Drug repurposing-patentability scope for Swiss Type claims

February 24, 2023

This article has been written by Md. Omar Faruque Munshi has been edited by Oishika Banerji (Team Lawsikho).

It has been published by Rachit Garg.

Table of Contents

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Introduction
Principles and policy issues in patent law that pose difficulty in granting patents to repurposed drugs
The “Swiss-type use patent” is practised for repurposed drugs
- What is a “Swiss-type” use patent
  - The Swiss Federal Intellectual Property Office’s (FIPO) legal advice in respect of the second use patent to therapeutic treatment claim (dated 30 May 1984)
  - The earlier judicial decision that provided for grounding the Swiss-type claim receiving legal recognition
    - The summary fact of the case
- Subsequent replacement of Swiss-type claim: global context
Indian position for patent to repurposed drugs
- Novartis Ag vs Union of India & Ors (2013)
Conclusion
References

Introduction

A patent for drug repurposing (or drug repositioning) is a case where the patent is claimed for the discovery of new use or new property of a known drug or medicinal substance. Rather than embarking on a wholly new process of developing a drug, the repurposing of drugs does the work of redirecting the known medicinal substance towards new therapeutic use or treatment of a medical condition not contemplated in the previously patented substance. The repurposing of drugs has some advantages in developing medicines for the treatment of diseases in a more convenient way, having ready access to relevant experimental data relating to bioavailability, toxicities, established protocols and dosing regimes. These are data which are “in excess of what can be derived from Phase- I clinical trials of new drugs, particularly for first in a class of drugs”. Due to this advantage of the ready availability of clinical data, drug repurposing has been considered a mode of faster production of safe drugs for the treatment of diseases avoiding the huge cost of research and development expenditure in it, and thus serving the demand of the medical field and national interest on health protection. Upon such considerations, the patent claim of pharmaceutical companies to repurposed drugs has found the attention of government policymakers and legislators, researchers, investors, etc. But the patentability criteria of traditional patent jurisprudence (e.g. considerations of novelty, inventive step, and technical application) pose difficulty in obtaining patents for repurposed drugs. Equally important along the line of the said tests, there are certain policy issues of the Government concerning the grant of patent to the said invention. This article discusses the principles of patent jurisprudence, country-specific differing legislative approaches, government policy, legal practice and modern development in respect of patents to repurposed drugs.

Principles and policy issues in patent law that pose difficulty in granting patents to repurposed drugs

The traditional jurisprudence of patent law rests upon three basic patentability criteria, namely, novelty, inventive step, and technical advantage. When it comes to novelty, significance rests on whether the invented product or process is new or not. While this patentability criterion is easily crossed over by the inventors, it is the criteria of the invention being an ‘inventive step’ that usually becomes a hurdle for the inventors. ‘Inventive step’ for patentability is a quality that distinguishes the claimed invention from the prior art (or knowledge), belonging to the same field. Alongside an invention possessing an inventive step, it must also be non-obvious. Non-obviousness signifies that when the invention becomes known to people belonging to the same field as the inventor, the invention does not appear to be an obvious outcome with no unique traits attached to it. The Indian Patent Act, 1970 under Sections 2(1)(j) and 2(1)(ac) has incorporated these patentability criteria. Thus, the dominating patentability principles prevailing under patent jurisprudence can be summarised as below:

It must be “new”, that is to say, it must not have been anticipated in the existing knowledge or discovery;
It must involve an “inventive step” to such a level that it is not obvious to a person having ordinary skill and knowledge in the relevant field.
It must be capable of producing technical advantage, i.e. it can be put to “industrial application”, thereby being capable of being made or used in industry.

Taking into account the derivative effects of the said principles, the granting of a patent to repurposed drugs poses difficulty in terms of resolving important legal issues, such as:

Whether the claim of the invention having a “new use” or “is a new discovery” of the known patented substance is further patentable or not,
Whether such a grant of patent is in nature an extension of an existing patent.

Upon these central issues, the practice of patenting repurposed drugs differs from one country to the other. While grant of patents to repurposed drugs has been recognized in several jurisdictions such as the USA, Australia, China, Europe, etc (provided that certain patentability criteria set by the nations’ respective laws are fulfilled), on the contrary, there are countries that do not grant patents to repurposed drugs, such as India, Indonesia, Argentina, etc. The latter series of nations have provided their own set of interpretations when it comes to the patentability criteria mentioned previously. Further, government policies of these nations also contribute to the denial of patent grant to repurposed drugs, namely:

Preventing monopoly in the market.
Providing divergent scope for research and development of generic medicines by local players in the market.
Striking a balance between the competition of foreign industry vis a vis local industry in case of the medicinal field.

The “Swiss-type use patent” is practised for repurposed drugs

What is a “Swiss-type” use patent

Generally, patent laws across nations prohibit inventors from claiming a patent in the “method of treatment” of a disease. It follows that the patent claim on repurposed drugs, even in the jurisdictions where allowed, cannot be drafted in the form (eg “Use of X to the treatment of disease Y”), since it will be barred by being a “method of treatment claim”. Earlier to evade the said restriction of patent law, patent attorneys used to draft patent claims in a form known as “Swiss-type claim”. This claim type is a method of drafting a claim obtaining similar claims like a claim for patent on “medicinal use”, thereby avoiding the claim being placed directly as “the treatment of a medical condition”. As per the “Swiss-type claim” format, the claim will now be placed as a method or process of manufacturing medicine to be used in the treatment of a new medical condition (for example, “use of substance X for the manufacture of medicine to treat the Y”).

The name Swiss-type claim comes from its first recognition by the Swiss Federal Intellectual Property Office (FIPO) publishing “Legal Advice”, dated 30 May 1984” in the EPO Patent Journal no. 11/1984 in respect to a practice developed in Europe to claim patent to repurposed drugs. In the context of legal bar to the grant of patent in case of “method of treatment of medical condition”, the said Swiss patent authority cleared the way for getting second use patent of known drug suggesting a “claim format” by issuing the said official legal advice as provided hereunder.

The Swiss Federal Intellectual Property Office’s (FIPO) legal advice in respect of the second use patent to therapeutic treatment claim (dated 30 May 1984)

“A claim for the “use of compound X to treat … (indication) …” is inadmissible under Swiss Law. Limited claims directed to the “use of a compound … to produce agents against …” are admissible even where they relate to a second (or subsequent) medical use of a known medicament. Details concerning the formulation of a medicament (e.g. labelling, packaging or dosage) may be included in a patent application´s description.”

Thus according to the said FIPO notice, the Swiss-type claim for the repurposed drugs stood in brief like this,

“use of compound X in the manufacture of a medicament for the treatment of medical condition Y”.

However, even if the second use patent is allowed for an invention (e.g. repurposed drugs), it has to mandatorily pass the basic patentability criteria establishing novelty, non-obviousness, and industrial application. With this dominating three basic patentability criteria in the patent jurisprudence, the grant of a patent for repurposed drugs faces different levels of difficulties in different jurisdictions depending upon the actual text of patent legislations in such jurisdiction, the legislations which are backed by the country-specific government policy given considerations to variety issues and national concerns, such as– industrial, commercial, public health protection, economic and social context, etc.

The earlier judicial decision that provided for grounding the Swiss-type claim receiving legal recognition

The judicial principle previously developed recognized that, the “second use claim” for the manufacture of a medicament for the treatment of a new medical condition, although in effect involved the second (or further) use of a known pharmaceutical composition would be patentable provided that it passed the test of novelty, non-obviousness, and industrial application. In connection to the judicial development of this principle, as an attempt of rationalising the traditional patentability principles with the need to grant of “second use patent” can be referred to the most cited case, General Tire & Rubber Company v The Firestone Tyre and Rubber Company and Others (1972) (hereinafter mentioned as “the General Tire” case).

The summary fact of the case

An appeal was filed before the Supreme of Court of Judicature, UK, from the judgement given on 31st July 1970 by Graham, J. in a proceeding in which the respondent (plaintiffs) sought a remedy against the infringement of its patent No. 737,086 (priority date 20th November 1950) and the appellant (defendants) sought its revocation. The primary issue that arose, in this case, was that the impugned patent application was devoid of patentability criteria in terms of ‘anticipation’, ‘obviousness’ and ‘absence of any inventive step’, thereby being in violation of Sections 32(1)(e), 32(1)(f) and 32(1)(i) of the Patents Act, 1949.

The Supreme Court of Appeal had observed while dismissing the appeal, that,

The invention claimed was not anticipated by any of the cited documents,
That it was not obvious, and
That the objection of ambiguity was not established.

The test for determining the existence of novelty in subsequent inventions has been laid down by the court of law in this case. The fact that the prior art provides a direct lead of being similar to the claimed invention ipso facto eliminates the latter from the ambit of claiming patent protection. The case had concluded that “to anticipate the claim, the prior publication had to contain a clear and unmistakable direction to do what the patentee claimed to have invented”.

Subsequent replacement of Swiss-type claim: global context

Subsequently to the above-stated judicial recognition, the practice of “second use patent claim” got its firm footing by its later adoption in a decision of the Enlarged Board of Appeal of the European Patent Office dated 05 December 1984. This decision was made in connection to a Case Gr 05/83 which was referred to it by the Technical Board of Appeal for Chemistry of the European Patent Office in accordance with Article 112 of the European Patent Convention, 1973 (EPC 1973) to resolve a question of law on the application of “Swiss-type use claim”. The question of law raised was that, “Can a patent with claims directed to the use be granted for the use of a substance or composition for the treatment of the human or animal body by therapy?”

The Enlarged Board of Appeal had opined that decision in favour of Swiss-type claim can be passed after taking reference from the adoption of practice “use claims” by the Swiss Federal Intellectual Office, wherein “a claim to the use of an active ingredient for the manufacture of a medicament ready for administration could be allowed even where it related to the second (or further) application for a known pharmaceutical composition”.

The practice of “Swiss type claim” has now been abolished in Europe by the above stated decision given in the case G 05/83 of the European Patent Office (EPO) which prescribed the new form of drafting the patent claim in the second use of patented substance, i.e. claims “where the subject-matter of a claim is rendered novel only by a new therapeutic use of a medicament”. This simplified new EPC form for second use patent, states that, “Substance X for use as a medicament” or “Substance X for use in the treatment of disease Y”(hereinafter referred to as “the EPC-2000 Patent Claim Form”). However, such a claim must establish an “inventive step” over any prior art disclosing the use of “known substance” as a medicament.

The reason for abolishing the earlier practised “Swiss-type” claim is explained in the European Patent Examination Guideline stating that, “a claim to a particular physical activity (e.g. method, process, use) confers less protection than a claim to the physical entity per se (G 2/88, Reasons 5.1)”.

Here, attention is to be paid to the claim format, “Use of substance or composition X for the treatment of disease Y..”, which is not patentable under EPC since it will be regarded as relating to a method for treatment explicitly excluded from patentability under Article 53(c) and therefore will not be accepted. Rather this should be converted to the direct claim of patent to the ”medicinal substance” itself to be used in treating disease (instead of claim to the “use of the medicinal substance for treatment”).

After the abolition of the practice “Swiss-type patent claim” by EPC 2000, the UK also abolished it by issuing the patent practice guideline dated 25 November 2021 titled as “Examination guidelines for patent applications relating to medical inventions in the Intellectual Property Office” (in guideline No. 2 and 3). The said guideline also exemplified the effect of different claim formulations on patentability after EPC 2000, as have been provided in a table as below:

#	Claim	Patentable	Article
A	Use of product X for the treatment of asthma	No	53(c)
B	1. Product X for use as a medicament[X known as e.g. herbicide]2. Product according to claim 1 for use in the treatment of asthma	Yes(even if X is a known product, but its use in medicine is not known)Yes	54(4)
C	Product X for use in the treatment of cancer*	Yes(even if case B is prior art, provided that such a claim is inventive over B and any other prior art)	54(5)
D	Product X for use in the treatment of leukaemia*	Yes(even if cases B and C are prior art, provided that D is inventive over B and C and any other prior art because leukaemia is a specific type of cancer)	54(5)

(Note: Previously the corresponding Swiss-type claims for cases C and D (required under EPC 1973) would be “the use of Product X for the manufacture of a medicament for the treatment of cancer/leukaemia.)

Indian position for patent to repurposed drugs

In India, neither the patent claim in the form “Swiss Type” to use a known medicinal substance in the manufacture of a medicament (i.e. the process patent) is permitted, nor in the form claim to “medicinal product itself” in its repurposed use is possible. The relevant patentability bar arising under the Indian Patent Act, 1970 (amended 2005) is discussed below.

Indian Patent Act, 1970 defines the term ‘invention’ as “a new product or process involving an inventive step and capable of industrial application” (Section 2(1)(j)).The term “inventive step” is defined as “a feature of an invention that involves technical advantage as compared to the existing knowledge or having economic significance or both” of such a nature that it is “not obvious to a person skilled in the art” of the relevant field (Section 2(1)(ja)). The term “capable of industrial application” has been meant to indicate such quality of the invention by which it is “capable of being made or used in an industry” (Section 2(1)(ac)). It is necessary to note that while for any invention seeking patent protection, abiding by patentable criteria is a must, not falling under Sections 3 and 4 (non-patentable inventions), stands equally relevant. Pertinent to the subject matter of this present study, here it is worth mentioning that Section 3(d) of the 1970 Act excludes inventions which represent the mere use of known substances or already existing substances.

The collective impact of these provisions operates as a hindrance for the grant of patent in repurposed drugs. It is noticeable that the “inventive step” as required under the Indian patent law for patentability to an invention is of a higher degree of expectation which goes beyond the “mere discovery of new property or new use of known substance or process” being that it must attain the quality of new product or be made of applying at least a new reactant to the known process of manufacturing.

Novartis Ag vs Union of India & Ors (2013)

The leading case in the discussed matter, Novartis Ag vs Union of India & Ors (2013), remains a landmark judgement dealing with therapeutic efficiency and interpretation of Section 3(d) of the Indian Patents Act, 1970. The appellant, Swiss company, “Novartis AG” claimed a patent to its drug Glivec, in its beta crystalline form. The appeal was filed before the Supreme Court of India against the decision of denial of a patent by the Intellectual Property Appellate Board (IPAB). It was alleged by the appellant that the drug is the formulation of “beta crystalline”, a developed form of a chemical compound called Imatinib Mesylate which has been used as a therapeutic drug for the treatment of chronic myeloid, leukaemia.

It is interesting to note that in 2005, Madras Patent Office had rejected the patent application for “Glivec” by Novartis on grounds that the alleged drug was not only anticipated by prior publication, but also failed on satisfying requirements of novelty and non – obviousness as laid down by the Patents Act, 1970. Further reasoning that the claimed invention fell within the ambit of Section 3 (d) and that the new drug in no way contributed to enhanced efficacy of the existing one, the patent application stood dismissed.

In upholding rejection of the patent as was decided by the Madras Patent Office, the Indian Supreme Court held that the invention does not involve inventive steps to overcome patentability criteria as required under Section 3(d) of the Indian Patent Act, 1970 (as amended in 2005). The Court after paying intensive attention to the legislative history to find the purpose of enacting amended Section 3(d) and it’s true purports, commented that taking into consideration the collective impact of Sections 2(1)(j), 2(1)(ja), 2(1)(ac) and Section 3(d), the terms ‘invention’ and ‘patentability’ are to be construed having two different meanings.

Under Indian law, an invention, even if it is new, must further pass the test of patentability barrier provided under Section 3(d). Interpreting Indian patent law the Court held that to overcome the patentability barrier of Section 3(d), the appellant was obliged to show that, “the enhanced efficacy of (its claimed invention) the beta crystalline form of Imatinib Mesylate over Imatinib Mesylate (non-crystalline). There is, however, no material in the subject application or in the supporting affidavits to make any comparison of efficacy, or even solubility, between the beta crystalline form of Imatinib Mesylate and Imatinib Mesylate (non-crystalline).”

With the said findings, the Court refused to grant a patent to the appellant holding that its invention is simply an amended version of the known compound without producing any new medicine and showing any enhanced technical advantage over the existing medicine. Its patentability is thus hit under Section 3(d) of the Patent Act, of 1970. Though refused the patent in India for the said invention, it is pertinent to mention that the appellant’s medicine Glivec, had been patented in nearly 40 countries including USA, Russia and China.

The decision of the Apex Court in this landmark case hints on the weightage given to India being the hub of generic medicine thereby negating the evergreening of patents with an intention to restrict monopoly ruling in the Indian market. Prior to the amendment in 2005, the Patent Act 1970 was only in favour of process patents (patenting of the process through which the medicine has been made), when it came to drugs and chemical substances. Following the 2005 Patent Amendment Act, product patents had entered the Indian scenario. India continues to uphold the interest of the public over monopoly players and this judgement is a clear reflection of the same.

Conclusion

Patent to repurposed drugs is important in terms of its contribution to the necessity of the medical field. The question of granting a patent to the repurposing of drugs has to be answered by drawing a balance between protecting the statutory promise of monopoly granted to the patent holder for the statutory term in the exploitation of invention and mitigating the adverse effect of granting patent and further patents to an invention, granting which produces the obstructive effect or the narrowing down effect upon the subsequent research and development in the relevant patent area. Besides that, the national policy determination varies depending upon its special economic and social context. This is an area in which patent law has much to do to find appropriate legislative provisions drawing the said balance thereby resolving growing issues.

References

https://ecancer.org/en/journal/article/442-the-repurposing-drugs-in-oncology-redo-project
https://archive.epo.org/oj/issues/1984/11.html.
https://academic.oup.com/rpc/article/89/17/457/1597128.
https://www.epo.org/law-practice/case-law-appeals/pdf/g830005ex1.pdf.
https://www.epo.org/law-practice/legal-texts/html/guidelines/e/g_vi_7_1.htm.

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Depreciation as per Companies Act, 2013

Sneha Mahawar

February 24, 2023

This article is written by Sushree Surekha Choudhury from the KIIT School of Law, Bhubaneswar. It provides an insight into the concept of “depreciation” as per the Companies Act, 2013, the legal provisions therein, and the methods to calculate it.

This article has been published by Sneha Mahawar.

