Category: Corporate Laws

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Whither Balance Sheet Entries For Extension of Limitation In Insolvency Cases?

Section 18 of the Limitation Act 1963 (the Limitation Act) provides for extension of the limitation period where there is an acknowledgement of the debt by a borrower. In various cases, it has been held that an entry in the financials of a borrower to the effect that there is an amount due to a debtor amounts to such an acknowledgement. However, recently the NCLAT has set a cat amongst the pigeons as it were by holding that Insolvency & Bankruptcy Code, 2016 (IBC) would in effect be an exception to this general rule laid down by various other judicial authorities. There is a bit of a history to this pronouncement.

On August 17, 2018, the Second Amendment to IBC was made. This amendment added section 238A to the IBC, effectively making the provision of section 18 of the Limitation Act to all insolvency proceedings. The Second Amendment was made effective from June 6, 2018.

The Saga of the Second Amendment

The Second Amendment came on the heels of a debate over the applicability of limitation to proceedings under the IBC. Recall that ordinarily, a money debt can be claimed anytime within 3 years of the debt being due and payable. Beyond this period of 3 years, statutory limitation would come to apply such that a claimant couldn't then assert her rights over the debt due. Paraphrasing the Supreme Court, the rationale behind having such limitation period is to prevent disturbance of a right acquired in equity and justice by long enjoyment by the debtor1. Essentially, via a period of limitation of 3 years, the law ensures that if the lender has not acted or claimed the debt for a period of 3 years then the borrower acquires the right to enjoy it forever due to long enjoyment and should not be deprived of it under the principles of equity and justice.

Prelude to the Saga

Now, prior to the Second Amendment, the highest quasi-judicial authority dealing with insolvency matters had arrived at certain judgements holding that the Limitation Act did not apply to IBC proceedings.2 This was on the basis that the IBC was not a law for recovery of money but for resolution of insolvency3 and attendant liquidation (if resolution doesn't materialize). The NCLAT then went on to state that if there is a debt including interest due and there is default of debt and has a continuous cause of action, the argument that the claim of money is barred by limitation cannot be accepted.4

Amongst the rationale given by NCLAT was also that IBC is a complete code in itself. It does not provide for, or indeed incorporate any reference to the Limitation Act. Hence, per the NCLAT, before the Second Amendment Act came into effect, Limitation Act could not have applied to proceedings under the IBC.5

These pronouncements, collectively, had the effect of allowing a 'right to sue' to keep running for a creditor indefinitely.

What happened next

Needless to add, there were various cases where the debate regarding limitation cropped up. The decision in Speculum Plast Pvt. Ltd.6 was pronounced on November 7, 2017. Wheels, however, were already in motion in relation to, amongst other such questions, the question of limitation elsewhere. The Injeti Srinivas led Insolvency Law Committee (the Committee) was set up on November 16, 2017.

Its report (the Report) was submitted to the Union Minister of Finance and Corporate Affairs on March 26, 2018. Doubtless, there were several issues that were deliberated upon by the Committee. One amongst the issue was also in relation to limitation that is the subject matter of this document. Thought the topic of limitation was not mentioned in the Preface to the Report issued, the application of Limitation Act to IBC first finds mention at page 72 as a summary of its detailed recommendation and then again at Chapter 28 of the Report. In about three paragraphs and just about one page of space, the Report succinctly states that the intent was not to package the IBC as "a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period"7. And thus, came to be inserted section 238A into the IBC Code on August 17, 2018 (with effect from June 6, 2020).

Supreme Court on applicability of limitation

With the question of applicability of Limitation Act to IBC now settled, the pages turned quickly to BK Educational Services Pvt. Ltd. v. Parag Gupta & Associates8. This case was culmination of various appeals filed against various NCLAT judgements on limitation before the Report had been released - one amongst them the case law of Speculum Plast Pvt. Ltd.9. On various grounds, the Supreme Court proceeded to decide that Limitation Act is indeed applicable to the IBC - this was the decision of the Supreme Court even without recourse to the Second Amendment10. However, the Supreme Court also noted that such applicability would be only from the inception of the IBC, i.e. in the same vein as the Speculum Plast Pvt. Ltd.11 (i.e. section 137 of the Limitation Act would be relevant).

Subsequently, the Apex Court in K. Sashidhar v. Indian Overseas Bank12 reiterated the ratio laid down in B.K. Educational Services Case.

Then came Jignesh Shah v. Union of India13 where three judges of the Supreme Court were faced with a winding up petition filed by IL&FS Financial Services Ltd. against La-Fin Financial Services Pvt. Ltd. Such winding up petitions after enactment of the IBC were converted to section 7 proceedings under IBC.

Above decision, while holding that a winding up petition was time-barred, having been filed beyond three years, made a passing observation that an "acknowledgment of liability under Section 18 of the Limitation Act would certainly extend the limitation period". This therefore, neatly brings us to the controversy at hand - extension of limitation period under section 18 of the Limitation Act.

Recall that in the beginning of this article, the authors had referred to section 18 of the Limitation Act. This provision provides for a fresh period of limitation, where there is 'acknowledgment of liability', which is to be computed from the date of 'acknowledgment'.14

The Saga Continues

It has been held in several cases15 that an entry in the balance sheet amounts to an acknowledgement of the debt. Therefore, if any entry is indeed made, then a fresh period of limitation under section 18 of the Limitation Act would begin from the date of such accounts. With the Second Amendment, the question of applicability of the Limitation Act to proceedings under IBC was put to rest in that Limitation Act would indeed apply.

However, what was intended to be a final settlement of the issue of applicability of limitation to IBC threw up a vexed problem. The latter would need some explanation - what usually occurs is that even though the 'date of default' as per the records of financial creditors occurs upon the happening for certain pre-defined events, filing of a petition under IBC is delayed beyond a period of 3 years from such date of default. One such case was that of Babulal Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd.16. In this case, the bank had proceeded against the corporate debtor in 2011 after its accounts were declared non-performing assets in a proceeding under the RDBFI Act17. Suffice it to say that a case came to be filed before the NCLT in March 2018 (note that the default had occurred in 2011, well beyond 3 years earlier). The NCLT admitted the application and the process under IBC commenced. However, not to be outdone, Mr. Babulal Gurjar who was one of the directors of the company, appealed to the NCLAT. One amongst his pleas was to do with limitation - i.e. having been filed well after 3 years' time, the case filed in the NCLT was barred by limitation. The NCLAT dismissed his appeal summarily. Mr. Gurjar being of a strong bent of mind, approached the Supreme Court against the NCLAT order where he contended that the NCLAT shouldn't have summarily rejected his appeal and instead, at the least, heard him on the various issues he had raised, including that of limitation. The Supreme Court agreed with the point of view regarding limitation and directed the NCLAT to hear the matter again, specifically in relation to limitation.

The NCLAT, under the Supreme Court's express orders thereafter, re-heard the matter, and came to the conclusion that its earlier decision was correct. It based its decision on the fact that limitation would be counted only from December 2016, i.e. when the IBC came into effect, and also that even otherwise, there were mortgaged properties that were involved, the limitation for invocation of which is anyways 12 years.

Mr. Gurjar, being of a resilient bent of mind, approached the Supreme Court a second time against this pronouncement of the NCLAT. The Supreme Court on August 14, 2020 stated that the application filed by the creditors was barred by limitation as it had been filed after the period of 3 years had expired from the date of default as mentioned in the application itself. The Supreme Court also held that there is no basis to the assertion that limitation would commence only from the date on which IBC was enacted.

Now, it must be pointed out here that in the above case, the books of the corporate debtor did reflect that it owed the amounts in question to the bank / financial institution. However, the Supreme Court, having been apprised of this particular quirk of the case, said that since the application itself records the date of default as July 8, 2011, the records of the corporate debtor would not be of assistance in extending the limitation period.

As it would transpire, before the judgement of the Supreme Court in Babulal Vardharju Gurjar's case could have been pronounced, the NCLAT had already arrived at a conclusion even more far reaching.

