hh oo uuss ee jj rr nn aa ll -...

6, Lyons Range, 3rd Floor, Unit - 2, Kolkata - 700 001 Phone : +91-33-2210-7724 Telefax : +91-33-4060-8353 E-mail : [email protected] Website : www.acaekolkata.orgl l l l

Implementation and Impact of Ind AS on accounting and financial statements

Dr. Rajkumar S. Adukia

Important developments in GST

CA Bimal Jain

0303 2020 2727 4040

For Private Circulation only

VOL : 01/2017-2018 January 2018 An ISO 9001 : 2015 Certified Organisation

TE AA DRO VP ISR EO RC SF &O EN XO EI

CT A UI TC IVOS ES SA

ACAE

Work is Worship

ESTD. 1960

H O U S E J O U R N A LH O U S E J O U R N A L

Overview on the Insolvency and Bankruptcy Code, 2016

CA Sumit Binani

Penalty and Interest relating to ITC under GST

Advocate Shailesh Sheth

ACAE HOUSE JOURNAL l JANUARY 2018

VOL : 01/2017-2018 January 2018

C O N T E N T S

Penalty and Interest relating to ITC under GST– Advocate Shailesh Sheth

Important developments in GST– CA Bimal Jain

Overview on the Insolvency and Bankruptcy Code, 2016– CA Sumit Binani

Important caselaws of Uttam Galva Steel Limited under Insolvency and Bankruptcy Code, 2016– IP Binay Kumar Singhania

Implementation and Impact of Ind AS on accounting and financial statements– Dr. Rajkumar S. Adukia

Ind AS Implementation – 5 Major Challenges – CA Vivek Agarwal

Benami Property (Prohibition) Amendment Act, 2016 – Salient Features– Advocate Paras Kochar

NCLT approves Resolution Plan quashing arithmetic requirement: Instates the importance of greater good– Vallari Dubey

GST

IBC

IND AS

Benami Properties

Companies Act

H O U S E J O U R N A L

Editorial

President Speaks

Editorial Board

Executive Committee : 2017 - 2018

Sub-Committees : 2017-2018

VOL : 01/2017-2018 January 2018


Dear Members,

At the very outset, I would like to quote a famous American author, Helen Keller, "Character cannot be developed in ease and quiet. Only through experience of trial and suffering can the soul be strengthened, ambition inspired, and success achieved. "With immense delight and happiness, we present you with the issue of ACAE Journal for the month of January, 2018, inaugurating the New Year.

The journal shall cover the major changes, reforms and applicability of the recent laws and regulations. As we all know the India's biggest tax reform is now a reality and recently there has been few new developments taking place in the same, so our cynosure of the journal shall be the important developments in GST and the Penalty and Interest relating to ITC under GST.

The introduction of Insolvency & Bankruptcy Code , 2016 has brought a major relief to the vexed issue of corporate insolvency. The enactment of IBC, 2016 shall shift the debtor-creditor dynamics from "debtor under possession" to "creditor in control". While IBC, 2016 is expected to play a key role in NPA resolutions, much of its success would depend on its implementation, which seems challenging owing to a host of factors. The journal elaborates on topics like overview on IBC, 2016 and few case laws including the recent judgment in the matter of Uttam Galva Steel Limited has also been discuss in this issue.

Also, the applicability of IndAS has brought a bundle of changes in the accounting atmosphere which shall hence hold a major part of this journal. Few major discussions on Implementation and Impact of IndAS on accounting and financial statements and the major challenges on IndAS implementation has also been focused on. The journal shall also cover the most talked about subject, i.e., the Benami Property (Prohibition) Amendment Act, 2016.

The ministry is mulling over the introduction of Budget, 2018, and the industry expectation is at peak. Thus, we shall have a complete coverage on the same in our subsequent journal.

We hope that this Journal is able to provide valuable insight to our readers on the latest developments in the legal world. The copy of the Journal shall also be available on our website.

It is rightly quoted by Buddha, "There is no wealth like knowledge, and no poverty like ignorance". Under the shadow of this quote, I would request all the members to share their observation and feedback on this issue which will help us to improve the construction and contents of the Journal and will also serve as a tool for continued learning.

We wish to encourage more contributions/ suggestion/ feedback from the members to ensure a continued success of the journal.

Thank you. We hope you will find this issue informative.

From Editorial BoardJanuary, 2018



Pre

sid

ent

Sp

eak

sDear Members,

With the impending dawn of the year, it is time to take stock of the activities, events and developments. We are towards the end of the year with the juncture bearing the massive reforms and developments in the various sectors of our nation. Thus, before the New Year, we shall recollect the major creativities, reforms, ideas, experiences and outcomes and present to you the Journal aggregating the same.

Wish you all and your families a very Happy New Year! May your dreams come true and may you help others fulfil their dreams this New Year. By now, we all must be through with filing of Tax Audit Reports, Income Tax returns and ROC returns.

We are in the final stages of getting the Budget,2018 by the Finance Ministry. Everyone is quite hopeful from this budget because under the present government this is going to be there last complete Budget before 2019 General Election.

Yet another major addition to the existing framework dealing with the Insolvency of Corporate, Individual, Partnerships and other entities is The Insolvency and the Bankruptcy Code 2016. It is a welcome overhaul in the law field.

The Key Highlights of the IBC, 2016 comprises of Insolvency Resolution Process, Corporate Debtors- The two stages process, Insolvency Resolution Process for Individuals/Unlimited Partnerships and more.

Ind AS converged with IFRS have become the new Generally Accepted Accounting Policies (GAAP) for many companies. Approximately 350 companies/groups, covered in phase I of Ind AS roadmap, have published their interim financial results under Ind AS. Ind AS contains many new concepts and many requirements are quite complex. Therefore, it would be fitting for these Ind AS phase II companies to leverage on the learning and experiences of bigger phase I companies. This has turned out to be a new accounting norm in the financial reporting landscape in India.

ACAE has been successful in holding various seminars and workshops on GST, Issues in Tax Audit and MAT, measures related to strike off of companies, various critical topics under Income Tax Act, 1961 and Companies Act, 2013.In this issue you will also find details of seminars to be conducted in February, 2018.

ACAE has conducted workshops on GST, Seminar on Issues in Tax Audit and ICDS & Impact of IndAS on MAT, Lecture meetings on Benami Transactions (Prohibition) Amendment Act, 2016 and PMLA, 2002, Lecture Meeting on Recent Developments & Actions by regulatory authorities and remedial measures there of with special emphasis on Striked Off Companies and Restoration Procedures, Lecture Meetings on IBC, 2016 by eminent speakers

Also, ACAE is organizing the 6th ET Bengal Corporate Awards, in association with The Economic Times, which is to be held soon. We look forward for your participation in the same and encourage the members to register.

It is also time to celebrate and welcome our life with a new start and embrace this New Year. Let's hope to stick to our commitment and enjoy our lives, our profession and humanity.

Since my takeover in the month of September, the journey was incredible and astounding. I am also thankful to the Editorial Board for their first journal under this term. I congratulate the Chairman, CA Vivek Newatia and Co Chairman, CA Niraj Harodia for their efforts. We sincerely hope that this issue shall be appreciated by the members of ACAE and wish to encourage more contributions and suggestion from the members to ensure a continued success of the journal.

With their untiring efforts, we hope to continue publishing journals on significant topics which will be highly beneficial to all members.

Best Regards,

CA Arun Kumar AgarwalPresident8th January, 2018


VOL : 00/2018 January 2018

EDITORIAL BOARD

Co-Chairman :

CA Niraj Harodia

Chairman :

CA Vivek Newatia

Members :

Ex-Officio Members :

CA Anup Kumar Sanghai CS Aditi Jhunjhunwala

CA Arun Kumar AgarwalPresident

CA Jitendra LohiaGeneral Secretary


Views expressed in the articles of this journal are contributor's personal views and ACAE and its Journal Sub-Committee do not accept any responsibility in this regard. Although every effort has been made to avoid any error or omission in the Journal, the ACAE and its journal Sub-Committee shall not be responsible for any kind of loss or damage caused to any one on account of any error or omission which might have occurred.

SPECIAL INVITEES

CA Netai Bandyopadhyay CA Nitesh More CA Kamal Bagrodia CA Pramod Dayal Rungta CA Vivek Newatia

OFFICE-BEARERS

CA Arun Kumar AgarwalPresident

CA Vasudeo AgarwalVice President

CA (Dr.) Debashis MitraVice President

CA Jitendra LohiaGeneral Secretary

CA Anup Kumar SanghaiJoint Secretary

CA Vivek AgarwalTreasurer

CA Anup Kumar Banka CA Niraj Agrawal CA Pramod Kumar Mundra CA Ranjeet Kumar Agarwal CA Sumantra Guha

CA Sumit Binani CA Sunil Kumar Dokania CA Sushil Kumar Goyal CA Tarun Kr. Gupta

MEMBERS

EX-OFFICIO CA Ram Ratan Modi

EXECUTIVE COMMITTEE : 2017 - 2018

ASSOCIATION OF CORPORATE ADVISERS & EXECUTIVESSUB-COMMITTEES FOR THE YEAR 2017-2018

S.No SUB-COMMITTEES CHAIRPERSON CO-CHAIRPERSON

1 Direct Tax CA R R Modi CA B L Gang

2 GST/Indirect Tax CA Tarun Kr Gupta CA Rajeev Kr. Agarwal

3 Corporate Laws CA Sumit Binani CS Ghanshyam Saraf

4 Accounts & Audit CA Vivek Agarwal CA Naresh Kr. Agarwala

5 ACAE CA Study Circle CA Anup Kr Sanghai CA Beena Jajodia

(CONVENOR) (DY. CONVENOR)

6 ACAE CS Study Circle CS S M Gupta CS Ghanshyam Saraf

7 Group Discussions CA Anup Kr Banka CA Samya Sengupta

8 Annual Conference CA Madhav Prasad Sureka CA Kamal Nayan Jain

9 Corporate Executive Programmes CA Niraj Agrawal CA Bharat Kr. Baid

10 Residential Seminar Mr. Arvind Agrawal CA Pulak Kr. Saha

11 Prof. Sukumar Bhattacharya Memorial Lecture VP- CA Vasudeo Agarwal CA Jitendra Lohia

12 Students & New Members CA Pramod Kr Mundra CA Sonu Jain

13 Sports CA Pramod K Mundra CA Priyank Singhi

14 Membership Growth CA Sumantra Guha CA Sunil Kr Dokania

15 Information Technology CA Vivek Agarwal CA Sanjib Sanghi

16 House Journal CA Vivek Newatia CA Niraj Harodia

17 Library CA Sunil Kr Dokania CA Pankaj Kumar Verma

18 Legal Compliances CA Pawan Kr. Agrawal CA Sanjay Bhattacharya

19 Infrastructure CA Anand Chopra CA Sunil Kr Dokania

20 Finance CA R S Jhawar CA R R Modi

21 Research & Publications CA H K Agrawal (1) CA Nitesh More

- (2)CA Pramod Dayal Rungta

- (3) CA Ramesh Kr. Patodia

22 Website and Mobile App. development CA Ranjeet Kr. Agarwal CA Manisha Sharaf

23 Public Relations CA Nitesh More Mr. Pawan Kr. Paharia

24 Press & Media CA Kamal Bagrodia CA Netai Bandyopadhyay

25 Vision Development CA Jinesh S Vanzara CA Santosh K Roongtaa

26 Ladies Wing CA Manisha Sharaf (1) CA Beena Jajodia

(2) CA Anshuma Rustagi

27 Theme Conclave [Real Estate] CA Rishi Khator CA Girja K Choudhary

28 ET Bengal Corporate Awards CA Jinesh S Vanzara (1) CA Anand Chopra

- (2) CA Kamal Nayan Jain

- (3) Mr. Arvind Agrawal

29 Members- Co-ordination & Service CA Ketan Satnalia CA Chirajit Goswami

30 Fellowship CA Sunil Kr. Dokania CA Dilip Kr. Agrawal

31 Corporate Social Responsibility CA (Dr.) Debashis Mitra CA Ratan Lal Sethia

32 Department Co-ordination Committee :

33 Direct Tax CA Madhav Prasad Sureka CA Anup Kr. Sanghai

34 Indirect Tax / GST CA Sushil Kr Goyal CA Narayan Kr. Agarwal

35 SEBI, NCLT, MCA-ROC CA Jitendra Lohia -

36 Insolvency & Bankruptcy Study Group CA Kamal Nayan Jain CA Arun Kr. Gupta

ACAE HOUSE JOURNAL JANUARY 2018 1

ARTICLE

Penalty and Interest relating to ITC under GST

Introduction:Introduction:Introduction:Introduction:Introduction:

India has embraced GST on July 1, 2017 andwith that, has ambitiously embarked upon afascinating journey of the most fundamentalIndirect tax reform which is unprecedented in itsscale and impact post- independence. GST is thecurrent favoured name for ‘Value Added Tax’ (VAT)and therefore, the reader would find the use ofboth the expressions VAT & GST throughout thisarticle as synonymous.

VAT is the ‘consumption tax’ of choice of some160 countries today. VAT is called ‘unquestionablythe most successful innovation of the last half-century ….. perhaps the most economicallyefficient way in which countries can raisesignificant tax revenue’. (Bird, 2010). It is alsopassionately argued that ‘purely from a revenuepoint of view, VAT is probably the best tax everinvented’. (Cnossen, 1990).

The Rudiments of VThe Rudiments of VThe Rudiments of VThe Rudiments of VThe Rudiments of VAAAAAT/GSTT/GSTT/GSTT/GSTT/GST:::::

International Tax Dialogue, 2005 defines ‘VAT’ as“a broad based tax levied at multiple stages ofproduction (and distribution) with – crucially –taxes on inputs credited against taxes on output.That is, while sellers are required to charge thetax on all their sales, they can also claim a creditfor taxes that they have been charged on theirinputs. The advantage is that revenue is securedby being collected throughout the process ofproduction (unlike a retail sales tax) but withoutdistorting production decisions (as turnover taxdoes)”.

Under the ‘destination principle’ – which is theinternational norm – commodities or services aretaxed by the jurisdiction in which they areconsumed. This is generally implemented underthe VAT by zero rating exports and charging VATon imports.

VAT as defined above can be implemented inthe following three main ways viz:

a. Subtraction method (also known asAccounts method) under which each dealeris taxedon the difference between hispurchases and sales.

b. Addition method under which is tax islevied on an estimate of ‘value added’calculated by summing and adjusting, asneeded, the ‘factor incomes’. In nutshell,under this method, the tax is levied on thesum of wages and profits.

c. Invoice credit method under which theregistered traders charge tax on their salesand issue corresponding invoices to theircustomers, who, if also registered, can usethese invoices to establish a right to creditor refund against their own output VATliability.

Except Japan that applies a ‘subtraction method’of VAT, all the countries, including India, who haveadopted VAT/GST,have applied ‘invoice creditmethod’ for the implementation of VAT.

Self-Self-Self-Self-Self-enforcing feature of Venforcing feature of Venforcing feature of Venforcing feature of Venforcing feature of VAAAAAT/GSTT/GSTT/GSTT/GSTT/GST:::::

The Advocates of the VAT/GST suggest that theVAT is ‘self-self-self-self-self-enforcingenforcingenforcingenforcingenforcing’ in the sense that eachtrader has an incentive to ensure that its suppliershave themselves properly paid VAT, in order thatthey themselves can claim an appropriate credit.As VAT/GST is paid at each stage of production,in order to claim credit for the VAT/GST paid onits inputs against the VAT/GST received on itsoutputs, a taxpayer would need to show, ifrequired, that the VAT/GST had been paid by itssuppl iers. ”One man’s proof of purchases”One man’s proof of purchases”One man’s proof of purchases”One man’s proof of purchases”One man’s proof of purchasesis evidence of another man’sis evidence of another man’sis evidence of another man’sis evidence of another man’sis evidence of another man’ssales.”sales.”sales.”sales.”sales.” [National Economic Development[National Economic Development[National Economic Development[National Economic Development[National Economic Development

Shailesh ShethAdvocate & Founder, M/s. SPS LEGAL

“Only the Rule of Law can guarantee security of life and thewelfare of the people”.[Kautilya in “The Arthashastra”]

GST

ARTICLE

ACAE HOUSE JOURNAL JANUARY 20182

Office, VOffice, VOffice, VOffice, VOffice, Value Added Talue Added Talue Added Talue Added Talue Added Tax (2nd Ed.1971ax (2nd Ed.1971ax (2nd Ed.1971ax (2nd Ed.1971ax (2nd Ed.1971HMSOHMSOHMSOHMSOHMSO, L, L, L, L, London)]ondon)]ondon)]ondon)]ondon)]. It is argued that there wouldbe no incentive for two traders to fail to invoice atransaction between them, since the purchaser’sliability for VAT would be increased by the amountthe supplier had not been recorded as paying.With an indirect tax levied at only one stage ofproduction, the whole of the tax is potentially atrisk at that stage, whereas, with VAT, theoreticallyat least, it is only the tax added at that stage thatis at risk. [“VAT/GST: The UK Experience“VAT/GST: The UK Experience“VAT/GST: The UK Experience“VAT/GST: The UK Experience“VAT/GST: The UK ExperienceRevisited”Revisited”Revisited”Revisited”Revisited” - by Simon James] - by Simon James] - by Simon James] - by Simon James] - by Simon James]. It is furthersuggested that there is an important sense in whichthe VAT is self-correcting, if not self-enforcing: Iffor some reason a supply to some registeredtrader escapes VAT, that missing VAT will berecovered at the next stage in the VAT charged bythat trader on their own sales, since there will, inthat case, be no credit to offset against theirliability.

Enforcement, evasion and VEnforcement, evasion and VEnforcement, evasion and VEnforcement, evasion and VEnforcement, evasion and VAAAAAT/GSTT/GSTT/GSTT/GSTT/GST:::::

As observed by Michael Keen and Stephen Smith(2007))))), ”The implementation of a VAT involvesthe same core elements as does any other self-assessed tax; the identification and registrationof those required (or choosing) to pay the tax;collection and processing of amountsspontaneously remitted with periodical returns;audit to ensure accuracy of returns; andenforcement action on delinquent payers.” Likeany tax, VAT (or GST) is also vulnerable to evasionor fraud. At the heart of VAT/GST is the creditmechanism, with tax charged by a seller availableto the buyer as a credit against his (buyer’s)liability on his own sales and, if in excess of theoutput tax due, refunded to him (buyer), [Keenand Smith (2007)]. This credit and refundmechanism does offer unique opportunity forabuse and gives rise to several types of fraudcharacteristic of VAT/GST.

The critics often stress that the case for these ‘self-enforcing’ or ‘self-policing’ or ‘self-correcting’features of the VAT cannot be overstated. It hadbeen recognised that there was scope for evasion,inspite of these intrinsic features of the VAT. Forinstance, while traders have an incentive to ensurethat their suppliers provide them with invoices thatthe authorities will accept as establishing a rightto refund or credit, they have no incentive - unlessspecific requirements of this end are imposed -to ensure that tax has actually been paid. AsHemming and Kay (1981) stress, the notion that

the VAT is self-enforcing is ultimately ‘illusory’.

As noted by Richard M. Bird in his Paper ”Reviewof ‘Principles and Practice of Value AddedTaxation: Lessons for DevelopingCountries’”(1993): ”A VAT invoice is a checkwritten on the Government.” Needless to say, ina country like India, it is a cakewalk for the taxevaders to encash such checks i.e. VAT invoiceand encashing they have been and how?! In fact,the credit and refund mechanism of the VAT/GSTcreates its own opportunities for fraud.

A typology of VA typology of VA typology of VA typology of VA typology of VAAAAAT/GST fraud and evasion:T/GST fraud and evasion:T/GST fraud and evasion:T/GST fraud and evasion:T/GST fraud and evasion:

There are many ways in which VAT/GST can beevaded or fraudulently exploited. To derive asense of the main risks, it is useful to distinguishbetween those that also arise under other formsof sales tax, Retail Sales Tax (RST) being an areaof focus, and those reflecting distinctive featuresof the invoice credit VAT.

a .a .a .a .a . FFFFFrauds that can arise under both, a Vrauds that can arise under both, a Vrauds that can arise under both, a Vrauds that can arise under both, a Vrauds that can arise under both, a VAAAAATTTTTand other forms of Sales Tand other forms of Sales Tand other forms of Sales Tand other forms of Sales Tand other forms of Sales Tax e.gax e.gax e.gax e.gax e.g. RST. RST. RST. RST. RST:::::

Following are the types of frauds that are generallyattributed to or observed as arising under both,VAT/GST and other forms of Sales Tax includingRST:

Under-reported sales

Failure to register

Misclassification of commodities orservices

Omission of self-deliveries

Tax collected but not remitted

Imported goods not brought into tax

b. FFFFFrauds distinct to the Vrauds distinct to the Vrauds distinct to the Vrauds distinct to the Vrauds distinct to the VAAAAAT/GSTT/GSTT/GSTT/GSTT/GST:::::

At the heart of the VAT/GST is the creditmechanism, with tax charged by a seller availableto the buyer as a credit against their liability ontheir own sales and, if in excess of the output taxdue, refunded to them. This creates opportunitiesfor several types of fraud which are distinct to theVAT/GST. VAT fraud comes in various guises, butthe following main types deserve the mention:

False claims for credit or refund

Credit claimed for VAT on purchases thatare not creditable


ARTICLE

Bogus traders or “Invoice mills”

Shadow economy fraud

Suppression fraud

Insolvency fraud

Carousel fraud

Given the susceptibility of VAT/GST to evasion andfraud, particularly theInput Tax Credit (ITC) relatedfrauds, thelegislators and tax administrators allover the world, have been constantly devising the‘ways and means’ to check the tax evasion,promote tax compliance and in turn, enhancerevenue collection.

Determining which regulatory enforcementstrategy will be the most effective in gaining long-term voluntary compliance from taxpayers is achallenge for all tax authorities around the world.A long-standing debate in the regulatory literaturehas been between those who think that individualswill comply with rules and regulations only whenconfronted with harsh sanctions and penalties,and those who believe that gentle persuasion andco-operation works in securing compliance. Thesetwo alternative approaches to enforcement havebeen termed the ‘deterrence’ and‘accommodative’ models of regulation,respectively. Yet another model of regulation,amongst other varied models, that is beingseriously discussed is the ‘norms model’ ofregulation.

TTTTTax Pax Pax Pax Pax Penalties – Deterrence versusenalties – Deterrence versusenalties – Deterrence versusenalties – Deterrence versusenalties – Deterrence versusAccommodative versus Norms ModelsAccommodative versus Norms ModelsAccommodative versus Norms ModelsAccommodative versus Norms ModelsAccommodative versus Norms Models

The use of penalties and detection is a commonapproach used by tax administrators to combattax evasion and avoidance in order to enhanceefficient revenue collection. The increased relianceon penalties has been based on the relationshipsspecified in the ‘deterrence theory’. The ‘standarddeterrence model’ holds that the taxpayerscomply with their tax obligations to avoid legalsanctions (such as penalties and incarceration)whenever those sanctions are expected to be morecostly than compliance. This model, following thefamiliar economic analysis of punishment, impliesthat tax penalties should be severe enough thattaxpayers expect that the cost of non-complianceto exceed the costs of compliance.On the otherhand, the advocates of the ‘accommodativemodel’ of regulationtend to view individuals not

as ‘rational actors’ but as ‘social actors’ who areordinarily inclined to comply with the law, partlybecause of the belief in the rule of law, and partlyas a matter of long-term self interest. [kagan and[kagan and[kagan and[kagan and[kagan andScholz, 1984].Scholz, 1984].Scholz, 1984].Scholz, 1984].Scholz, 1984]. Regulatory authorities adoptingthe ‘accommodative model’ tend to be moreoriented toward seeking results through co-operation rather than by coercion, and prefer tosee themselves as service providers rather thanas a strict law enforcers. An important aspect ofthis approach is that it aims to establish acollaborative relationship between the regulatorand regulatee (Grabosky and Braithwaite,Grabosky and Braithwaite,Grabosky and Braithwaite,Grabosky and Braithwaite,Grabosky and Braithwaite,1986).1986).1986).1986).1986).The ‘norms model’ maintains that manytaxpayers satisfy their tax obligations becausethey want to adhere to specific social or personalnorms, such as reciprocating co-operation ofothers or respecting legal obligations. This modelimplies that harsh tax penalties may underminecompliance and argues for deemphasizing taxpenalties in favour of other government actionsthat enhance trust in government and respect forlegal obligations.

However, while the debate over the most effectivemodel of regulation to ensure the tax complianceon part of the taxpayers continues unabated, thedeterrence model has tended to dominate policymaking and enforcement approaches in taxationand continues to do so even in the present era.

In fact, the highly centralised Kautilyan state wasregulated by an elaborate system of penalties.That is why, the ‘‘‘‘‘Arthashastra’Arthashastra’Arthashastra’Arthashastra’Arthashastra’ (Economics) isalso called ‘Dandaniti’Dandaniti’Dandaniti’Dandaniti’Dandaniti’ (the science ofpunishment). Chanakya puts it succinctly when hesays, “the maintenance of law and order by theuse of punishment is the science of government.”

I .I .I .I .I . PPPPPenalty under GST Lenalty under GST Lenalty under GST Lenalty under GST Lenalty under GST Laws:aws:aws:aws:aws:

A quick glance at the penal provisions,particularly those relating to ITC, of GST lawswould reveal two things, viz:

that, the legislators are conscious of theevasion-prone, fraud-inducing nature ofGST as an indirect tax policy; and

that, they believe that the elaborate andeffective penal provisions based on‘deterrence theory’ would control the taxevasion and credit frauds and ensure taxcompliance.

The provisions relating to penalty are contained

ARTICLE


in Sections 73 and 74 of Chapter XV (Demandsand Recovery) of the Central Goods and ServicesTax Act, 2017(‘the CGST Act’). Aside from this,Sections 122 to 138 of Chapter XIX (‘Offence andPenalties’) contain elaborate provisions relatingto offences, penalties, prosecution andcompounding.

Those provisions shall apply mutatis mutandis, sofar as may be, in relation to Integrated Tax, UnionTerritory Tax and State GST as provided under theIGST Act, 2017, UTGST Act, 2017 and therespective SGST Acts of 2017.

PPPPPenalty – Meaning of Penalty – Meaning of Penalty – Meaning of Penalty – Meaning of Penalty – Meaning of Penaltyenaltyenaltyenaltyenalty

It is interesting to note here that in spite ofelaborate and substantive penal provisions itcontains, the CGST Act does not provide anydefinition of the term ‘penalty’. It will, therefore,be advantageous to refer to the dictionarymeaning of the term and a few judicialpronouncements that have explained this term.

a. Dictionary meaning:a. Dictionary meaning:a. Dictionary meaning:a. Dictionary meaning:a. Dictionary meaning:

P. RamanathanAiyar’s Advanced Law Lexicondefines the term ‘penalty’ as follows:

“A penalty is a sum which a party agrees to payor forfeit in the event of a breach, but which isfixed, not as pre-estimate of probable actualdamages, but as a punishment, the threat of whichis designed to prevent the breach, or as security,where the sum is deposited or the covenant to payis joined in by one or more sureties, to insure thatthe person injured shall collect his actualdamages. Penalties are not recoverable orretainable as such by the person in whose favourthey are framed. Charles T. McCormick,Handbook on the Law of Damages section 146,at 666 (1935).

bbbbb . Judicial pronouncements:. Judicial pronouncements:. Judicial pronouncements:. Judicial pronouncements:. Judicial pronouncements:

“The term ‘penalty’ is an elastic term with manydifferent shades of meaning, mainly involving theidea of punishment, corporeal or pecuniary or civilor criminal, although its meaning is generallyconfined to pecuniary punishment. [Allied v.[Allied v.[Allied v.[Allied v.[Allied v.Graves 261 NC 31, 134].Graves 261 NC 31, 134].Graves 261 NC 31, 134].Graves 261 NC 31, 134].Graves 261 NC 31, 134].

