Interest u/s 201(1A) to be levied from dt of on which tax was deductible till dt of payment of tax by deductee – Delhi HC

CIT v BABCOCK POWER (OVERSEAS PROJECTS) LTD. ITA 178/2002 dated 05.09.2014 – DELHI HIGH COURT

Background:

The assessee – M/s.Babcock Power (Overseas Projects) Ltd., a non-resident company incorporated in United Kingdom, during the Assessment Years 1987-88 to 1989-90 had a project office in India and was engaged in execution of a contract of setting up a coal based thermal plant. The assessee to fulfil their contractual obligations, had engaged their foreign technicians who were deputed to work at the Indian project office. These employees were on pay roll of UK office of the respondent assessee and salaries were paid in foreign currency in their bank accounts abroad. These contracts of employment were duly approved by the Ministry of Mines for the purposes of Section 10(6) of the Act. Assessee did not deduct Tax at Source on the salary paid on the ground that tax was not required to be deducted. The Assessing Officer disagreed and also directed interest under Section 201(A) of the Act be charged.

A question arose, whether the assessee was liable to deduct tax at source under Section 192 of the Act on the salaries paid to the foreign technicians. Tribunal, by the impugned order, has rejected the contention of the  assessee that they were not liable to deduct tax at source. Tribunal further upheld levy of interest and observed that interest was payable under Sections 201(1) and 201(1A). Interest has been referred to as the legitimate amount of tax due for delayed payment. However, the Tribunal did not accept and agree with levy of interest for the period commencing from 1st April following the Financial Year till the date of the order of levy of interest under Section 201(1A) observing that this was erroneous and cannot be sustained. This finding/direction is questioned.  (more…)

Expenditure on abandoned project (in relation to existing business) is allowable as revenue expenditure – Mumbai ITAT

Idea Cellular Ltd. v Addln CIT (ITA No 3260 & 3493 (MUM.) OF 2008 dated13.05.2014) – Mumbai ITAT 

Background:

The assessee has incurred expenses on abandoned project of Rs. 3,94,75,619. The assessee was required to put up cell-sites for enabling its business. In certain cases the assessee had incurred expenses for putting up cellsites but this could not be completed and were therefore, abandoned. The assessee claimed that the expenses were incurred for the purpose of its business and, therefore, is allowable as business expenditure. The AO disallowed the claim of the assessee on the ground that the expenditure has been spent by the assessee on sites to bring into existence the new asset and new source of income. Accordingly the AO held that the loss incurred due to abandonment of project, is capital in nature and accordingly disallowed the deduction claimed by the assessee. 

On appeal, the CIT(A) has concurred with the view of the AO and held that the expenses incurred on cell sites were definitely capital expenses, when such a project is abandoned, the entire expenditure incurred is a capital loss.  (more…)

Expenditure incurred in relation to exempt income earned only during that year to be considered u/s 14A – Hyd ITAT

Bellwether Microfinance Fund Pvt Ltd v ITO (ITA No. 1743/Hyd/2013 dated 27.06.2014)  Hyderabad ITAT 

Background:

Assessee is a non-banking financing company engaged in the business of investing in microfinance companies in India. Assessee entered into a fund management agreement with Caspian Advisors Pvt. Ltd. (‘CAPL’) on 27/05/2005 as per which the said company would render consultation services to the assessee in the matter of investment etc. as fund manager. CAPL was holding 18.7% shareholding in the assessee company. The fund manager was to be paid remuneration for the fund based services.

