Saturday, 31 March 2012

GAAR : 4 Important Tests For Its Application !

General Anti-Avoidance Rule (GAAR ) introduced under a new Chapter X-A starting from section 95 by Finance Bill 2012-13 and likely to be applicable from 1st April 2012 is being feared by all pundits of tax planning as a measure by government to put a shackle in their practice .
GARR is applicable only when the Commissioner of Income Tax , on a matter referred by the Assessing Officer finds that the so called tax planning or arrangements have failed at least one of the test laid down under section 97 of the Income Tax Act which is given below :
96. (1) An impermissible avoidance arrangement means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it—
(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;
(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
(c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or
(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes

What is deemed to lack commercial substance under GAAR?

One of the four tests laid down for declaring an arrangement as impermissible , there is clause for deeming an arrangement to lack commercial substance under section 97 of the Income Tax Act . It provides in following conditions ,
97. (1) An arrangement shall be deemed to lack commercial substance if—
(a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or
(b) it involves or includes—
(i) round trip financing;
(ii) an accommodating party;
(iii) elements that have effect of offsetting or cancelling each other; or
(iv) a transaction which is conducted through one or more persons and disguises the value,location, source, ownership or control of funds which is the subject matter of such transaction; or
it involves the location of an asset or of a transaction or of the place of residence of any party which would not have been so located for any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of this Chapter) for a party.
(2) For the purposes of sub-section (1), round trip financing includes any arrangement in which, through a series of transactions—
(a) funds are transferred among the parties to the arrangement; and
(b) such transactions do not have any substantial commercial purpose other than obtaining the tax benefit (…………………
So , the most problematic out all the test is the deeming provision because it is worded very widely .
Commissioner of Income Tax is now most powerful entity courtesy GAAR  !!!

Cash Credits & Unexplained Income – Sec 68 – Budget 2012

Existing provision of Sec 68 mandates that where any income is found in the books of assessee as credited or unexplained in the previous year and the assessee has not offered any explanation of that income or the Income Tax Authority is not satisfied regarding the nature and source of that income, then the sum so credited shall be chargeable to Income Tax of the assessee.
 The Section under discussion has been amended to the effect that if the assessee is a company  in which public are not substantially interested  and any cash credits consists of  share application money , share capital or share premium or any such amount then  it shall be regarded as unexplained income and shall be chargeable to tax .It is therefore quite evident from the amendment that the channelisation of black money from unauthorised sources into the share premium of family run companies will no longer be a routine procedure.The art of subscribing to the shares at a mammoth premium via unexplained incomes will be governed by Sec 68, and will cost considerably.
The sum so credited shall be taxed if the same is not disclosed by the assessee. However, the aforesaid provision will not take effect in case of a Venture capital fund or venture capital company.
 The amendment shall be effective from 1st April, 2013 and shall apply in the relevant assessment years.

Friday, 30 March 2012

Income tax offices open of March 31, 2012 - Saturday

F.No.225/138/20111IT A.II
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
New Delhi, the 30th March 2012

Order under Section 119(1) of the Income tax Act, 1961.

The Financial Year 2011-12 closes on 31-3-2012 falling on Saturday.
All the Income Tax Offices through out India shall remain open on this day and
the receipts counters shall also work during normal office hours. This direction
is issued for administrative convenience by the Central Board of Direct Taxes
in exercise of powers conferred under section 119 of the Income Tax Act,1961.

Special arrangements may also be made by way of opening additional
receipt counters, wherever required on so" and 31st March 2012 to facilitate
the taxpayers in filing their returns of income conveniently. These instructions
may be given wide publicity.

Copy to:-
Under Secretary to the Government of India.
The Chairman (CBDT), All Members, Central Board of Direct Taxes for information.
All Cadre Controlling CCslT for necessary action in respect of their region.
The Director General of Income Tax (Admn.) Mayur Bhawan, New Delhi.
DGIT (Systems) for putting it on Departmental Website.
Shri Shishir Jha, CIT (MC) of CBDT. (\~=
Under Secretary to the Government of India.


