ITR HIGHLIGHTS ISSUE DATED 30-8-2010 Volume 326 : Part 3

INCOME TAX REPORTS (ITR) HIGHLIGHTS ISSUE DATED 30-8-2010

Volume 326 : Part 3

 

 

HIGH COURT JUDGMENTS

--> State owned corporation incurring expenditure at instance of State on model villages deductible : CIT v. Karnataka Financial Corporation (Karn) p. 355

--> Export : Amount received by sale of scrap in domestic market includible :CIT v. Motor Industries Co. Ltd. (Karn) p. 358

--> Excise duty paid on goods manufactured but not sold and lying in closing stock cannot be disallowed : CIT v. Motor Industries Co. Ltd. (Karn) p. 358

--> Consideration of material filed in response to notices u/ss 143(2) and 142(1) in reassessment proceedings : Not a case of change of opinion : CIT v. Ravindran Prabhakar (Mad) p. 363

--> Purchase of immovable properties by individual and his wife and sale thereof by individual deeds : Prosecution u/s 276AB not valid : Banumathi v. ITO (Mad) p. 368

--> Sales tax and provident fund contribution paid within permissible time entitled to deduction : CIT v. Vijay Foundary and Engg. Works (MP) p. 378

--> Educational institution : Surplus funds must be used for objects of institution within five years for claiming exemption : Dr. Maharaj Krishana Kapur Educational Charitable Trust and Management Society v. UOI ( P&H) p. 385

--> Amount relating to transactions of earlier years not deductible trading loss : Matter remanded to permit assessee to prove claim of bad debt : CIT v. Popular Vehicles and Services Ltd. (Ker) p. 387

--> Professor developing educational material in form of CDs and in book form and exporting to students abroad not entitled to deduction u/s 80-O : P. C. Thomas v. Asst. CIT (Ker) p. 388

--> Interest earned on refinancing operation excludible from chargeable interest : CIT v. Punjab State Industrial Development Corporation (P&H) p. 390

--> Charitable purpose : Amount advanced only form of investment or deposit not entitled to exemption : CIT v. Shree P. Subramoniam Religious Trust (Ker) p. 393

--> Tax on undistributed profits : Assessment made at positive income in previous year : Invocation of s 104 justified : Thakur Devi Investments P. Ltd. v. CIT ( P&H) p. 396

--> Tribunal finding that investment cannot be treated as income and commission alone to be treated as income earned from sale : Finding of fact :CIT v. Dhani Ram (P&H) p. 399

--> Revision petition filed beyond time not rejected : Application under KVSS valid : Sheela Ashokkumar Goenka v. Designated authority under KVSS (Guj) p. 402

--> Sales tax paid within due time but after close of accounting year cannot be disallowed : CIT v. Paliwal Glass Works (All) p. 407

--> Depreciation : Generator : General rate applicable : CIT v. Paliwal Glass Works (All) p. 407

--> CIT (Appeals) and Tribunal finding only suppression of sale consideration : Addition only in respect of profit : CIT v. Samir Synthetics Mills (Guj) p. 410

--> Registration and stamp duty on lease deed for taking plant on lease revenue expenditure : CIT v. Gopal Associates (HP) p. 413

--> Tribunal finding expenditure was of recurring nature and no asset of enduring nature obtained : Expenditure deductible : CIT v. Lakhani Rubber Works (P&H) p. 415

--> Affidavit by assessee that notice not received within limitation : Onus on Revenue to prove that notice served in time : CIT v. Silver Streak Trading P. Ltd. (Delhi) p. 418

--> Agricultural income : Whether additional income already part of undisclosed income : Matter remanded : CIT v. Shrimati Ram Devi (Delhi) p. 421

--> Corporate membership fee to club deductible : CIT v. Samtel Color Ltd. (Delhi) p. 425

--> Law later settled by subsequent ruling of High Court and Supreme Court : No concealment of income or furnishing inaccurate particulars : CIT v. Arisudana Spg. Mills Ltd. (P&H) p. 429

--> Increased liability on account of foreign exchange rate fluctuation revenue expenditure : CIT v. Indian Toners and Developers Ltd. (Delhi) p. 435

--> Tribunal mechanically following decision of High Court which was not applicable to the facts : Matter remanded to Commissioner : CIT v. Damodar Magalji Mining Co. (Bom) p. 437

