High Court, appeals to [Section 260A] : High Court cannot condone d

Income-tax - High Court, appeals to [Section 260A] : High Court cannot condone delay in filing appeal - [2011] 9 taxmann.com 269 (MP)

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Block assessment

Undisclosed income — Matter remitted to Tribunal to decide as to whether M/S Globe Meditech was dummy concern of assessee and whether order of CIT(A), dealing with addition and holding that assessee herein was not benamidar, was correct or not, as held by Del HC in CIT v Mukesh Luthra — In favour of: Others; ITA Nos 1115, 1122 of 2009.

CIT v Mukesh Luthra
High Court of Delhi
ITA Nos. 1115, 1122 of 2009

A K Sikri and M L Mehta, JJ
Decided on: 3 June 2011

Counsel appeared:
Ms Prem Lata Bansal, Sr. Adv. & Mr Deepak Anand, Adv. for the appellant
Mr Ajay Vohra, Ms Kavita Jha & Mr Somnath Shukla, Advs. for the respondent

Judgment
Per: A K Sikri, J:
1. On 18.05.2001, ITA No.1115 of 2009 was admitted on the following substantial question of law: “Whether order passed by ITAT is perverse in law and on facts when it deleted the addition of Rs.92,29,561/- ignoring the material fact that said concern was a dummy concern and that the money was reflected in the regular books of accounts though found during the course of search and therefore, the addition could be made only in the regular assessment.”

2. The question of law in ITA No.1112 of 2009 is the same except the quantum of addition.

3. As the counsel for the parties were ready to argue the matter finally at that stage itself, the hearing also took place immediately after the admission of the appeal. The counsel for the parties took time to file the written submissions which have been filed as well. The dispute which has given rise to the aforesaid substantial question of law can be traced from the following events.

A search was carried in the case of the assessee on 30.08.2001. The assessee is a Director and one of the major shareholders of M/s CCIL which is in the business of running of health care centre under the name and style of M/s VLCC.
The assessee is also proprietor of M/s Shine International & Fashion dealing in export of garments. The assessee filed the block return on 31.12.2002 declaring undisclosed income at NIL.
Block assessment was completed on 31.10.2003 at undisclosed income for the block period at Rs.10,19,594/-.


4. In the course of block assessment proceedings, AO was noticed that there is a concern M/s Globe Meditech in the name of Shri Rajesh Khurana and this concern was in fact controlled by the assessee, Shri Mukesh Luthra. It was also noted by the AO that to investigate the case further, assessment in the case of Shri Rajesh Khurana for Assessment Years 1999-20000 to 2001-02 were reopened and on analysis of various evidences listed in detail in the case of Shri Rajesh Khurana.
In the said order, passed on 27.02.2004, it was held that M/s Globe Meditech is, in fact, a dummy concern of Shri Mukesh Luthra, but operated in the name of Shri Rajesh Khurana.
The AO reproduced the entire assessment order of Shri Rajesh Khurana in the assessment order for the present two assessment years in the name of the assessee. The AO added the income of Rs.92,29,561/- in Assessment Year 2001-02 and Rs.66,87,523/- in Assessment Year 2002-03 in the hands of the assessee on substantive basis which were added in the hands of Shri Rajesh Khurana on protective basis. The assessee carried the matter in appeal before the CIT(A) in both the years.

5. In Assessment Year 2001-02, the CIT(A) set aside the assessment that any undisclosed income for the period covered by search can be assessed only under section 158BC of the Income Tax Act (hereinafter referred to as 'the Act'). It was observed by him that if regular assessment is pending pertaining to the block period, only such income should be considered in the regular assessments, the detail of which is disclosed in the books of account maintained in the normal course of business by the assessee. Even on merits, the addition was deleted as it was held by CIT(A) that no evidence had been found to assume that the assessee is the owner of M/s Globe Meditech. The CIT(A) opined that the onus was on the AO to prove that M/s Globe Meditech belongs to the assessee, but the AO had not brought on record any material which could establish that the profits out of the business of M/s Globe Meditech were enjoyed by the assessee either through direct or circumstantial evidence. On this basis, it was held by CIT(A) that he was unable to accept the AO's view that what is apparent is not real and that Shri Rajesh Khurana is the benamidar of Shri Mukesh Luthra. On this basis, he deleted the addition in Assessment Year 2001-02. In the Assessment Year 2002-03, he deleted the addition by following his order in Assessment Year 2001-02.

6. The Department/Revenue preferred appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') against the aforesaid findings of the CIT(A) deleting the addition for both the assessment years. The Tribunal has repelled the challenge laid by the Department concurring with the opinion of the CIT(A) that the matter could be gone into and examined in the course of block assessment and addition could be made in those proceedings if the AO was in a position to establish that M/s Globe Meditech was a dummy concerned of the assessee. For this reason, the Tribunal did not go into the merits.

7. It is in this backdrop the issue that has arisen for consideration is whether addition could be made in the regular assessment proceedings as done by the AO or it could be the subject matter of block assessment proceedings alone.

8. In an endeavour to demonstrate that the course of action taken by the AO was valid and justified, Ms. Prem Lata Bansal, learned Senior Counsel appearing for the Revenue argued that search at the premises of the assessee was conducted on 30.08.2001 and much thereafter belated return for the Assessment Year 2001-02 was filed on 31.12.2002. It is during the block assessment proceedings that the AO noticed that there was a concern M/s Globe Meditech in the name of Shri Rajesh Khurana which was, in fact, controlled by the assessee herein. Since the entries were recorded in the regular books of account maintained for M/s Globe Meditech and Shri Rajesh Khurana, proprietor thereof regularly filing the returns declaring the income earned from M/s Globe Meditech, as far as Shri Rajesh Khurana is concerned, the assessment in respect of Assessment Years 1999-2000, 2000-01, 2001-02 were reopened under section 148 of the Act, which resulted in passing of the reassessment orders on 27.02.2004 making protective assessment in his hands. According the learned Senior Counsel, since the entries were recorded in the regular books of account of M/s Globe Meditech, insofar as Shri Rajesh Khurana its sole proprietor is concerned, no addition could be made by the AO for the block assessment year and therefore, proceedings were rightly initiated under section 148 of the Act. According to her, such a course of action was in conformity with the judgment of this Court in the case of Commissioner of Income Tax v Ravi Kant Jain [250 ITR 141], wherein it is held that the block assessment under Chapter XIV of the Act is not intended to be a substitute for regular assessment. It was also contended that unless and until the transactions were examined in the hands of M/s Globe Meditech, the AO could not have made any additions in the hands of the present assessee, Shri Mukesh Luthra. She argued that in a sense, in the case of the present assessee, the AO has only lifted the veil and found out that M/s Globe Meditech actually belonged to the assessee and not Shri Rajesh Khurana. Otherwise, all the entries have been recorded in the books of account maintained in a regular manner by M/s Globe Meditech. Therefore, the AO was justified in making the additions in the regular assessment.

9. Mr. Ajay Vohra, learned counsel appearing for the respondent, on the other hand, sought to justify the orders of the Tribunal which has held that such a course of action was available only in the block assessment. His submission was that as per provisions of Chapter XIV-B, in the block assessment, additions can be made for income which is relatable to evidence unearthed during the course of search. Any other income would be outside the purview of block assessment and can only be added in the regular assessment proceedings. Conversely, in the regular assessment, no addition can be made for income which has its genesis in materials found during the course of search. In other words, block assessment and regular assessment are mutually exclusive. While in the block assessment, addition can only be made for undisclosed income discovered during the course of search, such income cannot be the subject matter of regular assessment. He referred to the judgment of this Court in the case of Commissioner of Income Tax v Jupiter Builders P. Ltd. [287 ITR 287 (Del) and the judgment of the Gujarat High Court in the case of N.R. Paper and Board Limited and Ors. v Deputy Commissioner of Income Tax [234 ITR 733].

10. He argued that in the present case, the apparent position is that M/s Globe Meditech is the proprietary concern of Shri Rajesh Khurana. On the basis of evidence alleged to be found during the course of search, it is the allegation of the Revenue that the apparent is not the real, viz., that M/s Globe Meditech is not owned/controlled by Shri Rajesh Khurana but is a dummy concern of the respondent assessee. Such an allegation raised by the Revenue is sought to be substantiated by documents alleged to be found during the course of search at the premises of the respondent assessee. In that view of the matter, such addition, if otherwise sustainable, could only be made in the block assessment proceedings.

11. We have considered the respective submissions.

12. We are of the firm view that the view taken by the Tribunal is not proper in law. Learned Counsel for the Revenue is right in her contention that it is not a case where any evidence was unearthed during the course of the search. In fact, it was during block assessment proceedings the AO noticed that M/s Globe Meditech was in fact controlled by the assessee herein, though one Mr. Rajesh Khurana was shown as the proprietor of the said firm. Otherwise, entries were recorded in the regular books of accounts maintained by M/s Globe Meditech and Sh. Rajesh Khurana was even filing the income tax return declaring his income earned from M/s Globe Meditech as its proprietor. It was thus a case of lifting of the veil by the Assessing Officer and this could be done in the regular assessment proceedings, insofar as the assessee is concerned. At the same time, protective assessment is made at the hands of Mr. Rajesh Khurana in whose case the assessment is reopened under section 148 of the Act as that was the only course of action available qua Rajesh Khurana.

13. We, therefore, set aside the order of the Tribunal. Since the Tribunal has not gone into the merits of the additions made by the AO, the matter is remitted back to the Tribunal to decide as to whether M/s Globe Meditech was a dummy concern of the assessee herein and the order of the CIT (A) dealing with the addition holding that the assessee herein was not the benamidar is correct or not. The question of law is answered in the aforesaid terms, without any order as to cost.