A penalty is a sum of money which the law exactspayment of by way of punishment for doing someact which is prohibited or for not doing some actwhich is required to be done. [Hidden HollowHidden HollowHidden HollowHidden HollowHidden Hollow

Ranch v. Collins, 146 Mont. 321, 406 P.2dRanch v. Collins, 146 Mont. 321, 406 P.2dRanch v. Collins, 146 Mont. 321, 406 P.2dRanch v. Collins, 146 Mont. 321, 406 P.2dRanch v. Collins, 146 Mont. 321, 406 P.2d365 368].365 368].365 368].365 368].365 368].

“The sum a party agrees to pay in the event of acontract breach, but which is fixed, not as a pre-estimate of probable actual damages, but as apunishment, the threat of which is designed toprevent the breach.” [Westmount Country Club[Westmount Country Club[Westmount Country Club[Westmount Country Club[Westmount Country Clubv. Kameny, 82 N.J.Super.200, 197 A.2dv. Kameny, 82 N.J.Super.200, 197 A.2dv. Kameny, 82 N.J.Super.200, 197 A.2dv. Kameny, 82 N.J.Super.200, 197 A.2dv. Kameny, 82 N.J.Super.200, 197 A.2d379, 382].379, 382].379, 382].379, 382].379, 382].

‘P‘P‘P‘P‘Penaltyenaltyenaltyenaltyenalty ’, ‘’, ‘’, ‘’, ‘’, ‘TTTTTax’ and ‘Interestax’ and ‘Interestax’ and ‘Interestax’ and ‘Interestax’ and ‘Interest ’ – Difference’ – Difference’ – Difference’ – Difference’ – Difference

Here, it would be interesting to understand thedifference between three terms viz. ‘penalty’, ‘tax’and ‘interest’, which are commonly used in thefiscal statutes. This has been explained by theSupreme Court in the case of PratibhaPratibhaPratibhaPratibhaPratibhaProcessors v. Union of India – 1996 (88)Processors v. Union of India – 1996 (88)Processors v. Union of India – 1996 (88)Processors v. Union of India – 1996 (88)Processors v. Union of India – 1996 (88)ELT 12 (SC)ELT 12 (SC)ELT 12 (SC)ELT 12 (SC)ELT 12 (SC)as under:

“ ‘Tax’ is an amount payable as a result of thecharging provision and it is a compulsoryextraction of money by a public authority for publicpurposes, the payment of which is endorsed bylaw. ‘Penalty’ is ordinarily levied for somecontumacious conduct or for a deliberate violationof the provisions of the particular statute. ‘Interest’is compensatory in character and is imposed onan assessee who has withheld payment of any taxas and when it is due and payable. The levy ofinterest is geared to the actual amount of taxwithheld and the extent of the delay in paying thetax on the due date. Essentially, it is compensatoryand different from penalty, – which is penal incharacter.”

Keeping in mind the meanings attributed to theterm ‘penalty’ as above, let us now briefly studyand analyse the penal provisions of CGST Act.However, considering the specific subject of thisarticle, the penal provisions relating to ITC areonly referred to and discussed here.

PPPPPenal provisions of CGST Act relating toenal provisions of CGST Act relating toenal provisions of CGST Act relating toenal provisions of CGST Act relating toenal provisions of CGST Act relating to ITITITITITCCCCC

The penal provisions of the CGST Act can broadlybe divided into the following broad categories,viz:

a. Penalty for wrong availment or utilisation ofITC [S.73 or S.74 read with S. 122(2)]

b. Penalty for the specified offences [S.122 (1)]

c. Penalty for offences by any person who aidsor abets the specified offences [S.122(3)]


ARTICLE

d. Penalty for failure to furnish informationreturn or statistics [S.123 & S.124]

e. General i.e. residual penalty [S.125]

f. General penalty in certain cases [S.127]

g. General disciplines related to penalty [S.126]

h. Waiver of penalty in certain circumstances[S.73(8) read with Explanation 1 to S.74]

A close look at the aforesaid penal provisionswould reveal that the same are, by and large,patterned on the penal provisions prevalent inthe erstwhile Central Excise and Service Taxregime. The principles of law laid down onvarious aspects of the penal provisions existing inthe erstwhile tax regime may, therefore, becomequite important and relevant while analysing andunderstanding the penal provisions of GST laws.

In the ensuing paragraphs, the above provisionsare briefly discussed in the context of and to theextent the same relate to ITC.Certain importantjudicial pronouncements rendered in the contextof the penal provisions and the provisions relatedto Cenvat Credit of the erstwhile tax regime arealso referred to for better understanding.

a .a .a .a .a . PPPPPenalty for wrong availment orenalty for wrong availment orenalty for wrong availment orenalty for wrong availment orenalty for wrong availment orutilisation of ITutilisation of ITutilisation of ITutilisation of ITutilisation of ITC [SC [SC [SC [SC [S.73 or S.73 or S.73 or S.73 or S.73 or S.74 read with.74 read with.74 read with.74 read with.74 read withS. 122(2)] :S. 122(2)] :S. 122(2)] :S. 122(2)] :S. 122(2)] :

i. Demand towards ITDemand towards ITDemand towards ITDemand towards ITDemand towards ITC wrongly availedC wrongly availedC wrongly availedC wrongly availedC wrongly availedor util ised for the reason other thanor util ised for the reason other thanor util ised for the reason other thanor util ised for the reason other thanor util ised for the reason other thanfraud, etc. [S.73(1)]:fraud, etc. [S.73(1)]:fraud, etc. [S.73(1)]:fraud, etc. [S.73(1)]:fraud, etc. [S.73(1)]:

Section 73(1), inter alia, empower the properofficer to issue a show cause notice to the personchargeable to tax when it appears to the properofficer that there has been a wrong availment orutilisation of ITC by such person for any reason,other than the reason of fraud or any wilfulmisstatement or suppression of facts to evade tax.The provision also provides for the recovery ofthe amount specified in the notice along withinterest payable thereon under Section 50 and apenalty leviable under the provisions of the Actor the Rules made thereunder.

Sub-section (3) of Section 73, inter alia, providesfor the issue of a statement by the proper officer,instead of show cause notice, containing thedetails of the ITC wrongly availed or utilised forthe subsequent periods when a show cause notice,in terms of sub-section (1) has already been issued

for an earlier period. Such statement shall bedeemed to be the service of notice if the groundsrelied upon for the demand for the subsequenttax periods are the same as mentioned in theearlier notice.[S.73(4) refers].

It will be interesting to note here that theprovisions relating to demand and recovery ofthe ITC wrongly availed or utilised along withinterest thereon and imposition of penalty in suchcases are incorporated in the parent Act i.e. CGSTAct only. This is unlike the erstwhile Central Excise& Service Tax regime, where the analogousprovisions were contained in the Cenvat CreditRules, 2004 (‘CCR’) and to which, the provisionsrelating to demand, interest and penalty of theparent Acts i.e. Central Excise Act, 1944 (‘CEA’) orFinance Act, 1994 (‘FA’) were made mutatismutandis applicable. This is one of the strikingfeatures of the GST related Enactments where quitea few important provisions which were containedin the Rules in the erstwhile tax regime, have beenincorporated in the parent Act itself. This impartsa stability and certainty to the operation of theprovisions since the frequent amendments of theRules resorted to under the delegated legislation,would not be possible.

ii. Demand towards ITDemand towards ITDemand towards ITDemand towards ITDemand towards ITC wrongly availedC wrongly availedC wrongly availedC wrongly availedC wrongly availedor util ised by way of fraud, etc.or util ised by way of fraud, etc.or util ised by way of fraud, etc.or util ised by way of fraud, etc.or util ised by way of fraud, etc.[S.74(1)]:[S.74(1)]:[S.74(1)]:[S.74(1)]:[S.74(1)]:

Section 74(1) provides for the issue of the showcause notice by the proper officer to the personchargeable with tax where the ITC has beenwrongly availed or utilised by reason of fraud orany wilful misstatement or suppression of facts toevade tax. The provision also provides for therecovery of such amount along with interest interms of Section 50 and a penalty equivalent tothe tax specified in the notice.

Sub-sections (3) & (4) of Section 74 further providesfor the issue of the statement, instead of a showcause notice, by the proper officer containing thedetails of the ITC wrongly availed or utilised incase of recurring demands for the subsequentperiod where the notice for the earlier period hasalready been issued and such statement shall bedeemed to be a service of notice under Section73(1) subject to the condition that the groundsrelied upon in the said statement, except theexcept theexcept theexcept theexcept theground of fraud, or any wilful misstatementground of fraud, or any wilful misstatementground of fraud, or any wilful misstatementground of fraud, or any wilful misstatementground of fraud, or any wilful misstatementor suppression of facts to evade tax,or suppression of facts to evade tax,or suppression of facts to evade tax,or suppression of facts to evade tax,or suppression of facts to evade tax, are thesame as mentioned in the earlier notice. It will

ARTICLE


thus be seen that a specific exception has beencarved out so as to provide that once a showcause notice alleging wilful suppression ormisstatement of facts, etc. with intent to evade taxhas been issued, such allegations cannot berepeatedly made for the subsequent period forwhich the statement of demand is being issuedeven if the issue under dispute remains the same.

Explanation 2 to Section 74 states that theexpression “suppression” shall mean non-declaration of facts or information which a taxableperson is required to declare in the return,statement, report or any other document furnishedunder the Act or the Rules made thereunder orfailure to furnish any information on being askedfor by the proper officer.

iii. PPPPPenalties in respect of the demandsenalties in respect of the demandsenalties in respect of the demandsenalties in respect of the demandsenalties in respect of the demandsunder Section 73 or Section 74:under Section 73 or Section 74:under Section 73 or Section 74:under Section 73 or Section 74:under Section 73 or Section 74:

Where the demand towards ITC wrongly availedor utilised other than by reason of fraud, etc. israised under Section 73(1), the person chargeablewith tax will also be liable to penalty equivalentto 10% of tax or Rs.10,000/-, whichever is higher,due from such person.[S. 73(9) refers]. It will thusbe seen that the quantum of penalty prescribedunder Section 73(9) is mandatory in nature anda lower penalty cannot be imposed. This isdespite the fact that the wrong availment orutilisation of ITC is not due to any fraud or wilfulsuppression of facts, etc. with intent to evade tax.

On the other hand, where the demand towardsITC wrongly availed or utilised is raised underSection 74(1), inter alia, alleging fraud or wilfulsuppression of facts, etc. with intent to evade taxagainst the person chargeable with tax, suchperson shall be liable for penalty equal to tax asprovided under Section 74(9) of the CGST Act. Itis pertinent to note here that once the elements offraud, etc. are established, there is no discretionleft with any authority to reduce the quantum ofpenalty prescribed.

iv. PPPPPenalties under Section 73 or Sectionenalties under Section 73 or Sectionenalties under Section 73 or Sectionenalties under Section 73 or Sectionenalties under Section 73 or Section74 vis-à-vis Section 122(2):74 vis-à-vis Section 122(2):74 vis-à-vis Section 122(2):74 vis-à-vis Section 122(2):74 vis-à-vis Section 122(2):

It will be observed that sub-section (9) of Section73 or sub-section (1) read with sub-section (9) ofSection 74 of the CGST Act prescribes thequantum of penalty to be levied on a personchargeable with tax and against whom thedemand, inter alia, towards ITC wrongly availed

or utilised has been raised and upheld under therespective provisions.

At the same time, Section 122(2) of the CGST Actalso deals with the similar situations and providesfor the imposition of the same quantum of penaltyon any registered person in case of omission orcommission of any act resulting into the non-payment or short payment of tax or erroneousrefund or wrong availment or utilisation of ITC ,whether by reason of fraud, etc. or otherwise.

At first glance, there appears to be the ‘doublejeopardy’ in so far as the penal action providedunder Section 73 or Section 74 vis-à-vis Section122(2) is concerned. However, clause (ii) ofExplanation 1 to Section 74 provides that oncepenalty under provisions of Section 73 or Section74 are paid, all proceedings are concluded andpenalty cannot be imposed separately underSections 122, 125, 129 and 130 of the CGST Act.No doubt, clause (ii) is not very happily wordedand needs further refinement to put the matterbeyond any doubt.

Judicial pronouncements:Judicial pronouncements:Judicial pronouncements:Judicial pronouncements:Judicial pronouncements:

1. Issue of show cause notice is mandatoryIssue of show cause notice is mandatoryIssue of show cause notice is mandatoryIssue of show cause notice is mandatoryIssue of show cause notice is mandatorybefore levying penalty:before levying penalty:before levying penalty:before levying penalty:before levying penalty:

In a customs case, the CESTAT held thatpenalty under sections 112 and 114 of theCustoms Act, 1962 cannot be imposedwithout show cause notice.

[Henkel India Ltd. v. CC – 2007 (217)[Henkel India Ltd. v. CC – 2007 (217)[Henkel India Ltd. v. CC – 2007 (217)[Henkel India Ltd. v. CC – 2007 (217)[Henkel India Ltd. v. CC – 2007 (217)ELT 61 (TELT 61 (TELT 61 (TELT 61 (TELT 61 (Tri-Chennai)]ri-Chennai)]ri-Chennai)]ri-Chennai)]ri-Chennai)]

2. Mensreai.e. guilty mind – Is it anMensreai.e. guilty mind – Is it anMensreai.e. guilty mind – Is it anMensreai.e. guilty mind – Is it anMensreai.e. guilty mind – Is it anessential element for imposing penalty?essential element for imposing penalty?essential element for imposing penalty?essential element for imposing penalty?essential element for imposing penalty?

i .i .i .i .i . Mensrea is not an essential element forMensrea is not an essential element forMensrea is not an essential element forMensrea is not an essential element forMensrea is not an essential element forbreach of civil obligations:breach of civil obligations:breach of civil obligations:breach of civil obligations:breach of civil obligations:

It has been consistently held by the SupremeCourt, High Courts and the Tribunal thatmensrea is not an essential ingredient forimposing a penalty unless statute specificallyprescribes so. In R.S. Joshi v. Ajit Mills Ltd.R.S. Joshi v. Ajit Mills Ltd.R.S. Joshi v. Ajit Mills Ltd.R.S. Joshi v. Ajit Mills Ltd.R.S. Joshi v. Ajit Mills Ltd.– AIR 1977 SC 2279, – AIR 1977 SC 2279, – AIR 1977 SC 2279, – AIR 1977 SC 2279, – AIR 1977 SC 2279, the Supreme Courtobserved:

“The classical view that ‘no mensrea, no crime’has long ago been eroded and several lawsin India and abroad, especially regardingeconomic crimes and departmental penalties,have created severe punishments even where


ARTICLE

the offences have been defined to excludemensrea. Therefore, the contention that Section37(1) fastens a heavy liability regardless offault has no force in depriving the forfeitureof the character of penalty.”

i i .i i .i i .i i .i i . Mensrea is mandatory when theMensrea is mandatory when theMensrea is mandatory when theMensrea is mandatory when theMensrea is mandatory when thestatutory provision provides sostatutory provision provides sostatutory provision provides sostatutory provision provides sostatutory provision provides so:

In the case of CCE v. Pepsi Foods Ltd. –CCE v. Pepsi Foods Ltd. –CCE v. Pepsi Foods Ltd. –CCE v. Pepsi Foods Ltd. –CCE v. Pepsi Foods Ltd. –2010 (260) ELT 481 (SC2010 (260) ELT 481 (SC2010 (260) ELT 481 (SC2010 (260) ELT 481 (SC2010 (260) ELT 481 (SC), the SupremeCourt dealt with the applicability of mensreafor imposition of mandatory penalty underSection 11AC of the CEA. It was held thatwhen the statute create an offence and aningredient of that offence is a deliberateattempt to evade duty either by fraud ormisrepresentation, mensrea would be anecessary constituent of such offence andtherefore, the imposition of penalty underSection 11AC of the CEA would be whollyimpermissible when no fraud, suppression ormisstatement was alleged in the show causenotice. Therefore, criminal intent or ‘mensrea’would be necessary in order to attract thepenalty provisions under Section 11AC of theCEA.

i i i .i i i .i i i .i i i .i i i . Maximum penalty – whetherMaximum penalty – whetherMaximum penalty – whetherMaximum penalty – whetherMaximum penalty – whetherdiscretionary powers exist ?discretionary powers exist ?discretionary powers exist ?discretionary powers exist ?discretionary powers exist ?

In UOI v. Dharmendra TUOI v. Dharmendra TUOI v. Dharmendra TUOI v. Dharmendra TUOI v. Dharmendra Textile Processorsextile Processorsextile Processorsextile Processorsextile Processors– 2008 (231) ELT 3 (SC– 2008 (231) ELT 3 (SC– 2008 (231) ELT 3 (SC– 2008 (231) ELT 3 (SC– 2008 (231) ELT 3 (SC), the SupremeCourt, inter alia, held that lesser penalty wasnot imposable in the cases inviting impositionof mandatory penalty under Section 11AC ofthe CEA as there was no discretion availableregarding the quantum of penalty under thesaid provision.

The judgement in Dharmendra Textile’s case(supra) was later clarified by the SupremeCourt in the case of UOI v. RajasthanUOI v. RajasthanUOI v. RajasthanUOI v. RajasthanUOI v. RajasthanSpinning & Weaving Mills Ltd. – 2009Spinning & Weaving Mills Ltd. – 2009Spinning & Weaving Mills Ltd. – 2009Spinning & Weaving Mills Ltd. – 2009Spinning & Weaving Mills Ltd. – 2009(238) ELT 3 (SC).(238) ELT 3 (SC).(238) ELT 3 (SC).(238) ELT 3 (SC).(238) ELT 3 (SC).

In CCE v. Illpea Paramount Pvt. Ltd. –CCE v. Illpea Paramount Pvt. Ltd. –CCE v. Illpea Paramount Pvt. Ltd. –CCE v. Illpea Paramount Pvt. Ltd. –CCE v. Illpea Paramount Pvt. Ltd. –2006 (202) ELT 744 (SC),2006 (202) ELT 744 (SC),2006 (202) ELT 744 (SC),2006 (202) ELT 744 (SC),2006 (202) ELT 744 (SC), the SupremeCourt held that once the levy of penalty isfound to be warranted having regard to therequirements of statute under Section 11ACof the CEA, the quantum of penalty is not atthe discretion of authority and the same hasto be equal to the amount of duty.

i vi vi vi vi v..... PPPPPenalty not imposable if the demandenalty not imposable if the demandenalty not imposable if the demandenalty not imposable if the demandenalty not imposable if the demandof duty/tax is not sustainable:of duty/tax is not sustainable:of duty/tax is not sustainable:of duty/tax is not sustainable:of duty/tax is not sustainable:

In CCE vs. HMM Ltd. 1995 (76) ELT 497CCE vs. HMM Ltd. 1995 (76) ELT 497CCE vs. HMM Ltd. 1995 (76) ELT 497CCE vs. HMM Ltd. 1995 (76) ELT 497CCE vs. HMM Ltd. 1995 (76) ELT 497(SC(SC(SC(SC(SC),),),),), the Supreme Court held that the penaltyunder Rule 9 (2) and 173Q of the CentralExcise Rules, 1944 would not be imposableunless the department was able to sustain thedemand under challenge on the grounds oflimitation. It was held that the question ofpenalty would arise only if the departmentwas able to sustain its demand and wheredemand failed, the penalty would follow suit.

See, Pahwa Chemicals P. Ltd. v. CCE –Pahwa Chemicals P. Ltd. v. CCE –Pahwa Chemicals P. Ltd. v. CCE –Pahwa Chemicals P. Ltd. v. CCE –Pahwa Chemicals P. Ltd. v. CCE –2005 (189) ELT 257 (SC2005 (189) ELT 257 (SC2005 (189) ELT 257 (SC2005 (189) ELT 257 (SC2005 (189) ELT 257 (SC).

vvvvv..... No repeated allegations of wilfulNo repeated allegations of wilfulNo repeated allegations of wilfulNo repeated allegations of wilfulNo repeated allegations of wilfulsuppression of facts, etc.:suppression of facts, etc.:suppression of facts, etc.:suppression of facts, etc.:suppression of facts, etc.:

In Nizam Sugar Factory v. CCE – 2006Nizam Sugar Factory v. CCE – 2006Nizam Sugar Factory v. CCE – 2006Nizam Sugar Factory v. CCE – 2006Nizam Sugar Factory v. CCE – 2006(197) ELT 465 (SC), (197) ELT 465 (SC), (197) ELT 465 (SC), (197) ELT 465 (SC), (197) ELT 465 (SC), the Supreme Courtheld as follows:

“9. Allegation of suppression of fact againstthe appellant cannot be sustained. When thefirst SCN was issued, all the relevant facts werein the knowledge of the authorities. Later on,while issuing the second and third show causenotices, the same/similar facts could not betaken as suppression of facts on the part ofthe Assessee as these facts were already inthe knowledge of the authorities. We agreewith the view taken in the aforesaid judgmentand respectfully following the same, hold thatthere was no suppression of facts on the partof the Assessee/Appellant.”

In this case, the Supreme Court had referredto and followed its earlier judgments in thecase of P & B Pharmaceuticals (P) Ltd. v. CCE– 2003 (153) ELT 14 (SC); ECE Industries Ltd.v. CCE – 2004 (164) ELT 236 (SC) andHyderabad Polymers (P) Ltd. v. CCE – 2004(166) ELT 151 (SC).

Comment: Comment: Comment: Comment: Comment: The principle laid down in thesejudgements stand embodied in Section 74(4)of the CGST Act.

v i .v i .v i .v i .v i . No suppression of facts not required toNo suppression of facts not required toNo suppression of facts not required toNo suppression of facts not required toNo suppression of facts not required tobe disclosed:be disclosed:be disclosed:be disclosed:be disclosed:

In Smt. ShirishtiDhawan v. Shaw BrothersSmt. ShirishtiDhawan v. Shaw BrothersSmt. ShirishtiDhawan v. Shaw BrothersSmt. ShirishtiDhawan v. Shaw BrothersSmt. ShirishtiDhawan v. Shaw Brothers– AIR 1992 SC 1555,– AIR 1992 SC 1555,– AIR 1992 SC 1555,– AIR 1992 SC 1555,– AIR 1992 SC 1555, the Supreme Courtheld that there can be no suppression of facts

ARTICLE


if facts which are not required to be disclosedare not disclosed.

See, Apex Electricals (P) Ltd. v. UOI –Apex Electricals (P) Ltd. v. UOI –Apex Electricals (P) Ltd. v. UOI –Apex Electricals (P) Ltd. v. UOI –Apex Electricals (P) Ltd. v. UOI –1992 (61) ELT 413 (Guj.)1992 (61) ELT 413 (Guj.)1992 (61) ELT 413 (Guj.)1992 (61) ELT 413 (Guj.)1992 (61) ELT 413 (Guj.)

Comment: Comment: Comment: Comment: Comment: This principle of law is explicitlyrecognised in Explanation 2 to Section 74 ofthe CGST Act.

vii. Revenue Neutrality:Revenue Neutrality:Revenue Neutrality:Revenue Neutrality:Revenue Neutrality:

In Jay Yushin Ltd. v. CCE – 2000 (119)Jay Yushin Ltd. v. CCE – 2000 (119)Jay Yushin Ltd. v. CCE – 2000 (119)Jay Yushin Ltd. v. CCE – 2000 (119)Jay Yushin Ltd. v. CCE – 2000 (119)ELT 718 (TELT 718 (TELT 718 (TELT 718 (TELT 718 (Tri-LB),ri-LB),ri-LB),ri-LB),ri-LB), the Larger Bench of theCESTAT held as under:

“a. Revenue neutrality, being a question offact, the same is to be established in the factsof each case and not merely by showing theavailability of an alternate scheme.

b. Where the scheme opted for by the assesseeis found to have been misused (incontradistinction to mere deviation or failureto observe all the conditions), the existence ofan alternate scheme would not be anacceptable defence.

c. With particular reference to Modvat Scheme(which has occasioned this reference), it hasto be shown that the revenue neutral situationcomes about in relation to the credit availableto the assessee himself and not by way ofavailability of credit to the buyer of theassessee’s manufactured goods.”

See also, Nirlon Ltd. v. CCE – 2015 (320)Nirlon Ltd. v. CCE – 2015 (320)Nirlon Ltd. v. CCE – 2015 (320)Nirlon Ltd. v. CCE – 2015 (320)Nirlon Ltd. v. CCE – 2015 (320)ELT 22 (SC).ELT 22 (SC).ELT 22 (SC).ELT 22 (SC).ELT 22 (SC).

In CCE v. Mahindra & Mahindra Ltd. –CCE v. Mahindra & Mahindra Ltd. –CCE v. Mahindra & Mahindra Ltd. –CCE v. Mahindra & Mahindra Ltd. –CCE v. Mahindra & Mahindra Ltd. –2005 (179) ELT 21 (SC2005 (179) ELT 21 (SC2005 (179) ELT 21 (SC2005 (179) ELT 21 (SC2005 (179) ELT 21 (SC), it was, however,held by the Supreme Court that the judgmentrendered by it in another case of AmcoAmcoAmcoAmcoAmcoBatteries v. CCE – 2003 (153) ELT 7Batteries v. CCE – 2003 (153) ELT 7Batteries v. CCE – 2003 (153) ELT 7Batteries v. CCE – 2003 (153) ELT 7Batteries v. CCE – 2003 (153) ELT 7(SC)(SC)(SC)(SC)(SC) where the argument of revenueneutrality was accepted on the ground of theavailability of credit to the assessee himself,has to be read in the context of the facts. Itwas held that availability of Cenvat Credit toassessee by itself is not conclusive or decisiveconsideration. It may be one of the relevantconsideration. How much weight is to beattached thereto would depend upon facts ofeach case.

In Essar Steel v. CCE – 2009 (19) STTEssar Steel v. CCE – 2009 (19) STTEssar Steel v. CCE – 2009 (19) STTEssar Steel v. CCE – 2009 (19) STTEssar Steel v. CCE – 2009 (19) STT42 (CESTAT), 42 (CESTAT), 42 (CESTAT), 42 (CESTAT), 42 (CESTAT), it was held that if the assessee

was eligible for Cenvat Credit on payment oftax (under reverse charge method), therecannot be intention to evade payment of taxand hence, penalty is not imposable.

viii. Denial of Cenvat Credit when activityDenial of Cenvat Credit when activityDenial of Cenvat Credit when activityDenial of Cenvat Credit when activityDenial of Cenvat Credit when activityconsidered non-dutiable/non-taxable:considered non-dutiable/non-taxable:considered non-dutiable/non-taxable:considered non-dutiable/non-taxable:considered non-dutiable/non-taxable:

In CCE v. Narmada ChematurCCE v. Narmada ChematurCCE v. Narmada ChematurCCE v. Narmada ChematurCCE v. Narmada ChematurPharmaceuticals Ltd. – 2005 (179) ELTPharmaceuticals Ltd. – 2005 (179) ELTPharmaceuticals Ltd. – 2005 (179) ELTPharmaceuticals Ltd. – 2005 (179) ELTPharmaceuticals Ltd. – 2005 (179) ELT276 (SC), 276 (SC), 276 (SC), 276 (SC), 276 (SC), the Supreme Court has held thatwhen an optional exemption is not availedso as to avail Cenvat Credit and such Cenvatcredit held to be wrongly availed is exactlyequivalent to the amount of excise duty paidby not availing the exemption, theconsequence is revenue neutral and hence,demand for wrong availment of credit is notsustainable.