Table of Contents

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Introduction
What is depreciation
- Determination of depreciation and the profit and loss accounts of a company
- Necessity for charging depreciation
  - Matching principle
Methods for the calculation of depreciation
The Companies Act, 2013: relevant provisions regarding depreciation
Conclusion
Frequently Asked Questions (FAQs)
- Why is it important to calculate depreciation?
- Is it mandatory to claim depreciation as per the Companies Act, 2013?
References

Introduction

The term “depreciation” refers to the decrease in the monetary value of any object. Suppose you purchase a car today at the price of Rs. 14 lakhs. Now, after using it for three years, you want to sell it and buy a new one. Would you sell it at the same price that you bought it? No, right? You will obviously sell it at a lower price than its actual cost after calculating the depreciation in the value of your car over the course of three years. It may have incurred certain damages, the model will have become old, the operating system might not be the latest one, it must have run certain kilometres in these three years as opposed to when you bought it, and similar other situations will all contribute to the decrease in value of the asset. Thus, the resale value of the car will always be less than the price at which it was bought. This is exactly what is known as depreciation.

Just as the value of the car depreciates over its useful life, so does the value of every other tangible or intangible asset. In the context of companies, they own assets too, both tangible and intangible. These assets, like the car, depreciate in value with time. Thus, companies adopt procedures to calculate cumulative depreciation, which refers to the depreciation of each asset as determined separately, and all the values are clubbed together to be reduced from the EBITDA (earnings before interest, taxes, depreciation, and amortisation of the company) of all their assets at the end of their useful lives. This is essential to determine the net income of the company accurately. The Companies Act, 2013 provides a regulatory framework to determine the depreciation of assets owned by companies.

In this article, we will learn everything about depreciation as per the Companies Act, 2013, and the methods for determining it.

What is depreciation

In simple terms, depreciation refers to the loss in value of an asset due to its usage over a period of time. The loss in value may be caused by various factors, such as a change in the market and market needs, technological advancements, an increase or decrease in the demand and supply ratio, an increase or decrease in the usage of a particular asset, and industry-specific changes, among others. Thus, depreciation is calculated to determine the actual value of assets and also serves other accounting necessities.

Depreciation is used as a “fair proportion value” of the original value, which is deducted from the original value of assets to get an appropriate and accurate value. The calculated loss in value of an asset or depreciation in the value of an asset is a determining factor that is used in accounting. This is used in determining the profit and loss accounts of the company.

Determining depreciation is essential for a company, as it helps them understand the depreciated amount in their profit and loss account and, therefore, compensate for these losses. This depreciation amount is used in determining the value of an asset at the end of its useful life. Depreciation is considered a “business expense” while determining the profit-and-loss statement of the company in a given financial year. Depreciable assets can be tangible, such as buildings, machinery, furniture, vehicles, etc., or intangible, like copyrights, patents, and software of the company. Depreciation is also calculated for movable (like cars, furniture, etc.) and immovable (like land and buildings owned by the company) properties owned by the company.

Determination of depreciation and the profit and loss accounts of a company

At the end of any financial year, a company calculates its gross revenue or gross income. Gross income refers to the total revenue or income generated by the business of the company before deducting any expenses incurred or payments made by them. It is determined as the total products sold by the company or the overall services provided by them, in monetary terms.

For calculating gross income, the following assumptions shall be considered :

Assumption Number 1 – The price of each product is the same or identical.

Assumption Number 2 – The price of each service provided to each consumer is identical or the same.

Assumption Number 3 – Each customer is assumed to avail the service or bought the product only once OR if a customer avails the services or buys a product for more than one time (say n times), then such person is not assumed to be one person but rather n customers.

Gross income for a company is calculated as,

Gross income = number of products sold x price of each product, or

Gross income = number of customers served in that year x price of each service.

When gross income is calculated, the next step is to calculate net revenue. Net revenue refers to the actual revenue generated by the company after the payment of expenses, discounts, etc. To calculate net revenue, the following steps are followed:

Total revenue (gross income) generated by the company from all sources is determined.
Returns and discounts on products in that financial year are determined.
Finally, the net revenue is calculated as the returns and discounts in that financial year subtracted from the total revenue generated.

Therefore, net revenue = gross revenue – returns – discounts.

Returns refer to the products returned to the company, and discounts refer to the discounts given by the company on products or services. Sometimes, allowances are also deducted to calculate net revenue.

Hereafter, gross profit is calculated. Gross profit is calculated by subtracting the cost of goods sold from the net revenue and dividing the result by the net revenue of the company in that financial year.

Meanwhile, the EBITDA of the company is calculated, which ultimately leads to the calculation of depreciation. EBITDA refers to the earnings (net revenue) before interests, taxes, depreciation, and amortisation. Thus, it is the net sales of the company before subtracting any deductions and expenses.

Ultimately, depreciation and amortisation costs are deducted from the EBITDA to determine the EBIT of the company in that financial year. This is when the depreciated amount of the total assets comes into use. Depreciation and amortisation of assets are calculated and deducted from EBITDA.

Finally, interests and taxes are paid by the company, and what remains is the net profit or loss of the company. The remainder is compared with the net income of the company, and if the answer is a positive value, that is the net profit of the company. If this value becomes negative, then the business is burning cash or incurring losses.

Necessity for charging depreciation

Depreciation is the valuation of assets at the end of their useful lives. Attempts are made to make the closest approximation of the actual depreciated value of an asset. As it does not represent real cash flows since the depreciation in value of an asset is subjective and various factors are considered to calculate the closest approximation, the determination of depreciation is tricky. However, it is essential to determine depreciation as it causes a change in the loss and profit margins of the company.

Matching principle

Depreciation is used to charge an amount as revenue that is particular to a particular asset. This charge is made to the profit or loss account and is known as the “matching principle.” The matching principle is a principle in which both revenue and expenses occur in the profit and loss accounts in a specific reporting period. This gives an insight into the overall performance of the company during that period. The matching principle is used in accounting to match and report the revenues and expenses of a company in a given period of time, say, a month, a quarter, or a year. The expenses and revenues of a company are considered to be interrelated, and thus, the matching principle suggests that they should be reported simultaneously.

The matching principle is useful as it helps in reaching an accurate income statement of the company by including all the revenue as well as expense-related activities in the statement of the company. Matching revenues with expenses gives a better perspective on the sales and income of the company as opposed to when the two are disconnected in the statements of the company. The matching principle dictates accountability and reasoning for the numbers that are reflected in the income statement of the company.

Determining depreciation not only helps in knowing the actual value of assets but also helps in stabilising the expenses and revenue of a company. It is because the depreciation is calculated so that the actual current value of an asset can be determined. In the absence of this determination, companies would have to include the purchase value of all the assets as they were on the day they were bought or developed. This will substantially increase the expenses of the company, and the revenue will take a toll. The consequence will be that the financial statements and balance sheet will indicate huge losses for the company in the year or period in which maximum expenses were undertaken. As opposed to this, the period during which no or very little expenditure was made, will reflect fluctuating high profits. Neither of these determinations will be the correct measure of the performance of the company. Additionally, it will result in high fluctuations in the revenue and financial reports of the company.

Methods for the calculation of depreciation

The Companies Act, 2013 talks about the term “depreciation” through its provisions. Depreciation is calculated annually using any of the prescribed methods. These methods of calculating depreciation are prescribed in the Companies Act, 2013, as well as in the Income Tax Act, 1961.

The Income Tax Act, 1961, prescribes the calculation of depreciation as per the concept of “blocks of assets” using the written down value (WDV) method. The Companies Act, 2013, refers to the calculation of the useful lives of different classes of assets. This calculation of depreciation using the useful life determination or the number of units as a determinant of useful life is known as the “Unit of Production (UOP) Method.” These are specified under Schedule II of the Companies Act, 2013. It prescribes the determination of depreciation using the straight-line method (SLM), written down value (WDV), also known as the unit of production (UOP) method. Therefore, companies can prefer either of the methods for calculating depreciation.

The widely used methods for the calculation of depreciation are:

Straight line method (SLM);
Written down value (WDV) Method;
Double declining balance method, and
Sum of the years’ digits depreciation.

Let us understand these traditional methods of calculating depreciation in detail:

Straight line method (SLM)

In the straight-line method, the value of the asset is reduced at regular intervals till it reaches its salvage value. This reduction is carried out uniformly at regular periodic intervals. Salvage value refers to the value of an asset when it reaches the end of its useful life. It is also referred to as “scrap value” or “residual value.” Therefore, this value is used to calculate the depreciation in value of an asset using the straight-line method. Depreciation is calculated using the straight-line method by dividing the cost of an asset, less its salvage value, by the useful life of the asset.

(Cost of Asset – Salvage Value)

Annual depreciation = __________________________

Useful life of the asset

Where,

Cost of asset = purchasing price of the asset,

Salvage value = value of the asset at the end of its useful life, and

Useful life of asset = the number of years or the period for which the asset will be used by the company.

Annual depreciation using the straight-line method can also be calculated as:

Annual Depreciation Expense

Straight line depreciation = ___________________________

(Cost of Asset – Salvage Value)

Thus, depreciation using the straight-line method can be calculated using the following steps:

Determining the original cost of the asset/cost at the time of purchasing the asset.
Determine salvage value.
Subtract the salvage value from the original cost of the asset. This will be the value of the depreciable amount.
Determining the useful life of the asset by determining the period or number of years for which an asset will be used by a company.
Divide the calculated depreciable amount (step 3) by the useful life of an asset (step 4).

Written down value method (WDV)

The written-down value method calculates the annual depreciation in the value of assets by determining the depreciation in a company’s fixed assets. Determining the value of fixed assets of a company helps in knowing the actual value of assets. The written-down value method, or “reducing balance” method, is a method in which a predetermined percentage of the value of an asset is included in the balance sheet of the company at the beginning of an accounting year. This method determines the current value of an asset by including an estimated depreciation on the balance sheets at the beginning. Written down value is also known as “book value,” since it is the value that is recorded in the company’s financial statements at the end of an accounting year.

As per the written-down value method,

Depreciation = (cost – salvage value) x rate of depreciation

Rate of depreciation = [1 – (salvage value / initial cost of an asset) ^ 1/n] x 100

Here,

Initial cost refers to the cost at which the asset was purchased,

Salvage value refers to the scrap value of the asset or the value of an asset at the end of its useful life, and

“n” refers to the useful life of an asset.

For example,

Let us suppose an asset X,

Purchase value of the asset = 12000 INR

Salvage value = 2000 INR

Useful life of the asset = 5 years.

Therefore,

Depreciation rate (WDV) = [1 – (2000/12000) ^ 1/5] x 100 = 30.117%

Taking the same example, let us calculate depreciation using the straight-line method and then compare the two methods for the same asset X.

Thus, depreciation (SLM) = (12000 – 2000) / 5 = 2000 INR.

For asset X,

Year	Depreciation (Straight line method)	Depreciation (Written down value method)
1	2000 INR	3614.05 INR
2	2000 INR	2525.60 INR
3	2000 INR	1764.95 INR
4	2000 INR	1233.45 INR
5	2000 INR	861.95 INR
Total depreciation	10000 INR	10000 INR

Thus, the same results were deduced using two different methods of depreciation. Now that we have understood how to calculate depreciation and the methods used for it, let us understand the concept from the perspective of the Companies Act, 2013.

While the straight-line method and written down value method of calculating depreciation are the most commonly used under Indian laws, let us understand the two other available methods of calculating depreciation:

Double declining balance method

The double declining balance method helps in determining the depreciation in the value of assets in a quicker manner and at an early stage of their purchase. This method helps reduce the value of assets by deducting the depreciation early, which in turn results in tax benefits through the determination of actual value. It is usually used for determining depreciation for assets that tend to quickly depreciate in value as compared to others, for instance, a car or any other vehicle will depreciate in value faster than furniture or a trademark. It is a convenient method of calculating depreciation and also shows flexibility when an asset is sold by a company before the end of its useful life. Since the double declining balance method calculates depreciation at an early stage, it becomes easier for the company to determine the current value at any point in time when they wish to sell the asset before the completion of its useful life.

As the name suggests, the double declining balance method uses the method of depreciating the value of assets twice at the rate at which they are depreciated under the straight-line method. Thus, the depreciation is calculated as being highest in the first year of calculation and declines in the following years. Therefore, the double declining balance method of calculating depreciation is suitable for assets whose value essentially decreases in the first year of use as compared to the following years, like vehicles, heavy machinery, factory equipment, etc.

In the double declining balance method of calculating depreciation, depreciation is first calculated as per the traditional straight-line method. The value that is arrived at, is doubled. This doubled value is the amount of depreciation for the first year of use of an asset as per the double declining balance method. The remaining amount of depreciation is calculated from the years that follow. The remaining depreciation value is divided by the number of years for which the asset will be used, and this total value is multiplied by two. This process is followed till the final year of use is reached. The double declining balance method is an appropriate way of calculating depreciation as this method is equivalent to the practical scenario of depreciation of assets where the value of assets depreciates the most in the first year and subsequent depreciation is a downward sloping graph.

Depreciation using the double declining balance method can be calculated using the following formula:

Depreciation = (cost of the asset/length of useful life in terms of years) x 2 x book value of the asset at the beginning of the year.

This formula is used for all the consecutive years, and in the final year, the amount of depreciation is determined as the difference between the book value of the asset at the beginning of the year and the final salvage value arrived at till the previous year.

Or, depreciation = 2 x SLDP x BV

Where,

SLDP is the straight-line depreciation value, and

BV is the book value of the asset at the beginning of the year.

Sum of the years’ digits depreciation

Yet another method of calculating depreciation is the “sum of the years’ digits” method of calculating depreciation. The sum of the years’ method is referred to as an “accelerated method of calculating depreciation.” As this suggests, the method is used to depreciate the value of an asset at an accelerated rate. The sum of years’ digits method is based on a similar principle as the double declining balance method of calculating depreciation: the value of an asset depreciates faster in the early years of its use as compared to the subsequent years. This is because certain equipment, machinery, etc., are heavily used at the beginning when they are bought.

The essence of each method of calculating depreciation differs in the use of time as a factor. While the resultant depreciation is the same in all cases, the method of reaching it differs. The net income varies for each year in each method of calculating depreciation. In the sum of years’ digits method, the net income remains lower in the initial years as the depreciation is accelerated. But as the years pass by, the depreciation stabilises and lowers, and thus, the net income value increases. The sum of years’ digits method of calculating depreciation helps in determining depreciation using the useful life of assets by aligning with their initial cost. The useful life and the sum of digits of this useful life are used in calculating depreciation.

Using the following steps, depreciation can be calculated using the sum of years’ digits method:

Step 1

The depreciable amount is determined by subtracting the salvage value of an asset from the cost of acquisition or purchase of the asset.

Thus, depreciable amount = cost of purchase of the asset – salvage value.

Step 2

Useful years for the asset are determined. The company can adopt an internalised method of determining the useful life of an asset by determining the number of years for which it will use an asset.

Step 3

The depreciable amount is multiplied by a depreciable factor. This calculation is done for each year of useful life. The depreciable factor is determined as the useful life of an asset divided by the sum of the useful years of the asset. For instance, if the useful life of an asset is determined to be 5 years, the sum of its useful years will be 5 + 4 + 3 + 2 + 1 = 15.

Step 4

Thus, using the sum of years’ digits method,

Depreciation = (number of useful years/sum of useful years) x depreciable amount.

The Companies Act, 2013: relevant provisions regarding depreciation

The Companies Act, 2013, talks about the calculation of depreciation for the calculation of profits and understanding the finances of a company in a given accounting year through its provisions. Let us understand the crucial provisions of the Companies Act which deals with depreciation and its determination.

Section 198 of the Companies Act, 2013

Provisions for depreciation begin with the requirement of calculating revenues of the company in the given year. The revenue of any company in one accounting year can only be calculated after determining the total revenue made by the company as compared to the revenue spent on various requirements. This difference between the total revenue earned by the company less the expenditure made by them in the given accounting year determines the profit or loss of the company for that particular accounting year. If the annual expenditure deducted from the total revenue earned gives a positive remainder, the company has earned profits. If this resultant value is negative, the company is running with losses.

For calculating the profit or loss statement of the company, it is essential to first determine the expenditure made by the company.
While calculating the total expenditure made in a particular accounting year, several factors have to be considered. One such essential determinant is the calculation of the annual depreciation of the company.
Section 198 of the Companies Act, 2013 makes provisions for the calculation of profits of a company in a given financial year. As per the provisions of Section 198 of the Act, several factors need to be taken into account for the calculation of profits, such as profits from the sale of shares, capital profits, profits from the sale of immovable properties and assets, etc.
Similarly, certain deductions also need to be taken into account, such as directors’ remunerations, working charges, bonuses and commissions paid by the company, tax benefits, etc.
One such important deduction is the deduction of depreciation in calculating the value of assets using their useful life period.
Section 198(4)(k) of the Act talks about the depreciation in the value of assets that are taken as a deduction in calculating the profits of a company in a financial year. Section 198(4)(k) of the Act states that depreciation shall be calculated as per the provisions of Section 123 of the Act.

Section 123 of the Companies Act, 2013

Section 123 of the Act talks about the declaration and division of dividends. It makes a mandatory provision that the dividends can only be paid after calculating the profits of the company (as per Section 198) for that financial year and only after the depreciation has been deducted. Section 123 is a guiding provision for the calculation of depreciation and makes it mandatory that it is deducted from the total revenue as per any or all of the provisions of the Act which require the deduction of depreciation.

Section 123 states that the depreciation shall be calculated as per the provisions of Schedule II of the Companies Act, 2013. Thus, Section 123(1)(a) talks about the mandatory provision of deducting depreciation to arrive at a final profit statement, which is required by Section 198, and Section 123(2) states that depreciation shall be calculated as per the provisions of Schedule II.

Schedule II of the Companies Act, 2013

Schedule II of the Companies Act, 2013, read along with Section 123 of the Act, essentially deals with the determination of depreciation. While Section 198 directs towards Section 123, the latter ultimately reflects the legal provision that depreciation as per the Companies Act, 2013, which is calculated as per the provisions of Schedule II.

Schedule II takes into account the useful lives of assets to calculate depreciation. Useful life refers to the period for which an asset will be used in a company or manufacturing facility. Schedule II is divided into three parts: Parts A, B, and C, which enlist certain provisions for the calculation of depreciation. Let us understand them in more detail.

Part A

Part A of Schedule II begins with an explanation of the term “depreciation.” Part A Clause (1) describes depreciation as the determination of the depreciable value of an asset with the passage of its useful life. The depreciable amount is determined as the initial value of an asset less its residual value. The useful life of an asset can be reflected as the period of time for which the asset will be put to use, or the total production (in terms of the number of units or otherwise) for which the asset will be used by an industry or company.

