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Section 68 - Know Your Creditor!

hema.kadu@taxsutra.com — Mon, 07 Feb 2022 10:14:31 +0000

Section 68 - Know Your Creditor! hema.kadu@taxs… Mon, 07/02/2022 - 15:44

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The Union Budget for 2022 (Budget) was announced by the Hon’ble Finance Minister on 1 February 2022. Amidst the uncertainty of the pandemic, the Budget was presented as a blueprint to foster economic growth and rev up the economy. Focussed on infrastructure development and fintech advancements, the Budget showed the government’s focus and pragmatism on sustainably stabilising macro indicators.

While the Budget did not spring up many drastic changes, a few proposed amendments have raised some eyebrows. The broad focus of this Budget has been to plug loopholes, strengthen authorities (eased reopening of assessments, etc) and clarify positions by overruling certain positive rulings all done with an underlying intent of increasing tax collections. This article discusses the amendments proposed to the regime governing unexplained cash credits and related penalty provisions.

Background

Sections 68 to 69D of the Income-tax Act, 1961 (IT Act) bring to tax unexplained cash credits, investments and money. Perennially at the centre of debate and controversy, these provisions have always been highly litigious and an unexplained source of turmoil between taxpayers and tax authorities.

Section 68 of the IT Act imposes an onus on the taxpayer to provide a ‘satisfactory’ explanation as to the nature and source of any sum (in the nature of share capital, unsecured loan, etc) credited in his books of accounts. If a taxpayer is unable to discharge this onus, the amounts in question are treated as the taxable income of the taxpayer and charged to tax at a higher rate of 60% (as opposed to the highest slab rate of 30%) plus applicable surcharge, cess and penalties.

Since the section remains silent on what constitutes a ‘satisfactory’ explanation, several courts have in the past laid down and limited the taxpayer’s obligations to satisfying the “ICG Test”, i.e., providing details about the Identity, Creditworthiness and Genuineness of the payer and genuineness of the transaction as sufficient discharge of a taxpayer’s onus under the section. Once this burden has been discharged by the taxpayer, courts have held that tax authorities may choose to initiate proceedings against such payer, if warranted.

Pertinently, in 2012 Section 68 of the IT Act was amended vis a vis unlisted companies to provide that where the sum credited in the books of accounts of a company is in the nature of share application money, share capital, share premium or any such amount, the taxpayer’s explanation would be considered satisfactory only if the shareholder (being a resident) of the company also offers an explanation about the nature and source of the sum credited. Vide this amendment, the taxpayer was not only required to prove the source of funds but also the source of such source

While the amendment introduced was specific to credits in the nature of share application money, share capital, share premium or similar credits, tax authorities often invoked the provision to make enquiries in case of loans and borrowings, though strictly outside the purview of Section 68. This once again became the epicentre of litigation with aggrieved taxpayers approaching judicial forums. Ruling in favour of taxpayers, the Bombay High Court (in Gaurav Triyugi Singh vs ITO [TS-5009-HC-2020(BOMBAY)-O]) and Karnataka High Court [Kumar Nirav and Nivesh vs ACIT [TS-5488-HC-2020(KARNATAKA)-O]) as recently as 2020 reiterated that the taxpayer was not required to prove the source of source in all situations, such as in case of loans and borrowings.

Proposed Amendment

As per the proposed Budget amendment to Section 68, the onus of proving the source of source has been extended not just to credits in the nature of share capital and related receipts but also to loans and borrowings. Accordingly, the taxpayer would be required to not just provide details of the lender (i.e., the taxpayer’s source) but also explain the source of funds in the hands of such lender.

The Memorandum to the Budget has justified this amendment as a move to curb the “pernicious practice of conversion of unaccounted money by crediting it to the books of assesses through a masquerade of loan or borrowing.” The Memorandum has further referred to judicial pronouncements which “created doubts” about the onus of proof and the requirements of Section 68 in cases of loans and borrowings to buttress the amendment.

Accordingly, the Budget proposed to amend the provisions of Section 68 of the IT Act to provide that the nature and source of any sum (including in the form of a loan, borrowing, other liability) credit in the books of a taxpayer would be treated as explained only if the source of funds is also explained in the hands of the creditor. Exemptions from this requirement have been provided in case of the creditor is a well-regulated entity, i.e., a Venture Capital Fund, Venture Capital Company registered with SEBI. These amendments are proposed to be effective prospectively from Assessment Year 2023-24.

The Budget also seeks to amend Section 271AAC which was introduced from 1 June 2013 and enlists the penalty provisions in respect of additions made under Sections 68, 69, 69A, 69B, 69C and 69D. Currently under the IT only an assessing officer is empowered to impose a penalty on a taxpayer in situations where Section 68 is invoked. Thus, in a situation where the order of the assessing officer was to be modified at the appellate level, the Commissioner of Income Tax (Appeals) (CIT(A)) had no power to impose a penalty. This provision was not aligned with other penalty provisions under the IT Act (Chapter XXI) which provide concomitant powers to the CIT(A) to impose penalties, as well. Accordingly, with the intention of further deterring taxpayers from non-compliance, the power to impose a penalty for a Section 68 offence has also been provided to the CIT(A).

Conclusion

While the proposed amendment has been introduced to plug a lacuna, it adds heavily to the taxpayer’s woes essentially requiring them to conduct a diligence of the lender and seeking details of its source of income. Further, there is no clarity on what constitutes ‘satisfactory information’ which is a very subjective criterion leaving the door for litigation unlocked.

Requirement to maintain details of source of source of share capital (amendment introduced in 2012) in comparison to a similar requirement for loan looks a lesser evil of sorts in comparison. As generally share capital is a long-term commitment and the shareholder will be interested in the well-being of the investee company. And is thus, more likely to provide details of its source when called upon to avoid any adverse inferences being drawn against its investee. A loan on the other hand would be returned sooner or later and hence imposing such requirements on loan transactions could result in a lot of practical difficulties for taxpayers. Ultra-short term loans, bridge finance, etc. taken for very short period of time will be repaid very quickly and such transactions will be under the tax authorities lens (during assessment / reassessment proceedings) after a gap of years. Getting information for such short terms loans may pose practical challenges.

If the proposed amendments are incorporated into the Act, in the absence of a satisfactory explanation regarding source of lender, a transaction could be taxed in the hands of the taxpayer leading to an effective outflow on account of tax, penalty, etc. in excess of 80% of the amount of borrowing. Such an onerous provision, if used in an unfettered manner, is likely to halt and set the journey of ease of doing business in India, in reverse gear.

What should taxpayers do?

There is no substitute to diligent record keeping and Section 68 and alike provisions will always keep taxpayers on their toes. Robust documentation would be the most important defence available in cases where the tax authorities and courts would test the amended provisions of Section 68 on loans and borrowings.

Generally before lending any sum, a lender will do its diligences on the credit history, repayment capacity, etc. of the borrower. Since the implications of an adverse assessment and additions under Section 68 are huge, one will need to tread very cautiously when availing of loans and borrowings and do a reverse KYC of sorts on the source of the lender. While this would also depend on the amount of co-operation extended by the lender, it is imperative that these details be collected and retained by the parties at the time of initiation of the loan transactions itself to avoid hassles and anxieties later as these transactions will be scrutinized a couple of years (or more) later and by then it is likely that the loan would have been repaid and the borrower may not have any influence on / recourse to the lender to provide details regarding its source.

Views expressed, if any, are personal views of the authors and should not be treated as legal advisory.

Section 68 - Know Your Creditor!

sandeep.rathod@taxsutra.com — Mon, 07 Feb 2022 07:13:22 +0000

Section 68 - Know Your Creditor! sandeep.rathod… Mon, 07/02/2022 - 12:43

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Cash Credits & Unexplained Investments - A Walk Down Memory Lane

sandeep.rathod@taxsutra.com — Mon, 17 Jan 2022 05:14:01 +0000

Cash Credits & Unexplained Investments - A Walk Down Memory Lane sandeep.rathod… Mon, 17/01/2022 - 10:44

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Cash credits, unexplained investments, unexplained money, etc. have always been highly litigious issues. If one were to look at the way the law and judicial precedents surrounding these issues have evolved and developed over the years, one would surely be reminded of a game of musical chairs. The Income-tax Act, 1961 (IT Act) has over the years introduced several provisions to catch-up and at times race ahead in this game. Presently, Sections 68 to 69D of the IT Act (forming part of Chapter VI) are provisions that seek to bring to tax such credits, investments, assets, etc.

While the present sections continue to be marred by debate (as there is still a lot of subjectivity in view of use of the terms like ‘explanation offered is not in the opinion of the assessing officer satisfactory’) and controversies over intricate issues surrounding onus, these provisions have in essence even been a part of the erstwhile income-tax legislations enabling revenue authorities bring the so-called unaccounted / unexplained income within the tax net.