This was the seminal judgement rendered in V. Padmakumar Vs. Stressed Assets Stabilization Fund (SASF)18 (the "First Padmakumar case") by the NCLAT.

Decision in the case of Padmakumar Case (supra) was rendered by a 4:1 majority, which in itself was a result of reference to a Larger Bench to resolve conflicting decisions of coordinate benches19 of the NCLAT. Majority decision had held that balance sheets / annual returns being mandatory requirements under the CA'13, cannot amount to acknowledgement under section 18 of the Limitation Act.

The NCLAT observed that the Apex Court and various High Courts have consistently held that an entry made in the company's balance sheet amounts to an acknowledgment of debt under section 18 of the Limitation Act. Accordingly, reference was made to a larger bench to reconsider the Padmakumar Case (supra).

Soon however, a matter came to be heard in the NCLAT - Yogeshkumar Jashwantlal Thakkar v. Indian Overseas Bank20 where the date of default mentioned in the application was January 1, 2016 but the application for commencement of proceedings under IBC was filed on April 1, 2019 (i.e. 3 months beyond the 3 year limitation, to the day). What makes this case stand apart is the fact that the bank in question had obtained a "debit confirmation" from the borrower on March 31, 2017. This "debit confirmation" was seen by the NCLAT as the acknowledgement of debt under section 18 of the Limitation Act. Thus, the NCLAT held in this case on September 14, 2020, that the application, even though having been filed on April 1, 2019, was well within 3 years from March 31, 2017, i.e. the date of "debit confirmation". This case, as is wont, has been challenged before the Supreme Court and is pending as on date of going to press.

Despite the aforesaid judgement being pending in appeal before the Supreme Court, on September 25, 2020, a three-member bench of the NCLAT in Bishal Jaiswal vs. Asset Reconstruction Company (India) Ltd. & Anr.21, "with the great respect to the Hon'ble Members of the Judgement" (sic) in the First Padmakumar case, thought it fit to refer the First Padmakuma case for reconsideration.

The NCLAT in reference proceedings initiated in Bishal Jiswal (supra), observed that the majority decision in First Padmakumar case (supra) had dealt with the conflict between the decision of the coordinate benches22, and had observed that Ugro (supra) cannot be relied upon as Apex Court's decisions were not brought to the notice of the bench during the proceedings. Accordingly, the NCLAT dismissed the reference, and held that the date of default with regard to application under Section 7 of the Code is the date of classification of the account as NPA. Most importantly it observed that limitation cannot be impacted by an acknowledgement of liability under section 18 of Limitation Act to keep the 'debt' alive for the purpose of insolvency proceedings.23 This decision on reference was rendered by the NCLAT on December 22, 2020.

This order of reference was challenged before the Supreme Court24, which rendered its ruling on April 15, 2021. The Bench comprising of Justices RF Nariman, BR Gavai and Hrishikesh Roy, while answering the legal question of 'Whether acknowledgement of debts in the balance sheet will be considered for Section 18 of Limitation Act", held that balance sheets can amount to an acknowledgement of debt for insolvency matters.

The court also examined the provisions under the Companies Act, 2013 qua any compulsion of law for filing of balance sheets and acknowledgements made therein25. It observed that there is no doubt that the filing of balance sheet is mandatory, violations of which being punishable under law. However, Section 134(7) of the Companies Act expressly recognises the auditor's report and notes annexed to the said financial statement, which may provide for caveats with regard to 'acknowledgements' made in the books of account / balance sheet. In relation to the same, the Court appreciated the law laid down by the Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff26. In the said judgment, the court had held that though the filing of a balance sheet is by compulsion of law, the acknowledgement of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor's report, which must be read along with the balance sheet.

Now therefore, coming to the central question posed by this article.

Whither balance sheet entries for extension of limitation in insolvency matters?

While the application of Article 137 of the Limitation Act to IBC matters has been consistently upheld by the NCLAT and the Supreme Court, there was still confusion that whether balance sheet entries constitutes a valid 'acknowledgment' for extending the limitation period. Pursuant to the aforesaid judgment of April 15, 2021, the Supreme Court has clarified that entries in the balance sheet of the corporate debtor shall qualify as an 'acknowledgement' in terms of section 18 of the Limitation Act.

Therefore, the position as of date appears to be that if a Corporate Debtor has acknowledged a 'debt' in the form of a balance sheet entry, such entry would extend the period of limitation for the purposes of IBC. However, it is to be noted that the Supreme Court also observed that treatment of an entry in corporate debtor's balance sheet as an 'acknowledgment', would depend on facts of each case as to whether a balance sheet entry qua any particular creditor is unequivocal or is saddled with caveats. Then, the said balance sheet entries along with caveats, if any, would have to be examined on a case to case basis in order to establish the extension of limitation under section 18 of the Limitation Act. In fact, while doing so, the Supreme Court has itself put a 'caveat' to the law regarding the treatment of balance sheet entries as a valid 'acknowledgment' under IBC. However, this also gives rise to some practical issues, some of which the author has summarised hereunder:

  1. Where the corporate debtor has not put a caveat to the balance sheet entries of previous financial year, then in such a situation, whether such entries would constitute a valid 'acknowledgement'. Also, prior to the April 15, 2021 judgment of the Supreme Court, balance sheet entries were held to be not a valid acknowledgement as per the NCLAT's five-member bench's decision27.
  2. How does it impact the operational debt owed by the corporate debtor to its suppliers of goods and services. In situations, where such operational creditor fails to demand the due amount within 3 years, then whether the balance sheet entries would extend the limitation under IBC.

It remains to be seen how courts answer the aforesaid questions.

One of the key takeaway from the Supreme Court's decision is that it casts a responsibility on the key managerial personnel along with the secretarial and audit officers to examine each loan transaction(s) entered by the corporate debtor. Accordingly, balance sheet and reports prepared and authenticated by the management of corporate debtor would ultimately determine the admissibility of IBC petitions. Hence, it may prudent to put in place a mechanism to examine each and every loan transaction(s) in order to put proper caveats. To illustrate, where the normal period of limitation i.e. 3 years have elapsed, the corporate debtor(s) may while acknowledging the debt, may put caveat to the effect that a particular debt is beyond the period of limitation.

Abhishek Dutta, Partner with inputs from Yatin Sharma, Partner and Manish Parmar, Senior Associate.

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From Yatin’s Desk: The Faceless Assessment – Principles of Natural Justice

Imbibe technology – this has been the mantra of the Governments for years now. In context of income tax laws, while the first chapter can be dedicated to use of technology for tax compliances, we have now ushered into the more delicate phase of transforming assessments, appeals and the likes to a faceless regime through use of technology. Whatever be the reason – whether for sake of transparency, ease of business, minimizing interaction with authorities, mapping accountability, or simply cleaning the system, there is no doubt that the change is desirable. However, if not implemented within the realms of Natural Justice, this will be a recipe of unwanted litigation.  Also, in view of our system of laws and constitutional provisions, non-observance of principles of Natural Justice will spell failure of this novel system.

The scheme of Faceless Assessment

The legislature has enshrined a detailed procedure for conduct of faceless assessment under the provisions[1] of the Income Tax Act, 1961 (‘Act’). The National Faceless Assessment Centre (‘NFAC’), as the nodal wing of tax administration, acts as the fulcrum for the conduct of assessment, coordinating between the taxpayer and other wings comprising of assessment units, the review units and the technical units, each bestowed with specific functions.

As part of the procedure, faceless assessment requires the assessment unit to make in writing a draft assessment order, either accepting income returned by the taxpayer or making variation to the said income, providing therein details of penalty proceeding to be initiated, if any. The assessment unit is required to consider all the relevant material available on record while making the draft assessment order. A copy of such order is sent to the NFAC. The NFAC upon examining the draft assessment order may decide to:

  • Finalize the assessment in case no variation prejudicial to the interest of assessee is proposed as per the draft assessment order, serve such order and notice for initiating penalty proceedings, if any, to the taxpayer, along with the demand notice, or
  • Provide an opportunity to the taxpayer, in case any variation prejudicial to the interest of taxpayer is proposed, by serving a notice calling upon him to show-cause as to why the proposed variation should not be made; or
  • Assign the draft assessment order to a review unit for conducting review of such order.

