1. Interest on Interest on Refund of taxes should be allowed
Hon'ble Delhi High Court in India Trade Promotion Organization v. CIT [2013] 38 taxmann.com 233 has held that the expression 'any amount' used in section 244A in contrast to expression 'refund' used in section 244 is much wider and broader in scope. The word 'any amount' would include within its scope and ambit the interest element which has accrued and is payable on the date of refund. Similar view was taken by the Delhi High Court earlier in CIT v. Goodyear India Ltd. [2001] 249 ITR 527 and by Hon'ble Apex Court also in CIT v. HEG Ltd [2010] 324 ITR 331 (SC). Thus, as per existing interpretation of section 244A the assessee was entitled to interest on interest portion that accrued to him on the date of issue of refund if such payment of interest was delayed by the department for no reason attributable to the taxpayer.
However, a similar issue came in SLP before Hon'ble Apex Court in CIT v. Gujarat Flurochemical. The taxpayer had relied on the decision of Hon'ble Apex Court in Sandvik Asia Ltd v. CIT and others [2006] 280 ITR 643 (SC), wherein it was held that if there was a delay in paying interest on the amount of refund due to assessee and refund was paid without interest then taxpayer was entitled for interest on such delayed payment of interest. The division bench in CIT v. Gujarat Flurochemical doubted the decision in Sandvik Asia Ltd v. CIT (Supra) and referred the matterto the larger bench wherein the Apex Court (larger bench) has taken a view that assessee can claim only the interest provided for in the statute but no other interest on such statutory interest. This was pronounced in CIT v. Gujarat Flurochemical [2014] 42 taxmann.com 1 (SC).
The view taken by Hon'ble Delhi High Court in India Trade Promotion Organization v. CIT (Supra) lays down the correct law and, therefore, to avoid controversy and litigation, it is suggested that an Explanation be inserted in section 244A to define the scope and ambit of the expression "any amount" used in Section 244A(1) so as to include interest on interest which is not paid along with the refund if the reason for delay in payment of interest on refund is not attributable to the assessee.Read More
2. Increase in Maximum Exemption Limit
Since high inflation makes it difficult for a large number of small taxpayers to meet the two ends, an increase in the maximum exemption limits will provide a huge relief to such individual taxpayers. It is expected that the Finance Bill 2014 may reintroduce the different slab rates for female taxpayers. Further, it is recommended that the maximum exemption limit should be raised to Rs. 3,00,000 for an Individual taxpayers.
3. Deductions for ESOP compensation expenses
ESOP gives employees an option or right to purchase or subscribe at a future date to the securities offered by the company at a predetermined price. The predetermined price is less than the market price and is commonly known as 'discount'.
Recently the special bench of Bangalore ITAT1 has adjudicated the issue of deductions for discount on issue of ESOP in computing the income under the head "Profits and gains of business or profession"?
ITAT held that the discount given on issue of ESOPs can't be either considered as short receipt of securities premium or as contingent in nature. The discount under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Therefore, it is nothing but the employees cost incurred by the company and, hence, should be allowed as deduction under Section 37(1).
Thus, it is recommended that the upcoming Finance Bill, 2014 should clarify the above position and should allow deductions for discount given on issues of ESOPs.Read More
4. Cost of improvement of 'Trademark' may be taken to be nil
In the case of sale of self-developed trademark 'cost of acquisition' is assigned a nil value by section 55(2)(a)(ii). However, Section 55(1)(b) has not provided anything on the cost of any improvement of such trademarks while assigning nil cost of any improvement to other intangible asset such as goodwill, right to carry on business or right to manufacture, etc.
Whether all the three ingredients used in computation of capital gains, viz., (a) expenditure incurred wholly and exclusively in connection with transfer, (b) the cost of acquisition and (c) cost of any improvement thereto should have equal controlling effect on the computation machinery? If yes, failure of any one ingredient will lead to failure of the computation machinery and, consequently, the capital gains shall not be chargeable to tax.
Recently, the Pune Tribunal in the case of Institute for Micronutrient Technology v. Dy. CIT [2014] 43 taxmann.com 426, held that when asset under transfer was self-generated trademark and same was not capable of improvement at an ascertainable cost in terms of money, in absence of any possibility to determine 'cost of any improvement', computation of capital gains failed.
This inference may not be sustainable, in law, because mere absence of 'cost of any improvement' is not sufficient to draw such inference as use of word 'any' in the expression 'cost of any improvement', takes care of a situation where there may not be any improvement in the trade mark and, therefore, there may not be any cost of improvement. Therefore, absence of cost of acquisition may halt the machinery provision but absence of 'cost of improvement' cannot halt the machinery provision of computation of capital gains. Hence, Finance Bill, 2014 may insert the term 'trademark' in Section 55(1)(b)(1) to align its treatment with other intangible assets, i.e., goodwill, etc. Consequently, the cost of any improvement of trademark may be deemed to be nil.
5. Sec. 54/54F benefits for investment in single house only
Recently, ITAT2 allowed exemptions to the assessee in respect of all five flats received by her in lieu of land she had parted with. It held that 'residential house' cannot be construed as a singular and, moreover, it is not necessary that all residential units should have a single door number allotted to it.
The exemptions under Sections 54 and 54F were introduced to encourage people to invest in new residential accommodations. These exemptions were not introduced to incentivize the taxpayers purchasing the residential accommodations for investment purposes rather than for their own self-accommodation.
However, these two provisions, in their current structure, allow benefits to taxpayers for buying houses as a portfolio of their investments or for roll over of investments. Hence, a clarification may be introduced to restrict the benefits for investment in single house or to actuals users.Read More
6. Taxability of advertisement income earned by digital businesses
Unlike the conventional mode of doing business, the digital businesses are intangible and operate in one country with entire base in another country and servers are placed in a third country. Therefore, the tax authorities are facing challenges while taxing revenues earned by digital businesses.
In digital business, the parent company places the server in a remote low tax jurisdiction and operates the website in as many countries where it can find mart for its products. Since the presence of websites cannot be physically established in a particular country, the income generated by virtue of sale of goods or sale of advertisements does not fall within the four walls of tax laws. Various judicial precedents substantiate the situation where no royalty, FTS or permanent establishment could be established for income earned by the digital business through websites operating in India.
In February, 2013 the OECD published a report on BEPS which has also identified digital economy as challenging, both from direct and indirect tax aspects and has considered setting-up a task force for addressing concerns posed by digital economy as one of its action steps.
It is high time that the government should introduce a provision in the statute for taxing 'online advertisement' revenue earned by foreign companies through operating websites in India.Read More
7. The term 'Association of Person' should be defined
In this context the dispute generally arises when two or more foreign entities form a consortium to execute a turnkey contract in India. There have been disagreements over the taxability of an entity, being a member of the consortium, who is engaged in offshore supplies only as a part of the consolidated contract.
When contract is awarded to the consortium as a whole and not to independent members of the consortium individually, the taxability of one entity, as distinct from the consortium, becomes a matter of clash.
The core to the issue is whether the consortium can be constituted as an "Association of Persons" within the meaning of 'person' as defined under section 2(31).
Unless there is sufficient joint participation for a common enterprise, it would not be appropriate to treat two or more persons as an Association of Persons for the purposes of assessing them as a separate taxable entities3.
Hence, it is recommended to clarify the said issue through insertion of a definition of the term "Association of Persons".Read More
8. Tax on Joint Development Agreements
In Joint Development Agreements (JDA), the registered owner assigns the development rights of the property to the developers and also hands over the vacant possession of the land to the developers. In consideration the registered owner receives his share in the developed property in agreed ratio and some monetary considerations.
Following issues emanate from the transactions entered into through a JDA:
(a) If tax is levied in the year of entering into the JDA, it may amount to tax on notional gains as the constructed area/flat has not been received by the members at that time.
(b) There are practical difficulties in claiming deductions under section 54EC or section 54 since the capital gains which was not received by the owner could not have been invested as required under these provisions.
(c) Fair market value of the constructed property, which is deemed as full value of consideration, could not be computed on the date of the agreement. Actual market value of the property, to be constructed in future, will depend on its quality of construction, market conditions and other factors, and determination of its market value on the date of agreement would present the wrong picture.
(d) The sum received by the registered owner on the date of the agreement would be in the nature of advance payment whose accrual is contingent on certain future events, i.e., approval from statutory authorities for construction, completion of contract as per agreed terms and conditions, etc.
It is recommended that the Income-tax Act should include provisions on the taxability of capital gains in JDAs, the mechanism for claiming exemptions under Section 54, 54F, 54EC, etc.Read More
9. Depreciation on Goodwill
The Supreme Court in the case of CIT v. Smifs Securities Ltd. [2012] 24 taxmann.com 222 (SC) held that goodwill arising on amalgamation of companies would be eligible for depreciation as it is covered under Explanation 3(b) to Section 32(1) under the expression 'any other business or commercial rights of a similar nature'.
It is recommended that the definition of intangible asset [as provided in Explanation 3(b) to Section 32(1)] should include purchased goodwill, i.e., goodwill arising on amalgamation of companies, for the purpose of depreciation on intangible assets.Read More
10. MAT: Preparation of books of account as per Schedule III of Companies Act, 2013
Schedule VI of Companies Act, 1956 provides for general instructions for preparation of 'Balance Sheet' and 'Profit and Loss Account', which have been referred to in the provisions of Section 115JB for computation of Minimum Alternative Tax. With substitution of said Companies Act, 1956 with the Companies Act, 2013, it is most likely that Section 115JB shall make reference to Schedule III of the 2013 Act.
Schedule III of the 2013 Act is same as Revised Schedule VI of the 1956 Act, except that Schedule III contains general instructions for the preparations of consolidated financial statements of company and its subsidiaries as preparation of consolidated accounts has been made mandatory by the 2013 Act.
11. Electronic Maintenance of books of account
Section 128 of the Companies Act, 2013 allows companies to keep books of account and other relevant papers in electronic format. In contrast, Section 2(12A) of the Income-tax Act, 1961 requires maintenance of books of account in written format or print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device.
Thus, in current scenario, when Government of India is taking holistic approach for e-Governance plans, it is recommended that the Income-tax Act should permit electronic maintenance of books of account in line with Companies Act, 2013.