Section 68 of the IT Act puts an onus on the taxpayer to satisfactorily explain the nature and source of any credit / assets in his books of accounts or in the possession of the taxpayer. Failure to provide such an explanation may lead to the treatment of such sum / asset as taxable income in the hands of the taxpayer. While each case dealing with additions under these provisions would have some unique features and expositions as these issues are very fact based and circumstances driven, the author has discussed two cases of the Supreme Court of India which have had a huge influence in the way the law as well as later judicial precedents perceived these issues.

Case 1: Durga Prasad More case [TS-5156-SC-1971-O]

Relevant facts and events and the Supreme Court Ruling

1) While the ruling relates to Assessment Year (AY) 1958-59 and AY 1959-60, the facts and proceedings of previous years are also relevant and listed below:

a. The assessee in this case had purchased certain premises in the year 1940 for a consideration of INR 1,85,000. It was the assessee’s contention that this property was purchased by him in the capacity of a trustee of a trust created by his wife (an oral trust for the benefit of herself and their children).

b. For the first year, income from such property was offered by the assessee in his personal capacity, however for the second year, he did not offer such income pleading that the income did not belong to him in view of a deed of settlement executed by his wife in the year 1941.

c. The assessing officer sought details of source of funds for acquisition of such property. In response, the assessee submitted that the funds used to buy the property were his wife’s stridhana (and that INR 2,00,000 was lying with his father-in-law for many years). And that the said INR 2,00,000 was given to him by his wife under the said oral trust.

d. Noting that no credible evidence regarding source (like source of income of wife, money deposited in bank / advances received from others, etc.) had been placed on record, the assessing officer went on to tax the income from such property in the hands of the assessee.

e. The assessee agitated this in appeals and lost and did not agitate this further before the tribunal.

f. For AYs 1942-43 to 1957-58 the income from the property was assessed in his hands.

2) In the assessment proceedings for AY 1958-59 and 1959-60, the assessee revived his old plea that the income from this property was not assessable in his hands.

3) Assessing officer completed the assessment in line with previous years including such income in his hands. Assessee agitated this before appellate commissioner and then tribunal, but his appeals were summarily rejected in view of the case history namely:

a. Assessee’s wife was not shown to have earned any income to have collected such a huge corpus.

b. Property was acquired before the purported deed of settlement of trust by the assessee’s wife.

c. Assessee did not explain the source of funds of his wife.

d. Assessee did not contest the inclusion of income in his hands for 15 (fifteen) years.

4) On further appeal, the Calcutta High Court held in favour of the assessee [TS-5328-HC-1967(CALCUTTA)-O]. Although, both judges wrote separate orders. The observations made by the learned judges based on which they gave relief to the assessee are summarized in the table below:

Sr No

Justice A.C. Sen

Justice P.B. Mukherji

Apparent statements in the documents must be presumed to be real until contrary is established.

No proof or charge against the assessee that he had concealed his own income.

Department did not discharge its onus of showing that income was chargeable.

No evidence of assessee having passed on his income to his wife and concealing his own income

Department failed to examine the wife and father-in-law of assessee.

Separate accounts of trust and his own were maintained by the assessee throughout these years.

Assessee’s own inclusion in earlier years is immaterial as neither res-judicata nor estoppel is applicable to an assessment proceeding.

Assessee did produce sale deed and trust deed when asked by the tax authorities.

5) The Income-tax Department agitated this further and the Supreme Court dealt with each observation of the Calcutta High Court ruling which is summarized below:

On Justice Sen’s ruling:

a. As regards recitals in the deed, the Supreme Court held that a little probing would have proved that what was apparent was not real. It was held that “The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.”

b. As regards onus of proof, it was held that the law does not prescribe any quantitative test on whether onus was discharged or not. The arguments of the assessee that his wife had such a huge corpus without any income and it was simply lying in cash with the father-in-law cannot be believed as it does not accord with human probabilities.

c. Giving relief as wife and father-in-law were not examined was a very superficial way of looking at things.

d. Assessee’s act of inclusion of income in the return of income for 15 years could not have been ignored in the name of estoppel / res judicata not being applicable.

On Justice Mukherji’s ruling:

a. It was observed by the Supreme Court that there was indeed a charge by the authorities that the assessee was trying to conceal his income in the present case by putting forward a story that the premises were the income of the trust created by his wife.

b. As regards observations regarding concealment of income, the Supreme Court held that the High Court looked at the case from a wrong angle and that in their assessment, the assessee failed to satisfactorily prove that the funds belonged to his wife. The quote from text in this regard is “Science has not yet invented any instrument to test the reliability of the evidence placed before a court or tribunal. Therefore, the courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But in that sphere the decision of the final fact finding authority is made conclusive by law.”

c. Maintaining separate books as well as producing the deeds had much less evidentiary value as compared to the other overwhelming facts which needed to be given credence to.

6) To conclude the apex court held that the Tribunal being the final fact-finding authority had correctly assessed the evidence available and held in favour of the tax department.

This ruling gives an overview of all major arguments available in such matters and throws guidance on how the judges would look at these issues.

Case 2: Sumati Dayal case [TS-5013-SC-1995-O]

This is also a ruling wherein the apex court ultimately held in favour of the tax department after considering all facts and circumstances and reached the conclusion that the propositions of the taxpayer defied human probabilities.

Relevant facts and events and the Supreme Court Ruling

1) This ruling relates to AY 1971-72 and AY 1972-73. The assessee in this case was a dealer in art pieces, antiques, etc. The assessee received INR 3 lakh plus in an year by way of race winnings in Jackpots and Treble events in races at Turf clubs in various cities.

2) Such amount was claimed as not taxable by the assessee, however the assessing officer while passing the assessment order for the year treated the amounts as ‘Income from other Sources’ and levied tax thereon.

3) Some peculiar facts as listed in the ruling are as under:

a. That the assessee had sworn an affidavit wherein it was stated that she had begun going for races only in the end of the year 1969 and had no previous experience.

b. The assessee claimed to have won a sum in excess of INR 3 lakh in one year on thirteen occasion out of which ten were winnings from jackpots and three were treble events. In the other year, an aggregate of INR 1 lakh approximately was earned on two occasions being jackpot winnings.

c. That the assessee won a jackpot on the first day she went to the races.

d. The assessee stated that she worked out the combination on the basis of what her husband advised her and she also used to add a few horses of her own although she admitted that she did not know anything about the performance of these horses before the December of 1969.

e. The books of accounts of the assessee did not reflect drawings commensurate with the amounts that would be required to purchase the tickets for these races and related events.

f. While the capital account of the assessee were credited with the sums of winnings, there were no debits or expenses for purchase of tickets or losses incurred on races.

g. Winning from races became taxable from 1972 (vide an amendment treating the same as income), after such date, the assessee gave up the activity, which was found to be very strange given her exceptional luck and track record.

h. When the matter was before the settlement commission, the assessee offered to agree to a reasonable addition towards inadequate drawings if the settlement commission were to come to hold in her favour on merits of the case.

4) Based on the above findings the assessing authorities as well as the Settlement Commission was of the view that given the meagre knowledge the assessee had as well as the complexities involved for winning jackpots. It was observed that “A Jackpot is a stake of five events in a single day and one can believe a regular and experienced punter clearing a Jackpot occasionally but the claim of the appellant to have won a number of Jackpots in three or four seasons not merely at one place but at three different centres, namely, Madras, Bangalore and Hyderabad appears, prima facie, to be wild and contrary to the statistical theories and experience of the frequencies and probabilities.”

5) While the settlement commission held by majority that the facts stated by the assessee were devoid of human probabilities, the chairman of the Settlement Commission in his dissenting opinion mentioned that the payments were received by crossed cheques for payments of amounts toward winning of jackpots and also that in such a game of chance, expertise was not necessary. This dissenting opinion of the chairman was termed as a superficial approach by the Supreme Court and it was held that one needs to consider the matter in the light of human probabilities.

6) The Supreme Court held that having seen the entire factual matrix, an inference could be reasonably drawn that the winning tickets were purchased by the assessee after the events. The Supreme Court observed that such activities were prevalent and referred to the District Taxes Enquiry Committee and the recommendations made by the said Committee which led to the amendment of the Act by the Finance Act, 1972 whereby the exemption from tax that was available in respect of winnings from lotteries, crossword puzzles, races, etc., was withdrawn.

7) As regard onus of proof on the department that this was undisclosed income of the assessee and routed as lottery / jackpot winnings, the Supreme Court has observed that direct evidence about such acts would not be available as such events take place in secret.

Thus, it will be observed that even in this case the Supreme Court has given credence to the factual position as well as events surrounding these facts rather than go on a superficial approach and rely merely on the tangible evidences placed before them (like crossed cheques, copies of winning tickets, etc. produced by the assessee). The Supreme Court has unequivocally held that in such cases it would be impossible for the tax department to produce clinching evidence in support of their claims of tax evasion. Thus, such a superficial approach should not be adopted by the authorities and courts.

