agricultural land’ 

In CIT v. Madhukumar N. (HUF) [2012] 23 

taxmann.com 341 (Karnataka), the assessee 

sold a piece of agricultural land for certain 

consideration. AO held that said land was 


} 

691


capital asset and consideration from such land 

had to assessed as capital gain. The assessee 

contended that the sum did not amount to 

capital gain as sale was attributable to agriculture 

land, and such land was not coming either 

within the limits of any municipality or within 

the distance of 8 kms. from any notified 

municipality or urban area. The revenue took 

a stand that the subject land was located within 

8 kms. of city’s Municipal Council. 


It held that an agricultural land is not a capital 

asset; it becomes a capital asset when the subject 

agricultural land is located within the limits 

of municipal corporation, notified area committee, 

town area committee, town committee of 

cantonment which has a population of not less 

than 10,000. Definition of capital asset given 

under section 2(14) of the IT Act, 1961, covers 

the situation where the land is not only located 

within the distance of 8 kms. from the local 

limits, but also requires the fulfilment of the 

condition that the Central Government has 

issued a notification under this clause for the 

purpose of including the area up to 8 kms. 

from the municipal limits to render the land 

as a ‘Capital Asset’. 

Though it was contended by revenue that it 

was located within 8 kms. within the municipal 

limits of city municipal corporation, in the 

absence of any notification it could not be 

taken to be a capital asset within the meaning 

of section 2(14) and, therefore, the sale of 

agricultural land would not attract capital gains. 

692 

Allowance for additional depreciation 

prerequisites ‘existence of eligible business’ 

on date of purchase of asset 

In Shiva Cargo Movers Ltd. v. Dy. CIT [2012] 

23 taxmann.com 184 (Chennai - Trib.), the 

assessee was engaged in the business of transport 

of spirit & molasses. During the year, assessee 

bought a wind mill. The assessee, in addition 

to the normal depreciation, claimed additional 

depreciation under section 32(1)(iia). AO 


} 

disallowed the additional depreciation, as prior 

to purchase of wind mill assessee was not 

engaged in the business of manufacturing or 

producing any article or thing. On appeal, the 

CIT(A) upheld the order of AO. It held that 

before buying the wind mill, the assessee was 

not engaged in the business of manufacturing 

or producing any article or thing. 

The Tribunal held in favour of revenue - It 

held that there are two separate situations for 

claiming additional depreciation one in which 

the acquisition of plant & machinery results 

in the establishment of a new industrial 

undertaking and the other in which plant & 

machinery is acquired for the purpose of 

enhancing the installed capacity of the existing 

business under section 32(1)(iia) of the IT Act. 

However, in any case the condition of 

engagement of the assessee in the business of 

manufacture or production should be satisfied, 

which was not there in the present case. 

Therefore, additional depreciation was disallowed 

to the assessee. 

First receipt of income is material for 

determining place of accrual; subsequent 

bank transfer is not relevant 

In Dr. Sarmishtha Mukherjee v. ITO [2012] 

22 taxmann.com 24 (Kol. - Trib.), assessee 

sold her residential property in the UK through 

agents. Sale consideration was credited to her 

bank account in the UK. Subsequently, said 

amount was remitted to her in India. The CIT 

initiated revision proceedings under section 

263 on the ground that assessment under section 

143(3) was erroneous and prejudicial to interest 

of revenue, because capital gains on sale of 

a house property in UK by assessee were not 

brought to tax. According to the CIT, since 

sale was completed after the assessee returned 

to India and the sale proceeds of the house 

property were also received by her in India, 

the income was taxable in the hands of the 

assessee in India, even though assessee was, 

admittedly, a ‘resident but not ordinarily 

resident’. The AO was, accordingly, directed 

to bring to tax the capital gains.


It was held that it is place of first receipt of 

income which is material for purposes of 

determining place of accrual under section 

5(1)(i). Therefore, place of receipt of an income 

is place where it is received by assessee in its 

character of income; mere transfer of said amount 

thereafter from one bank account to another 

bank account cannot be considered as receipt 

of income, because one cannot receive income 

from himself. Therefore, income arising to 

assessee from sale of property in the UK could 

not be brought to tax in India. 

No Section 11 exemption if trust invests 

funds to buy shares of founder’s associated 

company 

In ITO v. KAS Foundation [2012] 23 

taxmann.com 292 (Chennai - Trib.), main object 

of assessee-trust was micro-financing of rural 

people. Assessee borrowed ` 20 lakhs on interest 

from a bank and invested same in a private 

company ‘J’. Assessee was paying interest on 

money borrowed but received no benefit from 

company ‘J’. Assessee’s investment in company 

‘J’ was found to be approximately 10 per cent 

of subscribed and paid-up share capital of ‘J’. 

Further, founders of assessee-trust had substantial 

interest in company ‘J’. On noticing it, the AO 

held that assessee had violated provisions of 

sections 13(1)(d)(iii) and 13(2)(h) and, therefore, 

was not eligible for exemption under sections 

11 and 12. 

The Tribunal held in favour of revenue - It 

held that as per the facts of the case assessee 

borrowed money and instead of financing in 

rural areas he invested the same in the company 

‘J,’ where the founders of the assessee-trust 

were having substantial interest, which was 

contrary to the object of which the registration 

was granted to the assessee under section 12AA. 

Apart from the above, the assessee was paying 

interest on money borrowed without receiving 

any benefit from ‘J’. It was evident that contrary 

to its objects assessee invested the borrowed 

} 

funds in private company ‘J,’ where the founders 

had a substantial interest. Therefore, the assessee 

had violated the provisions of section 13(1)(d)(iii). 

The AO was correct in holding that assessee 

was not eligible for exemption under sections 

11 and 12. 

Supply of news by agencies to a newspaper 

co. is ‘professional service’ and invites 

section 194J and not section 194C 

In Asstt. CIT v. Ushodaya Enterprises (P.) 

Ltd. [2012] 23 taxmann.com 258 (Hyderabad 

- Trib.), assessee-company was engaged in 

publishing of newspapers. It made payments 

to various news service agencies and deducted 

TDS under section 194C from said payments. 

During assessment the AO held that those 

payments would fall under section 194J and 

not under section 194C. Consequently, he raised 

demand to extent of difference of tax liable 

to be deducted under section 194J and that 

under section 194C. On appeal, the CIT(A) 

upheld the order passed by the AO. 


held that work carried out by newspaper agents 

required professional qualifications and skills 

and, therefore, TDS had to be deducted from 

aforesaid payments under section 194J and 

not under section 194C. Therefore, payments 

made by newspaper company to news agencies 

were liable for deduction of tax at source under 

section 194J. In the result, the Tribunal upheld 

the demand. 

