TAXVANI

AO could consider claim of deduction made under wrong section without asking assessee to file revised return: HC

Where claim for a deduction is made under a wrong provision but necessary facts for said claim to be set up are available in return, in such a case, Assessing Officer can consider such a claim without revised return being filed by assessee

Where assessee claimed deduction of sec. 80G in respect of amount given to a charitable trust for air-conditioning of a town hall owned by local authority, since said trust merely acted as an agent of assessee and it could not utilise amount in question for charitable purpose for which it was established, claim raised by assessee was to be rejected

Refer:[2018] 96 taxmann.com 498 (Kerala)

ITAT couldn’t remand matter back to AO if it had all relevant doc. on record to conclude finding

Where there was all relevant documentary evidence available on record to render finding whether assessee a Netherland based company had a permanent establishment in India, Tribunal could not have remanded back matter to Assessing officer for fresh consideration especially when Assessing officer had not discharged burden of proving that assessee had a PE in India.

Refer:[2018] 97 taxmann.com 24 (Bombay)

Madras High Court grants relief to disqualified directors of private companies

Introduction

1. The Central Government initiated campaign against black money, wilful defaulters and erring directors. After demonetisation, the Registrar of Companies identified 2.97 lakh companies during financial year 2017 – 2018 which were not filing their Financial Statements or Annual Returns for a continuous period of 2 or more financial years and, prima facie, were not conducting any business or were in operation. Out of such identified companies, the Registrar of Companies removed the names of 2,26,166 companies from the register of companies under section 248 of the Companies Act, 2013 ('the Act'). The Government identified 3,09,619 directors as disqualified directors under section 164(2)(a) of the Act pertaining to the deregistered companies for which Financial Statements or Annual Returns had not been filed for a continuous period of 3 Financial Years('FYs'). In the recent times, India Inc. and corporate law professionals are addressing two issues – Revival of deregistered company and disqualification of directors of the company. In Bhagavan Das Dhananjay Das v. Union of India [2018] 96 taxmann.com 189 (Madras), the Madras High Court granted reprieve to such disqualified directors. In the judgment, the Madras High Court addressed some pertinent issues relating to revival of deregistered companies, powers of Registrar of Companies, disqualification of directors, it's retrospective or prospective application, etc. The High Court considered a large group of writ petitions that various disqualified directors had filed before it. In doing so, the High Court interpreted the provisions of the Act and found that the actions of the Registrar of Companies were inconsistent with the statutory provisions of the law.

This article gives an analysis of the relevant facts of the case, key observations of the Madras High Court and conclusion drawn by the High Court. The observations made by the High Court about the contentious issues are quite interesting.

2. Case of Bhagavan Das Dhananjay Das v. UOI

2.1 Facts of the case - Petitioner was a director in a private company (incorporated under the Companies Act, 1956). Petitioner was also a director of a few other private companies. One of the private companies had no operations till 2012 and the directors prepared a plan to revive the company. The board of directors of the company was reconstituted. The new management infused additional capital into the company. Inspite of the change in management, the proposed revival plan did not fructify and, as a result the company was unable to commence its business activities. During this time the company did not file annual returns with the Registrar of Companies, i.e., from Financial Year 2012-13. On March 18, 2017, the Registrar of Companies issued a show cause notice under Section 248(1) of the Companies Act to the company for striking off its name from the Register of Companies for non-filing of the annual returns for a continuous period of 3 Financial Years. On receipt of the show cause notice, the company conveyed it's no objection for striking off the name, as there were no intentions to revive the company. Subsequently, the petitioner also came to know that the name of the company was struck off under Section 248 of the Companies Act, 2013 by the Registrar of Companies by the issue of a gazette notification. The Registrar of Companies released a list of directors disqualified under Section 164(2)(a) of the Companies Act with effect from November 11, 2016. In the list, the name of the petitioner was mentioned. In view of the consequential disqualification resulting from the striking off the company, the petitioner was prohibited to be appointed or re-appointed as a director in any other company for a period of 5 years until October 31, 2021 (5 years with effect from November 11, 2016). The petitioner (and many other directors of different company) filed a writ petition challenging the order passed by the Registrar of Companies.