Conclusion

While it has been consistently held that in cases where a receipt is sought to be taxed as income, the burden lies on the department to prove that it is within the taxing provisions, it is equally true that if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within an exemption provided by the IT Act lies heavily upon the taxpayers. The likes of Section 68, 69, 69A, 69B, 69C however would require that where any sum is found credited in the books of a taxpayer (or assets are found in possession of the taxpayer) the same may be charged to income-tax as income if the explanation offered by the taxpayer about the nature and source thereof is, in the opinion of the assessing officer, not satisfactory. In such case there is, prima facie, evidence against the taxpayer, viz., the receipt of money, and if he fails to rebut, the said evidence being unrebutted, can be used against him by holding that it was a receipt in nature of income.

The Supreme Court in the above discussed cases as well as in a number of cases upheld substance over form and held that the perfect and clinching evidence regarding tax evasion may not be available in every case and that the matters should then be adjudicated on the basis of surrounding circumstances and ‘Theory of Human Probabilities’. These cases and theories have been referred to in a number of later rulings dealing with bogus capital gains in penny stocks, investment in shares at unjustifiably high premiums, gift receipts from unexplained sources, etc. and in these cases, the courts have time and again given credence to substance over form.

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Six Years of Black Money Act - The Journey So Far & Way Ahead

sandeep.rathod@taxsutra.com — Tue, 16 Nov 2021 12:16:38 +0000

Six Years of Black Money Act - The Journey So Far & Way Ahead sandeep.rathod… Tue, 16/11/2021 - 17:46

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The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) has been on the statute for more than six years now. A press release dated 26 July 2021 issued by the Ministry of Finance gave an overview of the matters initiated under BMA as well as taxes recovered, etc. It has been stated that as on 31 May 2021, 166 assessment orders were passed raising demands in excess of INR 8,000 Crores. Undisclosed income of approx. INR 8,500 Cores has been brought to tax and penalty of approx. INR 1300 Crores levied in Swiss HSBC data leaks cases. It is further stated that in the Panama Papers Leaks cases, undisclosed credits in excess of INR 20,000 Crores have been detected. More than 100 prosecution complaints have been filed under BMA alone.

This is so especially in view of the constant flow of information concerning offshore assets on account of various data leaks as well as from various jurisdictions under bilateral information sharing arrangements as well as automatic sharing of information. BMA was introduced in the year 2015 specifically with a view to deal with undisclosed offshore incomes and assets as the prevalent laws were inadequate to deal with various aspects of offshore assets and incomes.

In the ensuing text, an attempt is made to list major events under the BMA (amendments in law as well as important rulings). This will hopefully provide the readers with a sense as to how the law has evolved over the years and where it stands today.

The author has been part of various articles in the past on this topic, Black Money Act - All You Need to Know - Part 1 listing the mechanics of this law, its triggers, applicability and implications of invocation. In a later part (Black Money Act - All You Need to Know - Part 2), the defenses available as well as rulings in the context of BMA were analysed. In Black Money Act - All You Need to Know - Part 3, the author endeavoured to provide some practical guidance on what course could be adopted once an assessment order was passed under BMA.

Year 1: 2015 – Introduction of law and voluntary disclosure scheme

BMA was introduced through the Finance Act 2015, by late Mr. Arun Jaitley, the then Finance Minister of India. BMA was to be administered by authorities appointed under the Income Tax Act, 1961 (IT Act). Tax rate on undisclosed income and assets was prescribed to be 30% and over and above that a flat penalty of 90% on the amount of additions.

A limited period one-time disclosure window was introduced wherein one could make a disclosure (up to September 2015) and come clean by paying 30% tax and 30% penalty (effectively 60% of the value of undisclosed income and offshore assets as against a minimum outflow of 120% as stated above). Immunity from action under five acts (IT Act, Wealth Tax Act 1957, Foreign Exchange Management Act 1999, Companies Act 2013, and Customs Act 1962) was given to taxpayers who availed this opportunity. The administrative focus for the major part of 2015 and early 2016 was spent on convincing the taxpayers to avail of this one-time disclosure window and come clean (multiple FAQs were issued clarifying various questions that were faced by the taxpayers) and collect the taxes for disclosures so made. This scheme did not get a very favorable response from the taxpayers and the disclosure applications as well as revenues therefrom were not commensurate with the Government’s expectations.

Years 2 to 4: 2016 to 2018 – Invocation of BMA in various cases (issuance of assessment notices)

Once the time limit for making the voluntary disclosure, related compliances and payment of taxes was over, the focus of the tax authorities shifted to issuance of investigation and assessment notices concerning offshore assets held by Indian taxpayers. A lot of notices were issued between 2017 to 2019 requiring taxpayers to explain / show cause as to why proceedings under BMA should not be initiated in their cases. As per news-reports, more than 400 BMA notices were issued by the end of 2019.

The administrative machinery of BMA sets in motion when a notice under Section 10 (1) of BMA (an equivalent of Section 143(2) or 148 of IT Act) is issued. A combined reading of Section 3 (Charging section), Section 10 (Assessment) and 72(c) (Removal of doubts) meant that in case a taxpayer did not avail the one-time disclosure window, tax was to be levied in the year in which the assessing officer discovers irregularities and issues a notice to the assessee (irrespective of the year in which such offshore asset was acquired). As per Section 11(1), an order under BMA needs to be passed within two years from the end of the financial year in which Section 10(1) notice is issued.

Note-worthy rulings pronounced in this period:

Madras High Court – Srinidhi Karti Chidambaram case [TS-658-HC-2018(MAD)]

The taxpayers in this case had approached the High Court seeking two reliefs, the ruling of the court on these reliefs sought is summarised as under:

1) Writ of prohibition, prohibiting tax authorities from instituting and sanctioning any prosecution against the taxpayers – The HC considered the provisions of Sections 48 and 55 as well as Chapter V of BMA dealing with offences and prosecution. It was also observed that there was no material placed on record to show that there was a sanction under Section 55 or steps have been taken to initiate prosecution against the taxpayer. In view of such position, the HC decided that it cannot issue a writ of prohibition as sought by the taxpayers.

2) Direction be given to tax authorities to conclude the assessment proceedings under BMA forthwith without any delay – It was prayed that substantial details were sought and submitted by the taxpayers and that the department was delaying conclusion of proceedings and that there were multiple officers issuing notices / summons in relation to the same assets which was causing undue harassment. With a view to bring a conclusion to the same, the taxpayer sought a direction from the court that the authorities should be directed to forthwith conclude the assessment proceedings initiated under BMA. The Court considered these arguments and held that since a limit had already been prescribed under BMA for passing an assessment order, no such direction compelling the authorities to pass an order well before the stipulated time was feasible.

It is pertinent to note that prosecution proceedings were indeed launched later and quashed by the High Court after considering the facts and circumstances of the case.

Year 5: 2019 – Sweeping changes made in BMA

When introduced in 2015, BMA was applicable only to an ‘assessee’ (defined under Section 2(2) of BMA) which meant Residents of India as per Section 6 of IT Act. Taxpayers who were ‘Non-residents’ or ‘Residents but not-ordinarily residents’ were specifically kept outside the purview of BMA. Vide Finance Act, 2019, the definition of an ‘assessee’ under BMA was amended retrospectively from the date of applicability of BMA (i.e., 1 July 2015) to include individuals / entities that were residents when undisclosed offshore incomes were earned / undisclosed offshore assets were acquired even if later such individuals / entities became non-residents of India. While the reason cited for this retrospective amendment was that it merely clarifies the legislative intent of BMA, it will be interesting to see if this amendment withstands the test of judicial scrutiny as it has the effect of substantially changing a taxpayer’s position retrospectively (especially those who could have been residents of India in the past, but left India before 2019).

Note-worthy rulings pronounced in this period:

Delhi High Court to Supreme Court and back – Mr Gautam Khaitan’s case

The Delhi HC while hearing a petition filed by Mr. Gautam Khaitan, reported as [TS-278-HC-2019(DEL)] (wherein various provisions of BMA were challenged), had in an interim order held that BMA was introduced from 1 April 2016, hence the notification (dated 1 July 2015) amending the effective date of BMA from 1 April 2016 to 1 July 2015 was retrospective and hence, ultra vires the law and thus, the tax authorities were restrained from taking any action under the BMA.

This could have huge repercussions on the applicability of BMA and hence the tax authorities immediately approached the Supreme Court challenging the Delhi HC ruling. The Supreme Court considered the intention of the law as well as the fact that the amendment in dates was made to enable taxpayers to avail the One Time Disclosure Window as well as and to remove difficulties with respect to penal provisions under BMA. Supreme Court by its order, reported as [TS-616-SC-2019], held that there was no infirmity and that the Delhi HC was not right in treating the notification as ultra vires. The matter is now pending before the Delhi HC to decide on the merits of the grounds taken by the taxpayer.

