Receiving HRA? Rent a house to save Income Tax

With the cascading cost of living, renting an accommodation is a major financial outflow for an individual. However, the same rented accommodation can help save some tax for salaried employees. In current salary packages, employees receive house rent allowance (HRA) to meet the cost of renting an accommodation. A salaried employee staying in a rented house can claim a tax exemption towards the HRA received, subject to the limits specified in this regard.

HRA exemption

The tax exemption is limited to the least of-

i) Actual HRA received

ii) 50% of the basic salary (if staying in Mumbai, Delhi, Kolkata, Chennai) else 40%

iii) Actual rent paid less 10% of basic salary.

For example, A lives in Mumbai and pays a rent of Rs 1,50,000 per annum. He receives a basic salary of Rs 6,00,000 per annum and an HRA of Rs 2,50,000 per annum. Here, tax exemption on rent would be calculated as follows:-

* HRA received: Rs 2,50,000

* 50% of basic salary: Rs 3,00,000

* Rent paid less 10% of basic salary: Rs 90,000

Of the above values, Rs 90,000 is the least and hence the balance Rs 1,60,000 is taxable. If A has no rent outflow, he will have to pay tax on full allowance of Rs 2,50,000. Also, tax exemption can be claimed only where HRA is part of the salary package. Depending on the amount paid as rent and HRA received, tax exemption can be claimed. If A receives HRA for the period during which he did not rent an accommodation, then no exemption can be claimed.

Documents required

The monthly rental receipts and rent agreement should be produced to the employer so that an exemption can be considered at the time of deducting tax on salary income. If one is unable to do so, he/she could claim the exemption while filing the tax return and seek a refund. The rent receipts act as proof of payment of rent and should, therefore, be preserved.

HRA and housing loan exemption

A general perception prevails that a person owning a house cannot claim an HRA benefit. However, this can be dispelled in a situation where one owns a house but, due to some genuine reason (like proximity from office to home), has to live in a rented accommodation. In this case he/she can claim a tax deduction for both HRA and housing loan. Of course, this is not a general rule and facts have to be examined for each case.

HRA under DTC

There are no tax-exempt HRA limits in the upcoming DTC. Therefore, those renting an accommodation may no longer be able to avail of this exemption. Considering that this exemption is a respite for the salaried class paying rent, we can only hope that this benefit is not done away with in the final draft of DTC

HighLights of Rail Budget 2012.

Presenting a populist budget, Railways Minister Dinesh Trivedi on Wednesday announced marginal hike in passenger fares ranging from 2 paisa per kilometre to 30 paisa per kilometre in various categories of trains despite noting that Railways was passing through a "difficult phase".

He also announced introduction of 75 express trains, 21 passenger trains and extension of 39 trains besides increase in the frequency of 23 trains.

Platform tickets have also been raised from Rs 3 to Rs 5. In his first Railway Budget, Trivedi announced increase in passenger fares by 2 paise per km for suburban and ordinary Second Class, 3 paise per km for Mail/Express Second Class and 5 per paise per km for Sleeper Class, 10 paise per km for AC Chair Car, AC-3 Tier and First Class.

AC-2 Tier will cost more by 15 paise per km while AC-1 will be dearer by 30 paise per km.

In his over 100-minute speech, Trivedi said these were aimed at rationalising the fares to cause "minimal impact" on the common man and "to keep the burden within tolerance limits in general".

He said he had been counselled to go for steep increase in passenger fares as there had been no increase in last eight years but he desisted from doing so "guided by the overriding concern for aam aadmi (common man)".

The proposed adjustments, he said, do not even cover fully the impact of increase in fuel prices during the last eight years.

"I am keeping the valuable passengers of Indian Railways insulated from the burden of increasing staff cost," he said.

S. 147 Reopening, even within 4 years, on basis of retrospective amendment to s. 80-IB(10) invalid

Ganesh Housing Corporation Ltd vs. DCIT (Gujarat High Court)

For AY 2006-07, the assessee claimed s. 80-IB(10) deduction of Rs. 11.38 crores which was accepted by the AO in s. 143(3) assessment. Subsequently, within 4 years from the end of the AY, the AO reopened the assessment u/s 148 on the ground that the assessee had not complied with s. 80-IB(10) including that after the insertion of the Explanation to s. 80-IB(10) by the FA (No. 2) Act 2009 w.r.e.f. 1.4.2000, a contractor was not eligible for deduction u/s 80-IB(10). The assessee challenged the s.148 notice by a Writ Petition. HELD allowing the Petition:

S. 263 Revision: CIT must give finding on merits & cannot simply remand to AO

ITO vs. DG Housing Projects Ltd (Delhi High Court)

The assessee purchased property for Rs.69.63 lacs in 1997, yielding a rent of Rs.2.05 lacs per month, and sold it for Rs.70 lacs in 2003. The assessee claimed indexation loss which was accepted by the AO. The CIT passed an order u/s 263 holding that a high-yielding asset could not be disposed off at such a low value and that the assessment order was erroneous & prejudicial to the interests of the revenue as the AO had not examined the aspect of full value of consideration receivable by the assessee. The Tribunal reversed the CIT on the ground that he had not come to the conclusion that the actual receipt of consideration was more than what was declared in the return. On appeal by the department to the High Court, HELD dismissing the appeal:

A to Z of Limited Liability Partnership

This article would through light on procedural aspect of LLP right from the incorporation to winding up.

A.        INTRODUCTION

The concept of Limited Liability Partnership (LLP) in India is viewed as an alternative corporate business vehicle that provides the benefits of limited liability and also allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The revised Bill received the assent of the President of India on 7, January 2009.