Income from transfer of shares by a 

promoter along with ‘not to compete’ 

agreement with the transferee is taxable 

as business income 

In Sumeet Taneja v. Addll. CIT [2012] 23 

taxmann.com 403 (Chd. - Trib.), assessee was 

a promoter/MD of a company ‘E’, which carried 

on business of running a call centre. Assessee 

had sold all his shares to another company ‘P’ 


} 

} 

693


under an agreement and agreed not to engage 

in any call centre, BPO and IT-enabled services 

for a period of two years and also agreed not 

to solicit business done by company ‘E’. Company 

‘P’ also acquired certain shares from another 

director to increase its shareholding in company 

‘E’ up to 50%. The assessee showed the gain 

on transaction as capital gain. During assessment 

the AO taxed it as business profits on the ground 

that the shares were not held as capital assets. 


held that the gain from transactions was to be 

taxed as business profits under section 28(va) 

on the following grounds: 

(a) The shares of company ‘E’ were not 

purchased by the assessee as an investor, 

as he was the original founder/promoter 

of the company; 

(b) Investment made by the assessee was in 

the nature of business asset of the assessee; 

and 

(c) The company ‘P’ had purchased 50 per 

cent of the entire equity shares of company 

‘E’. Therefore, the transfer of shares 

by the assessee to company ‘P’ was not 

the transfer of a capital asset within the 

meaning of section 2(14) but was, in fact, 

a transfer/renunciation of control over 

the company ‘E’ in favour of the purchaser 

‘P’. 

Therefore, the gain arising in the said transaction 

could not be taxed as capital gain under section 

45 or under section 50B and had to be assessed 

as business income under section 28(va). 

694 

When matter is remanded, section 220(2) 

interest is to be charged from the date 

of fresh demand notice 

In CIT v. Chika overseas (P) Ltd. [2012] 23 

taxmann.com 315 (Bombay), demand was raised 

against the assessee by an assessment order. 

On appeal filed by assessee, the CIT(A) partially 

allowed the claim of assessee. Subsequently, 

the Tribunal set-aside the order of AO and 


} 

directed the AO to pass a fresh assessment 

order. Fresh assessment order was passed by 

AO and, consequently, fresh demand notice 

was served on the assessee. Assessee paid the 

demand after expiry of thirty days from the 

date of service of demand notice. AO held that 

assessee was liable to pay interest under section 

220 from the date of original demand notice, 

as demand was paid beyond 30 days from the 

date of service of notice. CIT(A) held in favour 

of assessee. The Tribunal also upheld the order 

of CIT(A). 


It held that since demand had finally crystallized 

on fresh assessment order, assessee was not 

liable to pay interest under section 220 for 

period prior thereto. Therefore, assessee was 

liable to pay interest for non-payment of demand 

from the date of fresh assessment order. 

Production of media content software 

on beta-cam tape qualifies for deduction 

under section 10B 

In Asstt. CIT v. Sri Adhikari Brothers Television 

Network Ltd. [2012] 23 taxmann.com 322/137 

ITD 154 (Mum. - Trib.), assessee set-up a new 

unit for production of media content software 

which was exported on beta-cam tape to foreign 

parties. AO denied claim of deduction under 

section 10B on ground that production of a 

media content programme on a beta-cam tape 

could not be equated with an article or thing 

and, therefore, assessee did not satisfy basic 

condition of manufacture and production of 

an article or a thing prescribed in section 10B. 


was held that incorporeal rights contained in 

beta-cam tapes are ‘goods’ or ‘merchandise’. 

As a result, production of media content software 

on beta-cam tape qualifies for deduction under 

section 10B, as it amounts to ‘goods’ or 

‘merchandise’. Therefore, the assessee’s claim 

to allowability of deduction under section 10B 

was upheld. 

} 

}

‘Approach road’ treated as a part of 

factory building for depreciation 

In CIT v. Sunshine Glass Indus (P.) Ltd. 

[2012] 23 taxmann.com 336 (Rajasthan), the 

assessee constructed approach road to factory 

and claimed depreciation thereon. The AO held 

that approach road could not be said to be a 

part of the factory and no depreciation was 

admissible thereon. Assessee contended that 

the road was constructed within factory premises 

and, therefore, it should be treated as a part 

of building for the purpose of depreciation. 

On appeal, CIT(A) held that approach road 

could not be said to be a part of factory owned 

by assessee and no depreciation was admissible 

thereon. On further appeal, the Tribunal allowed 

the claim of assessee and directed that cost of 

construction of roads should be treated as part 

of building for the purpose of depreciation. 


It held that roads constructed inside and within 

boundary wall of premises, be it a building 

or factory, are meant to augment utilization 

thereof. Such roads are eventually intended to 

augment utilization of building/factory by 

providing access thereto. Therefore, as in the 

present case road was constructed within factory 

premises, it had to be treated as a part of 

building. Therefore, the revenue’s appeal was 

dismissed and the order of Tribunal was upheld. 


} 

695

COMPANY LAW 

INTRODUCTION 

696 

Related Party Disclosures 

and legal provisions 

1. In corporate world, the main difficulty is 

separation of real owners and management. 

There is possibility that management by using 

their powers may cheat the investors. So, the 

compliances to various provisions regarding 

related party transactions and disclosing the 

same in financial statements form an integral 

part from view point of an investor. Related 

party relationships are normal features of 

commerce and business houses. Without related 

party disclosures there is general assumption 

that transactions reflected in financial statements 

are consummated on an arm’s length basis 

between independent parties. Thus, a related 

party relationship could have an effect on the 

financial position and operating result of an 

enterprise. 

In India, there is complexity of provisions relating 

to “Related Party Transactions”. Various 

establishments may be complying with the 

same under different Acts simultaneously, like 

the Companies Act, 1956, the SEBI Act and 

their rules and regulations, Accounting Standard 

18 (AS 18), etc. As per different provisions, 

it is responsibility of corporate houses to keep 

the stakeholder’s aware of all major corporate 

developments to help them to take informed 

decisions. 

KIRAN MUKADAM 

CS 

DIFFERENT PROVISIONS OF RELATED 

PARTY DISCLOSURES 

2. Following are the different provisions 

regarding related party disclosures:— 

2.1 Companies Act, 1956 - 


2.1.1 Section 297: Approval of contract by the 

Board of Directors - A Director who is interested, 

whether directly or indirectly in a contract or 

in an arrangement or proposed contract or 

arrangement entered into or to be entered by 

or on behalf of the company, shall disclose the 

nature of his concern or interest at a Board 

meeting. The Central Government’s previous 

approval is required, if the company’s paidup 

capital is more than ` 1 crore. At the same 

time section 297(2) provides certain exemptions 

like transactions based on cash and prevailing 

market price, ordinary business transaction in 

banking and insurance business, Contract value 

less than ` 5000 in case of regular trading of 

goods, materials or services, etc. The company 

shall enter such contracts or arrangements in 

register maintained under section 301 within 

prescribed time-limit. 

2.1.2 Section 295: Loans to Directors - The public 

company cannot extend directly or indirectly 

loan or give any guarantee or provide any 

security in connection with loan to any director

or any form in which such Director or any 

firm in which such director or relative is partner 

or any private company in which such director 

is a member or director or any body corporate 

in which such director holds more than 25% 

voting power without prior approval of the 

Central Government. Special disclosure of 

outstanding amount and maximum amount of 

loan in the financial statement of the company 

are required. The restrictions of section 295 

cover both direct and indirect transactions relating 

to loans. 