Get the Income tax return form (other than company ) for AY 2012-13

Increase in passgenger fares of Indian Railway w.e.f April 1, 2012

The Indian Railway had issued the circular in respect of increased fares and also to collect the diffrence of fares.  read more at

S. 80-IB(10): Multiple Housing Projects On 1 Acre Plot Permissible

CIT vs. M/s.Vandana Properties (Bombay High Court)

The High Court had to consider the following questions on interpretation of s. 80-IB(10): (i) what is a “housing project” u/s 80-IB(10)?, (ii) whether if approval for construction of ‘E’ building was granted by the local authority subject to the conditions set out in the first approval granted on 12.5.1993 for construction of A and B building, construction of ‘E’ building is an “extension” of the earlier housing project for which approval was granted prior to 1.10.1998 and, therefore, benefit of s. 80IB (10) cannot be granted?, (iii) whether the housing project must be on a vacant plot of land which has minimum area of one acre and if there are multiple buildings and the proportionate area for each building is less than one acre, s. 80-IB(10) can be denied?, whether the merger of two flats into one so as to exceed the maximum size of 1000 sq feet violates the condition set out in s. 80IB (10)? HELD by the High Court:

Tax Due Date for the Month of April 2012

Your kind attention is invited to the table given below which contains the due date for Tax compliance in respect of TDS/TCS, IT/WT, ST/VAT on different dates during the month  of   April 2012

Sr No
Due Date
Related to
Compliance to be made
Payment of VAT & filing of monthly return for the month of March 2012
Service Tax
Filing of service tax return for the half year ended March 31, 2012
(Income Tax)
·        Deposit TDS for payments of Salary, Interest, Commission or Brokerage, Rent, Professional fee, payment to Contractors, etc. during the month of March 2012.

·        Deposit TDS from Salaries  deducted during the month of March 2012

•   Deposit TCS for collections made under section 206C including sale of scrap during the month of March 2012, if any

•    Deliver a copy of Form 15G/15H, if any to CCIT or CIT for declarations received in the month of March 2012, if any

27 Tax Deductions Now Create MAT Problem !

Budget 2012 has the bad news for any one who is dreaming of claiming tax deductions u/s 10 A or 80HH to 80RR or Section 10A and getting away tax free income .This dream is shattered as the section 115C is substituted by Finance Bill 2012  to provide a law which will make you liable to pay ALT of 18.5 % of adjusted total income if any one of the 27 tax deductions  are claimed .
Under the existing provisions of the Income-tax Act, Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) are levied on companies and limited liability partnerships (LLPs) respectively. However, no such tax is levied on the other form of business organizations such as partnership firms, sole proprietorship, association of persons, etc. Now Budget 2012 , Finance Minister has proposed taxing an entity who by virtue of any claim of tax deductions u/s 10 A or any deduction under section 80 H to 80RR , are not in the tax bracket , shall have to pay alternate minimum tax  .

Alternate Minimums Tax or MAT on  Even Individuals?

Yes, anyone  who claims tax deductions u/s 80H to 80RR will be labile to pay alternate minimum tax @ 18.5 % of adjusted total income. This is provided by substituting section 115C of the Income Tax Act which was previously  applicable only for LLP . The heading of the said section is now “PERSONS OTHER THAN A COMPANY”

Any way out of Alternate Minimums Tax

Only saving grace is that  the provisions of AMT ( Alternate Minimum tax ) under Chapter XII-BA shall not apply to an individual or a Hindu undivided  family or an association of persons or a body of individuals (whether incorporated or not) or an artificial juridical person referred to in section 2(31)(vii) if the adjusted total income of such person does not exceed twenty lakh rupees.

So what are those 27  tax deductions ?

It has been provided that anyone who claims any of the following deduction shall be liable to pay alternate minimum tax @ 18.5 % of adjusted total income.
1.      10A  Special provision in respect of newly established undertakings in free trade zone, etc.
2.      80HH   Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas
3.      80HHA   Deduction in respect of profits and gains from newly established small-scale industrial undertakings in certain areas
4.      80HHB   Deduction in respect of profits and gains from projects outside India
5.      80HHBA  Deduction in respect of profits and gains from housing projects in certain cases
6.      80HHC  Deduction in respect of profits retained for export business
7.      80HHD  Deduction in respect of earnings in convertible foreign exchange
8.      80HHE Deduction in respect of profits from export of computer software, etc.
9.      80HHF Deduction in respect of profits and gains from export or transfer of film software, etc.
10.  80-I  Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.
11.  80-IA Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.
12.  80-IAB Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone
13.  80-IB Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings
14.  80-IC Special provisions in respect of certain undertakings or enterprises in certain special category States
15.  80-ID Deduction in respect of profits and gains from business of hotels and convention centres in specified area
16.  80-IE Special provisions in respect of certain undertakings in North-Eastern States
17.  80JJA Deduction in respect of profits and gains from business of collecting and processing of bio-degradable waste
18.  80JJAA Deduction in respect of employment of new workmen
19.  80LA Deductions in respect of certain incomes of Offshore Banking Units and International Financial Services Centre
20.  80-O Deduction in respect of royalties, etc., from certain foreign enterprises
21.  80Q Deduction in respect of profits and gains from the business of publication of books
22.  80QQADeduction in respect of professional income of authors of text books in Indian languages
23.  80QQB Deduction in respect of royalty income, etc., of authors of certain books other than text books
24.  80R Deduction in respect of remuneration from certain foreign sources in the case of professors, teachers, etc.
25.  80RR Deduction in respect of professional income from foreign sources in certain cases
26.  80RRA Deduction in respect of remuneration received for services rendered outside India
27.  80RRB Deduction in respect of royalty on patents
So be ready for paying 18.5 % of alternate minimum tax if you claim any of the aforesaid deduction !