12. No interest or penalty in case of retrospective amendments
Tax Administration Reform Commission ('TARC'), which was constituted to recommend reforms exclusively in tax administration, issued its first report with various recommendations including its stand on 'Retrospective amendments'. It has provided in clear words that many of the retrospective amendments have been introduced to counter interpretation in favour of the taxpayer upheld earlier by the judiciary and one of them is retrospective amendment to tax the 'indirect transfer'.
Since retrospective amendments cannot be avoided completely, it is recommended that the immunity should be provided from penalty or interest if additional tax is demanded in view of such retrospective amendments.
However, in cases of retrospective amendments which are genuinely clarificatory in nature, an exception may be provided for charging interest or penalty.Read More
13. Deduction for CSR Expenditure
With effect from 01.04.2014 expenditure on Corporate Social Responsibility (CSR) has become mandatory for Indian and Foreign Companies working in India. The law relating to CSR in India is provided in Section 135 of the Companies Act, 2013, read with Schedule VII of the Act and The Companies (Corporate Social Responsibility Policy) Rules, 2014.
Expenditures of various nature have been allowed as permissible under CSR. For instance, the following types of CSR expenditures are permissible:
■ Direct expenditure on charitable activities
■ Direct expenditure on charitable activities in local area
■ Direct expenditure on capacity building of employees and implementing NPOs
■ Grant to Trust or Society
■ Transfer to other corporates under pooling of expenditure
■ Donation to Govt. recognised funds where 100% tax relief is available.
The new Companies Act, 2013 requires at least 2% of average Net Profit to be spent on Corporate Social Responsibility ('CSR'). It is expected that after enactment of the Companies Act, 2013 there will be a corresponding amendment to section 37(1) of the Income-tax Act allowing all CSR expenditure and donation.Read More
14. Tax treatment of Real Estate Investment Trusts (REITs)
REITs function mainly on the same principle as mutual funds and encourage investments purely in real estate (RE) assets, which otherwise would not be exposed to investment by individuals or small investors. Major income generating sources of REITs are rentals from RE assets ranging from warehouses, commercial buildings, malls, hospitals, etc.
FICCI has recommendedthe following for taxability of REITs and Unit holders:
(a) A onetime capital gains exemption under section 47 of the Act should be provided to a sponsor of a Real Estate Investment Trust who transfers assets directly or indirectly to the REIT in exchange for units and such exemption should be provided without prescribing any lock-in period for holding the REIT units;
(b) The units of listed REITs should be treated at par with listed shares and be granted exemption on long-term capital gains;
(c) REITs may become highly inefficient if distribution of profits is subject to Dividend Distribution Tax (DDT). It is recommended that DDT should be done away with at the level of REIT/SPV and the entire chain of distribution of income should be exempted from income-tax.Read More
15. Provisions should be introduced to monitor functioning of an Electoral Trust
Electoral Trust is a Section 25 Company or a non-profit company created in India for orderly receipt of the voluntary contributions from any person and for distributing the same to the respective political parties, registered under Section 29A of the Representation of People Act, 1951. The sole objective of the Electoral Trust is to distribute the contributions received by it to the political party concerned.
Detailed rules have been laid down in Rule 17CA of Income-tax Rules, 1962 for functioning of an electoral trust. However, the measures contained in the Act are not adequate to monitor such compliance. The Act does not contain any provision requiring an electoral trust to apply for and obtain registration under the Act or for cancelling registration of an electoral trust or any provision requiring it to submit its Return of Income.Read More
16. Advance payment of medical and leave travel allowance should not be taxable
The Income-tax Act, 1961 allows exemption in respect of medical allowance and Leave Travel Allowance ("LTA") under section 17(2) and Section 10(5) of the Act respectively. The basic condition for allowing such claim is that the employee has to submit proof for incurring such expenditure.
As per the industry practice, a large number of employers average out the allowable medical expenditure under the Act and pay it on monthly basis as an allowance, being part of regular salary payments. The employees consequently submit the medical expenditure receipts against the medical allowance received as and when incurred during the year.
The same practice is followed for LTA where instead of monthly payments, amount is disbursed at the time of employee undertaking such journey against which declarations and journey proofs are submitted later on before the end of relevant financial year.
At the year end, tax is deducted and deposited with the Central government under section 192 of the Act on the disbursed allowances against which no proofs are submitted. Thus, no tax is deducted at the time of disbursement of medical allowance and LTA to employees, rather a year-end tax is deducted. This practice does not result in loss of revenue at all, as eventually the due taxes are deducted from the employee's salary and are paid to the credit of Government.
However, the judiciaries have taken divergent views on deduction of tax from advance payment of medical allowance and leave travel allowance. Calcutta High Court4 has taken a strict view that the expenditure should actually have been incurred in the period in which TDS is to be deducted and, thus, on any such advance payments TDS liability would be attracted. In a recent order Bangalore ITAT5 has taken a lenient view that no tax is required to be deducted on advance payments if medical allowance is paid before incurrence of expenditure and tax is deducted on non-production of bills at year end.
If tax is deducted from the advance payment of such allowances, the monthly budget of an employee may be impacted badly. The employee would suffer double jeopardy as once tax is deducted from his salary, which is otherwise not deductible when computed on his annual salary, and secondly he would struggle to claim its refund.
So, it is recommended that any advance payment of allowances should be subjected to TDS in the last month or in the last quarter of the financial year. If bills are not submitted by the employee at year end the employer should be under an obligation to deduct all requisite taxes from employee's salary.
17. Contribution to defined benefit scheme should not be taxable
In the case of Royal Bank of Scotland, In re [2014] 45 taxmann.com 283 (AAR - New Delhi), the Authority for Advance Ruling has dealt with the issue of taxability of lump-sum contribution by employer to group superannuation fund in the hands of employees and deduction of tax therefrom under Section 192.
On appraisal of facts, the Authority observed that in group superannuation funds the applicant does not get a vested right at the time of contribution to the fund by the employer. The amount standing to the credit of the funds like the pension and fund account, social security of medical or health insurance would continue to remain invested till the assessee becomes entitled to receive it.
Following the judgment of the Hon'ble Supreme Court in CIT v. L. W. Russel [1964] 53 ITR 91 (SC), the Authority ruled that when the amount does not result in a direct benefit to the employee who does not enjoy it, but assures him a future benefit, in the event of contingency, the payment made by the employer does not vest in the employee.
Accordingly, such contribution is not a perquisite as per clause (vii) of Sec. 17(2) of the Act and shall not be included in the salary of the employee concerned. In case of failure to deduct tax on such contribution, the employer cannot be deemed to be assessee-in-default under Sec. 201(1) of the Act.
Recommendations:
The lump sum contribution by the employer to the defined benefit scheme is not employee specific, as no part of it can be attributable to a specific employee, and no employee has any vested right in such contribution. It is, therefore, not taxable in the hands of any specific employee. Accordingly, for non-deduction of tax from such contribution assessee cannot be treated as an assessee-in-default.
Therefore, it is recommended that the perquisite rules should spell out specifically that a lump sum contribution which is not specific to any employee should not be deemed as perquisite in the hands of any specific employee and, therefore, should not be chargeable under the head salaries.
18. Section 40(a)(ia) – Clarification on 'Payable' v. 'Paid'
Section 40(a)(ia) seems to be the one of the provisions which has been amended by many Finance Acts. Of late a new controversy has arisen on its applicability when tax is not deducted from the expenses incurred and paid during the year. In other words, the judiciaries have been asked to decide whether the disallowance for TDS default should be restricted to only those expenses which are outstanding as on the last day of the financial year?
Views of the Judiciaries and the clarifications issued by the CBDT subsequently are presented hereunder:
1. In Merilyn Shipping & Transports v. Addl. CIT [2012] 20 taxmann.com 244 (Visakhapatnam) it was held by Special Bench of ITAT that the provisions of section 40(a)(ia) of the Act would apply only to the amount which remained payable at the end of the relevant financial year and the provisions could not be invoked to disallow the amount which had actually been paid during the previous year without deduction of tax at source.
2. The Hon'ble Allahabad High Court in CIT v. Vector Shipping Service (P.) Ltd. [2013] 38 taxmann.com 77 (Allahabad) had affirmed the decision of the Special Bench in Merilyn Shipping (supra) and held that if the amount has been paid during the year than there would be no disallowance under section 40(a)(ia) of the Act. [The Supreme Court has dismissed the SLP filed by the Revenue against such judgment.]
3. However, the Hon'ble Calcutta High Court and Hon'ble Gujarat High Court in the case of CIT v. Crescent Exports Syndicate[2013] 33 taxmann.com 250 (Calcutta) and CIT v. Sikandarkhan N Tunvar [2013] 33 taxmann.com 133 (Gujarat), respectively, have held that section 40(a)(ia) of the Act would cover not only the amounts which are payable at the end of the previous year but also those expenditures which are payable at any time during the year.
4. The CBDT presented its views through Circular No. 10/DV/2013, dated 16-12-2013 that the provision of section 40(a)(ia) of the Act would cover not only the amounts which are payable as on 31st March of the previous year but also those amounts which are payable at any time during the year. The statutory provisions are amply clear and in the context of section 40(a)(ia) of the Act the term "payable" would include "amounts which are paid during the previous year".
It is expected that an Explanation may be inserted to Section 40(a)(ia) that the term 'payable' shall include paid as defined in Section 43(2) and notwithstanding that it is payable or paid at any time during the year.
19. Tax on 'Indirect Transfer' of asset
Finance Act, 2012 inserted Explanation 5 to Section 9(1)(i) with retrospective effect that a capital asset being any share/interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives its value substantially from assets located in India.
The absence of any definition of the term 'substantially' will lead to significant subjectivity, uncertainty and litigation. It should be clarified that an offshore entity should be regarded as deriving its value substantially from India if at least 50 per cent or more of the fair market value of all the assets owned directly or indirectly by such offshore entity are located in India.