LLP is a body corporate formed and incorporated under the LLP Act, which is a distinct legal entity separate from that of its partners. Introducing LLPs, as a new business structure would fill the gap between business firms such as sole proprietorship and partnership, which are generally unregulated and Limited Liability Companies, which are governed by the Companies Act, 1956. It will also provide an aid to the growth of service sector in India. Further, the provisions of the Indian Partnership Act, 1932 shall not apply to a limited liability partnership.

B.        SALIENT FEATURES

Karnataka High Court rules that Liaison Office engaged in certain commercial activities would constitute a Permanent Establishment in India under the India-Korea tax treaty

       Recently, the Karnataka High Court (High Court) in the case of Jebon Corporation India1 (the taxpayer) held that a Liaison Office (LO) engaged in commercial activities like identifying buyers, negotiating/ agreeing pricing and procuring purchase orders would constitute a Permanent Establishment (PE) of the Head Office (HO) under the India-Korea tax treaty (tax treaty).

Further, the High Court held that merely because the buyers placed orders and made payments directly to the HO would not be sufficient to hold that the work done by the LO was limited to liaisoning.

Whether negative figure of Net Worth is to be ignored for working out capital gains in a slump sale case - ITAT SB answer goes in favour of Revenue

 THE issues before the Special Bench are - Whether the negative figure of net worth has to be ignored for working out the capital gains in case of a slump sale and whether the liabilities being reflected in the negative net worth of the assessee has to be added to the sale consideration for determining the capital gains on account of slump sale. And the verdict goes in favour of the Revenue.

Facts of the case

Transaction within four corners of law can be treated as “sham” & “colourable device” by looking at “human probabilities”

Killick Nixon Ltd vs. DCIT (Bombay High Court)

In AY 2000-01 the assessee borrowed Rs. 48 crores from the G. K. Rathi group and used that to buy shares in three 100% subsidiary companies. Though the fair value of the shares was Rs. 24, the assessee paid Rs. 150 for each share. The amount received by the said subsidiary companies was transferred back to another company of the G.K. Rathi group. In AY 2001-02, the said shares were sold for Rs. 5 each and a short-term capital loss was claimed and this was set-off against other long-term capital gains. The AO, CIT (A) & Tribunal (order attached) rejected the transaction of investment into, and sale of, shares as a sham. On appeal by the assessee, HELD dismissing the appeal:

Knowhow write-off: Comparing Sec. 32 and Sec.35AB

The definition for Knowhow in the IT Act 1961 is “any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto.” Currently the act speaks of the amortization of Knowhow through two different provisions namely Sec.32 (depreciation of intangible assets) and Sec.35 AB (Amortization of Knowhow). Though neither of them is a non obstante provision, they are mutually exclusive benefits (i.e. both are not deductible simultaneously).

Charges towards reimbursement of expenses cannot be included in income

SUMMARY OF THE CASE LAWS

The question as to whether a reimbursement for expenses would form part of the taxable income is not res integra insofar as this Court is concerned. In CIT v. Siemens Aktiongesellschaft [2009] 177 Taxman 81 (Bom.), a Division Bench of this Court held that sharing of expenses of the research utilised by the subsidiaries as well as the head office organization would not be income which would be assessable to tax.

CASE LAWS DETAILSI

DECIDED BY: HIGH COURT OF BOMBAY, IN THE CASE OF: DIT (Int’l Taxation)  v. Krupp Udhe GmbH, APPEAL NO: ITA No. 2626 of 2009, DECIDED ON March 9, 2010

RELEVANT PARAGRAPH

2. The appeal by the Revenue against the order of the Income Tax Appellate Tribunal for assessment year 1998 ­1999 raises the following three questions of law :

i)Whether on the facts and in the circumstances of the case and in law ITAT was justified in holding that charges towards reimbursement of expenses cannot be included in income?

ii)Whether when income is taxed on gross basis, non inclusion of charges towards reimbursement of expenses would be in violation of law as it would tantamount to taxation of income partly on net basis ?

iii)Whether on the facts and in the circumstances of the case and in law the ITAT was justified in approving the deletion of levy of interest under Section 234B of the Act ?

3. The learned Counsel appearing on behalf of the Revenue has stated that the first and second question relate to the same issue namely whether reimbursement of expenses would be liable to be included in the income and hence they are taken up together.

4. The assessee had entered into a contract with M/s.EID Parry (India) Limited (EID Parry) for the supply of a compressor for an Ammonia Storage Tank. The compressor was found to be in a damaged condition. The assessee deputed two technicians from Germany to the establishment of EID Parry in India. EID Parry remitted an amount of DM202,433,37 comprising of (i) Inspection fees in the amount of DM 170,701.37 for technicians; and (ii) Reimbursement of expenses for air tickets for travel between Germany and India in the amount of DM 11,732. The Commissioner of Income Tax, on the question of reimbursement of expenses, followed the decision of the Andhra Pradesh High Court in the case of Elkem Technology Vs. DCIT 1 and of the Kerala High Court in the case of Cochin Refineries Limited V/s. CIT and held that the decision of the Assessing Officer to treat the reimbursement of expenses as part of taxable income was correct.

5 In appeal, the Tribunal dealt with the issue as regards the payment of fees received by the assessee and of the reimbursement of expenses separately. Inso far as the receipt of fees was concerned, the Tribunal noted that the assessee had deputed its technicians for inspection of the equipment. Inspection could not be done unless the personnel deputed had technical knowledge in respect of the equipment to be inspected. Consequently the fees received by the assessee were held to amount to fees for technical services. In so far as the issue of reimbursement is concerned, the Tribunal held that though there was a conflict between the judgment of the Kerala High Court, which was relied upon by the Commissioner of Income Tax (Appeals) and the judgment of the Calcutta High Court in the case of CIT V/s. Dunlop Rubber Company Limited, it would follow a view which was favourable to the assessee, consistent with the judgment in Vegetable Products Limited.