Thursday, 29 March 2012

S. 14A & Rule 8D Disallowance Cannot Exceed Total Expenditure

Gillette Group India Pvt.Ltd. vs. ACIT (ITAT Delhi)

In AY 2008-09, the assessee earned tax-free dividend income. Its’ total expenditure as per the P&L A/c was Rs. 49 lakhs. The AO applied Rule 8D and made a disallowance u/s 14A of Rs. 2.37 crores which was reduced by the CIT (A) to Rs. 1.78 crores. Before the Tribunal, the assessee claimed that even assuming that the entire expenditure had been incurred to earn the dividend, the disallowance u/s 14A & Rule 8D could not exceed the expenditure incurred. HELD accepting the plea:

Accounting for Taxes on Income :

What is the Object of this standard?
In number of cases, the accounting income is different from taxable income that is profit as per Profit & Loss account is different compared to Income calculated in Statement of Total Income for calculating tax liability. The reasons are as follows:
1.        There are some items which are debited in profit and loss account which are not allowed as expenses as per Income Tax Act for calculating tax liability. For e.g. We have debited Rs. 60,000 as payment to contractor but we have not deducted tax on it, so the result is it will get added back in Statement of Total Income that is not allowed as expenses u/s 40(a)(ia).
2.        There are some expenses which are wholly debited in Profit and loss account but are allowed as expenses in part or amortized over some years. For e.g. Preliminary expenses are entirely debited to the Profit & Loss account but as per section 35D of Income Tax Act are spread over time for deduction that is not entirely allowed in the year in which it is incurred.

Whether essence of law for availing Sec 54F benefits is to ensure that capital gains earned by assessee are invested in residential house irrespective of unfinished construction within 3 years - YES: HC

THE issues before the Bench are - Whether the essence of law for availing Sec 54F benefits is to ensure that capital gains earned by the assessee are invested in a residential house and Whether when the construction of the building is not completed within the stipulated period of three years after the assessee earns capital gains, even then the assessee is entitled to claim the benefits Sec 54F. And the verdict goes against the Revenue.
Facts of the case
The AO came to the conclusion that the construction was not complete even after lapse of three years of time from the date of transfer of the shares on which the capital was derived. He held that the assessee had neither purchased the property within the period of two years nor constructed the property within the period of three years after the date of transfer of the asset, on which the capital gain was derived, and Section 54F was not applicable to the assessee. The CIT(A) held that the house which the assessee intended to purchase/construct was not even fit to be called a house, not to speak of residential house. It was neither purchased nor constructed in the true sense of the terms. Hence the assessee was not eligible to the benefit u/s 54F. The Tribunal was of the opinion that the authorities below were not justified in depriving the exemption legitimately claimed by the assessee u/s 54F.

On Appeal before the HC the Revenue's counsel contended that the undisputed material on record discloses that within the period of three years stipulated u/s 54F, the building was not complete in all respects. It was not in a position to occupy, and no sale deed had been executed in terms of the agreement. The assessee's Counsel submitted that no doubt the building was not complete in all respects and the sale deed was not executed within three years, but within the period of three years, the assessee had invested a sum of Rs.2,16,61,670/- in construction of the building. After three years period, sale deed was executed in his favour. He had taken possession and was living in the said premises.

Held that,
++ section 54F of the Act is a beneficial provision for promoting construction of residential houses. Therefore, the said provision has to be construed liberally for achieving the purpose for which it was incorporated in the statute. The intention of the legislature was to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of law;

++ the words used in the section are 'purchased' or 'constructed'. For such purpose, the capital gain realized should have been invested in a residential house. The condition precedent for claiming benefit under the said provision is the capital gain realized from sale of capital asset should have been parted by the assessee and invested either in purchasing a residential house or in constructing a residential house. If after making the entire payment, merely because a registered sale deed had not been executed and registered in favour of the assessee before the period stipulated, he cannot be denied the benefit of section 54F. Similarly, if he has invested the money in construction of a residential house, merely because the construction was not complete in all respects and it was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit u/s 54F;

++ the essence of the said provision is whether the assessee who received capital gains has invested in a residential house. Once it is demonstrated that the consideration received on transfer has been invested either in purchasing a residential house or in construction of a residential house even though the transactions are not complete in all respects and as required under the law, that would not disentitle the assessee from the said benefit