14. The appeal is disposed of accordingly.

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Money advanced to subsidiary company cannot be allowed as deduction either u/s 3

Money advanced to subsidiary company cannot be allowed as deduction either u/s 36(2) or u/s 37(1) on writing off the same

To claim debt as bad debt and as a deduction, the debt should be in respect of business, which is carried on by the assessee in the relevant assessment year


[2010] 6 taxmann.com 86 (Hyd. - ITAT)
ITAT, HYDERABAD BENCH `B', HYDERABAD
VST Industries Ltd.


v.


ACIT


ITA No. 691/Hyd/2005


July 23, 2010


FACTS
Brief facts of the case are that it was noticed by the Assessing Officer that the assessee company made investment in a subsidiary company acquiring 39.90 lakhs shares. The assessee-company held 99.75 per cent of the shares issued by the subsidiary company and hence was holding controlling interest thereon. The assessee-company sold the subsidiary company to M/s GGCL for a consideration of Rs.15.50 crores. An agreement was entered into to this effect on 23-11-1999. The assessee-company also passed a board resolution, wherein the modalities of the transfer were discussed. The details of the resolution are noted by the Assessing Officer at page 11 of his order. It was also noticed by the Assessing Officer that an annexure was attached to the agreement wherein the balance sheet as on 1-12-1999 was reconstructed. The proposed balance sheet is extracted at page 12 of the assessment order. The Assessing Officer noticed that the assessee-company entered into a supplementary agreement on 24-12-1999 making a minor variation in the proposed balance sheet. The Assessing Officer held that the assessee-company entered into a "package deal" to transfer the subsidiary company VST NPL to GGCL for a lump sum consideration. The Assessing Officer held that the assessee-company transferred the shares held in the subsidiary company to M/s GGCL as per the conditions mutually agreed upon. The Assessing Officer observed that the assessee-company sold the shares for a consideration of Rs.15.50 crores and incurred a loss. The Assessing Officer considered the issue whether the loss is to be computed as a capital loss or loss assessable u/s 45 of the Act. The Assessing Officer held that the assessee-company passed a resolution on 27-5-1999 wherein it was noted that the amount of Rs.38.46 crores owed by the subsidiary company is treated as not payable. The resolution is extracted at page13 of the assessment order. The Assessing Officer held that in the process of reconstructing the balance sheet as on 31-3-1999 and transferring the subsidiary company the assessee company chose to forego the amount due to them from VST NPL. The Assessing Officer observed that the loss incurred by the assessee in the process of sale of the transaction is nothing but loss of capital invested in the subsidiary company. The Assessing Officer rejected the assessee's contention that the long-term capital loss is incurred in the course of the transaction. On appeal, the CIT(A) held that the transfer of subsidiary company effected by assessee the capital gains required to be computed as per special provisions viz., sec.50Bof the Act. Accordingly, he directed the Assessing Officer to compute the capital gain u/s 50B of the Act. He rejected the claim of the assessee regarding the allowance of the amount computed at Rs.13.96 crores as capital loss. According to the CIT(A), the impugned transaction is nothing but a slump sale and capital gain is required to be computed u/s 50B of the Act. Against this disallowance, the assessee is in appeal before us.


HELD
To claim debt as bad debt and as a deduction, the debt should be in respect of business, which is carried on by the assessee in the relevant assessment year, should have been taken into account in computing the income of the assessee for the accounting year or should represent money lent in ordinary course of its business of banking or money lending. The amount should be written off as irrecoverable in the accounts of the assessee for that accounting year in which the claim for deduction is made for the first time. The assessee can claim debt as bad debt, in respect of debt which would have come into the balance sheet as a trading debt. The debt means something more than a mere advance. It means something which is related to business of the assessee. The amount is given as a trading debt since inception and the character of such amount is not changed by any act of the assessee or by operation of law, then such loan constitutes as a trade debt. In other words, debt emerges or springs from the trading activity in the course of ordinary business of the assessee, which can be claimed as bad debt. The debt arising out of capital field or emerging from the investment activity of the assessee is not a trade debt. In the capital field, it cannot be treated as debt in ordinary course of business or trading debt, even by unilateral action, the assessee treated the debt in the capital field as trade debt. In order to claim the allowances as bad debt, there should be relation between the debtor and creditor from the date of lending the money till the date of write-off of debt as bad debt. The debt arising out of investment activity which is in the capital field cannot be allowed as bad debt as revenue deduction. To claim bad debt the business in respect of which such debt has been given must continue to exist in the year for which the bad debt is claimed. As stated earlier, to claim deduction as a bad debt, it should not be too remote from the business carried on by the assessee and if the debt or guarantee given by the company while carrying on the business other than finance to the subsidiary company, it is not given in the course of assessee's business as there is no privity of the contract or any legal relationship between the assessee and such subsidiary company as trade debtor and creditor. There is neither any custom nor any statutory provision or any contractual obligation under which the assessee was bound to advance loan to the subsidiary company. Hence, the amount that had to be lost or incurred on account of subsidiary company cannot be claimed as bad debt when it became irrecoverable. In order to be deductible as a business loss, it must be in the nature of trading loss, not as capital loss springing directly out of trading activity and it must be incidental to the business of the assessee and it is not sufficient that it falls on the assessee in some other capacity or is merely connected with its business. Because the assessee bore the loss of the subsidiary company on account of failure of the subsidiary company to repay the same, that itself cannot be the reason of debt as bad debt. In order that a loss might be deductible it must be a loss in the business of the assessee and not a payment relating to the business of somebody else which under the provisions of the Act was deemed to be and became the liability of the assessee. Losses allowable if it sprang directly and was incidental to business of the assessee, loss which assessee had incurred was not in its own business and it cannot be deducted in respect of the business of the assessee from its profits. The amount incurred by the assessee which is not in the ordinary course of business cannot be allowed as a deduction. Further, a debt can be incident to business only if it arises out of transaction, which was necessary in furtherance of the business and was within the range of business activity of assessee. Everything associated or connected with the business cannot be said incidental thereto. Not merely should there be a close proximity to the business, as such, but it should also be an integral and essential part of the carrying on the business of the assessee. We should see whether the transaction is necessary part of the normal course of business and also is closely interlinked with the assessee's business as incidental to carrying on the business of the assessee. The mere object in the memorandum of association of the company is not conclusive as to the real nature of a transaction and that nature not only has to be deduced from the memorandum but also for the circumstances in which the transaction took place. If the amount was incurred for ensuring any investment which is very source of its business and that advance is not incidental to the trading activity of the assessee, the same is not allowable as deduction. The advance in the field of investment for the purpose of securing source of income and not for the purpose of earning income does not qualify for deduction as bad debt. In order to entitle for deduction it should have been incurred in the course of carrying on the business and it should be in the nature of revenue. In the present case, debt claimed as bad debt is not a trading debt emerging from the trading activity of the assessee. The debt arises out of investment activities of the assessee or associated with the capital field, not on account of revenue cannot be allowed as a bad debt. The assessee-company neither a banker nor a money lender, the advance made by the assessee as an investment not to be said to be incidental to the trading activity of the assessee and merely money handed over to someone in the capital field and that person failed to return the same, that amount cannot be claimed as deduction as bad debt. Accordingly, money advanced to subsidiary company cannot be allowed as deduction either u/s 36(2) or u/s 37(1) on writing off the same.


ORDER


Per Chandra Poojari, Accountant Member:


This appeal by the assessee is directed against the order of the CIT(A) IV, Hyderabad dt.24-3-2005 for assessment year 2000-01.


2. The first ground raised by the assessee is that the CIT(A) erred in confirming the disallowance of the claim of the assessee, as long term capital loss of Rs.13,96,22,585, arising out of the sale of shares held by it in VST-NPL to M/s Global Green Company Ltd. (GGCL for short) and instead directing that the loss is to be computed u/s 50B of the Income tax Act, 1961 (the Act), as slump sale.


3. Brief facts of the case are that it was noticed by the assessing officer that the assessee company made investment in a subsidiary company acquiring 39.90 lakhs shares. The assessee company held 99.75 per cent of the shares issued by the subsidiary company and hence was holding controlling interest thereon. The assessee company sold the subsidiary company to M/s GGCL for a consideration of Rs.15.50 crores. An agreement was entered into to this effect on 23-11-1999. The assessee company also passed a board resolution, wherein the modalities of the transfer were discussed. The details of the resolution are noted by the assessing officer at page 11 of his order. It was also noticed by the assessing officer that an annexure was attached to the agreement wherein the balance sheet as on 1-12- 1999 was reconstructed. The proposed balance sheet is extracted at page 12 of the assessment order. The assessing officer noticed that the assessee company entered into a supplementary agreement on 24-12- 1999 making a minor variation in the proposed balance sheet. The assessing officer held that the assessee company entered into a "package deal" to transfer the subsidiary company VST NPL to GGCL for a lump sum consideration. The assessing officer held that the assessee company transferred the shares held in the subsidiary company to M/s GGCL as per the conditions mutually agreed upon. The assessing officer observed that the assessee company sold the shares for a consideration of Rs.15.50 crores and incurred a loss. The assessing officer considered the issue whether the loss is to be computed as a capital loss or loss assessable u/s 45 of the Act. The assessing officer held that the assessee company passed a resolution on 27-5-1999 wherein it was noted that the amount of Rs.38.46 crores owed by the subsidiary company is treated as not payable. The resolution is extracted at page13 of the assessment order. The assessing officer held that in the process of reconstructing the balance sheet as on 31-3-1999 and transferring the subsidiary company the assessee company chose to forego the amount due to them from VST NPL. The assessing officer observed that the loss incurred by the assessee in the process of sale of the transaction is nothing but loss of capital invested in the subsidiary company. The assessing officer rejected the assessee's contention that the long-term capital loss is incurred in the course of the transaction. On appeal, the CIT(A) held that the transfer of subsidiary company effected by assessee the capital gains required to be computed as per special provisions viz., sec.50Bof the Act. Accordingly, he directed the assessing officer to compute the capital gain u/s 50B of the Act. He rejected the claim of the assessee regarding the allowance of the amount computed at Rs.13.96 crores as capital loss. According to the CIT(A), the impugned transaction is nothing but a slump sale and capital gain is required to be computed u/s 50B of the Act. Against this disallowance, the assessee is in appeal before us.


