TAXATION OF CORPORATE ENTITIES - vasai-icai.org Ajmera Sir [Compatibility Mode].pdf · • Capital Gain relating to Slump Sale & Recent developments

TAXATION OF CORPORATE ENTITIES

Mr. Amit Ajmera,

11 July 2011

ROADMAP

Taxation of Corporate EntitiesPage 2

• Overview of Corporate Taxation• Compliances for Corporates• Computation of Tax Liability• Basic Issues in MAT• Controversies under income from

house property• Controversies under income from

Business • Capital Gain relating to Slump Sale

& Recent developments• Deemed Dividend• Issues in MAT• Carry forward and set off of losses


Overview of Corporate Taxation


CORPORATE TAX PROVISIONS

Provisions of Income Tax Act, 1961

� Scope of taxability based on residential status. A company is a resident in Indiaif –- It is an Indian Company; or- During that year, the control and management of its affairs is situated

wholly in India

� Resident companies taxed on worldwide income in India� Non resident companies taxed on income received, accruing or deemed to be

accruing in India

DTC Provisions

� Under DTC even a foreign company would be held to be an Indian resident ifeven a part of its control & management was in India for a part of the previousyear


CORPORATE TAX PROVISIONS

Tax Rates

Assessee Effective tax rate (Upto 1 crore)

Effective tax rate (More than 1 crore)

MAT

(Upto 1 crore)

MAT

(More than 1 crore)

Indian Incorporated Companies

30.90% 33.22% 18.54% 19.93%

Foreign Companies 41.20% 42.23% 18.54% 19.00%


COMPLIANCES TO BE FOLLOWED


LAW RELATING TO FILING OF RETURN

OF INCOME

• Every company –

• Every firm

• Any other person - whose total income exceeds the maximum amount not chargeable to tax without giving effect to S10A or 10B of Chapter VIA

Have to furnish their return of income on or before the due date

Following instances – Whether require to file tax return?

a. Indian Co. having no any activity in India

b.Foreign Co. having a PAN No. in India, but does not have any business activity in India and does not have income taxable in India as per the DTAA – VNU International B.V - A.A.R – 2011-TII-05-ARA-INTL

c.Foreign Co. having a PAN No. by virtue of 206AA


TYPES OF RETURN/ TIME LIMIT

Regular Return

Persons Time Limit

• A Company

• A person whose accounts are required to be audited

• Working partner of a firm covered under audit

30th September of the AY

A Company required to file a transfer pricing report in Form 3CEB

30th November of the AY



Section 139 (3) – Loss Return

• The word used is “may” – assessee may lose the right to c/f losses, if returned is filedlate

• Profits and gains of business or profession / Capital gains/ or loss from owning andmaintaining race horses

• unabsorbed depreciation can be c/f even in case where return is filed belatedly

• Assessee can revise the loss return – Deemed to be returned filed u/s. 139(1)

- CIT vs. Periyar District Co-Op Milk Producers 266 ITR 705 (Mad)

Section 139(4) – Belated Return• If return is not furnished within the time allowed under section 139(1) or within the

time allowed under notice issued under section 142(1), the person may furnish thereturn at any time before the expiry of one year from the end of the relevantassessment year or before the completion of the assessment, whichever is earlier

• Belated return for A.Y. 2010-2011 can be filed up to 31st March 2012 or beforecompletion of assessment, whichever is earlier



Section 139(5) – Revised Return

• Any omission or wrong statement in the return filed under section 139(1) or inpursuance to notice under section 142(1) can be corrected by filing a revised returnbefore expiry of one year from the end of assessment year or before completion ofassessment, whichever is earlier

• Return filed under section 139(4) cannot be revised even if it is filed voluntarily

- Kumar Jagdish Chandra Sinha 220 ITR 67 (SC)

• Revision of revised return is also possible

- Niranjan Lal Ram Chandra 134 ITR 352

• Revised return does not wash away the original return but only cures the defectscontained in the original return

- CIT vs. Chitranjali 159ITR 801(Cal)

• The filing of a revised return after discovery of the omission or wrong statement is notby itself sufficient to bring the revised return within the domain of section 139(5) of theAct. A further requirement is that this omission or wrong statement in the originalreturn must be due to a bonafide inadvertence or mistake.

- CIT v. J.K.A. Subramania Chettiar [1977] [110 ITR 602] [Mad]



Section 139(9) – Defective Return

• A return is said to be defective if it is not duly filled up or the return is notaccompanied by the prescribed documents

• The defect can be rectified within 15 days from the day on which intimation of defect isreceived from the Assessing Officer or within the extended period, else it will betreated as an invalid return

• Where the defect is rectified after the extended period but before completion ofassessment, the Assessing Officer may condone the delay and treat the return as validreturn

• Defects specified in section 139(9) are only illustrative and not exhaustive


DEFECTIVE OR INVALID RETURN?

• Return considered invalid if signed by Secretary

- Bharat Nidhi Ltd. vs. CIT 165 Taxmann 314 (Delhi)

• Return in a inapplicable form/Wrong form is not invalid

- CIT vs. Ranchodas Karsondas [1959] 36 ITR 569 (SC)

- Dhampur Sugar Mills vs. CIT 90 ITR 236(All.)

• Returned signed by an unauthorised person is not invalid but is merely defective andcapable of rectification. If further clarifies that Section 292B only saves the improperlysigned return from being treated as invalid, but it does not make such a return valid

- Morgan Stanley Asset Management Inc. vs. DCIT 33 SOT 452 (Mum)


DEFECTIVE OR INVALID RETURN?

• Return filed without signature and verification will be considered as invalid return

- CIT vs. Keshab Chandra Mandal 18 ITR 569 (SC)

- Khialdas & Sons vs. CIT 225 ITR 960(M.P.)

• Absence of proper signature or verification on the ROI is an irregularity and as such acurable defect

- CIT vs. Haryana Sheet Glass Ltd 318 ITR 173 (Delhi)

- Prime Securities Ltd vs. ACIT 317 ITR 27 (Bom)


SECTION 140 –RETURN BY WHOM TO BE SIGNED

Circumstances Return to be signed by

in all cases except 2 to 5 below Managing Director

there is no MD or he is unable to sign any Director

company is not resident in Indiaperson holding a valid power of attorney

company is being wound up the Liquidator

management has been taken over by Central or State Government the Principal Officer


CONSEQUENCES FOR NON-FILING

• Penalty of Rs.5,000/- may be imposed – Section 271F

• In case of willful failure to furnish return within the due time, and where the taxsought to be evaded exceeds Rs.1,00,000/-, the punishment is rigorous imprisonmentfor not less than six months which may extend to seven years and with fine. In anyother case, the punishment is rigorous imprisonment for a term not less than threemonths which may be extended to three years and with fine - Section 276CC

• Interest at the rate of 1% per month on the assessed tax for failure to file return ondue date – Section 234A

• Assessee loses the benefits of c/f of losses (Business losses or Capital gain)

• Loses the opportunity to revise the return as belated return cannot be revised.


CLAIM FOR DEDUCTION/EXEMPTION

SECTION 80A(5): CLAIM OF DEDUCTION/EXEMPTION

As per the provisions of sub-section 5 of section 80A, exemption under sections 10A, 10AA,10B, 10BA and deductions under Heading-’C’ of Chapter VI-A such as sections 80-IA, 80-IB,80-IAB, 80-IC, 80-ID, 80P, 80JJA, 80JJA, 80QQB and 80RRB, will be allowed only if the claimhas been made in the return of income

DEPOSIT IN CAPITAL GAIN ACCOUNT SCHEME

For the purpose of claiming exemption under section 54, 54B, 54D, 54F, 54G or 54GA, theamount of capital gain not utilised for purchase or construction of a new asset, shall bedeposited in capital gain account scheme before the due date of filing of return of income


TAX AUDIT

Tax payers Provisions applicability

A person carrying on Business

If the total sales, turnover or gross receipt in business for the previous year relevant to the assessment year exceeds Rs 60 lakhs

A person covered u/s 44AE, 44BB or 44BBB

If such persons claims that the profits and gains from the business are lower than the profits and gains computed under these sections

(irrespective of his turnover)

A person covered u/s 44AD

If such persons claims that the profits and gains from the business are lower than the profits and gains computed in accordance with the provisions of section 44AD(1) and if his income exceeds the maximum amount which is not chargeable to tax


COMPLIANCES

• A company needs to furnish the complete details of the deductions in the specific report.

• Transfer pricing documentation necessary if quantum of transactions exceed INR 10million. The company has to compulsorily file transfer pricing audit report in the Form 3CEB with the tax authorities


COMPUTATION OF TAX LIABILITY



• First ascertain income under the different heads of income.

• Income of other provisions may be included in the income of the company under section 60 and 61

• Current and brought forward losses should be adjusted according to the provisions of sections 70 to 80.

• The total of income so computed under different heads is gross total income.

