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    Deemed cost of acquisition set as fair market value where accreted income is taxed under Chapter XIIEB.
    Where capital gain arises from transfer of an asset held by a trust or institution for which accreted income has been computed and tax paid under Chapter XIIEB, the cost of acquisition of that asset shall be deemed to be the fair market value taken into account for computing accreted income as on the specified date referred to in sub section (2) of section 115TD.
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    Cost of acquisition tied to stamp duty value for land pooling allotments determining capital gains computation.
    Where capital gains arise from transfer of a specified capital asset received under the Andhra Pradesh Capital City Land Pooling Scheme and transferred after two years from the end of the financial year in which possession was handed over, the cost of acquisition shall be deemed to be the stamp duty value of the asset as on the last day of the second financial year after the end of the financial year when possession was handed over; the amendment also defines "stamp duty value."
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    Cost of acquisition set as deemed full value of consideration for project-share transfers under development agreements, effective 2018-19.
    The amendment provides that the cost of acquisition of a share in a project consisting of land or building, given as consideration under specified agreements (for example, joint development agreements), shall be the amount deemed as the full value of consideration under the related provision, subject to the proviso excluding certain capital assets, and applies prospectively from the effective date for subsequent assessment years.
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    Deemed cost of acquisition: equity received on conversion of preference shares treated as costing the original preference shares.
    A new deeming provision treats the cost of acquisition of equity shares received in consideration of a transfer under clause (xb) of section 47 as the cost of the preference shares in relation to which those equity shares are acquired, thereby carrying over the preference share cost for computing capital gains.
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    Cost of acquisition rule: consolidated-plan unit transfers deemed to carry forward cost from consolidating-plan units, affecting capital gains.
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    Cost basis for demerger transfers: previous owner's acquisition cost to determine transferee's cost for share transfers.
    Where shares in an Indian company are transferred in a demerger, the transferee's cost of acquisition shall be the cost for which the previous owner acquired those shares, increased by any cost of improvements, by virtue of the Clause 25 amendment; the change takes effect from 1 April 2018 and applies to assessment year 2018-19 onward.
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    Indexed cost base changed for capital gains computation, altering base-year reference and effective assessment period.
    Amendment revises the benchmark year used in the computation of the indexed cost of acquisition by replacing the earlier base-year reference with a more recent base year, with consequential changes to the mode of computation and prospective application to the stated assessment year and subsequent years, thereby altering the use of the Cost Inflation Index in proportionately adjusting cost of acquisition for capital gains.
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    Capital gains computation: rupee appreciation on redemption of rupee bonds held by non-residents excluded from full value.
    Amendment clarifies that for a non-resident holder of a rupee-denominated bond of an Indian company, any gain arising from appreciation of the rupee against a foreign currency at redemption shall be ignored in computing the full value of consideration for capital gains; the change substitutes "held by" for "subscribed by" and operates prospectively from the notified effective date.
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    Conversion of preference shares into equity not treated as transfer, changing capital gains treatment from assessment year 2018-19.
    The Finance Bill, 2017 adds a new clause excluding conversion of preference shares into equity of the same company from the definition of transfer for capital gains purposes. This amendment, aligning preference-share conversion with existing non-transfer treatment for bond or debenture conversions, takes effect from 1 April 2018 and applies to assessment year 2018-19 onward.
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    Capital gains exemption for non resident rupee bonds: transfers outside India between non residents not treated as transfer.
    The Bill inserts a provision that any transfer made outside India of a capital asset consisting of a rupee denominated bond of an Indian company issued outside India, where both transferor and transferee are non residents, shall not be regarded as transfer for capital gains purposes; this change complements existing non recognition for conversion of bonds into shares and applies prospectively from the operative year specified in the Bill.
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    Capital gains timing under specified development agreements: tax charged when project completion certificate is issued, using stamp duty value.
    Section 45 is amended by inserting section 45(5A) to tax capital gains of individuals and HUFs from transfers of land or building under specified agreements in the previous year when the competent authority issues the project completion certificate; the stamp duty value of the assessee's share on that date, increased by any cash consideration, is deemed the full value of consideration. If the assessee transfers the share on or before that certificate date, capital gains are taxable in the year of that transfer and general provisions (excluding section 45(5A)) apply to determine full value. The amendment defines key terms and takes effect from 1 April 2018.