2.2 High Court's key observations on disqualification of directors of private companies, interpretation of 'financial year', powers of Registrar of Companies & Principles of natural justice - Before concluding on the contentious matters relating to disqualification of directors and deregistration of companies, the High Court relied on some important principles and precedents. The important points covered by the High Court are calculation of Financial Year, notices issued by the Registrar of Companies w.r.t. Directors disqualification, General Principles concerning retrospective application of law and the principles of natural justice. Following five points will give us some background of the conclusion drawn by the High Court:

(i) High Court compared the provisions of Section 164(2)(a) of the Companies Act, 2013 with the provisions of Section 274(1)(g) of the Companies Act, 1956. The High Court noted that Section 274(1)(g) of the Companies Act, 1956, which came into effect from December 13, 2000, clearly states that '3 financial years commencing on and after the first day of April, 1999', whereas the Section 164(2)(a) of the Companies Act, 2013 uses the expression 'for any continuous period of 3 financial years'. Based on this, the High Court observed that Section 164(2)(a) of the Companies Act, 2013 was made effective from April 1, 2014 as per Section 2(41) of the Companies Act, 2013, the first financial year for the purpose of Section 164 of the Companies Act, 2013 would be March 31, 2015 i.e. April 1, 2014 to March 31, 2015;

(ii) The High Court observed that Section 164(2)(a) of the Companies Act, 2013 either expressly or by implication had not contemplated that the financial year would be from April 1, 2013. The High Court opined that "The Registrar of Companies, being a statutory body, cannot be allowed to misconstrue the provisions of a statute which infringes the fundamental rights of the petitioners. Hence, the writ petitions filed under Article 226 of the Constitution of India, which is the only remedy available to the petitioners, are maintainable and the wrong interpretation of Section 164(2)(a) of the 2013 Act for wrongly disqualifying the petitioners to be eligible to be appointed as director of that company or to be appointed in any other company for a period of five years by taking into account the default in filing of annual returns or financial statements even before the provision came into force by the second respondent, is bad in law";

(iii) The High Court perused the provisions relating to Annual Return and Financial Year, observed that last date for filing the Annual Return for the third FY. (i.e., March 31, 2017) is October 29, 2017. Based on this background, the High Court stated that "When this is the legal position, as per Section 164 of the 2013 Act, the disqualification of directors of a private company can get triggered only on or after October 30, 2017, hence, the list of disqualified directors published on the website of the first respondent in September, 2017 has no legal legs to stand up to the scrutiny of the Court under Article 226 of the Constitution of India";

(iv) On the General Principles concerning retrospectivity, the Madras High Court relied on the ratio laid down by the Constitution Bench of the Apex Court in Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited, [2015] 1 SCC 1, wherein it has been observed that "…. Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: Law looks forward not backward. As was observed in Phillips v. Eyre [1870] LR 6 QB 1, a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law."

(v) The High Court referred to the judgment passed by the Constitution Bench of the Apex Court in A.K. Kraipak v. Union of India, AIR 1970 SC 150, wherein the rule of the principles of natural justice was reiterated as "The aim of the rules of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. These rules can operate only in areas not covered by any law validly made. In other words, they do not supplant the law of the land but supplement it. The concept of natural justice has undergone a great deal of change in recent years. In the past it was thought that it included just two rules, namely, (1) no one shall be a judge in his own cause (Nemo debet esse jndex propria cause), and (2) no decision shall be given against a party without affording him a reasonable hearing (Audi alter partem). Very soon thereafter a third rule was envisaged and that is that quasi-judicial enquiries must be held in good faith without bias and not arbitrarily or unreasonably. But in the course of years many more subsidiary rules came to be added to the rules of natural justice. Till very recently it was the opinion of the courts that unless the authority concerned was required by the law under which it functioned to act judicially there was no room for the application of the rules of natural justice…. An unjust decision in an administrative enquiry may have more far reaching effect than a decision in a quasi-judicial enquiry".

Analysis of the conclusion drawn by the High Court

3. This part of the article is the summary of conclusions drawn by the High Court. The important and relevant points covered are retrospective effective of director's disqualification, interpretation of the 'financial year', effective date of director's disqualification, principles of natural justice and most importantly, whether the provisions relating to disqualification of directors of private companies is applicable with retrospective effect? The High Court's observations have far-reaching effects on the contentious issues relating to directors disqualification and deregistration of companies.