• From the gross total income so computed, the following deductions are permissible under sections 80C to 80 U( 80G, 80GGA, 80GGB, 80-IA, 80-IBV, 80-IC, 80JJA, 80-ID, 80-IE, 8OJJAA, 80LA)


Under Normal Provisions Under Minimum Alternate Tax

Step 1- Find out taxable income under normal provisions Step 8 - Find out the book profit

Step 2- Find out income-tax at the rate of 30* % (40*% in the case of foreign company) of income computed under (1) supra. There is no exemption limit.

Step 9- Find out 18% of the book profit

Step 3 – Add surcharge at the rate of 7.5%** of (2) [2.5% in the case of foreign company], if the net income exceed Rs.1 crore.

Step 10 – Add surcharge at the rate of 7.5% [2.5% in the case of foreign company] of (9), if the book profits exceed Rs. 1 crore.

Step 4 – Find out (2)+ (3) Step 11- Find out (9)+(10)

Step 5 – Add education cess at the rate of 2% of 9$) and secondary and higher education cess at the rate of 1%.

Step 12- Add education cess at the rate of 12% of(11) and secondary and higher education cess at the rate of 1% of (11)

Step 6 – Deduct tax rebate or tax credit under sections 86, 90, 90A and 91#

Step 13- Find out (11)+(12)

Step 7 – Find out (4)+(5)-(6) [it cannot be less than zero]



BASIC ISSUES IN MAT


BASIC ISSUES IN MAT

Whether MAT is applicable to foreign companies / branches of foreign companies

• The provisions of MAT do not apply to the foreign companies which have no physical presence in India i.e. a permanent establishment or a branch office, etc

The Timken Company v. DIT [2010] 326 ITR 193 (AAR)

• MAT provisions are applicable to foreign companies having fixed place of business in India

Praxair Pacific Limited v. DIT [2010] 326 ITR 276 (AAR)

• Provisions of Minimum Alternate Tax do not apply to Banking companies

Krung Thai Bank PCL v. JDIT [2010] 133 TTJ 435 (Mum)


CONTROVERSIES UNDER INCOME FROM

HOUSE PROPERTY


INCOME FROM HOUSE PROPERTY VS INCOME FROM

BUSINESS

Tax payersHouse Property Business Income Summary

2011] 11 taxmann.com 58

Sheetal KhuranaFoods (P.) Ltd.v. Income-tax Appellate Tribunal

If business of assessee has nothing to do with renting of property and renting is an isolated transaction to earn property income, mere fact that such income will result in reduction of business loss is not enough to hold that it will fall under head of business income

298 ITR 394 (Del - ITAT)

ITO vs Skipper

Properties (P) Ltd

Temporary leasing of property by a business concern



BUSINESS


300 ITR 118 (Mad)

Keyaram Hotels P. Ltd. Vs. ACIT

Income earned by way of leasing property - no commercial activity carried out.

119 TTJ 421 (Bang)

Global Tech Park (P) Ltd. vs ACIT

The assessee company was incorporated with the sole intention of developing technology park for which it obtained leasehold land for constructing superstructure thereon which could not be considered as investment in a property for earning rental income only. Where, letting out of the property was a composite one with the host of services and amenities, it has to be charged as income from business.



BUSINESS


122 TTJ 0163 (MUM-ITAT)

Harvindarpal Mehta (HUF) vs DCIT

Running of business centre and providing services like receptionist, waiting room etc - ultimate control over the premises is with the assessee as keys of the centre always remain with the assessee, ie, no tenancy rights was given.

031 SOT 0132 (Mum - ITAT)

Gesco Corporation Limited vs ACIT

Assessee was giving space with services and facilities which were varied and wide and such activities together would definitely constitute an organized structure for making profits, and would necessarily constitute a business. Thus, in our view the assessee had created a commercial infrastructure and the services rendered were complex commercial / business activity – assessee was a property manager rather than a passive owner of the property.


INCOME FROM HOUSE PROPERTY

COMMISSIONER OF INCOME TAX, DELHI CENTRAL III Vs MONI KUMAR SUBBA

• Whether for the purpose of arriving at the annual letting value of the property, notional interest on interest free security deposit is to be added to the actual rent received


CONTROVERSIES UNDER INCOME FROM

BUSINESS & PROFESSION


ISSUES UNDER SECTION 32

• Whether depreciation can be claimed on non compete fees paid by theassessee?

• Whether depreciation can be claimed on goodwill paid by the assessee?

• Whether depreciation can be claimed on assets leased out by the assessee inthe ordinary course of business?

• Whether user of each individual asset post inclusion in block of asset essentialfor depreciation allowance?

• Whether depreciation can be claimed on Stock Exchange Membership card?

• Whether depreciation is allowable on the assets of a closed unit on thegrounds that the assets were in passive use and the assets remained part ofthe block of assets


Facts of the Case:• The Company is in the business of of pharmaceuticals products• To expand its market , it acquired another pharmaceutical company. The

transferor company agreed that it will not carry on the said business for thenext 10 years, for which separate consideration was paid to it as noncompete fees.

• Assessee claimed the amount as a revenue expenditure and on the samebeing disallowed by the A.O. made an alternate claim that the said paymentwas eligible for depreciation u/s. 32(1)

Decision of Mumbai Tribunal :• Non-compete fee is a business / commercial right• Applying the functional test it can be said that the non-compete right

acquired by the assessee is of similar nature to the business / commercialrights such as Patents, Trademarks, Copyright etc. which are specified in theAct as the rights entitled to claim depreciation

• Depreciation is statutory allowance, not confined necessarily to thediminution to the value of the asset by wear and tear

MEDICORP TECHNOLOGIES INDIA LTD. (CHENNAI ITAT)

[2009-TIOL-203-ITAT-MAD]


Facts of the Case:• The assessee company was engaged in the business of two wheelers. One of

its employees had acquired specialized knowledge of technology during thecourse of his employment.

• The said employee entered an agreement with another company to promoteand collaborate with it to set up manufacturing facilities with it after hisretirement from the assessee.

• In turn, the assessee entered into a non-compete agreement with the saidemployee and the other company for not carrying on any business of two-wheelers and claimed the payment as business expenditure. The revenuedisallowed this expenditure

Decision of Delhi High Court:• The payment of non-compete fees is made only for elimination of

competition in business of two wheelers for a while• The payment made is to be allowed as a revenue expenditure and not a

capital expenditure

CIT VS. EICHER LTD. (HC OF DELHI) [218 CTR 612]


The assessee engaged in manufacture of non-alcoholic beverages claimeddepreciation u/s 32 on “goodwill” being the amounts paid to bottlers formarketing and trading reputation, trading style and name, territory know-howetc. The AO, after due inquiry, allowed the assessee’s claim u/s 143(3). The CITrevised the assessment u/s 263 on the ground that goodwill was not an“intangible asset” as defined in s. 32(1)(ii) and directed the AO to withdrawdepreciation. On appeal by the assessee, the Tribunal upheld the assessee’sclaim. Hence, it was held that goodwill is an intangible asset fort he purpose ofSec 32.

CIT VS. HINDUSTAN COCA COLA BEVERAGES PVT LTD.

(HC OF DELHI)


Facts of the Case:• The assessee had acquired a company along with its ten employees• The skills and know-how brought by these employees were classified as

‘business information’ under the category of ‘other identifiable intangibles’and depreciation was claimed on it

• The CIT held the depreciation claimed by the assessee as incorrect andexcessive

Decision of Bangalore Tribunal:

• The Tribunal relied on the decision of the Mumbai Tribunal in case of Skyline Caterers (P) Ltd and held that the assessee was entitled to claim depreciation on ‘business information’

BOSCH LTD. VS. CIT [ 2009-TIOL-736-ITAT-BANG]


Facts of the Case:• The assessee had purchased a running business from firm “R”. While

acquiring the business, the assessee had paid certain amount in respect oftrade name, goodwill and for all other business and commercial rights andclaimed depreciation on such payment

• The A. O. rejected the assessee’s claim stating that goodwill cannot betreated as intangible asset and therefore not depreciable

• The CIT (A) upheld the decision of the AO

Decision of Bangalore Tribunal:

• In light of the statutory provisions contained in section 32(1)(ii), thegoodwill acquired by the assessee does not come under the expression ofany other business or commercial rights of the similar nature and thereforeno depreciation on goodwill is allowed

R. G. KESWANI V. ACIT (MUMBAI ITAT) [116 ITD

133]


Facts of the Case:

• Assessee is into the business of purchasing breakers and leasing out thesame. It claims depreciation

• The A. O. disallows the depreciation on the ground that the breakers werepurchased at the end of the F. Y. and were never used for the Business.CIT(A) affirmed the stand taken by A. O.

Decision of Bombay High Court:

• The expression “used” does not mean actual use of the equipment.

• As long as the assets are used for the purpose of business, it is to beconsidered valid for claiming depreciation.