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    Deemed profit rule change - lower presumptive rate for receipts received through banking channels, other receipts remain at higher rate.
    Amendment inserts a proviso reducing the deemed total income rate under the presumptive taxation regime for the portion of turnover or gross receipts received by account payee cheque, account payee bank draft or electronic clearing through a bank account during the previous year or by the return due date; the original rate continues to apply to receipts received by other modes. The change takes effect from the fiscal start date and applies to the specified assessment year and subsequent years.
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    Audit threshold increase for presumptive taxation reduces audit applicability where turnover does not exceed prescribed limit.
    A proviso to the tax audit requirement exempts persons who declare profits under the presumptive taxation scheme and whose total sales, turnover or gross receipts do not exceed the revised turnover ceiling, thereby narrowing the class required to obtain an audit when they comply with sub section (1) of the presumptive taxation provision. The amendment is effective from 1 April 2017 for the relevant assessment year and subsequent years.
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    Maintenance of books obligation raised for individuals and HUFs, reducing the number required to keep accounts under tax law.
    The amendment raises the monetary thresholds triggering the maintenance of books and documents for individuals and Hindu undivided families: income threshold increased from one lakh twenty thousand rupees to two lakh fifty thousand rupees, and total sales/turnover/gross receipts threshold increased from ten lakh rupees to twenty five lakh rupees; the change applies from 1 April 2018 for assessment year 2018 19 and onward.
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    Interest income recognition on bad debts: cooperative banks aligned with accrual-or-receipt tax treatment for recovered interest.
    Amendment extends the rule that interest on certain bad or doubtful debts is taxable in the year it is credited to profit and loss or actually received, whichever is earlier, to co-operative banks while excluding primary agricultural credit societies and primary co-operative agricultural and rural development banks; it also adds in-section definitions of those terms and specifies a prospective operative date applying to the indicated assessment year and subsequent years.
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    Deductibility of interest: interest on co-operative bank borrowings allowed only on actual payment, with specified exclusions.
    Interest on loans or advances from co-operative banks will be allowable as a deduction only if actually paid on or before the due date of filing the return for the relevant previous year; exclusions apply to primary agricultural credit societies and primary co-operative agricultural and rural development banks, and statutory definitions for those terms are incorporated to define scope and application prospectively.
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    Actual cost adjustment for assets subject to investment-linked deduction reduces cost by allowable depreciation, altering basis for deemed income.
    The proviso to Explanation 13 provides that where a capital asset in respect of which deduction or part of deduction was allowed under section 35AD is deemed to be the assessee's income under sub section (7B), the asset's actual cost shall be the actual cost reduced by an amount equal to depreciation calculated at the rate in force that would have been allowable had the asset been used for business since acquisition.
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    Restriction on cash payments for capital expenditure conditions recognition of actual cost and depreciation claims on payment mode compliance.
    Amendment adds a proviso to section 43(1) that excludes from the actual cost for depreciation any expenditure on acquisition of an asset where payments to a person in a day exceed a specified cash threshold unless made by account-payee cheque, account-payee bank draft or electronic clearing system through a bank account, thereby conditioning depreciation eligibility on permitted modes of payment.
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    Restriction on deduction for specified domestic transactions removes arm's length deduction and subjects payments to disallowance rules.
    The Finance Bill 2017 amends section 40A to withdraw automatic deductibility for payments under specified domestic transactions made at Arm's Length Price; such payments are now subject to the disallowance rules of section 40A(2). The amendment also alters the proviso to clause (a) of sub section (2) consequential to the transfer pricing provision, aligning domestic specified transaction treatment with the transfer pricing framework and applying retrospectively as provided in the Bill.
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    Restriction on cash payments: non banked payments above the prescribed limit are nondeductible and may be taxable.
    Amendment lowers the cash payment threshold for deductibility from twenty thousand rupees to ten thousand rupees per person per day and requires payments above that limit to be made by account payee cheque, account payee bank draft, or electronic clearing through a bank account; amounts paid otherwise will be disallowed as deductions or deemed to be profits and gains of business or profession. Consequential changes to related sub provisions are also proposed, effective 1 April 2018 for the relevant assessment year.