6.The question as to whether a reimbursement for expenses would form part of the taxable income is not res ­integra in so far as this Court is concerned. In Commissioner of Income Tax V/s . Siemens Aktiongesellschaft, a Division Bench of this Court held that it was in agreement with the view taken by the Calcutta High Court in Dunlop Rubber Company Limited (supra) and by the Delhi High Court in Commissioner of Income Tax V/s. Industrial Engineering Products (Private) Limited. The observations of this court in Siemens (supra) are as follows :

“33.That leaves us with the last contention as to whether the amounts by way of reimbursement are liable to tax. To answer that issue, we may gainfully refer to the judgment of a Division Bench of the Delhi High Court in CIT V. Industrial Engineering Products(P) Ltd., (supra). The learned Division Bench of the Delhi High Court was pleased to hold that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt and in the present case the Tribunal had found that the assessee received no sums in excess of expenses incurred. A similar issue had also come up for consideration before the Division Bench of the Calcutta High Court in CIT v. Dunlop Rubber Co. Limited (supra). The learned Division Bench was answering the following question :

Whether, on the facts and in the circumstances of the case, the amounts received by the assessee (English company ) from M/s. Dunlop Rubber Co. (India) Ltd., (Indian company) as per agreement dt. 29 th Jan., 1957 constituted income assessable to tax ?

On considering the issue the learned Bench noted that the Tribunal was of the view that what was recouped by the English company was part of the expenses incurred by it. The learned Court upheld the said finding. The learned Bench was pleased to hold that sharing of expenses of the research utilised by the subsidiaries as welL as the head office organisation would not be income which would be assessable to tax. A similar view was taken in CIT v. Stewarts & Lloyds of India Ltd., (supra).

Consequently , in view of the judgment in Siemens , the first and second issue would not raise any substantial question of law since they are covered against the Revenue.

Income tax - Whether when assessee fails to prove that any agricultural activity was carried on plot of land, located in proximity of residential area, sale of such land gives rise to capital gains - YES: ITAT

THE issue before the Tribunal is - Whether when assessee fails to prove that any agricultural activity was carried on the plot of land, located in proximity of the residential area, the sale of such land gives rise to capital gain. And the verdict goes against the assessee.

Facts of the case

A) Assessee sold an agricultural land and claimed that since it was not a capital asset, the profit on the transfer of the

Documentation requirements under the Indian Transfer Pricing law

In India a new transfer pricing regime has been introduced this year by the Finance Act 2001. Earlier a limited provision (Section 92) existed in the Income tax Act, which provided for making adjustment to the income of a resident taxpayer from a transaction with a non resident if the Assessing Officer was of the view that the income from such a transaction was understated in the hands of the resident due to the close connection between the two. No other rules or obligations about maintenance of documents about such transaction existed under the old Section 92 which remained in the statute for a number of years though it was almost never invoked in practice. The Finance Act 2001 has substituted a new section 92 and inserted sections 92A to 92F and certain other provisions in the Income tax Act which provide the statutory backbone of the new transfer pricing law. The procedural rules under these sections have been inserted in the Income tax Rules, by Notification S.O 808 (E) dated 21 August, 2001. This article touches very briefly on the main substantive provisions and then provides a summary of the requirements relating to documentation under the Indian transfer pricing regulation.
The new transfer pricing regime requires compliance with the principle of arm's length price in cases i

Section 43B – Certain Deductions only on Actual Payments

In computation of income under the head Profits and gains of business or profes­sion (PGBP), some of the expenses are allowed under Income Tax Act 1961 and can be claimed by the assessee only in the year in which the payment is actually made.

As per Section 43B

Notwithstanding anything contained in any other provision of this Act*, a deduction Sudame otherwise allowable under this Act in respect of—

a)     any sum payable by the assessee by way of tax, duty, cess or fee, (by whatever name called, under any law for the time being in force);

b)     any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees;

c)     any sum payable as bonus or commission to employee for services rendered;

d)     any sum payable by the assessee as interest on any loan or borrowing from any public finan­cial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing;

e)     any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advanc­es;

f)       any sum payable by the assessee as an employer in lieu of any leave at the credit of his em­ployee.

shall be allowed as deduction only in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay such sum was incurred by the as­sessee.

* ^?Notwithstanding anything contained in any other provisions of this act‘ denotes that section 43B overrides all the sections in Income Tax Act, 1961.

Exception- When deductible on accrual basis

The exception is applicable if the following three conditions are satisfied:

1. Assessee keeps books of accounts on mercantile basis
2. Payment in respect of aforesaid expenses is actually made on or before the due date of submission of return of income under sec 139(1)
3. The evidence of such payment is submitted along with return of income.

Overview Analysis of clauses

Clause (a)

It is of significance to remember that Sec 43B is applicable in case of tax, duty, cess or fee only when such items are paid under statute to pay under a particular law. This has been the most debatable issue and it is advised to refer most of the case laws which can solve this debate.

Clause (b)

Previously, Employer‘s contribution to various funds was allowed as deduction if the same was paid on or before the due date for making such contribution to the fund. Now these condi­tions have been deleted by Finance Act 2003 and such contributions are allowed as deduc­tions if same has been deposited within the due date of filing return under sec 139(1).

