Interest incurred exclusively for business purpose cannot be subject to disallowance u/s 14A – Allahabad HC

ACIT vs. Dhampur Sugar Mill Pvt. Ltd (ITA No 220 of 2014 dated 05.11.2014) (Allahabad High Court) 

Background:

The assessee is engaged in the business of the manufacture and sale of sugar, chemicals and power, and has a distillery. For the FY 2007-08, the assessee had incurred interest on working capital which was debited to P&L A/c. During the course of assessment proceedings, the AO observed that assessee had invested some of its funds in shares and the dividend income which had been or was receivable on these investments did not form part of the total income. Holding that certain expenses, such as on account of interest, were directly attributable to the exempt income, the AO made disallowance of Rs 67.75 lakhs under section 14A.   (more…)

Penalty cannot be levied merely because of differential rate of tax and mistake in advice of CA – Mum ITAT

ACIT v Smt. Cecilia Haresh Chaganlal [ITA NO. 2661/Mum/2013 dated 05.11.2014] (Mumbai ITAT)

Background:

The assessee is an individual and a senior citizen of 80 years age. Assessee filed the return of income declaring long term capital gains on sale of paintings and the same were offered to tax at the normal tax rate of 20% applicable to the long term capital gains under the Act. Thereafter, the assessee filed revised return wherein the aforesaid long term capital gains are offered to tax at the concessional tax rate of 10% under proviso to sub section (1) of section 112 of the Act. The AO held that assessee has made a wrong claim in the revised return by offering the impugned capital gains at 10% tax rate instead of 20% tax rate and thus, furnished inaccurate particulars of her income in respect of the sale of paintings. Accordingly, the A.O. initiated penalty proceedings and imposed penalty u/s. 271 (1 )(c) of the Act.  The CIT(A) was satisfied with the explanation of the assessee and deleted penalty levied under section 271(1)(c). (more…)

80IC allowable even if undertaking formed with same partners of erstwhile firm & having common employees – HP HC

CIT v Yash International Inc. (ITA No. 4002 of 2013) dated 28.10.13 - HIGH COURT OF HIMACHAL PRADESH

Background:

The assessee firm formed a unit under the name and style of M/s Yash International having same partners as in the case of its erstwhile firm M/s Yash Electricals, Baddi. The assessee claimed deduction under section 80IC in respect of undertaking established in HP. The AO denied the deduction to the assessee on the ground that the assessee firm was formed splitting up / reconstruction of erstwhile firm. CIT(A) and ITAT allowed the benefit u/s 80IC to the assessee.

Tax Authority’s arguments:

  • The assessee and the erstwhile firm have same partners. Only the wife was introduced as new partner of erstwhile firm who did not contribute any capital except sharing of profit at the end of the year. 
  • The workers of M/s Yash Electricals were also shifted to the new unit
  • Control and management of the existing and new unit remained the same.

Explanation to section 73 to be applied after setting off share trading loss against derivative income – Kol ITAT

DCIT v M/s. Baljit Securities Private Limited /I.T.A No.1183/Kol/2012 (Kol ITAT) dated 21.10.14

Background:

The assessee is engaged in the business of trading in shares on self account, derivative transactions and share broking activity. During the course of assessment proceedings, the AO noted that the assessee has incurred it incurred net loss of Rs.2,16,75,441/- in purchase and sale of shares (delivery based loss of Rs.7,29,56,706 and non-delivery based profit of Rs.5,12,81,265). The assessee treated the entire activity of purchase and sale of shares which comprised of both delivery based and non-delivery based trading, as one, before application of the deeming provision contained in explanation to section 73 of the Act and accordingly, claimed set off of the loss incurred in delivery based trading with the profit derived from derivative trading. The AO applied explanation of Section 73 of the Act and denied the claim of set off of loss from dealing of shares with profit from F & O operations. The CIT(A) allowed the claim of the assessee by holding that share trading loss is to be allowed to be set off with the profits earned in derivative transactions. The Department filed an appeal before the ITAT against the CIT(A) order.  (more…)

TP adjustment cannot be made in relation to issue of shares at a premium lower than ALP as it is not “income” – Bom HC

Vodafone India Services Pvt. Ltd vs. UOI (WRIT PETITION NO.871 OF 2014) (Bombay High Court) dated 10.10.2014

Background:

The Petitioner, Vodafone India Services Pvt. Ltd., is a wholly owned subsidiary of a non-resident company, Vodafone Tele-Services (India) Holdings Limited. The Petitioner issued 2,89,224 equity shares of a face value of Rs.10/- each at the premium of Rs.8,519/- per share to its holding company.  The Fair Market Value for the issue of equity shares was determined by the Petitioner in accordance with the methodology prescribed under the Capital Issues (Control) Act 1947. The Petitioner filed Form 3CEB alongwith return of income wherein the transaction of issuance of equity shares was declared as an International Transaction and also the ALP of the shares so issued, was determined. However, a note was appended to its Form 3-CEB report by the Accountant making it clear that the transaction of issue of equity shares did not affect the income of the Petitioner and was being reported only as a matter of abundant caution.

According to the AO and TPO, the Petitioner ought to have valued each equity share at Rs.53,775/- and on that basis shortfall in premium to the extent of Rs.45,256/- per share resulted into total shortfall of Rs.1308.91 crores. The short fall in the value of shares issued by the Petitioner to its holding company was also treated as a deemed loan by the Petitioner to its holding company. This deemed loan was sought to be charged with interest at 13.5% per annum amounting to Rs.88.35 crores.  Thus the total amount of Rs.1397,26,37,035/- was treated as transfer pricing adjustment for the FY 2008-09, relevant for the AY 2009-10. (more…)

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…)

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