2.1.3 Section 299: Disclosure of interest by Director 

- Section 299 imposes a duty on a director to 

disclose his interest in a contract or in an 

arrangement in which he is interested in through 

special notice at the time of entering into contract 

or general notice by the last month of the end 

of the financial year, in Board meeting of the 

company. The general notice is given in 

prescribed Form No. 24AA and its validity is 

one financial year. The company has to enter 

such disclosures in the register maintained 

under section 301. 

2.1.4 Section 300: Position of Interested Director - 

The interested director is prohibited to take 

part in discussion or voting related to any 

contract or an arrangement in which he is 

directly or indirectly interested in. This section 

only applies to a public company. It helps to 

avoid personal gain by interested director and 

promotes impartiality in transactions. 

2.1.5 Section 301: Register of contracts, companies 

and firms in which directors are interested - Section 

301 requires that every company shall keep 

one or more registers in which directors are 

interested in contract or an arrangement under 

sections 297 and 299 of the Companies Act, 

1956. The entries must be made within seven 

days from date of board meeting at which the 

contracts are approved and should be placed 

in the next board meeting of the board and 

should be signed by all the Directors present 

at the meeting. 

2.1.6 Section 314: Directors and their relatives 

not to hold office or place of profit - Section 314 

imposes certain restrictions on the holding of 

office or place of profit in a company by the 

directors and their associates. As per the following 

limits of monthly remuneration, the company 

has to take necessary approvals- 

Limit of Remuneration Approving Authority (u/s 314) 

Remuneration to Directors or their relatives is less Board’s Approval 

than ` 10,000. 

Remuneration to Directors or their relatives is less Approval from members-within 3 months from the 

than ` 20,000, but is more than ` 10,000. date of appointment or in the first general meeting 

after the appointment, whichever is later. 

Remuneration to Directors or their relatives is less Prior approval of members in a general meeting 

than ` 2,50,000, but is more than ` 20,000. 

Remuneration to Directors or their relatives is more Prior approval of members in a general meeting and 

than ` 2,50,000 approval from the Central Government. 

Above stated are the necessary disclosures and 

requirements under the Companies Act, 1956. 

The practicing Company Secretary certifies the 

compliances of the same in his compliance 

certificate issued under section 383A(1) of the 

Companies Act, 1956, if applicable to company. 

The statutory auditor gives the comments on 

above provisions in his statutory audit under 

the Companies (Auditor Report) Order Rule, 

2003 like maintenance of register under section 


697

Company Law 

301 of the Companies Act, 1956, disclosing 

whether the transaction under section 301 is 

based on arm’s length price or not, preferential 

allotment to interested party, etc. 

2.2 Accounting Standard 18 (AS 18) - To make 

an investor aware of the related party 

transactions, the Institute of Chartered 

Accountants (ICAI) has introduced the AS 18 

“Related Party Disclosures”. Every company 

must comply with AS 18 including small and 

medium sized companies as per Accounting 

Standard Rule, 2006. The objective of this 

standard is to establish requirements for 

disclosure of related party relationships and 

transactions between reporting enterprises and 

their related parties. 

As per Accounting Standard (AS 18), “Related 

party” means “Parties are considered to be 

related, if at any time during the reporting 

period one party has the ability to control the 

other party or exercises significant influence 

over the other party in making financial and/ 

or operating decisions”. Further “Related Party 

transaction” means transfer of resources or 

obligations between related parties, regardless 

of whether or not a price is charged. An enterprise 

or an individual is considered to have a 

substantial interest in another enterprise, if 

that enterprise owns, directly or indirectly, 

20% or more interest in the voting power of 

the other enterprise. If there have been 

transactions between related parties, during 

the existence of a related party relationship, 

the reporting enterprise should disclose the 

following:- 

u Name of the transacting related party, 

u relationship and nature of transaction with 

related party, 

u volume of transaction, 

u amounts written off or written back in the 

period in respect of debts due from or to 

related party. 

Scope of AS 18 is wider than the Companies 

Act, 1956. Directors and their relatives, key 

698 

managerial personnel and their relatives who 

control or influence decision making of the 

company, holding companies and their subsidiary 

companies, associates and joint ventures are 

covered under related parties. In the Companies 

Act the approval is required only if the director 

or his relative is involved in transactions. The 

company makes disclosure of related party 

transactions in the given format in financial 

statement of the company. For example, purchase 

or sale of goods and fixed assets, agency 

arrangements, leasing or hire purchase 

arrangements, transfer of Research and 

Development, license agreement, finance 

guarantee, management contracts, rendering 

or receiving of services, etc. Such disclosures 

help in an understanding of the financial 

statement. 

2.3 SEBI - Its rules, regulations - 


2.3.1 Listing Agreement - Listing Agreement is 

an important document which is to be executed 

by the company with the Stock Exchange where 

its shares are proposed to be listed. The company 

must follow and implement the provisions 

relating to related party under Listing Agreement. 

For example, the audit committee of the company 

must review related party transactions in their 

meetings; the company should place periodically 

before the audit committee a statement in a 

summarized form of transactions with related 

parties in the ordinary course of its business 

and the company should make disclosures in 

compliance with the Accounting Standard on 

“Related Party Disclosures” in its Annual Report, 

etc. 

2.3.2 SEBI (Insider Trading) Regulation, 2011 - 

Insider trading means act of subscribing, buying 

and selling or agreeing to subscribe, buy, sell 

or deal in securities by an insider who is 

connected with the company and who is 

reasonably expected to have access to 

unpublished price sensitive information in respect 

of securities or who has received or has access 

to unpublished price sensitive information. The 

purpose of this dealing is to make personal 

profit at the expense of other investor who

invests in a fair manner. Generally, the director, 

key managerial personnel, employees, an officer, 

merchant banker, relatives of above personnel, 

banker of the company are covered under these 

regulations. SEBI prohibits dealing in or 

counselling in securities by the above mentioned 

persons having unpublished price sensitive 

information. An insider must disclose some 

information in the prescribed format like 

acquisition of a share of more than 5%, Disclosure 

of number of shares held and exceeding ` 5 

lakhs or ` 25,000 worth of shares or 1% of the 

total shareholding, whichever is lower. Also, 

the company’s duty is to disclose Model Code 

of Conduct, pre-clearance of certain trade, 

adoption of concepts of “Chinese Wall” and 

“Need to know” in respect of price sensitive 

information. 

2.4 New Companies Bill - The Central 

Government placed New Companies Bill, 2011 

in the winter session of the Parliament and for 

the first time the Government clarified the 

related party term in a detailed manner. Clauses 

184, 185, 188, 189, 192 and 195 deal with the 

transactions in which directors are interested 

in and disclosure according to those clauses. 

3. PROVISIONS OF RELATED PARTY 

TRANSACTIONS 

3.1 New Companies Bill, 2011 - In New 

Companies Bill, 2011, the Central Government 

has defined the terms “Relative”, “Interested 

Director”, and “Related Party” specifically. 

