Bombay HC confirms that Stock-in-trade to be excluded while computing 14A disallowance r.w. Rule 8D

CIT v India Advantage Securities Ltd (ITA No 1131 OF 2013 dated 13.04.2015) BOMBAY HIGH COURT

Background:

The assessee had received dividend income of Rs Rs.1,40,859/- which was exempt from tax. The assessee had however, not made any disallowance of expenses relating to exempt income. The A.O. in the course of assessment proceedings therefore, computed the disallowance u/s.14A as per Rule 8D which come to Rs.48,73,483/- consisting of interest expenditure of Rs.39,00,174/- and other expenses of Rs.9,73,309/-.  

In the first level appellate proceedings, the assessee contended that the interest expenditure had been claimed by the assessee as deduction u/s.36(1)(iii). It was also submitted that the shares had been shown as stock-in-trade in the books of accounts and, therefore, such stock-in-trade could not be taken into account while computing the disallowance under Rule 8D. The CIT(A) was satisfied by the explanation given and agreed that the disallowance under Rule 8D could be made only with respect to investment and not in stock-in-trade(more…)

If earning rent income is the main object of a Company, it should be taxed as ‘Income from House Property’ – SC

CHENNAI PROPERTIES & INVESTMENTS LTD v CIT [CIVIL APPEAL NOS. 4491-4493 OF 2004 dated 09.04.2015] SUPREME COURT

Background:

The assessee is a company incorporated under the Indian Companies Act. Its main object, as stated in the Memorandum of Association, is to acquire the properties in the city of Madras (now Chennai) and to let out those properties. The assessee had rented out such properties and the rental income received therefrom was shown as income from business in the return filed by the assessee. The Assessing Officer held since that the income was received from letting out of the properties, it was in the nature of rental income and thus it would be treated as income from house property.  (more…)

Section 206AA does not apply to beneficial rates provided in tax treaty – Pune ITAT

DDIT v Serum Institute of India Limited ITA No.792/PN/2013 dated 30.03.2015) – Pune ITAT

Background:

Assessee during the financial year 2010- 11 made payments to non-residents on account of interest, royalty and fee for technical services. The assessee deducted tax at source on such payment in accordance with the tax rates provided in the Double Taxation Avoidance Agreements (DTAAs) with the respective countries. The tax rate so provided in the DTAAs was lower than the rate provided under the Income-tax Act, 1961. In case of some of the non-residents, the recipients did not have Permanent Account Numbers (PANs). The AO treated such payments, as cases of ‘short deduction’ of tax in terms of the provisions of section 206AA of the Act. Section 206AA prescribes that if the recipient of any sum or income fails to furnish his PAN to the person responsible for deduction tax at source, the tax shall be deductible at the rate specified in the relevant provisions of the Act or at the rates in force or at the rate of 20%. The AO treated it as short deduction being difference between 20% and the actual tax rate on which tax was deducted in terms of the relevant DTAAs. As a consequence, demands were raised on the assessee for the short deduction of tax and also for interest u/s 201(1A) of the Act. CIT(A) granted relief holding that where the DTAAs provide for a tax rate lower than that prescribed in 206AA of the Act, the provisions of the DTAAs shall prevail and the provisions of section 206AA of the Act would not be applicable.  (more…)

CBDT circular on 14A disallowance in the absence of exempt income is invalid – Bang ITAT

Anriya Project Management Services(P)Ltd. v DCIT (ITA No.1799/Bang/2013 dated 20.02.2015) – Bangalore ITAT

Background:

The assessee during the year did not earn any exempt income and therefore, did not make any disallowance under section 14A in its return of income. However, the AO made disallowance u/s 14A holding that there is increase in the investment of the assessee during the relevant assessment year resulting in increase of interest on total loans and thus interest bearing funds were utilized in investments earning exempt income. Therefore, he held that proportionate interest on investments earning exempt income is disallowable(more…)

BUDGET 2015 – An Insight into Key Direct Tax Proposals

The Union Budget for the fiscal year 2015-16 was presented by the Finance Minister on 28th February 2015.

Apart from abolishing Wealth Tax Act, 1957 and officially warding off Direct Tax Code (‘DTC’), he also deferred the least liked GAAR (General Anti-Avoidance Rules) for two more years. He proposed to implement a roadmap for the reduction of corporate tax rate to 25% over a period of four years and also promised to phase out exemptions to give a fillip to the stagnant tax-base in India.

Most of the direct tax proposals in the Finance Bill, 2015 are effective from the financial year commencing on 1 April 2015, unless otherwise specified.

