MCA notifies rules for Reporting of frauds by auditor

[TO BE PUBLISHED IN THE GAZETTE OT- INDIA, EXTRAORDINARY’ PART II.

SECTION 3, SUB-SECTION (i) l

Government of India

Ministry of Corporate Affairs

Notification

New Delhi, dated the 14th December, 2015

G.S.R. 972(E). – In exercise of the powers conferred by sub-section (12) of section 14 read with sub-section (1) of section 469 of the Companies Act’ 2013 (18 of2013)’ the Central Government hereby makes the following rules further to amend the Companies (Audit and Auditors) Rules, 2014 namely:-

1. (1) These rules may be called the Companies (Audit and Auditors) Amendment Rules, 2015.

    (2) They shall come into force on the date of their publication in the Official Gazette

2. In the Companies (Audit and Auditors) Rules, 2014 (hereinafter referred to as the principal rules),- (i) For rule 13, the following rule shall be substituted’ namely:-

“13. Reporting of frauds by auditor and other matters: (1) lf an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government.

(2) The auditor shall report the matter to the Central Government as under:-

(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud seeking their reply or observations within forty-five days;

(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations;

(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report lo the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;

(d) the report shall be sent to the Secretary. Ministry of corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same;

(e) the report shall be on the letter-head of the auditor containing postal address, email address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and

(f) the report shall be in the form of a statement as specified in Form ADT-4

(3) In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report the matter to Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:-

(a) Nature of Fraud with description;

(b) Approximate amount involved: and

(c) Parties involved.

(4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule(3) during the year shall be disclosed in the Board’s Report:-

(a) Nature of Fraud with description;

(b) Approximate Amount involved;

(c) Parties involved, if remedial action not taken: and

(d) Remedial actions taken.

(5) The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor during the performance of his duties under section 148 and section 204 respectively.”;

(ii) In the principal rules, after rule 14 and before FORM NO. ADT-1, insert the word “Annexure”;

(iii) In the principal rules, in Forrn No. ADT-4,-

 (A) in line 3, for the word, figures and brackets “rule 13(4)” the word, figures, letter and brackets “rule 13(2)(f)” shall be substituted; and

(B) in line 25, in item No. (10), for the word, figures and brackets, rule 13(1),’, the word, figures, letter and brackets “rule 13(2)(a),’shall be substituted.

[F. No. 1/33/2013-CL-V]

(Amardeep Singh Bhatia)

Joint Secretary to the Government of India

Note:- The principal rules were published in the Gazette of India, Extraordinary, Part 11, Section 3, Sub-section (i), vide number G.S.R. 246(E), dated the 31st March, 2014 and were subsequently amended vide G.S.R. 722(E) dated 14th October, 2014.

Cumulative FDI Inflow

The details of total FDI inflow in the years 2012-13, 2013-14 and 2014-15 are as under:

(Amount in US$ billion)

Sl. No.	Financial Year	Amount of FDI inflow
1	2012-13	34.30
2	2013-14	36.05
3	2014-15	44.29
	Cumulative total (2012-15)	114.64

Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII)/ Foreign Portfolio Investment (FPI) are two different routes of foreign investment and FII/ FPI is not a component of FDI. FII/FPI investment in 2014-15 was US$ 40,923 million.

Measures taken by CBDT recently to simplify Tax Compliance

CBDT takes various significant decisions in last three months for providing better taxpayer services, improving ease of doing business and reducing the burden of compliance on the tax payer . 

The Central Board of Direct Taxes (CBDT) has taken a number of decisions over last three months with the objective of providing better taxpayer services, improving ease of doing business and reducing the burden of compliance on the tax payer.