• Since the assessee is into the leasing business and had leased theequipments, it is to be accepted that it has “used” the same for the purposeof business

CIT VS. KOTAK MAHINDRA FINANCE LTD. [2009-TIOL-

190-HC-MUM-IT]


Facts of the Case:

• The Assessee was carrying on 2 businesses at Surat and Dombivli. The divisionat Surat was closed since 2/3 years

• The A. O. disallowed depreciation on the assets of Surat division. The CIT(A)confirmed.

Decision of Mumbai Tribunal:

• The depreciation is allowed on entire block even if some of the assets of theblock have not been used

• Use of individual asset for the purpose of business can be only examined in thefirst year of purchase

M/S SWATI SYNTHETICS LTD. VS. ITO [2010-TIOL-78-

ITAT-MUM]


Facts of the Case:

• Assessee claimed depreciation on certain items of plant and machineryforming part of block of assets not used during the year

• A.O. disallowed the assessee’s contention on the facts that ownership and useof assets are primary conditions for depreciation allowance in every year.

• AR’s contention that the Block of asset concept introduced to simplifydepreciation computation and an asset entering block loses its identity andmerges with the pool of asset in the same block.

Decision of Delhi High Court :

• The High Court held that the use of individual assets in subsequent years isnot a pre condition for claiming depreciation, if the asset forms part of theblock.

CIT V. M/S BHARAT ALUMINUM CO LTD [2009-TIOL-619-

HC-DEL-IT.]


Facts of the Case:

• The assessee had claimed depreciation on BSE card held by it. However, theA. O. disallowed the same.


• No depreciation is allowable on member ship card acquired by the assesseeon or after 1/4/1998

• The expression “licenses” applies only to licenses relatable to intellectualproperty rights and not to all licenses

Decision of Supreme Court:

• The depreciation on BSE card was allowed

CIT VS. TECHNO SHARES & STOCKS LTD. [2009-TIOL-

495-HC-MUM-IT]


Facts of the Case:

• The Assessee had a unit at Bhopal which was not functioning since the assessment year 1997-98.

• For the assessment year 1998-99, the assessee claimed depreciation in respect of closed unit at Bhopal.

• The AO, however rejected the assessee’s contention and disallowed depreciation on Bhopal unit on the ground that unit at Bhopal was closed throughout the year and had not been put to use.

• The Commissioner of Income-tax (Appeals) also confirmed the disallowance made by the AO.

CIT VS OSWAL AGRO MILLS LTD (DELHI HIGH COURT)-ITA

NO. 161 OF 2006 AND OTHERS DATED 24 DECEMBER,

2010)


• On an appeal made to the Tribunal, it allowed the depreciation since the Revenue authorities: – had not brought out on record that the Bhopal unit was finally closed or

sold out in succeeding years, though it was closed during the year, – had also not bought on record that the assets of Bhopal unit do not form

part of block of assets, and that – Depreciation was allowable on the entire block of assets if part of block

is not used but the remaining part was in continuous use.


• No depreciation is allowable on member ship card acquired by the assessee onor after 1/4/1998

• The expression “licenses” applies only to licenses relatable to intellectualproperty rights and not to all licenses

CIT VS OSWAL AGRO MILLS LTD (DELHI HIGH COURT)-

ITA NO. 161 OF 2006 AND OTHERS DATED 24

DECEMBER, 2010)


ISSUES UNDER SECTION 36 (1)(iii)

� Whether interest on capital borrowed for business and furtheradvanced for other than business should be allowed ?

� Whether interest expenditure would be allowed u/s 36 (1) (iii) wherethe funds have been utilized for non-business purpose and theassessee has own funds as well as borrowed funds?


Facts of the Case:

• The assessee is engaged in the business of stainless steel

• Assessee has diverted capital borrowed for the purpose of business and has advancedinterest free funds to its sister concern

• A.O. disallowed the proportionate interest

• CIT (A) observed that there was a direct nexus between the funds borrowed oninterest and funds advanced

• ITAT observed that the assessee failed to substantiate its plea of commercialexpediency

Decision of Delhi High Court :

• The high court upheld on the decision of ITAT and disallowed the expenditure asthere was no material presented to show that the interest free advances had beengiven for the purpose of business or that interest free advance would serve thebusiness better and no case of commercial expediency in making the interest freeadvances was made out by the assessee

M/S. PUNJAB STAINLESS STEEL INDUSTRIES V. CIT

(DELHI HC) [2010-TIOL-347-HC-DEL-IT]


Facts of the Case:

• The assessee is engaged in the business of sales and services of vehicles

• Assessee made payment of interest on loan taken from its sister concern andclaimed deduction for same

• A.O. rejected the claim u\s 40A(2)(b) that the payment was made to relatedparty and was not for the purpose of business

• CIT (A) upheld order of A.O

Decision of Jabalpur ITAT :

• The ITAT upheld the order of CIT (A) considering the fact that assessee hadsufficient own funds which remained idle and it could not justify taking loanfrom its sister concern as business need. Therefore, payment of interest wasnot admissible u/s 36(1)(iii).

YASH VEHICLES (P.) LTD V. ACIT [2009-34-SOT-502-

JAB.]


ISSUES UNDER SECTION 36 (1)(v)

� Whether the assessee is entitled to claim deduction for provision of gratuity which is not ascertained liability?

Facts of the Case:

• The balance sheet of the assessee reflected provision for gratuity. The assessee claimeddeduction for the same. However, the actual amount payable for contribution was lessthan the amount reflected in the balance sheet of the assessee

• A.O. allowed the deduction without making any discussion on the same

• CIT directed the AO to withdraw the excess allowance

Decision of the ITAT :

• An expenditure which is deductible under Income Tax is towards a liability actuallyexisting at the time, but setting apart money which might become expenditure onhappening of an event is not an allowable expenditure under the law

M/s RAJALAKSHMI MILLS LTD Vs ITO (ITAT) [2009-TIOL-

317-ITAT-MAD-SB]


ISSUES UNDER SECTION 36 (1)(vii)

� Whether as per existing provisions even after the amendment with effect from1st April, 1989, it is obligatory on the part of the assessee to prove that thedebt written off by him is indeed a bad debt for the purpose of allowanceunder section 36(1)(vii)?

� Whether on the peculiar fact and circumstances of the case the amendedprovisions of the act grants specific amnesty to the assessee for claiming anyamount as bad barring the A. O. to question the veracity of the same?

� Whether the department is entitled to treat the “Provision for NPA”, which interms of RBI directions 1998 is debited to the P&L Account as “income” undersection 2(24), while computing the profits and gains of the business?

� Whether it is necessary to close the individual accounts of each debtors ormere reduction in the loans and advances or debtors on the assets side ofbalance sheet would be sufficient to constitute a write off?


Facts of the Case:

• The assessee claimed deduction in respect of bad debts which were writtenoff in its books

• The AO disallowed claim stating that the company had not proved that thedebts had become bad

• The CIT(A) held that after the amendment with effect from 1st April, 1989the assessee is not required to establish that the debt had actually becamebad. The Tribunal upheld the decision of CIT(A)

Decision of Mumbai HC:• After the amendment of the section it is sufficient if the bad debt is written

off as irrecoverable in the accounts of the company based on commercialexpediency. Hence it is not necessary for the assessee to establish that thedebt has actually become bad in order to write it off

DIT (INTERNATIONAL TAXATION) V. OMAN

INTERNATIONAL BANK (MUMBAI HC) [2009-TIOL-159-

HC-MUM-IT]


Facts of the Case:

• The assessee was an engineering company manufacturing various materialhandling equipments

• It claimed deduction in respect of bad debts which were written off in itsbooks

Decision of the Supreme Court :

• After amendment of the section w.e.f. 1st April, 1989, the assessee need notestablish that the debt has become irrecoverable

• If bad debts are written off in the books, it is enough to become eligible fordeduction

TRF LTD VS. CIT, RANCHI (SC) [2010-TIOL-15-SC-IT]


Facts of the Case:

• The assessee was engaged in the business of developing and printing photos

• During the relevant year it had claimed deduction for amount written off asbad debts. The A.O. disallowed the same u/s 36 (1)(vii)

• The CIT (A) upheld the contention of the A. O.

• The ITAT upheld the claim of the Assessee by placing reliance in the case ofOman International of Mumbai High Court

Decision of the High Court :

• In view of the amendment in the relevant section, mere writing off of thedebt as not recoverable is sufficient

CIT VS. KOHLI BROTHERS (HC) [2009-TIOL-662-HC-ALL-

IT]


Decision of the High Court :

• But the A. O. is at the same time, not barred from probing into whether theentries made in the books are genuine and not fanciful. The A. O. has powersu/s 143(2) to make inquiry

• The provision of Sec. 143(2) vis- a- vis section 36(1)(vii) read with Sec. 36 (1)both would be harmonized to give purposeful meaning to both the statutoryprovisions

CIT VS. KOHLI BROTHERS (HC) [2009-TIOL-662-HC-ALL-

IT] (Contd..)