Where the taxpayer has received the show-cause notice, he may furnish his response to the NFAC within the stipulated timelines which thereafter is required to be considered by the assessment unit. The assessment unit is required to make a revised draft assessment order and send it to NFAC after taking into account the response furnished by the taxpayer.

NFAC, upon receiving the revised draft assessment order would proceed to finalise the assessment as per the revised draft assessment order and serve a copy of such order and notice for initiating penalty proceedings, if any, to the taxpayer.

As is notable from the aforesaid procedure, the law requires issuance of a show-cause notice (‘SCN’) to the taxpayer where any variation is proposed to the income declared, prior to issuance of final assessment order.

What if procedure is not followed?

It is being witnessed that in many cases, the NFAC has proceeded to issue final assessment orders with variation without issuance of SCN. In some cases, where SCN has been issued and objections filed by the taxpayer, the taxpayer is still denied the opportunity of personal hearing even where requested by the taxpayer. The question that arises is how tenable is the action of the tax authorities and what legal remedy do the taxpayers have?

The classical approach will be to file an appeal with the first appellate level i.e. Commissioner (Appeals) and work through the prolonged spell of litigation over years. Even if one reconciles to this fate, an impediment to such approach is the requirement to pay 20% of the disputed tax upfront for grant of stay of balance tax demand as per the prevailing CBDT directions. This has material impact on the cash flows of taxpayers which are anyway squeezed given the prevailing conditions. Thus, for taxpayers willing to explore unconventional opportunity, it may be worthwhile to examine the writ jurisdiction of the High Courts under Article 226 of the Constitution.

Writ jurisdiction of High Court in tax matters

Article 226 of the Constitution confers wide powers to High Courts to issue writs. The remedy of writ is not absolute but discretionary in character. If the High Court is satisfied that the aggrieved party has an adequate or suitable relief elsewhere, it can refuse to exercise its jurisdiction.[2] The Court, in extraordinary circumstances, may exercise the power if it concludes that there has been a breach of principles of natural justice or procedure required for decision has not been adopted. Thus, the normal rule is that a writ petition under Article 226 of the Constitution ought not to be entertained if alternate statutory remedies are available, except in cases falling within the well-defined exceptions.  In this regard, the Supreme Court in Commissioner of Income Tax and Others vs. Chhabil Dass Agarwal[3], observed as follows:

‘19. Thus, while it can be said that this Court has recognized some exceptions to the rule of alternative remedy, i.e., where the statutory authority has not acted in accordance with the provisions of the enactment in question, or in defiance of the fundamental principles of judicial procedure, or has resorted to invoke the provisions which are repealed, or when an order has been passed in total violation of the principles of natural justice, the proposition laid down in Thansingh Nathmal case, Titagarh Paper Mills case and other similar judgments that the High Court will not entertain a petition under Article 226 of the Constitution if an effective alternative remedy is available to the aggrieved person or the statute under which the action complained of has been taken itself contains a mechanism for redressal of grievance still holds the field. Therefore, when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation.’

Therefore, extraordinary circumstances meeting the prerequisite for exercise of writ jurisdiction of the High Court arise where statutory authorities have not acted in accordance with the provisions of the enactment, or in defiance of the judicial procedure, or when an order has been passed in total violation of the principles of natural justice.

In context of the faceless assessment scheme, provisions of the Act specifically require issuance of a SCN where any variation is proposed to the income declared. These provisions cannot be considered redundant or insignificant. These embody the basis right of fair hearing to the taxpayer and adherence to principle of natural justice. The basic principle of natural justice requires the authority to give the affected party reasonable notice. Such notice must specify the grounds on the basis of which an action is proposed to be taken so as to enable the noticee to defend himself.  In this regard, it will be useful to take note of the observation of the Supreme Court in the case of UMC Technologies Private Limited versus Food Corporation of India and Anr.[4] as under:

“13. At the outset, it must be noted that it is the first principle of civilised jurisprudence that a person against whom any action is sought to be taken or whose right or interests are being affected should be given a reasonable opportunity to defend himself. The basic principle of natural justice is that before adjudication starts, the authority concerned should give to the affected party a notice of the case against him so that he can defend himself. Such notice should be adequate and the grounds necessitating action and the penalty/action proposed should be mentioned specifically and unambiguously. An order travelling beyond the bounds of notice is impermissible and without jurisdiction to that extent. This Court in Nasir Ahmad v. Assistant Custodian General, Evacuee Property, Lucknow and Anr.,1 has held that it is essential for the notice to specify the particular grounds on the basis of which an action is proposed to be taken so as to enable the noticee to answer the case against him. If these conditions are not satisfied, the person cannot be said to have been granted any reasonable opportunity of being heard.”

More specifically, the Supreme Court in the case of Gokak Patel Volkart Limited vs Collector Of Central Excise[5], while examining the provision of section 11A of the Central Excises and Salt Act, 1944 containing specific provisions for issuance of SCN for recovery of duty of excise observed as under:

“The provisions of Section 11A (1) and (2) make it clear that the statutory scheme is that in the situations covered by the sub-section (1), a notice of show cause has to be issued and sub-section (2) requires that the cause shown by way of representation has to be considered by the prescribed authority and then only the mount has to be determined. The scheme is in consonance with the rules of natural justice. An opportunity to be heard is intended to be afforded to the person who is likely to be prejudiced when the order is made, before making the order thereof. Notice is thus a condition precedent to demand under sub-section (2). In the instant case, compliance with this statutory requirement has not been made, and, therefore, the demand is in contravention of the statutory provision.”

Thus, it appears that failure of NFAC to issue SCN, enabling the taxpayer to contest such action would clearly fall short of the threshold of natural justice. In the circumstances, it will be a strong case to contest that the statutory authority has not acted in accordance with the specific provisions of the Act. There in non-adherence to the judicial procedure and principles which are considered to be a bedrock of a common law based civilized society. There is thus, blatant infringement of the right of the taxpayer under the Act in so far as there is denial of the opportunity to contest the variations proposed before issuance of final order.

Persuasive jurisprudence

In somewhat comparable provisions prescribed in relation to matters[6] which are subject to the jurisdiction of Dispute Resolution Panel (‘DRP’), section 144C of the Act require the Assessing Officer to issue a draft assessment order wherein variation is proposed which is prejudicial to the interest of the taxpayer. This is to enable the taxpayer file objection contesting the variation before the DRP, prior to issuance of final order.

In the past, there have been a number of instances wherein the Assessing Officers have proceeded to issue the final order, overlooking the specific requirement to issue a draft order. In such cases, the taxpayers have often exercised the writ jurisdiction of the courts challenging failure to adhere to the mandatory requirement of section 144C i.e. the obligation to first pass a draft assessment order to enable filing of objections before the DRP. In such cases, the courts have held that failure to follow mandatory procedures prescribed in statute could not be termed as mere procedural irregularity and thus cannot be cured. The orders thus passed are contrary to, and in violation of, the mandatory provisions of the Act, and would result in invalidation of the final assessment order, demand notice and penalty proceedings.

This position of law is now fairly established across jurisdictions, indicatively as held in the case of Zuari Cement Ltd[7], Vijay Television[8], Turner International[9], JCB India[10], etc.

Significantly, in a direct case relating to the faceless assessment scheme, a writ petition has been filed before the Delhi High Court in the case of K L Trading Corporation vs National E-Assessment Centre Delhi & Anr[11]. In the matter, the taxpayer has challenged the action of the tax authorities wherein a final order with variation has been issued without prior issuance of the SCN. The taxpayer has contested that there has been a breach of the principles of natural justice which stands engrafted in the faceless assessment scheme. The Court has found prima-facie merit in the petition and admitted the same for further hearing. On similar issues, a writ has been admitted by the Delhi High Court in the case of SAS Fininvest LLP v National E-Assessment Centre Income Tax Department, New Delhi[12]

In yet another matter, in Magick Woods Exports Private Limited v National e-Assessment Centre, Delhi.[13], the Madras High Court in a recent writ petition set aside the order passed in violation of principles of natural justice. The impugned order was assailed on the ground that it was passed contrary to the principles of natural justice. In response to SCN issued upon the taxpayer accompanied by a draft assessment order, the petitioner has sought an adjournment on the ground that the petitioner is collating materials necessary to substantiate its stand. However, the impugned order of assessment was passed without taking note of the request of the petitioner for adjournment. The request for adjournment had also not been rejected. The court observed that there has been apparent violation of principles of natural justice. The court accordingly directed the tax authorities to enable the online portal to receive the objections, hear the petitioner and complete the assessment in accordance with law.

