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Taxsutra Database Special : Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum - Part III

 

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) 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 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”
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Taxsutra Database Special: “2018 - A look back”

 

Issue No. 171 / January 9, 2019

Taxsutra Database Special: “2018 - A look back”

As we step into a new year 2019, the events of the past year are fresh in our memories. This special Orange bulletin captures  the glimpses of of the year 2018 and presents issues that were trending the most in the year that passed, recent rulings on these issues, important CBDT circulars/notifications of the year 2018 and some interesting articles published by us in the year.

The topics that topped the list of most searched issues include "Accommodation entries through Shell Companies", "Bogus capital gains from Penny Stocks", "Stamp Duty rates under Sec. 50C on leasehold rights" etc. The articles - "Taxman's view on the Flikart-Walmart deal", "PMLA-Government's Magic Wand against Illegal money launderers", "Important amendments in Budget 2018 in Sections 50C, 43CA & 56" are among the most read articles of the year. 

We hope the newsletter keeps you engaged and helps you get an overview of the the year 2018.

Click here to read and download Taxsutra Database Special: “2018- A Look Back”

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Taxsutra Database Special : Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum - Part II

 

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
 
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Taxsutra Database Special : Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum - Part I

 

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

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Taxsutra Database Bulletin : Penny Stock LTCG u/s. 10(48); Manufacture vis-a-vis Additional Depreciation; CBDT Updates and more ...!

 

Issue No. 158/ Dec 17th, 2018

Key Takeaways from Handpicked rulings
 
1. [TS-9014-ITAT-2018(MUMBAI)-O] : Remuneration to Directors u/s. 40A(2) : Absent finding by AO to demonstrate that remuneration to directors is excessive and unreasonable having regard to the market rate or business needs or benefit derived by the assessee, disallowance u/s. 40A(2) is unsustainable - ITAT deletes disallowance u/s. 40A(2) on account of remuneration to directors for newspaper publisher, notes that over the years there is incremental increase in payment of remuneration to the directors and there is  no quantum jump in the subject year; Explains that while invoking the provisions of sec. 40A(2)(a), the AO must bring material on record to demonstrate that the payment made by the assessee is excessive or unreasonable having regard to the market rate for the goods, services, facilities availed or the business needs of the assessee or commensurate with the benefit derived by the assessee which has not been done by the AO; Noting that the object behind introduction of sec 40A(2) is to prevent evasion of tax through shifting of profit by making payment to related parties, ITAT states that “Therefore, it is of paramount importance to examine whether the assessee has made payment for evading tax through shifting of profit”;
 
Click here to read the Ruling Copy
 
2. [TS-9018-ITAT-2018(JAIPUR)-O] : Penny Stock LTCG u/s. 10(48) : Absent evidence to show that assessee has paid over and above the purchase consideration or paid in cash, it cannot be held that the assessee has introduced his own unaccounted money by way of bogus long term capital gain - Jaipur ITAT allows assessee's appeals, sets aside CIT(A)'s order and directs the AO to not treat the LTCG as bogus and delete the consequential addition; Holds that when shares were allotted directly by the company to the assessee at par on face value then the same cannot be considered as a penny stock transactions; States that "...once the assessee produced all relevant evidence to substantiate the transaction of purchase, dematerialization and sale of shares then, in the absence of any contrary material brought on record the same cannot be held as bogus transaction merely on the basis of statement of one Shri Anil Agrawal recorded by the Investigation Wing"; Notes that the transaction is established from the evidence and record which cannot be manipulated as all the entries are part of the bank account and D-mat account which is also an independent material and evidence;
 
Click here to read the Ruling Copy
 
Editorial Note :
 
Mumbai ITAT in a similar case, facts and circumstances, following the above ruling allowed the LTCG exemption u/s. 10(38) in its ruling reported in [TS-9009-ITAT-2018(MUMBAI)-O],
 
Recently, Bangalore ITAT in its ruling reported in [TS-600-ITAT-2018(Bang)] has rejected assessee’s LTCG exemption claim citing dubious trading in ‘penny stocks’. Rejecting assessee’s stand that contract notes were placed on record and the payment were made through cheques identifying the company whose shares were transacted, ITAT observed that the financial worth of the company was very meager and which did not justify the manifold increase in the prices.
 
3. [TS-8948-ITAT-2018(DELHI)-O] : Principles of Mutuality/Benefit u/s. 11 : All ingredients of mutuality exists, interest income earned by assessee-society eligible for benefit under section 11 - ITAT rules in favour of assessee, holds that Interest income is nothing but income derived from property (i.e., maintenance fund from the members) held under the trust as stipulated in sec 11; Holds that “Once the assessee has been granted registration u/s 12A, then it is an incumbent upon the AO to mandatorily compute the income u/s 11 to 13. Such a benefit can only be denied if the conditions laid down u/s 11 to 13 are not fulfilled.”;
 
Click here to read the Ruling Copy
 
4. [TS-9104-ITAT-2018(BANGALORE)-O] : Manufacture vis-a-vis Additional Depreciation : Activity of Fractional distillation, using natural air to produce commercial gases is ‘manufacture’; Assessee eligible for additional depreciation u/s. 32(1)(ii) - ITAT dismisses Revenue’s appeal, allows additional claim of depreciation u/s. 32(1)(ii) to assessee on additions made to the plant and machinery during AY 2011-12; Notes that the gases produced by the assessee in the process of fractional distillation of air are having different chemical and physical properties and commercial values from the raw material and is in line with the intention of the legislature is to bring in new things, article or product by using the machines etc., and the said products, thing or article are having different commercial name and values;
 

Click here to read the Ruling Copy

 
CBDT Updates:
 

https://ci5.googleusercontent.com/proxy/cICQffTpQFTthn9CGLXCqLTzFer_Z4qyAIy5uUxuIWkIFdHxPkHeZ2egMZDwjgyfoEtqCU8vTxYfAyNrQYwGDp9hWUY=s0-d-e1-ft#https://ymlpsend3.com/imgz/f33j_unnamed--10.jpg

1. CBDT- Clarifies scope of Departmental appeal on merits notwithstanding low tax effect - Clarification to Circular No. 3/2018
 
2. CBDT- Issues final notification u/s. 115JG relating conversion of foreign banks’ Indian branch into subsidiary - Notification No. 85/2018; Notification No. 86/2018
 
3. IT Dept. - Clarifies no Sec. 194A TDS on Senior citizens’ income not exceeding Rs. 50,000 - Notification No. 6/1/2018
 
4. MoF : Cabinet approves revised Model MoU between India and foreign Financial Intelligence Units (FIUs) for exchange of information
 
5. CBDT: Direct tax collection upto November, 2018 records increase of 15.7% compared to last year
 
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