Saturday, 23 rd June, 2012 ICAI Bhawan Baroda Pradip N. Kapasi Chartered Accountant1

Pradip N. Kapasi Chartered Accountant

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CRITICAL ISSUES IN CORPORATE TAXATION

Saturday, 23rd June, 2012ICAI Bhawan

Baroda


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Tax in the hands of shareholders or recipients◦ Bhaumik Colour, 120 TTJ 865 (Mum.) (SB)

◦ Universal Medicare, 237 CTR 147 (Bom.)

Registered & Beneficial Owner◦ Hotel Hilltop, 217 CTR 527 (Raj.)

◦ Ankitech (P) Ltd., 242 CTR 129 (Del.) Where partnership is a recipient

◦ National Travel Service, 202 Taxman 327 (Del.)

◦ Chandmull Batia, 115 ITR 388 (Cal.)

Where beneficiary; HUF, Trust, AOP, BOI, Company

Deemed Dividend- 1


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Book Entry or no economic benefit◦ Swati Energy & Projects Pvt. Ltd., 11 ITR (Trib.) 705 (Mum.)

Loan to a debenture holder ◦ Anilkumar Agarwal, 132 ITD 314 (Mum.)

Loan form one subsidiary for advance to another ◦ Farida Holdings Ltd., 51 SOT 452 (Chennai)

Two or more persons with substantial interest◦ None. Anyone. Proration

Deemed Dividend- 2


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Priority of credit u/s 115JAA over SC & EC◦ Classic Shares & Securities (Mum.), ITA No. 5869/Mum/2007

Withdrawal from reserves ◦ Indo Rama Synthetics Ltd. 2011-TIOL-01-SC

Capital Gains credited to Reserves◦ Akshay Textile Trading, 304 ITR 401 (Bom.)

◦ Kopran Pharmaceuticals, 309 ITR 146 (AT) (Mum.)

Deduction u/s 80HHC◦ Al Kabeer Exports Ltd. 32274 of 2010 (SC)

◦ Bhari Infotech Systems 328 ITR 380 (Mad.)

FA 2011 Amendment

Minimum Alternative Tax- 1


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Depreciation at different rates ◦ Malayala Manorama Ltd, 300 ITR 251 (SC)

◦ Dynamic Orthopedics, 321 ITR 300 (SC)

Loss on reduction in share capital◦ Sumi Motherson, 2010-TIOL-756-Delhi

Finance Act, 2012 Amendments.◦ Compulsory credit( addition) to Book Profit

Revaluation reserve on retirement or disposal of asset Year of debit

◦ ‘S.211(2) Proviso company’ – special P&L Account Banking, Insurance, Electricity companies

Minimum Alternative Tax- 2


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S.47(vii) and s.2(19AA)◦ W.e.f. 01.04.2013, A.Y. 2013-14◦ Saving from allotment of shares in consideration◦ Where concerned company a shareholder◦ Prospective application, only

Set-off of losses of amalgamated company- Reverse merger◦ Wrigley India (P) Ltd., 142 TTJ 23 (Del.)

Amalgamation & Demerger – s.47(vii)(a), s.2(19AA) & s. 72A


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Tuticorin Alkali, 227 ITR 172 (SC)-Interest Bokaro Steel, 236 ITR 315 (SC)-Rent Neha Proteins Ltd, 306 ITR 102 (Raj.)- Set-off Winsome Dyeing, 10 DTR 207 (HP) -Taxable L.G. Electronics, 309 ITR 265 (Del.)-Set-off

Income during Construction Period

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Public Offer & Exemption u/s 10(38)

Amendment of Finance Act, 2012 for STT Sale of promoters shares Private deal – SPA Price Difference Subsequent Listing on recognised Stock Exchange

Difficulty for s. 10(38) exemption up to A.Y. 2012-13

◦ Bulk window & Block deal mechanism◦ SEBI circular, MRD/SE-7 dt. 14.01.2004◦ Guidelines◦Possible tax implications◦Cost of controlling interestPradip N. Kapasi