Calcutta High Court on retrospectivity as well as double jeopardy:

In the case of Shrivardhan Mohta [TS-64-HC-2019(CAL)], the Calcutta High Court dismissed a writ petition seeking a declaration that provisions of BMA must be applied prospectively and inter alia, the quashing of the sanction for the taxpayer’s prosecution under BMA. The taxpayer in this case also argued that there was a double jeopardy so far as the taxpayer could have been held liable for prosecution under BMA as well as IT Act.

The HC noted that the petitioner had opportunities to make a true and proper disclosure about his foreign bank accounts on two occasions after the introduction of the BMA and his failure to do so would attract prosecution under the BMA. With respect to double jeopardy, relying on the Supreme Court’s decision in State of Maharashtra v Sayyed Hassan the HC held that, “where an act or an omission constitutes an offence under two enactments, the offender may be prosecuted and punished under either or both enactments but shall not be liable to be punished twice for the same offence.” The High Court held that in this case, the IT Act does not impose a punishment of imprisonment while the BMA does. The HC thus held that, in such circumstances, it cannot be said that, the Taxpayer has been sought to be punished twice for the same offence. Assuming that prosecution was initiated only under Section 50 of the BMA, the HC’s observation on double jeopardy is not free from doubt. The HC held that the IT Act does not impose a punishment of imprisonment while the BMA does and hence it cannot be said that, the Taxpayer has been sought to be punished twice for the same offence. Pertinently, under Section 277 of the IT Act, a taxpayer can be imprisoned for any verification made under the IT Act or its rules which is false, and which he either knows or believes to be false or does not believe to be true. This can be equated with a taxpayer wilfully failing to furnish in his income tax returns any information relating to an asset located outside India, held by him, as a beneficial owner or of which he is a beneficiary (i.e., the offence under Section 50 of the BMA).

Gujarat High Court in case of PCIT v Income Tax Settlement Commission (ITSC) [TS-834-HC-2019(GUJ)]

BMA provisions do not contain any provision for settlement of cases. In this case, the taxpayer had sought to settle and pay taxes on certain offshore assets under their Income Tax Settlement application before the ITSC under the IT Act. As per the facts, it seems the tax department accepted such a settlement and recovered taxes on the amount settled under the ITSC order and later approached the courts seeking annulment of the ITSC order challenging it on the grounds that offshore assets could be dealt under BMA only, which is a specific law, rather than IT Act which is a general law. The Gujarat HC considered various arguments raised on both sides and ultimately held that there is no specific bar of exclusion from applicability of IT Act under the BMA. The HC also referred to some of the FAQs issued under BMA which also provide for invocation of IT Act. It was also held that the applicants under the ITSC did not qualify as ‘assessee’ under the then definition of ‘assessee’ under BMA and hence it cannot be held that ITSC lacked jurisdiction to decide the applications. The tax authorities were given various opportunities during the ongoing settlement procedures and hence could not bring these proceedings challenging the settlement order.

Year 6 and onwards: 2020-21 – First lot of assessment orders, Commissioner of Appeals notified, and separate Bench notified in Tribunal for hearing BMA cases

While the first major batch of assessment orders under BMA was due in March 2020, on account of COVID – 19 and related relaxations in time limits announced, the time limit for passing such assessment orders were extended until 31 March 2021. Number of administrative steps were taken in 2021 namely designation of area-wise Commissioner of Income Tax (Appeals) for the purposes of filing and hearing BMA appeals, constitution of specific benches in the Income Tax Appellate Tribunal for hearing BMA cases as well as consolidation of ongoing investigation and assessment cases area wise in specifically designated ranges to ensure focused and consistent approach.

Note-worthy rulings pronounced in this period:

Three rulings of Mumbai Bench of Tribunal

1) Mr Jatinder Mehra ruling [TS-521-ITAT-2021(DEL)] – In this case, BMA proceedings were invoked in case of the taxpayer on receipt of information concerning offshore assets. The taxpayer was stated to be a settlor of an offshore trust, which when revoked had transferred funds to a company based in BVI. The credits in the bank account of this BVI company were sought to be added in the hands of the assessee. The assessee explained that he was the nominal settlor of the trust without making any financial contribution and he did the same on request of his family members. The assessee’s son (who was a non-resident for more than two decades) was the owner of the entity to which the bank account being investigated belonged and that the assessee was neither a director nor shareholder of the entity. The assessee also filed an affidavit stating he never signed any documents and did not receive any funds from this company. The Commissioner of Income Tax (Appeals) found merit in the submissions of the assessee and deleted the additions made. The Tax Department agitated this before the Tribunal and even the Tribunal upheld the appellate order. In doing so, the Tribunal also examined meaning of the terms “beneficial ownership” and “beneficial interest” in the backdrop of a number of laws including Companies Act, Prevention of Money Laundering Act, The Benami Property (Prohibition) Act, etc. and held that there was no evidence placed on record to prove that the assessee was the beneficial owner of such offshore assets. The Tribunal also held that merely because a taxpayer’s name appears on the account opening documents, the taxpayer does not become an owner of such a bank account and that the onus is on the department to prove that the funds sought to be taxed belonged to such a taxpayer.

2) Mr Yashovardhan Birla ruling [TS-837-ITAT-2021(Mum)] – Recently the Mumbai Bench of Tribunal pronounced a ruling under BMA in case of Yashovardhan Birla in the context of the offshore assets. These offshore assets were subject matter of litigation under Wealth Tax Act 1957, and there was a positive ruling in the context of Wealth Tax in case of the taxpayer. In the present case, the Tribunal held that the provisions of BMA were not applicable in the case of Yash Birla as merely on account of his being a discretionary class beneficiary of an offshore trust, he could not have been alleged to be the owner of the assets of the trust. It was observed that the taxpayer was not a contributor to the trust structure and was not liable to be construed as sole beneficiary of the trust. It was held that the Revenue cannot collapse the offshore trust structure. It was further held that the bank account in foreign jurisdictions pertaining to offshore entities could not be treated as bank accounts of the taxpayer, even though for anti-money laundering purposes the taxpayer had been declared as a ‘beneficial owner’.

3) Mr Rashesh Manhar Bhansali ruling [TS-1015-ITAT-2021(Mum)] – In contrast to the above two rulings, this is a very different ruling in terms of facts. In this case, the taxpayer denied any relationship with the offshore assets under investigation to begin with and at the fag end of the BMA assessment proceedings, the taxpayer owned up the accounts, stating that these were set up on instructions of his late father. The Tribunal has considered the factual matrix very minutely and made many observations which have culminated in the confirmation of additions. Multiple legal arguments were raised and dealt in the following manner:

a. Bank accounts under investigation were shut before BMA was introduced and hence could not have been taxed at all as their existence at the time of introduction of BMA was sine qua non for applicability of BMA thereon. The Tribunal considered the arguments raised including the use of the word “is” in Section 2(11) – Definition of the term ‘undisclosed asset located outside India’ of BMA and concluded that under the provisions of BMA, existence of an asset at the time of introduction of BMA was not a pre-condition for its applicability.

b. It was argued that revenue authorities were already aware of and investigating the concerned offshore assets even before the BMA was introduced and in such a situation BMA could not be invoked. The Tribunal after considering the language of Section 3(1) held that asset coming to the knowledge of ‘assessing officer’ is the trigger and the Tribunal’s finding is that “whether an undisclosed foreign income is in the knowledge of the Assessing Officer at any point of time or not is not the material factor; the material factor is that it should remain undisclosed in the income tax return or return of income in respect of the same is not filed. While the investigation wing was indeed carrying out inquiries even before the point of time when the provisions of the BMA came into effect but that factor, as the above analysis of legal position indicates, is not a material factor.”

While addressing the taxpayer’s arguments, the Tribunal also considered a FAQ (regarding knowledge about offshore assets by other functionaries of Government of India and not just the assessing officer) that was released to assist taxpayers in making disclosures under the One Time Disclosure Window. The Tribunal ultimately held that the context of the FAQ was different (to assist disclosures and not in the context of assessments under BMA) and also that a circular that goes beyond the scope of the law is not binding on the assessee and hence cannot be of any assistance to taxpayers in this regard.

c. The next major argument for consideration by the Tribunal was definition of the term ‘beneficial owner’. The Tribunal referred to the intention and preamble of BMA in this regard. It has been held that the context in which ‘beneficial owner’ is to be considered under BMA is diametrically different than that under the IT Act. If the restrictive definition of beneficial owner as assigned under IT Act was to be considered, that would amount to adopting the same shortcomings as were prevalent in existing laws and thus, such an interpretation is undesirable. The relevant finding of the Tribunal in this regard is - Viewed thus, if we are to hold that definition of ‘beneficial owner‘ as assigned by Explanation 4 to Section 139(1) is to equally apply, we will end up in a situation in which the BMA itself will become unworkable. Therefore, for both of these reasons- i.e. (a) the contextual requirements being otherwise, and (b) the adoption of this meaning rendering the provisions of BMA becoming unworkable, the definition under Explanation 4 to Section 139(1) cannot be adopted in the context of the BMA.