3.2 When is Board’s approval essential? - The 

Board’s approval is essential if the company 

enters into any contract or an arrangement 

with a related party with respect to the 

following:— 

u sale, purchase or supply of any goods or 

materials; 

u selling or otherwise disposing of, or buying, 

property of any kind; 

u leasing of property of any kind; 

u availing or rendering of any services; 

u appointment of any agent for purchase or 

sale of goods, materials, services or property; 

u such related party’s appointment to any 

office or place of profit in the company, 

its subsidiary company or associate company; 

and 

u underwriting the subscription of any securities 

or derivatives thereof, of the 

company. 

3.3 When is special resolution essential? - If 

the company’s paid-up capital is more than 

the prescribed amount, a special resolution in 

the member’s meeting is essential for above 

mentioned contracts. The member, who is covered 

under definition of related party, shall not 

vote on such special resolution or approve any 

contract or an arrangement. Such clause does 

not apply to transactions which are based on 

an arm’s length. 

3.4 Justification for entering into such a contract 

- The duty of Board of Directors is to disclose 

every contract or an arrangement entered into 

under clause 188 which shall be referred to 

in the Board’s report to the shareholders along 

with the justification for entering into such a 

contract or an arrangement. 

3.5 Personnel prohibited from dealings in 

securities - Directors and the key managerial 

personnel of a company are prohibited from 

forward dealings in securities of the company. 


4. A company should consider above mentioned 

provisions at the time of preparation of its 

financial statements. SEBI provisions apply only 

to listed companies. Schedule 1A to Companies 

Act, 1956 has list of 22 persons as relatives, 

as per AS 18, the relatives include spouse, son, 

daughter, mother, brother, father and sister. 

The object of all of these provisions is to disclose 

the transactions and events between the related 


699

Company Law 

parties. The mere existence of the relationship 

may have an affect on operating result and 

financial position of the company which may 

cause loss to the investors who are different 

from management. Therefore, the company must 

disclose the related party relationships and 

700 


their transactions as per applicable provisions 

in a fair manner, so that the investors are 

assured about transactions on arm’s length 

basis. Such assurances shall encourage growth 

of capital in present uncertain corporate sector 

scenario. 

•••

Disclosure of 

Borrowings under 

Revised Schedule VI 

INTRODUCTION 

ACCOUNTS & AUDIT 

CA VINAYAK PAI V 

1. Revised schedule VI is a qualitative improvement in presentation and disclosure 

requirements of financial statements. While India still does not have a mandated 

accounting standard for accounting of financial liabilities, disclosures in the area 

of borrowings have been improved to a great extent under revised Schedule 

VI vis-à-vis its predecessor version. 

This article analyses the key requirements of the revised Schedule VI with respect 

to disclosures of borrowings, relevant guidance provided by the Institute of 

Chartered Accountants of India (ICAI) on revised Schedule VI implementation 

by way of a Guidance Note and an FAQ statement and case studies from 

published financial statements. 

REVISED SCHEDULE VI REQUIREMENTS 

2. Borrowings are required to be presented under three broad categories in the 

balance sheet under revised Schedule VI as follows: 

Non-current liabilities Long-term borrowings 

Current liabilities Short-term borrowings 

Other current liabilities 

The requirements of Schedule VI with respect to disclosure of borrowings is 

discussed hereinbelow. 


701


Long-term borrowings 

(i) Long-term borrowings should be classified 

as follows: 

702 

(a) Bonds and debentures, 

(b) Term loans, 

u From banks 

u From other parties 

(c) Deferred payment liabilities, 

(d) Deposits, 

(e) Loans and advances from related 

parties, 

(f) Long-term maturities of finance lease 

obligations, 

(g) Other loans and advances. 

(ii) Borrowings shall further be sub-classified 

as secured and unsecured. The nature of 

security shall be specified separately in 

each case. 

(iii) Where loans have been guaranteed by 

directors or others, the aggregate amount 

of such loans under each head shall be 

disclosed. 

(iv) Bonds/debentures (along with the rate of 

interest and particulars of redemption or 

conversion, as the case may be) shall be 

stated in descending order of maturity or 

conversion, starting from farthest redemption 

or conversion date, as the case may 

be. Where bonds/debentures are redeemable 

by instalments; the date of maturity 

for this purpose must be reckoned as the 

date on which the first instalment becomes 

due. 

(v) Particulars of any redeemed bonds/debentures 

for which the company has power 

to reissue shall be disclosed. 

(vi) Terms of repayment of term loans and 

other loans shall be stated. 

(vii) Period and amount of continuing default 

as on the balance sheet date in repayment 

of loans and interest, shall be specified 

separately in each case. 

3. SHORT-TERM BORROWINGS 

(i) Short-term borrowings should be classified 

as follows: 

(a) Loans repayable on demand 

u From banks 

u From other parties 

(b) Loans and advances from related 

parties, 

(c) Deposits, 

(d) Other loans and advances. 

(ii) Borrowings shall further be sub-classified 

as secured and unsecured. Nature of security 

shall be specified separately in each case. 

(iii) Where loans have been guaranteed by 

directors or others, the aggregate amount 

of such loans under each head shall be 

disclosed. 

(iv) Period and amount of default as on the 

balance sheet date in repayment of loans 

and interest shall be specified separately 

in each case. 

3.1 Other current liabilities - 

The amounts shall be classified as: 


(a) Current maturities of long-term debt, 

(b) Current maturities of finance lease obligations, 

(c) Interest accrued but not due on borrowings, 

(d) Interest accrued and due on borrowings.

RELEVANT GUIDANCE PROVIDED BY THE ICAI IN ITS GUIDANCE NOTE AND FAQs ON 

REVISED SCHEDULE VI 

4. The relevant guidance with respect to disclosure of information under “borrowings” issued 

by the ICAI by way of its Guidance Note on Revised Schedule VI and Frequently Asked Questions 

are provided in the following chart:— 

Definition of term loan • Term loans normally have a fixed or predetermined maturity period 

or a repayment schedule. 

Deferred payment liabilities • Deferred payment liabilities would include any liability for which 

payment is to be made on deferred credit terms, e.g., deferred sales 

tax liability, deferred payment for acquisition of fixed assets, etc. 

Security for loans • A blanket disclosure of different securities covering all loans classified 

under the same head, such as “all term loans from banks” will not 

suffice. 

• Where one security is given for multiple loans, the same may be 

clubbed together for disclosure purposes with adequate details or 

cross-referencing. 

Default on borrowings • The disclosures relating to default should be made for all items listed 

under the category of borrowings, such as bonds, debentures, deposits, 

deferred payment liabilities, finance lease obligations, etc., and not 

only to items classified as “loans”, such as term-loans or loans and 

advances, etc. 

• Any default that had occurred during the year and was subsequently 

made good before the year end need not be disclosed. 

Repayment terms • Disclosure of repayment terms should include the followings: 

n the period of maturity with respect to the balance sheet date, 

n number and amount of instalments due, 

n applicable rate of interest, 

n other significant relevant terms, if any. 