4. The learned counsel for the assessee submitted that there is no sale of undertaking as enumerated in sec.50B of the Act. There is no slump sale either. The intention of the assessee is to just sell all shares of NPL. The assessee held the shares in NPL which were sold to M/s GGCL vide agreement dt.23-11-1999 and 24-12-1999. The transaction constitutes a transfer u/s 2(47) of the Act and the consequent profit or loss has to be computed under the provisions of sec. 45 of the Act. The assessing officer's contention that the same is a capital receipt is totally incorrect and is not based upon any provisions of the Act. The loss arising out of this transaction is governed by the provisions of sec.45 of the Act and it is a capital loss to be allowed. The learned counsel for the assessee with due respect to the lower authorities, submitted that the lower authorities totally misunderstood the facts of the case. According to him, the intention of the parties is to be seen and in the present case, the intention is only to sell the shares and there is no meaning in calling the same as "package deal" by the lower authorities. He drew our attention to the impugned agreement of sale entered into between the parties on 23-11-1999 and also drew our attention to the supplement agreement dt.24-12-1999 and submitted that the agreement itself shows that the assessee shall transfer and convey the legal title of the purchased shares of the company as on the date of transfer and whereupon the purchaser shall pay the total consideration of Rs.15.50 crores to the seller in consideration of such transfer of shares in the manner described in the agreement. He submitted that by no stretch of imagination it can be called as transfer of the undertaking or slump sale and disallow the claim of the assessee as capital loss.


5. On the other hand, the learned Departmental Representative submitted that this impugned transaction is nothing but transfer of the undertaking as a whole, as enumerated in the provisions of sec.50B of the Act and it is not only transfer of shares but also transfer of the undertaking itself. By entering into the agreement dt.23-11-1999, the assessee transferred all the assets and liabilities of the subsidiary company (VST NPL) to GGCL. It is nothing but a "package deal". The purchaser is not only intended to purchase only the shares but also the undertaking as a whole for which purpose it had entered into an agreement. If the purchaser wanted to purchase the shares alone or to purchase clear company, what is the necessity of this agreement ? She drew support from the judgement in the case of CIT v.Shri B.C.Srinivasa Setty 128 ITR 294 (SC) and submitted that assets transferred cannot be construed as a capital asset within the contemplation of sec.45 and it falls u/s 50B of the I.T.Act. Further, she submitted that there is no material on record to show that there is item wise valuation. It is a clear case of slump sale and sec.50B of the Act is clearly applicable to the facts of the present case on hand. Alternatively, she submitted that if the provisions of sec.50B are not applicable and then the computation provisions fail, the assessee cannot compute capital loss. She drew our attention to the various parties (1 to 9) involved in the impugned agreement. She submitted that what is the necessity of involving various parties to the agreement when it is just sale of shares. Further, she submitted that as per the agreement, the principal seller undertakes that all outstanding liabilities of the company and taxes including without limitation income tax, penalties, interest, charges, dues and levies of whatsoever nature leviabale and all claims, charges, penalties, interest etc., levied on the company on account of claims by customers or on account of quality of the company's products, pertaining to the period prior to the date of transfer, such claims arising before or after such date, shall be borne by the Principal Seller and the Principal Seller undertakes to indemnify the company as well the purchaser in this regard. The principal seller shall bear, pay, discharge and settle all liabilities disclosed or undisclosed, taxes, interest, charges, dues, levies or any claims towards the dividends on the cumulative preference shares or any other liability of whatsoever nature levied on the company for the period prior to the date of transfer, which has come to the knowledge of the purchaser after the date of transfer, including any retrospective orders and the principal seller undertakes to indemnify the company as well as the purchaser in this regard. She drew our attention to clauses III and IV of the agreement dt.23-11-1999, available in the paper book at page Nos. 28 to 57, wherein it was stated as follows.


i) The obligations of the sellers to complete the sale of the purchased shares under this agreement shall be subject to the satisfaction of or compliance with, at or before the date of transfer, each of the following conditions precedent, any one or more of which maybe waived by the purchaser in its sole discretion.


ii) Board Resolutions: That the sellers and/or the company as the case may be, have passed the requisite board resolutions in respect of the following:


a). Detailing the scheme of entries to arrive at the balance of assets and liabilities as reflected in the proposed or projected balance sheet of the company as annexed hereto as Annexure III.


b) Waiver of all liabilities of the company towards the Principal Seller.


c) Waiver of interest on advances due to the principal seller by the company.


iii) Valuation- The principal seller shall have provided to the purchaser a valuation report of the fixed assets of the company, conducted and prepared by an independent valuer.


iv) Transfer of other assets: The principal seller shall have transferred and conveyed or shall have caused to convey and transfer in the name of the company, all the computers and the car which are being used by the company.


v)Fixed assets and Inventory: as on the closing date, the company shall be in possession of such of the fixed assets and the inventory of raw materials, work-in-progress and finished goods, stores and spares, processing and packing materials, as specified in the list of fixed assets and inventory as reflected in the balance sheet of the company as aat the closing date and also as per the schedule of investment in fixed assets.


vi) Payment towards liability: The principal seller shall have made all payments due towards the liability to the Bank of Bahrain and Kuwait and to other creditors of the company secured and unsecured, and shall have obtained discharge letters from such creditors and further shall have filed the relevant documents with the Registrar of Companies in this regard, within a week from the date of transfer.


vii) Transfer of current assets: The company shall have transferred to the principal seller the cash and bank balances, sundry debtors and other current assets except deposits with the Government authorities.


6. Further, she submitted that from the above clauses, it is clear that the intention of the parties to the agreement, is to transfer the entire undertaking to the purchaser as a whole and not sale of shares alone and thus the provisions of sec.50B are applicable.


7. We have heard both the parties and perused the material on record. First of all it is to be seen what a "slump sale" is all about. Sec.2(42C) of the I.T.Act, which is applicable from 1-4-2000, defines "slump sale" to mean the transfer of one or more undertakings as a result of sale for a lump sum consideration, without values being assigned to the assets and liabilities of such a sale. In other words, if an undertaking is transferred as a going concern with all its assets and liabilities, without valuations having been assigned to individual assets of such a transaction is to be regarded as a "slump sale." As per Explanation 1 to sec. 2(42C) of the Act, "undertaking" shall have the meaning assigned to it in Explanation 1 to sec. 2(19AA) of the Act. Explanation 1 to sec. (19AA) says that Explanation 1 to sec.(19AA)


"undertaking" shall include any part of the undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting as business activity. From this, it is clear where the assets and liabilities of an undertaking are sold as a group or lumped together, such a sale would qualify as a slump sale. In the light of the above, we have carefully gone through the material on record and we have carefully gone through the agreement entered into by the parties on 23-11-1999, which is placed on record. By this agreement, though the assessee transferred and conveyed the legal title of the shares to the purchaser for a consideration of Rs.15.50 crores by transfer of the shares to GGCL, actually the assessee transferred the entire undertaking i.e. subsidiary company i.e. VST NPL to GGCL. On the transfer of shares, all outstanding liabilities of the transferred company and taxes including without limitation income tax, as stated in clauses III and IV of the impugned agreement dated 23.11.1999, it is not only transfer of shares but transfer of the entire undertaking to GGCL. On consideration of various stipulations and provisions stated therein the agreement, it is clear that the intention of the parties was to sell the subsidiary company i.e., VST NPL to GGCL and purchaser's intention is to purchase the VST NPL for a consolidated price, which is nothing but slump purchase price. The terms of agreement are very specific and clear and there is no need for importing any other meaning. The assets and liabilities of VST NPL were sold together as a group by the agreement cited supra and this sale squarely fell in line with the idea of a slump sale as provided in the provisions of sec.50B of the Act. Further, assessee sold the entire undertaking with all its assets and liabilities together with al licences, permits, approvals, registration, contracts, employees and other contingent liabilities also for a slump price. This kind of sale falls under the purview of sec.50B. In our opinion, the provisions of sec.50B are applicable and we are of the opinion that the direction given by the CIT(A) to compute the capital gain as per Sec.50B is in accordance with law and calls for no interference from us. The same is confirmed. 8. The second ground of appeal is with regard to disallowance of the claim of the assessee of bad debts/deduction u/s 37(1) in respect of amounts not recoverable from the subsidiary company i.e VST NPL and written off in the books of accounts of the assessee consists of money advanced to the subsidiary company at Rs. 17,88,50,501, salary, Secondment charges and other expenses incurred by the assessee on behalf of the subsidiary company at Rs.2,84,85,440 and money receivable towards sale of agronomy and marketing rights at Rs.6,50,00,000 aggregating to Rs.27,23,35,941.