The trend of cases under BMA (as well as generally in the context of offshore assets related rulings even under IT Act) seems to depict that in cases where one is able to prove that an offshore asset under investigation does not belong to him as well as produce details of / evidence regarding the actual owner of the offshore assets, the appellate authorities / courts seem to be taking a lenient view.

Conclusion:

Some important questions in the context of provisions of BMA that will need to be decided by Courts in due course are:

1) Are provisions of BMA violative of Article[1] 20(1) (in so far as it has retrospective application and criminal sanctions) and Article 20(2) (as a taxpayer may be liable under BMA as well as IT Act for certain offences – for example – incorrect return filings as discussed earlier in this article) of the Constitution of India?

2) Whether the amendment (introduced in 2019 to apply retrospectively from 1 July 2015) in the definition of ‘assessee’ to include certain Non-residents and Resident but not ordinarily residents in the ambit of BMA law will withstand judicial scrutiny?

3) Whether BMA can be invoked on assets that were not in existence at the time of introduction of BMA? While the Tribunal in the Bhansali ruling (supra) has taken a view on this, it will be interesting to see if this is agitated before higher courts and how the courts would look at these provisions.

4) Can the presumption under Section 72(c), which effectively does away with limitation period on account of non-availing of the One Time Disclosure Window, be used against taxpayers who were not even eligible to avail such a disclosure widow? There was a huge list of exclusions prescribed debarring taxpayers from availing the One Time Disclosure Window. One will need to see how the Courts look at this aspect, as the ultimate view on this may have many ramifications on the overall administration of BMA law.

5) Is there or does there need to be a time limit within which an assessing officer needs to initiate proceedings under BMA after having received information from any source. A writ petition raising this issue is pending before the Delhi High Court (in case of Harvansh Chawla) wherein amongst other grounds, the taxpayer has also sought quashing of BMA proceedings on the ground that a show cause notice was issued after the time limits prescribed (under Department guidelines).

While considering cases under BMA, Courts are likely to tread cautiously and give heavy weightage to the intent and preamble of the law while deciding the cases and such a consideration may result in undermining / sidestepping of many well-settled concepts.

It may however be noted that unlike the general perception on data leaks, not all names and entities appearing in these leaks are tainted. It is very much possible that the structures as appearing in the so called leaked or tainted / confidential information would be completely legal structures compliant with all regulatory framework, reporting requirements, etc. Even the websites on which leaked information is uploaded and made available for public access, generally there is a disclaimer that the offshore structures could well be within regulatory and legal framework. Having offshore structures and trusts and the mere fact that data is listed on these websites does not mean, suggest, or imply that there is any impropriety, evasion, etc., on the part of the individuals / entities mentioned therein. However, one will need to be mindful that the perception of the authorities / courts in case of offshore matter investigations is going to be negative and undoing that is going to be an uphill task.

One hopes a pragmatic view is taken in these matters and the Government considers introducing a disclosure scheme which will be more inclusive and devoid of the many exceptions made in the 2015 scheme, which made it impossible for even willing taxpayers to comply and settle their issues. While a lot of prosecution cases have been filed in offshore investigation related cases, however these cases result in application of a lot of time, efforts and resources both on the part of the taxpayers and tax administration. Rather than going through these rigorous proceedings and protracted litigation, it would be preferable for the taxpayers to settle the cases which will also result in revenue generation for the tax administration.

[1] Article 20 - Protection in respect of conviction for offences:

(1) No person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence

(2) No person shall be prosecuted and punished for the same offence more than once

(3) No person accused of any offence shall be compelled to be a witness against himself

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Section 68 Additions – Whose Onus was it Anyway?

sandeep.rathod@taxsutra.com — Wed, 20 Oct 2021 04:43:13 +0000

Section 68 Additions – Whose Onus was it Anyway? sandeep.rathod… Wed, 20/10/2021 - 10:13

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It is often said that the moment one argues on onus of proof and on whom the burden of proving something lies, it is more likely that the side making such arguments will be on the losing side. Thus, as a strategy, especially in direct tax litigation, the onus of proof would generally be one’s last resort. That, however, does not take anything away from how courts have dealt with and looked at the concept of burden of proof especially in the context of gauging the genuineness of transactions while considering the applicability of Section 68 of the Income Tax Act, 1961.

Onus of Proof - Developments under law – A swinging pendulum?

The burden of proof in the context of invoking Section 68 has been heavily litigated and this space has also seen legislative amendments. The settled law, at one point in time, was that where a credit is received from the assessee or a relative or an employee, etc. the burden to prove genuineness of the transaction would rest heavily on the assessee. Where the credit is not from such a party but a third party, the burden would still lie on the assessee to prove the identity of such third party and that such an entry is real and not prima facie fictitious. The onus would not be on the assessee to explain further how or in what circumstances the third party had obtained such funds and how or why such third party had approached the assessee to make a deposit of the same.

A proviso was inserted in Section 68 effective from 1 April 2013 (Assessment Year 2013-14) mandating explanation of nature and source of the amount credited in its books of accounts. Thus, post introduction of this proviso, merely providing names, addresses and PAN details of investors would not suffice; investee companies would be expected to provide in-depth details and lot more evidence.

Noteworthy rulings

One of the leading and often cited cases (pre-insertion of proviso to Section 68) was the Supreme Court ruling in the case of Lovely Exports [TS-85-SC-2008-O] wherein it was held that the onus of the assessee was discharged once name, address, PAN details of investor had been provided. It was further held that if tax department wishes to further investigate bogus shareholders, it would be free to initiate proceedings in their cases.

In case of private placement of shares in closely held companies, courts have held that merely submitting PAN details and identity of investors would not suffice and capacity of the investor as well as genuineness of the transaction would also need to be looked into and the onus to prove genuineness on all counts would lie heavily on the recipient assessee.

Then came the ruling in the case of NRA Iron and Steel [TS-106-SC-2019] wherein the Supreme Court held that in cases of private placement of shares, the company had an onus to prove to the authorities of the genuineness of the money received and was under a legal obligation to show that un-accounted money was not being converted through a cloak of share capital. This was a case where the assessee had been successful up to the Delhi High Court. However, the Supreme Court decided the case ex parte against the assessee on various counts (a review petition in this case was also dismissed). Some of the factors that influenced the Supreme Court in casting doubts on the genuineness of the transactions were negligible taxable incomes offered by the investors not commensurate with their investments, absence of justification for high share premiums, and non-availability of some investors at their mentioned addresses.

The Income Tax Appellate Tribunal, Mumbai Bench (Tribunal), in its recent ruling in case of Leena Power Tech Engineers Pvt Limited (Taxpayer) [TS-883-ITAT-2021(Mum)] has ruled that investments received by the Taxpayer for share subscription from ‘shell’ companies and through multiple- layered funding will not be considered a genuine transaction.

Background

As narrated in the Tribunal order, this case involved transfer of funds to a company via banking channels carried out through a series of transactions by shell companies whereby share application money was raised from unrelated companies at huge premiums.

The Taxpayer, a private limited investment company, had received funds in the form of share application money from certain entities say ‘R’ and ‘M’. The assessment was reopened in case of Taxpayer and additions were made by the tax officer on basis of information from investigation wing which indicated that such funds had been subjected to routing through several layered bank accounts wherein the Taxpayer had been named as the ultimate beneficiary. On being questioned, the Taxpayer failed to prove genuineness of the transaction to the satisfaction of the tax officer and additions were made to the Taxpayers taxable income under Section 68. The Taxpayer approached the Commissioner of Income Tax (Appeals) and was granted relief.

Aggrieved, the Tax Department filed an appeal before the Tribunal which noted the arguments of both sides and made some key observations.

Arguments

1. Bonafide transactions

The tax officer contended that the Taxpayer was a beneficiary of a sophisticated money laundering scheme carried out through layered banking channels via the share subscription route. However, the Taxpayer had argued that the companies which had subscribed did not receive any cash deposits and even if there were layers the flow of funds, the same had not been shown by the tax officer.

2. Responsibility to show genuine transaction

It was argued by the tax officer that the Taxpayer had a greater responsibility of showing genuineness of transaction and merely submission of PAN number, financial statements and returns of investor companies did not satisfy the conditions under the law. The information on these accounts and companies showed that there was no genuine business being undertaken. The Taxpayer contended that it had submitted the relevant documents prescribed by the tax officer and had no other onus and its obligations stood discharged.

3. Veracity of investigation

The Taxpayer argued that the tax officer merely relied on the observations of investigation report and did not carry out any independent investigations. However, the tax officer defended the position by stating that it became difficult to prove the case to the hilt within a limited time period and the information provided by the Taxpayer showed that nature of transaction was clearly dubious.

Ruling

The Tribunal took note of all the arguments as noted above and held that the burden was on the Taxpayer to prove 'genuineness' of the transaction i.e., bona fide nature and source of credits in its books of account, to the satisfaction of the tax officer.