(i) Retrospective effect of director's disqualification was erroneous: The High Court noted that the Companies Act, 2013 came into effect from April 1, 2014 and the ROC has wrongly given retrospective effect and erroneously disqualified the petitioner-directors from November 1, 2016 itself before the deadline commenced wrongly fixing the first financial year from April 1, 2013 to March 31, 2014,

(ii) Interpretation of 'financial year' under section 164(2) of the Act with reference to MCA Circular: By virtue of the Section 164(2)(a) of the Act using the expression 'for any continuous period of three financial years' and in the light of Section 2(41) of the Act defining 'Financial Year' as well as MCA Circular, the first FY. would be from April 1, 2014 to March 31, 2015, the second FY would be from April 1, 2015 to March 31, 2016 and the third FY. would be from April 1, 2016 to March 31, 2017. Whereas the ROC clearly admitted that the default of filing statutory returns for the FYs commenced from Financial Years 2013-14, 2014-15 and 2015-16 i.e., one year before Companies Act, 2013 came into force. High Court stated that "This is the basic incurable legal infirmity that vitiates the entire impugned proceedings";

(iii) Effective date of triggering of director's disqualification: The High Court rightly observed that the disqualification could get triggered only on or after October 30, 2017, if any company fails to file annual forms for 3 Financial Years. Interestingly, the High Court stated that "It is to be borne in mind that even beyond that time limit, additional time limit of 270 days was available by virtue of the then first proviso to Section 403 (of the Act)";

(iv) Principles of natural justice against disqualification of directors: The High Court also observed that, although there is no statute or provision expressly spelling out the observance of the principles of natural justice against disqualification of directors, as the legal right of the petitioners to continue as director in other company or reappointed in any other company, which are scrupulously following the provisions of the Companies Act, have been deprived of the principles of natural justice should have been adhered to by issuing proper notice to all the directors;

(v) Whether Section 164(2)(a) of the Act has retrospective application for private companies: With respect to the retrospective application of the Companies Act, 2013 for private companies, the High Court has made some significant observations. The High Court has referred to the corresponding provisions of the Companies Act, 1956 (Section 274(1)(g) of the Companies Act, 1956) and stated that when the disqualification clause was not attracted to the directors of private companies under the Companies Act, 1956, the same cannot be allowed to take a retrospective effect under the Companies Act, 2013, i.e., when the provision of Section 164(2)(a) of the Companies Act, 2013 came into force only from April 1, 2014. The High Court stated that this is also for one more reason that the failure to file the annual returns has been adequately taken care of by the penal provision under Section 92 of the Act, making it clear that every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5,00,000, or with both. The High Court further stated that under section 137 of the Act, the failure to file the financial statement visits punishment with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 5 lakhs, or with both. The High Court has further stated that under section 441(4) of the Companies Act, 2013, the default in filing returns or accounts compoundable by the National Company Law Tribunal or the Regional Director or by any officer authorized by the Central Government;

(vi) Compoundable Offence – Non-filing vis-à-vis director's disqualification: The High Court observed that when the default in filing the accounts or returns are made as compoundable offence, Section 164(2)(a) of the Act providing the disqualification of director of private company not only in the defaulting company, but also from other company in which the petitioner is a director, diligently and meticulously following every provision of law, is certainly disproportionate to the lapse, as it is only regulatory in nature;

(vii) Strike off notice by the Registrar of Companies vis-à-vis Notice for directors disqualification in relation to FY: The High Court stated that the notice to be sent under Section 248(1) of the Act by the Registrar of Companies on the premise that the company has not been carrying on any business for a period of 2 FYs, is different from the disqualification u/s 164(2)(a) of the Act, inasmuch as a company can be struck off, if the company has not been carrying on any business for a period of 2 FYs, whereas for disqualification, the criteria is 3 FYs. The High Court opined that "…. although the petitioners have not challenged the provision of Section 164(2)(a) of the Act, as ROC have not followed the principles of natural justice, extinguishing the corporate life of the directors to the extent of disqualifying them to hold the directorship in the other companies, the said provision is liable to be read down, hence, Section 164(2)(a) of the Act is read down to the extent it disqualifies the directors in other companies which are scrupulously following the requirements of law, making it clear that no directors in other companies can be disqualified without prior notice";

(viii) Mischief of removal of the names of the companies by the Registrar of Companies: With reference to the deregistered company and directors disqualification the High Court stated that "It is made clear beyond any pale of doubt that the mischief of removal of the names of the companies by the Registrar of Companies and the disqualification of the directors in the defaulting company will go together, as it is inseparable, and the Registrar of Companies need not give fresh notice to the directors for their disqualification from the dormant company, if there is a failure to file the financial statement or annual return for any continuous period of 3 FYs as per Section 164(2)(a) of the Act."