Part A of Schedule II also states that depreciation includes amortisation for the purpose of this schedule. Amortisation refers to the decrease in the cost of an asset over time. It is usually used to determine the value of intangible assets like copyrights, trademarks, patents, etc., which also lose value with time. This loss in value is determined through amortisation. Amortisation uses the straight line method to calculate depreciation in the value of an asset for the company. Intangible assets do not have any salvage or resale value at the end of their useful life, thus, the value of depreciation through each year of their useful lives using the straight line method remains uniform. Clause 2 of Part A states that depreciation includes amortisation for the purpose of this Schedule and thus, the annual amortisation value is added to the annual financial statement of the company.

Part A of Schedule II also talks about the specifications for the useful life of an asset. It states that the useful life of an asset will be as long as the period mentioned in Part C of the schedule for each asset or class of assets. Further, it states that the residual or salvage value of the asset shall be approximated at not more than five percent of the initial value (purchasing value) of the asset. If a situation ever arises where a company wishes to exceed these specified limits for the residual value of an asset or the useful life period, the company must disclose the same in their financial statements. Such disclosure shall also explain the plausible reasons for exceeding the limit. The reasoning will be complemented with relevant technical aid as justification for exceeding the limit.

In the case of intangible assets, whose depreciation is calculated using the method of amortisation, the Indian Accounting Standards (Ind AS) become applicable. In cases where the Indian Accounting Standards will not be applicable, the provisions related to essential accounting standards under the Companies (Accounting Standards) Rules, 2006, will become applicable. The only exception to this requirement is the intangible assets (toll roads) under “Build, Operate, and Transfer” or any other form of road projects built, owned, operated, or transferred under any public-private partnership routes.

Part A of Schedule II also determines and prescribes the mode of amortisation for the relevant assets. As per these provisions,

Amortisation rate = Amortisation Amount / Cost of Intangible Assets x 100

Further,

Amount of Intangible Assets x Actual Revenue of a year

Amortisation Amount = __________________________________________________

Projected Revenue from Intangible Assets for that year

(till the end of concession period)

In these modes of calculation,

Cost of intangible assets = cost incurred by the company in intangible assets in a given accounting year,

Actual revenue = revenue generated/received (Toll Charges) during an accounting year,

Projected revenue = the sum total of the projected revenue from intangible assets, provided to the project lender at the time of financial closure.

Therefore, the calculation of depreciation under the Companies Act, 2013, also includes the amortisation of intangible assets under this established method. The entire amount arising from the intangible assets must be amortised over the concession period. At the end of an accounting year, the revenue is reviewed. During this time, adjustments and changes are made in accordance with the projected revenue. Therefore, final estimates are calculated during this time.

Part B

Part B talks about the overriding effect of government norms or regulations regarding the calculation of depreciation over other rules and regulations under the Companies Act, 2013. Part B states that in cases where the useful life or salvage value determination of any asset or classes of assets is specified by any regulatory authority for the purposes of accounting, under the authority of the Central Government or through any Act of Parliament, such accounting provisions will be applied to those specific assets, irrespective of the provisions related to them in Schedule II of the Companies Act, 2013.

Thus, when a regulatory authority of the government prescribes the useful life or the rate of residual value for an asset or classes of assets, the company using those assets must use the government-specified values for determining depreciation for those assets, even if they are different from the rates determined by the management of the company.

For instance, the Ministry of Power of the Government of India, vide its notification dated January 6, 2006, specified the tariff policy with reference to Section 3 of the Electricity Act, 2003. This policy specifies that the specified rates under this notification by the Central Electricity Regulatory Commission (CERC) shall be applicable for both purposes—tariffs as well as accounting. Therefore, the companies that are regulated by this notification shall apply these provisions of the Ministry of Power of the government instead of Schedule II of the Companies Act, 2013.

Part C

Part C of Schedule II of the Companies Act, 2013, prescribes a list of the useful lives of various tangible assets and their classes. Part C determines the useful life of the following classes of assets:

Buildings (NESD),
Bridges, culverts, bunders, etc. (NESD),
Roads (NESD),
Plant and machinery (general and specific),
Furniture and fittings (NESD),
Motor vehicles (NESD),
Ships (NESD),
Aircraft or helicopters (NESD),
Railway sidings, locomotives, rolling stocks, tramways, and railways used by concerns, excluding railway concerns (NESD),
Ropeway structures (NESD),
Office equipment (NESD),
Computers and data processing units (NESD),
Laboratory equipment (NESD),
Electrical installations and equipment (NESD), and
Hydraulic works, pipelines and sluices (NESD).

NESD refers to “no extra shift depreciation.” It refers to the assets where no extra depreciation is charged when those assets are used for extra shifts than usual, which is one shift.

Part C of Schedule II talks about the specific useful lives for all the tangible assets that may fall into either of these above-mentioned categories. For instance, refineries, oil and gas assets, petrochemical plants, storage tanks, and related equipment under the category of specific plants and machineries have 25 years of estimated useful life as per this list in Part C. Similarly, general furniture and fittings have an estimated useful life of 10 years, and likewise, the list goes on. Part C further clarifies that factory buildings do not include offices, godowns, or staff quarters.

There may be instances when an asset (or assets) are added in the middle of a financial year. At times, existing assets may have been sold, rejected, thrown away, demolished, or destroyed before the financial year ends. In these circumstances, the depreciation of these assets will be calculated on a pro-rata basis. For those assets, this calculation is done from the date of addition of the assets, or till the date when the assets were in use in the company until they were destroyed, demolished, rejected, thrown away, or sold.

Further, Part C of Schedule II makes provisions for mandatory disclosure requirements. The company is required to disclose in its annual financial statements the method used for calculating depreciation. Additionally, if the useful life or residual value of the assets used by a company differs from those mentioned in Schedule II, the company must disclose it in its annual financial statements and also specify the other regulation that has been referred to by them.

Sometimes it happens that an asset consists of several assets or parts. Some of these can form a significant part of the asset. Part C of Schedule II prescribes a useful life period for the whole of an asset. However, if the asset consists of a significant part whose useful life is separately prescribed under Part C of this schedule, then the useful life of that asset will be used and the depreciation will be calculated separately. This requirement under the provisions of this schedule was voluntary for the companies to implement for financial years on or after 1st April, 2014 and became mandatory from 1st April, 2015.

Now, assets may be used on a shift-to-shift basis. The useful lives of these assets, as has been enlisted under Part C of Schedule II, are in reference to a single shift of these assets. Thus, when an asset is used for extra shifts than usual, if an asset is used for double shifts during one accounting year, its rate of depreciation increases at the rate of 50% for that period. Similarly, if the asset is utilised for triple shifts, the rate of depreciation will be calculated at a rate of 100% for that period. An exception to this rule is for the assets on which an extra shift depreciation is not applicable.

Conclusion

Depreciation is an essential calculation in determining the profit, loss, and overall revenue statements of a company in a given financial year. When an industry or company runs, there are several tangible and intangible assets that help in the everyday operation of the business. These assets can be machinery, furniture, fittings, and other office equipment, as well as intangible assets like computer software, trademarks, patents, etc. The use of these tangible and intangible assets comes with implied costs. The calculation of the cost of acquiring these assets is different from the cost of them at the end of their useful lives. This difference is known as the depreciation in the value of the assets. The value of an asset decreases when it is used in a company or industry over a period of time. This time period has been referred to as the useful life of assets. The useful life, along with the scrap value or salvage value of the asset, helps in determining the depreciation in the value of that asset. For intangible assets, we calculate the depreciation in the form of amortisation. This amortised value forms part of the total depreciation in the value of all the assets for that company in a given financial year. The total depreciation is deducted from the total revenue of the company in that financial year to calculate the net income of the company in that financial year. The Companies Act, 2013 prescribes an elaborate method for calculating depreciation and the determination of the useful life and residual value of assets.

Frequently Asked Questions (FAQs)

Why is it important to calculate depreciation?

Calculating depreciation is necessary because it helps in determining the actual value of assets owned by a company and has a direct implication in determining the financial report of the company. If depreciation is not determined, the financial statements of the company will become faulty due to improper and inaccurate information. Therefore, it is mandatory for every company to determine and claim depreciation.

Is it mandatory to claim depreciation as per the Companies Act, 2013?

No, it is not mandatory to claim depreciation as per the Companies Act, 2013. Depreciation is claimed for two purposes, accounting purposes and taxation. When the motive behind claiming depreciation is for accounting purposes, depreciation is usually calculated under the provisions of the Companies Act, 2013. However, a company can choose to claim it under the Income Tax Act, 1961. The procedures used in both contexts differ, but the end result is determining the depreciation of assets. Under the Income Tax Act, 1961, a company can claim depreciation on assets that can be put under the category of “income from business and profession.”

References

https://ca2013.com/schedule/schedule-ii/#
https://wirc-icai.org/wirc-reference-manual/part5/schedule-ii-rate-of-depreciation-the-companies-act-2013.html

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Section 33 of the Industrial Disputes Act, 1947

Sneha Mahawar

February 23, 2023

This article has been authored by Bhavika Mittal, pursuing BA LLB at Shri Navalamal Firodia Law College, Pune. This article is a detailed account of Section 33 of the Industrial Disputes Act of 1947, which prevents the victimisation of employees by employers at the time of pending proceedings. Additionally, the article showcases how the section is not absolute in its sense by permitting the altercation of services under certain circumstances. Further, the amendments like provisions for a protected workman, made to the section are also mentioned.

This article has been published by Sneha Mahawar.

Table of Contents

Toggle

Introduction
Prohibition on Employers
- - Meaning of alteration in the conditions of service
- 2. Not to discharge or punish
  - Domestic enquiry
Circumstances in which the Employer is allowed to alter, discharge or punish
What is a Protected Workman
- Provisions and limitations relating to Protected Workmen
Approval of any action under sub-section (2) taken by the employer
Landmark Cases
- Lord Krishan Textile Mills v. Its Workmen, 1961
- Strawbroad Manufacturing Co. v. Gobind, 1962
Conclusion
Frequently Asked Questions (FAQs)
- What are Standing Orders?
- What is meant by workman concerned?
References

Introduction

Laws have multiple functions. One such vital role is that it is a middle ground between disputing parties. One such legislation which resolves disputes between workman and employer, workman and workman, is the Industrial Disputes Act of 1947. Apart from resolving disputes, the act safeguards workmen’s and employers’ interests during proceedings. Chapter VII of the Industrial Disputes Act 1947, titled “Miscellaneous,” provides Section 33, which keeps a check on the employer to make changes in conditions of service, etc., during the pendency of proceedings.

When a workman initiates or continues any proceeding against the employer, or the company, the probability of the workman being victimised is high. Section 33 of the Industrial Disputes Act 1947 aims to protect the workman from victimisation. Additionally, the section ensures to terminate the pending proceedings peacefully and restores harmony. The ban on employers is not absolute; there are certain exceptions, which are added by way of the 1956 amendment. The provisions of and amendments to the section are discussed herein.

Prohibition on Employers

Section 33(1) of the act prohibits employers to undertake certain actions during the continuation of a dispute. The section is bifurcated into two sub-clauses, (a) and (b). Their respective provisions are as follows:

Not to alter terms of service

Section 33(1)(a) of the Industrial Disputes Act 1947 completely prohibits the employer’s right to terminate the services of his employees. For workmen to seek protection under the Section, the following conditions must be satisfied.

There should be an industrial dispute pending before the appropriate authority.

The period between the commencement and conclusion of conciliation, adjudication, or arbitration proceedings is the period of pending proceedings. As stated by the court in Karnal Kaithal Co-operative Transport Society v. State of Punjab, 1958.

The authorities with jurisdiction over industrial disputes are the Conciliation officer or Board, Arbitrator, Labour Court, Tribunal, or National Tribunal.

The workman should be concerned in the pending proceedings.
The alteration of the services made by the employer shall be regarding the matter of the pending proceeding. It shall also be prejudicial to the interest of the workman.
Additionally, the alteration should affect changing the conditions of service. These services apply to the workman before the commencement of such proceedings.

Meaning of alteration in the conditions of service

The definition of alteration has not been specified, but from judgments over the years, it can be deduced as what constitutes “alteration”.

In National Coal Co. v. L.P. Dave, 1956, the industrial dispute was about paying full pay and allowance to workmen on Independence day and Republic Day. The court held that any reduction or cut in workmen’s wages is an alteration.

While in Lakshmi Devi Sugar Mills v. Pt. Ram Sarup, 1956, lock-out has been held to not be an alteration in the service conditions. In the instant case, seventy-six workers went on a strike as a co-worker was dismissed. The management sought to prevent the entry of the workers, but they violently did. Later that day, a lock-out was declared.

2. Not to discharge or punish

Section 33(1)(b) of the Industrial Disputes Act, 1947, prohibits the employer from taking disciplinary action against the workman for misconduct connected with the dispute. The workman shall be concerned in such dispute. Along with this, the Section requires that the action proposed to be taken should be connected with discharge or punishment by dismissal or otherwise.

This discharge should be regarding any misconduct connected with the pending dispute. In Sasa Musa Sugar Works (P) Ltd. v. Shobrati Khan and others,1959, the appellant had served notices on forty-eight employees as they participated in go-slow (deliberately delaying the work). The Tribunal disallowed the application of dismissal. But the Supreme Court allowed the appeal and granted the dismissal of workers as there was sufficient evidence of misconduct. The court held that the Tribunal must accord permission under Section 33 when it is satisfied with the evidence of misconduct of the workmen.

But where there is express written permission from the authority before whom the proceeding is pending, the employer has the power to discharge or punish the workman. The employer is empowered to suspend the concerned workman based on the enquiry’s verdict without applying for permission. Thus, the restrictions imposed on the employer are not absolute.

In East India Coal Co. v. P.R. Mukherjee, 1959, there were two applications. The Tribunal rejected one of them and justified the discharge order, which could become a subject matter for future disputes. Thus, it was held that when permission of an Industrial Tribunal is asked for the discharge of the workmen under Section 33, the only duty of the Tribunal is to accord the permission or withhold it.

While carrying out disciplinary action against the workman, a fair domestic enquiry is required.

Domestic enquiry

The guidelines for carrying out a domestic enquiry should adhere to the principle of natural justice as there is no statutory provision governing this subject matter. Before charging a workman with disciplinary action, the employer is required to hold a domestic enquiry. This enquiry includes allowing the employee to represent their case adequately.

In Martin Burn Ltd. v. R.N. Banerjee, 1957, the respondent was under the appellant’s employment; over time, his work became unsatisfactory, an enquiry into his work service was held, and he was held unsuitable to work. An application was filed for discharge but was refused by the Tribunal as no prima facie case. The Supreme Court upheld the judgment and held that prima facie guilt is established after holding a fair domestic enquiry following the principle of natural justice.

Circumstances in which the Employer is allowed to alter, discharge or punish

Section 33(2) deals with alteration in the conditions of service and discharge or dismissal of a workman who is connected to a pending dispute, but such action is taken in regard to a matter not connected to the pending dispute. Sub-section 2 contains two sub-clauses.

Section 33(2)(a) states that the employer can alter the services applicable to the workman before the commencement of proceedings.

While Section 33(2)(b) states that the employer can for the misconduct of the workman discharge or punish by way of dismissal or otherwise. the matter certainly shall not be connected to the pending dispute.

In order to exercise the powers of discharge or dismissal, the proviso to Section 33(2)(b) requires two conditions to be fulfilled. If the requirements are not satisfied, the management’s application is liable to be dismissed. In the case of Podar Mills Ltd. v. Bhagwan Singh and Anr.,1974, the appellant’s application for approval of dismissal was refused by the Tribunal on grounds for delay in making an application of approval; the Supreme Court upheld the judgment. The conditions are

The concerned workmen should be paid wages for one month. These one-month wages include all prior wages plus the wages for the next month. The court viewed in Prabhakar H. Manjare v. Indian Telephone Industries Ltd., 1998, where the application of approval was denied and held illegal as one month’s back wages were not paid. Concludingly, the appellant’s appeal was granted, restoring his services, and he was entitled to all consequential benefits.
The employer must make an application before the appropriate authority for approval of the action taken by the employer.

Based on the proviso to Section 33(2)(b), it contemplates

dismissal or discharge,
the payment of wages, and
making an application for approval.

Further, the principles to be considered by the Tribunal before granting or refusing approval under Section 33(2)(b) are to observe:

Whether standing orders justify orders of dismissal,
Whether the enquiry has been held as prescribed by Standing Orders, and
Whether the conditions laid down in the proviso of Section 33(b) are fulfilled.

In G.K. Sengupta v. Hindustan Construction Co. Ltd.,1994, the appellant was an employee who was charged for showcasing indecent behaviour. The approval application sent to Maharashtra Tribunal was accepted. This judgment was challenged in the Bombay High Court as the Tribunal, without proceeding with the hearing of the application granted it.

The court held that before granting or refusing approval under Section 33(2)(b), the Tribunal must give a reasonable opportunity to hear the parties concerned.

Regarding the relationship between the employer and workman at the time of proceedings under Section 33. Only the de facto relationship ends when an order to discharge or dismissal is passed, but the de jure relationship ends only when the Tribunal accords approval.

In S.Ganapaty and Ors. v. Air India and Anr., 1993, where the employees were dismissed due to disciplinary action. The one-month wage was given after the deduction of tax, the grounds of the appeal. As the de jure relationship is still present, the content and character of wage would remain the same. Thus, the appeal was dismissed.

What is a Protected Workman

Section 33(3) was inserted in the Industrial Disputes Act, 1947, by way of amending the Act in 1956. With this section’s help, a new class of “protected workmen” was developed.

Explanation to Section 33(3) defines a protected workman as any workman who is a member of the executive or other office bearer of a registered trade union connected to the establishment.

Union of India v. Rajasthan Annushakti Karamchari Union Rawatbhata, 1976, defines a protected workman as someone who enjoys immunity against being dismissed or discharged during adjudication or conciliation proceedings relating to an industrial dispute pending between the workmen and the employer. The case deals with whether the time limit mentioned in Rule 61 is mandatory or directory. The court held that it was mandatory.

Provisions and limitations relating to Protected Workmen

A workman is recognised as a protected workman where the Rule 61 of the Industrial Disputes (Central) Rules is applicable.

Rule 61 of the Industrial Disputes (Central) Rules deals with the recognition and distribution of protected workmen. It contains four sub-rules, them being

Every registered trade union must communicate the names and addresses of office bearers to the employer for the recognition of a protected workman by 30th April of every year.
It is the duty of the employer to declare the list of protected workmen within 15 days of receiving the letter from the union.