During the course of assessment proceedings, the AO noticed that while computing its income, assessee has disallowed expenditure of Rs. 35,65,860/- under section 14A read with Rule 8D. The assessee under clause (i) of Rule 8D(2) i.e. amount of expenditure directly relating to income which does not form part of total income had already disallowed an amount of Rs 25,20,080 towards fund management fees. However, on the basis of the agreement with fund manager, AO worked out the fees paid to the fund manager and arrived at an amount of Rs 2,47,49,044 as fees paid. The AO then reworked the disallowance  and  added Rs. 1,97,36,624/- to the income of the assessee.  (more…)

Exemption u/s 54 cannot be denied merely because payment is made but possession is not obtained – Delhi HC

CIT v Kuldeep Singh (ITA No: 117/2014 dated 12th August, 2014) (Delhi High Court)

Background:

The assessee in his return had declared a taxable income of Rs.47,88,579/- after claiming benefit of Section 54 of the Act of Rs.37,86,273 on sale consideration of Rs.2 crores declared as income from capital gains on the sale of house property.  The Assessing Officer referred to the copy of the flat buyers agreement dated 9th February, 2006 between the assessee and the builder and observed that the ownership in the new property would be conferred on the date of issuance of occupation certificate. Further, the expected date of completion was 36 months from the date of the agreement dated 9th February, 2006 i.e. 8th February, 2009. He held that the assessee was not entitled to benefit of Section 54 as he had not purchased the new property within a period of one year before the sale of first property on 3rd June, 2005 or within two years from the date on which the transfer took place. The assessee had not constructed residential house within three years from 3rd June, 2005.   (more…)

Profit on sale of Compulsorily Convertible Debentures should be treated as Capital Gains and not Interest – Delhi HC

Zaheer Mauritius v DDIT (Intl Taxation)  (W.P.(C) NO. 1648 OF 2013 dated 30.07.2014) – Delhi High Court

Background:

The petitioner is a company incorporated in Mauritius and is engaged in the business of investment into Indian companies engaged in construction and development business in India. The petitioner entered into a Securities Subscription Agreement (‘SSA’) and a Shareholder’s Agreement (‘SHA’) with Vatika and its JV Company. As per the SSA, the petitioner agreed to acquire 35% ownership interest in the JV Company by making a total investment of Rs. 100 crores in five tranches. The petitioner agreed to subscribe to 46,307 equity shares having a par value of Rs. 10/- each and 88,25,85,590 zero percent CCDs having a par value of Rs. 1/- each in a planned and phased manner. The SHA provided for a call option given to Vatika by the petitioner to acquire all the aforementioned securities during the call period and likewise, a put option given by Vatika to the petitioner to sell to Vatika all the aforementioned securities during the determined period.

On 08.04.2010, Vatika partly exercised the call option and purchased 22,924 equity shares and 43,69,24,490 CCDs from the petitioner for a total consideration of Rs. 80 crores. The Petitioner filed an application before the AAR for advance ruling on the taxability of the consideration received with respect to CCDs. AAR held that gains received/receivable by the petitioner resulting from transfer of the investments held by the petitioner in the JV company, was interest under Section 2(28A) of the Act(more…)

Company gifting shares to a foreign company is exempt u/s 47(iii) and also not an international transaction u/s 92B – Chennai ITAT

Redington (India) Limited v JCIT (ITA No.513/Mds/2014 dated 07.07.2014) – Chennai ITAT

Background:

The assessee, M/s. Redington (India) Limited provides end-to-end supply chain solutions for all categories of Information Technology(IT) products. The assessee has a wholly owned subsidiary company M/s. Redington Gulf FZE(‘RGF Gulf’) in Dubai. In 2008, a Private Equity Fund(PE fund)- IVC evinced interest to invest in the overseas operations of the assessee group. The assessee company set up another wholly owned subsidiary company in Mauritius in July, 2008 (‘RIML Mauritius’). The assessee made an initial investment of US$ 25000 equivalent of ` 10.78 lakhs. The said newly set up subsidiary M/s. RIML Mauritius, in turn, set up its own wholly owned subsidiary in Cayman Islands (‘RIHL Cayman’). IVC has infused a sum of US$ 65 millions into M/s. RIHL Cayman for fresh allotment of shares.

