No Long Term Capital Gain Exemption if Asset is Converted to Stock in Trade – ITAT Delhi

Smt. Alka Agarwal Vs. ADIT (ITAT Delhi) - once the assessee has converted a capital asset into stock-in-trade, the capital gain arising on such transaction of transfer shall be deemed to be the income of the previous year in which transfer took effect. That was the ordinary position where the capital gain would have been liable to tax in the AY 2005-06 itself. Now, the provisions of Section 45(2) make an exception to the generality of provisions of Section 45(1). Where it is a case of conversion of stock -in-trade, the profit arising on transfer by way of conversion shall be chargeable to income tax as its income in the previous year in which such stock-in-trade is actually sold or otherwise transferred by him and for the purpose of computation of capital gain, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of such conversion, meaning thereby, the year of assessability of income to tax is postponed to date on which actual sale of this stock-in-trade takes place. There can be no confusion or a debate or two opinions as regards the aforesaid provisions. A cumulative reading of the aforesaid provisions, in our mind, makes it clear that as far as the benefit of Section 10(38) is concerned, the assessee shall not be eligible for this benefit at the first stage of chargeability of capital gains because the deemed sale is the point of conversion into stock-in-trade which had not suffered STT. Further, with regards to the second part of the transaction, the assessee is not eligible for benefit under Section 10(38) because the second part of the transaction is purely a business transaction and provisions of Section 10(38) are applicable only in terms of long term capital assets. In our view, these provisions should be read in this manner and there can be no confusion or two opinions about the scheme of the provisions of conversion of capital asset into stock-in-trade as also the liability towards the capital gains tax on sale of shares held as capital asset which has suffered STT. Nowhere on the date of actual sale, the assessee was holding the impugned securities as a part of capital asset. They have already become the stock-in-trade of the business. So, we do not agree with the assessee as regards the total exemption from capital gains tax in respect of the capital assets which were converted into stock-in-trade as on 1st April, 2005 merely because on the date of sale such stock-in-trade the assessee was required to pay STT on them. We agree with the departmental stand in respect of this issue as we do not find any merit in such contentions of the assessee.

Chartered Accountants (Amendment) Bill, 2010 (as passed by Lok Sabha on 19.12.2011)

The Lok Sabha passed on 19.12.2011 the much awaited Chartered Accountants (Amendment) Bill, 2010, which provides for the following: Firstly, to enable the Members of the Institute of Chartered Accountants of India to form Multi Disciplinary firms i.e Partnership with other recognised professions and offer Multi Professional services in a competitive and commercial manner. It permits to enter into partnership with prescribed profession. Secondly, to extend the benefits of the Limited Liability Partnership Act, 2008 to the Firms of Chartered Accountants under the Chartered Accountants Act, 1949. Though the amendments are brought in the Chartered Accountants Regulations, the existing Companies Act 1956 requires an amendment as follows, till the New Companies Bill is enacted. Section 226 of Companies Act, 1956 Clause 141 of the New Companies Bill 226(1) A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949): Provided that a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practising may act in the name of the firm. 141(1) A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant: Provided that a firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a Company The Chartered Accountants Act (as passed in the Parliament) permits Partnership with SPECIFIED PROFESSIONS. Specified Professions are already notified by the Council which includes (a) Company Secretary; (b) Cost Accountant; (c) Advocate; (d) Engineer; (e) Architect; (f) Actuary; and (g) Members of Professional Bodies outside India relating to accountancy and recognized council. If the partnership as per above is entered, the firm cannot be appointed as Auditor for a Company as the existing act requires all the partners in the Firm to be a practicing CAs. Whereas in the New Companies Bill, the corresponding provision is carefully worded as a firm whereof majority of partners practicing in India. Since, the Companies Bill did not find its way in the present winter session (as per the press announcements), the existing Companies Act will see the amendments soon.

Notifications prescribing Cost Accounting Records Rules, 2011 for different industries

MCA has vide Notifications G.S.R. 869(E), G.S.R.872(E), G.S.R.874(E), G.S.R. 870(E), G.S.R.873(E) and G.S.R. 871(E) dated 7.12.2011, notified Cost Accounting Records Rules, 2011 for 6 different industries. The Rules require the stated industries to keep cost records and books of account, and the books of accounts so maintained to contain specified particulars mentioned in the Schedule annexed to the respective rules. The Rules also prescribe the form of Compliance Report and the form for filing the Report (duly authenticated and signed by a cost accountant) and other documents with the Central Government in electronic mode.