Facts of the Case:

• The assessee is an NBFC

• It makes provision for non-performing assets as per RBI directions and claimssuch a provision should not be added back while computing taxable income. AOtreats the same as income

• Tribunal allows the deduction but HC reverses the decision


• Provision made for NPA as per RBI guidelines is a prudential write-off and istreated as notional expense and hence was rightly added back in thecomputation of taxable income.

M/s SOUTHERN TECHNOLOGIES LD Vs JCIT (SC) [2010-

TIOL-01-SC-IT]


Facts of the Case:

• The assessee writes off certain debts in its books of account by debiting theprofit and loss account and reducing the equivalent amount fromcorresponding debtors

• AO called for the explanation for the same and on not being satisfied, addedback the amount.

• Assessee went for appeal and CIT(A) justified the addition


• The assessee has fulfilled all the legal requirements and hence it is dulyentitled to deduction on account of bad debts

TCE CONSULTING ENGINEERS LTD Vs ACIT (ITAT) [2010-

TIOL-245-ITAT-MUM]


Facts of the Case:

• The assessee had reduced an amount from Loans and Advances or debtors andclaimed deduction for the same

• The AO disallowed the same on the grounds that the impugned bad debts hadnot been written off in an appropriate manner and the same was a mereprovision

• The CIT opined that it is not necessary to close the individual account of eachdebtors and it would be sufficient if the debit entries are made in the P&Laccount and the corresponding credit is made in the bad debt reserveaccount

• ITAT also upheld the contention of the assessee


• The deduction was allowed as the assessee has satisfied the conditions forclaiming the deduction.

M/s VIJAYA BANK Vs CIT (SC) [2010-TIOL-31-SC-IT]



� Whether expenditure incurred prior to obtaining approval from RBI to set upa project office is allowable?

� Whether fee paid for entering into an agreement with a financial institutionfor obtaining a loan for an exit option on deep discount bonds should betreated as revenue expenditure?

� Whether difference between forward rate and exchange rate prevailing ondate of entering into forward contracts is fully allowable as deductionthough amortized in books over life of the forward contracts?

� Whether issue expenses of FCCB are revenue in nature?

� Whether the expenditure incurred for developing\modification of productsmanufactured, by expanding the existing unit are revenue or capital?



� Whether the premium paid by the firm in respect of insurance policy on thelives of partners under Keyman Insurance Policy was allowable deduction andthe addition of the interest on the debit balance in the capital accountthough not charged by the firm?

� Whether fines and penalties charged by NSE allowed as expenditure anddisallowance of increased salary on the ground of decrease in profitsjustified?

� A unit cannot be said to have been set up unless it is ready to discharge thefunction for which it is being set up?

� Whether a provision for warranty claims is allowable deduction under section37?

� Whether loss arising on fluctuation of rate of exchange in respect of loantaken for revenue purposes can be allowed as a deduction u/s 37(1) in theyear of fluctuation or in the year of repayment of such loan


Facts of the Case:

• The assessee Is a non resident company incorporated in Netherlands. It getsengineering procurement and construction contract in India.

• It incurs expenditure after receiving the contract but before receiving theapproval from RBI for setting up a project office in India and claims deductionfor the same.

• AO disallows it and CIT allows it.


• Assessee entitled to deduction of expenditure incurred after thecommencement of its operation, i.e. from the date of securing the letter ofintent from an Indian concern for carrying out the contract

DDIT Vs M/s STORK ENGINEERS & CONTRACTORS B V

INDIA PROJECT OFFICE (ITAT) [2009-TIOL-417-ITAT-

MUM]


Facts of the Case:

• The assessee was engaged in construction of toll bridge roads under Build-own-operate-transfer scheme

• Due to financial crisis, the assessee entered into an agreement with afinancial institution for provision of an exit option on deep discount bonds(DDB’s)

• The assessee agreed to pay “take out assistance fees” to the financialinstitution and claimed the same as revenue expenditure

• AO disallowed the claim on the ground that redemption of DDB’s is a capitalexpenditure


• The take out assistance fees paid allowed as revenue expenditure as theassessee by entering into an agreement for obtaining a loan had not acquiredan asset of enduring benefit

M/s NOIDA TOLL BRIDGE CO LTD Vs DCIT (ITAT) [2009-

TIOL-427-ITAT-DEL]


Facts of the Case:

• The assessee raised foreign currency borrowings and entered into foreigncontracts for purchase of foreign currency

• The assessee reckoned loss of 81.7 crores on the difference between theforward rate and exchange rate prevailing on the date of contract

• The assessee amortized the loss over the life of the forward contractionrecognized loss of Rs. 14.06 crores in books of accounts

• However for tax purpose the assessee claimed deduction for full amount

• A.O. restricted the deduction to 14.6 cr and disallowed the balance loss

• CIT upheld the order of the A. O., however, the Tribunal ruled in the favourof Assessee

CIT V. INUSTRIAL FINANCE CORPORATION OF INDIA [

2010-TIOL-42-HC-DEL-IT]


Decision of the High Court:• The court held that the assessee is entitled to full deduction of Rs. 81.7 Cr as

the difference between the forward rate and the exchange rate on the date ofcontract has to be recognized as an expense, as a definite and ascertainedliability existed in the year of entering into forward contract

• Revenue expenditure incurred in a particular year should be allowed in thesame year and the tax authorities cannot deny the deduction if the taxpayerclaims it in that year

CIT V. INUSTRIAL FINANCE CORPORATION OF INDIA

[2010-TIOL-42-HC-DEL-IT]


Facts of the Case:

• The assessee Co. issued the Foreign Currency Convertible Bonds (“FCCB”)convertible into shares after minimum lock in period.

• The expenditure incurred on FCCB’s was claimed by the assessee as revenueexpenditure.

• A.O. held that the expenditure incurred on FCCB’s was capital in nature sinceit led to enhancement of the capital structure of the assessee company anddisallowed the entire expenditure.

Decision of Mumbai Tribunal :

• The Tribunal treated it as revenue expenditure relying on Rajasthan HCdecision in case of CIT v. Secure Meters Ltd. (2008) 175 Taxman 567 (Raj.),wherein it was held that the debentures when issued is a loan, whether it isconvertible or not convertible, does not militate against the nature of thedebenture being loan. Therefore, the expenditure incurred would beadmissible as revenue expenditure. Hence, the tribunal allowed the assessee’sclaim.

MAHINDRA & MAHINDRA LTD V. JCIT [(2010) 36 SOT

348 (MUM).]


Facts of the Case:

• The assessee Co. filed return of income without claiming the expensesrelating to expansion of existing unit for developing the new products forbetterment of business and then filed a revised return showing expenses ascapital work in progress.

• A.O. treated the expenses as capital and disallowed the same.

• CIT (A) & ITAT allowed the appeal of the assessee.

Decision of High Court :

• The High court observed that the expenditure incurred by assessee could notbe regarded as capital expenditure. Merely because the assessee-respondenthas declared by giving a note in its original return that it was an expenditurepertaining to new project and is of capital in nature and hence it cannot betaken as capital expenditure. Therefore assessee was allowed to claimexpenditure as revenue.

CIT V. M/S ESCORTS AUTO COMPONENTS LTD [2010-

TIOL-325-HC-P&H-IT]


Facts of the Case:

• The assessee claimed deduction in respect of premium paid in respect ofKeyman Insurance Policy on the lives of 2 working partners out of the fourpartners.

• The interest on debit balance of two partners was not charged thoughpartnership deed provided for the charging of interest on debit balance andpayment of interest on credit balance, however the assessee contented thatsuch withdrawal was used for their other business.

• The AO held that partnership was not independent and distinct from itspartners and disallowed the premium paid and the AO had made a addition ofthe interest to be charged on the debit balance of the capital accounts of thepartners.

• The CIT(A) held that conditions of section 37 were satisfied and AO was notjustified in presuming that there was no distinction between and the firm asper section 2(31)

ITO VS MODI MOTORS [2009-(207)-SOT-0476-TBOM]


Facts of the Case: (Contd..)

• The CIT(A) also held that the salary payable to such partners had not beencredited in their Capital Accounts on the monthly basis and no interest hadbeen paid on the capital contribution

of the partners and if that would have been do, it could have somehowcompensated for the withdrawals so made. It was also noted that suchwithdrawals had not been used for non-business purposes and relying on thefacts of the case CIT(A) deleted the addition.

Decision of ITAT MUMBAI BENCH ‘B’

• After the amendments take effect from the 1-10-1996, the employeeemployer relationship is not envisaged to allow the premium paid on KeymanInsurance Policy as business expenditure and there can exist other typesrelationship.

• It was held that the decision CIT(A) is not correct in law and computation ofinterest chargeable is to be made after giving credit of the salary payable onthe monthly basis.

ITO VS MODI MOTORS [2009-(207)-SOT-0476-TBOM]

Contd …


Facts of the Case:

• The assessee was a member of the National Stock Exchange (NSE) and fineswere imposed by the Disciplinary Action Bench of the NSE and also during therelevant year the there had been an increase in the employee costs.