Deposits • Deposits classified under borrowings include: 

n Deposits accepted from public, and 

n Inter-corporate deposits which are in the nature of borrowings. 

Default made good after • Revised Schedule VI requires disclosure of default in the repayment 

reporting date of loan and interest existing on the balance sheet date. A company 

needs to make this disclosure even if the default has been made good 

after the reporting date. However, it may choose to also disclose the 

fact that default has been made good after the reporting date. 

5. CASE STUDIES - FROM PUBLISHED ACCOUNTS 

5.1 Reliance Industries Limited – Extracts from Balance Sheet as at March 31, 2012 - 

5.1.1 Long-term Borrowings 


703


These are illustrated in the following chart:- 

Secured:- 

704 

As at 31 st March 2012 As at 31 st March 2011 

(` In crore) 

Non-current Current Non-current Current 

Non-convertible debentures 6,024 3,044 9,353 655 

Long-term maturities of finance 

lease obligations 168 20 188 18 

Unsecured:- 

6,192 3,064 9,541 673 

Bonds 4,564 - 3,976 - 

Term loans from banks 37,269 6,753 37,595 3,499 

Deferred payment liabilities 9 3 12 3 

41,842 6,756 41,853 3,502 

Total 48,034 9,820 51,124 4,175 

5.1.1.1 NOTES - 

Non-convertible debentures referred to above 

to the extent of following: 

(a) ` 1,593 crore are secured by way of first 

mortgage/charge on the immovable properties 

situated at Hazira complex and at 

Jamnagar complex (other than SEZ unit) 

of the company. 

(b) ` 5,000 crore are secured by way of first 

mortgage/charge on immovable properties 

situated at Jamnagar Complex (Other 

than SEZ unit) of the company. 

5.1.2 Maturity profile and rate of interest on Non- 

Convertible Debentures are as set out below - 

Maturity Profile (` in crore) 

Rate of interest 2013-14 2014-15 2015-162016-17 2017-18 2018-19 2020-21 

6.25% 133 133 133 133 133 133 - 

8.75% - - - - - - 500 

9.25% 250 250 

10.75% - - - - - 370 - 

11.45% 1,224 - - - - - - 

11.90% 2,500 - - - - - - 

Zero coupon 

debentures 75 26 31 - - - - 


5.1.3 Maturity profile of unsecured term loans are set out below - 

Maturity Profile (` in crore) 

1-2 years 2-3 years 3-4 years Beyond 4 years 

Term loans – from banks 12,920 3,418 5,926 15,005 

5.1.4 Short-term Borrowings - 

(` in crore) As at 31st March 2012 As at 31st March 2011 

Secured 

Working capital loans 

From Banks 

Foreign currency loans 738 312 

Rupee loans 19 251 

Unsecured 

Other loans and advances 

From Banks 

757 563 

Foreign currency loans-Buyers 

credit 9,736 11,741 

Rupee loans 100 - 

5.1.4.1 NOTE - Working capital loans are secured 

by hypothecation of present and future stock 

of raw materials, stock-in-process, finished goods, 

stores and spares (not relating to plant and 

machinery), book debts, outstanding monies, 

receivables, claims, bills, materials in transit, 

etc., save and except receivables of Oil and 

Gas division. 

9,836 11,741 

10,593 12,304 

5.2 Hindustan Construction Company Limited 

– Extract from Balance Sheet as at March 31, 

2012 - The company has defaulted in the 

repayment of dues (Principal and interest). 

During the period ended December 2011 to 

March 2012. 

The details of continuing defaults of principal 

and interest in each case are as follows: 


705


706 

Principal Interest 

(` crore) 

Name of the bank Amount Due from Jan-Mar 12 Feb-Mar 12 Mar 12 Total 

Axis Bank Ltd. 20.00 1-Feb-12 2.11 2.30 2.43 6.84 

EXIM Bank 14.25 20-Mar-12 3.17 3.00 3.39 9.56 

Canara Bank 60.00 22-Dec-11 4.21 3.95 4.27 12.43 

State Bank of Travancore 7.50 26-Dec-11 0.17 0.15 0.17 0.49 

State Bank of Travancore 7.50 26-Mar-12 - - - - 

Bank of Maharashtra 6.25 26-Dec-11 0.33 0.30 0.33 0.96 

Bank of Maharashtra 6.25 26-Mar-12 - - - - 

Punjab National Bank 50.00 29-Dec-11 1.00 0.92 1.00 2.92 

United Bank of India 100.00 30-Mar-12 2.62 2.47 2.68 7.77 

CONCLUSION 

6. Though a step in the right direction has 

been taken by the Ministry of Corporate Affairs 

by improving presentation aspects of financial 

statements, get urgent steps need to be taken 

to mandate the Accounting Standards on 


Financial Instruments for companies in India. 

Complex capital structures in a globalized 

environment call for international best practices 

in corporate reporting. India needs to take the 

necessary steps urgently. The time to act is 

now! 

•••


IN BRIEF 

A Fortnightly Analysis of Changes in Accounts & Audit 

Accounts and Audit, like all fields today, register new 

developments frequently. Here is a synoptic view of such 

recent changes which one cannot afford to miss. 

1. REVISED PREFACE TO THE 

STANDARDS ON QUALITY CONTROL, 

AUDITING, ASSURANCE, REVIEW AND 

RELATED SERVICES 

1.1 Background - The Preface to the Standards 

on Quality Control, Auditing, Assurance, Review 

and Related Services rendered by the Cost 

Accountants (‘CMA’s) (the “Preface”) is a 

document which was issued to help gaining 

clear understanding of the scope and authority 

of the pronouncements issued by the Cost Audit 

and Assurance Standards Board (‘CAASB’) of 

the Institute of Cost Accountants of India (‘ICAI’) 

(formally known as ICWAI). The existing preface 

is revised by ICAI to bring more clarity to the 

subject-matter. 

1.2 Summary - The preface summarizes the 

discussion on the following topics: 

u Standards issued by the CAASB under 

the authority of the Council of the ICAI; 

u Compliance with the Standards; 

u Guidance Notes; 

u Technical Guides, Practice Manuals and 

other papers; 

u Constitution of the CAASB; 


u Composition of the CAASB; 

u Objectives and Functions; 

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CA 

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u Procedure for issuing the Standards; 

u Procedure for issuing Guidance Notes; 

u Procedure for issuing Technical Guides, 

Practice Manuals and other papers; 

u Procedure for Revision of the Standards, 

Guidance Notes, Technical Guides, Practice; 

u Manuals and other Papers. 

Source: www.taxmann.com 

2. REVISED COST AUDIT AND 

ASSURANCE STANDARDS 101, 

“PLANNING AN AUDIT OF COST 

STATEMENTS” - JULY 17, 2012 

2.1 Background - To achieve audit objectives 

of any audit of cost statements and other related 

information, planning is considered to be the 

most important key. Therefore, to achieve this 


707


objective and to help the cost auditors, ICAI 

(formally known as ICWAI), has issued this 

revised standard. 