9. With regard to the above ground, the learned counsel for the assessee submitted that VST had diversified into the business of Natural Products like Paprika, Oleoresin etc. in 1992 considering enormous export potential of agri-products and also to take advantage of it strengths in working together with the farmer community. Initially, VST was mainly involved in trading of agri-products like Gherkins and Paprika in the export market. Subsequently, VST promoted a 100% subsidiary named VST Agrotech Ltd. which was subsequently renamed as VST Natural Products Limited (NPL) a 100% export oriented unit for carrying on the business of processing value added horticultural products. These horticulture products included Gherkins–both in bulk and bottled form, Dehydrated products, spices – power, Oleoresins etc. He submitted that this constitutes all together a new line of business in which the company did not have prior experience and was mainly dependent on the highly demanding export market as there was no ready market in India for such products and the "Made in India" product not easily acceptable to the foreign buyer and had to go through stringent process of product acceptance. For the above and various other reasons the business of NPL did not succeed and the amounts financed to NPL by the Company could not be recovered due to its mounting losses. The company as a matter of prudence had, in the financial year 1998-99 relevant to the ay 1999-2000, provided Rs.53 crores towards loss from NPL covering the aggregate of investments, fixed assets and monies advanced but unrecoverable. Such loss was taken as a disallowance in computation of total income as the amounts were mere provisions and not actually written off in the books. In the financial year 1999-2000 (AY 2000-01), the monies due from NPL were actually written off in the books and hence claimed as deduction in computation of total income for that year. This is also evident from the audited accounts for that year where sub-point (ii) of point 22-Notes to Profit and Loss accounts clearly mention that the provisions set up in the previous year i.e. FY 1998-99) under the head `contingencies – subsidiary' were fully adjusted. The advances made to NPL from time to tie in order to help them to meet their cash flow requirements. It is submitted that these payments have to be made by the assessee as at that time NPL could not raise funds from either conventional sources or the financial market and since as a parent company it is our responsibility to ensure the commitments of the subsidiary also. The assessee was hopeful at that time that the business of NPL could be revived and the amounts advanced could be recovered. However, in spite of their best efforts, due to various factors the business of NPL could not get revived and no part of the amount advanced as above could be recovered by it. Hence, it has written off the above amount of Rs.17,88,50,501 as irrecoverable and claimed the same as deduction in computing the business income. In this regard, it is submitted that any money advanced during the course of business and not recovered also constitute business expenditure. The above amounts were spent by the assessee out of business obligation as a parent company and were required by the principles of business expediency. It is also submitted that the amounts were revenue in nature and have not resulted in any asset or right or any other benefit of enduring nature. It is therefore submitted that the same is allowable as a business deduction u/s 37(1) of the Act. NPL was formed by the assessee company as a separate company in order to carry on the business of manufacture and sale of agro based products. The above said company was formed as a 100% subsidiary since the diversified new business requires independent focus separately from the main business of sale of cigarette of the parent company. The project of NPL was being implemented with a technology obtained from foreign companies. Even the work of supervision of the project implementation was being done by a US company. The project was initially estimated at Rs.29 crores and to be completed over a period of about one year. However, the project was delayed due to various reasons both technical and financial with the result that the project implementation go delayed much beyond the estimated tie resulting in cost escalation. The project ultimately had to be shelved off after the cost touched Rs.73 crores. During the period when the project was getting delayed, VST had to face a peculiar situation of requiring to finance much higher amounts than initially anticipated. Otherwise, even the existing amounts advanced would have been lost. The payments were due to be made to a large number of suppliers and creditors apart from foreign companies and hence VST had no option other than somehow making the payments. Because of the project delays and the doubts associated with the project, no financial institutions were coming forward to lend money to the project, NPL with difficulty managed to get only about Rs.7 crores as long term funding from banks and institutions, during the period when the project was getting delayed and the balance of finances were provided by VST in the form of advances. It is also submitted that VST being the parent company had a responsibility to fund and pay the creditors of the subsidiary. Otherwise not only NPL's creditors would have been affected but also the credibility and financial rating of VST itself would have been affected. During the above period, the financial markets were also undergoing serious downturn and depression and therefore NPL could not raise any moneys from public or through the financial market. Also, since the project had not reached a break-even point, the management did not deem it fit to go for a public issue though this was very much in the plans. In view of the above, it is submitted that the combination of the above factors has necessitated in VST making the advances to NPL,which are therefore clearly in the nature of advances made in the course of carrying on the business, made with commercial necessity and business expediency and hence is allowable as a deduction u/s 37(1) of the Act. In the light of the bad financial position of NPL coupled with mounting ongoing cash losses and non-recoverability of the amounts, no purpose would have been served by taking up legal action against the debtor-company. Therefore, the company has written off these amounts as bad debts. Moreover, bad debt is a description of a debt, which cannot reasonably be expected to be realized. There is no acid test to ascertain whether a debt had become bad and doubtful and if so, at what point of time it became bad. These are questions of fact and based on circumstances in which the assessee is doing his business. Further, it is upto the asessee to deicide whether the debt is bad or not. If the financial position of the debtor is such that it would be futile to make attempts to recover the amount, the assessee would be justified in writing-off the debt. Further, what is required is an honest judgement on the part of the assessee at the time when he made the write-off in the light of the events upto that stage and not in the light of later happenings. In fact, this has been recognized by the statute also by amendment to sec.36(vii) where under mere write-off of debt is sufficient and there is no requirement to establish that the debt has become bad. Therefore, the requisite condition under the Act is to writeoff of the debt, which was complied with. The above would be evident from the scheme of entries passed in the books of accounts that have been reproduced hereunder


9.1. The company has actually written off the debts as bad in the books by squaring off the Provision A/c and the Party A/c and hence claimed as deduction in computation of total income for that year. This is also evident from the audited accounts for that year where sub-point (ii) of point 22 – Notes to Profit and Loss accounts clearly mention that the provisions set up in the previous year ( i.e FY 1998-99) under the head `contingencies – subsidiary' were fully adjusted, meaning written off).


9.2. It is submitted that the amount written off satisfies the requirements of sec.36((1)(vii) and hence are eligible to be allowed as bad debt. Therefore, it is requested to allow the amount of Rs.14,09,13,424 as bad debt.


9.3. In respect of item Non-recovery of monies from NPL on Sale of Agronomy & Marketing Rights considered as income in earlier years written off as irrecoverable and claimed u/s 36(1)(vi)/37(1) – Rs.6,50,00,000- it is submitted that the company had spent considerable time and effort in developing the infrastructure and the know-how both on agricultural and marketing aspects of the business including Agronomy for developing suitable varieties of Spices and vegetables that were required by NPL to carry on their business operations. All such expertise and rights were sold as Agronomy and marketing rights to NPL in the previous year relevant to the assessment year 1997-98 for a consideration of Rs.6.50 crores. The resultant capital gains was offered by the assessee to tax in the ay 1997-98, however no part of the above consideration for sale of agronomy and marketing rights could be recovered by the assessee from NPL due to their adverse business circumstances. Therefore, the amount under consideration was written off as not recoverable, during the previous year relevant to the ay 2000-01. It is submitted that the above amount satisfies the requirements of sec. 36(1)(vii) and hence allowable as a bad debt. Further, the amount being non recovery of a business debt, incurred during the course of business and not being a capital expenditure in nature is also allowable as a deduction u/s 37(1) of the Act. It is further submitted that in respect of the above three deductions, the assessee company has genuinely incurred losses and has not been able to recover the advances made on the sale of proceeds in respect of sale of goods and services which constitutes a business loss. Therefore, they are allowable as a deduction while computing income for the business. Therefore, it is requested to kindly allow the deduction as claimed by the assessee in its return of income. The assessing officer held that the entire exercise of writing off of amounts due from NPL had been carried out in the light of agreement entered into by the assessee company with M/s GGCL vide agreement dt.23-11-99 for sale of shares in NPL. The assessing officer therefore concluded that in such circumstances, the amounts due to the assessee company from VST NPL cannot be bifurcated and considered independently, but should be treated as a capital loss incurred in the package deal for which the assessee company received a consideration of Rs.15.50 crores from M/s GGCL. The assessing officer therefore disallowed the claim of the assessee for deduction of the amounts written off either u/s 36(1)(vii) or u/s 37(1) and concluded that such capital loss is not allowable as a deduction. He relied on the following judgements:


i)Turner Morrison & Co.,Ltd., v. CIT 245 ITR 724 (Kol) wherein it was held that the assessee advanced the money to its subsidiary company and this company was wound up because its assets were purchased by a company wholly owned by Government of India and the entire amount went to the secured creditor. As a result, there was no chance of recovery of the amount from the subsidiary. It was immaterial whether the bad debt was shown after the close of the accounting year or during the accounting year itself. Bad debt was allowable as a deduction in computing the income even if the bad debt came into existence because of the expenditure incurred for advancing money to a subsidiary company of the assessee company. Since the assessee had no chance of recovering the amount, the amount in question from the subsidiary, the amount could be treated as a bad debt entitled to deduction from the income of the relevant assessment year. ii) CIT v. Amalgamation Pvt. Ltd. 226 ITR 188 (SC) wherein it was held that the assessee company had incurred the loss in carrying on is own business which included furnishing guarantees to debts borrowed by its subsidiary companies. The assessee company could have ascertained whether there was loss in the transaction of guarantee only at the stage of final payment by the liquidators, which was received in the relevant previous year 1962-63 and it was allowable in that year. iii) ITC Ltd. v. JCIT 95 TTJ 1017 (Kol), wherein it was held that expenses incurred by assessee company on restructuring the business of a group company (by merger with another company) with a view to protect its brand name associated with that company and its goodwill, was expenditure laid out wholly and exclusively for the purpose of assessee's business and is, therefore, allowable as deduction. iv) DCIT v. Oman International Bank SAOG 100 ITD 285 (SB) (Mum), wherein it was held that after amendment of sec.36(1)(vii) with effect from 1-4-1989, once the assessee written off the debt as bad debt there is no obligation on the part of the assessee to prove that the debt written off is indeed a bad debt for the purpose of allowance under sec.36(1)(vii).