Some of the significant decisions taken are:

• Acceptance of A.P Shah Committee’s recommendations regarding applicability of MAT on Foreign Institutional Investors/Foreign Portfolio Investors (FII/FPI).
• Decision that MAT will not apply to foreign companies having no PE in India.
• Simplification of procedures for submission of Form No 15G and Form No 15H for furnishing self declaration for lower deduction or no deduction of tax.
• Notification of Transfer Pricing Rules to incorporate “range concept” and use of “multi year data” to reduce litigation on transfer pricing issues.
• Launching of “e-sahyog” Pilot Project to provide online facility to resolve mismatch of prepaid taxes in Income Tax Returns.
• Setting up of Committee with a view to simplify the provisions of the Income Tax Act, 1961.
• Phasing out plan of deductions under the Income Tax Act with reduction in tax rates for corporate taxpayers– extension of time for submission of comments.
• Notification of Income Computation and Disclosures Standards (ICDS) under section 145(2) of the Income Tax Act.
• Notification regarding income from off-shore Rupee Denominated Bonds.
• Decision to expedite issue of refunds below Rs.50,000/- for A.Y. 2013-14 and 2014-15 for cases not selected for scrutiny.
• Monetary limits for filing appeal by the Income Tax Department before Tribunal and High Courts enhanced from Rs.4 lakh and Rs.10 Lakh to Rs.10 lakh and Rs.20 lakh respectively with retrospective effect.

Amendment of Rules regarding quoting of PAN for specified transactions

The Government is committed to curbing the circulation of black money and widening of tax base. To collect information of certain types of transactions from third parties in a non-intrusive manner, the Income-tax Rules require quoting of PAN where the transactions exceed a specified limit. Persons who do not hold PAN are required to fill a form and furnish any one of the specified documents to establish their identity. 

One of the recommendations of the Special Investigation Team (SIT) on Black Money was that quoting of PAN should be made mandatory for all sales and purchases of goods and services where the payment exceeds Rs.1 lakh. Accepting this recommendation, the Finance Minister made an announcement to this effect in his Budget speech. The Government has since received numerous representations from various quarters regarding the burden of compliance this proposal would entail. Considering the representations, it has been decided that quoting of PAN will be required for transactions of an amount exceeding Rs.2 lakh regardless of the mode of payment.

To bring a balance between burden of compliance on legitimate transactions and the need to capture information relating to transactions of higher value, the Government has also enhanced the monetary limits of certain transactions which require quoting of PAN. The monetary limits have now been raised to Rs. 10 lakh from Rs. 5 lakh for sale or purchase of immovable property, to Rs.50,000 from Rs. 25,000 in the case of hotel or restaurant bills paid at any one time, and to Rs. 1 lakh from Rs. 50,000 for purchase or sale of shares of an unlisted company. In keeping with the Government’s thrust on financial inclusion, opening of a no-frills bank account such as a Jan Dhan Account will not require PAN. Other than that, the requirement of PAN applies to opening of all bank accounts including in co-operative banks. 

The changes to the Rules will take effect from 1st January, 2016. 

The above changes in the rules are expected to be useful in widening the tax net by non-intrusive methods. They are also expected to help in curbing black money and move towards a cashless economy. 

A chart highlighting the key changes to Rule 114B of the Income-tax Act is attached.