The notified Rules are mentioned as follows:

The Cost Accounting Records(Telecommunication Industry) Rules,2011 vide G.S.R. 869(E) has superseded Cost Accounting Records (Telecommunications) Rules, 2002
The Cost Accounting Records( Sugar Industry) Rules,2011 vide G.S.R. 872(E) has superseded Cost Accounting Records (Sugar) amended Rules, 1997 and Cost Accounting Records (Industrial Alcohol) Rules, 1997
The Cost Accounting Records( Pharmaceutical Industry) Rules,2011 vide G.S.R. 874(E) has superseded Cost Accounting Records (Bulk Drugs) Rules, 1974 and Cost Accounting Records (Formulations) Rules, 1988
The Cost Accounting Records( Petroleum Industry) Rules,2011 vide G.S.R. 870(E) has superseded Cost Accounting Records (Petroleum Industry) Rules, 2002
The Cost Accounting Records( Fertilizer Industry) Rules,2011 vide G.S.R. 873(E) has superseded Cost Accounting Records (Fertilizers) Rules, 1993
The Cost Accounting Records( Electricity Industry) Rules,2011 vide G.S.R. 871(E) has superseded Cost Accounting Records (Electricity Industry) Rules, 2001

Circular No. 134 /3 / 2011 – ST

F.No.354/42/2011-TRU
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise& Customs
Tax Research Unit
North Block, New Delhi
8 th April, 2011
To
Chief Commissioners of Central Excise and Service Tax (All),
Director General (Service Tax),
Director General (Central Excise Intelligence),
Director General (Audit),
Commissioners of Service Tax (All),
Commissioners of Central Excise and Service Tax (All).

Madam/Sir,
Subject: - Education Cess and Secondary and Higher Education Cess – reg.

Representations have been received from the field formations, seeking clarification regarding the applicability of service tax exemption to Education Cess (refers to both Education Cess leviable under Finance (No.2) Act, 2004 and Secondary and Higher Education Cess leviable under Finance Act, 2007), under notifications where ‘whole of service tax' stands exempted. Apparently the doubt arises in the context of Tribunal’s Order in the matter of M/s. Balasore Alloys Ltd. Vs CCE, Customs and Service Tax, BBSR-I (2010-TIOL-1659-CESTAT-KOL).
2. The issue has been examined. Though Tribunal’s Order referred above is in favor of revenue, it is inconsistent with the policy intention of the Government to exempt education cess in addition to service tax, where ‘whole of service tax’ stands exempted. According to section 95(1) of Finance (No.2) Act, 2004 and section 140(1) of Finance Act, 2007, Education Cess and Secondary and Higher Education Cess are leviable and collected as service tax, and when whole of service tax is exempt, the same applies to education cess as well. Since Education Cess is levied and collected as percentage of service tax, when and wherever service tax is NIL by virtue of exemption, Education Cess would also be NIL.
3. This being the principle, field formations are directed not to initiate proceedings to recover the education cess, where ‘whole of service tax’ stands exempted under the notification. Extending the same principle, where education cess has been refunded to exporters along with service tax, by virtue of exemption notifications where ‘whole of service tax’ is exempt, the same need not be recovered.
5. Field formations may be instructed accordingly.
6. Please acknowledge the receipt of this circular. Hindi version to follow.
(J. M. Kennedy)
Director, TRU
Tel: 011-23092634

Payment of Cheques/Drafts/Pay Orders/Banker’s Cheques

Date: Nov 04, 2011

RBI/2011-12/251
DBOD.AML BC.No.47/14.01.001/2011-12
November 4, 2011
The Chairmen/Chief Executive Officers
All Scheduled Commercial Banks (excluding RRBs)/Local Area Banks
Dear Sir,
Payment of Cheques/Drafts/Pay Orders/Banker’s Cheques
In India, it has been the usual practice among bankers to make payment of only such cheques and drafts as are presented for payment within a period of six months from the date of the instrument.
2. It has been brought to the notice of Reserve Bank by Government of India that some persons are taking undue advantage of the said practice of banks of making payment of cheques/drafts/pay orders/banker’s cheques presented within a period of six months from the date of the instrument as these instruments are being circulated in the market like cash for six months. Reserve Bank is satisfied that in public interest and in the interest of banking policy it is necessary to reduce the period within which cheques/drafts/pay orders/banker’s cheques are presented for payment from six months to three months from the date of such instrument. Accordingly, in exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949, Reserve Bank hereby directs that with effect from April 1, 2012, banks should not make payment of cheques/drafts/pay orders/banker’s cheques bearing that date or any subsequent date, if they are presented beyond the period of three months from the date of such instrument.
3. Banks should ensure strict compliance of these directions and notify the holders of such instruments of the change in practice by printing or stamping on the cheque leaves, drafts, pay orders and banker’s cheques issued on or after April 1, 2012, by issuing suitable instruction for presentment within the period of three months from the date of the instrument.
4. Please acknowledge receipt
Yours faithfully,
(Deepak Singhal)
Chief General Manager in-Charge