After the above incorporation exercises, the assessee company transferred its entire shareholding in M/s. RGF Gulf to M/s. RIHL Cayman on 13th November, 2008. The transfer was made without any consideration. Once this transfer of shareholding was made, RGF Gulf became a step down subsidiary of RIML Mauritius and the assessee company. As the shares were transferred without consideration, the assessee company took the stand that it is a gift within the meaning of section 47(iii) and therefore, not chargeable to tax as capital gains. Further, it is also not an international transaction. It stated that in order to come under the purview of an international transaction, the transaction must generate income. 

The TPO held that the transfer of shares made by the assessee is an international transaction. In computing the value of shares transferred by the assessee, the TPO has adopted the price paid by IVC, the PE fund on allotment of shares in RIHL Cayman, as the comparable. The fresh infusion of funds by M/s. IVC and allotment of shares in M/s. RIHL Cayman, resulted in M/s. IVC, holding a stake of 27.17%. The TPO extrapolated the said shareholding and determined an amount of US$ 174.23 millions, as representing 100% of the value of M/s. RIHL Cayman and on that basis determined the ALP of RGF Gulf shares transferred by the assessee. Accordingly, the TPO determined the ALP of M/s. RGF Gulf shares at Rs 865,40,04,100. The Assessing Officer modified the above gross amount by setting off the indexed cost of acquisition and determined the long term capital gains adjustment at Rs 610,15,75,820.

The DRP stated that a gift as generally understood is made out of love and affection by natural persons; that corporate entities cannot make gifts, as the term “gift” in sec.47(iii) is used in conjunction with the word “will”. It directed to give a marginal relief in the capital gains addition proposed against the transfer of shares. They accepted the argument that in view of the buy-back agreement between the Venture capital fund (PE fund) and the assessee, the PE investment was relatively risk-free. Consequently, the DRP agreed that to the extent of the risk premium, the market price of the shares would be less than what was paid by the PE fund. The DRP estimated this risk factor at 10% and directed the Assessing Officer to allow 10% adjustment by way of reduction in the ALP of RGF Gulf shares. This relief is worked out at ` 88.51 crores. (more…)

Penalty u/s 271(1)(c) not applicable in case of bonafide mistake on account of change in law – Supreme Court

CIT v Chittorgarh Kendriya Sahakari Bank Ltd (SLP - CC No(s). 8127/2014 dated 02.07.2014)

Supreme Court dismissed the SLP filed by Tax Authorities against the Rajasthan High Court ruling in the case of Chittorgarh Kendriya Sahakari Bank Ltd [2014] 41 taxmann.com 11 wherein it was held penalty under section 271(1)(c) levied upon the assessee on incorrect claim for deduction was not justifiable as the same was on account of change of law and therefore, a matter of bona fide mistake. (more…)

BUDGET 2014 – Analysis of the key Direct Tax Proposals

The Union Budget for the year 2014-15 was tabled by the Finance Minister Mr Arun Jaitley on 10 July 2014. 

Certain significant tax proposals contained in the Finance (No.2) Bill, 2014 were made by the Finance Minister during the Budget 2014-15 speech. 

In relation to the retrospective amendments made in earlier Budgets, the Finance Minister recognized the harsh implications in the international business community. The Finance Minister proposed that all fresh cases of indirect transfer taxation arising will be scrutinized by a high level committee. Unfortunately, contrary to expectations, the budget does not contain any proposal to provide relief to taxpayers who are already in litigation on this matter.

Most of the direct tax proposals in the Finance Bill, 2014 are effective from the financial year commencing on 1 April 2014, unless otherwise specified.