Sl.	NATURE OF TRANSACTION	MANDATORY QUOTING OF PAN (RULE 114B)
		Existing requirement	New requirement
1.	Immovable property	Sale/ purchase valued at Rs.5  lakh or more	i.       Sale/ purchase exceeding Rs.10 lakh; ii.     Properties valued by Stamp Valuation authority at amount exceeding Rs.10 lakh will also need PAN.
2	Motor vehicle (other than two wheeler)	All sales/purchases	No change
3.	Time deposit	Time deposit exceeding Rs.50,000/- with a banking company	i.      Deposits with Co-op banks,Post Office, Nidhi, NBFC companies will also need PAN; ii.    Deposits aggregating to more than Rs.5 lakh   during the year will also need PAN
4.	Deposit with Post Office Savings Bank	Exceeding Rs.50,000/-	Discontinued
5.	Sale or purchase of securities	Contract for sale/purchase of a value exceeding Rs.1 lakh	No change
6.	Opening an account (other than time deposit) with a banking company.	All new accounts.	i. Basic Savings Bank DepositAccount excluded (no PAN requirement for opening these accounts); ii. Co-operative banks also to comply
7.	Installation of telephone/ cellphone connections	All instances	Discontinued
8.	Hotel/restaurant bill(s)	Exceeding Rs.25,000/- at any one time (by any mode of payment)	Cash payment exceeding Rs.50,000/-.
9.	Cash purchase of bank drafts/ pay orders/ banker’scheques	Amount aggregating to Rs.50,000/- or more during any one day	Exceeding Rs.50,000/- on any one day.
10.	Cash deposit with banking company	Cash aggregating to Rs.50,000/- or more during any one day	Cash deposit exceeding Rs.50,000/- in a day.
11.	Foreign travel	Cash payment in connection with foreign travel  of an amount exceeding Rs.25,000/- at any one time (including fare, payment to travel agent, purchase of forex)	Cash payment in connection with foreign travel or purchase of foreign currency of an amount exceeding Rs.50,000/- at any one time (including fare, payment to travel agent)
12.	Credit card	Application to banking company/ any other company/institution for credit card	No change. Co-operative banks also to comply.
13.	Mutual fund units	Payment of Rs.50,000/- or more for purchase	Payment exceeding Rs.50,000/- for purchase.
14.	Shares of company	Payment of Rs.50,000/-  or more to a company for acquiring its shares	i.      Opening a demat account; ii.    Purchase or sale of shares of an unlisted company for an amount exceeding Rs.1 lakh per transaction.
15.	Debentures/ bonds	Payment of Rs.50,000/- or more to a company/ institution for acquiring its debentures/ bonds	Payment exceeding Rs.50,000/-.
16.	RBI bonds	Payment of Rs.50,000/-or more to RBI for acquiring its bonds	Payment exceeding Rs.50,000/-.
17.	Life insurance premium	Payment of Rs.50,000/- or more in a year as premium  to an insurer	Payment exceeding Rs.50,000/- in a year.
18.	Purchase of jewellery/bullion	Payment of Rs.5 lakh or more at any one time or against a bill	Deleted and merged with next item in this table
19.	Purchases or sales of goods or services	No requirement	Purchase/ sale of any goods or services exceeding Rs.2 lakh per transaction.
20.	Cash cards/ prepaid instruments issued under Payment & Settlement Act	No requirement	Cash payment aggregating to more than Rs.50,000 in a year.

New facility of pre-filling TDS data while submitting online rectification

Central Board of Direct Taxes has simplified the process of online rectification of incorrect TDS details filed in the Income Tax Return. Taxpayers were required to fill in complete details of the entire TDS schedule while applying for rectification on the e-filing portal of the Income-tax Department (www.incometaxindiaefiling.gov.in). Errors due to incomplete TDS details in rectification applications were leading to delays in processing of such applications thereby causing hardship to the taxpayers. To avoid this inconvenience, a new facility has been provided for pre-filling of TDS schedule while submitting online rectification request on the e-filing portal to facilitate easy correction or up-dating of TDS details. This is expected to considerably ease the burden of compliance on the taxpayers seeking rectification due to TDS mismatch.

Ponds specially designed for breeding of prawns to be treated as plant for depreciation purposes

ACIT V. VICTORY AQUA FARM LTD.[2015] 61 taxmann.com 166 (Supreme Court)

Ponds which were specially designed for rearing/breeding of the prawns have to be treated as tools of the business of the assessee and the depreciation was admissible on these at the rates applicable to plant and machinery

The assessee-company was doing business of ‘Aqua Culture’. It grows prawns in specially designed ponds. Thus, the disputed issue was:

Whether such ponds constitutes plant under Section 32?

The Supreme Court held that since the ponds were specially designed for rearing/breeding of the prawns, thus, they have to be treated as tools of the business of the assessee. Therefore, such ponds would be treated as plant for the purpose of allowing depreciation thereon.