Since the tax on 'indirect transfers' is a new levy, it should have prospective application. Even the Shome Committee has recommended that the provisions relating to taxation of indirect transfer introduced by the Finance Act, 2012 are not clarificatory in nature and would widen the tax base and, consequently, should only have prospective application.Read More
20. Domestic Transfer Pricing: No adjustments should be made in tax neutral cases
Finance Act 2012 introduced the provisions of Transfer Pricing for Specified Domestic Transactions. Such provisions were introduced after Supreme Courts' suggestions in the case of CIT v. GlaxoSmithkline Asia [2010] 195 Taxman 35 (SC).
A transaction between two domestic related parties will ordinarily be revenue neutral, except in following circumstances:
(a) If one of the related entities is loss-making and the another one is profit-making;
(b) If both the entities are taxable at different rates on account of some incentives or exemptions or difference in status;
(c) The transactions between related entities have different tax treatments. One party considers the receipts as capital gains and the other party claims the payments as revenue expenditure.
Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2008] 219 CTR 562 has held that where revenue was not in a position to point out how assessee evaded payment of tax by alleged payment of higher commission to its sister concern, since sister concern was also paying tax at higher rate, disallowance of alleged excess commission paid to sister concern was not justified.
Therefore, no adjustment should be made in case two resident associated enterprises are taxed at same rate, have sufficient taxable profits, any transactions between them are subject to same incidence of tax and results in tax neutrality. It is recommended that Finance Bill, 2014 should provide relief to the resident associated enterprises subjected to Domestic Transfer Pricing in tax neutral cases.
21. Adjustment of TDS in case of cancellations of insurance policy during 'Free Look' period
IRDA allows policyholders to cancel the policy during the free look period (currently set to 15 days from the date of receiving the policy document). Policy holder is allowed to cancel only life and health insurances during such free look period.
In case of cancellations of insurance policy during free look period, the commission income accrued/paid to agents is reversed or recovered. Finance Bill, 2014 should provide a mechanism to adjust the taxes already deducted under section 194D and paid to the Central Government.
Following mechanism may be devised to adjust the TDS on commission which is no longer income of insurance agent:
(a) Refund may be granted of tax deducted from commission paid on insurance policies which are subsequently cancelled during free look period
(b) Carry forward the TDS in ITR form to adjust it against tax liability of subsequent year*.
* This mechanism has been introduced in New ITR Forms for Assessment Year 2014-15. In new ITR forms, taxpayer can disclose the unclaimed TDS brought forward and TDS being claimed this year from amount brought forward.
22. Unsold flats possessed by Real Estate Developer should not be taxed
A real estate developer generally owns and holds unsold flats for the purpose of its business. He does not enter into the business of letting out properties on hire. Yet, in a number of cases, he has been asked to pay tax on the notional Annual Letting Value (ALV) of the unsold flats as income taxable under the head "Income from House Property".
To impose tax on the ALV of such unsold flats/properties causes unnecessary hardship in his case. Finance Bill, 2014 should grant relief to Real Estate Developers wherein certain specified period of time should be allowed for selling out the flat after the same is ready. Read More
23. RTGS, NEFT, EFT and ECS should be equivalent to Account-Payee Cheques
These days banking system offers a variety of electronic payment systems such as RTGS, NEFT, EFT, ECS, etc. However, only the term 'Account-payee cheque' finds places in various provisions of Income-tax Act, i.e., Sections 40A(3), 269SS and 269T. Finance Bill 2014 should recognize RTG, NEFT, etc., as valid mode of payment to end any disagreement between taxpayers and Assessing Officer.
24. Additional Depreciation on assets put to use for less than 180 days
Clause (iia) to section 32(1) was inserted to provide incentives in form of additional sum of depreciation for fresh investment in industrial sector. The second proviso to section 32(1)(ii) restricts the allowances only to 50 per cent where the assets have been acquired and put to use for a period of less than 180 days in the year of acquisition. This restriction is only on the basis of period of use. There is no restriction that balance of one-time incentive in the form of additional sum of depreciation shall not be available in the subsequent year.
In section 32(1)(iia), the expression used is 'shall be allowed'. Thus, the assessee earns the benefit as soon as he purchases the new plant and machinery in full but it is restricted to 50 per cent in that particular year on account of period of usages. Such restrictions cannot divest the statutory right. Law does not prohibit that balance 50 per cent will not be allowed in succeeding year. The said earned incentive must be made available in the subsequent year. In aggregate, the overall deduction of depreciation under section 32 shall definitely not exceed the total cost of plant and machinery6.
A clarification in section 32(1)(iia) of the Act is recommended that new plant and machinery acquired in a year and put to use for less than 180 days would be eligible for balance additional depreciation at 10% in the subsequent year.
25. Meaning of the term 'Month' and computation thereof
In our routine life we roughly consider a 'month' as a period of 30 days. However, in taxation if a 'month' is considered as a standard period of 30 days, it may result in serious disagreements among taxpayers and I-T department over the entitlement to relief or for computation of interest chargeable under various provisions. Even a single day's delay or miscalculation can disrupt the whole tax planning of a taxpayer.
There have been disputes between revenue and judiciaries over the method of computation of the term 'month' - whether it has to be reckoned according to British calendar in terms of section 3(35) of the General Clauses Act, 1897 or has to be reckoned as period of 30 days or a period from a specified date in a month to the date numerically corresponding date in the following month.
The Mumbai Tribunal7 went deep into the meaning of the term 'month'. It held that the term 'month' is to be understood as month reckoned according to the British calendar.
How to compute the period?
Patna High Court8 has provided a mechanism for computation of months involved. It provided that when a month starts from any arbitrary date, it will expire with the day in the succeeding month immediately preceding the day corresponding to the date upon which the period starts.
It is recommended that Income-tax Act should define the meaning of the term 'Month' and should prescribe the methodology for its computation.
26. Distribution of income to life insurance companies by securitization trusts should be exempt from tax
Given the peculiar nature of life insurance business, the profits of life insurance companies are taxable at the rate of 12.5% as per section 115B of the Income Tax Act. Insurance law permits life insurance companies to invest in the securities issued by the securitization trust. A levy of additional tax at the rate of 30% on income distributed by securitization trust to life insurance companies can have the impact of reducing the return in their hands on such investments and, consequently, reducing the returns that can be distributed to their policyholders. It is recommended that the income distributed by securitization trusts to life insurance companies should also be provided a special tax treatment whereby income so distributed should be subjected to additional tax at the rate of 12.5% and not at 30%.
The income of a fund set-up by the life insurance company under a pension scheme, which is approved by IRDA, is exempt from tax under section 10(23AAB) of the Act. Further, it is requested that it should be clarified that no additional tax would be payable in respect of income distributed by the securitisation trust on investments made from IRDA approved pension fund set-up by a life insurance company.
27. Section 206AA should not be invoked if total income is below taxable limit
Section 139A of the Act makes it mandatory for every person to apply for allotment of a PAN if his total income exceeds the maximum exemption limit. However, the provisions of TDS require the deductor to deduct taxes at 20% or even at higher rate if PAN of the recipient is not available. This disparity among provisions of Section 139A and TDS causes undue hardship to the small investors earning income below taxable limit.
In view of this, it is recommended that Section 206AA should be made inapplicable to persons whose income is less than the taxable limit. This proposition is affirmed by the Karnataka High Court in case of Smt. A. KowsalyaBai v. Union of India[2012] 22 taxmann.com 157. Read More
28. Application for Advance Ruling should be allowed even after filing of return of income
The Authority for Advance Ruling does not allow the application if the question raised in it is already pending before any income-tax authority as provided in proviso (1) to section 245R(2). Now, the moot question arises when the case would be deemed to be pending before an income-tax authority: (a) on filing of return of income; or (b) on issue of notice under Section 143(2) for scrutiny assessment?
Supreme Court9 affirmed the ratio laid down in the Mitsubishi Corporation, Japan, In re [2013] 40 taxmann.com 335 (AAR - New Delhi) that question raised in application for Advance Ruling will be considered as pending for adjudication before Income-tax Authorities, only when issues are shown in return and notice under Section 143(2) is issued. Thus, application for Advance Ruling is to be admitted which is filed after filing of return but prior to issue of notice under section 143(2).
Accordingly, it is expected that a clarification may be inserted in Section 245R to affirm the above.
29. Restatements of fraudulent books of account
Companies Act, 1956 did not have any provisions for restatement of accounts when necessitated. However, with enactment of Companies Act, 2013 which has substituted the Companies Act, 1956 it contains provisions for such situations under Section 130. It allows re-opening and re-statement of the financial statement of a company under an order passed by the Court or NCLT.
If accounts have been prepared in a fraudulent manner, the new provision permits restatement of financial statements, even after their adoption in AGM, to present true and fair view.
Thus, it is recommended that new provisions should be inserted in Income-tax Act to tackle the situation arising on restatement of the financial statements.
30. Retirement of a partner without distribution of asset
Where retiring partner took cash towards value of his share in partnership firm and there was no distribution of capital assets among partners, there was no transfer of capital asset and, therefore, no profits or gains chargeable to tax under section 45(4) in hands of assessee-firm as held by Full Bench of Karnataka ITAT10.
This Full Bench decision has been followed by the Hyderabad Bench of ITAT11 to hold that amount received by a partner on dissolution of firm or on his retirement is an amount paid towards his share capital and no element of transfer of interest in partnership asset by retiring partner to continuing partner can be said to be involved.
It is recommended that Section 45(4) should specify clearly whether any capital gain would arise on retirement of a partner from the partnership firm where retiring partner took cash towards value of his share in partnership firm which does not result in distribution of any asset. Further, if capital gain arises on such retirement of partner, whether partnership firm or the partner shall be liable to pay on such capital gains?Read More
31. Computation of six months for investment under Section 54EC
Section 54EC allows exemption for long-term capital gain if it is invested in specified assets within a period of six months from the date of transfer.
There have been disputes in this context over the calculation of the term 'month' - whether it has to be reckoned according to British calendar in terms of section 3(35) of the General Clauses Act, 1897 or it shall be reckoned as period of 30 days or a period from a specified date in a month to the date numerically corresponding date in the following month?
The Special Bench of ITAT12 has held that time-limit of 'six months' in Sec. 54EC means 'six British Calendar months' in view of the General Clauses Act, 1897.