10. On the other hand, the learned Departmental Representative submitted that the above amount written off is not in revenue field. It is not a trade advance. The assessee is not in money lending business. It is a capital advance. The question of diminution of goodwill of the assessee or the credibility of the assessee has nothing to do with the allowing of the bad debt. Loss of capital asset cannot be allowed as bad debt under the provisions of sec. 36(2). She submitted that the claim of bad debts for an amount of Rs.6,50,00,000 being money receivable towards sale of agronomy and marketing rights, is not covered u/s 36(2)(i) and the contention of the authorised representative of the assessee that to allow a deduction as bad debt, it requires only that debt should have `been taken into account in computing the income of the assessee' and not in the computation of capital gain in an earlier year, the bad debt is to be allowed as a deduction u/s 36(1). She submitted that this argument of the assessee's counsel is devoid of any merit since as per Chapter IV of the Income tax Act, which deals with the computation of income, is divided into five parts, each part dealing exclusively with only one head of income and forming independent codes as far as each separate head of income is concerned. There is no scope of importing provisions of one head of income into another head while computing the income under another head under this Chapter. This compartmentalization of heads is done away with only under Chapter VI which provides for aggregation and set off of the various heads of income. The reference to the "computation of income" under sec.36(2) must, therefore, be read in the context in which it has been used. A harmonious construction of the provisions of the Act can only lead to the conclusion that income or loss other than profits and gains of business cannot be imported into computation of deduction u/s 36(1)(vii) read with sec.36(2)(i). If the interpretation given by the assessee were to be adopted, it would lead to a situation of discrimination in favour of a class of assessee having income under the head, profit and gains. Since there is no provision comparable to sec.36(1)(vii) under any head other than profits and gains, an assessee having income from the head other than profits and gains can never be in a position to claim such bad debts. This confer unfair advantage on assessees engaged in business and profession. This cannot be the intention of the Act. Further, she relied on the order of the Tribunal in the case of D.C.M. Ltd.,v. DCIT, 123 TTJ 114 (Del) for the proposition that when the assessee is not in the business of advancing the loan, the money advanced to its subsidiary is not in line with the normal business activities of the assessee. Therefore, the loan given to subsidiaries is not connected to the business of the assessee. Thus, the amount of loan given to a subsidiary cannot be termed as money advanced during the course of normal business activity of assessee and thereafter when there was no recovery and loss of that amount, is nothing but loss of capital and the claim of the assessee of that amount as a deduction cannot be business loss u/s 28 read with sec. 37. Further, she relied upon the judgement of the Bombay High Court in the case of Salem Mangnesite Pvt.Ltd. v. CIT 180 Taxman 545 (Bom) for the proposition that the assessee which is solely in the business of mining, had lent certain amount to its wholly owned subsidiary company for construction of a jetty, subsequently, subsidiary company suffered a loss and was not in a position to repay the said loan. Therefore, assessee accepted a small amount in full and final settlement of said loan and wrote off the remaining amount. It claimed deduction of that amount written off on ground that it was loss incidental to its business. The said loan amount granted to subsidiary company did not spring directly from the business of assessee company and not incidental to its business activity. The amount written off cannot be allowed as deduction u/s 28 of the Act.


11. We have heard both the parties and perused the material on record. To claim debt as bad debt and as a deduction, the debt should be in respect of business, which is carried on by the assessee in the relevant assessment year, should have been taken into account in computing the income of the assessee for the accounting year or should represent money lent in ordinary course of its business of banking or money lending. The amount should be written off as irrecoverable in the accounts of the assessee for that accounting year in which the claim for deduction is made for the first time. The assessee can claim debt as bad debt, in respect of debt which would have come into the balance sheet as a trading debt. The debt means something more than a mere advance. It means something which is related to business of the assessee. The amount is given as a trading debt since inception and the character of such amount is not changed by any act of the assessee or by operation of law, then such loan constitutes as a trade debt. In other words, debt emerges or springs from the trading activity in the course of ordinary business of the assessee, which can be claimed as bad debt. The debt arising out of capital field or emerging from the investment activity of the assessee is not a trade debt. In the capital field, it cannot be treated as debt in ordinary course of business or trading debt, even by unilateral action, the assessee treated the debt in the capital field as trade debt. In order to claim the allowances as bad debt, there should be relation between the debtor and creditor from the date of lending the money till the date of write-off of debt as bad debt. The debt arising out of investment activity which is in the capital field cannot be allowed as bad debt as revenue deduction. To claim bad debt the business in respect of which such debt has been given must continue to exist in the year for which the bad debt is claimed. As stated earlier, to claim deduction as a bad debt, it should not be too remote from the business carried on by the assessee and if the debt or guarantee given by the company while carrying on the business other than finance to the subsidiary company, it is not given in the course of assessee's business as there is no privity of the contract or any legal relationship between the assessee and such subsidiary company as trade debtor and creditor. There is neither any custom nor any statutory provision or any contractual obligation under which the assessee was bound to advance loan to the subsidiary company. Hence, the amount that had to be lost or incurred on account of subsidiary company cannot be claimed as bad debt when it became irrecoverable. In order to be deductible as a business loss, it must be in the nature of trading loss, not as capital loss springing directly out of trading activity and it must be incidental to the business of the assessee and it is not sufficient that it falls on the assessee in some other capacity or is merely connected with its business. Because the assessee bore the loss of the subsidiary company on account of failure of the subsidiary company to repay the same, that itself cannot be the reason of debt as bad debt. In order that a loss might be deductible it must be a loss in the business of the assessee and not a payment relating to the business of somebody else which under the provisions of the Act was deemed to be and became the liability of the assessee. Losses allowable if it sprang directly and was incidental to business of the assessee, loss which assessee had incurred was not in its own business and it cannot be deducted in respect of the business of the assessee from its profits. The amount incurred by the assessee which is not in the ordinary course of business cannot be allowed as a deduction. Further, a debt can be incident to business only if it arises out of transaction, which was necessary in furtherance of the business and was within the range of business activity of assessee. Everything associated or connected with the business cannot be said incidental thereto. Not merely should there be a close proximity to the business, as such, but it should also be an integral ad essential part of the carrying on the business of the assessee. We should see whether the transaction is necessary part of the normal course of business and also is closely interlinked with the assessee's business as incidental to carrying on the business of the assessee. The mere object in the memorandum of association of the company is not conclusive as to the real nature of a transaction and that nature not only has to be deduced from the memorandum but also fro the circumstances in which the transaction took place. If the amount was incurred for ensuring any investment which is very source of its business and that advance is not incidental to the trading activity of the assessee, the same is not allowable as deduction. The advance in the field of investment for the purpose of securing source of income and not for the purpose of earning income does not qualify for deduction as bad debt. In order to entitle for deduction it should have been incurred in the course of carrying on the business and it should be in the nature of revenue. In the present case, debt claimed as bad debt is not a trading debt emerging from the trading activity of the assessee. The debt arises out of investment activities of the assessee or associated with the capital field, not on account of revenue cannot be allowed as a bad debt. The assessee company neither a banker nor a money lender, the advance made by the assessee as an investment not to be said to be incidental to the trading activity of the assessee and merely money handed over to someone in the capital field and that person failed to return the same, that amount cannot be claimed as deduction as bad debt. Accordingly, money advanced to subsidiary company cannot be allowed as deduction either u/s 36(2) or u/s 37(1) on writing off the same. The Hon'ble Supreme Court in the case of A.V. Thomas & Company Ltd. Vs. CIT (48 ITR 67) (SC) it was held that when the assessee is neither a banker nor a money lender, the advance made by assessee to a private company to purchase a share could not be said to be incidental to the trading activity of the assessee. In the case of B.D. Bharucha Vs. CIT (1967) 65 ITR 403 (SC) it was held that if an advance made in the ordinary course of business of the assessee as a part of the business activity that debt emerges from that activity can be allowed as a bad debt and treated as a revenue loss. If the amount was incurred for ensuring any investment which is very source of his business and that advance is not incidental to the trading activity of the assessee. The advance in the field of investment made for the purpose of securing source of income and not for the purpose of earning income is not entitled for any deduction. In other words, the source of income is not synonymous to the income. In order to entitle deduction it should have been incurred in the course of carrying on the business and it should be in the nature of revenue loss. In the present case, debt claimed as bad debt is not a trading debt emerged from the trading activity of the assessee. The debt arises out of investment activities of the assessee and that is in the capital field, not on account of revenue, cannot be allowed as a bad debt. Reliance also placed on the judgement of Supreme Court in the case of Aluminium Company Ltd. Vs. CIT (1971) (79 ITR 514) (SC), CIT Vs. Abdullabhai Abdulkadar (1961) (41 ITR 545 ) (SC). In view of these judgements of the Supreme Court, we have not considered the various judgements cited by the assessee's counsel. 12. Regarding write off of the secondment charges and other expenses, this amount is advanced to the subsidiary company for making expenses like salary and secondment charges, expenses incurred on behalf of the subsidiary company and other expenses. These amounts are advanced to subsidiary company for the purpose of incurring the business expenses of the subsidiary companies and the consideration for the sale of the subsidiary company is worked out after considering the amount receivables. Hence it is presumed that the amounts due were already considered while arriving at the sale price of the subsidiary company represents an advance made to the subsidiary company and not an expenditure. Therefore the amount cannot be allowed u/s 36(2) or 37(1) as discussed in earlier para.


13. Regarding irrecoverable amount spent on agronomy and marketing rights, the assessee claimed to have incurred these expenditure in developing certain varieties of spices and vegetables for exports on behalf of subsidiary company. It is stated that expenditure is also incurred for developing infrastructure and know how. The expenditure incurred is valued at Rs.6.50 crores as relatable to Agronomy and marketing rights. This amount is claimed as recoverable from the subsidiary company. The assessee company computed long term capital gain considering this amount of Rs.6.50 crores as the sale consideration receivable on the transfer of agronomy and marketing rights. Since the subsidiary company is sold, this amount which is not realizable, is claimed as expenditure. The assessee company is making a claim u/s 37(1) as expenditure or u/s 36(2) as a bad debt. This expenditure cannot be allowable under this provision where this expenditure is not an expenditure incurred for the purpose of assessee's own business and also this is loss of capital and cannot be allowed as a bad debt as discussed in earlier paras. Accordingly, these grounds of the appeal are dismissed.