Chartered Accountant


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Receipt of shares of a non s. 2(18) company By ‘firm’ and ‘company’ recipients

◦ s. 2(18) company excluded ◦ LLP included

With/out consideration > Rs. 50,000, whole FMV as per Rule 11UA By or From –Resident or not Substantive not clarificatory Shares

◦ Preference shares included – CD not included ◦ Rights not included - Shares of subsidiaries

Receipt of shares - s.56(2)(viia) - 1


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Exclusion for transfers s. 47(via),(vic),(vicb),(vid),(vii)◦ Amalgamation, demerger, co-op. bank succession

No exclusions ◦ Similar to s. 56(2)(vii) – Relative, etc.◦ For stock-in-trade◦ For shares of foreign companies ◦ For other exempted transfers◦ For deemed transfers

Adjustment in purchase cost W.e.f. 01.06.2010

Receipt of shares-2


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COA in hands of recipient – s.49(4)o ‘Subjected to tax’ u/s 56(2)(vii) & (viia)o Value that is ‘taken into account’o COA in cases where FMV < Rs. 50,000o S. 49(4) and s. 49(1)o Period of holding and s. 2(42A)

Business receipts Receipts on distribution On credit by payer Deductions admissible

Receipt of shares - 3


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Issue of shares by closely held company, A.Y. 2013-14◦ Receipt’ by a ‘CHC’ from a ‘resident’◦ Consideration for ‘issue’ of ‘shares’

Where exceeds face value Tax on excess over FMV of shares -Rs.50,000

Exemption for issue by VCC, VCF and VCU FMV as per prescribed method or satisfaction of A.O.

◦ Non resident, R&NOR◦ Preference shares◦ Income of the company

Receipt of premium- s.56(2)(viib)- 1


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Expenditure allowance Set-off of loss Rate of taxation Objective behind amendment Application of s.68 Bonus/Right entitlement/Right/CD ESOP/ESOS

Receipt of premium - 2


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W.e.f. 01.04.2013-A.Y. 2013-14 Scope of Venture Capital Undertaking expanded

◦ Sectoral restriction of the specified business removed◦ VCU approved under SEBI Regulation of 1996 governing VCF

Scope of s. 115U amended◦ “Income received” to “income accruing or arising to or received”◦ “Income paid” to “income paid or credited”◦ Investor to be taxed on entitlement-◦ Irrespective of credit in the books- deemed credit on the last day◦ Advanced taxation

Expl. 2 w.e.f. 01.07.2012 inserted to remove double taxation

VCC/VCF- s.10(23FB) & s.115U


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W.e.f. 01.07.2012 One cascading effect of DDT on Dividend relaxed Distribution by recipient domestic company eligible for relief

◦ Need not be an ultimate holding company◦ May be subsidiary of another upstream company

Concession only for group companies

DDT- s.115-O (IA)

COA of asset in the hands of shareholder◦ FMV on the date of distribution◦ Not to be reduced by Deemed dividend◦ S. 49 (1)(iii)(c) and s. 55(2)(b)(iii) - applicability◦ T.R.Srinivasan, 133 TTJ 49(Chennai)

Piecemeal taxation and deduction of COA◦ Cable and Wireless Ltd., 90 ITR 84 (Bom)◦ Inland Agencies (P) Ltd., 143 ITR 186 (Mad)

Benefit of reinvestment◦ Ruby Trading Co. P. Ltd., 259 ITR 54 (Raj)◦ Brahmi Investment P. Ltd., 48 TTJ 326(Ahd.)

Exemption – distribution of qualifying asset◦ ‘Purchase’ or not for s. 54F

Pradip N. Kapasi Chartered Accountant 16

Liquidation s. 46 -1

Distribution of stock - ‘other asset’◦ Taxability of capital gains

Receipt of an agricultural land◦ N. Bagavathy Ammal, 259 ITR 678 (SC)

Where shares were held as stock-in-trade◦ G. Rajam & Anr., 64 CTR (Mad) 256◦ Taxable as capital gains◦ COA indexation and POH on subsequent sale

Applicability of s. 50C DTC effect and period of holding

Pradip N. Kapasi Chartered Accountant 17

Liquidation s. 46 - 2

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Loss & Profit◦ Samba Trading& Investment, 58 TTJ 360(Mum)

Application to a Broker◦ Priyasha Mever Finance P.Ltd., 5 ITR 441 (Mum)(Trib.)