The Tribunal observed that while a shell company in itself would not be an illegal entity, the act of abatement of, and being part of, financial manoeuvring to legitimise illicit monies and evade taxes, would take its actions beyond what was legally permissible. The only thing which would set a shell company apart from a genuine business entity would be lack of genuineness in its actual operations.

On examining the financial statements of ‘R’ and ‘M’, the Tribunal observed that no real activity had been carried out by these entities and almost all of the funds received by them had been passed onto other companies. There was also no mention of any revenues nor any telephone, office, equipment or other expenses in the balance sheet, which seemed difficult to believe especially given the aggressive manner in which these entities had undertaken investments at huge premiums. Further, all the funds that had been received by ‘R’ and ‘M’ had been transferred to the Taxpayer within a matter of days by repeating the same subscription model. Therefore, the Tribunal held that ‘R’ and ‘M’ were merely conduit companies without any independent business activities.

On perusal of the bank statements of ‘R’ and ‘M’, the Tribunal observed that certain payments had been made to the Taxpayer, but immediately preceding these transactions, certain repayment credit entries had been recorded. This seemed to have been a recurring cycle which did not inspire any confidence in the genuineness of the transaction.

Additionally, no information had been provided by the Taxpayer explaining who was controlling and managing ‘R’ and ‘M’ and its other associated entities. The entities involved in the transactions only provided different layers to the transaction and de facto hid the true investor. The shares were issued at a premium that too in a company which had no other activity except for routing the funds to another company (Taxpayer) by making investments therein at a huge premium. The Taxpayer was stated to be not connected with ‘R’ and ‘M’ in any manner, and yet the share subscriber had such a faith in the Taxpayer that it subscribed to the shares at an extremely high premium and that too without any management rights, which was quite unusual and suspicious. All this led to a conclusion that the investor company was acting as a conduit and shell company which was siphoning off money to other entities.

Therefore, the Tribunal rejected the Taxpayer’s appeal and ruled in favour of the tax authorities since Taxpayer had failed to justify huge share premium received by it and the material on record did not provide the abovementioned transaction to be a regular transaction in normal course of business. Accordingly, relevant additions made by tax officer were considered to be justified.

On onus of proof the Tribunal held, and we quote as under:

“There is no, and there cannot be any, dispute on the fundamental legal position that the onus is on the assessee to prove 'bona fides' or 'genuineness' of the share application money credited in his books of accounts.”

This Tribunal case (also a case before the proviso to Section 68 is applicable as the relevant year was AY 2011-12) has reiterated the position of the law that shell companies, irrespective of their form of existence, have to be analysed with respect to the substance of their activity. By holding that the transaction of share subscription was not genuine, the Tribunal emphasised on the fact that the burden of proof remains on the taxpayers to prove the genuineness.

In deciding this case the Tribunal (which is the final fact-finding authority in the appeal hierarchy) ignored Taxpayer’s technical arguments like change of opinion, natural justice, source of information in possession of the tax department, etc. and endeavoured to take a holistic approach giving credence to substance over form. The Tribunal also reiterated the findings from an earlier Supreme Court ruling to hold that it would be a superficial approach if it was expected of the alleger of fraud to prove so, as the fraudulent transaction could have taken place in secret and direct evidence of such deeds would be rarely available. These observations will have far reaching implications, and it will be interesting to see how the higher courts deal with this case as well as a lot of other similar cases.

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Unresolved Issues On Intermediary Services

parag.deshmane@taxsutra.com — Thu, 23 Sep 2021 10:42:05 +0000

Unresolved Issues On Intermediary Services parag.deshmane… Thu, 23/09/2021 - 16:12

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The introduction of an entirely new tax regime, in keeping with evolving business and needs of the society demands a well thought out process. The advent of the Goods and Services Tax (GST) was an important occasion for the nation and nothing short of a landmark in India’s financial roadmap. However, as the regime progressed, several complications ensued in implementation as well as interpretation of the GST legislation. One of the interminable conundrums of the GST regime pertains to taxation of intermediary services provided to foreign customers. In terms of Section 2(13) of the Integrated Goods and Services Tax Act, 2017 (IGST Act), activities in facilitating exchange of goods or services, or both are called ‘intermediary services’. Discussion on this issue becomes especially relevant considering the recent clarification issued by the Ministry of Finance dated 20 September 2021 after a fair amount of deliberation in the 45th GST Council Meeting.

It must be noted that the concept of ‘intermediary’ is not novel to GST regime, it has been in existence from the service tax regime. However, ‘place of supply’ provisions became the dominant force under GST regime, replacing the erstwhile ‘place of provision’ rules. Section 13 of the IGST Act deals with the determination of place of supply of services where either the supplier of service or the recipient of service is located outside India. As per sub-section (8)(b) of Section 13 of the IGST Act, the place of supply of intermediary services is deemed to be the location of supplier of services. This deeming fiction under the Section 13(8)(b) of the ICGST Act militates against the basic principles of destination-based consumption tax which forms the bedrock of GST and vitiates established constitutional provisions.

In writ petitions argued by the authors before various High Courts, differential GST treatment to service exports and intermediary services have inter alia been challenged. The Hon’ble Gujarat High Court, in Material Recycling Association of India vs UOI and Ors.[TS-586-HC-2020(GUJ)-NT] upheld the vires of Section 13(8)(b) of the IGST Act and made it open to for the Government to consider and redress the grievance raised in the petition, in a suitable manner, as per law. The order passed by division bench of Gujarat High Court in Material Recycling Association of India is presently under review before the same bench that had passed the judgment. In another writ petition argued before the Hon’ble Bombay High Court in ATE Enterprises Pvt Ltd. vs UOI and Ors [TS-257-HC(BOM)-2021-GST], the division bench of the Bombay High Court gave a divided verdict. One of the judges declared Section 13(8)(b) of the IGST Act as ultra vires and unconstitutional. The reference is presently under consideration before another bench. Several litigations in respect of classification of intermediary services have also proliferated in other forums due to ambiguous definition of ‘intermediaries’ in the IGST Act. Yet, no clarification has been issued on the place of supply provisions pertaining to intermediaries.

Sub-section (1)(a) of section 16 of the IGST Act, 2017 states that export of goods or services or both shall be considered a ‘zero-rated supply’ which allows the suppliers to claim refund on GST paid on inputs/input services used for affecting the zero-rated supply. In this context, the ambiguous definition of ‘intermediary’ read with the deeming fiction created by Section 13(8)(b) of the IGST Act have been progressively used to deny intermediaries the benefit of zero-rated supply or export refunds.

Powers to levy and collect taxes ultimately emanates from Constitution of India. In terms of Article 265 of the Constitution, no tax can be levied or collected except by the authority of law. It is therefore, impermissible to collect taxes without the explicit authority of law. The Hon’ble Supreme Court of India in GVK Industries Ltd. v. ITO[4] laid down the concept of pith and substance and stated that law only permits levy and collection of taxes which are provided and consumed within India. One might argue that Section 13(8)(b) of the IGST Act is violative of Article 265 of the Constitution of India as the provision empowers state legislatures to levy and collect State GST (SGST) on supplies which are made outside the state without ‘authority’ under Article 286 of the Constitution of India.

Besides, Article 286 of the Constitution provides that no law of a state shall impose or authorize the imposition of a tax on the supply of goods or services or both if the supply takes place outside India. The underlying deeming provision under section 13(8) of the IGST Act also violates this constitutional mandate. State tax (SGST) levied on intermediaries for supplying goods or services or both to a foreign entity is violative of this Article since there is no power vested with the authority to levy tax on a supply which occurred outside India.

GST is a destination-based tax. Goods or services or both have to be taxed at the place where they are consumed and not at their place of origin. Correspondingly, the state where they are consumed will have the right to collect GST. This basic tenet of the GST is contradictory to what is mentioned under the section 13(8) of the IGST Act whereby, the supplier of service is charged to tax rather than the end user. Section 13(8) is evidently not aligned with the basic intent behind introduction of GST. This ambiguity further gives rise to double taxation of the services provided by an intermediary to a foreign entity. In an export transaction, intermediary services are subjected to tax in India. Likewise, these services are again taxed as an import in the recipient Country thereby leading to double taxation of the same transaction making the service economically unviable. This contradiction in the law requires necessary government intervention and clarification.

Any rule of law cannot be in disregard of Article 14 of the Constitution of India which ensures that there is no unreasonable discrimination at play while treating two similar situations objectively. State actions need to be fair, reasonable, non-discriminatory, transparent, non-capricious, unbiased, and committed in pursuit of promotion of healthy competition and equitable treatment.[5] Section 13(8)(b) of the IGST Act unfortunately, fails to comply with Article 14 of the IGST Act since intermediary services are treated as recipient / destination-based service when the recipient is in India and is treated as a provider-based service when recipient is outside India. Besides, there is no rationale or justification for such arbitrariness or latitude in the act of policy making, in public interest. Incidentally, Section 13(8)(b) has been inserted / retained in the IGST Act against the recommendations of the Rajya Sabha Select Committee Report on Constitution (One Hundred and Twenty Second) Amendment Bill, 2014 and the Parliamentary Committee Report dated 19 December 2017 on the impact of GST on exports. The 139th Parliamentary Standing Committee, in its Report on impact of GST on exports expressed a clear view that Government must amend section 13(8) of the IGST Act to exclude 'intermediary' services and make it subject to the default section 13(2) so that the benefits of export of services are available to intermediaries.