In CCE v. Creative Enterprises – 2009CCE v. Creative Enterprises – 2009CCE v. Creative Enterprises – 2009CCE v. Creative Enterprises – 2009CCE v. Creative Enterprises – 2009(235) ELT 785 (Guj(235) ELT 785 (Guj(235) ELT 785 (Guj(235) ELT 785 (Guj(235) ELT 785 (Guj.), .), .), .), .), the Gujarat HighCourt upheld the Order of the Tribunalholding that if the activity of the Respondent-Assessee does not amount to manufacture,there can be no question of levy of duty and ifthe duty is levied, Modvat Credit cannot bedenied by holding that there was nomanufacture. [Affirmed in 2009 (243) ELTAffirmed in 2009 (243) ELTAffirmed in 2009 (243) ELTAffirmed in 2009 (243) ELTAffirmed in 2009 (243) ELTA 120 (SC)].A 120 (SC)].A 120 (SC)].A 120 (SC)].A 120 (SC)].

ix.ix.ix.ix.ix. Retrospective amendment – WhetherRetrospective amendment – WhetherRetrospective amendment – WhetherRetrospective amendment – WhetherRetrospective amendment – Whetherpenalty is imposable?penalty is imposable?penalty is imposable?penalty is imposable?penalty is imposable?

In one of its historic judgments rendered inthe case of J.K. Spinning and WeavingJ.K. Spinning and WeavingJ.K. Spinning and WeavingJ.K. Spinning and WeavingJ.K. Spinning and WeavingMills Ltd. v. UOI – 1987 (32) ELT 234Mills Ltd. v. UOI – 1987 (32) ELT 234Mills Ltd. v. UOI – 1987 (32) ELT 234Mills Ltd. v. UOI – 1987 (32) ELT 234Mills Ltd. v. UOI – 1987 (32) ELT 234(SC), (SC), (SC), (SC), (SC), the Supreme Court dealt with thechallenge made to the retrospectiveoperation of amendments of Rules 9 and 49(of Central Excise Rules, 1944) wherein, underthe Explanation, the said amendments to theRules had been given retrospective effect. Inthis context, the Supreme Court held that itwould be against all principles of legaljurisprudence to impose a penalty on a personor to confiscate his goods for an act oromission which was lawful at the time whensuch act was performed or omission made,but subsequently made unlawful by virtue ofany provision of law.

In the case of P. V. Mohammad BarmayP. V. Mohammad BarmayP. V. Mohammad BarmayP. V. Mohammad BarmayP. V. Mohammad BarmaySons v. Director of Enforcement - 1992Sons v. Director of Enforcement - 1992Sons v. Director of Enforcement - 1992Sons v. Director of Enforcement - 1992Sons v. Director of Enforcement - 1992(61) ELT 337, (61) ELT 337, (61) ELT 337, (61) ELT 337, (61) ELT 337, the Supreme Court held that


ARTICLE

penal provisions could neither haveretrospective applicability nor could agreater penalty than the one in force at thetime of commission of the offence be imposedin view of the provisions of Article 20(1) ofthe Constitution of India. It was held that Article20 (1) of the Constitution of India providesthat no person could be convicted of anyoffence except for a violation of the law inforce at the time of commission of the actcharged as an offence, nor be subjected to apenalty greater than that which might havebeen inflicted under the law in force at thetime of commission of the offence.

In the case of Commissioner of CentralCommissioner of CentralCommissioner of CentralCommissioner of CentralCommissioner of CentralExcise, Coimbatore v. ElgiEquipmentsExcise, Coimbatore v. ElgiEquipmentsExcise, Coimbatore v. ElgiEquipmentsExcise, Coimbatore v. ElgiEquipmentsExcise, Coimbatore v. ElgiEquipmentsLtd. 2001 (128) ELT 52 (SC),Ltd. 2001 (128) ELT 52 (SC),Ltd. 2001 (128) ELT 52 (SC),Ltd. 2001 (128) ELT 52 (SC),Ltd. 2001 (128) ELT 52 (SC), in thecontext of mandatory penalty stipulatedunder section 11AC of Central Excise Act,1944, the Supreme Court held that such penalprovisions would be prospective in operationsince the illegality committed prior to theinsertion of the said section in the Act couldnot be the subject matter of penalty under thesaid provision. Further, it was held that thepresumption against retrospective operationwas strong in cases in which the statute, ifoperated retrospectively, would prejudiciallyaffect the vested rights or the illegality of thepast transactions, or impair contracts, orimpose a new duty or attach new disability inrespect of past transactions or considerationalready passed.

x.x.x.x.x. PPPPPenalty is not imposable when issueenalty is not imposable when issueenalty is not imposable when issueenalty is not imposable when issueenalty is not imposable when issuerelates to the statutory interpretation:relates to the statutory interpretation:relates to the statutory interpretation:relates to the statutory interpretation:relates to the statutory interpretation:

In the case of Uniflex Cables Ltd. v. CCEUniflex Cables Ltd. v. CCEUniflex Cables Ltd. v. CCEUniflex Cables Ltd. v. CCEUniflex Cables Ltd. v. CCE– 2011 (271) ELT 161 (SC), – 2011 (271) ELT 161 (SC), – 2011 (271) ELT 161 (SC), – 2011 (271) ELT 161 (SC), – 2011 (271) ELT 161 (SC), the SupremeCourt dealt with the issue with regard to theimposition of penalty where the issue involvedwas of interpretational nature. Taking note ofthe fact that the Commissioner himself hadfound that it was only a case ofinterpretational nature, the Supreme Courtquashed the order of the Commissionerimposing the penalty as also the order of theTribunal so far as it confirmed the impositionof penalty on the Appellant.

b. PPPPPenalty for the specified offences [Senalty for the specified offences [Senalty for the specified offences [Senalty for the specified offences [Senalty for the specified offences [S.122.122.122.122.122(1)](1)](1)](1)](1)]

Section 122(1) of the CGST Act enumerates

the offences, other than those covered videSection 73 and 74 of the Act, which invitepenal consequences for the personcommitting such offence.

Section 122(1) lists total 21 offences includingthe specific offences relating to ITC whichare as under:

i. Supply of any goods or services or bothwithout issue of any invoice or issue of anincorrect or false invoice with regard to anysuch supply [S.122(1)(i) refers]

ii. Issue of any invoice or bill without supply ofgoods or services or both in violation of theprovisions of the Act i.e. CGST Act or the rulesmade thereunder [S.122(1)(ii) refers];

iii. Collection of any amount as tax but fails topay the same to the government beyond aperiod of three months from the date on whichsuch payment becomes due [S.122(1)(iii)refers];

iv. Taking or utilising input tax credit withoutactual receipt of goods or services or botheither fully or partially, in contravention of theprovisions of the Act i.e. CGST Act or the rulesmade thereunder [S.122(1)(vii) refers]

v. Obtaining refund of tax under the CGST Actfraudulently [S.122 (1)(viii) refers];

vi. Taking or distributing ITC in violation ofSection 20 (Input Service Distributor) or therules made thereunder (S.122 (1)(ix) refers];

vii. Falsification or substitution of financialrecords or production of fake accounts ordocuments or furnishing of any falseinformation or return with an intent to evadepayment of tax due under the CGST Act[S.122(1)(x) refers];

viii. Obstructing or preventing any officer indischarge of his duties under the CGST Act[S.122(1)(xiii) refers];

ix. Failure to keep, maintain or retain books ofaccounts and other documents in accordancewith the provisions of the CGST Act or the rulesmade thereunder [S.122 (1) (xvi) refers];

x. Failure to furnish information or documentscalled for by an officer in accordance withthe provisions of the CGST Act or the rules

ARTICLE


made thereunder or furnishing falseinformation or documents during anyproceedings under the Act [S.122 (1) (xvii)refers];

xi. Issue of any invoice or document by usingthe registration number of another registeredperson [S.122 (1)(xix) refers];

xii. Tampering with, or destroying any materialevidence or documents [S.122(1)(xx) refers];

The penalty, in case of any of the aforesaidoffences committed by a taxable person, shall beRs. 10,000/- or an amount equivalent to the taxevaded or ITC availed of or passed on ordistributed irregularly, or the refund claimedfraudulently, as the case may be, whichever ishigher.

From the careful study of Section 122(1) and theoffences listed therein as also the quantum ofpenalty prescribed, it will be observed that the‘mensrea’ is presumed to be existing in case ofany of such offences if committed by the taxableperson though it is not prescribed as an essentialelement. The stringent penalty, equivalent to theamount of tax or ITC involved, is a pointer to thisfact.

In the case of Chirag Gosalia v. CC – 2008Chirag Gosalia v. CC – 2008Chirag Gosalia v. CC – 2008Chirag Gosalia v. CC – 2008Chirag Gosalia v. CC – 2008(230) ELT 224 (Bom),(230) ELT 224 (Bom),(230) ELT 224 (Bom),(230) ELT 224 (Bom),(230) ELT 224 (Bom), the Bombay High Courtconsidered whether the imposition of penaltyunder Section 112 of the Customs Act, 1962 wasmandatory in nature. It was held that on areading of the section, it was clear that thelegislature had used the term ‘shall be liable’. Inother words, it was a mandatory provision.Therefore, the High Court agreed with the orderof the CESTAT and held that no question of lawwould arise and dismissed the appeal of theAssessee.

It is significant to note that a few of the offenceslisted in sub-section (1) of Section 122 were alsoearlier covered by Section 77 of the erstwhile FAfor which the penalty prescribed under the saidSection was ‘maximum Rs.10,000/-‘. maximum Rs.10,000/-‘. maximum Rs.10,000/-‘. maximum Rs.10,000/-‘. maximum Rs.10,000/-‘. Asagainst this, the penalty prescribed for the similaroffences under Section 122(1) is ‘Rs.10,000/-Rs.10,000/-Rs.10,000/-Rs.10,000/-Rs.10,000/-or equivalent to tax or credit involved,or equivalent to tax or credit involved,or equivalent to tax or credit involved,or equivalent to tax or credit involved,or equivalent to tax or credit involved,whichever is higherwhichever is higherwhichever is higherwhichever is higherwhichever is higher ’’’’’ and the same is‘mandatory’ in nature. This marks a quantumjump in the penalty imposable and appears tobe based on the ‘standard deterrence model’.

The penal consequences of Section 122(1) will beattracted only when any of the offences listedtherein is committed by a ‘taxable persontaxable persontaxable persontaxable persontaxable person’’’’’andnot by ‘any personany personany personany personany person’.’.’.’.’. The term ‘taxable person’is defined vide Section 2 (107) of the CGST Act soas to mean ‘a person who is registered or liableto be registered under Section 22 or Section 24’.

c .c .c .c .c . PPPPPenalty for offences by any person whoenalty for offences by any person whoenalty for offences by any person whoenalty for offences by any person whoenalty for offences by any person whoaids or abets the specified offencesaids or abets the specified offencesaids or abets the specified offencesaids or abets the specified offencesaids or abets the specified offences[S.122(3)][S.122(3)][S.122(3)][S.122(3)][S.122(3)]

Sub-section (3) of Section 122 provides for thepenal action against any person any person any person any person any person who is guiltyof omission or commission of any specified actand in the manner specified therein. Clause (a)of sub-section (3) provides that any person whoaids or abets any of the offences specified inSection 122(1) of the Act shall be liable to apenalty prescribed thereunder.

The quantum of penalty prescribed under Section122(3) is maximum Rs.25,000/-. Since the wordsused in the provision are ‘may extend to Rupeestwenty five thousand’, it is clear that the quantumof penalty prescribed is ‘maximum’ and not‘mandatory’.

It is interesting to note that the quantum of penaltyprescribed under Section 122(3) appears to bequite low when compared to the quantumprescribed in Rule 26 of the erstwhile CentralExcise Rules, 2002 or Section 78A of the erstwhileFA or Section 112 of the Customs Act, 1962 insimilar circumstances.

d .d .d .d .d . PPPPPenalty for failure to furnish informationenalty for failure to furnish informationenalty for failure to furnish informationenalty for failure to furnish informationenalty for failure to furnish informationreturn or statistics [S.123& S.124]return or statistics [S.123& S.124]return or statistics [S.123& S.124]return or statistics [S.123& S.124]return or statistics [S.123& S.124]

Section 123 of the CGST Act provides that if aperson who is required to furnish an informationreturn under Section 150 fails to do so within theperiod specified in the notice under Section150(3), the proper officer may direct that suchperson shall be liable to pay a penalty of Rs. 100/- for each day during which the default continues,subject to maximum Rs. 5,000/-.

Section 150 of the CGST Act requires the personsspecified therein to file an information return asprescribed therein.

Section 124 of the CGST Act provides that anyperson required to furnish any information orreturn under Section 151,-(a) without reasonablecause, fails to furnish such information or return;


ARTICLE

or (b) wilfully furnishes or causes to furnish anyfalse information or return, shall be punishablewith fine which may extend to Rs. 10,000/- and incase of continuing offence, to a further fine whichmay extend to Rs. 100/- for each day of defaultsubject to maximum Rs. 20,000/-.

Section 151 of the CGST Act empowers theCommissioner to collect the statistics relating toany matter dealt with by or in connection withthe Act.

e .e .e .e .e . General i.e. residual penalty [S.125]General i.e. residual penalty [S.125]General i.e. residual penalty [S.125]General i.e. residual penalty [S.125]General i.e. residual penalty [S.125]

The provisions of Section 125 are residual innature and provides for the imposition ofmaximum penalty uptoRs. 25,000/- in a casewhere no penalty is separately provided for in theCGST Act for the contravention of any of theprovisions of the Act or any rules made thereunderby any person.

In the erstwhile Service Tax regime, the residualpenalty prescribed was maximum Rs.10,000/-vide Section 77(2) of the FA.

fffff..... General penalty in certain casesGeneral penalty in certain casesGeneral penalty in certain casesGeneral penalty in certain casesGeneral penalty in certain cases[S.127][S.127][S.127][S.127][S.127]

Section 127 of the CGSTAct provides that wherethe proper officer is of the view that a person isliable to a penalty and the same is not coveredunder any proceedings

Section 62 (assessment of non-filers ofreturns) or

Section 63 (assessment of un-registeredpersons) or

Section 64 (summary assessment in certainspecial cases) or

Section 73 (determination of tax not paidor short paid or erroneously refunded orITC wrongly availed or utilised for anyreason other than fraud, etc.)

Section 74 (determination of tax not paidor short paid or erroneously refunded orITC wrongly availed or utilised by reasonof fraud, etc. )

Section 129 (detention, seizure andrelease of goods and conveyances intransit) or

Section 130 (confiscation of goods or

conveyances and levy of penalty), he mayissue an order levying such penalty aftergiving a reasonable opportunity of beingheard to such person.

g .g .g .g .g . General disciplines related to penaltyGeneral disciplines related to penaltyGeneral disciplines related to penaltyGeneral disciplines related to penaltyGeneral disciplines related to penalty[S.126][S.126][S.126][S.126][S.126]

Section 126 of the CGST Act contains ‘generaldisciplines related to penalty’. The provision is abeneficial piece of legislation and embodiescertain sound principles of law laid down in thematter of imposition of penalty on a person forcommission of any offence under the relevantstatute. However, unfortunately, the principles arerarely followed in practice by the authorities.

The ‘general disciplines’ enshrined in Section 126are as follows:

No penalty shall be levied for minorbreaches of tax regulations or proceduralrequirements and in particular, anyomission or mistake in documentationwhich is easily rectifiable and madewithout fraudulent intent or grossnegligence [S. 126(1) refers].

The Explanation to sub-section (1) statesthat- ‘for the purpose of this sub-section,-

a) a breach shall be considered a ‘minorbreach’ if the amount of tax involved is lessthan five thousand rupees;

b) an omission or mistake indocumentation shall be considered to beeasily rectifiable if the same is an errorapparent on the face of record.

Penalty shall depend upon the facts andcircumstances of each case and shall becommensurate with the degree andseverity of the breach [S. 126 (2) refers]

Penalty shall not be imposed on anyperson without granting personal hearing[S.126(3) refers]

The nature of the breach and theapplicable law, regulation or procedureunder which the amount of penalty for thebreach has been specified, shall bementioned in his order by the officer whileimposing a penalty for any such breachon any person. [S. 126 (4) refers]

ARTICLE


Voluntary disclosure by a person beforethe officer of the circumstances of a breachof the tax law, regulation or proceduralrequirement prior to the discovery of thebreach by the officer shall be consideredas a mitigating factor when quantifying apenalty for that person. [S.126(5) refers].

Finally, as a rider, it is provided, vide sub-section(6) that the provisions of the Section 126 shall notapply in such cases where the penalty specifiedunder this Act is either a fixed sum or expressedas a fixed percentage. This effectively means thatthe above disciplines would come into play onlywhere ‘maximum’ penalty is prescribed under therelevant provision and the discretion is vested inthe proper officer to impose a lesser penalty undersuch provision.

h.h.h.h.h. WWWWWaiver of and/or lower penalty inaiver of and/or lower penalty inaiver of and/or lower penalty inaiver of and/or lower penalty inaiver of and/or lower penalty incertain circumstances [S.73 and S.74 ]certain circumstances [S.73 and S.74 ]certain circumstances [S.73 and S.74 ]certain circumstances [S.73 and S.74 ]certain circumstances [S.73 and S.74 ]

a .a .a .a .a . WWWWWaiver of penalty [Saiver of penalty [Saiver of penalty [Saiver of penalty [Saiver of penalty [S.73]:.73]:.73]:.73]:.73]:

As discussed above, sub-section (1) and sub-section (3) of Section 73 provides for the issue ofshow cause notice or the statement of demand,as the case may be, in case of the wrongavailment and utilization of ITC by any personchargeable with tax. The demand raised underthis provision also entails interest as well aspenalty as prescribed.

However, sub-sections (5) and (6)of Section 73provides an ‘escape route’ to such person. It isprovided that a person chargeable with tax maypay the amount of tax (or ITC) along with interestpayable thereon, on the basis of his ownascertainment of tax (or ITC) or the tax (or ITC) asascertained by the proper officer before serviceof notice or the statement under sub-section (1)or sub-section (3), as the case may be and informthe proper officer in writing of such payment. Sub-section (6) provides that on receipt of suchinformation regarding payment made in termsof sub-section (5), the proper officer shall not serveany notice or statement under sub-section (1) orsub-section (3), as the case may be, in respect oftax (or ITC) so paid or any penalty payable underthe provisions of the Act or the rules madethereunder.

Sub-section (6) of Section 73 uses the phrase‘shall not serve any notice…. or the‘shall not serve any notice…. or the‘shall not serve any notice…. or the‘shall not serve any notice…. or the‘shall not serve any notice…. or thestatement….’ statement….’ statement….’ statement….’ statement….’ and it means that once a person

chargeable with tax pays the appropriate amountof ITC wrongly availed or utilised alongwithinterest on his own ascertainment or as ascertainedby the proper officer but before issue of the showcause notice or statement, the issue of any suchnotice or statement, whether for recovery of theamount of ITC or for penalty payable under anyprovisions of the Act or the rules made thereunderis prohibited.

Judicial pronouncementsJudicial pronouncementsJudicial pronouncementsJudicial pronouncementsJudicial pronouncements:

In MannalalKhetan v. KedarNathKhetan –MannalalKhetan v. KedarNathKhetan –MannalalKhetan v. KedarNathKhetan –MannalalKhetan v. KedarNathKhetan –MannalalKhetan v. KedarNathKhetan –AIR 1977 SC 536, AIR 1977 SC 536, AIR 1977 SC 536, AIR 1977 SC 536, AIR 1977 SC 536, it was held that if wording isnegative i.e. ‘shall not register ’, it will bemandatory provision, as negative words areclearly prohibitory.

See also, UOI v. A. K. Pandey – (2009) 10UOI v. A. K. Pandey – (2009) 10UOI v. A. K. Pandey – (2009) 10UOI v. A. K. Pandey – (2009) 10UOI v. A. K. Pandey – (2009) 10SCC 522;SCC 522;SCC 522;SCC 522;SCC 522;

Prakash Kumar v. State of Gujarat – AIRPrakash Kumar v. State of Gujarat – AIRPrakash Kumar v. State of Gujarat – AIRPrakash Kumar v. State of Gujarat – AIRPrakash Kumar v. State of Gujarat – AIR2005 SC 10752005 SC 10752005 SC 10752005 SC 10752005 SC 1075

Lower penalty [S. 73(8)]Lower penalty [S. 73(8)]Lower penalty [S. 73(8)]Lower penalty [S. 73(8)]Lower penalty [S. 73(8)]

In case a person chargeable with tax has alreadybeen served with a show cause notice or thestatement under sub-section (1) or sub-section (3),as the case may be, of Section 73 in respect ofITC wrongly availed or utilised, he has been givenan option vide sub-section (8) of Section 73 topay the said amount of credit along with interestthereon within 30 days of issue of the show causenotice and if so paid, no penalty shall be payableby such person and all proceedings in respect ofthe said notice will be deemed to be concluded.

Lower penalty in cases involving fraud, etc.Lower penalty in cases involving fraud, etc.Lower penalty in cases involving fraud, etc.Lower penalty in cases involving fraud, etc.Lower penalty in cases involving fraud, etc.[S.74 (5) & (8)][S.74 (5) & (8)][S.74 (5) & (8)][S.74 (5) & (8)][S.74 (5) & (8)]

As explained above, Section 74 of the CGST Actprovides for the issue of show cause notice, interalia, in respect of the ITC wrongly availed orutilised by reason of fraud or wilful misstatementor suppression of facts with intent to evade tax.Such amount would be recoverable with interestas prescribed and the person is also exposed tothe penalty equivalent to the amount of ITCinvolved.

However, as a relief measure, it is provided videsub-section (5) of Section 74 that the personchargeable with tax may pay the amount of tax(or ITC) along with interest thereon and a penaltyequivalent to 15% of such tax (or ITC) on the basis


ARTICLE

of his own ascertainment of such tax (or ITC) orthe tax (or ITC) as ascertained by the proper officerbefore issue of the notice under sub-section (1)and inform the payment particulars to the properofficer. In other words, a person who hasfraudulently or by resorting to wilful suppressionof facts, etc. availed or utilised ITC, may take thebenefit of reduced penalty of 15% of the amountof ITC involved by making the payment of theentire amount of ITC involved along with interestand such reduced quantum of penalty on his ownbefore issue of the show cause notice to him.Once, the payment is made in this manner asprescribed, the issue of notice under Section 74(1)in respect of the tax (or ITC) so paid or any penaltypayable under the Act or the rules madethereunder is prohibited.

However, in case a person has already beenserved with a show cause notice in terms of sub-section (1) of Section 74, he still has the option topay the amount of tax (or ITC) with interest thereonand a penalty equivalent to 25% of such tax (orITC) within 30 days of issue of the notice and inthat case, all the proceedings in respect of thesaid notice shall be deemed to be concluded.

Yet one more opportunity is provided to thedefaulting person who has missed to avail theopportunity provided under sub-section (5) or sub-section (8) of Section 74 of a reduced penalty.Any such person against whom an adjudicationorder has been passed consequent upon theproceedings held on the show cause notice issuedunder Section 74(1), may, within 30 days of thecommunication of the order, pay the amount oftax (or ITC) determined as payable along withinterest thereon and a penalty equivalent to 50%of such tax (or ITC) and if so paid, all proceedingsin respect of the said notice shall be deemed tobe concluded.

Judicial pronouncements:Judicial pronouncements:Judicial pronouncements:Judicial pronouncements:Judicial pronouncements:

In the case of CCE v. Viraj Alloys Ltd. – 2017CCE v. Viraj Alloys Ltd. – 2017CCE v. Viraj Alloys Ltd. – 2017CCE v. Viraj Alloys Ltd. – 2017CCE v. Viraj Alloys Ltd. – 2017(346) ELT(346) ELT(346) ELT(346) ELT(346) ELT 192 (Bom),Bom),Bom),Bom),Bom), the Bombay High Courthas, inter alia, held that the benefit of reducedpenalty will not be available if the payment ofduty along with interest is not made within thestipulated period of 30 days.

II. Provisions relating to ‘Interest’ underProvisions relating to ‘Interest’ underProvisions relating to ‘Interest’ underProvisions relating to ‘Interest’ underProvisions relating to ‘Interest’ underGST laws:GST laws:GST laws:GST laws:GST laws:

The provisions relating to ‘interest on delayedpayment of tax’ are contained in Section 50 of

the CGST Act.

Interest – Meaning ofInterest – Meaning ofInterest – Meaning ofInterest – Meaning ofInterest – Meaning of

The term ‘interest’ is not defined in the GST laws.However, it generally connotes the compensationpayable for usage of other’s money usuallycomputed on a percentage basis. Here, it will beadvantageous to refer to a few dictionarymeanings of the term ‘interest’.

BlackBlackBlackBlackBlack’s L’s L’s L’s L’s Law Dictionary: “aw Dictionary: “aw Dictionary: “aw Dictionary: “aw Dictionary: “Interest in the contextof usage of money is the compensation allowedby law or fixed by the parties for the use orforbearance of borrowed money.”

Corpus JurisSecondum, VCorpus JurisSecondum, VCorpus JurisSecondum, VCorpus JurisSecondum, VCorpus JurisSecondum, Vol.47: ol.47: ol.47: ol.47: ol.47: “Interest is acompensation allowed by law, or fixed by theparties for the use or forbearance of money, or fordetention.”

Interest – Statutory provisions [S.50]:Interest – Statutory provisions [S.50]:Interest – Statutory provisions [S.50]:Interest – Statutory provisions [S.50]:Interest – Statutory provisions [S.50]:

As discussed hereinabove, in case of non-paymentor short payment of tax or erroneous refund orwrong availment or utilisation of ITC by a personchargeable with tax, the proper officer isempowered to issue a show cause notice to suchperson in terms of Section 73(1) or Section 74(1)of the CGST Act, depending upon the existenceor otherwise of the element of fraud or wilfulmisstatement or suppression of facts with intentto evade tax. The notice shall contain the amountof tax (or ITC) and shall call upon the person whythe said amount should not be recovered fromhim alongwith interest payable thereon underSection 50 and penalty should not be imposedon him as prescribed in law.

Section 50 provides for the recovery of ‘intereston delayed payment of tax’ in two circumstancesviz.:

i. levy of interest in case of a failure of aperson to pay the tax or any part thereofwithin the prescribed period [S.50(1)refers]; and

ii. levy of interest in case of an undue orexcess claim of ITC or undue or excessreduction in output tax liability [S.50(3)refers].

For the purpose of the present article, theprovisions of Section 50(3) are only brieflydiscussed hereinafter.

ARTICLE


Interest on undue or excess claim of ITInterest on undue or excess claim of ITInterest on undue or excess claim of ITInterest on undue or excess claim of ITInterest on undue or excess claim of ITCCCCC[S.50 (3)]:[S.50 (3)]:[S.50 (3)]:[S.50 (3)]:[S.50 (3)]:

Sub-section (3) of Section 50 provides that if ataxable person makes undue or excess claim ofITC under Section 42(10) or undue or excessreduction in output tax liability under Section43(10), he shall pay interest on such undue orexcess claim or on such undue or excess reduction,as the case may be, as such rate not exceeding24% as may be notified by the government onthe recommendations of the Council.

Vide Notification No. 13/2017-CT dt.28.06.2017 (parallel Notification No. 6/2017-IT dt. 28.06.2017), the government had notified‘24%’ 24%’ 24%’ 24%’ 24%’ as the rate of interest for the purpose ofSection 50(3) of the Act.

It may be noted here that in case of failure of aperson to pay tax or any part thereof within theprescribed period, the rate of interest leviableunder Section 50 (1) has been notified at ‘18%’18%’18%’18%’18%’vide the aforesaid Notifications.