--> Dispute between parties and arbitration proceedings pending : No accrual of income : FGP Ltd. v. CIT (Bom) p. 444

--> Transfer not registered in books of society : Value of flat includible in net wealth of assessee : Bennett Coleman and Co. Ltd. v. Asst. CWT (Bom) p. 447

--> Right to purchase property at a fixed rate not an asset for purposes of wealth-tax : Ardeshir Behram Dubash v. WTO (Bom) p. 451

--> Export : Receipt on account of exchange fluctuation includible in total turnover : CIT v. Amber Exports (India) (Bom) p. 455

--> Payments towards PF and ESI made after due date specified inExplanation to s 36(1)(va) not entitled to deduction : B. S. Patel v. Deputy CIT (Assessment) (MP) p. 457

--> Amalgamation : Cost of shares to be taken at proportion of total price paid by assessee for takeover of assets : CIT v. Mahindra and Co. Ltd. (Raj) p. 465

--> Take over of business : Amount paid to transfer for deprivation of business revenue expenditure : CIT v. Hindustan Zinc Ltd. (Raj) p. 474

--> Export : Sales tax and excise duty not to be included in total turnover :CIT v. Standard Fireworks P. Ltd. (Mad) p. 498

--> Subsidy received from Central Government not to be deducted from cost of assets for allowing depreciation : CIT v. Standard Fireworks P. Ltd. (Mad) p. 498

--> Interest on enhanced compensation for agricultural land : Tax deductible at source on interest : Karnail Singh v. State of Haryana (P&H) p. 501

--> Payment of bonus to irrevocable trust before omission of proviso to s 43B(c) could not be disallowed : CIT v. Sri Venkatesa Mills Ltd. (Mad) p. 508

--> Dismissal of appeal by Tribunal justified where tax liability less than revised monetary limits : CIT v. Hospital Superintendent, Government Head Quarters, Mettur Dam (Mad) p. 511

AUTHORITY FOR ADVANCE RULINGS

--> Payments made to non-resident as a mark up of expenses not taxable in India : Bharati Axa General Insurance Co. Ltd., In re p. 477

--> Non-resident providing accreditation to conformity assessment bodies : Fees received by non-resident from bodies in India not taxable : Joint Accreditation System of Australia and New Zealand, In re p. 487

STATUTES
--> Notification :

Income-tax Act, 1961 : Notifications under section 35AC(1) Expln., clause (b): Eligible projects or schemes p. 29

JOURNAL
Right to Information Act, 2005-Applicability to income-tax proceedings-T. N. Pandey, Retd. Chairman, CBDT p. 1

NEWS-BRIEF
--> Non-compete fees on acquisition, taxable 

The Special Bench of ITAT, Delhi gave the ruling on July 30, 2010, on an appeal filed by Tecumseh India that non-compete fees are capital expenditure and therefore liable to tax. The transaction in question was the acquisition of Whirlpool assets at Faridabad and Ballabgarh. The assets were purchased on July 2, 1997 but the agreement for non-compete fees of Rs. 2.65 crore was signed on July 10, 1997.

The Income-tax Department did not agree with the taxpayer's contention and held that the payment of non-compete fee was capital expenditure and therefore tax has to be paid. The Assessing Officer, therefore added the expenditure back into the income computed for the purpose of levying tax.

The company had cited an earlier decision in which the Delhi High Court had held that the non-compete fees are mainly for protecting the profitability and business interest of the company. Further, since no profit-making apparatus was created through the payment of non-compete fees, such expenditures could be classified as revenue expenditure, and therefore tax was not payable on this count. The taxpayer company had also argued that the acquisition of the assets and the agreement for the non-compete fee were made on different dates and therefore the latter could not be construed as part of the acquisition.

The Income-tax Department cited section 6 of the Indian Evidence Act which stipulates that courts should take note of facts which formed part of the same transaction though they may have occurred at different places and time. It said the non-compete clause was part of the same transaction.[Source : www.economictimes.com dated August 17, 2010]

--> Pardon the delay in filing tax returns if found genuine

In an order that will help companies and individuals who face penalty proceedings on account of the delay in filing returns, a Delhi Bench of the Income-tax Appellate Tribunal (ITAT) has ruled that penalty cannot be levied if there is a genuine reason for the delay.