The way ahead

As we move toward completion of the annual tax assessment cycle, one can expect some misadventure from the tax authorities who may, consciously or ignorantly, err in finalizing tax assessment with income variation in haste, without providing opportunity in the manner prescribed. Taxpayers need to carefully weigh their options for challenging the assessment orders. Writ petition before jurisdictional High Court can be looked at as the preferable option where the principles of natural justice have been violated. Where successfully contested, in the best-case scenarios, invalidation of final assessment order, demand notice and consequential penalty proceedings would put an end to the rigours of lengthy litigation, or to the least a direction from the court to rehear the objections, limitation permitting.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

[1] Sec 144B of the Act

[2] Constitution Benches of the Supreme Court in K.S. Rashid and Sons vs. Income Tax Investigation Commission, AIR 1954 SC 207

[3] 2014 (1) SCC 603

[4] Civil Appeal No. 3687 of 2020

[5] 1987 AIR 1161

[6] Orders wherein variation arises consequence of Transfer Pricing orders and assessment of non-residents.

[7] Zuari Cement Ltd. V. ACIT (decision dated 21st February 2013 in WP(C) No.5557/2012)

[8] Vijay Television (P) Ltd. Vs. Dispute Resolution Panel & Ors. (2014) 369 ITR 0113 (Mad)

[9] Turner International India (P) Ltd. Vs. Deputy Commissioner of Income Tax

[10] Jcb India Ltd. Vs. Deputy Commissioner of Income Tax (2017) 298 CTR 0558 (Del)

[11] W.P.(C) 4774/2021

[12] W.P.(C) 5087/2021, Order dated 04.05.2021

[13] W.P. No.10693/2021, Order dated 28.04.2021

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From Yatin’s Desk: Taxation of Dividend Income of Non-Residents – Most Favored Nation Clause under Indian Tax Treaties

The Indian domestic tax laws in relation to taxation of dividend income were amended by the Finance Act of 2020 restoring taxability of dividend income distributed by companies to the classical system of taxation of such income in the hands of the shareholder. Prior to this amendment, for some time, dividend distributed by a company was subject to dividend distribution tax (‘DDT’) in the hands of the company and exempt in the hands of the shareholder. DDT paid by the company, arguably, did not enjoy benefit of lower withholding tax (‘WHT’) rate prescribed under Double Tax Avoidance Agreements (‘DTAA’), though during the last few years prior to the amendment now made, attempts had been made by taxpayers to claim the DTAA rates; an issue which is currently sub judice.

The change has once again brought the relevance of DTAAs to forefront given that DTAAs in most case prescribe a lower rate of WHT vis-à-vis the WHT rate of 20% applicable on dividend income in the hands of non-resident under the domestic tax law. Generally, application of a WHT rate prescribed under a DTAA is simple and straight forward. However, applying WHT rate where DTAAs have a Most Favored Nation (‘MFN’) clause has its nuances which have from time to time been examined by Indian courts.

In this respect, the Delhi High Court in a recent case of Concentrix Service Netherlands B.V. vs Deputy Commissioner of Income Tax & Anr.[1] (‘Concentrix’) had the occasion to examine applicability of MFN clause under the India-Netherlands DTAA in context of WHT rate applicable on dividend income received by the Dutch parent company from its India subsidiary. Under Article 10 of the India-Netherlands DTAA, dividend received by a resident of one country from the payer of the other resident country is subject to 10% WHT. However the protocol provides a MFN clause stating that in respect of dividend, interest, royalties and fee for technical services (‘FTS’), if after signing of the DTAA, under any Convention or Agreement between India and a third State which is a member of the OECD, India limits its taxation at source on such income to a rate lower or a scope more restricted than the rate or scope provided for in India – Netherlands DTAA, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention. Simply put, if the provision of another DTAA subsequently entered between India and OECD member country is beneficial to the stated nature of payments, the same would apply notwithstanding the provisions of India-Netherlands DTAA.

Taxpayer’s Contention

In Concentric, the taxpayer had applied for a WHT order before the tax authorities seeking 5% WHT rate (as against 10% prescribed under India-Netherlands DTAA) in relation to divided income taking the benefit of MFN clause and applying the rates applicable under India-Slovenia[2], India – Lithuania[3] and India – Columbia[4] DTAA. It was contended that since India has executed DTAAs with such other countries which were members of OECD, the lower rate, or the restricted scope in the DTAA executed between India and such other country would automatically apply to India-Netherlands DTAA.  This is considering the protocol which inter alia stated that the protocol “shall form part an integral part of the Convention” i.e., the subject DTAA.

In support of this plea, reliance was placed on the judgements in the case of Steria (India) Ltd. vs. Commissioner of Income-tax-VI[5], Apollo Tyres Ltd. vs. Commissioner of Income Tax, International Taxation[6].

Tax Authorities Contention

The tax authorities however contested the claim putting forth the following argument:

  • that the protocol appended to the India-Netherlands DTAA providing benefit of the lower rate of WHT or a scope more restricted would be available only if the country with which India enters into a DTAA was a member of the OECD at the time of the execution of the India-Netherlands DTAA, and
  • the DTAAs with such third States were entered while such States were OECD member countries.

India’s DTAA with Slovenia, Lithuania and Columbia were executed prior to such countries becoming OECD member countries. Since none of the countries, i.e., Slovenia, Lithuania, and Columbia were members of the OECD, on the date when such States executed DTAAs with India, protocol appended to the DTAA would have no applicability.

The Ruling

The Court however ruled in favour of taxpayer holding that:

  • the protocol forms an integral part of the DTAA and therefore no separate notification is required, insofar as the applicability of provisions of the protocol is concerned,
  • the state of affairs i.e. the point of time when the third State should be a member of OECD, should exist not necessarily at the time when the subject DTAA (India – Netherlands DTAA) was executed but when a request is made by the taxpayer or deductee for issuance of a lower rate withholding tax certificate.

The Court went on to draw reference to the decree issued by the Kingdom of Netherlands on 28.02.2012[7] wherein it was thus specified:

“Slovenia became a member of the OECD on 21 July 2010. Under the most favored nation clause in the Protocol to the Convention, this event has the effect that, with retroactive effect to July 21, 2010, a rate of 5 per cent will apply to participation dividends paid by a company resident in the Netherlands to a body resident in India.”

The Court made an important observation regarding principle of “Common Interpretation” to be adopted by courts of the contracting States. This would ensure that Conventions/DTAAs are applied efficiently and fairly so that there is consistency in the interpretation of the provisions by the tax authority and courts of the concerned contracting State. The Court accordingly accepted application of WHT rate of 5% prescribed under the DTAA with Slovenia, applying the MFN clause.

Insight for taxpayers

The court ruling reinforces importance of MFN clauses in DTAAs which, if applied judiciously, present significant opportunity of tax saving. The ruling provides credence to the application of MFN clause under DTAAs with countries such as Netherland, France, Sweden, Hungry and Switzerland enabling application of lower rate of WHT of 5% on dividend payment as against the 10% prescribed under the respective DTAAs. The MFN clause also aids in reading down the scope of certain categories of income, more specifically FTS in DTAA such as with France, Sweden, Hungry, Belgium and Spain, restricting taxability in the state of residence only in case of a permanent establishment in the country of source.