MONITORING OF DOSSIER CASES

RE-FIXATION OF MONETARY LIMITS FOR VARIOUS INCOME TAX AUTHORITIES [234 TAXMANN (ST.) 1]

The monetary threshold for classification of a case of outstanding demand as a Dossier case has not been revised in last 30 years. It has been decided to raise the primary threshold for Dossier cases from Rs. 10 lakhs to Rs. 30 lakhs and re-adjust intermediate thresholds for focused monitoring and

rationalisation of the workload.

Accordingly, the CBDT vide Instruction No. 10/2015 [F. No. 404/02/2015-ITCC] dated 16/9/2015, gives the revised jurisdiction of Income Tax Authorities in respect of Dossier cases. One may refer to above citation for revised jurisdictions of respective monitoring authority. It has been decided to give a supervisory role in Dossier cases to the Pr. CCsIT as well for greater focus on the critical area of recovery of outstanding taxes.

Indirect Tax Revenue (Provisional) Collections Increase from Rs. 44,475 Crore in November 2014 to Rs. 55,297 Crore During November 2015

An Increase of 24.3% Registered During November 2015 over the Corresponding Period in the Previous Year; Central Excise Collections Increase by 58.3%, Service Tax Collections Increase by 16.1 % While Customs Collections Increase by 1.7 % During the Same Period 

Indirect Tax Revenue (Provisional) collections have increased from Rs 44,475 crore in November 2014 to Rs. 55,297 crore during November - 2015. Thus an increase of 24.3 % has been registered during November - 2015 over the corresponding period in the previous year. This is an achievement of 67.8% of the target fixed for BE 2015-16.

Central Excise collections have increased from Rs. 14,551 crore in November - 2014 to Rs. 23,033 crore during November - 2015 registering an increase of 58.3%. This is an achievement of 74.8% of the target fixed at BE 2015-16.

Service Tax collections have increased from Rs. 12,739 crore in November, 2014 to Rs. 14,789 crore during November, 2015 registering an increase of 16.1%. This is an achievement of 60.9% of the target fixed at BE 2015-16.

Customs collections have increased from Rs.17, 185 crore during November 2014 to Rs. 17,475 crore during November 2015 registering an increase of 1.7%. This is an achievement of 67.2% of the target fixed for BE 2015-16.

Details of Indirect Tax revenue (provisional) collections during the month November 2015, along with growth rate compared to the corresponding period in the previous year.

For the month November 2015

                                                                                                                                     (Rs. in crores)

Tax Head		For November			Upto November			% of BE achievement
	B.E. 2015-16	2014-15	2015-16	% Growth	2014-15	2015-16	% Growth
Customs	2,08,336	17,185	17,475	1.7	1,22,016	1,39,923	14.7	67.2
Central Excise*	2,28,157	14,551	23,033	58.3	1,02,139	1,70,693	67.1	74.8
Service Tax	2,09,774	12,739	14,789	16.1	1,02,118	1,27,675	25.0	60.9
Total	6,46,267	44,475	55,297	24.3	3,26,273	4,38,291	34.3	67.8

*Exclusive of cess administered by other departments.

Even un-availed cash discount is deductible if it is known prior to clearance of goods

Purolator India Ltd. v. Commissioner of Central Excise, Delhi-III [2015] 60 taxmann.com 471 (Supreme Court)

Cash discount known at or prior to clearance of goods is to be deducted from sale price in order to arrive at value of excisable goods even if discount is not actually availed.


Facts:

• As per agreement buyers were eligible for 'cash discount'.
• Assessee claimed deduction of 'cash discount' in arriving at 'assessable value' even in cases where same was not actually availed of by buyers.
• Department argued that cash discount could be allowed only if it was actually allowed in price actually paid and not in cases where buyer did not avail of cash discount.