Whether when assessee has a complicated case and demand is not yet quantified, even then powers u/s 281B can be invoked for attaching property to safeguard Revenue's interests - NO: HC

THE issue before the HC is - Whether when the case of the assessee is complicated and demand is not yet quantified, even then powers u/s 281B can be invoked for attaching property to safeguard the Revenue's interests. And the verdict goes against Revenue.
Facts of the case

Assessment was made by the AO u/s 143(3) r.w.s 153A making additions in the returned income against which writ was filed and the High Court directed the CIT (A) to decide the appeal expeditiously and till then no coercive action be taken against the assessee. However, the appeals were disposed off as the post of the CIT (A) was lying vacant since long and the CIT (A) had not taken the charge. In the regular assessments the returned income was accepted and assessed. However in the search proceedings, the additions were made based on certain incriminating documents found during search.

Myths and misconceptions about Personal Income tax

In this article we will take a look at some common myths and misconceptions about personal tax:
Gifts received: Gifts received from specified relatives are exempt from income tax, and there is no upper limit also. Similarly, gifts of any amount and from anyone received during your marriage are totally tax-free. Similar is the case with the gifts received under a Will or by way of an inheritance, or from a registered charitable or education organisation or in contemplation of death of the donor. Also, in case an individual receives any gift from any local authority as specified under the Act, the same would not be taxable.
However, if one gets any other cash gifts from non-relatives exceeding Rs 50,000 in a year, one is required to pay tax on the excess amount exceeding Rs 50,000. Also, earlier, only cash gifts were taxed, but now, with the latest amendments in the I-T laws, even non-cash gifts will be taxed in the hands of the recipient with effect from October 1, 2009. For instance, the scope of the taxability provisions in respect of the gifts has been enlarged to include immovable property, including land or building or both. Besides, certain other gifts received w.e.f. October 1, 2009, has also been brought under the tax net. These include shares and securities, jewellery, archeological collections, drawings, paintings and sculptures as specified under the Act.
Must Read Articles on above:-

Ø   Amendments to Section 56(2) with respect to Deemed Gifts and transfer of movable & immovable property

Ø   Taxability of gift as Income from Other Sources u/s. 56 [2][vii]

Ø   Gifts of property (gifts-in-kind) above value of rs.50,000 become taxable from 1st October 2009

Deduction in respect of Payment off Interest on Housing Loan
Most taxpayers generally believe that the deduction related to interest and repayment of principal housing loan is applicable to one house only. But this is not true. On the contrary, an individual can have more than one housing loan.
In case the individual has two housing loans for two separate house properties and if he resides in one of the houses, then the other house will be considered as deemed to be let out and the deemed rental value will be considered as taxable in the hands of the individual.
Employee is eligible to claim a deduction under Section 80C of the Income-Tax Act for the repayment of the principal amount. However, this amount is limited to a total of Rs 100,000 (inclusive of the other investments). The interest paid on housing loan will be eligible for a deduction up to Rs 150,000 in case of a self-occupied property. However, in case a property is let out or deemed to be let out, then there is no such limit and the actual interest paid on the housing loan is allowed as deduction. This is contrary to the case of a self-occupied property, wherein the maximum interest on housing loan is restricted to Rs 150,000 p.a., subject to certain conditions.
Must Read Articles on above:-

Ø   FAQ on Housing Loan and Income tax benefit

Ø   Taxability of second House under the Income Tax Act,1961

Ø   All about deduction under section 80C and tax planning

Deduction U/s. 80GG for those who paying House rent but not receiving HRA
A tax exemption is available to a salaried employee if he receives house rent allowance (HRA) as part of his compensation from his employer. The exemption is calculated as per the limits prescribed under the law. However, the maximum exemption which can be availed will be equal to the amount of actual HRA received by the employee.
For an individual other than one receiving HRA (whether self employed or otherwise), deduction is available under Section 80GG of the Income Tax Act, 1961 for payment of rent on accommodation. In this case, however, the maximum deduction that can be availed is Rs 2,000 per month or 25 per cent of total income (whichever is less).
Must Read Articles on above:-

Ø   House Rent Allowance (HRA) taxability and working/calculation of taxable HRA

Ø   Get HRA rebate till you move into Your own house

Deduction in respect of Donation U/s. 80G
The belief that all donations are 100% tax-free is not true. True, deduction is available under Section 80G of the I-T Act in respect of donations made by an individual to certain funds, charitable institutions and so on. There is also no restriction on the amount of charity.
The rate of deduction, however, is either 50 or 100 per cent, depending on the choice of trust. Besides, donations must be made to registered institutions only. Also, only donations of up to 10 per cent of your total income qualify for such a deduction.
Must Read Articles on above:-