14. In the result, appeal of the assessee is dismissed. The order was pronounced in the open Court on: 23.7.2010.

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Some - Case Laws

Income Tax - 2009 - TMI - 34333 - HC , Appeal against remand order - No doubt, where material is enough, the appellate Court should normally determine the issue on merits, even if such issue has not been dealt with by the original authority. However, power of remand can be exercised when as a result of finding of the appellate authority, re-determination of issue becomes necessary. In the present case, on facts, the Tribunal held that it was necessary to have re-determination of assessment for the reasons mentioned in the impugned order. We are unable to hold that the reasons mentioned by the Tribunal for rejecting the conclusion for re-determination of issues are perverse.

Income Tax - 2009 - TMI - 34332 - HC (interesting case)Expenditure incurred for payment of commission to taxi drivers, guides and other commission agents - The assessee carries on the business of departmental stores in which various handicrafts items, carpets etc. are sold to tourists. For the Assessment Year in question i.e. 2005-2006, the assessee claimed expenditure towards commission paid to the taxi drivers, guides and other commission agent to the tune of Rs.11,45,47,937/-. The Assessing Officer allowed Rs.1,21,55,213/- as expenditure out of the aforesaid amount claimed by the assessee. The assessee declared a total income of only 1.43 crores on a turnover of Rs.55,45,91,631/-. The declared gross profit rate was 54.15% and the net profit rate was only 1.93% - CIT(A) allowed expenditure at 14% - ITAT increased it to 16% - Assessee claimed at 18-20% - ITAT order maintained.

Income Tax - 2009 - TMI - 34331 - HC Co-operative Bank – Deduction u/s 80P – Unexplained Income - The assessee invested certain sums, out of the surplus funds available out of the working capital including voluntary reserves, in various government securities and with the banks. Such investments are integral part of normal banking activities and, therefore, the assessee claimed deduction in respect of such income under Section 80P(2)(a)(i) of the Income Tax Act, 1961 – held that interest and dividend income derived out of investment are entitled to deduction - The assessing officer added Rs.2,86,260/- as unexplained cash credit under Section 68 of the said Act. - Such liability in suspense account was shown by the assessee in the normal course of its business as the amount could not be properly identified - the amount could not be treated as unexplained cash credit inasmuch as in the daily business of the banking transactions there are number of entries, which could not be properly tallied due to various mistakes, and, therefore, was shown in the suspense account

Income Tax - 2009 - TMI - 34330 - HC Rectification of mistake - ITAT held that depreciation allowed earlier cannot be withdrawn by revoking the provisions of Section 154 – held that - Only argument raised is that the asset itself did not exist and thus, the claim of the assessee was bogus. This submission cannot be accepted. There is nothing to substantiate this argument. Regular assessment had been done under Section 143(3) of the Act and depreciation was held to be admissible. It has been held that the assessee purchased the asset and leased out the same in the course of its business. Rectification was permissible only if there was error apparent on the face of the record and not something which could be established by long drawn process of reasoning – revenue appeal dismissed.

Income Tax - 2009 - TMI - 34329 - HC Charge of tax at low rate applicable to industrial company - assessee claimed itself to be an industrial company for claiming lesser rate of tax. The Assessing Officer rejected the said claim. The CIT(A) upheld the plea of the assessee - the assessee must itself be engaged in manufacturing activity of the nature specified in the definition and mere holding of shares of an industrial company, was not enough to declare an investment company to be an `industrial company'. Disposed off in favor of revenue.

Income Tax - 2009 - TMI - 34328 - HC Deduction under Section 80-M - gross dividends and without deducting the amount of interest and other expenses - The assessee claimed deduction under section 80-M of the Act on the gross dividend but the Assessing Officer did not accept the claim. It was held that the amount of interest paid by the assessee was required to be reduced from the gross dividend income while working out relief under section 80-M of the Act. This view was affirmed by CIT(A) but the Tribunal reversed the said view – held that – ITAT order is not cored and reversed.

Tags 80-P 80 M HC 154, interesting case,

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Sec 10 A : - Whether assessee is entitled to claim Sec 10A benefits even if foreign exc

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Whether assessee is entitled to claim Sec 10A benefits even if foreign exchange fluctuation gain is derived from ECBs and not from export activity - NO: ITAT

NEW DELHI, JUNE 16, 2011: THE Income Tax – Sections 10A, 143(3), 263 – Whether assessee is entitled to deduction u/s 10A even if the foreign exchange fluctuation gain is derived from external commercial borrowings and not from the export activity. NO is the Tribunal's answer.

Facts of the case

Assessee company had raised external commercial borrowings from its parent company for meeting its working capital requirements which were reinstated on year end which resulted in a notional foreign exchange gain of Rs. 382,15,000/- to the company. After adjusting the loss on export remittance, net income of Rs. 3,52,90,374/- was shown as "other income" in the profit and loss account and deduction was claimed u/s 10A – AO accepted the claim of the assessee in the order made u/s 143(3).

CIT initiated proceedings u/s 263 of the IT Act stating that the assessee had shown income from foreign exchange fluctuation gain of Rs. 352,90,374/- under the head "other income" and this income was different from "income from operation". Provisions of section 10A envisage deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software so such deduction on foreign exchange gain u/s 10A was clearly deviation from law and directed the AO to not allow deduction u/s 10A on the said amount - accordingly deduction claimed by the assessee u/s 10A on foreign exchange gain of Rs. 352,90,374/- was disallowed by AO.

CIT (Appeal) dismissed the appeal of the assessee observing that the deduction u/s 10A on the `other income' which was derived on account of fluctuation of foreign exchange did not satisfy the mandatory conditions of section 10A and was rightly disallowed.

In appeal before the ITAT, an additional plea was raised by assessee that no income had accrued to it, as it was a case of merely reflecting the income by a book entry made in accordance with the AS 11 issued by the ICAI - the said sum did not represent an income, since it was an amount, which represented the difference between the amount credited to the account of the loan creditor by adopting the rate of exchange in Indian Rupees to the Foreign Currency on the date of raising the loan and the rate of exchange at the close of the year, which sum alone was the liability to be discharged by the assessee - thus there was no gain other than artificial gain.

After hearing both the parties, the ITAT held that,

++ followed the decision of Supreme Court in the case of Woodword Governor India Pvt. Ltd. (2009-TIOL-50-SC-IT) in which it was held that "in case of revenue item falling under section 37(1), paragraph 9 of AS-11, which deals with recognition of exchange differences, needs to be considered. Under that paragraph, exchange differences arising on foreign exchange transactions have to be recognized as income or as expenses in the period in which they arise". The assessee was following mercantile system of accounting. The same is followed in respect of fluctuation in rate of foreign exchange. The assessee has made entries in the books on this basis for profits and losses. Rule 115 requires that reduction in liability on revenue account on account of rate of foreign exchange shall be reckoned on the last date of the previous year as per telegraphic transfer buying rate. This means that any reduction in liability, leading to revenue gain will have to be accounted as profits in case of business income. Thus, this rule independently reinforces the contents of AS-11 for recognition of income as well as loss arising on revenue account. Thus the additional ground was dismissed;

++ section 10A(1) provides for connotation of such profit or gain as are derived from the export of articles or things or computer software. By using the expression "derived from" in S. 10A(1), the Parliament intended to cover sources not beyond the first degree. Gain is not on account of fluctuation in foreign exchange relating to assessee's export activities. The same is with respect to the external commercial borrowings. This cannot be termed as derived from the export activity of the assessee. Section 10A(4) only provides the formula for computing profits derived from the export activity. First, the income or gain has to be derived from export activity, only then the computation formula can be applied. Thus, the assessee is not entitled to deduction u/s 10A.

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Sec 4 - assessee following project completion method is out of purv

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Assessee following project completion method is out of purview of revised AS-7 - AO cannot ignore it and apply percentage completion method particularly when it has been accepted for earlier years: ITAT

MUMBAI, AUG 10, 2010: THE issue before the Tribunal is - Whether an assessee who is following project completion method and has constructed the residential complex on his own is out of the purview of revised (Accounting Standard) AS-7 which is applicable in the case of construction contracts and recognizes percentage completion method and hence the AO was not correct in ignoring project completion method and applying percentage completion method particularly when the method applied by the assessee has been accepted in earlier years. And the answer is YES.

Facts of the case

Assessee bought some land in Khar, Mumbai and constructed certain floors on it but could not complete the construction for six years and as such did not reflect any profits attributable to the project. During the course of assessment proceedings the AO applied percentage completion method and estimated profits observing that assessee has received advances from prospective buyers and ignoring the contention of the assessee that the assessee was following project completion method and has shown profits in the year in which the project was completed. CIT (A) deleted the addition and reversed the order of the AO.