2.2 Summary - This standard summarizes the 

following topics: 

2.2.1 Objective - The objective of this Standard 

is to help the members of ICAI in planning 

for their audit of cost statements to achieve 

the excellence. 

2.2.2 Scope - This Standard covers the auditors’ 

responsibility to plan an audit of cost statements 

and other related information. 

2.2.3 Definitions - This standard besides other 

definitions, defines the following: 

Audit, Auditee, Audit Risk, Audit Strategy, 

Cost Audit, Cost Auditor, Audit Team, 

Misstatement. 

2.2.4 Requirements - This section explains the 

prerequisites for a cost audit prior to entering 

into planning phase, post-planning stage and 

developing and executing the cost audit plan. 

2.2.5 Application Guidance - This section explains 

the aspects related to cost audit planning in 

more detail so as to ease out the use of this 

standard for the members of ICAI. 

2.2.6 Effective Date - This standard is to be 

applied for planning the audit of cost Statements 

for the period commencing on or after 1st 

April, 2012. 

Source: http://www.icwai.org/icwainew/ 

CAASB/docs/CAAS-101.pdf 

3. REVISED COST AUDIT AND 

ASSURANCE 102, “COST AUDIT 

DOCUMENTATION” - JULY 17, 2012 

3.1 Background - Documentation is the one of 

the most important steps of any audit. It is 

taken as: no documentation, no audit done. 

Therefore, considering the importance of 

documentation, the ICAI (formally known as 

ICWAI) has issued this revised Standard on 

Documentation. 

708 


3.2 Summary - This standard summarizes the 

following: 

3.2.1 Objective - The objective of this Standard 

is to provide guidance to the members of ICAI 

to prepare documentation with respect to the 

audit of the cost statements and other related 

information. 

3.2.2 Scope - This Standard deals with the 

cost auditor’s responsibility to prepare audit 

documentation for the audit of cost statements 

and other cost related information. 

3.2.3 Definitions - This standard besides other 

definitions, defines the following items: 

Audit, Audit Documentation, Audit File, 

Audit Working Papers, Cost Auditor. 

Source: http://www.icwai.org/icwainew/ 

CAASB/docs/CAAS102.pdf 

3.2.4 Requirements - This section of the Standard 

states the requirements for a cost auditor for 

documenting and recording the audit procedures 

performed, relevant audit evidence obtained 

and conclusions reached. 

3.2.5 Application Guidance - This section explains 

the aspects related to cost audit documentation 

in more detail so as to ease out the use of this 

standard for the members of ICAI. 

3.2.6 Effective Date - This standard is to be 

applied for planning the audit of cost Statements 

for the period commencing on or after 1st 

April, 2012. 

4. FILING OF COST AUDIT REPORT AND 

COMPLIANCE REPORT IN THE 

EXTENSIBLE BUSINESS REPORTING 

LANGUAGE (XBRL) MODE - JULY 26, 

2012 

4.1 Background - XBRL is a language for the 

electronic communication of business and 

financial data for business reporting. It is a 

new format of reporting providing major benefits 

in the preparation, analysis and communication 

of business information. In a way it helps in

cost savings, greater efficiency, improved 

accuracy and reliability of financial information 

to all. 

XBRL stands for eXtensible Business Reporting 

Language. It is one of a family of “XML” 

languages which is becoming a standard means 

of communicating information between 

businesses on the internet. 

4.2 Summary - The Ministry of Corporate Affairs 

has decided that all cost auditors and the 

concerned companies will be able to file their 

Cost Audit Reports and Compliance Reports 

for the year 2011-12 with the Central Government 

in the XBRL mode, without any penalty upto 

31st December, 2012. 

It may be noted that the reports which have 

become overdue with respect to any previous 

year(s) are also allowed to take advantage of 

this circular. 

Source: www.taxmann.com 

5. FORM 23B FILING - JULY 23, 2012 

5.1 Background - While filing documents with 

the Registrar of Companies through MCA portal, 

certain fee is to be deposited as prescribed. 

However, there are certain documents on which 

no fees has to be paid so far. 

MCA vide Circular Number 14/2012, dated 

21st June, 2012, had decided to levy fees on 

certain forms at the rates prescribed in the 

circular. One of such forms is Form-23B 

(Information by statutory auditor to the Registrar 

of Companies pursuant to section 224(1)(a) of 

the Companies Act, 1956.) These fees had to 

be applicable with effect from 22 July, 2012. 

5.2 Summary - MCA has extended the last 

date for filing Form 23B without fee for two 

weeks. Therefore, the fee shall now be charged 

on e-Form 23B filed on or after 5th August, 

2012 as against 22nd July earlier. 

Source: http://www.mca.gov.in/ 

6. IAESB PROPOSES REVISED 

STANDARD ON PROFESSIONAL 

VALUES, ETHICS AND ATTITUDES - JULY 

27, 2012 

6.1 Background - The International Accounting 

Education Standards Board (‘IAESB’) is 

responsible for developing education standards, 

guidance and information papers to be used 

by the international Federation of Accountants 

(‘IFAC’) member bodies. This has been done 

under a shared standard-setting process which 

involves the Public Interest Oversight Board. 

This Board oversees the activities of the IAESB 

and the IAESB Consultative Advisory Group, 

which provides public interest inputs for the 

purpose of development of the relevant standards 

and other guidance. 

IFAC is the global organization for the 

accountancy profession, dedicated to serving 

the public interest, having 167 members and 

associates in 127 countries and jurisdictions. 

6.2 Summary - IAESB has issued an exposure 

draft on International Education Standard (IES) 

4, Initial Professional Development-Professional 

Values, Ethics and Attitudes. 

IES 4 issued in 2004, prescribes the values, 

ethics and attitudes that professional accountants 

should acquire during the educational 

programme leading to qualification. This is 

primarily aimed for the IFAC member bodies; 

however, it will also be useful for educational 

organizations, employers, regulators, government 

authorities and other stakeholders who support 

the learning and development of professional 

accountants. 

A first revised draft of IES 4 was issued for 

public comment in May 2011. The comments 

on these were generally supportive; however, 

further clarifications were requested for the 

purpose of explaining the requirements on 

learning outcomes, assessment and reflective 

activity—the recurring process of reviewing 

experiences with a view to improve future 


709


actions. Therefore, the IAESB has suggested 

significant amendments to IES 4 again. 

Source: http://www.ifac.org/news-events/2012- 

07/iaesb-proposed-revised-standard-professionalvalues-ethics-and-attitudes 

7. FASB ISSUES ASU TO SIMPLIFY 

TESTING OF INDEFINITE-LIVED 

INTANGIBLE ASSETS FOR IMPAIRMENT- 

JULY 27, 2012 

7.1 Background - The Financial Accounting 

Standards Board (‘FASB’) is a private, not-forprofit 

organization whose primary purpose is 

to develop generally accepted accounting 

principles (‘GAAP’) within the United States in 

the public interest. It was created in 1973, 

replacing the Committee on Accounting 

Procedure (‘CAP’) and the Accounting Principles 

Board (‘APB’) of the American Institute of 

Certified Public Accountants (‘AICPA’). 