It is worth noting that S.43B is applicable only to Employer‘s contribution and is not applicable to Employees‘ contribution.

Then what about Employees‘  contribution?

Sec. 2(24)(x) states as under:

Income includes:

^-any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees‘ State Insurance Act, or any other fund for the welfare of such employees^.

Sec..36(1)(va):

deduction shall be allowed for any sum received by the assessee from any of his employ­ees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee‘s account in the relevant fund or funds on or before the due date.

Note: Here Due Date means date by which assessee is required as an employer, to credit an employees‘ contribution to the employees‘ account in relevant fund.

Explanation: The reason why the employees‘ contribution is treated as income is because employer‘s con­tribution is debited to profit and loss account while employees‘ contribution is not debited to profit and loss account but is treated as liabilities and provisions. So, in simple words, for in come tax act purpose, employees‘ contribution is treated as business income u/s 2(24)(x) and deduction is made from such income u/s 36(1)(va) if the contribution is paid within the due date of such contribution.

Clause (c)

It is worth noting that Sec 43B is applicable when bonus or commission is payable to employ­ees only when some services are rendered by the employees. This means that there must be an establishment of Employer-Employee relationship between the employer and the employee. This item is referred in section 36(1)(ii). In other words if commission is paid to an agent, Sec 43B is not applicable as here there is an Agent-Principal relationship.

Clause (d) and Clause (e)

Previously certain courts held that if assessee is not able to pay interest on loans from institu­tions mentioned above, and as part of restructuring such institutions converts this interest in­to loan (such concept is known as Funded Interest Term Loan [FITL]), then it shall be deemed that such interest has been actually paid for the purpose of section 43B and deduction shall be allowed in the year in which such conversion is affected.

To nullify such practices, Section 43B was amended (vide Circular No 7/2006 dated 07-07- 2006 ) by Finance Act 2006 inserting therein two clarificatory Explanations namely; Explana­tion 3C and Explanation 3D the contents in simple words are as follow:

^-If any sum payable by an assessee as interest on any loan is converted by the financial insti­tution into a fresh loan, the interest so converted and not ^?actually paid‘, shall not be deemed as ^?actually payment‘

The converted interest (FITL) in wake of its conversion into a loan, will be eligible for de­duction in the computation of income of the previous year in which the converted interest is ^?actually paid‘.

A Day’s delay in TDS remittance – Interest upto 3%!!!

Yes, TDS remittance delayed by a day may cost the deductor up to 3%. So next time, as a deductor  if you are not serious about the due date for TDS remittance, just think about this.

Due date for TDS remittance

Ø  Where the amount is credited or paid during the month of March – Due date 30^th April.

Ø  Other cases – within 7 days from the end of the month in which the deduction is made.

What if the above deadline is missed?

According to Section 201(1A) which is amended by Finance Act, 2010(effective from 01-07-2010):

“Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest,—

               (i)   at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and

             (ii)   at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid,

and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section (3) of section 200”

So, as per the above section, if the tax was deducted, but was not remitted within the due date, interest will be applicable : from the date of deduction to the date of actual payment of TDS.

Relevant Points

1.       Interest @ 1.5% will be applicable from the date of deduction till such amount is actually paid and for every month or part thereof. While calculating the period for interest, the period prescribed for making the payment (i.e period up to the due date) cannot be excluded.

2.       This interest liability is absolute and should be deposited through self assessment; and the AO or any other Authority cannot waive off such liability for any reason.

3.       While calculating the interest, the defaulted TDS amount shall be rounded off to the nearest multiple of 100, any fraction thereof may be ignored.

How 3% interest for a delay of 1 day?

Now, consider an example. Tax was deducted on certain payment made on 05-07-2010. As mentioned above, the due date for payment of this amount to the credit of Central Govt. is 07-08-2010, but the deductor makes the payment on 08-08-2010. Now, interest will be applicable not after the default, but from the date of deduction, which is 05-07-2010 and while calculating the period for interest, the period prescribed for making the payment to the Govt. cannot be excluded. So, applicable interest will be :

From 05-07-2010 to 04-08-2010 – 1 Month

From 05-08-2010 to 08-08-2010 – part of the month, to be considered as full month.

Thus, interest for 2 months @ 1.5% per month will be 3% and a delay of 1 day in remittance of TDS has resulted in payment of 3% interest by the deductor!!!

Variable pay and employee reimbursements- Delhi High Court Teaser

The salary packages are flexible and often designed keeping in account interest of individual employees or section of employees and variable component assume a sizeable sum. The variable component assumes various forms of reimbursements and payments. in a sequel to yesterday’s report viz a viz Delhi High Court ruling in CIT (TDS) v. American Express Bank Ltd. in ITA No. 75/2003 dated 21.12.2011 under heading ‘’employee reimbursements’’ it may be advisable to have a built in softer mechanism either in the employee contract or some kind of employer liability insurance cover (if its exists or even if not it should be fought for) which would provide a safeguard for possible recovery of any sum from the employee as arrears of TDS or otherwise from the insurance company for any liability arising in future upon the employer or company by invoke of s.201 provisions for short deduction viz a viz reimbursements/variable pay.


      The Court in their order has gone straight in writing that in case the employees of the assessee have paid the taxes as per their individual returns/assessments, then no amount towards tax would be payable to that extent by the assessee. In the rarest of the rare cases an employee would go against the estimate made by the employer in which case the liability would only fall on the employer. In this case the year of default is as old as financial year 1992-93 and it would be now impossible for the employer and even almost difficult for the AO to gather employee record of taxes paid in which case the liability will remain that of the employer only.