It is recommended that Income-tax Act should define the meaning of the term 'month' and should prescribe the methodology for its computation to end all disagreements and possible disputes on its computation and meaning.Read More
32. Exemption limit under Sec. 54EC – Rs. 50 Lakhs or Rs. 1 Crore
Various ITAT benches have held that the assessee can invest up to Rs. 1 Crore in capital gain bonds under section 54EC which is spread over a period of two financial years at Rs. 50 lakhs each. However, such investment should be made within a period of 6 months from the date of transfer.
However, the Jaipur Bench of ITAT13 has struck a different note by opining that as per section 54EC investment within 6 months is investment for that particular financial year in which transfer has taken place and said period of six months would not include some part of subsequent financial year. In other words, an assessee is not eligible to claim more than Rs. 50 lakh under section 54EC of the Act as exemption in an assessment year.
Therefore, it is recommended that the provisions of Section 54EC should clarify the correct position to end the above controversy.Read More
33. Scope of Sec. 206AA when income is governed by DTAA
If a non-resident does not obtain a PAN, the Assessing Officer insists on withholding of taxes at 20% even when lesser rate of tax is prescribed in DTAA. Such deduction of tax as per provisions of Section 206AA is unjustified in view of Section 90(2) of the Act, which provides that a taxpayer can opt to apply provisions of the Act or the DTAA, whichever is more beneficial.
Whenever any specific arrangement or agreement has been made regarding the taxability of any income under the Agreement for Avoidance of Double Taxation, such an arrangement or agreement will necessarily prevail over the provisions of the statute14. If a tax liability is imposed by the Act, the agreement may be resorted to for negating or reducing it15 and not for imposing an additional burden.
Thus, a clarification is needed in Section 206AA on the scope of the provisions and whether it can override the provisions of the Treaty entered into between two sovereign countries?Read More
34. Section 50C should not be applicable if entire capital gain is exempted due to Section 54F or 54EC, etc.
Following two controversies revolve around when land or building is transferred at a consideration which is less than the value adopted by Stamp authority and assessee claims section 54F exemptions for investment of consideration in a new house:
(a) Whether investment in new residential house (under Section 54F), should be the actual consideration or the notional sales consideration as computed under Section 50C?
(b) Whether deeming provisions of Section 50C can be invoked when assessee has invested entire net consideration for investment in new house?
Various judicial authorities have dealt with the above issues and held that provisions of Section 50C cannot be used for computation of Section 54F relief.
■ Deeming provisions as mentioned in section 50C will not be applicable to section 54F, so far as meaning of full value consideration is concerned, as deeming provision mentioned in section 50C is for specific asset and for purpose of section 48. As per the Explanation to section 54F(1) 'net consideration' means 'the full value of consideration received or accruing as a result of transfer of the capital asset' and the Explanation to section 54F(1) is not governed by meaning of the words 'deemed full value of consideration' mentioned in section 50C16.
■ Where entire amount of sale consideration has been invested in Bonds, provisions of section 50C are not applicable17.(This judgment was delivered on the issue of relief under Section 54EC, however, it can be applied mutatis-mutandis under section 54F).
We suggest that a clarification should be inserted to resolve the above controversy. It should be clarified that deeming fiction under Section 50C will not operate when entire capital gain is exempt by virtue of Section 54F.Read More
35. Permit larger time-limit for payment by employer of employees' contribution to PF / superannuation funds
Several Courts have taken a view that the benefit of extended limitation to the employer is available in respect of employee's contribution as well, i.e., if employer remits the employee's contribution to the administrator of the funds before the due date of filing of return, the employer will get the deduction of such contribution.
However, in a recent decision rendered by Hon'ble Gujarat High Court in CIT v. Gujarat State Road Transportation corporation [2014] 41 taxmann.com 100, a contrary view has been taken to the affect that the benefit of extended limitation available to the employers contribution by virtue of proviso to section 43B will not be available in respect of employee's contribution, if not remitted by employer within the due dates as per the relevant statues and as provided in section 36(1)(va).
It is submitted that this view of Hon'ble Gujarat High Court is contrary to several decision of the Courts as mentioned above. When two contrary views are on record, there is likelihood of an unending controversy and litigation. Therefore, it is suggested that necessary amendment to section 36(1)(va) be carried out to recognize the view taken by the several other High Courts that section 43B would also regulate the time limitation for payment of employee's contribution by the employer to the respective superannuation funds. This can be done by omitting the Explanation existing below clause (va) to section 36(1) or to modify that Explanation, thereby due date would mean the date of filing of the return by the employer under section 139(1).Read More
36. Levy of Surcharge and Education Cess over Withholding Tax
DTAA entered into by India with several countries provides rates of withholding tax on several specified incomes such as dividend, interest, royalty and fee for technical services. Such rates vary from 10% to 20%, depending upon the respective treaty. The issue now arises whether education cess and surcharge should also be levied over and above the withholding tax.
The view of the department, that withholding tax liability can further be enhanced by education cess and surcharge, is not sustainable, in law, because DTAAs are entered into by India with sovereign States and any modification either in terms of agreement or in the tax rates provided in the agreement cannot be altered without following mutual agreement procedure.
Notwithstanding it is suggested, to avoid contrary view and litigation, an Explanation to section 195 or to section 2(37A) be provided so that withholding tax liability is not enhanced by Education Cess and Surcharge if such liability arises under DTAA.Read More
37. Clarification needed in Section 194-IA to tackle some vital issues
Finance Act, 2013 introduced a new provision Section 194-IA in Chapter XVII for deduction of tax at source on transfer of certain immovable properties other than agricultural land.
This provision is applicable to all persons who are going to purchase immovable property in excess of Rs. 50 lakhs per property and is applicable wef June 1, 2013.
However, the provision of Section 194-IA is silent on its applicability and the scope in certain circumstances. It is recommended that the provision should address the following concerns:
(a) Adjustment for tax deducted at source from advance payment of consideration in case contract is cancelled subsequently (in both cases, when advance money is forfeited and when advance money is refunded to the proposed buyer);
(b) Applicability of provision in Joint Development Agreements, where the consideration may not be in cash;
(c) Where the property is registered in name of a person but there are other co-owners or beneficial owners who claim title over the property, i.e., building owned by the Company but registered in the name of one of its director, etc;
(d) Whether transfer of shares of a company which derives its substantial value from the immovable properties it owns should be made subject to Section 194-IA?
(e) More than one buyer buying property from one seller;
(f) Whether tax is to be deducted by a non-resident buyer purchasing a property situated outside India from a person resident in India?
38. Transfer of immovable property through a Power of Attorney
A property is generally transferred through 'General Power of Attorney' or 'Agreement to Sell' so as to avoid payment of stamp duty and registration charges on deeds of conveyance, to avoid payment of capital gains on transfers, to invest unaccounted money ('black money') and to avoid payment of 'unearned increases' due to development authorities on transfer.
The Supreme Court in the case of Suraj Lamp & Industries (P) Ltd. v. State of Haryana[2011] 14 taxmann.com 103 (SC) has held that any transfer through a General Power of Attorney, Agreement to sell and a Will couldn't be recognized as valid mode of transfer of immovable property.
Consequently, to give effect to Supreme Court's judgment, Govt. of NCT Delhi had issued a Circular No. 298 dated 27-4-2012 and made it clear to the registrar or sub-registrar that on basis of a GPA, a will and an agreement to sell, collectively or separately in respect of an immovable property, a conveyance cannot be executed, i.e., no transfer of property will take effect unless a clear sale deed is executed and duly registered by the executants.
However, in the case of Pace Developers & Promoters (P) Ltd. v. Government of NCT [2013] 33 taxmann.com 99, the Delhi High Court turned down the circular issued by the Govt. of NCT of Delhi and held that the directions contained in the impugned circular are quite contrary to the observations made by the Supreme Court in the case of Suraj Lamp (Supra). The Supreme Court had not said that in no case a conveyance can be registered by taking recourse to a GPA. As long as the transaction is genuine, the same will have to be registered by the sub-registrar. It was held by the Delhi High Court that a person entering into a development agreement with a land developer or builder for development of a parcel of land or for construction of apartments in a building, and for this purpose a power of attorney empowering the developer to execute sale agreements can be executed.
It is recommended that Section 2(47) read with Section 45 should clarify the taxability of transfer of an immovable property through a general power of attorney or agreement to sell, which is eventually not considered as a valid mode of transfer.
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1. Biocon Ltd.v. Dy. CIT [2013] 35 taxmann.com 335 (Bang.) (SB)
2. Smt. V.R. Karpagam v. ITO [2013] 34 taxmann.com 98 (Chennai - Trib)
3. Linde AG, Linde Engineering Division v. Dy. DIT [2014] 44 taxman.com 244 (Delhi)
4. C.E.S.C. Ltd. v. ITO [2004] 134 Taxman 511 (Cal.)
5. ITO v. Tata Elxsi [2013] 37 taxmann.com 275 (Bang. - Trib.)
6. Dy.CIT v. Cosmo Films Ltd. [2012] 24 taxmann.com 189 (Delhi)
7. Yahya E. Dhariwala v. Dy. CIT [2012] 17 taxmann.com 159
8. Chandrika Singh v. Addl. Member Board of RevenueAIR 1998 Pat. 118
9. Sin Oceanic Shipping ASA Norwayv. AAR [2014] 41 taxmann.com 444 (SC)
10. CIT v. Dynamic Enterprises [2013] 40 taxmann.com 318 (Karnataka) (FB)
11. Asst. CIT v. N. Prasad, Executive Chairman [2014] 43 taxmann.com 253
12. Alkaben B. Patel v. ITO [2014] 43 taxmann.com 333
13. Asstt.CIT v. Shri Raj Kumar Jain & Sons (HUF) [2012] 19 taxmann.com 27
14. CIT v. Davy Ashmore India Ltd.[1991] 190 ITR 626 (Cal.)
15. CIT v. R. M. Muthaiah[1993] 67 taxman 222 (kar.)
16. PrakashKarnawat v. ITO [2011] 16 taxmann.com 357 (JP.- Trib.)
17. PrakashKarnawat v. ITO [2011] 16 taxmann.com 357 (JP.- Trib.)
Sournce: www.taxmann.com
Hon'ble Delhi High Court in India Trade Promotion Organization v. CIT [2013] 38 taxmann.com 233 has held that the expression 'any amount' used in section 244A in contrast to expression 'refund' used in section 244 is much wider and broader in scope. The word 'any amount' would include within its scope and ambit the interest element which has accrued and is payable on the date of refund. Similar view was taken by the Delhi High Court earlier in CIT v. Goodyear India Ltd. [2001] 249 ITR 527 and by Hon'ble Apex Court also in CIT v. HEG Ltd [2010] 324 ITR 331 (SC). Thus, as per existing interpretation of section 244A the assessee was entitled to interest on interest portion that accrued to him on the date of issue of refund if such payment of interest was delayed by the department for no reason attributable to the taxpayer.