Notification No.12/2006-Service Tax

G.S.R. (E).– In exercise of the powers conferred by clause (aa) of sub-section (2) of section 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:-

1. Short title and commencement.– (1) These rules may be called the Service Tax (Determination of Value) Rules, 2006.
(2) They shall come into force on the date of their publication in the Official Gazette.

2. Definitions.–In these rules, unless the context otherwise requires,–
(a) “Act” means the Finance Act, 1994 (32 of 1994);
(b) “section” means the section of the Act;
(c) “value” shall have the meaning assigned to it in section 67;
(d) words and expressions used in these rules and not defined but defined in the Act shall have the meaning respectively assigned to them in the Act.

3. Manner of determination of value.– Subject to the provisions of section 67, the value of taxable service, where the consideration received is not wholly or partly consisting of money, shall be determined by the service provider in the following manner:–
(a) the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration;
(b) where the value cannot be determined in accordance with clause (a), the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.

4. Rejection of value.– (1) Nothing contained in rule 3 shall be construed as restricting or calling into question the power of the Central Excise Officer to satisfy himself as to the accuracy of any information furnished or document presented for valuation.
(2) Where the Central Excise Officer is satisfied that the value so determined by the service provider is not in accordance with the provisions of the Act or these rules, he shall issue a notice to such service provider to show cause why the value of such taxable service for the purpose of charging service tax should not be fixed at the amount specified in the notice.

(3) The Central Excise Officer shall, after providing reasonable opportunity of being heard, determine the value of such taxable service for the purpose of charging service tax in accordance with the provisions of the Act and these rules.

5. Inclusion in or exclusion from value of certain expenditure or costs.– (1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.
(2) Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:-
(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;
(ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;
(iii) the recipient of service is liable to make payment to the third party;
(iv) the recipient of service authorises the service provider to make payment on his behalf;
(v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
(viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

Explanation1.–For the purposes of sub- rule (2), “pure agent” means a person who–
(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;
(b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;
(c) does not use such goods or services so procured; and
(d) receives only the actual amount incurred to procure such goods or services.

Explanation2.– For the removal of doubts it is clarified that the value of the taxable service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual components of the total consideration is indicated separately in the invoice.
Illustration 1.– X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television. Y billed X including charges for Television advertisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent

Illustration 2.– In the course of providing a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service.

Illustration 3.– A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B.

Illustration 4.– Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients of service. The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of services by the company X.

6. Cases in which the commission, costs, etc., will be included or excluded.– (1) Subject to the provisions of section 67, the value of the taxable services shall include‚–
(i) the commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock-broker to any sub-broker;
(ii) the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit;
(iii) the amount of premium charged by the insurer from the policy holder;
(iv) the commission received by the air travel agent from the airline;
(v) the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer;
(vi) the reimbursement received by the authorised service station, from manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer;
(vii) the commission or any amount received by the rail travel agent from the Railways or the customer;
(viii) the remuneration or commission, by whatever name called, paid to such agent by the client engaging such agent for the services provided by a clearing and forwarding agent to a client rendering services of clearing and forwarding operations in any manner; and
(ix) the commission, fee or any other sum, by whatever name called, paid to such agent by the insurer appointing such agent in relation to insurance auxiliary services provided by an insurance agent.
(2) Subject to the provisions contained in sub-rule (1), the value of any taxable service, as the case may be, does not include–
(i) initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit;
(ii) the airfare collected by air travel agent in respect of service provided by him;
(iii) the rail fare collected by air travel agent in respect of service provided by him;and
(iv) interest on loans.

7. Actual consideration to be the value of taxable service provided from outside India.– (1) The value of taxable service received under the provisions of section 66A, shall be such amount as is equal to the actual consideration charged for the services provided or to be provided.
(2) Notwithstanding anything contained in sub-rule (1), the value of taxable services specified in clause (ii) of rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, as are partly performed in India, shall be the total consideration paid by the recipient for such services including the value of service partly performed outside India.

F. No. B1/4/2006-TRU