On appeal, the Tribunal held that,

++ right from the inception, i.e. from the assessment year 1994- 95, the assessee has been following the project completion method of accounting and has also stated so in its accounts as well as before the Income Tax authorities. The returns up to and including the assessment year 1999-2000 do not appear to have been disputed by the Assessing Officer. For the first time an attempt was made to disturb the return filed by the assessee for the assessment year 2000- 01 in which year the Assessing Officer had attempted to estimate profits from the project on a percentage of the work-in-progress. This attempt was negated by the CIT(A) who held that the assessee was following the project completion method which had been accepted by the Department since 1994-95. He also held that the project was completed only in the financial year 2006-07. A similar decision was rendered by him in respect of the assessment year 2004-05 by order dated 29.04.2008. Both these orders do not seem to have been appealed against by the Assessing Officer. Thus the rule of consistency requires that the same decision has to be applied even for the year under consideration as there is no difference in the facts of the case;

++ for the year under consideration, in addition to the earlier orders of the CIT(A) which have become final, there are further facts which are in favour of the assessee. These facts are that the BMC gave the Occupation Certificate only on 24.05.2006 and that the possession letters were given to the purchasers only in the period between May to July 2006. The electricity connection has also been provided in June 2006. These three aspects have also been taken note of by the CIT(A) in the impugned order. In addition to the same there is also the certificate of the Civil Engineers & Architects that the RCC work up to sixth floor was completed as on 31.03.2005. The Occupation Certificate as well as the certificate of the Civil Engineers & Architects have been furnished before the Assessing Officer as can be seen from paragraph 4.13 of the assessment order. These additional facts also go to show that the project was not completed as on 31.03.2005;

++ in the paper Book the assessee has given the summary of the work-in-progress for the years ended 31.03.2005 to 31.03.2007. The work-in-progress which was Rs.5,53,36,058/- as on 31.03.2005 increased to Rs.6,74,65,954/- as on 31.03.2006 and further increased to Rs.7,35,68,053/- as on 31.03.2007. When the work is in progress, it is not possible to say that the project has been completed. It may be clarified that the work-in-progress of Rs.7,35,68,053/- has been taken as the final cost of construction of the project and debited to the Profit & Loss Account for the year ended 31.03.2007. A copy of the Profit & Loss Account for the year ended 31.03.2007 is at page 33 of the Paper Book. After taking credit for the sale of flats of Rs.7,49,71,250/-, legal charges, electricity & water charges and car parking charges, the assessee has set off the expenditure being the cost of construction of Rs.7,35,68,053/-, audit fees, depreciation, interest on vehicle loan and Directors' remuneration and has arrived at a net profit of Rs.24,58,942/- which has been shown as the assessee's profit from the project in the return filed for the assessment year 2007-08;

++ as already noted, the said return has been examined under section 143(3) and accepted. The full Occupation Certificate issued by the Municipal Corporation of Greater Mumbai, a copy of which is at page 41 of the Paper Book, is dated 24.05.2006. When the Occupation Certificate has been issued only in the financial year ended 31.03.2007, it cannot be said that the project was complete earlier. The assessee's contention that the revised Accounting Standard-7 is applicable for construction contracts as clarified by the Expert Committee of the ICAI is correct. The assessee has constructed the building all by itself and cannot be said to be in the business of taking up and executing construction contracts

Revenue's appeal dismissed.

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HC(MUM):- loss on share trading , AO's view in earlier year

Where assessee filed its return of income and incurred loss on sale of shares and debited same in profit and loss account as a business expense, since in earlier years after due application of mind Assessing Officer allowed claim of assessee a change in view was evidently not warranted for assessment year in question - [2011] 11 taxmann.com 262 (Bom.)

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ANALYSIS OF FOREIGN CONTRIBUTION (REGULATION) ACT, 2010 & RULES 2011

ANALYSIS OF FOREIGN CONTRIBUTION (REGULATION) ACT, 2010 & RULES 2011
 

INTRODUCTION

1.1 The Foreign Contribution (Regulation) Act, 2010 and The Foreign Contribution (Regulation) Rules, 2011 have been enacted w.e.f. 1-5-2011. The old FCR Act and Rule, 1976 have been repealed. In this issue, we are discussing the major changes and the impact thereof.

THE SCOPE OF FCRA EXPANDED

2.1 The new FCRA, 2010 has a much broader applicability; it is applicable to individuals, Hindu Undivided Family (HUF), Association and a section 25 company. In the old Act, the term 'person' was not defined and generally the Act referred to the term 'Association'. However, now it is very clear that FCRA applies to the above category of persons.

DOES FCRA APPLY TO COMMERCIAL OR BUSINESS ORGANISATIONS

3.1 Movement of foreign funds in the normal course of commerce and business is outside the purview of FCRA. Therefore, business organisations are not covered by FCRA 2010 also. However, the provision of Foreign Exchange Management Act, 1999, which is a financial legislation, would be applicable.

WHAT IS FOREIGN CONTRIBUTION

4.1 Foreign Contribution includes all kind of transfers from foreign sources. The new act retains the older definition which includes any kind of transfer, delivery or donation of currency, article or securities. The notable change in the new act is that Foreign Contribution does not include commercial receipts. In other words, an NGO can receive consultancy or other commercial receipt from foreign sources even without having FC registrations. FC registered NGOs should receive such receipt in their domestic account and the commercial receipt are not required to be reported to the FCRA department.

PANCHAYAT HAS BEEN DEFINED AS LEGISLATURE

5.1 'Panchayat' has been included under the definition of 'Legislature' under section 2(1)(k). The implication of this change is that a member of a Panchayat cannot receive any foreign contribution. Secondly, NGOs who are working closely with Panchayat will have to be careful and ensure that their activities are not interpreted as of political nature.

FC FROM RELATIVES OR SCHOLARSHIP, STIPEND ETC.

6.1 The term 'Relative' has been defined for the first time giving it the same meaning as under section 2(41) of the Companies Act, 1956.

6.2 No permission is required to obtain foreign contribution from a relative under section 4 which is a relaxation. However, rule 6 provides that any gift from relatives above Rs. 1,00,000 in one year shall be intimated to the FCRA department in Form FC-1. Therefore, the rules seems to be in contravention of the Act.

6.3 Similarily scholarship, stipend etc. received from foreign sources are excluded under section 4. This again is a relaxation over the old Act.

** ** **

TRANSFER OF FUNDS TO FC REGISTERED ORGANISATIONS

8.1 The Act prohibits transfer of funds to any other organisation unless the recipient organisation also possesses FC registration. However, there is some confusing requirement under Rule 24(2) which requires filing of Form 10 for prior permission even for transfer to registered FC organisations. This issue has been clarified by the FCRA department in writing. It has been clarified that there is no need for obtaining prior approval for transfer of FC funds to organisations which are having FC registration.

TRANSFER OF FUNDS TO UNREGISTERED ORGANISATIONS

9.1 The old Act prohibited transfer of funds to any other organisation unless the recipient organisation also possesses FC registration. However, the new Act allows of FC funds to even unregistered organisation.

9.2 Section 7 of FCRA, 2010 provides that foreign contribution can also be transferred non FC organisation with prior approval. Rule 23(4) provides that an organisation may apply in Form FC-10 for transfer of FC funds to unregistered organisations. Such transfer could be made to multiple recipients through one prior approval. However, the total amount of transfer to unregistered organisations shall not exceed 10% of the total foreign contribution received. Further, a recommendation from the District Magistrate have to be obtained. The aforesaid rule has practically defeated the purpose of this amendment as prior permission was in any case available to all organisations. Further, suppose a donor organisation wants to transfer funds to various districts, then certificate from District Magistrate would have to be obtained serparately for each district. In other words, the purpose of this new provision will not be achieved and the small CBOs and registered SHGs will continue to be deprived of FC funds.

ADMINISTRATIVE EXPENSES

10.1 Under the new FCRA, 2010 there is a new provision which prohibits administrative expenses beyond 50%. The definition of administrative expenses includes various expenses such as rent, vehicles etc. which can also be incurred for programme purposes.

10.2 This amendment may cause hardship in interpreting the Rule 5 constituted in this regard. The definition of Administrative Expenditure briefly is as under :

- Remuneration and other expenditure to Board Members and Trustees

- Remuneration and other expenditure to persons managing activity

- Expenses at the office of the NGO

- Cost of accounting and administration

- Expenses towards running and maintenance of vehicle

- Cost of writing and filing reports

- Legal and professional charges

- Rent and repairs to premises

10.3 The Rule further provides that the following salaries shall not be considered as administrative in nature :

- Salaries of personnel engaged in training or for collection or analysis of field data of an association primarily engaged in research or training (1st proviso)

- Expenses related to activities for example salaries to doctors of hospital, salaries to teachers of school etc. (2nd proviso)

10.4 From the above definition of administrative expenses the followings issues need greater clarity :

- All kinds of vehicle expenditure has been considered as administrative in nature. However, the last proviso provides that expenses for furtherance of activity shall be excluded. Therefore, it should be expected that all programme related vehicle expenses and other expenditures are excluded from calculation of administrative expenses.

- The Rule includes the salaries of persons engaged in management of activity and at the same time the proviso as discussed above also applies. Therefore, it is expected that all direct programme salaries shall be excluded.

- In case of network organisations, the programme is implemented through partner organisations. In such cases, it is not clear how the admn. expenditure of the mother NGO shall be determined. It is expected that the programme expenses incurred by the subsequent organisation will be considered as a part of programme expenses of the mother NGO as well.

** ** **

POWERS FOR REJECTING AN APPLICATION

12.1 The FCRA, 2010 has provided considerable powers to the authorities for rejecting an application for prior permission or registration. Under section 12, various strict conditions have been provided which include that the applicant should not have been prosecuted or convicted for indulging in activities aimed at conversion or creating communal tension. It may be noted that the word `prosecuted' has been used which implies that even if there is a Court proceeding pending, then also FCRA registration could be denied.

SUSPENSION OF REGISTRATION CERTIFICATE

13.1 Section 13 of the new Act allows the power to suspend the registration pending cancellation of certificate, for a period upto 180 days. During suspension the organisation cannot receive any foreign funds without prior approval. However, such organisation can utilise the existing foreign funds to the extent of 25%, that to with prior approval from FCRA department. Before suspending any organisation, the FCRA department shall record the reasons in writing. One very important issue under this section is the absence of any provision for an opportunity of being heard, before suspension which seems to be very harsh and unfair.

CANCELLATION OF REGISTRATION CERTIFICATE

14.1 Under section 14, the Central Government may cancel the registration certificate for various reasons. However, no certificate shall be cancelled unless reasonable opportunity of being heard is provided. The reasons for cancelling the certificate are :

(i) Providing false information

(ii) Violating the terms and conditions like filing of return, etc.