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      Introduction of concept of mediation and Advance Ruling System for Residents to reduce tax litigation and more clarity

      15 September, 2020

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      2020 (9) TMI 496 - Supreme Court

      While decided an issue pertaining to AY 1976-77, honorable Supreme Court has wrote two postscript with the following note:

      We have been persuaded to write two postscripts on account of the backbreaking dockets which are ever increasing and as a move towards a trust between the Tax Department and the assessee, and we hope that both the aspects meet consideration at an appropriate level. [Para 21]

       

      Postscript 1:

      1. The Indian legal system is reeling under a docket explosion.

      The Government and public authorities are active contributories to this deluge. To top it, a number of litigations arise inter se the Government and its bodies and, thus, the only question, as stated in the beginning, is which pocket of the Government will be benefitted?

      2. The aforesaid position resulted in a judicial innovation with the Supreme Court passing orders in Oil and Natural Gas Commission & Anr. v. Collector of Central Excise [1991 (10) TMI 58 - Supreme Court] requiring that such cases must be referred to a Committee to be appointed by the Government to facilitate a resolution of such disputes and that no case should be filed without the approval of this Committee. This system was a failure as is apparent from the facts of the present case, where the SLP filed by the appellant-Corporation was initially dismissed with liberty to revive the same in case the High Powered Committee granted such a permission which was so granted in a meeting held on 14.08.2009. The said Committee discussed the legal ramifications, and in some way opined in favour of the appellant-Corporation, as is apparent from the discussion aforesaid. But the ball was again lobbed back into the Court to adjudicate the said issue rather than a resolution being reached. The result was only the revival of the appeal, and the consequent decision which has seen the light of the day only now.

      3. The aforesaid failure of the system resulted in the Supreme Court recalling its orders in the ONGC cases vide Electronics Corporation of India v. Union of India. [2011 (2) TMI 3 - Supreme Court].

      4. The Central Government and the State authorities have been repeatedly emphasising that they have evolved a litigation policy. Our experience is that it is observed more in breach. The approach is one of bringing everything to the highest level before this Court, so that there is no responsibility in the decision-making process – an unfortunate situation which creates unnecessary burden on the judicial system. This aspect has also been commented upon in a judgment of this Court in Union of India & Ors. v. Pirthwi Singh & Ors., [2018 (4) TMI 1586 - Supreme Court]   albeit between the Government and the private parties, where the question of law had been settled and yet the appeal was filed only to invite a dismissal. The object appears to be that a certificate for dismissal is obtained from the highest court so that a quietus could be put to the matter in the Government Departments. Undoubtedly, this is complete wastage of judicial time and in various orders of this Court it has been categorized as “certificate cases”, i.e., the purpose of which is only to obtain this certificate of dismissal.

      5. The 126th Law Commission of India Report titled ‘Government and Public Sector Undertaking Litigation Policy and Strategies’ debated the Government versus Government matters which weighed heavily on the time of the Courts as well as the public exchequer. This was as far back as in 1988. It was only in the year 2010 that the National Litigation Policy (for short ‘NLP’) was formulated with the aim of reducing litigation and making the Government an efficient and responsible litigant. Five (5) years later it reportedly saw a revision to increase its efficacy, but it has hardly made an impact. In the year 2018, the Central Government gave its approval towards strengthening the resolution of commercial disputes of Central Public Sector Enterprises (for short ‘CPSEs’)/ Port Trusts inter se, as well as between CPSEs and other Government Departments/Organisations. The aim was and is to put in place a mechanism within the Government for promoting a speedy resolution of disputes of this  kind, however it excluded disputes relating to Railways, Income Tax, Customs and Excise Departments. It has now been made applicable to all disputes other than those related to taxation matters. This was pursuant an order passed in The Commissioner of Income Tax (Exemptions) v. National Interest Exchange of India -SLP (C) Diary No. 35567 of 2019 [2020 (3) TMI 1250 - SC ORDER] by a bench of which one of us (Sanjay Kishan Kaul, J.) was a part.