Appropriate application of MFN clause also becomes important considering that the resident State may allow credit of tax payable in the country only to the extent of appropriate tax applicable under DTAA. For instance, Indian DTAAs such as with Netherlands and France prescribe a period of three years within which application for refund of excess tax levied at source should be filed. Further, applications for the refund of the excess amount of tax will have to be lodged with the authority of the State having levied the tax. This makes it critical to evaluate impact of MFN clause under the applicable DTAA.

It is also relevant to take note that the Finance Act of 2020 has materially amended provisions relating to filing of income tax returns by non-residents. As per the current provisions, a non-resident taxpayer will mandatorily be required to file an Indian tax return where lower WHT rates as prescribe under DTAA are applied in respect of income in the nature of royalty/FTS (taxable on gross basis), interest or dividend. Dispensation to file the tax return is available only where WHT has been deducted at the rate prescribed under the domestic tax law. A non-compliance has penal implications.

Given the significance of MFN clause under DTAAs and the opportunity such clause offers to reduce the tax cost, taxpayers will be well advised to evaluate MFN clause under the relevant DTAA while at the same time ensuring timely fiscal compliance to remain on the right side of law.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

[1] W.P.(C) 9051/2020, judgement dated 22 April 2021

[2] DTAA executed between India and Slovenia; which came into force on 17.02.2005 and was notified on 31.05.20

[3] DTAA executed between India and Lithuania; which came into force on 10.07.2012 and was notified on 25.07.2012

[4] DTAA executed between India and Columbia; which came into force on 07.07.2014 and was notified on 23.09.2014

[5] [2016] 386 ITR 390 (Delhi)

[6] [2018] 92 taxmann.com 166 (Karnataka)

[7] [No. IFZ 2012/54M, Tax Treaties, India], published on 13.03.2012

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Anti – Dumping Duty in India – A Primer

This offering from Aureus Law Partners seeks to present a primer on Anti-Dumping Laws and procedure in India. Anti-Dumping Duties (“ADD“) are imposed to counter dumping of goods or articles in India causing material injury to the domestic industry. Hence, the imposition of ADD is driven from Government’s intent to provide expeditious relief to the domestic producers from the trade-distorting phenomenon of dumping.

ADD measures are different from the ‘Safeguard’ measures where the requirement to establish ‘material injury’ is more stringent, and when duties of safeguard are imposed, Exchequer may also be required to pay compensation to the trading countries. For the purposes of this article, we have limited ourselves to law and procedure relating to ADD in India.

Legal Framework

Member nations of the World Trade Organisation have agreed to the General Agreement on Tariffs and Trade of 1994 (“GATT”). As per Article VI of GATT, 1994 read with Anti-Dumping Agreement, WTO member states can impose anti-dumping measures subject to conditions.[1]

Indian laws were amended with effect from January 1, 1995 to align the national law with the Article VI of GATT and specific agreements between the member nations.

Sections 9A, 9B and 9C of the Customs Tariff Act, 1975 (“Tariff Act”) as amended in 1995 and the Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995 (“ADD Rules”) framed thereunder constitute the legal basis for anti-dumping investigations and for the levy of anti-dumping duties.

Currently, given the slowdown faced by the domestic industry due to the COVID pandemic and ensuing decrease in cross-border trade, there has been upward trend in imposing ADD on several items of import. In 2021 itself, the Ministry of Finance until March 11 has issued more than 10 notifications imposing ADD on several items of import (primarily from China PR).

What is ‘Dumping’

Dumping occurs when the ‘Export Price’ of goods imported into India is less than the ‘Normal Value’ of ‘like articles’ sold in the domestic market of the exporter. The ‘Normal Value’ refers to the comparable price at which the ‘product under consideration’ (“PUC”) are sold, in the ordinary course of trade, in the domestic market of the exporter.

The ‘Export Price’ of goods imported into India /PUC is the price paid or payable for the goods by the primary independent buyer. Principles governing the determination of “export Price’ include – (i) Arm’s Length Transaction; (ii) Resale price to an independent buyer[2]; and (iii) Price determined on a reasonable basis[3].

‘Margin of Dumping’ refers to the difference between the Normal Value of the like article and the Export Price of the PUC. These are normally determined on the basis of – (i) a comparison of weighted average Normal Value with a weighted average of prices of comparable export transactions; or (ii) a comparison of ‘Normal Value’ and ‘Export Price’ on a transaction to transaction basis[4].

The ‘Export Price’ and the ‘Normal Value’ of the PUC are to be compared at the same level of trade i.e. ex-factory price, for sales effected during the nearest possible time. Due consideration is also made for differences that affect price comparability of a domestic sale and an export sale. These factors, inter alia, include – (i) physical characteristics; (ii) levels of trade; (iii) quantity; (iv) taxation; (v) conditions and terms of sale.

It is pertinent to note that the said factors are only indicative and any other factor which can be demonstrated to have an effect on the price comparability, may be considered.

Injury to the Domestic Industry

The Indian domestic producer must show that dumped imports of PUC are causing or are threatening to cause ‘material injury’ to the Indian ‘Domestic Industry’[5].

Broadly, the principles governing the determination of ‘material injury’ because of alleged dumping are – (i) PUC has been exported to India from the subject country below its ‘Normal Value’; (ii) Domestic Industry has suffered ‘material injury’; and (iii) There is a casual link between the alleged dumping and ‘material injury’ caused to the Domestic Industry. Also, the analysis of ‘material injury’ is undertaken by following two methods:

Volume Effect

Examination of volume of the dumped imports, including the extent to which there has been or is likely to be a significant increase in the volume of dumped imports. These may be either in absolute terms or in relation to production or consumption in India, and its effect on the Domestic Industry.

Price Effect

The effect of dumped articles on prices in the Indian domestic market including price-undercutting, price depression or preventing increase in price which otherwise would have increased.

Investigation for imposing ADD

An investigation for alleged dumping may be initiated by the Designated Authority upon an application made by or on behalf of Domestic Industry.[6] Following two conditions are pre requisites for a valid application to be considered by the Designated Authority:

  • Application must be supported by domestic producers accounting for not less than 25% of total production of the like article in India; and
  • Domestic producers supporting the application must account for more than 50% of total production of like article by those opposing the application.

Miscellaneous Provisions

Termination of Investigation

  • Request in writing from the Domestic Industry at whose instance the investigation was initiated;
  • No sufficient evidence of dumping or injury;
  • If the Margin of Dumping is less than 2% of the Export Price;
  • If the volume of dumped imports from a country is less than 3% of the total imports of the like article into India or the volume of dumped imports collectively from all such countries is less than 7% of the total imports;
  • Injury is negligible.

Retrospective imposition of ADD

  • If there is a history of dumping which caused the injury or that the importer was, or, should have been aware that the exporter practices dumping and that such dumping would cause injury, and
  • If the injury is caused by massive dumping, in a relatively short time, so as to seriously undermine the remedial effect of anti-dumping duty.

Such retrospective application will not go beyond 90 days of the date of imposition of provisional duty.

Refund of collected duty

  • If the imposed ADD on the basis of final findings is higher than the provisional duty (already imposed and collected), the difference shall not be collected;
  • If the final ADD is less than the provisional duty (already imposed and collected), the difference shall be refunded;
  • If the provisional duty is withdrawn based on a negative final finding, then the provisional duty already collected shall be refunded.

Contributed by Manish Parmar. Manish can be reached at manish.parmar@aureuslaw.com.

Views are personal.

[1] Pursuant to investigation in accordance with the Agreement, a determination is made (a) that dumping is occurring, (b) that the domestic industry producing the like product in the importing country is suffering material injury, and (c) that there is a causal link between the two. In addition to substantive rules governing the determination of dumping, injury, and causal link, the Agreement sets forth detailed procedural rules for the initiation and conduct of investigations, the imposition of measures, and the duration and review of measures.

[2] If there is no export price or the export price is not reliable because of association or a compensatory arrangement between the exporter and the importer or a third party, the export price may be determined on the basis of the price at which the imported articles are first resold to an independent buyer.

[3] If the PUC are not resold as above or not resold in the same condition as imported, their export price may be determined on a reasonable basis.

[4] Introduced after the Uruguay Round.