In P.H. Kalyani v. Air France, Calcutta, 1963, the appellant had challenged his dismissal, which was denied. The court held that the employer must show positive action by sending his confirmation of the recognised protected workmen before the worker can claim to be a protected workman.

In Divisional Controller MSRTC v. Conciliation Officer Akola and Anr,1993, the court held that where the union sends only one name, such a workman is bound to accept the privilege. In the case, declaring respondent No.2 as a protected workman was challenged. The appellant stated that this was impossible as no list regarding the number of workmen was sent. The application contained only one name, which was accepted.

Where any dispute arises between the employer and registered trade union related to the matter of recognition of protected workmen, the dispute is referred to Regional Labour Commissioner or Assistant Labour Commissioner (Central).
The rule prescribes the number of workmen to be recognised as protected workmen. Section 33(4) of the Industrial Disputes Act 1947 provides provisions for the same. It states that one percent of the total number of workmen employed is subject to a minimum of five and a maximum of one hundred.

The employer can refuse to recognise a protected workman if the case is within the statutory grounds of Section 33(4). The court held this in R Balasubramanian and Ors. v. Caebarandum Universal Ltd, 1975, where a petition was filed stating that there was no infringement to Section 33(3) of the Act because the petitioners were not proven to be protected workmen at the time of the dismissal order. The Gujarat High Court allowed the petition.

Finally, this protection is available to every registered trade union related to the establishment. The maximum number of protected workmen varies.

Approval of any action under sub-section (2) taken by the employer

The provisions for the approval of actions taken by the employer under sub-section (2) are provided under Section 33(5) of the act. Sub-section (5) states that the concerned authority, without any delay, shall hear and pass the application. This process shall be concluded within three months from the date of receipt of the application; such was substituted by Act 46 of 1982.

Further, the Act 46 of 1982 added a proviso to the sub-section that if the authority deems it necessary, it may extend the period further in writing.

Landmark Cases

Lord Krishan Textile Mills v. Its Workmen, 1961

In Lord Krishan Textile Mills v. Its Workmen, 1961, two officers were assaulted by workmen. Upon domestic enquiry per standing orders, the workmen were found guilty and consequently dismissed from employment. As a dispute of bonus payment was pending before the Tribunal, the appellant applied for dismissal. The Tribunal denied the approval, an appeal against the order was made in the Supreme Court, and the same was set aside.

The case is a landmark case of Section 33 as it laid down principles that showcased clarity. Firstly, the Supreme Court illustrated the distinction between Section 33(1) and Section 33(2) concerning the scope of enquiry.

	Section 33(1)	Section 33(2)
Permission	obtaining express permission is necessary.	obtaining express permission is not a necessity but must fulfill the specified conditions.
Jurisdiction	the jurisdiction of the authority to grant or withhold permission is broad.	permission not being a necessity, the jurisdiction is narrow. Also, under Section 33(2)(a), no approval is required, and the right of the employer remains unaffected by the ban.

The court pronounced that the appropriate authority should be actively aware that there are two classes of cases, and the separating line between the two sub-sections is providing express permission in only approval in another.

Secondly, the court observed that, even though express permission in writing is not required in cases under Section 33(2)(b), there should be no time lag between the action taken by the employer and the order passed by the authority.

Next, the court also upheld the proviso to sub-section (2) and held that satisfying those conditions is required before dismissing a workman.

Strawbroad Manufacturing Co. v. Gobind, 1962

In this case, the respondent was an employee who did not comply with officers’ orders repeatedly. He was suspended based on the enquiry. Further, the appellant dismissed the respondent. The employer sent applications for approval. The approval was refused because the application was made after dismissal. Then, the appellant appealed to the apex court.

The Supreme Court in Strawbroad Manufacturing Co. v. Gobind, 1962, answered whether the application for approval should be made before or after the employer’s discharge or dismissal action.

The court, upon consideration of three things under the proviso of Section 33(2)(b), held that a dismissal order could be passed and an application under Section 33(2)(b) could be taken thereafter. The court held that such an action is an inchoate condition. But dismissal, payment of one month’s wages and making an application should take place simultaneously and be part of the same transaction.

Further, if the order of approval is not granted under the section, the order of dismissal becomes ineffective from the date it was passed. Thus, the employee would be deemed as never to be dismissed or discharged and entitled to wages from the date of dismissal to the date of disapproval.

Conclusion

The procedure for reaching the final verdict is long. Thus, there are numerous pending proceedings; new disagreements could arise. Section 33 of the Industrial Disputes Act of 1947 governs such situations between employers and employees. It ensures to avoid victimisation of employees and avoids an absolute ban on the employer’s powers. Instead, the section does not take away any existing management rights. It only requires them to submit its action for scrutiny.

Frequently Asked Questions (FAQs)

What are Standing Orders?

Generally, Standing orders are procedures that continue to be followed until changed or cancelled. While, for the matter of Industrial Disputes Act, it means that the management formally defines the condition of employment.

What is meant by workman concerned?

The workman against whom action is taken in a dispute is said to be the workman concerned. In New India Motors Ltd. v. K.T. Morris, 1960, the court held that the “workman concerned” also includes those on whose behalf the dispute has been raised and are bound by the award which may be made in the dispute.

References

An introduction to labour and industrial laws by Dr S.K. Puri
Handbook of labour and industrial law by P.L. Malik
https://thelawbrigade.com/wp-content/uploads/2019/05/Rahat-Dhawan.pdf

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A brief on essentials of online contracts vis-a-vis Indian laws

Rachit Garg

February 23, 2023

This article is written by Samridhi Chauradiya and edited by Nishka Kamath, Team LawSikho.

It has been published by Rachit Garg.

Table of Contents

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Introduction
What is an online contract
- Components of online contract
Essential elements of online contracts
Important case laws on online contracts
Conclusion
Frequently Asked Questions (FAQs) on online contracts
- Are online contracts legalised in India?
- Why are online contracts needed?
References

Introduction

Gone are those days when contracts were entered into by sophisticated, literate adults. Nowadays, you might have witnessed a 6-year-old using their parents’ phone to play games or do other random stuff. Recently, there was this news about how a kid had ordered 1000$+ worth of stuff online from his father’s card and that order could not be cancelled. So now in this particular case, on whom shall the burden of proof lie as to prove that the contract was invalid because was entered into by a minor. Let’s find out about this with the essentials of a valid online contract that are covered briefly in this article.

What is an online contract

Online contracts, commonly known as “e-contracts” are those contracts formed between two or more individuals via any electronic means like emails, computer programmes, an application, or an electronic agent. They may also be formed between two electronic agents that are programmed to recognize that a contract exists. The most important factor involved in online contracts is that such contracts take place via digital modes of communication, thus avoiding the involvement of any middlemen. In India, online contracts are governed under the Indian Contract Act, 1872, the Information Technology Act, 2000, the Code of Civil Procedure, 1908, amongst other laws.

Components of online contract

For an online contract, the following components are of utmost importance:

An offer must be made.
The offer has to then be acknowledged by the other party/parties.
There has to be some legal consideration.
Further, there has to be an intention between the parties to create lawful relations.
The parties must be able to and have the capacity to contract.
There must be free and unaffected consent between the parties.
The object of the contract has to be legitimate.
There must be conviction and possibility of performance.

Essential elements of online contracts

Essential elements of online contracts are the same as physical contracts i.e., offer, acceptance, lawful consideration, consent, and capacity of parties who enter into the contract.

Let us have a look at each of them in the context of online contracts.

Importance of consent in online contracts

You may have observed that workers and senior citizens are using smartphones these days, but there is a higher chance that they might not have reading and writing proficiency in the English language. So when they download a mobile application and just give consent or click ‘I agree‘ button to give access to their contacts, access to reading messages there is a higher chance that they might not be aware as to what they are giving consent to and later if they are defrauded or have an issue with a mobile application misusing their data how will they prove that they did not give access knowingly or they did not understand what they were agreeing to.

How will an illiterate prove that he was not aware of what he was giving consent to when he was downloading or using a particular mobile application most mobile applications or software have their terms and conditions in the English Language.

Essential elements of online contracts under the Indian Contract Act of 1872

Section 3 and 4 of the Indian Contract Act, 1872

Section 3 deals with the communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances.

Section 4 lays down conditions and examples for when the communication of a proposal is complete. It states that the communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.

As per Sections 3 and 4 of the Indian Contract Act, 1872, there is no specific provision for communicating an offer and acceptance. A mere click on the “I agree” button on the web page can have you enter into a contract. So, if Mr. A visits the website of ‘Flopkart’ which uses cookies to track its users, and Mr. A clicks “I agree” option for the use of cookies, then such acceptance can be termed as valid acceptance.

Section 5 of the Indian Contract Act, 1872

Section 5 states that a proposal can be revoked at any time before its communication of acceptance is complete, as against the proposer. So once Mr. A clicks on the option “I agree” on the website ‘Flopkart’ for the use of cookies and submits it, then such acceptance cannot be revoked.

Section 10 of the Indian Contract Act, 1872

Section 10 states that if the agreement is made with the free consent of parties competent to contract for a lawful consideration and with a lawful object and is not expressly declared to be void, then it is a contract. So if Mr. A, who is 18 years of age and of sound mind, has ordered a mobile phone from the e-commerce website ‘Flopkart’ and has consented to it and made payment online, then it is a valid contract.

Example of consent

If Mr. A understands only native languages such as Hindi and he wants to open an account on a video streaming website. There might be a possibility that the “I agree” button that he is clicking on has a description only in English. If later he wants to sue that website for the subject matter already mentioned in that online contract, he won’t be able to, as ignorance of the law cannot be excused.

Section 11 of the Indian Contract Act, 1872

Section 11 lays down provisions for persons who are competent to enter into a contract. If Mr. A, a 17 year old, enters into a contract with the website ‘Flopkart’ then, the burden of proof shall lie on Mr. A to prove that he was not a competent party at the time of entering into the contract with the website ‘Flopkart’, in case this contract becomes subject matter of dispute in court.

Section 12 of the Indian Contract Act, 1872

As per the provisions of Section 12, if the person is of unsound mind at the time of making the contract, then such a contract cannot be enforced. In the case of online contracts, it is difficult to find out whether a person is of sound mind or not. The burden of proof should lie on the person who has entered into a contract online to prove that he was of unsound mind or was unable to understand or form a rational judgement at the time of clicking and submitting the “I agree” button.

Section 23 of the Indian Contract Act, 1872

Further, Section 23 states that every agreement whose object or consideration is unlawful is void. For example, if Mr. A visits a link on the dark web and pays Rs 5,00,000 against the delivery of drugs, then such an agreement is void as the payment of consideration is unlawful. Hence, even though Mr. A does not get delivery of the drugs even after payment of consideration, such a contract cannot be enforced as it is void ab initio.

Section 28 of the Indian Contract Act, 1872

As per the provisions of Section 28, agreements that restrain a person from enforcing his rights through a legal proceeding are void. So say, if Mr. A is restrained from filing a suit against the website ‘Flopkart’ even if it delivers bad quality products and refuses to take back, pick up, or exchange such defective/damaged goods expressly through its terms and conditions displayed on its website, then such a contract is void as it restricts Mr. A to file a suit against the website ‘Flopkart’.

In simple words, any clause or terms in a contract that does not allow a party to file a suit against the other party, will be termed as a void agreement.

Information Technology Act, 2000

The Information Technology Act, 2000, has made certain provisions for the validity and formation of online contracts, but there is no specific legislation for the validity of online contracts in India per se.

Section 4 of the Information Technology Act, 2000

Section 4 gives legal recognition to electronic records for subsequent reference. When the Indian Contract Act, 1872, came into force, no provision was made to give legal recognition to contracts entered by a person online by clicking the “I agree” button because computers did not exist then. With the advancement in technology, we can see that jurisprudence has evolved as well.

Section 75 of the Information Technology Act, 2000

Section 75 is applicable to offences and contraventions committed outside India that involve a computer, computer system, or computer network located in India. So if Mr. A, a UK resident, uses an Indian IP address to commit online banking frauds, then such an offence can be charged and tried in an Indian court as per Section 75 of the Information Technology Act, 2000, as an Indian IP address was used to commit online banking fraud.

Essential elements of online contracts under the Indian Evidence Act, 1872

Section 65B of the Indian Evidence Act,1872

Section 65B allows information contained in an electronic record to be deemed evidence if it satisfies the conditions mentioned in that Section. So if a transaction between Mr. A and the website ‘Flipkart’ generates an online record, then the same shall be considered evidence as per the provisions of Section 4 and Section 65B of the Indian Evidence Act, 1872.

Section 85A of the Indian Evidence Act,1872

As per the law laid down in Section 85A, if an electronic record is affixed with an electronic signature by the parties involved, then such a record shall be presumed to be an “e-agreement.” This gives validity to the income tax returns filed online and verified by DSC.

Section 85B of the Indian Evidence Act,1872

As per the provisions of Section 85B, it shall be presumed by the court that the secure electronic record has not been altered and it is authentic from the point of time to which the secure status relates unless the contrary is proved. So, if Mr. A has verified his income tax return and is later prosecuted for Income Escaping Assessment for that specific return, then Mr. A cannot plead later that he did not file and verify the income tax return under dispute because the court shall not doubt the integrity and authenticity of the return unless the contrary is proved.

Section 85C of the Indian Evidence Act,1872

As per the provisions of Section 85C, it shall be presumed by the court that the subscriber information listed in the Digital Signature Certificate (DSC) is correct unless the contrary is proved. As per the author’s interpretation, the burden of proof lies on the person who objects to such DSC and its use, he shall have to prove the ineligibility.

Essential elements of online contracts under the Code of Civil Procedure, 1908

Section 13 of the Code of Civil Procedure, 1908, lays out conditions when a foreign judgement is not conclusive. Mr. A, a resident of India, living in Mumbai, orders goods from the website ‘Flopkart,” registered at its principal office in California, United States of America. If these goods are found to be defective, Mr. A can file a suit in an Indian court or a U.S. court. If Mr. A files a suit in the Court of California and receives a judgement, then such a judgement shall not be conclusive and can be appealed, or a fresh case can be filed in Indian court if it does not satisfy the conditions specified in Section 13 of the CPC.

Important case laws on online contracts

Trimex International FZE Ltd. Dubai v. Vedanta Aluminum Ltd. (2010)

In this case, the Hon’ble Supreme Court that offer and acceptance conveyed via email will be deemed to be valid.

Tamil Nadu Organic Private Ltd. and Ors. v. State Bank of India (2019)

In this case, the Madras High Court applied several laws pertaining to the IT Act, 2000, and stated that contractual liabilities can arise by any electronic means and that such contracts will be valid and enforceable in the eyes of law.

State of Punjab and Ors. v. Amritsar Beverages Ltd. and Ors. (2006)

In this case, the Apex Court observed that the computer outputs on media, papers, and other magnetic forms are admissible under Section 63 of the Indian Evidence Act.

Conclusion

To bring this article to a conclusion, the author has tried to interpret all the important sections relating to communication and acceptance of proposals online through websites and how an individual can use them in different scenarios. The author has tried to explain when communication of a proposal is completed online if a minor enters into a contract online on a website, and if that becomes a subject matter of dispute as to whom the burden of proof lies.

Further, how the elements of valid contracts are satisfied in the case of online contracting has been demonstrated in this article by way of examples. There would always be a conflict in determining the jurisdiction for online contracts because the laws of each country are different. The settled position with regard to the burden of proof in contracts won’t be altered in online contracts because Ignorance of law cannot be excused. The website and applications these days take various permissions and age declarations, such as “this site can only be visited by adults,” etc. You do not just waive off your responsibility by saying that, “I was not having my mobile or DSC with me when the contract was entered.” You are responsible for the consequences that result due to the use of your mobile device and DSC. Hence, report to the police as soon as you lose your phone, DSC, or any other electronic device.

Moreover, online contracts, also known as e-contracts or digital contracts, are now used in our day-to-day lives. It has several advantages, like the fact that it saves a lot of time that would have otherwise been spent commuting from one place to another, it also saves money as there is no need to be present in person to form a valid contract.

Frequently Asked Questions (FAQs) on online contracts

Are online contracts legalised in India?

As long as a contract serves all the essentials of a valid contract, any contract, no matter what type of contract it is, will be legal. So, to answer the question, online contracts are legal in India, provided they fulfil the conditions of an essential contract.

Why are online contracts needed?

In order to get into an agreement and eventually sign a contract with an individual(s) residing far away from one of the parties to the contract, one can opt for an electronic contract for getting into a contract with the other party/parties.

References

The Indian Contract Act, 1872
The Code of Civil Procedure,1908
The Indian Evidence Act, 1872
The Information Technology Act, 2000
https://legalstudymaterial.com/e-contracts/#Case_laws_on_electronic_contracts

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Seeking a handwriting expert’s opinion in a cheque bounce case

Rachit Garg

February 22, 2023

This article has been written by Parth Mullick, pursuing a Diploma in US Corporate Law and Paralegal Studies from LawSikho.

It has been published by Rachit Garg.

Table of Contents

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Introduction
Which is the appropriate stage for moving the application by an accused
- What happens when the accused has outrightly denied his signature on the subject cheque
- What happens when the accused admits his signature but denies filling in the remaining contents of the subject cheque
Judicial precedents against the accused denying the right to take a handwriting expert’s opinion
What happens when neither the accused nor the complainant comes forward to take responsibility for the authorship of the dishonoured cheque during the trial proceedings
Conclusion

Introduction

A case of cheque bouncing with regard to Section 138 of the Negotiable Instruments Act, 1881 (NI) stands on a different footing than other criminal cases under the various laws in India. The fundamental principle of criminal jurisprudence is that an accused is presumed to be innocent and the burden of proof lies on the prosecution to prove the guilt of the accused beyond a reasonable doubt. However, in a case under Section 138 of the Negotiable Instruments Act, 1881, there is a presumption drawn by virtue of Section 118(a) and Section 139 of Negotiable Instruments Act, 1881 in favour of the complainant that a cheque, that could not be honoured upon presentment, was issued towards settlement and discharge of a legally enforceable debt owed by the accused to such complainant only. It is for the accused to rebut such presumption drawn against him under Section 118(a) and 139 of the NI Act and prove his innocence in accordance with the law before the trial court by adducing evidence to support his defence that no such legally enforceable debt ever existed in favour of the complainant and/or the complainant has misused such cheque to wrongfully extract money from him.

