Issue No. 173 / Jan 19th, 2019
|
Expert Column:
One of the most significant developments in 2017 and 2018 has been the nation-wide investigation into Shell Companies and Penny Stock companies. Several thousands of cases have been re-opened citing bogus capital gains and penny stocks. This has even led to the Government introducing a provision that Sec 10(38) can only be enjoyed if STT has been paid on purchase of the share, as well, with certain exceptions. Dr. Abhishek Murali (Chartered Accountant, Partner, Victor Grace & Co.) in his 2-part article makes a comprehensive analysis of taxation of Penny Stocks and Shell Companies. The author points out that the Department has three significant assessment points in the process viz., (i) Issue of shares at a premium by Shell companies, (ii) Benefit of business loss on sale of shares purchased at inflated prices and (iii) Benefit of Capital gains exemption on sale of shares at a high price. Issue of shares at a premium by Shell companies
In Part-I, the author discusses the nitigrities of the first limb i.e., Issue of shares at a premium by Shell companies. The author studies some of the most recent decisions on this aspect such as Bangalore ITAT decision M K Rajeshwari vs ITO reported in [TS-9007-ITAT-2018(BANGALORE)-O] where after studying the financial worth and share price movement of the company, ITAT held that it was not worth investing in and upheld Revenune’s stand that unaccounted money was introduced in the form of long-term capital gains. Referring to the different views by ITAT in different jurisdictions, author signs off stating “It appears a solution will only be obtained when the Apex Court considers the matter and provides a judgement on the same, that can help resolve the issue pan-India.” Click here to read the article titled “Comprehensive Analysis of Taxation of Penny Stocks and Shell Companies - Part I” |
|
Key Takeaways from Handpicked rulings
1. [TS-6810-HC-2018(RAJASTHAN)-O] : Sec. 50C on transfer of capital asset/rights : Rajasthan HC upholds applicability of Sec. 50C to assessee, distinguishes Bombay HC ruling in case of Greenfield Hotels & Estates [TS-6112-HC-2016(Bombay)-O]; Examines the provisions of Sec. 50C, and states that the section is clearly applicable to assessee in view of the facts that assessee executed and registered a sale deed for sale of the land and received consideration; Holds that ITAT rightly upheld application of Sec. 50C inasmuch as sale deed was made on consideration of Rs.11,70,000/-, whereas, value of the property taken by the Sub-Registrar IV, Jaipur for registration of sale deed was at Rs.53,11,367/-; Rejects assessee’s submission that the land sold by assessee was purchased from the khatedar having rights like a leaseholder and further that the vesting and possession of land was with RIICO (State Govt.) and hence, there was no transfer of capital asset, rather, it was only transfer of rights in the property; Distinguishes Bombay HC decision in Greenfield Hotels & Estates [TS-6112-HC-2016(Bombay)-O] wherein it has been held that Section 50C would not be applicable when there is a transfer of lease hold rights of the land. Click here to read the Ruling Copy
2. [TS-5023-ITAT-2019(JAIPUR)-O] : TDS on employees’ LTC claim on foreign travel : Assessee-bank held assessee-in-default for short-deduction of TDS on LTC claim relating to foreign leg of the travel of its employees, being not eligible for exemption u/s. 10(5) r/w Rule 2B - Jaipur ITAT dismisses assessee’s appeal for AY 2013-14, upholds Revenue’s stand that the employees were not eligible for exemption u/s. 10(5) on foreign travel made by them and hence, the payments made towards the LTC claim to that extent were chargeable to tax and assessee was under obligation to deduct TDS on such payments; Owing to non-deduction of tax at source on reimbursement made to its employees to the extent of foreign travel leg of their LTC claim, ITAT upholds order passed u/s. 201(1)/201(1A) holding assessee as assessee-in-default; Follows Coordinate Bench decision in case of SBI [TS-5711-ITAT-2017(Jaipur)-O]