However, a similar issue came in SLP before Hon'ble Apex Court in CIT v. Gujarat Flurochemical. The taxpayer had relied on the decision of Hon'ble Apex Court in Sandvik Asia Ltd v. CIT and others [2006] 280 ITR 643 (SC), wherein it was held that if there was a delay in paying interest on the amount of refund due to assessee and refund was paid without interest then taxpayer was entitled for interest on such delayed payment of interest. The division bench in CIT v. Gujarat Flurochemical doubted the decision in Sandvik Asia Ltd v. CIT (Supra) and referred the matterto the larger bench wherein the Apex Court (larger bench) has taken a view that assessee can claim only the interest provided for in the statute but no other interest on such statutory interest. This was pronounced in CIT v. Gujarat Flurochemical [2014] 42 taxmann.com 1 (SC).
The view taken by Hon'ble Delhi High Court in India Trade Promotion Organization v. CIT (Supra) lays down the correct law and, therefore, to avoid controversy and litigation, it is suggested that an Explanation be inserted in section 244A to define the scope and ambit of the expression "any amount" used in Section 244A(1) so as to include interest on interest which is not paid along with the refund if the reason for delay in payment of interest on refund is not attributable to the assessee.Read More
2. Increase in Maximum Exemption Limit
Since high inflation makes it difficult for a large number of small taxpayers to meet the two ends, an increase in the maximum exemption limits will provide a huge relief to such individual taxpayers. It is expected that the Finance Bill 2014 may reintroduce the different slab rates for female taxpayers. Further, it is recommended that the maximum exemption limit should be raised to Rs. 3,00,000 for an Individual taxpayers.
3. Deductions for ESOP compensation expenses
ESOP gives employees an option or right to purchase or subscribe at a future date to the securities offered by the company at a predetermined price. The predetermined price is less than the market price and is commonly known as 'discount'.
Recently the special bench of Bangalore ITAT1 has adjudicated the issue of deductions for discount on issue of ESOP in computing the income under the head "Profits and gains of business or profession"?
ITAT held that the discount given on issue of ESOPs can't be either considered as short receipt of securities premium or as contingent in nature. The discount under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Therefore, it is nothing but the employees cost incurred by the company and, hence, should be allowed as deduction under Section 37(1).
Thus, it is recommended that the upcoming Finance Bill, 2014 should clarify the above position and should allow deductions for discount given on issues of ESOPs.Read More
4. Cost of improvement of 'Trademark' may be taken to be nil
In the case of sale of self-developed trademark 'cost of acquisition' is assigned a nil value by section 55(2)(a)(ii). However, Section 55(1)(b) has not provided anything on the cost of any improvement of such trademarks while assigning nil cost of any improvement to other intangible asset such as goodwill, right to carry on business or right to manufacture, etc.
Whether all the three ingredients used in computation of capital gains, viz., (a) expenditure incurred wholly and exclusively in connection with transfer, (b) the cost of acquisition and (c) cost of any improvement thereto should have equal controlling effect on the computation machinery? If yes, failure of any one ingredient will lead to failure of the computation machinery and, consequently, the capital gains shall not be chargeable to tax.
Recently, the Pune Tribunal in the case of Institute for Micronutrient Technology v. Dy. CIT [2014] 43 taxmann.com 426, held that when asset under transfer was self-generated trademark and same was not capable of improvement at an ascertainable cost in terms of money, in absence of any possibility to determine 'cost of any improvement', computation of capital gains failed.
This inference may not be sustainable, in law, because mere absence of 'cost of any improvement' is not sufficient to draw such inference as use of word 'any' in the expression 'cost of any improvement', takes care of a situation where there may not be any improvement in the trade mark and, therefore, there may not be any cost of improvement. Therefore, absence of cost of acquisition may halt the machinery provision but absence of 'cost of improvement' cannot halt the machinery provision of computation of capital gains. Hence, Finance Bill, 2014 may insert the term 'trademark' in Section 55(1)(b)(1) to align its treatment with other intangible assets, i.e., goodwill, etc. Consequently, the cost of any improvement of trademark may be deemed to be nil.
5. Sec. 54/54F benefits for investment in single house only
Recently, ITAT2 allowed exemptions to the assessee in respect of all five flats received by her in lieu of land she had parted with. It held that 'residential house' cannot be construed as a singular and, moreover, it is not necessary that all residential units should have a single door number allotted to it.
The exemptions under Sections 54 and 54F were introduced to encourage people to invest in new residential accommodations. These exemptions were not introduced to incentivize the taxpayers purchasing the residential accommodations for investment purposes rather than for their own self-accommodation.
However, these two provisions, in their current structure, allow benefits to taxpayers for buying houses as a portfolio of their investments or for roll over of investments. Hence, a clarification may be introduced to restrict the benefits for investment in single house or to actuals users.Read More
6. Taxability of advertisement income earned by digital businesses
Unlike the conventional mode of doing business, the digital businesses are intangible and operate in one country with entire base in another country and servers are placed in a third country. Therefore, the tax authorities are facing challenges while taxing revenues earned by digital businesses.
In digital business, the parent company places the server in a remote low tax jurisdiction and operates the website in as many countries where it can find mart for its products. Since the presence of websites cannot be physically established in a particular country, the income generated by virtue of sale of goods or sale of advertisements does not fall within the four walls of tax laws. Various judicial precedents substantiate the situation where no royalty, FTS or permanent establishment could be established for income earned by the digital business through websites operating in India.
In February, 2013 the OECD published a report on BEPS which has also identified digital economy as challenging, both from direct and indirect tax aspects and has considered setting-up a task force for addressing concerns posed by digital economy as one of its action steps.
It is high time that the government should introduce a provision in the statute for taxing 'online advertisement' revenue earned by foreign companies through operating websites in India.Read More
7. The term 'Association of Person' should be defined
In this context the dispute generally arises when two or more foreign entities form a consortium to execute a turnkey contract in India. There have been disagreements over the taxability of an entity, being a member of the consortium, who is engaged in offshore supplies only as a part of the consolidated contract.
When contract is awarded to the consortium as a whole and not to independent members of the consortium individually, the taxability of one entity, as distinct from the consortium, becomes a matter of clash.
The core to the issue is whether the consortium can be constituted as an "Association of Persons" within the meaning of 'person' as defined under section 2(31).
Unless there is sufficient joint participation for a common enterprise, it would not be appropriate to treat two or more persons as an Association of Persons for the purposes of assessing them as a separate taxable entities3.
Hence, it is recommended to clarify the said issue through insertion of a definition of the term "Association of Persons".Read More
8. Tax on Joint Development Agreements
In Joint Development Agreements (JDA), the registered owner assigns the development rights of the property to the developers and also hands over the vacant possession of the land to the developers. In consideration the registered owner receives his share in the developed property in agreed ratio and some monetary considerations.
Following issues emanate from the transactions entered into through a JDA:
(a) If tax is levied in the year of entering into the JDA, it may amount to tax on notional gains as the constructed area/flat has not been received by the members at that time.
(b) There are practical difficulties in claiming deductions under section 54EC or section 54 since the capital gains which was not received by the owner could not have been invested as required under these provisions.
(c) Fair market value of the constructed property, which is deemed as full value of consideration, could not be computed on the date of the agreement. Actual market value of the property, to be constructed in future, will depend on its quality of construction, market conditions and other factors, and determination of its market value on the date of agreement would present the wrong picture.
(d) The sum received by the registered owner on the date of the agreement would be in the nature of advance payment whose accrual is contingent on certain future events, i.e., approval from statutory authorities for construction, completion of contract as per agreed terms and conditions, etc.
It is recommended that the Income-tax Act should include provisions on the taxability of capital gains in JDAs, the mechanism for claiming exemptions under Section 54, 54F, 54EC, etc.Read More
9. Depreciation on Goodwill
The Supreme Court in the case of CIT v. Smifs Securities Ltd. [2012] 24 taxmann.com 222 (SC) held that goodwill arising on amalgamation of companies would be eligible for depreciation as it is covered under Explanation 3(b) to Section 32(1) under the expression 'any other business or commercial rights of a similar nature'.
It is recommended that the definition of intangible asset [as provided in Explanation 3(b) to Section 32(1)] should include purchased goodwill, i.e., goodwill arising on amalgamation of companies, for the purpose of depreciation on intangible assets.Read More
10. MAT: Preparation of books of account as per Schedule III of Companies Act, 2013
Schedule VI of Companies Act, 1956 provides for general instructions for preparation of 'Balance Sheet' and 'Profit and Loss Account', which have been referred to in the provisions of Section 115JB for computation of Minimum Alternative Tax. With substitution of said Companies Act, 1956 with the Companies Act, 2013, it is most likely that Section 115JB shall make reference to Schedule III of the 2013 Act.
Schedule III of the 2013 Act is same as Revised Schedule VI of the 1956 Act, except that Schedule III contains general instructions for the preparations of consolidated financial statements of company and its subsidiaries as preparation of consolidated accounts has been made mandatory by the 2013 Act.
11. Electronic Maintenance of books of account
Section 128 of the Companies Act, 2013 allows companies to keep books of account and other relevant papers in electronic format. In contrast, Section 2(12A) of the Income-tax Act, 1961 requires maintenance of books of account in written format or print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device.
Thus, in current scenario, when Government of India is taking holistic approach for e-Governance plans, it is recommended that the Income-tax Act should permit electronic maintenance of books of account in line with Companies Act, 2013.