7.2 Summary - FASB has issued Accounting 

Standards Update (ASU) No. 2012-02, Intangibles 

—Goodwill and Other (Topic 350): Testing 

Indefinite-Lived Intangible Assets for Impairment, 

to simplify the guidance for testing impairment 

of indefinite-lived intangible assets other than 

goodwill. This is applicable to intangible assets 

including indefinite-lived trademarks, licenses 

and distribution rights. The standard would 

apply to all public, private and not-for-profit 

organizations. 

The amendments allow an organization to make 

a qualitative evaluation about the likelihood 

of impairment of an indefinite-lived intangible 

asset to determine whether it should apply the 

quantitative test and calculate the fair value 

of the indefinite-lived intangible asset ? 

Specifically, an organization has the option to 

first assess qualitative factors (events and 

circumstances) that could have affected the 

significant inputs used in determining the fair 

value of the indefinite-lived intangible asset 

to determine whether it is more likely than not 

(meaning a likelihood of more than 50 per 

710 


cent) that the indefinite-lived intangible asset 

is impaired.Under the amended guidance, an 

organization may choose to bypass the qualitative 

assessment for any indefinite-lived intangible 

asset in any period and proceed directly to 

calculate its fair value. The amendments do 

not change how an organization measures an 

impairment loss. Therefore, it is not expected 

to affect the information reported to users in 

financial statements. 

7.3 Effective date - The amendments are effective 

for annual and interim impairment tests 

performed for the years beginning after 

September 15, 2012. However, early adoption 

is also permitted. 

Source: http://www.fasb.org/cs/ContentServer? 

site=FASB&c=Document_C&pagename=FASB% 

2FDocument_C%2FDocumentPage&cid= 

1176160199605 

http://www.fasb.org/cs/BlobServer?blobkey= 

id&blobwhere=1175824275038&blobheader= 

application%2Fpdf&blobcol=urldata&blob 

table=MungoBlobs 

8. IESBA PROPOSES CHANGE TO CODE 

OF ETHICS DEFINITION OF THOSE 

CHARGED WITH GOVERNANCE - JULY 

20, 2012 

8.1 Background - The International Ethics 

Standards Board for Accountants (‘IESBA’) is 

an independent standard-setting board for the 

purpose of developing and issuing high-quality 

ethical standards and related guidance for 

professional accountants worldwide in the public 

interest. The IESBA develops the Code of Ethics 

for Professional Accountants, which establishes 

ethical requirements for professional accountants. 

IFAC facilitates the structures and processes 

of the IESBA. 

IFAC is the global organization for the 

accountancy profession, dedicated to serving 

the public interest, having 167 members and 

associates in 127 countries and jurisdictions.

8.2 Summary - IESBA has released the exposure 

draft of proposed change to the definition of 

“those charged with governance” in the IESBA 

Code of Ethics for Professional Accountants (the 

Code). 

The basic purpose of amendment is to align 

the definition of “those charged with governance” 

in the Code with that in the IAASB’s International 

Standard on Auditing (‘ISA’) 260, Communication 

with Those Charged with Governance. 

As per the IESBA, the proposed amendment 

does not require any change in systems or 

common practice. However, the change is 

suggested to clarify that a sub-group, such as 

an audit committee, may assist the governing 

body in meeting its responsibilities. In those 

cases, the auditor shall evaluate with whom, 

within the entity’s governance structure, to 

communicate. As per the IESBA, this will help 

in contributing to more consistent application 

of the Code, which is their main mission to 

support the global adoption and implementation 

of the Code. 

Source: http://www.ifac.org/news-events/2012- 

07/iesba-proposes-change-code-ethics-definitionthose-charged-governance 


••• 

711

STOCK MARKET 

712 

YOUR QUERIES 

Please share the prospects of Hercules Hoists Ltd. and also 

whether its shares can be held for the longer term? What target 

of company should I keep in my mind for this purpose? 

Hercules Hoists Limited is engaged in the manufacture and sale 

of material handling equipments and spare parts in India. The 

company offers chain pulley blocks, chain and wire rope electric 

hoists, ratchet lever hoists, winches, roll-out racks, light profile 

Stock Corner 

ARUN K. MUKHERJEE 

Investment Consultant 

systems, pulling and lifting machines, H.O.T./E.O.T./Jib cranes, floor operated stacker cranes 

and stores stacker cranes. It also markets shrouded conductors and profile crane systems 

and generates power through 4 windmills with an installed capacity of 1.25 megawatt in 

each wind-mill in Maharashtra. The company supplies its products to various industries, 

such as iron and steel, cement, oil and gas, chemicals, construction, material handling 

equipment manufacturers, State electricity boards, power plants, petro-chemicals, mining, 

pharmaceutical, logistics and general engineering industries, as well as to turn-key solution 

providers. It’s one of the finest companies which I have been tracking for the past 5-6 years. 

It’s one of the coolest Bajaj group companies with more than decent prospects. The company 

is expected to go forwards with its sales and profits expected to grow at 30% CAGR for 

the next 3 years. Some months back the company shifted to the Khopoli area and has the 

capacity to do ` 300 crore of turnover. The company previously used to cater to the domestic 


equirements but of late has received loads of 

enquiries from the export world too. It’s still 

a tiny company with 100 odd crore sales. So, 

increasing demand for its products can do 

wonders for the company. Quoting now at ` 

126 it is a solid long-term player. It’s a debt 

free entity with huge intrinsic value (has 2 

acres of prime land in Mulund). The company 

should be a 1000 crore marketcap company in 

the next 3 years from the present 400 crore 

net worth company. Now that certainly makes 

a good bet for you to go in for its shares. 

I have shortlisted a penny stock company 

called Aadhaar Ventures. Should I go in for 

the 1 ` counter Company’s stocks? 

What caught my eye in this scrip is the amazing 

movement it has witnessed over the last 

3 years. From a level of 1.65 ` in March 2009 

it went all the way to 87 ` in March 2011 - 

an amazing gain of 50 times in just a matter 

of couple of years. Marketcap vaulted to 1785 

crores from 30 crores. Things changed drastically 

post July 2011 when the counter nosedived to 

a level of as low as ` 1 and it’s still quoting 

at the same price. ‘An operator’s special’ should 

be the proper words to chant here. Its sales 

jumped from 8 crores in 2006 to 265 crores in 

2011, whereas its net profit remained at a 

meagre of 1crore. Who knows, maybe again 

it can fly to abnormal levels. 

An operator’s activities are still to be kept 

under scanner, no matter how bad or good its 

environment be. No shortcuts for becoming 

rich, you see. In my teens, I loved a novel 

called ‘Reminiscences of a stock operator’ by 

American author, Edwin Lefevre (which is the 

thinly disguised biography of Jesse Lauriston 

Livermore. The Wall Street Journal described 

the book as a ‘classic’. It was ranked at 15 on 

‘Fortune’s 75. The Smartest Books We Know, 

and Alan Greenspan said it is ‘a font of investing 

wisdom’). Go through the book before buying 

the scrip! 