One of the common defences raised by an accused, when summoned by a trial court to face the proceedings u/s 138 NI Act has been handing over a blank security cheque or a half-filled cheque by such accused to the complainant, which was later filled up and misutilised by the complainant to wrongfully extract money from the accused person in the absence of a legally enforceable debt owed. In light of such averments made, it is not uncommon for such an accused person to request the trial court to compare the handwriting appearing on the subject cheque and move an application before the trial court to send a such cheque for the opinion of a handwriting expert to ascertain whether the complainant has filled the blanks in such half-filled or blank cheque or not and sometimes a further prayer is made to obtain an opinion with regard to the age of the contents of the subject cheque ie whether the subject cheque was filled on the same day or such subject cheque was filled in during different time periods.

Which is the appropriate stage for moving the application by an accused

It is advisable that an accused should move an application seeking the opinion of a government-approved handwriting expert before the trial court after completion of the evidence of the complainant that is after cross-examination and the witnesses sought to be examined by such complainant have been examined and closed by the trial court or else such application might be deemed to be premature by the trial court.

Is there any force in such an application seeking the opinion of a handwriting expert by the accused person or is it merely a delay tactic to prolong the trial proceedings under Section 138 NI Act before the trial court?

Two possible situations can arise in view of such defence of an accused:-

i. Where an accused has outrightly denied his signature on the subject cheque.

ii. Where an accused admits his signature but denies filling the remaining contents of the subject cheque or where the accused admits his signature and filling some contents of the cheque and denies filling the remaining contents of the said cheque

What happens when the accused has outrightly denied his signature on the subject cheque

It is an entirely different situation where an accused outrightly denies having appended his signature on the subject cheque. The right of an accused in such a situation to defend himself and seek an opinion of an expert with respect to his signatures has been well recognized by the Apex Court as well as various high courts. Denying one’s signature goes to the root of the case and the accused’s right to have a handwriting expert’s opinion has been well-founded and accepted.

In the case of G Someshwar Rao vs Samineni Nageshwar Rao & Another (2009), their Lordships of the Apex Court recognized the right of an accused to a fair trial, which is a part of his fundamental right guaranteed under Article 21 of the Constitution of India. In this matter, the accused had challenged the execution of the cheque and even disputed his signature thereon. The Hon’ble Supreme Court had directed the appellant to examine an expert at his own costs. Following this judgement of the Apex Court, various high courts have ruled in favour of the accused, where a challenge is sought with respect to the very signature appearing on the subject cheque and the opinion of a handwriting expert is prayed for to prove the same.

What happens when the accused admits his signature but denies filling in the remaining contents of the subject cheque

This is a tricky situation and the answer to this lies in the facts of each case. There have been a plethora of judicial decisions on this issue, the conspectus of which squarely shows that no straight jacket formula can be laid down to answer this issue and unanimously apply the same in all such cases, where the such defence has been taken by an accused person coupled with the request to refer the subject cheque for the opinion of a handwriting expert.

However, merely relying on judicial precedents should not be done by the trial court in a mechanical manner. It is for the trial court to see what defence and grounds have been taken by the accused in the application under Section 145(2) NI Act seeking cross-examination of the complainant. It ought to be seen if the accused has, right from the stage of moving an application u/s 145(2) of NI Act, taken any defence with respect to misuse of the cheque by the complainant or that an incomplete cheque was filled up completely by the complainant without the consent, knowledge and prior approval of the accused behind his back.

Whether, during the complainant’s cross-examination, any questions and suggestions were put by the accused or his counsel about handing over a blank security cheque or half-filled cheque to the complainant and what was the answer given by the such complainant, or the complainant has himself admitted about filling the blanks in the subject cheque or he had authorised any person to fill the blanks in the such incomplete cheque is a vital factor to be noted down. The appreciation of the evidence of the complainant recorded before the trial court must play a crucial factor in such a situation rather than relying on the judicial precedents without appreciating the facts of the case in question before the trial court. Only after appreciation of such facts, the trial court can ascertain whether the accused has moved an application seeking the opinion of a government-approved handwriting expert as a delay tactic or such an application forms a part of a valid defence, which must be granted in view of Section 243(2) of CrPC.

In the case of T Nagappa vs YR Muralidhar (2008), the Apex Court was faced with a similar situation, where the appellant-accused had contended about giving a signed cheque in the year 1999, which was later filled up in the year 2004 and the opinion of a handwriting expert was sought with respect for determining the age of his signature. The Apex Court ruled in favour of the appellant and held that it was necessary to have an expert opinion with respect to the age of the contents appearing on the said cheque in light of the finding that even though a presumption had been raised against the appellant-accused under Section 118(a) or Section 139 of the NI Act, an opportunity must be granted to the accused for adducing evidence in rebuttal thereof.

In Mohit Chaudhary vs Khatan Electricals Limited decided by the High Court of Calcutta on 17.07.2019, the petitioner claimed to have handed over a security cheque in the year 2007, which was misutilised in the year 2010. Moreover, as the impugned cheque number 59648 was admittedly issued in 2007, it was highly inconceivable that the next cheque bearing number 59649 i.e. the subject cheque was issued only in the year 2010 despite regular business transactions being continued between the parties. In light of the same, the application seeking the opinion of a handwriting expert was allowed by the Hon’ble High Court.

In the matter of Shashikant Shamaldas Patel vs State of Gujarat decided by the Hon’ble Gujarat High Court on 24.06.2022, it was urged before the Hon’ble Court that a blank cheque had been issued in 2011 to the complainant, which was later misused in 2018 and the complainant was not the holder in due course. The Hon’ble Court observed that should be the nature of evidence must not be left to the discretion of the court, as only an accused knows how to prove his defence. In light of such stand taken, the Hon’ble High Court was pleased to direct sending the disputed cheque to FSL for the opinion of the hand-writing expert qua the ageing and writing on the cheque.

In M/s. Survika Distributors Pvt. Ltd. & another vs. M/s. S.R. Retail Zone (CRLMC No 219 Of 2012) decided on 05.02.2018, the Hon’ble High Court of Calcutta had observed that the petitioners were not disputing the signatures appearing on the cheques but they disputed that the other entries in the cheques like date and amount, etc were not that of the accused. In view of the same, the Hon’ble High Court was pleased to decide in favour of the petitioner and allowed the opinion of a handwriting expert qua the subject cheques. After obtaining the handwriting expert’s opinion, the learned Magistrate could have assessed the oral evidence as well as documentary evidence coupled with the handwriting expert’s opinion in order to find out the truth.

Judicial precedents against the accused denying the right to take a handwriting expert’s opinion

While the aforementioned few judgments deal with a handful of situations, where the application seeking the opinion of a handwriting expert was allowed, there are a plethora of case laws against the said proposition as well like Manoj Sharma vs Anil Aggarwal (Crl MC No 1325 to 1333/2012) decided by the Hon’ble Delhi High Court on 20.04.2012, Rambir Sharma vs M/s HBN Housing Finance Ltd bearing Crl MC No 862/2017 decided on 11.10.2017 by the Hon’ble Delhi High Court, AR Banerjee vs State and Another bearing Crl MC No 3742/2013 decided on 08.08.2014 by the Hon’ble Delhi High Court, PSA Thamotharan vs Dalmia Cements P Ltd, 2005 (1) JCC (NI) 96 Madras, etc.

In Oriental Bank of Commerce vs Prabodh Kumar Tiwari decided by the Apex Court on 16.08.2022, in light of the Appellant’s contention at the time of handing of the subject cheque, a letter was also given to the complainant with a request to present the cheque in the second week of January, it was held that no purpose would be achieved by sending the cheque to a handwriting expert to ascertain who filled the blanks therein. In essence, the facts of a case need to be properly appreciated by the Trial Courts to decide whether to rule in favour of an accused or dismiss such application on the ground of the same being arbitrary and a delay tactic.

What happens when neither the accused nor the complainant comes forward to take responsibility for the authorship of the dishonoured cheque during the trial proceedings

It would be an entirely different situation where during the complainant’s cross-examination, the complainant has refused to fill up the incomplete cheque or deposed about not authorising any person on his behalf to fill the subject cheque or expresses his ignorance about the author of the subject cheque and on the other hand, even the accused denies having filled up the cheque in his handwriting or having authorised any person to fill up such blank cheque in his application under Section 145(2) of the NI Act. In such a rare situation, where the author of the cheque is unknown and no one has taken the responsibility of filling the cheque, the trial court ought to take note of such a vital fact and take the opinion of a government-approved handwriting expert to at least ascertain whether the subject cheque carries different handwritings or if so, whether the handwritings of the complainant and the accused appear on such cheque or not rather than believing the versions of the complainant and the accused persons.

In such a scenario, Section 20 of the NI Act, which provides authority to the holder of a blank or incomplete instrument to complete such incomplete instrument cannot come to the rescue of such complainant/holder of the cheque since the complainant/holder has also denied filling up an incomplete cheque. It is pertinent to note that Section 20 of the NI Act only authorises the holder of the cheque to complete an incomplete instrument and no one else. Thus, the complainant’s lack of knowledge as to who has filled up the incomplete cheque, especially when the accused has also denied filling up the same goes to the root of the case thereby bringing such a case outside the ambit of Section 20 of the Negotiable Instruments Act.

The trial court cannot assume in this situation that since there is no authorship, the accused person gave implied authority to some person on his behalf or the complainant gave implied authority to some person to fill such blanks in a cheque. Depending on the facts of each case and the examination of the witnesses conducted, such an eventuality can fall within the four corners of Section 87 of the Negotiable Instruments Act, which deals with the material alteration of an instrument and its effect thereto without the consent and common intention of the parties involved in the transaction thereby making such instrument void.

Conclusion

To sum up, reliance on the law laid down in various judicial precedents should be the last resort and the trial court must appreciate the facts and circumstances under which the application seeking the opinion of a handwriting expert has been sought by the accused person. Moreover, before relying on the judicial precedents, the trial court must also appreciate the facts involved in such decisions and not solely rely on the ratio laid down in such precedents.

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Section 234F of the Income Tax Act

Sneha Mahawar

February 22, 2023

This article is written by Monesh Mehndiratta, a law student at Graphic Era Hill University, Dehradun. This article explains the provision of late fees imposed under Section 234F of the Income Tax Act. It further provides the meaning of an income tax return and the time limit for filing it, along with other provisions of penalties or late fees under the Act.

This article has been published by Sneha Mahawar.

Table of Contents

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Introduction
Meaning and scope of Section 234f
Income tax return
Late fees levied under Section 234F
- Payment of late fees under Section 234F
Provisions of interest to be paid in default
Conclusion
Frequently Asked Questions (FAQs)
References

Introduction

Have you filed your income tax return? If not, hurry up, or you will miss the last date to do it. Do you know that if you do not file your income tax return on time, late fees can be imposed upon you?

If you are not aware of this, you need not worry because this article will help you understand all such provisions. If you pay income tax, then you must be aware that it has to be paid and the return has to be filed within the prescribed time limit. In case you forget to do so or miss the due date late fees are automatically imposed upon you. You can still file the return, but with late fees. It is important to note that there is a difference between paying income tax and filing a return. If you have paid the income tax but have not filed the return, you are also subjected to penalties or late fees. Before the insertion of Section 234F in the Income Tax Act, 1961, Section 271A levied a penalty for failure to file a return.

The article explains the provisions of Section 234F and provides the meaning and benefits of filing an income tax return. It also explains the procedure for payment of late fees and mentions the necessary documents required for this. It further provides a tax calendar for the financial year 2021–22 and assessment year 2022–23, along with other provisions of penalty or late fees are given under the Act.

Meaning and scope of Section 234f

If a person fails to file the income tax return within the prescribed time limit, late fees will be imposed according to Section 234F of the Act. For example, if X files his income tax return for AY 2021–22 on 15/08/21, no late fees will be imposed as the return has been filed within the due date. However, if he files the same after the due date, then it will attract late fees. This Section was introduced in 2018 and came into effect from 1st April 2018, as a result of which there has been an amendment to Section 143 as well. The amount of fees payable under Section 234F will be considered when computing the amount of the refund that is due for processing the return.

The section is mandatory in nature, which means that if a person misses the due date for filing the return, late fees will be automatically imposed and there will be no exemption. This section is applicable to all persons, as mentioned under Clause 31 of Section 2 of the Act. The due date for filing an income tax return as prescribed under Section 139 of the Act by an individual, company or firm whose accounts have to be audited is 31st October of the assessment year while in cases where a report under Section 92E has to be furnished, it is 30th November of the assessment year. Thus, all persons, i.e., individuals, HUFs, associations of people, bodies of individuals, companies, firms, etc., are liable to pay late fees in case they miss the due date for filing the return.

Income tax return

A statement of a person’s gross annual income, assets and liabilities, paid taxes and refund which is to be paid by the government is known as an income tax return. It helps a person to disclose his income. If the income of a person exceeds the exemption limit without the deduction given under the Act, he is required to file the return. The filing of a tax return is important, though it may vary due to age, residence, income, etc. Section 139 of the Act provides provisions for the filing of an income tax return even if it has been delayed.

Persons eligible to file an income tax return

Section 139 gives instances where the filing of an income tax return is voluntary or mandatory. The following persons are required to file income tax returns mandatorily:

If the total income of a person exceeds the exemption limit, he/she is required to file the return within the prescribed time limit.
Any company or person carrying business in India whether it is private or public irrespective of the fact that it suffered profit or loss.
Any limited or unlimited liability partnership.
Residents having assets outside the country or retaining authority over an account that is based outside India are also required to file the return.
Hindu undivided families or bodies of individuals have to file the return only if the income exceeds exemption limits.

However, filing of return of income tax may be voluntary in certain situations. The section further gives power to the Central Government to exempt any person from filing a return, which can only be done if a notice is issued and placed in each house of parliament.

Subsection 3 of Section 139 states that if an assessee is an individual person and he suffered a loss in any previous financial year, he is exempt from filing the return, but companies and firms have to mandatorily file the return. However, the section lays down certain rules for this purpose:

If the firm decides to carry forward the loss, the return has to be filed mandatorily before the lapse of the due date.
If there’s a loss under the head or property it can be carried forward even if the return is filed after the due date.
A loss can be offset against any category of income for the same year, even if the return has been filed after the lapse of the due date.
Previous year losses can be carried forward only if the return of such losses was filed before the due date.

Subsection 5 of this section allows the revision of returns in case of a mistake. However, belated returns or returns filed after the due date cannot be revised. This revision of the return can be done either in the original return or in a separate revised return that is filed for this purpose.

Instances where the filing of income tax returns is mandatory

All the persons mentioned above have to mandatorily file the income tax return in the following circumstances:

The total income of a person is beyond the exemption limit as set under the Act. This exemption limit varies from person to person. However, if a person decides to opt for a new tax regime, he/she cannot avail of the benefits of the exemption limit under the old tax regime.
- For individuals of less than 60 years of age, the exemption limit is 2.5 lakhs rupees.
- For senior citizens i.e. people above 60 years of age, it is 3 lakhs rupees.
- For people above 80 years of age, the exemption limit is 5 lakhs rupees.
If the assets of a person are located outside India then he/she must mandatorily file an income tax return.
The amount deposited in the bank account exceeds one crore rupees and fifty lakhs rupees in the case of a savings account.
In case the travelling expenditure is more than two lakhs rupees to a foreign country, a person has to file the return.
If gross receipts from a profession and business exceed ten lakhs rupees and sixty lakhs rupees respectively.
The total amount of tax deducted at source (TDS) or collected at source (TCS) is more than twenty-five thousand rupees.

Defective returns

Subsection 9 of Section 139 of the Act deals with defective returns. It provides that where there is any defect in the income tax return, the tax officer has to inform the assessee and give him a time period of 15 days to rectify the mistake. In order to avoid defects in return, the following documents must be attached properly with it:

Income tax return along with the required form.
A statement providing computation of taxes payable.
Claims of paid taxes and proofs of tax deduction, advance tax, payment of self-assessment tax, etc.
Audit report.
Copies of books of accounts, if any, like a balance sheet, a profit and loss statement, personal accounts of members in the case of an association of person and body of individuals, etc.
Report of cost audit.
Any other document that is necessary to be furnished.

Advantages of filing an income tax return

Every person whose income exceeds the exemption limit is required to pay tax, and after payment of tax, the return has to be filed. The following are the advantages of filing an income tax return:

The filing of an income tax return can help avoid penalties under the Act that can be imposed if you fail to do so.
It helps in availing the benefits of loans as it is one of the requirements for necessary documents that are to be furnished while applying for a loan.
The return serves as proof of your income, which also depicts that you are a responsible person and hence trustworthy.
It also helps in claiming adjustments, and deductions, or set off against the losses suffered in the previous year.
The return is also used as identity proof for a person and is considered a legal document.
It also helps in quick visa approval as most embassies ask for an income tax return while scrutinising the visa application.

Late fees levied under Section 234F

Section 234F of the Act imposes late fees if a person fails to file an income tax return within the said due date. However, the amount of fees varies due to variations in income and also depends upon the time when the return has been filed. This can be easily understood as:

Income	Late fees as per Section 234F
More than five lakhs rupees and the return has been filed before 31st December of the assessment year.	Rs. 5000
Less than or equal to five lakhs rupees irrespective of the fact whether the return is filed before or after 31st December of the assessment year.	Rs. 1000
Other cases (for example, income is more than five lakhs rupees but the return has been filed after 31st December of the assessment year.)	Rs. 10000

Let us take an example to understand this. There are three friends, B, C, and D, and all of them are earning and hence eligible to pay tax. However, they all went on a trip and forgot to file their income tax returns by the due date. They decide to file their return but the due date has lapsed and thus, a penalty has been imposed upon which differs due to variation in their incomes. The quantum of fees is as follows:

Assessee	Income	Late fees
B	Rs. 3,00,000	Rs. 1000 (income is less than five lakh rupees)
C	Rs. 7,00,000, but the return has been filed before the 31st of December of the assessment year.	Rs. 5000
D	Rs. 7,50,000, but the return is filed after the 31st of December of the assessment year.	Rs. 10000

Payment of late fees under Section 234F

In order to pay the late fees imposed under the section, one needs to fill out Challan No. 280. Tick on “Self Assessment (300)” in the type of payment column and fill in the amount according to Section 234F in “others.” Below is a sample of Challan 280:

Provisions of interest to be paid in default

The Act provides various penalties in default of certain actions like payment of tax, concealment of income, failure to furnish required documents, failure to furnish an income tax return, etc. Section 234A of the Act provides the interest that is imposed upon an assessee if he/she fails to furnish an income tax return. If this happens, a person is liable to pay simple interest at the rate of 1% for every month or part of a month commencing immediately after the due date. Further, Section 234B provides that if a person fails to pay advance tax according to Section 208 or where the paid tax is less than 90% of the assessed tax according to Section 210, then he or /she is liable to pay interest at the rate of 1%.