Ø   All about Deduction under Section 80G of the Income Tax Act, 1961 for donation

Deduction under Section 80C
Under Section 80C benefits, you can get an exemption of up to Rs 1 lakh on contributions to a wide range of investments. These include Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year bank fixed deposits, life insurance policies, equity-linked savings schemes (ELSS), and unit linked insurance plans (Ulips), among others.
However, you needn’t always make an investment or save money to avail tax benefits under Section 80C. You can also claim a deduction for the school or university tuition fees you pay for your children provided they are enrolled in a full-time course at any institute in India. Likewise, your home loan principal repayment also qualifies for deduction under the overall limit of Section 80C.
Also, the amount you pay as stamp duty when you buy a house and the amount you pay for the registration of the documents of the house can also be claimed as deduction under section 80C. However, this can be done only in the year of purchase of the house.

Steps to take when your Income Tax Refund stuck with department

Unfortunately in our country, many honest tax-payers have pending income tax refunds. Whether it’s the Income Tax (I-T) department’s lethargy or the growing number of tax payers, delayed refunds remain high on the list of complaints against the department. One of the challenges for any tax payer is getting a refund, because it is a lengthy and time-consuming process.
Ideally, once you file your returns, the I-T department has to verify the information and any excess tax paid is supposed to be automatically processed and refunded. A cheque is supposed to be sent to the assessee’s address in four months. The amount can also be credited to his bank account (through electronic clearing system or ECS), if he has chosen the option.
However, the ECS option, which was introduced under the Refund Banker Scheme in 2007 to implement speedy redressals of refund issues, does not cover the salaried tax-payer in Mumbai ,though it covers 14 other cities.

Wednesday, 28 March 2012

Article on Tax Audit for Individual Tax payers – for Beginners

September month is a Tax audit month. Tax audit is popularly known 44AB audit. This article is intended to give insight on 44AB & help individual Tax payers (other than professionals) who are under 44AB audit with list of documents needed for tax audit & caveats on 44AB. This audit has to be completed on or before due date i.e. 30th Sept.

Introduction & background of 44AB

A Small Tweak For Higher Advance Tax From You

From FY 2012-13, you may be paying higher advance tax and even salaried class will be liable to advance tax if the literal meaning of the proposed amendment in section 209 is read. Under the existing provisions of section 209 of the Income-tax Act, the amount of advance tax payable is computed by reducing the amount of income-tax which would be deductible or collectible during the financial year from income-tax on estimated income.
Therefore, in cases where the assessee receives or pays any amount (on which the tax was deductible or collectible) without deduction or collection of tax, it has been held by Courts that he is not liable to pay advance tax to the extent the tax is deductible or collectible from such amount. Consequentially even interest  u/s 234B & 234C does not apply. For example , this blog had brought before readers that In case of Sumit Bhattacharya v. Asstt. CIT (2008) 113 TTJ (Mumbai), Mumbai Tribunal has held that where an employer is bound to deduct tax at source, the employee would not be held liable for the interest leviable under Section 234B and 234C.This order was followed by ITAT Madras , in case of ACIT vs Jagdish Gagual Rangwani ITA No. 2214/Mds/2005.
In order to make an assessee liable for payment of advance tax in respect of income which has been received or paid without deduction or collection of tax,it is proposed to amend the aforesaid section to provide that where a person has received any income without deduction or collection of tax, he shall be liable to pay advance tax in respect of such income.
The amendment will make every one liable to pay more advance tax and consequentially more interest u/s 234B & 234C  .Even the salaried class , which was saved from the advance tax on salary may be asked for advance tax on salary and if there is scrutiny of salaried cases and A.O adds any salary on which the employer did not deduct tax at source, the A.O will now charge interest u/s 234B.
This amendment will take effect from the 1st April, 2012 and would, accordingly, apply in relation to advance tax payable for the financial year 2012-13 and subsequent financial years.

No interest disallowance For advances given to group and subsidiary companies out of commercial expediency

Assessee has further submitted that no disallowance out of interest of Rs. 31,39,988/- paid to HSBC loan was called for. This is for the reason that loans were advanced to group companies which fell under the category of subsidiary companies under the same management and were engaged in similar business of entertainment / distribution of pay channels. Advances were given to the said group companies as part of the corporate / business strategy of the assessee to expand the business operations. Assessee’s further submission is that lower authorities further failed to appreciate that since the loans and advances were advanced by the assessee to group companies engaged in the similar business out of commercial expediency, no part of interest expenditure was disallowable for advancing interest free loans. In our considered opinion, there is considerable cogency in the assessee’s submission as above. Hence, in our considered opinion, since the advances were given to the group companies and subsidiary companies out of commercial expediency, no disallowance of interest in this regard is called for.