With the ever-growing use of technology in businesses, India’s prospects on providing back-office services, technical services and customer support to the world have surged exponentially. However, the current regime of taxation is not aligned to augment or sustain this growth. Taxation on export intermediary services from India stands in direct conflict with international best practices.

Section 13(8)(b) of the IGST Act also violates Article 19(1)(g) of the Constitution as unfair treatment in law makes export of intermediary services unviable and uncompetitive in international markets. The dilemma between export services and intermediary services also poses a formidable threat to the Indian exporters as several rulings illustrate that the collective administrative intent to include the intermediary exports under the tax ambit when the export other services remain zero-rated.

Following the 45th GST Council meeting, Department of Revenue, vide Circular dated 20 September 2021, clarified its position on classification of intermediary services. It was clarified that there must be involvement of three parties and two distinct supplies i.e., principal supply and ancillary supply; supplier must have a character of an agent or broker or similar person and must not supply goods or services on his own account. Additionally, it was clarified that a supply under a sub-contract arrangement will not qualify as an intermediary service. While the circular clarifies to a certain extent, as to what qualifies as an ‘intermediary service’ it fails to address discrepancies between export and intermediary services.

In the best interest of all exporting intermediaries in India, the government must attempt to clarify its position on export of intermediary services and aim to resolve legal conflicts surrounding the deeming fiction under Section 13(8)(b) of the IGST Act.

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Black Money Act – All you need to know – Part 3

superadmin — Fri, 30 Apr 2021 05:40:27 +0000

Black Money Act – All you need to know – Part 3 superadmin Fri, 30/04/2021 - 11:10

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Black Money Act Sanjay Sanghvi

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The first major lot of assessment orders have been passed under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA). Like timelines under various acts, the time limits for passing assessment orders under BMA were also extended on account of COVID 19 and the first major lot of assessment orders were passed on or around 31 March 2021. Taxpayers (in whose cases these orders have been passed) are in advanced stages of filing an appeal or would have recently filed appeals before the Commissioner (Appeals), which is the first appellate authority.

The author had co-authored an article on this topic last year. Published in two, part 1 released on 4 May 2020 (Black Money Act - All You Need to Know - Part 1) listed the basics of BMA and in Part 2 published on 8 May 2020 (Black Money Act - All You Need to Know - Part 2), the author had analysed some defenses available to the taxpayers. In this article (Part 3), the author has endeavored to cover aspects around appeals and related practical aspects of BMA.

Relevance of the date - 31 March 2021:

BMA is effective from 1 July 2015. A limited period one-time disclosure window was introduced wherein one could file a disclosure (until 30 September 2015) and come clean by paying 30% tax and 30% penalty (effectively 60% of the value of undisclosed income and offshore assets). Immunities from action under five acts (Income Tax Act, 1961. Wealth Tax Act, 1957, Foreign Exchange Management Act, 1999, Companies Act, 2013 and Customs Act, 1962) were given to taxpayers who availed this opportunity.

Taxpayers who were not eligible for or did not opt to disclose and settle (by paying 60%) may later on discovery of such assets / incomes be required to pay 120% (being 30% tax and 90% penalty) and also be liable to prosecution under the provisions of BMA. A lot of notices were issued (under Section 10(1) of BM Act, the section under which assessment proceedings are initiated under BMA) in the year financial year 2017-18. Time limit prescribed to complete assessment is 2 years from the end of the financial year in which notice is issued, hence the time barring to complete these assessments was 31 March 2020. However, on account of COVID-19, this time limit was extended up to 31 March 2021. Thus, effectively the first lot of assessment orders under this Act were passed last month.

Received an assessment order under BMA, what next?

Under Section 15 of BMA, any person can file an appeal before the Commissioner (Appeals) within 30 days of the service of notice of demand relating to assessment or penalty under BMA. Delay of up to 1 year in appeal filing can be condoned by the Commissioner (Appeals) if he is satisfied that the appellant had sufficient cause for not filing the appeal in time.

Points on which an appeal can be preferred:

1) Where the person denies liability to be assessed under this Act, or

2) Where the person objects to the amount of tax on undisclosed foreign income and asset for which the assessing officer has passed an order, or

3) Where the person objects the levy of any penalty under BMA, etc.

There are various situations wherein the taxpayer may altogether deny liability to be assessed under the Act. This could be a situation where the taxpayer denies being treated as an ‘assessee’ to whom BMA applies or would have sufficiently explained the source of investment in such asset and hence is of the view that BMA does not apply at all. Or it could be a situation that the Tax Department would be aware of the existence of the offshore assets and incomes even prior to the BMA coming into effect and hence the taxpayer may claim that invocation of BMA in such a situation is untenable. In the alternative, the Taxpayer may contend that certain provisions of BMA are in contravention of the Constitution of India (see part 2 of this article for detailed arguments in this regard) and hence deny liability to be assessed under this Act altogether. Facts supporting, this argument needs to be taken as in such a case, the Commissioner (Appeals) will decide the issue regarding applicability of BMA initially and then take up the appeal on merits, if required.

If the facts support, taxpayers may also consider approaching the High Court with a writ petition seeking to quash the assessment order.

Who is the jurisdictional Commissioner (Appeals)?

BMA proceedings have been kept outside the purview of faceless assessments and appeals and hence assessments and appeals are still being undertaken in the traditional manner. Until recently there was lack of clarity on where to file an appeal against an order passed under the BMA as there were no designated Commissioner (Appeals) under BMA and there was complete reorganization of Commissioner of Income Tax (Appeals) on account of introduction of faceless appeals. Taking note of this situation, the Central Board of Direct Taxes (CBDT) recently (on 23 March 2021) notified jurisdictional Commissioner (Appeals) for BMA. In the said notification 19 Commissioner of Income Tax (Appeals) under the Income Tax Act, were designated as Commissioner (Appeals) for the purpose of BMA. Jurisdictional Commissioner (Appeals) for major cities are listed in below table:

Sr No

Jurisdiction

Designated Commissioner to exercise jurisdiction for cases under BMA

Mumbai

Commissioner of Income Tax (Appeals) – 51, Mumbai.

Delhi

Commissioner of Income Tax (Appeals) – 31, Delhi.

Chennai (Tamil Nadu & Puducherry)

Commissioner of Income Tax (Appeals) – 18, Chennai.

Kolkata (West Bengal & Sikkim)

Commissioner of Income Tax (Appeals) – 20, Kolkata.

International Taxation

Commissioner of Income Tax (Appeals) –42, Delhi.

An appeal needs to be filed physically in Form 2 (along with applicable appeal filing fee) as prescribed under the requisite rules under BMA. The format of appeal under BMA also includes submission of statement of facts and grounds of appeal as is the case in appeals filed under Income Tax Act, 1961 (vide Form 35).

Appeal is filed, what next?

Since proceedings under BMA have been kept outside the purview of faceless assessments and appeals, the appeals will be decided by the Commissioner (Appeals) in the traditional manner. Section 16(8) of BMA prescribes that the Commissioner (Appeals) shall endeavor to schedule hearings as expeditiously as possible and try and dispose the appeal within a period of one year from end of the financial year in which appeal is filed. The appeal process under BMA is quite similar to the normal appeal process under the provisions of IT Act and the Commissioner (Appeals) has been granted wide powers including enhancement related powers (after giving requisite opportunity to the taxpayers). The Commissioner (Appeals) has powers to consider and decide any matter which may not even have been considered by the Assessing Officer.

Once an appeal is filed with the Commissioner (Appeals), the taxpayers may also consider writing to the Assessing Officer to keep demand recovery as well as penalty proceedings in abeyance until the appeal is decided by the Commissioner (Appeals).

Higher appellate hierarchy

An order passed by the Commissioner (Appeals) can be agitated before the Appellate Tribunal. An appeal will need to be filed with the Appellate Tribunal within 60 days from the date of receipt of order of Commissioner (Appeals).

An order of the Appellate Tribunal can be agitated before the High Court by filing an appeal within 120 days. The High Court will admit an appeal only if it of the view that the matter involves a substantial question of law. An appeal will lie to the Supreme Court against an order of the High Court only in case the High Court certifies it as a fit case for appeal to the Supreme Court.

It may be noted here that Section 25 of BMA prescribes that taxes due in accordance with the assessment will need to be paid irrespective of the fact that the taxpayer is in appeal before the High Court or Supreme Court.