Section 243C gives interest that is to be paid for the deferment of advance tax, while interest on excess refunds is given under Section 234D. It provides that the assessee will be liable to pay simple interest at the rate of 0.5% on the excess amount that is refunded for every month or part thereof from the date of refund if:

No refund is due for the regular assessment.
The amount refunded exceeds the refundable amount on the assessment.

Conclusion

Taxes play a major role in building the economy of any nation. It also puts an obligation on the government to work for the welfare of its citizens and use the money received through taxation for the development of infrastructure like bridges, roads, educational institutions, hospitals, etc., and technology in the country. Taxes can only be imposed by the government, and no other authority can compel a person to pay them, so if a person fails to pay the tax, the government can impose sanctions in the form of penalties. These penalties are given under the Act. One such penalty is provided under Section 234F of the Act, in which late fees are imposed on a person who fails to file the income tax return for a financial year within the prescribed time limit as set by the appropriate authority.

Frequently Asked Questions (FAQs)

Can a person file his income tax return after the due date?

Yes, an income tax return can be filed by a person if the due date has passed, but he/she will also be liable to pay late fees.

Can the late fees imposed under Section 234F be waived off?

The late fees imposed under this section cannot be waived off as it is mandatory in nature. Every person who defaults in filing the return before or on the due date has to pay the fees imposed under the section without any excuse, as there is no exemption.

Do the senior citizens have any exemption under Section 234F?

The section does not provide any exemption to senior citizens or any other person for the payment of late fees.

Difference between Section 234E and 234F of the Act.

Section 234E of the Act imposes late fees if a person fails or delays filing a TDS return, whereas Section 234F provides late fees for a delayed income tax return.

References

https://tax2win.in/guide/section-234f
https://blog.tax2win.in/is-it-mandatory-to-file-income-tax-return/
https://help.myitreturn.com/hc/en-us/articles/360002322332-Section-234F-Fee-Penalty-for-delay-in-filing-Income-tax-return
https://taxguru.in/income-tax/section-234f-late-fees-rs-5000-processing-revised-return.html
https://taxguru.in/income-tax/section-234f-late-fees-payable-default-furnishing-income-tax-return.html
https://cleartax.in/s/due-date-tax-filing
https://cleartax.in/s/income-tax-return-filing-benefits

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Damages for breach of contract under Indian Contract Act and English Contract Law

Rachit Garg

February 21, 2023

This article has been written by Sahiba Chopra, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

This article has been published by Rachit Garg.

Table of Contents

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Introduction
Damages under the Indian Contract Act, 1872
- Section 73 and Hadley vs. Baxendale(1845) : an analysis
  - Exemplification
Purpose of damages under Indian and UK laws
Indian law and English law : an antithesis on damages for contractual breaches
- Limitation of damages
- Distinction between liquidated damages and penalty
  - English law
  - Indian law
Conclusion
References

Introduction

The term “damages” was explained by the Supreme Court in the case of Common Cause vs. Union of India (1999) as a form of compensation due to a breach, loss or injury caused to the plaintiff. The Apex Court gave this simple explanation after taking into consideration definitions of damages by McGregor and Lord Hailsham. The court in this case bifurcated damages as pecuniary and non-pecuniary. While the former can be determined arithmetically, the later lacks the element of calculation. Damages are awarded not only in cases of contractual breaches, but also in cases relating to consumer law, intellectual property rights, tort, Sale of Goods Act, 1930 and arbitral proceedings. Thus, the spectrum of damages as a remedy is quite wide. This study focuses on damages as a remedy of breach of contract in Indian and English contract law. Since the Indian Contract Act, 1872 is based on the principles of English common law, the concept of damages under Indian and UK legislation is not much different and many a times stark similarities can be clearly cited while there are certain peculiarities wherein the two laws stand diametrically apart.

Damages under the Indian Contract Act, 1872

Sections 73 and 74 of Indian Contract Act, 1872 entail two types of damages namely, unliquidated damages and liquidated damages. Section 73 states that in the event of a contract being brought to an end, the aggrieved party is entitled to claim from the party who committed the wrong, compensation for loss or damage being caused to it. This section comes with two prerequisite conditions.

Firstly, the damage or injury must have arisen in the ordinary course of things.
Secondly, the damage has to be of such a nature that the parties to a contract must have anticipated it.

Contrary to this, there is Section 74, wherein parties pre-meditate upon the amount to be paid to the aggrieved party by the defaulter in the event of any contractual breach. This section refers to such an amount as a penalty or compensation. Proof of actual loss is not necessary under Section 74. An explanation attached to this section even provides for making stipulation as to increased interest payable by defaulting party to aggrieved party as penalty from the date of breach of contract. Therefore, while Section 73 makes provision for unliquidated damages (not stipulated in a contract), Section 74 deals with liquidated damages (stipulated in a contract).

Section 73 and Hadley vs. Baxendale(1845) : an analysis

Section 73 of Indian Contract Law is based upon the English common law of damages as laid down in Hadley vs. Baxendale (1845). In this case, the court bifurcated damages as ‘general damages’ and ‘special damages’. It was clearly held that in the event of breach of contract, the breaching party shall compensate the non-breaching/ aggrieved party with the damages which arose in the ordinary or usual course of things and not for such damage or injury which could not be contemplated by either of the parties. The major points of distinction between these two types of damages can be represented by way of following table:

Points of distinction	General damages	Special damages
1. Meaning and Interpretation	These damages arise naturally in the usual course of things from the act of breach itself. These are such damages which can be contemplated by the parties to a contract at the time of entering into a contract.	These are based on special circumstances which are too remote to be anticipated or contemplated by the parties at the time of entering into a contract.
2.Test of Reasonableness	Foresight of a reasonable man is used to determine these damages. If damage falls within the ambit of foresight of a reasonable man, the damages are categorised as general.	If a damage is such that a reasonably prudent man cannot under any circumstances anticipate it, it comes under the category of special damages.
3.Whether recoverable or not	These damages are made recoverable under Section 73 of the Indian Contract Act,1872 as they are clearly pre-meditated upon by the parties before the execution of a contract.	There is a bar on recovering such damages under Indian Contract Act, 1872, unless and until the plaintiff conveys special circumstances to the defendant which could cause such damage.
4. Presumption	Once the plaintiff proves that he/she has sustained damages, those damages are presumed to be general damages by the court.	In this case, the plaintiff has to prove that it gave notice of such anticipated damage to the defendant. Also, the plaintiff has to prove that he took reasonable steps to mitigate loss.

Exemplification

Company Y placed an order with Company X to deliver office chairs and tables to its office meant for being used by its employees and clients for sitting and doing work comfortably. Company X instead of delivering chairs and tables, delivered shoe racks and couches to Company Y. Company Y insisted on replacing furniture, but Company X failed to do so causing Company Y to rent requisite furniture till new furniture arrived. Since, delivery of right furniture was the essence of contract, it amounted to material breach of contract. In such a case if Company Y sues Company X, the court may order following general damages:

Refund to be made by Company X to Company Y of any pre-payment made while placement of order, along with,
Reimbursement of any expense Company Y incurred on sending furniture back to Company X.

In the given scenario, if Company X was beforehand conveyed by Company Y that it needed new furniture on a particular day since its old furniture was going to be discarded, the damages for breach of contract apart from above listed general damages, would also include payment for company Y’s expenditure incurred on renting furniture, until the right furniture arrived, as special damages. It is so because Company X had prior knowledge that Company Y would not have sitting arrangements for his employees and clients in case timely delivery of furniture is not made. Here, since notice of such special circumstance (old furniture to be discarded the previous day) is duly given to Company X, so special damages can be claimed. Also, to mitigate loss, Company Y rented temporary furniture. So, both conditions as mentioned in the above table under the heading ‘Special damages’ alongside presumption’ are satisfied, thereby enabling Company Y to claim special damages.

Purpose of damages under Indian and UK laws

Both in Indian contract law and English contract law, damages are of compensatory nature. Their purpose is not to punish the defendant for the breach, but to put the party whose rights have been violated in such a place as if the contract has been duly performed. Thus, the prime purpose of awarding damages in both India and UK is to make good the losses and damage suffered by the plaintiff rather than to punitively charge the defendant. But there are certain legit exceptions to this general rule. Such exceptions can be discussed as below:

Damages for mental pain and suffering

As a general rule, damages for mental pain and suffering are not awarded, but as held in Jarvis vs. Swan Tours Ltd (1972) damages for mental distress can be recovered in certain special cases. These special cases are those wherein a contract is entered into by a party for enjoyment, recreation and entertainment purposes, but instead of getting amusement, the party undergoes mental agony, distress, anguish and disappointment. In such cases where the purpose of contract is not fulfilled by the other party resulting in causing distress to the other party, damages for mental pain and suffering can be awarded.

Indian courts too now award damages for mental pain and suffering. One such case came to light in 2022 wherein Gurugram District Consumer Forum imposed a fine of about Rupees 4 lakh on gated housing society’s management and its security agency due to incident of dog bite of a resident. Not only petitioner’s legal expenses were ordered to be borne by defendants but payment of 9 percent interest since the date of admission of case to the court was awarded. Since, petitioner paid maintenance as per rent agreement, the purpose of rent agreement was defeated causing trauma and mental agony to petitioner, hence court awarded damages for mental pain and suffering apart from physical damage.

Nominal damages

These damages are awarded by the court where the plaintiff has suffered no loss but it is necessary to convey that the plaintiff’s right has been duly recognised. These damages consist of a meagre amount imposed on the wrong- doer and are awarded both by Indian and UK courts in those cases wherein there is infringement of a legal right but no financial loss is suffered by the plaintiff.

Exemplary damages

These damages are purported to punish the defendant and not merely compensate the plaintiff. These are punitive in nature. Courts in both the UK and India apply strict parameters before granting punitive or exemplary damages in contractual breach cases. Landmark case on punitive damages is Rookes vs. Barnard (1964) wherein three cases were laid down wherein punitive damages can be awarded. These are –

Oppressive, arbitrary, or unconstitutional action by any servant of the government.
Wrongful conduct by the defendant which has been calculated by him for himself, which may well exceed the compensation payable to the claimant; and
Any case where statute provides for exemplary damages.

These principles of exemplary damages, though, have been affirmed by the Supreme Court of India, but are largely granted in cases of violation of constitutional rights by public authorities and Indian courts ordinarily refrain from granting such damages. In this context, Delhi High Court had observed that punitive damages should follow general damages and these damages can be granted only if the court is satisfied that the exemplary element is not adequately met with the general damages computed for the plaintiff. So, punitive damages alone can never be awarded and are always awarded over and above the general damages.

Measure of damages and granting damages with interest

With regard to computation of damages, the rule was laid down in Jamal vs. Moola Dawood Sons & Co. (1915) wherein it was held that difference between the contract price and market price existing on the date of breach of contract, shall amount to proper measure of damages. Granting interest alongside damages is dependent upon many factors like terms of agreement, customs relating to payments and relevant statutory provisions. The amount of interest shall be determined in accordance with Section 34 of the Civil Procedure Code, 1908 under which courts have discretionary power to grant interest with damages. There is a bar of 6% on interest rate to be levied.

Indian law and English law : an antithesis on damages for contractual breaches

With regard to damages, there exists two differences between Indian contract Law and English contract law. First one relates to ‘limitation of liability’ and the second one is differential treatment of expressions ‘liquidated damages and penalty’. These can be discussed as follows.

Limitation of damages

Under the English contract law, the scope of damages is quite wide, including within its ambit not only general damages but also consequential losses incurred by the plaintiff. Recognition of such a loss was given in the British Sugar Case. English contract law talks about various aspects of damages like expectation interest, reliance interest and restitution interest. These interests can be explained as follows.

Expectation Interest	Reliance Interest	Restitution Interest
It is meant to place the plaintiff in a situation which he would have otherwise occupied had the defendant fulfilled his obligations towards the plaintiff. Such an interest is also referred to as performance interest and aims to meet the expectation of promisee.	Reliance interest can be understood on the basis of the concept of status quo, aiming at restoring the plaintiff’s initial position before he entered into a contract. Since he relied on the breaching party and changed his position, the court restored his initial position.	It aims to prevent the party breaching the contract to earn any kind of benefit or gain at the disadvantage and expense of the non-breaching party. Restitution interest is also meant to force the breaching party to return any amounts received by the non- breaching party.

In order to better understand these interests, an example can be used- ‘A’ is the owner of a reputable bakery. He enters into a contract with one Mr ‘B’ for delivery of high-quality chocolates. A and B agree that ‘A’ shall pay Rs. 30,000 upfront. Once the contract is entered into, ‘A’ buys extremely rare coffee beans of Rs. 40,000 to later mix with chocolate in order to prepare confectionery items. B takes ₹30,000 but the next day fails to deliver chocolates ‘A’ expected to make a total income of Rs 2,00,000 if chocolates were delivered by ‘B’ timely.

Here, expectation interest is ₹2,00,000 (income expected by ‘A’ to be earned if ‘B’ had performed his promise).

Reliance interest is ₹40,000 (amount for which coffee beans were purchased relying on the delivery of chocolate to be made).

Restitution interest is ₹ 30,000 (advance payment by ‘A’ to ‘B’).

While such a wide range of interests are recognised as damages under English contract law, Indian contract law adopts a comparatively much narrower approach. Section 73 of Indian Contract Act covers damages ensuing from the usual course of things and the already anticipated damages by the parties to a contract. Indirect or consequential losses are clearly recognised under English law but Indian courts apart from certain exceptions do not recognise remote damages.

Distinction between liquidated damages and penalty

English contract law draws a distinction between liquidated damages and penalty while Indian contract law under Section 74 makes no concrete separation between the two. If the sum agreed between parties is a genuine pre estimate of prospective damages then we term it as liquidated damages, while if the sum is excessively disproportionate to the likely prospective loss, then it is termed as penalty. While aim of liquidated damages to provide compensation to the aggrieved party, aim of penalty is to impose punishment on party breaching the contract. A simple example clarifying the difference between liquidated damages and penalty is electricity bills. When we err in bill payment of electricity use, the bill amount is liquidated damages we need to pay while over and above the actual bill amount is penalty to deter consumers from being late bill payers.

English law

In England, special care is taken to draft liquidated damages provision since many times if such a provision stipulates an exorbitant amount of damages, such damages would be struck down on the ground of being a penalty clause. In other words, under English contract law, the amount mentioned in a contract can either be treated as liquidated damages or penalty. If the amount is a reasonable and genuine estimate of prospective loss, it is recoverable and upheld by courts. However, if the amount mentioned in the contract is added for the purpose of dissuading another party from committing breach of contract and the amount is highly disproportionate to the loss estimated, such a clause is struck down by courts. Thus, English courts forbid parties to add penalty clauses in contracts in the disguise of liquidated damages.

Indian law

Indian courts make no distinction with regard to liquidated damages and penalty. Section 74 of the Indian Contract Act, 1872 uses both expressions namely liquidated damages and penalty in such a way so as to signify no explicit distinction between the two. Where contracts are silent on the amount of damages, courts determine damages after considering facts and circumstances of each case. Courts cannot award compensation in excess of what is mentioned in the contract, but they can award a lesser amount as damages.

If in a case the defendant proves that no loss was caused to the plaintiff, then no damages, even if they are liquidated, can be claimed. Though there may be breach of contractual obligations, it may not result in awarding of liquidated damages/penalty to the plaintiff if there was no actual loss caused due to such breach. The same was held in the case of Indian Oil Corporation vs. Messrs Lloyds Steel Industries Ltd (2007) where the court made it clear that liquidated damages cannot be claimed solely on the ground that they find mention in the contract. There has to be an occurrence of actual loss.

Conclusion

Though there are other remedies available to parties aggrieved by breach of contract like rescission of contract, sue for specific performance, injunction and quantum meruit, damages especially liquidated ones are considered far better option than the enlisted remedies due to the easy nature of their computation, thereby leading to prevention of litigation or at least fast outcome of litigation. For fixation of liability in order to claim damages, there has to be establishment of causation, that is, to establish a causal connection between the loss incurred/ injury sustained and the breach committed. Such an establishment of causation will not solely make a defendant liable if the loss or injury is too remote to the breach of contract. In cases where there is contributory negligence on the part of plaintiff himself, the court may disentitle him from claiming damages. Thus, the maxim of “He hath committed inequity shall not have equity” may be applied by courts.

References

https://www.mondaq.com/india/contracts-and-commercial-law/1079412/revisiting-the-principles-of-damages-under-the-contract-regime-in-india#:~:text=The%20Law%20of%20Damages%20under,losses%20to%20the%20aggrieved%20party.
https://lawplanet.in/hadley-vs-baxendale-case-summary-1854-all-er/.
http://jec.unm.edu/education/online-training/contract-law-tutorial/remedies-for-breach-of-contract.
https://www.juscorpus.com/comparing-indian-contract-law-and-english-contract-law/#:~:text=According%20to%20the%20Indian%20contact,B%20sell%20is%20a%20pen.

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Co-existence of similar trademarks: benefits every business owner should know

Rachit Garg

February 20, 2023

Table of Contents

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Introduction

Introduction

An estimated 13.9 million trademark applications covering 18.1 million classes were filed worldwide in 2021 alone, adding up to 73.7 million active trademark registrations at 149 IP offices, according to the World Intellectual Property Organization (WIPO) report. Due to the rapid increase in the number of new small businesses, there exist numerous overlaps in names and logos between different companies. This often leads to situations where two businesses will use similar trademarks without knowing about the others’ existence, until

Sometimes the goods or services sold under the same trademarks are offered in different geographic areas, are unrelated, or utilize different trade channels. In such cases, business owners can benefit from so-called “co-existence agreements”. A well-drafted co-existence agreement can be used as an effective strategy for quick trademark dispute resolution and efficient brand building.

What is a Trademark Co-Existence Agreement?

Trademark co-existence describes a situation in which two different enterprises use a similar or identical trademark to market a product or service without necessarily interfering with each other’s businesses, according to the WIPO.

Successful co-existence agreements usually limit each trademark owner to use the trademark in a way that suits both parties. The agreement must set forth in detail the rights of the respective trademark owners and how confusion in the marketplace will be avoided. Trademark co-existence agreements usually include the following information:

All parties bound by the agreement;
The exact trademarks and/or logos which are to coexist;
Who has the right to the domain names, media use of the trademark, and any modifications made to the trademark;
Which party has the right to use the trademark when expanding territory or product line;
Whether international use of the trademark is permissible, and under what conditions;
The licensing or assigning of the trademark to third parties;
The rights and responsibilities if one party abandons the use or rights to the copyright;
Consequences for breaches of the co-existence agreement.

