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Recent Developments. Divakar Vijayasarathy DVS & Partners India : Singapore : Dubai : London. Amendments by Finance Act 2013. Rates of Taxation. Rates of Taxation. Enhanced Marginal Relief.
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Recent Developments DivakarVijayasarathy DVS & Partners India : Singapore : Dubai : London
Enhanced Marginal Relief • Enhanced Marginal Relief- Applicable for all Domestic and Foreign Companies having incomes marginally in excess of Rs 10 crores • This relief is a benefit made available to company assessees having a total income marginally in excess of Rs 10 crores since the surcharge rate increases from 2%/5% to 5%/10% respectively.
Enhanced Marginal Relief • Rationale for Marginal Relief: Relief is provided to ensure that incremental income tax payable including surcharge, on income in excess of Rs 10 crores does not exceed such excess income. • Eligible assessee: All company assessees • Condition/Situation: • Total Income should be more than Rs 10 crores • Incremental tax and surcharge liability on account of income exceeding Rs 10 crores should be more than income in excess of Rs 10 crores . • • Relief: Incremental tax and surcharge liability will be restricted to the value of income in excess of Rs 10 crores
Investment Allowance – Sec 32AC • Period of investment – 1st April 2014 to 31st Mar 2015 • New Asset – Plant and Machinery except: • Used machinery (in India or outside) • Those installed in any office, residence • any office appliances including computers or computer software • any vehicle; or • Where, the whole of the actual cost of which is allowed as deduction (depreciation or otherwise)
Investment Allowance – Sec 32AC • 5 years lock in • Investment threshold in excess of Rs 100 crores • Deduction – 15% of amount invested • Violation – of holding period – deduction claimed shall be regarded as income
Full value of consideration – Sec 43CA • Real estate assets held as stock in trade- guideline value taxation similar to Sec 50C • Minimum guideline value shall be regarded as sale consideration • In case of JDA- date of agreement considered for valuation
TDS on Property Purchases- Sec 194IA • (1) Any transferee, paying to a resident transferor • Any consideration for transfer of any immovable property (other than agricultural land), shall, • at the time of credit or payment • deduct an amount equal to one per cent of such sum as income tax thereon No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.
Buyback Taxation- Sec 115QA • Additional income tax on distributed income • Applicable to unlisted companies • Additional income tax @20% plus surcharge & cess • Distributed income = Buyback price less allotment price • Sec 46A shall not apply to shares of unlisted companies • Buyback consideration exempt u/s 10(34A) • Dividend distribution now more cheaper than buyback
Section 14A • No deduction shall be allowed in respect of expenditure incurred by an assessee for earning an income which does not form part of the total income (exempted income) under this Act. • Assessing Officer shall determine if he is not satisfied with the correctness of the claims of the assessee.
Section 14A • Allocation of Expenditure in relation to exempt income – Sec 14A(2) read with Rule 8D: • i. Where the Assessing Officer is satisfied with the correctness of claim: He shall accept the allocation of expenses made by the assessee.
Section 14A • ii. Where the Assessing Officer is not satisfied with the correctness of claim: He shall determine the amount of expenditure in relation to such income in accordance with the following rule: • The expenditure in relation to exempt income shall be the sum of the following: • 1. Direct expenditure • 2. Allocated share : A*B/C • 3. 0.5% of Avg exempted Investment
Section 14A – Interest free funds • Where assessee had sufficient interest free funds to meet its tax free investments yielding exempt income, it could be presumed that such investments were made from interest free funds and not loaned funds and, thus no disallowance under section 14A being warranted • Commissioner of Income-tax-I vs. UTI Bank Ltd - [2013] 32 taxmann.com 370 (Gujarat) [22-03-2013]
Deductibility for disallowance u/s 40(a)(ia) • Whether the expenditure sought to be disallowed should be allowable u/s 37 for a disallowance to operate u/s 40 ITO vs. Rajesh A. Boricha [2013] 38 taxmann.com 435 (Rajkot - Trib.)
Deductibility for disallowance u/s 40(a)(ia) Ref : In Indian Molasses Co. (P) Ltd. v. CIT [1959] 37 ITR 66 (SC), it has been held that expenditure is what is paid out or away and is something which is gone irretrievaly. To be a payment which is made irretrievably there should be no possibility of the money forming, once again, a part of the funds of the assessee. The impugned expenditure incurred by the assessee fully answers the aforesaid features of expenditure and hence is fully covered by the term 'any expenditure' used in section 37.