 

Supreme Court held in favour of assessee as under:

• On each removal of excisable goods, transaction value of such goods must be determined. Transaction value means the price actually paid or payable for the goods, when sold.
• Transaction value has to be read along with expression "for delivery at time and place of removal". Therefore, value of excisable goods on basis of transaction value has only to be at time of removal, that is, time of clearance of goods from assessee's factory or depot.
• Expression actually paid or payable for the goods, when sold means whatever is agreed to as price for goods forms basis of value, whether such price has been paid, has been paid in part, or has not been paid at all. Basis of transaction value is therefore agreed contractual price.
• Expression when sold is not meant to indicate time at which such goods are sold, but is meant to indicate that goods are subject matter of an agreement of sale. Hence, cash discount which is known at or prior to clearance of goods, being contained in agreement of sale between assessee and its buyers, must therefore be deducted from sale price in order to arrive at value of excisable goods at time of removal.
• Hence, cash discount was deductible for arriving assessable value of goods.

Capital gain exempted under section 47 isn't liable to MAT as it doesn't fall in definition of income

SHIVALIK VENTURE (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX, 8(3), MUMBAI - [2015] 60 taxmann.com 314 (Mumbai - Tribunal)

Whether capital gains exempted under section 47(iv) of income-tax Act (‘the Act’) would be includible in the books profit under section 115JB for computing MAT?

The Mumbai ITAT held in favour of assessee as under:

• The provisions of section 10 lists out various types of income, which do not form part of total income. All those items of receipts shall otherwise fall under the definition of the term "income" as defined in section 2(24) of the Act, but they are not included in total income in view of the provisions of section 10 of the Act. Since they are considered as "incomes not included in total income", the legislature, in its wisdom, has decided not to subject them to MAT.
• Clause (ii) of Explanation 1 to section 115JB specifically provides that the amount of income to which any of the provisions of section 10 applies (other than the provisions contained in clause (38) thereof) than it is to be reduced from the Net profit, if they are credited to the Profit and Loss account.
• The logic of these provisions is that an item of receipt which falls under the definition of "income" but exempted under section 10 are to be excluded for the purpose of computing "Book Profit".
• Thus, it is seen that the legislature seeks to maintain parity between the computation of "total income" and "book profit", in respect of exempted category of income.
• If the said logic is extended further, an item of receipt which does not fall under the definition of "income" at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in "book profit" under Section 115JB of the Act.
• The profits and gains arising under Section 47(iv) is not falling under the definition of "transfer" and consequently, the same does not fall within the purview of the definition of "income" given under Section 2(24)(vi) of the Act.
• Therefore in the instant case the capital gains does not fall within the purview of the definition of "income", so the question of including the same in the Book Profit under section 115JB of the Act does not arise.

No Penalty on Tax Audit Report Obtained on last day of due date

Chopra Properties Vs ACIT (ITAT Delhi)

Facts:

Assessee is a partnership firm who filed its return of income on 30th March, 2009 showing total income of Rs. 58,57,760/- and assessment was completed u/s 143(3) on 24th November, 2010 at total income of Rs. 1,95,51,565/-. During the assessment proceedings while perusing the Tax Audit report AO observed that the tax audit report is signed on 30th September 2008. Therefore, according to the AO tax audit report should have been obtained before the specified date i.e. 30th September 2008. Therefore, AO issued a show cause notice, which remained unresponded. On further opportunity, the assessee submitted that the audit report was obtained on 30th September 2008, which was within the time prescribed for obtaining tax audit report. However, AO was of the view that according to provisions of Section 44AB assessee is required to get his accounts audited before specified date and not on the specified date. Therefore, as assessee has obtained this tax audit report on 30th September 2008 and not before 30th September, 2008, therefore, levied penalty of Rs. 1,00,000/- u/s 271B of the IT Act. Against this, assessee-preferred appeal before the CIT (A) who confirmed penalty holding that assessee has committed a default by not getting its accounts audited before the due date. Against this assessee is in appeal before us. 

