ITR: ITR HIGHLIGHTS ISSUE DATED 23-8-2010 Volume 326 : Part 2

INCOME TAX REPORTS (ITR) HIGHLIGHTS ISSUE DATED 23-8-2010

Volume 326 : Part 2

HIGH COURT JUDGMENTS

==> Rejection of accounts : Tribunal not justified in confirming order of Commissioner (Appeals) without considering material on record : CIT v. T. M. Kuruvilla (Ker) p. 210

==> Amounts not accounted for and on which no advance tax paid : Additions in block assessment valid : M. A. Anto v. CIT (Ker) p. 212

==> Receipt of amount for not competing with transferee : Revenue receipt : CIT v. Tata Coffee Ltd. (Karn) p. 214

==> CIT (Appeals) and Tribunal accepting explanation of assessee for fall in gross profit : Findings of fact : CIT v. Smt. Poonam Rani (Delhi) p. 223

==> Assessment order adopting valuation of stamp duty authorities without waiting for valuation of valuation cell not valid : N. Meenakshi v. Asst. CIT (Mad) p. 229

==> Export : Ninety per cent. of gross interest received to be reduced : Ambattur Clothing Co. Ltd. v. Asst. CIT (Mad) p. 245

==> Assessee not availing of opportunity provided u/s 50C(2), (3) : Reduction in capital loss justified : Ambattur Clothing Co. Ltd. v. Asst. CIT (Mad) p. 245

==> Tribunal not justified in cancelling assessment without considering facts : Matter remanded : CIT v. Smt. M. Thankamma (Ker) p. 2

==> Tribunal granting weighted deduction for entire expenditure on technical know-how : Proper : CIT v. Claris Lifesciences Ltd. (Guj) p. 251

==> Appeal to Appellate Tribunal : Co-ordinate Bench cannot take a contrary view : Affection Investments Ltd. v. Asst. CIT (Guj) p 255

==> AO entitled to refer valuation after completion of assessment : CIT v. Mrs. Achamma Chacko (Ker) p. 258

==> Expenditure on performing puja not deductible : Hira Ferro Alloys Ltd. v. Deputy CIT (Chhattisgarh) p. 261

==> Amount borrowed at 16% interest and invested in purchase of 4% non-cumulative preference shares : No part of interest could be disallowed : CIT v. Pankaj Munjal Family Trust (P&H) p. 286

==> Interest on borrowed capital : Tribunal failing to apply test of commercial expediency : Matter referred to a larger Bench : CIT v. Rockman Cycle Industries P. Ltd. (P&H) p. 291

==> Industrial undertaking : Loss from non-industrial unit in terms of s 80AB and s 71 to be adjusted first : CIT v. Mentha and Allied Products (All) p. 297

==> Plant and machinery put to use for purposes of business during relevant accounting year : Assessee entitled to depreciation : CIT v. Mentha and Allied Products (All) p. 297

==> Penalty order set aside based on evidence and material on record : CIT v. Amrit Banaspati Co. Ltd. (All) p. 303

==> Rate of depreciation restricted to 75% : Applies only to companies and only for AY 1991-92 : CIT v. Lotus Roofings P. Ltd. (Mad) p. 307

==> Registration of charitable institution : Amended deed not a pre-requisite condition : CIT v. R. M. S. Trust (Mad) p. 310

==> Cash compensatory support whether to be excluded from business profits in AY 1991-92 : Matter remanded : CIT v. Tractors and Farm Equipment Ltd. (Mad) p. 313

==> Bad debt : Finding that advances irrecoverable bad debts and interest not charged due to commercial expediency Findings of fact : CIT v. V. Ramakrishana and Sons Ltd. (Mad) p. 315

==> Assessee cannot claim that its entire income was exemption u/s 10B : CIT v. Sangeetha Granites Ltd. (Karn) p. 324

==> Limited waiver of interest granted to rival group belonging to same organisation : Waiver application must be reconsidered : S. Pankajam v. Chief CIT (Mad) p. 331

==> Tax less than prescribed monetary limit and issue involved not falling within exception under CBDT circular : Appeal by Department dismissed : CIT v. G. Chandra (Mad) p. 336

==> Rectification of mistakes : Issue settled subsequently by SC : Rectification based on such decision not valid : CIT v. Palani Andavar Cotton and Synthetic Spinners Ltd. (Mad) p. 339

==> Assessee not raising question before Tribunal : Not entitled to raise question before court : Asvini Fisheries P. Ltd. v. Deputy CIT (Mad) p. 344

==> Fixed deposits considered in earlier assessment years and interest on fixed deposits assessed in prior years : Notice on ground that fixed deposits revealed unaccounted investments not valid : CIT v. Ramakrishna Hegde (Karn) p. 347

==> Expenditure on allotment of shares to assessee in subsidiary company : Not entitled to deduction : G. T. N. Textiles Ltd. v. Deputy CIT (Ker) p. 352

==> Share application money placed in deposit : Interest thereon is income from other sources : G. T. N. Textiles Ltd. v. Deputy CIT (Ker) p. 352

AUTHORITY FOR ADVANCE RULINGS

==> MAT not applicable to foreign company having no physical presence or PE in India : Timken Co., In re p. 193

==> Financial corporation : Interest paid eligible for deduction : Rural Electrification Corporation Ltd., In re p. 267