COMPANY UPDATE - JAI BALAJI INDUSTRIES 

The company is one of the well known steel 

manufacturing groups in Eastern India with 

diversified product range which includes pig 

iron, sponge iron, TMT bars, ferro-alloys, alloy 

bars, etc. With rising raw material prices and 

increased volatility, it plans to use its coal 

assets to increase raw material integration. 

The company holds varying stakes in four 

coal blocks, viz., Dumri and Rohne in Jharkhand 

and Andal and Jagannathpur in West Bengal. 

The promoters of Jai Balaji have been on a 

buying spree pocketing over 2 lakh shares 

from the open market in the last couple of 

months. This indicates that the worst is over 

for the counter and at the present juncture 

there’s nothing much to loose. 

Long-term trends show that companies in which 

promoters and related entities have bought 

shares on sharp declines have done well when 

the market came under the control of the bulls. 

Jai Balaji which was recommended a few months 

ago has so far been an inferior performer; 

thanks to its debt and not so encouraging 

numbers. But with its coke oven plant getting 

operational any day now, coupled with a rise 

in its margins, should see its stocks delivering 

much better numbers and going forward. 


713

Stock Market 

Scripscan : Hyderabad Industries Ltd. 

CMP : 467.45 

Traded in : NSE-BSE 

Marketcap : 300 crores 

Risk category : Low 

Returns expected : 40% CAGR for next 

5 years. 

Story : Here’s a company which has excited 

me a great deal and gives me the hunch of 

digging out a huge infinite bagger in the coming 

years. I was looking for a counter which would 

be nearly debt free (high inflationary environment, 

double digit interest rate), should have 

a great brand value, better if was a household 

name, market leader and domestic company 

(recall our jockey company, Page Ind ? How 

about Hawkins or a TTK Prestige? Ah! all 

` 10-15-20 baggers, attractive valuations (to 

get that great midnight comfort and sleep), 

good dividend yield (so that if it doesn’t perform 

the dividend cheque may come to the rescue) 

and a business model which would be simple 

to understand coupled with stunning prospects 

and potential. Hyderabad Industries Ltd. just 

fits in everything so perfectly, at least as per 

my norms! 

Hyderabad Industries (HIL) is a flagship 

company of C K Birla Group. HIL’s product 

range includes Fibre Cement roofing sheets 

(Charminar), Autoclaved Aerated Concrete Blocks 

and Panels (Aerocon) and Calcium Silicate 

insulation products (HYSIL) and Jointing material 

for gaskets. HIL’s most modern manufacturing 

plants are located at 12 locations in 8 States, 

viz., Andhra Pradesh, Gujarat, Haryana, 

Jharkhand, Kerala, Maharashtra, Orissa and 

Uttar Pradesh. HIL, being a market leader 

over several years now, has a strong and extensive 

distribution network with nearly 8000 sale outlets 

spread across the country which are serviced 

by its 45 depots. Company is the market leader 

in the asbestos-based roofing industry, with 

714 

MULTIBAGGER STOCK IDEA 


an estimated market share of 21%. Its famous 

brand is ‘Charminar’ that has established over 

six decades now and enjoys a premium of 6- 

8% over others in the market. From a mere 

roof manufacturing company, this company 

has evolved into a multi-product, green building 

products organization. The demand for these 

building products is likely to stay firm led by 

growth in rural housing and price advantage 

of asbestos sheets over galvanized iron sheets. 

It has gradually diversified from an one-product 

company into other areas such as autoclaved 

aerated concrete (AAC) blocks, thermal insulation 

products and other products like pre-fabricated 

building panels, Hysil powder, spares and 

accessories, etc. The expansion of the capacities 

and the overall buoyant economic scenario are 

boosting demand from this segment. Over half 

of our population still lives under thatched 

roofs (Kuccha roofing) and clay tiles. Thatched 

roof is not waterproof and poses a fire hazard 

besides needing regular replacement. Tiled roof 

needs recurring maintenance and is also not 

safe. Hence, security concerns coupled with 

rising income levels, have given impetus to 

the desire to shift from kuccha houses to pucca 

houses. Asbestos Cement Sheets (ACS) are good 

insulators of heat and are sound as compared 

to thatched, tiled or galvanized metal roofs. 

Additionally, ACSs are water resistant and 

fire resistant. ACSs are also relatively cheaper 

than galvanized metal roofs. ACSs require 

minimal maintenance and infrequent 

replacement, unlike thatched and tiled roofs. 

Hence, whenever disposable income increases, 

switching to ACS roofs is the most obvious 

choice. The ACS industry grew by 5% in FY10, 

by 3.5% in FY11 and further by 7% in FY12. 

The industry is estimated to grow at 6-9% 

over the next few years on account of increased 

income levels in rural areas coupled with various 

initiatives by the Central Government for 

affordable housing schemes, such as Indira 

Awas Yojana, Golden Jubilee Rural Housing 

Finance Scheme and Pradhan Mantri Adarsh

Gram Yojana. Additionally, other schemes such 

as the Mahatma Gandhi National Rural 

Employment Guarantee Act (MGNREGA) 

guarantee employment to low-income 

individuals, which also helps to generate demand 

for the roofing industry. These Government 

sponsored initiatives in providing residential 

houses and schools for the masses in general 

and the poor in particular will increase the 

demand for Hyderabad Industries products 

many a times in a near future. The company 

has delivered a topline of 860 crores in FY- 

12 (730 crores in FY 10-11) and targets the 

topline to cross 2000 crores by 2016. Its profits 

jumped to 60 crores from 50 crores in the same 

period. It paid a dividend of 18.5 `, translating 

to an yield of over 4%. The company should 

at least grow by 25-30% during this fiscal. The 

company is expected to deliver an EPS of ` 

105 for FY13. This company is nearly a zerodebt 

company having reserves (335 crores) of 

nearly 50 times its equity cap (a liberal bonus 

which could be another trigger to rally always 

remains in the offing). At present prices it 

quotes at just 4 odd times, which is incredibly 

cheap for a quality company having a neat 

visionary management. In a country of 122 

crores where 75% remain below poverty line 

Hyderabad Industries caters to those poor people. 

ROE and ROCE too should comfortably be 

above 20%, respectively, in the coming years 

which provides the required conviction to own 

such a quality business. A pizza franchise with 

100 crores profit attracts a market-cap of 8000 

crores, while as a company which provides 

you the required shelter trades at just around 

300 crores market-cap having a profit of about 

60 crores. Rationality may not be in vogue but 

would be someday for sure. Its Hyderabad 

factory is situated on 70 acres land in a very 

prime area of Sanatnagar which is like heart 

of a big city. Govt. policy is to shift all factories 

from Sanatnagar so that residential and office 

buildings can come up. Currently, some industries 

in this area, specially polluting pharma-industries 

have already been shifted. It is not very far 

fetched that management of HIL may plan to 

shift this factory too in next the 1-2 years 

itself. As and when it happens, it will bring 

huge value for its stakeholders. Altogether, a 

lovely bet to make you rich within a reasonable 

time. 


••• 

715

716 August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 96

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