Training expense of employee cannot be treated as capital expenditure

Assessee has not obtained any benefit of enduring nature. The royalty is payable on the basis of volume of sales year to year. In the event of termination of agreement has to discontinue uses of material provided return everything in this respect. Hence it cannot be said that any benefit of enduring nature accrued to the assessee. Furthering examining the present case on the touchstone of Jurisdictional High Court cited above, we find that the same is squarely applicable to the facts of the case. The ld. Departmental Representative did not fully dispute this finding, he only contended that the agreement also provided training to the assessee’s employees, which cannot be returned in any case. We do not find any cogency in this aspect of this agreement as training expense of employee cannot be treated as capital expenditure.

Tuesday, 27 March 2012

Lessor not entitled to depreciation in case of finance lease

 IndusInd Bank (the taxpayer) is in the business of banking and had leased out assets to another company during assessment years (AY) 1998-99 and 1999-00.
 For AY 1998-99, the taxpayer claimed depreciation of ` 25.70 crores in its return of income.
 The details of asset purchased and leased during the year is as follows:
Name of the supplier
Thermax Limited
Name of the taxpayer / lessor
IndusInd Bank Limited
Name of the lessee
Indo Gulf Fertilizers and Chemical Corporation
Description of the asset
Lease Agreement
4 September 1997
Cost of the asset
` 19.45 crores
Depreciation claimed by the taxpayer for AY 1998-99
` 9.72 crores (being 50% of the cost of the asset, since leased for less than 6 months)
Depreciation claimed by the taxpayer for AY 1999-00
` 9.72 crores
 The taxpayer claimed depreciation on the ground that it was the rightful owner of the asset purchased and the lease was in the nature of an operating lease.
 The AO concluded that it was a case of finance lease and the taxpayer was not the owner of the asset. Consequently, depreciation of ` 9.72 crores on the leased asset was disallowed by him interalia on the following grounds:
‒ Taxpayer never got the possession of the asset and it was a case of full payout;
‒ Risks and rewards incidental to ownership vested with the lessee;
‒ The risks and rewards incidental to ownership vests with the lessee and it is the lessee who pays taxes etc. in relation to the asset leased;
‒ Features of bailment are absent in a finance lease;
‒ Lessor simply holds the title of the asset as his security till his investment and interest thereon is recouped.
‒ Lessor is only the symbolic owner during the lease period and on the expiry of the lease period, such ownership ends.
 An analysis of the relevant clauses of the lease agreement entered into by the taxpayer, reveals that all the criteria of finance lease are fully satisfied. The factors indicate that the lessee is the actual or the real owner and the taxpayer is the symbolic or the so called, perceived owner.
 However, some clauses in the lease agreement indicate that the agreement is in the nature of an operating lease whereas others largely indicate it to be a finance lease On considering all the cumulative factors for and against the operating lease,in pith and substance, the agreement was a “finance lease”. The Circular issued by the Reserve Bank of India2 which is binding on the taxpayer also provides that equipment leasing activity should be treated by banks on par with loans and advances.
 In order to allow depreciation, the twin conditions of ownership and use of the asset for business purpose are to be satisfied cumulatively.
 In the facts of the present case, the lessee had chosen the type of asset, model, other special features required and had negotiated with the supplier about the delivery, installation and purchase price.
 The taxpayer‟s role was only to provide finance. The title of the taxpayer in the asset is only symbolic, which serves no purpose other than a security for the recoupment of his investment with interest in the shape of lease rentals. Such nominal ownership ceases with the end of the lease period.
 It is the lessee who is the real owner of the asset and is in possession of the property exercising control over the asset. Apart from exercising control over the asset and having full right to use, there is prior understanding with the taxpayer that after the expiry of the lease period, the asset will be transferred to it at a predetermined value. The taxpayer has absolutely no control over the property during the lease period.
 In a finance lease, it is the lessee who is the owner of the property and for all practical purposes entitled to depreciation as per law and not the lessor.
 Only the right person entitled under law, can get the benefit of depreciation. Parties cannot, in disregard to law, mutually decide as to who out of them will be allowed the depreciation. The fact that the lessee has not claimed depreciation is inconsequential when the point for determination is the admissibility of depreciation to the taxpayer.
 If a deduction has not been allowed to a right person, it does not mean that the same deduction should be allowed to a wrong person.
 The sanction letter issued by the taxpayer amply proves that it was a case of mere loan granted by it to the lessee and later on the lease agreement was formally executed to give such a loan transaction, the colour of lease.
 The law permits tax planning and not tax avoidance. A simple loan transaction was made to adorn the garb of lease to avoid the rightful tax due to the exchequer.
 If the conditions laid down in the judgment of the SC in Asea Brown Boveri are satisfied in a lease agreement, it will be a finance lease.
 In case of a finance lease, the lessee is to be treated as the owner of the asset and only the lessee can claim depreciation.
 In the present case, it was a mere advancing of loan and neither operating nor finance lease. Hence, depreciation is not admissible to the taxpayer.