• The AO came to the conclusion that these fines were penal in nature andcould not be allowed as a deduction.

• This was upheld by Commissioner (Appeals).

• The AO during the course of assessment noted that there was disproportionateincrease in employee cost and the assessee was unable to provide supportingevidence and details, hence he disallowed 20 percent of total cost.

• The Commissioner (Appeals) deleted the disallowance.

GOLDCREST CAPITAL MARKETS LTD. VS ITO[2010 2 ITR

(TRIB) 355 (MUMBAI)]


Decision of the ITAT

• Fines and penalties levied for violation of NSE rules and regulation cannot beequated with violation of a statutory rule or law. The fines paid could not bedisallowed.

• As no defect was pointed out in the accounts of the assessee, but thedisallowance was only made for the reason that share trading and otherincomes had come down in the relevant P.Y., no part of the amount paid assalary could be disallowed.

GOLDCREST CAPITAL MARKETS LTD. VS ITO [2010 2 ITR

(TRIB) 355 (MUMBAI)] Contd …


Facts of the Case:

• The assessee company was incorporated on 24 April 2001, with the mainobject to purchase/acquire part or all of international express business ofAFL Ltd, subject to statutory approval.

• After the incorporation but before the commencement of the business, theassessee had incurred expenditure towards various expenses and claimed thepre-demergers expenses as revenue expenditure

• The AO disallowed the expenditure incurred by the assessee before thecommencement of the business i.e. 1st January 2001as revenue expenditure.

• The CIT(A) held that there was no case for allowance of any expenditureincurred prior to that date when the business was setup, however directedthe AO to allow the claim of the assessee in respect of expenditure incurredafter demergers of International Express Business of AFL Ltd.

M/s. DHL EXPRESS (I) PVT LTD VS ACIT [2009-TIOL-139-

ITAT-MUM]


Decision of the Tribunal

• It was held that after the approval of Scheme of Arrangement by the HighCourt on 2nd November 2001 the assessee was ready to commence business.

• As the expenses incurred after the setting up of the business and date ofcommencement of business are distinct and the expenses incurred aftersetting up of the business are deductible as Revenue Expenditure.

• The Tribunal directed the Assessing Officer to allow the expenditure incurredafter the setting up of the business i.e. after 2nd November 2001 as revenueexpenditure though in the case of the assessee the commencement ofbusiness takes effect from 1st January 2002.

M/s. DHL EXPRESS (I) PVT LTD VS ACIT [2009-TIOL-139-

ITAT-MUM] Contd …


Facts of the Case:

• Assessee is a manufacturer of value actuators and offers standard warrantylinked to sales.

• The assessee made provision on account of warranty claims likely to arise onthe sales effected by the appellant and to cover up that expenditure.

• The AO disallowed on the ground that the liability was merely a contingentliability not allowable as a deduction.

• This decision was upheld by CIT(A).

• It was held by the Tribunal that right from AY 1983-84 the CIT(A) as well asthe Tribunal had allowed the warranty claim's) under the ground that everyitem sold had a corresponding obligation under the warranty clause's)attached to such sales.

• The High Court held that since the liability had not crystallized on the date ofsale and, therefore , appellant was not entitled to deduction in respect ofthe provision made for warranty charges payable under the terms of sale.

M/s. ROTORK CONTROLS INDIA (P) LTD VS CIT [2009-

TIOL-64-SC-IT]



• Thus held that in the present case, warranty provision needs to be recognizedbecause the appellant is an enterprise having a present obligation as a resultof past events resulting in an outflow of resources. Lastly, a reliable estimatecan be made of the amount of the obligation.

M/s. ROTORK CONTROLS INDIA (P) LTD VS CIT [2009-

TIOL-64-SC-IT] Contd …

Facts of the Case:

• During the assessment year 1998-99, the assessee, who was maintaining thebooks on mercantile system, had debited an unrealized loss arising due toforeign exchange fluctuation in respect of loan taken for revenue item.

• The A.O. held that the liability as on the last date of the previous year was acontingent liability and added it back to the total income.

CIT vs. WOODWARD GOVERNOR INDIA P. LTD.[2009-

TIOL-50-SC-IT]



• It was held that the loss was allowable as a deduction u/s 37 in theyear of fluctuation and not in the year of repayment of such loan. Theterm “expenditure” in s. 37 covers an amount which is a “loss” eventhough the said amount has not gone out from the pocket of theassessee

• The fact that the department taxed the gains on fluctuation on thebasis of accrual while disallowing the loss is important and indicatesthe double standards adopted by the Department;

• As per the pre-amended section 43A, actual payment of the liabilityas a consequence of the exchange variation is not required. Further,the amendment to section 43A made by Finance Act, 2002, is notclarifactory and applies w.e.f. 01-04-2003.

CIT vs. WOODWARD GOVERNOR INDIA P. LTD.[2009-

TIOL-50-SC-IT]


Facts of the Case:

• Assessee is a public sector undertaking engaged in exploration andprospecting oil

• It had taken foreign loans and claimed a deduction u/s 37(1) on account offoreign exchange fluctuations in the year of fluctuations

• It had also adjusted the actual costs of assets at the end of each year pendingactual payment of liability. The A. O. disallows. The CIT(A) rejects the claimof revenue expenditure but accepts the capital adjustment


• In view of decision in Woodword Governor’s case and the fact that the casepertains to the period prior to the amendment of Section 43A both the issuesare settled in favor of the assessee

OIL & NATURAL GAS CORPORATION LTD. VS. CIT [2010-

TIOL-20-SC-IT]


Facts of the Case:

• Assessee entered into an agreement with a Mauritius company, ‘K’ under which‘k’ had granted a non exclusive right to the assessee restricted to the territoryof India for the manufacture and use of tube-making machines and tools for aperiod of 5 years

• The A .O held that the payment of royalty component was of revenue nature,however, the lump sum component spread over a period of 5 years was capitalin nature. CIT(A) allowed the claim of the assessee


• The Tribunal was justified in coming to the conclusion that the assessee didnot acquire any asset of a capital nature and the provisions of Sec. 32 werenot attracted

CIT VS. M/S ESSEL PROPACK LTD. [2010-TIOL-209-HC-

MUM-IT]


Facts of the Case:

• Assessee had claimed a deduction on account of software expenditure

• The A.O. held that the said software was use for more than 3-4 yearsand thus gave enduring benefit to the assessee. He included it as a partof the plant and machinery of the assessee and allowed depreciation @25%. The CIT(A) upheld the A.O.s order but allowed depreciation @60%.

Decision of Tribunal:

• The Special Bench observed three tests to decide whether expenditureis revenue or capital in nature as follows:

(i) enduring benefit test(ii) ownership test and(iii) functional test

AMWAY INDIA ENTERPRISES VS. DCIT [2008-TIOL-

97-ITAT-DEL-SB]


Decision of Tribunal:

• Once the tests of ownership and enduring benefit are satisfied, the questionwhether expenditure incurred on computer software is capital or revenue hasto be seen from the point of view of its utility to a businessman and howimportant an economic or functional role it plays in his business.

• Having regard to the fact that software becomes obsolete with technologicalinnovation and advancement within a short span of time, it can be said thatany software having its utility to the assessee for a period beyond two yearscan be considered as accrual of benefit of enduring nature. However, that byitself will not make the expenditure incurred on software as capital in natureand the functional test also needs to be satisfied

• This exercise is required to be done in respect of each and every softwareindependently, having regard to the criteria laid down.

AMWAY INDIA ENTERPRISES VS. DCIT [2008-TIOL-97-

ITAT-DEL-SB]


ISSUES UNDER SECTION 43B

� Whether the provision of sec 43B can call upon a statutory liability whichby change of circumstances changed it’s character?

� Whether contribution made by employer and employee to PF and ESIdeposited after due date can be allowed as deduction?

� Whether interest claimed as business expenditure in the year where thereis no business activity can be allowed as deduction?

� Whether Excise duty can be allowed on payment basis even if it is notaccrued?


Facts of the Case:

• The assessee did not pay sales tax and reflected the same as interest freeloan in balance sheet

• A.O. did not allowed the same as per the provision of sec 43B.

• CIT (A) allowed the appeal of the assessee.

Decision of Hyderabad Tribunal :

• The assessee was awarded sales-tax deferral benefit scheme. Under thisscheme, the Industrial Unit of the assessee was permitted to retain the salestax collected from its customers for a period of 14 years. This scheme of theState Government was revised and as per the provision thereof the deferredamount of sales tax stands converted into interest free loan in the records ofthe State Government thereby losing its character of current liability. Againstthese facts, since the deferred amount has lost its character of currentliability, the provisions of section 43B are not applicable to sales tax deferralscheme.

ACIT V. M/S KAVURI POLYMERS [2010-TIOL-260-ITAT-

HYD.]