      6. Insofar as non-taxation matters are concerned, the Administrative Mechanism for Resolution of CPSEs Disputes was conceptualised to replace the Permanent Machinery of Arbitration and to promote equity through collective efforts to resolve disputes. It has a two-tiered structure.

      7. At the first level, commercial disputes will be referred to the Committee comprising Secretaries of the Administrative Ministries/Departments to which the disputing parties belong and the Secretary, Department of Legal Affairs. In case the two disputing parties belong to the same Ministry/Department, the Committee will comprise Secretary of Administrative Ministry/Department concerned; the Secretary, Department of Legal Affairs and the Secretary, Department of Public Enterprises. If a dispute is between a CPSE and a State Government Department/Organisation, the Committee will comprise of the Secretary of the Ministry Department of the Union to which the CPSE belongs, the Secretary, Department of Legal Affairs and the Chief Secretary of the State concerned. Such disputes are ideally to be resolved at the first level itself within a time schedule of three (3) months, and in the eventuality of them remaining unresolved, the same may be referred to the Cabinet Secretary at the second level, whose decision will be final and binding on all concerned.

      8. We are of the opinion that one of the main impediments to such a resolution, plainly speaking, is that the bureaucrats are reluctant to accept responsibility of taking such decisions, apprehending that at some future date their decision may be called into question and they may face consequences post retirement. In order to make the system function effectively, it may be appropriate to have a Committee of legal experts presided by a retired Judge to give their imprimatur to  the settlement so that such apprehensions do not come in the way of arriving at a settlement. It is our pious hope that a serious thought would be given to the aspect of dispute resolution amicably, more so in the post-COVID period.

      9. In most countries, mediation has proved to be an efficacious remedy and here we are talking about mediation inter se the Government authorities or Government departments. India is now a signatory to the Singapore Convention on Mediation and we understand that a serious thought is being given to bring forth a comprehensive legislation to institutionalise mediation, in furtherance of this function to which India has committed itself.

      Postscript 2:

      10. We now turn to the issue of matters pertaining to CPSEs and Government authorities insofar as taxation matters are concerned,  because they are consistently sought to be carved out as a separate category of cases. One of the largest areas of litigation for the Government is taxation matters. The petition rate of the tax department before the Supreme Court is at 87%. - See ‘Economic Survey 2017-19 – Volume 1’ by the Department of Economic Affairs, Ministry of Finance, Government of India So, the question is can something be done about it?

      11. In our opinion, a vibrant system of Advance Ruling can go a long way in reducing taxation litigation. This is not only true of these kinds of disputes but even disputes between the taxation department and private persons, who are more than willing to comply with the law of the land but find some ambiguity. Instead of first filing a return and then facing consequences from the Department because of a different perception which the Department may have, an Advance Ruling System can facilitate not only such a resolution, but also avoid the tiers of litigation which such cases go through as in the present case. In fact, before further discussing this Advance Ruling System, we can unhesitatingly say that, at least, for CPSEs and Government authorities, there would be no question of taking this matter further once an Advance Ruling is delivered, and even in case of private persons, the scope of any further challenge is completely narrowed down.