Judicial pronouncementsJudicial pronouncementsJudicial pronouncementsJudicial pronouncementsJudicial pronouncements:

i. Provisions relating to interest are theProvisions relating to interest are theProvisions relating to interest are theProvisions relating to interest are theProvisions relating to interest are theprovisions of substantive law:provisions of substantive law:provisions of substantive law:provisions of substantive law:provisions of substantive law:

In In In In In J. K. Synthetics Ltd. v. CTO – AIR 1994J. K. Synthetics Ltd. v. CTO – AIR 1994J. K. Synthetics Ltd. v. CTO – AIR 1994J. K. Synthetics Ltd. v. CTO – AIR 1994J. K. Synthetics Ltd. v. CTO – AIR 1994SC 2393, SC 2393, SC 2393, SC 2393, SC 2393, the Constitution Bench of theSupreme Court held that the provisionsrelating to the charging and levying of interestin a statute are provisions of substantive law.

In the case of CCE v. Ukai PradeshCCE v. Ukai PradeshCCE v. Ukai PradeshCCE v. Ukai PradeshCCE v. Ukai PradeshSahakariKhandUdyogMandali Ltd. –SahakariKhandUdyogMandali Ltd. –SahakariKhandUdyogMandali Ltd. –SahakariKhandUdyogMandali Ltd. –SahakariKhandUdyogMandali Ltd. –2011 (271) ELT 32 (Guj.), 2011 (271) ELT 32 (Guj.), 2011 (271) ELT 32 (Guj.), 2011 (271) ELT 32 (Guj.), 2011 (271) ELT 32 (Guj.), the GujaratHigh Court held that interest can be leviedand charged on delayed payment of tax onlyif the statute that levies and charges the taxmakes a substantive provision in this regard.

In a significant judgment recently deliveredby the Guwahati High Court on 24thNovember, 2017 in the case of ONGC Ltd.ONGC Ltd.ONGC Ltd.ONGC Ltd.ONGC Ltd.v. UOI,v. UOI,v. UOI,v. UOI,v. UOI, it is held that in absence of anysubstantive provision in the Oil Industry(Development) Act, 1974 which obliged theAssessees to pay interest on delayed paymentof cess, the interest is not leviable on thedelayed payment of cess. The High Courtrejected the contention of the Revenue thatinterest was applicable in terms of Section15(4) of the said Act which adopts the

provisions of Central Excise Act and rulesmade thereunder in relation to levy andcollection of excise duties. The High Court,while upholding the decision of the CESTAT,referred to the decision of the Supreme Courtin India Carbon Ltd. vs. The State ofCarbon Ltd. vs. The State ofCarbon Ltd. vs. The State ofCarbon Ltd. vs. The State ofCarbon Ltd. vs. The State ofAssam - AIR 1977 SC 3054,Assam - AIR 1977 SC 3054,Assam - AIR 1977 SC 3054,Assam - AIR 1977 SC 3054,Assam - AIR 1977 SC 3054, wherein theApex Court, after considering an identicalprovision of the Central Sales Tax Act, hadheld that interest on tax due could be chargedonly when the taxing statute made asubstantive provision to pay interest fordelayed payment of tax and not otherwise.

See also,VVS Sugar v. Govt. of AP – AIRVVS Sugar v. Govt. of AP – AIRVVS Sugar v. Govt. of AP – AIRVVS Sugar v. Govt. of AP – AIRVVS Sugar v. Govt. of AP – AIR1999 SC 2124 (SC 5 Member Bench)1999 SC 2124 (SC 5 Member Bench)1999 SC 2124 (SC 5 Member Bench)1999 SC 2124 (SC 5 Member Bench)1999 SC 2124 (SC 5 Member Bench)

i i .i i .i i .i i .i i . Whether the discretionary powers existWhether the discretionary powers existWhether the discretionary powers existWhether the discretionary powers existWhether the discretionary powers existin case of levy of interest?in case of levy of interest?in case of levy of interest?in case of levy of interest?in case of levy of interest?

In CCE v. Padmavati V.V. Patil SSK Ltd.-CCE v. Padmavati V.V. Patil SSK Ltd.-CCE v. Padmavati V.V. Patil SSK Ltd.-CCE v. Padmavati V.V. Patil SSK Ltd.-CCE v. Padmavati V.V. Patil SSK Ltd.-2007 (215) ELT 23 (Bom), 2007 (215) ELT 23 (Bom), 2007 (215) ELT 23 (Bom), 2007 (215) ELT 23 (Bom), 2007 (215) ELT 23 (Bom), the BombayHigh Court held that interest is a civil liabilityof assessee who has retained amount ofpublic money. Interest is mandatory, even ifevasion of duty is not malafide or intentional.

In Futnani Steels v. CCE – 2009 (235)Futnani Steels v. CCE – 2009 (235)Futnani Steels v. CCE – 2009 (235)Futnani Steels v. CCE – 2009 (235)Futnani Steels v. CCE – 2009 (235)ELT 869 (TELT 869 (TELT 869 (TELT 869 (TELT 869 (Trib), rib), rib), rib), rib), the CESTAT held that interestfor delayed payment is a statutory liabilityand accrues automatically. It is payable evenif there was a bonafide doubt or mistake. Itwas further held that the Tribunal cannot setaside the interest.

i i i .i i i .i i i .i i i .i i i . Interest is payable even if duty/tax isInterest is payable even if duty/tax isInterest is payable even if duty/tax isInterest is payable even if duty/tax isInterest is payable even if duty/tax ispaid before issue of show cause notice:paid before issue of show cause notice:paid before issue of show cause notice:paid before issue of show cause notice:paid before issue of show cause notice:

In CCE vs. Karnataka Soaps – 2011CCE vs. Karnataka Soaps – 2011CCE vs. Karnataka Soaps – 2011CCE vs. Karnataka Soaps – 2011CCE vs. Karnataka Soaps – 2011(267) ELT 593 (Kar.), (267) ELT 593 (Kar.), (267) ELT 593 (Kar.), (267) ELT 593 (Kar.), (267) ELT 593 (Kar.), the Karnataka HighCourt held that interest is payable even if dutyis paid before issue of show cause notice.

See also, CC v. TCC v. TCC v. TCC v. TCC v. Toyota Kirloskar Motors –oyota Kirloskar Motors –oyota Kirloskar Motors –oyota Kirloskar Motors –oyota Kirloskar Motors –2015 (324) ELT 636 (SC)2015 (324) ELT 636 (SC)2015 (324) ELT 636 (SC)2015 (324) ELT 636 (SC)2015 (324) ELT 636 (SC)

i vi vi vi vi v..... Interest is not payable when a time-Interest is not payable when a time-Interest is not payable when a time-Interest is not payable when a time-Interest is not payable when a time-barred demand is voluntarily honoured:barred demand is voluntarily honoured:barred demand is voluntarily honoured:barred demand is voluntarily honoured:barred demand is voluntarily honoured:

In an interesting case, the Gujarat High Courtheld that interest is not payable if excise dutyis paid voluntarily by assessee before showcause notice even when demand was time-barred – CCE v. Gujarat NarmadaCCE v. Gujarat NarmadaCCE v. Gujarat NarmadaCCE v. Gujarat NarmadaCCE v. Gujarat NarmadaFertilizers Co. Ltd. -2012 (285) ELT 336Fertilizers Co. Ltd. -2012 (285) ELT 336Fertilizers Co. Ltd. -2012 (285) ELT 336Fertilizers Co. Ltd. -2012 (285) ELT 336Fertilizers Co. Ltd. -2012 (285) ELT 336(Guj) .(Guj) .(Guj) .(Guj) .(Guj) .


ARTICLE

vvvvv..... Interest is payable even if Cenvat CreditInterest is payable even if Cenvat CreditInterest is payable even if Cenvat CreditInterest is payable even if Cenvat CreditInterest is payable even if Cenvat Creditwas available to the recipient unit ofwas available to the recipient unit ofwas available to the recipient unit ofwas available to the recipient unit ofwas available to the recipient unit ofthe same assessee:the same assessee:the same assessee:the same assessee:the same assessee:

in the case of Bayers ABS Ltd. v. CCE –Bayers ABS Ltd. v. CCE –Bayers ABS Ltd. v. CCE –Bayers ABS Ltd. v. CCE –Bayers ABS Ltd. v. CCE –2012 (281) ELT 296 (T2012 (281) ELT 296 (T2012 (281) ELT 296 (T2012 (281) ELT 296 (T2012 (281) ELT 296 (Tri),ri),ri),ri),ri),assesse paid theduty without contesting and took Cenvatcredit in its other unit where goods were sent.It was argued by the assessee that if duty waspaid earlier, the recipient unit could havetaken Cenvat credit earlier and hence interestis not payable. However, the CESTAT, by amajority order (2 v.1) held that interest is stillpayable. (Minority view was that it was arevenue neutral exercise and hence interest isnot payable).

v i .v i .v i .v i .v i . Interest is not payable when CenvatInterest is not payable when CenvatInterest is not payable when CenvatInterest is not payable when CenvatInterest is not payable when CenvatCredit was available to other companyCredit was available to other companyCredit was available to other companyCredit was available to other companyCredit was available to other company,,,,,or for captive consumption:or for captive consumption:or for captive consumption:or for captive consumption:or for captive consumption:

In Paper Products Ltd. v. CCE – 2013Paper Products Ltd. v. CCE – 2013Paper Products Ltd. v. CCE – 2013Paper Products Ltd. v. CCE – 2013Paper Products Ltd. v. CCE – 2013(292) ELT 389 (CESTAT), (292) ELT 389 (CESTAT), (292) ELT 389 (CESTAT), (292) ELT 389 (CESTAT), (292) ELT 389 (CESTAT), it was held thatinterest is not payable when Cenvat Creditwas available to other company (sister unitin this case).

In Reliance Industries Ltd. v. CCE – 2013Reliance Industries Ltd. v. CCE – 2013Reliance Industries Ltd. v. CCE – 2013Reliance Industries Ltd. v. CCE – 2013Reliance Industries Ltd. v. CCE – 2013(292) ELT 378 (CESTAT), (292) ELT 378 (CESTAT), (292) ELT 378 (CESTAT), (292) ELT 378 (CESTAT), (292) ELT 378 (CESTAT), it was held thatinterest is not payable on captive consumptionwhen Cenvat Credit was available.

v i i .v i i .v i i .v i i .v i i . Whether interest is automatic or aWhether interest is automatic or aWhether interest is automatic or aWhether interest is automatic or aWhether interest is automatic or ademand is necessary?demand is necessary?demand is necessary?demand is necessary?demand is necessary?

In Haji LalMohd. Biri Works v. State ofHaji LalMohd. Biri Works v. State ofHaji LalMohd. Biri Works v. State ofHaji LalMohd. Biri Works v. State ofHaji LalMohd. Biri Works v. State ofUP – AIR 1973 SC 2226, UP – AIR 1973 SC 2226, UP – AIR 1973 SC 2226, UP – AIR 1973 SC 2226, UP – AIR 1973 SC 2226, the SupremeCourt held that when liability to pay interestis automatic and arises by operation of law,it is not necessary to make an assessment inrespect of interest or issue notice of demandin respect of interest.

A similar view was expressed in Royal BootRoyal BootRoyal BootRoyal BootRoyal BootHouse v. State of J & K – (1984) 56 STCHouse v. State of J & K – (1984) 56 STCHouse v. State of J & K – (1984) 56 STCHouse v. State of J & K – (1984) 56 STCHouse v. State of J & K – (1984) 56 STC21 SC; CST v. Qureshi Crucible Centre21 SC; CST v. Qureshi Crucible Centre21 SC; CST v. Qureshi Crucible Centre21 SC; CST v. Qureshi Crucible Centre21 SC; CST v. Qureshi Crucible Centre– AIR 1994 SC 25; PrahladRai v. STO –– AIR 1994 SC 25; PrahladRai v. STO –– AIR 1994 SC 25; PrahladRai v. STO –– AIR 1994 SC 25; PrahladRai v. STO –– AIR 1994 SC 25; PrahladRai v. STO –AIR 1991 SC 1737; CCE v. K.L. ConcastAIR 1991 SC 1737; CCE v. K.L. ConcastAIR 1991 SC 1737; CCE v. K.L. ConcastAIR 1991 SC 1737; CCE v. K.L. ConcastAIR 1991 SC 1737; CCE v. K.L. Concast– 2007 (209) ELT 425 (T– 2007 (209) ELT 425 (T– 2007 (209) ELT 425 (T– 2007 (209) ELT 425 (T– 2007 (209) ELT 425 (Tri-SMB); CST v.ri-SMB); CST v.ri-SMB); CST v.ri-SMB); CST v.ri-SMB); CST v.Pepsi Cola – 2007 (8) STR 246 (TPepsi Cola – 2007 (8) STR 246 (TPepsi Cola – 2007 (8) STR 246 (TPepsi Cola – 2007 (8) STR 246 (TPepsi Cola – 2007 (8) STR 246 (Tri-ri-ri-ri-ri-SMB).SMB).SMB).SMB).SMB).

v i i i .v i i i .v i i i .v i i i .v i i i . Whether the period of limitation isWhether the period of limitation isWhether the period of limitation isWhether the period of limitation isWhether the period of limitation isinvokable for the demand of interest?invokable for the demand of interest?invokable for the demand of interest?invokable for the demand of interest?invokable for the demand of interest?

However, though as per the aforesaidjudgments, a formal demand is not required

for recovery of interest and therefore, the timelimit for raising demand for interest wouldalso not apply as a corollary, the issue isdebatable. It has been held that when aspecific provision for demand of interest ismade in the statute like excise law, the timelimit for raising the demand of duty will alsoapply to interest also. Nonetheless, even onthis aspect, there are divergent viewsexpressed by the differential judicial forums.

In ANS Steel TANS Steel TANS Steel TANS Steel TANS Steel Tubes Ltd. v. CCE – 2011ubes Ltd. v. CCE – 2011ubes Ltd. v. CCE – 2011ubes Ltd. v. CCE – 2011ubes Ltd. v. CCE – 2011(265) ELT 127 (T(265) ELT 127 (T(265) ELT 127 (T(265) ELT 127 (T(265) ELT 127 (Tri-Del.), ri-Del.), ri-Del.), ri-Del.), ri-Del.), the SingleMember Bench of the CESTAT held that theasssessee by not informing the departmentregarding non-payment of interest on differedpayment of duty on supplementary invoices,had kept it in dark regarding the same andtherefore, the extended period was invokablefor demand of interest.

However, the judgment of the Tribunal wasreversed by the Punjab & Haryana High Courtin ANS Steel TANS Steel TANS Steel TANS Steel TANS Steel Tubes Ltd. v. CCE – 2015ubes Ltd. v. CCE – 2015ubes Ltd. v. CCE – 2015ubes Ltd. v. CCE – 2015ubes Ltd. v. CCE – 2015(318) ELT A 160 (P&H) (318) ELT A 160 (P&H) (318) ELT A 160 (P&H) (318) ELT A 160 (P&H) (318) ELT A 160 (P&H) where the HighCourt answered the substantial questions oflaw as framed therein in favour of theAppellant-company. The High Court took duenote of the judgment of the Delhi High Courtin the case of Hindustan Insecticides Ltd.Hindustan Insecticides Ltd.Hindustan Insecticides Ltd.Hindustan Insecticides Ltd.Hindustan Insecticides Ltd.v. CCE – 2013 (297) ELT 332 (Del.) v. CCE – 2013 (297) ELT 332 (Del.) v. CCE – 2013 (297) ELT 332 (Del.) v. CCE – 2013 (297) ELT 332 (Del.) v. CCE – 2013 (297) ELT 332 (Del.) inwhich case, the Delhi High Court, relying uponthe judgements in Kwality Ice Cream Co.Kwality Ice Cream Co.Kwality Ice Cream Co.Kwality Ice Cream Co.Kwality Ice Cream Co.v. UOI – 2012 (281) ELT 507 (Del.) andv. UOI – 2012 (281) ELT 507 (Del.) andv. UOI – 2012 (281) ELT 507 (Del.) andv. UOI – 2012 (281) ELT 507 (Del.) andv. UOI – 2012 (281) ELT 507 (Del.) andCCE v. TVS Whirlpool Ltd. – 2000 (119)CCE v. TVS Whirlpool Ltd. – 2000 (119)CCE v. TVS Whirlpool Ltd. – 2000 (119)CCE v. TVS Whirlpool Ltd. – 2000 (119)CCE v. TVS Whirlpool Ltd. – 2000 (119)ELT A 177 (SC), ELT A 177 (SC), ELT A 177 (SC), ELT A 177 (SC), ELT A 177 (SC), held that as the period oflimitation that applies to recovery of theprincipal amount shall also apply to the claimfor interest thereon, the demand is time-barred and had reversed the judgment of theCESTAT under challenge before it.

A similar view is expressed in CCE v. VAECCE v. VAECCE v. VAECCE v. VAECCE v. VAEVKN Industries Pvt. Ltd. – 2015 (332)VKN Industries Pvt. Ltd. – 2015 (332)VKN Industries Pvt. Ltd. – 2015 (332)VKN Industries Pvt. Ltd. – 2015 (332)VKN Industries Pvt. Ltd. – 2015 (332)ELT 269 (P&H).ELT 269 (P&H).ELT 269 (P&H).ELT 269 (P&H).ELT 269 (P&H).

ix.ix.ix.ix.ix. Whether interest liability arises even ifWhether interest liability arises even ifWhether interest liability arises even ifWhether interest liability arises even ifWhether interest liability arises even ifITITITITITC is not utilised?C is not utilised?C is not utilised?C is not utilised?C is not utilised?

Section 73 and 74 of the CGST Act, inter alia,provides for the issue of demand in case ofITC has been wrongly availed or utilised,wrongly availed or utilised,wrongly availed or utilised,wrongly availed or utilised,wrongly availed or utilised,depending upon the existence or otherwiseof the element of fraud, etc. The use of thedisjunctive word ‘ororororor’’’’’ in the provision gives

ARTICLE


rise to an important issue as to whether theinterest will still be payable even if the taxableperson has not utilised the ITC claimed bythe department as wrongly availed?

A similar question had arisen in the contextof the Rule 14 of the erstwhile CCR as in forceprior to its amendment w.e.f. 17.03.2012 videNotification No. 18/2012-CE (NT) dt.17.03.2012. Rule 14, inter alia, providingfor the recovery of Cenvat Credit wronglytaken/utilised and as was in force prior to17.03.2012 also employed the disjunctiveword ‘ororororor’ ’ ’ ’ ’ with the opening part of the Rulereading as ‘where the Cenvat Credit has beentaken or or or or or utilised wrongly……’.

The question that had arisen before theSupreme Court in the case of UOI v. Ind-UOI v. Ind-UOI v. Ind-UOI v. Ind-UOI v. Ind-Swift Laboratories Ltd.- 2011(265) ELTSwift Laboratories Ltd.- 2011(265) ELTSwift Laboratories Ltd.- 2011(265) ELTSwift Laboratories Ltd.- 2011(265) ELTSwift Laboratories Ltd.- 2011(265) ELT3 (SC) 3 (SC) 3 (SC) 3 (SC) 3 (SC) wherein the Supreme Court held thatonce the credit is taken, the beneficiary is atliberty to utilise the same, immediatelythereafter, subject to the Credit rules. Relyingon its own judgment in CST, UP v. ModiCST, UP v. ModiCST, UP v. ModiCST, UP v. ModiCST, UP v. ModiSugar Mills Ltd. – AIR 1961 SC 1047, Sugar Mills Ltd. – AIR 1961 SC 1047, Sugar Mills Ltd. – AIR 1961 SC 1047, Sugar Mills Ltd. – AIR 1961 SC 1047, Sugar Mills Ltd. – AIR 1961 SC 1047, itwas observed by the Court that taxing statuteshall not be interpreted on any presumptionsor assumptions and the Court must looksquarely at the words of the statute to interpretthem. Therefore, there is no necessity ofreading the word ‘OROROROROR’ ’ ’ ’ ’ as ‘ANDANDANDANDAND’.’.’.’.’.

It appears that this judgment was renderedconsidering the antecedents of the caseregarding false claim of Modvat Credit at theavailment stage itself.

Subsequently, in an interesting development,the Karnataka High Court in the case of CCECCECCECCECCEv. Bill ForgePvt. Ltd. – 2012 (279) ELTv. Bill ForgePvt. Ltd. – 2012 (279) ELTv. Bill ForgePvt. Ltd. – 2012 (279) ELTv. Bill ForgePvt. Ltd. – 2012 (279) ELTv. Bill ForgePvt. Ltd. – 2012 (279) ELT209 (Kar.) 209 (Kar.) 209 (Kar.) 209 (Kar.) 209 (Kar.) very succinctly brought out theeffect of the aforesaid judgment of theSupreme Court and held that creditavailment is only a book entry and actualutilisation happens when the excise dutypayable is short paid to the extent of creditavailed. Interest, being compensatory, can becalculated only when these set off happensand payment is withheld to that extent. If theassessee reversed the credit and did not usethe credit for setting off, the question ofpayment of interest does not arise.

Mercifully, the CBEC took note of the

consternation created by the aforesaidjudgment of the Supreme Court and promptlysubstituted the word ‘ororororor ’ ’ ’ ’ ’ by ‘and’ and’ and’ and’ and’ videNotification dated 17.03.2012.Subsequently, entire Rule 14 was substitutedby Notification No. 06/2015-CE (NT) dt.01.03.2015 explicitly reflecting the nature ofinterest, the trigger point for the levy of interestand the legal position as amplified withregard the liability to interest by the KarnatakaHigh Court in the case of Bill ForgePvt. Ltd.Bill ForgePvt. Ltd.Bill ForgePvt. Ltd.Bill ForgePvt. Ltd.Bill ForgePvt. Ltd.(supra).(supra).(supra).(supra).(supra).

However, for some inexplicable reason,Section 73 and 74 of the CGST Act has onceagain used the same disjunctive word ‘ororororor’ ’ ’ ’ ’ in‘where input tax credit has been wronglyavailed or utilised…..’. Consequently, theissue as to whether interest liability wouldarise even when ITC is merely availed but notutilised, may raise its ugly head again ! Onecan only fervently hope that the GST Councilwill take note of this issue and a suitablecorrective measure will be taken for theamendment of the provision by the Parliamentso as to avoid any unpleasant dispute on thisissue!

Conclusion:Conclusion:Conclusion:Conclusion:Conclusion:

From the close study of the various offences listedin Section 122 and in particular, those relating toITC, it will be observed that the same closelyresemble to the frauds distinct to the VAT/GST likefalse claims for credit or refund, bogus traders or‘invoice mills’, shadow economy fraud, carouselfraud, etc. The legislature, with a view to checkthe tax evasion and frauds, foster tax complianceand enhance revenue collection, has made theprovisions for the stringent penalties which followthe ‘standard deterrence model’ of regulation.

However, even if one accepts the inevitability ofsuch harsh penalty measures considering therampant tax frauds, particularly relating to ITC,being witnessed in the country, it is essential thatthe penal provisions are clear and unambiguous.Unfortunately, the penal provisions of the GST lawsleave much to be desired on this count.

The larger and the important question, however,is how far and to what extent the tax penaltiesencourage the tax compliance? The variousfindings suggest that the penalties per se aregenerally viewed as being limited in influencing


ARTICLE

compliance behaviour. As a matter of fact, therelationship between tax penalties and taxcompliance needs serious examination. [Doran,Doran,Doran,Doran,Doran,2009]2009]2009]2009]2009]

Regulatory/administrative policies based only onenforcement may well be a reasonable startingpoint but not a good ending point for increasingtax compliance. Indeed, what is needed is amultifaceted policy approach that includesenforcement, but one that also emphasises suchthings as service, especially trust. People exhibita remarkable diversity in their behaviour. Thereare individuals who always cheat and those whoalways comply, some who behave as if theymaximise the expected utility of the tax evasiongamble, others who seem to overweight lawprobabilities, individuals who respond in different

ways to changes in their tax burden, some whoare at times co-operative and at other times free-riders, and many who seem to be guided by suchthings as social norms or moral sentiments. Anygovernment approach toward tax compliancemust address this “full house” of behaviours bydevising a comparable “full house” of policies tocombat tax evasion. [Alm, 2013] [Alm, 2013] [Alm, 2013] [Alm, 2013] [Alm, 2013]

“A severe king (meting out unjust“A severe king (meting out unjust“A severe king (meting out unjust“A severe king (meting out unjust“A severe king (meting out unjustpunishment) is hated by the people hepunishment) is hated by the people hepunishment) is hated by the people hepunishment) is hated by the people hepunishment) is hated by the people heterrorises, while one who is too lenient isterrorises, while one who is too lenient isterrorises, while one who is too lenient isterrorises, while one who is too lenient isterrorises, while one who is too lenient isheld in contempt by his own people.held in contempt by his own people.held in contempt by his own people.held in contempt by his own people.held in contempt by his own people.Whoever imposes just and deservedWhoever imposes just and deservedWhoever imposes just and deservedWhoever imposes just and deservedWhoever imposes just and deservedpunishment is respected and honoured”.punishment is respected and honoured”.punishment is respected and honoured”.punishment is respected and honoured”.punishment is respected and honoured”.

[Kautilya in “The Arthashastra”][Kautilya in “The Arthashastra”][Kautilya in “The Arthashastra”][Kautilya in “The Arthashastra”][Kautilya in “The Arthashastra”]

Repeating the same mistakes over and over is unnecessary.When lessons in life repeat, it's a call to look at things closely tofind deeper understanding.

ARTICLE


In first remarks after the GST Council’s decisionsin its 23rd meeting, our Hon’ble PrimeMinister Shri Narendra Moditweeted that “jan“jan“jan“jan“janbhagidari”bhagidari”bhagidari”bhagidari”bhagidari” was “at the core” of the government’sfunctioning and all its decisions were “people-“people-“people-“people-“people-inspired, people-friendly and people-inspired, people-friendly and people-inspired, people-friendly and people-inspired, people-friendly and people-inspired, people-friendly and people-centric”centric”centric”centric”centric”. Indeed, the GST Council in its 23rd

meeting has made sweeping changes to thepresent framework of GST, allowing taxpayersand small businesses to breathe easy. Importantly,the highest GST tax slab was slashed to retainonly 50 items at 28% tax bracket. Effective fromNovember 15, 2017, as many as around 233items from chocolates, detergents to granite andmarble will become cheaper - 177 items movingfrom 28% to 18%, 2 items from 28% to 12% andaround other 54 items also moving to lower taxbrackets. As per government algorithm, thesemeasures are expected to cost the exchequeraround Rs. 20,000 crore.

Additionally, the GST Council has come out witha string of deadline relaxations and lowering ofpenalty/ late fees for delayed filing of return alongwith an increase in the annual turnover thresholdfor the composition scheme to Rs 1.5 crore(overall limit to be increased to Rs. 2 Cr) from therecently revised Rs 1 crore. Taxpayers would filesummary return in Form GSTR-3B along withpayment of tax by 20th of the succeeding monthtill March, 2018. Further filing of GSTR 2 & 3 isdone away with till March, 2018 and requiresfiling of details in FORM GSTR-1 only till March2018, with taxpayers divided into two categories- Taxpayers with annual aggregate turnover

Important Developments in GST

CA Bimal JainFCA, FCS, LLB, B.Com (Hons)

upto Rs. 1.5 crore filing quarterly GSTR-1 andthose with annual aggregate turnover morethan Rs. 1.5 crore filing GSTR-1 on monthlybasis, as per revised frequency provided. Eatingout will also be easier as all standalone restaurantsare now going to be taxed at 5% without ITC, asagainst attracting different rates based on whetheror not they were air-conditioned.

Gist of the changes is discussed in this article forease of reference.