TS Note : Recently, Jaipur bench of ITAT in the case of SBI, deleted penalty u/s. 271C for non-deduction of tax on leave travel payment to employees with respect to foreign leg of travel, accepting assessee’s ‘reasonable cause’ plea u/s 273B
Click here to read the Ruling Copy
3. [TS-5022-ITAT-2019(MUMBAI)-O] : Interest-free deposit from tenant; Notional rent : Sudden reduction in rentals post receipt of interest-free advance from tenant, a colourable device to reduce overall tax burden, upholds addition; Corporate entity, a separate legal entity, notional rent on premises used for business of a company in which assessee is a director, liable to tax as income from house property; Business of a partnership-firm, is business of the partner, deletes notional rent addition on premises used by one of assessee’s partnership firms - ITAT upholds Revenue’s bringing to tax differential rent, accepts its view that sudden, drastic reduction of rent from Rs. 2 lakhs p.m to Rs. 25,000 p.m on receipt of an interest-free deposit of Rs. 4 crores from the tenant nothing but a colourable device to reduce overall tax burden, also notes that interest free security deposit received by the assessee was advanced to sister concerns without any interest and no income has been reflected by the assessee against the same; Further, upholds Revenue’s taxation of notional rent on assessee’s premises used for business of a company in which assessee is director, holds that “corporate entity is a separate legal entity in the eyes of law and the business carried out by the corporate entity could not be said to be the business of shareholders / directors”; However, declines Revenue’s similar notional rent claim from a premises in which assessee’s partnership firm is running its business, notes that “since a firm is constituted, collectively by its partners and the business of the firm could be said to be the business of its partner”; Remits to AO, the issue of estimation of rent used by corporate entity and other other claims of the assessee; Separately, upholds Revenue’s view that notional rental value of the premises not let out since inception is to be brought to tax and vacancy allowance u/s. 23(1)(c) is not available to assessee, notes that “since under law only one property, at the option of the assessee, could be termed as self-occupied property whereas all the other properties are deemed to be let out”
Click here to read the Ruling Copy
4. [TS-5001-HC-2019(MADRAS)-O] : Sec. 40A(3)-Cash Payments : Absent cogent reason compelling assessee to make cash payments, disallowance u/s. 40A(3) is sustainable - HC dismisses assessee’s appeal, sustains disallowance of cash payments of Rs. 34.68 crores made in bidding processes; Considers ITAT’s finding that assessee failed to demonstrate that the conditions of the bid required the assessee to effect payments in cash then and there and payments could not have been made by cheque or Demand Draft or any other mode; Upholds Revenue’s stand that considering the nature of transaction done by the assessee, it would not fall under any one of the exceptional clauses under Rule 6DD; Rejects assessee’s submission that in the auction of old gold conducted by finance company for which assessee bids, as soon as the auction is confirmed, the highest bidder has to remit part of the amount in cash and the amount which has to be paid is not known to the assessee earlier and therefore, the payments cannot be made through banking channel.