      12. It is as far back as in 1971 that a report was submitted by the Direct Taxes Enquiry Committee under the Chairmanship of Dr. K.N. Wanchoo, recognising the need for providing Advance Ruling System, particularly in cases involving foreign collaboration. The aim was to give advance rulings to taxpayers or prospective taxpayers, which would then considerably reduce the Revenue’s workload and decrease the number of disputes. This finally resulted in a scheme of Advance Ruling being brought into effect in 1993, with the introduction of a new Chapter in the Income Tax Act, 1961 (hereinafter referred to as the ‘IT Act’). A quasi-judicial tribunal was established as the Authority for Advance Rulings (for short ‘AAR’) to provide certainty and avoid litigation related to taxation of transactions involving non- residents. The scope of the transactions on which an advance ruling can be sought from the AAR has gradually increased to now include both residents and non-residents, who can seek the same for issues having a substantial tax impact. Chapter XIX-B of the IT Act deals with advance rulings and it has been defined in Section 245N(a) of the  IT Act. These rulings are binding both on the Income Tax Department and the applicant, and while there is no statutory right to appeal, the Supreme Court has held in Columbia Sportswear Company v. Director of Income Tax Bangalore [2012 (8) TMI 105 - Supreme Court]  that a challenge an advance ruling first lies before the High Court, and subsequently before the Supreme Court. The advance ruling may be reversed in the event a substantial question of general public importance arises or a similar question is already pending before the Supreme Court for adjudication.

      13. The ground level situation is that this methodology has proved to be illusionary because there is an increasing number of applications pending before the AAR due to its low disposal rate and contrary to the expectation that a ruling would be given in six (6) months (as per Section 245R(6) of the IT Act), the average time taken is stated to be reaching around four (4) years!- See Deloitte Report on Advance Rulings in India: Delivering Greater Tax Certainty (Deloitte Tax Policy Paper 5, 2019)  There is obviously lack of adequate numbers of presiding officers to deal with the volume of cases. Interestingly, the primary reason for this is the large number of vacancies and delayed appointments of Members to the AAR. ibid In view of the time taken, the very purpose of AAR is defeated, resulting in the mechanism being used infrequently as is evident from the ever- increasing tax related litigation.

      14. We may notice a significant development in Section 245N of the IT Act. It was through Notification No.11456 dated 3.8.2000 that public sector companies were added to the definition of ‘applicant’, and in 2014, it was made applicable to a resident who had undertaken one or more transactions of the value of ₹ 100 crore or more.

      15. Insofar as a resident is concerned, the limit is so high that it cannot provide any solace to any individual, and we do believe that it is time to reconsider and reduce the ceiling limit, more so in terms of the recent announcement stated to be in furtherance of a tax friendly face-less regime!

      16. We may refer to the international scenario where there has been an incremental shift towards mature tax regimes adopting advance ruling mechanisms. The increase in global trade puts the rulings system at the centre-stage of a robust international tax cooperation regime. The Organisation for Economic Cooperation and Development (for short ‘OECD’) lists advance rulings as one of the indicators to assess trade facilitation policies, making it an aspirational international best practice standard. For example, Australia and New Zealand have a robust system of advance rulings wherein the decisions (which are public rulings affecting a large number of taxpayers) are given teeth by being made binding on the revenue authorities. New Zealand has gone a step further and innovated “status rulings” under which a taxpayer can apply to the Commissioner for a ruling on how a change in the law impacts an existing ruling.

      17. In the United States, there is a mechanism for the Treasury to authorise guidance in the form of revenue rulings, procedures and notices. The mechanism again, has been bolstered by subsequent practice and interpretations of the United States courts, where rulings have indicated that taxpayers may be penalised if they act inconsistently with legal interpretations set out in the revenue rulings, procedures or notices.

      18. Tax transparency has been a hallmark trait of the Swedish legal system. Swedish law requires public disclosure of ex ante tax administration such as advance rulings. Both the taxpayer as well as the Swedish Tax Agency can request an advance tax ruling, these rulings are published without information identifying the taxpayer that requested them. The Skatterättsnämnden, or the Council for Advance Tax Rulings is the Swedish Government agency which is vested with this power. The advance ruling system has played a crucial role in Sweden’s position as a country with one of the highest tax compliance rates in the world.

      19. The aim of any properly framed advance ruling system ought to be a dialogue between taxpayers and revenue authorities to fulfil the mutually beneficial purpose for taxpayers and revenue authorities of bolstering tax compliance and boosting tax morale. This mechanism should not become another stage in the litigation process.

      20. We, thus, consider it appropriate to recommend to the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. A council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward.

       


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      2020 (9) TMI 496 - Supreme Court

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