12. No interest or penalty in case of retrospective amendments
Tax Administration Reform Commission ('TARC'), which was constituted to recommend reforms exclusively in tax administration, issued its first report with various recommendations including its stand on 'Retrospective amendments'. It has provided in clear words that many of the retrospective amendments have been introduced to counter interpretation in favour of the taxpayer upheld earlier by the judiciary and one of them is retrospective amendment to tax the 'indirect transfer'.
Since retrospective amendments cannot be avoided completely, it is recommended that the immunity should be provided from penalty or interest if additional tax is demanded in view of such retrospective amendments.
However, in cases of retrospective amendments which are genuinely clarificatory in nature, an exception may be provided for charging interest or penalty.Read More
13. Deduction for CSR Expenditure
With effect from 01.04.2014 expenditure on Corporate Social Responsibility (CSR) has become mandatory for Indian and Foreign Companies working in India. The law relating to CSR in India is provided in Section 135 of the Companies Act, 2013, read with Schedule VII of the Act and The Companies (Corporate Social Responsibility Policy) Rules, 2014.
Expenditures of various nature have been allowed as permissible under CSR. For instance, the following types of CSR expenditures are permissible:
■ Direct expenditure on charitable activities
■ Direct expenditure on charitable activities in local area
■ Direct expenditure on capacity building of employees and implementing NPOs
■ Grant to Trust or Society
■ Transfer to other corporates under pooling of expenditure
■ Donation to Govt. recognised funds where 100% tax relief is available.
The new Companies Act, 2013 requires at least 2% of average Net Profit to be spent on Corporate Social Responsibility ('CSR'). It is expected that after enactment of the Companies Act, 2013 there will be a corresponding amendment to section 37(1) of the Income-tax Act allowing all CSR expenditure and donation.Read More
14. Tax treatment of Real Estate Investment Trusts (REITs)
REITs function mainly on the same principle as mutual funds and encourage investments purely in real estate (RE) assets, which otherwise would not be exposed to investment by individuals or small investors. Major income generating sources of REITs are rentals from RE assets ranging from warehouses, commercial buildings, malls, hospitals, etc.
FICCI has recommendedthe following for taxability of REITs and Unit holders:
(a) A onetime capital gains exemption under section 47 of the Act should be provided to a sponsor of a Real Estate Investment Trust who transfers assets directly or indirectly to the REIT in exchange for units and such exemption should be provided without prescribing any lock-in period for holding the REIT units;
(b) The units of listed REITs should be treated at par with listed shares and be granted exemption on long-term capital gains;
(c) REITs may become highly inefficient if distribution of profits is subject to Dividend Distribution Tax (DDT). It is recommended that DDT should be done away with at the level of REIT/SPV and the entire chain of distribution of income should be exempted from income-tax.Read More
15. Provisions should be introduced to monitor functioning of an Electoral Trust
Electoral Trust is a Section 25 Company or a non-profit company created in India for orderly receipt of the voluntary contributions from any person and for distributing the same to the respective political parties, registered under Section 29A of the Representation of People Act, 1951. The sole objective of the Electoral Trust is to distribute the contributions received by it to the political party concerned.
Detailed rules have been laid down in Rule 17CA of Income-tax Rules, 1962 for functioning of an electoral trust. However, the measures contained in the Act are not adequate to monitor such compliance. The Act does not contain any provision requiring an electoral trust to apply for and obtain registration under the Act or for cancelling registration of an electoral trust or any provision requiring it to submit its Return of Income.Read More
16. Advance payment of medical and leave travel allowance should not be taxable
The Income-tax Act, 1961 allows exemption in respect of medical allowance and Leave Travel Allowance ("LTA") under section 17(2) and Section 10(5) of the Act respectively. The basic condition for allowing such claim is that the employee has to submit proof for incurring such expenditure.
As per the industry practice, a large number of employers average out the allowable medical expenditure under the Act and pay it on monthly basis as an allowance, being part of regular salary payments. The employees consequently submit the medical expenditure receipts against the medical allowance received as and when incurred during the year.
The same practice is followed for LTA where instead of monthly payments, amount is disbursed at the time of employee undertaking such journey against which declarations and journey proofs are submitted later on before the end of relevant financial year.
At the year end, tax is deducted and deposited with the Central government under section 192 of the Act on the disbursed allowances against which no proofs are submitted. Thus, no tax is deducted at the time of disbursement of medical allowance and LTA to employees, rather a year-end tax is deducted. This practice does not result in loss of revenue at all, as eventually the due taxes are deducted from the employee's salary and are paid to the credit of Government.
However, the judiciaries have taken divergent views on deduction of tax from advance payment of medical allowance and leave travel allowance. Calcutta High Court4 has taken a strict view that the expenditure should actually have been incurred in the period in which TDS is to be deducted and, thus, on any such advance payments TDS liability would be attracted. In a recent order Bangalore ITAT5 has taken a lenient view that no tax is required to be deducted on advance payments if medical allowance is paid before incurrence of expenditure and tax is deducted on non-production of bills at year end.
If tax is deducted from the advance payment of such allowances, the monthly budget of an employee may be impacted badly. The employee would suffer double jeopardy as once tax is deducted from his salary, which is otherwise not deductible when computed on his annual salary, and secondly he would struggle to claim its refund.
So, it is recommended that any advance payment of allowances should be subjected to TDS in the last month or in the last quarter of the financial year. If bills are not submitted by the employee at year end the employer should be under an obligation to deduct all requisite taxes from employee's salary.
17. Contribution to defined benefit scheme should not be taxable
In the case of Royal Bank of Scotland, In re [2014] 45 taxmann.com 283 (AAR - New Delhi), the Authority for Advance Ruling has dealt with the issue of taxability of lump-sum contribution by employer to group superannuation fund in the hands of employees and deduction of tax therefrom under Section 192.
On appraisal of facts, the Authority observed that in group superannuation funds the applicant does not get a vested right at the time of contribution to the fund by the employer. The amount standing to the credit of the funds like the pension and fund account, social security of medical or health insurance would continue to remain invested till the assessee becomes entitled to receive it.
Following the judgment of the Hon'ble Supreme Court in CIT v. L. W. Russel [1964] 53 ITR 91 (SC), the Authority ruled that when the amount does not result in a direct benefit to the employee who does not enjoy it, but assures him a future benefit, in the event of contingency, the payment made by the employer does not vest in the employee.
Accordingly, such contribution is not a perquisite as per clause (vii) of Sec. 17(2) of the Act and shall not be included in the salary of the employee concerned. In case of failure to deduct tax on such contribution, the employer cannot be deemed to be assessee-in-default under Sec. 201(1) of the Act.
Recommendations:
The lump sum contribution by the employer to the defined benefit scheme is not employee specific, as no part of it can be attributable to a specific employee, and no employee has any vested right in such contribution. It is, therefore, not taxable in the hands of any specific employee. Accordingly, for non-deduction of tax from such contribution assessee cannot be treated as an assessee-in-default.
Therefore, it is recommended that the perquisite rules should spell out specifically that a lump sum contribution which is not specific to any employee should not be deemed as perquisite in the hands of any specific employee and, therefore, should not be chargeable under the head salaries.
18. Section 40(a)(ia) – Clarification on 'Payable' v. 'Paid'
Section 40(a)(ia) seems to be the one of the provisions which has been amended by many Finance Acts. Of late a new controversy has arisen on its applicability when tax is not deducted from the expenses incurred and paid during the year. In other words, the judiciaries have been asked to decide whether the disallowance for TDS default should be restricted to only those expenses which are outstanding as on the last day of the financial year?
Views of the Judiciaries and the clarifications issued by the CBDT subsequently are presented hereunder:
1. In Merilyn Shipping & Transports v. Addl. CIT [2012] 20 taxmann.com 244 (Visakhapatnam) it was held by Special Bench of ITAT that the provisions of section 40(a)(ia) of the Act would apply only to the amount which remained payable at the end of the relevant financial year and the provisions could not be invoked to disallow the amount which had actually been paid during the previous year without deduction of tax at source.
2. The Hon'ble Allahabad High Court in CIT v. Vector Shipping Service (P.) Ltd. [2013] 38 taxmann.com 77 (Allahabad) had affirmed the decision of the Special Bench in Merilyn Shipping (supra) and held that if the amount has been paid during the year than there would be no disallowance under section 40(a)(ia) of the Act. [The Supreme Court has dismissed the SLP filed by the Revenue against such judgment.]
3. However, the Hon'ble Calcutta High Court and Hon'ble Gujarat High Court in the case of CIT v. Crescent Exports Syndicate[2013] 33 taxmann.com 250 (Calcutta) and CIT v. Sikandarkhan N Tunvar [2013] 33 taxmann.com 133 (Gujarat), respectively, have held that section 40(a)(ia) of the Act would cover not only the amounts which are payable at the end of the previous year but also those expenditures which are payable at any time during the year.
4. The CBDT presented its views through Circular No. 10/DV/2013, dated 16-12-2013 that the provision of section 40(a)(ia) of the Act would cover not only the amounts which are payable as on 31st March of the previous year but also those amounts which are payable at any time during the year. The statutory provisions are amply clear and in the context of section 40(a)(ia) of the Act the term "payable" would include "amounts which are paid during the previous year".
It is expected that an Explanation may be inserted to Section 40(a)(ia) that the term 'payable' shall include paid as defined in Section 43(2) and notwithstanding that it is payable or paid at any time during the year.
19. Tax on 'Indirect Transfer' of asset
Finance Act, 2012 inserted Explanation 5 to Section 9(1)(i) with retrospective effect that a capital asset being any share/interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives its value substantially from assets located in India.
The absence of any definition of the term 'substantially' will lead to significant subjectivity, uncertainty and litigation. It should be clarified that an offshore entity should be regarded as deriving its value substantially from India if at least 50 per cent or more of the fair market value of all the assets owned directly or indirectly by such offshore entity are located in India.