Relevance of legislative intent◦ AMP Spg. & Wvg. Mills (P) Ltd., 101 TTJ 1113 (Ahd.)(SB)

Excl. of speculation loss for deciding applicability◦ Paramount Info. Systems P.Ltd., 42-A BCAJ 169(Mum),

Set-off of Explanation loss and amendment of 2006◦ Virendrakumar Jain, 42-A BCAJ 169(Mum.)


Deemed Speculation


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Three Amendments of FA, 2012- w.e.f. A.Y. 2013-14 Law of cash creditors upto A.Y. 2012-13

◦ Provisions. Essentials. Case Laws. Rate Expanding and extending onus for certain receipts

◦ Share capital. Share premium. Like receipts ◦ From resident- VCC & VCF excluded◦ Closely held company

Share Capital and s.68- amendments


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Onus to explain sources of source of receipt◦ Payer to offer explanation- nature & source◦ Satisfaction of AO◦ On notice by AO to Payer◦ Relevance of satisfaction of Payer’s AO

Consequence◦ Income of CHC◦ Tax at 30% u/s 115BBE◦ Absence of discretion

Share Capital and s.68


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Lovely Exports (P) Ltd., 216 CTR 195 (SC)◦ Shareholders name & address

Steller Investment Ltd., 115 Taxman 99 (SC)◦ Non- genuine (Owners of Funds)

Divine Leasing, 158 Taxman 440 (Del.)◦ Non- genuine (Owners of Funds)

Onus shifts to AO to examine capacity

Case Law on Share Capital


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S. Hastimal, 49 ITR 273 (Mad.) Tolaram Daga, 59 ITR 632 (Assam) Sarogi Credit Corpn., 103 ITR 344 (Pat.)

Case Law on Source of Source of Capital


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Receipt of such amount by whatever name called◦ Preference Shares. CD. Mergers. ◦ Para IX. Rights. Sweat-Equity

R& NOR, change of status Conversion of loan into equity Expenditure for issue of capital Set-off of losses

Share Capital and s.68 - Issues


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Motivation of payer Dual taxation Year of taxation Credit in share capital account

Share Capital and s.68- Issues


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Interest free and investment in shares commercial expediency◦ S.A. Builders, 288 ITR 1 (SC)

◦ Tulip star Hotels Ltd. (SC) Effect of s.14A on investment in shares

Loan to Subsidiary- s.36(1)(iii)


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Date of offer or grant or allotment◦ Dr. Dhurjati Gupta, 127 TTJ 356 (Hyd.)

◦ Pramod H. Lele, 143 TTJ 721 (Mum.)

ESOP & DOA


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S.209 of Companies Act Cash system of accounting

◦ Stup Consultants Pvt. Ltd., 13 ITR (Trib) 468 (Mum.)

Method of Accounting, AS & Company


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Scheme to be in accordance with Rule 2BA Implication of non-compliance

◦ Warner Lambert, 143 TTJ 571 (Mum.)

◦ Sony India Ltd., 141 TTJ 432 (Del.)

VRS & s.35DDA


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Time for issue of shares◦ Prakash Electric Co., 118 TTJ 539 (Bang.)

◦ Sanjay Singh., (2012) 19 taxmann.com 88 (Del.)

Corporatization & s.47(xiii)


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Adequacy of owned funds ◦ Reliance Utilities Ltd., 313 ITR 340 (Bom.)

Position u/s 14A for owned funds◦ Bunge Agribusiness Ltd., 142 TTJ 817 (Mum.)

Applicability to MAT◦ Goetze (India) Ltd., 32 SOT 101 (Del.)

Rule 8D and Stock-in-trade◦ CCI Ltd., ITA no. 359 of 2011 (Karnataka)

◦ Catholic Syrian Bank, 237 CTR 164 (Ker.)