[5] Rule 2(b) of ADD Rules.

[6] Under Rule 5(4) of ADD Rules, the Designated Authority may also initiate investigation suo motu based on information received from Customs authorities or any other person.

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Guidelines on Provisional Attachment of Property under GST

Central Board of Indirect Taxes and Customs (“CBIC”) has issued Circular No. CBEC-20/16/05/2021-GST/359 dated February 23, 2021 providing guidelines for provisional attachment of property under Section 83 of the Central Goods and Services Tax Act, 2017 (“CGST Act, 2017”).

Section 83 provides for provisional attachment of property for the purpose of protecting the interest of revenue during the pendency of any proceeding under Section 62 (Assessment of non-filers of returns) or Section 63 (Assessment of unregistered persons) or Section 64 (Summary assessment) or Section 67 (Power of inspection, search and seizure) or Section 73 (Demand of tax) or Section 74 (Demand of tax by invoking extended period of limitation) of the CGST Act. In relation to the same, Rule 159 of the CGST Rules provides the procedure to be followed by the proper officer.

We have culled out the highlights of the Guidelines herein below.

Grounds for provisional attachment of property

  • Commissioner must exercise due diligence and duly consider as well as carefully examine all the facts of the case, including the nature of offence, amount of revenue involved, established nature of the business, and extent of investment in capital assets before attaching the property.
  • Commissioner must have reasons to believe that the taxable person may dispose of or remove the property if not attached provisionally.
  • Commissioner should duly record the ‘reasons to believe’ on file.
  • CBIC has directed that the power of provisional attachment must not be exercised in a routine/mechanical manner and should be based on careful examination of all the facts of the case. It has been mandated that the collective evidence, based on the proceedings/ enquiry conducted in the case, must indicate that prima-facie a case has been made out against the taxpayer, before going ahead with any provisional attachment.
  • As the provisional attachment of property may affect the working capital of the taxable person, the investigation and adjudication should be completed at the earliest.

Cases fit for provisional attachment of property

Provisional attachment should not be invoked in cases of technical nature and should be resorted to mainly in cases where there is an evasion of tax or where the wrongful input tax credit (“ITC”) is availed or utilized or wrongfully passed on. Provisional attachment can be resorted to in following cases:

  • Where taxable person has supplied any goods or services without issue of any invoice with an intention to evade tax; or
  • Where taxable person has issued any invoice without supply; or
  • Where taxable person has availed ITC using the invoice or bill issued without any corresponding supply or fraudulently availed ITC without any invoice; or
  • Where taxable person has collected any amount as tax but has failed to pay the same to the Government beyond a period of 3 months; or
  • Where taxable person has fraudulently obtained refund; or
  • Where taxable person has passed on ITC fraudulently to the recipient(s) but has not paid the commensurate tax.

Aforesaid list is not exhaustive and is illustrative only.

Procedure for provisional attachment of property

  • Commissioner should duly record the ‘reasons to believe’ on file and pass an order in Form GST DRC -22 with proper Document Identification Number (“DIN”) recording the details of property being attached.
  • Copy of order in Form GST DRC – 22 to be sent to the concerned revenue authority / transport authority / bank or the relevant authority to place encumbrance on the attached property. The property, thus attached, shall be removed only on the written instructions from the Commissioner.
  • Copy of such attachment order shall be provided to the taxable person as early as possible so that objections, if any, to the said attachment can be made by the taxable person within 7 days.
  • If such objection is filed by the taxable person, Commissioner should provide an opportunity of being heard. After considering the facts presented by the person in his written objection as well as during the personal hearing, if any, the Commissioner should form a reasoned view whether the property is still required to be continued to be attached or not, and pass an order in writing.
  • In case, the Commissioner is satisfied that the property was or is no longer liable for attachment, he may release such property by issuing an order in FORM GST DRC- 23.
  • Even in cases where objection is not filed within the time prescribed under Rule 159(5) of CGST Rules i.e. 7 days, the Commissioner should pass a reasoned order.
  • Each such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order of attachment.
  • In case the attached property is of perishable/hazardous nature, then such property shall be released to the taxable person by issuing order in FORM GST DRC-23, after taxable person pays an amount equivalent to the market price of such property or the amount that is or may become payable by the taxable person, whichever is lower, and submits proof of payment.
  • In case the taxable person fails to pay the said amount, then the perishable / hazardous property may be disposed of and the amount recovered from such disposal of property shall be adjustable against the tax, interest, penalty, fee or any other amount payable by the taxable person.
  • Further, the sale proceeds thus obtained must be deposited in the nearest Government Treasury or branch of any nationalised bank in fixed deposit and the receipt thereof must be retained for record, so that the same can be adjusted against the amount determined to be recoverable from the said taxable person.

Types of property that can be attached

  • Value of property attached should not be excessive and should be reasonable to the estimated amount of pending revenue. More than one property can be attached.
  • Provisional attachment can be made only of the property belonging to the taxable person, against whom the proceedings under Section 83 of the Act are pending.
  • Movable property should normally be attached only if the immovable property, available for attachment, is not sufficient to protect the interests of revenue.
  • As far as possible, it should also be ensured that such attachment does not hamper normal business activities of the taxable person. This would mean that raw materials and inputs required for production or finished goods should not normally be attached by the Department.
  • In cases where the movable property, including bank account, belonging to a taxable person has been attached, such movable property may be released if taxable person offers any other immovable property which is sufficient to protect the interest of revenue.

(Circular No. CBEC-20/16/05/2021-GST/359 dated February 23, 2021 issued by Central Board of Indirect Taxes and Customs)

By Manish Parmar. Views are personal.  Manish can be reached at manish.parmar@aureuslaw.com.

As on: Tuesday Feb 23, 2021

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From Yatin’s Desk: Income escaping assessment – A revamped law on reassessment proceedings

As the dust settles and the excitement subsides over Budget 2021 announcements, it is now an opportune time to examine the fine print of tax proposals. One such proposal which have drawn considerable attention and has the effect of substantially rewriting the law relates to the provision of Income Escaping Assessment i.e. Reassessment Proceedings.

A Look back at the extant provisions

The extant law relating to reassessment are codified under S. 147, to S. 153 of the Income Tax Act, 1961 (‘the Act’). The provisions enable the Assessing Officer (‘AO’) who has ‘reason to believe’ that an income has escaped assessment to reopen concluded assessment years to reassess the escaped income and any other income which comes to his notice subsequently in the course of such proceedings. However, where the assessee has been subject to scrutiny assessment in relation to a year, no reassessment can be made beyond a period of 4 years from the end of relevant assessment year (‘AY’) unless the assessee has failed to ‘disclose fully and truly all material facts necessary for his assessment’ for the year. Where the income likely to have escaped amounts to Rs. 1 lac or more, assessment can be reopened upto 6 years from the end of relevant AY[1]. Before making any reassessment, the AO is required to ‘record his reasons’ for reopening the assessment and serve a notice requiring the assessee to file a tax return. Re-opening of assessment beyond a period of 4 years requires sanction of the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner.

Reopening of assessment – an evergreen controversy  

Reassessment proceedings, often, have been challenged in writ proceedings before the High Courts on the ground that the notice for reassessment lacks legal validity on account of failure by the AO to follow due process of law enshrined in the provisions and established under common law.  Rather than the merits of concealment, courts are overwhelmed with cases to decide upon the sustainability of the core issue of initiation of reassessment i.e. whether the AO had ‘reasons to believe’, did he ‘record his reasons’ appropriately, did the assessee fail to ‘disclose fully and truly all material facts necessary for his assessment’, was proper ‘sanction’ of the appropriate authorities taken, etc.

The Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. vs. ITO & Ors. has laid that when a notice for reopening of assessment u/s 148 of the Act is issued, the proper course of action for the assessee is to file the return and, if he so desires, to seek reasons for issuing the notices. The AO is bound to furnish reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file objections to issuance of notice and the AO is bound to dispose the same by passing a speaking order.