Delay by Department in filing appeal cannot be mechanically condoned

Chief Post Master General vs. Living Media India Ltd (Supreme Court)

The Government filed an appeal to challenge the judgement of the High Court. There was a delay of 427 days in filing the appeal which was caused due to the normal bureaucratic procedure. The department cited a number of judgements and argued that in matters relating to the Government, a lenient view had to be taken as there was no want of bona fides. HELD dismissing the appeal:

Judge alleged to have “outsourced” judgements can be dismissed without opportunity of hearing or enquiry

The appellant was appointed sub-ordinate Judge in the Garhwa Civil Court. The Inspecting Judge inspected the records of the Civil Court and submitted a confidential report to the Chief Justice of the Jharkhand High Court that the appellant did not prepare judgments on his own but got it prepared by some body else before delivering the judgments. The Chief Justice referred the matter to the Full Court. The Full Court resolved that the appellant be recommended for removal from service without any enquiry as it was felt that it was not practicable in the interest of the institution to hold an inquiry since it may lead to the question of validity of several judgments rendered by him. Pursuant to that resolution, the Governor exercised power under proviso (b) to Article 311(2) of the Constitution and removed the appellant from service. This was unsuccessfully challenged before the High Court. In appeal before the Supreme Court, it was argued that an enquiry for the purpose of removal of a judicial officer could not be dispensed with. It was also claimed that there was no evidence to show that the appellant was guilty of any misconduct as alleged. HELD dismissing the appeal:

Highlights of Report of Standing Committee on Finance on DTC Bill, 2010

* Raise I-T exemption limit to Rs 3 lakh from Rs 1.8 lakh
* Levy 10 pc tax on income between Rs 3-10 lakh
* 20 pc on income between Rs 10-20 lakh,30 pc above Rs 20 lakh
* Senior citizen benefits from 60 years instead of 65 years
* Raise tax rate on life insurance cos to 15 pc from 12.5 pc
* Retain corporate tax rate at 30 pc
* Remove Securities Transaction Tax (STT)
* Hike tax savings schemes limit to Rs 3.2 lakh,from Rs 1.8 L
* Raise wealth tax limit to Rs 5 crore from Rs 30 lakh

Highlights of Report of Standing Committee on Finance on Direct Taxes Code Bill, 2010 presented to Lok SabhaSpeaker Meira Kumar  on 9-3-2012

Personal Income-Tax exemption limit (i.e. tax slab attracting nil rate or full exemption from income tax limit) be increased from Rs. 2 Lakhs proposed in the DTC Bill to Rs. 3 Lakhs

Income-tax Rates

•  Recommended revised tax slabs for personal income-tax

Income Slabs (Rs. in Lakhs)	Tax Rates
0-3	Nil
3-10	10%
10-20	20%
Beyond 20	30%

•  Exemption-limit be statutorily linked to changes in Consumer Price Index so that exemption limit will be automatically and periodically adjusted for inflation facilitating tax planning.

Wealth tax Rates

With regard to the wealth tax, the committee suggested that it should be levied only if the value of specified asset exceeds Rs 5 crore as against Rs 30 lakh currently and Rs 1 crore suggested by the proposed DTC Bill.As regards the rate, it said, the wealth tax should be charged at 0.5 per cent on assets between Rs 5-20 crore, 0.7 per cent on assets between Rs 20-50 crore and 1 per cent above Rs 50 crore. The wealth tax rate now is 1 per cent.

Net Wealth (Rs. in crores)	Wealth Tax Rates
0-5	Nil
5-20	0.5%
20-50	0.75%
50 and above	1%

•  Onus of proving tax avoidance for GAAR (General Anti Avoidance Rules) provisions should rest with Department, not with taxpayer

•  Orders of CIT invoking GAAR should be reviewed not by Dispute Resolution Panel (DRP), as proposed by DTC Bill as it is a purely departmental body, but by an independent body

•  Provisions for enforcing accountability of Assessing Officers recommended – Unreasonable tax demands raised and adjudicated, if finally quashed at higher levels, should be adversely reflected in the career dossier of the concerned officials. Proper disciplinary action should be taken against such officials responsible

•  Regime for Tax consolidation of group entities at the option of taxpayer recommended (As tax consolidation regime seeks to eliminate multiple levels of taxation of income generated within a group, reduce compliance costs and lower the effect of tax incidence on the competitiveness of corporate groups)

•  Extensive rule-making powers in the Code criticized some 200 clauses in Code expressly leave scope for rule-making  substantive matters conferring discretionary powers to tax authorities and matters impinging on vital taxpayer-interest recommended to be brought in the Code itself.

•  To reduce plethora of litigation, setting up special courts comprising of experts to dispose of cases in a “fast track” manner has been recommended.

•  The period of stay for NRIs to retain their non-resident status recommended to be restored to the existing 182 days as in the 1961 Act instead of 60 days as proposed in DTC Bill, subject to two conditions, namely (i) each person claiming NRI status should simultaneously indicate the tax jurisdiction in which he is resident and, (ii) that all cases of fraud should be severely dealt with and nobody is allowed to become a global non-resident.

•  Proposal in Clause 5(1)(d) read with Clause 5(4)(g) and Clause 5(6) of Code to tax income of a non-resident, arising from indirect transfer of capital asset, situated in India – As regards this, exemption to transfer of small shareholdings and transfer of listed shares outside India recommended to avoid hardship to the non-resident shareholder.

•  Clause 5(2) of DTC Bill be modified in order to clearly provide that import freight received by non-resident engaged in shipping business outside India is not deemed to accrue in India.

•  Clause 27 of the DTC Bill be amended to cover unrealized rent, which is the case under the prevailing Income Tax Act.