When is Co-Existence Agreement beneficial for the brand?

Co-existence agreements make solid business and financial sense in many situations, and both parties can strike a fair compromise when using an identical or similar trademark. Co-existence of trademarks provides the parties with an opportunity to save money on marketing expenses and avoid lengthy and expensive litigation processes, which can lead to increased quality of the products as well as lower prices for consumers.

Complications can arise when one party already has certain advantages over the other in the marketplace. In one case, a smaller business with a trademark may seek to use a similar or identical trademark of a more established company in a related industry. In most cases, there is significantly less incentive for the bigger company to enter into a co-existence agreement.

This is because, in a co-existence agreement, there is no way to control the quality of the goods or services the other party produces under a similar trademark. Suppose the quality of the other products is poor. In that case, the reputation of this poor quality can affect the overall perception of the trademark, which can be detrimental to businesses using similar or identical trademarks.

The case of Apple Corps vs Apple Computer

The case of Apple Corps, the record company founded by the Beatles, and Apple Computer illustrates some difficulties of the co-existence agreements (see WIPO Magazine 3/2006). The two companies entered into a brand co-existence agreement in 1991. The agreement acknowledged the “similarity between their respective Trade Marks” and the parties’ wishes “to avoid confusion between their respective business activities and to preserve their respective Trade Mark rights. According to the terms of the agreement, Apple would not use its name and logo on any computer products “specifically adapted for use in the recording or reproduction of music or of performing artist works,” and both parties would not oppose or attempt to cancel the registration of their trademarks.

Apple Corps filed the lawsuit in 2003 after Apple Computer launched the iTunes online music store. The Beatles’ company charged that Apple Computer had violated a 1991 co-existence agreement. The Court, however, sided with Apple Computer, stating that the use of the apple logo “does not suggest a relevant connection with the activity that a record company” and that it was “a reasonable and fair use on and in connection with the service.”

Takeaway

Co-existence agreements can be effective tools to resolve trademark disputes under the appropriate circumstances. However, parties should take time to reflect on the pros and the cons and draft a list of all necessary details before committing to engage in such an agreement. If you would like to know more about trademark co-existence agreements and if they are right for your business, or need assistance with your trademark application, don’t hesitate to schedule a free consultation with an experienced trademark attorney today.

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Recognition of false evidence under IPC and possible consequences it holds

Rachit Garg

February 20, 2023

This article is written by Preethikha AR, a student pursuing B.B.A. LL.B. (Hons.) from the School of Excellence in Law, Chennai and edited by Nishka Kamath, Team LawSikho.

it has been published by Rachit Garg.

Table of Contents

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Introduction
False evidence under the IPC
Important case laws on false evidence
Witness making untruthful confession in a court of law
- False confession
- Forced confession leading to false evidence
Giving false evidence or misleading information
Conclusion
References

Introduction

Any statement made under oath that the court requires or permits and any document that is produced in accordance with its instructions constitute evidence. The term ‘evidence’ includes all information and facts that contribute to proving the truth. Further, “false evidence” is evidence that is not true in nature. Creating evidence out of the blue, showing something that has never happened, or just altering an incident that has really happened amounts to false evidence.

False evidence under the IPC

Chapter XI of the Indian Penal Code, 1860, deals with false evidence and offences against public justice. Every form of legal proof that is admissible during a trial and designed to persuade the judge or jury of the purported material facts of the case is referred to as evidence. False evidence or fake evidence refers to information that has been fabricated or obtained illegally in an effort to influence the outcome of a court case. False evidence is a statement or piece of documentation used in court that is known to be false or is suspected to be untrue. Criminal evidence includes any tangible or intangible proof offered to establish a crime.

Section 191 : Giving false evidence

Under Section 191 of the IPC, an individual who is legally bound by an oath or by any express provision of the law to speak the truth or is obliged to make a declaration on any matter and makes any statement that is untrue and which he either knows or believes to be untrue or thinks it is untrue, is claimed to have provided false evidence.

Section 192 : Fabricating false evidence

Under Section 192 of the IPC, a person is guilty of fabricating false evidence if he intentionally creates a situation or creates a document or electronic record containing a false statement with the intent that the situation or false statement may be used as evidence in a legal proceeding and that the situation or false statement will be used as evidence.

Section 193 : Punishment for false evidence

Under Section 193, any individual who deliberately gives false evidence in any court proceeding or furnishes false evidence with the motive of using it in court proceedings, will be penalised with imprisonment of either description for a term that may extend to seven years and be liable to a fine. Further, anyone who deliberately furnishess false evidence in any other case, will be liable to imprisonment for a term extendable up to three years and be liable to a fine, as well.

Section 194 : Giving or fabricating false evidence with intent to procure conviction of capital offence

Further, under Section 194, any individual who furnishes false evidence with the intention to cause or after being aware that it will cause any innocent person to be convicted of an offence that is punishable by the death penalty shall be given a penalty of life imprisonment or rigorous imprisonment for a period extendable up to 10 years and shall also be liable to pay a fine.

Section 195 : Giving or fabricating false evidence with intent to procure conviction of offence punishable with imprisonment for life or imprisonment

Moreover, under Section 195, any individual who furnishes false evidence with the intention to cause or after being aware that it will cause any innocent person to be convicted of an offence that is not punishable by the death penalty but punishable with imprisonment for life in prison or a term of seven years or exceeding it shall be held guilty of that offence and would be liable for punishment.

Section 196 : Using evidence known to be false

Furthermore, under Section 196, anyone who fraudulently presents evidence that they know to be false or fabricated as true or genuine evidence is punished in the same way as if he gave or fabricated false evidence.

Section 197 : Issuing or signing false certificate

Additionally, Section 197 states that any person who issues or signs any certificate that is required by law to be signed, or relates to any fact for which such a certificate is legally admissible in evidence, knowing or believing that such a certificate is false in any material point, will face the same punishment as if he provided false evidence.

Section 198: Using as true a certificate known to be false

According to Section 198, any individual who uses or attempts to use any evidence which he is aware is false or fabricated as true or genuine evidence, shall be given a punishment in the same manner as if he gave or fabricated false evidence.

Section 199 : False statement made in declaration which is by law receivable as evidence

According to Section 199, any individual who, in any declaration made or subscribed to by him, in any court of law, or as a public servant or other individual, is obliged by the legal norms to get evidence of any fact, makes a false statement of which he has knowledge or believes it to be false or fabricated, will be punished in the same way as if he had furnished false evidence.

Important case laws on false evidence

Santokh Singh v. Izhar Hussain (1973)

In Santokh Singh v. Izhar Hussain (1973), the Supreme Court ruled that test parade identification is typically used in rape cases to identify the accused by the victim, and that if the victim lied and said he was the accused, that is an offence that is covered by Sections 192 and 195 of the IPC. The Court noted that, rather than Section 211 of the IPC, providing false testimony in support of a prosecution case is a crime punishable under Sections 193 and 195 of the Code.

Baban Singh v. Jagdish Singh & Ors. (1996)

In Baban Singh v. Jagdish Singh & Ors. (1996), the Supreme Court held that the offence would come under Sections 191 and 192 if a witness swore a false affidavit during a court procedure. Giving false testimony or creating fake evidence with the intent to use it in a legal action is against the law.

Ram Dhan v. State of U.P. & Anr. (2012)

In Ram Dhan v. State of U.P. & Anr. (2012), the Court noted that Section 195 of the IPC makes it illegal to fabricate false evidence. It’s not required for fake evidence to be created inside a courtroom because it can also be created outside a courtroom and still be used there.

Jotish Chandra Chaudhary v. State of Bihar (1968)

In Jotish Chandra Chaudhary v. State of Bihar (1968), the Supreme Court held that the accused could not be charged with acting corruptly because the minor son’s age in the trademark lawsuit was only declared after proper verification from the school administration.

Witness making untruthful confession in a court of law

False confession

False confession can refer to the accused pleading guilty to a crime when, in fact, he did not commit that crime. False confession can refer to the accused pleading guilty to a crime when, in fact, he did not commit that crime. It has occurred that people make false confessions either when threatened, forced, or when they have any mental disability and either fail to understand the questions asked while cross-questioning them during interrogation or do not have the mental capacity to answer them.

Moreover, such confessions are not admissible in a court of law, and the police are obliged to interrogate the accused properly to reveal the truth. Such confessions impede the country’s justice delivery system and cause the trial process to be delayed. Further, it may even cause the imprisonment of an innocent person and the freeing of real culprits, causing the purpose of justice- punishment to remain unaccomplished.

In Palvinder Kaur v. State of Punjab (1952), the Hon’ble Supreme Court ruled that the court must accept the confession made in its entirety, that the incriminating portion cannot be accepted, and that the defensible portion be rejected. Further, the Court stated that any court of law does not have the authority to do so.

Forced confession leading to false evidence

A forced confession is one in which a suspect or prisoner is coerced into confessing through the use of torture. Such a confession cannot be relied on to get out the truth, as there was coercion and torture involved. In order to appease the interrogator and end the torture, the individual (or individuals) being questioned may tell the story told to them or even fabricate lies on their own.

For decades, the practice of coerced confessions in the European court system was justified by the Latin proverb “confessio est regina probationum,” meaning “confession is the queen of evidence.”

Giving false evidence or misleading information

Police perjury

Police perjury is defined as any dishonest testimony given by a police officer in a court of law while under oath to give an honest testimony. Perjury is committed if an officer intentionally on the stand gives a dishonest testimony. It is pertinent to note that perjury can also be a misdemeanour; however, this depends on multiple factors, like the background of the officer or what he lied about while he was on the stand. In either case, it is a serious offence that involves lying about a defendant, causing a stumbling block in the justice system, and unfair treatment of the defendant. The phrase “lying on oath, especially by a police officer, to help gain a conviction” has been used to describe police perjury more broadly.

Mistaken identity

Mistaken identification is a legal defence that asserts the criminal defendant’s real innocence and strives to discredit proof of guilt by claiming that any eyewitness to the crime mistakenly believed they saw the defendant when, in fact, the person they saw was someone else. The defendant must persuade the jury that there is a reasonable doubt over whether the witness truly saw what they claim to have seen, or recalls having seen, because the prosecution in a criminal case must show the guilt of the accused beyond a reasonable doubt.

Tampering with evidence

On numerous occasions, we have witnessed a common scene on police drama shows wherein a suspect, fearing arrest, destroys or damages evidence. The suspect may be witnessed throwing away incriminating documents or damaging evidence, perhaps tossing the documents or evidence in the fire or flushing it down the toilet. These are classic examples of tampering with evidence.

Simply put, tampering with evidence is an offence involving any action that destroys, alters, conceals, or falsifies any evidence. Furthermore, tampering with evidence is strongly linked to impeding the administration of justice. Usually, evidence is tampered with to conceal a crime or to cause harm to the accused.

Frameup

A frameup can be described as a setup where someone pretends that an innocent person has committed a crime by deliberately lying or inventing evidence to create a circumstance to prove his guilt. Framing is primarily used as a distraction, and yet it may be done with pure malice to incriminate the innocent. Usually, the person who frames another is the one who committed the crime.

Conclusion

A person who fabricates evidence or provides false testimony will be penalised in accordance with the terms set forth in the IPC, 1860. We can infer that Section 191 and Section 192 are distinct from one another. The offender who coerces, threatens, or promises to provide false testimony will be punished. It should be highlighted that the individual providing testimony must be aware of or firmly believe that what they are saying is true.

In conclusion, false evidence is the information that is provided to influence the outcome of the truth in a legal proceeding. False evidence can be produced, forgeried, or tainted; it is up to the party using it to establish where it is being used. The goal of providing false testimony is to secure a conviction and convict the innocent. As a result of the widespread use of fabricated evidence and witnesses, the penalties outlined in these clauses need to be strengthened.

References

https://devgan.in/ipc/chapter_11.php
https://blog.ipleaders.in/false-evidence-and-offences-against-public-justice/#Introduction
https://devgan.in/ipc/chapter_11.php#s195
https://www.livelaw.in/news-updates
https://www.scconline.com/blog/post/tag/false-evidence/
https://lawcorner.in/giving-false-evidence-and-fabricating-false-evidence/#Giving_false_evidence

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Section 40A of Income Tax Act, 1961

Sneha Mahawar

February 20, 2023

This article is written by Divya Raisharma, a law student at the Government Law College, Mumbai. This article explains Section 40A of the Income Tax Act, 1961, in detail, the exceptions to the said sub-sections (if any), and the exception to Section 40A. It also mentions relevant case laws and frequently asked questions (FAQs).

This article has been published by Sneha Mahawar.

Table of Contents

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Introduction
Elements of Section 40A of the Income Tax Act, 1961
Exceptions to Section 40A of the Income Tax Act, 1961
Case Laws
- Principal Commissioner of Income Tax v. NEO Sports Broadcast (P.) Ltd. (2019)
- Deputy Commissioner of Income Tax (OSD), Mumbai v. Saraswat Co-operative Bank Ltd (2016)
Conclusion
Frequently Asked Questions (FAQs)
References

Introduction

Any person who earns any profit or gains from carrying out a business or profession is eligible to deduct allowable expenditures from the profit earned, unlike in the case of salary income, as per the Income Tax Act, 1961. This provision significantly reduces tax liability and relieves businessmen and professionals of a significant burden. However, because any beneficial scheme can be abused, there have been cases of taxpayers deducting expenses that are not permitted, personal, excessive, fictitious, or unreasonable. Such expenditures are disallowed as deductions by the assessing officer, who assesses the assessee’s income tax return. This disallowance takes place when the assessing officer’s opinion is that the expenditure is excessive or unreasonable with regard to the fair market value of the goods, beyond the legitimate needs of the business or profession, or even beyond the benefit derived from such goods, services, or facilities. However, it is not necessary that the whole amount be disallowed. Even a part of the expenditure can be disallowed if the assessing officer finds it unreasonable or excessive.

Elements of Section 40A of the Income Tax Act, 1961

Section 40A belongs to Chapter IV of the Act, which deals with the computation of total income under the heading “profits and gains from business or profession.” It is applicable when calculating total income under profits and gains from business or profession. Section 40A has multiple sub-sections, so the dissertation would be done sub-section by sub-section.

Section 40A(1) of the Income Tax Act, 1961

Section 40A(1) is a non-obstante clause, which refers to an overriding clause that is superior to other clauses.

In case of any overlaps or disharmony between the clauses, other clauses have to make way for them; this is affirmed in the case of Commissioner of Income Tax v. Bharat Vijay Mills Ltd. (1980).

Section 40A(2) of the Income Tax Act, 1961

Section 40A(2)(a)

Professional and personal relations in businesses can lead to assumptions of bias. For example, family members are naturally assumed to be favourably biased toward one another. People tend to grant each other excess or unreasonable monetary benefits due to the closeness of certain relationships and biases. Such benefits, however, are not allowed by laws, and the embodiment of this rule can be seen in Section 40A(2)(a).

This clause is a crackdown on people who not only grant excess or unreasonable benefits to the specified persons but also take tax deductions on the same. In the absence of a special relationship between the parties, the transaction would have been reasonable and proper. But this way, people not only fill their relatives’ pockets but also hinder the rightful taxation of the excess amount, which would otherwise be taxed.

However, not all transactions with the specified persons are deemed to be excessive or unreasonable. The onus is on the assessing officer to prove so. The relevant case law for the same is Marghabhai Kishabhai Patel and Co. v. Commissioner of Income Tax (1976).

When the assessee incurs any expenditure which is paid or is payable to the below-specified persons and such expenditure is (in the opinion of the assessing officer) excessive or unreasonable in regards to

The fair market value of goods, services or facilities;
Legitimate needs of the business or profession, or
The benefit derived/accrued by the assessee,

In these cases, such an excessive or unreasonable amount of expenditure has to be disallowed. Hence, an assessing officer cannot allow an expenditure to be excessive. Only the excess or unreasonable portion of the deducted expenditure is to be disallowed. It, however, does not speak about the disallowance of the whole expenditure, even though it is inflated. For example, if the fair market value of a good is 100, but the assessee has deducted 120 for the same, then only the excess amount of 20 is disallowed while the assessee is allowed to deduct 100.

Section 40A(2)(b)

As mentioned above, Section 40A(2)(a) is applicable only to specified persons. This list of persons is given in clause (b), and is produced as follows:

Nature of assessee	Specified person(s)
Individual	Relative
Company	Directors of the company and their relatives.
Firm	Partners of the firm and their relatives.
Association of person	Members of the association of persons and their relatives.
Hindu undivided family	Members of the family and their relatives.
Any assessee	individual with a substantial interest in the business or profession and any of their relatives.
Any assessee	A company with a substantial interest in the business or profession, directors of the company, directors’ relatives, and any company having a substantial interest in the aforesaid company.
Any assessee	A firm with a substantial interest in the business or profession, a partner of the firm, and a partner’s relative.
Any assessee	Association of persons with a substantial interest in the business or profession, members of the association, and members’ relatives.
Any assessee	Hindu Undivided Family (HUF) with a substantial interest in the business or profession, members of the family and members’ relatives.
Any assessee	Company of which a director has a substantial interest in the business or profession of the assessee. To illustrate, Mr. Apple has a substantial interest in the business of the assessee, and Mr. Apple is the director of company Y. Hence, company Y is a specified person.
Any assessee	Other directors belonging to the above-mentioned company and their relatives. For example, Mr. X has a substantial interest in the business of the assessee, and Mr. X is a director of company Y. Mr. B is also a director of company Y. Hence, Mr. B is a specified person.
Any assessee	Firm of which a partner has a substantial interest in the business or profession of the assessee.
Any assessee	Other partners belong to the above-mentioned firms and their relatives.
Any assessee	Association of persons, of which a member has a substantial interest in the business or profession of the assessee.
Any assessee	Other members of the above-mentioned association and their relatives.
Any assessee	Hindu undivided family of which a member has a substantial interest in the business or profession of the assessee.
Any assessee	Other members of the above-mentioned family and their relatives.
Individual	The person in whose business or profession the assessee or his relative has a substantial interest.
Company	The person in whose business or profession the assessee, its director, or, director’s relative has a substantial interest.
Association of persons	The person in whose business or profession the assessee, its member, or member’s relative has a substantial interest.
Firm	The person in whose business or profession the assessee, its partner, or partner’s relative has a substantial interest.
Hindu Undivided Family	The person in whose business or profession the assessee, its member, or member’s relative has a substantial interest.