Recently the Hon’ble Supreme Court in the case of New Delhi Television Limited v DCIT (Civil Appeal No. 1008 Of 2020), in the context of disclosure of ‘fully and truly all material facts necessary for his assessment’ has held that the obligation of the assessee is to disclose all primary facts before the AO and he is not required to give any further assistance to the AO by disclosure of other facts.  It is for the AO at this stage to decide what inference should be drawn from the facts of the case.  The court went on to hold that non-disclosure of other facts which may be termed as secondary facts is not necessary.

Further, numerous court decisions have repeatedly stated that while the AO has to record reasons for reopening, there should be proper application of mind and it should not just be a mechanical process.

As the reality stands, proper reopening in the manner provided under law has remained wanting. The courts have over and again expressed anguish over the mechanical approach of reopening assessment without adherence to the provisions which have resulted, more often than not, reassessment proceedings being quashed on the issue of proper exercise of jurisdiction itself.

Budget proposal 2021 – revamp of reassessment procedure

The Finance Minister brought smiles by announcing in her budget speech the proposal to reduce time-limit for reopening of assessment to 3 years from the present 6 years, and in serious cases where there is evidence of concealment of income in a year of Rs. 50 lakh or more, upto 10 years. However, on examining the details, one can observe that far-reaching changes have been proposed to the entire scheme of reassessment.

The proposals substitute the exiting provisions of S. 147 with a new section which pari materia contain similar provisions to the extent enabling the AO to assess the escaped income and any other income which comes to his notice subsequently in the course of proceedings. The new substituted S. 148 however makes a significant departure from the existing provisions which put the onus upon the AO to form a belief that an income has escaped assessment.  The new provisions propose to provide a monitored criterion, having application across jurisdiction and assesses, to establish when the AO would be considered to have information which suggests that the ‘income chargeable to tax has escaped assessment’.

Defined meaning of expression ‘income chargeable to tax has escaped assessment’

The expression, forming the basis for triggering reassessment proceedings has now been defined in a restrictive manner to mean –

(i) any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Central Board of Direct Taxes (CBDT) from time to time. Such flagging would largely be done by the computer based system;

(ii) any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act.

In case of Search & Seizure (S. 132), Survey (S. 133A), Requisition of books of accounts, etc relating to the assessee (S. 132A)  or where money, bullion, jewellery or other valuables articles are sized in case of another person but belong to the assessee or books of accounts or documents seized or requisitioned in case of another person pertain to the assessee or contain information related to the assessee, the AO is ‘deemed to have information suggesting escapement of income’ chargeable to tax for 3 AY preceding the AY relevant to the year in which the aforesaid proceedings is conducted (i.e. 4 preceding financial years). These provisions principally seek to simplify and align the special procedure presently applicable to matters relating to search & seizure etc., with the new procedure for reassessment.

It is pertinent to note that the information flagged in accordance with the risk management strategy should necessarily pertain to ‘the assessee’ and thus it appears that information flagged in the case of thirds party, even if implicating the assessee cannot be made a basis of issuance of notice. Perhaps it may have to be seen whether the mechanism to be formulated by the CBDT ensures checks and balances to identify such delinquent taxpayers also.

Procedure to be followed before issuing notice for reassessment

The new provisions further codify the procedure to be followed by the AO before issuing a notice for reassessment. The provisions required the AO to:

  • Conduct any enquiry, if required, with prior sanction of the specified authority, with respect to the information suggesting escapement of income;
  • Provide the assessee an opportunity of being heard by serving a notice to show cause within such time (being not less than 7 days and not exceeding 30 days) as to why a notice under section 148 should not be issued on the basis of information suggesting escapement of chargeable income and results of enquiry conducted, if any;
  • Consider the reply of assessee, if any, furnished and basis the material including reply of the assessee, decide whether a notice is to be issued by passing an order, with the prior approval of specified authority, within 1 month from the end of the month in which the reply referred to in received/ time allowed to furnish a reply expires.

The aforesaid procedure is not required to be followed in cases relating to search and seizure, or where books of account, other documents or any assets are requisitioned under section 132A, etc. (i.e. situations where AO is deemed to have information suggesting escapement of assessment.)

Time limit for issuance of reassessment notice

The new provisions reduce the time-limit for re-opening of assessment to 3 years from the end of relevant AY. For instance, in relation FY 2017-18 corresponding to AY 2018-2019, the reassessment proceedings can be opened only upto 31 March 2022 (being 3 years from the end of relevant AY). FY 2016-17 and prior years will henceforth be barred by limitation if a notice is issued after 31 March 2021 (as against FY 2013-14 and prior years under existing law). In case where the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, ‘represented in the form of assets’, which has escaped assessment amounts to Rs. 50 lacs or more, the assessment can be re-opened upto 10 years.

Grandfathering period of limitation for AY 2021-22 and prior years

The new reassessment provisions are applicable from April 1, 2021. The provisions grandfather issuance of notice for reopening of assessment for financial years (FY) ending till 31 March 2021 upto the end of 6 assessment years relevant to such assessment year (for which notice is issued) as prescribed under the existing provisions. This would imply that if a notice for reassessment was to be issued in FY 2021-22, notice for reassessment can be issued only for FY 2017-18 and subsequent years (i.e. 3 years limitation under new provisions). Further, if it is a case where the quantum of income escaped is Rs.50 lacs or more, notice for reassessment can be issued only for FY 2015-16 and subsequent years on account of grandfathering provisions. The extended period of 10 years would not apply in such case.

Analysing the changes

The proposals, in all fairness are in the right direction. Reduction of period of limitation from 6 to 3 years would provide much desired certainty and closure to a large section of taxpayers. Further restricting reopening based on risk management strategy of CBDT and objections raised by CAG will bring an end to the often-abused powers of reopening exercised by AO, typically at the fag end of the limitation period. By providing a clear mechanism of inquiry, issuance of notice and its timeframe, the proposal will, to a major extent, aid in streamlining the procedure. The unpleasant surprise of receiving reassessment notice on the last day of the financial year will now be a thing of the past given that the new provisions require a detailed procedure to be followed and opportunity to be granted to the assessee to provide his reply before issuance of notice.  

The proposal for extended 10 years limitation where the alleged income, ‘represented in the form for assets’, has escaped assessment exceeds ‘Rs. 50 lacs or more’, principally seem reasonable. Prima-facie, it appears that since the revelation of escaped income has to be ascertained from ‘the books of accounts or other documents or evidence in possession of the AO’, this may typically apply to cases of search and seizure, survey, requisition of books, etc. However there seems to be some ambiguity which could have far reaching implications.

The new provision in so far as relate to matters of search & seizure, requisition of books etc. prescribe that where the aforesaid proceeding are initiated, the AO shall be deemed to have information suggesting escapement of chargeable income for 3 AY immediately preceding AY relevant to the FY in which such proceedings are undertaken. Thus, for instance, if search proceedings are initiated against an assessee in FY 2021-22 (relevant AY being 2022-23), income will be deemed to have been concealed for 3 immediately preceding AY i.e. AY 2019-20, AY 2020-21& AY 2021-22, (corresponding to FY 2018-19, FY 2019-2020 & FY 2020-21). Thus, notice would be issued for all the 3 years. Consider this in light of the operative provision which prescribes that where income chargeable to tax has escaped assessment for any assessment year, the AO shall reassess such income for such assessment year. The combined reading of law appears to suggest that in case of aforesaid matters, reassessment proceedings can be undertaken only for 3 years prior to the year in which search proceedings are initiated. If this was to hold good, the question arises whether the extended period of 10 year is really redundant for search & seizure/survey/requisition of books, etc. matters?

This leads to the next pertinent question – in which situations will the 10-year limitation period apply?

The limitation period beyond 3 year and upto 10 year is applicable where the AO ‘is in possession’ of books of accounts or other documents or other evidence which reveal escapement of income chargeable to tax and represented in the form of assets. Ordinarily, AO obtains possession of bocks of accounts/other documents/evidence in proceedings relating to search & seizure/survey/requisition of books, etc. matters. As discussed above, given the provisions as presently stated, one possible reading is that reassessment proceedings can only be undertaken for 3 years prior to the year in which search proceedings, etc are initiated. Would this imply that the extended period of 10 years would apply to matters other than search & seizure/survey/requisition of books, etc.?