The ITAT, while waiving the penalty observed that penalty proceedings are quasi criminal proceedings and should not be levied unless there is reason to believe that the taxpayer had acted deliberately in defiance of law or acted in conscious disregard of its obligation. This was not the case here, ITAT ruled.

The judgment however has not considered an earlier circular issued by the CBDT wherein it was mentioned that the Accountant's Report has to be furnished to the tax authorities within the due date. [Source :www.economictimes.com dated August 21, 2010]

--> DTC bill likely to be tax-friendly

Taxpayers can look forward to a substantial reduction in their tax liability when the Direct Taxes Code, which will replace the archaic I-T Act comes into effect from April 1, 2011. "We are in the process of reducing the rate of tax and the Direct Taxes Code (DTC) will be a good example in that direction," the Central Board of Direct Taxes (CBDT) chairman said at an ASSOCHAM tax conference.

The first draft of the Direct Taxes Code had proposed substantial widening of the income-tax slabs, but they were only illustrative.

In fact, the Finance Ministry did not mention these slabs or suggest new ones in the revised draft as it did not want to give the impression of the suggested rates being a firm proposal. At present, annual income of Rs. 1.6 lakh- Rs. 5 lakh attracts 10 % income-tax, Rs. 5 lakh- Rs. 8 lakh attracts 20% and over Rs. 8 lakh faces 30% tax. The CBDT Chairman said rates in India will be almost in line with international standards, and that the Government would take measures so that the flight of revenue from India can be checked.[Source : www.economictimes.com dated August 21, 2010]

--> SEBI, Fund houses want tax benefit to continue for ELSS units

Market regulator SEBI and mutual fund houses have asked the Finance Ministry to continue with the tax benefits on equity linked schemes in the Direct Taxes Code, which will replace the existing Income-tax Act.

The revised DTC draft, based on which the Government is finalising the bill, has proposed to do away with the tax benefits available to people investing in the equity-linked savings schemes (ELSS).

Under the IT Act, investments up to Rs. one lakh in the ELSS and dividends accrued on them are exempted from tax. Besides, there is no long-term capital gain tax on withdrawal of the funds after the three-year lock-in period.

Sources said SEBI and the mutual fund industry have written to the Finance Ministry to continue with the current exemption, as the industry is witnessing redemption pressure post the entry-load ban, a type of agent commission that was charged from investors.

The sources said retail investors benefit from investment in ELSS and SEBI wants that ELSS schemes continue to enjoy tax deduction.

Currently, ELSS comes under a method of taxation called EEE- wherein it is exempted at the points of investment, in the entire tenure of the investment and as well at the time of withdrawal. [Source : www.economictimes.comdated August 20, 2010]

--> Full disclosure of income a must for case settlement

In a significant judgment, the Supreme Court has said that the full and true disclosure of undisclosed income and their manner of acquisitions is mandatory for the settlement of the cases and grant of immunity from criminal prosecution.

The Income-tax Settlement Commission, even after commencing the proceedings, is empowered to examine the authenticity of such full and true disclosure of the unaccounted return of the assessees, said the apex court dismissing the plea of a real estate major.

The court said, "disclosure of 'full and true' particulars of undisclosed income and 'the manner' in which such income had been derived are the pre-requisites for a valid application under section 245C(1) of the Act. Additionally, the amount of income-tax payable on such undisclosed income is to be computed and mentioned in the application".

Section 245C(1) of the Act mandates "full and true" disclosure of the particulars of undisclosed income and "the manner" in which such income was derived and, therefore, unless the Settlement Commission records its satisfaction on this aspect, it will not have the jurisdiction to pass any order on the matter covered by the application, court pointed out.

It said, "in the scheme of Chapter XIX-A (IT Act), there is no stipulation for revision of an application filed under section 245C(1) of the Act and thus the natural corollary is that determination of income by the Settlement Commission has necessarily to be with reference to the income disclosed in the application filed under the said section in the prescribed form".

The Chapter envisages settlement of complex tax disputes and grant of immunity from criminal proceedings by a Settlement Commission. [Source :www.economictimes.com dated August 23, 2010]

--> Tax authorities to decide issues on factual foundations

The Supreme Court has asked the Central Board of Direct Taxes (CBDT) and other tax authorities to get the help of technical experts while deciding income-tax liability of cellular service providers. 

The question was whether manual intervention was involved in the technical operations by which cellular service providers were given the facility by BSNL/MTNL for interconnection. A related question was whether TDS was to be deducted by service providers when they paid interconnect charges/access/port charges to BSNL.