Since the tax on 'indirect transfers' is a new levy, it should have prospective application. Even the Shome Committee has recommended that the provisions relating to taxation of indirect transfer introduced by the Finance Act, 2012 are not clarificatory in nature and would widen the tax base and, consequently, should only have prospective application.Read More
20. Domestic Transfer Pricing: No adjustments should be made in tax neutral cases
Finance Act 2012 introduced the provisions of Transfer Pricing for Specified Domestic Transactions. Such provisions were introduced after Supreme Courts' suggestions in the case of CIT v. GlaxoSmithkline Asia [2010] 195 Taxman 35 (SC).
A transaction between two domestic related parties will ordinarily be revenue neutral, except in following circumstances:
(a) If one of the related entities is loss-making and the another one is profit-making;
(b) If both the entities are taxable at different rates on account of some incentives or exemptions or difference in status;
(c) The transactions between related entities have different tax treatments. One party considers the receipts as capital gains and the other party claims the payments as revenue expenditure.
Bombay High Court in the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd. [2008] 219 CTR 562 has held that where revenue was not in a position to point out how assessee evaded payment of tax by alleged payment of higher commission to its sister concern, since sister concern was also paying tax at higher rate, disallowance of alleged excess commission paid to sister concern was not justified.
Therefore, no adjustment should be made in case two resident associated enterprises are taxed at same rate, have sufficient taxable profits, any transactions between them are subject to same incidence of tax and results in tax neutrality. It is recommended that Finance Bill, 2014 should provide relief to the resident associated enterprises subjected to Domestic Transfer Pricing in tax neutral cases.
21. Adjustment of TDS in case of cancellations of insurance policy during 'Free Look' period
IRDA allows policyholders to cancel the policy during the free look period (currently set to 15 days from the date of receiving the policy document). Policy holder is allowed to cancel only life and health insurances during such free look period.
In case of cancellations of insurance policy during free look period, the commission income accrued/paid to agents is reversed or recovered. Finance Bill, 2014 should provide a mechanism to adjust the taxes already deducted under section 194D and paid to the Central Government.
Following mechanism may be devised to adjust the TDS on commission which is no longer income of insurance agent:
(a) Refund may be granted of tax deducted from commission paid on insurance policies which are subsequently cancelled during free look period
(b) Carry forward the TDS in ITR form to adjust it against tax liability of subsequent year*.
* This mechanism has been introduced in New ITR Forms for Assessment Year 2014-15. In new ITR forms, taxpayer can disclose the unclaimed TDS brought forward and TDS being claimed this year from amount brought forward.
22. Unsold flats possessed by Real Estate Developer should not be taxed
A real estate developer generally owns and holds unsold flats for the purpose of its business. He does not enter into the business of letting out properties on hire. Yet, in a number of cases, he has been asked to pay tax on the notional Annual Letting Value (ALV) of the unsold flats as income taxable under the head "Income from House Property".
To impose tax on the ALV of such unsold flats/properties causes unnecessary hardship in his case. Finance Bill, 2014 should grant relief to Real Estate Developers wherein certain specified period of time should be allowed for selling out the flat after the same is ready. Read More
23. RTGS, NEFT, EFT and ECS should be equivalent to Account-Payee Cheques
These days banking system offers a variety of electronic payment systems such as RTGS, NEFT, EFT, ECS, etc. However, only the term 'Account-payee cheque' finds places in various provisions of Income-tax Act, i.e., Sections 40A(3), 269SS and 269T. Finance Bill 2014 should recognize RTG, NEFT, etc., as valid mode of payment to end any disagreement between taxpayers and Assessing Officer.
24. Additional Depreciation on assets put to use for less than 180 days
Clause (iia) to section 32(1) was inserted to provide incentives in form of additional sum of depreciation for fresh investment in industrial sector. The second proviso to section 32(1)(ii) restricts the allowances only to 50 per cent where the assets have been acquired and put to use for a period of less than 180 days in the year of acquisition. This restriction is only on the basis of period of use. There is no restriction that balance of one-time incentive in the form of additional sum of depreciation shall not be available in the subsequent year.
In section 32(1)(iia), the expression used is 'shall be allowed'. Thus, the assessee earns the benefit as soon as he purchases the new plant and machinery in full but it is restricted to 50 per cent in that particular year on account of period of usages. Such restrictions cannot divest the statutory right. Law does not prohibit that balance 50 per cent will not be allowed in succeeding year. The said earned incentive must be made available in the subsequent year. In aggregate, the overall deduction of depreciation under section 32 shall definitely not exceed the total cost of plant and machinery6.
A clarification in section 32(1)(iia) of the Act is recommended that new plant and machinery acquired in a year and put to use for less than 180 days would be eligible for balance additional depreciation at 10% in the subsequent year.
25. Meaning of the term 'Month' and computation thereof
In our routine life we roughly consider a 'month' as a period of 30 days. However, in taxation if a 'month' is considered as a standard period of 30 days, it may result in serious disagreements among taxpayers and I-T department over the entitlement to relief or for computation of interest chargeable under various provisions. Even a single day's delay or miscalculation can disrupt the whole tax planning of a taxpayer.
There have been disputes between revenue and judiciaries over the method of computation of the term 'month' - whether it has to be reckoned according to British calendar in terms of section 3(35) of the General Clauses Act, 1897 or has to be reckoned as period of 30 days or a period from a specified date in a month to the date numerically corresponding date in the following month.
The Mumbai Tribunal7 went deep into the meaning of the term 'month'. It held that the term 'month' is to be understood as month reckoned according to the British calendar.
How to compute the period?
Patna High Court8 has provided a mechanism for computation of months involved. It provided that when a month starts from any arbitrary date, it will expire with the day in the succeeding month immediately preceding the day corresponding to the date upon which the period starts.
It is recommended that Income-tax Act should define the meaning of the term 'Month' and should prescribe the methodology for its computation.
26. Distribution of income to life insurance companies by securitization trusts should be exempt from tax
Given the peculiar nature of life insurance business, the profits of life insurance companies are taxable at the rate of 12.5% as per section 115B of the Income Tax Act. Insurance law permits life insurance companies to invest in the securities issued by the securitization trust. A levy of additional tax at the rate of 30% on income distributed by securitization trust to life insurance companies can have the impact of reducing the return in their hands on such investments and, consequently, reducing the returns that can be distributed to their policyholders. It is recommended that the income distributed by securitization trusts to life insurance companies should also be provided a special tax treatment whereby income so distributed should be subjected to additional tax at the rate of 12.5% and not at 30%.
The income of a fund set-up by the life insurance company under a pension scheme, which is approved by IRDA, is exempt from tax under section 10(23AAB) of the Act. Further, it is requested that it should be clarified that no additional tax would be payable in respect of income distributed by the securitisation trust on investments made from IRDA approved pension fund set-up by a life insurance company.
27. Section 206AA should not be invoked if total income is below taxable limit
Section 139A of the Act makes it mandatory for every person to apply for allotment of a PAN if his total income exceeds the maximum exemption limit. However, the provisions of TDS require the deductor to deduct taxes at 20% or even at higher rate if PAN of the recipient is not available. This disparity among provisions of Section 139A and TDS causes undue hardship to the small investors earning income below taxable limit.
In view of this, it is recommended that Section 206AA should be made inapplicable to persons whose income is less than the taxable limit. This proposition is affirmed by the Karnataka High Court in case of Smt. A. KowsalyaBai v. Union of India[2012] 22 taxmann.com 157. Read More
28. Application for Advance Ruling should be allowed even after filing of return of income
The Authority for Advance Ruling does not allow the application if the question raised in it is already pending before any income-tax authority as provided in proviso (1) to section 245R(2). Now, the moot question arises when the case would be deemed to be pending before an income-tax authority: (a) on filing of return of income; or (b) on issue of notice under Section 143(2) for scrutiny assessment?
Supreme Court9 affirmed the ratio laid down in the Mitsubishi Corporation, Japan, In re [2013] 40 taxmann.com 335 (AAR - New Delhi) that question raised in application for Advance Ruling will be considered as pending for adjudication before Income-tax Authorities, only when issues are shown in return and notice under Section 143(2) is issued. Thus, application for Advance Ruling is to be admitted which is filed after filing of return but prior to issue of notice under section 143(2).
Accordingly, it is expected that a clarification may be inserted in Section 245R to affirm the above.
29. Restatements of fraudulent books of account
Companies Act, 1956 did not have any provisions for restatement of accounts when necessitated. However, with enactment of Companies Act, 2013 which has substituted the Companies Act, 1956 it contains provisions for such situations under Section 130. It allows re-opening and re-statement of the financial statement of a company under an order passed by the Court or NCLT.
If accounts have been prepared in a fraudulent manner, the new provision permits restatement of financial statements, even after their adoption in AGM, to present true and fair view.
Thus, it is recommended that new provisions should be inserted in Income-tax Act to tackle the situation arising on restatement of the financial statements.
30. Retirement of a partner without distribution of asset
Where retiring partner took cash towards value of his share in partnership firm and there was no distribution of capital assets among partners, there was no transfer of capital asset and, therefore, no profits or gains chargeable to tax under section 45(4) in hands of assessee-firm as held by Full Bench of Karnataka ITAT10.
This Full Bench decision has been followed by the Hyderabad Bench of ITAT11 to hold that amount received by a partner on dissolution of firm or on his retirement is an amount paid towards his share capital and no element of transfer of interest in partnership asset by retiring partner to continuing partner can be said to be involved.
It is recommended that Section 45(4) should specify clearly whether any capital gain would arise on retirement of a partner from the partnership firm where retiring partner took cash towards value of his share in partnership firm which does not result in distribution of any asset. Further, if capital gain arises on such retirement of partner, whether partnership firm or the partner shall be liable to pay on such capital gains?Read More
31. Computation of six months for investment under Section 54EC
Section 54EC allows exemption for long-term capital gain if it is invested in specified assets within a period of six months from the date of transfer.
There have been disputes in this context over the calculation of the term 'month' - whether it has to be reckoned according to British calendar in terms of section 3(35) of the General Clauses Act, 1897 or it shall be reckoned as period of 30 days or a period from a specified date in a month to the date numerically corresponding date in the following month?
The Special Bench of ITAT12 has held that time-limit of 'six months' in Sec. 54EC means 'six British Calendar months' in view of the General Clauses Act, 1897.