Rationalisation of GST rates on certainRationalisation of GST rates on certainRationalisation of GST rates on certainRationalisation of GST rates on certainRationalisation of GST rates on certaingoodsgoodsgoodsgoodsgoods:

The Central Government vide Notification No.Notification No.Notification No.Notification No.Notification No.41/2017 - Central T41/2017 - Central T41/2017 - Central T41/2017 - Central T41/2017 - Central Tax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedNovember 14, 2017November 14, 2017November 14, 2017November 14, 2017November 14, 2017has amended NotificationNo. 01/2017 - Central Tax (Rate) dated June 28,2017 to, inter-alia, reduce GST rate onapproximately 177 items earlier falling in 28%slab to 18% slab, leaving only 50 items that willstill be taxed at GST rate of 28%.Further, the CBECvide Press Release dated November 16,Press Release dated November 16,Press Release dated November 16,Press Release dated November 16,Press Release dated November 16,20172017201720172017 has grouped these items for easy referencewhich includes beauty or make-up preparations,slabs of marbles and granite, ceramic tiles,chocolates, chewing gum/bubble gum etc.

Additionally, 2 items have been moved from 28%to 12% and around other 54 items also movedto lower tax brackets.

The changes are effective from 00hrs on 15th ofNovember, 2017.

Note: Please also see Notification No. 43/Notification No. 43/Notification No. 43/Notification No. 43/Notification No. 43/

GST


ARTICLE

2017 – Integrated T2017 – Integrated T2017 – Integrated T2017 – Integrated T2017 – Integrated Tax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedNovember 14, 2017November 14, 2017November 14, 2017November 14, 2017November 14, 2017.

Changes relating to GST rates onChanges relating to GST rates onChanges relating to GST rates onChanges relating to GST rates onChanges relating to GST rates onrestaurant and other services:restaurant and other services:restaurant and other services:restaurant and other services:restaurant and other services:

The Central Government vide Notification No.Notification No.Notification No.Notification No.Notification No.46/2017-Central T46/2017-Central T46/2017-Central T46/2017-Central T46/2017-Central Tax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedNovember 14, 2017November 14, 2017November 14, 2017November 14, 2017November 14, 2017has made the followingchanges in GST rates of restaurant and otherservices:

ARTICLE


The changes are effective from 00hrs on 15th ofNovember, 2017.

Notes:

1) Outdoor catering will continue to be at 18%with full ITC.

2) Please also see Notification No. 48/2017Notification No. 48/2017Notification No. 48/2017Notification No. 48/2017Notification No. 48/2017– Integrated T– Integrated T– Integrated T– Integrated T– Integrated Tax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedNovember 14, 2017November 14, 2017November 14, 2017November 14, 2017November 14, 2017.

Amendment in the CGST Rules, 2017Amendment in the CGST Rules, 2017Amendment in the CGST Rules, 2017Amendment in the CGST Rules, 2017Amendment in the CGST Rules, 2017

The Central Government vide Notification No.Notification No.Notification No.Notification No.Notification No.55/2017 – Central T55/2017 – Central T55/2017 – Central T55/2017 – Central T55/2017 – Central Tax dated Novemberax dated Novemberax dated Novemberax dated Novemberax dated November15, 201715, 201715, 201715, 201715, 2017 has amended the CGST Rules,2017. Some of the technical changesSome of the technical changesSome of the technical changesSome of the technical changesSome of the technical changes a r eas under:

No reversal in respect of services suppliedto Nepal & Bhutan: Manner ofdetermination of ITC in respect of inputs/input services/ capital goods and reversalthereof in specified cases is containedunder Rule 42 and Rule 43 of the CGSTRules, 2017.

Now, an explanation has been inserted inRule 43, after sub-rule (2), to provide forexclusion of value of supply of services toNepal and Bhutan, against payment inIndian Rupees, at the time of calculatingaggregate value of exempt supplies. InInInInInnutshell, i t can be said that ITnutshell, i t can be said that ITnutshell, i t can be said that ITnutshell, i t can be said that ITnutshell, i t can be said that ITC inC inC inC inC inrespect of services supplied to Nepalrespect of services supplied to Nepalrespect of services supplied to Nepalrespect of services supplied to Nepalrespect of services supplied to Nepaland Bhutan, against payment inand Bhutan, against payment inand Bhutan, against payment inand Bhutan, against payment inand Bhutan, against payment inIndian Rupees, need not to beIndian Rupees, need not to beIndian Rupees, need not to beIndian Rupees, need not to beIndian Rupees, need not to bereversed.reversed.reversed.reversed.reversed.

Note – – – – – Supply of services having placeof supply in Nepal and Bhutan, againstpayment in Indian Rupees have beenexempted vide Notification No. 42/2017-Integrated Tax (Rate) dated October 27,2017.

Issue of consolidated invoice by bankingcompanies made optional: In Rule 54, in

sub-rule (2), for the words “supplier shallshallshallshallshallissue”, the words “supplier maymaymaymaymay issue” issubstituted to make it optional for aninsurer or a banking company or afinancial institution, including a non-banking financial company, to issue aconsolidated tax invoice or any otherdocument in lieu thereof for supply ofservices made during a month at the endof the month.

New Rules inserted on “Manual filing &processing”: After Rule 97 and Rule107,new Rules (Rule 97A and Rule 107A)has been inserted to provide for manualmanualmanualmanualmanualfi l ing of application, intimation,fi l ing of application, intimation,fi l ing of application, intimation,fi l ing of application, intimation,fi l ing of application, intimation,replyreplyreplyreplyreply, declaration, statement or, declaration, statement or, declaration, statement or, declaration, statement or, declaration, statement orissuance of the notice, order orissuance of the notice, order orissuance of the notice, order orissuance of the notice, order orissuance of the notice, order orcertificate in required forms for thecertificate in required forms for thecertificate in required forms for thecertificate in required forms for thecertificate in required forms for thepurpose of refund and advancepurpose of refund and advancepurpose of refund and advancepurpose of refund and advancepurpose of refund and advancerulingrulingrulingrulingruling.

(Process of manual filing and processingof refund claims in respect of zero-ratedsupplies has been detailed out in CircularCircularCircularCircularCircularNo. 17/17/2017 – GST datedNo. 17/17/2017 – GST datedNo. 17/17/2017 – GST datedNo. 17/17/2017 – GST datedNo. 17/17/2017 – GST datedNovember 15, 2017November 15, 2017November 15, 2017November 15, 2017November 15, 2017)

New Refund forms: For the purpose ofclaiming refund manually by casualtaxable person or non-resident taxableperson, tax deductor, tax collector andother registered taxable person, “F“F“F“F“FormormormormormGST RFDGST RFDGST RFDGST RFDGST RFD-01 A-01 A-01 A-01 A-01 A””””” and “F“F“F“F“Form GST RFDorm GST RFDorm GST RFDorm GST RFDorm GST RFD-----01 B01 B01 B01 B01 B””””” has been inserted after Form GSTRFD-01.

Return filing made easyReturn filing made easyReturn filing made easyReturn filing made easyReturn filing made easy

The return filing process has been furthersimplified in the following manner:

All taxpayers would file monthly return inForm GSTR-3B along with payment oftaxes by 20th of the succeeding month tillMarch, 2018 – Notification No. 56/Notification No. 56/Notification No. 56/Notification No. 56/Notification No. 56/2017-Central T2017-Central T2017-Central T2017-Central T2017-Central Tax dated Novemberax dated Novemberax dated Novemberax dated Novemberax dated November15, 201715, 201715, 201715, 201715, 2017.


ARTICLE

For filing of details in FFFFForm GSTRorm GSTRorm GSTRorm GSTRorm GSTR-1-1-1-1-1 tillMarch 2018, taxpayers would be dividedinto two categories. Details of these twocategories along with the last date of filingGSTR-1 are as follows:

a) Taxpayers with annual aggregate turnoverup to Rs. 1.5 Crore need to file GSTR-1on quarterly basis as per followingfrequency: (Notification No. 57/Notification No. 57/Notification No. 57/Notification No. 57/Notification No. 57/2017– Central T2017– Central T2017– Central T2017– Central T2017– Central Tax dated Novemberax dated Novemberax dated Novemberax dated Novemberax dated November15, 2017)15, 2017)15, 2017)15, 2017)15, 2017)

b) Taxpayers with annual aggregate turnovermore than Rs. 1.5 Crore need to file GSTR-1 on monthly basis as per following

frequency: (Notification No. 58/2017Notification No. 58/2017Notification No. 58/2017Notification No. 58/2017Notification No. 58/2017– Central T– Central T– Central T– Central T– Central Tax dated November 15,ax dated November 15,ax dated November 15,ax dated November 15,ax dated November 15,20172017201720172017)

Note: The time period for filing GSTR-2 and GSTR-3 for the months of July 2017 to March 2018would be worked out by a Committee of Officers.Therefore, filing of GSTR-1 will continue for theentire period without requiring filing of GSTR-2 &GSTR-3 for the previous month / period.

Extension of dates for furnishing other FExtension of dates for furnishing other FExtension of dates for furnishing other FExtension of dates for furnishing other FExtension of dates for furnishing other Formsormsormsormsorms

Taking cognizance of the late availability or unavailability of some forms on the GSTN portal, it hasbeen decided that the due dates for furnishing the following forms shall be extended asu n d e r :

ARTICLE


Reduction in late fees for delayed filing of return in FReduction in late fees for delayed filing of return in FReduction in late fees for delayed filing of return in FReduction in late fees for delayed filing of return in FReduction in late fees for delayed filing of return in Form GSTRorm GSTRorm GSTRorm GSTRorm GSTR-3B-3B-3B-3B-3B

The Central Government vide Notification No. 64/2017-Central TNotification No. 64/2017-Central TNotification No. 64/2017-Central TNotification No. 64/2017-Central TNotification No. 64/2017-Central Tax dated November 15,ax dated November 15,ax dated November 15,ax dated November 15,ax dated November 15,20172017201720172017 has reduced the per day penalty for delay in filing of return in Form GSTR-3B from October2017 onwards in the following manner:

Notes:

1) Late fees prescribed above is total of bothCGST and SGST/UTGST law

2) The penalty for late filing of returns for themonth of July, August and September hasalready been waived off and refunds arebeing credited to taxpayers online GSTaccount. Furthermore, it has been decided thatwhere any such late fees were paid, it willbe re-credited to the electronic cash ledgerunder the ‘tax head’ instead of ‘fee head’so as to enable the taxpayers to use thatamount to discharge their future tax liabilities.

No GST on Advances in respect ofNo GST on Advances in respect ofNo GST on Advances in respect ofNo GST on Advances in respect ofNo GST on Advances in respect ofsupply of goodssupply of goodssupply of goodssupply of goodssupply of goods

The Central Government vide Notification No.Notification No.Notification No.Notification No.Notification No.

66/2017 – Central T66/2017 – Central T66/2017 – Central T66/2017 – Central T66/2017 – Central Tax dated Novemberax dated Novemberax dated Novemberax dated Novemberax dated November15, 201715, 201715, 201715, 201715, 2017, has notified the registered person whodid not opt for the composition levy, as the classof persons who shall pay the CGST onoutward supply of goodssupply of goodssupply of goodssupply of goodssupply of goods at the time of supplyas specified in Section 12(2)(a) of the CGST Act,2017 including in the situations attracting theprovisions of Section 14.

Section 12(2)(a) of the CGST Act, 2017, prescribestime of supply for goods as the date of issuanceof invoice or the last date on which invoice isrequired to be issued.

Thus, no GST will be applicable onThus, no GST will be applicable onThus, no GST will be applicable onThus, no GST will be applicable onThus, no GST will be applicable onadvance amount received in respect ofadvance amount received in respect ofadvance amount received in respect ofadvance amount received in respect ofadvance amount received in respect ofgoods.goods.goods.goods.goods.

It may be noted that this notification has been


ARTICLE

issued in suppression of earlier Notification No.40/2017 – Central Tax dated October 13, 2017,wherein the stated benefit was allowed only tosmall assessees whose aggregate turnover inpreceding financial year did not exceed Rs. 1.5crore. Now, the provision has been generalisedfor all the registered assessees other thancomposition supplier.

Reverse charge on supply of Raw CottonReverse charge on supply of Raw CottonReverse charge on supply of Raw CottonReverse charge on supply of Raw CottonReverse charge on supply of Raw Cottonby agriculturist:by agriculturist:by agriculturist:by agriculturist:by agriculturist:

The Central Government vide Notification No.Notification No.Notification No.Notification No.Notification No.

43/2017-Central T43/2017-Central T43/2017-Central T43/2017-Central T43/2017-Central Tax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedNovember 14, 2017November 14, 2017November 14, 2017November 14, 2017November 14, 2017has notified “supply ofsupply ofsupply ofsupply ofsupply ofraw cotton by agriculturist” raw cotton by agriculturist” raw cotton by agriculturist” raw cotton by agriculturist” raw cotton by agriculturist” as a supply, thetax on which shall be liable to be paid by therecipient of such supply (i.e. any registeredperson) under reverse charge.

This notification shall come into force with effectfrom November 15, 2017.

Note: Please also see Notification No. 45/Notification No. 45/Notification No. 45/Notification No. 45/Notification No. 45/2017 – Integrated T2017 – Integrated T2017 – Integrated T2017 – Integrated T2017 – Integrated Tax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedax (Rate) datedNovember 14, 2017November 14, 2017November 14, 2017November 14, 2017November 14, 2017

Satisfaction lies in the effort not the attainment.Full effort is full victory.

– Mahatma Gandhi– Mahatma Gandhi– Mahatma Gandhi– Mahatma Gandhi– Mahatma Gandhi

ARTICLE


OVERVIEW ON THE INSOLVENCY ANDBANKRUPTCY CODE, 2016[with extracts from the IBBI Newsletter]

A Single Unified Code for ResolvingA Single Unified Code for ResolvingA Single Unified Code for ResolvingA Single Unified Code for ResolvingA Single Unified Code for ResolvingInsolvenciesInsolvenciesInsolvenciesInsolvenciesInsolvencies

The Insolvency and Bankruptcy Code, 2016 (IBC)provides a consolidated single regulatoryplatform for insolvency of Corporates, LLPs,Individuals and Partnership firms. It has taken thepositives of US and UK Bankruptcy Laws such asmoratorium during insolvency process, timebound insolvency process, role of insolvencyprofessionals, in the process such as taking overof management, powers of creditors in theprocess etc.

The code has identified the delay in the insolvencyand bankruptcy resolution process in the currentregulatory system. Under the current system,considerable time is lost in obtaining creditinformation. Another source of delay is multi-layered adjudicating mechanism. The Codeprovides for an Insolvency Resolution Processwithin a period of 180 days which can beextended to a maximum of 90 more days.

Establishment of Board, Notif ication ofEstablishment of Board, Notif ication ofEstablishment of Board, Notif ication ofEstablishment of Board, Notif ication ofEstablishment of Board, Notif ication ofRegulat ionsRegulat ionsRegulat ionsRegulat ionsRegulat ions

The establishment of the Insolvency andBankruptcy Board of India (IBBI) on 1st October,2016 and the notification of provisions of theInsolvency and Bankruptcy Code, 2016 (the‘Code’) relating to Corporate InsolvencyResolution Process, Insolvency Professionals,Insolvency Professional Agencies and theRegulations/Rules made there under andnotification of Sick Industrial Companies(SpecialProvisions) Repeal Act, 2003 with effect from 1st

December, 2016, are one of the recent landmarkregulatory reforms in India. This is expected toresult in:

faster and efficient adjudicationmechanism

in a time bound manner

for maximization of the value of assets ofsuch persons

to promote entrepreneurship

availability of credit and balance theinterests of all the stakeholders includingalteration in the order of priority ofpayment of Government dues

The Code has opened up a plethora ofopportunities for the professionals in the areas ofCorporate Insolvency Resolution Process,Corporate Liquidation Process, IndividualInsolvency Resolution Process and the BankruptcyProcess. It calls for fresh approach in learning thenew legislation and in dealing with the cases.

Key Highlights of the CodeKey Highlights of the CodeKey Highlights of the CodeKey Highlights of the CodeKey Highlights of the Code

The salient features of the law are as follows:

Clear, coherent and speedy process forearly identification of financial distressand resolution of companies and limitedliability entities if the underlying businessis found to be viable.

Two distinct processes for resolution ofindividuals, namely- “Fresh Start” and“Insolvency Resolution”.

Debt Recovery Tribunal and NationalCompany Law Tribunal to act asAdjudicating Authority and deal with thecases related to insolvency, liquidationand bankruptcy process in respect ofindividuals and unlimited partnershipfirms and in respect of companies andlimited liabilities entities respectively.

Establishment of an Insolvency and

CA Sumit BinaniB.Com(H), MBA(IIM-C), FCA, FCS, ACMA, Insolvency Professional

IBC


ARTICLE

Bankruptcy Board of India to exerciseregulatory oversight over insolvencyprofessionals, insolvency professionalagencies and information utilities.

Insolvency professionals would handle thecommercial aspects of insolvencyresolution process. Insolvencyprofessional agencies will developprofessional standards, code of ethics andbe first level regulator for insolvencyprofessionals members leading todevelopment of a competitive industry forsuch professionals.

Information utilities would collect, collate,authenticate and disseminate financialinformation to be used in insolvency,liquidation and bankruptcy proceedings.

Enabling provisions to deal with crossborder insolvency.

The essential idea of the new law is that when afirm defaults on its debt, control shifts from theshareholders/promoters to a Committee ofCreditors, who have 180 days in which to evaluateproposals from various players aboutresuscitating the company or taking it intoliquidation.

When decisions are taken in a time-boundmanner, there is a greater chance that the firmcan be saved as a going concern, and theproductive resources of the economy (the labourand the capital) can be put to the best use. This isin complete departure with the experience underthe SICA regime where there were delays leadingto destruction of the value of the firm.

Resolution is the key after default...if notResolution is the key after default...if notResolution is the key after default...if notResolution is the key after default...if notResolution is the key after default...if notseamless exit is the needseamless exit is the needseamless exit is the needseamless exit is the needseamless exit is the need

A failure usually manifests as default in repaymentobligations, though there can be occasions whena firm may default without failure and vice versa.Default is a state of insolvency. The failure andconsequent insolvency needs to be prevented.Where prevention is not possible, it needs to beresolved: (a) preferably within the firm as a goingconcern, as closure of the firm destroysorganisational capital; (b) at the earliest,preferably at the very first default, to prevent itballooning to un-resolvable proportions; (c) in atime bound manner as undue delay reduces

organizational capital of the firm makingresolution difficult; (d) by stakeholders who havea claim against the firm; and (e) in a calmenvironment when nobody disturbs the firm.Where resolution is neither possible nor desirable,the firm needs to exit seamlessly. The Codeaddresses all these – endeavours to preventinsolvency, provides a market determined andtime bound mechanism for resolution ofinsolvency, wherever possible, along withfacilitators for quick and effective resolution, andpromotes ease of exit, wherever required.

The Code prescribes for balancing theThe Code prescribes for balancing theThe Code prescribes for balancing theThe Code prescribes for balancing theThe Code prescribes for balancing theInterests of all StakeholdersInterests of all StakeholdersInterests of all StakeholdersInterests of all StakeholdersInterests of all Stakeholders

A corporate (other than a financial serviceprovider) has broadly two sources of funds,namely, equity and debt. Usually, the equityowners control and run the corporate. TheInsolvency and Bankruptcy Code, 2016 (Code),however, envisages that if they fail to service thedebt, the corporate in default undergoescorporate insolvency resolution process (CIRP). AnInsolvency Professional (IP) carries on the businessoperations of the corporate as a going concernuntil the Committee of Creditors (CoC) draws upa resolution plan that would keep the business ofthe corporate going on for ever.

The Code, as stated in the long title, requires aCIRP to (a) maximise value of assets of thecorporate, and (b) while doing so, balance theinterests of all the stakeholders, and assigns thisresponsibility primarily to the IP, and the CoCcomprising non-related financial creditors.

The Code maximizes the value by striking abalance between resolution and liquidation. Itencourages and facilitates resolution in mostcases where creditors would receive at least asmuch as they would in liquidation. This wouldhappen where enterprise value is ‘sufficiently’higher than the liquidation value. In such cases,resolution preserves and maximizes the enterprisevalue as a going concern. In the remaining cases,the Code facilitates liquidation as that maximizesthe value for stakeholders.

The Code enables initiation of CIRP at the earliest,even at the very first default, when enterprise valueis usually higher than the liquidation value andhence the CoC has the motivation to resolveinsolvency of the corporate rather than liquidate

ARTICLE


it. It mandates resolution in a time bound mannerto prevent decline in enterprise value with time,reducing motivation of the CoC to opt forliquidation. It facilitates resolution; makes acadre of professionals available to run thecorporate as a going concern; prohibitssuspension or termination of supply of essentialservices; enables raising interim financesrequired for running the corporate; etc

The Insolvency Professional Agencies andThe Insolvency Professional Agencies andThe Insolvency Professional Agencies andThe Insolvency Professional Agencies andThe Insolvency Professional Agencies andthe Registration of Insolvency Professionalsthe Registration of Insolvency Professionalsthe Registration of Insolvency Professionalsthe Registration of Insolvency Professionalsthe Registration of Insolvency Professionals

Insolvency Professional Agencies (IPAs)

The IPAs, which are wholly owned subsidiaries ofpremier institutes such as Institute of CharteredAccountants of India, Institute of CompanySecretaries of India and Institute of CostAccountants of India are incorporated as aSection 8 company and are registered with IBBIand have started enrolling the professionalmembers to be registered as insolvencyprofessionals The IPAs are front line regulatorsfor the Insolvency Professionals under the Code.

Limited Period Registration for InsolvencyProfessionals

Under Regulation 9 of the Insolvency andBankruptcy Board of India (InsolvencyProfessionals) Regulations, 2016, CharteredAccountants, Company Secretaries, CostAccountants, and Advocates having more than15 years of practice could register themselves asinsolvency professionals without appearing inany examination for a limited period of 6 (six)months only. This registration for limited periodwas available up to 31st December, 2016. TheIBBI has granted registration to 977 InsolvencyProfessionals in this category. For a freshregistration beyond the said period of six months,all such professionals were required to clear theLimited Insolvency Examination being conductedby IBBI.

Limited Insolvency Examination and Registrationof Insolvency Professionals

The IBBI (Insolvency Professionals) Regulations,2016 allow chartered accountants, companysecretaries, cost accountants and Advocates with10 years’ of post-membership experience(practice or employment) or Graduates with 15years’ of post qualification managerial

experience to be registered as IPs on passing theLimited Insolvency Examination. For this purpose,the IBBI launched the Limited InsolvencyExamination on 31st December, 2016. The IBBIhas assigned administration of the LimitedInsolvency Examination to National Institute ofSecurities Markets (NISM). The format ofexamination is as under:

a. The examination is conducted online(computer-based in a proctoredenvironment) with objective multiplechoice questions

b. The duration of the examination is twohours

c. A candidate is required to answer 90questions in two hours for a total of 100marks

d. There is a negative marking of 25% of themarks assigned for the question

e. Passing mark for the examination is 60%

f. A candidate is issued a temporary marksheet on the submission of examinationpaper

g. Passing candidate is awarded a certificateby the IBBI and

h. No workbook or study material isprovided

The frequency of examination is as under:

a. The examination is available from multiplelocations in the country

b. The examination is available between9:30 AM and 5:30 PM

c. A candidate pays an examination fee ofRs.1500 (Rupees one thousand fivehundred only) online on every enrolment

The validity of limited insolvency examination islife time. Also there is no cap on the number ofattempts for appearing in this examination.

National Insolvency Examination & Registration asInsolvency Professional

The IBBI (Board) shall, either on its own or througha designated agency, conduct a ‘NationalInsolvency Examination’ in such a manner and at


ARTICLE

such frequency, as may be specified, to test theknowledge and practical skills of individuals inthe areas of insolvency, bankruptcy and alliedsubjects. Probably, individuals not fitting in theabove criteria specified for registration as anInsolvency Professional would be permitted to beregistered as such after passing the NationalInsolvency Examination. The details of the sameare yet to be announced by the Board.

Regulations Issued by IBBI under the Code

The IBBI issued a total of 9 regulations to providefor regulation of service providers and enableimplementation of provisions relating tocorporate insolvency resolution and liquidationas on the date of this article. The details of someof the relevant ones are as under:

The IBBI (Model Bye-Laws and Governing Boardof Insolvency Professional Agencies) Regulations,2016

These regulations make it mandatory for anInsolvency Professional Agency (IPA) to adopt bye-laws that are consistent with the Model Bye Lawsissued by the IBBI. More than half of the directorsof its Board of the IPA shall be independentdirectors and not more than one-fourth of thedirectors shall be IPs. The IPA shall haveMembership Committee(s), MonitoringCommittee, Grievance Redressal Committee(s),and Disciplinary Committee(s) for regulation andoversight of professional members.

The IBBI (Insolvency Professional Agencies)Regulations, 2016

These regulations inter alia provide for theeligibility norms to be a Professional Member ofan IPA and also for eligibility norms to beregistered with the IBBI as an IPA. A companyregistered under section 8 of the Companies Act,2013 with a minimum net worth of Rs.10 croreand a paid up capital of Rs.5 crore is eligible tobe an Insolvency Professional Agency. At least51% of the share capital of the IPA must be held,directly or indirectly, by persons resident in India.The IPA, its promoters, its directors and personsholding more than 10% of its share capital mustbe fit and proper persons.

The IBBI (Insolvency Professionals) Regulations,2016

These regulations, inter alia provide for

registration, regulation and oversight ofinsolvency professionals (IPs). These provide forthree modes of registration which has alreadybeen dealt earlier in this article. These allow anIP to use organisational resources of a recognisedinsolvency professional entity. A limited liabilitypartnership, a registered partnership firm and acompany can be recognised as an insolvencyprofessional entity if a majority of the partners ofpartnership firm or a majority of the whole timedirectors of the company are registered asinsolvency professionals with the IBBI. Theregulations provide for the code of conduct forIPs whereby IPs are required to inter alia adhereto timelines, maintain confidentiality, comply withthe restrictions on employment and occupationand avoid conflict of interests.

The IBBI (Insolvency Resolution Process forCorporate Persons) Regulations, 2016

The regulations delineate the processes andactivities from initiation of Corporate InsolvencyResolution Process (CIRP) till its conclusion withapproval of the resolution plan. These regulationsprohibit an insolvency professional from actingas a resolution professional for CIRP of acorporate debtor if he is not independent of thecorporate debtor. These prohibit partners ordirectors of an insolvency professional entity ofwhich the insolvency professional is a partner ordirector from representing other stakeholders inthe same CIRP. These oblige the insolvencyprofessional to make disclosures - initial andcontinuing - if he has any pecuniary or personalrelationship with any of the stakeholders entitledto distribution of assets. These regulations specifythe manner and contents of public announcement,receipt and verification of claims of creditors,formation of committee of creditors, and mannerof holding meetings of committee of creditorsand voting in such meetings. These also specifythe contents of information memorandum and ofresolution plan, including its implementationschedule, and the manner of determination ofliquidation values. These further specify thecomponents of resolution process costs and scopeof essential supplies.

The IBBI (Liquidation Process) Regulations, 2016

These regulations inter alia provide for the detailsof activities from issue of liquidation order undersection 33 of the Code to dissolution order under

ARTICLE


section 54. These regulations prohibit aninsolvency professional from acting as aliquidator for a corporate debtor if he is notindependent of the corporate debtor. Theseprohibit partners or directors of an insolvencyprofessional entity of which the insolvencyprofessional is a partner or director fromrepresenting other stakeholders in the sameliquidation process. These oblige the liquidator,and also registered valuer(s) and professional(s)assisting him in liquidation to make disclosures -initial and continuing - about pecuniary orpersonal relationship with any of the stakeholdersentitled to distribution of assets.

These regulations specify the manner andcontents of public announcement, receipt andverification of claims of stakeholders, reports andregisters to be maintained, preserved andsubmitted by the liquidator, the manner ofrealisation of assets and security interest, anddistribution of proceeds to stakeholders.