•  Quantum of standard deduction permissible in computing Income from House Property be raised to a more reasonable percentage.

•  Clause 31 “Business when treated distinct and separate” be deleted as this Clause would increase administrative hassles for the assessee with no appreciable benefit to the revenue authorities. Since business losses are fungible, this provision would not serve any useful purpose. The deeming fiction of treating business as distinct and separate based on the capability of maintaining separate accounts would fuel litigation as it is a very subjective criteria. Further, profit linked incentives are proposed to be phased out under the Code, so such separate computation of business profits would not have much of a relevance.

•  Clause 33(1) of the DTC Bill be modified so that only revenue receipts are taxed as business income and capital receipts are not so taxed.

•  The Tax-exempt sum assured to premium ratio in case of life insurance policies be increased from 5 times the annual premium (as in existing Income-Tax Act, 1961) to 10 times as against the rather drastic increase of 20 times proposed in DTC Bill, 2011. The increase in ratio should apply only on policies sourced post-implementation of the Code and not to old life policies purchased before effective date of DTC Bill.

•  Pay-backs of sum assured under money back policies and accrued bonuses should be treated as “sum assured” payable on the happening of certain event of life and should not be taxable under the Code.

•  With regard to tax savings scheme, the panel has proposed to raise the total tax exemptions limit under various scheme to Rs 3.2 lakh from existing Rs 1.8 lakh and Rs 2 lakh suggested by the DTC.

•  Limit for deduction to individuals and HUFs under clauses 70-72 of the DTC Bill ( for tuition fees, life insurance premium and health insurance premium) recommended to be increased from Rs.50,000 proposed in clause 73 of DTC Bill to Rs.1,00,000. Further, additional deduction on account of health insurance premia paid for dependent parents to the tune of Rs. 20,000 may be separately allowed with a view to promoting social security for senior citizens. This may also include dependent grand-parents.

•  Since higher education, particularly professional education has become extraordinarily expensive for ordinary citizens of the country, similar additional deduction to the tune of Rs. 50,000 recommended for this purpose over and above the deductions suggested above in clauses 70-73.

•  Limit of deduction Rs.1,00,000 proposed in clause 69 of the Bill, which is same as present section 80C, for contributions to approved funds recommended to be increased to Rs.1,50,000.

•  Exemption for interest on housing loan for self-occupied house property mentioned in clause 74 of the DTC Bill be modified so as to include in its ambit loan taken from all types of employers apart from financial institutions.

•  Qualifying condition of loan taken for higher education from a financial institution alone as specified in Clause 75(1) may be relaxed so as to facilitate borrowing from other institutions or self-help community groups as well.

•  Proposed monetary limit of Rs. 2,000 per month for rent paid in clause 80 of the Bill which is same as present section 80GG be increased to Rs. 5,000 per month. The limit be periodically revised in sync with prevailing market conditions.

•  Existing exemption from taxation of perquisite in the form of premium paid or reimbursed by an employer to keep in force an insurance policy on the health of family members of an employee proposed to be omitted by DTC Bill recommended to be retained to avoid hardships to employees.

•  ESOPs as a perquisite be taxed only at the time of sale/alienation instead of at the time of vesting as proposed by DTC Bill

S. 263 Revision: Conflict Amongst Judgements Resolved

CIT vs. Jawahar Bhattacharjee (Gauhati High Court Full Bench)

The assessee bought shares on 21.4.2000 for Rs.19,536 and sold them on 2.5.2001 for Rs.6,36,640. A gain of more than 30 times was made in one year. The AO accepted the LTCG and allowed s. 54F relief. The CIT passed an order u/s 263 in which he held the order to be ‘erroneous and prejudicial to the interest of the revenue’ on the ground that the AO had not made any enquiry to determine the genuineness of the transaction though the circumstances warranted the same. On appeal of the assessee, the Tribunal relied on B & A Plantation 290 ITR 395 (Gau) and held that as the order of the AO was not without jurisdiction, it could not be held to be ‘erroneous’ for purposes of s. 263. On appeal by the department, the issue was referred by the Full Bench as to the supposed conflict between various judgements of the Court on the subject:

For s. 50B “Slump Sale”, liabilities reflected in “negative net worth” cannot be treated as “consideration” but the resultant “negative net worth” has to be added to the “consideration”

DCIT vs. Summit Securities Ltd (ITAT Mumbai Special Bench)

 

Pursuant to a scheme of arrangement u/s 391 & 394 of the Companies Act, the assessee transferred its “Power Transmission Business” to KEC International Ltd for a total consideration of Rs. 143 crores. The assessee claimed this transaction to be a “slump sale” u/s 50B. The “net worth of the undertaking” was computed at a negative figure of Rs.157.19 crores, being the excess of liabilities over assets. The assessee treated the net worth as Nil and offered the entire sale consideration of Rs. 143 crore as LTCG. The AO held that as the purchaser had taken over liabilities of Rs. 157.19 crores, the same had to be added to the consideration of Rs. 143 crores to arrive at the “full value of consideration” of Rs. 300 crores. The CIT (A), relying on Zuari Industries 105 ITD 569 (Mum) & Paper Base Co 19 SOT 163 (Del), held that the “net worth’ in s. 50B could not be a negative figure and if it was so because of the liabilities exceeding the assets, the net worth had to taken at Nil. The Special Bench had to consider two issues (i) whether the excess of liabilities over assets could be treated as “consideration” in the hands of the assessee & (ii) whether the resultant “negative net worth” could be treated as Nil or had to be added to the “consideration”? HELD by the Special Bench:

Differences in Working Capital materially affects ALP and requires adjustment for better comparability