Under Section 2(41) of the Act, “relative” means the assessee’s husband/wife, brother, sister, or any lineal ascendants or descendants.

A person is said to have a substantial interest in the assessee’s business or profession in the following situations:

Assessee	Person
Company	the beneficial owner of equity shares carrying not less than twenty percent of the voting power
Other	Someone who is beneficially entitled to not less than twenty percent of the profits of the assessee’s business or profession.

Section 40A(3) of the Income Tax Act, 1961

Along with the above provisions, Section 40A(3) puts up another category of disallowed expenditures. This provision encourages the Digital India initiative and fulfils the aim of tax authorities’ to curb fake entries for tax-saving purposes. Due to this provision, no one can claim expenditure in excess of Rs. 10,000 in a single day. This amount may be from one transaction or the sum of multiple transactions. This, however, does not apply to transactions done by account payee check drawn on a bank or account payee bank draft. It is important to note that the sub-section has only excluded two methods of payment from the restriction, and hence, any payment made by cash, debit card, or UPI, etc., will not escape the restriction. The object of this provision is to have sources of payment disclosed, which in turn keeps a check on tax evasion.

However, the authorities have relaxed the effects of this provision by putting out Rule 6DD and the Income Tax Rules, 1962.

As per Section 7 of the Finance Act, 1968, the definition of “cheque” is to be taken from the Negotiable Instruments Act, 1881. Section 6 of this Act defines a “cheque” as a bill of exchange drawn on a specified banker and payable only on demand. A cheque includes the electronic image of a truncated cheque and a cheque in electronic form.

Section 40A(3A) of the Income Tax Act, 1961

While in Section 40A(3A), the expenditure in question was the expenditure pertaining to and made in the previous year, it talks about the scenario where the assessee makes payment in the assessment year pertaining to an expenditure of the previous year. Just as above, if the total payment exceeds Rs. 10,000/-, the excess payment is disallowed and deemed to be the profit or gain from the business or profession of the subsequent year. However, the disallowance won’t affect circumstances covered by Rule 6DD of the Income Tax Rules, 1962.

An important point to note is the explicit provision in the sub-section regarding the extension of the payment limit from Rs. 10,000 to Rs. 35,000 when the said payment is made for the ply, hire, or leasing of goods.

Definition of other electronic modes as per Rule 6ABBA of Income Tax Rules, 1962

As per Rule 6ABBA, the other electronic modes meant:

Credit Card
Debit Card;
Net Banking;
IMPS (Immediate Payment Service);
UPI (Unified Payment Interface);
RTGS (Real Time Gross Settlement);
NEFT (National Electronic Funds Transfer); and
BHIM (Bharat Interface for Money) Aadhar Pay;

Exceptions: Rule 6DD of Income Tax Rules, 1962

Rule 6DD of the Income Tax Rules, 1962, is an exception to Sections 40A(3) and 40A(3A). The rule prescribes circumstances wherein the sub-section is not applicable. As per the rule,

Any payment to:

Reserve Bank of India
Banking company under Section 5(c) of the Banking Regulation Act, 1949
State Bank of India or its subsidiary bank
Co-operative bank or land mortgage bank
primary agricultural credit society or any primary credit society as under Section 56 of the Banking Regulation Act, 1949
Life Insurance Corporation of India (LIC)
Government under legal tender
Purchase products manufactured or processed without the aid of power in a cottage industry, to the producer of such products
Cultivator, grower, or producer for purchase of agricultural or forest products, products of animal husbandry or dairy or poultry farming, fish or fish products and products of horticulture or apiculture
an employee or the employee’s heir, on or in connection with retirement, retrenchment, resignation, discharge or death of a such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums is not more than Rs. 50,000.

Payment made by:

letter of credit arrangements through a bank
mail or telegraphic transfer through a bank
book adjustment from one bank account to another
bill of exchange payable to a bank
Way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee.

Payment made in a village or town where no bank serves on the date of payment and such a payment is made to any person who:

ordinarily resides, or
is carrying on any business, profession or vocation, in any such village or town.

Salary payment made by an assessee to his employee after deducting the income tax in accordance with the provisions of Section 192 (i.e. Deduction at source – Salary) of the Act, and

such an employee is temporarily posted for a continuous period of fifteen days or more in a place other than his usual place of duty, or on a ship; and
The employee does not maintain any account in any bank at such a place or ship.

Payment made by any person to his agent, who is required to make payment in cash for goods or services on behalf of such person or an authorised dealer or a money changer against the purchase of foreign currency or traveller’s cheques in the ordinary course of business.

Section 40A(4) of the Income Tax Act, 1961

Section 40A(4) has been given an overriding effect over other laws in force and even contracts. It further gives the object of Section 40A(3) and 40A(3A) while simultaneously protecting assessees from suits or proceedings (such as breach of contract). Hence, even if a contract requires an execution cash payment of more than Rs. 10,000 in a day, the assessee can choose to make this payment by the mode of an account payee check drawn on a bank, an account payee bank draft, or an electronic clearing system through a bank account and would be safeguarded from litigation even though the payment mode term of the contract per se was not fulfilled.

Section 40A(7) of the Income Tax Act, 1961

It comprises two clauses that are complementary and have to be read together. Section 40A(7)(a) is a negative clause, and Section 40A(7)(b) functions as its exception.

As per Section 40A(7)(a), no deduction will be allowed in respect of any provision for payment of gratuity to employees on their retirement or termination. However, nothing in clause a applies to the provision of Section 40A(7)(b) wherein any payment of contribution sum towards an approved gratuity fund payable in the previous year or payment of gratuity liability, which arose during the previous year, is allowed as a deduction.

Section 40A(9) of the Income Tax Act, 1961

It allows contributions to an employee’s superannuation fund, provident fund, and gratuity fund as tax deductions for employers and employees. This is done to further the objective of these funds and encourage employers to contribute to these funds by incentivising the same. However, many instances of people playing the system to take advantage of the above scheme came to the government’s notice. For example, irrevocable discretionary trusts that give absolute discretion to trustees to utilise the trust property for the benefit of the employees without any scheme or safeguards.

These trusts receive substantial amounts in the form of contributions and, consequently, are used as a vehicle for tax evasion by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investments in shares, etc.

To discourage such tricks, the government inserted it as a checkpoint. Sub-section 9 restricts the allowance of deduction of the sum paid for setting up or formation of, or contribution to, any fund, trust, company, an association of persons, body of individuals, or society registered under the Societies Registration Act, 1860, or any other institution except the ones made for the purpose mentioned in Section 36(1) clauses (iv), (iva) and (v):

Employer’s contribution towards a recognised provident fund or an approved superannuation fund, subject to

The prescribed limits of recognition of provident fund or approving superannuation fund, and
Conditions as the Board may think fit in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head salaries, the contributions or the number of members of the fund.

The employer’s contribution towards the pension scheme is referred to in Section 80CCD (Deduction in respect of contribution to the pension scheme of the Central Government), to the extent of 10% of the employee’s salary in the previous year. Herein, the salary calculation includes dearness allowance, if the terms of employment so provide, but does not include any other allowances and perquisites

Employer’s contribution towards an approved gratuity fund created for the exclusive benefit of employees under an irrevocable trust.

Section 40A(10) of the Income Tax Act, 1961

It provides that, concerning Section 40A(9), if the assessing officer is satisfied that the expenditure is bona fide or expended for the benefit of the welfare of the employees, then the amount is to be allowed as a deduction when computing income under the heading “profits and gains of business or profession” for the previous year in which the assessee laid down the expenditure. This is a relief section for bona fide cases.

Section 40A(11) of the Income Tax Act, 1961

On a plain reading of the whole section together, it may appear to some that Section 40A(11) does not quite fit in with other provisions. While the rest of the provisions in the section talk about non-deductible expenses or payments, it talks about repayment claims. Though there may appear to be no nexus between this and the other sub-sections, Section 40A(11) plays a significant role in keeping the scale of the law balanced.

It provides that when an assessee has paid any sum to institutions referred to in subsection (9), then, notwithstanding anything contained in any other law or any instrument, he shall be entitled:

to claim repayment of the paid but unutilised amount with these institutions. In this scenario, the unutilised amount has to be repaid as soon as possible.
to claim transfer of assets (being land, building, machinery, plant or furniture) acquired or constructed by the institutions in sub-section 9, out of the money paid by the assessee. When such a claim is made, the asset will be transferred to the assessee as soon as possible. In this case, the amount paid by the assessee exists as an asset with the institutions, compared to the above scenario wherein the said payment is not put to use by the institutions.

It has imposed a timeline so only bonafide cases can avail of the benefit. This timeline is in respect of payment of the sum to any institution referred to in sub-section 9.

Section 40A(13) of the Income Tax Act, 1961

It provides that no deduction or allowance is to be allowed in respect of a marked-to-market loss or other expected loss, except as allowable under clause (xviii) of sub-section (1) of Section 36. The crux of this section can be listed as Section 36 and “marked to market.”

Marked to Market

The value of an asset keeps fluctuating depending on the type of asset it is, usage, status, holding period, and much more. For this, various valuation methods were developed. One of them is marked to market. “Marked to market” is an accounting method of valuing an asset that represents the fair and accurate value of the asset. It basically means the asset is being marked or valued to its market value. To understand it more, it is important to delve into the “valuation of an asset” and then look into what exactly is “marked to market loss.”

Valuation of Asset

Assets can be valued in a balance sheet at numerous different prices, such as their historic cost, book value, market value and so on. Let us say, an asset has a historic cost of Rs. 10, but its current market value is Rs. 14. One of these valuations will be put down in the balance sheet, and consequently, the appreciation/depreciation will be calculated with this valuation as one of its factors. Consequently, every different valuation paints a different picture. For sake of uniformity in disclosure, this valuation method is decided by the Accounting Standards in place. To give an example, Short-term investments are valued at their current market price whereas buildings and machineries are valued at their historic cost.

Marked to market loss

However, as years go by, the status and holding position of the assets may change, which will warrant a change in the valuation amount of the asset in the balance sheet. For example, a long-term investment is converted into a short-term investment and vice versa. When a long-term investment is converted into a short-term investment, the concept of ‘Mark-to-Market’ comes into play. This concept, however, also comes into play in the yearly accounting of short-term investments as they are to be marked to their market price at the end of each financial year. ‘Mark-to-Market’ is as its name says, marking/valuing the asset to its market price. To illustrate,

Short-term investment of stock was valued at Rs. 100 in the last financial year’s balance sheet. At this current financial year’s end, its market price has fallen down to Rs. 90. The short-term investment will be valued at Rs. 90.
A long-term investment in debentures of Rs. 100 is getting redeemed three months from the end of the financial year. This change in the holding period caused the investment to be converted into a short-term investment. Its current price is Rs. 105. The investment will be valued at Rs. 105.

In the above-mentioned scenarios, the first scenario is an example of ‘marked to market loss’ which is also known as ‘Mark-to-Market loss’. Herein, purely in the accounting book, the assessee has suffered a loss of Rs. 10. The assessee has not faced a real liquid loss of Rs. 10 on his investment as he has not sold the investment yet. This loss will be recorded in the ‘Profit and loss account’ and ‘Investment account’ in the assessee’s books of accounts. No entry of this will be found in the cash or bank books. Even in the case of the second scenario, if the current price was Rs. 90, the same above-mentioned workings of the first scenario would be applicable.

Hence, in conclusion, an assessee can not take deduction or allowance of any marked-to-market loss or other expected loss unless such losses are in accordance with the official government gazette notifications prescribing income computation and disclosure standards.

Exceptions to Section 40A of the Income Tax Act, 1961

A specified domestic transaction, which is conducted at arm’s length price, cannot be disallowed on the grounds of it being excessive or unreasonable to fair market value when the transaction is for the assessment year commencing on or before 1st April 2016.

Arm’s length price

The arm’s length price for this exception has to follow the definition laid down in Section 92F(ii). As per this, arm’s length price is the applied price or proposed to be applied price in a transaction undertaken by persons other than associated enterprises in uncontrolled conditions.

Associated enterprise

To give a general overview of associated enterprises, it is prudent to refer to its definition under the Income Tax Act. An associated enterprise gets its definition from Section 92A. An associated enterprise is described as per its relation to other enterprises, meaning:

I. An enterprise participating in the management, control or capital of the other enterprises either: directly, indirectly, or, through one or more intermediaries.

II. An enterprise wherein one or more persons participate in the management, control or capital of the enterprise either: directly, indirectly, or, through one or more intermediaries

are the same persons who participate (directly, indirectly, or through one or more intermediaries) in the management, control, or capital of the other enterprise.

Specific domestic transaction

As for the main element of the exception, we find its definition under Section 92BA. As per Section 92BA, a specific domestic transaction comprises the following elements:

Non-international nature of the transaction,
The aggregate of the transaction(s) in the previous year exceeds the sum amount of twenty crores rupees, and
It is one of the below-mentioned transactions:

Any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A;
Transaction referred to in Section 80A (Deductions in total income) or
Transfer of goods or services referred to in Section 80-IA(8), that is:
1. Goods or services held for eligible business which is transferred to another business of the assessee;
2. Goods or services held for another business which is then transferred to an eligible business.
Any transaction referred to in any section under
1. Chapter VI-A (Deductions to be made in computing total income) or
2. Section 10AA (Special provisions in respect of newly established units in Special Economic Zones), to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable;
Section 80-IA(10): Any business transacted between the assessee and a person who either:
1. Has a close connection with assessee, or
2. The profit generated by the business between them is more than ordinary and expected profits, which can arise in the eligible business.
Any transaction prescribed as a specified domestic transaction.

Case Laws

Principal Commissioner of Income Tax v. NEO Sports Broadcast (P.) Ltd. (2019)

Facts

The assessee had an agreement with one M/s. Nimbus Communication Limited for exhibiting cricket matches on television organised by the Board of Control for Cricket in India (BCCI). The assessee would pay a total of Rs.124.98 Crores to Nimbus for executing 8 such matches between India and England. The payment per match came to 24.99 Crores (rounded off). For the same year, the assessee had to pay Rs.136.89 crores to Nimbus for covering 7 matches between the India-Sri Lanka-West Indies series.

One of the matches between India and England had to be cancelled for which the assessee received a credit note of Rs. 24.99 from Nimbus. In the same year, an additional match was played in the India-Sri Lanka-West Indies series for which an additional sum of Rs.19.55 crores was payable by the assessee.

However, by an agreement between the assessee and Nimbus, the assessee forgoes the claim of Rs.24.99 Crores in lieu of Nimbus not demanding additional fees of Rs.19.55 Crores for the additional match. This difference of Rs 5.45 crores, which the assessee had to receive from Nimbus, but did not, was added to the assessee’s income by the assessing officer using Section 40A(2) of the Act.

Issue Raised

Whether the assessing officer was right in adding Rs. 5.45 Crores to the assessee’s income by invoking Section 40A(2).

Held

The Bombay High Court held that the assessing officer erred in doing so.

The assessing officer had not doubted the existence of mutual understanding between the assessee and BCCI, which gave the assessee the right to telecast live matches. Not only that, the assessing officer had also not made any addition for non-direction of TDS under Section 40(a) of the Act, but instead held that the expenses in question are not allowable because the same has been made in the absence of any expressed agreement between the parties.

The Court also noted the Appellate Tribunal’s rejection observations, wherein it was found that the entire transaction was in the nature of a fresh business transaction under revised circumstances as a measure to adjust the revenue proceeds.

Deputy Commissioner of Income Tax (OSD), Mumbai v. Saraswat Co-operative Bank Ltd (2016)

Facts

The assessee paid Rs. 13,44,73,913 to its related enterprise for the provision of services pertaining to software and data entry, as well as the maintenance and management of the entire IT infrastructure of the bank. The assessee pays on a “per transaction basis” to its related enterprise.

The assessee paid transaction charges of Rs. 1.38 per transaction to its related enterprise, while the same charge per transaction was reworked by the assessee based on the current cost and the projected operational cost of the related enterprise as well projected investment. The reworked charge per transaction was Rs. 4 per transaction.

The assessing officer observed that these costs paid by the assessee are unreasonable and excessive under the provisions of Section 40A(2)(b) of the Act as the payments are made to its related enterprise.

The assessing officer worked out the cost per transaction at arms’ length at Rs.1.64. The excessive expenses claimed by the assessee up to Rs. 7.95 crores were added to the income of the assessee by invoking provisions of Section 40A(2)(a).

Issue Raised

Whether cooperative society is covered under Section 40A(2)

Held

The Appellate Tribunal bench held that the provisions of Section 40A(2) are not applicable to co-operative societies and, therefore, the disallowance of expenditure for making payment to related enterprises for availing certain services was not sustainable.

Conclusion

While the Income Tax Act has given business owners and professionals many leeways to save tax in form of tax deductions and exemptions, some curbs on it are essential to keep in check the misuse of the levied benefits. Section 40A gives the assessing officer grounds to keep in check and disallow expenditures shown with the intent of evading taxes. Hence, discretion is given to the assessing officers as each case differs from one another. However, seeing case laws we can deduce that, the judiciary has time and again maintained the scale of the balance and deterred abuse of this power.

We can also see the importance of knowledge of tax laws for assessees as sub-sections like 3 and 3A disallow certain types of expenditure, which the assessees may unknowingly make the whole year only to discover the tax loss they suffer due to a lack of tax saving strategy. Hence, it is highly recommended to be aware of the tax laws applicable to a person from the very beginning of the previous year.

Frequently Asked Questions (FAQs)

Is Section 40A applicable to the assessees not having ‘profits and gains from business or profession’ income?

Section 40A is not applicable to an assessee other than the one who has “profits and gains from business or profession” income. The legal reasoning behind this can be found in the case of N.M. Anniah vs. Commissioner of Income Tax (1975)

Is there any general assumption under Section 40A(9)

There is no general assumption under Section 40A(9). Hence, to disallow any expenditure under this, the assessing officer needs some evidence or proof to back up the disallowance.

Does the disallowance under Section 40A(3) and Section 40A(3A) apply in the case of crossed cheques or bearer cheques?

Yes, any amount paid by way of crossed cheques or bearer cheques attracts disallowance under Section 40A(3) and Section 40A(3A) as they are categorised as cash payments. Only account payee cheques are exempt from disallowance under Section 40A(3) and Section 40A(3A).

References

Chaturvedi and Pithisaria: Income Tax Law
https://wirc-icai.org/wirc-reference-manual/part3/amounts-not-deductible-under-section-40-40a-and-43b.html

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