Click here to download an analysis of the key Direct Tax Proposals in the Budget

Linkedin Profiles of Employees can be used to determine PE in India – Delhi ITAT’s interim order

GE Energy Parts Inc v Addl DIT ITA No. 671/Del/2011 dated 04.07.2014 (Delhi ITAT’s interim order)

Decision:

Whether Re-assessment proceedings are valid:

  • In the reasons recorded by assessing officer it was categorically stated that the information regarding the employees of GE in India prior to the present expats was not given by GE group.  
  • Assessing officer had recorded a finding that there had been the persons working for such sales through out the period 1-4-2000 to till date. This factual finding recorded by assessing officer was not objected to by the assessee while filing objections before assessing officer. 
  • It cannot be said that assessing officer had not made inquiries regarding the employees of GEIPL who were working for other GE entities. The assessee did not provide this information. In the back drop of these facts, now the department is seeking admission of Linkedin profiles of various employees which has been down loaded from the website and is available in public domain.

On Admissibility of additional evidence:

  • Section 254(1) provides that the Tribunal may, after giving both parties to the appeal an opportunity of being heard, “pass such orders therein as it thinks fit”. Section 255 deals with the procedure before the Appellate Tribunal in discharge of its powers and functions.
  • On perusal of the above section, Tribunal has all the powers vested in it which are vested in the income-tax authorities with reference to section 131.
  • The basic ingredient for exercising powers under Rule 29 for admission of additional evidence is that Tribunal should come to the conclusion that a particular document would be necessary for consideration to enable it to pass orders or for any other substantial cause. The document can be brought to the notice of Tribunal by either party.
  • The Tribunal is final fact finding body and, therefore, the powers have been conferred on it u/s 131 and Rule 29 to enable it to record a factual finding after considering the entire evidence. For dispensation of justice wide powers have been given to Tribunal.

On LInkedIN profiles:

  • Ld. Sr. Counsel has submitted that Linkedin profiles is an hearsay evidence and has no probative value. In this regard ld. Sr. counsel has relied on two decisions of US courts.  Further, Linkedin profiles is self appraisal of employees and, therefore, it is hearsay evidence.
  • We are unable to accept this contention. Linkedin profiles is not in the nature of hearsay because it is the employee who himself has given all the relevant details and the same relate to him. These detalis are akin to admission made by a person. No third party is involved in creating of this Linkedin profiles and, therefore, it cannot be said to be an hearsay evidence.
  • The Linkedin profiles are in the nature of admissions of persons on their job profile. The data is in pubic domain.

On violation of S. 47(xiiib) (for LLP), capital gains to be computed considering value at which assets are transferred and not the market value – Kol ITAT

Aravali Polymers LLP v JCIT (I.T.A. No. 718/Kol. / 2014 dated 27.06.2014) (Kol ITAT)

Background:

A Private Limited Company namely Aravali Polymers Pvt. Ltd. was converted into a Limited Liability Partnership under section 56 of the ertwhile Companies Act and the assessee Aravali Polymers LLP came into existence. After the conversion of the Private Limited Company into the Assessee LLP, 31,84,807 equity shares of the East India Hotels Ltd. was sold by the appellant for an amount of Rs.53,56,69,888/- and the same was offered for taxation as long-term capital gains. After paying the capital gains tax, the assessee had approximately Rs. 49 crores profit. The assessee had also received Reserves and Surplus amounting to Rs.3,06,31,969/- of the Private Limited Company. The assessee had given an amount of Rs.50 crores as interest-free loans to the partners of the LLP. When the assessee filed its return, the assessee had offered the capital gains on the sale of the equity shares of East India Hotels Ltd. and had also claimed exemption under section 47(xiiib).

The AO observed that the assessee had provided interest-free loan to the partners of the assessee-firm out of the Reserve and Surplus received by the assessee firm on the conversion. The AO held that there was violation of the provisions of section 47(xiiib) and consequently held that in view of the provisions of section 47A(4), the amount of profit and gains arising from the transfer of the capital assets or shares is to be profit and gains chargeable to tax on the assessee. The AO adopted the value of the shares in East India Hotels Ltd. held by the Pvt. Limited Company and transferred to the assessee-firm as liable to be valued at market price as on the date of the transfer(more…)

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