ITR HIGHLIGHTS ISSUE DATED 4-10-2010 Volume 326 : Part 3

INCOME TAX REPORTS (ITR) HIGHLIGHTS

ISSUE DATED 4-10-2010 Volume 326 : Part 3

SUPREME COURT JUDGMENTS

> Membership card of Bombay stock exchange is an intangible asset entitled to depreciation : Techno Shares and Stocks Ltd. v. CIT p. 323

> Duty to deduct tax at source does not arise unless remittance contains wholly or partly taxable income : GE India Technology Centre P. Ltd. v. CIT p. 456

HIGH COURT JUDGMENTS

> Withdrawal of approval u/s 10(23C)(vi) for AY 2009-10 and show-cause notices for AY 2007-08 and 2008-09 justified : Valliammai Society v. Director General of Income-tax (Investigation) (Mad) p. 337

> Valuation of stock could not be changed where no evidence that valuation not correct : Voltamp Transformers Ltd. v. CIT (Guj) p. 360

> Excise duty liability only at time of removal of goods not includible in valuation of closing stock of finished goods at end of accounting period : Asst. CIT v. Narmada Chematur Petrochemicals Ltd. (Guj) p. 369

> Activity of import of machine and indigenizing and improving it to suit Indian market entitled to deduction u/s 35(4) : CIT v. Engineering Innovation Ltd. (HP) p. 392

> Deletion of addition justified where assessee reconciling entire material recovered during survey with return filed : CIT v. Diplast Plastics Ltd. (P&H) p. 399

> Additions to income in hands of assessee valid, where husband of assessee admitting that he carried on business and that he had suppressed sales and assessee not rebutting presumption raised : T. Radha v. Asst. CIT (Mad) p. 401

> Lump sum received after retirement from service as non-compete fee not assessable as profits in lieu of salary in AY 2001-02 : CIT v. A. Khosla (Mad) p. 406

> Tribunal confirming additions proper where donors disowning making gifts and denying acquaintance with assessee : Smt. Kusum Lata Thakral v. CIT (P&H) p. 424

> Transport subsidies shown in reserve and surplus account and not in profit and loss account in original return : Reassessment proceedings valid : CIT v. Shiv Shakti Flour Mills P. Ltd. (Gauhati) p. 430

> AO passing order of rectification on ground that assessee wrongly debited warranty claims which was an uncertain liability : Debatable issue : Rectification cannot be made : CIT v. Gemi Motors India P. Ltd. (P&H) p. 443

> Tribunal finding transaction giving rise to capital gains not business income : Finding of fact : CIT v. Rohit Anand (Delhi) p. 445

> High Court has no power to review under I. T. Act : Deepak Kumar Garg v. CIT (MP) p. 448

> Order rejecting application for waiver of penalty without proper reason not valid : Shrinath Ceramics v. CIT (MP) p. 452

JOURNAL

> Education cess is allowable as business expenditure ? (Narayan Jain and Deepak Jain , Advocates) p. 1

> Is excise duty payable on manufactured goods includible in value of closing stock ? (M. S. Prasad, Retd. Director (A & PAC) CBDT) p. 11

NEWS-BRIEF

> Income-tax returns filing date extended to November 30 in Jammu and Kashmir

The Central Board of Direct Taxes (CBDT) has extended the due date of filing of returns of income for the assessment year 2010-11 for all categories of cases in the State of Jammu and Kashmir to November 30, 2010. The decision was taken by the CBDT in exercise of powers conferred under section 119 of the Income-tax Act, 1961, considering the reports of disturbance of general life, caused due to the law and order problem in the State.

Accordingly, the date for obtaining and furnishing Tax Audit report under section 44AB of the Income-tax Act is also extended to November 30, 2010. [Source : www.pib.nic.in dated September 23, 2010]

> Short-lived gift of extra 1% EPF interest under tax-net

The Labour Ministry has hiked the employees' provident fund, or EPF, rate to 9.5 per cent., but a Finance Ministry notification says that anything in excess of 8.5 per cent. will be taxed.

The Labour Ministry is, however, confident that the tax department will renotify the higher rate, as otherwise a lot of contentious issues will come up. The Labour Minister had declared a 9.5 per cent. bonanza on provident fund deposits on September 15-marking a one percentage point increase in the rate from the 8.5 per cent. paid in the last five years.

But even before the EPF board met under the Labour Minister, the Central Board of Direct Taxes had notified a tax-free PF rate of 8.5 per cent. for 2010-11-effective from September 1. This means that the 1 per cent. extra income (or Rs. 1,700 crore) that the Labour Ministry has projected as a gift to the workforce, would be fully taxable. This is the first time ever that income from provident fund would be taxable, if the tax department does not notify the higher rate.