Click here to download an analysis of the key Direct Tax Proposals in the Budget  (more…)

Expression “fees for technical services” in s. 9(1)(vii) explained with reference to “consultancy” services – SC

GVK Industries Ltd vs. ITO (Supreme Court)

The assessee paid fees to a non-resident (NRC). The obligation of the NRC was to: (i) Develop comprehensive financial model to tie-up the rupee and foreign currency loan requirements of the project.(ii) Assist expert credit agencies world-wide and obtain commercial bank support on the most competitive terms. (iii) Assist the appellant company in loan negotiations and documentation with the lenders. The assessee claimed that as the fees were paid for services rendered outside India, the same were not chargeable to tax in India and that the assessee was under no obligation to deduct TDS u/s 195. However, the AO and CIT rejected the claim of the assessee. The High Court (228 ITR 564) held that the said payment was not assessable u/s 9(1)(i) but that it was assessable u/s 9(1)(vii). The assessee claimed that s. 9(1)(vii) was constitutionally invalid as it taxed extra-territorial transactions. However, this claim was rejected by the Constitution Bench of the Supreme Court in 332 ITR 130. On merits, the matter was remanded to the Division Bench of the Supreme Court. HELD by the Division Bench dismissing the appeal:  (more…)

No penalty even if the return is revised after issue of notice u/s 143(2) wherein no details are asked – Mum ITAT

Ms.Prema Gopal Rao v DCIT (I.T.A. No.8653/Mum/2011 dated 07.01.2015) Mumbai ITAT

Background:

The assessee filed original return of income on 10.09.2004 declaring total income of Rs.12,16,600/-, which included Long Term Capital Gain on sale of Shares of Rs.3,60,305. The case was selected for scrutiny vide issue of notice u/s 143(2). After the receipt of the said notice, the assessee filed revised return of income, wherein the assessee revised the Long term Capital gains upwards to Rs.14,87,789/-. The AO completed the assessment as per the Revised return of income by making certain disallowances. In the penalty proceedings, the AO took the view that the assessee has revised the return of income only after the enquiry was initiated by him and accordingly, levied penalty on the upward adjustment of long term capital gains.

CIT(A) also confirmed the penalty on the reasoning that  filing of revised return of income was not voluntary, since it was filed after selection of the original return of income for scrutiny. (more…)

Allotment of equity shares in lieu of interest liability is a mode of payment allowable u/s 43B – Mum ITAT

Garware Chemicals Ltd. v DCIT (IT APPEAL NO. 7819 (MUM.) OF 2010 dated 21.01.2015) Mumbai ITAT

Background:

The assessee is engaged in the business of manufacturing of various Petro Chemical products. During the assessment proceedings, the Assessing Officer noted that the assessee has claimed the deduction of Rs. 14 crore u/s 43B of Income Tax Act. The AO found that the claim of the assessee u/s 43B was in connection with the discharge of interest amount payable to IDBI amounting to Rs. 14 crore by way of conversion of the same into equity shares of the assessee company. The AO held that in view of the Explanation 3C of section 43B, the claim of the assessee is not allowable and accordingly rejected. The CIT(A) also did not accept the contention of the assessee and confirmed the disallowance made by Assessing Officer by following the decision of this Tribunal in the case of SRF Ltd. v. DCIT (34 SOT 1). (more…)

Provisions of section 50C not applicable on leasehold rights in land – Pune ITAT

Kancast Pvt. Ltd v ITO (ITA No.1265/PN/2011 dated 19.01.2015) – Pune ITAT 

Background:

The assessee transferred factory land, building and shed for a consideration of Rs.3,12,04,000/- for land and building and Rs.47,96,000/- for other fixed assets. Out of the consideration of Rs 3,12,04,000 for land and building, amount of Rs 77,00,000 pertained to leasehold rights in land. The Assessing Officer noted that the value of land and building adopted by the registering authority for the purposes of stamp duty valuation under section 50C for the purpose of computing capital gains based on the Ready Reckoner rates of the State Government was Rs.5,75,93,000/-. The assessee  contended that section 50C of the Act was not applicable as the assessee was only holding leasehold rights in the land and was not owner of the land.  However, the Assessing Officer considered the stamp duty value of the consideration for land under section 50C at Rs.4,98,93,000/- (Rs.5,75,93,000/- minus Rs.77,00,000/-). 

In the first level appellate proceedings, the assessee reiterated that it did not transfer any land because it was not owning the land and therefore transfer of leasehold rights in land did not invite the provisions of section 50C of the Act. Reliance was placed on the ruling of Mumbai ITAT in the case of Atul G. Puranik vs. ITO vide ITA No.3051/Mum/2011 dated 13.05.2011. The CIT(A) dismissed the submission of the assessee and held that the Explanation below section 269UA(d)(i) of the Act makes it clear that the land, building, etc. included in the phrase ‘immovable property’ also includes any rights therein. Therefore, he upheld that the order of Assessing Officer was justified in applying the provisions of section 50C.  (more…)

Penalty not applicable for addition on account of deeming provisions of section 50C – Mumbai ITAT

ACIT v Sunland Metal Recycling (ITA NO.6454/Mum/2011 dated 10.12.2014) Mumbai ITAT

Background:

The assessee sold office premises to its sister concern for a sale consideration of Rs. 1.55 crores. The Assessing Officer considered the full sale consideration as per stamp duty authority valuation at Rs. 2,00,08,000/- in accordance with the provisions of section 50C of Income Tax Act. Accordingly, the Assessing Officer made an addition to the Short term Capital Gain. Subsequently, the Assessing Officer initiated penalty proceedings u/s 271(1)(c) for levy of penalty against the addition made to the Short term Capital Gain and levied a penalty of Rs. 22,12,069. The CIT(A) deleted the penalty by following the various decisions of Mumbai  Tribunal on the point and held that there is no concealment of any particulars of income on the part of the assessee(more…)

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