Facts of the Case:

• The assessee had deposited the employers as well as employees contribution tothe PF and ESI after the due date as prescribed in the relevant Act/Rules.

• A.O. disallowed the employes contribution u/s 36(1)(va).

• The CIT (A) accepted the assessee’s contention. The Tribunal upheld the orderof CIT(A).

Decision of High Court :

• If the employees contribution is not paid within the due dates prescribed underthe relevant Acts/Rules but is paid within the due date of filing the return,deduction cannot be disallowed u/s 43B.

CIT V. AIMIL LTD. [229 CTR 418]


Facts of the Case:

• The assessee filed the return of income claiming loss and that loss was dueto interest claimed on business expenditure.

• A.O. disallowed the business expenditure on the basis that the assessee hadno business activity for that year.

• CIT (A) however ruled in favour of the assessee.

Decision of Bangalore Tribunal :

• The Tribunal held that the amendment in sec 43B(e) of the Act relating toschedule interest payments to the bank was made w.e.f A.Y. 1997-98. Hencethe interest relating to the prior period was required to be claimed in earlierassessments and only the interest relating to FY 1997-98 should have beenclaimed during the relevant A.Y. The tribunal pointed to the case of AlliedMotors (P) Ltd. v. CIT (1997) 224 ITR 677 (SC), where it was held that theamendment to the sec 43B of the Act was retrospective in nature.Accordingly, the Tribunal held that the interest would be allowable asdeduction.

ACIT V. M/S BLUE MOUNTAIN FOOD PRODUCTS LTD

[2009-TIOL-787-ITAT-BANG.]


Facts of the Case:

• The assessee had paid excise duty through the Personal Ledger Account (PLA)

• A.O. disallowed the excise duty on the grounds that the liability towardsexcise duty was not accrued in the relevant year

• CIT (A) confirmed the order of A.O.

Decision of Delhi Tribunal :

• The Tribunal relied on the decision of DCIT v. Glaxo Smithkline Consumerhealthcare Ltd(2007) 107 ITD 343 (Chd.) (SB.), where it was held that theitems of expenditure included in sec 43B of the Act were allowable only onactual payment. To claim expenditure of such expenses, it was not necessarythat the liability to pay duty must be incurred first and only thereafter waspayment of such duty to be made for the purpose of its tax deductibility.Hence the Tribunal allowed the deduction of excise duty lying in PLA on apayment basis.

SRF LTD V. DCIT [2009-TIOL-586-ITAT-DEL.]


CAPITAL GAIN RELATING TO SLUMP SALE &

RECENT DEVELOPMENTS


Transfer of undertaking as a going concern for slump consideration notliable to capital gains

• No taxation with reference to individual asset in absence of earmarkedsale consideration

• No taxation for transfer of business as cost of undertaking and cost ofimprovement not ascertainable

• Charge fails in absence of support computation mechanism

SC in PNB Finance Ltd (307 ITR 75) in the context of slump sale held asunder.

In this case, s. 45 applies. There is no dispute on that point. The first test isthat the charging section and the computation provisions are inextricablylinked. The charging section and the computation provisions togetherconstituted an integrated code. Therefore, where the computationprovisions cannot apply, it is evident that such a case was not intended tofall within the charging section, which, in the present case, is s. 45.”

PRE-SECTION 50B POSITION


SECTION 50B : OVERVIEW

• Section 50B introduced w.e.f. AY 2000-01 for computation of capital gains incase of slump sale of undertaking.

• CBDT Circular 779 dated 14 September 1999 explaining provisions of S.50Bstates.

“A new section 50B has been inserted in the Income tax Act containingspecial provision for computation of capital gains in case of slumpsale……..”

• Slump sale defined u/s.2(42C

• Undertaking’ defined u/s.2(19AA)

• Net worth of undertaking constitutes cost of acquisition

• Long term v. Short term determined w.r.t age of the undertaking

• Indexation benefit not available

• Report from an accountant which certifies computation of net worth to befurnished in prescribed form


SLUMP SALE - SEC 2(42C)

• Section 2(42C) defines slump sale as

“slump sale” means the transfer of one or more undertakings as a result of thesale for a lump sum consideration without values being assigned to theindividual assets and liabilities in such sales.”

• Conditions to be satisfied cumulatively in order to qualify an arrangement as‘slump sale’.

• There should be transfer of one or more ‘undertakings’

• Transfer should be as a result of ‘sale’

• Sale should be for a ‘lump sum’ consideration

• No values should be assigned to individual assets or liabilities in such sales

• Specific exception provided

Determination of value of an asset or liability solely for the purpose ofpayment of stamp duty, registration fees or other similar taxes or feesnot regarded as assignment of values to individual assets or liabilities

MEANING OF SLUMP PRICE

• Sale for a lump sum consideration without assignment of values to individual

assets and liabilities

• Factors supporting lump sum consideration

• Business valuation on DCF or yield method • Valuation as a multiple of capacity, customer base etc • Negotiated value for ‘the undertaking’

• Issues : Whether following impact the slump sale

• Absence of ‘assignment of individual’ values ‘in document of sale’ v/s.’ in transaction of sale’

• Reference in any collateral documents or evidences such as Board resolution, pre-sale correspondences exchanged; asset valuation report, etc [Refer, Artex Manufacturing [227 ITR 260(SC)]

Page 84Taxation of Corporate Entities

MEANING OF SLUMP PRICE

• Impact of separate valuation of Land and Building or intangible for payment of

stamp duty / registration charges / sales tax

• Adjustment contemplated for working capital.[Refer, Premium Automobiles

(264 ITR 229(Bom)]

• Separate mention in respect of value of liability taken over (or) mention about

cap on value of contingent liability


MEANING AND SCOPE OF UNDERTAKING - SEC 2(19AA)

• Undertaking’ is defined in Explanation 1 to Sec 2(19AA) as under

For the purposes of this clause, “undertaking” shall include any part of an

undertaking, or a unit or division of an undertaking or a business activity

taken as a whole, but does not include individual assets or liabilities or any

combination thereof not constituting a business activity.”

• Inclusive definition : ‘undertaking’ in popular sense covered



• Extracts from P. Alikunju, M.A. Nazeer Cashew Industries v. CIT [166 ITR 804

(Ker)]

Undertaking" in common parlance means an "enterprise", "venture",

engagement". It can as well mean "the act of one who undertakes or

engages in a project or business" (Webster).

Construing this word "business", the Supreme Court in Narain Swadeshi

Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC) has observed that the word

business" connotes some real, substantial and systematic or organised

course of activity or conduct with a set purpose.“



• Extracts from CIT v. Textile Machinery Corporation 80 ITR 428 (Cal)

The words "industrial undertaking" in the Indian IT Act, 1922, should, in our view, be

interpreted to mean any venture or enterprise which a person undertakes to do and

which has relation to some industry or has some industrial consequences

Undertaking" is a very general and wide term. It has both literary as well as

technical connotations ……………Normally, anything undertaken to be done

is an undertaking.”

• Yallamma Cotton Woollen and Silk Mills Co Ltd vs Official Liquidator 40 ComCas 466 while examining the expression “undertaking” in the context of“floating charge” Mysore HC observed as.

undertaking’’ is not anything which may be described as a tangible piece

of property like land, machinery or the equipment; it is in actual effect an

activity of man which in commercial or business parlance means an

activity engaged in with a view to earn profit.”



• Additionally, undertaking covers :

• A part of an undertaking

• A unit of an undertaking

• A division of an undertaking

• A business activity taken as whole

• Specific exclusion

• Individual assets or liabilities or any combination thereof not constituting

a business activity

• Should undertaking be a going concern?




Transfer of business undertaking excluding certain assets / liabilities considerednot fatal to slump sale concept . Test to apply : Whether buyer is put in positionto continue the running business without the impugned asset?

Citation Exclusion of asset

Premier Automobiles vs ITO [264 ITR 229)(Bom)]

Transfer of manufacturing undertaking – sundry debtors not transferred

DCIT vs Mahalasa Gases & Chemicals (84 TTJ 992)(Bang)

Transfer of manufacturing and distribution undertaking -excess land, vehicle and debtors not transferred

Rohan Software (P) Ltd vs ITO 115 ITD 302)(Mum)

Sale of software business including intellectual properties, etc; exclusion of building and motor car does not defeat slump sale

Max India Ltd [112 TTJ 726] Transfer of manufacturing division –Technical know-how transferred in subsequent period; until that use thereof given on royalty payment

I.C. I India Ltd [23 SOT 58] Transfer of fertilizer unit - Bank balance, cheque on hands, unpaid insurance claims not transferred

COST OF ACQUISITION OF UNDERTAKING


• Net worth’ of an undertaking constitutes cost of acquisition

• Net worth’ defined to mean aggregate value of total assets of undertakingexcluding revaluation) as reduced by book value of liabilities

• Aggregate value of total assets• In case of depreciable assets : WDV of block of assets• Capital assets claimed deduction u/s 35AD : NIL• Other assets : Book value

• Illustrative ambiguities• Cost / book value of scientific research assets claimed u/s.35• Cost / book value of scientific research assets for which weighteddeduction claimed u/s.35(2AB)

• Cost / book value of Telecom license amortized under section 35ABB.