Concluding Remarks

4. In a very recent development, the Supreme Court has admitted a Special Leave Petition of the Ministry of Corporate Affairs. The Supreme Court has stayed the Bombay High Court's order, which gave relief to directors of the deregistered companies. The Bombay High Court had directed the Registrar of Companies to accept physical documents of such deregistered companies and treat them as applications for voluntary striking off. This means that the directors of such deregistered companies, who are disqualified by the notice of the Registrar of Companies, would no longer be considered disqualified

Refer:[2018] 96 taxmann.com 293 (Article)

Addition was limited to profit elements when undisclosed purchases were discovered during assessment proceeding

Section 69C of the Income-tax Act, 1961 - Unexplained expenditure (Purchases) - In course of survey operations at rice mill of assessee, Assessing Officer discovered large quantities of undisclosed stock - He thus made addition of value of entire quantity of additional stock to assessee's income - Whether when undisclosed purchases are discovered, in course of assessment, it is only profit embedded in transaction which can be added to total income - Held, yes[In favour of assessee]

Refer: [2018] 96 taxmann.com 286 (Calcutta)

Subsidy received from Govt. for upgradation of plant & machinery was capital receipt: HC

Section 4 of the Income-tax Act, 1961 - Income - Chargeable as (Subsidy) - Assessee-company received subsidy from Central Government for technology upgradation of existing units as well as to set up new units with latest technology to enhance their viability and competitiveness in domestic and international markets - In course of assessment, Assessing Officer opined that amount of subsidy received by assessee was taxable as revenue receipt - Tribunal finding that subsidy was clearly for purpose of upgrading machinery and plant and for acquiring capital assets and not for purpose of day-to-day business operations of assessee, held that quantum of subsidy received by assessee was a capital receipt - Whether, on facts, no substantial question of law arose from Tribunal's order - Held, yes [In favour of assessee]

Refer: [2018] 96 taxmann.com 303 (Calcutta)

Due date for Kerala income-tax assessee’s who are liable to file ITR within extended due date of August 31, 2018 further extended up to 15th Sep.

Central Board of Direct Taxes vide its order F. No. 225/242/2018/ITA.II dated 28th Aug 2018, U/s 119 In view of disruption cause due to severe floods, the Central Board of Direct Taxes (CBDT) has extended due date for filing of ITR from August 31, 2018 to September 15, 2018 for the Kerala income-tax assessee’s who are liable to file ITR within extended due date of August 31, 2018.

Implementation Guide on Tax Audit w.r.t. Notification No. 33/2018 to be effective from 20.8.2018

Recently, the CBDT vide Notification No. 33/2018 dated 20th July, 2018 has made revisions to Form No. 3CD wherein it requires additional requirements to be reported. The additional inclusions in the said form has increased the scope of tax audit significantly and requires various additional procedures to be performed with due diligence before reporting on these additional requirements.

The Institute of Chartered Accountants of India (ICAI) as a partner in nation building is always ready to understand and implement the changes in laws concerning the fraternity and does so at the earliest and enables its members to be fully geared up to implement the changes and stand besides the stakeholders including tax payers.

Direct Taxes Committee of ICAI has come out with the “Implementation Guide on the Amendments made vide Notification No. 33/2018 dated 20th July, 2018” by the CBDT and effective from 20th August, 2018 to enable the stakeholders and our members to implement the changes in the best possible manner in the available time.

The same can be downloaded from the below link:-

https://drive.google.com/file/d/18ijCxgx3U4qQT3PVh6uGYamdVhbgoK73/view?usp=sharing

Non-disposal of an application within six months would result in deemed grant of trust registration: HC

Section 12A, read with section 12AA of the Income-tax Act, 1961 - Charitable or religious trust - Registration of (Deemed registration) - Whether deemed registration under section 12A would be applicable only after expiry of six months from date of application - Held, yes - Whether where assessee-society filed an application under section 12A for grant of registration and same was responded after nine months, registration was deemed to be granted automatically on expiry of six months period as specified in section 12AA(2) - Held, yes

Refer:[2018] 96 taxmann.com 356 (Kerala)

No deemed dividend if assessee wasn't a registered shareholder in lending Co.