Held:

The meaning of the word ‘before’ in section 44AB of the Act is cloudy and uncertain. The word is possible of two meanings, one being the common meaning and the other as given in Chamber’s Twentieth Century Dictionary as ‘previous to the expiration of’. Looking to the other sections of the Act as above and giving harmonious construction and applying respectfully the ratio of the above decision of the Bombay High Court, we hold that the expression ‘before the specified date’ in section 44AB of the Act means ‘on or before the specified date’.

 

Transferee-Co. can change its name as per Amalgamation Scheme without adhering to Companies Act

Michelin India (P.) Ltd. v. Michelin India Tamilnadu Tyres (P.) Ltd. [2015] 60 taxmann.com 220 (Madras High Court)

Where scheme of amalgamation provided that name of transferee company would be deemed to have been changed to name of transferor company then there is no need to follow the procedures and rules laid down under Companies Act for such change of name.

Facts

• In pursuant to a scheme of amalgamation sanctioned under Section 391 of Companies Act, 1956 (corresponding to section 230 of Companies Act, 2013), it was decided that name of transferee company would be deemed to have been changed to name of transferor company.
• However, Regional director raised an objection that Transferee Company should follow the procedures laid down under Section 21 of Companies Act, 1956 (corresponding to section 13 of Companies Act, 2013) for such name change even if scheme of amalgamation itself provides for such change.

The High Court held that-

• Section 391 is a complete Code under which the Court can sanction a Scheme of amalgamation containing all the alterations required in the structure of the Company for the purpose of carrying out the Scheme.
• In the instant case, scheme was passed through the procedure laid down under Section 391 and approved by the majority of the shareholders.
• Hence, there was no need to follow the repetitive procedures laid down under Section 21 for name change when sanctioned scheme of amalgamation itself provide for the same.

ITAT sounds note of caution for frivolous appeal by revenue; it damages public faith

ACIT v. R.P.G. Credit & Capital Ltd. [2015] 60 taxmann.com 160 (Delhi - Tribunal)

Filing of appeal with complete knowledge of its fate by the Revenue only reflects the mischievous adamancy to attempt to mislead the Tribunal and waste the time of the Court and the officers concerned.

Facts:

• CIT(A) on its first remand order dated 06.06.2012 had accepted the application filed by assessee seeking permission to file additional evidence which was objected to by Assessing Officer (AO).
• On 22.06.2012 CIT(A) issued second remand report directing AO to verify the claim of assessee as same was unverified.
• In the second remand report, AO admitted the assessee’s claim and based on such remand report CIT(A) deleted the addition made under Section 68.
• Still, revenue filed appeal before tribunal referring to the fact that the relief was granted by CIT(A) on the basis of first remand report dated 06.06.2012 thereby consciously ignoring making reference to the second remand report dated 22.06.2012 before the tribunal.

Tribunal held in favour of assessee as under:

• Filing of an appeal by an Assessing Officer ('AO') is a right which is vested in him by the statue. However, same should be exercised by applying proper due diligence in order to avoid any inappropriate litigations.
• Since the claim had been given up in the second remand report by the AO himself in second remand report, he could not claim to be aggrieved by the findings arrived at relying upon his own remand report. The CIT(A) accepted the assessee's claim based on the strength of the second remand report. Reference to this material document, i.e., second remand report in the grounds raised by revenue was curiously missing. This omission appeared to be deliberate and led us to conclude that the revenue had consciously indulged in meritless litigation.
• Once the AO in second remand report had already communicated that the enquiries made after issuing notices under Section 133(6) to the parties/persons who had confirmed the assessee's version and the AO concluded that the loans taken stood verified. No further legitimate grievance could be said to have remained for examination by the AO.
• This deliberate, mischievous and selective reference to facts by such responsible persons grievously damages the public faith and belief in the honest fair play of the tax administration.
• Filing of appeal with complete knowledge of its fate by the Revenue only reflects on revenue’s attempt to mislead the Tribunal and waste the time of the Court and the officers concerned.
• Departmental officers had willfully and deliberately failed to exercise their powers using their minds as was required of them as per law and has abused government machinery to initiate a litigation which entailed financial costs and tarnished the image of the Department and also strained the government resources.