"The problem which arises in these cases is that there is no expert evidence from the side of the department to show how human intervention takes place, particularly, during the process when calls take place," the order passed by a Bench headed by Chief Justice S H Kapadia said.

The Supreme Court underlined "with the emergence of our country as one of the BRIC countries and with the technological advancement, matters like the present one will keep on recurring and, hence, the time has come when the Department should examine technical experts so that the matters could be disposed of expeditiously and further it would enable the appellate forums, including this court, to decide legal issues based on factual foundation."

The court further clarified, in this batch of cases, the companies were not at fault as the question of human intervention was never raised by the Department before the Tribunal. Therefore, the Assessing Officer (TDS) was asked to re-examine the issue, "keeping in mind the larger interest and the ramification of the issues, which is likely to recur, particularly, in matters of contracts between Indian companies and multinational corporations." [Source : www.businessstandard.com dated August 23, 2010] 

 

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HC (MUM):- MAT 80 HHC useful judgment

Find attached.

SC: Revision Of Undisclosed Income In Settlement Application Not Permissible

Ajmera Housing Corporation vs. CIT (Supreme Court)

The assessee filed a settlement application u/s 245C (1) in which it disclosed additional income of Rs. 1.94 crores. This was revised to disclose further undisclosed income of Rs. 11.41 crores. After the s. 245D (1) order, a further disclosure of Rs. 2.76 crores was made. Despite the department's objection that the assessee had not made a "full & true disclosure", the Settlement Commission passed a final order u/s 245D (4) determining the total income at Rs. 42.58 crores and imposed token penalty of Rs. 50 lakhs. The department filed a Writ Petition to challenge the Settlement Commission's order. The High Court held that as the Settlement Commission had not applied its mind to the maintainability of the application u/s 245D (1) for want of full and true disclosure of income, the matter had to be remanded to the Settlement Commission for fresh consideration. That order of the High Court was challenged by the assessee in the Supreme Court. The Supreme Court remanded the matter to the High Court on the ground that a report given by the Commissioner estimating the undisclosed income at Rs. 42.50 crores which approximately coincided with the figure arrived at by the Settlement Commission had not been considered by the High Court. In the second round, the High Court held that in view of the multiple disclosures made by the assessee, the assessee could not be said to have made a full and true disclosure of income. However, it did not set aside the application on that ground but remanded the matter to the Settlement Commission for re-determination of the undisclosed income. The result of the second remand order of the High Court was that the Settlement Commission was not required to go into the question of maintainability of the application but only the question of determination of income. The department did not challenge the High Court's order though the assessee did. HELD dismissing the appeal:

(i) The disclosure of "full and true" particulars of undisclosed income and "the manner" in which such income has been derived are pre-requisites for a valid application u/s 245C (1) and unless the Settlement Commission records its satisfaction on this aspect, it will not have jurisdiction to pass any order on the settlement application;

(ii) The scheme of settlement does not contemplate revision of the income so disclosed in the application. If an assessee is permitted to revise his disclosure, in essence, he would be making a fresh application in relation to the same case by withdrawing the earlier application. S. 245C (3) prohibits the withdrawal of an application. An assessee cannot be permitted to resile from his stand at any stage during the proceedings. By revising the application, the applicant would be achieving something indirectly what he cannot otherwise achieve directly and in the process rendering s. 245 (3) otiose and meaningless. As there is no stipulation for revision of an application filed u/s 245C(1), the natural corollary is that determination of income by the Settlement Commission has necessarily to be with reference to the income disclosed in the application;

(iii) The High Court, having come to the conclusion that the assessee had not made a full and true disclosure of undisclosed income, was wrong in treating the application as maintainable. The High Court's order is clearly erroneous as it has not appreciated the object and scope of the scheme of settlement. "However, for reasons best known to the Commissioner, he has chosen not to challenge this part of the impugned order";

(iv) The argument of the assessee that the scope of judicial review being limited, the High Court should not have interfered with the order of the Settlement Commission is not acceptable. "We have no hesitation in observing that the manner in which assessee's disclosures of additional income at different stages of proceedings were entertained by the Settlement Commission, rubbishing the objection of the Commissioner that the assessee had not made a full and true disclosure of their income in the application u/s 245C(1), leaves much to be desired".

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]

 

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