==> Transfer by non-resident of shares held in another private company to subsidiary : Not taxable in India : Praxair Pacific Ltd., In re p. 276

STATUTES

==> Notifications :

Income-tax Act, 1961 : Notification under section 80-IB(10)(a)/(b) : Housing projects notified for the purpose of section 80-IB(10(a)(b) p. 9

Income-tax Act, 1961 : Notification under section 80G(2) : Sports associations notified for the purpose of section 80G(2)(c) p. 9

Income-tax Act, 1961 : Notifications under section 120(1) and (2) : Jurisdiction of Income-tax authorities : Amendments pp. 10, 17

NEWS-BRIEF

==> Tax code bill to spare SEZs and other draft proposals

The Government may not introduce too many changes in the Bill on the Direct Taxes Code (DTC), except in a few contentious areas such as taxation of special economic zones (SEZs), capital gains and unit-linked insurance plans (ULIPs). A major part of the Bill has been drafted by the Task Force on DTC. The drafted portions are being vetted by the Law Ministry so that it can be placed on the floor of the House before the session ends on August 27.

The proposals in the second discussion paper on Double Taxation Avoidance Agreement, concept of residence in case of a company incorporated outside India, and General Anti Avoidance Rules are unlikely to be changed in the DTC Bill. Besides, proposals on the Minimum Alternate Tax, taxation of income from employment, retirement benefits and perquisites, taxation of income from house property, taxation of non-profit organisations and wealth tax may not see any major changes.

The Finance Minister said that units which start functioning after the SEZ is developed would be allowed tax concessions for some more time beyond April 2011.

At present, units in SEZs enjoy 100 per cent. tax exemption on their income for the first five years, 50 per cent. in the next five years and another 50 per cent. on re-invested profits in the following five years. SEZ developers get 100 per cent. tax exemption on profits for 10 years, which can be used in the first 15 years. Due to these tax sops, the Finance Ministry had to forgo revenue of Rs. 5,266 crore in 2009-10.

The DTC had also proposed to treat capital gains from stocks and equity funds as part of ordinary income. At present, no capital gains tax is paid on long-term gains. Income arising through sale and purchase of securities to foreign institutional investors (FIIs) was also proposed to be taxed under capital gains. This suggestion was opposed by FIIs because currently it is treated as business income of a foreign company.

Another widely opposed proposal of the draft DTC was to impose tax on unit-linked insurance plans. It had proposed to tax exempt provident fund, new pension system, approved pure life insurance products and annuity schemes at the withdrawal stage, but ULIPs were kept out of this exemption. [Source : www.businessstandard.com dated August 9, 2010]

==> Immediate action for unauthorized maintenance of foreign bank account

India has taken steps to re-negotiate all existing Double Taxation Avoidance Agreements (DTAAs) to revise Article concerning Exchange of Information to specifically provide for exchange of banking information, if in case such a provision does not exist in the existing Article.

Government has proposed to review the India-Mauritius Double Taxation Avoidance Convention (DTAC) to incorporate appropriate changes in the DTAC for prevention of treaty shopping and to strengthen the mechanism for exchange of information on tax matter between India and Mauritius. For this purpose a Joint Working Group (JWG) comprising members from the Government of India and the Government of Mauritius was constituted in 2006 to inter alia put in place adequate safeguards.

India does not have a DTAA with Cayman Islands. India has taken steps to conclude a Tax Information Exchange Agreement (TIEA) in line with international standards, with Cayman Islands as India does not want to enter into DTAA with Cayman Islands. [Source : www.pib.nic.in dated August 10, 2010]

==> Investment linked deductions replaces profit linked incentives to spur economy

The draft Direct Taxes Code (DTC) along with a Discussion Paper was released for public discussion in August 2009. The Discussion Paper mentioned that profit-linked incentives are inherently inefficient. Essentially, a profit-linked incentive is regressive in nature. Consequently, there is an inbuilt incentive for laundering and shifting of profits to the exempted activity. Since profit is the basis for exemption, there is no incentive for investment and up-gradation during the period of tax holiday. Such profit-linked incentives also lead to significant loss of revenue and encourage rent-seeking behaviour. Therefore, the Code proposes to substitute the currently available profit-linked incentives by investment-linked deductions for specified sectors including SEZs developers. Investment-linked incentives are better directed instruments since they are performance based and target the incentive specifically to the capital investment. With regard to the profit-linked incentives available to SEZs, the draft Direct Taxes Code (DTC) proposed the following :

provision for profit-linked deduction currently available to SEZ developers for the unexpired period for all SEZs which are notified on or before the commencement of DTC;

provision for an investment-linked deduction for all SEZ developers notified on or after the date of commencement of the DTC;

Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) to be levied on SEZ developers;

no protection of the profit-linked deduction available to SEZ units for the unexpired period of the deduction left to them after the date of commencement of the DTC;

no tax benefits for SEZ units set up on or after the date of commencement of the DTC; and MAT on all SEZ units.

A number of inputs, have been examined and the major issues on which various stakeholders have given their views have been identified. These issues have been addressed in the form of a Revised Discussion Paper which was released earlier.

The revised Discussion Paper modifies the proposals for SEZ units to also protect the profit-linked deduction for the unexpired period for SEZ units beginning operations before March 31, 2011. [Source : www.pib.nic.in dated August 10, 2010]