Click here to read the Ruling Copy
|
|
CBDT Updates:
1. CBDT notifies annual circular for TDS on salary for FY 2018-19 - Circular No. 1/2019 2. CBDT: Withdraws circular on Sec. 56(2)(viia) applicability to ‘fresh’ issuance of shares; Cites subjudice matters - Circular No. 2/2019 3. CBDT notifies interest at 7.90% on deposits made under the Senior Citizens Welfare Fund w.e.f. 1.4.2018 - Notification 13/20/2014-NS 4. CBDT notifies National Iranian Oil Company for the purposes of Sec. 10(48) exemption - Notification No. 91/2018 5. CBDT notifies Procedure, Formats and Standards of issue of Permanent Account Number (PAN) - Notification No.7/2018 6. CBDT specifies the procedure, format and standards for the purpose of electronic filing of Form No. 13 and generation of certificate under sub-section (1) of section 197 / sub-section (9) of section 206C through TRACES - Notification No.8/2018 7. CBDT notifies conditions for Start-Ups to be eligible for approval u/s. 56(2)(viib) - Notification 5(4)/2018-SI 8. CBDT : Gross direct Tax Collections 14.1% higher than the last year 9. CBDT: Carves out exceptions from online application for nil/lower TDS / TCS Certificates Click here to read more latest news |
Issue No. 172 / January 11, 2018
We are glad to present to you the 172th edition of ‘Taxsutra Database Special’ which comprises of Part-III of the series of articles on Section 56(2)(viib)
Section 56(2)(viib) which was introduced by Finance Act, 2012 has been subject matter of a lot of controversy recently. Huge additions were made to the returned income in some of the cases in the recent past during the regular assessment proceedings, notwithstanding the availability of judicial precedents on the subject matter. In this three-part article series titled Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum, authors Mr. Prashanth (Partner, Guru & Jana, Chartered Accountants) and Mr. Sidanna Baradar (Practice Leader, Guru & Jana) explain the practical difficulties which the taxpayers face while complying with the law, recent decisions on the issues and developments in terms of notifications, etc. The series will be published in three parts, namely:
|
1. Part I – Introduction to the section, its literal understanding and the issues involved.
2. Part II - Discussion on the issues on the strength of the available precedence.
3. Part III- Recent Rulings and Notifications - Number G.S.R. 364(E), Notification No. 24/2018, Letter (Instruction) (File No. 173/14/2018-ITA.I) dated 06.02.2018 and other aspects.
|
  Part III – Recent Rulings and Notifications
After discussing the intricacies encompassing determination of FMV of shares, applicability of Sec. 56(2)(viib) to preference shares allotment and several other important aspects supported by judicial precedents in Part I and Part II, authors in the third and the last leg of the series, discuss two of the most recent and important rulings of the Income Tax Tribunal bench of Bangalore in cases of Innoviti Payment Solutions [TS-4-ITAT-2019(Bang)] and 2M Power Health Management Services [TS-756-ITAT-2018(Bang)]. In the former decision, ITAT inter alia laid down the criteria for valuation of shares of start-ups while stating that AO cannot change the method of valuation adopted by assessee. The authors further review the most recent circulars by CBDT on the subject. They highlight instruction dated 6th February 2018 which instructed the IT officers that no coercive recovery of demand shall be made against ‘start-ups’ where demands arise consequent to additions made u/s. 56(2)(viib). Examining the notification No. 24/2018 which provides for exemptions from the section and the tedious conditions therefor, authors opine that it is really a cumbersome process to get the benefit of the said notification. Stating the need for a lot of clarity to settle the dust, the authors sign off remarking that “On one hand the government is trying to promote the startup ecosystem, which will bring in new ideas, innovation, employment, etc, but on the other hand there is a uncertainty looming around in the form of so called Angel tax(Sec.56(2)(viib)”
Click here to read Part-III of the Article Series titled “Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum”
Click here to read Part-II of the Article Series titled “Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum”
Click here to read Part-I of the Article Series titled “Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum” |
Issue No. 170 / December 28, 2018
We are glad to present to you the 170th edition of ‘Orange Special’ which comprises of Part-II of the series of articles on Section 56(2)(viib)
|
Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum
Section 56(2)(viib) which was introduced by Finance Act, 2012 has been subject matter of a lot of controversy recently. Huge additions were made to the returned income in some of the cases in the recent past during the regular assessment proceedings, notwithstanding the availability of judicial precedents on the subject matter. In this three-part article series titled Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum, authors Mr. Prashanth (Partner, Guru & Jana, Chartered Accountants) and Mr. Sidanna Baradar (Practice Leader, Guru & Jana) explain the practical difficulties which the taxpayers face while complying with the law, recent decisions on the issues and developments in terms of notifications, etc. The series will be published in three parts, namely: 1. Part I – Introduction to the section, its literal understanding and the issues involved.