These regulations provide that a liquidatorshould ordinarily sell the assets through auctions.He may sell the assets through private sale onlywhen the asset is perishable; the asset is likely todeteriorate in value significantly if not soldimmediately or the asset is sold at a price higherthan the reserve price of a failed auction. He maysell an asset on standalone basis, or assets in aslump sale, assets in parcels or a set of assetscollectively. These regulations provide that the feepayable to a liquidator shall form a part ofliquidation cost. These further provide that aliquidator shall be paid such fees and in suchmanner as has been decided by the committeeof creditors during the resolution process. In allother cases, the liquidator shall be entitled to afee as a percentage of the amount realised netof other liquidation costs and of the amountdistributed.

Registration of 1Registration of 1Registration of 1Registration of 1Registration of 1ststststst Information Utility under Information Utility under Information Utility under Information Utility under Information Utility underthe Codethe Codethe Codethe Codethe Code

The Insolvency and Bankruptcy Board of Indiaregistered National E-Governance ServicesLimited (NeSL) as an Information Utility (IU) underthe IBBI (Information Utilities) Regulations, 2017on 25.09.2017. This registration is valid for fiveyears from the date of registration. IU storesfinancial information that helps to establishdefaults as well as verify claims expeditiously and

thereby facilitates completion of transactionsunder the Insolvency and Bankruptcy Code, 2016in a time bound manner. It constitutes a key pillarof the insolvency and bankruptcy ecosystem, theother three being the Adjudicating Authority, theIBBI and Insolvency Professionals.

Individual Insolvency ResolutionIndividual Insolvency ResolutionIndividual Insolvency ResolutionIndividual Insolvency ResolutionIndividual Insolvency Resolution

The Insolvency and Bankruptcy Board of India hadconstituted a Working Group to recommend thestrategy and approach for implementation of theprovisions of the Insolvency and Bankruptcy Code,2016 dealing with insolvency and bankruptcy inrespect of:

(i) Guarantors to corporate debtors, i.e.,personal guarantors, and

(ii) Individuals having business, and submit areport along with draft Rules andRegulations.

The Working Group has since submitted a reportdealing with insolvency resolution process ofindividuals and firms. It intends to submit aseparate report for bankruptcy process ofindividuals and firms. IBBI intends to implementinsolvency resolution in the first phase for: (i)Guarantors to corporate debtors, i.e., personalguarantors, and (ii) Individuals having business(partnership, proprietorship or any other).

Along with the report for insolvency resolutionprocess of individuals and firms, the WorkingGroup has submitted (i) the draft Insolvency andBankruptcy (Application to Adjudicating Authorityfor Insolvency Resolution Process for Individualsand Firms) Rules, 2017, and (ii) the draftInsolvency and Bankruptcy Board of India(Insolvency Resolution Process for Individuals andFirms) Regulations, 2017.

As per press reports, the above Rules andRegulations along with relevant provisions underthe code dealing with Individual Insolvency islikely to be made effective very soon. This wouldagain open lots of opportunities for aspiringprofessionals. The enforcement of the aforesaidindividual bankruptcy related provisions will alsoprovide more teeth to the lenders.

Ep i logueEpi logueEpi logueEpi logueEpi logue

The vision of the new law is to encourageentrepreneurship and innovation. Some business


ARTICLE

ventures will always fail, but they will be handledrapidly and swiftly. Entrepreneurs and lenders willbe able to move on, instead of being boggeddown with decisions taken in the past. A keyinnovation of the Insolvency and Bankruptcy Codeis four pillars of institutional infrastructure.

The first pillar of institutional infrastructure is aclass of regulated persons, the “InsolvencyProfessionals”. They would play a key role in theefficient working of the bankruptcy process. Theywould be regulated by “Insolvency ProfessionalAgencies”.

The second pillar of institutional infrastructure isa new industry of ‘Information Utilities’. Thesewould store facts about lenders and terms oflending in electronic databases. This wouldeliminate delays and disputes about facts whendefault does take place.

The third pillar of institutional infrastructure is inadjudication. The NCLT will be the forum wherefirm insolvency will be heard and DRTs will be theforum where individual insolvencies will be heard.

These institutions, along with their Appellatebodies, viz., NCLAT and DRATs is required to beadequately strengthened so as to achieve worldclass functioning of the bankruptcy process.

The fourth pillar of institutional infrastructure is aregulator viz., “The Insolvency and BankruptcyBoard of India”. This body will have regulatoryover-sight over the Insolvency Professionals,Insolvency Professional Agencies and InformationUtilities.

The Insolvency and Bankruptcy Code is beingexperienced as a comprehensive and systemicreform, which will give a quantum leap to thefunctioning of the credit market. It is likely to takeIndia from among relatively weak insolvencyregimes to becoming one of the world’s bestinsolvency regimes. It also lays the foundationsfor the development of the corporate bondmarket, which would finance the infrastructureprojects of the future. The passing of this Codeand implementation of the same has alreadygiven a boost to ease of doing business and alsoease of resolving insolvencies in India.

Things can be viewed many different ways. Choosing to have apositive attitude regardless of circumstances will have the great-est impact on your success.

ARTICLE


The Insolvency and Bankruptcy Code, 2016(Code) was enacted with the primary objectiveto Ease of doing Business and in order to achieveit, a consolidated law relating to reorganisationand insolvency resolution of corporates firms andindividuals (except for organisations in financialsector) is enacted.

In the last few months there have beenfewsignificant orders passed by the Tribunals andthe Courts.

One of these significant orders was the orderpassed by the National Company Law AppellateTribunal on 28th July, 2017 in the matter of UttamGalva Steel Ltd. V/s DF Deutsche Forfait AGand Anr.

Brief Background of the Litigation

The Corporate Debtor, Uttam Galva SteelsLimited submitted an application with theAppellate Tribunal challenging the impugnedorder passed the National Company LawTribunal, Mumbai Bench on 10th April, 2017.

NCLT, Mumbai Bench had passed an impugnedorder for commencement of InsolvencyResolution Process on an application made byDF Deutsche Forfait AG and Anr (applicant-1)&Misr Bank Europe GmbH (applicant-2), bothbeing operational creditor of Uttam Galva SteelsLimited.

Uttam Galva originally had the outstandingamount of USD 10,787,040.00 to be paid to aGerman company namely AIC Handels GmbHtowards the supply of 19,976 MT of prime steelbillets. AIC against its outstanding amount drewtwo bills of USD 5,387,040 and USD 5,400,000which were duly accepted by Uttam Galva.

Later, AIC entered into a forfeiting agreement withDF Deutsche andMisrBank discounting the saidbills and stating that the entire debt with present

Important caselaws of Uttam Galva SteelLimited under Insolvency and BankruptcyCode, 2016

IP Binay Kumar SinghaniaChartered Accountant andInsolvency Professional

and future rightsto claims and demand had beentransferred to DF Deutsche andMisrBank. Thedetails of the transfer were brought to theknowledge of Uttam Galva and were partiallyacknowledged by them.

Therefore, DF Deutsche along with Misr Bankbeing the current operational creditor submitteda joint application quoting an a total outstandingamount of USD 16,542,886.33 i.e, a principalsum of USD 10,787,040 and interest of USD5,755,846.33 to be in default.

Study of the appeal made by Uttam Galva(Corporate Debtor)

The Corporate Debtor, Uttam Galva challengedthe impugned order on different grounds and theappeal made by the corporate debtor raised thefollowing questions:-

1) Whether a joint applicationjoint applicationjoint applicationjoint applicationjoint application by two ormore’operational creditors’operational creditors’operational creditors’operational creditors’operational creditors’ underSection 9 of I&B Code is maintainable?

2) Whether it is mandatorymandatorymandatorymandatorymandatory’ to file‘certif icate of recognised financial‘certif icate of recognised financial‘certif icate of recognised financial‘certif icate of recognised financial‘certif icate of recognised financialinstitutioninstitutioninstitutioninstitutioninstitution’ along with an applicationunder the code?

3) Whether the demand noticedemand noticedemand noticedemand noticedemand notice with invoiceunder Section 8 of I&B Code can be issuedby any lawyerby any lawyerby any lawyerby any lawyerby any lawyer on behalf of anOperational Creditor?

4) Whether there is an existence ofexistence ofexistence ofexistence ofexistence ofdispute, dispute, dispute, dispute, dispute, if any, in the present case?

Joint Application by Operational CreditorJoint Application by Operational CreditorJoint Application by Operational CreditorJoint Application by Operational CreditorJoint Application by Operational Creditor :::::Not Maintainable.

As per the code, ‘Financial Creditor’ either byitself or jointly with other financial creditors asprovided in Section 7 of the code may the triggerof CIRP before the Adjudicating Authority, i.e.NCLT when a default occurs.

IBC


ARTICLE

The relevant provision of Section 7 of the Codereads as follows:-

7.-Initiation of corporate insolvency7.-Initiation of corporate insolvency7.-Initiation of corporate insolvency7.-Initiation of corporate insolvency7.-Initiation of corporate insolvencyresolution process byfinancial creditorresolution process byfinancial creditorresolution process byfinancial creditorresolution process byfinancial creditorresolution process byfinancial creditor

(1) A financial creditor either by itself or jointlyby itself or jointlyby itself or jointlyby itself or jointlyby itself or jointlywith other financial creditors may file anapplication for initiating corporate insolvencyresolution process against a corporate debtorbefore the Adjudicating Authority when a defaulthas occurred.

ExplanationExplanationExplanationExplanationExplanation — for the purposes of this sub-section, a default includes a default in respect ofa financial debt owed not only to the applicantfinancial creditor but to any other financialcreditor of the corporate debtor.

(2) The financial creditor shall make anapplication under sub-section (1) in such form andmanner and accompanied with such fee as maybe prescribed.

(3) The financial creditor shall, along with theapplication furnish—

(a)record of the default recorded with theinformation utility or such other record orevidence of default as may be specified;

(b)the name of the resolution professionalproposed to act as an interim resolutionprofessional; and

(c) Any other information as may be specifiedby the Board.

Unlike section7, the provisions applicable on theoperational creditor, Section 8 and Section 9provide for the procedure to be followed by anOperational Creditor to initiate InsolvencyResolution Process.

From these provisions it is clear that a DemandNotice under Section 8 is to be issued by ananananan“““““Operational CreditorOperational CreditorOperational CreditorOperational CreditorOperational Creditor” individually individually individually individually individually and thepetition under Section 9 has to be filed byOperational Creditor individually and notindividually and notindividually and notindividually and notindividually and notjointlyjointlyjointlyjointlyjointly. Otherwise also it is not practical for morethan one Operational Creditor to file a jointpetition.

Therefore, the Appellate TTherefore, the Appellate TTherefore, the Appellate TTherefore, the Appellate TTherefore, the Appellate Tribunal held thatribunal held thatribunal held thatribunal held thatribunal held thatJoint application under Section 9 as notJoint application under Section 9 as notJoint application under Section 9 as notJoint application under Section 9 as notJoint application under Section 9 as notmaintainablemaintainablemaintainablemaintainablemaintainable .

Certif icate of recognised FinancialCertif icate of recognised FinancialCertif icate of recognised FinancialCertif icate of recognised FinancialCertif icate of recognised FinancialInstitution.Institution.Institution.Institution.Institution.–Mandatory to be filed along with theapplication.

As per Rule 6 of the Adjudicating Authority rules,2016, an operational creditor shall make anapplication forinitiating the corporate insolvencyprocess under section 9, in Form 5 accompaniedwith documents and records required therein .

As provisions of Section 8(3)(c) the operationalcreditor requires to furnish thecopy of thecertificate from the ‘Financial Institutions’maintaining accounts of the operational creditorconfirming that, there is no payment of an unpaidoperational debt by the corporate debtor and

In the matter of “smart Timing Steel Limitedsmart Timing Steel Limitedsmart Timing Steel Limitedsmart Timing Steel Limitedsmart Timing Steel Limitedvs. National Steel and agro Industriesvs. National Steel and agro Industriesvs. National Steel and agro Industriesvs. National Steel and agro Industriesvs. National Steel and agro IndustriesLimited” on 19Limited” on 19Limited” on 19Limited” on 19Limited” on 19ththththth May, 2017 May, 2017 May, 2017 May, 2017 May, 2017 the AppellateTribunal held that fil ing of “Certificate ofrecognised financial Institution” maintaining theaccount of the operational creditor conformingthat there is no payment of unpaid operationaldebt made by the corporate debtor ismandatorymandatorymandatorymandatorymandatory.

Excerpts of the order for reference are as follows:-

“““““12. On perusal of entire Section (3) along withsubsections and clauses, inclusive of proviso, itwould be crystal clear that, the entire provision ofsub-clause 13, of Section 9 required to bemandatorily followed and it is not empty statutoryformality.

13. The provisions of sub-section (3) mandatesthe operational creditor to furnish copy of invoicedemanding payment or demand notice deliveredby the, operational creditor to the corporatedebtor, an affidavit to the effect that, there is nonotice given by the corporate debtor relating todispute of unpaid operational debt, a copy of thecertificate from the ‘Financial Institutions’maintaining accounts of the operational creditorconfirming that, there is no payment of an unpaidoperational debt by the corporate debtor and suchother information as may be stipulated. Sub-section (‘5) of section 9 is procedure required tobe followed by Adjudicating Authority. One canOne canOne canOne canOne cansay that procedural part is not mandatorysay that procedural part is not mandatorysay that procedural part is not mandatorysay that procedural part is not mandatorysay that procedural part is not mandatorybut is directorybut is directorybut is directorybut is directorybut is directory.

14. The provision being “directory’ or “mandatory”hasfallen for consideration before Hon’bleSupreme Court onnumerous occasions. In ManualShah Vs. SardarSayedAhmed (1955) 1 SCR 108,the Hon’ble Apex Court heldthat where statuteitself provide consequences of breachornon-compliance, normally the provision has toberegarded as having mandatory in nature.

ARTICLE


For determination of the issue whether a provisionismandatory or not, it will be desirable to refer todecisionof Hon’ble Supreme Court in State ofMysore Vs.V.K.Kangan (1976) 2 SCC 895. In thesaid case, theHon’ble Supreme Court specificallyheld: “10. Indetermining the question whether aprovision ismandatory or director one must lookinto the subject matter and consider theimportance of the provision disregarded and therelation ofthat provision to the general objectintended to be secured. No doubt all laws aremandatory in the sense they impose the duty toobey on those who come within itspurview. But itdoes not follow that every departure from it shalltaint the proceedings with a fatal blemish. Thedetermination of thequestion whether a provisionis mandatory or directory.

16 Therefore it is clear that the word shall used insub – section (3) of section 9 of I& B Code ismandatory including clause 3 therein.”

As per the facts of the Uttam Galva matter,operational creditor attached a Certificate dated6th March 2017 as a ‘Certificate of FinancialInstitution’ as required by the provisions issuedby Misr BankMisr BankMisr BankMisr BankMisr Bank which is a foreign bank andis notrecognised as a ‘financial institution’.

The Certificate attached was issued by ‘collectingagency’ as distinct from “FinancialInstitution andauthenticity of the same cannot be verified by theNCLT.

Hence, the mandatory compliance of attachingCertificate of Financial Institution was notadhered to making the application made notmaintainable.

Affidavit mandating that no notice ofAffidavit mandating that no notice ofAffidavit mandating that no notice ofAffidavit mandating that no notice ofAffidavit mandating that no notice ofdispute was received by Operationaldispute was received by Operationaldispute was received by Operationaldispute was received by Operationaldispute was received by OperationalCreditor Creditor Creditor Creditor Creditor – Mandatory to file along with theapplication.

Order also that the affidavit as per provision ofSection 8 (3) (b) in support of insolvencyapplication, as prescribed in Form 5 of theAdjudicating Authority Rules had not been filedalong with the application which mandatesthat”no notice of dispute received to be returnedor it is returned when dispute was raised”.Inabsence of the Affidavit theFrom 5 is notcomplete, and hence the application made undersection 9 of the Insolvency &BankruptcyCode,was not maintainable.

Notice of Demand whether can be issuedNotice of Demand whether can be issuedNotice of Demand whether can be issuedNotice of Demand whether can be issuedNotice of Demand whether can be issued

by Professional on behalf of Operationalby Professional on behalf of Operationalby Professional on behalf of Operationalby Professional on behalf of Operationalby Professional on behalf of OperationalCreditor Creditor Creditor Creditor Creditor – Allowed, provided properauthorisation is obtained from the OperationalCreditor.

To determine whether a Professional is allowedto issuethe Notice of Demand in Form 3 or Form4 as perSection 8 of the Insolvency andBankruptcy Code, 2016, the AdjudicatingAuthority on perusal of the Section was of theopinion that on occurrence of default, theoperational creditor is required to deliver thedemand notice of unpaid operational debt andcopy of the invoice demanding payment of theamount involved in the default to the corporatedebtor in such from and manner as is prescribed.

Clause (a) and (b) of sub rule (1) of Rule 5 of the‘Adjudicating Authority Rule’ provides for theformat in which the demand notice/invoicedemanding payment in respect of unpaid‘Operational Debt ’ is to be issued by‘Operational Creditor’.

As per Rule 5(1) (a) & (b), the following person (s)are authorised to act on behalf of operationalcreditor, as apparent from the last portion of Form3 which read as follows:-

6. The undersigned request you tounconditionally repay the unpaid operationaldebt (in default) in full within ten days fromthe receipt of this letter failing which we shallinitiate a corporate insolvency resolutionprocess in respect of [name of corporatedebtor]

Yours sincerely

Signature of person authorisedSignature of person authorisedSignature of person authorisedSignature of person authorisedSignature of person authorisedto act on behalf of theto act on behalf of theto act on behalf of theto act on behalf of theto act on behalf of theoperational creditoroperational creditoroperational creditoroperational creditoroperational creditor

Name in block letters

Position with or in relation to theoperational creditor

Address of person signing

Therefore, from Form 3 and From 4, read withsub-rule (1) of Rule 5 and Section 8 of the Code,it is clear that an Operational Creditor can applyhimself or through a person authorised to act onbehalf of Operational Creditor.

The person who is authorised to act onThe person who is authorised to act onThe person who is authorised to act onThe person who is authorised to act onThe person who is authorised to act onbehalf of Operational Creditor is alsobehalf of Operational Creditor is alsobehalf of Operational Creditor is alsobehalf of Operational Creditor is alsobehalf of Operational Creditor is alsorequired to state “his posit ion with or inrequired to state “his posit ion with or inrequired to state “his posit ion with or inrequired to state “his posit ion with or inrequired to state “his posit ion with or in


ARTICLE

relation to the Operational Creditorrelation to the Operational Creditorrelation to the Operational Creditorrelation to the Operational Creditorrelation to the Operational Creditor ”””””meaning hereby the person authorised bymeaning hereby the person authorised bymeaning hereby the person authorised bymeaning hereby the person authorised bymeaning hereby the person authorised byOperational Creditor must hold posit ionOperational Creditor must hold posit ionOperational Creditor must hold posit ionOperational Creditor must hold posit ionOperational Creditor must hold posit ionwith or in relation to the Operationalwith or in relation to the Operationalwith or in relation to the Operationalwith or in relation to the Operationalwith or in relation to the OperationalCreditor and only such person can applyCreditor and only such person can applyCreditor and only such person can applyCreditor and only such person can applyCreditor and only such person can apply.....

Therefore, a professional duly authorised mayissue the Notice of Demand.

As in the matter of Uttam Galva, the Advocate/Lawyer who has issued the notice did not haveon record any document that stated that thelawyer was authorised by the Board of Directorsof the operational Creditors,the notice issued wasnot maintainable.

Existence of Dispute Existence of Dispute Existence of Dispute Existence of Dispute Existence of Dispute – Application underSection not maintainable.

An ‘operational creditor’ on occurrence of adefault before making an application to theAdjudicating Authority has to serve a demandnotice demanding payment of the unpaid debtto the corporate debtor under sub-section (1) ofsection 8 providing a 10 day window to thecorporate debtor to either repay the unpaid debtor bring to the notice of the operational creditoran existence of dispute, if any, and record of thependency of the suit or arbitration proceedingsfiled before the receipt of the demand notice.

Therefore the operational creditor either receivesthe payment of the debt due or receives a noticeof dispute at the end of 10 days window.

Meaning of Dispute Meaning of Dispute Meaning of Dispute Meaning of Dispute Meaning of Dispute

Clause (6) of section 5 of the Code defines“dispute”, to include, a dispute pending in anysuit or arbitration proceedings relating to -

existence of amount of the debt ;

quality of goods or service ;

Breach of a representation or warranty.

As per the definition of ‘dispute’, it is evident that

clause (6) of section 5 read with sub-section (2) ofsection 8 cannot be confined to pendingarbitration or a civil suit. It must include disputespending before every judicial authority includingmediation, conciliation, etc., as long there aredisputes as to existence of debt or default, etc.,which would satisfy sub-section (2) of section 8 ofthe Code.

Furthermore, as observed in “Kirusa Software Pvt.Ltd. v. MobiloxInnovations Pvt. Ltd.” the termdispute is given its natural and ordinary meaningupon reading of the code as a whole,the width ofdispute should cover all disputes on debt inall disputes on debt inall disputes on debt inall disputes on debt inall disputes on debt indefault etcdefault etcdefault etcdefault etcdefault etc. and not be limited to only two waysof disputing a demand made by the operationalcreditor i.e. either by showing a record of pendingsuit or by showing a record of apendingarbitration.

The intent of the legislature as evident from thedefinition of the term dispute is that it wanted thesame to be illustrative (and not exhaustive). If theintent of the Legislature was that a demand byan operational creditor can be disputed only byshowing a record of a suit or arbitrationproceeding, the definition of dispute would havesimply said dispute means a dispute pending inArbitration or a suit.

Clause (a) of sub-section (2) of section 8 statesthat there should be an “existence of a dispute,if any, and a record of pendency of the suit orarbitration proceedings filed before receiptof such notice or invoice in relation to suchdispute.

Therefore, the appellate court in the UttamGalva matter admitted the dispute claimedby the debtor in reply dated 3rd January, 2017which was a reply to the liquidation Noticegiven to it on 8th December, 2017.

In existence of dispute the application undersection 9 was not maintainable.

It is not what you do rather than whatyou say that has the greatest impact.

ARTICLE


Implementation and Impact of Ind AS onaccounting and financial statements

1 .1 .1 .1 .1 . Introduct ionIntroductionIntroductionIntroductionIntroduction

Rapid globalization and integration of trade,commerce and economies worldwide, hasobviated the need to follow homogeneity in thereporting standards in the financial sector so asto facilitate comparison, universality andcomprehensiveness. This led to emergence ofInternational Financial ReportingInternational Financial ReportingInternational Financial ReportingInternational Financial ReportingInternational Financial ReportingStandardsStandardsStandardsStandardsStandards (IFRSIFRSIFRSIFRSIFRS), which is currently permittedor required in over 125 Nations of the world.Realising the benefits of IFRS, it was all the moresignificant for a developing country like India toadopt it as earliest so as to ensure positivesentiments and faith and credibility in the IndianMarket of the investors globally. India made acommitment towards the convergence of Indianaccounting standards with IFRS at the G20 summitin 2009. In line with this, the Ministry of CorporateAffairs (MCA), Government of India previouslyissued a roadmap for implementation of IndianAccounting Standards (Ind ASs) converged withIFRS beginning April 2011. However, this plan wassuspended due to unresolved tax and other issues.

On February 15, 2015, MCA in consultation withthe National Advisory Committee on AccountingStandards (NACAS), notified the Companies(Indian Accounting Standards) Rules, 20151,laying down the roadmap for the implementationof internationally recognised standards in India.Ind AS, as these standards are popularly referredto, arebeing made applicable to large and listedcorporate in phase out manner as discussedbelow.

2 .2 .2 .2 .2 . Applicability of Ind ASApplicability of Ind ASApplicability of Ind ASApplicability of Ind ASApplicability of Ind AS

2.1.2.1.2.1.2.1.2.1. FFFFFor Companies other than Banks,or Companies other than Banks,or Companies other than Banks,or Companies other than Banks,or Companies other than Banks,NBFCs, Insurance CompaniesNBFCs, Insurance CompaniesNBFCs, Insurance CompaniesNBFCs, Insurance CompaniesNBFCs, Insurance Companies

Companies were permitted to voluntarily andirrevocably adopt Ind AS for accountingperiods beginning on or after 1 April 2015 with

comparatives for period ending 31st March,2015 or thereafter. Infosys Limited2, CromptonGreaves Limited3 and Jindal Saw Limited wereamong few corporate that voluntarily adoptedInd AS in their annual reports of 2015-16.

Ind AS was made mandatorily applicable tothe Indian entities other than Banks, Insuranceand NBFCs in two Phases. In Phase I, Ind AS wouldapply to companies with net worth of Rs. 500 croreand their holding, subsidiary, joint venture orassociate companies, for periods beginning onor after 1 April 20161 April 20161 April 20161 April 20161 April 2016, with comparatives forthe per iod ending 31st March, 201631st March, 201631st March, 201631st March, 201631st March, 2016 o rthereafter.

Under Phase I I , Ind AS has been mademandatorily applicable to all remaining listedentities and unlisted entities with net worth ofmore than 250 crores and holding, subsidiary,joint venture or associate companies of abovecompanies.

2.2.2.2.2.2.2.2.2.2. FFFFFor Banks, Insurance Companies andor Banks, Insurance Companies andor Banks, Insurance Companies andor Banks, Insurance Companies andor Banks, Insurance Companies andNBFCsNBFCsNBFCsNBFCsNBFCs

MCA announced requirements for Scheduledcommercial banks (excluding RRBs), All-IndiaTerm-lending Refinancing Institutions (i.e. EximBank, NABARD, NHB and SIDBI), NBFC andInsurance Companies to prepare Ind AS basedstandalone and consolidated financialstatements4. Accordingly, all commercial banks,term lending institutions, refinancing institutionsand their holding, subsidiary, joint venture orassociate companies and NBFCs having net worthof Rs. 500 crores or more, would be required toadopt Ind AS from April 1, 2018. NBFCs with networth of over 250 crores will have to adopt IndAS from April 1, 2019. Urban Cooperative Banks(UCBs) and Regional Rural Banks (RRBs) arehowever, not requirednot requirednot requirednot requirednot required to apply Ind AS and shouldcontinue to comply with the existing AccountingStandards.

Dr. Rajkumar S. AdukiaB. Com. (Hons.), FCA, FCS, FCMA, LL.B.,M.B.A, DIPR, Dip IFRS (UK), Dip LL&LW,Dip in criminology, Ph.D.

INDAS


ARTICLE

Insurance Regulatory Development Authority ofIndia has deferred the implementation of Ind ASfor insurance companies till 2020 as Ind AS 104Insurance Contracts is expected to be replacedby a new standard once IASB5 issues IFRS 17Insurance Contracts. However, insurancecompanies like Banks would still be required tosubmit the proformaInd AS financial statementsto IRDAI on a quarterly basis effective from 31December 2016.

3 .3 .3 .3 .3 . Impact of Implementation of Ind ASImpact of Implementation of Ind ASImpact of Implementation of Ind ASImpact of Implementation of Ind ASImpact of Implementation of Ind AS

Transition to Ind AS is big transformationalchange for Indian companies as there aresignificant differences between the existing IndianGAAP and Ind AS. To identify the implementationissues and impact it would be ideal to first studythe differences between these GAAPs and have abrief idea of Ind AS 101 First time Adoption of IndAS that deals exclusively with the transition to IndAS.