Buyback of shares of a 100% subsidiary liable to capital gains tax

 The applicant, a German company, held 99.99% of the shareholding of an Indian public limited company. The remaining shares were held by six other companies as nominees of the applicant.
 The shares were held by the nominees in order to comply with the requirements of the Companies Act, 1956 with regard to the minimum number of members for a public limited company.
 The Indian company proposed a buy-back of shares under section 77A of the Companies Act which would result in transfer of shares of the Indian company from the applicant to the Indian company at a price to be determined.
Issue before the AAR
 Whether the transfer of shares of the Indian subsidiary in the course of the proposed buy-back of shares, be exempt from tax in India in the hands of the applicant, in view of the provisions of section 47(iv) of the Income Tax Act („ITA‟)?
 Without prejudice to Question 1, whether the applicant would not be liable to tax under the provisions of section 115JB of the ITA, in the absence of any business presence or permanent establishment („PE‟) in India?
 Whether the applicant is entitled to receive the amount on buy-back of shares without any deduction of tax at source?
Contentions of the applicant
 Under the provisions of section 47(iv), any transfer of a capital asset by a holding company to its subsidiary would not be taxable in India provided the parent company or its nominees hold the whole of the share capital of the subsidiary and such subsidiary is an Indian company. Therefore, the assessee was of the view that the proposed transfer of shares would get covered under the purview of section 47(iv).
 The buyback of shares would be chargeable to tax under section 45(1) and section 47(iv) of the ITA was applicable; therefore under the provisions of 47(iv), such a transfer was not taxable in India.
 Under the provisions of section 46A, the difference between the cost of acquisition and the value of consideration received by the shareholders shall be deemed to be capital gains. In the view of the applicant, such provision was clarificatory in nature.
 In the context of section 49(3) of the Companies Act, 1956, there cannot exist a subsidiary (Indian) company, whether public or private, in which the parent company could legally hold 100% of the shares.
Observations and Ruling of the AAR
 Section 47(iv) exempts a transfer of a capital asset by a company to its subsidiary if “the parent company or its nominees hold the whole of the share capital of the subsidiary company”. The word used is “or” and not “and”.
 The assessee held only 99.99% of the shareholding. The shares held by the nominees cannot be considered as held by the assessee. In other words, it cannot be inferred that the applicant was holding 100% shares in the subsidiary.
 Section 47(iv) postulates that a company must hold 100% shares in a subsidiary Indian company, either directly or through its nominees. In its wisdom, the Parliament thought that the benefit under this provision must be confined to cases where a parent company holds 100% shares in an Indian subsidiary through its nominees. This makes this provision workable.
 Section 46A, which provides that in the case of a buyback, the difference between the consideration and the cost of acquisition shall be deemed to be capital gains is a special provision and prevails over section 45.
 Section 47 overrides section 45 but not section 46A. The result is that even if the exemption in section 47(iv) is held applicable, it does not override section 46A and the applicant is subject to capital gains.
 Hence, the proposed buy-back would be taxable as capital gains under section 46A of the ITA.
 In so far as question 2 is concerned, it was not pursued further since the parties proceeded as if the provisions of section 115JB may have no application.
 On question 3, it was held that the applicant was not entitled receive the amount on buy-back of shares without deduction of tax at source.
This ruling would be of prime importance to wholly owned Indian subsidiaries contemplating a buy-back of shares or where there is a transfer of capital asset by a holding company to a subsidiary (other than a buyback). This also has significance as it explains the interplay between section 45, 47(iv), 46A of the ITA as also some of the related provisions of the Indian Companies Act, 1956.
Source: AAR in the case of RST. No 1067 of 2011

Budget 2012 – TDS – Amendments and Implications

Newly Inserted Sections
  1. Section 194LAA
  2. Section 194LC
Amendments in existing Sections
  1. Section 193
  2. Section 194E
  3. Section 194J
  4. Section 194LA
  5. Section 195
  6. Section 197A
  7. Section 234E

   Newly inserted sections

FIle your Income tax return for 2011 before March 31, 2012 in case not yet filed

Not filing a return on time does have financial implications, especially if you have a net income tax payable and / or if you have losses to be carried forward. This can really hurt especially if the losses to be carried forward are significant. Therefore, your best option is to ensure that you file the income tax return by the deadline.