Interpretation of word ‘or’

Spentex Industries Ltd. vs. CCE [2015] 62 taxmann.com 101 (Supreme Court)

The assessee has claimed rebate under certain notifications issued by Board under Rule 18 of Central Excise Rules, 2002. It was held that the word ‘OR’ occurring in Rule 18 cannot be given literal interpretation as that leads to various disastrous results pointed out in the preceding discussion and, therefore, this word has to be read as ‘and’ as that is what was intended by the rule maker in the scheme of things and to carry out the objectives of the Rule 18 and also to bring it at par with Rule 19. The principle that the word ‘or’ is normally disjunctive and ‘and’ is normally conjunctive. However, there may be circumstances where these words are to be read as vice versa to give effect to manifest intention of the Legislature as disclosed from the context

Levy of VAT on Indian liquor sold by hotels in Tamil Nadu is constitutionally valid

Hotel & Bar (FL.3) Association of Tamil Nadu (HOBAT) v. Secretary to Government, Commissioner Taxes Department [2015] 60 taxmann.com 75 (Madras High Court)

Levy of VAT on Indian-made liquor sold by hotels/clubs is constitutionally valid, irrespective of the fact that VAT has been imposed without giving benefit of set-off of tax-suffered turnover at the time of purchase. It is so since liquor is non-vatable goods and provisions imposing non-vatable tax on goods has not been challenged.

Background of the case:

• Hotels and clubs were paying Tamil Nadu VAT on foreign liquor sold by them to their customers. However, no tax was payable on sale of Indian-made-liquor by them to their customers.
• A tax had been levied in 2012 on sale of Indian-made-liquor by hotels and clubs to their customers.
• This tax had to be paid upon total turnover arising on sale of such liquor without any set-off of tax-suffered turnover at the time of purchase.
• Hotels and clubs purchase Indian-made-liquor from Tamil Nadu State Marketing Corporation Limited (“TASMAC”, a State’s instrumentality) after payment of tax. TASMAC has the benefit of paying tax on turnover after setting off tax-suffered turnover at the time of purchase. However, hotels and clubs have no such benefit.
• It was argued by the hotels and clubs that there could not be taxation of entire turnover. It placed fetters on the right of the petitioners to carry on their own business. Therefore, there was violation of Article 19(1)(g).

The High Court held that:

• The rights protected by Article 19(1) are not absolute but qualified. The qualifications are stated in clauses (2) to (6) of Article 19. The fundamental rights guaranteed in Article 19(1)(a) to (g) are,therefore, to be read along with the said qualifications.
• Potable liquor as a beverage is an intoxicating and depressant drink which is dangerous and injurious to health and is, therefore, an article which is res extra commercium, being inherently harmful. A citizen has, therefore, no fundamental right to do trade or business in liquor. Hence, the trade or business in liquor can be completely prohibited.
• The State can create a monopoly either in itself or in the agency created by it for the manufacture, possession, sale and distribution of the liquor as a beverage and also sell the licences to the citizens for the said purpose by charging fees. This can be done under Article 19(6) or even otherwise.
• The petitioners made considerable profit by the escalation of sale price. The petitioners were making considerable value additions to their sales in favour of their customers.When the petitioners were selling liquor at a higher price than the TASMAC, they could not seek parity.
• Liquor is specified as non-vatable item. Provisions as to tax certain goods treating them as non-vatable have not been challenged [Section 3(5) and Second Schedule].
• The petitioners, who are clubs and hotels, cannot be compared with the retail outlets of TASMAC. The customers of the TASMAC and the petitioners form two distinct and different categories based upon their respective socio-economic status. The petitioners are not prevented from doing their business. Thus, there is no violation of Article 19(1)(g).