2. Part II - Discussion on the issues on the strength of the available precedence.
3. Part III- Recent Notifications, number G.S.R. 364(E), notification No. 24/2018, letter (Instruction) (File No. 173/14/2018-ITA.I) dated 06.02.2018 and other aspects
|
  After discussing controversies surrounding determination of FMV of shares in Part-I of the series, authors in the second part titled Part II - ‘Discussion on the issues on the strength of the available precedence’ deliberate on other aspects along with supporting jurisprudence. Examining if the section 56(2)(viib) is applicable where preference shares are allotted, authors highlight Kolkata ITAT decision in Microfirm Capital wherein the Court set aside the argument that preference shares are quasi-debt and it was not the intention of the legislature to bring such instruments within the ambit of this Section. Authors further ponder over issues such as whether provisions of sec. 56(2)(viib) can be invoked in spite of a satisfactory explanation provided u/s. 68, whether the AO can compare the revenue/profit projected under DCF method vis a vis actual revenue/profit of the company and reject the valuation report. Further, authors draw attention to Chennai ITAT decision in the case of Ascendas India wherein it was clarified that net asset value as per Rule 11UA is only intended for application of section 56 and never intended for arriving at a fair market value for comparing an international transaction to establish Arm’s Length Price for transfer pricing purposes.
Click here to read Part-II of the Article Series titled “Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum”
Click here to read Part-I of the Article Series titled “Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum”
|
|
CBDT Updates :
CBDT : No coercive measures on start-ups to recover demand w.r.t additions u/s 56(2)(viib)
CBDT: Carves out exceptions from online application for nil/lower TDS / TCS Certificates
MoF : Action against Illegal Operations of Shell Companies
Click here to read more latest news
|
Issue No. 169 / December 21, 2018
|
We are glad to present to you the 169th edition of ‘Orange Special’ which comprises of Part-I of the series of articles on Section 56(2)(viib)
|
|
Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum
Section 56(2)(viib) which was introduced by Finance Act, 2012 has been subject matter of a lot of controversy recently. Huge additions were made to the returned income in some of the cases in the recent past during the regular assessment proceedings, notwithstanding the availability of judicial precedents on the subject matter. In this three-part article series titled Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum, authors Mr. Prashanth (Partner, Guru & Jana, Chartered Accountants) and Mr. Sidanna Baradar (Practice Leader, Guru & Jana) explain the practical difficulties which the taxpayers face while complying with the law, recent decisions on the issues and developments in terms of notifications, etc. The series will be published in three parts, namely:
1. Part I – Introduction to the section, its literal understanding and the issues involved.
2. Part II - Discussion on the issues on the strength of the available precedence.
3. Part III- Recent Notifications, number G.S.R. 364(E), notification No. 24/2018, letter (Instruction) (File No. 173/14/2018-ITA.I) dated 06.02.2018 and other aspects
|
|
In the first article of this series titled 'Introduction to the section, its literal understanding and the issues involved', authors dissect and succinctly explain each aspect of the section in a tabular form as to its applicability, exceptions, determination of shares FMV etc. Discussing dispute surrounding the method of determination of FMV of shares, authors highlight a recent decision of Mumbai Tribunal in the case of Ozoneland Agro [TS-6963-ITAT-2018(MUMBAI)-O] wherein it has been held that it is beyond the jurisdiction of the AO to insist upon a particular system for determination of FMV of shares, especially when the Act allows the assessee to adopt one of the two methods viz., Net asset value (NAV) Method or under Discounted cash flow (DCF) method
Click here to read Part-I of the Article Series titled “Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum”
|
|
CBDT Updates :
CBDT relaxes CbCR furnishing deadline for entities from countries having systemic failure Notification No. 88/2018 CBDT: Registration process of charitable trusts / institutions brought within purview of internal audit - Click here
DIPP : Acts on news reports about angel investors' notices, takes up matter with DoR - Click here
Click here to read more latest news |