(iii) Violating the Act or the Rules

(iv) Acting against public interest

(v) No reasonable activity for 2 years.

14.2 Once a registration certificate is cancelled, such person shall not be eligible for registration or prior permission for the next 3 years from the date of cancellation.

14.3 The term "reasonable activity" has not been defined. It may so happen that an NGO may have activity from local sources. Therefore, it is expected that reasonable activity whether from FC or local sources should be there for retaining FC registration.

FOREIGN COMPANY & FOREIGN SOURCE

15.1 The old FCRA, 1976 considered Indian companies, where more than 50% of equity is held by foreigners, as foreign source. For example : companies like ICICI Bank, Infosys etc. were foreign source and donations cannot be accepted from them without FCRA registration. Unfortunately this provision has been retained in the new FCRA, 2010, though the stated intent of the Government was to exclude such companies. This provision could be a drafting error as the FCRA, 2010 has defined a foreign company under clause (g) of section 2, which does not include Indian Companies. This clause is apparently inserted to exclude Indian companies having more than 50% of Foreign equity holding. However section 2(j) which defines the term `foreign source' includes an Indian company under the category of foreign source if more than 50% of its equity is held by foreigners.

15.2 This provision shall create problem in flow of funds from such organisations to various genuine NGOs as only FC registered NGOs can accept such contributions.

BUSINESS/CONSULTANCY INCOME OF AN NGO

16.1 As discussed earlier, the new Act excludes consultancy or commercial receipts from the purview of foreign contribution. This amendment was very necessary but it comes with a lot of potent controversies and trouble for the NGOs. As per the new provisions, any fee or cost against business, trade or commerce shall not be considered as foreign contribution. In other words, such receipts can be treated as local income. However the problem is that this provision is in contradiction with the amended section 2(15) of the Income-tax Act which prohibits trade or business related receipts beyond Rs.25 lakh. Therefore, NGOs should be careful in treating consultancy income and other receipts as local income even though it is now permissible under the proposed Act.

PERSONS SPECIFICALLY DEBARRED FROM RECEIVING FOREIGN CONTRIBUTION

17.1 Section 3 of FCRA, 2010 specifies that the following persons cannot receive foreign contribution:

(a) candidate for election.

(b) correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper.

(c) Judge, Government servant or employee of any corporation.

(d) member of any legislature

(e) political party or office-bearer thereof.

(f) Organisation of a political nature.

(g) Association or company engaged in broadcast of audio or visual news.

(h) Correspondent, columnist etc. related with the company refered in clause (g).

** ** **

RENEWAL OF REGISTRATION EVERY 5 YEARS

18.1 The FCRA, 2010 provides for renewal of registration of NGOs every 5 years. However, the Act has provided relief to all the existing NGOs for the first 5 years from the date of enactment. In other words, all existing NGOs have to renew their registration at the end of the period of 5 years from the date of enactment of FCRA, 2010. This implies that the renewal of all the existing NGOs will become due on 1st May, 2016.

18.2 Rule 12 provides the procedure for renewal application. All NGOs have to apply in Form FC-5 six months before the due date. Therefore, all the existing NGOs have to file their FC-5 for renewal before 1st November, 2015. The Rule further provides that NGOs implementing multi year projects shall be eligible to apply for renewal twelve months before the date of expiry of the certificate of registration.

18.3 In case an NGO fails to apply for renewal within the due date, its registration shall become invalid. However, the department may condone the delay if satisfactory reasons for not submitting the renewal application are provided. Such delay should not be for more than 4 months after the expiry of the original certificate of registration.

POWER TO PROHIBIT SOURCES FROM WHICH FC CAN BE ACCEPTED

19.1 The Act provides power to the Central Government under section 11(3)(iv) to notify such source(s) from which foreign contribution shall be accepted with prior permission only. It implies that the Central Govt. may notify specific donors or countries from which foreign funds could not be received or shall be received with prior permission only.

MULTIPLE BANK ACCOUNT

20.1 Section 17 of FCRA, 2010 provides that multiple bank accounts can be opened for the purposes of utilisation provided only one bank account is maintained for receiving foreign contribution. This amendment provides a great reilef to all the NGOs which were struggling under the arbitrary disallowance of multiple bank accounts under FCRA, 1976.

20.2 Under Rule 9 it is provided that the NGOs may open one or more bank accounts for the purpose of utilisation. However, in all such cases an intimation in plain paper should be sent to the FCRA department within 15 days of the opening of such account.

DISPOSAL OF FIXED ASSETS ON DISSOLUTION

21.1 Section 22 of the FCRA, 2010 provides that, in case of dissolution, the Central Govt. shall have the power to determine the process of disposal of FC assets. The Central Govt. may specify the manner and procedure in which such asset shall be disposed of.

SPECULATIVE ACTIVITIES

22.1 Rule 4 specifies the circumstances under which an investment could be treated as speculative in nature.

22.2 Rule 4(1)(a) prohibits investment in shares & stocks even through mutual fund. This provision is in conflict with section 11(5) of the Income-tax Act which provides investment in certain stock linked mutual funds.

22.3 Rule 4(1)(b) prohibits investment in high return schemes or in land if it is not directly linked to the declared aims and objectives of organisation. This provision may create needless controversies as it will be very difficult to make distinction between investment in land in relation to the objectives and otherwise. Infact, NGOs cannot invest anything beyond the objectives. All investments have to be towards fulfilment of the long term objectives.

DISCLOSURE OF INFORMATION IF RECEIPTS EXCEED Rs. ONE CRORE

23.1 Rule 12 provides that if the contributions received during the year exceed Rs. one crore, then the organisation has to keep in the public domain all data of receipts and utilisation during the year and also in the subsequent year. The rule also states that the Central Government will also upload such summary data through its website.

23.2 The manner of disclosure or meaning of `public domain' has not been explained. It seems that all such organisations are required to have their own website where such data should be uploaded.

CUSTODY OF FUNDS AND ASSETS IN THE EVENT OF CANCELLATION

24.1 Rule 14 provides the procedure regarding the custody of foreign funds and assets in the event of cancellation of registration.

24.2 In case of available bank balances, the respective banking authority will become the custodian till the Central Government issues further directions.

24.3 If funds have been transferred to another NGO after cancellation, then the funds in the bank account of such NGO will also go to the custody of the banking authority.

24.4 All other assets of the organisation whose certificate has been cancelled or has become defunct shall go to the interim custody of the District Magistrate or any other authority which the Central Government may direct. This provision seems unfair, because the direction for repossession of asset should only be issued when all appellate remedies are exhausted.

REPORTING BY BANKS

25.1 Rule 15 provides that the bank should report to the FCRA department within 30 days under two circumstances :

(i) if any foreign contribution is received without registration or prior permission,

(ii) if foreign contribution is receive in excess of Rs. one crore during a period of 30 days, this rule will apply to all FC funds received through valid registration or prior permission.

FILING OF RETURN & METHOD OF ACCOUNTING

26.1 Rule 16 provides that the annual return accompanied by Income and Expenditure statement, Receipt and Payment Account and Balance Sheet shall be submitted by 31st of December. The law regarding filing of returns remains, more or less unchanged. However, the notable changes are as under :

- The return shall be filed in Form FC-6 and not FC-3

- For the first time, FC rules are asking for submission of income and expenditure account

- A copy of bank statement certified by the bank has to be submitted

- A nil return is required to be filed if there is no activity

26.2 The FCRA, 2010 and the Rules thereof do not specify any method of accounting. Section 19 of the FCRA, 2010 just provides that accounts with regard to FC receipt and utilisation should be maintained. In the past, it was assumed that FCRA required cash basis of reporting (if not accounting). However, with the new requirement of filing Income and Expenditure account raises the question whether accrual basis of accounting is also permissible. On a plain reading of section 19 of FCRA, 2010, Rule 16 and Form FC-6, it seems that the requirement is to report FC funds received and utilised during the year. In other words, the receipt of funds shall be on cash basis only but there is no direction regarding utilisation on payment basis only. FCRA, 2010 does not seem to be prescribing any fixed method of accounting. Any method of accounting may be followed by the organisation but the receipt of FC funds should be reported on cash basis only. It seems due to the inclusion of Income and Expenditure account, the utilisation will be permissible on accrual basis also if the organisation consistently follows accrual basis of accounting. However, the proposed Direct Tax Code (DTC) prescribes cash basis of computation only.

WHICH RETURN SHOULD BE FILED FOR THE CURRENT YEAR

27.1 The new Rules provide that the annual return shall be filed in Form FC-6. However it is not clear which form shall be used for filing of return for the year 2010-11, as the act became effective from 1st May, 2011. To our understanding all return should be filed in the new form FC-6.

ADDITIONAL REQUIREMENT OF FILING FORM FC-7

28.1 All NGOs are required to file Form FC-7 alongwith a certificate for Chartered Accountant, if they receive contribution in kind. In the old act, there was no such requirement for filing a separate return for foreign contribution received in kind. It may be noted that old Form FC-3 and the new Form FC-6 both have a column for contribution received in kind. Therefore, it was not necessary to have an additional requirement of filing Form FC-7. However, as it stands, FC-7 has to filed in case of receipt of contribution in kind.

PRESERVATION OF ACCOUNTING RECORDS FOR 6 YEARS

29.1 The Rule 17(7) provides that accounting statements shall be preserved for 6 years. This is a very welcome change. Earlier it was seen that the NGOs were asked to provide books and records for past 10-15 years which was practically not possible. This rule will provide a lot of relief to the existing NGOs.

COMPOUNDING OF OFFENCE

30.1 Section 41 read with Rule 21 provides that the Ministry of Home Affairs may compound any offence punishable under the FCR Act. When an offence is compounded, then such organisation is not prosecuted. This is also a positive change which will help in avoiding needless legal cases.