4 .4 .4 .4 .4 . Major Impact Areas on TMajor Impact Areas on TMajor Impact Areas on TMajor Impact Areas on TMajor Impact Areas on Transit ion toransit ion toransit ion toransit ion toransit ion toInd ASInd ASInd ASInd ASInd AS

4.1.4.1.4.1.4.1.4.1. Consol idat ionConsol idat ionConsol idat ionConsol idat ionConsol idat ion

Retrospective application of businesscombination principles under Ind AS 103 mayresult in increased amounts of tangible/intangible assets due to fair valuation and aconsequential impact on subsequentdepreciation/amortization. Definition of Controlin Ind AS is principle based wherein a concept ofde-facto control is introduced as result of whichconsolidation could be done even withoutmajority shareholding rights or not done ifminority shareholders have veto rights. Ind ASfurther uniform accounting policies to be usedamong the consolidating entities elseappropriate adjustments need to be made.Accounting for joint ventures now will be doneusing equity method instead of proportionateconsolidation.Ind AS also requires accounting ofcommon control business combinations using thepooling of interest method where goodwill willnot be recognized.

4.2.4.2.4.2.4.2.4.2. Financial InstrumentsFinancial InstrumentsFinancial InstrumentsFinancial InstrumentsFinancial Instruments

The major impact will be caused due to following:

Measurement of financial assets such asinvestments in equity instruments/ mutualfunds at fair value through profit and loss(FVPL)

Use of amortised cost, fair value through

other comprehensive income (FVOCI) andFVPL for debt instruments

Recognition of impairment losses—expected credit losses (ECL)

Discounting of long term financial assetsand liabilities

Changes in fair value of derivatives

Fair value of compound instruments suchas convertible debentures and preferenceshares

Use of effective interest rate (EIR) method—transaction costs related to borrowing,redemption premium on debentures,preference dividend

Long-term interest-free security depositsand employee loans measured at fairvalue

4.3.4.3.4.3.4.3.4.3. Revenue RecognitionRevenue RecognitionRevenue RecognitionRevenue RecognitionRevenue Recognition

Key changes in respect to revenue recognition willbe noticed in these areas:

Ind AS will require deferral of revenue oncustomer contracts where revenuerecognition criteria has not been met—service arrangements, maintenancecontracts, upfront fees.

Fair value of consideration will have tobe assessed in case of long-termconstruction contracts/extended paymentterms

Awards and incentives to customers,promotional expenses/customerreimbursements, cash discounts, etc., willbe netted from revenue

Provision for rebates/expected salesreturns will be required to be made.

Sale and repurchase kind ofarrangements will have to be linked.

4.4.4.4.4.4.4.4.4.4. Other Major Impact AreasOther Major Impact AreasOther Major Impact AreasOther Major Impact AreasOther Major Impact Areas

Discounting of retirement obligations,decommissioning and site restorationliabilities and long-term provisions under IndAS which were recorded on an undiscountedbasis under Indian GAAP.

Under Ind AS deferred tax liability would berecognised on undistributed earnings fromsubsidiaries and JVs and deferred tax asseton carried forward business and long-term

ARTICLE


capital losses. Also unrealised profits on intragroup transaction would be considered fordetermining deferred taxes.

Recognition of provisions related toconstructive obligations under Ind AS.

Recognition of arrangements that may nothave been legally termed as leases but insubstance are right to use underlying assetshave been accounted as embedded leasesunder Ind AS.

Recognition of provisions related toconstructive obligations under Ind AS.

5 .5 .5 .5 .5 . Ind AS 101 First Time Adoption ofInd AS 101 First Time Adoption ofInd AS 101 First Time Adoption ofInd AS 101 First Time Adoption ofInd AS 101 First Time Adoption ofInd ASInd ASInd ASInd ASInd AS

Ind AS 101 prescribes the accounting principlesfor first-time adoption of Ind AS.Ind AS 101requires a first-time adopter to use the sameaccounting policies including general principleof retrospective application, optional exemptionsand mandatory exceptions in its opening Ind ASBalance Sheet and all periods presented in itsfirst Ind AS financial statements. The selection ofaccounting policy among diverse existingalternatives should be done carefully, fullyunderstanding its implication on both theopening Ind AS Balance Sheet and the financialstatements of future periods.

Briefly stating Ind AS 101 requires an entity to:

Identify the first Ind AS financialfirst Ind AS financialfirst Ind AS financialfirst Ind AS financialfirst Ind AS financialstatementsstatementsstatementsstatementsstatements;

Prepare an opening balance sheet opening balance sheet opening balance sheet opening balance sheet opening balance sheet atthe date of transition to Ind AS;

Select accounting policies accounting policies accounting policies accounting policies accounting policies that complywith Ind AS and apply those policiesretrospectively ;

Consider whether to apply any of theoptional exemptions optional exemptions optional exemptions optional exemptions optional exemptions from retrospectiveapplication;

Apply the mandatory exceptions mandatory exceptions mandatory exceptions mandatory exceptions mandatory exceptions fromretrospective application; and

Make extensive disclosures extensive disclosures extensive disclosures extensive disclosures extensive disclosures to explainthe transition to Ind AS.

5.1.5.1.5.1.5.1.5.1. Mandatory Exemptions:Mandatory Exemptions:Mandatory Exemptions:Mandatory Exemptions:Mandatory Exemptions:

Ind AS 101 provides that an entity should applythe following mandatory exceptions:

A. Estimates: Estimates: Estimates: Estimates: Estimates: In accordance with Ind AS 101,an entity’s estimates under Ind AS at the date of

transition to Ind AS must be consistent withestimates made for the same date under IndianGAAP, unless there is objective evidence that thoseestimates were in error.

B. De-recognition of financial assets andDe-recognition of financial assets andDe-recognition of financial assets andDe-recognition of financial assets andDe-recognition of financial assets andfinancial l iabil i t iesfinancial l iabil i t iesfinancial l iabil i t iesfinancial l iabil i t iesfinancial l iabil i t ies

A first-time adopter should apply the de-recognition requirements in Ind AS 109 on‘Financial Instruments’ prospectively fortransactions occurring on or after the date oftransition to Ind AS.

C .C .C .C .C . Hedge AccountingHedge AccountingHedge AccountingHedge AccountingHedge Accounting

As required by Ind AS 109, at the date of transitionto Ind AS, an entity should measure allderivatives at fair value; andeliminate alldeferred losses and gains arising on derivativesthat were reported in accordance with previousGAAP as if they were assets or liabilities.

DDDDD..... Non-controll ing interestsNon-controll ing interestsNon-controll ing interestsNon-controll ing interestsNon-controll ing interests

A first-time adopter should apply certainrequirements of Ind AS 110 ConsolidatedFinancial Statements prospectively from the dateof transition to Ind AS like that of requirementproportionate attribution of total comprehensiveincome to NCI even it results in deficit balance,accounting for changes in the parent’s ownershipinterest in a subsidiary that do not result in a lossof control and accounting for a loss of controlover a subsidiary, and the related requirementsunder Ind AS 105 Non-current Assets Held for Saleand Discontinued Operations.

E .E .E .E .E . Classification and measurement ofClassification and measurement ofClassification and measurement ofClassification and measurement ofClassification and measurement offinancial assetsfinancial assetsfinancial assetsfinancial assetsfinancial assets

Ind AS 101 provides exemptions to certainclassification and measurement requirements offinancial assets under Ind AS 109, where theseare impracticable to implement.

FFFFF..... Impairment of financial assetsImpairment of financial assetsImpairment of financial assetsImpairment of financial assetsImpairment of financial assets

An entity should apply the impairmentrequirements under Ind AS 109 FinancialInstrumentsfor recognition and measurement ofexpected credit losses, retrospectively subject tocertain exemptions provided under Ind AS 101.

G.G.G.G.G. Embedded derivativesEmbedded derivativesEmbedded derivativesEmbedded derivativesEmbedded derivatives

A first-time adopter should assess whether anembedded derivative is required to be separatedfrom the host contract and accounted for as aderivative. This assessment is based on the


ARTICLE

conditions that existed at the later of the date itfirst became a party to the contract; and t h edate a reassessment is required under Ind AS 109.

H .H .H .H .H . Government loansGovernment loansGovernment loansGovernment loansGovernment loans

A first-time adopter should classify allgovernment loans received as a financial liabilityor an equity instrument in accordance with IndAS 32 Financial Instruments: Presentation. A first-time adopter should apply the requirementsunder Ind AS 109 and Ind AS 20 Accounting forGovernment Grants and Disclosure ofGovernment Assistance prospectively togovernment loans existing at the date of transitionto Ind AS.

Optional ExemptionsOptional ExemptionsOptional ExemptionsOptional ExemptionsOptional Exemptions

Ind AS 101 provides 18 optionalInd AS 101 provides 18 optionalInd AS 101 provides 18 optionalInd AS 101 provides 18 optionalInd AS 101 provides 18 optionalexemptions, important ones are as follows:exemptions, important ones are as follows:exemptions, important ones are as follows:exemptions, important ones are as follows:exemptions, important ones are as follows:

A. In case of Property, plant and equipment,Property, plant and equipment,Property, plant and equipment,Property, plant and equipment,Property, plant and equipment,Investment property and Intangible assetsInvestment property and Intangible assetsInvestment property and Intangible assetsInvestment property and Intangible assetsInvestment property and Intangible assets,a company can choose to measure the valueusing:

- Cost in accordance with Ind AS; ororororor

- Fair value at the date of transition as deemedcost; ororororor

- A revaluation carried out at a previous date(like a IPO) less accumulated depreciationtill the date of transition; ororororor

- Book value (carrying value) of assets recordedin Indian GAAP as on the date of transaction.

Thereby, allowing companies to use the existingbook values of assets without requiring it toreopen past adjustments.

B. Cumulative TB. Cumulative TB. Cumulative TB. Cumulative TB. Cumulative Translation Differences:ranslation Differences:ranslation Differences:ranslation Differences:ranslation Differences:

If a first time adopter uses this exemption:

- the cumulative translation differences for allforeign operations are deemed to be zero atthe date of transition to Ind ASs; and

- The gain or loss on a subsequent disposal ofany foreign operation shall excludetranslation differences that arose before thedate of transition to Ind AS and shall includelater translation differences.

C. Business Combinations:C. Business Combinations:C. Business Combinations:C. Business Combinations:C. Business Combinations:

For all transactions qualifying as businesscombinations under Ind AS 103, a company canchoose to:

- Not restate business combinations before thedate of transition.

- Restate all business combinations before thedate of transition.

- Restate a particular business combination, inwhich case all subsequent businesscombinations must also be restated and theInd AS 36 impairment guidance must beapplied.

6. Conclusion6. Conclusion6. Conclusion6. Conclusion6. Conclusion

After analysis of Ind AS compliant annual resultsreported by various companies for FY 2016-17,the impact of adoption has been pervasive to allmajor sectors as Ind AS brings a fundamentalchange in reprting framework which calls for ashift from conventional historical cost to greateruse of fair value and increased focus oversubstance rather than the legal form of theunderlying transaction. Net income of sectorssuch as industrial manufacturing, automotive,metals and capital projects and infrastructure hasbeen impacted the most. The two phaseimplementation has been helpful as smallerentities covered in phase two has benefited fromtransition experience and journey of Phase Icompanies. The implementation of Ind ASs mighthave lead to short term investments and initialchallenges but the long term benefits are strongenough to justify the initial hassles ofimplementation and adoptability.

(Foo tno tes )(Foo tno tes )(Foo tno tes )(Foo tno tes )(Foo tno tes )1 Vide its G.S.R 111 (E) dated 16 February 20152 Source: https://www.infosys.com/investors/reports-filings/annual-report/annual/Documents/infosys-AR-16.pdf3 Source: http://www.cgglobal.com/pdfs/annual-report/ar15-16/AR1516.pdf4 MCA press release No. 11/10/2009 CL-V dated January 18, 20165 International Accounting Standard Board, the International Accounting Body that issues IFRS

ARTICLE


Financial reporting in India is passing throughvery remarkable moments owing to adoption ofIndian accounting standards (Ind AS). Forcompanies covered under Phase – 1 ofmandatory Ind AS Financials, 31st March 2017is first time complete reporting period and June2016 was first Quarterly result publication dateand we are months away from the second phase.Ind AS Implementation has very wide impact onthe organization so companies should assesscarefully impact on growth, strategies, jointventures and tax planning. There are manychallenges in implementation of Ind AS howeverthis blog/ article focuses on 5 major challenges:

Challenges AheadChallenges AheadChallenges AheadChallenges AheadChallenges Ahead

Financial Instruments

Deferred Taxation

Revenue Recognition

Control for Group Accounting

Business Combination

Financial instrument (Ind AS 32, 109):-Financial instrument (Ind AS 32, 109):-Financial instrument (Ind AS 32, 109):-Financial instrument (Ind AS 32, 109):-Financial instrument (Ind AS 32, 109):-

There are no mandatory standards applicableunder Ind GAAP, Ind AS provide the detailed

Ind AS Implementation – 5 Major Challenges

CA Vivek Agarwal

guidance on accounting of classification,measurement, derecognition and impairment offinancial assets and financial liabilities. Thefinancial asset is classified based on entity’sbusiness model for managing financial asset andcontractual cash flow characteristics of thefinancial asset. Under an Indian GAAP, theclassification of financial liability or equity islargely governed by legal form of the instrumentand under Ind AS 32 the same is based onsubstance of the contractual agreement ratherthan its legal form. This may create the majorchanges in net worth as well as net income dueto reclassification.

Key Differences:Key Differences:Key Differences:Key Differences:Key Differences:

Classification of liability and equity incase of compound financial instrumentslike convertible bonds, redeemablepreference shares, compulsory convertibledebentures etc.

Re-classification of dividend and interestin profit & loss account due toreclassification of liability and equity.

Expected loss model for Impairment offinancial assets

All derivative instrument to be carried at

Source: Observation on Implementation of Ind AS by EY

Standard Percentage ofcompanies impacted

Financial instruments 83%Income taxes 87%Property, plant and equipment 27%Share-based payments 22%Business combination 15%Operating segments 38%

INDAS


ARTICLE

fair value, unless hedge accountingrequirements met

Investments to be categorized – Fair valuethrough profit or loss, Fair value throughother comprehensive income andamortized cost

Impact:-Impact:-Impact:-Impact:-Impact:-

Accounting Standards (AS) – 30, 31 and 32 wereissued but not notified as there are constantchanges in the accounting of financial instrumentsin International GAAP. ICAI has recently issuedGuidance note on Accounting for derivativesapplicable for accounting period commencingafter 1st April 2016 for Non-Ind AS entities.However, there is a significant diversity in thepractice. The implementation of Ind AS 32, 109,disclosure requirements of Ind AS 107 andapplying fair value measurement of Ind AS 113would be the most challenging during Ind ASImplementation. As per various reports publishedafter reviewing June 2016 results, it is observedthat Standards relating to Financial Instrumentsare the most challenging standards.

Control /Consolidation (Ind AS 110) :-Control /Consolidation (Ind AS 110) :-Control /Consolidation (Ind AS 110) :-Control /Consolidation (Ind AS 110) :-Control /Consolidation (Ind AS 110) :-

Under prevailing accounting standard control isassessed on the basis of more than one-half ofthe voting power or control on the compositionof board however as Ind AS is principle basedstandard, it explains the control in detail and IndAS 110 provides a single control model.

As per Ind AS 110, “An investor controls aninvestee if and only if the investor has all thefollowing:

(a)power over the investee;

(b)exposure, or rights, to variable returns from itsinvolvement with the investee; and

(c) the ability to use its power over the investee toaffect the amount of the investor’s returns”

The determination of who controls whom is thecritical when we move from existing Indian GAAPto Ind AS. The universe of entities that getconsolidated could potentially different underboth the frame works. The application of controldefinition would change the line items ofConsolidated financials in Ind AS.


Consolidation based on new definition ofcontrol

- Veto right with minority share holders

- Potential voting rights

- Structured entities

- De facto control

Deferred tax on undistributed reserve

Deferred tax on intercompany elimations

Mandatory use of uniform accountingpolicy

Impac t Impac t Impac t Impac t Impac t:-

With the introduction of new definition severalentities that are not currently consolidated mayget included and vice-versa and it will be achallenge for Corporate India and professionals.

Revenue recognit ion ( Ind AS 115):-Revenue recognit ion ( Ind AS 115):-Revenue recognit ion ( Ind AS 115):-Revenue recognit ion ( Ind AS 115):-Revenue recognit ion ( Ind AS 115):-(Deferred till 2018-19)(Deferred till 2018-19)(Deferred till 2018-19)(Deferred till 2018-19)(Deferred till 2018-19)

Ind AS 115, Revenue recognition from contractwith customers, introduce a single revenuerecognition model, which applied to all type ofcontracts with customers, including sale of goods,sale of services, construction arrangements,royalty agreements, licensing agreements etc. Incontrast under existing Indian GAAP, there isseparate guidance that applies to each of thesetype of contracts. Ind AS brings five-step modelwhich determines when and how much revenueis to be recognized.


5 step revenue recognition model

Timing of recognition of revenue (Right ofreturn, dispatch Vs. delivery) based onsatisfaction of performance obligation

Detailed Guidance on

Incentive schemes

Service concession arrangements

Customer loyalty programs

ARTICLE


Time value of money to be considered

Separation of contracts in case of linkedtransactions


India has deferred to implement this standard inas it has not been implemented internationally.NACAS had recommended to defer theapplication of Ind AS 115 and Ministry ofCorporate Affairs announcedthe same on March2016. Ind AS 18 and 11 has been notified in linewith IAS 11 and IAS 18.

Business combinations (Ind AS 103):-Business combinations (Ind AS 103):-Business combinations (Ind AS 103):-Business combinations (Ind AS 103):-Business combinations (Ind AS 103):-

Currently there are no comprehensive standardwhich wholly addressing accounting for businesscombination, currently it is done by form oftransaction like Merger, Acquisition etc. Under IndAS 103, all business combinations are accountedfor using the purchase method that considers theacquisition date fair values of all assets, liabilitiesand contingent liabilities.


Acquisition date is the date when controlis transferred – not just a date mandatedby court or agreement

Mandatory use of purchase method ofaccounting and fair value

Post-acquisition amortization of assetbased on the acquisition date fair values

Transaction cost charged to the profit andloss account

Goodwill to be tested at least annuallyfor impairment

Common control transactions areaccounted using pooling of interestmethod


With the adoption of new requirements onbusiness combinations, it will result intoconsistency over the period. Companies whichare in progress of negotiation regardingacquisition, need to pay kind attention to the

requirement of the standard. Fair valuation ofasset on the date of acquisition and resultantgoodwill are major areas to look after under newInd AS.

Deferred taxes (Ind AS 12) :-Deferred taxes (Ind AS 12) :-Deferred taxes (Ind AS 12) :-Deferred taxes (Ind AS 12) :-Deferred taxes (Ind AS 12) :-

As per Indian GAAP deferred taxes are recognizedon timing difference between accounting incomeand taxable income for the year and it is knownas income statement approach whereas underInd AS, deferred taxes are recognized for futuretax consequences of temporary differencesbetween carrying value of assets and liabilitiesin their books and their respective tax base andknown as balance sheet approach.


Ind AS is based on balance sheetapproach whereas AS 22 is based onincome statement approach

Disclosure requirements are moredetailed in Ind AS compare to AS

Deferred tax on revaluation, undistributedprofit by subsidiaries/associates,intercompany elimination

The concept of virtual certainty does notexist in Ind AS 12

Impact :Impact :Impact :Impact :Impact :

Whole method of calculation of deferred taxprovision has changed so we have to carefullyassess the impact on the financial statement. Ontransition to Ind AS, the deferred tax onreconciliation with Ind AS, deferred tax oncomponents of Other Comprehensive Income(OCI) and during consolidation will bechallenging during implementation.

The above mentioned are some of the majorchallenges in implementation of Ind AS. The otherareas of challenges are application of Ind AS 101First time adoption, determination of functionalcurrency under Ind AS 21, preparation ofStatement of Changes in Equity and accountingof components of Other Comprehensive Income.Corporate India and professionals have to becautious while dealing with transformationprocess to ensure smooth and effectiveconvergence.


ARTICLE

Benami Property (Prohibition) AmendmentAct, 2016 – Salient Features

Advocate Paras Kochar

Introduction:Introduction:Introduction:Introduction:Introduction:

The Benami Transactions (Prohibition)Amendment Act, 2016, (hereinafter referred to asthe “Act”) received the President’s assent on August10, 2016 and has come into force fromNovember 1, 2016. The Act will be effective inwashing off and unearthing black money fromthe country. The Income tax department isregularly collecting data from its various sourcessuch as Statement of Financial Transaction orReportable Account (SFTRA) previously known asAIR, FIU, Registration authorities. The assessingofficers are also sending information of Benamiproperties or Benami transactions to theconcerned officers dealing in such cases.

The Amendment Act seeks to covercomprehensively all aspects of transactions orarrangements where the source of funding foracquisition of a benami property has nopermissible links to the ownership structure. Inother words, a benami transaction encompassesall such transactions in which the real beneficiaryof a property is a different entity from the entitywho has made the payment for such property, asa result of which, the owner of such property is amere ‘front’ for the actual beneficiary/ fundingentity.

Important TImportant TImportant TImportant TImportant Terms:erms:erms:erms:erms:

Certain terms such as ‘benami property ’,‘benamidar’, ‘beneficial owner’, ‘transfer’ and‘fair market value’ are explained below:-

‘Benami property’ has been defined as a propertywhich is the subject matter of a benamidar. If anyproperty has been disposed off, proceeds of suchproperty will be held to be banami and allconsequences will follow.

A ‘Benamidar’ is a person or a fictitious person,as the case may be, in whose name the benamiproperty is transferred or held and includes a

person who lends his name.

‘Beneficial owner’ means a person, whether hisidentity is known or not, for whose benefit thebenami property is held by a benamidar.

‘Transfer’ includes sale, purchase or any otherform of transfer of right, title, possession or lien.

‘Fair market value’ means the price that theproperty would fetch, if sold in the open marketon the date of transaction. For determining theprice of unquoted equity shares, CentralGovernment have framed Rule 3 of theProhibition of Benami Property Transactions Rules,2016, which is almost similar to Sub Rule 1 ofRule 11UA of the Income Tax Rules, 1962, notifiedon 12.07.2017.

Movable and Immovable Property underMovable and Immovable Property underMovable and Immovable Property underMovable and Immovable Property underMovable and Immovable Property underthis Act:this Act:this Act:this Act:this Act:

Many people are of view that this Act applies onlyfor immovable properties but this Act applies toproperties (assets) whether movable orimmovable, tangible or intangible, corporeal orincorporeal. Therefore, this Act applies tojewellery, valuables, etc. as movable property andbuildings, flats, plot of land etc. as immovableproperty. As per law dictionary, corporeal andincorporeal property mean the property whichaffects the senses, and may be seen and handledby the body, as opposed to incorporeal property,which cannot be seen or handled, and exists onlyin contemplation. Thus a house is corporeal, butthe annual rent payable for its occupation isincorporeal. Corporeal property is, if movable,callable of manual transfer; if immovable,possession of it may be delivered up. Butincorporeal property cannot be so transferred, butsome other means must be adopted for its transfer,of which the most usual is an instrument in writing.Tangible property means Property that hasphysical substance and can be touched; Anything

Benami Properties

ARTICLE


other than real estate or money, includingfurniture, cars, jewellery etc. are tangible property.A property which cannot be touched such ascheque amount etc. are called intangibleproperty.

Benami TBenami TBenami TBenami TBenami Transactions:ransactions:ransactions:ransactions:ransactions:

A benami transaction, as defined under Section2(9) of the Act is a transaction in which:

a. the property is held by one personand paid for by another; or

b. it is held in a fictitious name; or

c. the owner of such property is unawareof or denies having knowledge of suchownership; or

d. the person financing such transactionis not traceable.

However, the Act prescribes certain exceptionsto benami transactions, under Section 2(9).These exceptions include property held by:

a. Karta for his or his family member’sbenefit; or

b. a person standing in fiduciary capacityfor the benefit of another, including atrustee, an executor, a partner, acompany director or a depositoryparticipant or agent; or

c. a person for the benefit of his spouseor child; or

d. a brother or sister or lineal ascendantor descendent.

Provided the consideration paid for suchtransactions comes from known and traceableresources. Also, the Central Government may, bynotification, exempt any property relating tocharitable or religious trusts from the operationof this Act. A Benami transaction applies toproperties (assets) whether movable orimmovable, tangible or intangible, corporeal orincorporeal. All transactions which were carriedout even before 1988 are covered under this Act.

Authority under the Act:Authority under the Act:Authority under the Act:Authority under the Act:Authority under the Act:

The Initiating Officer, the Approving Authority, theAdministrator and the Adjudicating Authority arethe four major authorities which have beenappointed by the Central Government. The officeof the Initiating Officer will be held by an officer

who is the Assistant Commissioner or a DeputyCommissioner as required by section 2 of theIncome Tax Act, 1961. The authorities will havethe same powers as those of the Civil Courts underCivil Procedure Code, 1908.

The Initiating Officer:The Initiating Officer:The Initiating Officer:The Initiating Officer:The Initiating Officer:

Such officer shall have reason to believe on thebasis of material available to him and shallrecord the reasons in writing. Thereafter, he shallissue a notice to the parties and after obtainingthe replies, if he thinks so, he may provisionallyattach the property with prior permission of theapproving authority for a period not exceeding90 days and he may also revoke the provisionalattachment with prior permission of the approvingauthority. He shall have power to conduct enquiryin regard to person, place, property, document,bank etc. He shall pass order for attachment ornon attachment of the property within 90 days ofissue of notice. If an order for continuingprovisional attachment of the property is passedthen he shall within 15 days from the date of theattachment, draw up a statement of the case andrefer it to the adjudicating authority.

The Approving Authority:The Approving Authority:The Approving Authority:The Approving Authority:The Approving Authority:

The approving authority means an AdditionalCommissioner or a Joint Commissioner asdefined in section 2 of the Income Tax Act, 1961.It shall have powers to give approval for retentionof books of accounts and documents impoundedwithin 15 days and will give permission to theinitiating officer. He will also give permission orapproval to the approving authority for his variousactions like continuation of attachment,revocation of attachment, enquiry, investigation,etc.

The Adjudicating Authority:The Adjudicating Authority:The Adjudicating Authority:The Adjudicating Authority:The Adjudicating Authority:

This authority consisting of at least two membersand one chairman will issue notice to the partieswith 30 days from the date on which a referencehas been received from the initiating officer. Theauthority may pass an order revoking orconfirming attachment after holding that theproperty is Benami or not. Such order shall bepassed within expiry of one year from the end ofthe month in which reference under this Act wasreceived. This authority shall make an order forconfiscation of the property after giving anopportunity of being heard to the personconcerned.


ARTICLE

The Administrator:The Administrator:The Administrator:The Administrator:The Administrator:

He shall have the power to receive and managethe property, in relation to which an order ofconfiscation has been made. He is empoweredto take such measures as are necessary formanaging such property. He also has the powersto enforce possession by giving reasonable noticeto the occupier of such property.

PPPPPowers of Authorities:owers of Authorities:owers of Authorities:owers of Authorities:owers of Authorities:

The authorities shall have the same powers asare vested in a civil court under the Code of CivilProcedure, 1908, while trying a suit in respect ofthe following matters, namely–

a) discovery and inspection;

b) enforcing attendance of any person,including any official of a bankingcompany or a public financial institutionor any other intermediary or reportingentity, and examining him on oath;

c) compelling the production of books ofaccount and other documents;

d) issuing commissions;

e) receiving evidence on affidavits; and

f) any other matter which may beprescribed.

The above proceedings shall be deemed to be ajudicial proceedings within the meaning ofsection 193 and 228 of IPC. The authorities mayrequisition the service of any police officer or ofany officer of the Central Government or StateGovernment or of both to assist him in abovematters.

Appeal :Appeal :Appeal :Appeal :Appeal :

An appeal can be filed before the Tribunal againstorder of the adjudicating authority within 45 daysof passing of order and against order of Tribunalan appeal can also be filed before the Hon’bleHigh Court within 60 days of service of

Tribunal order. The Appellate Tribunal is expectedto decide the appeal within one year from thelast date of the month in which appeal is filed.