Practical suggestions for taxpayers

All in all, robust documentation (especially explaining source of funds, wherever applicable), proper representation and filing responses / submissions coupled with accurate compliances will act as the best possible defence for the taxpayers against any regulatory action that may be initiated under BMA. It is also very important to note that ramifications of negative appellate orders are very high in case of BMA especially in view of the fact that the act prescribes for payment of taxes due irrespective of the fact that the taxpayer is in appeal before the High Court or Supreme Court. This provision makes the appellate proceedings before the Commissioner (Appeals) and Appellate Tribunal all the more important as in case these orders are negative, there could be huge tax outflows on one hand and regulatory action like initiation of prosecution proceedings by the authorities on the other. One also needs to be mindful that only a question of law will be taken up by the High Court.

Thus, it becomes imperative to bring all requisite facts as well as arguments on record before the Commissioner (Appeals) as well as Appellate Tribunal and get adjudication on merits as Appellate Tribunal is the final fact-finding authority and the base for the case will be created by the orders passed by Commissioner (Appeals) as well as Appellate Tribunal.

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Tax Residency Determination – COVID Induced Stay in India – Clarity Expected Soon!

superadmin — Mon, 15 Feb 2021 05:03:37 +0000

Tax Residency Determination – COVID Induced Stay in India – Clarity Expected Soon! superadmin Mon, 15/02/2021 - 10:33

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Determination of residential status is one of the foremost steps in ascertaining an individual’s income taxation as well as tax reporting requirements in India. Given the uncertain times that the World is facing today on account of COVID – 19 and international travel restrictions, there is lack of clarity even on this very basic aspect for a certain class of taxpayers.

One is reminded of the quote:

For every ailment under the sun,

There is a remedy or there is none,

If there is one, try to find it,

If there is none, never mind it.

What is the ailment?

India ascertains residency for individuals based on a “physical presence test”. An Indian citizen may also be deemed to be a resident of India under certain circumstances (but there too “physical presence test” plays an important role).

The ‘ailment’ / issue that is being faced by many taxpayers (majorly NRs and expats) is in determining whether COVID – 19 induced stay in India would need to be included in the days count undertaken for the “physical presence test”. We could understand this further in terms of a hypothetical example:

Factual background:

Mr A is a person of Indian origin who has been working in the USA for more than a decade and has taken up US citizenship.
Mr A regularly files his tax returns in India as a non-resident of India, reporting his Indian sourced investment and passive incomes.
He came to India on a ‘visit’ in the middle of February 2020 for about three to four weeks to attend social events as well as spend time with his family and friends.
Just when he was to leave India, international travel restrictions got imposed and he was stranded in India until say until December 2020.
Mr A continued to work remotely and was receiving his salary from the US employer for work done (his work has no connection with India whatsoever).
A plain reading of the provisions of Indian taxation would render him a resident of India for Financial Year 2021-22 (Assessment Year 2022-23) as his stay in India during this period has exceeded 182 days (April 2020 to December 2020).

Questions / practical issues that arise in this situation:

Will Mr A be treated as a tax resident of India and accordingly will he be liable to pay taxes in India on his US salary (India taxes global incomes of its residents)
Mr A will also be liable to pay taxes on his US income as he is a citizen of USA. Once this situation arises, will the tie breaker clause come into picture and will Mr A need to take a call on that.
To add to the issues, say US follows calendar year for taxing and reporting of incomes and Mr A needs to do that determination and file taxes in US before March 2021 (which is the year end for India)?

In addition to the above, say Mr A found a good buyer for one of his ancestral property in India, while he was in India and decided to sell the property. There would be further complications here as the buyer will need to ascertain Mr A’s residential status and deduct taxes accordingly. If Mr A were to be a resident (which meant that the COVID – 19 induced stay is included in his stay in India) the buyer would be required to deduct taxes at 1% (or relaxed rate of 0.75% as applicable presently) under Section 194IA applicable for resident sellers of land and or building. Had Mr A been treated as a non-resident (which would mean that the COVID – 19 induced stay is excluded), taxes were required to be withheld under Section 195 on the sum chargeable to tax at the applicable rates in force.

The complications do not end at this assessment i.e., assessing Mr A’s residential status. Assume, a position is taken, and Mr A is treated as a resident and taxes withheld at 1% or 0.75% and later a clarification were to come from the Central Board of Direct Taxes (“CBDT”) that such forced / unintentional stay was not required to be included in undertaking the “physical presence test”. Then Mr A would become eligible to be file his tax return as a non-resident and will indeed be treated / assessed as a non-resident by the tax authorities and there could be potential issues of lower withholding of taxes, etc. as the transaction would have been consummated by the time a clarification came and appropriate taxes would have been withheld and deposited by then.

This is just a depiction of one of the many practical situations that may arise

Is there a remedy?

Yes, there indeed is. A lot of representations were made to the CBDT in this regard and remedial / clarificatory measures were expected in the Budget 2021. In fact, a ‘trailer’ of the expected remedy had already been released by the CBDT in the form of a clarification (Circular no 11 dated 8 May 2020 – “Circular”) providing for exclusion of the following days from the “physical presence test”:

From 22 March 2020 to either:

31 March 2020; OR
a date prior to 31 March until which such person was quarantined in India and could not leave India; OR
a date prior to 31 March 2020 by which such person left India on an evacuation flight.

In the said Circular it was further quoted as under:

Further, as the lockdown continues during the Financial Year 2020-21 and it is not yet clear as to when international flight operations would resume, a circular excluding the period of stay of these individuals up to the date of normalisation of international flight operations, for determination of the residential status for the previous year 2020-21 shall be issued after the said normalisation.

Why hasn’t the remedy been administered yet?

A reading of the above reproduced paras of the Circular suggest two things:

Timing of the circular: The circular was issued in the month of may and not immediately after the end of the year (31 March 2020). Thus, clarification was issued closer to the period when individuals had started raising questions as a position needed to be taken in filing their tax returns for Financial Year 2019-20.
Normalisation reference: The circular also states that requisite clarifications will come post normalisation and even on the date of this write up, there still exist extant restrictions on international travel globally.

It may be noteworthy that while issuing the Circular, one may not have thought that the pandemic situation will continue almost for the whole financial year.

Why is a remedy so important?

As has been stated earlier, determination of residential status is one of the foremost and a very important criteria for ascertaining taxes, reporting requirements, entitlements, withholding obligations for payers, etc.

Advance information on India’s position on this will assist / smoothen filings in other jurisdictions as well as then the taxpayer will know in advance whether he / she could state the position as a non-resident of India straight away in their global filings or require invocation of the tie breaker clauses under the relevant treaty as well as take care of any other related reporting requirements. While in the above circular it has been stated that similar clarification would be issued the situation normalises, but it is high time that a clarification is issued more so in view of the fact that a lot of jurisdictions follow calendar year for taxation and income tax returns would have started becoming due. It is preferable that the non-residents, expats would know their positions in advance and are able to make informed decisions accordingly rather than having to go through the hassles of revised filings in their respective jurisdictions later, etc.

Various countries[1] have already issued useful guidance and administrative relief on the impact of COVID-19 on the domestic and tax treaty determination of the residence status of an individual. The UK for example issued guidance on whether days spent in the UK can be disregarded for purposes of determining residency due to exceptional circumstances. Australia has also published guidance stating that where a person that is not an Australian resident for tax purposes is in Australia temporarily for some weeks or months because of COVID-19, she will not become an Australian resident for tax purposes. Ireland’s guidance provides for “force majeure” circumstances where an individual is prevented from leaving Ireland on his or her intended day of departure because of extraordinary natural occurrences.

Conclusion:

One only hopes that the CBDT takes note of these practical difficulties being faced by taxpayers and issues a clarification (on lines similar to the Circular) at the earliest.

The Hon’ble Supreme Court is already ceased of this issue[2]. The petitioner in this case has cited COVID and requested the Hon’ble Court for an appropriate ruling directing his treatment as a non-resident of India irrespective of the length of his stay in India. The Hon’ble Court took note of the Circular as well as the fact that the position has not changed till date and ultimately directed the petitioner to approach the CBDT with a representation and directed the CBDT to consider it within a period of three weeks. Thus, it is likely that a clarification will be issued by early next month.

While the contents of such a clarification will be interesting, one may also consider documenting and maintaining requisite records justifying the reason of the unintentional stay in India also including the lock down and travel restriction notifications, etc. There has been some litigation in the past around inclusion / exclusion of involuntary stay and such precedents will also come in handy if at all needed to defend residency related claim.

[1] Source: OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis (Version 3 April 2020).

[2] Gaurav Baid v UOI & ORS (Writ Petition (Civil) No.136/2021) order dated 10 February 2021. [TS-62-SC-2021]

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Ashish Mehta

superadmin — Mon, 14 Dec 2020 12:55:08 +0000

Ashish Mehta superadmin Mon, 14/12/2020 - 18:25

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