It is recommended that Income-tax Act should define the meaning of the term 'month' and should prescribe the methodology for its computation to end all disagreements and possible disputes on its computation and meaning.Read More
32. Exemption limit under Sec. 54EC – Rs. 50 Lakhs or Rs. 1 Crore
Various ITAT benches have held that the assessee can invest up to Rs. 1 Crore in capital gain bonds under section 54EC which is spread over a period of two financial years at Rs. 50 lakhs each. However, such investment should be made within a period of 6 months from the date of transfer.
However, the Jaipur Bench of ITAT13 has struck a different note by opining that as per section 54EC investment within 6 months is investment for that particular financial year in which transfer has taken place and said period of six months would not include some part of subsequent financial year. In other words, an assessee is not eligible to claim more than Rs. 50 lakh under section 54EC of the Act as exemption in an assessment year.
Therefore, it is recommended that the provisions of Section 54EC should clarify the correct position to end the above controversy.Read More
33. Scope of Sec. 206AA when income is governed by DTAA
If a non-resident does not obtain a PAN, the Assessing Officer insists on withholding of taxes at 20% even when lesser rate of tax is prescribed in DTAA. Such deduction of tax as per provisions of Section 206AA is unjustified in view of Section 90(2) of the Act, which provides that a taxpayer can opt to apply provisions of the Act or the DTAA, whichever is more beneficial.
Whenever any specific arrangement or agreement has been made regarding the taxability of any income under the Agreement for Avoidance of Double Taxation, such an arrangement or agreement will necessarily prevail over the provisions of the statute14. If a tax liability is imposed by the Act, the agreement may be resorted to for negating or reducing it15 and not for imposing an additional burden.
Thus, a clarification is needed in Section 206AA on the scope of the provisions and whether it can override the provisions of the Treaty entered into between two sovereign countries?Read More
34. Section 50C should not be applicable if entire capital gain is exempted due to Section 54F or 54EC, etc.
Following two controversies revolve around when land or building is transferred at a consideration which is less than the value adopted by Stamp authority and assessee claims section 54F exemptions for investment of consideration in a new house:
(a) Whether investment in new residential house (under Section 54F), should be the actual consideration or the notional sales consideration as computed under Section 50C?
(b) Whether deeming provisions of Section 50C can be invoked when assessee has invested entire net consideration for investment in new house?
Various judicial authorities have dealt with the above issues and held that provisions of Section 50C cannot be used for computation of Section 54F relief.
■ Deeming provisions as mentioned in section 50C will not be applicable to section 54F, so far as meaning of full value consideration is concerned, as deeming provision mentioned in section 50C is for specific asset and for purpose of section 48. As per the Explanation to section 54F(1) 'net consideration' means 'the full value of consideration received or accruing as a result of transfer of the capital asset' and the Explanation to section 54F(1) is not governed by meaning of the words 'deemed full value of consideration' mentioned in section 50C16.
■ Where entire amount of sale consideration has been invested in Bonds, provisions of section 50C are not applicable17.(This judgment was delivered on the issue of relief under Section 54EC, however, it can be applied mutatis-mutandis under section 54F).
We suggest that a clarification should be inserted to resolve the above controversy. It should be clarified that deeming fiction under Section 50C will not operate when entire capital gain is exempt by virtue of Section 54F.Read More
35. Permit larger time-limit for payment by employer of employees' contribution to PF / superannuation funds
Several Courts have taken a view that the benefit of extended limitation to the employer is available in respect of employee's contribution as well, i.e., if employer remits the employee's contribution to the administrator of the funds before the due date of filing of return, the employer will get the deduction of such contribution.
However, in a recent decision rendered by Hon'ble Gujarat High Court in CIT v. Gujarat State Road Transportation corporation [2014] 41 taxmann.com 100, a contrary view has been taken to the affect that the benefit of extended limitation available to the employers contribution by virtue of proviso to section 43B will not be available in respect of employee's contribution, if not remitted by employer within the due dates as per the relevant statues and as provided in section 36(1)(va).
It is submitted that this view of Hon'ble Gujarat High Court is contrary to several decision of the Courts as mentioned above. When two contrary views are on record, there is likelihood of an unending controversy and litigation. Therefore, it is suggested that necessary amendment to section 36(1)(va) be carried out to recognize the view taken by the several other High Courts that section 43B would also regulate the time limitation for payment of employee's contribution by the employer to the respective superannuation funds. This can be done by omitting the Explanation existing below clause (va) to section 36(1) or to modify that Explanation, thereby due date would mean the date of filing of the return by the employer under section 139(1).Read More
36. Levy of Surcharge and Education Cess over Withholding Tax
DTAA entered into by India with several countries provides rates of withholding tax on several specified incomes such as dividend, interest, royalty and fee for technical services. Such rates vary from 10% to 20%, depending upon the respective treaty. The issue now arises whether education cess and surcharge should also be levied over and above the withholding tax.
The view of the department, that withholding tax liability can further be enhanced by education cess and surcharge, is not sustainable, in law, because DTAAs are entered into by India with sovereign States and any modification either in terms of agreement or in the tax rates provided in the agreement cannot be altered without following mutual agreement procedure.
Notwithstanding it is suggested, to avoid contrary view and litigation, an Explanation to section 195 or to section 2(37A) be provided so that withholding tax liability is not enhanced by Education Cess and Surcharge if such liability arises under DTAA.Read More
37. Clarification needed in Section 194-IA to tackle some vital issues
Finance Act, 2013 introduced a new provision Section 194-IA in Chapter XVII for deduction of tax at source on transfer of certain immovable properties other than agricultural land.
This provision is applicable to all persons who are going to purchase immovable property in excess of Rs. 50 lakhs per property and is applicable wef June 1, 2013.
However, the provision of Section 194-IA is silent on its applicability and the scope in certain circumstances. It is recommended that the provision should address the following concerns:
(a) Adjustment for tax deducted at source from advance payment of consideration in case contract is cancelled subsequently (in both cases, when advance money is forfeited and when advance money is refunded to the proposed buyer);
(b) Applicability of provision in Joint Development Agreements, where the consideration may not be in cash;
(c) Where the property is registered in name of a person but there are other co-owners or beneficial owners who claim title over the property, i.e., building owned by the Company but registered in the name of one of its director, etc;
(d) Whether transfer of shares of a company which derives its substantial value from the immovable properties it owns should be made subject to Section 194-IA?
(e) More than one buyer buying property from one seller;
(f) Whether tax is to be deducted by a non-resident buyer purchasing a property situated outside India from a person resident in India?
38. Transfer of immovable property through a Power of Attorney
A property is generally transferred through 'General Power of Attorney' or 'Agreement to Sell' so as to avoid payment of stamp duty and registration charges on deeds of conveyance, to avoid payment of capital gains on transfers, to invest unaccounted money ('black money') and to avoid payment of 'unearned increases' due to development authorities on transfer.
The Supreme Court in the case of Suraj Lamp & Industries (P) Ltd. v. State of Haryana[2011] 14 taxmann.com 103 (SC) has held that any transfer through a General Power of Attorney, Agreement to sell and a Will couldn't be recognized as valid mode of transfer of immovable property.
Consequently, to give effect to Supreme Court's judgment, Govt. of NCT Delhi had issued a Circular No. 298 dated 27-4-2012 and made it clear to the registrar or sub-registrar that on basis of a GPA, a will and an agreement to sell, collectively or separately in respect of an immovable property, a conveyance cannot be executed, i.e., no transfer of property will take effect unless a clear sale deed is executed and duly registered by the executants.
However, in the case of Pace Developers & Promoters (P) Ltd. v. Government of NCT [2013] 33 taxmann.com 99, the Delhi High Court turned down the circular issued by the Govt. of NCT of Delhi and held that the directions contained in the impugned circular are quite contrary to the observations made by the Supreme Court in the case of Suraj Lamp (Supra). The Supreme Court had not said that in no case a conveyance can be registered by taking recourse to a GPA. As long as the transaction is genuine, the same will have to be registered by the sub-registrar. It was held by the Delhi High Court that a person entering into a development agreement with a land developer or builder for development of a parcel of land or for construction of apartments in a building, and for this purpose a power of attorney empowering the developer to execute sale agreements can be executed.
It is recommended that Section 2(47) read with Section 45 should clarify the taxability of transfer of an immovable property through a general power of attorney or agreement to sell, which is eventually not considered as a valid mode of transfer.
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1. Biocon Ltd.v. Dy. CIT [2013] 35 taxmann.com 335 (Bang.) (SB)
2. Smt. V.R. Karpagam v. ITO [2013] 34 taxmann.com 98 (Chennai - Trib)
3. Linde AG, Linde Engineering Division v. Dy. DIT [2014] 44 taxman.com 244 (Delhi)
4. C.E.S.C. Ltd. v. ITO [2004] 134 Taxman 511 (Cal.)
5. ITO v. Tata Elxsi [2013] 37 taxmann.com 275 (Bang. - Trib.)
6. Dy.CIT v. Cosmo Films Ltd. [2012] 24 taxmann.com 189 (Delhi)
7. Yahya E. Dhariwala v. Dy. CIT [2012] 17 taxmann.com 159
8. Chandrika Singh v. Addl. Member Board of RevenueAIR 1998 Pat. 118
9. Sin Oceanic Shipping ASA Norwayv. AAR [2014] 41 taxmann.com 444 (SC)
10. CIT v. Dynamic Enterprises [2013] 40 taxmann.com 318 (Karnataka) (FB)
11. Asst. CIT v. N. Prasad, Executive Chairman [2014] 43 taxmann.com 253
12. Alkaben B. Patel v. ITO [2014] 43 taxmann.com 333
13. Asstt.CIT v. Shri Raj Kumar Jain & Sons (HUF) [2012] 19 taxmann.com 27
14. CIT v. Davy Ashmore India Ltd.[1991] 190 ITR 626 (Cal.)
15. CIT v. R. M. Muthaiah[1993] 67 taxman 222 (kar.)
16. PrakashKarnawat v. ITO [2011] 16 taxmann.com 357 (JP.- Trib.)
17. PrakashKarnawat v. ITO [2011] 16 taxmann.com 357 (JP.- Trib.)
Sournce: www.taxmann.com