In light of the aforesaid, the expression “Assessing Officer has in his possession books of accounts or other documents or evidence which reveal that…”, a necessary condition for exercising extended limitation of 10-year, merits consideration. Would it therefore mean that the documents gathered during regular assessment proceedings may well be regarded as relevant ‘documents or evidence’ being in the possession of the AO. ‘Books of accounts’ are typically not given in possession during assessment proceedings, and therefore how it fits into the scheme of things remains a grey area. Further, would the information mined and provided under the ‘risk mitigating strategy’ of CBDT also be regarded as ‘evidence’ in possession of the AO.

While this may still be debatable, any such inference would be a huge damper as it would now enable reopening assessment for 10 years (subject to Rs. 50 lacs threshold) as against 4 year under the existing law even where the assessee has made full and true disclosure of material facts during the course of prior assessment. Take for instance a case where risk management strategy of CBDT flags substantial increase in loans and advances or investments as a data point for triggering reassessment. The same would logically have been disclosed in the balance sheet. In such a situation, inspite of such disclosure, there could perhaps be possibility to reopen reassessment proceedings upto 10 year (subject to monetary threshold), effectively giving the CBDT a 10-year timeframe to refine its data intelligence and risk-based criterion. This would certainly be an area of concern.

Overall, it is encouraging to note a transformational change in the provisions relating to reassessment proceedings. There is a fundamental shift from an obscure and discretionary regime to systematic and risk-based criterion applicable uniformly across jurisdictions and taxpayers, without bias and subjectivity. It will however be interesting to see how the authorities go about enforcing the extended period of limitation given the ambiguity involved. One can hope the same is not enforced against the interest of taxpayer, specifically taking a liberal interpretation of 10 years extended limitation period, which otherwise will be a huge disappointment.   

[1] Extended period of 16 years is prescribed in case of escaped income in relation to an asset located outside India.

Yatin can be reached at yatin.sharma@aureuslaw.com. Views are personal. 

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SEBI Directions on Listed Companies going through CIRP

On December 16, 2020, the SEBI Board met for what is its last meeting before the full budget for Financial Year 2020-21. Certain key decisions were announced in relation to shareholding norms for listed companies going through Corporate Insolvency Resolution Process (CIRP). 

Presently, during Corporate Insolvency Resolution Process (CIRP) where the public shareholding falls below 10%, listed companies are required to bring the public shareholding to at least 10% within a period of 18 months and to 25% within 36 months.  Per the Press Release the following has been reported:

"..., the Board has decided the following in respect of companies which continue to remain listed as a result of implementation of the resolution plan under the Insolvency and Bankruptcy Code: 

"i. Such companies will be mandated to have at least 5% public shareholding at the time of their admission to dealing on stock exchange, as against no minimum requirement at present. 

"ii. Further, such companies will be provided 12 months to achieve public shareholding of 10% from the date such shares of the company are admitted to dealings on stock exchange and 36 months to achieve public shareholding of 25% from the said date. 

"iii. The lock-in on equity shares allotted to the resolution applicant under the resolution plan shall not be applicable to the extent to achieve 10% public shareholding within 12 months. 

"iv. Such companies shall be required to make additional disclosures, such as, specific details of resolution plan including details of assets post-CIRP, details of securities continuing to be imposed on the companies’ assets and other material liabilities imposed on the company, proposed steps to be taken by the incoming investor/acquirer for achieving the minimum public shareholding (MPS) and quarterly disclosure of the status of achieving the MPS."

Source: https://www.sebi.gov.in/media/press-releases/dec-2020/sebi-board-meeting_48451.html. 

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Ex-Gratia Payment of Interest to Borrowers during COVID

October 23, 2020

As a part of relief measures announced in view of the COVID-19 pandemic, the Ministry of Finance, on October 23, 2020, issued a scheme for grant of ex-gratia payment of difference between compound and simple interest. The period to be considered for this payment would be 184 days, from March 1, 2020 to August 31, 2020.  This applies to borrowers with aggregate loans (with all banks) upto that INR 20 million (INR 2 crores). This is subject to the condition that the account should be categorised as ‘standard’ i.e. the account shouldn’t have been declared an Non Performing Assets at any time as on February 29, 2020.  

The banks would be required to submit their claims for reimbursements with State Bank of India (SBI). SBI would be the nodal agency for disbursement of funds to such other banks.  

In case any compound interest has been paid by the borrowers, the same shall be refunded to the extent of difference between the simple interest and the compound interest. The rates applicable would differ as under:

  • Education, housing, cars, personal loans to professionals, consumptions loans, consumer durable loans and terms loans to MSMEs as per the agreement
  • Cash credit overdraft facilities to MSMEs as per the rates applicable as on February 29, 2020
  • Credit card dues as per the Weighted Average Lending Rate (WALR) charged by card issuer for transactions charged on EMI basis. The WALR has to be certified by the statutory auditor of the card issuer.
  • In case no interest has been charged on the Equated Monthly Installment (EMI) for specific period then as per lenders’ base rate or marginal cost of funds based lending (MCLR), whichever is applicable

The Scheme provides that this exercise would be completed by lending institutions by November 5, 2020. Further, lending institutions would be required to establish a grievance redressal mechanism for eligible borrowers within 1-week from October 23, 2020.

The Scheme is in consonance with submissions made by the Central Government before the Supreme Court in relation to provision of policy measures for reliefs to borrowers. This may provide a major relief to small businesses and individual borrowers. However, impact of the Scheme on the banking sector remains a question as Scheme does not provide for a time period within which the lending institutions would. 

By Vineet Shrivastava and Sayli Petiwale. Views are personal.  Vineet and Sayli can be reached at vineet.shrivastava@aureuslaw.com and sayli.petiwale@aureuslaw.com respectively. 

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From Yatin’s Desk: Delhi ITAT provides relief on indirect transfer of shares made prior to April 2015

In what comes as a relief to foreign investors stuck in litigation around indirect transfer of share (transfer prior to April 2015) held in an Indian company, the Delhi Bench of ITAT in the case of Augustus Capital PTE Ltd has held that the threshold specified in Explanations 6 and 7 of section 9(1)(i) of the Income tax Act would have to be read with Explanation 5 and given retrospective effect.

Explanation 5 inserted by the Finance Act 2012 provides that shares in a foreign company shall be deemed to have been situated in India if the shares derives, directly or indirectly, value substantially from the assets located in India. This has retrospective effect. Explanation 6 and 7 were inserted by the Finance Act 2015 (i.e. made effective from FY 2015-16). Explanation 6 provides thresholds for the applicability of indirect transfer rules i.e. the value of assets (owned by the foreign entity whose shares are being sold) exceeds INR 10 Cr and represents 50% or more of the value of all assets owned by the foreign entity. Further Explanation 7 excludes from the ambit transfers made by the non-resident transferor who directly or indirectly, neither holds management right/control over the foreign company or voting power/ share capital exceeding 5% at any time during the period of 12 months preceding the date of transfer.

The tax authorities have been contesting that while the ambit of indirect transfer has been made retrospective, the exclusion only applies prospectively from FY 2015-16. Thus, indirect transfer made prior to April 2015 will be subject to tax in India. The ITAT decision would come as a relief to foreign investors who can now take benefit of the thresholds prescribed under Explanation 6 and 7, a claim being denied by the tax authorities. It is useful to take note that the Hon'ble Delhi High Court in the case of Copal Market Research Limited had interpreted the term ‘substantially’ in Explanation 5 to cover transfer of shares of a company incorporated overseas, which derive more than 50% of their value from assets situated in India, and not otherwise. The decision was rendered before the insertion of Explanation 6 and 7. However by reading of Explanation 6 and 7 as being retrospective by the ITAT, the ruling provides additional benefit to certain category of foreign investors who may have otherwise not satisfied the 50% India assets value criterion. 

Yatin can be reached at yatin.sharma@aureuslaw.com. Views are personal.