Rectification of Order:Rectification of Order:Rectification of Order:Rectification of Order:Rectification of Order:

In order to rectify any mistake apparent fromrecord, the Appellate Tribunal or the AdjudicatingAuthority may amend its order passed within aperiod of 1 year from the end of the month inwhich the order was passed.

PPPPPenalty and prosecution:enalty and prosecution:enalty and prosecution:enalty and prosecution:enalty and prosecution:

The Act prescribes that whoever is found guilty ofthe offence of a benami transaction shall bepunishable with rigorous imprisonment for a termwhich shall not be less than 1 year, but which mayextend to 7 years and shall also be liable to finewhich may extend to 25 % of the fair market valueof the property. Further, if any person knowinglyprovides false information to any authority orfurnishes any false document he/she shall bepunishable with rigorous imprisonment for a termwhich shall not be less than 6 months but whichmay extend to 5 years and shall also be liable tofine which may extend to 10% of the fair marketvalue of the property.

Retrospective or prospective:Retrospective or prospective:Retrospective or prospective:Retrospective or prospective:Retrospective or prospective:

The expanded scope of benami transaction, whichcame into effect from 01.11.2016, should notbe applicable to property purchase made in2009.

Sub-section (3) clearly states that benamitransactions entered into on and aftercommencement of the Amendment Act, 2016,shall attract penal provisions contained in ChapterVII. It should be noted that prior to theamendment, the punishment provided under theearlier law, was much less rigorous. So also theingredients of offence described in the Act asbenami transaction.

Whether certain provisions of the original Act, i.eBenami Transactions (Prohibition) Act, 1988, wereprospective or retrospective came to beconsidered by the Hon’ble Supreme Court inR. Rajagopal Reddy (Dead) by LRs vs.R. Rajagopal Reddy (Dead) by LRs vs.R. Rajagopal Reddy (Dead) by LRs vs.R. Rajagopal Reddy (Dead) by LRs vs.R. Rajagopal Reddy (Dead) by LRs vs.Padmini Chandrasekharan (Dead) by LRs,Padmini Chandrasekharan (Dead) by LRs,Padmini Chandrasekharan (Dead) by LRs,Padmini Chandrasekharan (Dead) by LRs,Padmini Chandrasekharan (Dead) by LRs,(1995) 2 SCC 630(1995) 2 SCC 630(1995) 2 SCC 630(1995) 2 SCC 630(1995) 2 SCC 630. The controversy in this casecentres around applicability of the Act to pendingsuits already filed and entertained prior to cominginto force of section 4 (of the Original Act).

Hon’ble Supreme Court held that section 4(1) wasnot retrospective in operation, as it provides thatonly from the date of its coming into operation,no suit, claim or action preferred by the realowner, to enforce any right in respect of anyproperty held benami, would lie in any court. Theword ‘lie’ in the context means “admissible”.

More importantly, Hon’ble Supreme Courtexplained that a law prescribing a prohibition andpunishment for its violation cannot apply totransactions entered into during the period theprohibition was not in force.

ARTICLE


Section 2(9)(D) has introduced a new ingredientin the office described as “benami transaction”.The corresponding penal provision is in section3(3) read with Chapter-VII of the Act. When a newoffence has been brought in the statute book w.e.f.01.11.2016, the same cannot be invoked againstthe Defendant for a transaction effected in 2009.

Applying the ratio of the above ruling to thepresent case, it is amply clear that the provisionsof amended Benami Property Transactions Act,effective from 01.11.2016, should not beapplicable to the property transaction made in2009.

Accommodation entries and BenamiAccommodation entries and BenamiAccommodation entries and BenamiAccommodation entries and BenamiAccommodation entries and Benamitransactions:transactions:transactions:transactions:transactions:

There are various types of accommodation entriesfor conversion of black money into white money,such as share capital, long term capital gain inpenny stock, loans etc. Such accommodationentries are also considered as Benamitransactions by the authorities. Everyone is awarethat a large number of companies have beenformed in India in which share capital money hasbeen raised and the amount received has beeninvested in shares of other such companies eitherby buying the same or by subscribing the same.Such transactions are made on paper only. Thesetransactions are called accommodationtransactions. Now a days accommodation entriesare provided mainly through shell companies. TheIncome tax department is issuing notices to allsuch companies which have takenaccommodation entries from shell companiesand have invested the said fund in immovableproperties. Large number of notices have beensent to such companies. The shell company,beneficiary company and the middleman all arecovered under this Act.

FFFFFactors to determine Benami Tactors to determine Benami Tactors to determine Benami Tactors to determine Benami Tactors to determine Benami Transaction –ransaction –ransaction –ransaction –ransaction –

The apex court as well as the high courts havelaid down following factors to determine whethera transaction was Benami –

i) The source from which purchase moneycame

ii) The nature and possession of the property,after the purchase

iii) Motive, if any, for giving the transactiona Benami colour

iv) Position of the parties and relationship, ifany, between the claimant and thealleged benamidar

v) The custody of the title deed after sale

vi) Conduct of the parties concerned indealing with the property after sale

Conclusion:Conclusion:Conclusion:Conclusion:Conclusion:

The Act is being applied on politicians of reputetoo. Confiscation of property of Satyendra Jain(AAP Minister) and family members of Lalu PrasadYadav are recent examples. The Government mayfurther crack down on bureaucrats and otherGovernment servants soon. It is expected that allmatters related to confiscation of property will goup to higher court and Supreme Court, so therewill be huge litigation. The income tax departmentmay also issue notices on parties who are involvedin accommodation transactions subject to certainevidences under their possession. The taxconsultants should advise their clients well inadvance about the scope of Benami transactionsand Benami property. Proceeding under TheBenami Transactions (Prohibition) Amendment Act,2016 is more painful than action under searchand seizure u/s 132 of the Income Tax Act, 1961.

Regardless of what you are doing, strive to do the very best youcan. This position dissolves difficulties.


ARTICLE

In a recent judgment pronounced by NCLTHyderabad, a resolution plan was approved,passed by less than the required mandate asprovided under the Insolvency and BankruptcyCode, 2016 (‘the Code’), leaving an interestingprecedent for other resolution plans.

In the case of Kamineni Steel &PowerIndiaPvt Ltd1,the Corporate Debtor, the Hon’ble Bench of NCLTHyderabad has vide its Order dated 27th

November, 2017, approved the resolution plansubmitted by the Resolution Professional (‘RP’).

Relevant Facts of the CaseRelevant Facts of the CaseRelevant Facts of the CaseRelevant Facts of the CaseRelevant Facts of the Case

The Corporate Debtor has been into CorporateInsolvency Resolution Process (‘CIRP’). In the 4th

Committee of Creditors (‘CoC’) meeting,resolution plan as submitted by the CorporateDebtor (‘CD’) was reviewed by SBI capital marketsltd, considering which, it was resolved that infusionof fresh funds as debt amounting to Rs. 150 cr.would not be acceptable since it will be a prioritydebt instead of equity.

It was further decided that the CD shall infusefunds for working capital and the CD must comeout with a concrete resolution plan within 15 daysor on/before 14th July, 2017and present to thecore CoC and upon receipt of in-principlein-principlein-principlein-principlein-principleapprovalapprovalapprovalapprovalapproval, present the same in the next CoCmeeting.

In the 5th CoC meeting, revised resolution planas submitted by CD was considered. It containedthe details of fresh infusion of funds amountingto Rs. 150 cr. either as debt/equity but not aspriority debt. Given the requirements of approvalsof respective creditor’s boards and report to beprepared by SBI capital markets, further extensionof 90 days was sought.

NCLT approves Resolution Plan quashingarithmetic requirement: Instates theimportance of greater good

Vallari Dubey

In 7th CoC meeting, members having 87.69% ofvoting share had expressed that revised resolutionplan should be improved. Lead bankersindicated that sustainable debt portion should beincreased to 40%. JMF ARC holding 12.31%voting share had stated that they were not infavour of the resolution plan and will only considerthe same, if sustainable debt portion is increased.

8thCoC meeting was called for and it was agreedthat the resolution plan shall also provide formonitoring and supervision of resolution plan bythe RP. Indian bank and JMF ARC rejected theresolution plan, holding 22.33% and 12.39%respectively and expressed that they wouldreconsider the plan, if sustainable debt portion isincreased further.

CD had sent a One-timesettlement (OTS) schemethrough mail on 18.10.2017 as an alternative toresolution plan.Revised OTS proposalconsidering the mail of Indian Bank (Lead Banker)was prepared and presented by CD in next CoCmeeting.

In the 9thcoc meeting, revised resolution plan waspresented by the RP and it was approved by55.73% of creditors, few others awaited approvalfrom their sanctioning authorities. Final approvalfrom members holding 66.67% was received ason 30.10.2017. Percentage of dissenting/notapproving creditors stood at 26.97%. Memberswho remained open (Bank of Maharashtra) was6.36%; considering these as neutral and notagainst the resolution plan, consentingpercentagebecame 71.19%.

On receipt of the aforesaid approval, the RP filedthe resolution plan with the Adjudicating Authority(‘Hon’ble NCLT Hyderabad’), seeking approvalof the same.

Companies Act

ARTICLE


Provisions of the Code:Provisions of the Code:Provisions of the Code:Provisions of the Code:Provisions of the Code:

Submission of Resolution PlanSubmission of Resolution PlanSubmission of Resolution PlanSubmission of Resolution PlanSubmission of Resolution Plan

Section 30Section 30Section 30Section 30Section 30

(1) A resolution applicant may submit a resolutionplan to the resolution professionalprepared on thebasis of the information memorandum.

(2) The resolution professional shall examine eachresolution plan received by him toconfirm thateach resolution plan—

(a) provides for the payment of insolvencyresolution process costs in a mannerspecifiedby the Board in priority to the repayment ofother debts of the corporatedebtor;

(b) provides for the repayment of the debtsof operational creditors in suchmanner asmay be specified by the Board which shallnot be less than the amount to bepaid to theoperational creditors in the event of aliquidation of the corporate debtorundersection 53;

(c) provides for the management of the affairsof the Corporate debtor afterapproval of theresolution plan;

(d) the implementation and supervision of theresolution plan;

(e) does not contravene any of the provisionsof the law for the time being inforce;

(f) conforms to such other requirements asmay be specified by the Board.

(3) The resolution professional shall present to thecommittee of creditors for itsapproval suchresolution plans which confirm the conditionsreferred to in sub-section (2).

(4) The committee of creditors maymaymaymaymay approve aresolution plan by a vote of not less thanseventyfive per cent. of voting share of the financialcreditors.

(5) The resolution applicant may attend themeeting of the committee of creditors inwhich theresolution plan of the applicant is considered:

Provided that the resolution applicant shall nothave a right to vote at the meeting ofthe committeeof creditors unless such resolution applicant is alsoa financial creditor.

(6) The resolution professional shall submit theresolution plan as approved by thecommittee ofcreditors to the Adjudicating Authority.

Approval of resolution planApproval of resolution planApproval of resolution planApproval of resolution planApproval of resolution plan

Section 31Section 31Section 31Section 31Section 31

(1) If the Adjudicating Authority is satisfied thatthe resolution plan as approvedby the committeeof creditors under sub-section (4) of section 30meets the requirementsmeets the requirementsmeets the requirementsmeets the requirementsmeets the requirements as referred to in sub-section (2) of section 30, it shall by order approvethe resolution planwhich shall be binding on thecorporate debtor and its employees, members,creditors,guarantors and other stakeholdersinvolved in the resolution plan.

(2) Where the Adjudicating Authority is satisfiedthat the resolution plan does notconfirm to therequirements referred to in sub-section (1), it may,by an order, reject theresolution plan.

(3) After the order of approval under sub-section(1),—

(a) the moratorium order passed by theAdjudicating Authority under section 14

shall cease to have effect; and

(b) the resolution professional shall forwardall records relating to the conduct

of the corporate insolvency resolution processand the resolution plan to the Board to

be recorded on its database.

Submissions of the Corporate DebtorSubmissions of the Corporate DebtorSubmissions of the Corporate DebtorSubmissions of the Corporate DebtorSubmissions of the Corporate Debtor

The CD had been submitting resolution plansrevised for a number of times as per the terms ofcreditors. It was submitted by CD, that theproposal would not cause any haircut on theprinciple debt to the banks.

While submitting the resolution plan, the RP citedthe following judgements:

- Raj Oil Mills Ltd and Edelwise ARC, NCLTMumbai bench – Section 22 provides thattheCoC maymaymaymaymay appoint an RP with a consentof members of CoC holding not less than75%. Following was quoted from thejudgment: “A viable solution is to give thepreference to the decision taken by the


ARTICLE

largest percentage of the financialcreditors”

- Bachandevi and another v nagarnigam,Gorakhpur, Supreme Court

- Sarladevi and others v Kishan Chand,Supreme Court

Referring to the RBI Notification 2016-17/299dated May, 2017 which amended therequirements as under Joint Lending ForumMechanism (JLF) have been laid down, it wasstated that a majority of 60% of creditors by valueand 50% by number shall be sufficient to make adecision of JLF valid; even though bothrequirements, as under JLF and the Code areunder separate enactments, the intent and spiritis similar to go, that is, the will of the majoritywill of the majoritywill of the majoritywill of the majoritywill of the majorityshall prevailshall prevailshall prevailshall prevailshall prevail.

On based of the above arguments, the RP prayedto pass the res plan u/s 30(4) of the Code.

Further, the contents of the resolution plancontained all the details as provided undersection 30(2) of the Code and the CIRPRegulations, as contended by the applicant.Implementation and supervision shall be doneby the RP himself. And there would be nocontravention of any law.

The CD claimed to cooperate with lenders andoperate in the best interest of all the stakeholdersand the economy and industry at large. The CDfurther claimed that once it is revived, it shall beable to start its operations for the good of thesociety, serve the nearby locality, increaseemployment and livelihood.

Submissions of the RespondentSubmissions of the RespondentSubmissions of the RespondentSubmissions of the RespondentSubmissions of the Respondent

Rights against personal guarantorsRights against personal guarantorsRights against personal guarantorsRights against personal guarantorsRights against personal guarantors

The Indian Overseas BankThe Indian Overseas BankThe Indian Overseas BankThe Indian Overseas BankThe Indian Overseas Bank which is one of thelenders, rejecting the resolution plan, alleged thatthe CD had completely ignored their rightsagainst the personal guarantors and corporateguarantors, on account of which the bankwouldhave to bear enormous loss.

Further the report submitted by RP does not specifythe sources of funds, required for the proposedpay out.

Contentions of the Lead BankerContentions of the Lead BankerContentions of the Lead BankerContentions of the Lead BankerContentions of the Lead Banker

The lead bank, Indian Bank had made thefollowing contentions:

- The Bank had referred to the case ofPalogixInfrastructure ltd v ICICIBank Ltdon the question of whether a provision isdirectory or mandatory. It pressed on theinterpretation of certain provisions of theCode as merely directory and notmandatory, since ultimate decision of thejudiciary has to be taken in the eyes ofutmost good and justice for all.

Observations of the BenchObservations of the BenchObservations of the BenchObservations of the BenchObservations of the Bench

The Bench made the following observationsconsidering all the submissions of the parties andprovisions of law:

- CoC meetings – All the CoC meetingswere duly held and conducted. Thedissenting banks appeared to beinterested in liquidation instead ofresolution, while resolution is the ultimateintent of the legislature. Managers of thedissenting banks did not have themandate to agree to the revised resolutionplan, which is not in conformity with theRBI Notification. As per CIRP Regulations,RP shall take the vote of the members andconvey the decision taken. However, fewmembers had conveyed their voting postthe meeting which is not in accordancewith the Code and the Regulations.

- Revised OTS Scheme – the revised schemewas totally in tune with the revised reportof SBI Capital Markets Ltd

- Mechanism of JLF – The mechanism is tooperate together, and as far as possible,operate for the best interest of thestakeholders.

- IBC Code - It is not out of context to referto various percentages provided underRBI circulars and notifications. The intentof the legislature is to seek all possibleoptions to resolve the company, and onceall options are exhausted, order forliquidation of the company. The threedissenting banks did not present a positiveapproach to revive the company, when agood revival was indeed possible, which

ARTICLE


will also benefit the lenders including thedissenting lenders.

- Adjudicating Authority – Word ‘may’ isused in Section 30(4), providing that theCoC may approve the resolution plan withnot less than 75%.

- Banking Sector – In order to move forwardwith a better plan, the lenders have toabsorb few losses as well and cannotnormally recover 100% of the dues. Inrespect of personal and corporateguarantees, the Hon’ble Bench is of theview that the same can be dealt with inaccordance with individual loanagreements outside the OTS Scheme.Further, none of the dissenting banks havenot filed any evidence in support of theircontentions.

As rightly highlighted by the Hon’ble Bench, whilepronouncing any judgment, the NCLT shall overand above arithmetic calculations, give dueconsideration to the following parameters:

- Various/guidelines issued by RBI;

- Economy of the Country;

- Social Obligations cast on theGovernment to create employment;

- Rural development;

- Judicial function of the courts of law, whichdiffers from the administrative function ofthe ministry;

- Maximization of value of assets of theCorporate Debtor

Final JudgmentFinal JudgmentFinal JudgmentFinal JudgmentFinal Judgment

In light of the aforesaid contention andobservations, the Hon’ble Bench approved theresolution plan filed by the RP.

ConclusionConclusionConclusionConclusionConclusion

The Hon’ble Bench has clearly highlighted thatthe ultimate justice lies in the greater good. Andgreater cannot be solely bound by arithmeticcalculations of written law. Of course, one has toalways consider the facts and requirements ofeach case. However, as submitted in the currentjudgment, when approval of resolution planwould benefit the local economy and increaseemployment opportunities, once the CD isrevived, there is no harm in allowing suchapproval, when though not as per mandate oflaw, however, sufficient to validate the resolutionplan, a percentage of consent has been dulyobtained. Since, all other procedures andprovisions of law were duly followed, a resolutionplan, which is otherwise absolutely fit, should notrejected basis shortage of requisite consent, whenthe dissenting parties are themselves at fault.

Liquidation of a CD which can otherwise beresolved, should not be allowed for commongood of the society.

Though approval of each resolution plan shallbe considered basis individual facts of the caseand the arithmetic requirement not liable to beignored each time, the judgment however, setsan interesting precedent allowing newerinterpretations to follow.

(Footnotes)1http://nclt.gov.in/Publication/Hyderabad_Bench/2017/Others/285.pdf

No one can make you feel inferior without your consent.


ACAENew Members

1. CA Puja Agarwal L 1357

2. Dr. Dilip Kr. Datta L 1358

3. CA Bhabataran Maji L 1359

4. Ms. Rachna Jaiswal L 1360

5. CA Rajni Lath L 1361

6. Mr. Manoj Kataruka L 1362

7. CA Lalit Kumar Shroff L 1363

8. CA Praveen Kumar Shroff L 1364

9. CA Bishnu Kant Agarwal L 1365 *

10. CA Rahul Sureka L 1366

11. CA Ravi Sarda L 1367

12. CA Abhijit Pathak G 1368

13. CA Amit Saraf L 1369

14. Mr. Mrityunjoy Seal L 1370 *

15. CA Mukesh Khandelwal L 1371

16. CA Adarsh Rathi L 1372

17. CA Harsh Satish Udeshi L 1373 *

18. CA Ramakant Sureka L 1374

19. CA Om Prakash Dokania L 1375*

20. CA Partha Pratim Ghosh L 1376

NEW MEMBERS ENROLLED : APRIL, 2017 TO JANUARY, 2018

Sl.No. Name Membership No.

21. CA Sourabh Mitra L 1377

22. CA Amita Mundra L 1378

23. CA Sushil Kr. Agrawal L 1379

24. Mr. Ritesh Kr. Agarwal L 1380

25. Mr. Kaushik Gangwal L 1381

26. CA Kamlesh Kumar Agarwal L 1382

27. CS Ghanshyam Saraf L 1383 *

28. CA Rishabh Jain L 1384

29. CA Vivek Chiraniya L 1385

30. CA Aditya Chirimar L 1386

31. CA Vinod Kr. Khetan L 1387

32. CA Gagan Kedia L 1388

33. CA Rajiv Kr. Agarwal L 1389

34. CA Gurjot Singh Gulati G 1390

35. Ms. Priti Kanoria L 1391 *

36. CA Abhijit Bandyopadhyay L 1392 *

37. Mr. Ajay Kumar Joshi L 1393

38. CA Vidyut Sethi L 1394

39. CA Debayan Patra L 1395

40. CA Lata Saraogi L 1396

41. Mr. Kailash Dhanuka L 1397

* Conversion from General to Life Membership Conversion from General to Life Membership Conversion from General to Life Membership Conversion from General to Life Membership Conversion from General to Life Membership

Sl.No. Name Membership No.


ACAENOTE


ACAEACAE Application Form for Membership


ACAEA L B U M

Workshop on 16.09.2017 on GST at ACAE Emami Conference Hall

L-R : Guest Speakers CS T B Chatterjee, CA Tarun Kr. Gupta, Mr. Khalid Aizaz Anwar, Senior Joint Commissioner (WBGST) and CA Pramod Kr. Mundra, Past Convenor.

L-R : Guest Speakers Mr. Desh Dulal Chatterjee, Superintendent (CGST), Central Excise & Customs and Advocate Vinay Shraff

Seminar on Issues in Tax Audit and ICDS & Impact of Ind AS on MAT on 20.09.2017 at ACAE Emami Conference Hall.

L-R : Guest Speakers CA Vivek Agarwal, CA Anup Kr. Sanghai (Convenor), CA S S Gupta and CA Ramesh Kr. Patodia.

Lecture Meeting on Recent Developments & Actions by regulatory authorities and remedial measures thereof with special emphasis on striked off Companies and Restoration Procedures on 21.09.2017 at ACAE Emami Conference Hall.

L-R : Convenor CA Anup Kr. Sanghai, Guest Speaker CS Vinod Kothari and Vice President CA Vasudeo Agarwal.

Programme for Articles & Students on Approach to Audit, Audit Sampling, Audit Documentation on 23.09.2017 at ACAE Emami Conference Hall.

One of the Students felicitating Guest Speaker CA Vivek Agarwal

ACAE – ALBUM


ACAEA L B U M

Lecture Meeting on Benami Transactions (Prohibition) Amendment Act, 2016 and Prevention of Money Laundering Act 2002 with Amendment Rules 2016 – An Overview on 06.10.2017 at ACAE Emami Conference Hall.

Guest Speaker Advocate Subash Agarwal giving his deliberations at the Lecture Meeting

Programme for Articles & Students on Tax Audit.

on 07.10.2017 at ACAE Emami Conference Hall.

L - R Guest Speaker CA Manoj Tiwari and Chairman of Students & New Members Sub-Committee, CA Pramod Kr. Mundra

Lecture Meeting on Recent Developments in Goods and Services Tax on 12.10.2017 at ACAE Emami Conference Hall.

Guest Speaker and Past President-ACAE CA Pulak Kr. Saha being felicitated by General Secretary, CA Jitendra Lohia

Lecture Meeting on The Insolvency and Bankruptcy

Code, 2016 (1) Advisory Opportunity for Young

Professionals (2) Recent Developments on

13.10.2017 at ACAE Emami Conference Hall.

Guest Speaker CA Sumit Binani interacting with the participants.

Programme for Articles & Students on Approach to Audit, Audit Sampling, Audit Documentation on 23.09.2017


ACAEA L B U M

Lecture Meeting on Impact of GST on (1) Real Estate

and Works Contract (2) Transportation and Logistics


L-R : President CA Arun Kr. Agarwal, Guest Speaker CA Rajeev Kr. Agarwal, Chairman-GST/Indirect Tax Sub-Committee, CA Tarun Kr. Gupta and Guest Speaker CA Vivek Jalan

A Glimpse of Bijoya & Deepawali Get-together on 04.11.2017 at Middleton Chambers


ACAEA L B U M

A Glimpse of Bijoya & Deepawali Get-together on 04.11.2017 at Middleton Chambers

Guest Speaker CA Ranjeet Kr. Agarwal giving his deliberations at the Lecture Meeting.

Lecture Meeting on ICAI Code of Conduct and

Professional Ethics, Corporate Form of Practice

for Practicing on 10.11.2017 at ACAE Emami

Conference Hall.


ACAEA L B U M

Lecture Meeting on Assessment Proceedings u/s 143 (3) of the Income-tax Act, 1961 on 17.11.2017 Emami Conference Hall.

Guest Speaker CA Sanjay Bhattacharya being felicitated by CA R R Modi, Chairman - Direct Tax Sub-Committee.

at ACAE

Programme for Articles & Students on 25.11.2017 ACAE Emami Conference Hall.

Guest Speaker CA Pramod Kr. Mundra, Dy. Convenor CA Beena Jojodia and Guest Speaker CA Suraj Goyal.

at

Lecture Meeting on Goods and Services Tax (GST) on 25.11.2017 at ACAE Emami Conference Hall.

On the dais Guest Speaker CA Vivek Mehta, Manager Deloitte India, CA Tarun Kr. Gupta, Chairman - GST/Indirect Tax Sub-Committee and Guest Speaker CA Hemant Jajodia, Sr. Manager, Deloitte India

Lecture Meeting on GST


Deliberations by Guest Speakers, CA Jayesh Gupta, Bengaluru, CA Anshuma Rustagi and CA Gagan Kedia

(1) Interstate Movement of Goods in CST and GST (2) Export Refunds and Procedures


ACAEA L B U M

Programme for Articles & Students on 16.12.2017 ACAE Emami Conference Hall.

Guest Speaker CA Rishi Khator giving his deliberations to the Articles & Students.

at

Lecture Meeting on 28.12.2017 Conference Hall.

at ACAE Emami

Guest Speaker CS Siddhartha Murarka, Chairman, EIRC of ICSI being felicaed by Past President, CA Indu Chatrath

Guest Speaker CA Vivek Newatia giving his deliberations. On the dais Convenor CA Anup Kr. Sanghai and President CA Arun Kr. Agarwal

Guest Speaker CA Sumantra Guha giving his deliberations

(1) Highlights of Companies Amendment Bill 2017, Opportunities in NCLT and Restoration of Struck-off Companies.

(2) Prohibition of Benami Property Transactions Act, 1988 as amended by Benami Transactions (Prohibition) Amendment Act, 2016 (BTP Amendment Act).

(3) Prevention of Money Laundering Act, 2002 : An Overview.


ACAEA L B U M

57th Annual General Meeting of Association of Corporate Advisers & Executives held

at Barsana Boutique Hotel, Kolkata on 7th September, 2017

JAN :

MAR :

12th Vivekananda Birthday22nd Saraswati Puja23rd Netaji Birthday26th Republic Day

1st Dol Jatra30th Good Friday31st Yearly Bank A/c.

APR :

MAY :

JUNE :

14th Ambedkar Birthday15th Bengali New Years29th Buddha Purnima

1st May Day9th Rabindranath Birthday

16th Id-ul-fitter

AUG :

SEP :

OCT :

15th Independence Day22nd Id-uj-joha

2nd Janmastami21st Muharram

2nd Gandhi Birthday8th Mahalaya

16th to 19th Durga Puja24th Laxmi Puja

6th Kali Puja21st Fateh D. Daham23rd Gurunanak Birthday

25th Christmas Day

NOV :

DEC :

H O U S E J O U R N A LH O U S E J O U R N A L

TE AA DRO VP ISR EO RC SF &O EN XO EI

CT A UI TC IVOS ES SA

ACAE

Work is Worship

ESTD. 1960

6, Lyons Range, 3rd Floor, Unit - 2, Kolkata - 700 001Phone : +91-33-2210-7724Telefax : +91-33-4060-8353E-mail : [email protected] : www.acaekolkata.org