ISSUE 1 : IMPACT OF NEGATIVE NET WORTH

Page 92

Scenario A

Sale consideration 100

Less: cost of acquisition (net worth)

Aggregate value of total assets

300

Less: Value of liabilities (500)

Nil(200)

Capital Gains (restricted to) negative net worth ignored)

100

Scenario B

Sale consideration 100

Less: cost of acquisition (net worth)

Aggregate value of total assets

300

Less: Value of liabilities (500)

(200)

Capital Gains [100 – (- 200)) 300

Which of the scenario represents correct computation of capital gains?

ISSUE 2 : APPLICABILITY OF SECTION 50B IN CASE OF

SLUMP EXCHANGE

The transaction

XYZDivision A & Division B

ABC

Transfer of Division A

Allotment of Shares

• XYZ transfers one of its businessundertaking (Division A) to ABC

• In exchange, ABC allots its equityshares to XYZ by way of consideration( i.e. other than money)

• For XYZ, difference between fairvalue of business over net worthresults into capital gains

• Since there is no presence of moneyconsideration, admittedly transactionis of exchange and not a sale*

Will section 50B apply to slump exchange?

ISSUE 3 : SOME ISSUES


• Is section 50B a charging provision or machinery provisions?

• Impact on exemption under sections 47(xiii) /(xiv) or 47(iv)/(v) etc. which

exempts capital gains chargeable under section 45

• Impact on exemptions under sections 54EC / 54G

• Does section 50C apply to slump sale covered by section 50B?

IMPLICATIONS IN HANDS OF PURCHASER


• Purchaser entitled to allocate value of consideration to individual asset on fair

basis including intangible assets acquired, depreciable assets, stock in trade,

etc. [Refer, Shreyans Industries Ltd 277 ITR 443 (P&H) ]

• Subject to fifth proviso to section 32, entitled to depreciation w.r.t actual cost

determined.

• Unless governed by specific provision, entitled to reckon cost of acquisition of

asset at actual price paid

• Beware about seller’s tax arrears / liability [S.281 / S.170]


BHARAT BIJLEE LIMITED V ACIT (ITA NO.

6410/MUM/2008)

When bonds and preference shares are issued in consideration for transfer ofan undertaking, the transaction is not a sale but an exchange, and thereforeprovisions of section 2(42C) read with section 50B of the act relating tocomputation of capital gain case of slump sale are not applicable for suchtransfer


KEC International Ltd. v. Ad.CIT 8(2), Mumbai

[2010-TIOL-478-ITAT-MUM]

• In this case adjudged by the Mumbai Tribunal, the assessee had acquired thepower transmission business of one of its group concerns through slumpsale. The net worth of the undertaking acquired was a negative sum ofRs.157.19 crores. Whereas, the sales consideration paid was Rs.143 crores.The book value of the assets in the books of the vendor was Rs.35 crores.Subsequently, the assessee had got the assets valued at Rs.339 crores andclaimed depreciation on this amount. Out of this amount, the valueattributed

• During the assessment proceedings, the Assessing Officer (“A.O.”) had heldthat it was a demerger and computed the depreciation on the WDV of theassets in the books of the vendor.


KEC International Ltd. v. Ad.CIT 8(2), Mumbai

[2010-TIOL-478-ITAT-MUM]

• On further appeal, he Commissioner of Income-tax (Appeals) (“CIT(A)”) heldthat it was not a case of demerger and allowed depreciation on the basis ofthe revaluation of assets. However, disallowance related to claim ofdepreciation on ‘brand’ was upheld.

• The Hon’ble Mumbai Tribunal decided the issue in favour of the assesseeand allowed depreciation on ‘brand’


DEEMED DIVIDEND


DIVIDEND

• Dividend means payment made by the company to its shareholders out ofcurrent or retained earnings.

• Dividend is the share of investor in profits.

• Section 8 of Income Tax Act – Includes dividend income [including dividendas per section 2(22)(e)] in total income of an assessee.

• W.e.f. 01.06.1997 dividend is exempt in the hands of shareholder

• Company is liable to DDT on the amount of dividend as per the provisionsof section 115-O

Section 2(22)(e)

Taxable in hands of shareholder

Section 115-O does not apply (Explanation to Section 115-Q)

SECTION 2(22)(E)

Section 2(22)(e) has three limbs, which are as under:

“ Any payment by a company, not being a company in which the public aresubstantially interested, of any sum (whether as representing a part of theassets of the company or otherwise) made after 31-5-1987, by way of advanceor loan:

First limb

to a shareholder, being a person who is the beneficial owner of shares (notbeing shares entitled to a fixed rate of dividend whether with or without a rightto participate in profits) holding not less than ten per cent of the voting power.

Closely Held Company Shareholder

Loan

10% or more voting power

SECTION 2(22)(E)

Second limb

(b) or to any concern in which such shareholder is a member or a partner andin which he has a substantial interest hereafter in this clause referred to as thesaid concern).

Concern means a HUF, or a firm or an association of persons or body ofindividuals or a company.

Closely Held Company Concern

Loan

Shareholder

10% or more equity shares 20% or more equity shares

SECTION 2(22)(E)

Third limb

(c) or any payment by any such company on behalf, or for the individualbenefit, of any such shareholder,

to the extent to which the company in either case possesses accumulatedprofits.

Closely Held Company Concern

Shareholder

10% or more equity shares

Loan

ISSUES IN ACCUMULATED PROFITS

CIT v Mayur Madhukant Mehta [1972] 85 ITR 230 (Guj)

There is nothing in sub-clause (e) of section 2(22) to restrict the Deemeddividend to that portion of accumulated profits which corresponds to theassessee’s shareholding in the capital of the company.

CIT v Arati Debi [1978] 111 ITR 277 (Cal)

If a loan is given by a company to a shareholder who owns 25% of the sharecapital, the amount of loan to the extent of entire accumulated profits (andnot to the extent of 25% of accumulated profits) will be treated as dividend.

CIT v Bhagwat Tewari [1976] 105 ITR 62(Cal)

Dividend is taxable to the extent of accumulated profits and not limited toshare of shareholder in profits.

LOANS OR ADVANCE

• Inter Corporate Deposits shall not be treated as deemed dividend u/s 2(22)(e) –Bombay Oil Industries Ltd v DCIT [2009] 28 SOT 383 (Mum)

• Every sale of goods on credit does not amount to a transaction of loan. A loanof money results in debt but every debt does not involve a loan – BombaySteam Navigation Company P. Ltd v CIT [1965] 56 ITR 52 (SC)

• Walchand & Co. Ltd [1975] 100 ITR 598- Bombay High Court has held that loaneven for a short period of 23 days is to be treated as deemed dividend.


SHAREHOLDER HAS CURRENT ACCOUNT

P. K. Badiani v CIT [1970] 076 ITR 0369 (BOM)

• Every debit entry i.e. Every payment made by the company to the assessee,may not be treated as loan.

• To be treated as loan, every amount paid must make the company a creditorof the assessee for that amount.

• At the time when payment is made, the company was already a debtor of theassessee, the payment would merely be a repayment by the companytowards already existing debt and only to the extent of excess shall betreated as loans/ advances for the purpose of section 2(22)(e).

CIT v K. Srinivasan [1963] 50 ITR 788(Mad)

• Overdraft taken by major shareholder from a company will be covered u/s2(22)(e) if all other conditions are satisfied


CIT v Kunal Organics (P) Ltd. [ 2007] 164 Taxman 169 (Ahd)

Shares held by a person in two different capacities i.e. as individual and asHUF, cannot be clubbed for the purpose of deciding whether a person hassubstantial interest in concern.

ACIT v Bhaumik Colour (ITAT Bombay – Special Bench)

U/s 2 (22) (e), deemed dividend can be assessed only in the hands of a personwho is a “shareholder” of the lender company;

The expression “shareholder” in s. 2 (22) (e) refers to both a registeredshareholder and beneficial shareholder. If a person is a registered shareholderbut not the beneficial shareholder than the provisions of s. 2(22) (e) will notapply. Similarly if a person is a beneficial shareholder but not a registeredshareholder then also the provisions of Sec. 2(22) (e) will not apply

SHAREHOLDING


CIT v C. P. Sarathy Mudaliar [1972] 83 ITR 170 (SC)

Section 2(6A)(e) speaks of a shareholder and not to the beneficial ownerand hence, a loan granted to a beneficial owner of shares who is not aregistered shareholder cannot be regarded as loan advanced toshareholder of company. So as to be within mischief of section 2(6A)(e).