Executive Summary
The Pune bench of the Income Tax Appellate Tribunal (“the Tribunal”) recently pronounced its ruling in case of Demag Cranes & Components (India) Private Limited (“the taxpayer”), wherein the Tribunal held the following:
 Taxpayer is entitled to adjustments with regard to working capital adjustment as the working capital differences are likely to affect the arm’s length price of the operating margin of the comparables.
 TP adjustments should be made on Proportionate Basis (i.e. on proportionate sales relating to the impugned international transaction) and not on the entire sales.
 Benefit of +/- 5 percent as per erstwhile proviso to section 92C (2) of the Act available to the taxpayer.
Facts

S. 54F does not require construction to be complete within specified period

CIT vs. Sambandam Udaykumar (Karnataka High Court)

The assessee sold shares for Rs. 4.18 crores and, within 12 months, invested Rs. 2.16 crores thereof to construct a house property and claimed exemption u/s 54F. However, as even after the expiry of 3 years of the date of transfer, the construction of the house was not complete and sale deed not executed, the AO & CIT (A) denied relief u/s 54F though the Tribunal granted it. On appeal by the department to the High Court, HELD dismissing the appeal:

S. 54EC investment time limit begins from date of receipt of consideration

Chanchal Kumar Sircar vs. ITO (ITAT Kolkota)

The assessee entered into an agreement and handed over possession to the buyer which constituted a “transfer”. The consideration received from the buyer was invested by the assessee in s. 54EC Bonds beyond 6 months from the date of transfer though within 6 months from the date of receipt of the consideration. The Tribunal had to consider whether in view of the language of s. 54EC that the consideration had to be invested in the specified bonds within 6 months of the date of transfer, the relief could be allowed. HELD by the Tribunal:

CA issuing wrong s. 80HHC certificate is guilty of “gross professional misconduct”

Council of ICAI vs. Ajay Kumar Gupta (Delhi High Court)

The CIT, Delhi, filed a complaint before the ICAI that the Respondent-CA had issued an audit report in Form No. 10CCAC certifying that the assessee had exports and that it was eligible for deduction u/s 80HHC of Rs. 18.32 lakhs. However, during the assessment, the claim was found to be false and the assessee admitted that. The assessee’s accounts showed that sale proceeds had not been realized within the prescribed period of 6 months. After enquiry, the ICAI held the CA to be guilty of professional misconduct under clause (7) of Part- I of the Second Schedule read with s. 22 & 21 of the Chartered Accountants Act, 1949. It recommended that the CA’s name be removed from the Register of Members for a period of three years and filed a reference seeking confirmation of that. In his defence, the CA argued that he had practiced for 21 years without a single incident of professional misconduct or negligence and that he could not put up his defence properly because he had suffered paralytic attack and the assessee had taken away the file and that a lenient view should be taken. HELD by the High Court:

No s. 195 TDS Liability On Payer If Payee Not Assessed

Crompton Creaves Ltd vs. DCIT (ITAT Mumbai)

The assessee made a public issue of Global Depository Receipts (GDR) for which it engaged international lead managers like Jardine Fleming, Merrill Lynch etc and paid management and underwriting commission of Rs. 7.68 crores without deducting TDS. The AO & CIT (A) held that the said commission constituted “fees for technical services” and that the assessee ought to have deducted TDS u/s 195. The assessee was held to be in default u/s 201. Before the Tribunal, the assessee argued that as no action has been taken by the department against the payees and the time for taking such action had expired, no order u/s 195 & 201 could be passed. HELD by the Tribunal:

Brief on formation of NGO, Charitable Trust, Society, Non profit section 25 Company

The NGO can be formed as following

1. Trust
2. Society, and

3. Non profit Company

TRUST

The procedure for registration of Trust is as follows:

A public charitable trust is usually floated when there is property involved, especially in terms of land and building.

Legislation : Different states in India have different Trusts Acts in force, which govern the trusts in the state; in the absence of a Trusts Act in any particular state or territory the general principles of the Indian Trusts Act 1882 are applied.

IT services comprising of WAN, Lotus Notes and application support provided by a French Company to its Indian subsidiary company qualify as Fees for Technical Services (FTS) under India France tax treaty

Facts
 AREVA T&D India Ltd. („the Applicant‟) is a subsidiary of AREVA T&D SAS, France (Areva France) and both are engaged in design, engineering, manufacturing and supply of electric equipment that help in transmission and distribution of power, commissioning and servicing of transmission and distribution system on turnkey basis.
 Areva France proposed to enter into an Information Technology Sharing Services Agreement (IT Agreement) with the applicant in order to provide support services in the area of information technology,

HAPPY HOLI

Saade rang ko galti se aap naa kora samjho,

Isi mey samaaye indradhanushi saaton rang,

Jo dikhe aapko zindagi saadagi bhari kisi ki,

To aap yun samjho satrangi hai duniya usiki.

Wish you &  your family  Happy Holi.

 

Treatment of pre-incorporation expenses (whether dead loss or capitalisation with fixed assets)

Section 3 of the Income tax Act, 1961 define the first previous year being the period beginning with the date of setting up of the business or profession. Setting up is broadly narrated as the date on which the assessee is ready to commence business. Further in the context of a company assessee section 35D provide for allowance of certain expenses incurred before actual commencement of business. Sub-section (2) of section 35 D list out such categories of expenses as under:

“ (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely:--

(a) expenditure in connection with-
(i) preparation of feasibility report;
(ii) preparation of project report;
(iii) conducting market survey or any other survey necessary for the business of the assessee;
(iv) engineering services relating to the business of the assessee:
Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board;

(b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee;

(c) where the assessee is a company, also expenditure-
(i) by way of legal charges for drafting, the Memorandum and Articles of Association of the company;
(ii) on printing of the Memorandum and Articles of Association;
(iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956);
(iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus;

(d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.”