◦ Maxopp Investment, 203 Taxman 364 (Del.)

◦ Leena Ramachandran, 235 CTR 512 (Ker.)

Disallowance u/s 14A - 1


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Interest (net or gross)◦ Morgan Stanley P. Ltd., 3077/M/2005

Higher interest income◦ Trade Apartment Ltd., 1277/Kol/2011

◦ Gillette Group, 267/Del/2012

◦ Lakshmi Ring Travellers, 2083/Chen/2011

Administration Expenses @ 0.5%◦ Philips Carbon Black, 566/Kol/2009

Disallowance u/s 14A - 2


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Membership of stock exchanges◦ Techno Shares & Stocks, 327 ITR 323 (SC)

Business & Commercial rights◦ Osram India (P) Ltd., 51 DTR 297 (Del.)◦ Areva T&D, 315 of 2010 (Del.) - Customers

◦ ONGC Videsh, 37 SOT 97 (Del.) - Prospection◦ Ashoka Info, 123 TTJ 77 (Pune) - Toll collection

License◦ Piem Hotels, 135 TTJ 228 (Mum.)

Brand on amalgamation◦ KEC International Ltd., 41 SOT 43 (Mum.)

Goodwill

Intangibles for s.32

Pradip Kapasi & Co. 33

Exchange Fluctuation Currency translations – year end

◦ Maruti Udyog Ltd., 320 ITR 729 (SC)◦ Woodward Governor , 312 ITR 254 (SC)

Loss on refund of advance received ◦ Loksons Pvt. Ltd., 11 DTR 206 (Bom)

Rollover premium and S. 36(1)(iii), 43A◦ Elecon Eng. Ltd., 322 ITR 20 (SC)

Loss on advance against sales◦ Taiko CNCPL, 311 ITR 475(Delhi)

Forex forward contracts◦ Open ended ◦ Nature of loss◦ Accounting◦ Taxation


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Payer’s perspective◦ Revenue or capital◦ Depreciation- tangible or intangible

Payee’s perspective◦ Capital receipts- capital gains, s. 55(2)◦ Business income s.28(va)

Guffic Chem Ltd., 332 ITR 602 (SC)

◦ Late Dr. B.V. Raju, 14 ITR (Trib.) 387 (Hyd.)

◦ Tecumseh Ltd., 127 ITD 1 (Del.) (SB)

◦ Ramesh D. Tainwala, 48 SOT 324 (Mum.)

◦ Savita N. Mandhana, 3900/M/2010

◦ Hami Aspi Balsara, 30 DTR 576 (Mum.)

◦ Pitney Bowes (P) Ltd., 204 Taxman 333 (Del.)

Non- Compete Fees

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‘Paid’ and ‘Payment’◦ Merilyn Shipping,146 TTJ 1 (Vizag) (SB)

Short withholding, rate or section◦ Bunge Agribusiness Ltd., 142 TTJ 817 (Mum.)

◦ Chandabhoy & Jassobhoy, 49 SOT 448 (Mum.)

◦ Beekaylon Synthetics, 6506/M/2008 (Mum.)

◦ S.K. Tekriwal, 1135/Kol/2010 (Kol.)

Second proviso and retrospectability◦ Bharati Shipyard, 132 ITD 53 (Mum.) (SB)

◦ Virgin Creations, ITA No. 302 of 2011 (Cal.)

◦ Rajamahendri Shipping, 51 SOT 242 (Vizag)

◦ Kotak Securities Ltd., 340 ITR333 (Bom.)

◦ DICGC Ltd., 14 ITR (Trib) 194 (Mum.)

◦ Dynamic Vertical Software, 332 ITR 222 (Del.)

FA, 2012 Amendment◦ Relief Pradip N. Kapasi

Chartered Accountant

Disallowance u/s 40(a)(ia) & TDS


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THANK YOU

Documents

Saturday, 23 rd June, 2012 ICAI Bhawan Baroda Pradip N. Kapasi Chartered Accountant1