The Payment of Gratuity Act - In Short

The Payment of Gratuity Act 1972:- Gratuity is a voluntary Payment made by the employer to the employee in recognition of continuous, meritorious services and sincere efforts by the employee towards the organization.It is governed under the Payment of Gratuity Act 1972.It  is  an  Act  to  provide  for  a  scheme  for  the  payment  of gratuity  to  employees  engaged  in  factories,  mines, Oilfields, plantations, ports, railway companies, and shops or other establishments.
Applicability:-As per the Gratuity Act, the scheme for the payment of gratuity is available to:

e-filing of Income Tax Return - Misconception

Individual assesees with income from salary or pension, one house property and income from other sources are required to file their tax return in ITR-1 (form Saral-II). ITR-2 will be applicable to salaried assessees who have also made some capital gains or own multiple house properties.
You can complete the process either by seeking the assistance of a chartered accountant, through the I-T department’s website or other online tax Filing portals portals  that promise to simplify the e-filing process further. If you decide to opt for the I-T department’s website, there are a few points — some dos and don’ts — that you need to bear in mind while filing your I-T returns. Here are some:
At the outset, you need to make sure you choose the right form. Salaried individuals should opt for ITR-1 (form Saral-II) or ITR-2, as applicable.

Monday, 26 March 2012

No penalty u/s 271B, If the audit report is obtained within the due date, but return is filed after the due date.

I have had a discussion lately on the topic whether penalty u/s 271B is imposable in case the audit report u/s 44AB is obtained within the due date of filing the ITR u/s 139 but the ITR is filed after such due date? I have tried to examine such situation out of my Legal conscience as follows:

The due date for filing Income Tax Return for corporate and those assessees who are required to get their accounts audited is 30th september every year. But it has been extended to 15th October this year. The Due date for furnishing Audit report u/s 44AB to the Income Tax Department is also 30th september every year which also has been extended to 15th october this year.

Earlier before the introduction of annexure less forms the audit report was required to be submitted with the department before the due date of return of Income, otherwise it attracted penal provisions u/s 271B. Penalty under section 271 B is a sum equal to half per cent of the total sales, turnover or gross receipts from business or profession as the case may be , in such financial year or one lakh rupees, whichever is less.

But after the introduction of annexure less forms i.e ITR4, ITR5, ITR6 etc., the Tax Audit Report is not required to be submitted along with the Return of Income nor it is to be submitted separately any time before or after the due date. But one should get the Tax Audit Report from his CA before the due date of submitting the Return of Income and fill the relevant columns of the Return of Income on the basis of such report.


The Tax Audit Report is required to be submitted if it is called for by the Income Tax Officer during the Assessment proceedings. This has also been explained in CBDT's circular No 3 of 2009. The relevant portion of the said circular is reprduced herebelow:

"7. Following clarifications are also issued in respect of certain issues arising from furnishing the returns in the above mentioned forms:

(i) An assessee should obtain the report of audit from an accountant under section 44AB of the Act on or before the due date of the furnishing of the return and should fill out the relevant columns of the return forms on the basis of such report. However, the report of audit should not be attached with the return or furnishes separately any time before or after the due date. The assessee should retain the report with himself. If called for by any income-tax authority during any proceeding under the Act, it shall be incumbent upon the assessee to furnish/produce the same in original. No penalty under section 271B shall be initiated or levied for not furnishing the tax audit report on or before the due date. However, if the audit report has not been obtained before the due date, provisions of section 271B shall continue to be attracted."
As per the above circular You are not in contravention of any provisions if tax audit report is obtained before due date.
There is no Penalty attracted if the Tax Audit Report is not submitted along with the Income Tax Return on or before the due date. However , if the Tax Audit report has not been obtained from the CA on or before the due date of filing return of Income, Penalty under section 271 B shall be attracted.
Although section 234A is attracted for late filing of return .There was one view expressed by someone to me that filing up the ITR ( particularly tax audit columns) is furnishing of the tax audit report and if that is not done before due date , penalty can be levied .  
 In my view  circular asks the assessee to fill up the relevant tax audit columns in the return of Income and file the return . It no where mentions that fill up the columns and file the ITR before due date. Moreover section 271B should be read with section 44AB and not with section 139.
Penalty u/s 271B is imposed on two grounds i.e for not getting the books of accounts audited within due date and for not furnishing the audit report within due date of filling of return of income. Now as per above circular furnishing of audit report has been done away with after the introduction of annexureless forms. The only thing that is required is to obtain the audit report within due date and fill the relavant audit columns of the ITR,  if it is done no penalty can be initiated u/s 271B.
Therefore in my view if you have got the audit report from your C.A. on or before the due date of furnishing the Return of Income, there is no penalty u/s 271B attracted even if you file return after the due date