In the context of allowance of preliminary expenses the Madras High Court in Commissioner of Income-tax v. Ennar Steel and Alloy (P) Ltd. (2003) 261ITR347 held that the preliminary expenses in respect of which benefit can be claimed under section 35D have been spelt out in that section. The power reserved to include other items of expenditure has not been exercised by the authority who had been conferred with the power. The Courts cannot proceed to exercise that power and include within section 35D items which have not been included therein by Parliament. The deductions allowable under the Act have necessarily to be allowed in accordance with the provisions of the Act as it exists. The Act must be applied as one finds it and it was not open to the Courts to allow amortisation for expenditure for which the Act does not make provision for amortisation.

Further in regard to the first category of expenses viz. Feasibility, project, market survey or engineering expenses it is provided therein that each of such activity must be carried out by the assessee himself or by any other concern approved in this regard by the Board. Thus in a situation the company is not so incorporated and promoters are to incur any such expenses these are necessarily to be pre approved by the Board for their allowance at a later date in the hands of the new entity. In other words it is desirable to have a pre approval from the board for the purpose of getting an allowance of deduction for Feasibility, project, market survey or engineering expenses where these were to be incurred by any other concern. Further in the second category there is a provision for allowance of legal costs in relation to drafting of agreement etc. necessitated for the purpose of the setting up of business of the assessee. In the third and final category there is also a provision for allowance of company incorporation expenses. Thus sub-section (2) alongside sub-section (3) in plain words limits as well as restricts allowance for deduction of post incorporation expenses and in case of company assessee even incorporation expenses. Thus ordinarily speaking there is no provision for allowance of any pre-incorporation expenses under the Act unless these are pre approved viz a viz only those expenses that are finding entry in sub-section (2) list.

The Madras High Court in Cairn Energy (India) Ltd. v. Joint Commissioner of Income-tax (2008)297ITR59 upheld the order of the assessing authority who disallowed the claim of Rs. 2,73,93,866 relatable to pre-incorporation expenses incurred by the holding company. In this case the assessing authority took the view that no deduction had been provided for either in section 35D or in any other provisions of the Act on the claim of pre-effective cost.

As a safeguard in order to seek benefit of deduction of pre-incorporation expenses it is advisable to get an approval of the Board which would serve as some kind of advance ruling in the allowance of deduction at assessment stage. In the worst case scenario where no approval is obtained a petition u/s 119 (2) (b) can be moved to the Board to seek allowance of pre-incorporation expenses. However it must be ensured that the kind of expenditure incurred must be one falling in one of the categories mentioned in sub-section (2) of section 35D. Any other expenditure must be claimed either u/s 37 or as part of plant and machinery capitalisation depending on the nature of each expenditure.

S. 54EC limit of Rs. 50L applies to the transaction & not financial year

ACIT vs. Raj Kumar Jain & Sons (HUF) (ITAT Jaipur)

 

In AY 2008-08, the assessee sold property for Rs. 2.47 crores and disclosed capital gain of Rs. 1.14 crores. To overcome the restriction in the Proviso to s. 54EC that the investment made in the specified asset “during any financial year” should not exceed Rs. 50 lakhs, the assessee, within the prescribed period of 6 months, invested Rs. 50 lakhs on 31.03.2008 (FY 2007-08) & 10.06.2008 (FY 2008-09) and claimed a deduction of Rs. 1 crore. The AO rejected the claim though the CIT (A) allowed it. On appeal by the department, HELD reversing the CIT (A):

S. 40(a)(ia) TDS amendment to give extended time for payment is retrospective

CIT vs. M/s Virgin Creations (Calcutta High Court)

The assessee deducted tax at source from paid charges between the period 1.4.2005 & 28.4.2006 though it paid the TDS in July and August 2006. The TDS was deposited after the end of the FY though before the due date of filing of the return of income. The AO invoked s. 40(a)(ia) and held that as the TDS had not been paid on or before the last day of the previous year, the deduction was not admissible. The Tribunal allowed the assessee’s claim. On appeal by the department, the High Court had to consider whether the amendment to s. 40(a)(ia) by the FA 2010 w.e.f. 1.4.2010 to provide that the TDS has to be paid on or before the due date for filing the ROI was prospective or retrospective. HELD by the High Court dismissing the department’s appeal:

Issues and Procedures for Assessment of Search Cases

1. Notice for submission of return of six assessment years –

Section 153A provides the procedure for completion of assessment where a search is initiated under section 132 or books of account, or other documents or any asset are requisitioned under section 132A after May 31, 2003.

In such cases, the Assessing Officer shall issue notice to such person requiring him to furnish, within such period as may be specified in the notice, return of income in respect of six assessment years immediately preceding the assessment year relevant to the previous year in which the search was conducted under section 132 or requisition was made under section 132A.

Tax Planning- Save tax through your family

Income TaxSimplest way of saving tax is by investing through parents, parent in laws, wife and children. If you invest in the right instrument, the rate of return may be higher as well. Here is how we can save tax through our family members.

Through Parents

Its a fact that Your own parents as well as your own in-laws can become legal tools of tax planning for you and your family. If you want to achieve this dictum then all you are need to do is just to give away a portion of your funds, either as a gift or a loan, to your parents as well as your parents in law so that in years to follow your income tax burden becomes lighter as the income on funds transferred by you to them which would bring in income would be taxed in their hands.