Where AO made addition to income of assessee-company under section 2(22)(e) in respect of loan on ground that there was a common shareholder in case of assessee and lender company, since addition if any, could be made in hands of such registered shareholder, same deserved to be deleted in assessee's case
Refer:[2018] 96 taxmann.com 262 (Mumbai - Trib.)

Guidelines for manual selection of returns for Complete scrutiny during the financial year 2018-2019

Central Board of Direct taxes vide its instruction no. 4/2018 dated 20th Aug, 2018 has issued Guidelines for manual selection of returns for Complete scrutiny during the financial year 2018-2019 . Detailed guidelines can be read through the below link or details are provided here under;-

https://drive.google.com/file/d/168OkHS28KILUaxyRP8ZbWP0VkyYYQFRn/view?usp=sharing

Instruction No. 04/2018

Government of India

Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

North Block, New Delhi, the 20th of August,2018

All Pr. Chief Commissioners of Income Tax/Chief Commissioners of Income Tax

All Pr. Directors-General of Income Tax/Directors-General of Income Tax

Sir/Madam

Subject: Guidelines for manual selection of returns for Complete scrutiny during the financial year 2018-2019 regd:-

1. The parameters for manual selection of returns for complete scrutiny during financial year 2018-19 are as under:-

(i) Cases involving addition in an earlier assessment year(s) on a recurring issue of law or fact-

a. exceeding Rs.25 lakhs in eight metro charges at Ahemdabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata, Mumbai and Pune, while at other charges, quantum of addition should exceed Rs. 10 lakhs;

b. exceeding Rs. 10 crore in transfer pricing cases.

and where such an addition-

1. has become final as no further appeal was/has been filed; or

2. has been confirmed at any stage of appellate process in favour of revenue and assessee has not filed further appeal; or

3. has been confirmed at the 1st stage of appeal in favour of revenue or subsequently and further appeal of assessee is pending

(ii) Cases pertaining to survey under section 133A of the Income tax Act, 1961 (‘Act’) excluding those cases where books of accounts, documents etc. were not impounded and returned income (excluding any disclosure made during the survey) is not less than returned income of preceding assessment year. However, where assessee has retracted from disclosure made during the Survey, such cases will not be covered by the exclusion.

(iii) Assessments in search and seizure cases to be made under section(s) 153A, 153C, 158B, 158BC & 158BD read with section 143(3) of the Act and also for return filed for assessment year relevant to previous year in which authorization for search and seizure was executed under section 132 or 132A of the Act.

(iv) Returns filed in response to notice under section 148 of the Act.

(v) Cases where registration/approval under various sections of the Act such as 12A, 35(1)(ii)/(iii), 10(23C) etc. have not been granted or have been cancelled/withdrawn by the Competent Authority, yet the assessee has been found to be claiming tax-exemption/deduction in the return. However, where such orders of withdrawal of registration/approval have been reversed/set-aside in appellate proceedings, those cases will not be selected under this clause.

(vi) Cases in respect of which information pointing out specific tax-evasion for the relevant year is given by any Government Department/ Authority/ Agency/ Regulatory Body. However, before selecting a return for scrutiny under this criterion, Assessing Officer shall take prior administrative approval from concerned jurisdictional Pr. CIT/Pr. DIT/CIT/DIT.

2. Through Computer Aided Scrutiny Selection (CASS), cases are being selected in two categories viz. Limited Scrutiny & Complete Scrutiny in a centralized manner under CASS-2018. CASS is a system based method for scrutiny selection which identifies the cases through data-analytics and three-hundred sixty degree data profiling of taxpayers and in a non-discretionary manner. The list of these cases id being/has been separately intimated by the Principal DGIT (Systems) to the concerned jurisdictional authorities for further necessary action.

3. This may be brought to the notice of all concerned for necessary compliance.

4. Hindi version to follow.

(Rohit Garg)

Director-ITAII, CBDT

F.No. 225/282/2018/ITA.II

Copy to:

I. PS to FM/OSD to FM/PS to MoS (R)/OSD to MoS(R)

II. PS TO Secretary (Finance)/(Revenue)

III. Chairman, CIIDT & All Members. CBDT

IV. All Joint Secretaries/ CsIT, CBDT

V. ADG (PR,PP&DL) with request to place on Departmental Twitter handle

VI. D/o Pr. DGIT (Systems) with request to upload the Instruction on Departmental website

VII. Data-Base Cell for uploading on irs officers website

VIII. ITCC Division, CBDT (3 Copies) (Rohit Garg)

Director-ITA.II, CBDT