Interest on loan for investment • The assessee was a partner of Sahara India (Firm) and had substantial interest in the companies of Sahara Group. He had claimed the interest paid on loan for purchase of shares and had filed loss return for 36.48 crore. • The Assessing Officer found that the assessee had obtained loan which was invested in purchase of shares of closely held companies of Sahara Group which were incurring heavy losses and there was no possibility to get dividend on share capital of these companies. • Accordingly, the Assessing Officer held that the assessee had adopted a colourable device to reduce tax liability and disallowed the interest claimed by the assessee. • On appeal, the Commissioner (Appeals) deleted the addition made by the Assessing Officer. • On revenue's appeal, the Tribunal confirmed the order of the Commissioner (Appeals).
Interest on loan for investment • the assessee has invested the amount in the companies, which were already suffering heavy losses. So, there was no chance to receive any pecuniary benefits. Perhaps in the past also, the assessee might have invested some amounts without any financial benefit. In these circumstances, fresh investment made by the assessee cannot be considered for business purposes specially when the assessee is running a financial entity. The assessee is Managing Director in Sahara India Financial Corporation Ltd. (SIFCOL) and was aware about the financial health of all the companies of the group • In the instant case, the assessee has shown no income from the company, where interest bearing borrowed funds were invested. Thus, the transactions were not exclusively and wholly for the purpose of business.
Interest on loan for investment • In fact, it was colourable devices for tax evasion. In fact, it is an attempt of the assessee to divest the funds to avoid tax liability. In the case of McDowell & Co. Ltd. v. CTO[1985] 154 ITR 148/22 Taxman 11, the Apex Court observed that it is the duty of the Court to expose of colourable device by uplifting the corporate veil. [Para 26] • In view of above and by considering the totality of the facts and circumstances, the impugned order is set aside passed by the appellate authorities and restored the orders passed by the Assessing Officer pertaining to the disallowance of the interest on borrowed funds in the relevant appeals. [Para 27]
Reconstitution of a Firm • It cannot be said that the land owned by a firm was transferred when firm was reconstituted and new partners were admitted and there was reduction in the shares of erstwhile partners. Capital gains did not arise on reduction of share of partners. (A.Y. 1996-97) CIT v. P. N. Panjawani (2013) 356 ITR 676 (Karn) (HC)CIT v. Usha K. Panjkanai (2013) 356 ITR 676 (Karn) (HC)
Base year of Previous Owner • The assessee acquired land as a gift from his mother and sold that land. He opted for fair market value of land as on 1-4-1981 under section 55(2)(b)(ii), calculated on basis of Patwari’s certificate and a comparable sale transaction. A.O. held that period of holding was to be reckoned from date of gift, ignoring period for which it was held by donor. The Assessee therefore calculated cost of acquisition on date of gift and indexed it taking it as base year. Tribunal held that where capital asset became property of assessee by gift or other modes mentioned in section 49(1), period of holding of previous owner was to be included while calculating capital gains. therefore, cost of acquisition of such capital asset was cost to previous owner or fair market value on 1-4-1981, at option of assessee, and indexation was to be done taking year of acquisition by previous owner or 1-4-1981, as the case may be, as base year. (A.Y. 2006-07) Vishwanath Sharma v. ACIT (2013) 58 SOT 267 (Chd.)(Trib.)
Exchange of flats regarded as construction • The assessee exchanged an old flat for anew flat and cash compensation, under development agreement with builder. She claimed capital gaims arising of transfer of old flat as exempt under section 54 and amount invested in NBARD bonds exempt under section 54EC.The AO held that the assessee had neither purchased a house property within 1 year before or two years after the date of transfer nor had constructed a new residential house with in a period of three years from the date of transfer therefore disallowed the exemption under section 54 and 54EC.On appeal Commissioner (Appeals) also confirmed the order of AO. On second appeal the Tribunal held that ,where new flat received in exchange of old flat was constructed by builder and its possession was given to assessee within 3 years from the date of transfer, it amounted to construction, and therefore exemptions under section 54 is allowable and part of consideration was invested in NBARD bonds the exemption under section 54EC is also allowable. (A.Y.2006-07)Veena Gope Shroff (Smt.) v. ITO (2013) 58 SOT 36 (Mum.)(Trib.)
