Vodafone is destined to be a saga of never-ending controversy. The raging controversy at the moment is whether the newly appointed Law Minister Kapil Sibal was justified in overruling the decision of his predecessor Ashvini Kumar on the grant of amnesty to Vodafone over its’ tax liability of Rs. 19,000 crore.

It is worth appreciating that the tax professionals send the pre-budget representations very objectively for the consideration of Honourable Finance Minister, however the Honourable Finance Minster or his team to the reasons best known to them does not interact or send invitation to the tax professional organizations while in the process of preparing the Finance Bill.

1. Introduction

A great Indian statesman and philosopher ‘Chanakya’, variously described as a ‘Kingmaker’, ‘Ruthless administrator’ etc., courted controversy when he said-

‘The ends justify the means’ and

‘The ruler should use any means to attain his goals. His actions require no moral sanctions’.

But when it came to framing of tax laws and collection of taxes, he made a very sober statement-

‘Ideally, governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can survive’.

But the Government of India while framing the tax laws is conveniently forgetting the later maxim and seems to be laying emphasis on the former one.

"Taxation is the price which civilized communities pay for the opportunity of remaining civilised."

— Albert Bushnell Hart, Actual Government, 1903

Tax patently appears to be an individual liability. Examined objectively, it is an investment for development and for the good of the society. I am very happy that the All India Federation of Tax Practitioners has chosen me to engage in a deep and mutually enriching dialogue with Indian Tax Professionals. I assure you that your interest in Indian taxation jurisprudence will provide you with a unique and stimulating journey, through the realms of abstract philosophy and also right up to the challenging ground realities of developmental concerns.

Good Evening to all. I am grateful for inviting me to inaugurate the National Seminar at Radhika Beach Resort, Diu. Diu is a famous tourist destination and the weather is pleasant. At the very outset, I wish every success of this National Seminar 2013 at Diu which is organized by All India Federation of Tax Practitioners, Mumbai and All Gujarat Federation of Tax Consultants, Ahmedabad jointly with Rajkot Tax Consultants Society, Jamnagar Tax Practitioners Association and Taxation Association, Junagadh.

Recovery is one of the most important subjects in direct taxation, of which all of us are very much concerned in our day to day practice, either as consultants or while dealing with our own taxation matters. I must congratulate the President and his team for selecting a very appropriate subject at a very appropriate time, because maximum recovery proceedings are initiated in the month of January, February and March every year.

1.      Introduction

A country levies taxes, both direct and indirect for promoting its own economic development. For economic development not only domestic capital is necessary but also the contribution of foreign capital in the domestic market is required. Prior to 1970, world trade grew at a greater pace than that of the FDI, but in the following decades since then the flow of FDI has grown at twice the pace of the growth of worldwide exports.1 Hence the sovereign authorities felt the need to relax the taxation statutes in order to seek contribution from foreign capitalists, with an ultimate motive of economic development.

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Section 37 of the Income Tax Act, 1961 (the “Act”) has been a source of numerous disputes between the department and the taxpayer.  For the sake of convenience, the sub-section with explanation thereto is quoted below:

37 (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

 

Explanation—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

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The nature and scope of assessment/ reassessment and nature & scope of additions/disallowances in assessments to be made u/s 153A of the Act have been contentious issue. Contradictory views have been expressed by different benches of Income Tax Appellate Tribunal on the issue as to whether those assessments which have already been passed u/s 143(3) or u/s 143(1) on the date of search would abate or not and whether addition can be made during assessment/ reassessment u/s 153A relating to the matters for which no incriminating material was found during the course of search.

1. Capital Gains exemption u\s 54 – Mumbai Tribunal decision – Jatinder Kumar Madan vs. ITO – [2012] 26 SOT 583 {Mum}{Trib} – Surrender of  a residential flat in an existing  building by assessee to a developer under a development agreement in lieu of another flat to be allotted to him in the new building to be developed. Held – Agreement amounts to construction of new flat by assessee and not purchase.

Under the provisions of section 54, an assessee is entitled to exemption in respect of long term capital gains resultant from transfer of residential premises, if he either purchases another residential premises within a period of two years or constructs a residential premises within three years from the date of the transfer. In the case before the Mumbai Tribunal cited above, the assessee had entered in to a development agreement with a developer under which he had agreed to surrender his residential flat in an existing building in lieu of a another flat agreed to be allotted by the developer in the building proposed to be  re-developed. Before the Assessing Officer, the assessee had canvassed his claim for exemption u\s 54 on a proposition that the development agreement amounted to an agreement for construction of a new flat by the developer on his behalf and this being so, he ought to be entitled to the exemption as the construction of the flat had been completed within a period of three years from the date of surrender of his old flat. In assessment, this claim of the assessee had been turned down by the Assessing Officer. The assessee’s appeal to the Appellate Commissioner was also dismissed