Historically, the tax-free PF rate notified by the Income-tax Department has never been lower than the EPF rate declared for the year.

But levying the tax would be far from easy. The PF interest would be credited to workers' accounts at the end of the year. The trust in charge of the PF would be responsible for deducting the applicable tax at that time.

Usually, the Income-tax Department notifies a tax-free PF rate for the whole year. But this year, it is only applicable from September 1. So the 9.5 per cent. provident fund return would be tax-free from April to August, but taxable thereafter. "For company-run trusts, this would be a headache - calculating the tax liability on 1 per cent. PF income for seven months," said a senior vice president at a private consultancy firm.

But the most acute problem will be faced by the Employees' Provident Fund Organisation-which manages 5 crore PF accounts.

Firstly, EPFO simply does not have the systems in place to deduct tax at source. All PF account withdrawals before completing five years of service, are fully taxable, as per existing income-tax rules. But the rule has never been implemented because of EPFO's unreliable manual record-keeping systems.

Even if EPFO could deduct tax at source before crediting interest to members, the applicable income-tax bracket would vary for its members. For every deduction made, it would also have to give workers a Form 16 statement. [Source : www.economictimes.com dated September 25, 2010]

> Companies will soon be asked to unearth investments held abroad

The provision to tax productive assets will be implemented once the Direct Tax Code regime, which seeks to replace the Income-tax Act, 1961, is implemented from April 2012.

In short, investment by Indians in controlled foreign corporations (CFCs) will be liable to wealth tax, once DTC becomes law. Under the 20th Schedule of DTC, an entity is considered a CFC when one or more persons residing in India exercise control over a foreign company.

Wealth-tax Act in its current form charges tax only on non-productive assets such as urban car, motor vehicles, jewellery, yachts, boats, aircraft etc., at the rate of 1 per cent. on wealth exceeding 15 lakh. The productive assets such as investment with financial institutions, bank balances, land and machinery etc. are not liable for wealth tax.

DTC is proposing to cover productive assets such as investments in equity and preference shares of a CFC. Many Indian companies have investments in CFCs and DTC is proposing to tax these investments. [Source : www.economictimes.com dated September 25, 2010]

> SEZ developers to look at legitimate ways to beat DTC deadline

The deadline of March, 2014, under the proposed Direct Taxes Code (DTC) for making new special economic zone units operational if they are to get tax benefits is likely to speed up development of these SEZs by entrepreneurs, a report said.

The DTC Bill, which was tabled in Parliament in August, proposed that units in SEZs that commence commercial operations by March, 2014, shall be allowed profit-linked deductions permitted under the Income-tax Act, 1961.

It also proposed that SEZs notified on or before March 31, 2012, will get income-tax benefits.

With SEZs attracting investments of over Rs. 1.66 lakh crore, industry sources said the income-tax benefit provided in the SEZ Act, 2005, is the major attraction for investors.

ASSOCHAM further said that demand for offices in the SEZs is expected to be low in the next 3-6 months, as occupiers are likely to rework their real estate strategies in the wake of the new time lines proposed in the DTC.

"The real estate market in India is likely to adjust to the changing circumstances once DTC comes into force and then see a sustained demand momentum until 2014 from developers as well as occupiers," the report said.

The Government has given formal approval for setting up about 580 SEZs, of which 122 have become operational. [Source : www.economictimes.com dated September 23, 2010]

> Supreme Court launches tax evasion plea

The special leave petition of a telecom major has been listed for hearing before a three-judge bench headed by Chief Justice SH Kapadia. The apex court will decide whether the Income-tax Department has the jurisdiction to tax the company's $11.2-billion purchase of 67% controlling interest in the Indian company in February 2007.

The Income-tax Department slapped a show-cause notice on the company's Netherlands-based subsidiary, seeking $1.7 billion as capital gains tax. It also sought to impose penalty for the company's failure to deduct tax at source for the transaction. This was contested by the telecom company in the Bombay High Court, but its petition was dismissed.

The dissident approached the Supreme Court, but the apex court refused to entertain the special leave petition of the telecom giant. The court expressed its displeasure over major's refusal to divulge the details of the agreement of such transaction. "Why the details were not disclosed to the High Court (Bombay High Court). It is not even shown to us (apex court)", a bench comprising Justice SB Sinha (now retired) and Justice MK Sharma had said.
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The apex court, however, asked the assessing authority to decide on the issue of whether the Revenue Department has the jurisdiction to demand capital gain tax on the deal which was carried outside the country. The Department, after hearing it afresh, served an order on the telecom company, saying it had the jurisdiction to tax the deal and once again approached the High Court, which ruled in favour of the Department. [Source : www.economictimes.com dated September 27, 2010]


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