CIT v Rameshwarlal Sanwarmal [1980] 3 Taxman 1 (SC)

The word shareholder as occuring in section 2(6A)(e) of the 1922 Act [corresponds to section 2(22) of the 1961 Act] refers to a registeredshareholder and not to a beneficial owner. It is the former who is theshareholder within the matrix and scheme of company law and not thelatter.

WHERE TO TAX


(i) CIT v Nagindas M. Kapadia [ 1989] 177 ITR 393

Bombay High Court excluded from ambit of dividend monies which the

assessee had received towards purchases.

(ii) CIT v RajKumar [2009] 181 Taxman 155 (Delhi)

The word “advance” which appears in the company of the word “loan”

can only mean such advance which carries with it an obligation of repayment.

Trade advance, which is in nature of money transacted to give effect to commercial transaction, would not fall within section 2(22)(e).


BUSINESS PURPOSE

(iii) Sri Satchidanand S Pandit v ITO [2008] 019 SOT 213 (TBOM)

Bombay Tribunal had held that by enacting section 2(22)(e), the

legislature has created a fiction and has made the payments referred to therein as dividend. But fiction cannot be extended to go beyond the legislature intention in creating the fiction.

Advances made during the course of ordinary business cannot constitute loan for section 2(22)(e).

(iv) DCIT v Sunil Sethi [2008] 026 SOT 0095 TDEL

Documentary evidence on record to substantiate that the explanation

of assessee that the amount given was for business purpose, section 2(22)(e) is not applicable.


BUSINESS PURPOSE

v) DCIT v Lakra Brothers [2007] 162 Taxman 0170 TCHD:

Chandigarh Bench has held that the definition u/s 2(22)(e) cannot be

stretched to include even legitimate transactions carried out in ordinarycourse of business, where the intention is neither to give a loan oradvance or to confer some individual benefit on the shareholder. Theimportant words in the section are “individual benefit”.

(vi) ACIT v Harshad V Doshi [2011] 136 TTJ 351 (Chennai)

Advances received which were motivated by business considerations and

commercial expediency, cannot be treated as deemed dividend u/s 2(22)(e).


BUSINESS PURPOSE

Whether transfer entries passed in the books of accounts on account of loansadvanced, are liable to be included in the value of loans taken for the purpose ofsection 2(22)(e)?

• Madras High Court in case of G. R. Govindarajulu Naidu v CIT [1973] 90 ITR 13has held that notional entries by way of book adjustment cannot beconsidered for section 2(22)(e) as the words ‘payment by way of loan oradvance’ employed in this section reflects that there should be an outgoingor flow of money from company to shareholder.

• Madras High Court in case of CIT v Smt Savithiri Sam [1999] 236 ITR 1003(Mad) has held that the provision of section 2(22) itself introduces a fiction. Itis thus, improper to introduce another fiction and construe even a transferentry as amounting to payment. There must be actual flow of cash fromcompany to shareholder.


NOTIONAL ENTRIES

• There is no specific requirement in Audit Report in Form No. 3CD.

• However, there is Clause 27 in Form 3CD

• Auditor has to disclose whether the assessee has complied with the provisionsof Chapter VII-B relating to Deduction of Tax at Source.


WHETHER TAX AUDITOR HAS TO REPORT IN

RESPECT OF DEEMED DIVIDEND?

• Section 194 requires the principal officer of a company to deduct tax atsource u/s 194 at the rate in force before making any payment of any sumdeemed to be dividend u/s 2(22)(e).

• CIT v Ravindra D Amin [1994] 208 ITR 815 (Guj)

• Penalty u/s 271C(1)(a) = amount of tax which the person failed to deduct

WHETHER TDS IS REQUIRED TO BE DEDUCTED ON

THE AMOUNT OF DEEMED DIVIDEND

• Section 2(22)(e) speaks of a ‘company ’.

• It does not distinguish between an Indian or a foreign company.

• Sum paid by a foreign company to a resident shareholder is taxable as deemeddividend

• Gautam Sarabhai v CIT [1964] 52 ITR 921 (Guj)


WHETHER DEEMED DIVIDEND CAN BE ASSESSED IN

HANDS OF NON-RESIDENT SHAREHOLDER

• Clause (iv) of sub-section (1) of section 9, states that any dividend paid by anIndian Company outside India is Income deemed to accure or arise in India.

• Subject to provisions of DTAA

• If after giving loan or advance to a shareholder, the company declares normaldividend and such dividend is set off against outstanding loan/advance, theamount so set off will not be taken as dividend.

• Burden to prove that the payment was made on behalf of or for individualbenefit of the assessee is upon the assessee. CIT v P. V. John [1990] 181 ITR0001 (Ker).


WHETHER DEEMED DIVIDEND APPLICABLE IN CASE

OF LOAN OR ADVANCE BY A FOREIGN COMPANY

TO A RESIDENT SHAREHOLDER

• Section 7 of DTC corresponds to section 8 of IT Act – Include dividendincome in total income of an assessee for a financial year to the extent ofaccumulated profits

• Section 314(81)(e) of DTC corresponds to section 2(22)(e) of IT Act

• Similar except – the words “of any sum (whether as representing a part ofthe assets of the company or otherwise)” missing

• Section 314(4) of DTC defines accumulated profits – definition same


DTC


ISSUES IN MAT


ISSUES IN MAT

• MAT credit to be adjusted before reducing advance tax and TDS

Bharat Aluminium Co Ltd. [ TS-213-HC-2011(DEL) ]

• Exempt income is taxable under MAT / s.115JB. The assessee credited itsP&L A/c with the profit on sale of assets to its wholly owned subsidiary. Asthe said profits were not chargeable to tax u/s 47(iv), the assessee tookthe view that the same had also to be reduced from the “book profits” u/s115JB. The fact that the capital gains was exempt u/s 47(iv) does notmean it can be excluded from the “book profit” because no such exclusionwas permitted under the Explanation to s. 115JB. Accordingly, in theabsence of any provision for exclusion of exempted capital gain in thecomputation of book profit u/s 115JB, the assessee is not entitled to theexclusion claimed.

Rain Commodities vs. DCIT (ITAT Hyderabad Special Bench) [ITA No.673/Hyd/2009]


ISSUES IN MAT

• Interest under sections 234B and 234C shall be payable on failure to payadvance tax in respect of tax payable under section 115JA/115JB.

Joint Commissioner of Income-tax v. Rolta India Ltd. [2011] 9 taxmann.com

36 (SC)]

• Where MAT assessment u/s 115JA is completed based on profits taken from

P&L Appropriation A/c, it is an apparent mistake which could be rectified in

proceedings u/s 154. AO has to start assessment u/s 115JA by adopting the

profit available in the P&L A/c prepared in terms of Parts II and III of

Schedule VI of the Companies Act; and if the assessee has made a claim of

deduction from this profit not enumerated in clauses (i) to (ix) covered by

Explanation to section 115JA, the assessment so completed based on the

profit taken from the P&L Appropriation A/c submitted by assessee happens

to be an apparent mistake which could be rectified in proceedings to be

initiated u/s 154 [Section 154 of the Income-tax Act, 1961 – Rectification of

mistake – Apparent from record]

Sree Bhagawathy Textiles Ltd. v. ACIT, [2011] 10 taxmann.com 197 (Ker.)


CARRY FORWARD OF LOSSES


CARRY FORWARD AND SET-OFF OF LOSSES

• Section 79 is applicable if the following conditions are satisfied –

1. The taxpayer is a company in which the public are not substantiallyinterested

2. The persons beneficially holding 51% of the voting power on the followingtwo dates are different :

a. On the last day of the P.Y. in which the loss was incurred

b. On the last day of the P.Y. in which the company wants to set offthe brought forward loss

• Section 79 will not be applicable if after the change in the shareholdingpattern, the assessee becomes a 100% subsidiary of a company in which thepublic are substantially interested.

- Classic Shares & Stock Broking Services Ltd v. CIT [2007] 11 SOT 377 (Mum)

• Section 79 does not specify change in directorship or change in managementas a criteria

- Sunanda Capital Services Ltd v. CIT [2009] 28 SOT 484 (Mum)

CARRY FORWARD AND SET-OFF OF LOSSES

Delhi bench of the Income-tax Appellate Tribunal (the Tribunal), in the case ofDCIT v. Select Holiday Resorts Pvt. Ltd. (ITA Nos. 1184 & 2460/Del/2008)

(Judgment Date: 23 December 2010, Assessment Years: 2004-05 & 2005-06)

held that where a parent company merged with its subsidiary, the benefit ofbrought forward and set off of losses under Section 79 of the Income-tax Act,1961 (the Act) claimed by the amalgamated company, cannot be disallowedon the grounds that there was a change in the shareholding of more than 51percent of the share capital of the subsidiary company since there was nochange in control and management of amalgamated company pre and postmerger.


Taxation of Corporate EntitiesPage 123Page 123

Amit AjmeraE-mail: [email protected]

The views contained in this presentation is solely that of the Speaker and should not necessarily be construed as an Opinion of the Company. Before implementing any of the views the expert guidance is recommended.

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